Document of The World Bank Report No: 25470-GE PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 11.0 MILLION (US$15.0 MILLION EQUIVALENT) TO THE GOVERNMENT OF GEORGIA FOR A SECOND SOCIAL INVESTMENT FUND PROJECT APRIL 10, 2003 Human Developement Sector Unit Europe and Central Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective April 10, 2003) Currency Unit = GEL 2.12 GEL = US$1 US$I = 2.12 GEL FISCAL YEAR JANUARY - DECEMBER ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CDC Community Development Comrnittee CPP Community Participation Procurement CQ Consultant Qualification ECA Europe and Central Asia Region GOG Government of Georgia GPN General Procurement Notice GSIF Georgia Social Investment Fund IC Individual Consultant IDA Intemational Development Association IS International Shopping LCS Least Cost Selection LG Local Government LSG Local Self-Government MDDP Municipal Development and Decentralization Project MDF Municipal Development Fund MIS Management Information System NGO Non-Government Organization NS National Shopping PHRD Japan Policy and Human Resources Development Fund PIU Project Implementation Unit RFP Request For Proposal SOE Statement of Expenditures TOR Terms of Reference USAID United States Agency for International Development VAT Value Add Tax Vice President: Johannes Linn Country Director: Donna Dowsett-Coirolo Sector Director: Annette Dixon Task Manager: Aleksandra Posarac GEORGIA SECOND SOCIAL INVESTMENT FUND PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1. Project components 5 2. Key policy and institutional reforms supported by the project 7 3. Benefits and target population 7 4. Institutional and implementation arrangements 9 D. Project Rationale 1. Project alternatives considered and reasons for rejection 13 2. Major related projects financed by the Bank and/or other development agencies 14 3. Lessons learned and reflected in the project design 15 4. Indications of borrower commitment and ownership 18 5. Value added of Bank support in this project 18 E. Summary Project Analysis 1. Economic 18 2. Financial 19 3. Technical 20 4. Institutional 20 5. Environmental 22 6. Social 23 7. Safeguard Policies 24 F. Sustainability and Risks 1. Sustainability 25 2. Cntical risks 25 3. Possible controversial aspects 26 G. Main Conditions 1. Effectiveness Condition 27 2. Other 27 H. Readiness for Implementation 29 I. Compliance with Bank Policies 29 Annexes Annex 1: Project Design Summary 30 Annex 2: Detailed Project Description 33 Annex 3: Estimated Project Costs 37 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 38 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 40 Annex 6: (A) Procurement Arrangements 41 (B) Financial Management and Disbursement Arrangements 49 Annex 7: Project Processing Schedule 57 Annex 8: Documents in the Project File 58 Annex 9: Statement of Loans and Credits 59 Annex 10: Country at a Glance 61 Annex 11: Organigram 63 Annex 12: Training 64 Annex 13: Microproject Typologies 67 Annex 14: Microproject Cycle 68 Annex 15: Project Inplementation Plan 70 Annex 16: Management Information System 71 Annex 17: Decentralization 73 MAP(S) IBRD 28703 GEORGIA SECOND SOCIAL INVESTMENT FUND PROJECT Project Appraisal Document Europe and Central Asia Region ECSHD Date: Apnl 10, 2003 Team Leader: Aleksandra Posarac Sector Director: Annette Dixon Sector(s): Other social services (100%) Country Director: D-M Dowsett-Coirolo Theme(s): Social risk coping (P), Civic engagement, Project ID: P074361 participation and community driven development (P), Lending Instrument: Specific Investment Loan (SIL) Social risk reduction (P) Project Finarncing Data . >i- -; - I Loan [XI Credit [ ] Grant [] Guarantee [ ] Other: For LoanslCredits/Others: Amount (US$m): 15.0 million Proposed Terms (IDA): Standard Credit Grace period (years): 10 Years to maturity: 40 Financing:Plani(SS) . -Surc ~. *: -~. j >e ocal .-'- fFoin ,--T- Plan(US$ 9i67>Stice. 7" BORROWER 5.80 0.00 5.80 IDA 14.70 0.30 15.00 US AGENCY FOR INTERNATIONAL DEVELOPMENT 3.00 0.00 3.00 (USAID) LOCAL COMMUNITIES 1.70 0.00 1.70 GERMANY: KREDITANSTALT FUR WIEDERAUFBAU 4.70 0.00 4.70 (KFW) Total: 29.90 0.30 30.20 Borrower: GOVERNMENT OF GEORGIA Responsible agency: GEORGIA SIF GEORGIA SOCIAL INVESTMENT FUND Address: 39A, Chavchavadze Ave. 11th Floor, Tbilisi, 380062 P.O. Box #112, 380079 Contact Person: Shalva Kokochashvili Tel 995-32-23-07-79 Fax: 995-32-23-01-03 Email: skokochashvili@gsif.ge Estimated Disbursements ( Bank FY/US$m): 2003,_ .00.4 -'. .2005 , >2OO6> ;:; OQ7. . - - Annual 0.20 3.20 5.00 6.00 0.60 Cumulative 0.20 3.40 8.40 14.40 15.00 Project implementation period: 2004 - 2008 Expected effectiveness date: 09/01/2003 Expected closing date: 01/30/2008 A. Project Development Objective 1. Project development objective: (see Annex 1) The Second Georgia Social Investment Fund Project (GSIF II) has the following development objectives: (i) participating local self-governments use enhanced management skills and a participatory process in establishing local development plans and setting investment priorities; (ii) participating poor communities apply for, manage and use micro-projects in a sustainable manner; and (iii) participating poor communities benefit from improved social and economic infrastructure and related services. To that end, the project will place an explicit emphasis on strengthening the interaction between local self-government and citizens in improving the quality of life in communities. The project will introduce community development planning through a participatory process involving local self-government and citizenry. It will finance community-level micro-projects generated by that process. It will undertake capacity building and asset management at the local self-government level. At the community level, it will develop community mobilization and advocacy skills to strengthen self-reliance and self-help mechanisms. This involves a fundamental shift in the practice of GSIF interventions from straight-forward financing and implementation of micro-projects with limited community involvement, towards one that aims at fully engaging the community in the local development planing and decision-making process. This is expected to increase the likelihood that selected micro-projects are appropriate to the local development context and reflect community preferences. It also should help secure community ownership of micro-projects and improve their sustainability. The approach, with its focus on local self-government and community, would moreover support the decentralization process, which places a great deal of responsibility for local development with local self-government authorities; it would in particular help bring about a decentralization process that is both inclusive and transparent in relations between local self-governments and their constituencies. The change in emphasis from GSIF I addresses issues that were raised in the mid-term review of GSIF I as well as in subsequent beneficiary impact assessments. The design of corresponding instruments draws on experience and lessons learned in other similar ECA projects, as well as such projects in other regions, and of other donors active in Georgia. They are discussed in Section D.3. 2. Key performance indicators: (see Annex 1) The key performance indicators set out in Annex 1 reflect monitorable outcomes and impacts in key areas of the project. They include quantitative indicators (measurable improvements and outputs relating to micro-project completion and improved social and economic infrastructure) and qualitative assessments of demand-driven mechanisms, service delivery, local self-government processes and community participation. Specific areas that will be assessed include: (i) project impact, i.e. local self-government attitudes to participatory processes and their readiness to use them; community mobilization for the micro-project cycle; and advocacy in participating communities; (ii) outputs relating to micro-project completions, training occasions - 2 - with local self-governments, communities; and (iii) process, relating to GSIF operating efficiency. Key performance indicators were discussed and agreed on during project preparation in collaboration with GSIF. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 17000-GE Date of latest CAS discussion: [The text reflects sector contents of the CAS currently under preparation] The existing CAS did not cover FY03 and so the proposed project was not included in that CAS, which is why this project is being presented to the Board under regular procedures; a new CAS, which includes the proposed project, is under preparation and is expected to come to the Board in the first quarter of FY04. The core objective of the upcoming CAS is to support the Georgian government in its efforts to reduce vulnerability among the population. To this end, the upcoming CAS develops a multifaceted social risk management strategy that seeks to draw on public and private resources to improve coverage and targeting of benefits and services to the poor and provide them with opportunities to rise out of poverty. The strategy includes improving access to economic and social infrastructure to reduce vulnerability to income shocks, and strengthening the poverty-orientation of social protection programs to buffer the poor from risk. A central element of the Government's poverty reduction strategy is the decentralization of decision-making to local and local self-government levels. Critical to successful decentralization will be the capacity of local and local self-govemment authorities to assume in practice more responsibility for management and administration of the development process; and for the local citizenry to actively participate in that process. The Government sees GSIF as having a central role to play in its social risk management strategy, and its aims and concerns are reflected in GSIF's mandate and are taken up in GSIF II: the project will support and complement government initiatives and the CAS objective - in providing access to better quality social and economic infrastructure and related services in a sustainable manner, strengthening local self-governance and building up self-reliance and self-help capabilities at grassroots levels. 2. Main sector issues and Government strategy: With extensive poverty, a deteriorating social and economic infrastructure, and insufficient formal safety nets, many households are vulnerable to risk of experiencing severe income shocks; and they lack the resources and support systems that could mitigate such risk. Health status and educational achievement is threatened, especially among the poor, as provision of good health care and quality education is jeopardized by systemic inefficiencies and inadequate resources. Economic infrastructure has deteriorated, and service provision is absent or only intermittent in many areas. Access to assets, or asset creation opportunities, are lacking, especially for poorer households, severely limiting income generating opportunities. - 3 - Poverty in Georgia is widespread with 43 percent of the population below the official poverty line at any one time. High poverty reflects political uncertainties and steady economic decline over much of the past decade, which improvements in economic performance in recent years have not been able to reduce significantly. The period has seen a virtual breakdown in local economic and social infrastructure and basic services, reflecting inadequacies in local government and a chronic lack of public moneys, resulting in poor asset management and little or no new capital investment. The absence of adequate infrastructure and basic services, as well as lack of access to capital, gradually have become principal obstacles to local development efforts and improved welfare of the population, especially poor population groups. The countryside has been particularly hard hit, where infrastructure and services have virtually collapsed from war, vandalism and lack of maintenance. Rural well-being is rendered even more fragile from bad land management, which has made farmers particularly vulnerable to weather conditions. With agriculture providing employment for over half the population and often the only source of income for many rural communities, a functioning rural environment and an economic infrastructure that reduce fluctuations in output and rural family incomes, is essential for coming to grips with poverty. Government strategy. The Government is in the process of developing a comprehensive long term poverty reduction strategy aimed at reversing the decline in welfare among the population and reducing vulnerability of households to risks rising from both income and non-income shocks. An I-PRSP for Georgia was discussed by the Board in December 2000, and a PRSP status report was sent to the Board in July 2002. A central element of Government strategy is decentralization of economic management to local and local self-government levels and promotion of community-driven development through a participatory process that actively involves citizens and communities in local level decision-making. Major achievements so far include elections of local governments, delineation of responsibilities among different government levels (central, regional, local) and introduction of greater fiscal accountability, and the establishment of GSIF as an important vehicle for improving local and community-level social and economic infrastructure. However, decentralization faces tremendous challenges: a still incomplete and in may aspects inadequate legal and fiscal framework for decentralization; nonexistent or weak managerial and administrative capacities; few resources; and issues of trust between local government and its constituents. In particular, local self-governments are being transferred a broad range of responsibilities - provision of local utility services, budget planning and revenue management - all of them tasks that they will be hard-pressed to master. Improving the population's access to basic social and economic infrastructure, particularly in poorer areas, is a high priority. The emphasis on local self-government and community mobilization aims at facilitating the meeting of critical smaller-scale infrastructure needs at local levels - primarily school and health facilities rehabilitation, small hydropower schemes to provide electricity, drinking water and sanitation rehabilitation, irrigation and road rehabilitation. - 4 - 3. Sector issues to be addressed by the project and strategic choices: GSIF plays a central role in the Government's attempts to reverse the decline in basic infrastructure and services, promote participatory decentralization, and revitalize the countryside. It is expected to help decrease economic vulnerability among the population, especially outside the big cities, and help mobilize public and private resources and initiatives for comnmon development objectives at local levels. * GSIF investments in basic economic infrastructure (erosion control, irrigation schemes, village access roads) should reduce vulnerability to weather conditions, stabilize incomes and promote income generation at community levels. Investment in water supply and sanitation and energy generating and distribution would contribute to improving the quality of life in poor communities. Investments in basic social infrastructure and services, including in particular the rehabilitation and equipping of education facilities, and rehabilitation of community level health facilities, should enhance their future income opportunities and reduce the inter-generational transmission of poverty. * Vulnerability should be further reduced by GSIF providing some critically needed capacity building at local self-government and community levels. That should strengthen local decision-making and implementation capacity, and strengthen interaction between local self-government and citizenry, improve problem solving and lead to improved govemance and democratic decision-making. In turn, it should result in more active communities and local self-governments, more capable of mobilizing resources - public and private - and in their better targeting at priorities that have broad public support. Ultimately, it should result in more resilient communities that are less vulnerable to risk. GSIF II would complement work undertaken under a number of other Bank projects underway or being developed - water, rural infrastructure, health and education, municipal development and decentralization, and social protection. All GSIF interventions in essential services areas will be designed to be consistent with sectoral strategies and service standards. In the case of the second Municipal Development and Decentralization Project, the two projects are designed to be complementary: the MDDP is expected to focus on improving performance at local government levels - districts and large cities - while GSIF will support local self-government units in areas where it is financing micro-projects. The proposed Social Protection Project, which is scheduled for FY04, aims at strengthening income transfer programs and social care services, including in particular increasing the efficiency of the poverty benefit, thus helping poor families cope with continued income insecurity. GSIF in turn generates opportunity by creating the economic and social infrastructure that enables communities to improve their living standards. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The GSIF II project will have three components: (a) capacity building at local community and self-government levels, relating to the participatory planning process, and institutional strengthening of local self-governments through training in management and administrative - 5- skills; (b) identification, development and implementation of some 300 community-based micro-projects; and (c) project management. Annex 2 provides a project description and Annex 3 a detailed breakdown of costs. nlhdicative Bank- - % of Costs |. %of - . inancing T ;'b'> e ' ^ ~4 r7-A,; > 6 s 1 - o ',, ~~'t~;- ( ,0US$M) Total (USWM) financing 1. Capacity building(a) 4.00 13.2 1.00 6.7 a. community-level b. local self-government level 2. Micro-projects 22.60 74.8 11.70 78.0 3. Project management(b) 3.60 11.9 2.30 15.3 a. investment costs b. incremental recurrent costs Total Project Costs 30.20 100.0 15.00 100.0 Total Financing Required 30.20 100.0 15.00 100.0 (a) Capacity building costs: Community level costs are estimated at US$ 3.2 million; local self-government level costs are estimated at US$ 0.8 million (b) Project management costs: Investment costs are estimated at US$ 0.7 million; incremental recurrent costs are estirnated at US$ 2.9 million The total cost of the project is estimated at US$ 30.2 million, of which IDA would finance US$15.0 million. An amount of US$ 4.7 million equivalent would be provided by the German Government; of which US$ 4.4 million equivalent would be earmarked for micro-projects in the six districts of the Borjomi-Kharagauli area in the southern part of Georgia, with the remainder (US$ 0.3 million) being applied to incremental operating costs of GSIF (the Project Implementation Unit). A partnership arrangement with USAID, described below, is expected to finance US$ 3.0 million of the capacity building component. Additional project funding would be provided by communities through direct contributions to micro-project costs (an estimated US$ 1.7 million). The Government of Georgia would contribute US$ 5.8 million, covering part of incremental recurrent costs (US$ 0.9 million) and project taxes (US$ 4.9 million). Total incremental recurrent costs are US$ 2.9 million, or 9.6 percent of project costs. USAID intends to enter into a partnership agreement to finance the implementation of the capacity building component at community and local self-government levels. The partnership agreement will involve two USAID programs currently underway in Georgia: (i) the Georgia Community Mobilization Initiative (GCMI) and (ii) the Georgia Local Government Reform Initiative (GLGRI). Currently, CARE and Mercy Corps are implementing the USAID program Georgia Community Mobilization Initiative. The program finances rehabilitation of small scale economic and social infrastructure in poor communities through an intensive community mobilization effort, which also includes the development of advocacy skills. Thus, a partnership arrangement with USAID will bring extensive and successful community mobilization and advocacy experience to GSIF II. Urban Institute is one of the key implementing agencies of the USAID financed program Local Government Reform Initiative. It is implementing that initiative in collaboration with the Georgian Institute for Public Administration and the Presidential Service for Regional Policy and Govemance. - 6 - Under the Georgia Community Mobilization Initiative, GSIF would collaborate with USAID in assisting communities and self-governments to draw up participatory local development plans and provide training in micro-project implementation, community mobilization and advocacy skiiis. Under the Local Government Reform Initiative, GSIF and USAID would collaborate in providing local self-governments management training. Field-level implementation would be undertaken by the NGOs and other organizations implementing the GCMI and GLGRI. It is expected that partners would cover the full cost of capacity building. A framework agreement would be established between the two USAID initiativ_s and GSIF. 2. Key policy and institutional reforms supported by the project: The project will support key Government public policy and institutional reforms by providing a mechanism to (a) reach the poor more effectively; (b) mitigate the deterioration of basic economic and social infrastructure; and (c) supporting the Government's decentralization policy by (i) building institutional capacity in participating local self-governnents; and (ii) engaging local self-governments and communities in an interactive and mutually supportive partnership for development. 3. Benefits and target population: Among participating communities, the main benefits of the project will be: (a) better community economic and social infrastructure resulting from the implementation of an estimated 300 micro-projects; (b) increased ownership of and accountability for such infrastructure; (c) increased participation in local decision-making; (d) increased self-reliance and self-help capabilities. At the local self-government level, (a) enhanced capacity to apply and benefit from a participatory process in establishing local priorities and implementing local development plans, and (b) better local administration in line with increased responsibilities under decentralization. At the national level, promoting the Government's decentralization program by the application of enhanced management skills at self-government levels and introduction of local and community partnerships in poverty alleviation and economic development. While the project would be nationwide in scope, the primary target group will be poor communities in peri-urban areas, rural towns and villages. Secondary targets are local self-government authorities, who will benefit from training in management skills, administration and participatory community action. Targeting methodology: While there is broad agreement with the Government on the need for selectivity, the sensitivity of limiting funds to a few chosen regions or distncts, and excluding others, has been emphasized by Government. It was therefore agreed that the project would be nationwide in scope, with priority being given to poorer communities in peri-urban areas, rural towns and villages. It was also agreed to initially, on a notional basis, limit IDA funds available to any district over the life of the project to US$ 160,000 and not allow more than five projects within that limit. The allocation would be reviewed and revised after the first year. The districts eligible for KfW funds would not be eligible for IDA funds. - 7 - At start-up, GSIF will focus on communities in peri-urban areas, rural towns and villages in six of the poorest districts in each of its two Areas of Operation (see Section 4 below) that do not include KfW districts (in that Area, it is expected that GSIF will give priority to KfW-targeted districts). The determination of those initial districts will be done by GSIF and implementing partners on the basis of jointly developed criteria. (The term "implementing partners" indicates the NGOs or other agencies carrying out capacity building activities and financed under the partnership agreement with USAID.) This list would be a condition of effectiveness. Subsequently, GSIF would operate on a national scale, while continuing to give priority to poor communities in peri-urban areas, rural towns and villages. In the agreed districts, GSIF staff will, in collaboration with the implementing partners undertake a needs-based ranking of local self-government units using a transparent two-stage ranking process. Initially all local self-government units within the district will be ranked by means of key informants representing each local self-government unit and cross-checked with available statistical data. Following that ranking, GSIF staff will in collaboration with the implementing partners undertake a rapid needs assessment of at least one third, but not less than three, of the local self-governments with the lowest rankings. On the basis of the rapid needs assessment, the three poorest self-governments will be selected for community mobilization and institution building support. Micro-project identification occurs according to the following process: 1. a community development plan is elaborated by each of the communities in the local self-government with implementing partner facilitation (and GSIF monitoring) using participatory techniques; (in a few cases, where the partnership arrangement with USAID may not be applied, GSIF will contract out the task to qualified NGOs, firms or individuals); 2. community plans are then consolidated in a participatory way at the local self-government level, involving full consultation with the communities and further facilitation by the implementing partners; 3. micro-projects proposed for financing are drawn from such plans. In cases where local self-governnents are assessed by GSIF and implementing partners as being insufficiently established, plans will not be consolidated and proposals will be drawn from community development plans. A set of criteria for use in the key informant process and needs assessments has been developed by GSIF, based on its previous experience, experience of NGOs and donors active in community mobilization in Georgia, and recent beneficiary impact assessments. Mainly, readily available socioeconomic indicators will be used, such as: (i) access to basic social and economic infrastructure; (ii) income levels and economic activity; (iii) unemployment; (iv) extent of Government and donor intervention; (v) lack of natural assets; (vi) location - distance from the district center, altitude; and (vii) other qualitative indicators that reflect the level of organization and participation in the communities. Detailed procedures and criteria will be included in the Operating Manual. It is expected that the two-stage procedure to targeting will allow resources to be channeled to the neediest communities. Criteria will be further developed and refined by GSIF prior to and during project implementation. - 8 - 4. Institutional and implementation arrangements: I. Implementing entity and institutional structure of GSIF II. The project will be implemented by GSIF, which was established under Decree No. 527 of the President of Georgia, dated August 16, 1996, and revised by Decree No. 105, dated March 28, 2003. GSIF will administer project operations as an autonomous public entity according to operating guidelines and procedures set out in the project's Operating Manual. GSIF will recruit office staff and technical consultants according to qualifications and selection criteria set out in its Financial and Administrative Manuals. GSIF will have the authority to enter into consultants' service, civil works and equipment contracts and manage the project's financial accounts. While the project will benefit from some of the institutional and implementation arrangements that were put into place by GSIF I, the organization that was in charge of implementing GS1F I has been extensively restructured to reflect the shift in emphasis from micro-project financing to community development. The new structure will allow a more integrated and cost effective approach to local development. In particular, the introduction of decentralized area management and task teams is expected to enhance capacity building at local levels and contribute to increased micro-project quality. Moreover, the increased emphasis on community development notwithstanding, it is also expected to significantly shorten the micro-project cycle from its average of some 560 days in GSIF I to some 300 to 350 days. The main features of the new organization are as follows (see also the Organizational Chart in Annex 11): * An Executive Board approves GSIF policies and procedures, annual budgets and work plans, and quarterly and annual reports. The Executive Board is composed of eight members, including the chairman, who is elected from among the members for one year. Five members are senior government representatives and three, including two NGO representatives, are from the private sector. * GSIF is headed by an Executive Director, appointed by the President of Georgia. GSIF comprises five departments: three operational area departments, a finance and administration department and an inforrnation systems department. Each area department covers a defined geographic area of the country. An area department consists of an area manager and three task teams. In addition to area management, each area manager has technical oversight responsibility in his or her field of competence - one in procurement, one in engineering and one in community development. Each task team consists of three community development specialist, two of which have a background and experience in engineering and one in social sciences. Task teams, in collaboration with implementing partners, manage the local self-government and community selection (targeting) and community mobilization processes, micro-project design and implementation, and institutional strengthening of local self-governments. Micro-project approval for projects less than US$ 30,000 equivalent would be delegated to area managers; micro-projects above US$ 30,000 would be approved by the Executive Director in consultation with the task team and respective area manager; and exceptionally large micro-projects (over US$ 75,000) would be approved by the Board. Any changes in the appointment of or terms of employment of the Executive Director, -9- Deputy Executive Director, Area Managers and the Department Heads, will be subject to prior Bank approval. Operating procedures will change to reflect the emphasis placed on community mobilization and institution building of local self-government throughout the micro-project cycle. O They will begin with participatory community-level development planning involving the whole community (facilitated by implementing partners in collaboration with GSIF task teams); at this point in time, a community development committee (CDC) is set up to manage the community planning and micro-project development and implementation processes. Throughout the micro-project cycle, training and support will be provided by GSIF and its implementing partners to the CDCs in micro-project cycle management and maintenance of the finished product; o The community development plans should lead to a consolidated development plan for the local self-government, done in full consultation between the communities and the local self-government, and facilitated by the implementing partners. Again, the process would be in collaboration with GSIF. The local self-government development plan sets out investment priorities in the local self-government. o On the basis of the local self-government development plan and in consultation with member communities and citizenry, a micro-project proposal, or proposals, for GSIF financing is defined and submitted to GSIF for appraisal; criteria for appraisal are defined in the Operating Manual. In cases where local self-governments are assessed by GSIF and implementing partners as being insufficiently established, plans will not be consolidated and proposals will be drawn from community development plans. o At the same time, training in community advocacy skills is provided to all communities in the local self-government by the implementing partners. Training in institutional development will be provided to the local self-government in the application of laws governing local self-government activities, budgeting and accounting, and asset management. This training will also be provided by implementing partners. Other local self-governments in the district can participate in that training as well. While all departments in GSIF will be manned with skilled professionals, many of them drawn from the previous organization that implemented GSIF 1, they will need intensive training in the new approaches. A detailed staff training program has been developed and is set out in Annex 12. It will be implemented prior to project start-up. II. Implementation arrangements. The project will be implemented over a period of three years and seven months (September 2003 to March 2007) in accordance with the Project Implementation Plan provided in Annex 15. Implementation arrangements under the GSIF II project will be governed by the guidelines and procedures set out in an Operating Manual. The Operating Manual will be approved by GSIF's Board and adopted as a legal document. The development of the Operating Manual satisfactory to the Bank and its approval by the GSIF Board is a condition of effectiveness. Any changes in the procedures set forth in the Operating Manual will be subject to the Bank's approval prior to being implemented. The - 10- Operating Manual defines processes, procedures, roles and responsibilities in project and micro-project implementation, it describes eligible micro-project typologies and key appraisal cnteria for micro-projects; and it sets out the critena for selection of communities for GSIF interventions. A separate manual covers financial and administrative procedures. Handbooks on technical norms and standards for types of works financed by GSIF, procurement and environmental procedures have also been prepared. A comprehensive, computerized information system (see MIS description in Annex 16) will provide GSIF with up-to-date information on its operational activities and the status of micro-project implementation. It will be the major tool for tracking performance, identifying bottlenecks, measuring cost effectiveness and feeding the decision making process. For that purpose, it will generate process, output and impact indicators for the project as a whole, and for the various stages involved in community and micro-project development. It will be closely integrated with the GSIF accounting system. MIS-generated reports will be an integral part of the reports submitted to the GSIF Board and to donors for review. The key institutions in GSIF II implementation, and their respective roles, are as follows: * Project Implementation Unit: The PIU (also referred to as GSIF) is responsible for the overall management and administration of the GSIF II project. Its structure and implementation responsibilities were summarized above. * Local self-governments. Under the project, identification, prioritization of needs and consensus building on small-scale investment priorities (community development plans) will be undertaken first at the community level and then consolidated at the local self-government level in a participatory way. Micro-projects will be proposed to GSIF from such plans. For micro-project implementation, the local self-government council will be represented on the community development committee (see below). In appropriate instances, local self-governments will also be responsible for the operation and maintenance of the facility rehabilitated or renovated under the micro-project, either singly or jointly with the benefiting community. * Community development committees. Community development committees will be legally responsible for carrying out GSIF-financed micro-projects under a framework agreement with GSIF. They will be responsible for micro-project design, collection of local contributions, procurement, implementation and reporting to the community on progress of the micro-project. They may also be responsible for the operation and maintenance of facilities, either at the village level, or in collaboration with the local self-government authority in instances where the latter does not take over full responsibility of asset management. The composition of the village committee is meant to strengthen the interaction between local self-government authorities and community members: while community development committees will be headed by a community member and their membership mainly drawn from the community, they will also include a representative of the local self-government. In cases where several communities are benefiting from a GSIF-financed micro-project, a joint community development committee will be established - 11 - with representatives from each concerned community, as well as the local self-government. o USAI[D-funded nongovernmental organizations. On the basis of the partnership arrangement with USAID, GSIF will draw on the services of the USAID-funded NGOs to undertake all field-level community development - community development planning as well as advocacy - through the full micro-project cycle, including the training of local NGOs. The partnership will also include institution-building for local self-government entities, including strengthening local NGOs in training for institution-building at local self-government levels. O Other nongovernmental organizations, firms and individuals. GSIF will draw on other (pre-qualified) NGOs, firms and individuals in the few instances where USAID-funded NGO support will not be available for local self-government and community development; and for special studies on the impact of GSIF interventions. o Private contractors and design firms. Private local contractors will compete for micro-project contracts for design and rehabilitation works. On larger works, design firms will be hired on a competitive basis to prepare designs and supervise implementation of works. Contractors will also be supervised by the community development committees and local on-site supervisors. Contractors will be paid directly by GSIF based on certified statements and accomplished works that meet quality standards. All design firms will be pre-qualified. Procurement: Project activities, estimated costs, procurement methods and prior review thresholds are outlined in Annex 6(A) of the PAD. A procurement capacity assessment was undertaken during project preparation, and a procurement action plan was developed - see Annex 6(A) - to strengthen procurement capacity in GSIF. That plan has been implemented. The GSIF will have overall responsibility for the management of procurement activities under the project. For the implementation of micro-projects, it will provide technical assistance to Community Development Committees (CDC) in undertaking procurement. In communities, procurement of goods, works and services is the primary responsibility of the CDCs. For each micro-project, GSIF will enter into a Framework Agreement with the CDC and the procurement procedures will be agreed. The Framework Agreement will specify, inter alia, the terms and conditions under which the funds may be used. The CDCs will operate as employers and will be in charge of taking all steps and decision necessary for procurement in relation to the micro-projects. The GSIF will contract out micro-projects through the CDCs to individuals, private contractors, and community based organizations following procedures detailed in the OM and Framework Agreement. Procurement of Micro-projects will be based on Community Participation Procurement (CPP) as described under 3.15 of the Procurement Guidelines. The relevant procurement procedures include: National Competitive Bidding and Minor Works procedures. The procedures would require local advertisement and public bid opening in line with the sample bidding documents and standard contract forms specifically developed for community application under micro-projects. Strict guidelines would be included in the bidding documents regarding the necessary prerequisites for participation by a bidder. Nongovernmental organizations, local contractors and other community-based organizations, registered according to legislation, will be allowed to bid. Procurement details are set out in a Procurement Handbook - 12 - that was developed by the GSIF staff and was reviewed by the PAS. Disbursement: Disbursement arrangements will be based on traditional methods (e.g., replenishment of the Special Account based on full documentation and/or Statement of Expenses, direct payments and Special Commitments). GSIF will open and maintain a Special Account for IDA disbursement purposes. Additional accounts will be opened for: the Government's counterpart contribution; the communities' co-financing of micro-projects; and co-financiers. These accounts will be autonomous and will be audited annually by an accredited auditing firm. Detailed disbursement arrangements are outlined in Annex 6. Funds flow: Project funds will flow from (i) the Bank, either via a single Special Account which will be replenished on the basis of withdrawal applications, or by direct payment on the basis of direct payment withdrawal applications, (ii) other donors (KfW), via a separate Special Account operating like IDA Special Account, (iii) local communities, via a separate (single) communities' contributions account opened in a local commercial bank, same bank where IDA Special Account will be opened, (iv) the Government, from the Treasury at the Ministry of Finance via Government of Georgia co-financing account opened in a local commercial bank, same bank where IDA Special Account will be opened, on the basis of payment requests of GSIF. Funds flow diagram is provided in Annex 6(B). Monitoring and evaluation: Project monitoring activities will be the responsibility of GSIF, contracting out these functions when appropriate. Monitoring activities under the project will entail a process for reviewing continuously and systematically different aspects of project implementation. The objectives of the monitoring and evaluation activities would be to: (a) ensure that procedures carried out for implementing micro-projects, executing contracts and managing project accounts are in compliance with the Operating Manual; (b) provide information regularly on progress toward achieving desirable results and facilitating reporting to the Board, the Government and donors; (c) provide information on project performance in terms of social development outcomes, including community mobilization and institution building for local self-governments; (d) alert managers to actual or potential problems in implementation so that adjustments can be made; (e) determine how the project is affecting the intended beneficiaries; and (f) provide a vehicle whereby GSIF could reflect and improve on their performance. The monitoring and evaluation framework of GSIF would comprise: (i) micro-project monitoring by GSIF staff and community development committees; (ii) the management information system: (iii) annual technical, procurement and audit reviews; (iv) annual beneficiary impact assessments; (v) regular dissemination seminars and workshops with beneficiaries on monitoring and evaluation outcomes; (v) Bank supervision missions carried out quarterly until the mid-term review scheduled for July, 2005; and (vi) quarterly and annual progress reports to be prepared by GSIF and submitted to the Bank. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The following project alternatives have been considered: (a) replacing support for GSIF by - 13- relying essentially on sector investment operations; (b) continuing "business as usual": i.e. rehabilitating socioeconomic infrastructure with a modicum of community participation; and (c) continuing the rehabilitation of socioeconomic infrastructure, while emphasizing community participation and local self-government and community collaboration ("community development"). a. Relying on sector investment operations or a social fund. While it is expected that broad sector-specific operations will continue to serve an important role in Georgia's overall development strategy, GSIF is seen by the Government as having a crucial complementary function in that it is able to (i) directly and immediately address a broad menu of service needs at the grassroots level; targeting vulnerable communities with interventions that can alleviate economic and environmental shocks, as well as raise incomes; and (ii) promote its decentralization policy. Consequently, GSIF has become a central element in the Government's poverty reduction strategy. The team agrees with this view - sector authorities will play the leading role in setting policies, drawing up national strategies and implementing larger programs and projects; GSIF will serve as the link to service provision at local and community levels. b. "Business as usual" or community ownership. The weakest element of GSIF I was the relatively limited emphasis on community participation in micro-project development and implementation. In part, this is reflected in reluctance of communities to come up with the community contribution; it has raised concerns about the sustainability of micro-projects; and in many instances it has led to the capture of decision-making in micro-project selection by local authorities and elites and the implementation of oversized projects. Both GSIF and the project team believe that a stronger grass-roots level demand-driven emphasis is preferable - it is better in identifying priorities, in mobilizing local and community resources, and ensuring community ownership and micro-project sustainability. c. Community development. In view of Government's commitment to decentralization and local development, and the parallel need to ensure that citizens meaningfully participate in managing the local development process, an approach that focuses on mobilizing communities; and strengthening local decision making and implementation capacities, seems most appropriate and is likely to bring the most value added for the resources spent. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). ___ - .. r L- Latest Supervisio'' - ~ ~ ~ ~ ~ W 4 , : , . >t- ' _'_ _ _ _ _ _ -.rjwf ,,. . ; n I-f - - I -.--~--*-*- -* -- Bank~financed peojedts'only) Implementation Development Bank-financed Progress (IP) Objective (DO) Need for stronger management and Municipal Development and S S accountability of local authorities as Decentralization Project government organization is decentralized Absence of adequate socioeconomic Georgia Social Investment S S infrastructure in poor communities Fund I - 14 - Public infrastructure and service S S provision constraints Road Project Irrigation and Drainage S S Community Dev. APL Tbilisi Water and Sanitation Project (FY04) Rural Development Project (FY05) Municipal Water Project (FY05) Need for stronger management and Second Municipal S S accountability of local authorities as Development and government organization is Decentralization (FY03) decentralized Inadequate social risk management Social Protection Reform structures Proj ect(FY04) Weak health financing and inadequate Health 2 (FY04) primary health care Need to improve learning outcomes of Education APL (FYOI) S S pnmary and secondary students Other development agencies USAID Georgia Community Mobilization Initiative Local Government Reform - Initiative IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: A. Lessons learned from GSIF I: The design of GSIF H has drawn extensively on experience under the first project, including the findings of World Bank supervision missions, beneficiary assessments conducted by GSIF staff and extemal consultants, an in-depth technical assessment of the project during the mid-term review and findings during project preparation. The following are major lessons from GSIF I that have been taken into consideration in preparing GSIF II: 1. Sustainability. Sustainable community development requires engagement by community members as well as local governments (participation), the services provided by outside agencies have to be relevant, the output has to be satisfactory, and adequate operations and maintenance arrangements need to be in place. * Community participation requires intensive interaction between GSIF, the participating community and the local authority before, during and for some time after project implementation. The interaction has to be relevant to the service needs - skills generation in -15 - planning, management, operation, maintenance - as perceived by the community. This was often not the case in GSIF 1, where priority was placed on physical implementation and less effort went into ensuring community engagement. GSIF II will emphasize community mobilization and capacity building, and the demand-driven nature of micro-projects; and participatory approaches for local self-governments; it will pay more attention to operations and maintenance arrangements to ensure that necessary skills and resources are available, and preventive maintenance is undertaken appropriately. Both are joint responsibilities of beneficiary communities and local self-government authorities and underline the need for active involvement of both communities and local self-government. GSIF I will pay particular attention to enhancing community development in both constituencies. O In addition to the project being a recognized priority by the community, the micro-project has to be designed to correspond to the needs of the community. Under GSIF I, this was not always the case, at times resulting in facilities that were much too large in terms of community need, and unaffordable both in terms of community participation and subsequent operations and maintenance. Under GSIF II, micro-project proposals will be addressed through the participatory community planning process and GSIF will during appraisal take into account the capacity of the community to absorb them, i.e. scale and affordability of a micro-project to the community. Altemative approaches to a micro-project will be considered, even altemative micro-projects that can be better absorbed by the community. o GSIF I has been only partially able to ensure that micro-projects are consistent with sector strategies and priorities, national, municipal and local government reform programs, and programs carried out by NGOs and donor agencies. Under GSIF 11, procedures will be strengthened for coordinating GSIF interventions with line ministries, NGOs, donor agencies and Bank Project management units. The partnership arrangement with USAID will also significantly contribute to avoid inconsistency between GSIF investments and other public and private initiatives. 2. Micro-project size. Under GSIF I, the average size of micro-projects was a relatively high US$ 50,000 equivalent. This has proven awkward for a number of reasons: o In many instances poor communities find it difficult to mobilize the necessary counterpart resources for larger projects; o Larger projects that exceed the capabilities of poor communities may often be inappropriate and not cost-effective for the community; o Local authorities may unduly influence the selection process in the direction of larger urban projects and in support of official priorities which do not necessarily focus on poverty; o In some instances, undertaking large projects may result in underfunded and/or partially completed projects. Under GSIF H it is expected that average project size will go down: the focus on local - 16 - self-government and community planmng is likely to reduce the pressures of vested interests for larger "showcase" or politically motivated micro-projects; community-level facilitation should reinforce this; and more ngorous appraisal criteria focusing on absorptive capacity, stricter beneficiary definition and participation, and need, are likely to result in less unwieldy micro-projects. 3. Counterpart funds. Difficulties to mobilize community contributions and shortages of government funds, essentially to meet tax requirements, adversely affected performance under GSIF 1. Community contributions may have suffered both from a lack of ownership of projects by the community and the often excessive size of projects. In part, this caused GSIF in many instances to focus on better-off communities that could more easily afford to contribute to micro-project costs. These issues will be addressed under the new project - by means of strengthening ownership (see sustainability above), by attempting to reduce project size and designing projects that better correspond to current and future community needs, and that are technically sound. Moreover, the community counterpart contribution will be reduced to 10 percent of micro-project costs net of taxes (that is 8 percent of micro-project costs inclusive of taxes). The Government's precarious financial situation is likely to continue to influence performance under GSIF II, and it may slow down the pace of implementation of the project. It is one of the main project risks. 4. . Poverty targeting. Under GSIF I, a combination of micro-project size and counterpart funding requirements may have resulted in a selection bias towards wealthier communities. Under GSIF II, targeting peri-urban areas, small towns and villages, rather than large urban areas; emphasizing smaller, more manageable projects that are more approprnately calibrated to the community; and a more intense focus by GSIF in seeking affordable and sustainable solutions, should help reduce selection bias. 5. The GSIF Executive Board. Under GSIF I, the Executive Board played a limited role in guiding GSIF's activities. Nonetheless, a Fund Board provides formal links to government authorities, sets policy directions, guards against misuse and misallocation of funds and more generally reflects a national commitment to poverty reduction that involves both public authorities and civil society. For GSIF I, the Board has been restructured to make it pro-active. The Board will take a more active role in the micro-project process, receiving regular reports on micro-projects and approving exceptionally large micro-projects (over US$ 75,000). In addition, the Board chairmanship will be only annual, private sector representation, including NGOs, will be more prominent, a quorum will be required for decision-making, and formal minutes will be issued for each meeting. While apparently modest, these measures should go far in activating the Board and involving it more closely in GSIF's activities. B. Lessons drawn from other experiences. Project design also draws on the experience of other social fund-type operations in the ECA Region, as well as relevant experiences of donors active in Georgia. Ongoing SIF projects in Armenia, Moldova and Ukraine has helped guide the design for building ownership, advocacy and capacity at the community level, as well as administrative capacity and participatory approaches at local self-government levels. The Armenia SIF, which is in its second phase, has provided valuable experience in capacity building - 17- and sustainability: at the local self-government level in institutional strengthening aiming at better financial and asset management, and participatory planning; and at the community level in community mobilization and advocacy. It has also provided guidance in how to improve the quality of micro-project design (quality of works); on improving the GSIF management information system; and in developing strong monitoring and evaluation mechanisms. The Moldova project has provided valuable insights into innovative approaches to community mobilization and participatory approaches for project ownership and community-level capacity building, and it's experience with setting up partnership arrangements with institutions that share similar objectives as GSIF in order to draw on synergies and achie-e a greater impact at the local level, have been examined for introduction into GSIF. The Ukraine project has informed project design in a number of areas: the potential for developing partnership arrangements between GSIF, various government levels, communities and NGOs; public information and awareness campaign design; and monitoring and evaluation. Project design has also drawn on the experience from Latin American social funds, in particular with regard to community oriented actions and fund organization. Donor activities, especially those of NGOs, have already demonstrated that participatory and demand-driven approaches common to social funds can work in Georgia, and their experience also has been sought in developing the project. This is especially the case in seeking approaches that bring local self-government and communities together in a participatory manner to promote community development. CARE and Mercy Corps, in particular, have extensive experience in this area in Georgia. 4. Indications of borrower commitment and ownership: GSIF is a featured element of the Government's poverty reduction strategy, and the Government has requested a follow-up to the first project. 5. Value added of Bank support in this project: IDA brings to bear its global experience in helping design and implement social fund operations that strengthen community action and local govemance. Specifically, the value added of Bank support will be: (a) greater stakeholder participation at the local level through decentralization of activities, with clear roles for local self-government and communities in the preparation, design, implementation, and maintenance of micro-projects; (b) capacity building at the local level focusing on community participation, strengthening of local self-government in decentralized management and financing systems, greater transparency in local self-govemment actions and increased interaction between local self-govemment authorities and community members; (c) enhanced micro-project quality through better technical design, strict adherence to specifications, improved procurement procedures, and better supervision; (d) poverty targeting based on an improved two-stage process for project selection; and (e) ensuring cost effectiveness in the use of project funds by closer monitoring through the MIS, and a cost accounting system. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): - 18- ) Cost benefit NPV=USS million; ERR = % (see Annex 4) * Cost effectiveness C) Other (specify) Due to the nature of the project, where the list of micro-projects to be financed cannot be known up front, it is not feasible to calculate an ERR. Consequently, NPV and ERR are not applicable to the project. Cost-effectiveness analyses are more appropriate, but these could be conducted only ex-post, after the mid-term review and project completion stages. Such analyses would include: the project rationale within the broader context of the Government's pnorities and the Bank's Country Assistance Strategy; comparisons with other projects under traditional government or NGO programs; cost per micro-project; and cost effectiveness indicators for each type micro-project and service completed (e.g., cost per unit of pipeline, or cost per square foot of school rehabilitation or construction). In the meantime, during project implementation, GSIF will carry out a simple cost-effectiveness analysis for each micro-project proposal presented by the communities. The analysis will be based on viable altematives, least-cost solutions, unit cost estimates from private construction firms, specific circumstances of the community, estimated benefits from the project, number of beneficiaries, and other relevant factors at the micro level. The Operating Manual will provide guidelines for carrying out such analyses. The carrying out of a full scale cost-effectiveness analysis will be discussed during the mid-term review of the project, based on the progress in implementing micro-projects. Such an analysis will include: (i) the project rationale within the broader economic context of the Government's economic priorities as well as the Bank's country assistance strategy; (ii) effective targeting of project funds to poor areas; and (iii) cost-effectiveness in the use of funds compared to those of government programs or NGO sponsored projects. At a detailed level, such an analysis will include: (a) direct costs covering labor, matenals, and service costs at site; (b) overhead costs, which are essentially GSIF office costs; (c) and cost-effectiveness indicators. The data for this analysis will be generated by the MIS. The analysis will also include an assessment of project impact as perceived by the populations benefitting from GSIF support. 2. Financial (see Annex 4 and Annex 5): NPV=USS million; FRR = % (see Annex 4) No financial analysis will be carried out as this is a non-revenue generating project. However, some financial management aspects should be taken into account at the micro-project level: Userfees and cost recovery. In the case of micro-projects such as water projects, irrigation or solid waste disposal projects, GSIF will assist in the development of cost recovery plans to ensure that beneficiaries contribute to cost recovery. Guidance will be provided by GSIF on how fees could be channelled for operation and maintenance of facilities constructed. GSIF will emphasize the importance of cost recovery in their dialogue with potential beneficiaries. To this end, they will direct their efforts in raising the awareness of beneficiaries on the importance of paying for services obtained, and on use of such funds for operation and maintenance to ensure the sustainability of services provided. Community contributions. Communities would be required to finance 10 percent of total micro-project costs (net of taxes). The contribution would be in cash and/or kind. Community -19- contributions play an important role for the following reasons: (i) they offer some assurance that the micro-project addresses a priority need of the community and demonstrates its commitment to the micro-project in financial terms; and (ii) it helps maintain the micro-project at a size that the community can afford. Fiscal Impact. The impact of the project on government finances would include the Government counterpart contribution, incremental taxes (VAT and local taxes), social security payments and, in some instances, operating and maintenance costs. Over the life of the project, the Government is expected to contribute a total of US$ 5.8 million. 3. Technical: GSIF will support the financing of well defined, technically sound and cost effective micro-projects. In doing so, it will address key technical issues concerning quality of works which will be enhanced by: (i) technical norms and standards for each type of micro-project conforming to national norms and standards; (ii) enforcement of such norms and standards through technical designs, effective procurement procedures, and systematic project supervision at the local level focusing on contractor performance by qualified technical consultants and GSIF staff; (iii) engagement of technical experts in design and supervision of works; (iv) consultations with technical experts in micro-projects in which special advice may be needed, as for example irrigation or water supply projects; (v) training of GSIF staff, community development committees and contractors in relevant fields of quality enhancement; (vi) the engagement of advisors/supervisors in quality of works, micro-project procurement, MIS and cost accounting, and compliance with the Operating Manual; (vii) annual procurement and technical reviews; and (viii) quarterly Bank supervision missions leading up to a mid-term review and subsequent semi-annual supervision missions. GSIF will also support institution-building of local self-govemnment and the promotion of participatory govemance at the local self-government and community levels. This activity will involve issues related to local administration, community-level development planning techniques, community mobilization strategies and advocacy. It will draw on USAID-financed NGOs for the provision of training in these areas to local self-governments and communities. 4. Institutional: 4.1 Executing agencies: The Project Implementation Unit, GSIF, will be the executing agency of the project. The legal status of this unit will be one of an autonomous agency reporting to a Board that has representation from relevant ministries and civil society representatives. The establishment of GSIF with structures, functions and staffing necessary to start project implementation is expected by end-April, 2003. The organizational structure is set out in Annex 11. 4.2 Project management: GSIF will be responsible for the overall management of the project, covering institutional, technical and administrative matters. While GSIF will benefit from the experience and lessons - 20 - learned under GSIF 1, the shift in emphasis of operations under GSIF II will require significant special training and on-the-job training in order to build up capacity to manage functions and responsibilities in community development, as well as in management, coordination and monitoring of the different component activities under the project, training and technical coordination, and monitoring and evaluation. On-the-job training will also be provided to GSIF to assist it in formulating strategies for each of the departments being created. (See Annex 12 on GSIF in-house training). Project management will be systematically assessed durng Bank supervision missions. At the micro-project level, the assessment will cover: (i) the internal monitoring system ensuring that it provides transparency and accountability of GSIF activities; (ii) procurement conducted by community development committees and the technical quality of the rehabilitation works; (iii) compliance with the project's criteria and procedures for appraisal, approval, implementation, and monitoring set out in the Operating Manual; (iv) adherence to environmental standards; and (v) effective maintenance of micro-project files. At the project management level, the assessment will cover: (i) all documentation relating to disbursement, procurement and reporting; (ii) the project accounting system and the project's financial accounts; and (iii) legal and financial covenants ensuring that the Government is in compliance with the Credit Agreement. The management information system will provide systematic and timely feedback through an enhanced reporting and monitoring system for better decision making in project management. 4.3 Procurement issues: A procurement assessment was carried out during project preparation. Based on this assessment, on-the-job and special training in procurement will be organized for the task teams. A Procurement Action Plan outlining procurement training requirements was developed during preparation and is provided in Annex 6(A). 4.4 Financial management issues: Financial management arrangements for GSIF have been developed during project preparation by an accounting consultant familiar with Bank financial requirements. With the aid of the consultant, a new comprehensive Financial and Administrative Procedures Manual has been developed, based on requirements of the International Financial Reporting Standards (IFRS), including accrual accounting, which sets out procedures relating to financial management, internal controls, accounting and auditing. The consultant also provided the necessary training to the GSIF financial manager and staff in the proper application of IFRS, including principles of accrual accounting, and other financial management procedures as per the new FAPM. GSIF has also contracted a local taxation specialist. This will allow GSIF to correctly document the taxes it has to pay, procedures for their calculation and payment, and procedures for recording the taxes payable and paid in the accounting records. New accounting software - 1C accounting software - has been selected and purchased. The software package, which is widely used in Bank-financed projects, has proved to be capable of providing accurate, timely and sufficiently detailed information regarding project resources and expenditures, and flexible in terms of production of the necessary financial reports. IC accounting software is compatible with software currently employed in GSIF Management -21 - Information System, and is expected to be integrated with it. GSIF intends to continue in future close cooperation with the accounting and tax consultants, and with the software company. Also, the project will be supervised by the Bank FMS. All those factors taken in conjunction may be regarded as a sound guarantee for successful operation of the newly set-up financial management system. More details on financial management arrangements for the project are in Annex 6(B) to the PAD. Current.financial management arrangements, as they have been assessed for the new GSIF second project, are in place and in compliance with Bank guidelines. 5. Environmental: Environmental Category: F (Financial Intermediary Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. No major environmental issues are anticipated under the project, given the relatively small size and rehabilitation nature of most community infrastructure projects. Instead, the proposed project is expected to have some positive environmental impact, especially by rehabilitating sanitation and water-supply facilities. Likewise, improvements in schools in many instances is expected to improve energy efficiency. Environmental concerns will be mitigated in the selection and implementation of micro-projects. The relevant chapter of the Operating Manual of the project will lay out procedures and implementation arrangements for ensuring full consideration of environmental safeguards, in accordance with the Bank's environmental assessment guidelines. Each micro-project will be individually screened and reviewed by the GSIF - by specific type - for any negative impact, as well as needed mitigating measures (a sample EMP is included in the Operating Manual for those projects with more complex environmental impact). The micro-project proposal will incorporate an environmental review checklist, and the micro-project appraisal document will adapt type-specific analysis, costs, and mitigation measures. Training will be provided to the community development specialists in GSIF to carry out the evaluation and monitoring of micro-projects according to agreed environmental standards. Whenever a micro-project would have an identifiable negative impact, an appropriate mitigation plan would be submitted to IDA. Micro-projects with serious negative impacts would be excluded from funding. The environmental impact methodology and mitigation plans will be monitored during Bank supervision of the GSIF. 5.2 What are the main features of the EMP and are they adequate? The Operating Manual describes the procedures and implementation arrangements required to comply with environmental safeguards. It spells out the institutional responsibilities, including the role of relevant government bodies for screening of proposed micro-projects, preparing environmental assessments when and where necessary, reviewing such assessments, and ascertaining that appropriate mitigation actions are included in contract documents and/or mitigation plans. Public participation and consultation in the preparation of mitigation plans will be mandatory. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: n/a 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA - 22 - report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Georgian legislation requires that public consultations be held for all investments that could have a significant environmental impact. At the national level, GSIF has undertaken a stakeholder meeting with the concerned government authorities and the main NGOs that may be involved in the project. In the case of micro-projects, stakeholders will be consulted on a case-by-case basis, depending on the nature of the proposed project, during the screening process, during the development of plans to address potential environmental impact, and during micro-project supervision to assess environmental aspects of micro-projects. Typically, GSIF staff will hold discussions on-site with the community during screening and with both the community and the local self-government in preparing and reviewing environmental assessments and environmental management plans, if and when required. Whenever possible, experts within the local self-government or community will participate directly in the preparation of environmental assessments and plans. Communities must obtain all necessary permits and clearances from the local self-government before final approval by the GSIF of any project proposal. During project implementation, GSIF staff will monitor and supervise the quality of works and assess the environmental standards of the micro-projects. In addition, annual technical reviews will be carried out by independent consultants to assess the quality of works, including environmental standards, of a number of selected micro-projects of different types. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Micro-project supervision and annual technical reviews will include environmental assessments to ensure adequate compliance with environmental regulations and/or identify possible environmental risks and required mitigation measures. 6. Social: 6.1 Sumnimanze key social issues relevant to the project objectives, and specify the project's social development outcomes. The key social issue relevant to project objectives which the project addresses is the mentality of dependence and the absence in communities of self-reliance or ability to take collective action for a common good. With a central State no longer able to provide adequate services and pursuing a policy of decentralization, there is increasingly need for initiative and self-reliance at local levels - its absence constitutes a severe roadblock to improved standards of living and higher welfare. Against that background, the projects aims to strengthen social cohesion and grassroots action. The expected social development outcomes of the project focus on key areas of social development, i.e. inclusion and participation. The social development strategy implicit in the project design includes frameworks to address these areas. With respect to inclusion, the procedures for community investment projects will be designed to ensure that the poor and/or vulnerable groups are able to participate in and benefit from project activities. Community outreach by means of community development planning, mobilization and advocacy will ensure the involvement of such people. With respect to participation, the project is designed as a community-driven development project, whereby beneficiaries are directly involved in the planning, identification, preparation, design, implementation, and subsequent operation of community investment projects. The proposed project will support community development at - 23 - the local level by giving primacy to the active involvement of local self-governments and communities in the decisions and activities which affect the quality of their lives, and thereby enhance social cohesion. 6.2 Participatory Approach: How are key stakeholders participating in the project? The main stakeholder at the national level is the Government, participating through GSIF's Board, which oversees project management and ensures the consistency of GSIF II operations with Government policy. At sub-national levels, -the main stakeholders are communities and local self-governments, and here the capacity-building programs under GSIF II aim squarely at providing them with skills that will ensure broad participation in the local development process. Other local-level stakeholders are private enterprises that are eligible to participate in micro-project implementation. Donors include KfW, which participates with the Bank in the financing of GSIF I; KfW has participated in project preparation and is expected to continue its active engagement through participation in Bank supervision missions. Through a partnership arrangement with USAID, the project will facilitate participation by NGOs in supporting community development under the project; at the same time, it is expected that local NGOs will benefit from their exposure to and collaboration with the USAID-funded international NGOs on various aspects of local development. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? The community and local self-government participatory process is heavily dependent on the participation of community-based organizations (either preexisting ones or ones developed as part of the micro-project preparation process). 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The Operating Manual will include a requirement that social assessments and public consultations are an integral part of the micro-project generation and implementation process. 6.5 How will the project monitor performance in terms of social development outcomes? GSIF will undertake regular assessments as mentioned above. In addition, independent beneficiary impact assessments will be undertaken periodically, the mid-term review will include social development impact considerations in its analysis, and there will be a final beneficiary impact assessment at the end of the project. 7. Safeguard Policies: 7.1 Are any of the following safeguard policies triggered by the pro ect? .-iJ .r' .. ...... . . . o-'z' Policy b rgged. Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes ( No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) (9 Yes S No Forestry (OP 4.36, GP 4.36) (9 Yes * No Pest Management (OP 4.09) (9 Yes * No Cultural Property (OPN 11.03) (9 Yes S No Indigenous Peoples (OD 4.20) (9Yes No Involuntary Resettlement (OPIBP 4.12) (_Yes * No Safety of Dams (OP 4.37, BP 4.37) -24- U Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) U) Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* U Yes * No 7 2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Provisions made by the project to ensure compliance with enviromnental safeguards are covered in section 5.0: Environmental. F. Sustainability and Risks 1. Sustainability: Sustainability of project benefits is critically dependent on the following: (i) participatory local decision making is institutionalized; (ii) administrative skills are applied; and (iii) communities have ownership of micro-projects. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth columnn of Annex 1): Risk ga on- eRiiaRatisg;~- .ke. From Outputs to Objective Government remains committed to S CAS dialogue decentralization Local self-governments and communities S Micro-project cycle and capacity building accept a participatory approach to local components will contain strategies to development and are willing to maintain specifically address this risk element and build on it Critical mass of community members M Community mobilization and advocacy participate during the micro-project cycle From Components to Outputs Timely availability of government H Based on quarterly implementation plans, counterpart funds government would deposit the necessary funds on the account for government funds GSIF able to effectively apply new M Extensive training program prior to project approaches to micro-project, community launch and local self-government development Timely availability of community S Participatory planning process, community contributions participation in setting local priorities and appropriate scaling of micro-projects Overall Risk Rating S There is a significant risk when (i) community mobilization is introduced into a post-Soviet environment, where passive dependency on government assistance is prevalent; (ii) decentralization process is in its infancy; and (iii) the project implementation agency is being - 25 - reorganized. The project is designed to especially recognize these aspects: the partnership with USAID will significantly strengthen conununity mobilization and institution building programs; and it would introduce checks and balances into GSIF operations. GSIF staff would undergo extensive training prior to and during project implementation. Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) | Risk Rating Risk Mitigation Measures Inherent Financial Management Risk 1. Country financial management issues M Monthly morntoring of the arrears in Government Counterpart Funding will be performed by the World Bank Tbilisi Office Portfolio Analyst/FMO and distnbuted to the task teams and country unit for their information and follow-up 2. Project financial management issues M Regular and detailed supervision of the project, including review of quarterly Financial Monitoring Reports by the Bank FMS, especially at the reparation and early implementation stages of the project 3. Weak banking sector issue in Georgia S World Bank Tbilisi Office has a number of effective measures in place to mitigate the nsk of loss of funds due to weakness of the banking system in Georgia 4. Perceived corruptions M Ring fencing of projects Overall inherent FM n M Moderate Financial Management Control Risk 1. Implementing entity L 2. Funds flow M Guidelines of evaluation and documentation of the communities' contributions in-kind are documented in the new Financial and Administrative Procedures Manual. Timely availability of Government counterpart funds and community contributions should be closely monitored by GSIF Financial Manager. 3. Staffing M Training needs should be assessed by GSIF on the annual basis and costs of the necessary training, if any, should be included in budgets and approved in advance. 4. Accounting policies and procedures L 5. Internal audit n/a ot applicable 6. External audit L 7. Reporting and monitoring L 8. Information systems L Overall control risl L H - High, S - Substantial, M - Moderate, L - low 3. Possible Controversial Aspects: - 26 - G. Main Loan Conditions 1. Effectiveness Condition * The Borrower has entered into a agreement, acceptable to IDA, with GSIF for the purpose of making available the proceeds of the Credit allocated from time to time for the carrying out of the project. * A Project Account has been opened by the Borrower in a commercial bank on terms and conditions acceptable to the Association with an initial deposit of US$ 50,000; and * An Operating Manual, and accompanying manuals, handbooks and guidelines, satisfactory to the Association, has been adopted by the Board of GSIF. * (d) the Borrower has submitted an initial 18 districts selected for Parts A and B of the Project, acceptable to the Association. 2. Other [classify according to covenant types used in the Legal Agreements.] Accounts/Audits * During execution of the project, the Borrower shall maintain the Project Account and transfer each quarter an amount required to allow GSIF to perform in accordance with its annual work plan and budget agreed with the Bank. * The Borrower shall have the records, accounts and financial statements (balance sheets, -a summary of funds received, showing IDA funds, project funds from other donors, and counterpart funds separately, both for the current fiscal year and accumulated separately; a summary of expenditures, shown under the main project headings and by main categories of expenditures, both for the current fiscal year and accumulated to-date; and a balance sheet showing accumulated funds of the project, bank balances, other assets of the project, and liabilities, if any) for each fiscal year audited, in accordance with auditing standards acceptable to the Association, consistently applied, by independent auditors acceptable to the Association. * The Borrower shall furnish to the Association not later than six months after the end of each such year, (A) certified copies of the financial statements for such year as so audited, and (B) an opinion on such statements and report of such audit, by said auditors, of such scope and in such detail as the Association shall have reasonably requested * GSIF shall prepare and furnish to the Association a financial monitoring report, in form and substance satisfactory to the Association, which includes: * a brief written discussion of the progress of the project including explanation of significant variances between actual and budgeted amounts for the period (that is, actual variances +/- 10% of budgeted amounts); * a Statement of Sources and Uses of Funds, which sets forth actual and budgeted sources and applications of funds for the project, both cumulatively and for the period covered by said report, shows applications of funds by main categories of expenditures and includes actual to budget comparisons; - 27 - o a summary of expenditures which sets forth actual and budgeted applications of funds for the project, both cumulatively and for the period covered by said report, shows applications of funds by main project activities and includes actual to budget comparisons; o a balance sheet showing accumulated funds of the project, bank balances, other assets of the project, and liabilities, if any; o Output Monitoring Report, which describes physical progress in project implementation, both cumulatively and for the period covered by said report, and explains variances between the actual and planned project implementation; and o Procurement Process Monitoring Report, which sets forth the status of procurement under the project, as at the end of the period covered by said report. Management Aspects of the Project o The GSIF shall notify and obtain prior approval of the Association for any changes in the appointment of or terms of employment of the manager, deputy manager or department managers. o The Borrower shall ensure that GSIF's operations shall be carried out in accordance with the procedures set forth or referred to in the Operating Manual and accompanying manuals, handbooks and guidelines. o Any changes in the procedures set forth in GSIF's Operating Manual and accompanying manuals, handbooks and guidelines will require the approval of the Association Monitoring, Review and Reporting o The GSIF shall carry out, annually an independent technical and managerial audit of implementation of the Project under terms of reference satisfactory to the Association. o The GSIF shall: (a) furnish to the Association the draft Framework Agreement and such other documents and information as the Association may request in respect of any of Micro-projects for the Association's review and approval prior to GSIF's approval of: (i) any social Micro-project estimated to cost $50,000 equivalent or more; and; (ii) any economic Micro-project estimated to cost $75,000 equivalent or more. o GSIF shall furnish to the Association an environmental mitigation plan, acceptable to the Association, in case GSIF has identified negative impact on the environment. o The GSIF shall: o maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with indicators satisfactory to the Association, the carrying out of the project and the achievement of the objectives thereof; o the Borrower shall review with the Association, by September 15, 2005, or such later date as the Association shall request, the mid-term review report and, thereafter, take all measures required to ensure the efficient completion of the project and the achievement of its objectives, based on the conclusions and recommendations of the mid-term report and the Association views on the matter. o GSIF shall prepare an annual work plan and budget to be agreed with the Association. - 28 - H. Readiness for Implementation 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 1 1. b) Not applicable. D 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. [ 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. lIZ 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. C 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Aleksandra Posarac Annette Dixon D-M Dotfsett-Coirolo Team Leader Sector Director Country Director - 29 - Annex 1: Project Design Summary GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT ,iKey Performance* DataCollecton Strategy - .. -4ierarcihy'of:Objecti`esf - u Indicators -_*_-_._. . Critical,-Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) To decrease poverty and Incidence, depth, severity of Poverty Assessments that Continued Government vulnerability among the poverty include income/consumption commitment to poverty population. and non-income aspects of reduction strategy poverty; Risk and vulnerability assessments; Social Protection Review Project Development Outcome i Impact Project reports: (from Objective to Goal) Objective: Indicators: Participating local Participatory decision making Beneficiary impact National policy continues to self-govemments use process institutionalized, as assessments pursue decentralization, enhanced management skills reflected in: (i) public access provide support to local and a participatory process in to information; (ii) inclusion Institutional assessments at self-government and establishing local pnorities and informed participation; local and community levels, community based and implementing local (ni) mechanisms for public including participatory development, and promote development plans. accountability. processes participatory local and community partnerships New administrative techniques being applied by local self- governments Participating poor Improved inclusiveness of MIS generated information on Local Self-Goverment communities apply for, local initiatives with respect to stakeholder participation authorities continue to apply manage and use poor and vulnerable groups. enhanced management skill micro-projects in a sustainable World Bank supervision sand communities continue to manner Communities organize and reports use mobilization and advocacy mobilize resources to solve skills problems of common interest. Quarterly and Annual Progress Reports Increased or stabilized income flows as result of sustainable Mid-term review report economic infrastructure rehabilitation micro-projects. End-of-project independent beneficiary and impact assessment Implementation Completion Report Participating poor Completed micro-projects communities benefit from being operated on a improved social and economic sustainable basis and used by infrastructure and related the beneficiaries for the services intended purposes - 30 - ;- D-aty P= crnia'nce zDat Co1lectionrSirate_gy I . HiMich--f bj'"ctives IndicAtors ; XI.CikIA~rpi1& Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: I a. Increased capacity of Number of local development Beneficiary impact Local self-governments and communities to define programs elaborated in a assessments communities accept a problems and organize participatory process. participatory approach to local themselves to work towards Institutional assessments at development and are willing to sustainable solutions, and Number of community local and community levels maintain and build on it participate in local members involved in carried out by GSIF Participatory community development decisions participatory process development mechanism has a demonstration effect on other communities I.b. Increased capacity of Number of local MIS generated information on Local self-government local self-governments in self-governments trained in stakeholder participation authorities and communities decentralized planning and administration and commit to operating and management and in the participatory techniques. Special studies (GSIF) maintaining project application of participatory infrastructure on a sustainable techniques basis 2. Economic and social Number infrastructure World Bank supervision infrastructure appropriate to facilities rehabilitated, total reports the community installed and and by micro-project type operational Annual training reviews Quarterly and Annual Progress Reports 3. Improved capacity of GSIF Number of GSIF staff who to manage and administer its have participated in training Mid-term review report operations Feedback from GSIF staff on Implementation Completion integrated team approach Report Feedback from communities on GSIF services. Feedback from contractors on contracting arrangements for service provision Share of GSIF operating costs to total cost of Micro-projects completed/year Micro-project cycle duration not exceeding 350 days/average Proportion of contracts completed on time. Proportion of contracts completed on budget. - 31 - Re- * ' KyPerformance Data Collection_Strategy | . . I:ibrarcfiy f Objptivgs i- 'Indicators, -- Critical Ass Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Capacity-building $4.00 million Same as above Timely availability of - participatory planing government counterpart funds - institution-building 2. Micro-projects $22 60 million Timely availability of community contributions 3. Project management $3.60 million Communities receptive to empowerment GSIF able to effectively apply new approaches to micro-projects, community and local self-government development - 32 - Annex 2: Detailed Project Description GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT The project would consist of two mutually reinforcing components, as well as a project management component for project implementation (GSIF). The components comprise (a) capacity building at local community and self-government levels, relating to the participatory planning process, and institutional strengthening of local self-governments through training in management and administrative skills; (b) identification, development and implementation of community-based micro-projects; and (c) project management. All project components would be managed by a reorganized GSIF. GSIF would implement the capacity building component under a partnership arrangement with the USAID-financed programs the Georgia Community Mobilization Initiative and the Georgia Local Government Reform Initiative. Government in Georgia has four levels - state, region, local (district) government, local self-government. Local self-government is the lowest level, and it may consist of a village or a group of villages, a town or a city. In the case of larger towns and cities, there may be more than one local self-government, representing different sections of the town or city. In most instances, self-government units have an elected local self-government council. The Government's decentralization program covering the 2000-2005 period aims at devolving extensive responsibilities to local self-governments: (i) local utility services; (ii) budget planning and management; and (iii) asset management. It will also assign local taxes and other sources of revenue to local self-governments. The different levels of government are described in Annex 17. At start-up, GSIF will focus on communities in peri-urban areas, rural towns and villages in six of the poorest districts in each of its two Areas of Operation that do not include KfW districts (in that Area, it is expected that GSIF will give priority to KfW-targeted districts). The determination of those initial districts will be done by GSIF and implementing partners on the basis of jointly developed criteria. (The term "implementing partners" indicates the NGOs or other agencies carrying out capacity building activities and financed under the partnership agreement with USAID.) This list would be a condition of effectiveness. Subsequently, GSIF would operate on a national scale, while continuing to give priority to poor communities in pen-urban areas, rural towns and villages. In the agreed districts, GSIF staff will, in collaboration with the implementing partners undertake a needs-based ranking of local self-government units using a transparent two-stage ranking process. Initially all local self-government units within the district will be ranked by means of key informants representing each local self-governmnent unit and cross-checked with available statistical data. Following that ranking, GSIF staff will in collaboration with the implementing partners undertake a rapid needs assessment of at least one third, but not less than three, of the local self-governments with the lowest rankings. On the basis of the rapid needs assessment, the three poorest self-governments will be selected for community mobilization process, advocacy, and capacity and institutions building. Community mobilization involves generating community support around specific activities. Advocacy involves identifying issues and objectives and developing strategies and targeted messages to mobilize outside support for community interests. - 33 - Micro-project identification occurs according to the following process: 1. a community development plan is elaborated by each of the communities in the local self-government with implementing partner facilitation (and GSIF monitoring) using participatory techniques; (in a few cases, where the partnership arrangement with USAID may not be applied, GSIF will contract out the task to qualified NGOs, firms or individuals); 2. community plans are then consolidated in a participatory way at the local self-government level, involving full consultation with the communities and further facilitation by the implementing partners; 3. micro-projects proposed for financing are drawn from such plans. In cases where local self-governments are assessed by GSIF and implementing partners as being insufficiently established, plans will not be consolidated and proposals will be drawn from community development plans. A set of criteria for use in the key informant process and needs assessments has been developed by GSIF, based on its previous experience, experience of NGOs and donors active in community mobilization in Georgia, and recent beneficiary impact assessments. Mainly, readily available socioeconomic indicators will be used, such as: (i) access to basic social and economic infrastructure; (ii) income levels and economic activity; (iii) unemployment; (iv) extent of Government and donor intervention; (v) lack of natural assets; (vi) location - distance from the district center, altitude; and (vii) other qualitative indicators that reflect the level of organization and participation in the communities. Detailed procedures and criteria will be included in the Operating Manual. It is expected that the two-stage procedure to targeting will allow resources to be channeled to the neediest communities. Criteria will be further developed and refined by GSIF prior to and during project implementation. By Component: Project Component 1 - US$4.00 million (a) Capacity building: This component, which would support the Government's decentralization effort, would provide training and technical assistance to enable communities and local self-governments to address the needs and priorities for local development through a capacity building program that would aim at increasing the competences of local self-governments, involve citizens in decision-making and, ultimately, create empowerment at the local level. The capacity building component would have two sub-components: (i) community development planning and related micro-project development, and advocacy; and (ii) institutional strengthening of local self-governments in line with their evolving responsibilities for local utility services, taxation, budget planning and local management. A partnership agreement between GSIF and two USAID-financed programs currently underway in Georgia: (i) the Georgia Community Mobilization Initiative and (ii) the Georgia Local Government Reform Initiative, will be established, where USAID would finance the - 34 - implementation of the capacity building component at community and local self-government levels. Under the former, GSIF would collaborate with implementing partners in assisting communities and self-governments to draw up participatory local development plans and provide training in micro-project implementation, community mobilization and advocacy skills; under the latter, GSIF and implementing partners would collaborate in providing local self-govemments management training. Field-level implementation would be undertaken by NGOs and other organizations. A framework agreement would be established between the two USAID programs and GSIF. It is expected that the partnership arrangements would apply to most GSIF interventions. Only in a small minority of cases would capacity building be contracted out to qualified NGOs, firms or individuals under GSIF financing. Community development planning and micro-project development would focus on developing community level development plans and integrating them into consolidated local self-government plans using participatory methods. It is expected that the process would (a) help move communities and local self-governments from a dependency culture focused on short-term interventions to one that recognizes that communities can have the ability to improve their living conditions and prospects for sustainable development through the active involvement of community members; and (b) introduce a comprehensive local development framework for overcoming poverty issues through prioritization of investment needs in a participatory manner through interaction between community members and local self-government authorities. The community development planning process would also serve to (c) identify micro-projects for GSIF financing. Significant capacity building would be linked to micro-project development and implementation, again focusing on communities and local-self-governments. The emphasis would be on building their capacity to plan, prioritize, manage, operate, supervise and maintain investments. Specific topics to be covered would include: (i) needs assessment and prioritization; (ii) elaboration of development plans and their costing; (iii) project identification and formulation focusing on developing project proposals together with detailed cost estimates; (ii) project costing and accounting; (iii) procurement; (iv) mobilization of the community in construction and maintenance activities; (v) building partnerships with local authorities, NGOs, and other entities; (vii) fund raising techniques; (viii) disseminating of information to community members on micro-project activities; (viii) formulation of business plans; (ix) quality control; and (x) monitoring and evaluation. Institution-building at the local self-government level will provide training to local self-governments in areas where micro-projects are being implemented. It will focus on enhancing understanding of current legislation relating to decentralization and local self-government, and it will strengthen skills in local financial administration (budgeting and accounting), asset management (inventory monitoring, operation and maintenance of assets), information dissemination (i.e., community meetings, public hearings and referendums, surveys, and information materials), and the participatory planning process. Project Component 2 - US$22.60 million (b) Community-based micro-projects This component would finance on a grant basis small community-level economic and social - 35 - infrastructure micro-projects located in poor peri-urban areas and rural towns and villages. Micro-projects would be proposed for GSIF financing based on priorities set up by the participatory local development planning process. They would be carried out by community development committees. Examples of micro-project types include: small-scale water supply and sanitation systems, minor irrigation works, solid waste management; land clearance, etc.; community health center rehabilitation; school rehabilitation, including related equipment, furniture, materials, including teaching materials, and fixtures; winterization of facilities; and space redesign to take into consideration function (need), work flow and energy efficiencies. (The menu of micro-projects is set out in Annex 13.) In addition, the component would finance consultant services for micro-project design and supervision to ensure good quality of works. The maximum size of an economic micro-project would be US$ 150,000 equivalent; the maximum size of a social micro-project would be US$ 100,000 equivalent. Average size of micro-projects would be targeted at below US$ 50,000. The minimum size of infrastructure micro-projects would remain at US$ 10,000 equivalent. A community contribution would be mandatory. Under GSIF I, a minimum community contribution of 16 percent of the micro-project cost was required, either in cash or in kind. When a sponsor was contributing, a minimum of 3 percent was still required from the community members. In many instances, communities were unable to mobilize the necessary counterpart funding, and poorer communities in particular found themselves at a disadvantage. Consequently, during the mid-term review of GSIF I, the minimum community contribution was reduced to 5 percent. During preparation of GSIF II, appropriate levels for community contributions were discussed (see section on Lessons learned and reflected in project design). As a result, the community contribution would be set at 10 percent (net of taxes) of the cost of a micro-project. Project Component 3 - US$ 3.60 million (c) Institutional Support to GSIF This component would support the Project Management Unit through the provision of limited office equipment (computers, software, printers, photocopy machines, fax machines, etc.), vehicles, consultants' fees, operating costs such as communications, local travel, utilities, printing and publication, office supplies, fuel, vehicle insurance and inspection, vehicle maintenance and repair, project audits, training and technical assistance, and monitoring and evaluation. The component will also finance training for GSIF staff on a range of topics identified during GSIF I implementation ( See section on Lessons learned and reflected in project design) and GSIF II preparation. Already, study tours and workshops have been organized under a Dutch Trust Fund arrangement. An intensive training program, which initially will be launched under a PHRD grant, will cover participatory local development, micro-project design, appraisal, procurement and implementation concepts and processes, information systems management and use, management and planning, and administration. The program is described in Annex 12. - 36 - Annex 3: Estimated Project Costs GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT * I--; -=sv>.gdl- ,- . rP,roJectCost oinprn r $milt S- V'oniiiin n- o S$ ilion ; Capacity building 3.80 0.00 3.80 Micro-projects 22.20 0.00 22.20 Project Management 3.15 0.30 3.45 Total Baseline Cost 29.15 0.30 29.45 Physical Contingencies 0.30 0.03 0.33 Price Contingencies 0.40 0.02 0.42 Total Project Costsl 29.85 0.35 30.20 Total Financing Required 29.85 0.35 30.20 -.-e. . . W.<* $m I ign- a .-gTotal -~~~ ~~~ S'~~~~~$~~~T5~.ill(rr ~$ioin,~ ___rni__lio Microprojects 22.60 0.00 22.60 Goods 0.02 0.08 0.10 Consultant services 4.08 0.10 4.18 Training 0.12 0.07 0.19 Studies 0.23 0.00 0.23 Incremental Operating Costs 2.80 0.10 2.90 Total Project Costs 29.85 0.35 30.20 Total Financing Required 29.85 0.35 30.20 Identifiable taxes and duties are 4.9 (US5m) and the total project cost, net of taxes. is 25 3 (USSrn) Therefore, the project cost shanng ratio is 59 29 % of total project cost net of taxes - 37 - Annex 4: Cost Effectiveness Analysis Summary GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT '*PresentValue of F iows Fiscal Impact- '-Economif AnaIysis Financial Analysts-- Twxs - ~ ~ ~ ~ ~~~~~~Txs- Subsidies Project Costs Not applicable Not applicable US$ 4.9 ______________________ _ I m illion If the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The difference between financial and economic costs arises from price controls on the inputs." Summary of benefits and costs: Given the demand-driven nature of the micro-projects, the variations in their typology and size, and their dispersal across Georgia, conventional ex-ante economic or financial analyses were not carried out during project preparation. However, micro-projects to be financed under the project are expected to yield high social and economic returns, since GSIF would finance simple but cost-effective social and economic infrastructure (see Annex 13). The use of competitive bidding processes may generate savings ranging from 10-20 percent of estimated costs for each micro-project (based on experiences and analyses of other social investment funds in the ECA region), when compared with infrastructure provided through conventional government ministries. Although a full-scale economic analysis would not be carried out ex-ante, a number of selection criteria would be used to screen micro-project proposals submitted and to eliminate micro-projects that are not cost-effective. First, the selection of micro-projects would be demand-driven, selected by local self-governments and their communities on the basis of community plans, where investment priorities have been determined based on need, affordability and absorptive capacity in the beneficiary communities. Moreover, feasibility studies will be carried out for each proposed micro-project. In addition to the site surveys and technical/environmental reviews of the proposed infrastructure, criteria covering technical, social, economic, and financial aspects will be used for each type of infrastructure to assess overall economic viability of the project. The use of project funds in a cost effective manner is an issue that will be addressed during the course of the project and especially during the mid-term review. The focus of analysis will be on recording actual costs of completed micro-projects, estimated costs of micro-projects in the pipeline, and the composition of such costs in terms of materials, labor, and overheads. The data thus obtained and recorded in the management information system would be used to develop monitorable benchmarks of cost-effectiveness. These benchmarks will then be inputted into the project's management information system. To ensure the cost-effectiveness of individual micro-projects, a unit cost database will be - 38 - maintained to assess various norms and standards, cost per beneficiary and possible rates of return for different types of micro-projects (such as water supply and schools). This would help GSIF arrive at least-cost solutions to infrastructure needs. Beneficiary impact assessments throughout the life of the project will ascertain the impact of micro-projects on communities, and will enable GSIF to gain a better understanding about who in terms of gender, age, socioeconomic group and vulnerable status is actually benefiting. The carrying out of a full scale cost-effectiveness analysis will be discussed during the mid-term review of the project, based on the progress in implementing micro-projects. Such an analysis will include: (i) the project rationale within the broader economic context of the Government's economic poverty reduction strategy, as well as the Bank's country assistance strategy; (ii) effective targeting of project funds to poor areas; and (iii) cost-effectiveness in the use of funds compared to those of government programs or NGO sponsored projects. At a detailed level, such an analysis will include: (a) direct costs covering labor, materials, and service costs at site; (b) overheads, which are essentially GSIF office costs; (c) short-term employment created; (d) the increased demand for materials and services; and (e) cost-effectiveness indicators. The data for this analysis will be generated by the management information system. The analysis will also include an assessment project impact as perceived by the populations benefiting from the micro-projects Main Assumptions: 1. Government commitment throughout the life of GSIF, and disbursement of government financial contributions in a timely manner. 2. Provision of community contributions as required. 3. The required technical norms and standards are maintained in the design and construction phases of micro-projects. 4. Beneficiary calculations will only include direct beneficiaries of a micro-project. 5. All activities are carried out in a transparent and accountable manner. Cost-effectiveness indicators: The cost-effectiveness analysis will include the following indicators: 1. Average cost per each type of micro-project; and 2. Impact and efficiency indicators, examples of which are listed below: Micro-projects Indicators Potable Water Cost per beneficiary, Cost per unit of pipe length Irrigation Cost per beneficiary, Cost per unit of pipe length, Cost per Irrigated hectare School Rehabilitation Cost per beneficiary, Cost per unit area. Such indicators should compare the micro-project with a suitable comparator, e.g. unit project costs of alternative project designs or international standards. JThese indicators should compare the project with a suitable comparator, e g. unit project costs of alternative project designs or international standards. - 39 - Annex 5: Financial Summary GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT Years Ending 12131 >~~~tN; l>- - --tP§.ll.i-iO#RfOD -- b Year 2 Year2 3 Year 4 | Year 5 Year6 | Year7 Total Financing Required Project Costs Investment Costs 0.1 5.7 9.4 11.2 0.9 0.0 0.0 Recurrent Costs 0.2 0.8 0.8 0.9 0.2 0.0 0.0 Total Project Costs 0.3 6.5 10.2 12.1 1.1 0.0 0.0 .Total Financing 0.3 6.5 10.2 12.1 1.1 0.0 0.0 Financing IBRDIIDA 0.2 3.2 5.0 6.0 0.6 0.0 0.0 Govemment 0.1 1.1 1.7 2.1 0.2 0.0 0.0 Central 0.0 1.1 1.7 2.1 0.2 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 1.1 1.6 1.9 0.2 0.0 0.0 User Fees/Beneficiaries 0.0 0.5 0.8 0.8 0.1 0.0 0.0 Other 0.0 0.6 1.1 1.3 0.0 0.0 0.0 Total Project Financing 0.3 6.5 10.2 12.1 1.1 0.0 0.0 Main assumptions: 1. A micro-project cycle of on average 350 days; 2. Government contribution is forthcomig in a timely maner. - 40 - Annex 6(A): Procurement Arrangements GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT Procurement General 6.1 Procurement of works and goods under the project will follow the Procurement Guidelines "Procurement under IBRD Credits and IDA Credits" published in January 1995, revised in January and August 1996, September 1997, and January 1999. Procurement of consulting services under the project will follow the Consultants Guidelines "Selection and Employment of Consultants by World Bank Borrowers" published in January 1997, revised in September 1997, January 1999 and May 2002. The procedures outlined in these Guidelines apply to all contracts financed in whole or in part from the Bank Credit. Project activities not financed by the Bank will be procured in accordance with procurement procedures agreed between the respective financing organizations and the Government. 6.2 The project will be financed by an IDA Credit of US$ 15.0 million equivalent, a Government counterpart contribution of US$ 5.8 million, beneficiary financing of US$ 1.7 million, German Government co-financing of US$ 4.7 million, and USAID financing of US$ 3 million equivalent. The aggregate cost of the investment is US$ 30.2 million equivalent. Notification of Business Opportunities 6.3 A General Procurement Notice (GPN) would be published in the UN Development Business, No. 603, March 31, 2003 and would be annually updated. For ICB goods contracts and large-value consultants contracts (more than US$ 200,000), Specific Procurement Notice would be advertised in the Development Business and national press, and in the case of NCB, in a major local newspaper (in the national language). Procurement Management 6.4 The Government of Georgia through a Presidential Decree No. 527 dated August 16, 1996 established the Georgian Social Investment Fund (GSIF). The Decree was amended by Decree No. 105 dated March 28, 2003. The GSIF is a juridical entity under Public Law. It is an autonomous public sector institution reporting to the GSIF Board. It has independent procurement and disbursement procedures that operate on the basis of the World Bank procedures and its approved Operating Manual. The GSIF will have overall responsibility for the management of procurement activities under the project. The procurement arrangements under the project are primarily based on the Bank appraisal of the existing procurement management capacity of the GSIF. The Capacity Assessment report and action plan are shown in Table C to this Annex. 6.5 Delegation of Procurement Function. The GSIF will provide technical assistance to the Community Development Committee (CDC) in undertaking procurement. In communities, procurement of goods, works and services is the primary responsibility of the -41- CDCs. For each micro-project, GSIF will enter into a Framework Agreement with the CDC and the procurement procedures will be agreed. The Framework Agreement will specify inter alia the terms and conditions under which the funds may be used. The CDCs will operate as Employers and will be in charge of taking all steps and decision necessary for procurement in relation to the micro-projects. Procurement Scope and Procedures Arrangements 6.6 The Bank is planning to provide US$ 15.0 million Credit to the Government of Georgia to continue to finance, on a grant basis, basic economic and social infrastructure micro-projects. The GSIF II project will have three components: (a) capacity building at local community and self-government levels, relating to the participatory planning process, and institutional strengthening of local self-governments through training in management and administrative skills; (b) identification, development, implementation of community-based micro-projects; and (c) project management. The Project will finance the procurement of micro-project works, goods, consultant services, training and incremental operating costs. Table A summanzes the project costs by procurement arrangements. The procurement plan is shown in Table B. A summary assessment of procurement capacity of the implementing agency and the Bank's review processes is shown in Table C. For procurement financed by the Bank Credit, the Borrower shall use the Bank's latest Standard Bidding Documents, Standard Form of Consultant Contracts and Request for Proposals (RFP), and Standard Bid Evaluation Forms. Procurement of Micro-projects Works 6.7 The project will finance community-based micro-projects to be identified. The GSIF will contract out micro-projects through the CDCs to individuals, private contractors, and community based organizations following procedures detailed in the OM and Framework Agreement. Procurement of Micro-projects will be based on Community Participation Procurement (CPP) as described under 3.15 of the Procurement Guidelines. The relevant procurement procedures, described in detail in the OM, include: National Competitive Bidding and Minor Works procedures. The procedures would require local advertisement and public bid opening in line with the sample bidding documents and standard contract forms specifically developed for community application under micro-projects as attached to the OM. Nongovernmental organizations, local contractors and other community-based organizations, registered according to legislation will be allowed to bid. Procurement of Goods 6.8 The project will finance the procurement of goods and including office equipment and furniture, computer and software as shown in Table B. Goods will be grouped to the extent possible and considering project objectives, in package sizes and homogenous groupings that will encourage competitive bidding. The following methods of procurement will be followed: (i) International Competitive Bidding (ICB). Goods contracts estimated at more than US$ 100,000 equivalent per contract, will be procured using International - 42 - Competitive Bidding (ICB) procedures in accordance with the Bank Procurement Guidelines. Bid documents for ICB will be prepared in accordance with the Bank Standard Bidding Documents (SBD) for Procurement of Good. (ni) International Shopping (IS) and/or National Shopping (NS). IS procedures will be used for the purchase of goods estimated to cost per contract less than US$ 100,000 equivalent per contract, covering office equipment, computers and software. NS procedures will be used for the purchase of goods estimated to cost per contract less than US$ 30,000 equivalent per contract, covering office furniture and fixture. IS/NS procedures applied would be consistent with the provisions of the Bank Procurement Guidelines. The Bank's ECA Regional sample format for International Shopping "Invitation to Quote" available on the ECA Procurement Web Site will be applied. The IS format will be modified for use in National Shopping. Procurement of Consulting Services 6.9 Contracts for consultant services to be executed by the GSIF as shown in Table B will be packaged in a manner that will combine related skills and services, in order to attract competition, improve quality of services, to reduce the number of contracts to be managed by the GSIF. The following methods of procurement would be followed: (i) Least Cost Selection (LCS) procedures would be used for auditing services contracts for annual audit throughout the life of the project and a technical and procurement audit. (ii) Consultant Qualification (CQ) procedures would be used for consulting services for the design of micro-project construction and monitoring and evaluation estimated under US$ 100,000 per contract. (iii) Individual Consultants (IC) would be hired in accordance with Section V of the Consultant Guidelines. The GSIF consultants, who have been competitively selected under the GSIF I project and would continue service under the implementation of the GSIF II project, would be hired on a sole source basis in accordance with paragraph 5.4 of the Guidelines. 6.10 Incremental Operating Costs. The operating costs of administering the GSIF as detailed in annual budgets approved by the Borrower, and reviewed and approved by the IDA, would be 59% financed under the Credit on average for the duration of the project. 6.1 1. Review by the Bank of Procurement Decisions Scheduling of Procurement. Procurement of goods and services for the project would be -43 - carried out in accordance with the agreed procurement plan (Table B), which would be updated annually, included in the progress report, and reviewed by the Bank. (i) Prior Review Goods and works: Prior review of bidding documents, including review of evaluation, recommendation of award and contract would be conducted for all ICB and IS. The first two NS contracts for goods, first two MW for works and those NCB works above US$ 50,000 would require prior review. Consulting Services and Training: Requests for Proposal (RFP), terms of reference (TOR), short lists, terms of condition of contracts as well as evaluation reports and recommendation for award would be prior reviewed by the Bank for contracts for individual consultants above US$ 50,000 and firms above US$ 100,000. All documents and recommendations involving sole source contracting would be subject to Bank prior review. After award of contracts, should any material modifications or waiver of terms and conditions of a contract resulting in an increase or decrease above 15 percent of the original amount, the Bank would undertake a prior review of such modifications (including modifications to contracts for consulting services). (ii) Post Review Those contracts below the Bank's prior review threshold, are subject to the Bank's ex-post review. Periodic ex-post review by the Bank of not less than I in 5 procurement contracts will be undertaken during regular supervision missions. 6.12. Custom Duties and Taxes All custom duties and taxes for goods specifically imported for the project and for all technical assistance would be financed by the Borrower. 6.13. Action Plan for strengthening Agency's Capacity to I[mplement Project Procurement The following action plan is recommended to strengthen the procurement administration capacity of the GSIF: (i) The existing procurement capacity of the GSIF will be transferred to GSIF, i.e. the Procurement Manager and three procurement specialists positions shall be transferred to GSIF II project administration. In the reorganization of GSIF, there will no longer be a separate procurement department. Instead, procurement will be undertaken by operational task teams. Each member of a task team will be trained in procurement, have procurement responsibilities and will be responsible for ensuring that all procurement related to micro-project activities is designed and undertaken in conformity with rules - 44 - stated in the Operating Manual. GSIF procurement will be overseen by the previous Procurement Manager who will become one of the area managers. He was competitively selected under the GSIF I project and would continue service under the implementation of the GSIF II project, where he would be hired on a sole source basis in accordance with paragraph 5.4 of the Guidelines. He would also be responsible for GSIF-related procurement. (ii) In order to update the procurement knowledge of the current staffing, the former Procurement Unit Manager shall attend training on community-based project procurement management run by the Bank. The procurement training for task teams shall be provided in GSIF by the former Procurement Manager and accredited Bank PAS, as well as consultants experienced in Bank procurement methods. (iii) Initiating a Project Launch Workshop before the credit effectiveness, as part of the project implementation/capacity building initiatives, especially in procurement, to train the GSIF, NGOs and CDCs staff. (iv) Supervision of the procurement activities in the project by the Bank shall be decentralized to the Bank's Resident Office in Tbilisi. (v) Periodic ex-post review by the Bank of 1 in 5 contracts during the supervision missions every 3 months until mid-term review, subsequently every 6 months.. (vi) An experienced intemational consultant shall be selected under the PHRD financing, to assist the GSIF in updating the procurement sections of the OM and procurement management through MIS for the GSIF 2 project Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) nditur' -ea- t '-e d :''." - "g ¢ 'r :7 13-X n -ure - ~B~ NCB NBF hTt.*'t 1. Works 0.00 7.00 8.70 5.90 21.60 for Micro-Projects (0.00) (5.50) (5.80) (0.00) (11.30) 2. Goods 0.00 0.00 0.09 0.00 0.09 (0.00) (0.00) (0.08) (0.00) (0.08) 3. Services 0.00 0.00 5.01 0.00 5.01 Consulting Services (0.00) (0.00) (1.42) (0.00) (1.42) 4. Training and Studies 0.00 0.00 0.40 0.00 0.40 (0.00) (0.00) (0.40) (0.00) (0.40) 5. Incremental Operating Cost 0.00 0.00 2.90 0.00 2.90 (0.00) (0.00) (1.70) (0.00) (1 70) -45 - 6. Miscellaneous 0.00 0.00 0.20 0.00 0.20 (0.00) (0.00) (0. 10 ) (0.00) (0. I 0) Total 0.00 7.00 17.30 5.90 30.20 (0.00) (5.50) (9.50) (0.00) (15.00) "Figures in parentheses are the amounts to be financed by the IDA Credit. All costs include contingencies. 2' Other includes: I. Goods. "Other" includes packages to be procured through International and National Shopping. 2. Works. "Others" includes Minor Works. 3. Consulting Services: "Other" includes consultant services, to be contracted through selection procedures of CQ, least cost, and individual consultants. 4 Training- "Other" includes all costs associated with study tours, workshops and training. 5. Incremental Operating Cost: "Other" includes annual operating budgets of thle GSIF. 6. Miscellaneous: "Other" includes the social charges. -46 - Table B. Procurement Plan Given the demand-driven nature of the project, the procurement plan will contain a summary of Procurement Activities, Methods and Schedules for operations under micro-project component and capacity building and project management components. Estimated cost and number of packages are approximate, may vary during life of the project and will be reviewed annually or as needed Oili Wks NLtrfEsti ted Prepairitionl of f Seleclon, ]ID Pticlwge tNMptipon ~Pe Nubr of Qst Proc ureent Tl o Preparation i Evaluation and ODnirad Contract P11 ges 1 ti&n nwthod speificatons Proposals 1DA Rgaing Conhpedion _DCounrrnce NMcroprtects MN 315 15 80 NC19MW I Total Me cjes = IS80 VC I Vdecles GDods I 001 is 15-Jl-04 16-Aug.04 17-Sq>04 18-Oct-04 VC 2 VeIides Goxds _I 01 IS 1_5-3u01 5 1J6-Aug405 17-Sqep05 1S-OXt-05 VC3 Vehdces GCods I 001 LS 15-Jul-06 16-Ag 06 17-S>O6 18-Oi-06 GC I Of fice Eq'pt C-Ts Goods 1 004 is 1-Dx-03 1-Feb-04 20Feb-04 1-Mvr-04 and Softr__ _ GC22 FwutCre ad FoIdures Gxxts 1 001 _ _ _ 2-Jan-04 I-Nbr-04 15-ISr-04 30vr-04 Total Goods 0.09 Consultng Swvices Estimated IDA SelecLdon P_ cge Descripdon Type NlNuner of Ct Procrenent Preparation of IDA Evaluation, a Contract Cotrac Pacloige I«cription Type Pacl C 9rillion nhod TM DOnRence MA Siging Conmpleton _oConcurre CS I MIitmng ard Evaluahon CS 4 021 CQ 15-Jun-04 15-SS>04 15-N'v-04 15-Ewc04 15-M0 CS2 PnyectAudt CS I 011 LCS 15-May-04 15-Jun-04 15-Aug-04 15-Nv-04 15-Apr4 CS3 Ll Advisor CS 001 LCS 15-Dec-03 15-Feb04 15-Mar-04 15-My-4 31-Dec4 CS4 CanmtyMobahzaticn CS 4 269 QCBS IS-Sep-03 15-t-04 15-DIc03 15-JaIn-04 31-Cec4 CS 5 Desigi and Supvision CS 75 080 O 15-Mwr-04 15- 4 15-Jun-04 15-Jul-04 31-Dec4 Sub-total =_ 3.82 _ _ __ =_ Other Categories Tining | 02 N/A _ _ _ _ _ thalqxmnqc=rg oosts 942 NIA (stafffees, nwmals_ SomalhrgesfirPUStaff i ____ 017 N/A _ _ _ _ _ Sutotal 2.79 OterDDnors 7.70 TUrAL PRO)ECT OOST 30.20 -47 - Table C: Summary of Procurement Activities ICB NCB is NS DC % of Credit subject to ___________ _____________prior review Goods Procurement thresholds. Above Below Below 95% $100,000 $100,000 $30,000 Prior Review Ali packages All packages First 2 contracts Micro-Project Works Minor Works Procurement thresholds Above Below 0% $30,000 $30,000 Prior Review Contracts First 2 above contracts $50,00 Consultants Consultant Least Cost Single- Individual Qualification Source Consultants s Prior Review Short-list, Short-list, TORs and draft Shortlist, TORs, TORs, contracts for all TORs, evaluation evaluation contracts evaluation reports and reports and reports and draft draft contracts draft contracts for audit contracts for all contracts for contracts above contracts above $100,000 above $100,000 $50,000 - 48 - Ex-post Review x-post review mechanism Review carried out in accordance with Para 4 of Appendix I of the Bank's Gutdelines and reviews dunng supervision missions Section 2: Capacity of the Implementing Agency in Procurement and Technical Assistance r equirements Brnef statement The Govemment of Georgia through a Presidential Decree established the Georgian Social Investmen und. The GSIF was formed as a juridical entity under the Public Law on Apnl 13, 1998. It is an autonomous public sector institution reporting to the GSIF Board The GSIF has implemented GSIF I roject following independent procurement and disbursement procedures based on the World Ban procedures and its approved Operational Manual Under GSIF II, the previous head of the procurement department would serve as one of the are managers, and he would be responsible for oversight of procurement The manager, who was competitively selected under the GSIF I project and would continue service under the implementation o he GSIF II project, would be hired on a sole source basis in accordance with paragraph 5.4 of the Guidelines In addition, every member of each of the area department task teams will have procurement responsibilities and will be responsible for ensuring that all procurement related to mucro-project activities is designed and undertaken in conformity with rules stated in the Operating Manual, with assistance whenever necessary from the procurement-overseeing area manager. Training and techncal assistance will be provided to the Micro-Project Comnuittee (CDC) and contractors by the task teams in undertaking procurement Country Procurement Are the bidding documents for the procurement actions for the first year ready9 Yes Assessment Report or Country The bidding documents for the first year of project implementation are being prepared and would be Procurement Strategy Paper ready by Credit effectiveness. status A CPAR for Georgia has been completed For this Project, the Government would follow the agreed Bank procurement procedures as described in this document and in the Development Credit Agreement. Section 3- Training, Information and Development on Procurement stimated date of Project Launch Workshop: October 2003 stimated date of publication of General Procurement Notice: March 2003 ndicate if there is procurement subject to mandatory SPN in Development Business No Domestic Preference for Goods No Domestic Preference for Works, if applicable: No etroactive financing No Advance procurement. No xplain briefly the Procurement Monitoring System: All procurement related documentation that requires IDA's prior review would be cleared b rocurement Accredited Staff (PAS) and relevant technical staff. Packages above mandatory review thresholds would be reviewed by the RPA The Borrower would maintain complete procurement files, especially for the contracts subject to Post-review, which would be reviewed by IDA's supervision missions. The Procurement Plan would be updated annually. Procurement information would be ecorded by the Borrower and submitted to the IDA as part of the quarterly and annual progress reports rhis information would include: revised cost estimates for the different contracts; revised timing o rocurement actions, including advertising, bidding, contract award, and completion time for individual ontracts A Management Information System (MIS), with a procurement module would help the PCU onitor all procurement information Co-financing: Yes Section 4. Procurement Staffing Indicate name of Procurement Staff or Bank's staff part of Task Team responsible for the procurement in the Project Name: Yingwei Wu Ext. 35291 Explain briefly the expected role of the Field Office in Procurement. A procurement accredited staff located in Georgia will be the PAS for procurement implementation - 49 - Annex 6(B) Financial Management and Disbursement Arrangements GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT Financial Management 1. Summary of the Financial Management Assessment 1.1 Country Issues 1) The key country financial management fiduciary issues for Georgia are: a) Problems with Government counterpart funding (GCF), which in some cases have adverse effect on project implementation. MoF currently prefers not to disburse in advance, but rather after the expenses are already incurred by PIUs. As a result, for those categories which are less than 100% financed by credit proceeds, PIUs can pay contractors (suppliers, consultants) only percentage of the contract which is eligible for Bank financing, and pay remaining balance after counterpart funds are received from MoF (often with certain delay). GSIF is also significantly affected by problems with GCF. Of GEL 1,535,000 requested by GSIF from MoF in FY 2002, only GEL 756,000 were actually paid by MoF. b) Insufficient availability to PIUs of training on World Bank financial management and disbursement procedures, and also in IFRS, which results in otherwise avoidable deficiencies in the quality of financial management arrangements in PIUs. c) Weak banking system. d) All projects use traditional disbursement methods rather than PMR-based disbursement. The insufficient quality of FM capacity in the country does not yet allow transition to PMR-based disbursement. e) Limited availability of qualified audit firms in the country. 2) The latest Country Financial Accountability Assessment (CFAA) was conducted in May - June 2002 and updated in February 2003, however, the report has not yet been finalized and made public. 3) In May 2002 World Bank financial management team performed assessment of a number of audit firms operating in Georgia. As a result of that assessment two firms (Georgian Audit & Consulting Company Llc, associated with Deloitte & Touche, Ukraine, and Auditing Corporation of Georgia Ltd, associated with Grant Thornton Amyot) were fully pre-qualified to audit World Bank financed projects in Georgia. No firms were conditionally pre-qualified. However, GSIF will be able to choose any firm from the list of audit firms pre-qualified to perform audits of World Bank-financed projects in Hub-North region. 4) Other important issues affecting financial management arrangements in all Georgian PIUs are the following: a) Standardized job descriptions for PIU stalf. By the time of GSIF-2 main credit effectiveness it is expected that the Ministry of Finance will finalize standardized job - 50 - descriptions for PIU staff. b) Reports submitted by PIUs to Georgian authorities. Currently all PCU/PIUs submit quarterly reports to the MoF on uses of funds in accordance with standard formats and monthly reports to the Tax Inspection. c) Standard audit TOR. For all projects in Georgia the Bank recommended to include in the 2001 audit TOR the following paragraph: "It is also desirable that the auditor becomes familiar with Extract of the Letter of the Chamber of Control of Georgia #01-2/82 dated June 08, 2001 (Attachment ) and Program of tax Audit of the World Bank Financed Project Implementation Units (Attachment ), and uses both documents in preparation of audit program for these assignments." The purpose of this paragraph was to ensure that the auditor, which might be both a Georgian and a foreign audit firm, is familiar with the requirements of the regulatory authorities of Georgia. Tax Program was first included as an annex to 2001 audit TOR by the World Bank financed Georgian ADPCC as an effort to further pursue CPPR recommendations. Finance Manager of ADPCC addressed the Deputy Head of the Large Taxpayers' Inspectorate (LTI) with letter on CoC requirements and CPPR recommendations, and asked him to provide with LTI program relevant to PIUs for inclusion in audit TOR. This imtiative was considered by the Bank as potentially useful and the program was recommended for inclusion in the 2001 audit TOR for other projects implemented in Georgia. However, it should be noted that although the annual audit of World Bank financed projects by independent auditors may (and, ideally, should) lessen the work to be carried out during Chamber of Control and Tax Inspection audits, it can not totally eliminate them. Both Chamber of Control and Tax Inspection are legally obliged to carry out such annual audits, and these audits cover 100% of transactions (i.e., they are not sample-based audits). d) Taxation issues. Government of Georgia clarified it's policy on taxation of Bank-financed activities and introduced full taxation of all of the Bank-financed projects in accordance with the local tax legislation. Detailed tax instructions on tax regime applicable to Bank-financed projects were issued by MoTR in June, 2001. All PCU/PIUs were transferred to the Large Taxpayers' Inspectorate with a view to streamlining administration and ensuring consistency across all projects. e) Standard Disbursement Percentages (SDPs). An Operational Memorandum (OM) issued by the Bank in June 2001 entitled "Bank Policy on Financing Income Taxes" clarified that it is the policy of the Bank that the local taxes levied by or in the territory of the borrower on payments for services provided by consultants and for salaries of staff of PIUs are not eligible for disbursement under Bank credit. To implement the requirement of the OM, country specific Standard Disbursement Percentages (SDPs) were established according to the Bank methodology for calculating SDPs. SDPs are based on estimates of effective legal rates of local income taxes in Georgia, i.e. on taxes that consultants and PIU staff are legally obliged to pay, and on estimates of transaction-specific taxes in Georgia associated with consultant contracts. As a result the following percentages were established for Georgia: Local consultancy firms, individuals and PIU staff 80% - 51 - Foreign consultancy firms and individuals 90% Eligible Social/Medical Charges 100% Eligible Social/Medical Charges are those charges that are levied by the employers in respect to the contracts with the citizens of Georgia (to be consistent with the Bank's policy according to which Social Charges are eligible for Bank financing only if they contribute to the future benefits of the individuals). It should be noted that Bank's policy on not financing income taxes was also extended to the category of "Works" by the WBTO (due to the fact that local taxation policy is identical for both financing categories, ie "Works" and "Consultant Services"). It is important to note that the SDPs apply to loans, credits and grants for which invitations to negotiate are issued on or after March 1, 2002. With respect to the grants, which are not fornally negotiated, the SDPs apply in respect of legal documents sent to recipients on or after March 1, 2002. As an exception to the policy, Bank-funded or Bank-administered grant to "not-for-profit" entities are not subject to the policy. The exception is justified because these entities carry out activities consistent with the Bank's mandate; the activities of many not-for-profit entities would be substantially constrained if they had to rely on counterpart funds to meet any local tax obligations. 1.2. Strengths and Weaknesses The significant strengths that provide a basis of reliance on the project financial management system include: (i) significant experience of GSIF in implementing Bank-financed projects (first Social Investment Fund project, related PHRD Grant and PPF, and PHRD Grant for the second SIF project); and (ii) the quality of audit reports issued by GSIF's project auditors for the last three years (unqualified audit reports for FY1999 and FY 2000 and qualified audit report for FY 2001, however, the reason for qualification was only the application of cash basis accounting, which is not in compliance with International Financial Reporting Standards (IFRS)). Significant weaknesses are: (i) absence of practical experience in producing of FMRs; (ii) absence of practical experience in application of IFRS. Thus, regular and detailed project supervision, including review of quarterly FMRs, will be especially important at the preparation and early implementation stages of the project. 1.3. Implementing Entity See Section C4 of PAD. 1.4. Staffing Financial and Administrative Department (FAD) of GSIF will consist of: (i) the Manager of FAD, directly subordinate to the Executive Director of GSIF; (ii) the Accountant, subordinate to the FAD Manager; (ii) the Cashier, subordinate to the FAD Manager; (iii) the Office - 52 - Manager, subordinate to the FAD Manager; and (v) Administrative Assistants, subordinate to the FAD Manager. 1.5. Accounting Policies and Procedures (Financial Manual) The accounting books and records for the second GSIF projects will be maintained in accordance with International Financial Reporting Standards on accrual basis. In order to ensure proper transition to IFRS, the new comprehensive Financial and Administrative Procedures Manual has been prepared. This task has been performed by the foreign consultant financed from the PHRD Grant for the second project. Project financial statements will be presented in United States dollars. 1.6. Reporting and Monitoring Project management-oriented Financial Monitoring Reports (FMRs) will be used for project monitoring and supervision. Indicative formats of these FMRs have been included as Annexes to the new Financial and Administrative Procedures Manual, however, they still have to be agreed upon dunng negotiations and prior to Board presentation. 1.7. Information Systems The new accounting software - 1 C accounting software - was selected for purchase and installation. This software package is widely used by other World Bank - financed projects, and has proved to be capable of providing accurate, timely and sufficiently detailed information regarding project resources and expenditures, and flexible in terms of production of the necessary financial reports. Also, 1C accounting software is compatible with the currently employed in GSIF Management Informnation System, and is expected to be integrated with it. It should be noted that as of March 2003 installation of the software and its adaptation to GSIF needs have yet to be finalized, and GSIF staff is yet to be trained in usage of the new accounting software. 1.8. Action Plan, if required (agreed with the borrower) Action required as per results of the Status offulfillment in March 2003 November 2002 pre-assessment 1. Prepare the new Financial Management Done. Manual. 2. Select, install and adapt to GSIF needs The new accounting software - IC accounting to enable it to automatically produce the software - was selected. See section 1.7 "Information necessary FMRs the new accounting software Systems" above. (possibly integrated with MIS). Provide necessary training to the staff how to use this software. - 53 - Develop a plan for continued training of key The foreign consultant conducted a number of GSIF personnel throughout the lectures on accrual accounting, so at the present implementation period of the new project. moment the situation in respect of training is not critical at all. Therefore, it was decided that instead of preparation of the training plan at this point of time for the whole life of the new project, GSIF will assess its training needs on an annual basis when the project starts and throughout its life. Clarify with the World Bank Tbilisi Office GSIF concluded a contract with the local correct treatment of taxes, especially VAT, consultant, who previously served as an auditor in and ensure that refund of VAT paid to the tax inspection and also served in the tax audit suppliers in respect of the Grant received department of the audit firm "Audit-Service". The from KfW is obtained from the Ministry of contract has been concluded for 2 months, and it is Finance. planned that as a result of this consultancy GSIF will have a documented report on the taxes it has to pay, procedures for their calculation and payment, and procedures for recording the taxes payable and paid in the accounting records. Also, GSIF continues consultations with the WB Tbilisi Office whenever necessary. However, GSIF has not yet achieved any progress in receipt of VAT refund from the MoF. The work in this direction will be continued. 1.9. Supervision Plan. During project implementation, the Bank will supervise the project's financial management arrangements in two main ways: (i) review the project's quarterly FMRs and six-monthly management reports as well as the project's annual audited financial statements and auditor's management letter; and (ii) during the Bank's supervision missions, review the project's financial management and disbursement arrangements (including a review of a sample of SOEs and movements on the Special Account) to ensure compliance with the Bank's minimum requirements. As required, a Bank-accredited Financial Management Specialist will assist in the supervision process. 2. Audit Arrangements 2.1. Internal Audit The new 1C accounting software has been selected, however, it has yet to be installed and adapted to GSIF needs and staff has to be trained how to use this software. 2.2. External Audit The audit of the project will be conducted by independent private auditors acceptable to the Bank and on terms of reference (TOR) acceptable to the Bank. There is a list of audit firms - 54 - pre-qualified to conduct audits of World Bank financed projects in HUB-North region, which is updated regularly, and the standard audit TOR applicable for ECA are updated and officially approved on an annual basis. The project will choose the auditor from the above-mentioned list and use the ECA standard audit TOR as a basis for preparation of its own audit TOR, which is to be cleared with the project FMS annually irregardless of the term of contracts concluded with the auditors (one year contract or several year contract). The auditors should be engaged not later than the end of December of the fiscal year to be audited. The annual audited project financial statements will be provided to the Bank within six months,of the end of each fiscal year and also at the closing of the project. The contract for the audit awarded dunng the first year of project implementation may be extended from year-to-year with the same auditor, subject to satisfactory perfornance. The cost of the audit will be financed from the proceeds of the credit. The following chart identifies the audit reports that will be required to be submitted by GSIF together with the due date of submission. Audit Report Due Date Entity (GSIF) Since GSIF is not implementing any other projects apart from the second GSIF project, it is not necessary to produce separate financial statements for the implementing entity. Project - includes balance sheet, summary of Within six months of the end of each fiscal year sources and uses of fumds, summary of uses of and also at the closing of the project funds by project components and notes to financial statements SOE Within six months of the end of each fiscal year and also at the closing of the project Special Account Within six months of the end of each fiscal year and also at the closing of the project Other (specify) None 3. Disbursement Arrangements Project funds will be initially disbursed based on traditional methods (e.g. replenishment of the Special Account based on full documentation and/or Statements of Expenditures, direct payments and Special Commitments. Allocation of credit proceeds (Table C) Table C: Allocation of Credit Proceeds ¶j -^.:'Expenditu'r.Categoy :. | -'Amount in US$ nillirn.-| t 1. Micro-projects 11.30 72 % - 55 - 2. Goods 0.10 100 % of foreign expenditures and ex-factory; 80% of local expenditures 3. Consultant Services 1.60 90 % for foreign and 80% for local; 100% eligible social charges 4. Training and Study Tours 0.20 100 % 5. Incremental Operating Cost 1.60 70% in 2003; 70% in 2004; 60% in 2005; 50% in 2006; and 40% including social charges 6. Unallocated 0.20 Total Project Costs 15.00 Total 15.00 Use of statements of expenditures (SOEs): Use of Statements of Expenditures: Withdrawal applications would be fully documented, except for expenditures under: (a) contracts for goods valued at less than US$ 30,000 each; (b) contracts for works less than US$ 50,000 each; (c) contracts for consulting firms costing less than US$ 100,000 equivalent; (d) contracts for individual consultants costing less than US$ 50,000 equivalent; and (e) training, study tours and Incremental Operating Costs. Special account: Special account: Special Account will be opened under the second GSIF project in a commercial bank acceptable to the World Bank before effectiveness. The initial allocation to the special account will be limited to US$ 500,000. The initial allocation may be increased up to the authorized allocation of US$ 1,000,000 equivalent (about 4 months worth of projected expenditures), once aggregate disbursements of SDR 5.0 million are reached by submitting the relevant withdrawal applications. Replenishment applications should be submitted every month. These applications would be fully documented, except in the case of disbursements on the basis of Statements of Expenditure (SOEs). Related documentation in support of SOEs should be retained by the GSIF for at least one year after receipt by the Bank of the audit report for the year in which the last disbursement was made. These documents would be available for review by the auditors and the Bank staff. It is advisable that the GSIF keeps zero balance in local currency transaction accounts, utilizing the GEL amounts received from conversion of Special Account US$ funds on the same day when the conversion was executed. Should the GSIF decide to adhere to a different practice, it should be in any case ensured that, when conversions of Special Account US$ funds into GEL are executed, the amount converted from Special Account funds and deposited into the local currency transaction account does not exceed 30 days of budgeted expenditures, as is the agreed - 56 - practice on projects in Georgia. Payments from the local currency transaction account may cover only the eligible percentage for IDA financing. Any losses due to depreciation or foreign exchange loss on currency conversions/re-conversions are to be borne by the borrower. This local currency transaction account is also subject to review by the independent auditors as part of their review/opinion on the special account. - 57 - Annex 7: Project Processing Schedule GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT Proqject SchedUleEL-l-fi- 'R,, U --Plannec! Actu(aIl Time taken to prepare the project (months) 24 First Bank mission (identification) 08/01/2001 04/11/2002 Appraisal mission departure 03/18/2003 02/05/2003 Negotiations 04/01/2003 Planned Date of Effectiveness 09/01/2003 Prepared by: Georgia Social Protection Team Preparation assistance: Bank staff who worked on the project included: -',; L iName .t - - -p8j 7 li-i Aleksandra Posarac Program Team Leader/Task Manager Antonio Lim Operations Officer Tamar Gotsadze Operations Officer Helen Shahriari Social Scientist Hjalte Sederlof Consultant Nicole LaBorde Program, Assistant Eka Duchidze Team Assistant Ekaterina Arsenyeva Financial Management Specialist Hannah Koilpillai Finance Officer Ahmed Mohammed Jehani Lead Counsel Junko Funahashi Senior Counsel Yingwei Wu Procurement Specialist David Warren Peer Reviewer Kalanidhi Subbarao Peer Reviewer Gagik Khachatryan Peer Reviewer - 58 - Annex 8: Documents in the Project File* GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT A. Project Implementation Plan Project Implementation Plan (March 2003) B. Bank Staff Assessments Procurement Capacity Assessment Report (November 2002) Financial Management Capacity Assessment Report (November 2002) Georgia CPPR (draft February 2003) C. Other GSIF Institutional and Organizational Capacity Assessment GSIF Cost Effectiveness Analysis Beneficiary Impact Assessments Report on Financial Management System Improvements in GSIF Local Self-Government Assessment Report Quality of Works Guidelines GSIF Management Information System - Requirements Study Report Operating Manual Administrative and Financial Manuals Environmental Guidelines and Procedures *Including electronic files - 59 - Annex 9: Statement of Loans and Credits GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT April 10, 2003 Difference between expected and actual Original Amount in USS Millions disbursements Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Ong Frm Rev'd P040555 2003 PRIM HEALTH CARE DEVT 0 00 20 34 0 00 0 00 2212 0.01 0 00 P044800 2003 FORESTRY 0 00 15 67 0 00 0 00 17 07 0 23 0 00 P077368 2003 MUN DEVT 2 0 00 19 41 0 00 0 00 20 91 1 62 0 00 P055173 2001 EDUCI(APL) 000 2590 000 000 2226 491 000 P055068 2001 IRRtDRAIN REHAB (APL #1) 000 27 00 000 0.00 25 57 2 72 000 P054886 2001 ELEC MRKT SUPPORT 0 00 27 37 0 00 0 00 27 55 -0 52 0 00 P072394 2001 ENERGY TRANSIT INST BLDG 0 00 9 63 0 00 0 00 8 67 3 08 0 00 P048791 2001 PROT AREAS DEV (GEF) 0 00 0.00 8 70 0 00 9 04 180 0 00 P040556 2000 ROADS 000 4000 000 000 2113 -1880 000 P064091 2000 AGRIC RES EXT TRG (GEF) 0 00 0 00 2 48 0 00 2 06 0 76 0 00 P065715 2000 AGR RES EXT & TRG 0 00 7 60 0 00 0 00 516 3 23 0 00 P052154 1999 STRUCT REF SUPPORT 000 1650 000 000 907 9.25 125 P050911 1999 INTG COASTAL MGT 000 440 130 0.00 333 295 027 P056514 1999 TRANS MIN RESTRUCT 000 230 000 000 093 080 000 P057813 1999 JUDICIALREFORM 000 1340 000 000 516 -786 000 P060009 1999 INTG'DCOASTALMGMT(GEF) 000 000 130 000 1 13 081 031 P008416 1999 ENT REHAB 0 00 15 00 0 00 0 00 5 94 517 0 00 P055573 1998 CULTURAL HERITAGE 0 00 4 49 0 00 0 00 0 07 0 03 -0 05 P039929 1998 SIF 0 00 20 00 0 00 0.00 513 0 78 0 00 P008415 1997 AGRIC DEVT 0 00 15 00 0 00 0 00 1.09 2 05 0 00 Total: 0 00 284 01 13 78 0 00 213 41 13 01 177 - 60 - GEORGIA STATEMENT OF IFC's Held and Disbursed Portfolio Jun 30 - 2002 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2000 Bank of Georgia 3.00 0 00 0 00 0.00 1.96 0 00 0.00 0 00 Georgia G&MW Co. 0.00 0.18 000 0.00 0.00 0 18 0.00 0.00 1997/00 Georgia M-F Bank 6 00 0 00 0 00 0.00 2.00 0 00 0 00 0 00 1999/01/02 Ksani 6.32 2.50 0.00 0.00 0 00 2 50 0 00 0.00 1998 TBC Bank 3.00 0.00 0.00 0 00 2.00 0.00 0 00 0 00 1998/02 TbilComBank 0.52 0.00 0.00 0.00 0.52 0 00 0.00 0 00 1999 Telasi 30.00 0.00 0.00 0 00 30 00 0.00 0.00 0 00 2000 Total Portfolio: 48 84 2.68 0.00 0 00 36.48 2 68 0 00 0 00 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2002 Georgia M-F RI 2 0.00 0.00 0 72 0.00 Total Pending Commitment: 0 00 0.00 0 72 0.00 - 61 - Annex 10: Country at a Glance GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT :Europe & POVERTi;ind SOCiAL Central Low- _ Georgia' Asla Income Development diamond* 2001a- ip6uiabon mid-yeaF (millions) 5 4 t. 475 2,511 Life expectancy GNI percapita (Abesnieithod, US$) 580 - --960 :430 GNi4(AIIas~etn/ d,US$bdlblons) -31 * *:' -930 0.-.1p69- Average annualgrotvih, 199541 Populabon(%) -,. 00 01 1.9 Labiboi f ) , -1 - 0 6 2.3 GNI Gross per pnmary ,Most recent e,stimnate (la;test year available, 1995-01) - -, capita - enrmllment Povertj (,f of populaion below national poverty line) 11 Urbanp-opldation (% of total populabon) 57. -- 63, 31 Lfde expectancyat birt(h'years) 73 69 59 Infant mortality(per 1,000 live birfhs) 17-_* 20: _76 Child malnutnbon (96 of children under 5) 3 - 8- - Access to improved water source Access toean improved water source (96 of populaton) 76 - - 90 76 - Illiteracy ( jpopulaion -age 15+) 3 37 Gross pnmary enrollment (% ofschool-age populaton) 99 ., 102, 96 GeorWa Male ' 99 103 103 Low-income group i-emale' ' ~ ~, 98 101 88e KEY ECONOMIC RATIOS and LONG-TERM TRENDS - - --- 1981 1991 _.2000 -_ 2001 . c . _ GDP (iUSS bilions) 88*-- 3.0 3.2 E c Gross.domestc investrivehitGDP 254 28 2 '18 3 '18.7 Exports oifgoods and services/GDP . 27 8 - ,23.1. -2310 .- Trade Gross domestic saving-sGDP 32 8 24 9 - 1.5 2 8 - Gfts".nationalsavings'/GDP - 5 9 - 71 Current account balance/GDP , . ,45 --,689\ Currefif-~~~~~~~~~~~~~~~ ~Domestic Interest payments/GDP - :14 0 9 Investment Total debt7GDi' -; : ' ~ - 53 8 -: '537 savngs Total debt serwice/exports .. 9.6 6 2-.. P,resent value of debUGDP - 37 t 35 4 PresentilueofldebVtexports 135.5 1219 - ~~~~Indebtedness 1981-91 1991-01 2000 -2001 *200145'-----Id (average.annual'growth)' 'GOP-*^-* " -' - - ' -19 -25 19- 45- .-. 39 - Georgia GDPpr capita ' -2 6 -2 4 18 44 3 8' Low-income grup Expolsbof,gqoodsand services 10 8 33 2 - 3'3 ' 67 STRUCTURE of the ECONOMY 1981 1991 2000 2001 Growth of Investment and GDP(%) (,f of GDP) 100 Agnculture 25 2 28 7 216 22 3 Industry 359 372 224 219 50 Manufactunng 28 7 28 7 0 Services 38 9 34 1 56 0 55 8 -s 9 9 9 01 Pnvate consumption 55 0 65 6 90 1 87 9 -100 General govemment consumpbon 12 3 9 5 8 4 9 3 rSDI GOP Imports of goods and services 31 1 398 389 9 G - G P 1981-91 1991-01 2000 2001 Growth of exports and Imports (%) (average annual growth) Agnculture 16 -12 0 8 2 so Industry 12 2 5 3 6 7 40 Manufactunng 3 2 3 0 4 0 Services 25 0 1 5 3 7 20 Pnvate consumption 2 2 -13 8 -17 2 o 98 General govemment consumption 68 -19 7 -13 9 -2 Gross domestic investment -9 5 -22 8 8 3 - Exoarts 0-lnqports Imports of goods and services 7 6 4 4 -1 2 _ Note 2001 data are prelinnary eslmates The diamDnds show tour key indicators in the country (in bold) coffmpared with its income-group average. It data are nismng, the diamornd wit be incorprIte - 62 - Georgia PRICES and GOVERNMENT FINANCE 1981 1991 2000 2001 InflaUon (%) Domestic prices (% change) 200 Consumer pnces 78 5 4 0 4 7 150 Implicit GDP deflator 3 7 62 1 4 2 5 3 *o- Government finance so (% of GDP, includes current grants) o z Current revenue 32 4 151 16 5 9t 97 98 99 0o 01 Cufrent budget balance -1 8 -3 0 04 - GOP deflator --CPl Overall surplusideficit -32 7 -4 5 -1 4 G TRADE (US$Smillions) 1981 1991 2000 2001 Export and Import levels (USS mill) Total exports (fob) 528 496 1,S00 Black metal 34 30 Tea 85 62 Manufactures 10 1.00. Total imports (cif) 937 954 Food13 14 0 Fuel and energy 166 176 Capital goods 246 183 o Export pnce index (1995=100) 84 95 95 go 97 93 59 o o Import pnce index (1995=100) 101 105 8 E>orts *Inorrts Terms of trade (1995=100) 83 90 BALANCE of PAYMENTS (USS millions) 1981 1991 2000 2001 Current account balance to GDP (%) Exports of goods and servces 1,044 999 0 Imports of goods and semces 1,343 1,352 Resource balance -299 -353 Net income 1 3 -5 Net current transfers 120 136 Current account balance -166 -221 --i Financing items (net) 169 254 Changes in net reserves -3 -33 Memo: Reserves including gold (USS millions) 110 161 Conversion rate (DEC, locallUS$) 2 17E-6 2 0 2 1 EXTERNAL DEBT and RESOURCE FLOWS 1981 1991 2000 2001 (USS millions) Composition of 2001 debt (USS m Ill) Total debt outstanding and disbursed 1,638 1.713 IBRD 0 0 G 60 IDA 347 396 F ss Total debt service 118 77 IBRD 0 . IDA3 3 Composition of net resource flows Official grants 52 58 Official creditors -3 64 CE790 - C287 Pnvate creditors 26 13 Foreign direct investment 153 96 Portfolio equity 0 0 |. 125 World Bank program Commitments 48 90 A- IBRD E- Bilateral Disbursements 18 63 B - IDA D - Oer mutlatseat F - Pnvate Pnrcipal repayments 0 0 C - IMF G - Short-term Net flows 18 63 Interest payments 3 3 Net transfers 15 61 tJevelopment Economics 9l23102 - 63 - IL a.~~~~~~~~~~~r l Uj I a > , 0 7 . 7 7 X 1 1 X> 8 C CO)0 -4~ ~ ~ ~ ~~~C z _ R _~~~~~~~ i~ H O 0 0.0 __ __ mH D"HI W ~~~~~~~P -ne W n | X w n |~~~~~~~~~~~ Additional Annex 12: Training GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT Modules Days I. GSIF Intemal Staff Training I. A. GSIF Intemal Staff Training 62 1. Local Development 12 a. Social Management 5 b. LSG law 3 c. Participatory Local Planning 4 2. Study cases for MPs Design concepts and processes 12 a. Elaboration of TORs 1.5 Scope of works 0.5 Products and timing 0.5 Norms and specifications 0.5 a. Design of Vertical infrastructures 3 b. Design of Horizontal infrastructures 3 c. Training project. 3 3. Study cases for MPs Appraisal concepts and processes 11 Verification of criteria and requirements 1 a. Eligibility criteria 1 b. Institutional requirements 0.5 c. Social requirements 1 d. Technical criteria 1 Analysis of alternatives 1 e. Environmental criteria 1 f. Economic Criteria 1 fI. Cost-Efficiency 1 f2. Cost - Benefits 1 Cut-off Lines and MP Indicators 1.5 4. Study of cases for Procurement 7 Procedures of Training 1.5 Procedures of MP Design 2 Procedures of MP Civil Works 2 Model of Contracts 1 Guarantees 0.5 -65 - 5. Study of cases for Follow Up 7 Procedures for Installment Site 1 Procedures for progress payments 2 Procedures for Change of Orders 1 Procedures for Preliminary Handover 1 Procedure for Final Handover 1 Procedure for MP Suspension 1 6. Information System 5 General concepts 1 Data register, integrity and reliability 1 Reports 2 MIS 1 7. Management and Planning 8 Definition of Management by Objectives I Program Goals and objectives 0.5 Investments 1 Institutional strengthening 0.5 Budgeting 1 Operational planning 0.5 Key Performance Indicators 1 Institutional performance indicators 1 Global, by Region, by Head of districts 0.5 Local development indicators 1 1. B. GSIF Internal Staff Operational Training 1. Operational Manual Training 90 a. Procedures, norms and mechanisms of social management 60 b. Functions and responsibililies 30 1. C. GSIF Internal Staff Study Tour (Three SIF countries with decentralization experience will be selected by GSIF and WB Task Manager) 1. Study Tour 90 a. Procedures, norms and mechanism used. 60 b. Functions and responsibilities. 30 I. D. GSIF Internal Staff Study Office Software (Excel, Word, Power Point) 1. Office Software Training 60 a. Excel, Word and Power Point 60 - 66 - II. Training for Qualified NGOs, Firms, and Individuals iDays II.A Training 6 1. Local Development 2 a Social Management b. LSG law c. Participatory Local Planning 2. MP Profile requirements 1 a. Concepts b. Technical requirements 3. Overview of MP Cycle 2 a. Design b. Appraisal c. Follow - UpD 4. Procurement 1 Ill. Training to community Development Committee and LSGs Days III.A Local Development Plan |Local Development Plan Process NGO selected by District 90 III.B Training workshops GSIF process 5,400 GSIF, LSG CDC workshop of TOR for Design and NGO Procurement Services 270 GSIF, LSG, CDC and Design Provider workshop for Design proposal 270 GSIF, LSG, CDC and Trainer Provider (Community Development) planning workshop 270 GSIF, LSG, CDC and Design Provider workshop for final Design 270 GSIF, LSG TS, CDC Appraisal workshop 270 GSIF, LSG, CDC workshop for Procurement of Civil works and Supervisor 270 GSIF, LSG, CDC, and Supervisor workshop (Rules, procedures, functions, SAW, PHO, FHO) 270 GSIF, LSG, CDC, Executor and Supervisor workshop for Installment Site (Rules, procedures, functions) 270 Training on Community Development completed 1350 GSIF, LSG, CDC Procurement workshop for NGO Provider 270 GSIF, LSG, CDC and interested community members workshop for Procurement of Micro project Management 270 Training on Micro Project Management completed. 1350 III.C Community Maintenance Training 1350 1350 III.C Micro-project Management Training 1350 - 67 - Additional Annex 13: Microproject Typologies GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT 1. Social Infrastructure a. rehabilitation of community level health centers; b. rehabilitation, including furniture and equipment, of pre-school facilities, primary and secondary schools, special schools (for physically or mentally handicapped children); c. establishment of social work and care centers, establishment and rehabilitation of community-based centers for placement of children deprived of parental care, old age homes, centers for homeless children and institutionalized persons; and d. rehabilitation of rural community centers. 2. Economic Infrastructure a. rehabilitation and construction of potable water networks: supply lines, distribution networks, source development, and pumping stations; b. rehabilitation of local level irrigation networks; c. rehabilitation of village or neighborhood roads, access roads to isolated villages, access roads to agricultural lands and farms (including bridges, drainage, culverts, retaining walls, etc.); d. rehabilitation and construction of energy-generating and distributing micro-projects for small and isolated communities (micro hydro-power stations based on irrigation channels and water pipelines, bio-energy plants, gas supply, solar power and distribution); and e. rehabilitation of telegraph / telephone lines, TV towers for isolated villages. f. rehabilitation and expansion of sewage networks, and pumping stations; g. collection and transport of solid and liquid waste; h. rehabilitation of micro-dams; i. environmental improvement and rehabilitation of degraded towns and villages through tree planting and clean up j. erosion control activity (tree planting, terracing, drainage canals), not on private land. - 68 - Additional Annex 14: Microproject Cycle GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT = S-eps ;-;.= --r-RLeadfiagency-.r. Gerinci ;o I t - in l _ h Acion= .,-pHticipan s- i . Selection of inutial GSIF Poverty cnteria applied to districts Implementing peri-urban areas, rural towns partners and villages Selection of local self- GSIF Key informants The poorest LSGs in a distnct govemments (LSGs), Implementing partners are identified first phase Selection of LSG, GSIF Implementing Rapid assessments Poorest LSGs selected in first second phase partners phase are assessed and three are selected Community Implementing CDC/Communities Elaboration of community A CDP is developed for all development planning partners GSIF development plan (CDP) communities in an LSG CDC is established Advocacy training in Implementing partners CDC/communities All communities I LSG are communities GSIF targeted Note this program runs through the micro-project cycle LSG institution buildin Implementing partners LSGs Training in law, budgeting, All LSGs in a district are invited Note: this program GSIF accounting, asset management, to participate runs through the participatory management micro-project cycle _ Consolidation of CDPs Implementing LSG LSG and communities LSG development plan is a into an LSG partners CDC/Communities determine jointly investment multi-year investment plan development plan prionties in LSG Micro-project proposed GSIF Communities Proposed mucro-project is for GSIF financing LSG selected jointly by LSG/communities from the consolidated plan; may be from one or more communities; one or more projects may be presented, depending on how LSG and communities decide to use available funds Micro-project proposed GSIF Communities Where LSGs are inoperative, for GSIF financing communities would present (alternative) micro-projects based on community plans Micro-project appraisal GSIF GSIF Desk appraisal Proposal accepted or rejected; (I) LSG informed of decision and reason for rejection If proposal is rejected, GSIF detenmines need for, and provide, TA to improve proposal, or new micro-project proposal is submitted Micro-project appraisal GSIF CDC/communities Field-level appraisal; (2) community development committee (CDC) is formed; Micro-project GSIF CDC Discussion of project proposal TORs for design company preparation (I) with CDC prepared and request for bids Preparation of TORs for design launched, in small projects, company design and construction may be - 69 - done by the same company Micro-project GSIF CDC Competitive selection of design Design company selected and preparation (2) company based on contract signed pre-qualification Micro-project GSIF CDC/conmunities Design accepted; review of At this stage, micro-project may preparation (3) design prove to be unaffordable - design adjusted or micro-project Determination of commurnty dropped; another micro-project contribution amount and form may be selected and process repeated Procurement GSIF CDC Competitive selection of The community (through the construction company CDC) would participate in all phases of identify,ing and selecting a contractor and/or a supplier; in small works, community contracting would be undertaken Implementation GSIF CDC Momtor progress of works Monitoring would be undertaken Design firm or by design firm in cases where independent separate design firm is used; and supervisor by independent supervisor in case of smaller contracts that combine design and construction Preliminary handover GSIF CDC Inspection of completed work Community LSG After completion of GSIF Community Social and technical monitonng This monitonng will be done micro-project LSG about twice a year over a Implementing two-year penod partners - 70 - Additional Annex 15- Project Implementation Plan GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT I Q1 I Q2 la3 IQ4 qS Q6 07 QB 109 IQ10 Q11 Q12 Q'i3 Q14Q1 I. Preparation Phase 1 Establishment of Fund a Issue Decree establishing GSIF II b Establishment of GSIF Board c Review and validate design, appraisal and follow-up methodologies d Finalization of Operating Manual e Finalization of other Manuals and Handbooks fApproval of Manuals by GSIF Board p Establishment of a fully operational MIS ____ h Draft TORs for staff iDetermine salary scale IReach agreements with co-financiers k Open Special Account and Deposit Government counterpart funds 2 Procurement of Office Equipment a Computers 3 Establishment of GSIF II Executive Office a Appointment of Managing Director b Appointment of GSIF department and unit heads c Development of departmental strategies and action plans d Appointment/recruitment of technical and support staff 4 Staff training a Local Development b Study Cases for MPs design concepts and processes c Study Cases for MPs Appraisal concepts and processes d Study Cases for Procurement Design, Civil Work, Supervision and Training e Study Cases for Follow - Up fInformation System concepts, exploitation and MIS gManagement and Planning, Key Performance Indicators, and Fund Rising Strategies and elaboration of proposals h Operational Manual ,Office Software I Designer, administrator and security (gnly ISD personnel) _- _ k Study Tour (only selected Manasers and Coordinators) tt tmplementatlon Phase 1. MIcro-pro ectdevelopment a District-level outreach b LSG mapping/needs assessment c Community development planning d Selection of micro-projects e Implementation of micro-projects 2. Community mobilization a Establishment of community development committees (CDC) b Training of CDCs in m-p cycle 3 Advocacy a Training of CDC/communities in advocacy skills 3. Local self-g overnment ca pacity building a Agree on partnership arrangement with USAID b Draft TORs c Implementation 3. Monitorlng and evaluation _ t a WB launch mission b Mid-term review c Beneficiary Assessment and Social Impact d Procurement and technical audits _ L -_ e Quarterl reports fAnnual reports g Annual financial audit h Staff performance evaluations - - - _ - iAnnual budgets =_ - 71 - Additional Annex 16: Management Information System GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT In order to enable the taking of informed decisions to achieve GSIF institutional goals more adequately, improve targeting strategies and assess the effectiveness of micro-projects, GSIF will need an effective MIS which provides integrated and complete information. In the light of the changes that GSIF will be undergoing, the current Management Information System will be redesigned to allow necessary information to be provided to the GSIF, government and participating donors. The new structure of MIS need to be designed and implemented considering the new information requirements based on the new organizational structure, operational policies and procedures. The new MIS should include three main components: a An improved micro-project monitoring system that will effectively track project progress. The system should contain detailed and integrated data on each phase of implementation, which is required to monitor, manage and evaluate the micro-projects. It would monitor micro-project implementation against specific performance indicators through consolidated reports, after identification of quantifiable micro-project objectives and selection of appropriate indicators. a A Financial and Accounting System on accrual basis, which can be integrated with the micro-project monitoring system. This system should provide the necessary data to the other systems in order to provide a view of the complete financial figures, and allow comparison of expenditures against targets. o A new Management Information System built on top of the operating systems (micro-project monitoring system and financial system), to give management an appropriate level of detail and control over cost, quality and quantity of micro-projects being implemented, and to enable timely, informed and effective decisions. This system should collect required data from the operating systems, consolidate them in a common database which would be designed to fit reporting and analysis needs. It should also include a new technology reporting and analysis tool which would allow the required reports to be generated automatically and offer the users easy access to the inforrnation they need and, moreover, permit them to analyze that information from different perspectives The effective design of the MIS and the micro-project monitoring systems, requires detailed definition of GSIF's new structure, operational policies, business processes and procedures, since the new information requirements and business needs must be well understood before these systems are designed and implemented. - 72 - # nyimtf e me R*bl P4smibe TirreSdwe _ ~~~~~~~~~~status_ _ _m Ifiin ofGSIFgods anldjecm s e nu*mab1tsrs tet apct DoEw cF,z Ekms ?vrch 20B CbmTrrIbmt effinm2a resm= lkirficato of t acirvitxes wdrmm i dtoh b dtifx e m sSnc~qiiu t to a hijpxtx CIF VDN1ms NMchf3X- &aDnfu ctidtszcn Apnl 7,2003 - iffica crbaliaxt - Efimniamofprct aguhcri slnlie - EDfiomf rdesand rxxhfies; d naIltnoft1ical assr - AsgicfUgetsnt~ - Icficanbcf fT rnasnLtucr - Rfmcfpoeplan - Tirmgof tlmmnuiTrs (tiamingil begn mt anrs d I cinftm dizig the inrplenarln) 2. Req*uent AzuIAs (f0 Mtoje tu Niixtaam tW MS) _I&hficafbn ofu iredmed d t CIIFguxs and 1bectis a" lts u h MS prce I=n NE co 7-10ApIl DlTa}c of aDTer ard re4ured nqx rdw gma Xr-Ak I-84 Idkhficam ofUt ky hsey ptes and ntt & data fa eadi on In proces tmm 7-IOApil ldtinnofdatartqretoproAvhefcbircn and i Pj Tcmndyst 21-30 A1iI Idtficatci of ky frnce nlcat IO Ats, Po In p_ m 7-1OAonl iDrcFnut ofaia moi Irepwu ildata flcwaad prcm mutDomrTiHbmn) *thm te CEIF. 1-9Mey I:hht 12-IIVh bFiratbn cf 9>reim1s azd ais &un16 nhnX daficuafic of s=a t rcp nsad srpcies 21 a Ddntion of dada omxxslup. AnaW~~~~~~h 12-16 May P_nto cfla rmris analyms XdoaDt Aig19-23 Nh 3 Dgn(forNIcnroed MIiti seteanmUMLS) Dmgr of a dt*ax toD ittor cdIeicRn stl4W ardprrgciof NVa EBasVpI)q 12-16 Nby DgiQcfa rtak to s%at U cunn of iab enp ds p c f ocd pr ar% 19-2 Miy lZgp cbta gLobt y resolubcn mnMes / cdcp data vAdalihc nde; EB D ; lhEdq- 21-3O hy Dgrx ef prg, tc fmhtate clata oflctcn,prc=r g occmnncabcn irdmEh pregaMotn. b Dsg-, ai 26Mi)16 h Prepabcn of dwabox " apphcabicn deagi dorut D sgx, DU-4 16-20 J - 73 - Additional Annex 17: Decentralization GEORGIA: SECOND SOCIAL INVESTMENT FUND PROJECT (This summary is drawn from the PAD of the second Municipal Development and Decentralization Project and from Local Government Reform Initiative Baseline Assessment of Georgia, July 2001, prepared by the Urban Institute for USAID.) To address weaknesses in the institutional and policy environment, the Government of Georgia (GOG) developed, and largely implemented, a program to support decentralization beginning in the late 1990s. The legal basis for government operations was set out in an Organic Law on Local Self-Government and Government that went into effect in October 1997. Thus, government in Georgia has four levels: o Level One: village, agglomeration of villages, village/town, and city (966 entities). The term "local self-government (LSG)" is applicable only in this first level of government - the legislative body (city council) is elected by the citizens, and the executive (mayor) is then elected from the council. The executive is also the chair of the council. D Level Two: rayon or district (60) and republican or special status city (7). "Local governments (LG)" (as distinct from "local self-governments") are seen at this second level with elected legislative bodies, but with the mayor appointed by the president of Georgia. o Level Three: region (12). There are nine regions, plus the capital city, Tbilisi, and two autonomous republics: Abkhazeti and Ajara. The heads of the nine regions are governors who are appointed by the president. The governors are powerful, but their position is purely administrative because the regions do not have independent budgets and they are not responsible for any service delivery. Even though Tbilisi enjoys the status of region (as well as special status city), it does not have a governor, because the law On the Capital of Georgia, Tbilisi, specifies that it be managed by a directly elected city council. Abkhazeti is a separatist autonomous republic, and governed by an elected president, whose legitimacy is not recognized by Georgia. Ajara has not claimed independence from Georgia, but does not have a governor appointed by the president of Georgia. It is governed by an elected chair of the supreme council of Ajara. 0 Level Four: the State. Major achievements of decentralization to date include the first elections of LGs, better delimitation of responsibilities among different levels of government, and the imposition of greater fiscal accountability. Although this first stage of decentralization was an important step forward, much work remains to be done, especially in the following areas: Inadequate legal and fiscal framework for decentralization: The current legislation leaves serious ambiguities in: (i) the assignment of governmental responsibilities to either the LSGs or the LGs, including those for the delivery of basic local utility services and health, education and culture; (ii) the transfer of state-owned properties to the new local government units, (iii) the structure of inter-governmental fiscal relations; (iv) the procedures for local government budgetary management; and (v) the assignment of - 74 - revenue sources consistent with expenditure responsibilities together with the ability to improve collection at the local level. Deteriorating local services: A poor policy environment, uncertain ownership rights and responsibilities, more than ten years of poor maintenance, little or no capital investment, and inadequate oversight by local governments, due to weak capacity, have all contributed to the continued erosion in local utilities and provision of local services. In most parts of the country, water is provided for only a few hours several times a week, solid waste collection is erratic, roads are neither repaired nor maintained and natural gas and public transport have largely disappeared. Absence of long-term financing for local capital needs. A critical issue for the improvement of delivery of local services to the population are the difficulties local governments and local utilities encounter in obtaining financing for capital repairs. Lack of liquidity in the banking sector and the risky financial environment means long-term financing is not available from private sector sources. The creation of a Municipal Development Fund (MDF) under the first Municipal development and Decentralization Project (MDDP I) was an important step towards improving access to financing for capitalized repairs at the local level. Weak local capacity. Since the first State Program "On the Municipal Development of Georgia" was adopted in mid-1 997, increasing responsibilities have been assigned to the LG and LSG levels. However, both generally lack the managerial and financial capacity to meet their responsibilities because of limited technical and financial resources, inexperienced staff and a constantly changing legal and financial environment. Poor financial accountability. Although substantial improvements were made in local government reporting as the result of work on the MDDP I and an earlier IDF grant on Decentralization and Municipal Management, additional work is needed. LGs have not yet moved to internationally acceptable accounting systems, thus the quality of information is inadequate for sound financial management and for government oversight. Changes in the legal framework mean the current reporting system needs to be updated, made useful for all government and other users, streamlined and extended to the LSGs. Limited local resource mobilization. Local governments' revenues are extremely low, averaging US$18 per capita in 2000 in eleven of the twelve local governments (excluding Tbilisi) participating in the MDDP I. Of this total, about 23% comes from the shared income tax with an additional 20% from the combined land and property taxes. A review of six local governments not participating in the MDDP I found that capital expenditures were less than 2 percent of ordinary income. Maintenance of local assets is extremely low in proportion to total expenditures and, unless the trend is changed, local government units will be unable to maintain assets or to make capitalized repairs. Collection rates for utilities such as water remain extremely low, usually below 5 percent. - 75 - The Government of Georgia's Municipal Development and Decentralization Strategy In recognition of the need for further clarification of the rights and responsibilities of local governments and local self-governments in order to successfully decentralize, the GOG adopted the "State Program for the Second Stage of Georgia's Municipal Development", for the period 2000-2005 in March 2000. This program lays out an ambitious agenda to strengthen and improve the legal framework by: (i) devolving responsibility for local utility services (water supply and sewerage, local transport, solid waste collection and disposal, energy distribution, etc.) previously assumed by the LGs to the lower-level LSGs, (ii) assigning exclusive responsibility for education, health, and culture to the LGs; (iii) confirming the autonomy of LSGs in matters of budget planning and management, (iv) unambiguously assigning local taxes and other sources of revenue to LSGs; and (v) the transfer of assets to LSGs. The first key step in the new State .Program was amendment of the Organic Law on Local Self-Government to reflect the objectives outlined above. The amendment was adopted in August 2001, but will only become effective after the local elections currently scheduled for June 2002 are held. Actual implementation will also depend on the expeditious adoption of three complementary laws currently under review by the GOG that will regulate: (i) the mechanisms of inter-governmental fiscal transfers; (ii) the assignment of former State-owned property to local government units; and (iii) the procedures of local government budgetary management. While the new legislation, in its principles, represents an important and positive step forward, it still leaves open a variety of issues which, if not properly addressed, could prevent the local government system from functioning as expected. Worse, the new legislation could lead, especially in smaller local self-governments, to a significant deterioration in the quality of delivery of basic municipal services to the population, in general, and its poorer segments, in particular. Two broad categories of potential problems relate to the evolving framework: The development, adoption or effectiveness of key pieces of legislation (including the Amendment to the Organic Law on Local Self Government and the necessary complementary laws) may be delayed. New legislation may be developed that is not fully consistent with the principles of sound decentralization (for example, by fragmenting local utilities into units that are too small to operate effectively, failing to provide appropriate revenue sources or the ability to improve collections). The reform effort undertaken by the GOG has benefited extensively from support provided by USAID through its 'Local Government Reform Initiative'. Working groups established under this initiative - which also include MDDP I staff - are instrumental in providing critical advice and recommendations on these matters to the GOG. The effectiveness of technical assistance contemplated under a second MDDP project will depend on close coordination with all other donors active in this area in order to maximize benefits, avoid unnecessary and costly overlaps, and prevent unwarranted confusion in policy matters. The donors have established a monthly rotating meeting, which the project staff also participates in, to share experience and information and this coordination has been helpful. - 76 - 3. Sector issues to be addressed by MDDP II: MDDP II would support the second stage of the GOG's decentralization and municipal development program. The project would address a selected number of key priorities, which are critical to successful decentralization and which fall into two broad categories: Policy framework. The project would complement work already under way by other donors to support the evolution of a sound legal and policy framework for decentralization. Key areas to be supported by the project include: developing national criteria for local borrowing; improving LG financial accountability; providing clear and predictable revenue sources and improving the ability to collect those revenues; assessing the local utility sector and establishing sensible ownership structures; and, regulatory responsibilities for longer-term sustainability. Improved performance of LGUs. The first project linked demonstrable improvements in local government performance to access to the investment financing; the second project would build on this successful approach. LGs will develop action plans to improve their financial situation, administrative capacity, and accountability. The project will provide assistance to implement improvements in financial management (reporting and accounting systems), increase accountability and community involvement (budget hearings and improved reporting), increase revenues (local taxes and fees), and rationalize local administrative structures. It will also assist in the general increase in capacity of LGs to deliver services by improving the functioning of local utilities. This assistance should improve the overall performance of LGs and improve the number of LGs able to meet objective creditworthiness criteria and qualify for financing for investment projects. Under the MDDP I, local governments had to first identify feasible investments and then demonstrate their capacity to repay the funds borrowed. The latter, in turn, required improved revenue collection, as well as better budgeting and financial management. As a result, the cumulative debt capacity of the 12 participating LGs increased about 2.5 times between 1998 and 2000, or by more than GEL 21.0 million. Budgetary income likewise increased by 30% for the same period. Concurrently, budgetary expenditure was trimmed by eliminating redundant or ineffective staff positions, transforming administrative units into financially autonomous entities, and introducing competitive procurement procedures. Most of the funds under the MDDP I have been fully committed and will be disbursed before the end of the project, in December 2002. The supply of new financial resources to MDF will allow it to maintain the momentum of the financial improvement drive. In the first phase of the new project, the MDF will primarily finance investments that were already identified and evaluated under MDDP I but could not be financed due to shortage of resources. The borrowers for these investments will be 'Special Status' (Republican) cities that have a demonstrated borrowing capacity and whose finances, because of the cities' special status, will be minimally affected by the outcome of the ongoing local govermment reform. In a second phase, MDDP II will expand its market. It will reach out to those lower-level local self-government units that will have improved their financial and management capacity as a result of the technical assistance provided by the project. - 77 - - 78 - AO0 4I 42° 43° 44° 45 467 GEORGIA BUILT-UP URBAN AREA RUSSIAN FEDERATION 0~~~~~~~~~~~~~~ SELECTED CITIES ® AUTONOMOUS REPUBLIC CENTERS ® NATIONAL CAPITAL -*-- , RIVERS GLACIER AREAS 'i.__ _ MAIN ROADS J. IZ-.--.-. RAILROADS 43 - - - - - AUTONOMOUS REPUBLIC BOUNDARIES T;_od,kok -- INTERNATIONAL BOUNDARIES H Schkh. ~~~~~~~~~~~~~RUSSIAN Sea; F EDERATIN > ERBLW.a (s S The hauosnDdansolors, dieMoompaionad any oiTher In fEomnat ,o _o~>n) >~~~~~~~~~~~~~~~dan onKE in mopV do note, . sn on ies mpSoto n=o World Bank I \ AZERBA NIJANS -4 d Bnend n n ordocc.ptotc of sank boandon or / 1 isYRlANAR A RREP ' RQXISLAMIC REP OF IRAN 42° 43° 4d° 4s- 6 Report No.: 25470 GE Type: PAD