Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 68506-AZ

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$30 MILLION

TO THE

REPUBLIC OF AZERBAIJAN

FOR THE

SECOND RURAL INVESTMENT PROJECT

June 13, 2012

Sustainable Development Department

South Caucasus Country Unit

Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed without World

Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 26, 2012)

Currency Unit = Azerbaijani New Manat

AZN 0.79 = US$1

US$ 1.27 = AZN 1

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AzRIP Azerbaijan Rural Investment Project

AzRIP-AF Azerbaijan Rural Investment Project Additional Financing

AZN Azerbaijani New Manat

CDD Community Driven Development

CIG Common Interest Group

CIS Commonwealth of Independent States

CPS Country Partnership Strategy

ECA Europe and Central Asia Region of the World Bank

EMF Environmental Management Framework

EMPF Environmental Management Plan Framework

ExComm Local Executive Committee

FAO Food and Agriculture Organization

FM Financial Management

GDP Gross Domestic Product

IDP Internally Displaced Person

IFR Interim Financial Report

IBRD International Bank for Reconstruction and Development

IGA Income Generation Activities

LSMS Livings Standards Measurement Survey

M&E Monitoring and Evaluation

MIS Management Information Systems

MP Micro-project

OM Operational Manual

PAT Project Assistance Team

PDO Project Development Objective

PM&E Participatory Performance Monitoring and Evaluation

PMU Project Management Unit

RGAC Regional Grant Approval Committee

ROO Regional Operations Office

SAAC State Agency for Agricultural Credits

SFDI Social Fund for the Development of IDPs

PRA Participatory Rural Appraisal

WG Working Group

Regional Vice President: Philippe Le Houerou

Country Director: Asad Alam

Sector Director:

Sector Manager:

Laszlo Lovei

Elisabeth Huybens

Task Team Leader: Daniel Owen

Table of Contents

I. Strategic Context ............................................................................................................ 1

A. Country Context ............................................................................................................... 1

B. Sectoral and Institutional Context .................................................................................... 1

C. Higher Level Objectives to which the Project Contributes ............................................. 3

II. Project Development Objectives ................................................................................... 4

A. Project Components ......................................................................................................... 5

B. Project Financing ............................................................................................................. 6

C. Lessons Learned and Reflected in the Project Design ..................................................... 7

III. Implementation .............................................................................................................. 9

A. Institutional and Implementation Arrangements ............................................................. 9

B. Results Monitoring and Evaluation ............................................................................... 10

C. Sustainability.................................................................................................................. 11

IV. Key Risks and Mitigation Measures .......................................................................... 11

A. Economic and Financial Analysis .................................................................................. 11

B. Technical ........................................................................................................................ 12

C. Financial Management ................................................................................................... 13

D. Procurement ................................................................................................................... 13

E. Social (including safeguards) ......................................................................................... 13

F. Environment (including safeguards) .............................................................................. 15

Annex 1: Results Framework and Monitoring ...................................................................... 17

Annex 2: Detailed Project Description ................................................................................. 20

Annex 3: Implementation Arrangements ............................................................................. 30

Annex 4: Operational Risk Assessment Framework (ORAF) ............................................. 46

Annex 5: Implementation Support Plan ................................................................................ 50

MAP: IBRD 38276

i

.

PAD DATA SHEET

Azerbaijan

Second Rural Investment Project (P122944)

PROJECT APPRAISAL DOCUMENT .

EUROPE AND CENTRAL ASIA

ECSS4

.

Basic Information

Date: 13-Jun-2012 Sectors: Other social services (40%), Microfinance (15%), Water supply (15%), Rural and Inter-

Urban Roads and Highways (15%),

Transmission and Distribution of Electricity

(15%)

Country Director: Asad Alam Themes: Rural services and infrastructure (33%), Participation and civic engagement (25%),

Rural non-farm income generation (25%),

Decentralization (17%)

Sector

Manager/Director: Elisabeth

Huybens/Laszlo Lovei

Project ID: P122944 EA Category:

B - Partial Assessment

Lending

Instrument: Specific Investment

Loan

Team Leader(s): Daniel Owen

Joint IFC: No .

Borrower: Republic of Azerbaijan

Responsible Agency: State Agency for Agricultural Credits (SAAC)

Contact: Mr. Subhan Asgerov Title: Director

Telephone

No.: 994-12-934693 Email: subhan@azrip.org

.

Project Implementation

Period: Start

Date: 01-Sep-2012 End

Date: 30-Mar-2017

Expected Effectiveness

Date: 01-Sep-2012

Expected Closing Date: 30-Sep-2017 .

Project Financing Data(US$M)

[ X ] Loan [ ] Grant [ ] Other

[ ] Credit [ ] Guarantee

ii

Proposed term: The IBRD flexible Loan with a variable spread has a final maturity of 17 years

including a grace period of 4 years.

For Loans/Credits/Others

Total Project Cost (US$M): 53.60

Total Bank Financing

(US$M): 30.00

.

Financing Source Amount(US$M)

Borrower 20.00

International Bank for Reconstruction and

Development 30.00

LOCAL BENEFICIARIES 3.60

Total 53.60 .

Expected Disbursements (in USD Million)

Fiscal

Year 2013 2014 2015 2016 2017 2018 0000 0000 0000

Annual 4.07 6.54 7.02 6.92 4.42 1.03 0.00 0.00 0.00

Cumulati

ve 4.07 10.61 17.63 24.55 28.97 30.00 0.00 0.00 0.00

.

Project Development Objective(s)

The Project Development Objective is to improve access to and use of community-driven rural

infrastructure and expand economic activities for rural households. This would be achieved through: (i)

the provision of grants to finance eligible demand-driven micro-projects in rural infrastructure; (ii) the

provision of training and consultants‟ services to support micro-project development by enhancing the

capacity of engaged local stakeholders in all aspects of micro-project program development; (iii)

building opportunities for rural employment and livelihood support services through the provision of

training and consultants‟ services to carry out pilot livelihood support services in six communities; and,

(iv) supporting project management capacity at the Project Management Unit and its Regional

Operations Offices for the purposes of effective management, implementation and monitoring and

evaluation of Project activities. .

Components

Component Name Cost (USD Millions)

Rural Community Infrastructure 18.90

Technical Assistance for Rural Infrastructure 4.73

Project Management and Results Monitoring 6.37 .

Compliance

Policy

Does the project depart from the CAS in content or in other significant

respects? Yes [ ] No [ X ]

.

iii

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] .

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X .

Legal Covenants

Name Recurrent Due Date Frequency

Schedule 2, Section I. A. Institutional

Arrangements X

Description of Covenant

1. The Borrower shall carry out the Project in accordance with the Operational Manual 2. The Borrower shall maintain the PMU and ensure it is adequately staffed with qualifications in

accordance with procedures necessary for the carrying out of the project. 3. The Borrower shall ensure the Working Group shall be maintained with broad stakeholder

representation satisfactory to the Bank.

Name Recurrent Due Date Frequency

Schedule 2, Section I. C. Micro-projects X

Description of Covenant

1. The Borrower shall make Grants to Beneficiaries in accordance with eligibility criteria and procedures

acceptable to the Bank. 2. The Borrower shall make each Grant under a Grant Agreement with the respective Beneficiary on

terms and conditions approved by the Bank.

Name Recurrent Due Date Frequency

Schedule 2. Section I. D. Safeguards X

Description of Covenant

The Borrower shall ensure that the Project is carried out by the Project Implementing Entity in

accordance with the provisions of the EMF and/or EMP(s). .

iv

Conditions

Name Type

Description of Condition

Team Composition

Bank Staff

Name Title Specialization Unit

Myrtle Laura Diachok Operations Officer Monitoring and Evaluation

SDV

Joseph Paul Formoso Senior Finance Officer Disbursement CTRLA

Ahmet Gokce Consultant Procurement ECSO2

Daniel Owen Senior Social Development Specialist

Task Team Leader ECSS4

Hiwote Tadesse Senior Program Assistant

Operations ECSSD

Deepal Fernando Senior Procurement Specialist

Procurement ECSO2

Rufiz Vakhid Chirag-

Zade Senior Operations

Officer Institutional

Arrangements ECSS1

Ghada Youness Senior Counsel Legal LEGEM

Gulana Enar Hajiyeva Environmental Specialist Environment ECSS3

Yagut Iltifat Ertenlice Procurement Assistant Procurement ECCAZ

Norpulat Daniyarov Sr Financial Management Specialist

Financial Management ECSO3

Martin Henry Lenihan Senior Social Development Specialist

Social Safeguards LCSSO

Sabina Vagif Majidova Team Assistant Logistics ECCAZ

Tural Jamalov Financial Management Specialist

Financial Management ECSO3

Non Bank Staff

Name Title Office Phone City

Peter Reid Consultant, Livelihood Specialist

Lyme Regis

Yoshiko Ishihara Consultant Rome .

Locations

Country First Administrative

Location Planned Actual Comments

v

Division

Azerbaijan Beylaqan Rayonu Beylagan Rayon X

Azerbaijan Yardimli Rayonu Yardymli Rayon X

Azerbaijan Salyan Rayonu Salyan Rayon X

Azerbaijan Sabirabad Rayonu Sabirabad Rayon X

Azerbaijan Saatli Rayonu Saatly Rayon X

Azerbaijan Bilasuvar Rayonu Bilasuvar Rayon X

Azerbaijan Neftcala Rayonu Neftchala Rayon X

Azerbaijan Masalli Rayonu Masally Rayon X

Azerbaijan Lerik Rayonu Lerik Rayon X

Azerbaijan Lankaran Rayonu Lankaran Rayon X

Azerbaijan Imisli Rayonu Imishli Rayon X

Azerbaijan Calilabad Rayonu Jalilabad Rayon X

Azerbaijan Astara Rayonu Astara Rayon X

Azerbaijan Agcabadi Rayonu Aghjabadi Rayon X

Azerbaijan Tartar Rayonu Tartar Rayon X

Azerbaijan Zardab Rayonu Zardab Rayon X

Azerbaijan Zaqatala Rayonu Zaqatala Rayon X

Azerbaijan Yevlax Rayonu Yevlakh Rayon X

Azerbaijan Oguz Rayonu Oghuz Rayon X

Azerbaijan Ucar Rayonu Ujar Rayon X

Azerbaijan Tovuz Rayonu Tovuz Rayon X

Azerbaijan Samaxi Rayonu Shamakhi Rayon X

Azerbaijan Saki Rayonu Shaki Rayon X

Azerbaijan Samkir Rayonu Shamkir Rayon X

Azerbaijan Kurdamir Rayonu Kurdamir Rayon X

Azerbaijan Qabala Rayonu Qabala Rayon X

Azerbaijan Qusar Rayonu Qusar Rayon X

Azerbaijan Quba Rayonu Quba Rayon X

Azerbaijan Xacmaz Rayonu Khachmaz Rayon X

Azerbaijan Qazax Rayonu Qazakh Rayon X

Azerbaijan Goranboy Rayonu Goranboy Rayon X

Azerbaijan Qax Rayonu Qakh Rayon X

vi

Azerbaijan Ismayilli Rayonu Ismayilli Rayon X

Azerbaijan Goycay Rayonu Goychay Rayon X

Azerbaijan Daskasan Rayonu Dashkasan Rayon X

Azerbaijan Balakan Rayonu Balakan Rayon X

Azerbaijan Barda Rayonu Barda Rayon X

Azerbaijan Abseron Rayonu Absheron Rayon X

Azerbaijan Agsu Rayonu Aghsu Rayon X

Azerbaijan Agdas Rayonu Aghdash Rayon X

Azerbaijan Gadabay Rayonu Gadabay Rayon X

Azerbaijan Agstafa Rayonu Aghstafa Rayon X

Azerbaijan Qobustan Rayonu Gobustan Rayon X

Azerbaijan Samux Rayonu Samukh Rayon X

Azerbaijan Siyazan Rayonu Siazan Rayon X

Azerbaijan Xizi Rayonu Khizi Rayon X

Azerbaijan Haciqabul Rayonu Hajigabul Rayon X .

1

I. Strategic Context

A. Country Context

1. Over the past decade, Azerbaijan has experienced many of the same challenges as other Commonwealth of Independent States (CIS) transition economies including deterioration in

infrastructure and service provision and increasing inequality. Infrastructure attrition in

Azerbaijan has been particularly acute in rural areas and the poor quality of public infrastructure,

exacerbated by a weak public expenditure framework, has been one of the factors impeding

development since the mid-1990s. Roughly 45% of the main and regional roads are in poor

condition, hindering social and economic development and limiting growth prospects in rural

areas of the country. The Government places high priority on infrastructure provision, including

power supply and gasification, irrigation investments and major highways crucial for the

development of Azerbaijan as a transport corridor, internal connectivity and the development of

regions within the country.

2. Since independence, oil and gas discoveries have given Azerbaijan new means for combating poverty and developing a diversified and sustainable middle-income economy.

Driven by the oil boom, per capita income rose from a post-independence low of just US$470 in

1995 to $4,820 in 2009. The economy has continued to grow in recent years, recording an

average annual GDP growth rate of 24% in 2005-2008, with 12% growth in the non-oil sectors.

3. Strong growth and rising government social spending have reduced poverty markedly, from 49% in 2001 to 16% in 2008 and to 7.6% in 2011, according to official estimates. This

decline has been largely driven by high growth rates averaging more than 20% over the period.

Higher minimum wage rates over the last decade are likely to have contributed to poverty

reduction. Minimum wages were last increased by 10% in January 2012 to the equivalent of

US$118 a month. Social transfers, including a well targeted social assistance program, have also

contributed to declining poverty. Data suggests that while rural and urban poverty rates have

fallen sharply, much of the poverty is rural.

4. Azerbaijan‟s development challenge is to maintain momentum by strengthening the non-oil economy, improving competitiveness and by building skills and strengthening its institutions.

Azerbaijan faces an important challenge in improving governance and fighting corruption and

new challenges are emerging in economic prospects. The rapid growth derived from oil and gas

revenues is likely to plateau over the coming decade and decline thereafter. While Azerbaijan

has weathered the global economic crisis relatively well, the crisis has underlined the need for a

diversified economy, market-based policies and improved social services.

B. Sectoral and Institutional Context

5. Deficiencies in basic infrastructure (roads, water, and energy) in rural areas serve as an obstacle to poverty reduction by discouraging people and businesses from residing in or

investing in rural space. Despite the tripling of government investment in basic infrastructure

since 2006, there are still important gaps in terms of access and quality of public services

between urban and rural areas. While over 90% of households in Baku have access to piped

2

water, the same is true for less than 33% of households in rural areas and in many parts of the

country outside Baku people receive as little as three hours supply per day. Similarly, rural

communities suffer from unreliable supplies of gas and electricity, a problem that becomes

especially acute in remote mountainous areas where access may be completely lacking.

Furthermore, the 2009 Country Economic Memorandum states that domestic vehicular traffic

has increased 10% per year since 2003, leading to increasing pressure on local road networks and

negative impacts on rural economic development. According to the 2008 Living Standards

Measurement Survey (LSMS), improved access to, and the quality of public utilities will not

only improve household livelihoods and living conditions but also the operating environment for

rural enterprises such as food processing and light manufacturing.

6. While rural poverty reduction depends on increasing incomes from agriculture and the diversification and growth of the non-farm rural economy, there are significant constraints

facing the development of both sectors. Currently, employment in rural areas does not

guarantee a route out of poverty; the working poor account for 60% of the rural poor compared

to 50% for the whole country and 35.6% in urban areas. This is due to the poorly paid and

seasonal nature of employment in rural areas (median monthly earnings AZN 75 versus AZN

120 in urban areas), the lack of non-farm rural enterprises and the numerous constraints farmers

face in maximizing income earned from agriculture. A key constraint is the weakness in

infrastructure provision such as rural roads, irrigation and drainage systems. Irrigation is

particularly problematic, with at least 50% of all irrigated land damaged due to the effects of

salinity resulting from degraded irrigation and drainage systems. Similarly, farm profitability

and off-farm employment is constrained by undeveloped value chains with farmers typically

producing for their own consumption or sale in informal markets at very low prices. This is

compounded by the absence of market infrastructure such as storage, packaging and processing

facilities. Despite these constraints, agri-food is a key sector for the country‟s development,

being the second largest exporter after oil and gas and employing close to 40% of the total

workforce in full-time or seasonal employment. There are significant opportunities for

generating off-farm employment at the upper end of the agricultural value chain which is

currently underdeveloped.

7. There are important disparities between urban and rural areas in terms of access to health services and education attainment. Physical remoteness to health care has been cited in

the 2008 LSMS as an explanation for lower utilization by the poor. Over two thirds of women in

the poorest quintile surveyed by the LSMS reported distance from a health facility as

representing a barrier to access, versus 14% in the richest quintile. Similarly, health service

utilization for both out-patient and in-patient services is higher in Baku and other urban areas

than for rural areas. For education, in rural areas, post-secondary education attainment rates are

below 11% compared to 40% in Baku. In general, rural areas have lower access to both pre-

school and post-secondary education, while the quality of the learning experience at primary and

secondary levels is affected by the poor condition of school facilities.

8. Institutional capacity at the local-self government level to address these urban-rural disparities is growing and in need of support. Key institutions at the local level in Azerbaijan

include Municipalities and Local Executive Committees. Local Executive Committees

(ExComms) represent the various agencies and line Ministries of Central Government and are

3

primarily focused on regulatory functions and the development needs of larger settlements.

While elected Municipal Councils were established by law in 1995, they are still relatively new

institutions with limited responsibility (for roads, parks, cemeteries and some aspects of social

care) and financial capacity to support the provision of critical rural infrastructure. The Second

Rural Investment Project in Azerbaijan (AzRIP-2) is well placed to support the developing

decentralization agenda through mobilizing local communities to work closely with both

ExComm authorities and municipalities in the development of infrastructure in underserviced

rural communities.

9. Aside from the decentralization agenda, AzRIP-2 further reinforces a range of other Government strategies and programs. AzRIP-2 complements specific strategies such as the

Regional Development Program covering 2009-2012 which is focused on strengthening the

productive potential of the regions in non-oil sectors (such as agriculture and tourism) and

improving living conditions to ease the pressure on migration to Baku. AzRIP-2 is similarly

aligned with Government action programs in other sectors such as infrastructure (prioritizing

power supply, roads and social infrastructure), and the state program for agriculture covering

2008-2015 which prioritizes the rehabilitation of irrigation networks and the development of

food processing enterprises. The Operational Manual (OM) specifies that micro-projects which

do not confirm to national legislation and regional development programs will not be supported

by AzRIP-2.

10. In terms of rationale for Bank engagement, AzRIP-2 not only builds on the successful implementation of the original project, but also the experience with Community Driven

Development operations elsewhere in the region and globally. Beyond Azerbaijan, the World

Bank has supported a range of successful Local and Community Driven Development (CDD)

activities across Europe and Central Asia (ECA) that finance improved service delivery,

infrastructure provision and income generation in countries as diverse as Croatia, the Kyrgyz

Republic, Poland and Russia. These projects respond to the infrastructure and service deficits

that arose during the transition era following the privatization of collective farms and local

industries previously responsible for social infrastructure and service provision. They also

respond to a need to support alternative, more participatory and transparent forms of local

governance. These projects build on global best practice by the Bank to support participatory

decision making, local capacity building, and community control of resources through CDD.

Over the last decade, the Bank has increasingly used CDD projects across a range of countries to

address critical infrastructure needs and the current global CDD portfolio amounts to

approximately US$2 billion of Bank investments per year. According to the 2008 World

Development Report on Agriculture for Development, CDD can also contribute to the agriculture

for development agenda by first focusing on the provision of basic services and public goods and

then by supporting income generating activities once basic needs have been met.

C. Higher Level Objectives to which the Project Contributes

11. The Country Partnership Strategy (CPS) for Azerbaijan for 2011-2014 is focused on achieving results in two key pillars: (i) building a competitive non-oil sector; and (ii)

strengthening human and social services; with a cross-cutting filter for improving governance

and institution-building across all activities. The importance of improved access to rural

4

infrastructure through cost-effective approaches that support rural communities‟ demand-driven

infrastructure investment priorities is emphasized in the CPS. Rural infrastructure projects have

a high impact on employment generation. Rehabilitation of small scale irrigation works

increases productivity significantly and school rehabilitation leads to increases in school

enrollment. The CPS identifies the primary vehicle for achieving these outcomes as the

Azerbaijan Second Rural Investment Project.

12. The Government‟s current development program is laid out in its strategy document “State Program on Poverty Reduction and Sustainable Development 2006-15”. The broad

development goals include: maintaining macroeconomic stability; creating enabling conditions

to improve income-generating opportunities; improving the quality and access to basic health

and education services; improving infrastructure; and strengthening the social protection system

to better protect vulnerable groups. The project is also in line with the objectives of the state

programs on regional development, poverty reduction and food security.

II. Project Development Objectives

A. PDO

13. The Project Development Objective is to improve access to and use of community-driven rural infrastructure and expand economic activities for rural households. This would be achieved

through: (i) the provision of grants to finance eligible demand-driven micro-projects in rural

infrastructure; (ii) the provision of training and consultants‟ services to support micro-project

development by enhancing the capacity of engaged local stakeholders in all aspects of micro-

project program development; (iii) building opportunities for rural employment and livelihood

support services through the provision of training and consultants‟ services to carry out pilot

livelihood support services in six communities; and, (iv) supporting project management

capacity at the Project Management Unit and its Regional Operations Offices for the purposes of

effective management, implementation and monitoring and evaluation of Project activities.

B. Project Beneficiaries

14. Under Component A - Rural Community Infrastructure, beneficiaries will include individuals in rural communities in the 11 currently un-serviced rayons (Shabran, Siyazan, Xizi,

Abseron in the North, and Agcabadi, Beylaqan, Masalli, Uardimli, Lerik, Astara and Lankaran

Rayons in the Mugan-Salyan Zone) who will benefit from mobilization and access to improved

infrastructure. Other beneficiaries will include households and individuals from well-performing

micro-projects in the 45 existing rayons served under the original Azerbaijan Rural Investment

Project (AzRIP) and the Azerbaijan Rural Investment Project Additional Financing (AzRIP-AF),

who will benefit from second generation community infrastructure and livelihood support

services.1 These rayons comprise: Aghsu, Balakan, Gabala, Gakh, Gobustan, Guba, Gusar,

Ismayilli, Khachmaz, Oghuz, Shaki, Shamakhi, Zakatala in the North; Aghstafa, Barda,

Dashkasan, Gadabay, Goranboy, Khanlar, Qazakh, Samukh, Shamkir, Tartar and Tovuz in the

1 AzRIP became effective on January 18, 2005. The total project costs were US$21.10, of which US$15 million was financed

from a Bank loan. On March 27, 2008, additional financing of US$15 million was approved to support the expansion of

activities under AzRIP. The closing date for AzRIP was March 31, 2012.

5

North West; Aghdash, Goychay, Hajigabul, Kurdamir, Ujar, Yevlakh and Zardab in Lower

Shirvan; Bilasuvar, Imishli, Jalilabad, Neftchala, Saatly, Sabirabad and Salyan in Mughan

Salyan, and; Babek, Julfa, Kengerli, Ordubad, Sadarak, Shahbuz and Sherur in Nakhchivan.

Micro-projects in Nakhchivan are to be fully financed by Government funds. Other zones are

eligible for World Bank financed micro-projects. Individual, household and community-level

beneficiaries will be measured, tracked and monitored (incorporating social and gender data

disaggregation) using baseline surveys and follow-up impact evaluation. It is expected that in

total 600 eligible communities in 56 rayons will be serviced under AzRIP-2 and an estimated

1,500,000 community members are expected to benefit from infrastructure investments. Under

Component B – Technical Assistance for Rural Infrastructure, beneficiaries are projected to total

130,000 under participatory rural appraisal engagement; 9,000 in training and 10,000

beneficiaries in Community Network activities including workshops, cross visits and

Community Investment Conferences. Livelihood pilots are expected to benefit approximately

1,200 people. Women‟s empowerment through incubating leadership and participation in

decision-making has been a prominent feature of AzRIP‟s results narrative and a strong gender

focus will continue under AzRIP-2.

C. PDO Level Results Indicators

15. Achievement of the Development Objective will be assessed through the increase in access to and use of rural infrastructure; the change in access to markets and basic social services

through improved rural infrastructure; and improved economic opportunities for rural

households. The outcome and intermediate indicators are specified in Annex 1.

II. Project Description

A. Project Components

16. The project is a Specific Investment Loan (SIL) with a total investment cost estimated at US$53.60 million, of which US$30 million will be financed by the World Bank Loan. The

Project will scale up AzRIP both geographically into currently un-serviced rayons and vertically

through the inclusion of pilot livelihood support services and second generation institutional

support in current AzRIP active project areas. The Project has three components.

17. Component A - Rural Community Infrastructure. This component will finance demand-driven micro-projects in rural infrastructure. Micro-projects eligible for finance through

Project proceeds would increase access to, and quality of local economic and social

infrastructure, such as roads, rural water supply, irrigation, schools, clinics and markets. Costs to

be supported from the project include identification, design, construction, rehabilitation, and

initial operation and maintenance of the micro-projects. Potential investments include basic

economic (e.g., rehabilitation of secondary roads, potable water systems, irrigation infrastructure,

electricity transformers) and social (e.g., school and clinic rehabilitation and construction)

infrastructure, based on priority needs identified by communities. The Project will target rural

communities (greater than 1,000 and less than 10,000 people with smaller communities open to

clustering with neighboring communities to achieve scale) in regions that meet established

selection criteria and have a higher relative incidence of poverty. The average size of micro-

projects will be US$70,000, while projects over US$85,000 will require prior review. Current

6

micro-project cycle procedures will be maintained in the new Project, including local governance

arrangements involving local authorities and sectoral line ministry representation in project

screening and approval and public and private sector linkages for key operation and maintenance

medium-term projections. Three categories of micro-project grants will be supported under

Component A: (i) micro-projects in previously un-serviced rayons which meet eligibility criteria

set out in the OM; (ii) second generation micro-projects in active AzRIP communities with high

performance ratings from previous micro-project implementation and which meet eligibility

criteria set out in the OM, and; (iii) micro-projects submitted by Common Interest Groups

supported under the pilot scheme in Component B which meet eligibility criteria as established

in the OM.

18. Component B - Technical Assistance for Rural Infrastructure. The objective of this component is to enhance the capacity of engaged local stakeholders, including community

groups, local authorities, Regional Grant Approval Committees, Project Assistance Teams and

staff in the Regional Operations Offices in micro-project program development and to provide

technical assistance for pilot livelihood support initiatives. Stakeholder capabilities in functions

of contracting, procurement, financial management, and participatory monitoring and evaluation

will be strengthened. Livelihood support services will be piloted in six communities selected

among communities that successfully implemented economic infrastructure projects under

AzRIP and meet eligibility criteria described in the OM. Livelihood support services will

include mobilization and organization of common interest groups (CIGs), identification of

income generation activities (IGAs), preparation of business plan proposals, legalizing CIG

status, and training CIG members in business management. CIGs that are well organized and

performing in accordance with standards set out in the OM and equipped with quality business

plans may submit their proposal as a micro-project under Component A, Category (iii).

19. Component C - Project Management and Results Monitoring. This component will finance the administrative and operational project implementation and management costs,

including overheads of Project Management Unit (PMU) professional staff, as well as PMU and

four Regional Operations Offices (ROOs) and their associated support staff, project outreach,

and support to Regional Grant Approval Committees (RGACs). AzRIP-2 will continue the

current practice of regular and rigorous project monitoring and evaluation using mixed

quantitative and qualitative methods and results based, gender disaggregated indicators

implemented on multiple levels – project, rayon and community. AzRIP-2 will also maintain the

intensive effort of physical verification of works and technical aspects of sub-project

implementation.

B. Project Financing

20. The Lending Instrument for the project is a SIL of US$30 million for a period of 5 years from 2012 to 2017. The Loan will be a single currency (US dollar denominated), variable spread

loan, with a maturity of 17 years inclusive of 4 years of grace, a front end fee of 0.25%, with

repayments linked to commitment.

21. Total project financing requirements are estimated at US$53.60 million, inclusive of price and physical contingencies, taxes, interest, and the front-end fee. The Government of

Azerbaijan will finance US$20 million towards total project costs, including 100% of costs of

7

micro-projects for Nakhchivan. The World Bank Loan of US$30 million will finance

Components A, B and C. Information on costs and financing sources is provided in Table 1.

Table 1. Project Costs by Component and Use of Financing

Project Components

Project Cost

(in millions)

IBRD

Financing

%

Financing

1. Component A: Rural Community Infrastructure

2. Component B: Technical Assistance for Rural infrastructure 3. Component C: Project Management and Results Monitoring

Front-End Fees

Total Project Costs

41.64

4.75 7.21

0.075

53.60

18.90

4.73 6.37

30.00

63

16 21

C. Lessons Learned and Reflected in the Project Design

22. The proposed project is a repeater project, building on the current AzRIP design and institutional and implementation mechanisms with day-to-day management under the aegis of

the existing PMU, which will be strengthened with additional core and technical staff as needed.

The repeater project is founded on a similar yet enhanced PDO, project design and institutional

arrangements as the existing project.

23. AzRIP, under implementation since 2005, has garnered widespread recognition for its strong results record and positive impact. The high quality operation has successfully achieved

its development objectives and has been acknowledged for delivering tangible results on the

ground and improving people‟s lives. The cumulative record of AzRIP is one of significant

improvement of rural communities‟ access to infrastructure services, improved mobility and

increased farmers' incomes. Beneficiary surveys have indicated that travel times to schools and

markets have been reduced by 47% and 26% respectively as a result of the rehabilitation of rural

roads. Livelihoods have improved significantly. The rehabilitation of irrigation systems,

reaching over 700,000 people, has increased average productivity by roughly 30% and added

more than $1 million to the value of production in project areas while primary school enrollment

has increased by 25% subsequent to school rehabilitation. Moreover, in villages where roads

have been rehabilitated under the project, 78% of farm products are now brought to markets in

nearby towns by farmers themselves (as opposed to 18% in non-project areas). In project areas,

farmers can now sell their produce at their farms at 20% higher prices, while prices for the same

products in non-project areas have decreased. A keen emphasis on sustainable infrastructure,

maintenance contracts and accountability has helped ensure that over 90% of infrastructure

rehabilitated is operational. The income of over 600,000 farmers has increased and 150,000

rural poor now have access to safe water. Women‟s empowerment has been a prominent feature

of AzRIP‟s implementation results narrative and a gender focus will continue under AzRIP-2 to

support women‟s participation and empowerment and dedicated gender tracking and monitoring

of project implementation and impacts.

8

24. The AzRIP-2 approach to local development pays particular attention to issues of sustainability and maintenance. Participating communities prepare maintenance plans and cost-

share for maintenance of assets in conjunction with municipalities and service providers.

Financial and institutional sustainability has been strengthened through mobilization by

municipalities and line ministries of over US$800,000 for the operation and maintenance of

rehabilitated infrastructure.

25. A Social Assessment carried out as part of preparation of AzRIP-2 reaffirmed the appropriateness of design choices and presented a series of recommendations which have been

integrated in the revised OM for the project. These relate to additional advocacy and promotion

work in new rayons with larger concentrations of internally displaced people; review of

settlement size eligibility criteria for national minority group areas with smaller settlement sizes;

and intensified efforts to foster women's leadership.

26. Impact evaluation findings from the first phase of AzRIP demonstrate a significant economic boost as a result of project interventions and improvements in financial security

resulting from asset value and service enhancements and increases in on-farm and off-farm

income. A Cost-Benefit analysis of AzRIP micro-projects carried out in 2010 recorded very

high net present values and monetary appraisals of anticipated revenues from micro-projects at

85 times the value of initial investments. Participating communities from the first phase of

AzRIP have expressed strong demand for AzRIP to stimulate livelihood and income generating

opportunities and AzRIP-2 is incorporating this sequential evolution in project design.

Experience from CDD practice globally attests to the viability of this model and phased

evolution of a CDD program from an initial focus on welfare and public goods to second

generation public plus private goods and a productive investment focus.

27. Building on lessons learned under AzRIP, rayons that have demonstrated successful results from AzRIP micro-project implementation will be eligible to request further support for

complementary rural infrastructure investments under a second generation window in

Component A. Evidence suggests that several engagements in one community are more likely to

have an impact on poverty reduction. These second generation micro-projects will also step up

efforts to crowd in private sector participation and thereby leverage additional capital, as well as

new ideas and skills in support of local development initiatives. An incremental approach is to

be incorporated within AzRIP's community engagement strategy to introduce support for

productive infrastructure and livelihoods support services. Diagnostic work on livelihoods to be

undertaken during the first year of Project implementation will determine the appropriate support

services for income generation and livelihood strengthening in the pilot communities. The

selected pilots would be targeted at a restricted number of communities that successfully

implemented economic infrastructure projects under the original project and would be

conditional on feasibility assessments. Probable areas of support would be business

development services, local organizational capacity strengthening, market and institutional

linkages and value addition initiatives.

28. Over the longer-term, the expected transformative impact of AzRIP-2 is twofold: (i) to facilitate the translation of enhanced social capital into financial capital and economic well-

being; and (ii) to secure gains achieved in solidarity and social cohesion at the local level and

9

extend these pathways into improved governance and accountability between citizens and the

State. The intensive investment in social capital in AzRIP-2 is manifested by the design

emphasis on social and gender inclusion, social mobilization, collective decision-making,

establishment of local governance groups and networks (community networks, cross-visits

between communities and regional and national community investment knowledge sharing and

networking) and broad mandates on transparency, information access and communications. The

expected outcomes from such social capital investment include improved local governance, a

sustained demand side stimulus for inclusive economic growth and continued attention to

targeting to the most vulnerable and a focus on social inclusion.

29. The proposed operation is hence aligned with the CPS‟s cross-cutting filter on 'improving governance and institution building‟. In particular, the articulation within the AzRIP sub-project

cycle of roles and responsibilities at the rayon level and its attendant municipal governance

support can be broadly understood as supporting decentralization efforts in Azerbaijan.

III. Implementation

A. Institutional and Implementation Arrangements

30. The proposed project builds on the ongoing AzRIP design and its institutional and implementation mechanisms which proved to be successful in terms of achieving results on the

ground. The project will be under the general management of the State Agency for Agricultural

Credits (SAAC), which is the Ministry of Agriculture‟s agency for overseeing international rural

development projects. Day-to-day management of the project will be delegated to the Project

Management Unit (PMU) constituted within SAAC. The PMU has successfully implemented

the on-going AzRIP. It reports to the Director of SAAC and would have direct responsibility for

management, administration and coordination of the proposed project. The PMU has developed

the necessary experience and competence to manage all core functions including program

management, regional coordination, community mobilization and facilitation, capacity building,

training, procurement, financial management and monitoring and evaluation (including

environmental monitoring). This would facilitate a smooth transition from the current to the new

project. Annex 3 provides a chart of the proposed project organization. The project

implementation arrangements are described in detail in the OM. The OM for AzRIP-2 is based

on the manual utilized for guiding operations under the previous project and updated and revised

accordingly. The PMU comprises core staff, including the Director, Deputy Director, Engineers

and Community Development, Procurement, Financial Management, M&E and MIS Specialists.

As required, the project could also finance additional core and technical staff to provide

specialized inputs that are not currently available in the project structures and also to ensure that

all project activities are carried out effectively. In particular, the implementation of livelihood

activities will require a full-time Coordinator in the PMU. It is also proposed to add a Legal

Specialist to the core PMU team and to enhance its communications competencies. The PMU

has acquired solid experience in procurement and has established a reliable and effective

accounting and internal control systems under AzRIP. The PMU will continue to use these

arrangements for the financial management of AzRIP-2. The PMU is planning to retain existing

accounting software and accounting staff.

10

31. The project institutional arrangements at the national level also include the project Working Group (WG) established by SAAC to review the OM on a quarterly basis and adopt

revisions, as required. The WG includes representatives of the Ministries of Economic

Development and Agriculture, the Parliamentary Commission on decentralization, Regional

Grant Approval Committees and civil society.

32. At the regional level, the PMU will be supported by the Regional Operations Offices (ROOs) which are the PMU representatives in the project zones to support and monitor the

community project portfolio. The existing ROOs would continue to operate as under the

previous AzRIP projects. The ROOs have been operating as umbrella offices, incorporating

Project Assistance Teams (PATs), Technical Design Companies and Regional Grant Approval

Committees (RGACs) in one location, under the coordination of a Program Specialist

functioning as an extension of the PMU. This has worked well, and the same approach will be

adopted for AzRIP-2. The PATs are currently functioning as the Service Providers for providing

community mobilization, training and consultancy services for communities. The RGACs will

continue to review the project proposals for approval, while the Technical Design Companies

will help to develop local capacity for infrastructure development and maintenance.

B. Results Monitoring and Evaluation

33. The implementing agency of AzRIP has a good system in place for monitoring and evaluation, including an intensive effort of physical verification of works and technical aspects

of sub-project implementation, which is conducted at several levels (project, rayon and

community). Reports from the field are generated regularly to produce monthly, quarterly and

annual progress reports. Several improvements will be made in AzRIP-2, including: (i)

sharpening of existing indicators and generation of new indicators with which to track progress

and measure impact, in particular to assess women‟s participation and empowerment, economic

changes and social capital impacts; (ii) improved monitoring and reporting on the complaints and

grievance redress mechanisms which were built into AzRIP; and (iii) using MIS information

more effectively for internal and external communications.

34. Impact Evaluation and Special Studies. A rigorous impact evaluation with quantitative and qualitative components will be conducted for AzRIP-2. Specifically, the project plans to

conduct impact evaluation baseline, mid-point and end line field surveys. As part of the

monitoring and evaluation framework, the project will also undertake several thematic

evaluations and studies including the effects of the sub-projects on technical quality, women‟s

participation and empowerment, economic changes and social capital impacts.

35. Regular monitoring and reporting, including maintaining the MIS, will be carried out by the PMU, who would also undertake the special studies with the assistance of contracted

consultant services. The impact evaluation and more complex special studies will be supported

by the Bank‟s Development Impact Monitoring and Evaluation (DIME) team.

11

C. Sustainability

36. This project will continue to use the AzRIP model which has demonstrated sustainability by using an integrated approach to infrastructure development which combines sound economic

analysis in the selection of micro-projects, solid engineering design with support from Technical

Design Companies and attention to social dynamics and environmental sustainability.

Operations and maintenance plans prepared by communities will allow them to identify potential

funding gaps and develop financing mechanisms and strategies for long-term maintenance

requirements.

IV. Key Risks and Mitigation Measures

37. Since the proposed project builds on the ongoing AzRIP design and its institutional and implementation mechanisms, the overall risk is anticipated to be Low. Potential risks are

summarized in the Operational Risk Assessment Framework (Annex 4). The proposed Project

has been strongly endorsed by the Cabinet of Ministers and the Prime Minister‟s Office and the

Project will coordinate closely with relevant central and local line ministries and agencies.

Project implementation risks are expected to be Low as existing PMU staff are experienced and

strongly committed to the project, and appropriate mitigation measures are in place, including

increased monitoring and evaluation at several levels, to ensure transparency and accountability

within the project.

V. Appraisal Summary

A. Economic and Financial Analysis

38. For the original project, an ex-post cost benefit analysis was conducted for 18 of the 340 micro-projects implemented between 2005 and 2009. This exercise was completed by an

independent consultant, who selected an equal number of projects from each of the three target

regions, as well as an equal number of water (potable and irrigation), health, and roads projects.

The findings of the cost-benefit analysis demonstrated a positive economic return from the

micro-project investments.

Ex-Post Cost Benefit Analysis of a Sample of 18 Micro-Projects

Project type

Project

Cost

Stream

Project

Benefit

Stream

Net Present

Value Budget

Number of

beneficiaries

Average for four water projects 39,979 143,096 103,117 31,171 1,444

Average for two irrigation

projects 54,631 11,776,892 11,722,261 34,154 1,200

Average for six health post

projects 442,719 120,334 80,582 38,281 2,645

Average for six roads projects 36,313 1,190,578 1,154,264 30,796 1,626

12

39. In addition to the above analysis, the beneficiary assessment for the original project also demonstrated important socio-economic benefits. Where AzRIP rehabilitated rural roads, the

travel time to school and markets was reduced by 47% and 26% respectively. Moreover, 78% of

farm products are now brought to markets by farmers themselves, eliminating costly

intermediaries. This represents a significant achievement compared to non-beneficiary villages

in the same region where only 18% of farm produce are brought to market by the farmers

themselves. The value of agricultural production increased by more than US$1 million where

irrigation systems were rehabilitated and primary school enrollment increased by 25% after

rehabilitation of school buildings.

40. As a repeater project, supporting similar types of sub-projects, it is expected that AzRIP-2 will yield similar positive economic returns and socio-economic benefits. However, given the

expected large number of micro-projects, a full cost-benefit analysis will not be carried out for

each micro-project. However, economic criteria and basic economic analytical tools will be used

to appraise micro-projects both at the community level (who will assess the financial costs of the

project and the degree to which it benefits the majority of community members), along with the

RGAC who will score each proposal based on a number of economic criteria. The specific

economic criteria to be used are outlined in the OM.

41. The livelihoods pilots will also be designed and implemented on the basis of economic feasibility analysis to be undertaken during the first year of AzRIP-2 implementation, prior to

launching the livelihood initiatives.

B. Technical

42. Project investments will be based on appropriate technology for the infrastructure needs of local communities, the majority of which have already been tested and validated under the

original project. Over the course of AzRIP implementation, the technical quality of the

completed infrastructure works has improved significantly. In the last year of the project, the

World Bank Task Team Engineer and engineers working for the independent evaluation

consultants deemed construction and engineering works completed in a sample of micro-projects

to be satisfactory. The preparation of each community micro-project is supported by a Technical

Design Company hired by the PMU for each operational zone who ensures technical norms and

standards are adhered to. The Technical Design Companies are responsible for helping with the

preliminary designs of each project, comparing technical and costing feasibility of alternative

designs, preparing technical documentation packages, environmental standards, as well as the

preparation of implementation monitoring and sustainability plans. Each community must also

designate a Community Engineer to collaborate with the Technical Design Company and Project

Assistance Team Engineers. Furthermore, a maintenance plan designed to ensure the

sustainability of the micro-project after its construction must be presented by the community

before the project is approved. For AzRIP-2, these practices will be scaled up to new project

areas and the OM will address in detail technical norms and standards for project preparation,

implementation, as well as operation and maintenance. Also, regular internal and external

technical audits will be undertaken to ensure construction meets the required technical standards.

13

C. Financial Management

43. The financial management (FM) arrangements have been assessed as satisfactory under AzRIP and will be continued under AzRIP-2. The PMU will be responsible for FM

arrangements. The most recent FM supervision (December, 2011) indicates that the Accounting

and Internal Control system of the PMU is reliable and effective. Under AzRIP, the PMU have

submitted timely Interim Unaudited Financial Reports (IFRs) and project audit reports, the

quality of which have been assessed as satisfactory to the Bank. FM staffing arrangements of the

PMU were also assessed as adequate. The PMU will continue to use these arrangements for the

proposed project. The Bank and management of the PMU will work together to ensure that the

current PMU staff and systems for the proposed project needs are retained. Currently, the PMU

fully complies with the audit requirements of the ongoing project. As is the case with AzRIP,

independent auditors will audit project financial statements under terms of reference acceptable

to the Bank and in accordance with International Standards on Auditing (ISA). The PMU will

submit quarterly IFRs covering the period of one quarter, format and content of which have been

agreed with the PMU.

D. Procurement

44. A procurement assessment carried out during the pre-appraisal of AzRIP-2 in April 2011 found three potential risks: (i) the procurement environment may be affected by the problems

related to governance and corruption; (ii) probable attempts of administrative intervention in

procurement and selection under the AzRIP-financed sub-projects; and (iii) as the project

embraces community participation procurement, the pilot livelihood initiatives may face

procurement risks due to lack of capacity at that level.

45. The assessment concluded that due to their previous involvement in AzRIP, PMU staff are familiar with Bank procurement procedures and have acquired the adequate experience and

capacity to carry out procurement activities related to the proposed Project. Risk mitigation

measures were discussed with PMU during project appraisal. The Procurement Plan will be

updated at least annually (or as required) to reflect project implementation needs. Procurement

under Component A - Rural Community Infrastructure will be will be carried out by the

communities under the guidance of the ROOs.

E. Social (including safeguards)

46. The primary stakeholders driving this project are the communities themselves, who will be actively supported in identifying, selecting, planning, implementing and maintaining

infrastructure micro-projects. Communities targeted for assistance will be those suffering

serious infrastructure deficits and will be identified using socio-economic infrastructure

indicators provided by rayon authorities. This ensures that the most disadvantaged communities

in terms of infrastructure access are targeted for mobilization. Under the original project, about

30 communities whose primary inhabitants were national ethnic minorities benefited from

micro-projects and this number is expected to expand under AzRIP-2 as the project moves into

new rayons in the east of the country where ethnic minorities such as the Lezgins account for a

larger proportion of the population. A number of these rayons also border conflict-affected

areas.

14

47. Social development principles such as participation, transparency, gender and social inclusion and local ownership underpin the micro-project selection, preparation and

implementation process.

48. Aside from communities, other key stakeholders include Rayon ExComm authorities (local representatives of central government) and the relatively new municipalities. ExComm

authorities play a key role at critical junctures in the micro-project process including the

selection of project communities, the decision to mobilize, securing the relevant permits, and the

handover of specific community projects for operation and maintenance to the relevant line

agencies and ministries. Rayon ExComm representatives also participate in the RGACs.

Currently, municipalities have limited responsibility for rural roads, parks, and cemeteries, as

well as limited financial resources. AzRIP-2 will complement the national decentralization

agenda through engaging municipal officials as community project group members, targeting

training and capacity building measures at municipal officials, and transferring rural roads to

municipalities for operation and maintenance purposes. Furthermore, there is strong

involvement of private sector stakeholders in the form of contractors for the construction of civil

works, as well as Technical Design Companies who support communities in project design and

supervision.

49. Positive social impacts of the Project will include reduced travel time to access markets and social services resulting in improved incomes, as well as enhanced human capital, increased

agricultural productivity, job creation during micro-project construction and increased

availability of power and potable water to households. Alongside these tangible benefits, it is

also expected that communities will benefit from increased levels of social capital, with

community members, especially women, becoming more engaged in decision making that

affects their lives, along with increasing trust, transparency and information sharing among

community members. This will largely be the result of the strong emphasis placed on consensus

building, broad based participation and community ownership during the community project

process.

50. Compared to the social benefits, Project social risks are relatively minor and mitigation measures are already in place from the original project. Potential risks include elite capture and

gender bias in sub-project selection, the exclusion of IDPs and ethnic minorities from decision

making processes and project benefits, and potential resettlement impacts of micro-projects. In

order to assess these risks, a Social Assessment was conducted in March 2011. This analysis

found that the risk of elite capture was minimal, as AzRIP successfully introduced informed

participation of the beneficiaries and transparent decision-making at the community level. The

approach created a strong sense of community ownership of the infrastructure project during its

identification and planning, as well as for operations and maintenance.

51. In terms of gender, women actively participated in the process and were well represented in the community level project committees („Community Group‟). AzRIP-2 will continue to

promote these key principles while paying closer attention to new challenges related to the

inclusion of Internally Displaced Persons ( IDPs) and ethnic minorities, such as intensifying

mobilization and participation of IDPs in the two new rayons (Agdzhebedi and Beilagan) where

15

their presence is significant; better coordination with the Social Fund for the Development of

IDPs Project (SFDI); and more emphasis on female leadership. AzRIP-2 will attempt to capture

social outcomes rigorously through a set of social capital indicators.

52. AzRIP-2 does not trigger OP 4.10 (Indigenous Peoples), but the Social Assessment carried out as part of project preparation examined some aspects of one major national minority

group (the Talysh) in the southern rayons, which will be included in the newly expanded

coverage areas of AzRIP-2. The study found that the Talysh are integrated in wider society.

Interactions with Government institutions (rayon ExComm and municipality) are well

established and communications in the national Azeri language are not a constraint. Key village

institutions are not different from those in other areas and, with prevailing practices of broad

leadership structures and public meetings, are unlikely to provide an obstacle to AzRIP-2‟s

approach of inclusive participation and transparent decision-making. Like other areas, women

holding public offices, such as teachers and health workers, actively participate in public

meetings and are listened to. The project does not trigger OP 4.12 (Involuntary Resettlement) as

it will not finance activities that will require land acquisition or the displacement of livelihoods

or residences. These potential impacts will be screened out using provisions in the EMP

checklist.

F. Environment (including safeguards)

53. The project does not raise any significant adverse environmental concerns. Experience derived from the original AzRIP indicates that positive environmental impacts resulted from the

implementation of micro-projects such as improved irrigation, water supply and sewerage

systems. The potentially adverse environmental impacts of AzRIP-2 are mainly associated with

civil works during micro-projects‟ implementation, and include, inter alia, dust, noise, soil and

water pollution, generation of waste materials, waste disposal (including medical waste), and

damage to soil by excavation works.

54. Environmental Assessment. These potential negative environmental impacts trigger the Operational Policy OP 4.01. The impacts are minor and can be prevented or minimized through

appropriate preventive actions and mitigation measures. Therefore, the project is classified as

Environmental Category „B‟, requiring a partial environmental assessment. Since micro-projects

are not pre-identified and will be determined in the course of project implementation by

applicant communities through intensive participatory processes, an Environmental Management

Framework (EMF) will be applied which will establish screening mechanisms and govern the

process of development and implementation of specific mitigation plans. The EMF for the

original AzRIP has been updated by the Borrower to address impacts from the newly proposed

activities to strengthen rural livelihoods and to reflect the expanded geographical coverage. The

updated EMF has been discussed with stakeholders and has been publicly disclosed by the

Borrower on April 15, 2011.

55. Capacity for the EMF implementation has been built under the original project through a series of training regularly provided to the PMU, its Regional Offices and potential beneficiary

communities. The PMU Environmental Specialist is responsible for training delivery, assisting

the Regional Offices and applicant communities throughout the micro-project cycle and closely

16

supervising implementation of specific preventive and mitigation measures by project

beneficiaries. The same good practice will continue under AzRIP-2.

G. Other Safeguards Policies triggered

56. Projects on International Waterways. As was the case with AzRIP, AzRIP-2 will support activities on rehabilitation or construction of irrigation and drainage systems, water

supply improvement and wastewater treatment. Such activities are likely to be developed inter

alia on rivers flowing into the Caspian Sea and trans-boundary rivers, which are international

waterways for the purposes of the World Bank Operational Policy on Projects on International

Waterways (OP 7.50). It is expected (and also based on the experience under the original

project) that proposed micro-projects would not produce a noticeable change for the abstraction

volumes of the systems and would not have an adverse change to the quality or quantity of river

flows, while the works would not change the nature of the original systems. With OP 7.50 being

triggered, riparian states have been notified accordingly.

17

Annex 1: Results Framework and Monitoring .

Country: Azerbaijan

Project Name: Second Rural Investment Project (P122944) .

Results Framework .

Project Development Objectives .

PDO Statement

To improve access to and use of community-driven rural infrastructure and expand economic activities for rural households. .

Project Development Objective Indicators

Cumulative Target Values Data Source/ Responsibility for

Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection

Percentage increase in

access to and use of rural

infrastructure Percentage 0.00 0.00 15.00 20.00

3 times during

project (baseline,

mid-term, final)

Randomized impact evaluation

DIME, Contracted firm

Percentage of households

that are satisfied with the

quality of basic rural infrastructure

Percentage 10.00 40.00 64.00 3 times during project (baseline,

mid-term, final)

Randomized

impact evaluation DIME, Contracted firm

Percentage reduction in travel time to market,

hospital, school, safe

water source

Percentage 0.00 30.00 48.00 3 times during

project (baseline, mid-term, final)

Randomized

impact evaluation DIME, Contracted firm

Percentage change in

income from household

economic activity Percentage 0.00 16.00 23.00

3 times during

project (baseline,

mid-term, final)

Randomized impact evaluation

DIME, Contracted firm

.

Intermediate Results Indicators

Cumulative Target Values Data Source/ Responsibility for

Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection

Number of micro-projects Number 79.00 79.00 215.00 368.00 521.00 600.00

3 times during

project (baseline,

mid-term, final)

Randomized impact evaluation

DIME, Contracted firm

Direct project

beneficiaries Number 197500.00 197500.00 537500.00 920000.00 1300000.00 1500000.00 Quarterly and

annual project reports

Project MIS PMU/ROOs

18

Female beneficiaries Percentage Quarterly and

annual project reports

Project MIS PMU/ROOS

Participants in

consultation activities

during project

implementation (number)

Number 700.00 700.00 2000.00 3500.00 4800.00 5600.00 Quarterly and

annual project

reports

Project MIS PMU/ROOS

Intended beneficiaries

that are aware of project

information and project supported investments

Number 0.00 13000.00 35000.00 61000.00 86000.00 100000.00 3 times during project (baseline,

mid-term, final)

Randomized

impact evaluation DIME, Contracted firm

Number of Women in

Community Project Committees

Number 0.00 160.00 400.00 700.00 1000.00 1200.00 Quarterly and

annual project reports

Project MIS PMU/ROOs

Percentage of subprojects where necessary

maintenance operations

are taking place with community engagement

Percentage 0.00 0.00 0.00 0.00 0.00 70.00

Six-month and 1

year after MP

completion

Micro-project evaluations

PMU/ROOs

Grievances registered related to delivery of

project benefits addressed

(%)

Percentage 0.00 0.00 60.00 60.00 70.00 80.00 Quarterly and

annual project reports

Project MIS PMU/ROOs

Change in community

members who feel they

have some influence in community decision-

making processes

(male/female)

Percentage 0.00 0.00 0.00 30.00 30.00 40.00

3 times during

project (baseline,

mid-term, final)

Randomized impact evaluation

and qualitative

studies and focus groups

Contracted firm

Change in degree of people‟s trust in

community groups

Percentage 0.00 0.00 10.00 20.00 40.00 60.00

3 times during project (baseline,

mid-term, final)

Randomized

impact evaluation and qualitative

studies and focus

groups

Contracted firm

Change in people‟s willingness to contribute

to community project

costs

Percentage 0.00 0.00 15.00 30.00 50.00 60.00

3 times during

project (baseline, mid-term, final)

Randomized

impact evaluation

and qualitative studies and focus

groups

Contracted firm

No. of trainees in

capacity building

activities by kind of activity

(male/female/youth/

minorities/IDPs/municipal/ExComm)

Community training;

Cross visits; Seminars; Conferences

Number 0.00 1100.00 5500.00 10000.00 14500.00 19000.00

Quarterly and

annual project

reports

Project MIS PMU

No. of villages which

hold community-wide Number 0.00 0.00 30.00 60.00 90.00 120.00 Measured 6 and 12

months after

Regional

evaluations PMU

19

meetings organized by

Community Group to discuss public matters

after project completion

(measured at 6 and 12

months after completion

of sub-project)

project completion

No. of communities with new projects

implemented with

internal resources (including activities with

municipality and ExComm)

Number 0.00 0.00 50.00 110.00 260.00 420.00 Measured 6 and 12

months after project completion

Regional

evaluations, PMU

No. of communities with

projects implemented with external resources

Number 0.00 0.00 30.00 60.00 90.00 120.00 Measured 6 and 12

months after project completion

Regional

evaluations PMU

.

20

Annex 2: Detailed Project Description

Azerbaijan: Second Rural Investment Project (P122944)

1. Objective: The Project Development Objective is to improve access to and use of community-driven rural infrastructure and expand economic activities for rural households. This

would be achieved through: (i) the provision of grants to finance eligible demand-driven micro-

projects in rural infrastructure; (ii) the provision of training and consultants‟ services to support

micro-project development by enhancing the capacity of engaged local stakeholders in all

aspects of micro-project program development; (iii) building opportunities for rural employment

and livelihood support services through the provision of training and consultants‟ services to

carry out pilot livelihood support services in six communities; and, (iv) supporting project

management capacity at the Project Management Unit (PMU) and its Regional Operations

Offices (ROOs) for the purposes of effective management, implementation and monitoring and

evaluation of Project activities.

2. This repeater project is a Specific Investment Loan (SIL) with a total investment cost estimated at US$53.6 million, of which US$30 million will be financed by IBRD. The Project

will scale up AzRIP both geographically into currently un-serviced rayons and vertically through

the inclusion of pilot livelihood support services and second generation institutional support in

current AzRIP active project areas.

3. The Project has three components:

Component A - Rural Community Infrastructure -US$41.64 million

4. Two categories of micro-project grants will be supported under Component A: (i) micro-projects in previously un-serviced rayons which meet eligibility criteria set out in the Operational

Manual (OM); (ii) second generation micro-projects in active AzRIP communities with high

performance ratings from previous micro-project implementation and which meet eligibility

criteria set out in the OM, and; (iii) micro-projects submitted by Common Interest Groups

supported under the pilot scheme in Component B which meet eligibility criteria as established

in the OM.

5. The current AzRIP provides investments in demand-driven micro-projects to eligible communities in five regions (Mughan-Salyan, Lower Shirvan, Nakhchivan, North and North

West). This component will extend coverage and provide funding for demand-driven micro-

projects in rural infrastructure in eleven new rayons in the North and in the Mugan-Salyan zones.

The average size of the micro projects will be US$70,000, while micro-projects valued at over

US$85,000 will require prior review by the Working Group. Micro-project expenses eligible for

financing from the project include identification, design, construction and rehabilitation of the

investment. Potential investments, based on priority needs identified by communities include,

inter alia, rehabilitation or construction of:

Potable water systems

Irrigation infrastructure

Sewerage and drainage systems

Secondary roads and small bridges

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Small-scale local electricity distribution

Primary schools and kindergartens

Health centers

Community centers

Parks

Market places

6. Costs: This component will support costs related to the identification, design, construction, rehabilitation, and initial operation and maintenance of the investment.

Beneficiaries are required to share the cost of the investment and to ensure the availability of

funds for O&M after the grant funding has been completed. Micro-projects require a minimum

community contribution of 10% of the investment cost, of which at least 2% must be in cash.

7. Eligibility: The project targets newly eligible rural communities and communities in existing project coverage areas in 56 rayons across the country (11 new rayons and 45 rayons

served under AzRIP). These comprise the North zone rayons of Aghsu, Balakan, Gabala, Gakh,

Gobustan, Guba, Gusar, Ismayilli, Khachmaz, Oghuz, Shaki, Shamakhi, Zakatala and new

rayons of Absheron, Khizi, Shabran and Siyezen and; North West zone rayons of Aghstafa,

Barda, Dashkasan, Gadabay, Goranboy, Khanlar, Qazakh, Samukh, Shamkir, Tartar and Tovuz;

Lower Shirvan zone rayons of Aghdash, Goychay, Hajigabul, Kurdamir, Ujar, Yevlakh and

Zardab and Yevlakh; Mughan Salyan zone rayons of Bilasuvar, Imishli, Jalilabad, Neftchala,

Saatly, Sabirabad and Salyan and new rayons of Aghjebedi, Astara, Beylagan, Lenkaran, Lerik,

Masalli and Yardimli; Nakhchivan zone rayons of Babek, Julfa, Kengerli, Ordubad, Sadarak,

Shahbuz and Sherur. Micro-projects in Nakhchivan are to be fully financed by Government

funds. Other zones are eligible for IBRD financed micro-projects.

8. These rayons will benefit from mobilization and access to improved infrastructure. Households and individuals from well-performing micro-projects in the 45 existing rayons

served under AzRIP will benefit from second generation community infrastructure and

livelihood support services.

9. The size of the communities should be greater than 1,000 and less than 10,000 people, but smaller communities can cluster with neighboring communities to achieve scale, in regions

that meet established selection criteria and have a higher relative incidence of poverty. A total of

600 micro-projects are expected to be implemented in communities meeting eligibility criteria.

10. Current micro-project cycle procedures as detailed in the AzRIP OM will be maintained in the new Project. Grants to project beneficiaries shall be delivered in accordance with

eligibility criteria and procedures acceptable to the Bank and shall include the following: (a) the

Grant(s) shall be denominated in Manat; (b) grants for financing micro-projects under

Component A shall be made available to: (i) municipalities; community-based organizations

registered as legal entities, which consist of representatives of rural communities with

populations of more than 1,000 and less than 10,000 (including clusters of smaller communities

that add up to 1,000), eligible under the OM; and any other associations and organizations as the

Government and the Bank may agree.

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11. ROOs shall launch a promotion and outreach campaign, issue requests for micro-project proposals and assist in the preparation of micro-project proposals. Investments will be identified

by beneficiaries, prioritized through local participatory planning processes, and appraised

according to technical, financial, social, economic, institutional and environmental criteria set

out in the OM. Micro-project committees formed as part of community mobilization, as defined

in the OM, shall submit proposals of micro-projects to ROOs on behalf of their respective

community. ROOs shall appraise and evaluate micro-project proposals based on the following:

(i) impact on the community; (ii) institutional capacity to implement the service intended by the

Micro-project; (iii) financial viability; and (iv) technical and environmental safety. Any micro-

projects involving land expropriation shall not be eligible for consideration. ROOs shall register

the results and forward the summary evaluation of proposals to the respective Regional Grant

Approval Committee (RGAC) for their approval or rejection. Any members of the RGACs who

may have a potential conflict of interest in a particular proposal shall recuse themselves from

making a decision on that particular proposal.

12. The amount of individual grants shall be based upon the estimated cost of goods, works services and operating costs that will be required for the Micro-project, and shall not exceed 90%

of the overall costs of Micro-projects. The Government shall take necessary actions, satisfactory

to the Bank, to ensure that, where proposals approved by the RGACs call for implementation of

micro-projects by community-based organizations that are not already registered as legal entities,

the charters of such organizations shall be registered in accordance with the laws of the

Government in a timely manner. The Government shall provide each Grant under a Grant

Agreement with the respective beneficiary community on terms and conditions approved by the

Bank, which shall include the following:

(a) The Beneficiary shall ensure that the grant funds are used exclusively for the

purposes specified for the Micro-project approved by the RGAC.

(b) The Beneficiary shall provide no less than 10% of the total cost of the Micro-

project, in cash or in-kind.

(c) The Government shall obtain rights adequate to protect its interests and those of

the Bank, including the right to: (i) suspend or terminate the right of the Beneficiary to

use the proceeds of the Grant, or obtain a refund of all or any part of the amount of the

Grant then withdrawn, upon the Beneficiary‟s failure to perform any of its obligations

under the Grant Agreement; and (ii) require each Beneficiary to: (a) carry out its Micro-

project with due diligence and efficiency and in accordance with sound technical,

economic, financial, managerial, environmental and social standards and practices

satisfactory to the Bank, including in accordance with the provisions of the Anti-

Corruption Guidelines applicable to recipients of loan proceeds other than the

Government; (b) provide, promptly as needed, the resources required for the purpose; (c)

procure the goods, works and services to be financed out of the Grant in accordance with

the provisions of this Agreement; (d) maintain policies and procedures adequate to enable

it to monitor and evaluate in accordance with indicators acceptable to the Bank, the

progress of the Micro-project and the achievement of its objectives; (e) (1) maintain a

financial management system and prepare financial statements in accordance with

consistently applied accounting standards acceptable to the Bank, both in a manner

adequate to reflect the operations, resources and expenditures related to the micro-

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project; and (2) at the Bank‟s or the Government‟s request, have such financial

statements audited by independent auditors acceptable to the Bank, in accordance with

consistently applied