The World Bank Iraq Social Fund for Development (P163108) REPORT NO.: RES50494 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF IRAQ SOCIAL FUND FOR DEVELOPMENT APPROVED ON FEBRUARY 6, 2018 TO REPUBLIC OF IRAQ SOCIAL PROTECTION & JOBS MIDDLE EAST AND NORTH AFRICA Regional Vice President: Ferid Belhaj Country Director: Jean-Christophe Carret Regional Director: Keiko Miwa Practice Manager/Manager: Anush Bezhanyan Task Team Leader(s): Alex Kamurase, Khalid Ahmed Ali Moheyddeen, Marcelo Jorge Fabre The World Bank Iraq Social Fund for Development (P163108) I. BASIC DATA Product Information Project ID Financing Instrument P163108 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 06-Feb-2018 31-Jan-2023 Organizations Borrower Responsible Agency Republic of Iraq Ministry of Planning Project Development Objective (PDO) Original PDO The project development objective is to: (i) improve access to basic services and; (ii) to increase short-term employment opportunities, in targeted communities. Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-88270 06-Feb-2018 29-Apr-2018 13-Jul-2018 31-Jan-2023 300.00 15.77 284.23 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES The World Bank Iraq Social Fund for Development (P163108) Overview 1. The Social Fund for Development Project (SFDP) was approved on February 6, 2018, and became effective on July 13, 2018. The project development objectives are to (i) improve access to basic services and (ii) increase short- term employment opportunities in targeted communities. The project is implemented through three main components, namely: i) Financing Community Subprojects (US$262 million), ii) Supporting Microfinance Systems Strengthening (US$3 million), and iii) Capacity Building and Institutional Development (US$30 million). SFDP has country-wide coverage and is implemented in targeted communities selected from governorates based on a predetermined set of criteria, including poverty levels, service delivery needs, employment situation, and levels of vulnerability and fragility. The project empowers local communities by supporting them to identify their priorities and develop concrete solutions to their most pressing development needs, helps build capacity for all stakeholders involved in its implementation, and develops systems for community-driven development at the central government, governorates, and community levels. 2. Implementation of the project was launched at the start of 2019 and followed a phased approach with a gradual scale-up of project activities to new governorates and villages. SFDP is currently under implementation in all governorates of Iraq, and activities are at different stages of the community subproject cycle - with subprojects completed, under implementation, at the contracting phase, under screening for safeguards, or being identified and prioritized by community. In addition, the project implements community mobilization activities in a number of villages to prepare for subproject identification and prioritization. Capacity building is an essential underpinning for implementation across all stages and is continuous. By June 30, 2022, a total of 27,380 households were benefitting from services of subprojects that have been completed and become functional, of which 1,916 households are female- headed, and beneficiaries of short-term employment have increased to 2,400. The government has committed to an ambitious scale-up plan that is expected to significantly increase these indicators. 3. The main implementation agency is the Ministry of Planning (MOP). As enshrined in the loan agreement, the MOP established a Project Management Office (PMO) at the ministry, an equivalent of a project implementation unit (PIU), which manages and coordinates the daily implementation of the project. In collaboration with the governorates, the MOP also established Project Management Teams (PMTs) at the governorate level. The PMTs are in charge of implementation while ensuring community participation throughout the subproject cycle with the facilitation of community development groups (CDGs) at the village level. The project implementation has faced challenges, mainly due to the violent demonstrations of 2019, the COVID-19 pandemic impacts, and low-capacity levels in some participating areas. 4. The Government of Iraq has requested an extension of the closing date for the project by three years. Subsequent discussions with the government reached an understanding that an initial 23 month-extension would suffice for the implementation of the identified subprojects, provide adequate time for evaluation and learning and feed into the future project scale-up and/or additional financing programming. The proposed duration would also enable the government to finalize considerations for the long-term SFD institutional development objectives and decide how to adapt or change the initial requirements for establishing the independent institution. Project Status Component 1 - Financing Community Subprojects The World Bank Iraq Social Fund for Development (P163108) 5. Component 1 constitutes 87 percent of the total project resource and is expected to be the main driver toward achieving the project development objective. Under the community-driven development approach, the implementation of Component 1 uses a systematic subproject cycle that spans community mobilization through a subproject's prioritization process to implementation, completion, and validation before handover to users and beneficiaries. Implementation of Component 1 is now active in all 18 governorates in Iraq and 536 villages, and a gradual scaleup through five phases of programming has been adopted. This overall progress has resulted in a growing portfolio of community subprojects. The PMO reports indicate that governorates credit the project for positively impacting participatory planning and citizen engagement in participating villages and governorates. 6. As of June 30, 2022, 239 community subprojects had been approved for implementation. To date, an additional 809 community subprojects have been identified and programmed for detailed costing and safeguards screening to be considered for approval by the Bank. All the 60 subprojects under phase 1 have been completed and handed over to the communities and service providers. PMO reports indicate that 75 percent of beneficiaries of improved basic services from the subprojects respond that they are satisfied with the quality of subproject investments. Cumulatively, implementing the community subprojects has resulted in the creation of 360,000 person-days of short-term employment. Several other subprojects under phase 2, equivalent to over US$50 million, have been cleared for safeguards screening and await contracting to launch implementation as soon as the extension of the project closing date becomes effective. In sum, 1,048 community subprojects with an estimated budget of US $261,957,629 have been programmed for implementation in five phases, as summarized in annex 1 and detailed in annex 2. Component 2- Supporting Microfinance Systems Strengthening 7. Component 2 had been envisaged to support technical assistance for establishing a microfinance system that would be an integral part of the SFD-independent institution if it was created. The component would focus on the provision of advisory services to (i) enhance the capacity to manage Microfinance Institutions (MFIs) that will be engaged under the SFD in the future; (ii) review the regulatory environment to allow MFIs to function without market distortions; and (iii) develop a framework for structured financing that would allow the flow of funds from SFD to MFIs in a sustainable manner, while meeting SFD objectives. Progress achieved to date comprises the provision of advisory services and technical assistance to the MOP and other stakeholders, including establishing the structure, staffing, and reporting lines for the envisaged microfinance unit under the would-be SFD autonomous agency. Support has also included elaborating terms of reference (TORs) for the relevant project staff positions and providing advice on coordination and communication arrangements with other departments in the institution when it will be constituted. Given the setbacks experienced with the establishment of the SFD independent institution, there has not been further progress in implementing component 2 (refer to the explanations provided under component 3 on institutional development). Component 3 - Capacity Building and Institutional Development 8. Component 3 set out to support areas which include: (i) supporting MOP in managing the SFD functions during the establishment phase and project management activities; (ii) providing institutional development for the eventual SFD autonomous institution; (ii) building the capacity of local government, community groups, and NGOs; and (iv) contracting NGOs to undertake social and economic assessments for local communities. This component has supported several capacity-building activities; and will sustain the project while advancing ongoing efforts for institutional development. 9. To date, substantial capacity building has been provided to the various PMTs in planning and monitoring, Community Driven Development (CDD) approaches, procurement, financial management, and social and environmental safeguards. The project, therefore, supports short- to medium-term project implementation and The World Bank Iraq Social Fund for Development (P163108) invests in institutional capacity development for long-term SFD objectives. To date, the project has significantly improved in all the main support areas mentioned above at varying levels and depths. It has supported the establishment of the PMO, PMTs, and Community Development Groups (CDGs) at the MOP, governorates, and community level, structures that have proven functional, albeit with much room for improvement, as discussed in subsequent paragraphs below. By June 30, 2022, over 227 and 335 targeted communities and government staff involved in the project implementation had been trained in participatory decision-making. From a low base, female representation in the village-level CDGs has improved from 0 to 25 percent; about 95 percent of grievances registered by project stakeholders, including beneficiaries, are resolved in time. Interim implementation arrangements and legal covenant on the establishment of the SFD independent institution 10. The MOP established interim implementation arrangements at the ministry, governorates, and community levels. The current PMO and PMT arrangements have proven workable and continue to advance project implementation, albeit with the need for more capacity at all levels. 11. Work on elaborating the draft law for establishing the SFD independent institution was started during project appraisal, and an advanced version was in place before the project approval. Revisions to the law, consultation, and awareness sessions with key stakeholders were undertaken in 2019 and 2021 with the Bank's technical assistance. The consultations included focused discussions with select members of parliament and the council of advisors. In addition, with technical support from the Bank, the MOP developed a profile of minimum institutional development needs, including the staffing requirements for the envisaged institution in 2020/21. The Council of Ministers (COM) discussed and approved the law. The law was submitted to the Shura Council, which objected to the Law and, in turn, returned it to the COM. However, the latter did not approve the Law due to the feedback from the Shura council and the government’s reservations about creating new independent institutions. Consequently, there has been no further substantial progress in establishing the autonomous SFD institution as was envisaged at project approval. 12. The supervision mission of July/August 2021 reached an agreement that the establishment of the autonomous institution be deferred for two years until July 2023, subject to project extension, to pave the way for the Government to further review progress to date, reconsider options, and the current situation in Iraq, and propose to the World Bank a detailed plan on the nature and form of the SFD long term institutional development. This work is expected to regain momentum once policy leadership at the MOP and Ministry of Finance (MOF) can convene other relevant stakeholders to hold consultations and reach decisions. 13. In the short and medium term, the MOP has committed to an action plan aimed at sustaining and improving current implementation arrangements through the PMO, PMTs, and the CDGs at the community level. Key actions include: i) formation of a project steering committee (PSC) which was established by a ministerial order of November 4th, 2019, and its terms of reference elaborated and approved, and ensuring its effective functioning through quarterly meetings; ii) strengthening the project alignment to the poverty reduction strategy (PRS) to maximize the former’s contribution to the PRS objectives; iii) scaling up implementation of the human resources and staffing plans that were developed in 2020/21, and iv) undertaking a capacity needs assessment every year and implementing resultant recommendations to improve the pace of project implementation starting with the calendar year 2023. 14. Under the proposed restructuring, the implementing agency (Ministry of Planning) will continue using the same fiduciary and disbursement arrangements, including staffing, Internal controls, the flow of funds, accounting, reporting, auditing, budgeting, and procurement. There are no overdue Interim Un-audited Financial Reports, and the Project audited financial statements, along with the management letter of the year ended December 31, 2021, were submitted on time, and the auditor issued an unqualified “clean” opinion. There has been no deviation from the World The World Bank Iraq Social Fund for Development (P163108) Bank procurement regulations recorded and actions to improve procurement management capacity are devised and efforts to build the capacity introduced progressively. In addition, the project is in compliance with the overall environmental and social safeguards requirements and the Bank continues to provide support to improve safeguards capacity in areas where this is needed. The presence of a Third-Party Monitoring Agent will continue to provide the needed support working on the ground. III. DETAILED CHANGES 15. The Bank and government teams have agreed to continuously review the project progress to make necessary adjustments when needed. Preliminary discussions covered four areas: i) extension of the closing date; ii) revisions to the results framework to deepen measurements for results and accommodate monitoring of community-driven development; iii) revisiting the long-term institutional development arrangements; and iv) changes in components 2 and 3. It was also agreed that these restructuring aspects would be done through two stages, with the extension of the closing date covered under the first stage and the rest of the changes in the second stage. The approach would facilitate continued implementation, sustain the momentum created over the last three years of implementation, and provide time for political and policy-level leadership to stabilize and hold conclusive deliberations on changes related to long-term institutional development and the changes in the components. 16. A formal request from the government focused on extending the closing date for three years was received on August 11, 2022. The request was further discussed with the MOP, and an agreement was reached that an extension is provided for 23 months. 17. The proposed closing date extension will help compensate for the time lost due to the violent conflicts, the COVID-19 pandemic constraints, and the challenges of low capacity in fragile and conflict-affected areas. The extension is urgently required to unlock the stalemate in launching new community subprojects, which have gone through a lengthy process of community participatory planning and prioritization, screening for safeguards, and procurement planning to select implementing firms. Phase 2 subprojects equivalent to over US$50 million are ready for contracting once the project extension becomes effective. A series of other subprojects will be ready for contracting over the next months following the phased rollout explained in section II of the paper, for which more details are provided in Annex 2. Lastly, the extension will further enable the bank and government teams to undertake assessments to facilitate decision-making on feasible options for the long-term SFD institutional development goals. III. DETAILED CHANGES LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-88270 Effective 31-Jan-2023 31-Dec-2024 30-Apr-2025 The World Bank Iraq Social Fund for Development (P163108)