The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) Project Information Document (PID) Concept Stage | Date Prepared/Updated: 03-Jun-2022 | Report No: PIDC34004 Jun 03, 2022 Page 1 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Parent Project ID (if any) Project Name Malawi P178818 Second Agricultural Commercialization and Resilience Enhancement Project (P178818) Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) EASTERN AND SOUTHERN Feb 13, 2023 May 22, 2023 Agriculture and Food AFRICA Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Republic of Malawi Ministry of Agriculture, Ministry of Lands, Ministry of Trade and Industry Proposed Development Objective(s) To increase the commercialization of primary and value-added agricultural products and enhance the resilience of the food system PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 250.00 Total Financing 250.00 of which IBRD/IDA 250.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Development Association (IDA) 250.00 IDA Credit 250.00 Jun 03, 2022 Page 2 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) Environmental and Social Risk Classification Concept Review Decision High Track II-The review did authorize the preparation to continue Other Decision (as needed) B. Introduction and Context Country Context 1. The food systems1 of Eastern and Southern Africa (AFE), including Malawi, are some of the most vulnerable in the world. AFE is home to over 656 million people, many of whom are extremely poor and face significant challenges accessing adequate, safe, and nutritious food every day. Over 40 percent of AFE’s population live on less than US$1.90 purchasing power parity per day. In recent years, the shortcomings in AFE’s food systems have translated into a deterioration of the food security situation, especially in some hotspots such as the Horn of Africa. In Malawi, the poverty rate continues to be high and has stagnated since 2005 at approximately 50 percent of the total population, which is projected to exceed twenty million in 2022. By using the international poverty line of US$1.90 per day, 73 percent of the population falls within the poverty category. The most recent estimate for early June 2022 indicates approximately 30 percent of the population, equivalent to 5.4 million, are likely to be food insecure (refer to box 1). 2. The changing climate is a major long-term contributor to food insecurity in AFE and Malawi. Climate change has already increased the frequency and severity of extreme weather events across Sub-Saharan Africa and accelerated the cycle of food production shocks. Across Sub-Saharan Africa, drought and flood-related shocks to the food system that occurred once every 12.5 years on average between 1982–2006 occurred every 2.5 years between 2007–2016. Malawi is among the most climate fragile countries in the world, ranking 105 of 113 countries.2 According to the Climate Country Diagnostic Report (CCDR), Malawi is also one of the countries with the largest proportion of poor populations exposed to floods.3 Malawi is also feeling the effects of more frequent extreme weather events.4 The impacts of these events are compounded by the high level of natural degradation: nearly 8 million hectares, 80 percent of the total land area, is degraded and requires restoration. 3. Weak economic growth has characterized Malawi over the past two decades . Malawi’s track record of economic growth is disappointing. GDP per capita is in the lowest quintile of all African countries, averaging approximately US$502 1 The United Nations Food Systems Summit of 2021 defined food systems as “the entire range of actors and their interlinked valu e-adding activities involved in the production, aggregation, processing, distribution, consumption and disposal of food products that originate from agriculture, forestry or fisheries, and food industries, and the broader economic, societal and natural environments in which they are emb edded.� Resilience is the capacity of vulnerable households, communities, and systems to withstand and respond effectively to shocks, recover, and adapt sustainably. 2 World Bank 2018: Hard hit by El Nino: Experiences, Responses and Options for Malawi 3 Malawi CCDR Report (2022)- draft version. An estimated 12 percent of the population is exposed to floods. 4 Extreme weather including both floods and droughts have occurred in 2015, 2016, 2019, and 2022. In 2019, Cyclone Idai resulted in losses of about US$9.96 million, equivalent to 0.13 percent of GDP. In January 2022, Tropical Storm Ana caused over 200 deaths, power outages, and infrastructure destruction throughout Malawi. Jun 03, 2022 Page 3 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) over the past decade. Annual growth has averaged 1.6 percent for the last two decades.5 The Covid-19 pandemic slowed growth to 0.9 percent in 2020, the lowest rate in the decade6. 4. Subsistence agriculture and governance weaknesses are some of the key drivers of poverty, food insecurity and modest growth in Malawi. Approximately 85 percent of the population and 80 percent of the poorest households live in rural areas and rely on rainfed agriculture, primarily cultivating low productive maize.7 This low productive agriculture has consistently failed to foster growth and reduce poverty, yet government policies have focused to an excessive degree on ensuring maize self-sufficiency at the household level and stabilizing domestic food prices. Some of these policies such as input subsidies have resulted in a deteriorating fiscal situation. Between 2010 and 2017, government debt increased from 28 percent of GDP to 34.29 percent of GDP. The high risk of debt distress and dire overall fiscal situation undermines the government’s capacity to finance a minimum level of services and investments. 5. Creating jobs and addressing gender inequalities are two of the most significant development challenges. Malawi’s population is approaching 20 million people and is projected to double by 2050. 51 percent of the population is under 18 years of age and approximately 400,000 young people are joining the workforce every year.8 To meet the needs of a young and growing population, the country needs to step up investments and policy actions that generate private sector-led jobs. Furthermore, IHS5 revealed that gender disparities in economic opportunities, income, and productivity persist in Malawi: 80.2 percent of men compared to 71.9 percent of women above age 15 are in the workforce, and men work considerably more hours in non-agricultural and remunerative activities. Women are more likely than men to live in poor households. Compared to men, women own fewer parcels of land, have less access to production inputs, and are involved in riskier and lower-paying activities, such as non-diversified farming.9 6. Despite significant challenges, recent developments offer reasons for optimism. In the coming years, population growth, rising incomes, and urbanization will produce a huge increase in the demand for food products. By 2030 the value of food markets in Africa will reach US$1 trillion. In 2019, imports of soybeans, oilcake, and soybean cooking oil each exceeded over US$1 billion across the continent. Between 2009 and 2019 Malawi’s per capita calorie consumption almost doubled. As the middle class grows and consumption increases, the demand for protein-rich products, processed foods, fresh vegetables, and fruits, will grow significantly. There is space to substitute imports with locally grown foods and processed products. Currently food imports represent approximately US$300 million, half of which are cereals, animal and vegetable fats, and oils.10 Expanding intra-Africa trade can play a critical role in the context of a global crisis and disruptions of global supply chains, further exacerbated by the Ukraine-Russia war. Estimates indicate that by 2035 the African Continental Free Trade Area (AfCFTA), ratified by Malawi in 2021, has the potential to increase the country’s intra -Africa exports by 25 percent.11 In addition, the introduction of digital technologies can substantially accelerate access to 5 https://www.worldbank.org/en/country/malawi/overview#1 accessed on February 22, 2022 ; World Bank 2022: Poverty stagnation and regional disparities in Malawi: A poverty assessment ; World Bank Development Indicators, 2021; World Bank 2022: Poverty and Gender in Malawi 6 Baulch, Bob et al. 2020: Short-term impacts of COVID-19 on the Malawian economy: Initial results. Losses of 11.6 percent to the GDP were estimated during the first two months of the pandemic. 7 World Bank 2022: Poverty stagnation and regional disparities in Malawi: A poverty assessment. It used the Fifth Integrated Household Survey (IHS5). 8 Baulch, Bob et al. 2019: Malawi's challenging employment landscape 9 World Bank 2022: Poverty and Gender in Malawi 10 Demand for agricultural products is expected to increase in all the value chains covered by AGCOM(1.0). Private agri-processors and food manufacturers have capacity to expand business and accommodate increased supply. There is high demand for soybean to produce feed for poultry and fish industries. A large off-taker such as Sun Seed Oil Ltd has a processing capacity of 280,000 metric tons per year but is operating at 50 percent due to the lack of consistent supply. Recently a groundnut factory (Pyxus) has been installed with capacity to process 50,000 tons per year. The Malawi Dairy Industry has an unsatisfied demand of over 70,000 liters per month in the plant in Lilongwe. 11 World Bank 2020: The African Continental Free Trade Area- Economic and Distributional Effects Jun 03, 2022 Page 4 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) information. Over the past decade, mobile phone subscriptions increased significantly reaching 10 million in 2020, equivalent to 52.30 per 100 people12. Implementing the existing land management framework presents another opportunity, as land tenure security incentivizes investments, fosters productive activities, and preserves natural capital.13 Box 1: Is the Russia-Ukraine crisis affecting Malawi’s food security? As of June 2022, the food security situation is deteriorating. In May 2022, an estimated 9 percent of the Malawian population, approximately 1.65 million people, were classified as food insecure. As of the begin of June 2022, a draft report of the Malawi Vulnerability Assessment Committee has increased the estimate to 30 percent, equivalent to 5.4 million people. The main driver is food inflation. Already a 22 percent increase in fuel prices is having inflationary impacts on both food and non-food prices. Prices of some commodities such as wheat and vegetable oil have increased over 40 percent compared to last year. However, wheat consumption is concentrated in more affluent urban populations. As the growing season 21/22 is being completed and good yields have been reported, staples such as maize, rice and legumes are likely to be available and accessible to most of the population, which result in fewer food insecure people. Nevertheless, it is a fluid and highly uncertain situation. The most important threat to medium-term food security is the surge in fertilizer prices. As Russia is the fourth largest producer of chemical fertilizers in the world, the crisis has exacerbated the upward trend in the cost of fertilizer. Supply constraints are likely to continue to push up international prices, making fertilizer unaffordable for many farmers. Reduced use of fertilizers can result in lower yields in subsequent growing seasons and, in turn, negatively affect food availability. Sectoral and Institutional Context 7. Building medium- and long-term food system resilience to climate change in Malawi – and more broadly in AFE – calls for integrated approaches. Improving the access of agri-food producers to domestic and international markets, diversifying production, and improving the policymaking processes and institutions, are among the critical building blocks that need to be integrated to enhance food system resilience. 8. Boosting access to markets, that is shifting from subsistence towards commercial agriculture, is crucial for poverty alleviation and human development. Among all the small-scale farmer households in Malawi, only 200,000 to 300,000 farmer households are commercially oriented, that is, they sell more agricultural products than they consume. The bulk of smallholder farmers, approximately 2.5 million, engage in low productive agriculture with virtually no access to markets. For them farming neither secures enough food for self-sufficiency, nor provides enough cash to satisfy basic needs. Commercial agriculture can help them exit poverty. By responding to market incentives and demands, and linking up with agri-food value chains, farmers can become more productive. Commercial farms have myriad economic multipliers: they 12 https://data.worldbank.org/indicator/IT.CEL.SETS.P2?end=2020&locations=MW&start=2010 accessed on February 21, 2022 13 World Bank 2020: Implementation status of the Malawi national land policy and land laws Jun 03, 2022 Page 5 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) invest in capital goods, procure services and employ labor, thereby creating income that helps satisfy basic needs and promotes overall developmental benefits. A recent analysis of model scenarios revealed that by 2030 productivity gains in agriculture are likely to yield the greatest benefits in terms of improving the welfare of the poor in Malawi.14 9. Boosting access to markets matters to national and regional food security. Over the past decades, government policies have sought to achieve national food security through increased domestic production and availability of staple foods, primarily maize. Input subsidies and export restrictions have been the core of these policies. Despite these efforts, Malawi’s food system has consistently failed to guarantee national food security. Even in goo d years with bumper crops, many Malawians have been food insecure.15 As a consequence of fiscal constraints, the humanitarian response is often financed by development partners, which creates few incentives for the government to enhance its preparedness. This perpetuates a vicious cycle of low productivity, food insecurity, and humanitarian response. Increased agricultural productivity can help break this cycle, by generating income for rural households and enabling them to access sufficient and quality food in markets. Expanding commercial agriculture can also have regional spillovers by increasing the supply and availability of foods in the regional context through trade. For instance, the value chain of soya is important for regional food security and nutrition, and, in recent years, Malawi has become an important supplier of soya beans and related processed products. 10. Boosting access to markets is also strategic to foster economic growth and job creation. A more productive agriculture sector will translate into overall economic growth. The importance of agriculture for Malawi’s economy remains high, although its contribution to GDP dropped from 29.6 percent in 2010 to 21.09 percent in 2020 and is likely to continue to decline in relative terms compared to services and industry. In absolute terms, sectoral Gross Production Value has stagnated at approximately US$9 billion over the past decade due to low productivity. Evidence shows that markets can create incentives to raise productivity and thereby create on-farm jobs via either self-employment or hired casual labor. Moreover, gains in productivity can result in off-farm jobs being created upstream and downstream along agri-food value chains, as well as in associated industries and services.16 11. Efforts to promote diversification are of paramount importance. The monocropping of maize renders Malawi’s food system highly vulnerable to environmental shocks. It deteriorates soils and ecosystems, creates high risks of pest attacks, such as fall armyworm, and increases the chance of losses by drought and dry spells. Maize is cultivated by 92 percent of all farming households in Malawi.17 The risks and challenges derived from the over-reliance on maize has also been underlined by the CCDR. Exports are dominated by only three commodities: tobacco, tea, and sugar.18 To reduce this over- reliance on such a limited number of commodities, there is a need to diversify value chains, technologies, and markets. Exploring international markets, leveraging the AfCFTA, and expanding the universe of off-takers engaging with small farmers are critical to diversifying risk in the context of unpredictable climate-related shocks. The CCDR acknowledges that climate change will make it more challenging for Malawi to transition from subsistence to commercial agriculture. Scaling up irrigation is crucial: it is one of the most effective pathways to enhance food system resilience. Irrigation enables farmers to diversify crops, add production cycles outside the rainy season, and mitigate the risk of dry spells that can negatively affect yields. Malawi has water resources capable of quadrupling the current irrigated area, expanding the total area to over 400,000 hectares. 14 Benson, Todd 2021: Disentangling Food Security from Subsistence Agriculture in Malawi. Refer to chapter 6, using computable general equilibrium. 15 During the season 21/22, which had record yields, over 1.6 million people were estimated to be food insecure. In bad years, the figure is much higher: in 2016, after being hit by a drought caused by El Nino, Malawi had over 6 million food-insecure people. 16 World Bank 2020: Agriculture, Jobs and Value Chains in Africa. Jobs Notes Issue No. 9 17 IFPRI, 2021: Are the drivers of production and sales of maize, groundnut, and soya bean by farming households in Malawi changing? 18 Together, these represent US$700 million, over 70 percent of national export earnings and forex influx. Jun 03, 2022 Page 6 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) 12. Food system resilience requires improving policymaking processes and addressing governance and institutional weaknesses. AFE countries need to build institutional capacity for resilience-focused policies at both the regional and national levels. In the case of Malawi, food system resilience needs to be made a priority: reforms are needed that can improve access to markets and contribute to diversification. For example, reforming the Affordable Input Program (AIP) is of the utmost importance. It not only has a large fiscal footprint,19 but it is a blanket solution that makes no distinction between commercial and subsistence farmers, plus it targets ultra-poor rural inhabitants who cannot take advantage of the inputs and would be better assisted by social safety nets. In contrast, commercial and transition farmers such as those that have participated in AGCOM(1.0) are generally able to afford inputs. Profitable agri-food value chains generate enough income for farmers to reinvest. In the future, the AIP can be scaled down, as more farmers join vibrant cooperatives in profitable agri-food chains. The government also needs to shift its policy and institutional environment toward building better and more transparent markets; for instance, better regulations for contract farming can create better conditions for long-lasting, mutually beneficial partnerships between cooperatives and off-takers. In addition, there is a need to continue to build institutional capacity and leverage digital platforms and services that can dramatically improve public service delivery. As examples, the Land Management Information System and the Business Registration System, both developed through AGCOM(1.0), are becoming effective enablers for private investment and sustainable land management. 13. When it comes to improving access to markets, diversifying production, and enhancing inclusion and gender mainstreaming, farmer organizations are pivotal. Reaching scale through organizations is the first step for small-scale farmers to become part of agri-food value chains that can reach national and regional markets. An average land size of 0.7 hectares per household makes commercial agriculture virtually impossible. To achieve larger volumes, smallholders need to cooperate and organize. Food manufacturers looking to procure raw products find it difficult and inefficient to buy from widely dispersed, low-volume farms. Information asymmetries are exacerbated when farmers work individually and independently. Only in recent years, encouraged by external actors and projects, have some farmers started to form groups and cooperatives. Commercial organizations benefited by AGCOM(1.0) have a mixed composition of men, women, and youth. To date 57 percent of the beneficiaries have been women.20 Contrary to the common belief that organizations exclusively represent elites, AGCOM(1.0)-supported cooperatives comprise illiterate as well as educated farmers. Differences in productivity between women and men are driven by unequal access to inputs, rather than by women’s lack of productivity per se.21 The organizations allow women to access inputs, technologies and markets, and match the levels of productivity of men. All-female organizations also enable women to take the lead and make business-related decisions on their own. 14. To realize their potential, farmer organizations face various challenges. The need for agri-food marketing infrastructure, including transport, electricity and water supply, is massive. Furthermore, the lack of collateral, prohibitive interest rates of over 20 percent, and short repayment periods prevent farmers and organizations from accessing private financing and investing in assets such as machinery, equipment, and storage facilities. Another challenge is posed by climate-related risks. Farming systems have become increasingly exposed to extreme weather events. Organizations need to enhance preparedness and diversify risks, for instance, by adding value, reducing post-harvest losses, and creating new 19 For the season 2022/23, AIP has been allocated a budget of MKW109b, equivalent to approximately US$120 million. It represents about 40 percent of the budget for the MoA. 20 The high level of women participation conforms to the high proportion of women working in agriculture, 59.6 percent, according to IHS5 (World Bank 2022: Poverty and Gender in Malawi). 21 World Bank 2022: Poverty and Gender in Malawi. Estimates indicate that closing the gender gap in agricultural productivity in Malawi would increase the agricultural GDP by 6.7 percent, raise the national GDP by 2.1 percent, and reduce poverty by 2.4 percent (Goldstein et al. 2015: Costing the Gender Gap, Washington, DC: World Bank). Jun 03, 2022 Page 7 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) business areas that cushion periods of low commodity prices. There is also ample room to massify climate-smart agriculture (CSA) practices such as agroforestry. On a related note, off-takers, especially small and medium-size enterprises (SMEs), are often constrained by the lack of financing. Similarly, limited cash flow and delays in payments are detrimental to the solvency of cooperatives, which cannot afford to wait for long periods of time. And lastly, enhancing quality along agri-food value chains and achieving relevant certifications are critical. Some of the quality shortcomings cannot be resolved at the level of single cooperatives and call for value chain coordination, as well as more systematic efforts at the regional level. This is the case of the seed subsector, for which regional coordination is essential. 15. AGCOM2.0 is aligned with the national development vision and investment plan. In 2020, the National Planning Commission completed a consultative process to develop a national development vision, called Malawi 2063. Three pillars constitute the vision: (i) Agriculture Productivity and Commercialization; (ii) Industrialization; and (iii) Urbanization. The Agriculture Productivity and Commercialization pillar focuses on the production of raw materials for the industrial processing of food. Its objective is to connect primary agriculture with agri-based industries that offer job opportunities to the youth and enable them to become engaged in competitive agricultural value chains. The Malawi 2063 10-year investment plan includes agriculture diversification, irrigation development, anchor farms through large aggregate farms or cooperatives, agriculture inputs, mechanization and use of technologies, structured markets, and research and innovation. AGCOM2.0 is expected to become one of the catalytic umbrella programs to materialize the vision with respect to agricultural commercialization and food system resilience. Relationship to CPF 16. AGCOM2.0 is part of a broader engagement guided by the Country Partnership Framework (CPF FY 21-25). The CPF lays out the foundations for the engagement of the World Bank in Malawi for the period FY21-25 (Malawi Country Partnership Framework Report No. 154505-MW, dated April 2, 2021). CPF Focus Area 2 targets key short- and long-term strategies for boosting job creation and fostering sustainable livelihoods. Promoting commercial agriculture and resilience are at the core of this engagement. Focus Area 2 anchors various operations: Agricultural Commercialization (P158434); Second Agriculture Sector Wide Approach Support (P164445); Financial Inclusion and Entrepreneurship Scaling (P168577); Shire Valley Transformation 1 (P158805); and Shire Valley Transformation 2 (P176575). AGCOM2.0 will aid these efforts, assist in policy dialogue, and create space for collaboration with other development partners. The preparation of the project will be informed by the CCDR, to ensure that the proposed interventions effectively contribute to implementing pathways that enhance climate resilience in a cost-effective manner. 17. The CPF FY21-25 and AGCOM2.0 conform to the regional policy frameworks. In line with the World Bank Group Africa Climate Business Plan, Focus Area 2 of the CPF incorporates objectives for food security through CSA and environmental stability through integrated water and landscape management. The plan aims to implement climate-smart policies and programs designed to scale up integrated landscape approaches on 60 million hectares, provide 150 million people with access to impact-based warnings , and facilitate the adoption of CSA by 28 million farmers. The CPF will also continue to assist Malawi to deliver on its commitments to the African Union Agenda 2063, the Malabo Declaration on African Agriculture, and the Comprehensive Africa Agriculture Development Program (CAADP). AGCOM2.0 aims to contribute to achieving regional targets and bolstering the participation of women and youth in agriculture value chains. Jun 03, 2022 Page 8 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) C. Proposed Development Objective(s) To increase the commercialization of primary and value-added agricultural products and enhance the resilience of the food system Key Results (From PCN) The Project will attain the following key results: ▪ Increased sales of primary and value-added agricultural products, both in volume and value, from farmer organizations to off-takers within productive alliances (increased market access and commercialization); ▪ Number of value chains with increased sales in domestic and regional markets (increased commercialization and building resilience by reducing dependence on a limited number of commodities); ▪ Farmers adopting resilience-enhancing technologies and practices (building resilience: farmers applying CSA technologies and farmers using irrigation); ▪ Expanded cultivation area under climate-smart agriculture (building resilience: total area applying CSA technologies and total new irrigated area). ▪ Another regional indicator to be determined D. Concept Description 18. The Second Agricultural Commercialization and Resilience Enhancement Project (AGCOM2.0) will be a multi- sectoral, country-wide operation with costs estimated at US$250 million over six years. AGCOM2.0 will bring together agriculture, water, lands, industry and trade, as well as other sectors. Project interventions will cover the entire country, building on the success of AGCOM(1.0) (refer to annex 1). The funds will be sourced from IDA20, using the performance- based allocation for Malawi (PBA). There is also an opportunity for the government to complement the available funds in the PBA by accessing regional IDA funds. The World Bank is in the process of approving the Food Systems Resilience Program for Eastern and Southern Africa (P178566), using a multi-phase programmatic approach (MPA). The scope of AGCOM2.0 fits well within the regional program and the proposed project can become a phase of the MPA. By doing so, the World Bank should be able to cover most of the costs of the proposed operation22. If the use of the regional allocation is confirmed, the following aspects will be determined during preparation: (i) at least one regional PDO indicator that reflects the contribution of the project to regional public goods; (ii) the role of regional actors and entities, for example, the Centre for Coordination of Agricultural Research and Development for Southern Africa (CCARDESA); (iii) a suite of specific activities and interventions that are eligible for regional financing and interventions with a regional focus; and (iv) the share of PBA versus regional funds, along with other sources of financing. 19. AGCOM2.0 is primarily meant to support medium- and long-term resilience building. The proposed interventions are designed to have short-term effects on sales through inclusive value chains, and long-term impacts on food system resilience through access to markets and diversification (refer to theory of change in Annex 2). The proposed interventions 22 Based on the previous experience of the multi-donor trust fund for the Agriculture Sector Wide Approach Support projects, setting up a new multi-donor trust fund to co-finance AGCOM2.0 is an option currently being discussed with development partners to cover a financial gap, if any. Jun 03, 2022 Page 9 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) are in line with the findings of the CCDR with respect to strengthening resilience in agriculture to achieve sustainable development. The project is expected to commence implementation in late 2023 or early 2024. If the Russia-Ukraine crisis aggravates Malawi’s food security to the point that short-term responses are called for, (emergency) projects other than AGCOM2.0 will be needed. It is crucial to continue monitoring the food security situation and have contingency plans in reserve. It is important to note that both the MPA and the proposed AGCOM2.0 will have contingency emergency response components (CERC) available for future crises. 20. AGCOM2.0 will scale up and upgrade the inclusive value chain development approach called 'productive alliances', successfully implemented under AGCOM(1.0). AGCOM(1.0) has supported over 200 productive alliance subprojects and benefited 40,000 small-scale farmers. It has contributed to diversifying the agricultural sector by promoting sales in 20 value chains, including dairy, soya, rice, tea, and honey. Leveraging the lessons learned and the improved implementation capacity within the government, AGCOM2.0 will finance an additional 500 subprojects, reaching 100,000 farmers. The project will reinforce interventions that empower women and youth. In addition, AGCOM2.0 will expand the scope to include the support of processes that increase the value of primary agricultural products and propel the creation of off- farm jobs. Building on the experience of AGCOM(1.0), AGCOM2.0 will continue to support the implementation of the land reform program and improve the institutional and policy environment for commercialization. 21. To enhance food system resilience in response to climate change AGCOM2.0 will implement a three-pronged approach: (i) expand the irrigated area and implement landscape approaches in their catchment areas, including restoration and conservation activities; (ii) promote the adoption of CSA approaches and technologies on farm and at the organization level;23 and (iii) develop research and innovations,24 as well as introduce digital platforms and services that support farmer preparedness and rapid response to extreme weather events. 22. AGCOM2.0 will target several types of beneficiaries and narrow the gender gap in the agriculture sector. Direct beneficiaries will include small-scale farmers, including women and youth, who join commercial organizations such as cooperatives; and farmer organizations and entrepreneurs who engage in value addition. AGCOM(1.0) has effectively fostered the participation of women and youth. Based on this success, the proposed project will reduce unequal access to inputs such as labor and labor-saving technologies, knowledge, fertilizer, and improved seeds. It will also address unequal access to land tenure security and the participation of women in cash crops and agri-business. 23. AGCOM2.0 will promote citizen engagement and generate sizable climate co-benefits. The participatory approach of AGCOM(1.0) has made it possible to effectively engage farmers in the planning, co-financing, and implementation of business-oriented investments. This approach will remain unchanged in AGCOM2.0. Due to the demand-driven and bottom-up nature of the proposed project, fostering citizen participation will continue to be essential to achieve the PDO. Citizen feedback will be encouraged and reviewed on a regular basis through the multiple channels established under AGCOM(1.0). Furthermore, the proposed interventions show significant potential climate co-benefits, including the adoption of climate-adapted crop varieties, the dissemination and adoption of CSA practices, and the expansion of irrigation services that optimize water use and enhance resilience to climate change impacts. There are also ample mitigation opportunities, such as improving or restoring watershed functions in catchment areas through afforestation. 23 The experience of the Second Agriculture Sector Wide Approach Support Project (ASWAp SpII, P164445) is relevant. Through ASWAp SPII, CSA practices and technologies have been adopted in 17,000 ha. There is ample room for scaling it up. 24 Under the Agricultural Productivity Program for Southern Africa Project (APPSA, P094183), over 90 improved technologies for productivity and climate resilience were made available to farmers. AGCOM2.0 will take up where APPSA left off. Jun 03, 2022 Page 10 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) 24. The proposed interventions are clustered in five components. Component 1 will scale up and upgrade the inclusive value chain approach effectively tested under AGCOM(1.0). Component 2 will finance public infrastructure that supports commercial agriculture and climate resilience, including irrigation systems and their associated landscape approaches. Component 3 will strengthen research services, expand the capacity of pivotal institutions and support policy reforms. Component 4 will finance the costs of project management and cross-cutting functions. Component 5 will be a Contingent Emergency Response Component (CERC). Performance-based conditions will be included in some of the components. Approximately 80 percent of the funds will cover investments under Components 1 and 2. Component 1 Developing inclusive agri-food value chains [initial estimate US$80-100m] 25. The interventions to scale up and upgrade the inclusive value chain approach are broken down into two subcomponents: (i) building and strengthening farmer organizations and (ii) supporting productive alliances. The proposed activities fit within Pillar 4 of the MPA: ‘Getting to market’. The pillar aims to improve physical and economic access to sufficient, safe, and nutritious food by improving agri-food producers’ access to domestic and international markets and enhancing marketing infrastructure. Pillar 4 will help agricultural producers and agri-entrepreneurs create and capture more value from their agricultural products. 26. Building and strengthening farmer organizations. As in AGCOM(1.0), AGCOM2.0 will reach out to individual farmers and encourage them to mobilize and work collectively to form capable organizations, which have proved to be an effective way to reach scale and link up with agri-food value chains. The project will intensify communication and dissemination campaigns to sensitize individual farmers and train the nascent organizations (also called ‘horizontal alliances’). The project will help the collective groups become functional and formal, reach minimum standards of governance and accountability, include women and youth, link up with off-takers, and develop viable business plans. Based on lessons learned from AGCOM(1.0), the proposed project will step up its efforts to promote the formation of cooperatives. An estimated 300 new organizations will be created. Some of the new commercial organizations will include the smallholder farmers of the newly irrigated areas (refer to Component 2). AGCOM2.0 will also continue to develop existing organizations that have been awarded matching grants and satisfactorily carried out productive alliance subprojects under AGCOM(1.0). The goal is to help these organizations become viable, sustainable businesses that are able to leverage more investments and reach larger markets. AGCOM(1.0) has shown that a single round of support does not guarantee the sustainability of the organizations, given the low baseline of capacity and production in the organizations. Providing further technical support is critical for them to endure. Areas of technical assistance will include scaling up by through measures such as merging cooperatives or building secondary cooperatives;25 adding value to primary products and diversifying business; incorporating CSA approaches;26 and empowering women by including them in leadership roles. An estimated 100 organizations will be strengthened. Drawing upon the results of the pilot carried out through AGCOM(1.0), AGCOM2.0 will continue the demarcation, adjudication and registration of sporadic (dispersed) parcels, reaching an estimated 30,000 smallholder farmers in the organizations. To make this process more cost-effective, the project will put in place the necessary institutional arrangements to register land parcels in areas with a high concentration of organizations. 25 The experience of AGCOM(1.0) reveals that certain value chains such as soya need larger scales for the organizations to endure cycles of low commodity prices. AGCOM(1.0)-supported cooperatives, with an average of 300 members and a maximum aggregated volume of 400 tons per year, are still too small. The same logic is valid for organizations with the potential of exporting their products. To attract the interest of purchasers abroad they need to increase their volumes. 26 In Malawi about 80,000 farmers are insuring their crops against shocks with primes mostly subsidized or paid in full by development partners. AGCOM2.0 will explore options for organizations and off-takers to access crop insurance. Jun 03, 2022 Page 11 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) 27. Supporting productive alliances. AGCOM2.0 will continue to apply the rules established under AGCOM(1.0) (summarized in Box 2). In addition to these guidelines, each of the new generation of subprojects under AGCOM2.0 will incorporate a module of investments to enhance climate resilience, including the adoption of CSA techniques on farm and other risk-management approaches at the organization level such as climate insurance. Approximately 100 business plans that have been approved under AGCOM(1.0), but have not yet been financed, will form part of the portfolio of investments during the first year of AGCOM2.0. By the end of the project, a total 500 productive alliance subprojects will have been effectively implemented. To complement these efforts, AGCOM2.0 will introduce two innovative windows of matching grants: (i) a second round of matching grants to AGCOM(1.0)-supported organizations, with the objective of expanding the scale of operations or adding value to primary products; and (ii) awarding matching grants to SME off-takers that, as either anchor firms or farms, seek to engage farmer organizations as suppliers of primary products under productive alliances. Both of these new windows will be developed during project preparation, including the eligibility criteria and rules, such as minimum membership and the level of monetary contribution. To the extent possible, matching grants will be awarded in conjunction with commercial loans, seizing the opportunities offered by the Financial Inclusion and Entrepreneurship Scaling Project (FINES, P168577), to help SMEs mobilize private sector financing.27 Both windows will prioritize investments with the greatest potential to boost the creation of on-farm and off-farm jobs. As a result of the new windows, an estimated 50 subprojects will be completed. Box 2: Productive alliances under AGCOM(1.0) The matching grant process under AGCOM(1.0) has followed the guidelines below: (i) a two-pronged process with calls for proposals for concepts, from organizations of at least 20 households, and the development of full-fledged business plans; (ii) an independent party then evaluates the submissions; (iii) the organizations co-finance the business plans by contributing at least 10 percent in cash (monetary contribution) and another 20 percent in kind; (iv) the grant is capped at US$2,500 per household; (v) the organizations receive the funds, mostly earmarked for capital investments, and follow through with the planned activities to meet the off-takers’ demand; (vi) an Environmental and Social Management Plan (ESMP) to mitigate the risks of the investments is an integral part of every business plan; and (vii) special calls-for-proposals are organized for women-only and youth-only organizations. As of June 2022, AGCOM(1.0) has supported 151 farmer organizations, mainly cooperatives, allowing approximately 40,000 farmers to expand sales. 22,000 of the beneficiaries are women and 11,000 are youth. The high demand for the grants is demonstrated by the fact that over 1,200 farmer organizations submitted applications for grants under AGCOM(1.0). If revised and improved, many of these proposals can be financed by AGCOM2.0. Through 151 productive alliance subprojects valued at US$24 million, farmers are investing in productive- enhancing assets and technologies to meet the volume and quality demanded by off-takers. To match the grants, participant farmers have already mobilized US$2.1 million, materializing the mobilizing-finance-for- development approach. By the end of the project, over 200 productive alliances will have been financed. 27FINES has made available a line of credit for commercial banks to assist SMEs. It has also set up a partial credit guarantee fund to help SMEs overcome the impediment of lack of collateral. Jun 03, 2022 Page 12 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) Approximately 20 percent of the subprojects will be in the northern region, 30 percent in the southern region, and 50 percent in the central region. Based on 26 organizations, there has been an increase of 16,000 metric tons in sales compared to the initial level. The project has supported 20 value chains, with soya (23 percent) and dairy (21 percent) concentrating the lion’s share of the support. Off-takers include over 100 restaurants, hotels, supermarkets, and agri-processing firms such as Sunseed Oil, Lilongwe Dairy, Malawi Dairy Industry, Millennium Farms, Sakuli Foods, and Press Cane. Each AGCOM(1.0)-supported cooperative is expanding membership and hiring more casual labor. For instance, the Shire Highlands Milk Producers Association, a supplier of Lilongwe Dairy Ltd, is adding more than 300 new farmers yearly to milk production. The cooperatives have also started to create off-farm jobs, such as the Mwandama Cooperative in Zomba, which has employed 12 additional people since the start of the subproject. Component 2 Improving public infrastructure [initial estimate US$80-100m] 28. AGCOM2.0 will scale up the last-mile infrastructure approach introduced with AGCOM(1.0) and finance the construction of medium-size to large scale irrigation schemes and the management of their catchment areas. The proposed activities fit within both Pillar 4 (Getting to market) and Pillar 3 (Supporting the Sustainable Development of Natural Resources for Resilient Agricultural Landscapes) of the MPA. Pillar 3 will adopt a watershed or landscape approach to enhance the sustainable and resilient use of natural resources for food systems and livelihoods within priority areas. 29. Last-mile infrastructure subprojects. AGCOM2.0 will scale up investments in last-mile infrastructure, building on AGCOM(1.0)’s bottom-up approach. The infrastructure is primarily meant to support agri-food production and marketing. The set of guidelines of AGCOM(1.0) will remain unchanged: (i) each subproject will comprise a cluster of small investments that are crucial to the organizations supported under the matching grant scheme28; (ii) the subprojects are primarily identified and proposed by the organizations; (iii) each subproject will have a cost of US$500,000 or higher and exclusively finance the rehabilitation or construction of public infrastructure; (iv) each subproject will be subject to a technical design approval, a comprehensive Environmental and Social Management Plan, a Resettlement Plan (if needed), and a strategy to secure sustainability and with strong engagement of the beneficiaries and district councils; (v) irrigation subprojects will also go through an economic and financial assessment; (vi) construction work and supervision will be outsourced; and (vii) each subproject will undertake strict preventive measures for gender-based violence and sexual abuse and exploitation. AGCOM(1.0) has developed a pipeline of approximately US$12 million, which will be transferred to AGCOM2.0 and form part of the portfolio of investments during the first year of implementation. The portfolio includes road rehabilitation, water supply, the rehabilitation of small irrigation schemes, and power supply. The pipeline being carried over to the proposed project will benefit 47 organizations that have implemented productive alliance subprojects under AGCOM(1.0). Through the existing pipeline and the new subprojects to be identified, by the end of the project, an estimated 30 last-mile infrastructure subprojects will have been completed and 100 organizations will have benefited. 30. Medium-size to large scale irrigation schemes and landscape approach for catchment management. AGCOM2.0 will also finance the construction of medium-size to large scale irrigation schemes in the central and northern regions. In the Irrigation Master Plan, the MoA has preliminarily identified three possible new irrigation schemes that will expand 28 As an example, a subproject being implemented under AGCOM(1.0) includes the rehabilitation of a small irrigation scheme, the improvement of a feeder road, and a bridge. The investments have been identified by a benefited cooperative. The individual works are of small scale and their locations are close to the farms of the members of the organizations or the sites of their collective assets. Jun 03, 2022 Page 13 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) irrigation services to 3,000 ha in the central and northern regions.29 In recent years, most irrigation investments have been concentrated in the south, so, by covering other regions, AGCOM2.0 will add value to the diversification agenda. Design work for all three schemes is in progress. For each new scheme, the subproject will finance the infrastructure work and the management of catchment areas with a focus on landscape conservation and restoration. The final selection of schemes as well as their landscape-related interventions will be confirmed during preparation, according to the availability of funds in AGCOM2.0, the level of readiness of the designs, and the potential impacts. In association with the new schemes, farmers will be mobilized to build viable commercial organizations and connect with profitable value chains, as per the approach outlined in Component 1. The need to promote a landscape approach emerges from the high level of deterioration in most of the catchments of Malawi, which threatens the sustainability of any irrigation scheme. By controlling soil erosion and enhancing the water storage capacity in the soil, the maintenance costs of the irrigation schemes will be reduced and the prospects for sustainability will improve significantly. Once the sites are confirmed, it will be critical to develop effective strategies that involve the beneficiaries in catchment management activities and determine modalities that will secure the operation and maintenance of the schemes, including the role of potential water user associations. Component 3 Strengthening public service delivery and policy environment [initial estimate US$20-30m] 31. Component 3 will strengthen research services, expand the capacity of pivotal institutions, and promote policy reforms regarding agricultural commercialization and climate resilience. Four clusters of activities are proposed: (a) research, development and innovation; (b) the development and upgrade of digital platforms; (c) the construction, rehabilitation and upgrade of strategic public facilities; and (d) the preparation and implementation of strategic policy reforms. The proposed activities fit within both Pillar 2 (Rebuilding Resilient Agricultural Production Capacity) and Pillar 5 (Promoting a Greater Focus on Food Systems Resilience in National and Regional Policymaking) of the MPA. Whereas Pillar 2 aims to strengthen the resilience of food supply to climate change and other shocks and stressors with a focus on agricultural production and related support services, Pillar 5 seeks to enhance the overall capacity of public sector organizations to anticipate and respond to various shocks and stressors more effectively. 32. Research, development, and innovation. AGCOM2.0 will support research subprojects that fill knowledge gaps with the objective of improving productivity and the resilience of high value commercial livestock and crops. Research will include innovations, emerging market niches, value chain demand, and diagnostic studies, and strategic planning that identifies the catalytic investments and policy reforms that are needed. It will build on and add value to the contributions of APPSA and ASWAp SPII and strengthen the regional collaborations built with SADC and COMESA. The proposed activities will promote data collection to generate increased knowledge across borders, the exchange of skills and use of harmonized methods and approaches across countries, and the provision of reliable data for improved policy making. 33. Development and upgrade of digital platforms. A preliminary set of digital tools includes upgrading the National Agricultural Management Information System developed under ASWAp SPII; automating the cooperative registry; establishing a virtual one-stop service center for agricultural investment and trade; scaling up the decentralized meteorological information system; operationalizing the Crops Act; scaling up the Land Management Information System developed under AGCOM(1.0); and developing a sanitary, phytosanitary and food safety digital system . During preparation, the introduction and contribution of regional data networks and cross-border information sharing will be assessed and determined. Likewise, the contribution of AGCOM2.0 to regional coordination mechanisms will be discussed. 29 The proposed schemes are the following: (i) Bwanje Valley in Dedza district for 1,400 ha, US$30 million; (ii) Lembani in Ntcheu district for 1,024 ha, US$15.4 million; and (iii) Mwenilondo scheme in Karonga district for 575 ha, US$22 million. Jun 03, 2022 Page 14 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) 34. Construction, rehabilitation, and upgrading of strategic public facilities. A preliminary suite of facilities includes a national agriculture exhibition center; agriculture residential training centers; a central veterinary laboratory and regional laboratories; facilities needed for decentralized land registration in selected districts; trade facilitating infrastructure; and stud breeding infrastructure. 35. Preparation and implementation of strategic policy reforms. Some of the regulatory documents to be prepared or upgraded include the national crop production and development policy; the agriculture research policy; the horticulture strategy; the contract farming policy; the livestock breeding strategy; the national apiculture strategy; and the e- commerce strategy. In addition, a set of reforms will be implemented, for example, structured markets with an improved warehouse receipt system. Pathways to support the AIP reform will be discussed during preparation in conjunction with policy dialogue and the implementation of the Malawi Growth and Resilience Development Policy Financing (P175072). Component 4 Project coordination and management [initial estimate US$10-20m] 36. Component 4 will finance the costs of project management and cross-cutting functions. Critical functions include monitoring and evaluation, finance management (FM), procurement, environmental management, and social management. This component will cover the costs of the collection, storage, administration and processing of data of the organizations and the individual beneficiaries. It will finance, among other things, production costs, yields, sales, and employment. AGCOM2.0 will use the Geo-Enabling initiative for Monitoring and Supervision (GEMS) platform and will incorporate an impact evaluation as part of the design. 37. In addition, Component 4 will upgrade the citizen engagement and social accountability mechanism established under AGCOM(1.0). This will include setting up and upgrading grievance redress schemes, measuring and publicizing project impacts, and generating feedback from beneficiaries. AGCOM2.0 will continue to use the dedicated website developed under AGCOM(1.0). All communication and visibility efforts will be part of a communication strategy that will be continuously revised and improved. Citizens will provide feedback on the services delivered through the multiple mechanisms, including an annual survey commissioned by the PIU. Citizen-engagement indicators will form part of the Result Framework. Component 5 Contingent emergency response component 38. In accordance with OP/BP 10.00, this zero�budget component establishes a disaster recovery contingency fund that may be triggered in the event of an eligible natural or human�induced crisis or emergency that has had (or is likely to have) major adverse socio�economic impacts during the life of the project. If approved by the Bank, resources may be drawn from the unallocated expenditure category, or the government may request the Bank to re�categorize and reallocate financing from other project components to cover emergency response and recovery costs. Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 TBD Projects in Disputed Areas OP 7.60 No Jun 03, 2022 Page 15 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) Summary of Screening of Environmental and Social Risks and Impacts . The Environmental and Social task team conducted an initial risk assessment and identified the following as potential risks for component 1 which involves the formation of new farmer organizations, supporting existing farmer organizations, technical assistance, the awarding of matching grants, and land demarcation, adjudication, and certification; risk of exclusion, especially for vulnerable groups such as women, youth, and people living with disabilities, social conflicts emanating from land demarcation and adjudication activities, and the mismanagement of matching grants. Components 2, 3, and 5 involve construction activities to be implemented countrywide, including building medium-size and large dams and expanding other existing dams. These activities poses multiple risks, including Occupational Health and Safety risks, community health and safety risks, soil erosion, waste management risks, the pollution of air, water, and soil, the transmission of Covid-19 and other communicable diseases, the downstream impacts and maintenance of hydrological flow in irrigation system operations, Gender Based Violence/Sexual Exploitation and Abuse-Sexual Harassment (GBV/SEA-SH), the exclusion of persons with disabilities (PWDs) and the lack of consultation with women?s groups concerning project design and the construction of facilities. Once the irrigation schemes become operational, potential risks include the generation, handling, and disposal of waste, possible air, water, and soil pollution from processing activities, dam safety, downstream impacts, hydrological flow, flooding due to faulty design, water and soil salinity, soil erosion, possible interaction with cultural heritage, GBV/SEA, and the lack of consultation with and participation of certain community groups. Agricultural activities bring risks, such as the pollution, community and health risks due to fertilizer and pesticide use, soil erosion resulting from the clearing of land, the introduction of invasive or environmentally unsustainable species, and so on. However, climate-smart agriculture approaches will benefit soil health, increase carbon sinks, and help control runoff. Digital platforms, though small-scale, could increase digital waste production. Communicable and non-communicable disease transmission is also a health risk during the implementation of the project. There is a country context risk being proneness to climate change impacts and vulnerabilities. Malawi as a nation and Agriculture as a sector has significantly been affected by climate change impacts such as cyclone, droughts, flooding, pests infestations, erratic rainfall, too much rainfall etc. this is a risk to agriculture and any type of infrastructure. Though the project activities risks have been assessed, they have not been assessed in space since exact locations are not yet known but will be known during implementation, when beneficiaries are identified. It is for this reason that framework approach will apply at project preparation prepared and the ESIA/ ESMPs and RAPs/ARAPs will be prepared once exact sites of sub-projects are known. Institution capacity was also screened. The Ministry has PIU which will facilitate preparation of instruments and Department of Land Resources that is the contact point for the ministry on Environmental and Social risk management aspects. Having assessed project activities risks and borrowers capacity, the project risk rating is substantial and the following instruments have been recommended for preparation to provide means of managing identified environmental and social risks and impacts: Environmental and Social commitment plan that outlines borrowers commitment to implement measures to address environmental and social risks; Stakeholder engagement that outlines approaches and methods that the borrower will use to consult and solicit feedback from various stakeholders. project grievance redress mechanism will be included in this document; Labor management Procedures that will outline procedures for managing labor of different categories. Workers grievance redress mechanism will be included; Environmental and Social Management Framework during preparation and ESIA/ESMP during project implementation. Jun 03, 2022 Page 16 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) . CONTACT POINT World Bank Francisco Javier Obreque Arqueros, Efrem Zephnath Chilima, Tesfaye Bekalu Wondem Senior Agriculture Specialist Borrower/Client/Recipient Republic of Malawi Macdonald Mwale Secretary of Treasury, Ministry of Finance mmafutamwale@gmail.com Implementing Agencies Ministry of Agriculture Sandram Maweru Principal Secretary smaweru@gmail.com Ministry of Lands Reneck Matemba Principal Secretary reynmatemba@yahoo.com Ministry of Trade and Industry Christina Chatima Principal Secretary chatimachristina@yahoo.com FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects Jun 03, 2022 Page 17 of 18 Official Use The World Bank Second Agricultural Commercialization and Resilience Enhancement Project (P178818) APPROVAL Francisco Javier Obreque Arqueros, Efrem Zephnath Chilima, Tesfaye Bekalu Task Team Leader(s): Wondem Approved By APPROVALTBL Country Director: Hugh Riddell 03-Aug-2022 Jun 03, 2022 Page 18 of 18 Official Use