Document of The World Bank Report No: 21075-UZ PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US $36.14 MILLION TO THE REPUBLIC OF UZBEKISTAN FOR A RURAL ENTERPRISE SUPPORT PROJECT November 28, 2001 Environmentally and Socially Sustainable Development Sector Unit Central Asia Country Unit Europe and Central Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective February 19, 2001) Currency Unit = Soum 332 Soum = US$1 US$1 = 0.00301 Soun FISCAL YEAR January - December -- ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy EA Environmental Assessment EMP Environmental Management Plan GOU Government of Uzbekistan l&D Irrigation and Drainage NMAWR Ministry of Agriculture and Water Resources M&E Monitoring and Evaluation MoF Ministry of Finance NGO Non-governmental Organization O&M Operations and Maintenance PFI Participating Financial Institution PIP Project Implementation Plan PIU Project Implementation Unit PMR Project Management Reports PPF Project Preparation Facility RBAC Rural Business Advisory Component RBAS Rural Business Advisory Service RESP Rural Enterprise Support Project RFC Rural Finance Component RRA Rural Restructuring Agency SA Social Assessment SOE Statements of Expenditure WUA Water User Association WUG Water User Group WUO Water User Organization Vice President: Johannes Linn Country Director: Dennis de Tray Sector Director: Kevin Cleaver Task Team Leader: Mark Lundell UZBEKISTAN RURAL ENTERPRISE SUPPORT PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key perfornance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 2 3. Sector issues to be addressed by the project and strategic choices 3 C. Project Description Summary 1. Project components 3 2. Key policy and institutional reforms supported by the project 6 3. Benefits and target population 7 4. Institutional and implementation arrangements 8 D. Project Rationale 1. Project altematives considered and reasons for rejection 9 2. Major related projects financed by the Bank and other development agencies 11 3. Lessons learned and reflected in the project design 12 4. Indications of borrower commitment and ownership 12 5. Value added of Bank support in this project 13 E. Summary Project Analysis 1. Economic 14 2. Financial 15 3. Technical 16 4. Institutional 16 5. Environmental 17 6. Social 18 7. Safeguard Policies 21 F. Sustainability and Risks 1. Sustainability 21 2. Critical risks 22 3. Possible controversial aspects 23 G. Main Loan Conditions 1. Effectiveness Condition 23 2. Other 24 H. Readiness for Implementation 25 I. Compliance with Bank Policies 25 Annexes Annex 1: Project Design Summary 26 Annex 2: Detailed Project Description 29 Annex 3: Estimated Project Costs 42 Annex 4: Cost Benefit Analysis Summary 43 Annex 5: Financial Summary 49 Annex 6: Procurement and Disbursement Arrangements 50 Annex 7: Project Processing Schedule 59 Annex 8: Documents in the Project File 60 Annex 9: Statement of Loans and Credits 61 Annex 10: Country at a Glance 62 MAP(S) UZBEKISTAN RURAL ENTERPRISE SUPPORT PROJECT Project Appraisal Document Europe and Central Asia Region ECSSD Date: November 26,2001 Team Leader: Mark R. Lundell Country Director: Dennis de Tray Sector Director: Kevin M. Cleaver Project ID: P046043 Sector(s): AY - Other Agriculture Lending Instrument: Specific Investment Loan (SIL) Theme(s): Rural Development; Private Sector Poverty Targeted Intervention: N Program Financing Data [X] Loan [ ] Credit [] Grant [ Guarantee [ Other: For Loans/Credits/Others: Amount (US$m): 36.14 Proposed Terms (IBRD): Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% Financing Plan (US$m): Source Local Foreign Total BORROWER 4.11 0.00 4.11 IBRD 14.07 22.07 36.14 LOCAL GOVTS. (PROV., DISTRICT, CITY) OF BORROWING 3.20 0.00 3.20 COUNTRY Total: 21.38 22.07 43.45 Borrower: REPUBLIC OF UZBEKISTAN Responsible agency: MINISTRY OF AGRICULTURE AND WATER RESOURCES (MAWR) Address: 4, Navoy Street, Tashkent, 700004, Republic of Uzbekistan Contact Person: Deputy Minister Abduvokid M. Juraev Tel: 998711 412692 or410020 Fax: 998 711 412574 or413292 Email: Estimated disbursements ( Bank FY/US$m): FY 2002 2003 2004 2005 2006 Annual 1.50 13.40 11.90 7.50 1.84 Cumulative 1.50 14.90 26.80 34.30 36.14 Project implementation period: April 2002 - January 2006 Expected effectiveness date: 03/31/2001 Expected closing date: 07/31/2006 -CS FAD Corn, F ha,. 2AD A. Project Development Objective 1. Project development objective: (see Annex 1) The Rural Enterprise Support Project (RESP) aims to increase the profitability and sustainability of agriculture through the privatization and restructuring of farming and associated agribusiness activities. To that end, the Government prepared a multi-year investment program to support the restructuring of collective farms and associated agricultural enterprises into privately operated units. The RESP, extend:ing over four years, focuses on initiating post-restructuring technical and financial support to qualifying newv[y constituted private farms and agribusiness units in five selected Tumans. If the implementation of the RESP proves successful over the period 2002-2004, the Bank could then pursue a further investment program with the Government to provide similar post-restructuring support to a larger number of farmls and rural enterprises country-wide. The RESP has been designed to meet the following development objectives: (i) increase profitability and productivity in the agricultural sector; (ii) support the emergence of private sect;r initiatives; and (iii) ensure sustainability of the agricultural sector through rehabilitation of Irrigation and Drainage (I&D) systems and improved farm management. Post-restructuring support is planned for the following five Tumans (Districts): Akhangaran (Tashkent), Ellikalin (Karakalpakstan), Marharnat (Andijan), Nishan (Kashkadarya) and Sherabad (Surkhandarya). Enabling conditions to be introduced under this project would include: (i) devolution of farn management functions to families and private commercial farmers to hamess more dedicated labor effort by the rural population; (ii) elimination of barriers which prevent private sector initiatives in input supply, output marketing and processing; (iii) provision of credit, machinery and advisory services for such initiatives; (iv) reduction in domestic trade impediments; and (v) creation of part?cipatory irrigation management institutions. 2. Key performance indicators: (see Annex 1) B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 17376-UZ Date of latest CAS discussion: 03/10/98 * Completing liberalization of domestic trade and improving incentives for increased output and employment by the private sector in agriculture. * Removing the inefficiencies in resource utilization in rural infrastructure. * The RESP is listed under the current CAS (in which it is denoted as the Agriculture Enterprise Restructuring Project). 2. Main sector issues and Government strategy: The main issue facing the agricultural sector is the lack of farmers' incentives to imprc,ve production and productivity. This lack of motivation is a result of the de-facto continued public sector domnination of the agro-industrial complex. This control has been exercised through the state order system, which dictates the cropping pattern down to the collective farm level; the settlement account system, which limits farmers' access to their own financial resources; and the monopolistic input supply, agro-processing, and marketing systems, which deprive farmers of choice, raise the cost of their purchases, and lower the price of their sales. Moreover, the lack of funds for proper operation and maintenance (O&M), and rehabilitation of irrigation and drainage (I&D) infrastructure, has led to serious deterioration of the - 2 - irrigation and drainage systems (both off-farm and on-farm). Weaknesses in canal operations and management at all levels within the irrigation system result in huge water losses, widespread and severe water and soil salinization, declining crop yields, and loss of once-productive agricultural lands. A reform process to address these issues had been initiated under the Rehabilitation Loan and the Cotton Sub-Sector Improvement Project, and a comprehensive farm restructuring program was devised, with implementation beginning in 1998. Uzbekistan's current overall agricultural strategy is outlined in the government's "Program for Strengthening of Economic Reforms in Agriculture during 1998-2000", published in March 1998. The strategy was further elaborated in at least four laws designed to enable the program's implementation, namely: the Land Code; the Law on Agricultural Cooperatives (Shirkats); the Law on Private Farms; and the Law on Dekhkan Farms. The key issues on the sectoral agenda for reform relate to: (i) further reforms in policies of pricing and marketing for creating efficient and competitive markets for inputs and outputs, which include: the phasing out of state orders, fostering private sector participation in input supply, marketing and processing; (ii) improved provision of services for rural communities, including better access to commercial financial services, as well as advisory services on business development, financial management, new technology and legal matters; and (iii) improvements in land tenure and farm organization to increase security of possession, and to ease transfer of land rights, improve incentives for investment in land and I&D infrastructures, and create incentives for more efficient farm management. These issues have been discussed with Govemment in the context of the Rehabilitation Loan, the Cotton Sub-Sector Project, and in the course of preparation of the RESP. 3. Sector issues to be addressed by the project and strategic choices: This project would address issues related to farmers' incentives, as well as the sustainable management of irrigation and drainage systems. The project would be based on the introduction of the following measures: (i) adoption of a new state procurement system for cotton and wheat, with reduced obligatory sales to the state and introduction of tolling arrangements for the procurement of the above-quota production of cotton; (ii) adjustments of procurement price of cotton, based on quality grades and fluctuations of the official exchange rate and fiber price; (iii) increasing access to foreign exchange for cotton producers to import machinery and other agricultural inputs; (iv) development of Water Users Groups (WUGs) and Water Users Associations (WUAs) with responsibility over rehabilitation and management of on-farm I&D infrastructure; (v) establishment of private agro-service centers to provide farmers with agricultural machinery services, chemicals, seeds and other necessary inputs; (vi) organization of advisory services to inform rural communities and guide farmers and agribusinesses through the post-restructuring process; and (vii) drafting of normative acts to allow transference of land use rights pledged as collateral, and on the sub-lease of such land use rights, as well as on the other methods of guaranteeing loans in the form of movable property. The Govemment has commnitted itself officially to introducing this package of measures in the project areas to improve the market environment in which project participants will operate. The intention of the Government is to extend the applicability of those measures to the whole rural economy once their detailed procedures are introduced and streamlined, and once their impact on sector productivity and on the well-being of project participants is demonstrated. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): -3 - As noted, the proposed RESP, covering four years, will focus on initiating post-restructuring technical and financial support to qualifying newly constituted private farms and agribusiness enterprises :in five selected Tumans. The RESP will comprise five components: i) Rural Business Advisory Services (RBAS); ii) Rehabilitation of Irrigation and Drainage Systems; iii) Rural Finance; iv) Credits for Agro-Service Enterprises; and v) Project Implementation Support. Each component's size is indicated below including physical and price contingencies. Component 1: Rural Business Advisory Services (US $1.22 million) This component will support providers of business farm advisory services in the rural sector, so that they can better assist participants in the restructuring process become familiar with policies, laws, regulations and procedures underlying the restructuring process, as well as business planning activities, agro-technical information (traditional farm extension), and perhaps market information. The main existing providers to participate would be the business planning and extension centers set up under the Association of Dekhkan and Private Farmers. Component 2: Rehabilitation of Irrigation and Drainage Systems (US $16.63 million) It has been agreed with the GOU to focus on the irrigation, and especially drainage, structures which need incremental maintenance on a yearly basis, and even more extensive rehabilitation investmen1:s in many cases. The investments will be chosen by water users groups (WUGs) to be formed under the project. WUGs will decide how much on-farm investment to focus on, and the farms will repay the loan funds used for these purposes through an increased land tax (with a recovery period of 15-20 years). The WUGs would then jointly decide on using the remainder of the loan funds of this component (the component would total roughly US $3 million in each Tuman) for investments in inter-farm drainage and irrigation infrastructure, which would not be repayable (they would be considered as grants to the Tuman level irrigation drainage enterprise - raivodkhoz). Component 3: Rural Finance (US $5.93 million) This component will focus on lending for both working capital and investment expenditures by private farms and rural businesses. Access by farms and other enterprises to the rural finance component will be determnined by participating financial institutions (PFIs), selected based upon agreed eligibility zriteria, and whose activities will be govemed by agreed upon Credit Guidelines (both to be agreed between the GOU and the Bank). Each sub-loan would have to be supported by a business plan submitted by thi- borrower. To encourage broad participation, loans would be limited to a maximum of the equivalent of US $10,000 for seasonal loans and US $50,000 for term loans. To be eligible for loans, borrowers must have completed legal procedures concerning privatization and restructuring (in the case of farms) or be private or privatized nonfarm enterprises. Component 4: Credits for Agro-Service Enterprises (US $16.0 million) Sub-loans provided under this component would be on the order of US SI-2 million to newlly formed private enterprises and cooperatives of private farmers and made directly through subsidiary loanl agreements with the Ministry of Finance. The duration of such loans would be 5-10 years, with a maximum debt-to-equity ratio of 4-to-1. The intention is to establish well-equipped private agro-service centers for machinery services and supply of agricultural inputs, which would create competition with the existing state-owned enterprises in the machinery services and input markets. Two to three new private enterprises of this type would be established in each Tuman participating in the Project. - 4 - Component 5: Project Implementation Support (US $2.31 million) Project implementation will be administered by the Rural Restructuring Agency (RRA), with a staff of about 30 (including five tuman level offices) in charge of all project management activities, including procurement, financial management, maintenance of links with the Tuman-level rural business advisory services providers and with participating financial organizations, and project monitoring and evaluation. This component will include technical assistance (drawing on both local and foreign experience) to assess the current deficiencies in farm restructuring procedures, and develop amendments to legislation and government-set procedures, to improve the transparency of the farm restructuring process and make it more equitable. It would also address improving security of private land tenure rights and establishing a fair and transparent basis for the transfer and pledging of such rights. Indicative Bank- % of Component Sector Costs % of financing Bank- (US$M) Total (US$M) financing 1. Rural Business Advisory Services Agricultural 1.22 2.8 0.79 2.2 Extension 2. Rehabilitation of Irrigation and Irrigation & 16.63 38.3 13.21 36.6 Drainage Systems Drainage 3. Rural Finance Agricultural Credit 5.93 13.6 5.93 16.4 4. Credits for Agro-Service Enterprises AN 16.00 36.8 12.80 35.4 5. Project Implementation Support Other Agriculture 2.31 5.3 2.05 5.7 6. Project Preparation Facility (PPF) AD 1.00 2.3 1.00 2.8 Total Project Costs 43.09 99.2 35.78 99.0 Front-end fee 0.36 0.8 0.36 1.0 Total Financing Required 43.45 100.0 36.14 100.0 -5- 2. Key policy and institutional reforms supported by the project: Uzbekistan: Rural Enterprise Support Project Matrix of Agricultural Reform Policies to be applied to private farmers and farms restructured under the RESP Needed Measures Ultimate Objectives Introduced By For Pilot Tumans 1. State Purchases in the Wheat and Cotton Sectors A. In the pilot districts covered by the RESP, the Government Minimal government intervention in Included in CzEinet of would replace the current system of setting production targets agricultural markets. Distortion-free and Ministers Resolution for grain and cotton with a policy of recommendations on crop competitive agricultural markets. rotation aimed at the improvement of soil quality. B. The Government will replace the state order system by a Farmers shall be given full rights to make Included in CZ ainet of state procurement system, under which obligatory sales to the production decisions and to select product Ministers Resolution state from the crop of 2002 will not exceed 25% of the marketing arrangements independently. historical averages (1990-1999) of actual cotton and grain production, respectively. Above the fixed procurement quota for cotton, producers can either: Assure that state purchase prices for (i) toll the remaining volume of raw cotton for a specified cotton do not implicitly tax cotton tolling fee and retain the cotton fiber to sell at market prices; producers or, (ii) sell the remaining volume of raw cotton to the state a price no lower than 30% of the FOB Tashkent cotton fiber price (in US dollars) converted at the CBU official exchange rate at the time of delivery less the tolling fee. After meeting the state procurement quota for wheat, enterprises and individual farmers will have the right to sell wheat, produced above the quota, on the internal market and at negotiated prices. 11. Land Tenure and Farm Restructuring A. A draft enactment regarding subrogation with respect to Secure, transferable land use rights To be done by Ministry land use rights pledged as collateral will be prepared no later conducive to promoting long-term of Justice, MA.WR, State than by June 30, 2002. Dated Covenant in the Loan investment, access to financial markets, Committee for l_and Agreement. and enhanced land mobility. Resources (SCLR) B. Obligatory sales volumes allocated to agricultural Improve the incentives of farm members Done nationally by enterprises are divided among the members in such a manner to take greater responsibility for own Cabinet of Ministers that the failure by a member to meet his share of the delivery labor effort and receive the corresponding Resolution 29 S (1999) does not increase the quota-meeting obligations of others. benefit. Ill. Rural Finance, Taxation, and Cost Recovery A. The system of registration for becoming a participant in Increase in liquidity and growth of Done by Law oni Foreign foreign economic activity at the Ministry of Foreign Economic efficiency in input and output markets. Economic Act, .ity (May Relations was abolished, so that now registered agricultural 2000) enterprises can open foreign currency accounts. -6 - Needed Measures Ultimate Objectives Responsible Agency B. The foreign exchange surrender requirement with respect to Increase in liquidity and growth of export of cotton fiber and seed produced by rural enterprises efficiency in input and output markets. of Ministers in participating districts in excess of the state procurement quota will be reduced to a level not more than 50% (except as the Bank shall otherwise agree) and be applied starting with regard to the cotton crop of 2002. Dated Covenant in the Loan Agreement. C. The system of credit advances by the Fund for Settlements Eliminate the tying of advances for output Done nationally through for Agricultural Commodities Procured for State Needs will purchases to the provision of input guidelines to financial ensure that agricultural enterprises are enabled to use these supplies from state supply agencies. agents of the Fund for advances to procure their inputs from any and all suppliers Settlements for they choose at market prices, provided that these agricultural Agricultural enterprises do not have debts to state-owned input suppliers. Commodities Procured for State Needs D. Implement the consolidation of all taxes on farms into a Simplify the tax system in the agricultural Done nationally by unified land tax. sector and ensure simple tax assessment Presidential Decree procedures from private farmers. which took effect from January 1999. E. Farm debt to the Govemment budget should be restructured Reduce indirect subsidies to the This has been done and payment on debts to state-owned input suppliers should be agricultural sector and decrease pressure nationally. postponed until 2003. on the national budget. Lay the foundation for the long-term financial sustainability of the irrigation sector. F. Improve cost recovery in the supply of irrigation water by Reduce indirect subsidies to the To be implemented by including the cost of investments in on-farm drainage and agricultural sector and decrease pressure MAWR, with Ministry irrigation structures into the level of water fees (over a 20-year on the national budget. Lay the of Finance, and Rural amortization period). foundation for the long-term financial Restructuring Agency .._________________________________________________________ sustainability of the irrigation sector. 3. Benefits and target population: Restructuring collective fanns is an important step toward rationalizing farming operations, cropping patterns, and the use of resources. Resulting improvements in farm productivity and profitability would set the stage for growth in the rural economy, and in the national economy at large. Benefits of the RESP would result from the comprehensive and coordinated package of policies and interventions that would remove current obstructions to agricultural development and provide the inducements and resources for sustainable private sector investment in the rural economy. Elimination of state intervention in production and marketing and the transfer of land and water rights to private operators would provide the foundation for environmentally sustainable and profitable agriculture. The initiation of transparent rural financial services would introduce farmers to commercial finance and intermediation, and to financial responsibility. By acquiring significant freedoms in decision-making and economic activities, restructured farm units would become a catalyst for the development of a variety of complementary production services, value-added processing and marketing functions, and a broad array of agribusinesses likely to generate rural employment. The potential beneficiaries under the RESP would be a rural population of about 400,000 people living on 162,000 hectares (ha) of irrigated land and the people providing goods and services to farms in the five participating Tumans. Their incomes would be expected to rise as a result of the RESP, through increased -7 - crop yields, lower costs of production, value-added from processing, and access to markets and credit sources. The potentially significant increases in rural employment and incomes would allow family-level investments in housing and health that are essential to raising the standard of living. Roughly 70% of these potential beneficiaries are expected to participate in the project fully (under all components). 4. Institutional and implementation arrangements: Implementation Period: The RESP would be implemented over a four year period in 2002-2006. Executing Agencies: Tuman (district/country) administrations, their irrigation agencies, commercial banl:s, and private enterprises would all be involved with implementation of relevant project components. Institutional improvements would be focused on both existing government departments and as well as private and nongovernmental entities at the local level that demonstrate a commitment to delis tT demand-driven services. Responsibility for implementation will be shared by the RRA with the following entities: Rural Business Advisory Service: Association of Dekhkan and Private Farmers. Rehabilitation of I&D Infrastructures: WUGs, Raivodkhoz, Ministry of Agriculture and Water Resources 'MAWR). Rural Finance: Commercial Banks under contract with the Ministry of Finance. Sub-Loans for Agro-service Companies: Ministry of Finance. Project Coordination, Monitoring and Evaluation: The Rural Restructuring Agency (RRA), establishetd in 1998 under the Ministry of Agriculture and Water Resources (MAWR), will coordinate th2 implementation of the RESP. The RRA would ensure a direct link with policy/decision-makers and would provide guidance to the Viloyat and Tuman administrations. It would also: (i) coordinate improvements of the legal framework for farm restructuring and rural credit; (ii) assist implementing agencies in organizing information campaigns to create awareness of the RESP and associated policy measures among rural communities and the institutions serving them at the local level; (iii) coordinate technical assistance provided for capacity building in agricultural policy formulation; (iv) coordinate procurement and financial control matters under the project; and (v) coordinate the participation of various funding agencies under the RESP. The RRA would also monitor the progress and efficiency of the Project and evaluate its impact, and would report its findings and recommendations to the MAWR and to the World Bank. In addition, as part of the institutional development effort under the RESP, provision would be made for strengthening the capability in the RRA to extend their activities to other rural programs, monitor their effectiveness anrd e valuate their impact. The intention would also be for the RRA to provide the Government with a basis for improving its policy analysis and the planning and design of its development programs. With regard to the RESP, performance indicators closely linked to project-specific objectives were selected and agreed between the Government and the Bank. Impact indicators have also been selected in consultation wil project stakeholders (see Annex 1). Detailed terms of reference, charter, and the Government order establishing the RRA are available in the Project Implementation Plan (PIP). Financial Management: 1. General. The overall responsibility for financial management of the project will rest with the RRk in Tashkent. At the time of project appraisal, the financial management capacity of the RRA was determined to be weak and insufficient to perform the financial management of the RESP. Subsequently. the financial management capacity of the RRA was strengthened prior to Board presentation, as a time-bound Financial Management Action Plan was achieved (included in the PIP), together with the overall schema for the project's flow of funds and the general financial management controls that will bt -8 - applied. 2. Staffing. The RRA already has a Chief Accountant and an Accountant to support the accounting requirements of the Project Preparation Facility. An international financial management adviser was engaged during project preparation and will be retained throughout project implementation to advise on the financial management arrangements of the project. Additionally, one other accountant will be recruited to the RRA during project implementation. 3. Project Management Reporting (PMRs). The format of the PMRs for the project has been agreed with the RRA and is enclosed in the PIP. The RRA will produce a complete set of PMRs for every calendar quarter throughout the life of the project. Project funds will be initially disbursed under the Banks established procedures, including Statements of Expenditures (SOEs); however, a move to PMR-based disbursements will be made at the mutual agreement of the Government and the Bank once the RRA is familiar with the project's monitoring aspects and is considered able to produce sufficiently timely and reliable project management information. A change to PMR-based disbursements will be considered by September 30, 2002. 4. Audit arrangements. The project will be audited annually by external auditors acceptable to the Bank and on terms of reference acceptable to the Bank as presented in the PIP. The appointment of the auditors is a condition of Project Effectiveness. The audit of the project's financial statements will be completed within six months of the end of every fiscal year of project implementation and the cost of the audit will be financed from the loan. D. Project Rationale 1. Project alternatives considered and reasons for rejection: A five-year project to support country-wide farrn restructuring, initially contemplated by Government and the Bank, was rejected on the basis that the enabling conditions for such a large project were not in place, and that the Government prefers to introduce such conditions in a gradual way. Thus, a program approach was adopted, whereby the main elements of a long-tern umbrella program were identified and agreement was reached to implement such a program in a pilot phase; and then later generalize these reforms to the country as whole, depending on their success during the pilot phase. As a result, two phases are planned: (i) a four-year Phase I Project as the vehicle for creating the legal, policy and institutional conditions for demonstrating the restructuring process in five Tumans; and (ii) a follow-up phase to support an expansion of the restructuring process to a wider area in the country. Under the current design, a number of components were considered for inclusion, and were ultimately rejected. (i) The Land Registration Component which was aimed at "defining a registration system for land rights and initiating its implementation in the project Tumans". On the one hand, documentation of land use rights for private and dekhkan farns is currently being done reasonably well by the Tuman Land Registration Offices; therefore, definition and implementation of documenting land use is no longer a necessary project intervention. In addition, investment support to the national cadastral agency Uzgeodezcadaster, the Land Institute, and the State Land Committee would be premature over the next four years since at this stage: (a) land is not privately owned and is unlikely to become real estate usable as collateral; and (b) an integrated title registration system of land and other real estate with a sufficiently -9- strong legal base typically will take the next five years. (ii) The Infrastructure Strengthening Program was intended to make grants for rehabilitation/improvement of infrastructure deemed essential for the effective operation of restructured farms and agribusinesses, including "agro-services support facilities, marketing infrastructure, rehabilitation of primary and secondary irrigation canals and inter-farm drains." Grants for all of the above, except the investments in primary and secondary irrigation infrastructure were deemed inappropriate. Therefore, the component was split into two components - one for grants for primary and secondary canal rehabilitation, and a second for the funding of pre-appraised investment loans to private agro-service centers. (iii) A separate Project Monitoring and Evaluation (M&E) Component to be executed by the Institute of Market Reforms was originally proposed but then rejected. The M&E activities to be execuied under the project are now included under the terms of reference of the RRA, which has better knowledge of the project rationale, specific investments, and managerial structure, and is therefore better suited to execute the M&E function, compared to an outside academic research institute. - 10- 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Price liberalization, trade reform Rehabilitation Loan U Cotton grading, development of private Cotton Sub-Sector S S seed industry, integrated pest Improvement Project management, water use efficiency Safe potable water Water Supply, Sanitation, and S S Health Economy-wide post-privatization Enterprise Institution Building U S support for growth Other development agencies Rural Development - EU TACIS Pilot Integrated Rural Development Farm Management - Germany Pilot program to strengthen management of collective farms. Land cadaster and title registration -EU Land Registration in TACIS Uzbekistan-Phase II Irrigation & farm management - EU On farm irrigation and Tacis management project, Phase II Training and extension services - EU Training and education of Tacis farmers and allied personnel, TEFAP II Rehabilitation of I&D infrastructures, Ak Altin Agricultural WUAs, cotton production - Asian Development Project Development Bank Grain production - Asian Development Grain Productivity Bank Improvement Project IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) - 11 - 3. Lessons learned and reflected in the project design: Several studies and evaluations of land reform initiatives in countries with economies in transition have been completed by the Bank and other agencies since March 1994. These studies concluded that, among the important enabling conditions for effective farm restructuring are: (i) legislation, administrative procedures and enforcement mechanisms that would establish possession, utilization and transfer rights lo real property, and allow unrestricted entry into, and exit from, agricultural activities; (ii) competitive input supply activities and marketing channels that effectively replace monopolies which served ihe collective/state farms; (iii) financial institutions that meet the needs of a monetized agricultural sector; ar.d (iv) farm support infrastructure and services to serve the restructured fanns. Bank experience al.so indicates that success of projects involving land reform is contingent upon: (i) a clear strategy and eligibility criteria for the allocation of land rights and for the transfer to farners of control over producticn and marketing decisions; (ii) a policy environment that does not penalize agriculture; and (iii) active participation of the target population during both the planning and implementation stages. Given the need to address the above-mentioned factors which crucially influence the success of tie farm restructuring process, but also owing to the inability of the Government to implement measures 1o address these factors throughout all regions of the country at the same time, the Bank preparation team and the RRA decided on the adoption of a pilot approach, which covers all the necessary factors, but in five of the country's 165 Tumans. For this reason, the institutional focus of the RESP is placed mainly on local implementation capacity, rather than development of national institutional capacity. The RRA, as ihe national coordinating body, is an exception to this strategy, since it will also be the recipient of technical assistance to prepare it for the second phase of the project during which the restructuring process is widened to include a greater number of Tumans nationwide. 4. Indications of borrower commitment and ownership: The Government has included the RESP on its list of priority prograrns as defined in a presidential decree issued in 1995. The Government confirmed in November 1996 and March 1997 that fal-n restructuring remains a high priority and outlined the overall agricultural strategy in the governments "Program for Strengthening of Economic Reforms in Agriculture during 1998-2000", published in March 1998. The strategy was further elaborated in at least four laws designed to enable the progran s implementation, namely: the Land Code, the Law on Agricultural Cooperatives (Shirkats), the Law on Private Farms, and the Law on Dekhkan Farms. Analysis of these four laws confirm that the government s intentions in the short-term are essentially three-fold: - to complete the transformation of the largest collective farms (kolkhozes) into cooperative firrns (shirkats), in order to: (a) pernit continued large-scale cultivation of cotton and wheat (the country's twv : strategic crops); and (b) ensure continued employment, minimum living standards, and social stability among the already large and increasingly youthful population in the rural areas, until other sources oDf employment have been developed; - to strengthen the legal and enabling environment for private farms (larger than 10 ha) and for small Dekhkan farms; - to enhance farm profitability as a result of progressive increases of yields and prices, and th- adoption of other incentives, so that farmers will be able to invest in the rehabilitation of on-farm irrigation and drainage infrastructures and agricultural machinery. The reform package implemented by the Government since January 1, 1999 has: (i) significantl:v increased State procurement prices for cotton and wheat; (ii) transferred social costs from the farms to the - 12 - government budget; (iii) written off farm debts to the State and restructured those to input suppliers; (iv) simplified taxation and reduced its level; (v) granted a tax break for newly established private farms; and (vi) established rural business advisory centers to assist private farms. As a result of this strategy, 963 collective farms were restructured into shirkats with allocation of the land plots to member families and brigades on a short-term (up to 3 years) contractual basis, and has led to 290,000 people (28% of the workforce) being laid off. It is anticipated that restructuring into shirkats would be completed by the end of 2002 for the remaining collective farms. As of January 1, 2000 more than 31,000 private farms (665,700 ha or 17% of total irrigated land) were created and further allocation of land for dekhkan farms, i.e. small-scale farming (up to one hectare) and residential building took place, which brought the amount of dekhkan farms to over 3.3 million with a total area of about 514,000 ha (13% of total irrigated land). The Government has been actively supporting preparation of the RESP, and has used a Project Preparation Facility (PPF) advance to initiate implementation of project start-up activities, including the organization of the RRA, training activities and procurement of office equipment. In parallel with the restructuring program, the Government has already started transferring O&M of on-farm irrigation and drainage infrastructures to newly established water user associations (WUAs) in Khorezm and Karakalpakstan. Other projects which supply technical assistance for this important institutional development are also under implementation in the Fergana Valley and Ak-Altin raion, funded by the Swiss Cooperation Program, and EU Tacis, respectively. 5. Value added of Bank support in this project: The Bank has extensive experience in the region in identifying and introducing best practices in the development of land reform legislation, restructuring of farm support services, introduction of participatory irrigation management, and lending to rural private-sector agribusiness enterprises. The Bank's regional experience and professional and financial resources position it well to assist the Government of Uzbekistan in post-privatization support of the rural sector, which involves a complex interplay of economic, social, and political factors, which often compete with one another. This experience manifests itself in the formulation of the structure of the RESP in the following ways: i) Focusing on improvements in the legislation/procedures for the registration of land use rights and movable property using existing administrative bodies. The project does not aim to establish an integrated title registration system for land and other real estate (houses, other buildings, etc.) since land ownership is not envisioned to become private in the near future. ii) High priority is placed on forming altemative market channels which will compete with state structures and will through their expansion gradually allow the reduction of the state's involvement in input supply and marketing of agricultural output. A move to eliminate the state's involvement in marketing will not be undertaken under the RESP because it has proven unsuccessful in other ECA countries which do not have both extensive land reform in place (with small farm predominance) and high foreign investor confidence in the free exportability of agricultural commodities. iii) An innovative approach to combining simultaneous investments in main, secondary, and on-farm irrigation and drainage infrastructures in an integrated chain. This focus on tackling water losses in the same chain of structures supplying given farms will rehabilitate the most deteriorated structures in the whole chain rather than considering off-farm and on-farm structures separately, as have most irrigation projects done in the ECA region over the past six years. The choice of investments in these structures will be made by WUGs set up prior to and after the project begins implementation. - 13 - E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$59 million; ERR = 30 % (see Annex 4) O Cost effectiveness O Other (specify) Economic Assessment (see Annex 4-a). A cost-benefit analysis has been undertaken for the project using gross margin calculations based on economic prices for tradable inputs and outputs. Economic prices have been calculated for major tradable products using prices and price projections available from issues of the Bank's Business Quarterly. A conversion factor of I has been used for proj -ct costs as no price distortions are expected to affect the prices of goods to be procured under the Project. Economic values for tradable inputs and outputs are higher by 30% to 100% than their current financial values. When introduced in farm budgets, the economic prices show positive results indicating that major crops supported by the Project are economically justified. Critical assumptions have been made in assessing the costs and benefits: * The economic analysis applies only to restructured farms which participate in the project. On the cost side, the economic analysis reflects the expected on-farm costs to be partly financed partly through seasonal credit and partly through the agro-service centers, as well as investments for on-fann irrigation structures and equipment services. These project costs total about US $400/ha. Other components of project costs related to national-level work were included fully into the economic analysis (not being pro-rated for the project area). On the benefit side, it has been estimated that 70% of the farmns in the project area would participate and be able to fully introduce the technological improvements needed within a five-year period. This assumption was based on the observation that the most critical current technological constraints have been caused by input shortages and poor management of collectivized agriculture. As no support is expected from other projects, all benefits are attributed to the proposed Project. The transition to market-based private farming would not involve radical changes in farm practices at the onset of the restructuring process. The expected technological change would be simple and within the technical capacity of most farmers in Uzbekistan. The impact of these changes is, however, expected to be substantial. As a result of better agricultural practices, effective use of inputs, and a market driven crop rotation, yields are expected to increase over a five year period as follows: Yield Without Project Yield With Project Increase tons/ha tons/ha (%) Cotton 2.16 2.9 34 Wheat 3.13 3.9 25 Potatoes 7.43 8.4 13 Fruits and Vegetables 10.95 12.4 13 Silage 6.02 6.5 8 The base ERR for the RESP was estimated to be in the range of 22% to 30%, corresponding to Net Present Values in the range of $33 to $59 million (assuming a 10% discount rate). A sensitivity analysis has been undertaken using the following approaches (i) decrease in benefits due to lower gross margins owing to imperfect input and output markets; (ii) increase in costs owing to underestimation in the project preparation period; and (iii) slower yield increases owing to delays in project implementation. The analysis - 14 - indicates that the ERR is most sensitive to change in the benefit streams. The project is thus justified in allocating resources for the development of agro-service enterprises, agro-processing facilities and associated infrastructure to reduce the risk of decrease in the benefit streams. The results of the sensitivity analysis (in economic terns) are as follows: Base Level of Benefits 10% Costs 30% 50% Slower Yield Parameters Less than Base Above Base Increase than Base Base case is 70% Case Case Case participation 30.0% 17.5% 23.8% 20.6% 60% participation 26.2% 15.5% 20.7% 17.8% 50% Participation 22.3% 13.3% 17.3% 14.8% Cost Recovery. The Project was designed on the basis that the cost of services would be progressively borne by the beneficiaries. The Rural Finance component will charge positive, market-determined interest rates (on the order of 15-20% in dollar terms). The RBAS is expected to progressively recover the cost of all services, which are not of a public goods nature (for information bulletins, consultations, etc.). While a serious effort would be made to institute the practice of cost recovery in the on-farm investments under the hrigation and Drainage component, significant cost-recovery of investments at the main and secondary levels will become more of a reality during the period after 2004. Emphasis during the period 2000-2004 would, therefore, be put on developing practical methodologies and procedures for cost recovery at the main and secondary levels of the irrigation and drainage system. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = 117 % (see Annex 4) The financial model has been developed by adopting the gross margin estimates for each crop in the economic model (which assumed domestic prices equal border prices for all inputs and outputs). The the non-project base is developed as a base line in which output price is taken as the (current) mix of 90% state order price and 10% free market price. The project financial gross margins then push this mix to 25% state order price and 75% free market price. Given that free market prices exceed by 50-100% or more those set by the state for state order purchases, the financial gross margins in the project case exceed those of the non-project case by roughly $50 and $400 per hectare for grain and cotton, respectively. This yields a financial rate of return for farms participating under the project of 117%. Incremental costs for these farms are $152 per hectare for I&D investments and phased-in water charges, which reach $75 per hectare in year 15 of the analysis. Fiscal Impact: If successful, the project would end the exploitative extraction from farm incomes through extremely low farm-gate prices for products, monopolistic prices for inputs and services, and dictated cropping patterns involving unprofitable crops. It is difficult to precisely estimate these implicit taxes accruing to public revenues, but most calculations place them on the order of $24 million annually (5 tumans/165 tumans = 3% of $800 million annually). Gradual elimination of these implicit taxes (which accrue mainly to those controlling the export of cotton) will reduce public revenues, which will partially be recovered at later stages as taxation such as land lease fees and water charges are increased in line with the improved productivity in the agricultural sector. In the long run, increases in yields and productivity should provide a healthy economic base for increased tax revenues which can be simply and efficiently collected through the land lease system. The fiscal impact at project maturity would stem from (i) increased tax revenues accruing from marketing and service activities associated with increased agricultural productivity; (ii) - 15 - transfer of production-related responsibilities from the public to the private sector, including cost recovery measures which would decrease the burden of the rural sector on the public budget; and (iii) increased productivity which would improve domestic food supplies, reduce the need for imports and increased exports from cotton. As noted above, the project has been designed for cost recovery. The main component having a direct impact on the budget is the Irrigation and Drainage component, which will have roughly a 50% rate of recovery for the budget. This amounts to a net present value of the subsidy over the course of the project of $8 million. The cost recovery for the RBAS will also be phased in to recover at least 50% of the costs by the end of the project. 3. Technical: The RESP is technically sound. Uzbekistan has a commercial agriculture with technical skills, technical packages and a resource base to support it. The current poor performance of agriculture is only partly owing to technical shortcomings. The primary deficiencies are operating constraints and a lack of incentives for farmers to use their knowledge and skills to make better use of the agricultural resource base. It is these gaps that the RESP would aim to address by: (i) creating the legal base for secure land use rights; (ii) making policy, legal, and technical information more accessible to the rural sector; and (iii) strengthening linkages between farming, agribusiness and marketing services. The RESP would aLso strengthen management skills on farms and in the businesses serving them. The anticipated increase in farm productivity over the period 2001-2005 would be in the range of 20-30% depending on the cropping patterns. The projected increase is feasible in view of the current low levels of productivity caused by institutional constraints and pervasive shortages of high quality agricultural inputs in the sector. Thle projected outcomes are consistent with what has been achieved elsewhere in the world under similar conditions, and in Uzbekistan itself in the past. 4. Institutional: 4.1 Executing agencies: Executing Agencies: Local administrations, and private enterprises would be responsible for Tuman and Viloyat-level project components. Institutional improvements would be focused on existing Government departments and governmental, private and nongovernmental entities at the local level that demonstrate a commitment to deliver demand-driven services. Responsibility for implementation will be shared by the RRA with the following entities: * Rural Business Advisory Service: Association of Dekhkan and Private Farmers. Rehabilitation of I&D Infrastructures: WUGs, Raivodkhoz, Ministry of Agriculture and Waler Resources (MAWR). * Rural Finance: Commercial Banks under contract with the Ministry of Finance. * Sub-Loans for Agro-service Companies: Ministry of Finance 4.2 Project management: Project management would be the responsibility of the RRA. The RRA would have a liaison office to work with each Tuman Hokim's office where farm restructuring activities are underway. The RRA liaison staff would work directly with the Hokim in the field and report to the Director General at the center. 4.3 Procurement issues: The majority of I&D rehabilitation works will be contracted out under ICB and NCB procedures, but for - 16- some activities, Tumans will need to contract some rehabilitation using minor works procedures. This is owing to the remoteness of some Tuman infrastructures, and the fact that there isn't always a wide enough private contracting capacity for undertaking a variety of small, widely scattered improvements packaged together, especially those that would be performed during peak irrigation season operations. 4.4 Financial management issues: The financial management risks for Uzbekistan have not been the subject of a detailed review by the Bank. However, primarily because of other implementation considerations, any weaknesses that may exist in the financial accountability and management capacity within Uzbekistan have been mitigated for this project by using the RRA. Specific weaknesses of the RRA in respect of its financial management capacity and accountability are being addressed by the recruitment of a financial management consultant who will be retained throughout project implementation to advise on the financial management arrangements of the project. Weaknesses in the Uzbekistan banking sector will be mitigated by the use of a bank deemed eligible by the Bank to hold the project's Special Account and the receipt from that bank of a comfort letter. However, these weaknesses do not compromise the fiduciary responsibilities of either the Borrower or the Bank. 5. Environmental: Enviromnental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The program has been rated in the environmental screening category "B" and has been subject to a field-based environmental review by the preparation team. The environmental impact of the program is expected to be strongly positive. Farm restructuring is expected to lead to a more effective and environmentally friendly use of land and water resources. Soil salinization would be reduced as a result of irrigation infrastructure improvements and use of market-driven, decision-making processes. The RESP is also expected to result in a more effective and environmentally-friendly use of agro-chemicals as a result of the shift to private sector supplied inputs, along with an operational information system introduced under the Cotton Sub-sector Improvement Project. In addition, impact monitoring and evaluation for the RESP will include provisions for monitoring adherence to the new National Pesticide Policy and the Pesticide Law developed in the context of the Cotton Sub-Sector Improvement Project. 5.2 What are the main features of the EMP and are they adequate? The EMP, the final draft of which was prepared on August 21, 2000, is intended to provide guidelines to contractors in implementing the I&D component and to the manager of the line of credit and PFIs in reviewing and appraising credits/loans so that the project can be implemented in an environmentally sound manner. The procedures and requirements described herein are designed specifically for construction firms and on-lending by the PFIs. Environmental screening will be carried out by the PFIs at an early stage in their credit review procedures, and may require the contracting of extemal expertise or the hiring of permanent environmental staff. Following screenings will be recommended for identifying the type of environmental analysis that will be required. A list of example sub-projects which may fall under each defined category is given in para. 11 of the Environmental Assessment Annex of the PIP. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: March 11, 1998 - 17- 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed enviromnent management plan? Describe mechanisms of consultation that were used and which groups were consulted? During project preparation, the PFIs which may participate in the Rural Finance component were infonrled of the four categories of sub-projects which have been enumerated, and advised of the ban by the Bank:: on the financing of projects using particular agro-chemicals. The PFIs, the Raivodkhoz agencies, and the farms in the participating tumans, were advised that the RRA will require that every loan applicat:.on submitted under the Rural Finance Component and every proposal submitted under the Irrigation and Drainage Component include an environmental assessment of the program proposed. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Sub-project screening categories are defined as follows, with examples of sub-projects likely to be included under each category listed in para. 18 of the Environmental Assessment Annex of the PIP. TIhe sub-project screening process will be carried out by the PFIs. Categorv I (low risk): These would include sub-projects whose environmental impacts are expected: to be negligible, for which no environmental evaluation would be required. There may be opportnmiries here to incorporate environmental measures which would enhance the sub-project through minor (low cost) modifications in the design without reducing efficiency. Category II (intermediate risk): These would include sub-projects with impacts that can be readlily identified and standard preventive and/or remedial measures can be prescribed without a full EA. T his category also includes projects which may have immediate levels of regular and accidental emissions (see para. l1). A limited EA would be recommended in these cases, which may simply requ:re specifying well-defined mitigating measures and adopting accepted operating practices. An environmental assessment would follow a simplified outline of that presented herein with relev ant sections pertaining to an area outside the potential impact of the sub-project omitted (to be determined by the environmental specialist). Catego III (high risk): These would include sub-projects which may have highly significant, negative and/or long-term environmental impacts, the magnitude of which are difficult to determine at the project identification stage. A full environmental assessment (EA) would be prepared by tlhe sub-borrower in parallel with the techno-economic feasibility study of the sub-project. Category IV: Projects which would include the production or use of harmful materials (para. 1 1) are normnally not financed under the project. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. As a part of project preparation, a Social Assessment (SA) was conducted in 1997 by local scientists in collaboration with an international consultant to identify social implications of the RESP arid to define participatory mechanisms that would encourage active participation of all stakeholders in the design and implementation of the project. This Social and Participatory Assessment was undertaken to examine potential strains that the transition can cause on the resources and well-being of rural household;, and it identified ways that the organization of agricultural communities can be drawn into the process lo - 18 - bring about positive results. This helps to ensure that the design of the proposed project takes account of the country's socioeconomic realities and that it is built around the priorities, aspirations, and constraints of the people it is intended to benefit. The SA approach consisted of a survey of 1 000 households undertaken in 65 randomly selected communities initially identified to be project areas. However, due to recent changes in project areas, the SA does not cover all of the regions under current project design. The survey gathered data on: (i) the current situation; (ii) how the situation has changed following the introduction of reforms and independence; (iii) the effectiveness of current modes and mechanisms; (iv) perceived areas of need or vulnerability, given current conditions; (v) perceived options for change and attitudes regarding the feasibility and desirability of these options; and (vi) perceived roles for individual and community participation in improved organization of agriculture and means of achieving this. Furthermore, the SA: (i) incorporates an examination of the impact of reform processes on social indicators; (ii) has identified the stakeholders; (iii) has produced analysis on critical farm input and service; and (iv) has provided recommendations by which positive results can be achieved under the project. Findings of the social assessment can be summarized as follows: l) From this social and participatory assessment emerged a picture of severe problems facing agricultural reform in Uzbekistan, as well as some indications of how these problems may be most effectively addressed. 2) In the rural regions of Uzbekistan, the population is fairly evenly divided, with approximately 25% in each of the following categories: Collective farmers, those engaged in private business or farming, those engaged in nonagricultural work, and those who have no source of personal income. In addition, small but important segments of the population are engaged in administration and agricultural marketing, with the former being very influential and the latter having by far the largest incomes. Income from the main categories of employment vary markedly, as does the effectiveness of labor. There are sharp regional differences in household income, levels of private economic activity, and personal initiative, with the best conditions being generally found in Kharazm Province and the worst by most criteria being found in Qashqa-Darya, though provinces in the Ferghana Valley, where there is severe population pressure and Soviet-era institutions are deeply entrenched, face particularly acute problems in the transition to market agriculture. 3) For the vast majority of the rural population, meeting the most basic needs presents serious problems, with most households currently being unable to afford anything beyond the fundamental necessities. Educational opportunities and health conditions are markedly declining, despite the Govermment's prioritization of these realms of social protection. The great majority of the population feels that recent changes have resulted in a sharp decline of their material well-being. Few have any opportunity to accumulate capital in order to cover start-up costs in private enterprise. Indeed, very few are oriented toward employment in the non-state economy. Only in Kharazm Province does a significant percentage of the population feel that their lives are improving. 4) With the role of the Central Govemment diminishing in the life of the rural population, community-based structures are filling in the vacuum to some extent. The patterns of change vary from one region to another, with the community government (mahalla committee or qishlaq council) assumning a prominent role in some areas and the administration of collective farms and enterprises taking a leadership role in others. - 19- 5) Participation of the general population in the reform process to date has been very weak. A substantial percentage of the population is extremely poorly informed about developments in the realrn of agricultural policy reform, and a significant number do not recognize that any concerted action is being taken to reform agriculture at all. A majority of the population also feels that the consequences of any agricultural reforms are likely to negatively impact their own households and communities. 6) For any reform of agriculture to be successful, it must: a) lead to a substantial expansion of non-agricultural employment in rural areas; b) provide access to minimal start-up capital making possible the establishment of private farns and businesses, c) improve training and education; and d) encourage rhe participation of the rural population in the design and implementation of reforms so as to direct the reform efforts effectively and to ensure the active involvement of those whose needs the reforns must address. 6.2 Participatory Approach: How are key stakeholders participating in the project? Providing technical assistance through extension services and mobilizing the public to actively participate in development and implementation of the reform process can speed up the process and can generate positive impacts. Business advisory services to be established under the project will provide technical assistance to household farmers, dekhkan farmers, collective farm managers and workers, rural businessmen and national, provincial and local government administrators. Special attentions shoulcl be given to minority groups and women. Such assistance should cover information on farm management, farm registration, creation of joint stock companies, agronomy, finance and accounting, business plans, credit, marketing, input purchasing and public policies. Since popular participation is essential for speeding up the process of reforms, the project should provide for establishment of interactive public forums for citizens and government officials to express ideas, criticism and evaluations regarding relevant public policy issues. Such forums should include surveys, seminars and workshops, and it is important that local minority community should have an active participation in the process. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? The Business Advisory Services component will be implemented through the Association of Dekhkan and Peasant Farmers, working in tandem with the local (Tuman level) offices of the RRA. The Tuman level offices of the Association will be staffed with additional technical personnel under the project, and will also play a large role in executing the surveys to be done under the project to monitor economic and social impact of the project. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? At present, centralized credit is only available for cotton and grains and use of collateral in obtaining credit is very limited in practice. Through the technical assistance to the RRA, the RESP will prepare tlie necessary legislation on collateral and needed mechanisms for the banking system to extend the credit line to restructured farms and agribusinesses. For further strengthening of the program, training should be provided for both lenders and applicants in the use of new financial instruments such as mortgage financ ing and leasing. As the process of reform in the rural sector is progressing, the role of the local institutions such as Mahalla/Qishlaq committees has been increasing. The government has traditionally used the Qishlaq advisory committees to collect information regarding rural residents. These committees have also provided limited admninistrative services for the rural people. It would be useful to provide incentives and to make them responsible for initiation, implementation and completion of the share distribution process of - 20 - farmlands, equipment, and other assets as well as tax on farm production. In addition, these communities are in a very good position to develop and implement social welfare programs such as unemployment, health care insurance, education, water and gas supplies, and kindergartens. Attention should be given that these programs accommodate the most vulnerable groups, such as single women and those working on state/collective farms. 6.5 How will the project monitor performance in termns of social development outcomes? Annual surveys will be executed to assess the economic and social impact of project investments and activities focused on improving rural reform policy formation and dissemination. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy Applicability Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes 0 No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No Forestry (OP 4.36, GP 4.36) O Yes 0 No Pest Management (OP 4.09) * Yes 0 No Cultural Property (OPN 11.03) 0 Yes * No Indigenous Peoples (OD 4.20) 0 Yes * No Involuntary Resettlement (OD 4.30) 0 Yes * No Safety of Dams (OP 4.37, BP 4.37) 0 Yes 0 No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Environmental screening will be carried out by the PFIs at an early stage in their credit review procedures, and may require the contracting of extemal expertise or the hiring of permanent environmental staff. Following screenings will be recommended for identifying the type of environmental analysis that will be required. A list of example sub-projects which may fall under each defined category is given in para. 11 of the Environmental Assessment Annex of the PIP F. Sustainability and Risks 1. Sustainability: Management and technical sustainability of the RESP would depend on: (i) beneficiary confidence resulting from the more equitable laws, policies, and procedures underlying the restructuring process; and (ii) beneficiary access to technical, financial and management support services. Fiscal sustainability would be enhanced through the introduction of land-based taxation and the discontinuation of the operation by the Government of ineffective input supply and marketing monopolies, in favor of a market-based production and service delivery system. Institutional sustainability would be realized through an effective allocation of responsibility and accountability between the central and local agencies and through a simplification of procedures. The design of the RESP is intentionally flexible to allow for the necessary adjustments to be introduced as information and lessons learned become available from the impact monitoring system. - 21 - 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Government ensures that farm M The MAWR and RRA have a clear restructuring done in an equitable manner understanding of the balance which neecls to be (to achieve increased employment). maintained between forming relatively large private individual farms (which typical) y shed labor) and giving families access to lan;l through lease contracts for relatively smaller fie] d areas. Off-farm rural employment is also targered by the rural finance component to address iliose forner collective farm members which "xit farming. Government comnitment to policy S The reform steps included in the Matre) of reforms which liberalize marketing of Agricultural Reform Policies have been agricultural inputs and outputs. formulated conservatively, and the understanding of them and ability to deftnd them in agricultural policies has been developed both within the RRA and more widely a rmong Deputy Ministers in the MAWR. From Components to Outputs Investors confidence and macroeconomic H This is expected to increase slowly as the role of environment improve (to achieve private agro-service centers expands an; after increased output). full convertibility is returned to the fore:.gn exchange market. Procurement of proper equipment by M Substantial analysis by Bank consultants will go eligible enterprises. into the drafting and approval of agro-service center business plans. Financial intermediaries responsible for M Rigorous selection procedures will be observed the line of credit carry their and substantial monitoring by the RRA and responsibilities in accordance with the supervision missions will be made of the PFIs' agreed criteria. loan portfolios. Farmers' willingness and ability to pay for S Applicability of advisory services and advisory services. responsiveness to farmers' needs will be given top priority in the training of providers of these services. Pricing of services for cost recovery will be partial and phased. Credit recipients use funds for intended M Rigorous business plans, even for the small productive purposes. seasonal loans, will be required, and the 7uman RRA offices will involve agro-technical expertise in their appraisal. Periodic mor itoring during the crop year will be executed by ]FIs. Government maintaining primary and M Raivodkhoz (Tuman level) budgets will b~ secondary canals and pumping stations examined yearly to assure adequate O&lvI expenditure levels, and some I&D investnients - 22 - Iwill be made in inter-tuman structures. Overall Risk Rating s I Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: Possible negative factors that may impact on success of the project include: (i) likely opposition of existing agribusiness monopolies to the economic liberalization actions proposed under the program: to mitigate this, the Government would need to adopt precise policies to prohibit any obstruction to the entry of private sector operators into inputs supply, outputs marketing, cotton ginning, and any other agro-processing activities and output marketing. The Government would also need to instruct marketing monopolies such as Khlopkoprom to adopt procedures for allowing farmers to toll cotton paying farmers in cash in the five Tumans under the project starting with the 2002 crop season, pending the development of private traders and input suppliers. In addition, the Government would need to issue clear instructions for the enforcement of such policies, and to disseminate such instructions among input supply, marketing agencies, and beneficiaries in the project areas. (ii) the current transaction system, based on settlement accounts, poses a major obstacle to effective management and potential profitability of restructured farms and the businesses serving them: to mitigate this, the Government would need to allow the farms in the five Tumans selected for participation in the project to export their tolled cotton and retain at least 50% of net export earnings in cash, in hard currency, and allow private farms and enterprise units flexible access to cash and hard currencies to effect their domestic and foreign business transactions. (iii) possible Government unwillingness to make extensive use of loan funds to acquire needed technical assistance specialists. Although this could be partially mnitigated through co-financing with agencies offering grant financing, Govermment agreement to obtaining the necessary skills and experience would also remain a prerequisite for the loan. (iv) lack of ownership and support by Raivodkoz and other local institutions with regard to the institutional developments (WUAs) introduced by the Irrigation and Drainage component, which may cause delays in its implementation. (v) the proposed changes would require sustained support by top Government officials and Bank management to overcome entrenched vested interests and habitual control responses. This implies the need for above average implementation support and, thus, above average budget for supervision. Bank commitment to the RESP as a substantial risk/high-return program implies an equal commitment to a supervision budget that would allow continued strong support to the Government, to ensure that the enabling conditions for rural enterprises restructuring are being put in place. G. Main Loan Conditions 1. Effectiveness Condition Project Account opened in a commercial bank acceptable to the Bank, and deposit into said Account an initial amount equivalent to US three hundred thousand Dollars (US $300,000). - 23 - Conclusion of the contract with independent auditors acceptable to the Bank. 2. Other [classify according to covenant types used in the Legal Agreements.] A. Conditions of Board Presentation 1) Cabinet of Ministers Decree issued on the pilot policy reforms being introduced in the five project districts. 2) Establishment of a financial management system acceptable to the Bank. More specifically: (i) produce draft financial management manual; (ii) finish implementation of the accounting software; and (iii) write Terms of Reference for the project auditor. 3) Procurement documents for the first years' activities completed. B. During Project Implementation 1) Dated Covenant on Collateral - Not later that by June 30, 2002 preparation of a draft enactrnent regarding subrogation with respect to land use pledged as collateral acceptable to the Bank. 2) Dated Covenant on Foreign Exchange - Not later than by March 1, 2002, the Borrower shall reduce the foreign exchange surrender requirement with respect to export of cotton fiber and seed produced by rural enterprises in Participating Districts in excess of state procurement quota to a level not more than. 50 percent, except as the Bank shall otherwise agree, and to be applied starting with regard to the cotton crop of the year 2002. 3) Mid-Term Review - Prepare, under terms of reference satisfactory to the Bank, and furnish to the Bxak, on or about March 30, 2004, a report integrating the results of the monitoring and evaluation activi.ties performed, to ensure the achievement of the objectives. 4) Proiect Management: The Borrower shall maintain the RRA until completion of the Project, with staff, resources and terms of reference satisfactory to the Bank and assign to it responsibility for overall Project management and coordination including: (i) maintenance of Project financial records and accounts; ii) preparation of applications for withdrawal of the proceeds of the Loan; (iii) preparation of bidding 2nd contract documents and management of procurement procedures under the Project, including coordination of the recruitment of foreign and national consultants required for the Project implementation; and (iv) supervision of implementation of work programs under the Project. By February 1 of each year, the Borrower shall prepare and submit the Bank for its review and concurrence, an annual work program for the Project for the following calendar year, including procurement and financing plans. Starting in September 2002, the Borrower shall prepare and submit semi-annual reports on the progress of project implementation, to be submitted no later than March 1 and September I of each year. 5) Financial Management: (i) The Borrower shall open and maintain a Special Account in a commercial bank acceptable to the Bank. (ii) The RRA shall maintain a financial management system acceptable to the Bank. (iii)The project, the PFIs and the Agro-service Enterprises shall be audited annually in - 24 - accordance with terms of reference and by auditors acceptable to the Bank (iv) The RRA will implement a time-bound action plan to strengthen the financial management system to enable the RRA to prepare quarterly PMRs. Project funds shall initially be disbursed under the Bank's established procedures including Statements of Expenditures (SOEs), and a move to PMR-based disbursements would be made at the mutual agreement of the Govemment and the Bank, once the RRA is familiar with the project's monitoring aspects and is considered able to produce the PMRs in a sufficiently timely and reliable manner. A change to PMR-based disbursements shall be considered by September 30, 2002, in accordance with the agreed time-bound action plan. H. Readiness for Implementation 0 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. Z 1. b) Not applicable. 1 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. Z 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. LE 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. n 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. 4Ak4/i, 4 __ __ ark . Lundell Kevin M. Cleaver Dennis de Tray Tiam Leader Sector Director Country Director - 25 - Annex 1: Project Design Summary UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT More information on Logframes Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Promote liberalization of Reduce procurement for Data from farms, and Macro economic stability dcmestic trade and improve wheat and cotton and Ministry of through maintaining a incentives for increased improve business Macro-economics and prudent fiscal and monitory output and employment by environment for rural Statistics (MMS) stance the private sector in enterprises agriculture Increase the efficiency of Water conservation Data from the Ministry of resource utilization in rural supported by water pricing Agriculture and Water infrastructure and farm restructuring Resources (MAWR) Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: 1) Increased profitability 1) 25% average increase in 1) Data from district 1) Government ensures that and productivity in crop yields of restructured government, MAWR, and farm restructuring done in agricultural sector through farms by PY4 MMS an equitable manner (to reduction in domestic trade achieve increased impediments and through employment) sulbstitution of state purchasing and input supply by more competitively priced and higher quality goods and services of pnivate agro-services centers 1) Increase of the average 1) District administration 1) World market pnce for farm-gate prices for statistics cotton and wheat remain agricultural commodities by stable 70% in real terms by PY4 2) Growth of the 2) Increase in the number of 2) District govemment and 2) Investors confidernce and restructured farms and newly created private industry statistics. macroeconomic private rural enterprises agribusiness by at least 50 environment improve through provision of by PY4 and attainment of substantially. advisory services and rural participation of 50 former finance collective agricultural enterprises by PY4 3) Ensure sustainability of 3) Reduced losses in supply 3) Records of Raivodkhoz, 3) Increased water the agricultural sector of water in inter-farm farm associations and payments induce elficient through rehabilitation of canals from 25% to 15% MAWR water use. on-farm irrigation system, and in on-farm canals from - 26 - and creation of institutions 40% to 20% by PY4 for participatory management of inigation water 3) Studies assessing savings in water use Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1) Business Advisory Services: Advisory centers provide 1) Advisory services for 1) Periodic survey of farmer 1) Farmers' ability to access effective and timely services preparation of 50 business satisfaction with 1) Records technologies to implement in business planning, plans during PYI, 100 of Business Advisory the advise received marketing, finance, legal plans in PY2, 150 plans in Centers and technical areas to PY3, and 100 plans in PY4 restructured farms and agribusinesses 2) Private Agro-service Companies: Availability of heavy 2) Number of enterprises 2) Records of district 2) Procurement of proper agricultural machinery to formed: administration equipment by eligible small and medium sized PYI - 2 companies enterprises farms through leasing PY2 - 2 companies 2) Project quarterly PY3 - 2 companies and progress reports and expansion of existing ones, supervision reports PY4 - expansion of existing companies 3) Rural Finance: Access to credit by 3) Project progress reports 3) Financial intermediaries restructured farms and 3) 50 Loans applications and supervision reports responsible for the line of eligible agribusinesses. approved during PYl, 100 credit carry their applications in PY2, 150 3) Records of responsible responsibilities in applications during PY3 financial intermediaries and accordance with the agreed and 100 applications during RRA criteria PY4 3) Credit recipients use funds for intended productive purposes 4) Irrigation and Drainage Component: Rehabilitation of on-farm 4) 25% of targeted 4) Data from Raivodkhoz 4) Government maintaining and inter-farm irrigation inter-farm canals primary and secondary system. rehabilitated during PYI, canals and pumping stations - 27 - 35% in PY2, and 40% in PY3 4) Greater role by farmers 4) Number of water users 4) Project quarterly 4) Government all,ows in managing water use at associations created and progress and supervision organization and o.oeration the on-farrn irrigation level. registered as independent reports of these associations to be legal entities - 8 in PYI, 16 conducted in a mainer in PY2, 18 in PY3, and 8 in which promotes members' PY4 confidence in therm Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) I) Business Advisory 1) USD 1.22 million 1) Procurement and 1) Government provide Services financial management space for the centers reporting system 2 1 Rural Finance 2)USD 5.93 million 2) Procurement and 2) Capable financial financial management intermediaries selected reporting system 3) Private Agro-service 3)USD 16.0 million 3) Procurement and 3) Qualified Compamies Companies financial management selected reporting system 4) Irrigation and Drainage 4) USD 16.63 million 4) Procurement and 4) RRA carries oLt financial management procurement activities reporting system on-time 5) Project Implementation 5) USD 2.31 million 5) Procurement and RRA maintains adequate Support: financial management links with the Tuman-level reporting system implementing agercies - 28 - Annex 2: Detailed Project Description UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT A. Objectives and Policy Issues Introduction 1. The overall objective of agricultural enterprise restructuring in Uzbekistan is to undamentally change the relationship between rural assets and people through the establishment of private farms and other rural enterprises. This will give participants greater empowerment over resource use, offer them real decision-making opportunities as to which economic activities they would engage in, and motivate them to invest in the rural economy. 2. The Government developed in the last three years the enabling legal, policy, and institutional conditions for the implementation of a farm restructuring program nationwide. The legal control over land is in the form of long term leases and an additional reform package implemented by the Government since January 1, 1999 has (i) significantly increased State procurement prices for cotton and wheat; (ii) transferred social costs from the farms to the government budget; (iii) written off farm debts to the State and restructured those to input suppliers; (iv) simplified taxation and reduced its level; (v) granted a tax break for newly established private farms; (vi) established advisory centers to help implementing the restructuring program, and (vii) made available various lines of credit for private farmers. 3. However, in a number of areas no agricultural reform have not yet taken place. The Government continues to dictate the cropping pattem as well as assigns annual production targets with penalizing those who are unable to reach these targets. The system of production pre-fmance is, in fact, a factoring agreement between the state-run input suppliers and financing institutions based with an unbending time schedule of such transfers. Complementary normative documents to the Land Code are not yet elaborated to effect the possibility of pledging land rent rights against a bank's loan and to permit for greater land mobility. Agricultural enterprise restructuring legislation needs to be reviewed to ensure greater equity and transparency with regard to allocation of land for private farmers and allocation of land among the members of a collective farm. Most importantly, there has been only partial improvement in the system of state procurement of cotton. 4. The Government intention is for the restructuring process to lead to a plurality of farm and agribusiness sizes and forms of association based on the Land Code, the Law on Agricultural Cooperatives (Shirkats), the Law on Private Farms, and the Law on Dekhkan Farms. To achieve this, the Government intends to speed up the reform process and introduce a series of new normative acts and a system of incentives to ensure that restructured rural enterprises will be able to operate under conditions of a market economy. This further development of the Government strategy involves the successful implementation of complex operations for the reorganization of production, processing and marketing arrangements, in particular for the cotton and wheat sectors, which need to be tested and enhanced during project implementation in selected pilot areas. This demonstration phase will also build confidence in this strategy at the grass roots in the five tumans selected to demonstrate the post-restructuring process over a four year period. The selected Tumans are: Akhangaran (Tashkent), Ellikalin (Karakalpakstan),Markhamat (Andijan), Nishan (Kashkadarya) and Sherabad (Surkhandarya). - 29 - B. Project Area Project Area Current Conditions 5. The total area of the five tumans exceeds 1.3 million hectares, of which about 165,000 hectares are irrigated lands. The total population exceeds 480,000 people with the 80% of them living in r.iral areas. Based on the restructuring program implemented in the last few years, 63 large enterprises (mainly Shirkats) are currently present in the five tumans, while the number of private farms (individual farms) is 754. The total land allocated to family plots has an area of 15,340 ha. The project tumans are located in different climatic and environmental regions of Uzbekistan and are characterized by different conditioans with regard to the progress reached in the restructuring process, the general development of agribusiness, the status of I&D infrastructures and the organization of WUAs. Given such differences, the selected Tumans are good sites for demonstrating the project's rural enterprise post-restructuring approach, anal as demonstration laboratories for improved production and post-restructuing support activities. 6. The Ellik-Kala Tuman is located in the South-Eastern part of the Republic of KarakalpaksXan. The total area is 541,300 ha out of which agricultural land covers 386,540 ha or 71% including 27,39C ha of arable land, 1,290 ha of perennial plants and 357,480 ha of pasture lands. The area of irrigated lands is 29,487 ha including the irrigated arable lands that cover 24,467 ha, perennial plants (1,290 ha), pasilure lands (570 ha) and family land plots for a total of 3,160 ha. In this Tuman there are 14 shirkats and 77 private farms created on the basis of former state farms and collective farms. The shirkats' area is 28,625 ha, while private farmers have received 862 ha of land on a long term lease basis. The average area of irrigated lands belonging to the shirkats is 2,045 ha, while the land assigned to individual farms is I I ha. As of January 1, 2000, the population of this Tuman was 113,553 people including a rural population of 99,249 people (87.4% of the whole Tuman population). The number of able-bodied people is 51,80(i9, including 45,636 people in rural areas. The average area of irrigated lands in the Tuman is 0.3 ha rier capita and 0.75 ha per one able-bodied person in rural area. The live stock sector includes 3,863 heads of cattle including 1,081 heads of milking cows, 17,648 sheep, and 978 horses. The annual production of nii Ik is 1,174 tons, the milk production per cow being 1,085 liters per year. 7. The Markhamat Tuman is located in the southern part of the Andijan region. The total area of thle tuman is 30,951 ha, out of which irrigated land covers 21,644 ha (71%), including 13,664 ha of arable land, 2,460 ha of perennial plants, 2,890 ha of pasture lands and 2,630 ha of family land plots. All major agricultural enterprises in the tuman have been restructured into 8 shirkat farms, managing 20,620 ha of irrigated land. The tuman currently has 128 private farms, out of which 110 are engaged in plant growing and 18 in live stock raising. The private farms have 1,024 ha of irrigated lands leased out to them on a long term basis. As of January 1, 2000, the population of the tuman was 120,400 people including a naral population of 102,700 people (85.3% of the whole tuman population). The number of able-bodied people in rural area is 46,534. The average area of irrigated lands in the tuman is 0.18 ha per capita and 0.46 ha per one able-bodied person in the rural areas. The main sector of agricultural production here is plant growing, the value of gross production in this sector being 96.1% of the whole value of gross agricultural production. The profitability of agriculture in this tuman has dropped from 18.2% in 1991 to 9.90/% in 1999. At the same time, the profitability of plant growing has risen from 5.5% to 14.9% and hle profitability in live stock sector has fallen from +3.1 % to - 24.6%. The area under cotton covers 57.7°/c of the whole arable territory and the area under winter grain the 40.4%. The sowing area of grain and cereal crops has increased from 1,360 ha in 1991 to 5,523 ha in 1999 as a result of a corresponding decrease in cotton and Luceme sowing. - 30 - 8. The Nishan tuman is located in the south-western part of the Kashkadarya region. The total area is 187,380 ha out of which agricultural land covers 162,420 ha including 47,110 ha of arable land, 1,730 ha of perennial plants, 113,590 ha of pasture lands. The area of irrigated lands is 51,296 ha including 47,186 ha of irrigated arable lands and 2,380 ha of family land plots. Large agricultural enterprises have access to 45,807 ha of irrigated lands, while private farmers received long term lease rights on 5,489 ha of land. The average area of irrigated lands that belong to shirkat farms is 2,695 ha and that belonging to private farmers is 28 ha. As of January 1, 2000, the population of this tuman was 96,137 people including a rural population of 71,055 people (73.9% of the whole tuman population). The number of able-bodied people is 48,846 including 35,476 people in the rural areas. The average area of irrigated lands in the tuman is 0.49 ha per capita and 1.33 ha per one able- bodied person in the rural areas. The main sector of agricultural production here is plant growing. The level of its development significantly affects food consumption satisfaction of the population as well as it the situation in the live stock sector. The value of gross agricultural production in the tuman in 1999 was 2,753,883,00 Soums (88.9%), that of live stock raising 304,748.00 Soums (11.1%). Cotton accounts for 42,8% of the sowing area in the irrigated lands, winter grain and cereal crops 38.9%. The sowing area of grain and cereal crops has increased from 5,158 ha in 1991 to 18,100 ha mainly due to a reduction of areas under cotton and fodder crops. The livestock sector includes 5,003 head of cattle, 55,329 sheep and 64 horses. Annually, the tuman produces 1,610 tons of milk (milk yield per cow is 1,510 liters) and 721 tons annually of meat. 9. The Sherabad tuman is located in the south-western part of the Surkhandarya region. The total area of the tuman is 239,690 ha, out of which irrigated land covers 41,000 ha including 33,830 ha of arable land, 2,200 ha of perennial plants, and 4,970 ha of family land plots. In this tuman there are 7 collective fanns, 4 shirkats and one joint stock company organized on the basis of a state farm. Major agricultural enterprises account for 37,776 ha of irrigated lands, while the total area of land assigned to 176 private farms is 3,224 ha. As of January 1, 2000, the population of the tuman was 124,475 people including a rural population of 99,775 people (80.1% of the whole tuman population). The number of able-bodied people in the tuman is 56,851 including 46,459 people in the rural area. The average area of irrigated lands in the tuman is 0.33 ha per capita and 0.88 ha per one able-bodied person in the rural areas. The main sector of agricultural production here is plant growing. There are also two bee-keeping farms and one poultry farn. The value of gross agricultural production in the tuman in 1999 was 1,473,845,000 Soums, including plant growing 1,414,245,000 Soums (or 96%), livestock raising - 59,600,000 Soums (4%). Cotton accounts for the major sowing area (48.3%) and winter grain and cereal crops 46.8%. The sowing area of grain and cereal crops has increased from 5,297 ha in 1991 to 13,268 ha mainly due to the decrease in area of cotton and fodder crops. The live stock sector includes 2,661 heads of cattle out of which 826 milking cows, 26,417 sheep and 2000 birds. Annually, the tuman produces 1,160 tons of milk and 355,700 tons of meat. 10. The Akhangaran tuman is situated in the south-eastern part of the Tashkent region. Its total area is 318,386 ha out of which agricultural lands cover 161,301 ha (irrigated lands account for 20,901 ha, dry lands 140,400 ha) including 15,900 ha of arable land, 2,800 ha of perennial plants, 137,100 ha of pasture lands and 2,200 ha of family land plots. In this tuman 17,179 ha of irrigated lands have been assigned to 12 large farms (including eight shirkat farns), while 176 private farns account for 3,722 ha. The average area of irrigated lands that belong to large farms is 1,432 ha and the average area of the private farmns is 21 ha. As of January 1, 2000, the population of this tuman was 30,400 people including a rural population of 21,345 people (70.2% of the whole tuman population). The number of able-bodied people is 16,100 (12,765 people in rural areas). The a;erage area of irrigated lands in the tuman is 0.69 ha per capita and 1,64 ha per one able-bodied person in rural area. The value of gross agricultural production in the tuman in 1999 was 4,813,400 Soums (26.7%). Grain and cereal crops accounts for the major part of the sowing - 31 - area in the irrigated land (51%). - 32 - Table 1 Summary data on the RESP Tumans Data Ellik -Kala Markhamat Nishan Sherabad Akhangaran Total area (ha) 541300 30951 187380 239690 318386 Population 113553 120400 96137 124475 30400 Number of farnilles 25234 28667 6517 18758 8686 Large farms 14 8 17 12 12 Total area (ha) 28625 20620 45807 37776 17179 Private farms 77 128 197 176 176 Total area (ha) 862 1024 5489 3224 3722 Irrigated land (ha) 29487 21644 51296 41001 20901 Area under crops (ha) 24467 13664 47186 33831 15901 Cotton 14000 6745 20200 16495 - Grains 1550 5523 18100 13840 7252 Rice 4000 65 19 232 Lucerne from past years 1034 450 3058 790 1881 Lucerne of current year 532 200 1000 550 1235 Maize for silage 600 651 770 1416 3030 Maize for grain 600 60 400 508 Annual grasses 1476 2675 Potato 15 50 20 312 Vegetables 380 428 310 1192 Cucurbetaceous 280 623 282 Sugar beets 30 103 10 Oil yielding crops 100 1212 Live stock Cattle 3863 5003 2661 Milking cows 1081 1104 826 Goats and sheep 17648 55329 26417 Poultry 2000 Others 978 64 I&D Infrastructures Inter-farrn drainage (km) 356.1 265.8 232.9 106.3 88.5 Inter-farms canals (km) 236.1 147.0 43.4 62.5 154.9 On-farm irrigation 1908.0 711.8 1798.1 1450.0 387.8 On-farrn drainage 1378.5 469.3 2577.4 2186.5 51.0 Horizontal drainage (km) 156.6 61.3 2684.0 1511.0 Vertical drains 6 85 - 33 - C. Project Components 11. The RESP will consist of five components, which are briefly described in the following paragraphs (values below include contingencies). By Component: Project Component 1 - US$1.22 million Rural Business Advisory Services Component Objective 12. The objective of this project component is to develop Rural Business Advisory Services (RBAS) intended to support the post-restructuring of farns and agribusinesses, thereby helping to establish business entities that can prosper in a competitive market economy. The RBAS is seen as an important instrument to help beneficiaries develop privately owned businesses and is expected to: * collect and disseminate information on the agricultural policy measures adopted by the Governmenit (including those related to the implementation of the RESP), and on production techniques, business and financial management, and marketing; * provide training and advisory services regarding legal issues, business plan preparation, and business management. 13. The mission of RBAS is twofold: (1) to provide assistance to rural enterprises in developing efficient and financially viable structures and operations, whether oriented toward farming or agribusiness, and (2) to create a demand-driven, and, eventually, demand-financed advisory service, which will become ani important contributor to the advancement of a market economy in the Republic of Uzbekistan. 14. Initially, the main responsibility of RBAS will be to provide the information and services needed by those individuals and associations directly involved in the post-restructuring process. These include the households and agribusinesses within the shirkats, as well as Government-sponsored or existing independent enterprises, which desire to transform themselves into private, efficient, profit or nonprofit operations. A second responsibility for RBAS is to ensure that all organizations and individuals with an interest in the restructuring process are kept informed about related issues so that any agricultural business problems that arise can be resolved promptly. A third responsibility is to ensure that all interested beneficiaries have access to information and advice on developing and managing their business enterprises. Implementation Arrangements 15. The Rural Restructuring Agency (RRA) will have overall responsibility for the implementation of the RBAS component. The Component Coordinator will be permanent staff of the Agency and will repol to the RRA managers about implementation progress and issues. - 34 - 16. The RBAS would be part of the services provided by the Association of Dekhkan and Private Farmers (ADPF). Although initially to be fully-funded by the project, RBAS is expected to begin charging for some of its services by project end, with the goal of eventually becoming a fully commercial entity. The ADPF will be the main implementation agency of this project component and will support project activities through its organization and staff at the national and local levels. At the headquarters and tuman levels the project will rely on rural business advisory centers (RBACs), to be established by the Association and will provide necessary support in terms of office renovation, equipment and technical-assistance. 17. The RBAS will consist of a Headquarters (RBAS/Hqs) in Tashkent and RBACs in each of the five selected Tumans. RBAS/Hqs will be located in the ADPF offices and the RBAC in facilities made available by the respective local administrations in the five selected tumans. The RBACs will report to the RBAS/Hqs. A Chief Executive Officer will head the RBAS/Hqs and will be assisted by two experts: an Information and Agricultural Development Officer, and a Business Advisory Officer. In addition, a Training and Development Assistant will work with the two experts, and will be responsible for developing various informational and advisory documents, including audio-visual materials on successful RBAS farm and agribusiness developments, or on problems and problem-solving in specific business situations. 18. The staff required by the RBACs includes an Information and Agricultural Development Outreach Officer, a Rural Business Planning Outreach Officer, a Training and Development Outreach Officer, plus support staff. The necessity for the number and type of additional staff required in the RBAS will be determined by the volume and nature of tasks to be performed by RBAS staff. The terms of reference (TOR) for the initial RBAS/Hqs and RBAC positions and the TOR for the intemational consultants are reported in the PIP Annex 1. 19. Intemational experts will provide advisory services to the Project Component Coordinator at the RRA, to the RBAS/Hqs and the RBACs teams for a total of 18 months during the first three years of project implementation. One expert will be responsible for providing advice regarding the initial set-up of the organization and development of operations policies. The remaining experts will advice on specific topics relating to agricultural science and business. Project Component 2 - US$16.63 million Rehabilitation of Irrigation and Drainage Systems Component Objectives 20. The main objective of the Irrigation & Drainage component is to promote sustainable irrigated agriculture through investment and technical assistance to improve the reliability and efficiency of irrigation and drainage. This component would aim to promote the development of participatory irrigation management, rehabilitate key irrigation and drainage infrastructures, improve operation and maintenance and water management and promote improved agricultural practices. 21. The project would support a four year irrigation and drainage investment program in the RESP pilot tumans, based on the organization of WUGs and the implementation of low-cost rehabilitation activities of I&D infrastructures. A key determinant of the project strategy is to promote and support the behavioral changes required for: (i) the successful transfer of O&M responsibilities of on farm infrastructures to the new private and Dekhan farms and (ii) the development of cooperation amongst neighboring farmers for the use of shared resources in a more efficient way especially in situations of water scarcity. - 35 - Scope of Work 22. The following activities would be supported by this project component: establishment and development of Water Users Organizations (WUOs) in five rayons with a gre ss irrigated area of 162,400 ha; * on-farm rehabilitation of the most critical I&D infrastructure within the areas under jurisdiction of Water Users Groups (WUGs); off-farm rehabilitation of the most critical I&D infrastructure for the water supply to the WUOs anLd the removal of drainage water from the territory of the WUOs; * preparation of the detailed designs and tender documents for the identified rehabilitation needs and the supervision of I&D rehabilitation works. Investments and cost recovery 23. The above activities have been assessed and the estimated investment costs are as follows: Investments Cost (USS) Establishment and development of WIUOs 210,600 On-farm rehabilitation 7,937,400 Off-farm rehabilitation 7,120,400 Detailed designs and supervision of works 1,364,000 Total 16,632,400 24. USS 13.2 million would be financed by a Bank loan and the remaining US$ 3.4 million by he Government of Uzbekistan. On-farm rehabilitation will be repaid by the beneficiaries (farmers) through rn increased land tax. The amortization schedule for this repayment would be agreed by the WUOs, the Khokimyat and the Ministry of Finance (but would be no less that 15 years). The loan funds for the other activities will be fully repaid by the Ministry of Finance. The investments under the component are financially affordable and rewarding for the farmers and economically viable for the Government. 25. The average investments per ha amount to US$130 over a four year period. This amount is small in comparison with some other I&D rehabilitation projects in the region, but substantially larger than the current funding levels for I&D maintenance in Uzbekistan, which amount to maximum USS 10/ha/year. No doubt that more investments are needed during the next ten years to sustain the I&D systems and to serve the many new private farmers in the five rayons. However, the above investments are sufficient to remove the most critical bottlenecks in the I&D systems which suppress crop yields and start the process of I&.D rehabilitation and improvement of O&M activities and funding. - 36 - Water Users Organizations 26. The establishment and development of WUOs is crucial to start the process of I&D rehabilitation and improvement of O&M activities and funding. The project would support the development of a two-tiered system of WUOs: - Water Users Groups (WUGs) would be responsible for water allocation and maintenance of I&D infrastructure within tertiary units with a size ranging from 200 to 600 ha. Whenever possible, the territory of WUG would form an hydrological unit served by the irrigation agency through one or more existing delivery points (hydroposts); - Water Users Associations (WUAs) would be responsible for I&D management on the territory of a former sovkhoze or kolkhoz (FSK) with a size of 1,500 to 3,000 ha. The WUAs can be established on the basis of existing legislation (law on water and water use and the law on associations and enterprises). The rights and responsibilities of WUGs would be stipulated in the bylaws of the WUAs. Existing legislation would allow empowerment of a WUA for carrying out its essential functions of O&M, resource mobilization and conflict resolution. 27. Establishment and development of the above WUOs requires technical assistance throughout the implementation period of the project. The establishment of the WUOs in a major part of the project area is likely the easy part. Development or empowerment of the WUOs for carrying out their essential functions would be more difficult because this needs a re-orientation in thinking about decision making processes and management conditions and processes which will differ in may respects from current ones. The project will provide technical assistance in the following fields: - development of a manual for systems O&M, adapted to the local conditions, with particular emphasis on irrigation water scheduling, field application and rules for systems maintenance; - a capacity building program aimed at strengthening the management capabilities of WUOs; - a funding and a cost recovery system, and an appropriate bookkeeping and financial control system with tools and facilities required. 28. An I&D service fee would be set in a progressively increasing manner to eventually cover the following costs: cost of staff of the WJUA, office costs, operation costs to distribute irrigation water, maintenance of canals and drains owned by the association , major repairs and replacement of I&D infrastructure, and purchase or lease of O&M equipment. In addition the WUA would pay a service fee to the irrigation management agency (usually the Raiselvodkhoz) for the costs of services to provide the water to the delivery points at the boundary of the area under jurisdiction of the WUA. At these delivery points, the volumes of delivered water will be measured by hydroposts, rehabilitated or constructed under the project. 29. For the first year of the project, the service fee to Raiselvodkhoz would cover 10% of O&M cost for water delivery to the WUA. However assurances have to be obtained from Government that the funds collected by irrigation management agencies will be fully designated for service delivery to the paying WUAs. These assurances can be given in the overall Government decree for the project . 30. The members of the WUOs would re-assess, prioritize and supervise the rehabilitation works in the area under their jurisdiction, as they will be responsible for repayment of the loan funds used for on-farn investments. The current identification of the on-farm rehabilitation works provides some guidance on the - 37 - nature and costs of the works. However, the identification is mainly based on information from irrigation management agencies and doesn't take yet into account the new realities in the field where the FSKs are being gradually restructured into many agricultural production units with very different sizes. To serve these units adequately, the traditional ways of irrigation water distribution and field application would need adaptation. Therefore, WUOs would first prepare of a plan of how they would like to operate the irrigation system to improve service delivery to their members. The rehabilitation and improvements needs would be chosen to make the plan work. Procurement 31. Procurement will be undertaken in accordance with the Bank's procurement guidelines. The preparation of detailed designs and tender documents and supervision of the rehabilitation works will be contracted out in various procurement packages by the RRA to eligible consulting institutions and firrms. The detailed design and tender documents for part of the off-farn rehabilitation works in three rayons have been prepared before approval of the project by the Bank's Board. Individual consultants would be contracted by the RRA for supporting the establishment and development of the WUOs. The expertise needed has been identified and costed. The RRA would contract intemational expertise according to needs. Performance indicators 32. The key performnance indicators for achievement of the project development objectives are water productivity and operational canal losses in the areas under jurisdiction of WUOs. Output indicators include the number of WUOs established and empowered and progress of I&D infrastructure rehabilitation. Project Component 3 - US$ 5.93 million The Rural Finance Component Objective :33. The aim of the Rural Finance Component (RFC) is to provide financial support to restructuredl farmns and private farmers' needs through the banking system. The RFC will total $5.93 million for the five project tuwnans and be distributed roughly equally between two lending programs: * Short-term loans up to $10,000 equivalent to cover seasonal credit needs of private farmers and other small rural enterprises. Medium-term loans up to $100,000 equivalent for restructured farms, agro-processing enterprises, and other medium-size rural enterprises. 34. The RFC would be adrministered by PFIs, selected with a tender process for access to trances of funds channeled through this project component. The Government will entrust the Ministry of Finance wit:h the RFC administration. In its turn, the Ministry of Finance will delegate the intermediation of the RFC to participating financial institutions (PFIs) through their branches in the pilot project tumans. 35. At the beginning of component implementation, potential clients will operate in an unstable anrd uncertain financial environment. At first, they will not be familiar with commercial credit culture based on World Bank procedures agreed upon with the Government. Therefore, they will be assisted by tuman level Rural Business Advisory Services (RBAS) that will provide necessary information and advisory support in the preparation of business plans and credit applications, which are acceptable by conmmercial creditors - 38 - under this the RFC. Description of Short-Term and Medium-Term Loan Programs 36. Under RFC, the PFIs will extend sub-loans through two windows: a window for seasonal loans (short-term up to 18 months) and a second window for capital investments such as purchase of equipment (medium-term). 37. Short-term credits are expected to finance purchase of production input such as seeds, agricultural chemicals, fuel, small works such as refurbishment of buildings, lease and use of equipment, spare parts and other circulating assets of RFC participants. In order to overcome the potential problem of lack of collateral by sub-borrowers, the PFIs may accept guarantees in lieu of collateral from suppliers of inputs and materials and from purchasers of raw agricultural products (e.g. agro-processors) through lawful and tripartite voluntary contracts among sub-borrowers of PFIs and these suppliers and buyers. 38. Medium-term and long-term credits to farmers and associated agribusinesses will finance: (i) equipment and facilities to improve land management and irrigation, and storage facilities for farms; and (ii) civil works, vehicles, equipment and so on, for enterprises. 39. Transactions of Borrowers, financed by the RFC, will be technically viable and financially profitable. They will also have to satisfy World Bank requirement for environment.. Specific farms and enterprises will prepare business-plans and credit applications, indicating the following key aspects: Current financial conditions of activities; Plan for improving current and future production/productivity, supposed investment; Proposed acceptable collateral and/or other forms of security; Repayment mechanism of loan and its interests, including agreements for sale of the agricultural production. Implementation arrangements 40. The RRA will prepare Credit Guidelines containing information about types of proposed financial and nonfinancial services, credit policy under the Project, including: mortgage, collateral, loan backed with immovable property and requirements of additional security, interest norms policy, PFIs management, staffing, accounting and auditing, liabilities, and periodic reports. This handbook shall contribute to the successful implementation of the RFC, and allow potential clients to familiarize with the project approach to the finance of agribusinesses. Before their adoption, the Credit Guidelines will be approved by the Ministry of Finance and the Ministry of Agriculture and Water Resources. 41. Participating branches of PFIs will undertake the responsibility for day-to-day administration of their RFC loan portfolios. The Rural Restructuring Agency (RRA) will encourage quick payments from special accounts that will be set up for bank loans by participating branches of the PFIs. These disbursements will be authorized on the basis of "no objections" to loans that are issued by the RRA. Technical Assistance 42. At the beginning of the RESP, technical assistance will be provided, owing to the lack of tuman level RRA staff trained in the sphere of credit management and monitoring. Institutional development and training, provided through the RRA, will also support the development of the capacity of the PFIs tuman offices by assisting them in the management of the credit program. Decisions regarding this TA will be - 39 - jointly made by the RRA and each PFI. Project Component 4 - US$16.00 million Credit for Agro-service Enterprises Component Objective 43. The Private Agro-service Companies component is designed to focus on the establishment of private agro-service centers, supplying machinery services and agricultural inputs in competition with the state joint-stock corporations (SJC). The objective is to provide private farmers and shirkats with a viable altemative to the current virtual state monopoly and supply them services and inputs which are more competitively priced, of higher quality and provided in a more timely manner, thereby raising farmns productivity and profitability. 44. The project envisages the creation of private ago-service centers which would supply agricultural producers with competitively priced agricultural machinery services, maintenance and repair of ilhe machinery belonging to the farms, transportation services and other inputs (fertilizers, pesticides, seeds and possibly professional advice). The sub-loans on-lent by the Government of Uzbekistan will be extended lo qualified sub-borrowers for long-term financing of specific projects or investment programs. Eligible proposals would cover a wide range of operations including the creation, modemization, expansion ar.d diversification of industrial and production facilities in the agro-service sector, with specific reference to tLe commercial supply of machinery services. The sub-loans will be extended in accordance with the provisiorns described in the Annex 4. Implementation arrangements 45. Each sub-borrower would sign a sub-loan agreement with the Ministry of Finance of the Republic of Uzbekistan (MoF), acting for and on behalf of the Republic of Uzbekistan. The Deputy Minister of Finance will sign the agreement, after review of the sub-loan proposal by the World Bank, and verification by the Director General of the RRA that appropriate arrangements exist for monitoring compliance with the contractual provisions on the use of the sub-loan proceeds and their repayment. Sub-loan approval process 46. The RRA shall be responsible for preparation of a credit appraisal report. The sub-loan application shall be considered by the Ministry of Finance. Sub-loans shall be analyzed, documented and monitored in accordance with the guidelines set forth in the Annex 4. The MoF's appraisal of each sub-loan shall include a financial evaluation in the form of a cash flow analysis, balance sheet projections, an examination A)f financial ratios, an appraisal of management and, where relevant, a technical project repo 1. Implementation of this component will be guided by the component coordinator and the machine!y specialist in the RRA. Technical assistance 47. There is no technical assistance under this component. Project coordinator and agricultural machinery specialist will receive extensive credit training at the outset of the project implementation Project Component 5 - US$2.31 million Project Implementation Support Component Role of the RRA - 40 - 48. The Rural Restructuring Agency (RRA), established in 1998 under the Ministry of Agriculture and Water Management (MAWM), will coordinate the implementation of the RESP. The RRA would ensure a direct link with policy/decision makers and would coordinate the activity of project participants, including the Viloyat and tuman administrations. It would also: (i) coordinate improvements of the legal framework for farm restructuring and rural credit; (ii) assist implementing agencies in organizing information campaigns to create awareness of the RESP Project and associated policy measures among rural communities and the institutions serving them at the local level; (iii) coordinate Technical Assistance provided for Capacity Building in agricultural policy formulation; (iv) coordinate planning of project activities, procurement and financial control matters under the project; and (v) coordinate the participation of various funding agencies under the RESP. The RRA would also monitor the progress and efficiency of the Project and evaluate its impact and would report its findings and recommendations to the MAWR and to the World Bank. Organization 49. The Agency is headed by a full-time Director General reporting to the Deputy Prime Minister in charge of Agriculture, through the Minister of Agriculture and Water Resources. He is assisted by a deputy Director General and by a TA Team of foreign and local consultants. 50. The Director General will liaise with the Government and the World Bank. His responsibility will be overall coordination of the program and control over project resources, to ensure effective and timely use and strictly conformance with the objectives of the project and Bank conditions. He will supervise the performance of the agency staff in carrying out the department's core strategy, the production and provision of outputs for effective implementation of agreed plans. He will also be responsible for adoption of measures and institutional arrangements to ensure the alignment of the strategy of the agency and its intemal organization design to maximize both operational efficiency as well as effectiveness of the RRA. 51. The RRA main office is located in Tashkent, inside the Institute for Irrigation and Mechanization of Agriculture. In order to ensure a more effective coordination of project implementation, the RRA will also have liaison offices in each project tuman. 52. The structure envisaged for the Rural Restructuring Agency is reported in the PIP Annex 5, with a description of the staffing plan and ToRs of key personnel. Technical Assistance 53. The project will provide a Technical Assistance team composed by foreign and local consultants, who will assist the RRA staff during project implementation. The development and implementation of a capacity building program for the RRA will be an important aspect of TA activities, in order to ensure transfer of know-how for a sustainable management of the RESP. 54. Advice and training for project coordination and management will be provided by international experts in procurement, finance management, agricultural policy formulation (Farm Restructuring, Domestic Trade and Price Policy and Crop Rotation), and project monitoring surveys. Additional TA for project implementation is envisaged with regard to the other project components both from intemational and local consultants. A complete list of these experts is reported in the PIP Annex 5, with an estimate of the input required. - 41 - Annex 3: Estimated Project Costs UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT Local Foreign rotal Project Cost By Component US $million US $million US $million Rural Business Advisory Service 0.62 0.56 1.18 Irrigation and Drainage 14.24 0.43 14.67 Rural Finance 0.00 5.93 5.93 Sub-Loans for Private Agro-Service Companies 3.20 12.80 16.00 Project Implementation 1.28 0.95 2.23 Project Preparation Facility (PPF) 0.00 1.00 1.00 Total Baseline Cost 19.34 21.67 41.01 Physical Contingencies 1.16 0.00 1.16 Price Contingencies 0.88 0.04 0.92 Total Project Costs 21.38 21.71 43.09 Front-end fee 0.36 0.36 Total Financing Required 21.38 22.07 43.45 Local Foreign Total Project Cost By Category US $million US $million US $million Goods & Equipment 0.00 0.90 0.90 Civil Works 15.13 0.00 15.13 Consultant Services 2.13 0.88 3.01 Sub-loans to Enterprises 3.20 12.80 16.00 Rural Finance Credit 0.00 5.93 5.93 Recurrent Costs 0.92 0.20 1.12 Project Preparation Facility (PPF) 1.00 1.00 I~~~~~~~~~~~ Total Project Costs 21.38 21.71 43.09 Front-end fee 0.36 0.36 Total Financing Required 21.38 22.07 43.45 Identifiable taxes and dutes are 0 (US$m) and the total project cost, net of taxes, is 43.45 (US$m). Therefore, the project cost sharing ratio is 3 3. 18% of total project cost net of taxes. - 42 - Annex 4: Cost Benefit Analysis Summary UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT The economic analysis presents a rationale for investments under the RESP. The prime focus of the program activities would be to transfer greater decision making and operation of restructured collective farms, private individual farms, and agribusinesses from the state to family operators and emerging private entrepreneurs. The enabling legislative and institutional activities would provide the foundation for this transfer and establish procedures to support the objective. The post-restructuring activities would help emerging private farmers develop confidence to participate in a market economy, by providing private input supply and marketing services, infrastructure rehabilitation and business advisory services. The Rural Finance component would promote the development of both agricultural and nonagricultural rural enterprises. Link to ESW The Farm Profitability Study (1997-99) makes an assessment of the status and opportunities for the rural sector. It highlights the reasons for poor productivity and identifies the macro-economic, institutional and environmental changes required for attaining sustainable agricultural production. The RESP represents the interpretation of these objectives and would provide the framework for initiating their achievement. Links to the CAS The reform of macroeconomic, institutional and organizational aspects of the rural sector is a main pillar of the CAS (2/98). Particular emphasis is given to removing regulation of foreign exchange, trade liberalization, minimizing distortions in the financial sector, and improving incentives for increasing output and employment opportunities. The proposed project would specifically address price, production and trade liberalization by removal of controls on cotton and wheat in the project area. It is logical to anticipate that these adjustments would be further extended throughout the country as soon as improved productivity is demonstrated. Project activities for piloting credit at commercial terms should contribute a valuable demonstration for future cooperation with the financial sector. The project would have a direct influence on improving resource efficiency and raising rural incomes through the I&D and Agro-service center components, and initiating the transfer of labor from farms to other rural activities under the Rural Finance component. Summary of Benefits and Costs: Demonstration of Increased Productivity Crop Models: The cost-benefit analysis of project impact are based on data from three rural surveys carried out in 1996-97 and updated surveys in 1999-2000 as part of project preparation. The data included organizational, production and accounting information from collective farrns in different agro-ecological areas. This data provided the basis for "without project" financial and economic analyses. Data from "private" farms and research institutes was the basis of potential performance of restructured farm units under the "with project" situation, to ascertain the impact of the project. These results would be attained as a result of the combined effects of the incentives from independence of private farm units, the effects of the business management and advisory services, development of markets and infrastructure and the provision of credit. - 43 - Cost-benefit Analysis: A cost-benefit analysis has been undertaken for farms using representative farm budgets and gross margin calculations based on economic prices for tradable inputs and outputs. This analysis applies only to restructured farms which participate in the project. On the cost side, the economic analysis reflects the expected on-farm costs to be partly financed through seasonal credit, as wel as investments for on-farm irrigation structures and equipment services estimated at about US $400-500'ha. Other components of project costs related to national level work were included fully into the economic analysis (not being pro-rated for the project area). Economic prices have been calculated for maiJor tradable products using prices and price projections available from issues of the Bank's Business Quarterly. A conversion factor of I has been used for project costs as no price distortions are expected to affect the prices of goods to be procured under the Project. Economic values for tradable inputs and outputs are higher by 30% to 100% than their current financial values. When introduced in farm budgets, the economic prices show positive results indicating that major crops supported by the Project are economically justified. The base ERR for the RESP was estimated to be in the range of 22% to 30%, corresponding to Net Present Values in the range of $33 to $59 million (assuming a 10% discount rate). A sensitivity analysis has been undertaken using the following approaches (i) decrease in benefits due to lower gross margins owing to imperfect input and output markets; (ii) increase in costs owing to underestimation in the project preparation period; and (iii) slower yield increases owing to delays in project implementation. The analysis indicates that the ERR is most sensitive to change in the benefit streams. The project is thus justifiec. in allocating resources for the development of agro-service enterprises, agro-processing facilities and associated infrastructure to reduce the risk of decrease in the benefit streams. Main Assumptions: The critical assumptions made in assessing the costs and benefits are as follows: * On the benefit side, it has been estimated that 70% of the farms in the project area would participate and be able to fully introduce the technological improvements needed within a five-year period. T;his assumption was based on the observation that the most critical current technological constraints have been caused by input shortages and poor management of collectivized agriculture. * As no support is expected from other projects, all benefits are attributed to the proposed Project. Tlhe transition to a market-based private farming would not involve radical changes in farm practices at the onset of the restructuring process. * Complete liberalization of prices and production structure during project the implementation period. * Farms are expected to reach full development by year 5 following restructuring. * The expected technological change would be simple and within the technical capacity of most farmuxrs in Uzbekistan. The impact of these changes is, however, expected to be substantial. As a result of better agricultural practices, effective use of inputs, and a market driven crop rotation, yields are expected to increase 8-34% over a five year period, as shown below: Yield Without Project Yield With Project Increas- tons/ha tons/ha (%) Cotton 2.16 2.9 34 Wheat 3.13 3.9 25 Potatoes 7.43 8.4 13 Fruits and Vegetables 10.95 12.4 13 Silage 6.02 6.5 8 - 44 - A financial model has been developed by adopting the gross margin estimates for each crop in the economic model (which assumed domestic prices equal border prices for all inputs and outputs). The the non-project base is developed as a base line in which output price is taken as the (current) mix of 90% state order price and 10% free market price. The project financial gross margins then push this mix to 25% state order price and 75% free market price. Given that free market prices exceed by 50-100% or more those set by the state for state order purchases, the financial gross margins in the project case exceed those of the non-project case by roughly $50 and $400 per hectare for grain and cotton, respectively. This yields a financial rate of return for farms participating under the project of 117%. Incremental costs for these farms are $152 per hectare for I&D investments and phased in water charges which reach $75 per hectare in year 15 of the analysis. Both Economic and Financial Models are presented in the PIP. Sensitivity analysis / Switching values of critical items: Sensitivity Analysis A sensitivity analysis has been undertaken using the following approaches (i) decrease in benefits due to lower gross margins owing to imperfect input and output markets; (ii) increase in costs owing to underestimation in the project preparation period; and (iii) slower yield increases owing to delays in project implementation. The results of the sensitivity analysis (in economic terms) are as follows: Base Level of Benefits 10% Costs 30% 50% Slower Yield Parameters Less than Base Above Base Case Increase than Base Base case is 70% Case Case participation 30.0% 23.8% 60% 26.2% 17.5% 20.7% 20.6% participation 22.3% 15.5% 17.3% 17.8% 50% 13.3% 14.8% Participation Gainers and Losers The farmers will gain with liberalization of prices as they are expected to get the international price for their output. Government revenue will increase due to income taxes, land taxes and water charges, although they lose indirect taxes from cotton and wheat farmers from liberalized prices. Project Sustainability - Cost Recovery The project has been designed to progressively reduce the dependence on government funding and to increase private sector participation on the basis of fee for service. Accordingly, in the land registration component, no new organizations will be created and the project would invest in strengthening of existing government institutions and make it financially autonomous. The cost recovery would come from fees that would be charged by the government for future land titling and registration activities which would be facilitated by the project. The Rural Business Advisory Services component would gradually promote the payment of service fees. To facilitate this the RBACs are expected to be autonomous and decentralized with the participation of the local communities. The Sustainability of RBACs will depend upon the value of - 45 - its service to farms and agribusinesses. The Rural Finance component will charge commercial rates of interest, to earn enough, to maintain its value in real terms and cover its cost of capital and intermediation. Under the I&D component, the rehabilitation investments in on-farm structures would be recoverecl by charging 8% interest to the beneficiaries and amortizing repayment of principal over 15 years. This would yield a cost recovery of roughly 50% assuming a long term inflation rate of 13%. Summary of the Financial Operating Principles under the Rural Finance Component The Rural Finance component will provide funds to Participating Financial Institutions to be on-lent to final beneficiaries through sub-loans. The RFC is expected to be disbursed by PFIs as follows: (USS equivalent): PYI = 900,000; PY2 = 1,600,000; PY3 = 2,100,000; PY4 = 900,000. Sub-loans will not exceed US$ 10,000 (per private farner) for seasonal loans and US$ 100,000 for term loans. The government will entrust the overall supervision of the sub-loans with PFIs to the Ministry of Finance. Short-term sub-loans will have maturities up to 12 months. Term sub-loans will have maturities up to five years. Interest rate on sub-loans in dollar terms (interest for seasonal and term loars) would be market-determined (and expected to be in the range of 5-20%). Late repayments (both on interests and principal) would be charged penalty interest. The Credit Guidelines for these sub-loans would be as follows. Each Sub-loan will have to be made to a beneficiary which shall have established to the satisfaction of the PFI that it is an enterprise, engaged in agricultural production or agribusiness, that has completed legal procedures concerning farm restructuring or privatization (fifty-one percent private ownership) and has provided financial statements to the PFI and a plan for use of funds and projected earnings. Sub-loans shall be made for sub-projects which demonstrate that they: (a) are related to the type of business in which an Beneficiary is engaged; (b) are technically feasible and financially and commercially viable; (c) attain financial rates of return on proposed sub-projects which exceed 15% . (d) possess cash flow is adequate to meet debt servicing; (e) are designed in accordance with appropriate environmental standards and the laws of the Republic of Uzbekistan. (f) satisfy a collateral ratio of at least 1.2 over the life of the project, calculated on the basis of the entity's debt and a cash flow coverage ratio of 1.5; The Rural Finance component funds will be available to all PFIs meeting the eligibility critelia shown below. A subsidiary loan agreement may be entered into with a PFI which as the Central Bank shal I have determined: (a) has an acceptable audit report which: (i) covers the last year of operations; (ii) incorporates a portfolio review; and (iii) is prepared by external auditors in accordance with International Accounting Standards ("IAS"); - 46 - (b) has been in existence and has produced operating results for a minimum of two years; provided that in the case of a merger or reorganization of two or more PFIs, at least one PFI existed and produced operating results for minimum of two years; (c) has a network of branches with experience in extending loans both shirkats and to individual farmers; (d) has a capital adequacy ratio as defined under IAS of at least 8%, incorporating a risk-weighted ratio as determined by the Basel Committee of Banking Supervision; (e) has provided a certificate of compliance from CBA stating that: (i) it has a valid banking license and specifying type and date of license; and (ii) the PFI is in general compliance with all relevant banking laws and regulations of the Republic of Uzbekistan; (f) does not have exposure to any one borrower as a percent of its IAS capital of more than 30 percent by the date of its accreditation as a PFI; (g) has aggregate exposure to insiders (defined as council members, members of the Management Board of such PFI, employees in a management position and shareholders with voting rights in excess of 10 percent) of no more than 100 percent of IAS capital as of the date of its accreditation as a PFI; (h) on the basis of the audit report referred to in (a) above, has adopted adequate policies and procedures with respect to credit administration, loan servicing, and other key areas of banking practice; (i) has established capacity, for credit, accounting, and to manage investment lending to enterprises; and (1) has adopted a strategic corporate plan with specific arrangements to strengthen its capacity for credit, analysis, loan approval, accounting and environmental assessment for management of investment lending. Funds will be allocated to PFIs on the basis of competitive tenders for access to four trenches of such funds, with the proposals under the tenders to be evaluated with the following set of criteria and respective weighting: -47 - Recommended Weights in Tenders for Medium and Short-Term Loans Recommended Recommended Weights for Medium Term Loans Weights for Short Term Loans Past Repayment 25.0% 25.0% Credit Procedures 15.0% 15.0% Branches in Place in 15.0% 10.0% Rural Areas Number of Past Loans 15.0% 10.0% Volume of Past Loans 10.0% 15.0% Experience with 10.0% 15.0% Collateral Deposit Creation* 10,0% 10.0% * Deposit Creation is the ratio of Deposits to Total Liabilities. - 48 - Annex 5: Financial Summary UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT Years Ending IMPLEMENTATION PERIOD Year I Year 2 | Year 3 Year 4 Year 5 Year 6 | Year 7 Total Financing Required Project Costs Investment Costs 1.2 14.7 13.8 9.4 2.7 Recurrent Costs 0.1 0.3 0.3 0.3 0.2 Total Project Costs 1.3 15.0 14.1 9.7 2.9 0.0 0.0 Front-end fee 0.4 0.0 0.0 0.0 [Total Financing 1.7 15.0 14.1 9.7 2.9 0.0 0.0 Financing IBRDIIDA 1.5 13.4 11.9 7.5 1.8 Government 0.2 1.0 1.2 1.2 0.5 Central Provincial Co-financiers User Fees/Beneficiaries 0.0 0.6 1.0 1.0 0.6 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 1.7 15.0 14.1 9.7 2.9 0.0 0.0 Main assumptions: - 49 - Annex 6: Procurement and Disbursement Arrangements UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT Procurement Procurement Procedures 1. Procurement of goods and civil works for the project would follow World Bank guidelines, ( Guidelines: Procurement under IBRD Loans and IDA Credits, Washington, D.C.: World Bank, January 1995, revised January and August 1996, September 1997 and January 1999). The appropriate standard procurement documents issued by the Bank will be used with the minimum changes acceptabl; to the Bank. Selection of consultants for technical assistance and training would follow World Bank guidelines. (Guidelines: Selection and Employment of Consultants by World Bank Borrowe.rs: Washington, D.C: World Bank, 1997, revised in September 1997 and January 1999). Selection ;and contracts shall be based on the standard forms issued by the Bank, with such modifications thereto as slhall have been agreed with the Bank. A General Procurement Notice (GPN) will be published in "Developinent Business", no later than June 1, 2001, informing potential bidders of procurement activities and the expected release of bidding documents. A new Procurement Notice will be issued at the beginning of each subsequent fiscal year (January) of the project. A Project Launch Workshop will be conducted in Tashkent, Uzbekistan, during the first calendar quarter following Board presentation, where project components, organization and implementation arrangements, procurement methods, and disbursement procedures to be used for project-financed contracts would be reviewed with project staff, beneficiaries and potentially interested participants. Procurement Arrangements 2. Project Implementation Unit. The Rural Restructuring Agency (RRA) is the agency responsible for implementing the proposed Rural Enterprise Support Project. It was established at the end of 1998 under the Ministry of Agriculture and Water Resources (MAWR) to coordinate the implementation of the RESP, and has been executing the current US$1,000,000 Project Preparation Facility (P321-0-UZ). A11 procurement for the project under the loan would be coordinated and processed by RRA prior o.o submission to the Bank. The agency has responsibility for all procurement activities under the project, including compliance with the World Bank procurement procedures for all components. 3. Procurement Capacity. The RRA has a Procurement Department with two procurement staff, but their experience is limited to some IS/NS packages executed under the current PPF and to a one-week training provided by an internationally recruited consultant. They have no experience at all in both selection/hiring of consultants and other type of more complicated non-ICB or ICB procurement, which makes us propose to rate the risk in procurement operations as high. Under the current PPF, an international Russian-speaking procurement consultant was hired for a 6-month period to assist RRA in preparing the procurement documentation while providing general guidance and on-hands training on procurement financed by the Bank. It is expected that this consultant will continue assisting RRA afler project implementation starts, to cover a 12-month period. 4. The Director of the RRA will be responsible for overall management and supervision of project procurement. Procurement related activities will be initiated by trained staff located in each of the RRA Tuman level office, but executed by procurement specialists at the Tashkent office of the RRA. The RRA will be responsible, with periodic foreign technical assistance, for procurement of irrigation and drainage - 50 - works and the machinery under the Agro-service Center component. It is expected that the irrigation and drainage (I&D) component's civil works, due to both the remoteness of the sites and their relatively low estimated cost, will be undertaken mainly by local enterprises, with contracts awarded mainly through NCB procedures. 5. Performance of procurement staff would be assessed during project supervision missions with appropriate measures being recommended. Bank staff will also be involved in prior reviews of required procurement documentation and actions, and will carry out post-reviews of a sampled portion of intemational shopping, national competitive bidding and local shopping procurements under all components, including the medium tenn loans under the Rural Finance Component. Procurement procedures are described in the following paragraphs and summarized in Tables 6AI, 6A2, and 6A3. The project procurement plan providing details of various procurement packages is presented in Table 6B. Contracts financed under this Loan will be signed only with entities or individuals eligible as per the Bank procurement guidelines. Pre-identified Procurement and Procurement under Sub-Credits 6. The Credit Agreement reflects both the procurement packages already pre-identified in the Procurement Plan to be procured directly by RRA and the purchases of basically goods resulting from the beneficiary sub-credit agreements. Pre-identified Procurement Packages Procurement of Goods 7. International Competitive Bidding (ICB): Goods and equipment, estimated to cost above US$100,000 per contract, such as vehicles and computer equipment would be packaged and procured under ICB procedures. ICB contracts for supply computer equipment, office furniture and vehicles are expected to be about 2 in number for an aggregate amount of US$1,092,800. 8. International Shopping (IS): International Shopping will be used for readily available, off-the-shelf goods valued at less than US$100,000 per contract. IS procurements would be based on quotations obtained from at least three eligible suppliers in two different Bank-member countries. 9. National Shopping (NS): National Shopping would be used for goods contracts for supply of farm survey equipment where the desired goods are ordinarily available locally from more than two eligible sources at competitive prices for purchases valued at US$50,000 or less per contract. For pre-identified procurement, NS will be allowed up to an aggregate amount not to exceed US$3 1,000 in loan funds. Civil Works 10. Intemational Competitive Bidding. Infrastructure-related civil works will consist of rehabilitation of irrigation canals, water control structures, pumping stations, drainage canals, processing facilities and other types of infrastructures under the Irrigation and Drainage Component. The ICB threshold for works contracts would be US$300,000 and above. 11. National Competitive Bidding. NCB procedures will be used for works contracts estimated to cost less than US$300,000 each, basically one for refurbishment of central RRA office and the remaining in remote areas. In pre-identified procurement it is expected about 27 contracts in remote areas, for an - 51 - estimated aggregate amount of USS3,686,000. 12. Minor Civil Works. For fixed-price contracts below USS50,000 quotations of at least 3 eligible and qualified national construction firms will be required. Office renovations, minor land leveling, irrigation and drainage works involving about 11 contracts and averaging about US$29,000 each in credit funds, would be procured as small works, under these procedures. In pre-identified procurement, it MCW contracts are expected to amount to about US$320,340. Procurement Under the Credit Lines in the Rural Finance Component and under the Agro-service Component 13. Credit Lines under the Rural Finance Component. In the first year of project implementation, Agency procurement specialists, in coordination with the PFIs, would assist the privatized farmers and enterprises with procurement planning and purchasing activities. In subsequent years, Agency assistance will be provided on an as-needed basis. Since credit line resources will be obtained under Sub-borrower risk and Sub-borrowers are assumed to act in their own best economic interests, more flexible procurement procedures will be allowed. Given the private, commercial nature of the Sub-borrowers, the following procurement thresholds will apply: (i) Intemational Shopping is available for procurement of goods contracts estimated to cost less than US$100,000; (ii) National Shopping is available for procuremeni of goods contracts estimated to cost less than US$50,000; (iii) Commercial Practices are expected in tile purchases of some equipment and other goods estimated to costs below US$10,000, transactions will have to be both traceable and auditable; (iv) procurement of fixed-price works contracts expected to less than US$50,000 will be carried out on the basis of quotations of at least 3 eligible and qualified national construction firms. No procurement of goods or civil works contracts above US$100,000 are expected. Procurement of technical and consultant services will be procured using Bank Guidelines, and will be conducted under the guidance of RRA specialists. Sub-loan agreements between the farmers / farms / enterprises and the PFIs would provide for the relevant procurement procedures, depending upon the needs of the sub-loan business plans. The Bank will review and approve these procedures, in general, as an element of the Bank-approved PFIs on-lending Operations Manual, which will be submitted for B2nk review before May 1, 2001. 14. Agro-service Component. Agency procurements specialists, in coordination with the sub-borrowers (each of the agro-service centers) would manage the procurement planning and purchasing activities for all contracts tendered under the Agro-service Center component. Given the private, commercial nature of the sub-borrowers, flexible procurement thresholds will apply: (i) ICB for procurement of goods contracts estimated to cost above US$100,000 and for and civil works contra,cts estimated to cost above USS300,000; (ii) IS for procurement of goods contracts estimated to cost less than US$100,000; (iii) NCB for procurement of civil works contracts estimated to cost less than USS300,00C0; (iv) NS is available for procurement of goods contracts estimated to cost less than US$50,000; and (v) civ il works contracts estimated to cost less than US$50,000 will be procured as indicated in paragraph 12 above. Technical Assistance 15. The project would finance technical assistance and training activities for farmers, potential sub-borrowers, newly established private input supply or agro-processing entities, farm management advisors and other program staff, and basic institutional development, such as involved with thel management of credit administration. A number of short-term and long-term consulting services for variou, specialized activities such as farm privatization, credit, accounting and financial systems, construction - 52 - management, etc., would be provided within the project. 16. CDnsulting services required for project implementation in the fields of procurement, financial management, legal, environmental and other advisory services will be basically procured on the basis of hiring qualified individuals. Selection of individual consultants would be made based on quality, through comparison of CVs of eligible candidates quality by comparison of at least three CVs indicating candidates' skill areas, work experience, etc. It is expected about 42 of such contracts. Contracts with individual consultants estimated to cost more than US$20,000 shall be advertised. Procurement of consulting services through hiring of firmns will be limited to audit services and study tours. Least Cost Selection will be the preferred method for procuring contracts estimated to cost USS30,000 and above, for an aggregate amount of US$141,000, and for contracts estimated to cost below US$100,000, selection based on Consultants Qualification, for an approximate aggregate of USS1,445,560. Prior and Post Reviews 17. All ICB procurement will be subject to Bank's prior review. The Bank will also pre-review the first two contracts procured under, MCW, IS and NS procedures, and every works and goods contract estimated to cost US5150,000 and above. Consultant assignments estimated to cost US$100,000 and above with consulting firms, and assignments estimated to cost US$25,000 and above with individuals will be also subject to prior review by the Bank. Prior review shall apply to contract amendments which result in prior review threshold levels, as well as all consultanit terms of reference, and selection and staff or consultant assignments of critical nature, as reasonably determined by the Bank. Post-review efforts by a PAS will be planned by Bank staff during supervision missions to sample tenders of the International Shopping, National Competitive Bidding, National Shopping and Commercial Practices associated with Credit Line purchases. Incremental Operating Costs 18. Incremental operating costs consist of incremental staff salaries, vehticle operating costs, office supplies, office communication expenses, etc. as per approved budget. Procurement of small equipment, supplies and office equipment maintenance services, etc under operatinig costs will be done at market rates and/or in accordance with National Shopping procedures - 53 Procurement methods (Table A) The aggregations below in Table A were made on the basis of the appraisal mission and adjusted sligltly during Negotiations as consultant services were reduced and the Rural Finance component was incre: sed by $430,000 Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method Expenditure Category ICB NCB Other' N. B.F. Total Cost 1. Works 11.12 3.69 0.32 0.00 15.13 (8.48) (2.84) (0.25) (0.00) (11.57) 2. Goods 0.87 0.00 0.03 0.00 0.90 (0.87) (0.00) (0.03) (0.00) (0.90) 3. Services 0.00 0.00 3.01 0.00 3.01 (0.00) (0.00) (3.01) (0.00) (3.01) 4. Rural Finance and 0.00 0.00 21.93 0.00 21.93 Agro-service Components (0.00) (0.00) (18.73) (0.00) (18.73) 5. Front-end fee 0.00 0.00 0.36 0.00 0.36 (0.00) (0.00) (0.36) (0.00) (0.36) Operations Costs 0.00 0.00 1.12 0.00 1.12 (0.00) (0.00) (0.57) (0.00) (0.57) PPF 0.00 0.00 1.00 0.00 1.00 (0.00) (0.00) (1.00) (0.00) (1.00) Total 11.99 3.69 27.77 0.00 43.45 .__________________________ (935) (2.84) (23.95) (0.00) (36.14) Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 21 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) implementing the Rural Business Advisory Services component. - 54 - Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Selection Method Consultant Services Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total Cost A. Firms 0.44 0.00 0.00 0.14 1.45 0.00 0.00 2.03 (0.44) (0.00) (0.00) (0.14) (1.45) (0.00) (0.00) (2.03) B. Individuals 0.00 0.00 0.00 0.00 0.00 0.99 0.00 0.99 (0.00) (0.00) (0.00) (0.00) (0.00) (0.99) (0.00) (0.99) Total 0.44 0.00 0.00 0.14 1.45 0.99 0.00 3.02 (0.44) (0.00) (0.00) (0.14) (1.45) (0.99) (0.00) (3.02) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Loan. - 55 - Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prioi Review Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ miHons) 1. Works 300> ICB 11.12 <300 NC'B 3.6" <50 MCW O.__. ;2 2. Goods I 00> ICB 0.87 <100 iS 0.0' <50 _0. ___ 3. Services Firms 30> LCS 0.14 Individuals <30 CQ 1.45 Individuals _____ _________ 3C__s .98 _ 4. Rural Finance and All above thresholds TBE Agro-services <10 Commercial Practices - Component ________ 5. Operations Costs N/A _ l._ N/A _ N/A _ Total value of contracts subject to prior review: Overall Procurement Risk Assessment High Frequency of procurement supervision missions proposed; Gne every 6 months (includes special procurement supervision for post-review/audits) Ex-Post review procurement will be part of the supervision missions and will be carried out by a PAS. A procurement capacity assessment of the PIU was carried out and it was decided that the PIIJ should be classified within the high risk zone. A plan to strengthen procurement capacity has bezn devised and it included the hiring, for at least one year. of an intemational procu-rement consultant to provide advice an - hands-on training of the PIU's procurement staff By the time of Board presentation, a year of procurerment documentation wvill be ready. A project launch workshop is estimated to be taking place in the third quarter of fiscal year 2002. No advance procuremert is expected. There is a simple procurement monitoring system that was reviewed during the project appraisal mission and which is being improved since arrival of the foreign procurement consultant. Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 56 - Disbursement Allocation of loan proceeds (Table C) Table C: Allocation of Loan Proceeds Expenditure Category Amount in US$million Financing Percentage Works 11.24 77% Goods 12.67 100% of foreign expenditures, 100 % of local expenditures (ex-factory cost) and 80% of local expenditures for other items procured locally Consultants' services including training 2.88 100% Subloans under Part C of the Project 5.93 100% of amount disbursed Incremental operating Costs 0.47 80% for expenditures incurred up to June 30, 2003; 60% for expenditures incurred up to June 30, 2004; and 40% thereafter Refunding of Project Preparation 1.00 Amounts due pursuant to Section 2.02 Advance (b) of the Loan Agreement Fee 0.36 Amount due under Section 2.04 of the Loan Agreement Unallocated 1.59 Total Project Costs 36.14 Front-end fee 0.00 Total 36.14 Use of statements of expenditures (SOEs): Pending the Bank's full satisfaction of Borrower's financial management capability, disbursements from the special account would be limited to SOEs on contracts valued at less than US$150,000 for works and goods, US$ 100,000 for consulting firms and US$25,000 for individual consultants and contracts under sub-loans, training and incremental operating costs. Once the Bank is satisfied with the financial management capability of the Borrower, these thresholds would be raised and the requirement for submission of supporting documents would be adjusted accordingly. Full documentation in support of SOEs would be retained by RRA for three years. This information would be available for review during supervision by Bank staff and for annual audits conducted by auditors and on terms of reference acceptable to the Bank that will be required to specifically comment on the propriety of SOE disbursements and the quality of the associated record-keeping. A move to PMR-based disbursements will be made at the mutual agreement of the Government and the Bank once the RRA is familiar with the project's monitoring aspects and is considered able to produce sufficiently timely and reliable project management information. A change to PMR-based disbursements will be considered by September 30, 2002. Special account: 1) To facilitate timely project implementation, the borrower would establish, maintain and operate, under condition acceptable to the Bank, a special accounts in US dollars in a commercial bank. Selection - 57 - process and criteria for selection of the commercial bank would follow the World Bank standard selection procedures. During the early stage of the project, the initial allocation of the Special Account would be limited to US$500,000. However, when the aggregate disbursement under the loan has reached the level of US$2.5 million, the initial allocation may be increased up to the authorized allocation by submitting the relevant Application of Withdrawal. Replenishment applications should be submitted every three months, and must include reconciled bank statements as well as other appropriate supporting documents. The special account shall be maintained by RRA to facilitate implementation project components. The Special Accounts will be audited annually by independent auditors and on terms of reference acceptable to the Bank. Financial Management: 1. General. The overall responsibility for financial management of the project will rest with the RRA in Tashkent. At the time of project appraisal, the financial management capacity of the RRA wias determined to be weak and insufficient to perform the financial management of the RESP. Subsequertly, the financial management capacity of the RRA was strengthened prior to Board presentation as a time-bound Financial Management Action Plan to achieve as much was implemented. This Action Plan is included in the Project Implementation Plan (PIP) together with the overall schema for the project's flow of funds and the general financial management controls that will be applied. 2. Staffing. The RRA already has a Chief Accountant and an Accountant to support the accounting requirements of the Project Preparation Facility. An international financial management adviser was engaged during project preparation and will be retained throughout project implementation to advise on the financial management arrangements of the project. Additionally, one other accountant will be recruitect to the RRA during project implementation. 3. Financial management risks. The financial management risks for Uzbekistan have not been the subject of a detailed review by the Bank. However, primarily because of other implementation considerations, any weaknesses that may exist in the financial accountability and management capacity within Uzbekistan have been mitigated for this project by using the RRA. Specific weaknesses of the RRA in respect of its financial management capacity and accountability are being addressed by the recruitment of a financial management consultant who was engaged during project preparation and will be retained throughout project implementation to advise on the financial management arrangements of the project. Weaknesses in the Uzbekistan banking sector will be mitigated by the use of a bank deemed eligible by tle Bank to hold the project's Special Account and the receipt from that bank of a comfort letter. However, these weaknesses neither compromise the fiduciary responsibilities of the Borrower nor of the Bank. 4. Project Management Reporting (PMRs). The format of the PMRs for the project has been agreed with the RRA and is enclosed in the PIP. The RRA will produce a complete set of PMRs for every calendar quarter throughout the life of the project. 5. Audit arrangements. The project will be audited annually by extemal auditors acceptable to the Bank and on terms of reference acceptable to the Bank as presented in the PIP. The appointment of the auditors is a condition of Project Effectiveness. The audit of the project's financial statements will te completed within six months of the end of every fiscal year of project implementation and the cost of the audit will be financed from the loan. - 58 - Annex 7: Project Processing Schedule UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT Project Schedule Planned Actual Time taken to prepare the project (months) 18 42 First Bank mission (identification) 01/01/1997 01/01/1997 Appraisal mission departure 02/10/1998 06/05/2000 Negotiations 04/10/1998 12/04/2000 Planned Date of Effectiveness 08/15/1998 03/31/2002 Prepared by: Preparation assistance: Bank staff who worked on the project included: Name Speciality Salem Gafsi Former TTL Mark Lundell TTL, Senior Agricultural Economist Bekzod Shamsiev Operations Officer Giuseppe Fantozzi Project Officer, Project Costs Mahwash Wasiq Operations Analyst, LogFrame K. Srish Kumar Financial Analyst Nilufar Egamberdi Social Assessment Jose Martinez Procurement Ranjan Ganguli Financial Management Specialist Nikolai Soubbotin Legal Counsel Hannah Koilpillai Disbursement Officer Joop Stoutjesdijk Peer Reviewer - Irrigation Engineer Lorenz Pohlmeier Peer Reviewer - Sr. Financial Analyst Rodrigo Chaves Peer Reviewer - Sr. Financial Economist Arrigo Di Carlo Consultant, Water Sector Institutions and Project Management David Bontempo Program Assistant, QA/QC * Note on Appraisal - the mission in June 2000 was a re-Appraisal. Original Appraisal mission took place in November 1997. - 59 - Annex 8: Documents in the Project File* UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT A. Project Implementation Plan Final Draft of the PIP - January 2001 B. Bank Staff Assessments - Environmental Management Plan - August 2000 - Environmental Assessment - March 1998 - Social Assessment - November 1997 * All above are present in the PIP C. Other *Including electronic files - 60 - Annex 9: Statement of Loans and Credits UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT Difference between expected and actual Original Amount in USS Millions disbursements Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd P050508 2000 URBAN TRANS 2900 000 0 00 28.27 0.21 0.00 P009131 1999 FIN INSTBLDG 25.00 0.00 0.00 22.16 3.86 0.00 P009125 1999 HEALTH I 30.00 0.00 0.00 25.62 8.92 0.00 P009121 1998 RURALWS & SAN 75.00 0.00 0.00 55.22 -1.28 0.00 P049582 1998 TASHKENTSOLIDWASTE 24.00 0.00 0.00 20.80 10.00 -2.20 P055159 1998 ENTINSTBLDG 28.00 000 0.00 25.23 7.53 0.00 P009122 1995 COTTON SUB-SECTOR IMPROVEMENT 66.00 0.00 0.00 24.78 24.78 24.78 Total: 277.00 0 00 0.00 202.08 54.01 22.58 UZBEKISTAN STATEMENT OF IFC's Held and Disbursed Portfolio Jan-2001 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1996 ABN AMRO Uzbek 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.00 1999 Asaka Bank 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1997 Core Pharm 3.35 0.50 0.00 0.00 3.35 0.50 0.00 0.00 1999 NBU-SME 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 SEF Asia Granite 1.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1999 SEF Elma Cheese 0.58 0.00 0.00 0.00 0.47 0.00 0.00 0.00 1997 SEF Fayz 1.90 0.50 0.00 0.00 1.90 0.50 0.00 0.00 1995/00 UZBEK LEASING 0.00 0.30 0.00 0.00 0.00 0.00 0.00 0.00 1997 UzCase Agrolease 5.00 1.00 0.00 5.00 0.00 0.00 0.00 0.00 1997 Uzcasemash 6.80 2.60 0.00 4.00 0.00 0.00 0.00 0.00 Total Portfolio: 44.28 5.90 0.00 9.00 5.72 2.00 0.00 0.00 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2001 SEF Hamkorbank 0.00 2000.00 0.00 0.00 2001 SEF Parvina CL 0.00 1000.00 0.00 0.00 1999 ABN-SME 5000.00 0.00 0.00 0.00 1999 Arsin 12260.00 0.00 1467.00 0.00 Total Pending Commitment: 17260.00 3000.00 1467.00 0.00 - 61 - Annex 10: Country at a Glance UZBEKISTAN: RURAL ENTERPRISE SUPPORT PROJECT Europe & POVERTY and SOCIAL Central Low- Uzbekistan Asia income Development diamond* 1999 Population, mid-vear (millions) 24.4 475 2,417 Life expectancy GNP per capita (Atlas method, US$) 720 2,150 410 GNP (Atlas method, US$ billions) 17.6 1,022 988 Average annual growth, 1993-99 Population (%) 1.8 0.1 1.9 Labor force (%) 2.6 0.6 2.3 GNP Gross per I + primaryl Most recent estimate (latest year available, 1993-99) capita enrollment Poverty (% of population below national poverty line) . .. i Urban Population (% of total population) 37 67 31 Life expectancv at birth (vears) 70 69 60 Infant mortality (per 1,000 live births) 22 22 77 Child malnutrition (% of children under 5) 19 8 43 Access to safe water Access to improved water source (% of population) 57 .. 64 Illiteracy (% of population age 15+) 1 3 39 Uzbekit Gross primary enrollment (%of school-agn population) 100 100 96 - zbekIsan Male 100 101 102 Low-income group Female 100 99 86 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1979 1989 1998 1999 Economic ratios* GDP (US$ billions) .. .. 17.6 17.7 Gross domestic investment/GDP .. 16.9 15.1 Trade Exports of goods and services/GDP .. 22.3 19.3 Gross domestic savinqs/GDP .. .. 16.5 15.8 T Gross national savinqs/GDP .. 16.1 15.0 Current account balance/GDP . . -0.7 -0.1 Domestic Interest pavments/GDP .. 0.7 0.9 S Investment Total debt/GDP .. 18.6 24.0 S Total debt service/exports .. 11.1 16.3 Present value of debt/GDP .. 17.7 21.3 Present value of debt/exports .. - 94.3 119.1 Indebtedness 1979-89 1989-99 1998 1999 1999-03 (average annual growth) GDP 4.4 4.4 2.8 - Uzbekistan GNP Per capita 3.1 2.1 1.2 --Low-income group Exports of qoods and services -11.8 -1.9 2.0 STRUCTURE of the ECONOMY 1979 1989 1998 1999 Growth of investment and GDP (%) (% of GDP) Aqriculture .. 31.1 31.3 32.9 Industrv - 32.6 26.2 24.5 Manufacturinq .. 22.1 11.4 .. 96 97 98 99 Services .. 36.3 42.5 42.6 -5 Private consumDtion .. 78.1 73.5 74.5 -la General qovernment consumption 3.4 10.0 9.7 -GDI --C-GDP Imports of qoods and services .. 22.7 18.6 1979-89 1989-99 1998 1999 Growth of exports and imports (%) (average annual growth) Aqriculture -0.2 4.0 5.9 sO Industry . -4.0 2.3 4.0 Manufacturing .40 Services 0.9 5.9 3.7 Private consumption . .. .. .. 94 9 9- General qovernment consumption .. .. -40 Gross domestic investment .. . . ..po Imports of qoods and services . 0.2 -23.9 -12.2 - xports S Imps Gross national product , 0.5 5.0 3.9 Note: 1999 data are preliminary estimates. *The diamonds show four kev indicators in the countrv (in bold) comDared with its income-grouD average. If data are missing. the diamond will be incomplete. - 62 - Uzbekistan PRICES and GOVERNMENT FINANCE 1979 1989 1998 1999 Inflation (%) Domestic prices 2.0, (% change) Consumer prices .. .. 29.0 29.1 1,5o0 Implicit GDP deflator .. .. 38.9 38.5 1 .00 0 Govemrnent finance soo (% of GDP, includes current.orants) | Current revenue .. . 31.2 30.5 94 95 96 97 98 9 Current budget balance . . 4.5 5.0 - GDP deflator O CPI Overall surplus/deficit .. -3.2 -2.6 TRADE 1979 1989 1998 1999 (USS millions) Total exports (fob) .. .. 3,029 2,946 s.oo Cotton ,. 41900 Gold6 Manufactures .. .. 18 35000r Total imports (cit) .3,125 2.841 Z Food51 40 Fuel and energy100 Capital goods 1,554 1,394 0 93 94 95 96 9 6 9 Export price index (1995=100) 90 89 Import price index (1995=100) 99 103 a Exports U Imports Terms of trade (1995=f00) - 90 87 BALANCE of PAYMENTS rUSS millions) 1979 1989 1998 1999 Current account balance to GDP (%) Exports of goods and services .. .. 3,295 3,170 2 T Imports of coods and services .. .. 3,359 3,059 Resource balance -64 ill Net income -101 -174 Net current transfers 1 2 Current account balance -122 -14 Financing items (net) .. .. 123 88 Changes in net reserves -1 -74 Memo: Reserves includinq qold (USS millions) 1 168 1.242 Conversion rate (DEC, local/US$) - 80.7 115.7 EXTERNAL DEBT and RESOURCE FLOWS 1979 1989 1998 1999 (US$ millions) Composition of 1999 debt (USS mill.) Total debt outstanding and disbursed .. . 3,260 4,253 IBRD 177 203 G 359 A:25 3 IDA .. .. 0 9 Total debt service .. .. 367 518 D:t69 IBRD .. .. 10 12 IDA .. .. 0 0 Composition of net resource flows Official grants .. .. 28 Official creditors .. .. 128 372 F. 183C E: 1,493 Private creditors 392 627 Foreiqn direct investment .. .. 140 121 Portfolio equity .. . 0 0 World Bank proqram Commitments .. .. 82 25 A - iSRD E - talera Disbursements .. .. 13 28 3.IDA D- Otrer'xu latera F ^.va:e Pnncipal repayments .. .. 0 1 C - IM G - Sho-te'm Net fows .. .. 13 27 Interest payments .. .. 10 11 Net transfers .. .. 3 16 Development Economics 8/31100 -63 - IBRD 28006R2 55° 60 65' 703 KAZAKH-TAN UZBEKISTAN KAZAKHSTAN ' ' ,Xu SELECTED CITIES Ta*"'6T° ; / -- ''; t LLJ- \® @ OBLAST CAPITALS 1. / 'A!y X>rc! ® .# X 6 NATIONAL CAPITAL / ½; Sea ~~~~~~~~~~~~~~~~~~~~~~~~~~~MAIN ROADS RAILROADS J| t;--? 'X'' . Nukus KYRGYZ /no Toen Loro11ro1son12 oFsjI boenddu nes&:~ - 1 2w. x5i 5Se;5 ' T . eu, ThS r4ooo doR OF'~oo IRAN ooo eofoc ToUR7'\PKMENSTAN - Uch6d.kn Ois mop do nor oopJy ood,opo,of toW dO Boo2 C,oooo orry jodgoneor or~~~~~~~~~~~~~ SC IC5oI orohs ot oorrcrrrory or orn~~~~~~~~~~~~~~,,g code en rrr or eec,npreneo oFo A booodench v.* --~~~~~~~~~~~~~~~~~-yl 75 50- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- ~~~~~~~~~egn KAZAKHS AN r TURKrNISTA Arc~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~TJKSA -5 60~~~ 10. C 9 no &~~o"-rr `s JKYRGYZ REP .TroSry~0 - 43- 0 25 5075 100 ,2r..e-K"" -I ~r~'1~ r CHINAI r VAJIK5TAN~~~~~~~~~~~0o ~~0 25 5 75 OI i6AFGHANISTAN - I5143IC REPJBLIC t NAKNLAIA IRO IAN0 OP IRAN ArEG5ANI0TAN I .to¶ERRNATIRAN,T.7dK 6T\ OF)R_____N 65 OrNAP IMtr 0c' 1AKSA