Project Name. PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6411 Additional Financing to the Poverty Alleviation Fund II

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1 Project Name Region Sector PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6411 Additional Financing to the Poverty Alleviation Fund II Project ID Borrower(s) Implementing Agency Environment Category Date PID Prepared February 27, 2011 Date of Appraisal Authorization Date of Board Approval April 21, 2011 SOUTH ASIA General agriculture, fishing and forestry sector (60%);Water supply (20%);General transportation sector (10%);General education sector (10%) P NEPAL Poverty Alleviation Fund [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) 1. Country and Sector Background 1. Nepal is a predominantly agrarian economy characterized by low productivity and high rural poverty. Agriculture contributes 33% to the GDP and employs nearly 81% of the labor force. The shares of services and industry in the GDP and labor force are respectively 50% and 16%, and 8% and 3% respectively. Civil conflict and political uncertainty has affected Nepal s economy for over a decade. Real GDP growth between 2001and 2006 averaged about 2.7 percent per annum. Nepal s per capita income is around $440 and it is estimated that remittances accounted for nearly 22% of Nepal s GDP in FY2009. About 86% of the poor live in rural areas and engage in subsistence agriculture with limited access to land, credit, infrastructure, markets, and basic social services. Ethnic minorities and lower caste communities in remote areas and women (especially female-headed households) are some of most marginalized households in the country and a special effort is required to address their needs. 2. The Poverty Alleviation Fund was created by Government Ordinance 2060, and is an autonomous institution governed by an Executive Board under the Poverty Alleviation Fund Act Since 2004, the PAF s aim is to improve living conditions, livelihoods and empowerment among the rural poor, with particular attention to groups that have been traditionally excluded because of gender, ethnicity, caste and location by investing in community selected and managed sub-projects that create access to basic socioeconomic infrastructure and services, increase assets, generate employment and expand income-generating opportunities in poor villages and by improving government efforts to better coordinate support targeted towards poor and excluded groups. 2. Objectives 3. The objective of this additional financing is to continue support to the Poverty Alleviation Fund. IDA support to the PAF has been US$ 140 million to date. PAF II s Project Development Objective (PDO) is to improve living conditions, livelihoods and empowerment among the rural poor, with particular attention to groups that have

2 traditionally been excluded by reasons of gender, ethnicity, caste and location. PAF II is making satisfactory progress towards these outcomes, particularly with regard to improvements in infrastructure, income generating activities and increase in citizen participation in community decision making. Employment is being generated through income generating activities and community infrastructure. Project objectives will not change under additional financing and restructuring but changes to the results framework are provided in order to have more measurable outcomes related to this additional financing. 3. Rationale for Bank Involvement 4. PAF has covered 40 districts (ranked as poorest in CBS data), directly supporting 14,831 Community Organizations (COs) and 418,000 poor households, and has benefitted more than 529,000 households in total. Of the total number of poor households supported, 57% are Dalit and Janajati. Income monitoring results indicate that 66% of households have obtained a minimum income increase of 15% (in real terms), thereby fully meeting the outcome indicator. Households have in fact achieved an average increase in income of 82.5% in real terms and 145% increase in nominal terms. Based on an independent impact assessment carried out over the last 3 years of the project, the estimated net program impact on per capita consumption (in real terms adjusted for price inflation) growth is 15% for all PAF participant households, 31% for households who have received grants and 42% for households in the program 6 months or more after receiving grants to support livelihoods activities. The net impact in growth in per capita consumption is even higher for Dalit and Janajatis and for the poorer segments of the population, implying that the program is able to effectively distribute growth towards targeted groups. The impact on other welfare indicators are also positive and significant: 10 percentage points decrease in incidence of food insufficiency and 6 percentage points increase in school enrolment rate for children aged The program effect is also seen in increased access to services (agriculture centers, community forest groups, farmer s groups) and women s empowerment. This impact is attributable to PAF interventions, with the data suggesting that real per capita consumption has actually decreased for similar (control) households who have not been reached by PAF. 5. The project has disbursed funds faster than anticipated and has exceeded targets originally identified. It has successfully overcome delays due to political uncertainty and has expanded coverage in the poorest districts while waiting for authorization to expand into new districts and as a result has continued to meet its development objectives. While impacts of the project are significant, continued support is required to ensure that assisted communities do not fall back into poverty and are in fact able to form institutions capable of accessing services from the state and private sector as the country moves into a new phase of political stability and peace. 6. The proposed additional credit would finance costs associated with scaled-up activities under the PAF and will also address an unexpected financing gap due to the efficient performance of the project. The Second Poverty Alleviation Fund project (PAF II) was approved by the Board of Directors in December 2007 and the current closing date is September 30, After three years since project effectiveness, the project has

3 disbursed US$ million of a total grant of US$ 100 million. The proposed additional funds are being made available through IDA and the GFRP MDTF. The GFRP is intended to finance activities to mitigate both the short-term and the medium to long-term impact of rising food prices in Nepal as a result of global food price trends and due to low productivity and drought conditions in remote and food insecure areas of the country. The proposed additional financing supports the Government of Nepal s objectives to alleviate poverty and to maintain and enhance food security for vulnerable households. 4. Description 7. The Project Development Objective (PDO) remains unchanged. PAF II s Project Development Objective (PDO) is to improve living conditions, livelihoods and empowerment among the rural poor, with particular attention to groups that have traditionally been excluded by reasons of gender, ethnicity, caste and location. The proposed changes to the project are: a) extension of the closing date of the original credit and b) revised outcome indicators to reflect scaling up of activities to increase investments in infrastructure and for households to be able to address local food security and nutrition constraints. 5. Financing Source: ($m.) BORROWER/RECIPIENT 10 International Development Association (IDA) 70 Global Food Crisis Response Program 10 Total Implementation 8. The additional financing will adopt the same implementation arrangements as currently exist under the PAF II. The following areas will be supported: 9. Component A: Small-Scale Community Infrastructure Projects (SSIP) shows good progress on the number of infrastructure project implemented and the percentage of target households benefiting from them. A total of 617 completed sub-projects (under PAF II), has benefitted 22,518 households of which Dalit and Janajatis constitute 49 percent. Monitoring data shows a preference for investments in water supply-related infrastructure, followed by construction of community buildings, irrigation, and micro hydro power plants. 10. Component B: Income Generating Sub-Projects/Activities (IGAs) indicators show good progress on the number of activities implemented and the number of benefited households. The total number of income generating activities has reached 26,060. These activities have benefitted a total of 262,544 households, including 62 percent of target households (Dalits and Janajatis). In cumulative terms, investments on IGA in COs remain high, with more than 80 percent of PAF supported investments categorized as IGAs, in physical and financial terms and 20 percent in SSIPs. Investments in livestock related activities constitute the largest share amongst all IGAs (59 percent), followed by trading (18 percent) and agriculture (11 percent). Similarly, a majority of households

4 benefit from livestock-related IGAs (58 percent), followed by agriculture (16 percent), and trading (13 percent). Manufacturing related IGAs have the smallest share of all IGAs, both in terms of funds (5 percent) and households (6 percent). This component will continue to be supported since it is the primary vehicle for income generation at the household level. However, a renewed focus on increasing diversification of activities will be expected. High value investments in agriculture and livestock, such as vegetable drying and processing, spices, processing of dairy products; and manufacturing investments, such as furniture, soap and carpet making, will be tracked by PAF management, to encourage greater diversification of activities. 11. Use of GFRP funds: The PAF can play a critical role in addressing the food security and nutritional needs of marginalized communities by financing longer term activities such as agriculture production and reforms in nutritional habits. PAF has already helped vulnerable communities and households access land and start production of high value vegetables which have contributed to both income and nutritional outcomes. Food security for PAF assisted households has increased 10 percent over non-paf assisted households in similar geographical areas. The funds provided by the GFRP will be directed to support interventions that promote local food security and improve nutrition. These activities will focus on improving agriculture interventions such as vegetable and legume farming, locally adapted higher productivity grains, fish ponds and other small scale agriculture interventions which can increase access to food in remote, marginalized localities. In addition, promotion of specific behaviors and knowledge related to women s food consumption and care during pregnancy is needed to help women gain appropriate levels of weight during pregnancy and feed young children properly to avoid malnutrition. Capacity building for improved hygiene, child nutritional practices, use of health services by pregnant mothers will be financed. 12. Component C: Innovation and special programs. PAF has completed the implementation of 151 projects (out of 253). Despite good progress on implementation, knowledge sharing and replication of innovative approaches has been limited. New guidelines (completed) will be applied to scale up use of the window and support replication of successful evaluated activities and technology dissemination and adoption. A constraint identified in scaling up activities is that the parameters of the proposal which received support under this window did not include strategies to scale up successful activities. This has now been addressed and included in the guidelines and in the assessment process. Innovative activities which extend PAF support to communities such as the urban poor and other severely marginalized groups, such the Mushhar, Dom, Dusad, Kusunda, Gandharva, Badi will be encouraged Component D: Capacity Building, Monitoring and Evaluation (M&E). This component, in addition to monitoring and evaluation, has three sub-components focusing on capacity building of a) local government bodies, b) CO managerial capacity, c) CO capacity to manage Income Generating Activities. To reflect learning through implementation, the component will be restructured to a) reflect more accurately the type 1 A concept note on providing focused support to severely marginalized communities has been approved by the PAF Board.

5 of capacity building for local bodies that is feasible under the project and b) to focus on providing capacity building which is more relevant to CO activities and is provided by skilled service providers who can be held accountable for results. 14. Component E: Administration of PAF II. As per PAF guidelines, operating costs are maintained at 4% of the total cost of the program and an allocation of US$ 3.62 million (US$ 2.90 million IDA; US$ 0.72 million GON) is provided under the additional financing for operating costs of the PAF. 7. Sustainability 15. PAF has implemented a number of actions aimed at strengthening CO capacity to manage their finances and activities, including CO participation in the assessment of Partner Organizations (POs). Institutional development of COs into marketing and production cooperatives is taking place and increased efforts to provide legal cover to these groups and to ensure financial security will be required in the next few years of the program. The Government has indicated a strong preference to provide financing to the PAF, with a gradual increase of its own resources over time. Impact results suggest that there is a significant and positive welfare effect of the program on marginalized communities and a significant increase in incomes beyond the early periods of receiving support from the program. Based on a sample of households drawn from six of the nineteen PAF districts in phase II, the results show that the households who received PAF money for at least 6 months saw real per capita consumption increases of more than 42%. 8. Lessons Learned from Past Operations in the Country/Sector 16. Past operations indicate that community driven programs such as the PAF are resilient to political uncertainties and that control over resources remains with communities. Furthermore, the findings of the PAF Impact Evaluation (IE) show that program impact on real per capita consumption growth was 31 percent over a two year PAF intervention period while households who received PAF money for at least 6 months saw their real per capita consumption increase by more than 42%. The same analysis indicates that in the absence of the PAF program, such households would have recorded a negative growth of about 2 percent. Significant and positive PAF impacts are also seen in welfare indicators such as food sufficiency, child schooling, access to services and women s empowerment and the results indicate that targeting of benefits to marginalized communities is also working. The impact evaluation results show an encouraging trend in PAF s ability to reach its targeted group as well. While the real per capita consumption increase for dalits and the janajatis was 30%, the increase was about 16% for poorest three quintiles of households, as measured by the baseline survey of Safeguard Policies (including public consultation) 17. Social: PAF II uses a social inclusion strategy to reach out to the poor specifically poor women, Dalit and Janajati. The proposed project will continue to target the poorest and the most vulnerable communities. Households are organized into community organization to plan, implement and manage sub-projects. Data shows that key position holders within these community organizations are 33 percent Dalit, 30 percent Janajati, and 62 percent women. PAF has more than 300,000 female CO members (64 percent of

6 total CO members). Currently, there are 16,099 active Activity Agreements with a total of 14,831 COs, including a significant percentage of COs with only women members (16 percent of total COs). While livestock activities are still the primary IG investment (52 percent), data shows that women only CO investments are more diversified and display a wide array of activities including retail business, vegetable farming and marketing, rice marketing, tailoring and sewing. Women COs show a higher preference for investments in literacy (11 percent), higher than the average of investments in literacy for all COs (7 percent). 18. Environmental Safeguards: The additional financing activities will continue to use the established Environmental Screening approaches through collection and preparation of Environmental Information (EI) with simplified Environmental Management Plans (EMP). In addition, PAF has the potential to support forest users groups already registered as COs and in COs that are registered in buffer zones. PAF investments in forestry-related activities have also taken place in COs that are not part of protected areas, buffer zones or registered as forest users groups but are active forest users. 10. List of Factual Technical Documents CBS (2005), Nepal Living Standards Survey : Statistical Report Volumes 1 and 2. Kathmandu: Central Bureau of Statistics World Bank (2004) Poverty Alleviation Fund Project, Project Appraisal Document World Bank (2007) Second Poverty Alleviation Fund Project, Project Appraisal Document World Bank (2010) Implementation Completion and Results Report Poverty Alleviation Fund Project Monitoring and Evaluation Follow-Up Survey Poverty Alleviation Fund, Tribhuvan University, Kathmandu. 11. Contact point Contact: Gayatri Acharya Title: Senior Economist Tel: / Fax: gacharya@worldbank.org Location: Kathmandu, Nepal (IBRD) 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) pic@worldbank.org Web: