Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB4754 Project Name MZ-PROIRRI Sustainable Irrigation Development Project Region AFRICA Country Mozambique Sector Irrigation and drainage (50%); Crops (30%), Agro- industry (20%) Lending Instrument Specific Investment Loan Project ID P107598 Borrower(s) REPUBLIC OF MOZAMBIQUE Implementing Agency MINISTRY OF AGRICULTURE Environmental Screening Category { }A { X }B { }C { }FI Date PID Prepared November 11, 2010 Estimated Date of Appraisal Completion December 31, 2010 Estimated Date of Board Approval March 17, 2011 Decision { Insert the following } Project authorized to proceed to negotiations upon agreement on any pending conditions and/or assessments. {the text is automatically generated after PID is filed}. Other Decision {Optional} Teams can add more if they wish or delete this row if no other decisions are added I. Country Context Mozambique has been a very strong economic performer in Africa and has shown a remarkable recovery from the damage of the civil war ended in 1992 . Looking back at the last fifteen years, the growth record has been impressive, averaging above 8 percent from 1993 to 2009, making Mozambique the fastest growing non-oil economy in Sub-Saharan Africa. This performance has been made possible by good macroeconomic management, and was driven by a few significant foreign investment projects (“mega-projects”), strong donor support, healthy agricultural growth (based primarily on area expansion), and foreign direct investment in the services sector. While Mozambi que’s rapid economic growth was accompanied by significant strides in reducing poverty up to 2003, recent surveys indicate stagnation in poverty reduction. Household survey data indicate that the national poverty headcount fell from 69 to 54 percent during 1996 to 2003. Reduction in rural poverty was even more pronounced, declining from 71 to 55% during the same period. The results of the 2008/09 household survey suggest that poverty reduction has stagnated at a level around 55 percent of the population. Additionally, the results indicate that urban poverty continued to decline, although at a much slower rate, reaching 50 percent, while rural poverty increased to 57 percent. The results also suggest that Page 2 this increase in rural poverty is most significant in some provinces in Central Mozambique (Sofala and Manica), and is in part due to the harvest losses resulting from extreme whether events (droughts and floods). Mozambique has made substantial progress towards achieving the Millennium Development Goals (MDGs). Given the results of the recent household survey, Mozambique needs to accelerate poverty reduction to halve the population living in absolute poverty by 2015 (additional 15 percent decline in poverty in six years). Reducing hunger and child malnutrition remains a challenge. The MDG for sustainable coverage for water supply could also be met, given the rapid improvements in the provision of urban water supply, although significant progress is needed to increase access to water in rural areas. There has also been substantial progress toward other MDG targets, specifically on improving universal primary education, gender equality and women’s empowerment, reducing child mortality, and improving maternal health. Nevertheless, more progress will be required to meet these MDGs, while combating HIV/AIDS, malaria and other diseases remains a serious challenge. II. Sectoral and Institutional Context With an annual average of 24% (1991-2004), Agriculture is the second largest contributor to GDP growth . Growth of agricultural GDP has been regularly above the 6 percent expected in the context of NEPAD strategies. Two-thirds of the country’s population live in rural areas, where agriculture is dominated by low input smallholder rain-fed farms (of which almost a quarter are led by women) that grow mostly food crops (maize, cassava). Outgrowers arrangements and other forms of contract farming are mostly limited to traditional cash crops (e.g. tobacco, cotton, sugar), but recent efforts based on value-chain approach are showing promising results with non-traditional cash crops (such as high-end vegetables or soja/poultry). As the majority of the poor in rural areas consists of subsistence farmers, improving agricultural productivity, sustaining agricultural growth, and improving access to inland markets while tapping into regional and international agriculture markets are central to boosting food production, agricultural growth and rural poverty reduction. While agriculture is essential to Mozambique’s development, its potential will remain untapped if agricultural productivity is not significantly increased . The sector features some of the lowest cereal yields in southern Africa, and average annual growth in irrigated land is around 1 percent (1990-2003), against 15 percent in Zambia or 9 percent in Malawi (WDR, 2008). Low adoption rates of productivity-enhancing agricultural technologies 1 coupled with an inadequate provision of agricultural services 2 , limited access to rural financial services and a land law inefficiently enforced, are major constraints to transforming subsistence smallholders into market-led agricultural entrepreneurs and are essential elements in boosting and sustaining productivity increases. Mozambique ranks third amongst the African countries most exposed to risks from multiple weather-related hazards , suffering from periodic floods, cyclones and droughts. As much as 58 percent of the population and more than 37 percent of GDP are at risk from 1 Farmers’ adoption rates of irrigation, improved plant varieties, fertilizer, mechanization are on the order of 3 percent country-wide 2 About 8 percent of agricultural exploitations received extension services in 2008 (TIA 2008). Page 3 two or more hazards. Floods, epidemics and cyclones are the most frequent disasters, although drought affects by far the largest number of people. Central Mozambique is particularly at risk of floods and droughts. Climate change will increase extreme weather patterns, based on observed trends and future scenarios. Hence, critical sectors that will be at increasing risk include agriculture, infrastructure, power, water and sanitation, and health and nutrition. In all scenarios run with the model developed by the Bank for the preparation of the Strategic Program for Climate Resilience (SPCR), the net average crop yield for the entire country is lower relative to baseline yield without climate change. The impact of climate change over the next forty years would lead to a 2-4% decrease in yields of the major crops, with yield decreases especially in the Central region. The Ministry of Agriculture (MINAG) is in charge of most activities related to the sector . At provincial level, MINAG is represented through Provincial Directorates for Agriculture (DPA), and at the district level the offices for District Services for Economic Activities (SDAE) are covering agriculture. MINAG is also the lead agency on the country’s efforts to embark on the CAADP agenda; a national CAADP Compact is expected to be finalized and signed during the first half of 2010. Public spending on agriculture (including agriculture sending from other ministries) represents approximately 7.7 percent of agriculture and fishing GDP, a comparatively high figure in the region. The platform for institutional, policy and strategy dialogue on agriculture between MINAG and Development Partners is provided by the PROAGRI program. Several bilateral donors and the EU have been providing sector budget support to MINAG through the PROAGRI common fund; the current PROAGRI II has been extended to 2011 but discussions with MINAG are underway to develop a new aid architecture for the sector that responds better to GoM priorities. MINAG’s National Directorate for Agrarian Services (DNSA) covers the irrigation subsector through its Department for Hydraulic Engineering (DEH). DEH is one of 11 Departments in DNSA, and inadequately endowed with human and financial resources relative to the stated political priority given to the irrigation subsector. Overall, the performance of the irrigation sub-sector in Mozambique has remained below expectations. The large and medium-sized irrigation schemes and related infrastructure date from the colonial times; many schemes have been abandoned during and deteriorated after the civil war, and public investments in irrigation have since been largely inconsistent. As a result, only about 40% of the land developed for irrigation (ca. 50,000 ha out of a total of 120,000 ha) is effectively irrigated, with a total potential for irrigation estimated at over 3 million ha. More recently, as the result of a focus of the country’s poverty reduction strategy PARPA, an estimated additional 13,000 ha have been rehabilitated or newly built between 2004-2009 (MINAG, 2010). Sugar cane (60% of the total area effectively irrigated, with private investments on large commercial estates), horticulture (18%) and rice (10%) are the major irrigated crops. To improve performance in the irrigation subsector three key areas need to be thoroughly addressed : (i) enhancing the management of irrigation assets, particularly focusing on cost recovery to finance operation and maintenance of the assets in order to prevent their degradation, e.g. through the promotion of Irrigation Organizations (IO) with the mandate of water users associations; (ii) improving the regulatory framework on water for agriculture and the efficiency in the enforcement of the land law, the latter to clarify land- use rights and enhance land-use security in order to promote producer access to irrigation as Page 4 well as private sector investments; and (iii) establishing institutional linkages and working relationships between public entities responsible for irrigation (at central and at provincial level) and the beneficiaries (smallholder farmers associations, irrigation organizations, individual emerging and commercial farmers, private enterprises), e.g. through public-private partnerships for irrigation development. The GoM has made the development of irrigation a priority for agriculture growth and rural development . To that effect, MINAG submitted in September 2010 for adoption by the GoM a National Strategy for Irrigation (ENI) developed by an inter-ministerial panel and international experts. The ENI feeds directly into the new Agriculture Sector Strategy (PEDSA, GoM approval pending), itself anchored in the country’s Green Revolution Strategy (2008). The ENI’s strategic objectives are “to contribute to an increase in production and productivity, to generate production surpluses to be marketed, to create jobs in rural and peri-urban areas, and to increase producers income”. Three of the fifteen hydro-ecological basins highlighted by the ENI (Buzi, Pungoe and Zambezi) are covered by the PROIRRI intervention area. ENI advocates two main strategic lines of actions which PROIRRI will also support: (i) the creation of a National Institute for Irrigation (INIRRI) represented also at the provincial level, to adequately cover policy, strategic and operational issues related to irrigation, and (ii) the development and implementation of a comprehensive National Irrigation Program (PNI). Rice is the priority crop in GoM agenda to increase food security and phase out the gap between internal demand and supply, as stated in the PEDSA and the Food Production Action Plan (PAPA), Mozambique’s supply response to the high international food prices in 2008-2009. Yet, Mozambique is exploiting only about 20% of its potential area estimated at more than 900,000 ha (with an average yield stagnating at around 1.0 ton/ha in the last 15 years. Total production, most of which is consumed locally, is around 200,000 tons of rice per annum, complemented by 350,000 tons imported annually from Asia. PROIRRI will support the GoM strategic objective of import substitution by increasing rice production through irrigation development. Fruit and Vegetable production is also a priority for the GoM sector policy, both to enhance food security and nutrition, as well as to increase smallholders’ income through increased supply to urban centers (including supermarkets that source most of their supply from South Africa), regional and, to some extent, international markets. The cooler climate and availability of water in the upland regions of Central Mozambique provide opportunities for diversified smallholder horticulture production. The main challenge to sustaining an increased supply to local markets is to fully leverage the comparative advantage of the potential for counter-cyclical nature of horticultural production. With regard to exports markets, agro-climatic conditions present an early-season comparative advantage over South Africa with potential for expanding exports among others of bananas, mangoes, litchis, citrus and macadamia – if the fruit fly is effectively combated and the business environment improved. The GoM is increasingly promoting smallholder-based outgrower arrangements for fruits and high-end vegetables with commercial entities (large-scale farmers, processing units, etc.), a business model already well established in Mozambique for traditional cash crops such as cotton and sugar. In Central Mozambique, the GoM is supporting the Beira Agriculture Growth Corridor (BAGC), a public-private partnership which seeks to increase Page 5 agriculture productivity among other through the promotion of outgrowers schemes. PROIRRI will develop a strategic partnership with BAGC as part of the outgrowers business line of the project. III. Project Development Objectives The development objective of the PROIRRI project is to increase agriculture production marketed and raise farm productivity in new or improved irrigation schemes in Central Mozambique . The primary target group of PROIRRI are smallholder farmers (groups and associations) and individual emerging farmers who will benefit from the adoption of: (i) improved production technologies and know-how related to irrigation; (ii) complementary technical skills required to harness the full potential of water for agriculture; (iii) improved post-harvest techniques; (iv) access to better performing extension and financial services; and (iv) closer linkages with potential market opportunities. PROIRRI will support primary beneficiaries towards the following three main objectives: (1) to use water for agriculture efficiently, whereby minimizing producer dependency on rainfall patterns; (2) to improve and diversify their farming system to mitigate their production risks; and (3) to increase their yields and either produce a surplus that can be marketed to generate income (e.g. rice), or take market-led production planning decisions and dedicate part of their production for a secured market outlet (e.g. outgrowers scheme). PROIRRI will enable targeted producer groups to evolve towards formalized “bankable” farmers associations with stronger links to the market and with access to financial services from commercial banks. IV. Project Description Irrigation development is at the core of the GoM’s agricultural growth strategy. To achieve this strategic goal, the PROIRRI follows a holistic, systems-based approach to take irrigation development beyond the simple infrastructure construction model and unlock the full potential of water for agriculture. To ensure the social, environmental and financial sustainability of project investments in irrigation infrastructure, PROIRRI design embraces the combination of (i) investing in the social and technical capital of beneficiaries and actors on the ground, (ii) investing in institutional capacity development at all administrative levels, and (iii) the adoption of a market-led, value-chain based approach. This innovative approach for Mozambique applied in PROIRRI is referred to in this document as the PROIRRI Irrigation Site Development Path . This Development Path will be adapted to the specificities of the three project business lines : (i) revitalized of medium-size rice-based irrigation schemes, (ii) enhanced horticulture-based small-scale irrigation systems, and (iii) set-up of smallholder based outgrowers schemes. PROIRRI activities are structured around three operational project components and one for project management and coordination: (i) Institutional support and capacity development; (ii) Investing in people and infrastructure for sustainable irrigation; (iii) Market-led production and value chain development; and (iv) Project coordination. The project is expected to be implemented over a six-year period until June 20, 2017 . PROIRRI components are listed here below with their objectives and core activities. Page 6 Component 1: Institutional Capacity Development and Participatory Irrigation Management The objective of this component is to improve the enabling environment, strengthen institutions at various levels, and enhance through their participation beneficiaries’ capacity to manage water for agriculture. The component contributes to the PDO by enhancing capacities for the design of irrigated agriculture policies, and for planning irrigation programs and implementing related activities at central, provincial, and district levels. The component will focus on institutional strengthening and technical skills development, and many activities will be developed in response to the capacity enhancement needs assessment carried out in the preparation phase. Sub-component 1.a: Enhancing the enabling environment and building irrigation capacity . The project will strengthen the capacity of MINAG/DNSA to deliver on its core function of policy, planning and development of the regulatory framework in support to the irrigation sub-sector along the priorities defined in the National Irrigation Strategy (ENI). This includes providing support to: (i) the development and implementation of the National Irrigation Program (PNI); (ii) the establishment of a dedicated national irrigation agency, (iii) the elaboration of a legislation and regulatory framework for water user associations and for the management of irrigation sites; (iv) the development of a portfolio of follow-up investment operations in the irrigation subsector; (v) the strengthening public and private extension services; and to (vi) the implementation of the national Fruit Fly Surveillance Plan (FFSP). Sub-component 1.b: Participatory planning, development and management of irrigation schemes . PROIRRI will support comprehensive capacity development and facilitate a participatory scheme-level process for planning irrigation interventions, developing and managing infrastructure and irrigated agriculture. This process is referred to as PROIRRI Irrigation Site Development Path. To this end, the project will work with water users to: (i) create and/or strengthen Irrigation Organizations (IOs); and (ii) establish and support Producer Associations (PAs) by promoting a variety of improved production and post- harvest technologies, the development of savings and loans, and building PAs and IOs capacity in financial literacy and business management in view of developing ‘bankable’ beneficiaries attractive for financial institutions. Component 2: Investments in Irrigation Systems and Support Infrastructure The objective of this component is to finance the irrigation infrastructure required to increase the productivity and profitability of irrigated smallholder agriculture while taking into account the environmental and social safeguards associated with the civil works. The component contributes to the PDO by increasing the irrigated area. On the basis of participatory designs developed under Component 1.b, PROIRRI will finance the costs of the eligible scheme rehabilitation/construction , and the immovable irrigation and drainage infrastructure (weir construction, main and secondary canal construction, scheme buildings, etc.). The Beneficiaries ( i.e. IO members) will contribute a minimum of 15% of the investment costs, mainly in the form of labor and materials. The project will also cover, where relevant, the enabling infrastructure (e.g. electricity, flood protection dykes, earth embankments and road connectors). Page 7 Under this component, PROIRRI will also finance most of the costs associated with the implementation of the safeguards instruments applicable to the irrigation site construction/rehabilitation works. The project will cover some 3,000 ha of medium scale rice irrigation schemes, some 1,300 ha of small scale horticulture irrigation schemes (flatland and upland irrigation systems) and around 1,200 ha of value chains specific out-grower irrigation schemes (e.g. sugar, bananas, other fruits, high-value vegetables). Irrigation infrastructure development will be demand- driven within the identified eligible areas. PROIRRI will endorse a mix of construction methods, including both plant-based and labor intensive construction methods. Component 3: Financial support to production and value chain development Access to financial services for smallholders and micro and small entrepreneurs in value chains supported by the project is key for the sustainability of the public investment through PROIRRI in irrigation infrastructure. The objective of this component is to facilitate access to financial services for PROIRRI beneficiaries, as well as to support production, innovations and marketing through a cost-sharing grant window. The component supports the PDO by creating the enabling environment for sustainable production and marketing of produce. Sub-component 3.a: Cost-sharing grant for production support and value chain development . To facilitate agricultural production and marketing investment, PROIRRI will provide demand-driven support under this component in the form of a cost-sharing grant scheme for farmers and value chain actors (micro and small enterprises), conditional on meeting clearly defined eligibility criteria (see Annex 2 for details). The grant scheme will consist of two windows: (1) Production support (seeds and fertilizer start-up kit); and (2) Equipment (e.g. farm machinery, greenhouse) and Value chain development (e.g. product processing, storage, marketing, transportation). Sub-component 3.b: Partial risk guarantee for irrigation and value chain development . The PROIRRI will develop a risk-sharing facility using a partial risk guarantee as the financial instrument to mitigate the risks that financial institutions associate with the provision of credits to agricultural and agribusiness players. This facility will provide an incentive to financial institutions to lend to PROIRRI beneficiaries, enabling them to further expand their productive activities. The partial risk guarantee will complement the catalytic effect of the cost-sharing grant under Component 1.b. Component 4: Project management and coordination The objective of this component is to manage and use resources in accordance with the project’s objectives and procedures . A semi integrated Project Coordination Team (PCT) will be established in MINAG/DNSA and composed of recruited individual consultants (including for project management, procurement and financial management) as well as technical specialists from the relevant central and provincial level directorates. The PCT will be responsible for the following types of activities: (i) project coordination and management; (ii) overall project planning, quality oversight, procurement, and financial management; (iii) outsourcing of quality oversight through independent financial and technical audits, and evaluation of project activities; and (iv) project monitoring and impact evaluation. Page 8 V. Financing Source: Borrower/Recipient IBRD IDA ($m.) 0.8 0.00 70.00 Others: Beneficiaries PHRD 7.2 15.00 Total 93.00 VI. Implementation Project coordination and implementation arrangements have been designed and agreed upon to overcome capacity constraints and reduce institutional bottlenecks to project execution while maintaining a high level of ownership with MINAG and the Provincial Directorates of Agriculture (DPAs). The Ministry of Agriculture (MINAG) will be responsible for the implementation of the project and all its components . Overall responsibility for project coordination will be with the National Directorate for Agrarian Services (DNSA). Once a public institution with a national mandate for irrigation is created, as proposed in the upcoming National Irrigation Strategy, the transfer of project responsibilities to that institution will be assessed. Performance oversight and strategic and policy guidance will be provided by the National Steering Committee led by H.E. the Ministry of Agriculture; the National Technical Committee led by the Director of DNSA will regularly assess project implementation progress, review where applicable proposals for PROIRRI cost-sharing grants and requests for irrigation site development, and assess the compliance in project implementation with fiduciary and safeguards requirements. At provincial level, a Provincial Technical Committee will assess project implementation progress, regularly interact with PROIRRI Irrigation Service Providers and Strategic Partners, and review where applicable the proposals for PROIRRI cost-sharing grants and irrigation site development. To address capacity constraints with the implementing agency and the need to strengthen its skills, PROIRRI will be coordinated by a Project Coordination Team (PCT), which will be semi-integrated in MINAG/DNSA and also represented at the provincial level where it will be hosted by the DPAs. Staffing of the PCT will combine externally hired consultants for core functions (e.g. project management, procurement, financial management, monitoring & impact evaluation) with technical specialists from the administration (including from various MINAG directorates, MOPH/DNA and MICOA). A key role of the semi-integrated PCT will be to promote institutional and technical capacity development within the implementing agency, both at the central as well as at the provincial level, as part of mainstreaming the project and its activities in an irrigation program fully led by MINAG. To further address institutional capacity constraints and ensure timely project implementation with high-end level expertise, PROIRRI clusters of activities will be executed with irrigation service providers (ISP) and Strategic Partners . MINAG/DNSA will recruit two long term ISP (for the Rice and the Horticulture business lines) who will be in charge of implementing the PROIRRI Irrigation Site Development Path, which includes the following functions: (i) producers mobilization and associations promotion, (ii) participatory irrigation Page 9 design and management, (iii) technical production support, (iv) marketing and value chain integration, and (v) business management, financial literacy and micro savings. The ISP will lead the execution of PROIRRI activities in Component 1.b ( Participatory scheme planning, development and management ), and provide the operational framework and coordination for Component 2 ( Investments in irrigation systems and support infrastructure ). For specific areas of PROIRRI implementation, MINAG/DNSA will seek to develop Strategic Partnerships with institutions that have on-going related programs in Mozambique, in particular in the area of: (i) irrigation capacity development with an international academic institution (Component 1.a); (ii) rice development, with the International Rice Research Institute IRRI (Component 1.b.); partial risk guarantee scheme managed by GoM/Danida Loan Guarantee Fund Administrator (Component 3.b); and smallholder-based outgrowers schemes promotion with the Beira Agricultural Growth Corridor public-private initiative. Project beneficiaries will be required, with the technical support of ISPs, to develop to access PROIRRI support: (i) requests for the financing of irrigation scheme development and irrigation infrastructure, as well as (ii) sub-project proposals for production support, equipment and value chain development. Requests for irrigation scheme development will be subject to agreed eligibility criteria. PROIRRI financial support for sub-project proposals will be provided on a cost-sharing basis. While the ISPs and Strategic Partners will lead technical aspects of project implementation, the PROIRRI cost-sharing grant for beneficiaries will be managed by the PCT. To comply with corporate requirements, PROIRRI will be on-budget and on-CUT , i.e. funds enter the Single Treasury Account at central level and are disbursed through e- SISTAFE, the country accounting and financial management platform for public expenditures. However, to avoid delays with the disbursement of the PROIRRI cost-sharing grant through e-SISTAFE, the GoM will open a Special Account for the grant in a local commercial bank for invoice-based payments to the suppliers of goods purchased for beneficiaries’ sub-projects. No funds will be transferred directly to project beneficiaries. A detailed Project Implementation Manual (PIM) for the PROIRRI will be compiled prior to effectiveness of the project. The PIM will be comprised of several volumes and will serve as a reference guide for PROIRRI coordination and implementers alike. The PCT will ensure that throughout the lifetime of the project the PIM is kept up to date through regular reviews. The PIM volumes are as follows: Vol.1: PROIRRI Operational Procedures; Vol.2: Implementation Procedures for the PROIRRI cost-sharing grant; Vol.3: Procurement Procedures; Vol.4: Financial Management Procedures; Vol.5: Monitoring & Impact Evaluation Procedures. Page 10 VII. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP 4.01) X Natural Habitats ( OP / BP 4.04) X Pest Management ( OP 4.09 ) X Physical Cultural Resources (OP/BP 4.11) X Involuntary Resettlement ( OP / BP 4.12) X Indigenous Peoples ( OP / BP 4.10) X Forests ( OP / BP 4.36) X Safety of Dams ( OP / BP 4.37) X Projects in Disputed Areas ( OP / BP 7.60) * X Projects on International Waterways ( OP / BP 7.50) X VIII. Contact point at World Bank and Borrower World Bank Contact: Patrick Verissimo Title: Senior Sector Economist Tel: +258 21 48 23 47 Email: pverissimo@worldbank.org Borrower/Client/Recipient Contact: Boaventura Nuvunga Title: National Director, DNSA Email: bnuvunga@gmail.com Implementing Agencies Contact: Dra. Fernanda Gomes PROIRRI/DNSA National Directorate for Agrarian Services, Ministry of Agriculture (DNSA/MINAG) Title: Project Manager Email: fgomes@proirri.gov.mz IX. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 11