Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD2542 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF EUR30 MILLION (US$ 34.89 MILLION EQUIVALENT) TO MONTENEGRO FOR THE SECOND INSTITUTIONAL DEVELOPMENT AND AGRICULTURE STRENGTHENING PROJECT DECEMBER 29, 2017 Agriculture Global Practice Europe And Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective October 31, 2017) Currency Unit = EUR EUR 1 = US$1.163 US$ 1 = EUR 0.859 FISCAL YEAR January 1 - December 31 Regional Vice President: Cyril E Muller Country Director: Linda Van Gelder Senior Global Practice Director: Juergen Voegele Practice Manager: Julian A. Lampietti Task Team Leader(s): Jeren Kabayeva, Svetlana Edmeades ABBREVIATIONS AND ACRONYMS ABP Animal By-Products AFSVPA Administration for Food Safety, Veterinary and Phytosanitary Affairs BIP Border Inspection Post BSE Bovine Apongiform Encephalopathy CAP Common Agricultural Policy CFP Common Fisheries Policy CPF Country Partnership Framework CPUE Catch Per Unit Effort DfA Directorate for Agriculture DfF Directorate for Fisheries DfP Directorate for Payments DfRD Directorate for Rural Development DFIL Disbursement and Financial Information Letter EAFRD European Agricultural Fund for Rural Development EAGF European Agriculture Guarantee Fund EBRD European Bank for Reconstruction and Development EC European Commission EIPPCB European Integrated Pollution Prevention and Control Bureau EMFF European Maritime Fisheries Fund ERP Economic Reform Program ERR Economic Rate of Return ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan EU European Union EUR Euros EX-ACT Ex-Ante Carbon-balance Tool FAO Food and Agriculture Organization FM Financial Management GAEC Good Agricultural and Environmental Conditions GDP Gross Domestic Product GEF Global Environment Facility GHG Greenhouse Gas GMO Genetically Modified Organisms GNI Gross National Income GOM Grant Operational Manual GPN General Procurement Notice GRM Grievance Redress Mechanisms IACS Integrated Administration and Control System IBRD International Bank for Reconstruction and Development ICT Information and Communications Technology IDA International Development Association IFAD International Fund for Agricultural Development IFR Interim Unaudited Financial report INDC Intended Nationally Determined Contribution IPARD Instrument for Pre-Accession and Assistance for Rural Development IPF Investment Project Financing IPPC International Plant Protection Convention IRR Internal Rate of Return ISO International Organization for Standardization ISP Implementation Support Plan IUU Illegal, Unreported, and Unregulated M&E Monitoring & Evaluation MARD Ministry of Agriculture and Rural Development MDD Montenegro Development Directions MIDAS Montenegro Institutional Development and Agriculture Strengthening Project MoU Memorandum of Understanding NPV Net Present Value NRL National Reference Phytosanitary Laboratory NSSD National Strategy for Sustainable Development PDO Project Development Objective PFS Project financial statements PMT Project Management Team POM Project Operational Manual PPDO Project Procurement Development Objectives PPP Public-Private-Partnership PPSD Project Procurement Strategy Document PSC Project Steering Committee QCBS Quality and Cost Based Selection RF Results Framework RfB Request for Bid SAA Stabilization and Association Agreement SPN Specific Procurement Notices SPS Sanitary and Phytosanitary Measures STEP Systematic Tracking of Exchanges in Procurement TA Technical Assistance TAC Total Allowable Catch TOR Terms of Reference TSE Transmissible Spongiform Encephalopathies TSU Technical Services Unit UN United Nations UNDB United Nations Development Business USD United States Dollars WTO World Trade Organization MONTENEGRO SECOND INSTITUTIONAL DEVELOPMENT AND AGRICULTURE STRENGTHENING PROJECT Table of Contents I. STRATEGIC CONTEXT ...................................................................................................... 7 A. Country Context .................................................................................................................. 7 B. Sectoral and Institutional Context ...................................................................................... 8 C. Higher Level Objectives to which the Project Contributes ............................................... 11 II. PROJECT DEVELOPMENT OBJECTIVES ............................................................................ 11 A. PDO.................................................................................................................................... 11 B. Project Beneficiaries.......................................................................................................... 12 C. PDO-Level Results Indicators............................................................................................. 12 III. PROJECT DESCRIPTION.................................................................................................. 12 A. Project Components.......................................................................................................... 12 B. Project Cost and Financing ................................................................................................ 16 C. Lessons Learned and Reflected in the Project Design ...................................................... 16 IV. IMPLEMENTATION........................................................................................................ 17 A. Institutional and Implementation Arrangements ............................................................. 17 B. Results Monitoring and Evaluation ................................................................................... 18 C. Sustainability ..................................................................................................................... 18 D. Role of Partners................................................................................................................. 18 V. KEY RISKS ..................................................................................................................... 19 A. Overall Risk Rating and Explanation of Key Risks.............................................................. 19 VI. APPRAISAL SUMMARY .................................................................................................. 20 A. Economic and Financial Analysis ....................................................................................... 20 B. Technical............................................................................................................................ 21 C. Financial Management ...................................................................................................... 23 D. Procurement ..................................................................................................................... 23 E. Social (including Safeguards) ............................................................................................. 24 F. Environment (including Safeguards) ................................................................................. 26 G. Other Safeguard Policies ................................................................................................... 26 H. World Bank Grievance Redress......................................................................................... 26 VII. RESULTS FRAMEWORK AND MONITORING .................................................................... 28 ANNEX 1: DETAILED PROJECT DESCRIPTION ......................................................................... 35 ANNEX 2: IMPLEMENTATION ARRANGEMENTS .................................................................... 45 ANNEX 3: IMPLEMENTATION SUPPORT PLAN ...................................................................... 54 ANNEX 4: EU ACESSION PROCESS......................................................................................... 56 ANNEX 5: GLOSSARY OF EU TERMINOLOGY ......................................................................... 59 ANNEX 6: MIDAS VS. MIDAS2 .............................................................................................. 61 ANNEX 7: ECONOMIC AND FINANCIAL ANALYSIS ................................................................. 64 ANNEX 8: GREENHOUSE GAS ACCOUNTING ......................................................................... 73 ANNEX 9: MAP OF MONTENEGRO ....................................................................................... 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) BASIC INFORMATION Is this a regionally tagged project? Country(ies) Financing Instrument No Investment Project Financing [ ] Situations of Urgent Need of Assistance or Capacity Constraints [ ] Financial Intermediaries [ ] Series of Projects Approval Date Closing Date Environmental Assessment Category 30-Jan-2018 30-Jun-2023 B - Partial Assessment Bank/IFC Collaboration No Proposed Development Objective(s) The Project Development Objective is to improve the competitiveness of agriculture and fisheries in Montenegro through enhanced delivery of government support in alignment with EU accession requirements. Components Component Name Cost (US$, millions) Strengthening MARD agriculture, rural development and fisheries program 23,030,000.00 Support for the Food Safety, Veterinary and Phytosanitary Services 3,490,000.00 Modernization of the Fisheries Sector 6,980,000.00 Project Management 1,390,000.00 Organizations Borrower : MONTENEGRO Page 1 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Implementing Agency : Ministry of Agriculture and Rural Development PROJECT FINANCING DATA (US$, Millions) [ ] [ ✔ ] IBRD [ ] IDA Credit [ ] IDA Grant [ ] Trust [ ] Counterpart Funds Parallel Funding Financing FIN COST OLD Total Project Cost: Total Financing: Financing Gap: 34.89 34.89 0.00 Of Which Bank Financing (IBRD/IDA): 34.89 Financing (in US$, millions) FIN_SUMM_OLD Financing Source Amount IBRD-88200 34.89 Total 34.89 Expected Disbursements (in US$, millions) Fiscal Year 2018 2019 2020 2021 2022 2023 Annual 0.81 4.45 6.93 7.64 8.75 6.30 Cumulative 0.81 5.26 12.19 19.84 28.59 34.89 INSTITUTIONAL DATA Practice Area (Lead) Agriculture Page 2 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Contributing Practice Areas Environment & Natural Resources Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF Yes b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment Yes c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance  Moderate 2. Macroeconomic  Moderate 3. Sector Strategies and Policies  Low 4. Technical Design of Project or Program  Low 5. Institutional Capacity for Implementation and Sustainability  Low 6. Fiduciary  Moderate 7. Environment and Social  Moderate 8. Stakeholders  Low 9. Other 10. Overall  Moderate Page 3 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✔] No Does the project require any waivers of Bank policies? [ ] Yes [✔] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Natural Habitats OP/BP 4.04 ✔ Forests OP/BP 4.36 ✔ Pest Management OP 4.09 ✔ Physical Cultural Resources OP/BP 4.11 ✔ Indigenous Peoples OP/BP 4.10 ✔ Involuntary Resettlement OP/BP 4.12 ✔ Safety of Dams OP/BP 4.37 ✔ Projects on International Waterways OP/BP 7.50 ✔ Projects in Disputed Areas OP/BP 7.60 ✔ Legal Covenants Conditions Type Description Effectiveness The Project Operational Manual has been adopted by the Borrower in form and substance satisfactory to the Bank Type Description Disbursement For expenditures under Disbursement Category (2), i.e. Grants under Part A.1 of the Project Loan Agreement, unless the Borrower has approved the Grant Operational Manual for the first call for Grants in form and substance satisfactory to the Bank Page 4 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) PROJECT TEAM Bank Staff Name Role Specialization Unit Team Leader(ADM Jeren Kabayeva Rural Development GFA03 Responsible) Svetlana Edmeades Team Leader Agriculture Economist GFA03 Procurement Specialist(ADM Manjola Malo Procurement GGO03 Responsible) Financial Management Aleksandar Crnomarkovic Financial Management GGO21 Specialist Charlotte De Fontaubert Team Member Fisheries Specialist GENGE Daniel P. Gerber Team Member Agriculture Economist GFA01 Diego Arias Carballo Peer Reviewer Peer Reviewer GFA07 Dionisis Panagiotatos Team Member Food Safety GFA03 Dragana Varezic Team Member Operations ECCBM Environmental Safeguards Esma Kreso Beslagic Environment GEN03 Specialist Funda Canli Team Member Project Assistant GFA03 Hans Christoph Kordik Team Member EU Payment System GFA03 Irina Schuman Peer Reviewer Peer Reviewer GFA07 Jasna Mestnik Team Member Disbursement WFALN Joseph Alan Sciortino Team Member Port Engineer GEN01 Luz Meza-Bartrina Counsel Country Lawyer LEGLE Maurizio Guadagni Peer Reviewer Peer Reviewer GFA04 Michael Morris Peer Reviewer Peer Reviewer GFA04 Rosalie Quong Trinidad Team Member Program Assistant GFA03 Silvia Mauri Team Member Rural Devt Grant Program GFA03 Vera Dugandzic Social Safeguards Specialist Social Development GSU03 Page 5 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Extended Team Name Title Organization Location Kairat Nazhmidenov Economist FAO Page 6 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) I. STRATEGIC CONTEXT A. Country Context 1. Montenegro, a small, upper middle-income country, gained its independence in 2006 and is making big strides towards negotiating its accession to the European Union (EU). With a population of only 0.6 million, and a Gross National Income (GNI) per capita of US$7,320, Montenegro is the smallest country in the Western Balkans. It started negotiations with the EU in June 2012 and strives to join by 2020 ahead of the other countries in the Western Balkans. Of the 35 negotiations chapters, three have been provisionally closed and 30 have been opened. 1 Good progress towards EU alignment has been made in areas such as free movements of goods, agriculture and rural development, food safety, veterinary and phytosanitary policy, energy, employment and social policy, regional policy and preparation for structural instruments. In the latest Progress Report on Montenegro (November 2016), the European Commission (EC) notes that the country is at early stages of preparation regarding budgetary and financial provisions, environment and climate change, and more needs to be done to improve competitiveness, as well as economic and monetary policy. Strengthening the administrative capacity for ensuring the application of the acquis communautaire 2 remains a substantial challenge for Montenegro. 2. Montenegro has followed a steady path of economic growth, but not without challenges. The economic boom, from 2000 to 2008, triggered by a large inflow of capital that stimulated aggregate demand, led to a steady increase in Gross Domestic Product (GDP) growth, and a fall in the unemployment rate. During the boom, there was a steady decline in the percentage of households below the poverty line and an increase in the income of households in the bottom 40 percent, most of them in rural areas. After experiencing a double-dip recession due to the 2008 global financial and the 2012 Eurozone debt crises, Montenegro’s economy slowed down to 1.8 percent in 2014 and recovered to 2.9 percent in 2016, continuing its recovery path (with over 4 percent in 2017) due to investments in road infrastructure and robust tourism activity. However, the unemployment rate remains high at 16.7 percent in mid-2017. Large fiscal deficit and growing fiscal debt have prompted the Government of Montenegro to adopt a set of fiscal consolidation measures aimed at reducing public spending. 3. Montenegro’s overarching development goal is to achieve smart, sustainable and inclusive growth. Montenegro’s development plan is outlined in three separate, but complementary strategies: the EU Accession Program 2014-2018, the Montenegro Development Directions (MDD) 2015-2018, and the Montenegro Economic Reform Program (ERP) 2016-2018. Montenegro’s EU Accession Program was adopted in December 2013 and represents the main strategic document regarding European integration. It focuses on measures required for completing alignment with the acquis communautaire. The MDD, aligned with the Europe 2020 strategy, was adopted by the Government in July 2015. The MDD identifies four driving sectors, namely tourism, energy, agriculture and rural development, and manufacturing, towards achieving the objective of “smart, sustainable and inclusive growth.” The ERP complements these efforts by tightening fiscal spending and reducing public debt. 1 The description of the EU Accession Process is provided in Annex 4 2 The list of EU-related terminology with definitions is provided in Annex 5 Page 7 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) B. Sectoral and Institutional Context 4. Agriculture is an important sector for the economic development of Montenegro. In this predominantly mountainous country, agricultural land represents 38 percent of total land area, two thirds of which is covered by pastures. Agriculture and food production play an important role in the economy, contributing around 10 percent of GDP (with the primary sector contributing 7.5 percent, and agro-food processing and fisheries contributing around two percent). With agricultural exports increasing by around four percent annually during the last eight years, agricultural imports have been increasing much faster (around 16 percent annually) leading to the worsening of agricultural trade deficit from US$166 million in 2005 to quadrupling by 2014. 5. Agriculture contributes to income and job creation, but much of it is not accounted for. Agriculture is the largest economic activity in rural Montenegro; close to 50,000 families (roughly a quarter of the country’s population), with an average holding of 4.5 hectares, derive their income partly or entirely from agriculture. Despite its small size, the agro-climate and landscape varies dramatically from the north to the south and coastal areas of Montenegro. Olive and citrus fruit production dominate in the coastal region; early vegetable production and vineyards - in the center and in proximity of the larger agglomerations of Nikšić and Podgorica; and, extensive livestock production - in the north. According to MONSTAT, in 2010 there were 2,347 people formally employed in agriculture. Yet according to the 2010 Agricultural Census, the equivalent of 46,473 Annual Work Units were employed in agriculture, suggesting that only around five percent of agricultural employment is formal. 6. Montenegro’s agriculture is characterized by constraints similar to those that prevail in Southeast Europe. Among them: (i) inability of agricultural producers to adopt modern technologies due to limited access to finance; (ii) small average farm size and an incomplete land use planning; (iii) slow uptake in development of aggregators that could improve collecting, storage, packaging and marketing of produce; and (iv) the effects of climate change, especially increased weather-related natural disasters such as droughts and floods that have a major negative impact on productivity, water supply and land erosion. Extreme weather will continue to significantly impact the sector as Montenegro’s climate models predict significant rises in temperature and diminishing precipitation in future 3. 7. With an extensive coastline, the fisheries sector of Montenegro has an enormous potential that has not yet been capitalized on. The fisheries sector has not yet developed to its full potential. According to recent stock assessments, marine living resources are currently under-exploited by the domestic fleet, which could safely increase in size. Today Montenegro is a net importer of fish products. In 2014, for example, 3,316 tons of fisheries products were imported into Montenegro, of which 2,000 tons of fresh, frozen and fileted products, whereas a mere 11 tons of fisheries products were exported. With current marine catch estimated at around 900 tons a year, Montenegro has the potential to substantially increase its production to meet domestic demand (leading to an ultimate phase-out of imports), a large share of which will be absorbed by the growing tourism sector. The capacity of the fisheries sector, however, is currently constrained by outdated equipment, lack of adequate infrastructure (landing sites and dedicated access in existing ports) and an underdeveloped value chain. 8. The Ministry of Agriculture and Rural Development (MARD) has a cross-cutting mandate that covers not only agriculture, rural development, and the food system, but also encompasses water, forestry and fisheries. While the focus of the past 10 years has primarily been on agricultural production and to a lesser extent 3Projected seasonal temperature increase in 2001-2030 (SRES A1B Scenario), compared with 1961-1990, is 0.6-1.3C, depending on the season and area of Montenegro Page 8 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) on food safety, the Ministry recognizes the need to strengthen the performance of other sub-sectors, i.e. food safety and fisheries, for which little policy orientation or support has been provided. The MARD has recently taken important steps to address this matter by adopting legislation that provides a new framework for food safety and establishes the Administration for Food Safety, Veterinary and Phytosanitary Affairs (AFSVPA). Further, it has functionally separated the Directorate for Agriculture and Fisheries into two Directorates to focus on supporting each sub-sector individually. 9. Agriculture is an important sector in the EU accession agenda of Montenegro. Montenegro has made significant progress in establishing the required institutions and systems, and has developed capacity to implement the EU Instrument for Pre-Accession and Assistance for Rural Development (IPARD). However, further work is required as the country has committed to align its national agricultural policy to the Common Agricultural Policy (CAP) of the EU by the date of accession. To this end, the country is required to have all the necessary systems in place in order to manage and receive funding from the EU and to make payments to Montenegrin beneficiaries in accordance with EU rules and procedures. An Integrated Administration and Control System (IACS), along with other tools, are necessary for the efficient utilization and monitoring of support funds, and for the harmonization of the national direct payment measures with those currently implemented in the EU. EU membership brings important benefits to the country both at the macro and micro levels. It has been found to increase GDP per capita by approximately 12 percent (using data from the 1980s and 2004 enlargements) 4. Trade liberalization has increased the flow of goods and services and has put competitiveness at the forefront of market integration. In agriculture, EU membership unlocks significant assistance and direct payments to farmers under the EU’s CAP, yet it also imposes stricter food safety and other trade-related requirements to agricultural production. 10. Montenegro is making good progress towards alignment to EU food safety legislation. A number of rulebooks, decrees and bylaws have been adopted. A new AFSVPA has been established under the oversight of the MARD, which also incorporates inspection services that previously operated autonomously. Several advances have been made in veterinary policy. The Animal Identification and Registration system, which already included large and small ruminants, was extended to pigs, and it has been completed. The multiannual program for the eradication of rabies has continued and routine monitoring and testing of ruminants for transmissible spongiform encephalopathies (TSEs) are being introduced. The implementing legislation on food safety rules was adopted in various fields but enforcement remains a challenge mainly due to shortage of human and material resources. As the country moves towards EU accession, the MARD would need to continue improving its administrative capacity, in particular for inspection services and laboratories, as well as upgrading food safety establishments. 11. Montenegro’s preparations for the fisheries sector are at an early stage, but important progress has been made. The country’s Fisheries Strategy of 2015-2020 provides an overall guidance for the development of the Montenegrin sector and its administration in line with the Common Fisheries Policy (CFP), including steps required to fully align and harmonize the national fisheries policy with the EU acquis communautaire. Steps must be taken to inform fishermen, traders and processors about the requirements they will face prior to and upon accession of Montenegro to the EU. The strategy identifies some of the sub-sector’s key areas for potential growth, including improved resource exploitation and connecting production from capture fisheries to the tourism sector and processing, thus ultimately increasing the added value of fish products. To reach this potential, adequate support will be required to increase fisheries production – including number of boats, improvement of fisheries coastal infrastructure, and enhancement of the control and surveillance system to address illegal, 4 Campos N., Coricelli F., Moretti L. (2014) How much do countries benefit from membership in the European Union Page 9 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) unregulated and unreported (IUU) fishing. It is important to note that after EU accession, production capacity will be capped because of overall EU policy for the preservation of marine living resources. As a new EU member, Montenegro’s vessel capacity will be frozen as to the date of entry, without possibility of future expansion of the fleet. 12. Since the early stages of Montenegro’s EU accession process, the EC and the World Bank (WB) have closely coordinated their activities to support Montenegro’s authorities and the agricultural sector towards unlocking access to the IPARD. Funded by the International Bank for Reconstruction and Development (IBRD) and the Global Environment Facility (GEF), the Montenegro Institutional Development and Agriculture Strengthening Project (MIDAS) was launched in July 2009 5 and has made important contributions to compliance with the IPARD requirements. The country’s authorities have put considerable efforts into setting up the required legal and institutional framework to meet EU pre-accession requirements. To this end, the MIDAS project has contributed towards (i) the establishment and capacity building of the Directorate for Rural Development (future Managing Authority) and preparation of the IPARD 2014-2020 Program and of the Code of Good Agricultural Practices; (ii) the establishment of the Directorate for Payments (future Paying Agency), including setting up infrastructure that meets accreditation requirements, and establishment of the Farm Registry and of the Reference Price Database; (iii) provision of grants to agriculture holdings to promote their development and modernization along with familiarization of both farmers and Montenegrin authorities with the IPARD rules and principles; and (iv) enhancing food safety through investments in the national reference laboratories (Veterinary Lab and Institute of Marine Biology), as well as building and equipping the first Border Inspection Post (BIP) in Bar and strengthening the sector’s legal and regulatory framework. 13. Montenegro received the EU’s “Entrustment of budget implementation tasks for EU IPARD funds.” The EU provides access to IPARD funds through the “Entrustment of budget implementation tasks for EU IPARD funds” which certifies that the country has established structures, systems and procedures in compliance with EU requirements. Thanks to Montenegro’s efforts, which were also supported by the ongoing MIDAS project, the entrustment was received in October 2017 for Measure 1 (Investments in physical assets of agricultural holdings) and Measure 3 (Investments in physical assets concerning processing and marketing of agricultural and fishery products) of the IPARD II Program. It is expected that IPARD funds to support the above-mentioned measures will be available in the beginning of 2018. To this end, Montenegro’s IPARD II Program for 2014-2020 (approved by the EU and adopted by the Government of Montenegro in September 2015), is conceived as a multi-annual development program for rural areas and proposes seven measures to be co-financed by EU and implemented by the Government. The Sectoral Agreement between Montenegro and the EU has been signed and ratified. 14. Montenegro has opened negotiations with the EU on Chapter 11 (Agriculture and Rural Development) in December 2016, while negotiations for Chapter 12 (Food Safety), and Chapter 13 (Fisheries) were opened in June 2016. The opening benchmarks for these chapters have all been met and positions adopted by the Montenegrin Government. MIDAS activities have actively contributed in supporting the country in reaching the EU pre-accession negotiation opening benchmarks for Chapters 11 and 12. In this context, the MARD has requested the Bank continue its support to the Ministry with meeting the closing benchmarks of these two chapters and provide additional support towards meeting the closing benchmarks for Chapter 13. 5 The MIDAS is scheduled to close on March 30, 2019 Page 10 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) C. Higher Level Objectives to which the Project Contributes 15. The project will support Montenegro’s broader strategic development goals of facilitating agriculture’s transition to a modern and competitive sector. Montenegro’s Strategy for Development of Agriculture and Rural Areas defines the framework and the path for development of the agricultural sector and rural areas in the process of integration of EU policies during the period of 2015-2020. The strategic objectives for the development of the sector include: (i) development of an effective, innovative and sustainable agro-food sector that provides healthy, high-quality, specialized food products based on the added value of natural resources and traditional way of production, which can meet demand and compete on the EU market; (ii) development of economic activity and creation of jobs in rural areas with special emphasis on the development of quality tourism opportunities and a short supply chain in the production of quality products and services, while at the same time respecting the cultural heritage and sustainable use of natural resources; and (iii) promotion of rural development and social services to improve the quality of life in rural areas and reduce migration of rural population to urban areas. The proposed project will contribute to these objectives by strengthening the potential of the sector to be competitive on the domestic market and developing products with high value added intended for export and tourist markets. 16. The proposed project is consistent with the Montenegro Country Partnership Framework (CPF) for the period of FY16-20. Specifically, the project contributes to Focus Area 2 “Expand access to economic opportunities and jobs” and its Objective 2c “Enhanced private investments and job-creation in high-potential sectors,” which includes an indicator of “Increased investments in agriculture and rural development in line with IPARD measures.” The project will stimulate economic opportunities following the improvements in food safety as it will improve competitiveness of Montenegrin producers to access new markets. In addition, the grant program is expected to increase economic activities and generate new jobs. Grants to the fisheries sub-sector will help mobilize private capital, create an enabling environment, and signal the sector remains a priority. This will likely attract downstream investment in processing and post-harvest practices, further contributing to the creation of added value to the primary resource. 17. Montenegro has ratified the United Nations (UN) Framework Convention on Climate Change, and became a member of the Convention as a non-Annex 1 country in January, 2006. The Kyoto protocol was ratified in March 2007, and the Paris Agreement was signed in April, 2016. Montenegro is among the group of UN member countries, which have officially adopted a key development document, the National Strategy for Sustainable Development (NSSD) until 2030. It has also submitted its Intended Nationally Determined Contribution (INDC). The country’s contribution to the international effort to avoid dangerous climate change, which includes reducing emissions from agriculture, was set as 30 percent emission reduction by 2030 compared to the 1990 year. The proposed project is well positioned to contribute to the INDC and NSSD goals by supporting climate adaptation and mitigation activities. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO The Project Development Objective is to improve the competitiveness of agriculture and fisheries in Montenegro through enhanced delivery of government support in alignment with EU accession requirements. Page 11 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) The competetiveness in the context of this project is defined as the ability of the supported productive units (individuals and enterprises) to increase their market sales, by meeting established quality standards and identifying different markets. B. Project Beneficiaries 18. The direct beneficiaries of the project are individual agricultural producers, agricultural holdings/enterprises and fishermen that will benefit from the grant program and capacity building provided by the project. Institutional beneficiaries are comprised of: • The MARD, including the Directorate for Agriculture (DfA), Directorate for Rural Development (DfRD), the Directorate for Payments (DfP), Advisory Services, Directorate for Fisheries (DfF), and AFSVPA; • National reference phytosanitary laboratory (NRL) housed at the Bio-Technical Faculty of the University of Montenegro; • The national livestock and food producing/processing industry; • The port towns of Bar and Herceg Novi, and other localities in which fishing landing sites will be developed. C. PDO-Level Results Indicators - Farmers reached with agricultural assets or services; - Percentage increase in sales per productive unit supported by the project; - Share of direct payments processed in alignment with EU accession requirements. 19. In the core PDO indicator, "farmers" is used broadly to include all productive units receiving government support, including individual agricultural producers, agricultural holdings/enterprises, as well as fishermen. III. PROJECT DESCRIPTION A. Project Components 20. The project will support Montenegro in meeting several specific benchmarks for EU’s Chapters 11, 12 and 13, namely: • Support for meeting the two benchmarks for Chapter 11 (Agriculture and Rural Development): (i) IACS to be fully operational by the date of accession; and (ii) Paying Agency to be fully operational by the date of accession. • Support for meeting three closing benchmarks for Chapter 12 (Food Safety, Veterinary and Phytosanitary Policy): (i) upgrading of establishments for products of animal origin, including establishments for animal by- products (ABPs); (ii) setting up of an EU compliant system for official control of animal and plant products, including its funding; and (iii) developing, in accordance with the acquis, the relevant administrative structures for food safety controls, and further increasing administrative capacities and infrastructure. Page 12 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) • Support for meeting two benchmarks for Chapter 13 (Fisheries): (i) adoption of legislation that provides a substantial degree of alignment with the EU acquis for fisheries and ensures that Montenegro will be able to fully apply the Common Fishery Policy upon accession, and (ii) strengthen the administrative, inspection and control capacity required by the CFP and ensure that EU requirements will be fully met at the date of accession. 21. The project will include the following components: Component 1: Strengthening MARD agriculture, rural development and fisheries program (EUR19.8 million). The component will: (i) increase and diversify income generation opportunities for productive units, contribute to the creation of jobs, as well as improve resilience of productive units for adaptation to climatic pressures 6, and (ii) support Montenegro for meeting Chapter 11 closing benchmarks. The grant program is expected to address most of the constraints faced by the country’s agricultural sector, including: (i) enabling access to finance to grant beneficiaries to adopt modern and energy efficient technologies; (ii) development of aggregators to improve collection, storage, packaging and marketing of produce; and (iii) implementation of agro-environmental measures, including those measures that will help mitigate GHG emissions from current agricultural practices. Sub-component 1.1: Increasing and diversifying income opportunities through grants for agriculture, rural development and fisheries. This sub-component will support the development of agriculture, rural development and fisheries through the provision of grants. The design of the grant program will follow the implementation experience gained through the MIDAS project, where “the learning by doing” approach has been successfully tested with the core principle of IPARD. Investments are pre-financed by the beneficiaries, with reimbursement received upon successful completion and on-spot verification of the investment, and according to the share of support to total cost of investment (normally between 50 and 65 percent of the total investment); four-eye principle both for administrative control and on-spot control, coordination with Technical Bodies as appointed for verification of compliance with relevant national legislation. 22. The grant program will be targeted at: (i) piloting further IPARD-like measures, including farm diversification and on-farm processing, that have not been previously implemented in order to develop the capacity of both institutions and beneficiaries while stimulating economic growth in rural areas; (ii) implementing direct support for rural development measures, including agro-environment measures, that will support MARD’s policy objectives towards harmonization with the CAP; (iii) support to production and processing associations/collections centers (including for milk, fruit and vegetables, etc.); and (iv) fisheries grants to enhance the capacity of both beneficiaries and relevant institutions to implement the European Maritime Fisheries Fund. The grant program is expected to leverage private sector investment and beneficiaries’ contribution, as well complement public sector investment in the modernization of the fisheries sector under Component 3. Detailed criteria, procedures, and related safeguards requirements of the grant program will be described in the Grant Operational Manual (GOM), satisfactory to the Bank, which will be prepared during project implementation prior to each call. Sub-component 1.2: Strengthening the MARD toward fulfilling EU accession requirements. This sub- component will provide investments to strengthen the DfP (future Paying Agency) management capacity through the development of the IACS components required for the management and control of payments to 6 by means of creating alternative employment and income opportunities outside the agricultural sector Page 13 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) productive units, as well as the implementation of the European Agriculture Guarantee Fund, functionality of which constitute one of the closing benchmark of Chapter 11. The project will support the development of several modules necessary for the operational system of integrated controls, strengthen the regional offices for Advisory Services, and build the Paying Agency system at the regional level, which will be part of the final structure of a fully functional Paying Agency. For logistical and accessibility purposes, the two services could be hosted in the same building but in different offices, however, the roles and responsibilities of the Advisory Services and Paying Agency will be well defined and fully separated from each other. To this end the project will finance refurbishing and equipping of existing offices, and purchasing the required hardware and software infrastructure. The project will also strengthen capacity of the DfRD, DfA, and DfP through provision of technical assistance (TA), training and study tours to assist with the policy design towards the EU CAP, and to assist with the design required to finalize the IACS and its various applications. Component 2: Support for the Food Safety, Veterinary and Phytosanitary Services (EUR3.0 million). This component will develop capacity for food safety, veterinary and phytosanitary services as part of the creation of an integrated food quality system which is consistent with EU requirements. Promoting safer agricultural products, including the prevention and control of animal and plant diseases are essential for improving the competitiveness of Montenegro’s agricultural production both domestically and abroad. It will also help producers to introduce cross-compliance requirements to receive IPARD funds. This component will support: (i) the establishment of an official, comprehensive control system for the safe disposal and/or processing of ABPs; (ii) strengthening of the diagnostic capacity of the phytosanitary laboratory; and (iii) strengthening of the capacity of the inspection services. The following set of activities will be financed under this component: Sub-component 2.1: Safe management of animal by-products. The project will support the establishment of a comprehensive system for the processing and/or disposal for ABPs which will be identified and documented in the National Plan and Action Plan for the Management of ABPs scheduled to be adopted by the MARD in late- 2017 or early-2018. Specifically, the project will support the National Plan and Action Plan by providing TA for the design of a control system for the safe management of ABPs, which when operational, will significantly reduce GHG emissions from livestock disposal. The design will include a business plan for a disposal facility, as well as detailed technical specifications and cost estimates. The project will also support the gradual operationalization of the official control system for ABPs along the entire chain (production, separation, storage, transport, and disposal and/or processing), including training of inspectors and business operators, establishing documented procedures and check lists for the approval of establishments and inspection thereof, aligning and completing the legal and regulatory framework in line with the current and relevant EU acquis and launching a public information and awareness campaign addressed to the associated food production/processing industry. Sub-component 2.2: Strengthening the diagnostic capacity of the phytosanitary laboratory. The project will assist the NRL housed at the Bio-Technical Faculty of the University of Montenegro with construction of new laboratory facilities (vertically extending an existing site), procurement of laboratory equipment and fixed laboratory furniture to support official controls. The project will also provide targeted TA aiming to ensure efficient inter-agency collaboration between the AFSVPA and the NRL by means of a Memorandum of Understanding or another instrument, and pave the way towards accreditation of priority tests and methods as per ISO standard 17025 and of NRL in line with ISO standard 17025:2011. Sub-component 2.3: Support to inspection services. To enable the inspectors of the unified AFSVPA to implement effectively the enhanced official control regime arising from alignment of national legislation with Page 14 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) EU legislation, and the risk-based annual official control and sampling plan, the project will provide new vehicles and equipment for collection, cold storage and transport of samples, IT equipment, protective clothing, official uniforms, and other items. Component 3: Modernization of the Fisheries Sector (EUR6.0 million). This component will finance public sector investment aimed at achieving two objectives: (i) enhancing the productive capacity of the sector with investments in basic infrastructure and equipment that will provide fishermen with regulated safe, and sanitary landing facilities and access to port, and (ii) strengthening the institutional capacity to apply the CFP upon EU accession, as well as substantially strengthen administrative, inspection, and control capacity. This component will finance the following interventions: Sub-component 3.1: Development of a network of landing sites (both in ports and other locations) with enhanced access to auxiliary services. A national coastal urban planning strategy is currently being elaborated at various levels of government (both national and local), though it is not expected to be fully finalized before 2019. This planning process incorporates the designation of several locations for landing sites, including in the country’s six coastal cities, where accommodations can be designed for fishing activities in existing ports and in new landing sites to be developed. The port towns of Bar (in the far South of the country’s coastline), Herceg Novi (the far North of the country’s coastline) and a network of other sites along the coastline will be subject to infrastructure improvements and specific sites for construction and reconstruction activities will be identified by the Government. The project will finance TA for the preparation of designs and technical specifications required for equipment and infrastructure. The project will also finance civil works, including construction of facilities for landing, catch data collection, weighing and access to market for landed catches in sites that comply with World Bank norms. In addition, and where appropriate, improvements will be made in certain locations for access to water and fuel, and operational support (boat and gear maintenance). The project will also finance the installation of remote flake ice machines along the coastline that would help fishermen adapt to the risk of spoilage of caught fish during the extreme summer heat that persists in the country in the last decade. Sub-Component 3.2: Capacity Building for the Directorate for Fisheries, and support to Associations of Fishermen. The MARD Directorate for Fisheries already benefits from the various regional programs supporting the sustainable management of marine living resources. Scientific support is provided mainly by the Institute of Marine Biology in Kotor, while the Directorate itself is receiving support in the development of rules and regulations pertaining to the sector converging towards the full application of the CFP. The project will support training and equipment for the DfF including for fisheries inspectors to enable them to meet EU requirements. Significant TA support will be provided to Associations of Fishermen, which will be the direct beneficiaries of resources from the European Maritime Fisheries Fund (EMFF) designed mainly to cover the added expenses incurred by fishermen in application of CFP rules and regulations. Component 4: Project Management (EUR1.12 million). This component will cover the costs for project management related to staffing, consultancies, and equipment costs, as well as implementation of the Environmental and Social Management Framework (ESMF), monitoring and evaluation of all project activities in line with the Results Framework, adequate fiduciary (procurement and financial management), audits and accountability mechanisms for oversight, including a grievance redress mechanism. Page 15 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) B. Project Cost and Financing Project cost IBRD or IDA Counterpart Project Components Trust Funds (EUR million) Financing Funding Component 1: Strengthening MARD agriculture, rural 19.800 19.800 development and fisheries program Component 2: Support for the Food Safety, Veterinary and 3.000 3.000 Phytosanitary Services Component 3: Modernization 6.000 6.000 of the Fisheries Sector Component 4: Project 1.125 1.125 Management Total Costs 29.925 29.925 Total Project Costs 29.925 29.925 Front End Fees 0.075 0.075 Total Financing Required 30.000 30.000 C. Lessons Learned and Reflected in the Project Design 23. The preparation of this project has benefitted significantly from the ongoing MIDAS Project, and several similar projects and analytical work in the agricultural sector in countries of the Western Balkans with objectives associated with EU pre-accession or/and EU accession requirements, including Croatia, Kosovo, FYR Macedonia, Serbia, and Bosnia and Herzegovina. The principal lessons from these operations and studies are closely reflected in the project design, including the need for improved management of public expenditures; the need for timely investments in establishing a Paying Agency meeting strict EU requirements, and develop mechanisms and capacity of both institutions and beneficiaries to implement EU support programs such as IPARD; the need for mainstreaming agri-environmental measures and climate smart agricultural activities in agricultural support programs; the need for investment support to farmers and processors in upgrading their activities in line with EU food safety, environmental and animal and plant health standards and cross-compliance requirements; and the need for an effective and efficient food system. 24. The design of Component 1 of the proposed project benefits from lessons learned from the most successful element of the MIDAS Project, i.e. provision of grants modeled after the EU’s pre-accession financial support scheme, namely the IPARD. The MIDAS grants to agricultural holdings (i.e. agricultural producers or farmers) were provided through Montenegro’s public institutions and were designed and implemented in a Page 16 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) gradual “learning by doing” approach. The MIDAS grants piloted the core principle of IPARD, including pre- financing of the entire investments from the beneficiaries, with subsequent reimbursement according to the set amount (between 50 and 65 percent of the total investment) upon successful completion and on-spot verification of the investments; four-eye principle both for administrative control and on-spot control, coordination with Technical Bodies as appointed for verification of compliance with relevant national legislation. This approach has: (i) provided financial support for productivity improvements; (ii) supported the gradual adjustment of agricultural holdings to the EU financial and legal framework; and (iii) increased the capacity of Montenegro’s institutions to manage EU funded financial schemes. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 25. The MARD will be the lead Implementing Agency and will have overall responsibility for project management and implementation. Following the project implementation structure established under the ongoing MIDAS Project, relevant Directorates and Administrations within the MARD will be responsible for the technical implementation (i.e. preparing terms of reference and technical specifications, preparing training programs, supervising consultants and advisors, participating in procurement evaluation committees, etc.) of project activities. Specifically, given the extensive experience on implementation of Bank-funded projects, the General Director of the Directorate for Payments will be appointed as a Project Coordinator. The Director for Rural Development will be responsible for the implementation of Component 1; the Director for the Administration for Food Safety, Veterinary and Phytosanitary Affairs will be responsible for the implementation of Component 2; and the General Director of the Directorate for Fisheries will oversee Component 3 of the project. 26. An existing, experienced and well-performing Project Management Team (PMT) established to implement the MIDAS Project, will also manage MIDAS2. The PMT is currently housed in the DfP premises, and consists of the Project Coordinator (General Director of DfP, civil servant), Project Manager, Civil Engineer, IT specialist and Safeguards Specialist. Up to the closing date of the MIDAS Project, i.e. March 30, 2019, the proposed Project will continue to be supported by the current PMT staff. Thereafter, sufficient resources will be allocated to retain a Project Manager and other staff as required. The project implementation team will also continue to rely on a part-time environmental and social specialist, who will take active participation in the screening of the grants and direct payments as per the ESMF. The specialist’s tasks will include desk reviews, training and guidance of the applicants, and site visits to review compliance with both the World Bank safeguards policies and relevant Montenegrin laws. In addition, a Monitoring and Evaluation Specialist and other specialists in the field of fisheries and civil engineering will be recruited to support MIDAS2. Details of the above-mentioned arrangements will be provided in the Project Operational Manual (POM). 27. A Project Steering Committee (PSC) will be established and maintained throughout the life of the Project to ensure overall coordination and strategic guidance functions. The PSC will be chaired by the Minister of Agriculture and Rural Development and will include the Project Coordinator (DfP General Director); General Directors of DfRD, DfA, and DfF; Director of the AFSVPA, Advisory Services, Ministry of Finance, Ministry of Transport and Maritime Affairs, Morsko Dobro, Biotechnical Faculty/Phytosanitary Laboratory Director; and representatives of beneficiaries (civil society, local institutions, private sector). Page 17 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) 28. Fiduciary responsibilities, including procurement and financial management and disbursement, will be carried out by the existing central Technical Services Unit (TSU) under the Ministry of Finance. The TSU will be responsible for the preparation of quarterly unaudited financial reports and annual audited financial statements. Expenses incurred by the TSU will be financed out of the loan on a pro rata basis with other World Bank-financed projects in Montenegro. B. Results Monitoring and Evaluation 29. The Project Results Framework (RF) is provided in Section VII of this PAD. The project’s Monitoring & Evaluation (M&E) system will be based on: (i) continuous data collection; (ii) regular monitoring of the results of all project component interventions; and (iii) Mid-Term review (MTR), and final impact assessment. The baseline data established during project appraisal will be used as the benchmark and compared against follow- up data collected during implementation. Data collection and monitoring of outcomes and results will occur at the level of all project entities, and will be consolidated by the PMT’s M&E Specialist. Each project entity will have adequate staffing and technical capacity to properly implement data collection and monitoring. The key participating MARD Directorates (Directorate for Agriculture, Directorate for Rural Development, Directorate for Payments, Directorate for Fisheries, Administration for Food Safety, Veterinary and Phytosanitary Affairs) will provide semi-annual progress reports using a set of agreed monitoring variables as provided in the project Results Framework to report the implementation progress of their respective components. If needed though, adjustments can be introduced to fine-tune the agreed monitorable variables as the project progresses. C. Sustainability 30. Sustainability of the project activities beyond the implementation period will be high as the project is embedded in the broader framework of Montenegro’s accession agenda with the EU. The institutional capacity building activities supported under the project will ensure that the MARD has improved institutional and human resources to deliver agricultural, rural and fisheries development services and assistance to farmers, fishermen and processors as well as access future rural development assistance under EU support programs, when they become available to Montenegro. The project will also ensure that rural communities, farmers, fishermen and processors have improved awareness and capacity to effectively leverage future EU assistance. Finally, the use of the MARD staff to implement the project will ensure its sustainability as experience developed during the project will be retained within the government. D. Role of Partners 31. Montenegrin agriculture has been continuously receiving support from EU funds since 1999, with the most recent program in the form of IPA support in the amount of EUR52.4 million for the period of 2014-2020. Most of the EU projects include support for institution building necessary for implementation of the legislation harmonized with the acquis communautaire. The EU has also invested in equipment and reconstruction of laboratory facilities monitoring and controlling the safety and quality of agricultural products, with emphasis on strengthening of the veterinary and phytosanitary sectors. Considering the challenge to implement the Page 18 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Stabilization and Association Agreement (SAA) with the EU and membership in the World Trade Organization (WTO), the EU has supported building capacity of the respective institutions. In the field of agricultural policy, the EU is assisting the country with adjustment to CAP reforms. In addition, the EU institutions support projects of integrated food system, animal disease control, and provide training to the inspection services staff. Finally, the EU is in the process of designing its IPA 2018 support in the amount of EUR9.5 million. All EU-financed activities have been closely coordinated with the MIDAS and MIDAS2 activities to avoid any duplication and ensure complementarity. 32. The United Nations (UN) Food and Agriculture Organization (FAO) stays active in supporting Montenegro’s agricultural sector. Its assistance is shaped by the 2015-2019 Country Programming Framework, which sets out three key priorities: (i) improvement of the competitiveness of agriculture through supported approximation of agriculture, rural development policies and standards to the EU level; (ii) natural resources are managed in a sustainable manner; and (iii) sustainable rural development, improved rural incomes and reduced rural poverty. FAO is currently supporting the regional AdriaMed Project financed with EU resources, which promotes scientific cooperation among the Adriatic nations and improves the management of fishing activities in conformity with the Code of Conduct for Responsible Fisheries. 33. Several other development partners have been also active in supporting the country’s agricultural sector to align itself to EU accession requirements including the USAID, Italy, Luxembourg, Denmark, Germany, Norway, Sweden, and the European Bank for Reconstruction and Development (EBRD). Since Montenegro became an International Fund for Agricultural Development (IFAD) member in February 2015, the partnership between IFAD and Montenegro officially started in 2017 following the approval of a loan in the amount of approximately EUR4 million and a non-refundable support of about EUR2 million for the improvement of agricultural production and infrastructure in rural areas of Montenegro. The IFAD project envisages a grant program that prioritizes three essential aspects: (i) support towards developing of producer clusters; (ii) rural infrastructure (mainly rural roads and water supply infrastructure); and (iii) small grants (up to EUR1,000) to agricultural producers. With the contribution of the Government of Montenegro and local governments, the total value of the project is EUR13.6 million. It is anticipated that the project will be implemented in the following municipalities: Nikšić, Šavnik, Žabljak, Mojkovac, Bijelo Polje, Berane and Petnjica. V. KEY RISKS A. Overall Risk Rating and Explanation of Key Risks 34. The overall risk rating for the project is Moderate. The structure of the proposed project builds on the successful implementation of the ongoing low-risk MIDAS project, and no substantial risks are foreseen under Component 1 regarding institutional arrangements. However, for new activities to be carried out as planned and within the project timeframe, it is important that the human resources within the MARD Directorate for Payments are retained, and increased with the introduction of additional functions as per the EU requirements. There is also a possible risk of slow uptake of new IPARD-like measures to be introduced and fisheries grants due to the industry’s unknown absorption capacity. Page 19 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) 35. The perceived risks in relation to Component 2 that will require attention and mitigating measures on the part of the MARD include: (i) functional and constructive working relation between the AFSVPA and the Bio- technical Faculty acting in its capacity as the Phytosanitary NRL to ensure that the latter’s educational and research activities do not compete with or hinder its official control duties and ensure that the AFSVPA receives, in return to the substantive investment, high quality services in a timely and efficient manner addressing its current and forecasted needs; and (ii) strengthening of the material and human resource capacity of the AFSVPA, especially by appointing new staff at the central and regional level that is adequate for the efficient performance of official controls. 36. MIDAS2 venturing in the fisheries sector under Component 3 does present some unknowns. First and foremost - as is the case for any fisheries project the Bank undertakes - the risk of overexploitation (overfishing) must be assessed. The Institute of Marine Biology has carried out a rigorous assessment and has set out how many of each type of vessel (including trawlers and purse-seiners) could be added to the existing fleet. This risk can be further addressed by applying the precautionary approach and adding less vessels than indicated by this scientific assessment. Second, important risks of a different nature may arise mostly because of possible delays due to the expected complexity of obtaining all required permissions and agreements for the construction of new infrastructure along the coast and within the areas under the control of exiting port authorities. This will be a somewhat complex undertaking involving up to six different institutions including the municipality, the Ministry of Sustainable Development and Tourism, the port authority, the Ministry of Transport and Maritime Affairs, Morsko Dobro and the Directorate for Fisheries. They will need to reach agreement on the specifics of the proposed projects, including berthing costs, authorization to build for fishery services such as ice making, crating/packaging and access to the relevant sites. VI. APPRAISAL SUMMARY A. Economic and Financial Analysis 37. Improving the competitiveness of the agriculture and fisheries sectors in the context of alignment with EU accession requirements imposes costs to individual production units and the country, in general, and requires significant investments in both public goods and support to private producers to achieve these goals. The project is intended to bridge some of these investment requirements while supporting the development of the sector in Montenegro. The economic and financial analysis was based on a quantitative assessment of the incremental benefits generated by the different elements of the investment: the grant program and the investments in the fisheries sector, as well public goods, such as the food safety, veterinary and phytosanitary and in strengthening the public administration capacity and improved public expenditure system. 38. Grant Program: A cost-benefit analysis was carried out using information from subprojects that were funded under the original MIDAS Project. The key quantifiable benefit of the grant program is the incremental income from improved productivity and profitability of farm and nonfarm enterprises resulting from improved technology, quality and safety of agricultural products, and more effective marketing, all supported through the project. The analyzed subset of subprojects reveal positive returns on investment, with milk, vegetable and honey production having the highest IRR (see Annex 7), supporting the financial viability of the grant program. 39. Investments in the fisheries sector: Economic benefits of the modernization of the country’s fisheries sector will be generated by incremental fish production in response to improvements in the fisheries Page 20 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) infrastructure and increasing domestic demand supported by growing tourism. It is estimated that the country can increase fish catch in the Montenegrin fishing sea up to 3,000 tons per year, which is within country quotas. The trade analysis shows that imports of fish will continue to grow while fish exports will decrease despite growing domestic production. This indicates that demand is expected to further grow in the future. This is confirmed by the growth of per capita fish consumption in the country which grew at six percent during the last seven years, reaching 11kg/year in 2016. Current levels of per capita fish consumption are much higher than that in Albania or Bosnia and Herzegovina, but well below that in other European countries. The Economic Rate of Return (ERR) of the planned investments in the Montenegro’s fisheries sector is about 35 percent, supporting the economic viability of planned investments. 40. Public goods: Investments in the food safety, veterinary and phytosanitary infrastructure will contribute to an increased readiness of the country for EU accession. Strengthening the public administration capacity is one of the prerequisites to increase access to and absorption of EU and other funds. These funds could ideally be assessed and attributed to the benefit stream of the project. However, such assessment could be considered as too speculative since it is quite difficult to estimate the extent to which the project will contribute to making these resources available. Economic benefits associated with import substitution related to tourism-driven food consumption will be also generated. Other unquantifiable benefits of the project include, for example, the efficiency gains in the improved public expenditure system and contribution of the grant program to competitiveness of the agri-food sector through meeting quality and safety standards of the local and world markets at prices that are competitive and provide adequate returns on investment. 41. Given the above benefit and cost streams, the ERR of the project is estimated at 26.7 percent. The Net Present Value (NPV) of the project, discounted at 7 percent, is USD 15.4 million. The benefit stream was mainly generated by the grant program and investments in the fisheries sector, which represent 66.3 percent and 15.4 percent respectively of the overall project costs (or 81.7 percent in total). The shadow price of carbon was considered for the projected 15-year period. Using an estimated net carbon sink of 2,685 tCO2-eq per year (calculated in Annex 8), the average shadow price of carbon is estimated at USD 68 per tCO2-eq. If a low estimate of the shadow price of carbon is considered, the ERR is slightly reduced to 25.8 percent and the NPV - to USD 14.9 million; if a high estimate of the shadow price of carbon is considered, then ERR remains the same at 26.8 percent with NPV equal to USD 15.6 million. The resulting net carbon balance is considered a close estimate. 42. The sensitivity analysis assessed the effect of variations in benefits and costs and for various lags in the realization of benefits. A decrease in total project benefits by 20 percent and an increase in total project costs by the same proportion would reduce the base ERR to about 24 percent. A one-year delay in project benefits reduces the ERR to 22.7 percent. With a two-year delay in project benefits, the ERR falls to 19 percent. Hence the project demonstrates quite a good resistance to the variations in benefits and costs. The detailed Economic and Financial Analysis is provided in Annex 7. B. Technical 43. The project is a logical consequence of a series of investments the Bank made through the MIDAS project along with the two IPARD-like Grants that have supported the MARD in meeting EU requirements. This has included: (i) the reorientation and reforms of subsidy policy and paying system towards meeting requirements of Chapter 11; and (ii) support to veterinary services, and phytosanitary and plant protection services as well as inspection services towards reaching requirements of Chapter 12. MIDAS2 is expected to support the fisheries Page 21 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) sector in view of Chapter 13 that will eventually provide access to the EMFF. The table with achievements of the MIDAS Project and achievements envisaged under MIDAS2 is provided in Annex 6. 44. Component 1 of the proposed project progresses from a relatively advanced stage due to the extensive work on developing the payment system in Montenegro under the ongoing Bank and EU financed projects. To date, a set of databases and information system are already available, which will form the information basis for the IACS system. It is, therefore, critical that each of these databases is fully functional, updated and managed on its own before live links can be established to inform the IACS. A crucial part of this Component focuses on the development of income support or direct payment measures including all necessary records and controls. Therefore, activities of this component are designed to ensure that the DfP meets its closing benchmark as a fully functional Paying Agency capable of (i) tracing all payments down to the individual farm, parcel or animal level; and (ii) reporting back on the effective use of funds it will obtain under the CAP. 45. The MIDAS Project has also provided substantial support to the country in meeting EU food safety requirements. Important activities have been completed including the categorization of meat processing establishments as well as a grant program to support the processing sector. Further, support was extended to the veterinary services to better perform their role in surveillance of animal health, and their inspection role to secure a safe food supply. With the recent establishment of the AFSVPA, the topics of inspections and systematic controls of food operators across the full spectrum of animal or plant based food operations have become more critical. While substantial efforts have been made to adjust the legal and regulatory framework, relatively little has been done to effectively align the practices of the official control system with the new environment. One of the key elements required for ensuring adequate food safety controls includes the introduction of a compliant mechanism for handling ABPs as appropriate. However, the current practice in Montenegro mostly consists of burying remains in unauthorized landfills. To address this issue, the project proposes to design a control system for disposal and /or processing of ABPs with approved method(s) in a compliant and dedicated facility in line with EU requirements and national policy options embedded in the National Plan and Action Plan. 46. Official controls also involve managing plant based products and phytosanitary aspects related to production, processing and import of plant based products, and for which inspection services will be appropriately equipped under the proposed project. Most importantly official controls will need to be able to rely on adequate capacity for testing of products in a functional reference laboratory. While such capacity has been developed in the veterinary sector, it remains inadequate for the phytosanitary sector. The current processes for testing conducted by the phytosanitary faculty at the University of Montenegro are characterized by poor process flows and poor isolation of various tests mainly due to the layout of the laboratory building. The project, therefore, proposes to construct a new laboratory facility, which will optimize the work flow, minimize excessive and potentially hazardous movement of samples and personnel, enhance bio-safety and help meet accreditation requirements. 47. The fisheries sector has suffered from benign neglect since Montenegro’s independence. Due to quick returns and ready investors, the coastal areas of Montenegro have benefited from major real estate investment driven in large part by tourism. The Montenegrin coast is approximately 130 km long along its Western border, it is strikingly beautiful and the territorial water have a rich and diverse fish habitat that is under exploited or taken advantage of by fishing boats from neighboring countries. Montenegro is an active party to all regional fishing conventions and its fish catches are well below the agreed permitted quotas, yet simultaneously it imports large quantities of fish and marine products to feed its population and tourists. The sector is Page 22 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) disorganized and lacks investment, but by agreeing on the closing benchmarks of the aquis communautaire under Chapter 13, the fisheries sector has come back into focus. The project will therefore support capacity building to ensure adequate surveillance, port facilities for safe docking, and necessary investments to ensure adequate sanitary and environmental conditions to meet food safety standards. C. Financial Management 48. Financial management arrangements for the project are acceptable to the Bank. The Ministry of Finance’s Technical Services Unit (TSU) will be responsible for fiduciary aspects of project implementation. TSU is a well- established unit with qualified staff experienced in World Bank financial management and procurement procedures. TSU currently manages the fiduciary function, including procurement for seven World Bank financed projects. 49. The Designated Account for the Project will be opened in a commercial bank acceptable to the Bank. The Designated Account will be in Euros. Funds will be disbursed either as an advance, via a Designated Account, or by direct payment, on the basis of direct payment withdrawal applications. Funds will be withdrawn to the Designated Account, up to the ceiling amount that will be described in the Disbursement and Financial Information Letter (DFIL), through withdrawal applications signed by the authorized signatories. The project financial statements will be audited by independent auditors acceptable to the World Bank, and based on TORs acceptable to the Bank. Interim Unaudited Financial reports (IFRs) will be submitted to the Bank in the agreed format, 45 days after the end of each calendar quarter throughout the life of the Project. D. Procurement 50. Procurement will be conducted according to the World Bank’s Procurement Regulations for Investment Project Financing (IPF) Borrowers’, issued in July 2016, for the supply of goods, works, and non-consulting and consulting services, and the Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants, dated October 15, 2006 and revised in January 2011 and as of July 1, 2016. Under the new policy, the Project Procurement Strategy for Development (PPSD) is prepared to analyze and determine the optimum procurement approach to deliver the right procurement result. The PPSD carried out for the project entailed a strategic assessment of the operating context and beneficiaries’ capabilities, as well as the market, the different stakeholders, and the risks impacting procurement processes, and it will inform the Procurement Plan. 51. TSU will be directly responsible for the procurement related to all works, goods, and consulting and non- consulting services. An initial review of project procurement capacity and risk of the TSU conducted in May 2017, found that the TSU has sufficient experience on World Bank procurement procedures and has shown satisfactory performance on procurement for Bank financed projects. The TSU has a solid management structure and is staffed with qualified and experienced procurement and financial management specialists. Diligence is also observed in record keeping and quality of evaluation. The procurement processing and contract management was rated satisfactory. The TSU is familiar with Bank’s bidding documents and procedures and has received training on the new procurement framework. Page 23 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) 52. Despite adequate capacity, the following risks are identified: (a) delays in procurement processing and implementation related to internal approval process, and (b) supervision of contracts and contract management. To mitigate these risks, the following mitigation measures will be incorporated in the project: (a) Bank supporting the TSU team to expedite the internal approval process, (b) selection of priority procurement activities based on readiness for the initiation of the first‐year program, and (c) continuous training and capacity building for the TSU and PMT’s staff. 53. The following project procurement arrangements, will apply during project implementation: Selection methods for works: The project is expected to use: (i) Request for Bids (for national markets) and other methods, where justified, including: (ii) Request for quotations; and (iii) Direct selection. Selection methods for goods and non‐consulting service: The project is expected to purchase equipment using: (i) Request for Bids for both international and national markets, (ii) Request for quotations; and (iii) Direct selection. Procurement of consultants: The project is expected to use request for proposals with the following methods: (i) Quality‐and‐Cost‐Based Selection (QCBS), (ii) Selection under a Fixed Budget (FBS); (iii) Least‐ Cost Selection (LCS); (iv) Selection based on the Consultants’ Qualification; (v) Direct Selection; (vi) Selection of Individual Consultants. Systematic Tracking of Exchanges in Procurement (STEP): An initial procurement plan for the life of the project is developed by the government and will be uploaded in STEP. It defines the market approach options, the selection methods and contractual arrangements, and determines the World Bank’s reviews. The initial procurement plan for the project was also discussed during appraisal. Prior Review threshold: Based on the satisfactory assessment, the project shall be subject to moderate risk prior review threshold, making the project mostly subject to post review. E. Social (including Safeguards) 54. The project will stimulate economic opportunities of Montenegrin producers to access new markets and generate more jobs in rural areas through the grant program that will support farmers and agriculture holdings engaged in farm diversification and on-farm processing. The improved quality of life in rural areas is expected to contribute to reduced rural to urban migration. In addition, actions will be taken to inform fishermen, farmers and processors about the requirements they will face prior and upon accession of Montenegro to the EU. The planned capacity building activities would also help farmers prepare themselves for future Montenegro’s participation in the common EU market and to improve their ability to benefit from the CAP. The grant program is expected to leverage private sector investment and beneficiaries’ contribution, as well compliment public sector investment in the modernization of the fisheries sector. 55. Safeguards: The project will maintain the monitoring systems built by the ongoing MIDAS Project to ensure the social safeguards under the MIDAS2 Project are adequately tracked and managed. The Bank’s Operational Policy (OP) 4.12 on Involuntary Resettlement is not triggered as no land acquisition will take place under the MIDAS2 Project. The eligibility criteria under the proposed grant program will clearly state that only sub-projects that do not trigger the application of Bank’s OP 4.12 policy on Involuntary Resettlement are eligible for funding. They will also state that sub-projects that may result in displacement of any third party formally or informally occupying or using the land on which the sub-project will be implemented are also excluded from Page 24 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) financing. Only activities that are located on the farmer’s own land or on land for which the grant applicant has written consent from the owner to use the land will be eligible for funding. 56. No land acquisition will be required for the development of the landing sites and their auxiliary services, either in the ports of Bar (and possible Herceg Novi during the second half of the project) as civil works will be carried out in the public maritime domain. In brief, the project will not support any activities which might involve involuntary taking of land or physical or economic displacement of squatters, scavengers, or any kind of third party formally or informally occupying or using the land. 57. Gender: Regarding the agriculture gender dimension in Montenegro, according to the 2010 Agriculture Census some 40 percent of the agriculture labor force is composed of women, of which women aged over 65 represent nearly a quarter. Women represent slightly less than 13 percent of owners 7 of agriculture holdings. The share of women farmers is low in Montenegro, just as it is throughout Europe mainly because most young women may not seek farming as a career path. In the Balkans, as in much of Western Europe, women tend to have higher educational achievements than men, which leads them to seek professional careers or careers in the services industry in urban centers. The Project will maintain a good track record of being gender informed and responsive. Notably, the grants program will continue to specifically target women beneficiaries by providing preferential ranking criteria for woman applicants. Out of the total number of grants approved under the MIDAS Project, 10 percent were given to woman applicants that amounted to 11.5 percent of the total applicants. In addition, female farmers benefitted from the training program on the principles of the Code of Good Agriculture Practice. The project will also continue to present data in a gender-disaggregated manner and meet the set targets on reporting on the number of male and female beneficiaries under indicator on investments into agricultural holdings and capacity building and training indicator. There are currently no licensed fisherwomen in Montenegro as their role is strictly limited to post-harvest practices, but women will also benefit from the development of the fisheries value chain as they are actively involved in the commercialization of catches. 58. Citizen engagement: In May 2017, the Phase II Review of Grievance Redress Mechanisms (GRM) and Citizen Engagement (CE) Mechanisms for the WB-supported projects under implementation in Montenegro was carried out and findings were extremely positive for MIDAS. No gaps, weaknesses or any implementation problems of the GRM have been identified during implementation of the MIDAS Project. Additionally, no corrective measures or changes to the institutional set up have been proposed. All GRM procedures including timeframes for responses and resolution, governing structures, appeals process are transparent and publicly advertised in line with set provisions of the ESMF document and Grant Operation Manual. MIDAS2 will maintain well-functioning complaints handling mechanism and beneficiary feedback surveys. The high-quality practice of registering complaints, handling rejections, monitoring and reporting as well as disclosure practice established under the MIDAS project will continue under MIDAS2. All procedures related to complaints handling and relevant information will continue to be posted on the MIDAS website: www.midas.co.me to ensure full transparency. Beneficiary satisfaction/socioeconomic survey will be carried out at the mid-term review and final stages of project implementation. Additionally, public awareness campaign will be launched to present the features of the support program with dedicated presentations and workshops to be held country-wide as to familiarize the potential applicants with the scheme and EU required standards and documentation. 7Owner is the person on whose account and in whose name the holding is operated and who is legally and economically responsible for the holding, i.e. who takes the economic risks of the holding (MONSTAT) Page 25 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) F. Environment (including Safeguards) 59. The project is classified as Environmental Category B in accordance with the Bank’s OP 4.1. The project activities on direct payments and grants under Component 1 will finance a diverse series of activities aimed at improving the agricultural and fisheries practices in the country. However, some of these activities, as evident from the original MIDAS project, could have environmental impacts and implications. This includes, but is not limited to, small scale construction and interventions on farms, agro-processing, traditional katuni huts, etc. The environmental screening procedure that was implemented for the original project will continue to be applicable to these activities through the revised ESMF with template Environmental and Social Management Plans (ESMPs) for additional guidance. 60. Furthermore, the ESMF addresses the construction and reconstruction activities under Component 3, aimed at improving the pier facilities for the fisheries. The specific sites for construction and reconstruction activities in the port areas and scope of works will be identified based on the Government’s decision during project implementation. A Checklist EMP will be used for this Component. There are no major environmental impacts anticipated at this stage except for the dust and noise, material sourcing, and waste management with regards to Components 1 and 3. The technical assistance aimed at establishing a management system of animal byproducts will be supplemented with due diligence documentation of the environmental impacts associated with the selected choice of technology for management of ABPs. 61. The draft ESMF was completed in November 2, 2017 and publicly disclosed in Montenegro on November 3, 2017. Following the incorporation of comments received from after public discussion, the final ESMF was submitted to the Bank on November 15, 2017 and disclosed through the World Bank’s external site on November 17, 2017. 62. The main conclusion of the environmental analysis is that potential adverse environmental impacts of the project are minor, and that there are no significant, long-lasting or irreversible negative impacts associated with project implementation. In cases were negative environmental impacts have been identified, adequate mitigation measures were proposed. The screening mechanism under the ESMF shall ensure that no subproject activities correspond to a World Bank Category A and that the adequate due diligence is prepared for each activity, followed by a disclosure and consultation requirement in line with the World Bank Operational Policies. G. Other Safeguard Policies 63. The project triggers OP 4.09 on Pest Management since it supports and increase and improvement in agricultural practices which may indirectly lead to an increase in pest management practices. The ESMF includes a section on Pest Management Practices that is in line with this policy. H. World Bank Grievance Redress Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Page 26 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. . Page 27 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) VII. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY : Montenegro Montenegro Second Institutional Development and Agriculture Strengthening Project Project Development Objectives The Project Development Objective is to improve the competitiveness of agriculture and fisheries in Montenegro through enhanced delivery of government support in alignment with EU accession requirements. Project Development Objective Indicators Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Farmers reached with ✔ Number 0.00 1500.00 Semi-annual MARD, PMT progress MARD, PMT agricultural assets or services reports Farmers reached with ✔ Number 0.00 150.00 Semi-annual Directorate for Payments, Directorate for agricultural assets or Directorate for Agriculture, Payments, Directorate services - Female Directorate for Rural for Agriculture, Development at MARD, Directorate for Rural PMT Progress reports Development at MARD Description: Page 28 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Percentage increase Percentage 0.00 20.00 Semi-annual Directorate for Payments at Directorate for in sales per productive unit MARD, PMT Progress Payments at MARD, supported by the project reports PMT Description: Name: Share of direct Percentage 0.90 30.00 Semi-annual Directorate for Payments at Directorate for payments processed in MARD, PMT Progress Payments at MARD, alignment with EU accession reports PMT requirements Description: Intermediate Results Indicators Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Share of grant Percentage 0.00 90.00 Semi-annual Directorate for Payments at Directorate for funding awarded of total MARD, PMT Payments at MARD, available grants under the PMT project Description: Page 29 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Share of grant Percentage 0.00 75.00 Semi-annual Directorate for Payments at Directorate for funding disbursed from total MARD, PMT Progress Payments at MARD, grants awarded from the Reports PMT project financing Description: Name: Number of Number 0.00 1000.00 Semi-annual Directorate for Payments at Directorate for commercial relations MARD, PMT Progress Payments at MARD, established and maintained reports PMT for at least two production cycles Description: Name: Number of methods Number 0.00 2.00 Semi-Annual Administration for Food Administration for accredited as per ISO 17025 Safety, Veterinary and Food Safety, Phytosanitary Affairs, PMT Veterinary and Progress reports Phytosanitary Affairs, PMT Description: Name: Phytosanitary NRL Text No Yes Semi-annual AFSVPA, PMT progress AFSVPA, PMT Page 30 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection accredited according to ISO reports 17025:2011 by the National Accreditation Body Description: Name: Percentage increase Percentage 0.00 60.00 Semi-annual Administration for Food Administration for of tests performed by the Safety, Veterinary and Food Safety, National Reference Lab in Phytosanitary Affairs, PMT Veterinary and the framework of food Progress reports Phytosanitary safety requirements Affairs, PMT Description: Name: Number of registered Number 140.00 200.00 Semi-annual Directorate for Fisheries at Directorate for fishermen in Montenegro MARD, PMT Progress Fisheries at MARD, reports PMT Description: Name: Volume of fish Metric 830.00 1330.00 Semi-annual Directorate for Fisheries at Directorate for produced within tons/year MARD, PMT Progress Fisheries at MARD, Montenegro quotas reports PMT Page 31 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Description: Name: Number of days of Number 0.00 5000.00 Semi-annual MARD, PMT Progress MARD, PMT training provided reports Number of training days Number 0.00 1000.00 Semi-annual MARD, PMT Progress MARD, PMT provided for women reports Description: Name: Grievances registered Percentage 0.00 90.00 Semi-annual PMT Progress reports PMT related to delivery of project benefits addressed Description: Page 32 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Target Values Project Development Objective Indicators FY Indicator Name Baseline YR1 YR2 YR3 YR4 YR5 End Target Farmers reached with agricultural assets 0.00 250.00 500.00 800.00 1200.00 1500.00 1500.00 or services Farmers reached with agricultural assets 0.00 25.00 50.00 80.00 120.00 150.00 150.00 or services - Female Percentage increase in sales per 0.00 0.00 0.00 5.00 10.00 20.00 20.00 productive unit supported by the project Share of direct payments processed in alignment with EU accession 0.90 0.90 15.00 20.00 25.00 30.00 30.00 requirements Intermediate Results Indicators FY Indicator Name Baseline YR1 YR2 YR3 YR4 YR5 End Target Share of grant funding awarded of total 0.00 0.00 20.00 40.00 60.00 90.00 90.00 available grants under the project Share of grant funding disbursed from total grants awarded from the project 0.00 0.00 10.00 20.00 50.00 75.00 75.00 financing Number of commercial relations 0.00 0.00 0.00 500.00 750.00 1000.00 1000.00 Page 33 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Indicator Name Baseline YR1 YR2 YR3 YR4 YR5 End Target established and maintained for at least two production cycles Number of methods accredited as per ISO 0.00 0.00 0.00 0.00 1.00 2.00 2.00 17025 Phytosanitary NRL accredited according to ISO 17025:2011 by the National No No No No No Yes Yes Accreditation Body Percentage increase of tests performed by the National Reference Lab in the 0.00 0.00 0.00 30.00 45.00 60.00 60.00 framework of food safety requirements Number of registered fishermen in 140.00 140.00 140.00 160.00 180.00 200.00 200.00 Montenegro Volume of fish produced within 830.00 830.00 930.00 1130.00 1230.00 1330.00 1330.00 Montenegro quotas Number of days of training provided 0.00 500.00 1500.00 2500.00 3500.00 5000.00 5000.00 Number of training days provided for 0.00 100.00 300.00 500.00 700.00 1000.00 1000.00 women Grievances registered related to delivery 0.00 90.00 90.00 90.00 90.00 90.00 90.00 of project benefits addressed Page 34 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ANNEX 1: DETAILED PROJECT DESCRIPTION COUNTRY : Montenegro Montenegro Second Institutional Development and Agriculture Strengthening Project 1. Component 1: Strengthening MARD agriculture, rural development and fisheries program (EUR19.8 million). The overall objective of the component is to: (i) increase and diversify income generation opportunities for farmers and fishermen, contribute to the creation of jobs, as well as improve resilience of productive units for adaptation to climatic pressures 8, and (ii) support Montenegro for meeting Chapter 11 closing benchmarks. The grant program is expected to address most of the constraints faced by the country’s agricultural sector, including: (i) enabling access to finance to grant beneficiaries to adopt modern and energy efficient technologies; (ii) development of aggregators to improve collection, storage, packaging and marketing of produce; and (iii) implementation of agro-environmental measures, including those measures that will help mitigate GHG emissions from current agricultural practices. 2. The design of Component 1 of the project benefits from lessons learned from the most successful element of the MIDAS Project, i.e. provision of grants modeled after the EU’s pre-accession financial support scheme, namely the Instrument of Pre-accession Assistance for Rural Development (IPARD). MIDAS grants to agricultural holdings (i.e. agricultural producers or farmers) were provided through Montenegro’s public institutions and were designed and implemented in a gradual “learning by doing” approach. The MIDAS grants piloted the core principle of IPARD, including pre-financing of the entire investments from the beneficiaries, with subsequent reimbursement according to the set amount (between 50 and 65 percent of the total investment) upon successful completion and on-spot verification of the investments; four-eye principle both for administrative control and on-spot control, coordination with Technical Bodies as appointed for verification of compliance with relevant national legislation. This approach has served three purposes: it has (i) provided financial support for productivity improvements; (ii) supported the gradual adjustment of agricultural holdings to the EU financial and legal framework; and (iii) increased the capacity of Montenegro’s institutions to manage EU funded financial schemes, in this case mainly the IPARD. 3. MIDAS2 is expected to continue strengthening the capacity of the institutions and beneficiaries involved and further supporting the development of the sector considering the progress Montenegro has already achieved over the last years regarding the EU accession requirements and those elements that are required to be in place on the day of accession. It will also extend a step-wise approach tested with IPARD to the fisheries sector, replicating support previously provided to farmers (including fish farmers). To this end the project will support further strengthening of the Directorate for Rural Development (DfRD), Directorate for Agriculture (DfA), Directorate for Payments (DfP) and the Advisory Services each in their defined respective role of policy design, implementation and control function, and advisory. 4. The Government of Montenegro has adopted its IPARD II Program for 2014-2020 as approved by the EU. This multi-annual development program for rural areas envisages seven measures to be co-financed by EU and implemented by the Government, which include: (i) Investments in physical assets of agricultural holdings; 8 by means of creating alternative employment and income opportunities outside the agricultural sector Page 35 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) (ii) Investments in physical assets concerning processing and marketing of agricultural and fishery products; (iii) Agri-environment-climate and organic farming measure; (iv) Implementation of local development strategies-LEADER 9 approach; (v) Investment in rural infrastructure; (vi) Farm diversification and business development; and (vii) Technical Assistance. 5. While the DfP has developed full capacity for the implementation of the (i) and (ii) above-mentioned elements with support of MIDAS and IPARD-like projects, thanks to which Montenegro received the EU entrustment of budget for their implementation, no or little capacity has been developed for the other remaining elements. The estimated EU support envisaged for the five years of IPARD II is EUR39 million for all the measures, with about EUR30 million envisaged only for the implementation of (i) and (ii). 6. The MIDAS2 support to Montenegro in its IPARD process will consist of provision of IPARD-like grants for one or more of the remaining above-mentioned five measures, within the framework of objectives, eligibility criteria for the investments and for the beneficiaries, and aid intensity as described in the Montenegro IPARD II Program. Based on the previous experience, the design of the measure will be tailored to the Montenegro reality, and will also include on-farm income generation activities including processing of agriculture products on farm, to broaden the scope of the farm diversification measure as envisaged in the IPARD program. This will be done through the “learning by doing” approach successfully tested during the implementation of MIDAS project. Detailed criteria, procedures, and related safeguards requirements will be described in the Grant Operational Manual (GOM), satisfactory to the Bank, which will be prepared during project implementation prior to each call. The grants will continue to include the element of pre-financing by the beneficiaries that will be reimbursed at the successful completion of the investment according to the rules laid out in the GOM, which constitutes one of the very important features of the IPARD Program. The project also envisages support to production and processing associations both in terms of technical assistance and grants for investments to develop the collection centers. 7. Further, and in order to support Montenegro with developing its capacity to implement the Common Agricultural Policy (CAP) on direct support schemes for rural development, the project will provide funding for the implementation of rural development measures, including agro-environment measure. The support will be provided in a manner consistent with EU required management and control system, gradually developing and introducing the Integrated Administration and Control System (IACS). Some elements of the IACS have already been established under the MIDAS Project (i.e. Farm Registry, upgrading of animal registry) and with EU support (Land Parcel Information System), while others will be further developed under the proposed project. In fact, Montenegro’s closing benchmarks for Chapter 11 require the development of a fully functional Paying Agency including establishment of IACS through which direct payments and rural development measures are to be processed and controlled. Further, according to the Action Plan for aligning with EU acquis in Chapter 11, a policy alignment regarding direct payments and rural development measures will be undertaken gradually during the pre-accession period, in line with the national budget available, taking into consideration the strategic objectives of Montenegro's agricultural policy protection of farm income and rural communities. Along with the 9French acronym which stands for Links Between Actions of Rural Development (Liaison Entre Actions de Développement Rural), and was designed as a separate axis of the EU Rural Development Program, aimed at mobilizing and delivering rural development in rural communities through encouraging local and innovative responses to rural development rather than through a fixed set of measures and has proven to be an effective mechanism in driving local development). Page 36 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) process of defining the policy of direct payments and rural development by the Government, the implementation of direct payments and rural development measures will be gradually transferred for processing to the Paying Agency to align the process with EU rules and principles (IACS requirements). 8. With regard to the Advisory Services, the project envisages to strengthen the capacity toward fulfilling the EU requirements of the Farm Advisory System (FAS) introduced together with 2003 agriculture reform and Cross-compliance mechanism that links payments to compliance by farmers with basic standards concerning the environment, food safety, animal and plant health and animal welfare, as well as the requirement of maintaining land in good agricultural and environmental conditions (GAEC). While each member state may organize its system according to the agricultural context and needs, the FAS is obliged to provide advisory services to the farmers on voluntary basis, covering at the minimum cross-compliance rules, as these are pre- conditions for direct payments and for some rural development measures – including agri-environment measures, organic farming measure, natural constrain areas. Further, following the new regulation on the financing, management and monitoring of the common agricultural policy and on support for rural development by the European Agricultural Fund for Rural Development (EAFRD), the role and functions of the farm advisory system/services was broadened due to more complex agricultural environment and numerous new requirements that farmers need to meet in the future. To this end farm advisors have to be qualified and regularly trained, while control functions must be separated from advising. 9. With regard to fisheries, Montenegro is in the process of identifying key issues that must be addressed to meet the requirements of participation in the Common Fisheries Policy (CFP), which includes a series of activities aimed at adjusting legislation, determination of competent authorities and implementation of adequate measures that will enable the sector and the administration to fulfil the requirements to access EU funds. In addition, the development of Montenegro’s potential in the fisheries sector will benefit the broader national economy. MIDAS2 will support the introduction of fisheries measures in preparation for the implementation of the European Maritime Fishery Fund. In this process, and taking into account the experience accumulated over the past years, the project will increase the capacities of the institutions tasked to design and implement the support program - the Directorate for Fisheries (DfF) and the Directorate for Payments (DfP) respectively, as well as beneficiaries, including the fishermen and all members of the value chain, improving their absorption capacity and increasing compliance with the EU accession requirements. It is important to bear in mind that this requires a wider perspective and new support provided should be introduced gradually, following a step- by-step approach toward alignment rather than immediate compliance with the current CFP and EMFF rules. This particular phase will be crucially important for Montenegro to acquire adequate capacity and knowledge before full EU accession. 10. This will be achieved through the following two subcomponents: Sub-component 1.1: Increasing and diversifying income opportunities of farmers through grants for agriculture, rural development and fisheries. This sub-component will support the development of agriculture, rural development and fisheries through the provision of grants. The grant program will be targeted at: (i) piloting further IPARD-like measures including farm diversification and on-farm processing, that have not been previously implemented in order to develop the capacity of both institutions and beneficiaries while stimulating economic growth in rural areas; (ii) implementing direct support for rural development measures, including agro-environment measures 10, supporting the ministerial policy objectives towards harmonization with the 10 Including measures that will help mitigate GHG emissions from current agricultural practices Page 37 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Common Agriculture Policy (CAP); (iii) support to production and processing associations collections centers (including for milk, fruit and vegetables, etc.); and (iv) fisheries grants to enhance the capacity of both beneficiaries and relevant institutions to implement the European Maritime Fishery Fund. The grant program is expected to leverage private sector investment and beneficiaries’ contribution, as well compliment public sector investment in the modernization of the fisheries sector under Component 3. Sub-component 1.2: Strengthening MARD toward fulfilling EU accession requirements. This sub-component will provide investments to (i) strengthen the DfP (future Paying Agency) management capacity through the development of the Integrated Administration and Control System (IACS) components required for the management and control of payments to farmers, as well as the implementation of the European Agriculture Guarantee Fund, functionality of which constitute one of the closing benchmark of Chapter 11. The project will support the development of several modules necessary for the operational system of integrated controls; (ii) strengthening the regional offices for Advisory Services and building the Paying Agency system at the regional level, that will be part of the final structure of a fully functional Paying Agency. For logistical and accessibility purposes, the two services could be hosted in the same building but in different offices; the roles and responsibilities of the Advisory Services and Regional PA will be well defined and separated. To this end the project will finance refurbishing and equipping of the existing offices and the required hardware and software infrastructure; as well as technical assistance and training and (iii) strengthening DfRD, DfA, and DfP through technical assistance, training and study tour to assist in policy design towards the EU CAP and in design required to finalize the IACS and its various applications. Component 2: Support for the Food Safety, Veterinary and Phytosanitary Services (EUR3.0 million). This component will develop capacity for food safety, veterinary and phytosanitary services as part of the creation of an integrated food quality system which is consistent with EU requirements. Promoting safer agricultural products, including the prevention and control of animal and plant diseases are essential for improving the competitiveness of Montenegro’s agricultural production both domestically and abroad. It will also help producers to introduce cross-compliance requirements to receive IPARD funds. This component will support: (i) the establishment of an official, comprehensive control system for the safe disposal and/or processing of animal by-products (ABPs); (ii) strengthening of the diagnostic capacity of the phytosanitary laboratory; and (iii) strengthening of the capacity of the inspection services. The following set of activities will be financed under this component: Sub-component 2.1: Safe management of animal by-products (ABPs) 11. MIDAS has paved the way for addressing this complex issue by producing, inter alia, (i) two Rule Books transposing the current and relevant EU acquis, namely Regulation (EC) No. 1069/2009 and Implementing Regulation (EC) No. 142/2011, (ii) an ABP management plan for all categories of ABPs prepared in 2011 and updated in 2015, (iii) a feasibility study for the disposal of all categories of ABPs prepared in 2012, and (vi) a pilot study prepared in 2015 for the disposal of SRMs and Category 1 ABPs in the municipalities of Bjelo Polje and Niksic where the two largest slaughterhouses in the country are located. 12. An approximate estimate of all Categories of ABPs produced in Montenegro annually is given in the Table below (*). Page 38 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ABP from slaughterhouses Species Amount of ABP per Category/year (kg) Cat I Cat 2 Cat 3 Cattle 1988150 0 1520350 Sheep/Goats 22125 88500* 199125 Pigs 0 141500* 141500 Poultry 0 0 331100 subtotal 2010275 230000 2192075 ABP from fallen stock Species Amount of ABP per Category/year (kg) Cat I Cat 2 Cat 3 Cattle 255000 1500000 Sheep 114000 Goats 11700 Pigs 60000 Poultry 24638 subtotal 1880700 84638 0 Total ABP in tons/year** 3891 85 2192 (*) Source: ABP Management Plan, van de Vuurst et al, March 2015 13. Currently no official control system for ABPs is in place, no comprehensive national management plan exists, and the business operators are not fully aware of, or prepared for undertaking, their obligations arising from the EU acquis and practices. With respect to national policy decisions, the recently established AFSVPA is in the process of formulating a firm and clear vision to manage ABPs. They plan to further elaborate and embed their policy options in a National Plan for the management of ABPs, accompanied by an action plan, scheduled to be adopted by the end of 2017 or the beginning of 2018. Such strategic document would provide the missing road map towards a comprehensive solution for the disposal of all categories of ABPs and would inform feasible and appropriate interventions by the Bank. 14. The project will support the National Plan for management of ABPs, by providing TA to design a comprehensive system to manage ABPs of all categories, which when operational, will significantly reduce GHG emissions from livestock disposal. The design will include a business plan for the selected disposal facility, detailed technical specifications and cost estimates for the housing facility. 15. The following issues will be taken into consideration when building the system design: a) For Category 1 and 2 ABPs, which represent the highest risk and more strictly regulated groups, the opted technical method(s) for either direct disposal or pre-processing and subsequent disposal of intermediate products by an approved alternative method. b) For Category 3 ABPs, which are considered as low-risk and have a potential economic value, identification of alternative routes of exploitation, either inside or outside the country, particularly through trade agreements for exporting and/or further processing for the production of usable and valuable derivative products such as pet food, feed for fish and pigs, medical devices, etc. c) Identification of the specific site where the disposal facility will be built. Such site needs to be assessed in terms of suitability, accessibility, connection to public utility networks (electricity, water, sewage) waste water treatment, cleaning and disinfection facilities, supporting infrastructure, etc. d) Definition of the ownership and management status of the facility. In case the facility is privately- Page 39 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) owned and -managed, a suitable form of a public-private-partnership (PPP) arrangement must be foreseen whereby, in the first instance, the MARD will provide the necessary infrastructure thus acquiring and maintaining its ownership and, subsequently, procure the services-for-a fee of a private operator. In case the facility is publicly-owned and managed, (i) a new public enterprise must be established according to requirements and procedures laid down in the national legislation, and (ii) a number of qualified and skilled technical staff must be recruited and included in the public pay roll. Sub-component 2.2: Strengthening the diagnostic capacity of the phytosanitary laboratory 16. Pursuant to the Law on Plant Health No.28/2006, as specified by annually renewed Decisions of the Government of MNE (for 2017 Decision no.060-320/17-0415-172/2), the phytosanitary laboratory of the Bio- technical Faculty, University of Montenegro, is the designated National Reference Laboratory (NRL) supporting official controls in the phytosanitary and plant health fields, and therefore is eligible for support under MIDAS 2. The phyto-sanitary laboratory’s mandate covers:  Performing activities of public interest in plant health protection, and  Laboratory tests of plants, plant products and facilities under control for the purpose of diagnosing harmful organisms. 17. The Bio-technical Faculty is adequately staffed with technical personnel and covers a wide range of subjects including mycology, bacteriology, virology, entomology, parasitology/ nematology, molecular biology etc. The laboratory was in receipt of support – for the renovation of facilities and supply of equipment – by the EU-funded project “Strengthening Veterinary and Phyto-sanitary Services in Montenegro“ (2003 - 2005) and the “Luxembourg Project for improving the production of seed potatoes in Montenegro“ (2004 - 2007). However, due to ill-design and poor quality of materials and furniture, currently, the building premises and basic infrastructure have fallen in a state of disrepair, the lay-out is crowded, the work flow is dysfunctional and fragmented, much of the old equipment is either broken or obsolete, new equipment is required, and the laboratory furniture and bench surfaces are corroded and peeling away rendering them unsuitable and unsafe. 18. The current (2016) and forecasted (2022) work load of the phytosanitary NRL, as calculated by the multi- annual risk-based official control and sampling plans prepared by the AFSVPA, is summarized in the Table (*) below, provides the baseline and target values of the Sub-component and justifies the investment in quantitative, i.e. increase the number of samples routinely tested, and qualitative, i.e. accreditation of priority tests/methods, terms. Description Baseline (2016) Target value (2022) Random sampling and testing in the framework of official controls Mycological 301 ≥ 400 Bacteriological 295 ≥ 400 Virological 213 ≥ 300 Entomological 242 ≥ 400 Nematological/parasitological 374 ≥ 500 Molecular (PCR) 18 ≥ 200 Routine monitoring schemes Imported consignments 65 ≥ 200 Accreditation Page 40 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ISO 17025:2011 standard No accredited method/test - Identification of Phytophthora fragariae var. rubi by PCR - Identification of Xylella fastidiosa by PCR (*) Source: FSVPSA, October 2017 19. The project will also upgrade the facilities of the NRL by financing the following list of activities: a) Civil works for the construction of a new floor above the Bio-technical Faculty, including electro- mechanical equipment and utility supply networks, and supervision. On the occasion of the construction, the laboratories will be spatially rearranged to ensure uninterrupted, functional and efficient flow of work and minimize unnecessary movement of samples and personnel. b) Procurement of fixed laboratory furniture, such as cabinets and benches, of appropriate TS for the intended use. c) Procurement of laboratory equipment and, where possible, maintenance and fixing of old one as dictated by the scope and work-volume of official controls. d) Provision of TA to draft and MoU or another instrument between the AFSVPA and the NRL, prepare a feasibility study and business plan aiming to justify investments, demonstrate functional efficiency and financial sustainability, and pave the way towards eventual accreditation of priority tests and methods as per ISO standard 17025 and of NRL in line with ISO standard 17025:2011. 20. The operations of the new facility of the Phytosanitary NRL will be dictated by the annual risk-based official control and sampling plan and the guiding operating principles and procedures will be EU requirements, notably Regulation (EC) No.882/2004 and Plant Health Directive 2000/29/EC, and international standards, notably FAO’s International Plant Protection Convention (IPPC) and WTO’s Agreement on Sanitary and Phytosanitary Measures (SPS). Sub-component 2.3: Support to inspection services 21. The Decree of the Government of Montenegro OG No.br. 019/17 of March, 27, 2017 established and laid down the competencies of the AFSVPA under the auspices of the MARD. Furthermore, as of June 01, 2017, food safety, veterinary and phytosanitary inspectors previously functioning in the separate government body were returned to the AFSVFA while budgetary resources have been approved for the recruitment of more inspectors in all three areas. The number of inspectors currently employed and forecasted to be appointed in the foreseeable future is given in the Table below. Food safety Veterinary Phytosanitary Serving Planned Serving Planned Serving Planned Central 6 13 7 8 4 8 North 4 10 6 8 7 9 South 3 13 6 6 4 6 Total 13 36 19 22 15 23 22. Currently, inspectors lack basic equipment, materials and tools to dispense their duties and are in dire need of support to enable them to implement effectively the enhanced official control regime arising from EU Page 41 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) legislation and the risk-based annual official control and sampling plan. Furthermore, the Administration currently operates a number of data bases and IT applications – notably the animal identification and registration system, the veterinary information system and the phytosanitary registrar – but the last two systems are not operational, there is no inter-/intra-service IT interfacing, and the AFSVPA is lacking an integrated inspection management system responding to its current and forecasted functions. 23. The project will provide new vehicles, inspection equipment for collection, cold storage and transport of samples, official uniforms and protective clothing and other items necessary for the performance of official controls. The design and development of an integrated Inspection Management System is expected to be supported by EU under the IPA 2018 national program. Support to inspection services will be put into context and justified by a risk-based annual official control and sampling plan, which will allow an objective estimate of the workload and optimize the utilization of human and material resources. Component 3: Modernization of the Fisheries Sector (EUR6.0 million) 24. Drawing on the many lessons from the application of the MIDAS approach to support farmers, this project will be extended to encompass the promising but underdeveloped fisheries sector. Unlike most other countries in the Adriatic, Montenegro does not have a long history of fisheries exploitation. Conversely, growing tourism throughout the country is creating strong and increasing demand for fish products that cannot be produced locally, thus necessitating the import of some 3,000 tons annually. Whilst good progress has been achieved with the recent creation of the Directorate for Fisheries, the institutional system is still under-developed, and the fisheries-related infrastructure is inadequate. On the production side, the necessary investments for the increase in the quality and quantity of boats will fall under the purview of Component 1, through the attribution of grants, but further efforts to modernize the sector will be launched through two parallel and equally important subcomponents: Sub-component 3.1: Development of a network of landing sites (both in ports and other locations) with enhanced access to auxiliary services 25. Most of the value added in the fisheries value chain occurs after landing, once the catches are processed and delivered to their ultimate markets, including hotels, restaurants, and other tourism establishments. Most importantly, catches must be landed as shortly after capture as possible, and with constant input of ice and clean water, within an uninterrupted cold chain. As things currently stand, larger fishing boats – trawlers and purse-seiners – mostly use inadequate facilities in the port town of Bar, while fishermen on smaller boats land their catches where they dock (close to their homes in the Bay of Kotor) or, for a number of them, in the town of Herceg Novi, where the infrastructure is lacking, while the tourism industry is increasing and so are the demands for port use (currently, both fishing and tourism vessels use the port). 26. This sub-component will focus first on the refurbishment of identified (by the national coastal urban strategy) areas reserved for fishermen and on a series of landing sites where fishermen can register their catches before taking them to market. The specific sites for construction and reconstruction activities in the port areas will be identified by the Government. The project will finance TA for the preparation of designs and technical specifications required for equipment and infrastructure. Further, the project will finance civil works, including construction of facilities for unloading, catch data collection, weighing, sorting and boxing of fish and will provide permanent locations for fueling and light maintenance of boats and equipment for waste management at the Page 42 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) port of Bar and along the Kotor Bay coastline and beyond. In addition, and where appropriate, improvements will be made in certain locations for access to water and fuel, and operational support (boat and gear maintenance). 27. The dual objective of this sub-component is to both facilitate access to markets and auxiliary services for the fishermen (including access to ice, fuel, water, and other forms of support), but also, and perhaps most importantly, to ensure that all catches are accurately recorded, thus bringing a significant proportion of the informal and undocumented share of the industry within the formal recorded and reported sector, and in line with EU regulations on IUU fishing. This formalization of the sector is essential, and a key condition to ensuring its sustainability, particularly as the overall number of fishermen, and thus the level of fishing effort, is expected to increase markedly. Along with catches, data on the level and intensity of effort will also be recorded, thus enabling the Fisheries Directorate to keep track of Catch Per Unit Effort (CPUE) for different species targeted and gear used. 28. Under sub-component 3.1, the selected project activities will include: • the upgrading of the fishing areas in the port towns of Bar and Herceg Novi, based on the national coastal urban planning strategy; • the strengthening of the catch reporting system along the coastline of Montenegro; • the installation of remote flake ice machines at selected points along the coastline 11; • the rehabilitation of the existing 4 first-points-of-sale (i.e. fish markets) at Kotor, Herceg Novi, Budva and Bar. Sub-Component 3.2: Capacity Building for the Fisheries Directorate and support to Associations of Fishermen 29. The creation of the Fisheries Directorate is relatively recent, demonstrating a political commitment to the support of the sector at the highest level. In spite of the best intentions and efforts of its staff, however, the Directorate cannot be expected to meet its new responsibilities, including those required under accession to the EU Common Fisheries Policy and the expected increase in production to replace the current level of imports without significant support. Likewise, the Associations of Fishermen are in dire need of support, and this need will only increase with the addition of new fishermen who have expressed interest in entering the sector and are willing to invest accordingly. This support to the Directorate and the Associations will be targeted at three distinct areas: at the governance level, in acquiring new and needed equipment and in the form of training and capacity building. 30. Governance support to the Directorate will be centered around the new obligations it is required to meet under the CFP requirements, with a particular emphasis on the fight against IUU fishing (including surveillance and control) but also all other aspects of fisheries management and governance (including sanitary conditions throughout the cold chain). Support for governance of the fishermen’s associations will include their creation and management, best financial practices (including savings, investment and amortization) and improved access to markets. 31. The equipment to be acquired will include, but not be limited to: a. A small vessel for monitoring, research and surveillance; 11Remote flake ice machines are expected to help fishermen adapt to the risk of spoilage of caught fish during the extreme summer heat that persists in the country in the last decade Page 43 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) b. Up to eight vehicles; c. Computers, IT and related equipment; d. Sampling and monitoring equipment (including nets and related gear); e. Navigation and safety equipment; and f. Enforcement and prosecution equipment, including photographic instruments and all others related to surveillance and documentation 32. Training and capacity building will include: a. Meeting any and all requirements under the conditions of accession to the CFP b. Improvements to the surveillance, monitoring and prosecution national legal infrastructure to combat IUU fishing c. All matters related to trade and access to markets, with a view to promoting higher value catches and direct access to the national tourism infrastructure; and d. Cooperative management for fishermen’s associations. Component 4: Project Management (EUR1.12 million). The objective of this component is to support the MARD to carry-out project implementation as well as monitoring and evaluation according to the agreed mainstreamed arrangements. It will support the Project Management Team as already established under the ongoing MIDAS project. The PMT, headed by the DfP General Director will comprise of a Project Manager, a Monitoring and Evaluation (M&E) Specialist, a Safeguard Specialist as well as two technical specialists, i.e. the IT Officer and Civil Engineer. The Safeguards Specialist of the PMT will monitor the implementation of the Environmental and Social Management Framework, which is an integrated part of the implementation of project activities. The PMT M&E Specialist will coordinate the data collection and reporting on key performance outputs and impact indicators, and will provide support to the MARD with preparation of the semi-annual progress reports, to be submitted to the Bank. 33. Support for the project implementation will include: provision of technical assistance, training, equipment and incremental operating costs to support project management and monitoring; and support implementation of Bank fiduciary requirements that will be provided by the Technical Service Unit under the Ministry of Finance. It will also support financial audits and surveys as required for monitoring and evaluation of project results and impacts. Page 44 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ANNEX 2: IMPLEMENTATION ARRANGEMENTS COUNTRY : Montenegro Montenegro Second Institutional Development and Agriculture Strengthening Project Project Institutional and Implementation Arrangements 1. MARD will be the lead Implementing Agency responsible for the project management and implementation. Project implementation will be streamlined into its structure as already successfully designed and implemented under the original MIDAS project, with relevant directorates and bodies under the Ministry technically responsible for project activities and with support for specific day-to day project management, required technical support, monitoring and safeguards requirements provided by the project. In particular, the General Director of the Directorate for Payments (DfP) be appointed as a Project Coordinator with overall project coordination responsibilities. The Director for Rural Development (DfRD) will be responsible for activities under Component 1 of the project. The Director of the Administration for Food Safety, Veterinary and Phytosanitary Affairs (AFSVPA) and the General Director of the Directorate for Fisheries (DfF) will be Component Coordinators responsible respectively for the activities under Component 2 and Component 3. 2. A Project Management Team (PMT) headed by the Project Coordinator (DfP General Director, civil servant), and composed by Project Manager, M&E specialist (serving also as gender focal point), safeguards specialist, and technical specialists as required (this may include engineer, fishery experts, etc.) will be supported by the project and housed in the DfP premises. Fiduciary aspects of project implementation, including procurement, financial management and disbursement will be the responsibility of the existing Technical Services Unit (TSU), established and functioning under the Ministry of Finance to fulfill fiduciary requirements of Bank’s projects. Expenses incurred by the TSU will be financed out of the loan on a pro rata basis with other World Bank-financed projects in Montenegro. 3. The PMT main responsibilities will include: (i) day-to-day Project management; (ii) coordination and cooperation among various directorates/administrations; (iii) coordination with the Bank and project stakeholders; (iv) preparation of annual work plan and budget; (iv) coordination and facilitation of interaction between the TSU and project stakeholders, (v) support the TSU in preparation and updating of procurement plan; (vi) monitoring and evaluation of Project activities, including monitoring and reporting of safeguards compliance and Gender; (viii) preparation of semi-annual and annual progress reports; (ix) briefing of the Project Steering Committee on the status of Project implementation; and (ix) systematic filing of all Project-related documents. The preparation of quarterly unaudited financial reports and annual audited financial statements will be the responsibility of the TSU. 4. Up to the MIDAS closing date on March 30, 2019, the proposed Project would be supported by the MIDAS’ PMT (led by the DfP General Director, and currently staffed with a Project Manager, Civil Engineer, IT Specialist and a Safeguards Specialist and housed in the DfP). Thereafter sufficient resources will be allocated to retain the Project Manager, Civil Engineer, IT Specialist and a Safeguards Specialist to ensure compliance with the Bank’s operational procedures. In addition, a Monitoring and Evaluation Specialist, specialists in the field of fisheries and other as necessary will be recruited to support the MIDAS2. Details of the above-mentioned arrangements will be provided in the Project Operational Manual (POM), which will be a condition of effectiveness. Page 45 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) 5. With regard to overall project oversight and higher-level coordination, a Project Steering Committee (PSC) will be established and maintained throughout the life of the Project. The PSC will be chaired by the Minister of Agriculture and Rural Development and will include the Project Coordinator (DfP General Director); General Directors of Directorate for Rural Development (DfRD), Directorate for Agriculture (DfA), and Directorate for Fisheries (DfF); Director of Administration for Food Safety, Veterinary and Phytosanitary Affairs, Advisory Services, as well as representatives of the Ministry of Finance, Ministry of Transport and Maritime Affairs, Morsko Dobro, Biotechnical Faculty/Phytosanitary Laboratory Director; and representatives of beneficiaries (civil society, local institutions, private sector). The PSC will meet at least twice a year and will have the following responsibilities: (i) provide overall policy and strategic guidance, as well as inter-institutional coordination; (ii) approve the annual work plan and budget; (iii) review progress towards annual work plans and assist in resolving obstacles that may arise during Project implementation; and (iv) recommend changes to the Project Operational Manual (POM) as required. 6. With regard to technical implementation as earlier mentioned each component will be the responsibility of the relevant MARD directorates/bodies. MARD has appointed Component Coordinators (civil servants) that will work directly with the PMT and who will be responsible for coordinating and facilitating technical inputs (i.e. preparing terms of reference and technical specifications, preparing training programs, supervising consultants, participating in procurement evaluation committees, etc.) for the implementation of specific project activities. 7. The DfRD will be responsible for the implementation of Component 1 (Strengthening MARD agriculture, rural development and fisheries program), in coordination with DfP, DfA and DfF. To this end, the DfP is well accustomed to the design, launch, management of the grants program, and related administrative procedures. The design of measures to be supported will be the responsibility of the DfRD, DfA and DfF. Capacity and systems of the DfP, DfA, DfRD and Advisory Service as required for EU accession will be further developed under Sub- Component 1.2. 8. With regard to Component 2 (Support for the Food Safety, Veterinary and Phytosanitary Services) the AFSVPA will be responsible for the implementation of project activities, in coordination with the Ministry of Sustainable Development and Tourism with regard to addressing safe disposal of animal by-products, and with the Biotechnical Faculty of the University of Montenegro with regard to strengthening the Phytosanitary Laboratory. 9. Component 3 (Modernization of the fisheries sector) activities will be the responsibility of DfF, which will coordinate with the Ministry of Transport and Maritime Affairs and Morsko Dobro (i.e. the public institution responsible for the development of the coastal area of Montenegro) regarding the development of the required port infrastructure and landing site. Financial Management 10. Implementing Entity: MARD will have overall responsibility for implementation of the project, while the TSU within the Ministry of Finance will be in charge of fiduciary aspects of project implementation, namely financial management and procurement. The TSU has long track record of ten years of successful Page 46 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) implementation of WB projects. It is in charge of fiduciary aspects for six ongoing projects in Montenegro. The unit is staffed by qualified and experienced staff in all functions, including financial management (FM). It includes two procurement and two financial management staff (Senior FM Officer and FM Officer). Performance of the TSU during implementation of the ongoing projects was overall satisfactory. 11. Risk Analysis: The overall financial management risk for the project is substantial before mitigation measures, and with adequate mitigation measures agreed, the financial management residual risk is rated moderate. Combined fiduciary risk is likewise moderate. 12. Strengths: The TSU is staffed by qualified and experienced staff which represents an important driver of successful implementation. In addition, the staff has substantial prior experience in implementation of World Bank supported projects gained during implementation of three currently active projects. 13. Weaknesses: Without undermining strengths derived from the TSU’s experience and prior performance, there is a potential risk of overstretching the unit’s capacity. The TSU is already in charge of the fiduciary aspect of implementation of six projects. Expanding their scope of work with new projects requires monitoring the TSU’s capacity and potential need to increase the headcount with experienced and qualified professionals. The risk will be monitored and mitigated through Bank’s supervision. The respective procedures relating to eligibility, evaluation, selection and flow of funds for grants will be included in the Project/Grant Operations Manual, and the project will rely on the original MIDAS project and implementation arrangements in this sense. 14. Planning and Budgeting: Planning and budgeting for the previous/ongoing World Bank projects implemented by the TSU proved to be adequate. MARD will play an important role in the process of planning and budgeting as well, thus good communication between MARD and the TSU is one of key factors. MARD will take the lead role in preparing project budgets, while the TSU should provide inputs, particularly on disbursement forecasts. It is important that there is sufficient capacity for planning and budgeting to be able to manage project funds in an optimal manner from aspects of funds allocation, liquidity and overall performance. Any variances between actual and budgeted figures should be monitored regularly, appropriately analyzed, and corrective actions should be taken. Accounting 15. Staffing: Financial management function in the TSU is staffed by experienced and qualified specialists. The implementing entity is responsible for the project’s financial management arrangements and its accountant will provide supplementary expertise and time as will be required for the specificity of World Bank procedures for accounting, reporting, disbursement, and as necessary, procurement procedures. 16. Information Systems: The TSU has acquired and installed FMS.sys accounting software to be used for project accounting for ongoing projects. The software is acceptable to the Bank and the same accounting system will be used for this project as well. The software provides reliable accounting information and it is automated to significant extent. Management information system developed for implementation of ongoing projects has been assessed to be adequate for implementation of this project. 17. Accounting Policies and Procedures: The accounting books and records are maintained on cash basis with additional information on signed contracts. Project financial statements will be presented in EURO. Accounting Page 47 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) policies and procedures currently used for the projects the TSU is involved with will serve as a basis for the new project. Additional accounting policies to be applied for the project will include the following major assumptions: - cash accounting as the basis for recording transactions; - reporting should be done in EURO (reporting currency); - consolidated IFRs should be prepared to cover all donors funds and all components; - counterpart funds should be reflected in the financial reports. 18. Internal Controls: Adequate system of internal controls has been instituted within the TSU for projects under implementation and it will be used for implementation of this project as well. Defined controls and procedures are applied in practice which has been verified by the Bank’s financial management supervision and annual audits by private audit firms. Clean audit opinions on ongoing projects financial statements have been issued by the auditors. 19. In general, key internal controls to be applied for the project include: - appropriate authorizations and approvals; - segregation of duties; - different persons being responsible for different phases of transaction; - reconciliations between records and actual balances, as well as with third parties should be performed on regular basis; - complete original documentation should exist to support project transactions. 20. MARD publishes tenders and is signatory to the contract. After receiving an invoice, it is forward for verification to technical staff (project coordinator) or other institutions as relevant responsible for checking the quality and quantity of the delivery covered by the invoice. Independent consultants may also be contracted to perform verification that goods, services or works have been delivered to acceptable level prior to payments. 21. After the technical staff has approved the invoice in terms of quality and quantity of the work/service, the invoice is registered by the Archives by the TSU. The invoice is then reviewed by the project accountant who registers the invoice in a simple log file with name of supplier, amount, and date of payment. He checks the invoice, the calculation of the invoice, and finds the appropriate budget from which the amount will be charged (contract number, item number and program (component)). The accounting codes needs to be written on the invoice by the accountant. After putting his/her initials the invoice is given to the project procurement staff. The procurement staff checks the invoice against the relevant contract number, if necessary attaches a copy of the relevant paragraph on which the invoice is based from the contract and signs. 22. All relevant documentation shall be attached to the invoice enabling the Project Coordinator to immediately evidence that the necessary checks have been performed. The invoice is finally received again by the project accountant. The receipt of the approved invoice is registered in the registry mentioned above ensuring that payment can be made as per the payment terms. Payment orders and the invoice with all designated approvals and signatories are submitted for payment. Bank Statements are received daily and Treasury reports on regular basis by the TSU. Based on the Bank Statements/Treasury reports the TSU Financial Specialist will record the executed payments and perform due reconciliation of the bank balances. The TSU will prepare interim un-audited financial reports listed above quarterly in the agreed format and submit the reports to the Bank and those reports will be responsibility of the TSU Financial Specialist. Page 48 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) 23. Reporting and Monitoring: Project management-oriented interim un-audited financial reports (IFRs) will be used for project monitoring and supervision. The format of the IFRs will be agreed during negotiation and attached to the Minutes of negotiation. The TSU will produce a full set of IFRs for each calendar quarter throughout the life of the project. They will be due 45 days after each quarter ends. The IFRs will comprise the following reports presented in the agreed format: - Cash receipts and payments; - Uses of Funds by Activity; - Designated Account statement; - Unit of Output by Activity; - Narratives to the reports. 24. The accounting for the project is cash basis with additional information provided for commitments on signed contracts. 25. External Audit: The project financial statements will be audited in accordance with terms of reference acceptable to the Bank by a private sector audit firm acceptable to the Bank, and the audit report will be submitted to the Bank at the latest six months after the end of the period audited. The annual cost of the audits of the project will be covered by the project funds. The project financial statements are prepared on cash basis. Audits should be conducted in accordance with International Standards of Auditing. The project audit will be required to extend the scope with respect to grant lines to include performance review at least on a sample basis to ensure that agreed outputs are delivered in an efficient manner. 26. The following chart identifies the audit reports that will be required to be submitted by the project implementation agency together with the due date for submission. Audit Report Due Date Entity financial statements n/a Project financial statements (PFS), including SOEs and Within six months of the end of each Special/designated account. The PFSs include sources fiscal year and at the closing of the and uses of funds by category, by components and by project financing source; SOE statements, Statement of designated account, notes to financial statements, reconciliation statement. The scope of audit will be extended to include performance review at least on a sample basis to ensure that agreed outputs are delivered in an efficient manner. Disbursements 27. Funds Flow and Disbursement Arrangements: Project funds will flow from the Bank either as an advance, via Designated Account to be opened in a commercial bank acceptable to the Bank to administer funds, which will be replenished under transaction based disbursement method, and managed as described below in the section on disbursement arrangements, or by direct payment based on direct payment withdrawal applications. Page 49 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) 28. The TSU will be administering the Designated Account. The TSU will prepare withdrawal applications for replenishment of the Designated Account which ought to be signed by designated signatories and will include a Government official of at least Director level. Payments from the Designated Account are executed by the means of payment orders. After all the procedures with respect to flow of documents, verifications and authorizations described in internal controls section are applied, payment orders signed by designated signatories are submitted for payments from either the Designated Account or request for direct payment. In the case of Direct Payment, the application form for such method payment is submitted to the Bank with the same authorized signatories as described above. 29. The Ceiling for this Designated Account is defined in the DFIL. Documentation requirements for replenishment would follow standard Bank procedures as described in Disbursement Handbook. Monthly bank statements of the Designated Account, which have been reconciled, would accompany all replenishment requests. 30. Internal controls and funds flow for the grants: Adequate procedures and controls need to be instituted and applied in practice for grant lines under the project. The arrangements will follow those already applied in MIDAS project. The respective procedures will be designed to ensure use of funds for intended purposes and will be described in Grant Operational Manual. Key internal controls and procedures that need to be in place with respect to grant mechanism for all above grant facilities before grant funds can be disbursed include: - clear description of eligibility criteria for beneficiaries; - clear description of eligibility criteria for projects; - procedures relating to evaluation and selection of grants, including determining and describing responsibilities for this process; - procedures and processes of monitoring of grants implementation, including reporting back; - time plan of the number and allocated time of the staff to perform activities relating to grant facility; - the procurement processes for the grants. 31. The grant funds will flow directly from the Designated Account to the beneficiaries in accordance with the procedures described above in internal controls and flow of funds sections for other components and sub- components. During implementation entity administering grant lines will perform monitoring function including on site reviews of quality and quantity goods and services procured, and they will report on regular basis on their findings and provide recommendations. Extended scope of audits described in external audit section will include review of implementation of grants by the beneficiaries at least on sample basis. 32. Supervision Plan: During project implementation, the Bank will supervise the project’s financial management arrangements in two main ways: (i) review the project’s interim un-audited financial reports for each calendar quarter, as well as the project’s and entity’s annual audited financial statements and auditor’s management letter; and (ii) perform on-site supervisions, review the project’s financial management and disbursement arrangements to ensure compliance with the Bank's minimum requirements. The on-site supervision will include monitoring of agreed actions, review of randomly selected transactions, review of internal controls, and other specific supervision activities. Supervision will be performed by the Bank accredited Financial Management Specialist. Page 50 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Procurement 33. Procurement will be conducted according to the World Bank’s Procurement Regulations for IPF Borrowers’ (the Regulations), issued in July 2016, for the supply of goods, works, and non-consulting and consulting services, and the Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants, dated October 15, 2006 and revised in January 2011 and as of July 1, 2016. Under the new policy, the Project Procurement Strategy for Development (PPSD) is used to analyze and determine the optimum procurement approach to deliver the right procurement result. The PPSD carried out for the project entailed a strategic assessment of the operating context and beneficiaries’ capabilities, as well as the market, the different stakeholders, and the risks impacting procurement processes, and it informed the Procurement Plan. 34. Most of the civil works would involve open and limited National Competition (under Request for Bid method and Request for Quotation), but a few packages may also involve the use of International Competition (RfB). The project will use the online tool STEP (Systematic Tracking of Exchanges in Procurement). 35. Project Procurement Strategy Development. As per the requirement of the Regulations, a Project Procurement Strategy Document (PPSD) has been developed and finalized after review by the Bank. Extensive market analysis has been carried out for different packages of procurement and based on the findings, decisions on packages and lots are finalized for civil works to ensure adequate participation of bidders. Consultancy contracts are also framed based on market research and packaging of the same in terms of scope of services are decided. Based on the PPSD, the procurement plan has been prepared to set out the selection methods to be followed by the Borrower during project implementation in the procurement of goods, works, non-consulting and consulting services financed by the Bank. 36. Project Procurement Development Objectives (PPDO). The project procurement development objectives are the following: (a) To ensure procurement efficiency and ensure value for money that contributes to agricultural productivity and fishery; (b) To ensure appropriate market participation in relatively low to medium value civil works that are critical for realizing project development objectives; and (d) To ensure effective distribution of grants, effective contract management that facilitates the market access for small and medium farmers and fisherman in terms of technical services and physical assets procured through the project. 37. Project Procurement Result Indicators. The achievement of the PPDO will be measured by the following indicators: (a) Reduction in rebidding cases by 50 percent compared with the predecessor MIDAS Project; (b) Timely completion of major contracts by 75 percent. 38. Key procurement under the project. The following procurement methods are anticipated under the project: (a) Civil Works. There are civil works anticipated for implementation of Components 2 and 3. To implement these components, small-scale infrastructure and technology support are planned and Page 51 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) detailed in the PPSD (minor works or repair of existing facilities in the targeted project locations). (b) Procurement of Goods and Non-Consulting Services. Goods required under the project would include goods and non-consulting services such as vehicles, laboratory equipment, equipment to support fishery component, office supplies, consumables, etc. (c) Information and Communication Technologies (ICT) procurement: Several packages of ICT procurement are anticipated to support establishing and operating an integrated IT inspection management system – including a business analysis and definition of IT users’ requirements, training, design/development of software and procurement of hardware – and interfacing such a system with other IT systems currently in operation, notably for animal identification and farm registration. As per PPSD, appropriate procurement method will be selected and stated in the procurement plan. (d) Selection of Consultants: Consulting services will be procured for detailed design and supervision of infrastructure improvement, institutional capacity building for MARD and its directorates, advisory and authorities, and Implementation Support for the PMT. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions ECA Regional Procurement Thresholds. Individuals will be selected in accordance with Regulation for Borrowers. All Terms of References (TORs) are subject to the Bank’s prior review irrespective of prior/post review status. (e) Component 1- Grant scheme IPARD like. The project will finance, activities such as small works and equipment for community infrastructure, activities and materials. Simplified procurement methods may be included, e.g. local shopping for goods, local shopping for works, Direct Contracting/Off the shelf purchases, etc. The PPSD has helped to identify the major items that account for about x percent of the project funds and for the same, framework agreements will be established. 39. Advertisements: A General Procurement Notice (GPN) will be published online on the UNDB website. Specific Procurement Notices (SPN) will be published as the corresponding bid documents become available. 40. Debarments: The Borrower will respect debarment decisions by the Bank and will exclude debarred firms and individuals from the participation in the competition for Bank-financed contracts. Current listing of such firms and individuals can be found at the following website address: http://www.worldbank.org;/debarr 41. Assessment of the Agency’s capacity to implement procurement: The Bank team has carried out an assessment of the procurement capacities of TSU and MARD in May 2017. The assessment has taken into consideration the current capacity of TSU, including a review of the organizational structure of MARD as well as the necessary interaction between TSU staff responsible for procurement and MARD. The assessment concluded that: (i) The Technical Service Unit will be directly responsible for procurement related to all works, goods, and consulting and non-consulting services; (ii) the TSU has sufficient experience on World Bank procurement procedures and has shown satisfactory performance on procurement for Bank-financed projects; and (iii) the TSU has a solid management structure and is staffed with adequate and experienced procurement and financial management specialists. Diligence is also observed in record keeping and quality of evaluation. The procurement processing and contract management was rated satisfactory. The implementing agency is familiar with the Bank’s bidding documents and procedures and was trained on the new procurement framework, and when local bidding is conducted, the standard documents will be reviewed to be acceptable to the Bank. Page 52 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) 42. Frequency of Procurement Supervision. In addition to the prior review supervision to be carried out by the Bank team, the capacity assessment of the Implementing Agency recommends supervision missions every six months during the first year of implementation, and once every subsequent year. Post reviews will be carried out regularly with a minimum sampling of one into ten. 43. Procurement methods and thresholds: Procurement thresholds and prior review thresholds. The procurement plan shall set forth those contracts which shall be subject to the World Bank’s mandatory Prior Review. It is proposed to follow the procurement thresholds applicable effective July 2016, as part of the new procurement framework, which will be applied with any reduction or enhancement of the threshold levels. All other contracts shall be subject to post review by the World Bank. The prior review thresholds will be periodically reviewed and revised as needed during the Project implementation period based on implementation of risk mitigation measures, reports from procurement post-reviews, and improved capacity of the implementing agency. Page 53 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ANNEX 3: IMPLEMENTATION SUPPORT PLAN COUNTRY : Montenegro Montenegro Second Institutional Development and Agriculture Strengthening Project Strategy and Approach for Implementation Support 1. The Implementation Support Plan (ISP) describes how the Bank will assist the client in achieving the PDO of the project. In particular, the ISP puts emphasis on accomplishing the following objectives: (i) provide necessary technical advice to the client and bring international experiences and good practices to ensure that the project meets the Bank’s technical standards; (ii) ensure that the Implementing agency’s measures meet the standards approved by the Bank in terms of project supervision; and (iii) ensure that the required fiduciary, social, and environmental safeguards are put in place and implemented per the Financing Agreements and other project documents. Implementation Support Plan and Resource Requirements 2. Given the diversity of activities that the project supports, the Bank task team will require a corresponding range of skills covering general agriculture, EU accredited and funded IPARD II program and IACS system, food safety, veterinary and phytosanitary policies and services, fisheries and port engineering. The expertise should have sufficient adaptability to cover operational and technical aspects of project activities, as well as related policy issues. Enhanced implementation support will be critical during the first 18 months of implementation, with appropriate resources required. The Bank team will review implementation progress at least 2 times a year, provide recommendations and guidance, and agree on the action plan/next steps. More frequent interaction will be carried out by the staff based in the region if needed. The ISP will be reviewed at least once a year to ensure that it continues to meet the implementation support needs of the project. 3. Procurement Supervision and Ex-post Review. Routine procurement reviews and supervision will be provided by the procurement specialist based in Albania. In addition, two supervision missions are expected to take place per year during the first year of implementation, and once every subsequent year during which ex- post reviews will be conducted for the contracts that are not subject to Bank prior review on a sample basis (20 percent in terms of number of contracts). One ex-post review report will be prepared per fiscal year, including findings of physical inspections for not less than 10 percent of the contracts awarded during the review period. 4. Financial Management Implementation Support. Routine financial management reviews and supervision will be provided by the financial management specialist based in Serbia. During project implementation, the project team will supervise the project’s financial management arrangements in the following ways: (i) review the project’s semiannual IFRs as well as the project’s annual financial statements, the auditor’s management letters, and remedial actions recommended in the auditor’s management letters, and (ii) during the Bank Team’s on-site missions, review the following key areas: project accounting and internal control systems; budgeting and financial planning arrangements; disbursement arrangements and financial flows, including counterpart funds, as applicable; and any incidences of corrupt practices involving project resources. Page 54 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) 5. Environmental and Social Safeguards Implementation Support. A Bank Environmental Specialist will review the implementation of the ESMF and the specific ESMPs and provide guidance to the PMTs safeguards specialist and the Project implementing agencies to ensure compliance with the Bank’s environmental safeguards policies. Similarly, a Bank Social Development Specialist will review the implementation of the ESMF to ensure compliance with social safeguards policies and the citizen engagement plan, including the gender dimension, and provide support to the PMT regarding the implementation of the grievance mechanism. Table A3.1: Skills mix required for the duration of project implementation Skills Needed Number of Staff Weeks Number of Trips Comments Task Team Leader/ Agriculture 6 staff weeks annually At least 2 mission HQ-based Specialist per year Co-Task Team Leader/ Senior 6 staff weeks annually At least 2 mission HQ-based Agriculture Economist per year Technical (Grant Program) 4 staff weeks annually At least 2 missions CO-based per year Technical (IACS System) 4 staff weeks annually At least 2 missions CO-based per year Technical (Food Safety, 4 staff weeks annually At least 2 missions CO-based Veterinary and Phytosanitary per year Policy) Technical (Fisheries) 4 staff weeks annually At least 2 missions HQ-based per year Technical (Port Engineer) 4 staff weeks annually At least 2 missions CO-based per year Project Assistant (Operations) 4 staff weeks annually At least 2 missions CO-based per year Environmental Specialist 2 staff weeks annually At least 1 mission CO-based per year Social Specialist 2 staff weeks annually At least 1 mission CO-based per year FM Specialist 2 staff weeks annually Site visits as needed CO-based Procurement Specialist 2 staff weeks annually Site visits as needed CO-based Page 55 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ANNEX 4: EU ACESSION PROCESS 12 COUNTRY : Montenegro Montenegro Second Institutional Development and Agriculture Strengthening Project 1. Accession to the EU is conditioned by the adoption of all the founding rights and obligations of the EU and its institutional framework, which are collectively called acquis communautaire. The most important elements of the acquis are: • Primary legislation – founding treaties • Secondary legislation – regulations, directives, decisions, recommendations, and opinions • Other legal sources – decisions of the European Court of Justice, joint actions, joint positions, etc. 2. The acquis communautaire is divided into 35 chapters, which are at the same time considered negotiating chapters. Prior to accession, each country is obliged to assume all of the acquis and to be capable of implementing it effectively. If a candidate country considers that for justifiable reasons it will require a longer period of time for harmonization in a particular chapter, it may request during negotiations on that chapter the so-called transitional periods. In certain cases, candidate countries may also request derogations from the acquis, which are permanent exceptions in particular areas. 3. Accession negotiations are formally opened at an Inter-Governmental Conference, where general negotiating positions of the EU and the candidate country are being exchanged, followed by the phase of analytic overview of the harmonisation of national legislation with the European Union's acquis communautaire, better known as the screening process. Screening enables the Commission and the member-States to assess the level of a candidate country's readiness, to get informed about their plans for future preparations, and to receive preliminary indication of the issues that will most likely arise during the negotiations. Screening is conducted through meetings on all individual chapters except Chapters 34 and 35. 4. The decision on launching negotiations on a chapter is reached based on a candidate's readiness, by the member-States within the Council of the European Union. The launch of negotiations in a chapter marks the beginning of a comprehensive phase of negotiations, during which the negotiations take place about the terms under which the candidate country will accept and implement the EU's acquis in that chapter, including the transitional periods required by the candidate. 5. After reaching an agreement between the EU and the candidate on a chapter, and when the conditions for its closure have been met, it is considered provisionally closed. The formal decision on this is made by the Inter-Governmental Conference at the ministerial level. Until the Treaty of Accession is signed there is a possibility of re-opening the chapter if significant new regulations are adopted in this area or if the candidate fails to meet the preconditions and commitments it has undertaken for that chapter. 6. When negotiations are temporarily closed in all chapters, the European Council in its conclusions usually marks the closing of accessions with a candidate country. The outcomes of negotiations are then incorporated 12The information can be found at: http://www.eu.me/en/ For the purposes for this document it was updated with additional information. Page 56 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) into the draft Treaty of Accession, whose drafting is done by representatives of member-States, EU institutions, and candidate country. 7. After reaching the agreement on the draft Treaty of Accession, the text is sent for a necessary procedure within the institutions, member-States, and the candidate country. On the basis of the draft Treaty, and before signing, the Commission must reach a final opinion on the request of the candidate to join, the European Parliament must give consent, and the Council must reach a unanimous decision on admitting the new member and accepting its request for accession. 8. After the signing of the Treaty of Accession, the country starts participating in the work of the Council of the European Union and the European Parliament as an active participant. For the Treaty to enter into force, it must be ratified by the parliaments of the member-States and the candidate country. EU and Montenegro: → Stabilization and Association Agreement (SAA) signed in October 2007. → Application to join the EU submitted in December 2008 → Commission Opinion issued in November 2010 → Granted candidate status: December 2010 → Accession negotiations started in June 2012 → Screening meetings completed in June 2013 → 30 Chapters opened; 3 provisionally closed Montenegro: Negotiating Chapters overview Source: Montenegro Ministry of Foreign Affairs and EU Integration/EU4ME Page 57 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Chapter 11 - Agriculture and Rural Development, Chapter 11 eu4me 9. The acquis in the area of agriculture and rural development covers a large number of mandatory rules, many of which are directly applicable. Their proper application and their effective enforcement by the public administration are essential for the functioning of the Common Agricultural Policy. The key importance for the proper application and efficient implementation of the Common Agricultural Policy is to have a Paying Agency established and the system for management and control such as Integrated Administration and Controls System as well as capacities for the implementation of rural development measures, direct payment schemes and the common market organization for various agricultural products. 10. Common Agricultural Policy (CAP) is the EU’s agricultural policy, whose main goals are insuring the living standards of farmers, stability and security of supply of food at affordable prices, while preserving the rural areas. The basic principles of CAP: • The Single Market – all Member States form a single market providing with uniform rules for all the states, with regards to both the common market and trade with third countries. • The priority of the EU is to avoid market distortions and establish stability in the supply of agricultural products. • Financial solidarity is pertinent to all the EU Member States, without exception. The Member States contribute towards CAP expenses, but not all the Member States contribute in equal parts. Chapter 12 – Food safety, veterinary and phytosanitary policy, Chapter 12 eu4me 11. The EU acquis in this area aims to ensure a high level of protection for consumer health, and health and well-being of animals and plants, whilst at the same time preventing the spread of infectious and parasite diseases and organisms harmful to the plants in Montenegro and the European Union. The EU applies an integrated approach “from the field to the table,” which includes three mutually supporting parts: - Food safety (hygiene rules for foodstuff production and distribution, official control and mechanisms for ensuring food safety); - Veterinary policy: rules on animals and animal products distribution, animal health, official control of third-country imports, and monitoring of animal migration; - Phytosanitary oversight: rules on the control of harmful organisms in plants and plant materials, market placement of plant protection products, seeds and planting materials, control of pesticide residue in plant products. This Chapter also includes regulations related to genetically modified organisms (GMOs). Chapter 13- Fisheries, Chapter 13 eu4me 12. Fisheries are an important industry and historically speaking they have a very long-standing activity in the EU countries. Rational exploitation of renewable resources and the issues of market regulation, structural policy, oversight, control, and international cooperation in fisheries are covered by the Common Fisheries Policy (CFP). The EU’s Common Fisheries Policy deals with the issues of harvesting and managing fish, regulating the fisheries markets, structural policy issues, oversight and control, as well as international cooperation. The CFP used to be part of the CAP; the establishment of a separate policy came after the accession of countries with large fishing fleets and maritime resources to the EU, as well as the growing need to solve specific problems, such as protection of fish resources. Page 58 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ANNEX 5: GLOSSARY OF EU TERMINOLOGY 13 COUNTRY : Montenegro Montenegro Second Institutional Development and Agriculture Strengthening Project 1. Acquis Communautaire, sometimes called the EU acquis and often shortened to acquis, is the accumulated legislation, legal acts, and court decisions which constitute the body of European Union law. 2. Common Agricultural Policy (CAP) is the set of legislation and practices adopted by the European Union to provide a common, unified policy on agriculture. The initial measures were introduced in 1962. Since then, the policy has been adapted and developed and has undergone a number of reforms. 3. Common Fisheries Policy (CFP) is a set of rules for managing European fishing fleets and for conserving fish stocks. Designed to manage a common resource, it gives all European fishing fleets equal access to EU waters and fishing grounds and allows fishermen to compete fairly. 4. Direct Payments - EU farmers receive support in the form of direct payments, on the condition that they respect strict rules on human and animal health and welfare, plant health and the environment. The amount of support they receive is not linked to the quantities they produce, and is designed to provide EU farmers with a safety net against volatile market prices. Additional payments are available, for example for farming methods that go beyond basic environmental protection or for farmers working in areas with natural constraints. 5. European Agricultural Guarantee Fund (EAGF) primarily finances direct payments to farmers and measures regulating or supporting agricultural markets. 6. European Maritime and Fisheries Fund (EMFF) is the fund for the EU's maritime and fisheries policies for 2014-2020. It helps fishermen in the transition to sustainable fishing helps fishermen in the transition to sustainable fishing; finances projects that create new jobs and improve quality of life along European coasts; makes it easier for applicants to access financing. 7. Integrated administration and control system (IACS) is an obligatory system used by member states for the management and control of payments made to farmers under the Common Agricultural Policy, using advanced techniques to check parcels by aerial or satellite photography, and to cross-check farmers claims with computer databases. Specifically, the integrated administration and control system ensures that payment irregularities are revealed and that queries are followed up. In this way, payments to farmers are made correctly and any amounts which have been unduly paid are recovered 8. Instrument for Pre-Accession Assistance in Rural Development (IPARD) aimed at providing assistance for the implementation of the acquis concerning the Common Agricultural Policy and contributing to the sustainable adaptation of the agricultural sector and rural areas in the candidate country. 9. Land parcel identification system (LPIS) is a database which contains all agricultural areas that are eligible for a direct payment under the Common Agricultural Policy. It is used to cross-check the parcels for which 13 https://europa.eu/european-union/documents-publications/language-and-terminology_en Page 59 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) payments have been claimed by the farmer. The land parcel identification system ensures that the farmer is paid for the correct area and that overpayment is avoided. 10. Technical Bodies means an entity of the Government appointed for the verification of compliance with the national legislation. In the case of Montenegro appointed Technical Bodies include the Ministry of Sustainable Development and Tourism, Ministry of Labor and Social Affairs, the Ministry of Health, Agency for Environmental Protection, Authority for Food Safety, Veterinary and Phytosanitary Administration, Directorate for Water, and Monteorganica. Page 60 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ANNEX 6: MIDAS VS. MIDAS2 COUNTRY : Montenegro Montenegro Second Institutional Development and Agriculture Strengthening Project Activity MIDAS MIDAS 2 MARD Institutional capacity-building Development of Ministry Systematization x Establishment of Directorate for Payment x Preparation of MARD Information System Strategy x Implementation of Agriculture Census and update of sector analysis x Development of Code of Good Agricultural Practices x Strengthening capacity of DfP, DfA, DfRD, DfF and Advisory Services x Develop capacity to support production and processing associations x collections centers IPARD-system (programming and implementation) developed x IPARD accountancy system x Reference Price Database x DfP (future Paying Agency) Refurbishing of PA premises fully meeting EU requirements (headquarter) x Refurbishing of PA premises fully meeting EU requirements (regional offices) x Development of capacity to implement IPARD measure supporting agricultural x holdings and processing and marketing of agriculture and fishery products, and to draft the relevant accreditation package Development of capacity to implement IPARD measure supporting farm x diversification and on-farm processing, and to draft the relevant accreditation package Development of system to implement director support for organic farming x Development of capacity and system to implement direct support for rural x development including agro-environmental measure Development of capacity to implement fishery grants x Integrated Administration and Control System (IACS) elements Farm Registry x Animal Registry (update, upgrade and connection to FR) x Aid application (ongoing) x Integrated Control System x Finance system x Payments entitlements registry (tbd) x Food Safety Legal and regulatory framework Transposition of current and relevant EU acquis governing food safety x Transposition of current and relevant EU acquis governing feed safety x Institutional capacity-building Page 61 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Structure, organogram of Food Safety, Veterinary & Phytosanitary Agency x Individual job descriptions and qualifications of staff, central/regional level x Administrative capacity-building Strengthening risk management capacity, e.g. Inspection Manual and SOPs in line with ISO 17020, check lists for conducting official controls etc. x x Strengthening risk assessment capacity, e.g. elaboration of basic principles, concepts and methodologies for microbiological/chemical/physical risk assessment, technical support to risk assessment structures, e.g. Scientific x Committees and Panels, design and implementation of risk assessment case studies and simulation exercises etc. Strengthening risk communication capacity, e.g. preparation of public information strategies and SOPs, design and/or implementation of consumer x awareness surveys and campaigns etc. Preparation of multi-annual control plan and risk-based annual official x x controls and sampling plan(s) Preparation of food crisis management plan x Technical capacity-building Elaboration and implementation of pilot studies and/or surveys to establish a x baseline risk classification of food/feed establishments Upgrading of laboratory diagnostic capacity for animal health & food safety x based on feasibility study and business plan, accreditation as per ISO 17025 Upgrading of laboratory diagnostic capacity for phytosanitary based on x feasibility study and business plan, accreditation as per ISO 17025 Design/development of IT module for application in laboratories x Further support to unified/upgraded inspection services with IT equipment, x x inspection kits, vehicles etc. Training needs assessment – Elaboration of training curricula and provision of introductory and refresh training (theoretical and on-the-job) to inspectors x x involved in food/feed safety official controls and business operators IT & C support Design/development of integrated inspection management system (IMS), supply of IT & C hard-ware for networking, electronic registration of food x /feed establishments and interfacing of various registrars and databases Veterinary and Phytosanitary border controls Update feasibility study and business plan to identify long-term BIPs and x x inform further investments based on current/forecasted throughput Construct new, or upgrade existing BIPs, as justified by (a) above. This x may include facilities, IT and inspection equipment, furniture etc. Train border inspectors in EU-compliant procedures for documentary, identity x and physical controls Introduce risk-based border controls by applying a reduced frequency of x physical checks including sampling Design/development of a TRACES-like IT module for application in BIPs x Animal By-products (ABPs) Page 62 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Transpose current and relevant EU acquis governing disposal of ABPs x Develop a national strategy for managing ABPs x Develop documented procedures and tools, i.e. check list, for official controls x of ABPs Prepare feasibility study for the disposal of all categories of ABPs, and pilot x study for the disposal of SRMs and Category 1 ABPs in the municipalities of Bjelo Polje and Nicsic Prepare ABP Management Plans, in 2012 and updated 2015 x Design the system to dispose and process ABP x Page 63 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ANNEX 7: ECONOMIC AND FINANCIAL ANALYSIS 1. Introduction: The Project Development Objective is to improve the competitiveness of agriculture and fisheries in Montenegro through enhanced delivery of government support in alignment with EU accession requirements. The primary target group includes local farmers and fishermen, agricultural/fisheries producers and associations that will benefit from the grant program and capacity building provided by the project. 2. Grant program: It is expected that the grant program within the MIDAS-2 will be similar to the ongoing grant program of the original MIDAS Project 14. Therefore, the current analysis was based on the cost-benefit analysis of the grant subprojects that were funded under the original MIDAS Project. It must be noted that no ex-post economic and financial analysis has been done yet for the grant program of the MIDAS Project, except the one that was carried out during its preparation. According to this analysis, it was expected that overall gross returns of the project would substantially increase after implementing the grant program and the level of profitability would vary between the activities; NPV for the analyzed farms and enterprises would range between EUR33,345 and EUR1.25 million while the IRRs range was estimated from -8% to 68%. The key quantifiable benefit of the grant program of the MIDAS Project is the incremental income from improved productivity and profitability of farm and nonfarm enterprises resulting from improved technology, quality and safety of agricultural products, and more effective marketing supported through the project. 3. Summary of the grant investments made under the original MIDAS Project is presented in the table below. About 73% of the investment was made in the livestock sector, including 62% - in cattle breeding (milk and beef production), 5% - in sheep and goat breeding, and 6% - in other livestock sub- sectors. About 26% of the investment was made in the crops production sector, including mixed crops production, viticulture, vegetables and other crops. Only 1% of the investment was made in aquaculture sector. Table A7.1: MIDAS-1 Investments by Agricultural Subsectors Investment in % to Grant Sector of investment Number % amount (with % total support VAT) investment Aquaculture 6 1% 172,323 1% 86,161 50% Aquaculture 6 1% 172,323 1% 86,161 50% Crops production 159 24% 3,265,081 26% 1,640,185 50% Mixed crops 92 14% 1,553,050 12% 779,571 production 50% Viticulture 23 3% 596,985 5% 303,091 51% Vegetable farming 21 3% 453,694 4% 226,847 50% Crop farming 14 2% 385,760 3% 192,880 50% Fruit growing 5 1% 106,341 1% 53,170 50% Mushrooms 3 0% 143,700 1% 71,850 50% Olive growing 1 0% 25,550 0% 12,775 50% 14 Except the fact that unlike the original MIDAS, in MIDAS-2 a number of grants will be given to the fisheries sector. Page 64 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Livestock production 494 75% 9,354,547 73% 4,805,694 51% Cattle breeding 322 49% 6,431,693 50% 3,275,724 51% Mixed cattle 102 15% 1,514,013 12% 809,146 production 53% Sheep breeding 35 5% 573,024 4% 299,646 52% Beekeeping 16 2% 250,286 2% 125,143 50% Poultry 12 2% 381,167 3% 193,161 51% Goat breeding 4 1% 82,258 1% 41,822 51% Pig farms 3 0% 122,107 1% 61,053 50% Grand Total 659 100% 12,791,951 100% 6,532,041 51% 4. The calculation of economic benefits of the grant program is challenging due to its demand-driven nature as the details of future sub-projects cannot be forecasted. The specific interventions will be identified during project implementation, taking into account the demands of beneficiaries, the economic conditions at a particular location, and services needed to deliver and support the selected investments. However, possible activities and investments that the grant beneficiaries may choose have been identified based on the experience of the original MIDAS project. The five models were prepared to identify and value the incremental benefits that the grant program will generate: two dairy farms, goat farm, honey production and vegetable farm. 5. Dairy farm (high breeds, improved feeding): This model presents a dairy farm which used to have 10 local milking cows and decided to purchase 30 high breed milking cows to increase milk productivity. The total cost of the purchased cows was EUR 64,200 (EUR 2,140 per a cow). The milk yield in without- project (WOP) situation was 4,000 kg per cow per year and in the with-project (WP) situation it increased up to 6,000 kg per cow per year. The recommended technology is thoroughly followed (feeding regime and animal health measures). As a result, the total production of milk increased from 40 tons/year to 240 tons/year. Thanks to the purchased high breeds, the farm increased sale of live calves from 5 calves in WOP to 40 calves in WP. The incremental gross income reached EUR 21,000 in 3rd year after the investment. With a 10-year projected period, NPV of the model is positive and the IRR is quite high – 43.4% at the discount rate of 10%. The business is very sensitive to any decrease in milk price (see Figure A7.1). For example, if milk price drops by 8% (from EUR 0.25/l to EUR 0.23/l), IRR will drop by almost one- third (from 43.4% to 30.5%); if milk price drops by 20% (from EUR 0.25/l to EUR 0.20/l), IRR will drop by almost two-third (from 43.4% to 12.1%). Decrease in milk price greater than 20% makes the IRR drop below the discount rate (7%), hence making the investment not viable. Page 65 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Figure A7.1: Sensitivity of IRR to Changes in Milk Price 0.50 0.45 43.4% IRR 0.40 36.8% Milk price (EUR/Kg) 0.35 30.5% 0.30 24.3% 0.25 0.20 18.2% 0.15 12.1% 0.10 5.6% 0.05 0.00 6. Dairy farm (high breeds, improved own feed): This model presents a dairy farm which used to have 7 local milking cows and decided to purchase additional 10 high breed milking cows in order to increase milk productivity and to purchase some agricultural machinery and equipment in order to produce forage crops. The total cost of the purchased cows was EUR 22,000 (EUR 2,200 per a cow) and the total investment in machinery and equipment was EUR 13,770. The latter allowed the farm to produce own alfalfa at a lower cost. The milk yield in without-project (WOP) situation was 4,000 kg/cow per year reaching 6,000 kg/cow per year in the with-project (WP) situation. As a result, the total production of milk has increased from 28 tons/year to 102 tons/year. As a result of purchasing high breeds, the farm increased the sale of live calves from 3 calves in WOP to 17 calves in WP. The incremental gross income reached almost EUR 11,000 in 3rd year after the investment. NPV of the model is positive and the IRR is quite high – 39.3% at the discount rate of 10%. The business is also very sensitive to any decrease in milk price. For example, if the milk price drops by 8% (from EUR 0.25/l to EUR 0.23/l), IRR will drop to 30.6%; if the milk price drops by 20% (from EUR 0.25/l to EUR 0.20/l), IRR will drop to 17.9%. Decrease in milk price greater than 25% makes the IRR below the discount rate (7%), hence making the investment not viable. 7. Goat farm: The model presents a new goat farm which was established by purchasing the high breed goats in order to produce goat milk, cheese and meat. Some 250 goat were purchased for the total amount of EUR 37,500. The initial investment also included equipment and machinery and construction of the goat stable for the total amount of EUR 24,910. The farm produces 1.8 tons of goat cheese, 8.8 tons of goat milk and 6.5 tons of goat meat. The incremental gross income reached almost EUR 25,000 on 3rd year after the investment. With a 10-year projected period, the model shows that NPV is positive and the IRR is quite high – 51.8% at the discount rate of 7%. Sensitivity analysis shows that the business is quite resistant to the decreases in output prices. For example, if the revenue decreases by 10% it will lead to a decrease of IRR of 38.8%, by 20% - to IRR of 27.0%, by 30% - to IRR of 16.0%. 8. Honey production: The model presents a well-established beekeeping business with 265 beehives that aimed to increase production of honey by purchasing additional 90 beehives. The total investment Page 66 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) estimated at EUR 18,483, including purchasing the beehives and other equipment. The honey farm supplies the honey to the retails outlets. The incremental gross income reached EUR 9,380 in a 3rd year after the investment. With a 10-year projected period, the model shows that NPV is positive and the IRR is 38.8% at the discount rate of 7%. Sensitivity analysis shows that the business is quite resistant to the decreases in honey price. For example, if the honey price drops by 40%, IRR will be still above the discount rate. 9. Vegetable farm: The farm has 3.3ha that was used for production of vegetables. The farm owner decided to increase production of vegetables through the improvement of cultivation and agrotechnics. About EUR 15,190 was spent for purchasing of various agricultural machinery and equipment (tractor, plough, etc.). As a result of investment, the vegetable yield increased by 60% - from 20 tons per hectare to 32 tons per hectare. The incremental gross income reached almost EUR 4,000 in a 2nd year after the investment. With a 15-year projected period, the model shows that NPV is positive and the IRR is 47.9% at the discount rate of 7%. Sensitivity analysis shows that the business is very sensitive to any decreases in yield. For example, if the yield drops by only 10% (from 32 tons per hectare to 29 tons per hectare), IRR will drop to 9% and if the yield drops by 15%, IRR will become negative. Table A7.2: Key Data on Analysed Subprojects Investment Costs (Euro) Annual Gross Benefits (Euro) With MIDAS- NPV Subprojects Project IRR (%) 2 Benefic Without Increme (Euro) Grant Total (Full % subproj iary Project ntal Develop ect ment) Dairy farm (high breeds, 1 25,680 25,680 12,840 64,200 2,940 21,000 18,060 614% 43.4% 80,625 improved feeding) Dairy farm (high breeds, 2 14,308 14,308 7,154 35,770 617 6,526 5,909 958% 13.6% 7,435 improved own feed) 3 Goat farm 24,964 24,964 12,482 62,410 - 6,526 6,526 - 15.9% 19,740 Vegetable 4 6,076 6,076 3,038 15,190 1,032 4,936 3,904 378% 47.9% 30,760 production Honey 5 7,393 7,393 3,697 18,483 2,722 8,260 5,538 203% 38.8% 8,260 production 10. The analysis of the grant program shows that the overall gross returns substantially increased after the implementation of the grants/investments and the level of profitability varies by the activities. All analyzed grant projects generate good investment returns, however among them the milk, vegetable and honey production have the highest IRR. Although some of the businesses are quite sensitive to the changes in the output prices and yield (dairy farm, vegetable farm), the analysis shows that in overall the grant program financially viable and generates good investment return 11. Modernization of the Fisheries Sector: Under Component 3 the project will make investment in the fisheries sector of the country aimed at achieving two objectives: (i) to enhance the productive capacity of the sector with investments in basic infrastructure that will provide fishermen regulated safe, and sanitary landing facilities and access to port, and (ii) to strengthen the institutional capacity in the Page 67 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) sector to apply the Common Fishery Policy upon EU accession, as well as substantially strengthen the administrative, inspection and control capacity. The total amount of the project investment in the sector is estimated at EUR 5.0 million. 12. Unlike most other countries in the Adriatic, Montenegro does not have a long history of fisheries exploitation, which is now apparent in a relatively abundant resource that remains, essentially, under- exploited. Conversely, growing tourism throughout the country is creating strong and increasing demand for fish products that cannot be produced locally hence creating necessity for import which is according to the expert assessment is estimated at 3,000 tons annually. This figure is confirmed by the FAOSTAT data, according to which Montenegro imports on average annually about 1,835 tons of pelagic fish, 845 tons of demersal fish and 851 tons of other marine fish (Table 3 below). 13. However, this incremental demand that currently met by import can be covered locally by increasing fish catch. For example, according to the Institute for Marine Biology the maximum allowed catch of small pelagic fish in the Montenegrin fishing sea is 3,000 tons per year or 15,000 tons in the next five-year period. Page 68 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Table A7.3: Montenegro: Balance of Fish, Fish Products and Seafood (FAOSTAT) Average for 2006 2007 2008 2009 2010 2011 2012 2013 2009-2013 Pelagic Fish Production 114 124 154 136 138 125 171 173 149 Export 364 388 38 395 175 - - 1 114 Import 2,001 2,036 1,871 1,992 1,867 1,850 1,642 1,826 1,835 Domestic supply 1,751 1,772 1,987 1,733 1,830 1,975 1,813 1,997 1,870 Food supply 1,231 1,772 1,987 1,733 1,805 1,950 1,813 1,997 1,860 Feed 520 - - - 25 25 - - 10 Marine Fish, Other Production 203 173 171 206 206 196 226 186 204 Export 42 27 4 33 28 31 - - 18 Import 755 1,099 1,148 1,208 1,194 1,139 319 396 851 Domestic supply 916 1,245 1,315 1,381 1,372 1,304 545 582 1,037 Food supply 916 1,245 1,315 1,381 1,372 1,304 545 582 1,037 Demersal Fish Production 198 219 283 262 291 245 245 235 256 Export 17 9 8 - - - - 1 0 Import 810 832 604 480 604 605 1,175 1,362 845 Domestic supply 991 1,042 879 742 895 850 1,420 1,596 1,101 Food supply 991 1,042 879 742 895 850 1,420 1,596 1,101 Freshwater Fish Production 922 577 1,161 1,128 1,005 1,321 1,141 1,369 1,193 Export 32 5 - 1 - - 2 - 1 Import 28 108 185 210 179 169 519 532 322 Domestic supply 918 680 1,346 1,337 1,184 1,490 1,658 1,901 1,514 Food supply 918 680 1,346 1,337 1,184 1,490 1,658 1,901 1,514 Cephalopods Production 68 67 78 47 61 49 55 44 51 Export 8 2 - 13 13 11 6 - 9 Import 343 516 557 453 448 479 508 508 479 Domestic supply 403 581 635 487 496 517 557 552 522 Food supply 403 581 635 487 496 517 557 552 522 Crustaceans Production 29 25 41 21 27 22 25 22 23 Export 9 - 4 6 - - - - 1 Import 114 178 202 173 178 224 272 299 229 Domestic supply 134 203 239 189 205 246 297 321 252 Food supply 134 203 239 189 205 246 297 321 252 Aquatic Animals, Others Import - - - - - - 32 38 14 Domestic supply - - - - - - 32 38 14 Food supply - - - - - - 32 38 14 Fish Meal Import 33 86 68 37 15 7 1 - 12 Domestic supply 33 86 68 37 15 7 1 - 12 Feed - - - 2 - - - - 0 Other uses 33 86 68 35 15 7 1 - 12 Fish, Body Oil Import - - - - 1 1 - - 0 Domestic supply - - - - 1 1 - - 0 Food supply - - - - - - - - - Other uses - - - - 1 1 - - 0 Fish, Liver Oil Import - - - 2 1 1 1 1 1 Domestic supply - - - 2 1 1 1 1 1 Food supply - - - - - - - - - Other uses - - - 2 1 1 1 1 1 Page 69 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) 14. The trade analysis shows that the import of fish is continuing to grow while the fish export is going down in spite of growing domestic production. This seems to be a sign of increasing demand which has a tendency to grow further (Figure 2). This increasing demand is also confirmed by the growth of per capita fish consumption in the country which grew at 6% during the last 7 years reaching almost 10kg/year in 2013 and according to the estimations reaching 11kg/year in 2016. Current level of per capita consumption is still lower than in some neighboring countries like Croatia or Italy, but much higher than in Albania or Bosnia and Herzegovina. In general, per capita fish consumption in Montenegro is well below than that in other European countries. Taking this into consideration as well as growing tourism sector and strengthening of economic activity in the country it can be assumed that fish consumption will grow further. Figure A7.2: Production, Export and Import of Fish in Montenegro, tonnes 4500 4000 3500 3000 2500 Production 2000 Export Quantity Import Quantity 1500 1000 500 0 2006 2007 2008 2009 2010 2011 2012 2013 Source: FAOSTAT Figure A7.3: Per Capita Fish Consumption in Comparable European Countries, kg/year 18 16 14 12 Croatia Italy 10 Greece Montenegro 8 Slovenia Serbia 6 Bosnia and Herzegovina Albania 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: FAOSTAT Page 70 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Figure A7.4: Per Capita Fish Consumption in Montenegro and Europe, kg/year 25 20 15 Montenegro Southern Europe Europe 10 European Union Eastern Europe 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: FAOSTAT (no data for Montenegro in 2001-2005) 15. The cost benefit analysis of the planned investment in the fisheries sector of the country was carried out in order to assess the viability of the project intervention. The analysis was based on conservative assumptions and benefit estimations. During the analysis the investment costs and potential economic benefits of the increased fish production were compared. Particularly, the economic cost of the investments in basic infrastructure (landing facilities) and access to port was estimated. Approximate cost of the additional fisheries fleet was also added to the economic cost of investments. To estimate the benefit stream, the economic value of incremental fish production (catch) of 3,000 tons per year 15 was calculated. According to the results of the analysis, the ERR of the investments is about 35% with a positive NPV, which means that the planned investments are economically viable. 16. Support for the Food Safety, Veterinary and Phytosanitary Services: Component 2 will support the country to meet the closing benchmarks in relation to Chapter 12, including: (i) setting up an official control system for animal by-products and safely disposing of all categories of ABPs; (ii) strengthening the phytosanitary laboratory diagnostic capacity; and (iii) support to inspection services. 17. Investments in food safety, veterinary and phytosanitary policy will contribute to an increased readiness of the country to EU accession. Strengthening the public administration capacity is one of the prerequisites to being able to increase access to and absorption of EU and other funds. These funds could have been assessed and attributed to the benefit stream of the project 16. However, such assessment could be considered as too speculative since it is quite difficult to estimate the extent to which the project will contribute to making available these resources. Some economic benefits associated with import 15Based on the assessment of the Institute for Marine Biology mentioned above. 16Any investments into (payment) delivery systems will, in the short run, increase the cost of delivery, until these investments are amortized. However, it is expected that the overall benefits of the project (including unquantifiable benefits) will compensate the increased cost of delivery in the long run. Page 71 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) substitution related to tourism-driven food consumption will be also generated by the investment within this component. 18. Also the following unquantifiable benefits of the project should also be considered: • Efficiency gains in the improved public expenditure system. For example, some estimation on farm level showed that on-time payments and investments could significantly increase the profitability and return of on farm investments. • The grant program of the project will contribute to a competitiveness of the agrifood sector of Montenegro through meeting the quality and safety standards of the local and world markets at prices that are competitive and provide adequate returns on the investment resources. 19. Overall economic return of the project: Given the above benefit and cost streams, the overall Economic Rate of Return (ERR) of the project is estimated at 26.7 %. The Net Present Value (NPV) of the project’s net benefit stream, discounted at 7%, is USD 15.4 million. The benefit stream was mainly generated by the grant program and investments in the fisheries sector, which represent 66.3% and 15.4% respectively of the overall project costs (or 81.7% in total). The shadow price of carbon was taken into account for the projected 15-year period. Based on the GHG accounting (Annex 8) which estimated the net carbon sink of 2,685 tCO2-eq per year, the average shadow price of carbon is estimated at USD 68 per tCO2-eq. If low estimate of the shadow price of carbon is taken into account, then ERR would be 25.8% with NPV equal to USD 14.9 million; if high estimate of the shadow price of carbon is taken into account, then ERR would be 26.8% with NPV equal to USD 15.6 million. The EFA takes a broader perspective than GHG accounting. The resulting net carbon balance is considered a close estimate. 20. The sensitivity analysis assessed the effect of variations in benefits and costs and for various lags in the realization of benefits. A decrease in total project benefits by 20 percent and an increase in total project costs by the same proportion would reduce the base ERR to about 23%-24%. A one-year delay in project benefits reduces the ERR to 22.7%. With a two-year delay in project benefits, the ERR falls to 19.0%. Hence the project demonstrates quite a good resistance to the variations in benefits and costs. Table A7.4: Summary of Sensitivity Analysis Sensitivity Increase of Base Costs Increase Decrease of Benefits Delay of Benefits Analysis Benefits case (15-year period) +10% +20% +50% +10% +20% -10% -20% - 30% 1 year 2 years ERR 26.7% 25.4% 24.2% 21.2% 28.0% 29.3% 25.2% 23.6% 21.8% 22.7% 19.0% NPV (EUR mln) 15.4 15.0 14.6 13.4 17.3 19.3 13.5 11.5 9.6 11.8 8.4 Page 72 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ANNEX 8: GREENHOUSE GAS ACCOUNTING 1. Corporate mandate. The World Bank has adopted, in its 2012 Environment Strategy, a corporate mandate to conduct greenhouse gas (GHG) emissions accounting for investment lending in relevant sectors. The ex-ante quantification of GHG emissions is an important step in managing and ultimately reducing GHG emission, and it is becoming a common practice for many international financial institutions. 2. Methodology. To estimate the impact of agricultural investment lending on GHG emission and carbon sequestration, the World Bank has adopted the Ex-Ante Carbon-balance Tool (EX-ACT), developed by FAO in 2010. EX-ACT allows the assessment of a project’s net carbon-balance, defined as the net balance of CO2 equivalent GHG emitted or sequestered as a result of project implementation compared to a without-project scenario. EX-ACT estimates the carbon stock changes (emissions or sinks), expressed in equivalent tons of CO2 per hectare and year. 3. Project boundary and key assumptions a) Under component 1, the project will finance the competitive grant program which supports (i) farm diversification; (ii) on-farm processing, (iii) agri-environmental measures; (iv) support to production and processing associations/collection centers, and (v) fisheries grants to enhance the capacity of both beneficiaries and relevant institutions to implement the European Maritime Fisheries Fund. Activities under window (i) and (ii) are captured in EX-ACT. It is assumed that 1,100 ha of crop land (corn, wheat, clover, potato and barley) and 230 ha of perennials (vineyards, olives, stone fruits and pome fruits) will fall under improved agronomic practices and manure management (Table 1). 17 b) Activities under component 2 and component 3 are not accounted for in EX- 4. Regional and project characteristics. The project region (which is the entire national territory) has a cool temperate climate. The dominant soil type is Low Activity Clay. The project implementation phase is 5 years and capitalization phase 15 years. Tier 1 coefficients are used. 5. Results. The net carbon balance quantifies GHGs emitted or sequestered because of the project compared to the without-project scenario. Over the project duration of 20 years, the project constitutes a net carbon sink of 53,708 tCO2-eq, equivalent to 2,685 tCO2-eq per year. See Table 1 for a summary of these results. 17For grant windows (i), (ii), (iv), (v) there is lack of information about type of investments and resulting operation requirements (i.e. electricity consumptions, fuel use) at this stage. The primary data source for (iii) was the data obtained from the task team. Page 73 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) Table 1: Results of the ex-ante GHG analysis Over the economic project lifetime (tCO2 eq) Annual average (tCO2 eq/year) GHG Gross emissions Net GHG GHG emissions of Gross emissions Net GHG emissions of “with project emissions “without project” of “with project” emissions of scenario (2) (2–1) scenario (3) scenario (4) (4–3) Project activities “without project” scenario (1) Annual Agriculture 0 -53,708 -53,708 0 -2685 -2,685 Perennial Agriculture -2,342 -2,342 0 -117 -117 -117 Total -2,342 -56,049 -53,708 -117 -2,802 -2,685 Page 74 of 75 The World Bank Montenegro Second Institutional Development and Agriculture Strengthening Project (P164424) ANNEX 9: MAP OF MONTENEGRO Page 75 of 75