Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD1427 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT PAPER ON A PROPOSED RESTRUCTURING AND ADDITIONAL GRANT IN THE AMOUNT OF EUR4.7 MILLION (US$5.3 MILLION EQUIVALENT) TO MONTENEGRO FOR A MONTENEGRO INSTITUTIONAL DEVELOPMENT AND AGRICULTURE STRENGTHENING PROJECT (P107473) November 25, 2015 Agriculture Global Practice South East Europe Country Unit 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 Sep. 17, 2015) Currency Unit = Euro EUR1 = US$1.1325 US$1 = EUR0.883 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS AF Additional Financing CAP Common Agricultural Policy (EU) CAS Country Assistance Strategy DfIP Directorate for IPARD Payments EC European Commission EMF Environmental Management Framework EU European Union GDP Gross Domestic Product GHP Good Hygiene Practices GMP Good Manufacturing Practices GOM Grants Operational Manual HACCP Hazard Analysis and Critical Control Point IBRD International Bank for Reconstruction and Development IPA Instrument for Pre-Accession Assistance IPARD Instrument for Pre-Accession Assistance for Rural Development MARD Ministry of Agriculture and Rural Development MIDAS Montenegro Institutional Development and Agriculture Strengthening MONSTAT Statistical Office of Montenegro PDO Project Development Objective POM Project Operational Manual SOPs Standard Operating Procedures TA Technical Assistance TF Trust Fund Vice President: Cyril Muller Country Director: Ellen A. Goldstein Country Manager: Tatiana A. Proskuryakova Practice Manager / Manager: Steven N. Schonberger Task Team Leader(s): Maurizio Guadagni ii MONTENEGRO PROPOSED RESTRUCTURING AND ADDITIONAL FINANCING MONTENEGRO INSTITUTIONAL DEVELOPMENT AND AGRICULTURE STRENGTHENING PROJECT (P107473) CONTENTS Project Paper Data Sheet .......................................................................................................................... iv I. Introduction .............................................................................................................................................. 1 II. Background and Rationale for Additional Financing ............................................................................... 2 III. Proposed Changes ................................................................................................................................... 6 Annex 1 - Revised Result Framework ..................................................................................................... 13 Annex 2 – Description of Modified and New Activities ......................................................................... 24 iii ADDITIONAL FINANCING DATA SHEET Montenegro Montenegro Additional Financing EU/IPA Agriculture and Rural Development Institution Building Project (P154111 ) EUROPE AND CENTRAL ASIA GFA09 Basic Information – Parent Parent Project ID: P107473 Original EA Category: B - Partial Assessment Current Closing Date: 31-Mar-2016 Basic Information – Additional Financing (AF) Additional Financing Type Project ID: P154111 Scale Up (from AUS): Regional Vice President: Cyril E Muller Proposed EA Category: B - Partial Assessment Expected Effectiveness Country Director: Ellen A. Goldstein 21-Dec-2015 Date: Senior Global Practice Juergen Voegele Expected Closing Date: 30-Jun-2018 Director: Practice Manager/Manager: Steven N. Schonberger Report No: PAD1427 Team Leader(s): Maurizio Guadagni l Approval Authority Approval Authority Board/AOB Decision Please explain The Additional Financing will be entirely funded by a Trust Fund and it is therefore approved at the RVP level. However, since the additional financing operation also envisages the change of the original PDO, an approval by the Executive Board of the World Bank Group is needed on an Absence of Objection Basis (AOB). Borrower Organization Name Contact Title Telephone Email Minister of Ministry of Finance Radoje Zugic radoje.zugic@mif.gov.me Finance Project Financing Data - Parent (Montenegro Institutional Development and Agriculture Strengthening (MIDAS)-P107473) (in USD Million) Key Dates Effectiveness Original Project Ln/Cr/TF Status Approval Date Signing Date Revised Closing Date Date Closing Date P107473 IBRD-77160 Effective 21-Apr-2009 27-May-2009 23-Jul-2009 30-Jun-2014 31-Mar-2016 Disbursements iv Project Ln/Cr/TF Status Currency Original Revised Cancelled Disbursed Undisbursed % Disbursed P107473 IBRD-77160 Effective USD 15.70 15.70 0.00 12.75 1.70 81.21 Project Financing Data - Additional Financing Montenegro Additional Financing EU/IPA Agriculture and Rural Development Institution Building Project (P154111) (in EUR Million) [ ] Loan [X] Grant [ ] IDA Grant [ ] Credit [ ] Guarantee [ ] Other Total Project Cost: 4.72 Total Bank Financing: 0.00 Financing Gap: 0.00 Financing Source – Additional Financing (AF) Amount Borrower 0.00 Free-standing TFs for ECA SD Sector Unit 4.72 Total 4.72 Policy Waivers Does the project depart from the CAS in content or in other significant respects? No Does the project require any policy waiver(s)? No Bank Staff Name Role Title Specialization Unit Maurizio Guadagni Team Leader Senior Rural Task Team Leader GFADR (ADM Development Responsible) Specialist Arben Maho Procurement Procurement Procurement GGODR Specialist Specialist Aleksandar Crnomarkovic Financial Sr Financial Financial GGODR Management Management Management Specialist Specialist Antonio Cristian D'Amelj Counsel Senior Counsel Legal LEGLE Dionisis Panagiotatos Team Member Consultant Food Safety GFADR Esma Kreso Safeguards Senior Environmental Environmental GENDR Specialist Specialist Safeguards Jasna Mestnik Team Member Finance Officer Fiduciary WFALA Marko Bucik Team Member Consultant Editing GFA03 Ruxandra Maria Floroiu Team Member Lead Environmental Environmental GENDR Specialist Safeguards Silvia Mauri Team Member Consultant Operations GWADR Valencia M. Copeland Team Member Program Assistant Support GFADR Vera Dugandzic Safeguards Senior Operations Social Safeguards GSURR v Specialist Officer Locations Country First Administrative Location Planned Actual Comments Division Montenegro Countrywide Institutional Data Parent ( Montenegro Institutional Development and Agriculture Strengthening (MIDAS)-P107473 ) Practice Area (Lead) Agriculture Contributing Practice Areas Cross Cutting Topics [ ] Climate Change [ ] Fragile, Conflict & Violence [ ] Gender [ ] Jobs [ ] Public Private Partnership Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits % Co-benefits % Public Administration, Law, and Justice Public 48 administration- Agriculture, fishing and forestry Agriculture, fishing, and forestry General agriculture, 46 fishing and forestry Agriculture, fishing, and forestry Agricultural 6 extension and research Total 100 Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Rural development Rural policies and institutions 84 Trade and integration Regional integration 10 Rural development Rural services and infrastructure 6 Total 100 Additional Financing Montenegro Additional Financing EU/IPA Agriculture and Rural Development Institution vi Building Project (P154111 ) Practice Area (Lead) Agriculture Contributing Practice Areas Cross Cutting Topics [ ] Climate Change [ ] Fragile, Conflict & Violence [ ] Gender [ ] Jobs [ ] Public Private Partnership Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits % Co-benefits % Public Administration, Law, and Justice Public 40 administration- Agriculture, fishing and forestry Agriculture, fishing, and forestry General agriculture, 30 fishing and forestry sector Industry and trade Agro-industry, 30 marketing, and trade Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Rural development Rural markets 40 Rural development Rural non-farm income generation 40 Public sector governance Managing for development results 20 Total 100 Consultants (Will be disclosed in the Monthly Operational Summary) Consultants Required? Consultants will be required vii I. Introduction 1. This Project Paper seeks the Board approval to restructure the Montenegro Institutional Development and Agriculture Strengthening Project (P107473), hereafter the MIDAS Project. The proposed restructuring would entail broadening the Project development objectives to widen the typology of beneficiaries receiving grants with a methodology similar to the Instrument of Pre-accession Assistance for Rural Development (IPARD) from agricultural holdings (farmers) to food establishments (agro-processors) and consequently revising the Results Framework in order to better capture the outcome of the proposed additional activities. The current PDO is to improve delivery of government assistance for sustainable agriculture and rural development in a manner consistent with the EU's pre-accession requirements. The proposed PDOs are: (i) to improve delivery of government assistance for sustainable agriculture and rural development in a manner consistent with the EU's pre-accession requirements; (ii) to increase the experience of Montenegrin authorities in administering rural development grants in accordance with EU-IPARD core rules, and (iii) to support a selected number of agricultural holdings and food establishments in upgrading towards EU standards. 2. Activities supported under the proposed restructuring are funded through an additional grant fully financed by the European Union through a World Bank administered Trust Fund and will be complemented with counterpart funding by the Government of Montenegro. Commitment of funds for the additional grant in the amount of EUR4.7 million (US$5.3 million) has already been approved by the Regional Vice-President on November 25, 2015. 3. The MIDAS Project became effective in July 2009 and it is due to end in March 2016. The project has been successfully implemented, with progress towards achievement of the Project Development Objectives (PDO) consistently rated in the satisfactory range. The most successful element of MIDAS has been the provision of grants modelled after the EU’s pre-accession financial support scheme called the Instrument of Pre-accession Assistance for Rural Development (IPARD) to agricultural holdings (i.e. agricultural producers or farmers) through Montenegro’s public institutions. This approach has served three purposes: (i) it has provided financial support for productivity improvements; (ii) it has supported the gradual adjustment of agricultural holdings to the EU financial and legal framework; and (iii) it has increased the capacity of Montenegro’s institutions to manage EU funded financial schemes, in this case mainly the IPARD. 4. While the focus of MIDAS Project so far has remained on providing support to agricultural holdings and public institutions, the proposed AF would allow for the inclusion of agro- processors (small and large), enabling investments in increased compliance with EU requirements, most importantly in the area of food safety.1 The main expected outcomes of the AF are therefore the following: (i) increased awareness of the agro-processing industry in Montenegro about EU food safety regulations and the flexibility therein; (ii) increased compliance of food establishments in Montenegro with EU food safety regulations 2; and (iii) increased capacity of Montenegro’s institutions in administering IPARD grants to food establishments. 1 At present, the MIDAS Project provides grants to improve competitiveness of the agricultural sector through the measure 101 of IPARD Axis 1 “Investments in agricultural holdings to restructure and to upgrade to EU Standards”. The AF would allow for the provision of grants unde r measure 103 of IPARD Axis 1 “Investments in the processing and marketing of agriculture and fishery products to restructure and upgrade to EU standards”. 2 This paper adopts the term “food establishment” used mainly within the EU to encompass establishme nts handling, preparing or producing foodstuffs, independently whether conducted by farmers or specialized agro-processors. The term does not include restaurants and food retailers. 1 5. The AF will be financed by the EU (EUR4.7 million or US$5.3 million) and will be complemented by EUR1.6 million (US$1.8 million) of counterpart funding by the Government of Montenegro. The EU will also finance Bank-Executed activities and Trust Fund (TF) administrative costs in addition to the Recipient-Executed activities through an established Hybrid TF. II. Background and Rationale for Additional Financing Background 6. The importance of agriculture to Montenegro’s rural economy remains significant, as it represents a key source of employment, income generation, and food security for some of the most vulnerable parts of society. According to official statistics, agricultural primary production represents around 10 percent of GDP, yet official data likely underestimate the contribution of agriculture to the economy because a large share of agricultural production is carried out informally. Historically, the region of Southeast Europe has had a tradition of growing food at home and many families still grow fruits and vegetables and sometimes raise animals (even urban dwellers often have rural second houses called vikendica). This production is not accounted for in most national statistics, as is the case with agricultural employment. For instance, according to the official statistics provided by the Statistical Office of Montenegro (MONSTAT), the number of persons formally employed in agriculture was 2,347 in 2010. However, the 2010 Agricultural Census reported the equivalent of 46,473 Annual Work Units for agriculture, indicating that only 5% of agricultural employment is formal. This in turn implies that 95% of agricultural employment is not reported in official statistics. In turn, this also means that a large share of this production may not be reported, neither as production nor as consumption. The importance of agriculture is also expressed through the growing demand for agricultural products that contributes to a large and increasing trade deficit. Agricultural exports have been increasing by around 4 percent annually during the last 8 years, while agricultural imports have been increasing much faster, around 16 percent annually. This divergence has resulted in a worsening agricultural trade deficit that increased from US$166 million in 2005 to US$473 million in 2012. Agriculture’s share within the goods trade deficit increased from 21 percent to 27 percent over the same period. 7. Montenegro’s agricultural development is held back by constrains similar to those witnessed elsewhere in the region of Southeast Europe: (i) low levels of education among farmers and their reluctance and/or inability to adopt modern technologies; (ii) small average farm size and a limited or sub-optimal land rental market; (iii) slow uptake in development of agricultural cooperatives that could improve storage, packaging and marketing of produce; (iv) the effects of climate change, especially increased risks of weather-related natural disasters such as floods, and to a lesser extent droughts, the former often resulting in damaging land erosion. Comparing the agricultural value added per hectare of land with other countries in the region, it seems that agriculture in Montenegro has potential for growth. 8. In addition to productivity and competitiveness improvement, Montenegro’s agriculture needs to address the prospect of regulatory integration with the EU. Both primary agricultural production and agro-processors will need to invest in new skills and new technologies to comply with demanding EU food safety regulations. At the same time, due to the progressive integration into the EU single market, Montenegro’s agriculture will come under increasing pressure both domestically and in export markets. While EU regulations allow flexibility for ‘small-scale’ and ‘traditional’ food production, their implementation requires the development of national legislation that is aligned with EU rules and the development of local capacity. For larger food establishments, adherence to EU requirements is a must. 9. The EU offers financial support to candidate countries for regulatory alignment, increased competitiveness and institutional capacity building in the field of agriculture, as well as other sectors. In fact, Montenegro became eligible for the EU’s pre-accession agriculture sector support – in the form of IPARD – after obtaining candidate country status in December 2010. IPARD serves a dual 2 purpose. On one hand, it functions as a familiarization tool for all involved agricultural stakeholders (e.g. authorities, extension services, financing agencies, agro-holdings, food establishments, suppliers), as it introduces some elements of the EU Common Agricultural Policy (CAP) matched with a more limited amount of financial resources. IPARD thus serves as ‘training wheels’ or ‘learning-by-doing’ for the introduction of the CAP following accession, when the country will need to comply with a wider set of rules and have the capacity to manage a larger amount of funds dedicated to agriculture. On the other hand, IPARD provides funds for investments into alignment with EU regulatory requirements in order to sustain a gradual transition and reduce the adjustment shock upon accession. 10. The actual disbursement of IPARD funds is subject to conditions, mainly legal and institutional (including, but not limited to, the Paying Agency premises complying with strict EU requirements), that a country needs to satisfy. Montenegro’s authorities have put considerable efforts into setting up the required legal and institutional framework for IPARD implementation.3 Following the capacity improvements at the Ministry of Agriculture and Rural Development (MARD) in terms of staff, technical and administrative ability to manage IPARD financial schemes, few steps are still required in order for the EU to grant Montenegro’s authorities access (in the form of “Conferral of Management”) to IPARD funds. In fact, Montenegro submitted the request for IPARD accreditation to the EU in August 2015 and is currently awaiting its evaluation, expected in early 2016, in order to receive the Conferral and gain full access to IPARD funds. 11. Since the early stages of Montenegro’s EU accession process, the European Commission and the World Bank have coordinated closely their activities in supporting Montenegro’s authorities and the agriculture sector towards unlocking access to IPARD. The MIDAS project was launched in July 2009 and has made an important contribution in assisting Montenegro’s authorities in achieving closer compliance with IPARD requirements through TA and investment in physical infrastructure. MIDAS has consistently met its PDOs and has overall proceeded at moderately satisfactory pace, with its grant program executed in a timely manner. MIDAS has provided key support during the set-up of the EU- required IPARD Paying Agency, to be completed soon, and also to the establishment of the Farm Registry.4 In what is of direct relevance to this AF, MIDAS has so far completed five successful grant- making rounds to agriculture holdings that made in total 1,467 applications out of which 794, or 54 percent, were approved. All funds available for grants (app. EUR7 million) have been contracted and almost 619 projects have already been completed (e.g. investments in new machinery, livestock, buildings rehabilitation and expansion, manure management) with about EUR6 million transferred to beneficiaries by September 2015. Related capacity building activities of all MARD Directorates involved in the design, preparation and implementation (Directorate for Rural Development, Directorate for IPARD Payments and the Extension Service) of the grant-making program, as well as the training of farmers, is proceeding in line with expectations and without significant difficulties. Throughout the implementation of the project, the principles and rules of IPARD have been gradually introduced and thus have assisted the Montenegro’s authorities in making progress in their alignment.5 3 The Ministry of Agriculture and Rural Development (MARD) established a Directorate for IPARD Payments and a Directorate for Rural Development which will serve as the future Paying Agency and Managing Authority respectively. MARD is also in the process of signing the Sectoral Agreement with the EU and receiving approval for the IPARD 2 Program for 2014 - 2020. In line with EU requirements, this document is conceived as a multi-annual development program for rural areas and proposes measures to be implemented under IPARD allocations and rules. 4 The rehabilitation for the building to house the future IPARD Paying Agency is on-going and expected to be finished by the end of 2015. The Farm Registry has been established according in line with IPARD requirements, and more than 900 farmers have already registered through the Extension Services. In parallel, the first version of the Registry’s software has been completed and is in a testing phase, while hardware equipment is being procured. 5 A good example of sensible relaxation of IPARD rules was used in the procurement procedures. The grant program rules required only one price quotation at the application stage, while three quotations were required only once the grants were approved/signed and the beneficiary needed to carry out the procurement. Instead, IPARD rules require three quotations already 3 12. The results of MIDAS and the established cooperation with EU resulted in a separate EU funded small project, the Montenegro EU/IPA Agriculture and Rural Development Institutions Building Project (P144994), hereafter Montenegro IPARD Project, which started in December 2014 and launched its first grant call in February 2015.6 The response proved particularly strong with 521 applications received, substantially over the target of 250 applications, reflecting the earlier success of MIDAS and the effective awareness campaign. As of October 2015, 291 grants have been contracted (which is 56 percent of applications), against a target of 130 contracted grants, with 100 percent of funds allocated. 13. In light of the good cooperation and positive results so far, the European Commission and the World Bank agreed to allocate further funds (EUR5.3 million or US$6.0 million) to a new TF to be administered by the World Bank and fund further activities strengthening Montenegro’s agriculture and the capacity of its public institutions.7 The Government of Montenegro agreed to co-finance the Recipient-Executed portion with EUR1.6 million (US$1.8 million). Rationale for Additional Financing 14. Montenegro’s agriculture and food-processing sectors have a strong potential to increase rural incomes and create jobs. Opportunities exist in traditional sectors where productivity can grow substantially, but also in a number of niche sectors, such as wine-making, production of olive oil, organic produce, medicinal herbs, spices, honey, as well as mushroom and truffles harvesting.8 These non- traditional products are labor intensive and often benefit mountainous, poorer regions. 15. However, in order to tap the existing market potential (domestic supply and exports), investments in newer technologies, as well as the adoption of new farming techniques and introduction of food safety measures are required. As shown in Table 1, only 8 percent of the larger food establishments comply with EU food safety and hygiene standards according to recent survey and classification of food establishments. Improving the level of compliance will require significant investments, as the current level of non-compliance would lead to a post-accession shock which would likely result in forced closing of many establishments. Many of the targeted food establishments are located in the north and northeast of Montenegro, including some of the poorest regions in the country. at the application stage - something that was considered an excessive burden for the applicant at the outset. The AF will follow the same logic. 6 Total funding for the Montenegro EU/IPA Agriculture and Rural Development Institutions Building Project amounts to EUR4.5 million, including the contribution of EUR1.2 million by the Government of Montenegro. 7 These funds are part of the EUR7.2 million IPARD allocation for Montenegro for the years 2011, 2012 and 2013 that could not be used due to the missing Conferral of Management. 8 For example, the value of mushrooms and berries exported in 2013 was US$8.8 million, representing the fifth largest export category in value terms. 4 Table 1. Montenegro – Specialized Agro-Processors Categorization (December 2014) Compliant with Type of Food Non-compliant with EU EU Food Safety Total Compliance Establishment Food Safety Standards Standards Food of animal origin 3 1699 172 2% By-products of animal 3 3 6 50% origin Food of non-animal origin 12 46 58 21% TOTAL 18 218 236 8% Source: MARD. 16. Addressing this compliance gap among food establishments in Montenegro is the main objective of the AF. More specifically, the AF aims to: (i) increase the understanding of the EU food safety regulations (and the flexibility therein) among all stakeholders (inspectors, advisory services, food establishments, etc.) in Montenegro; (ii) increase the level of compliance of Montenegro’s food establishments with EU food safety regulations; and (iii) increase the capacity of Montenegro’s institutions in administering IPARD grants to the agro-processing industry. The AF will follow the successful methodology adopted by MIDAS and the Montenegro EU/IPARD Project by (a) securing funding for the provision of grants; and (b) by providing TA to MARD and its institutions on IPARD-like administration of funds, as well as introduction and monitoring of EU Food Safety Standards. 17. It is important to stress that the AF does not aim to directly support Montenegro’s authorities with the speeding up of IPARD accreditation, as MIDAS is already doing it. Rather, the AF importance is two-fold. On the one hand, it ensures that EU funds allocated to Montenegro for IPARD are used to support the modernization of food establishments, even while IPARD accreditation is not completed. If these funds would not be used through this AF, Montenegro would have missed the opportunity. On the other hand, both MIDAS and the AF contribute to the successful introduction of IPARD by gradually introducing its rules, thus generating a strong demand for IPARD financing, as well as progressively training Montenegro’s authorities in the implementation of IPARD. The immediate introduction of full-fledged IPARD requirements a few years ago – taking into account the level of preparation in Montenegro then – would have likely encountered major obstacles due to complicated procedures and, as a result, low demand. 18. In addition to expanding the range of beneficiaries of the original project to include agro- processors, an important aspect of the planned AF is also the extensive treatment of the flexibility foreseen within the EU food safety rules. In fact, the EU recognizes among others traditional foods as valuable heritage and allows, in so far as hygiene standards are not being compromised, significant flexibility in the application of its food safety regulations on a permanent basis. Few EU member states and candidate countries have fully and timely used this opportunity, yet in the case of Montenegro, the cooperation between EU and MIDAS has created the necessary pre-conditions for the flexibility to usefully benefit the development of food processing. 19. In practice, flexibility makes it easier for specific – and recognized – food establishments to meet EU standards, including in the case of ‘small scale’, ‘specific geographic location’ and ‘traditional’ food processing. The aim is to allow for the continuation of the production of foods in specific geographic location, or in small scale establishment, or with traditional characteristics, or the application of traditional methods of production, and reduce the administrative burdens and compliance 9 41 of these 169 do not have a Hazard Analysis of Critical Control Points (HACCP) in place and 128 have various degrees of non-compliance. 5 costs for businesses with defined characteristics. The low production volumes and traditional production, processing and marketing practices used by the Montenegro’s food industry suggest that they may greatly benefit from the introduction of flexibility. In order to do so, Montenegro needs to design and introduce legislation that will include the detailed definition of ‘small scale’, ‘geographic location’, ‘traditional’ food processing etc., as well as the justification for such definitions. 20. The careful transposition of EU food safety rules, including their provisions on flexibility, is therefore key for the proposed AF. If not done correctly, the activities of the AF could support investments in upgrading that might not even be required, or even worse, some food establishments might decide to cease production due to their inability to introduce standards that may not be required. Unfortunately, the food safety legislation currently in force in Montenegro does not allow for full use of the flexibility contained in the EU rules. In part thanks to MIDAS support, the Government of Montenegro has already introduced the necessary changes in the new Food Safety Law approved by Parliament in September 2015. III. Proposed Changes Summary of Proposed Changes The proposed changes include: (i) expanding the Project Development Objective, and (ii) expanding the Result Framework in order to better capture the additional activities proposed. Given these changes, an additional loan covenant and condition will be added, the disbursement estimates will be revised, the description of project components and costs will be adjusted, and the implementation schedule will be updated accordingly. Change in Implementing Agency Yes [ ] No [ X ] Change in Project's Development Objectives Yes [ X ] No [ ] Change in Results Framework Yes [ X ] No [ ] Change in Safeguard Policies Triggered Yes [ ] No [ X ] Change of EA category Yes [ ] No [ X ] Other Changes to Safeguards Yes [ ] No [ X ] Change in Legal Covenants Yes [ X ] No [ ] Change in Loan Closing Date(s) Yes [ ] No [ X ] Cancellations Proposed Yes [ ] No [ X ] Change in Disbursement Arrangements Yes [ ] No [ X ] Reallocation between Disbursement Categories Yes [ ] No [ X ] Change in Disbursement Estimates Yes [ X ] No [ ] Change to Components and Cost Yes [ X ] No [ ] Change in Institutional Arrangements Yes [ ] No [ X ] Change in Financial Management Yes [ ] No [ X ] Change in Procurement Yes [ ] No [ X ] 6 Change in Implementation Schedule Yes [ X ] No [ ] Other Change(s) Yes [ ] No [ X ] Development Objective/Results Project’s Development Objectives Original PDO The Project Development Objective is to improve delivery of government assistance for sustainable agriculture and rural development in a manner consistent with the EU's pre-accession requirements. Change in Project's Development Objectives Explanation: The proposed AF would serve to increase the scope of Montenegro Institutional Strengthening and Agriculture Development (MIDAS) Project and widen the typology of beneficiaries receiving grants with a methodology similar to the Instrument of Pre-accession Assistance for Rural Development (IPARD). IPARD-like grants will expand from agricultural holdings (farmers) to food establishments (agro- processors). Component 1, which currently provides grants to agricultural holdings, will be expanded to provide support also to food establishments in order to upgrade them to EU standards. Component 2 will be expanded to ensure that adequate support to the implementation of the grants is provided, including with regard to the institutional and legal framework required. The justification for such change is that Montenegro has already implemented a number of grant rounds supporting agriculture holdings, both under the MIDAS Project and the Montenegro EU/IPA Agriculture and Rural Development Institution Building Project. Previous IPARD-like rounds have increased the capacity of the grant administering institutions and grant beneficiaries who are learning the demanding IPARD-like application process. At this stage Montenegro is ready to move to the next level and introduce new measures to support the agro- processors that will soon need to be upgraded to align their production to the EU Food Safety requirements. Proposed New PDO - Additional Financing (AF) The new objectives of the Project are: (i) to improve delivery of government assistance for sustainable agriculture and rural development in a manner consistent with the EU's pre-accession requirements; (ii) to increase the experience of Montenegrin authorities in administering rural development grants in accordance with EU-IPARD core rules, and (iii) to support a selected number of agricultural holdings and food establishments in upgrading towards EU standards. Change in Results Framework Explanation: The Project Results Framework will need to be expanded in order to capture the impact of the expanded activities. Compliance Covenants - Additional Financing (Montenegro Additional Financing EU/IPA Agriculture and Rural Development Institution Building Project - P154111 ) Source of Finance Description of Funds Agreement Date Due Recurrent Frequency Action Covenants Reference Schedule 2 - By not later than F7SD 29-Feb-2016 New Section 1.A.4 sixty (60) days 7 from the Effectiveness Date, the Recipient, through MARD, shall update the GOM, in a manner acceptable to the World Bank Conditions Source Of Fund Name Type F7SD Project Operational Manual Effectiveness (POM), paragraph 4.01 of the Grant Agreement Description of Condition The POM has been updated by the Recipient, through MARD, in a manner acceptable to the World Bank Risk Risk Category Rating (H, S, M, L) 1. Political and Governance Low 2. Macroeconomic Moderate 3. Sector Strategies and Policies Low 4. Technical Design of Project or Program Moderate 5. Institutional Capacity for Implementation and Sustainability Moderate 6. Fiduciary Moderate 7. Environment and Social Moderate 8. Stakeholders Moderate 9. Other Moderate OVERALL Moderate Finance Loan Closing Date - Additional Financing (Montenegro Additional Financing EU/IPA Agriculture and Rural Development Institution Building Project - P154 111 ) Source of Funds Proposed Additional Financing Loan Closing Date Free-standing TFs for ECA SD Sector Unit 30-Jun-2018 Loan Closing Date(s) - Parent ( Montenegro Institutional Development and Agriculture Strengthening (MIDAS) - P107473) Explanation: The Loan Closing date does not need to be extended. The project closing date will be extended from March 8 31, 2016 to June 30, 2018 to allow for implementation of the additional activities proposed under the additional financing. Status Original Closing Current Closing Proposed Closing Previous Closing Ln/Cr/TF Date Date Date Date(s) IBRD- 30-Jun-2015, 31- Effective 30-Jun-2014 31-Mar-2016 30-Jun-2018 77160 Mar-2016 Change in Disbursement Estimates (including all sources of Financing) Explanation: Disbursement estimates affects only the EU Trust Fund. World Bank Loan (IBRD-77160) and GEF Grant (TF-93405) will close as planned on March 31, 2016 Expected Disbursements (in EUR Million) Fiscal Year 2016 2017 2018 2019 2020 Annual 0.60 0.40 3.72 0.00 0.00 Cumulative 0.60 1.00 4.72 0.00 0.00 Allocations - Additional Financing (Montenegro Additional Financing EU/IPA Agriculture and Rural Development Institution Building Project- P154111 ) Disbursement % (Type Source of Category of Allocation Currency Total) Fund Expenditure Proposed Proposed F7SD EUR Sub-grants 3,900,000.00 75.00 Goods, non-consulting services, consultants' 823,806.00 72.44 F7SD EUR services, works, training and operating costs Total: 4,723,806.00 Components Change to Components and Cost Explanation: There will be a change in components and cost. Activities under both Component 1 and Component 2 of the project will remain the same though their scope will expand. In particular, Component 1 will continue to finance sub-grants, but will broaden them to food establishments. Similarly, activities under component 2 will continue supporting the implementation and monitoring of the grants program, but will also include supporting the implementation of grants to agro-processors that will require an increased involvement in food safety, in particular in terms of veterinary administration and inspectors, whose capacity will need to be strengthened to comply with EU standards. Component 3 on project management will be closed. Current Component Proposed Component Current Cost Proposed Action Name Name (US$M) Cost (US$M) Component 1: Component 1: Strengthening Implementation of a grant 12.14 16.55 Revised MAFWM's rural scheme based on core development program IPARD rules 9 Component 2: Strengthening Component 2: Technical MAFWM's assistance to support administrative and 10.85 11.76 Revised implementation and management capacity in monitoring accordance with EU pre- accession requirements Component 3: Project Component 3: Project Management, Management, 0.86 0 Marked for Deletion Administration and Administration and Monitoring Monitoring Total: 23.85 28.31 Other Change(s) Implementing Agency Name Type Action Ministry of Agriculture and Rural Development Implementing Agency No Change Change in Implementation Schedule Explanation: The closing date of the project will be extended from March 31, 2016 to June 30, 2018 to allow for implementation of the activities of the additional financing. The closing dates of the Loan and GEF Grants will not be extended. Appraisal Summary Economic and Financial Analysis Explanation: It is expected that the additional finance will increase the economic and financial benefits of the original project. While the original project supported only the efficiency of producers (farmers), the proposed additional financing will support also food establishments (agro-processors) along the value chain. This will contribute to the modernization of food safety systems and thus support Montenegro’s negotiations on EU accession, in particularly concerning Chapter 12 on “Food Safety, Veterinary & Phytosanitary Policy”. Ultimately, the key short term local benefit will be to mitigate the risk that local food processors will need to close because they are not compliant with EU food safety and hygiene standards. By increasing food safety, it is expected that the additional financing will in turn contribute to reducing the risk of food poisoning and foodborne diseases, while at the same time facilitating the adding of value to raw materials, and help access more profitable markets. It is important to note, however, that food safety is only one of the several bottlenecks to access European and other profitable markets. Therefore additional efforts will be needed to increase the export of food products. The financial analysis (or business plan) of each grant proposal will be reviewed specifically as part of the grant approval process. The project will provide TA so that business planning is not just a mere administrative requirement. Technical Analysis Explanation: 10 Investments in agro-processing is an area where the Ministry of Agriculture and Rural Development has limited experience. The extension services, for instance, have less knowledge on agro-processing than primary production. It will therefore be important to have external technical assistance available to ensure the technical feasibility of proposed investments. This will be also be guaranteed by grant applicants, considering that they will co-finance at least half of the investments (excluding taxes) and will thus have a direct interest in its success. Social Analysis Explanation: The additional financing will not change social aspects of the existing grant scheme. The experience under MIDAS proved that the redress mechanism and transparency of the grant scheme contributes to generate trust in the political and economic system grant scheme will not change By avoiding the likely closure of agro-processors upon EU accession due to non-compliance with food safety regulations, it is expected that the additional financing will provide solid social benefits. Environmental Analysis Explanation: It is expected that improving hygiene conditions will provide health and environmental benefits. In some cases, the additional financing could also invest in compliance with other standards in addition to food safety, such as environmental standards. However it will not enforce strict cross-compliance (i.e., investment in food safety will be allowed even without full compliance with environmental standards) It is expected that improving hygiene conditions will provide health and environmental benefits. In some cases, the AF could also invest in compliance with other standards in addition to food safety, such as environmental standards. However it will not enforce strict cross-compliance (i.e., investment in food safety will be allowed even without full compliance with environmental standards) because this is not the objective of the EU Trust Fund and it would be, at this stage, overambitious. The environmental category B – partial assessment – of the project will remain unchanged, with no changes to safeguards. The following safeguards will continue to be triggered: Environmental Assessment (OP/BP 4.01), Projects on International Waterways (OP/BP 7.50), and Pest Management (OP 4.09). Safeguard aspects of both the MIDAS and the Montenegro EU-IPARD projects have consistently been rated as satisfactory. Environmental Assessment. The support from the AF grant-making program may be used for a number of varied agro-processing activities, ranging from milk and meat processing to fruit and vegetables. However, the AF implementation will not result in any new significant environmental impacts and all grant applications will continue to be screened according to the established Environmental Management Framework (EMF)/Screening Procedure in order to be able to identify and exclude from financing those activities that are equivalent to a World Bank Category A. The MIDAS EMF was updated to reflect its applicability to the AF and was re-disclosed in country and through the World Bank Infoshop. Projects on International Waterways. Most of Montenegro lies either in the Tara River Basin (Danube Catchment Area) or the catchment of the Adriatic Sea. The activities financed by sub-grants will be located on these waterways. Due to the fact that the AF will primarily target agro-processing, impacts on international waterways are expected, but with no definite knowledge about their nature and scope (the grants financed through the AF and their purpose will only be known at a later stage). A notification to 11 riparians (namely the International Commission for the Protection of the Danube River - and the Mediterranean Action Plan - Barcelona Convention) was sent out by MARD on March 06, 2015. No objections or comments had been received within the 45-day deadline specified in the letter, or by August 25, 2015 when MARD sent a letter notifying the World Bank team that no comments or requests were made by the riparian countries. Accordingly, the regional Vice President, Cyril Muller, approved advancing with project preparation. Pest Management. The support to agro-processing and agriculture may lead to an increased use of pest management products, which would need to be controlled by the Integrated Pest Management Plan, as part of the original EMF. Risk Explanation: The overall risk of the additional financing is rated as moderate. In fact, the proposed financing carries risks similar to those of MIDAS whose positive experience showed how to address such risk. The only exception concerns food safety at the level of food establishments which presents some new risks. Complying with complex EU food safety standards will be demanding, particularly for smaller processors. That is why the Government of Montenegro (including MARD and MIDAS) has been collaborating with the EU to mitigate associated risks. The key element to address these risks is the EU flexibility for small establishments and derogation for traditional products (see more details in Annex 2). The new Food Safety Law was approved by the Parliament in September 2015 and is essential for creating the legal environment for such flexibility in Montenegro. Detailed by-laws to allow proper implementation of the new law are under design. 12 Annex 1 - Revised Result Framework Project Montenegro Additional Financing EU/IPA Agriculture and Project Additional Financing Status: DRAFT Name: Rural Development Institution Building Project (P154111) Stage: Team Requesting Maurizio Guadagni ECCU4 Created by: Silvia Mauri on 24-Mar-2015 Leader(s): Unit: Product Responsible Recipient Executed Activities GFA09 Modified by: Maurizio Guadagni on 02-Nov-2015 Line: Unit: Country: Montenegro Approval FY: 2016 EUROPE AND CENTRAL Lending Region: Investment Project Financing ASIA Instrument: Parent Project Parent Project Montenegro Institutional Development and Agriculture Strengthening (MIDAS) P107473 ID: Name: (P107473) Project Development Objectives Original Project Development Objective - Parent: The Project Development Objective is to improve delivery of government assistance for sustainable agriculture and rural development in a manner consistent with the EU's pre-accession requirements. Proposed Project Development Objective - Additional Financing (AF): The new objectives of the Project are: (i) to improve delivery of government assistance for sustainable agriculture and rural development in a manner consistent with the EU's pre-accession requirements; (ii) to increase the experience of Montenegrin authorities in administering rural development grants in accordance with EU-IPARD core rules, and (iii) to support a selected number of agricultural holdings and food establishments in upgrading towards EU standards. Results Core sector indicators are considered: Yes Results reporting level: Project Level Project Development Objective Indicators Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target No Change MAFWM capacity to disburse Text Value Limited Achieved. MARD Fully compliant 13 and track the use of rural coverage of developed a system monitoring and development funds and to monitoring and capacity to evaluation evaluate their impact in line and disburse & track system, eligible with EU IPARD requirements. verification. use of rural for EU development accreditation. IPARD funds, procedures are improved in each forthcoming round, and the capacity of both beneficiaries and processors is enhanced. Accreditation package including procedures fully aligned with IPARD requirements submitted to EU. M&E system developed and operational for IPARD like measures and programs for grant support. Indicators developed. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment New Number of agro-processors Number Value 18.00 60.00 compliant toward EU food Date 23-Oct-2015 30-Jun-2018 safety/hygiene regulations Comment 14 No Change EU IPARD compatible rural Text Value No EU Achieved. Rural Rural development measures fully IPARD development development integrated in MAFWM support compatible measures (101, 103, measures programs. rural and 302) included defined in EU development in IPARD program. IPARD program measures in Measure 101 MAFWM integrated in support MARD support programs through MIDAS grants program round 1 and 4. Agro- environmental measures integrated in MARD support program through MIDAS grants program round 2, 3 and 5. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment Revised Food safety system upgraded in Text Value Reference Partially achieved. Lab EU compliant manner. Labs lacking Veterinary accreditation equipment Diagnostic Lab completed, and/or equipped, 16 supply of BIP facilities, methods accredited; equipment, full BIPs and Kotor Marine monitoring of food Biology Institute water and processing rehabilitated, aquaculture establishmen furnished and products, food ts not equipped. Bar establishments meeting EU Border Inspection meeting EU standards, Post construction standards for animal by- works 95% approval products not completed fully 15 safely furnished and disposed of equipped; gap analysis on legal/institutional, administrative and technical aspects of food system completed, TA to create animal by- products legal and regulatory framework, and increase administrative and technical capacity completed, trainings to veterinary inspectors and veterinary directorate carried out. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment Full disposal of animal by- products target removed Intermediate Results Indicators Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target No Change Investments in agricultural and Text Value Number of Overachieved. 619 400 agro- rural development in line with commercial commercially holdings IPARD measures orientated oriented agro- farmers holdings availing of 16 market driven support measures is 0 (zero) Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment New Number of applications for Number Value 0.00 150.00 Food Establishments Grant Date 23-Oct-2015 30-Jun-2018 approved Comment New Number of grants for Food Number Value 0.00 120.00 Establishments successfully Sub Type Date 23-Oct-2015 30-Jun-2018 completed Breakdown Comment New Amount of IPARD-like grant Percentage Value 0.00 90.00 funding awarded (percentage) Date 23-Oct-2015 30-Jun-2018 Comment New Amount of grant funding Percentage Value 0.00 75.00 disbursed (percentage) Sub Type Date 23-Oct-2015 30-Jun-2018 Breakdown Comment No Change Adoption of agri- Text Value No Overachieved. 278 200 agricultural environmental measures among awareness agricultural households beneficiaries. and use of households adopted agri- agro-environmental environment measures al measures among farmers, processors, and rural communities. 17 Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change Amount of IPARD-like grant Number Value 0.00 7700000.00 7000000.00 funding awarded (Euros) Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change Amount of grant fund Number Value 0.00 6040000.00 5925925.90 disbursed (Euros) Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment Revised Client days of training Number Value 0.00 5681.00 6000.00 provided (number) Date 23-Mar-2011 23-Oct-2015 30-Jun-2018 Comment End target increased from 5,330 to 6,000 Revised Client days of training Number Value 0.00 850.00 900.00 provided - Female (number) Sub Type Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Breakdown Comment End target increased from 800 to 900 No Change Clients who have adopted an Number Value 0.00 1468.00 1500.00 improved agricultural Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 technology promoted by the project (number) Comment Revised Direct project beneficiaries Number Value 0.00 5962.00 6200.00 Date 23-Mar-2009 23-Oct-2015 30-Jun-2018 Comment End target increased from 5,500 to 6,200 Revised Female beneficiaries Percentage Value 0.00 15.00 15.00 18 Sub Type Supplemental No Change Land area where sustainable Hectare(Ha) Value 0.00 2142.00 2000.00 land mgt. practices were Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 adopted as a result of proj Comment No Change Supports toward Montenegro Text Value No structure Partially achieved. IPARD program IPARD accreditation in place IPARD Program II II approved by adopted by EU on EU, updated July 20, 2015 and accreditation Mn Gov on Sept package 10, 2015. according to Accreditation IPARD program package submitted II and submitted to EU for for national Accreditation on accreditation, August 14, 2015. Paying Agency Completion of the building, IT and PA Building and Farm Registry Farm Registry system software are the functional. only missing elements to achieve this target Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change EU IPARD compatible Rural Text Value No EU Achieved. Final IPARD Development Plan, including IPARD Directorate for Program II agri-environmental measures, compatible Rural Development submitted to EU submitted to EU. Rural EU IPARD Development compatible in Unit or Plan. place, final IPARD Program II adopted by EU on July 20, 19 2015 and Montenegro Government on September 10, 2015. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change All agricultural and rural Text Value Non- Achieved. MARD Proto-Paying development investments compliant and its Directorate Agency remains executed through an EU system. for IPARD operational. IPARD compatible Proto- Payments approved Paying Agency (as approved by the Bank to be by the World Bank). fully in charge for execution of payments as detailed in the grants fourth and fifth round operational manual. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change Agricultural Census is Text Value No Achieved. Census Main implemented and results agricultural implemented and agricultural disseminated. census data results census available. disseminated. implemented. Statistical register established Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change Integrated farm register Text Value No farm Partially achieved. Farm Register operational register in Paper-based Farm software and 20 place. Registry hardware system established and in place, more than 900 registration of farmers registered. farms initiated Electronic Farm and ongoing. Registry software in testing phase. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change Number of analysis methods of Text Value No Achieved. Vet Achieved. Vet the Veterinary Diagnostic accreditation Diagnostic Diagnostic Laboratory in Podgorica ISO at present, Laboratory in Laboratory in 17025 accredited. overlapping Podgorica has 16 Podgorica has competence analysis methods 16 analysis in food ISO17025 methods safety accredited ISO17025 system. accredited Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change Marine Biology Institute in Text Value No suitable Achieved. Marine Full monitoring Kotor functioning as NRL in facilities in Biology Institute of sea waters adequate facilities. place. No rehabilitated, and aquaculture clearly provided with lab products in line defined role furniture and with national in food equipment, regular legislation. safety testing ongoing. In system, no late February 2015 routine the MBI accredited testing Microbiological performed. testing of sea water methods. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment 21 No Change Veterinary and phyto-sanitary Text Value No suitable In progress. 98% of Building border controls performed in facility in Bar Border completed, EU-compliant facility in Bar. place Inspection Post equipment construction works procured and completed, lab installed. furniture and equipment installed. Pending utilities connection and landscaping. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change Feasibility Study on safe Text Value National, Achieved. Legal Legal disposal of animal by-products non-EU framework on safe framework on prepared and legal framework compliant disposal of animal safe disposal of improved. system of by-products animal by- safe disposal improvements products of ABPs in completed, training drafted. place to Veterinary Directorate and Inspectors conducted. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment No Change Food establishments classified Text Value No system in Achieved. Procedures for and annual control plans place Procedures for classification of prepared. classification of food food establishments establishments and annual control and annual plans completed control plans according to EU completed standards, according to EU preliminary standards. 22 classification completed. Training to Veterinary Directorate and Inspectors conducted. Date 23-Mar-2009 23-Oct-2015 31-Mar-2016 Comment 23 Annex 2 – Description of Modified and New Activities 21. The additional financing will maintain the main design of the on-going project. However, the project will be based on two Components (Component 1 – Implementation of a grant scheme based on core IPARD rules; and Component 2 – Technical Assistance (TA) to support implementation and monitoring) while Component 3 on Project Management, Administration and Monitoring will be dropped. A detailed project description is provided below. Component 1: Implementation of a grant scheme based on core IPARD rules (total EUR5.2 million of which EUR3.9 million contribution by the EU, and EUR1.3 million contribution by the Government of Montenegro). 22. Building on the positive experience of the Montenegro Institutional Development and Agriculture Strengthening (MIDAS) project and the on-going project Montenegro EU/IPA Agriculture and Rural Development Institution Building project (P144994), provision of IPARD-like grants will remain the key project activity, representing around 83% of the AF. Currently the project is supporting the provision of grants for a gradual introduction of the IPARD approach to improve competitiveness of the agricultural sector. With the Additional Financing (AF) the scope of the Rural Development Measure to be supported by the grants under this Component will be broadened, as the grant scheme will support beneficiaries in agro-processing industry in addition to agricultural holdings that have been supported by the project so far. The current focus on the measure 101 of the IPARD Axis 1 “Investments in agricultural holdings to restructure and to upgrade to EU Standards” will be expanded to include measure 103 “Investments in the processing and marketing of agriculture and fishery products to restructure and upgrade to EU standards”. The AF would also support the institutions involved in the implementation of grants for agro-processing industry so as to also ensure increased institutional capacity to deal with IPARD-like grants. 23. Activities included under Component 1 are the following: (a) Implementing a grant scheme, based on IPARD rules, to strengthen the Sector for Rural Development and the Sector for Payment at the Ministry of Agriculture and Rural Development (MARD) through the carrying out of the following activities. i.) drafting the Grant Operational Manual (GOM) including, inter alia, rules and procedures of the grant scheme; ii.) preparing and issuing calls for applications, iii.) selecting applications; iv.) signing of grant contracts between MARD and the final beneficiaries; v.) authorizing and controlling commitments and payments; vi.) carrying out on-the-spot checks; vii.) accounting for commitments and payments; and viii.) monitoring and evaluation of the implementation of the grants investments. (b) Strengthening the capacity of MARD and the government’s Technical Bodies (as defined in the Government Conclusion No. 06-336/3 of February 21, 2013), through the implementation of procedures introduced in the accreditation package. (c) Implementing a grievance redress and complaints mechanism building on the existing MIDAS procedures. 24. Details of the IPARD-like measures, such as specific activities to be financed, applicant selection criteria, investments requirements including environmental and social safeguards, and 24 administrative procedures for grants disbursement will be detailed in the GOM prepared by MARD under the supervision of the World Bank, and in line with future EU requirements for IPARD accreditation. The GOM, satisfactory to the Bank, will build on GOM previously used for the implementation of grant programs within MIDAS and the ongoing project. 25. The administration of the proposed grant scheme will provide MARD’s Directorate for IPARD Payments and the relevant Technical Bodies with an opportunity to gain further practical experience in designing the measures to be supported, handling applications, contracts, and claims, and to test its management and control system developed during the implementation of MIDAS Grants program. It would also allow the Directorate for Rural Development the opportunity to practice and improve its design, management and coordination capacities. 26. IPARD requirements. As a general rule, the project will co-finance 50% of total eligible cost (the Eligible Public Expenditure does not include taxes) of each eligible investment in the processing and marketing of agriculture and fishery products to restructure those activities and to upgrade them towards EU standards. The EU contribution will make up to 75% of the total eligible public expenditure and the Government of Montenegro will contribute the remaining 25% from the national agricultural budget. The outstanding 50% of the total eligible costs of the investments will be financed by private beneficiaries. The total investment expenses will be pre-financed by the beneficiaries of the grants. Reimbursements through the rural development grants program will be made based on the cost-sharing arrangements defined in the GOM. 27. Eligible investments. Eligible investments and activities to be supported under the grants Component, as well as their size, will be detailed in the GOM prepared for each round of the grants calls. Given the demand-driven nature of the grants scheme, determining ex-ante the nature of grants is hardly possible. Different rounds could target different groups of beneficiaries, including large- and medium-size food establishments, and small-scale establishments. Based on the preliminary work done to define the target beneficiaries as described below, two types of beneficiaries have been identified, namely: large and medium-size establishments (218 larger agro-processor) and about 2,000 small-scale “informal” establishments that are in practice agricultural holdings that add some value by doing a limited amount of agro-processing. It is expected that the size of investments will fall within the range of EUR15,000 and EUR250,000. 28. For large and medium-size establishments which must meet the full set of hygiene standards and are subject to formal registration/approval, eligible investments will be accurately identified and described, so as to provide the beneficiary the opportunity to upgrade and thus avoid the risk of closure for reasons of non-compliance following Montenegro’s entry in the EU (unless some derogation has been agreed). For these establishments, investment requirements will most likely refer to improvement of facilities (infrastructural investments to comply with hygiene or environmental standards) and/or procurement of equipment for processing, transport, cool chains, and similar. However, in addition to hard investment, beneficiaries may need to receive some technical assistance to increase their knowledge of Good Hygiene Practices/Good Manufacturing Practices (GHP/GMP) and procedures based on the Hazard Analysis and Critical Control Point (HACCP), which are difficult to objectively measure, verify and support under the grant program. Accordingly, alternative budgetary resources will be provided for under Component 2 of the project. 29. Screening/classification of food establishments. An on-site assessment of all registered/approved establishments (172 establishments processing food of animal origin and 58 processing food of plant origin) was carried out by the Veterinary Administration and MARD in December 2014. This assessment classified all registered food establishment according to their compliance with EU food safety standards whose result is reported in Table 1 of the main text of this 25 Project Paper. The results showed that only 8% of the establishments complies with EU rules, with non- compliance ratio being particularly high among the establishment processing food of animal origin. This initial classification will be further detailed by classifying non-complying establishments in three pre- established categories: category B (minor deviation), category C (major deviation) and category D (major non-compliance). This subdivision will provide an indication of the gaps in food safety rules implementation and indicate the estimated time and budgetary resources needed for achieving compliance. 30. For small-scale establishments which may be subject to and benefit from national rules introducing a more flexible application of hygiene standards, rather than upgrading facilities and/or equipment, it is expected that the main focus of project support would be to document and justify their compliance by means of detailed Standard Operating Procedures (SOPs) for traditional production methods, Technical Specifications for traditional products, Guides to Good Practice and similar, as appropriate. Therefore, for these establishments, it is expected that infrastructural investment requirements will be lower than for large establishments. Instead, small establishments will require more TA targeted to clusters of producers/processors of similar characteristics. The project has allocated sufficient resources for this purpose under Component 2. 31. EU Food Safety flexibility principles will be used as guidance in defining eligible investments for small-scale establishments. The EU in fact recognizes traditional foods as valuable heritage and allows, in so far as hygiene standards are not being compromised, the application of flexible national rules in order to: (a) continue the production of foods with traditional characteristics; (b) continue the application of traditional methods of production; and (c) reduce the administrative burdens and compliance costs for small businesses. 32. In particular, EU regulations prescribe several well defined cases of food production and marketing which may be subject to and benefit from flexible national rules. The most important among them are cases of:10 (a) direct supply by the producer, of small quantities of primary products to the final consumer or to local retail establishments directly supplying the final consumer; (b) direct supply by the producer, of small quantities of raw milk to the final consumer or to local retail establishments directly supplying the final consumer; (c) direct supply of small quantities of wild game, by hunters to the final consumer or to local retail establishments directly supplying the final consumer; (d) direct supply by the producer of small quantities of meat from poultry or lagomorphs that have been slaughtered on the farm to the final consumer or to local retail establishments directly supplying such meat to the final consumer as fresh meat; (e) supply of foodstuffs of animal origin from one retail establishment to other retail establishments as a marginal, localized and restricted activity; (f) national rules aiming to enable the continued use of traditional methods of production of certain specific origin; (g) national rules aiming to accommodate the needs of milk processing establishments situated in regions that are subject to special geographical constraints; 10 A complete list of derogations/exceptions is contained in the Regulation (EC) No 853/2004. 26 (h) adapting requirements aiming to accommodate the needs of food businesses with a low throughput: construction, layout and equipment for small dairy establishments and for small slaughterhouses; and (i) national rules granting derogations for foods with traditional characteristics. 33. There are approximately 2,000 registered small-/medium-size dairy farms supplying raw milk to dairy plants, and an undetermined, but probably higher, number of unregistered small-size dairy farms supplying milk and/or dairy products directly to the consumers or local retailers. The Veterinary Administration, with support by MIDAS, is planning to conduct a survey of a representative sample of small food establishments with particular emphasis on small dairy establishments, which may benefit from the derogations/exceptions and may be eligible for support. The information provided by the survey will be used to define eligible activities for these target group. 34. The implementation of the grant scheme will build on previous experience. Additionally, internal control procedures will be further improved in parallel with the capacity of staff and institutions involved, in order to increase their alignment with IPARD criteria and requirements. Through this process, MARD and the Technical Bodies will further increase their institutional capacity, while at the same time testing the procedures introduced in the national accreditation package in practice. During the grant scheme implementation, MARD will, to the extent possible, gradually introduce EU standards for grant investments. 35. The project will also continue supporting a grievance redress and complaints mechanism, building on the positive experience of MIDAS. This mechanism has proven effective in helping to deter fraud and corruption, increase accountability, transparency and responsiveness to beneficiaries, and increasing stakeholders’ involvement in the project. The Implementing Agency has a good track record in registering, monitoring, and reporting the complaints received. The GOM lays out in detail the guidelines to be followed for complaints handling; the composition and role of the evaluation and complaints commissions; and disclosure requirements stating that all complaints handling procedures and information are to be posted on the project’s website to ensure full transparency of the process. Component 2: Technical assistance (TA) to support implementation and monitoring ( total EUR1.14 million of which EUR0.82 EU contribution, and EUR0.32 contribution by the Government of Montenegro). 36. This Component will fund all the activities necessary to: (a) support the implementation and monitoring of the grant scheme, including the following: (i) the implementation of a monitoring support system to measure results achieved by the grant scheme; (ii) the provision of support to the Sector Monitoring Committee (SMC) for Rural Development responsible for implementation of the monitoring arrangements, including the monitoring indicators; and (iii) the enhancement of knowledge and capacity in implementing the tasks foreseen under the future IPARD for the relevant staff of MARD’s Directorates for Rural Development and for IPARD Payments, as well as of Technical Bodies, Advisory Services and members of the SMC, in particular through financing TA (including training, study tours, etc.) and equipment. (b) carry-out a baseline survey in the first year of project implementation and a final survey; carrying out public awareness of the project including dissemination of promotional material; providing support for the coordination, fiduciary requirements, monitoring and implementation of environmental and social safeguards, carrying audits of grant beneficiaries; and providing operational support for the implementation of the project. 27 37. The public awareness campaign will be in line with the EU visibility requirements, and will include the distribution of promotional material to illustrate the features of the grants program and dedicated session in the field for potential applicants. The awareness campaign will be conducted by a multi-disciplinary team that will include at least representatives of the MARD, the extension service, and a safeguards specialist. 38. Support under Component 2 will provide the MARD Directorates and Veterinary Administration, and the Inspections Directorate, with the opportunity to gain further practical experience in checking and verifying applicable hygiene standards and in implementing various official control methods and techniques by conducting and documenting mock inspections in the field. Furthermore, the engagement of the Extension Services in an advisory capacity during the upgrading process of the establishments will expand their current scope of activities and expertise, add value to the beneficiaries’ technical insight and the quality of supporting documentation, enhance the sustainability of the investments and, conceivably, form a pool of qualified staff which may be more optimally re-deployed in future to strengthen the administrative capacity of MARD 39. The TA and capacity building activities supported by Component 2 include: (i) TA to complete and align the legal framework with the current and relevant body of EU law (acquis communautaire). Its objectives would aim at meeting EU hygiene standards and, where appropriate, other productivity, marketing and/or competitiveness standards. EU and national food hygiene standards will coincide once the secondary legislation detailing implementation of the new Food Safety Law will enter into force. For other non- hygiene standards, appropriate national legislation should be identified and referenced to, and gradually harmonized with the EU acquis; (ii) TA for large and medium-size producing/processing establishments (which are most likely to benefit from the grant scheme for improvements in facilities, infrastructure and/or equipment) to augment and sustain their investments by introducing GHP/GMP and HACCP–based procedures; (iii) TA for small-scale establishments (which may be subject to and benefit from derogation/exceptions in the application of hygiene standards) to document and justify their compliance by means of detailed SOPs for traditional production methods, Technical Specifications for traditional products, Guides to Good Practice and similar, as appropriate; (iv) Awareness raising on technical aspects of food hygiene among the beneficiaries; (v) Capacity-building of the Technical Bodies, the Extension Services and the Directorate for IPARD Payments, which may involve targeted TA, the supplying of equipment and training either inside the country or in study tour(s), and supporting them to perform better their official control, advisory or management duties, as appropriate. 19. It is important to note that the detailed scope of the above mentioned activities will be reviewed and adapted according to progress made by the Montenegro’s administration in implementing the National Food Safety Strategy and associated action plans, as well as according to the progress of the pre-accession negotiations in relation to Chapter 12 (“Food safety, veterinary and phytosanitary policy”), and the available support provided by ongoing MIDAS, IPARD-like and other EU-funded projects. 28