Documentof The World Bank FOROFFICIAL USEONLY ReportNo: 35804-ZM PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDGRANT INTHEAMOUNT OFSDR25.7MILLION(US$37.2MILLIONEQUIVALENT) TO THE THE REPUBLIC OF ZAMBIA FOR AN AGRICULTURAL DEVELOPMENT SUPPORT PROJECT APRIL 20,2006 Environment,Rural, and Social DevelopmentUnit, AFTSl CountryDepartment2, Zambia Africa Region duties, Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective January 31,2006) Currency Unit = ZambianKwacha (K) K3432 = US$1 US$1.44899 = SDRl FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS ACP Agricultural Commercialization Program ADSP Agricultural Development Support Project AfDB African DevelopmentBank AAP African Action Plan AMDP Agricultural MarketingDevelopment Plan A M I C Agricultural Marketing Information Centre ASP Agricultural Sector InvestmentProgram BOZ Bank o f Zambia CAS Country Assistance Strategy CDT Cotton Development Trust C E M Country Economic Memorandum CFAA Country Financial Accountability Assessment CFRN Core Feeder RoadNetwork CP CooperatingPartners C R N Core Road Network cso Central Statistics Office DISS Department o f Infrastructure and Support Services DPP Department o fPolicy and Planning ECZ Environmental Council o f Zambia EDP EnterpriseDevelopment Project EIB EuropeanInvestment Bank ESMF Environmental and Social Management Framework FA0 Foodand Agriculture Organization o f the UnitedNations FBS FixedBudget Selection F M P M Financial Management and Procedures Manual FMS Financial Management System FMU Financial Management Unit GRZ Government o f the Republic o f Zambia ICB International Competitive Bidding IFAD International Fundfor Agricultural Development IPM Integrated Pest Management LCMS LivingConditions Monitoring Survey LCS Least Cost Selection M A C 0 MinistryofAgriculture and Cooperatives MDG MillenniumDevelopment Goal MIIF MarketImprovement andInnovationFacility MIS Management Information System MOFNP MinistryofFinance andNationalPlanning MTENR MinistryofTourism, Environment andNaturalResources NAP NationalAgricultural Policy NBFI Non-Bank Financial Institutions N C National Coordinator NCB National Competitive Bidding NCO National Coordination Office NDP NationalDevelopment Plan N E W National Early Warning Unit N O W Norwegian Agency for Development Cooperation NPSC NationalProject Steering Committee NRFA National Road FundAgency NSCB National Savings and Credit Bank OED Operations EvaluationDepartment OPRC Output and Performance BasedRoad Contracts PEMFA Public Expenditure Management and FinancialAccountability PFIs Participating FinancialInstitutions PIP Project hnplementation Plan PPF Project PreparationFacility PQPS Plant Quarantine Phytosanitary Section PRSP PovertyReduction Strategy Paper PSU Procurement and SuppliesUnit QAG Quality Assurance Group QBS Quality Based Selection QCBS Quality Cost Based Selection RDA RoadDevelopment Agency RIF Rural InvestmentFund ROADSIP Road Sector InvestmentProgram RPF Resettlement Policy Framework RRIF Rural Road Improvement Facility RRMP Road RehabilitationMaintenance Project RTSA RoadTransport and Safety Agency SACS Smallholder Agricultural Commercialization Strategy SAPMSP Smallholder Agricultural Productionand MarketingSupport Prc3ject SBD Standard BiddingDocuments SCCF SupplyChain Credit Facility SCCI Seed Control and Certification Institute SIDA Swedish International Development Agency SPS Sanitary and Phytosanitary Support UNDP UnitedNationsDevelopment Program USAID UnitedStates Agency for InternationalDevelopment WTO World Trade Organization FOROFFICIAL USE ONLY This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. ZAMPIP Zambia Agricultural Marketing andProcessing Infrastructure Project ZARI Zambia Agricultural Research Institute ZATAC Zambia Agribusiness Technical Assistance Centre ZNCB Zambia National Commercial Bank ZNFU Zambia National Farmers Union Vice President: GobindNankani Country ManagerDirector: Ohene Owusu Nyanin/ MichaelBaxter Sector Manager: Frank Byamugishd Richard G. Scobey Task Team Leaders: Paavo Eliste/Tijan Sallah Zambia AgriculturalDevelopmentSupport Project(ADSP) CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE 1 1. Country and sector issues 1 2. Rationale for Bank involvement 4 3. Higher level objectives to which the project contributes 5 B. PROJECT DESCRIPTION 5 1.Lendinginstrument 5 2. Project development objective and key indicators 5 3. Project components 6 4. Lessons learned and reflected inproject design 10 5. Alternatives considered and reasons for rejection 12 C. IMPLEMENTATION 13 1.Partnership arrangements 13 2, Institutional and implementation arrangements 14 3. Monitoring and Evaluation outcomes/results 16 4. Sustainability 16 5, Critical risks and possible controversial aspects 17 6. Grant conditions and covenants 19 D.APPRAISAL SUMMARY 20 1.Economic andFinancial Analyses 20 2. Technical 21 3. Fiduciary 22 4. Social 24 5. Environment 25 6. Safeguard Policies 26 7. Policy exceptions and readiness 27 Annex 1: Country and Sector Background 28 Annex 2: Major related projects financed by the Bank and other Agencies 42 Annex 3: Results Framework and Monitoring and Evaluation 43 Annex 4: DetailedProject Description 51 Appendix 4-1: Eligibility Guidelines 60 Appendix 4-2: Demand analysis for the SCCF 62 Appendix 4-3 Demand analysis for the MIIFMatching Grants 64 Appendix 4-4 Pre-assessment o f Rural Roads 66 Annex 5: Project Costs 68 Annex 6: ImplementationArrangements 69 Annex 7: FinancialManagementandDisbursementArrangements 75 Annex 8: Procurement 85 Annex 9: Economic andFinancial Analysis 92 Annex 10: SafeguardPolicy Issues 101 Annex 11: Project Preparation and Supervision 108 Annex 12: Documents inthe Project File 109 Annex 13: Statement of Loans and Credits 110 Annex 14: Country at a Glance 111 MAP(SI Annex 15: IBRD33514 ZAMBIA AGRICULTURAL DEVELOPMENT SUPPORT PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTS1 Date: April 17, 2006 Team Leader: Paavo Eliste/Tijan Sallah Country Director: Michael Baxter Sectors: Agro industry(30%); Roads and Sector Manager: Frank ByamugishdRichard highways (40%); Agricultural marketing and G. Scobey trade (15%); General public administration (15%) Themes: Export development and competitiveness (P); Rural services and infrastructure (S); Ruralmarkets (S); Rural policies and institutions (S) Project ID: PO70063 Environmental screening category: Partial Assessment LendingInstrument: Sector Investment Grant Safeguard screening category: Limitedimpact [ ] Loan [ ] Credit [XI Grant [ ] Guarantee [ 3 Other: For Loans/Credits/Others: Total Bank financing (US$m.): 37.2 ASSOCIATION Total: 21.7 17.9 39.6 Borrower/recipient: Republico fZambia ResponsibleAgency: Mr.RichardChizyuka Permanent Secretary (Agriculture) Ministryo fAgriculture and Co-operatives P.O.Box 50197 IndependenceAvenue Lusaka. Republico f Zambia FY 07 08 09 10 11 12 Annual 4.0 6.0 8.0 8.0 7.0 4.2 Cumulative 4.0 10.0 18.0 26.0 33.0 37.2 Component 2: Institutional Development (US$3.9 million) - The component would improve the public sector's capacity to provide core public services requiredto enhance smallholders' access to markets as well as their productivity and quality. Component 3: Project Management and Coordination (US$2.6 million) - The component would provide support for the establishment and operation of a National Coordination Office (NCO) within Ministryo fAgriculture and Co-operatives (MACO). Which safeguard policies are triggered, ifany? Re$ PAD D.6, Technical Annex 10 Environmental Assessment (OP/BP/GP 4.0 1) Pest Management (OP 4.09) Involuntary Resettlement (OP/BP 4.12) Significant, non-standard conditions, if any, for: Re$ PAD C.6 Boardpresentation: None Grant effectiveness: Conditions o f Effectiveness (i)TheRecipientwillfurnishevidencesatisfactorytoIDAthattheconditionsspecifiedin paragraphs (a) through (c) o f Section 8.01 o f the General Conditions.for Credits and Grants of IDA, dated July 1, 2005, shall beensatisfied; (ii)TheSubsidiaryFinancingAgreementwouldhavebeenexecutedonbehalfoftheRecipient and the Apex Organization, inform and substance satisfactory to IDA; (iii) RecipienthasfinalizedandsubmittedthePIPinaformandsubstancethatis The satisfactory to IDA; Covenants applicable to project implementation: (iv) The standard IDA legal conditions requiring the existence o f a suitable financial management system and the external audit o f the financial statements will apply. A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues CountryIssues Zambia i s a land-locked nation bordered by eight countries. It has a total land area o f about 750,000 h2 and a populationestimated at about 10.5 millionpeople, with an average density o f about 13 people per h2, i s relatively low compared to many African countries. which Population density i s higher near the line of rail and along the main roads, where human settlement and economic activities were organized earlier during the colonial times. The population in Zambia has been growing at a slower pace in recent years, not only due to successes in family planning programs, but also because o f public health problems, among other things, the highincidence of HIV/AIDS. The population growth during2000s was 1.7 percent per annum, as opposed to the annual average o f 2.5 percent inthe 1990s. The Zambian economy has been historically dependent on copper mining. The gradual decline inworld copper prices has led to economic decline and erosion o f the relatively high standard o f living enjoyed by the population in the 1970s. This led to unsustainable budgetary deficits and hyperinflation as the government resorted to external and internal borrowing to minimize the decline inliving standards. In spite o f this per capita income has declined from U S 7 5 2 in 1965 (at the time o f Independence) to U$440 in2004. Structural reforms initiated inthe 1990s slowed the economic decline, but did not lead to the expected high economic growth as the country was slow to diversify. Duringthe first half of the reform period in 1991-98, Zambia's real GDP fell by an average rate of 0.2 percent a year, mainly due to the declining performance o f the mining sector. Growth trends reversed, however, during 1999-2003 period when real GDP grew at an average rate of 4.0 percent a year. Zambia remains one o f the poorest countries in Sub-Saharan Africa. Poverty i s more widespread in rural areas, where two-thirds o f total population and 72 percent o f the poor live. The 2004 Living Conditions Monitoring Survey IV (LCMS) shows that Zambia's poverty headcount has declined from 73 percent in 1998 to 68 percent at the end o f 2004. However, this decline i s less than that needed to reach the poverty related Millennium Development Goal (MDG), which aims to reduce the proportion of Zambians whose income i s less than one dollar a day by 50 percent between 1990 and 2015. Sector Issues Following declines incopper earnings, agriculture has become a major driver of growth and a significant source o f export earnings and diversification. Agriculture and agro-processing account for more than 40 percent o f Zambia's GDP and contribute about 12 percent o f export earnings. The sector provides employment to some 67 percent of the labor force and supplies raw materials to agro-related industries, which account for some 84 percent o f manufacturing value-added inthe country. Zambia has 42 million hectares o f arable land (about 55 percent o f total land area), o f which only 1.5 million hectares (about 4 percent) i s cultivated every year. The country's 800,000 smallholders account for some four-fifths of this area. The Government o f the Republic o f 1 Zambia (GRZ) recognizes the importance of smallholder agriculture and i s committed to supporting their development. Past Government efforts to improve productivity of smallholders have not achieved expected results. Before introduction of policy reforms in the 1990s, the Government attempted to support smallholder commercialization through provision o f subsidized inputs and credit, price interventions and operating agricultural parastatals. However, these measures were less successful, partly because o f the desire to provide cheap staple food for the urban population and the uniform pricing of inputs and outputs throughout the country, which biased production incentives in favor o f maize. In the first 25 years after independence in 1964, agricultural GDP inZambia grew by an average o f about 2.5 percent per annum, considerably below the population growthrate, at that time estimated at 3.1 percent. Following the economic reforms o f the early 199Os, the Government reduced its role and budget for agriculture, leading to deterioration inpublic service delivery. Investmentsinstaff development, necessary facilities and equipment have basically ceased, while operating funds are at a minimum. This has hurt most smallholder farmers dependent on public services who were ill-prepared to face the challenges and exploit the emerging market opportunities that come with market liberalization. With reduced Government role, the private sector has been spearheading the impressive growth in agricultural exports. Duringthe period o f 1990 to 2000, agricultural GDP grew at an average rate o f 3.9 percent per annum, faster than the population growth o f 2.5 percent, indicating a positive growth per capita. Average growth rates o f agriculture have, however, slowed to 1.7 percent during2000-2004, as a result o f a series o f droughts. Agricultural exports also have shown impressive performance since the start o f reforms in early 1990s. Between 1990 and 1994, agricultural exports doubled from US$30 million to US$6lmillion, increasing to US$189 million in 2004, representing about 2% o f GDP and some 12% o f total exports. However, a gradual appreciation o f the real exchange rate o f the Kwacha against major currencies since mid 2002, and especially a rapid surge in the fourth quarter o f 2005, threatens to put agricultural exports under considerable pressure and could lead to declines o f output and employment insome sub-sectors. Since the mid-l990s, production systems have emerged in Zambia that are based on partnerships between smallholders and commercial farmers or agro-entrepreneurs. Currently, almost a third o f the 800,000 smallholder farmers in Zambia are organized in some form o f out-grower scheme arrangements. The majority o f those involved are contracted by cotton companies. Cotton i s undoubtedly one o f the success stories in smallholder commercialization in Zambia. The sector currently employs some 220,000 smallholders, up from some 38,000 smallholders in 1990. Almost one out o f four rural households inZambia received some income from cotton production. Production volumes have increased from about 36,000 tons in 1990 to 170,000 tons in 2004. This would not have been possible without heavy investments and consequent risks taken by private sector ginneries, which faced unfavorable business and macro-economic conditions through most o f the 1990s. Tobacco i s another important smallholder crop which has shown impressive performance with little assistance from the Government and donors. In 2004/05 season, the tobacco industry employed some 24,000 licensed farmers, of which some 15,000 are smallholders 2 involved inburley production'. Tobacco production volumes have grown from 5,000 tons in 1989/90 to 35,500 tons (seven fold increase) in 2004/05 season, with burley production increasing from 1,500 tons to 15,400 tons during the period. Total value o f tobacco received by farmers in 2004/05 was US$44.4 million, of which US$20.7 million went to burley farmers. Total export value of tobacco in2004/05 was about US$89 million (up from US$68 million a year before), o f which about 45 percent came from burley. In addition, a sugar outgrower scheme, operated by Zambia Sugar, i s one o f the most successful outgrower schemes inZambia and could serve as a model to others. Other crop sub-sectors have fared less well despite significant inflow of donor funds. Vegetable outgrower schemes, which at their peak employed some 300 smallholders, have ceased largely to exist after sudden collapse of the major corporate sponsor in2004. Current vegetable exports come from a few large scale commercial farms, which contract about 85 smallholder farmers. The commercial farms, however, employ directly a substantial number o f workers. The paprika industry, which reached its peak o f about 6,000 farmers in 2001102 and 2002/03 seasons and more than US$3.5 million of annual export earnings, has been in decline since then. The industry currently contracts less than 3,000 smallholders with export earnings just under US$1 million. The industry has been affected by heavy side- sellinghuying and i s currently strugglingto restructure itself. New promising sectors have also emerged in recent years. Honey currently employs about 5,000 smallholders and the industry has been on a rapid upward trend in terms of export earnings. Other emerging smallholder commodities are chilli, oilseeds, and dairy. The outgrower schemes for chilli and oilseeds are largely managed by private sector enterprises, while the smallholder dairy sub-sector is based on informal linkages between cooperatives and dairy processors. The capacity building and investment support to the dairy sub-sector i s provided largely through various donor funded projects. Despite significant support, most farmer groups still strugglewith low levels o f productivity and poor quality of raw milk. The coffee industry, which has received support from the World Bank in the past, has not been able to make significant progress. Currently, the total annual production o f coffee i s about 6,000-7,000 tons o f Arabica coffee, o f which more than 99 percent comes from about 40 large-scale commercial estates. The number o f smallholder coffee growers i s estimated at 250 farmers. Despite the relative success of outgrower schemes, the commodity industries in Zambia are facing increasing challenges in sustaining their production and competitiveness levels vis a vis export competitors. The main challenges relate to rampant side-sellingrouying, leading to companies to reduce their investments in extension and the establishment of rural agents. This has led to the strategy of horizontal development of outgrower schemes as a risk 'Tobacco waiver was grantedby Bank Managementbecausemanypoor smallholdersgrow anddependon tobacco as a source of income.Basedon currentdata andindustrytrends, it is expected that tobacco productionandmarketing investmentswould take up asmall share of the creditline andmatchinggrants, andthe proportions will be monitored and the eligibility criteriaadaptediftobacco relatedinvestmentsstarts to depart significantly from current trends. It shouldbe notedthat many of these smallholders got into tobacco productionafter liberalizationof agriculturalmarketsinthe 1990s which aimedto diversify smallholderproductionsystems away from its heavy dependence on maizetowards moreprofitable cash crops. The expansionof the smallholder tobacco (burley) area startedfrom a low production base, from about 1,500 ha in 1989/90to about 8,000 ha in2003104 -- which is stillabout0.5 percent of total cultivatedarea inZambia. This trend in growthof tobacco productionis unlikely to continuebecausenow, following structural adjustment,smallholdershave a wider menuo fcrop choicesandthe projectedprice for burley tobacco is expected to increase only marginallyinnominal terms between2005 and2015. It is not envisaged, therefore, that smallholder tobacco productionwill manifest the same level of robustgrowthinburley tobacco as inthe precedingdecade. See sectionD7,andAnnexes 1 and 4 for details related to tobaccopolicy waiver. 3 minimization strategy to cover the cost of inputs, growing its volumes through increasing the number of smallholder farmers or land area, rather than investinginto increased productivity. For the most part, Zambia's smallholder farmers are cost competitive for a variety o f industrial and food crops, although there are major problems in the reliability/continuity o f their market supply and in aggregating their supplies effectively. The delicate comparative advantage that exists in smallholder production systems i s adversely affected by high transport costs. Freighthaulage i s readily available in Zambia, but volume i s often the issue which prevents most small-scale farmers from accessing it. This i s less o f a problem when small-scale commercial farmers are in a contractual arrangement with processors or an agribusiness. The issue i s one o f road access to areas with high agricultural potential due to the poor condition o f the feeder roads (some 80 percent of feeder roads are inbad condition). Limited availability of term financing for capital investments is another factor which constrains agricultural competitiveness. High risks and costs o f providing quality services (extension, training, technology transfer) for large numbers o f smallholders spread over large geographical areas i s another problem. Finally, despite significant improvements in macroeconomic stability, the sustained episodes o f exchange rate appreciation could threaten to undercut the export competitiveness o f agriculture. There are ample opportunities for increasingagricultural exports from smallholder production systems, achieving import substitution, and strengthening inter-industry linkages in agriculture. Restoring growth and dynamism in the agro-food system will require concerted actions both at the macroeconomic and micro/sectoral levels. For the latter, there are major opportunities to improve supply chain linkages, for the benefit o f farmers, agribusinesses, and consumers. Ago-processing and marketing companies are likely to remain the main drivers o f growth for agriculture. Significant support i s needed to improve the efficiency o f existing and new outgrower operations and their export competitiveness. The proposed project aims to enhance competitiveness o f smallholder agriculture in terms o f supply reliability o f major export and domestic commodities through channelling funds for productive investments and capacity building directly through industry associations, agribusinesses and farmer organizations. Investmentsinkey public service areas supported by the project help improve critical public service delivery to the private sector. 2. Rationale for Bank Involvement The rationale for Bank involvement in the proposed operation i s fourfold. First, the Government of Zambia has requested the preparation o f this operation for smallholder commercialization, which i s featured in the Bank Country Assistance Strategy (CAS), and which can significantly contribute to the CAS pillar o f promoting economic growth and export diversification in Zambia. Second, Bank involvement brings in considerable global experience and knowledge on value chain development and smallholder commercialization which was factored into the project design. For example, one of the global lesson learned i s that smallholder commercialization cannot be carried out effectively without looking at the entire supply chain, including the role o f agribusinesses, and addressing the critical constraints inthe chain. Third, Bank involvement helps develop a comprehensive and harmonized framework of support for smallholder commercialization, which includes smallholder capacity building, provision of working capital and term-investments, provision o f critical public goods, 4 sanitary and phytosanitary (SPS) support, and development o f market linkages. Because of the convening power of the Bank as a multilateral institution, various key donors active in smallholder commercialization inZambia agreed to harmonize within a framework to reduce possible duplication and improve the development impact o f their interventions. For example, the African Development Bank (AfDB) i s focussing its support on smallholder capacity building, provision o f extension services, and some public good investments. The International Fund for Agricultural Development (IFAD) i s focussed on creating an enabling environment for rural credit through supporting rural finance reform. The proposed Bank operation i s focussed on provision of input and trade finance, and term investments through a line o f credit, matching grants for value chain development, capacity building support for SPS and market information systems, and investments in rural transport infrastructure. The Bank involvement fills a critical residual financing gap for the smallholder sector, after other donor financing. Finally, recent sudden appreciation of the kwacha has revealed how delicate the comparative advantage o f smallholder production systems inZambia can be. Bank involvement i s needed to address broader macro-economic shocks to ensure that recent gains in agricultural export performance are not reversed. 3. Higher LevelObjectivesto which the Project Contributes The project would support the Bank's new results-based CAS, which in turn i s aligned with the Government's Poverty Reduction Strategy Paper (PRSP) and National Development Plan (NDP). The project would support directly the following strategic and longer-term country outcomes which are linked to the first pillar o f the CAS of sustained economic growth anchored in a diversified and export-oriented economy: (i) positive contribution of sectors to GDP growth; (ii) growth o f exports; (iii) increased private investments in non-traditional sectors; and (iv) increase in the number o f people employed in the productive sectors, including commercial agriculture and agro business. Furthermore, the CAS emphasizes the need for the development o f agriculture that facilitates opportunities for outgrower schemes and assists with the additional infrastructure needed to market agricultural produce as a critical condition for a diversification strategy. The project would contribute directly to the second strategic priority of the African Action Plan (AAP), which i s to support the private sector as a driver o f growth, and which supports improving export competitiveness, and building skills, especially for rural poor, within the framework o f a shared growth strategy. B. PROJECTDESCRIPTION 1. LendingInstrument The project will be financed by an IDA Sectoral Investment Grant inthe amount o f US$37.2 million. 2. ProjectDevelopmentObjectiveand Key Indicators The project development objective i s to support increased commercialization o f smallholder agriculture through improved productivity, quality and efficiency o f value chains where smallholders participate. The project would: (i) provide resources for working capital and 5 term lending for capital investments in agricultural production and marketing; (ii) develop innovative business linkages between smallholders and other actors in the target supply chains; and (iii)target investments inpublic goods and inkey public sector functions. The project's central aim i s to improve smallholders' access to markets and the competitiveness o f their agricultural commodities. The project would, therefore, focus on highpotential agricultural areas and will adopt a value chain approach to make sure that all levels o f the chains are operating efficiently and increasing value added. Key PerformanceIndicators Outcome Indicators: The primary project outcome would be increased marketed output of agricultural products and an associated increase in export earnings, increased incomes o f farmers participating in supply chains, and increased employment in agribusiness enterprises and agro-processing. The outcome indicators are linked directly to the results-based CAS goal of sustainable, diversified and export oriented economy that responds to market demand, particularly: (i) positive contribution of the sector to GDP growth, and (ii) of exports. The outcome growth indicators are: 0 Value o f agricultural exports from target value chains; 0 Volume of commodities producedby target outgrower schemes; 0 Increase inparticipating farmers' incomes. Output Indicators: Output indicators are linked to the intermediate results described in the results framework (Annex 3) and comprise mainly the following: 0 Amount of loans taken by target outgrower schemes; 0 Increase innumber o f smallholders linkedto target outgrower schemes; 0 Volume of investments for corporate extension, R&D, and marketing activities o f agribusinesses; 0 Km.of feeder and district roads rehabilitatedandmaintainedunder the OPRC; 0 Volume o f certified seed produced; 0 Volume o f quality foundation cotton seeds produced and distributed. 3. Project Components In order to achieve its objectives, the project has three components, namely: (i) Support to Farmers and Agribusiness Enterprises; (ii)Institutional Development; and (iii)Project Management and Coordination. Detailed description o f the components can be found in Annex 4. 6 Component 1: Support to Farmers and Agribusiness Enterprises (US$33.2 million - IDA US$30.8 million;Beneficiaries US$2.4 million). Component Objective. This component would aim to increase the degree of smallholder commercialization in Zambia by promoting the development o f a network o f well- functioning and competitive value chains. Issues Addressed. Generally, Zambia's smallholder farmers are cost competitive in a variety o f industrial and food crops. However, this cost competitiveness i s delicate and could be reversed by suddenmacroeconomic shocks and declining world commodity prices. There are opportunities for supporting the commercial smallholder sector to enable it to cope with these challenges by improving the efficiency o f value chain linkages between producers and downstream processing and marketing organizations. The project would approach value chain development through a two pronged approach. First, it would aim to improve the competitiveness and efficiency o f value chains through improving access to credit for agribusinesses, marketing organizations and other entities that are instrumental to creating markets for smallholders. Secondly, it would address the equity aspects of agricultural commercialization by lowering the barriers of inclusion o f smallholders into agricultural value chains. Target Group. The value chain approach requires work with all agents in potentially profitable agricultural supply chains to address weaknesses and bottlenecks in the chain through facilitating strategic partnerships. Thus the project beneficiary groups include not only smallholder farmers but also agribusiness enterprises, large scale.estate and commercial farmers, input suppliers, processors, traders, and financial institutions, which are part o f the value chains. Component Activities. The component has the following three sub-components: (a) Supply Chain Credit Facility (SCCF) (US$12.2 million). The SCCF will provide a line o f credit, on a demand driven basis, to support investments geared to improving the supply chains o f existing and emerging contract farming systems. The sub-component would enable those Zambian agro-enterprises, traders or nucleus and commercial farms working with smallholders, under outgrower schemes or other forms of contract farming, to borrow in foreign exchange to finance capital investments, seasonal inputs and export activities. Line o f credit will be made available through eligible Participating Financial Institutions (PFIs), who will then on-lend to those qualifying agribusinesses/commercial farmers for whom the PFIs would assume the credit risk. The SCCF would support three activities: (i) productivity improvement and up-scaling o f existing outgrower/contract farming schemes; (ii) establishment of new contract farming enterprises; and (iii)upgrading processing and marketing capacity of those agribusinesses working with smallholders. Funds would be provided for: 0 Short Term Loans to agribusinesses/commercial farmers to finance the purchase of inputs,working capital, trade, and inventory/ warehousing loans to smallholders; and 0 Medium to Long Term Loans to agribusinesses/commercial farmers to finance: (i) investmentsin assets and technology to improve the productivity and quality o f the supply at the smallholder level; and (ii) technology and marketing investments at 7 agro-enterprise level that enhance market access and/or add value to the produce along the supply chain. Inaddition, the project would support the following activities: (i) technical assistance limited to the Apex Organization; (ii) training for the environmental assessmentcapacity building for PFIs (to be coordinated with the IFC); (iii) development o f training material on agricultural risk appraisal; and (iv) capacity buildingfor businessplandevelopment. (b) Market Improvement and Innovation Facility (MIIF) (US$6.0 million). The facility would provide financial resources, on a matching grant (MG) basis, for the development o f innovative business linkages between smallholders and other actors in agricultural value chains. Eligible applicants for MGs would include: (i) organized producer associations and related smallholder organizations with developed or developing linkages to agricultural value chains, and supporting the development o f smallholder farmers; (ii) agribusinesses linked with smallholders, involved in processing, trading, and marketing o f agricultural and food products/commodities which help to improve the growth and competitiveness o f smallholder farmers; (iii) input suppliers; (iv) nucleus commercial farms working with smallholders; and (v) publicly and privately funded agricultural and industrial institutions and trusts. The facility would support the following activities: 0 Extension and technology development activities - improved corporate extension and management of outgrower schemes; trials on new extension approaches including the use o f media; research and development; input sales promotion, includingpromotion ofrural inputsuppliers and stockists; 0 Studies and pilots - business development analyses; market access analyses and trials; contract farming legal frameworks; development o f standardization and certification systems; food safety and ethical quality enhancement system analyses; value chain efficiency and competitivenessanalyses; and 0 Support to smallholder producer organizations - collective investments for productive and marketing type investments, and technical assistance and training for organizedproducer/farmer associations/groups. (c) Rural Roads Improvement Facilitv (RRIF) tUS$l5.0 million). The project would provide resources for the rehabilitation and maintenance o f a network o f selected feeder and district roads of economic importance inhighagricultural potential areaddistricts on the basis of core feeder roads network management. These roads relate to main transportation routes for major agricultural products. Activities include: (i) road rehabilitation and maintenance works using the Output and Performance Based Road Contracts (OPRC) concept; (ii) supervision services for OPRC contracts; (iii)capacity building and training for Road Development Agency (RDA) and National Road Fund Agency (NRFA) to enhance their management capacity; and (iv) resources for the Environmental Impact Assessment (EIA) studies. Outcomes. Increased number o f smallholders linked or being able to access value chains and high value markets; increased volumes and value o f agricultural products from smallholder production systems; increased agricultural exports; and reduced transportation costs between producers and markets. 8 Component 2: InstitutionalDevelopment (US$3.9 million-IDA US$3.9 million). Component Objective. The component would improve the public sector's capacity to provide core public services requiredto enhance smallholders' access to the market as well as improve their productivity and quality. Issues Addressed. The agribusiness sector will require a wide variety o f support services from the public sector to enhance the competitiveness of production, processing and marketing o f agricultural commodities in Zambia. Competitiveness i s increasingly being determined by the producer's ability to meet increasingly stringent trade related measures, such as the traceability o f the origin and phytosanitary quality o f plant produce. There i s a need to strengthen country capacity to meet SPS standards and comply with the food safety requirements o f different export markets. This will enable Zambian entrepreneurs to take advantage o f domestic market opportunities and export possibilities linked with supermarkets. Furthermore, the sector needs up-to-date information on the state o f agriculture, results o f sector and policy analysis, major international trade related decisions and their implications on the comparative advantage o f Zambian smallholder production systems, and a range of domestic and international price information. The public sector should provide adequate rules and standards and advanced certification facilities in food safety. Inaddition, the cotton industry,which involves the largest number o f smallholders in Zambia, urgently needs quality planting materials. The project would address institutional capacity constraints inthe provision o f public services that are requiredfor strengthening the competitiveness of smallholder production systems andplanning for exports. Target Group. The project would provide capacity building support to the Ministry o f Agriculture and Co-operatives (MACO) Department o f Policy and Planning, Agricultural Marketing InformationCentre (AMIC), Seed Control and Certification Institute (SCCI), and Zambia Agricultural Research Institute (ZARI). Support will also be provided to the MACO Financial Management and Procurement and Supplies Units to strengthen their capacity to handle the incremental work load related to this project. In addition, since cotton i s the main commodity in Zambia that i s organised through contract farming arrangements, involving over 200,000 smallholders, the project would provide support to the industry specific public- private sector partnership institution, the Cotton Development Trust (CDT). Component Activities. The project would provide support to selected MACO core functions. It would strengthen MACO services related to: data and policy analysis, monitoring and evaluation, market information and capacity in trade negotiations; seed certification and control; food safety and quality standards and phytosanitary services. Activities would include staff training (both short term and long term), study tours, participation in domestic and regional workshops, consultancy services, limited procurement of equipment (office, computing, laboratory and testing), vehicles, civil works and incremental operating costs. The project would increase the capacity o f the CDT to conduct entomological research and to supply an increased amount of foundation seed for further multiplication by the cotton industryinorder to improve smallholder farmers' access to quality seed. Outcome. Improved understanding o f the profitability o f agricultural production systems in high priority areas, improved information on smallholder commercialization activities, analytical work on smallholder commercialization issues relevant to the private sector, increased volume o f certified seed, improved SPS services for enterprises and commercial smallholders, and increased production o f quality foundation cotton seed. 9 Component 3: Project Management and Coordination (US$2.6 million - IDA US$2.6 million). Project management and coordination would largely rely on existing M A C 0 institutions and structures. The proposed project would strengthen MACO's implementation capacity by establishing within it a National Coordination Office (NCO). The NCO will include the following staff: National Coordinator, Safeguard Specialist, M&E Specialist, and support staff, The salaries o f the externally hired staff will be competitive but within the guidelines for harmonized salary structures. The project would finance the salaries o f externally hired staff, limited technical assistance and training, office equipment and vehicles, project M&E costs, and operational costs. The IDA allocation for the project management also includes the Project Preparation Facility (PPF) of US$0.8 million advanced to the GFU to finance project preparation activities. 4. LessonsLearnedand Reflectedinthe ProjectDesign Key lessons learned from the Bank and donor funded agricultural development projects in Zambia, which are relevant to the ADSP, include: Project Design. The QAG Zambia Country Lending Assessment (2004) recommended that ADSP should be based on the Government priorities to ensure strong commitment and ownership by the Government and key stakeholders. Hence, the project design has been restructured to reflect the client's desire for a greater focus on smallholder agricultural commercialization and i s consistent with the Government strategic priorities articulated inthe PRSP, Agricultural Commercialization Program (ACP), and National Agricultural Policy (NAP) * Rural Credit. Experience from the Bank financed supply chain development projects show that improved access to credit i s a critical element. Experience also shows that with improved access to term credit, the private sector i s enabled to invest into productive assets, and that this can be done without distorting the overall financial system. However, a recent OED review of Bank lending for lines o f credit (LOC) found that a majority o f operations with LOCs have unsatisfactory outcomes. It identified that better outcomes for LOC are associated with: (i)stable macroeconomic conditions; (ii) stronger financial sectors, including satisfactory competition policies and good legal and regulatory regimes governing financial institutions, and mostly market determined interest rates, few distortionary credit and tax policies, and limited state ownership o f financial institutions; (iii) use o f clear eligibility criteria in the selection o f participating financial institutions, and (iv) use of only private sector financial intermediaries. In addition, smaller lines o f credit are associated with lower cancellation rates. In Zambia specifically, the successful Enterprise Development Project (EDP), a multi-sectoral line o f credit supported by the Bank, has shown that when commercial banks have full control in setting credit criteria and terms and conditions o f loans, they also accept the risk on loans, and can run successful operations, including inthe agricultural sector. Under the EDP, the eligibility criteria for investments and beneficiaries were universal and transparent. The proposed design o f the SCCF builds on the successes o f the EDP. Matching Grants. MG instrumentsare not suitable for all types o f investments. They are for investments with a predominantly public good content or which are innovative and risky in 10 their nature and would not therefore attract financing from formal credit sources. Key lessons learned with respect to matching grants are: (i) investments for supply chain MG development mustbe aligned with industryneeds. Evidencefrom Zambia shows that ad hoc provision of MGs for productive and marketing assets for smallholders was often financially unsustainable due to lack o f business skills and access to markets; (ii) design of the MG instruments mustbe based on a detailed analysis o fpotential beneficiaries, including numbers and sizes o f potential beneficiaries, size o f potential grant activities, and the absorptive capacity o f beneficiaries, especially their ability to effectively raise the funds required for their contribution to the matching grant; and (iii)administering the MG schemes i s most efficient and effective when it i s done through independent and professional agents. The design o f this MIIF incorporates these lessons. Rural Road Infrastructure. Zambia Agricultural Marketing and Processing Infrastructure Project (ZAMPIP) and Road Sector Investment Program (ROADSIP) experience in Zambia show that road rehabilitation design should include sufficient resources and practical arrangements for post-rehabilitation maintenance. The OPRC i s a new concept designed to increase the efficiency and sustainability o f road rehabilitation works and post-rehabilitation maintenance operations for several years through combining them both in one contract. The contractor, who carries out the rehabilitation works, i s also kept accountable for ensuring maintenance service quality levels required in the contract. A contractor will be paid in monthly installments based on the maintenance performance. Under the OPRC, the contractor has a strong financial incentive to be efficient in optimizing the physical interventions, while the road agency and the road users obtain the best value for money for maintenance services provided. Implementation Arrangements. The experiences with the ZAMPIP show that in projects where there are several implementing agencies (Le. MACO, RDWRFA, etc.), it i s appropriate to have an inter-ministerial coordinating body to discuss and resolve implementation progress and issues. The lack o f such an arrangement was one o f the main causes for the poor implementation of ZAMPIP. The proposed project would have an inter- ministerial steering body to provide broadproject oversight and guidance. Monitoring and Evaluation. Early establishment o f a project monitoring and evaluation (M&E) system andmaintainingthe systemthroughout the project is critical inorder to enable project management to check and assess implementation progress. Lessons learnedfrom donorfunded smallholder commercializationprojects in Zambia. The presence of donors and donor-funded NGOs in smallholder commercialization activities varies significantly from sector to sector. While the large and successful Zambian outgrower schemes such as cotton and tobacco are operated and funded entirely by the outgrower companies themselves, the smaller schemes have received substantial aid allocations. For example, a large number o f paprika farmers were contracted through NGOs and the now defunct vegetable outgrowers scheme was, to a very large extent, donor-funded. The major donor funded smallholder commercialization projects in Zambia include the Smallholder Enterprise and Marketing Project (SHEMP/IFAD), Support to Farmers Association Project (SFAPNORAD), the Zambia Agribusiness Technical Assistance Centre (ZATACNSAID), and Agriculture Support Program (ASP/SIDA). Often these projects or their components were implemented by NGOs active insmallholder commercialization. 11 A number o f donor-funded NGOs have been involved in farmer mobilization and capacity buildingamong farmer groups, notably inimparting inbusiness skills training. While many o f these activities have been successful in establishing farmer groups, many of them floundered becauseo f the lack o f direct market linkages and industry involvement. In some instances, extension service provided by NGOs has reduced the control that the agribusiness companies have over the standard o f service provided or the content of the technical advice and assistance being given. This has often resulted in inconsistent advice being given, causing confusion and having a negative impact on production. The situation with NGO or donor involvement in extension services i s exacerbated when the project or funding ends and there i s no sound exit strategy to ensure that service continues to be provided ina sustainable manner. Some donor funded projects and NGOs have become competitors rather than facilitators to the private sector. Beneficiaries from donor funded organizations with cheap financial sources have been pushing up market prices in an attempt to increase margins for smallholders (Le. paprika) which has disadvantaged commercial outgrower companies who consequently have been facing viability problems and increased side selling. On the other hand, training and capacity building operations by some donor programs and NGOs have been instrumental in the development o f networks o f farmers' associations/groups, which are in turn used as intermediaries in company credit operations. Some donor funded projects have managed to broker functional relationships between the outgrower companies and farmer associations/groups, including financial links. The presence of donor funded NGOs in the field has assisted the companies to reduce risks and transaction costs and thus catalyzed private sector market development. These actions have often served as useful starting points in the intensification o f smallholder agriculture in the rural areas o f Zambia. Overall, the experience from donor funded smallholder commercialization projects inZambia suggests that funds for smallholder mobilization and capacity building should be channeled through industry associations, agribusinesses and farmer organizations, in order to have a lasting impact. The functions of the development organizations in terms o f farmer capacity building, extension, marketing, etc. should be the responsibility of commercial outgrower scheme operators, who ensure their consistency with industry priorities and business needs. Finally, there is a need to ensure a more coordinated approach between development partners supporting the smallholder outgrower sector in Zambia. Lack o f coordination o f agency policies and activities and competition for smallholders i s often restricting the impact o f the assistance provided. It i s thus important that the role o f each partner i s clearly defined and understoodby all from the onset. 5. Alternatives Considered and Reasonsfor Rejection Three alternative project design options were considered and rejected. First, the project design considered scaling up the successful elements o f the Agricultural Sector Investment Program (ASIP), most notably the Rural Investment Fund (RIF) and support to public extension. This approach was rejected because support for public extension requires sustained government commitment and funding o f field extension services, which appeared lacking. For example, in 2005 some 80% of the agriculture budget (excluding personal emoluments) was allocated to fertilizer subsidies and maize market interventions, while only 12 20% of the budget was allocated to infrastructure investments, public extension services, R&D, etc. During the 2003-2004 period, only 15% o f public expenditures in agriculture were allocated to infrastructure investments and extension services, while about 85% o f expenditures were spent on fertilizer subsidies and maize price support. Therefore, project support would only be temporarily effective and would not redress the persistent problem o f under-funding o f public extension services. Scaling up the RIF was also considered and rejected on the grounds that RIF investments were carried out without linking the beneficiaries to markets. As a result, many RIF investments later became economically unviable. Secondly, the project design considered using an area based approach and focussing on supporting smallholders at the lower end o f the supply chain. This approach considered supporting smallholders in selected districts, whose capacities have already been built under other donor financed projects (e.g., SIDA, AfDB, IFAD), by providing production and marketing assets using matching grants. This approach was rejected because it was too limiting, since it focussed only on smallholders and not all players throughout the supply chain. There i s also a limited capacity of smallholder groups to absorb productive infrastructure investments due to their chronically weak financial position, thus reflecting their difficulties to raise funds required for their contribution to the matching grants. Another alternative project design that was considered focussed on providing matching grants for productive investments for all players in the value chain, including private agribusiness enterprises working with smallholders. This alternative was rejected due to the recognition that the matching grant instruments are not suitable to finance private productive investments, especially when the underlying sectoral constraint i s lack o f term financing. Hence, the project was restructured to provide a line o f credit for term investment needs, while the matching grants will be used for investments with a predominantly public good content, or which are innovative but risky intheir nature and would not, therefore, attract financing from formal credit sources. C. IMPLEMENTATION 1. PartnershipArrangements The project will build on partnership arrangements with various development partners active in the Zambian agricultural sector. The Bank and AfDB have agreed on a common harmonization framework to coordinate their support for smallholder commercialization. Within this framework, the Bank would finance investments into feeder and district roads in highpotential agricultural areas for improved market integration, value chain strengthening through specialised extension services and technology transfer, and a line of credit. The AfDB would, through its proposed Smallholder Agricultural Production and Marketing Support Project (SAPMSP), support capacity building o f existing and new farmer groups, provision o f extension services and support to rural seed industry and livestock production. It has been agreed that both the ADSP and SAPMSP will move towards establishment ofjoint project management arrangements. It has also been agreed that the AfDB and the Bank will aim to harmonize, to the extent possible, other elements o f the project, including conditionalities for effectiveness and fiduciary arrangements. The project collaborates closely with the IFAD Rural Finance Program which addresses broader rural credit reform issues in Zambia through provision o f support to the National 13 Savings and Credit Bank (NSCB), which i s expected to become a major credit provider in rural areas through its expanded network o fbranches. 2. Institutionaland ImplementationArrangements The project would be managed by the National Coordination Office (NCO) which will be integrated within the existing structures of the Department o f Policy and Planning o f MACO. The NCO will be responsible for project coordination. Since the project consists of two distinct components, one with public service focus and the other with commercial orientation, the actual implementation of project activities will be carried out by specialized entities with the necessary technical expertise. The NCO will be led by a National Coordinator (NC). In order to support project implementation and strengthen MACO's capacity, the NCO will be supported by a lean externally recruited service team, comprising o f Safeguard Specialist, Monitoring and Evaluation (M&E) Specialist, Accountant, and support staff, The NCO would be responsible for disbursingproject funds for MACO-managed components, ensuringthe replenishmento f project bank accounts and processing withdrawal applications. The NCO would coordinate the activities of all the implementing bodies involved in the project, and ensure that work plans are prepared, budgeted and implemented in a timely manner, and that management of project funds i s in line with the provisions o f the project's eligibility guidelines (attached in Annex 4). The NCO would become the focal point for the project, where all the information relevant to the project and accounts are consolidated and held. The NCO would ensure that the implementing bodies are supported adequately and that they adhere to the principles o f the project. The NCO would also keep all project documentation, including special account reconciliations and monitoring and evaluation reports. The Institutional Development Component o f the project will be implemented directly by MACO. The execution o f specific activities under this component will be carried out by beneficiary departments and institutions o f MACO (DPP, SCCI, AMIC, ZARI) and the CDT. The Support to Farmers and Agribusiness Enterprises component will be implementedby following three implementingbodies: (i)The Supply Chain Credit Facility (SCCF) will be administered by the Apex Organization, which was established under the World Bank financed Enterprise Development Project (EDP), and which i s currently managing the revolving line o f credit o f the EDP. The Apex Organization will release loans to commercial banks and Non-banking Financial Institutions (NBFI) that act as Participating Financial Institutions (PFIs), who inturnwould on-lend to investors. (ii)TheMarketImprovementandInnovationFacility(MIIF)willbeadministeredbyan independent Secretariat (i.e. Matching Grant Scheme Administrator). Given the private good nature of supply chain development investments, the administrator o f the MIIF must be a private sector entity or NGO with a demonstrated experience in agribusiness development and fiduciary qualifications for fund management. The function o f the Secretariat i s to coordinate and manage the MIIF that will provide matching grants for eligible interventions proposed and implemented by eligible beneficiaries. 14 (iii)TheRuralRoadsImprovementFacility(RRIF)willbeimplementedbytheRoads Development Agency (RDA) which will also act as the coordination body with MACO for the RRIF sub-component, while the National Roads Fund Agency (NRFA) will manage the overall funding of the sub-component and the Special Account assigned for the RRIF. This arrangement i s in line with the current Zambian legislation where the NRFA i s managing the road funding responsibility for the road sector and the RDA i s the manager of all road projects. Once the details o f the rural roads sub-component and its implementation plan are finalized, the RRIF sub- component will be implemented using the implementation arrangement currently adopted under the World Bank Road Rehabilitation Maintenance Project (RRMP), whereby any relevant information, including progress reports, on the implementation status o f the rural roads sub-component will be provided to the N C O in time for its records and reporting to the NPSC I PROJECT IMPLEMENTATION RELATIONSHIPCHART NATIONALPROJECTSTEERINGCOMMITTEE (MACO,MOFNP,MW&S, BOZ, MTENR, ZNFU) I I ? r xJ z r SUPPORT TO FARMERS AND AGRO-ENTERPRISES IINSTITUTIONALDEVELOPMENT A National Project Steering Committee (NPSC) will be established by the GRZ to approve annual work plans and budgets, provide guidance o n project implementation, and resolve any issue o f a policy nature that might arise during project execution. The NPSC would facilitate linkages between various ministries, line agencies and key stakeholders involved in the project implementation to ensure that project activities are implemented in a manner consistent with the development objectives. It will be chaired by the Permanent Secretary (Agriculture) of MACO, and its Members would include all the implementing bodies (MACO, RDA, NRFA, and Apex Organization), the Ministry o f Finance and National Planning (MoFNP), the Ministry o f Works and Supply (MOWS), the Bank of Zambia (BOZ), 15 Ministry of Tourism, Environment and Natural Resources (MTENR), and the Zambia National Farmers Union (ZNFU). NPSC will meet every three months to review project work plans and progress, resolve implementation bottlenecks, and provide guidance on any other matters prepared by the NCO. The NCO will act as the secretariat to the Committee. The NPSC would have a Sub-committee focusing onthe Matching Grant Facility. 3. Monitoringand Evaluationof Outcomes/Results Performance indicators have been established for the project and its components, and are provided in Annex 3. The indicators are linked directly to the results-based CAS goal o f sustainable, diversifiedand export oriented economy that responds to market demands. The project M&E system will build, to the extent possible, on the country systems already in place in order to minimize the need for parallel M&E frameworks. To a large extent, the project impact on smallholders would be measured through information already collected and consolidated by national institutions such as the Central Statistical Office (CSO) and Monitoring and Evaluation Unit o f the Policy and Planning Department o f MACO. National institutions would, in particular, be a source o f information on: (i) changes inproduction o f specific commodities at district level using annual Post Harvest Surveys; and (ii) relevant macro-economic and sectoral aggregates. Additional source of information for the project M&E to complement the country systems would include: (i)data provided by beneficiary enterprises and producer organizations financed under the SCCF and MIIF on the number o f farmers benefiting from improved access to marketing and extension services, changes in production volume from outgrower schemes, changes in farm gate prices, value o f agricultural production and agricultural exports, average yields, etc; and (ii)ad hoc surveys and participatory assessments carried out by the NCO which would be a source of additional information on changes in yields, adoption o f improved and more sustainable production systems, impact o f on-farm investment on farmer incomes, and return on labour. Monitoring o f the rural roads investments will assess the changes in production volumes as a result o f improved road network. The NCO will be responsible for the overall monitoringand evaluation (M&E) o f the project and a specific management information system (MIS) will be established within the NCO. Project monitoring would be based on activity reporting originating from the institutions involved in project implementation, as well as on information collected by the M&E Specialist of the NCO, from the farmers and farmer groups, agribusinesses, and contracted operators. To this end, the M&E Specialist would develop and operate procedures that enable up to date performance measurement, i.e. tracking o f activities, inputs and outputs. This would contribute to monitoring the overall project intermediate outcomes and, finally, the project impact. 4. Sustainability The proposed project will aim at increasing overall sustainability o f contract farming and outgrower schemes within the agribusiness sector. The measures devoted to smallholder productivity improvement will enable increased sales and incomes. Investments for business and organizational strengthening o f producer associations/groups are geared at enhancing the capacity o f important intermediary levels o f the value chain. Addressing the limitations and 16 risks related to the delivery o f services (e.g. extension, technology transfer) to the smallholders allows for sustained and efficient functioning o f the outgrower arrangements. Provision o f resources to seek new markets and to study and find ways o f improving system efficiency, transparency, and reciprocity o f interest, would also contribute to sustainability. The project operates mainly through existing institutions and will enhance their capacity to operate. Additional project management and capacity enhancing resources will be minimized and limited to coordination and facilitation o f functions. The line o f credit sub-component will be implemented through the Apex Organization housed in the BOZ, which is already managing revolving funds from the earlier EDP. The rural road rehabilitation and maintenance activities will be implemented through semi- autonomous RDA, and funded by NRFA that provides basis for sustainable financing for road maintenance. The RDA will ensure the sustainability o f planning, programming, improved implementation and enhanced efficiency o f road investments. Based on the reclassification process, which will be completed by end o f 2006, RDA in close coordination with NRFA will evaluate the selected rural roads and consider the accommodation thereof into the Core Road Network (CRN) as appropriate, in order to ensure the sustainability o f rehabilitation and maintenance o f the selected rural roads under the National Road Fund in the post-project stage. 5. Critical risksand possiblecontroversialaspects ____ Risks Risk Mitigation Factors Risk Ratingwith Mitigation Exchangerate volatility may The Bank, together with donors, supports on-going capacity reduce the competitiveness of building efforts of the Government and business community Zambianagriculturalexports. in hedging against weather, commodity price, and adverse exchangeratemovementrisks. Limitedmarket opportunities may Project designallocates substantialresources to developing dampendemand for investments new ventures, which, ifprovenviable, would become eligible into valuechains. for up-scalinginvestment. Commercialrisk will be minimizedthroughsupportfor commoditiesthat have clear market demandandare profitable. The MACO Procurementand The project would provide resources to build the capacity of M SuppliesUnit have limited MACO procurement staff through training in basic experience inthe World Bank procurement of consultant services and civil works preferably procurementproceduresof Works inthe first six months ofprojectimplementation. andConsultantServices. Coordination of implementation The projectwould establishaninter-ministerialcoordinating M amongseveral agenciescouldbe body, inwhich all the implementingagencies are represented, cumbersomeandcoulddelay to discuss implementationprogress and issues.Performance implementation. measuringsystems are to be inplaceincluding ways to . remedyconstraints. Lack of accountability andpoor A financial procedures manualwill beproduced, that will S' compliancewith existing documentall controlprocedures,clearly specify roles regulations/procedures andlackof and allocateresponsibilities. sanctions for offenders (as . The enactment of the new FinanceAct of 2004 andnew identifiedin2003 CFAA) may financial regulationshaveaddressedweaknesses result infunds not beingusedfor identified in2003 CFAA, andis likely to act as a intendedpurposesin an efficient deterrent. and economic way. 17 . Weaknesses inbudgetaryallocations, tracking of expenditures andbudgetarycontrol have beenaddressed throughthe adoptionof Activity BasedBudgeting, a new . FinancialManagement System, whichis working well, and MTEF. GRZ is showingits commitment to address weaknesses . identifiedin2003 CFAA throughthe implementationof the Public ExpenditureManagementandFinancial Accountability(PEMFA)program. The series of highprofilecorruptioncasesbeing prosecutedinthe courts of law are sending a positive messageto would-be offenders. The widely publicized . zero tolerance for corruptionat the highestpoliticallevel i s intendedto serve as a deterrent. Increase financial managementsupervisionmissions, as deemed appropriate. Projectdesign includes eligibility andbeneficiary selection M mostly capturedby elite groups criteria that helpsprevent suchbiases.Resources are directed and agribusiness operators. at improvingproductivity, quality, and sales ofproduceof smallholders and producersassociations who are linked to agro-enterprises. Smallholdersto agribusiness The projectdesignaims at improvingsystem efficiencyand S operators' arrangements are competitivenessby promotingreciprocityof interest and skewed in favor of agribusinesses. returns. Supportiresources wouldbeprovidedto assist smallholdersto improve their bargainingposition andget greater benefits from supportedcontract farmingsystems. Delayof the OPRC awards and The projectprovides short term technical assistancespecific to M weak contract management due to the OPRC management along with specialized and targeted lack of experience trainingto strengthenthe capacity of implementingagencies. There is a risk that political The project design includes specific criteria for prospective M pressure may determine beneficiaries and checks and balances inthe approval process beneficiaries from the line of to reduce chances of political interference. Similarly, areas credit andmatching grant, or even where rural roads will have maximumimpact for agricultural influencethe selectionof rural productivity havebeenagreed at appraisal. roads to berenamnwea. . . . .... . * Based on 2003 CFAA.Whilst GF has takenmany risk mitigating measures, this ratinghas notbeen changed as no formal studyhas been undertakensince the 2003 CFAA tojustify a lowerrating Risk ratings: High Risk (H)-greater than 75 percentprobability that the outcomeiresultwill not be achieved; Substantial Risk (Stprobability of 50 75 percent that the outcomeiresultwill not be achieved; Modest Risk (MFprobability of 25 . - 50 percentthat the outcome/resultwill not be achieved; Low or Negligible Risk (N)-probability of less than 25 percentthal the outcomeiresultwill not be achieved. 18 6. Grant conditions and covenants Conditions of Effectiveness (9 The Legal Agreement shall not become effective until evidence satisfactory to IDA has been furnished to IDA that the conditions specified in paragraphs (a) through (c) o f Section 8.01 o f the General Conditions for Credits and Grants of IDA,dated July 1,2005, havebeen satisfied; (ii) TheSubsidiaryFinancingAgreementshallhavebeenexecutedonbehalfofGRZ (the recipient) and the Apex Organization, in form and substance satisfactory to IDA; and (iii) GRZhasfinalizedandsubmittedtheProjectImplementationPlan(PIP) inaform and substance that i s satisfactory to IDA. Financial Covenants (iv) The standard IDA legal conditions requiring the existence of a suitable financial management system and the external audit ofthe financial statements will apply. 19 D. APPRAISAL SUMMARY 1. EconomicandFinancialAnalyses Summary of Benefits and Costs: Project benefits. The project would generate direct benefits to smallholders participating in organized supply chains through increased production o f high value crops and increased farmgate prices due to quality improvement. This, combined with improved access to markets, would contribute to increased farmers' incomes. The project i s expected to contribute to increased foreign exchange earnings through increased volume and value of marketed crops to regional and global markets through agribusinesses, traders and commercial farmers. Increased agricultural commercial activity would have a positive impact on both central and local governments' revenues. Finally, the project would create incremental employment in the outgrower schemes and in the trade and agro-processing sector, by supporting expansion of existing supply chains and development of new investment opportunities. Beneficiaries. The project would benefit directly about 65,000 commercializing smallholders who are already participating in organized supply chains. However, the project would have other significant number o f beneficiaries, not easily quantifiable a priori, in the form of smallholders who would benefit from up-scaling o f existing supply chains or development of new outgrower schemes. There would also be substantial qualitative benefits and multiplier effects, in the form of, for example, traders, entrepreneurs and agribusinesses participating in the project who would benefit from (i) increased and more secure raw material availability, (ii) improved produce quality, and (iii) reduced transport costs and increased outgrower schemes outreach through improved rural road network in high agricultural potential areas. Approach. Project investments would be on a demand driven basis. Indicative production models have been developed based on a range of enterprises identified with potential project beneficiaries (such as commercial smallholders, producer associations and agribusinesses), which are likely to be eligible under the project SCCF or MIIF. Models were successively developed at crop/activity level and farm level. Farm models were then aggregated at value chain level. Economic and financial analyses are based on the eight representative farm models, which were developed based on underlyingcrop budgets to analyze expected project impacts on farmer incomes. Financial Analysis. Financial internal rate o f return and net present value were calculated for each o f the farm models. All farm models appear financially attractive. The financial rate o f return (FRR) - before labor, o f farm models ranges from 26 percent for the development o f irrigated soybean production (with US$4 income per day) to above 100 percent for irrigated paprika and chiliproduction (with US$5.3 and $7.8 income per day, respectively). The total project FRR was estimated at 21 percent and financial net present value at US$14.3 million, The project FRR compares the costs and benefits along main supply chains which were analyzed on the basis o f the farm models, taking into consideration project costs which 20 were not included in the crop models, such as corporate extension and research, transport means for producer associations, and civil works for commercial infrastructure. Economic Analysis. The total project economic rate o f return (ERR) is estimated at 28 percent and net present value at US$26 million when taking into account the project costs as identified under the financial analysis above. If all project costs were to be included in the economic analysis, including investments into public goods, the economic rate o f return would be 22 percent. Sensitivity Analysis. Sensitivity analysis was carried out for different project scenarios. The project i s not particularly sensitive to limited increases in costs or decreases in prices (by 10 percent). It i s also not very sensitive to delays in project start-up. For example, a two year delay in accrual o f project benefits would yield an ERR o f 12 percent. The project is, however, relatively more sensitive to declines in benefits than increases in costs. A 30 percent increase in costs would yield an ERR o f 13 percent, while a 30 percent reduction in benefits would cause the ERR to drop to 7 percent. The ERR considers investments, such as rural roads rehabilitation to be o fpublic good nature. Fiscal Impact. Most o f the project activities would be conducted outside the GRZ budget as the bulk o f costs would be within subprojects implemented and co-financed by private beneficiaries. The main budget impact i s related to the maintenance o f the rehabilitated rural roads after project completion where the OPRC would no longer be funded by the Grant. The estimated maintenance cost under the OPRC i s USSl million per year. It i s expected that these costs would be covered by the fuel levy which goes to the National Road Fund managedby NRFA. 2. Technical Alternative technical approaches were considered in the design of the proposed project components, utilizing experience from similar components o f projects in Zambia. Extensive consultations were carried out with Government and key stakeholders on this to improve the technical integrity o f the proposed design. For the line o f credit, the experience o f the EDP proved valuable. The EDP was instrumental inencouragingparticipating financial institutions inZambia to lend to the commercial sector, with about 40% o f the lending by PFIs going to agriculture. It demonstrated that agriculture was bankable under conditions where PFIs could access finance wholesale on favorable terms but on a competitive basis and fully carrying out their sub-project appraisals on commercial criteria and fully bearing the credit risks. The experience with designing matching grants in Zambia has demonstrated that it i s more appropriate for supporting the provision o f goods and services with highpublic good content. The MIIF sub-component introduces matching grants aimed particularly at generating innovative technologies for supply chain development and to strengthening linkages between smallholders and agro enterprises. Utilizing global experience, the proposed matching grants will address industry-specific needs for supply chain development, including market research and market access activities, innovative extension and advisory services, and development o f business linkages between smallholders and agro enterprises. 21 The component dealing with rural roads rehabilitationandmaintenance works wouldbuildon the experiences on road designs, technical specifications, and standards developed under the ROADSIP. It would also involve capacity strengthening of the RDA/NRFA. During the process o f identification o f candidate rural road sectiondnetworks critical to support agricultural development, cross-sectoral (transport and agriculture) participatory approach was undertaken among central Government agencies, District Councils, and District Agricultural Committees. The OPRC rehabilitation and maintenance works use capital (equipment/machinery) intensive approaches to ensure a higher quality o f road rehabilitation works and sustained quality inpost-rehabilitation maintenance works and services. 3. Fiduciary (a) Financial Management. The overall conclusion of the Country Financial Accountability Assessment (CFAA) on Zambia, dated Novemebr 2003, was that "there still remain substantial weaknesses and risks within the public financial management system o f Zambia." As indicated inthe critical risks table, GRZ has taken several actions to mitigate these risks, which includes the implementation o f the Public Expenditure Management and Financial Accountability (PEMFA) Program recommended in the CFAA review. The PEMFA Program i s beingfinancedjointly by the Bank and a number of other development partners. The ADSP's financial transactions will be managed and/or facilitated by the MACO and the NRFA. The NRFA Financial Management Assessment's conclusion is that this satisfies the Bank's minimumrequirements under OP/BP10.02. NRFA i s currently implementing an IDA supported RRMP, a follow-on project to the ROADSIP which closed on 31March 2005. The financial management ratings for both projects have been satisfactory. The same accounting system at NRFA will be usedto administer the RRIF sub component o f the ADSP. The Financial Management Unit (FMU)o fMACO, under the overall supervision o f the Chief Accountant, will be responsible for maintaining the financial management and accounting records o f ADSP for the MACO-managed components. The rationale i s to have ADSP financial management system fully integrated with the Government FMS and the planned IFMIS roll out. Whilst individual implementingagencies will be responsible for their own financial management needs, they will be responsible for sending their quarterly financial management (and M&E) reports to the National Coordination Office (NCO) within MACO, to enable the Chief Accountant's office in MACO to prepare a consolidated ADSP progress report for submission to the National Project Steering Committee (NPSC) and IDA. Reporting to the MACO Permanent Secretary (Agriculture), the Chief Accountant will ensure that the financial management and reporting procedures to be put inplace will be acceptable to the Recipient and the IDA. A Financial Management and Procedures Manual (FMPM) is being developed which will provide guidance on financial management o f the project. MACO has adequate and qualified numbers of finance/accounting staff within the Financial Management Unit, who will be allocated responsibility for managing the day-to-day financial affairs o f the ADSP-related activities, under the direction of the MACO Chief Accountant. Training will be provided to all relevant staff inthe operation o f the Government FMS and the IDA financial management requirements and disbursement procedures. * The CFAA was part of acomprehensivePublic ExpenditureManagementand FinancialAccountability Review(PEMFAR) carriedout by the Governmentofthe Republic ofZambia with the support of cooperatingpartnersandthe World Bank inNovember 2003. 22 The ADSP activities will be subject to both internal audit by the Office o f the Controller of Internal Audit and External Audit annually by the Office o f the Auditor General. The project financial statements will be audited in accordance with the Zambian statutory requirements, with audit terms o freference acceptable to IDA. The overall conclusion o f the financial management assessment i s that, even though the project will operate in the country's weak financial management control environment, the project financial management risk i s assessed as moderate. (b) Procurement. The legal framework for public procurement in Zambia comprises the Zambia National Tender Board Act (ZTBA) o f 1982, the Tender Regulations (TR), and the Procurement Guidelines. The ZTBA provides for the establishment o f the Zambia National Tender Board (ZNTB) and the Central Tender Committee (CTC) in the ZNTB. The tender regulations provide for the establishment o f tender committees and procurement and supply units (PSUs) in sectoral line ministries, provinces and agencies. Some aspects of the regulations are supplemented by procurement guidelines. The World Bank Country Procurement Assessment Report (CPAR) for Zambia was conducted in 2002 with close collaboration of the government and Cooperating Partners and which in turn i s the basis for the multi donor reform program - Public Sector Management formed as one of the inputs for the Public Expenditure and Financial Accountability Report, Program. This program has the Public Expenditure Management and Financial Accountability (PEMFA) as one o f its components. Some o f the reform measures to be undertaken under the PEMFA include: (i) replacing the legal framework with a new Act based on the UNCITRAL Model Law and current international best practice; (ii) excluding executive procurement from the oversight responsibilities o f ZNTB and decentralize procurement fully to the procuring entities over a period; (iii)creating an independent appeals body/mechanism within a new Zambia National Procurement Authority (ZNPA); (iv) introducing procurement planning and a contracts register, and a procurement filing system; (v) re-designing the registration list system; and (vi) establishing a ProfessionalProcurement Cadre with competitive salaries. The project procurement activities will mainly be carried out by the M A C O Procurement and Supplies Unit (PSU) with technical input from the various Departments o f the Ministry, except inthe case o f the RRIF. A Procurement Capacity Assessment o f the MACO has been carried out. The procurement capacity of the MACO PSU i s reasonably adequate. The category of the PSU i s 3, which i s the highest delegated procurement level under the Zambia National Tender Board for a Ministry or an institution. However, the MACO PSU has inadequate experience in the procurement of works and consultant services for which there i s need to improve capacity. Overall, the assessment indicates an average risk. To mitigate the risk, the project would provide resources to build the capacity of MACO procurement staff through training inbasic procurement o f consultant services and civil works, preferably in the first six months o f project implementation. The procurement capacity will also be complemented by the capacity under the RDA and NRFA, which will implement and coordinate the implementation of the RRIF. Both o f these institutions have vast experience and good track record of undertaking public procurement, including the application of World Bank Procurement Guidelines for large works, goods and service contracts. 23 The Implementing Agencies under the Institutional Development Component will be responsible for the procurement o f their unit-specific needs. They will be preparing periodical reports on the procurement status o f their respective agencies, and submitting such reports to the NCO. The road rehabilitation and maintenance contracts under the RRIF and the related consultant activities of engineering design and works supervision, feasibility studies and environmental assessments will be implementedby the RDA and NRFA. Procurement of goods, works, and services for the MIIF could include a wide range o f works, goods and services as described in Annex 4 and the MIIF Operational Manual. The eligible activities will be undertaken by private beneficiary entrepreneurdfarmer associations themselves under the guidance and supervision o f the NCO. The procurement will be based on the private sector procurement practices and/or simplifiedprocurement practices used for community driven development projects, as will be outlined in operational manuals and procurement guidelines for this component. The procurement procedures, specifications, and contract packaging shall be suitably adapted to reflect practices which will be acceptable to the Bank. These will be elaborated in the procurement plans and the relevant project implementation manuals. As part o f the Financial Monitoring Reports (FMR), the NCO will consolidate and submit the six months reports to IDA not more than three calendar months after the end o f every semester. The FMR should includethe status o f (i) implementation of the procurement plan, and (ii) management and expenditures on contracts. M&E o f procurement performance would be carried out during IDA implementation supervision missions (frequency o f procurement supervision missions proposed i s once every 6 months) and through annual ex- post procurement audits. At minimum, 1 out o f 5 contracts will be subject to post review. In addition, post-reviews o f in-country training will be conducted from time to time, to review the selection of institutions/ facilitators /course contents/trainees and justifications thereof, and costs incurred. 4. Social Currently, almost a third o f the smallholder farmers inZambia are organized in some form o f out-grower scheme arrangements. The majority o f those involved are contracted by cotton companies. However, outgrower production systems are diversifying to other high value crops and livestock products. The major commodities involved in such schemes are: cotton, sugar, Burley tobacco, paprika, honey, coffee, chilli and dairy products. The analytical evidence shows that smallholders who participate in outgrower schemes are better off than those who do not; Le., crops typically cultivated under outgrower arrangements produce generally much higher per hectare net earnings than common alternative, such as low-input production of maize. Input credit packages and extension advisory services provided by agro-processing and marketing companies make it possible for small-scale farmers to get involved in the production o f such high-value crops that the cash-poor smallholders without access to credit would not otherwise be able to cultivate. The companies also provide them with assured markets. This has meant increase in cash earnings o f the participating households. Another indication o f the beneficial impacts o f outgrower schemes for smallholders i s that farmers have shown considerable persistence incontinuing their contract farming arrangements. A Resettlement Policy Framework (RPF) was prepared to minimize and mitigate any potential adverse social impacts resulting from the project investments. Given the demand 24 driven nature o f project activities, it would be difficult to estimate the number o f people who would be impacted by the project investments ex ante. However, the populations that are likely to be impacted are agricultural households in high potential agricultural areas. These areas would most likely include Chipata, Lundazi and Katete Districts in Eastern Province; Choma in Southern Province, and Chongwe in Lusaka Province. The combined population of households inthese areas i s 178,434 people, o f which 168,893 are rural households (about 20% o f total rural household in Zambia). The only activity that could have adverse social impacts i s rural road improvement, which, in rare instances, could involve involuntary displacement, loss o f assets, or impact on livelihoods. Aspects which might result in involuntary resettlement are road realignment and diversion, borrow pits and construction camps. Even then, experience shows that the social impact o f rehabilitation and maintenance projects are considerably lower than that o f new road construction. The RPF provides the overarching framework by which potential resettlement issues would be addressed. 5. Environment The potential environmental concerns as identified in the Environmental and Social Management Framework (ESMF) are those associated with (i) rehabilitation and maintenance o f rural roads by RDA; (ii) agricultural development and commercialization which would lead to increased production volumes both through extensive and intensive margins; and (iii) increased value added processing and marketing capacity o f agribusinesses involved in the commodity supply chains. Anticipated sub-projects would include, for example, the following investments: farm power, farm equipment and implements, irrigation schemes and facilities, post-harvest and handling equipment and means, technology and marketing at agro- enterprise level; and handling, transportation, storage and processingassets improvements. The project would not finance any major infrastructure, and sub-projects are unlikely to involve the acquisitions o f land. There would be no Environmental Category A sub-projects financed under the project. The project will thus have limited environmental impact. The road rehabilitation and maintenance works are expected to have minor negative environmental impact since the works will follow the existing alignments. Small-scale agriculture and commercial farming projects may involve strengthening existing practices, introducing new and perhaps exotic crops, or crop diversification or intensification with new farming systems. They may also assist people move from shiftingto settled agriculture, from subsistence to cash cropping, and/or from labour-intensive to mechanized farming. Land clearing and preparation, perhaps o f marginal lands, may be required, as well as new water supply and management systems. The project would not directly finance purchases o f fertilizer and chemicals. Agribusinesses and farmers are able, or course, to purchase them from input suppliers. 25 6. Safeguard Policies Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OPIBP 4.04) [I [XI Pest Management (OP 4.09) [XI [I Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [XI Involuntary Resettlement (OPIBP4.12) [XI [I Indigenous Peoples (OD 4.20, beingrevisedas OP 4.10) [I [XI Forests (OP/BP 4.36) 11 [XI Safety o f Dams (OP/BP 4.37) [I [XI Projects inDisputedAreas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI This is an EA Category "B" project. Actual project investments are demand driven and will only be determined during implementation. ESMF was prepared to address the substantive requirements of the OP4.01 and OP4.09, the latter primarily for livestock hygiene facilities and weed control around project-funded facilities. In addition, a Resettlement Policy Framework (RPF) was prepared to address potential land acquisition issues of the project under OP4.12. Both the draft ESMF and RPF have been disclosedinZambia and sent to the Info Shop on January 5, 2006. The ESMF also contains a screening procedure for determining if a resettlement plan i s required for any particular investment according to the RPF. The ESMF separately addresses differentproject components as follows: 1. Component 1.1:Supply Chain Credit Facility through a line of credit to finance working capital and investment term lending. Project funds will flow to commercial banks for on- lending. This i s a financial intermediary (FI) arrangement, and each FI (Le. commercial bank) will be required to screen proposed investments and ensure that sub-borrowers comply with the applicable World Bank safeguards policies and similar Zambian requirements. The ESMF specifies what investments (by type and/or location) must be approved by an FI and by the World Bank and Zambia government. 2. Component 1.2: Marketing Improvement and Innovation Facility would provide financial resources, on a matching grant (MG) basis, for the development o f innovative business linkages between smallholders and other actors in the supply chains, introduce innovative technologies, and demonstrate improvements to a broader audience o f supply networks. Like the FIs in Component 1.1 (above), the MIIF Secretariat will be required to screen proposed investments and ensure that grant recipients comply with the applicable World Bank safeguards policies and similar Zambian requirements. 3. Component 1.3: Rural Roads Improvement Facility for the rehabilitation o f feeder and district roads o f economic importance inhighpotential areas. The sub-component would be implemented through the RDA. The RDA has a well-established Environmental Management Unit that can competently handle World Bank safeguards, and similar Zambian requirements. The ESMF describes the procedures for planning, review and approval by the RDA to ensure that project-financed investments comply with the applicable World Bank safeguards policies and similar Zambian requirements. ~ liBy supporting theproposedproject. theBank does not intend toprejudice thefinal determination of theparties'claims on the disputed areas 26 Apart from the RDA, the recipient has limited safeguards policies capacity. The ESMF and RPF outline institutional arrangements, including the roles and responsibilities o f various stakeholder groups, to implement and monitor environmental and social mitigation measures, and include capacity building activities to strengthen their ability to act effectively on those responsibilities. A project-funded Safeguard Specialist will be a full-time member o f the NCO to support project implementing agencies in fulfilling their safeguards responsibilities through training, technical assistance, monitoring and performance reviews. 7. PolicyExceptionsand Readiness Policy exceptions: Inview of the dependence of a large number of poor smallholders and farm workers (over 100,000) on tobacco for their income inZambia, it i s proposed to allow the project credit line and matching grants facilities, on a demand driven basis, to provide resources for tobacco- related investments, provided the other eligibility criteria are met. The rural economy in Zambia i s considered to fall within the exception to the Bank policy under OP 4.76, which states that the Bank does not lend directly for, invest in, or guarantee investments or loans for tobacco production, processing, or marketing, but recognizes that for countries that are heavily dependent on tobacco as a source o f income (especially for poor farmers and farm workers), an exception may be justified. Based on current data and industry trends, it i s expected that tobacco producing and marketing investment would take up a small share o f credit line and matching grants; however, the proportion will be monitored and the eligibility criteria may be adapted if the take-up from tobacco related investment starts to depart significantly from current trends. See Annexes 1and 4 for details related to this issue. Readiness: A draft Project ImplementationPlan(PIP) has beenprepared before Negotiations andwill be finalized before effectiveness. ReadinessChecklist Comments Project Management Unit (PMU) The PMUi s the National Coordination Office (NCO), which i s being mainstreamed inthe MACO. TORSfor the hired-in staff are beingprepared. M&E SysteminPlace Consultants hired and preparing the M&E plan. Initial baseline data collected during project preparation. Fiduciary (Procurement and Financial First 18 monthprocurement plan agreed, Management Arrangements inPlace) draft ProcurementManual, and draft Financial Management Manual received and under review. Project Implementation Plan Draft PIP has been received. Counterpart Funding Does not apply; since 100% IDA financing i s required under agreed Zambia country financing parameters. LandAcquisition Plans Ready N o t applicable. Safeguards Addressed and Disclosed Disclosure requirements already met. ~ Institutional and Social Assessment Institutional assessment o f implementing Completed and Applied agencies was completed as part of project preparation. Social assessment i s not applicable. 27 Annex 1: Country and Sector Background ZAMBIA: AgriculturalDevelopmentSupport Project(ADSP) Background: Zambia i s a land-locked nation bordered by eight countries. It has a total land area o f about 750,000 h2 a population estimated at about 10.5 millionpeople, with an average density and of about 13 people per km2,which i s relatively low compared to many African countries. Population density i s higher near the line of rail and along the main roads, where human settlement and economic activities were organized earlier during the colonial times. The population in Zambia has been growing at a slower pace in recent years, not only due to successes in family planning programs, but also because of public health problems, among other things, the high incidence o f HIV/AIDS. The population growth during2000s was 1.7 percent per annum, as opposed to the annual average o f 2.5 percent inthe 1990s. Macro-EconomicSituation: Background. The Zambian economy has been historically dependent on copper mining. The gradual decline in world copper prices in the 1980s and 19990shas led to economic decline and erosion of the relatively high standard of living enjoyed by the population inthe 1970s. This led to unsustainable budgetary deficits and hyperinflation as the government resortedto external and internal borrowingto minimize the decline inliving standards. Structural reforms initiated in the 1990s slowed the economic decline, but did not lead to the expected high economic growth as the country was slow to diversify. Duringthe first half o f the reform period in 1991-98, Zambia's real GDP fell by an average rate o f 0.2 percent a year, mainly due to the declining performance o f the mining sector. Growth trends reversed, however, during 1999-2003 period when real GDP grew at an average rate o f 4.0 percent a year. Recent economic developments. Zambia i s experiencing a robust growth period with positive per capita GDP growth for seven consecutive years and with all sectors positively contributing duringthis period. This contrasts sharply to the early period of reforms o f 1991- 1998. Real GDP growth is estimated to equal 5.1 percent for 2005 albeit the country experienced a drought for the 2004/05 farming season and witnessed serious fuel shortages in the fall o f 2005 because o f an unanticipated production failure at the local refinery. Growth i s expected to increase to around 6 percent for 2006 as the 2005/06 planting season has seen sufficient rains while other sectors are able to sustain their growthmomentum. The rise in copper prices between 2003 and 2005, combined with a recovery in copper production, has led to significant growth inexports. Non traditional exports have also grown rapidly amounting to an estimated US$540 million for 2005, up by 115 percent compared to its US$ level in 2000. As a result, overall export levels measured in US$ in 2005 are estimated to amount to US$2.1 billion, almost three times the level o f exports in2000. pronounced real appreciation against all major currencies relevant for Zambia - the Kwacha The last quarter o f 2005 saw a strong nominal appreciation o f the Kwacha and an even more appreciated by 34 percent with respect to the US$, and over 40 percent with respect to the Euro, Rand and UK Pound. However, when evaluating the real effective exchange rate, which corrects for inflation differentials with all o f Zambia's trading partners, the Kwacha 28 began a steady appreciation in real effective terms in mid 2002. The steady appreciation o f Kwacha has affected particularly the profitability of the agricultural sector (cotton, vegetables, tobacco, paprika, honey, etc.) which depend heavily on exports denominated in major currencies and where prices are set on the world market in US$,while most of the sector's production costs are denominated in Kwacha. Several causes can be identified for the sudden appreciation of the Kwacha: strong export performance inrecent years, helpedby the recovery of the world copper prices; HIPC completion, Multilateral Debt Relief Initiative (MDRI) and increased AID flows which reducedZambia's external debt from $7 billion to just about $500 million; and willingness by foreign portfolio investors to hold GRZ Treasury Bills and Bonds. If the new values of the Kwacha are maintained, it may have very significant effects on Zambia's export competitiveness. Future growth rates will need to come from an improved trade regime, one that increases incentives for the private sector to produce goods for export markets. The recently completed Country Economic Memorandum (CEM, 2005) simulates the growth and welfare impact of both exogenous changes and alternative government policies over the next decade (2004- 2015). The simulation results show that targeting traditional and nontraditional crops, which have strong links to export markets, would be the best way to enhance growth and household welfare. The pro-poor outcomes o f agricultural expansion would be greatly enhanced if market access were widened on a large scale. Improving the condition of the road network and extending the network to remote areas i s a key step not only to increasing growthbut also to significantly reducing rural poverty. Poverty: Zambia remains one o f the poorest countries in Sub-Saharan Africa. However, using a survey design similar to the one used in the survey conducted in 1998, the 2004 Living Conditions Monitoring Survey IV (LCMS) shows that Zambia's poverty headcount has declined from 73 percent in 1998 to 68 percent at the end of 2004. The incidence o f poverty fell both in the rural areas (from 83 to 78 percent) and in the urban areas (from 56 to 53 percent). All provinces showed reduction inpoverty. The largest reductions were observed in Copperbelt and Eastern provinces. The lowest reductions were noted in North-Western and Luapala provinces. However, this decline i s less than that needed to reach the poverty related Millennium Development Goal (MDG), which aims to reduce the proportion o f Zambians whose income is less than one dollar a day by 50 percent between 1990 and 2015. Poverty i s more widespread inrural areas where two-thirds o f total population and 72 percent of the poor live, with the highest concentrations in Northern and Eastern Provinces. Agriculture i s the overwhelmingly dominant activity inrural areas. Infour out o f five rural Zambian households, the principal activity o f the household head i s farming. Only nine percent o f rural individuals live in households where the head i s engaged mainly in wage work, with a smaller percentage among the poorest households. The Poverty and Vulnerability Assessment for Zambia (PVA, 2005) identifies that poorer households in rural Zambia are on average, larger and have more children per working age adult than better off households'. The household heads of the poorest households have less schooling and are older and more likely to be female than the heads o f better off households. The PVA also identified that the principalreasons for rural poverty are structural intheir nature, rather than due to shorter term shocks. The dominant causes are related to agriculture, particularly the twinproblems of lackof accessto agricultural inputsandlack ofcredit. 29 Agriculture Sector Background. Zambia has a considerable agricultural potential for economic growth and poverty reduction. The country i s endowed with a large naturalresource base for agricultural production. Land resources remain largely unexploited. Out o f a total land area of 75 million hectares, about 40 million hectares are suitable for agricultural production, of which only 1.5 million hectares are cultivated every year. The country has also abundant water resources which could be used for irrigation. However, only about 100,000 hectares (less than 2 percent) o f its cultivated land i s irrigated. This i s about 24% o f an estimated 420,000 hectares o f potential irrigable land in Zambia. The FA0 estimates that the current irrigated land i s approximately 156,000 hectares if low land seepage zones and wetlands with water control are included. It has been recognized for a long time that Zambia i s well endowed with these physical resources, but the distance from significant external markets means that the cost of transport reduces Zambia's competitiveness, which i s why much o f the land i s still not cultivated and the irrigation potential i s not tapped. Agriculture remains an important sector for the national economy in Zambia. Together with agro-processing, it accounts for more than 40 percent of Zambia's GDP. The sector provides employment to about 67 percent o f the labor force and supplies raw materials to agro- processing industries, which account for about 84 percent o f manufacturing value-added in the country. Agricultural exports reached US$189 millionin 2004, representing about 2% o f the GDP and about 12% of total exports. Main export products are cotton, tobacco, coffee, vegetables and cut flowers. In spite of its potential, the agricultural sector has not developed commensurate to its resource endowment. Before introduction o f policy reforms in the 199Os, the Government attempted to support smallholder commercialization though provision o f subsidized inputs and credit, market price interventions and operating agricultural parastatals. However, these initiatives did not yield the desired results because they didnot reflect commercial reality; the desire to provide cheap staple food for the urban population and the uniform price paid throughout the country biased production incentives in favor o f maize. Inthe first 25 years after independence, the agricultural sector in Zambia grew by an average of about 2.5% per annum, considerably below the population growth rate, at that time estimated at 3.1%. Following the economic reforms o f the early 199Os, the agricultural sector has moved out o f public control to become a market-based economic sector. The Government dismantled parastatals, moved away from marketing and price settings and eliminated large share o f subsidies. During the period o f 1990 to 2000, agricultural GDP grew at an average rate o f 3.9% per annum. This was faster than the population growth o f 2.5%, indicating a positive growth per capita. Average growth rates have, however, slowed to 1.7% during 2000s, as a result o f series o f droughts, which exposed the sector's vulnerability to external shocks. Policy Environment. The current policy environment in agriculture i s relatively free o f major distortions and conducive to sectoral development, as demonstrated by relatively high sectoral growth rates since early 1990s and explosion o f agricultural exports. The Government has put in place a suitable policy environment for broad-based agricultural growth. The PRSP identifies assistance to be provided to small-scale producers by facilitating irrigation, credit, better extension, and enhanced access to markets as key priorities. The strategy also recognizes that commercial agriculture i s well below its potential 30 and aims at encouraging large-scale production to exploit the untapped potential, especially for export markets. To facilitate faster and more diversified agricultural activity, priority i s placed on infrastructure development, particularly feeder roads with emphasis on products for which Zambia has comparative advantage in the different ecological zones. The Agricultural Commercialization Program (ACP) was put in place to spearhead the implementation of the agricultural component o f the PRSP. The ACP underscores the focus on developing commercial agriculture, while at the same time ensuring food security and increasing incomes, thereby contributing to poverty reduction. The vision set out inthe National Agricultural Policy (NAP) i s "to promote the development of an efficient, competitive and sustainable agricultural sector, which ensures food security and increased income". To this end, MACO i s inthe midst o f an organizational restructuring that ensures conformity with the setting of its core functions to become more responsive to the needs o f the producers. Furthermore, MACO has finalized the Agricultural Marketing Development Plan (AMDP) which lays out a strategy for the development o f an efficient and functioning private sector-driven agricultural marketing system inZambia. Agricultural Production Trends. The main crops grown in Zambia are maize, cassava, groundnut, millet, cotton, sorghum, sugarcane, sunflower, soybeans, wheat, rice and tobacco. The relative importance o f each crop in terms o f production and area cultivated has been changing over the past few decades, largely influenced by government policies (Table 1). Production patterns inthe 1970s and 1980s were strongly influencedby government in favor of maize. Inthe 1980s, maize accounted for roughly 70 percent of total cropped area. Since the start o f reforms, Zambian farmers have diversified considerably away from maize in response to the decline in heavy subsidies on maize production and Government marketing interventions. In the past five years, the share o f maize has declined to about 55 percent. Maize area decreasedby 165,007 hectares; a 22 percent decline over the period 1990 to 1999. Soybeans and sunflower areas decreased by 18,100 hectares (a 60 percent decline) and 30,933 hectares (a 70 percent decline) respectively. These crops were partially substitutedby a 55,000 hectare increase in cotton area since 1990 (65 percent increase); a 40,000 hectare increase in groundnut area (76 percent increase), a 130,000 hectare increase in cassava area (65 percent increase), and an increase in sweet potatoes by 7,000 hectares (54 percent increase). Of the higher-value, labor intensive crops, tobacco has shown the largest increase, from 5,000 to 14,000 hectares3. In addition, increased production o f export crops such as coffee, flowers and vegetables also took place after the reform due to the positive climate created by the liberalization o f the economy. The rapidincrease inburley tobacco area, a smallholder crop, was largely the resultof liberalization o f agricultural markets inthe early 1990s which aimedto diversify smallholder productionsystems away from its heavy dependenceon maize, It shouldbe notedthat expansionofburley area come from avery low productionbase, from about 1,500 ha in 1989190to about 8,000 ha in2003/04 -- which isabout 0.5 percentof total cultivatedarea inZambia. The increase inthe area under Virginia tobacco, from 3,500 ha in 1989/90to about 5,500 ha in2003/04, was muchslower andwas largely as a result ofinflow of commercial farmers fromZimbabwe. According to the World Bank globalcommodityforecasts, the projectedprice for burleytobacco is expectedto increase only marginally innominal terms between2005 and 2015, with the result that the Bank does not envisage the same level of robustgrowth inburley tobacco as inthe precedingdecade. 31 Virginia Tobacco 3,489 14,331 311% 3,588 5,464 52% Paddy rice 9,293 11,699 26% 9,627 12,379 29% Sorghum 19,591 24,467 25% 48,466 45,350 -6% Millet 31,531 39,784 26% 58,869 59,081 0% Mixedbeans 14,312 18,161 27% 26,436 45,270 71% Agribusiness Support to Smallholders. Market liberalization inagriculture entailedremoving government involvement in the sector, such as in the marketing o f agricultural inputs and outputs, the provision o f credit to smallholders as well as operating agricultural-basedpublic enterprises. This led to the collapse o f the governmental agencies that were involved in marketing o f agricultural inputs and outputs, and in supplying agricultural credit to small farmers as they could not sustain themselves without subsidies. The disappearance o f such institutions was strongly felt by the bulk o f smallholders as they did not find any valid alternative to such institutions. The immediate effect o f liberalization has been the increased costs o f agricultural inputs, which often meant reverting to low input and low output production technology, leadingto low productivity andmarketable surplus and low incomes. With the declining Government role inthe sector, the private sector has become a key source for funds and services for the development of smallholder agriculture in Zambia. Since the mid-l990s, production systems have emerged in Zambia that are based on partnerships between smallholders and commercial farmers or agro-entrepreneurs. In these schemes, a commercial farm/farmer or an agri-business entity enters into a business partnership with smallholders, to produce commodities o f high value to be marketed by the entrepreneudentity. The entrepreneudentity will provide to the smallholder the necessary technical extension advice and inputs and contract the latter to produce an agreed product for which the former will ensure market outlet. The reason behind the upsurge o f contract farming i s the appreciation that these arrangements respond to the reciprocal needs o f both the agribusinesses and the small-scale farmers. The former are eager to get high quality produce and the latter require working capital and a market outlet. However, there have been considerable issues with side-selling and side-buying o f outputs. This has resulted in the larger agribusinesses supporting outgrower production, in particular the cotton industry, changing their internal support structure and reducing the extension service offered to the farmers. In addition to the reduction in the formal extension, these larger agri-businesses established rural-based agents who are given incentives to ensure that farmers repay loans and sell their crop to the lender o f inputs. Contract farming and outgrower schemes have become important elements o f agricultural development in the country. The schemes have been expanding rapidly, mainly along the line o f rail and major highways, given their ease o f accessibility and market proximity. In 2003/04, almost a third o f smallholder farmers in Zambia were organized in some form of out-grower scheme arrangements (Table 2). When considering that some farmers may be 32 involved in more than one out-grower scheme, the total coverage of small holder farmers in out-grower scheme arrangements i s likely to be around 30-40 percent. The size of contractual farming and outgrower schemes vary from small operations covering a few hundred farmers to massive operations in which hundreds of thousand of smallholders participate. Most o f these farmers are engaged in cotton production. In 2003/04, about 85 percent o f farmers participating in formal outgrower schemes were contracted by cotton companies. However, there have been considerable efforts to promote diversification o f out- grower production systems, but results have been mixed. Tobacco has been successfully expanded, but the paprika industry has shown a disappointing decline while in some others such as honey and food crops (maize and soybeans), the number of farmers participating in out-grower schemes has grown drastically. The coffee sector i s comparatively small and also grew at a slow rate. There i s increasing evidence that smallholders who participate in outgrower schemes have been better off than those who do not. Input credit packages and extension advisory services provided by agro-processing and marketing companies make it possible for small-scale farmers to get involved in the production o f such high-value crops that the cash-poor smallholders without access to credit would not otherwise be able to cultivate. The companies also provide them with assured markets. This has often meant a clear increase in the cash earnings o f the participating households. Crops typically cultivated under contractual arrangements such as paprika, tobacco, various types o f vegetables and cotton, produce generally much higher per hectare net earnings than common alternatives, such as low-input production o f maize. There has been an evidence of positive spill-over effects from production under an out-grower scheme to the regular farming activities in form of technology and skills transfer and inputs. Another indication o f the beneficial impacts of schemes for smallholders i s that farmers have shown considerable persistence in continuing their contract farming arrangements. Agricultural Market Potential. Agricultural market potential for the Zambian agribusiness sector comes from three sources; domestic growth in demand; regional trade with its neighbors, and international trade. Due to high poverty levels in the country, local demand beyond basic food needs i s limited. Dairy and oilseeds would be examples o f produce that mainly have a local demand. Poverty thus tends to constrain the exploitation o f local markets. Selling primary and processed agricultural products to international and regional customers offers Zambian farmers and firms opportunities for rapid income growth. Regional markets are particularly lucrative for staples grown by Zambian smallholder farmers. However, regional and international country markets are highly competitive with consumers o f dynamic and exacting product price and quality preferences. Virtually all o f the international markets for agricultural produce are already well-supplied. Therefore Zambian exporters have to search for niche opportunities where it may have some comparative advantage. Box 1presents the market potential o f key commodities. The agro-processing and marketing companies are likely to be the main growth drivers o f the agricultural sector for years to come. Sustained growth, however, very much depends on the ability of the agro-enterprises, including large scale commercial farmers, to integrate smallholders into the regional and global value chains. The long-term prospects for agriculture in Zambia will depend on the following elements. First, further integration with world (WTO) and regional (SADC) markets would provide greater opportunities for Zambian agriculture, which enjoys a relatively favorable natural resource base and an internationally acknowledged quality for a number o f export products. However, greater challenges would 33 I I- f arise as a consequence o f increased competition from the rest o f the world (e.g. low cost producers in Latin America and South-East Asia) and due to decreasing market prices and subsidized agricultural economies of major producing countries. Private sector enterprises are instrumental in increasing the competitiveness o f agriculture and seeking best market opportunities. Secondly, given the large share of labor in agriculture, agricultural commercialization process in Zambia will continue to rely on labor intensive practices which characterize current outgrower schemes. Small farm sizes would imply that higher productivity o f smallholder farming systems must come from a diversification into higher value crops, improved yields and product quality. Thirdly, declining public budget for agriculture will imply that growth for agriculture will rely less on "hardwareyy,such as large scale irrigation projects, and more on "software", such as transfer o f technologies and methods o f production, innovation and human resources development. It also relies on the increasing role o f private sector financing for infrastructure development. 3ox 1: Commodity market potentialin Zambia. Cotton. Zambia's uroduction of lint cotton at 53.000 tons is minute in a market that is o w 23 million tom. .\lost of the ~~ ~ cottonis tradedinto SouthAfrica for spinning. By 2007, world demandis expectedto have increasedby 1million tonnes. IfZambia cancontinueto producecotton competitively, then its productionis unlikely to affect world market supply of the crop. There is asmall spinningindustryinthe country. Paprika. The world paprikamarketis approximately75,000 tons per annum. Zambiaproduces less than400 tons presentlybut could increase this to over 2,500 tonnes, a figure it achieved at the end o f the 1990s. At this levelit would still only be supplying3.3 percent of the worldmarket. As productioncosts inEuroperise, Africa couldbecome a more competitive supplier of this spice. Increases incolor yield, which are also envisionedthrough advisory support to farmers, couldincrease Zambia's standinginthe international markets. Some paprikais also sold regionallyto processorsinSouth Africa. Chilli The chilli mashmarket for Tobasco is directlycontractedto a supplier inZambia andcurrently stands at 342 tons. . Under contractualagreementsthere is growthpotential to expandyearly productionto over 1,500 tonnes per annum inthe next four years. There is alocal market for chilli products sold to supermarkets and this could be developedregionally whenproductionvolumes increase. Cofee. Zambia currentlyproducesjust over 6,000 tons of an Arabica coffee in a total world coffee market of 5.7 million tons expectedin2005. Arabica prices havebeenimproving duringthe recentyears andifZambia reaches its desired target of 10,000 haofcoffee productionby 2020, itwill still have a fractionof the worldmarket butbepositionedinthe sector that is showing stronggrowth. Inorder to realise the biggestreturns for this crop, it has to be sold into the specialty market. Currentlyonly 500 tons of the Zambiancrop reachesthis market. About 15 percentof Zambiancoffee is consumedlocally andthere is potentialto sell moreproduceinto the SouthAfrican andthe Botswanamarkets. Dairy. Mostmilk enteringthe formal sector (about 30 millionlitres) inZambiais from freshdairyproduction. There is nearly 5 million litres that is reconstitutedfrom milk powder, which is more expensivethan fresh milk (about 25 percent higher than using raw milk). This is the import substitutionpotentialthat existswithin the industry and couldbe supplied by small-scale dairy farmers. However, the potentialof the growth of domesticconsumptionof milk inZambia is limited. Oil Seeds. Small-scaleoil seedproductionthat is directly soldto processorscurrentlystands at 500 tons ina domestic marketwhle over 12,000 tons ofpalmoil are imported annually. The livestockfeed industry is expectedto grow 30 percentover the next five years and this sector is able to buy all the local oilseeds available. Honey. The organic honey market is difficult to quantifyinternationallybut Zambia has certifiedorganic productionareas andconfirmed buyers inEuropeand USA. This market is large andgrowing. Buyers inEuropeand USA are continually looking for new sources of supply of organic honey. The localmarket accepts local productionthat is often adulterated andpremiums for quality are not appreciated. Honeyis available regionally andthere i s limiteddemand for apremium organicproduct. Vegetables.The mainexportopportunities for Zambian vegetables are into the EU, Australia, USA andregional markets. Dueto highair-freightcosts inZambia, thesemarketsmight be atriskandpotentialfor further developmentis low. MarketsinSouthAfrica havelow potentialdue to the well developedlocal commercial farmingsector enabling them to produce locally to satisfy demand. Otherregionalmarketsfor freshvegetables do not exist becauseof the low purchasing power of the population. The limitedexpansionpotentialthat maybe representedin the domesticmarket by the supermarket chains is well servicedby commercial farmers andto a very limited extent by few peri-urban smallholders. 35 RuralFinance: Background. In 1980, Barclays Bank o f Zambia (BBZ) started the LIMA Scheme. The scheme i s believed to have operated successfully in the pre-liberalised regulated produce marketing system. However, the program deteriorated in performance in 1991 largely as a result o f liberalization of the marketing system. The scheme was eventually discontinued and BBZ has since reviewed its corporate strategy, which included contraction o f its branch network resulting in the closure o f several outlying branches. In similar vein, Zambia National Commercial Bank (ZNCB), in the mid 1980s, established a special program for seasonal loans to peasant farmers with a 2 hectare farming plot. The farmers were generally beginners who by their circumstances lacked collateral to pledge to the banks and therefore had no access to borrowed financial resources. Under the program, the farmer could grow any one o f the following crops: maize, cotton, soybean, sunflower, and sorghum. To qualify for a loan, farmers had to show evidence o f residence, possession of at least 2 hectares o f land and to have satisfactorily operated a bank account with a ZNCB branch for at least six months before a loan could be granted. However, following massive defaults arising from liberalization o f the economy and hence the produce marketing system, ZNCB became reticent about unsecured lending with the result that many o f the small-scale farmers could no longer qualify for repeat borrowing. The program was subsequently discontinued. The critical element here was that in the regulated produce marketing regime, the stop order mechanism ensured collection o f the banks' portion o f the funds directly from the produce marketing bodies. This was not possible with the marketing agents o f the liberalized environment to whom the farmers were now selling their commodities with no stop order arrangements. ITable 3. CommercialBanksLoans andAdvances by Sector (K' million) SECTOR I Dec-00 IShareI Dec-01 1Share 1 D e e 4 2IShareI Dec-03 IShare 1Jan44 IShare 1 Agriculture, Forestry, 185,215 17% 221,065 20% 228,216 22% 345,642 25% 352,551 25% FishingandHunting Communications 36 Currently commercial banks are still the dominant providers o f agricultural credit facilities to the farming community. Agriculture has become a leading sector for commercial banks' loans and advances in Zambia. In 2002 and 2003, lending to agriculture sector reached 22 and 25 percent, respectively, o f the total commercial banks' loans and advances (Table 3 above). Credit facilities to agricultural producers take three forms: (i)short-term credit; (ii)medium- term; and (iii) long-term credit. Short-term credit aims at providing the farmer with working capital funds to purchase production inputs such as fertilisers and chemicals, seeds, fuel and lubricants, and cash to pay for farm labor and other recurrent bills. This facility has to be repaid within the season (normally a year) inwhich the crop i s grown and harvested, and it i s therefore commonly referred to as a seasonal loan. Medium-tern credit i s extended to assist the farmer to acquire farm support fixed assets such as vehicles and office equipment. This facility i s repaid over an average period o f three years. Leasing companies regularly complement the commercial banks by offering lease finance credit especially for acquisition o f vehicles for farm transport needs. The attraction o f lease finance i s that the assets also constitute collateral for the lending. Long-term credit provided by banks in Zambia i s a facility meant for financing long-term fixed assets. Repayment o f such loans range for a period o f between five and seven years, normally including a grace period. Constraints to Agricultural Credit. Virtually all commercial banks in Zambia insist on traditional prudent lending, rigorous credit appraisal procedures, and require, without exception, satisfactory tangible security to secure the facilities to be granted. As a result, the bulk o f commercial banks' lending to the agricultural sector inZambia thus far has gone to the commercial farmers and agribusinesses who are able to meet the banks' lending criteria. The above scenario has resulted, to all intents and purposes, in the total exclusion o f commercial bank credit to the small-scale or smallholder farmers, who simply cannot meet the stringent and prudent lending criteria applied by the banks in credit application processing. In the traditional form, small-scale or smallholder farmers use traditional farm production methods and are confronted by geographical isolation, difficulty in accessing inputs, extension services, and absence of reliable market outlets for their produce. They also lack the sort of tangible security requiredby the commercial banks. The current levels o f both the nominal and real interest rates in Kwacha terns are very high and a considerable hindrance to potential borrowers in the agricultural sector, even taking into account the evident downward trend ininterest rates over recent years. Other transaction charges by the commercial banks when dealing with lending proposals include: (i) evaluation fee; (ii)commitment fee; (iii) documentation fee; and (iv) other fees depending on mode legal o f payment on project item purchases such as letter o f credit, bank draft, and electronic funds transfer. These extra charges could run up to 5 - 10 percent in addition to the already high interest rate charge, although it must be emphasized that these are valid transaction charges in the banking and financial services sector. The overall development of agricultural activities from the primary stage o f production to the secondary phase o f processing and through to tertiary step o f marketing involves all the various forms o f credit described above. These include short, medium- and long-term credits required to finance working capital needs, basically seasonal or periodical input costs, and fixed asset investment costs such as farm equipment and machinery, oxen, tractors and implements. However, expansion o f medium and long-term credit i s currently limited due to lack o f appropriate sources o f funds. In view of the short-term nature o f the commercial 37 banks' deposit funds and also because of the high interest rates and transaction charges, virtually all commercial bank lendingto agriculture i s currently directed towards short-term credits rather than medium- to long-term activities. Banks lack sources o f funds, which would enable them to offer appropriately priced and structured credits to the agricultural sector. Finally, even though banks and financial institutions in Zambia have intensified their fight against the perverse culture of borrowers' unwillingness to service debts, the legacy o f bad credit culture i s still prevalent. Small-scale borrowers, including smallholder farmers, continue to be among the worst culprits. The banks and financial institutions have responded by being reticent about extending credit to this group. This is compounded by the fact that banks and financial institutions regard small-scale borrowers, especially smallholder farmers, as too risky because they lack reliable and sustainable markets for their commodities and have no tangible or acceptable security to offer to secure credits. As a result, smallholders continue to find it difficult to access bank credit. Sources of Lending to Smallholders. From the point o f view o f the smallholders, the dominant form of smallholder credit in Zambia i s provided through supply chain financing arrangements by agri-business companies. A processor or a marketing company issues inputs to farmers on credit, in cash, or in kind, to help secure produce o f sufficient quantity and quality. The risk o f defaulting by borrowing smallholders i s reduced, as the agreed debt repayment will be deducted from the sale proceeds. The credit enables the farmer to acquire the required inputs to which he/she would not otherwise have access. With a written or verbal contract, the company guarantees to buy the farmer's produce, and the repayment for the provided inputs i s deducted when the crops are sold to the contracting firm. Outgrower schemes operate in the same manner but normally involve more company control over the farmer's production process. With a lot of small variations o f the theme, all o f the contract farming schemes reviewed inZambia follow this basic model. The cotton sub-sector i s the largest provider o f credit for smallholders. Majority o f contracted farmers take credit for seasonal input packages, which consist o f graded and treated cotton seeds, a package o f chemicals, spraying instruments and extension services. Total annual seasonal credit disbursements by cotton companies were estimated to approach US$10 million in 2003. Other supply chain credit schemes in Zambia are smaller in scale, with tobacco being the next largest source o f credit for smallholders, followed by paprika sub-sector. The development and growth o f the outgrower schemes is currently constrained by lack o f adequate credit to finance smallholders' farm fixed asset investments as well as working capital for input requirements. Although currently, the business partner provides credit to the smallholder, as shown above, the financing i s virtually restricted to provision o f funds for production inputs with practically no credits for mediumor long-term activities, which are an essential part of farm development. It i s evident, therefore, that one o f the constraints o f outgrower scheme growth i s the capacity o f the business partner to provide adequate term credit to the smallholder farmers. RoadInfrastructure: Background. The delicate comparative advantage and competitiveness that exists in Zambian agricultural produce i s vulnerable to the high transport costs and difficulties in 38 accessing major production areas. Freight haulage i s readily available in Zambia but volume i s often the issue which prevents most small-scale farmers from accessing it. This i s less of a problem when small-scale commercial farmers are in a contractual arrangement with processors or an agribusiness. The issue i s one of road access to areas with high agricultural potential due to the poor condition o f the feeder roads. As a general rule, the freight rate for distances under 150 km i s about US$0.04 per tonne per kilometre. This rises to US$O.OS per tonne per kilometre for distances over 150 km. Zambia has 37,000 km o f gazetted and 30,671 km of ungazetted roads. O f this 31,000 km are considered feeder roads and only about 50 percent are gazetted - the remainder being community, private or farm roads. Feeder roads are essentially rural roads, gravelled usually with rudimentary drainage and bridges, that link trunk, main and district roads to the communities inthese areas. The highproportion o f feeder roads (more than 50 percent) i s attributed to the large land area o f Zambia and the corresponding long distances involved in linking main roads, connecting centres o f population and circumventing the many geographical/topographical obstacles that exist inZambia. Thus, away from peri-urban areas, the line o f rail and main roads, access to markets for rural producers i s a major issue. This i s particularly so for relatively larger producers such as smallholder commercial farmers wanting to supply processors, urban and larger local markets. Head-loading and cawing small amounts of produce by bicycles, motorbikes and scotch carts i s commonplace in rural Zambia, reflecting the poor quality o f roads, lack o f bridges and highcosts o f motorisedtransport once away from the better roads. Majority (about 80 percent) o f feeder roads in Zambia are in poor or very poor condition (Table 4). All roads classed as poor or very poor were built many years ago or were not built to any engineering standard. Also, many o f those regarded as fair have a history o f limited or no maintenance. Policy and Sectoral Reform. The guiding policy today, following a long period of consultation and finalisation o f proposals for reform, i s the National Transport Policy o f 2002. The policy sets out priorities for investment and provided a blueprint for development and reform inthe sector. Previously, the Roads Department o f the Ministry o f Works and Supply was responsible for constructing, operating and maintaining trunk, main and district roads. The Roads Department had established Provincial Roads Engineer's offices in Zambia's nine provinces. The Provincial Roads Engineers also provided technical support to District authorities. Feeder roads have been administered inthe past by local authorities (District, Municipal and City Councils) under the Ministry o f Local Government and Housing's Department o f Infrastructure and Support Services (DISS). 39 Institutional and financial problems constrained investment in road works in the 1980s and 1990s resulting inthe deterioration of the road network inZambia. District and feeder roads inparticular sufferedfrom neglectandlack ofmaintenance. Since 1992 onwards, the World Bank has provided assistance to the transport sector, coordinating external assistance and encouraging reform for institutional and fiscal probity. The 1997 World Bank funded Road Sector Investment Program (ROADSIP I)had a significant impact on improving the quality o f the strategic road network in Zambia. By 2002, 73 percent o f trunk and 37 percent o f main roads were in good or fair condition. However, ROADSIP I,now completed, did not meet its targets for district and feeder roads and, by 2002, only 26.7 percent of district and 26.8 percent o f feeder roads were in good or fair condition. A second phase of the project, RRMP (started 2004), aims to remedy this situation by incorporating primary feeder roads into the Core Road Network (CRN) and including a special program to fund other feeder roads. Priority interventions for district and feeder roads are in rehabilitation followed by strict maintenance regimes to preserve the investment. InDecember 2002, in line with the Transport Policy, three Acts of Parliament were passed that changed the responsibilities within the road sector. These Acts have now been implemented and comprise: (9 Road Traffic Act No. 11/2002: Established the Road Transport and Safety Agency (RTSA), replacing three disparate organisations, to deal with both transport and safety issues with the Ministryof Communications and Transport (MCT) as the lead Ministry. (ii)PublicRoadsActNo12/2002:EstablishedtheRoadDevelopmentAgency(RDA)to consolidate the hitherto scattered technical responsibilities for the development and maintenance o f the public road network. It is to replace the Roads Department, DISS and other roads sections in a number o f Ministries (except tourist roads under the Zambia Wildlife Authority) with the Ministry o f Works and Supply as lead Ministry. Responsibility for maintenance o f rural (district and feeder roads) roads was passed to the district councils. (iii)NationalRoadsFundAct No 13/2002:EstablishedtheNationalRoadFundAgency (NRFA) for the financial management o f the road sector and the administration of the National Road Fund (NRF) with the Ministry o f Finance and National Planning (MoFNP) as the lead Ministry. All three agencies have the legal status of corporate bodies with own powers and functions according to the provisions o f the relevant acts, The agencies are semi-autonomous from Government and report, through their lead Ministries, to a Committee o f Ministers (on the Road Management Initiative), which provides policy direction. The management o f these agencies are self-responsible and free in decision making and administration within the framework of the Transport Policy. The agencies are supposed to be self-financing through the NRFA and their functioning will be dependant on financial resources received through this fundingagency. Sector Funding. Funding for the sector comes from the following main sources: (a) Government; (b) fuel levy; (c) road user charges, i.e. vehicle licensing fees; and (d) donors. The Government, through the MoFNP, allocates an amount o f money towards roads projects 40 inits annual budgets. Table 5 shows the expenditure on the road sector inthe last six years, mostly throughROADSIP Iand RRMP. Table 5. RoadSector Expenditure1999-2004 (US$ millions) The National Road Fund i s replenished by remittances raised mostly through a levy o f 15 percent on the wholesale price o f fuel at Ideni Petroleum Refinery (Ndola) or on imports. The remittance increased significantly in 2004 due to an increase in crude oil prices and the higher percentage of these remittance allocated by the Government to the National Road Fund. Some sector budget support funding (Le. EU funding for ROADSIP 11) is already being channelled through the National Road Fund. Remittances o f about US$25 million to the National Road Fund would pay for almost all o f the current routine maintenance and 50 percent o f the periodic maintenance needs o f the CRN. 41 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies ZAMBIA: AgriculturalDevelopmentSupport Project(ADSP) Sector Issue Project .atest Supervision (PSR)Ratings Bank-financed IP DO Capacity building, Agricultural Sector InvestmentProgramme(completed) agriculturalextension and U U research, rural infrastructure Foodsecurity EmergencyDrought RecoveryProject(completed) S Ruralinfrastructure Zambia Social InvestmentFund(completed) S Financialsector, PSD EnterpriseDevelopmentProject (completed) S S RoadInfrastructure RoadRehabilitationandMaintenanceProject(ongoing) Other Development Agencies Smallholder IFAD - Smallholder EnterpriseandMarketingProgramme commercialization, farmer (SHEW) (ongoing) capacity building, feeder roads Foodsecurity IFAD SouthernProvinceHouseholdFoodSecurity - Programme (completed) Rural credit IFAD - RuralFinanceProgramme (ongoing) Livestock development IFAD SmallholderLivestockInvestmentProject - (forthcoming) Irrigation infrastructure AfDB Small-scaleIrrigation(ongoing) - Farmer capacity building, AfDB Supportto ASP inthe EasternProvince(ongoing) - extension,rural credit Smallholder AfDB Smallholder Agricultural ProductionAnd Marketing - commercialization, farmer SupportProject (forthcoming) capacitybuilding Foodsecurity, agricultural EU Support to Agricultural Diversification and Food - extension, rural infrastructure Security inWesternandNorthWesternZambia (forthcoming) Smallholder SIDA Agricultural Support Programme(ASP) (ongoing) - commercialization, farmer capacity building Smallholder Finland - LuapulaAgricultureandRural Development commercialization,farmer Program(forthcoming) capacity building Smallholder USAID - Production,Financeand TechnologyProject commercialization,farmer (PROFIT) (ongoing) capacitybuilding Commercialagriculture, USAID - Market Access, Trade and EnablingPolicies export support Project (MATEP) (ongoing) Agricultural research The Netherlands Agricultural InnovationFund (AGRIFU) - (ongoing) 42 Annex 3: ResultsFrameworkandMonitoringandEvaluation ZAMBIA: AgriculturalDevelopmentSupport Project(ADSP) Performance indicators have been established for the project and its components. The indicators are linked directly to the results based CAS goal o f sustainable, diversified and export oriented economy that responds to market demands. The project M&E system will build, to the extent possible, upon the country systems already inplace inorder to minimizethe need for parallel M&E frameworks. To a large extent, the project impact on smallholders would be measured through information already collected and consolidated by national institutions such as the Central Statistical Office (CSO) and the Monitoring and Evaluation Unit o f the Policy and Planning Department of MACO. National institutions would, in particular, be a source of information on: (i) changes in production o f specific commodities at district level using annual Post Harvest Surveys; and (ii) relevant macro-economic and sectoral aggregates. Additional source o f information for the project M&E, which will complement the country systems, would include: (i)data provided by beneficiary enterprises and producer organizations financed under the SCCF and MIIF, such as on the number o f farmers benefiting from improved access to marketing and extension services, changes inproduction volume from outgrower schemes, changes in farm gate prices, value of agricultural production and agricultural exports, average yields; and (ii)ad hoc surveys and participatory assessments carried out by the NCO which would be a source o f additional information on such factors as changes in yields, adoption o f improved and more sustainable production systems, impact of on-farm investment on farmer incomes, return on labor. Monitoring o f the rural roads investments will assess the changes in production volumes as a result of improved road network. The monitoring o f the SCCF would allow a review on the way beneficiary loans are being used and managed, based on quarterly reports o f disbursements and repayments by the Apex Organization; ad hoc assessments and audits by the NCO, and periodic visits to the financial institutions and project beneficiaries during supervision missions. The project would also be able to assess PFIs' lending behavior and appetite for the agricultural enterprises by monitoringthe change insector's share within the total lendingportfolios. The matching grants provided through the MIIF will be continuously monitored, based on milestones for each matching grant project that would be prepared as part of the contract. Each matching grant intervention would be evaluatedwithin 12 months o f completion. Monitoring of the RRIF investments will assess the impact o f the component on agricultural production volumes and smallholders with access to markets. The World Bank OPRCs will include serviceability indicators that would be included in the M&E-system to manage the success ofproviding all-weather quality access roads for all farming activities. The increased relevance and effectiveness o f MACO's and CDT roles vis-a-vis stakeholders, private sector and the Zambian society would have to be assessed through consultations and evaluations. The NCO will be responsible for the overall monitoring and evaluation (M&E) o f the project, and a specific management information system (MIS) will be established in the NCO. 43 Project monitoring would be based on activity reporting by the institutions involved in project implementation, as well as on information collected by the M&E specialist o f the NCO, from the farmers and farmer groups, agribusinesses, and contracted operators. Therefore, collaborative arrangements would be established with these entities to ensure the smooth flow o f information. To this end, the M&E specialist would develop and operate procedures that enable up to date performance measurement, Le. tracking o f activities, inputs and outputs. This would contribute to monitoring the overall project intermediate outcomes. An internal Mid-Term Review would be carried out together with World Bank staff, appropriate consultants and the implementers as part of the regular M&E activities. Periodic M&E assessments of the overall project, as well as specific topics, would be carried out through an independent qualified office or firm on a contract basis. The project would finance in-depth studies on specific project interventions; e.g., to analyse the experience acquired with the implementation of the MIIF, and to identify to what extent the facility is achieving its objectives. As a management tool, the output of the M&E would provide sufficient evidence in linking periodic and annual monitoring with subsequent annual project planning exercises. In this way, the M&E would become an instrument for successive planning in addition to monitoring project progress and application of resources. Reporting. The M&E specialist would produce quarterly and annual reports for the purposes of monitoring project implementation. The reports would be simple and clear and as much as possible action oriented. The implementingagencies will use their current reporting systems to the extent they are compatible to the requirements of the ADSP. The NCO will be responsible for the generation o f the consolidatedM&E reports. It will prepare guidelines for the implementingagencies, as part o f the PIP, which would help them to compile the relevant information. Finally, the project would establish synergies between the project M&E system and the Monitoring and Evaluation Unit of the Policy and Planning Department o f MACO. This Department would continue to undertake its normal monitoring task o f the overall MACO development programs, which the project i s part of, and benefit from the project capacity building activities. 44 ResultsFramework Project Dev. Objective Outcome Indicators Use of OutcomeInformation Supporting Value of agricultural exports for target value P Y1-5. Review evidence o f economic, ncreased chains social and environmental impacts and their :ommercialization sustainability ifsmallholder Volume o f commodities produced by tgriculture through outgrower schemes PYI-5. Evaluate the project's contribution mproved Increase in participatingfarmers' incomes to sectoral growth and exports iroductivity, P Y1-5. Ensure that the process of targeted luality and supply chain development achieves expected :fficiency o f value results. Otherwise re-orient project to remove :hains where constraints to market driven agricultural ;mallholders growth iarticipate. EndPY5. Provide evaluation o f project results for the Government to assess needs and design future investments Intermediate Results4 ResultsIndicators Use of ResultsMonitoring 7omponent 1:Suppc 1to Farmers and AgribusinessesEnterprises Caise smallholder Value o f loans taken by target outgrower PY2-5: To assess project impact on iroductivity and schemes commercial bank portfolios ncome; improve inks between Increase in number o f smallholders linked to PY2-5. Assess assumption made on iroducers and target outgrower schemes absorptive capacity for MGs and credit, narkets; and Volume o f investments for corporate including assessment o f the viability of ncrease value chain extension, R&D, and marketing made by different levels o f cost-sharing and co- ;ystem agribusinesses financing arrangement o f MGs :ompetitiveness Kmo f feeder roads rehabilitated and PY2-5. Assess relevance and efficiency o f maintained under the OPRC contracts the project facility supporting corporate extension, research and development. Kmo f district roads rehabilitated and maintained under the OPRC contracts PY5. Assess the relevance of project investments inremoving the transport Change in vehicle traffic on improved feeder infrastructure constraints which limit and district roads (number o f vehicles and all expansion and efficiency o f supply chains weather access) One per component. 45 Component 2: Znsti ,tionalDevelopment Improvedpublic Developmentand updatingof financialmodels PY2-5.To assessthe NEWSUnitcapacity sector's capacity for smallholder commercialactivitiesand in providing core disseminationto target districts public good services that are Developandregularlyupdate district specific requiredto support databaseof organizationsinteractingwith PY2-5.To assess MACO M&E capacity agricultural smallholders PY2-5.To determinethe relevanceof commercialization. Number of MACOpolicy analyses and advisory MACO's policy analysis and coordination notes on aspectsof smallholder commercialization capacity Volume of certifiedseedproducedfrom PY3-5.To assess SCCI capacity to Southernprovince Choma SCCI station undertakeresearch, produce, control and Numberof enterprises / commercial distribute seeds smallholdersreceivingadequate food safety and PY3-5.To assess ZARI capacityto provide phytosanitaryservices through ZARI food safety andphytosanitary services Number oftarget smallholders and PY3-5.To assessAMIC capacity to collect, agribusinessesreceivingaccurate andrelevant process and disseminaterelevant market market informationon time informationontime Volumeof quality foundation cotton seeds PY3-5.To assess CDT capacity to produced,controlledand distributed undertakeresearch, produce, control and distributefoundation seeds Component 3: Proj Improvedand M&E system establishedand operational PY1-5, To assessNCO ability to timely efficientproject identify major constraints and continuously management improveproject outcomes. Ifnot, apply organization, corrective measures. contributingto timely and effective implementation of 46 m *e: 2 * VI 6& VI VI *d fhilg.-cv w d E E-8: 2 '2 0 - m .C - e E n e, c, e, 0 e E 0 vi Annex 4: DetailedProjectDescription ZAMBIA: AgriculturalDevelopmentSupport Project(ADSP) The project has three components namely, (i)Support to Farmers and Agribusiness Enterprises; (ii) Institutional Development; and (iii) Management and Coordination. Project Component 1: Support to Farmers and Agribusiness Enterprises (US$33.2 million - IDA US$30.8 million;BeneficiariesUS$2.4 million). This component aims to raise smallholder productivity and income; improve links between producers and markets; and increase value chain system competitiveness. The investment framework covers three subcomponents: (a) Support to Supply Chain Credit Facility to finance through a line o f credit, activities geared at improving the value chains o f existing and emerging systems; (b) Market Improvement and Innovation Facility to provide financial resources o n a matching grant basis to support corporate extension and technology development; to support organised producer associations; and studies and pilots to develop market access and to identify measures that improve value chain system competitiveness; and (c) Rural Roads Improvement Facility to provide resources for the rehabilitation and maintenance of feeder roads o f economic importance. Appendix 4-1 provides the details o f eligibility criteria and guidelines for the selection o f the project beneficiaries under the SCCF and MIIF. Sub-Component 1.1. Support to Supply Chain Credit Facility (SCCF) (US$12.2million - all IDA). The project will provide resources for the targeted line o f credit for investments geared to improving, on a demand-driven basis, the commodity supply chains of existing and emerging contract farming systems5. Inaddition, the project would provide limited resources for technical assistance (TA) for the PFIs and beneficiaries expected to access the line o f credit through the facility. The project would support the following activities: (a) Line of Credit (US$12.0 million). The SCCF will provide a line o f credit, on a demand driven basis, to support investments geared to improving the supply chains o f existing and emerging contract farming systems. The sub-component would enable those Zambian agro- enterprises, traders or nucleus and commercial farms working with smallholders, under outgrower schemes or other forms o f contract farming, to borrow in foreign exchange to finance capital investments, seasonal inputs and export activities (see Appendix 4-2 for the credit demand analysis). Line o f credit will be made available through eligible Participating Financial Institutions (PFIs), who will then on-lend to those qualifying agribusinesses/commercial farmers for whom the PFIs would assume the credit risk. The SCCF would support three broad activity clusters: (i) productivity improvement and up- scaling o f existing outgrower/contract farming schemes; (ii) establishment o f new contract farming enterprises; and (iii)upgrading processing and marketing capacity o f those agribusinesses working with smallholders. Funds would be provided for: Basedon current commercialbank lendingportfolios, with tobacco makingup inaverage about 25 percentof the agriculture lendingportfolio, andinlight of the fact that the project would encourage expansionof a wide range of cash crops andlivestockproductsutilizingthe creditline andmatchinggrant funds on ademanddrivenbasis, it is expected that the share ofcredit line andmatchinggrants utilizationfor tobaccoproductionand marketing would not depart radically from current trends or couldevendecline ifthe relativeprofitability of tobacco declinescomparedto other smallholder alternatives. 51 (i) Short Term Loans. Loans to agribusinessedcommercial farmers to finance the purchase o f inputs, working capital, trade, and inventory/ warehousing loans to smallholders; and (ii) Medium to Long Term Loans. Loans to agribusinesses/commercial farmers to finance: (i) investments in assets and technology to improve the productivity and quality o f supply at the smallholder level (e.g. farm power, farm equipment and implements, irrigation components, post-harvest and handling equipment); and (ii)technology and marketing investments at agro-enterprise level that enhance market access andor add value to the produce along the supply chain (e.g. agribusinesses handling, transportation, storage and processingassets). The SCCF will follow the operational principlesof the EDP as described inthe Statement of Policies and Operational Procedures of Multi-sector Credit Facility (SPOP). The eligibility criteria of PFIs will follow the criteria established for the EDP Multi-sector Credit Facility (MCF). This would require that the PFI i s in good standing with the BOZ prudential regulations and minimum capital requirements, and approval from IDA has been obtained. The PFIs will assume all o f the credit risk for the loans that they extend. The disbursement' repayment schedules between the PFIs and the end borrowers will be mirrored exactly inthe agreement betweenthe PFI and the Apex Organization. Credit under the SCCF will be made available to Zambian agribusinesses and large scale nucleus and commercial farmers, input suppliers, processors, traders and financial institutions, which are part o f the value chain for smallholders and who have activities that will: (i) enhance productivity and upscaling o f existing outgrower/contract farming schemes; (ii) establish new outgrower/contract farming schemes; and (iii) upgrade the processing and marketing capacity o f agribusinesses involvedinthe smallholder supply chain. The SCCF will not refinance existing loans to borrowers by PFIs, and enterprises with non- performing loans to any PFI. The PFIs will on-lend the SCCF funds to those borrowers that meet their own internal risk criteria, and are obligated to repay the Apex Organization regardless o f the repayment performance o f their borrowers. The broad terms and conditions for mediumto long term loanswill be: 0 Maximum loan amount: US$3,000,000; a Loanmaturity: between 3 and 7 years; 0 Grace period: 6 to 17 months, but not to exceed one fifth o f the term o f the loan; 0 Minimumcontribution to the investmentbytheborrower: 10% o ftotal cost of Investment and 0 Interest rate: Set by the PFIsbased on theirjudgement o f the costs/ risks o f the loan. The general terms and conditions for short term loans will be: 0 Maximum loan amount: US$ 1,000,000; 0 Loanmaturity: Up to 12 months; 0 Grace period: nil; 0 Minimumcontribution to the investmentbythe borrower: 10% o fcost o fproduction; 0 Interest rate: Set by the PFIsbased on their judgement o f the costs/ risks o f the loan. 52 PFI's credit limit will be equivalent to the total Tier 1 regulatory capital of each PFI as determined by BOZ. No single borrower and its associates will have an outstanding balance with the facility o fmore thanUS$3,000,000. (6) Technical Assistance (US0.2 million). The project would support the following activities: (I, Technical assistanceto theApex Organization. The project would provide resources to: upgrade the existing MIS software packages and programs to accommodate the SCCF, and to enable portfolio risk management and analysis to be undertaken; (ii) purchase of hardware and broadband access to the internet; and (iii) develop a website that will enable the posting o f the current status o f available funding, and projections for future funding availability; (ii) Training for the Environmental Assessment Capacity Building for PFIs. The project would provide funding for the training o f management and staff o f the PFIs on environmental assessment and safeguard risks; (iii) Development of training material on agricultural risk appraisal. The project would provide resources for the development of the training curriculum for a workshop on agricultural risk assessment. The PFIs will pay for their staff to attend the course; (iv) Preparation of Guidelinesfor the Development of Comprehensive BusinessPlans. The project would provide resources for a consultancy to develop a business planning format for the potential borrowers, which details the information that the lenders need in order to make a credit decision. Training will be provided through ad hoc workshops. Sub-Component 1.2. Market Improvement and Innovation Facility (MIIF) (US$6.0 million IDA US$3.6million; Beneficiaries US$2.4 million) - 1.2.1 Matching Grant Investments (US$ 5.4 million: IDA US$3.0 million, Beneficiaries US$2.4 million). The MIIF would provide financial resources, on a matching grant and demand-driven basis, for the development o f innovative business linkages between smallholders and other actors in the supply chain, introduce innovative technologies, and demonstrate improvements to a broader audience o f supply networks. In addition, the activities under MIIF should be considered as complementary and at times providing further justification to the capital asset investments made through the SCCF. Eligible applicants for MGs would include: (i)organized smallholder producer associations and related organizations linked to or developing linkages to agricultural supply chain, and supporting the development o f smallholder farmers; (ii) agribusinesses involved in processing, trading, and marketing of agricultural and food products/commodities which help to improve the growth and competitiveness of smallholder farmers; (iii)input suppliers; (iv) nucleus commercial farms working with smallholders; and (v) publicly and privately funded agricultural and industrial institutions and trusts. The MIIF will follow the operational principles as described in the Implementation Manual. Appendix 4-3 provides demand analysis for the potential uptake of the facility. The facility would support the following broad categories o f activities: (a) Extension and Technology Development. The matching grants will be provided to improve corporate extension and management o f outgrower schemes; trials on new extension 53 approaches including use of media; corporate research and development; and input sales promotion. The matching grant portion under this category will be 50 percent. Specific activities include the following. (i)Expansionof corporateextensionactivities. Thecomponentwouldsupportenhanced outreach activities as means to improve the organization and relationship o f the operator- outgrower systems, thus enabling the conditions for agribusiness operators to acquire confidence for on-lending to smallholders on productive asset investments. Priority will also be given to pilot activities that are innovative, such as demand driven extension approaches (e.g. Farmer Field Schools), and pilot cost sharing schemes between operator and outgrowers. In such pilot schemes, the matching grant could contribute supporting extension packages and training to small-scale farmers by agribusiness operators. Other investment options could include equipment, extension inputs, staff salaries and running costs. (ii)Radiobroadcastinganduseof other information media. The component would support broadcasting and other use of media to meet the demand by major commodity operators. This could be a powerful and very effective outreach means for which the MIIF could fund services, materials, program design and runningcosts. (iii)CorporateResearch andDevelopment. Thecomponent wouldprovidematching grant investments for ago-processing companies and agribusinesses, who intend to improve quality and productivity by introducing and promoting adoption o f technology (e.g. R&D protocols to identify/adapt improved and quality enhancing varieties o f cash crops; design and manufacturing o f adapted technology; sustainable improvement o f soil fertility). Project resources could contribute towards capital investment, specialized consultancies and running costs. (iv) Input sales promotion. The MIIF could be accessed by eligible beneficiaries to strengthen and build sustainable linkages betweenenterprises in commercial input supply and distribution systems - down to rural stockists -to increase flows o f inputs and services for smallholders and rural communities. (b) Studies and Pilots. Matching grants will be provided for the development o f new entrepreneurial ideas and for studies on measures to enhance the comparative advantage o f Zambian agricultural commodities. The matching grant portion under this category will be 60 percent. Priority will be givento the following mainareas o f interest: (i) Market access analyses and trials. For the development o f local and regional markets; (ii) Business plan development and bankable project design - to enable the target beneficiariesto access the line o f credit under the SCCF; (iii)Elaboration of acknowledged legal frameworks regulating contract farming/outgrower schemes. To develop mechanisms to formalize ad hoc contractual arrangements and promote comprehensive partnerships including modalities for producer selection, scheme organization and management, extension system, financial mechanisms and loan recovery systems, produce collection, pricing, value adding, agreement enforcement modalities, etc.; 54 (iv) Identibing appropriate, efficient and sustainablestandardization and certification systems. For food qualityhafety and "global" quality attributes that may be conveniently applied to outgrower/contract farming production modes. The matching grant would provide resources for such activities as feasibility studies, research, and trial activities through consultancies, trial running,and workshops. (c) Support to Organized Producer Associations. This sub-category o f support under the MIIF was designed for potential beneficiaries who would likely not qualify to access commercial credit at their present stage of entrepreneurial capacity but who would however hold sufficient qualifications and are engaged in profitable business undertakings. The matching grants could be provided on a demand basis to support capacity building and technical advisory services for smallholder groups, and productive and marketing investments. The matching grant portion under this category will be 75 percent. The MIIF could contribute resources for capital assets, training, organizational and human resource capacity development. 1.2.2.Administration of the MIIF (US$ 0.6 million - all IDA). The project would provide resources for the administration of the MIIF. This would include incremental costs associated with the additional staffing, operating expenses and training for potential applicants inproposal development. Inaddition, the project would provide resources for the technical reviews and M&E o f the activities funded through the MIIF. Sub-component 1.3. Rural Road Improvement Facility (RRIF) (US$lS.O million - all IDA). The project would provide resources for the rehabilitation and maintenance o f selected feeder and district roads of economic importance inhighpotential agricultural areas on the basis of a core feeder road network management relating to main transportation routes for major agricultural products. Appendix 4-4 provides information on a preliminary needs assessment o f candidate feeder roads investments. The activities supported by this sub-component would include: 1.3.1 Rural Roads Rehabilitation and Maintenance (US$13.5 million). Based on the preliminary screening, the project would rehabilitate about 410 km o f feeder roads and 130 km of district roads in three to five districts of high agricultural potential using the Output and Performance Based Road Contracts (OPRC) concept. The candidate feeder road sectionshetworks were identified in consultation with M A C 0 and RDA, and through a participatory approach with the District Councils and District Agricultural Coordinators. Priorities were based on targeting the major agricultural products transportation roads in Eastern and Southern provinces (cotton, paprika, vegetables, groundnuts, livestock). Appendix 4-4 provides the rationale and selection criterion o f districts for project road interventions. However, the final selection of districts and specific feeder and district roads to be targeted will be carried out after the Needs Assessment, including, more detailed costing and this will be fundedunder the World Bank Roads Rehabilitation and Maintenance Project (RRMP). Facilitated by the NRFNRDA, the needs assessment would be completed bythe time of effectiveness o fthe project. 1.3.2Administration and supervision of the road investments (US$0.2million). The project would make available resources for the NRFNRDA to cover the incremental administration 55 and supervision costs of the feeder roads rehabilitation and maintenance works under the project, includingthe support to tender advertisement and contract preparation. I,3.3 Technical Assistance and Consultancy Services (US$1.2 million). The specific activities which will be supported include: (i)OPRCsupervisionservices. SincetheOPRCisrelativelynewinZambia, theproject would make available resources for the long-term consultancy services. A qualified consultant will be required, in the early stage o f supervision, to assist the RDA in project oversight and contract management to ensure compliance with contract conditions and performance standards. The consultancy serves as capacity building to enable the RDA to gradually take over responsibilities for the supervision of the OPRC after project completion. (ii)TechnicalAssistance on OPRCtoRDMRFA. TheRDA/NRFAhaveamandateto coordinate and implement all road investments in Zambia. As the OPRC will be their first experience with it in Zambia, the project will support the RDA/NRFA to increase their capacity to supervise and monitor OPRC as an implementing and coordinating/funding agency through a provision of a short term TA on OPRC management during the initial stage o f the project. (iii)Trainingfor the RDA/NRFA stafj The project would provide resources for the capacity building o f the RDA staff to increase their absorptive capacity. Activities would include training, inter alia: road engineering at the Construction School, financial management, procurement and contract management, road asset management, GIs, road safety and safety guard at various institutions, study tours for OPRC practices. (iv) Environmental Impact Assessment. The project would provide resources to carry out environmental safeguard studies related to the rehabilitation and maintenance o f the feeder roads under the project, which comprise: consultancy services for the Environmental Impact Assessment (EIA); development o f EMtraining materials; and delivery o f training on EIA to RDA. Component 2: InstitutionalDevelopment (US$3.9 million- all IDA). The objective of this component is to improve the public sector's capacity inproviding core public good services that are required for the operations and development o f the agribusiness sub-sector. The component aims at strengtheningthose public or quasi public services that can improve the efficiency of smallholder farmers and entrepreneurs involved in agriculture, The services to be supported under the project include general agricultural information needed for investment planning in production, processing and marketing, as well as other services that are instrumental in improving productivity and marketability o f agricultural commodities. This component has the following sub-components: 2.1 Support to Selected MACO Core Functions (US$0.62 million). The Policy and Planning Department of MACO has an important role to play in supporting successful small- farmer commercialisation. Three unitso f the Department will be supported: (i)TheNationalEarly WarningUnit(NEWU). TheNEWalreadycollectsandcollates valuable data from small-farmers. The project would expand the capacity o f the N E W to collect input cost and revenue data on a range o f small-farmer activities, with a particular 56 focus on highvalue cash crops. The data will be analysed to get a better understanding of the profitability o f these activities, and appropriate financial models will be prepared and distributeddown to the district level. This will provide a better understanding and awareness of the profitability o f differentactivities invarious districts, which will help farmers and agri- businesses to improve their decision making. It will also provide an invaluable source of informationfor establishing contract prices. (ii)TheMonitoring andEvaluation (M&E) Unit. TheM&EUnitwillbesupportedto expand its data-base of agribusinesses and subsequently distribute the information to small- farmer groups. The data-base will consist of input and service suppliers as well as organisations that market small-holders outputs. It i s expected that the benefits associated with supporting the Unit would be greater knowledge of service providers which would enable smallholders to negotiate better terms and conditions for both inputs and outputs. (iii)ThePolicyAnalysisUnit. PolicyAnalysisUnitwillbesupportedtoundertakeanalysis and the production of policy papers and also analytical work on a range o f small-farmer issues for the Government or inconjunction with donors. (iv) Financial Management and Procurement Unit. The project would strengthen the capacity o f the FMU and the Procurement and Supplies Unit (PSU) to undertake the additional fiduciary responsibilities associated with the project. 2.2 Seed Control and Certification Institute (SCCI) (US$ 0.6 million). The project would strengthen the SCCI's capacity in seed certification and testing. The Southern Province does not currently have a seed testing and certification facility. Seed producers in Southern province have to get their seed certified in Lusaka. Given the high demand for improved seeds and the consequent increase in seed production activities in the Southern Province, the project would support SCCI to establish a seed testing laboratory in Choma to strengthen seed services in the area. The project would provide funds for seed testing equipment, vehicles, computers, office equipment, and incremental operating costs. In addition, district staff will be trained in seed sampling, inspection and testing, licensing, and variety assessment. Inaddition, the project would finance the establishment ofabio-technology laboratorywithin the SCCI facilities inLusaka. A bio-technology laboratory is needed to genetically "finger- print" seed. This will give the confidence to plant breeders to release their seed in Zambia knowing that their rights (and royalties) can be respected - which will improve the genetic potential o f the seed offered to small-farmers. A bio-technology laboratory will also provide a valuable service for Zambian seed companies who currently have to send their samples to Europe for genetic finger-printing. The value of seed exports to regional markets i s increasing and there are increasing efforts by the larger breeders to encourage seed production in smallholder farms. The seed companies would be charged for this genetic finger-printing service which will help the laboratory to improve its financial sustainability. 2.3 Agricultural Marketing Information Centre (AMIC) (US$ 0.4 million). AMIC collects and analyses farm-gate and retail price data for a range o f products. Currently, AMIC has two distinct roles to play in collating and analysing market information, especially price information. The first i s to analyse price data over time so that it can be used for planning or strategic purposes. The second function o f market information i s to help with trading, i.e. negotiations of buyinghelling price. Market information for strategic and planning purposes 57 need not be collected and published promptly. However, data collected for facilitating buying and selling decisions must be collected frequently, it must be disseminated promptly and it must be very accurate. The project will strengthen the capacity o f AMIC to improve the collection and analysis o f price data for strategic and planning purposes. In addition, the project will support the AMIC to up-grade its Market Information Service (MIS) in order to provide up-to-date and accurate market data for farmers and traders to help with their trade negotiations. The MIS was originally set up in early 1990s to target smallholders and rural traders to improve their negotiating stance. However, since the original MIS was installed, there have been considerable changes in the best methodology for collecting and distributing market information. As a result, the project will take the two-phased approach for up-grading the MIS within AMIC. In the first phase, a needs assessment will be carried out that would determine what the farmers need and evaluate the new methodologies for MIS. The project would finance the cost o f services o f an international MIS specialist who would help AMIC design a questionnaire to establish the farmer needs assessment and evaluate the experiences o f other countries in implementing new MIS technologies and investigate the success o f achieving sustainability. The second phase would be to implement the funding recommendationsmade at the end of first phase. 2.4 Zambia Agricultural Research Institute (ZARI) (US$ 0.8 million). The project will strengthenthe capacity o f ZARI to comply with emerging SPS requirements inorder to help Zambian agribusinesses to take advantage o f export opportunities. Failure to address potential SPS issues could negatively impact on Zambia's competitiveness. Several donors are already supporting ZARI on specific issues (Le. the Netherlands Government and USAID). To ensure that all the SPS issues are addressedand adequately financed, the World Bank, together with the USAID,will carry out a comprehensive needs assessment o f SPS and quality related issues as a pre-condition for releasing investment funds. The study would assess the strengths and weaknesses o f ZARI's quality assurance and SPS management capacity and identify priority capacity-building needs, its structure, performance, and future aspirations for trade. After satisfactory completion o f the needs assessment, the project would support the strengthening of the Plant Quarantine Phytosanitary Section (PQPS) o f the ZARI, which would include procurement o f laboratory equipment, training and study tours. The exact allocation o f budget for this activity would be amended following the needs assessment. In addition, the project would provide resources to improve the facilities at Chirundu, Chipata and Nakonde border posts and train customs' staff who could cover some o f the functions o f the PQPS staff intheir absence. 2.5 Cotton Development Trust (COT) (US$1.5 million). The project would strengthen the capacity o f the CDT to supply an increased amount o f seed to the cotton industry. The CDT i s a public-private partnership which was established to contribute to the commercial development o f cotton through crop research, plant breeding, seed multiplication, training and extension. It has thus an important role to play in supporting the smallholder industry and helping ensure that the farmers remain competitive. The management o f CDT i s currently updating its business plan, which will lay out the strategy for reducing CDT's dependence on the public budget and increasing its revenues from services provided to the private sector and from contributions from the Cotton Growers Association. The presentation o f a satisfactory business plan would be a pre-condition for the project to support the CDT. 58 The project would support the CDT by financing the installation of an 80 hectare irrigation scheme in Magoye. The strengthening o f the irrigation capacity of the CDT i s expected to increase reliability of supply of good quality cotton seed, which would contribute to improved overall cotton yields. The irrigation scheme would also help to guarantee a secure supply ofbreeders andpre-basic seed, andwill help the CDT to generaterevenues which will reduce the CDT's reliance on Government funding. The project would also strengthen CDT capacity to undertake entomological research and introduce Integrated Pest Management (IPM). Currently, the use of agrochemicals in the Zambian cotton crop is very significant and there would be considerable benefit to the safety o f the farmers and their workers as well as the environment iftheir usage could be reduced. Introduction of I P Mtechnology would be beneficial to both the workers in the cotton crop and the environment. It would also lead to higher yields whichwill contribute to betterprofit margins. Component 3: ProjectManagementand Coordination(US$2.6 million-all IDA). Project management and coordination would largely rely on existing MACO institutions and structures. However, because current capacities inMACO in some areas need strengthening, the proposed project would strengthen MACO's implementation capacity by establishing within it a National Coordination Office (NCO). The project would finance the salaries of the following hired-in staff National Coordinator, Safeguard Specialist, M&E Specialist, Project Accountant, and support staff. The project will also fund technical assistance; communication and training; equipment and vehicles; and operation cost (US$1.3 million). The salaries o f the externally hired staff will be competitive but within the guidelines for harmonized salary structures. Under this component, support would be provided for the various project monitoring and evaluation functions (US$0.5 million). Finally, the component includes the allocation for the PPF (USS0.8 million). 59 Appendix4 -1:EligibilityGuidelines ~~ Beneficiary categories Agro-enterprises, traders or nucleus andcommercial Organisedproducer associationsthat ensure the farms working with smallholdersunder outgrower marketingof smallholders' products. scheme, or any other form of arrangement, providedthere i s a clear understandingof serviceprovisionto small farmers and SMEs andthe procurement oftheir products. GeneralCriteria Investment options under the projectentail:(i) up-scalingof existingandfunctioningoutgrower/contractfarming schemes and/or (ii) development of new agribusinessactivitiesin the context of smallholdercommercialization. Investmentsmust show positiveimpact on smallholders(changeinproductivity sales, income, etc.); supply from smallholders shouldbe significant either as the overallsupply source of the agro-enterpriseor as a portion of supply relatedto the specificinvestment for whichprojectresourcesare applied; contractual or output buyingarrangements with smallholders must exist. Investment options inproductiveassets shouldshow feasibilitv (havean establishedmarket linkageandpotentialfor growth; betechnically sound; havecommensurateinvestors' financingandbe appropriateto their organizational capabilities);profitabilitv (have adequatefinancial returnon investment); aualitv gains (increase local value added); sustainability(be appropriateto the investors'financial capacity; be environmentallyand sociallysound; have no negativeimpact on humanhealth; andbe gender balanced). Studies, pilots and extensiodtechnology activities should be technically feasible, environmentally and financially appropriateand sustainable(with a clear exit strategywhen financing extension). Creditline medium- lo1 term short term Investmentsin technology and assets Technology andmarketing Input credit that aim to improveproductivity, investmentsat ago-enterprise TradelWarehousinglInventoryfinance profitability andor the quality of levelthat enhance the market producealongthe supply chain which opportunity of smallholder includes smallholders, such as farm farmers productsandlor that power; farm equipment and addvalue to productswithin implements;irrigation facilities; post- the supply chain, such as harvestandhandlingequipment. handling,transportation, storageandprocessingassets. Loans to ParticipatingFinancial ~~ Loans to ParticipatingFinancialInstih Maximumloan amount: US$3,000,000* Institutions: Maximumloanmaturity: 7 years Maximum loan amount: US$3,000,000* Maximumgrace period: 17months Maximum loanmaturity: 12months Interest Rate:in accordance with what PFIs are payingto similar funds. Maximum grace period: nil Initial rate andany change to this rate will be done incoordinationwith Interest Rate: in accordance with what andconsent of the Bank PFIs are paying to similar funds. Initial Loans by PFIsto EndBorrowers: rate and any change to this rate will be Maximumloan amount: US$3,000,000. done in coordination with and consent of Loanmaturity:3-7 years the Bank Graceperiod:6-17 months Loansbv PFIs to EndBorrowers: Minimum contributionto investment by borrower: 10% Maximumloan amount: US$ 1,000,000. Interest rate: PFIs free to charge a rate commensurate with the costs Loanmaturity: 12months and risks of sub-loans Grace period: nil Minimum contribution to investment b j borrower: 10% of cost ofproduction Interest rate: PFIs free to charge a rate commensurate with the costs and risks oj sub-loans *The PFI's credit limit will be eauivalentto the total Tier 1regulatorvcauit of each PFIas determinedbv BOZ. No sinele borrowerandits associates will hHveanoutstandingbalancewith thefaciiity of more thanUS$3,000,000. ' I 60 Matching grant Studies andpilots, such as: Extension and technology development, such Collective infrastructure as: Investments, such as productive and Business development (studies, Improved corporate extension and marketing assets for smallholder analysis; management for incremental outreach producer associations operating business plans, impact analysis o f of contract farmingloutgrower schemes; under outgrowericontract farming institutional/organisational Trials on new extensionapproaches schemes and associated technical innovations; including use o fmedia; advisory services and capacity Market access analysis and trials; Corporate research and development building activities. Elaboration of acknowledgedlegal activities; and framework regulating contract Input salespromotion activities. farming and out growers systems; Development of standardization, certification systems; quality and food safety enhancement systems, adoption o f environmentally and socially friendly measures; Studies for value chain efficiency and competitiveness; and The develomnent o f new financial products that will benefit the sector. Applicants' Qualifications 4gro-enterprises (or other entrepreneurs as indicated under Producer associations should be established organizations, having with a sound track record and should: I should: show a soundbusiness strategy with audited accounts from e bebusiness oriented and be capable of demonstrating a respected major chartered firm; that they have a sound business strategy; be established for at least tbree years andbeprofitable and e be financially solvent and capable o f producing financial have a positive net worth for the last financial year; statements on a regular basis; have a documentedwork planwith clearly defined annual e be established for at least three years and have a track results; record o f delivering services to their members; have a written business code o f conduct for operating the e keep detailedrecords of all financial transactions; enterprise, as well as their relations with outgrowers including a codified disputes procedure and a mechanism have a documentedwork plan with clearly defined for periodically (at least annually) negotiating prices and targets; and contracts with outgrowers; e have written articles of association and be registered with the appropriate government authority. Inaddition, agro-enterprises financed under the project shouldbe transparent, accountable and capable o f monitoring project impact on involved smallholders, as well as ontheir own activity. [nthis regard, they should agree to have their activities benefiting fromproject funds monitored by anindependent organisation. 61 Appendix 4-2: DemandAnalysis for the SCCF The size o f the SCCF was determined in two ways. First, the demand for the credit by eligible beneficiaries was determined by identifying the underlying incremental demand by those agricultural sub-sectors which are involved in contract farming arrangements with smallholders. Secondly, the analysis estimated the interest and the capacity o f the PFIs to finance these activities. Overall investment assumptions at the sector level were made by prioritizing those sub- sectors that showed high market potential for broadening and deepening the productivity o f the smallholder sector. The sub-sectors that hold particular promise include cotton, coffee, paprika, chilli, honey, dairy, poultry and sugar. The gross amount o f fundingneeded, and the categories o f activities that needed funding to be successful, are classified as follows: ActivityIFunction Short Term LongTerm Total (US$) (US$) (US$) Supportto productivity 4,000,000 5,150,000 9,150,000 improvementandup-scalingof existing outgrowers' schemes Support to new contract farming 1,250,000 3,650,000 4,900,000 enterprises Ago-enterprises processingand 13,500,000 13,500,000 marketingcapacityimprovement Total I 5,250,000 I 22,300,000 I 27,550,000 The EDP's MCF was successful in maintaining a high quality loan portfolio. This was attributable to careful screening by the Apex Organization o f the PFIs that were able to access the facility and good lendingpractices o f the PFIs. The SCCF intends to replicate this success by adopting the system o f two levels o f screening. First, at the level o f the PFIs, only those financial institutions that are in good standing with the BOZ's regulatory unit will be able to access the credit facility, and as such, represents the first constraint on lendingto the agricultural sector. The second level o f constraint relates to the individual PFIs themselves. Current banking best practices include the use o f portfolio risk management as a tool to help diversify the risk exposure of the lender to any one sector o f the economy. This normally takes the form o f setting o f monetary caps on the amount o f loan exposure that the PFI will have to each particular sector o f the economy inits loan portfolio. Based on the above constraints, the potential usage o f the proposed SCCF will be limitedby the number of potentially qualifying PFIs as assessed by the Apex Organization, and the portfolio risk limits for agriculture and agribusiness set by each PFI. To allow for future development o f the Zambian financial sector, provision has been made for other institutions to access the SCCF. These assumptions have resulted in an estimated total corporate portfolio of current, and future, PFIs o f about US$ 550 million. The ceiling limit for agricultural loans for each o f the lenders' individual portfolio also was used to assess their combined current ceiling for agricultural loans. This amounted to about US$178 million to which was added the expected portfolio growth over the next 5 years. This resulted in a projected incremental increase o f agricultural lending capacity o f about US$80 million. From this potential ceiling, the projected tobacco loan portfolio was 62 deducted, and an estimation made that approximately 40% of the net portfolio would be represented by loans to borrowers involved in outgrower fanning activities. The projections show that PFIs would be prepared to lend an incremental US$33 million to the outgrower sub-sector over the next 5 years. The projected demand at the field level for credit under an SCCF facility will not be constrained by the PFIs risk management strategies, since their likely credit ceilings are higher than the projected demand of US$28 million. In order to diversify their funding risk and to encourage prudent lending practices, it i s expected that the PFIs will fund approximately 25% o f these loans from their own resources (approximately US$7 million), which will reduce the need for an external line o f credit by a similar amount. Thus the gross external fundingneeded for finding under the ADSP, therefore, will be US$21 million. There is, however, other finding available to the agricultural sector in general, and to outgrowers sub-sector in particular, that are attractively priced to the PFIs. Primarily, these sources are: (i) which anticipates making US$4 million available through the banking IFAD, system for the smallholder sector for short term loans, at an interest rate to commercial banks o f 1.0-1.5% per annum; (ii) The European Investment Bank (EIB) could allocate some US$3.2 million to the outgrower sector in long term financing, with the concession o f risk sharing with the lending commercial banks; and (iii) could make available US$2.9 DEG million to the outgrower farming. After allowing for the availability o f these other funds, (totalling US$10 million) the "gap" that needs to be financed by the SCCF i s estimated to total approximately US$l 1 million. An indicative breakdown of the funding will likely be as follows: ActivitylFunction Identified Identified Fundedby Funded Funded Short Term Long PFIs From by SCCF Needs Term Internal Other (US$) (US$) Needs Resources External (US$) support to 4,000,000 5,150,000 2,863,000 productivity improvement and upscaling o f existing -7- outgrowers' schemes Support to new 1,250,000 3,600,000 1,212,000 1,200,000 2,438,000 contract fanning enterprises Agribusinesses 13,500,000 5,305,000 processing and marketing capacity improvement Total 5,250,000 22,250,000 10,606,000 Sensitivity analysis was undertaken to test the validity o f the estimated funding need. Assuming that the PFIs are able to finance only 20% of the total credit demand, the "gap" that needs to be financed by the SCCF i s estimated at US$l 1.8 million. However, assuming that only 50% o f the potential EIB/DEG line o f credit becomes available for agriculture, the demand for the SCCF line o f credit increases to US$13.7 million. 63 Appendix 4-3. DemandAnalysis for the MIIFMatchingGrants The demand analysis was carried out to pre-identify potential uptake and absorptive capacity o f MIIF matching grants for value chain development investments by potential beneficiaries. The demand analysis included a specific needs assessment o f those investments with high public good content and for which the private sector (agribusinesses, commercial farmers, producers associations, traders and input dealers in contract farming/outgrower relationship with smallholders) would require support in order to be able to cover the entire cost. All investment assumptions under the MIIF are indicative and are proxies o f potential demand from the players o f various commodity chains in Zambia. They were made through prioritizing those sub-sectors that showed highmarket, expansion potential and scope for up- scaling smallholder commercialization: cotton, coffee, paprikdchilli, honey, oilseeds, dairy, and poultry. The assumed distribution of investmentsunder specific line activities are only indicative and do not exclude diverse range o f potential innovative financing proposals which would meet eligibility criteria. However, for planning purposes, the following three broad MIIF categories o f investmentwere identified: (a) Extension and Technology Development. Potentialinvestmentopportunities have been considered for cotton, paprika, chilli, coffee, honey and coffee and other emerging commodities. The MIIF would provide matching grants, on a demand basis, for the following broad categories of potential investment proposals: (i)Expansionofcorporateextensionactivitieswhichwouldenableagribusinessoperators to meet their production, productivity and product quality targets. The need i s particularly felt in those commodities that are considered in development stage, such as paprika and honey, and even more for potential new ventures under outgrower arrangements (e.g. coffee, chilli, oilseeds). Enhanced outreach i s considered as a means to improve the organisation and relationship of the operator-outgrower systems, enabling thus the conditions for agribusiness operators to acquire confidence for on-lending to smallholders on productive asset investments. There could also be opportunities for pilot innovative and demand driven extension approaches (e.g. Farmer Field Schools), and pilot cost sharing schemes between operator and outgrowers. The MGs could contribute supporting extension packages and training for small-scale farmers by agribusiness operators. Other investment options could include equipment, extension inputs, staff salaries and running costs; (ii)Radio broadcastinganduse ofother informationmediacouldbe another areaof demand by major commodity operators. This could be a powerful and very effective outreach means for which the MIIF could become an option to contribute funding services, materials, program designand runningcosts; (iii)CorporateResearchandDevelopmentcouldbeanotheropportunityareaformatching grants investments, mainly for agro-processing companies and agribusinesses, who intend to improve quality and productivity by introducing and promoting adoption o f technology (e.g. R&Dprotocols to identifjdadapt improved and quality enhancingvarieties o fpaprika; design and manufacturing o f adapted beehives for quality honey collection; sustainable improvement o f soil fertility for cotton productivity, etc.). Project resources could contribute towards capital investment, specialised consultancies and runningcosts; and 64 (iv) Input sales promotion. The MIIF could be accessed by eligible beneficiaries to strengthen and build sustainable linkages between enterprises in commercial input distribution systems - down to "agrodealers" to increase flows of inputs and services for smallholders and rural communities. The overall assumed financial requirement for the Extensionand Technology Development activity line i s estimated at US$4.5-5 million, to be shared on a 50-50 % basis betweenthe project and the investor. (b) Studies andpilots. The demand analysis showed that agro-processing andmarketing companies would welcome financial contributions for the development o f new entrepreneurial ideas and also for studies on measures to enhance comparative advantage and competitiveness of Zambian agricultural commodities. The following main areas o f interest have emerged: (i)Market access analyses andtrials (e.g., for development ofregional marketsfor processed milk and dairy products); (ii)Businessdevelopmentandbankableprojectdesign(e.g.,small/mediumscalebroiler production schemes; new sugar production outgrower schemes; establishment o f a Zambian milkpowder plant, etc.); (iii)Elaboration of acknowledged legal frameworks regulating contract farming/ outgrower schemes (to determine ad hoc contractual arrangements and promote comprehensive partnerships including modalities for producer selection, scheme organization and management, extension system, financial mechanisms and loan recovery systems, produce collection, pricing, value adding, agreement enforcement modalities, etc.); (iv) Identifying appropriate, efficient and sustainable standardization and certification systems (for food qualityhafety and "global" quality attributes), that may be conveniently applied to outgrower/contract farming production modes. The MGs could contribute resources for such activities as feasibility studies, research, and trial activities through consultancies, trial runs; and workshops. The overall assumedfinancial requirement for the Studies and Pilots activity line is estimated at US$1.2 million,to be shared on a 60-40 % basis between the project and the investor. (e) Support to organised producers associations. This sub-category o f the MIIF was designed for the project beneficiary categories who would likely not qualify to access commercial credit at their present stage o f entrepreneurial capacity, but who would however hold sufficient qualifications and are engaged inprofitable business undertakings. The MGs could be provided, on a demand basis, to support productive and marketing type investments. The MIIF could contribute resources for capital assets, training, organizational and human resource capacity development. The overall assumed financial requirement for the Capacity building support to organised producers associations activity line i s estimated at US$1.5 million, to be shared on about 75- 25 %basis betweenthe project and the investor. 65 Appendix 4-4: Pre-assessmentof RuralRoads The pre-assessment of rural roads for priority rehabilitation and maintenance needs was done incollaboration with the RDA, MACO and other stakeholders (major commodity producers and processors, farmer groups and organisations and crop producer associations). The actual scope o f road rehabilitation and maintenance works will be confirmed through the needs assessment and prioritization study that will take place prior to project effectiveness. Utilising crop production statistics from MACO for 2005 and census data from 2000 for provinces and districts with highagricultural potential for cotton, paprika, wheat, soyabeans, groundnuts and sunflower, the main cash crops produced by smallholder farmers in Zambia, were analysed. For these crops, provincial and district statistics were collated from the 2005 raw data provided by MACO. For each crop, the top producing districts were assessed and the top provinces, and the top 3-10 districts were thenlistedinorder ofnational importance. Next, the analysis considered i s feeder road status, and existing and planned projects for the future. The table below summarises the results o f this analysis. Central EU-financed project will target highproportion of feeder roads. Copperbelt .. Relatively few small scale commercial areas. $15.0 million BADEA project planned for feeder roads under ROADSIP 11. Eastern Major smallholder commercial farming area and important cotton, soyabean, groundnut and burley tobacco producing province. N o feeder road projects planned. 3,743.5 km. o f total o f 3,861.7 km. o f feeder roads classified as poor or very poor. Luapula Not a significant smallholder commercial farming area. Lusaka Many vegetable smallholders (not recorded in MACO statistics) in Lusaka peri-urban area. Important paprika producing province. N o feeder road projects planned. Northern Not a significant smallholder commercial farming area. NDF labor-based works project for EUROl.4 millionplanned. North- Not a significant smallholder commercial farming area. EU-financed Western project will target 3 districts with highest agricultural potential (Kabompo, Kasempa and Mufumbwe). Southern KfW-financed project will target 60-70% o f feeder roads on poverty alleviation basis. Choma district - the most productive district inZambia for cotton - will have 175kms o f 497kms o f feeder roads targeted on this basis. Western Not a commercial farming area-mainly a livestock province. Feeder road works expensive and problematical due to sandy soils and water-logging. DANIDAproject targeting selected feeder roads. Finally, the numbers o f households - from 2000 provincial census data - involved in crop production was considered. Eastern province with 382,997 farming households (some 2/5 o f total farm households in Zambia) far exceeded any other province. Lusaka, Western and North Westernprovinces were lowest with less than 90,000 households each. Inconsultation with RDA and MACO, the following districts were indicated as appropriate for feeder and district road interventions to improve access to high potential agricultural areas: 66 District National Ranking(x)by District Cropproduction2005 (1) Chipata, EasternProvince Cotton(3) Sunflower Groundnuts (1) (2) Katete, EasternProvince Cotton(4) Sunflower Choma, SouthernProvince Cotton(1) Chongwe, LusakaProvince 11Paprika(1) IWheat (4) I Soyabeans (5) 1 Lundazi, Chipata and Katete produced 32% o f Zambia's cotton, 45% o f the sunflower and 21% o f the nation's groundnuts from almost entirely small scale farmers. Two new cotton ginneries have opened in Eastern province to process cotton locally in the last two years. Choma produced 21% o f Zambia's cotton in 2005 from small to medium scale farmers with yields o f 3.95mdha that far exceeded the productivity for cotton compared to any other district where the highest yield was 0.87 mdha (Lundazi). Southern Province i s consistently Zambia's highestyielding province for cotton, and 2004 statistics had provincial yields o f 2.8 mtha compared with 1.57 mdha for 2005. Choma and Mazabuka Districts are also developing high value export crops grown under contract farming arrangements. Chongwe district produced, by small to medium scale farmers, 75% of paprika and 12% o f wheat (63% of Lusaka provincialoutput) harvested inZambia in2005. UsingRDA data, the feeder road information and road conditionwas analysed: Lundazi, Chipata and Katete are contiguous districts in the Eastern Province (allowing for economies o f scale inproposedroad works and inmaintenance). Choma district will receive some interventions from the proposed KfW RTP project from 2006 onwards. The project feasibility report suggests that about 175kms o f feeder roads and 144kms o f district roads with rehabilitation and accessibility improvements will be targeted in Choma district under the project. It should be noted that the RTP is a gender sensitive poverty reduction oriented road project with the objective o f supportingpro-poor growth, inthe long term, by improving accessibility and, in the short term, through labour based employment generation and the injection o f cash into the local economy. Road selection was not based on areas o f high agricultural production and potential alone (although these were considered), but more on socio-economic factors, populations served by the roads, the incidence and distribution o f poverty and to achieve an equitable distribution o f interventions amongst the districts o f the province. There are no projects planned for the future to target feeder roads specifically in the districts ofLundazi, Chipata, Katete and Chongwe. 67 Annex 5: Project Costs ZAMBIA: Agricultural Development SupportProject (ADSP) Support to Farmersand AgribusinessEnterprises 16.6 15.0 31.6 InstitutionalDevelopment 1 9 1 7 3 6 Project Management and Coordination 1.9 0.5 2.4 Total Baseline Cost 20.4 17.2 37.6 Physical Contingencies 1.o 0.6 1.6 Price Contingencies 0.3 0.1 0.4 TotalPrqject Costs6 21.7 17.9 39.6 Interest duringconstruction Front-end Fee TotalFinancingRequired 21.7 17,9 39.6 II Government World Bank Beneficiaries Total Amount YO Amount YO Amount I YO Amount 1 YO I I II III 1I I I A. COMPONENT 1: Support to Farmers and Agribusiness 1 Enterprises I1 1.1: Supply Chain CreditFacility - 12,141 100.0 12,141 30.7 1.2: MarketImprovement and InnovationFacility I - I 3,673 61.0 2,350 I 39.0 6,023 15.2 1.3: Rural Roads ImprovementFacility - 15,000 100.0 15,000 37.9 I and Coordination Total PROJECT COSTS I - 1 37,239 1 94.1 1 2,350 I 5.9 I 39,589 I100.0 Identifiable taxes and duties are US3.7million and the total project cost, net oftaxes, is US$39.6 million 68 Annex 6: ImplementationArrangements ZAMBIA: AgriculturalDevelopmentSupport Project (ADSP) National Coordination Office. The project will be managed by the National Coordination Office (NCO) which will be integrated within the existing structures o f the Department o f Policy and Planning o f the Ministry o f Agriculture and Cooperatives (MACO). The NCO will be responsible for project coordination. The actual implementation o f project activities will be carried out by specialized entities with the necessary technical expertise. The N C O would coordinate the activities o f all the implementing bodies involved in the project, and ensure that work plans are prepared, budgeted and implemented in a timely manner, and that management o f project funds i s in line with the provisions o f the project's eligibility guidelines. The NCO would become the focal point for the project, where all the information relevant to the project and accounts are consolidated and held. The N C O would ensure that the implementing bodies are supported adequately and that they adhere to the requirements o f the project. The NCO will be supported by a recruited lean service team to emphasise its role in the project as a coordinator. The N C O would comprise a National Coordinator (NC), Monitoring and Evaluation Specialist (M&ES), Safeguard Specialist (SGS), Project Accountant (PA) and support staff. The N C O would be responsible for disbursing project funds in line with the provisions o f the project guidelines, as well as for ensuring the replenishment o f project bank accounts and for preparing and submitting withdrawal applications to the World Bank. The project provides resources for a specific Project Management and Coordination Component. National Project SteeringCommittee. A National Project Steering Committee (NPSC) will be established by M A C O to provide guidance to project implementation and resolve any issue o f a policy nature that might arise duringproject execution. The NPSC would facilitate linkages between various ministries, line agencies and key stakeholders involved in the project implementation to ensure that project activities are implemented in a manner consistent with the development objectives. It will be chaired by the Permanent Secretary (Agriculture) of MACO, and its Members would include all the implementing bodies (MACO, RDA, NWA, and the Apex Organization); the Ministry o f Finance and National Planning (MoFNP); the Ministry o f Works and Supply (MW&S); the Bank o f Zambia (BOZ); the Ministry o f Tourism, Environment and Natural Resources (MTENR)tand the Zambia National Farmers Union (ZNFU). The NPSC will meet every three months to review project work plans and progress, resolve implementation bottlenecks, and provide guidance on any other matters as requested by the NCO. The NPSC would have a Sub-committee (NPCS-SC) which will approve the fundingproposals for the MIIF. The actual implementation o f project activities would be delegated to entities that are specialized in working with the private sector. The Institutional Development Component will be directly managed by MACO. The Support to Farmers and Agribusiness Enterprises Component will be implemented by three different implementing bodies as explained below: Support to Supply Chain Credit Facility. The overall responsibility for the supervision o f the Supply Chain Credit Facility will be modelled on the successful structure implemented 69 under the Enterprise Development Project (EDP). Under this modality there will be three levels o f management/oversight. (i)National Coordination Office (NCO). The NCO would be responsible for supervision and monitoring, based on the operational reports provided by the Apex Organization. The NCO will also have the authority to commission external audits and reviews o f the functioning of the facility as needed. (ii)Apex Organization. The Apex Organization will have responsibility for the routine operations of the facility. Its duties will include ensuring that all PFIs meet the criteria for participating in the facility, reviewing the applications for draw-downs from the facility to ensure that the activity being financed accords with the terms o f the program, and disbursingto and collecting repayments from the PFIs. Inaddition, it will manage the ongoing liquidity of the facility, be responsible for the Sinking Fund, prepare the monthly and quarterly monitoring reports, and liaise with theNCO. It will not undertake a credit review of any loan application forwarded to it by the PFIs. (iii) Participating Financial Institutions (PFIs). The PFIs will solicit applications for credit from potential borrowers/ a g o - enterprises who may qualify for funding under the facility. The PFIswill undertake their own due diligence, andnegotiatethe terms and conditions (including loan pricing) with the borrowers, without outside interference. When they have completed their credit procedures, they will request funding from the facility to finance the loan, and upon receipt will then disburse the proceeds o f the loan to the borrower. At the time o f loan repayment, the PFIs will repay the funds owing under the repayment schedule to the Apex Organization, regardless o f whether they have receivedpayment from their credit client. Market Improvement and InnovationFacility (MIIF). The Facility will be implemented through the following arrangements: (i)Secretariat. A Secretariat will be responsible for the day to day management, coordination and fund management o f the MIIF. It could be a private sector entity or NGO with a demonstrated technical experience in agriculture and agribusiness development and fiduciary qualifications for fund management. The Secretariat will have the following main functions: e Organize a nation-wide information campaign and call for proposals; e Direct participation inand coordination o f the project concept note screening process for eligibility; e Coordinate any cases for appeal; e Coordinate collaboration with other similar facilities and funds; e Arrange for a comprehensivereviewby the TRP; e Coordinate the endorsement for funding; e Arrange for agreement signing; e Disburse grant and manage the fund; e Arrange for M&E o fprojects; e Act as a secretary to the TRP, NCO and SC-NPSC. 70 (ii)TechnicalReviewPanel(TRP). TheTechnicalReviewPanelconsistsofqualified technical agribusiness and/or agricultural specialists. The ZNFU, as the leading agriculture and agri-business association in Zambia, will serve as the primary focal point o f the T U . In coordination with the Secretariat, the ZNFU will select qualified experts from its membership on a case-by-case basis to serve as technical review panelists. The selection o f the panelists will reflect the expertise required to effectively review the full proposals for each TRP meeting. The main function o f the TRP i s to review the full proposals for technical and financial quality and feasibility, consistency with industry priorities and provide written comments on those aspects for final endorsement by SC- NPSC. (iii) Sub-committee of the National Project Steering Committee (SC-NPSC). The MIIF will be managed under the overall guidance of the Sub-committee o f the National Project Steering Committee (SC-NPSC) and NCO with technical, administrative and fund management support provided by the Secretariat. The SC-NPSC i s expected to consist of representatives from MACO, Banker's Association o f ZambidZambia Chamber of Commerce, and the Secretariat. Activities to be funded by the MIIF will be selected through a transparent two-step screening and review process, including an initial submission of project concept notes and development of full proposals. The MIIF will follow the operational principles as described in the MIIF Implementation Manual. The Secretariat will make calls for proposals. It then carries out the first screening o f the brief one-two page concept notes received from applicants against pre-identified eligibility criteria. For transparency purposes, all concept notes submitted by applicants considered either eligible or not, along with filled eligibility checklist, will be forwarded to the SC-NPSC for review and authorization. Applicants o f approved concept notes will be advised to develop full proposals. Workshops will be conducted to assist prospective applicants develop basic skills required to prepare a full project proposal. In addition, the Secretariat informs applicants of qualified technical service providers that may support the proposal development (at the expense o f the applicants). The Secretariat will work with the ZNFU to assign three to five TRP members with most appropriate expertise and with no conflict o f interest with a given proposal, to review and comment on the full proposals for technical and financial quality and feasibility. Upon approval by the TRF', the Secretariat reviews the amount requested and endorses the funding based on the comments and funds availability. Secretariat i s also responsible for coordinating and forwarding any appeals to the NPSC for review. After the concept note approvalby the SC-NPSC, the Secretariat informs all applicants of the screening results and forwards the approved concept notes to the applicants for full proposal development. 71 (i) National Road Fund Agency (NRFA). The NWA is responsible for managing funds for the road sector in Zambia. Thus, all project funding o f the RRIF will be routed through NRFA using well established procedures. Funds will be allocated by the N C O to a special account managed by the NRFA upon approval o f Annual Work Plans and Budgets (AWPB) by the NPSC. The NWA has one procurement specialist. The NRFA has already established its Project Implementation Manual developed for the ROADSIP-I and -11, and for the Bank funded RRMP, which will be used as the basis for the procurement arrangements for the RRIF. (ii) Road DevelopmentAgency (RDA). The RDA will be responsible for the road sub- project coordination, technical implementation, setting o f the overall framework, co- ordination, administrative, supervising and monitoring functions. Procurement will be managed centrally while supervision will be managed from the decentralised offices o f the respective Provincial Engineers using consultants under established modalities for such works. Overall responsibility for the design will rest with the RDA's Manager for Planning and Design. The RDA's Division o f Construction and Rehabilitation will act as the Client's representative for contract management. Institutional Development Component. The implementation arrangements o f this component will be carried out by MACO. The concerned departments and institutions o f MACO (Department o f Policy and Planning, Seed Control and Certification Institute, Agricultural Marketing Information Centre, Zambia Agricultural Research Institute) and the CDT would implement their specific components within their existing structure and modus operandi. These implementing institutions would prepare their AWPB and submit them to the NCO. The latter would check the proposals for conformity with project objectives and have them approved by the National Project Steering Committee (NPSC). Once approved, funds would be allowed to flow inthe same manner as it is currently done from MACO to its own departments and to the CDT. 73 Y L 3 d .;3 zn I 1 c 0 E 5 a E d n <- - + 0 .I c, Yd 8EW V i! I P I P Y l e r Yu W E: *C) a zEi 8 a C 1< (1 C *. e 3 d a aw8a f fb C ? EE C Annex 7: FinancialManagementandDisbursementArrangements ZAMBIA: AgriculturalDevelopment Support Project (ADSP) Background: The assessment o f financial management arrangements for the project was carried out to determine whether the project has in place an adequate financial management system as requiredby the Bank's OP/BP 10.02. The assessment was conducted using the guidelines' issuedby the Bank's Financial Management Sector Board on October 15, 2003. For projects financed by the Bank, the borrower and the project implementing agencies are required to maintain financial management systems, including accounting, financial reporting, and auditing systems adequate to ensure that they can provide accurate and timely information regardingproject resources and expenditures. Country Issues: The overall conclusion o f the Country Financial Accountability Assessment' (CFAA) on Zambia, dated November 2003, was that "there still remain substantial weaknesses and risks within the public financial management system o f Zambia in the areas of budget management; financial reporting and audit, and procurement". "Many o f Zambia's public finance laws and regulations are not enforced. This has led to a breakdown o f administrative systems and procedures for the control o f expenditure. Audit systems that are in place to detect improprieties have been rendered ineffective due to the lack o f follow-up and enforcement of the Auditor General's recommendations. Unfortunately, the lack o f sanctions may have only served to embolden those who have been engaged in improper activities. The challenges faced by Zambia in public expenditure management have been longstanding and will require targeted efforts as well as a strong degree o f political will to address." The IDA projects in Zambia operate in these poor control environment. Inthe ongoing consultations with the World Bank and the Cooperating Partners (CPs), the Government has indicated that the implementation of the Public Expenditure Management and Financial Accountability Review (PEMFAR) recommendations i s a top priority. Inthis regard, the World Bank and the CPs are jointly funding the Government PEMFA Project at the MoFNP to implement the recommendations of the PEMFAR. With the help o f the World Bank and other CPs, Government i s trying to address all these problems o f public finance management and accountability. The PEMFA component o f the Public Sector Management Program - Support Project (PSMP-SP) i s aimed at implementing the recommendations o f the PEMFAR. 'FinancialManagementPracticesinWorldBank-FinancedInvestmentOperations,Financial Management Sector Board, November 3, 2005. The CFAA was part of a comprehensivePublicExpenditureManagementandFinancialAccountability Review(PEMFAR) carriedout by the Governmento fthe Republic ofZambia with the support of cooperatingpartnersandthe World BankinNovember2003. - 75 - RiskAssessment and Mitigation: Risk Risk mitigatingMeasures Conditionof Negotiations, Risk Rating Incorporated Boardor Effectiveness into ProjectDesign (Yesmo?) 1Countrv Level: Lack of accountabilityand poor S* The PEMFA projectunder the compliance with existingregulations/ PSMP-SP component being procedures and lack of sanctions for supportedby IDA andother offenders (as identified in2003 CFAA) cooperatingpartners has may result in funds not being usedfor objectives to address the Country intendedpurposes inan efficient and levelrisks identified. economic way. . The series of highprofile corruptioncases currently being prosecutedinthe courts of law are sending apositivemessage to would-be offenders. The widely publicizedzero tolerancefor corruptionat the highestpolitical levelis intendedto serve as a deterrent. * Based on 2003 CFAA. Whilst GRZ has . A new Finance Act has been taken many risk mitigatingmeasures, this enactedalongwith new financial rating has not beenchanged as no formal regulationsandis aimedat study hasbeen undertakensince the 2003 reducingthese risks. CFAA to justify alower rating EntityLevel: a) MACO M m The Ministryhas been No . The financial management restructuredandhas adequate performanceof the ministry under numbers ofqualified accountants ASIP CrediUMngt of Miombo The MACO accountingunit staff No Woodland EcosystemTrust Fund has beeninvolved inthe project was poor. preparationanddesignof the financial managementsystem and thereforehas a better understandingof their roles and responsibilities well ahead of the project comingonboard. The activities to be funded do not No involve the community where most of the accountability problems were experienced under ASP The experience under the No Miombo Trust Fundwill be beneficial. The staff has receivedtraining onWorld Bank FinancialManagementand disbursements procedureswhich . will beusefulfor ADSP. Poorlyremuneratedcivil servants M . The concern i s beingaddressed No may notbe that dedicatedto runthe by nationwide civil servicepay I------ system efficiently reform, supportedby the PSMP-SP. b) NRFA L The entityhas beeninvolved in No the implementationofWorld Bank projects with satisfactory performance - 76 - ;) BO2Apex OrganizatiodZEF M . The entity (ZEF) will not handle Before transfer of the SA to m Lacks financial management IDA Special Account until the ZEF, financial management experienceinrunningof a World necessaryfinancial management assessmenthas to be carried Bank financedprojectprocedures capacity has beencreatedanda out to determineits capacity ZEF is a newly createdcompany satisfactory FMassessment to handle IDA funds. without an establishedhistory of carriedout by IDA. Inthe performance interim, MACO Accounting Unit will operate the SpecialAccount onbehalfof BOZ Apex OrganizationandZEF. . Proiect Level: There are manyimplementing M There is a National Coordinating No :ntities/sub- agencies; other Office under the MACO which ionors(AfDB, FAD) inthe sector will haveresponsibilities to coordinateall activitiesand the various units under the project IDA has agreed oncommon No harmonisationto coordinatethe supportto the sector with other cooperatingpartners. M A procedures manualis being No developed to providethe guidelines. A procedures manualis being Existenceof an adequate developed to providethe guidelines. accountingsystemwill be a requirementunder the financial covenants. hternal Control A procedures manualis being No developed to providethe guidelines. Funds Flow The FMproceduresmanualwill give No guidance andidentify the key players, I anddescribe the responsibilities of each of the entities involved to ensure smoothflow of funds. FinancialReporting Tne FMproceduresmanual i s being FMreportingwill form part developedto providethe guidelines. of the financial covenants requiringthe productionof periodic interim financial monitoringreports and annual financial statements Auditing M . FMproceduresmanualis being Productionof audited . developedto providethe financial reports will be part guidelines of financialcovenants. The office of the Auditor General which is anindependentbody has overall statutory responsibilityto ensure that the projectactivities I are audited ERALLCONTROLRISK M Strengthsand Weaknesses: The ADSP financial management system will be strengthened by a number o f factors. First, the NRFA, which has managed IDA projects with satisfactory financial management ratings, will manage about 40% of the total project resources. The NRFA Finance Unit is headed by a qualified Chartered Accountant with many years experience with bank financed projects. Second, MACO will use the existing GRZ Financial Management System (FMS), which i s adequately serving GRZ's accounting needs. This arrangement will allow the Government to - 77 - capture and report on all the resources and expenditures. Third, the MACO Chief Accountant will be in charge of ADSP's financial management needs for the MACO-managed components. Fourth, the operations will be guided by a financial management procedures manual which will be strictly enforced. The financial management i s weakened by the poor control environment at the country level, leading to non compliance with and non enforcement o f existing regulations and internal controls. In addition, in some cases, projects lack Government ownership and, therefore, are not adequately supervised by controlling officers who perceive them as World BanWdonor projects. This i s compounded by the existence o f a poorly remunerated civil service staff that may not be committed to the efficient implementation o f the project. Besides, the internal and external audit i s inadequately resourced in both human and financial terms. The audit findings and recommendations are sometimes not acted upon promptly by the Controlling Officers. The high number o f implementing entities and implementing sub entities may adversely affect the pace o f implementation with regards to coordination and this may affect disbursements and the flow o f funds. The measures to mitigate the impact o f some o f these weaknesses are addressed through the establishment o f the NCO which will ensure the smooth implementation o f the project, and the terms o f reference for the NPSC will include reviewing o f audit reports and ensuring that appropriate actions are taken by the relevant officials on the audit recommendations. Funds Flow: Funds will flow from IDA to three segregated accounts to be maintained at Bank o f Zambia inUnited States dollars. Account A for Rural Roads will be managed by NRFA.Account B for marketing improvement and innovation matching grant facility (MIF), institutional development and project management will be managed by NCO/MACO, with support from MACO's accounting unit. Account C for support to supply chain credit facility (the line o f credit) will be managed initially by MACO on behalf o f the Apex Organization within BOZ. MACO will make payments to beneficiaries on the instructions o f the Apex Organization, and provide support on the processing o f withdrawal applications untilsuch time that the new company, Zambia Enterprise Finance (ZEF) Ltd. can take over the Apex Organization activities. MACO has adequate financial management capacity to provide these services to the Apex Organization. The Bank's Financial Management Specialist will carry out the financial management capacity assessment o f ZEF, once it has been established and i s ready to take over the Apex Organization's role. The flow o f funds i s depicted in the diagram below. - 78 - Allocation of IDA Proceeds: The proceeds of the Grant will be disbursed over a period o f five years with 100% financing being available under the IDA funds in line with the Country Financing Parameters for Zambia. Amount o f Grant Percentage of Allocated Expenditures to be Grant Expenditure Category (US$ million) Financed 1. Goods, works, consultants' services and training for the Project 20.57 100% 2. Operating Costs for the Project 0.87 100% 3. Sub-loans under Line o f Credit 12.00 100% 4. Matching grants 3.OO 100% Amounts due pursuantto 5. Refundo f Project Preparation Section 2.02 (c) of the Advance 0.80 General Conditions Total 37.24 Staffing: The MACO Financial Management Unit (FMU) will provide the financial management services for the components to be managed by NCO/MACO, and will assist in the consolidation o f financial management and progress reports submitted from all project components. The MACO Chief Accountant will have overall financial management responsibility for ADSP components to be managed by NCO/MACO. The Chief Accountant will need to realign the responsibilities within the MACO FMU to ensure that project activities are adequately managed. During appraisal, the Chief Accountant and his team confirmed that MACO's FMU was adequately staffed to handle project-related accounting needs, both for MACO components and other components. Following the realignment o f duties and responsibilities, and actual experience gained, it will be determined whether the FMU or the NCO will require additional staff to be recruited for the smooth operations o f the project, A provision for an additional accountant is being made under the NCO's budget for this eventuality. Similarly, NRFA management Confirmed during the appraisal that its existing finance/accounting staff will be able to manage the ADSP's financial management requirements. Accounting Policiesand Procedures: The project will have written a manual o f financial management procedures that will describe the accounting system, internal control procedures, and standards to be followed, and the basis of accounting that will be used as a guide for implementation o f activities under the project to ensure accountability. These procedures should be in line with the Government financial procedures that are beingrevised, based on the new Finance Act o f 2004. Internal Audit: According to the Public Finance Act Number 15 o f 2004, internal auditing in Government i s the responsibility o f the Controller o f Internal Audit based at the MoFNP. The Controller seconds staff to Government ministries, who report to the Controlling Officers in the - 80 - respective ministries. There i s an internal audit unit at the MACO, who will provide the internal audit function for the project. The inherent constraints of poor staffing levels and inadequate operational funding, which have made the internal audit ineffective, are expected to be mitigated by the PEMFA project at the MoFNP, which will make funds available to strengthen the Internal Audit function within GRZ. With the increased funding under PEMFA, the Internal Audit function for the project i s expected to improve through better annual work plans, acquisition of equipment, and training of staff. The Internal Audit i s expected to work collaboratively with the External Auditors and the M & E sections o f MACO. At NRFA, there i s no internal audit function. It i s recommended that this unit be established as soon as possible. This was agreed with GRZ during the appraisal and confirmed during the negotiations. The NRFA structure provides for an internal audit unit and recruitment of staff under this unit i s underway. ExternalAudit: An external audit will be carried out annually by the Auditor General (AG), who, as outlined inthe ConstitutionofZambia Act 1996, is responsible for the audit of all Government Funds. In practice, however, because of capacity constraints, the AG frequently appoints private sector auditors, acceptable to IDA, to carry out the audit on behalf o f the AG. The external auditor will conduct the audit according to International Standards on Auditing and Terms of Reference (TOR) acceptable to IDA. IDA requires that the Audited Financial Statements for theproject be submittedno later than six months after the year-end. Besides the audit opinion, the auditor will be required to prepare a separate report to Management, giving significant weaknesses that the auditor came across during the course o f the audit that are not reflected in the audit opinion. These may include weaknesses in the internal control systems, inappropriate accounting policies and practices, issues regarding general compliance with broad covenants and any other matters the auditor considers should be brought to the attention of the Recipient, and providing recommendations for improvements. Like the audit report, the Management Letter should be submitted to IDA within six months after the year end. The audit arrangements should be based on the "Guidelines - Annual Financial Reporting And Auditing For World Bank - Financed Activities" issuedby the World Bank on 30 June 2003. Reportingand Monitoring: Monitoring will be at various levels: NPSC oversight o f NCO; NCO general oversight o f the Implementing units; MACO FMU to monitor general funds utilisation; IDA supervision missions; and the annual external audit. The project will report on the basis o f agreed performance indicators inAnnex 3 o f the PAD. It was agreed that, at a minimum, quarterly FMRs, based on the FMS generated monthly returns, will beproduced for ADSP. The FMRswill comprise of: Financial Reports: Sources and Uses o f Funds (by funding source and expenditures by component and activity) Statement, showing for the quarter and cumulatively; beginning and ending cash balances of the project; Physical Progress Report: Linking financial information to outputs based on agreedindicators; and, Procurement Monitoring Reports. - 8 1 - In addition to the quarterly FMRs, the Project will produce annually audited Financial Statements in accordance with International Public Sector Accounting Standards (IPSAS) cash basis o f accounting. These Financial Statements (outline o f the expected contents were agreed during the negotiations and will be included inthe Financial Procedures Guidelines of the PIP andjointly agreedto by all stakeholders) will comprise at the minimum:' A Consolidated Statement of Sources and Uses, which recognizes all cash receipts, cash payments and cash balances controlled by the entity/entities; and separately identifies payments made on behalf of the entity/entities by third parties. The presentation should show cash receipts by sources and expenditures by main expenditure classifications i.e. categories, components and activities. Significant Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Statement o f Sources and Uses o f Funds being cross referenced to any related information in the notes. A Management Assertion that the funds have been expended in accordance with the intended purposes as specified inthe Grant Financing Agreement. Any supplementary information or explanations that may be deemed appropriate by management to enhance the presentation of a "true and fair view." The following audit reports will be required (for the initial period ending on December 31, 2007): # Audit Report ImplementingEntity DueDate Statements Apex Organization I 30 June 2008 I 30 June 2008 SpecialOpinions: MACO, Apex 30 June 2008 SOE OrganizationandNRFA MACO, Apex OrganizationandNRFA InformationSystems: The ImplementingEntities will have a computerized financial management system. Impactof Procurement Arrangements: There are no specific procurement arrangements that specifically impact upon the financial management arrangements. Disbursement and BankingArrangements: Inorder to facilitate the flow of funds, three SegregatedAccounts inUS dollars at the Central Bank (Bank of Zambia) and the same number o f mirror accounts in local currency will be Guidelines:Annual FinancialReportingand Auditing For World Bank-Financed Activities, World Bank, 30 June 2003 - 82 - opened at any approved commercial Bank as stipulated in the GRZ Banking Arrangements Circular o f 2006, and acceptable to IDA. The initial allocation to the segregated accounts will be based on the estimated commitments to cover four months' expenditure. Transfers from the dollar accounts to the local currency accounts will be based on actual liabilities on a monthly basis. Disbursement and withdrawal procedures are detailed in the Bank Disbursement Handbook and the Financial Monitoring Reports: Guidelines to Borrowers. All disbursements will be governed by the conditions inthe Grant Financing Agreement and the procedures defined in the Disbursement Letter that will be sent to the Recipient upon the signing o f the Agreement. This will include the remedies available to IDA incases o fineligible expenditures made from the segregated accounts, the accounts remaining inactive, and when the reporting requirements are not complied with. Cheque signing arrangements will follow the two panel system. Details o f this will be included in the financial procedures manual to be produced by project effectiveness. All Bank accounts will be reconciled monthly by the relevant implementing entities (IEs), and the information shared with the NCO. The Bank reconciliation statements will be reviewed by designated officials on a timely basis, and all identified unusual differences will be investigated expeditiously. Control procedures over all bank transactions (e.g. cheque signatories, transfers, advances, etc.) will be documented inthe Financial Procedures Manual. FinancialManagementActionPlan: In order to strengthen the control environment and to mitigate the project financial management risk identified above, the following actions should be taken by the due dates. 1. Agree contents and formats o f the FMRreports and Agree during the annual financial statements, including for negotiations interim FMRreports 2. Produce draft Financial Procedures Manual as part Negotiations condition of the PIP 3. Opening o f Bank Accounts: Grant effectiveness 0 3 Segregated Accounts inU S $ at the Central Bank 0 3 Segregated Accounts in Local Currency at a Commercial bank acceptable to IDA 4. Preparationand clearance of the TOR for external Within 90 days o f Grant audit effectiveness - 83 - Supervision Plan: Financial Management (FM) supervision will be carried out by IDA as part o f the overall supervision for ADSP. At least two FM supervision missions are expected in a year. The objective o f the financial management supervision i s to ensure the continued adequacy of the Recipients' FMS, compliance with relevant legal covenants o f the FA, and that the proceeds o f the Grant are used only for the purposes for which the Grant was intended, with due regard to economy and efficiency, and also to build the financial management capacity o f the Recipients' implementing agencies ( M A C 0 and NWA). The actual work will include the checking o f conditions o f effectivenesddisbursements, SOE reviews, review o f the financial components o f the FMRs, Audit Reports and Management Letters from the external auditors, and following up with the NCOiIEs on all significant accountability related issues. - 84 - Annex 8: Procurement ZAMBIA: AgriculturalDevelopmentSupportProject(ADSP) A. General: Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurementunder IBRDLoans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure categories are described below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are as agreed between the Recipient and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The thresholds, including prior review thresholds, indicated in this Annex 8 correspond to the thresholds in the procurement plan for the first 18 months. These thresholds will be subject to periodic review, and depending on the re-assessed risk level, the thresholds may be revised and reflected inthe updatedprocurement plans. Procurement of Works. Works procuredunder this project, would include Civil Work. IDA will finance the costs o f construction and rehabilitation o f roads, marketing infrastructure, water supply and irrigation works and other diverse agricultural infrastructure constructions as will be defined during project implementation with the participating farmer groups. Contracts for works costing US$500,000 equivalent or more per contract will be awarded through International Competitive Bidding (ICB). Contracts for works estimated to cost US$50,000 equivalent or more per contract but less than US$500,000 will be awarded through National Competitive Bidding. Contracts o f works estimated to cost less than the equivalent o f US$50,000 per contract may be procured under the Shopping procurement method. Under the Force Account procurement method, farmer groups may implement small subprojects using their own resources (skilledunskilled labor, materials, equipment), or by hiringlabor and purchasing materials themselves and subcontracting the rest o f the work to petty contractors by obtaining three quotations. Theprocurement will be done using the Bank's Standard Bidding Documents (SBD)for all ICB and National SBD agreed with (or satisfactory to) theBank. Procurement of Goods. Goods procured under this project would include mostly vehicles, laboratory equipment and office equipment including computers, copiers, etc. Goods estimated to cost US$100,000 equivalent or more per contract will be procured centrally by the NCO within MAC0 under ICB procurement method. Where practical, the goods to be purchased will be grouped and be procured under ICB contracts. Goods estimated to cost less than US$lOO,OOO equivalent per contract may be procured through NCB procedures. Goods that are estimated to cost less than US$50,000 equivalent per contract may be procured through Shopping procedures in accordance with the procedures set forth in the Bank Guidelines. Procurement for subprojects will be carried out by the beneficiary based on procedures that will be set forth in the Operational Manual. These will consist mostly o f small contracts. - 85 - Direct contracting o f one contractor or one supplier without getting other quotations may be allowed, upon prior clearance o f the Bank, under the conditions specified in paragraphs 3.6 and 3.7 o f the Guidelines. Theprocurement will be done using Bank's SBDfor all ICB and National SBD agreed with (or satisfactory to) theBank. Selection of Consultants. Short lists o f consultants for services estimated to cost less than $200,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. This procurement category includes costs associatedwith consultancies, studies, training, and consultant services resulting from activities under matching grant hnds and line o f credit funds. Except as detailed below, consulting services will be selected through the Oualitv- and Cost-Based Selection (QCBS). Consultants for financial audits and other standard or routine nature services estimated to cost less than US$50,000 equivalent per contract will be selected through Least Cost Selection (LCS) method. Consultants' services for training estimated to cost more than US$50,000 equivalent per contract will be procured through the Selectionbased on Consultants' Qualifications (CQS) method. As appropriate, other selection methods such as selection based on a fixed budget (FBS) and Quality Based Selection (QBS) may be used for selection o f consultants, in accordance with the provisions o f the Consultant Guidelines. In exceptional cases, when selection o f consultants through competitive process is not practicable, the Recipient may, upon prior clearance with the Bank, hire consultants through the Single-Source Selection method, under the provisions of paragraphs 3.9 to 3.13 o f the Consultant Guidelines. Consultants for services meeting the requirements o f Section V o f the Consultant Guidelines will be selected under the provisions for the Selection o f Individual Consultants (IC) method. Support to implementation of certain interventions, such as matching grants, may be contracted to specialized NGOs or farmers' organizations with necessary expertise. This will be done through a competitive process using appropriate selection method described above. Inthe case o f the use o fNGOs, the requirements described under 3.16 o f the Guidelines will be observed. Exceptionally, the strengthening o f existing research systems aimed at improving the quality of studies and or research shall be carried out through identified in- country research institutions and the Universities subject to clearance by IDA in the procurement plan. Operational Costs which would be financed by the project would be procured using the implementing agency's administrative procedures which were reviewed and found acceptable to the Bank. B.Assessment of the Agency's Procurement Capacity: Except in the case o f the RRIF o f the project, procurement activities will be mainly carried out by the M A C O Procurement and Supplies Unit (PSU), with technical input from the various implementing agencies. A procurement capacity assessment o f the MACO was carried out by the Zambia Country Office Procurement Specialist in November 2005. Overall, the assessment indicates an Average Risk rating for the Ministry. Similarly, MACO's procurement capacity will be complemented by the capacity under the RDA and - 86 - NRFA. They are currently responsible for implementing the US$SOmillion IDA Credit facility under the Road Rehabilitation and Maintenance Project (RRMP) in support of the first phase o f the ROADSIP I1program. Both of these institutions have vast experience and good track records o f undertaking public procurement, including in the application of World Bank procurement Guidelinesfor large works, goods and service contracts. A formal procurement capacity assessment of the predecessor institutions to the NRFA and the RDA, the National Road Board (NRB) and the then Roads Department (RD) under the Ministry of Works and Supply, was undertaken as part ofthe preparationfor the RRMP. The procurement management under the RRMP was found to be satisfactory and no major issues were found regarding handling o f the procurement functions. Some risk mitigation recommendations were, however, made in respect of the participating institutions. Detailed information i s contained in Report No.27891 - Project Appraisal Document for the RRMP dated February 13,2005. Main Procurement Risks. The procurement capacity o f the MACO PSU i s reasonably adequate and in the case o f the components under MACO it may even be in excess on the sufficiency side. The category o f the PSU i s 3 - which i s the highest delegated procurement level under the Zambia National Tender Board for a Ministry or institution. However, some risks exist as follows: The MACO PSU has inadequate experience in the procurement o f works and Consultant services for which there i s need to improve capacity; MACO PSU has, inthe recent past, carried out procurement o f goods mostly on the basis o f shopping procurement method. Capacity therefore needs to be improved for procurement to be undertakenonthe basis o fNCB and ICB; Procurementplanning and monitoring, though inplace, needs enhancing; As the ADSP will involve a lot of players and institutions, it is imperative to review the existing Procurement administration manual or develop a new manual that clearly spells out the procurementroles and responsibilities o f all participating institutions; To address possible use o f inadequate procurement procedures and guidelines in the procurement of goods, works, and services for MIIF matching grant sub-component under the Support to Farmer and Agribusiness Enterprises Component, a procedures and procurement manual will need to be developed. The procedures will include private sector procurement and/or simplifiedprocurement practices for community participation. Procurement Risks Mitigation Action Plan. The following actions are suggested to mitigate the procurementrisks and facilitate the implementation o f the program. A selected number o f MACO procurement staff to undergo training inbasic procurement of consulting services and civil works preferably in the first six months o f project implementation; MACO PSUto streamline its procurement processes and improve assignment o f staff to carry out specific procurement functions aimed at improving overall process management and coordination. Review and identification o f changes to be finalized by Grant effectiveness; - 87 - Update the existing MAC0 Operations Guidelines to include procurement procedures and guidelines to reflect the implementation requirements o f the ADSP before project effectiveness; and To meet the procurement needs for the demand-driven matching grant investments under the MIIF sub-component, develop an Operational Manual for preparing, screening, approving and implementing subprojects, including the procurement arrangements and procedures. This manual should be finalized before project effectiveness. C. Procurement Plan: A procurement plan covering the goods, works and consultancy service contracts for the first 18 months o f project implementation has been prepared. The plan includes relevant information on goods, works and consulting services under the project as well as the timing o f each milestone in the procurement process. The procurement plan will be updated once every six months and reviewed by IDA during supervision missions. It will also be available inthe Project's database and inthe Bank's externalwebsite. As agricultural demand-driven matching grant investments under the MIIF sub-component cannot be identified up-front, an Operational Manual that provides all the guidelines that would be used in preparing, screening, approving and implementing subprojects will be finalized before project effectiveness and will be included inthe final PIP. D. Frequencyof Procurement Supervision: Inaddition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended supervision missions every six months to visit the field to carry out post review o f procurement actions. Annual independent technical audits may also be carried out and would aim to: 0 verify that the procurement and contracting procedures and processes followed for the projects were inaccordance with the Financing Agreement (FA); 0 verify technical compliance, physical completion and price competitiveness o f each contract inthe selected representative sample; 0 review and comment on contract administration and management issues as dealt with byparticipating agencies; 0 review capacity o f participating agencies inhandling procurement efficiently; and 0 Identify improvements inthe procurement process inthe light o f any identified deficiencies. ContractAward Disclosure Requirements: Contract awards done through ICB. Procurement method shall be consistent with Paragraph 2.60 o f the Guidelines: Procurement under IBRD Loans and IDA Credits,May 2004. Within two weeks o f receiving the World Bank's "no objection" to the recommendation of contract award, the Recipient shall publish in UNDP online and in dgMarket the results identifying the bidand lot numbers and the following information: - 88 - a name o f each bidder who submitteda bid; a bidprices as readout at bidopening; a name and evaluated prices o f eachbidthat was evaluated; a name o fbidderswhose bids were rejected and the reasons for their rejection; and a name o f the winningbidder, and the price it offered, as well as the duration and summary scope o f the contract awarded. Contract Awards done through Direct Contracting. The procurement method shall be consistent will Paragraph 3.7 o f the Guidelines: Procurement under IBRD Loans and IDA Credits, May 2004. After the contract signature, the Recipient shall publishin UNDP online and indgMarket the: a name o f the contractor; a price; a duration; and a summary scope of the contract. This publication may be done quarterly and inthe format of a summarized table covering the previous period. Contract Awards for Consultancies. These shall be consistent with Paragraph 2.28 o f the Guidelines: Selection and Employment of Consultants by World Bank Borrowers, May 2004. After the award o f contract, the Recipient shall publishin UNDB online and indgMarket the following information: a names of all consultants who submittedproposals; a technical points assigned to each consultant; a evaluated prices o f each consultant; a final point ranking o f the consultants; and a name o f the winning consultant and the price, duration, and summary scope o f the contract. The same informationshall be sent to all consultants who have submitted proposals. Contract Awards for Selection Based on the Consultants' Qualifications (CQS). These shall be consistent with Paragraph 3.8 o f the Guidelines: Selection and Employment of Consultants by World Bank Borrowers, May 2004. The Recipient shall publish in UNDB online and indgMarket the: a name of the consultant to which the contract was awarded; theprice; 0 duration; and a scope of the contract. This publication may be done quarterly and inthe format of a summarized table covering the previous period. - 89 - Appendix 1: Details of the Procurement Arrangement Involving International Competition. Table Al: Goods and works and non consulting services. List of contract packages which i 1 will beprocured following ICB and Direct Contracting. 1 2 3 4 15 6 7 I 8 19 LO Ref. No. Contract Estimated Procurement Prequali Domestic Review Expected Expected Zomments (Description) cost US$ Method fication Preference by Bank Bid-Opening Contract (YesflYo) [yeslno) Date Completion Date MACO 4 Irrigation system 742,000 Yes Prior Oct 06 Dec. 07 :goods) To 38 bidfor in lots MACO 5 Motor Vehicles 420,000 Yes [goods) To 4x4 be bid for in lots MACO 7 Desktop 170,000 Yes [goods) To computers, be bid for printers,UPS, in lots scanners and 100,000 Yes Post I Sep06 I Feb 07 (goods) 180,000 Yes Prior I Nov 06 1May 07 (goods) To Equipmentand be bid for testing equipment in lots MACO 8 High Performance 280,000 Yes Prior Nov 06 June 07 (goods) To Chromatography, be bid for Atomic in lots Absorption Chromatography andGas Liquid Chromatography NRFNRD Various Contracts 12,200,000 ICB Yes Yes Prior Sept 06 June 07 Estimated A over 4 yrs (contract contract Agricultural feeder award) sums will roads inthree vary. Most provinces of contracts Zambia total will when 4ookm (feeder definedbe I Iroads and district procured under ICB. To be bid roads) for in lots - 90 - Table A2: Thresholds for Procurement Methods and Prior Review' Contracts Subject to Prior ExpenditureCategory Contract Value Threshold (US$) Procurement Method Review (US$ millions) Works >=500,000 ICB All Contracts >=50,000 <500,000 - NCB 1" contractonly <50,000 Shopping None All values Direct Contracting All Contracts Goods >=100,000 ICB All Contracts >=50,00 < 100,000 NCB 1'' contractonly <50,000 Shopping None All values Direct Contracting All Contracts Table A3: Consulting services. List o f contract packages which will be procured following ICB andDirect Contracting. I 1 2 1 3 4 1 5 1 6 I 8 Ref. No. Description of Estimated Selection Expected Expected Comments Assignment cost Method !yii:k Proposals Assignment (Prior I Post) Submission Completion Date NRFAI RDA Feasibility studies, 1,100,000 May 08 There will be Engineeringdesign various contracts and supervision of spread over time various road and will only be contracts definedduring implementation NRFA I RDA Various contracts 200,000 May 08 There will be for Environmental various contracts impactbriefs and spread over time assessments, and will only be defined during implementation Table A4:Thresholds for Procurement Methods and Prior Review Contracts Subject to Prior ExpenditureCategory ContractValue Threshold (US$) Procurement Method Review (US$millions) Firms >=100,000 QCBS All contracts <100,000 CQS, LCS, QBS, FBS First contract Individual =50,000 IC All contracts Short lists composed entirely of national consultants: Short lists o f consultants for services estimated to cost less than $200,000 equivalent per contract, may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. -91 - Annex 9: Economic and FinancialAnalysis ZAMBIA: AgriculturalDevelopmentSupport Project (ADSP) Approach of Economic and FinancialAnalysis: Project investments would be decided on a demand driven basis. Production models have been developed based on a range of enterprises identifiedwith potential project beneficiaries (Le. commercial smallholders, producer associations and agribusinesses), which are likely to be eligible under the project SCCF or MIIF. The economic and financial analysis was carried out successively at crop/activity level, farm level and value chain level. BeneficiaryGroup: (i) Smallholder farmers. It is expected that the project would directly benefit some 65,000 commercializing smallholders who are already participating in organized supply chains. In addition, a more limited number o f smallholders would benefit from the up-scaling o f existing supply chains or development o f new outgrower schemes identified. Such farmers would benefit from corporate extension programs, input supply and secure markets for their produce through investments in value chain development. It i s estimated that the project would indirectly benefit an additional 55,000 smallholders through increased outreach o f existing supply chains and new outgrower schemes, and rehabilitation of rural roads. (ii) Agribusinesses. Traders, entrepreneurs, commercial farmers and agribusinesses participating in the project would benefit from: (i)increased and more secure raw material availability; (ii)improved produce quality; (iii)reduced transport costs and increased outgrower schemes outreach through improved feeder road network in high agricultural potential areas; and (iv) access to new markets identified under the MIIFFacility. Outgrower schemes would be strengthened and side selling reduced due to improved organizational arrangements. Yields. Increased crop yields would result through the adoption o f improved production methods and use of modern inputsas well as irrigationequipment. The yield assumptions are in line with what is being achieved currently by some commercial smallholders. However, these are much lower than those obtained by large scale commercial farmers. Assumptions made on yields and farm gate prices are presented inTable 1. Prices. The analysis i s expressed in constant 2005 prices. All economic and financial prices are converted to local currency at the exchange rate o f 4,600 ZMK for 1 US$. Local costs have been converted to border prices using a standard conversion factor o f 0.9. Fertilizers have been costed using import parity prices, estimated on the basis o f World Bank projections for year 2010, but expressed in 2005 constant prices using the Manufacturing Unit Value Index. The export crops have been valued at export parity price except for soybean which was valued at import parity price. Taxes and duties have been excluded from economic cost streams. World Bank projections have been used to estimate prices for which projections were readily available. Year 2010 has been considered more appropriate reference for the price projections as full project development would take place close to that year. Therefore, prices for major crops have been based on Year 2010 projections, but expressed in 2005 constant prices usingthe Manufacturing Unit Value Index: - 92 - Cotton. The Cotlook A index is expected to average $1.20/kg during 2005, down from $1.37/kg during 2004. It i s expected to average $1.24 during 2006, and recover to $1.29/kg and $1.33/kg during 2007 and 2008, as increased demand will remove some of the price pressure from the cotton market". Coffee. Coffee price made a remarkable recovery during 2005 with Arabica expected to average $2.58/kg during 2005, up from $1.77/kg in 2004. The scope for further increases in coffee prices i s limited as prices appear to have reached their cyclical high.Arabica prices are expected to average $2.42/kg during2006 and decline slightly during2007'l. Soybean. Soybeanprices are expected to average $275/ton in2005, down from $307 in2004. Prices are projected to decline to $255/ton in 2006 and continue to decline to $235/ton in 2007. This would keep annual average nominal prices within their historical range o f $200- 300 per ton which has prevailed for more than three decades. The projected decline i s consistent with the recent and projected price declines for maize, which i s an important livestock feed substitute to soybean meal, and palm oil which i s an important vegetable oil substituteto soybean oil 12. Paprika. In spite o f historic fluctuations between $1.60 and $2.40 per kg over the past decade, further downward price volatility risk i s assumed to be low since current prices lie already at the low end o f historic norms13. Chilli. The industry which intends to develop chilli production in Zambia benefits from contractual arrangements that guarantee a fixed price and minimum supply quota. The price paid for mash i s well above industry expectation and return on investment for agricultural produce. The mash production quotas are increased annually based on the producer's performance and their ability to meet their current quotas. It is assumed that the financial cost of farm labor reflects its opportunity cost, as: (i)most incremental labor requirement would be required in the peak agricultural season (e.g. more than 50% o f incremental on-farm activities would occur during the harvest period, which i s already a peak period for farm labor demand) and (ii) HIViAIDS and migration towards urban areas are both contributing to a decreasing availability o f labor force in rural areas. Furthermore, the evidence from commercial smallholders, who already employ spot labor, shows that farm labor availability couldpotentially be a constraint. Discount rate. The discount rate of 12 percent is used as an opportunity cost o f capital and projections o f cost and benefit streams are made over 20 years. Crop models. Crop models have been developed for major supply chains working through contract farming arrangements with smallholders that are showing a positive trend, have potential for growth, involve a large number o f smallholders and are likely to benefit from project support Le.: cotton (rainfed and irrigated), paprika (rainfed and irrigated), coffee (irrigated), soybeans (rainfed and irrigated) and chilli (irrigated). Crop models witldwithout irrigation and witldwithout farm power were developed. Crop models have also been lo Commodity market brief; Cotton, DevelopmentProspect Group, the World Bank, 31October 2005 Commodity market brief; Coffee, DevelopmentProspect Group, the World Bank, 31 October 2005. Commodity marketbrief; Soybean, DevelopmentProspect Group, the World Bank, 31October 2005. l3 Opportunities for Smallholder Income Growth in Zambia's Paprika Subsector, Peter Manda and Steven Haggblade, IDEZambia, October 2003. - 93 - developed for crops which may not directly benefit from project support, but would be part of target beneficiaries' farming systems (such as staple crops and groundnuts) and would indirectly benefit from project investment (Table 2). Production technologies used in the "with project" situation are already known in the country but that farmers do not use them due to the constraints which would be addressedby the project (e.g., lack of farm input, weak organizational arrangements within supply chains, market uncertainty, lack o f access to extension services). The crop models assume 2 to 3 years phasing period from the existing situation to any improved cropping system (rainfed or irrigated). Farm Models. Eight representative farm models were developed based on crop budgets. Without project farm models are based on recent Central Statistical Office data for Central, Eastern and Southern provinces, where most of the commercial smallholders are located. The area cropped per year without project is about 1.5 to 2 ha for smallholders growing a commercial crop, except for farm model 1 (Table 3); and o f 1.25 ha for smallholders without commercial crops. Most of the producers practice manual land preparation or hire oxen'4. Farm model number one, with a number o f commercial crops inthe without project situation, i s representative o f smallholders with a higher investment capacity and reliable access to oxen farm power. It i s assumed that they would be in a position to invest on irrigation development. Farm holdings are usually larger than the area cropped annually. Hence, farm land area should not be a major constraint to commercial crops expansion. Table 4 presents assumed change of cropping patterns and land use as a result o f project interventions. In addition, the financial and economic analysis included the following farm enterprise models: Honey. The model i s based on an assumed support for small producers inmarketing honey, through access to convenient handling equipment (adequate for organic production) and better storage facilities at collection point which would be provided by agribusinesses. Productivity, not being a major constraint, would be supported mainly through extension. This would allow producers to progressively evolve from an average 80 kg of raw honey production to 170 kg/year. Benefits generated by a diversification o f products marketed within the same value chain have not been considered inthe analysis. Milk. Milk collection centres that could potentially benefit from the project investments produce currently about 2.4 million litres annually. It i s estimated that about 10 percent of the milkproducedbecomes sour due to poor handling and transport facilities. With improved transport means, handling facilities and processing equipment, it i s foreseen that the percentage o f milk getting sour would be reduced. In addition, it has been assumed that quality improvement measures supported under the project would result inat least 40 percent of the milk sold to graduate from Category B (prevailing current quality o f smallholder produce) to Category A, as it has been recently proven feasible under smallholder conditions. Category A milk would be awarded a premiumincrementalprice o f ZMK300 per litre by the industry. Project costs. Project financial and economic performances were estimated taking into account all project costs corresponding to: (i)Supply Chain Credit Facility; (ii) Market Improvement and Innovation Facility; and (iii) Project Management and Coordination. In l4 It is estimatedthat about 25 percent of cotton producers own oxen; 25 percent cultivatewith hired oxen and 50 percent are hand-hoe farmers. Hand-hoefarmers cultivate annually 1 to 2 ha depending on family labor availability. Farmers hiring oxen may still crop a limited area of 1.5 to 2.5 ha. Farmers owning oxen have the capacityto crop awider area with a maximumestimatedto 5 haper oxenpair. - 94 - addition, the analysis considers 50 percent of the RRIF costs, and 40 percent of the institutional development costs. Results: Physical Impact. It is assumed that the overall annual incremental output i s expected to reach 42,000 tons o f cotton, 1,500 tons o f paprika, 2,200 tons of chili, 14,300 tons of soybean, 120 tons of coffee and 390 tons o f honey inyear 5, and 64,000 tons o f cotton, 2,000 tons o f paprika, 2,400 tons o f chili, 18,700 tons of soybean, 440 tons o f coffee and 475 tons of honey inyear 10. Project impact on cotton, soybean and paprika production i s expected to be significant; in project year 5, increases would account respectively for 27, 16 and 200 percent o f 2004-2005 estimated production, and, in year 10, these would reach 40, 20 and 270 percent o f 2004-2005 estimated production. Project impact on maize and groundnut production (which have been considered for farm modeling purposes) i s considered negligible. Project impact on national coffee production i s expected to be limited (less than 10 percent increase), as most o f the Zambian coffee would continue to be produced by commercial farmers. However, the project would have a significant impact on smallholder coffee production which i s now extremely low. Project impact on production o f honey o f exportable quality would also be significant. The project i s not expected to have a significant impact on milk production in quantitative terms as other projects would be supporting increased milkproduction and collection. However, the project i s expected to have an impact on milk quality and milk conservation. Financial Analysis: Financial internal rate o f return (FRR) and net present value (NPV) were calculated for each of the farm models i s presented in Table 5. The profitability shown would be additional to the farm income generated by on-farm family labor, as both hire and family labor costs have beenincludedinthe analysis, at a rate of ZMK4,OOO per day ofwork. All farm models appear financially attractive. Delayed yield maturity for coffee induces a lower rate o f return. Paprika production under sprinkler irrigation has also been considered inthe analysis. However, due to highinvestment, maintenance and operation costs, sprinkler irrigation would require high yields to be profitable as well as rotation with a winter crop. Consideringpresent smallholder yields and cropping systems, this model was not considered representative. However, it could be still supported under the project if proven profitable in specific contexts. Irrigated cotton and soybean production appears to be marginally profitable. However, these crops would be grown in sequence with more profitable crops. In particular, soybean would be cultivated as a winter crop in rotation with profitable summer crops such as paprika. Costs and benefits were compared for the main supply chains which were analyzed on the basis o f the farm models developed, taking into consideration all relevant costs which were not included in the crop models (Le. extension costs, corporate research, transport means for producer associations, civil works for commercial infrastructure, investment in processing and marketing facilities within the target supply chains, etc.). Producers have been considered to start gaining benefits from project investment during the same season they would have access to improved corporate extension programs or any intervention supported under the project. This explains the significant proportiono f beneficiaries already that would be benefiting from the project inthe second year. Table 6 presents FRR and NPV of supply - 95 - chain models. The total project FRR is estimated at 21 percent and the financial NPV at US$14.3 million. EconomicAnalysis: The project economic rate of return (ERR) i s estimated at 28 percent and NPV at US$26 million, taking into account the proportion of project costs justified inthe financial analysis. If all project costs were to be included in the economic analysis, the ERR would still be attractive at 22 percent. Sensitivity Analysis: Sensitivity analysis was carried out (Table 7). The project i s not particularly sensitive to small increases in costs or decreases in benefits (by 10 percent). The project i s relatively more sensitive to declines inbenefits than increases in costs. A 30 percent increase in costs would yield an ERR of 13 percent, while a 30 percent reduction in benefits would reduce ERR to 7 percent. The ERR is not very sensitive to delays in project investments such as large investments o f public good nature, such as feeder roads rehabilitation. A two year delay inthe accrual of project benefits would yield an ERR of 12 percent. FiscalImpact: Most o f the project activities would be conducted outside GRZ's budget as the bulk of costs would be within subprojects implemented and co-financed by private beneficiaries. The project impact on the budget would therefore be minimal. The main budgetary impact i s related to the maintenance o f the rehabilitated feeder and district roads after the project completion, which would cost an estimated US$1 million per year. It i s expected that these costs would be covered through the fuel levy. - 96 - --- - = = Incomeper Incomeper Without habefore ha after Income IRR IRR project labour labour per day before after (US$) (US$)* labour labour Without project CM1: Maize rainfed - basic X 82 21 1.2 CM2: Groundnuts rainfed - basic X X 118 38 2.3 CM4: Paprika rainfed - basic CM3: Cottonrainfed - basic X 157 52 1.3 With project Maize rainfed - improved (oxen) C M1 213 150 3.0 69% 77% Groundnuts rainfed- imp. (ox) CM2 269 185 2.9 44% 44% Cotton rainfed - improved CM3 183 82 2.4 NA NA Cotton rainfed - improved 60% (oxen) CM3 234 168 3.2 44% Cotton irrigated 0 319 183 2.8 41% 17% Paprika rainfed - improved 0 251 98 1.5 NA NA Paprika irrigated surface 0 996 826 5.3 >loo >loo Chilli irrigated 0 2,140 1,870 7.8 >loo >loo Soybeansrainfed - improved 0 173 75 2.5 NA NA Soybeans irrigated 0 225 138 4.0 26% 8% Coffee irrigated 0 2.060 1.400 2.3** 29% 20% ***withproject situation average for the 10 years plantation cycle. - 97 - Farm models Characteristics Support received under the Area I project annuallj without - Member of aproducer organizationor organizedproducer FM1: Irrigation group - Surface irrigationscheme scheme - Reliable and timely access to rehabilitationidevelopment I rehabilitation farm power -- Corporateextension Supportto producer organizations -- Investmentcapacity Several commercial crops with -clearmarketoutlets Insufficient/ unreliableaccessto farm power (through hired - Access to farm power and farm FM2: Access to equipment farm power -services) Commercial crop(s) with clear - Corporateextension !.5 5 market - Capacityto access credit funds -(cottodoilseeds)organisation Supply chain through outgrower schemes - FM3: Cotton Access to farm equipment production - Cotton production with clear -- Corporateextension intensification market outlets (cottodoilseeds) 2 2.25 (rainfed) Supply - to farm equipment FM4: Dev. of - Willing to develop cotton --- Access chain organisation Corporateextension rainfed cotton production (cottodoilseeds) 1.25 2 production - Clear market outlets -- Improvedmarketing Supply chain organisation capacities through improved feeder roads - FM5: Paprikaprod. intensification - Paprikaproduction with clear -- Access to farm equipment Corporateextension 1.5 1.5 (rainfed) marketoutlets (cottodoilseeds) ----- Improvedmarketing Supply chain organisation - Access to farm equipment FM6: Dev. of - Willing to develop paprika Corporateextension rainfed paprika production Supply chain organisation 1.25 production - Clear market outlets capacities through improved feeder roads - Willing to develop chili FM7: Dev. of chili production production under - Clear market outlets Idem 1.25 irrigation - Access to lands and water sources Irrigation systemdevelopment suitable for irrigation FM8: Dev. of coffee prod. under - Access to lands andwater sources -- Idem suitable for irrigationwith reliable development 1.25 2.25 irrigation and available access to electricity if - Irrigationsystem Coffee plantation and required maintenance - 9 8 - B =m= FMl: + F M 2 + - + FM5: FM6: FM7: FM8 Maize rainfed - basic 1.o 1.o 0.75 0.75 0.75 1.0 0.75 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Maize rainfed improved - 1.25 Groundnuts rain. -basic 0.2s 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 3.25 0.25 0.25 0.25 Groundnuts rain. -impr. 0.25 Cotton rainfed basic - 1.5 1.5 1 1 0.5 Cotton rainfed - improved 2.5 0.5 Paprika rainfed - basic 0.5 0.25 Paprika rainfed - * improved 0.25 0.25 Paprika irrigated 1.o Chilli irrigated 0.25 Commercial crop irrigated 0 1.o Soybean rainfed basic - 1 1 Soybean rainfed -impr. 1.o 0.25 Soybean irrigated 2.0 1.o Coffee irrigated 1.o Oxen rental (ha) Total rainfed 4.0 1.0 2.5 5.0 20.0 20.25 !;:5 20.0 1.5 1.5 1.25 1. 5 1.25 1.5 1.25 1.25 Total irrigated 0 4.0 0 0 0 0 Total 4.0 5.0 2.5 5.0 2.0 2.25 2.0 1.5 1.5 Number of farmers 100 2,700 17,500 2,000 3,700 - 99 - - FM1: Surface irrigation schemerehabilitation/ development 139% 8,300 FM2: Access to farm power 41% 2,800 FM3: Cotton production intensification (rainfed) 30% 230 FM4: Dev. of rainfed cottonproduction 28% 170 FM5: Paprika production intensification (rainfed) 72% 190 FM6: Dev. of rainfed paprika production 46% 210 FM7: Dev. of irrigated chili production 60% 2,400 FM8: Dev. of coffee production under irrigation 19% 2,700 A1: ExDansionof honevDroduction 51% 200 m Producersinvolved IRR NPV (at12%) Surface irrigation scheme rehabilitation /developmenti7 FM1 (100) 46% 674 Cotton & oilseedsproduction development FM2 (2,700) + FM3 (50,000) + FM4 (5 0,000) 48% 23,684 Paprikaproduction development FM5 (5,000) + FM6 (5,000) 15% 212 Chili production development FM7(1,200) 61% 2,080 Coffee production development FM8 (200) 20% 382 Expansionof honeyproduction A1 (5,000) 43% 873 Milkquality and food safetyimprovement (800) 30% 246 Scenario Baseline 10%increase in costs 30% increase in costs 10% reduction inbenefits 22 30% reduction inbenefits ( 7 I Two year On year delay inbenefits 18 delay inbenefits 1I12 1 l5 Calculated over 20 years with a 12percent discount rate. l6 Aggregateof farm modelsat value chain level. l7 Low investmentand recurrentcosts. - 100- Annex 10: Safeguard Policy Issues ZAMBIA: AgriculturalDevelopmentSupport Project (ADSP) A. Environmentaland SocialManagementFramework (ESMF) Anticipated Sub-project Types. The potential environmental concerns as identified in the Environmental and Social Management Framework (ESMF) are those associated with (a) rehabilitation and maintenance of feeder roads by the Road Development Agency (RDA); (b) agricultural development and commercialization which would lead to increased production volumes both through extensive and intensive margins; and (c) increased value added processing and marketing capacity o f agribusinesses involved in the commodity supply chains. Anticipated subprojects would include, for example, the following investments: farm power, farm equipment and implements, irrigation schemes and facilities, post-harvest and handling equipment and means, technology and marketing at agro-enterprise level; and handling, transportation, storage and processing assets improvements. The project would not finance any major infrastructure and sub-projects are unlikely to involve the acquisitions of land. There would be no Environmental Category A sub-projects financed under the project. Potential Environmental Issues. The ESMF provides a detailed assessment o f the potential environmental impacts o f the proposed project investments. The road rehabilitation and maintenance works are expected to have a limitednegative environmental impact since the works will follow the existing alignments. Small-scale agriculture and commercial farming projects may involve strengthening existing practices, introducing new and perhaps exotic crops, or crop diversification or intensification with new farming systems. They may also assist people move from shifting to settled agriculture, from subsistence to cash cropping, and/or from labor-intensive to mechanized farming. Land clearing and preparation, perhaps o f marginal lands, may be required, as well as new water supply and management systems. The project would not directly finance purchases of fertilizer and chemicals. Agribusinesses and farmers are able, or course, to purchase them from input suppliers. Mitigation and Monitoring Measures. The ESMF provides detailed guidelines for the mitigation and monitoring o f types o f activities anticipated to be funded under the proposed project, Inorder to avoid or minimize impacts associated with activities to be funded under the proposed project, mitigation measures will be implemented as part o f subproject construction and operation to ensure compliance with local and international environmental and social guidelines and standards. These measures will be included as part o f the subproject EMP and will be budgeted for in the Technical Specifications o f each subproject. The project would provide training to target groups and stakeholders who play role in implementing the ESMF. This would include development o f awareness raising materials for farmers associations under the MIIF, resources for the NRFNRDA to training on EIA process for road rehabilitation and for carrying out EIAs and annual environmental reviews, and training on EINagro environmental issues to M A C 0 and its institutions and CDT. The project i s working closely with the IFC who will be providing training for PFIs, who manage the line o f credit, in screening sub-projects for environmental and social sustainability. A set o f monitoring indicators will be used to verify compliance with local and international standards and to identify corrective actions for subprojects failing to meet these standards. These indicators will be applied when undertaking annual monitoringreports. - 101- Responsibility for Environmental Screening of Sub-projects. The ESMF will provide the detailed guidelines for sub-project preparation, approval and implementation to determine to what extent various project activities will affect the environment, and to ensure that developers / loan applicants have incorporated all necessary measures to keep their proposed project compliant with Bank safeguard policies and Zambian law. The implementation of the ESMF will take place at all levels of the ADSP, taking into account the coordination and implementation arrangements set out for the Project. The following organizations would needto play a role inintegrating the ESMF into the ADSP program and inimplementing the ESMF: The Ministry of Tourism, Environment and Natural Resources (MTENR). MTENR i s the lead institution responsible for environmental issues in the country. Their core activities include legislation, policy formulation and reviewing policies, and monitoring o f implementation agencies, including the Environment Council o f Zambia (ECZ). The MTENR through its membership in the NPSC would provide guidance to project implementation and resolving any environmental issues o f a policy nature that might arise during project execution. As a member of the NSPC, the MTENR's main role would be to facilitate linkages betweenM A C 0 and the MTENR, to ensure that environmental matters are taken into account, to advise on environmental policy issues and to monitor ECZ's activities inrelationto the ESMF. The Environment Council of Zambia (ECZ). The ECZ i s the lead institution for the implementation o f environmental policies, and i s responsible for environmental protection, pollution control and natural resources management. The ECZ would be responsible for ensuring that all subprojects under the SCCF, MIIF and RRIF facilities comply with national EIA regulations and the requirements of the ESMF. Screening shall be undertaken by the ECZ. Where relevant the ECZ will review and approve project briefs and EIAs and would issue an environmental permit/ license as applicable. The ECZ would further undertake audits where required to ensure that implementers are complying with their Environmental Management Plans (EMPs) and their commitments to environmental management, mitigation and monitoring. The Road Development Agency (RDA). The RDA will be responsible for the technical implementation, setting o f the overall framework, co-ordination, administrative, supervising and monitoring functions o f the RRIF. As part o f this responsibility, the RDA will have to ensure that each feeder road subproject complies with the national EIA regulations and the requirementso f the ESMF. Where necessary, the RDA will need to undertake a project brief or ETA inorder to receive an environmental permit or license. Where relevant, the RDA will be required to implement the EMP during construction and operation and undertake monitoringactivities as per their commitments inthe EMPs. The National Roads Fund Agency (NRFA). The NRFA i s responsible for coordinating and managing funding for all road expenditure in Zambia. It will coordinate and authorize funding under the FRIFusingwell established procedures. Funds are only received from the NCO ifthe NPSC has approvedAnnual Work Plans and Budgets (AWPB) for the RRIF. As part o f this approval process, the NPSC will require that the costs associated with the implementation of the ESMF have beenbudgeted for and included inthe Annual Work Plans. The NRFA will therefore have to ensure that these provisions have been made, in order to receive funding from the NCO. - 102- The National Coordination Of$ce (NCO). The NCO would become the focal point for the project, where all the information relevant to the project and accounts are consolidated and held. As part of this role, the NCO would be responsible for holdingall information relevant to the ESMF and liaising with ECZ to ensure projects' compliance with this aspect of the project. To carry out this function, the NCO will hire a Safeguards Specialist whose responsibility will include supervising the overall implementation of the ESMF/RPF, and providing support to agencies with a role inthe ESMF/RPF such as the RDA, ECZ and PFIs. The Safeguards Specialist will ensure that the NCO receives monitoring reports from the RDA and PFIs. As the NCO will also be responsible for the achievement of M&E targets, the achievement of Environmental and Social M&E targets will also ultimately be the responsibility o f the NCO. The MIIF Secretariat. The Market Improvement and Innovation Facility (MIIF) will be administered by an independent Secretariat-administrator (Secretariat). The Secretariat, through appointed grant officers, will need to liaise with the ECZ to determine whether each subproject funded as part o f the MIIF will need to comply with the national EIA regulations and/ or be subject to the requirements o f the ESMF. The nature o f this project component i s such that this is highlyunlikely. However, the Secretariat needs to be aware of this should a subproject with potential environmental or social impacts be considered. The Secretariat will be required to arrange for regular monitoring and evaluation of the projects. Where a project has required an environmental permit/ license, the Secretariat will be required to monitor and evaluate applicable environmental and social performance as per the ESMF. The Ministy of Agriculture and Cooperatives (MACO). MACO departments and institutions and CDT will work with the NCO Safeguards Specialist to identify their knowledge gaps regarding environmental and social issues and determine where additional training i s required in these areas. The relevant MACO departments and CDT will participate in the proposed environmental and social impact training and capacity building efforts to be funded under the ESMFand RPF component of the ADSP. Apex Organisation. The Apex Organization will have responsibility for the routine operations o f the SCCF. Its duties will include ensuring that all PFIs meet the criteria for participating in the facility, reviewing the applications for draw-downs from the facility to ensure that the activity being financed accords with the terms of the program, and disbursing to and collecting repayments from the PFIs. In reviewing the applications for draw-downs, the Apex Organization will need to ensure that ESMF requirements have been met. Where relevant, they will liase with the NCO regarding environmental and social risks associated with credit lendingunder the Project. Participating Financial Institutions (PFIs)). The PFIs, through loan officers, will solicit applications for credit from potential borrowers/ agro-enterprises who may qualify for funding under the facility. They will undertake their own due diligence, and negotiate the terms and conditions with the borrowers. When they have completed their credit procedures, they will request funding from the Apex Organization to finance the loan and upon receipt will then disburse the proceeds o f the loan to the borrower. The loan officers will be responsible for screening loan applications for environmental and social risks, and will request that borrowers carry out EIAs where required, prepare EMPs and RAPSif necessary and obtain environmental permits. The loan officers will prepare annual monitoring reports to be submitted to the Apex Organisation and NCO to include in their monitoring reports. - 103 - The project is working closely with the IFC who will be providing training for PFIs in screening sub-projects for environmental and social sustainability. Project Supervision (Environmental). Bank supervision will rely on monitoring and progress reports from the NCO and the Safeguard Specialist, so early attention (Le. shortly after grant effectiveness) to the recruitment of the Specialist and implementation o f the various training programs will be vital. Thereafter, annual supervision missions will monitor progress with implementing the project and meeting ESMF requirements, identify areas where performance improvement i s required, and develop plans for effecting such improvements. B. Resettlement Policy Framework Impacted Populations. A Resettlement Policy Framework (RPF) was been prepared to minimize and mitigate the potential negative social impacts resulting from the project investments. Given the demand driven nature o f project activities, it would be difficult to estimate the number o f people who would be impacted by the project investments ex ante. However, the populations that are likely to be impacted are agricultural households in high potential agricultural areas. These areas would most likely include Chipata, Lundazi and Katete Districts in Eastern Province; Choma in Southern Province and Chongwe in Lusaka Province. The combined population o f households inthese areas i s 178,434 people, o f which 168,893 are rural households or some 20% o f total rural household in Zambia. The social safeguard issues which might result from the project activities are involuntary resettlement due to road realignment and diversion, borrow pits, construction camps, or the development of water retention areas or irrigation canals. Even then, experience shows that the environmental and social impacts of infrastructure rehabilitation and maintenanceprojects are considerably lower than that o f new construction. The RPF provides the overarching framework by which potential resettlement issues will be addressed. crops, trading Chongwe Maize, cattle, cash 17,287 16,798 489 11 crops, wages Preparation of Resettlement Action Plans. Preparationo f Resettlement Action Plans (RAPS) i s required for all sub-projects under ADSP that will involve involuntary resettlement, loss of assets, loss of livelihoods, or loss o f access to resources. The preparation o f the RAP will follow the subproject cycle and will be closely aligned with ADSP organization, coordination and implementation arrangements. The preparation o f RAP will immediately follow the subproject identification process as shown inthe flow diagram below. - 104 - SUBPROJECT PLANNING PHASE ........... ........................ ................................................................................................................................................................................................................................. STAGE 1: SUBPROJECT IDENTIFICATION $ , Will the subproject involve taking of land which might result inphysical displacement of persons, loss of assets, loss of livelihoods, or restriction to the use o f asset? + +I // +I I RAP Not Triggered I RAP Triggered .................................. STAGE 2: SUBPROJECTPREPARATION I........................................ SUBPROJECTIMPLEMENTATIONPHASE Implementationof RAP IMPLEMENTATION OF SUBPROJECTACTIVITIES ResettlementActivities Overall responsibility for preparing a RAP for each sub project will lie with the NCO. The NCO shall ensure that the proponent o f each proposed sub project prepares a Resettlement Action Plan that conforms to this policy framework and to the requirements o f World Bank. The actual process to be followed inpreparinga RAP shall involve the following steps: Screening and Preliminary Assessment The proponent o f a sub project shall examine whether any environmental study i s required for the type o f sub project being proposed. At this stage, an Initial Social Assessment should be conducted where the project indicates potential social impacts. - 105 - Initial Social Assessment (ISA). This initiates consultation directly with individuals and groups who are expected to be directly affected by the project. The ISA would identify the major population groups that may be affected by the proposed project and which should be the focus o f the social assessment in the EIA. It would also identify the specific social dimension issues which would be examined during the social assessment and provide the basis for preparing the TOR for the social assessment. Preliminary Information. A sub project proponent will be required to give the NCO preliminary information on the proposed prescribed project as early as possible. It shall include a description o f the nature, scope and location' o f the proposed sub project accompanied by location maps and any other details as may be required by the NCO. Preliminary Information submitted to NCO should indicate that the project has potential involuntary resettlement, based on ISA findings. If it i s determined that the resettlement policy may be triggered, the NCO will immediately inform the proponent o f a need for a RAP and provide them with a copy o f the RPF. Social and Economic Baseline Census. This shall be carried out to provide baseline data on various factors as described inthe RPF. Preparation of RAP. Ifthe environmental and social scoping exercise indicates the need for land acquisition, a loss of assets, an impact on livelihood or restricted access to resources, the sub project proponent shall prepare the RAP in accordance with this Resettlement Policy Framework prepared for the project, World Bank Safeguard Policies and the legal requirement of the Government of Zambia. The actual preparation o f the RAP may be outsourced to a specialist. Inthis case, a TOR for the preparation o f a RAP shall be prepared by the sub project proponent. The scope and level o f detail o f a resettlement instrument vary with the magnitude and complexity o f resettlement. With regard to resettlement plans, two types may be identified, depending on the magnitude and complexity o f resettlement: (a) full RAP; and (b) abbreviated RAP. A full RAP will be prepared for any subproject that involves involuntary resettlement. The RAP for each sub project shall conform to this policy framework. An abbreviated RAP i s an alternative to a full RAP. It shall be prepared where impacts on the entire displaced population will be minor, or fewer than 200 project-affected people will be displaced, or less than 10%o f assets are impacted. RAP Approval Process. Once a draft RAP has beenprepared, NCO (or its delegated agency) shall ensure that the draft RAP i s made available at a place accessible to displaced persons, local NGOs, and other interested parties in a form, manner and language that are understandable to them. At the same time, the draft RAP shall be routed to the World Bank for review and to serve as a basis for sub project appraisal. The Bank shall make it available to the public through its InfoShop. After the Bank has approved the final resettlement instrument, the Bank and M A C 0 shall disclose it again inthe same manner. Inaddition, the Bank shall provide clearance before any resettlement actions are implemented. Implementation and Monitoring Process. NCO shall have overall responsibility for adequate monitoring and evaluation o f the activities set forth in the RAP. The World Bank shall regularly supervise resettlement implementationto determine compliance with the RAP. A RAP shall be implemented along the lines o f a development project. A Safeguards Specialist based inthe NCO shall be responsible for the smooth implementation of the RAP. -106- There shall be both internal and external monitoring. Internal monitoring o f the day-to-day operations of the resettlement program shall be done by the implementing agency whilst external monitoring shall be done by the monitoring agency designated under ADSP to carry out external monitoring o f the project activities. Project Supervision (RPF). For sub-projects requiring a RAP, a RAP will be prepared and submitted to the World Bank for approval. If it i s deemed necessary, a site visit will be arranged prior to initiating resettlement actions and implementing civil works. At least once a year a social safeguards person will conduct a supervision mission to (a) assess pending subprojects, (b) review delivery o f resettlement packages, and (c) assess and monitor resettlement actions which have been implemented. This includes determining the level of success or failure to follow World Bank policy and recommend mitigating actions where needed. - 107- Annex 11:ProjectPreparationand Supervision ZAMBIA: AgriculturalDevelopmentSupport Project(ADSP) Planned Actual PCNreview May 25,2005 November 29,2005 Initial PID to PIC December 14,2005 January 05,2006 Initial ISDS to PIC December 14,2005 January 5,2006 Appraisal December 5 - 16,2005 December 14,2005 Negotiations March 6 - 9,2006 February 27,2006 Board/RVP approval May 18,2006 Planneddate o f effectiveness September 1,2006 Planneddate o f mid-tern review May 15,2009 Plannedclosing date June 30,2012 Key institutions responsible for preparationo f the project: Bank staff and consultants who worked on the project included: Name Title Unit Paavo Eliste CO-TTL AFTS1 Tijan Sallah CO-TTL AFTS1 Jean Paul Chausse Lead Specialist AFTS1 Mohammed Taqi Sharif Senior Financial Analyst AFTS1 Alex Mawanakasale Agricultural Specialist AFTS1 Meseret Kebede Program Assistant AFTS1 Jonathan Pavluk Senior Councel LEGAF Wedex Ilunga Procurement Specialist AFTPC Fenwick Chitalu Financial Management Specialist AFTFM Riikka Rajalahti Agricultural Specialist (R&D) ARD Ahmet I. Soylemezoglu Senior Financial Sector Specialist AFTFS Ben Gericke Senior Highway Engineer AFTTR Modupe A. Adebowale Senior Finance Officer LOAG2 Tesfaalem Gebreiyesus Senior Procurement Specialist AFTPC Turi Fileccia Preparation-Team Leader FAO-CP Pietros Kidane Institutions Specialist FAO-CP Elen Lemaitre Economist FAO-CP KazimKemal-ur-Rahim Marketing Specialist FAO-CP Tim Stephens Civil Engineer FAO-CP Graham Perrett Credit Specialist FAO-CP Andrew Sergeant Agribusiness Specialist Consultant Yasuo Konishi Value Chain Development Consultant Specialist Yoshimichi Kawasumi Highway Engineer Consultant Peer Reviewers: Steven Jaffee (PRMTR) Severin Kodderitzsch (ARD) - 108 - Annex 12: Documents inthe ProjectFile ZAMBIA: AgriculturalDevelopmentSupport Project(ADSP) 1. Project Concept Note; 2. Project Information Data Sheet (PCN stage); 3. Integrated Safeguards Data Sheet (PCN stage); 4. Minutes o f the PCN Review Meeting; 5. Project Information Data Sheet (PAD stage); 6. IntegratedSafeguards Data Sheet (PAD stage); 7. Letter from the Government o f Zambia requesting support for ADSP preparation and funding; 8. Working Papers (WP) to the PAD: -- WP2 InfrastructuralDevelopment; WP1 Value Chain Development; --- WP3 InstitutionalDevelopment; WP4 Implementation Arrangements; WP5 Project Costs and Economic and Financial Analysis; 9. Aide Memoire o f the Appraisal Mission; 10. Environmental and Social Impact assessment; 11. Resettlement Policy Framework; 12. ProcurementAssessment; 13, Financial Management Capacity of Project. - 109- Annex 13: Statement of Loans and Credits ZAMBIA: AgriculturalDevelopmentSupportProgram ~~ ~~ ~~ Differencebetween expected and actual Original Amount inUS$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO82452 2006 Pub Service MgmntProg - Support 0.00 30.00 0.00 0.00 0.00 29.77 0.00 0.00 Proj PO96131 2006 ZM-Malaria HealthBooster SIL 0.00 20.00 0.00 0.00 0.00 19.63 0.07 0.00 (FY06) PO74258 2005 ZM-GEF SEED Biodiversity SIL 0.00 0.00 0.00 4.00 0.00 3.20 0.58 0.00 (FY05) PO71407 2005 ZM-SEED (FY05) 0.00 28.15 0.00 0.00 0.00 22.96 1.42 0.00 PO71985 2004 ZM-Road Rehab MaintenancePrj 0.00 50.00 0.00 0.00 0.00 37.48 19.06 0.00 (FY04) PO70962 2003 ZM-Copperbelt Env (FY03) 0.00 40.00 0.00 0.00 0.00 34.05 17.36 3.01 PO03248 2003 ZM-Zanara HIViAIDS APL 0.00 42.00 0.00 0.00 0.00 24.17 8.52 -4.00 (FY03) PO70122 2001 Regional Trade Fac. Proj. -Zambia 0.00 15.00 0.00 0.00 0.00 8.75 7.31 0.00 PO57167 2001 ZM-TEVET SIM(FYO1) 0.00 25.00 0.00 0.00 0.00 14.36 6.90 6.54 PO03249 1999 ZM-Basic Education APL (FY99) 0.00 40.00 0.00 0.00 0.00 4.27 4.97 0.36 Total: 0.00 290.15 0.00 4.00 0.00 198.65 66.18 5.90 ZAMBIA STATEMENT OF IFC's Heldand DisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2001 AEF Chingola Htl 0.48 0.00 0.00 0.00 0.48 0.00 0.00 0.00 1998 AEF Drilltech 0.12 0.00 0.00 0.00 0.12 0.00 0.00 0.00 2001 AEF Michelangelo 0.10 0.00 0.00 0.00 0.10 0.00 0.00 0.00 2000 MarasaHoldings 3.17 0.00 0.00 0.00 3.17 0.00 0.00 0.00 1999 Zamcell 0.90 0.60 0.00 0.00 0.90 0.60 0.00 0.00 2000 Zamcell 0.66 0.44 0.00 0.00 0.66 0.44 0.00 0.00 2004 Zamcell 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00 Totalportfolio: 5.43 1.29 0.00 0.00 5.43 1.29 0.00 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. Total pendingcommitment: - 110- Annex 14: Country at a Glance Zambia PRICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Domestic prices inflation (Oh) II (% change) 40 T Consumer prices 53.6 17.2 17.5 implicit GDP deflator 18.3 65.4 20.0 19.4 Government finance (% of GDP, includes current grants) Current revenue 20.1 17.9 18.4 88 00 01 02 03 Current budget balance -7.8 -1.6 0.3 -GDP deflator +CPI Overall surplusldeflcit -11.8 -12.9 -8.4 TRADE I 1984 1994 2003 2004 (US$ millions) Export and import levels (US$ mlli.) Total exports (fob) 883 1,067 1,052 1,618 2,000 Copper 719 741 576 768 Cobalt 29 162 122 139 I500 Manufactures 99 129 262 292 Total imports (ci0 618 1,003 1,393 1,727 IO00 Food 24 55 15 18 500 Fuel and energy 144 56 230 285 1 I Capital goods 118 296 579 718 0 88 98 00 01 02 03 Export price index (2000=100) 89 119 112 138 Import price index (2000=1001 69 102 102 114 Exports Imports O4 Terms of trade (2000=100) 128 116 109 121 BALANCE of PAYMENTS 1984 1994 2003 2004 (US$ millions) Current account balance to GDP (Oh) Exports of goods and services 964 1,175 1,246 1,825 0 Imports of goods and services 913 1,317 1,796 2,187 Resource balance 51 -142 -549 -363 5 Net income -277 -236 -148 -304 -10 Net current transfers -35 -19 -2 -25 -15 Current account balance -261 -398 -700 -691 Financing items (net) -222 475 816 719 -20 Changes in net reserves 484 -77 -116 -28 Memo: Reserves including gold (US$ millions) 55 268 197 201 Conversion rate (DEC, /ocaVUS$J 1.8 669.4 4,733.3 4,778.9 EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 1 (US$ millions) Composition of 2003 debt (US$ mill.) Total debt outstanding and disbursed 3,761 6,816 6,425 6,394 IBRD 287 201 3 0 IDA 36 1,042 2,405 2,533 Total debt service 244 376 187 389 IBRD 45 76 8 3 405 IDA 0 8 35 42 Composition of net resourceflows 1950 Official grants 92 355 286 282 Official creditors 150 133 -71 203 Private creditors 38 -25 -3 -12 Foreign direct investment (net inflows) 17 40 172 270 Portfolio equity(net inflows) 0 0 0 0 World Bank program Commitments 97 253 29 A IBRD E Bilateral - Disbursements 32 186 74 151 B IDA -- D .Other multilateral F. Private Principal repayments 21 56 26 27 C-IMF G Short-term . Net flows 12 130 49 124 Interest payments 24 27 17 18 Net transfers -13 103 32 106 ~ AFTPI 9/19/05 -111- 2003 17 2 17 0 -1h .T*? LI 122 262 i393 1UL 1OY 2603 -148 -2 -7oc1 810 ~110 2063 Coriiposltian nf2@33rfrbf (US$mill f in; 8 35 2% 1 LY 19 - 1 1 2 -