The World Bank AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT (P122812) REPORT NO.: RES32305 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT APPROVED ON SEPTEMBER 30, 2013 TO GOVERNMENT OF AZERBAIJAN/MINISTRY OF FINANCE AGRICULTURE EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Mercy Miyang Tembon Senior Global Practice Director: Juergen Voegele Practice Manager/Manager: Julian A. Lampietti Task Team Leader: Rufiz Vakhid Chirag-Zade The World Bank AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT (P122812) ABBREVIATIONS AND ACRONYMS ACIP Agricultural Competitiveness Improvement Project AZN Azerbaijan Manat CBA Central Bank of Azerbaijan EMP Environmental Management Plan FSA Food Safety Agency PDO Project Development Objective PFI Participating Financial Institution PMP Pest Management Plan PMU Project Management Unit SPCS State Phytosanitary Control Services The World Bank AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT (P122812) BASIC DATA Product Information Project ID Financing Instrument P122812 Investment Project Financing Original EA Category Current EA Category Financial Intermediary Assessment (F) Financial Intermediary Assessment (F) Approval Date Current Closing Date 30-Sep-2013 31-Dec-2018 Organizations Borrower Responsible Agency State Agency on Management of Agricultural Projects Government of Azerbaijan/Ministry of Finance and Credits under the Ministry of Agriculture Project Development Objective (PDO) Original PDO The Project Development Objective is to facilitate the access of agricultural producers to markets by strengthening sanitary and phytosantiary services, enhancing selected value chains and providing financial services to agribusiness enterprises. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-82860 30-Sep-2013 12-Jun-2014 27-Aug-2014 31-Dec-2018 34.50 18.00 16.50 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT (P122812) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING Project Status 1. The project is proceeding well and the development objectives continue to be achievable. 75 percent of the beneficiary agribusinesses demonstrate sizeable growth of 45 percent in outputs, which is a core outcome indicator of the project. The PDO remains in line with the Government’s strategic goals of improving agricultural competitiveness and food security, and its strategic relevance has even increased over time. Project performance have been rated Moderately Satisfactory for most of the period since the effectiveness. 2. Implementation progress. Component A: Support to Sanitary and Phytosanitary Services (SPS). There is continuing good progress with the implementation of the animal health and veterinary services sub-component. A national animal disease control program is advancing. Vaccination campaigns of 2016-2017 were completed on schedule. A sero-survey for Brucellosis among humans is carried out aiming to establish the baseline prevalence among humans prior to mass vaccination of animals. A training farm has been established in Agrarian University to improve competencies of graduate veterinarians. Students of vet faculty have participated in project activities to gain field experience. The project initiated activities on upgrading the veterinary training curriculum. A strategic plan for establishing the animal identification and registration system has been developed. 3. The project supports a food safety capacity building program which includes a comprehensive training on food safety standards and establishing food safety training facilities. However, no major activities were carried out under the food safety sub-component pending clarification and consolidation of the institutional set-up of the food safety system in Azerbaijan. Major development in the food safety area is the establishment of the new Food Safety Agency (FSA) which shall be considered as a beneficiary for Component A. 4. Component B: Agribusiness Value Chain Development. Activities are progressing. Upon completion of outreach activities, expressions of interests were received from about 110 groups potentially interested to establish productive partnerships. The first eight sub-project proposals were approved and selected groups are being mobilized to facilitate productive partnerships along the selected value chains. In the second round, the additional ten value chain sub-projects are being prepared. Under the seed sector development sub-component, good progress continues to be made with the activities aimed at strengthening research and variety development program, and seed production and processing. Investments have already resulted in an increase in volume of quality seeds in total production and overall seed production capacity, and improvement in lab test techniques. The next step is upgrading the new seed testing laboratory and preparing the laboratory for international accreditation. 5. Component C: Financial services to agribusiness. Some 51 sub-loans have been provided to a wide range of agribusinesses leading to important achievements in terms of increase in sales in beneficiary agribusinesses and repayment performance. Despite these achievements, there have been no disbursements in 2017 due to the significant increase in the on-lending rate to the participating banks. It is agreed to revise the formula for calculating the on-lending rate. It is expected that the demand to sub-loans will increase with application of the new formula. 6. Component D: Project management. PMU implementation team is functioning well, and there are no outstanding safeguards or fiduciary issues. Financial management arrangements and procurement performance under the project are assessed as satisfactory. There is no overdue financial audit report and all audits are acceptable. The project’s overall environmental performance remains satisfactory. 7. Disbursement. As of March 31, 2018, the project has disbursed US$18 million (52 percent of the total Loan) from IBRD Loan. Overall, the disbursements have slowed down in 2017 due to (i) no demand to the project credit line because of sharp increase in the refinancing rate of the Central Bank of Azerbaijan, and (ii) uncertainties with functions of the State Phytosanitary Control Services (SPCS) in view of reforms in food safety institutional set up. Disbursement is expected The World Bank AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT (P122812) to rise with the introduction of the new interest rate policy under the project credit line and inclusion of the Food Safety Agency as a beneficiary of the Component A. Rationale for Restructuring 8. While the project continues to perform well, some adjustments are required in the scope of the project activities under Component A and terms of the project credit line (Component C) in view of the reforms of the institutional set-up in the food safety system and overall situation in the banking sector in Azerbaijan. Extension of the project closing date is also necessary to enable satisfactory completion of key remaining activities. The proposed restructuring will introduce: (i) extension of the project closing date; (ii) adjustments to Component A by expanding the scope of the activities under the food safety capacity building sub-component and inclusion of the newly established Food Safety Agency as a beneficiary of the project; (iii) a new formula for calculation of the on-lending rate for Manat denominated sub-loans under the Component C. 9. Extension of the project closing date. The Government has requested an extension of the project to continue the project activities that cannot be completed by the current project closing date of December 31, 2018 and ensure their satisfactory completion. Overall, the project became effective only in the end of August 2014, i.e. eleven months after approval, due to long delays with the signing of the Loan Agreement. Actual implementation of the project started in January 2015, due to restructuring of the Ministry of Agriculture. 10. The proposed extension is necessary to satisfactorily complete the remaining project activities. Such activities include implementation of the animal disease control program which is a composite activity deployed over a four- year period, continuous disbursement of the project credit line to agribusiness, implementation of agribusiness value chain development component which was affected by effectiveness delay and slow startup phase, food safety capacity bulling program and other activities aimed at strengthening the Food Safety Agency which has just been established, upgrading seed testing laboratory and others. The task team notes that while the Government’s request is for 24 months, per task team assessment of the current status of project implementation, completion of the pending activities and full achievement of PDO is realistic with an 18-month extension of the closing date. The task team therefore recommends that the project be extended to June 30, 2020. This will be the first extension of the project. 11. Inclusion of the Food Safety Agency to the project as a beneficiary of the Component A. With the establishment of the new Food Safety Agency the timing and conditions have become opportune to move the project activities aimed at improving the food safety system ahead. This requires expanding the scope of the activities envisaged originally under food safety sub-component of Component A to address the needs of the newly established entity. In particular, some functions of the SPCS, which are planned to be supported by ACIP investments under plant health sub-component of Component A, are being transferred now to the FSA. Some activities aimed at supporting the FSA have been explored during the recent Mid-Term Review mission (Jan-Feb 2018). The project task team will hold further discussions during June-July 2018 to determine the need for adjustments of the originally planned activities under the food safety sub-component. The new agency shall be considered also as a beneficiary for Component A. The respective letter was received from the Ministry of Finance on January 16, 2018. 12. The PMU will coordinate with the FSA the technical aspects of project activities under the food safety sub- component. The PMU remains responsible for procurement, financial management, and safeguard aspects of the project. 13. Adjustments in the scope of activities under Component A do not envisage a change in the nature of activities. Therefore, safeguard arrangements established for the original project related to World Bank Safeguard Policies OP 4.01 ‘Environmental Assessment’, OP 4.09 ‘Pest Management’, and OP 7.50 ‘Projects on International Waters’ The World Bank AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT (P122812) remain valid and applicable to the restructured project. According to the safeguard requirements, an Environmental Management Plan (EMP) and Pest Management Plan (PMP) were developed to ensure environmental compliance of the original project and as such duly address anticipated adverse environmental implications of the project implementation. TheEMP and PMP will continue to govern the activities under the restructured project. 14. Revision of the interest rate on Subsidiary Loans in Manats to the Participating Financial Institutions (PFIs). The Azerbaijan Manat (AZN) on-lending rate to the PFIs under the project credit line (Component C) is based on the Refinancing Rate of the Central Bank of Azerbaijan (CBA). The Refinancing Rate, which was at 3 percent at the outset of the project, was raised to 15 percent in September 2016. This is one of the main reasons for a virtual halt on all withdrawals from the credit line. Formula for calculation of the on-lending rate for AZN sub loans is proposed to be revised to smooth out changes in costs of funding to the PFIs. A letter from the Ministry of Finance requesting application of an additional, inflation-based interest rate calculation formula was received on December 27, 2017. The formula is based on the average of actual inflation rate for the past 12 months and a projected inflation rate for the following 12 months. This approach has been used in a number of countries in circumstances of inflation volatility. II. DESCRIPTION OF PROPOSED CHANGES This Level II restructuring seeks to: 1. Extend the Closing Date for 18 months from December 31, 2018 to June 30, 2020 to continue implementation and complete the ongoing and remaining project activities to ensure satisfactory completion of the project. The project objectives continue to be achievable and the performance the Borrower is satisfactory. 2. Revise description of Component A to include the Food Safety Agency to the project as beneficiary agency. The scope of the project activities aimed at strengthening the food safety system in Azerbaijan shall be expanded as functions of the SPCS, which are planned to be supported by the project are being transferred to the new Food Safety Agency. The description of the food safety activities of the project set forth in Schedule 1 (Part A.1) to the Loan Agreement shall be amended as follows: “Strengthening the Food Safety Agency by implementing a comprehensive capacity building program, establishment of food safety and innovation center, and provision of goods, works, consultants’ services and operating costs” 3. Revise procedures for determining the interest rate for Subsidiary Loans dominated in Manat to the PFIs. The change proposed in determining the interest rate is to introduce an alternative interest rate calculation procedure for the Subsidiary Loans denominated in Manat to the PFIs. The alternative calculation procedure is based on the average of actual inflation rate for the past 12 months and on a projected inflation rate for the following 12 months. The interest rate procedures for Subsidiary Loans is stated in the Loan Agreement (Schedule 2, Section 1 Part D 2(c) as follows: Unless the Borrower and the Bank shall otherwise agree: (i) the interest rate on the Subsidiary Loans dominated in Manat shall be the refinancing rate set forth by the central Bank of Azerbaijan; (ii) the interest rate on the Subsidiary Loans dominated in Dollars shall be the total cost of the Loan plus a minimum of 1% margin. These interest rates shall be revised semi-annually in accordance with the provisions stipulated in the Agribusiness Investment Guidelines. The procedure is proposed to be amended as flows: The World Bank AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT (P122812) Unless the Borrower and the Bank shall otherwise agree: (i) the interest rate on the Subsidiary Loans dominated in Manat shall be the refinancing rate set forth by the central Bank of Azerbaijan or average of actual inflation rate for the past 12 months and projected inflation rate for the following 12 months, whichever is lower; (ii) the interest rate on the Subsidiary Loans dominated in Dollars shall be the total cost of the Loan plus a minimum of 1% margin. These interest rates shall be revised semi-annually in accordance with the provisions stipulated in the Agribusiness Investment Guidelines III. SUMMARY OF CHANGES Changed Not Changed Change in Components and Cost ✔ Change in Loan Closing Date(s) ✔ Change in Disbursement Estimates ✔ Change in Implementation Schedule ✔ Change in Implementing Agency ✔ Change in DDO Status ✔ Change in Project's Development Objectives ✔ Change in Results Framework ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Change in Disbursements Arrangements ✔ Change in Overall Risk Rating ✔ Change in Safeguard Policies Triggered ✔ Change of EA category ✔ Change in Legal Covenants ✔ Change in Institutional Arrangements ✔ Change in Financial Management ✔ Change in Procurement ✔ Other Change(s) ✔ Change in Economic and Financial Analysis ✔ Change in Technical Analysis ✔ Change in Social Analysis ✔ The World Bank AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT (P122812) Change in Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Support for sanitary and Support for sanitary and 19.06 Revised 19.06 phytosanitary services phytosanitary services Agribusiness value chain Agribusiness value chain 11.94 No Change 11.94 development development Financial services to Financial services to agribusiness 19.18 Revised 19.18 agribusiness Project management 2.98 No Change Project management 2.98 TOTAL 53.16 53.16 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-82860 Effective 31-Dec-2018 30-Jun-2020 30-Oct-2020 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2014 500,000.00 500,000.00 2015 2,400,000.00 2,400,000.00 2016 7,500,000.00 7,500,000.00 2017 7,000,000.00 7,000,000.00 2018 9,000,000.00 9,000,000.00 The World Bank AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT (P122812) 2019 8,100,000.00 8,100,000.00