Document of The World Bank Public Disclosure Authorized Report No. 13156-ALB Public Disclosure Authorized STAFF APPRAISAL REPORT ALBANIA RURAL DEVELOPMENTPROJECT Public Disclosure Authorized JANUARY 10, 1995 Public Disclosure Authorized Agriculture and Urban Development Operations Central Europe Department Europe and Central Asia Region CURRENCY EQUIVALENT Currency Unit = Lek AVERAGE EXCIIANGE RATES 1987-90 1991 1992 1993 1994 US$1.00 = Leks 8 14 75 102 93 WEIGHTS ANI) MEASURES Metric System ALBANIAN GOVERNMENT FiSCAI, YEAR January 1 - December 31 ABBREVIATIONS ADF Albanian Development Fund ASAC Agriculture Sector Adjustment Credit CAS Country Assistance Strategy EU European Union GDP Gross Domestic Product ha hectare IDA International Development Association IFAD International Fund for Agricultural Development IMF International Monetary Fund MOF Ministry of Finance MOLSP Ministry of Labor and Social Protection NGO Non-Governmental Organization OED Operations Evaluation Department PY Project Year RCB Rural Commercial Bank RDF Rural Development Fund RPAPP Rural Poverty Alleviation Pilot Project UNDP United Nations Development Program USAID United States Agency for International Development VCF Village Credit Fund ALBANIA RURAL DEVELOPMENT PROJECT CONTENTS CREDIT AND PROJECT SUMMARY .......................................... CHAPTER 1. ALBANIA'S RURAL SECTOR ................ .. .................. A. Introduction ................................................... 1 B. Recent Economic Trends ........................................... C. Main Features of the Rural Sector ..................................... 2 D. The Impact of Land Reform: Return to Subsistence Farming .................... 3 E. The Safety Net in Rural Areas ....................................... 3 F. Local Government in Transition ...................................... 4 G. Deterioration of Rural Infrastructure and Natural Resources ..................... 5 H. Rural Credit .................................................. 6 CHAPTERII. THlE GOVERNMENT'S RURAL POVERTY ALLEVIATION PROGRAM ....... 7 A. Overall Strategy ................................................ 7 B. Methodology: A Participatory Process Approach ........................... 8 C. The Full-Scale Project: A Modular Approach .............................. 9 D. Rationale for IDA Involvement ....................................... 9 CHAPTER mI. LESSONS FROM THE PILOT PHASE ........... ................. 10 A. Overview of Pilot Phase Activities ..................................... 10 B. Rural Works .................................................. 12 C. Credit Program ................................................ 13 D. Transfer of Technology ........................................... 15 E. Project Impact Study ............................................. 15 F. Findings and Lessons Learned ....................................... 17 CHAPTER IV. THE PROJECT ............................................. 19 A. Objectives .................................................... 19 B. Project Description and Components ................................... 19 C. Detailed Features ............................................... 20 D. Project Cost and Financing ......................................... 22 E. Coordination with IDA-Financed Sectoral Projects ........................... 24 F. Environmental Impact ............................................. 24 CHAPVER V. PROJECT IMPLEMENTATION .............. .................... 25 A. Project Management ............................................. 25 B. Procurement .................................................. 27 C. Disbursements ................................................. 29 D. Supervision, Reporting, and Monitoring ................................. 31 This report is based on findings of an appraisal mission that visited Albania in June 1994. The mission comprised Maria Nowak (Task Manager, EC2AU); Kathryn Funk (Operations Officer, EC2AU); and Consultants Pierre Marie Berard (Infrastructure); Konrad Ellsasser (Credit); Yves Graton (Cooperative Banking); and Jean-Marie Collombon (Microenterprises). The mission was assisted by the staff of the Albanian Development Fund, especially by the Executive Director, Genc Juka, and the Deputy Directors. Johanna Eigen (Intern, EC2AU) contributed to this report. Aleathea Thomas and Richard Huber (EC2AU) were responsible for document processing. The Peer Reviewers are Alexandre Marc (EC4HR), Jacob Yaron (EMTAG), and Michael Nightingale (MN1AG). Rory O'Sullivan is the Division Chief and Kemal Dervi§ is the Department Director. CHAFFER VI. BENEFITS AND RISKS . 32 A. Benefits.32 B. Risks.32 CHAFFER VII. AGREEMENTS REACHED AND RECOMMENDATION.33 TABLES Table 1.1 Rural Land Holdings Following the 1991 Land Reform.2 Table 2.1 Estimated Full-Scale Project Costs.9 Table 3.1 Breakdown of Pilot Project Costs, as of December 1, 1994.11 Table 3.2 Pilot Project Costs, Appraisal Estimates and Projected Final Costs.12 Table 3.3 Rural Works Subprojects Underway or Completed (as of 12/1/94).12 Table 3.4 Number of Credits Disbursed per District (as of 12/1/94).14 Table 4.1 Summary of Project Costs by Component.22 Table 4.2 Summary of Project Costs by Category of Expenditure.23 Table 4.3 Sources of Project Financing.24 Table 5.1 Summary of Proposed Procurement Arrangements.27 Table 5.2 Estimated IDA Disbursements.30 Table 5.3 Disbursement Categories.30 FIGURES Figure 3.1 Use of Credits (As of December 1, 1994).14 Figure 5.1 Albanian Development Fund Organizational Chart.26 ANNEXES Annex A Government Decision to Establish Albanian Development Fund (Decision 427, September 8, 1994) Annex B Summary and Detailed Cost Tables Annex C Rural Population, Villages, Farms, and Average Farm Size by District, 1993 Annex D Albanian Development Fund Manual of Procedures (Amended December 1995) Annex E Rural Development Project: Rural Works Component Annex F Rural Development Project: Small Credit Component Annex G Rural Development Project: Promotion of Rural Activities Component Annex H Implementation Schedule ALBANIA RURAL DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: Governmentof Albania ExecutingAgency: Albanian DevelopmentFund' Beneficiaries: Rural inhabitants Credit Amount: SDR 4.1 million (US$6.0 million equivalent) Terms: Forty years maturitywith a ten year grace period. Credit proceedswould be lent to the Governmentat the standard IDA charge. Project Objectives: To promote small farm and off-farm activities and help restart a rural market economy;to repair basic rural infrastructure; and to create employmentfor the rural populationand inject cash resources into rural households. Project Description: The project is an extension of a successful pilot phase-the Rural Poverty AlleviationPilot Project (RPAPP, Credit 2461-ALB)-that establishedthe Rural Development Fund, which was subsequently transformed into the Albanian DevelopmentFund (ADF), and tested approaches to rural works, small credit, and microenterprisesupport. The proposed Rural DevelopmentProject would finance a core program to extend ADF activity for three years. Project componentsare: (a) Rural works. Evaluate, design, finance, and help implementabout 190 rural works to rehabilitatesmall infrastructure,such as ex-cooperativedirt roads, village water supply or irrigation systems, schools and health centers, and market facilities. (b) Small-scale credit. Establish and fund approximately 135 village credit funds in order to extend the existing village credit fund networkand provide small loans to farmers and other rural microentrepreneursfor all types of income-generatingactivity. (c) Promotion of rural activities. In coordinationwith village credit funds, provide business and technical advice to approximately 600 rural microentrepreneurs,and promote and support the creation of village animal health associationsto improve prophylaxis. (d) Studies and local governmenttraining. Beneficiary assessment studies would be undertakento regularly evaluateproject impact and to monitor and guide project activities. Training and study tours would be used to help equip local governmentofficials with the skills necessaryfor promoting and sustaining local development. l/ The Albanian Development Fundwas establishedby the Council of Ministers as the successor to the Rural DevelopmentFund (GovernmentDecision 427, September 8, 1994). - j; - Envirommental Aspects: The project has been assigneda category "B" environmentalrating, and will be subject to environmentalanalysis, although adverse environmentalimpact is unlikely given the small size of subprojects financed. During the pilot project, environmentalguidelines and checklists were developed and implementedfor rural works subprojects. Benefits: Direct and immediate benefits would flow from the 190 labor-intensiverural works, which would create about 550,000 man-days of employment, injecting badly needed cash resources into the economy. In addition, rehabilitation of infrastructure-roads, water supply, irrigation, schools, and health centers- would provide the environment for increased trade and market activity, and would improve the qualityof rural life. Direct benefits would also accrue to the 135 villages given access to small-scalecredit through village credit funds, and activitiesto support microenterpriseswould help restart small-scale agriculture processingand off-farm activities Risks: The risks of the project are minimizedby its process approach, which provides for continuousfeedback and adjustment. Furthermore, project