PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2679 AGRICULTURAL STRENGTHENING AND ACCESSION PROJECT Region

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2679 AGRICULTURAL STRENGTHENING AND ACCESSION PROJECT Region EUROPE AND CENTRAL ASIA Sector General agriculture, fishing and forestry sector (70%); Irrigation and Drainage (30%) Project ID P Borrower(s) FYR Macedonia Ministry of Finance Dame Gruev 7 Skopje Macedonia, former Yugoslav Republic of 1000 Implementing Agency Ministry of Agriculture, Forestry, and Water Economy "Leninova" no. 2 Skopje Macedonia, former Yugoslav Republic of 1000 Tel: Fax: Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared March 29, 2007 Date of Appraisal April 10, 2007 Authorization Date of Board Approval June 12, 2007 A. Country and Sector Background 1. Following the entry into force of the Stabilisation and Association Agreement (SAA) with the EU in April 2004, Macedonia became a candidate country for accession to the European Union (EU) in December Although the current status of candidate country and the prospect of EU membership bring with them vast economic opportunities for Macedonia, the principles, priorities and conditions for accession, as laid down in the 2006 European Partnership Agreement with the EU, also pose substantial challenges to the country, in particular to its agricultural sector. 2. The agriculture sector plays an important role in Macedonia s economy through its contributions to GDP (agriculture accounts for 12 percent of GDP, agri-food for 16 percent), employment, trade and the rural economy (almost half the population lives in rural areas). Macedonia s comparative advantages in agriculture lie in abundant labor, fertile soils, a range of moderate continental and Mediterranean micro-climates in the South (though with water deficiencies and occasional droughts in parts of the country) and natural upland pastures. About 49 percent of the total land area, or 1.16 million hectares (ha), is agricultural land, split evenly between cultivable land and pastures; a further 37 percent of land is forest, while the rest includes lakes and urban areas. About 80 percent of cultivated land is farmed by approximately

2 180,000 private family farms that are becoming increasingly commercially-oriented. The remainder is farmed by 136 agricultural enterprises. Agricultural growth is largely determined by a growing but fluctuating crop sub-sector, with livestock making a stable but smaller contribution to agricultural productivity. Key potential growth areas include horticultural products, lamb and wine. 3. Macedonia is a net agricultural importer. As with other countries in the region, increasing trade liberalization and modernization of the economy are transforming Macedonia s agricultural sector. While opportunities presented by increased trade are great, unless producers and agroprocessors can become more competitive they will have trouble competing in both external and internal markets, as low-cost, high-quality imports increase. Constraints to increasing productivity and competitiveness include low use of inputs, low use of technology, and a dilapidated and poorly-managed irrigation system covering only 23,500 ha, creating dependency on favorable weather conditions and discouraging cultivation of high-value crops. In addition, the agro-processing sector is constrained by out-dated equipment and poor marketing; an inability to meet increasingly important food safety standards; limited access to rural credit markets, and weak extension services capacities. 4. Overcoming these constraints calls for effective public sector actions to resolve market failures and create an enabling environment for the private sector through suitable policies and regulations and investment in public goods. For several years the Ministry of Agriculture, Forestry and Water Economy (MAFWE) has had weak institutional and human capacity, and lacks vital functional departments in the fields of policy analysis and human resources development. In light of increasing opportunities and competition in regional markets, Macedonia urgently needs public institutions with the capacity to facilitate agriculture s transition to a modern sector, allowing it to remain competitive in domestic markets and increase agricultural exports. A second key part of the agenda is Macedonia s status as an EU candidate country. This simultaneously presents opportunities to the government in the form of preaccession assistance funds for agriculture (including funds directed at farmers and agroprocessors) and imposes additional obligations in terms of institutional and regulatory requirements. In the pre-accession period, assistance will flow in the form of Instrument for Pre- Accession Assistance (IPA) funds, part of which will be destined for agriculture under the Instrument for Pre-Accession for Rural Development (IPARD) program. After accession, support will become available through the Common Agricultural Policy (CAP) of the EU. 5. Although such assistance brings great potential to modernize the agricultural sector, requirements to access these funds and comply with EU accession requirements will create additional challenges for the government in the coming years, including institutional investments and regulatory adjustments. Required investments include setting up and running the IPARD agency; co-financing of IPARD projects; establishment of systems and databases needed for IPARD and eventually CAP payments, such as an Integrated Administration and Control System (IACS) and an Agricultural Information System (AIS); and capacity to help producers meet cross-compliance requirements on food safety. EU accession will also present additional burdens for producers and rural entrepreneurs who must improve practices and food safety standards, and who must locate sources of pre- and co-financing and negotiate complex application procedures if they are to benefit from IPARD funds. 2

3 6. The EU accession agenda has magnified the importance of agriculture in Macedonia s overall policy agenda since agriculture constitutes a significant part of the EU pre-accession requirements. The government has demonstrated a renewed commitment to improving capacity and policy in its dealings with the sector. To address the challenge of transforming the agricultural sector in compliance with EU requirements for accession and assistance, the government is reassessing and reformulating its policy approach. A comprehensive plan of activities is given in the National Program for Adoption of the Acquis Communautaire and MAFWE is finalizing a National Agricultural and Rural Development Strategy (NARDS), which aims to identify an efficient policy for the development of agricultural and rural areas in compliance with EU requirements. The agriculture sector is also addressed in the government s Pre-Accession Economic Programme MAFWE is adopting a systematization plan for restructuring of the Ministry; finalizing the plan for IPARD; and adopting a number of laws relating to the agricultural sector (IPARD Paying Agency, the law on Agriculture and the Law on Water). B. Objectives 7. The Project Development Objective is to improve the delivery of government assistance to the agriculture sector in a manner consistent with the European Union s pre-accession requirements. Key outcome indicators would be: (a) improved MAFWE ability to disburse and track the use of rural development funds and to evaluate their impact on the agri-food sector; (b) EU IPARD funds paid to farmers in an EU compliant manner; (c) timely delivery of improved veterinary services to producers and agro-processors; (d) establishment of participatory, demand driven irrigation management; and (e) divesting the state of financial responsibility for the irrigation sector. C. Rationale for Bank Involvement 8. The government of Macedonia has requested the World Bank s assistance in addressing the challenges and constraints outlined above. Specifically, the borrower has requested assistance to strengthen the capacity of MAFWE to support the agriculture sector, including improving its ability to formulate and implement effective policies and increase effectiveness of public expenditures in agriculture in an EU-compliant manner. In addition, it seeks assistance in building the institutions necessary to meet EU accession requirements and access and absorb preaccession assistance that it is eligible for. Further, the government seeks to use World Bank funds to strengthen veterinary capacity to help producers and agro-processors meet EU food safety standards. Lastly, it wishes to alleviate irrigation-related constraints on productivity, by completing the ongoing reform of the irrigation sector conducted under the previous World Bank Irrigation Restructuring and Rehabilitation Project. 9. Such an ambitious agenda will place substantial technical and financial demands on the Macedonian government. Despite substantial EU pre-accession assistance under the IPA, significant funding gaps remain in relation to the government s reform agenda. By providing the technical and financial assistance requested, the World Bank would support agricultural growth 1 Republic of Macedonia, Pre-Accession Economic Programme Skopje, November

4 and rural development in Macedonia while advancing the country s broader strategic development goal of EU accession. By supporting institutional reform and strengthening within MAFWE the World Bank is able to leverage the impact of EU-funded and other donor support to the sector. D. Description Component 1: Strengthening MAFWE s administrative and management capacity in accordance with EU accession requirements 10. This component will improve MAFWE s management, administration, information technology, staffing and institutional structure by establishing or upgrading the capacity needed for an efficient design, implementation, management, monitoring, control and evaluation of national agriculture policy in accordance with EU accession requirements. The initial focus will be on capacity-building activities ( ). The component will ultimately move MAFWE structures and systems towards full compliance with the requirements for EU accession and improve transparency and governance in MAFWE. Subcomponents include: (a) (b) (c) Initiation of an Integrated Administration and Control System (IACS), to help further develop the key IACS components, particularly focusing on establishing an integrated Farm Register and a Land Parcel Identification System (LPIS). The sub-component will build on other recent MAFWE initiatives such as the Animal Identification and Registration System operated by the Veterinary Directorate and the pilot vineyard cadastre project supported by the EU. It will support investments in appropriate information technology (IT), communication infrastructure, aerial surveys and mapping in three pilot regions, technical assistance and training of staff. Further development of an Animal Identification and Registration System will be a part of Component 3 of the project. Establishment of an Agriculture Information System (AIS), to help establish the key components of an AIS, which include a Farm Accountancy Data Network (FADN), Agricultural Statistics (including Economic Accounts for Agriculture (EAA)) and a Market Information System (MIS). This will be achieved by further developing the current Farm Monitoring System operated by the National Extension Agency and strengthening the FADN institutional framework, and developing an Agricultural Market Information System in a manner compliant with EU requirements. This subcomponent will support investments in appropriate IT equipment and software, technical assistance, training of staff, logistical support, operational support, and market data collection and dissemination. Strengthening the Agricultural Inspection Services, by strengthening the human capacity and technical resources of the State Agricultural Inspectorate (SAI) of MAFWE so that they can effectively carry out their responsibilities for control and monitoring compliance, both with legal acts and use of IPARD assistance. This subcomponent will support investments in IT and communications technology, technical assistance, training of staff, logistical support, and the organizational streamlining of the AIS. 4

5 (d) Establishing adequate institutional capacity in MAFWE, putting special emphasis on strengthening MAFWE s capacity in agriculture policy analysis, project cycle management, human resource development, budget planning and in helping to reorganize and streamline the links between MAFWE s regional offices and headquarters. This subcomponent will support investments in renovation and refurbishment of MAFWE facilities, IT equipment, logistical support, technical assistance, and training of staff. Component 2: Supporting MAFWE s ability to deliver EU rural development funds 11. This component will help establish the Paying Agency that would acquire accreditation to administer IPARD funds on behalf of the EU before accession, and CAP funds after accession; and improve the capacity of potential beneficiaries to make successful applications for IPARD grants. Subcomponents include: (a) Supporting establishment of the IPARD Paying Agency (PA). This will be implemented in the first and second year of the project. It will include investments in training for PA staff capacity building; technical assistance for PA fiduciary system development and implementation, design and purchase of an IT software/hardware platform for the PA, data security, and developing payment verification procedures and equipment for inspectors; civil works and goods for PA offices refurbishment and office equipment; and training in capacity to generate inputs necessary for monitoring and evaluation. (b) Supporting PA capacity building needs for: (i) taking over the responsibility for the administration of the national direct agriculture payments; and (ii) administering the newly accredited measures under the IPARD program. This will take place in the third and fourth year of the project and will involve investments in training. (c) Supporting an IPARD-tailored capacity-building program for rural advisory services providers in order to make specific IPARD advisory services available to the potential beneficiaries. This will take place in the first and second year of the project, and will involve investments in technical assistance and training. (d) Supporting capacity-building in the Rural Development Department in order to improve MAFWE s capacity to design, implement, monitor and evaluate rural development policies and programs; and to ensure adequate preparation of multi-annual rural development strategies and plans as a pre-condition for accessing and disbursing IPARD funds. Component 3: Developing effective veterinary capacity 12. This component will develop effective veterinary capacity as part of the creation of a functioning integrated food quality system consistent with EU requirements. This will promote safer products of animal origin and prevention and decrease of animal diseases; will help producers meet cross-compliance requirements to receive IPARD funds; and will enable producers and agri-processors in Macedonia to export their products to the more stable and higher value market of the EU. It will include the following subcomponents: 5

6 (a) Strengthening the Veterinary Directorate (VD) in accordance with the VD draft strategy and business plan. The project will support the completion of the Veterinary Information System (VIS) and provide support for approximately forty new staff that have and will join the VD in the next year. The animal identification and registration program will be upgraded to include small ruminants, and the associated database will be linked to the Integrated Administration and Control System (IACS). To accomplish this, investments will be made in information technology, training, data collection and inspection equipment (including vehicles), and public outreach. In addition this component includes a feasibility study for safe disposal of animal by-products in line with EU requirements, and investment in a disposal facility. (b) Strengthening the Veterinary Laboratory (VL) and the Food Institute Laboratory (FL). The laboratories will be strengthened so that they can improve the range and quality of services they can deliver. This will be achieved through investments in equipment, to complement training and equipment received through other donor programs. The laboratories will become ISO certified and will be able to perform a number of tests according to the workplan included in the project operations manual. Component 4: Completing reform of irrigation sector 13. This component will support the government in completion of reform of the irrigation sector that started in 2003 under the Irrigation Rehabilitation and Restructuring Project, whereby water users govern irrigation systems. Subcomponents include: (a) Liquidation of Water Management Organizations (WMOs). This will support completion of the liquidation of 9 WMOs, involving about 1,100 employees. It will fund expenditures for severance payments, salary and allowance arrears and pension contributions. (b) Establishing new Water Economies (WEs) to undertake responsibility for multipurpose water systems. This will support the establishment of 6 new WEs by financing initial working capital to cover the first 6 months of operations before they can collect fees from users; and providing basic equipment. (c) Strengthening capacity of the Water Economy Directorate (WED) to effectively support and oversee the establishment of new IWCs and WEs and monitor their performance, as well as to carry out improved planning of water resources. This will support investments in goods, technical assistance and training as well as minimum incremental operating costs. E. Financing Source: ($m.) BORROWER 9,900,000 INTERNATIONAL BANK FOR RECONSTRUCTION AND 20,000,000 DEVELOPMENT Total 29,900,000 F. Implementation 6

7 Partnership arrangements 14. The project generally aims to complement EU pre-accession assistance to Macedonia as provided under the IPA. While no formal arrangements have been concluded, the project has been designed taking into account EU commitments (mostly technical assistance) on activities related to the project. Project implementation will be conducted in close consultation with the EU to ensure that project activities are closely coordinated with EU technical assistance and technical assistance provided by other donors, and leverage this assistance to maximum effect. It will also take advantage of the experience of new member states and other EU candidate countries through ongoing incorporation of lessons learned into project implementation. Institutional and implementation arrangements 15. Project implementation would be undertaken by MAFWE Directorates responsible for the respective components: Component 1 in the Policy Analysis and AIS Department; Component 2 in the Policy Analysis and AIS Department until creation of the PA (thereafter in the PA) and in the Rural Development Department; Component 3 in the Veterinary Directorate (VD); and Component 4 in the Water Economy Department. The Departments and Directorates will be supported by leadership from the Deputy Minister of Agriculture in his role as Project Coordinator, and project staff to be hired using project funds (a Project Manager, a Financial Management Specialist and a Procurement Specialist) and reporting to the Deputy Minister. Overall coordination will be provided through a project Steering Committee, comprising the Deputy Minister of Agriculture and designated representatives from MAFWE; the Ministry of Finance; Ministry of Health Directorate for Food; the Cabinet of the Deputy Prime Minister for Education and Agriculture; the Cabinet of the Deputy Prime Minister for Economic Affairs; the Secretariat for European Integration Affairs (SEA); the State Authority for Geodetic Works; and the State Statistical Office. 16. The implementing entity will maintain a financial management system acceptable to the Bank. The project financial statements and the Designated Account will be audited by independent auditors acceptable to the Bank and on terms of reference acceptable to the Bank. The annual audited project financial statements and audit report will be provided to the Bank within six months of the end of each fiscal year. 17. The audits will be conducted in accordance with International Standards on Auditing (ISA) as issued by the IFAC and on terms of reference acceptable to the Bank. 18. Financial management conditions of negotiation are presented in the table below: Description Professional possessing appropriate qualifications and experience should be appointed as financial management officer for the project. Draft Financial Management Manual (as integral part of Operations Manual) will be prepared. Responsible entity MAFWE MAFWE 7

8 G. Sustainability 19. Sustainability beyond the implementation period would be strong as the project would be embedded in the broader framework of Macedonia s EU accession process. Specifically, it will help implement reforms executed in the context of agreements negotiated by the government of Macedonia with the EU. The very focus of the project on institutional capacity building programs will ensure that MAFWE has the institutional and human resources to deliver agricultural and rural development assistance to producers and agro-processors in the longer term. Also, the use of MAFWE staff to implement the project, rather than a discrete PIU, will ensure sustainability, as skills and expertise developed during the life of the project will be retained within the government. H. Lessons Learned from Past Operations in the Country/Sector 20. The preparation of this project has benefited significantly from the existence of analytical work on the sector, previous World Bank operations (a previous operation in agriculture and a recently completed irrigation project), and the experience of other countries in achieving similar objectives associated with EU accession requirements. 21. An ESW on Macedonia s agricultural sector was published in late Its principal findings are closely reflected in the project design, including the need for improved management of public expenditures; the need for timely investments in an IPARD PA and mechanisms to assist potential IPARD beneficiaries; the need for an effective and efficient food safety system; and the need for reform and rehabilitation of irrigation. 22. The Private Farmer Support Project (PFSP) ICR was completed in 2003 and noted several lessons applicable to this project. Weak institutional capacity was a problem, addressed in the new project by a focus on improving MAFWE s institutional capacity. Lack of ownership of the project, and subversion of reforms by powerful minorities, were compounded by a weak policy environment and political instability (factors which have since improved). There is currently strong ownership in MAFWE, and at the highest levels of government, of the broader goals supported by the project (policy reform and EU accession) and project objectives. The ICR highlighted the importance of an experienced, politically independent, appropriately funded and professional management team. On Monitoring and Evaluation (M&E), the ICR highlighted the importance of easily measurable project objectives that can be traced to project inputs; and a clear, complete and well-elaborated M&E program with beneficiary participation. The government s slowness in processing certain laws undermined several project activities; in the new project, any such legislation is driven by the wider goal of EU accession, and the government is receiving technical assistance to help draft it. Lastly, the ICR also mirrored the ESW in terms of priority areas that should be considered for support by future Bank operations. 23. Although the new project will be implemented largely by MAFWE staff rather than through a Project Implementation Unit (PIU), a full-time Project Manager, Procurement Specialist and Financial Management Specialist are being hired, and measures are being taken during project preparation to ensure MAFWE has appropriately skilled and mandated staff for project implementation. In 2007 MAFWE is hiring new staff which will also improve capacity 8

9 for project implementation. Moreover, project implementation will be designed to include a mechanism for identifying any deficiencies with project implementation capacity at an early stage so that appropriate action can be taken (see III.E. below). Using MAFWE staff rather than consultants to implement the project will also avoid the problem encountered in previous Bank projects, in Macedonia and elsewhere, of losing valuable human capacity upon project closure. 24. Countries that have recently joined the EU have provided useful lessons in meeting EU requirements in agriculture. Foremost is the need to prepare to be able to receive IPARD payments in order to reap the maximum benefits from these funds. In some countries it took longer than expected to accredit the SAPARD Paying Agency, resulting in the loss of some SAPARD funds to which they were entitled. 2 In Romania farmers found it difficult to apply for funds, both because application procedures were overly complicated and because many potential applicants were unable to identify sources of mandatory pre-financing and co-financing. To disburse all the available funds in a timely way the government eventually resorted to measures such as subsidization of rural credit. This represented sub-optimal use of funds and resulted in high dead-weight losses. These experiences have informed the design of Component 2 of the project, e.g. the focus on public information campaigns, application support to beneficiaries, and helping beneficiaries identify sources of pre- and co-financing. 25. Regarding food quality standards, the project design is intended to make it easier for producers to achieve specified standards and receive EU-compliant certification, and in turn take advantage of growing opportunities in external and internal markets. Experience suggests that the most effective way to achieve this can be investments in the public sector. Testing for food safety certification requires laboratory capacities well beyond the means of most private producers; hence public testing laboratories and veterinary services are recommended as the most cost efficient means to encourage producers to invest in food quality and meet EU private sector standards. 3 Moreover, while competition can be healthy, in a country as small as Macedonia it does not make sense to have a large number of private laboratories providing the same services. 26. On irrigation, the design of the Irrigation Restructuring and Rehabilitation Project (IRRP), with intervention areas defined by MAFWE s Water Economy Directorate, may not have adequately taken into account the demand for irrigation at the local level/farmer level. Rehabilitation works were limited to structures with the highest possible economic benefit when agriculture was in decline. Moreover, at the time of project design a lot of land was still held by Agro-Kombinats, which strongly advocated for the rehabilitation of irrigation systems. The rehabilitated irrigation schemes ultimately suffered from a lack of demand by farmers, and only half the equipped irrigation area was ever effectively used. To promote proper demand under the new irrigation component, investments will be made in WEs that will eventually need to be selfsufficient through user-fees, forcing them to respond to user demands. This will result in improved prospects for farmers ownership and long-term commitment. 2 SAPARD in the predecessor to IPARD, and was implemented along similar lines, making SAPARD experience transferable to IPARD. 3 Jaffee, S.; Van Der Meer, C. (2005), Food Safety and Agricultural Health Standards: Challenges and Opportunities for Developing Country Exports, The World Bank, Washington DC, 142pp. 9

10 27. Due to the political difficulties and the extreme institutional weakness of MAFWE and the Water Economy Directorate, the IRRP was systematically implemented by the Project Management Unit responsible for implementation. Although this ensured adequate fiduciary practices and shielded implementation from excessive political influence, it never helped build adequate capacity within MAFWE to assume responsibility for water management. Although reforms in the sector have pushed responsibility for irrigation and water management towards local entities (who are best placed to be responsive to clients), the government still needs to function effectively as a regulator and have the capacity to ensure its policies are implemented. As a result, the irrigation component will be implemented within existing institutions, with a real focus on building capacity in MAFWE and the Water Economy Directorate. I. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [ ] [X] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) * [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X] J. List of Factual Technical Documents Agriculture and EU Accession: Achieving FYR Macedonia s Agricultural Potential. World Bank, Republic of Macedonia, Pre-Accession Economic Programme Skopje, November National Agriculture and Rural Development Strategy (NARDS) for the period K. Contact point Contact: Julian A. Lampietti Title: Lead Country Sector Coordinator, ECCU4 Tel: (202) Fax: Jlampietti@worldbank.org L. For more information contact: * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas 10

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