Document of The World Bank Report No: 58434-MK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE AGRICULTURE STRENGTHENING AND ACCESSION PROJECT LOAN NUMBER IBRD 48610-MK JUNE 12, 2007 IN THE AMOUNT OF EUR 15 MILLION (US$ 20 MILLION EQUIVALENT) TO THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA JANUARY 3, 2011 SUSTAINABLE DEVELOPMENT DEPARTMENT SOUTH CENTRAL EUROPE COUNTRY UNIT EUROPE AND CENTRAL ASIA ABBREVIATIONS AND ACRONYMS AFSARD Agency for Financial Support of Agricultural and Rural Development AIS Agricultural Information System ASAP Agriculture Strengthening and Accession Project BRU Brucellosis BSE Bovine Spongiform Encephalopathy CAP Common Agricultural Policy (EU) EC European Commission EU European Union FADN Farm Accountancy Data Network FR Farm Register IACS Integrated Administration and Control System IBRD International Bank for Reconstruction and Development IPARD Instrument for Pre-Accession for Rural Development IWC Irrigation Water Community LPIS Land Parcel Identification System MAFWE Ministry of Agriculture, Forestry and Water Economy MIS Market Information System MoF Ministry of Finance PA Paying Agency PAAISD Policy Analysis and Agriculture Information System Department PDO Project Development Objective SAI State Agricultural Inspectorate SAPARD Special Assistance Program for Agriculture and Rural Development TB Tuberculosis VD Veterinary Directorate WB World Bank WE Water Economy (regional water authorities) WED Water Economy Directorate WMO Water Management Organization Vice President: Philippe H. Le Houerou Country Director: Jane Armitage Country Manager Lilia Burunciuc Sector Manager/Director: Dina Umali-Deininger/Peter D. Thomson Task Team Leader: Malathi S. Jayawickrama 2 FORMER YUGOSLAV REPUBLIC OF MACEDONIA AGRICULTURE STRENGTHENING AND ACCESSION PROJECT P101216 CONTENTS Page A. SUMMARY................................................................................................................ 4 B. PROJECT STATUS.................................................................................................. 4 C. PROPOSED CHANGES .......................................................................................... 5 ANNEX 1: RESULTS FRAMEWORK AND MONITORING .................................... 7 3 AGRICULTURE STRENGTHENING AND ACCESSION PROJECT (ASAP) RESTRUCTURING PAPER SUMMARY This Restructuring Paper seeks approval to drop one activity, namely the investment of equipment for the safe disposal of animal by-products (i.e. establishment of a disposal facility) under Component 3, and reallocate these funds (EUR 408,516) to the refurbishment of the Agency for Financial Support of Agricultural and Rural Development (AFSARD) ("Paying Agency") building under Component 2. This restructuring paper also seeks approval to remove discrepancies between the outcome indicator and the related intermediate outcome indicator under Component 4, and revise a target value to a more realistic target. The latter changes are reflected in the revised results framework and a revised Supplemental Letter. The project is nine months from its Closing Date of September 30, 2011. It is foreseen that the full loan amount will be disbursed by the closing of the project. PROJECT STATUS ASAP was approved by the Board on June 6, 2007 and became effective on October 2, 2007. As of December 1, 2010, 73.4% of project funds have been disbursed. ASAP's Project Development Objective (PDO) is to improve the delivery of government assistance to the agriculture sector in a manner consistent with the European Union's (EU's) pre- accession requirements. The Project has four components: Component 1, Strengthening the Ministry of Agriculture, Forestry and Water Economy's (MAFWE's)capacity in accordance with EU accession requirements; Component 2, Supporting the Borrower's ability to deliver EU rural development funds; Component 3, Developing Veterinary Capacity, and: Component 4, Completion of Irrigation Sector Reforms. Overall, implementation of ASAP is progressing satisfactorily and the project is expected to achieve its PDO. Most project activities have been completed or are under implementation. Under Component 1, capacity building in MAFWE has notably strengthened the Ministry's service delivery, the building blocks for the Integrated Administrative Control System (IACS) are fully operational, and the establishment of an Agricultural Information System (AIS) is progressing well. Under Component 2, the main activities have been successfully carried out, and the EU gave conferral of management to AFSARD in December 2009. The main remaining activities constitute works under Component 1 and 2, namely the completion of the new MAFWE headquarters (HQ), the refurbishment of a number of MAFWE branch offices, and the completion of the AFSARD building and the relocation of the AFSARD staff to the refurbished facilities. It is estimated that more than 90% of the refurbishment works of the latter have been completed to date. 4 Similarly, Component 3 has progressed well overall. Planned activities have been successfully implemented or are in the process of being completed, with the exception of the development of a strategy or system design for safe disposal of animal by-products. Under Component 4, Completing Reform of the Irrigation Sector, all former Water Management Organizations (WMOs) have been liquidated and Water Economies (WEs) have been registered. Irrigation Water Communities (IWCs) have been formed within the WEs to contract irrigation water supply with farmers. In 2009, the first year of operation, WEs collected between 10% and 50% of the amount billed on water invoices from all users. ASAP was restructured in 2010 following a general request from the Government of F.Y.R. Macedonia for the World Bank to provide 100% financing for all on-going World Bank-financed projects in the country. This request was met through earlier savings and by dropping certain activities no longer regarded as necessary to finance under ASAP. It was also agreed that two activities would continue to be co-financed by the Borrower, namely the reconstruction of the HQ for MAFWE, and the refurbishment of the AFSARD building. The Ministry of Finance has since had difficulties in ensuring timely payments of some of the invoices for these two works contracts. Financial Management Status. The appointed auditors have issued a clean (unqualified) opinion on the project financial statements as of December 31, 2009. A financial management implementation support and supervision mission was carried out in November 2010 and assessed that the financial management arrangements continue to be satisfactory. PROPOSED CHANGES The proposed changes concern mainly Component 2, 3 and 4, and follow a request from the Ministry of Finance received by the Bank on December 24, 2010. These changes would not affect the PDO. Dropping of activity under Component 3 and the reallocation of related funds. It is proposed that the planned investment in equipment for the safe disposal of animal by-products under Component 3 -"establishment of a disposal facility"- is dropped and that the funds allocated for this activity are instead used for the refurbishment of the Paying Agency building under Component 2. However, this will not require a reallocation of funds between expenditure categories in the disbursement table of the loan agreement. Also, as there is no intermediate outcome indicator solely related to this activity, the results framework will not be affected by this change. Changes to the indicators and target value for Component 4. It is proposed that outcome indicators and related intermediate outcome indicators for Component 4, Completing Reform of Irrigation Sector, are revised due to inconsistency between the outcome indicator for the component and the intermediate outcome indicator for the collection of irrigation water fees. The outcome indicator for this component was defined as "reduce financial burden to government from irrigation management", where in the last project year, Water Economies (WEs) would achieve a 90% operating cost recovery, while the intermediate outcome indicator defined as 5 "collecting water fees and breaking even in year 4 reflects 70% collection rate of irrigation water fees. Restructuring would correct this discrepancy between the component outcome indicator and the intermediate indicator, and it is proposed that the indicator solely reflect the collection of irrigation water fees. The reason for the focus on irrigation fees is that the outcome indicator for the Component is to reduce the financial burden to Government from irrigation management and the proposed revision would hence be in line with the intended Component outcome. In addition, it is proposed that the target collection rate is adjusted to a more realistic value, given experience from other countries. Also, due to the current economic environment, it seems unlikely that collection rates for the 2010 season would exceed those of 2009. Thus it is proposed to keep the 2009 collection rate of 60% as the target for the 2010 season (collected in 2010-2011). The detailed change is reflected in Annex 1. Project Costs (EURm.) Components Current Proposed Component 1 5,98 5,98 Component 2 2,76 3,17 Component 3 3,19 2,78 Component 4 3,07 3,07 Total 15,00 15,00 The Expenditure Categories (Schedule 1 to the Loan Agreement) will not be affected and no reallocation will be made between the Expenditure Categories: Amount of the Loan % of Category Allocated Expenditures Expressed in Euro to be financed (1) Goods, works, consultants' services Training and 12,900,000 100% Incremental Operating Costs (2) Severance 2,100,000 100% payments Amount payable pursuant to Section 2.04 of this Agreement (3) Front-end Fee 0 in accordance with Section 2.07 (b) of the General Conditions TOTAL AMOUNT 15,000,000 6 7 ANNEX 1 Results Framework and Monitoring FORMER YUGOSLAV REPUBLIC OF MACEDONIA: AGRICULTURE STRENGTHENING AND ACCESSION PROJECT Project Development Objective (PDO): Improve the delivery of government assistance to the agriculture sector in a manner consistent with the EU pre-accession requirements Revised Project Development Objective: No revision to the PDO D=Dropped Cumulative Target Values** C=Continue Responsibility Core PDO Level Results Unit of Data Source/ N= New Baseline Frequency for Data Indicators* Measure YR 1 YR 2 YR 3 YR4 Methodology R=Revised Collection Indicator One: Improved C Information lacking PAAISD Steps taken to Farm Registry FADN in place Twice a Reports from PAAISD MAFWE ability to disburse to forecast uptake established pilot farm year the PAAISD and track the use of subsidies report and analyze and registry LPIS, subsidies; poor operational MIS and FADN and rural development funds targeting monitoring and to evaluate their impact on and verification the agri-food sector Indicator Two: EU IPARD C No IPARD funds IPARD PA Potential Payments are Payments are being Twice a Reports from Reports from funds are paid to farmers in an paid established beneficiaries are being made made year IPARD PA IPARD PA EU compliant manner applying Indicator Three: Effective C No EU compliant Training Begin Complete 75% of food Twice a Reports from VD delivery of EU compliant food official control program implementing training program establishments year VD safety certification to producers procedures developed for training for food hygiene inspected and established; No food food hygiene program for inspectors; approved; and agro-processors establishment inspectors; food hygiene Complete 75% of sheep/goat approved as EU Approach for inspectors; screening of 25% flocks and bovine compliant; screening food Begin of food herds tested and Brucellosis/tubercul establishments screening food establishments; declared free from osis control and developed; establishments 25% of BRU/TB; eradication programs Finalize EU ; sheep/goat flocks National legislation ineffective. compliant Begin and bovine herds compliant with EU. Drafted national national food implementing declared free food safety safety program to from BRU/TB legislation compliant legislation; eradicate with EU. Develop BRU/TB 8 improved program to eradicate BRU/TB Indicator Four: Reduce R % WEs supported by 6WEs Irrigation user Irrigation user WEs effectively Yearly Reports of WEs Department of financial burden to government collecte the State established fees collected fees collected at representing user and IWCs Water Economy from irrigation management d of at 40% 60% interest and at MAFWE invoiced collecting invoiced irrigatio irrigation user fees at n user 60% fees. INTERMEDIATE RESULTS Intermediate Result (Component One): Improved MAFWE ability to disburse and track the use of subsidies and rural development funds and to evaluate their impact on the agri-food sector Revised Intermediate Result (Component One): Intermediate Result indicator C PAAISD not yet PAAISD PAAISD able N/A PAAISD able to Quarterly Quarterly PAAISD One: MAFWE systematically formally established established to carry out carry out policy reports from conducts agricultural policy and staff policy analysis and monitor SAI trained analysis and IACS and AIS analysis in accordance with set monitor IACS functions criteria aligned with EU SAI operational but Functional and AIS requirements, and systems for not able to carry out Assessment of functions budget planning, project EU required functions the SAI management, monitoring and completed; Expanded SAI Full SAI operational and Quarterly Quarterly PAAISD reporting are established and new staffing operational complement of performing to reports from functional and training staff in place required standards SAI program and trained underway Intermediate Result indicator C No Farm Register FR plan All FR FR is FR is operational Quarterly Quarterly PAAISD Two: Integrated Administrative (FR) in place. developed, systems put on operational. reports from FR and Control System (IACS) is offices a common equipped to platform. established and functional, implement it. including operational Integrated Farm Register and No LPIS in place. Plan for pilot LPIS LPIS piloted NA Quarterly Reports from PAAISD Land Parcel Identification developed functional in 3 and ready for Land Policy System (LPIS). pilot regions scaling up to Unit of other regions MAFWE Intermediate Result indicator C No MIS in place First pilot Ready to Second pilot Structures for Quarterly Reports from PAAISD Three: Market Information phase data conduct phase assessed. establishing full MIS MIS specialist System (MIS) and Farm processed, second pilot database in place. in MAFWE report phase of MIS Accountancy Data Network disseminated (FADN) established f ll 9 (FADN) established, fully operational and appropriately No FADN in place Procedures System and Further scaling Full-sized FADN in Quarterly Reports from PAAISD linked to IACS. and structures reporting up place local FADN in place, mechanism in team leader initial pilot place; pilot underway being scaled up Intermediate Result (Component Two): EU IPARD funds are paid to farmers in an EU compliant manner. Revised Intermediate Result (Component Two): Intermediate Result indicator C PA being established National Conferral of Conferral of Conferral of Annual Official Gazette PA Director One: Paying Agency obtains accreditation Management Management for Management for necessary accreditation for completed for the initial additional additional measures IPARD measures published by the EC managing IPARD funds on measures published by the behalf of the European published by EC Commission the EC Intermediate Result indicator C Procedures being Beneficiary Beneficiary 75% of the 95% of the planned Semi- MAFWE's MAFWE, Two: Potential IPARD developed guidelines guidelines planned IPARD IPARD funds for annual IPARD Monitoring beneficiaries apply using for the initial disseminated, funds for the the calendar year implementation Committee, PA measures applications calendar year committed, 80% of progress reports correct procedures completed received by committed, 60% of previous year the PA, first previous year commitments commitments commitments disbursed made disbursed Intermediate Result indicator C National direct Farm register PA assumes 100% of the 100% of the Annual Official MAFWE, PA Three: Paying Agency is payments managed by completed responsibility payments managed payments managed Gazette, PA delegated administration MAFWE for receiving by the PA by the PA National Direct claims and Payments responsibility for the direct disbursing progress reports national payments funds Intermediate Result indicator C IPARD measures Digitalizatio IPARD FM 80% of IPARD 100% IPARD and Semi- IPARD PA, Monitoring Four: Farmer application and developed for manual n of IPARD and record administration National Payments annual implementation Committee claims procedures digitalized accreditation FM and management digitalized and administration progress record system National Payment digitalized reports, management digitalized IT system tested National Direct system Payments initiated progress Intermediate Result indicator C Test manual Deploy 25% reduction 50% reduction of 70% reduction of Annual PA application PA, Monitoring Five: IPARD application and processing procedures manual of processing processing time for processing time for processing logs Committee claims processes accelerated. procedures time for the the initial the initial measures initial measures 10 measures Intermediate Result (Component Three): Effective delivery of EU compliant food safety certification to producers and agro-processors; Revised Intermediate Result (Component Three): Intermediate Result indicator C Design VIS workflow Deploy VIS Deploy VIS Deploy VIS Deploy VIS workflow Quarterly VIS VIS manager One: Reduction of prevalence and program workflow ­ workflow ­ workflow ­ ­ Monitoring of bovine TB / BRU ­ No. 20% herds 70% herds 100% herds officially free herds Intermediate Result indicator C Design VIS workflow Deploy VIS Deploy VIS Deploy VIS Deploy VIS workflow Quarterly VIS VIS manager Two: Increased investigation of ­ 0 cases workflow ­ workflow ­ workflow ­ ­ BSE in fallen stock (bovines) 100 cases 500 cases 1000 cases 2000 cases (1) Intermediate Result indicator C Design VIS workflow Deploy VIS - - - Quarterly VIS VIS manager Three: Preliminary screening of and audit scheme workflow ­ food establishments for 150% of establishmen granting provisional approval ­ ts IPARD Intermediate Result indicator C Four: Monitoring of food Design VIS workflow - Deploy VIS Deploy VIS Deploy VIS workflow Quarterly VIS VIS manager establishments for granting and audit scheme workflow ­ workflow ­ ­ 75% of food 25% of food 50% of food establishments (2) permanent EU-compliant establishmen establishments approval ts Intermediate Result indicator C 40-50 percent 60 percent 80 percent 100 percent Annual Annual Report Lab director Six: Animal Health lab achieves method/test workplan agreed in OM Intermediate Result indicator C Seven: Animal Health lab ISO 0 0 Annual Annual Report Lab director 17025 accredited Intermediate Result indicator C Eight: Food Hygiene lab 70 percent 80 percent 90 percent 100 percent Annual Annual Report Lab director achieves method/test workplan agreed in OM Intermediate Result indicator C Nine: Food Hygiene lab ISO 0 0 Annual Annual Report Lab director 17025 accredited 11 Intermediate Result (Component Four): Reduce financial burden to government from irrigation management Revised Intermediate Result (Component Four): Intermediate Result indicator C 5 WMOs in All 9 WMOs NA NA NA NA NA Department of One: All remaining WMOs liquidation successfully Water at liquidated. proceedings, 4 to liquidated MAFWE begin proceedings Intermediate Result indicator C None 6 WEs Annual Annual Annual reporting of Yearly WEs annual Department of Two: Successfully established successfully reporting of reporting of financial accounts to report Water at WEs in Kumanovo, Strumica- established financial financial IWCs and other users MAFWE accounts to accounts to Radovis, Pelagonjia, Prilep, IWCs and IWCs and other Skopje, Juzna, Vardarska other users users Dolina. Intermediate Result indicator R Water 10% of irrigation No Irrigation Irrigation water Irrigation water fees Quarterly Financial Department of Three: WEs successfully fee water fees are being discernable water fees fees collected at collected at 60% reports of WEs Water at collecting irrigation user fees collecti collected difference in collected at 60% and IWCs MAFWE on irrigation 40% water fee collection *Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators) **Target values should be entered for the years data will be available, not necessarily annually. 12 13