Page 1 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6109 Project Name Agriculture and Rural Development Project Region Europe and Central Asia Country Republic of Kosovo Sector Agriculture and Rural Development Lending Instrument SIL Project ID P112526 Borrower(s) Government of Kosovo Implementing Agency Ministry of Agriculture, Forestry and Rural Development Environmental Screening Category { }A { x }B { }C { }FI Date PID Prepared November 23, 2010 Estimated Date of Appraisal Completion December 18, 2010 Estimated Date of Board Approval April 28, 2011 Decision Project authorized to proceed to negotiations upon agreement on any pending conditions and/or assessments. I. Country Context 1. The declaration of independence on February 17, 2008 gave a new impetus to Kosovo’s development. After a decade under temporary UN administration following the conflict in 1999, post- conflict reconstruction efforts have begun to give way to greater engagement in longer-term development endeavors. In the early years following the war, Kosovo made remarkable progress, experiencing an economic boom, with GDP growth in double digits in 2000-2001. This was primarily due to massive donor-funded reconstruction efforts and substantial remittances from its growing diaspora. 2. However, dependence on the international community and the diaspora for financial and technical assistance cannot establish the foundation for sustainable development and growth. The government of Kosovo needs to replace these flows with domestic demand growth, export earnings, and more investments, especially as donor assistance and remittances begin to decline. Kosovo’s economic performance prior to the global economic crisis, although solid, was weaker than that of the other Southeastern European (SEE) countries. In 2006 and 2007, Kosovo had the lowest growth rate in the SEE region. Substantive productive investment in the tradable goods sector has not taken place and this is confirmed by high and rising imports and very low exports. In 2009, exports were 159 million (4% of GDP), which equaled the average monthly imports. In 2009 and 2010, GDP growth has remained moderate at about 4% due to the limited effects of the crisis on Kosovo’s economy. 3. With a population of two million, and gross domestic product (GDP) per capita of 1, 890, Kosovo is one of the poorest countries in Europe. Poverty remains widespread, with about 45% of the population estimated to be living below the poverty line (based on latest figures from 2007); approximately 17% are characterized as extremely poor, i.e., unable to meet basic nutritional needs. About 60% of the poor live in rural areas where access to basic infrastructure is substantially constrained. Page 2 2 At the same time, Kosovo has the highest rate of unemployment in the region at 48%. Youth unemployment reaches 76 percent, an alarming figure considering that half o f Kosovo’s total population is below 25. 4. Substantial efforts on several fronts are necessary to reduce poverty and put Kosovo on the path of sustained economic development. The government’s strategy for addressing these concerns is to: (i) maintain macroeconomic sustainability through fiscal sustainability and financial system; (ii) improve the business climate and develop new sources of growth through establishing the legal and institutional framework for business for energy, water, transport and agricultural sectors; (iii) build an efficient public administration; and (iv) strengthen social cohesion and access to social services. Additionally, in the longer-term, Kosovo is looking to become a European Union (EU) member and the Government of Kosovo (GoK) has been engaged with the EU in the Stabilization and Association Process Dialogue, the framework for EU negotiations with the Western Balkan countries, the main objective of which is to assist with and monitor reforms in the country towards eventual EU accession. 5. Kosovo’s location, EU membership prospects and free market access to the EU and Central European Free Trade Agreement (CEFTA) countries offer tremendous opportunities for sustained and rapid overall development. The government is beginning to put in place the policies, institutions and investments that will help unleash the country’s export and growth potential. Kosovo became a member of the World Bank and IMF in June 2009. Both institutions are actively assisting the government in its efforts to implement its development strategy and put the country on the path to sustained economic and social advancement. II. Sectoral and Institutional Context 6. Agriculture is an important sector in Kosovo’s economy. The sector contributes about 12% to GDP and is the largest employer in post-war Kosovo, accounting for approximately 35% of total employment. As a result of the transition and conflict of the 1990s, there was a sharp increase in the proportion of the population engaged in agriculture as most of the urban and rural unemployed turned to part-time, subsistence farming to meet their household food security needs. About 90% of the population has land for cultivation, 55% has livestock and 15% grows food primarily for self consumption. 7. The sector faces several challenges that are reducing competitiveness and preventing it from meeting its production potential. The sector is characterized by unfavorable farm structures (average land holding of less than 2 ha per family spread into eight plots), outdated farm technologies, lack of technical expertise, sub-optimal use of inputs, outmoded farm management practices, weak rural infrastructure, a rudimentary rural advisory system and limited access to credit and investment capital. Kosovo now imports most of its food and other products. Agricultural imports from Kosovo’s trading partners, who receive production and export subsidies, place Kosovo farmers at a disadvantage. Production and export subsidies are used to support agriculture by many of Kosovo’s trading partners. Agricultural subsidies in these countries facilitate the entrance of better quality products at lower prices into the Kosovar market. 8. The World Bank’s recent Country Economic Memorandum 1 recommended the following policies to enhance the competitiveness of Kosovo’s agricultural sector: (a) improving the business environment and encouraging private investment; (b) reducing transaction costs for market organization and trade; (c) enhancing public services and institutional capacity; and (d) providing targeted public investment. This 1 World Bank, Country Economic Memorandum: “Unlocking Kosovo’s growth potential: Polices, Strategies, Actions”, April 20, 2010, page 109. Page 3 3 project, while limited in its scope, supports all four of these recommendations by supporting public and private investments in agriculture, strengthening value chain linkages, and building the capacity of the Minsitry of Agriculture, Forestry and Rural Development (MAFRD) to implement programs to manage and leverage such investments. 9. The EU has provided Kosovo with substantial technical assistance to develop an Agricultural and Rural Development Plan (ARDP) – 2007-13 (updated in 2009), whose fundamental objectives are to: (i) undertake actions to overcome the bottlenecks holding back sustainable rural development in the country; and (ii) align Kosovo’s rural sector with the four axes of the EU Instrument for Pre-Accession (IPA) for Rural Development (RD): (a) Competitiveness; (b) Environment and Improved Land Use; (c) Rural Diversification and Quality of Rural Life; and (d) Community-based Local Development Strategies. To achieve these objectives, the Government has identified eight measures under the four axes to promote growth and competitiveness in the agriculture sector. 2 10. However, implementation of the ARDP is a complex and fiscally demanding undertaking. The government has limited institutional and administrative capacity and structures as well as budgetary resources for progressive alignment of the sector with the objectives of the ARDP. A strategic and prioritized approach is therefore critical to identify and phase areas of support to start the process of transformation of the sector to one that that is competitive and promotes growth. 11. The government has started efforts in this direction. It initiated a program for strengthening its rural advisory services (RAS) earlier this decade. However, capacity to provide the range of advisory services needed is still considerably limited. Municipal advisors are overstretched, have little access to training to update skills , and are largely immobile due to lack of transport and therefore unable to deliver all the basic specialist technical advice as well as assisting in the preparation of business plans for rural development grants offered by MAFRD and other donors. Moving towards preparation for EU candidate status, the government recently established the Managing Authority (MA), the policy department within MAFRD as well as the Paying Unit (PU), responsible for administering MAFRD’s rural development grant program. The PU is expected to evolve into the IPARD Paying Agency. It is currently administering a small matching rural development grant program (RDGP) in the amount of 2.0 million initiated in May 2010. However, the PU has extremely limited capacity to execute its mandate of administering grant funds. It is seriously under-staffed and the current staff has limited experience and training with grant programs and IPARD requirements. There is, therefore, an urgent need to bolster and maintain the staff capacity of the MAFRD and its relevant agencies and units in order to become eligible for EU IPARD support and effectively start the process of EU harmonization. 12. Government expenditures in the agricultural sector remain limited and current allocations are only a small fraction of what is needed to realize the objectives of the ARDP. Several international 2 The eight measures are as follows: Axis 1:Competitiveness Measure 1 - Vocational training Measure 2 - Restructuring physical potential; Measure 3 - Managing water resources Measure 4 - Improving processing and marketing of agricultural products Axis 3: Rural Diversification and Quality of Rural Life Measure 6 – Farm diversification and alternative activities Measure 7 – Improvement of rural infrastructure and maintenance of rural heritage Axis 2: Environment and Improved Land use Measure 5: Improving natural resource management Axis 4: Community-based Local Development Strategies Measure 8 – Support for local community development strategies Page 4 4 donors are therefore actively assisting the government in its EU approximation efforts in the rural sector. These include, among others, the EU, U.S. (USAID), Denmark (DANIDA), Switzerland (Inter- Cooperation), U.K. (DFID), Germany (KFW) and Austria (Austrian Development Agency). Support spans a broad spectrum of activities, including inter alia , private enterprise development, land consolidation, food safety and veterinary services, crop diversification, vocational education, employment promotion through business and skills development, agro-processing, and development of farmer associations. Currently, the European Commission Liasion Office (ECLO) has allocated 5.0 million, USAID US$3.76 million, Intercooperation US$4.6 million and MAFRD 2 .0 million for providing grants to strengthen value chains in the milk, fruits and vegetables and vineyards sub-sectors. 13. Bank support is being sought to promote growth and competitiveness in selected areas of the agricultural sector. The Government of Kosovo has requested the Bank to complement and boost MAFRD’s rural development grant program in the critical sub-sectors of livestock and horticulture, two areas in which the country has a relative competitive potential. It has also requested support for capacity building of the PU and MA to be able to implement and administer the RDGP in a manner approximating IPARD standards. 14. The Bank has a comparative advantage in helping Kosovo with the development of its rural sector and approximation with relevant EU policies and requirements. It has gained considerable experience in supporting similar efforts in several countries that became EU members such as Poland, Romania, Slovenia, Bulgaria as well as through ongoing programs in several EU-candidate countries, such as Croatia, Macedonia and Turkey and pre-candidates, such as Albania, Bosnia, and Montenegro. The Bank has a unique advantage of transferring experience and lessons learned between countries and regions and applying best practices to the benefits of its clients. The Bank has been working in Kosovo for over a decade. Since 1999, the Bank has provided about US$170 million through 28 grant operations in a broad range of sectors, including through an agricultural project and two farm reconstruction projects. III. Project Development Objectives 15. The development objective of the project is to assist the government of Kosovo to promote competitiveness and growth in the livestock and horticulture sub-sectors over the next decade through implementation of selected measures of its agricultural strategy and institutional development. IV. Project Description Component 1: Transferring Knowledge to the Rural Sector (total cost: US$2.17 million). 16. This component will serve to strengthen the knowledge and skills of: (i) farm operators as well as commercial and semi-commercial agro-processing enterprises to effectively plan investments and utilize financial support available under Component 2 of this project; and (ii) municipal advisors to provide day- to-day guidance and advice to farmers on technical and available agricultural support programs as well as on sound investment planning. The training and advice provided will also help the target populations benefit from IPARD-supported grant schemes in the future. The following activities are envisaged under this component: (a) Rural Advisory Service Contracts: Project funds will be used to contract private firms or non- governmental organizations to deliver tailored training and advice: (i) to farm operators, agro-processing enterprises, local action groups, farmer associations and other rural entrepreneurs for the preparation of high quality, fundable grant proposals and related business plans; and (ii) to municipal advisors to assist the farming community and other rural entrepreneurs in the preparation of such grant proposals and Page 5 5 business plans. This activity would build on similar contracts implemented by the MAFRD in 2009 and 2010. Three contracts are envisaged under this component for the following: (i) Livestock Production; (ii) Horticulture Sector; and (iii) Agro-processing and Diversification (targeting Local Action Groups, Associations, Rural Enterprises and Municipal Advisors). Contractors will be required to assist potential beneficiaries analyze the strengths, weaknesses, opportunities and threats for their particular farm and/or enterprise (SWOT Analysis) in order to identify growth potential and investment opportunities. They will introduce improved techniques and technologies to beneficiaries as part of the training, provide follow-up clinics to review grant proposals and business plans and prepare informational brochures on the topics that will be addressed as well as workbooks on the preparation of grant proposals. These will be widely distributed throughout the country for the benefit of the rural population at large. The contracts would be issued on an annual basis, implemented over six years, with renewal subject to satisfactory performance. (b) Regional Knowledge Exchange: The project will support study tours/visits to countries in the region to enable farm operators/agro-processors to learn from the experiences of other agri-food producers and processors. These exchanges will be focused on introducing the group to advanced practices in their particular sub-sectors that would educate and inform them on opportunities for promoting growth and competitiveness in their own sub-sectors. (c) Strengthening Municipal Rural Advisory Centers: The project will support the purchase of small pieces of equipment considered essential to the functioning of an effective advisory service (e.g., digital cameras, small printers, scanners, projectors). Furthermore, the project will provide financial support to the travel and subsistence budgets of municipal advisors and MAFRD specialists, to enable staff undertake field visits as necessary in the implementation of advisory service contracts. Component 2: Enhancing Investments to Promote Sustainable Rural Development (total cost: US$18.0 million). 17. The objective of this component is to foster growth and competitiveness in the rural sector of Kosovo through the promotion of modern agricultural technologies among farm operators and agro- processing enterprises and to build the capacity of the Managing Authority (MA) and Paying Unit (PU) within MAFRD to approximate their functioning to IPARD requirements. (a) Rural Development Grant Program (RDGP). The RDGP sub-component would finance investment proposals in line with Measure 2 (restructuring physical potential) and Measure 4 (processing and marketing) of the ARDP. The sub-sectors to be supported would include milk, fruits, vegetables and vineyards, as is currently supported by MAFRD under Measure 2 and by ECLO under Measure 4. Project grants would range in value from 30,000 to 200,000. This range bridges the gap between the MAFRD’s program of 10,000 to 30,000 and the larger ECLO program of 200,000 to 500,000. Co- financing by the beneficiary would average 50% depending on project size and type of grant activity; this would filter for beneficiary solvency and intent as well as broadly correspond to future IPARD financing criteria. Co-financing under MAFRD’s RDGP is also 50%. Grants will be pre-financed by the qualifying beneficiaries and will be awarded on a rolling basis. 18. The project will finance grants to support the priority sub measures that are identified every year by MAFRD’s Working Group under the MA. Measures qualifying for grant support may be revised and/or expanded depending upon implementation experience and the identified priority needs. . (b) Institutional Capacity Building. This sub-component would support capacity building of the MA and the PU. The PU will administer the RDGP; it is already administering the MAFRD’s grant program and is expected to handle future donor-funded grant programs and eventually grant funds under IPARD. Project support would finance the hiring of local consultants in both the PU and the MA critical for Page 6 6 effective implementation of the RDGP. All consultants will be local hires, remunerated at local civil service salary levels. IDA financing for these consultants would cease when the financed positions are absorbed by the MAFRD budget, which is expected in year three of project implementation. The new staff will be trained and provided with office equipment, furniture, office space and transportation costs, and other relevant operating costs. Component 3: Project Management, Coordination, Monitoring and Evaluation (total cost: US$1.52 million). 19. A dedicated Project Implementation Unit (PIU) would be established within the MAFRD for the daily management, administration and coordination of the project’s activities in accordance with Bank requirements, including procurement, financial management, monitoring and evaluation, and audits. In addition to the core team comprising a Project Manager and Procurement, Financial Management, Monitoring and Evaluation and Training specialists, as well as translation/administrative staff, the PIU would also hire additional specialists or specialized firms as needed. 20. The project would support the staffing, establishment and operating costs of the PIU to carry out basic coordination, implementation and fiduciary obligations. A local and nationwide public information campaign would also be undertaken to inform the farming community about the benefits of the project and the opportunities for investments under RDGP. The project will use a variety of media channels to disseminate project information, such as radio, television broadcasts, posters, brochures and will develop and maintain a website. V. Financing Source: Borrower/Recipient IBRD IDA ($m.) 0.51 14.85 Others (Local Beneficiaries) 6.52 Total 21.88 VI. Implementation 21. The project will be implemented by the Ministry of Agriculture, Forestry and Rural Development (MAFRD). 22. Component 1: The Rural Advisory Services (RAS) unit within the MAFRD Rural Development and Advisory Services Department (DRDAS) will be responsible for the implementation of this component. It will take the lead in managing each of the thematic contracts. The project will provide resources to hire a coordinator for Component 1, who will be responsible for coordinating the work of the contracted RAS providers with the municipal rural advisory centers and the regional MAFRD offices. The contracted RAS providers will report to the RAS coordinator in the RAS Unit. The RAS Unit will furthermore be responsible for ensuring the quality of services delivered under the RAS contracts, and in assessing the publicity and follow-up program needs for the municipalities in their respective regions. The coordinator will assess the adequacy of equipment and training provided to ensure that they are in accordance with the needs of the municipal rural advisory centers. Page 7 7 23. Component 2 : The Paying Unit (PU) , in charge of administering the MAFRD’s RDGP, will also carry out the RDGP under the proposed project. Implementation of the RDGP would follow the procedures developed by MAFRD in collaboration with the EU-Twinning project with the Austrian Paying Agency. These procedures, including the various steps for the selection, award and signing of grant applications as well as the mechanism for on-spot inspections have been reviewed by the Bank and found to be satisfactory. An addendum would be affixed to these procedures defining additional procedures needed to meet World Bank guidelines. The procedures provide a clear tracking tool and adequate transparency in the process to ensure that grants reach the intended beneficiaries. 24. Component 3 : A newly established PIU under the Permanent Secretary (PS) will be in charge of the overall management of the project, particularly coordination with other donors, and other government units, as well as the fiduciary requirements (procurement, financial management), monitoring and evaluation, training and administration. The head of the PIU will report to the Minister of MAFRD, with day-to-day supervision by the PS. The PS will sign contracts and disbursement requests. This PIU will also be responsible for managing the public awareness campaigns to ensure effective dissemination of the availability of the rural advisory services and rural development grants under the project as well as reporting on the project’s results framework and monitoring. VII. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP 4.01) x Natural Habitats ( OP / BP 4.04) x Pest Management ( OP 4.09 ) x Physical Cultural Resources (OP/BP 4.11) x Involuntary Resettlement ( OP / BP 4.12) x Indigenous Peoples ( OP / BP 4.10) x Forests ( OP / BP 4.36) x Safety of Dams ( OP / BP 4.37) x Projects in Disputed Areas ( OP / BP 7.60) * x Projects on International Waterways ( OP / BP 7.50) x 25. No major adverse environmental impacts are anticipated under the project. Some limited environmental impacts may be associated with sub-projects financed under Component 2. These sub- projects financed through the provision of grants to farmers or other rural actors will be screened to ensure they will not cause adverse environmental impacts. The screening procedure is outlined in the Environmental Management Framework (EMF) which has been prepared, disclosed and publicly consulted, in accordance with OP/BP 4.01 on Environmental Assessment for a Category B project. The screening procedures take into account environmental requirements of both legislations in force in Kosovo (and the EU) and the World Bank. In addition, the procedures identify projects with moderate environmental impacts for which an Environmental Management Plan (EMP) is to be prepared, disclosed, implemented and monitored. 26. The EMF provides sample EMPs for activities such as construction of manure platforms, fruit and vegetable storage construction and milk collection systems. Through the development and implementation of the EMPs for grant-financed activities, the environmental awareness of the individual * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 8 8 farmers will be raised and their agricultural practices will become more environmentally friendly. In addition, the EMF document provides additional guidance through good agricultural practices, sound environmental construction measures and other information which would benefit the end user. 27. The EMF has been developed in anticipation of potential co-financing by the Global Environmental Facility (GEF). If GEF funding becomes available to supplement the IDA resources, the EMF would still be applicable in its current form. 28. The project also triggers OP 4.09 on Pest Management as it may be anticipated that investments and technical assistance supported by the project could lead to agricultural intensification which could in turn trigger increased use of agrochemicals, including pesticides. The Rural Development Grants Manual will, however, specify that grant funds cannot be used for the purchase of agricultural inputs as grants are intended for investments and not operating capital. 29. The EMF includes a section on pest management and the related environmental risks. The main elements of the Pest Management Plan (PMP) are: (i) the promotion of Integrated Pest Management and safe and rational pesticide use through the advisory, educational and capacity-building elements of the project; (ii) preparation of a limited “positive list” of pesticides which would be eligible for financing of on-farm trials/demonstrations (should GEF funding become available); and (iii) measures for ensuring that any pest management undertaken as part of the on-farm trials/demonstrations will promote an IPM approach and follow safe pesticide management practices. The PMP associated training will focus on transport and storage, implementation and rational application, and management of unused pesticides and container wastes and will target staff dealing with these issues and on-site end-users (farmers). The trainings offered will also introduce the Good Agricultural Practices (GAP) certification, EuroGAP norms and management and control of pests through integrated pest management. The PMP within the EMF also includes a list of banned pesticides and a list of pesticides which are eligible for use. 30. The EMF was disclosed in-country on September 30, 2010. Advertisements were published in newspapers and individual invitations were sent out for public consultations that were held in Pristina October 11, 2010. Prior to this large consultation meeting, two smaller group consultations were held on MAFRD’s premises on September 30 and October 1, 2010. 31. The key stakeholders range from the end-users (farmers, local communities, commercial and semi-commercial agro-processing entrepreneurs) to the institutions of Kosovo’s government, including MAFRD and the Ministry of Environment and Spatial Planning. All stakeholder representatives, about a 100, representing different ministries and agencies, international organizations, NGOs, local communities and farmers, radio station representatives, consultants, and directorates attended the public consultations organized for the EMF for this Project. Since most project activities will have direct involvement with the end-users, there will be a constant mechanism of providing information and receiving potential grievances, if any. VIII. Contact point at World Bank and Borrower World Bank Contact: Ms. Cora Melania Shaw Title: Senior Agricultural Economist Tel: (202) 473-9263 Email: cshaw1@worldbank.org Borrower/Client/Recipient Page 9 9 Contact: Mr. Kapllan Halimi Title: Acting Permanent Secretary, MAFRD Tel: 381 38 211 834 Email: kapllan.halimi@ks-gov.net Implementing Agencies Contact: Ms. Shqipe Dema Title: Head of Policy Unit, MAFRD Tel: 381 38 211 131 Email: shqipe.dema@ks-gov.net IX. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop