world bank document€¦ · the overall objective of the project is to improve the standard of...

Document of

The World Bank

Report No: 25130

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN THE AMOUNT OF EURO 50.80 MILLION(US$ 50.00 MILLION EQUIVALENT)

TO THE

REPUBLIC OF BULGARIA

FOR A

SOCIAL INVESTMENT AND EMPLOYMENT PROMOTION

November 21, 2002

Human Development Sector UnitSouth Central Europe Country UnitEurope and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 11/21/2002)

Currency Unit = Bulgarian LevI BGN = US$0.51968US$1 = BGN 1.92425

FISCAL YEAkJanuary 1 - December31

ABBREVIATIONS AND ACRONYMS

ALS Active Labor Services LSMS Living Standard Measurement StudyALMPs Active Labor Market Programs M&E Monitoring and EvaluationALMSs Active Labor Market Services MIS Management Information SystemALSD Active Labor Services Department MOE Ministry of the EnvironmentBALMI Bulgarian Active Labor Market MOLSP Ministry of Labor and Social Policy

InitiativeBIA Beneficiary Impact Assessments MTR Mid-Tern ReviewBNB National Bulgarian Bank NAMRB National Association of the Municipalities in the

Republic of BulgariaBoQ Bills of Quantity NGOs Non-Governmental OrganizationsCAS Country Assistance Strategy OCRDs Oblast Councils for Regional DevelopmentCEM Country Economic Memorandum PAL Programmatic Adjustment LoanCFAA Country Financial Accounting PLEDGE Partners in Local Economic Development and

Assessment Govemment EffectivenessCIDI Community Infrastructure for PLW Project Launch Workshop

Development InitiativeCPP Community Participation in PMC Project Management Committee

ProcurementCRDs Councils for Regional Development PMR Project Management ReportsEA Employment Agency PMU Project Management UnitECA Europe and Central Asia POM Project Operational ManualEIAR Environmental Impact Assessment RIF Regional Initiatives Fund

ReportEU European Union SA Special AccountFMRs Financial Monitoring Reports SC Steering CommitteeIA Implementing Agency STEP Social Investment and Employment Promotion

IDF Institutional Development Fund SIF Social Investment FundIEC Information, Education and SMEs Small and Medium Sized Enterprises

CommunicationJPRs Joint Portfolio Reviews SOE Statement of ExpensesJSDF Japan Social Development Fund TEP Temporary Employment ProgramLEA Local Employment Agency UNDP United Nations Development ProgramLEB Labor Employment Bureaus USAID United States Agency for Intemational

DevelopmentLIL Leaming and Innovation Loan VSL Variable-Spread Loan

Vice President: Johannes F. LinnCountry Director. Andrew N. Vorkink

Sector Director: Annette DixonSector Manager: Michal Rutkowski

Program Team Leader- Sandor SiposTask Team Leader: Peter Pojarski

BULGARIASOCIAL INVESTMENT AND EMPLOYMENT PROMOTION

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 32. Main sector issues and Govemrnent strategy 43. Sector issues to be addressed by the project and strategic choices 7

C. Project Description Summary

1. Project components 82. Key policy and institutional reforms supported by the project 93. Benefits and target population 94. Institutional and implementation arrangements 10

D. Project Rationale

1. Project alternatives considered and reasons for rejection 142. Major related projects financed by the Bank and other development agencies 153. Lessons learned and reflected in the project design 154. Indications of borrower commitment and ownership 195. Value added of Bank support in this project 20

E. Summary Project Analysis

1. Economic 202. Financial 203. Technical 204. Institutional 205. Environmental 246. Social 287. Safeguard Policies 30

F. Sustainability and Risks

1. Sustainability 312. Critical risks 31

3. Possible controversial aspects 32

G. Main Conditions

1. Effectiveness Condition 332. Other 33

H. Readiness for Implementation 33

I. Compliance with Bank Policies 33

Annexes

Annex 1: Project Design Summary 34Annex 2: Detailed Project Description 38Annex 3: Estimated Project Costs 47Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 48Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 59Annex 6: Procurement and Disbursement Arrangements 60Annex 7: Project Processing Schedule 83Annex 8: Documents in the Project File 85Annex 9: Statement of Loans and Credits 86Annex 10: Country at a Glance 88Annex 11: General System of Indicators for Poverty Ranking of SIF Micro-projects 90Annex 12: General System of Indicators for Poverty Ranking of SIF Micro-projects 93

MAP(S)32130

BULGARIASocial Investment and Employment Promotion

Project Appraisal DocumentEurope and Central Asia Region

ECSHD

Date: November 21, 2002 Team Leader: Peter PojarskiSector Manager/Director: Annette Dixon Sector(s): Central government administration (60%),Country Manager/Director: Andrew N. Vorkink Sub-national government administration (40%)Project ID: P069532 Theme(s): Infrastructure services for private sectorLending Instrument: Specific Investment Loan (SEL) development (P), Civic engagement, participation and

community driven development (P)

[X] Loan [1 Credit [ Grant [ ] Guarantee [ Other:

For Loans/CreditslOthers:Loan Currency: EuroAmount (US$m): 50.00

Borrower Rationale for Choice of Loan Terms Available on File: 1 Yes

Proposed Terms (IBRD): Variable-Spread Loan (VSL)Grace period (years): 4 Years to maturity: 17Commitment fee: 0.75% Front end fee (FEF) on Bank loan: 1.00%

BORROWER 15.47 1.28 16.74IBRD 23.70 26.30 50.00Total: 39.16 27.58 66.74

Borrower: REPUBLIC OF BULGARIAResponsible agency:Ministry of Labor and Social Policy (MOLSP)Address: 2, Triaditza St., Sofia 1000Contact Person: Ms. Lydia Shouleva, Deputy Prime Minister and Minister of Labor and Social Policy

Tel: 359-2-9332500 Fax: 359-2-9861318 Email:

Estimated Disbursements ( Bank FY/US$m):4,F~~Y l)W c' - -2 0 04 .,;120_ 5MQ 11~20 .9 7 5 i!,gi't 'x -_a

Annual 5.00 10.00 12.00 15.00 8.00Cumulative 5.00 15.00 27.00 42.00 50.00

Project implementation period: 5 yearsExpected effectiveness date: 03/31/2003 Expected closing date: 12/31/2007

OCSPAD Fom P. M- 20tO

A. Project Development Objective

1. Project development objective: (see Annex 1)

The overall objective of the project is to improve the standard of living of people who are locked inpersisting "pockets" of poverty in Bulgaria, concentrated regionally, among the long-term unemployed,and among specific ethnic minorities (Roma, Turkish). Because these targeted vulnerable groups sufferfrom multiple disadvantages (e.g., exclusion, weak social capital, poor access to markets and basicservices, low employment, low income), the project will achieve its objective through complementingthe existing, relatively good social protection system by offering a range of instruments, all focused onbuilding the assets, individual and communal, of poor and vulnerable people living in these pockets.

The Community Infrastructure for Development Initiative (CIDI) component will address issuesrelated to empowerment and integration of targeted communities and of inadequate access to basicinfrastructure and services, by allowing communities to identify and to manage, themselves,development investments of greatest local priority. It is expected that the investments will also laythe groundwork for improved market access and human capital development-preconditions toenhancing employment opportunities and reducing poverty.

The Bulgarian Active Labor Market Initiative (BALMI) component will identify medium-termeconomic and labor trends information and provide active labor services to assist economicallydisadvantaged individuals in poor communities to extend and use their human capital productively,particularly in the context of changing economic and labor market conditions.

These mutually reinforcing targeted interventions are designed to secure and deliver additional help tovulnerable communities to leverage their own efforts to escape poverty. The actual combination of theseinterventions will be determined by the participating communities and other users during projectimplementation making the project flexible and demand driven. In addition to that, the project will alsoprovide support and financial resources to the ongoing decentralization process and help empowerdemocratically elected local governments.

2. Key performance indicators: (see Annex 1)

Overall project performance will be judged by the additionality of resources provided to poorcommunities and the effectiveness of the use of these additional resources in reducing poverty andincreasing social capital in the target hard-to-reach vulnerable groups. Success will be measured throughreduced long-term poverty and unemployment in the targeted poor communities.

Output Indicators:

CIDI: Number of community-based organizations established, number of community sub-projectscompleted, number of partnerships with private and public institutions established.

BALMI: Short term labor market survey designed, pilot tested, and semi annual surveys completed inthree regions with above average unemployment and poverty levels. Administrative frameworkdesigned for Active Labor Market Programs (ALMPs), and ALMPs delivered to approximately 25,000unemployed with first priority to those in communities with higher than average unemployment andpoverty rates, and the gross and net impact of services determined (i.e. impact on employment andwages of participants). Number of ALMPs contracts completed successfully (i.e. meeting agreedperformance criteria; the ratio between successful and unsuccessful contracts.

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Impact/Outcome Indicators:

Overall: Lower poverty headcount in targeted poor communities and shorter spells spent asunemployed or under the poverty line; more effective partnership between central government and localcommunities in addressing local problems (from beneficiary assessment); more vibrant communitydriven development in targeted poor communities.

CIDI: Number of beneficiaries served; number of community level maintenance committees in placewith capacity to manage operation and maintenance of assets; level of satisfaction of beneficiaries; levelof social capital and civic engagement in communities (measured by beneficiary assessments).

BALMI: More comprehensive labor market and economic information available at selected districtswith above average unemployment and poverty levels to refine economic and human resourcedevelopment planning including operation of active labor services. Active labor services provided toabout 25,000 unemployed with gross employment/job creation data as follows, and net impactsignificantly positive for the majority of participants -- employment services: 25 percent placement,retraining; 50 percent placement for institutional; and 75 percent for on-job training; small businessassistance: 10 percent business start-up, incubators: 90 percent business survival rate after one year forthe businesses in the incubator.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 23927-BUL Date of latest CAS discussion: May 9, 2002

The joint IBRD-IFC CAS for FY02-04 identifies the Social Investment and Employment PromotionProject (SIEP) as the key Bank investment lending instrument in supporting Bulgaria to reduce poverty,to develop Bulgaria's social capital and to improve the status of minorities and women. The jointIBRD-IFC CAS recognizes that a special instrument is needed to reach the pockets of long-term povertyas four years of economic growth reduced transient poverty by almost two thirds but failed to preventdoubling the size of the pockets of long-term poverty, especially among ethnic minorities, long-termunemployed, large households concentrated in certain geographical areas (for example Plovdiv, Varnaand Bourgas). To address this problem, the CAS expects SIEP to upscale the successful RegionalInitiatives Fund (RIF) LIL project to effective size. Although RIF was proved to be very effective inreaching the most vulnerable groups and communities, it was too small to prevent the formation andexpansion of pockets of long-term poverty. STEP will make significantly more resources available tothese communities for demand driven projects in a broader spectrum of activities that are relevant toreducing long-term poverty and accelerating social capital formation in these vulnerable communities.SIEP will also introduce community driven development to enhance the use of these additionalresources. SEEP will seek increased participation of women in the identification and monitoring ofcommunity-based projects. In this respect, STEP will also play an important role in advancing the genderagenda of the joint IBRD-IFC CAS.

The joint IBRD-IFC CAS argues that by supporting community driven development in poorcommunities and municipalities, SIEP will also prepare the ground for the third ProgrammaticAdjustment Loan (PAL) which is scheduled for FY03. After the expected improvements in localcapacities to respond to economic and social challenges that SIEP will catalyze and facilitate, PAL IHwill be able to focus on labor market and social policies, with particular attention to long-termsustainability of the social protection system and the restructuring and consolidation of the health and

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education sectors.

By helping to improve the circumstances of the poor communities, especially the Roma and Turkishminorities, SIEP will also contribute to another priority of the CAS--assisting Bulgaria's accession tothe EU. Improvement in the status of the minorities and children is tightly monitored during theaccession process. SIEP, along with the STEP related IDF and JSDF grants aimed at improving theintegration of ethnic minorities and building of positive social capital in poor and marginalizedcommunities will help position Bulgaria favorably in this process.

Preparing for EU accession as a priority of the CAS is also addressed through the overall strengtheningof the SIF institution that will result directly from project implementation. In addition to covering theimmediate short- and medium-term poverty alleviation objectives, in the future, a strong SIF could growinto a broader instrument for channeling EU structural funds. Building appropriate instruments forimplementing EU structural funds is one of the significant accession challenges before Bulgaria.

2. Main sector issues and Government strategy:

The October 2001 Executive Program of the Republic of Bulgaria, identifies developing social capitaland improving social integration as the next most important priority after maintaining macroeconomicstability and creating a conducive environment for investment and broad based economic growth. TheGovernment's social capital and social integration agenda includes protecting vulnerable groups andadvancing them with various instruments based on continuing reforms of the social protection system,the education and health sectors and the preservation of the historical and cultural heritage of allBulgarian citizens. Enhancing the flexibility of the labor market, developing a vibrant social dialogueand continuing the reforms of the social protection system to better address the needs of the mostvulnerable groups are at the center of the social development objectives of the Bulgarian Government.SIEP will be the primary investment instrument with which the Bank will support the Government'sefforts to assist people and communities in long-term poverty and on the margin of the society.

Pockets of Poverty Persist and Threaten Further Progress

A welcome ebbing of transient poverty with sustained growth exposes higher and longer-term thanpre-crisis poverty in persistent pockets, and a large number of people just above the poverty line. This isa special challenge to further progress in fighting poverty in Bulgaria. The background LSMS for theupdated Bulgaria Poverty Assessment identified that in 2001, after four years of successful economicreforms, poverty is still more than twice as high in Bulgaria than it was in 1995 (12 percent versus 5.5percent), just before the economic crisis skyrocketed poverty levels to 36 percent in 1997 (measured bythe same yardstick held constant over the years at two thirds of 1997 per capita consumption). Forwardlooking economic reforms not only brought about four years of growth (1998-99: 3 percent p.a.;2000-01: 5 percent p.a.) and reduced transient poverty by two thirds but also reduced the depth andseverity of poverty compared to the crisis years. However, with two thirds of 2001 per capitaconsumption levels rather than constant 1997 consumption, the poverty rate would still be above 20percent. Apparently, this relative poverty line, applied to current consumption levels, has a greaterimpact on subjective perceptions of social status than consumption levels from the peak of the crisisfour years before. Especially, because the overall consumption is still about 10 percent lower, in realterms, than in 1995, before the crisis, and because a large number of people have been lifted just slightlyabove the poverty line. The concentration of a large group of low income people around any sensiblepoverty line is well illustrated by the fact that while a US$2.15 per day absolute poverty line wouldresult in only 6.4 percent poverty in Bulgaria, a somewhat higher US$4.3 PPP poverty line used in ECAwould show almost 30 percent of the Bulgarian population poor.

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The decline in measured poverty rates has taken place within the context of increasing unemployment,suggesting a large role for social assistance income, informal employment and remittances in mitigatingthe impact of labor shedding in the formal sector. Poverty is highest among unemployed andeconomically inactive people. The share of households headed by unemployed person grew from 7percent in 1997 to 18.6 percent in 2001, and individuals in those households whose head is unemployedmake up almost 40 percent of the poor. In the context of increasing unemployment, the impact of socialprotection transfers on poverty was sizable. Bulgarian households, on average, derive 12 percent oftheir income from social assistance. The share of household income derived from social assistancejunps to more than one third among the poor. Pre-transfer poverty rates in the group receiving socialbenefits are estimated at 20.6 percent versus 14.9 percent after transfer.

Basic Unemployment Data by Year__________________________________ _ |1999 2000 2001Total Unemployed Persons 527 058 693 481 661 100Unemployment % 13.8% 18.1% 19.4%Absolute size of Working Population 2 811 000 2 735 500 2 751 500Absolute size of Labor Force 3 387 900 3 272 200 3 412 600Working population/labor force ratio 83% 83.6% 80.6%Number of unemployed receiving benefits 146 023 185 580 149 892Percentage of unemployed receiving 27.7% 26.8% 22.7%benefits

Break-out by Type of Unemployment, Age, and Education by Year_____ _[ 1999 J 2000 2001| Nomninal Ratio ] Nominal Ratio Nominal Ratio

Type of unemployed _____4

Long term over 12 months 166 917 31.7 % 257243 37.1% 410300 62.1%Male 244 069 46.3% 327 913 47.3% 363 200 54.9%Female 282 989 53.7% 365569 52.7% 297 800 45.1%By Age>20 25 556 4.9% 29 346 4.2% 37 044 5.6%20-29 139 749 26.5% 176 149 25.4% 1190 455 28.8%30-44 208 201 39.5% 265 588 38.3% 229 713 34.8%45-54 133 982 25.4% 186 064 26.8% 151 902 23%Over 55 19 571 3.7% / 36 336 5.2% 51 985 7.9By Education _ X X XPrimary or less 301 595 57.2% 381 466 55% 44800 6.8%Specialized Secondary * 154 482 29.3% 210 647 30.4% 241 400 36.5%Secondary 41 408 7.9% 56 141 8.1% 109300 16.5%Lower Sec. _ _ 197 700 29.9%Higher 29 573 5.6% 45 227 6.5% j 67800 10.3%

*Secondary schooling with specialized professional/vocational profile.

Pockets of poverty are concentrated regionally and among ethnic groups and affect children andlarge families. Poverty rates in Plovdiv and Bourgas are four times higher than in Sofia with ruralpoverty reduced much less than urban poverty. Ethnic minorities that make up about 15 percent of the

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population are particularly affected. The 2001 data indicate that the Roma are ten times more likely tobe poor than ethnic Bulgarians while the chances of ethnic Turks to be poor are four times higher.Poverty rates among female headed urban households are twice as high as among male headed ones.Children 10 and below are only 10 percent of the population while they make up almost 20 percent ofthe poor. Poverty rates are the highest among younger, less educated individuals: almost two thirds ofthose between 18-21 with primary education or less are poor in Bulgaria. Multivariate analysis showedthat ethnicity, on its own, is a very strong factor in determining poverty status. Even after controlling forall other socio-demographic factors, Roma households are still likely to consume only two thirds ofsimilar households of non-Roma descent.

The high concentration of poverty in certain population groups poses a special social policy challenge,as long-term poverty often leads to inter-generational reproduction of poverty, nurturing a "cultureof poverty", potentially threatening social cohesion and making fighting poverty more difficult.Already, there is some disturbing evidence of declining educational attainment among the poor andethnic minorities. While enrollment rates in basic education have increased slightly for the country atlarge, enrollment rates for poor children have fallen ten percentage points, just over four years, from 84percent in 1997 to 74 percent in 2001. The trend in secondary education is even worse with anation-wide loss of about 26 percentage point in the net enrollment of the poor (from 60 percent to 34percent) during the same four years. Ethnic minorities hardly make it for higher education at all. Only 6percent of the Roma enters secondary schools guaranteeing low educational status for most Romayouth. Areas with high concentration of Roma and Turkish population show the highest loss in netenrollment at all levels of education.

While the traditional channels of social protection have been effective in keeping a large segment of thepopulation above the poverty line, these social protection programs either have not reached thesepockets of persistent poverty or, more typically, they were not effective enough to lift people in thesepockets above the poverty line.

Social Capital Is Inadequate to Fight Poverty

Social capital is weak in local communities in Bulgaria. Bulgaria entered the transition after almost 50years of communist rule that had destroyed community self-reliance, broke up traditional communityorganizations and severely weakened social capital, leaving the society poorly equipped to deal withtransition-related social shocks. After democratic change, partial decentralization of responsibility forsocial assistance to local governments without adequate financial resources left poorer municipalities ata disadvantage in confronting poverty. Municipal authorities, the smallest legal units of governmentadministration (covering from 6,00040,000 individuals in dozens of settlements), are still often tooremoved from actual communities that harbor the poor and face multiple pressures. In this environment,municipalities are ill equipped to encourage community initiatives to improve the local economy orsocial services.

Communities, on their part, lack experience with grass root initiatives and have inadequate skills toarticulate their problems, find local solutions or apply for co-financing from the central Government orinternational donors. They also have very limited capacity to implement, properly account for anddocument projects.

Government Strategy

In line with the October 2001 Executive Program of the Republic of Bulgaria, the Government is

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planning to harness additional resources through innovative community contracting for demand drivenand performance based programs to combat poverty in areas and among social groups most exposed topoverty. These programs will range from community infrastructure development to active labor marketprograms and to providing credit and business support services to micro and small businesses. TheGovernment will use the Social Investment Fund (SIF) to upscale the successful experience of RIF toreach out to these communities. SIF will ensure that the resources used will be additional and that themost effective programs are supported. When possible, SIF will operate through community-basedorganizations and NGOs and will finance programs that are selected competitively, on performancebase or with the maximum possible community involvement.

As part of this effort, the Government will strengthen its capacity to monitor poverty, consumption,incomes, labor markets and social programs and to formulate social policies by institutional capacitybuilding in MOLSP, the National Statistical Institute and the Employment Agency (EA). It will use theimproved monitoring capacities and the results of the Bank's Poverty Assessment Update to prepare apoverty map for the country that will be used to target additional interventions to the remaining pocketsof poverty. The Government will use the Institutional Capacity Building IDF Grant and part of theproject management, monitoring and evaluation component of STEP to strengthen its poverty monitoringand social policy formulation capacities. In December 2001, the Government organized two high levelpolicy seminars to advance policies and build capacities for poverty monitoring and social capitaldevelopment and to refine policies guiding Government support to micro and small businesses.

In addition, the Government has started taking action to integrate ethnic minorities into mainstreamBulgarian society, and address the large range of problems poor and vulnerable children face. TheGovernment has finalized a Framework Agreement on the Integration of the Roma in the Bulgariansociety and established a National Council on Ethnic and Demographic Issues. With the implementationof the Child Welfare Reform Project it will address burning issues in institutionalization of vulnerablechildren and child poverty.

As a solid basis for more innovative outreach instruments, the Government is committed to ensureadequate funding of Bulgaria's main social protection system and to further improve its targeting.

3. Sector issues to be addressed by the project and strategic choices:

Weak capacity for implementing community driven initiatives in poor communities:

Demand-driven models operate on the premise that communities which have planned their own actionsfor development are more likely to support those actions, and in the longer term are more likely to feel asense of responsibility and ownership of the asset created. Therefore, SIEP will help strengthencapacities of poor communities and municipalities to find local solutions including sources of funding(from central government, private sector, donors etc.) to address needs of poor and excludedcommunities. STEP will use a two pronged approach to strengthen capacity at the local level. At thecommunity level, STEP "facilitators" will work closely with communities to involve them in all aspects ofthe micro-project cycle from identifying needs, defining priorities to managing implementation andmonitoring of community projects. Facilitators who could be SIF staff, staff of public and private entitiesand/or community leaders will be trained in participatory techniques in order to help them work closelywith poor communities and marginalized groups. At the municipal level, SIF staff will work closely withlocal government functionaries to help them select and fund projects that best reflect communitypriorities. This bottom up-top down approach is expected to build capacity of communities to betterdemand services from their local governments while building capacity of the local government to respondmore effectively to these demands in a participatory manner. This will lead to funding projects that will

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remove many local obstacles to growth and provide access to markets and social services.

Inefficient and supnpl driven active labor market services:

SEEP will ensure additional resources for demand driven, performance based, active labor services (ALS)for unemployed in poor communities. It will help SIF and the National Employment Service to build amonitoring and evaluation capacity that could screen ALMPs more effectively. Once developed, thiscapacity and experience may eventually be extended to other publicly financed ALMPs. Currently, theGovernment offers a menu of ALMPs - including job search assistance, temporary work programs,targeted temporary wage subsidies, institutional and on-the-job training for unemployed and financialsupport to the unemployed to start business, as set out in the 'Unemployment Security and EmploymentIncentive Act'. However, the majority of funds are currently used for temporary work programs, and astudy of the net impact of the programs financed by the RIF LIL has shown that the outcomes of theseprograms are very uneven. The strategic choice is to support demand driven, performance basedcontracting practices while ensuring services are targeted to the poor instead of providing softerconditions for supply driven ALMPs which may go to individuals who do not need them.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The SIEP project will have three components and will be supported by policy and regulatorydevelopments, covered by other programs as well. Proposed SIEP components include: (i) CommunityInfrastructure for Development Initiative (CIDI); (ii) the Bulgarian Active Labor Market Initiative(BALMI); and (iii) project management, including operating costs, training, technical assistance,monitoring and evaluation (M&E) of SIF activities.

The two substantive components (the Initiatives) will be managed by a single agency - SIF -- tomaximize social policy coordination. The two initiatives will be implemented by SIF's ManagementUnit which will provide contracting, financial management and logistical services for their regularoperations. However, the two initiatives will be managed separately by each having its own managementgroup within SIF. This will ensure effective and efficient operation. The supervisory functions will beperformed by the tripartite SIF Steering Committee, as defined in the Law for the Social InvestmentFund.

- rs -. _ . . Indicative. - Bank-,. , -/ooft-i!>-¢ *- - Component - Costs % of financing -Bank-

________;--- __________ .____-____-_____ -____ -___ (US$M) 'Total (US$M ) -financing1. Community Infrastructure for Development Initiative 50.53 75.7 37.48 75.02. Bulgarian Active Labor Market Initiative 14.14 21.2 11.34 22.73.Project Management, Monitoring & Evaluation 1.57 2.4 0.68 1.4

Total Project Costs 66.24 99.3 49.50 99.0Front-end fee 0.50 0.7 0.50 1.0

Total Financing Required 66.74 100.0 50.00 100.0

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Component Indicative Costs %O of -Total Baik Financinig % of fB'(EURO M) (EURO M) financing

1. Community Infrastructure for 51.31 75.7 38.06 74.9Development Initiative2. Bulgarian Active LaborMarket 14.35 21.2 11.51 22.7Initiative3.Project Management, Monitoring & 1.60 2.4 0.69 1.4Evaluation

Total Project Costs 67.26 99.3 50.26 99.0Front-end fee 0.51 0.7 0.51 1.0

Total Financing Required 67.77 100.0 50.77 100

2. Key policy and institutional reforms supported by the project:

The project supports the Government's ongoing reform process by responding quickly to unemployment,loss of purchasing power, and falling living standards during structural change. The project wouldcapitalize on new avenues for action through closer contact with municipalities and other intermediariesin tackling problems of employment, social services and infrastructure development. The SIF would alsoprovide some workers and others who suffer consequences of adjustment, some income-earningalternatives, thereby allowing the Government to continue with the reforms that are essential to futureeconomic growth and employment creation. Given the high unemployment rate in Bulgaria, immediateassistance is needed.

3. Benefits and target population:

Income Earning Opportunities:Short-term: SIEP will generate short-term employment through infrastructure sub-projects and ALMPs.An estimated 700,000 employee days of labor (estimate based on RIF experience) would be generatedthrough the implementation of sub-projects only. Temporary employment helps stop the erosion ofhuman capital of the idle workers and helps them escape long-term unemployment. It also helps reduceincome inequalities through income support provided to the poor.

The challenge for the project will be to create employment opportunities for workers who will be laid offin sectors undergoing restructuring who need short-term employment to bridge the gap until more durableemployment that will come with broad-based economic recovery. This group may be interested inincome earning opportunities created through sub-projects.

Long-Term:

BALMI. The active labor market interventions will provide services which address frictionalunemployment (i.e., in-depth employment services), structural unemployment (i.e., on-job andinstitutional training) and lack of demand for labor (i.e., small business assistance services, incubators,and local economic development planning grants).

CIDI. Standard infrastructure sub-projects are also expected to generate some long-term employment.The average proportion of long-term jobs created under RIF LIL infrastructure projects was around 4percent. In localities where infrastructure sub-projects would be financed, the project is likely togenerate income earning opportunities for some long-term unemployed with the capacity to work, manyof whom live in conditions of deep poverty, characterized by low education and skill levels. While muchof the employment would require unskilled labor, some skilled laborers would be hired (engineers,

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masons, electricians, plumbers). It is expected that temporary employment will provide a stepping stoneto regular employment; a goal which would be monitored during implementation of the project.

Improved Infrastructure and Services: The project will improve the country's infrastructure and basicservices through grants (that in many cases would supplement or leverage municipalities' highlyconstrained capital budgets). People throughout Bulgaria would benefit directly from the resultingimprovements in the availability, regularity or quality of municipal services through investments toexpand and maintain infrastructure. These projects will reflect local priorities better than centrallyinitiated ones and are expected to have bigger impact on the living conditions of the poor and vulnerablegroups.

Capacity Building: The SIF institution will create increased national capacities to target and assist poorand vulnerable groups in a more cost effective and pro-active way than current state structures. SIF willdevelop the implementation capacities of municipalities, NGOs, and other intermediaries who areassuming increasing responsibility for the provision of infrastructure and social services. SIF could alsobe used to channel resources from other donors. The EU has assessed SIF as a long-term instrument fordelivering EU structural funds.

The CIDI component will provide training on the spot in the specific requirements for project design,management, and monitoring. It will also empower local development foundations, community groupsand municipal fora to help develop people's ability to articulate their needs and mobilize for collectiveaction. Dissemination of best practices will be supported through newsletters, publications, Internet,workshops, and community networks for sharing information. The component will also promoteexchange of experience and twining arrangements, and will encourage cooperation betweenmunicipalities and NGOs.

The BALMI component will be mainly focused on improving the employability of those groups ofpeople who are most vulnerable on the labor market, in-particular the poor, including but not limited tofirst-time entrants, long-term unemployed, ethnic minorities, etc.. The services provided under BALMIwill broaden and create additional capacity that is currently either underdeveloped or nonexistent inBulgaria. The component will also refine procedures for identifying medium-term economic and laborforce trends and to assist regions in developing local economic development plans and targeting otheractive labor programs.

4. Institutional and implementation arrangements:

Implementation Period: The project would be implemented over a period of 5 years, beginning March2003.

Executing Agencies: The Bulgarian Social Investment Fund (SIF) would serve as the implementingagency for the project, on behalf of the Government, with oversight from a Steering Committee (SC)headed by the MOLSP. The administrative core of the new SIF institution will be the staff of theRegional Initiatives Fund pilot project plus several new key staff members, including acompetitively-selected SIF Executive Director, a Manager for the BALMI component and a ProjectManager for the Social Capital Building grant from the World Bank. REF PMU staff have been in placesince August 1, 1998. The SIF would supervise the implementation of sub-projects along withmunicipalities and other intermediaries.

Project Oversight: A tripartite SIF Steering Committee has already been established in accordance withthe SIF Law. In addition to approving policies and providing guidance and oversight to the SIF

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administrative unit (further referred to as SIF administration or just SIF), the Steering Committee willendorse: (i) financial audits; (ii) quarterly progress reports and financial statements; and (iii) any changesto the Project Operations Manual (OPM) for the SIF. The SC will also receive recommendations fromthe SIF administrative unit on the design and regulations of the SIF, promote a dialogue about therecommendations among policy makers and the public, determine a process to arrive at final decisions,and ensure that the administration implements the SIF effectively. The two SIEP components (initiatives)will be managed on a regular basis by separate management committees within SIF that include moreadequate representation of the stakeholders most heavily involved in the respective component (e.g.Employment Agency).

Operationally, the project will be guided by an Operational Manual (OPM). The OPM includes aChapter for the CIDI component, which is linked to the World Bank guidelines for implementation ofcommunity projects (Community Handbook or Community Guidelines), and also a chapter on BALMI(Active Labor Services Manual), which has an annex called Field Implementation Manual. While theexecution of procurement and contracting responsibility may be delegated to implementingagencies/communities, the financial management of the project and payments shall be carried out by theSIF itself.

On policy, the two components will be coordinated on local level through the Regional EmploymentCommission (RECs). These councils represent an official coordination mechanism for the regions onissues of regional development and employment, and are representing all stakeholders in that process.SIF will develop routine procedures for obtaining the RECs' opinion on targeting and allocation offunding, especially under the BALMI component.

Financial management: (see Annex 6b for detailed Review of Financial Management Arrangements):

The Social Investment Fund (SIF), established recently under the authority of the Ministry of Labor andSocial Policy (MOLSP) in Sofia will be in charge with all the financial management aspects of theProject. The existing financial management capacity within the previously implemented WB RIF PMUhas been transferred to the new SIEP Project. All the financial management and disbursementprocedures will be in accordance with the relevant World Bank guidelines.

The Bulgarian Government, through the SIF has established and will maintain a project financialmanagement system in a format acceptable to the World Bank.

A World Bank accredited Financial Management Specialist has performed a detailed assessment of thesystem in accordance with the Bank's OP/BP 10.02 and the WB Project Financial Managementrequirements. The result of the assessment is that the Project arrangements meet the minimum WorldBank financial management requirements. Additional actions and steps agreed with the borrower tostrengthen the system are included in the FM Action Plan.

Financial Accounting and Reporting: The SIF will keep separate project accounts, by each financingsource and by each project component and activity. The SIF will prepare quarterly Financial MonitoringReports (FMRs) for the Project in accordance with the formats agreed with the Bank during negotiations.The FMRs will be submitted to the WB no later than 45 days after each quarter's end. The first quarterlyFMRs will be submitted after the end of the quarter in which disbursements commence, most likely Qlof 2003 and will be due on May 15, 2003.

Audit arrangements: The SIF and the project annual financial statements will be audited each fiscal year

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in accordance with Bank guidelines, by independent auditors acceptable to the Bank, based on terms ofreference agreed with the WB. Conclusion of a contract with selected auditors, satisfactory to the Bank,will be a dated covenant in the Loan Agreement. Copies of the audit reports will be submitted to theBank within six months after the close of the fiscal year (calendar year). The audit reports will cover theSIF and Project Financial Statements, Special Account, as well as all the Statement of Expenses (SOEs).

Disbursements: Disbursements from the Loan be made based on traditional disbursement methods (i.e.,from the Special Account with reimbursements made based on Statements of Expenditures (SOEs) andfull documentation, and direct payments from the Loan Account). The Government, through the SIF willestablish, maintain and operate, under terms and conditions acceptable to the Bank, a Special Account(SA). The borrower decided that the SA will be opened at the Central Bank, the National BulgarianBank (BNB). The SIF will also use local project accounts for local contributions to the Project.

Monitoring and Evaluation: This section describes the objectives of the integrated M&E system; maintools used; the effectiveness of existing M&E arrangements under the RIF project; as well as M&Eactivities to be undertaken as part of each component.

Objective:The project will put in place effective monitoring and evaluation arrangements to assess operations - ofthe individual components as well as the overall integrated SIF project -- analyze the effects and projectoutcomes, establish a knowledge base and incorporate these lessons to improve the design andimplementation of SIF on an on-going basis. The objectives of the integrated monitoring and evaluationsystem would be to:

* improve targeting in the poorest regions by developing up-to-date poverty and unemploymentmonitoring indicators (e.g., poverty and unemployment maps);

* provide feedback on the implementation and impact of the two components as a basis formodifying/improving SIF design;

* enable the SIF to estimate costs and benefits of each component so that comparisons can be madeand methodology refined to increase impact and, if needed, reallocate funds within the project;and

* track beneficiary performance which would in turn inform and drive further funding decisions.

The M&E system will encompass a number of tools: (a) poverty and unemployment maps (b) processand impact monitoring by SIF and target beneficiaries (municipal staff, communities,intermediaries/contractors, ALMPs beneficiaries); (c) computerized management information system;and (d) evaluations including beneficiary assessments, financial and technical audits, impact assessments,gross and net impact assessment of active labor programs, supervision visits, mid-term review.

MIS:The Management Information System (MIS) will serve as the primary source of information for theoverall M&E system. The MIS will rely on stakeholders involved at all levels in the SIF, to gather,process and disseminate the information required for transparent and efficient decision-making, and fordetailed financial and technical monitoring of activities.

The MIS will be used as a management tool to track SIF inputs, processes, outputs and activities and tomonitor whether these are being delivered in line with the expectation of the SIF Executive Office. Itwill also be used to collect, store and generate information that will be used to measure SIF benefitsaccruing to SIF beneficiaries, to monitor all outcomes, and the sustainability of the SIF approach. The

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MIS will also allow managers, technical staff and beneficiaries to track the movement of resources asprojects are implemented.

Existing M&E Arrangements under RIF:It must be noted that an efficient M&E system has already been developed by the RIF. For example,based on poverty targeting indicators (rate of unemployment, level of social/economic development etc.)used by the SIF, it was able to ensure that 95 percent of project beneficiaries were the poorestmunicipalities (category 4). The new M&E arrangements will add qualitative social analyses whenneeded to identify and target smaller and difficult-to-reach poor groups and communities.

In the same way, there is an effective and up-to-date MIS system in place under the RIF project. TheMIS provides technical and financial information on the preparation and execution of sub-projects and isused to track among other things the status of works construction, payments to contractors and profiles ofrehabilitation projects. The MIS has been used to track and monitor the entire RIF portfolio containingall sub-project proposals (including 200 infrastructure rehabilitation profiles), and a wide range of datanecessary for accounting, financial reporting, management, and decision making. This system will beupdated and modified as needed to successfully manage SIF.

M&Efor the CIDI Component:The CIDI component will build upon and refine the already existing M&E arrangements under the RIFproject. It will draw on a wide range of information sources and tools (monthly progress reports,beneficiary and impact assessments, financial and technical audits, etc.) to monitor the progress andquality of sub-projects. An important aspect of the CIDI M&E system will be the participatorymonitoring that will be carried out at the community level at each stage of sub-project implementationand will provide equal opportunities and access to information across gender and different interest groups(elderly, people with disabilities, etc.).

The MIS will provide data on project types and grant processing indicators. Data from the financial andaccounting systems and reports from the beneficiary municipalities and communities will be linked toassess performance (time lapse between sub-project application and approval, speed of disbursementetc.) and poverty impact.

M&Efor the BALMI Component:The overall responsibility for monitoring and evaluation of this component will be done by the EAALMPs unit in cooperation with the SIF and selected technical assistance contractors as outlined below.Long-term sustainability of the ALMPs M&E activities will be dependent on fostering synergies andbuilding capacity of the overall EA monitoring system with the eventual aim of convergence.

All information and data, including the design of the MIS for the ALMPs sub-component will beintegrated into and aligned with the overall project MIS. Specifically:

Project Management Reports (PMR): The ALMPs, in cooperation with the EA, will provide the SIF withprogrammatic input to the Project Quarterly PMR.

Labor Market Information Sub-Component: In addition to being monitored and evaluated by SIF staff,the SIF Tripartite Board will review and comment on the design and results of the surveys.

Active Labor Market Services Sub-Component: This component will have multiple monitoring andevaluation activities including:

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* Regular MIS reporting on the status of all service provider contracts* Regular on-site monitoring of service providers by EA ALMPs extension agents and EA LEB staff.* On-site visits by Bank staff during supervision staff* Provision of gross impact (job placement or business start-up) by all contractors.* Net-impact reporting as result of a special study completed during the third year of the project.

Procurement Arrangements: (see Annex 6 for detailed Review of Procurement Arrangements)The Bulgaria SIF will have overall responsibility for the project. The management of its procurementactivity will be carried out by SIF. The SIF may delegate the execution of procurement of certain smallscale activities to Implementing Agencies (IAs) (e.g. to community-based organizations, NGOs and localcommunities under selected micro-projects and to Local Employment Bureau under Active Labor MarketServices). Such delegation of procurement to the communities/lAs would be with the prior agreement ofthe Bank. Procurement responsibilities, procedures and sample documentation are described in detail in aSIF OPM.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

The project preparation team considered supporting existing active labor market programs (includingthe Temporary Employment Program run by the EA that enables municipalities to pay laborers' wages upto five months for minor cleaning and repair; wage subsidies to encourage employers to hire unemployedand disabled workers; and credits to unemployed to start businesses). While an existing administrativestructure is in place to run these programs (labor offices of the EA), an Active Labor Market Programs(ALMPs) study recently conducted under RIF casts doubts on the cost-efficiency and positive impact ofthese programs and points out how the targeting of the programs can be improved. Also, the BulgarianGovernment intends to restructure EA to improve its efficiency in designing and delivering betterALMPs and the project is providing additional stimulus for this restructuring.

The project preparation team considered a full-fledged component or sub-component for grants tomunicipalities for local/regional economic development planning, but discarded this option because itwould duplicate an ongoing USAID program, Partners in Local Economic Development and GovernmentEffectiveness (PLEDGE). PLEDGE works through Regional Associations of Municipalities, local laboroffices, and community organizations to assist communities facing large-scale economic restructuring inplanning economic development strategies. SIF would seek to collaborate with the PLEDGE programwhenever feasible. However, SIF itself will also retain the ability to assist specific local economicdevelopment planning initiatives, as a menu item within the ALMPs sub-component of BALMI in casemore local governments would wish to prepare local development plans than PLEDGE or other availablefunding sources could support, or in case the funding of PLEDGE would be reduced.

The project preparation team also considered including a microcredit component to provide micro-creditand services to small and microbusinesses through eligible intermediaries or partnerships between NGOsand banks, with the possible support of business centers, business incubators, and other forms of TA.The microcredit scheme proposed was one based on a sustainable on-lending arrangement withparticipating intermediaries, using the experience of international best practice. However, the idea waseventually dropped as the Govermment at a later stage in project preparation declared that it needed aguarantee scheme rather than an on-lending arrangement, and it had already started such a scheme withsome of its own resources. The Govemment and the Bank agreed that it would not be feasible to pursuetwo different routes for providing microcredit, and this component was dropped from SIEP. This alsoresolved some concems of experts and stakeholders that microcredit was not a traditional element of

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social fund-type projects and might not work well in the SIF setting.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).K. -Scor s e a Sup-ervi rit S

Sect-14i !oecdd'j ... 2U5(!~ Ratings>-;|s_'" *' 5 '- -'|*--' ] - t7(Bii ianc 6dar o j'---T 'nly)-

Implementation Development

Bank-financed Progress (IP) Objective (DO)Social Insurance Reform Social Insurance HS HS

AdministrationHealth Sector Reform Health Sector Restructuring HS HS

ProjectHealth Sector Reform Health Sector Reform Project S SEducation Education Modernization S S

ProjectChild Welfare Child Welfare Project S SChild Welfare JSDF Grant Children in S S

Disadvantaged CommunitiesEthnic Minorities IDF Grant for Integration of S S

Ethnic MinoritiesInstitutional Capacity IDF Grant for Strengthening of S S

Policy-making and Analysis inthe Ministry of Labor andSocial Policy

Social Capital JSDF Grant for Building SocialCapital in DisadvantagedCommunities

Other development agenciesEU and UNDP Beautiful BulgariaCivil works microprojects.UNDP Small Enterprise DevelopmentSmall business development. ProgramUSAID Firm Level Assistance GroupSmall business development. (FLAG)USAID LGIStrengthening of local governmentplanning and administration.USAID PLEDGECommunity developmentUNDP JOBS

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

3.1. Lessons learned from the LIL-funded Bulgarian RIF

Background. The World Bank has been working with the Government to alleviate the adverse impacts

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of structural reform by creating income support through generating temporary and long term jobs. Oneof the tools in this process has been the RIF project, which tested the social fund approach as aninstitutional mechanism to help Bulgaria protect incomes of the poor and vulnerable groups during thetransition. The Bulgarian SIEP Project is building upon the experience created through the LIL-financedRIF in the period 1998-2001. The RIF project is still active-to date, 250 public works microprojectshave been approved for financing by the Steering Committee, with financing from the Bank loan andadditional USAID financing. Of those, more than 200 are completed and the remaining are to betransferred to SIF.

The RIF project created the basic administrative and operational capacity of a Bulgaria social fund. Nowthis capacity is to be transferred to the SIF, while increasing public awareness and a political consensusaround the objectives, institutional set-up and types of activities to be included in the social fund inBulgaria.

The RIF Project had the following components:

(a) Microprojects to inform the Government about real impacts of the social fund approach, optimaldesign features for the RIF, risks and likely benefits of additional investments (microprojects);

(b) Labor markets analysis and information including financing of labor force survey, andtechnical assistance to undertake a net impact evaluation of the ALMPs and legal and administrativechanges conducive to microcredit for self-employment; and

(c) RIF preparatory work and project management including operating costs, training andtechnical assistance, and monitoring and evaluation activities for the microprojects and the design andoperation of the RIF, including preparation of legal and administrative instruments.

Summary of Lessons Learned. To consolidate and systematize lessons learned from the RIF Project,the Govermment and the World Bank also conducted a series of seminars with social fund stakeholders.

As expected, the three-year RIF pilot produced much information for improving and expanding the socialfund model in Bulgaria. The major lessons are presented below in three categories: (i) policy level; (ii)management and admninistration level; and (iii) at the level of social fund operations. While there weremany lessons leamed from the RIF, the list below is limited to those that have the greatest bearing on theimmediate evolution of the project into a full-fledged social fund.

Policy-Level Lessons Learned

Microprojects can simultaneously create short-term jobs and improve infrastructure and facilities thatare critical to preserving Bulgaria's human resources and expanding private sector employment andgrowth. Microprojects are expensive instruments to transfer income but are justifiable on public goodgrounds because they protect and create vital public assets and have a positive impact on local serviceavailability and labor market extemalities. While microprojects are not cost-effective alternatives of cashtransfers to the poor, both the employment in well-targeted micro-projects and the public goods theycreate can reduce poverty.

Microprojects can contribute to Bulgaria's broader efforts to decentralize the provision ofpublic goodsand services to local governments in a way that also helps local governments fight poverty. Theexperience of social funds around the world suggests that delegation of microproject preparation andimplementation tasks to local governments bodes well for greater benefits in terms of local governance,

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accountability, local capacity building and sustainability of local services. The SIF could contribute moreto effective decentralization by investing in training and capacity building activities directly or throughother govemment programs, and by improving its methodologies and capacity to appraise institutionalcapacity of local governments during microproject appraisal.

The composition and the operation of the RIF Steering Committee raised some questions as to bias, lackcf transparency and political favoritism. To reduce perceptions of bias and discretionary approval ofmicroprojects, the SIF oversight board will have to be more open and transparent.

Microprojects create tension between maximizing labor content and increasing social impacts. TheRIF's emphasis on labor content resulted in minimization of equipment (e.g. boilers and desks) andlimited the RIF's efforts to give a more effective and complete solution to problems. The challenge forthe SIF is to maximize the impact of its investment by using its leverage to attract (and help communitiesattract) other sources of funding including volunteer or in-kind support from community members, and toapply the best technical expertise to optimize every investment dollar. The SIF also will have to do abetter job of monitoring whether intended vulnerable groups are benefiting from microprojects, so thatpolicies and procedures can be considered to make microprojects more pro-poor.

Lessonsfrom RIF Management and Administration

Keeping bureaucracy at a minimum is essential to ensure rapid response to proposals. This is one of themost important characteristics of the RIF that must be preserved for the SIF.

A social fund can be an effective mechanism for diverse government agencies and donors to worktogether so long as they agree on and respect a common set of hiring, procurement, financialmanagement, and reporting guidelines. Microprojects can and should be aligned with existing Bulgarianlegislation and regulations.

The Steering Committee's tripartite representation encourages consultation and consensus building butwould benefit from greater transparency and input from more diverse partners. A more diverse SIFoversight board would help reduce perceptions that political influence determines microprojectprioritization and approval. Transparency is key.

Municipalities have tie potential to conduct procurement in accordance with World Bank guidelinesprovided training and oversight are available in a timelyfashion.

A larger portfolio of infrastructure microprojects can be managed with a small, centrally-located staffusing contracted firms and individuals to perform routine tasks. PMU staff had an incentive to performwell because they had good remuneration, one-year renewable contracts, regular performanceevaluations, and access to computers, telecommunications, cars and other equipment to perform theirfunctions. RIF staff represent a well-trained pool of candidates to be considered for SIF employees.However, with foreign direct investment picking up in Bulgaria, it might be difficult to retain for SIFexperienced and well trained staff from RIF. The RIF experience also revealed the difficulty in attractingexcellent managerial skills. Experience from other social funds in the region suggest that it takes 12-18months for top managers to grow into their positions and to become advocates for social fund objectivesand policies and leaders/mentors of their staff.

Bulgaria 's construction industry was tested and produced good quality designs and BoQs and conductedefficient and effective inspection. However, local capacity to conduct social analysis, communityorganizing and social impact evaluations will need to be strengthened. As social analysis and impact

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evaluation were a weaker side of the RIF process, staffing and training of the SIF will need to put anemphasis on creating a capacity that could assist municipalities in this area as well.

The Technical review, beneficiary assessments and the poverty assessment conductedfor RIF were usefulfor assessing impacts but would have been more useful with better methodologies, quality control andrepetition. More efforts will be needed under the SIF to transform lessons into policy alternatives andprocedural revisions.

The social fund infrastructure-type policies, procedures and human resources are not fully appropriatefor preparing, appraising, monitoring and evaluating non-infrastructure micro-projects (e.g. businesssupport activities) and of the active labor market policy measures. More specialized human resourceswill have to be tapped to prepare any business support and credit component of the SIF and to developpolicies and an operations manual and advise on management structure and skills mix. With a broaderprofile, SIF management will have to build daily operational links with the functional branches ofMOLSP. These operational links cannot be fully substituted by more frequent meetings of the SteeringCommittee.

Active labor programs need to be carefully designed and targeted to improve net impacts. There is aneed to move away from an emphasis on use of temporary employment programs (which are costly andhave marginal downstream impact on employment and wages), and increase funding for programs thatmore directly impact frictional and structural unemployment and lack of demand for labor.

Lessons from RIF Operating Procedures

The Government's desire to rapidly implement microprojects created a distortion in the filtering ofmicroproject applications. Together with the objective-related prioritization criteria, microprojects werealso prioritized according to readiness of designs and BoQ. The schedule and deadlines for processingapplications should be more flexible to allow municipalities sufficient time to prepare applications andthe PMU time for verification, desk review and field appraisal in accordance with the OperationsManual.

"Exclusive" and "ranking" criteria for micro-project proposals need to be revisited to ensure they aresimple, reflect the priorities and objectives of the SIF, and perform their intendedfunction.

Lessons learned from other social funds. The project design has incorporated the following lessonsand factors and would monitor their significance in Bulgaria during project implementation:

* political and institutional autonomy* technically simple project design* strong local participation during all stages of the microproject cycle* well-defined appraisal criteria and transparent appraisal procedures* regular and frequent financial and operational audits* rigorous supervision of microprojects* collaboration with ministries/agencies to ensure complementary objectives* political support and commitment to the goals and integrity of the fund* well-qualified, professional staff with a director with proven managerial experience* promotion and technical support to communities to elaborate microprojects* ensuring the expression of local "demand" for the sub-projects, as a guarantee for sustainability

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Lessons learned from the latest Bulgaria Portfolio Review. A number of issues featured prominentlyin this year's portfolio review and have been taken into consideration in designing the project. Ingeneral, project management capacity, financial management, procurement processing, counterpart fundsand taxation, special accounts, and project accounting and auditing have been identified in prior JointPortfolio Reviews (JPRs) as key generic factors influencing project implementation and developmentimpact. Throughout the year, these factors have been closely monitored, both at project and overallportfolio levels.

* Project management capacity has been assessed as adequate for each investment project. Thisachievement requires continued close attention in order to be sustained. In particular, specific attentionand quick corrective actions are needed to significantly improve project management capacity for timelyand successful implementation of Government-managed grants.

* Financial management capacity has been improving steadily, with experience being sharedamong Project Implementation Units, especially for new projects. These efforts need to be continued tofurther strengthen implementing agencies' financial management capacity.

* A procedure for requesting and receiving counterpart funds is in place. While somewhatcumbersome and problematic for new implementing agencies, this procedure has ensured the neededcounterpart funding for all projects under implementation.

* A new development for special accounts has been the implementation of the Single TreasuryAccount concept and the related new policy of concentration in the Bulgarian National Bank (BNB) ofall special accounts for World Bank loans to the Government. The Bank has requested information toensure that the BNB has the resources and capabilities to perform this function and to ensure timely cashflow for project implementation. For existing loans the Bank recommended a careful case-by-casereview before any changes are implemented.

No problem has been identified in project accounting and auditing.

4. Indications of borrower commitment and ownership:

On October 22, 2001, Prime Minister Simeon Saxe Coburg Gotha presented to the EU in Brussels theGovernment's social and economic program. He characterized SIF as a major social policy instrumentthat will be key to the successful implementation of this program. On October 18, 2001, the Council ofMinisters decided to include SIEP in the borrowing plan for calendar 2002.

The new Government of Bulgaria elected in June 2001 recognizes the heavy and inevitable social burdenassociated with economic restructuring and privatization. It continues to view the SIF as a majorinstrument of conducting social policy in a business-like manner. The Government has already budgetedBGN 5 million for SIEP activities in calendar 2002. During its dialogue with the Bank regarding the newBank Country Assistance Strategy, the Government expressed a keen interest in developing projects fortemporary and perrnanent employment creation to relieve social tensions in regions with high levels ofunemployment and where restructuring would result in closures and job loss.

Successive Bulgarian cabinets have worked towards establishing SIF which is a clear sign of broad,bipartisan support to this institution. In December 1998, the Government signed a Learning andInnovation Loan with the World Bank for the implementation of the Regional Initiatives Fund pilot socialfund. The Government also provided office space, computers and equipment for the RIF PMU staff inadvance of loan effectiveness. Since then, the Government has been effectively implementing the RIF

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pilot, and looking forward towards the larger Social Investment Fund. The Government prepared and theParliament passed in March 2001 a Law to legally establish the new Social Investment Fund. Thealready-built RIF capacity and assets will now be transferred automatically to SIF.

5. Value added of Bank support in this project:

The Bank brings to bear in the project its global experience in helping design social funds andemployment promotion (social programs including ALMPs do not create jobs in the long run, they createhuman capital and the economy creates jobs) programs which can be an effective approach in achievingthe objectives held by the Govermnent and the Bank. The Bank maintains an effective link with theGovernment for policy-guidance and institutional development in social protection through its dialogueand ongoing investment lending program of which the proposed project is a part. This project is anopportunity for the Bank to use its development experience and influence to catalyze more effectivecollaborative networks with donors in support of the Government's reform efforts. This project willfurther leverage the Bank's effort to help the Government develop a fully fledged poverty monitoringsystem and to use this system to target public assistance to the poor. The Bank poverty monitoring knowhow will be further developed to produce and update poverty map as means of targeting. Bank supportwill help bring this targeting capability to infrastructure, social services, and labor market projects.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):O Cost benefit NPV=US$ million; ERR = % (see Annex 4)

0 Cost effectiveness* Other (specify)Economic Assessment

2. Financial (see Annex 4 and Annex 5):NPV=US$ million; FRR = % (see Annex 4)

Fiscal Impact:

The impact on government finances would include social contributions raised on wages of the SIFconsultants and private contractors. 20% of microproject costs, as well as certain implementation costs,will be absorbed by communities, estimated at over EURO 3.8 million (US$3.71 million) or 6 percent oftotal project cost. The counterpart contribution from the central budget is estimated at EURO 13.24million (US$13.04 million equivalent) or 20 percent of total project cost.

3. Technical:No outstanding issues not considered elsewhere in the PAD.

4. Institutional:

First, the implementing agency for the project is a govermnental institution established with an Act ofParliament (Law for the Social Investment Fund). The SIF law was passed by Parliament in March 2001.It should be noted that though this Law will enable the functioning of the SIF as planned, it is in manyrespects different from what has been endorsed by the Bank and agreed among partners in precedingconsultations.

Second, though the SIF institution is legally existing, it needs to be "created" in practice - this should be

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done by hiring an executive director and core staff, and by transferring RIF assets and staff to the SIF.

4.1 Executing agencies:

The project will be executed by the Social Investment Fund, a Government institution with anindependent multi-stakeholder Steering Committee presided by the Minister of Labor and Social Policy,in cooperation with the Employment Agency (EA).

4.2 Project management:

The capacity of a project management team (unit) has been built through the RIF, funded by a LIL.Currently, RIF is implemented by a capable team of professionals in all technical areas.

However, a number of issues may arise in the process of transferring the RIF human resources capacityto SIF. (See contingency planning in Annex 6.)

I) The need for quick start-up of implementation under the RIF LIL required that a projectmanagement mechanism be found that would allow for a speedy set up of the PMU. Thus the otherdonor in the project, UNDP, provided technical assistance, and also constituted the PMU as a group ofUNDP local consultants. This setup was endorsed by the Bulgarian Govemment and the Bank at thattime, with the understanding that the RIF will become a Government-owned institution within 18 monthsafter the project's start. However, with the delays in passage of the Social Investment Fund legislation,the PMU is still operating under the initial scheme. Smooth transfer between RIF and SIF administrativemodes of operation needs to be ensured.

2) The general opinion of donors and the Govermnent is that a very high level of managerial capacityis needed for the SIF. As expected that the process of finding an executive manager for the fund wasdifficult, but the Govermment managed to identify a suitable candidate (in January 2002).

4.3 Procurement issues:

Annex 6 provides an overall procurement assessment.

CIDI

Procurement Arrangements for CommunitiesThe Bulgaria SIF promotes a new approach to community development by providing an opportunity forcommunities to effectively participate in the identification, preparation, and implementation of their owndevelopment in collaboration with government agencies, NGOs and private institutions.

The exact mix of goods and services to be financed will depend on the results of demand-drivensubprojects identification processes undertaken by communities. Community-based Project ManagementCommittees (PMC) will take primary responsibility for procuring goods, services and civil works but willreceive overall support and guidance from the SIF. PMCs will receive specific training in this areabefore project implementation, they will also use the SIEP OPM (based on World Bank guidelines forimplementation of community projects), which will outline the procurement guidelines to be used bycommunities.

Procurement at the community level will be guided by CPP, Community Participation in Procurement(Para 3.15 of the Procurement Guidelines). The SIF will encourage community involvement andcontribution in all aspects of project implementation. Communities will manage subprojects, hiringskilled contractors and purchasing materials locally to ensure minimal delays and reduce inefficienciesdue to loss during transport and storage. Standard price lists will be maintained by the SIF updatedregularly, and will be used by communities as price ceilings to guide their procurement.

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Sub-projects costing up to US$ 80,000 equivalent per project will be implemented through self-helpprojects, which SIF will contract out through Project Management Committees to individuals, privatecontractors, and conmnunity based organizations following procedures detailed in the operational manualand grant agreement. Such agencies/contractors, selected on strict criteria established in the OperationalManual, will use community labor and will purchase goods or materials prescribed in their contractagreement signed with the community. Communities will hire contractors of the required skill level,using guidelines established in the Operational Manual, and procure materials by obtaining three quotesfrom three suppliers, when available, and selecting the supplier with the lowest cost who fulfills theirrequirements. The SIF will disburse funds to the communities in tranches against certified completion.

BALMI

Technical assistance for the three technical assistance contractors will be procured and managed by theSIF ALMPs following standard Bank procedures, as will the minor amount of goods. Procurement ofactive labor services will be done by Local Employment Bureaus (LEBs), under the general supervisionof the SIF ALMPs and EA, following procedures agreed with the Bank. Allocation of funds by Oblastand Municipality for ALMPs Department will be based on an algorithm agreed with the Bank thatreflects unemployment and poverty. Procurement and contracting with service providers will followdetailed Guidelines agreed with the Bank including specific principles and criteria for different services(see Annex II for draft), standard Requests for Proposals, and contracts. These will be included in a FieldOperational Manual (which is part of the SIEP OPM) to be agreed between the Bank and Borrower atnegotiations (but prior to expenditure of funds under the sub-component). The flow of funds within theALMPs component will be as follows. LEBs will contract with service providers and make all initial andsubsequent payments with local funds. On a monthly or as needed basis the LEBs will forward invoicesto the SIF ALSB for reimbursement. The SIF will review and approve 75 percent reimbursement fromthe Project SA.

4.4 Financial management issues:

The first CFAA for Bulgaria will be prepared in late 2002 - early 2003. When finalized, the documentwill present in detail the financial management risks for the country and the implications for the WorldBank operations.

From the financial management perspective, the Project is considered a substantial-risk operation andmajor risks in the financial management area are presented below:

Country generic risks

A summary of the main financial management country generic risks is given below.

After the extensive degree of restructuring and 'cleaning' of the banking sector, that was carried outfollowing the 1996 - 1997 banking system crisis, when an important number of banks were declaredbankrupt and others were restructured, the banking sector systemic risk is perceived as relatively low, asonly a few commercial banks are regarded as not very safe. In the past years, the privatization of thebanking sector recorded a certain progress. Major foreign banks, such as Unicredito, Bank Austria, etc.,have entered the Bulgarian banking sector either by privatizing some Bulgarian banks, or by establishingtheir own subsidiaries. It is perceived that by opening the SA at the National Bulgarian Bank (CentralBank), acceptable to the WB, the banking risk is kept at an acceptable low level.

Following the banking and economic crisis a monetary council was established in Bulgaria, and the

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national currency was pegged to the German mark. The fixed exchange rate established in 1997(1.95583 lev = I EURO) is still applicable. Following these measures, yearly inflation was cutdrastically from 3 and 4 digit figures (in 1996 and 1997) to a single digit figure in the period 1998-2001.In addition, the overall macroeconomic situation in Bulgaria has improved substantially in the last 3years, with solid economic growth achieved, as opposed to several years of dramatic decline in GDPbefore 1997. It is thus perceived that the macroeconomic risks are quite low.

Bulgaria has a relatively weak public sector financial management, as little reforms have been carried outin the public sector. There is some accountability in the Government's overall accounting and reportingfunctions, but the Bulgarian SAI still has to undergo significant reforms to fully perform its functions.All these aspects lead to a substantial risk in respect of the public sector financial management.

Significant protection measures must be taken to protect the Project's assets against fraud, waste andabuse. The risk that Loan proceeds will not be used as intended for financing the defined investmentprogram is judged as acceptable by introducing several measures, in principal the 'ring-fencing' of theproject through the establishment of the SEF that will act as the project management, co-ordination andimplementation unit, with a comprehensive staff structure and segregation of duties within the unit,proper supervision from the World Bank team and an independent yearly audit of project funds and ofthe SIF financial statements by independent reputable audit firm, acceptable to the Bank.

Project specific risks

One risk is the SIF assuming the authority and responsibility for every aspect of the project, therebyexposing it to possible risks of collusion and corruption. To address this risk: (i) all payment orders willbe signed jointly by the SIF director and a high level officer (such as the General Secretary or ChiefAccountant of the MOLSP) and (ii) the beneficiaries' representatives will certify the acceptance of theworks done, goods delivered and services rendered before the payments are made by the SIF.

Moreover, the complete segregation of duties amongst SIF staff members will have to be achieved, i.e.the functions of implementing and overseeing will not reside with the same SIF staff member. Inaddition, the SIF and the project financial statements will be audited by an external auditor, acceptable tothe WB.

The second risk is that the project is exposed to delays in payments to suppliers: (i) due to the signaturesrequired on both Loan funds and Govemment contribution and (ii) inadequate counterpart funds in theGovernment project account. The signing mechanism proposed for the operation the above accounts isperceived as acceptable, and since the SIF will be located near the MOLSP, all the signatures requiredwill be obtained in a timely manner. The experience so far on previous projects demonstrated that thesigning mechanism does not pose significant delay risks.

The amounts to be used as local contribution to the project for the year 2003 will have to be included inthe 2003 budget (the project is not expected to become effective before Ql of 2003). An official letterwill have to be issued by the MOLSP, in which the borrower will have to state that the amounts for 2003and yearly thereafter will not constitute a issue, and will be made available timely and sufficiently, fromthe funds available in the budget of the MOLSP. Then, the local annual contributions for 2004 andthereafter will be requested and allocated in advance, as a separate budget line, within the MOLSPbudget, by the time when the yearly budget is prepared and submitted for approval. So far, thecontributions from the Government in respect of the previous projects were received broadly on time andin line with the amounts requested.

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Overall, the above mentioned risks are considered as manageable due to the various risk mitigationsmeasures proposed. Annex 6b presents in detail the full description of the risk mitigation measures.

5. Environmental: Environmental Category: F (Financial Intermediary Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

There are no significant environmental issues and Bulgaria's environmental laws and requirements arecompatible with the Bank's policies and those of the EU. It is expected that the execution ofmicroprojects would not cause any substantial environmental impact. For the purpose of controlling andpreventing any particular situation, wastes of health posts, wastewater of sewerage systems, irrigationwater of agriculture infrastructure and water distribution networks would be treated and/or disposed of inadequate manner. Microprojects concerned with reforestation, erosion control and sanitation areexpected to have a positive environmental impact. Infrastructure design and equipment would take intoconsideration elements to mitigate negative impact. Used materials, garbage and products of theconstruction phase would be buried in authorized and controlled places. All necessary precautions willbe taken to ensure that potentially toxic substances such as asbestos or lead from paint will be handled ina safe and environmentally sound manner, based upon positive experiences already gained in undertakingenviromnental reviews and monitoring environmental aspects of sub-projects. Furthermore, theconstruction plan will take steps to minimize waste, dust, and debris from construction and to safelydispose of construction wastes. Only licensed contractors will undertake such contracts. A guide for theformulation and evaluation of environmental aspects, with sections on diagnosis, interpretation andprevention of situations, is a part of the Operations Manual.

Three factors ensure that the activities implemented under the SIF project will not be environmentallydamaging interventions:

> Bulgaria has a strong policy for enforcing environmental regulations;> The SIF project will finance only small infrastructure construction and rehabilitationsub-projects, with minor environmental impacts;> The pilot Regional Initiatives Project, the precursor of SIF, is transferring significant experienceto SIF in implementing sub-projects according to highest standards of environmental scrutiny.

Impacts on soilThe nature of the above infrastructure works is not conducive to any destructive impacts on soil. On thecontrary, within the limits of its funds and under the Erosion control and Landscaping projects the SIFwill be of a considerable avail to local authorities to mitigate destructive effects on soil in terms of loss ofproductive soil; erosion; contamination of soil and other cumulative effects.

Impacts on water resourcesAll water and sewage system projects that come within the scope of infrastructure works in the aboveAnnex (page 5) shall be subject to EIA in accordance with the above mentioned Ordinance N4.

Impacts on indigenous peoplesThere are no indigenous peoples in Bulgaria in the traditional sense of the term. The SIF financedprojects have a beneficial impact on improving social conditions of life for all the categories of the localpopulation - moreover, the project includes special targeting for vulnerable minority groups.

Impacts on cultural heritageThe type of the SIF financed infrastructure projects does not imply any destructive effects on the cultural

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heritage. In case rehabilitating public buildings (schools, hospitals, social homes etc.), which constitute apart of the national cultural heritage clearances by the Ministry of Culture are requested.

Impacts on airConstruction works on the SIF financed projects under the above typology do not imply any detrimentaleffects on the air composition and purity.

Legal framework and environmental assessment management

Legal Provisions

The protection of the environment including the procedure of EIA is a constitutional requirement.According to Art.15 of the Constitution (1991), the environment engagement of the State is a primarypart of its functions: "The Republic of Bulgaria guarantees the protection and regeneration of theenvironment, the maintenance and variety of the living nature and the efficient use of the natural richesand resources of the country." Among the basic human rights is the right of the citizens of healthy andbeneficial environment in correspondence with the set standards and normative requirements. TheConstitution is the basic and supreme regulatory source and all other legislation should be coordinatedwith it - laws, adopted by the Parliament, acts, adopted by the administrative institutions and the localself-government institutions. The international conventions under Constitutional requirements alsobecome a part of the internal legislation and are superior to the respective national legislative clauses oracts which contradict diem.

The Convention on environmental impact assessment in a trans-boundary context was ratified by an Actof the 376' Parliament on 16.03.1995.; published in the State Gazette is. 86 of 01.10.1999; and in effectsince 10.09.1997. Is legal norms are a source of rights and obligations for the subjects of Bulgarian law.

The process of approximation to the acquis communautaire: With the effectiveness of the EuropeAccession Agreement (EAA) of Bulgaria at 01.02.1995, the approach of the union towards the protectionof environment became the measurement of the effectiveness of the national legislation. The process ofhannonization is quite strongly reflected in environment legislation. On the grounds of art. 69 and 70 ofEAA there is an obligation for Bulgaria to harmonize its legislation in many areas including theenvironment. The main document for the harmonization policy is the National Program for Adoption ofthe Acquis /NPAA/. The NPAA serves two purposes - as a program and as an activities plan. Theprogram presents the character, principles, and priority goals of the harmonization, as well as the startingdocuments for its achievement in regard to the accession process.

The adopted principles in environment law, set in the EIA in EPA are procedurally guaranteed andsettled in accordance with the EU Directive 85/337/EEC. The short-term priorities of NPAA setmeasures for achievement of full correspondence with the developing requirements in that area andespecially Directive 97/1 I/EC. The upcoming adoption of a new Environment Protection Act willcontribute to that goal. The draft law can be characterized as an environmental constitution, because itestablishes an integrated method for decision making related to environmental protection. It is envisionedthat Bulgaria will establish procedures for the issuance of complex permits for pollution control incorrespondence with the Directive 96/6 1 /EC and 97/11 /EC. The new Environmental Protection Actionincludes a detailed procedure regarding access to information and the participation of the public in theprocess of environment decision making.

The EIA procedure was anticipated in Bulgarian legislation in 1991 which adopted the EnvironmentalProtection Act, (EPA). The EPA established the term EIA and provides for the main characteristics of theEIA procedures ( EPA Section IV).

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Environmental assessment managementImplementation of legislation on EIA is distributed among several units in MEW: the centraladministration, Executive Environmental Agency and Regional Environment and Waters Inspectorates(REWI). The EIA procedure is organized and coordinated by the EIA Department in MEW (respectivelythe EIA units in REWI for the facilities within their competence) with the participation of experts fromall specialized units in MEW, e.g. Center for Environment and Sustainable Development, NCESD, andREWI, that have any relation to proposals subjected to EIA.

Decisions on the EIA reports are made by the Supreme Expert Environmental Council (SEEC) in MEWwith permanent staff comprising experts from MEW and representatives of the Ministry of RegionalDevelopment and Public Works (MRDPW), Ministry of Health, (MH), Ministry of Agriculture andForest (MAF) and Ministry of interior (MI). Representatives of the interested parties, including theRegional expert environmental councils (REEC) within REWI also take part in SEEC. Appeals ofdecisions are settled through the court.

The EIA Department in MEW and the units in REWI are staffed in accordance with the tasks they haveto fulfill. The EIA Department has a leading role for developing the legislation on EIA, preparation ofdecisions and instructions for applying the procedures and for keeping a record of the decisions. Controlof the fulfillment of the decisions of EECs is exercised by REWL.

Project proponents pay for the preparation of ETA reports by independent experts licensed by MEW andare charged for assessment of the reports by the EECs. These charges recover part of the costs for theorganization of the activity. SEEC and REECs are set up in accordance with the requirements of the law.

Information services and public relations are distributed between SER and AESA Departments in MEW,NCESD and REWL The existing procedures for collection, processing, keeping and submission ofinformation will be further developed in the future, once the Regulation for information on environmenthas been adopted. Information on the state of environment is presented in monthly (by regions), quarterly(for the country), six-months' (for Bulgaria - Romania borderland) and annual (for the country) bulletins.The bulletins are submitted free of charge to interested state bodies and local administrations. They arealso sold finally to the public for the cost of printing. Regarding the reporting to EEA there is a NationalFocal Point appointed - the Head of APP Department in MEW and a National Reference Center -NCESD. Quality Control and Quality Assurance positions have been established within this center.

Guidelines and ProceduresThere are no sector guidelines to complement the existing general-EIA oriented guidelines. Investorscould be provided with comprehensive information of potential impacts and appropriate impactprediction techniques. WB guidelines will improve and serve as a best practice (along side with otherinternational practice) national EIA system.

Community Involvement in Assessing the Environmental Impact of Sub-Projects

Community involvement in the assessment of the environmental impacts of sub-projects will be ensuredvia:

(i) disclosure and dissemination of information about the envisaged project activities withpotentially hazardous environmental impact. The SIF is responsible to provide the relevantinformation to communities prior to consultations with the local stakeholders. The informationshould be provided in a timely manner and in a form that is meaningful for, and accessible to, the

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groups being consulted.

(ii) public consultation, soliciting people's views on proposed actions and engaging them in adialogue. Interaction with people and eliciting feedback will allow the affected population toinfluence the decision-making process by raising issues which should be considered in developingthe scope of sub-projects, project design, monitoring of environmental impact, risk mitigation andanalysis of alternatives where applicable. The process of consultation on environmental issuesshould be documented.

Environmental Inspection for Sub-Projects at SIF Level

Fully-fledged environmental assessments are not applicable in the case of sub-projects implementedunder the SIF project. Projects entailing rehabilitation, maintenance and upgrading usually will havemuch more limited impacts, but may require attention to existing environmental problems at the site.Therefore, an environmental screening (inspection) may be more useful in fulfilling the environmentalassessment needs for such projects.

The aim of environmental inspection at SIF level is twofold: (i) to ensure that sub-projects with negativeenvironmental impact are not financed, and (ii) to ensure that approved sub-projects are implemented inan environmentally acceptable manner.

The environmental inspection will be initiated by the SIF. Normally, potential environmental impacts areidentified early during the review of the proposal for a sub-project. For projects under implementationthe environmental inspection will complement the check for compliance with national environmentallegislation. The process will include a detailed review of the technical proposal (specification) for smallworks with respect to defining the type and scale of the potential environmental impact and risk.

SIF financed projects (sub-projects) and their environmental impacts

SIF sub-project typologyThe main part of the SIF funds would be directed to financing projects of the social and economicinfrastructure, and namely:1. Infrastructure projects that improve social service and create temporary employment by means ofconstruction and renovation of:

> Water supply and sewage systems> Social care homes (old peoples' homes, orphanages, asylums etc.)> Schools> Social service premises> Landscaping by labor-intensive public works> Erosion control> Feeder roads of local importance

2. Infrastructure microprojects that create conditions for long-term employment and income generationby means of construction and renovation of:

> Marketplaces> installation of telephone post> electrification of locations and market places etc.

In the case of SIF financed infrastructure projects, when specifically and formally required, EIA

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constitutes an integral part of the project technical documentation and is carried out by the Intermediaryapplying for financing before the SIF. A duly-prepared EIA is a criterion for a positive TechnicalAssessment. Certified bodies hired by those applying for SIF financing will be commissioned to carry outEIA based on the provisions of Ordinance N4 by the Ministry of Environment, Ministry of RegionalDevelopment; Ministry of Health and Ministry of Agriculture The Regional Environment ProtectionOffices are entitled to clear their work. The existing Ordinance provides guidelines how to align theenvironment protection procedures for the specific projects with the Environment Protection Act. TheRegional Environment Protection Offices are supposed to enforce the Environment Protection procedureson each specific SWF financed site. They are empowered as well to clear project hand over in concert withother authorized authorities.

Possible Cumulative Effects from Concentration of Sub-projects in one Type of Investment

The experience from the pilot Regional Initiatives Fund shows that the criteria for micro-project selectionand the diversity of priorities on community level do not allow the concentration of project resources in asingle type of investment (see table below). It is not expected that this trend would be changed in SIF.Moreover, the total amount of SIF financing of infrastructure under the SEEP project would not be morethan US$ 30 million, which is a relatively small amount of infrastructure investment for Bulgaria.

However, to ensure that cumulative effects of a single type of investment be avoided, the SIF will includein its quarterly reports, based on data from the MIS, summary tables and analysis of the approvedmicro-projects during the past period by type. The tables and analysis will also include regionalbreak-down and analysis.

5.2 What are the main features of the EMP and are they adequate?

n/a

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: September 2002

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describemechanisms of consultation that were used and which groups were consulted?

n/a

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

n/a

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

The key social issues relevant to the project are: poverty and high unemployment, particularly among thedisadvantaged groups, weak social capital (manifested i.e. by public apathy and prejudice againstcollective action, low trust in institutions), relatively weak social cohesion, exclusion, gender biases andlack of participation in the development process of various segments of the Bulgarian society.

The anticipated key social development outcomes are: poverty reduction through effective targeting and

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inclusion, strengthening social capital, community empowerment and increased public participation,particularly of the marginalised and impoverished groups and communities, addressing gender biases.

6.2 Participatory Approach: How are key stakeholders participating in the project?

Mobilization for participation and harnessing participation for community development is one of themain features of the SIF. Wide participation of stakeholders is ensured on several levels.

First, at the central level the SLF will be managed by a Steering Committee involving the mainstakeholders - Government, employers' and workers' organizations, donors. The constitution of theSteering Committee and its participatory nature are set in the Law for the Social Investment Fund. Inaddition, all project components will be managed by separate structures that will include representationof key stakeholders in the respective components. The criteria for selecting the representatives to theabove bodies will be made public in advance and the selection will be conducted in a transparent fashion.

At the regional level the implementation of the components will be overseen by the Oblast Councils forRegional Development (OCRDs). The representatives of project beneficiaries (through the localgovernments) and other key stakeholders are members of the OCRD. Specific procedures will beincluded in the SIF operations manuals to outline the role of OCRD in project review and coordinationunder each component.

A participatory procedure for local-level project identification will be implemented. This procedure willlook for community consensus on local priorities, and will involve local governments, social partners,NGOs and community groups, etc.

The Information, Education and Communication (IEC) campaign is to ensure that the stakeholders'understanding of project objectives and implementation mechanisms is adequate. Regular quantitativeand qualitative surveys will contain indicators of whether the stakeholders' access to information and thechoice of information channels are adequate.

Participatory monitoring and evaluation mechanism envisaged under CIDI will give opportunities tostakeholders (including minority groups, the elderly and disabled, etc.) to voice their concerns. It willalso contribute to the overall environment of openness and active engagement.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

Given the nature of the operation, its design, implementation and monitoring and evaluation envisage anintensive level of stakeholder participation (see 6.2), including NGOs and CSOs.

A project identification process in the case of both CIDI subcomponents will be conducted in atransparent way, involving consultations with local CSOs and NGOs. The implementation of CIDI'scommunity subcomponent will, in many cases, result in the creation of community-based organizations.These organizations will play the key role in identifying, implementing and monitoring project-supportedinvestments at the community level. It is also conceivable that NGOs will be involved in the design andexecution of the EEC campaign as well as training and facilitation activities at the community level underthat component.

Local research institutes will be in charge of carrying out regular surveys to support the implementationof the Active Labor Services subcomponent. NGOs might also be contracted as providers of specificservices envisaged under that component.

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6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

The project proposes a two-phase targeting mechanism, initially to be based on a complex set of criteriatargeting poor conununities; and later, to use a poverty map that is being developed under the ongoingpoverty assessment study. The mechanism will also be supported by surveys envisaged under all threecomponents. Regular beneficiary assessments and the participatory monitoring and evaluationmechanism at the community level will enable effective targeting of the poor, excluded or disadvantagedcommunities and social groups.

In regard to social capital and community mobilization, the project envisages intensive training andcommunity facilitation efforts as well as a public information program that should enhanceempowerment and civic engagement. A strong emphasis on participatory approaches (see 6.2) willcontribute to the creation of social capital (community activism, transparency, trust) and indirectly to theenhancement of social cohesion.

6.5 How will the project monitor performance in terms of social development outcomes?

The following performance monitoring methods will be used to track project impact: monitoring ofpoverty and unemployment levels in targeted communities, annual beneficiary and social impactassessments, demand response at the community level to the interventions supported by the project,quantitative and qualitative research on social capital and citizens' readiness to pursue common goals.The above performance monitoring methods will have an explicit gender and ethnic dimension.

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

. . .Policy .- - ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes (9 NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) (9 Yes * NoForestry (OP 4.36, GP 4.36) (9 Yes * NoPest Management (OP 4.09) (9 Yes * No

Cultural Property (OPN 11.03) ( Yes * NoIndigenous Peoples (OD 4.20) 7 ()Yes * No

Involuntary Resettlement (OP/BP 4.12) --- -()Yes * NoSafety of Dams (OP 4.37, BP 4.37) U(Yes S No

Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) ( Yes * No

Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* (U Yes S No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

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F. Sustainability and Risks

1. Sustainability:

On central level, the project will support the Social Investment Fund - a Government institution withspecial poverty-alleviation, regional development, and employment promotion mandate. This recentlycreated institution draws on experience developed by the pilot Regional Initiatives Fund Project. Boththe Government and Bulgaria's most important development partners see SIF as a long-term instrumentfor implementing projects. The EU has positively assessed SIF for using it to disburse pre-accession andlater structural funds within the context of Bulgarian Government structure.

The sub-projects under the CIDI component have an excellent chance of sustainability, because of thehigh level of participation of local communities in sub-project identification, preparation andimplementation. This will create incentives at local level for cost recovery, appropriate maintenance andpressure on local administrations (where applicable) for funding recurrent costs. Capacity buildingactivities under the component will help sustain services and benefits beyond project life. Co-financingby communities will result in increased sense of ownership. SIF technical requirements will lead to theapplication of modem technologies and materials, resulting in reduced maintenance and operationalcosts.

The demand-driven and performance-based nature of the active labor market programs under BALMI is aprerequisite for the sustainability of project outcomes, including job placements and human capacity.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

-Risk .5- at-ng-- eRisk.MiWigation1MeasureFrom Outputs to ObjectiveGovernment remains committed to M From 1997 to 2001 a reform-minded Bulgarianreforms in general, and social assistance Government completed a full mandate withreform in particular. significant progress in structural reforms and

accession to the European Union. A newGovernment in 2001 was elected with aplatform preserving the main policy and reformdirections, and has so far demonstrated similarcommitment to fighting poverty, implementingreforms, and striving to increase economicgrowth.

Communities, local governments and M A strong public outreach program will be a partNGOs are willing to participate, and able of project preparation. On the sustainabilityto sustain provided services. side, appropriate procedures for project

selection will be designed, requiring anoperational financing plan for each project.

From Components to OutputsProject partners (local governments, S The pilot RIF has created significant capacitycommunity organizations, NGOs) in infrastructure project implementation withpossess sufficient capacity to manage local governments. However, the expandedprojects. wdirect work with communities will require

continuous commitment on behalf of theGovernment and the SIF.

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The SIF policy decision-makers (MOLSP S During the pilot phase of the social fund theand Steering Committee) maintain Government developed a set of regulations forregulations that allow for transparent and the SIF which, though not fully applicable,efficient operation of the SIF. have set the ground for the regulations of the

real SIF and became the basis for the SIEPOperational Manual. The pilot set a traditionof transparency and partnership. However,these regulations and the open and transparentmanagement policies have to be kept in orderto preserve the effectiveness of the SIF.

Overall Risk Rating S Government has so far demonstratedcommitment to fighting poverty, implementingreforms, and striving to increase economicgrowth. Judging by the pilot RIF and othersimilar programs, communities, localgovernments and NGOs are willing toparticipate in local development programs.However, sustained commitment is needed onbehalf of the Government and SIF to preserveappropriate SIF regulations, and to expanddirect work with communities.

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

Project implementation will involve three main agencies - the Ministry of Labor and Social Policy(MOLSP), the Social Investment Fund (managed by a tripartite Steering Committee but receiving itsbudget through MOLSP), and the Employment Agency (EA). SEF is still a young institution, and EA hadrecently been restructured (the previously independent National Employment Service was brought underthe auspices of MOLSP). The synchronized functioning of MOLSP, SIF and EA for this project willrequire building relationships and very good coordination and cooperation.

The pilot RIF PMU became full-fledged SEF staff. It will need to be expanded and supported in buildinga capacity able to handle the complex coordination, and the management and implementation of a widermenu of programs.

Successful project implementation will also depend on the functioning of the tripartite SIF SteeringCommittee, which represents the views of different stakeholders with varying interests - includingdifferent Government agencies, as well as labor and employer organizations.

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G. Main Loan Conditions

1. Effectiveness Condition

2. Other [classify according to covenant types used in the Legal Agreements.]

Dated covenant:* Select auditors by no later than February 28, 2003

Ongoing:* Prior Bank approval for any changes to/the Project Operational Manual or Operational

Manual for Sub-projects* Submit FMR to the Bank no later th$i 45 days after the end of the first calendar quarter after

the effectiveness date and quarterly/thereafter* Monitoring and evaluation report submitted to the Bank commencing March 31, 2004, and

thereafter annually* Maintain SIF with adequate staff and resources

H. Readiness for Implementation

0 1. a) The engineering design 'documents for the first year's activities are complete and ready for thestart of project implemnentation.

i 1. b) Not applicable.

2 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

2 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

0 4. The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank PoliciesEW 1. This project complies with all applicable Bank policies.O 2. The following exceptions to Bank policies are recommended for approval. The project complies

with all other applicable Bank policies.

Peter Pojarski~Z/ Annette Dixon Andrew N. VorkinkTeam Leader Sector Manager/Director Country Manager/Director

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Annex 1: Project Design SummaryBULGARIA: Social Investment and Employment Promotion

. key-Performance Data Collection.StrategyHierarchy of Objectives Indicators - - - Critical Assumptions,--t

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Support the Govermnent in Poverty headcount rate. 1. IMF reports. 1. Government maintainsadvancing substantial 2. Beneficiary Assessment 2. CEM. reform momenturn andstructural reforms to (satisfaction percentage) 3. Poverty assessment update. progress towards EUrationalize the role of the state accession.and enhance EU accession, 2. Improving the livingwhile protecting poor and standards of the Bulgarianvulnerable groups during the people remains a key objectivetransition. of the Government.

Project Development Outcome I Impact Project reports: (from Objective to Goal)Objective: Indicators:The project development Overall: 1. Beneficiary assessment. 1. Economic stability isobjective of the Bulgaria 1. Lower poverty headcount 2. Household surveys. preserved with modestSocial Investment and in targeted poor communities; 3. Project progress reports. economic growth.Employment Promotion 2. Shorter spells spent as 4. Technical evaluation reports 2. Economic growth results inProject (SIEP) is to reduce unemployed or under the 5. Ministry of Regional job creation.poverty and increase social poverty line; Development reports and 3. Improved access to basiccapital among the socially 3. More effective partnership statistics. infrastructure and servicesmost vulnerable groups between central government 6. National Early Warning improves income opportunities(long-term unemployed and and local communities in Report and standard of living.ethnic minorities) and poor addressing local problems 7. Data from the National 4. Income from laborcommunities through targeted (from beneficiary assessment); Association of the generated throughinterventions that foster 4. More vibrant community Municipalities in the Republic microprojects is spent oninitiative and self-dependence driven development in of Bulgaria (NAMRB) meeting basic householdin these communities. targeted poor communities. 8. UNDP Human needs.

Development Report for 5. Increased localCIDI: Bulgaria governments' responsiveness1. Number of beneficiaries and transparency leads toutilizing improved more and betterinfrastructure and services; income-generating2. Target beneficiary and opportunities of theprogram administrators constituency.assessments: attitudes towards 6. The institutionaleach other; and at least 60% framework of the SIF is ablelevel of satisfaction with the to support implementationavailability, quality of towards achievement of theinfrastructure, utilities and project objectives.social support servicesprovided through thesub-projects, andresponsiveness tocommunity-felt needs.(measured by beneficiary assessments);3. Satisfactory technical auditshowing that the completedmicro-projects are being

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operated and used by thebeneficiaries for the intendedpurposes.4. Level of social capital andcivic engagement incommunities (measured bybeneficiary assessments).

BALMI:1. More comprehensive labormarket and economicinformation available in threeregions;2. Active labor marketservices provided to about25,000 unemployed with grossregistered employment/jobcreation data as follows.Employment Services: 25%placement; Retraining: 40%placement for institutional,and 75% for on-job training;Small Business Assistance:5% business start-up;Incubators: 90% businesssurvival rate after one year.3. Net impact of activelabormarket servicessignificantly positive for themajority of participants.

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:Overall 1. Additional resources 1. MIS

provided to poor communitiesand the effectiveness of theuse of these additionalresources in reducing povertyand increasing social capital.2. Reduced long-term povertyand unemployment in general,and in the targeted poorcommunities in particular.

1. Community 1. Number of beneficiaries; 1. MIS 1. Local budgets vill be ableInfrastructure for 2. Unit cost per beneficiary; 2. Beneficiary Assessment to cover the operating andDevelopment Initiative 3. Effective microprojects 3. Impact Assessment maintenance costs of the(CIDI) percentage; (evaluation of micro-projects', infrastructure;* improved infrastructure 4. % of laborers hired from anti-poverty impact) 2. The social services/smalland services in poor lists of long-term unemployed; 4. EA data infrastructure will be used by

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communities; 5. Average wage in 5. NAMRB data the intended beneficiaries;* local communities and microprojects as % of 6. Bank supervision reports 3. Local contractors will belocal governments are stronger national average; interested in small, laborin the identification, 6. 25% average labor content intensive infrastructure works.preparation and for microprojects; 4. Local communities see theimplementation of 7. % of microproject wage economic benefits of socialcommunity-driven initiatives; payments going to unskilled capital development.* community ownership and workers. 5. Local governmentssocial capital; 8. Number of municipalities understand the link between* temporary employment participating; the transparency and quality ofand associated increase in 9. Number of public service they provide, and theearning and skills budgetary consultations; level of approval they receive.maintenance; 10. Beneficiary Assessment 6. There is local initiative to

(satisfaction percentage) capitalize on.11. Number of 7. Poor and vulnerable arecommunity-based hired locally;organizations established; 8. Poor and vulnerable are12. Number of community able to compete forsub-projects completed; newly-created jobs;13. Number of partnerships 9. Long-term unemployed seewith private and public their skills quickly deteriorateinstitutions established. if not given employment

opportunities;2. Active Labor Market 1. Short term labor market 1. MIS 1. Private sector is able andInitiative (BALMI) survey designed and pilot 2. Beneficiary Assessment willing to implement active* Long-term employment tested; 3. Impact Assessment labor market programs;and associated increase in 2. Semi annual surveys (evaluation of micro-projects' 2. Public and private laborearning and skills completed in three Oblasts; anti-poverty impact) market services are able tomaintenance; 3. Administrative framework, 4. EA data cooperate;* Enhanced prospects for including information system 5. Bank supervision reports 3. Private sector is interestedemployment through automated management in in public-private partnershipsdeveloping skills among place to manage service to provide labor services toprivate firms and contractors and provide gross vulnerable groupsself-employed individuals; impact evaluation data.

4. Active Labor MaketServices (ALMS) delivered toapproximately 25.000unemployed.5. The gross and net impact ofservices determined (i.e.impact on employment andwages of participants).6. Net Impact Studyimplemented7. Number of ALMSscontracts completedsuccessfully (i.e. meetingagreed performance criteria.8. Ratio between successfuland unsuccessful contracts.

3. Program Management, 1. Administrative costs as % 1. MIS 1. Salaries of SIF staff areMonitoring and Evaluation of project expenditures; 2. Bank Supervision competitive.* SIF is an efficient and 2. Timely completion of 2. The SIF legal frameworkwell-managed institution with Project Progress Reports. allows for anhighly-qualified staff. efficiently-managed

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institution.

Project Components I Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)1. Community US$ 50.53 million Project Progress Reports 1. Timely payment toInfrastructure for (EURO 51.31 million) contractors and suppliers;Development Initiative 2. Contractors are available(CIDI) locally to undertake work;

3. Local Governments arecooperative;4. Communities are willing toenter into partnerships withlocal administrations;5. Timely availability ofbudgetary co-financing onnational and local level.

2. Active Labor Market US$ 14.14 million Project Progress Reports 1. Job insertion programs andInitiative (BALMI) (EURO 14.35 million) job retention programs result

in long-term employment.2. Improved skills lead tobetter prospect foremployment.3. Timely availability ofbudgetary co-financing onnational and local level.

3. Program Management, US$ 1.57 million Project Progress Reports 1. Low tumover of key staff.Monitoring and Evaluation (EURO 1.6 million) 2. Policy level approval of

appropriate operationalregulations.3. Timely availability ofbudgetary co-financing

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Annex 2: Detailed Project DescriptionBULGARIA: Social Investment and Employment Promotion

The overall objective of the project is to complement the existing, relatively good social protectionsystem through addressing the poverty and long-term unemployment that persists in "pockets",concentrated regionally, among the poor long-term unemployed, and among specific ethnic minorities(Roma, Turkish). Because these targeted vulnerable groups suffer from multiple disadvantages (e.g.,exclusion, weak social capital, poor access to markets and basic services, low employment, weakness ofsocial capital), the project will offer a range of instruments, all focused on building the assets, individualand communal, of poor and vulnerable people living in these pockets.

(i) The CIDI component will address issues related to empowerment and integration of targetedcommunities and of inadequate access to basic infrastructure and services, by allowing communities toidentify and to manage, themselves, development investments of greatest local priority. It is hoped thatthe investments will also lay the groundwork for improved market access and human capitaldevelopment-preconditions to enhancing employment opportunities and potential returns tomicro-credit financed activities (although the employment enhancement goals are more directlyaddressed through the other two components).

(ii) The BALMI component will offer information and active labor market services to assisteconomically disadvantaged individuals in poor communities to extend and use their human capitalproductively, particularly in the context of changing economic and labor market conditions.

These mutually reinforcing targeted interventions are designed to secure and deliver additional help tovulnerable communities to leverage their own efforts to escape poverty. The needs of these hard-to-reachvulnerable groups-the hard-core poor, minorities and long-term unemployed-can only be addressedthrough an integrated approach that combines the availability of the two project components to thesetarget groups: community-based development and infrastructure to improve human capital and well-beingas well as the physical infrastructure that is needed to support improvement in the local businessenvironment (which fosters new business and local labor market development); and ALMSs targetingindividuals and firms (which reduces unemployment, creates jobs, and raises productivity and incomes ofworkers). The actual combination of these interventions will be determined by the communities andother users during project implementation making the project demand driven. By achieving theseobjectives, the project will also provide support and financial resources to the ongoing decentralizationprocess and help empower democratically elected local governments.

The two components will be coordinated on local level through the regional RCEs. RCEs are specialregional coordinating mechanisms on the issues of employment and regional development, involvingregional and municipal governments, the Employment Agency branches (labor bureaus), the socialpartners (employers and unions) as well as NGOs working in the field of employment promotion andregional development. The same coordination mechanism will be used to finalize targeting decisions onthe distribution of funding for the BALMI component.

By Component:

Project Component 1 - US$50.53 millionCommunity Infrastructure for Development Initiative (CIDI) - (EURO 51.31million)

The primary aim of the CIDI component is to improve delivery of social and economic services, and

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enhance social capital and capacity of poor communities and local governments by financing small-scaledemand-based initiatives primarily in the social sectors. This will include but not be limited torehabilitation of old and construction of new basic infrastructure stimulating local development, such as -water and sewerage; roads; market places, erosion control mechanisms etc.; as well as infrastructuredirectly linked to the provision of social services to the population, such as centers for the disabled,social care centers, schools; health facilities, community centers.- in poor communities. Under the SIF,CIDI will consolidate and build on the positive experiences gained during the implementation of the RIF.In order to ensure that social priorities are met, indicative allocations (of Bank financing) of EURO 12.03million (US$ 11.77 million equivalent) for social protection infrastructure and EURO 25.58 million (US$25.03 million equivalent) for economic development infrastructure will be made up front.

Two windows of financing are envisioned as part of CIDI: 1) direct financing to communities toimplement small-scale community identified subprojects (up to US$80,000); and 2) financing tomunicipalities to implement more technically complex, multi-community projects (up to US$ 200,000).Although both options were available under the RIF, the second option was the preferred method ofdoing business and RIF has gained extensive experience in refining the methodology and developingprocedures for providing funding to and working in partnership with municipalities. In order to promotedirect financing to communities, an indicative amount of at least 30 percent may be allocated to thiswindow from the total financing of EURO 37.61 million (US$36.80 million equivalent).

Under the new SIEP project, special emphasis will be put on targeting and mobilizing poor communitiesto access funds from the SIF. Communities will be responsible for identifying needs, selecting priorities,and managing implementation of the subprojects (including for example hiring contractors, supervisingconstruction, accounting/bookkeeping, procuring materials etc.). Communities will carry out these tasksnot only with the help and guidance of SIF technical staff but also with assistance from their localgovernment offices and technical units.

Communities will also be expected to contribute a minimum of 20 percent (net of taxes) of totalsub-project costs in the form of cash, labor, and/or materials to demonstrate their comrnmitmnent to theinitiative and promote ownership of the asset. It may be possible to reduce community contributions forprojects that address ethnic minority priorities or priorities of women's groups as an incentive to promotesuch types of projects.

For the purposes of the SIF, a "community" is defined as a group of individuals living in close proximityto each other and/or other social groups, grass roots entrepreneurs or associations able to identify a needand come together to access project funds. The size of the community will vary depending on the type ofsub-project and include people from all areas that make direct use of the sub-project. The concept of acommunity coming together to promote the common good is already existing in Bulgaria. Communityorganizations exist such as the Chitalishte (community organizations that promote cultural and socialactivities) for example which is a traditional expression of community organization that has played amajor role in education and the preservation of the national cultural heritage at the community level.

A municipality is the smallest legal unit of government administration and can cover from 6,000-40,000individuals. The elected municipal body consists of a mayor and local council members. Theadministrative body is divided into several technical departments. A municipality usually comprises atown and several surrounding villages and hamlets.

During the first phase, SIF will use a set of indicators to target poor municipalities - these indicators arebased on RIF experience, but are developed further in order to capture deteriorating economic and socialenvironment as well as regional potential for business development. These indicators and the

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methodology for their practical implementation are described in detail in the Operation Manual.

To enhance the ability of SIF to reach poor communities within targeted municipalities, SIF will use avariety of methods. First notional per capita allocations will be made per municipality. This increasestargeting transparency and sends a clear signal to the local level about the amount of financing availablewithout distorting the project's demand driven features. Second, outreach and consultation efforts will becarried out by facilitators at the local level to encourage participation by the poorer communities withineach municipality. Third, the targeting objectives and criteria will be clearly transmitted to the localgovernments and community groups for transparency and information.

Window 1: Direct Financing of Communities

This promotes a new approach to community development (for Bulgaria) by providing an opportunity forcommunities to effectively participate in the identification, preparation, and implementation of their owndevelopment in collaboration with government agencies, NGOs and private sector. This ensurescommunity participation beyond identification and involves communities in the overall implementation,management, and monitoring of the community asset. While communities retain ownership of the entireprocess, appropriate mechanisms for encouraging transparent and accountable management are ensuredand overseen by SIF.

The project cycle for implementation of this window would be similar to procedures being followedunder the RIF to provide financing to municipalities. However, as noted above emphasis will be put ontargeting training and involving communities throughout the entire project cycle. The modifiedcommunity selection and financing process is currently being tested under a World Bank JSDF grant forbuilding social capital (TF026777), with the support of the USAID-funded PLEDGE program. It isexpected that after the completion of the grant the grant procedures will be incorporated in the SIF OPM,and the capacity built under the grant will be used to implement CIDI Window 1. No later than 6 monthsbefore the closing date of the grant, the Government and SIF will develop a plan for incorporating thegrant's results and experience (technical expertise and operational regulations) in SIEP's Window 1operations.

Preparation of Communities

Once poor communities are identified using poverty criteria (rate of unemployment as well associal/economic indicators), two mechanisms could be used for mobilizing communities:

* A targeted Information, Education, Communication (LEC) campaign will be developed to raiseawareness among all stakeholders - community members/leaders, politicians, municipalities, contractors,suppliers - on the project's objectives and methodology. The campaign which will start out on a targeted,small-scale basis covering a limited geographical area will expand as the project increases its coverageand scope. In addition to sensitizing communities and other stakeholders, the IEC campaign will strive todocument and disseminate stakeholder experience through the use of radio messages, posters, infopamphlets etc.

* An effective facilitation process will be put in place to mobilize communities and ensure atransparent consultation process at the community level. Specific emphasis will be put on inclusion ofwomen and ethnic minority groups during the consultation process. Communities will be expected toidentify problems, prioritize needs, and explore options for solving community problems. As envisioned,SIF will hire staff (trained facilitators, community leaders, NGOs etc.) to work closely with SIF and

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communities to develop this process further. Synergies and opportunities for collaboration are also beingexplored with the USAID funded PLEDGE project which seeks to build local capacity for strategizingcommunity development priorities, designing local projects that address those priorities and accessingresources and assistance needed to implement them successfully.

Implementation and Operation and Maintenance by Communities

Once a community proposal/application is approved by SIF, communities will be expected to manage theimplementation of the project. Communities will elect a Project Management Committee (PMC) whowill be responsible for overseeing overall implementation of the sub-project. This committee willregister itself (as a representative of the community) as a non-profit legal entity, open a bank account,manage accounts, hire contractors, procure materials, and provide periodic reports to communitymembers, local leaders, and SIF. Emphasis will be put on allocating seats for women and minorities inthese committees. The greater community as well as the PMC will be involved in the day to daymonitoring of the sub-project.

The PMC will receive technical support from SIF staff (training, participatory audits/supervision ofcommunity accounts, assistance on hiring and supervising contractors, ensuring technical quality etc.) aswell as local government staff (e.g., local authorities will provide designs, provide technical oversight,clear each stage of construction before financing, etc.). Training for communities will be carried outthroughout the sub-project cycle.

Communities will also put in place a sound maintenance plan for upkeep of the assets. This couldinvolve electing a maintenance committee, developing plans for community fundraising, charging userfees, making formal arrangements with local authorities etc. These issues will be discussed duringpreparation and maintenance arrangements (financial and technical) will be described in the applicationssubmitted by the community.

The procedures for financing communities and monitoring implementation is not very different from theway in which the RIF supported municipalities and other intennediaries. In fact, many procedures forselection and approval of subprojects, technical monitoring (use of standard designs, unit cost databasesfor example) are already in place and will only have to be slightly modified for providing financing tocornmunities.

SIF has developed a detailed manual (the Operational Manual, or OPM) incorporating the project cycle,systems and procedures for implementation of subprojects using direct financing of communities. Thismanual also includes environmental safeguard provisions to ensure environmental sustainability of CIDIsub-projects. The OPM will be reviewed at negotiations.

Window 2: Financing of Municipalities

The pilot RIF provided a capable institutional framework and a wealth of experience for designing thiscomponent well. The pilot RIF Operational Manual was updated and modified to incorporate lessonslearned provides detailed guidelines on targeting, selection criteria, appraising and approval ofsubprojects, technical assistance and supervision, financial management, procurement, monitoring andevaluation etc. of this component. It became the basis for the SIEP OPM (see last paragraph of previoussection).

In addition to financing subprojects, the component will build the capacity of municipalities to identifyand implement projects in an open and transparent manner and to work in close cooperation with the

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Regional Employment Councils.

A recent study commissioned for the preparation of SIEP, demonstrated that small municipalities lackcapacity and proposed that efforts be made to disseminate knowledge and technical assistance in all basicproject management areas. As such, SIEP will finance projects for improving access to information,training, (including training of trainers, and general and specialized training modules); and by helping toestablish a wider market for consultancy services to local governments.

Project Component 2 - US$14.14 millionThe Bulgarian Active Labor Market Initiative (BALMI) (EURO 14.35 million)

The objective of the Active Labor Market Programs (ALMSs) component is to increase productivity andreduce poverty by assisting unemployed economically disadvantaged individuals in poor communities,and to extend and use their human capital in response to changing economic and labor market conditions.This objective will be accomplished through two sub-components:

(a) Labor Market Information, to develop better short and medium term economic and labor marketinformation via a series of medium term (semi-annual) qualitative surveys, with a view towardreplication countrywide; and

(b) Active Labor Market Services (ALMSs), to provide a range of services (e.g. employment services,retraining, small business assistance, incubator, and local economic development planning) to theunemployed in poor communities to assist them in rapidly re-entering the labor market.

The project will ensure that poor communities receive additional resources to carry out ALMSs and thatthese communities are served with the kind of ALMSs that have proved the most effective in helpingunemployed workers back to gainful employment. This design and selection of programs will be guidedby on-going monitoring of gross impact of the programs, review of the recently completed net impactstudy, and replication of the latter at the mid-point of the project by analysis generated by the M&Esystem of SIF and EA.

Implementation

The component will be technically managed on a day-to-day basis by the Employment Agency (EA) incooperation with Local Employment Bureaus (LEB) and selected service providers, and in cooperationwith the SIF. A protocol will be signed between the SIF and EA defining their respective roles. Morespecifically the EA will establish an Active Labor Services Department (ALSD) with a civil servant asDepartment Head. There will be a support staff of four (4) individuals at the national level, and nineout-stationed (9)-extension agents (one at the EA and one in nine regions) to provide overall manage.iC-tof the component. These support staff will be long-term local consultants funded by the project and hiredthrough a technical assistance contract. The role of the four central staff, and extension agents, would beto provide overall guidance and supervision for the labor market information and active labor programcomponents including design and operation a MIS, and providing technical input to the twosub-components.

The SIF will act as a "business office" regarding procurement of the three technical assistance contractsrelated to the component, and goods and materials for the component, based on requests from the EA.The SIF will also disburse all funds to Local Employment Bureaus which are contracting for active laborservices, after invoices from Local Employment Bureaus have been approved by the EA. Management of

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specific sub-components is outlined below.

Labor Market Information Sub-Component: These surveys will be designed and pilot tested in oneOblast, then replicated in three Oblasts four times at six-month intervals. The Surveys will be supervisedby the EA, in cooperation with selected Local Employment Bureaus, and in consultation with theNational Statistical office (i.e. for sample selection).

Active Labor Services Sub-Component: This sub-component has two parts: (a) active labor marketservices, and (b) a net impact study of active labor services.

* Active labor market services. The EA ALSD will provide overall management and LocalEmployment Bureaus will actually contract for labor services. Local Employment Bureaus willcontract with service providers following procedures agreed with the Bank. EA extension agents willbe stationed in 9 regions and be available to assist Local Employment Bureaus with promotion ofservices, contracting, and monitoring; and will review and endorse all contracts before they areexecuted by Local Employment Bureaus (LEBs). Local Employment Bureaus will finance servicesusing local funds, and request reimbursement from SIF via the EA. Regarding the second, the SIFwill mange the contractor, which will be selected to evaluate active labor services.* Net Impact Study of Active Labor Market Services. The SIF will manage this study, incooperation with the EA and Local Employment Bureaus.

Detailed Principles and Criteria for Active Labor Market Services (ALMS)

General Principles

Availability of ALMS Funds to Regions and Municipalities: ALMS funds will be available, via LocalEmployment Bureaus, in all Municipalities. Allocation will be done by 28 Regions based on an algorithmagreed with the Bank that would use levels of formal unemployment and poverty as the key allocationmechanism (see Annex II of the PAD). It is understood that the allocation would be done on a yearlybasis, and that unused funds within Regions could be reallocated by the end of first half of each year.

Availability of ALMS services to individuals: ALMS services will be provided to individual citizens,through local services providers selected following procedures agreed by with the Bank. Eligibleindividuals include those who are formally registered as unemployed at Local Employment Bureaus andthose who have been served notice that they are going to be released from employment within threemonths. At least 40 percent of participants served in each Region must be those identified as eligible forsocial assistance.

Allocation of ALMS Funds by type of Service: The ALMS is demand driven; there is no specificallocation of resources by ALMS program at the national, regional, or municipal level. However,Municipalities will develop a general plan for use of the services each year, which is to be presented toEmployment Commissions which will coordinate the plan with Regional Committee for Employmentbefore solicitations for individual service provider contracts are begun by Local Employment Bureaus.Once the general plans are approved by the Employment Commissions, Local Employment Bureaus willproceed with solicitations and sign contracts without further approval from regional authorities, unless aspecific project clearly goes outside the parameters of the general plan.

Cost of services reimbursed to service providers: In general, reimbursement will be based on thecontracted average cost per client (i.e. by month, day, hour) times the number of clients receiving

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services. Service providers are eligible for limited mobilization payments to a maximum of 25 percent,but will thereafter present bill for services provided on a monthly basis.

Monitoring and Evaluation of Services: Local Employment Bureaus will have the primaryresponsibility, with support by the Employment Agency (EA), for monitoring of service providers. Thegross impact of services will be evaluated by all service providers as a condition of their contracts asservice providers are required to report on the status of clients at the end of each program, when a clientterminates a program, and before final invoices are paid (e.g., did clients get jobs after services, did theystart businesses, what is their wage and/or income). Most service provider contracts (e.g. training, smallbusiness assistance, employment counseling) have built-in incentives to improve labor market impact(e.g. negotiated levels of job placement and business start-up, with financial incentives to meetobjectives, and disincentives if objectives are not met). The Local Employment Bureaus will alsomaintain records of all service contracts through a Management Information System (MIS) developed bythe NEA in cooperation with the SIF. Finally, there will be a net impact study of results of the ALSduring the second half of the project; the contractor implementing this study will be supervised by theSIF. Service providers failing to meet negotiated minimums would not be eligible for further contractsfor a period of a minimum of one year. However, initial contracts would not be excluded from Loanfinancing)

Labor mobility: Mobility is to be encouraged by providing information, by sharing information onservices being provided in different regions, by relocation of grants that can be provided through theLocal Employment Bureaus, and by allowing individuals from one municipality to participate inprograms being provided in other municipalities.

Contracting for ALMS: There are no predefined lists of service providers. Local Employment Bureauswill publicly and regularly (i.e. every several months) solicit proposals from service providers on anongoing basis. Proposals that meet minimum standards will be negotiated and implemented, dependingon availability of funds. There is no direct competition between service providers, unless proposals foridentical 'services are made, or limited services are needed in one locality (i.e., one incubator or smallbusiness center). If there is sufficient demand, identical proposals may be funded, if not the lowestcost-qualifying proposal is to be funded. Solicitation for incubator service providers must be done usingnational competitive bidding because of the size of the contracts.

Criteria for Specific Active Market Labor Services2.1 Criteria for Employment Services:

Eligible lServices: vocational and social information and counseling, provision of labor marketinformation, aptitude/ interest assessment, job search, setting up job club programs, labor exchange, andrelocation services

Eligible Service Providers: non-govemment non-profit organizations (NGOs), private firms, andemployer and employee organizations. Providers must demonstrate minimum capabilities to be serviceprovidersm (e.g. staff qualifications, facilities, financial viability, placement capability) on proposals.Service providers must secure initially negotiated registered job placement rate of a minimum of 25percent. Contracts can be for up to one year, and follow-up contracts may be implemented if all partiesconcur.

Eligible Costs: staff and administrative personnel, rent and utilities, consumable materials, clienttransportation for job interviews, non-durable goods, depreciation of equipment - 20 percent per year,

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relocation costs up to US$500 lump sum per family.

2.2. Criteria for Training Services Persons receiving training under this program cannot receivetraining under locally financed EA training programs and vice versa.

Eligible services: vocational and literacy training. Local organizations proposing training programs mustshow evidence of demand for trained workers and agree to a negotiated registered job placement rate of aminimum of 40 percent for institutional training and 75 percent for employer provided on-job-training.

Eligible Service Providers: enterprises, private firms, NGO, and public education and traininginstitutions. Institutions must show minimum capability for provision of training services (e.g. staffqualifications, facilities, financial viability, placement capability on proposals).

Eligible Costs: maximum length of training per client (6 months), training and administrative personnel,rent and utilities, consumables, client transportation, non-durable goods, depreciation of equipment(maximum depreciation 20 percent per year), scholarship allowances up 60 percent of minimumunemployment benefit, hostel accommodation costs if needed, and costs of social insurance for clients inon-job training. Enterprises, which are to train clients for internal hiring, will be reimbursed 50 percentof total training costs; other contractors (e.g., training institutions), which are to train individuals for thegeneral labor market, will be 100 percent reimbursed.

2.3 Criteria for Small Business Centers

Eligible Services: provision of business planning including bookkeeping/financial, legal, marketing andsales services, assistance in contacting local authorities, and other consulting services to the unemployedwho intend to start, or who were unemployed and started businesses during the past 24 months.

Eligible Service Providers: private agencies and non-government organizations and other associations.Service providers, which have, or intend to develop, links with micro-small business finance programsand incubators, are encouraged to apply. Contract of length of maximum one year shall be subject toextension provided all parties agree. A minimum registered business start-up rate of 5 percent of clientscontacting service providers is required for all contracts.

Eligible Costs: personnel and audit services, transportation costs, rent and utilities, consumable materialsand non-durable goods, depreciation of equipment (maximum 30 percent per year).

2.4. Criteria for Small Business Incubators

Eligible Services: facilities, small business technical assistance for incubator tenants, shared supportservices (i.e. accounting, security, communications) and general office support equipment.

Eligible Service Providers: private and' non-government organizations. Applicants will be judged onavailability of facilities, qualifications of management staff, linkages with existing small businessorganizations and financing institutions, financial and administrative capabilities, and experience withsmall business, and linkage with sources of micro-small business finance. Contract term is up to threeyears, with no contract follow-up provision. Service providers may also be awarded a separate contractfor provision of small business technical assistance to the unemployed who are not tenants of theincubator (see 2.3 above). Minimum business success rate of 90 percent each year for businesses in theincubator.

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Eligible Costs: facility refurbishment and/or rent but not land or new building construction, generaloffice support equipment; limited staff costs (e.g., manger, secretarial/accounting, security staff),administrative costs, consumable supplies and non-durable goods, and operating expenses.Reimbursement of operating costs to be phased out over three years (e.g., 100 percent first year, 66percent second year, and 33 percent for third year).

2.5 Criteria for Local Economic Development Planning Initiatives

Eligible Services: (a) grants for planning and preparation of proposals for studies and promotionalmaterials (maximum US$ 2,500), (b) local economic potential studies (maximum US$ 20,000), (c)development of promotional materials on local economic potential and investment projects inconsultation with District Council for Regional Development (maximum US$ 5,000). Planning may bedone at the municipal, , regional, or national levels depending on needs.

Eligible Service Providers: NGOs, Foundations, Employer Organizations, private entities. All proposalsmust be approved by local social partners who must be involved in review and dissemination of theresults. Proposals may be presented for any of the three eligible services; with the understandingmovement from phase (a) to (b) to (c) would be based on successful completion of previous phases.

Eligible Costs: local consultant salaries and fees, travel and per-diem, consumable materials andsupplies, communications, printing.

Project Component 3 - US$ 1.57 millionProject Management, M&E (EURO 1.6 million)

This component will act as a business office for the project including all liaison and reportingwith the Bank, administer all procurement cover the following core projectexpenditures/activities: operating costs, training, technical assistance, monitoring and evaluationactivities of sub-projects and work by the SIF to further develop and strengthen this newinstitution on behalf of the Government.

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Annex 3: Estimated Project CostsBULGARIA: Social Investment and Employment Promotion

'N. --= - - ocal". Fop3igi§ii1' -6alr-] -,mpon n . EURb ri,illDone -lEpRooiIjEoSQrUdllion

1. CIDI 33.98 17.33 51.312. BALMI 4.26 10.09 14.353. Project Management, M&E 1.52 0.08 1.60

Total Project Costs 39.76 27.5 67.26

Front-end fee 0.51 0.51

Total Financing Required 39.76 28.01 67.77

g ory - . -. or.y:IEocal R 0Q`Thtal

Goods 0.56 0.00 0.56Consultant Services 1.12 0.55 1.67Training 0.41 0.06 0.47Active Labor Services 3.24 9.74 12.98Grants for sub-projects 33.34 17.16 50.50Operational Expenses 1.08 0 1.08

Total Project Costs 39.76 27.5 67.26

Front-end fee 0.51 0.51Total Financing Required 39.76 28.01 67.77

Identifiable taxes and duties are 0.84 (US$m) and the total project cost, net of taxes, is 66.44 (USSm). Therefore, the project cost sharing ratio is75.25%°o ortotal project cost net of taxes.

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Annex 4 Economic AssessmentBULGARIA: Social Investment and Employment Promotion

A. General

The overall objective of the project is to address the poverty and long-term unemployment of "pockets"of the population, concentrated regionally, among the poor long-term unemployed, and among specificethnic minorities (Roma, Turkish). These targeted vulnerable groups suffer from multiple disadvantages(e.g., exclusion, weak social capital, poor access to markets and basic services, low employment,weakness of social capital), resulting from specific governance or market failures. The project willaddress those failures by offering a range of instruments. First, the CIDI component will improve theability of the Government to identify and manage development investments of greatest local priority.Second, BALMI will be used to address a marketfailure by improving access to and motivation for usingALMPs by economically disadvantaged individuals in poor communities who currently do not engage inretraining and other ALMPs, even though they would benefit from it, because they are misinformed orface some other constraint. The BALMI component will also remove the inefficiencies in this type ofprograms by creating direct links between program funding and program results.

B. Economic Implications of the Infrastructure Component

The economic assessment of community infrastructure projects (based on pilot Bulgaria social fundexperience as well as on international experience) shows that these provided greatly improved servicesand contributed to local social capital formation and capacity building very effectively and efficiently.The project will build upon these characteristics of the community micro-projects to improve local andcentral governments' effectiveness in identifying and funding projects of highest local priority. Thesemicro-projects will generate some employment and will transfer some income to the poor but what theyare most efficient in is strengthening the social capital of these disadvantaged communities. This is whythe CIDI component will focus on building the social capital of disadvantaged communities..

1. Emphasis on participation and prioritization

Beyond the improvement of local assets, CIDI will work to make local investments more efficient -thatis, achieving more with less resources- through reducing costs and leakages. One of the ways ofachieving this is through improving the social capital within the communities. There are manydefinitions of social capital with varying details, but a general one summarizes social capital in informalterms as trust influencing collective action, where trust is the set of expectations about the actions ofothers that have a bearing on ones own choice of action, when that action is chosen without observing theactions of those others. As put by K.J Arrow: "Trust is an important lubricant of a social system. It isextremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people's word....Trust and similar values.... increase the efficiency of the system, enable you to produce more goods"(Arrow, K.J. (1974) The Limits of Organization. New York, NY: W.W. Norton, p.23)

Recent theoretical and empirical studies show that the level of social capital and the presence ofparticipatory approaches in the development and implementation of social funds microprojects hassignificant bearing on the success and sustainability of the microprojects (Kammersgaard, Jesper (1999)Causalities Between Social Capital and Social Funds. World Bank Social Protection Discussion PaperNo. 9908.) The main focus of development projects has moved away from the creation of employmentopportunities and infrastructure towards establishing participatory approaches involving the beneficiariesinto the development process. This change is caused by a realization that by involving vulnerable groups

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into the identification, implementation, and maintenance process the success rate of projects will increaseand at the same time empower the beneficiaries to take better care of their development needs in thefuture.

2. What was the RIF experience?

The conclusions of the importance of participatory approaches in social funds was also confirmed by theBulgaria social fund pilot - the Regional Initiatives Fund (RIF).

2.1. Better ServicesWhile the net wage benefits of microproject job opportunities were relatively low, microprojects werewidely appreciated by communities and local governments for extending, restoring and preserving basicservices and public assets such as water and sewage infrastructure, school buildings, health facilities,streets, small bridges and market places. The Beneficiary Impact Assessments (BIA) and the Bank'sMidterm Review Report concluded that the benefits from improved services were significant andcommunity members expected these benefits would be more long lasting and would benefit many morepersons than income benefits from temporary jobs. In 1999 and 2000, the BIA found that 90 percent ofrespondents thought their microproject was "rather useful" or "very useful". On the whole, the socialeffects of the microprojects were significant and appreciated by local government representatives andresidents. The principal social effects identified by residents were temporary jobs and improved facilities.

The RIF experience illustrated that the SIF has much potential to introduce more cost efficient norms inschools, public buildings and other microprojects to enhance longevity and lower maintenance costs.According to the PMU, the Ministry of Regional Development issued new energy-efficiency standardsfor public buildings in January 1999 based on European Union norms, and consultants were required toinclude these norms in Bills of Quantity (BoQ) for RIF microprojects. The RIF also piloted theconstruction of a new model of social homes for "socially disadvantaged, physically and mentallydisabled" youths.

In addition, the local governments which were in most cases formal RIF partners, had limited experiencewith formal procurement procedures. RIF experts trained their local counterparts and led and supervisedthem in the implementation of the standard World Bank procurement procedures for selectingcontractors. This resulted in the selection of higher-quality lower-costs bidders, and helped build thecapacity of the local counterparts for conducting efficient procurement procedures.

The microproject experience demonstrated that some RIF policies and procedures need to be refined toenable the SIF to better reach people living in poverty and navigate the political and social constraintsthey face, including: (i) balancing limited resources with enormous need and heightened expectations;and (ii) weighing the importance of access to services next to protection and extension of infrastructure.

Needs versus resources. All social funds struggle with the exigency to balance limited resources withenormous needs, and the RIF trial suggests that the SEF will too. The high demand for small-scalemicroprojects reflects the poor state of Bulgaria's schools, water supply, sewage infrastructure, roads,and other urban infrastructure and the considerable investment that will be required to upgrade theseservices. But a social fund with job creation aspirations will encounter tension with its humandevelopment and other social aspirations. To illustrate: Initially a labor content of 30 percent (laterreduced to 25 percent) was set as a minimum requirement for the approval of RIF microprojects in orderto optimize job creation. To achieve this percentage, microprojects with higher costs of materials werelimited or delayed and equipment was often excluded. As a result, there are numerous examples of RIF

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microprojects which would have had greater impact if additional funds had been available for equipment:sewer works without treatment facilities, partially-rehabilitated school buildings without sufficient desksand teaching materials, cultural centers with new roofs but nonfunctioning heating systems (TechnicalReview, p. 5-6). The challenge for the SIF will be to maximize the impact of its investments by using itsleverage to attract, and help communities attract, other funds, especially for equipment.

2.2. Institution BuildingMunicipalities. The RIF contributed to Bulgaria's broader efforts to decentralize the provision of publicgoods and services to local governments by delegating responsibility to municipalities to directly managemicroproject implementation. Under RIF procedures, municipalities identified microprojects inaccordance with local and regional development plans, secured permits and clearances from ministriesand other government agents, contributed 16 percent average microproject costs in cash and kind,procured design and construction firms, appointed local work site supervisors, approved quality of worksprior to the PMU's release of payment to contractors, and took responsibility for recurrent operating andmaintenance costs. The experience of social funds around the world suggests that delegation of thesetasks to local governments bodes well for greater benefits in terms of local governance, accountability,local capacity building and sustainability of local services.

Bulgaria's economic transition has entailed the rapid devolution of fiscal responsibility for schools,water, sewage, roads and social homes to municipalities. At the same time, there has been a mismatchbetween the expenditure and revenue responsibilities allocated to municipal governments. In order forthe SIF to help municipalities and community groups cope with their new management and financingresponsibilities, greater attention must be paid to provision of technical assistance and training, especiallyto increase their revenue-raising capacity and thus fulfill their recurrent costs commitments. Although itis not necessarily SIF's responsibility to provide this institutional strengthening, it is in the country'sinterest that the SIF encourage it to happen.

One way the SIF can encourage and foster capacity building is by collaborating with existing localgovernance and institution building programs such as PLEDGE, Capacity 21 and Municipal Forunm.Another way the SIF can encourage local institutional development is by creating a grant windowespecially for training and technical assistance that may or may not be tied to microprojects, but whichwould aide local governments in preparing, implementing, monitoring and evaluating local investments.

Training topics could include budget estimation, fund-raising, procurement, financial management,citizen participation and other topics based on demand from the local level. Also, in order for the SEF tocontribute to better local governments, SIF evaluation activities need to focus more on howmunicipalities are coping with microprojects in the post-implementation stage. The BLAs and TechnicalReview of RIF microprojects did not assess whether municipalities were fulfilling their commitments foroperating and maintenance and whether refurbishment produced desired savings through energyefficiency investments, etc. These are important topics that should be evaluated on a yearly basis. SIFcould also consider adding some other features that are common in other social funds, such as: (i)requiring communities to report back on implementation of operation and maintenance plans and budgets(or "performance contract"); (ii) making a second microproject in a municipality contingent uponsuccessful implementation of the operation and maintenance plan for the first microproject; and (iii)encouraging and investing in development of users associations for schools, water, and othermicroprojects.

Finally, RIF did have clear internal rules and procedures. However, accountability is a two-way street,and RIF was not always perceived from the outside as a transparent and objective funding mechanism.SIF will have to be more transparent to earn and preserve its credibility among local governments and the

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public by abiding by clear rules of the game for microproject approval and avoiding discretionalmicroprojects without public disclosure and justification.

Contractors. RIF microprojects yielded important evidence that small private firms could deliver highquality works in a proper incentive structure, with close supervision by RIF staff and on-site supervisors.Threat of disqualification from future contracts also seemed to be a strong incentive for contractors toperform well. Emphasis on accountability and discipline in preparation of bids, adherence to technicaldesigns, contract values and implementation schedules may have improved overall capacity of the smallbusiness sector.

2.3. Temporary EmploymentFour indicators were selected during RIF Project design to measure job creation and income supportperformance: (i) number of labor days of employment; (ii) average labor content for microprojects; (iii)percentage of laborers hired from list of long-term unemployed (more than 6 months); and (iv) averagewage in microprojects as percentage of national average wage. The analysis below is limited to data fromone survey of laborers and contractors conducted in October 1999, covering the first 49 microprojects("Evaluation of Microprojects Anti-Poverty Impacts," hereafter, "anti-poverty study"). The analysis alsomakes reference to findings of the PMU in 2000 during its evaluation of payroll data on the first 58infrastructure microprojects.

Labor days. A total of 280,000 person days of employment were expected to be created by the firstUS$4.7 million for microprojects, but the results were far less than anticipated. According to preliminarydata provided by the PMU in 1999, the funds set aside for microprojects were estimated to produce labordays equivalent to 71 percent of the original goal or about 200,000 labor days (Mid-Term Review, p. 16).However, subsequent data provided by the PMU in June 2001, showed that just 99,500 labor days or 36percent of the original goal, were created from the US$4.7 million equivalent. The significant differencebetween the 1999 and 2001 data reflects a discrepancy between the PMU's estimates and actual laborcontents for microprojects: the 1999 data was taken from BoQ, or what the contractor estimated to pay,while the 2001 data reflected actual labor costs according to payroll statements. The significantdiscordance between 1999 and 2000 data also can be explained by the PMU's revision of its formula forcalculating labor content (Technical Review Report, p. 13).

Labor content. While it is important to have reliable tools for estimating and measuring labor days, a keydeterminant of labor creation is labor content, and on this indicator the RIF Project fell far short of itsgoal. The goal set during RIF Project design was an average of 45 percent labor content formicroprojects, but an average of just 24 percent was achieved (PMU data). The lower labor content isattributable to (i) high cost of equipment relative to labor for the types of microprojects ordered bymunicipalities; and (ii) inappropriateness (because of the potential for market distortions) of imposingmore labor-intensive work methods on contractors (such as manual labor for digging and backfillingtrenches) to increase the labor content of common microprojects. While the labor content outcome wasdisappointing, it was not inconsistent with similar types of works in social funds in nearby countries thatalso struggle to maximize labor creation through social funds.

Hiring long-term unemployed. Although the RIF microprojects did not yield the number of labor daysand consequent job opportunities as envisaged, they did afford temporary jobs to some of the mostdisadvantaged laborers in the labor market. According to the anti-poverty study, 60 percent of employeeson contractors' payrolls were "newly hired" or specially hired to execute microprojects; the other 40percent had already been working for the contractor company. Of newly-hired workers, many werelong-term unemployed, and over half (52.8 percent) had been out of work for more than a year. Thetypical newly-hired laborer was male, aged between 30-49, unemployed for more than one year, with low

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skills and low prospects for gaining a well-paying job or any job. This laborer was from a minoritygroup, with elementary education, married and living in a village. Moreover, his household had moremembers, more registered unemployed and unregistered at employment offices, and more memberswithout income than households of other workers on the sites. A larger share of the newly hired workersrented private housing or did not have permanent housing compared to permanent workers. Bulgaria'sminority ethnic and religious groups were well represented among laborers: 33 percent Turkish, 10percent Roma, and 11 percent Bulgarian Muslims (anti-poverty study, p. 9-13).

Wage levels. Even though newly hired workers were low skilled and performed simple tasks, they madegood wages relative to the minimum and average wages for Bulgaria. According to worker respondents,the average monthly wage equaled BGN 185,000 (before the 1000:1 denomination of the Bulgarian levthat took place in July 1999) or 277 percent of the minimum monthly salary for the country in July 1999,and 93 percent of the country's average monthly salary. Company respondents (employers) reported theypaid their workers a bit higher, an average monthly wage of BGN 203,698 or 300 percent of theminimum monthly salary and 101 percent of the average monthly salary. (The variance between laborersand contractors' reported wages reflects the fact that laborers were unaware of social insurancecontributions paid by contractors.) More importantly, the survey data showed that the average monthlywage paid to newly hired workers, according to worker respondents, was BGN 171,424 or 86 percent ofthe national average; according to contractor respondents, newly hired workers earned BGN 189,398 or95 percent of the national average (anti-poverty study, p. 23-24). The World Bank's Midterm Review(MTR) mission speculated that contractors were compelled to pay high "efficiency wages" to reduceturnover and attract workers who would lose social assistance benefits (MTR Report, p. 18-19).

While temporary jobs on microproject sites were well targeted at low-skilled unemployed workers, theydid not culminate significantly in skills upgrading or long term employment. Newly hired workers andcontractors/employers reported during the 1999 survey that microprojects provided few opportunities forworkers to increase their skills. There was anecdotal evidence during the midterm review and later fieldtrips that contractors offered employment after microproject completion to one or two newly hiredworkers who performed well, but no statistically representative data was available. (MTR Report, p. 17).Most newly hired workers (86 percent) expected they would be unemployed once again after thecompletion of the microproject (anti-poverty study, p. 32). Even though microprojects provided fewopportunities for skill upgrading and long-term employment, there were likely extemalities that cannot bequantified, such as that the temporary jobs likely helped to prevent existing skills from deteriorating andboosted workers' morale which may contribute to a more active job search in the future (MTR Report,pgs. 17 and 54).

2.4. Income TransferThe relatively high wages paid by contractors meant that microprojects played a significant incomesupport role. Over three-quarters of newly hired workers reported that their income increased due to theiremployment on a microproject site, and wages paid were the main source of income for 95 percent of allworkers hired and the main source of household income for 79 percent (anti-poverty study, p. 26).

A key indicator for monitoring the RIF's income transfer impact is cost per dollar transferred. On thisindicator, microprojects have low cost-efficiency. Based on payroll data of 85 microprojects, the PMUestimated that the average cost per labor day was 76 DEM (Quarterly Report, March 2001, p. 13). Thiscompares to a finding of DEM 67 of preliminary data from the first 49 microprojects (PSR, December 3,1999). The World Bank estimated it cost BGN 12 to transfer BGN 1 through microproject wages, so onstrictly economic grounds it would be difficult to justify the RIF as an income transfer mechanism (MTRReport, p. 21). This estimate was based on preliminary data so the actual costs may be much higher. (Itshould be noted that the calculation of the income transfer ratio is done taking into account the total costs

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of the created infrastructure. This infrastructure fulfills specialized social purposes and covers a wholeset of objectives of which income transfer is one. This is discussed at length in the next section.

How do microprojects compare to other mechanisms to finance temporary employment and small-scaleinfrastructure in Bulgaria? Comparative analysis on cost efficiency is complicated by an absence of validcomparisons. The National Employment Agency's Temporary Employment Program (TEP), also runthrough the MOLSP, is a program that provides temporary work for a maximum period of five months. Itis not directly comparable to the RIF because microprojects create tangible community assets whereasTEP workers are engaged in routine maintenance such as street sweeping. The MOLSP's BeautifulBulgaria (BB) also is not directly comparable because BB investments finance primarily building facadeswith little attention to the interior or utility of facilities. Moreover, there may be hidden costs in TEP andBB programs that are not counted as administrative costs, such as equipment provided by municipalitiesand the use of ministry or local government personnel to design and supervise activities.

2.5. Results ofRIF AssessmentsIn the first year of the RIF (the pilot for the SIF), more than 1700 microproject applications were madeby municipalities from all over Bulgaria. After the PMU labored intensively to process the requests, theapplications were narrowed to 249. The prioritization criteria included: (1) the social and economicdevelopment of the municipalities (by an official index of the Ministry of Regional Development); and(2) unemployment rate in the locality. Thereafter, proposals were prioritized for final field appraisalaccording to readiness of design and bill of quantities (BoQ) and sent on for final consideration by theSteering Committee. Because the average cost of approved microprojects was US$ 82,000 equivalentcompared to the US$ 45,000 equivalent estimated at RIF design stage, the RIF was able to finance just 58microprojects (this number does not include 7 innovative) from the Government's World Bank loan (andmatching funds from municipalities). With new resources from the Government of Bulgaria and theUSAID, RIF processed over 2000 applications and financed a total of 255 microprojects (including 16innovative), at an average cost of US$ 63,000 equivalent, at the end of 2001.

Creation of temporary jobs and associated increase in earnings and skill maintenance was one of the keyRIF Project outcomes to support the project's development objective of poverty alleviation duringeconomic transition. The accomplishments and shortcomings of the RIF Project in meeting this objectiveare discussed in more detail below taking into account available data on job creation and income support.

Another important aspect of the infrastructure micro-projects is their operational sustainability. Anindependent technical evaluation of the RIF microprojects from August 2000 stated that, in general, theRIF infrastructure micro-projects are likely to be operationally sustainable.

The evaluation states that the quality of future maintenance and the coverage of operational costs are notfully resolved questions, but microprojects like for example Health Centers (integrated into the healthreform framework), or Water and Sewage systems (that charge fees) are more likely to be properlymaintained. However, the evaluation also notes that resources for appropriate maintenance are not alwaysreadily available as originally planned. Intermediaries have budget constraints and maintenance is notone of their first priorities. Certain types of projects have better possibilities of having appropriatemaintenance when there are more government subsidies or where adequate fees are paid for the use ofthe service. Others, that are more independent like Community Centers have more difficulties raisingmoney to cover operations and maintenance. To help improve the probabilities of future maintenance,SIF could introduce some alternatives, for example:

(i) Training modules for operation and maintenance use recommended for projects that are not covered

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by central government subsidies. This is to help establish the correct mechanisms for fund raising,maintenance and administration of the fund. For example, projects like Water and Sewage systemadministered by the Municipality should consider training modules to help the correct establishment ofthe group for operation and maintenance and the determination of fees (after appropriate clarifications ofthe roles of the companies, the municipality and the State as co-owners). The same applies to projectslike Market Places.

(ii) For projects with inadequate government subsidies for maintenance (like schools for example), atraining module could help sensitize the community to the importance of maintenance and transfer skillsand best practices as to the most effective and cost efficient ways of ensuring maintenance.

(iii) Improving the overall efficiency of municipal administration through capacity building could alsohelp the future maintenance of projects.

In general, the sustainability of many of the services is related to the effectiveness and availability ofresources in the central and local government budgets. The projects that are not linked to municipal orcentral subsidies need to explore mechanisms early on to raise money for operation and maintenance.

3. Planned Ex ante Financial and Economic Evaluation of Micro-projects

An ex ante appraisal of applying micro-projects will be conducted as part of the project appraisalprocess. Desk and field appraisal will be used to complete technical feasibility, economic analysis,financial assessment, institutional assessment of executing agencies, community and beneficiaryparticipation, environmental impact.

More specifically, the economic assessment will answer the following questions:* Cost-effectiveness of every element of the design* Efficiency of the operation and maintenance of the completed facility* Availability of funds to cover costs of operation and maintenance of the facility* Financial ability of the potential contractor

To assure transparency and objectivity of the SIF evaluation the SIF will apply a standardized financialand economic evaluation of the projects. Projects whose designs have been evaluated positively will beranked by means of the following financial and economic criteria:* Total labor cost* Direct (unskilled) labor costs* Cost per Labor Day Created* Potential number of permanent jobs created (to be created upon project completion and beginning of

operationof the facility)* Cost per Job Created* Number of man-months worked by long-term registered unemployed from the location and the region

The economic soundness of SIF micro-projects will be monitored through: (i) the ManagementInformation System (MIS), which will provide standard reports on the number of beneficiaries, costs perbeneficiary, cost per unit delivered, and other key performance indicators; and (ii) independent technicalaudits and beneficiary assessments (ex ante and ex post) which will assess the levels of differentindicators, including cost effectiveness, benefit level and/or economic impact depending on the type ofsub-projects.

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C. Economic Implications of the Labor Market Adjustment

Demand driven performance based ALMSs are effective and reasonably efficient ways of confrontingmajor labor market challenges, and are seen as a complementing measure under SIEP to attack directlythe problem of long-term unemployment, thus enforcing the effect of the physical assets and socialcapital built by CIDI. ALMSs work best as part of well monitored and adequately resourced laborredeployment packages.

Bulgaria has considerable experience with labor market adjustment in response to economicrestructuring, and has conducted net-impact evaluations of related labor redeployment services. Howeverunemployment is now stabilizing and there is a need to review these services to ensure that they aredesigned and targeted in a manner that will have the greatest impact on adjusting the human capital of theunemployed so they are able to respond rapidly to emerging labor demand

There are economic, social, and political objectives for providing social support packages to workersdisplaced by economic restructuring. From an economic standpoint the objectives are to reduce excesslabor costs so enterprises can be competitive, and to facilitate the rapid return of workers to productiveemployment and thus reduce the duration of state supported income support payments. From a socialstandpoint, the objectives are to provide transitional income support while displaced workers are findingalternate employment and, for those who have difficulty finding employment, providing extended incomesupport to prevent these workers and their families from slipping into poverty. From a politicalstandpoint, social support programs are intended to build public support for restructuring by signaling tocitizens, communities, and labor representatives that those responsible for restructuring are attuned to theneeds of affected workers and that they are ready and willing to assist those that need and want help.

Social support programs should include elements that combine to "pull" and entice excess labor to leaveover-staffed enterprises, while at the same time helping "push" and assist displaced workers to quicklyrejoin the labor market. These measures should include both temporary income support and active laborprograms. To be effective the measures must be carefully designed and targeted. Furthermnore, thereshould be continuing social monitoring of displaced workers to ensure the services are reaching the mostneedy workers and the most vulnerable are identified early and provided with special assistance asneeded.

1. International Experience

Many countries around the World have and are implementing economic restructuring and recoveryprograms (Fretwell, 1995; Hoeven, 1997, Kikeri, 1998). Some are directly linked with privatization ofstate owned enterprises (e.g., in transition economies in Eastern Europe and Central Asia) while others(e.g. North America and Western Europe) are part of an ongoing process of economic change andrenewal. Bulgaria has already gained some experience in this field. However, the design and use ofsocial support programs varies considerably between countries and is greatly influenced by the economicenvironment, including the level of unemployment, and type of general social support programs alreadyin-place in the country where economic restructuring is occurring. A review of 12 case studies ofenterprise divestiture in Europe, Latin America and Asia indicated that workers as a class did not looseby divestiture, but that individual workers could be worse off, especially where layoffs or reduced hiringwere involved (World Bank, 1992). Unfortunately, this is the environment in which divestiture oftenoccurs, and why temporary social support programs are instituted to minimize losses. A brief survey of asampling of such programs follows.

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Latin America: In Brazil, a varied set of income support and other support packages were used toretrench workers in six state owned enterprises, including three banks and three utilities, between1995 and 1997. A parallel program was carried out by several states. Severance payment were a coreelement of the program, plus extended medical benefits, retraining, help for business startups, andjob search assistance to affected workers. Economic restructuring in Latin America has, sometimes,been carried out in a manner and in an environment that has increased employment thus makingdivestiture more palatable to labor. For example, in Chile, employment in 10 state owned companiesprivatized between 1985 and 1990 increased 10 percent because of overall headway achieved ineconomic growth and investment by the firms involved (Larroulet, 1992). In Argentina, startingfrom a base of 222,000 employees in thirteen major public enterprises in 1990, employment wasreduced to about 42,000 by 1993 via transferring 66,000 workers to private firms, retiring 19,000,and providing 95,000 with severance payments. The advanced age of many workers, generousseverance, multi-job holding phenomena and reactivation of the economy and expanding labormarket, are credited are producing a lack of opposition from labor (World Bank, 1993; Guasch,1996).

Western Europe: In Germany a new institution, the Treuenhandanstalt (THA) was established todeal with rapid privatization of some 8,000 state companies, with a workforce of 4.1 million. Theprivatization program had a rapid and severe impact on employment. Labor reductions wereachieved by early retirement, job placement in new private firms, employment creation schemesincluding wage sub-subsidies, public works, and retraining plus unemployment benefits. Specialemployment companies and counseling services were also established to employ and retrain workers.In the UK, British Coal divested a total of 204,000 workers, mostly over the age of 50, who acceptedlump sum redundancy payments. In addition, British Coal Enterprise Ltd. was established to assistemployees in the sector, and their families, in developing skills and securing new employment with aspecial emphasis on helping displaced workers start small businesses. In Sweden, the Uddevallashipyard was downsized via normal turn-over, early retirement, a freeze on recruitment, andassistance with job search and retraining. The KLAB mine was downsized by normal and earlyretirement, severance, and retraining.

In Eastern Europe: Privatization in transition economies often has taken place in a difficultenvironment where the economy was contracting while unemployment was increasing. In Poland,restructuring in the Coal Sector has been supported by a Miners Social Package which includeslump-sum payments, early retirement assistance, combined with ALMPs (e.g. small businessassistance, counseling, retraining) and local economic development assistance to affectedcommunities. In Macedonia, severance payments were combined with ALMPs to assist workersaffected by restructuring of 25 large loss makers. Approximately, 1/3 of affected workers participatedin the latter services. An added complication in the transition economies is the fact that often a largenumber of conmmunity services (e.g. schools, hospitals, heating, housing) are connected with stateenterprises and when these enterprises are liquidated or downsized these social assets must bedisbursed in a manner that ensure essential community social services are maintained. In Turkey, ageneric job loss compensation package is defined in the Privatization Law, and this is supported by abroad array of active labor redeployment programs and related social monitoring activities.

2. Active Labor Market Services

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These programs are designed to help "assist and push" displaced workers back into the labor force toincrease overall productivity and decrease use of income support payments. These services support, andneed to be coordinated with, income support payments. There is evidence that active labor markedservices can have a signific-ant positive impact (Fretwell, 1999; Dar, 1999) if appropriately targeted andwell run (e.g. services are demand driven and delivered by service providers which have performancebased contracts). Services are normally used by about 1/3 of workers and are relatively low cost (e.g.averaging US$ 750-1,000 per worker in middle income countries) as compared with income supportpayments (see Figure HI for typical unit costs). It should also be noted that while income supportpayments are usually directed only to displaced workers, that other affected workers (e.g. familymembers, secondary layoffs) are often allowed access to redeployment services. This can help producepositive social and political reactions to economic reform programs, at a reasonably low cost. A varietyof services is needed to address three conditions commonly experienced by displaced workers who aretrying to re-enter the labor market:

* Frictional Unemployment: Displaced workers have marketable skills for which there is demand, butthey need intensive job placement assistance. These services can have a substantial positive impacton re-employment and have a low unit cost. These services can include assistance for remote jobsearch and relocation at a low unit cost.

* Structural Unemployment: Displaced workers lack skills, or their skills are not in demand, and needsome re-skilling to compete and re-enter the labor market. Different types of retraining, includingon-job-training and/or institutional training is needed in these circumstances and can helpredeployment at a moderate unit cost per worker.

* Lack of demand for Labor: This is a particular problem in areas of high unemployment and inmono-enterprise communities where many workers are laid off. Programs include small businessconsulting assistance, incubators, and micro-loans (although the latter may not be critical ifsubstantial severance payments are provided). These programs tend to be more expensive than otherservices, attract a limited number of participants from state enterprises (e.g. 5-6 percent), but can bequite effective. Temporary Community Employment Programs are also sometimes used and,although the social and infrastructure benefits are recognized, these programs must be limited andcarefully targeted to the vulnerable because of the high unit costs and considerable evidence that theyhave no impact, and often negative impact, on post prograrm employment and wages (Fretwell, 1999).Public Service Employment: A review of Programs in selected OECD countries and TransitionEconomies, Fretwell and Wilson, World Bank Discussion paper, June 1999, #9913. Finally, localeconomic development planning grants, particularly in mono-enterprise communities, can have along term impact on job creation and have already been implemented successfully in OECD andMiddle Income Countries (i.e., Poland, Romania, Turkey, Macedonia).

Efficient administration of these programs, in response to worker demand, is critical to their success. Theprograms may run in parallel with normal programs for the unemployed, but often have different criteriadue to the clientele (i.e. training programs may be longer given the fact that some displaced workers maybe high level and need major re-skilling). Some key lessons leamed from operation of active labormarket services include a need to:

* Ensure sufficient financing at the outset so programs do not have to be terminated early withsubsequent social and political problems.

* Use performance based contracting (i.e. negotiate job placement or business start-up rates) withservice providers to maximize impact and quality.

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* Implement ongoing gross impact evaluation, and infrequent net impact evaluations.* Assess and screen applicants before entry to programs to increase impact and cost effectiveness.* Limit the use temporary community employment programs as their impact on downstream

employment may be negligible or negative, and the programs are very expensive. Use other typesof income support.

* Be careful in generalizing from research on impact of programs from other countries, insteadevaluate ongoing programs and adjust as necessary.

* And realize that well designed and targeted programs may have a positive net impact, but poorlydesigned and targeted programs probably will not have any economic impact.

Finally, it needs to be emphasized that active labor market services, in and of themselves, do not createjobs. They help create needed human capital and improve the mobility of labor. But, in the end it isinvestment and economic development that creates employment.

D. Alternative Designs Considered

In conclusion, we would like to briefly review several alternative design features, which were consideredduring project design stage. The most important of these were:

* Including a component expanding on existing active labor market programs (including theTemporary Employment Program run by the Employment Agency that enables municipalities to paylaborers' wages up to five months for minor cleaning and repair; wage subsidies to encourageemployers to hire unemployed and disabled workers; and credits to unemployed to start businesses).Recent studies question the cost-efficiency and positive impact of these programs and points out howthe targeting of the programs can be improved. Also, the Bulgarian Government is already financingthese programs itself and is restructuring the Employment Agency to improve its efficiency indesigning and delivering better ALMPs.

* Including a micro-credit component. Including a micro-credit component was discussed andenvisioned in earlier stages of project preparation until appraisal. However, the Government had inthe meantime started its own micro-credit guarantee scheme. A merger of this scheme wasconsidered, but it was decided that it was not compatible with SIF's implementation model. At thesame time, it was not feasible to duplicate this effort with another micro-credit scheme under SIF.

* Creation of a single-component social infrastructure project A simplified extension of theexisting infrastructure micro-projects component would not account for the complex social prioritiesof the Bulgarian Government that need to be addressed through the SIF. Infrastructuremicro-projects perform well in addressing certain social capital and infrastructure access relatedaspects of poverty in Bulgaria. ALMPs allow attacking different aspects of poverty in the targeteddifficult-to-reach communities. Furthermore, important synergies are expected from applyingelements of all three major types on interventions.

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Annex 5: Financial SummaryBULGARIA: Social Investment and Employment Promotion

BulgariaSocial Investment and Employment Promotion Project (EURO '000)Components by Financiers Communities and

The Govemment IBRD Municipalities TotalAmount % Amount % Amount % Amount %

1. Community Infrustructure for Development Initiative 9,484.048 18.5 38,063.401 74.2 3,762.470 7.3 51,309.919 75.72. Active Labor Market Initiative 2,841.241 19.8 11,513.875 80.2 - - 14,355.116 21.24. Project Management 913.177 57.1 686.736 42.9 - - 1,599.913 2.45. Front-end Fee - - 507.717 100.0 - - 507.717 0.7

Total Disbursement 13,238.467 19.5 50,771.730 74.9 3,762.470 5 6 67,772.666 100.0

BulgariaSocial Investment and Employment Promotion Project (US$ '000)Components by Financiers Communities and

The Govemment IBRD Municipalities TotalAmount % Amount % Amount % Amount %

1. Community Infrustructure for Development Initiative 9,339.891 18.5 37,484.838 74.2 3,705.280 7.3 50,530.009 75.72. Active Labor Market Initiative 2,798.054 19.8 11,338.864 80.2 - - 14,136.918 21.24. Project Management 899.297 57.1 676.297 42.9 - - 1,575.595 2.45. Front-end Fee - - 500.000 100.0 - - 500.000 0.7

Total Disbursement 13,037.242 19.5 50,000.000 74.9 3,705.280 5.6 66,742.522 100.0

BulgariaSocial Investment and Employment Promotion ProjectProject Components by Year - Totals Including Conti Totals Including Contingencies (EURO '000)

2003 2004 2005 2006 2007 Total

1. Community Infrustructure for Development Initiative 5,924.404 13,168.447 12,997.751 11,632.442 7,586.876 51,309.9192. Active Labor Market Initiative 2,711.800 3,768.785 3,697.033 2,870.887 1,306.610 14,355.1164. Project Management 449.334 295.515 288.406 288.406 278.252 1,599.9135. Front-end Fee 507.717 - - - - 507.717

Total PROJECT COSTS 9,593.254 17,232.747 16,983.190 14,791.736 9,171.739 67,772.666

BulgariaSocial Investment and Employment Promotion ProjectProject Components by Year - Totals Including Conti Totals Including Contingencies (USS '000)

2003 2004 2005 2006 2007 Total

1. Community Infrustructure for Development initiative 5,834.353 12,968.287 12,800.185 11,455.629 7,471.556 50,530.0092. Active Labor Market Initiative 2,670.580 3,711.500 3,640.839 2,827.250 1.286.750 14,136.9184. Project Management 442.504 291.023 284.023 284.023 274.023 1,575.5955. Front-end Fee 500.000 - - - 500.000

Total PROJECT COSTS 9,447.437 16,970.809 16,725.046 14,566.902 9,032.329 66,742.522

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Annex 6: Procurement and Disbursement ArrangementsBULGARIA: Social Investment and Employment Promotion,

Procurement

General

6.1 Procurement of all works, goods and technical service under the project will follow theProcurement Guidelines "Procurement under IBRD Loans and IDA Credits" published in January 1995,revised in January and August 1996, September 1997, and January 1999. Procurement of consultingservices under the project will follow the Consultants Guidelines "Selection and Employment ofConsultants by World Bank Borrowers" published in January 1997, revised in September 1997 andJanuary 1999, and May 2002. The procedures outlined in these Guidelines apply to all contracts financedin whole or in part from the Bank loan. Project activities not financed by the Bank will be procured inaccordance with procurement procedures agreed between the respective financing organizations and theGovernment.

6.2 The project will be financed by a Bank Loan of EURO 50.8 million equivalent, which includesthe Front End Fee (EURO 508,000 equivalent) requested be included in the Loan amount, and aGovernment counterpart funding of EURO 16.97 million equivalent. The aggregate cost of theinvestment, including the Front End Fee is EURO67.77 million equivalent.

Notification of Business Opportunities

6.3 A General Procurement Notice (GPN) will be published in the UN "Development Business"around the period of Loan Negotiations and would be annually updated. For ICB goods contracts andlarge-value consultants contracts (more than EURO 200,000), Specific Procurement Notice will beadvertised in the Development Business and national press, and in the case of NCB, in a major localnewspaper (in the national language).

Procurement Management

6.4 The Bulgaria SIF will have overall responsibility for the project. The management of itsprocurement activity will be carried out by a Social Investment Fund (SIF). The procurementarrangements under the project are primarily based on the Bank appraisal of the existing procurementcapacity of the Project Management Unit of the Regional Investment Fund (RIF) Project. The RIF PMUwas transferred to the SIF as of July 1, 2002. The Capacity Assessment report and action plan are shownin Table B2 to this Annex.

6.5 Delegation of Procurement Function. The SIF may delegate the execution of procurement ofcertain small scale activities to Implementing Agencies (IAs) (e.g. to community-based organizations,NGOs and local communities under selected micro-projects and to Local Employment Bureau underActive Labor Market Services). Such delegation of procurement to the communities/lAs would be withthe prior agreement of the Bank. Procurement responsibilities, procedures and sample documentation aredescribed in detail in a SIF Project Operational Manual (OPM). While the execution of procurement andcontracting responsibility may be delegated to IAs/communities, the financial management of the projectand payments shall be carried out by the SIF itself.

6.6 Procurement Management under Community Infrastructure for Development Initiative (CIDI).

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Community-based Project Management Committees (PMC) will take primary responsibility forprocuring goods, services and civil works but will receive overall support and supervision from the SIF,as the SIF will retain the overall responsibility for ensuring the integrity of the procurement action.PMCs will receive specific training in procurement and financial management before the start of projectimplementation. Their activities in procurement would be governed by the respective parts of the OPM(based on World Bank guidelines for implementation of community projects), which will outline theprocurement guidelines to be used by communities. Communities will manage subprojects, hiring skilledcontractors and purchasing materials locally to ensure minimal delays and reduce inefficiencies due toloss during transport and storage. Standard price lists will be maintained by the SIF , updated regularly,and will be used by communities as price ceilings to guide their procurement. The lAs/communities maystart procurement activities after receiving advise from the SIF Regional Committee that their applicationfor micro-project financing has been approved. The IA shall sign a Financing Agreement with SIF thatwill specify the procurement methods for works, goods and services with applicable sampledocumentation, in accordance with the OPM and procedures agreed with the Bank.

6.7 Procurement Management under Active Labor Market Service (ALMS)

The three technical assistance contracts as well as the minor amount of goods will be procured andmanaged by the SIF following standard Bank procedures. Procurement of active labor services will bedone by Local Employment Bureaus (LEBs), under the technical supervision of the Employment Agency(EA), following procedures agreed with the Bank. Procurement and contracting with service providerswill follow detailed Guidelines agreed with the Bank including specific principles and criteria fordifferent services, standard Requests for Proposals, and contracts, specified in a Field ImplementationManual to be agreed between the Bank and Borrower, preferably at negotiations, but prior todisbursement of funds under the sub-component.

Procurement Scope and Procedures Arrangements

6.8 The Project will finance the procurement of goods and technical services, works, consultantservices and training contracts and incremental operating costs to support institutional units to beexecuted by SIF. In addition, the project will also finance (i) demand-driven Community Infrastructuremicro-projects (EURO 37.5 million) to be executed by communities and local Implementing Agencies,financing goods, works, social services and training; and (ii) Active Labor Market Service (ALMS)contracts (EURO 11.5 million) to be executed by LEBs and EA, covering contracts for labor marketservices and incubators for small businesses. The relevant procurement procedures are described in thesucceeding paragraphs. Table A summarizes the project costs by procurement arrangements. Theprocurement plan is shown in Table B1. A summary assessment of procurement capacity of theimplementing agency is presented in Table B2 and the Bank's review processes is shown in Table C. Forprocurement financed by the Bank Loan, the Borrower shall use the Bank's latest Standard BiddingDocuments, Standard Form of Consultant Contracts and Request for Proposals (RFP), and Standard BidEvaluation Forms.

6.9 Procurement of Micro-proiects for Community Infrastructure for Development Initiative(CIDI)

The project will finance CIDI sub-projects at total aggregate of EURO 36.9 million equivalent, under twowindows: Window I - direct financing to communities to implement small-scale community identifiedsubprojects and Window 2 - financing to municipalities to implement more technically complex,

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multi-coimmunity projects. Under Window 1, SIF will contract out sub-projects through ProjectManagement Committees to individuals, private contractors, and community based organizationsfollowing procedures detailed in the OPM and Financing Agreement. Sub-projects contracts would be ofvery small value ranging up to a maximum EURO80,000. It is assumed that most of the communitieswill be procuring goods, works and related services, and completing works themselves, rather than actingas contractors. For Window 2, SIF will contract out municipality sub-projects of up to EURO200,000through IAs, following procedures detailed in the OPM and Financing Agreement. Procurement ofSub-projects will be based on Community Participation Procurement (CPP) as described under 3.15of the Procurement Guidelines. The exact mix of works, goods, services and training to be financed willdepend on the results of demand-driven sub-projects identification processes undertaken byconmnunities/municipalities. The relevant procurement procedures are described in detail in the OPM.These include: for goods - National/International Shopping; for works - National CompetitiveBidding and Minor Works procedures; and for services-training - selection of Individual Consultants,Consultant Qualifications, fixed-budget, and, on an exception basis, Sole Source Selection (subject tothe Bank's prior approval). The procedures would require local advertisement and public bid opening inline with the sample bidding documents and standard contract forms specifically developed forcormnunity application under micro-projects as attached to the OPM. Non-government organizations,local contractors and other community-based organizations, registered according to legislation, will beallowed to bid.

6.10 Procurement of Active Labor Services for Active Labor Market Service (ALMS)

Procurement for Active Labor Services will be based on Section 3.15 of the Procurement Guidelines,depending on the type of services being procured, following criteria and procedures acceptable to theBank as described in the Operational Manual (OPM). These include, inter alia (i) the type of communityservices to be provided, (ii) the agencies eligible to provide said services, and (iii) the eligible costs thatwill be reimbursed in the service delivery contracts as described in Annex 2 of the PAD, and furtherdefined and discussed in the Project Operation Manual (OPM). Individual contracts for services such asemployment counseling, retraining and small business assistance, and local economic developmentplanning are generally not expected to exceed EURO50,000. The Bank's no-objection is required forindividual contracts exceeding EURO50,000. Procurement under Labor Redeployment Services will becarried out by the Employment Agency (EA) and their Local Employment Agencies (LEA) by contractedservice providers. LEA offices will execute all contracts. LEAs can approve contracts up toEURO20,000. Contract proposals over EURO20,000 and up to EURO50,000 must be submitted to theEA for review and approval. Contracts over EURO50,000 must be submitted to the SIF and the Bank forreview and no-objection. The initial three contracts for all services, regardless of value, and all contractsover EURO50,000, must be submitted to the Bank for review and no-objection. Service contracts forsmall business incubators are not expected to exceed EURO250,000, and will be subject to NationalCompetitive Bidding, as further described in the OPM. In addition, during the regular 6-month projectsupervisions, a ex-post review of selected projects will be carried out.

6.11 Procurement of Goods and Technical Services. The project will finance the procurement ofgoods and technical services (EURO 0.6 million) to be executed by the SIF for training of Communitiesand Municipalities under CIDI, and for project institutional units under ALMS and SIF projectmanagement, including office equipment and furniture, computer hardware and software, and vehiclesetc. as shown in Table B 1. These goods are independent of those procured under Micro-projects. Goodswill be grouped to the extent possible and considering project objectives, in package sizes andhomogenous groupings that will encourage competitive bidding. The following methods of procurementwill be followed:

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i. International Competitive Bidding (ICB). Goods contracts estimated at more thanEURO200,000 equivalent per contract, will be procured using International Competitive Bidding(ICB) procedures in accordance with the Bank Procurement Guidelines. Bid documents for ICBwill be prepared in accordance with the Bank Standard Bidding Documents (SBD) forProcurement of Good.

ii. National Competitive Bidding (NCB). This procedure would be used for goods estimated tocost less than EURO 200,000 equivalent per contract, and works estimated to cost less thanEURO 500,000 per contract may be procured in accordance with the provisions of paragraphs3.3 and 3.4 of the Guidelines.

iii. International Shopping (IS) and/or National Shopping (NS). IS procedures will be used forthe purchase of goods estimated to cost less than EURO100,000 equivalent per contract. NSprocedures will be used for the purchase of goods estimated to cost less than EURO50,000equivalent per contract. IS/NS procedures applied would be consistent with the provisions of theBank Procurement Guidelines. The Bank's ECA Regional sample format for InternationalShopping "Invitation to Quote" available on the ECA Procurement Web Site will be applied.The IS format will be modified for use in National Shopping.

6.12 Procurement of Consulting Services and Training. Contracts for consultant services andtraining to be executed by the SIF as shown in Table BI will be packaged in a manner that will combinerelated skills and services, in order to attract competition, improve quality of services, to reduce thenumber of contracts to be managed by the SIF. These services and training contracts are independent ofthose included under Micro-projects and Active Labor Service contracts. The following methods ofprocurement would be followed:

i. Quality and Cost Based Selection (QCBS). QCBS procedures would be the preferred methodfor contracting consultant services relating to Labor Market Information, Active Labor Measuresand Net Impact Study for ALMS.

ii. Fixed Budget Selection (FBS) would be used for selection of supervising companies and forbeneficiary assessment contracts up to EURO 150,000 throughout the life of the project.

iii. Least Cost Selection (LCS) procedures would be used for auditing services contracts for annualaudit estimated to cost up to EURO 20,000 throughout the life of the project.

iv. Consultant Qualification (CQ) procedures would be used for contracting specialized firms forcontracts, largely devoted to local training contracts estimated to cost up to EURO 50,000.

v. Individual Consultants (IC) would be hired in accordance with Section V of the ConsultantGuidelines. Individual consultants would be used for small assignments of short-term durationsuch as institutional assessment for MFIs and monitoring and evaluations for the projectmanagement.

vi. Single Source Selection (SSS) procedures would be used for the study tours under the project.

6.13 Incremental Operating Costs. Government staff's salaries or fees and expenditure related tothe incremental operating costs generated under the project would be financed by the Government.

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Travel and per diem costs of SIF staff and related staff directly associated with supervision andmonitoring of project activities, office materials and supplies, communications would be financed underthe Loan for the duration of the project.

6.14. Review by the Bank of Procurement Decisions

Scheduling of Procurement. Procurement of goods and services for the project would be carried out inaccordance with the agreed procurement plan (Table B), which should be updated regularly, included inthe progress report, and reviewed by the Bank.

(i) Prior Review:

Goods, works and Technical Services: Prior review of bidding documents, including review ofevaluation, recommendation of award and contract would be conducted for all ICB. The first two IS, NS,NCB, and SW contracts would require prior review.

Consulting Services and Training: Terms of reference for all consulting assignments would be subject toprior Bank review. Requests for Proposal (RFP), short lists, terms of condition of contracts as well asevaluation reports and recommendation for award would be prior reviewed by the Bank for contracts forindividual consultants above EURO50,000 and firms above EURO100,000. All documents andrecommendations involving sole source contracting would be subject to Bank prior review.

CPP - ALMS projects: The initial three contracts for each type of ALMS contract awarded, regardless ofvalue, and all contracts over EURO50,000, will be subject to prior review by the Bank. The documentssubmitted for Bank prior review include, inter alia, documents describing the scope and terms of thecompetition for services, evaluation report, and draft contract.

CPP - Sub-projects: The initial three sub-project contracts awarded each year, regardless of value, andall contracts over EURO100,000, will be subject to prior review by the Bank. The documents submittedfor Bank prior review include, inter alia, documents describing the scope and terms of the competitionfor goods, works and services, evaluation report, and draft contract.

Following the award of contracts, the Bank reserves the right to conduct Prior Review of any materialmodifications or waiver of termns and conditions of a contract which would result in a significant changein the scope of the contract (Terms of Reference in the case of consultant services) and/or increase ordecrease of more than fifteen percent of original contract amount.

(ii) Post Review:Those contracts below the Bank's prior review threshold, are subject to the Bank's ex-post review.Periodic ex-post review by the Bank of not less than 1 in 5 procurement contracts will be undertakenduring regular supervision missions.

6.15. Action Plan for strengthening Agency's Capacity to Implement Project Procurement

The following action plan is recommended to strengthen the procurement administration capacity of theSIF:

(i) Initiating a Project Launch Workshop (PLW) before the loan effectiveness, as part of the projectimplementation/capacity building initiatives, especially in procurement. As part of the PLW, it would beonly beneficial for the stakeholders who are directly involved with the project, if a 2-3 day workshop is

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carried out on the different phases of goods and works procurement process, as well as selection ofconsultants.

(ii) In order to build-in and maintain strong management capacity, it is recommended that bothProcurement Specialists undergo appropriate training in procurement of civil works and goods, as well asselection of consultants. It is recommended that they attend training on international procurementmanagement in ILO, Turin, or other relevant training center, to be financed by the loan. Theprocurement training for other staff in the SIF shall be provided at the workshop to be run by the countryoffice in Y2003.

(iii) SEF to conduct methodological and technical assistance to small municipalities lacking capacityto prepare their own microproject proposals.

(iv) With regard to the BALMI component, the SIF shall provide general training in Bankprocurement to the Employment Agency (EA) which will be technically managing the component.

(v) Supervision of the procurement activities in the project by the Bank every 6 months.

(vi) Periodic ex-post review by the Bank of 1 in 5 contracts during the supervision missions.

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Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

- _'Expenditure Cikeorye o -- P.rocurement Method'>--: ______3_- ___

s - i . ,. ICBB- CB .thr-. N.B.F Total C st1. W orks 0.2 0.2

2. Goods 0.5 0.5(0.45) (0.45)

3. Consulting Services and 2.47 0.06 2.53Training (1.80) (0. 0) (1.80)

4. Technical Services

5. Community-Based Micro- 50.49 50.49Projects (37.00) (37.00)

6. Active Labor Market 12.98 12.98Service (10.30) (10.30)

7. Incremental Operating 0.37 0.7 1.07Cost3 (0.27) (0.00) (0.27)

8. Front-end Fee -

(0.51) (0.51)9. Unallocated (0.47) - (0.47)Total 66.81 0.96 67.77

(50.80) (0.00) (50.80)

Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingenciesand taxes and are rounded.2 Other includes:1. Goods: "Other" includes packages to be procured through International and National Shopping.2. Consulting Services: "Other" includes international and local training, consultant services, to becontracted through selection procedures of QCBS, CQ, least cost, single-source and individualconsultants.3. Communnity-based Micro-Projects: "Other" includes Community Participation Procurement.4. Active Labor Market Service: "Other" includes Community Participation Procurement.5. Micro-credits: "Other" includes Community Participation Procurement.6. Incremental Operating Cost: "Other" includes annual operating budgets ofthe PMU.

3Non-Bank Financed includes US$1.34 million contribution to Government staffsalaries and renovation ofSIFPromises.3Incremental Operating Costs comprise per diem, travel and related costs of supervision activities, officesupplies and communications for PMU.

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Prior review thresholds (Table B)

Table Bi: Procurement Plan.

The Procurement Plan covers only tangible items and activities for each component. The loan allocation for CPP for Micro-projectURO 36.9 million)2 and Active Labor Service TRO !I!5 millio are not included in this plan due to the demand-driven nature.

Bulgaria Social Investment and Employment Promotion ProJect

PACKA PROCUR ALLOCATED PRIOR/POST PREPARE APPROVEDGE IFB DESCRIPTION LOTS Category EMENT AMOUNT REVIEW DATE DATENOS. METHOD (EURO)

Component 1 - CIDI (Most of the packages under this component will b demand driven, and therefore will be an on-going p1-1 Demand driven micro-projects

CommunitiesMunicipalities 50,584,157

1-2 Training materials 5 Goods NS 57,6001-3 Beneficiary Assessment 5 CS FBS 63,750 prior Feb. 2003 July 20031-4 Printing, TV and Radio , etc. 3 Goods NS 80,000 First 2 for prior review 2003/2007 2003/20061-5 Training for trainers and CS IC 168,000 Contracts over 50,000 2003/2007 2003/2006

beneficiaries1-6 Consulting Services for CS IC 76,158 Contracts over 25,000 2003/2007 2003/2006

Information Campaign1-7 Individual consultants (int'l) CS IC 101,543 Contracts over 25,000 2003/2007 2003/20061-8 Individual consultants (local) = CS IC 121,852 Contracts over 25,001 2003/20071-9 Intemational training 56,0001 2003/2007 2003/2006

ITotal for component 1 51,309,0601

______________ ___________ __________________________ _________________________ ___ ____________________ _ ____________________ _____ _________________________ I_ I _____________________ __________________________ _ ______________________I

Component 2 - Active Labor Market Program (Most of the packages under this component will b demand driven, and thereft2-1 Active Labor Market Service 13,065,798

Contracts l l

2-2 Labor Market Information CS QCBS 200,000 prior Oct.2002 Nov.2002

2-3 Active Labor Market Measures CS QCBS 857,278 prior 2003/20062-4 Net Impact Study ALMs CS QCBS 102,000 prior 2003/2007 | _

2-5 Office Equipment and materials Goods NS 30,000 post 2003/2007 Jan.2004for Labor Market Information

2-6 Office Equipment and materials Goods Is 100,000 prior 2003/2007 Jan-04for Active Labor Service

_ Total for com onent 2 14,355,076 . 2003/2007

Component 3 - Project Management3-1 Vehicles 1 Goods . IS 61,000 prior Jan.2003 | _ l3-2 Computers and Office 4 Goods is 81,000 prior Sept. 2003

Equipment (incl. Airconditioners and telephonesystem) I I I

3-3 Office Fumiture and supplies 1 Goods NS 40,000_post Aug. 2004 Sept. 20043-4|Training I_83,0001prior 2003/20073-5 Local Consultants =CS IC 161,0001post 2003/2007 _ l

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Overall Procurement Risk AssessmentHigh

Frequency of procurement supervision missions proposed: One every 6 months (includes specialprocurement supervision for post-review/audits)

Table B2: Summary of Findings and Actions on Procurement Capacity AssessmentThis Table is prepared in accordance with ECA Regional Procurement Management Guidelines, itserves as additional information.

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Table B2. Summary of Findings on Procurement Capacity AssessmentSection 2: Capacity of the Implementing Agency in Procurement and Technical AssistanceRequirem entsThe assessment covers the recently established Social Investment Fund (SIF) which is under theauthority of the Ministry of Labor and Social Policy (MLSP), in particular, of the SIEP ProjectManagement Unit (PMU) which will carry out. the different phases of the procurement cycleunder the Social Investment and Employment Promotion Project (SIEP). The two substantivecomponents (i) Community Infrastructure for Development Initiative (CIDI); and (ii) theBulgarian Active Labor Market Initiative (BALMI) (the Initiatives) will be linked in SIF'sgovernance structure to maximize social policy coordination, but will be managed separately toensure effective and efficient operations. The two Initiatives will be implemented by SIF'sProject Management Unit that will provide contracting, financial management and logisticalservices for their regular operations. In the mean time, the initiatives will be managed separatelyby each having its own Management Board, or through other specific arrangement in accordancewith the Project Operational Manual. The supervisory functions will be performed by the tripartiteSIF Steering Committee, as defined in the Law for the Social Investment Fund. .

The staff and assets of the World Bank Financed Regional Initiatives Fund Project for USD 6.3mln. were transferred to the SIF. The core team who will be involved in the project managementare the following:

I. Head of Procurement and Administration Department2. Procurement Officer (to be hired after loan effectiveness)3. Chief Accountant4. Junior Accountant5. Lawyer6. Monitoring and Evaluation Coordinator7. Technical Assistant

Note: Temporary consultants will be hired to help the staff members in the process ofimplementation of micro projects promotion, preparation, appraisals and supervision.

All the above staff (with the exception of the Procurement Officer) have experience andknowledge of Bank procurement rules. The staff have solid educational background and they allspeak English language. During the first year of RIF implementation the PMU was supported by aProcurement Advisor. They have attended specialized training in ILO, Turin and different traininginitiatives organized by the country office in Sofia. Moreover, there is institutional support andinterest on behalf of the staff for conducting procurement according to the international standards.

In spite of the above strengths of the management unit, the Bank team considers the procurementrisk as "High" due to a number of factors, such as the big amount of the loan, the extensivenumber of procurement procedures, the absence of a second procurement specialist, the not verysatisfactory procurement in the country.The actions to be taken to build-in and maintain strong management capacity of the PM Uare outlined in detail in Par. 6. 16. above.

Country Procurement Assessment Report or Are the bidding documents for the procurementCountry Procurement Strategy Paper: actions of the first year ready by negotiationsA Country Procurement Assessment Report for YesX NoBulgaria was completed in June 2000. A copyof the report is available in the OCS website.

Section 3: Training, Information and Development of ProcurementEstimated Date Estimated Date Indicate if there I Domestic Domestic

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Country Procurement Assessment Report or Are the bidding documents for theCountry Procurement Strategy Paper: procurement actions of the first year readyA Country Procurement Assessment Report by negotiationsfor Bulgaria was completed in June 2000. A YesX Nocopy of the report is available in the OCSwebsite.

Section 3: Training, Information and Development of ProcurementEstimated Date Estimated Date Indicate if there Domestic Domesticof Project of Publication of is procurement Preference for Preference forLaunch General subject to Goods WorksWorkshop: Procurement mandatory SPN Yes YesBefore Loan Notice in Development No X No XEffectiveness October 2002 Business:

Yes X

Retroactive Financing AdvanceYes No X Explain Procurement

Explain briefly the procurement monitoring system: The PMU will oversee Yesall procurement under the project. The PMU will maintain a complete No Xprocurement file for all components and contracts, and shall manage itsSpecial Account. Evaluation Committees will be established uponcommencement of procurement activities. Periodic supervision missionswill review PMU financial records.

Co- Financing:Section 4: Procurement Staffing

Indicate name of procurement staff or Bank's staff, a member of Task Team responsible forthe procurement in the project - Social Investment and Employment Promotion: VladislavKrassikovExplain briefly the expected role of the Field Office in procurement:There is a plan for decentralization of procurement and fiduciary functions in the CountryOffice in Sofia. The procurement supervision may be delegated to the Country Office inSofia, subject to the required Bank clearances.

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Table C: Summary of Procurement Activities

ICB NCB SW Is NS Other Methods 04 of loansubject to

priorreview

Goods CPPProcurement Above below EURO200,000 Below EURO I 00,00O Below N.A. 80%thresholds: URO200,000 UR050,000Individual and Aggregate: Aggrepte: Aggrepte:aggregate Aggregate: AN/A

N/A N/APrior Review Ali packages First 2 contracts First 2 contracts First 2 contracts All micro-projects

contracts aboveEURO 100,000 andALMS aboveEURO50,000, plus foreach year first 2 forALS and first 3 forMicro-projectsregardless of value

Works below EURO below EUROProcurement 500,000 100,000thresholds:Individual andaggregate Aggreate: Aggregate

N/A N/A

Prior Review First 2 contracts First 2 contractsQCBS Consultant Fixed Budget Least Cost ingle- Individual(firms) Qualifications Source Consultants

Consultants Aggregate: Aggreate: Aggregate: Aggregate: Aggrete Aggrete:N/A N/A N/A N/A N/A N/A

Prior Review Shortlist, TORs, Shortlist, TORs, hortlist, TORs, Shortlist, TORs, TORs and draft Shortlist, TORs,evaluation reports evaluation reports valuation reports valuation reports ontracts for study valuation reports andand draft contracts and draft contracts nd draft contracts nd draft contracts ours raft contracts forfor all contracts for the two three for the first two for audit contracts ontracts above

contracts contracts . URO50,000

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Disbursement

Allocation of loan proceeds (Table C)The proceeds of the Loan would be disbursed in accordance with the guidelines provided in the IDA"Disbursement Handbook". The procurement and disbursement arrangements are based on the Bank'sappraisal of the procurement and financial management capability of the implementing ministry and itsinstitutions, as well as the experience and lessons learned from ongoing Bank operations in the HD sector:Bulgaria Health Restructuring Project, Bulgaria Social Insurance Project, Bulgaria Child Welfare ReformProject, and Regional Initiatives Fund Projects. Loan funds are expected to be fully disbursed withinfourteen (18) quarters after the expected effectiveness date of September 1, 2002. The ProjectCompletion Date is December 31, 2006 with a Loan Closing Date of June 30, 2006. The disbursementcategories and amounts and percentages to be financed under each category are presented in Table C, asfollows.

Table D: Allocation of Loan Proceeds

Expenditure Category Amount in EURO (thousands) Financing Percentage1. Goods 450.00 100% of foreign expenditures,

100% of local expenditures(exfactory)

80% of other local expenditures2. Consultants Services and Training 1,800,00 85% for loca consultants; and

95% for international consultants3. Active Labor Services 10,300.00 80% of the disbursed amount4. Grants for sub-projects 37,000.00 80% of the disbursed amount5. Operational Expenses 270.00 95% until December 31, 2003

90% until December 31, 200480% until December 31, 200575% until December 31, 200625% of expenditures incurred

thereafter.6. Unallocated 472.00

Total Project CostsFront-end fe 508.00

Total 50,800.00

Use of statements of expenditures (SOEs):

Disbursements will be made against Statements of Expenditures (SOEs). Supporting documents forexpenditures financed on basis of SOEs will be retained by SIF for at least one year after disbursementsand made available for review by Bank representatives and external auditors.

The proposed allocation of Loan proceeds is shown in the Table C above. Disbursements would not bemade for works, goods and services which have been procured from ineligible sources or which have notbeen procured according to Bank's procurement and consultants' guidelines.

The Bank Loan is expected to be fully disbursed over a four year period. All applications to withdrawfrom the loan will be made in accordance with guidelines set out in the bank's disbursement handbook.

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All applications to withdraw will be fully documented, except those for contracts not subject to priorreview, as shown above, for which reimbursement may be made against certified statements ofexpenditures SOEs.

Thresholds:* Goods: contracts costing less than EURO 98,200 (EURO 100,000

equivalent)* Consulting services - firms: contracts costing less than EURO 98,200 (EURO 100,000

equivalent)* Consulting services - individuals: contracts costing less than EURO 49,000 (EURO 50,000

equivalent)* Active Labor Services: contracts costing less than EURO 49,000 (EURO 50,000

equivalent)* Grants for Sub-projects: contracts costing less than EURO 49,000 (EURO 50,000

equivalent)

Project accounts will be subject to an independent audit for each fiscal year, in accordance with auditingstandards acceptable to the Bank.

of Disbursement:

The MOLSP, through the SIF, will co-ordinate and monitor the overall implementation of differentcomponents of the Project. The SIF will be responsible for the maintenance of a centrally managedfinancial management system, including records and accounts, for the preparation of financial statementsin a format acceptable to the Bank, adequate to reflect the operations, resources and expenditures of allwithdrawal applications in accordance with Bank's guidelines.

Special account:In order to facilitate Loan disbursement, the Government of Bulgaria will establish a Special Account inthe Bulgarian National Bank (BNB) on terms and conditions satisfactory to Bank to cover the Bank's shareof expenditures. The Authorized Allocation for the Special Account would be EURO 1.50 million butlimited to EURO 500,000 until aggregate withdrawals exceed EURO 2.00 million. Applications forreplenishment of the Special Account would be submitted monthly, or whenever one-third of the amounthas been withdrawn, whichever occurs earlier.

Traditional Disbursement Procedures. Applications for Withdrawal from the Loan will be used torequest: (i) direct payment to third party for amount due; (ii) replenishment to the Special Account; (iii)reimbursement of payments already made by the Borrower for eligible expenditures; and (iv) applicationfor Special Commitment.

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Annex 6bFinancial Management Assessment

1. Executive summary and Conclusion

Bulgaria is currently undergoing a period of economic growth (since 1998) and with relativemacro-economic stability, following the major financial crisis in 1996-1997. The country has a relativelyweak public sector financial management and the perceived levels of corruption are significant.

The latest assessment of the financial management arrangements for the Project was undertaken in lateJuly - early August 2002, during the financial management assessment (re-appraisal) mission, prior tonegotiations. The result of the assessment is that the Project financial management arrangements satisfythe WB minimum financial management requirements.

A financial management action plan was developed and agreed with the Borrower to enable the Project tostrengthen the financial management arrangements of the Project.

A summary of financial management assessment and conclusions are as follows:

Financial Management Rating CommentsAssessment

1. Implementing Entity Satisfactory SIF officially created within MOLSP,contains staff fully familiar with WBregulations and procedures

2. Funds Flow Satisfactory Simple funds flow in place3. Staffing Satisfactory SIF Chief Acc. and Accountant4. Accounting Policies and Satisfactory Detailed financial manual and internalProcedures control policies documented5. Internal Audit N/A No reliance placed on internal audit6. External Audit Satisfactory The project will be audited annually.

Appointment of auditors will be a datedcovenant in the Loan Agreement.

7. Reporting and Monitoring Satisfactory Customized reporting capacity, with anumber of reports to be finalized bySeptember 15th, 2002.

8. Information Systems Satisfactory Developed software system, with anumber of reports to be integrated.

Overall Financial Management SatisfactoryRating

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2. Project description summary

The Project would contain the following three components:

Component 1: Community Infrastructure for Development Initiative (CIDI).

The primary aim of the CIDI component is to improve delivery of social and economic services, andenhance social capital and capacity of poor communities and local governments by financing small-scaledemand-based initiatives primarily in the social sectors. This will include but not be limited torehabilitation of old and construction of new basic infrastructure stimulating local development, such as -water and sewerage; roads; market places, erosion control mechanisms etc.; as well as infrastructuredirectly linked to the provision of social services to the population, such as centers for the disabled,social care centers, schools; health facilities, community centers.- in poor communities. Under the SIF,CIDI will consolidate and build on the positive experiences gained during the implementation of the RIF.In order to ensure that social priorities are met, indicative allocations (of Bank financing) of EURO 4million for social protection infrastructure and EURO 18 million for economic developmentinfrastructure will be made up front.

Two windows of financing are envisioned as part of CIDI: 1) direct financing to communities toimplement small-scale community identified subprojects (up to EURO80,000); and 2) financing tomunicipalities to implement more technically complex, multi-community projects.

Component 2: The Bulgarian Active Labor Market Initiative (BALMI).

The objective of the Active Labor Market Programs (ALMSs) component is to increase productivity andreduce poverty by assisting unemployed economically disadvantaged individuals, in poor communities,extend and use their human capital in response to changing economic and labor market conditions. Thisobjective will be accomplished through two sub-components:

(a) Labor Market Information, to develop better short and medium term economic and labor marketinformation via a series of medium term (semi-annual) qualitative surveys, with a view towardreplication countrywide; and

(b) Active Labor Market Services (ALMSs), to provide a range of services (e.g. employmentservices, retraining, small business assistance, incubator, and local economic development planning)to the unemployed in poor communities to assist them in rapidly re-entering the labor market.

The project will ensure that poor communities receive additional resources to carry out ALMSs and thatthese communities are served with the kind of ALMSs that have proved the most effective in helpingunemployed workers back to gainful employment.

Component 3: Project Coordination, Management and Monitoring.

This component will act as a business office for the project including all liaison and reporting with theBank, administer all procurement cover the following core project expenditures/activities: operatingcosts, training, technical assistance, monitoring and evaluation activities of microprojects and developthe SIF on behalf of the Government.

3. Country Financial Management Issues

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A Country Financial Accountability Assessment for Bulgaria will be carried out by the Bank in late 2002- early 2003. When finalized, the document will detail issues on the financial management risks for thecountry and the implications for the World Bank operations.A summary of key country financial management issues in Bulgaria is given below:

* There have been some reforms in the public sector financial management of Bulgaria.* The accounting standards have recently been modified substantially to adhere closely to

International Accounting Standards (IAS).* The macroeconomic situation has generally improved after the financial crisis of 1996 - 1997.

GDP growth was recorded yearly since 1998. Inflation has been brought down to single digitsfigures. The currency was pegged to the DM (now to the Euro) following the introduction in1997 of a Monetary Council. However, unemployment and total foreign debt as a % of GDPremain at very high levels.

* The Supreme Audit Institution (SAI) in Bulgaria is undergoing a reform process that willimprove its capacity to carry out an independent external audit on the Government accounts.

4. Financial Management System Assessment

4.1 Project Management and Coordination

The SIF established under the MOLSP includes all the key staff agreed upon (director, chief accountant,accountant, procurement specialist, a number of technical experts, etc.). The Government has establishedand will maintain a project financial management system (FMS) in a format acceptable to the Bank andin accordance with OP/BP 10.02 and the WB Project Financial Management requirements. The SIF willbe responsible for the project's overall financial management system. All procurement, financialmanagement and disbursement procedures for the Project will be centralized at the SIF and be inaccordance with the relevant Bank guidelines.

4.2 Staffing of the Accounting / Finance Function

The SIF is based on the previous PMU that has implemented the RIF WB Project and that has beenoperating for over three years in the implementation of the RIF Project. The same financial managementstaff (chief accountant and the accountant) that worked on the RIF were retained by the SIF. The overallRIF activity and progress was satisfactory.

The SIF chief accountant handles all financial accounting records, ensure that accounting records arekept up to date within the accounting software and is in charge of the petty cash arrangements. She isalso be responsible for the planning, budgeting, auditing and reporting aspects, reporting to the SIFdirector. The chief accountant has also established permanent contacts with the accounting departmentof the MOLSP, auditors and the MOF.The SIF Accountant deals with the daily accounting operations, keeps the petty cash book, prepares allrelevant documentation and introduce the transactions in the computerized system.

4.3 Accounting and Internal Controls

The SIF will maintain the project accounts in accordance with Cash accounting and the Bulgarianstatutory requirements, reporting to the accounting department of MOLSP and to the World Bank.The SIF will maintain all documentation related to project expenditures and keep financial records in

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accordance with sound accounting practices. The SIF will be responsible for keeping the full accountingrecords of the Project, in charge of all payments, operating the accounting software, handling the SpecialAccount (SA) and requesting payments from the Project Account (PA - Government contributions),prepare all bidding documents, reporting both to the Bank and Government, planning, budgeting,disbursement and auditing.All the original project documents, contracts, payment orders, bank statements and all other relevantaccounting documents are to be kept by the SIF, filed on a timely basis and organized in a manner toensure the full audit trail with the accounting software records.The SIF staff are responsible for: preparing the bidding documents; receive the offers and evaluate themin accordance with the WB regulations; submit the evaluations to the WB for no objection; sign contractsin an acceptable format; supervise the works performed by the contractors; certify (jointly with thebeneficiaries' representatives) the acceptance of the goods, works and services provided in accordancewith the terms of reference, contracts and the relevant technical specifications. The beneficiaries will bethe local municipalities and the local communities. The payment documents will be prepared by the SIFonly after the fulfillment of the above steps.The local councils, communities and the other beneficiaries will make the payments from their ownproject accounts used for their cash contribution to their sub-components and inform the SIF about thepayments made. Only after these local contribution payments are made, the SIF will make paymentsfrom the Loan funds and Government contribution. The local councils and beneficiaries will send to theSIF monthly reports which detail payments made, forecasted payments for the next months and quarterand will include supporting documentation (payment orders, bank statements, invoices, receipts, in-kindcontribution statements, acceptance protocols, etc.)The SIF has developed detailed financial statements, reporting formats and methods, internal controlprocedures, disbursement and flow of funds arrangements, assigned staff responsibilities in order toensure a complete segregation of duties.Detailed accounts will be kept for each project component and its sub-components. The accounts alsoreflect: the status of payment against each contract; utilization of the Special Account (SA) andreplenishments made by the Bank; utilization of the Government contribution and uses of the funds. TheSIF will prepare reports showing detailed budgeted and actual expenditures, uses of funds by source,summary of withdrawals and forecasts, statements of progress achieved to date and the objectives for theforthcoming quarter and semester.The SIF will prepare the Financial Monitoring Reports (FMRs) on a quarterly basis. The SIF will submitthe quarterly FMRs to the Bank starting with the period in which disbursements will commence (i.e.probably the period ended December 31, 2002) and quarterly thereafter, no later than 45 days after therelevant quarter's end.

4.4 Computerized Accounting System

The existing accounting and reporting software system developed for the RIF Project requires a numberof adjustments to cater fully to the specifics of the new Project. The in house IT specialist, together withthe chief accountant and accountant will perform and include all adjustments needed by September 15th,2002. Some changes and a certain degree of customization are needed to modify the software to respondto the specifics of the Project. These changes will be performed in house by the SIF specialists inaccordance with the action plan and will imply some adjustments to the Project chart of Accounts and theFinancial Monitoring Reports.The system features a customized chart of accounts, detailed financial statements, reporting formats andmethods, etc. The system can produce a trial balance, balance sheet, a statement of sources and uses offunds, income and expenditure statement, special and project account statements.Usual joumals and ledgers are also produced by the system, such as separate joumals for works, goods,

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consulting and training, and operating costs. The system also features the bank accounts ledger, theaccounts receivable and accounts payable ledgers, the general ledger and a fixed assets register.The chief accountant and the accountant are the operators of the software with the SIF directorresponsible for authorizing all payments. The procurement specialist has limited rights to access thesoftware on procurement related aspects. All these SIF staff members were trained and are familiar withthe use of the computerized software.Any changes to the software will have to be authorized a prior by the Bank and the SIF director inwriting and a report will be prepared by the Chief Accountant and the IT Specialist documenting the needfor such changes and updates and a fully detailed log of the programming actions implemented.The software system is currently able to prepare only the Statement of Sources and Uses of Funds andwill be adjusted to be able to produce all the quarterly Financial Monitoring Reports as requested by theBank's Financial Management requirements. The format of the FMRs was agreed with the SIF beforenegotiations.

4.5 Audit arrangements

The SIF and Project annual financial statements will be audited each fiscal year in accordance with Bankguidelines, by independent auditors acceptable to the Bank. Conclusion of a contract with selectedauditors, satisfactory to the Bank, will be a dated covenant in the Loan Agreement. Copies of the auditreports will be submitted to the Bank within six months of the close of the fiscal year (calendar year).The audit reports will cover the SIF and Project Financial Statements, Special Account Statement, aswell as all the Statement of Expenses (SOEs).The previous experience with the RIF Project showed that the audit reports (prepared by KPMGBulgaria) carried clean (unqualified) opinions on the RIF Project Financial Statements and themanagement letters did not contain significant internal control issues.

4.6 Planning and Budgeting

The SIF will prepare reports showing detailed budgeted and actual expenditures, uses of funds by source,summary of withdrawals and forecasts, statements of progress achieved and the objectives for theforthcoming quarter and semester.Detailed accounts will be kept for each project component and its sub-components. The accounts alsoreflect: the status of payment against each contract; utilization of the Special Account (SA) andreplenishments made by the Bank; utilization of the local contribution and uses of the funds. The SIFwill submit the quarterly FMRs to the Bank starting with the period ended December 31, 2002 andquarterly thereafter, no later than 45 days after the relevant quarter's end.The budgeting and financial forecasting are an integral part in the process of preparing the FMRs. Theseactivities will involve the SIF director, the chief accountant, the accountant and the procurementspecialist.

4.7 Financial and Accounting Procedures Manual

The SIF will adhere to sound internal control procedures and practices, to ensure that the Project fundsare used with economy and efficiency and only for the purposes intended.A Financial and Accounting Procedures Manual was developed by the SIF staff members for each of theproject components, documenting all the various types of financial transactions, approval andauthorization steps, the flow of documents within the SIF and between the SIF and the beneficiaries, tothe MOF, SIF staff responsibilities and measures to ensure a complete segregation of duties, as well asother internal control procedures. The manual also documents the day-to-day internal procedures foreach type of activity (such as correspondence handling, contracting and payment procedures, operation of

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all bank accounts, petty cash, authorization mechanism, reporting, budgeting, planning, filling, etc.).

4.8 Conclusion

It is concluded that the financial management arrangements of the Project satisfy the minimum WBfinancial management requirements because:* The SIF has implemented an acceptable computerized accounting and reporting system for the

Project and the remaining actions will be implemented by September 15th, 2002, in accordance withthe attached FM Action Plan;

* The SIF has developed a detailed financial, accounting and internal control manual describing theaccounting policies and procedures, internal controls, delegation of responsibilities and authorities,transaction flows, reporting, planning and budgeting;

* The SIF has an experienced chief accountant and accountant, acceptable to the Bank;* The SIF will contract independent external auditors, acceptable to the WB (dated covenant in the

Loan Agreement).

5. Flow of Funds

The Loan Agreement will be signed between the World Bank and Republic of Bulgaria. The MOF willauthorize the SIF to handle the Loan amounts through the Special Account (SA). The SIF will be incharge of operating the SA. The SA is to be opened at the Bulgarian Central Bank, in accordance withthe WB requirements.Government contributions will be received in separate project sub-account of the main budgetary currentaccount of MOLSP, that will just be used specifically for the Bulgarian contribution to the project. Thesecontributions will be received monthly, directly from the MOLSP budget. These contributions will bereflected as a separate line in the budget of MOLSP and will be managed directly by SIF.The SIF will have full rights to operate both the special and the project accounts. All documentationpertaining to the project (relating to Loan funds, to the local contributions and other donors asapplicable) will be kept at the SIF. All payment requests, statements of expenditures, replenishmentrequests, payment orders will be countersigned by high level official of the MOLSP.

6. Financial Monitoring Reports

The SIF will maintain accounts of the Project and will ensure appropriate accounting of the fundsprovided. It has been agreed that the SIF will prepare the Financial Monitoring Reports on a quarterlybasis. The format of the reports was discussed and agreed upon with the Borrower before negotiationsand the description of these will be attached to the minutes of negotiations. The FMRs include:

* Project Sources and Uses of Funds* Uses of Funds by Project Activity* Physical Progress Reports* Procurement Monitoring Reports

7. Financial Risk Analysis

From the financial management perspective, the proposed project is considered a substantial - riskproject. A summary of the consolidated risk assessment for the project is as follows:

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Risk Rating Comments

Inherent Risk1. Country Financial Management Substantial There is generally low financial managementRisk capacity and accountability in public sector.2. Project Financial Management Moderate Timely counterpart funding could be an issue.Issues3. Banking sector Moderate Restructured banking sector4. Perceived corruption Substantial The perceived level of corruption at all levels of

the economy is substantial, as reported in thepress.

OVERALL INHERENT RISK Substantial

Control Risk1. Implementing Entity Moderate Existing SIF familiar with WB regulations2. Funds Flow Moderate Simple arrangements in place3. Staffing Moderate Satisfactory4. Accounting Policies and Procedures Moderate The manuals document policies and procedures5. Internal Audit N/A No reliance placed on intemal audit6. Extemal Audit Moderate Appointment of auditors is a dated covenant7. Reporting and Monitoring Substantial Enhanced capacity for the Project and some FMRs

are to be adjusted and finalized by Sept 15 th, 20028. Information Systems Substantial Customized software system in place, updates to

be performed b September 1 5th, 2002Overall Control Risk Moderate

8. Costs andfinancialperformance

The project's financing plan, which includes the IBRD Loan and the project's planned expenditures,have been realistically estimated. In order to facilitate the implementation, the project's cost tablesinclude an appropriate cost matrix, which adequately shows the relationship between the Loan agreementcategories and project components.

9. Auditing Arrangements

The annual SIF and Project financial statements will be audited by independent auditors, acceptable tothe Bank, in accordance with the International Standards on Auditing (ISA) and the Bank guidelines onauditing and financial reporting such as the World Bank Financial Accounting Reporting and AuditingHandbook and the World Bank Project Financial Management Manual. The cost of the audits are to befinanced from the Loan.Appointment of independent auditors acceptable to the World Bank will be a dated covenant specified inthe Loan Agreement.The borrower (Government of Bulgaria) does not have any audit reports overdue on WB projects.

10. Disbursements

Disbursements from the IBRD Loan will be made based on traditional disbursement methods (i.e., fromthe Special Account with reimbursements made based on Statements of Expenditures-SOEs and fulldocumentation, and direct payments from the Loan Account). The proceeds of the loan are expected to bedisbursed over a period of four years.Withdrawal applications would be fully documented. The reimbursement of expenditures made from theSpecial Account may be made on the basis of certified Statements of Expenditures (SOEs), for the

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following items: (i) contracts for goods valued at less than EURO 100,000 equivalent each; (ii) contractsfor active labor services less than EURO 50,000 equivalent each; and (iii) contracts for consulting firmscosting less than EURO 100,000 equivalent each, and contracts for individual consultants amounting lessthan EURO 50,000 equivalent each; (iv) contracts for grants for sub-projects valued at less than EURO50,000. Expenditures above these thresholds will be fully documented.

11. Special Account

The Special Account will be opened at the Central Bank, the Bulgarian National Bank (BNB). Themaximum authorized allocation of the Special Account will be lirmited to EURO 1.5 million millionequivalent. However, during the initial stage of the project, an amount limited to EURO 0.5 millionequivalent will be deposited in the Special Account. When the amount disbursed reaches (cumulative)EURO 2.00 million, the amount deposited in the SA will be increased to the full amount of EURO 1.5million. Replenishment applications should be submitted monthly or whenever one third of the amounthas been withdrawn, whichever occurs earlier and must include reconciled bank statements as well asother appropriate supporting documents.

12. Financial Management Action Plan

Action Responsibility Due date* Finalization of the remaining FMRs and full integration SIF 9/15/2002

within the computerized system* Adjustments to the operational manuals, in respect of SIF 9/15/2002

the latest updates performed in respect to the financialmanagement arrangements for the Project

* Conclude contract with selected auditors SIF 1/31/2003

13. Impact ofprocurement arrangements

The SIF is staffed with a procurement specialist that will be in charge with the procurement aspects ofthe Project, and will draw upon the existing expertise of MOLSP specialists in their area of competence,as needed. The procurement specialist became fully familiar with the WB procurement regulationsduring the RIF Project.The intemal control manual details the procurement procedures in a separate section of the manual andestablishes the links between procurement and financial management / disbursements procedures.

14. Loan Agreement covenants

The following are the covenants relating to financial management matters:

* The Government will complete the agreed financial action plan for strengthening the projectfinancial management system by January 31, 2003.

* The Government will furnish WB the annual project implementation work programs for the projectfor the next year, including procurement and financing plans, and will review these plans with theWB before implementing them.

* The Government will submit to WB, commencing upon Loan effectiveness, quarterly FinancialMonitoring Reports, not later that 45 days after the end of each quarter outlining progress made inthe implementation of each project component, as well as the problems encountered and how they

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are being addressed.* The Government will cause the SIF to have the SIF and the Project financial statements audited each

year, by independent auditors acceptable to the WB, commencing with the accounts for the periodending December 31, 2002.

15. Supervision Plan

The development for further strengthening the financial management system will be monitored ofprocedures and staff development before effectiveness, during the first supervision missions andthroughout project implementation.The reports of the progress of the project implementation will be monitored in detail during supervisionmissions. The FMRs will be reviewed on a regular basis by the field-based FMS and the results or issuesfollowed up during the supervision missions. Financial audit reports of the project will be reviewed andissues identified and followed up. The field based FMS would monitor the agreed action plan to ensureappropriate actions have been implemented by the SIF.

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Annex 7: Project Processing ScheduleBULGARIA: Social Investment and Employment Promotion

Pr;oje tSchzeduIej7s$ - - - h =-jaeZ*,@ be

Time taken to prepare the project (months)

First Bank mission (identification) 11/05/2001 11/05/2001

Appraisal mission departure 02/18/2002 09/11/2002

Negotiations 03/18/2002 11/18/2002

Planned Date of Effectiveness 09/01/2002

Prepared by:MOLSP with Bank assistance

Preparation assistance:PHRD

Bank staff who worked on the project included::- -Nm :Crn e --- .. Speciality- y. z--

Sandor Sipos Bulgaria HD Program Team Leader, ECSHD

Peter Pojarski Task Team Leader, ECSHD

Samantha De Silva Social Funds/CDC Specialist, HDNSP

David Fretwell Active Labor Markets, ECSHD

Goran Tinjic Microfinance, ECSHD

Sonja Brajovic-Bratanovic Microfinance/Small Business Finance, ECSPF

Jan Pakulski Social Assessment, ECSSD

Boryana Gotcheva Social Assessment/Targeting, ECSHD

Dena Ringold Targeting/Ethnic/Gender/Poverty Assessment, ECSHD

Leonardo Concepcion Procurement/Implementation (ECSHD)

Antonia Viyachka Procurement, ECOPSYingwei Wu Procurement, ECSHD

Bogdan Constantinescu Financial Management, ECCRO

Nadejda Mochinova Implementation/COSTAB, ECSHDDaria Goldstein Legal, LEGEC

Nicholay Chistyakov Senior Finance Officer, LOAGIMarilou Abiera Program Assistant, ECSHD

Boryana Savova Team Assistant, ECCBG

Vladimir Nedialkov Team Assistant, ECCBG

Vladislav Krasikov Procurement, ECOPS

ConsultantsKenneth Peoples (Peoples Group, USAID), MicrocreditYordan Dimitrov (Government, PHRD), ImplementationJavier Jansen (Government, UNDP), Social Funds/Operations ManualBlagovest Georgiev (Government, UNDP (RIF PMU), Social Funds

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Ivayla Taseva (Government, UNDP (RIF PMU)), Social AssessmentStefka Pipkova (Government, UNDP (RIF PMU), ProcurementKrassimir Christov (Government, PHRD), MicrofinanceAndrey Lalov (Government, PHRD), Employment/LaborAdriana Petrova (Government, PHRD), Technical SupportStefan Ivanov (Government, PHRD), Targeting/Poverty

Bank Peer ReviewersGordon Betcherman (HDNSP), Labor MarketsManiza Naqvi (ECSHD), Social FundRodrigo Chaves (ECSSD), MicrofinanceAmit Dar (HDNSP), Labor Markets

Bank QER PanelLynne D. Sherbume-Benz (HDNSP), ChairJulie Van Domelen (HDNSP), Social Protection/Social FundsWilliam F. Steel (AFTPS), Social Funds/MicrofmanceDouglas Pearce (PSDCG), MicrofmanceHong W. Tan (WBIHD), Labor MarketsDavid Seth Warren (LCSHS), Social ProtectionRanda G. El-Rashidi (HDNSP), Operations

Safeguard ReviewNorval Stanley Peabody (ECSSD)Tjaart W. Schillhorn-Van Veen (ECSSD)Johnson Appavoo (ECSSD)

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Annex 8: Documents in the Project File*BULGARIA: Social Investment and Employment Promotion

A. Project Implementation Plan

B. Bank Staff Assessments

1. Social Assessment, December 20012. Procurement Assessment, December 20013. Poverty Assessment Update, Forthcoming 20024. Country Assistance Strategy 2002 (Draft)

C. Other

1. Law for the Social Investment Fund, March 21, 20012. Law for the Protection from Unemployment and Stimuiating Employment, last revision

December 20013. Employment Promotion Act, January 20024. Banking Law, last revision January 20015. Regional Initiatives Fund (RIF) LIL Implementation Completion Report, November 20016. Report on the Terminal Evaluation Mission of RIF by UNDP, November 20017. Regional Initiatives Fund Operations Manual, October 1999, modified 2000 and 20018. Regional Initiatives Fund LIL Mid-term Evaluation, December 19999. Regional Initiatives Fund Ex-ante and Ex-post Beneficiary Assessments (1999 and 2000)10. Regional Initiatives Fund Technical Evaluation, August 200011. Regional Initiatives Fund Government Assessment Report, October 200012. Evaluation of Active Labor Market Policies in Bulgaria, Netherlands Economic Institute,

January 200113. Report on Local Government Capacity Needs, Foundation for Local Government Reform,

October 200014. Sociological and Beneficiary Assessment of Potential Low-Income Housing Micro-Projects,

Vitosha Research, June 200115. Report on Municipal Poverty Targeting, Stefan Ivanov, December 200116. Report on the Capacity of Business Support Organizations in Bulgaria, Stocker and Benov,

September 200017. The Microfinance Revolution, Marguerite S. Robinson, 200118. The Environmental Assessment, September 2002Including electronic files

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Annex 9: Statement of Loans and Credits

BULGARIA: Social Investment and Employment Promotion04-Nov-2002

Difference between expectedand actual

Original Amount in US$ Millions disbursements

Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm RevdP068858 2002 WETLAND REST (GEF) 0.00 0.00 7.50 0.00 8.05 0.00 0.00

P064536 2001 CHILD WELFARE REF 8.00 0.00 0.00 0.00 8.07 8.33 0.00

P055158 2001 EDUC MOD (APL #1) 14.39 0.00 0.00 0.00 14.01 -1.06 0.00

P055021 2001 REG AND CADASTRE 30.00 0.00 0.00 0.00 31.53 2.88 0.00

P070086 2000 TRADE & TRANS FACIL IN SE EUR 7.40 0.00 0.00 0.00 7.04 5.07 0.00

P057927 2000 ENV/PRIVSUPT SAL 50.00 0.00 0.00 0.00 19.66 23.35 0.00

P055157 2000 HEALTH SECT REF 63.30 0.00 0.00 0.00 51.52 .14.74 0.00

P033965 1998 ENV REM PILOT 16.00 0.00 0.00 0.00 0.10 0.10 -0.37

P008319 1994 WATER COMPANIES REST 57.00 0.00 0.00 41.23 4.13 52.17 1117

Total: 246.09 0.00 7.50 41.23 144.12 76.09 10.80

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BULGARIASTATEMENT OF IFC's

Held and Disbursed PortfolioJun 30 - 2002

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1999 BAC Bank 0.00 0.00 4.00 0.00 0.00 0.00 4.00 0.002001 Bulbank 0.00 17.47 0.00 0.00 0.00 17.47 0.00 0.001999 Celhart 1.83 1.50 0.00 0.00 1.83 1.50 0.00 0.001998 Devnya Cement 27.42 0.00 0.00 0.00 27.42 0.00 0.00 0.002001 Doverie 3.04 0.00 1.78 0.00 2.54 0.00 1.27 0.002001 EPIQ 8.93 0.00 0.00 0.00 4.96 0.00 0.00 0.001994 Euromerchant FND 0.00 4.86 0.00 0.00 0.00 4.86 0.00 0.002000 Florina 4.17 0.00 0.00 0.00 3.87 0.00 0.00 0.001996 Interlease Inc. 1.79 0.30 0.00 0.00 0.29 0.30 0.00 0.002000/01 Kronospan Group 6.95 0.00 0.00 2.98 6.95 0.00 0.00 2.982002 PFS Restr 0.00 2.01 23.49 0.00 0.00 2.01 17.47 0.002001 ProCredit Bank 0.00 1.05 0.00 0.00 0.00 1.05 0.00 0.001997 SofiaHilton 11.05 0.00 2.00 8.68 11.05 0.00 2.00 8.682001 Sofia Med 13.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Portfolio: 78.58 27.19 31.27 11.66 58.91 27.19 24.74 11.66

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

2002 BAC Bank II 0.00 5.00 0.00 0.002002 Unionbank SME 5.00 0.00 0.00 0.00

Total Pending Commitment: 5.00 5.00 0.00 0.00

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Annex 10: Country at a Glance

BULGARIA: Social Investment and Employment PromotionEurope & Lower-

POVERTY and SOCIAL Central middle-Bulgaria Asia income Development dlamond'

2001Population, mid-year (nmilions) 8.1 475 2,164 Life expectancyGNI per capita (Atlas method, USS) 1,630 1,960 1,240GNI (Atlas method, US$ billions) 13.2 930 2,677

Average annual growth, 1995-1g

Populatlon (%) -0.6 0.1 1.0 G \Labor force (%) -0.5 0.6 1.2 GNI .' Gross

per ~ .pnmary

Most recent estimate (latest year available, 1995-01) capita enrollment

Poverty (% ofpopulation below national poverty line)Urban population (% of total population) 70 63 46Life expectancy at birth (years) 72 69 69Infant mortality (per 1,000 live births) 14 20 33Child malnutrition (% of children under 5) . 11 Access to Improved water sourceAccess to an improved water source (% df population) 98 90 80Illiteracy (% ofpopulation age 15+) 2 3 15Gross primary enrollment (% of school-age populatlon) 101 102 107 Bulgaria

Male 102 103 107 Lower-middle-Income groupFemale 99 101 107

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1981 1991 2000 2001Economic ratloe

GDP (US$ billions) 20.1 10.9 12.6 13.6

Gross domestic investmentlGDP 35.5 22.6 18.3 20.4 TrdExports of gobds and servioestGDP 35.6 43.5 55.7 55.7 radeGross domestic savings/GDP 36.6 26.9 12.9 12.9Gross national savings/GDP - .. 17.3 12.7 14.3

Current account balance/GDP 0.6 -0.7 -5.6 -6.1 DomestcInterest paymentslGDP 0.2 0.8 4.1 3.8 . InvestmentTotal debtIGDP '3.9 107.3 88.9 78.3 savlngsTotal debt seivice/exports 0.7 6.6 16.0 19.2Present value of debtVGDP .. 76.3Present value of debtlexports 1. . 131.3

Indebtedness1981-91 199141 2000 2001 200145

(average annual growth)GDP 2.2 -0.7 5.4 4.0 4.6 BulgarlaGDP per capita 2.4 -0.1 5.9 4.6 5.2 Lower-middle-income groupExports of goods and services -11.4 7.2 16.6 8.5 10.0

STRUCTURE of the ECONOMY1981 1991 2000 2001 Growth of Investment and GDP (%)

(% of GDP) 40

Agriculture 16.6 15.4 12.3 12.1Industry 51.9 57.8 25.8 25.2 20

Manufacturing . 157 155 aServices 31.4 26.8 61.9 62.7 -205

Private consumption 48.7 54.1 69.2 71.1 .40

General govemment consumption 14.7 19.0 17 9 16.1 - GDI e GDPImports of goods and services 34.5 39.2 61.1 63.2

1981-91 199141 2000 2001 Growth of exports and Imports (%)(average annual growth)Agiculture -1.9 4.1 -10.3 0.5 30Industry 3.0 -3.2 10.6 4.2 20

Manufacturing I. 1 - \.Services 4.2 -0.4 12.2 5 o9

Prvate consumption 1.5 -0.5 4.4 5.1 0 9 7 o o oGeneral govemment consumption 3.7 -6.0 11.7 2.4 .101Gross domestic investment 1/ -0.1 1.6 15.4 19.9 E-xports eO ImportsImports of goods and services -12.9 8.8 18.6 13.0

Note 2001 data are pretimnary estimates.The diamonds showfour key indicators in the country (in bold) oompared vwith its income-group average. If data are missing, the diamond will be inmomptete.

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Bulgaria

PRICES and GOVERNMENT FINANCE1981 1991 2000 2001 Inflation (%)

Domestic prices 1 sro(X change)

Consumer prices .. .. 10 4 75 000Implicit GDP deflator SW226.6 6.7 6.5 t

5009 Government flnance 1 / N(% of GOP, includes current grants) o' 9Current revenue .. 43.6 38.2 38.1 98 D7 98 99 00 01Current budget balance .. -1.2 3.2 4 0 - GDP deflator 'CPIOverall surplus/deficit .. -4.2 0 4 21

TRADE1981 1991 2000 2001 Export and Import levels (US$ mill.)

(USS millions)Total exports (fob) .. 3737 4,825 5.107 8.000

Consumergoods 1.439 1,715Investment goods .. .. 552 625 8,000 .

Manufactures .. .. 656 675 4Total imports (cif) i754,071 6,507 7,261 0

Food ... 175 198 2.00Fuel and energy -1263 1, 75 1,627Capital goods ., 1.263 1,592 1,816 0 95 9 97 8 go 0

Export pr'ce index (1995=100) .. . 91 89Import price Index (1995=100) . .. 105 103 U Exports U ImportsTerms of trade (1995=100) 8. 7 86

BALANCE o1 PAYMENTS1981 1991 2000 2001 Current account balance to GDP (%)

(USS millions)Exports of goods and services 9,338 4,137 7,000 7,532 Is -Imports of goods and servIces 9.046 4,255 7,670 8,555Resource balance 292 -118 -670 -1,023

Net income -261 -28 -321 -304 5Net current transfers 90 69 290 498 o

Current account balance 121 -77 -702 -828 - 5 es79sj

Financing items (net) 490 4 975 1,272Changes In net reserves 369 81 -273 -444 .10

Memo:Reserves Including gold (USS millions) .. 616 3,460 3.579Conversion rate (DEC, locallUS$) .. 0.01 2.1 2.2

EXTERNAL DEBT and RESOURCE FLOWS1981 1991 2000 2001

(USS millions) Composition of 2001 debt (US$ mill.)Total debt outstanding and disbursed 773 11.742 11.202 10,616

IBRD 61 824 844 G: 1219 A: 64IDA 0 0 0 - C. 1.1'0

Total debtservice 68 276 1,170 1,513lRD .. 0 76 80IDA 0 0 0 -D:667

Composition of net resource flows E-- S735Official grants 19 74 177Official creditors .. 29 71 -189Private creditors .. 30 107 360 r '*'Foreign direct investment .. 56 1,002 694 -6VtPortfolio equity 0 5 -9 F 0041

World Bank program 28- BlateralCommitments 267 135 68 A -18RDDisbursements .. 58 71 88 8 - IDA D -Other multilateral F -PrivatePrincipal repayments .. 0 27 32 C -IMF G -Short-termNet flows .. 58 44 56Interest payments .. 0 49 48Net transfers .. 58 -5 8

Ueveiop-Ment COnomlics Y/1 YUC

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Additional Annex 11General System of Indicators for Poverty Targeting of SIF Micro-projects

BULGARIA: Social Investment and Employment Promotion

Description of the Indicators

SIF funding will be allocated on the basis of a comprehensive poverty map, which will be developedduring the first year of project implementation with funding from a JSDF grant that is already effective.

During the first year of implementation and until the poverty map becomes available, SIF funding andmicro-project selection will be guided by a methodology for evaluating the development and povertylevels of the 262 municipalities in Bulgaria. This interim system includes the following groups ofindicators:

A. B. C. D.Local Investments Poverty Small Business General Social and

Development Economic StatusEnvironment

investment per resident % unemployment income per resident demographicdevelopment

net operational surplus paid and outstanding property status tax revenue per residentsocial assistance perresident

share of own paid social assistance amount of patent tax per budget expenditures perinvestment financing divided by total paid plus resident resident

outstanding socialassistance

An important characteristic of the interim system is that the proposed indicators are backed bycontinuous flow of collectable data. The data on the used indicators is available from the municipalbudgets, from the National Employment Agency (% of unemployment), and from the National StatisticalInstitute (population). These sources of information are considered reliable and available.

A specialized methodology will be used to calculate consolidated groups of indicators. These separategroups of indicators reflect the objectives of the SIF:

* Investments reflect the capacity of municipalities to invest in local infrastructure* The group of poverty indicators reflect the relative poverty rate in the separate municipalities* The third group of indicators reflect the conditions and the level of development of small business* The indicators in group 4 reflect:

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- Demographic development. The two indicators applied, i.e. changes in the number of population andthe coefficient of the demographic structure, reflect the reaction of the population toward thecommon social and economic conditions in the municipality.

- The tax revenue per resident reflects the economic potential of the municipalities.

Budget expenditures per resident reflect the level of local public services made available to thepopulation.

Methodoloev for Calculating the Indicators

The methodology used to calculate and compare the indicators is based on the following steps:

First, adjusting each indicator to the same scale. This is done by assuming the highest (best) value foreach separate indicator to be equal to 100 percent and then computing the indicators for the remainingmunicipalities in relation to this indicator. In this way, the value of each indicator for each specificmunicipality is represented as a percentage of the indicator of the municipality with the highest value,assumed to be 100 percent. For instance, in 2000 the municipality of Chelopech had the best value for theincome per capita indicator - 490.9 leva per resident. This amount is adopted as 100 percent. Two otherrandomly selected municipalities, for instance the municipality of Aksakovo and Pordim, have revenuesfrom the taxation of the income of natural persons based on respective levels of 110.85 leva per residentin the municipality of Aksakovo and 59.07 leva per resident in the municipality of Pordim. The relationof the value of their indicators is respectively 110.85 divided by 490.9 = 22.58 for Aksakovo and 12.03for Pordim (59.07 divided by 490.9).

Second, computing of the average group indicators. All indicators within the group participate with anequal weight. After they are adjusted to the same scale, that is, having them expressed in percentagesrelated to the highest value, the values of the separate indicators are added together and their sum isdivided by the number of indicators. For instance, the municipality of Dryanovo has a 13.49 indicator forthe taxation of real estate and a 41.72 indicator for the taxation of motor vehicles. This by itself showsthe percentages of the respective municipality in relation to the top municipality concerning therespective indicators. The group indicator of Dryanovo concerning the level of ownership is computed byadding together these two numbers and dividing the sum by 2. The result is 27.6. In this way, each of thegroups participates with the same weight, irrespectively of the number of indicators used.

Third, adjusting the group indicators to a uniform scale. The group indicator for each municipality refersto the average indicator for the group. For instance, the group indicator of economic development forSofia is 23.2, while the average indicator for the group is 16.43. The indicator for Sofia is obtained bydividing 23.2 to 16.43 and representing it in percentage points, multiplying it by 100. Sofia obtains agroup indicator equal to 141.25, which means that it is 41.25 points higher than the average for thecountry. In this way, one eliminates the different influences of the separate group indicators for theformation of the generalizing indicator, such influences being caused by the inter-municipalitydifferences of the variation within the separate groups. The influence of group indicators for the separatemunicipalities can now be determined solely by their differences in relation to the respective averageindicators for the country.

Fourth, calculating a generalizing indicator. The group indicators for each municipality are addedtogether and the resulting sum is multiplied by 5, which is the number of the groups. In this way, anon-normalized number is obtained for each municipality, and the biggest number among these is againassumed to be 100, while the respective indicators for the separate municipalities are computed in

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relation to it. In conclusion, the final generalizing indicator for the first municipality is 100, while for allother municipalities it is expressed as a percentage of the best one.

Fifth, ranking of municipalities. This is done by arranging all municipalities in a descending order,putting in the first place the municipality with the best value of the indicator, respectively by assigningthe last place to the municipality with the lowest value. Thus, the ranking of municipalities can be doneboth by separate indicators and by group indicators or generalizing indicators as well.

Analysis of Experience and Justification of the Choice of Methodoloav

The idea is for the SIF to build on and extend the RIF, which has been in operation since 1998.

The RIF Projects were aimed at:

* Financing economic and social infrastructure projects;* Creating employment among the poorest and most disadvantaged groups of the population.

The RIF projects were approved based on a complex and many tiered eligibility criteria.

First, following the promotion of the program, the institutions, which desired financing had to showinitiative and apply by filling out a Preliminary Application Form (PAF). Then all submitted projectswere reviewed based on exclusive criteria.

The projects that passed through this phase were further evaluated on the basis of two criteria, whichcharacterized the "needs of the municipalities":

* Rate of unemployment;* Level of social and economic development.

The projects from areas with greatest "needs" (i.e. the poorest) were evaluated through a multitude ofcriteria, which assess the quality of the projects themselves.

It is important that the two criteria correspond, to a large extent, to the objectives of the RIF. However,selecting the municipalities according to the rate of unemployment corresponds to the objective ofcreating employment. In this case it cannot be understood and assessed to what extent the municipalitiesare poor. The assumption is that higher rate of unemployment corresponds to higher rate of poverty.

The municipalities' needs in developing local infrastructure were assessed through the level of theiroverall social and economic development. It is difficult to comment on the categorization ofmunicipalities, because there was no information on: (i) what the separate indicators included: theindicator on output produced does not say what output, perhaps solely industrial, or only public sector;(ii) what period they were pertinent to; (iii) what method was used to compile the indicators, the groupscopes, etc.

As a result of reviewing RIF experience, the team came up with the proposed refined method for rankingmunicipalities for the purposes of directing SIF financing in this initial period until the poverty map isconstructed.

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Additional Annex 12: Social Assessment Desk ReviewBULGARIA: Social Investment and Employment Promotion

1. Background and Methodologv

At the project team's request, in December 2001, a small mission conducted a review of the existing dataand social studies that might be used for the preparation of a Social Assessment in support of theproposed Social Investment and Employment Promotion (SIEP) project. SIEP is a follow-up operation toan earlier Bank-supported project, the Regional Initiatives Fund (RIF), under implementation in Bulgariasince 1998. SEP proposes, however, a much more complex set of components whose successes orfailures will depend (much more than in the RIF's case) on the social impact and community response tothe interventions proposed under the project.

The methodology used in the review was primarily based on desk research of the beneficiary assessmentsand other reports prepared in conjunction with the RIF. In addition, other reports on various socialaspects of Bulgaria's transition process (see attached list of sources) were reviewed. Lastly, the teampaid two field visits to the municipalities of Haskovo and Suvorovo that included meetings with bothmayors, local NGOs, beneficiaries of the RIF project, the head of the regional Local Employment Bureauand local media.

This note summarizes the main findings of the review, identifies some areas of risks faced by the projectand formulates approaches to mitigate them. While a large quantity of social analysis material has beengathered during the implementation of the RIF, the review confirmed significant information gaps inregard to a number of critical socio-economic issues relevant to the proposed SEP operation.Addressing these gaps will require further field work and analysis during the preparation andimplementation of the project.

2. Key Social Development Issues

The SEP project envisages three components that, in mutually reinforcing ways, are to address thepoverty and long-term unemployment in Bulgaria. The diversity of interventions foreseen in thisintegrated approach, while serving the same overarching objective, will involve a number of importantsocial issues. For the purpose of a Social Assessment, the most important issues are characterized below.Given the methodology applied, some of a detailed analysis of some of the issues will require follow upfield work.

Poverty

The initial findings of the currently ongoing poverty assessment indicate that poverty in Bulgaria hasfallen drastically over the last four years but remained at levels more than double the pre-1997 crisis rates(11.7 percent in 2001 vs. 5.5 percent in 1995). By June 2001, poverty in rural areas was four timeshigher than in urban areas (23.7 vs. 5.9 percent). Compared with the 1997 levels, urban areasexperienced a much more significant drop in poverty levels (from 33.5 to 5.9 percent), while in ruralareas poverty rates were only less than halved (from 41.2 to 23.7 percent). Poverty is also uneven acrossthe country: 60 percent of the total number of poor are concentrated in Plovdiv, Vama and Bourgas.Rural poverty in Varna and Bourgas is extremely high, where more than 30 percent of the population livein poverty.

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Poverty is also concentrated in larger households of five or more members. These households accountfor nearly 30 percent of the population but represent nearly 60 percent of the poor. In urban areas,poverty rates among female-headed households is twice as high as among households headed by a man.In the rural areas, however, female-headed households in rural areas do better than those that aremale-headed. Poverty is concentrated among younger people. According to the 2001 data, every secondchild (age 0-5) living in a rural area is poor. Although children 10 and under make up only 10 percent ofBulgaria's population, they account for nearly 20 percent of the poor.

Poverty has also highly uneven distribution along the ethnic lines. The Roma and Turkish minorities aresignificantly poorer than the nation's average. In June 2001 a Roma individual was ten times more likelyto be poor than a citizen of Bulgarian origin. In the case of the Turkish minority such probability wasfour times higher.

The Roma population has also a number of distinct characteristics as compared to the remainingpopulation. Roma households larger with an average size of 4.5 persons (vs. 2.8 among non-Roma).Roma household heads are younger and less educated, with over 80 percent of household heads notreaching secondary school (vs. 35 percent in non-Roma households). The Roma households' access tobasic services is much more limited (every five lacking access to improved toilet, and only one householdin four with access to public sewage). Only 10 percent of Roma households have access to a telephone.Less than 33 percent of Roma households use electric or gar stoves, compared with three quarters amongnon-Roma households. Roma households are still using primarily coal and wood for cooking andheating. Average per capita consumption is less than one half the one estimated for non-Romahouseholds.

While the above characteristics indicate the magnitude and nature of poverty, in the context of asociological analysis, it is important to recognize that poverty in Bulgaria on such a scale was not knownin the country's post-2nd World War history, and before 1989 rarely spoken of. To most of the people inpoverty today, it is a new phenomenon and in the minds of many associated with political and economicchanges of the nineties. Many people equate these changes with a setback in living standards and a lossof security, idealizing the pre-1989 times: forgetting the previous commodity shortages and absence ofdemocratic rights. The nineties are also seen as a crisis of the state, a collapse of the state institutions andthe emergence of organized crime and social tensions.

Unemployment

The main cause of poverty in the eyes of most Bulgarians in unemployment. Over the last decade, theunemployment rate in Bulgaria has been increasing - from 6.7 percent in 1991 to 11.7 percent in 1995and 19.4 percent in June 2001. The number of people who are looking for jobs amounted to 661.1thousand in mid-2001. Out of them 50.6 percent are registered with the public employment offices, 46.5percent seek assistance from friends and relatives, 10 percent place or answer job offers and newspapersadvertisements, 24.7 percent prefer establishing direct contacts with employers and 4 percent go fordirect contacts and job interviews. Over 166.1 thousand employed people are also looking for jobs, outof them 31 percent would like to have an additional job, 28.4 percent are seeking permanent employment,20.8 percent want to work under better conditions, while 8.9 percent perceive that there is a risk of losingtheir present job.

In mid-2001 unemployment in urban areas was 17.9 percent and 23.8 percent in rural areas.Unemployment was the highest among low-skilled workers (primary or lower education) from urbanareas - 57.7 percent and among young people (age 15 - 19) in urban areas - 60.8 percent. About 35percent of the unemployed are heads of households. The main reasons for becoming unemployed are as

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follows: closure or downsizing of the business (redundancy) - 44.5 percent, termination of seasonal ortemporary job - 7 percent, unsatisfactory conditions of work - 3.6 percent, personal or family reasons - 2percent, retirement - 2 percent.

At present women represent about 48 percent of the labor force in Bulgaria and dropping employmentrate after a peak in the 1980s. Unemployment among women remains higher compared to unemploymentamong men. In the last decade the share of unemployed women in the overall number of registeredunemployed has always been higher than the share of men (see Table 1).

Table 1. Dynamics and structure of unemployment 1991-2000.1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Unemployment 6.7 13.2 15.7 12.8 11.7 12.5 13.7 12.2 14.2 18.1rate (in %)Women (% of all 54.2 52.4 52.9 54.3 55.5 53.6 52.7 53.8 54.4 52.7unemployed) ISource: National Employment Service, 2001.

Along with that women in Bulgaria face a horizontally and vertically segregated labor market -

traditional 'feminized' professions are in the area of education where 75 percent of all employees arewomen, health services with 78 percent women, trade - 64 percent, financial services and clerical work -80 percent. Women prevail among the low-paid staff, such as support staff - 75.5 percent, retail tradeand services - 64 percent , staff involved in implementation of programs and decisions - 56 percent.Only 28.5 percent of working women occupy managerial positions. This implies that women will bemore severely affected by the health, education and child welfare reforms which involve restructuringand downsizing of institutions, optimization of the school and health facilities networks, changes in thescope of services and the modes of their provision.

Women are a more vulnerable category of job seekers compared to men. Over 60 percent of womenthink that regular employment has a priority importance compared to nutrition, inflation and availabilityof housing. Although the women at the age of 41-50 are most concerned about unemployment, youngwomen (age group 18-30) also feel that they are very vulnerable at the labor market. The highereducational level does not contribute to overcorning the anxiety of becoming unemployed.

There are significant regional disparities which intensify with the increase in the unemployment rate.Critically high are the unemployment rates in the North-Western and the North-Eastern parts of thecountry, and in the regions of the Rila mountain and the Rhodopes. Highest unemployment rate isregistered in rural municipalities (such as Dimovo, Ruzhintzi, Yakimovo, Iskar, Kainardja, NikolaKozlevo) and municipalities where the population is of mixed ethnic and religious composition (such asKaolinovo, Borino, Rakitovo, Omourtag, Antonovo, Belitza, Yakoruda). The long-term unemployedaccount for more than 60 percent of all unemployed, including 10.4 percent unemployed for two yearsand 32.3 percent unemployed for three and more years.

Protection against unemployment in Bulgaria is effected mainly through passive measures. The"Unemployment Protection and Employment Promotion Act", enacted in 1997, regulates the provision ofunemployment benefits. In 2000, 185,580 unemployed workers received benefits, or approximately 26.8percent of those registered as unemployed. In October 2001 the share of unemployed receiving benefitsfell further to 25 percent. This coverage rate has fallen dramatically over the past decade with the highgrowth in long-tern unemployment. In 1990 79 percent of registered unemployed received benefits. TheActive Labor Market Policies cover a relatively small share of the unemployed. In 2000 225,660 personsparticipated in the various programs, about 33 percent of total registered unemployed against 41 percent

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for 1999. Most of the participants were placed in programs for temporary employment. Less than 10,000unemployed finished training courses in 2000.

Table 2. Labor Market Policies in Bulgaria:- . -'1:"''. s--^- Percentage oftheunetloy6m d:ih=61ved in labor f Betkies

; i Unemployed involved-iri Uneinplioqyediceiving .- USnnploY9&ojV&ide theMonths a;empl6yment programs -severance payments.or msrteof1abor rake'

a d;v6cationial trai n Omin-ploymen'tbe-nefits - po'iiescourses

Source: National Employmnent Service.

The share of labor market expenditures in GDP has doubled over the last decade, from 0.6 percent ofGDP in 1991 to 1.2 percent in 2000. Labor market spending accounts for approximately 9 percent of totalsocial protection expenditures. The increase has largely been driven by the growth in payments forunemployment benefits, which amounted to 0.9 percent of GDP in 2000. The balance between active andpassive measures has shifted during the decade too. Active measures were gradually introduced in theearly 1 990s and were scaled up during the crisis period of 1996-97, particularly the temporaryemploymnent programs. Since then ALMPs have been scaled back, declining to 15 percent of total laborspending in 2000.

Figure 1. Distribution of Labor Market Expenditures by Type in Bulgaria

100% - -- -

90%80% *Admngnstrative and Capital70% -Expenditures60% - E Other50%

40% 0~~~~~~~~~~~~~~~I Active Measures

30%-20% - Passive Measures10% 0%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: National Employrnent Service.

All unemployment programs are financed through an extra-budgetary find, the Professional Training andUnemployment Fund (PTUF), which is financed by payroll taxes. The contribution rate for benefits iscurrently 4 percent of gross wages, with 0.8 percent paid by the employee and 3.2 percent paid by theemployer. Following the increase in unemployment the PTUF is running a deficit since the first quarterof 2000 which makes impossible additional reductions of the contribution rate, as initially planned. In2000, the deficit of the fund amounted to BGN 14.6 million, or 5 percent of total re'venues. State budget

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transfers were 30 percent of revenues in 2000. Additional revenues come from fines. The PTUF coversunemployment risks and also makes social insurance contributions to the health and pension funds for theeligible unemployed. The present government is revising the Mandatory Social Insurance Code and theUnemployment Protection and Employment Promotion Act with the idea of separating the passive labormarket measures (insurance against risk of unemployment) from the active labor market measures. From2002 the PTUF will be managed by NSSI and will provide cash unemployment benefits only. Itsinsurance basis will not be compromised any more by the obligation to finance ALMPs. These programswill be financed through general state revenues. Shifting non-insurance based benefits to the state budgetwill bring fiscal stability to the PTUF.

Along with the state unemployment offices, there is a growing number of private companies that act aslabor market intermediaries providing training, job placement and other services to unemployed andemployed who want to change their jobs. As of December 2001, 90 'labor exchanges' are licensed for therecruitment of workers for the domestic market, 35 agencies recruit and contract workers for workoutside the country and 29 agencies are specialized in hunting for marine specialists. Along with themon the domestic market operate about 15 large international recruitment and personnel managementcompanies. The turnover of the human resources consultancy market in Bulgaria is limited and notexceeding DEM 200 million per annum. The supply of these services is higher than the demand due tothe high unemployment, underdeveloped and inflexible labor market, high tax burden, limitedinformation, knowledge and understanding of the role of the labor market intermediaries, the lowinvestment requirements for this business. There is a scope for involving the private companies in activelabor market programs using their capacity to screen the job applicants and deliver high qualityspecialized services as training in soft skills as career planning, team work, conflict resolution andpersonal time management.

Social Capital and Community Involvement

One of the key design expansions under the SIEP compared to the RIF is the emphasis on directcommunity financing. While this 'window" was also nominally available under the RIF, for a variety ofreasons, among some 250 infrastructure investments supported by the RIF only one was carried out by alocal community (all the remaining projects were financed under the second window - available toproposals submitted and carried out by municipalities).

The existing material offers only a limited explanation for this phenomenon. One of the reasons appearsto be the weak information dissemination and public consultation effort. While the quality of this effortdiffered across the communities, according to one of the RIF social scientists, in some communities"people learned about the investment only when they saw the arrival of the equipment and buildingmaterial at the project site". In her view, the quality of public outreach and consultation was primarily afunction of the leadership skills and personal management style of the local mayor.

Another, not less important, explanation may be found in the weak community activism tradition and,more broadly speaking, social capital of Bulgaria. While no comprehensive study exists, at this stage, onthe social capital of Bulgaria, numerous studies suggest low levels of trust, particularly when it comes topublic sector institutions. In addition, the legacy of five decades of communist system and centrallyplanned economic management have resulted in public apathy, lack of confidence in self-initiative,especially among the older population, and the engrained expectation that the state and the state alone isresponsible for solving all socio-economic problems. Communist rule destroyed traditional communityorganizations and their self-reliance; rapid industrialization has exacerbated the problem - furtherfragmenting the informal structures and adversely affecting communities' cohesiveness.

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A related issue is the recent phenomenon of depopulation - the decline in population due to migration toother parts of Bulgaria or abroad. According to a survey conducted among 18 mayors involved in theexecution of the RIF, depopulation was the third most serious issue in their municipalities (afterunemployment and low living standards). In some communities in South Eastem Bulgaria with arelatively large Turkish minority, the population decline over the last five years has been as high as 50percent, resulting in the departure of primarily young and entrepreneurial people.

The 1999 qualitative study conducted as part of a global research effort entitled "Consultations with thePoor" quotes that all nine focus groups conducted under the program seemed concemed about socialcohesion. Their participants argued that society (or the community) was less "close-knit" now, that therewas a lack of "common understanding," "mutual trust," or "community spirit". There was a primeconcem for Roma, disabled, middle-aged women and elderly people.

Gender

At the end of 2000 women represented 51.3 percent of the population, including 47.6 percent of thepopulation in working age, 48.1 percent of the population under working age and 61.7 percent of thepopulation over working age. Gender inequalities in economic opportunities are considered small inBulgaria. Women have traditionally high labor force participation in formal employment - 47 percent inthe end of 2000. Gender presents no legal barriers to wealth, land ownership and access to credit. Thereis a fairly high degree of gender equality with respect to human capital accumulation. However, womenhave been the first to be laid off in the economic transformation process of Bulgaria after 1989. Theindustries most affected by mass dismissals have been sectors predominated staffed by women.Concerns are growing that the shrinking of government budgets combined with increased incidence ofpoverty will erode achievements such as girls' high educational attainment, bring back traditional genderstereotypes and roles in the household, and thus increase gender inequality.

The implementation of the SIEP project will confront gender problems and erosion of typical genderroles, that are pertinent to small, remote and poor communities in the transition period. These includefeminization of poverty, growing share of non-paid labor in the household, low and irregular cashincomes coupled with increased responsibilities for the physical survival of children and other relatives,more limited labor mobility. In such communities women and women-headed households tend to havescarce incomes; compared to men, women have higher and increasing faster incidence of poverty andwomen's poverty is more severe. Poverty correlates with the number of children in the household, andwomen are those who more often care for children in single-parent families both in rural and urban areas.

There are also other ways in which women are poorer than men, especially within households inmarginalized communities. Often men may forbid their wives to work for wages or men may usewomen's labor to produce homegrown food, crops, homemade carmed products, tobacco, to collectherbs, but will not share the proceeds equally. Men can also use cash child and mateirnity benefits forpurposes not contributing to the welfare and living standard of the family. Men can exercise control inthe family and in particular over their wives through violence or threat of violence.

Women-owned micro, small and medium sized enterprises (SMEs) have been growing in number in thepast decade in Bulgaria. There are only marginal differences in the profile and performance ofwomen-owned companies in relation to Bulgarian SMEs in general. All entrepreneurs face similarbarriers - socio-cultural, behavioral, economic, financial, and educational. Nevertheless, these barriersare somewhat higher for women than for men in Bulgaria and women's businesses tend to survive withmore difficulties compared to men-owned businesses. Bulgarian men. are more entrepreneurial than

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women - 21 percent of men have tried to start up their own business against 12 percent for women. Menare more successful in maintaining the established companies - the share of successful 'men-owned' tosuccessful 'women-owned' businesses is 60: 40. In other words, women are less likely to start abusiness and are more likely to fail if they take the initiative.

In 1999, 1.4 percent of all women entrepreneurs employed other people against 3.3 percent for men; 6.3percent of women were self-employed against 11 percent for men; 2.6 percent of women fell in thecategory of unpaid family workers against 1.1 percent for men. The number of self-employed women isstill low and is dropping due to lack of opportunities and incentives. With a few exceptions, womenentrepreneurs tend to develop small and micro-business activities related to their previous employmentand expertise. Women who would decide to take a credit in order to start own business are by 30 percentless compared to men who are ready to borrow.

The attitudes of women towards business development vary based on age. Approximately 30 percent ofwomen entrepreneurs under 40 consider that the main role of women is to look after family and childrencompared to 19 percent of women aged 41 and above. This change in social expectations about the roleof women in society may have a negative impact on the participation of women in business in the longterm.

The Bulgarian women entrepreneurs have a clear-cut profile - they are young, well educated,self-confident and are trying to balance the various roles they must play even though society is prejudicedagainst them (this is especially true for women who are not entrepreneurs). Bulgarian womenentrepreneurs are typically married, have 2 children (higher than the national average), hold a universitydegree, and had decided to establish a business in order to gain financial independence as well as toutilize their know how. They most frequently are located in the largest cities - over 60 percent. Up to 50percent of the women-owned businesses are in the domain of trade. About one third of the businesses aregrowth/expansion-oriented, which is in contradiction with the commonly held belief that women inbusiness are subsistence-orientated.

Among women-owned small businesses prevail the green field investments. Micro enterprises owned bywomen have 2.9 employees while in general; micro enterprises have only 1.8 employees. Women ownedbusinesses have a tendency to employ more people once they are no longer considered micro enterprises.The level of employees in large companies owned by women is 175 in comparison of 156 for the generalSME population. This seems to point to the belief that women employ more people.

3. Stakeholders and Institutions

The project's primary beneficiaries are the poor and disadvantaged individuals and households - whooften live in remote communities and have limited access to basic services; the long-term unemployed;and disadvantaged groups such as women and ethnic minorities. Other important stakeholders arenational, oblast, and village leve*l officials, NGOs, commercial banks, the Ministry of Labor and SocialPolicy and the National Employment Service with their local branches, the Regional Commissions forEmployment (RCEs), the central and regional media, the Social Investment Fund, the World Bank andother donor agencies.

At the central level the SIF will be managed by a tripartite Steering Committee made up ofrepresentatives of the Govemment, employers' and workers' organizations, and donors. The constitutionof the Steering Committee and its participatory nature are laid down in the Law for the Social InvestmentFund adopted by the Bulgarian Parliament in 2001. The Steering Committee, chaired by the DeputyPrime Minister and the Minister of Labor and Social Policy, is the SIF's highest oversight body. All

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project components will be managed by separate structures that will include representation of keystakeholders in the respective components. Criteria for the selection of representatives to the abovebodies have not yet been developed but will be made public in advance and the selection will beconducted in a transparent fashion.

At the regional level the implementation of the components will be overseen by the RegionalComrnmissions for Employment (RCEs). Representatives of project beneficiaries (through their localgovernments) and other key stakeholders are members of the RCE. Specific procedures will be includedin the SIF operations manuals to outline the role of RCE in project review and coordination under eachcomponent. A participatory procedure for local-level project identification will be implemented. Thisprocedure will look for community consensus on local priorities, and will involve, inter alia, localgovernments, social partners, NGOs and community groups.

The material available for this desk review offers only limited information for a meaningful institutionaland organizational analysis of the SIEP (the bulk of the relevant material has already been summarized inthe Participation section of this document). Given the particular stage of project preparations, it ishighly desirable that the social analysis work that is to be continued over the next four years (see theMonitoring and Evaluation section) include detailed analysis of the formal and informal institutionsinvolved in the implementation of the respective components. The analysis should also look into thedecision-making process and the incentives determining these institutions' behavior. It should likewisecover the existing legal and regulatory framework and the proposed legislative changes (e.g. the law onmicro-credit institutions). Lastly, the institutional analysis should examine the capacity of the respectiveorganizations to conduct proactive public outreach and support stakeholders' participation in the project.

4. Participation

Since awareness is a prerequisite for participation, a closer look at the participation record under the RIFmust be preceded by an analysis of the awareness level. According to the quantitative survey (N= 1092),79.5 percent of the respondents were aware of the project (asked after project completion). However,among those who were aware of the project (N=857), 61 percent had learned about it when theimplementation of the project began and another 10.5 percent after project completion. The awarenesslevel correlates positively with the size and type of the investment and negatively with the size of thesettlement. From an ethnic background point of view, the Turkish minority was most informed. TheRoma and the Bulgarian Muslims were the least informed and, in addition, learned about the project at aconsiderably later stage. 57 percent of the respondents who were aware of the project had learned aboutit through neighbors and fellow community members while only 10.2 percent had done so at a meetingbetween the mayor and the residents.

Data from the Beneficiaries Assessment studies carried out under the RIF project in the period July1999-October 2001 show that the participation of the local population in the micro-project cycle(including identification of problems, proposal development, selection and submission, projectimplementation, supervision, maintenance) was low - 4 percent declared their participation in projectselection and implementation in 1999; 6.6 percent - in 2000; 6.4 percent - in 2001. In five out of a totalof eighteen projects the citizens were not involved at all in the decision-making. Most of the respondentswho did participate described their participation as having attended the meeting with the mayor to discusspriority investments.

Although the registered personal involvement was low, it should be underlined that nearly 60 percent ofthe population in places where RIF has implemented micro-projects expressed the opinion (ex-post) that

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local people should participate in the project selection and implementation and that they wouldpersonally participate. The Beneficiary Assessments did not probe the respondents on the reasons why,despite the above, only a few actually participated. Based on anecdotal evidence, it appears that one ofthe reasons may be the actual process of consultations and the extent to which the community membersidentified themselves with the project and developed some degree of ownership of the initiative.

A capacity and needs assessment study commissioned as part of the SIF preparations in the Fall of 2000also revealed that the lack of information hampered municipalities in preparing successful projectproposals. The report distinguishes between the small municipalities (SMs) and the bigger ones, referredto as Regional Center Municipalities (RCMs).

Half of the RCMs surveyed identified "lack of information" as a major obstacle to preparing successfulproject proposals. Most of them (80 percent) receive information about financing programs onlysporadically. The Internet, the specialized bulletins and local NGOs appear to be the main sources ofinformation (see Chart 1). However, only a small number of experts have adequate knowledge and skills,including language skills, to extract the necessary information from the Internet. The specialized bulletinsare not very effective in presenting new programs as the period needed for their proper dissemination isusually longer than the time period given for submitting an application. Local NGOs often are not highlyeffective distributors of information as they have problems in obtaining the information themselves. TheRCMs are under the impression that the information flow usually stops at the Ministry level.

Chart 1. Sources of Information among the Regional Center Municipalities

U Intemnet

60% -- _ _ Specialized bulletins

40% jj 3O,o NGOs

30% l i l Personal contacts

20% State institutions

10% ~~~~~~~~~~~~~iMedia

0% 1 0 Embassies

Source: Foundation for Local Government Reform.

Most of the SMs (90 percent) receive information about international assistance programs occasionallyor incidentally. The Internet is not a source of information at all because most SMs (85 percent) don'thave access to it and/or lack experts with appropriate foreign language skills. The specialized bulletins,local NGOs and state institutions appear to be the main sources of information (see Chart 2).

SMs believe that state institutions are not very efficient either, as underscored by the notion that theinformation flow usually stops at the Ministry level. Ministry officials do not have any incentive tobroadly distribute information. This is why 62 percent of SMs rely on personal contacts to obtain theneeded information. The report also argues that municipalities that are members of regional municipalassociations seem better informned.

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Chart 2. Sources of Information among Small Municipalities

What source of information do you use?

.A- E Intemet70%'60% JOL i i - - - - Specialized bulletins

50% - O NGOs40%A

I0% g *Personal contacts20% istate insitutons

0% - IMedia

1 Embassies

Source: Foundation for Local Government Reform.

So far, only a limited number of qualitative studies and small-scale community level initiatives point atpossible approaches towards mobilizing local communities for development initiatives in Bulgaria.

The FLGR study provides some basic information in this regard. Public discussions and NGOfacilitation appear to be the main instruments to engage communities in the process of identifyingcomnmunity development priorities, and generating and developing projects. However, the outcome ofthese efforts was relatively weak. In some small municipalities, local officials admitted that they do itrarely because they believe that small communities are notalways able to prioritize well and go beyond the personal interests of the concerned. They are concernedthat "sometimes the involvement of the community can retard or ruin a nice project idea". Similar viewswere reported in the qualitative Assessment conducted under the RIF. Some mayors interviewed for theBeneficiary Assessment stated that, while the involvement of the community is necessary, it is donethrough the municipal councils who represent the members of the community.

The FLGR report confirms the existence of prejudice against community involvement and states that "itis considered ineffective". In regard to needs assessment, it recommends capacity building and trainingin using effective instruments for involving local communities in the development process. TheUSAID-funded PLEDGE project seeks to build local capacity for identifying development priorities,preparing small-scale project proposals and implementing them. The PLEDGE experience, whilesuccessful so far, shows the need for an intensive and prolonged training and facilitation effort at thecommunity level. Further analysis is needed before applying this and similar approaches nation-wide.Intensive field research is also needed to establish the capacity of the communities, the skill requirementsof the facilitators and the contents of the training program for future facilitators, etc.

According to the FLGR report, 10 percent of surveyed large municipalities (RCMs) have adopted theinstitution of Ombudsman that proved very successful in dealing with minority neighborhoods.

5. Monitoring and Evaluation

In view of the complexity of the operation and its innovative CDD-approach, at least in the Bulgariancontext, the monitoring process should focus on a number of broad issues, particularly targeting anddelivery; social and economic impact; demand and participation; and sustainability of the interventions.

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Such an approach should also help fill the information gaps in the existing social analysis material andprovide a basis for mitigating the main risks in regard to the social outcomes of the project (see sectionE.6 of the PAD).

Given the nature of the operation, a participatory M&E program would be particularly desirable.Stakeholder representatives, especially project beneficiaries, would need to be involved in the designingof the M&P instruments and in identifying benchmarks for measuring the impact of the respectiveinterventions. The exact formulation of these mechanisms would, however, require further fieldwork.

Targeting and delivery. The key to the project's success lies in the targeting of beneficiary groups underall three components and the respective subcomponents. The M&E must provide the project team with arapid assessment system in this area. In particular, it should address the issue of effective outreach to thepoor and disadvantaged under the first component, identify potential risks of exclusion and develop plansfor mitigating these risks. Similarly, M&E should establish and provide regular feedback in regard to thesuitability of ALMPs and micro-credit schemes for addressing the problems of long-term unemploymentand the prospects for starting successful small-scale businesses.

M&E should also provide explanations for the causes of any possible failures in reaching thebeneficiaries effectively and timely. In this regard, one area that will require monitoring is the"performance" of the existing legal framework (both in terms of its formulation and execution trackrecord), that is supposed to facilitate a smooth project implementation (e.g. how easy is it to register aProject Management Committee under the CIDI component? Aren't the legal requirements formicrofmance institutions too restrictive or too liberal?).

Social and economic impact. Systematic social monitoring will be an integral part of projectimplementation in order to maximize the learning process and make the necessary adjustments. Theproject will be implemented over a 4-year period, which will include annual beneficiary and socialimpact assessments. Of crucial importance will be the analysis of the impact of the project on creatingsocial capital at the community level.

This part of M&E will also analyze the behavior and impact of the institutions concerned. Relevantquestions on this dimension might include the following: Will the micro-credit program contribute to thedevelopment of the microfinance infrastructure in the country or will it undermine the already existingmicro-credit schemes under operation in the country? Will the CIDI infrastructure grant facility formunicipalities erode the relevance and potential impact of the community financing facility? What arethe outcomes when both subcomponents are being implemented in the same community? Does onescheme undermine the impact of the other?

Demand and participation. Considering the implementation track record of the RIF and the proposedexpanded design of the SIEP, this area may prove the biggest challenge ahead. M&E has to address thequestion of the exact nature of stakeholder participation, its intensity and timing under the respectivecomponents. The monitoring system should also probe the beneficiaries' demand for the interventionsproposed under the project and the project beneficiaries' ownership of the outcomes of the project (e.g.in the area of community infrastructure). One area that could possibly serve as an indicator in regard tothese processes is the maintenance of the infrastructure investments carried out under the first component(both the municipal as well as the community financed subcomponents).

The project team should have thorough knowledge of the incentives structure and dynamics thatdetermine stakeholder participation. Moreover, it should strive to develop an action plan for achieving an

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adequate level of stakeholder engagement, particularly in the case of the CIDI and microfinancecomponents. Those action plans should include measures in the area of capacity building, facilitationand training activities that would together foster an environment conducive to stakeholder participation.To this end, M&E should include elements of the organizational and capacity assessment of theinstitutions involved in project implementation.

A closely related and equally important process that will need to be carefully monitored and evaluated isthe public outreach and related efforts to ensure the necessary awareness and transparency of theproject's interventions among the respective stakeholders. As all three components envisage bothquantitative and qualitative surveys - either in support of the planned public information campaigns(CIDI and microcredits) or free-standing in support of BALMI's implementation - an effort should bemade to ensure that these surveys provide timely feedback on the choice of communication channels(coverage and credibility), their message content, and the overall effectiveness of the outreach program.

Sustainability. In this regard, the M&E program will analyze the prospects of ensuring outcomes lastingbeyond the project's completion. For instance, what is the (short and long-term) impact of the CIDIcomponent on employment, what are the prospects for the community-financed infrastructureinvestments to be maintained by the local municipalities or communities? What are the chances of thelong-term unemployed who got a job thanks to active labor market policies, of staying employed? Whydo many micro-businesses started by women collapse relatively soon after start-up compared to thosestarted by men? The annual beneficiary assessments that are to be conducted under the project willprovide a good instrument for analyzing these issues.

For all of the above to be done thoroughly, the M&E process will have to be clearly scheduled, fullybudgeted and properly supervised.

6. Reviewed Documents

Bulgaria Consultations with the Poor. A Study to Inform the World Development Report 2002/1 onPoverty and Development.

Bulgaria 2000. 2000 Regular Report: "From the Commission on Bulgaria's Progress TowardsAccession" (November 8, 2000).

Carletto, Gero and Fujii, Tomoki, "An Update on Poverty in Bulgaria: a Background Paper for theBulgaria Poverty Assessment" (August 2001).

Foundation for Local Government Reform (FLGR). Defining the Capacity Building Component of theBulgarian Social Fund (October 2000).

Ganev, Georgy, Centre for liberal strategies - Sofia, and Department of Economics - Sofia University"St. Kliment Ohridski". Fundamental Beliefs, Elite Behavior and Social Capital: "Reflections on aDecade of Transition in Bulgaria". Unpublished draft.

Ganev, Georgy and Svetlana Stamenova, CEP Eastern Scholar. Political and Economic Orientations ofthe Bulgarians Ten Years after the Beginning of the Systemic Change: "Analyses of Survey Results"Sofia (July 2000).

Netherlands Economic Institute, Evaluation of Active Labor Market Policies in Bulgaria, (November2001).

RIF. Beneficiary Assessment of the Results of the Microprojects Implemented by the Regional InitiativeFund: "Analysis of the findings of the quantitative and qualitative surveys" Sofia (September 2001).

RIF. Beneficiary Assessment of the Results of the Microprojects Implemented by the Regional InitiativeFund: "Analysis of the findings of the quantitative and qualitative surveys" Sofia (July 2000).

RIF. Beneficiary Assessment of the Results of the Microprojects Implemented by the Regional Initiative

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Fund: "Analysis of the findings of the quantitative and qualitative surveys" Sofia (September 1999).RIF. Micro-business Support Institutions Study (2001).Statistical Yearbooks. National Employment Service.United States Agency for Intemational Development (USAID), United Nations Development Programme

(UJNDP), Open Society Foundation Sofia. "Bulgaria: Early Warning Report" (May 2001).World Bank. Implementation Completion Report: "Regional Initiatives Fund" (November 5, 2001).World Bank. Project Appraisal Document: "Regional Initiatives Fund" (1997).World Bank. Transition: the First Ten Years. Analysis and Lessons for Eastern Europe and the Former

Soviet Union (2002).

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