Document of The World Bank Report No: ICR0000506 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-47630) ON A LOAN IN THE AMOUNT OF US$ 35.0 MILLION TO THE REPUBLIC OF KAZAKHSTAN FOR A SECOND AGRICULTURAL POST-PRIVATIZATION PROJECT September 14, 2012 Sustainable Development Department Central Asia Country Management Unit Europe and Central Asia Region CURRENCY EQUIVALENTS Exchange Rate Effective December 31, 2011 Currency Unit = Kazakhstan tenge (KZT) KZT 1.00 = US$ 0.0068 US$ 1.00 = KZT 148.04 FISCAL YEAR January 1- December 31 ABBREVIATIONS AND ACRONYMS ABTC Almaty Bank Training Center ACC Agrarian Credit Corporation AMFOK Association of Microfinance Organizations of Kazakhstan AMP Automatic Meteorological Post AMS Automatic Meteorological Station APPAP-1 First Agricultural Post-Privatization Assistance Project APPAP-2 Second Agricultural Post-Privatization Assistance Project CPS Country Partnership Strategy FY Fiscal Year IBRD International Bank for Reconstruction and Development ICR Implementation Completion and Results Report IRR Internal rate of return ISR Implementation Status and Results KZT Kazakh tenge M&E Monitoring and evaluation MFI Microfinance institution MP Meteorological Post NPV Net present value PAD Project Appraisal Document PDO Project Development Objective PFI Participating financial institution SME Small and medium enterprise TOC Team of Consultants TTL Task Team Leader US$ United States dollar Vice President: Philippe H. Le Houerou Country Director: Saroj Kumar Jha Sector Manager: Dina Umali-Deininger Project Team Leader: Sandra Broka ICR Team Leader: Sandra Broka ii REPUBLIC OF KAZAKHSTAN Second Agricultural Post-privatization Assistance Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives, and Design .............................................. 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 6 3. Assessment of Outcomes .......................................................................................... 13 4. Assessment of Risk to Development Outcome: Significant ..................................... 20 5. Assessment of Bank and Borrower Performance ..................................................... 21 6. Lessons Learned ....................................................................................................... 24 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 25 Annex 1. Project Costs and Financing .......................................................................... 26 Annex 2. Outputs by Component ................................................................................. 27 Annex 3. Economic and Financial Analysis ................................................................. 39 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 42 Annex 5. Beneficiary Survey Results ........................................................................... 44 Annex 6. Stakeholder Workshop Report and Results................................................... 45 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 46 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 62 Annex 9. List of Supporting Documents ...................................................................... 63 MAP iii A. Basic Information Agricultural Post- Privatization Assistance Country: Kazakhstan Project Name: 2 Project (APL Phase 2) Project ID: P058015 L/C/TF Number(s): IBRD-47630 ICR Date: 09/14/2012 ICR Type: Core ICR REPUBLIC OF Lending Instrument: APL Borrower: KAZAKHSTAN Original Total USD 35.00M Disbursed Amount: USD 6.52M Commitment: Revised Amount: USD 6.52M Environmental Category: F Implementing Agencies: Ministry of Agriculture Cofinanciers and Other External Partners: N/a B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 01/10/2004 Effectiveness: 02/28/2006 12/16/2008 Appraisal: 04/27/2004 Restructuring(s): 11/09/2010 11/18/2011 Approval: 12/13/2004 Mid-term Review: 10/31/2007 Closing: 12/31/2009 12/31/2011 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Unsatisfactory Risk to Development Outcome: Substantial Bank Performance: Moderately Unsatisfactory Borrower Performance: Moderately Unsatisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Government: Unsatisfactory Unsatisfactory iv Moderately Implementing Moderately Quality of Supervision: Unsatisfactory Agency/Agencies: Unsatisfactory Overall Bank Moderately Overall Borrower Moderately Performance: Unsatisfactory Performance: Unsatisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Moderately Closing/Inactive status: Unsatisfactory D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Agro-industry 89 30 Micro- and SME finance 11 70 Theme Code (as % of total Bank financing) Micro, Small and Medium Enterprise support 50 85 Rural markets 50 15 E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Saroj Kumar Jha Dennis N. de Tray Sector Manager: Dina Umali-Deininger Joseph R. Goldberg Project Team Leader: Sandra Broka Eustacius N. Betubiza ICR Team Leader: Sandra Broka ICR Primary Author: Talaibek Torokulovich Koshmatov F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) APPAP-II's principal objective was to enhance the access to commercial financial services by farmers and small/medium size rural enterprises. v Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Indicator 1 : Growth in rural lending 10 % growth per year in commercial bank 10% growth in Value lending rural lending quantitative or 0 Not available due to the Qualitative) 15% growth in project aggregate lending by MFI Date achieved 11/17/2004 12/15/2004 10/04/2010 12/31/2011 Comments Not achieved. The PDO indicator was not monitored by the project. Only a small (incl. % fraction of the originally planned lending amount was implemented. achievement) (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : Number of farmers using the private advisory services consultants Value (quantitative 0 17,000 11,800 or Qualitative) Date achieved 11/17/2004 12/15/2004 12/31/2011 Comments Partially achieved. The target number is taken from three Supplemental Letters (incl. % #2 all of which consistently used 17,000 as the target. The percentage of achievement) achievement is 69.4%. Number of individual consultants and firms trained for providing rural financial Indicator 2 : advisory services Value (quantitative 0 600 603 or Qualitative) Date achieved 11/17/2004 12/15/2004 12/31/2011 Comments (incl. % Achieved. achievement) Indicator 3 : Number of crop insurance contracts issued Value 0 14,500 Dropped 0 vi (quantitative or Qualitative) Date achieved 11/17/2004 12/15/2004 11/15/2011 12/31/2011 Comments (incl. % Not achieved. The indicator was dropped. achievement) Number of oblasts where the insurance scheme is analyzed and recommendations Indicator 4 : provided Value (quantitative 0 8 8 or Qualitative) Date achieved 11/17/2004 11/15/2011 12/31/2011 Comments (incl. % Achieved. This is a new indicator introduced by 2011 restructuring. achievement) Indicator 5 : Number of rayons where agricultural weather stations are equipped and upgraded Value (quantitative 0 6 6 or Qualitative) Date achieved 11/17/2004 11/15/2011 12/31/2011 Comments (incl. % Achieved. This is a new indicator introduced by 2011 restructuring. achievement) Indicator 6 : Number of contracts traded on the Commodity Exchange Value (quantitative 0 33,000 Dropped 0 or Qualitative) Date achieved 11/17/2004 12/15/2004 11/15/2011 12/31/2011 Comments Not achieved. The price risk management activity and, accordingly, this indicator (incl. % were dropped in 2011 restructuring. achievement) Indicator 7 : Number of loans/leases issued by PFIs from the Credit Facility Value (quantitative 0 750 100 83 or Qualitative) Date achieved 11/17/2004 12/15/2004 11/15/2011 12/31/2011 Comments (incl. % Partially achieved. The percentage of achievement of the revised target is 83%. achievement) Indicator 8 : Volume of IBRD support to lines of credit for SME, USD Value (quantitative 0 30,000,000 6,500,000 6,390,500 or Qualitative) Date achieved 11/17/2004 12/15/2004 11/15/2011 12/31/2011 Comments Partially achieved. This is a core indicator added in 2010 restructuring and (incl. % further revised in 2011. achievement) Indicator 9 : Volume of IBRD support for institutional development of SME, USD vii Value (quantitative 0 320,000 321,000 or Qualitative) Date achieved 11/17/2004 12/15/2004 12/31/2011 Comments Achieved. This is a core indicator added in 2010 restructuring with a target of (incl. % US$0.32 million set in the Project Restructuring Paper based on actual achievement) expenditures. Number of MFIs that graduate into superior performance where they qualify for Indicator 10 : borrowing from commercial sources Value (quantitative 0 6 4 4 or Qualitative) Date achieved 11/17/2004 12/15/2004 10/04/2010 12/31/2011 Comments (incl. % Achieved. The target was revised down to 4 in 2010 restructuring. achievement) Indicator 11 : Volume of IBRD support for institutional support of microfinance, USD Value (quantitative 530,000 409,275 or Qualitative) Date achieved 11/17/2004 12/15/2004 12/31/2011 Achieved. The indicator tracked the implementation of the planned inst'l support Comments activities. These activities were completed at a cost of $409,275, which was (incl. % lower than projected cost of $530,000. This is a core indicator added in 2010 achievement) restructuring. Indicator 12 : Repayment rate to the PFIs, % Value (quantitative 95 99 or Qualitative) Date achieved 11/17/2004 12/15/2004 12/31/2011 Comments The original indicator with original target. Actual value is taken from the ISR. (incl. % The target is fully met. achievement) G. Ratings of Project Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 12/21/2004 Satisfactory Satisfactory 0.00 2 05/13/2005 Satisfactory Satisfactory 0.00 3 05/08/2006 Satisfactory Satisfactory 0.00 4 04/03/2007 Highly Unsatisfactory Highly Unsatisfactory 0.00 5 07/28/2007 Unsatisfactory Unsatisfactory 0.17 6 05/30/2008 Unsatisfactory Unsatisfactory 0.17 7 12/29/2008 Unsatisfactory Unsatisfactory 0.17 8 06/09/2009 Unsatisfactory Unsatisfactory 0.17 viii 9 09/15/2009 Moderately Satisfactory Moderately Satisfactory 0.74 10 11/30/2009 Moderately Satisfactory Moderately Satisfactory 0.74 11 03/31/2010 Unsatisfactory Unsatisfactory 3.04 12 01/09/2011 Moderately Satisfactory Moderately Satisfactory 5.85 Moderately Moderately 13 08/14/2011 5.85 Unsatisfactory Unsatisfactory Moderately Moderately 14 12/25/2011 6.85* Unsatisfactory Unsatisfactory * Before a refund of US$324,469. H. Restructuring (if any) ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions The project underwent the restructuring to: (i) introduce an advance disbursement mechanism for the participating financial intermediaries; (ii) 12/16/2008 N U U 0.17 provide working capital financing under the Credit Line; and (iii) increase the sub-loan size from US$100,000 to US$1 million. The project was restructured to partially cancel US$19,590,725 and revise the performance indicators because it was expected that due to low disbursements the loan funds 11/09/2010 N U U 5.85 would not be utilized in full. The partial cancellation affected Component 3 (US$15,000,000 cancelled), Component 4 (US$ 3,240,725), and Unallocated Category (US$1,350,000). The project was restructured to: (i) cancel the undisbursed balance of US$8,474,500 from the Component 3 as no more 11/18/2011 N MU MU 6.85 disbursements were expected to be made by the closing date; (ii) to cancel the Price Risk Management subcomponent of Component 2, and (iii) to revise ix ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions the performance indicators to reflect the above cancellations. I. Disbursement Profile x 1. Project Context, Development Objectives, and Design 1.1 Context at Appraisal 1. At the time of project appraisal (2004), Kazakhstan was experiencing abundant proceeds from its exports, mainly petroleum and other mineral resources. In that context, the mere 5 percent share of agriculture in Kazakhstan’s exports may have seemed insignificant, but it did not diminish the overall importance of agriculture for the country. Agriculture employed 30 percent of the labor force and was the primary source of livelihood, directly or indirectly, for about 6.5 million rural residents of a total population of 15 million.1 After an initial decline during the early post-Soviet period, the sector grew during the three consecutive years preceding appraisal. During that period, the sector had undergone significant transformation from collective farming to the new paradigm of privatized, mostly medium-sized family farms. That type of farm numbered 122,000 in 2003, 7.5 times greater than in the 1990s.2 On the policy side, the government had passed new laws such as the Land Code, the Real Estate Registration Law, and the Bankruptcy Law and had mostly liberalized prices and trade. 2. Agriculture faced serious challenges, however. The most serious challenge was that the sector’s investment needs were mounting, especially to replace obsolete agricultural machinery, but loans and leasing operations covered only 17 percent of investment needs. Despite the growing demand for rural financial services, the supply of those services was limited by various factors, including: (i) farmers’ inadequate financial skills, coupled with insufficient skill in long-term lending in the banking sector, which regarded agricultural lending as less desirable than other lending opportunities; (ii) production and market (price) risks that deterred risk-averse parties—in this case, farmers and bankers—from borrowing/lending transactions; (iii) the lack of suitable collateral; and (iv) poor financial market integration, which affected the microfinance organizations’ ability to obtain capital for loans to small-scale borrowers. 3. In this context, the Government of Kazakhstan launched a variety of credit programs for agriculture to complement the private financial sector’s resources. In 2003 these programs amounted to US$ 72.3 million and were channeled primarily through (i) regional governments for on-lending to farmers against bank guarantees (US$ 30.6 million); (ii) a state-owned leasing company, KazAgroFinance (U$ 19.9 million); (iii) a state-owned livestock trading company, Mal Onimderi (US$ 10.2 million); and Agrarian Credit Corporation (US$ 5.4 million). The balance was used for a line of credit to commercial banks for financing agro-processing equipment and to reimburse farmers for some portion of the interest paid on credit obtained under commercial terms. It was estimated that overall government credit programs accounted for about 8 percent of agricultural lending by commercial banks and leasing companies. The significant unmet demand for credit that remained in the sector constrained growth in small-scale agriculture and rural small and medium enterprises (SMEs). 1 Here and later in this section, if not indicated otherwise, information is taken from the PAD. 2 Development Strategy for 2011-2020, KazAgroFinance, 2011. 1 4. The government recognized the central role of the private financial sector in financing rural investment and set out to create an enabling environment for it to do so. It (i) streamlined the law on leasing, (ii) adopted a grain law to serve as a platform for a warehouse receipt financing system in the grain market, (iii) set up a commission to review the existing legislation on commodity exchanges to improve price/market efficiency, (iv) launched a crop insurance program that, if successful, would make rural lending more appealing to financial institutions, and (v) passed a microfinance law to stimulate the emergence and growth of microfinance institutions (MFIs). 5. The Government of Kazakhstan also sought World Bank assistance in addressing agricultural and rural finance issues through a second phase of the Agricultural Post- Privatization Assistance Project (APPAP). The second phase was intended to continue the satisfactorily completed first phase of that program. The rationale for the Bank’s further involvement was to build on the success of APPAP’s first phase and to assist Kazakhstan in promoting access to finance in rural areas. In addition to scaling up the credit line, which constituted the core of the project and the main means of addressing the shortage of agricultural and rural financing, the Bank would bring its global experience in agricultural risk management to bear on refining the government’s crop insurance program and streamlining its implementation arrangements. Having an adequate crop insurance program was very important for Kazakhstan, which had the highest yield variation (27 percent) among the world’s main grain producers,3 with 80 percent of that variation attributable to weather. The lack of risk management tools was affecting farmers’ incomes and hampering commercial lending to agriculture because of the common fear of probable default caused by adverse weather. 6. On its side, the Bank saw opportunities for improving the efficiency of market operations through commodity exchanges. It was estimated that improved price efficiency in the grain market alone could result in an immediate revenue gain of US$ 60–80 million per year for farmers. The Bank was also to contribute its international experience in long-term investment lending, structured financing (to bypass issues related to lack of collateral), and promoting and building capacity for microfinance operations. 7. In terms of higher-level objectives, the project was to support the government’s goal of economic diversification beyond the extractive sector (mainly petroleum), creating economic opportunities and improving living conditions by promoting broad- based, private sector-led growth in rural areas, where 45 percent of the country’s population lives. 1.2 Original Project Development Objectives (PDO) and Key Indicators 8. APPAP-2’s principal objective, as stated in the Project Appraisal Document (PAD), was to enhance the access to commercial financial services by farmers and small/medium-size rural enterprises. The objective was worded differently in the Loan 3 Compare to 5 percent in European Union countries or 8 percent in Canada. 2 Agreement, although the essence was the same. Because it provides more detailed information, however, the wording from the PAD is used as the formal PDO. APPAP-2 sought to build on achievements under APPAP-1 by: (i) building capacity for viable rural businesses through strengthening and expanding the rural advisory services program; (ii) supporting agricultural risk management initiatives; (iii) facilitating the development and implementation of new financial instruments by commercial banks and leasing companies for deepening rural financial outreach; and (iv) supporting sustainable rural microfinance schemes for providing financial services to rural micro-entrepreneurs that are currently excluded from the formal banking sector. 9. The key performance indicator of the project’s outcome was:  ― Growth in Rural SME portfolio of PFIs‖4 (participating financial institutions). 10. Results indicators for each component were: Component 1:  Number of farmers using the private consultants. Component 2:  Number of crop insurance contracts issued.  Number of contracts traded on the exchange. Component 3:  Number of loans disbursed from credit facility. Component 4:  Number of MFIs qualifying for borrowing from commercial sources. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 11. The PDO remained the same,5 but some indicators and their target values were revised twice as part of project restructurings approved on November 9, 2010 and November 18, 2011 as a ― corrective measure‖ to align the indicators with changes in the project. Some indicators were dropped or replaced with new indicators to reflect the changes in project activities; for other indicators, target values were revised to account for cancellation of loan amounts that were not utilized due to slow implementation of some activities.6 The PDO indicators were formulated differently in different documents or even in different parts of the same document (for example, in the PAD, the Loan Agreement’s Supplemental Letter 2, and ISRs). The PAD contained different wording and different measures of the PDO on different pages. The main text on page 6 has the 4 Taken from page 34 of the PAD. The wording of the outcome indicator was formulated differently in different places, as described in Section 1.3. 5 The Bank team was considering changing the PDO to adjust it to the amended scope of activities, but in view of the procedural hurdles, including a potentially lengthy parliamentary ratification, the team refrained from changing the PDO. 6 See Annex 2, Attachment 1 for a revised list of indicators as per Supplemental Letter 2. 3 following as the outcome indicators: (i) Access to financial services improved: supplemental growth (in real terms) in overall rural and agricultural lending by commercial banks and leasing companies of at least 10 percent per year during the project period; (ii) Microfinance institutions outreach improved: the aggregate lending by microfinance institutions is up by 15 percent. These indicators implied that growth in lending was to be measured for the entire banking and microfinance sectors. But page 34 of the PAD had only one PDO indicator: ― Growth in Rural SME portfolio of PFIs,‖ which refers to growth only in the participating financial institutions. The Supplemental Letter 2 to the Loan Agreement dated April 1, 2005 contained indicators formulated to capture both the sector-wide lending growth and growth in PFIs only. 12. In project Restructuring Papers of November 9, 2010 and November 18, 2011, the PDO indicator was formulated as ― Growth in rural lending due to the project,‖ with a cumulative target of 10 percent. Given the ambiguities of the initial versions of the outcome indicator and the relatively small size of the project compared to the entire financial sector, it is believed that the last version of the PDO indicator better reflects and measures the project’s outcome through growth in the rural portfolio of PFIs. This indicator will be used to assess the achievement of the PDO in Section 3.2. It should be noted, however, that this indicator was omitted in the amendments to the Supplemental Letter 2 that were signed after the project restructurings mentioned above, and it was not monitored by the project. Meanwhile, the Implementation Status and Results (ISR) Report contained this indicator but expressed the target in absolute amounts (US$ 16.0 million), whereas the PAD and the two Restructuring Papers referred to the percentage of growth. These discrepancies remained until the project closed. 1.4 Main Beneficiaries 13. The ultimate beneficiaries of the project were small-scale farmers and rural SMEs. They were to benefit from financial advisory services, training programs, and the ability to cover or mitigate their risk through insurance and commodity exchange transactions. All of these efforts were expected to improve beneficiaries’ access to financing. Financing would be provided by commercial banks and MFIs, which would receive training in new financial instruments and long-term lending to increase their lending capacities. The government would benefit from technical assistance to improve the crop insurance program and establish commodity exchanges. Other beneficiaries included the Hydrometeorology Agency, whose 40 weather stations were to be fully automated through the provision of hardware and software. If the project had been implemented as originally intended, the insurance companies and commodity exchange participants would also have benefited, but the curtailment or cancellation of related activities prevented those benefits from materializing. 1.5 Original Components 14. Component 1: Rural Financial Advisory Services (US$ 1.681 million, all government financed) to build awareness among farmers about business planning and 4 financing options through the establishment and engagement of a private financial consultants’ network. 15. Component 2: Agricultural Risk Management (US$ 1.924 million, all government financed) consisting of two sub-components:  Production Risk Management (US$ 1.424 million) to improve the crop insurance program through technical assistance, upgrading of weather data infrastructure, and training of agro-meteorologists, farmers, insurance companies, and other actors.  Price Risk Management/Market Efficiency (US$ 0.5 million) to: (i) advise the government on technical, financial, organizational, and regulatory aspects of a modern commodity exchange and (ii) train potential investors, commodity exchange managers, regulators, key companies, and agents and build mass awareness using various channels. 16. Component 3: Rural Outreach by the Mainstream Financial Sector (US$ 85.304 million) to help commercial banks and leasing companies accelerate rural investment lending through loans and by expanding the use of nontraditional instruments such as leasing of agricultural machinery and structured finance. The component had two sub-components:  Technical Assistance (US$ 0.604 million, all government financed).  Credit Line Facility (US$ 84.7 million, of which US$30.0 million government, US$ 30.0 million IBRD, US$ 10.8 million PFIs, US$ 13.9 million beneficiaries). 17. Component 4: Rural Micro Finance Development (US$5.372 million) had two sub-components:  Technical Assistance (US$ 0.622 million, all government financed) to support selected MFIs to strengthen their financial management, accounting, risk management, credit analysis, governance, and reporting capacities; assist the development of new rural microfinance products; facilitate linkage of MFIs to commercial sources of funding; and conduct a baseline study of the MFI sector.  Micro Credit Facility (US$ 4.750 million, of which US$ 1.1 million government, US$ 3.65 million IBRD) for eligible MFIs for further on-lending to the latter’s clients. 18. Component 5: Project Management (US$ 0.46 million, all government financed). The project was to be implemented by the Ministry of Agriculture with assistance from a team of consultants (TOC) hired under this component for day-to-day implementation. The component financed office equipment and incremental operating expenses incurred in the course of implementing and monitoring the project. 1.6 Revised Components 19. The Price Risk Management sub-component of the Agricultural Risk Management component was cancelled in November 2011 at the request of the government because of its decision to remove price risk management issues from the 5 Ministry of Agriculture’s responsibilities. This cancellation was approved by the Bank,7 but the amendment to the Loan Agreement was not countersigned by the Borrower on the grounds that the signed amendment had to be ratified by the Parliament, which would not have happened until long after the project closed on December 31, 2011. Therefore, even though the sub-component was cancelled by mutual agreement, it was not fully formalized. 1.7 Other significant changes 20. To accelerate the disbursement of credit line funds, a 3rd order restructuring8 was done on December 16, 2008 to (i) introduce an advance disbursement mechanism for PFIs, (ii) allow working capital financing under the credit line, and (iii) increase the individual sub-loan size from US$ 100,000 to US$ 1,000,000. 21. The project was restructured for the second time on November 9, 2010 9 to partially cancel US$ 19,590,725 and revise the performance indicators, because it was expected that low disbursements would prevent loan funds from being used in full. The partial cancellation affected Component 3 (US$ 15,000,000 cancelled), Component 4 (US$ 3,240,725), and Unallocated Category (US$ 1,350,000). 22. The project was restructured for the third time on November 18, 201110 to: (i) cancel the undisbursed balance of US$ 8,474,500 from Component 3, as no more disbursements were expected to be made by the closing date; (ii) cancel the Price Risk Management sub-component of Component 2 (see Section 1.6), and (iii) revise the performance indicators to reflect the above cancellations. 2. Key Factors Affecting Implementation and Outcomes 23. Over the project’s life, many factors affected its implementation and outcomes. These included an optimistic project design, delays with effectiveness, adoption of a new Budget Code, changes in the economic situation, rigidity of internal government rules, staff turnover, and inadequate working conditions for the TOC. 2.1 Project Preparation, Design, and Quality at Entry 24. The project’s preparation and design were affected by the following factors. As mentioned, it was prepared in 2004 as a follow-up phase for APPAP-1, which demonstrated potential for lending to small-scale farmers and rural entrepreneurs. Inspired by the success of the first phase, the second phase (APPAP-2) sought to expand 7 Bank approval of November 18, 2011. 8 Bank approval of December 16, 2008. 9 A 2nd order restructuring approved by the Bank on November 9, 2010. 10 A 2nd order restructuring approved by the Bank on November 18, 2011. The agreement on this restructuring was reached in the autumn of 2010, but it took the government almost a year to send the request for the restructuring. 6 the outreach of rural financial advisory services and commercial lending. In addition, two new components on agricultural risk management and rural microfinance development were introduced. Even though they made the project more complex than APPAP-1, the additional activities were complementary and enhanced the chances of achieving the project objectives, if implemented successfully. The design of the project was based on the country background analysis, including the social and economic importance of the agricultural sector, its financing needs, and the factors affecting whether those needs were met. A good assessment of agricultural production and price risks as well as poor integration of financial markets was done. 25. Given the logical linkages among the components, which together would contribute to better access to financing by farmers and rural SMEs, the project’s design looked appealing. The government had shown its commitment to the project during the preparation stage, although support was not unanimous; some government officials were of the opinion that the credit line was unnecessary. 26. The inclusion of new components on risk management and microfinance turned out to be a bit too optimistic. Even though the team should be praised for taking the initiative and risk to innovate, subsequent circumstances proved that the project could not be implemented as designed. 27. At negotiations, the Ministry of Finance cut the project budget, which had repercussions for the implementation of Component 2; the resulting budget made it impossible to find qualified consultancy companies for the assignments. Eventually, the scope of this component was curtailed significantly. The budget cut also led to inadequate staffing, frequent changes in the TOC, poor working conditions, and other issues that took a long time to resolve. 28. Overall, the project’s quality at entry was rated by the Quality Assurance Group as Satisfactory during its Quality Assessment of Lending Portfolio review in 2010.11 2.2 Implementation 29. The following factors of a structural nature affected project implementation. 30. Strong economic growth during 2004–07 at a rate of 9–10 percent per annum12 caused commercial banks to focus on lending large amounts to big borrowers, mainly in industry, trade, and construction. Banks had little or no interest in small-scale agricultural and rural lending. The project’s credit lines could not entice them, as they had enough loan resources, including those obtained from international financial markets. The expected participation of all seven banks involved in APPAP-1 did not materialize for the same reasons. Interviews with the three interested banks showed that the maximum sub- 11 Because the Quality Assurance Group was disbanded, the report was not uploaded into the system, and its ratings are not reflected in the Data Sheet. 12 Statistical Bulletins of the National Bank of Kazakhstan (http://www.nationalbank.kz/?docid=222). 7 loan size of US$ 100,000, aimed at small and medium borrowers, was simply too small for the banks to consider and that the ceiling must be increased. In addition, the fast pace of the country’s economic development had driven up prices of goods, and some potential borrowers regarded US$ 100,000 as inadequate. Given these realities, the maximum sub-loan size was increased to US$ 1,000,000 to accommodate some larger sub-loans and retain the banks’ interest in the credit line. At the same time, it was hoped that smaller-scale farmers and rural entrepreneurs would remain the main target for financial services. 31. The unexpected global financial crisis of 2008 also negatively affected the project’s credit line, but for different reasons. Kazakhstan was one of the countries in Europe and Central Asia to be most affected by the crisis. Local banks became very risk averse in lending, as their provisions for nonperforming loans kept mounting. The share of nonperforming loans in Kazakhstan’s commercial banks soared from 7.53 percent at the end of 2008 to 36.15 percent at the end of 2009. Under these conditions, lending to small- and medium-scale agricultural producers and processors became even less of a priority for the banks, and the project’s credit line was untouched until mid-2009. Although three banks (in addition to Eurasian Bank and Bank CenterCredit) wanted to participate in the project and applied for the credit line during this period, they were all disqualified because of the losses they had incurred in the previous financial year as well as the high share of nonperforming loans in their portfolios.13 32. In summary, the economic boom of 2004–07 and financial crisis of 2008 ultimately affected APPAP-2 more than any other project in the country’s portfolio. For one thing, the core of the project was the credit line; for another, the primary vehicle for implementing the main credit line—the banking sector—was hit hard by the economic downturn. 33. The rigidity of the government’s internal rules made the implementation of the project overly complex and slow. For example, the project had to have a feasibility study, a government-approved equivalent of the PAD. Any changes to the project or implementation arrangements, including minor amendments, had to be reflected in the feasibility study document and approved by the government. Since the project required several changes, getting them approved by the government took time and delayed implementation of the amendments. Lines of responsibility were not clearly drawn among the ministries involved in the project, which contributed to the slowdown. Although the Loan Agreement clearly stated that the Ministry of Agriculture was responsible for implementing the project, the Bank’s Aide Mémoires noted that continued micromanagement by the Ministry of Finance and the Ministry of Economy caused inordinate delays. 34. The following project-specific factors also affected implementation. 13 Under the project’s eligibility criteria, a PFI had to show positive income over the last three-year period, and it had to have assets of acceptable quality. 8 35. Delayed effectiveness of the Loan Agreement. The project was approved on December 13, 2004. The Loan Agreement was signed soon thereafter on April 1, 2005, but because of the protracted ratification process, the loan became effective only on February 28, 2006, more than a year after Board approval. The momentum gained at the end of the project’s first phase was lost. 36. New rules of the game set by the new Budget Code. The new Budget Code, which came into effect on January 1, 2005, had a strong negative effect on implementation of the credit line component. All credit resources channeled to the PFIs through the national budget, including World Bank loan funds, had to be approved by a Government Resolution—an overly complex, inflexible, and time-consuming process. Three other aspects of the new code were similarly discouraging: (i) Implementation of the budget credit lines through a single operator. This rule created a bottleneck for disbursing project funds and seriously undermined the implementation of the project’s credit line component. (ii) Stipulation of specific loan amounts in Subsidiary Loan Agreements prevented the different pace of disbursement of different PFIs at different times from being accommodated. The administrative challenges likely to be involved in amending and re-signing the Subsidiary Loan Agreement were additional deterrents for potential PFIs. (iii)The requirement for PFIs to put up collateral in addition to a portfolio assignment clause under the Subsidiary Loan Agreement was another disincentive for PFIs. The potential PFIs revealed that they would not be able to provide physical collateral because of negative pledge clauses under agreements with their other creditors. The option of giving the Ministry of Finance access to the banks’ correspondent accounts with the National Bank was not acceptable to most prospective PFIs. 37. The World Bank team brought these issues to the government’s attention, and after a lengthy process the respective amendments were introduced. After the PFIs were selected and the approval process was adjusted, the first Subsidiary Loan Agreement for US$ 200,000 was signed in October 2007, after about 20 months of processing by the government. The credit line then stalled until June 30, 2009, when the Subsidiary Loan Agreement was signed with Eurasia Bank, followed by the Subsidiary Loan Agreement with Center Credit Bank (April 30, 2010). Late activation of the credit line and limited participation of PFIs (exacerbated by the economic factors discussed earlier) slowed disbursements and led to partial cancellation of loan amounts. 38. The Budget Code also affected implementation of the credit line under Component 4. Under the project, the credit line for the MFIs was to be accessed through a Subsidiary Loan Agreement signed between the Ministry of Finance, Ministry of Agriculture, and the MFI. As indicated, the new Budget Code required that the credit line be implemented via ― an operator,‖ meaning some financial institution. The new lending mechanism under this component was approved by Government Resolution N969 only in October 2007. The new rule required that the operator be selected through a competitive process, but none of the commercial banks were interested. After a second attempt, the 9 state-owned Agrarian Credit Corporation (ACC) was selected. The Subsidiary Loan Agreement between the Ministry of Agriculture and ACC was signed on December 11, 2009, just a few weeks before the original closing date of December 31, 2009.14 Even then, the credit line was not used. Only three MFIs applied for the microcredit facility, but none fully met the eligibility criteria. Strong MFIs that would have been eligible preferred to borrow from investors abroad at cheaper rates. As a result, the entire undisbursed amount of US$ 3,240,724 15 from the Bank loan was cancelled under the restructuring approved on November 9, 2010. 39. At the operational level, issues with the staffing and operating budget for the local 16 TOC negatively affected implementation. The salary scales denominated in US dollars were low in relation to market rates and deteriorated with the appreciation of the tenge. As might be expected, attracting good consultants at noncompetitive rates proved impossible, and hiring took some time. The capacity of the TOC was low at the beginning, and turnover was frequent. 17 Even relatively simple procedures like the translation of bidding documents held up procurement by many months. These difficulties originated with the arbitrary 50 percent reduction in operating costs and TOC headcount by the Ministry of Finance. With no translator and no budget to outsource translations, procurement essentially ceased (without the translated documents, the Ministry of Agriculture could not move ahead with procurement). It took more than a year to change the staffing schedule and hire a translator. 40. Inadequate working conditions for the TOC weakened its effectiveness. Initially the team was located in the basement of the Ministry of Agriculture’s old building, although the space could accommodate only three of the five consultants and was prone to flooding. On one occasion, flooding damaged documents, which were kept on the floor because there were no filing cabinets. The TOC had outdated computers, no fax, and no internet connection. To communicate with the Bank, the team members had to find and use free computers connected to the internet, an inefficient use of time and a practice that placed the confidentiality of project correspondence at risk. More than a year after implementation began, the TOC was provided another office. That office, located outside the Ministry of Agriculture building, limited team members’ access to ministry offices and information systems. Daily interaction and communication with the ministry on project matters was very difficult. 41. The factors mentioned above explain why APPAP-1 was successful and APPAP- 2 was not. First, economic conditions were different during the implementation of APPAP-1. The economy was not booming as it was at the start of APPAP-2, and the banks were still interested in credit lines. Second, the design of APPAP-1 was simpler; it 14 The closing date was extended to December 31, 2011 on September 25, 2009. 15 At the time of restructuring, US$ 409,275 of the total amount allocated to Component 4 (USD$ 3,650,000) was advanced to the Special Account and had to be cancelled at closing of the loan. 16 A team of consultants (TOC) was hired to support the Ministry of Agriculture in implementing the project. 17 The consultants’ salaries improved only in 2009, when the tenge depreciated by about 25 percent. 10 did not contain additional activities, agricultural risk management, and microfinance. Third, APPAP-1 had a dedicated Project Implementation Unit. 2.3 Monitoring and Evaluation (M&E) Design, Implementation, and Utilization 42. The project was not designed with a detailed M&E system. The PAD and Project Implementation Manual briefly described how monitoring data would be collected. The Ministry of Agriculture, assisted by the TOC, would collect information on direct beneficiaries from individual PFIs and MFIs. Data on overall growth in rural lending by commercial banks was to be taken from the National Bank, and the Association of Microfinance Organizations of Kazakhstan (AMFOK) was to provide data on MFIs. Each member of the TOC was responsible for collecting and analyzing data related to particular project components. 43. This arrangement involved a number of parties and required effective coordination and consolidation. There is no evidence that coordination and consolidation were done satisfactorily. Monitoring data were not reported or recorded systematically. Very few field trips were organized to monitor project activities. Instead, data were collected on a relatively ad hoc basis, at times only at the behest of the Bank team. Despite repeated requests and reminders in the Aide Mémoires, the first project progress report was not submitted until October 2007 for the 2008 Mid-term Review. 44. Several factors contributed to poor monitoring of project results. First, overall coordination was lacking; second, there was no demand for this information for decision making; third, staff turnover affected the continuity of the process; and finally, the TOC’s travel budget was insufficient to monitor the activities in the field. 45. The Quality Assurance Group’s Quality Assessment of Lending Portfolio review (2010) assessed the quality of proposed M&E arrangements as Satisfactory but reported poor implementation. The most important issue was that the PDO indicator was not monitored and measured. 46. The project impact assessment was to be done by an experienced international consultant, but budget constraints meant that the assignment was carried out by a local consultancy company. The resulting study offers some insight into project results, but the soundness of its assessment methodology, soundness of the evidence collected, and interpretation of results are questionable. 47. Parts of the monitoring system used for the project continue to operate independently. For example, the National Bank collects and publishes credit market data. The data are available in the bank’s statistical bulletins and on its website. AMFOK continues to collect information from member MFIs. 11 2.4 Safeguard and Fiduciary Compliance 48. The Environmental Category of the project was FI (Financial Intermediation). An Environmental Review was completed in March 2004 for project preparation. Environmental Guidelines for Lending were developed for the credit line and were an integral part of the Rural Investment Guidelines. Responsibility for checking compliance of sub-projects with environmental norms rested with the PFIs. The TOC was responsible for monitoring compliance with the Guidelines. The limited budget—with no allowance for air travel—prevented the team members responsible for this task from monitoring all of the sub-projects. No issues were reported in relation to the projects that were visited, however. 49. The World Bank environmental specialist participated in one supervision mission, and no issues were identified. The limited safeguards supervision was explained by the small number of sub-loans under the credit line where safeguard issues might potentially be found. 50. From a financial management perspective, the major issues were the lack of an acceptable accounting system for an extended period and late submission of financial management reports and audit reports. The first financial management report was submitted only at the end of September 2008, despite repeated reminders in the Aide Mémoires. For more than two years, the Financial Services Department of the Ministry of Agriculture was unable to install and launch accounting system software 1C. Eventually, the attempt was abandoned, and project accounting was done manually through an Excel- based system. With subsequent improvements in reporting, and after the Excel-based accounting system was brought to an acceptable level, the financial management rating was upgraded to Moderately Satisfactory. 51. Handling of procurement was rated Moderately Satisfactory, reflecting the lack of procurement capacity in the TOC and Ministry of Agriculture and, at the same time, the absence of major procurement violations. Relatively few procurement contracts were administered under the project. Procurement under the sub-loans followed commercial practices. The procurement specialist based in the Bank’s country office was available for support and advice to the TOC. 2.5 Post-completion Operation/Next Phase 52. Following completion, the PFI will continue to administer the sub-loans financed under the project until funds received under the Subsidiary Loan Agreement are repaid to the Ministry of Finance. Hydromet will operate and maintain the automated weather stations. 53. The government continues to support the financing of agriculture and rural development through various programs, such as the Damu Foundation, Business Road 12 Map 2020, KazAgroFinance, and the Agrarian Credit Corporation. The President of Kazakhstan has declared that employment creation through the promotion of rural entrepreneurship and training is the number one priority. Development of agriculture and finding alternative ways of enhancing farmers’ access to financing is among the top 10 tasks. 18 The government has been instructed to develop programs on livestock sector development, including the utilization of distant pastures. 54. Based on the implementation experience and the disappointing results of APPAP- 2, the Bank and government decided not to trigger a third phase. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design, and Implementation 55. The objective of the project, which was to enhance the access to commercial financial services by farmers and small/medium-size rural enterprises, was and is very relevant to the country’s needs and priorities. Strategically, at the preparation stage the project was meant to contribute to the government’s objective of diversifying the economy and improving living conditions of the population by promoting broad-based, private sector-led growth in rural areas, where the incidence of poverty is twice as high as in urban areas. At the project’s completion, its objective remains aligned with the government’s current priorities and the World Bank’s strategy. The government’s Strategic Plan for Development 2020 covers a set of priorities intended to achieve a competitive, diversified economy, including development of the agro-industrial sector and creation of jobs. As noted, the President of Kazakhstan’s list of the top 10 tasks for government at the start of 2012 included the development of agriculture and finding alternative ways of enhancing farmers’ access to financing. The World Bank’s new Country Partnership Strategy (CPS) for FY12–FY17 states that ― with land reform and privatization, agriculture has excellent prospects, but the state dominates the provision of services and finance for agriculture. Important reforms include strengthening of farmer organizations, agricultural SME development, and rural credit and agricultural insurance.‖ In this respect, ― the proposed CPS would also continue to provide advisory and investment assistance to help generate productive transformation and increased rural incomes in the agricultural sector.‖ 56. The design of the project was well conceived in terms of logical connections among its components and their expected contribution to achievement of the project’s objective. Each component was designed to address specific problems that remain relevant. The diagram shows the logical connections and expected cause-effect relationships among the project’s various activities and outputs. 18 President Nazarbaev’s Address to the Nation on January 27, 2012 http://www.parlam.kz/ru/presidend- speech/29. 13 57. Aspects of the design were not suited to the realities of implementation, however. For example, the credit line sub-component was predicated on the expectation that banks would continue to issue small loans as they did under APPAP-1, but the economic boom reduced commercial banks’ interest in small loans. No feasible alternative lending mechanism could be developed to reach smaller borrowers in rural areas,19 aside from the microfinance component targeted to smaller borrowers, which also failed to work as planned (see Section 2.2). In summary, despite shortfalls in design and implementation, the overall relevance of the project is considered to be high. 3.2 Achievement of Project Development Objectives 58. The PDO was not achieved, although some progress was made toward its achievement. As explained in Section 1.3, the achievement of the PDO is assessed Growth in rural lending due to the project.‖ through the outcome indicator ― 59. Although the unit of measurement for the outcome indicator in the PAD was a percentage of growth, the ISR (#6) of May 30, 2008 set the outcome indicator’s end 19 The definition of ―rural areas‖ adopted under the project covered all populated areas except for Almaty and Astana. Other urban areas were included under the project at preparation on the grounds that business activities were as poorly developed in those areas as in rural areas. Also, banks were rarely present in truly rural areas. Banks were located in oblast and rayon centers; from those locations, they served parts of the surrounding rural area. 14 target in absolute terms at US$ 66.6 million. This figure was revised downwards to US$ 37.5 million in ISR (#12) of December 27, 2010 and reduced further to US$ 16.0 million in ISR (#14) of December 25, 2011. The actual lending by the project’s closing date of December 31, 2011 was US$ 12.96 million, including funds from the IBRD credit line and government co-financing. These resources were provided through 8320 sub-loans (against the original target of 750 and revised target of 100 sub-loans). Thus the original and revised targets were significantly underachieved. 60. With the PFIs’ contribution, the original target for total lending under the project was US$ 70.8 million. 21 The actual amount at the end of the project was US$ 17.5 million, or only 24.7 percent of the amount initially planned. 61. In terms of lending growth in PFIs, Eurasian Bank (which accounted for about 93 percent of the actual lending under the project) had a credit portfolio of KZT 150,015 million as of June 1, 2009, just prior to joining the project. The share of agricultural loans in that portfolio was 5.7 percent (KZT 8,686 million). As of November 1, 2012, Eurasian Bank’s total portfolio was KZT 183,229 million, while the share of agricultural loans amounted to 12.5 percent (KZT 22,883 million).22 In absolute terms, over 2.5 years of participation in the project, agricultural lending grew by a factor of 2.6, and its share in the lending portfolio increased by a factor of 2.2. These rates of growth look excellent, but overall lending under the project was only one-quarter of the amount initially planned, so the outcome target and the project development objective were not achieved. 62. In terms of outputs under specific components, the project’s achievements are summarized below. For a detailed presentation of outputs by component, see Annex 2. 63. Under Component1: Rural Financial Advisory Services, the project trained 603 individual consultants against a target of 600. These consultants were to provide financial advisory services to 17,000 people as a way of expanding the pool of qualified borrowers. About 11,800 farmers sought consultancy services from the consultants trained by the project, but they represented 65% percent of the 18,246 attendees of information sessions, which is a good achievement. Almost 5,000 business plans were prepared for these clients; unfortunately, none of the plans were financed from the project credit line because of its delayed implementation and banks’ reluctance to lend to small borrowers, who often lacked adequate collateral. Hence the output target for the number of trained consultants was fully met and the target on the number of clients was partially met. 20 Of these, 38 (46 percent) were agricultural sub-loans. 21 US$ 30.0 million (IBRD) plus US$ 30.0 million (Government of Kazakhstan) plus US$ 10.8 million (PFIs). 22 Monitoring & Evaluation Report, 2011. 15 Objective Original indicator Target Actual Revised indicator Target Actual To build capacity for viable # of individual consultants 600 603 The same 600 603 rural businesses through trained strengthening and expanding the rural advisory services # of farmers using services 17,000 11,800 The same 17,000 11,800 program of private consultants 64. Under Component 2: Agricultural Risk Management, the two initial output targets were: (i) number of crop insurance contracts issued (14,500) and (ii) number of contracts traded in commodity exchanges (33,000). These targets were not achieved because the component could not be implemented as planned (the inadequate budget meant that the required consultancy inputs were not obtained). In early 2010, the Bank team and Ministry of Agriculture agreed to drop the commodity exchange activities from the project for reasons explained in Section 1.6, but it took more than a year to get an official request for this action from the Borrower. The scope of activities on crop insurance also was reduced significantly following repeated problems with hiring consultants. The target outputs were changed to: (i) number of oblasts where the insurance schemes are analyzed and recommendations made (8) and (ii) number of rayons where the agricultural weather stations are equipped and upgraded (6). The latter two targets were met. Objective Original indicator Target Actual Revised indicator Target Actual To support # of crop insurance # of oblasts where insurance 14,500 Dropped 8 8 agricultural risk contracts issued schemes are analyzed management # of contracts traded in # of rayons where ag. weather initiatives 33,000 Dropped 6 6 commodity exch. stations are equipped & upgraded 65. Under Component 3: Rural Outreach by the Mainstream Financial Sector, the original target was to extend 750 sub-loans. As explained, the actual number of sub- loans was 83, owing to problems with implementation of the credit line and partial cancellation of the Loan. That number is less than the final revised target of 100 sub- loans and is only 11 percent of the original target. It should be noted that the entire sub- loan portfolio was disbursed during the last two years of the project. By the last year of the project, the PFI had attained good momentum and was seeing considerable interest and demand from borrowers. Had the project been extended one more time, it is possible that the entire credit line allocation would have been disbursed. Given the project’s earlier performance, an extension was not considered an option by the task team or Bank management. 66. In terms of capacity building under this component, 568 credit specialists and 240 branch managers from more than 40 financial institutions were trained in investment lending and structured finance. The participants reported very high levels of satisfaction with the relevance, quality, and usefulness of the training. On a 10-point scale, the overall score given by the participants in the course evaluation was 9.4. Feedback was 16 particularly positive on the preparedness of trainers (9.9) and their teaching methods (9.8), which involved a combination of lectures, case studies, and class discussions. Objective Original indicator Target Actual Revised indicator Target Actual Access to financial services improved: supplemental growth (in real terms) in Volume of IBRD overall rural and agricultural 10 n/a* support for lines of 13,000,000 6,390,500 lending by commercial banks credit to SMEs, US$ and leasing companies of at least 10% per year during the To enhance the access project period to commercial financial services by Number of loans and leases farmers and disbursed by participating 750 83 The same 100 83 small/medium-size financial institutions rural enterprises Growth in lending to Volume of IBRD small/medium-size rural support for enterprises by participating n/a Dropped institutional 320,000 321,000 commercial banks with own development of funds SMEs, US$ Repayment rate [of loans] to 98% 99% The same 98% 99% the PFIs * The PFI that participated in the project for the last two years increased its agricultural loan portfolio by 160%. 67. Under Component 4: Rural Micro Finance Development, significant work was done to build capacity in MFIs. Overall, 310 people from 146 MFIs were trained on various topics (strategic business planning, risk management, credit cycle, new product development, linkage to commercial sources of funding, and others). Four participating MFIs built up sufficient institutional capacity to qualify for borrowing from commercial banks. But again, none of the four MFIs benefited from the project’s credit line for various reasons: the delayed start of the credit line and its subsequent cancellation, the banks’ unwillingness to lend, and/or the MFIs’ dislike of the banks’ lending terms. Instead, some of the stronger MFIs trained under the project were able to locate investors and lenders elsewhere who offered more favorable terms. Objective Original indicator Target Actual Revised indicator Target Actual Volume of IBRD n/a Participating MFIs outreach support for (micro credit To support sustainable improved: the aggregate 15% facility was institutional 530,000 409,275 rural microfinance lending by MFI is up by 15% development of cancelled) schemes for providing microfinance, US$ financial services to # of participating MFIs rural micro- graduating into superior entrepreneurs performance where they 6 4 The same 4 4 qualify for borrowing from commercial sources 68. Thus despite some positive intermediate outcomes and outputs for this component, for reasons mentioned earlier, they were not able to contribute directly to growth in rural lending under the project. 17 3.3 Efficiency 69. The financial analysis of a sample of sub-loans issued under the project has shown that: (i) overall, gross and net returns of the enterprises increased reasonably after implementing the activities financed by the loans; (ii) benefit/cost ratios demonstrate the attractiveness of the investments; (iii) the level of profitability varies significantly between the activities. Positive net present value (NPV) for the analyzed farms and enterprises ranges from KZT 283,000 to KZT 460 million. The internal rate of return (IRR) ranges from 13 percent to 975 percent. These numbers are much higher than those projected during appraisal: NPVs between KZT 84,000 and KZT 41 million and IRRs between 13 percent and 50 percent. Favorable cash flows from the most analyzed investments give an indication that the project credit line would continue revolving effectively even after the project’s closure. 70. A sensitivity analysis was undertaken to assess the impact on financial returns of changes in: (i) output prices, (ii) expected outputs, (iii) operating costs, (iv) interest rate, and (v) investment costs. The analysis showed that the credits are more sensitive to changes in both outputs and price assumptions than they are to variations in investment, operating costs, and interest rate. However, they remain reasonably sound in revenue terms. 71. With an average net incremental income at US$ 0.66 for each dollar borrowed, the total NPV of the credit line of US$ 12.96 million could be estimated at about US$ 16.5 million—significantly lower than the US$ 50.1 million estimated at appraisal. The shortfall is explained by significant underutilization of the credit line. 72. In terms of efficiency, the implemented activities such as consultancy services, training, procurement of goods, and so on were efficient in the sense that they were carried out through competitive selection following the World Bank’s procurement rules. As such, they were implemented at the best rates available in that time and under those circumstances. Even though they were efficient, they were not truly effective, however, in the sense that they did not lead to increased access to finance by farmers and rural people. Because of the foregone opportunities in rural business development, employment, and economic growth, some project resources can be considered as not having maximized their returns. 3.4 Justification of Overall Outcome Rating: Unsatisfactory 73. The objective of the project was very relevant to the needs of the country. It was consistent with the Bank’s Country Partnership Strategy, Kazakhstan’s development priorities, and the recently adopted Strategic Plan for Development 2020. Shortcomings in the project’s design and major problems with its implementation prevented it from achieving its development objective, although some progress was made toward its achievement. In terms of efficiency, the available resources were underutilized and 18 significant economic and financial gains were foregone. Notable achievements were made in capacity building and development of financial institutions, and it is expected that those capacities will be continued to be used in the financial sector. But the impact of those achievements on the project development objective could not be assessed and directly attributed to the project, while only a small portion of the original credit line was utilized and many of the original output targets were not achieved. Therefore, due to major shortcomings in the achievement of the objective, the project’s outcome is rated Unsatisfactory. 3.5 Overarching Themes, Other Outcomes, and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 74. According to Eurasian Bank data, during the implementation of the credit line some 2,068 new jobs were created, which is believed to contribute to employment generation and increased incomes in rural areas. The multiplier effect of business activities supported by the project can be expected to magnify the impact of the project to some extent. (b) Institutional Change/Strengthening 75. The project can be credited with contributing to institutional changes in the microfinance sector. It helped to strengthen AMFOK, exposed MFIs to international best practices, and introduced the principles of corporate governance and transparency in financial accounting and reporting. Many MFIs now publish their financial reports in MixMarket, and some MFIs have received ratings from international microfinance rating agencies such as MicroFinanza. The Chairman of the Board of AMFOK was elected in November 2011 as Chair of the International Coordination Council of the Commonwealth of Independent States Microfinance Association. 23 76. The microcredit sector has shown explosive growth over the past seven years. The number of registered and active microcredit organizations grew from 159 in 2005 to 1,173 in 2011.24 In 2011 alone, 378,000 microcredits were issued for the total amount of KZT 55.4 billion, helping tens thousands of people to open new micro businesses or to save existing workplaces. The forecast for 2012 is that 400,000 microcredits valued at KZT 70 billion will be issued.25 Even though no microloans were issued under the project, many representatives of microcredit organizations and AMFOK who were interviewed mentioned that the training provided by the project was very timely and useful. They felt that without the project’s coordinated technical assistance, the development of AMFOK and other organizations would have been delayed. The knowledge obtained efficiently under the project saved them from many aimless efforts to seek the knowledge they needed. 23 See http://www.amfok.kz/news/98.html. 24 Microcredit organization KMF, 2010 Annual Report. 25 See http://www.amfok.kz/news/98.html. 19 77. The commercial banking sector benefited from training in investment lending and exposure to new lending instruments such as structured finance. A total of 808 branch managers and credit specialists from more than 40 financial institutions were trained. Even though the majority of the trainees did not participate in the project’s credit line, they reportedly apply the acquired knowledge in their own lending businesses. The new knowledge could not be fully internalized or adopted, however, because of banking regulations and/or the commercial banks’ own strategies and policies. (For example, structured loans that allow financing without collateral could not be adopted while banking regulations require loan security or full provision.) 78. Similarly, the project intended to expand institutional capacity for agricultural risk management through crop insurance and commodity exchange operations. The inadequate budget for these activities caused the commodity exchange activities to be dropped from the project, while the crop insurance activities were curtailed to a review of the existing insurance scheme and recommendations for its improvement. The expected institutional changes in agricultural risk management unfortunately did not materialize, although the Agricultural Risk Management component was maintained until the last year of the project. (c) Other Unintended Outcomes and Impacts (positive or negative) 79. The project revealed imperfections in the Budget Code adopted in 2005 and led to improvements in budget legislation with respect to using financial institutions in budget programs. For instance, now more than one financial intermediary can participate in the implementation of government credit line programs for increased outreach. 80. The Almaty Bank Training Center (ABTC) built its capacity and reputation through the training it provided to bank personnel under the project. ABTC reportedly continues to enjoy good demand for its training on various topics, including those that were first offered under the project. 4. Assessment of Risk to Development Outcome: Significant 81. Even though the government at the highest levels reiterates the importance of improving access to financial services by rural people and allocates significant amounts through numerous government-supported credit programs, the risk of not reaching small rural borrowers remains high. First of all, most state programs are geared toward large- scale, high-end agricultural producers and processors that fit into the government’s modernization agenda. Second, the channels for delivering credit funds to small borrowers remain an issue. Commercial banks still prefer to deal mostly with larger borrowers in urban areas. Third, provision of acceptable collateral continues to be a problem for small rural borrowers. On the positive side, the microfinance sector is getting greater attention from the state. The National Bank of Kazakhstan has presented the draft Law on Microfinance Organizations to Parliament; the law aims to place MFIs under the regulatory supervision of the central bank. Combined with mandatory minimum capital 20 requirements and prudential norms, this measure is expected to strengthen and streamline the microfinance sector, which has been growing very fast but without proper supervision. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry: Moderately Unsatisfactory 82. The project was prepared based on the successful experience of APPAP-1. The development objective was strategically relevant and the cause-effect linkages among the components were well thought out. The new components on agricultural risk management and microfinance fit very well with the objective of the project and could serve as complimentary and supportive additions. The Bank team brought its knowledge of international practice to bear on project preparation and appraisal to solve the local problem. The Quality Assurance Group assessed quality at entry as Satisfactory, although it identified as shortcomings the decision not to have a separate Project Implementation Unit and failure to identify the project management risk. 83. In retrospect, it appears that some aspects of the project, despite being well designed in theory, did not fit into the realities of the environment and situation. For example, the appraisal was too optimistic about the prospects of the agricultural insurance market and commodity exchanges; commercial banks’ interest in the project and the government’s commitment were overestimated. During the negotiations, the government delegation decided to cut the budget of the Agricultural Risk Management component by a significant amount, which proved detrimental for the component. While agreeing to the lower allocation, the Bank team did not take appropriate action to adjust the design of the component to accommodate the more limited resources. In addition, the monitoring indicators in project documents were not consistent, and some discrepancies remained until the project closed. 84. These shortcomings of an otherwise well-designed project make its quality at entry rating Moderately Unsatisfactory. (b) Quality of Supervision: Moderately Unsatisfactory 85. The Bank supervision team was led by a lead specialist in rural finance and consisted of another experienced rural finance specialist and operations officer as a core team complemented by fiduciary, safeguards, and other specialists. The core team stayed intact throughout the project except for one change in October of 2008, when the second rural finance expert in the team took the leadership role with the departure of the previous Task Team Leader (TTL). This continuity allowed the team to remain constantly attuned to the project’s issues, to identify obstacles early, and to inform Bank management and the Borrower of all problems that the project was facing. The supervision missions were carried out regularly, twice a year, and all mission Aide Mémoires reported in detail the problems identified and solutions proposed. When warranted, the team demonstrated 21 flexibility and proactively undertook the efforts necessary to restructure the project or to cancel unused portions of the loan. 86. During the Mid-term Review in April 2008, the team was ready to cancel the project and had preliminary agreement with the implementing agency. Subsequent considerations at higher levels of the Government of Kazakhstan caused the option of project cancellation to be dropped, and the project underwent the first restructuring to (i) introduce an advance disbursement mechanism for the PFIs; (ii) provide working capital financing under the credit line; and (iii) increase the sub-loan size from US$ 100,000 to US$1,000,000. The Bank also remained overly optimistic about the credit demand situation and could have worked toward an earlier partial cancellation. The Bank supervision team did not address the issue of project indicators in the early years, and some inconsistencies persisted until the end of the project despite the mentioned restructurings. The problems were identified in a timely way and reported in the Aide Mémoires and ISRs. (c) Justification of Rating for Overall Bank Performance: Moderately Unsatisfactory 87. Given some shortcomings at entry and supervision, and respective ratings at each stage, overall Bank performance is rated Moderately Unsatisfactory. 5.2 Borrower Performance (a) Government Performance: Unsatisfactory 88. As described in paragraphs 29–32, economic factors played a critical role in the performance of the project, particularly in the implementation of its credit line. The 2008 shock—a crisis on a global scale—was beyond the government’s control. Adjusting to a financial crisis of such scale and depth was not possible within a short period, and the banking sector remained in a condition that was not conducive to success in implementing the project’s credit line, which eventually led to the project’s unsatisfactory performance. With due consideration of these circumstances, however, it should be noted that the government was slow to implement actions that were fully under its control, in particular actions related to the delays with approval of various documents, provision of co-financing, and micromanagement of the actions taken by the implementing agency (Ministry of Agriculture) to implement the project. In general, it was felt that even though the government appeared to be interested and committed to the project at the preparation stage, that commitment was not so obvious during the implementation phase. 89. Delays with ratification and effectiveness of the Loan Agreement and the subsequent changes to the budget legislation put the project implementation on hold for extended periods, slowing the positive momentum achieved at the end of APPAP-1, which closed in 2002. Protracted delays with approval of the Subsidiary Loan Agreements, especially at the early stages of the project, held disbursement of the credit line back for many months. Had the Subsidiary Loan Agreements with the interested banks been approved soon after project effectiveness, a number of initially interested 22 PFIs could have participated in the credit line and utilized some funds early on. The long bureaucratic procedures for approval of necessary changes to the project documents, such as project restructurings or changes to the project’s feasibility study, put the project off track and caused it to fail to achieve its objective. Some improvement in the approval processes was noted after 2008, although it was still quite slow. In addition, the government suspended financing of the project for several months in 2008 and later in 2011 because of the need to review the project’s performance. While project activities resumed after these reviews, they also contributed to further delays in implementation. 90. On the co-financing side, at negotiations the government cut half of the project’s operating budget and reduced the budget allocated for agricultural risk management activities. As a result, the project experienced difficulties with staffing, office space, and travel to project sites. Local personnel involved in project implementation were not allowed to use air transport but had to use ground transport only, which made monitoring very difficult given the geographical scale of the country. Insufficient allocation of resources from the state budget led to cancellation of price risk control activities and curtailment of the production risk control activities under the project. 91. At the operational level, even though the Ministry of Agriculture was designated as the implementing agency, the Ministry of Finance was unduly micromanaging the project, especially during its first half. For example, approval of the consultants Terms of Reference, purchase of computers for the TOC, even a connection to the phone line required the Ministry of Finance’s clearance. These interventions all caused unnecessary delays and operational difficulties for the TOC, and they also undermined the Ministry of Agriculture’s role as implementing agency. (b) Implementing Agency or Agencies Performance: Moderately Unsatisfactory 92. The departmental-level staff members of the Ministry of Agriculture who were responsible for the project were actively involved in the preparation and implementation process. They regularly met with the Bank’s project team and were often for the Bank team the only contact point with the government. Overall, the Ministry of Agriculture put considerable effort into implementing the project, and its achievements should be attributed to their persistence and active cooperation. Some shortcoming, however, need to be mentioned, including the absence of an adequate project accounting system for an extended period; failure to install the 1C accounting software and reliance on an Excel- based manual system; no reporting until the end of September 2008; delays in submitting subsequent reports; and delays in submitting audit reports. The audit reports were all clean, however; nor were any procurement issues reported. 93. It should also be noted that it took a long time for the Ministry of Agriculture to provide the TOC with adequate working conditions. Keeping the team away from the ministry’s premises led to poorer communication and coordination of daily work between the consultants and the ministry’s supervising staff. The TOC was not supervised and financed properly to monitor the project’s progress. Likewise, the TOC did not receive from the Ministry of Agriculture the necessary support for timely clearance by the 23 Ministry of Finance or Ministry of Economy for various project documents. Despite the overall commitment of the top management of the implementing agency and its designated department, some other units, notably the legal department, reportedly failed to provide constructive support for implementation and often presented considerable bureaucratic impediments to implementation. (c) Justification of Rating for Overall Borrower Performance: Moderately Unsatisfactory 94. Taking into account the major factors that affected the project’s implementation but were outside the government’s control, as well as the efforts of the implementing agency to implement the project in a difficult environment, it is proposed to rate the Borrower’s performance as Moderately Unsatisfactory. 6. Lessons Learned 95. In Adaptable Program Loans, the success of one phase does not necessarily lead to success in the next phase. Changes in the economic situation and level of government commitment arising from the changing circumstances significantly affect project performance. New activities included in the follow-up phase may create additional challenges for implementation. 96. It is important to have clear and measurable outcome indicators for the project. They need to be systematically monitored to keep the focus on achieving project objectives. Unclear PDO indicators or a lack of focus on outcomes causes underachievement of the project objectives. 97. A proactive approach and flexibility in the Bank and government to adapt to changing circumstances are critical for the success of the project. Problems need to be identified early and measures taken on time to put the project on track. 98. When the project is not moving well and reasonable efforts to fix the situation do not yield results, the Bank and Borrower should be ready to cancel the project when warranted. 99. A properly designed and implemented M&E system is important for the project’s success. It is important, therefore, when designing an M&E system, to take into account the nature of the project and the logistical requirements of the M&E (APPAP-2 was a nationwide project working with a wide number of private sector beneficiaries in a vast country with correspondingly large travel distances). 24 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies Not applicable (b) Cofinanciers Not applicable (c) Other partners and stakeholders Not applicable 25 Annex 1. Project Costs and Financing (a) Project Cost by Component (in US$ million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (US$ millions) Appraisal (US$ millions) RURAL FINANCIAL 1.681 1.212 72.10 ADVISORY SERVICES AGRICULTURAL RISK 1.924 1.560 81.08 MANAGEMENT RURAL OUTREACH BY MAINSTREAM FINANCIAL 85.304 30.997 36.34 INSTITUTIONS RURAL MICRO FINANCE 5.372 0.510 9.49 DEVELOPMENT PROJECT MANAGEMENT 0.460 0.625 136 UNALLOCATED/ 1.350 0.000 CONTINGENCIES Total Baseline Cost 96.091 34.903 36.32 Physical Contingencies 0.000 0.000 0.00 Price Contingencies 0.000 0.000 0.00 Total Project Costs 96.091 34.903 36.32 Project Preparation Fund 0.000 0.000 .00 Front-end fee IBRD 0.000 0.000 .00 Total Financing Required 96.091 34.903 36.32 Note: Costs for Component 3 include the contributions from the PFI and beneficiaries (sub-borrowers). (b) Financing Appraisal Actual/Latest Type of Percentage of Source of Funds Estimate Estimate Cofinancing Appraisal (US$ millions) (US$ millions) Borrower 36.400 10.720 29.45 International Bank for 35.000 6.526 18.65 Reconstruction and Development Borrowing Country's Fin. 10.800 4.597 42.56 Intermediaries (PFIs) Beneficiaries (sub-borrowers) 13.900 13.060 93.96 Total financing 96.100 34.903 36.32 Note: Discrepancy of 0.009 between total financing required and total financing is due to rounding. 26 Annex 2. Outputs by Component Component 1: Rural Financial Advisory Services aimed at building awareness among farmers about business planning and financing options through the establishment and engagement of a private financial consultants’ network. Under this component, an international consultancy company was hired to organize and administer the logistics for training. Six individual trainers (of whom three had international experience) were engaged in training and testing 60 oblast-level consultant- trainers, who were selected in a competitive manner by announcing the selection via Kazakhstanskaya Pravda and regional newspapers. In the next step, the oblast consultants conducted training and certification of 603 rayon- level consultants. The recruitment of rayon consultants was done via announcements in the local newspapers, information bulletins of farm associations and cooperatives, as well as through akimats. 26 The consultants were recruited mostly from the joint-stock company KazAgroMarketing, the Farmers’ Union of Kazakhstan, the Fund for Financial Support of Agricultural Producers, the Chamber of Trade and Industry, as well as among farmers. The selected participants then passed through training and certification in business planning, types of financial products, legal issues, and taxation. Table A2.1: Consultants trained and certified at oblast and rayon levels No. Oblast Number of oblast Number of rayon consultants consultants 1 Jambyl 12 120 2 Almaty 6 60 3 Southern Kazakhstan 3 30 4 Akmola 7 71 5 Northern Kazakhstan 2 41 6 Karaganda 3 40 7 Kostanay 5 50 8 Western Kazakhstan 2 30 9 Aktobe 8 71 10 Eastern Kazakhstan 4 60 11 Pavlodar 4 40 Total 60 603 Overall, 162 information seminars were held countrywide to increase awareness among farmers and rural people about financial advisory services and to stimulate their entrepreneurial activity. Some 18,246 people attended these seminars; about 11,800 of them later used the rayon consultants’ services. Depending on the region, population density, and other characteristics, each consultant received from 6 to 79 requests from clients. As a result, 4,965 new business plans were prepared. 26 An akimat is a rayon-level state administration office. 27 28 Table A2.2: Business plans developed under However, because of delays in the the project implementation of the credit line, none of Region No. of business plans these business plans was financed under developed under the project the project, but a significant number of SOUTH 2,414 developed business plans were financed EAST 317 WEST 390 by banks and other financial institutions NORTH 1,844 outside the project. The data vary highly TOTAL 4,965 by oblasts, in some oblasts it is 20 %, in others up to 45 %27. The initial wave of interest from clients in financial advisory services under the project faded after they saw that their hopes for financing their ideas did not materialize. Thus, despite having been implemented quite well on its own, the component’s outputs were not streamlined into the overall project outcome because of problems with the implementation of other components. Table A2.3: Component 1 output indicators Objective Original indicator Target Actual Revised indicator Target Actual To build capacity for # of individual 600 603 The same 600 603 viable rural businesses consultants trained through strengthening # of farmers using and expanding the services of private 17,000 11,800 The same 17,000 11,800 rural advisory services consultants program Component 2: Agricultural Risk Management (US$1.924 million, all government financed) consisted of two sub-components: 1. Sub-component 1: Production Risk Management (US$1.424 million) to improve the crop insurance program through technical assistance, upgrading of weather data infrastructure, and training of agro-meteorologists, farmers, insurance companies, and other actors. 2. Sub-component 2: Price Risk Management/Market Efficiency (US$0.5 million) to:  Advise the government on technical, financial, organizational, and regulatory aspects of a modern commodity exchange.  Train potential investors, commodity exchange managers, regulators, key companies, and agents and build mass awareness using various channels. The component experienced problems with implementation due to inadequate budget allocation. Because there was not enough budget to recruit qualified international 27 Variance is due to availability of financial institution. Data provided by the Borrower’s final report and includes reported numbers and estimates made by local consultants. 29 consultants and because of the subsequent government decision to remove responsibility from the Ministry of Agriculture for the development of agricultural commodity exchanges, the sub-component of price risk management was dropped from the project at the government’s request. Under the first sub-component, two attempts to select an international consultancy company with experience in agricultural insurance failed because the financial proposal from the consultants was well above the available budget, while an excessive reduction in the scope of the work to fit the budget would have undermined the purpose of the major consultancy assignment. As a result, it was decided to hire only a local consultancy company while additional expert support was provided by the World Bank. Because of the changes, the original output indicators were not met, but instead were replaced by new indicators through project restructuring. Table A2.4: Component 2 output indicators Objective Original indicator Target Actual Revised indicator Target Actual # of oblasts where # of crop insurance 14,500 Dropped insurance schemes are 8 8 To support agricultural contracts issued analyzed risk management # of rayons where ag. initiatives # of contracts traded in 33,000 Dropped weather stations are 6 6 commodity exch. equipped & upgraded Two insurance experts hired by the World Bank under a separate Trust Fund and the local consultancy company Arka Consulting, hired under the project, carried out the study of the agricultural insurance system in the country with detailed focus on eight oblasts: Kosatanay, Akmola, Northern Kazakhstan, Eastern Kazakhstan, Western Kazakhstan, Pavlodar, Karaganda, Aktiubinsk, and Southern Kazakhstan. The study included:  Analysis of the existing grain production systems.  Analysis of the existing agricultural insurance system (legislative basis, technical characteristics, and financial results).  Assessment of weather risk for grain production.  Recommendations for improvement of the insurance system.  Modernization of meteorological stations in 6 pilot rayons.  Some training for people involved in the agricultural insurance system. The study revealed technical and financial problems facing the existing system. Because of its mandatory nature but limited coverage of any losses that occur, farmers try to buy the minimum possible level of insurance just to meet the obligation to have insurance.28 For their part, the commercial insurance companies are not interested in the scheme and are not supporting it because all of the insurance terms are set by the government. The 28 It is estimated that 74 percent of the planted area is covered by insurance. 30 companies involved29 are being subjected to huge risks in the case of major crop failures, because the system does not allow for reinsurance. In fact, in four of six years in 2005–10, the system experienced financial losses. There is a need to adopt a new and differentiated method for the calculation of insurance premiums. As it is presently designed, the system has proved completely unsustainable for Aktiubinsk and Western Kazakhstan oblasts. The findings of the study were presented and discussed in a seminar on July 21, 2011. The participants included representatives from the Ministry of Agriculture, Fund for Financial Support of Agriculture, Kazakh Research Institute on Agricultural Economics and Rural Development, KazHydroMet, insurance companies, and farms. The participants have recommended to the Ministry of Agriculture that it establish a committee consisting of representatives of all involved parties to develop amendments to the Law on Mandatory Crop Insurance, taking into account the findings and recommendations of the study done under the project. To learn from the international experience in crop insurance schemes, a study tour was organized to Spain for representatives of the insurance companies and relevant government agencies (16 people). The intensive eight-day study tour organized by AGROSEGURO (Association of Agricultural Insurance Companies of Spain) included: (i) Classroom training covering such topics as an overview of the insurance system in Spain, its legal basis, a review of insurance products, insurance management, insurance contracts, and information technologies in the insurance business, among other topics. (ii) Visits to and meetings with players in Spain’s insurance market: ENESA (State Agricultural Insurance Agency under the Ministry of Agriculture), Consorcio de Compensación de Seguros (CCS), Dirección General de Seguros (DGS), insurance companies, and farm associations. (iii)Field visit to livestock and grain farms, the clients of the insurance system. To improve weather monitoring and to close some gaps in the existing network of meteorological stations and posts, the project procured and installed 5 automatic weather stations and 16 automatic weather posts in 6 pilot rayons (Table A2.5). Table A2.5: Location of meteorological stations and posts c Agricultural MPs Meteorological Settlements where the that existed Oblast Rayon stations where the b a AMPs are put before the AMSs are put project Dievka Auliekol Auliekolskiy Novonejenka Kushmurun Pervomaiskoe Kostanay Silantievka Dokuchaevo Altynsarinskiy Ubaganskoe Novoalekseevka Mayakovskiy 29 Only three companies were supporting the scheme at the time of the study. 31 Andianovka Aktogayskiy Aktogay Janabek Jolboldy Pavlodar Alakol Priirtyshskiy Jelezinskiy Michailovka Jelezinka Petropavlovka Aktas Enbekshilderskiy Stepniak Kudykagash Zaozernyi Akmola Makinsk Altyndy Bulandinskiy Voznesenka Shubargash Juravlevka Total 5 16 7 (a) AMS = Automatic meteorological station. (b) AMP = Automatic meteorological post. (c) MP = Meteorological post. Component 3: Rural Outreach by the Mainstream Financial Sector (US$ 85.304 million) to help commercial banks and leasing companies accelerate rural investment lending through traditional loans and by expanding the use of nontraditional instruments like leasing of agricultural machinery and structured finance. The component had two sub-components: Technical Assistance and Credit Line Facility. The Technical Assistance sub-component aimed to increase the capacity of the commercial banks and leasing companies in long-term agricultural lending and to introduce them to new financing instruments. The training under this sub-component meant to facilitate the implementation of the credit line facility sub-component. As such, a wide number of commercial banks, leasing companies, and other relevant institutions were involved in the training (Table A2.6). The training sessions were delivered by ABTC, with involvement of two international and four local experts. Under two broad themes (Investment Lending and Structured Finance), training covered such topics as special features of long-term agricultural financing, credit risk assessment, loan structuring and pricing, collateral valuation, supply chains and supply chain financing, warehouse receipts and insurance, contract farming, and credit monitoring, among others. Overall, 808 people were trained, including credit specialists and bank branch managers (Table A2.7). Although only two banks eventually participated in the implementation of the credit line sub-component, it is believed that the training received by other banks contributed to the expansion and/or improvement of their lending portfolios, although the magnitude of this impact could not be quantified or reasonably assessed. Table A2.6: Number of people trained, by topic and financial institution Institution Investment Lending Structured Finance Credit Branch Credit Branch Specialists Managers Specialists Managers Alliance Bank 2 5 2 Alliance Leasing 2 Astana Finance 1 32 ATF Bank 35 11 36 8 AgriCredit Corporation 17 1 15 Bank of China, Kazakhstan 4 3 3 Bank Positive 1 0 1 BTA Bank 15 14 17 9 KaspiiskiyBank 16 7 11 Bank Center Credit 30 10 13 16 Delta Bank 1 1 5 12 Demir Bank 1 Eurasian Bank 7 4 25 13 Exim Bank 0 5 8 Forum Bank Representative 1 Office Halyk Bank 16 7 28 21 KazAgroFinance 11 5 5 Development Bank of 4 Kazakhstan Kazincombank 1 0 1 Kazinvestbank 1 1 Kazcommercebank 31 18 23 1 Lariba Bank 4 1 Neftebank 3 Nurbank 11 14 10 4 RBS Kazakhstan 3 Sberbank Russia 4 6 11 1 Senim Bank 1 1 1 Taib Bank 1 1 Temirbank 25 3 33 8 Temir Leasing 1 Trust Commerce Bank 3 1 1 Tsesna Bank 37 3 11 Zamabank 5 1 2 1 Agency on Financial 1 Supervision Association of Commercial 1 0 Banks State agency “Agricultural 2 Sub-Unit� Samruk Kazyna 1 Scientific Research Institute 1 on Water Resources Fund Centurus 3 5 KazMicroFinance 1 National Bank 1 BTA Mortgage 1 9 Metrocombank 1 Centras Securities 3 Centras Capital 4 Total 281 118 287 122 Table A2.7: Number of people trained 33 Subject Credit Specialists Branch Managers Total Investment Lending 281 118 399 Structured Finance 287 122 409 Total 568 240 808 The participants reported very high levels of satisfaction with the relevance, quality, and usefulness of the training. On a 10-point scale, the overall score given by participants on the course evaluation forms was 9.4. Particularly positive feedback was received on the trainers’ preparation (9.9) and their teaching methods (9.8), which involved a combination of lecturing, practical case studies, and class discussions. It should be noted that the materials obtained from these training courses continue to be used by the banks in their internal training programs for new staff. The ABTC reportedly has growing demand for its training programs, partly owing to the successful delivery of training sessions under the project. The Credit Line Facility sub-component experienced difficulties in implementation for various reasons mentioned in the main text. As a result, out of US$ 30.0 million from the IBRD loan allocated for this sub-component, the sum of US$ 23,474,500 was cancelled. To select PFIs, banks were invited to participate five times over the course of the project. Many banks showed no interest in the project’s credit line, partly because cheaper funds were provided under the various government-financed programs. A few interested banks could not meet the eligibility criteria for financial performance. Consequently, only two commercial banks participated in the credit line. Overall, 83 sub-loans were issued, of which 38 were for agriculture or agri-processing (Tables A2.8 and A2.9). They were financed by US$ 6.391 million from the IBRD and KZT 940.836 million from the government co-financing. The average interest rate on sub-loans was in the range of 12–14 percent, with maturities of one to three years. Geographically the sub-borrowers were from the following oblasts: Northern Kazakhstan, Aktiubinsk, Kostanay, Jambyl, Southern Kazakhstan, Karaganda, Atyrau, and Eastern Kazakhstan. Table A2.8: Number and amount of sub-loans by PFI Number of sub-loans IBRD, US$ 000s Government, KZT 000s Eurasian Bank 74 5,390.5 794,176 Bank Center Credit 9 1,000 146,660 Total 83 6,390.5 940,836 Table A2.9: Number of sub-loans by type of sub-borrowers Types of sub-borrowers No. Individual entrepreneurs 23 Farms 9 Limited Liability Companies 49 34 Joint-stock companies 2 Total 83 35 Table A2.10: Component 3 output indicators Objective Original indicator Target Actual Revised indicator Target Actual Access to financial services improved: supplemental growth (in real terms) in overall rural and Volume of IBRD support agricultural lending by 10 n/a for lines of credit to 13,000,000 6,390,500 commercial banks and SMEs, US$ leasing companies of at least 10% per year during To enhance the the project period access to commercial Number of loans and financial services by leases disbursed by 750 83 The same 100 83 farmers and participating financial small/medium-size institutions rural enterprises Growth in lending to Volume of IBRD support small/medium-size rural for institutional enterprises by n/a Dropped development of SMEs, 320,000 321,000 participating commercial US$ banks with own funds Repayment rate [of loans] 98% 99% The same 98% 99% to the PFIs Component 4: Rural Micro Finance Development (US$5.372 million) had two sub- components: Technical Assistance and Micro Credit Facility. Under the Technical Assistance sub-component, initially 27 MFIs applied for participation in the project. Even though some of them did not meet the selection criteria (for example, they were too small), they were allowed to participate in the training. Later the number of MFIs that applied for participation in the project reached 83. However, because of high interest in the sector generated by the project’s training activities, other MFIs were also allowed to participate. As a result, 310 people from 146 MFIs participated in the training sessions. In addition, selected MFIs received on-site technical assistance. The training topics included: strategic and business planning, credit cycle management, internal control, risk management, new product development, transparency and financial reporting, and linkage to commercial banks, among others. The training sessions were highly rated by the participants, scoring 3.7 out of 4.0. During the technical assistance to individual MFIs, the most frequently discussed topics were: 1. Management of problem credits 2. Calculation of key financial indicators 3. Credit policy 4. New microcredit products 5. Calculation of portfolio at risk 6. Business planning 7. Client financial statements 8. Assessment of creditworthiness of a client 9. Special features of rural credit policy 36 10. MicroFin software for credit specialists 11. Calculation and analysis of loan loss provisions 12. MFI rating and finding of donors 13. Marketing strategy development 14. International practice in staff bonus systems 15. Client risk assessment ratios 16. Selection and assessment of clients 17. Monitoring of active clients 18. International experience in MFI operations Technical assistance included initial diagnostics of the beneficiary MFI and subsequent development of recommendations for improvement. MFIs that diligently implemented the recommendations showed improvements in their operations. Four achieved the level of overall performance that would qualify them for borrowing from commercial banks. Other activities included organization for the weaker MFIs of study tours to the most successful MFIs in the country. For the public officials responsible for the development of the microfinance sector, a study tour was organized to India. AMFOK was both a vehicle for delivering training and also the beneficiary of technical assistance. The project helped to build AMFOK’s institutional capacity, build contacts with the MFIs, expand its membership by 5 MFIs, and gain visibility and offers to participate in other projects. For example, AMFOK was invited to implement the Planning for the Future Project by the Microfinance Center (Poland), a social project aimed at increasing the financial literacy of both MFIs and their clients. The Micro Credit Facility sub-component was cancelled due to delays in implementation and absence of interest from commercial banks. On the other hand, the MFIs were either not qualified to access the Micro Credit Facility or not interested in it, as they could get cheaper funding from investors abroad. For those reasons, the training and capacity building under the first sub-component did not result in any microcredit issued from the project. Nevertheless, the development of MFIs under the project quite possibly had an impact on the overall growth of the lending portfolio in the microfinance sector, although exact attribution and quantification of this impact is not possible here. Table A2.11: Component 4 output indicators Objective Original indicator Target Actual Revised indicator Target Actual n/a Participating MFIs Volume of IBRD support (micro outreach improved: the for institutional 409,27 15% credit 530,000 To support sustainable aggregate lending by MFI development of 5 facility was rural microfinance is up by 15% microfinance, US$ cancelled) schemes for providing # of participating MFIs financial services to graduating into superior rural micro- performance where they 6 4 The same 4 4 entrepreneurs qualify for borrowing from commercial sources 37 Attachment 1 to Annex 2 KAZAKHSTAN – SECOND AGRICULTURAL POST-PRIVATIZATION ASSISTANCE PROJECT (PHASE 2 APL) KEY PERFORMANCE INDICATORS (as per Supplemental Letter 2) Objective Original Key Indicators (2005) Revised Key Indicators Revised Key Indicators (2011) (2010) To enhance the  Access to financial services  At least 200 loans and leases  At least 100 loans and leases access to improved: supplemental growth (in disbursed from the credit disbursed from the credit facility commercial financial real terms) in overall rural and facility  At least 98% repayment rate services by farmers agricultural lending by commercial  At least 98% repayment rate  Volume of IBRD support for and small/medium- banks and leasing companies of at  Volume of IBRD support for lines of credit to SMEs size rural enterprises least 10% per year during the project lines of credit to SMEs  Volume of IBRD support for period  Volume of IBRD support for institutional development of  At least 750 loans and leases institutional development of SMEs disbursed by participating financial SMEs institutions  Growth in lending to small/medium- size rural enterprises by participating commercial banks with own funds  At least 98% repayment rate To build capacity for  Some 600 individual consultants and  Some 600 individual  Approx. 600 individual viable rural firms trained for providing rural consultants and firms trained consultants and firms trained businesses through financial advisory services for providing rural financial for providing rural financial strengthening and  At least 17,000 farmers using the advisory services advisory services expanding the rural private consultants  At least 17,000 farmers using  At least 17,000 farmers using advisory services the private consultants the private consultants program To support  Review of the crop insurance  Review of the crop insurance  Crop insurance scheme analyzed agricultural risk program completed and key program completed and key in at least in 8 oblasts, and key management recommendations for making it cost recommendations for making recommendations developed initiatives effective and more operational it cost effective and more for making it cost effective and implemented operational implemented more operational  At least 14,500 crop insurance  At least 14,500 crop  Agricultural weather stations contracts issued insurance contracts issued equipped and upgraded in 6  Review of the regulatory  Review of the regulatory pilot rayons of 3 oblasts environment for commodity environment for commodity exchanges completed and the exchanges completed and necessary amendments to the the necessary amendments current legal and regulatory to the current legal and framework passed regulatory framework passed  33,000 contracts traded on the  33,000 contracts traded on commodity exchange the commodity exchange To support  Participating MFIs outreach  At least 95% repayment rate  At least 4 participating MFIs sustainable rural improved: the aggregate lending by by project end graduating into superior microfinance MFIs is up by 15%  At least 4 participating MFIs performance where they qualify schemes for  At least 95% repayment rate by graduating into superior for borrowing from commercial providing financial project end performance where they sources services to rural  At least 6 participating MFIs qualify for borrowing from  Volume of IBRD support for micro-entrepreneurs graduating into superior commercial sources institutional development of that are currently performance where they qualify for  Volume of IBRD support for Microfinance excluded from the borrowing from commercial sources lines of credit to formal banking Microfinance sector  Volume of IBRD support for institutional development of Microfinance 38 Annex 3. Economic and Financial Analysis APPAP-2 aimed to create direct linkages between training farmers, strengthening local advisory service providers, and strengthening rural financial services. Technical support to farmers, service providers, PFIs, and other stakeholders was granted in the areas of: (i) business planning, management, and monitoring; (ii) accounting and financial and credit analysis; (iii) financial options and risk management; and (iv) legal and tax issues. The credit line amounting to about KZT 1,903.92 million (US$ 12.96 million) was provided to 83 farmers and entrepreneurs, mainly to finance seasonal agricultural/enterprise inputs and replacement/upgrading of critical equipment and machinery. By region, the highest share of borrowers was located in Kostanay Oblast (39.4 percent), followed by Aktobe Oblast (12.6 percent) and South-Kazakhstan Oblast (10.8 percent). The average interest rate ranged between 12 percent and 14 percent. The repayment rate of loans is estimated at 98 percent. Approach The financial analysis focused on beneficiaries rather than on macro considerations such as export earnings. The prime objective was to ascertain the viability of project activities, particularly at the farm/enterprise level. An optimum number of representative borrowers was identified to encompass the wide variation within the country and yet achieve a reasonable degree of precision. Information was collected during field visits, discussions with borrowers and PFIs, and a review of available reports. The results were compared with those projected at appraisal. Finally, a sensitivity analysis was carried out to assess the impact of various parameters on the financial returns. Analysis Thirteen project credits were analyzed (16 percent of borrowers), amounting to about KZT 571 million (US$ 3.9 million) or 30 percent of the total credit line. The sample is considered sufficient for the analysis to be extrapolated across the entire project. Detailed data on the credits analyzed are presented in Table A3.1. Table A3.1: Project Completion – Key Data on Analyzed Project Credits a Investment Amount, Credit Amount, Incremental Benefit, Borrowers KZT 000s KZT 000s KZTs 000s Medium Farm 1 108,000 42,000 27,154 Small Farm 1 59,000 27,000 21,612 Small Enterprise 1 4,200 2,700 540 Medium Enterprise 1 33,000 25,000 22,944 Small Enterprise 2 9,700 8,400 2,568 Medium Farm 2 31,000 7,000 3,132 Medium Farm 3 38,000 10,000 48,048 Large Farm 1 119,000 100,000 13,812 Medium Farm 4 81,000 61,000 41,304 Medium Farm 5 20,124 15,000 18,252 Large Farm 2 406,668 247,500 125,213 Small Enterprise 3 14,900 14,700 21,725 Small Farm 2 12,803 10,800 32,146 (a) Small, medium, and large farm/enterprise codes are used for consistency with the PAD and for confidentiality. 39 Table A3.2: Project Appraisal – Farm and Enterprise Models: Financial Results, Ratios, and Switching Valuesa Switching Values, % NPV, Incremental Incremental Model IRR, % Incremental Incremental Incremental KZT 000s Production Investment Revenues Inflows Outflows Costs Costs Northern Region-Large Farm 41,071 24 -17 -10 23 105 12 Northern Region-Medium Farm 4,649 14 -6 -4 8 21 6 Northern Region-Small Farm 149 13 -2 -2 3 8 2 Western Region-Medium Farm 13,531 19 -13 -10 19 51 14 Western Region-Small Farm 378 16 -6 -5 8 24 7 Eastern Region-Medium Farm 6,917 14 -5 -4 7 18 5 Eastern Region-Small Farm I 251 13 -2 -2 3 6 2 Eastern Region-Small Farm II 518 31 -17 -12 23 193 14 Central Region-Medium Farm 26,333 23 -20 -15 31 101 21 Central Region-Small Farm -152 9 5 4 -5 -21 -4 Southern Region-Medium Farm 11,977 23 -17 -14 25 92 19 Southern Region-Small Farm I -1,040 1 34 22 -34 -67 -24 Southern Region-Small Farm II 162 13 -1 -1 2 5 2 Southern Region-Small Farm III 84 15 -7 -5 11 16 7 Household Plot 386 >50 -40 -27 77 432 37 Replanting of Apples 3,132 30 -57 -34 127 193 51 Tomato Paste Plant 7,893 NA -3 -2 3 174 2 Milk Processing 12,838 NA -12 -9 13 359 10 Milk Collection 2,372 NA -4 -4 5 186 4 * The switching values show the percentage by which costs would need to rise or benefits decrease before the NPV reaches zero, associated with each of the values (at 12% opportunity cost). Some models show that benefits after financing would be positive beginning in the first year; therefore no IRR could be calculated. NA =Not available. Table A3.3: Project Completion – Farm and Enterprise Borrowers: Financial Results, Ratios, and Switching Values Switching Values, % a NPV, Incremental Incremental Borrowers IRR, % Incremental Incremental Incremental 1000 KZT Production Investment Revenues Inflows Outflows Costs Costs Medium Farm 1 106,394 33 -30 -30 69 110 42 Small Farm 1 108,751 58 -25 -25 40 206 33 Small Enterprise 1 283 13 0 0 0 8 0 Medium Enterprise 1 141,915 228 -46 -46 103 482 85 Small Enterprise 2 10,521 36 -9 -9 11 121 10 Medium Farm 2 -4,284 9 1 1 -1 -15 -1 Medium Farm 3 324,963 N/A -41 -41 74 958 68 Large Farm 1 -3,082 11 0.3 0.3 -0.3 -2.9 -0.3 Medium Farm 4 236,196 104 -35 -35 63 327 53 Medium Farm 5 118,364 975 -5 -5 5 659 5 Large Farm 2 460,378 31 127 127 Small Enterprise 3 148,971 N/A -54 -54 129 1,120 116 Small Farm 2 228,678 N/A -47 -47 93 2,000 89 * Small, medium, and large farm/enterprise codes are used for consistency with the PAD and for confidentiality. Some models show that benefits after financing would be positive beginning in the first year; therefore no IRR could be calculated. NA =Not available. Results Tables A3.2 and A3.3 show the main results of the financial analysis. In summary: (i) overall, gross, and net returns increased reasonably after loans were obtained; (ii) benefit/cost ratios demonstrate the attractiveness of the investments; and (iii) the level of profitability varied significantly between activities. Two credits had negative NPVs and 40 are therefore not attractive for financing. Positive NPVs for the farms and enterprises analyzed range from KZT 283,000 to KZT 460,000,000. IRRs range from 13 percent to 975 percent. These IRRs are much higher in comparison to the numbers projected during appraisal: NPVs between KZT 84,000 and KZT 41,000,000; IRRs between 13 percent and 50 percent. Favorable cash flows from the most analyzed investments indicate that the project credit line would continue revolving effectively even after closure. Sensitivity analysis Sensitivity analysis was undertaken to assess the impact on financial returns of changes in: (i) output prices; (ii) expected outputs; (iii) operating costs; (iv) interest rate; and (v) investment costs. The analysis showed that credits are more sensitive to changes in both outputs and price assumptions than they are to variations in investment, operating costs, and interest rate. However, they remain reasonably sound in revenue terms. Summary of findings  Although large farms have higher net incomes and cash flows, they commonly have lower cost/benefit ratios compared to medium and small farms.  Farms/enterprises are more sensitive to changes in output and price assumptions than they are to variations in investment, operating costs, and interest rates.  Farms with diversified production are more profitable and less risky.  Optimal use of available resources, diversification and/or a combination of various activities, appropriate marketing, and risk management are keys to successful business and assured loan repayments. No formal economic analysis was undertaken at appraisal due to the uncertainty of the scope and types of loans. Moreover, the need for economic analysis is justified by the presence of significant distortions in the economy. However, agricultural reforms in Kazakhstan are well advanced, and there is little rationale for an overall economic analysis, as all major distortions between domestic and border prices essentially have been removed. Nevertheless, with an average net incremental income at US$ 0.66 for each dollar borrowed, the total NPV of the credit line of US$ 12.96 million could be estimated at about US$ 16.5 million. The appraisal estimated a much higher NPV, at about US$ 50.1 million. The shortfall is explained by significant underutilization of the credit line. Fiscal impact Incremental recurrent costs after the project’s completion are envisaged only for operation and maintenance of meteorological equipment. This cost amounts to about US$ 125,000 per year or less than 0.1 percent of state expenditures on agriculture in 2012. The equipment has been officially transferred to the balance sheet of Kazhydromet under the Ministry of Environmental Protection, and a sufficient budget has been allocated for operation and maintenance. 41 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Eustacius Betubiza Senior Microfinace Specialist ECSSD TTL Samir Suleymanov Operations Analyst ECSSD Microfinance Maurizio Guadagni Sr. Rural Development Specialist ECSSD Rural development Sandra Broka Rural Finance Specialist ECSSD Rural finance Panayotis Varangis Lead Economist ARD Commodity Exch. Olivier Mahul Sr. Insurance Specialist OPD Insurance Helen Shahriari Sr. Social Scientist ECSHD Social Environment/ John Ambrose Consultant AFTU1 Safeguards Bulat Utkelov Operations Officer ECSSD Operations support Talimjan Urazov Consultant ECSSD Economic analysis Anarkan Akerova Counsel LEGEC Legal Anara Jumabaeva Financial Analyst FAO Financial analysis Hannah Koilpillai Finance Officer LOAG1 Disbursement Allen Wazny Sr. Fin. Management Specialist ECSPS Fin. management Naushad Khan Lead Procurement Specialist ECSPS Procurement Renate Kloeppinger-Todd Rural Finance Adviser ARD Rural Finance Michael Wills Consultant ECSSD Microfinance Hennicus van Oosterhout Consultant ECSSD Rural Development Administrative Daphne Sawyerr-Dunn Program Assistant ECSSD support Administrative Anara Akhmetova Team Assistant ECCKZ support Administrative Aitolkun Kourmanova Program Assistant ECCU8 support Supervision/ICR Eustacius Betubiza Lead Rural Finance Specialist ECSSD TTL Sandra Broka Sr. Rural Finance Specialist ECSS1 TTL Talimjan Urazov Operations Officer ECSS1 Operations support Norpulat Daniyarov Financial Management Specialist ECSPS Fin. management John Otieno Ogallo Sr. Fin. Management Specialist ECSO3 Fin. management Olivier Mahul Program Coordinator FPDSN Insurance Gurcharan Singh Sr. Procurement Spec. ECSPS Procurement Samir M. Suleymanov Sr. Operations Off. ECSSD Microfinance Nurbek Kurmanaliev Procurement Specialist ECSO2 Procurement Aliya Kim Finance Assistant ECCKA Fin. management Ramiro Jose Itturioz Sr. Insurance Specialist CMPNB Insurance Kosuke Anan Social Development Specialist ECSS4 Social Anara Akhmetova Procurement Assistant ECCKZ Procurement Arcadii Capcelea Sr. Environmental Specialist ECSS3 Environment Administrative Valencia Copeland Program Assistant ECSSD Support 42 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) US$ 000s (including Stage of Project Cycle travel and consultant No. of staff weeks costs) Lending FY01 0.23 FY02 13.73 FY03 118.44 FY04 471.74 FY05 56.37 Total: 660.51 Supervision/ICR FY05 37.21 FY06 122.10 FY07 149.60 FY08 128.20 FY09 87.40 FY10 79.60 FY11 136.50 FY12 94.70 Total: 835.31 43 Annex 5. Beneficiary Survey Results Not applicable 44 Annex 6. Stakeholder Workshop Report and Results Not applicable 45 Annex 7. Summary of Borrower's ICR Brief report on outcomes of implementation of the Second Agriculture Post- Privatization Assistance Project Being implemented by MOA and the World Bank since 2006, the Second Agriculture Post Privatization Assistance Project (APPAP II) is aimed at improving the sustainability of the agricultural crediting system, stabilization of profitability of agricultural enterprises based on availability of more affordable long-term credits in the agricultural sector and improved access of farmers, small and middle-sized commodity producers to information, consultations and training on the basis of development of the financial consulting services system. The project was implemented under the Loan Agreement concluded between the Republic of Kazakhstan and the World Bank ratified by Law of the Republic of Kazakhstan of December 14, 2005 No. 99. The total project cost is US$21.918 million, out of which:  US$8.525 million – proceeds from the IBRD loan;  US$13.393 million – funds of the Republican budget (RB). The Project Structure consists of two areas: Technical assistance co-financed from the Republican budget; The credit line which was implemented through participating financial institutions at the expense of funds of the Republican budget and the World Bank loan. The principal objectives of the Project are:  Building capacity for viable rural businesses through strengthening and expanding the rural financial services;  Supporting agricultural risk management initiatives and improving marketing efficiency;  Facilitating the development and implementation of new financial instruments by commercial banks and leasing companies for deepening rural financial outreach;  Supporting sustainable development of rural businesses that are currently excluded from the formal banking sector.  The main participants in the Project are:  The Republic of Kazakhstan represented by the Ministry of Finance which provides co-financing of the Technical Assistance program under the project and MOA appointed as the Project Manager;  The World Bank, which provides the long-term loan in the form of a credit line, supports the technical assistance program for rural outreach by the mainstream financial institutions and rural micro finance development;  PFI, involved local commercial banks: Eurasian Bank, Bank CenterCredit as well as micro-financial organizations which provide partial co-financing of Project credit 46 resources directly to beneficiaries – agricultural small and medium-sized businesses;  Representatives of small and medium-sized business operating in the agricultural sector that guarantee their own contribution if Project credit funds are allocated for implementation of their own investment projects. APPAP-II is the continuation of the three-stage 10-years joint program of the RK Government and the World Bank for Agriculture Post-Privatization Assistance. APPAP-1 which took effect on October 23, 1998 and was completed on July 31, 2003 was focused on laying a legal foundation, establishment of institutes and development of procedures aimed at supporting the improvement of efficiency of agricultural enterprises and providing loans to commercially viable re-structured enterprises. The Project has been implemented since March 2006. At that moment, the Project cost was US$ 70.4 million. Terms and conditions of project implementation are regulated by the following documents: 1. The Loan Agreement (the Second Agriculture Post-Privatization Assistance Project) between the Republic of Kazakhstan and the International Bank for Reconstruction and Development (Loan No. 4763 KZ); 2. Resolution of the Government of the Republic of Kazakhstan No. 139 of February 23, 2007; 3. Resolution of the Government of the Republic of Kazakhstan No. 969 of October 19, 2007; 4. The Feasibility Study (FS) executed during the preparation of the Loan Agreement; 5. The project operational and crediting manuals prepared by project consultants on the basis of the above documents, coordinated with RK MOA and the World Bank. During the project implementation due to external circumstances, the project Feasibility Study was amended three times, as a result its cost changed to US$ 21.918 million. At an early stage of the project, the Project Operational Manual coordinated with IBRD, the Ministry of Agriculture and the Ministry of Finance was developed. The Manual determines roles of all participants in the project and the procedure for implementation of project components. To perform works under the project, a team of consultants selected in accordance with IBRD procedures was established. The Project goals were expected to be achieved under 4 basic components of the Project:  Rural financial advisory services;  Agricultural risk management;  Rural outreach by the mainstream financial institutions, including the credit line offered through second-tier banks and leasing companies in the total amount of US$60 million; and  Rural micro finance development, including the credit line for a total amount of US$4.750 million for crediting of micro-financial institutions. It is worth noting that the credit and micro-credit line (in which participation of borrowing banks, micro-financial institutions and leasing companies was planned) accounted for 94 % of the Project cost. 47 Under the Rural financial advisory services component: a) a local consulting company was hired for training of trainers and consultants of the financial services network, b) 6 individual consultants, including 3 international were hired. Under the Agricultural risk management component: a) equipment and software for 40 new agricultural/weather stations were purchased, b) a foreign company and/or individual consultants (both international and local) were hired. Under the Rural outreach by the mainstream financial institutions component: a) a company and 2 international consultants were hired, b) a credit line which accumulates proceeds from the loan, the Republican budget and own funds of PFI was established. Under the Rural micro finance development component: a) a local company and 4 international consultants were hired, b) a credit line for PIFI was established at the expense of loan proceeds and Republican budget funds. Information on disbursement under the Second Agriculture Post-Privatization Assistance Project, Loan 4763-КЗ as of 01.01. 2012 Total Total Loan Component title Co-financing in Tenge in in Tenge in Tenge in US$’000 in US$’000 ‘000 US$‘000 ‘000 ‘000 COMPONENT 1 Rural financial advisory services 0.00 0.00 1 174.67 153 045.60 1 174.67 153 045.60 COMPONENT 2 Agricultural risk management 0.00 0.00 1 564.65 231 458.20 1 564.65 231 458.20 COMPONENT 3 Rural outreach by the mainstream financial institutions, including. 6 525.52 956 774.70 6 823.85 994 941.90 13 349.37 1 951 716.60 Technical assistance 0.00 0.00 387.99 48 495.90 387.99 48 495.90 Credit line 6 525.52 956 774.70 6 435.86 946 446.00 12 961.38 1 903 220.70 COMPONENT 4 Rural micro finance development 409.20 60 729.00 557.51 72 433.00 966.71 133 162.00 COMPONENT 5 Project management 0.00 0.00 591.23 82 259.32 591.23 82 259.32 1 017 10 1 534 TOTAL: 6 934.72 503.70 711.90 138.02 17 646.61 2 551 641.72 48 Component 1. Rural financial advisory services The component was aimed at attaining two objectives: (i) instill in farmers the general awareness of the need to develop feasible business ideas and seek financing required for their materialization; and (ii) establishment of a nation-wide sustainable private financial advisory system. The basic differences between APPAP-1 and APPAP- 2 approaches include: (i) shift of focus to development of local advisory capacities (individual consultants, workers of consulting firms); training and certification are carried out under the project; however, consultants will work independently of the project; (ii) support of the trainer’s network for training of consultants; (iii) certification of consultants through examinations; and (iv) engagement of the training management company for assistance in its implementation. In accordance with the Feasibility Study for implementation of this component in 2007 and with application of IBRD procedures, FASET, BV, the Netherlands, (with which a contract for the sum of 128.583 million tenge was concluded) and the following international and local consultants were selected: 1. Business planning - G. Arymkulova (LC) and N. Kaskatayev (NC); 2. Taxation and legal aspects - M. Bobukeyeva (LC) and A. Darinov (NC); 3. Financial products - A. Patel (LC) and A. Dogalov (NC). Under the component the following works were performed: 1. 60 oblast trainers - consultants, 600 raion consultants were trained. 2. 4965 new business plans were developed for farmers. 3. 185 awareness raising workshops were arranged and held jointly with raion akimats, the total number of participants is 18249 farmers; 4. Re-certification (re-attestation) of trainers - consultants and local consultants. Training seminars under components 1, 2 and 3 of the project were held. On their part, all beneficiaries (farmers, specialists of banking and micro-financial sectors) were interviewed for assessment of qualification of trainers - consultants, quality and availability of training materials, work of trainers with audiences and arrangement of activities, results of which were used to determine the average score of training which by all above components was assessed from 3.7 to 4 points with a maximum score of 4 points. The analysis demonstrated that subject matters of held workshops are in high demand of specialists employed in agriculture. A large number of specialists and the entire audience stipulated by the Terms of Reference were covered by training. It was planned to hold 120 one-day information workshops for farmers. Actually, 162 workshops were held. The actual number of farmers and commodity producers who got consultations was 11 800. During 3 years, a total of 18246 farmers and agricultural commodity producers was trained. Over fulfilment by the number of held information workshops is due to the interest of farmers in obtaining additional information under the component. During the period from November 3 to November 20, 2009, trainings were provided in re-attestation of raion and oblast consultants. International and national consultants were involved in re-attestation of consultants. Re-certification (re-attestation) of local consultants 49 LC certification began in November 2009, 18 workshop on certification were held; 603 LCs were invited and 575 actually attended. The re-attestation contained a training element held by individual, national and international consultants. As a whole, more than 95 % of LC passed examination. Re-certification of instructors - consultants Re-certification of IC was carried out in Astana instead of four regional workshops as it had been originally planned. Examinations were conducted for IC; re-certification took place on November 20 at the beginning of the final workshop. Results were positive; all IC passed examination; the majority scored high points. The final workshop The final workshop was held in the building of the Ministry of Agriculture in Astana on November 20, 2009. The workshop was preceded by meetings between international and national consultants and IC invited on the eve, on November 19. During these meetings, consultants discussed the Project progress and further development of advisory services for agricultural financing. The final workshop was held for 60 IC (or LC who replaced IC), international and national consultants, and about 60 invited visitors from various organizations connected with agriculture. Among other invited were Mr. T.D.Urazov, Country Office of the World Bank, and Mr. A. Loeff, the Managing Director of Triodos Facet, and a representative of the Eurasian Bank. The latter briefly informed about conditions of loan provision under the credit line and timeframe of expert examination of the loan carried out by the Eurasian Bank. One of main challenges is the method for evaluation by the bank of collateral offered by farmers to secure credits. The summary of project progress, including data on performance indicators and results of monitoring, are presented in the Table below. The number of farmers’ requests for services increased everywhere: almost in all oblasts international consultants noted an increased demand for advisory services in the agricultural sector. On the average, each LC received requests from 6 to 79 new clients, i.e. farmers. Fluctuations are high, but not unexpected: some oblasts possess more advanced agricultural production capacity than others; LC interests and qualifications also vary. Nevertheless, it is a good result which demonstrates an increased demand for advisory services. Besides almost all LC noted that the number of requests of farmers increased; the lowest share was demonstrated by western oblasts, whereas oblasts with strong agricultural production and high number of LC reached almost 100 % outcome. There was an essential increase in the number of business plans developed during the Project: a total of 4965 new business plans were developed during the project implementation. It is a very good result and a strong indicator of both increase in demand and in the level of confidence of farmers in LC capacities. The number of business plans developed during the project Oblast Number of business plans developed during the project South 2414 East 317 West 390 North 1844 Total 4965 50 A significant number of completely developed business plans was financed by banks and other financial institutions; in this area the data vary highly by oblasts. In some oblasts it is 20 %, in others may be 45 %. To a considerable degree, this is due to availability of financial institutions and offers they can make. In those regions where banks and other financial organizations are active and effective, results are accordingly better. Component 2. Agricultural risk management In Kazakhstan, the Law on mandatory insurance in crop production was adopted in 2004 (Law of the Republic of Kazakhstan of 10.03.2004 No. 533-II On mandatory insurance in crop production). It was assumed that later as insurants and insurers would be acquiring skills and experience, the insurance system itself would improve. In recent years, serious problems were identified in the agricultural insurance system. Its main drawbacks are unprofitability, high level of underinsurance, corruption and complexity of obtaining payments for insured accidents. The objective of the Agricultural risk management component was to study the condition of insurance in crop production in Kazakhstan and to make recommendations for its improvement and development. In this area, since December 2010, Kazakhstan company LLP «Arca Consulting» and international consultants of the World Bank on agricultural insurance (Ramiro Iturrios, Charles Stutely and Andrea Stoppa) conduct research. The goal of the research is to review the current situation, identify drawbacks and advantages, develop framework for improvement of the insurance system in crop production in Kazakhstan. The research covered Kostanay, Akmola, North-Kazakhstan, East-Kazakhstan, West-Kazakhstan, Pavlodar, Karaganda, Aktyubinsk and South-Kazakhstan oblasts. Under the component, the following main types of works were performed:  Review of performance of agricultural production, namely grain production, with description of main agricultural production systems;  Review of the current insurance system in crop production in Kazakhstan, namely legal framework, performance, technical and financial outcomes;  Analysis of weather risk in grain production;  Development of proposals and recommendations for improvement of the insurance system in crop production;  Modernization of the weather monitoring system in 6 pilot areas in 3 oblasts;  Training of specialists involved in the insurance system in crop production. All these types of works were aimed at solving problems in the insurance system in crop production. LLP «Arka Consulting» and international consultants presented findings of their research during workshops of the Ministry of Agriculture held on July 21 and on November 8, 2011. During the workshop held on November 8 they suggested following a stage-by-stage plan for improvement of the insurance system in the area of crop 51 production. The workshop decided to recommend to the RK MOA Commission on Insurance in Agriculture that findings of the research be applied for improvement of the legal framework on insurance. In the framework of the Modernization of the weather monitoring system in 6 pilot raions selected on the recommendation of the Department of Agriculture of the Ministry of Agriculture and coordinated with Kazhydromet, the following activities were carried out: 1. Modernization of 5 existing weather stations with installation of MAWS301 automatic weather stations; 2. Establishment in 16 communities of automatic weather posts (AWP) with installation of MAWS110 automatic weather stations; 3. Provision of 3 oblast centers of hydrometeorology (Kostanay, Akmola, Pavlodar) with Delta mobile soil hydrometers, UK; 4. Modernization of weather information collection centers in 3 oblast centers of hydrometeorology. Implementation of these activities made it possible: • To ensure complete coverage of agricultural areas in pilot raions by weather monitoring; • To issue reliable weather information in case of weather hazards (insured accident); • To computerize processes of observation, transmission, collection and processing of weather data; • To measure soil humidity with mobile soil hydrometers promptly and reliably; • To establish in 16 communities workplaces for technician agrometeorologists who will keep under observation the condition of agricultural crops on nearby fields. The weather monitoring system was modernized by LLP «SKYMAX TECHNOLOGIES». Also under the project, 16 Kazakhstan specialists involved in the insurance system in crop production were trained at the «AGROSEGURO» training center under the Ministry of Agriculture of Spain (from 14th to 20th of November). Globally, the Spanish agricultural insurance system along with Canada and the USA are considered the most advanced and effective. The study tour was arranged by ATI of International Professional Academy «TURAN-PROFI». As a whole, it is possible to state that works and activities planned under the Production risk management component were performed. As a result of the review of the current insurance system in crop production, the main three blocks of most relevant problems which hinder its development were highlighted: 1) A legislative problem which consists in the fact that the current law On mandatory insurance in crop production contains many contradictions and problematic issues that require solution and harmonization with accepted international practice of insurance. This block determines the need to solve, first of all, such issues as: format of agricultural insurance, insurance mechanism, management and control, etc. 2) Ways of participation of the state in agricultural insurance. At present, the existing state support is not effective and does not perform its functions; and no institutional framework was established during the years of development of the mandatory insurance system in crop production. No specialized institution was 52 established to perform control and methodological function to ensure adequate state support of the insurance system in agriculture. It is necessary to develop reliable methodology for assessment of the capacity of the insurance market in agriculture, consequently, the amount of budget funds required for state support of agricultural crop insurance. It will make it possible to determine ways of participation of the state in the insurance system and to develop institutional framework of this system at the level of the state. 3) Training of qualified specialists in agricultural insurance and information work. This part includes the need for training of qualified specialists both out of public employees of the Ministry of Agriculture and other official agencies and workers of business entities involved in the agricultural insurance system. Besides, it is necessary to carry out extensive information work among agricultural producers aimed at enhancing knowledge and culture in the area of agricultural risk management in connection with insurance. In addition, it is necessary to solve issues of interaction of such organizations as Kazhydromet, the Agency on Statistics, insurance companies and others with regard to timely information support of the agricultural insurance system. The international consultants of the World Bank highlighted the following features of the insurance system which deserve further consideration: 1. Financial outcomes of the system of agricultural crop insurance which consists in issuing one-time policies worsened in recent years; 2. The state subsidy at a rate of 50 % of insurance requirement for payment to be made through the Fund of Financial Support to Agriculture (FFSA) for last 6 years (2005- 2010) amounted to 4.1 billion tenge or on the average to 685 million tenge a year (in 2010 – 1.4 billion tenge), i.e. annual budget expenditures of the Government of Kazakhstan on the average were 685 million tenge a year. 3. Without Aktyubinsk and West-Kazakhstan oblast, budget expenditures of the Government of Kazakhstan would be 409 million tenge a year, thus 40 % would be saved; 4. In addition to budget expenditures, the Government of Kazakhstan covers operational expenses of the Fund of Financial Support to Agriculture, which on the average are 46 million tenge a year. 3 stages of development of the insurance system in crop production were suggested: Stage I: Short-term – Strengthening of the existing mandatory insurance system; Stage II: Transition to market insurance system in crop production; Stage III: Mid-term - Transformation into a commercial pool of the insurance system in crop production. At Stage I it is necessary to carry out the following activities: 1. To strengthen the regulatory framework; 2. To improve calculations and estimation of insurance premiums for policies; insurance against the risk of loss of capital investment; 3. To take measures to increase profitability; 4. To strengthen systems and methods of work; 5. To strengthen organizational structures; 6. The top limit of loss in case of natural disasters (protection against excess of loss); 7. To consider the issues of subsidizing insurance premiums. 53 The following recommendations are made:  To introduce amendments into the legislation to enable insurance companies to establish conditions;  To increase the amount of the insurance sum;  To revise the methodology for calculation of insurance premiums in order to determine rates on the basis of actuarial calculations;  To revise the methodology for calculation of insurance premiums in order to introduce rates of insurance premiums at the raion level;  To consolidate terms and conditions of the existing insurance policy;  To exclude WKO and Aktyubinsk oblast from the insurance system;  To streamline and reduce expenditures for marketing, preliminary checks and procedures for loss assessment;  To create incentives for private insurance companies to maintain the insurance system in crop production;  To create equal conditions for commercial insurers and mutual insurance associations;  To develop reinsurance protection on the basis of catastrophic excess of loss both for private insurance companies and for farmer mutual insurance associations, at the expense of their own contributions;  To estimate whether farmers can afford increased rates in case of increase in the level of coverage as well as whether there is a need for state subsidies for insurance premiums. At Stage II it is necessary to carry out the following activities: 1. To introduction insurance of agricultural crops against multiple risks (MPCI) for individual producers; 2. To introduce reinsurance protection on the basis of excess of loss in insurance of agricultural crops. The following recommendations are made:  To conduct research on insurance of agricultural crops against multiple risks and to develop an insurance product;  To consider mechanisms of the state support for such a system;  Disproportionate reinsurance on the basis of excess of loss for the MPCI program. At Stage III it is necessary to carry out the following activities: 1. To make transition to voluntary insurance of agricultural crops; 2. To enhance the existing PPP in insurance of agricultural crops; 3. To cover risks; 4. To conduct research and develop insurance products; 5. To strengthen operational systems and procedures; 6. To introduce an official program for international reinsurance protection for the pool. The following recommendations are made:  To provide insurers with the possibility to choose risks (i.e. to choose independently, what farms, what crops and what regions they are ready to insure); 54  To establish links of insurance of agricultural crops with other services for farmers, for example: rural credits, governmental programs for assistance to farmers, etc.);  The Kazakhstan PPP on agricultural insurance should clearly determine the roles of private players and the public sector;  To establish a co-insurance pool in crop production among insurers engaged in insurance of other than lives;  To introduce new insurance products in insurance of agricultural crops to widen the range of choices available to farmers;  Increase competence in insurance of agricultural crops;  To streamline systems of and procedures for assessment of losses/damage at the site in insurance of agricultural crops against multiple risks;  The Government of Kazakhstan should assist insurers in purchase of shares, quotas and/or reinsurance on the basis of excess of loss to protect obligations arising out of risks stipulated by the co-insurance pool. Opportunities for development and introduction of new insurance products for insurance in crop production: 1. Insurance against stipulated risks (hailstones) 2. Insurance by the area-based crop yield index 3. Insurance by the weather index Conclusions and recommendations The stage-by-stage approach to transformation of the national mandatory insurance system in crop production based on capital investment losses into the market oriented system is recommended. Key characteristics of the process include: 2004 Mandatory Law Reforming • To make insurance in crop production voluntary • To allow insurance companies to choose what crops to work with and in what areas they want to work. • To reconsider insurance for Aktyubinsk oblast and WKO in the future, having prepared a separate program for assistance in case of disasters Institutional reforming and strengthening: • To consider the possibility to introduce a pool of agricultural crop insurance • To create equal conditions for commercial insurance companies and MIA Technical strengthening: • To introduce the assessment of premiums based on actuarial calculations at the raion level • To introduce new insurance products and programs for insurance of marketable agricultural crops Financial strengthening and reinsurance: • To facilitate insurance market entry for international reinsurance companies (proportional and disproportionate reinsurance) • To reconsider the financial role of the RK Government (through FFSA), concerning the provision of support in the form of subsidizing insurance premiums. 55 Component 3. Rural outreach by the mainstream financial institutions In accordance with the Agreement, the primary goals of component 3 included training of specialists of banks and leasing companies in agricultural crediting; and crediting, arrangement of transactions under the credit line in selected participating financial institutions (hereinafter referred to as PFI). To attain these goals, the following activities were implemented: - Provision of technical assistance to PFI that included capacity building in regional offices of banks and leasing companies by means of training in specific issues of rural crediting, leasing and structural financing. For implementation of this component, on a competitive basis, a contact was concluded with the Almaty Center for Banking Training» and international consultants Enzo Maravita, Srinat Keshavan and national consultants who trained by 400 persons in each area, including 280 credit specialists and 120 branch managers. A total of 808 persons was trained against 800 planned, so the goal to cover as many trained specialists as possible with engagement of local consultants was attained. Training was provided in the following subjects: 1. Structural financing; 2. Long-term financing of agricultural investments and leasing. Outcomes are shown in the following table: The number of attendees who registered for the The number of workshop workshop in advance attendees 1. Information on workshops held by E.Maravita Credit specialists 137 Branches managers 56 Total 260 193 2. Information on workshops held by S.Keshavan Credit specialists 172 Branches managers 84 Total 314 256 3. Information on the workshops held by national consultants from OF «ACBT» on long-term investment crediting and leasing Credit specialists 144 Branches managers 62 Total 223 206 Information on the workshops held by national consultants from OF «ACBT» on structural financing Credit specialists 115 Branches managers 38 Total 223 153 Information on Total Credit specialists 568 Branches managers 240 56 Total 1020 808 As a result of measures taken during the implementation of Component 3, the Project ensured: - Improvement in functional capabilities of 808 credit specialists and branch managers; - Growth in general rural and agricultural crediting of commercial banks and leasing companies by about 10 % a year; - Increase in crediting of small and medium-sized rural enterprises by participating commercial banks at the expense of their own funds. The credit line The credit line for financial sector, proceeds from which were designed for crediting of private farms, agricultural companies and other rural enterprises. Credits were provided on the basis of the Loan Agreement and the Guidelines on rural investments for financial sector. Due to the fact that the Feasibility Study developed for the project had been prepared before the adoption of new legal acts (the Budget and Tax Codes), additional time was required to draft amendments, update the Guidelines on rural investments for financial sector, introduce amendments into the Feasibility Study for the project and to pass new coordination in the ministries and agencies, adopt a Resolution by the Government. So, during the period of project implementation, amendments were introduced twice into the Feasibility Study and the Guidelines on rural investments for financial sector. In addition, various state programs with lower rates became operational and created a certain competitive environment for the credit line implemented under the APPAP-2 Project. Moreover, adequate implementation of the credit line was complicated by the crisis of the banking system in 2008, as a result of which the majority of banks in the Republic could not meet requirements set to PFI. Two ways were provided for implementation of the credit line: a) Refinancing of credits financed by PFI to achieve objectives of the Project (no credits were provided under this scheme). b) Making advance payments to PFI on condition that the disbursement period is determined in ICA. Under this scheme, 2 banks (JSC «Eurasian Bank» and JSC «Bank Centrecredit») were credited. The average rate for sub-borrowers was about 12-14 %, out of which 7.5 % is the refinancing rate of the RK National Bank and 4.5-6.5 % is bank margin; periods of credits are from 1 year to 3 years. Sub-borrowers, in their turn, provided co-financing in the amount of 25 % of the received credit; credit repayment risks were assigned to banks. Under the internal credit agreement No. 10BVU021 of 30.06.2009 concluded with JSC «Eurasian Bank» and five additional agreements, US$5390.5 million of loan proceeds and 794176 thousand tenge of co-financing were transferred. 74 credits were provided to the following business entities: - Individual entrepreneurs – 22; - Peasant farms - 8; - Various LLP – 42; - Joint stock companies - 2. 57 31 project for development of agricultural producers, out of which 20 for agricultural production (livestock production, crop production, poultry farming), 6 for development of processing, storage, packing, sell of agricultural products and other associated subsectors of agriculture, 5 for development of physical infrastructure of agricultural production, were financed. In April 2010, internal credit agreement No. 10BVU026 was concluded with JSC «Bank Centercredit», under which 1 tranche in the sum of 1000.0 thousand dollars from loan proceeds and 146600.0 thousand tenge of co-financing funds were transferred. 9 credits, out of which 7 were designed for investment in agricultural production, were provided. Credits were distributed with the following breakdown: individual entrepreneur - 1, peasant farm – 1, LLP - 7. As a whole, under the project, during the period from 2007 to 2011, 83 subprojects for a total amount of 1903920 thousand tenge were financed for replenishment of working capital, modernization and purchase of equipment as well as for other investment purposes. Subprojects were financed in North-Kazakhstan, Aktyubinsk, Kostanay, Zhambyl, South-Kazakhstan, Karaganda, Atyrau and East- Kazakhstan oblasts. Most credits were provided in the following regions: Kostanay, South-Kazakhstan, North-Kazakhstan, East-Kazakhstan oblasts. Component 4. Rural micro finance development The ultimate objective of the Rural micro finance development component is to increase the portfolio of rural credits of selected micro-financial organizations and to meet requirements for working capital and demand of small farmers and other rural small/micro businessmen for small investment credits. To achieve this objective, it was suggested attaining the goal of strengthening institutional capacities of individual PIFI by means of benchmark research to determine initial project level and to provide technical assistance for diversification of micro- crediting products and development of integration links, increase in the portfolio of rural credits of micro-credit organizations. In addition, it was suggested creating a credit facility and arranging operations under the microcredit line in individual PIFI. The component consists of two areas (subcomponents): (a) the technical assistance program for improvement of functional capabilities of participating microfinancial institutions – US$622 thousand; and (b) a microcredit line designed for financing of short-term and mid-term credits for replenishment of working capital and investment with a view to supporting sustainable rural microfinancing scheme in the sum of US$ 4750 thousand, out of which proceeds from the World Bank loan are US$3650 thousand, funds of RB co-financing are US$1100 thousand. To perform works under the component, JSC «Association of Microfinancial Organizations of Kazakhstan», international consultants Ruben Sammerlin and Michael Wills (consultants on IFI institutional development), Amritkumar Patel (consultant on rural microfinancing) and Tilman Brue (consultant on development of links with commercial banks) as well as Roxana Savesku and Margarita Lalayan. The subject matters of workshops were as follows: 1. IFI institutional development; 58 2. Rural micro finance development: 3. Establishment of links with commercial banks; 4. Development of new products. A total of 400 attendees took part in the workshops. Participating MCO: MCO KazMicroFinance, MCO Asian Credit Fund, MCO Arbat, MCO Moldir, MCO Kazakhstan Fund of Businessmen Support, MCO Balsu Credit, MCO Bank-Notes, MCO Baspana Credit, MCO Arnur Credit, MCO Orta Nessie, MCO Orda Credit, MCO Iris, MCO Zhardem AC, MCO Delta Credit, MCO Arnur. Participating banks: ATF Bank, Eurasian Bank, Cessna Bank, Bank CenterCredit. Other participating organizations: Fund DAMU, Fund of Financial Support to Agriculture, Agrarian Credit Corporation. The achieved results are: 1. The total number of participants in training is 146 MCO; 2. The total number of participants in training are 310 branch managers, accountants, MCO credit specialists, out of which 215 employees are female; 3. Local technical assistance was provided at requests of 27 organizations from 11 cities of the Republic; 4. The number of participants in technical assistance is 84 persons, out of which 43 are women. 5. More than 7 MCO which participated in the Project after strengthening of policies and procedures applied for financing to international and investment funds, such as Simbiotics, Oikocredit, Blue Orchards, Frontiers, Response Ability, Incofin. 6. AMFOK increased its capacity as a training and consulting organization. The microcredit line Resolution of the Government of the Republic of Kazakhstan of October 19, 2007 No. 969 determined basic conditions of implementation of the microcredit line of the Project. The sum of credit is US$4.75 million, the currency of credit is tenge, the period of credit is 12 years with a four-year grace period for repayment of the principal, the interest rate is the refinancing rate of the National Bank. According to this document, the main financial intermediary that allows microfinancial institutions to receive credit resources from MCL proceeds of the Project should be the borrowing bank. In December 2009, an internal credit agreement was signed by RK MF, RK MOA and the Agrarian Credit Corporation as the borrowing bank. To implement the microcredit line, MCO should fully comply with general, financial prudential norms and norms of corporate leadership and management. However, in connection with difficult situation in the financial market at that time and due to the need to repay credit resources to external investors and banks, large and sustainable microcredit organizations meeting eligibility criteria refrained from obtaining proceeds of the microcredit line. The microfinancial organizations which submitted applications for funds were not approved due to failure to meet financial and prudential norms determined by the Loan Agreement. 59 In spite of the fact that the microcredit line «did not work», we believe that in the future the organizations which took or will take part in financing of IFI will take into account both positive aspects and weaknesses identified during project implementation. First of all, this is settlement of security issue, appropriate MCO assessment, cooperation with MCO as socially-oriented organization, in the long run possible in the capacity of partner, commercial agent. Component 5. Project management The Head of the MOA Department of Investment Policy and External Relations was responsible for daily project implementation; he was assisted by an ad hoc consultant team. However, MOA DFS bore general responsibility for financial management, including monitoring of cash flows funds and accounting. Categories of expenditures under this component included material and technical support, office equipment and additional operational costs incurred by MOA during implementation and monitoring of the project. Based on positive experience of earlier implemented Feasibility Study projects, PIU which directly performed all works stipulated by the project was established on a competitive basis. Due to the fact that the financial manager of the project is the Ministry of Finance, at early stages all Terms of Reference were coordinated with its departments. Actually, only one employee in the Ministry of Finance was involved in control, which resulted in significant delays in project implementation. Later the Ministry of Finance abandoned irrelevant functions and design works were coordinated only by departments of the Ministry of Agriculture supervising corresponding areas. Originally, the PIU manning table included 4 authorized positions responsible for 4 basic components of the project and the team leader (consultant – coordinator) simultaneously worked on the agricultural risk management component. During the project implementation, having reviewed the work of the unit, the project managers (the Ministry of Agriculture and the Ministry of Finance) arrived at a sound decision to include a translator position into the PIU manning table. Salaries of consultants were regulated by the order of the Ministry of Finance which approved the matrix of salary rates of consultants who work under projects of international organizations. The approved salary rates turned out to be much lower than in subordinated units of the Ministry of Agriculture or in businesses. This explains personnel turnover in PIU. At the end of 2009, the above order of the Ministry of Finance was revoked and the authority to establish salary rates for consultants was transferred to project managers. This resulted in stabilization of the consultants staff. 4. Updating the Feasibility Study During the project implementation, for the purpose of rectifying the identified problems and achieving better results, amendments were introduced into the Feasibility Study of the project three times. As a result, the Price risk management subcomponent 60 was cancelled from the project, the Agricultural risk management subcomponent was considerably reduced and changes were made in the crediting scheme. The main problem which complicated the project implementation was due to the 2007-2010 global financial and economic crises which most of all affected the banking system. The credit line of the project was uncalled which led to incomplete project implementation 61 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Not applicable 62 Annex 9. List of Supporting Documents 1) Project Appraisal Document 2) Loan Agreement and Supplemental Letter 2 3) Project Restructuring Papers and amended Supplemental Letters 2: - Restructuring Paper of October 4, 2010 (Report #56579-KZ) - Amended Supplemental Letter-2 (signed on January 11, 2011) - Restructuring Paper of November 3, 2011 (Report #65110-KZ) - Amended Supplemental Letter-2 (signed on December 30, 2011) 4) Aide Mémoires for the missions of: - March 20-31, 2006 - September 14-22, 2006 - February 4-12, 2007 - June 4-8 &15, 2007 - April 14-18, 2008 - October 13-17. 2008 - April 6-10, 2009 - October 12-16, 2009 - March 1-10, 2010 - November 22-29, 2010 - May 3-7, 2011 - November 7-11, 2011 5) Implementation Status and Results Reports (sequence #1- #14). 6) Country Partnership Strategy for the Republic of Kazakhstan for the period FY12-FY17 (March 30, 2012; Report # 67876-KZ) 7) Development Strategy for 2011-2020, KazAgroFinance, 2011 8) Statistical Bulletins of the National Bank of Kazakhstan (http://www.nationalbank.kz/?docid=222) 9) President Nazarbaev’s Address to the Nation on January 27, 2012 (http://www.parlam.kz/ru/presidend-speech/29) 10) Microcredit organization KMF, 2010 Annual Report 11) News from AMFOK website (http://www.amfok.kz/news/98.html) 12) Component Reports prepared by the Team of Consultants (2012) 63 55°N 50°E 55°E 60°E 65°E To 70°E 75°E To 80°E 85°E Tyumen‘ Novosibirsk To Kurgan To Chelyabinsk To R U S S I A N NORTH Petropavlovsk Novosibirsk F E D E R A T I O N Toby KAZAKHSTAN l a To lg Er Vo To Ufa tis Samara Kostanai (Irt To Barnaul Kokshetau ysh Ural To ) To Orenburg O Saratov b‘ Pavlodar To T orghay AKMOLA PAVLODAR Plateau Ekibastuz 50°N Ural'sk 50°N KOSTANAI (Ishim) ASTANA Esil Chapaevo skemen Öskemen Zhaiy Semipalatinsk (Ust-Kamenogorsk) WEST k Aktobe (Ural) KAZAKHSTAN hai Arkalyk Karagandy EAST Lake Yrgh Torg Zaisan Turgay Kazak h KAZAKHSTAN yz Vo lg Ayakos ATYRAU Embi a hem Z AKTOBE Shalkar Uplands To Astrakhan‘ Atyrau Zhezkazgan Balkhash KARAGHANDY Leps To Urumqi Aral i Lake 45vN su 45°N Lake Alakol ry Saryshaghan ar K Balkash Sa ata l To Urumqi Beineu Aral Baikonur C Ile Sea ALMATY Taldykorgan CHINA as MANGYSTAU ZHAMBYL pi Kyzyl-Orda Shu (Ch Aktau KYZYLORDA u) To Korla an Ustyurt Tal Sy da as r ri y a Shu Almaty To Nukus Plateau Turkistan Pik Khan-Tengri (6995 m) Sea 2001 LEVEL OF ARAL SEA Taraz Taraz 1990 LEVEL OF ARAL SEA 1960 LEVEL OF ARAL SEA SOUTH To Naryn AZERBAIJAN KAZAKHSTAN Shymkent KYRGYZ 80°E UZBEKISTAN UZBEKISTA N 40°N R E P. K AZAK H STAN 40°N SELECTED CITIES AND TOWNS OBLAST CAPITALS TU R K M ENISTA N TURKMENISTAN To Bukhoro To Dushanbe GALASY (CITIES WITH TA J I K I S TA N REGIONAL STATUS) This map was produced by NATIONAL CAPITAL KAZAKHSTAN the Map Design Unit of The RIVERS World Bank. The boundaries, 0 100 200 300 Kilometers colors, denominations and MAIN ROADS IBRD 33425R1 any other information shown on this map do not imply, on JANUARY 2007 the part of The World Bank RAILROADS 0 100 200 Miles Group, any judgment on the OBLAST BOUNDARIES AFGHANISTAN A FGHA NISTA N legal status of any territory, or any endorsement or INTERNATIONAL BOUNDARIES acceptance of such 50°E 55°E 60°E 65°E 70°E boundaries.