proposed grant assistance to azerbaijan for the mahalla

Grant Assistance

JFPR: AZE 38248

Proposed Grant Assistance to Azerbaijan for the Mahalla Business Development Project (Financed by the Japan Fund for Poverty Reduction) August 2005

CURRENCY EQUIVALENTS

(as of 11 August 2005)

Currency Unit – manat (AZM) AZM1.00 – $0.00021

$1.00 – AZM4,695

ABBREVIATIONS

ADB – Asian Development Bank BSSC – business support service center CSG – community savings group EA – executing agency GIM – grant implementation manual IA – implementing agency IDP – internally displaced people JFPR – Japan Fund for Poverty Reduction MFI – microfinance institution MOED – Ministry of Economic Development MRFD – Micro and Rural Finance Development Project NGO – nongovernment organization PCB – private commercial bank PMU – project management unit PSC – project steering committee SCWA – State Committee on Women Affairs SOE – statement of expenditure SPPRED – State Program on Poverty Reduction and Economic

Development

NOTES

In this report, “$” refers to US dollars.

Mingechevir Reservoir

Ganikh River

Samur River

ShamkirReservoir

ArazReservoir

CASPIAN SEA

Ku

r River

Kur R

iver

Sarisu Lake

Araz R

iver

Araz River

Balaken

Zagatala

Gakh

OghuzGabala

Gusar

Guba

DevechiSiazan

Khyzy

Aghsu

Ismailly

Gazakh

Aghstafa

Tovuz

Nabiagaly

Geranboy

YevlakhAghdash

Mingechevir

Ujar

Goychay

Kyurdamir

Zardab

Maraza

Sumgait

Khyrdalan

Gazi-Mammad

Ali-Bayramli

Sabirabad

Saatly

Aghjabedi

Terter

Ganja

Dashkesan

Kelbajar

Gadabey

LachinShusha

Khojaly

Aghdam

KhojavendKhankendi Beilagan

Gubadly

Jebrail

Fizuli

Zangilan

Astara

Lerik

Yardymly

Masally

Jalilabad

Bilasuvar

Neftchala

Sadarak

Sharur

Shahbuz

Nakhchivan

Julfa

Ordubad

BAKU

Bank

Alyat

Gobustyan

Sangachaly

Primorsk

Lokbatan

Karasu

Lagich

Khudat 1

Nabran

Vartashen

Mardakert

Prishib

Avrora

Project Area

National Capital

City/Town

National Road

Other Road

Railway

River

Provincial Boundary

International Boundary

Boundaries are not necessarily authoritative.

A Z E R B A I J A N

MAHALLA BUSINESSDEVELOPMENT PROJECT

0 25 50 75

Kilometers

N

39 00’No

39 00’No

41 00’No

41 00’No

46 00’Eo

46 00’Eo

50 00’Eo

50 00’Eo

05

-31

83

RM

I R A N

R U S S I A NF E D E R A T I O N

G E O R G I A

A R M E N I A

Shamkir

Khanlar

Sheki

Khachmaz

Shamakhy

Imishly

Barda

Lenkeran

Salyan

Babek

Lenkeran

1

JAPAN FUND FOR POVERTY REDUCTION (JFPR)

JFPR Grant Proposal I. Basic Data Name of Proposed Activity Mahalla1 Business Development Project

Country Azerbaijan

Grant Amount Requested $1,500,000

Project Duration 4 years

Regional Grant Yes / No

Grant Type Project / Capacity building

II. Grant Development Objective(s) and Expected Key Performance Indicators

Grant Development Objectives: The objective of the JFPR grant is threefold (i) form business support service centers

(BSSCs) in 10 rayons2 to train poor households on income-generating activities, (ii) foster a savings and credit culture through creation of community savings groups (CSGs), and (iii) provide financial assistance to the extremely poor for income-generating activities. Expected Key Performance Indicators:

(i) 10 BSSCs established and sustainable, with continued knowledge dissemination and real income levels of beneficiary households raised by 15%;

(ii) 1,000–2,000 of the beneficiary households engaged in income-generating activities, and poverty incidence reduced by 15% in beneficiary communities;

(iii) Inclusion of women as beneficiaries, both in training and financial assistance; and (iv) 50 CSGs established to enhance understanding of savings and credit, with

participation from at least 1,000 members to reintroduce confidence in savings and credit and increase credit usage in rural areas.

III. Grant Categories of Expenditure, Amounts, and Percentage of Expenditures

Category Amount of Grant Allocated in $

Percentage of Expenditures

1. Civil Works 0 0

2. Equipment and Supplies 94,100 6.3 3. Training, Workshops, Seminars, Public campaigns 116,000 7.7 4. Consulting Services 542,900 36.2 5. Grant Management 72,000 4.8 6. Other Inputs (Central Revolving Fund-Seed Capital) 600,000 40.0 7. Contingencies 75,000 5.0 TOTAL 1,500,000 100.0 Incremental Cost 75,000 5.0

1 Mahalla stands for “community”. 2 Rayons stand for districts.

2

JAPAN FUND FOR POVERTY REDUCTION

JFPR Grant Proposal Background Information

A. Other Data Date of Submission of Application

1 June 2005

Project Officer Lu Shen, Financial Economist Project Officer’s Division, E-mail, Phone

Governance, Finance and Trade Division (ECGF) [email protected], tel: (632) 632 5414

Other Staff Who Will Need Access to Edit/Review the Report

Sector Finance/Microfinance Theme Sustainable Economic Growth Targeting Classification General Intervention Was JFPR Seed Money used to prepare this grant proposal?

Yes [ x ] No [ ]

Have SRC comments been reflected in the proposal?

Yes [ x ] No [ ]

Name of Associated ADB Financed Operation(s)

Loan 38110-AZE: Micro and Rural Finance Project (MRF)

Executing Agency

State Program on Poverty Reduction and Economic Development (SPPRED) Secretariat, Ministry of Economic Development Mehman A. Abbas Head, SPPRED Secretariat Ministry of Economic Development tel: +994 12 4990047 fax: +994 12 4990047 e-mail: [email protected]

Grant Implementing Agency(ies)

It is envisioned that the grant implementing agencies (IAs) will be a consortium of international and local non-government organizations (NGOs). To ensure that the best consortium is selected, a competitive bidding process is necessary. Thus, the IAs have not been identified. Selection will begin at the start of project implementation.

B. Details of the Proposed Grant 1. Description of the Components, Monitorable Deliverables/Outcomes, and Implementation Timetable

Component A Component Name Business Support Services Cost ($) (include contingencies) $330,000 Component Description This component will address obstacles related to the lack of

(i) business-related information in rural areas; (ii) know-how in starting a business; and (iii) advisory service for local

3 communities interested in creating sustainable business activities. This component will establish business support service centers (BSSCs) in 10 rayons3 in two phases. During phase 1 (first year of project implementation), five BSSCs will be established by the IAs. Toward the end of the second year, a midterm review will assess the performance of the five BSSCs and summarize the lessons learned. Phase 2 will be implemented at the beginning of the third year and will incorporate lessons learned from phase 1. The local staff trained during phase 1 is expected to spearhead the second round of BSSC establishment. The BSSC will be the regional focal point for disseminating business information to provide local communities with access to market information for products and pricing. To ensure effective knowledge transfer and continuation of BSSC functions after the Project is completed, BSSCs will be physically established within or in conjunction with the existing regional Ministry of Economic Development (MOED) offices, and staff will be trained by international and local NGOs. The BSSCs will (i) conduct training-of-trainers courses to prepare local staff and regional MOED staff to complete knowledge transfer; (ii) gather information for local business opportunities; (iii) provide training in basic business skills (budget management, bookkeeping and business start-ups); (iv) help local communities/poor households identify sustainable business opportunities, develop and implement business plans; and (v) link entrepreneurs with good business plans and seeking funding for business start-up and expansion to local financial institutions. In the beginning of the Project, training will be provided by the IAs. As the training-of-trainers courses are completed, the local trainers and MOED staff will conduct the majority of the training sessions in the BSSC. A project management specialist will be recruited before project implementation to assist in the design and specification of a grant implementation manual (GIM), which will specify the implementation arrangements, including specific mechanisms for establishing and operating the BSSCs.

Monitorable Deliverables/Outputs

• Five target rayons during phase 1, in consultation with central and local government, municipal leaders, and community members

3 The selection of rayons is based on (i) level of economic development, (ii) poverty incidence as demonstrated through national census and SPPRED Secretariat statistics, and (iii) least duplication with other funding agency activities. Currently identified rayons include Babek, Barda, Imishly, Khachmaz, Khanlar, Lenkeran, Salyan, Sheki, Shamakhy, and Shamkir.

4

• BSSCs established in each rayon and sustainable within 3 years of operation

• Training of trainers for at least 50 trainers in the first year of operations

• 50% of the target community households trained on the following techniques: - basic business skills, including basic bookkeeping,

obtaining credit, marketing, understanding collaterals and repayment methods;

- proposal writing and business plan development; - skills for trainers to strengthen local knowledge of

business skills and entrepreneurship development • Women mobilized to participate in the training specified

above. Consultation with the State Committee on Women Affairs (SCWA) to organize local activities to encourage women’s participation.

Implementation of Major Activities: Number of months for grant activities

36 months

Component B Component Name Community-based Savings Groups Cost ($) (include contingencies) $150,000 Component Description Due to the credit union crisis in the 1990s, the rural

communities in Azerbaijan have lost confidence in savings organizations. This lack of confidence, combined with the absence of formal financial institutions in rural areas, has created a vacuum for formal savings and investment mechanisms. Further, individual households have too little savings to provide relief during adverse times. The development of credit and savings makes it feasible for households to smooth consumption and cope with contingencies and life cycle needs. This component will (i) establish community savings groups (CSGs) in selected beneficiary communities4 from the same rayons piloting the BSSCs so as to establish a healthier savings and credit culture, (ii) train the beneficiary communities on how to use savings for productive investments, and (iii) build the capacity of CSG members to effectively manage and use their savings. The CSG membership will be based on the one-member, one-vote system, not on the size of contributions. The amount of weekly savings contribution will be fixed and affordable to poor households, within the range of AZM1,500-AZM2,000 per week. The amount, however, can be adjusted, based on the ability of each community to mobilize savings, to prevent any one individual from dominating the CSG.

4 For each of the selected rayons (10 in total), five communities will be selected to pilot-test the CSG concept.

5 The community savings will be deposited with a local or regional financial institution. With the participation of all CSG members, two to three members will be elected as CSG representatives responsible for accessing the savings account. CSG savings could be withdrawn only with the consent of all CSG members. CSGs can decide to use the savings for in-group lending, but only to members according to the rules established by the members themselves. A project management specialist will be recruited before project implementation to assist in the design and specification of a GIM, which will specify the implementation arrangements, including specific mechanisms for establishing and operating the CSGs.


• Five target rayons and five communities per rayon selected during phase 1 in consultation with central and local governments, municipal leaders, and community members

• Awareness campaigns delivered to disseminate information on the CSGs with community leaders at both village and rayon levels

• CSGs established in five rayons in the first year of implementation and five rayons after the midterm review

• CSG members trained on establishing group norms • Savings activities implemented • Rules and regulations established for CSGs • CSG members trained in group savings management


36 months

Component C Component Name Livelihood Assistance Fund5 Cost ($) $600,000 Component Description This component will provide financial assistance to extremely

poor6 households to initiate revenue-generating activities. Eligible households must be (i) among the poorest of households according to total household income in the community, and (ii) identified as households who have just enough to meet their consumption needs but do not have enough savings to initiate revenue-generating activities. The beneficiary households will be selected through a participatory process, engaging the local government, community representatives, and project management unit (PMU).

5 The detailed guidelines, criteria and manuals for the usage of the Livelihood Assistance Fund, including fund management, fund allocation, and monitoring will be prepared by the project management specialist in consultation with NGOs (implementing agencies), and the executing agency (EA).

6 Extremely poor are households that are among the poorest in the community in terms of household income. Preliminary findings indicate that the communities have a clear idea of who these households are and can reach consensus on defining these households using participatory methods.

6

Once selected, the beneficiary households must complete the following training at the BSSC:

(i) basic business concepts and skills such as bookkeeping and/or budgeting,

(ii) identification of feasible and financially viable livelihood activities for each household, and

(iii) preparation of business and marketing plans for these activities.

It will be emphasized during training that under no circumstances can the fund be used for consumption purposes, but rather as start-up capital for income-generating activities developed during the training. Upon completion of the training program, beneficiary households will be eligible to apply for up to $300 for seed capital through the Livelihood Assistance Fund. To ensure the sustainability of the Fund, primary beneficiary households will pay the principal ($300) to the next poorest household within the bottom quartile (this can be regarded as a pay-it-forward mechanism). The repayment will be determined by the PMU in consultation with local community leaders and local government. The poor households eligible to receive the revolving contribution will also be determined by the local community leaders, together with the PMU and local government. Monitoring mechanisms will be jointly established by the local community leaders, the PMU, local government, and the BSSCs. As the extremely poor households are selected through a participatory manner, the local stakeholders will also act as enforcers during the implementation of this component, both for the usage of the Livelihood Assistance Fund and for the pay-it-forward system. In the event the Fund has revolved through all eligible households in the bottom quartile, it can be recycled to the same set of households as deemed appropriate by the PMU, in consultation with local community leaders and the local government. In the beginning of the Project, the Livelihood Assistance Fund will be managed by the PMU. Once the funds have been allocated to the beneficiary households, it is envisioned that the local community leaders will take on the primary role of managing the repayment and reallocation of the fund to the next household. The detailed guidelines, criteria, enforcement mechanisms and manuals for the use of the Livelihood Assistance Fund, including fund management, fund allocation, and monitoring will be prepared by the project management specialist, in

7 consultation with the Asian Development Bank, NGOs, and the Executing Agency before project inception.


• Reporting requirements and arrangements to standards articulated in the GIM with the PMU, BSSCs, local governments and local communities

• Based on the classification of income distribution within the community, extremely poor households in each community selected through participatory methods

• Training course for the extremely poor households conducted

• Business proposals developed by the extreme poor households collected and evaluated

• Financial assistance provided for extremely poor households within the selected communities

Number of months for implementation of major activities:

36 months

Component D Component Name Project Management Monitoring and Auditing Cost ($)(include contingencies) $420,000 Component Description This component will focus on effective project management

through support for (i) central, regional, and local project coordination, supervision, management, and monitoring; (ii) preparation of implementation guidelines and work plans; (iii) development of lessons learned from the pilot program for future project replication. The PMU will consist of the lead international NGO, representatives from the local NGOs, an office manager, and Government counterpart staff. This component will also conduct studies such as the poverty impact assessment to measure the effectiveness of project activities.


Effective project management and coordination through • NGOs, consultants, and other individuals selected for

the PMU • Comprehensive project work plan designed and

delegation of duties on the national, regional, and local levels

• Implementation schedule prepared and executed • Annual budget for individual component prepared • Inception, progress, interim, completion, impact

assessment reports delivered • Timely submission of reports on project status,

contract, and audits • Staff performance evaluated and monitored


48 months

8

2. Financing Plan for Proposed Grant to be Supported by JFPR

Fund Source Amount ($) JFPR 1,500,000

Government 187,200

Community Contributions 150,000

Total 1,837,200 3. Genesis

The Government of Azerbaijan, through MOED, requested the ADB to support its

poverty reduction strategy program in rural areas, particularly to improve and diversify rural livelihood opportunities. It was agreed that a Japan Fund for Poverty Reduction (JFPR)-funded project should be linked to the ongoing Micro and Rural Finance Development Project (MRFD), scheduled for Board consideration in 2005.

Before its independence, Azerbaijan was one of the poorest republics in the former Soviet Union (FSU), with about one third of its population living below the official Soviet subsistence level. Azerbaijan ranked 10th in living standards and per capita income among the 15 former Soviet Union republics. Use of an absolute poverty line of AZM194,0007 per capita per month, shows 40.2% poverty incidence in rural areas. Extreme poverty level8 stood at 20.7%. Except for Shirvan region, differences in poverty incidence across regions are not large, suggesting that poverty is broadly distributed across the country.

With 9 of the world’s 11 major climactic zones identified within its borders, Azerbaijan

grows a wide variety of crops. The main agricultural products include grain, cotton, tea, vegetables, fruits, and nuts. Further, products such as beef, spices, wine, and spirits have become increasingly important commodities, as significant scope exists for the production and sale in the domestic market as well as the export market.

Despite the high potential for agriculture-related production, growth in economic activities in the rural areas has been limited. The lack of expansion in economic activity can be attributed to (i) the lack of adequate access to financial resources, agricultural inputs, and markets; (ii) lack of basic business skills; (iii) lack of information on market conditions and economic opportunities; and (iv) lack of sufficient business activities to benefit from scale production. As the MRFD will address the lack of financial outreach in the rural areas, the JFPR will be complementary by enhancing the ability of rural households to use financial services. 4. Innovation

The JFPR Mahalla Business Development Project will introduce innovative livelihood development techniques as well as a highly participatory approach to poverty reduction. Through three components, the Project will develop capacity on the national, regional, and local levels to assist the poor in Azerbaijan. The national Livelihood Assistance Fund will allow for successful business proposals to be reviewed and replicated in other regions in Azerbaijan. The regional BSSCs will become information hubs for communities to gain business skills and develop new livelihood opportunities. The local CSGs will cultivate a solid savings and credit 7 $39.2 equivalent. 8 Using an extreme poverty line of AZM168,000, $34.0 equivalent.

9 culture from a grassroot level to prepare communities for future access to the formal financial system.

One main departure of the Livelihood Assistance Fund from the traditional revolving fund is that repayments by the original beneficiary households are made over an agreed upon period of time, but the money is given to other households in the same community rather than paid back to a managing organization. With peer enforcement originating from the local communities themselves, the Project will instill a greater sense of accountability and ownership in the local communities.

Another departure from international assistance programs 9 in Azerbaijan is that the Project will provide not only training and capacity building for local communities, but also a venue for the rural poor to put their ideas and innovations to practice by providing the necessary capital to develop new businesses.

Lastly, due to the long-term conflict with neighboring Armenia, much of international aid has been concentrated on the border regions, where there is a high incidence of internally displaced people (IDP). Other poor regions, in turn, have been traditionally overlooked. With assistance from MOED, the Project will be able to extend the reach to poverty-stricken areas other than those with high IDP concentration. The selection of rayons is based on (i) level of economic development, (ii) poverty incidence as demonstrated through national census and SPPRED secretariat statistics, and (iii) least duplication with other aid agency activities. 5. Sustainability

Sustainability has been demonstrated in international best practices as described below and will be achieved through the following aspects of project implementation:

Business Support Service Centers. In the first 2 years, the BSSCs will be funded through the Project. These will help improve business skills of local community members. As the beneficiaries become more knowledgeable in business and find new income-generating activities, the BSSCs can establish more sophisticated workshops and information sessions where they can operate on a fee-for-service basis, thus becoming self-sustaining. Types of services that have been offered in similar programs include (i) developing pre-loan training for clients of microfinance institutions, (ii) managing training for small businesses taking on nonrelative employees for the first time, and (iii) organizing related services to enhance sustainability.

This model has in fact been tested in Ganja and Lenkeran where business centers are now financially sustainable. The fee-for-service workshops are designed to meet the demand of more sophisticated beneficiaries and the local conditions. The Project will draw experience from these successful business centers and will apply the lessons learned in the design of BSSCs in the project rayons to ensure sustainability.

Further, the BSSCs will engage the participation of regional MOED offices in both providing office space and participating in training-of-trainers activities. With the enhanced institutional knowledge in MOED and local training capacity, the BSSCs will maintain their activities and staffing after project completion.

9 International assistance include grants from United States Agency for International Development, DFID, United

Nations Development Programme, and other bilateral agencies. These grants were limited to establishing business information and education centers.

10

Community-based Savings Groups. Over the past several years, much has been learned in the way of extending credit to the poorest microentrepreneurs. Many lessons have been based on concepts long employed by traditional informal finance activities. For example, rotating savings and credit associations (ROSCAS) have been long in existence in Africa, Asia, and Latin America. These groups typically pool members' deposits and extend loans to members after a given period. Funds can also be disbursed for member emergencies or funeral expenses.

In the case of India, grassroots groups are members of primary cooperatives, which, in turn, are part of federations of cooperatives at the provincial and national levels. When group members deposit their savings with the group, the amount is usually rotated as credit. A local administrative council promotes the scheme and recommends an interest rate of 2% per month on the loans. The accounts of the savings and credit operations are supervised by the council, which helps in calculating dividends at the end of the year.

The advantages of the savings schemes in all the groups are that (i) members have greater involvement in group activities if they save in the group; (ii) a habit of savings instills discipline among members; (iii) members can avail of credit from the group's savings to buy raw material and other requirements; (iv) the group can build up capital to procure machines and better technology, and improve the quality or/and quantity of its production; (v) the savings of members is a risk cover in case the business faces problems; for instance, if working capital cannot be obtained from other sources, the group can use this fund for some time; (vi) membership in such a group builds a culture of self-reliance; the group acquires a greater degree of control as its capital base increases, enabling it to take better financial decisions; and (vii) when the group's capital base increases, it gains recognition from other institutions; if the group builds up a good capital base through its savings kept in a group account in a banking institution, it will have enough credibility to be able to obtain loans for its business from the institution.

Livelihood Assistance Fund. The Livelihood Assistance Fund is an example of a formal revolving fund, typically funded through seed money from an aid organization or agency. The seed money is used to loan money to many small borrowers, who will use the fund and pay back the fund at a determined time so other people can also benefit from the same fund. Revolving funds are excellent means of making financial resources available to the poor, and can help a small amount of capital benefit many people.

Through the Livelihood Assistance Fund, income-generating activities will increase for the extremely poor households in the beneficiary communities. In turn, these households, with the greater liquidity, can (i) use the CSGs as a vehicle for savings as well as a source for future credit needs, and (ii) provide cash contributions within their community to help other households under similar conditions to finance revenue-generating activities.

To further ensure sustainability of the Livelihood Assistance Fund, the revolving fund will

be distributed to beneficiary households after BSSC training and concurrence on their income generation plan. The local community will designate eligible households. The BSSC and beneficiary households will agree on appropriate loan amounts and repayment structures based on the plans. The PMU will confirm the amount and repayment structure of the loans, issue funds, and arrange the method of collecting repayments. Repayments will be placed back into the fund for lending to new eligible households. At the midterm review, the BSSC, local community, and local NGOs will be reviewed to determine who would be the most appropriate entity to continue management of the revolving fund after project completion.

11 6. Participatory Approach

In the preparatory stage for the Project, a local NGO was commissioned to conduct interviews with the local government, communities, and households to (i) gain broader understanding of the current situation and needs of the communities in the different regions of Azerbaijan, and (ii) better design the scope for the assistance offered under the JFPR to address these needs.

Meetings were held with 50 villages in nine regions. Focus groups involved 769 household heads, 420 of whom took part in more in-depth interviews. Output from this exercise is a region-by-region profile of current household economic activities, income generation, and potential business opportunities based on local characteristics. Information regarding community-based enterprises and CSGs was also disseminated to the participants during this time.

JFPR project implementation will continue to be highly participatory, involving all stakeholders, including central and regional government representatives, private sector, NGOS, villages, and local communities. Consultations will be held with each of these stakeholder groups to ensure that all major economic and social objectives are met.

Most importantly, ideas for new enterprises and community development projects will be formulated and implemented by the local communities themselves. This participatory process will in turn give the local communities more accountability and sense of ownership over the businesses and local projects.

Primary Beneficiaries and Other Affected Groups and Relevant Description

Other Key Stakeholders and Brief Description

1,000–2,000 of the bottom quartile poor households from 10 selected rayons will participate under the Livelihood Assistance Fund and will be helped to (i) start revenue-generating activities; (ii) participate in community-based savings groups. The fund will reintroduce these households into community life and participation in the decision-making process. Local NGOs, who will act as key implementers of the Project, will benefit from (i) specialist training in community-based business development and CSGs, (ii) networking and knowledge-sharing with other NGOs working on the same Project, and (iii) receiving equipment and knowledge material to support their activities and management.

State Program on Poverty Reduction and Economic Development (SPPRED) secretariat, MOED Regional and local governments in selected rayons that will be responsible for establishing of BSSCs and overall project implementation 50 communities that will be responsible for implementation of the specific livelihood activities and community-based savings groups

12

7. Coordination

The concept for the Project was shared with the Embassy of Japan10 in Azerbaijan, United Nations Development Programme, European Bank for Reconstruction and Development, and World Bank. During the project design phase, much attention was paid to coordination with the World Bank, particularly with regard to its Rural Investment Project. Despite the difference in the nature of the Rural Investment Project, cooperation with the World Bank was important to avoid overlaps in geographic coverage and poverty impact assessments. The Project will ensure complementarity with other external funding agencies, and will share information and lessons learned during project implementation.

8. Detailed Cost Table

Please refer to Appendix 1 for the detailed cost estimates, and Appendix 2 for the fund flow arrangement. C. Linkage to ADB Strategy and ADB-Financed Operations 1. Linkage to ADB Strategy

Document Document Number

Date of Last Discussion

Objective(s)

Country Strategy and Program Update (2005–2006)

Sec. M55-04

July 2004 Development of sustainable microfinance in rural areas is consistent with the ADB microfinance strategy,11 and with the importance accorded to integrated financial sector growth.

2. Linkage to Specific ADB-Financed Operation Project Name Azerbaijan Micro and Rural Finance Development Project

Project Number 38110

Date of Board Approval November, 2005 (tentative)

Loan Amount ($ million) $25 million 3. Development Objective of the Associated ADB-financed Operation:

The proposed Azerbaijan Micro and Rural Finance Development Project (MRFD Project) aims to deepen and broaden financial services in rural areas. Components include (i) a credit line of $11.25 million to microfinance institutions (MFIs) to increase their outreach in rural areas and assist the MFIs to achieve financial sustainability; (ii) subordinated debt of $11.25 million to private commercial banks to encourage innovations in financial services in the rural areas; and (iii) technical assistance of $2.5 million to provide (a) institutional strengthening for participating MFIs and banks, and (b) project management support.

10Mr. Seisuke Shimizu, First Secretary, Embassy of Japan. 11 ADB. 2000. Finance for the Poor: Microfinance Development Strategy. Manila.

13 The MRFD Project focuses exclusively on the supply side of financial services by

enhancing bank and MFI outreach into rural areas. The proposed JFPR activities cannot be implemented under the Project largely due to the resource constraints.

The JFPR Project will complement the MRFD Project by providing assistance for the

demand side. With training in business, business plan development, self-generated employment, and enhanced savings and credit culture, poor households will better understand and more effectively use financial services for income-generating activities. Participants under the JFPR Project are envisioned to link up to MFI lending programs or access new banking services directly after active participation in CSGs.

4. Main Components of the Associated ADB-Financed Operation:

No. Component Name Brief Description 1. The Microfinance

Development Facility This component will help meet the financing gap until MFIs can mobilize savings or until they are financially sound enough to attract additional investment; and expand MFI services to rural households. 1.1 Review, select, and fund MFIs so they can expand their loan portfolios 1.2 Monitor MFI project-related operations and make any necessary midcourse corrections

2. The Rural Banking Development Facility

This component will extend commercial bank coverage in rural areas by providing long-term loans for private commercial banks (PCBs) to invest directly in service expansion through new technology or branching arrangements. 2.1 Review, select, and fund PCBs for the proposed regional branch operations and e-banking expansion 2.2 Monitor PCB project operations and make any necessary midcourse corrections

3. Institutional Strengthening This component will deliver focused capacity building for MFIs and PCBs, and provide project management support. 3.1 Capacity-building training 3.2 MFI rating and diagnostic exercises, and related quarterly international performance reporting 3.3 Executive team-building and work-planning exercises

5. Rationale for Grant Funding versus ADB Lending

The nature of the activities proposed under the JFPR Project is more grassroot and participatory. This is a departure from the type of expertise required for the MFIs and PCBs. To achieve the dual objective of assisting both the financial intermediaries and the credit recipients, a JFPR grant can focus on the latter, introducing a comprehensive credit and savings culture on the local level.

Lastly, the activities proposed under the JFPR Project are conducted on a pilot basis and will be developed and tested for effectiveness. Once proven successful, projects can be

14

developed on a broad-based scale using a lending facility. The use of JFPR grant funding is thus justified for piloting an innovative poverty reduction methodology. D. Implementation of the Proposed Grant

1. Executing and Implementing Agencies

The SPPRED secretariat under MOED will be the Executing Agency (EA) for the grant (Appendix 3). A steering committee chaired by an executive director and including representatives from each of the implementing agencies (IAs) will be established. A project management unit (PMU) will also be set up to (i) oversee the implementation of project activities; (ii) coordinate with central, regional, and local governments; and (iii) maintain close linkages between the Project and the associated Rural and Microfinance Development Loan.

IAs will include a consortium of international and local NGOs that will attend to the day-

to-day project activities. A lead NGO will be selected as the overall coordinator for the activities at the regional and local levels. Due to the nature of the project components and activities, a lead NGO is deemed necessary to provide capacity building, interregional communication, and NGO coordination.

The PMU will be established under the SPPRED secretariat. The PMU will consist of

the international NGO, representatives from the local NGOs, an office manager, and government counterpart staff.

A project management specialist will be recruited by ADB to design the GIM before

inception and to set up the PMU at project inception. Details on the implementation arrangements, procedures, selection criteria, and monitoring mechanisms will be described in greater detail in the GIM.

The local NGOs will prepare monthly and quarterly progress reports. The lead NGO will

be responsible for compiling annual progress reports to be submitted to the SPPRED secretariat and ADB. The quarterly progress reports will include descriptions and evaluations of project activities implemented during the period. A project completion report will be prepared by the IA and submitted to the SPPRED secretariat and ADB within 3 months of project completion. The Project will also submit a project replication assessment report.

An independent public accountant will be engaged by the SPPRED secretariat to conduct yearly financial audits related to project implementation at the end of each year. Audit reports will be submitted to ADB within 6 months of the end of each year and will include a separate audit opinion on the use of special account and statement of expenditures procedures.

2. Risks Affecting Grant Implementation

Type of Risk Brief Description Measure to Mitigate the Risk Political and Institutional

Government budget commitment to the Project and qualified counterpart staff assigned to the Project at the local level BSSCs are not self-sustaining after 2 years.

MOED is highly committed to the Project and has declared continuous support through provision of funds, skilled counterpart staff, and mobilized local governments and communities.

15 Governance Transparency and accountability of

the IAs and EA

Transparency in the project selection process and the use of grant funds

ADB’s close monitoring of the use of project funds and the detailed approval procedure for specific project activities will provide adequate safeguards. Submission of audited annual financial reports and NGOs’ project progress reports will also facilitate monitoring.

Public Commitment Active participation of all beneficiary rayons, local government, and community/village leaders

Regional offices, the project steering committee and the PMU will be actively involved in the design and implementation of the components and the related training to familiarize all relevant stakeholders with the Project.

Local technical capacity

Development of local capacity for microfinance and microcredit related activities may be more time consuming than expected.

Domestic consultants and/or NGOs will receive training from the international experts. By sharing information on international best practices and local conditions, the domestic and international experts can work together to achieve the optimal outcome for the Project.

3. Incremental ADB Costs

Component Incremental Bank Cost Amount requested $75,000

Justification

Assistance will be required for the following: (i) Staff consultant to prepare detailed project

implementation manual and associated workshops (ii) Staff consultant required to assist with key technical

aspects that arise, in which local NGOs should be supported and trained

Type of work to be rendered by ADB

The two project staff consultants will be recruited by ADB under ADB’s Guidelines on the Use of Consultants. The consultants will (i) develop a grant implementation manual (GIM); (ii) work with ADB-financed counterpart project officers in setting up the project implementation unit; (iii) together with the lead NGO, prepare work plan and implementation schedule; (iv) work with the lead NGO in procuring project equipment and recruiting local NGOs based on ADB’s relevant policies and guidelines; (v) monitor, supervise, and coordinate overall project implementation and progress; (vi) coordinate with ADB, the PMU, and the counterpart project officers;

16

and (vii) assist ADB in conducting inception and regular review missions.

4. Monitoring and Evaluation

Key Performance Indicator Reporting Mechanism Plan and Timetable for M&E One thousand participants engaged in village-based CSGs by second year, with at least 20% increase thereafter

Inception report Progress reports Annual baseline survey and impact assessment Annual project review reports

Project inception stage Quarterly Annual Annual

Four hundred extremely poor households trained through the BSSC by the second year and Livelihood Assistance Fund delivered to 100 households for income-generating activities

Inception report Progress reports Annual baseline survey and impact assessment Annual project review reports

Project inception stage Quarterly Annual Annual

Training-of-trainers courses for each component in the 10 beneficiary rayons Number of workshops conducted by trainers each year and number of participants

Inception report Progress reports Annual project review reports

Project inception stage Quarterly Annual

Livelihood Assistance Fund revolved at least once during project life

Progress reports Annual project review reports

Quarterly Annual

At least 30% of women participants in BSSC training activities and in CSGs

Progress reports Annual baseline survey and impact assessment Annual project review reports

Quarterly Annual Annual

Collect baseline indicators and annual updates for level of outreach including: Number of beneficiary households (BSSC and Livelihood Fund) Number of savers and amount of savings (CSGs) Repayment (Livelihood Fund)

Inception report

Annual baseline survey Progress reports Annual project review reports

Project inception stage

Annual Quarterly Annual

17 5. Estimated Disbursement Schedule

Fiscal Year Amount ($) 2005 150,000

2006 450,000

2007 650,000

2008 250,000

Total Disbursements 1,500,000 ----------------------------------------------------------------------------- Appendixes

1. Detailed Cost Estimates 2. Fund Flow Arrangements 3. Implementation Arrangements

18 Appendix 1

DETAILED COST ESTIMATES Table A1.1: Summary Table

Component A

Business Support Services

Component B Community Based Savings Groups

Component C Livelihood

Assistance Fund

Component D Project

Management

Total (Input)

Percent

1. Civil Works (incl. technical surveys and designs and supervision of constructions)

0

0.0

2. Equipment and Supplies (e.g., power tools, turbines, excavation and construction tools, agricultural tools and equipment, communications devices, audio/visual, computing and other office equipment, furniture, etc.)

58,000

6,000

30,100

94,100

6.3

3. Training, Workshops, Seminars, Public Campaigns (e.g., resource persons, technical training specialists, community mobilizers and organizers, venue rental, travel, food and accommodation for participants, and other related costs)

66,000

50,000

116,000

7.7

4. Consulting Services (e.g., for surveys, assessments and reviews, technical specialists, advisors, external auditors, etc., including related costs such as travel accommodation and per diem)

156,00

84,000

302,900

542.900

36.2

5. Grant Management (management of the specific components and of the PIU including wages for project staff, travel costs and per diem, office equipment, rental, O&M, and recurrent costs, etc.)

0

0

72,000

72,000

4.8

6. Other Inputs: Central Revolving Fund-Seed Capital 600,000 600,000 40.0

7. Contingencies (0.10 % of total estimated grant fund) Use of Contingencies requires prior approval from ADB.

50,000

10,000

15,000

75,000

5.0

Subtotal JFPR grant financed

330,000

150,000

600,000

420,000

1,500,000

Government Contribution (e.g., salaries for government staff, provision of project office, land acquisition, participation in workshops/meetings)

72,000

115,200

187,200

10.2

Other Sources of Contributions (e.g., NGOs, multi- and bilateral aid agencies): (e.g., costs for O&M, livelihood skills development and training, logistic, administration, infrastructure assistance, technology, material and equipment supply, etc.)

Community’s Contributions (mostly in kind e.g., participation in all training and community development, land development, and in-kind labor contribution through food for work)

150,000

150,000

8.2%

Total Estimated Costs

402,000

150,000

750,000

535,200 1,837,200

ADB=Asian Development Bank, NGO=nongovernment organization, PIU=project implementation unit, O&M=Operations and Management

Inputs / Expenditure Category

Grant Components

Appendix 1 19

DETAILED COST ESTIMATES Table A1.2 Cost Estimates by Component

Costs Contributions Code Supplies and Services Rendered Unit Quantity

Units Cost

per Unit Total

$ JFPR Government Other

Sources Communities

Amount Method of Procurement

Component A. Business Support Services Subtotal 352,000 280,000 72,000 0 0 1.1

Civil Works

1.1.1

e.g., square meter

0

0

0

0

1.2

Equipment and Supplies

58,000

1.2.1 Furniture set 20 500 10,000 10,000 Direct purchase

1.2.2 Office rental Annual rental 30 2,400 72,000 72,000 1.2.3 Computers: installation and maintenance set 30 1,500 45,000 45,000 Direct purchase

1.2.4 Training equipment (overhead projectors, screen, etc.)

set 10 300 3,000 3,000 Direct purchase

1.3

Training, Workshops, Seminars

66,000

1.3.1 Training aids and materials (stationery, writing materials, etc.)

Lump sum/year

40 750 30,000 30,000 Direct purchase

1.3.2 Workshops/training for local communities 1.3.2.1 Awareness campaign Workshop 60 100 6,000 6,000

1.3.2.2 Regional business assessments and action plans

1.3.2.3 Basic financial management Workshop 60 100 6,000 6,000

1.3.2.4 Leadership and organizational management Workshop 60 100 6,000 6,000 1.3.2.5 Gender and environment Workshop 60 100 6,000 6,000

1.3.2.6 Small- and micro-enterprise development Workshop 120 100 12,000 12,000 1.4

Consulting Services (domestic NGO, or experts)

156,000

1.4.1

Remuneration, travel, and per diems

person-month

120

1,300

156,000

156,000

QCBS, ADB Guidelines

20 Appendix 1


Units Cost

per Unit Total

$ JFPR Government Other

Sources Communities


Component B. Community Based Savings Groups Subtotal 140,000 140,000 0 0 0 2.1

Civil Works

2.1.1

e.g. square meter

0

0

2.2

Equipment and Supplies

6,000

2.2.1

Training equipment (overhead projectors, screen, etc.)

set 10 300 3,000 3,000 Direct purchase

2.2.2

Communications equipment set 10 300 3,000 3,000 Direct purchase

2.3

Training, Workshops, Seminars

25,000

2.3.1

Training aids and materials (stationery, writing materials, etc.)

Lump sum/year

10 1,000 10,000 10,000 Direct purchase

2.3.2

Training of trainers (CSG establishment, setting CSG norms, rules and regulations)

Training session

200 75 15,000 15,000

2.4

Establishing Savings Groups

25,000

2.4.1

Awareness building campaign Workshop 150 100 15,000 15,000

2.4.2

Leadership and organizational management Workshop 100 100 10,000 10,000

2.5

Consulting Services (domestic expert)

84,000

2.5.1

Remuneration, travel and per diems

person-month

36

2,333

84,000

84,000

QCBS, ADB Guidelines

Component C. Livelihood Assistance Fund Subtotal 750,000 600,000 0 0 150,000 3.1

Livelihood Assistance Fund

3.1.1

Microfinance fund Household 1,900 300 570,000 570,000

3.1.2

Participatory training for selection of households

Workshop 100 300 30,000 30,000

Borrower contribution (20% cash or in-kind)

Household 1,900 79 150,000 150,000

Appendix 1 21


Units Cost

per Unit Total

$ JFPR Govern-

ment Other

Sources Communities


Component D. Grant Management, Monitoring and Audit

Subtotal 520,200 405,000 115,200 0 0

4.1 Project Administration (including support staff, equipment, and supplies)

30,100

4.1.1 Local office rental (incl. utilities) Annual rental 4 6,000 24,000 24,000 4.1.2 Wages and salaries of support staff Annual cost @

2 staff 8 8,400 67,200 67,200

4.1.3 Travel cost Annual cost 4 6,000 24,000 24,000 4.1.4 Furniture set 5 560 2,800 2,800 Direct purchase

4.1.5 IT (fax machine, printer) set 1 400 400 400 Direct purchase 4.1.6 IT (computers, support services) set 5 2,100 10,500 10,500 Direct purchase

4.1.7 Translation services day 120 70 8,400 8,400 4.1.8 Operational costs Annual cost 4 2,000 8,000 8,000

4.2 Audit and Monitoring 72,000

4.2.1 External audit/public accountant Annual audit 4 12,000 48,000 48,000 QCBS, ADB Guidelines

4.2.2 Baseline survey and impact assessment Annual assessment

4 6,000 24,000 24,000 QCBS, ADB Guidelines

4.3 Management and Coordination of this Component

302,900

4.3.1 Microfinance and livelihood development NGO (international) intermittent

person-month 20 8,000 160,000 160,000 QCBS, ADB Guidelines

4.3.2 Gender specialist (domestic) person-month 36 1,250 45,000 45,000 QCBS, ADB Guidelines 4.3.3 Community development specialist (domestic) person-month 48 1,250 60,000 60,000 QCBS, ADB Guidelines

4.3.4 Project manager person-month 48 790 37,900 37,900 QBS, ADB Guidelines Components A to D = Subtotal Subtotal 1,762,200 1,425,000 187,200 0 150,000 Contingency (Maximum 10% of total JFPR

Contribution) 75,000 75,000

Total Grant Costs Total 1,837,200 1,500,000 187,200 0 150,000 Incremental Cost Details Project management specialist (preparation of

GIM, reviews) person-month (intermittent)

3 12,500 37,500 37,500

Participatory specialist person-month (intermittent)

3 12,500 37,500 37,500

Total Incremental Costs 75,000 75,000 ADB=Asian Development Bank, CSG=community savings group, GIM=grant implementation manual, IT=information technology, JFPR=Japan Fund for Poverty Reduction, NGO=nongovernment organization, QCBS=quality and cost based selection.

Appendix 2

22

FUND FLOW ARRANGEMENTS 1. Funds will be disbursed under the terms of a contractual arrangement with a government-approved party acceptable to the Asian Development Bank (ADB), through the project management unit (PMU), which will maintain a separate Japan Fund for Poverty Reduction (JFPR) imprest account at a commercial bank acceptable to ADB. The JFPR imprest account will be established, managed, replenished, and liquidated in accordance with ADB’s Loan and Disbursement Handbook and detailed arrangements agreed upon by the Government and ADB. Local nongovernment organizations (NGOs) will prepare and submit to the lead NGO the budget requirements for the proposed project activities and submit the budget requirements to the lead NGO. The lead NGO will consolidate all budget requirements and forward them to the JFPR project consultants for review. Upon approval of the consolidated requirements, the Executing Agency (EA) will submit to ADB a formal request for fund release. The approved budget will be disbursed to the NGO consortium, which will maintain a separate JFPR account for both the lead and local NGOs. The initial amount to be deposited into the JFPR imprest account will be based on estimated expenditures for the first 6 months or 10% of the grant amount, whichever is lower, but not exceeding the equivalent of $50,000. The statement of expenditures (SOE) procedure will be used to liquidate/replenish the imprest account. The use of the JFPR account, imprest account, and SOE procedure will be audited annually by auditors acceptable to ADB. A separate audit opinion on the use of the JFPR account, imprest account, and SOE procedure should be included in the annual audit report. 2. Replenishment will be subject to the liquidation of expenditures. The accounts should be replenished regularly to ensure that sufficient funds are always available. All withdrawal applications will be monitored by the PMU and approved by the EA. The designated commercial bank will provide monthly statements of the imprest account to the EA and PMU, which will claim liquidation on the basis of the statement and other supporting documents. Arrangements such as the flow and administrative procedures will be detailed in the grant implementation manual. The schematic fund flow and implementation arrangements for the JFPR Project are shown in Figures A2.1 and A2.2. 3. As confirmed by the Government of Japan, interest earned on the JFPR imprest account should be returned to the JFPR fund. At the end of the Project, such interest should be remitted to the JFPR fund account maintained at ADB.

Appendix 2

23

Figure A2.1: Fund Flow Arrangement

Memorandum of Understanding

Ministry of Economic Development (Executing Agency)

Signing of Collaboration Agreement

Project Management, Monitoring and Auditing

$405,000 Incremental Cost

$75,000

Asian Development Bank

Establishment of Imprest Account

Component 1 Business Support Service

Centers

$280,000

Component 2 Community Savings

Groups

$140,000

Contingencies

$75,000

Component 3 Livelihood Assistance

Fund

$600,000

Appendix 2

24

Figure A2.2: Project Implementation and Fund Flow

Memorandum of Understanding

Ministry of Economic Development

(Executing Agency)

Asian Development Bank

Signing of Collaboration Agreement

Selection of Lead Nongovernment Organization

(NGO)

Define Selection Criteria and Select NGOs

First Year Project Plan

First Year Project Completion

Second Year Project Plan

Second Year Project Completion

Third Year Project Plan

Third Year Project Completion

Fourth Year Project Completion

Fourth Year Project Plan

Establish Project Steering Committee (PSC) and

Project Management Unit (PMU)

Approval by EA, PSC and ADB

Establish Imprest Account

First Year Disbursement

Second Year Disbursement

Fourth Year Disbursement

Third Year Disbursement

Project Completion

Review and approval by EA, PSC and ADB

Financial Audit and Annual Report







Appendix 3

25

IMPLEMENTATION ARRANGEMENT

A. Executing and Implementing Agencies

1. The State Program on Poverty Reduction and Economic Development (SPPRED) secretariat under the Ministry of Economic Development (MOED) will be the Executing Agency (EA) for the grant. A steering committee chaired by an executive director and including representatives from each of the implementing agencies (IAs) will be established (Figure A3.1). The steering committee and the EA will be responsible for the overall coordination, supervision and smooth implementation of the Project.

2. IAs will include a consortium of international and local nongovernment organizations (NGOs) who will attend to the day-to-day project activities. The international NGO will be selected as the overall coordinator for activities at the regional and local levels, including the establishment of business support service centers (BSSCs) and community-based savings groups (CSGs). The NGOs will provide capacity building for regional and local staff, facilitate inter-regional communication and coordination of project activities.

B. Grant Implementation Design

3. Before project implementation starts, a project management specialist will be recruited to assist in the design and specification of a grant implementation manual (GIM). The GIM will specify all aspects of implementation arrangements, including specific mechanisms for establishing and operating the BSSCs, CSGs and the Livelihood Assistance Fund. Using examples from international best practices for each component, the project management specialist, in conjunction with the Asian Development Bank (ADB), will design the procedures and the guidelines for implementing each component.

C. Project Management

4. A project management unit (PMU) will be set up to (i) oversee the implementation of project activities; (ii) coordinate with central, regional, and local governments; and (iii) maintain close linkages between the Project and the associated Rural and Microfinance Development Loan. The PMU will consist of the lead international NGO, representatives from the local NGOs, an office manager, and Government counterpart staff. To facilitate the start-up of the PMU, a project management specialist will be recruited by ADB.

D. Procurement and Consulting Services

5. Consistent with Japan Fund for Poverty Reduction requirements, all procurement under the Project will be in accordance with ADB’s Guidelines for Procurement. Goods and services valued at less than $100,000 will use ADB’s direct purchase procedure. Goods and services above $100,000 will be procured using ADB’s international shopping procedure.

6. International and local NGOs and domestic experts will be recruited by ADB through joint consultation with the EA and in accordance with ADB’s Guidelines on the Use of Consultants. Four main consultant contracts are anticipated for the following components: (i) business support services development (domestic NGOs); (ii) community-based savings groups (domestic expert); and (iii) grant management (international NGO, community development specialist). A domestic project manager will also be recruited to oversee the day-to-day

Appendix 3

26

activities in the PMU. The GIM will describe in detail the number of NGOs and the terms of reference for the NGOs. The GIM will further elaborate on the detailed implementation and procurement arrangements.

E. Reporting and Project Monitoring

7. The local NGOs will prepare monthly and quarterly progress reports. The quarterly reports will include descriptions and evaluations of project activities implemented during the period. The PMU will be responsible for compiling annual progress reports to be submitted to the EA and ADB. A project completion report will be prepared by the IA and submitted to the EA and ADB within 3 months of project completion. The Project will also prepare a project replication assessment report.

8. An independent public accountant will be engaged by the EA to conduct yearly financial audits related to project implementation. Annual audits will be undertaken at the end of each year of project implementation. Audit reports will be submitted to ADB within 6 months of the end of each year. Audit reports should include a separate audit opinion on the use of special account and statement of expenditures procedures.

Appendix 3

27

Figure A3.1: Institutional Structure for Project Implementation

ADB

Project Management Unit Project Steering Committee

International NGO (IA) Local NGO (s)

(IA) MOED (EA)

National

Livelihood Assistance

Fund

PMU

MOED

Regional

Local

Business Support Services

NGO

Local MOED

Ex Comm

Community Savings Groups

NGO

Municipal Gov’t

The Poor and

Extremely Poor

ADB=Asian Development Bank, EA=Executing Agency, IA=implementing agency, MOED=Ministry of Economic Development, NGO=nongovernment organization, PMU=Project Management Unit

Appendix 3

28

Figure A3.2: Sequencing of Project Implementation

Phase 1

Phase 2

Phase 3

Awareness Building Campaign for Japan Fund for Poverty Reduction Project

Community and Local Government Mobilization

Participatory Selection of Extremely Poor Households

Livelihood Assistance Fund Disbursements

Establishment of Business Support

Centers

Establishment of Community

Savings Groups

Training and Livelihood Development for Extremely

Poor Households

Training for Management and Operation of Community

Savings Groups

proposed grant assistance to azerbaijan for the mahalla

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