Document of The World Bank FOR OFFICIAL USE ONLY ReportNo: 39321-BD PROJECTPAPER ONA PROPOSEDADDITIONAL FINANCINGCREDIT INTHEAMOUNTOFSDR5.4MILLION (US$S.O MILLIONEQUIVALENT) TO THE PEOPLE'S REPUBLIC OF BANGLADESH FORA SOCIAL INVESTMENT PROGRAMPROJECT April 18,2007 SustainableDevelopmentSector Unit South Asia Region This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (Exchange Rate Effective March 15,2007) Currency Unit = BDT BDT 1.00 = US$0.01449 US$l.OO = BDT69.005 July 01 -- June 30 FISCAL YEAR ABBREVIATIONS AND ACRONYMS CAP Community Action Plan CAS Country Assistance Strategy CDD Community-kven Development COM Community Operational Manual DFID Department for InternationalDevelopment (UK) DO Development Objectives FM Financial Management GOB Government ofBangladesh IDA International DevelopmentAssociation IP ImplementationProgress MD Managing Director M I S Management Information System MOF Ministry of Finance MTR Mid-TernReview OM Operational Manual O&M Operations andMaintenance PDO Project DevelopmentObjective PO Partner Organization PRSP Poverty Reduction Strategy Paper SDF Social DevelopmentFoundation SIPP Social Investment ProgramProject VDC Village Development Committee FOROFFICIAL USE ONLY BANGLADESH SOCIAL INVESTMENT PROGRAMPROJECT ADDITIONAL FINANCING TABLE OF CONTENTS PAGE Project Paper Data Sheet ............................................................................................................. 1 I. Introduction.......................................................................................................................... 2 I1. Background and Rationale for Additional Financing.......................................................... 2 I11. ProposedChanges ............................................................................................................... 4 IV ConsistencyWithCountry Assistance Strategy (CAS) ...................................................... . 5 V. Appraisal of Scaled-Up ProjectActivities........................................................................... 5 VI. ExpectedOutcomes............................................................................................................. 7 VI1. Benefits AndRisks ............................................................................................................. 7 VI11.FinancialTerms And Conditions For The Additional Financing....................................... 8 Annex: Fiduciary RiskAssessment ....................................................................... 9 This document has a restricted distribution and may be usedby recipients only inthe performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. BANGLADESH SOCIAL INVESTMENT PROGRAMPROJECT ADDITIONAL FINANCING PROJECTPAPER SOUTHASIA - SASSD Country: Bangladesh Sector Director: Constance Bernard ProjectName: Social Investment Program CountryDirector: Xian Zhu EnvironmentalCategory: B Borrower: People's Republic o fBangladesh Responsibleagency: Social DevelopmentFoundation Revisedestimated disbursements(Bank FY/US$m) FY 1FY07 I FYO8 IFY09 Current closingdate: 06/30/2007 Revisedprojectdevelopmentobjectives/outcomes The Project Development Objective would remain the same as the Original Project. The Additional Financing would continue to support the development o f effective and efficient financing and institutional arrangements at the local level for improving access to local infrastructure and basic services through the implementation o f community-driven small-scale socio-economic infrastructure, social assistance and income generating activities. Does the scaled-up or restructured project trigger any new safeguardpolicies? No - - P For Additional Financing d [] Loan [XICredit [] Grant For Loans/Credits/Grants: Total Bank financing : SDR 5.4 million (USD 8.0 million equivalent) Proposedterms: Standard Credit FinancingPlan (US$m.) Source Local Foreign , Total Borrower 0.70 0.00 0.70 IDA 7.75 0.25 8.00 communities 0.75 0.00 0.75 Total 9.20 0.25 9.45 I.Introduction This Project Paper seeks the approval o f the Executive Directors to provide an additional Credit in an amount o f SDR 5.4 million (USS8.0 million equivalent) to Bangladesh, for the Social Investment ProgramProject (Cr.3740-BD). The proposed additional Credit would help finance the costs associated with the scaling up o f activities to enhance the developmental impact o f this well-performing project. N o major changes are proposed to the Project's Development Objective, design or implementation arrangements o fthe Original Project. The proposed Additional Financing would continue to support the development o f sustainable and effective institutional arrangements at the local level, through which communities are empowered to address their own basic needs through investments ininfrastructure services, social assistance and income generating sub-projects. Activities in villages presently served by the project would be deepened, with a particular focus on strengthening community-driven institutions o f the poor, buildingupon both the existing implementation capacity and field results to date. Project activities would also be extended into a limited number o f villages in four additional districts, where some refinements in implementation strategy would be piloted, reflecting lessons learned and agreed post-Mid Term Review (MTR). The strategy maintains a focus on capacity building o f the poor via strengthening and direct financing to village level institutions. It enhances the focus on inclusion o f youth and the `hardcore' poor and responds to community demands for increased support for economic activities. Finally, the additional financing will pave the way for a future more significant scaling up o f support to the Social Investment Program, consistent with the Country Assistance Strategy (CAS) for Bangladesh. Partnership Arrangements: The proposed Additional Financing does not envisage specific partnership arrangements with other development partners. However, existing cooperating arrangements with Department for International Development (DFID), under the Bangladesh Country Trust Fund, and partnership with national and local NGOs will continue. In addition, during implementationunder the Additional Financing, partnerships with the private sector will be deepened. 11. BackgroundandRationalefor AdditionalFinancinginthe Amount ofUS$S.O Million Original Proiect D e s i m Since 2003, the Government o f Bangladesh (GOB), with support from IDA through the institutional channel o f the Social Development Foundation (SDF), has been implementing the Social Investment Program Project (SIPP). This is a community demand- driven (CDD) operation, which is exploring new ways o f delivering critical infrastructure services and social assistance to the rural poor, while at the same time addressing institutional organization and capacity-building needs at village level. Overall, this CDD approach entails a focus on community organization and principles o f participation, empowerment and downward accountability. The project has been successful indemonstrating the capacity o frural villagers to prioritize needs, manage resources and implement subprojects, empowering them to play an active role inshaping poverty reduction efforts at the local level. 2 The original Credit, in the amount o f SDR 13.5. million (US$18.24 million equivalent) was approved on March 18,2003, and became effective on April 20,2003. The project was intended as a small-scale pilot, implemented in two o f the poorest districts o f Bangladesh, to test new financing and institutional arrangements for improving access to local infrastructure and basic services. As under the Original Project, the Additional Financing would support the following four components: (i)Strengthening of SDF will support information and communication, capacity building,monitoringand learning, andproject management. (ii) InstitutionalDevelopmentat Community-Levelwill support awareness raisingand information sharing, and institutional development andplanning. (iii) Implementation of Community Action Plans (CAP) will provide matching grants for community subprojects to finance the implementation of small scale socio- economic infrastructure and income generating activities, and provide technical assistance to increase the capacity o f the poorest and socially excluded groups to avail themselves o f social and economic opportunities and resources. (iv) Pilot Private Financing of Community Utilities will finance the provision o f technical advisory services for testing o f new approaches to mobilize private participation inthe program. Reasons for Additional Financing: The original Project Development Objective (PDO) i s still valid, and overall project design and scope remain the same. The Additional Financing will be used primarily to consolidate gains and meet already identified community demands in the first three batches of villages where the Original Project i s under implementation. It will also scale up the approach with focus on institutional building and livelihoods in a batch o f villages in four additional districts. Finally, the additional financing will permit the piloting o f some refinements instrategy basedonlessons learnedto date, priorto subsequent more significant scaling-up ofthe program. Overall, it i s anticipated that building on ongoing activities in project villages and testing a revised strategy for future scale-up will contribute to enhanceddevelopment impact. Supervision ratings for the Ongmal Project have consistently been satisfactory both for Development Objectives 00)and Implementation Progress (IP). Thus far, the Original Project has demonstrated the benefits o f community level planning and has generated positive community responses as a result o f their increased participation in planning and implementation o f village level activities; enhanced information and empowerment base at the village level; and quality and cost o f community implementedinfi-astructure activities. As o f March 15, 2007, the project has reached 950 villages, (roughly 2.0 million people) through 1400 community subprojects. As SDF has gained experience with the project strategy and methodology, the pace o f execution has accelerated steadily (US$14.1 million have been disbursed and the remainder o f the IDA Credit i s fully committed) and at this time more than 950 Village Development Committees have requested additional project support for strengthening their institutions and financing critical investments for which they needresources. The Additional Financing instrument i s ideally suited for this purpose. With the volume o f demand already substantiated, the implementation capacity 3 o f SDF and the government recordunder this project o ftimely provision o f counterpart financing, no difficulty i s anticipated in the full utilization o f the Additional Financing within the proposed revisedClosing Date. Imulementation arrangements for Additional Financing: Implementation arrangements under the Additional Financing would remain the same as those o f the ongoing project, which have been performing well. Overall, the project management would continue to be the responsibility o f the existing implementationagency SDF. The project will continue to be implemented according to procedures defined in its project Operational Manual and Community Operational Manual. The implementation o f the village activities would continue to be the responsibility o f the village organizations. The fiduciary tasks o f procurement and financial management also detailed in the Operational Manual, are already satisfactory to IDA and will remain unchanged under the proposed Additional Financing. Audit reports and reviews during supervision missions confirm the effectiveness o f these arrangements. 111.ProposedChanges As mentioned above, the Project Development Objective, its design and institutional arrangements will remain the same as the Onginal Project. The Closing Date for the Ongmal Project would be extended; and revised Closing Date for the Original Project and the Additional Financingwould be September 30,2009. Allocation of Credit Proceeds: The same expenditure categories would be maintained as under the Onginal Project. IDA would fund 100% of allocation for all categories except incremental and operating costs (which will be maintained as in the Original Project) as approved under current Country Financing Parameters. The bulk o f IDA funds would be transferred to the communities directly as sub-grants for subprojects under expenditure Category 1for which there i s no tax element, and that there i s insignificant tax element in Categories 2 to 4 under consultancies and goods. Therefore, the higher financing percentages in these Categories under IDA funds would be justified, and is within the approved Country Financing parameters. Schedule 1 o f Development Credit Agreement has been revised to reflect re-allocation o f "unallocated category" of the Original Credit among other expenditure categories. Expenditure categories and revised allocations o f the Original Credit and Additional Financing are shown below: 4 Category Amount ofthe Amount of the Yo of RevisedAllocation AdditionalCredit Expenditu underthe Original allocated SDR res to be Credit SDR Million Million Financed (US million (US$ million equivalent) equivalent) Sub-grants for subprojects 8.960 (12.100) 4.400 (6.600) 100% under Part C TA for partnerships with 0.420 (0.567) O.lOO(0.150) I 100% I private sector under Part D Goods, including vehicles and 0.220 (0.297) 0.180 (0.250) 100% equipment Services, including POs, audit, 3.250 (4.387) 0.360 (0.500) 100% training I Incrementalstaff salaries and 0.650 (0.889) 0.360 (0.500) I 80%in operating costs FY03 and FY04 and 60% Unallocated Nil Ni1 Total 13.500 (18.240) 5.400 (8.000) I I IV. Consistency With CountryAssistance Strategy (CAS) The recent Bangladesh CAS (2006-10) aligns IDA assistance with the Government o f Bangladesh's national strategy as articulated in Poverty Reduction Strategy Paper (PRSP), through two pillarswhich emphasize empowering the poor and improving the climate for growth, supported by a cross-cutting focus on good governance. Expanding poor people's ability to make choices and participate in constructive actions to improve their situation i s at the heart o f empowerment and poverty reduction. One way o f doing this i s through a CDD approach that engages the poor directly in priority setting and increases both their control over and accountability for resources and decision-making. These are the central principles on which Social Investment Program Project operates, with the aim o f reducing poverty amongst the rural population, especially the "poorest o f the poor and most vulnerable", currently outside the reach o fmost official development interventions. The Additional Financing would support the deepening o f the original operation's development impacts and i s therefore hlly consistent with the CAS and the PRSP. V. Appraisalof Scaled-UpProjectActivities A. Economic andFinancialAnalyses. Important aspects o f project design under the Original Project, to be maintained under the additional financing, help ensure that community subproject investments represent the most cost- 5 effective alternative. The demand driven nature o f the community subproject selection helps ensure that scarce resources flow where they are most needed and that selected subprojects and institutional strengthening activities are the best alternatives for the communities. The direct involvement o f the communities indecision making and implementation have proven to generate very significant cost savings when compared to similar works executed by public sector agencies. Cost-benefit ratios o f such investments are high and analysis suggests that investments are generally financially sustainable. Although Village Development Committees receive a one-time matching grant, the communities contribute towards investment costs and take full responsibility for the cost o f operation and maintenance o f assets. The strong sense o f ownership by recipients, because they have played such an active role in decision making at all stages of subproject selection and implementation, not only produces the kind o f cost savings mentioned above (as communities carefully monitor the use of very scarce resources), but also improves quality (as compared with similar works done by others), and is a major factor explaining the strong prospects for sustainability o f investments. Technical Analysis Technical viability o f small scale infrastructure works under the Original Project has been demonstrated over the first 3 years o f implementation. At the time o f the MTR, both quality and cost indicators surpass those o f comparable works undertaken by the Local Government Engineering Division. Technical standards have been regularly reviewed by the IDA task team, looking at engineering designs, financial and economic feasibility, environmental impacts and Operation and Maintenance (O&M) arrangements. Indicativerates ofreturn are high, and SDF is currently undertahng a comprehensive assessment to systematically document these. Villages which will participate under the Additional Financing will have an open menu and may use their budget envelope for socio-economic infiastructure needs, social and institutional assistance or income generating subprojects. As under the origmal project, only technically feasible, simple, labor intensive and economicallyviable sub-projects which can be easily maintainedand operated and sustained by the communities would be eligible. All sub-projects will be screened by qualified staff in subproject appraisal teams and SDF, and communities can contract technical assistance to assist in design and implementation of sub-projects, and in strengthening o f their community based organizations. B. FiduciawAnalysis The same financial management and procurement arrangements used in the Original Project will be used under the proposed Additional Financing. Duringimplementation to date, SDF's finance and procurement team has acquired significant experience in IDA guidelines and requirements, and community financial management and procurement. Adequate fiduciary controls are inplace at the national level, with appropriate controls and accountability measures at community level. Regular field level supervision by SDF staff and IDA supervision missions will be continued. A detailed Fiduciary RiskAssessment i s included inattached Annex. SDF has prepared a revised Procurement Plan for the Original Project as well as the Additional Financing. Given the demand driven nature of subprojects, the community level procurement cannot be planned up-front. However, the key rules, procedures and process steps for community level procurement have been agreed and are incorporated in the procurement chapter o f Operational Manual. The Procurement Plan would be updated annually or as required to reflect actual project implementationpace and needs. 6 Environmental and Social Aspects Environmental: The Ongmal Project has an Environmental Category B classification, with community subprojects subject to screening and impact assessment criteria as detailed in the approved Operational Manual. Under the project to date, no adverse environmentalimpacts have been experienced. The Additional Financing would hnd community subprojects similar in scale and scope to those implementedunder the Onginal Project. No subprojects are approved or funds transferred until the environmental viability o f the investments i s determined, and subproject I agreement between SDF and the community organizations contain environmental compliance clauses as detailed inthe Operational Manual. Social: While the tribal population i s insignificant inthe project districts, a Tribal Development Plan was developed under the Onginal Project. This will be applicable to the additional financing as well, and the guidelines are detailed inthe Operational Manual. Other social impacts are expected to be positive, with project activities gradually leading to improved quality o f life o f the poor and vulnerable groups through enhancing their access to social and economic opportunities. In the villages already participating under the ongoing project, achievements to date will be capitalized on by further enhancing functioning and sustainability o f community groups, and broadening their inclusion to ensure participation o f young people and the poorest o f the poor. In the new villages, initial social mobilization activities will also seek to identify and include the poorest, youth and women, introducing the principles and benefits of collective action for both social and economic empowerment. VI. ExpectedOutcomes The existing project monitoring and evaluation system i s comprehensive. The implementing agency has a robust Management Information System (MIS) system in place, from which they generate quarterly reports tracking physicallfinancial progress and key Results Framework indicators. In addition, they are making use of an independent agency to provide process monitoring reports on a monthly and quarterly basis, in order to bring field level operational issues to management attention. The Original Project baseline i s complete and an impact assessment was carried out in preparation for MTR. With Additional Financing in place, expected outcomes will remain largely unchanged with outcome indicators similar to those o f the Original Project, tracking (i) the numbers o f poor benefited; (ii) numbers o f viable community organizations formed and functioning; and (iii)savings mobilized and non-project funddfinancing leveraged by community organizations. VII. BenefitsAnd Risks The proposed Additional Financing will benefit 2.0 million rural poor in the two districts o f Jamalpur and Gaibandha, served under the Original Project, through further strengthening o f their community-based organizations and additional support to productive economic activities and investments. In addition, in the four districts to which the project will be extended under the Additional Financing, a further 150,000 people will benefit. The key riskmay be that uncertainty about future elections and loss o f political commitment to address the needs o f the poorest may present a challenge to implementation. However, this has not been an issue so far, and the Care 7 Taker Government has shown strong commitment to the interest o f the poor. Maintaining a highly participatory nature o f the program at local level and engaging the poor directly in the implementation o f the program would mitigate this risk. The second risk could be SDF's institutional structure and capacity to ensure compliance to the project rules in the ground. However, the institutional set up o f SDF has worked effectively in the past, with an independent Governing Body, a competent Managing Director and supporting staff to ensure professionalism and compliance to the project rules. This risk would be further addressed through strengthening SDF's field presence to enable it to monitor compliance to the project rules, and respond quickly to the demands o f the communities. Inaddition, the institutional set-up created at the community level under the ongoing project, which includes the participation o f all members o f the community in the selection, preparation, implementation and management of resources, have provento be a strong mechanism to limit outside interference and address this type o frisk. Otherwise, the activities scaled up under Additional Financing should pose no additional risks, other than those identified in the Onginal Project, for which effective mitigation measures are already inplace. VIII.FinancialTerms And ConditionsFor TheAdditionalFinancing Bangladesh is eligible for IDA financing. Accordingly, the Additional Financing will take the form o f an IDA Credit, with standard terms o f 10years grace and40 year maturity. 8 Annex FiduciaryRiskAssessment A. Summary ofProjectDescription 1. The proposed additional financing would support the scaling up of the Social Investment Programproject (SIPP) to develop effective and efficient financing and institutional arrangements for improving access to local infrastructure and basic services through the implementation o f community-driven small-scale socio-economic infrastructure, social assistance and income generating activities. 2. The project i s implemented by the Social Development Foundation (SDF), an autonomous body established by a notification o f the Government o f Bangladesh in 2000 and registered in 2001 under the Bangladesh Companies Act of 1994. Day to day management o f SDF i s vested in a management team heading by the Managing Director, appointed by the SDF Government Body. The Governing Body o f nine persons is responsible for determining the direction and scope o f SDF's activities, the management and administration o f the Foundation. Policy direction and oversight i s providedby a 20-member General Body. B. FinancialManagementCapacityAssessment: 3. The financial management (FM) system developed under the Original Project i s adequate to account for, monitor and report the project resources and expenditures. Under Additional Financing, the priority for SDF i s to maintain a sound community Financial Management system ina sustainable manner, to continue ensuring appropriate downward accountability mechanisms that maintain integrity o f accounts at the local level. A summary o f key strengths and identified weaknesses i s given below. Agreed actions are included in the Financial Management Improvement Action Plan inParagraph 20 below. Overall Strengths and Wealmesses 4. Staffing: SDF has a Finance and Administrative Division, with eight staff headed by a General Manager, who have been maintaining a sound Financial Management system, capable o f producing timely financial information and maintaining checks and balance in the financial transactions. Existing staff will be able to manage the additional financing for the project. Suggested ImDrovement: The Financial Management staff need to diversify their focus from entity-based (SDF) financial management arrangements to the community level Financial Management system, to be able to support strong community-based systems, downward accountability mechanisms and provide constant field-based training and monitoring. In order to optimize overall Financial Management arrangements, it would be useful for SDF to clearly identify focal staff to work on community level accountability and distinguishtheir TOWjob descriptions from those who focus on SDF level Financial Management issues. To support these staff, the revised Community Operational Manual and Guidelines need to be widely disseminated, applied and monitored. 5. Computerized FinancialManagement System: Overall, SDF's financial management system i s a combination o f manual-based control functions and a computerized accounting 9 package for posting o f transactions. The key function o f the accounting package i s to consolidate financial information from the field as well as fiom central level and produce a set o f financial monitoring reports. The use o f a computerized system was a good start from the perspective o f traditional automation o f financial information. This has helped SDF to consistently meet the financial covenant to send quarterly Financial Management Reports (FMRs) within forty-five . days o f the end o f the quarter to the Bank, includingpreparation o f annual financial Statements. Suggested Improvement: A computerized financial management system having control functions built into the system for the sub-project as well as other revenue and capital expenditure at the central level should be considered. This would help avoid time consuming pre-audit functions for numerous transactions and use o f automated system at the transaction level rather than posting transactions after they occur. This would also help application o f control functions across the various types o f transactions with minimal human error. 6. InternalControlandAudit: SDF is responsible for carrying out periodic internal audit functions and submitting such reports to the MD. Supervision missions have shown that SDF has been conducting these internal audits regularly and that they have been a good source o f information to monitor the robustness o f its Financial Management system. The internal audit reports should always include a clear record o f management response for prior internal audit observations. The Governing Body have already demonstrated their commitment to this internal audit practice and should continue to monitor and review the prompt action by management, . where necessary. Suggested Improvement: Overall, internal audit could be further strengthened under Additional Financing by talung the following steps: (i) introducing an annual internal audit plan; (ii)show management responses in the internal audits; and, (iii)a table showing current status o f previous observations inthe same district/ thana/ villages. DisbursementArrangements: 7. For utilization o f IDA'Sshare o f expenditures, SDF makes use o f the Special Account, which, under the Original Project, has been working well. The authorized allocation o f the Special Account i s equivalent to 3-4 months o f estimated expenditures and this would be maintainedunder Additional Financing. 8. Current IDA disbursements - as o f March 15,2007 - are US$14.1 million or little above 70% o f the total Credit amount o f SDR 13.5 million (equivalent to US$18.24 million). This includes only the amount advanced to the project Special Account, not those expenditures under processing. 9. Commitments: Total commitments and estimated expenditure as o f March 15, 2007, i s US$5.8m (Approx) . Allocationsunder AdditionalFinancing: 10. The same expenditure categories will be maintained, as under the Original Project. The allocationbetween categories and the percentage o f expenditures to be financed are shown below in Table 1. The current approved Country Financing Parameters, 100% financing has been selected for all categories (except incremental costs), owing to enhanced practicality o f such arrangements. The bulk o f IDA funds would be transferred to the communities directly as sub- 10 grants for subprojects under expenditure Category 1 for which there i s no tax element, and that there i s insignificant tax element in Categories 2 to 4 under consultancies and goods. Therefore, the higher financing percentages in these Categories under IDA funds would be justified, and i s withinthe approvedCountry Financingparameters. Table 1: Category-wiseAllocations Category Amount ofthe Amount ofthe Credit Yo of RevisedAllocation allocated Expenditures under the Original SDRMillion to beFinanced Credit SDR Million (US million (US million equivalent)) equivalent) (US$ million) Sub-grants for 8.960 (12.100) 4.400 (6.600) 100% subprojects under Part C TA for partnerships 0.420 (0.567) 0.100 (0.150) 100% withprivate sector underPart D Goods, including 0.220 (0.297) 0.180 (0.250) 100% vehicles and equipment Services, including POs, 3.250 (4.387) 0.360 (0.500) 100% audit, training II II Incremental staff 0.650 (0.889) 0.360 (0.500) 80% inFY03 salaries and operating and FY04 and costs 60% thereafter Unallocated Total 13.500 (18.240) 5.400 (8.000) Project PlanningandBudgeting 11. National level: The national budget includes sector wise allocations, and i s approved by the Parliament. The project planning process for each financial year would follow the GOB budgetingcycle and would be completed when the project estimates are included in the Annual Development Plan and approved by Ministry o f Finance (MOF) for its execution by the line ministries/departments. Under the Original Project, the entire amount o f counterpart funding for SIPP was received from the MOF in two tranches. However, for the additional financing, it i s recommendedthat counterpart fundingi s received annually. 12. Community level: As under the ongoing project, the planning process for community level sub-grants would follow a `bottom-up' approach. Grants for sub-projects are disbursed based upon a signed Financing Agreement, specifying the mode and triggers for tranche release, submitted by the community organizations and approved by SDF. Communities' budgetary procedure will follow the sub-grants, based on the total resource envelope allocated to them, by planning and prioritizing village priorities in a participatory transparent manner and reflecting these ina Community Action Plan (CAP). 11 FundsFlow Arrangements 13. From IDA and Government to SDF Under a Subsidiary Grant Agreement between the Government and SDF, the Ministry o f Finance would provide the IDA Credit and any Government contribution to SDF. The original Subsidiary Grant Agreement would be amended to reflect the requirement under Additional Financing. IDA funds would continue to be channeled to the Special Account operated by SDF for SIPP, under terms and conditions acceptable to IDA. The Managmg Director o f SDF would remain the authorized person to withdraw IDA credit proceeds and the Government contribution, as under the current arrangements. GOB counterpart will follow the same procedures SIPP. 14. From SDF to participating communities: Upon approval o f a Community Action Plan and sub-projects proposals, SDF will directly transfer funds to the relevant Community Account. The transfer will be conditional to the communities complying with the project rules. ReconciliationofAccounts 15. SDF will carry out periodic reconciliation o f funds with community accounts so that any request for project funding or tranche payment can be based on balance remaining at the community account, as well as funds to be disbursed. FinancialManagementReports(FMRs) 16. FMRs have been received consistently under the on-going project and are o f acceptable quality. It would assist SDF if one set o f FMRs is prepared that meets both SDF and World Bank's requirement and i s used by all parties to monitor financial performance o f the project. This would be increasingly important with the Additional Financing also to be monitored and reported. ExternalAudit 17. Since SDF i s governed by the Companies Act, it i s mandatory for their accounts to be audited by a private audit firm. The external audit report, conducted under terms o f reference satisfactory to IDA, should be submitted to IDA within six months o f the end o f each fiscal year. Under the on-going project, IDA has been receiving external audit reports in a timely manner. The next audit report i s due on December 31,2007. 18. Overall, future external audits could be strengthened by covering the Bank's requirement for an audit opinion on both the SOE and Special account. It has also been recommended that SDF's Audit committee discusses both internal and external audit report and documents the decisions. The following audit reports are monitored in the Audit Report Compliance system (ARCS): Implementing Agency Audit Auditors Audit DueDate SDF EntityFinancial Statements with Private additional opinion on SOE (whether Audit firm end o f each fiscal SOEcan berelied to disburse IDA . year (December 31) funds) and SA I 12 Adequacy of FinancialManagementArrangements 19. The FinancialManagement arrangements under the on-going project will be adequate for the proposed additional finances. From the fiduciary perspective, the FMrisk rating is: modest. Attachment 1provides the FMfisk Rating Summary and mitigation measures. FinancialManagementActionPlan 20. Inthe context of scalingup, SDF has committed to completing followingactivities ina time-bound action plan, summarized in Table 2 below. Most o f the activities are extensions o f past activities and many o f the enhancements are already under progress. Table2: FMImprovementAction Plan Issues Responsibility Completion date A computerized financialmanagement systemhaving SDF- Finance team July 312007 control functions built into the system for the sub- project as well as other revenue and capital expenditure at the central level should be considered. Recruit staff with adequate skills and competence to SDF and World Bank June 30,2007 develop and monitor downward accountability framework with TOR acceDtable to the Bank. Further strengthen InternalAudit functions covering SDF -Management June 30,2007 Additional Financingby taking the following steps: (i) introducing an annual internal audit plan; (ii)show managementresponses inthe internal audits; and, (iii)tableshowingcurrentstatusofprevious a observations inthe same district/ thana/ villages. Revise and update the Operational Manual and the SDF -Management M a y 30,2007 Financial Management Manual, taking into Team considerationthe lessons learned to date and feedback from MTR. Prepare the draft ready for submission to IDA for amroval/clearance. SupervisiodImplementationSupport 21. Inthe early stages ofAdditional Financing, FinancialManagement supervision activities will focus on the adequacy o f implementation o f the action plan items. As project implementationmoves forward, desk reviews o f internal, external, and social audit reports will be conducted. To help ensure transparency, the SDF website will be reviewed for timely and correct postings o f sub-project details vis-&vis information contained inthe project FMRs. Site and field visits will be planned as needed to review internal control procedures and community level practices. C. Procurement CapacityAssessment 22. SDF has been carrying out procurement responsibilities under the original project since it's inception in2003. Existingprocurement arrangements are adequate, and the established SDF system i s sufficient to handle procurement activities arising out o f the Additional Financing. 13 23. As under the Original Project, procurement for the Additional Financing would be carried out in accordance with IDA'S"Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004, as well as the Public Procurement Regulations, 2003 promulgatedby the Government o f Bangladesh and the provisions stipulated inthe revised Legal Agreement. Threshold limits for the applicable Guidelines and/or Regulations and review category and methods o f procurement are indicated in the Procurement Plan for the additional financing. These procurement responsibilities are camed out at the national level by SDF itself, while procurement o f community infrastructure works i s carried out at the village level by the community committee members who have been imparted training on procurement by SDF through its partner organizations. 24. Given that the nature o f the project i s essentially community driven, the procurement through community participation cannot be planned upfront. However, SDF have prepared a Procurement Plan for the first eighteen months for the other components to be covered be the financing. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementationpace and needs. 25. A summary o f SDF's key strengths and identified weahesses in procurement is given below. Agreed actions for future improvement are included in the Procurement Improvement Action Plan inparagraph 30. Overall strengths and weaknesses 26. Staffing: SDF has a Finance and Administrative Division, with eight staff headed by a General Manager, who have been maintaining a sound Financial Management and Procurement system. A designatedProcurement Manager i s responsible for all procurement activities under the project, including oversight o fprocurement at community level. > Suggested improvement: While the Procurement Manager has proven to be very capable in her job and i s more than adequate as the specialist in charge at national level, SDF could optimize staffing arrangements in order to further enhance their capacity to oversee community-based procurement. This would include personnel designated to carry out regular quality control o f training activities camed out by partner organizations in the field, and monitoring o f community level procurement transactions. 27. Nationallevel procurement: The volume o fprocurement by SDF at the national level is relatively small, to the tune o f $1.4m only, while, as noted, the majority o f activities take place as community sub-project procurement. However, given the country context, irrespective o f the volume o f procurement, procurement activities in Bank-financed projects have typically faced risk probabilities in two areas: (i)qualitative, arising out o f lack o f transparency and poor fiduciary controls, and (ii)quantitative, as seen in non-achievement o f planned targets in the procurement plan and/or related project documents. Under the Onginal Project and as monitored during regular IDA implementation support missions, SDF has not faced major issues in these areas. Nevertheless, it i s important to maintain close and regular review on the part o f IDA and for SDF to continue to utilize risk mitigation measures, including enhancement o f staff procurement capacity. 28. Community levelprocurement: Under Additional Financing, the quality o f community procurement would continue to assume great priority and detailed reviews would be regularly 14 undertaken in the field by IDA supervision teams. Inpast reviews, procurement training at the field level has emerged as an important aspect for capacity buildingand considerable demand has been seen at community level for refreshment and updating o f skills. 9 Sunnested improvement: SDF therefore needs to orient the SDF staff, field teams and partner organizations to respond adequately to such demands, so that they may regularly monitor the quality o f procurement done by communities, in terms o f transparency, accountability and adherence to procedures, as well as reviewing technical quality o f resulting works, and checking adequacy o f training offered to communities by field-based partner organizations (POs). SDF should have the capacity to guide POs, assisting with design and delivery o f training, and routinely monitoring quality and impact o f such training. 29. Procedures for community-level procurement shall continue to follow the project's Community Operational Manual (COM), including the recently revised and updated chapter on Community Procurement detailing procurement rules, arrangements and methods for procuring works, goods and services, thresholds, roles and responsibilities o f community organizations, and various accountability controls at the local level. Most activities undertaken in the Community Action Plan component will continue to use community participation to mobilize and pay labor, with a small number o fworks procuredthrough small works. 9 Suggested improvement: Under Additional Financing, SDF should ensure that all participating communities are aware o f and following the applicable updated procurement rules and procedures. POs should be well-oriented to ensure that their training i s also following the latest revisions. SDF should ensure that regular field-based reviews are undertaken o f any procurement practices at community level. 30. ProcurementActionPlan: The table below briefly describes the identifiedprocurement constraints and suggested mitigating measures to further improve procurement related activities under the proposed Additional Financing: Table3: ProcurementImprovementActionPlan Issues, Action Responsibility Date Enhancing SDF's SDF to expand its capacity with SDF - The training procurement training appropriate experts to prepare Management and modules to be capability in procurement training modules Procurement finalized by M a y community level and deliver the training for team 31,2007; and procurement trainers (POs) along with training to start adequate assurance to receive immediately after and/or measure the level o f M a y 31,2007and feedback from the communities on a continuous on the training imparted basis. Enhancing SDF's SDF i s to diversify its SDF - The required capability in procurement capacity to Management and field-based staff overseeing strengthen its oversight at Procurement to be inplace by community level community level by identifying a team June 30,2007 procurement dedicated specialist(s) position at the field level and strengthening the nationalmocurement team 15 Issues Action Responsibility Date withregular field-based supervision capabilities. Lessons learned SDF to engage appropriate, SDF - Consultant to be assessmento f the qualifiedtechnical assistance to Management and hired by June 30, fiduciary and undertake the review (possible to Procurement 2007; and Study qualitative aspects o f be undertaken inconjunction with team to be completed community wider cost-benefit analysis o f by August 31, procurement that community infrastructure works 2007 was camed out under SIPP). duringthe last three years o f SIPP (2003- Findingsand lessons learned 2006). Specifically, would be usedto improve the looking at: community procurement activities (i)assessing the and training offered under the quality o f Additional Financing. procurement done bythe Dissemination o f positive communities in findings amongst the community terms o f members will boost self- transparency and confidence among the community adherence to members interms of being procedures in capable o f undertahng which they were procurement and implementing trained, and infrastructuralworks and will (ii) determining the provide lessons to new technical quality communities. o f the infrastructures constructed by the communities as compared to similar infrastructural works done by other entities like GOB, Ups, UZs, Zila Parishads, etc. D. Social Accountability and Transparency 31. The special focus o f the Onginal Project on principles o f downward accountability, transparency, participation and equity would be maintained and further strengthened under the Additional Financing. Transparent financial management and procurement practices at the local level are o f a highpriority to the project, given that the bulk o f funds are disbursed at this level. Accountability o f office bearers, committee members and service providers (including SDF staff and partner organizations) to the communities whom they are serving and in their handling o f 16 funds is paramount, and community-based mechanisms to institutionalizeand monitor this should continue to be a priority. 32. Clear operational procedures for FinancialManagement, procurement and the functioning o f village level institutions, which are founded on principles o f downward accountability, participation and transparency, are key means to embed the overall `social accountability' framework. Such a framework allows for community members to directly demand accountability from their leaders and service providers, and to participate in monitoring their performance, thereby introducing increased understanding and application o f principles o f `good governance' at the local level. Simple mechanisms are already routinely in use under the project, such as regular village-wide information-sharing and decision-takmg meetings, or public display o f funds received, expenditures incurred, procurement information, etc. SDF has also tested a `report card' mechanism, by which performance o f VDCs has been evaluated by their communities. 33. This social accountability framework and tools would be further strengthened through buildingcapacity o f the communities to regular displays and information sharing forums, village level general assembly meetings to take key decisions and share information; formation and strengthening o f `Social Audit Committees to monitor office bearers' performance, and institutionalizing report cards for the office bearers and service providers and project teams. A wide range o f practical tools are available that could be more systematically employed in monitoring accountability and performance in a participatory, community-driven manner. SDF has already planned a series o f practical, field-based trainings in these `social accountability' tools, in partnership with World Bank Institute (WBI). The first workshop i s planned during second quarter o f2007. 17 M xx Fvl I I, I I