PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Environment Category Date PID Prepared March 24, 2005 Date of Appraisal March 31, 2005 Authorization Date of Board Approval July 7, Country and Sector Background Report No.: Rural Enterprise and Small-Scale Commercial Agriculture Development Project EUROPE AND CENTRAL ASIA General agriculture, fishing and forestry sector (30%);Agricultural marketing and trade (20%);Micro- and SME finance (20%);Agroindustry (15%);General public administration sector (15%) P GOVERNMENT OF ARMENIA Ministry of Agriculture, Armenia Project Management Unit 74, Teryan Street, Yerevan Armenia [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) The rural sector in Armenia has suffered substantial disruptions over the last decade. The break-down of political authority and the loss of markets, coupled with a rapid land reform early in the transition period, led to land fragmentation and emergence of small mixed crop/livestock producers. These developments were compounded by migration from urban areas and the need to absorb some 300,000 refugees, mainly in rural areas. Most farms still operate at semi-subsistence levels with limited commercialization. The disintegration of the agro-processing and input supply network along with the loss of previously assured input and output markets severely affected farms and the agro-processing sector. In recent years, however, agricultural production has picked-up and commercial agro-processing has started to develop as a result of new investments, a restructuring and downsizing of the processing industry, some foreign direct investment, improved availability of credit, and increased demand. An increasing number of small and medium businesses are now being established in rural areas for processing, production and services. To date, these activities are mostly linked to agriculture activities and to a large extent represent the engines of growth and a key source of rural employment. Agriculture remains important for the national economy and, together with agro-processing, accounts for much of the country s employment and export earnings. It is the main source of rural livelihoods, with farm income accounting for some 51% of the total income of rural households. There are about 335,000 farm households with an average landholding of around 1.4 hectares. Farms generally are diversified with a strong subsistence orientation. Livestock production contributes around 40% of overall production and is characterized by an equally small-scale ownership structure. Poverty remains widespread in rural areas. In 2002, an estimated 45 per cent of the rural population lived below the poverty line, while 15% of the population lived in extreme poverty. The latest poverty assessment (2002) suggests that overall poverty incidence has declined in recent years. However, rural

2 poverty is still widespread and the rural economy has so far benefited relatively less than the urban areas from the overall substantial economic growth. Nevertheless, 2003 Household Budget Survey data indicate that the incidence of extreme poverty as well as overall poverty rates have declined in rural as well as in urban areas. In addition, 2004 data indicate that growth in the agricultural sector contributed more than other sectors to economic growth. The key concerns in rural Armenia include how to utilize most effectively the available means for rural production, and how to provide the rural population with employment and income opportunities for a sustainable rural economy. The agriculture sector will remain central to the development of viable farm and non-farm rural employment opportunities and an increased development of agro-processing, distribution and marketing enterprises will be required for the sector to develop further. Both upstream and downstream, direct investment in the sector will be necessary to achieve broader multiplier effects. The Government has embarked on a program to address the key rural issues within the framework of the Poverty Reduction Strategy Paper (PRSP). Sustainable economic growth and employment generation are recognized as important preconditions for poverty reduction. Major contributions to economic growth are expected to derive from the promotion of small business development and increased employment generation as well as improvements in the business environment. The Government s objectives for the agricultural sector are specified in its Agricultural Sustainable Development Strategy. The overall objectives are to promote sustainable agricultural development, to ensure greater food security, and to increase rural incomes. Key priorities in support of sustainable growth in the sector are to: (a) continue and deepen agrarian reform; (b) ensure food safety and improve food security; (c) promote the application of advanced agricultural technologies; (d) promote pedigree breeding and the improvement of animal health; and (e) promote agricultural processing and the development of associated supply and service infrastructure. 2. Objectives The objective of the project is to support the development of Armenia s small and medium-scale rural businesses by improving the ability of farmers and rural entrepreneurs to access markets and by stimulating market-oriented private and public investments in rural areas. The main target groups of the project are small and medium-scale farmers and rural entrepreneurs who would benefit from improved information services, access to finance, improved inputs and technologies, and support for marketing activities. The project contributes to higher-level objectives in three strategic documents: the Government s agricultural sector strategy, the CAS, and the PRSP. The Agricultural Sustainable Development Strategy specifies the Government s objectives for the agricultural sector. The overall objectives are to promote sustainable agricultural development, to ensure greater food security, and to increase rural incomes. The project is developed within the framework of the Government s strategy and assists the Government to further develop its strategic vision in the areas that the project will be active. The current CAS, presented to the board on May 20, 2004, is based on the Government s PRSP objectives. From the broad range of proposed interventions in the PRSP, the CAS focuses on three areas that fit the Bank's comparative advantage and complement activities of other donors: (i) promoting private sector led economic growth; (ii) making growth more pro-poor; and (iii) reducing non-income poverty.

3 The project would primarily contribute to the first two CAS objectives while also facilitating objective three. The project intends to stimulate market-oriented private and public investments in rural areas. The key task of the project will be to support farmers and other private entrepreneurs to increase their participation in rural economic activities. As such, the project would not only stimulate private sector led economic growth, but would do this in the less advanced, more remote and poorer regions. A large share of Armenia s poor relies on agriculture as a key source for survival and income generation. Given the project s focus on promoting agricultural production and increasing productivity and access to markets by smallholder farmers, the project will strongly contribute to the pro-poor objective of the CAS as well as to the private sector led economic growth objective. Special attention will also be given to activities that impact some of the poorer areas of Armenia. The project will also facilitate the reduction of non-income poverty through its community-focused component. Communities will be empowered to plan the use of their resources more efficiently and increase the amount of resources at their disposal. By doing so, the communities will have improved access to basic services such as water, transport and heating as well as other priority investments. 3. Rationale for Bank Involvement The Government of Armenia (GoA) is committed to the further development of the rural sector and has requested the preparation of a new Bank-financed rural project. The proposed project is responsive to this request for continuing support and is in line with the Agricultural Sustainable Development Strategy, with the proposed project components addressing the key areas of concern expressed by the Government. The project is being prepared concurrently with a Rural Sector Strategy Note that aims to identify priority interventions in support of increased rural productivity, incomes and employment. The Bank is well positioned to assist the GoA in the implementation of its agricultural strategy. The Bank has broad experience implementing rural programs in ECA countries that face similar challenges. The Bank also has a long-standing experience through its funding of several operations in the rural sector in Armenia over the past decade. At present, the Bank s portfolio in Armenia includes an irrigation project, a dam safety project, an agricultural services project, and a natural resources management project. In particular, the Agricultural Reform Support Project (ARSP), which has supported the development of advisory services as well as rural finance initiatives, has provided many invaluable lessons that are incorporated in the proposed new rural development project. The proposed project seeks to fill the gap between rural producers and higher end markets by assisting value-added business initiatives. Although agricultural production remains mostly semi-subsistence in nature, there is evidence that farmers and processors are beginning to move towards some vertical integration down the supply chain. There is an increasing demand from individual farmers, producer associations, and small and medium enterprises (SMEs) for advisory services, marketing support and access to financial services. In addition, the proposed project builds on the joint efforts of Armenia s government and the international community to foster the development of rural areas. Several international and bilateral organizations are active in this process as well as ongoing Bank projects. The project will consider the lessons learned from previous projects and will coordinate with other institutions active in the rural areas. For example, USDA and USAID are active in the promotion of market opportunities while other donors and international NGOs have supported activities such as irrigation, formation of producer groups, microcredit and community development. IFAD has recently approved a new project that would cover seven regions (Marzes) and DFID is strengthening local Government in two Marzes to increase their capacity to develop PRSP-based regional development plans. The proposed project will aim to complement ongoing

4 or planned activities of other institutions and to fill critical gaps. The project will also seek to support key policy measures and introduce new instruments that are currently not supported by other donor projects. Donor support is often regionally concentrated and implemented using different approaches. The project would seek to facilitate and coordinate present activities while building primarily on existing institutions. 4. Description The proposed project would consist of four components to be implemented over four years. The project would have a three-tiered approach by addressing critical gaps at the farm level, at the rural business and agro-processor level, and at the community level. Component A - Small Rural Business Support Component Objective: The objective is to support rural businesses to improve the link between their production and markets. The component aims to enable businesses to develop their supply chains efficiently, and to expand market opportunities through the provision of adequate financial services and targeted business support. Issues Addressed: An increasing number of small and medium businesses are being established in rural areas for processing, service provision and production. These activities are mostly agricultural but also non-agricultural in their scope, and, to a large extent, represent the engines of growth and a key source of rural employment. Many of these emerging businesses have been supported during their establishment phases by various donor programs. However, an insufficient range of financial and business management services and poor access to technological improvements to improve their competitiveness limits their continuing development. Target Group: The project would work primarily with existing finance and business institutions to provide the services, and with developing and start-up rural businesses, registered associations and other legal entities. Component Activities: The component would provide support to the further development of small rural businesses and agro-processors through: (a) enhanced rural financial services such as credit for working capital requirements, long-term credit for investment purposes, and leasing programs for processing and agricultural equipment; (b) promotion of rural business linkages through a program of small grants provided on a competitive basis to introduce and demonstrate business and technological innovations that could improve market access and linkages between producers and processors. Rural Financial Services: The project will: (a) support capacity building to participating financial institutions (PFIs) in order to promote requisite lending skills, and facilitate the development and widespread use of suitable financial instruments and methodologies; and (b) provide badly needed long term capital. (a) Capacity Building. The project will strengthen both sides of the credit nexus: the supply side (i.e. PFIs) as well as the demand side (i.e. beneficiaries). (i) PFIs will receive training on the specifics of agricultural lending/leasing, and in particular, the appraisal of medium and long term rural investments, including their associated risks and risk mitigation measures, product development, and downscaling to small rural borrowers. (ii) Beneficiaries (i.e. farmers and agribusinesses) will receive advice on improved business planning and management, and the most appropriate financing options.

5 (b) Credit Line. The project will provide resources for on-lending to farmers and farmer groups, agro-processors, and other agri-businesses through qualifying PFIs (commercial banks, leasing companies, credit organizations or micro finance institutions). In order to continue revolving these funds for an extended period beyond the project s implementation phase, the project will support the establishment of a financially and administratively autonomous refinancing unit, together with IFAD. Promotion of Rural Business Linkages: To assist emerging rural business entities to introduce innovative business practices and technologies, and to demonstrate such improvements to a broader audience of rural entrepreneurs, small grants would be awarded through a competitive grant program. The objective is: (i) to accelerate the transfer of improved technologies and business practices to others; (ii) to build capacity of rural service providers to support rural entrepreneurs; (iii) to assist small rural businesses to take advantage of economic opportunities; and (iv) to help the MOA establish public-private linkages for reaching farmers and rural businesses. Around 100 small grants from USD 8,000 up to a maximum of USD 20,000 will be awarded to rural business entities, with beneficiaries required to contribute at least 25 percent of the total cost of the proposed activities either in cash or in-kind. Grants would be provided for a wide range of possible technologies in quality production, processing and marketing, business management and best business practices. The program would include strong information and training programs to ensure that all potential beneficiaries were aware of the program and that proposals were of good quality and carefully selected. A strong monitoring and evaluation program would also be instituted to ensure that implementation was carefully monitored, and that costs and benefits of the technologies were determined and made available to a wide audience. Component B - Farm-Focused Development Support Component Objective: To enable farmers to improve their productivity, production quality and market access by developing a sustainable advisory system and increasing availability of quality planting material. Issues Addressed: There is a substantial need to improve the productivity and efficiency of rural producers and the quality of production to better serve the emerging markets. To accomplish this goal, the main areas identified are: (i) strengthening the advisory services system, including farm and business management, marketing and livestock advice, and (ii) improving access to good quality seeds and planting material. Creditable progress has been made in establishing a demand-driven, decentralized extension system with support through the present ARSP, and the technology assessment program (TAP) has proven to be a good way to ensure applicability and acceptability of research results. However, the extension system is not yet in a position to operate without support and cannot be considered fully sustainable at this point. There is a need to streamline the service to improve efficiency and outreach. In addition, rural producers have limited access and understanding of markets, poor knowledge of credit and finance, limited skills in accounting and cash flow analysis, and problems in obtaining documents and legal advice. Advisory services are required in these topics. There is also a need to improve farmers access to quality seeds and seedlings, including introduction of new varieties that may better provide for the needs of the developing agro-processing sector. Target Group: Small and medium farmers and farmer groups, including small-scale seed producers and livestock producers. Component Activities: Two main sub-components have been identified: (a) strengthening the decentralized agricultural extension system to improve linkages with village-level authorities; to increase the effectiveness and outreach of the flow of information on technological, management and marketing

6 improvements; and to further develop the technology assessment program (TAP) and on-farm demonstration activities; and (b) strengthening seed and seedling production capability of Armenian producers. Strengthening the Agricultural Extension System: The project would aim to develop a sustainable advisory system based on a public-private contracting model, which is increasingly self-financing and responsive to the information needs of rural producers. The sub-component would include: (i) streamlining the advisory system to improve effectiveness; (ii) technology assessment and dissemination; and (iii) increasing village-level outreach. Streamlining will be accomplished through regular farmer training and staff training programs and the provision of limited national and international technical assistance; introduction of a contracting system for provision of consultancy services for farmers and small and medium enterprises; implementation of an expanded cost recovery program; establishment of a cost-sharing agreement between Community Councils and the MOA for operations and staff contracts; and an increased outreach at the village level. Project support would be provided for staff contracts and operating costs on a sliding scale; for a consultancy fund to contract specialists, including four key business areas (marketing, financial operations, accounting and legal know-how), and specialized technical subjects, including processing technologies; for in-country training programs; for some re-equipping of the advisory system; and for comprehensive surveys to assess impact and improve quality of services. The technology assessment programs would be continued on a similar basis as in the ongoing ARSP, although the evaluation and dissemination of results will be emphasized. Around 100 TAPs averaging USD 1,500 will be conducted each year including around 33% in the livestock sector, with beneficiaries expected to contribute 20 per cent of the costs either financially or in-kind. The most successful and appropriate technologies will then be demonstrated on-farm. Village outreach will be supported directly through refurbishment and furnishing of village information rooms and improved communications. Strengthening Seed and Sapling Production: This sub-component aims to enhance the efficiency of Armenia s small-scale seed and sapling businesses; to increase the availability of good quality certified seed and planting material; and to increase the efficiency and level of trust in the seed regulatory system. Activities would include: (i) support to private seed and sapling producers; (ii) strengthening the seed legal and regulatory framework and the seed regulatory agency; (iii) improving public sector highgeneration seed multiplication. Support to private seed and sapling producers would be provided through training and information campaigns on seed production technology, marketing, business management and on the legal and regulatory framework governing the seed trade. Seed and sapling producers would also be eligible to apply for financial services and small grants (component 1), and the advisory services would contribute through the assessment and demonstration of improved varieties and use of good quality seed. Strengthening the legal and regulatory framework would consist of a phased approach comprising: (i) a comprehensive review of the seed legislation to bring the laws and regulations fully into compliance with recognized international standards; (ii) improving capacity of the Seed Regulatory Agency in management, financial planning and technical procedures; and (iii) upgrading facilities for implementing seed certification and variety testing activities based on the agreed restructuring plan. Support would also be provided to selected public sector plant breeding institutions to multiply pre-basic seed of new highyielding varieties of grain crops for sale to commercial seed producers. Component C - Community-Focused Economic Development Component Objective: The objective of the component is to stimulate economic development at the community level in selected rural areas through increased capacity of the communities to plan and

7 manage their resources, and prioritize, fund and maintain key infrastructure investments with clear market linkages. Issues Addressed: The rural areas face a number of serious problems which need urgent attention: deterioration of the economic potential and food security problems, shrinking forest areas, soil degradation, limited access to drinking and irrigation water, unsustainable agricultural production and animal husbandry practices, low living standards, limited access to main trade routes and markets, inadequate access to information and mass media, unemployment, emigration, and lack of funds to address the above issues. All these problems are interlinked and need to be addressed in the framework of a comprehensive community economic development strategy. Although many agencies have been working in the rural areas, most support has tended to focus on specific needs in geographically limited areas. The full impact of interventions in the rural sector is often not achieved because: (i) other equally important constraints remained un-tackled; (ii) interventions were limited in scope and very selective; and (iii) interventions were often supply-driven and with little coordination between various interventions. Target Group: Communities in selected rural areas who would benefit from an increased ability to develop, implement and monitor their Community Economic Development Plans; from an increased level of self-help and mutual responsibility; and from empowerment to take control of their own resources. Component Activities: The component would consist of: (i) community mobilization and capacitybuilding; (ii) technical support; and (iii) implementation of investment priorities. Mobilization would comprise the development of Community Economic Development Plans (CEDPs). Technical support would be provided to encourage effective participation in the planning process focusing on development and management of shared economic infrastructure, including market infrastructure and rural roads. The project would then support selected sub-projects falling within the first three years of implementation of the CEDP, which would be the basis for delivery of project interventions to rural communities. Since revitalization of the rural areas would require a range of activities, a CEDP would include activities in two broad categories: (a) improved resource management; and (b) rural market access infrastructure improvement. The project seeks to improve the access to markets and employment opportunities in the selected communities and would not support social infrastructure. If these items were identified as a priority it would be passed on to other possible support programs such as the ASIF. The component would be implemented in 20 selected communities in selected Marzes. Communities and Marzes will be selected based on broadly agreed and transparent criteria. Investments would be limited to US$ 50 per inhabitant or an average of US$ 68,000 for the participating community. Component 4 - Project Management The project would support the establishment and operation of a Project Management Unit (PMU) under the Ministry of Agriculture. 5. Financing Source: ($m.) BORROWER/RECIPIENT 1.82 INTERNATIONAL DEVELOPMENT ASSOCIATION 20.0 LOCAL COMMUNITIES 1.62 JAPAN: MINISTRY OF FINANCE - PHRD GRANTS 1.76 BORROWING COUNTRY S FIN. INTERMEDIARY/IES 1.8 SUB-BORROWER(S) 1.8 LOCAL FARMER ORGANIZATIONS 1.2

8 Total Implementation The rural finance activities will be closely coordinated with the new IFAD rural areas economic development program. A joint rural finance facility will be created that will serve both projects. A Project Management Unit (PMU) under the Ministry of Agriculture would manage the project. Key functions of the PMU will include financial management, procurement, monitoring and evaluation, and translation of project documents. There will also be a number of specialists in the PMU who would be responsible for the coordination of the various components and would take a pro-active role in ensuring timely start-up, implementation and completion of project activities. A Project Management Board would supervise the implementation of project activities. Annex 6 discusses the implementation arrangements for each component. 7. Sustainability The project has been designed specifically with the long-term sustainability after the implementation period in mind. Regarding rural finance, Government has taken a series of measures aimed at boosting public confidence and improving the lending environment in the banking system, including the introduction of a Deposit Guarantee Scheme and a Credit Registry. Similarly, the Central Bank has improved its oversight, including the introduction of a series of accounting standards and revisions to the Chart of Accounts of banks aimed at aligning them with international standards, as well as promoting the increased use of internal control systems and strategic planning among commercial banks. The improved macro-economic environment and improvement in managerial performance is leading to improved profitability in the banking sector. Together, all these measures are acting in concert to spur growth in domestic deposits, including long term resources. Consequently, the proposed refinancing facility, which is only a stop-gap measure, is expected to run for no more than ten years, a period within which sufficient accumulation of long term savings in the country s financial sector is expected to have been firmly established, and making similar lines of credit unnecessary in the future. For the competitive grants program, the demonstration of the technological innovations is likely to result in long-term benefits after the completion of the program, and cost-benefit analyses will be conducted and findings made available to banks and financial institutions as well as other potential users of the technology. Both these activities are aimed at increasing the efficiency and profitability of small-scale private sector rural businesses. For the extension services sub-component, the objective is to assist the GoA to establish a sustainable extension system based on a public/private model, with the development of cost-sharing agreements between the MOA and local communities and increased cost recovery from paid services. Similarly, the measures put in place for the seed sub-component are designed to improve the legal framework and the financial and technical efficiency of the seed regulatory agency, and to place the regulatory agency on a sound financial footing with sufficient resources from the MOA budget and through cost recovery from the services provided. The Community-Focused Economic Development component is designed to increase the capacity of the communities to plan and manage their resources and prioritize, fund and maintain investments, including investments in rural infrastructure with a focus on improving market access, which is expected to lead to long-term sustainable economic development and to provide a platform for the establishment of private sector initiatives in the rural areas. 8. Lessons Learned from Past Operations in the Country/Sector

9 Key lessons from ongoing Bank and donor activities in Armenia are that an increased availability of finance and provision of marketing assistance have strongly facilitated the development of rural businesses. The ongoing activities also underline that prospects of employment generation and cash income in rural areas are closely linked to the agricultural sector in the short and medium-term. However, the failure of some banks supported under the ARSP demonstrates the need for rigorous PFI selection and monitoring, and stronger capacity building. The advisory services have proved useful in improving agricultural production technology and product quality, but it has become evident that there is scope to improve outreach and information exchange and a need for the extension system to become more financially and operationally sustainable with an increased focus on business development, marketing, accounting and legal issues that affect production of both farmers and other rural enterprises. The interest in technology assessments and demonstrations is high, but surveys have indicated the need to couple the demonstrations with a strengthened capacity to disseminate and transfer the technologies. However, the disconnect between producers and processors remains an impediment to the growth of the agricultural sector. The promotion of horticultural and fruit crops, for example, will require strong growth in the processing industry over the medium term, with both demand and supply constraints remaining for farmers and processors at the current processing scale. Some community-focused development activities have been initiated in Armenia and have demonstrated the key role of local government in addressing concerns in rural areas. However, these activities have also highlighted the need to include substantial facilitation and technical support to assist communities to develop workable plans for prioritization, investment and maintenance of investments. 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [x] [ ] Natural Habitats (OP/BP 4.04) [ ] [x] Pest Management (OP 4.09) [ ] [x] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [x] Involuntary Resettlement (OP/BP 4.12) [ ] [x] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [x] Forests (OP/BP 4.36) [ ] [x] Safety of Dams (OP/BP 4.37) [ ] [x] Projects in Disputed Areas (OP/BP/GP 7.60) * [ ] [x] Projects on International Waterways (OP/BP/GP 7.50) [ ] [x] 10. List of Factual Technical Documents Broader Policy Context: PRSP Sustainable Agricultural Development Strategy Rural Sector Note (draft) CAS MTEF Seed and PVP Law Project Context: Project Concept Note Concept Notes for Individual Sub-components: * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

10 Rural Finance Rural Business Linkages Extension Services Rural Business Services Seed Development Livestock Services Community Economic Development Mission Aide Memoires Environmental Assessment Social Assessment Seed Legislation Documents Background Documents Regional Development Strategy Tavush and Geharkunyk (DFID) Community Development Plan Koti (FAO/UNDP) Veterinary Policy (EU Food Security) IFAD Rural Area Economic Development Program Appraisal Documents MEDI Microfinance Review (USAID) USDA Farm Survey NRI Report 2683 Constraints and Potential to the Development of Rural Non-Farm Activities in Armenia 11. Contact point Contact: Frauke Jungbluth Title: Senior Rural Development Economist Tel: (202) Fax: For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: