FOR OFFICIAL USE ONLY Report No: PAD3446 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF EUR45.8 MILLION (US$ 50 MILLION EQUIVALENT) TO THE REPUBLIC OF SERBIA FOR A SERBIA COMPETITIVE AGRICULTURE PROJECT (SCAP) November 8, 2019 Agriculture And Food Global Practice Europe And Central Asia Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective October 31, 2019) Currency Unit = US Dollar EUR 0.90 = US$1 US$1.11 = EUR 1 FISCAL YEAR January 1 - December 31 Regional Vice President: Cyril E Muller Country Director: Linda Van Gelder Regional Director: Steven N. Schonberger Practice Manager: Frauke Jungbluth Task Team Leader(s): Svetlana Edmeades, Olivera Jordanovic ABBREVIATIONS AND ACRONYMS ABIIS Agriculture Business Intelligence Information System B/C Benefit Cost Ratio CAP Common Agricultural Policy CFU Central Fiduciary Unit CMU Country Management Unit CPF Country Partnership Framework DA Designated Account DAP Directorate for Agrarian Payments DCA Development Credit Authority EAFRD European Agricultural Fund for Rural Development EAGF European Agricultural Guarantee Fund ECA Europe and Central Asia Region EIF European Investment Fund ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan EU European Union FADN Farm Accountancy Data Network UN FAO United Nations Food and Agriculture Organization FM Financial Management GDP Gross Domestic Product GEF Global Environment Facility GHG Greenhouse Gas GM Grievance Mechanism GOM Grant Operational Manual GRS Grievance Redress Service IACS Integrated Administration and Control System IBRD International Bank for Reconstruction and Development ICT Information and Communication Technology IFC International Finance Corporation IFRs Interim Un-audited Financial Reports IPA Instrument for Pre-Accession Assistance IPARD Instrument for Pre-Accession and Assistance for Rural Development IPF Investment Project Financing IT Information Technology LAC Latin America and the Caribbean LMP Labor Management Procedures LPIS Land Parcel Identification System M&E Monitoring and Evaluation MAFWM Ministry of Agriculture, Forestry and Water Management MFD Maximizing Finance for Development MIDAS Montenegro Institutional Development and Agriculture Strengthening Project MoF Ministry of Finance MRD Matching Rural Development Grant NARD National Agricultural and Rural Development NDCs Nationally Determined Contributions NGO Non-Governmental Organization NPV Net Present Value PDO Project Development Objective PFI Participating Financial Institution PHRD The Japan Policy and Human Resources Development Fund PLR Performance and Learning Review PMT Project Management Team POM Project Operational Manual PPSD Project Procurement Strategy for Development PSC Project Steering Committee R&D Research and Development RFP Request for Proposal SCAP Serbia Competitive Agriculture Project SCD Systematic Country Diagnostic SEP Stakeholder Engagement Plan SMEs Small and Medium-Sized Enterprises SOEs Statement of Expenditures SPS Sanitary and Phytosanitary STEP Systematic Tracking of Exchanges in Procurement TA Technical Assistance TAMP Tax Administration Modernization Project TORs Terms of Reference UNFCCC UN Framework Convention on Climate Change USAID United States Agency for International Development WB World Bank The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) TABLE OF CONTENTS DATASHEET ........................................................................................................................... 1 I. STRATEGIC CONTEXT ...................................................................................................... 6 A. Country Context................................................................................................................................ 6 B. Sectoral and Institutional Context .................................................................................................... 7 C. Relevance to Higher Level Objectives............................................................................................... 9 II. PROJECT DESCRIPTION.................................................................................................... 9 A. Project Development Objective ....................................................................................................... 9 B. Project Components ....................................................................................................................... 10 C. Project Beneficiaries ....................................................................................................................... 15 D. Results Chain .................................................................................................................................. 15 E. Rationale for Bank Involvement and Role of Partners ................................................................... 16 F. Lessons Learned and Reflected in the Project Design .................................................................... 16 III. IMPLEMENTATION ARRANGEMENTS ............................................................................ 18 A. Institutional and Implementation Arrangements .......................................................................... 18 B. Results Monitoring and Evaluation Arrangements......................................................................... 19 C. Sustainability................................................................................................................................... 19 IV. PROJECT APPRAISAL SUMMARY ................................................................................... 22 A. Technical, Economic and Financial Analysis ................................................................................... 22 B. Fiduciary.......................................................................................................................................... 22 C. Legal Operational Policies ............................................................................................................... 24 D. Environmental and Social ............................................................................................................... 25 V. GRIEVANCE REDRESS SERVICES ..................................................................................... 25 VI. KEY RISKS ..................................................................................................................... 25 VII. RESULTS FRAMEWORK AND MONITORING ................................................................... 28 ANNEX 1: Implementation Arrangements and Support Plan .......................................... 36 ANNEX 2: Greenhouse Gas (GHG) Analysis .................................................................... 44 ANNEX 3: Economic and Financial Analysis .................................................................... 46 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) DATASHEET BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name Serbia Serbia Competitive Agriculture Project (SCAP) Project ID Financing Instrument Environmental and Social Risk Classification Investment Project P167634 Moderate Financing Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date Expected Closing Date 03-Dec-2019 31-Dec-2024 Bank/IFC Collaboration No Proposed Development Objective(s) Improve agri-food market linkages of targeted beneficiaries. Components Component Name Cost (US$, millions) Page 1 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Improving the value-added of agriculture 37,700,000.00 Improving the capacity of MAFWM to support modern agriculture 10,000,000.00 Project management, monitoring and evaluation 2,300,000.00 Organizations Borrower: Republic of Serbia Implementing Agency: Ministry of Agriculture, Forestry and Water Management PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 50.00 Total Financing 50.00 of which IBRD/IDA 50.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 50.00 Expected Disbursements (in US$, Millions) WB Fiscal Year 2020 2021 2022 2023 2024 2025 Annual 0.50 6.35 8.64 12.23 14.04 8.24 Cumulative 0.50 6.85 15.49 27.72 41.76 50.00 INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Agriculture and Food Social Protection & Jobs, Urban, Resilience and Land Page 2 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of Yes country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or Yes men's empowerment c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ Substantial 2. Macroeconomic ⚫ Moderate 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Substantial 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ Substantial 7. Environment and Social ⚫ Moderate 8. Stakeholders ⚫ Moderate 9. Other 10. Overall ⚫ Moderate COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Page 3 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Does the project require any waivers of Bank policies? [ ] Yes [✓] No Environmental and Social Standards Relevance Given its Context at the Time of Appraisal E & S Standards Relevance Assessment and Management of Environmental and Social Risks and Impacts Relevant Stakeholder Engagement and Information Disclosure Relevant Labor and Working Conditions Relevant Resource Efficiency and Pollution Prevention and Management Relevant Community Health and Safety Relevant Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Not Currently Relevant Biodiversity Conservation and Sustainable Management of Living Natural Relevant Resources Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Not Currently Relevant Local Communities Cultural Heritage Not Currently Relevant Financial Intermediaries Not Currently Relevant NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS). Legal Covenants Sections and Description Schedule 2, Section 1.A.1. (a) Project Management Team (PMT): The Borrower establishes and maintains throughout Project implementation, with composition, resources, terms of reference, and functions acceptable to the Bank a Project management team within Directorate for Agrarian Payment (DAP), to be responsible for: (i) the overall coordination of all Project implementation activities; (ii) ensuring that the requirements, criteria, policies, procedures, and organizational arrangements set forth in the Project Operational Manual (POM) are applied in carrying out the Project; (iii) preparation of all Project implementation documents, including Project progress reports; and (iv) monitoring and evaluation of the Project. Page 4 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Sections and Description Schedule 2, Section 1.A.1. (b) Central Fiduciary Unit (CFU): The Borrower maintains throughout Project implementation, with composition, resources, terms of reference, and functions acceptable to the Bank a Central Fiduciary Unit (CFU), within MoF, to be responsible for the procurement and financial management of the Project, as detailed in the POM. Sections and Description Schedule 2, Section 1.A.2. Steering Committee (SC): Not later than six months after the Effective Date, the Borrower, through the Ministry of Agriculture, Forestry and Water Management (MAFWM), shall establish and thereafter maintain throughout Project implementation a steering committee with terms of reference and functions acceptable to the Bank. Conditions Page 5 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) I. STRATEGIC CONTEXT A. Country Context 1. Following years of recession and slow growth in the aftermath of the global financial crisis, the Serbian economy expanded on average by 1.8 percent during 2015–2017 and by 4.3 percent in 2018. Growth was driven by investment, which rose by an estimated 16.4 percent in real terms and contributed 3.4 percentage points to overall growth of Gross Domestic Product (GDP). Consumption also recovered, but at a slower pace of 3.3 percent annually in real terms, adding 2.9 percentage points to growth. The industry and services sectors contributed a combined 2.3 percentage points to overall growth in 2018. The contribution of agriculture to growth also improved in 2018, with real growth of output estimated at 15.6 percent, adding 1.1 percentage points to growth. The realization of Serbia’s medium-term growth aspirations depends crucially on successful and timely structural reforms and on the progress with regulatory and institutional modernization towards European Union (EU) accession requirements. 2. The prospects for EU accession have provided an impetus for a broad spectrum of reforms. In November 2007, Serbia initiated a Stabilization and Association Agreement with the EU. In 2012, Serbia was granted EU candidate status. Since the start of the accession negotiations in 2014, reform progress has evolved largely following its predicted trajectory. As of October 2019, Serbia had opened 17 out of 35 chapters of the EU’s Acquis Communautaire, of which two are provisionally closed. 3. Regional disparities of living standards are evident. There is a high degree of variability of living standards within the country, with 25 percent (or close to 1.8 million people) of the population of Serbia being at risk of poverty. Municipalities in the southern and eastern parts of Serbia have a higher poverty incidence compared to the rest of the country, with risk of poverty rates ranging between 13 and 63 percent within these regions. Designing and targeting policies and programs to effectively support growth, jobs, poverty reduction, and social inclusion will have to take these geographic disparities in living standards into account. 4. Serbia is highly vulnerable to climate change. Over the past two decades, droughts, floods, harsh winters and other weather-related extreme events (e.g., hail) have caused physical damage, financial losses and even loss of human lives, with significant impacts on the economy, especially in the agricultural sector. National climate projections indicate that Serbia will face a high probability of continuing temperature increases, along with more frequent and prolonged droughts and wildfires. Projected increases in temperatures and declines in precipitation will affect rainfed crops, that dominate Serbian agriculture. Commercial production is concentrated in the autonomous province of Vojvodina in northern Serbia, where crops are vulnerable to decreasing precipitation and increasing temperatures during the summer growing season. Rainfed maize production, for example, may decline by as much as 58 percent due to reduced rainfall and higher temperatures in summer. Increases in temperature have already brought about increases in fungal diseases and pests that reduce crop production. Cereals and fruits are the most important agricultural products in terms of production area and economic output; fruit production is particularly vulnerable to spring frost, hail, extremely low winter temperatures, low precipitation and/or heavy rainfall events1. 1USAID. 2017. Climate Risk Profile: Serbia: https://www.climatelinks.org/sites/default/files/asset/document/2017_USAID_Climate%20Change%20Risk%20Profile_Serbia.pdf Page 6 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) B. Sectoral and Institutional Context 5. Agriculture plays an important role in the economy of Serbia. Agriculture is the fourth largest sector, accounting for 17.4 percent of employment and 5.4 percent of total exports. The growth of exports of both primary and processed food products provides evidence of the competitiveness of Serbian production in international markets and of significant potential to further leverage the sector’s growth to create jobs and income. Agricultural sector growth, however, is influenced by regional disparities in sector performance and composition of crops. The autonomous province of Vojvodina is the key driver of Serbia’s agricultural output, contributing 43 percent to national agricultural GDP (2014), mainly because of large scale production of commodities. Between 2003 and 2013, increased crop and livestock output in Vojvodina was the main driver of agricultural growth while the south and southeastern regions of Serbia recorded only a marginal expansion or even a decline in production. However, the reliance on agricultural commodities increases Serbia’s exposure to price volatility in global commodity markets. The increasing number of extreme climatic events and the limited use of risk management instruments exacerbates agricultural growth volatility. 6. As Serbia seeks to modernize its agriculture sector and to align with the EU acquis, the effectiveness of public spending and service delivery is becoming a critical policy issue. National program resources2, which accounted for 82 percent of sector expenditure on average during 2011-2017, are mostly allocated to subsidies and direct transfers in the form of area-based and headage payments. These are found to negatively affect sector productivity and efficiency because they support farmers in what they currently produce, thereby freezing the current production patterns and the dual farm structure in Serbia.3 In addition, investments in rural development, including the provision of agricultural infrastructure, Research & Development (R&D), advisory services, are low. Current sector policy therefore does not provide an enabling environment for small and medium-size farms to increase their size; invest, modernize or change their production systems to benefit from expanding markets; or develop a competitive agri-food sector and vibrant rural economy. 7. Smallholders are found to be the most technically efficient producers in the country4. Large producers, because of economies of scale are also technically very efficient. However, middle size farms are found to be the worst performers in terms of technical efficiency, posing a question on the adequacy of the enabling environment for their development and consolidation of production, in general. These producer segments specialize in agricultural products that are not scale intensive yet can hold important value proposition and can drive the generation of jobs and growth in rural areas. This project proposes to bring the technically efficient and commercially viable small producers to scale and strengthen the performance of middle-size producers. 2 In 2019, the total budget for agriculture and rural development is US$348 million, of which 12 percent (or US$ 43 million) comes from EU resources (IPARD, EU contribution). The remainder of the budget is covered by national program resources, of which US$44.6 million is allocated to rural development. In addition, there is mandatory national contribution to the IPARD of US$14.4 million. 3 Very small and fragmented land holdings, ageing and declining farm labor force, limited associability, low efficiency and productivity, low use of technology, high labor intensity, low financial liquidity and capital availability for investment (especially for smallholders) and outdated production management practices characterize agriculture in Serbia in the South and Southeast. Cereals, vegetable oils and edible fruit have historically driven growth of agricultural production and exports, with Vojvodina ’s larger producers benefiting the most. Only one percent of the farms in Serbia have 50 hectares or more of land and most of them are in Vojvodina, while farmers who own less than 5 hectares of land account for 78 percent of all holdings and 25 percent of the total cultivated area in Serbia and are concentrated in the South and East Serbia. 4 In the context of Serbia, small producers are defined differently across studies. The Agriculture Public Expenditure Review carried out by the World Bank in 2019, and where this finding is derived from, small-scale producers are defined as those with an economic size of up to EUR8,000; medium producers are those with an economic size between EUR8,000 and EUR25,000. In a 2019 Technical Report on Smallholders and Family Farms in the Republic of Serbia, FAO uses a multicriteria approach to identify smallholders, using both physical and economic size as determinants. Page 7 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Redirecting resources from subsidies towards rural development investments and targeting the small and medium producers of Serbia, especially in the South and Southeast, could improve their productivity and competitiveness, put them on a path of modernization and financial inclusion, and enable them to actively participate in the process of structural transformation of agriculture in Serbia, and prepare them for EU accession. 8. Despite significant EU resources allocated to Serbia’s agriculture, available investment funds are underutilized because of the limited uptake of development grants by small and medium-size producers. The EU Instrument for Pre-Accession and Assistance for Rural Development (IPARD) funds in the amount of EUR230 million (including national co-financing) have been allocated to Serbia for the programming period of 2014-2020. Although the scope of the two measures for which Serbia is accredited5 is broad, the actual number of beneficiaries is limited. Most small and medium scale producers have not taken advantage of this productive support as many either lack the commercial scale required to meet the minimum eligibility requirements or are deterred by the complex application requirements and lengthy approval processes. In addition, the need to mobilize upfront private financing for productive investments in order to benefit from grant support is a key constraint in the uptake of IPARD grant support for most small and medium scale producers. 9. Further, small and medium farmers are particularly exposed and more vulnerable to climate disasters. This is due to: (a) small farm-size holdings (78 percent of farms have less than 5 ha); (b) lower and variable productivity; (c) large reliance on rain-fed production systems (only 1.4 percent of the utilized agricultural land is irrigated); and (d) lack or limited access to key resources including risk insurance and climate knowledge and information to help cope and adapt to climate impacts. As their capacity to deal with financial losses and production disruptions is relatively low, climate change impacts can even threaten the survival of their livelihoods. Hence, diversifying the sector base has important climate mitigation (reducing risks) and climate adaptation (improving resilience) implications for the country. 10. Different support mechanisms and financial instruments may be required to enable small and medium scale producers to build resilience, access financial resources and strengthen their links to markets. A policy mix that focuses on the improvement of competitiveness and value addition capacity can also have important sectoral and economy-wide growth effects, including increased employment, poverty reduction and economic prosperity of rural areas. For example, reducing the direct payments envelope and increasing the rural development one, including for infrastructure, advisory and farm extension services and R&D, could contribute to improved sector performance. Financial instruments, such as matching grants and public guarantee funds, can stimulate financial inclusion of small and medium-size producers, reduce financial risk6, and improve their ability to access private investment financing and benefit from IPARD support for better integration into value chains. Better policies can also support the implementation of agri-environmental and climate smart practices for small and medium-size producers. This would not only have important implications for better climate adaption (improving resilience) at the country level, but it would also help to increase agriculture’s climate mitigation potential and reduce individual producers’ exposure to climate risk and improve their real and perceived financial risk profile with financial institutions. 5 Accredited measures in 2018 are Investments in Physical Assets of Agricultural Holdings and Investments in Physical Assets for Processing and Marketing of Agriculture and Fisheries Products; two more are planned for accreditation in 2019 - Farm diversification and business development and Technical assistance; and two additional ones for 2020 – LEADER program for local development and organic production. 6 Due to their high perceived risk profile, smaller farmers currently have very limited access to bank financing and mostly rely on off takers and input suppliers to finance their inputs. Page 8 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) C. Relevance to Higher Level Objectives 11. The proposed project is consistent with the Serbia Country Partnership Framework (CPF) for the period of 2016-2020 (CPF Report No. 94687-YF). While the Systematic Country Diagnostic (SCD) identified agriculture as a priority sector for the twin goals, the CPF did not originally envisage an operation because of counterpart readiness. However, engagement with the Ministry of Agriculture, Forestry and Water Management (MAFWM) demonstrated a new strategic drive and opportunity to make an impact. Therefore, as part of the program update under the Performance and Learning Review (PLR), the agriculture sector was considered important for a re- engagement. Through productive investments targeting small and medium scale producers and strengthening the information systems of the agricultural sector, the project aims at increasing sector competitiveness, while providing economic opportunities in rural areas, as the country moves closer to EU membership. The PLR identifies agriculture as one of the high priorities for the Government with an important dimension of shared prosperity. 12. The project is also aligned with the strategic goals of the National Agricultural and Rural Development (NARD) Strategy for 2014-2024,such as: (a) growth of production and income stability; (b) growth of competitiveness with adjustments to domestic and foreign markets requirements and technical-technological promotion of the sector; (c) sustainable management of resources and environment protection; (d) promotion of quality of life in rural areas and poverty reduction; (e) efficient management of public policies and promotion of institutional framework for development of agriculture and rural development. 13. Through support to sustainable and climate smart investments, the project is expected to contribute towards global climate change development goals of Serbia. Serbia has been part of the UN Framework Convention on Climate Change (UNFCCC) since 2001 and the Kyoto Protocol since 2008. In 2015, the Government of Serbia adopted the Nationally Determined Contributions (NDCs) to fulfill its international obligations. NDCs were developed on the basis of GHG emission data of 1990, official data and projections, national strategic and planning documents and current and planned legislative framework which is primarily derived from the process of harmonization with the EU acquis. Total national GHG emission reduction until 2030, in accordance with the “scenario with measures” is to be 9.8 percent compared to 1990 emissions. The proposed project will contribute towards strengthening adaptation of agriculture production to climate shocks and will target agricultural producers that face the highest risks to climate change events. II. PROJECT DESCRIPTION A. Project Development Objective PDO Statement To improve agri-food market linkages of targeted beneficiaries. PDO Level Indicators 14. The proposed PDO will be achieved by increasing the productivity7 and efficiency8 of targeted beneficiaries through improved access to technical support, information and finance. 7 Improved on- and off-farm productivity, efficiency and value addition using better management practices, climate smart agriculture, technology, information, and technical assistance, etc. 8 Improved linkages between agri-food producers and buyers/markets (volume, quality and uniformity of production, value and volume of sales, market segmentation, entrepreneurial capacity of the production units, etc.). Page 9 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) 15. The PDO will be measured through the following indicators: (a) New formal contracts signed between beneficiaries and buyers of their products/services (Number) • New formal contracts signed between women beneficiaries and buyers of their products/services (Number) (b) Increase in the value of beneficiaries’ production (Percentage) B. Project Components 16. The project is structured in three Components. Component 1 focuses on improving the productive and entrepreneurial capacity of small and medium agri-food producers, producer groups and enterprises by supporting productive investments and capacity building (through advisory services, business and financial planning) for market access and added-value of their production. Component 2 focuses on improving the capacity of MAFWM to provide core public goods for improving sector performance. This includes establishing an integrated information system to enable evidence-based decision making by agri-food producers and MAFWM, monitoring of results, enhancing production and market information for stakeholders, and building capacity for regulatory roles and compliance functions aligned with EU CAP. Component 3 focuses on project management, including the tools for a project impact assessment. 17. The project will support a broader agriculture policy reform process by addressing sector needs at the level of agri-food producers (Component 1) and the MAFWM (Component 2), through: (a) improved targeting of policy instruments to different typologies of small and medium size producers; (b) improved leverage of financial resources and greater financial sustainability of investments in agriculture; (c) changes in the financial risk profiles of agri-food producers that could lead to improved access to IPARD resources; (d) strengthened enabling environment for investment for small and medium agri-food producers, by improving the delivery of services to these productive segments (advisory, financial, information, etc.); and, (e) improved monitoring of public resources and their utilization, as well as sector performance. It is expected that all these actions will bring about a significant shift in the utilization of public resources in agriculture from subsidies (direct payments) to rural development investments. Rural development investments (where both capital and knowledge are considered) are found to lead to improvements in productivity and sector growth in Serbia and other countries in the region. 18. The project will also contribute towards improving the resilience of small and medium-size agri-food producers. Some of the investments under Component 1 will finance climate resilient and mitigation technologies in the agricultural sector9. Through technical assistance, Component 1 will also improve the capacity of farmers to better adapt to climate change or use adequate mitigation technologies through knowledge transfer by the advisory services. Component 2 will support the creation of an information system to strengthen MAFWM’s capacity to manage risk and be pro-active, before extreme events strike, hence reducing their potential costs and adverse impacts. Integrated into the information system will be key climatic variables and data available to all agricultural stakeholders at the national level. The project could have an important contribution to diminishing the effects of climate events in the agricultural sector. 9An ex-ante GHG analysis conducted for this project (Annex 2) finds that activities under Component 1 can constitute a net carbon sink of 118,987 tCO2-eq., largely due to the avoided emissions from improved and sustainable agricultural (-87,070 tCO2-eq) and livestock management (-45,115 tCO2-eq) practices. The total balance of -118,987 can be translated into -21 tCO2-eq per hectare over 20 years period or -1.1 tCO2-eq per hectare per year. Page 10 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) 19. The project will work towards strengthening the role of women in productive decisions and market access. Despite the role women play in agriculture, they are constrained by their lack of involvement in decision- making and access to finance. Women are often the main custodians of knowledge on crop varieties and good management practices. Empowering women farmers can increase their income, develop a stable rural livelihood and contribute towards adoption of new practices for improving productivity. The project will target women both through customized advisory service delivery as well as through grant selection criteria (under Component 1). Women beneficiaries will also be supported with access to information and its use for productive purposes and market access (under Component 2). Component 1: Improving the value-added of agriculture (US$37.7 million / EUR34.5 million) 20. The objective of this component is to improve the productive and entrepreneurial capacity of small and medium agri-food producers, producer groups and SMEs to improve their linkages to markets. The component will support productive investments on- and off-farm (e.g. capital investments in equipment, machinery, processing units10, packaging, storage, etc.) and the building of productive and entrepreneurial capacity of agri- food producers through the integration of production decisions with market requirements and technical and financial services. 21. Component 1 is structured into two sub-components: (1.1) Strengthening access to agricultural advisory and business development services – focusing on capacity building activities required to formulate business plans, investment decisions and financial support, from public and private sources; (1.2) Facilitating access to finance for productive investments through matching rural development (MRD) grants, comprising investments in equipment and technical assistance to support implementation, using public resources and commercial bank loans. The detailed description of the sub-components is provided below. Sub-component 1.1: Strengthening access to agricultural advisory and business development services (US$4 million / EUR3.7 million) 22. This sub-component will focus on strengthening the sector capacity for provision of technical assistance to agri-food producers for the formulation and implementation of productive investments. It will comprise both strengthening the capacity and knowledge of existing advisory services (both public and private) to respond to producer demand, as well as the delivery of advisory services to the final beneficiary, enabling them to design and implement productive investments in line with market needs and requirements. The scope of the technical assistance provided to beneficiaries will encompass traditional farm advisory services focusing on improvements of productivity, business plan development support, support for improving financial and entrepreneurial capacity, marketing advice, including compliance requirements related to national standards (e.g. better agri- environmental practices, food safety, animal welfare, traceability, etc.), advice on the use of climate-smart production practices and technologies and information to mainstream climate adaptation and mitigation in key subsectors supported by the project, as well as support for the effective use of digital tools for decision-making, including transferring of climate-related knowledge and information to reach small and medium beneficiaries. 23. This sub-component will also support the design and implementation of a communication strategy for MAFWM aimed at raising awareness about the project to stimulate broad-based participation by target groups. The communication strategy would also target local governments to ensure their support for project activities. 10Under IPARD grants, investment grants for processing facilities is only provided for new structures; national rural development program can provide investments for rehabilitation and upgrade of existent facilities. Page 11 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) The communication strategy will also reach out to the private sector, including commercial banks, to increase their awareness about the economic opportunities provided by the project to small and medium-size agri-food producers and the role that the private sector can play in their development. Sub-component 1.2.: Facilitating access to finance for productive investments (US$33.7 million / EUR30.8 million) 24. This sub-component will focus on improving the productivity and competitiveness of agri-food producers by facilitating their access to finance for productive investments and to markets for their products/services. This will be carried out under a MRD grants11 program, as a financial instrument for advancing a sub-set of priority areas and operational goals defined in the NARD Strategy for 2014-2024. There is a strong public good argument for using matching grants12, such as to stimulate cross compliance (i.e. improving environmental outcomes), stimulate use of innovations, new technologies (including irrigation equipment such as solar pumps), development of skills (including those related to climate mitigation and adaptation), modernization (including climate smart and energy efficient technologies), horizontal integration, and financial inclusion, promoting the transfer of (digital) technologies, integrating agri-food chains, increasing farm diversification (along with creating alternative employment and income opportunities outside the agricultural sector that will help agricultural producers improve their resilience to climate change and adapt to future climatic pressures), and improving product safety and quality (including provision of cold storages that will help agricultural producers adapt to the risk of extreme climatic changes by preserving their produce during harsh winters and hot summers). Through the project, capacity for the use of matching grants will be improved in the sector, which can lead to a better absorption of IPARD grants later on. 25. The productive investments supported through the MRD grants program will be defined in business plans that bundle three key elements: (a) capital investment, (b) working capital, and, (c) technical assitance and/or training for improving productive and entrepreneurial capacitites and performance. The total cost of individual business plans would depend on the type of investment, the working capital required to make it operational, as well as the scope of the technical assistance and training needed. The cost would also vary by the productive activity, typology, and capacity of the applicant. Matching grant support provided under the project would represent 50 percent of the total cost of individual business plans, while the remaining cost would be covered by beneficiaries’ own funds (10 percent) and commercial loan (40 percent). The minimum and maximum total values of the investments included in the individual business plans are in the range of EUR 25,000 (i.e., minimum grant size of EUR 12,500) and EUR 400,000 (i.e., maximum grant size of EUR 200,000) for producer groups and SMEs, and between EUR 25,000 (i.e., minimum grant size of EUR 12,500) to EUR 50,000 (i.e., maximum grant size of EUR 25,000) for farmers. Eligibility and selection criteria are defined to ensure the participation of small and medium agri-food producers, producer groups and SMEs. The development impact of support provided under the MRD grant program would also be strengthened through the scoring and ranking criteria that would be applied to target investments towards youth, women and poorer areas in Serbia. These criteria are also formulated to incentivize 11 Matching grants are an instrument aimed at promoting private sector development which has been used extensively over the past years, in particular for agriculture development. A matching grant is defined as a one-off, non-reimbursable transfer to project beneficiaries, for a specific purpose, based on the condition that the recipient contributes for the same purpose. These grants can be used for a variety of activities including technical assistance, investment in assets or financing of working capital. Total grant financing dedicated to agriculture reached 650 million USD or almost twice the volume of those outside of agriculture. In addition, the proportion of matching grants projects supporting agriculture has significantly increased in the 2000s. 12 Recent interest for this instrument to support agriculture might be due to growing concerns about other forms of support which distort financial markets such as interest rate subsidies, as well to the compatibility of such agricultural subsidies with World Trade Organization requirements. Page 12 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) organization among producers13, increased compliance with food quality standards and adoption of technologies (digital, climate smart14). All selection criteria, as well as governance and management aspects of the MRD grants (including environmental and social standards, fiduciary norms and anti-corruption provisions), are detailed in the Grant Operational Manual (GOM). 26. The sub-component will also facilitate access to finance for agri-food producers participating in the MRD grants program by providing investment and working capital and by leveraging financing from commercial banks. Commercial banks will offer financing under approved business plans. Technical assistance will be provided for entrepreneurial capacity to targeted beneficiaries. Considering the high risk in lending to smaller producers, the project will support the de-risking of agri-finance by working with existent public credit guarantee funds in Serbia available for agriculture - the European Investment Fund (EIF) and the Development Credit Authority (DCA)15. By providing grants, the project will leverage these existing schemes as risk mitigating mechanisms to crowd-in private investment through increased agricultural lending by commercial banks. Aid intensity levels under the MRD grants program were established in consultation with the banks to sufficiently mitigate the risk profile of the target beneficiaries and thus incentivize program participation among commercial banks. The project will also assist commercial Banks to improve their knowledge about working with targeted beneficiaries through awareness and communication strategy. Partnership agreements between the MAFWM and interested commercial banks16 would be concluded prior to the calls for proposals to formalize the program participation arrangements. A feasibility study will also be carried out to assess demand for a public guarantee scheme for agricultural loans as a long-term de-risking option17. Component 2: Improving the capacity of MAFWM to support modern agriculture (US$10 million / EUR9.2 million) 27. The objective of this component is to improve the capacity of MAFWM and related public agencies to enable improved sector performance through evidence-based policy making and provision of public goods, such as an information delivery system and open data platform. This will be achieved through the upgrading and modernization of existing information systems and their integration into an open data platform that will benefit all agricultural producers of Serbia. The information system will also strengthen the Government’s capacity for risk management by providing all agricultural stakeholders access to relevant agroclimatic and market information 13 MRD grants are conditioned on more than one actor participating in the proposed sub-project submitted to the expression of interest – this could be two or more producers applying jointly (hence incentivizing horizonal linkages or group formation), or a producer and a processor (hence incentivizing vertical linkages). 14 These may include climate smart technologies such as soil-crop management, improve livestock feeding, conservation tillage, windbreak barriers, mulching/soil cover etc. On-farm inputs and equipment including irrigation, water storage/rain harvest, shading/anti-hail nets, manure treatment, drainage, use of biofertilizers, compost, integrated pest management, solar refrigeration, solar heating systems and energy efficiency equipment in processing facilities, appropriate grain storage to limit pest infestations among others. 15 Two public donor guarantee schemes with agricultural windows are expected to be available in early 2020 – EIF (backed by EU funding) and the DCA (guarantee facility of USAID), still under negotiations with MAFWM – and can be tapped on by commercial banks in the first couple of years of project implementation. IFC is already engaged with the EIF. Although a public guarantee fund exists in Serbia (the Serbian Development Fund, SDF), it is weak and does not cater to agriculture. Hence, a capacity building (through a TA) activity may be warranted under the project to provide guidance on future needs by the public sector for unlocking private investment in agriculture. 16 Commercial banks were extensively consulted during project preparation and calls for proposals will be issued for their participation during project implementation. While there are no guarantees, to date six commercial banks have expressed a clear interest in participating in MRD grants program. 17 Existent guarantee schemes tend to be time bound and have a limit on resources. A domestic guarantee agency has the advantage of not being time bound and can benefit from counter-guarantees from IFIs such as European Investment Bank (EIB), EIF and donors. Page 13 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) to enhance climate response at the farm and agribusiness level. The integration of information could also support the Government’s broader pension reform efforts with the provision of data for social benefits assessment. Sub-component 2.1: Improving MAFWM information systems (US$8.1 million / EUR7.4 million) 28. This sub-component will support MAFWM to modernize its information systems and strengthen its decision-making capacity, through the improvement of hardware, software and human capacity for information support to the sector. Modernizing the information systems, through redesigning and upgrading of existing applications is critical in the process of alignment to EU Common Agriculture Policy (CAP), including for compliance and monitoring of sanitary and phytosanitary measures (SPS), for provision of farm advisory information, for supporting the land parceling identification system (LPIS), and for data management, etc. The project will finance: a) technical assistance to develop a MAFWM ICT strategy and to improve the coordination within and across existing information systems and enhance the delivery of information for decision making at different levels; and b) the acquisition of hardware and software to improve the scope, functionality and compatibility of information systems18 and establish digital data collection and processing of current paper-based processes. Sub-component 2.2: Developing an Agriculture Business Intelligence Information System (US$1.9 million / EUR1.8 million) 29. This sub-component will improve the access to information to all sector stakeholders through an open, public information system – Agriculture Business Intelligence Information System (ABIIS) – which will pull together all relevant data, including the upgraded and reengineered applications developed under Sub-component 2.1. The project will finance the software, hardware and technical assistance required for the set-up and functionality of ABIIS. The information system can play an important role for the spatial tracking, traceability and connectivity of production and market demand, thus contributing to improved positioning of products, sales and overall competitiveness. The ABIIS will also serve as a support system for the advisory services in Serbia and can be linked to digital applications on-farm, ensuring a two-way communication on plant and animal health, and other risks that can constrain agricultural productivity and competitiveness. In addition, by including weather and climate information19 modeling, the project will contribute to early warning systems, helping producers to better prepare and adapt to changing climatic conditions. The project will use existing digital agriculture tools and will collaborate with private sector IT companies for finetuning electronic delivery mechanisms for monitoring production, access to technical information, traceability of goods and identification of market opportunities. Managing the content and enabling public access to ABIIS is a key role that MAFWM can play in providing the enabling environment for agricultural sector transformation. Component 3: Project Management, Monitoring and Evaluation (US$2.3 million / EUR2.1 million) 30. This component will support the establishment of a project management team (PMT) in the Directorate of Agrarian Payments (DAP) and the capacity needs related to project implementation, including project monitoring, a comprehensive baseline, mid-term review and a final impact evaluation of project investments. The Central Fiduciary Unit located in the Ministry of Finance will perform the fiduciary function for the project. 18 This will also support the interoperability with existing monitoring systems housed outside of the Ministry on weather, pests and hydrometeorology to enhance its usability by all agricultural stakeholders in the country. 19 Currently, climate-related information and services are available to the agricultural community at the website ( http://hidmet.gov.rs) maintained by the Hydrometeorological Institute of Serbia. However, this website is old and not optimized for mobile devices. The project will upgrade this portal to better disseminate climate information data to agricultural scientists, advisors and farmers. Page 14 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) C. Project Beneficiaries 31. Target beneficiaries are small and medium scale agri-food producers, producer groups20, and SMEs (e.g., agri-businesses, agri-processors) that (a) generate primary agricultural production or food products or services; (b) are or can be commercially viable; (c) are not covered by accredited IPARD measures, and (d) have difficulties meeting the pre- and co-financing requirements of the National Rural Development Program. Although large producers will not be directly targeted, the project will also benefit them through a better enabling environment based on improvements in information systems, financial and advisory services. The size of producers is defined in the Grant Operational Manual (GOM) per sub-sector and below the established IPARD thresholds. Project activities are designed to incentivize participation of women and young farmers. 32. The project will be implemented throughout regions of Serbia21. It is expected that most beneficiaries will be in the South and Southeast of the country, where small and medium scale agricultural production predominates, volumes per producer are small, private investment is limited and targeted investments in agricultural production and commercialization are expected to have the largest impacts. D. Results Chain 33. The figure below outlines the Theory of Change logic for the Project. 20In the context of Serbia and this project, producer groups are legally constituted cooperatives and farmer associations. 21 As the Project aligns with the EU Instrument for Pre-accession Assistance for Rural Development (IPARD) Program, an alignment with the Nuts 1 and Nuts 2 formulation of the scope of the IPARD would be adopted under the Project. This includes two Nuts 1 regions - Serbia North (including two Nuts 2 regions of Vojvodina and Belgrade) and Serbia South (including two Nuts 2 regions of Sumadija / Western Serbia and South / East Serbia). Page 15 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) E. Rationale for Bank Involvement and Role of Partners 34. This project marks a re-engagement of the World Bank in the agricultural sector. The previous agricultural operation in Serbia – Transitional Agriculture Reform Project (P094212) closed in May 2013. Since then, engagement in the sector has been through analytical and advisory assistance and a functional review of sector institutions. 35. The World Bank Group brings important global expertise on agricultural development to Serbia; the World Bank has, for many years, supported the sector in the region. Beyond the Western Balkans, the World Bank Group is an important partner to the European Commission and is supporting analytical work in several EU member countries. 36. The proposed project complements and builds on several World Bank Group and donor financed projects in Serbia. Through Competitiveness and Jobs Project the World Bank supports better targeting of public policies for increasing competitiveness (through increased private sector investments, innovation and jobs creation). Use of technology and innovation to increase productivity was supported through the WB supported Research, Innovation and Technology Transfer Project financed through EU Instruments of Pre-Accession Assistance (IPA) funds. Data sharing, improved government agency interoperability, and development and delivery of digital administrative services has been supported by several WB funded projects in Serbia, such as the Real Estate Management Project which is financing development and implementation electronic application for property registration and construction permits, and public and private sector access to real estate cadaster data. Enabling Digital Governance Project supports better access, quality and efficiency of selected digital administrative services. Similarly, Tax Administration Modernization Project supports document management and digital archiving. IFC Debt Resolution and Business Exit Program, several European Bank for Reconstruction and Development (EBRD) and EIB financed projects, and the United States Agency for International Development (USAID) through Competitive Economy Project and the Development Credit Authority Tool support access to finance which is one of the key constraints to increased agriculture sector competitiveness the proposed project aims to address. 37. Collaboration with the European Commission and other donors and stakeholders: Serbia as an EU candidate country is supported by the EU through its Instrument for Pre-Accession Assistance (IPA). Agricultural sector sustainability and its alignment with the EU’s CAP is supported through IPARD which provides grant funding to producers, processors and local communities for investments, diversification and technical assistance. The proposed project will work closely with the Delegation of the EU in Serbia to ensure complementarity and clear demarcation between the two grant programs (matching grants under the World Bank Group financed project and IPARD). Collaboration with the EBRD, USAID, FAO and other donors will be important for maximizing the impact of investments in smallholder agriculture. Project activities will also benefit from the Policy and Human Resources Development (PHRD) Grant from the Japanese Government on improving the monitoring and evaluation capacity of MAFWM. F. Lessons Learned and Reflected in the Project Design 38. Lessons from investment operations in Serbia: Agricultural and Rural Development policy in Serbia is significantly influenced by the EU, who is the largest donor in the sector. The Bank plays a complementary role and its interventions are substantially aligned with EU objectives and to close gaps in EU support. The project’s matching grants are designed to address such gap in targeting under the current IPARD and National Agriculture Page 16 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) and Rural Development Programs. Additionally, the project invests in infrastructure and capacity building for meeting the EU Acquis approximation requirements. 39. Main findings from the Agriculture Public Expenditure Review for Serbia: Support to agriculture in Serbia should be re-balanced - direct payments are found to not promote technical efficiency and productivity growth and they also slow down the structural transformation in Serbian agriculture. Hence, the current trend of reducing the direct payments envelope and significantly increasing the rural development one should be further pursued. Rural development support should constitute the main means of farm modernization and structural adjustment for both agriculture and rural development in Serbia. A new mix of rural development policy which commands a significant share of agricultural public support is necessary. The rural development budget should significantly increase its focus on the sustainable management of natural resources and rural diversification. Such a policy shift will promote sustainable farming practices, induce the commodification of the country’s rich natural resources by the agri-food chain and enable the transfer of underemployed resources currently locked in agriculture, to other economic activities. Together with market-oriented decoupled farm payments, such a shift in rural development support will facilitate an increase farm productivity and efficiency and promote structural transformation in Serbian agriculture. Further, rural development measures should target the provision of incentives which induce technical change and innovation. More importantly, they should provide distinct, special incentives for medium- sized farms and attempt to pursue their enlargement and technological/managerial modernization. 40. Lessons from agriculture investment in the region. The implementation of the first Montenegro Institutional Development and Agriculture Strengthening (MIDAS) project supported by the World Bank, which sought to improve the delivery of government assistance for sustainable agriculture and rural development in a manner consistent with EU pre-accession requirements, demonstrated that the “learning by doing” generated by piloting and gradually scaling up new delivery mechanisms for rural development grants can be an effective tool to build capacity at the level of both government institutions and agricultural producers in line with EU CAP requirements. Adequate local stakeholder engagement and transparency mechanisms should be integrated in rural development grants program in order to ensure broad-based participation. In addition, both technical and financial services must be tailored further to the needs of smaller agricultural producers and agribusiness SMEs to help them better plan and manage productive investments and meet changing market needs and requirement - thus maximizing the efficiency, equity, and effectiveness of rural development investments. Finally, data-driven and results-oriented monitoring and evaluation systems should be developed to evaluate the development impacts of ongoing public agricultural expenditures and enable evidence-based policymaking in the future. In particular through the development of key data management platforms that underpin monitoring and evaluation (M&E) systems such as the Integrated Administration and Control System (IACS) and the Farm Accountancy Data Network (FADN). 41. Lessons from use of the productive alliances model in agriculture: The Productive Alliance (PA) approach was introduced during the early 2000s in Latin America and the Caribbean22. Since then, the World Bank has provided more than US$1 billion in financing to support over 20 projects across the LAC region. Productive Alliance projects have performed well in including women and other disadvantaged groups, such as indigenous peoples or smallholder producers in post-conflict zones. Key lessons emerging from the Productive Alliance experience in Latin America include the following: (a) Setting up a competitive subproject selection process based on clearly 22 For more information see the document World Bank Group. 2016. “Linking Farmers to Markets through Productive Alliances: An Assessment of the World Bank Experience in Latin America”: http://documents.worldbank.org/curated/en/702681480494322907/pdf/110615-WP- LinkingFarmerstoMarketsthroughProductiveAlliances-PUBLIC-ABSTRACT-SENT.pdf Page 17 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) defined technical evaluation criteria is crucial for establishing credibility among stakeholders, avoiding political interference, and safeguarding the technical quality of selected subprojects; (b) Identifying and analyzing promising value chains based on technical criteria, aligned with project objectives and market potential, are important to ensure effectiveness and sustainability; (c) Establishing assessment criteria for the selection of potential buyers and regular monitoring of the producer-buyer relationship can reduce the risk of choosing an uncompetitive buyer or promoting elite capture in imperfect markets; (d) Requiring cash contributions or bank loans as co-financing from producers can ensure a stronger buy-in; and, (e) Building capacity of beneficiary producers over an extended period while they grow and mature is crucial for ensuring long-term success. III. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 42. The implementing agency for the project will be the Ministry of Agriculture, Forestry and Water Management (MAFWM) through its relevant departments and units, among others, Sector for Rural Development, Sector for Agrarian Policy, Directorate for Agrarian Payments (DAP) and Information Technology Group. A Project Management Team (PMT) will be established to support project implementation and will be placed with the DAP which is responsible for execution of the rural development investment support programs financed through the national budget and IPARD. DAP’s capacity has been built over the past 10 years to meet the requirements of IPARD accreditation and within the MAFWM they are best positioned to support the implementation of the project’s matching rural development grants program. Additional capacity needed to support the implementation of the investment loan financed by the Bank will be provided through the recruitment of consultants to form the PMT. The PMT’s integration into the current structures of the MAFWM and DAP will ensure longer term sustainability of built management capacity, as DAP will need to recruit additional staff in the medium to longer term to obtain accreditation for available IPARD measures (so far it has been accredited for only 2). 43. The Directorate for Agrarian Payments, as a part of MAFWM, is established by the Law on Agriculture and Rural Development (Official Gazette of the Republic of Serbia 41/09). The Directorate performs the activities related to the implementation of the subsidies program in agriculture, making calls for applications, decides upon the right to assistance, making payments to the final beneficiary, performs administrative and on the spot checks, establishes and keeps accounting records of contractual obligations and payments, implements international assistance to agricultural policy in the Republic of Serbia, and manages the Farm Register. 44. One of the goals of the Directorate is fulfillment of the requirements for use of EU funds in the area of agriculture and rural development. After gained EU candidacy status, Serbian agriculture became eligible for the fifth component of Instrument of Pre-accession Assistance (IPA) related to rural development. The establishment of the Directorate was necessary to enable not only the use of the IPA pre-accession funds, but also to prepare Serbian agriculture for further integration into the EU CAP in the future. The establishment of the Directorate increased transparency and efficiency of the implementation of national subsidies and made the Directorate open to the final beneficiaries, in terms of any assistance needed. 45. The Directorate has 220 staff with 69 of them on term-contracts and 4 temporary contracts. One hundred eighteen (118) of these staff are involved in implementing grants under IPA (Instrument for Pre-Accession Assistance) following EU Regulations and 26 in implementing national measures. The Directorate has extensive experience in implementing grants using both the IPA and national procedures. They have rulebooks for national Page 18 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) procedures and separate rulebooks for IPA, which are available on their website. Availability of grants is published/announced on their website, MAFWM website and during agricultural fairs. Processing of grant proposals usually take an average of 50-60 days. Documents are required to be kept from 7 to 10 years. 46. DAP follows the Code of Ethics for Civil Servants and complaints are addressed/resolved using the Law on Administrative Procedures. DAP will not have enough staff to implement the Grant component of the proposed project. As a preliminary assessment, in addition to a Grant Coordinator and a Grant Procurement Specialist, the DAP would require the active participation of commercial banks in the appraisal of sub-project proposals. The different steps in the application and selection process proposed by the DAP are summarized in Annex 1). 47. The Central Fiduciary Unit (CFU) located in the Ministry of Finance (MoF) will perform the fiduciary function for the project. The CFU was established within the Ministry of Finance in October 2017 to provide fiduciary support (procurement and financial management activities) to all World Bank supported projects in Serbia. The CFU is currently comprised of the following staff: Director, Head of Operations, two Procurement Specialists and Financial Management Specialist. A Memorandum of Understanding will be signed between the MoF and MAFWM regarding the fiduciary aspects of project implementation pertaining to matching grants. 48. The Project Operational Manual (POM) details the implementation arrangements, including the division of responsibilities between the PMT, DAP and the CFU. This arrangement would effectively mean that the PMT and DAP agree on activities with the Bank, evaluate and select contractors, monitor and evaluate implementation, act as signatory to the contracts, letters of acceptance of goods and services, payments orders and withdrawal applications, and have main roles in budgeting for the project as the project funds are part of the implementing entities’ budget. The CFU will provide procurement support in all phases of the procurement process, process payments, accounts for transactions, prepares interim and annual financial reports, perform all controls with regards to use of funds and ensure all transactions being properly documented, communicate and report regularly to the PMT on liquidity and other key financial parameters. B. Results Monitoring and Evaluation Arrangements 49. A monitoring and evaluation (M&E) unit will be established in MAFWM at the central level to oversee MAFWM’s M&E activities, including this project. It is envisaged that the unit will comprise two staff members from the Ministry’s existing staff structure, and the Head of the unit or Project Manager recruited (local consultancy) under the PHRD Grant for strengthening M&E capacities of the MAFWM23. The M&E unit at MAFWM will be supported by the CFU of MoF on fiduciary functions of the grant implementation. An M&E specialist will be hired under the project (and be part of the PMT) to oversee project-specific M&E and will liaise with the M&E unit of MAFWM. The project M&E arrangements will be aligned with those set-up for the implementation of the PHRD Grant. C. Sustainability 50. Citizen Engagement: The proposed project interventions have been formulated through preparation of relevant economic and sector studies and an interactive process of stakeholder engagement, including with 23 The PHRD Grant “Strengthening Agriculture Sector Capacities for Evidence-Based Policy Making” (US$1.8 million) was awarded by the Government of Japan to the Government of Serbia. The Grant will be implemented by the MAFWM. The objective of the Grant is to strengthen the M&E capacity and systems of the MAFWM and its decentralized services for evidence-based strategic planning in agriculture and rural development. Page 19 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Farmer Associations, Extension Services, small and medium size producers and processors. The Borrower has identified project stakeholders and prepared a Stakeholder Engagement Plan (SEP) that outlines the timing and methods of engagement with different stakeholders, including underrepresented/vulnerable groups (e.g., women, young farmers, producers in marginalized rural areas) and other interested parties, such as non- governmental organizations (NGOs) and women business networks. The SEP was disclosed on October 11, 2019 on MAFWM’s website and consulted on October 23, 2019 with a wide range of stakeholders, such as local and national agencies, NGOs, farmer’s representatives, regional development organizations and others. The SEP was finalized with a summary of consultations and the final version of the document was re-disclosed on the client’s website and sent to the World Bank’s external website on November 8, 2019. The project will launch a public awareness campaign to present the features of the support program prior to each call for proposals and stimulate participation of agricultural SMEs, including targeted messaging for women and youth (under Sub-component 1.2). The project will conduct sample-based surveys of grant applicants at critical phases of project implementation to ensure adaptive design of the grant program. Furthermore, the project will organize regional workshops with direct beneficiaries and stakeholders to collect in-person feedback on the project progress. The project will also integrate feedback/comments space into the information platform developed under Sub- component 2.1 and will introduce service satisfaction e-surveys as an integral part of the platform. Quick questionnaires will be automated and launched immediately after the use of the service to assess the relevance and quality of the information provided (result indicator). The results will be reviewed on a regular basis to ensure ongoing service improvements. A Grievance Mechanism (GM) will be added to DAP’s existing information center for the national support program. The GM will provide the opportunity for continued feedback on the grant scheme and resolution of individual grievances during implementation. Procedures related to complaints handling will be included in the Grants Operational Manual (GOM) and posted on the MAFWM’s website to ensure full transparency. 51. Maximizing Finance for Development (MFD): The project will create the enabling environment to encourage private sector (farmers and SMEs) investments by addressing structural problems for inclusion of small and medium scale agricultural producers in Serbia. Specifically, the project will: (a) work with participating financial institutions (PFIs) to build their capacity to finance working capital and investment for producers and aggregators alike as participants in the value chain; (b) identify missing/weak links between aggregators, farmers and PFIs and design solutions/tools to enable financial inclusion and access to markets for various value chain participants; (c) identify suitable aggregators and strengthen their capacity to expand, invest and provide services to farmers; and, (d) identify small and medium scale producers with the potential to sell their products. During project implementation, opportunities for working closely with the IFC will be explored and possible complementary activities identified. 52. Gender Considerations: The most recent research conducted on the role of women in the agricultural sector in Serbia24 finds that only a small share of women formally participates in agricultural production (20 percent) and female managers are older than men (64 vs. 59 due to an inheritance structure). There is a number of barriers that further limit women’s active engagement in the sector. These include: (a) access to land (84 percent of women do not own agricultural land); (b) management of agricultural holdings (16 percent by women); (c) access to finance; (d) agricultural education (73 percent of women managers rely on practical experiences, compared to 58 percent of men); and, (e) access to information about available support programs. 24 Situation of Rural Women in Serbia; publication was produced with support of the United Nations Entity for Gender Equality and the Empowerment of Women (UN Women) Page 20 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) 53. The support provided to agricultural producers will be available to women farmers as well as to male farmers. With migration dynamics pulling people out of rural areas and the overall aging of the rural population, characteristic of the Balkans, the role of women is becoming critical for developing the productive sector through participation in agricultural activities both on and off-farm. More women are becoming grant recipients (women received 11.5 percent of the national program grants in 2017) and have an active role in decision making for production and post-harvest. The project will encourage greater participation of women in the grant program through favorable grants selection criteria and targeted training and business advisory support services. Women often maintain the dual responsibility of farming and household production. Women also participate in direct sale of agricultural products in the fresh produce (also called green) markets. Hence their knowledge on both production needs and market dynamics is fundamental for modernization of the sector. Women, in general, also have limited access to credit and the project will strengthen their financial inclusion, including by facilitating women to access commercial credit by using production assets as collateral rather than land. The Project will also strengthen advisory services in subsectors dominated by women to better respond to their needs (captured in a dedicated indicator in the results framework). Under Sub-component 2.2, the project will make sure that the IT solutions being developed for monitoring, production, traceability of goods and identification of market opportunities are relevant to the subsector and business development needs identified by women agri-food producers. Targeted training for female producers and processors focused on technical issues, such as farming techniques, processing and marketing, will also be considered (under Sub-component 1.1). 54. Finally, the project will provide grant support for farm diversification activities including traditional handicrafts where women are predominantly engaged. Ultimately, all these project activities are expected to contribute to the increased rate of formal participation of women in agriculture and rural development (grant beneficiaries are to be formally registered) and increased income generated by women through alternative sources (e.g. handicrafts). 55. Climate co-benefits: The project has the potential for generating important climate co-benefits. Agricultural producers in Serbia, particularly small and medium ones, are very vulnerable to climate change due to small farm-size holdings (78 percent of farms have less than 5 ha and only 5 percent livestock holdings own more than 10 dairy cows); lower and variable productivity (e.g., average wheat yields in the southern part of the country with large segments of smaller farmers is less than half those of commercial farmers located in the north); reliance on rain-fed production systems (only 1.4 percent of the utilized agricultural land is irrigated); and lack or limited access to key resources including risk insurance and climate knowledge and information to help cope and adapt to climate impacts. The exposure to climate extremes in the country, particularly to droughts and floods, is high. The high probability of continuing increase in temperature and more frequent and prolonged droughts, changes in precipitation patterns and intensity as well as other extreme weather events will gravely disrupt traditional cultivation methods25. Component 1 specifically includes support to investments in climate smart technologies and technical assistance. Component 2 will strengthen climate knowledge and information systems. As such, the overall context of the project will contribute to diminish the climate risk in the agricultural sector. 25Drought has a negative impact on quality particularly of fresh fruits and vegetables. Lack of precipitation in the period from October to February may also adversely affect the yield of winter crops, such as sugar beet, rapeseed and others. Lack of water will also impact livestock production. Reduction of cereal yield will also impose constraints to animal feed. Flooding during sowing in spring can have detrimental impacts on fruit quality, cause delays on harvesting leading to rotting and loss of yield (especially in berries). The combination of warming, droughts, shifts in precipitation will impact the sowing period and possibly restricting sowing to one per year. Page 21 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis 56. Despite their context-specific nature, and the demand-driven approach, economic and financial analyses of productive partnership (through grants) operations globally are found to be viable types of investments in rural contexts. Economic rates of return vary across countries and range between 11 percent and 40 percent, with an average of 26 percent. The target number of partnerships is generally exceeded, as demand for rural economic coordination between producers develops. Women participation has also been found to be higher than expected at start of projects. There is also increasing evidence of positive socio-economic impacts and (largely unaccounted) positive spillover effects. Increases in sales have been found to be 20 percent to 60 percent higher than baseline, incomes have increase by 30 percent compared to control groups and improvements of quality of employment and creation of new jobs are evident26. 57. The methodology used to measure the economic viability of the project entails undertaking of a standard cost-benefit analysis with the estimation of indicators such as the Economic Rate of Return (ERR), the Net Present Value (NPV), and the Benefit-Cost Ratio (B/C), as well as a sensitivity analysis of these indicators based on changes to key variables. The stream of costs to be considered in the analysis would be based on the projected yearly financial execution of the Project during its implementation, while the stream of benefits would be based on the projected improvements in productivity and the reduction of other transactions costs of commercialization. Shadow prices would be used instead of market prices to account for market distortions, and recent World Bank guidelines with respect to economic (or social) discount rates would be followed (see Annex 3) 58. As the precise location, mix and scope of individual investments will not be known before project implementation, an ex-ante financial cost-benefit analysis of individual investments is not possible. Most of the Project activities and interventions will be demand driven. However, in order to quantify the benefits derived from the improved access to finance and entrepreneurship environment supported by the Project in Serbia, several indicative business activities were selected for the financial and economic analysis. The results of the analysis were then extrapolated to the whole project in order to identify the overall Project’s economic impact. 59. Given the benefit and cost streams, the project’s ERR is estimated at 23.1 percent. This indicates that the project is economically viable and justified and recommended for financing from the economic point of view. Sensitivity analysis suggests that the ERR can vary from as low as 14.8 percent to as high as 27.6 percent. B. Fiduciary (i) Financial Management 60. The CFU, established in MoF, will be in charge of the fiduciary function (financial management and procurement) under the project. The CFU will be responsible for implementation of the financial management (FM) arrangements of the project including, planning and budgeting, accounting, financial reporting, flow of funds (including disbursement), internal controls and external auditing. 26World Bank. 2016. Linking Farmers to Markets through Productive Alliances: An Assessment of the World Bank Experience in Latin America. Page 22 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) 61. The PMT will be established in the DAP, and under the oversight of MAFWM, and will remain responsible for technical and operational aspects of implementation. The DAP will implement the project’s MRD grant program. The POM will detail implementation arrangements, including the division of responsibilities between the PMT, DAP and the CFU. The GOM will be an integral part of the POM detailing internal controls and procedures for project implementation, including for eligibility, evaluation, selection and implementation of grants (flow of funds, reporting back). Application of the controls and procedures in practice will be verified by the Bank’s supervision. 62. The CFU has acceptable capacity and track record for meeting project fiduciary expectations, particularly: (a) adequate accounting software; (b) the audits of the active Bank-financed projects implemented by the CFU revealed no major issues, and, (c) the Interim Un-audited Financial Reports (IFRs) of the active projects were always received on time and found to be acceptable to the Bank. In addition, the CFU’s FM staff has significant experience in implementing Bank-financed projects. 63. Project management-oriented IFRs will be used for the project monitoring and supervision. The CFU will be producing a full set of IFRs every calendar semester throughout the life of the project. These financial reports will be submitted to the Bank within 45 days of the end of each calendar semester covering the semester. 64. Two Designated Accounts (DA) will be established: DA A - for all expense categories except the matching grants, and DA B - for matching grants. Both DAs will be opened at the National Bank of Serbia, and will be nominated in EUR. The control environment in the National Bank of Serbia is acceptable. Allowed methods of disbursement will be advances to the designated account, direct payments, reimbursement and special commitments. Statement of Expenditures (SOEs) based disbursement will be applied, with advances being the primary disbursement method, but direct payments and reimbursement also allowed. 65. The matching grant funds will flow to escrow accounts that the grant beneficiaries will open at the designated commercial banks. Grant beneficiaries will contribute 10 percent of the approved investment amounts, the commercial banks 40 percent, in the form of credits. MAFWM will contribute the remaining 50 percent as matching grants, which will be financed from the loan, and will be deposited to the escrow account by DAP through the PMT through a transfer from the project DA. The beneficiaries will draw funds from escrow accounts in approved tranches. 66. The annual audited project financial statements will be provided to the Bank within six months of the end of each fiscal year and at the closing of the project. The audit will be conducted by a private audit firm acceptable to the Bank and in line with agreed Terms of Reference (ToR). The audit ToR will extend the scope in order to assess applied procedures regarding grants and level of their alignment with POM and GOM. MAFWM will disclose the audit reports for the project within two weeks of their receipt from the auditors and acceptance by the Bank, by posting the reports on its web site. Following the Bank's formal acceptance of these reports, the Bank will make them publicly available according to the World Bank Policy on Access to Information. (ii) Procurement 67. The overall implementation and oversight of procurement will be carried out by the CFU. The initial procurement risk rating is substantial primarily due to imminent staff capacity and coordination issues between stakeholders as well as information technology (IT) hardware and software procurement. Procurement will be conducted in accordance with the World Bank’s Procurement Regulations for IPF Borrowers: Procurement in Investment Project Financing – Goods, Works, Non-Consulting and Consulting Services (July 2016, revised Page 23 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) November 2017 and August 2018). The project will also be subject to the World Bank’s Anti-Corruption Guidelines, dated July 1, 2016. More details on procurement arrangements are provided in the PPSD. The Systematic Tracking of Exchanges in Procurement (STEP) tool will be used for implementation of procurement procedures. 68. Risks and Mitigation Measures. Risks Mitigation Measures CFU capacity to handle additional Hire additional procurement specialist and financial management specialist. projects. Selection of PMT staff, in (a) TOR for each position will be reviewed and approved by the Bank; particular the Project (b) Selection of Project Coordinator is subject to the Bank’s prior review; and Coordinator, can potentially be (c) Although other PMT staff positions are subject to post review, evaluation contentious. reports and CVs of candidates will be shared with the Bank before inviting the selected consultant for negotiations. PMT capacity in preparing TORs Hire consultants to supplement or increase the PMT capacity. and technical specifications. PMT capacity in evaluating bids (a) Provide training to members of the Evaluation Committee and PMT staff; and consultant’s proposals. (b) CFU Procurement Specialist to provide guidance to Evaluation Committee members; and (c) PMT staff should attend procurement training organized by the World Bank procurement team in Belgrade. Coordination challenges between (a) Clarify roles and responsibilities of PMT and CFU staff; the PMT and the CFU staff which (b) POM has been prepared to guide PMT and CFU staff; and could delay submission of (c) Regular meetings between the PMT and the CFU and submission of progress documents in STEP. reports to the Bank. .C. Legal Operational Policies . Triggered? Projects on International Waterways OP 7.50 Yes Projects in Disputed Areas OP 7.60 No . 69. Exception to the Notification Requirement under OP 7.50 – Projects on International Waterways. The Policy is applicable to this project because the activities will involve the use or potential pollution of the Danube and its tributaries. The exception to the notification requirement based on paragraph 7 (a) of the Policy applies because activities will be limited to minor additions and alterations, not exceeding existing schemes and the Project will not finance any off-farm irrigation construction or rehabilitation activities and the proposed project will not have any adverse effect on the quantity or quality of water flows to other riparians and will not be adversely affected by the other riparians' possible water use. The procedures for allocation of matching grants, which will be specified in the Project and in the Grant Operational Manual, will explicitly exclude the establishment of new off-farm irrigation systems and expansion of existing irrigation systems. As the grant program is demand- driven, it is currently not known how many irrigation or aquaculture related activities will be eligible for funding. However, based on ex-ante assessments, it is expected that irrigation technologies and aquaculture investments will constitute only a small part of the activities funded under the project. The memorandum on the exception to the notification requirement based on paragraph 7 (a) of the Policy was approved by the Bank’s Regional Vice President on October 11, 2019. Page 24 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) D. Environmental and Social 70. The project is classified as Moderate Risk taking in account the low risk nature of the interventions, the limitations on implementation capacity, the application of environmentally friendly practices and new technologies, and the difficulty of enforcing workers’ rights in multiple SME agribusinesses. No adverse impacts such as involuntary land acquisition, impacts on community health and safety, on cultural heritage, are expected. Some of the project funded activities may include support to small scale community agriculture that is undertaken within areas under some level of environmental protection. The project will introduce new technologies and support improvement of technical knowledge and skills of beneficiaries on, amongst other, water and energy efficiency, pollution prevention and best practice use of herbicides and pesticides. The project’s anticipated social impacts are predominantly positive, such as increased income and employment in the agricultural sector as well as protection from climate related economic losses for farmers through the introduction of an early warning system. The MAFWM has prepared a draft Environmental and Social Management Framework (ESMF) with a targeted environmental and social screening methodology for agri-food producers/MSMEs in the agricultural sector. Given the prevalence of labor informality in the agricultural sector in Serbia, the ESMF includes mitigation measures through application screening, labor and working conditions reporting requirements and by providing grantee workers access to the project grievance mechanism. The environmental and social screening criteria developed for the agricultural grant schemes will screen for relevant environmental and social risks and apply mitigation hierarchy. On October 11, 2019, the draft ESMF was cleared by the Bank and disclosed in Serbian on the MAFWM website. On October 14, 2019 consultations were announced in national newspapers. The draft ESMF was discussed in a stakeholder's consultation workshop on October 23, 2019. Thereafter, the ESMF was finalized with a summary of consultations and the final version of the document was re-disclosed on the client’s website and sent to the World Bank’s external website on November 8, 2019. V. GRIEVANCE REDRESS SERVICES 71. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products- and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. VI. KEY RISKS 72. Political and Governance – Regular elections in Serbia scheduled for the spring of 2020 may interrupt the continuity of the dialogue in the agricultural sector with the current authorities in the Ministries of Agriculture and Finance. Moreover, reforms in the next CAP programming period may shift priorities within the EU structures with this project activities will align. Therefore, the political risk is rated as Substantial. Mitigation: Close Page 25 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) coordination between World Bank Country Management Unit and technical teams with Government and EU have been central to the project preparation process to ensure broad ownership among government and sector stakeholders. This will be continued in implementation. 73. Technical Design of Project – The context within which this project is being developed is complex and characterized by heterogeneity of productive units and their access to productive inputs, financial and other technical assistance, asymmetric information, diversity of crops and regional market dynamics all make attribution and correct measurement of results challenging. Furthermore, the set-up of IT applications and their number, although intended to improve information and knowledge flow for better decision-making, can become difficult to manage as each application requires data quality checks and continuous oversight to ensure its functionality. Based on this, the technical design of the project risk is rated as Substantial. Mitigation: The project structure is kept simple and focused on specific results, which will be closely monitored through the information systems put in place under the project. A rapid needs assessment on the status of IT systems and applications was carried out during project preparation and a strategy for their prioritized improvement will be developed early during project implementation. 74. Institutional Capacity for Implementation and Sustainability – The overall weak capacity of MAFWM and its related public entities is an important limitation. Capacity is higher in the DAP, although the demand for their services (grant processing) exceeds their ability to adequately respond in a timely matter. Although this provides an opportunity to develop capacity and strengthen the World Bank and MAFWM collaboration, it also imposes a risk to project implementation. We assess the institutional risk as Substantial. Mitigation: The World Bank team will work closely with the MAFWM team to provide all the necessary training and technical support during preparation and implementation of the project. A PMT that integrates consultants will be established in the DAP. Collaboration with other programs and important players in the agricultural sector in Serbia, such as EU, FAO, EBRD, USAID will also be sought to strengthen the knowledge base and support implementation. 75. Fiduciary – Procurement capacity assessment of MAFWM and DAP was conducted in January 2019. Although the fiduciary assessment of the DAP deemed it acceptable, its overall capacity for adequate processing and monitoring of grant applications is a potential risk. Furthermore, due to a recent allegation of corruption in the DAP, unrelated to any Bank funds, the fiduciary risk of the project is Substantial. Mitigation: To mitigate this risk, the Bank will establish a rigorous system for oversight of the project’s grant program. The POM will detail implementation arrangements, including the division of responsibilities between the PMT, DAP and the CFU. This arrangement would effectively mean that the PMT and DAP design activities, provide technical input, evaluate and select contractors, monitor and evaluate implementation, act as signatory to the contracts, letters of acceptance of goods and services, and have main roles in budgeting for the project as the project funds are part of the implementing entities’ budget. The DAP will hire additional staff under the project to help implement the Grant, e.g. Grant Coordinator, Grant Procurement Specialist. Finally, CFU will hire additional staff (procurement and FM specialists) in November 2019 as agreed under the Tax Administration Modernization Project (P127734), recently approved by the Board. 76. Environmental and Social - The project is classified as Moderate risk taking in account the low risk nature of the interventions, the limitations on implementation capacity, the application of environmentally friendly practices and new technologies, and the difficulty of enforcing workers’ rights in multiple SME agribusinesses. No adverse impacts such as involuntary land acquisition, impacts on community health and safety, on cultural heritage, are expected. Some of the project funded activities may include support to small scale community agriculture that is undertaken within areas under some level of environmental protection. The project will Page 26 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) introduce new technologies and support improvement of technical knowledge and skills of beneficiaries on, amongst other, water and energy efficiency, pollution prevention and best practice use of herbicides and pesticides. The project’s anticipated social impacts are predominantly positive, such as increased income and employment in the agricultural sector as well as protection from climate and animal health related economic losses for farmers through the introduction of early warning and communication systems. Given the prevalence of labor informality in the agricultural sector in Serbia, the Borrower will require grantees to contractually enforce the national labor law. The environmental and social screening criteria developed for the agricultural grant schemes will screen for relevant environmental and social risks and apply mitigation hierarchy. 77. Other – Serbian agriculture is very susceptible to climate variability with limited use of risk management tools by agricultural producers, most of whom rely on rainfed agriculture. Extreme events may cause significant damage to project beneficiaries. Over the past two decades, droughts, floods, exceptionally harsh winters and other weather-related extreme events have caused major physical damage, financial losses and even deaths, with significant impacts on the economy, especially in the agricultural sector. In 2012, for more than 50 days, temperatures exceeded 35 degrees centigrade resulting in more than one million ha of lost agricultural production and over US$141 million in damages. In 2014, floods affected more than 1.5 million people (20 percent of the population) and caused US$2 billion in damages. Mitigation: Climate smart agriculture approaches will be considered under Component 1 of the project related to production decisions as well options through access to finance. Under Component 2, climate variables will be made available to all stakeholders for their decision making. . Page 27 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) VII. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY: Serbia Serbia Competitive Agriculture Project (SCAP) Project Development Objectives(s) Improve agri-food market linkages of targeted beneficiaries. Project Development Objective Indicators RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline End Target Improve agri-food market linkages New formal contracts signed between beneficiaries and buyers 0.00 1,230.00 of their products/services (Number) New formal contracts signed between women beneficiaries 0.00 300.00 and buyers of their products/services (Number) Increase in the value of beneficiaries’ production (Percentage) 0.00 20.00 PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline End Target Component 1. Improving the value-added of agriculture Page 28 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline End Target Beneficiaries successfully completing their business plans 0.00 1,230.00 (Number) Farmers reached with agricultural assets or services (CRI, 0.00 5,500.00 Number) Farmers reached with agricultural assets or services - Female (CRI, Number) 0.00 1,375.00 Surveyed beneficiary women that report training/advisory 0.00 95.00 services offered were responsive to their needs (Percentage) Beneficiaries reached with financial services (CRI, Number) 0.00 1,230.00 Number of previously unbanked adults reached with transaction accounts (CRI, Number) 0.00 300.00 Productivity increase of beneficiary production (Percentage) 0.00 10.00 Component 2. Improving the capacity of MAFWM to support modern agriculture Applications accessible from the integrated data platform of 0.00 6.00 MAFWM (Number) Users of the integrated information platform reporting satisfaction (satisfied or very satisfied) with the information 0.00 90.00 received via the platform (Percentage) Unique users of the integrated information system (Number) 0.00 10,000.00 IO Table SPACE UL Table SPACE Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection New formal contracts signed between A one-to-one The indicator Project Project Management Page 29 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) beneficiaries and buyers of their correspondence between will be monitoring Team products/services grant approval/business measured system plan and new contract twice formulation can ideally be per year assumed - it is expected that the project will support 1,230 grants (1,144 for producers and 86 for producer groups and SMEs) and for each grant, at least one new contract will be formulated, for a minimum of 1,230 contracts. However, not all business plans will yield a new contract, while some may lead to more than one new contract. Hence, on average, it is expected that 1,230 new contracts are likely to materialize. It is expected that close to The indicator 25% of target beneficiaries will be Project New formal contracts signed between Project Management will be women. In the farm measured monitoring women beneficiaries and buyers of Team register of Serbia, 28% of all twice per system their products/services holdings are headed by year women. It is expected that with the The indicator Project provided technical will be Project Management Increase in the value of beneficiaries’ monitoring assistance, knowledge will measured Team production system improve, productivity will twice increase and so will product per year. Page 30 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) quality, which would lead to value increase. The increase of the value of production will be captured per awarded grant and the average across all grant value increases will be presented here. ME PDO Table SPACE Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection A "successful completion" of a business plan constitutes an approved loan, compliance with standards and fulfillment of milestones The as defined in the business indicator Project plan. A successfully will be Project Management Beneficiaries successfully completing their monitoring completed business plan measured Team business plans system may not result in a signed twice per contract. A one-to-one year correspondence is assumed between number of grants awarded and number of business plans successfully completed. This indicator measures the The Project Project Management Farmers reached with agricultural assets number of farmers who indicator monitoring Team or services were provided with will be system Page 31 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) agricultural assets or measured services as a result of World twice Bank project support. per year "Agriculture" or "Agricultural" includes: crops, livestock, capture fisheries, aquaculture, agroforestry, timber, and non-timber forest products. Assets include property, biological assets, and farm and processing equipment. Biological assets may include animal agriculture breeds (e.g., livestock, fisheries) and genetic material of livestock, crops, trees, and shrubs (including fiber and fuel crops). Services include research, extension, training, education, ICTs, inputs (e.g., fertilizers, pesticides, labor), production-related services (e.g., soil testing, animal health/veterinary services), phyto-sanitary and food safety services, agricultural marketing support services (e.g., price monitoring, export promotion), access to farm and post-harvest Page 32 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) machinery and storage facilities, employment, irrigation and drainage, and finance. Farmers are people engaged in agricultural activities or members of an agriculture-related business (disaggregated by men and women) targeted by the project. The indicator Project will be Project Management Farmers reached with agricultural monitoring measured Team assets or services - Female system twice per year Project Surveyed beneficiary women that report Project Management The indicator will be monitoring training/advisory services offered were Team measured twice a year system responsive to their needs The indicator Project will be Project Management Beneficiaries reached with financial monitoring measured Team services system twice per year The Project Number of previously unbanked Project Management indicator monitoring adults reached with transaction Team will be system accounts measured Page 33 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) twice per year The Productivity increase will be indicator measured by increase in Project will be Project Management Productivity increase of beneficiary yield per type of production monitoring measured Team production (per head, per ha) and per system twice grant received and then per year averaged across all grants. These constitute the different data inputs to be brought together into one integrated platform, such as 1) price per product; 2) The weather data (rainfall and indicator Project temperature per region); 3) will be Project Management Applications accessible from the monitoring volumes produced / traded measured Team integrated data platform of MAFWM system per product; 4) twice per support/advisory services year (sub-sets of data on veterinary, SPS, plant protection); 5) incentives; 6) project specific application (business plans information) The indicator Users of the integrated information Project will be Project Management platform reporting satisfaction (satisfied monitoring measured Team or very satisfied) with the information system twice per received via the platform year Page 34 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) The There are 350,000 indicator Project registered farmers; hence, it will be Project Management Unique users of the integrated management is expected that at a measured Team information system system minimum there are 10,000 twice per unique users of the system. year ME IO Table SPACE Page 35 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) ANNEX 1: Implementation Arrangements and Support Plan Project Management Coordination and oversight 1. The implementing agency for the project will be MAFWM through its relevant departments and units, among others, the Sector for Rural Development, Sector for Agrarian Policy, DAP and Information Technology Group. A Project Steering Committee (PSC) will be established and maintained throughout the life of the project to ensure overall coordination and strategic guidance functions. The PSC will be chaired by the DAP Director and will include the PMT Project Coordinator as well as the Assistant Ministers/Managers in charge of the Sector for Rural Development, Sector for Agrarian Policy, Information Technology Group, Advisory Services, Ministry of Finance; and representatives of beneficiaries (civil society, local institutions, private sector). Day- to-day Implementation 2. A PMT will be established to support project implementation and it will be placed with the Directorate for Agrarian Payments, which is responsible for execution of the rural development investment support programs financed through the national budget and IPARD. The PMT will consists of a Project Coordinator, M&E Specialist, ICT Coordinator, Social and Environmental Safeguards Specialist, Grants Coordinator, and a Grant Procurement Specialist. Temporary Grants Processors would be recruited to help process applications submitted under each call for proposals. The PMT will be responsible for the technical and operational aspects of implementation, including the development of annual work plans and progress reports and monitoring the implementation of these plans. The PMT will ensure that all project deliverables that are submitted to the Government of Serbia are of high quality and on time. It will participate in regular field visits to the project areas to assure project progress towards activity objectives and goals. Monitoring and Evaluation 3. An M&E Unit will be established in MAFWM at the central level to oversee the M&E activities of the whole agricultural and rural development sector, including the Project. It is envisaged that the Unit will comprise of two staff members from Ministry’s existing staff structure, and the Head of the Unit or Project Manager recruited (local consultancy) by the PHRD Grant. The M&E Unit at MAFWM will be supported by the CFU. An M&E specialist will be hired under the project (and be part of the PMT) to oversee project-specific M&E and will liaise with the M&E Unit of MAFWM. Fiduciary 4. The CFU, housed in MoF, will perform the fiduciary function for the project. The CFU was established within the Ministry of Finance in October 2017 to provide fiduciary support (procurement and financial management activities) to all World Bank supported projects in Serbia. Currently, the CFU team consists of Director, Head of Operations, two Procurement Specialists and Financial Management Specialist (FMS), and the hiring process for another procurement specialist and FMS is under way. The CFU has an Operation Manual and is currently responsible for procurement and financial management of five WB financed projects (ECEC, SOFI, TAMP, WBTTF, and EDGE) and a Trust Fund for Reform on Financial Reporting. The CFU also supports project preparation process and will be guiding the MAFWM and DAP through the preparation of the PPSD, the PP and the POM. The cost of CFU staff will be shared across all the portfolio of investment projects supported by them Page 36 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) on a rotation basis. A Memorandum of Understanding will be signed between the MoF and MAFWM regarding fiduciary aspects of project implementation pertaining to matching grants. Procurement Procurement Thresholds 5. The prior review thresholds for substantial risk projects as provided in the ECA Regional Procurement Maximum Thresholds, effective January 2, 2014 (revised November 15, 2017) will apply: Works - US$10,000,000; Goods, IT System and Non-Consulting Services – US$2,000,000; Consulting Firms – US$1,000,000; and Individual Consultants – $300,000. Direct Selection will be in accordance with paras. 6.8 to 6.10 for Goods, Works and Non- Consulting Services and paras. 7.13-7.15 for Consulting Services of the Procurement Regulations. There is no package/activity subject to OPRC review. 6. The above thresholds, based on the procurement risk rating, may be modified during project implementation depending on the performance of the CFU and PMT in implementing procurement activities. All TORs for consulting services are subject to prior review irrespective of procurement prior/post review status. Procurement Methods and Procedures are described in detail in the POM. 7. The CFU Procurement Specialist is in charge of preparing the evaluation reports based on the work of the EC. The EC applies the evaluation criteria set out in the Request for Proposal (RFP). It is not authorized to change, amend, or modify the technical specifications and TORs. Post-review Percentages and Frequency 8. Contracts not subject to Bank’s prior review would be subject to post review by the Bank’s procurement specialist. Post review of contracts will be carried out at least once a year. At a minimum, one out of five contracts will be randomly selected for post review. For all procurement, the Bank’s Standard Procurement Documents will be used. Financial Management Planning and Budgeting 9. The project’s budget will be prepared by MAFWM/PMT with the overall support from the CFU. There is sufficient capacity for planning and budgeting within CFU in order to manage project funds in terms of optimal allocation, liquidity and overall performance. Variances of actual versus budgeted figures should be monitored on a regular basis, appropriately analyzed, and corrective actions taken. The CFU will prepare in-year financial plans and cash forecasts based on the project’s budget, thus ensuring adequate liquidity management and withdrawal of funds. Supervision 10. During project implementation, the Bank will supervise the project’s financial management arrangements in two main ways: (i) review the project’s interim un-audited financial reports for each calendar quarter, as well as the project’s annual audited financial statements and auditor’s management letter; and (ii) perform on-site supervisions, review the project’s financial management and disbursement arrangements to ensure compliance Page 37 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) with the Bank's minimum requirements. The on-site supervision will include monitoring of agreed actions, review of randomly selected transactions, review of internal controls, and other specific supervision activities. Supervision will be performed by the Bank accredited Financial Management Specialist. Accounting System 11. Acceptable accounting software is in place and administered by the CFU, and it will be used for project accounting and reporting. Accounting records should include appropriate analytics of expenditures per contracts and each specific payment. The project will follow cash basis of accounting (cash based IPSAS), recording transactions when actual payment is done, rather than when they are incurred. Transactions should be accounted for within eight days after incurring. There should be appropriate back up of accounting records on external drives, as well as appropriate security regulation with regard to access and editing rights of the financial information. Internal Controls 12. Procedures and controls to be applied on the project will be detailed in the POM and, given the substantial amount of project allocated for grants, GOM. The POM should detail procedures and processes regarding planning and budgeting, accounting, financial reporting, internal controls, flow of funds and external audit for the project. It should also describe roles and responsibilities and communication channels and modes between the MAFWM/PMT, DAP and the CFU. This will minimize risk of an error, safeguard project’s assets and ensure use of funds for intended purposes. Application of the controls and procedures will be verified by the Bank’s supervision. Some of the key internal controls to be applied for the project should include: (i) appropriate authorizations and approvals of all purchases, relevant documentation, transactions of payments etc.; (ii) segregation of duties as different persons are responsible for different phases of a transaction; (iii) reconciliations between project accounting records and other relevant sources of information (Client Connection, bank account statements etc.) performed at least monthly by senior finance staff; and (iv) original documentation supporting all project transactions properly filed. 13. Sub-component 1.2. Facilitating access to finance for productive investments will finance rural development matching grants to two groups of beneficiaries (agricultural holdings and agri-food processing units) so there is a requirement of the adoption of detailed GOMs by the implementing entity, detailing procedures for eligibility, evaluation, selection and implementation of grants (flow of funds, reporting back, role of commercial banks and the administration of the escrow account etc.). Contract Management 14. Contract implementation will be monitored by the implementing entity. Checks and controls of the total contract amount and payments which are due will be checked before each payment under contracts by CFU as well. Respective technical staff and CFU will review and approve invoices and accompanying documentation against contracts provisions for ceilings, dynamics of payments and quality of deliverables. Page 38 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Financial Reporting 15. The CFU will submit a full set of interim un-audited financial reports (IFRs) consolidated for all implementing agencies and project components and sub-components for each calendar quarter throughout the life of the project. The IFRs will be due 45 days after the end of each quarter. The format of the IFRs will be agreed between the Government of Serbia and the World Bank and attached to the minutes of negotiation and the POM. The following financial reports will be submitted to the World Bank: • The Statement of Cash Receipts and Payments, • The Statement of Expenditure by Activity • Designated Accounts Statements • Statement of Grants Breakdown by Beneficiaries • Notes to the Statements. 16. CFU has acceptable accounting software and it will be used for project accounting and reporting, including quarterly IFRs and annual project financial statements. External Audit 17. The annual audit of the project financial statements will be conducted by a private audit firm acceptable to the Bank in line with agreed Terms of Reference. The ToR will be agreed between the GoS and the Bank and attached to the minutes of negotiation and the POM. In addition, the audit will include extension of scope to grants and level of their alignment with the GOM. It should include verification of the adequacy of financial reports delivered by the grant beneficiaries in relation to the accompanying documentation (contracts, invoices) and performance review at least on a sample basis to ensure that agreed outputs are delivered in an efficient manner with respect to grant facility. The audit of project financial statements will be funded by the project. The audit report will be submitted to the Bank no later than six months after the end of the audited period The audited project financial statements will be posted by the MAFWM/PMT website within 2 weeks upon the audit report being accepted by the World Bank. Financial Management Covenants 18. The financial management covenants for the project will be as follows: (i) CFU to maintain an adequate financial management system. (ii) CFU to prepare interim un-audited financial reports (IFRs) for each calendar quarter and deliver to the Bank no later than 45 days after the end of the reporting quarter. (iii) Annual project financial statements audited by a private audit firm acceptable to the Bank and such audit to be delivered to the Bank not later than six months after the end of the audited period. Action Plan 19. The implementation of the following actions has been agreed with the Government of Republic of Serbia in order to finalize the financial management arrangements. The listed actions do not represent legal conditions/covenants. Page 39 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Table 1. Financial Management Mitigation Actions Action Deadline Responsible POM and GOM prepared describing controls and Draft POM and GOM ready by MAFWM/PMT and DAP procedures for the project. negotiations. Final POM and GOM ready by effectiveness date. Additional FMS at CFU to be hired. By effectiveness date. MoF MoU signed with selected commercial banks. By negotiation. MAFWM/PMT and DAP Funds Flow and Disbursement Arrangements 20. Project funds will flow from the World Bank Loan Account to two Designated Accounts (DA) opened by MAFWM/PMT at the National Bank of Serbia: DA A - for all expense categories except the matching grants, and DA B - for matching grants. These will be foreign currency (EUR) accounts from which the funds will be withdrawn and will be used only for the purpose of inflows and outflows under respective project’s components. Payments in foreign currency to contractors based abroad will be executed directly from DA. Funds needed for payments in local currency will be transferred to the corresponding RSD records accounts opened with Treasury for the same purpose. 21. MAFWM/PMT will prepare withdrawal applications for the replenishment of the DA. Allowed methods of disbursement will be advances to the designated account, direct payments, reimbursement and special commitments. 22. The grants funds will follow a special financial mechanism through escrow accounts. Once the pre- approval process is completed by the commercial banks for their respective credit portion of the investment sub- project, the MAFWM/PMT will provide the final authorization for utilization of the grants. Subsequently, the grant beneficiaries will open escrow accounts with selected commercial banks to which they will deposit 10 percent of the grant amount. The commercial banks will deposit 40 percent of the grant amount in the form of credit approved to the beneficiaries. The remaining 50 percent will be deposited by the MAFWM/PMT through a transfer from the project DA. During the implementation of the sub-project, the funds will flow in tranches from the escrow account to the beneficiaries’ giro account based on approved payment requests. 23. The ceiling for the DA will be defined in the Disbursement Letter that accompanies Loan Agreement. Applications for replenishment of the DA will be submitted monthly or when one-third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow standard Bank procedures as described in Disbursement Handbook. Before funds from the Loan Account may be withdrawn or committed, the authorized representative of the implementing entities, as designated in the Loan Agreement, must furnish to the World Bank, electronically through the Client Connection website (http://clientconnection.worldbank.org), or through an authorized signatory designation letter, the names of the officials authorized (a) to sign and submit applications for withdrawal and (b) to receive Secure Identification Credentials (SIDC) from the World Bank. Page 40 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Page 41 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Environmental and Social Standards Environment and Social Management Framework 24. The environmental and social standards of the SCAP are governed by the World Bank’s new Environment and Social Framework (ESF). An Environment and Social Management Framework (ESMF) has been prepared for SCAP to avoid, minimize or mitigate, potential negative environmental and related social impacts caused by implementation of the project. Labor Management Procedures (LMP) are fully integrated into the ESMF (under Chapter Eight - Environmental and Social risk management). A competitive grant approach is chosen for part of the Project possibly soliciting a wide range of beneficiaries and activities which why the Framework approach is deemed to be adequate. The Framework ensures that the identified subprojects are correctly assessed from environmental and social point of view to meet the WB’s Environmental and Social Framework (ESF) and its applicable Standards, as well as the Environmental and Social Laws and Regulations of the Republic of Serbia for adequate mitigation of any residual and/or unavoidable impacts. In particular, the Framework serves as a guidance tool for the PMT and CFU, the implementing agencies, and any other stakeholder with implementation roles, in identifying and assessing the potential environmental and social impacts of subprojects and ensuring necessary mitigation measures are taken on board by any third party as relevant to minimize or prevent any adverse environment and social adverse. The Framework will also serve as guidance on environmental and social monitoring and reporting. Under the ESMF procedures and guidelines, there are details on responsibilities for subproject preparation, screening/appraisal, implementation and monitoring. ESMF guidelines will assist in outlining what is required for the subproject Environmental and Social Management Plans (ESMPs). They also include guidelines for proposed small to micro-scale construction subprojects in the form of an ESMP checklist. ESMF Implementation 25. The ESMF outlines detailed implementation arrangements at the level of the project and the matching grants component of the project. In addition to an Environmental and Social Safeguards Specialist, the MAFWM PMT will recruit a grants coordinator and grants processors, including engineers and/or specialists with experience in environmental and social impacts identification, mitigating measures. They will verify ESMF implementation reports and build public extension service capacity on environmental and social management issues and possible mitigating measures. As this is the first project with MAFWM PMT prepared under the Bank’s new ESF, the client’s capacity to deliver an ESF-based project is limited. Therefore, capacity building for the client including PMT Environmental and Social Safeguards and grants management, extension services providers, and local structures will be included in the ESMF as well in other environmental and social instruments to be prepared during preparation and implementation. To improve institutional capacities with regard to ESMF implementation the WB Environmental and Social Specialists will provide special training for the MAFWM PMT, Extension Services and TA service providers staff focused on: (i) Procedural aspects of ESA (stages, key actors, main responsibilities etc.); (ii) Assessment of environmental and social impacts potentially related to the subproject supported within the project; (iii) Consulting and approval of the ESA and monitoring plans; and (iii) preparing ESMP Checklist; (iv) Conducting field supervision and preparing progress reports. The project will also support training and capacity building of sub-project beneficiaries. Page 42 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Grievance Redress 26. Communities and individuals who believe that they are adversely affected by the SCAP project may submit complaints to the project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS) both of which are outlined in the SEP and ESMF. A Project level grievance mechanism (GM) will be established with two main entry points for grievances: a) DAP’s existing Information Centre for the national support program and b) a feedback space made available through the Open Data Platform developed by the project. To ensure GM access, potential beneficiaries, communities and other stakeholders may submit grievances through Local Governments and numerous Ministry channels as outlined in the SEP and ESMF. The GM will also provide the opportunity for continued feedback on the grant scheme and resolution of individual grievances during implementation. Procedures related to complaints handling are included in the Grants Operational Manual and posted on the MAFWM’s website to ensure full transparency. The GM shall serve as both, Project level information center and grievance mechanism, available to those affected by implementation of all Project sub-components and be applicable to all Project activities and relevant to all local communities affected by project activities. 27. The GM shall be responsible for receiving and responding to grievances and comments of the following three (3) groups: i. A person/legal entity directly affected by the project, potential beneficiaries of the Project, ii. Stakeholders - people with interest in the project, and iii. Residents/communities interested in and/or affected by project activities. 28. The GM shall be effective prior to commencement of the Grant Program, in order to manage and appropriately answer complaints during its different phases. It will be authorized to receive questions/complaints in respect to the marching grant scheme, including the eligibility criteria, adequacy of support to women, adequacy of TA services, adequacy of stakeholder engagement and the Environmental and Social performance of sub-grants. In addition to the GM, legal remedies available under the national legislation are also available (courts, inspections, administrative authorities etc.). 29. MAFWM will be responsible for establishing a functioning GM and informing stakeholders about the GM role and function, the contact persons and the procedures to submit a complaint in the affected areas. Information on the GM will be available: • on the website of the MAFWM (http://www.minpolj.gov.rs/.) • on the notice boards and websites of Local Governments • through the Ministry’s social media account https://twitter.com/poljoprivredars and https://es- la.facebook.com Page 43 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) ANNEX 2: Greenhouse Gas (GHG) Analysis Methodology and tools used The Ex-Ante Carbon-balance Tool (EX-ACT) is an appraisal system developed by FAO providing estimates of the impact of agriculture and forestry development projects, programs and policies on the carbon-balance. The carbon-balance is defined as the net balance from all greenhouse gases (GHGs) expressed in CO2 equivalent that were emitted or sequestered due to project implementation as compared to a business-as-usual scenario. Ex-ante analysis assesses future GHG emissions before project implementation. The minimum duration to assess future GHG emissions in EX-ACT is 20 years. EX-ACT is a land-based accounting system, estimating C stock changes (i.e. emissions or sinks of CO2) as well as GHG emissions per unit of land, expressed in equivalent tones of CO2 per hectare and year. The tool helps project designers to estimate and prioritize project activities with high benefits in economic and climate change mitigation terms. The amount of GHG mitigation may also be used as part of economic analyses as well as for the application for additional project funds. Since most of the Project activities and interventions will be demand driven and at this stage it is quite difficult to identify the exact number and types of business sub-projects that should be considered in the GHG analysis. Therefore, some preliminary estimations of the number and types of sub-projects that the Project will support in order to develop rural entrepreneurship were made, mainly based on the financial and economic analysis data. Based on these estimations, the agricultural area, number of livestock, energy consumption, workshops, etc. that would have an impact on GHG analysis were also estimated. Specific settings were selected for SCAP considering the climate, moisture conditions and dominant soil type in the region. Normally, the minimum project duration time in EX-ACT to make a carbon balance estimation is 20 years. Implementation of the project will be 5 years and the rest 15 years goes to the capitalization phase. Project interventions supported by the SCAP Since the Project is demand-driven, the total area under annual and perennial crops that will be established within the Project were estimated and the following assumptions were applied: (i) According to the Statistical Office of the Republic of Serbia, in 2016 crops constituted 70% and animal output constituted 27% of the total agricultural output in Serbia; (ii) According to Statistical Pocketbook of the Republic of Serbia (2019), in 2017 share of annual and perennial crops out of total agricultural land were 94% and 6%, respectively; (iii) Considering the average investments on establishment of 1ha crop farms derived from the financial analysis, the total area of annual and perennial crop farms was estimated: 5,466 ha for annual crops and 98 ha for perennial crops, and (iv) Considering the average investments on establishment of livestock farms derived from the financial analysis, the total number of cattle – 22,794 heads was estimated. Annual systems crop production module According to the estimation, the grants for farmers will support introduction on improved agriculture practices on the area of about 5,466 ha of annual crops in With Project scenario. The total amount of CO2-eq that will be mitigated due the improved management in annual crops production such as improved agronomic practices, improved nutrient management, no till and residue retention, improved water management and manure application is captured. Page 44 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Perennial systems crop production module It is estimated that grants for farmers will also support the establishment of the intensive production of perennial crops on the area of 98 ha. The CO2-eg will be mitigated due to the higher rates of soil C sequestration of intensive perennial crops production (1.0 t CO2/ha/year) compared to conventional one (0.51 t CO2/ha/year). Livestock production module In the livestock production module estimates the GHG balance of the livestock farmers which will potentially benefit from the project. The total number of livestock units which will be impacted by the project is estimated to be 22,794. It is expected that the project grants for farmers combined with trainings will support the farmers to introduce efficient feeding practices, including using specific agents and nutrients for CH4 reduction, breeding practices to improve productivity and management practices, however the total number of livestock impacted by the project will remain unchanged. In the situation with the project it is assumed that 80% of farmers will successfully introduce the improved practices compared to the situation without the project. The table below demonstrates the balance between With and Without Project scenarios of livestock production. Inputs and Energy consumption module Total amount of fertilizers that will be applied to the total project area of 5,564 ha (both annual and perennial) was estimated. According to financial and economic models, the average amount of nitrogen, phosphorus and potassium used per 1ha of crop area per year is 152kg, 75kg and 145kg, respectively. This module also estimates the GHG balance of energy consumption - under sub-component 1.2, the grants for SMEs which include investment into agricultural processing. Based on similar projects, it was estimated that in total around 18 newly established processing facilities will consume 4,000 MWh of electricity per year. EX-ACT Results module The net carbon balance is the difference between the gross results of With and Without Project scenarios achieved during 20 years, including 5 years of project implementation and 15 years of capitalization periods. This amount is estimated at 118,987 tCO2-eq of mitigated emissions. This improvement has been reached due to improved agricultural practices in crop production (-287,070 tCO2-eq) and improved livestock management (-45,115 tCO2- eq). As for the emissions part, 213,198 tCO2-eq will be made under inputs and investment section. The total balance of -118,987 can be translated into -21 tCO2-eq per hectare over 20 years period or -1.1 tCO2-eq per hectare per year. Page 45 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) ANNEX 3: Economic and Financial Analysis I. Project Benefits Approach. An economic and financial analysis was carried out in line with the Bank’s guidelines on financial and economic analysis and based on the guidance on assessing the shadow price of carbon. This includes assessing carbon externalities associated with projects and will build on the Greenhouse Gas Accounting exercise and incorporate shadow carbon pricing in the economic analysis described. The financial and economic analysis is based on data and information gathered during project preparation, including interviews with farmers and entrepreneurs, information from Government agencies and donor agencies. In particular, information on labor and input requirements for various operations, capital costs, prevailing wages, yields, farm gate and market prices of commodities, input and farm-to-market transport costs was collected. Conservative assumptions were made both for inputs and outputs, and the possible risks were taken into account. Prices for commodities/inputs reflect annual averages and those actually paid/ received by the producer. The models show only incremental revenues and costs generated by the new investments. Expected benefits: Quantifiable benefits of the project are expected from: (a) improved productivity due to strengthened advisory and technical support; (b) improved market access for small and medium scale farmers (including finance and business planning capacity); (c) improved government systems to strengthen the enabling environment for all agricultural producers (including capacity building for the Ministry, information systems, data platform); (d) improved access to finance (matching grants); (e) increased success rate of subprojects (due to business incubation). Project benefits would derive from increased productivity and production in project- supported sub-projects resulting from the introduction of improved management practices, including intensive technologies, usage of improved seeds and varieties in agriculture, better business planning and skills and improved access to markets due to but not limited to the business incubation. There are also some unquantifiable benefits that can be attributed to the Project that were also considered in the analysis: (a) improved infrastructure such as better access to water, roads and markets which has a value added to increasing the competitiveness of different value chain actors including production units; (b) knowledge and skills gained within the project will be useful for farmers and rural entrepreneurs in other activities beyond the scope of the project; (c) facilitation of expansion and/or pilot provision of financial services to the smallholders and rural entrepreneurs in a lower credit risk environment by other financial institutions because of established deeper value chain networks and wider support to the business development by the project; and (d) better understanding of specific SME business models by partner financial institutions. An ex-ante financial cost-benefit analysis of individual investments is not as most of the project activities and interventions will be demand driven. The analysis is therefore based on several indicative business activities that take into account improved access to finance and entrepreneurial capacity building supported by the project. The results of the analysis were then extrapolated to the whole project in order to identify the overall project’s economic impact. Six illustrative models were prepared to demonstrate the financial viability of potential investments. These include production of raspberries, apples, plums, maize, livestock (cattle and cows). Although the average farm size in Serbia 5.4 ha, the land plot taken for analysis of crop production models was 1 ha. This would ensure inclusion of both small and medium farms and the results of the analysis on 1 ha land could be extrapolated accordingly. All models show the prospective benefits and rate of return derived from the access to required financing, training, demonstration and advisory services. Page 46 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) Raspberry model. This financial model illustrates the incremental benefits for a farmer who decided to start raspberry berries production business. The model shows a positive NPV of US$77,681 over a fifteen-year period and a financial IRR of 43.5 percent before applying financing scenario, which is financially viable. In case the farmer needs to take a loan (50 percent of total investment) to meet the requirements of a matching grant, the model remains financially viable with NPV of US$67,097 showing the IRR of 47.2 percent. Apple model. This financial model illustrates the incremental benefits for a farmer who decided to intensify his/her fruit production business. It shows what benefit the farmer would gain from the establishment of an intensive apple orchard on 1 ha, replacing the low-yield old orchard already owned by this farmer. The model shows a positive NPV of US$50,928 over a fifteen-year period and a financial IRR of 23.4 percent before applying financing scenario, which is financially viable. In case the farmer needs to take a loan (50 percent of total investment) to meet the requirements of a matching grant, the model remains financially viable with NPV of US$15,110 showing the IRR of 38.2 percent. Plum model. This financial model illustrates the incremental benefits for a farmer who decided to intensify his/her fruit production business. It shows what benefit the farmer would gain from the establishment of an intensive plum orchard on 1 ha, replacing the low-yield old orchard already owned by this farmer. The model shows a positive NPV of US$52,004 over a fifteen-year period and a financial IRR of 41.9 percent before applying financing scenario, which is financially viable. In case the farmer needs to take a loan (50 percent of total investment) to meet the requirements of a matching grant, the model remains financially viable with NPV of US$42,855 showing the IRR of 46.3 percent. Maize model. This financial model illustrates the incremental benefits for a farmer who decided to start maize production business. The model shows a positive NPV of US$3,419 over a fifteen-year period and a financial IRR of 15.8 percent before applying financing scenario, which is financially viable. In case the farmer needs to take a loan (50 percent of total investment) to meet the requirements of a matching grant, the model remains financially viable with NPV of US$2,957 showing the IRR of 18.5 percent. 4 cattle model. This financial model illustrates the incremental benefits for a farmer who decided to improve his/her livestock production business. The main anticipated benefit would occur from the increased production of beef due to the improved breeds, feeding practices and veterinary services, which will be sold on the local markets and/or supplied to a local meat processing plant. The model shows a positive NPV of US$1,067 over a fifteen-year period and a financial IRR of 15.7 percent before applying financing scenario, which is financially viable. In case the farmer needs to take a loan (50 percent of total investment) to meet the requirements of a matching grant, the model remains financially viable with US$1,976 showing the IRR of 17.9 percent. 5 cows model. This financial model illustrates the incremental benefits for a farmer who decided to improve his/her milk production business. The main anticipated benefit would occur from the increased production of milk due to the improved breeds, feeding practices and veterinary services, which will be sold on the local markets and/or supplied to a local milk processing plant or a milk collection point. The model shows a positive NPV of US$2,650 over a fifteen-year period and a financial IRR of 19.2 percent before applying financing scenario, which is financially viable. In case the farmer needs to take a loan (50 percent of total investment) to meet the requirements of a matching grant, the model remains financially viable with US$2,721 showing the IRR of 32.7 percent. II. Overall Economic Analysis Page 47 of 48 The World Bank Serbia: Competitive Agriculture Project (SCAP) (P167634) The illustrative models described above have been used for the calculation of the overall benefit stream, on the basis of economic prices. Considering the illustrative examples as a reasonable assumption of the investments likely to be implemented, an estimated average incremental annual net benefit per US$1 of investments is used. The incremental net benefits were derived by multiplying this indicator by the amount of estimated investments, but, considering the gradual increase of such benefits over the period of five years. The period of economic analysis is 20 years to account for the phasing and gestation period of the proposed interventions. The conservative scenario is presented in the analysis and it is indicative and demonstrates the scope of profitability originated from the conditions prevailing at the time of the preparation (mid of 2019). The analysis identifies the quantifiable benefits that relate directly to the activities undertaken following implementation of the project components, or that can be attributed to the project’s implementation. It was assumed that at least 80 percent of the investments would achieve the estimated returns, i.e. an 80 percent success rate was applied to the models. Financing flows have not been undertaken in the calculations as they are already reflected in the project costs or represent transfer payments (duties and taxes). Given the benefit and cost streams, the base-case ERR of the Project is estimated at 23.1 percent and ENPV = US$52.7 million. This proves that the project is economically viable and justified and recommended for financing from the economic point of view. Shadow price of carbon. Considering the estimated shadow price of carbon, that will evolve from year to year according to the World Bank Shadow Price of Carbon Guidance Note, the ERR and the ENPV were calculated. The results of scenarios with low carbon price, high carbon price and without carbon are presented in the table below. A low shadow price of carbo scenario has a potential to improve the ERR from 23.1 to 24.3 percent, while the high shadow price of carbon scenario would improve the ERR up to 25.4 percent. Without carbon Low carbon price High carbon price benefits scenario scenario scenario ENPV (US$ million) 52.7 56.2 59.7 ERR 23.1% 24.3% 25.4% Sensitivity Analysis. Economic returns were tested against changes in benefits and costs and for various lags in the realization of benefits. In relative terms, the ERR is equally sensitive to changes in costs and in benefits. In absolute terms, these changes do not have a significant impact on the ERR, and the economic viability is not threatened by both a 20 percent decline in benefits nor by a 20 percent increase in costs, since the ERR in both cases remains well above the discount rate. A one-year delay in project benefits reduces the ERR to 19.3 percent. Increase of Delay of Sensitivity Analysis Costs Increase Decrease of Benefits Base case Benefits Benefits ( 20-year period) +10% +20% +50% +10% +20% -10% -20% - 30% 1 year 2 years ERR 23.1% 21.0% 19.1% 14.8% 25.4% 27.6% 20.8% 18.3% 15.6% 19.3% 16.6% ENPV (USD mln) 52.7 49.7 46.6 37.6 61.0 69.3 44.4 36.1 27.7 48.7 44.9 Page 48 of 48