IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA TF-56730) ON A CREDIT IN THE AMOUNT OF SDR 20.1 MILLION (US$29.2 MILLION EQUIVALENT)

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA TF-56730) ON A CREDIT IN THE AMOUNT OF SDR 20.1 MILLION (US$29.2 MILLION EQUIVALENT) TO THE REPUBLIC OF AZERBAIJAN FOR A Report No: ICR SECOND AGRICULTURAL DEVELOPMENT AND CREDIT PROJECT IN SUPPORT OF THE SECOND PHASE AGRICULTURAL DEVELOPMENT AND CREDIT PROGRAM South Caucasus Country Unit Sustainable Development Department Europe and Central Asia Region June 25, 2012

2 CURRENCY EQUIVALENTS (Exchange Rate Effective October 25, 2011) Currency Unit = New Azerbaijani Manat AZN 0.78 = US$ 1 US$ 1.59 = SDR 1 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ABTC Azerbaijan Bank Training Center ISR Implementation Status and Results ACDP Agricultural Development and Credit IS Interim Survey Project AKIA Azerbaijan Credit Union Association M&E Monitoring and Evaluation APL Adaptable Program Lending MICH Market Information and Commercial Hub AZN New Azerbaijan Manat MIS Management Information Systems AZVET National Animal Disease MoA Ministry of Agriculture Information System BG Borrowers Group MoF Ministry of Finance CES Completion Evaluation Survey CGP Competitive Grants Program MTR Mid-Term Review CGS Competitive Grants Scheme NGO Non-Governmental Organization CIA Credit Implementing Agency NPV Net Present Value CIMMYT International Maize and Wheat Improvement Center NRICH National Research Institute for Crop Husbandry and Crop Diversification CPS Country Partnership Strategy OM Operational Manual CU Credit Union PA Private Advisors DTRA Defense Threat Reduction Agency PAD Project Appraisal Document EEE External Environment Effects PC Price Collector EMP Environmental Management Plan PDO Project Development Objective ERR Economic Rate of Return PFI Participating Financial Institutions FM Financial Management PMU Project Management Unit FOE Follow-on effects (from ADCP-II PRSC Poverty Reduction Support Credit groups) FPP Farm Privatization Project PVU Private Veterinary Units FY Financial year RAC Regional Advisory Committee GDP Gross Domestic Product RIG Rural Investment Guidelines GoA Government of Azerbaijan SAAC State Agency for Agricultural Credits IAS Information and Advisory Services SDR Special Drawing Rights ICARDA International Center for Agricultural Research in the Dry Areas SIG Special Interest Groups ICR Implementation Completion and Results Report SPPRED State Program on Poverty Reduction and Economic Development IDA International Development Association SVS State Veterinary Service

3 IBRD International Bank for Reconstruction and Development USAID United States Agency for International Development IFC International Finance Corporation USDA United States Department of Agriculture IPGRI International Plant Genetic Resources Institute VFU Veterinary Field Unit Vice President: Philippe H. Le Houerou Country Director: Asad Alam Sector Manager: Dina Umali-Deininger Project Team Leader: Rufiz Chirag-zade ICR Team Leader: Malathi S. Jayawickrama

4 AZERBAIJAN SECOND AGRICULTURAL DEVELOPMENT AND CREDIT 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 Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Annex 9. List of Supporting Documents MAP IBRD No

5 A. Basic Information Country: Azerbaijan Project Name: AGRICULTURAL DEVELOPMENT AND CREDIT PROJECT-II Project ID: P L/C/TF Number(s): IDA-42070,IDA ,TF ICR Date: 07/18/2012 ICR Type: Core ICR Lending Instrument: APL Borrower: GOVERNMENT OF AZERBAIJAN Original Total Commitment: XDR 20.10M Disbursed Amount: XDR 19.47M Revised Amount: XDR 20.10M Environmental Category: F Implementing Agencies: PMU under State Agency of Agricultural Credits, Ministry of Agriculture Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 12/13/2005 Effectiveness: 12/29/ /29/2006 Appraisal: 04/11/2006 Restructuring(s): 09/06/ /30/2011 Approval: 06/27/2006 Mid-term Review: 01/15/ /12/2009 Closing: 05/31/ /29/2012 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Moderate Satisfactory Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Moderately Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Satisfactory Overall Borrower Moderately Satisfactory i

6 Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project No at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Agricultural extension and research Agro-industry Agro-industry, marketing, and trade Theme Code (as % of total Bank financing) Rural markets Rural non-farm income generation Rural policies and institutions Rural services and infrastructure E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Henry G. R. Kerali D-M Dowsett-Coirolo Sector Manager: Dina Umali-Deininger Juergen Voegele Project Team Leader: Rufiz Vakhid Chirag-Zade Frauke Jungbluth ICR Team Leader: Malathi S. Jayawickrama ICR Primary Author: Malathi S. Jayawickrama F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The main objective is to further increase rural productivity and incomes by enhancing the access of farmers and small and medium rural enterprises to rural business and ii

7 agricultural support services including financial, advisory and veterinary services and by stimulating market-oriented investments in rural areas. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Indicator Indicator 1 : Value quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Incomes of participating farmers and rural entrepreneurs increased by 20% through improved access to services and through vertical integration. Average net income of farmers according to the baseline survey results was AZN 3211 Incomes of farmers and rural enterprises to be increased by 20% Average net income of farmers according to the completion survey results was AZN 4481 (increased in comparison with BLS period by nearly 40%) Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) Indicator 2 : Production marketed for cash increased by 20% as a result of increased quantity and improved quality of production. Value quantitative or Qualitative) Production marketed for cash according to the baseline survey was 60.2% 20% increase over base levels Production marketed for cash according to the interim survey was 76.6% (increased in comparison with BLS period by 27%) Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) iii

8 (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Improved outreach and financial performance of CUs--At least 10,000 persons accessing credit through CUs. 14,216 members in 3,000 persons accessed 10,000 clients 55 CUs of persons credit through CUs served accessed credit through CUs Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) Greater outreach to rural areas by PFIs (commercial banks and leasing Indicator 2 : companies), leading to increases in their rural loan portfolios. Rural outstanding loan portfolio as a percentage of Agricultural GDP increased by 2.5 % over base level. Value (quantitative or Qualitative) Rural outstanding loan portfolio is 8.4 % of Agricultural GDP Rural outstanding loan portfolio as a percentage of Agricultural GDP increased by 2.5 % over base level Rural outstanding loan portfolio is 11.3 % of Agricultural GDP Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) High quality innovations linking farmers and markets introduced by rural Indicator 3 : business entities. Around 90 rural business innovations conducted satisfactorily, with improved practices demonstrated to at least 150 rural business entities. Value (quantitative or Qualitative) 0 rural business entities Around 90 rural business innovations conducted satisfactorily, with improved practices demonstrated to at least 150 rural business entities 74 grants for introducing and transferring improved technologies awarded. Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) Grant recipients are carrying out the technology transfer activities satisfactorily. Some 7000 entrepreneurs and farmers out of which about 150 rural business entities and other business groups participated in technology transfer activities. Indicator 4 : Additional 20% of persons benefited from services in the old regions targeted during ADCP-I. Value About 277,000 farmers Base plus 20% Some 438,720 iv

9 (quantitative or Qualitative) (around 55 % of total farmers in the five regions) received advisory services in the five existing regions in ADCP-I farmers in five ADCP-I regions (base plus 58%) received advisory services under ADCP-II during Jan March Date achieved 12/29/ /29/ /30/2011 Comments (incl. % This represents a 58% increase. achievement) Indicator 5 : Around 50% of farm households reached in the new regions through training courses, demonstrations and individual advisory services. Value (quantitative or Qualitative) About 380,000 farmers reside in the new five regions 50% of farmers of the total covered Some 264,630 farmers (69.5% of total number of farmers) received advisory services in the new five ADCP II zones during Jan March Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) Indicator 6 : Value (quantitative or Qualitative) RACs recovered up to 20% of their operational costs in the old regions. 10% of operational cost recovered in the five existing regions 20% of operational costs By the end of 2010 about 20% of the operational cost was recovered. Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) Indicator 7 : Value (quantitative or Qualitative) RACs recovered up to 10 % of operational costs in the new regions. 0% in the new regions 10% of total cost in new regions By the end of 2010 about 12% of the operational cost was recovered. Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) Indicator 8 : Around 75% of VFUs recovered their operational costs, and livestock owners satisfied with services received. Value (quantitative Not available 75% of VFUs All established and supported 55 PVUs v

10 or Qualitative) are recovering their operational costs Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) Indicator 9 : Value (quantitative or Qualitative) Brucellosis controlled effectively, shown by 25% reduction in human cases. Not available 25% drop from the base Taking into account the delay in the commencement of the pilot project proxy indicator (abortion rate of animals) was used instead of original one. Therefore abortion rate decreased by around 70% Date achieved 12/29/ /29/ /30/2011 Comments (incl. % achievement) Indicator 10 : Around 35% of farmers satisfied with quality of locally adapted seeds and seedling varieties. Value (quantitative or Qualitative) Not available Not available According to the completion survey results 71% of farmers somehow benefited by the ADCP II satisfied with locally available seeds and seedling varieties Date achieved 12/29/ /29/ /30/2011 Comments These farmers in comparison with non project groups prefer to buy seeds and (incl. % seedlings from specialized research institutes and companies. achievement) G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 08/23/2006 Satisfactory Satisfactory /18/2007 Satisfactory Satisfactory /21/2007 Satisfactory Moderately Satisfactory /09/2007 Satisfactory Moderately Satisfactory 1.76 vi

11 5 08/23/2007 Satisfactory Moderately Satisfactory /04/2008 Satisfactory Satisfactory /09/2008 Satisfactory Satisfactory /03/2009 Satisfactory Satisfactory /24/2009 Satisfactory Satisfactory /21/2010 Satisfactory Satisfactory /08/2010 Satisfactory Satisfactory /27/2011 Satisfactory Satisfactory /01/2012 Satisfactory Satisfactory H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO Amount Disbursed at Restructuring in USD millions 09/06/2010 S S /30/2011 S S IP Reason for Restructuring & Key Changes Made reallocation of additional funds to ensure sufficient funding for all activities Project extension, reallocation of funds and for preparation of ADCP-III I. Disbursement Profile vii

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13 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. Driven by the oil boom, Azerbaijan s per capita income rose from a postindependence low of US$470 in 1995 to US$1,240 in The country had achieved macroeconomic stability over the years prior to appraisal, and the increasing oil and gas revenues provided significant prospects for further GDP growth. The Government of Azerbaijan (GOA), however, also faced a major challenge in terms of using its oil revenues to stimulate sustainable and broad-based growth to generate jobs, equity and reduce poverty. Ensuring non-oil sector growth, and, in particular, preventing the loss of competitiveness of the agricultural sector, which employed about 45 percent of the workforce, and enhancing rural sector growth were seen as critical to enhancing food security and providing opportunities for expanding incomes of Azerbaijan s poor. 2. Agriculture accounted for approximately 12.3% of GDP in 2004, and was the third largest economic sector after oil and construction. In addition, agro-industry, including textiles, represented over 50 percent of total manufacturing employment. Agriculture was also an important source of income and stability for rural areas where the benefits of the country s petroleum wealth were much less evident. Further, the share of expenditures on food by Azerbaijani households was high (75%), and even higher for the rural poor (81%). While rural households produced half of their food consumption, the reliance on own consumption was even higher (65%) for the poorest households (PAD, June 2006). 3. The State Program on Poverty Reduction and Economic Development (SPPRED) of 2003 articulated the Government s strategy to promote more balanced, private sectorled growth and reduce poverty. Against this background, in 1998, GoA requested World Bank support for agriculture, through a multi-phase Adaptable Program Lending (APL) instrument to address the medium-term development goals of the rural sector. The first phase, ADCP-I ( , US$30 million), sought to raise agricultural productivity by consolidating land reform, agricultural extension, and credit elements of the Bank s Farm Privatization Project (FPP, 1997) covering a wider geographic area. ADCP-II was to build on ADCP-I s achievements, and strengthen the credit union system, expand the outreach of rural advisory services, improve access to adapted technologies, and fill the gap between rural producers and higher-end markets by assisting value-added business activities. ADCP-II was approved on June 27, 2006 and became effective on December 29, Original Project Development Objectives (PDO) and Key Indicators 4. The overall development objective of the three-phase Program as a whole was to return Azerbaijan s farming areas to former levels of productivity under a new system characterized by private family and group farms operating in private markets. Within this Program objective, the PDO of ADCP-II was to further increase rural productivity and incomes by enhancing the access of farmers and small and medium rural enterprises to 1

14 rural business and agricultural support services including financial, advisory and veterinary services and by stimulating market-oriented investments in rural areas. The project was to build on ADCP-1 s achievements by: (i) strengthening the credit union system established under ADCP-I and stimulating commercial financial services suited for agricultural businesses; (ii) expanding the outreach of the rural advisory services established under ADCP-I; (iii) developing private veterinary services and modernizing and streamlining the State Veterinary Services; (iv) improving access to adapted technologies by one or possibly two selected agricultural research institutes; and (v) assisting producers and processors in marketing and improved product quality. Key Performance Indicators (KPIs): (i) Incomes of participating farmers and rural entrepreneurs increased by 20% through improved access to services and through vertical integration; and (ii) Production marketed for cash increased by 20% as a result of increased quantity and improved quality of production. 1.3 Revised PDO and Key Indicators, and reasons/justification. Not Applicable. 1.4 Main Beneficiaries 5. The primary project beneficiaries were expected to be individual farmers, farmer groups, rural micro-entrepreneurs, and the small to medium agro-processors. Secondary beneficiaries anticipated to benefit included: participating financial institutions (PFIs), through improved skills and a diverse menu of suitably adapted financial products and services, and the Credit Union network; the national network of advisory services, through training and technical support; the State Veterinary Service, through strengthened capacity for disease diagnosis; the National Research Institute for Crop Husbandry and Crop Diversification (NRICH) and its experimental stations, through modernization and reforms. 1.5 Original Components 6. Component 1: Agricultural Business Services (US$42.1m) sought to support rural businesses to improve the linkages between their production and markets, and to enhance access to financial services by small and medium rural enterprises (including farmers), agro-processors, and other forms of agribusinesses, through: (a) capacity building in PFIs in order to improve their staffs lending skills and to promote new financial products; and (b) providing badly needed funds for lending to their clients. Component 1 included four sub-components: (i) Financial Services for Small Agribusiness/Credit Unions; (ii) Financial Services for Medium Agribusinesses/Banks and Leasing Companies; (iii) Development of Efficient Rural Market Links; and (iv) Rural Business Advisory and Market Service. 7. Component 2 - Agricultural Support Services (US$14.33m) aimed to enable farmers to improve their productivity and quality of production by expanding the outreach 2

15 of the advisory system, strengthening the provision of private veterinary services, and improving access to adapted technologies. It included three sub-components: (i) Information and Advisory Services (IAS), to build on the foundations established under ADCP-I and further develop the advisory system to cover a wider geographical area using a similar approach; (ii) Veterinary Services, to enhance access to quality veterinary services throughout the country by expanding and strengthening the private Veterinary Field Unit (VFU) system, supporting the privatization of the State Veterinary Service (SVS) field services staff, strengthening the disease surveillance and preparedness systems, and implementing an agreed control program against at least two priority diseases; and (iii) Improved Access to Adapted Technologies, where ADCP-II was to build on the experience gained under ADCP-I and provide one or two selected research institutes to improve their capacity to develop and demonstrate adapted technologies, focusing on variety improvement and crop husbandry. 8. Component 3 - Project Management (US$1.28m) sought to support the establishment and operation of a Project Management Unit (PMU) under the Ministry o f Agriculture and to build on the structures established under ADCP-I. 1.6 Revised Components. Not Applicable. 1.7 Other significant changes 9. Reallocation of Funds and Extension of Closing Date. ADCP-II was restructured on September 6, 2010 (based on a review in March 2010 of the financial status of project components) to ensure sufficient funding for the remaining activities. Rapidly rising prices had resulted in increasing costs for most IAS sub-component activities and project operation costs and necessitated reallocation of additional funds to these categories The project was restructured again in May 30, 2011 in response to a request from GOA to: (i) extend the project closing date from May 31, 2011 to February 29, 2012, to complete remaining project activities; and to (ii) reallocate funds to support agreed activities and ensure the most effective use of undisbursed credit funds under the proposed extension. In particular, the reallocation was to continue funding the pilot brucellosis program and develop the animal disease information system, provide additional TA for specialized studies on seeds and food safety standards, and develop and expand private veterinary services. The extension was also to allow building into the project as many activities as possible to help prepare for ADCP-III. 2 1 The reallocation (of SDR 691,500) is set forth in paragraph 2 of Section IV.A of Schedule 2 to the Financing Agreement (Restructuring Paper, August 31, 2010). 2 The reallocation of SDR 386,000 and these changes were set forth in Section IV.B.2 and in paragraph 2 of Section IV.A of Schedule 2 to the Financing Agreement (Restructuring Paper, May 26, 2011). 3

16 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 11. Project preparation activities to underpin ADCP-II commenced during ADCP-I, and integrated experiences from the first phase. For example, the Competitive Grants Program (CGP) established under ADCP-I had helped to instill a famer-oriented and problem-specific approach to promoting agricultural technology, and this was further improved, with strong support from Government. ADCP-II also planned to expand activities based on the positive experiences of private sector participation under ADCP-I. GoA expressed strong commitment and ownership, and participated actively in project preparation and design of Phase II. For example, at the Government s urging, ADCP-II shifted the CGS sub-component from the research institute-focused grant program to a more market-led and demand-driven program to address requests from various rural business enterprises and thus emphasize constraints identified by beneficiaries. GoA s commitment is also demonstrated by its contribution of approximately US$9 million for completing the rehabilitation of the National Research Institute for Crop Husbandry and Crop Diversification (NRICH) main building and its regional facilities (in addition to ADCP-II funds for limited essential upgrading of NRICH labs). 12. ADCP-II incorporated several key lessons in its design, from ADCP-I and other donor activities in Azerbaijan and the region. These were: (i) the need to promote a wider outreach and to enhance the capacity of participating financial institutions (PFIs) and offer a greater range of financial instruments; (ii) the need to strengthen the linkages between producers and processors, as weak links remained an impediment to agricultural growth; (iii) that while advisory services offered under ADCP-I had led to a strong impact on productivity and incomes, it was necessary to create a sustainable national network with an increased focus on business development; (iv) that farmers were willing to pay for private services, as indicated in previous experience, but that private veterinary services needed more income-generating opportunities in order to become self-sufficient; and (v) that while the CGS generated high interest, the functional linkages between the research and advisory systems and with producers and rural entrepreneurs needed to be better defined and improved. 13. The project s design included surveys to measure outcomes, which were undoubtedly useful, especially in assessing less quantitative outcomes such as farmer views on the benefits from different components. The design also considered the potential project risks and introduced mechanisms to mitigate their effects. Country-level inherent risks were considered high, while the project-level control risk was considered moderate. The project level control risk mitigation measures included the separate FM arrangements under the project; the use of external auditors acceptable to the Bank; and establishment of internal control system. 14. The Market Information and Commercial Hub (MICH) activities could have been better thought through. It seems at appraisal neither the Bank nor the client had much experience nor was well informed on the costs of setting up such a system. The estimated 4

17 budget for MICH quite insufficient and became an issue, which delayed implementation and resulted in a scale down of planned MICH activities. 2.2 Implementation 15. Overall, ADCP-II experienced a smooth start up, except in a few areas, where bottlenecks delayed progress towards laying the ground for good implementation. 16. The Ministry of Finance (MoF) signed the new Agency Agreement governing the Credit Union Funds after long delays, and with extensive changes to the Agreement, which deviated from the draft agreed to by all parties. The project team worked closely with MoF to overcome this issue and amend the signed Agreement. This delayed activities under the rural finance part of the Agricultural Business Service component, which finally got underway in early MoF also delayed in approving the Rural Investment Guidelines (RIG) and subsidiary loan agreements under the Credit line for agribusiness, stalling the start of this sub-component. The PMU worked closely with MoF to finalize the guidelines and disbursements finally commenced in May Establishment of the MICH was severely delayed, and affected implementation. The first procurement round failed (due to the financial proposal being far in excess of the amount budgeted for this activity) and MICH activities had to be scaled down. Eventually, a local company was contracted in July Overall, start-up activities to test approaches and methodologies before a full-scale commissioning of MICH commenced only in mid-2010, almost three and a half years into project implementation. The MICH has also experienced problems with respect to price collection, due to the insufficient quality of training initially provided to price collectors in The Veterinary Services sub-component experienced several problems that resulted in an unsatisfactory rating at the beginning of the project implementation. The main issue was the lack of commitment to follow the ADCP-II Implementation Manual (IM) for the PVU sub-component. The selection of veterinarians and contract procedures diverged from the IM. The market survey was also inadequate, leading to some misinterpretation and was subsequently modified. An action plan was prepared to improve performance and this was mostly completed by the mission in August 2007, and the rating was upgraded. As a result the project adopted a more sustainable approach to supporting PVUs with steep reductions in financial support over time and, by the end of the project, resulting in self-sufficient operations in all but one of the PVUs. This approach is being subsequently adopted by other projects and modified accordingly based on ADCP experience. 20. At the MTR, the newly-established licensing fees for private veterinary practice and drug production were seen as seriously undermining the project s efforts to establish private veterinary services, as the fees were high and prohibitive for developing the private sector. Although the Bank s mission had raised this issue with Government, it was 5

18 not resolved. The licensing fees and the reported subsequent harassment from tax authorities restricted operation of the PVUs supported by the program and was becoming a significant risk to their sustainability. The mission discussed the licensing issue with the MoA and subsequently with the SVS and the Agribusiness Department of the Cabinet of Ministers, and gave serious consideration to suspending the component. The Bank finally took up this issue with the Prime Minister s office to resolve it. The Presidential Decree about the fees was amended and fees were reduced to acceptable levels--from AZN 3000 to AZN 150 for private veterinary activities and from AZN 2000 to AZN 220 for drug sale. This was a significant commitment on the part of the Government to support the sustainability of the PVU activities through policy reforms. 21. The MTR identified certain shortcomings in the implementation of environmental safeguards. An action plan was agreed on and implemented to remedy the problems (see Section 2.4 below). 22. The poor and deteriorating quality of Credit Union (CU) lending portfolio put a severe strain on the profitability of the Credit Implementing Agency (CIA) and on the CUs, and affected the implementation of the small agribusiness/cu sub-component. While most CUs were performing well, a small group of CUs demonstrated weak governance, and the repayment rate of this group (with two CUs accounting for more than a half of bad loans) remained a concern. CIA s CU portfolio as risk (30 days) increased from AZN 0.19 million in December 2009 to AZN 1, 86 million in September Although the project satisfactorily met the target intermediate outcome indicator of over 95% financial recovery rate, by achieving an overall financial recovery rate of 97.42% as of September 30, 2011, CIA management needs to improve loan underwriting and collections in order not to jeopardize its future. Further institutional training of CUs is also needed, as governance continues to be an issue in some CUs. 23. Factors that contributed to successful implementation include: (i) the familiarity of PMU members with Bank agriculture projects in Azerbaijan (see Section 2.4 on Financial Management); and (ii) the flexibility shown by Government and the Bank in responding to emerging needs and in reallocating funds accordingly within the project s objectives and scope, i.e. project support to the computerized National Animal Disease Information System (AZVET) established initially under the Avian Influenza project and now operational in all regions, and project activities in upgrading the veterinary faculty of the Ganja Agriculture University through involving students in the pilot brucellosis program and project supported training activities. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 24. The project s M&E system was well-designed. The Results Framework was comprehensive and included relevant indicators to capture the project s activities under each component. The reporting formats for each component and sub-component were based on the annual performance targets and monitoring indicators as shown in Annex 3 of the PAD. The design did not include triggers for the next phase of ADCP (APL III). The design included outcome evaluation surveys, which were a strong aspect. The 6

19 Baseline Survey, 2006 (BLS); the Interim Survey, 2008 (IS); and the final Completion Evaluation Survey 2011 (CES) were well done, and the IS and CES used a similar questionnaire to the BLS, collected information on the same impact indicators, and covered most (88.5%) of the same groups and households. 25. The M&E system achieved considerable results. The PMU provided regular monitoring of project implementation, and the quarterly Progress Reports clearly reflected the status of implementation based on the performance indicators under each component. This information was utilized to both track progress and problems and served as a useful management tool, for example, in tracking changes in loan portfolio quality ratios of CIA, drafting relevant training materials for CUs, in assessing the demand for projectsponsored veterinary services and why some farmers did not avail themselves to these services, farmer satisfaction levels, and on how to expand the brucellosis program. The CES, which covered five regions where project activities commenced in 2006/07 and three regions where project activities started in 2008/09, should now serve as a baseline for continued project activities under ADCP-III. 2.4 Safeguard and Fiduciary Compliance 26. ADCP-II was assigned an environmental category Financial Intermediary (FI). To ensure that the project met the Bank s environmental safeguard policies (OP4.01), an Environmental Management Plan (EMP) was prepared and disclosed in April 2006, prior to the project appraisal. 27. At the MTR, implementation of environmental safeguards showed key shortcomings. Due to inconsistencies between the Rural Investment Guidelines (RIG) and the EMP, many agribusiness sub-projects financed through the participating commercial banks were under-categorized, and consequently, were not properly treated in terms of environmental impact mitigation. Operational manuals for operating the CGS and lending to CUs had only very brief reference to management of environmental impacts and missed references to the EMP and environmental management regulations to be applied. The Bank downgraded Environmental Safeguards to moderately unsatisfactory at the MTR and agreed on an action plan with the PMU to improve the environmental management system. Actions to be taken included: amendments to EMP to provide a clearer determination of sub-projects categories; amendments to the environmental section of the RIG to bring it in line with the EMP; the preparation of sample sub-project EMPs for the activities typically financed under the credit line to medium agribusiness in order to strengthen the capacity of PFIs in environmental screening and monitoring of subprojects; and more close on-site monitoring of selected sub-projects financed through both bank credits, CUs, BGs and Competitive Grant Scheme, to be undertaken by the PMU Environmental Specialist. These actions were completed following the MTR. 28. The final mission in March 2011 found that the environmental management and monitoring system for the credit line to medium agribusinesses was fully operational, and the revised RIGs were being followed. The PMU environmental specialist was also assisting PFIs and applicants throughout the cycle of implementing sub-projects. Under 7

20 the CGS and the credit lines to CUs and BGs, environmental management was proceeding satisfactorily. Environmental management capacity of PFIs, CIA and CGS has been enforced by a series of training sessions delivered in No major issues were reported as a result of monitoring visits. 29. Financial Management (FM). ADCP-II s financial management system remained satisfactory throughout implementation. The PMU already had the experience and capacity to implement ADCP-II, having implemented ADCP-I. FM staff of the PMU had also received training. The PMU maintained accurate accounting records of the project, and quarterly IFRs and annual audit reports were timely submitted and acceptable to the Bank. 30. Procurement. Procurement has been carried out in compliance with the Bank s procedures. At the beginning, there was a case of mishandling of procurement rules in relation to the IAS sub-component (as the PMU signed contracts without the Bank s no objection) but this was resolved. The procurement specialist was well acquainted with the World Bank s procurement procedures. The project carried out three post review missions. No major issues were identified. 2.5 Post-completion Operation/Next Phase 31. As foreseen in the PAD, a follow-on project, ADCP-III is being prepared as a third phase of APL, and will build on the lessons learned during implementation of the current phase of ADCP and the substantial progress made to date under the ADCP-II. The project is expected to: support the development of market-driven agri-food value chains; continue the process of expanding financial services for rural enterprises through commercial banks; and scale up the privatization of veterinary services while continuing to upgrade and modernize the State Veterinary Service to support public health functions. The project would also contribute to improving the regulatory and institutional basis for food quality and safety systems. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 32. ADCP-II s objectives are relevant to GOA s State Program on Poverty Reduction and Sustainable Development (SPPRSD), which sets out a vision where oil and gas would continue to play a critical role but would be accompanied by growth and income-generating opportunities in the non-oil sector. SPPRSD views agriculture as vital to food security and increasing employment and trade. ADCP-II is also consistent with the joint IDA/IBRD/IFC Country Partnership Strategy (CPS) for Azerbaijan (FY11- FY14), which emphasizes fostering a competitive non-oil sector. 33. ADCP-II s components were clearly linked and relevant to the PDO. Although the multi-activity approach led to a complex design and called for intensive supervision, these interventions were essential for building on activities initiated during ADCP-I to establish 8

21 new market relations for emerging small farmers and rural entrepreneurs following the comprehensive privatization and reform process. Project activities were also well-linked in terms of their implementation. For example, while advisory and extension services under Component 2 provided vital access for farmers to knowledge and technology in order to make informed investment decisions, the first Component increased the availability of rural financial services to farmers and small entrepreneurs for working capital requirements, and long-term credit for investment purposes. 34. The three-phase APL or incremental approach with flexibility to support long-term development goals also reduces risk and raises the likelihood of successful outcome, as later projects can be designed based on lessons and results from earlier phases. 3.2 Achievement of Project Development Objectives 35. Achievement of the PDO is rated as satisfactory. The two outcome indicators listed in Section 1.2 and below were well defined and reflected the project s PDO. 36. Three surveys were conducted to measure the project s achievements (see Section 2.3). The CES was conducted in the first quarter of 2011 and covered economic indicators and productivity for About 88.5% of the respondents were involved in all three surveys. The sample consisted of three main groups: ADCP-II groups and two control groups (flow-on effects--foe, and external environment effects--eee). The CES results are reported separately for five regions where ADCP-II activities started in 2006/07, and for three regions, where ADCP-II activities started only in late In the three regions, where project activities started in late , a survey was also conducted in 2008, which can be considered its baseline. Since the timeframe for fully measuring the impact of ADCP-II activities in these three regions is not sufficient, the achievement of the overall PDO is judged mainly by outcomes achieved in the five original regions. 3 However, the results of this 2008 survey for the two PDO outcome indicators are also reported below (i.e. progress from late to end-2010). Details of outputs by component that helped to achieve the PDO are presented in Annex 2. PDO Outcome #1: Incomes of participating farmers and rural entrepreneurs increased by 20% through improved access to services and through vertical integration. Increase in incomes In the five original regions, the net (mean) income from general agricultural activities of farmers who participated in ADCP-II activities increased from AZN (manats) 3211 in 2006 to 3518 AZN in 2008 and to 4481 in This represents a 27.3% increase from 2008 to 2010, and a 39.5% increase in The CES methodology is described in Annex 5 and in the respective reports. See Outcomes of Completion Evaluation Survey 2011 (Masalli, Makhchivan, Ganja, Sheki and Beylagan), and Outcomes of Completion Evaluation Survey (for 2008 to 2011) -- Salyan, Goychay, Khachmaz, Azerbaijan Republic State Agency on Agricultural Credits under the Ministry of Agriculture. 9

22 over the base year (Table 1). In terms of total income from agricultural activities of all respondents, this increased from AZN in 2006 to in 2008 and to in 2010, representing an increase of 28.2% from 2006 to In the three regions where activities started in late , the total income from agricultural activities of ADCP-II groups increased from AZN in 2008 to in 2010 (represending a 17.7% increase over two years) while the incomes of FOE/EEE groups increased from AZN in 2008 to in 2010 (a 6.6% increase). As a result of access to finance, the average income of the sub-borrowers who borrowed from the ADCP-II Credit Line has doubled, from AZN thousand before the financing, to AZN thousand. Table 1: Increase in net (mean) income of per ADCP-II farmer (AZN Manat) Mean on responses Surveys Cattlebreeding incomes Amount AZN Plantgrowing incomes Amount AZN Other agric. activities Amount AZN Income level from general agricultural activities 2010 CES IS % 2006 BS Average growth % of incomes per farmer % (in comparison to 2008) % (in comparison to 2006) 37. With respect to profit-making activities, 62.8 % of the CES respondents derived profits only from private farming activities (compared to 50% in 2006 and 58.3% in 2008). 38. The CES highlights significant improvements in access to services (including advisory, veterinary and financial services) and market-oriented investments that contributed to the increases in production and income. These include in the use of individual and group services of Private Advisors (PAs) and RACs in project areas, greater opportunities to invest in inputs, equipment, processing facilities etc. as a result of services of CUs, the availability of high-quality seeds, and in utilizing marketing channels for output sales. Activities under Component 2 aimed to help farmers to increase their productivity and quality of production by expanding the outreach of the advisory system, provision of private veterinary services, and improving access to adapted technologies. The project provided training to Private Advisors (PAs) and Regional Advisory Centers (RACs) who were then expected to then extend the information and advisory services to farmers. The project also worked with PVUs established under ADCP-I and established 30 new PVUs. 39. Improved access to Advisory Services: Of the CES respondents, 93.5% indicated having used individual services of ADCP-II while 92.8% had derived benefits from group 10

23 services. With respect to farmer satisfaction with the different components of services, the majority of respondents who received advisory services provided by the project noted that they were either satisfied or highly satisfied. Farmers reported impressive increases in agricultural production as a result of PA/RAC services, with 22%, 55% and 2.7% of respondents indicating increases of between 1-10%, 10-25% and greater than 25% respectively compared to Improved access to Veterinary Services: With respect to Private Veterinary Services (PVS), 85.8% of farmers had used PVS. The majority of the 14.2% who did not use the opportunities of PVS stated that they had no need for the services. Farmers who used the PVS reported satisfaction and productivity increases, with 36.3%, 26.1% and 10.3% of farmers indicating production increases of between 1-10%, 10-25% and greater than 25% respectively compared to The State Veterinary Service has now requested that the PVU program be scaled up country-wide and to incorporate 800 additional veterinarians to provide better animal health services to farmers and as a means to promote reduction in the salaried veterinary field staff at the village level as has been recommended in several project reports and the OIE evaluation of the veterinary services. 41. The Brucellosis Control program was implemented as a demonstration of the practical application of the operational aspects of the national disease surveillance and control programs which were being promoted under the project in close collaboration with the Avian Influenza Project and other donor projects. Through the program the project supported vaccination for a total of 490,000 sheep and goats. Other outputs included the procurement of more than 4 million doses of Rev 1 for the national control program. According to the census data, 5.1 million ewes and an expected 1.5 million immature females were eligible for vaccination in The abortion rate, which was selected as a proxy indicator for the evaluating the results of vaccination program, decreased by 60-70%. It can be safely assumed that this contributed to the increase in livestock assets of farmers discussed below and would lead to a reduction of the incidence of human brucellosis, a significant benefit of the program. The program has now been adopted by the Government to be scaled up country-wide. 42. The project, in cooperation with the Avian Influenza Project, also supported the establishment of the National Animal Disease Information System which was evaluated in the brucellosis pilot regions and has been subsequently scaled up country-wide with project support. This was an unexpected outcome of the project. 43. Improved access to Adapted Technologies: The project also provided better access to adapted technologies by modernizing and reforming NRICH, as described in Annex 2, including its research plans to suit the needs of farmers. The collaborative demonstration program between NRICH and RACs has been very successful in transferring new technologies to farmers. In the 2010/11 cropping season, 37 on-farm demonstrations were conducted by the Institute and RACs in 30 villages of 22 regions to show the performance of new varieties, efficient agronomic practices, water-saving technologies, conservation agriculture with wheat, barley, maize, chickpea and lentil both 11

24 under irrigated and rain-fed farming systems. Field days were also conducted for farmer groups. 44. NRICH s production of super-elite and elite seeds is presented in Annex 2. Overall, the distribution of these seeds to seed growers, and on-farm demonstration of technologies has led to significant yield increases. Even in 2010, which was unfavorable for crop production, wheat in 40 farmer fields gave a yield of 3.5 ton/ha, while the yield of progressive farmers near the demonstration plots was only 2.1 ton per hectare. The use of new varieties and production technologies increased profitability by 43.2%. On-farm demonstration of new chickpea variety Narmin was organized in 5 farms of 5 regions. Cultivation of this variety by farmers has enabled them to harvest 0.3 ton more yield per hectare and increase their profits by 31.5%. Overall, the seeds of new varieties of wheat, barley, maize, chickpea and lentil have been produced at experimental stations and by private commercial seed growers for rapid dissemination to farmers. 71% of ADCP-II groups were satisfied and indicated that the quality of the seeds were either good or very good, compared to 51% of the FOE/EEE groups. 45. As a complement to the CES, a separate survey was conducted in May 2011 and covered private seed farms (PSFs) in ten regions. Seed producing activities are the main income- generating activities of PSFs. PSF mainly get seeds of wheat, maize, barley, beans and clovers from the Regional Experimental Stations of NRICH in order to conduct their seed producing activities. The PSFs achieved average productivity of 4560 kgs per hectare during 2010, and sold on average to 14,324 farmers during the same year. 94% of the surveyed PSFs indicated that profits have increased after joining the seed sale system. 46. Improved Vertical Integration: Under Agricultural Business Services (Component 1), which sought to enhance links between production and markets, and through access to financial services, as described in Annex 2, the Credit Union (CU) subcomponent provided over 46,000 loans in the total amount of AZN million to 23,600 members of Borrowing Groups (BGs) and CUs to help investments in livestock, crop and retail/trade as of March 31, The number of people accessing credit through CUs was estimated at 14,216 as of September 30, 2011 (compared to the baseline of 3,000). Farmers who obtained credit through the CUs comprised 47.5% (in comparison to 37.8% in 2008). 47. Previous research in ADCP areas had shown that farmers had a need for credit. The CES respondents indicated that they were fully free to use credits for different areas, and that their production had increased as a result of being able to obtain credit. Farmers who engaged in livestock production prevailed in terms of getting credit. Farmers used credit for the following purposes: livestock breeding (73% of farmers); livestock fattening (58%); and stock feed (47%). In terms of the average quantity of livestock assets in ADCP-II districts between 2006 and 2010, these increased, for example, for sheep and goats, (2006), (2008) and 38.3 (2010). (See CES for other types of livestock and poultry). 12