Document of The World Bank FOR OFFICIAL USEONLY ReportNo: 31939-KZ PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHE AMOUNT OFUS24MILLION TO THE REPUBLIC OF KAZAKHSTAN FORAN AGRICULTURAL COMPETITIVENESSPROJECT April 5,2005 Environmentallyand Socially Sustainable Development(ECSSD) CentralAsia CountryUnit Europeand Central Asia Region This document has a restricteddistributionandmaybe usedby recipients only inthe performance of their official duties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective March 24,2005) Currency Unit = KazakhstanTenge (KZT) KZT 1 = US$0.0077 US$1 = KZT 130.51 FISCAL YEAR January 1to December 31 ABBREVIATIONS AND ACRONYMS cc Coordination Center CGS Competitive Grants Scheme CIS Commonwealtho f Independent States ERR Economic rate of return FA0 Food and Agriculture Organization of the UnitedNations FMR Financial monitoring report FSU Former Soviet Union GB GoverningBoard GDP Gross domestic product GOST State standards I S 0 International Standard Organization NGO Nongovernmental organization OED World Bank Operations EvaluationDepartment PHRD JapanPolicy and HumanResourcesDevelopment Fund PIP Project ImplementationPlan SOE Statement o f Expenditure SPS Sanitary and Phytosanitary Agreement of the WTO TACIS European Union Technical Assistance for Commonwealtho f Independent States WTO WorldTrade Organization Vice President: Shigeo Katsu Country Director: DennisDeTray Sector Manager: JosephGoldberg Task Team Leader: Maurizio Guadagni FOR OFFICIAL USEONLY KAZAKHSTAN AgriculturalCompetitivenessProject CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE ............................................................................... 2 1. Country and sector issues............................................................................................................... 2 2. Rationale for Bank involvement..................................................................................................... 5 3. Higher level objectives to which the project contributes ............................................................... 5 B . PROJECT DESCRIPTION ............................................................................................................... . 6 2. 1 Lending instrument ........................................................................................................................ 6 Project development objective and key indicators......................................................................... 6 3 Project components ........................................................................................................................ 6 4 Lessons learned andreflected inthe project design....................................................................... 9 5 ...Alternatives considered andreasons for rejection.......................................................................... 9 C . IMPLEMENTATION ........................................................................................................................ . 9 9 2. Institutional and implementation arrangements ........................................................................... 1 Partnership arrangements ............................................................................................................... 10 3 . 10 4. Sustainability................................................................................................................................ Monitoring and evaluation of outcomeshesults........................................................................... 10 11 6. Loadcredit conditions and covenants .......................................................................................... 5. Critical risks and possible controversial aspects .......................................................................... 12 D APPRAISAL SUMMARY . 12 1. Economic and financial analyses ................................................................................................. ............................................................................................................... 2. Technical ...................................................................................................................................... 12 14 3. Fiduciary ...................................................................................................................................... 14 4. Social............................................................................................................................................ 15 5. Environment................................................................................................................................. 15 6 . Safeguardpolicies........................................................................................................................ 16 7. Policy exceptions and readiness................................................................................................... 17 Text Tables Table 1:Factors Affecting Competitiveness of Agriculture inKazakhstan................................................. 2 Table 2: Farm Structure inKazakhstan. 2003 .............................................................................................. 4 Table 3: Project Costs and Financing(US$ millions)* ................................................................................ 9 Annexes Annex 1: Sector Background...................................................................................................................... 18 Annex 2: Major RelatedProjects Financedby the Bank and/or other Agencies ....................................... 26 Annex 3: Results Frameworkand Monitoring ........................................................................................... 27 Annex 4: Detailed Project Description....................................................................................................... 30 Annex 5: Project Costs............................................................................................................................... 39 This document has a restricteddistribution and may be used by recipients only in the performance of their official duties Its contents may not be otherwise disclosed without World Bank authorization . . Annex 6: ImplementationArrangements ................................................................................................... 40 Annex 7: Financial Management and Disbursement Arrangements .......................................................... 46 Annex 8: Procurement................................................................................................................................ 49 Annex 9: Economic and Financial Analysis............................................................................................... 51 Annex 10: Safeguard Policy Issues ............................................................................................................ 57 Annex 11: Project Preparation and Supervision......................................................................................... 60 Annex 12: Documents inthe Project File................................................................................................... 62 Annex 13: Statement o f Loans and Credits................................................................................................ 64 Annex 14: Country at a Glance .................................................................................................................. 66 Annex Tables Annex Table 1: The Research Centers inKazakhstan................................................................................ 21 Annex Table 2: Quality and Safety Issues o f Selected Agricultural Products ........................................... 24 Annex Table 3: Training Plan for Quality and Safety Monitoring............................................................. 31 Annex Table 4: Characteristics o f Applied Research and Extension Subprojects ..................................... 34 Annex Table 5: Examples o f applied researchlextension subprojects........................................................ 36 Annex Table 6: Project Cost By Component ............................................................................................. 39 Annex Table 7: Allocation o f Loan Proceeds ............................................................................................ 39 Annex Table 8: Competitive Grant Scheme Subprojects........................................................................... 43 Annex Table 9: Number o f Food-bome Illnesses per 100,000 Population................................................ 52 Annex Table 10: Summary o f the Illustrative Models ............................................................................... 53 Annex Table 11: Rate o f Return o f Research and Development Investments ........................................... 54 Annex Table 12: Financial Results, Ratios and Switching Values* .......................................................... 55 IBRD33700 iv K A Z A K H S T A NAGRICULTURECOMPETITIVENESS PROJECT PROJECTAPPRAISAL DOCUMENT EUROPEAND CENTRAL ASIA ECSSD Date: March 31, 2005 Team Leader: Maurizio Guadagni Country Director: Dennis de Tray Sectors: Agricultural extension and research (60%); Sector Director: Laura Tuck Agricultural marketing and trade (40%) Themes: Technology diffusion (P), Rural services and infrastructure (P) Project I D : PO49721 Environmental screening category: Financial Intermediary Lending Instrument: Specific Investment Safeguard screening category: S2 Loan (SIL) Project Financing Data [XILoan [ ]Credit [ ]Grant [ ] Guarantee [ 3 Other: For Loans/Credits/Others: Total Bank financing (US$ m.): 24.0 Proposed terms: 17 Years, with 5 Years o f Grace Borrower: The Republic of Kazakhstan Responsible Agency: Ministry of Agriculture Expectedeffectiveness date: November 30,2005 Expectedclosing date: July 30,2010 1 A. STRATEGIC CONTEXT AND RATIONALE 1. C o u n t r y and sector issues Agriculture contributes 8 percent o f Kazakhstan's GDP and employs 32 percent o f its economically active population. Principal products include wheat, cotton, meat, poultry and milk. Although agricultural output contracted sharply during the transition, output has steadily recoveredsince 1998. During 1998- 2003, total agricultural output increased at an average real annual rate o f 8.2 percent, with agricultural production growing by an annual average o f 10.5 percent and agroprocessing growing by an annual average o f 5.1 percent inreal terms. Crop production, which rose inreal terms by an annual average o f 19.5 percent, is responsible for most o f this growth. Livestock output inreal terms grew byjust 3.4 percent. Despite the recovery o f agricultural production, its share inthe economy shrank because o f strong growth in other sectors, particularly inthe extractive petroleum industry. The govemment is encouraging diversification o f the country's economy to reduce its dependence on oil, whose price volatility and resulting fluctuations inrevenues make budget management challenging. Agricultural development i s an important element o f its strategy. Agriculture has significant potential to contribute to the country's growth. Both crop yields and livestock productivity are well below levels reached incountries with similar agro-ecological conditions. For example, farmers produce an average o f one ton o f cereal per hectare inKazakhstan, compared with 2.7 tons per hectare inCanada, which has a similar climate, and 1.8 tons per hectare inAustralia, which has a similar extensive crop system. Cows produce on average about 1,800-2,000 lulograms o f milkper year, one-third o f those inNew Zealand. Available pasture, althoughnot o f excellent quality, can sustainably maintain a much larger livestock herd than it currently does. Infact, Kazakhstanhas the most extensive permanent pasture per animal inthe world. However, to unleash the potential o f agnculture, access to markets must be improved, know-how and technology must reach farmers, and the appropriate financial services to serve small farmers must be developed. The competitiveness o f agriculture inKazakhstan depends on many factors. The following table lists bothpositive and negative aspects o f the country's competitive environment. Table 1:FactorsAffectingCompetitivenessof Agriculture in Kazakhstan Positive Negative Abundant agricultural land Harsh and uneven climate Qualified labor force Higher cost o f labor compared to neighboring countries Stable macroeconomic environment Difficult access to markets, know-how, and technology Low cost o f energy Riskthat rising revenues from exports ofoilraises the value ofthe currency, making agricultural goods less competitive than those o f other nations (Dutch disease) Increasingpublic support to the sector Relatively unfavorable environment for private investment, including high transportation costs High liquidity o f commercial banks Limitedaccess of small farmers to financial services Kazakhstan's pattem o f economic growth duringthe past six years suggests that the country's comparative advantage lies with land-intensive agricultural products, such as wheat, rather than labor- intensive products, such as h i t s and vegetables. (Cotton, a labor-intensive crop, whose exports have grown at an average rate o f 16percentper year duringthe past five years, is an exception.) However, land-intensive products offer limited opportunity to contribute to economic diversification and rural poverty reduction. To offset the highcosts o ftransport and ensure that agriculture i s competitive inthe 2 long run, the country will have to diversify away from wheat and cotton, and focus more on producing higher value agricultural products. Limited access to international markets. Findingnew export markets i s essential if agriculture i s to contribute to the country's economic growth. Domestic demand for agncultural products i s largely fulfilled, except for in certain regions (oversupply inrural areas, and undersupply inurban areas), during periods o f seasonal shortfalls in output, and for specific high-quality products. Russia traditionally has been Kazakhstan's major export market. However, Russia is expected soon to become self-sufficient in wheat, and may also produce surpluses for export incompetition with Kazakhstan. In2002 for the first time Kazakhstan exported more grain to Iran and Azerbaijan than to Russia. During1998-2002, annual agricultural exports have averaged US$540million. Wheat comprises 60 percent o f agncultural exports. Kazakhstani s the eighth largest exporter o f wheat inthe world, with a share o f 2-3 percent o f the global market. The country produces a type o f soft wheat (triticum aestivum L)-with a level o f glutenand protein comparable to that o f Kazakhstan 2002 Agricultural Exports - hard wheat-that serves a special niche market. However, hightransport costs reduce the competitiveness o f Kazakhstan's wheat in international markets. Kazakhstanhas applied for aOil seeds & veg. oils membership inthe World Trade Organization (WTO). International markets require products that are certified for safety and quality and meet minimumanimal andplant health standards. To qualify for membership inthe WTO, the Ministryof Agriculture i s currently negotiating the limit for subsidies. It i s also worhng to comply with the Sanitary and Phytosanitary (SPS) Agreement of the WTO, which requires member countries to guarantee food safety and animal and plant health standards, without limitingtrade. This will require harmonization o f standards and development o f sufficient testing capacity. Currently only 3 out o f 37 agricultural state (GOST) standards and only 14 out o f 115 food GOST standards are harmonized with international standards). The proposed project will support Kazakhstan's efforts to comply with the SPS Agreement. Private enterprises have had difficulty implementing private standards to meet customer demand. For example, only three firms have introduced the standards o f the International Standards Organization (ISO). Moreover, wheat classification inthe Commonwealth of Independent States (CIS) i s based on gluten content, while international classification i s based on protein content. Although the ratio between gluten and protein i s usually two to one, the ratio is not fixed, making Kazakhstangrowers vulnerable to unfair quality assessment, which must be addressed through litigation. Thus, lack o f harmonization reduces the efficiency o f wheat trade. Inaddition, pricedifferentials reflectingdifferences inproductqualityarelimited. Forinstance, most farmers receive the same price for class two and class three o f wheat. This creates a disincentive to produce higher quality products, which reduces the efficiency o f the value chain. While competition among processors i s reducing such inefficiencies (such as for milk, where quality i s becoming an important factor inpricing), the government can assist by ensuring that information on price differentials 3 beingpaid by private firms are disseminated through the existing market information system, and by requiring state-owned enterprises to pay higherprices for higher quality products. Increasing number of smallfarmers who have limited access to knowledge. Since the break-up o f the former Soviet Union, nearly all agricultural enterprises have been privatized (with the exception o f agncultural research stations). As a result, the number o f family farms has doubled since 1998 to 121,500, and arable land under their control has climbed from 19 percent to over 42 percent (table 2). Family farms now produce more than a third o f grain, well over 50 percent o f meat, and more than two thirds o fraw cotton. Production from householdplots is also very important. In2003 they produced48 percent of agncultural output (26 percent o f crop products and 87 percent of livestock products). Table 2: Farm Structure in Kazakhstan, 2003 Type of entity Number Total arable Average size Proportion of value of land (hectares) total agricultural output (`000 hectares) Agricultural Enterprises 4,492 11,900 2,649.00 27% Family Farms 121,500 9,000 74.00 25% Many o f the family farms and householdplots are managed by people with limited experience infarming and limited access to modem technology. At the same time, the system o f research, technologcal development, and dissemination that served farmers duringthe Soviet era collapsed and a new system able to meet the needs o f increasing numbers of small farmers has not yet emerged to take its place. Agricultural research i s currently carried out by ten centers employing some 1,200 scientists. Although the public research system i s beingreorganized, many shortcomings remain. The system is underfunded, with an annual public investment of US$6 million, orjust 0.3 percent o f agricultural GDP, comparedwith a global average o f over 1percent o f agricultural GDP. More important, a system to disseminate the findings o fagricultural researchandto facilitate adoption o ftechnologyby farmers and agroprocessors currently does not exist. Most agricultural research centers are involved invarious types of commercial activities to supplement their limitedpublic resources. Many o f the activities relate to non-research products and services which substitute for, rather than complement, research activities. For example, the agricultural mechanization research center inAlmaty i s producing poles for a cellular phone company. Although the private sector i s increasinglybecoming involved in agricultural research, it finances just 10 percent o f total investment in agricultural research inKazakhstan, according to the Scientific Technical Information Institute. Role of agriculture in the economy. Agriculture employs 2.3 millionpeople, or 22 percent o f the economically active population, according to official statistics. However, 1.8 millionhouseholds-nearly half o fthe country's total-are involved in agriculture. Many grow food on small household plots (dachas) for self-consumption, but some 120,000 households rely on farming as their main livelihood. Government strategy. To reduce dependence on extractive industries, and to bringvisible benefits to rural areas where poverty i s concentrated, the government intends to embark on an ambitious program to stimulate agricultural growth and promote rural development. To this end, the Ministry o f Agriculture has developed two ambitious programs: the 2003-05 Agro-Food Program and the Rural Development Program. These involve three main actions: 4 0 Increased budget allocation. The government allocated US$l billion for implementationo f the 2003-05 Agro-Food Program, 8 percent o f the nationalbudget in 2003 up from 1percent in 1998; 0 Institutional reform. The Ministryo f Agriculture increased its oversight o f management o f natural resources (establishing water, forestry, and fisheries committees) and applied agricultural research, thus strengthening the linkages between agricultural research and agricultural policy. In2003, the Ministry o f Education transferred the management o f 30 public agricultural research institutes to the Ministryo f Agriculture, which subsequently consolidated them into ten centers, aimed at consolidatingmany dispersed institutes; and 0 Improved legalframework. Kazakhstan recently approved new laws to encourage agricultural growth and rural development, passing the land, forest and water codes, the microfinance law, and the law on credit partnership, among others. The land code allows private ownership o f agricultural land, which i s critical for agricultural development. 2. Rationale for Bankinvolvement A moreproductive export-oriented agriculturalsector canmake a valuable contribution to the country's economic diversification and growth. The priority that the government i s now giving agriculture offers the opportunity to unleashits potential. The World Bank with its experience, knowledge, and financial resources can help the country to establish the policy, legal and regulatory frameworks and to make the investments needed to stimulate rural growth. The World Bank has extensive experience inthe Europe and Central Asia Region and inother regions in designing and implementing research and extension projects that comprise competitive fundingschemes. Notable examples include projects inChile, Colombia, Brazil, Bolivia, Ecuador, Croatia, Azerbaijan, Romania, Albania, Georgia, among others. It also has experience indefining the roles o f the public and private sectors indelivering research and extension services, which will be valuable inhelpingKazakhstanto establish an effective research and extension system. Bank involvement i s also expected to strengthen collaboration betweenpublic and private actors by acting inthe role o f honest broker. Its experience in dealingwith issues of quality and safety o f agricultural products will be useful to Kazakhstanas it moves to implement the SPS Agreement. Bank involvement will also help instrengthening linkages with other development partners assisting the government, such as the Food and Agriculture Organization (FAO) and the Codex Alimentarius Commission, both o f which are supporting efforts to implement the SPS Agreement. Collaboration duringproject preparationhas already served to strengthen linkagesbetweenthe groups. 3. Higher level objectives to which the project contributes The project will support the implementationo fthe government's 2003-05 Agro-Food Programand the Rural Development Program, which aim to improve the productivity and competitiveness o f agricultural and agroprocessing enterprises through transfer o ftechnology and introduction o f food quality and safety standards, and therefore help to reduce poverty inrural areas, where the majority o f the poor are concentrated. It supports the overarching goal o f the Bank's Country Partnership Strategy for Kazakhstan, discussed by the Board on September 9,2004, to use its global knowledge and experience to help Kazakhstanto build a modem, rapidly growing, and diverse economy that improves the welfare o f all citizens, especially the poor. Specifically, the project supports the government's agenda to increase the competitiveness o f tradable non-oil sectors, accede to the WTO, improve public institutions and policies, and develop an appropriate role for the government to foster competitiveness and facilitate business. The proposed Agricultural Competitiveness Project is one o f four projects included inthe Bank's fiscal 2005 business plan outlined inthe Country Partnership Strategy. 5 B. PROJECT DESCRIPTION 1. Lendinginstrument The project will be financed with a specific investment loan. 2. Projectdevelopment objective and key indicators The project's development objective is to increase the competitiveness o f the agtlcultural sector in Kazakhstan. To achieve this objective, the project would facilitate access to markets by supporting measures to improve the quality and safety of agricultural products, enhance access to information, and harmonize standards. It will also help to increase the quality, quantity, and relevance o f applied agtlcultural research and facilitate transfer o fknowledge to farmers. The key outcome indicatorsproposed for the project are: 0 Increased farmer's income, particularly o f small and medium-size farmers. 0 Increased value o f agricultural exports, including livestock products, compared with 2003. 0 Increased proportion o f agncultural productsthat are tested and that meet international standards for quality and safety. 0 Satisfaction o fpotential direct and indirect beneficiaries o f the project. The key output indicators are: 0 Seven technical regulations, each consisting o f a number o f individual standards, are harmonized. 0 Sixty laboratories receive international accreditation. 0 At least 120 market-oriented subprojects implementedunderthe competitive grant scheme. 0 At least 600 appliedresearch and extension subprojects implementedunder the competitive grant scheme. 0 At least 40 scientists below the age o f40 receive advanced education. 0 Institutional structure for research and extension services, comprising the GoverningBoard (GB), the Coordination Center (CC), and the roster o f independent peer reviewers, established and operating as indicated through the minutes o f the semiannual meetings o f the GB. 3. Projectcomponents The project consists o f four components: (1) quality and safety management o f agncultural products, (2) agricultural marketing, (3) applied agricultural research and extension, and (4) institutional development and agricultural policy. A briefdescription o f each o f the components i s presentedbelow and details are presented inannex 4. Component 1:Quality and SafetyManagementofAgriculturalProducts. This component will enhance the management o f food safety controls and quality certification along the value chain. It comprises two subcomponents: harmonization and development o f standards, and quality and safety monitoring. Harmonization and development of standards. This subcomponent will support the country's ongoing efforts to harmonize standards, including the public safety standards requiredby the Codex Alimentarius and the SPS Agreement, and private quality standards such as those related to production o f organic products. It will support the establishment of technical committees on harmonization o fregulations and standards relatedto agricultural products, which will improve and institutionalize the current standards review process. It will provide training on technical regulations and standards. It will also finance an 6 awareness campaign aimed at generating interest inthe work o f the committees and disseminating their achievements. This subcomponent will also support efforts to monitor and certify organic production in accordance with internationally recognized standards. Kazakhstancan potentially compete successfully inmarkets for organic products, because its longcoldwinters reducethe needfor pesticides. Quality and safety monitoring. This subcomponent will strengthen the capacity o f public and private entities to monitor food quality and certify standards o f agricultural products through an internationally recognized system for testing and monitoring o f quality and safety. Activities include: 0 Establishing and equipping a veterinarian and a plant protectiontesting center (reference laboratory for microbiology, radiology, toxicology, biochemistry, virology, entomology, phyto- pathology) inAstana. 0 Modernizing laboratories for testing seeds and inputsby procuringnew equipment, training people on how to operate it, and improving laboratory systems. 0 Providing training and financial incentives (matching grants) to encourage public and private laboratories to seek accreditation. 0 Implementing a Quality Assurance Schemes inselected agro-enterprises. Component2: AgriculturalMarketing. This component will help to enhance agricultural producers' and processors' understanding o f markets, improve marketing infrastructure, and facilitate equal access to market information. It comprises two subcomponents: strengthening market information systems, and developing market-oriented infrastructure. Strengthening the market information system. Activities will enhance the existing system by (a) adding quality classifications and price differentials to the existing price lists; (b) increasing the frequency o f price bulletins to at least once a day for perishable agricultural products; (c) providing information on quantities traded; (d) supporting diverse means to disseminate information on prices and quantities in addition to posting information on the existing web page, such as through newspapers, radio, television, and messages to cell phones; (e) strengthening the monitoring o f use o f information withregular users' surveys; and (f) enhancing analytical capacity o fbothpublic and private entities concerning agricultural marketing. Developing market-oriented infrastructure. This will provide financial incentives to develop marketing associations or partnerships, or both. It will co-finance up to 40 percent o f the cost o f image enhancement and infrastructure subprojects (at least one or two subprojects inall districts included inthe northern and southern economic corridors) designed to improve post-harvest processing. Eligible subprojects will include facilities such as milk collection points, slaughterhouses, storage facilities, distribution networks, and the like for processing o f identified priority commodities. The grants will be provided to marketing associations, not to individuals, and a portion o f the funds provided under this subcomponent will be used to establish and strengthen marketing associations. Proposals for competitive grants will be reviewed through the same system developed for the Competitive Grant Scheme (CGS, described below under implementation arrangements). Component3: AppliedAgriculturalResearchandExtension. This component aims to increase the effectiveness o f agricultural research and extension services inKazakhstan. It will facilitate the adoption of innovationsthat increase the productivity o f farmers and agroprocessors. It comprises two subcomponents: appliedresearch, and agricultural extension. 7 Applied research. This subcomponent will finance (a) technical assistance required to design and implement plans to reorganize the existing system o f agriculturalresearch; (b) advanced education for 60 scientists below the age o f 40; and (c) competitive grant subprojects for applied research. Agricultural extension. This subcomponent will strengthen the publicly-financed system for provision o f extension services to agricultural entities. The Ministryo f Agriculture will expand its presence inrural areas, employing at least one extension agent per district and one extension supervisor per oblast. Altogether, about 200 new field staff and 14 supervisors will be placed in all 160districts o f the country. This subcomponent will also support the selection, training, and monitoring o fthe performance of extension agents; and training and certification o f 400 private extension agents. Finally it will finance competitive grant subprojects for training and provision o f extension services. Component4. InstitutionalandAgriculturalPolicyDevelopment. This component will create the institutional structure to implement project activities and will help the Ministry o f Agriculture to establish the policy and institutionalframework to improve the competitiveness o fthe country's agricultural sector. Itcomprises three subcomponents: institutionalstructure, project evaluation, and agriculturalpolicy development. Institutional structure. This subcomponent will help the government to separate roles between policy making, implementation, and technical review by supporting the establishment o f a GoverningBoard (GB), CoordinationCenter (CC), andthe roster ofindependent peer reviewers, eachwith distinct roles and responsibilities. 0 The Governing Board (GB) will have two distinct roles: (a) a role approving the CGS operational manual and list o f subprojects, and (b) a consultative and advisory role regarding priority setting, overseeing project implementation, and policy making for other project activities. All major decisions o f the Board will be recordedinthe project operational manual, which will be revised and approved by the Board. The Boardwill comprise ten members, nine o f whom will have voting rights and the Manager o f the Coordination Center (CC), who will not. Among the nine members with voting rights, four will represent public institutions (Ministry o f Agriculture, GOST standards, parliament, and the public research system), four will represent private institutions (professional associations, farmers unions, entrepreneurs forums, and consulting firms), and one will represent international organizations. This composition will ensure that the project design and implementationreflects private and public interests and the interests o f the farmers inthe two primary geographical corridors (described below). Board members will not be remunerated. 0 The CoordinationCenter (CC) will act as the secretariat o f the project. It will be responsible for implementingthe policies agreed by the Goveming Board (GB) and for implementing all project activities, including the CGS. 0 The roster o f independent peer reviewers will be responsible for selectingthe proposals submitted for fundingunder the CGS. It will comprise rotating national and international experts who will examine and evaluate proposals according to the multicriteria methodology described inthe operational manual. The CGS operational manual will specify criteria and assign relative weights to the criteria, which will be described inthe call for proposals to ensure transparency. Project evaluation. The subcomponent will finance technical assistance to monitor and evaluate project implementation and outcomes. The results of the monitoring and evaluation will be presented directly to the GoverningBoard (GB). 8 Agricultural policy development. This subcomponent will strengthen the capacity o f government to analyze, formulate, and monitor agricultural policies. This subcomponent will also finance training, including a limited number o f study tours, for selected staff o f the Ministry o f Agriculture. Table 3: ProjectCosts andFinancing(US$ millions)* Component Government IBRD Beneficiaries Total Amount % Amount YO Amount YO Amount YO 1. Quality and safety o f agricultural products 19.3 41.2 12.7 52.9 1.4 11.4 33.4 40.2 2. Agricultural marketing development 2.9 6.2 1.5 6.3 2.6 21.1 7 8.4 3. Applied agricultural research & extension 19.2 41.0 9 37.5 8.3 67.5 36.5 43.9 4. Institutional development 5.4 11.5 0.8 3.3 0 0.0 6.2 7.5 Total 46.8 56.3 24 28.9 12.3 14.8 83.1 100 *Including contingencies 4. Lessonslearnedand reflectedin the projectdesign The project reflects the lessons o f international experience in improving agricultural productivity and competitiveness. Inparticular, it focuses on redefining the role o f the state and o f the private sector in agriculture, givingthe state a policy malung and regulatory role, while leaving production to the private sector, It involves all stakeholders-scientists, educators, extension agents, farmers, nongovernmental organizations, and industryrepresentatives-in setting the research agenda and indesigning extension services for maximum impact. It includes a variety o f methods to reach farmers. It encourages innovation by offering matching grants through a transparent and competitive process for applied and adaptive research and knowledge transfer. It supports institutional and policy reformto complement investments inresearch and extension services. Finally, it supports interventions at all points inthe supply chain. These include measures to increase farm-level productivity, support to lower marketing costs, and actions to enable farmers to comply with international standards on food safety and quality. 5. Alternativesconsideredand reasonsfor rejection Project alternatives considered duringpreparationinclude: 0 Operating throughout the countty. This was rejected because the country's large size would make implementation and supervision o fthe project very difficult. Focusing on two o f the nation's primary economic corridors-a northern corridor and a southern corridor, where labor, transportation, ancillary services, and industries are concentrated-will facilitate implementation, increase the likelihood o f spillovers from innovation, and make project results more visible. The selected corridors account for nearly 90 percent o f the country's agricultural GDP and 70 percent of its population, although they cover less than 40 percent o f the country's area (see map o f project area at the end o fthis document). 0 Supporting allproducts. This was rejectedinfavor o f concentrating resources onthe products with highpotential for export and import substitution, for value addition, and for reducing poverty. Selected products include grains, cotton, fish and fishproducts, oil seeds and vegetable oils, and livestock products. C. IMPLEMENTATION 1. Partnershiparrangements 9 Several development partners are supporting aspects o f the project. The FA0 i s workmg closely with Codex Alimentarius and other standard setting organizations to harmonize standards. The Codex Alimentarius has encouraged the Kazakhstan delegation to participate in its sessions. It i s anticipated that consultants o f Codex Alimentarius contracted through a trust fundwill assist inrevising the existing system of Kazakhstanagncultural standards. 2. Institutionalandimplementation arrangements Executing agency. The Ministry o f Agriculture will be responsible for overall project execution. To support effective implementation, an institutional structure for project implementation will be created at the ministry, comprising a Coordination Center (CC), and the roster o f independent peer reviewers. Project oversight. The Governing Board (GB) will be responsible for overseeing project implementation. Itwill prepare strategic guidelines for the project, help to address obstacles hamperingproject implementation, provide policy direction on matters relating to implementation, promote collaboration, coordination, and cooperation among stakeholders, and support and facilitate project monitoring and evaluation. The GB will meet at least once every six months. Specific arrangements related to the Competitive Grant Scheme. One-thirdo fproject expenditures will be channeled through the CGS and will be managed inaccordance with the operational manual. The independent peer reviewers will be responsible for reviewing and selecting proposals for funding. A CGS agent will administer disbursements to the many grant recipients, checking for compliance with requirements laid out inthe operational manual andthe achievement o frequiredmilestones. The CGS agent will visit recipients to verify stated conditions, documenting the procedures performed and results o f the visit, and submittingkey findings to the Ministryo f Agriculture and the Coordination Center (CC). The Ministryo f Agriculture will advance funds to the CGS agent from a treasury or commercial bank account for the CGS agent to disburse to grant recipients. The CGS agent will provide documentationo f expenditure in a period o f 60 days, so that no funds will be advanced for a period longer than 60 days. The Ministryo f Agriculture and the CGS agent will sign a bilateral agreement specifylng the terms and conditions o f the assignment and comprising the fee to be paid to the CGS agent for administering the grants. 3. Monitoringand evaluation of outcomeshesults To track progress towards the desired outcomes, the Coordination Center (CC), with technical assistance from local and international experts, will regularly monitor a set o f intermediate results indicators in accordance with the results framework specified inannex 3. Twice a year it will present a report to the GB summarizingachievements o fthe previous six months andplans for the next six months. The GB will review and discuss the findings o fthe report at its regular semiannual meetings. A consultingfirmwill be hiredunderproject finance to produce an annual evaluation o fproject achievements, which will be presented directly to the GB. This evaluation will be based, among other sources, on data from a survey o fkey project stakeholders. The GB will review the annual evaluations and, ifneeded, recommend measures to improve performance. No evaluation will be carried out at the end o f the first year o f implementation, since experience shows that time is required before achievements are realized. 4. Sustainability Government i s deeply committed to increase the contribution o f agriculture to the economy, and views the project as central to its development agenda. It increased its budgetary allocation to the agricultural 10 sector to 8 percent of the national budget in2003 up from 1percent in 1998. As long as the project activities generate the expected benefits, the government i s likely to continue to finance project-related activities, such as research and extension services, quality and safety management, and marketing improvements. The institutional structure created under the project i s likely to be sustained because government plans to issue a decree providing it with a legal basis. Inaddition, the project aims to strengthen private sector participation inboth quality management and agricultural research and extension, which is likely to be sustained and grow once the project i s complete. 5. Criticalrisks and possiblecontroversialaspects I Risk Risk Risk MitigationMeasure Rating FromOutputsto Objective An overvalued currency due to the S The centralbank will maintain a prudent importance o f oil exports (Dutch disease) monetary policy. The NationalFundo fthe reduces the competitiveness o f the country's Republic o fKazakhstanwill continue to agricultural products. accumulate resources. The business environment and the transport network do not improve, and the M The government, international finance competitiveness o f agriculture therefore does institutions, and the private sector will not increase. continue with policy dialogue on the business environment and investments intransport network. The private sector does not assume an M The project will builda strong incentive increasing role inquality management and structure for private sector participation. agricultural research and extension. FromComponentsto Outputs Institutionalcapacity to implement a S The institutional development component will complex project, with investments inboth create a multiplayer structure involvingboth hardware and software, i s limited. the public and private sectors, and both local and intemational experts. The structure was developed on the basis o f experience gained duringproject preparation. Project activities, particularly the CGS, are M A draft operational manualhas beenunder not implemented transparently. Public and discussion discussedby a working group with private interests are not well balanced on the participation o f the Ministryo f Agriculture, GoverningBoard. Ministryo fFinance, Ministryo fJustice, civil society, and the private sector. Its finalization is a condition o f disbursement. The CGS i s not perceived as transparent and M A communication strategy has beendesigned fair. and will be implemented. OverallRiskRating S Bank staff based inthe field will supervise the I project and provide support and advice to address issues quickly. 11 6. Loadcredit conditions and covenants Conditions o f Loan effectiveness 0 None, except for standard conditions. Conditions o f disbursement 0 The Goveming Board (GB) and the Coordination Center (CC) have been established. 0 The Project ImplementationPlan (PIP) and the Operational Manual, satisfactory to the Bank, have been adopted by the Borrower in accordance with legislation o f the Borrower. Financial and legal covenants 0 The government shall maintain an institutional structure comprising the Goveming Board, the Coordination Center (CC), and the roster o f independent peer reviewers comprising experts who are satisfactory to the Bank to carry out project implementation. 0 Financial management and procurement are carried out inaccordance with Bank's guidelines, by staff whose qualifications are acceptable to the Bank. D. APPRAISAL SUMMARY 1. Economic and financial analyses Economic evaluation methodology: (?ICost benefit NFV =US$51million; ERR= 23.5 percent (see annex 9) 0 Costeffectiveness 0 Other(specify) For the project as a whole, the economic rate o f return (ERR) i s estimated to be 23.5 percent, and the net present value ("V) i s estimated to be US$51billion, assuming an opportunity cost o f capital of 12 percent. The key quantifiable benefit resulting from project investments is the incremental income from (a) higher prices paid to the farmers from improved quality and safety o f agricultural products and more effective marketing; and (b) improved productivity o f farm and rural nonfarm enterprises resulting from extension services and subprojects supported through the CGS. Since wheat i s a major crop inKazakhstan, the incrementalvalue o f improved quality o f wheat i s estimated as a proxy for the incremental value generally o f improved quality and safety o f agricultural products. According to official statistics, 70 percent o f wheat production i s class three, 22 percent is class four, and 8 percent i s divided among the remainingthree classes. Experts estimate that up to 30 percent o f Kazakhstan's wheat could be improved to classes one and two. This i s consistent with information from Kazakhwheat exporters inEurope (Gaonac'h, 2003). At the end o f the project (year 5), 10percent o f exports or 0.5 million tons o f wheat would graduate from class three to class two, and at full development (year 7), 20 percent or 1million tons would graduate fi-om class three to class two. The difference inthe price between wheat class three and class two i s US$15 per ton, and the annual incremental benefits from improving quality o f wheat would be US$15 million at full development (year 7). Estimatingthe incremental value o f CGS subprojects is difficult because most o f the activities that the project will support are not yet known. The estimates are thus based on experience insimilar locations. Business proposals were prepared for the following seven activity models: 12 Investments inan accredited laboratory at rayon level (either public or private) would produce an additional US$14,153 annually due to the increased number o f tests performed and the implementation o f a cost-recovery mechanism. Introduction o f a slaughterhouse would reduce marketing costs by up to 10 percent and increase the processing capacity o f meat to up to 9,200 heads, providing services valued at upto US$16,600 per year. Establishment o f a milk collection point would allow up to 1,500 liters o f milkper day to be collected and supplied to milkprocessing plants in a timely manner and with assured quality. This activity would bringan estimated incrementalnet benefit o f about US$2,950. Optimumapplication o f fertilizers on wheat would increaseyields by 20-30 percent and gross margins by US$47 per hectare. Improved animal feeding (such as use o f concentrate and soybean-based feeds) would increase milkproduction inthe participating farms from 7 to 12 liters per headper day, providing incremental benefits o f nearly US$150 per cow. Improved technology in cotton production such as highdensity sowing would lead to an increase incotton yield from 1.5 to 2.2 tons per hectare and additional margins o f US$205 per hectare. Adoption o f good agricultural practices insoybean production couldbringincremental benefits o f US$63 per hectare. Incalculating the overall benefits from the CGS,the followingassumptions were made: 0 The following rates o f success or adoption were applied to the different types o f subprojects: o appliedresearch: 10percent o extension andmarketing: 25 percent. 0 The benefits o f the models are calculated for a period o f ten years. 0 The models involve 5 to 40 direct beneficiaries. Assuming an average direct involvement o f the around 10 people, the project would directly benefit 8,700 people, assuming that about 870 subprojects are implemented. Onthe basis o f above assumptions and calculations, the ERRi s estimated to be 23.5 percent. The base case NPV o f the project's net benefit stream, discounted at 12 percent, i s US$51 million. A sensitivity analysis carriedout to assess the effect o f variations inbenefits and costs reveals that a fall o f 20 percent intotal projectbenefitsandanincreaseintotalproject costs bythe sameproportionwouldreducethe base case ERR to about 17percent. The switching value i s about 43 percent for total project benefits, and approximately 75 percent for project costs. A one-year delay inproject benefits reduces the project ERR to 19 percent. With a two-year delay inproject benefits, the ERR falls to approximately 16percent. Financial. The seven modelspresentedabove were also usedto estimate financial costs andbenefits. The analysis reveals that gross and net returns for each o f the models increase significantly with the project, and that benefit to cost ratios are high. The NPVs after grant financing for the various models range from US$12,931 to US$160,084. The financial rates ofreturn after grant financingrange from 16 percent to more than 50 percent. Fiscal impact. The government budget will finance 56 percent o f the total project costs. Nonetheless this will have amarginal fiscal impact, because the annual government's contribution o f about USSlO million represents less than four percent o f state expenditures on agriculture in2003. 13 2. Technical The technical design o f the project i s based on the findings o f several technical background notes (see annex 11) and on concurrent economic and sector work. An FA0 study focusing on wheat showed the importance o f diversification because o f Kazakhstan's highvariation inrainfall (one o f the highest inthe world), and the importance o f quality assessment as an element to increase the farmers' share o f the final price. The project design includes measures to promote diversification and product innovation, and to improve capacity for agricultural quality assessment at the farm level. A cotton study prepared under the PHRDgrant for project preparation showed that cottonyields could be improvedwith better cultivation practices and that farmers could obtain a higher price for their cotton ifthey could better monitor quality. The proposed project will encourage adoption o f better cultivation practices through extension services that demonstrate the financial and environmental impact o f improved cultivation, and will provide farmers' with options to test quality o fraw cotton. . 3. Fiduciary Procurement issues Generalprocurement environment. The June 2002 Country Procurement Assessment, a review of the general procurement environment and practices, revealed several weaknesses inKazakhstan's procurement practices, inparticular with respect to the legal framework and regulatory regimes, and procurement and contract administration. To help the government eliminate these weaknesses, a comprehensive action plan was drawn up, focusing on strengthening the legal and institutional framework to regulate and manage public procurementinthe country. For this project, as i s customary for all projects supported by international finance institutions, the Loan Agreement will need to be ratified and brought to the level o f an international treaty so that the World Bank procurement guidelines will apply. Procurement capacity of the Ministiy of Agriculture. The Ministryo f Agriculture has its own procurement department that handles all procurementissues, and maintains an up-to-date and well- organized records system. The Coordination Center (CC) will provide assistance to carry out day-to-day project management. Inview o f the above, suitable staff o fthe Ministry o f Agnculture as well as a member o fthe CC will receive appropriate and adequate refresher training inBank procurement guidelines prior to project effectiveness. Financial management issues The overall responsibility for financial management will rest with the budget department o f the Ministry o f Agriculture and with the CC. The budget department o fthe Ministryof Agriculture will control the flow o f funds and maintain the accountingrecords. The CC will be responsible for project monitoring and evaluation, including the preparation o f quarterly financial monitoring reports (FMRs). Personnel from Ministryo f Agriculture have past experience with implementing World Bank funded projects and are familiar with World Bank financial management and disbursement requirements. The key policies and procedures o f the CC, which will be outlined inthe financial management manual, and the key policies and procedures of the budget department o f the Ministryof Agriculture, will bothbe reviewed duringappraisal. Project management-oriented FMRs will be usedto monitor and supervise the project, and, subject to the foregoing, the forms will be included inthe financial management manual. 14 4. Social Participatory approach Project preparation was carried out inpartnership with several governmental agencies (including the MinistryofAgriculture, Standardization Commission ofthe Ministryo fIndustry,MinistryofHealth), the private sector (Seymar, Raimbek Group, KazAgroMarketing state owned enterprise, Food Contract Corporation state owned enterprise, etc.), and civil society (farmers unions, entrepreneurs forums, and others). Representatives o fboth government and private groups on the Governing Board and the independent peer reviewers will ensure that the partnership i s maintained duringproject implementation. Social assessment A social assessment was carried out duringprojectpreparation infour oblasts (Almaty, Akmola, Pavlodar, and West Kazakhstan) that are representative o f the geographic, ethnic, climatic, and structure o f farms inKazakhstan. The main stakeholders o f the social assessment were (a) owners o f small private farms as well as managers and owners o f large farms and agricultural enterprises, (b) farm workers, (c) managers and owners o f small and mediumrural non-farm enterprises, (d) managers o f agricultural processing companies, and (e) key village informants. The social assessment found that each of the major groups o f stakeholder believes that the project will help to stimulate the rural economy and improve the quality and safety o f agncultural products. It also confirmedthat information asymmetry, particularly regardingprices, limited knowledge o f quality issues, and insufficient price differentials for quality are major challenges for farmers. Finally, it showedthat producers and processors question whether access to government support programs i s truly equitable. One o fthe important topics addressed was the respondents' attitude toward participating actively in marketing associations. Although most respondents claimed to be interested, some doubts remain. In fact, very few effective associations have been createdto date inKazakhstan. Farmers were concerned about the need for financial contributions. Private traders were uneasy about the impact that such marketing associations could have on their livelihoods. Skepticism regardingthe value o f associations may also be a consequence o f the Soviet legacy o f collective farms. Inany case, given the limited trust o f stakeholders ingovernment action, it i s important that the project i s not perceived as exercising excessive pressure to create associations. 5. Environment The project i s rated environmental assessment category financial intermediaries. The project will finance (a) laboratories to monitor quality and safety o f agricultural products, (b) demand-driven investments o f different types; and (c) institutional development investments in extension and policy malung. A significant share o fproject funds will be provided through the demand-driven CGS, so activities are not yet known. As required for projects o f environmental assessment category financial intermediaries, a comprehensive environmentalreview (Environment Sector Review, June 2004) was conducted by a local consultant. Its main findings include: 0 National legislation aimed at protectingthe environment is significantly developed in Kazakhstan. However, by-laws and regulations are still under development, and enforcement i s weak. 0 N o potential large-scale, significant and/or irreversiblenegative impacts are likely under the proposed project. 0 The food safety component will have a direct positive impact on the environment, particularly the development and enforcement o f food safety legislation. However rehabilitation and 15 management o f laboratories could potentially have a negative impact because o f their use o f chemicals and reagents. Nonetheless the planned supply o f incinerators to dispose o f laboratory waste will benefit the environment. 0 Marketing, applied research, and extension subprojects supported through the CGS may have negative environmental consequences. Although some subprojects may have positive environmental impacts-natural resources management, organic agriculture, crop rotation, and integratedpest management-most will involve agricultural intensification, which may generate negative environmental impacts. A primary example i s increaseduse o f pesticides. Thus the pest management safeguardpolicy has beentriggered. Other subprojects that will require a careful environmental review include food processing subprojects, such as slaughterhouses. The capacity of the government o f Kazakhstan, and particularly of the Ministryo f Agriculture, to recognize and address environmental impacts o f project activities needs improvement. For this reason a set of manuals on operations o f laboratories and environmental screening o f CGS subproject has been developed. Other manuals will be prepared duringproject implementation. The manuals propose procedures for designing and implementingmitigation measures for subprojects that have the potential to damage the environment, such as the use o f incinerators in slaughterhouses. Training will be provided. The manuals were discussed at a consultation workshop with the stakeholders and local NGOs and disclosed inthe country. The Loan Agreement has appropriate language committing the borrower to implement the environmental guidelines set forth inthe operationalmanual. Inaddition, the project will contract the services o f an independent consultant each year to assess the extent to which environmental screening i s taking place, and the extent to which recommendedremedial actions have been satisfactorily carried out. This assessment will also recommend any further training that may be needed to ensure adherence to the agreed environmental screening procedures and management plan. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.0 1) [X 1 [X 1 [I Natural Habitats (OPBP 4.04) [I Pest Management (OP 4.09) [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [I c[I XI Involuntary Resettlement (OP/BP 4.12) 11 [XI IndigenousPeoples (OD 4.20, being revised as OP 4.10) [I [XI Forests (OPBP 4.36) [ I [XI Safety o f Dams (OPBP 4.37) [I [XI Projects inDisputed Areas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI The Pest Management Safeguard Policy (OP 4.09) has been triggered. The project will finance the purchase o f chemical control agents andreagents for testing laboratories. The project will also encourage farmers to adopt disease-resistant varieties and integratedpest management practices to limit the need for chemicals. The government o fKazakhstanhas recently upgraded its management o f the control and oversight regarding use of pesticides with the help o fFA0 (FAO/TCP/KAZ 0065). A new department of plant protection and quarantine was established inthe Ministryo f Apculture. The project will buildon this development. A pest management plan, which comprises a training manualon safe handling, use, and disposal o fpesticides, i s being finalized. Training will be provided. * By supporting theproposedproject, the Bank does not intend toprejudice thefinal determination of theparties' claims on the disputed areas 16 7. Policy exceptions and readiness No exceptions to Bank policy are required for this project. The project meets the regional criteria for readiness for implementation. The institutional arrangements for project implementation are largely in place due to the work carried out duringproject preparation. Issuing a decree to establish the project institutional structure comprising the Governing Board and CC, i s a condition o f disbursement, and i s not expectedto delay project implementation since legislationhas already been drafted. 17 I S Quality and safety of agriculturalproducts. Internationaltrade requires certified safe and quality products, including high standards o f animal and plant health. This i s also a requirement o f the forthcoming WTO accession, under the Sanitary and Phytosanitary (SPS) Agreement (see box to the right). Currently Kazakhstanhas difficulty inmeetingthese requirements due to insufficient harmonization o f standards and insufficient testing capacity. The majority o f standards currently used are not internationally accepted: only 3 out o f 37 agricultural standards and 14 out o f 115food Safety (publickompulsory) standardsrequired standards are internationally harmonized. The under the SPS agreement o f the WTO (Kazakhstan other standards are accepted in CIS countries. i s member o f the three organizations, and it i s However, for export beyond the CIS countries, applying for WTO membership): failure to adhere to international standards Codex Alimentarius constitutes an obstacle to market access. In Office International des Epizooties addition, the private sector has difficulty in International Plant Protection Convention access to the necessary skills to implement Quality (privateholuntary) standards: private standards according to client demand International Standard Organization (ISO) (see box): only three agroprocessing HazardAnalysis o f Critical Control Points companies have introduced I S 0 standards. For example, lack o f harmonization creates a (Hazard Analysis o f Critical Control Points) barrier to wheat trade. Wheat classificationin Good Agncultural Practices (good agricultural the CIS i s based on gluten content, while practices) international classificationi s based on protein Good Manufacturing Practices (good content. Since the ratio between gluten and manufacturingpractices) protein content is not fixed, this causes either Intemational Union for the Protection o f New unfair quality assessment and/or litigation. Varieties o f Plants The international trade trend is that this kind Etc. o f problem will increase inrelevance inthe Public standards accept some private standards: for future. instance the Codex Alimentarius for processed meats recognize ISO/DIS 2918 for determination of Finally, the capacity o f bothprivate andpublic sectors to Cert~3cation: certify quality and safety i s insufficient. There are 35 recognized quality/safety private certification companies with 70 labs for testing characteristics o f a product or service food and agricultural products. Moreover there are 6 Accreditation: recognizedcompetence o f public certification institutions and the major ones State - a laboratory to perform specific types o f Vet Inspection, National Public Sanitation- testing, orcalibration measurement, Both may be or not internationally Market inefficiencies are significant inKazakhstan. For instance, although the grain sub-sector i s one o f the most developed, marketing inefficiencies have been estimated inthe order o fUS$60-80 million. T w o different estimations provided such a result: the first compared parity price with farm gate price (Debatisse et al., 2000), while the second comparedthe costs ofhandling, storage, and marketing excluding transport o f Germany and Kazakhstan (FAO, 2003). Market inefficiencies are even more acute inother agriculturalproducts, such as fruits and vegetables. Many fruits and some vegetables are difficult to grow inmost o f the northern part o f the country, and therefore they are produced inthe south and sold 19 inthe north(imports from China are also increasingtheir competitivepressure). However the price differential between the two regions i s inthe order o f 200-400 percent, which i s significantly superior to marketing costs. Analysis shows that difference in income level can not justify differences inprices for vegetables and livestock products. For example, correlation o f tomato prices with income i s quite low. The problem has been highlighted at the government's top level. According to statistics, increase o f fruit and vegetable prices i s significantly higher than average inflation. This i s also caused by corrupt policemen who demand bribes particularly from trucks transporting perishable products. Inorder to avoid police corruption, some local authorities organized "vegetable trains" to deliver fruits and vegetables under their strict supervision. Administrative restrictionso f competition may also hinder efficient marketing. The government decided to undertake several initiatives to address it. The main adopted approach has been to create state owned enterprises, such as the Food Contract Corporation for grains, Malonemderi for livestock products, and KazAgroMarketing. This approach risks substitutingfor private sector inefficienciesrather than providing an incentive for the private sector to increase its role. Limited and asymmetric access to information i s one o f the main obstacles to private sector involvement inmarketingofagriculturalproducts. It contributes to a fragmented andinefficient market. The Ministry o f Agriculture, with the collaboration of a EUfinanced TACIS project, is addressing this issue. The Marketing Information System (market information system) accessible also through KazAgroInformweb page i s one o f the results. However this market information system i s still insufficiently utilized by farmers and traders. This i s due to several reasons, among which the fact that information is nonspecific (e.g., quality i s not taken into consideration) and not sufficiently timely (weekly information i s not sufficient for products whose prices change even inhours, such as fruits and vegetables.) Ina sector undergoingsuchrapidtransformation, the rapidchanges do affect indifferent ways the different value chains. Among the efforts ofproject preparation, the value chains o f cotton, oil seeds, and livestock products were analyzed. The analysis provided a list o fbottlenecks affecting the sector and recommended suitable actions. Some actions are clearly public sector's responsibility. However limited private sector infrastructure i s a key bottleneck which i s challenging to address. To avoid having the public sector substitute for the private, a possibility could be to create incentives for the private sector to step in. By doing this, public and private sectors wouldjoin efforts to develop market-oriented infrastructure(collection points, slaughter houses, markets, storage and distribution facilities, etc.). Country image. An important bottleneck to access internationalmarkets i s the image o f agriculture in Kazakhstan. People inother countries, particularly outside the CIS, have an image o f Kazakhstanas a polluted country, based on internationally renowned environmental disasters such as the nuclear test site inSemipalatinsk andthe Aral Sea. The graphs below show that Kazakhstan's efforts to promote its country image are significantly below most other Former Soviet Union (FSU) countries, which contrasts with an advancedpace o freforms (source: the Bleyzer initiative). 20 I Ranking of Country Promotion and Image Ranking of Reform Process I for FSU countries ( a v e r a g e of 9 indicators comprising governance, liberalization. stability, corruption, et ) klonla Latvla Latvia Lifhuanla Armnia Kazakhstan hssia Russia Msldova Armnia Kyrgyzstan Azerbaijan Georgla Ukraine Msldova Belarus Tajilostan Uzbekstan Turkmenistan 0 10 20 30 40 50 60 70 80 90 However Kazakhstanhas also some environmental advantages, such as cold winters which reduce the incidence o f some agricultural pests. Inaddition, duringthe last 10-12 years the level o f application o f agrochemicals inKazakhstanwas very low, which could facilitate the production o f organic agricultural products. Access to knowledge The system o f apcultural research and extension inKazakhstanhas to adapt to the increasing number o f small farms. Current investments intechnology development and extension are poor both interms o f quality and quantity. Agricultural research i s currently carried out by 10 public centers employing some 1,200 scientists. This public research system i s undergoing a re-organization which i s addressing its shortcomings. The system i s under-funded, with an annual public investment o f around US$6 million, or 0.3 percent o f Agricultural GDP. This i s less than one third o f a global average o f over 1percent public investments inagricultural research and extension. Inaddition, there is n o system o f knowledge transfer to disseminate the findings o f agricultural research and facilitate adoption o f technology by final users such as farmers and agroprocessors. Annex Table 1: The Research Centers in Kazakhstan # Namettopic Location 2003 budget (US$) 1 Livestock and veterinary Almaty, Semipalatinsk, 1,354,252 23% Petropavlosk, etc. 2 Farming and crop production Almaty, Taldykorgan, Ust- 916,088 16% Kamenogorsk 3 South-WestemAgricultural Shymkent / animal science, crop 859,109 15% Center production, cotton 4 Grains Shortandy, Astana, Kostanai 749,53 1 13% 5 Agricultural mechanization Almaty 579,226 10% 6 Agricultural processing and food Almaty 550,889 9yo industry 21 7 North-Western Agricultural Kostanai I animal science, crop 275,546 5?'o Center production 8 Agroindustrial economics and Almaty 272,957 5yo rural development 9 Forestry Kokshetau (Shchuchinsk) 168,814 3% 10 Fishery Center Almaty, Balkash 160,602 3% Total 5,887,014 100% The system started a process o freform in2003, when agricultural research was moved from the Ministry of Education and Science to the Ministryo f Agriculture. This i s a positive step because it will facilitate links with the final clients o fresearch activities. The Ministry of Agriculture consolidated the previous 21 research stations into the 10 research centers, reducing fragmentation and transaction costs. The Ministry also prepared a plan to hire 200 new extension agents in all 160 districts o f the country. This would represent a mere skeleton o fpublic extension, with an average o f one extension agent every 650 farmers. However many problems still remain: There i s no systematic difhsion o f researchresults into practice; on the contrary, there i s a widespread beliefthat the difhsion i s not working efficiently; Farmers' needs, as well as those o fprocessors and traders do not have an impact on the directions o f scientific research; Human resource management o f scientific centers i s inadequate. The pay scale ofresearchers i s not competitive, and therefore very few new scientists are entering the system, while over half o f scientists are over 50 years o f age. Only less than 10 percent o f scientists are under 40 years, the most productive age for innovative research. Almost none o f the scientists have foreign post- graduate training outside o f the FSU, and few speak English. Although research centers have a semi-autonomous status, which could allow a fair amount o f flexibility inmanaging funds, in practice they are not allowed to implement an independent humanresources strategy, such as setting competitive salaries; Access to international scientific knowledge i s extremely limited. Libraries have few subscriptions to internationaljournals and access to internet i s inadequate; Research methodology tends to be traditional, with limited participation o f farmers and the private sector insetting priorities. Most research activities involve a single discipline, and they are carried out on-station; There i s little consideration o f impact. Although some research activities undoubtedly lead to significant impact on the ground, such as wheat breeding, most o f the research has yet to adjust to a market oriented system, where profitability determines technology uptake; Most scientific equipment i s old, although generally well maintained; Many research centers are involvedinvarious types o f commercial activities to counteract limited budget allocations. Many of these activities relate to non-researchproducts and services which substitute for, rather than complement, research activities. For instance, the agricultural mechanizationresearch center inAlmaty i s producing poles for a cellular phone company. The private sector is takmg an increasingrole inagricultural research, albeit still limited. According to the Scientific Technical Information Institute, the private sector finances 10percent o f total investmentin applied agricultural research. The private sector i s also increasingits role inextension, with a few pilot extension systems supported by farmer associations and agrarian universities (such as inNorthern Kazakhstan). Also, some agroprocessors are providinggood technical advice to their suppliers. Some examples: (a) the milk chain, where some dairy companies are making an effort to help their suppliers to improve the quality of raw milk, and (b) soybean, where oil-mills are providingRizhobium Japonicum to inoculate soy seeds, with significant increase inyields (reaching significant results o f 6 tons per hectare). 22 These sporadic examples prove both the needs for such services and the potential for the private sector's role. However there i s still the necessity o f systematizing such services in a coherent structure o f public- private collaboration. Several analyses of farmers' needs for information and advisory services (Balgabaeva, 2003) showedthat there i s a demand for information and advisory services. The most pressing issues at the moment are legal, technological, and marketing ones. Only 11percent o frespondents answered positively to the question whether they are prepared to pay for provided services (while the percentage o f farmers willing to pay for advice on how to access credit i s higher). Limitedinstitutional capacity. An analysis carried out duringproject preparation proved that institutional capacity i s one o f the main obstacles to the effective implementation o f the government strategy. The public sector suffers institutional weaknesses as a consequence o f the legacy o f the Soviet hierarchical and bureaucratic management style. Personnel management and motivation, particularly in line ministries, i s weak. The Ministryo f Agriculture was a prestigious institution duringthe Soviet period, though after the transition central ministries such as economy and finance gained much more prestige, reducing line ministries' capacity to attract qualified staff. A low salary scale increases this problem, particularly incomparison to a private sector which i s quickly modernizing and draining the best skills. Therefore line ministries are facing increasing difficulties to manage their relatively large work force: the Ministryo f Agriculture has almost 8,000 employees, mostly deconcentrated inregional offices, without counting for 13 institutions related to the ministry (i-e., the ten Research Centers, water and forestry committee, and State Owned Enterprises such as KazakhAgromarketing, FoodContractCorporation,KazAgroFinance, etc.). The still persistent Soviet, top-down, bureaucratic approach creates difficulty to develop a culture o f serving clients (farmers). Institutional and policy monitoring remains mostly input oriented. This weakness i s even more acute when monitoring multi-faceted policies such as those affecting competitiveness. Inaddition, the Ministryo f Agriculture does not have a department specifically responsible for sector competitiveness, since responsibilitiesare carried across all specific departments (strategic department, crops, livestock, scientific research, and others). A Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis o f the Ministry o f Agriculture was carried out. The analysis identified a strong and determinedleadership, a significant fieldpresence, and a relatively positive perception o f the population. Major weaknesses are limited staff qualifications, international links, attention to implementationarrangements, and result-orientedmonitoring. The main opportunity i s the increasing attention o f the whole government to the rural/agricultural sector, while the major threat may come from inadequate implementation o f the National Ago-Food and Rural Development programs, whose significant budget allocation represents a strong challenge. 23 E u N m e, Annex 2: Major Related Projects Financed by the Bank and/or other Agencies KAZAKHSTAN: AgriculturalCompetitivenessProject Regional Rural Development study and plannedproject Economic Growth, Private Sector Development, Poverty Intervention EuropeAid Support to Agricultural Producers to Establisha Foodproduction, processing and (formerly Vertical Market Integration distribution TACIS) USAID- Enterprise Development Project Quality Management and PRAGMA Meteorology EBRD Kazakhstan Warehouse Receipt Program Agribusiness and bank lending 26 Annex 3: Results Frameworkand Monitoring KAZAKHSTAN: Agricultural Competitiveness Project Results F r a m e w o r k Project Development Objective Outcome Indicators Use o f Outcome Information Increase the competitiveness o f the Farmers' income, particularly o f small and medium-sized farmers, Project implementers will monitor rises compared with 2004 levels. progress inestablishing intermediate Value o f agricultural exports, indicators and take action if these including livestock products, are not being satisfactorily rises compared with 2004. implemented. Increased proportion o f agricultural products that are Progress towards project outcomes tested and that meet international will be reported annually and standards for quality and safety. compared with baseline data. Satisfaction o f potential direct and indirect beneficiaries o f the project Intermediate Results Results Indicators for Each Use of Results Monitoring One per Component Component Component One: Component One: Component One: Capacity to certify quality and safety 7 technical regulations, each Action will be taken to either ensure o f agricultural products increased. consisting o f a number o f that the project achieves these individual standards, are outputs or to redesign the project to harmonized. correct deficiencies. I 60 laboratories receive international accreditation. Component Two: Component T w o : Component Two: Market-oriented infrastructure At least 120market-oriented Action will be taken to either ensure strengthened. subprojects implementedunder that the project achieves these the CGS. outputs or to redesign the project to correct deficiencies. Component Three: Component Three: Component Three: Efficiency o f agricultural applied At least 600 appliedresearchand Action will be taken to either ensure research and technology transfer extension subprojects that the project achieves these increased. implemented under the CGS. outputs or to redesign the project to At least 40 scientists under age correct deficiencies. o f 40 receive advanced education. Component Four: Component Four: Component Four: Institutional structure to implement Governing Board, Coordination Action will be taken to either ensure project activities established. Center, and the roster o f that the project achieves these independent peer reviewers outputs or to redesign the project to established and operating, as correct deficiencies. demonstrated through minutes o f the meetings. 27 * c) L 0 X 8 U E m 0 h 83 B & L 16r- N 0 hl W vl n "7 . 0 /6 W W + hl i 3 vl 4 W s b vl 3 N 0 3 I" 0 N 0 2 hl 0 d N 0 d 0 2 N 0 0 rc, 2 hl 0 hl hl 0 0 3 0 a I,. 2 . J . Annex 4: Detailed Project Description KAZAKHSTAN: AgriculturalCompetitivenessProject 1, The project will implement the following components and sub-components: Component 1 Quality and Safety Managementof Agricultural Products - Subcomponent 1.1. Harmonization and Development of Standards Subcomponent 1.2. Quality and Safety Monitoring Component 2 AgriculturalMarketing - Subcomponent 2.I. Strengthening the Market Information System Subcomponent 2.2. Development of Market-Oriented Infrastructure Component 3 AppliedAgriculturalResearchandExtension - Subcomponent 3.I. Applied Research Subcomponent 3.2. Agricultural Extension Component 4 InstitutionalDevelopment andAgricultural Policy - Subcomponent 4.1. Institutional Structure Subcomponent 4.2. Agricultural Policy Development Subcomponent 4.2. Project Monitoring and Evaluation Component 1 Quality and Safety Managementof Agricultural Products - 2. Objective. The component will enhance the management of food safety control and quality certification along the value chain. To achieve this, the component will improve the capacity o fpublic and private sector to (a) harmonize and develop standards; and (b) monitor quality and safety. The component will comprise the following two subcomponents. 3, Subcomponent 1.I . Harmonization and Development of Standards. The subcomponent will strengthen the capacity o f public andprivate sector to harmonize and develop standards. To do so it will establish a Group o f Experts on harmonization o fregulations and standards o f quality o f agricultural products, and it will provide technical assistance and training on introduction ofregulations and standards. The Group o f Experts will provide a set o f capacity buildingand awareness activities such as: a conference on SPS standards for key individuals in government, the food and agriculture industry and consumer representatives inthe role and functions o f SPS standards a series o f Working Groups to work on harmonizing relevant Kazakhstan standards with those o f SPS on a priority basis, to evaluate the cost and benefits o f harmonization and to recommend changes to Kazakhstanlaws and standards as appropriate training o f key individuals involved in the development o f standards in SPS methods and the use o f existing SPS materials providing training to private sector on public and private standards sponsoring active participation inthe international SPS related meetings provide support to join the International Union for the Protection o f new Varieties o f Plants develop the fi-amework standards and regulations for organic production and certification increase awareness on sanitary, phytosanitary, and quality aspects ofthe value chain, including the value o f price differentials 30 5. As Kazakhstan adapts the necessary Codex rules, it can use the Codex organic production guidelines as a baseline to achieve internationalrecognition inthis area. It will work withinthis and the International Federation o f Organic Agriculture Movements (FOAM)framework to facilitate adoption of organic production methods and their certificationto an internationally accredited standard. This niche, for which Kazakhstan may have a comparative advantage (due to minimal application o f synthetic agrochemicals since independence and cold winters that reduce the incidence o f some agricultural pests), can facilitate improved natural resource management. It can also serve as a useful linkage to the image buildingactivities o fthe project since organic agricultureis typically perceivedas a safe, nutritious, and environmentally-friendly productionmethod and can eventually become a useful part o fKazakhstan's promotion. Perhaps most importantly, farmers who can meet organic production standards are meeting many o f the emerging requirements for high-value markets i.e. foods that are free o f chemical residues and traceability. It i s nonetheless important to consider that it takes 2-3 years for qualified production to be certified as organic. 6. An important component of competitiveness inmodern food production is traceability. This requires a reliable and documented chain of custody from farm to table. Inhighrisk foods such as meat products, this i s likely to be a vital component inopening markets that are often closedto Kazakh exports for sanitary reasons, such as the border with Russia. Some standards that are proposedunder the project - such as organics - intrinsically incorporate such traceability. Traceability inmeat production may be economically viable and required by the market, and thus the subcomponent will provide technical support to implement it. 7. Subcomponent 1.2. Quality and Safety Monitoring. The subcomponent will improve the capacity o f the public and private sectors to monitor food quality and certify standards o f agricultural products rationalize the system to testing and monitoring o f quality and safety. The component will: 0 establish and equip a public Veterinarian Testing Center (Microbiology, Radiology, Toxicology, Biochemistry, Virology) and Plant Protection Testing Center (Entomology, phytopathology, Virology, Herbology, Microbiology) 0 staff training (see following table) Annex Table 3: Training Plan for Quality and Safety Monitoring 0 modernize seeds and inputlaboratories 0 provide training and incentives for accrediting line laboratories as needed along value chain (through the Competitive Grant Scheme with 25 - 60 percent o f cost-sharing) 31 8. Regional laboratories: 0 Within the two economic corridors there are 9 oblast centers. Eachofthem has aMinistryof Agriculture lab which requires modernization 0 Within the corridors there are 80 districts. Each o fthem has a lab which require modernization 0 400 new mobile labs for veterinary services will be established 0 It is expectedthat some 20 private labs will require support on a matching grant basis. Component2 Agricultural Marketing - 9. Objective. The marketing component targets the private sector's ability to both assess agricultural markets and provide access to them. T o achieve this, the component will (a) facilitate access to market knowledge; (b) improve value chain efficiency through identifying bottlenecks and providing incentives to overcome them; and (c) promote exports by improving the international image o f Kazakhstani agriculture. The component will comprise the following three subcomponents. 10. Subcomponent 2.I. Strengthening the Marketing Information System. The subcomponent will strengthen the existing system inthe following aspects: (a) adding quality classifications and price differentials to the existing price lists; (b) increasingthe frequency o f price provided, providing at least a daily frequency for perishable agncultural products, (c) complementingprice information with traded quantities; (d) complementing the existing web page with means o f easier access to farmers and traders, such as mass media (newspapers, radios, TVs) and cellular phones; (e) strengthening the monitoring o f information use, and (0enhancing analytical capacity. 11. The subcomponent will regularly monitor the use o f informationby farmers and traders to assure that the needed information i s disseminated through appropriate channels. The extension subcomponent will complement this effort. 12. The subcomponent will also provide training for staff o f private companies and associations on (a) collection, processing and analysis o f data; and (b) use and development o f information-marketing systems. This training will not be provided to commodity exchanges, whose institutional development will be providedby the Second Agriculture Post PrivatizationAssistance Project. 13. Each o f the above trainings shall last 3-5 days. Intotal within the first two years o f the Project about 36 training courses shall be provided to 800 farms and 150 companies (comprising KazAgroMarketing, MalOnimderi and Food Contract Corporation, 10 information and marketing companies, 70 processing companies and 15 professional/farm associations). 14. Trainings shall be prepared and delivered with the support o f 6 international and local trainers. Recruitment o f experts, preparationand organization o f trainings shall be executed by local training company, selected on tender basis. 15. Subcomponent 2.2. Development of Market-Oriented Infrastructure. The subcomponent will provide financial incentives to develop marketing associations and or partnerships. It will co-finance up to 40 percent o f the cost o fpost harvest infrastructure such as milk collectionpoints, slaughter houses, storages, distributionnetworks, etc. for the identified priority commodities inthe northem and southern economic corridors. 16. Business plans,ofproposals will be reviewed through the same system developed for the Competitive Grant Scheme (CGS). T o avoid crowding out the private financial system, the grants will be required to have a strong public aspect, including butnot limited to: 32 0 incentive the creation o f marketing associations, with part o f the grant devotedto technical assistance for institutional development, 0 technology innovation, with one grant per type in each region, and a significant amount o f grant will be devoted to dissemination activities, and 0 promotion o f subsectors, and agricultural activities that have a public benefit beyond that o f the firm. Experience from other countries (e.g., Albania) shows that with a detailed guidelines and careful implementation these types o f grants can actually complement and contribute to the development o f the financial system. Component3 Applied Agricultural Researchand Extension - 17. Objective. The component aims at improving the current system o f agricultural research and extension inKazakhstan. The system will be improvedby (a) complementing the exiting system o f fundingwith a competitive fundingmechanism for appliedresearchand extension, and (b) complementingthe public extension system currently under development with a structure to train and support new extension agents. The component will: 0 increase the adoption o f technologies for both process and product innovation by farmers and agroprocessor; 0 strengthen linksbetweenknowledge generators and customers; 0 increase private-sector participation in priority-setting, delivery, and funding o f the system o f agricultural research and extension. , The component encompasses the following two subcomponents. 18. Subcomponent 3.1. Applied Research. The subcomponent will (a) provide technical assistance to complete the design of, implement, and monitor the draft planto reorganize the core agricultural research system. The technical assistance will emphasize researchprioritization (for which a set o f focus groups for need assessment has already been carried out duringproject preparation), human resource development and management, quality control and enhancement measures, accountability, information management and access, comprising internet access; (b) finance advance education for 60 young scientists, both domestically and internationally; and (c) utilize a Competitive Grant Scheme (CGS) to finance appliedresearchproposals. The Competitive Grant Scheme (CGS) would finance 180 proposals with an average matching-granto fUS$48,000. Definitions and examples o fproposals (or subprojects) are provided below. 19. Subcomponent 3.2. Agricultural Extension. The subcomponent will (a) establish a Government funded system for provision o f extension services to agricultural entities. The Ministry o f Agriculture will expand its presence inrural areas, employing at least one extension agent per district and one extension supervisor per Oblast. Altogether, this will represent about 200 new field staff inall 160 districts of the country and 14 supervisors; (b) provide a system o f support to the extension agents, including selection, training and output oriented monitoring o f extension agents; (c) train and certify 400 private extension agents; and (d) utilize a Competitive Grant Scheme to finance extension and training proposals. The Competitive Grant Scheme will finance around 450 proposals with an average matching- grant of US$25,000. Definitions and example o f this type o fproposals (or subprojects) are provided below. 20. The project will help Ministryof Agriculture to establish a public network o f extension agents, employing at least one extension agent per district and one extension supervisor per Oblast; altogether, this will mean about 200 new field staff in all 160 districts o f the country and 14 supervisors. The project will contributeto the selection andtraining of the new extension agents and to establish a system o f 33 support to these newly hired staff. The support system will provide an initial training and certification o f the extension agents, a continuous on the-job training program, and a system o f support which extension agents can address to ask specific questions inorder to linkthe work o f extension agents withthe best source of knowledge inthe country. Each new agent will receive a one-month initial training, with final test for certification. Hiringwill be conditional on passing the test; inaddition, eachyear there will be a one-week training based on on-the job practical experience. 21. Inadditiontopublic extensionagents, 400privateextension agents willbetrainedandcertified. Also 130 lecturers from Agricultural universities, colleges, and professional schools will be trained. 22. Main subjects o f training will be: e methodological aspects such as sociology o f change, extensionmethods and media, participatory rapid rural appraisal, local planning, community development, etc. e technical aspects such as agro-technology o f production and processing, marketing, quality management, etc. e natural resources management, comprising crop rotation, integratedpest management (IPM),organic farming, minimumtillage, environmental effects o f extensive versus intensive agriculture, pasture management, alternative sources o f energy, etc.; e legal and tax issues such as legal aspects o f associations and cooperatives, the tax code and tax holidays for agriculture and SME, the land code, the crop-insurance law, regstration and inspections, processing and marketing, quality management, etc.; and 0 business planning such as farm management, return on investments, cost and financial analysis, risk management, potentials for diversification, etc. 23. Supervisors and national coordinators will be required to have a master on subjects such as extension planning, extension management, extension monitoringand evaluation. 24. Implementation of the CGSfor Component 3 -Applied Research and Extension. Both subcomponents will utilize the Competitive FundingScheme (CGS) to finance demand driven proposals originating from both public and private organization. The approach is described under the chapter on implementation mechanisms. The operational aspects o f implementationare described inan operational manual currently which first draft has already been discussed. 25. Scientific centers and academic organizations may apply for grants irrespective o ftheir ownership (form of property). Individual researchers and consultants may also apply for grants, as well as farms and companies o fthe agncultural sector that will submit applications jointly with researchers. The cycle o f CGS, beginning with publication o f an announcement o f a certain competitive biddingand ending up with selection results, will be disseminated inthe mass media (see Annex 6 for subproject cycle). Annex Table 4: CharacteristicsofApplied ResearchandExtensionSubprojects AppliedResearch Extension/ Demonstration Providerbeneficiary co-financing >30% >35% Maximumsize o f grant*, thousand US$ US$lOO US$30 Average size o f grant, thousand US$ U S 4 8 US25 Max implementation period (years) 3 2 34 Research centers, Research centers, Providers (with technical capacity toKazAgroMarketing, KazAgroMarketing, universities, implement the proposedactivity) universities, NGOs, consultingNGOs, consulting companies, companies, scientist groups, scientist groups, international international organizations organizations Beneficiaries (final clients) Farmers, associations, Farmers, associations, amoDrocessors amotxocessors *The maximumsize of grants maybe changedduringprojectimplementation 26. Appliedresearchsub-projectsvalidate innovationswhich are likely to have positive results in the specific eco-region o f Kazakhstan, but have not yet been tested on a real scale. These subprojects will not limit their validation to technical feasibility o f innovations, but will also test their economic, institutional, social, and environmental feasibility. All sub-projects should be proposedby integrated teams, composed by researchers and producers (beneficiaries inagriculture or inthe food industry), and should allow validating innovationsbefore their diffusion to all interested parties. They will have a scientific approach and consequently the major responsibility for the elaborationo f proposals and for the implementation i s bome upon the scientists. However, due to the applied nature o f the research themes, and to avoid a separation between research and practice, it will be mandatory that validation research proposals include inthe researchteam and inthe research methodologiesalso the involvement o f technicians (agronomists, veterinarians, food experts, etc.). Their final products are (a) researchreports for the national and international scientific community and (only incase o f successful results); (b) very simple and clear guidelines for national producers; and (c) a dissemination plan, which will be implemented only incase the validation will have been positive. Joint proposal and alliances between local and foreigdintemational research institutes will be considered as a positive element at the moment o f subproject evaluation. 27. Extension,demonstration, andtrainingsub-projectswill be focused on disseminating technologies which have already been tested, and will also cover non technological aspects o f training, such as legal aspects, business planning, economic and financial analysis, quality management, marketing, etc. 28. Priorities. Although priority area o finvestmentwill be adjusted annually bythe Governing Board, since they need to adapt to a changing environment, the following priority criteria have been agreed. 0 Productinnovation. Testingnew products, such as crop, animal or foodproducts. a minimum o f 30% o f resources will be invested for this type o f subprojects, which i s needed to supply changing consumers' needs, diversify farmers' income, and reduce over-dependence on few products; 0 Processinnovation. Testingnew improved methods for obtainingthe same product. Most researches generally focus on process innovations and search to improve the productivity o f existing crops, or try to reduce the environmental impact o f old practices. 29. The following table reports some examples o f applied researcWdemonstration subprojects. 35 Annex Table 5: Examples of applied research/extension subprojects ... Topic Production Post-harvest, storage, processing, marketing Soft wheat Farmtrials of zero-tillage Post-harvest loss reduction Dryglutenproduction Durumwheat Variety on-farm trials Quality assurance Potentialniche market assessment Barley. Animal 0 Financial calculations Outtum inprocessing different . feeding and brewing accordingto quality grades varieties varieties Livestock 0 Financial calculations of Market assessments improved feeding. Improved 0 Collection, slaughtering, and . feedingVs improvedbreedin cooling quality aspects Small scale milk cell count Quantifying financial impact of Financial feasibility o f small scale improved feeding processing Potentials o f cashmere production 0 Organic livestock production 0 Effectiveness of panel for animal feeding Oil seeds 0 Seed development andtesting 0 Small scale oil seedprocessing Cotton 0 IntegratedPest Management Densely packing units Two seeds technology Ginningouttum Quantifying financial impact of cron rotation . Fish products . 0 Financialjustification of 0 Testingo f small-scale primary aquaculture of highcommercial processing and cooling plants value species (pike perch, trout, Financial feasibility o f smoked and sturgeon, silver carp, etc.) canned fishproduction Drvfish mealDroduction Natural resources .. Watering points for livestock Recuperation o f slaughterhouse management Biogas wastes Component 4 InstitutionalDevelopmentandAgriculturalPolicy - 30. Objective. This component will support the Ministryof Agriculture's ability to: (a) create the institutional structure to implementproject activities; (b) provide technical assistanceto improve the legal framework for sector competitiveness (c) monitor the effects ofpolicy changes; (c) provide training to staff on different aspectssuch as policy analysis, management, and economics, as well as technical aspects such as agricultural trade and WTO accession, agricultural knowledge and information systems, participation inregional agricultural fairs and conference, and (d) monitor and evaluate project activities. The component will be subdivided inthe following three subcomponents. 31. Subcomponent 4.1. Institutional Structure. According to intemational experience, the institutional setting o fthe systemwill require setting up a three bodies: (a) Goveming Board, (b) Coordination Center (secretariat), and (c) IndependentPeerReviewers. 36 (i)TheGoverningBoardwillhavetheresponsibilityofdefiningthestrategicguidelinesoftheproject, including the funding systems under the previous three components. All major decisions o f the Goveming Board will be recorded inthe project operational manual, which will be approved and revised by the Board. It will regularly meet semi-annually, plus eventual extraordinary meetings as necessary (but possibly not more than six time a year). The Board will be composed by nine members with voting rights and by the Director of the Secretariat, without voting rights. The members will be representatives o f the Ministryo f Agriculture and other Ministries, o f the most important associations of the three levels o f the agro-food chain (production, processing and trade) and/or private sector. Representatives o f public institutions such as Ministries will not exceed the number o f four. The representatives inthe Boardwill last for 3 or 4 years and can be reappointed only for a second term. The members of the Board shouldreceive a bonus per each meeting they participate. Other operational expenses include travels to participate inthe meetings, board and lodgings, study travels abroad to visit similar experiences and similar training. (ii) CoordinationCenterwillactasSecretariatoftheprojectandwillhavetheresponsibilityof The implementing the policies agreed by the Goveming Board and reflected inthe Project Implementation Plan and Operational Manual. Therefore it will be responsible for the implementation o f the whole project. One important task o f the Coordination Center will be to inform all concerned parties, through proper methods (mass media, meetings at Universities and Research Centres, leaflets and posters, etc.), about the opportunities offeredby the system. It will take care o f all administrative duties related to the Calls for proposals, administrative selection o fthe proposals, relationships with the Independent Peer Reviewers, signingo f contracts for the provider o f the selected sub-projects, disbursement procedures, monitoring and periodical evaluation of project activities. The Coordination Center will prepare the meetings of the Board to informabout the progress o f the implementation and will provide all necessary information incase o f proven misbehaviour o f contracted parties. The Coordination Center will be also responsible for project monitoring and it will produceprogress reports. (iii)The IndependentPeer Reviewersi s a rotating roster o f experts, not a permanent institution. It will be responsible for the technical review o fproposals submitted for the (a) private laboratories, (b) market-driven infi-astructure, (c) appliedresearch, and (d) extension, according to the criteria defined inthe CGS operational manual. The roster willbe composed ofnationalandinternationalexperts who will examine the proposals and will evaluate them according to the multi-criteria methodology described inthe operational manual. The CGS operational manual will specify criteria and relative weights which will be made public inthe Call for Proposals, to ensure hightransparency. For each group o fproposals inone specific area, 2-3 Independent Peer Reviewers will selected, out o f a roster elaborated by the Coordinating Centre. At least one Peer Reviewer will be intemational. The roster will include respected individuals o f the scientific and technical civil society inKazakhstanand abroad. Inorder to avoid conflict o f interests, individuals involvedina specific proposal can not evaluate it. The Independent Peer Reviewers will receive via internet the proposals and individually send back their judgment, based on scores; the Coordinating Centre will elaborate the average score and nominate winners. The Independent Reviewers are paid an honorarium per each proposal they have analyzed individually. 32. Subcomponent 4.2. Project Evaluation. The subcomponent will finance technical assistance to carry out project evaluation. A consulting firmwill be hired to produce two evaluations per year: the first evaluation will assess achievements interms o f output indicators working with project partners and executors, the second evaluation will be based on a survey o f a sample o f project potential beneficiaries to assess outcome achievements by subcomponent. The results will be presented directly to the Goveming Board. 37 33. Subcomponent4.3 Agricultural Policy Development. The subcomponent will strengthen the capacity o f public sector to analyze, monitor and develop agricultural policies. T o do so it will establish a Group o f Experts on agricultural policy, and it will provide technical assistance to introduce the monitoring o f state support indicators (such as aggregate measure o f support, producer subsidy equivalent, etc.). The Group o f Experts will also prepare o fproposals and recommendationon development o f legislation affecting agncultural competitiveness o f different sub-sectors, including fisheries. This subcomponent will also finance training to selected staff o fthe Ministry o f Agriculture, comprising a limitednumber o f study tours. 34. The subcomponent will also support the Ministry o f Agriculture to clearly define its role and responsibilitieswithin a national food control strategy. It will identify adequate coordination with other government agencies, food industry and other relevant stakeholder groups to ensure effective programs are inplace for food safety at the farm and market level. 38 Annex 5: Project Costs KAZAKHSTAN: AgriculturalCompetitivenessProject Annex Table 6: Project Cost By Component Project Cost By Component andor Activity Local Foreign Total US$ million US$ million US$ million 1. Quality and Safety of Agricultural Products 13.8 16.2 30.0 2. Agricultural Marketing Development 4.3 2.6 6.9 3. Applied Agricultural Research and Extension 22.2 12.8 35.0 4. Institutional Development 4.3 0.7 5.O TotalBASELINE COSTS 44.6 32.3 76.9 Physical Contingencies 1.2 1.4 2.6 Price Contingencies 2.9 0.7 3.6 TotalProject Costs' 48.7 34.4 83.1 Interest during construction Front-endFee TotalFinancingRequired Identifiable taxes and duties are US$7.9 million of the total project cost. Project cost net oftaxes is US$75.2 million. Therefore, the share o f project cost net of taxes i s 90.5 percent.. Annex Table 7: Allocation of Loan Proceeds Expenditure Category Amount inUS$ million Maximum % of expenditure to be finance by the IBRDLoan Civil works 5.3 70% Goods 6.7 100% foreign expenditures, 100% local expenditures (ex- factory cost), 84% local expenditures for other items procuredlocally Competitive grants 11.0 100% Unallocated 1.o Subtotal 24.0 Front-endFee 0 Total Loan 24.0 39 Annex 6: ImplementationArrangements KAZAKHSTAN: AgriculturalCompetitivenessProject Project Management 35. The Ministryo f Agriculture (Ministryo f Agriculture) will have the overall responsibility for the project implementation. This will include administration ofthe Project Special Account, maintenance o f records o f all project related transactions, carrying out procurement for all goods and technical assistance associated with the project (except the procurement associated with sub-projects financed under the Competitive Grant Scheme which will be carried out by the beneficiaries), among others. Specifically, the Head of the Department o f External Relations and Investments o f Ministry o f Agriculture will be responsible for the project's day-to-day implementation. 36. The institutional structure for project management i s designed in such a way as to separate policy setting (Governing Board), implementation (Coordination Center), and technical adviceheview (Independent Peer Reviewers). Summary responsibilitiesfor the three institutions have been described under sub-component 4-1 Institutional Structure. A Project ImplementationPlan (PIP) i s currently - under finalization. It will report draft terms o f reference for expert group that will work on standard harmonization, the criteria to select public and private laboratories for modernization, the criteria to select agro companies whom the project will help to get certificate, the modules for training inmarketing, an awareness campaign guide and terms o f reference for extension agents. The plan will set a detailed procedure for the activities plannedby the project and can be modifiedduringthe project implementation. The following chapter presents a summary o f the responsibilities o f the Coordination center and its main staff. 37. A Competitive Grant Scheme (CGS) will be usedwhenever project activities could be implemented by either private or public providers. The detailed implementation arrangements are being defined inan operational manual which i s currently under discussion with different stakeholders. A summary o f these implementationarrangements i s provided inthe next chapter CoordinationCenter 38. The Coordination Center, under supervisionof the Ministryo f Agriculture, will serve as a standing management body o f the Project and will fulfill the duties o f a Secretariat inthat it will be involved with the hands-on, routine aspects o fproject management. The Center's mainresponsibilities will include, butnot limited to: project implementationand monitoring preparation and implementation of the annual work program monitoring, evaluation and reporting to government, the Bank, and the Governing Board 0 procurement o f goods and services (except CGS) 0 administration o f the Competitive Grant Scheme 0 administration o f the Project and Special Accounts, and maintaining records o f all project related transactions, incollaboration o f the accounting department o f the Ministryo f Agriculture, and ensuring the preparation and submission of annual project audits. 39. The Ministry o f Agriculture is suggesting that the Coordination center be staffed with 12 professionals. However the Ministryof Economy may want to review this proposal and this will require some discussion duringnegotiations. 40 40. ProjectManager. The project manager will be responsible for managingthe Coordination Center and for overall project implementation. He/she will be responsible for communication with the Ministryo fAgriculture, the Governing Board, other governmental agencies, andthe WorldBanktask team. The manager will be accountable to the Vice Minister o fthe Ministryo f Agriculture who i s in charge o f the project implementation. Heishe i s supposed to take a lead introubleshooting duringthe project implementation, alert the Ministryof Agriculture, the Governing Board, and the World Bank task team on any deviation from the original Project Implementation Plan (PIP). 41. Each component will be responsibility o f a suitable professionalwho will be responsible for day- to-day implementation o f each component. They will follow the PIP and report to the project coordinator on any problems not envisaged in the PIP. 42. The coordinator o f Component 1 Qualityand Safety Managementof AgriculturalProducts - will: 0 Help Ministryo f Agriculture with designing, establishing, and accrediting the public laboratories planned under the project 0 Work with the Group o f Experts and Technical Committees on harmonization o fregulations and standards o f quality o f commodities and follow up on their activities 0 Carry out the dissemination campaign 0 Select on a competitive basis a qualified company for conducting training according to the preset modules 0 Review applications from public andprivate laboratories to be financed under the CGS and inform the Independent Technical Reviewers on short listed candidates. 43. The coordinator Component 2 AgriculturalMarketingwill: - 0 Select on a competitive basis a qualified company for conducting training on Management Information System according to preset modules 0 Make arrangements for domestic and internationalimage malung campaign to buildawareness, writing and distributingprintpromotional material onagriculture inKazakhstan, explainingthe potential to promising export markets o f Kazakh agricultural products. 0 Review applications from beneficiarieswilling to improve market infrastructureby the CGS and inform the Independent Technical Reviewers on short listed candidates. 44. The coordinator o f Component 3 AppliedAgriculturalResearchandExtensionwill: - 0 Administer the whole CGS scheme, organize calls for proposal and training, arrange for the signature o f contracts 0 Review applications, select peer reviewers, for the applications concerning applied research and extension 0 Organize training o f the module instructors and follow up on the elaboration o f training modules by them 0 Select on a competitive basis a qualified company for conducting training o fthe public & private extension advisors according to the modules developed consultants. 45. The coordinator o f Component 4 InstitutionalDevelopment andAgriculturalPolicy will: - 0 Help Ministryo f Agriculture with establishing the Governing Board by preparing necessary documentation and assuring continuous communication with members o f the Governing Board. The component coordinator will announce meetings o f the Governing Board, provide logistical and other support to facilitate Governing Board operation 0 Help Ministryo f Agriculture with establishing the roster o f Independent Technical Reviewers by preparingnecessary documentation and assuring continuous communication with the Independent 41 Technical Reviewers. The component coordinator will provide logistical andother support to facilitate the operation o f the Independent Technical Reviewers. 0 Provide administrative support to the project coordinator on Coordination Center operations, help him with communication with project stakeholders includingMinistryo fAgriculture and the WorldBank task team Public network of extensionagents. The Ministry o fAgriculture would like to select KazAgroMarketing as the institutional home o f the extension system. DuringNegotiations it was agreed that consultants to carry out this activity, which i s fully financed by the Republican Budget, will be selected according to domestic law. Inany case, the contract with the provider of these services will be not longer than one year, and it will be renewable. Although a state owned enterprise such as KazAgroMarketing may have some limits, alternatives were not acceptable to the Ministryo f Agriculture. The one year renewable contract limit will allow the possibility o freviewing and ifneededmodifying this arrangement duringproject implementation. The World Bank will provide prior review of the draft contract and TORS,butnot o f the selection method, given that the Borrower will finance the totality o f this contract. Competitive Grant Scheme(CGS) 46. The implementation arrangements for the Competitive Grant Scheme (CGS) are detailed inan operational manual which will be approved by the Governing Board and will receive no-objection by the World Bank. Incase o fneed, the Manualmay be periodically adjusted and updatedto incorporate lesson leamed duringimplementation. All changes will require approval o fthe Goveming Boardand World Bank no-objection. 47. The CGS will be managedby the same institutional structure to be developed under the project. The GovemingBoard, the Coordination Center, and the Independent Peer Reviewers will be respectively responsible for policy making, implementation, and technical advice, as described under the sub- component 4-1. Institutional Structure. 48. Applicants. Eligible applicants to the CGS canbe: researchcenters, universities, non governmental organizations (NGOs), consulting companies, private companies, scientist groups, international organizations, registered associations, etc. Proposals should provide evidences o f the provider's implementation capacity. For instance, inthe case o f applied research subprojects, the provider should prove its capacity to analyze results o fresearch activities, including but not limited to scientific capacity to provide statistically reliable results. A requiredminimal experience period will also be utilized as a rule-of-thumb. The Ministry o f Agriculture and project preparationteam are currently discussing the appropriate minimal experience (track-record.) The discussion i s oriented around 2-4 years o f actual experience. The shorter the experience required, the easier would be for newcomers to participate. However this will also have the trade-off of increasing the risk working with organizations with limitedcapacity. The discussion will be finalized by appraisal. 49. The scheme will make a distinction between "providers"-those withthe technical capacity to implement the proposed activity - and beneficiaries-those who will ultimately benefit from the achievements o f the proposed subproject. Ifdeemed useful, there could be a tripartite contract among the Coordination Center, the provider, and the beneficiary. Such tipartite contract will constitute a favorable feature, though it will not be a requirement. This was decidedbecause to sign a legally bindingcontract beneficiariesneed to have legal personality (thusbeingregistered as association or similar). The lack of regstrationwould constitute an obstacle to implementation. 42 50. Requirementsof sub-project proposals (i) All subproject proposalsshould providea benefitto society-publicbenefit- largerthenthe benefitto privateproviders. All proposals should clearly define the benefit to society, or spillovers, because grants are provided only for activities which provide a public benefit larger than the private benefit. This means that the goods or services provided shouldbe "not excludable" (additional potential users cannot be excluded from use by others) and "not rivalry" (goods and services can be usedmore times). The Grant has the objective o f compensate for a market failure. It i s however important that economic benefits are not confused with social benefits (i.e., employment generation.) Although a strict economic analysis i s not feasible for such small projects, some models were developed duringpreparation and will be used to benchmark proposals. (ii) Implementationcapacity.Proposalsshouldprovideevidencesoftheprovider'simplementation capacity. Inthe case of appliedresearch subprojects, the provider should prove its capacity to analyze results o f research activities, including but not limited to scientific capacity to provide statistically reliable results. (iii) Topicsandgrantsize. Subprojectswillbeselectedaccordingtotheprioritylevelofproposed topics, implementationperiod, grant size, and minimal beneficiaries' contribution (for most types o f subprojects, beneficiaries' contribution can be inkind, as detailed inthe operational manual). The following table (Annex Table 8) reports the details o f these requirements. Annex Table 8: CompetitiveGrant Scheme Subprojects Laboratories Market- Image Extension1 Total (sub-comp. 1.2) Infrastructure (comp. 2) Oriented EnhancementResearchDemonstration (sub- (camp 2) comp. (sub-comp. 3.1) 3.2) Budget allocation (US$) 1,300,000 4,200,000 1,300,000 8,640,000 11,250,000 26,690,000 Providerlbeneficiary >25% co-financing >40% >50% >30% >35% Maximumsize o f grant* (US$ `000) US$80 US$40 U S 5 0 US$100 US$30 Average size o f grant (US$ `000) U S 6 5 US$30 US$25 US$48 US$25 US$32 Expected number o f subprojects 20 140 30 180 450 800 M a x implementation 1 1 1 3 2 period (years) *The maximumsize of grantsmaybe changedduringprojectimplementation CGSAgent. Given the highnumber of CGS, itwas decided to use an agent to carry out administration of these grants. The CGS Agent will not be responsible for making technical decisions or approving proposals. It will only be requested to check whether grant recipients meet the conditions for subsequent tranche disbursements under the Competitive Grant Scheme. The Administrative Agent will be expected to perform certainagreed-upon procedures to assist the Ministry o f Agriculture (or Coordination Center, CC) indeterminingifthe conditions have been met. These procedures would include a representative o f the CGS Agent will (i) make field visits to the Sub-project sites to verify the Sub-project implementation state and will submit its findings to the MOAand CC; (ii) undertake all necessary actions and exercise all o f its rights in the CGS Agent Agreement, including suspension or termination o f the right of Grant 43 recipients to use the proceeds o f the Grant upon failure by the Grant recipient to perform any o f its obligation under the Grant Agreement; (iii) empowered, upon failure by the Grant recipient to carry be out its obligations under the Grant Agreement, to terminate it with prior agreement o f MOA, cease disbursement o f the Grant and request other appropriate remedies available under the law; (iv) receive up to a maximum 30% o f the Grant funds to assure that the proceeds o f the Grant are disbursed to the Grant recipients in a timely manner; and (v) furnish to the MOAand CC documentationo f expenditure ina period o f sixty days to assure that no Grant funds will be advanced for a period o f longer than sixty days The MOA and Administrative Agent would sign a bilateral agreement specifying the terms and conditions o f this work. The grant recipients/ beneficiaries should well understand the nature o f the relationship o f the between the MOA and Administrative Agent, particularly with respect to the agency fee. Subproject Cycle 1. Callfor submittingsubproject proposals. Twice ayear the CoordinationCenter (CC) will carry out a dissemination campaign to a call for proposals. The disseminationcampaign will comprise but not be limited to announcements invitingsub-project proposals under the CGS will be publicized. Advertisements inRussian and Kazakhlanguages will be placed inall newspapers distributedinrural areas. Advertisement will also disseminate (a) priority areas; (b) main requirements, (c) application and evaluation process, comprising deadlines, and (d) timing and location o ftraining on proposal formulation. 2. Training on proposalpreparation and submission. Training onproposal submission will be carried out duringthe two months after the Call for Proposals. The training will be based on the content o f the operational manual, with the main objective of disseminating its contents and explaining that selection will be basedon criteria defined inthe manual. The objective o fthis training willbe to improve the quality o fproposal receivedand to clearly explain the "rules o f the game" increasingthrust inthe system and reducing the possibility o f arbitrary decisions. 3. Submission of Short Proposals. The deadline for submission o f a short proposal o fmax three pages will be two months after the Call for Proposal. The two months period i s requiredto allow the dissemination campaign to achieve a significant share of target audience and sufficient time for training. Thisperiodmay be reduced infollow up calls. No proposal will be accepted after the deadline. (The Sample Short Proposal Formis available inAnnex N o f Operational Manual.) 4. Evaluation of Short Proposals (pre-selection). The Coordinating Center will have one monthto review the Short Proposals and eliminate those which do not comply with the to requirements of the operational manual. 5. Communication of results of pre-selection. All proponents will be informed o f the results o fpre- selection within one month. Only the pre-selected proponents will be invited to prepare FullProposals. They will have one month o f time to present full proposals. 6. Submission of fullProposals. Fullproposals will be presented according to a pre-designed form (max 25 pages). The deadline for presentation will be at least one month after communication o fpositive result o fpre-selection. (The Sample FullProposal Formi s available inAnnex V o f OperationalManual) Duringthisperiod, the CoordinatingCenter will also assign2-3 IndependentPeerReviewersto each proposal which will pass the pre-selection. At least one Peer Reviewer per project should be foreign. The names o f Peer Reviews should remain strictly confidential. 7. Evaluation of FullProposals. Proposals will be sent to selected IndependentPeer Reviewers for their analysis. A point based system of evaluation will be utilized by the Independent Peer Reviewers. 44 Proposals can be (a) rejected, (b) accepted after some revisions, or (c) accepted. Discussion i s still undergoing on who should have final approval authority over the proposals (whether the Governing Board, the Coordination Center, or others). A final decision i s expected by appraisal. 8. Contractsigning and registration. A formal contract will be signed between the Coordination Center (CC) and the providerheneficiary. The contract may be between two parties -CC and provider - or between three parties -CC, provider, and beneficiaries. The separation between provider and beneficiary will not be a requirement (as insome cases o f internationalexperience, i.e. Albania), though it will constitute a positive feature o fthe project. The contract will set out responsibilities, implementation arrangements, reportingrequirements, and monitoring indicators. The operational manual will constitute integral part o f the contract. (The Sample Contract i s available inAnnex VI1o f Operational Manual.) 9. Communication of results of finalselection. The list o f accepted as well as rejectedproposals will be always disseminated (iftimingwill coincide, inconjunction with the next call for proposals.) 10. Implementation:procurement andfinancialmanagement. The grant will be implemented according to the rules detailed inthe operational manual. Disbursements will be based "milestones", meaning that each tranche will be disbursed only after achieving a specific milestone or target. Procurement o f goods and consultant below US$lO,OOO each will be done inaccordance to the M a y 2004 Manual For Conducting Very Small-Value Procurement Under World BankAda Small Grants, Loans And Credits). World Bank guidelines will be utilized for procurement o f higher value. Grant applicants will be required to maintain a simple accounting system. 11. Reporting. The organization implementingthe grant will berequiredto provide technical and financial progress reports every six months starting on the date o f contract signature. Eachinterimreport should also comprise a detailed work plan for the next period. (see annex XI1o f Operational Manual for a sample form.) 12. Evaluationof Completion. The organization implementing the grant will be required to send a final evaluationreport within one month from completion. The report will link o f all project findings so that overall achievements and impact can be assessed. The evaluation report should clearly define the public nature o f these achievements, and separate them interms o f contribution to knowledge dissemination, human resources development. (see annex XI1o f Operational Manual for a sample form.) 13. Auditing. Project auditingwill comprise a sample o f around 10%o f subprojects. Therefore the organizationimplementing the grant should maintain records and the simple accounting system for a period o f at least two years after sub-project completion. 45 Annex 7: FinancialManagementand DisbursementArrangements KAZAKHSTAN: Agricultural CompetitivenessProject FinancialManagement A pre-appraisal assessment o fthe financial management arrangements for the Projectwas undertaken duringApril / May 2004 to determine whether the financial management arrangements are acceptable to the Bank. These financial management arrangements include the MOA'Ssystems o f accounting, financial reporting, staffing, auditing, and intemal controls inplace duringthe project preparation phase. InOctober2004, anupdate ofthe pre-appraisal assessmentdeterminedthat the FMarrangements are satisfactory and meet the World Bank's financial management requirements. Country Financial Management Issues. A Country FinancialAccountability Assessment (CFAA) for Kazakhstanwas completed in2002 and was disseminated to Government authorities in September 2002. The CFAA provided many recommendationtowards improving the country's public financial accountability, including, among others, strengthening external audit and public oversight, strengthening intemal audit within budget organizations, improving accountability for state-owned enterprises; and improving governance and transparency in govemment programs. Strengths and areasfor improvement. The primary strength o f the MOA financial management system i s the continuity infinancial management personnel responsible for implementing the existing projects withinthe MOABudgetDepartment andMOA ExternalRelations and Investments Department. The primary area for improvement will be for the financial management personnelwithin the MOA to gain experience working inan automated environment ("1-C" software system) for maintaining the books and records o f account. ImplementingEntity. The MOA, through its Budget Department, will control the flow o f funds and maintain the accounting records, including preparationo fthe quarterly Financial Monitoring Reports (FMRs). Personnel from the MOAhavepast experience withimplementing WB-funded projects and are familiar with WB financial management and disbursement requirements. The MOA will be supported by a Coordination Center (CC), and the roster o findependent peer reviewers. Funds Flow. The Project funds will be disbursed through a Special Account at a commercial bank acceptable to the World Bank. T o facilitate timely project implementation, the MOA will establish, maintain and operate, under terms and conditions acceptable to the Bank, the Special Account at a local commercial bank. All payments for project expenditures financed from Government o f Kazakhstan counterpart funds will be made directly from the bank accounts o f the Treasury Committee within the MinistryofFinance. The MOA will manage the Special Account, including preparing withdrawal applications and supporting documentation, replenishment and timely reconciliation o f the Special Account. The replenishment applications should be submitted at least every month and must include the Special Account Reconciliation Statement and relevant supporting documentation. Disbursements under the Competitive Grant Scheme (CGS) will be made directly to beneficiaries from the Administrative Agent. Advances from the Special Account to the Administrative Agent will be based upon expected disbursementsto beneficiariesnot exceeding acceptable periods o f time (maximum 60 days or otherwise as agreed-upon with the WB). 46 Staffing. The MOA have designated personnel from within the MOA Budget Departmentthat have gained experience from implementation of existing WB-funded projects. The project Coordination Centre (CC) will also include consultants responsible for implementing various components o f the project. Accounting Policies and Procedures. The MOA Budget Department will maintain appropriate financial records and accounts in accordance with existing MOA policies / procedures and project specific procedures to be established under the Project ImplementationPlan (PIE') and will be described inthe Operational Manual. These accounts which follow generally accepted accounting practices will reflect the progress o f the project and identify its resources, operations and expenditures. The project accounts will reflect all financial transactions duringthe projectperiod for the IBRDloan and government counterpart financing by project component and by expenditure categories. The project accounts will be maintained independently from any routine budget account or other externally funded project account. Internal Audit. There is no existing internal audit department within the Ministry o f Agriculture. The MOA activities are subject to periodic audits by the Committee for Financial Control within the Ministry of Finance and annually by the Accounts Committee o f Control Over Republican Budget Execution. For the purposes o f the IBRD loan, no reliance will be placed upon the audits performed by these two organizations. External Audit. Annual audits for the project accounts will be carried out inaccordance with the Guidelinesfor Financial Reporting and Auditing of Projects Financed by the WorldBank (June 2003). Effective from 1July 2003, the guidelines require a single audit opinion on the project financial statements as a whole, which will include the Special Accounts Statement and the Statement o f Expenditures on which Bank disbursements are made. The project will adopt these guidelines and submit a single audit opinion on the annual project financial statements within six (6) months following the end o f the projects fiscal year end. As noted above, the World Bank does not intendto place reliance onthe external auditing activities conducted by the Accounts Committee related to this project. The external audit will be carried out by independent auditors inaccordance with International Standards on Auditing (ISA) and terms o freference acceptable to the Bank. Appointment o f independent auditors acceptable to the World Bank i s a dated covenant specified inthe Loan Agreement. Reporting and monitoring. Project management-oriented Financial Monitoring Reports (FMR's)will be used for project monitoring and supervision and sample forms are included inthe Operations Manual. The Project will prepare and submit Financial Monitoring Reports (FMR) ina form and fi-equency agreed with the Bank. The FMRswill be customized to reflect the country circumstances and the needs o fthe project, while meeting the Bank's minimuminformation requirements for the financial monitoring o f the Project. The FMRwill include, but not be limitedto, (a) written summary o f project progress, including explanations for significant budget variances (b) statement o f sources and uses o f funds, including budget to actual comparisons, (c) a detailed schedule for tracking disbursements against specific project activities, (d) special account reconciliation statement, (e) forecast o f commitments, and (f) detailed results o fprocurement. The MOA will submit quarterly FMRs for the Project to the Bank starting with the first quarter ended inwhich disbursements will commence and quarterly thereafter, n o later than 45 days after the relevant quarter's end. Information systems. The MOA will prepare its initial FMR's and annual financial statements using EXCELspreadsheets. This is the current methodapplied bythe MOA for current WB-funded projects under implementationand is sufficient for meetingthe WB and GOKrequirements. The MOA Budget Departmenthas recently installedthe "1C" system, a Russian-based software system that i s commonly 47 used among WB-funded projects inCentral Asia. Once the 1-Chas been customized to respondto the Project components and specifics ,the MOA Budget Department will use it to produce routine reports such as: trial balance, general ledger, balance sheet, income and expenditure statement by sources of funds, cash flow, suppliers' ledger, andbudget to actual variances. The software systemwill also be used to produce quarterly FMR's and annual financial reports. Disbursement Arrangements. IBRDloan funds will be disbursed under the Bank's traditional disbursement procedures with full documentation, including the use o f Statements o f Expenditures (SOEs), letters o f credit, and direct payments. Statements of Expenditures (SOE) will be used for: (a) goods contracts estimated to cost less than US$lOO,OOO equivalent each; (b) works contracts estimatedto cost less than US$l,OOO,OOO equivalent each and; (c) all competitive grants under Components 2,3 and 4 o f the project;. The Ministry o f Agriculture will retain the relevant documents and make them readily available for inspection andreview by supervisionmissions and the auditors. Special Account (SA): To facilitate project implementation, the MOA will open a Special Account (SA) inabank acceptable to the Bank, and onterms andcondition acceptable to the Bank. IBRDwill makean initial deposit o fUS$500,000 to the Special Account upon the request by the Ministry o f Finance (MOF) after Loan effectiveness. The total Authorized Allocation will be limitedto US$l,OOO,OOO. Fundsfrom the Special Account will be usedto finance all IBRDdisbursement categories. Replenishment o f the Special Account from the IBRDloan account will be made against withdrawal applications, supported by appropriate documentation or statements o f expenditure preparedby the MOA, signed by the authorized officials and submitted to IBRD for approval. The selected commercial bank to hold the Special Account should have: (a) significant foreign correspondence network covering all currencies; (b)reasonable capacity and experience for issuingletters o f credit, malung direct foreign payments and other international transactions; (c) capacity to perform a wide range o fbanking services at local branches, including cash payments, transfers to other domestic and regionalbanks, issuance of debit notes, application o f conversionrates from foreign currencies; (d) the capacity to maintain adequate accounts for the Special Account as required by the Bank, and provide monthly statements to the MOA; (e) willingness to issue a Comfort Letter to ensure that amount deposited inthe Special Account will not be set o f f or otherwise seized or attached to satisfy amounts due to a commercial bank by the Borrower; and (0willingness to change competitive rates for their services and provide reasonable interest income to the balances held. SupervisionPlan. The reports o f the progress o fproject implementationwill be monitored indetail duringsupervision missions. The FMRswill be reviewed on aregular basisbythe field-based FMS and the results or issues followed up during supervisionmissions. Annual auditedproject financial statements and management letters will be reviewed and issues identified will be followed up with the MOA and CC. The FMsupervision missions will include a review o f the project's financial management and disbursement arrangements (including a review o f a sample o f SOEs and movements on the Special Accounts for each fundingsource) to ensure compliance with the Bank`s minimumrequirements. It is envisaged that the FMsupervision missions are carried out every six months initially, and subject to satisfactory FMperformance by the MOA Budget Department, the frequency may be reduced. 48 Annex 8: Procurement KAZAKHSTAN: AgriculturalCompetitivenessProject A) General Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRDLoans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004, and the provisions stipulated inthe Legal Agreement. The description o f various items under different expenditure category i s available below. For each contract to be financedby the Loadcredit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed betweenthe Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. Procurement of Works:Works procuredunder thisproject, would include refurbishment or construction of laboratory buildinds. The procurementwill be done usingthe Bank's Standard BiddingDocuments (SBD) for all I C B and National SBD agreed with the Bank. Procurement o f works under the Competitive Grants will be conducted based on the Operational Manual Procurement of Goods: Goodsprocuredunderthis project would include: Laboratory equipment; Vehicles; Office furniture and equipment. The procurement will be done using Bank's SBD for all ICB and National SBD agreed with the Bank. Procurement o f goods under the Competitive Grants will be conducted based on the Operational Manual Procurement of non-consultingservices: Services like Accreditation and Advertisement are non- consulting type o f services. Their procurementwill be done usingBank's SBD for all ICB and National SBD agreed with the Bank. Selectionof Consultants: Consulting services are envisaged on harmonizationand development o f standards; monitoring the quality and safety; training; information campaigns. Short lists o f consultants for services estimated to cost less than USD50,OOO equivalent per contract may be composedentirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. OperationalCosts: Office RunningCosts; Vehicles and Stationary which would bePnanced by the project would beprocured using the implementing agency s administrativeprocedures which were reviewed andfound acceptable to the Bank. Others:None B. Assessmentof the agency's capacity to implement procurement Procurement activities will be carried out by the Coordination Center (CC) under the Ministry o f Agriculture, Department o f Foreign Relations. The agency i s not staffed yet and there i s a personwho i s incharge for procurement andwho reportsto headofDepartment. The Vice Ministerisresponsible for the project. The Ministryhas hired a consulting firm working on preparation o f the project who i s advising them on all aspects o f the project preparation. 49 An assessment of the capacity o fthe ImplementingAgency to implement procurement actions for the project has been carried out by NaushadKhan and FasliddinRakhimov duringJune 1-4,2004. The assessment reviewed the organizational structure for implementing the project and the interactionbetween the project's staff responsible for procurement (Officer) and the Ministry'srelevant central unit for administration and finance. Most o f the issues/ risks concemingthe procurement component for implementation ofthe project have been identified and include first o f all lack o f World Bank procurement knowledge and experience o f the Project Coordination Center (CC) staff and consultants involved inpreparationo f the project. The corrective measures which have beenagreed are (a) hiringthe procurement consultant during the remainingproject preparationperiod; (b) hiringthe procurement consultant right from the beginning of the project; (c) training the CC staff on the Bankprocurementprocedures. It was decided by the Ministry o f Agriculture to send a person incharge for the project coordination and procurement Mr.Talgat - Akhmetjanov (Chief Specialist) to the World Bank procurementtraining being organized inBishkek in June 7-11,2004. The overall project risk for procurement i s that ifprocurement capacity i s not developed, then all the project activities may suffer. C. ProcurementPlan The Borrower developed a draft Procurement Plan for project implementation which provides the basis for the procurement methods. The plan has to be agreedbetween the Borrower and the ProjectTeam duringappraisal. As soon as it is agreeditwillbe available inthe Project's database and inthe Bank's extemal website. The Procurement Plan will be updated inagreement with the Project Team annually or as required to reflect the actual project implementationneeds and improvements ininstitutional capacity. D. Frequency ofProcurement Supervision Inadditionto thepriorreview supervision to be carriedout from Bank offices, the capacity assessment o f the Implementing Agency has recommended semiannual supervisionmissionsto visit the field to carry out post review o f procurement actions. 50 Annex 9: Economic and FinancialAnalysis KAZAKHSTAN: Agricultural Competitiveness Project Economic Analysis Cost benefit X NPV=US$51million; ERR = 23.5% Cost effectiveness X Other (specify) Project Benefits. Project activities are expected to increase incomes o f farmers, rural entrepreneurs, and other ruralresidents resulting from the following benefits (i)reducedlossesofproductionandprocessingandloweredquantitiesofrejectedproducts (ii)improvedqualityofproducts(includingrecognizedqualityofproducedcommoditiesbutignored due to absence o f laboratory test confirmations), thus fetching higher prices on internal and extemal markets (iii)improvedaccesstomarket,reducedtransactioncosts,increasedsalesandraiseproducers' sharein sales price (iv) employment generation either as hiredlabour or as increased household labourrequirements for both on-farm and off-farm activities (v) adoption o f improved technologies Other benefits related to project activities are difficult to quantify and therefore they were not considered inthe economic analysis: (a) innovationsthat go beyondthe scope andimplementationperiod o fthe project; (c) development o f an intellectualpool o f the Kazakhstan's science and education systems; (d) improved food safety; (e) consumer confidence inthe food system; (0improved market environment and a more equitable policy framework with reduced barriers for market entry; and (g) incremental tax revenues as a result o f increased volume o f taxable production. The difficulties incalculating such benefits relate to the complexity o fmakingjustifiable assumptions or to the lack o f reliable data. For example, food safety benefits could be measured ineconomic terms through the avoided costs associated with foodborne illnesses. Moreover, some non-healthbenefits may accrue from safer food such as increased consumers' demand for reputable products, reductions inmarket risks due to higher consumer confidence, lower market volatility and possible links between food safety and improved nutrition. This kindo f information partially exists inKazakhstan(see Annex Table 9 below) and can be used to justify project's interventions rather than suggesting any quantifiable benefit. Some world example can be useful to indicate the relevance o f food bome illness. The following are some estimates o f the annual cost o f foodbome illness: Australia: US$2.6 billion United States o f America: US$12 to 27 billion United Kingdom: GBP350 million (food poisoningonly) Sufficient cost-effectiveness indicators for food safety as well as effective monitoring and evaluation criteria will allow for a more detailed analysis of project benefits duringproject implementation. 51 Annex Table 9: Number of Food-borneIllnessesper 100,000 Population Type of illnessNear 1997 1999 2000 2001 2002 Typhoid 0.4 0.8 0.22 0.2 1.5 Brucellosis 12.9 12.3 12.9 15 16 Salmonella 28..2 27.3 23.9 19.9 17.6 HeDatitis A 364.5 83.8 156.5 116.3 70.7 Economic Analysis. The economic analysis was based on a period o f twenty years. The scenario presented inthe economic analysis i s rather conservative. The results presented below are indicative and illustrate the range o f profitability based on conditions prevailing at the time o f the preparation. The analysis attempts to identify quantifiable benefits that relate directly to project activities. The incrementalquantifiable benefit stream comprises of two main elements derived: (a) improved quality and safety o f agricultural products, as well as improved market environment at national level from; and (b) improved effectiveness and profitability at farmers' andrural entrepreneurs' level. Regardingthe former element, wheat was taking as a proxy as a major crop inKazakhstan and the following assumptions were made: Average annual export of wheat i s 5 milliontons. According to official statistics, 70% o f wheat production is class three, 22 percent i s class four, and 8 percent is divided among the remaining 3 classes. Wheat sector experts estimate that the share o f class 1and 2 i s upto 30 percent o ftotal wheat production. This data i s more consistent with information from Kazakh wheat exporters inEurope (Gaonac'h, 2003). As consequence o fproject investments inquality management, quality would gradually increase. At project end (year 5) 10 percent o f exports or 0.5 million ton wheat would graduate from class 3 to class 2, and at full development (year 7) 20 percent or 1millionton would graduate fiom class 3 to class 2. Difference inprice between wheat class 3 and 2 i s US$15. Based on the above assumptions, the annual incrementalbenefits from the first element at full development (year 7) are estimated at US$15 million. Inregardto the secondelement, a total number ofseven activity models were prepared. The calculation o f suchbenefits i s difficult, as the likely uptake o f activities cannot be known with certainty. Inaddition, given the demand-driven aspect o f the Competitive Grant Scheme (CGS), specific CGS financed activities cannot be knowninadvance. Nonetheless the estimations made are based on practical experience insimilar locations and they are sufficiently valid to make good estimations. Business plans were prepared for the following seven activity models: 1. Investments inaccredited laboratory at rayon level (either public or private) would bringan additional US$14,153 annually due to the increased number o f tests performed and a cost- recovery mechanism implemented. 2. Introduction o f a slaughterhouse would reduce marketing costs by upto 10percent and increase the processing capacity o fmeat up to 9,200 heads, or amount o f services provided up to US$16,600 per year. 3. Development o f a milk collection point would allow for assembling of up to 1,500 liters o f milk per day that could be supplied to milkprocessing plants timely and with assured quality. 4. Optimumapplication o f fertilizers on wheat is expected to increase its yield by 20-30 percent and gross margin by US$47 per hectare. 5. Improved animal feeding (such as use o f concentrate and soybean-based feeds) i s expected to increase milkproduction inthe participating farms from 7 to 12 liter per headper day or incrementalbenefits o f almost US$150 per cow. 52 6. Intensive technology in cotton productionwould lead to an increase incotton yield from 1.5 to 2.2 ton per ha or additional margins o f US$205 per hectare. 7. Promotion of good agricultural practices insoybean growing could bringincrementalbenefits o f US$63 per hectare. The illustrative models have been preparedusingrelatively conservative parameters for both output and inputsand account only for indicatedincome-generating activities. The summary o f economic benefits of demonstrated sub-projects i s presented inAnnex Table 10. It should be also notedthat each full proposal submitted would require detailed estimates o f the direct and indirect benefits including crop and livestock budgets. These crop and livestock budgets were prepared to support the assumptions applied for the sub- projects inthe field of agricultural appliedresearch and extension. Annex Table 10: Summary of the Illustrative Models Model EstimatedCosts Annual Net Benefits (US$ Incrementa (US$ '000) '000) -before financing 1annual net benefits (%I '000) CGS Benef. Total Wlout With Increment Project Project Rayon Level Laboratory 48.7 16.2 65 4.2 18.3 14.1 0.22 16.4% Marketing-Slaughter 10 10 2c 0 5.1 5.1 0.2t 22.1% House ,Marketing-Milk 6.8 6.8 13.5 0 2.9 2.9 0.22 Collection Point Applied Research- 15.1 17.2 32.2 0.4 0.9 48.4 1.5C Improved Fertilization T o f Spring Wheat Applied Research- 22.2 14.5 36.8 20.1 0.3 143 0.35 24.3% Improved Feeding for cows Extension-Intensive I 26.21 7.91 34.1 51.8% 79.3 Technology for Cotton Extension-good 10.51 3.01 13.2 15.6% lagricultural practices III I I 18.51 35.91 17.4I 0.5: ~~ 32.7% I I " , Y l , " Incalculatingthe overallbenefits from the CGS, the following assumptionswere made: 0 The following rates o f success or adoption were applied to the different types o f subprojects - appliedresearch: 10% - extensionandmarketing:25% 0 The benefits o fthe models are calculated for a period of ten years. 0 The models involve 5 to 40 direct beneficiaries. Assuming an average direct involvement o f the around 10 people, the project would reachout to 8,700 beneficiaries directly, considering that about 870 sub-projects will be implemented As a result, the following incremental annual net benefitsper one dollar o f investments were estimated: Laboratory equipment 0.22 Marketing development 0.24 53 Applied research 0.94 Extension 0.62 The incremental net benefits for each type of CGS's sub-projects were calculated by multiplyingthese indicators with the amount o f estimated investments for the CGS, considering a gradual increase o f such benefits over the project implementation. The models show that the activities inapplied research and extension have an ERR in a range o f 16 percent to 80 percent. These estimates are more conservative than a recent comprehensive study by Alston, and others (2000) that shows the return on research and development investments i s significantly highindifferent conditions (see Annex Table 11). Annex Table 11: Rateof Returnof ResearchandDevelopmentInvestments Numberof estimates Median return on investment(YO) Africa 188 34 Asia 222 50 Latin America 262 43 West Asia/". Afnca 11 36 Industrializedcountries 990 46 Furthermore, studies carried out ina number o f countries by the InternationalFoodPolicy Research Institute have shown that public investment inagricultural researchprovides higher returns than other investments inagricultural and rural development. Other studies show an average rate o f return o f over 40 percent for investment inagriculturalresearch, even ifonly a 10-20 percent o fresearchi s successful. This successful researchhas suchhighreturnrates that averageresultis over 40 percent. Inaddition, public research provides strong pro-poor benefits, to bothproducers and consumers. Project interventions are also expected to improve the management and negotiating skills o f rural . producers; as well as enhancing their access to training, extension, inputs, and market. The main financial benefits would arise from improved terms o f trade with the commercial sector and social capital arising from strengthened local rural institutions. Enhanced extension/ technical assistance and better market knowledge, information and negotiating skills will result inhigher farmer's share inunit prices for products sold. Ultimately, this will result inincreased farmers' income. The world experience shows an increase o f up 40 percent inthe net value o f marketedproducts cash earnings to producers due to the improved market efficiency. It i s not feasible to estimate the impact o f the project on prices and marketing margins. Nevertheless, these lunds o f benefits are financial innature, accruing to the target beneficiaries through increased farm-gate/factory prices for their products. These do not constitute an economic benefit, as they represent transfer payment from one element within society (traders, transporters, companies) to another (farmers, rural entrepreneurs), thus were not considered inthe economic analysis. However, an increased producer's share inconsumer price would be a good monitoring indicator for project's achievements. The incremental costs ineconomic prices have been calculatedby the removal o fprice contingencies and taxes and duties. N o residual values for capital investment items have been assumed. Replacement o f the vehicles and equipment (USS1.6 million every 5 years), laboratory equipment (USS4.6 million, 50 percent o f the initial amount every 5 years) and recurrent costs (USSl.8 million annually) beyond PY 5 have been included to support the public extension services and work o f the Veterinary and Plant 54 Protection National Testing Centers and regional public laboratories. The total economic cost o f the project amounts to about US$78.6 million. Overall Estimated Return o f the Proposed Project. Given the above benefit and cost streams, the base case internal rate of return (IRR) i s estimated at 23.5 percent. The base case net present value of the project's net benefit stream, discounted at 12 percent, i s USS51million. Fulldetails o f the economic analysis are available in project files (Jumabaeva, 2004). A sensitivity analysis to assess the effect o f variations inbenefits and costs and for various lags inthe realization o f benefits was carried out. The results are presented below. A fall intotal project benefits by 20 percent and an increase intotal project costs by the same proportion would reduce the base ERR to about 17 percent. The switching value for total project benefits i s about 43 percent; while for project costs it i s approximately 75 percent. A one-year delay inproject benefits reduces the project ERRto 19 percent. With a two-year delay inproject benefits, the ERRfalls to approximately 16percent. Financial Analysis The seven models presented above were also used for the financial analysis, on the basis o f financial costs and benefits. They are based upon the information on the production systems collected during field visits, and a review o f available documents and statistics as well as the achievements o f other similar projects. Inaddition, crop andlivestockbudgets were preparedto serve as buildingblocks for the models representing project activities. Annex Table 12 presents the summary o f financial costs andbenefits, while details could be found inproject annexes (Jumabayeva, 2004). The main results o f the financial analysis included: (a) a significant increase in gross and net returns for each of the models inthe with-project situation; and (b) highbenefithost ratios demonstrating the attractiveness o f the investments. NPVs after financing for the various models ranged from US$12,93 1to US$160,084. FRRsbefore financing ranged from 16 percent to more than 50 percent. The models show that benefits after financing would be positive beginning inthe first year, therefore no FRRs after financing could be calculated. Favorable cash flows fkom the possible project financed investments indicatedthat the improvements inincomes at the farm, community and national levels would be sufficient to ensure uptake o f the proposed activities. Also, a beneficiary's contribution i s likely to translate a highdegree o f economic rationality. Business proposals would be required for each sub- project financed under the CGS. Favorable financial benefits would be a reasonable indicator o f positive economic returns. Annex Table 12: FinancialResults,Ratios and Switching Values* 55 I Extension: intensive technology I 107.6 I 51 1 -78 I - G I I 181 I 371 I 159 I for cotton Extension: good agricultural 12.9 16 -50 -3 2 53 1I 3 47 practices for soybean A SensitivityAnalysis was undertakento assess the impact on the financial returns o f changes, in:(a) output prices; (b) expected yields; (c) operating costs; and (d) investment costs. Although the models were more sensitive to changes inboth yield and price assumptions than they are to variations in investment and operating costs, they remainedreasonably sound inrevenue terms. FiscalImpact. The government budget will finance 56 percent o fthe total project costs. Nonetheless this willhave a marginal fiscal impact as the annual government's contributiono fabout USSlO.0 million represents less than four percent o f state expenditures on agriculture in2003, The project will request a line item to be included inthe national budget duringbudget discussions in July/August o f each project year, a sustainable counterpart funding mechanism for the incremental costs duringthe project implementation will needto be further examined. Incremental costs for recurrent expenditures and the replacement o f equipment are requiredto support the public extension services and the work o f the Veterinary and Plant ProtectionNational Testing Centers and regional public laboratories after the project completion. Interms o f size, it shouldnot be difficult for the govemment to cover such costs. Project investments will indirectly increase economic activity and thus contribute to expanding the revenue base. 56 Annex 10: Safeguard Policy Issues KAZAKHSTAN: AgriculturalCompetitivenessProject 1. EnvironmentalAssessment 51. The project EnvironmentalCategoryis FinancialIntermediaries (FI) Category. The project will finance (a) laboratories to monitor quality and safety o f agricultural products, (b) demand-driven investments of different type; and (c) institutional development investments inextension andpolicy making. A large part the project will mainly provide funds through the demand-driven Competitive Grant Scheme (CGS), whose exact nature i s not known inadvance. As requiredfor FIcategory projects, a comprehensive Environmental Review (Environment Sector Review, dated June 2004, inproject files) was conducted by a local consultant and produced the following findings: (i) National legislation to ensure environmentalprotection i s significantly developed in Kazakhstan. However by-laws and regulations are still under development and enforcement i s weak; (ii) N o potential large-scale, significant and/or irreversible negative impacts are envisaged under the proposedproject; (iii) The food safety component will have a direct positive environmental effect, particularly in developing and enforcing food safety legislation. However rehabilitationand management o f laboratories can have a negative impact, as for the use o f chemicals and reagents in laboratories. Nonetheless the planned supply o f incinerators to dispose laboratories wastes will produce an environmentalbenefit (iv) Marketing, applied research, and extension CGS subprojects may cause negative environmental effects. Although there are some exceptions - e.g., naturalresources management, organic agriculture, crop rotation, and integrated pest management -the majority o f CGS subprojects will cause an agricultural intensification which may cause negative environmental effects. The main example i s increased use ofpesticide, and because o f this the pest management safeguard policy has been triggered (see below). Another example o f subproject which will require a careful environmental review are food processing subproject, such as slaughterhouses; (v) the capacity o f the government o f Kazakhstan, and particularly o f the Ministry o f Agriculture, to recognize and address environmental impacts o fproject activities needs improvement. For thisreasona set manuals on operations o flaboratories andenvironmental screeningo f CGS subproject has been developed. Others will be prepared duringproject implementation, and training on these subjects will be provided. The manuals also propose procedures for design and implementation o f mitigation measures for certain sub-projects, such as the use o f incineratorsin slaughterhouses. 52. The PestManagementSafeguard Policy (OP 4.09) has been triggered. Some project financed activities will finance the purchase of chemical control agents, chemicals, andreagents for laboratories. Farminput use will be the farmers' responsibility; nonetheless the project will assist farmers to use these inputsina more safe andresponsible way. The government o fKazakhstanhas recentlyupgradedit management o f the control and oversight regardinguse o f pesticides with the help of FA0 (FAO/TCP/KAZ 0065) and a new department o fplant protection and quarantine was established inthe MinistryofAgriculture. The project willbuildonthis development. As amitigationmeasure, laboratory personnel and farmers who will use chemical control agents will be trained inthe storage, handling and use of these chemicals as well as with respect to the careful disposal o f the containers, when suitable with the use o f incinerators. To be accredited, laboratories will need to develop environmental management plans which will increase the current level o f environmental safety. The use o f appropriate clothing will be encouraged through demonstration. The approved chemicals are all class I11chemicals. The project 57 will also propose alternative methods to chemicals, such as disease-resistant varieties and integrated pest management (IPM). A Pest ManagementPlan which comprises training manual on safe handling, use, and disposal o f pesticides i s under finalization. 53. Stakeholder Participation. The draft Guidelines were discussed at a series o f consultation workshop with a number o f stakeholders from the Ministryo f Environment, NGOs and farmer organizations and disclosed in country; and minor comments receivedhad been reflected inthe final document. 2. Social Assessment 54. A social assessmentwas completedas part o fproject preparationto helpproject managers develop the project to fit the needs o f local ruralresidents inthe project area, thereby increasing returns on investment and enhancing sustainability. The social assessment aimed to understand and express the needs, aspirations, and social and economic constraints and opportunities o fruralpeople, including levels and sources o f income, living standards, consumption patterns, access to goods and services, as well as standard social and demographic characteristics. The study took place infour oblasts which are representative o f the geographic, ethnic, and structure o f farms inKazakhstan: Almaty; Akmola; Pavlodar; and West Kazakhstan. The method usedincluded; (a) backgroundreview o f the existing data and information regarding land and land use and review o f different reports, including the background reports prepared for this project as well as the findings o f the study on farm restructuring; (b)key informant interviews; and (c) focus group discussions. 55. Project Implications. The Social Assessment produceda number o f important results that have implications for the project design, which have already beenincorporated into the project; others will shape the group training and support activities and provide the basis for social monitoring. 56. Overall, the project would contribute directly to the improvement o f the socio-economic state o f project beneficiaries by better access to knowledge and markets to the rural population. 57. One o f the main targets o fthe project i s the small family farms' whose access to commercial lending i s limited. The project will facilitate access to knowledge and markets to overcome some o f the constraints that small farmers face. The project will also facilitate access to testing quality o f agncultural products, thus increasing the equity o f payment for the real produced quality. Appropriate indicatorswill be integrated into the project monitoring and evaluation system for tracking by the project's Monitoring and Evaluation specialist throughout project implementation. 58. Some passages o f the social assessment gender analysis are available below. Its implication for project design were that no specific gender related target indicators i s suitable for this project. Nonetheless the monitoring system should disaggregate its results according to gender to highlight whether gender imbalances will occur, so that corrective action may be warranted. The roles of menandwomen haveshifted as economic conditionshaverecentlychanged. In 1994-1998, women were often the breadwinnersfor their families when many people lost theirjobs because women were available to pick up anyjob, even l o w paying manualjobs, such as street sweeping, to support their families. Duringthat period, women gained respect intheir families and 'A family farm is a legal classification connected to ownership. They are often referred to as "peasant farms" but in Kazakhstan they have an average size o f more than 50 ha, larger than what is usually referred to as a peasant farm. In addition to family farms, there are agricultural enterprises with an average holding of above 1,000 ha o f land and households plots. For the latter category it i s difficult to live solely on the land. Many o f them have a second income such as having a member in the family who i s a wage laborer or pensioners. 58 local communities for their hard work. Recently men are coming back to play more active roles because of increased opportunities. Some women have been happy to leave the hard manual labor behind and movedback into more traditional homemaker roles. 0 "Women havean importantrole in decision-making." Social assessment informants suggested that the new economic roles are leadingwomen into more active roles in decision-making inthe households and they are proud of this. Both men and women said that husbands and wives often jointly manage family money. 0 However the overall status ofwomen inthe rural area i s worse than that of men. There i s a difference inthe access o fmen and women to social and material resources inthe north as well as the south o f Kazakhstan. Consistently across villages, there are more poor women than poor men, due largely to divorce and widowhood. 0 The majority of farmers are men. Landprivatizationresultedinthe emergence new categories o f entrepreneurs-farmers (peasant or family farms) whose majority are men. This i s perceived as natural tradition because "land labor i s a men's labor." 0 The traditionalareas for women's employmentincludeeducation, healthcare, services, and seasonal farm work, while men work the peasant farms, provide private transportation services, and work inplants and factories, such as a plant producing reinforced concrete, a battery plant, or a furniture factory. 0 Recentlyit becamemore difficultfor womento findjobs. Previously the labor market offered more opportunities to women. Many women work only seasonally. 59 Annex 11: ProjectPreparation and Supervision KAZAKHSTAN: AgriculturalCompetitivenessProject Planned Actual PCNreview 0712312004 07/23/2004 InitialPID to PIC 01/16/2004 0111612004 Initial ISDS to PIC 0111612004 0111612004 Appraisal 0711912004 0811012004 Negotiations 10/25/2004 0211912005 Board/RVP approval 12/14/2004 Planned date o f effectiveness 03/3012005 Planned date o f mid-termreview 10/10/2007 Planned closing date 0313012010 Key institutions responsible for preparationo fthe project: The Ministryo f Agriculture o f the Republic o f Kazakhstan Bank staff and consultants who worked on the project included: Name Title Unit Maurizio Guadagni Senior Rural Dev. Specialist ECSSD MatthewA. McMahon Lead Agric., Peer Reviewer ECSSD Steven M. Jaffee Sr. Economist, Peer Reviewer PRMTR Janna Ryssakova Social Development Specialist ECSSD Derek R. Byerlee Adviser ARD Fasliddin Rakhimov Operations Analyst ECCUZ Kairat Nazhmidenov Consultant ECSSD Daniele P.Giovannucci Consultant ECSSD Emanuela Montanari Stephens Consultant ECSSD Bulat Utkelov Operations Officer ECSSD Talimjan Urazov Operations Analyst ECSSD Sholpan Spanova ET Temporary ECCKZ Anarkan Akerova Counsel LEGEC AllenWamy Senior Fin. Mgmt. Specialist ECSPS Aliya Kim Finance Assistant ECCU8 Anara Jumabaeva Financial Analyst FA0 HannahKoilpillai Finance Officer LOAGl NaushadKhan LeadProcurement Specialist ECSPS DavidLugg Agncultural Economist FA0 Anara Akhmetova Team Assistant ECCKZ Aitolkyn Kourmanova ProgramAssistant ECCU8 Wendv Aires Editor AFTTR 60 Bank funds expended to date on project preparation: 1. Bankresources: US$438,000 2. FA0 US$ 64,000 3. ItalianTrust Fund: US$ 47,000 4. Japanese PHRD Grant (implemented by the Borrower) US$620,000 5. Total: US$l,169,OO EstimatedApproval and Supervision costs: 1. Remaining costs to approval: US$5,000 2. Estimated annual supervision cost: us$100,000 61 Annex 12: Documentsin the ProjectFile KAZAKHSTAN: Agricultural CompetitivenessProject Reports available at http://wbln0018.worldbank.or~/ECPJruraldevelopmentkz.nsf/ExtECADocb~Unid/4F8EBB3AOF 1A8 1FD 85256EBOOOOEOB85?0pendocument 1. Agricultural Competitiveness Project -Report prepared by the International andNational Consultants for KERA, the Ministryof Agriculture and the World Bank Kazakhstan, October 31, 2003 2. Agro-Food Programof Kazakhstan for Years 2003 -2005. 3. Akhmetova, Dinara -Report on market information system and Value Added Chains 4. Balgabaeva, Zhanar - Report on the System of Agricultural Knowledge and Information- December 2003 5. BISAMCompany - Rapid Rural Assessment of Social Issues: Qualitative Analysis, May 2004 6. Debatisse, Michael, and Philippe Chabot - A Review o f Grain Marketing Sector inKazakhstan and Ukraine, June 2000 7. Deberdiev, Anvar- Institutional Development and Policy Framework -April 2004 8. FA0- Wheat Production inKazakhstan Technology, Incentives and Competitiveness, October 2003 9. Financial Management Guidelinesfor Project Management Unit 10. Gaonac'h, Laurent and Loftus, David - Kazakhstan - Au pays des steppes, la filiCre blC mise sur l'export, 2003 11. Giovannucci, Daniele - National Trade PromotionOrganizations: theirrole and functions 12. Giovannucci, Daniele, Back To Office Report, March 10-16,2004 13. Giovannucci, Daniele, Back To Office Report, October 24-28,2003 14. Grigoruk - Report on Knowledge Extension and Transfer, April 2004 15. Integrated Safeguards Data Sheet andMinutesof Public Disclosure 16. Jumabayeva, Anara -ACP Economic and Cost Analysis, May 2004 17. Kazantseva - Report on Reforms inAgricultural Commodities Quality Assessment 18. Kenny, Mary -Report onmanagement of food control programmes and improvements in compliance with food safety standards and the SPS Agreement, March 6,2004 19. KERA Company - Feasibility Study, June 2004 20. Latypova, Olga -Quality Improvement by International Standards, November 2003 21. Mandl, Paul - Quality Improvements Through International Standards, May 2004 22. McMurray, CecilH-Report on Monitoringand Control of Quality o f Agricultural Products and Food Safety, March 31,2004 23. Nazhmidenov, Kairat - Seed System o fKazakhstan- October 2003 24. Nazhmidenov, Kairat -Institutional Analysis -May 2004 62 25. Operational manual "Competitive Grand Scheme o fthe Agncultural Competitiveness Project", June 2004 26. ProcurementPlan 27. Project ImplementationManual 28. Sadler, Marc - Livestock, Cotton & Oilseed Sectors, May 2004 29. Santucci, Fabio M. - Agricultural Knowledge and Information System inKazakhstan: Present situation and proposals for its improvement, within the framework o f the Agricultural Competitiveness Project, March 22-30,2004 30. Serova, Evgeniya - Overview o f the Food and Agricultural Policy inthe Republic o f Kazakhstan, M a y 2004 31. World Bank Sector Work- Kazakhstan's Livestock Sector - Supporting Its Revival 32. Zharmagambetova, Zhamal- Justification on Reforms inAgricultural Commodities Quality Assessment, March 2004 63 Annex 13: Statementof Loansand Credits KAZAKHSTAN: AgriculturalCompetitivenessProject Difference between expectedand actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO59803 2003 NURA RIVERCLEANUP 40.39 0.00 0.00 0.00 0.00 40.39 0.00 0.00 PO71525 2003 DRYLANDS MGMT (GEF) 0.00 0.00 0.00 5.27 0.00 5.07 -0.20 0.00 PO46045 2001 SYR DARYA CONTROUNO. ARAL 64.50 0.00 0.00 0.00 0.00 51.39 7.56 0.00 SEA PO65414 2000 ELEC TRANS REHAB 140.00 0.00 0.00 0.00 0.00 90.23 78.10 0.00 PO08500 1999 ATYRAU PILOT WATER 16.50 0.00 0.00 0.00 4.50 0.56 4.98 0.56 PO08499 1999 ROADTRANSP. RESTRUC 100.00 0.00 0.00 0.00 0.00 9.81 8.15 0.00 PO08507 1997 UZEN OIL FIELD REHAB 109.00 0.00 0.00 0.00 0.00 33.93 33.93 14.23 PO08510 1996 IRRIG& DRAINAGE 80.00 0.00 0.00 0.00 0.00 7.65 7.65 0.00 Total: 550.39 0.00 0.00 5.27 4.50 239.03 140.17 14.79 KAZAKHSTAN STATEMENTOF IFC's H e l d and Disbursed Portfolio InMillionsofU SDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 Karachaganak 50.00 0.00 25.00 75.00 47.00 0.00 25.00 70.50 1996 Kazgermunai 0.00 0.68 23.87 0.00 0.00 0.38 5.82 0.00 1997199 Kazkommertsbank 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0197103 Nelson Resources 0.00 3.66 0.00 0.00 0.00 3.66 0.00 0.00 1999102 RambutyaLLP 1.56 0.00 0.00 0.00 1.56 0.00 0.00 0.00 2001 SEF CASPI Ltd. 2.50 0.00 0.00 0.00 2.50 0.00 0.00 0.00 1999 SEF Const. Mat 0.67 0.00 0.00 0.00 0.67 0.00 0.00 0.00 2000 SEF LP-GAZ Ltd. 0.52 0.00 0.00 0.00 0.52 0.00 0.00 0.00 2001 SEFNefteBank 0.00 0.00 2.50 0.00 0.00 0.00 2.50 0.00 2000 Sazankurak 12.50 0.00 5.00 0.00 7.50 0.00 5.00 0.00 1999 TuranA1em 6.70 4.95 0.00 0.00 6.70 4.95 0.00 0.00 0194198103 ABNAMRO Kazak 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 2002 Astana Tower 5.00 0.00 0.00 0.00 3.oo 0.00 0.00 0.00 2003 Citibank Kaz 25.00 0.00 0.00 0.00 25.00 0.00 0.00 0.00 2000 FIOC 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 IK 5.41 0.00 0.00 0.00 5.41 0.00 0.00 0.00 1998 2001 IKSME Resource 3.27 0.13 0.00 0.00 1S O 0.13 0.00 0.00 Totalportfolio: 123.13 9.43 56.37 75.00 111.36 9.13 38.32 70.50 64 ~ Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2001 Kazkommertsbk 2 0.02 0.00 0.00 0.00 Total pendingcommitment: 0.02 0.00 0.00 0.00 65 Annex 14: Country at a Glance KAZAKHSTAN: AgriculturalCompetitivenessProject Europe & Lower- POVERTY and SOCIAL Central middle- Kazakhstan Asia income 1 Development diamond' 2002 Population, mid-year (mi/lions) 14.8 476 2,411 I GNIpercapita (Atlas method, US$) Life expectancy 15D 2,160 1,390 GNI (Atlas method, US$ billions) 22.3 1,030 3,352 Average annual growth, 1996-02 Population(%) -12 0.1 1.0 I Laborforce(%) -0.7 0.4 12 1 GNI Gross M o s t recent estimate (latest year available, 1996-02) per ~ Primary nrollment Poverty (%ofpopulationbelownationalpovertyline) 38 I cap'ta Urbanpopulation (%of totalpopulation) 56 63 49 I Lifeexpectancyat birth (years) 62 69 69 Infant mortality (per lOOOlivebirths) 81 25 30 Child malnutrition(%ofchildren under5) 4 11 Access to improvedwater source Access to an improvedwatersource (%ofpopulatlon) 91 91 81 Illiteracy(% of populationage 159 1 3 13 Gross primaryenroiiment (%of school-agepopulation) 99 D 2 Ill ' -Kazakhstan Male 99 D3 111 __Lower-middle-incomegroup Female 98 D1 ID KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 IEconomic ratios. GDP (US$ billions) .. 27.4 22.2 24.2 Gross domestic investment/GDP .. 315 26.1 26.9 Exports of goods and services/GDP .. 74.0 46.8 46.0 Trade Gross domestic savings/GDP .. 30.2 23.7 23.5 Gross nationalsavings/GDP 18.9 B.4 Current account balance/GDP -5.6 -7.5 Interest payments/GDP .. 0.0 3.1 2.9 Total debtTGDP 0.1 64.9 72.5 Total debt servicelexports .. 0.0 311 36.7 Present value of debt/GDP 64.4 Present value of debtlexports t33.2 1982-92 1992-02 2001 2002 2002-06 (averageannualgrowth) GDP 0.4 13.5 9.5 5.9 -Kazakhstan GDP percapita 1.6 14.7 n.2 5.8 Lower-middle-income aroun I ~ STRUCTURE of the ECONOMY I 1982 1992 2001 2002 II (%of GDP) Growth of investment and GDP ( O h ) Agriculture .. 26.7 9.0 8.5 40 - Industry .. 44.6 38.8 43.4 20 Manufacturing 8.9 15.6 7.4 Services .... 28.7 52.3 48.1 ~.2: Privateconsumption .. 516 59.7 63.9 Generalgovernment consumption 18.2 15.6 P.6 Imports of goods andservices .... 75.3 49.2 -lo- 49.3 -GDI -GDP 1982-92 1992-02 2001 2002 Growth of exports and imports (%) (averageannualgrowth) Agriculture .. -5.6 16.9 -6.0 40 T Industry -12 15.1 D.7 Manufacturing Services .. 3.0 T3.8 8.6 Private consumption -0.1 18.9 9.1 1 I Generalgovernment consumption -14 8.6 0.3 Gross domestic investment -5.1 28.0 P.1 Imports of goods and services .. -2.7 n.5 6.7 -Exports +lnpOrtS 66 Kazakhstan ~~ ~ PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domestic prices Inflation ( O h ) I (%change) 50 Consumer prices 2.960.8 6.4 6.2 40 Implicit GDP deflator 1472.2 a.2 5.3 Government finance (%of GDP,includes current grants) Current revenue 218 22.5 97 98 99 00 01 02 Current budget balance 2.3 3.2 Overall surplusldeficit -0.9 -0.2 T R A D E 1982 1992 2001 2002 (US$ millions) Export and import levels (US$ Total exports (fob) 9,QO 9,676 Fueland oil products 4J33 5.038 Ferrous metals 1,009 i Manufactures 1,508 168 10 000-l Total imports (cif) 8224 8.886 Food 836 5 000 Fueland energy 790 Capitalgoods 2.837 3 . m l o Export price index(895=X)O) Import price index(895=?30) ~ 86 97 98 gg O0 O1 IExports IIrrpOrtS Terms of trade (895=X)O) B A L A N C E o f P A Y M E N T S 1982 1992 2001 2002 (US$ millions) Current account balance to GDP (X) Exports of goods and services 5,758 x),393 l l P 9 Imports of goods and sewices 5,862 11,077 11938 Resourcebalance - a 4 -684 -809 Net income -l75 -12.5 -1200 Net current transfers E8 232 8 0 Current account balance -1240 -188 Financingitems (net) 1625 2,089 Changes in net reserves 589 -384 -270 M e m o : Reserves includinggold (US$ millions) 2,508 3,136 Conversion rate (DEC,locai/US$) .. 8.80E-2 146.7 154.8 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) iC o m p o s i t i o n of 2002 debt (US$ mill.) Total debt outstandingand disbursed 35 14,372 77338 IBRD 0 1070 1778 IDA 0 0 0 Total debt service 0 3,331 4,115 IBRD 0 0 1 a 7 IDA 0 0 0 Composition of net resourceflows Official grants 3 28 Official creditors 1) 34 20 Privatecreditors l7 2 , m 1809 Foreign direct investment a0 2,763 Portfolio equity 0 55 F: 14,053 World Bank program Commitments 0 65 0 A IBRD E- Bilateral Disbursements 0 114 92 B IDA -- D -other mltilateral F Rivate Principalrepayments 0 47 56 C-IMF G Short-term -- 67 68 IBRD3370( -.\i C L i 0 d Y 0