62223 v1 Document of The World Bank Report No: RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SOCIAL INCLUSION PROJECT LOAN TO THE REPUBLIC OF BULGARIA MAY 19, 2011 ABBREVIATIONS AND ACRONYMS Regional Vice President: Philippe Le Houerou Country Director: Peter Harrold Sector Manager: Kathy Lindert Task Team Leader: Peter Ivanov Pojarski 2 BULGARIA SOCIAL INCLUSION PROJECT P100657 CONTENTS Page A. SUMMARY................................................................................................................ 4 B. PROJECT STATUS.................................................................................................. 4 C. PROPOSED CHANGES .......................................................................................... 4 3 SOCIAL INCLUSION PROJECT RESTRUCTURING PAPER SUMMARY Two changes have been requested by the Borrower’s implementing agency in order to facilitate project implementation. The two requested changes refer only to modifications of the Project Appraisal Document (PAD) and Project Operational Manual (POM) and do not affect the Project Development Objective, the substance of the project, the results of the project, the provisions of the legal documents, or the substantive elements of the project as described in the Project Appraisal Document. The changes pose no risks. A reference in text Box 3 of the Project Appraisal Document, bullet 4, will be changed as follows: from “have municipal commitment to retain services in the rehabilitated or new building, with a minimum of 10 years” to “have municipal commitment to retain services in the rehabilitated or new building, with a minimum of 5 years”. PROJECT STATUS The main task of the project is to promote with local governments a variety of early childhood development services that are expected to lead to reduced exclusion of vulnerable groups. To achieve that, the project is financing municipal subprojects that include the services themselves, and small infrastructure improvements. The project is progressing well, after an initial delay. At the moment the project is at the stage of signing financing agreements with municipalities for 63 approved projects from Round 1 of the project application process. The 63 approved projects will be implemented over the course of the next two years and amount to approximately EUR 35 million. The remaining EUR 5 million of loan funds will finance a second round of project proposals, which are expected to be approved by the end of CY2011. PROPOSED CHANGES Two changes have been requested by the Borrower’s implementing agency and have been duly justified. The Task Team verified the justification and agrees with the Borrower’s request for changing the respective provisions of the POM. The two Provisions to be changed are: • Sustainability of Services: change to the requirement in the POM, obligating municipalities to preserve the services under the project for 10 years after the project life if the project includes infrastructure improvements, and for 5 years after the project life if the subproject includes services only. 4 All municipalities that have participated with project proposals have expressed their concerns on the issue of providing sustainability for a 10-year term. Some of the 106 municipalities that had confirmed their participation in the project refused to submit project proposals due to that particular condition, while 4 municipalities that had filed initial forms failed to submit complete project documentation again for reasons related to the 10-year sustainability requirement. Especially strong are the concerns of the smaller municipalities, a fact that gives rise to fears of eventual withdrawals from the project at the stage of entering into agreements for financing, as the sustainability clause will be part of those agreements. The question of reducing the 10-year sustainability requirement under the Social Inclusion Project has been raised more than once by the National Association of Municipalities in the Republic of Bulgaria. It has also been discussed at a meeting with the Board of the Association held on May 10, 2011. 10 years is considered a very long period of commitment to particular service, given the dynamically changing socio- economic and demographic situation in the municipalities. Sustainability would largely depend on service demand, on the number of potential customers etc. Furthermore, the very process of service promotion is a very dynamic one, requiring flexibility as well as ability to introduce new practices and build upon the existing services. In order to allow the project to be efficiently implemented, the sustainability requirements in paragraph 84 of the POM will be modified as follows: For projects with investments in construction, repair works and equipment – 5 years after project completion (the current term being 10 years); For projects with investments in services only, without any construction or repair works – 3 years after project completion (the current term being 5 years). • Financial Management: A small change in the “Accounting of Subprojects” section of the POM, allowing advance payments to service providers for services only – approved by the World Bank Financial Management Specialist. In the original provision the implementing agency was supposed to pay directly to all small providers of services under each and every municipal subproject – the Borrower chose this modality despite the advice by the World Bank FM at the time of Negotiations and drafting the original POM. This provision is now being modified to allow municipalities to receive advances and pay small suppliers of services in order to ensure continues uninterrupted services. 5