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Document of

The World Bank

FOR OFFICIAL USE ONLY Report No: PAD722

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED {LOAN/CREDIT}

IN THE AMOUNT OF SDR 6.26 MILLION

(US$ 9.67 MILLION EQUIVALENT)

AND A

PROPOSED LOAN

IN THE AMOUNT OF US$ 23 MILLION

TO THE

REPUBLIC OF ARMENIA

FOR A

SECOND COMMUNITY AGRICULTURAL RESOURCE MANAGEMENT AND

COMPETITIVENESS PROJECT

May 28, 2014

Sustainable Development Department South Caucasus Country Unit Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 31, 2014)

Currency Unit = Armenian Dram (AMD) US$1 = AMD 413.31

US$ 1.55 = SDR 1 = AMD 640.63

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

APIU

Agricultural Projects Implementation Unit

CARD CARMAC CPAR CPMLDC

Center for Agriculture and Rural Development Community Agricultural Resource Management and Competitiveness Project Country Procurement Assessment and Reforms Community Pasture Management and Livestock Development Committee

CV DCFTA EMF EMP EU FAO FBO FM GAO GAP GDP GNI HACCP IBRD ICB IDA IDF IFAD IPM IRR M&E MASC MOA MST MTEF NCB NGO

Community Veterinarian Deep and Comprehensive Free Trade Agreement Environment Management Framework Environment Management Plan European Union Food and Agriculture Organization of the United Nations Food Business Operator Financial Management Gross Agricultural Output Good Agricultural Practices Gross Domestic Product Gross National Income Hazard Analysis and Critical Control Points International Bank for Reconstruction and Development International Competitive Bidding International Development Association Institutional Development Fund International Fund for Agriculture Development Integrated Pest Management Internal Rate of Return Monitoring and Evaluation Marz Agricultural Support Center Ministry of Agriculture Marz Support Teams Medium Term Expenditure Framework National Competitive Bidding Non-Government Organization

iii

PDO PEFA PMLDP PMP POM PUC RAP RESCAD RPF SCVIC SDR SNCO SPS SSFS USDA

Project Development Objective Public Expenditure and Financial Accountability Pasture Management and Livestock Development Plan Pest Management Plan Project Operational Manual Pasture Users Cooperative Resettlement Action Plan Rural Enterprise and Small Scale Commercial Agriculture Development Project Resettlement Policy Framework Scientific Center for Vegetable and Industrial Crops Special Drawing Rights State Non-Commercial Organization Sanitary and Phytosanitary Standards State Service for Food Safety United States Department of Agriculture

VSC Veterinary Service Centers WTO World Trade Organization

Regional Vice President: Laura Tuck

Country Director: Henry G. R. Kerali Sector Director: Laszlo Lovei Sector Manager: Dina Umali-Deininger

Task Team Leader: Nicolas Ahouissoussi

iv

ARMENIA Second Community Agricultural Resource Management and Competitiveness Project

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT .................................................................................................1

A. Country Context ............................................................................................................ 1

B. Sectoral and Institutional Context ................................................................................. 1

C. Higher Level Objectives to which the Project Contributes .......................................... 4

II. PROJECT DEVELOPMENT OBJECTIVES ................................................................4

A. PDO............................................................................................................................... 4

B. Project Beneficiaries ..................................................................................................... 4

C. PDO Level Results Indicators ....................................................................................... 5

III. PROJECT DESCRIPTION ..............................................................................................5

A. Project Components ...................................................................................................... 5

B. Project Financing .......................................................................................................... 8

C. Lessons Learned and Reflected in the Project Design .................................................. 9

IV. IMPLEMENTATION .....................................................................................................11

A. Institutional and Implementation Arrangements ........................................................ 11

B. Results Monitoring and Evaluation ............................................................................ 12

C. Sustainability............................................................................................................... 12

V. KEY RISKS AND MITIGATION MEASURES ..........................................................13

A. Risk Ratings Summary Table ..................................................................................... 13

B. Overall Risk Rating Explanation ................................................................................ 13

VI. APPRAISAL SUMMARY ..............................................................................................14

A. Economic and Financial Analyses .............................................................................. 14

B. Technical ..................................................................................................................... 15

C. Financial Management ................................................................................................ 15

D. Procurement ................................................................................................................ 16

E. Social (including Safeguards) ..................................................................................... 17

F. Environment (including Safeguards) .......................................................................... 18

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G. Other Safeguards Policies Triggered .......................................................................... 18

H. Policy Exemptions and Readiness for Implementation .............................................. 19

Annex 1: Results Framework and Monitoring .........................................................................20

Annex 2: Detailed Project Description .......................................................................................28

Annex 3: Implementation Arrangements ..................................................................................38

Annex 4: Operational Risk Assessment Framework (ORAF) .................................................52

Annex 5: Implementation Support Plan ....................................................................................57

Annex 6: Financial and Economic Analysis ..............................................................................61

Annex 7: Map ...............................................................................................................................68

vi

.

PAD DATA SHEET

Armenia

Second Community Agriculture Resource Management and Competitiveness Project (P133705)

PROJECT APPRAISAL DOCUMENT.

EUROPE AND CENTRAL ASIA

ECSAR

Report No.: PAD722.

Basic Information

Project ID EA Category Team Leader

P133705 B - Partial Assessment Nicolas Ahouissoussi

Lending Instrument Fragile and/or Capacity Constraints [ ]

Investment Project Financing Financial Intermediaries [ ]

Series of Projects [ ]

Project Implementation Start Date Project Implementation End Date

21-Jun-2014 31-May-2020

Expected Effectiveness Date Expected Closing Date

30-Nov-2014 31-May-2020

Joint IFC

No

Sector Manager Sector Director Country Director Regional Vice President

Dina Umali-Deininger Laszlo Lovei Henry G. R. Kerali Laura Tuck .

Borrower: Ministry of Finance

Responsible Agency: Agriculture Project Implementation Unit

Contact: Gagik Khachatryan Title: Director

Telephone No.: 37410297301 Email: [email protected]

Responsible Agency: Ministry of Agriculture

Contact: Armen Harutyunyan Title: Deputy Minister

Telephone No.: 37410235468 Email: [email protected] .

Project Financing Data(in USD Million)

[ X ] Loan [ ] Grant [ ] Guarantee

[ X ] Credit [ ] IDA Grant [ ] Other

Total Project Cost: 42.67 Total Bank Financing: 32.67

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Financing Gap: 0.00 .

Financing Source Amount

BORROWER/RECIPIENT 10.00

International Bank for Reconstruction and Development

23.00

International Development Association (IDA) 9.67

Total 42.67.

Expected Disbursements (in USD Million)

Fiscal Year

2014 2015 2016 2017 2018 2019 2020 0000 0000

Annual 0.00 3.50 7.50 7.50 6.50 5.00 2.67 0.00 0.00

Cumulative

0.00 3.50 11.00 18.50 25.00 30.00 32.67 0.00 0.00

.

Proposed Development Objective(s)

The Project Development Objective (PDO) is to (i) improve productivity and sustainability of pasture and livestock systems in targeted communities and (ii) increase the marketed production from selected livestock and high value agri-food value chains. .

Components

Component Name Cost (USD Millions)

Component 1: Community/Pasture Livestock Management System

27.87

Component 2: Value Chain Development 7.44

Component 3: Strengthening Public Sector Institutions 2.45

Component 4: Project Coordination and Management 2.24.

Institutional Data

Sector Board

Agriculture and Rural Development .

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation Co-benefits %

Mitigation Co-benefits %

Agriculture, fishing, and forestry Animal production 80 100 3

Industry and trade Agro-industry, marketing, and trade

5

Agriculture, fishing, and forestry Agricultural extension and research

9 100

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Public Administration, Law, and Justice

Public administration- Agriculture, fishing and forestry

6 89 22

Total 100

I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. .

Themes

Theme (Maximum 5 and total % must equal 100)

Major theme Theme %

Rural development Other rural development 45

Rural development Rural services and infrastructure 45

Rural development Rural markets 10

Total 100 .

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects?

Yes [ ] No [ X ]

.

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the project meet the Regional criteria for readiness for implementation? Yes [ ] No [ ] .

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X .

Legal Covenants

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Name Recurrent Due Date Frequency

Safeguards X CONTINUOUS

Description of Covenant

The Recipient shall carry out the Project in accordance with the Safeguard Frameworks and all Safeguard Documents .

Conditions

Source Of Fund Name Type

IDA Project Operational Manual Effectiveness

Description of Condition

The Project Operational Manual acceptable to the Association is approved by the Association and adopted by the Recipient.

Source Of Fund Name Type

IBRD Project Operational Manual Effectiveness

Description of Condition

The Project Operational Manual acceptable to the Bank is approved by the Bank and adopted by the Borrower.

Team Composition

Bank Staff

Name Title Specialization Unit

Joseph Paul Formoso Senior Finance Officer Senior Finance Officer CTRLA

Jasna Mestnik Finance Officer Finance Officer CTR

Suzy H. Yoon-Yildiz Senior Operations Officer

Senior Operations Officer

ECSAR

Nicolas Ahouissoussi Senior Agriculture Economist

Senior Agriculture Economist, Team Lead

AFTA1

Satik S. Nairian Program Assistant Program Assistant ECCAR

Darejan Kapanadze Senior Environmental Specialist

Senior Environmental Specialist

ECSEN

Arusyak Alaverdyan Operations Officer Operations Officer ECSAR

Alexander Astvatsatryan Procurement ECSO2

Rocio Mariela Malpica Valera

Senior Counsel Senior Counsel LEGLE

Sarah G. Michael Senior Social Development Specialist

Senior Social Development Specialist

ECSSO

Garik Sergeyan E T Consultant Financial Management ECSO3

Larysa Hrebianchuk Program Assistant Program Assistant ECSSD

Armine Aydinyan Consultant Consultant ECSHD

x

Hiromi Yamaguchi Consultant Consultant ECSAR

Non Bank Staff

Name Title Office Phone City

David Lugg Agricultural Specialist 441367718893 Faringdon

Josef Ernstberger Natural Resource Management Specialist

4968491616 Kirkel

.

Locations

Country First Administrative Division

Location Planned Actual Comments

Armenia Ararat Ararati Marz X

Armenia Syunik'i Marz Syunik'i Marz X

Armenia Vayots' Dzori Marz Vayots' Dzori Marz X

Armenia Aragatsotn Aragatsotni Marz X

Armenia Armavir Armaviri Marz X

Armenia Geghark'unik'i Marz

Geghark'unik'i Marz

X

Armenia Kotaykʼ Kotayk’i Marz X

Armenia Lorri Lorru Marz X

Armenia Shirak Shiraki Marz X

Armenia Tavush Tavushi Marz X

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I. STRATEGIC CONTEXT

A. Country Context

1. Armenia is a small (29,800 km2), landlocked lower-middle income country with a population of about 3 million, a large diaspora population of around 7 million, and an average per capita Gross National Income (GNI) of US$3,720 in 2012. In the decade preceding the global economic and financial crisis, real Gross Domestic Product (GDP) growth was more than 10%, strongly fueled by remittances. In 2009, there was a substantial contraction, but growth has since resumed, although at a slower pace, reaching 4.7 % in 2011 and 7.2% in 2012. Services including construction and tourism (43%), industry including mining and energy (33%) and agriculture (23%) are the largest components of GDP. Inflation has dropped to about 2.5% in 2012 from a high of 9% in 2010, but was less than 5% throughout most of the last decade.

2. Major exports include mining products and a limited range of foodstuffs and beverages, but are outweighed by imports of manufactured goods and food, resulting in a substantial trade deficit of around US$2.5 billion annually. Remittances from the Armenian diaspora of more than US$1 billion, foreign direct investment of around US$900 million, and donor funding help to close the gap. Armenia joined the World Trade Organization (WTO) in January 2003 and has put in place a favorable trade environment with low tariffs and some improvements in tax and customs administration. It is ranked 39th in the Index of Economic Freedom and 32nd in the 2013 Doing Business index, with a major constraint being connection to the electricity grid. The population has remained stable in recent years, with about 64% living in urban areas. In the 1990s, more than 50% were classified as poor. This figure was reduced to 27% in 2008, but increased to around 36% in 2010 due to the economic and financial crises, and was registered at 35% in 2011, and 32.4% in 2012. Similar percentages of poor live in urban and rural areas.

3. Overall, Armenia has reduced poverty, kept inflation at a manageable level, maintained a stable currency, and privatized most small and medium-sized enterprises during the transition period. Nevertheless, it is particularly vulnerable to external events and the global economic situation due to its geographic isolation, narrow export base, reliance on a single transport corridor through Georgia, heavy linkages with the Russian economy, susceptibility of agriculture to weather conditions, potential for regional instability, and high dependence on remittances. The major pillars of the government’s strategy include reducing poverty, ensuring human development, deepening economic growth and improving public administration as indicated in the 2011-2013 Medium-Term Expenditure Framework.

B. Sectoral and Institutional Context

4. Agriculture remains vital to the Armenian economy. In 2012, together with the associated agro-processing, it accounted for about 23% of GDP, 17% of export earnings, and about 44% of employment. The fast economic growth over the last decade has generated new opportunities for the agriculture sector, which has grown at a robust rate averaging more than 6% annually since 1997 despite the downturn in 2009-10. Exports of agricultural products have doubled since 2005, mostly beverages and to a lesser extent fruit and vegetable products, although there was a significant but proportionally small increase in the export of live animals in 2011. However, the sector has not been able to fully take advantage of opportunities, with expanding consumer

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demand partly met by a substantial increase in imported products, which has outweighed exports and resulted in a steadily increasing gap between imports and exports and a widening of the agro-food deficit. Overall, Armenia is a net importer of agricultural products with imports of US$700 million in 2011 compared with exports of about US$230 million. 5. Productivity has grown substantially in the agriculture sector in the last decade. The Crop Production Index more than doubled from 2002 to 2009 although there was a substantial drop in 2010 due to inclement weather conditions. During the same period the Livestock Production Index increased by about 60%. Crop production typically accounts for about two-thirds of the Gross Agricultural Output (GAO), while livestock accounts for one-third. However, about 60% of the agricultural land in Armenia is pasture and grassland in the country’s mountainous areas, where livestock production is the most important economic activity. Productivity increases have been supported by increases in availability of inputs, improved availability of finance, some foreign investment, improved market linkages, and an increase in farmers’ knowledge and skills. Nevertheless, yields are far from their potential, with cereals averaging only 2.5 tons per hectare (t/ha) and cow milk yields around 2,000 liters per head based on official statistics, although these figures are substantial improvements over the 1990s figures of 2 t/ha and 1,400 liters/head, respectively. Livestock productivity is constrained mainly by unmanaged and unsustainable use of pasture resources, with severe overgrazing and degeneration of nearby pasture areas and under-utilization of remote pasture areas, poor quality and shortage of winter fodder, animal health problems, and poor genetic resources. Livestock productivity could be increased by 40% with improved animal husbandry, feeding and veterinary care, while crop yield increases of 60% would be feasible in the medium term, with better varieties and improved management including soil fertility. 6. The sector is dominated by smallholders, with some 335,000 households with an average land-holding of around 1.4 hectares and a generally diversified production system involving both crops and livestock. Only a relatively small proportion can be considered truly commercial, and many farmers, especially those in more remote areas, are among the most vulnerable with about one-third still living in poverty and in some of the regions reaching as high as 46%1. A shift towards increased commercialization in the sector has been taking place in recent years. Some farmers (around 15%) now cultivate leased land, although a third of farmers do not cultivate all their land, mainly due to poor land quality, lack of water or distance from the farm. New agro-processors and small rural businesses are appearing, an increasing number of contractual arrangements between processors and producers are in place, and producer associations and cooperatives are helping to consolidate production and markets. Nevertheless, the links between the food processing industry and agricultural producers remain weak, and many rural enterprises lack technology and know-how that could improve their competitiveness. 7. Some of the key constraints limiting the sector’s full potential could be overcome by improving market access, supporting the commercialization process, and enhancing employment opportunities in rural areas while protecting the natural environment. Further development of rural enterprises, including cooperatives and associations, and strengthening the links between

1 According to the latest (2013) “Social Snapshot and Poverty in Armenia” report by the National Statistical Service, the regions with the most poverty incidence are Shirak (46%), Kotayk (42.5%) Lori (38.7%), Gegharkunik (35.5%), are Ararat (34.6%).

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agricultural producers and the food processing industry are critical. This is especially true for those products where Armenia has a comparative advantage, such as fodder-based dairy and meat production, fruits and vegetables, and niche products such as honey. Food safety and food quality standards are becoming increasingly relevant to the competitiveness of Armenia’s agro-food industry and, along with inconsistent supply, are major barriers for increasing exports and offsetting imports to meet domestic demand for fresh and processed products. 8. Accordingly, the proposed project will: a) extend the coverage of the pasture-based livestock system component under the Bank-funded Community Agricultural Resource Management and Competitiveness (CARMAC) project; b) support the development of selected value chains important to Armenia by providing targeted sub-project investments to help strengthen links between producers and processors, promote food safety, and support processing and marketing; and c) increase the capacity of public sector institutions that can support improved market access and selected value chain development. Overall, the project extends and improves the successful CARMAC pasture-based livestock component, but also widens its scope to include a new value chain component linking livestock production as well as other Armenian produce to markets.

9. The proposed project is a livelihood as well as an environmental project. As such, it is embedded in the context of global environmental changes. Pasture-based livestock production systems are affected by climate changes, but are also considered as major contributors of global warming through their potential degradation of vegetative cover (see text box 1) and the emissions of methane gases from the digestive systems of ruminant animals.

Text Box 1: Pasture Based Livestock and Impact of Global Warming in Armenia:

Globally, grasslands account for about 12% of the total carbon storage in the terrestrial biosphere, and therefore changes in the cycling of carbon in these ecosystems may be considered globally significant. In the Armenian context, alpine grasslands cover about 60% of total land area. They are a prominent type of carbon storage. The soil of these alpine meadows is particularly rich in organic carbon (containing between 20-50 kg/m2). This alpine ecosystem is a particularly important but also sensitive carbon sink because of its high productivity during the growing season and the low rate of decomposition resulting from low temperature in winter. Many of the pasture areas in the high mountains are characterized by a net accumulation of carbon over a long time, which becomes noticeable in the deep layers of black (carbon rich) soils. Improved management of these areas by avoiding overgrazing, as proposed under this project, will help to reduce soil erosion and protect this globally important carbon sink.

This positive project contribution to global warming will become even more critical in the context of global warming, which may lead to an additional release of C stored in alpine meadows. Improved pasture management would thereby counteract the expected reduction of the soil carbon accumulation.

In addition to the positive contribution for the carbon storage the project will explore opportunities of reducing methane gas emissions by introducing more efficient breeds and feeding technologies.

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C. Higher Level Objectives to which the Project Contributes

10. The proposed project is aligned with the government’s Agricultural Sustainable Development Strategy objectives to promote sustainable agricultural development, ensure greater food security, and increase rural incomes. Key priorities of the strategy are to: (a) continue and deepen agrarian reform; (b) ensure food safety and improve food security; (c) promote the application of advanced agricultural technologies; (d) improve animal health; and (e) promote agri-processing and the supply and service infrastructure. The project is also aligned with the Bank’s Agriculture and Rural Development Policy Note. Four of its seven policy recommendations are addressed: a) value chain and market integration; b) food safety; c) structural transformation and rural employment, including development of small and medium sized rural enterprises; and d) agricultural practices, including development of a Code of Good Agricultural Practices and combating over-exploitation of natural resources. Other recommended topics of water management and knowledge gaps in relation to irrigation structures are better addressed under the Irrigation Systems Enhancement Project. The project is specifically proposed in the Country Partnership Strategy for FY14-FY17 under Cluster 1: Supporting Competiveness and Job Creation, and Engagement Area 2: Rural economy sustainably improved. The proposed contributes to the Bank’s twin goals of ending extreme poverty and boosting shared prosperity through its focus on sustainable agricultural development and increasing rural incomes. Specifically, at least 50,000 pasture users from the poorer mountain communities as well as producers marketing their produce through some 100 small processors are expected to participate in the project.

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

11. The proposed Project Development Objective (PDO) is to: (i) improve productivity and sustainability of pasture and livestock systems in targeted communities; and (ii) increase the marketed production from selected livestock and high value agri-food value chains.

B. Project Beneficiaries

12. The main beneficiaries will be pasture users, farmer cooperatives and associations, and food business operators (FBOs). At least 50,000 pasture users would participate in the project through their membership in Pasture Users’ Cooperatives (PUCs) and in the planning and implementation of Pasture Management and Livestock Development Plans. Pasture users would and benefit from improved pasture management, infrastructure, veterinary care and agricultural machinery. Users will contribute some labor for construction and financially through cost-sharing of the implementation plan. Some 100 FBOs, including registered producer cooperatives, associations and small rural businesses, would participate in the value chain component and would be eligible to apply for sub-project investments. Experience under the completed in December 2010 Rural Enterprise and Small-Scale Agriculture Development (RESCAD) and under the ongoing CARMAC projects, both including competitive grant components, indicate that there is sufficient interest and capacity to prepare applications, implement sub-projects and contribute the minimum of 50% cost-sharing that will be required. An assessment of the number and nature of existing FBOs, as well as the need for revision of existing regulations governing

5

cooperatives, are carried out during preparation under the Russian Trust Fund grant. Other relevant stakeholders include local NGOs. Special efforts will be undertaken to ensure that the project is gender-sensitive and to encourage participation of women and rural youth, particularly through training programs as part of the PUCs.

C. PDO Level Results Indicators

13. The project is anticipated to produce the following key results in the project areas:

(i) Increased livestock productivity: (a) annual milk production per dairy cattle (liter per year), (b) number of animals sold (sheep) and (c) number of animals sold (cattle);

(ii) Improved pasture and livestock system management effectiveness (score)2;

(iii) Increase in value of annual marketed production of milk, meat, fruits and vegetables (in AMD million).

14. Detailed results indicators are presented in Annex 1. The project will strive to disaggregate indicator data by gender to the extent feasible. A survey carried out during preparation provided baseline data using results from the ongoing CARMAC project.

III. PROJECT DESCRIPTION

A. Project Components

15. The proposed project consists of four components with World Bank funding of US$32.67 million. First, the project will develop and support the implementation of participatory management plans to improve productivity and sustainability of pasture and livestock systems in targeted communities in upland areas. This will extend the coverage of the pasture-based livestock system component under CARMAC, by including more communities, particularly those adjacent to the villages already included in the ongoing project. Second, the project will support the development of selected value chains important to Armenia by providing targeted sub-project investments to help strengthen links between producers and processors, promote food safety, and support processing and marketing. Third, the project will provide investments to increase the capacity of public sector institutions that can support improved market access and selected value chain development. Accordingly, the project extends and improves the CARMAC pasture-based livestock component but also widens its scope to include a new value chain component linking livestock production as well as other Armenian produce to markets. 16. Component 1: Community/Pasture Livestock Management System (US$27.87 million). The component’s objective is to continue the implementation of an efficient and sustainable community managed pasture/fodder based livestock production system in communities where livestock is a primary source of livelihood and where there is a strong interest in improving pasture production. The communities will be in addition to the 86 already included in the CARMAC project. Three main component activities will be funded:

2 Using the Pasture Management Effectiveness tool utilized in CARMAC which measures 25 key parameters critical for effective management in a scoring system. For more explanation see Text Box 2 in Annex 1.

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a) Development of Sustainable Pasture/Livestock Management Plans (US$3.67 million). Pasture User Cooperatives (PUCs), comprising pasture users, will be created in up to 100 communities in the eight Marzes with significant pasture areas (out of 10 Marzes in the country). In addition, Community Pasture Management and Livestock Development Committees (CPMLDC) will be formed, comprising the chairman of the PUC, two elected PUC members, two community council members, and the village mayor. The CPMLDC will be responsible for developing the Pasture Management and Livestock Development Plans (PMLDPs), with the participatory process supported by Marz Support Teams (MSTs) and technical experts. Building on the experience of CARMAC, the project will strive to reach a minimum target of 30% female representation on the PUC Boards – governing bodies of PUCs, while measures to promote inclusive representation from all segments of the population will also be developed. Comprehensive pasture and fodder assessments will be carried out including soil tests, plant assessments, evaluations of productivity and quality, and assessments of feed/fodder balances. The PMLDP will identify: (a) measures to improve pasture productivity, such as rotational grazing, protecting areas for regeneration, pasture rehabilitation, improving access to remote pastures, and needs for supplementary fodder production; (b) stock watering points for a more balanced use of grazing areas; (c) animal health requirements and breed improvement measures; (d) agricultural machinery for hay and fodder production; (e) measures to improve the marketability of livestock products; (f) training requirements; (g) responsibilities for implementation of the planned activities, targets and indicators, and (h) applicable measures to change current practice to reduce vulnerability of climate change in pasture management. Implementation of the plans will be further supported through mobilization of community veterinarians (under component 3). The sub-component will involve the costs associated with implementation of the sub-component, such as for APIU component coordinators and the Marz Support Team coordinators, supervision, communication and outreach, and provide funds for vehicles, equipment, technical assistance, training, costs of transport and field visits and operational expenses. b) Community Fund for Implementation of Plans (US$24.00 million). Grants will then be provided to implement their PMLDP; grant amounts will depend on the activities proposed in the PMLDP. Beneficiaries will contribute a percentage of the costs, including 5% of public infrastructure; 20% of agricultural machinery, with an additional provision that 30% of the machinery investment costs will be recovered within the first four years and be placed in the cooperative fund; and 50% of fodder production costs. The grant amounts are expected to average about US$200,000. Investments will be provided in a phased way over three years. Funding will be subject to progress on community pasture and livestock management and may include financing of: (a) infrastructure to access and use remote pastures, such as spot road improvements, stock watering points, shelters and stock-pens; (b) milk collection points with cooling equipment; (c) machinery to produce and harvest fodder; (d) costs of rehabilitation measures for degraded areas such as fencing, weed and shrub control, and re-seeding; (e) fodder production which will reduce vulnerability of climate change; (f) community-based disease control programs including for market-limiting diseases, zoonoses and parasite control; (g) artificial insemination; (h) training and advisory services; and (i) PUC support, such as management training, office equipment and furnishings.

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c) Women/Youth Special Support Program (US$0.20 million). A training and mobilization activity would target women and youth to enhance their participation in the PUCs and their communal decision-making around livestock and pasture management, as well as foster engagement by the younger generation in livestock production. The training will include awareness-raising of risks from climate change and benefits of climate change adaptation. Training would also be provided to interested women and youth on the development of food businesses, and support provided to women- and youth-run food businesses to apply for sub-project funding available under this activity. 17. Component 2: Value Chain Development (US$7.44 million). The component objective is to increase the ability of Armenian agricultural producers and processors to meet domestic demand and access international market opportunities in the food value chains of fodder-based milk and meat3, and in processed fruit and vegetables4 where Armenia has a competitive advantage. The project will identify bottlenecks such as knowledge gaps in market requirements and quality standards, inadequate facilities and equipment to meet national and/or international food safety requirements and product standards, and weak linkages between the processors and producers. To address the bottlenecks, targeted funding would be provided to: (i) support producer cooperatives to standardize their production and to improve on-farm quality assurance and good agricultural practices; (ii) increase knowledge of markets and market requirements including food safety systems; (iii) incorporate food safety practices and compliance including Hazard Analysis and Critical Control Points (HACCP); (iv) improve processing, storage, product handling, marketing, and product quality; (iv) register brands and obtain certification including organic food certification; (v) improve management capacity; and (vi) change techniques to reduce vulnerability to climate change in pasture management. The targeted funding would be provided to registered producer cooperatives, associations and rural businesses operating along the value chain based on an application process. Applications will be selected based on criteria including that the sub-projects address critical constraints in the value chain and that they will improve market access. Beneficiaries will be required to match up to at least 100% of the investment amount depending on the category of investment (training, food safety practices, and market investment). It is anticipated that around 80 sub-projects from US$8,000 up to maximum of US$50,000 will be funded. The component will have national coverage. Recognizing that FBOs run by disadvantaged groups may lack the necessary skills to make high-quality applications to the sub-project fund, special assistance/training with the application process will also be made available to assist such FBOs (e.g. female- and youth-run FBOs) to apply to the program. The component will include costs of a small value chain secretariat for coordination, supervision, communication and outreach, and provide funds for vehicles, equipment, technical assistance and training, costs of transport and field visits and operational expenses. 18. Component 3: Strengthening Public Sector Institutions (US$2.45 million). The objective of the component is to increase the capacity of public sector institutions to facilitate business development and enable market access in the selected value chains supported under

3 Primarily fodder-based dairy milk and beef and mutton 4 Processed produce of fruit and vegetables where Armenia has a competitive advantage. The main value chains and likely activities are clear and have been agreed, with information included in the studies in the Agriculture and Rural Development Policy Note. Additional studies are being carried out under the ECAPDEV Trust Fund grant to support implementation by refining specific bottlenecks, eligible items and criteria.

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components 1 and 2. Activities to be funded under the component consist of: (i) Animal Health Services, including providing training and equipping around 20 community veterinarians (CVs) in addition to the 100 CVs trained under CARMAC, and establishing four regional-level Veterinary Service Centers (VSCs) to be operated by the CVs. These VSCs will be in addition to the four planned under the CARMAC project and the three currently in place under the CARD/USDA project, and will follow the same implementation approaches; (ii) Food Safety, including increasing capacity of food safety inspectors at the Marz and district level through provision of simple testing equipment and training; strengthening and supporting State Service for Food Safety (SSFS) laboratories; and providing additional equipment for vaccination programs undertaken by the Ministry of Agriculture’s Center for Veterinary, Food Safety and Phytosanitary Services SNCO; (iii) Support to the Scientific Center of Vegetable and Industrial Crops to produce high quality vegetable seeds and seedlings of the locally-adapted varieties developed by their breeding and selection program; (iv) Introduction of Good Agricultural Practices, which will include support to the Agrochemical Service State Non-Commercial Organization to analyze soils and chemicals and to test techniques more resilient to climate change vulnerability in farming systems and livestock breading; and (v) component coordination, including the costs of a coordinator, of transport, and field visits, as well as operational expenses. 19. Component 4: Project Coordination and Management (US$2.24 million). The project would continue to be coordinated by the existing Agriculture Projects Implementation Unit State Agency (APIU) of the Ministry of Agriculture. The project would use the present CARMAC structure for financial management (FM), procurement, monitoring and evaluation, and environmental and social safeguards. The project would provide incremental project management costs in these areas, additional technical specialists as identified during further project preparation, costs of transport and field visits, costs of impact assessments at mid-term including project evaluations, and audit.

B. Project Financing

Lending Instrument 20. The project will be financed through the Investment Project Financing (IPF) funded from IDA and IBRD resources. The total project cost is US$ 40.0 million, of which US$ 23 million is financed by an IBRD loan, payable in 25 years, including 10 years of grace period, at six-month Libor for US$ plus variable spread and US$ 9.67 million equivalent by an IDA credit, of which US$ 3.8 million equivalent will be provided on standard IDA blend terms, with a maturity of 25 years, including 5 years of grace period, at a fixed interest rate of 1.25% per annum and US$ 5.87 million equivalent will be provided on IDA hard terms, with a maturity of 25 years, including 5 years of grace period, at a fixed interest rate of 1.4% per annum. The remainder will be provided from beneficiaries and the Government.

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Project Cost and Financing

% of IDA/IBRD % Tota Project

Cost* Total Financing Financing

A. Community Pasture/Livestock Management System Pasture/Livestock Management Planning & Support System 3.67 9.2 2.75 75.0

Community Funds 24.00 60.0 19.68 82.0 Women/Youth Special Support Program 0.20 0.5 0.15 75.0

Subtotal Community Pasture/Livestock Management System 27.87 69.7 22.58 81.0B. Value Chain Development

Sub-project Investments 6.85 17.1 3.46 50.5Support Services 0.59 1.5 0.44 75.0

Subtotal Value Chain Development 7.44 18.6 3.90 52.4C. Strengthening Public Sector Institutions

Public Animal Health Services 1.74 4.3 1.30 75.0Seeds and Seedling Development 0.51 1.3 0.39 76.5Other Institutional Development 0.20 0.5 0.15 75.0

Subtotal Strengthening Public Sector Institutions 2.45 6.1 1.84 75.0D. Project Coordination and Management and M&E

Project Management 1.74 4.4 1.31 75.0Monitoring and Evaluation 0.50 1.2 0.37 74.0

Subtotal Project Coordination and Management and M&E 2.24 5.6 1.68 75.0Unallocated 2.67 2.67Total PROJECT COSTS 42.67 100.0 32.67 76.6

*Total project cost includes taxes

Program Objective and Phases

21. Not applicable.

C. Lessons Learned and Reflected in the Project Design

22. The project design builds on lessons and experiences from World Bank-funded projects in the agriculture sector, notably the on-going CARMAC project and the previous RESCAD project. These projects included community development activities, support for the development of an effective agriculture advisory system, and veterinary and food safety support. In particular, the CARMAC project has formed PUCs and has prepared participatory PMLDPs in 68 communities to date. As a result of CARMAC project interventions at this early stage, milk productivities for cattle and sheep have increased by 11% and 6%, respectively (from 1,428 to 1,585 kg/year for cattle and from 66 to 70 kg/year for sheep). Similarly, the growth rates of animals for cattle and sheep have increased by 12% and 3%, respectively. Efficiency of communal pasture management as measured by increased communal budgetary revenues from lease of pastures has increased by 55% while sales from livestock have increased by 48%. The available data for CARMAC suggest that project’s design and approach enable beneficiaries both to increase pasture productivity and to improve pasture management in a sustainable way.

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23. The main lessons from the CARMAC project that have been reflected in the design of CARMAC II include:

Turning over the management responsibilities to the communities of common access resources (communal pasture lands) needs to be built on a broad-based consensus by all users and the village authorities. This consensus and agreement needs to be reached and well-documented before the project starts to invest taking into account that villages not reaching such agreement would drop out from the project before receiving funds. Taking into account this lesson the development of the new community pasture management plans will be carried out in a very participatory way involving the effective participation of the different stakeholders.

Institutional capacity building and physical investments need to go hand-in-hand. Unbalanced investment in hardware (infrastructure and machinery) and software (training and capacity building) was a problem in the initial stage, which was corrected. Similar issues will be avoided under CARMAC II.

Communities tend to pick attractive investments and avoid implementing less attractive activities (‘cherry-picking’). To achieve the management objective including the necessary behavioral changes of people of using pasture resources more sustainably a comprehensive management plans needs to be developed and this plan needs to be implemented comprehensively and not partially. For example, sufficient winter fodder production remains a problem under CARMAC that may compromise the achievements of the management objective. The on-going and the new project need to pay attention to achieve a full and balanced implementation of the management plans.

The acceptance of sustainable pasture management practices depends on the economic gains and additional income farmers can achieve through better resources management. The proposed design therefore widens the scope of activities and includes in addition to productivity and production related investments also possible investments in processing and marketing of livestock products.

24. In addition, according to the Bank conducted Social Accountability Review on Community Pasture Management and Irrigation Water Management in Armenia completed in October 2013, grievance mechanisms are in place but could be improved, as could information flow from the APIU to PUCs. Further, although there is balanced representation of diversity among PUC members, steps could be taken to increase women’s participation in the PUCs and their executives. 25. The RESCAD and CARMAC projects included demand-driven Competitive Grants Programs that have supported some 87 rural businesses to date to introduce technical innovations and improve business practices. The RESCAD ICR, completed in June 2011, indicates that for the Competitive Grants the incremental annual net benefits per US$1 investment was US$0.76 on average and investment return was 85%. From the first 38 grants under CARMAC, 11 grants cover livestock production and processing and 9 fruit and vegetable production and processing, indicating the importance of these topics, although evaluations have not yet been completed. Nevertheless, the projects indicate that matching grants enable beneficiaries to invest in their businesses and allows them to introduce and test more innovative and risky approaches that they

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would not otherwise be able to do. In addition there is a need to introduce a broader food safety and quality approach to enhance the competiveness of rural businesses; and modify the approach to focus on specific value chains of importance to Armenia.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

26. The existing Agriculture Projects Implementation Unit (APIU) State Agency of the Ministry of Agriculture would be responsible for overall project management including all procurement, financial management, reporting, and Monitoring and Evaluation (M&E) responsibilities. The APIU has considerable experience in managing similar and related projects including the ongoing CARMAC project, the closed RESCAD and Avian Influenza Preparedness Projects, and the on-going IDF Food Safety Capacity Building Project. Technical specialists would be responsible for specific components as at present under CARMAC, including the Marz Support Teams responsible for the pasture/livestock system component. Support will also be provided for M&E and for implementing surveys and impact assessments. An environmental and social safeguards specialist would be contracted with responsibility for environmental and social issues including safeguards. Additional support may also be provided where necessary including a part-time social specialist to support gender sensitivity and youth involvement, oversee grievance mechanisms, and provide support on other social dimensions of project implementation. Further implementation details are given in Annex 3. 27. The APIU, continuing the successful arrangement under CARMAC, would be responsible for the project’s FM arrangements, including budgeting and planning, accounting, flow of funds, financial reporting, internal controls, and external auditing. In addition, the APIU agreed to implement the following actions:

Agreed actions Implementation Deadline 1. Develop and adopt the Project Operational Manual (including

the Operational Sub-Manuals for Community Fund Grants and Targeted Sub-Project Gran as integral parts of the overall Project Operational Manual) acceptable to the Bank, which will cover the controls over flow of funds under community grants in Component 1 and the sub-project funding under Component 2).

Effectiveness Condition

2. Update the Financial Management Manual (FMM) to describe the FM arrangements under the Project (a capacity building action – not a condition).

By Project Effectiveness

3. Hire a new financial manager with relevant experience and knowledge of Bank FM policies and procedures to enhance the FM/accounting staff for the proposed CARMAC 2 project (a capacity building action– not a condition).

By Project Effectiveness

28. In the environment of project implementation, governance is perceived as an important issue; therefore, adequate mitigation measures have been established and will be closely monitored, including: (a) putting in place a formal internal control framework, as described in the OMs/FMM; (b) enforcement by APIU of flow of funds mechanism agreed with the

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Borrower/Recipient; (c) auditing of the project financial statements by independent auditors with TORs acceptable to the Bank; and (d) conducting regular FM implementation support and supervision, and procurement prior and post reviews.

B. Results Monitoring and Evaluation

29. Sound Monitoring and Evaluation (M&E) is central to learn lessons and to enable dissemination of results to other Pasture User Cooperatives (PUCs), Food Business Operators (FBOs), and other stakeholders including the Ministry of Agriculture and other government entities. A full-time M&E Specialist will be employed in the APIU to closely work with component coordinators collecting information from them, to coordinate the M&E activities, and to facilitate wide dissemination. M&E activities will include field supervision of quality and safeguard compliance of works, surveys, mapping instruments, progress reporting, a baseline survey, a mid-term impact evaluation and a final impact evaluation to document results and outputs. The M&E surveys will be conducted in partnership with NGOs and research institutions, with information on M&E results included on project, Ministry and MASC websites. 30. The Community Pasture/Livestock Specialists and the Marz Support Teams will monitor progress of activities carried out by the communities, while the communities and PUCs themselves will play a substantial role in M&E for the Component 1. The management effectiveness of the PUCs will regularly be monitored using a simple scoring system (Management Effectiveness Tracking Tool (METT)). This tool will be applied externally by the PIU monitoring expert to certify eligibility for project funding; but the tool will also be applied as a self-evaluation tool by the PUCs (see also Tex Box in Annex 1). The Value Chain Secretariat will monitor the value chain sub-projects throughout their implementation and based on milestones included in each contract. Each sub-project will be evaluated by an independent consultant following completion, including a cost/benefit analysis and an assessment of the number of beneficiaries. For the Animal Health Services, the Veterinary Specialist will conduct regular monitoring and will organize an independent consultant to carry out an evaluation of each VSC and the performance of the community veterinarians. The veterinary specialist will also be responsible for the Food Safety activity, while the agricultural specialist will be responsible for monitoring the Seeds and Seedling Development and Good Agricultural Practices activities.

C. Sustainability

31. Component 1 will be built around three design features: (i) interlinked objectives of environmental conservation and poverty reduction that provide a holistic approach to rural development with all activities reinforcing one another; (ii) intensive participation among community-level stakeholders to promote social sustainability and local ownership; and (iii) cost-sharing among public and private stakeholders to provide sufficient incentives for farmers to continue adopting good practices for pasture management and livestock production, and for communities to maintain investments through adequate management. Overall, the project is expected to positively influence stakeholders’ behaviors, as a result of first-hand benefits resulting from the activities supported under it. As such, it is expected that the PUCs will continue to function based on the lease contractual arrangements and the pasture fees they collect

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from their members. In addition, specific support will be targeted to women and youth in the PUCs. 32. For the value chain activities, the targeted sub-project investments are intended to address bottlenecks in the value chains including improved food safety and better linkages between producers and processors and, thus, improve competiveness of Armenian products in both the domestic and international markets. Accordingly, the sub-projects are likely to lead to long-term efficiency gains in the value chains. The results of the evaluation of each sub-project, including a cost-benefit analysis, will also be widely publicized and made available to a wide range of stakeholders. For the animal health services, the fee-for-service and related income for community veterinarians are expected to be the critical catalysts to ensure sustainability of the program. The other component 3 activities are also intended to improve the capacity of public sector institutions to support components 1 and 2.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Risk Category Rating

Stakeholder Risk Low

Implementing Agency Risk

- Capacity Moderate

- Governance Moderate

Project Risk

- Design Low

- Social and Environmental Low

- Program and Donor Low

- Delivery Monitoring and Sustainability Low

- Transparency in the Selection of Communities and Grant Recipients Moderate

Overall Implementation Risk Moderate

B. Overall Risk Rating Explanation

Previous experience and lessons learned under the ongoing Bank-funded CARMAC project and the previous Rural Enterprise and Small-scale Agricultural Development (RESCAD) project, and the strong support from the Ministry of Agriculture, reduce the risks associated with project design and implementation. The project is based on designs already tested and proven and on an experienced project implementing agency. There are moderate operating environment risks, related to co-financing delays of pasture management plans under Component 1 of the on-going CARMAC project. This and other risks will be addressed during project implementation.

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VI. APPRAISAL SUMMARY

A. Economic and Financial Analyses

33. The project will have two major benefits: (i) improve productivity and sustainability of pasture and livestock systems in targeted communities; (ii) increase the marketed production from selected livestock and high value agri-food value chains. Benefits would derive from: (i) increased pasture yields; (ii) increased cultivated feed crop area; (iii) improved capacity of smallholders for livestock management; (iv) livestock advisory and health services; and (v) improved market access through value chain development. Overall, the development impact of improved pasture and livestock management would be increased income from livestock production by smallholder farmers in targeted communities. In addition, value chain development activities would increase competitiveness of existing producer cooperatives, associations and local food business operators. For example, analysis shows that proper package design and product promotion as well as certification may open international markets for Armenian honey producers and provide them additional revenue. Investments in product handling and grading may substantially decrease losses in apple production and provide an opportunity to receive higher price for separated premium apples. Establishment of milk cooling and collection points would enable smallholder farmers to access dairy processing enterprises. Project activities would also have a positive long-lasting impact on limiting pasture land deterioration. 34. The World Bank is well-placed to support this project, due to its experience in agriculture, rural development, pastures and livestock management, and participatory community development in Armenia, Europe and Central Asia, and globally. This includes experience gained in pastures and livestock management, and in community and matching grant programs, and from achievements and lessons learned notably in the RESCAD and CARMAC projects, which include successful participatory community development and competitive grants procedures, both highly applicable to this project. Without the project, resource degradation is likely to continue unabated until it becomes irreversible, leading to desertification and a missed opportunity to establish competitive livestock production in Armenia. No other support programs or projects in the country exist to address this issue. Public sector provision of financing is the most appropriate mechanism for this project. Improved pasture management is primarily a public good that will result in limiting pasture degradation, but is unlikely to be financed directly by individual pasture users. Public investment in improving the value chains will also limit the risk to food business operators and help improve market access that will benefit the Armenian economy as a whole. In both components, however, significant beneficiary contribution is required. 35. The economic and financial analysis mainly assumes quantifiable revenues generated by participating smallholder farmers from livestock production and food business operators from an increased value of their products. Environmental benefits as well as benefits from public sector institution development are difficult to estimate, largely due to lack of efficient and reliable data. Overall, the base case internal rate of return (IRR) is estimated at 18.1%. The base case net present value of the project’s net benefit stream, discounted at 12%, is US$ 15.2 million or US$75 per ha of pasture, US$420 per farm household, and US$16 per animal unit in participating communities. In relative terms, the IRR is equally sensitive to changes in costs and

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in benefits. In absolute terms, these changes do not have a significant impact on the IRR, and the economic viability is not threatened by either a 20% decline in benefits or by a 20% increase in costs. The analysis thus indicates that the project would be economically viable even if benefits decreased by 31% and investment costs increased by 46%. A one-year delay in project benefits reduces the IRR to 15%. With a two-year delay in project benefits, the IRR falls to approximately 13%.

B. Technical

36. The technical approaches take into account experiences with similar activities in Armenia and other countries in the region, and have been widely discussed and agreed with Government and other stakeholders. The knowledge and awareness of the value of efficient pasture/livestock management systems in Armenia has developed significantly during the CARMAC project, and the Ministry of Agriculture is keen to expand the program to encompass more livestock communities. The comprehensive approach for improved pasture management and higher productivity is accompanied by activities to: (i) restructure livestock production and feeding systems; (ii) improve animal health and nutrition; and (iii) develop new market and business opportunities. The value chain component is based on good practices from similar programs in the region and builds on and derives lessons from the Competitive Grants Program carried out during the ongoing CARMAC and the completed RESCAD project. The methodology is well-suited to identify bottlenecks in the value chains and to support rural businesses and entrepreneurs to address the bottlenecks through targeted sub-project financing, with potential to provide significant direct benefits, improve linkages with producers, and increase rural employment. Through information activities, wider benefits can also be realized. Support for community veterinarians through training and equipping builds on similar successful activities in Armenia and on experiences in other countries in the region, and will address farm-level animal health and production diseases prevalent in livestock areas. Other activities in component 3 address limitations in public sector capacity to support value chain development and to help improve the community pasture/livestock system.

C. Financial Management

37. The CARMAC 2 project FM assessment undertaken in September 2013 and updated in March 2014 established that the APIU has acceptable FM arrangements in place. As an effectiveness condition, a Project Operational Manual (POM) acceptable to the Bank (which will include Operational Sub-Manuals that specifically cover the controls over flow of funds under the community grants in Component 1 and the sub-project funding under Component 2) will be developed and adopted. The POM sections will detail the flow of funds and controls: (i) under the grants to be provided to PUCs to implement their Pasture Management and Livestock Development Plans (Component 1) and; (ii) under the sub-project funding provided to existing FBOs operating along the value chain such as registered businesses to implement Value Chain Development activities (Component 2). 38. In addition, prior to project effectiveness, the APIU will (i) have updated its Financial Management Manual (FMM) to describe the FM arrangements under the Project, which can be attached to POM, and (ii) have hired a Project financial manager and an additional accountant (these are agreed capacity building actions but not effectiveness conditions).

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39. The key elements that provide a basis for reliance on the Project FM system include: (i) APIU’s significant experience in implementing the Bank-financed projects5; (ii) use of reliable and flexible 1C accounting software for accounting and reporting; (iii) adequate filing system; (iv) overall adequate internal control system in place at APIU; and (v) satisfactory results from previous FM implementation support and supervision missions and the audits of current CARMAC project. 40. Annual audits of the Project financial statements will be provided to the Bank within six months of the end of each fiscal year, and at Project closing. The Borrower/ Recipient has agreed to disclose the audit reports for the CARMAC2 within one month of their receipt from the auditors and acceptance by the Bank, by posting the reports on the APIU website (www.arspiu.com). Following the Bank's formal receipt of these reports from the Borrower/ Recipient, the Bank will make them publicly available according to World Bank Policy on Access to Information. The Project will produce a full set of semi-annual interim un-audited financial reports (IFRs) to be submitted to the Bank within 45 days of the end of each calendar semester, from the first disbursement and throughout the project life. 41. Although analytical assessments conducted by the Bank (Public Expenditure and Financial Accountability (PEFA) Assessment completed in 2013 and Country Procurement Assessment and Reforms (CPAR) report completed in 2009) indicate weak downstream elements of PFM system, efforts are being made to use some elements of country PFM system. In particular, the Treasury system is being used to maintain the designated accounts of Bank-financed projects including this one, which plans to open the designated account in the Treasury. Other country PFM systems will be considered for the project implementation as Government progresses with ongoing PFM reforms.

D. Procurement

42. Procurement will be carried out by the APIU that has experience in managing similar projects and is familiar with Bank procurement rules and procedures. Procurement financed out of the targeted sub-project grants’ fund under Component 2 of the project will be carried out by the beneficiaries of the sub-projects using the Community Participation method as per the Clause 3.19 of the Procurement Guidelines described in detail in the Project Operational Manual. The Bank’s Procurement and Consultants Guidelines dated January 2011 shall apply. The World Bank Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credit and Grants dated October 15, 2006 and revised in January 2011 shall also apply. 43. Procurement will be conducted following implementation arrangements described in the POM and using the new and revised formats of the latest versions of the Bank’s Standard Bidding Documents (SBD) for Goods and Civil Works, and Standard Request for Proposals (SRFP) for consulting assignments available at www.worldbank.org. These new documents were recently revised and APIU capacity to use these documents should further be strengthened

5 APIU has considerable experience in managing similar and related projects including the active CARMAC, the closed RESCAD and Avian Influenza Preparedness Projects, and the new IDF Food Safety Capacity Building Project now starting up.

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through additional training for relevant staff. A Procurement Plan (PP) covering the first 18 months of project implementation will be prepared by the implementing agency and agreed with the Bank. The final version of the PP will be disclosed and posted on the Bank’s website.

Project procurement risk is rated Moderate after mitigation measures.

E. Social (including Safeguards)

44. The project is expected to generate positive social benefits by improving the productivity of livelihood resources such as communal pastures and livestock, and will be especially valuable to poor households that rely on livestock as an important source of food and cash income. These activities will focus on poorer mountainous areas where pasture degradation is the most problematic. Around 100 communities in eight poor regions in Armenia - a total population of around 125,000 - would benefit from the project. The project will contribute directly to increased opportunities for community voice and participation in decision-making around livestock and pasture management and has been structured to build community capacity in this regard. Additionally, through the value chain component, the project will help to diversify the community income base and their constituent households and provide better access to markets. 45. Project social risks relate primarily to potential unequal access to decision-making processes and unequal distribution of project benefits. More affluent or influential households may be in a position to dominate the decision-making process for resource allocation, improved pasture utilization, and the selection of sub-projects to be funded under the value chain component, resulting in a form of ‘elite capture’. Women may also be excluded by male-dominated community decision-making structures and processes. Youth and other marginalized groups may be similarly excluded. To promote gender sensitivity, a specific sub-component is designed to provide training and information for women and rural youth and to enhance their participation and involvement in the PUCs. Gender disaggregated data collection is also anticipated.

46. To mitigate other social risks, the project emphasizes participatory decision-making and channels to address grievances. The grievance redress mechanisms build on those used in the CARMAC project and will include the identification of a grievance officer in each PUC, a telephone feedback line to the APIU grievance focal point and a committee in the APIU to review grievances if they cannot be resolved. Further a Social Assessment has been commissioned for the Project and its findings will be used to enhance the project’s social impact, including to further identify: opportunities to reduce potential social risks linked to the Project; opportunities and strategies for reaching out to Project stakeholders, particularly the poor and vulnerable groups including women and youth; and strategies for strengthening community decision making processes under the project.

47. OP/BP 4.12 on Involuntary Resettlement has been triggered as a precaution as all the project sites are not yet known and the type and scale of civil works (including PUC sub-projects under Component 1 and VSC construction under Component 3) are still to be determined. A Resettlement Policy Framework (RPF) for the Project has been prepared by the government and will be followed by all Project activities. The RPF was consulted with stakeholders and disclosed publicly. Investment-specific Resettlement Action Plans (RAPs) will be prepared and

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implemented prior to commencement of works in those sites where resettlement or land use or acquisition would be required. However, the Community Fund for Implementation of PUC Plans will not approve any grants that involve land acquisition (permanent or temporary) or physical resettlement.

F. Environment (including Safeguards)

48. It is expected that the project will impart long-term environmental benefits through sustainable pasture management, improved waste management from livestock farms, improved food safety measures, training of community veterinarians in prevention and control of farm-level animal production diseases, and improved dissemination of good farming practices among rural communities. Development and implementation of PMLDPs are expected to arrest degradation of targeted pastures, reverse productivity losses, and improve biodiversity conservation in the alpine zone of Armenia. However, assisting communities to better organize animal husbandry and meat and dairy production implies certain environmental threats and requires a cautious approach. Weed control in fodder production and some value chain sub-projects may involve the use of pesticides. Animal farms and milk processing centers will produce organic waste. All of these require application of adequate mitigation measures, including public awareness raising and education. Targeted technical assistance will be required to work out optimal and realistic solutions for waste management in rural areas because of lack of regulations and infrastructure. 49. Environmental impacts from small construction works planned under the project will be minor and much easier to mitigate. These will likely include nuisance from the operation of construction vehicles and machinery and generation of small amounts of construction waste in the course of improving access roads and other infrastructure of pastures and premises of VSCs. 50. The project is classified as Category B. Because of multiple individual interventions, most of which will be defined on a rolling basis, the environmental guidance for project implementation is provided through an Environmental and Social Management Framework (ESMF) included in the Project Operational Manual. The ESMF outlines the system of screening the proposed project interventions by their expected environmental and social risks, defining the scope and nature of environmental work required during preparation of each intervention, managing identified risks, and monitoring application of the prescribed impact mitigation measures. The ESMF was prepared through updating the Environmental Management Plan (EMP) used for CARMAC, disclosed to the public in an accessible manner and discussed with stakeholders. The finalized ESMF was disclosed in-country and through the World Bank InfoShop.

G. Other Safeguards Policies Triggered

51. The project triggers OP 4.09 Pest Management. Fodder production and some value chain sub-projects may involve use of project proceeds for pesticide procurement, or may indirectly increase pesticide use while stimulating agricultural production by improving availability of other inputs and machinery. The main principles of sound pest and pesticide management are outlined in the ESMF, while specific Pest Management Plans (PMPs) will be developed for

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individual sub-projects, as required, to ensure that only sustainable use of pesticides is supported under the project. H. Policy Exemptions and Readiness for Implementation

52. There are no policy exceptions. The procurement plan will be finalized before project approval. The first component can begin implementation with a number of PMLDPs already developed and ready to start, while the second component will have identified eligible FBOs and major bottlenecks in the value chains prior to appraisal. A satisfactory business plan has already been prepared by the Scientific Center for Vegetable and Industrial Crops. Draft bidding documents will be prepared for the first year of project implementation.

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Annex 1: Results Framework and Monitoring .

Country: Armenia

Project Name: Second Community Agriculture Resource Management and Competitiveness Project (P133705).

Results Framework.

Project Development Objectives .

PDO Statement

The proposed Project Development Objective (PDO) is to (i) improve productivity and sustainability of pasture and livestock systems in targeted communities and (ii) increase the marketed production from selected livestock and high value agri-food value chains.

These results are at Project Level .

Project Development Objective Indicators

Cumulative Target Values Data Source/

Responsibility for

Indicator Name Core Unit of Measure

Baseline YR1 YR2 YR3 YR4 End

Target Frequency

Methodology

Data Collection

Increased livestock productivity: a) annual milk production per dairy cattle (liter per year)

1420 1420 1480 1560 1650 1700 Annually Village survey

PIU M&E expert

b) number of animals sold (sheep number)

Number Sub-Type Supplemental

56000 56000 56000 60000 65000 67000 Annually Village Survey

PIU M&E expert

c) number of animals sold

Number Sub-Type

27500 27500 27500 30000 31900 33000 Annually Village Survey

PIU M&E Expert

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(cattle number) Supplemental

Improved community-level pasture and livestock system management effectiveness (score)

Number 15.00 15.00 25.00 25.00 25.00 50.00

Before each investment round and end of project

METT PIU M&E expert

Increase in value of annual marketed production of milk, meat, fruits and vegetables (in AMD million)

Number 0 0 0 400 400 800 Mid- and end-project

Project reporting

PIU M&E expert

.

Intermediate Results Indicators

Cumulative Target Values Data Source/

Responsibility for

Indicator Name Core Unit of Measure

Baseline YR1 YR2 YR3 YR4 End

Target Frequency

Methodology

Data Collection

Number of food safety inspectors trained under project (cumulative)

Number 0 0 50 50 50 50 Annually

PIU Reporting

PIU M&E Expert

Additional number of Pasture User Cooperatives implementing


Project reporting

PIU M&E expert

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Pasture Management and Livestock Development Plans (cumulative)

Targeted clients who are members of an association (percentage)

Percentage 0.00 50.00 50.00 55.00 60.00 60.00 Annually

Project reporting

PIU M&E expert

Targeted clients who are members of an association - male (number)

Number Sub-Type Breakdown

0 1540 3850 6160 7700 7700 Annually PIU Reporting

PIU M&E Expert

Targeted clients who are members of an association – female (number)



PIU M&E Expert

Targeted clients - male (number)



PIU M&E Expert

Targeted clients - female (number)



PIU M&E Expert

Client days of training provided (number)

Number 0 5500 10700 17000 21000 21000 Annually

Project reporting

PIU M&E expert

Client days of training

Number Sub-Type

0 1200 3200 5000 6000 6000 Annually Project reporting

PIU M&E expert

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provided - Female (number)

Breakdown

Land area where sustainable land mgt. practices were adopted as a result of project

Hectare(Ha) 0.0 0.0 22000.0 55000.0 88000.0 110000.0 Annually Project reporting

PIU M&E expert

Increased efficiency of communal pasture management, as measured by increased communal budgetary revenues from lease of pastures

Percentage 0.00 100.00 110.00 125.00 140.00 150.00 Annually Project reporting

PIU M&E expert

Number of sub-project investments completed (cumulative)


Project Reporting

PIU M&E expert

Semi-annual reports and annual work plans prepared

Yes/No No Yes Yes Yes Yes Yes

Semi-annually

Project reporting

PIU M&E expert

M&E system developed and effective

Yes/No No Yes Yes Yes Yes Yes Semi-annually

Project reporting

PIU M&E expert

.

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Annex 1: Results Framework and Monitoring.

Country: Armenia

Project Name: Second Community Agriculture Resource Management and Competitiveness Project (P133705).

Results Framework.

Project Development Objective Indicators

Indicator Name Description (indicator definition etc.)

Increased livestock productivity: annual milk production per dairy cattle (liter per year)

Livestock productivity will be measured by annual milk production per dairy cattle.

a) number of animals sold (sheep number) Number of animals sold (sheep number) was selected as a supplemental indicator for measuring increased livestock productivity.

b) number of animals sold (cattle number) Number of animals sold (cattle number) was selected as a supplemental indicator for measuring increased livestock productivity.

Improved community-level pasture and livestock system management effectiveness (score)

This indicator measures effectiveness of pasture and livestock management based on a special estimation tool. The explanation of how to calculate a score is provided in the Box 2 below the table.

Increase in value of annual marketed production of milk, meat, fruits and vegetables (in AMD million)

The indicator measures the annual value of sales from milk, meat, fruits and vegetables.

.

Intermediate Results Indicators

Indicator Name Description (indicator definition etc.)

Number of food safety inspectors trained under project (cumulative)

This is an output indicator, which measures number of food safety inspectors trained under the project.

Additional number of Pasture User Cooperatives implementing Pasture Management and Livestock Development Plans (cumulative)

This is an indicator, which measures the number of approved Pasture Management and Livestock Development Plans.

Targeted clients who are members of an association (percentage)

This indicator measures the share of clients (may include farmers or members of a business) who have become members of a relevant association as a result of project activities.

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Targeted clients who are members of an association - male (number)

No description provided.

Targeted clients who are members of an association – female (number)

No description provided.

Targeted clients - male (number) No description provided.

Targeted clients - female (number) No description provided.

Client days of training provided (number) This indicator measures the number of client days of training provided i.e. the number of clients who completed training multiplied by the duration of training expressed in days.

Client days of training provided - Female (number) No description provided.

Land area where sustainable land mgt. practices were adopted as a result of project

This indicator measures the land area that as a result of the Bank project incorporated and/or improved sustainable land management practices. This indicator can track progress toward sustainability at farm scale and at landscape scales within agroecological zones, watersheds, or basins. The baseline value for this indicator is expected to be zero.

Increased efficiency of communal pasture management, as measured by increased communal budgetary revenues from lease of pastures

This indicator measures communal budgetary revenues from pasture lease, which demonstrates increased efficiency of communal pasture management.

Number of sub-project investments completed (cumulative)

This indicator measures number of sub-projects investments completed, which demonstrates project's progress in addressing value chain gaps.

Semi-annual reports and annual work plans prepared This indicator measures how well PIU monitoring and reporting system works.

M&E system developed and effective This indicator demonstrates whether the M&E system of the PIU has been developed and effective.

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Box 2: METT: Management Effectiveness Tracking Tool The Management Effectiveness Tracking Tool (METT) was originally developed by the WWF and the World Bank to track and monitor progress towards worldwide protected area management effectiveness (see: Reporting Progress in Protected Areas - A Site-Level Management Effectiveness Tracking Tool, World Bank/WWF Alliance for Forest Conservation and Sustainable Use, 2003). Following the principles and methodology this tool have been modified and adopted to track progress of management effectiveness of pasture and livestock management systems under the on-going CARMAC project. It is therefore proposed to continue using this tool under CARMAC II. The METT is based on the idea that many outcomes of good pasture management can only be observed and measured in a relatively long timeframe. However, good management principles likely leading to the desired outcomes could be well monitored and tracked starting from an early stage and on a regular basis within the project’s implementation period. Thereby good pasture and livestock management would follow a process that has six distinct stages, or elements including: a) an understanding the context of existing management objectives and threats, b) progresses of appropriate planning, c) allocation of sufficient resources (inputs), d) application of management actions (processes), e) provision of products and services (outputs), and f) eventually results in terms of impacts or outcomes. The Assessment Form consists of three sections: 1. Datasheet: The datasheet details information on the pasture user cooperative, its characteristics and management objectives and includes an overview of other relevant development investments and activities in the community. 2. Assessment Form: The assessment form includes three distinct sections, all of which should be completed.

- Questions and scores: The main part of the assessment form is a series of 25 questions that can be answered by assigning a simple score ranging between 0 (poor) to 3 (excellent). Several questions provide the opportunity to give additional points and the maximum achievable score is 84.

- Comments: A box next to each question allows for qualitative judgements to be justified by explaining why they were made (this could range from personal opinion, a reference document, monitoring results or external studies and assessments – the point being to give anyone reading the report an idea of why the assessment was made).

- Next Steps: For each question respondents are asked to identify a long-term management need to further adaptive management at the site, if this is relevant.

3. Graphical display of the Scoring Results: a cobweb diagram shows the averages scores related to the different fields of evaluation (see example from CARAMC I evaluations below).

Results of the initial and 2nd METT assessment of Pasture Management Groups under CARMAC I:

‐ 0.50 1.00 1.50 2.00 2.50 3.00

Context

Planning

Inputs

Process

Outputs

Outcomes

Initial Score

2ndAssessment

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Box 2: (continued) The frequency of assessments would be about annually. The first assessment would be carried out after the Pasture User Cooperative (PUC) has been established and a comprehensive pasture and livestock management plan has been prepared and agreed by the pasture users. The assessment would be repeated after each round (tranche) of investments has been completed and at the end of the project implementation. In order to become eligible for the first tranche investment the PUC needs to achieve a minimum score of 15. Thereby the questionnaire is designed in such a way that this minimum score can only be achieved if key conditions for the investments are met (e.g. legal registration, agreed management plan, formally assigned management responsibilities, etc.). For the second tranche investment a re-assessment will be conditional with a minimum score of 25 showing. The assessment would be carried out by the monitoring expert of the PIU, who has been trained under CARMAC I. World Bank task team members would carry out random assessments during their regular supervision missions. In addition the PUC are encouraged to use the METT as a regular self-evaluation tool.

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Annex 2: Detailed Project Description

ARMENIA: Second Community Agricultural Resource Management and Competiveness Project

1. The proposed project consists of four components with IDA/IBRD funding of US$32.67 million over six years. First, the project will extend the coverage of the pasture-based livestock system component by including more communities, particularly those adjacent to the villages already included in CARMAC, and will fine-tune the CARMAC program based on lessons learned and to emphasize community participation and decision-making including greater involvement of women and rural youth. Second, the project would support the development of selected value chains important to Armenia by providing targeted sub-project investments to help strengthen links between producers and processors, promote food safety, and support processing and marketing. Third, the project would provide investments to increase the capacity of public sector institutions that can support improved market access and selected value chain development. Accordingly, the project extends and improves the CARMAC pasture-based livestock component but also widens the scope to include a new value chain component linking livestock production as well as other Armenian produce to markets and by improving the provision of the needed public sector support. 2. The project design builds on lessons and experiences from World Bank-funded projects in the agriculture sector, notably the on-going CARMAC project and the previous RESCAD project. These projects included community development activities, support for the development of an effective agriculture advisory system, and veterinary and food safety support. In particular, the CARMAC project has formed PUCs and has prepared participatory PMLDPs in 68 communities to date. As a result of CARMAC project interventions at this early stage, milk productivities for cattle and sheep have increased by 11% and 6%, respectively (from 1,428 to 1,585 kg/year for cattle and from 66 to 70 kg/year for sheep). Similarly, the growth rates of animals for cattle and sheep have increased by 12% and 3%, respectively. Efficiency of communal pasture management as measured by increased communal budgetary revenues from lease of pastures has increased by 55% while sales from livestock have increased by 48%. Accordingly, the CARMAC project indicates that the approach enables beneficiaries both to increase pasture productivity and to improve pasture management in a sustainable way. 3. The main lessons from the CARMAC project that have been considered in the design of CARMAC II include:

Turning over the management responsibilities of common access resources (communal pasture lands) needs to be built on a broad-based consensus by all users and the village authorities. This consensus and agreement needs to be reached and well-documented before the project starts to invest taking into account that villages not reaching such agreement would drop out from the project before receiving funds.

Institutional capacity building and physical investments need to go hand-in-hand. Unbalanced investment in hardware (infrastructure and machinery) and software (training and capacity building) was a problem in the initial stage, which was corrected. Similar issues will be avoided under CARMAC II.

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Communities tend to pick attractive investments and avoid implementing less attractive activities (‘cherry-picking’). To achieve the management objective including the necessary behavioral changes of people of using pasture resources more sustainably a comprehensive management plans needs to be developed and this plan needs to be implemented comprehensively and not partially. For example, sufficient winter fodder production remains a problem under CARMAC compromising the achievements of the management objective. The on-going and the new project need to pay attention to achieve a full and balanced implementation of the management plans.

The acceptance of sustainable pasture management practices depends on the economic gains and additional income farmers can achieve through better resources management. The proposed design therefore widens the scope of activities and includes in addition to productivity and production related investments also possible investments in processing and marketing of livestock products.

4. In addition, according to the Social Accountability Review, grievance mechanisms are in place but could be improved, as could information flow from the APIU to PUCs. Further, although there is balanced representation of diversity among PUC members, steps could be taken to increase women’s participation in the PUCs and their executives. 5. The RESCAD and CARMAC projects included demand-driven Competitive Grants Programs that have supported some 87 rural businesses to date to introduce technical innovations and improve business practices. The RESCAD ICR, June 2011, indicates that for the Competitive Grants the incremental annual net benefits per US$1 investment was US$0.76 on average and investment return was 85%. From the first 38 grants under CARMAC, 11 grants cover livestock production and processing and 9 fruit and vegetable production and processing, indicating the importance of these topics, although evaluations have not yet been completed. Nevertheless, the projects indicate that matching grants enable beneficiaries to invest in their businesses and allows them to introduce and test more innovative and risky approaches that they would not otherwise be able to do. However, lessons learned suggest the need to introduce a broader food safety and quality approach to enhance the competiveness of rural businesses; and modify the competitive grant approach to focus on specific value chains of importance to Armenia. 6. The project components are: Component 1: Community/Pasture Livestock Management System (US$27.87 million). 7. The component objective is to continue the implementation of an efficient and sustainable community- managed pasture/fodder-based livestock production system in selected communities where livestock is a primary source of livelihood and where communities have a strong interest in improving their pasture management. The selected communities will be in the eight Marzes with significant pasture areas (out of 10 Marzes in the country). This objective would be achieved by reversing destructive grazing, using pastures more efficiently, improving fodder production and animal feeding systems, and raising animal production efficiency. To accomplish this, the project will build individual and community awareness and help form

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Pasture User Cooperatives (PUCs) to assume management and control of community pasture areas. Building on the experience of CARMAC, the project will strive to reach a minimum target of 30% female representation on the PUC Boards – governing bodies of PUCs, while measures to promote inclusive representation from all segments of the population will also be developed. An investment package linked to appropriate organizational and behavioral change will then be provided as an entry point to break the destructive cycle of pasture resources degradation. In the medium and long-term, increased income from livestock should provide the incentives necessary to improve the management of the pasture resources. 8. The on-going CARMAC project provides the basis for a successful implementation of this component. Its success experienced with the on-going implementation and the attractiveness to the local communities were the main reasons for the Government to request this follow-on CARMAC II project. CARMAC II would therefore not change the basic design and implementation arrangements of component 1, which would remain the largest component in CARMAC II. However, given the dual emphasis of the PDO on production and marketing, the scope of activities under component 1 would also include a number of activities, which help farmers to better market their livestock products, but were not explicitly included in CARMAC I, such as milk collection/cooling points, machine milking, milk quality testing, or communal slaughtering points.

9. Armenia has some 950 villages, of which some 300-350 villages depend heavily on pasture based livestock production. The experience under CARMAC I showed that only about half of the communities have sufficient organizational capacity and readiness the engage under the project leaving a total of some 175-200 potential villages to implement pasture and livestock management and development plans under such project. The scope of the component would be to provide funds for at least 100 additional communities (80-100 are already covered under CARMAC I). Both projects together are therefore expected to be sufficient to cover the demand for the entire country. 10. The component will fund three main activities: a) Development of Sustainable Pasture/Livestock Management Plans (US$3.67 million). Pasture User Cooperatives (PUCs), comprising pasture users, will be created in up to 100 communities. In addition Community Pasture Management and Livestock Development Committee (CPMLDC) will be formed comprising of the chairman of PUC, 2 elected PUC members, 2 community council members and the village mayor. The communities will be selected based on a written application, their willingness to transfer all management rights and obligations to a PUC and on qualitative criteria such as geographic location including the watershed, economic linkages, existing associations, common economic infrastructure, and synergies with other development projects. The selection process and the mobilization process for the PUCs are described in the Operational Sub-Manual (which is an integral part of the Project Operational Manual). The CPMLDC will be responsible for developing Pasture Management and Livestock Development Plans (PMLDPs) supported by the Marz Support Teams (MSTs) under the APIU

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and technical experts. Initially, comprehensive pasture and fodder assessments of all pasture and fodder production areas will be carried out including plant assessments, evaluations of productivity and quality, and assessments of community feed/fodder balances by a contracted service provider. These participatory technical assessments will be the entry point for mobilizing the PUCs. Authentic participation can only emerge from recognition among pasture users that their common resources have value, and that unsustainable practices degrade this value. To this end, outputs of the assessment will include productivity estimates for grassland and fodder production areas in the context of the feed/fodder demand in the communities, and participatory preparation of community fodder and feed maps, for use in making decisions on pasture management. The participatory approach will reinforce the understanding among pasture users of the need to use common resources wisely and that improved management can raise incomes for all PUC members. The sustainable PMLDPs will then be developed based on the participatory assessment and building on the improved understanding among pasture users. The PMLDPs will define options to increase fodder quantity and quality, reduce pressure on degraded pastures, and regenerate their productive capacity (sustainable resource management). In general, it is expected that this will be achieved by reducing grazing on nearby pastures, improving utilization of remote pastures, introducing a higher proportion of cultivated fodder and hay in overall livestock feeding, and could involve shifting some farmers’ livestock production systems to stall-feeding from grazing. The plans will define measures necessary to improve pasture productivity, which could include introducing rotational grazing, enforcing temporary protection for areas needing regeneration and rehabilitation, providing opportunities for additional fodder production, and providing better access to remote pastures, among others. The plans would also include basic animal health requirements such as vaccination timing and coverage, and simple and monitorable indicators and targets for implementation. The planning process would be supported by the Marz Support Teams and technical experts working with the PUCs. In summary, the PMLDPs will define: (a) measures to improve pasture productivity, such as rotational grazing, protecting areas for regeneration, pasture rehabilitation, improving access to remote pastures, and needs for supplementary fodder production; (b) stock watering points for a more balanced use of grazing areas; (c) animal health requirements and breed improvement measures; (d) needs for agricultural machinery for hay and fodder production; (e) measures to improve the marketability of livestock products; (f) training requirements; (g) responsibilities for implementation of the planned activities, targets and indicators, and (h) applicable measures to change current practice to reduce vulnerability of climate change in pasture management. The sub-component will involve the costs associated with implementation of the sub-component, such as staff costs for component coordinators and the Marz Support Team for coordination, supervision, communication and outreach, and provide funds for vehicles, equipment, technical assistance, training, costs of transport and field visits and operational expenses b) Community Fund for Implementation of Plans (US$24.00 million). The PUCs would sign agreements committing them to implement the plans and achieve the targets. Subject to PUC member agreement, funds will then be provided for each PUC to implement their PMLDP. Project funding will be subject to satisfactory progress on community pasture and livestock management. Fund amounts will depend on the activities proposed in the PMLDP based on

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pasture area and existing number of livestock units. Beneficiaries will contribute a percentage of the costs, including 5% of public infrastructure; 20% of agricultural machinery with an additional provision that 30% of the machinery investment costs will be recovered within the first four years and be placed in the cooperative fund; and 50% of fodder production costs as detailed further below. The fund amounts are expected to average about US$200,000 per community. Investments will be provided in a phased way over three years. The PUCs will receive an indicative open list of eligible investment activities including: (a) infrastructure to access and use remote pastures, such as spot road improvements, stock watering points, shelters and stock-pens; (b) milk collection points with cooling equipment; (c) machinery to produce and harvest fodder such as grass cutters, haying machines, or silage choppers; (d) costs of rehabilitation measures for degraded areas such as fencing, weed and shrub control, and re-seeding; (e) support for fodder production which will reduce vulnerability of climate change including leguminous plant seeds, corn seeds; (f) community-based disease control programs including for market-limiting diseases, zoonoses and parasite control; (g) breed stock improvement including artificial insemination; (h) training and advisory services; and (i) PUC support, such as management training, office equipment and furnishings. The following cost sharing arrangements will be applied:

Public infrastructure: 95% by IDA/WB, 5% from the village budget.

Training and technical assistance: 100% by IDA/IBRD.

Fodder production: grant of AMD 100,000 per hectare by IDA/IBRD ,

Agricultural machinery: 80% by IDA/UBRD, 20% by cooperatives, with the additional provision that 30% of the total machinery investment costs will be recovered within the first 4 years and will enter into the Cooperatives’ accounts to be used for the Cooperative’s statutory tasks,

Community milk sheds, milk processing facilities: 100% of the equipment costs by IDA/WB, 100% of the costs of a suitable building by cooperatives.

Community Fund use restrictions are as follows:

(i) a minimum of 5% of total funds in each community should be used for farmer training

and advisory services supplied by either public and/or private providers;

(ii) generally no more than 50% of allocated community funds should be used to purchase agricultural machinery; in case any PMLDP requires a higher proportion of investment for agricultural machinery the World Bank will review such proposal for ‘no objection’;

(iii) Fund will be provided in a phased manner over a period of about three years. The first investment will be subject to a sufficient management capacity of the PUC, which will be assessed using the Management Effectiveness Tracking Tool (METT) (minimum score 15) After the first investments, fund allocations will depend on successful implementation of the agreed PMLDP, as assessed using the METT (minimum score of 30);

33

(iv) indicative investment activities may be adjusted for each community PMLDP, but activities must have clear links to management plan objectives;

(v) the project will not support social benefit payments or social infrastructure investments;

(vi) no breeding stock will be provided to individual farmers. c) Women/Youth Special Support Program (US$0.20 million). A special training activity would target women and rural youth with the aim of enhancing their participation in the PUCs and the decision-making process around livestock and pasture management and to foster engagement of the younger generation in livestock production. The training will include awareness raising of risks from climate change and benefits of climate change adaptation. Greater involvement of rural youth is a particular priority of the Ministry of Agriculture and the government of Armenia. The sub-component will be implemented by a suitable service provider to be selected on a competitive basis. The activity would continue each year throughout the project and will be linked to increased membership of women in the PUCs. Linked to Component 2 on Value Chain Development, training would also be provided to interested women and youth on the development of food businesses, and support provided to women- and youth-run food businesses to apply for sub-project funding available under this activity. Component 2: Value Chain Development (US$7.44 million). 11. The objective of this component is to increase the ability of Armenian agricultural producers and processors to meet domestic demand and access international market opportunities in the food value chains of fodder-based milk and meat, and in processed fruit and vegetables where Armenia has an advantage. During implementation, through value chain studies carried out under the ECAPDEV Trust Fund Grant and a series of prioritization workshops, the project will identify bottlenecks in the value chains such as knowledge gaps in market requirements and quality standards, inadequate facilities and equipment to meet national and/or international product standards and food safety requirements and, and weak linkages between the processors and producers. 12. To address the identified bottlenecks, targeted sub-project funding will be provided to: (i) support producer cooperatives to standardize their production and to improve on-farm quality assurance and good agricultural practices; (ii) increase knowledge of markets and market requirements including food safety systems; (iii) incorporate food safety practices and compliance including Hazard Analysis and Critical Control Points (HACCP); (iv) improve processing, storage, product handling, marketing, and product quality; (iv) register brands and obtain certification including organic food certification; (v) improve management capacity; and (vi) change techniques to reduce vulnerability to climate change in pasture management. The targeted funding would be provided to registered producer cooperatives, associations and rural businesses operating along the value chain based on an application process. Applications will be selected based on criteria including that the sub-projects address critical constraints in the value chain and that they will improve market access. Beneficiaries will be required to match up to at least 100% of the investment amount depending on the category of investment (training, food

34

safety, and marketing facilities and infrastructure)6. It is anticipated that around 80 sub-projects from US$8,000 up to maximum of US$50,000 will be funded. The component will have national coverage so that bottlenecks in the selected value chains can be covered on a wider scale than in component 1. Recognizing that FBOs run by disadvantaged groups may lack the necessary skills to make high-quality applications to the sub-project fund, special assistance/training with the application process will also be made available to assist such FBOs (e.g. female- and youth-run FBOs) to apply to the program. 13. To support implementation, the value chains, eligible items, and criteria are being assessed under the ECAPDEV Trust Fund grant. Within the livestock sector, studies will analyze the fodder-based milk and dairy products and meat and meat products chains. In the fruit and vegetable sector, the studies are expected to propose specific commodities of importance in Armenia such as apricots, peaches, apples, plums, soft fruit, tomatoes and other vegetables, and/or different value chains such as dried fruit, juices, canned produce, frozen vegetables, and fresh produce. Within the specific value chains, areas for investment such as improved facilities and equipment, food safety improvements, certification, improved business linkages, market development, and training requirements are expected to be identified, and costs and eligibility criteria proposed7. 14. A survey of food business operators including registered companies, cooperatives, associations, and private entrepreneurs operating within the milk and meat and fruit and vegetable sectors also is being conducted under the ECAPDEV Trust Fund grant to support project implementation. The survey would provide a data base of FBOs including capacity, product range, certifications, types of business linkages, and food safety measures applied to be used by the APIU during project implementation. 15. In addition to the financing of sub-projects, the component will finance prioritization workshops, publicity, technical review and selection of applications. The component will include costs of a small value chain secretariat for coordination, supervision, communication and outreach, and provide funds for staff costs, vehicles, equipment, technical assistance and training, costs of transport and field visits and operational expenses. Component 3: Strengthening Public Sector Institutions (US$2.45 million). 16. The objective of the component is to increase the capacity of public sector institutions to facilitate business development and enable market access in the selected value chains supported under components 1 and 2. Activities to be funded under the component are:

6 % to be finalized, but for example, matching amount may be 50% for training activities; 75% for food safety measures, and 100% for infrastructural improvements and equipment upgrading to improve marketing. 7 For example, it is likely that the milk/meat production study will suggest milk quality and hygiene, introduction of food safety measures, milk collection and cooling facilities and additional processing opportunities, while the fruit study may suggest improved storage, grading and packaging; improving quality standards; development of processing techniques; and test marketing.

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a) Animal Health Services: This activity aims to improve animal health and breeding services available at the community level over and above the vaccination programs provided by government programs. It will follow the same approach as under the ongoing CARMAC project and will comprise two major programs:

i. Around 20 community veterinarians (CVs) in addition to the 100 CVs covered under CARMAC will be mobilized, provided training in veterinary practice management as well as technical topics, and provided with a set of basic veterinary equipment and consumables amounting to about US$5,000 each to enable them to diagnose and treat production diseases and conditions not addressed by government vaccination programs. The CVs will provide ambulatory veterinary services and AI services for up to six adjacent communities including those communities covered under Component 1. The CVs will be grouped into local veterinary groups established under the project.

ii. Four regional-level Veterinary Service Centers (VSCs) will be constructed and equipped, including equipment for Artificial Insemination, to serve producers in major livestock areas. The VSCs will include a meeting room, office, and dispensary. A vehicle equipped with a mobile clinic will also be included for each VSC following the preparation of a clear business plan to ensure that operations and maintenance costs can be covered. The VSCs will be operated by the CVs within each veterinary group. It is expected that the VSCs will become self-sufficient service centers around two years after construction. The VSCs will be in addition to the four being developed under the CARMAC project and the three currently in place under the CARD/USDA project, and will follow the same approach.

b) Food Safety Services: Support will be provided; a) to enhance the capacity of food safety institutions for inspection and regulation, primarily through provision of simple testing equipment and training for Marz and district-level food safety inspectors; b) strengthening and supporting State Service for Food Safety (SSFS) laboratories; and c) providing additional equipment for vaccination programs undertaken by the Ministry of Agriculture’s Center for Veterinary, Food Safety and Phytosanitary Services SNCO. The on-going IDF Grant for Food Safety Capacity Building Project, the EU project supporting the Deep and Comprehensive Free Trade Agreement (DCFTA), the IFC projects in Food Safety, and the FAO slaughterhouse project will build institutional capacity, align food and veterinary laws with the EU and other Free Trade Agreement requirements, help draft the requisite regulations, provide capacity building for inspectors at the central level, and provide information of food safety primarily for large companies. The CARMAC 2 project will thus support additional elements required to implement the regulations and introduce food safety standards including enforcement or facilitating compliance by farmers and FBOs. c) Seeds and Seedling Development: Support will be provided to the Scientific Center of Vegetable and Industrial Crops (SCVIC) to produce high quality vegetable seeds and seedlings of the locally-adapted varieties developed by their breeding and selection program. At present, some 100 varieties of widely-grown vegetable crops such as tomato, cucumber, pepper and eggplant have been developed, but facilities are inadequate and seeds and seedlings are not readily available to producers. Around 6,000 m2 of glasshouses will be rehabilitated and plastic houses refurbished and equipment provided to enable production of around 31 million seedlings

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at full production. This represents about 5% of the current demand and will enable private producers to multiply seed and produce seedlings of adapted varieties suitable for Armenian conditions. The Scientific Center is a non-profit State Non-Commercial Organization (SNCO) entitled to retain the proceeds from the sale of seeds and seedlings for its research and development responsibilities. d) Good Agricultural Practices: Support will be provided for the introduction of Good Agricultural Practices (GAP). GAP are a set of guidelines that cover topics such as food safety and hygiene at the farm level; proper pest management and use of pesticides; animal production, welfare and waste management; soil management to limit erosion; water quality protection; and farm labor health and safety. Development and implementation of these guidelines will be required for Armenia to access US and EU markets and eventually for other regional markets. Some of these guidelines are already in place such as use of pesticides (supported under RESCAD) and others are covered by existing environmental and other regulations, but they are not fully implemented. Rather than introducing a full Code of Good Agricultural Practices, the following steps will be taken: a) a workshop with advisors and other stakeholders on GAP concepts; b) farmer surveys to assess needs and establish priorities, carried out by the Republican Agriculture Support Center (RASC); c) elaboration and publication of three selected guidelines including updating the pesticide guidelines; d) training of advisors on content of guidelines; and e) dissemination of guidelines to farmers. While farmer surveys would help identify priorities, examples could include proper milking hygiene, waste management and other topics. Support will also be provided for the Agrochemical Service State Non-Commercial Organization (SNCO) to improve its capacity to analyze soils, fertilizers and chemicals, including contents of macro- and micro-elements, organic and inorganic material, and heavy metals, and to test techniques more resilient to climate change vulnerability in farming systems and livestock breading. This service has an important role in the food safety sphere, testing fertilizers and chemicals to ensure compliance with standards, and in supporting good agricultural practices through proper soil analysis. e) Component Coordination: including the costs of a coordinator, of transport, and field visits, as well as operational expenses. Component 4: Project Coordination and Management (US$2.24 million). 17. The project would continue to be coordinated by the existing Agriculture Projects Implementation Unit State Agency (APIU) of the Ministry of Agriculture. The APIU has successfully implemented the RESCAD, CARMAC and other agricultural projects, and under prevailing Armenian institutional/ministerial regulations, Ministries are responsible for policy formulation with implementation carried out by external bodies. The project would use the present CARMAC structure for financial management, procurement, monitoring and evaluation, and social and environmental safeguards. The project would provide incremental project management costs in these areas, training costs, additional technical specialists as needed, costs of transport and field visits, costs of impact assessments including project evaluations, and audit. Several other government structures and NGOs will also participate in project implementation, including the Ministry of Agriculture through project oversight, Pasture User Associations, State Service for Food Safety, and the Scientific Center for Vegetable and Industrial Crops.

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18. The APIU will have responsibility for project monitoring and evaluation (M&E), which is fundamental in disseminating lessons learned among communities involved in the improved pasture/livestock management systems and value chain participants. The M&E activities will include baseline, mid-term, and final surveys, mapping instruments, progress reports, and a completion report to document results and outputs. Possibilities would be explored to gather local plans into a larger central database of pasture plans and rural investments, including qualitative and photographic data, including establishing a project website. The M&E surveys will be done in partnership with NGOs and research institutions to measure, record, and verify results.

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Annex 3: Implementation Arrangements

ARMENIA: Second Community Agricultural Resource Management and Competiveness Project

Project Institutional and Implementation Arrangements 1. The existing Agricultural Projects Implementation Unit (APIU) State Agency of the Ministry of Agriculture will be responsible for overall project management including all procurement, financial management, reporting, and Monitoring and Evaluation (M&E) responsibilities. The APIU has considerable experience in managing similar and related projects including the present CARMAC, the previous RESCAD and Avian Influenza Preparedness Projects, and the new IDF Food Safety Capacity Building Project now starting up. Technical specialists would be responsible for specific components as at present under CARMAC, including Marz Support Teams responsible for the pasture /livestock system component and a Secretariat responsible for the value chain component. Support is foreseen for the improvement of M&E and for implementing gender-sensitive surveys and impact assessments. An environmental and social safeguards specialist would be contracted with responsibility for safeguards management. Additional support may also be provided where necessary. The organizational structures and institutions participating in the project are given in the Figure below and the specific implementation arrangements for individual components detailed in the following sections.

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The Government of

Armenia

Ministry of Agriculture (MoA)

Scientific Center for Vegetable and

Industrial Crops

Agricultural Projects Implementation Unit (APIU)

State Service for Food Safety (SSFS)

Community Veterinarians

Ministry of Territorial Administration

Community Council

Pasture User Cooperatives (PUCs)

Marz Support Teams (MSTs)

Value Chain Secretariat/Committee

Food Business Operators

Farmers

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Component 1: Community Pasture/Livestock Management System 2. This component will be implemented mainly by the APIU through community-based Pasture User Cooperatives (PUCs). These PUCs will be mobilized with the support of Marz Support Teams under the APIU using a model of community mobilization tested successfully and used under the CARMAC Project, and detailed in the Operational Sub-Manual for this component (which is an integral part of the Project Operational Manual). The Pasture User Cooperative model, where users agree on pasture management arrangements and key investments to improve productivity, is based on successful experience in other ECA Countries – such as under AISP in Kyrgyzstan, along with successful experience with watershed and pasture management projects in Mongolia and China. These PUCs will be open to all pasture users in the community, will be established as Cooperatives under Armenian Law, and will sign an agreement with the local authorities (Community Councils) to lease pastures and to take responsibility for pasture improvement and infrastructure. As such, the PUCs would be entitled to lease land and own assets, and will be responsible for managing, operating and maintaining all pastures and pasture-related infrastructure. From among the members of the Pasture Users Cooperative, a sub-group will be nominated to manage the process preparing the Pasture Management and Livestock Development Plans (PMLDPs). The preparation of the PMLDPs will be supported by a suitable service provider conducting the productivity assessment of pasture lands, hay meadows and other fodder areas, mapping of resources, preparing of fodder balances for the summer and winter seasons, making technical recommendations (e.g. grazing times and rotation, meeting winter fodder requirements, etc.). Once approved, PMLDPs represent a binding agreement between the APIU, the Pasture User Cooperative, and the local Community Council to adhere to the specified management regime in exchange for investments in pasture improvement (community fund). The Pasture User Cooperatives will also have responsibility for preparing and implementing sub-project investments to be financed by the Community Fund, the implementation and enforcement of the PMLDP, and the management of a grievance redress system. These tasks will be supported by the Marz Support Teams and APIU staff, following a similar model of capacity building for PUCs being carried out under CARMAC. Procurement will be carried out by the APIU. Representatives of the PUCs will participate in the procurement process particularly in the preparation of the technical requirements and TORs, evaluation of received bids/proposals, preparation of the draft contracts, and acceptance of the supplied goods, works and deliverables under the consultancy contracts.

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Component 2: Value Chain Development 3. A small Value Chain Secretariat within the PIU will administer the program, arrange prioritization workshops, organize publicity including a biennial national exhibition to publicize component activities and results of successful sub-projects, screen applications for compliance with criteria, arrange the technical review and selection process, prepare contracts, monitor sub-projects, and organize final evaluations of each sub-project. The Secretariat will consist of a Chief Specialist and Assistant, and will be augmented by short-term contracted specialists such as Dairy and Horticulture specialists as required for technical support and monitoring. 4. The bottlenecks in the selected value chains will be detailed through studies carried out during project implementation and the priority topics and eligibility criteria refined. Prioritization workshops will also be carried out during project implementation for each selected value chain to refine and finalize the topics and criteria, with participants including the Food Business Operators (FBOs), the Secretariat and APIU technical specialists, and MASC directors. All relevant FBOs on the data base drafted during project implementation will then be invited to apply for funding to alleviate the bottlenecks. In addition, announcements will be made in newspapers (including MASC newspapers) and Ministry, project and MASC websites to ensure that all eligible FBOs can access information on the program. Eligible FBOs comprise existing registered companies and businesses, cooperatives and associations, and registered entrepreneurs. Applications will follow a two-stage process. Initially, a sheet providing basic information on the applicant and the topic of interest will be submitted, which will be screened by the Secretariat for compliance with criteria. All applicants will then be asked to submit a more detailed application including a business plan, which will be reviewed by a technical reviewer and approved by a committee consisting of at least seven people including Ministry staff and technical experts. The applications will be reviewed in batches in the order that they are received and all satisfactory applications will be eligible for funding up to amount available in the project budget. After the committee meeting, the Secretariat will visit each successful sub-project applicant to verify that the information and resources indicated in the application are correct. 5. A contract signed with each successful applicant will specify the agreed budget and budget items, cost-sharing, procurement methods, and reporting schedule. Funds will be provided in tranches as agreed milestones are achieved. The successful applicant will be responsible for procurement as set out in their contract. The Secretariat will be responsible for monitoring and compliance with agreed activities, including compliance with procurement requirements and environmental regulations. The Secretariat will also organize training and information session for each group of successful applicants which will cover procurement, reporting, and financial requirements. An independent evaluator will be contracted to assess the achievement and impact of each sub-project after completion. A comprehensive Operational Sub-Manual (which is an integral part of the Project Operational Manual) will be finalized that will govern implementation of this component.

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Component 3: Strengthening Public Sector Institutions a) Animal Health Services. This activity will be coordinated by the APIU Animal Health

Specialist and will follow the same implementation approach as in CARMAC. A service provider with experience in similar activities will be contracted to mobilize and train the community veterinarians (CVs), and to form local veterinary associations from the CVs grouped around the Veterinary Service Centers (VSCs). The CVs will be selected based on an initial survey in the project areas carried out by the contracted service provider, in close consultation with communities, PUCs and Marz-level State Veterinary Officers. The selected CVs will participate in an orientation and training program, and will be provided with a set of basic equipment and supplies chosen from the list approved under CARMAC on successful completion of the program. The sites for constructing the VSCs will be agreed among the APIU, service provider, CVs and Marz authorities, and will be in different Marzes or regions than the VSCs already constructed. The APIU Animal Health Specialist will supervise the service provider contract and monitor the qualifications and selection of the selected CVs; coordinate the process of specifying equipment and selecting sites for the VSCs; monitor and report on progress of the sub-component; and arrange an independent evaluation of the impact of the program. Procurement of the equipment packages and civil works contracts for the VSCs will be carried out by the APIU.

b) Food Safety Services. This activity will be coordinated by the APIU Animal Health

Specialist. The Specialist will liaise with the State Service for Food Safety (SSFS) and the Marz-level Food Safety Inspectorates to determine the needs and specifications for training and testing equipment for the Marz-level food safety inspectors and for the SSFS food safety laboratories and with the Ministry of Agriculture’s Center for Veterinary, Food Safety and Phytosanitary Services SNCO for the vaccination equipment. In addition, the Animal Health Specialist will participate in training activities for food business operators and producers along with the Value Chain Secretariat (responsible for Component 2). Procurement of the equipment packages and training contracts will be carried out by the APIU.

c) Seeds and Seedling Development. This activity will be coordinated by the APIU

Agricultural Specialist (Deputy Director). The Specialist will liaise with the Scientific Center of Vegetable and Industrial Crops (SCVIC) to determine the specifications for the glasshouses and plastic houses and for the equipment to be provided, and will monitor progress and ensure that progress reports are delivered in a timely manner. Progress, including construction, production of seedlings, and financial, will be measured in comparison with the business plan submitted by the SCVIC during project preparation. The SCVIC is a non-profit State Non-Commercial Organization (SNCO) entitled to retain the proceeds from the sale of seeds and seedlings for its research and development responsibilities. Procurement of the equipment packages and civil works contracts will be carried out by the APIU in consultation with the SCVIC.

d) Good Agricultural Practices. This activity will be coordinated by the APIU Agricultural Specialist (Deputy Director). Depending on the gaps identified during project preparation, the Specialist will liaise with the Ministry of Agriculture, Republican Agriculture Support Center and the Marz Agricultural Support Centers to assess the needs for additional

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guidelines, contract technical assistance to draft guidelines and arrange training of extension providers as required. The agricultural specialist will also be responsible for coordinating the activities with the Agrochemical Service.

Financial Management, Disbursements and Procurement Financial Management 6. The APIU will be responsible for the project’s financial management (FM) arrangements, including budgeting and planning, accounting, the flow of funds, financial reporting, internal controls, and external auditing. The APIU is successfully implementing the CARMAC project, and CARMAC 2 is largely built on the implementation experience and structure of the CARMAC project. 7. It was established that APIU has acceptable FM arrangements in place; subject that prior to the Project Effectiveness the Project Operational Manual (POM) acceptable to the Bank (which will include Operational Sub-Manuals to specifically cover the controls over flow of funds under the community grants in Component 1 and the sub-project funding under Component 2) will be developed and adopted. The POM will detail the flow of funds and controls under: (i) the grants to be provided to Pasture User Cooperatives to implement their Pasture Management and Livestock Development Plans (under Component 1) and (ii) the sub-project funding for existing food business operators (FBO) operating along the value chain such as registered businesses to implement Value Chain Development activities (under Component 2). 8. In addition, prior to the Project effectiveness APIU will (i) have updated its Financial Management Manual (FMM) to describe the FM arrangements under the Project, which can be attached to POM, and (ii) have hired, and agreed with the Bank, the Project financial manager and an additional accountant (those are capacity building actions but not conditions). 9. The overall FM risk after mitigation measures for the Project was assessed as Moderate; with Inherent Risk also moderate before and after mitigation measures. The Control Risks of the Project before mitigation is substantial and after mitigation measures it is Moderate. 10. There is overall adequate planning and building capacity in place at APIU. The director, the financial manager, the procurement specialist and the coordinators are involved in the preparation of the annual budget. The final plans and budgets are submitted to the MOF for approval. The annual budget is based on project cost summary and the procurement plan, which is prepared by the procurement specialist, who collects the necessary information from other specialists. The final draft of the procurement plan is approved by the director, and agreed with the Bank. All changes to the procurement plan are reviewed by the director and agreed with the WB. 11. The budget is prepared in much detail, which is necessary for monitoring of the project. It is classified by categories, components and sub-components, sources of funds. All contracts

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(ongoing and planning) are included in budget separately. APIU agrees with the Bank and Government all variation from the budget before making changes to the annual budget. 12. The current FM/accounting staff of APIU consists of a chief accountant, with significant work experience in Bank-financed projects, also acting as a financial manager, as the previous financial manager recently left the position; and an accountant, with significant work experience in a position of chief accountant in private sector. Another accountant is on maternity leave expected to be back in a few months. During the assessments the staffing arrangements at APIU were discussed with the APIU director for the implementation of the proposed CARMAC 2 project. It was agreed that APIU will commence the recruitment process for the additional accounting staff, and by the effectiveness of CARMAC 2 project, APIU will have hired a new financial manager, with relevant experience and knowledge of Bank FM policies and procedures, to cope with the increased workload. The selected candidates and the terms of references for those positions need to be agreed with the Bank. Those are capacity building actions but not conditions, to be addressed before the Project effectiveness, which would enhance the staffing arrangements in place. 13. The APIU utilizes 1C accounting package, which is currently in use by a number of Armenian PIUs implementing WB-financed projects and is found to be adequate. The software has multi-user and dual currency (AMD and USD) functionalities and is capable of generating IFRs. For payroll preparation 1C accounting package for salary is used. The software ensures security and prohibits non-authorized access to the information. Monthly back-ups of the accounting data are made on a server hard disk as well as on CDs. The accounting at APIU is maintained on accrual basis according to former Accounting Standards of the Republic of Armenia (ASRA). For reporting purposes under the projects cash basis IPSAS is adopted. The current chart of accounts used for CARMAC project will be adapted to the CARMAC 2 project’s requirements. 14. In general there is a reasonable internal control system in place at APIU. The Financial Management Manual (FMM) properly documents the FM arrangements in place at APIU and will be updated to reflect the FM arrangements under CARMAC 2 before the project effectiveness. There are adequate internal controls over contract monitoring system in place at APIU. 15. Project management-oriented IFRs will be prepared under CARMAC 2 project. APIU will produce a full set of IFRs every semester throughout the life of the project. The format of IFRs has been agreed during the assessment and includes: (a) Project Sources and Uses of Funds, (b) Uses of Funds by Project Activity, (c) Statement of Financial Position, (d) Designated Account Statements, and (e) SOE Withdrawal Schedule. These financial reports will be submitted to Bank within 45 days of the end of each semester for the semester. The first semiannual IFRs will be submitted after the end of the first full semester following the initial disbursement. Those requirements and IFR formats are incorporated in the FMM. 16. The audit of CARMAC 2 project will be conducted (i) by independent private auditors acceptable to the Bank, on terms of reference (TOR) acceptable to the Bank and procured by APIU, and (ii) according to the International Standards on Auditing (ISA) issued by the

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International Auditing and Assurance Standards Board of the International Federation of Accountants (IFAC).

17. APIU’s current auditing arrangements are satisfactory to the Bank, and it has thus been agreed that similar audit arrangements will be adopted for CARMAC 2 project, to cover the Project financial statements. 18. The annual audited Project financial statements will be provided to the Bank within six months of the end of each fiscal year and also at the closing of the Project. The Borrower/Recipient has agreed that it will publish (posting on APIU’s Website – www.arspiu.com) the audit reports for the CARMAC 2 within one month of receipt of the reports from the auditors and acceptance by the Bank. Following the Bank's formal receipt of these reports from the Borrower/Recipient, the Bank will make them available to the public in accordance with the World Bank Policy on Access to Information. 19. APIU will establish project Designated Accounts (DAs) specifically for this Project (one for IDA funds and another one for IBRD funds) in Single Treasury Account of the Ministry of Finance at the Central Bank of the Republic of Armenia, which is holding almost all DAs for ongoing Armenian projects. 20. Project funds will flow from the Bank, either: (i) via the DA to be maintained in the Treasury, which will be replenished on the basis of SOEs or full documentation; or (ii) on the basis of direct payment withdrawal applications and/or special commitments, received from the APIU. 21. The government funding will be made via the Treasury through normal budget allocation procedures initiated by the implementing agency in accordance with standard Treasury and Budget execution regulations. 22. The beneficiaries are also planned to contribute for the project implementation and the arrangements will be similar to those under current CARMAC project. For this purpose a separate account will be opened in Treasury for beneficiaries co-financing. 23. Previously APIU experienced difficulties with timely collection of beneficiaries’ contribution under Community Pasture Management and Livestock Development Plans under CARMAC project. To ensure timely provision of beneficiary contributions, APIU currently finances only those Plans for which the contribution is provided. 24. The flow of funds and controls over the grants and sub-project funding (components 1 and 2 respectively) will be described in the relevant Operational Sub-Manuals of the Project Operational Manuals, acceptable to the Bank. Disbursements 25. Withdrawal applications documenting funds utilized from the DA will be sent to the Bank at least every three months. The following disbursement methods may be used under the

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Project: Reimbursement, Advance, Direct payment and Special Commitment. The IBRD DA ceiling is established at US$1,500,000, and IDA DA ceiling is established at US$500,000. These ceilings are reflected in the respective Disbursement Letters. Detailed instructions on withdrawal of loan proceeds are provided in the Disbursement Letters. Procurement A. General 26. Procurement for the project will be carried out in accordance with the World Bank’s "Guidelines: Procurement of Goods, Works and Non-consulting Services Under IBRD Loans and IDA Credits & Grants" dated January 2011 (Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants Under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Consultant Guidelines) and the provisions stipulated in the Financing Agreement (FA). The procurement actions under different expenditure categories are described in general below. For each contract to be financed under the project, the various procurement or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank and presented in the Procurement Plan (PP). The PP will be updated at least semiannually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A General Procurement Notice (GPN) will be published in June, 2014 in UNDB on-line and in its printed version. Specific Procurement Notices (SPN) will be published for all ICB procurement and Consulting contracts per Guidelines, as the corresponding bidding documents and RFPs become ready and available. B. Procurement Implementation and Arrangements 27. Goods: Goods estimated to cost US$1.0 million or more per contract will be procured through International Competitive Bidding (ICB). Goods estimated to cost less than US$1.0 million per contract will be procured through National Competitive Bidding (NCB). Readily available off-the-shelf goods estimated to cost less than US$100,000 per contract each may be procured through Shopping on the basis of three written quotations obtained from qualified suppliers. The World Bank sample for Invitation to Quote shall be used. Direct Contracting method for goods consistent with justifications per Procurement Guidelines will be subject to the World Bank prior review. Procurement of agricultural machinery and equipment in the frames of the Community Fund for Implementation of Plans will follow the two-stage Closed Framework Agreement as per the para 3.6 of the Procurement Guidelines. 28. Works: Works estimated to cost US$4,000,000 and more per contract will be procured through International Competitive Bidding (ICB). Works estimated to cost less than US$4,000,000 per contract will be procured through National Competitive Bidding (NCB). Smaller works estimated to cost less than US$100,000 per contract may be procured through Shopping procedures on the basis of three written quotations obtained from qualified contractors. The World Bank sample for Invitation to Quote shall be used. Direct Contracting method for works consistent with justifications per Procurement Guidelines will be also specified in the Financing Agreement and it will be subject to the World Bank prior review.

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29. Consultant Services and Training: Consultancy services to be provided by consultancy firms estimated to cost US$200,000 or more per contract will be procured through Quality and Cost Based Selection (QCBS) method. Consultancy services to be provided by consultancy firms estimated to cost less than US$200,000 per contract may be procured through Consultants’ Qualifications (CQ) method. The consultancy firm for project audit will be selected through Least Cost Selection (LCS) method. Other methods such as Fixed Budget Selection (FBS), Quality Based Selection (QBS), and Least Cost Selection (LCS) shall be made available through legal agreement irrespective of the amount. Individual Consultants (IC) will be selected in accordance with Section V of the Consultancy Guidelines. Single Source Selection method for firms and individuals consistent with justifications per Consultant Guidelines will be also specified in the Financing Agreement and it will be subject to the World Bank prior review. 30. Community Participation method as per the Clause 3.19 of the Procurement Guidelines described in detail in the Project Operational Manual will be used by the beneficiaries of the sub-projects under Component 2 for procurement of Goods, Works and consulting and non-consulting services. 31. The Procurement Plan will specify the procurement and consultant selection methods their threshold’s and circumstances under which such methods may be used. 32. Operating Expenses: The operating costs for PIUs may be needed and may cover inter alia such expenditures as: (i) maintenance and operation of equipment and vehicles procured or used for the management of the Project: (ii) salaries paid to staff hired for the purposes of the Project, other than civil servants’ salaries: (iii) travel costs and per diems, (iv) consumables office supplies, (v) communication, printing and publications, and (vi) costs of translation and interpretation, (vi) audit of the project. Other expenditures such as utilities, operating and maintenance expenditures of office equipment and vehicle, transportation costs, etc. may additionally be identified at appraisal/negotiations. All such costs would be disbursed on the basis of annual budgets to be prepared by PIUs and agreed with the Bank. C. Prior Review Thresholds 33. The prior review thresholds are proposed as follows: GOODS/WORKS:

- All ICB contracts for Goods and Works; - All NCB contracts for Works – above US$2,000,000 and for Goods – above US$200,000; - First NCB contract for Goods and First NCB contract for Works irrespective of the cost of

the contract; and - First Shopping contract for Goods and First Shopping contract for Works.

CONSULTANTS SERVICES:

- All contracts with consulting firms estimated to cost US$200,000 or more;

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- First contract with consulting firms selected on the basis of Consultants Qualifications (CQ);

- All contracts with individual consultants estimated to US$100,000 or more each and all contracts with PIU staff irrespective of the cost of the contract;

- Short Lists comprising entirely national consultants shall be for assignments below US$300,000.

D. Post Review Ratio 34. Contracts not subject to Bank’s prior review will be post reviewed by Bank’s supervision missions and/or during regular post-reviews by PAS on sampling basis, i.e. 1 out of every 5 contracts. Post review ratio is 20%. C. Procurement Plan

35. The implementing agencies at appraisal developed an initial Procurement Plan for at least the first 18 months of the project. It will be agreed upon between the Borrower and the Bank at negotiations, and will be available at the implementing agencies’ project database and will be published on the Bank’s external website time in accordance with paragraph 1.18 of Procurement Guidelines and paragraph 1.25 of the Consultants Guidelines. The Procurement Plan will be updated in agreement with the Bank semiannually or as required to reflect the actual project implementation needs and improvements in the implementing agency institutional capacity.

All the above thresholds will properly be reflected in the Procurement Plan.

Environmental and Social (including safeguards) 36. Environmental Safeguards. The project supports adoption of sustainable management of pastures, improvement of the quality of veterinary service provision, and adoption of productive and sustainable farming and other agricultural practices. All of these are expected to have positive long-term environmental impacts through arresting soil erosion and degradation under pastures, preserving biodiversity of meadows and forest lands used for grazing, and cutting threats to human health from cattle disease. However, while assisting farmers in increasing outputs from farming, animal growing and dairy production, there is a potential risk of causing negative environmental impacts. More specifically, poor planning of pasture rotation may damage vegetation along access roads and within currently abandoned remote pasture lands; poor application of agrochemicals may cause increase in nutrient load and pesticide pollution of water and soil; organic waste from animal farms and milk processing centers may also increase nutrient pollution to the environment. Management of manure, liquids, fragments of animal carcasses, and hazardous waste from animal sheds, farms, processing facilities, and Veterinary Service Centers will be a challenge because the country lacks relevant regulatory framework and infrastructure for handling waste, especially in rural areas. Therefore, targeted technical assistance will be required for finding realistic and optimal case-by-case solutions for waste management.

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37. The project triggers OP/BP 4.01 Environmental Assessment and is classified as environmental Category B. In accordance with the safeguard requirement, the ESMF was developed using the environmental management plan applied under the ongoing CARMAC project. The ESMF outlines the system of screening the proposed project interventions by their expected environmental and social risks, defining the scope and nature of environmental work required for preparing each interventions, managing identified risks, and monitoring application of the prescribed impact mitigation measures. The ESMF carries specific environmental guidelines for selecting, reviewing, approving, implementing, and monitoring activities to be financed through community grants for the improved pasture management, and funding proposals from the FBOs. User-friendly templates are provided for developing site-specific EMPs and PMPs. Selection of any activity for project support will include environmental screening and classification. Activities of environmental Category A will not be eligible for financing under CARMAC 2. The draft ESMF was disclosed to the public in an accessible manner and discussed with stakeholders. The finalized ESMF was disclosed in-country and through the World Bank InfoShop on March 26, 2014. 38. OP 4.09 Pest Management is also triggered by the project. It is not known upfront whether any of the project-supported activities will require purchase of pesticides; however support for improved fodder production and other farming activities may imply an increased use of pesticides. OP 4.09 will be applied in case of the project’s direct or indirect influence on pesticide use. More specifically, each activity identified for project funding will be screened for the need for agrochemicals’ application and if pesticide use in involved, then a sub-project specific PMP will be developed as part of the environmental management planning. If there is no need to prepare and implement PMP, the project beneficiary farmers will still receive information on good practices for plant disease management, including guidance for the Integrated Pest Management (IPM). 39. The APIU under the Ministry of Agriculture will provide day-to-day management of the project, including oversight on the adherence to the environmental and social safeguards triggered by the project. The APIU has extensive experience gained through the implementation of RESCAD and CARMAC projects, including management of environmental impacts of investments. For satisfactory performance under the CARMAC 2 project, PIU will hire or appoint from the existing staff a person responsible for safeguards compliance. Functions of this specialist will include: (i) reviewing proposals for project funding incoming from the PUCs and FBOs to ensure that they fall under the Project Category B or C, comply with all relevant safeguards policies, and to recommend and guide preparation of EMPs, RAPs and PMPs as required; (ii) assisting design companies with the preparation of EMPs and RAPs for the construction and/or refurbishment of infrastructure; (iii) planning and organizing social and environmental monitoring of all project components that imply physical works, and supervising social and environmental monitoring work of other staff members that may be contributing to safeguards oversight while carrying out other types of field work; (iv) producing, organizing, and filing regular records of social and environmental supervision under various components of the project and contributing information for the overall project progress reporting to the World Bank. 40. Social Safeguards. Project implementation will closely monitor and support community-based planning and decision-making processes to ensure equitable access to project

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benefits to all beneficiaries. Regular supervision by the APIU will include attention to gender-sensitivity in all aspects of the project and quarterly reports will include attention to gender and inclusion issues. The project grievance redress system will be integral to the system of community decision making that was recommended in the social management plan. This will build on grievance mechanisms used during the CARMAC project and will include grievance officers within each PUC, Marz-level grievance focal points, a telephone feedback line to an APIU grievance focal point and a committee in the APIU to review grievances if they cannot be resolved. 41. In addition, the APIU will conduct periodic consultations with beneficiaries in each target village to solicit feedback on their satisfaction levels with the overall project, their perceptions of equitable access to project benefits, and their ability to participate in decision making processes. These consultations will ensure attention to feedback from women, youth and marginalized groups. The project will also undertake regular information-sharing and communications with beneficiaries and local communities in the project areas 42. OP/BP 4.12 on Involuntary Resettlement has been triggered as all of the project sites are not yet known and the type and scale of civil works (including PUC sub-projects under Component 1 and VSC construction under Component 3) are still to be determined. A Resettlement Policy Framework (RPF) for the Project has been prepared by the government and will be followed by all Project activities. The RPF was consulted with stakeholders and disclosed publicly. Investment-specific Resettlement Action Plans (RAPs), will be prepared and implemented prior to commencement of works at a site where resettlement or land use or acquisition was required. However, the Community Fund for Implementation of PUC Plans will not approve any grants that involve land acquisition or physical resettlement. Any restrictions of access to pasture resources under the project would only occur as a result of community decision-making processes, deemed satisfactory to the Bank, and would be required to include appropriate measures to mitigate any adverse effects on vulnerable members of the community prior to their approval. The APIU will be responsible for ensuring compliance with these measures for ensuring that all World Bank safeguards provisions are followed. Monitoring & Evaluation 43. Sound Monitoring and Evaluation (M&E) is central to learn lessons and to enable dissemination of results to other Pasture User Cooperatives (PUCs), Food Business Operators (FBOs), and other stakeholders including the Ministry of Agriculture and other government entities. A full-time M&E Specialist will be employed in the APIU to coordinate the M&E activities and to facilitate wide dissemination. M&E activities will include field supervision of quality and safeguard compliance of works, surveys, mapping instruments, progress reporting, a baseline survey, a mid-term evaluation and a final completion report to document results and outputs. The M&E surveys will be conducted in partnership with NGOs and research institutions. Information on M&E results will be included on the project, Ministry and MASC websites. 44. In addition to overall project M&E, each component will have specific M&E procedures under the responsibility of the APIU specialists. The Community Pasture/Livestock Specialists

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and the Marz Support Teams will monitor progress of activities carried out by the communities, while the communities and PUCs themselves will play a substantial role in M&E for the Community Pasture/Livestock Management System component. The Pasture User Health Index (which uses a scoring system) will be used to measure the state of the pastures and will allow comparisons among sites and assessments of changes over time. The Value Chain Secretariat will monitor the value chain sub-projects throughout their implementation and based on milestones included in each contract. Each sub-project will be evaluated by an independent consultant following completion, including a cost/benefit analysis and an assessment of the number of beneficiaries. For the Animal Health Services, the Veterinary Specialist will conduct regular monitoring and will organize an independent consultant to carry out an evaluation of each VSC and the performance of the community veterinarians. The veterinary specialist will also be responsible for the Food Safety activity, while the Agricultural specialist will be responsible for monitoring the Seeds and Seedling Development and Good Agricultural Practices activities.

Role of Partners (if applicable) 45. Not applicable

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Annex 4: Operational Risk Assessment Framework (ORAF)

Armenia: Second Community Agriculture Resource Management and Competitiveness Project (P133705).

Risks .

Project Stakeholder Risks

Stakeholder Risk Rating Low

Risk Description: 1.1.1. Borrower: With the government reshuffle following the presidential elections of February 2013, there may be lack of support to the project from the new officials. 1.1.2. Beneficiaries: Farmers may not support cooperatives and producer associations as envisaged, and may not fully participate in preparation and implementation of pasture/livestock

Risk Management:

The project is aligned with the government’s agriculture sector objectives to promote sustainable agricultural development, to ensure greater food security, and to increase rural incomes, as specified in the Agricultural Sustainable Development Strategy. The borrower has specifically requested a follow-up to the on-going Bank-funded Community Agricultural Resource Management and Competiveness (CARMAC) Project including extending the sustainable development of pasture-based livestock systems, improving market access including strengthening links between producers and processors, promoting food safety and supporting producers associations. The Bank team will maintain a dialogue with the government throughout preparation and implementation, including Ministries of Finance and Agriculture, to ensure that the project design and implementation procedures are agreed and in line with priorities.

Resp: Both Status: In Progress

Stage: Both Recurrent:

Due Date:

Frequency:

Continuous

Risk Management:

The process of preparing and implementing pasture/livestock management plan will be strengthened based on lessons learned during the on-going CARMAC project including increased emphasis on community participation and decision-making. A comprehensive awareness and training activity is envisaged both for the pasture and value chain components to ensure that farmers are informed, and an assessment of the number and nature of existing cooperatives and associations, and the need for a Law on Cooperatives, will be carried out during preparation.

Resp: Both Status: In Stage: Both Recurrent: Due Frequency

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management plans Progress

Date: : Continuous

Implementing Agency (IA) Risks (including Fiduciary Risks)

Capacity Rating Moderate

Risk Description: 3.1.1 Although the existing Agriculture Projects Implementation Unit (APIU) with proven capacity will be in charge of the new project, it may not always be able to keep its entire experienced staff and/or may have difficulty in finding qualified staff to replace them. 3.1.2 Overall the Project FM risk before mitigation measures is assessed as substantial and after mitigation the risk is moderate. The Project’s design envisions a provision of grants.

Risk Management:

At APIU the staff salary level is competitive enough to retain the staff. Also according to the “Law on Public Service” of the Republic of Armenia adopted on May 26, 2011 the PIU staff is entitled to benefit from services defined by the social package.



Due Date:

Frequency:

Monthly

Risk Management:

Prior to the Project Effectiveness the grants’ Operational Manuals (as integral parts of the Project’s Operational Manual) acceptable to the Bank (which will cover the controls over flow of funds under the respective grants in Component 1 and 2) will be developed and adopted. During implementation OM will be a guiding principle for provision of grants.



Due Date:

Frequency: Continuous

Governance Rating Moderate

Risk Description: Risk Management:

3.2.1. Facilitators such as APIU Pasture Component coordinators, Marz Support Teams, and the Grant Secretariat may drive decision-making on project activities rather than the beneficiaries in a way not

A Project Operational Manual, including Operational Sub-Manuals for components 1 and 2, will be developed to detail the responsibilities of the different stakeholders and decision-making process. Extensive information will be provided on the decision-making process as well as on the project activities. Appropriate and regular training will also be provided to the beneficiaries and the Bank supervision will ensure that the decision-making process as agreed is being followed.

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conducive to benefit the beneficiaries. Resp: Both Status: In Progress


Due Date:

Frequency:

Quarterly

Project Risks

Design Rating Low


4.1.1. Although the project builds on existing project, the design and implementation of the two new components (selected value chain development and institutional support) could be challenging.

In principle the activities envisaged under the two new components are relatively well-known and non-controversial. Moreover, the design of the value chain development will be informed by existing studies (Value chains development for beef, Cornelian cherries and wild berries) and complementary value chain studies to be carried out during project preparation. The APIU management and staff will be fully involved in discussions on project design, objectives and activities, and a dialogue will be maintained with the government including the Ministry of Agriculture throughout the project preparation as well as implementation periods.



Due Date:

Frequency: Continuous

Social and Environmental Rating Low


Project activities with respect to pasture management and matching grants may result in negative environmental impacts such as loss of agro-biodiversity, pollution of water and soil with nutrients and agrochemicals, and unsustainable use of water and other natural resources. Social risks are related to restricted access to pasture lands, community-decision making process, and operation of grievance redress mechanisms.

Borrower prepared to the satisfaction of the Bank an Environmental and Social Management Framework and a Resettlement Policy Framework to guide planning and implementing of environmental and social risk mitigation measures under each component of the Project. APIU must enhance its in-house capacity of safeguards management by designating a full-time safeguards specialist with the responsibility of ensuring Project compliance with the established environmental and social management procedures and reporting on their application. APIU will maintain adequate safeguards expertise for the duration of the Project. World Bank safeguards specialists will provide guidance and support at stages of the Project life.

Resp: Both Status: Not Yet Due

Stage: Implementation

Recurrent:

Due Date:

Frequency:

CONTINUOUS

55

Program and Donor Rating Low


4.3.1. A number of other donors are implementing projects in the agriculture/ livestock sector and value chain development, with risks of overlap and different methodologies affecting implementation.

The Bank team will coordinate with the complementary IDF Food Safety Capacity Building Project, and with key donors such as IFAD, USDA, Heifer International, Swiss Development Cooperation, World Vision and IFC during design and implementation to minimize overlap and strengthen available synergies.



Due Date:

Frequency:

Quarterly

Delivery Monitoring and Sustainability

Rating Low


4.4.1. APIU staff may not properly monitor implementation of project’s activities given its scope (pasture management, value chain development, and institutional support).

The current M&E system will be revised and adjusted and complementary staff will be recruited as needed to ensure adequate monitoring of activities. Technical assistance will be provided for M&E system design and for surveys and impact assessments as needed.


Stage: Implementation

Recurrent:

Due Date:

Frequency:

Monthly

Other (Optional) Rating Moderate


4.5.1. Selection of communities and grant recipients: There are risks related to selection of communities for pasture management plans and grant recipients as part of the value chain component.

Rigorous selection criteria and procedures will be established for the component 1 and 2 and included in the Operational Sub-Manuals (which will be an integral part of the Project Operational Manual) and frequent monitoring will be conducted throughout implementation.



Due Date:

Frequency:

Quarterly

Other (Optional) Rating


56

Resp: Status: Stage: Recurrent:

Due Date:

Frequency:

Overall Risk

Overall Implementation Risk: Moderate

Risk Description:

The Project’s overall implementation risk is assessed as Moderate. Experience and lessons learned under the ongoing Bank-financed CARMAC project and the completed Rural Enterprise and Small-scale Agricultural Development project, and the strong support from the Ministry of Agriculture, reduce the risks associated with project implementation.

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Annex 5: Implementation Support Plan

ARMENIA: Second Community Agricultural Resources and Competiveness Project

Strategy and Approach for Implementation Support 1. To facilitate the achievement of the PDO, rigorous implementation support efforts covering technical, fiduciary and analytical aspects will be required. In addition, the implementation support will focus on mitigation measures to address key risks identified in the ORAF. 2. The range of activities supported by the project will require the task team to include corresponding skills covering pasture/livestock management, value chain and market development, animal health and food safety, agricultural development and social development. The expertise should be sufficiently versatile to cover operational and technical aspects of project activities, as well as related policy issues. 3. The team would also support the APIU to ensure robust monitoring and evaluation of results, both in assisting design and/or to adjust M&E systems to best capture project results, as well as to ensure proper collection and maintenance of data. In addition to reporting on project results as given in the results framework, impact evaluations would be carried iut during implementation, with survey methodologies subject to the task team’s review. 4. The APIU has strong experience in fiduciary aspects and arrangements are similar to previous projects. Adequate thresholds for post- and prior-review of procurement packages have been established. However, despite the considerable experience in implementing complex procurement packages, the team’s procurement and technical specialists would continue to work closely with the APIU to provide input and feedback on procurement aspects. 5. A number of institutional capacity building activities will be undertaken during the project primarily through contracting both international and national technical specialists. All TORs for national and international consultants would be subject to prior review by the team. 6. On safeguards compliance, the team will provide support to ensure proper implementation and monitoring of the project’s ESMF, EMP, RPF and other key safeguards documents and requirements. Particular attention will be paid to activities that involve civil works and the diverse sub-projects to be financed under the value chain component that might result in direct negative environmental or social impacts. Implementation Support Plan 7. The Bank’s supervision team will include a Washington-based Task Team Leader and regionally based fiduciary and safeguards staff. 8. Technical support for Component 1: The task team will include a natural resource management specialist to provide close supervision of the pasture/livestock program. The specialist will review the development of Pasture User Committees and progress in

58

implementing the Pasture Management and Livestock Development Plans, ensure that TORs and qualifications of international and national consultants are in line with the capacity building needed, provide technical advice on the implementation of activities, and ensure the inclusion of women and rural youth in the program and in the decision-making process. This input will be required for around two missions a year. The specialist will be supported by an animal health specialist who will also have responsibility for some Component 3 activities. To ensure that the community-driven approaches under Component 1 are fully implemented and that women and rural youth are included in the process, the natural resource management specialist may be supported by a community/social development specialist as needed. 9. Technical support for Component 2. The Bank supervision team for Component 2 will include an agricultural development specialist with experience of value chain development and small grants programs. The project will include a large number of small sub-projects to be financed under the value chain component. The number of diversity of investment sub-projects would pose challenge to implementation support. The Implementation Support Plan will involve field visits to a high proportion of these sub-projects in order to gather information and feedback on their quality, impact, and to ensure lessons learned from the field are adopted by the project. This input will be required for two missions a year. 10. Technical support for Component 3: The Bank’s task team will include an agricultural development specialist, also responsible for component 2, to supervise the seeds and seedling production and the Good Agricultural Practice activities. The animal health/food safety specialist, also supporting component 1, will provide support to the community veterinary component and other food safety activities. The latter input will be required once a year. 11. Financial Management Support: As part of its project implementation support and supervision missions, the Bank will arrange risk-based FM missions within a year from project effectiveness, and then at appropriate intervals. The Bank will supervise project financial management arrangements in the following ways: (a) review project semi-annual IFRs, annual audited financial statements, auditor’s management letter, and remedial actions recommended in the auditor’s Management Letters; and (b) during the Bank’s on-site implementation support and supervision missions, review the following key areas (i) project accounting and internal control systems; (ii) budgeting and financial planning arrangements; (iii) disbursement management and financial flows, including counterpart funds, as applicable; and (iv) any incidences of corrupt practices involving project resources. As required, a Bank-accredited Financial Management Specialist will assist in the implementation support and supervision process. 12. Procurement Supervision: A Bank procurement specialist based in Yerevan will be a member of the team throughout the project and will join the regular Bank supervision missions during project implementation. In addition to the prior review supervision to be carried out by the Bank team, procurement post reviews are to be carried on at least 10 percent of the contracts subject to post review. As a minimum, one post review report which will include physical inspection of sample contracts including those subject to prior review will be prepared each year and not less than 10 percent of the contracts will be physically inspected. 13. Environmental Safeguards supervision. A Bank environmental specialist based in the

59

region will be a member of the project team throughout the project. Besides supervision of compliance with environmental safeguards the specialist will provide assistance and support in the first years of the project on the delivery of the IPM program and on the habitat/biodiversity elements of the EMP. A Bank environmental specialist based in Baku will be a member of the project team throughout the project. Besides supervision of compliance with environmental safeguards, the specialist will provide assistance and support in conjunction with the PMU environmental specialist on environmental issues arising in implementation of grant and credit funded subprojects under Components 1 and 2. 14. Social Safeguards supervision: The Bank task team will also include a Social Development Specialist who will provide support to the APIU on social development issues, including social safeguards, social analysis and social sustainability. The social specialist will supervise compliance of the project with social safeguards policies and the project Resettlement Policy Framework. A minimum of two missions per year will be taken to supervise compliance with social safeguards and promote overall social sustainability of the project. (i) Main Focus of Implementation Support

Time Focus Skills Needed 0-12 months Project implementation

Preparation of first-phase procurement packages and initiation of procurement

Financial management arrangements

M&E baseline survey

Safeguard compliance

Natural Resources Management, Agricultural Development, Animal Health/Food Safety, Community Development Procurement FMS Environmental Safeguards Social Safeguards

12-48 months Implementation review

M&E mid-term survey

Safeguard compliance

Procurement prior and post reviews

FMS

Natural Resources Management, Agricultural Development, Animal Health/Food Safety, Community Development Procurement FMS Environmental Safeguards Social Safeguards

48-60 months Implementation review, assessment of the first

Natural Resources Management, Agricultural

60

results of value chain development activities, dissemination Procurement prior and post reviews FMS Safeguard compliance End-of-project M&E survey

Development, Animal Health/Food Safety, Community Development Procurement FMS Environmental Safeguards Social Safeguards

ii) Skills Mix for Implementation Support Skills Needed Number of Staff

Weeks Number of Trips Comments

Task Team Leader 40 10 Natural Resource Management

20 10 Pasture/livestock experience as well as natural resource management

Agricultural Development

20 10 General agricultural production, value chains, small grants, seeds and seedlings

Animal Heath/Food Safety 10 5 Support to pasture/livestock component, veterinary and food safety activities

Financial Management 15 0 Region based Procurement

15 0 Country based

Environment Specialist 15 0 Region based Social Development Specialist

12 4 Social development including social safeguards, participatory processes for natural resource management, involvement of women and rural youth and grievance redress mechanisms

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Annex 6: Financial and Economic Analysis

ARMENIA: Second Community Agricultural Resources and Competiveness Project

INTRODUCTION 1. The project will have two major benefits: (i) improve productivity and sustainability of pasture and livestock systems in targeted communities; (ii) increase the marketed production from selected livestock and high value agri-food value chains. Benefits would derive from: (i) increased pasture yields; (ii) increased cultivated feed crop area; (iii) improved capacity of smallholders for livestock management; (iv) livestock advisory and health services; and (v) improved market access through value chain development. Overall, the development impact of improved pasture and livestock management would be increased income from livestock production by smallholder farmers in targeted communities. In addition, value chain development activities would increase competitiveness of existing producer cooperatives, associations and local food business operators. For example, analysis shows that proper package design and product promotion as well as certification may open international markets for Armenian honey producers and receive additional revenue. Investments in product handling and grading may substantially decrease losses in apple production and provide an opportunity to receive higher price for separated premium apples. Establishment of milk cooling and collection points would enable smallholder farmers to access dairy processing enterprises. Project activities would also have a positive long-lasting impact on limiting pasture land deterioration. 2. The World Bank is particularly well-placed to support this project due to its experience and successes in agriculture, rural development, pastures and livestock management, and participatory community development in Armenia and the region. The project would combine and apply these experiences, providing a unique window of opportunity to integrate a strategic approach to natural resource management, value chain development, animal health and food safety. This includes experience gained in pastures and livestock management, and in community and matching grant programs, and from achievements and lessons learned notably in the RESCAD and CARMAC projects, which include successful participatory community development and competitive grants procedures, both highly applicable to this project. Without the project, resource degradation is likely to continue unabated until it becomes irreversible, leading to desertification and failure to establish competitive livestock production in Armenia. No other support programs or projects in the country exist to address this issue. Public sector provision of financing is the most appropriate mechanism for this project. Improved pasture management is primarily a public good that will result in limiting pasture degradation, but is unlikely to be financed directly by individual pasture users. Public investment in improving the value chains will also limit the risk to food business operators and help improve market access that will benefit the Armenian economy as a whole. In both components, however, significant beneficiary contribution is required FINANCIAL ANALYSIS 3. Environmental benefits as well as benefits from public sector institution development are rather difficult to estimate mainly due to lack of efficient and reliable data. Therefore, the analysis mainly assumes quantifiable revenues generated by participating smallholder farmers

62

from livestock production and food business operators from an increased value of their products. The objectives of the financial analysis are: (i) to assess the financial viability of the improved management practices promoted by the project and the increase in incomes from indicative investments; and (ii) to set a basis for the economic analysis. Key Assumptions 4. The parameters of the models are based upon information on the production systems gathered from interviews with farmers, food business operators, a fodder production scientist, PIU specialists and a review of available documents and statistics as well as information from Community Pasture Management and Livestock Development Plans (CPMLDP) from 55 communities. In particular, information on labor and input requirements for various operations, capital costs, prevailing wages, yields, farm gate and market prices of agriculture produce and farm-to-market transport costs were collected. Conservative assumptions were made both for inputs and outputs. The models show only incremental revenues and costs generated by the new investments. 5. Prices of commodities/inputs reflect annual averages and those actually paid/received by the farmer/entrepreneur. These were collected during the interviews and from national statistics, FAOSTAT and local experts. On average, a land tax of AMD 8,500 per ha and a Pasture User Cooperative fee of AMD 1,500 per Livestock Unit (LU) were applied. 6. Internal Rate of Return. An internal rate of return (IRR) of 12% is used in this analysis to assess the viability and robustness of investments. The selection criterion for the IRR is to accept all projects for which the IRR is above the opportunity cost of capital. Using the IRR as the measure, the models’ sensitivity to the changes in parameters can be assessed by varying the cost of investments, production costs and revenues. Production Models 7. Three production models were prepared to serve as building blocks for the analysis: (i) Pasture Improvement; (ii) Alfalfa Production; and, (iii) Controlled Grazing. Table 1 summarizes the results of the production models and the comparison of income in the without and with project (full development at Year 5) scenarios for the above activities.

Table 1: Production Models Summary (Financial) /a

Model

WP Investment

Cost (US$/ha)

WP Average

Recurrent Cost

(US$/ha)

Income, US$ Incremental Income

(US$/ha)

WP Benefit/Cost

Ratio WOP WP

Pasture Improvement 2433 0 51 102 51 N/A Alfalfa 140 315 627 1309 682 2,6 Controlled grazing 0 0 51 82 31 N/A

a\ WOP – without Project; WP – with Project.

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Community Pasture Management and Livestock Development Plan (CPMLDP) 8. The project would continue to support pasture and livestock improvement interventions such as improved access to pastures, rehabilitation of pasture schemes, development of stock watering points, and rotational grazing which would be for the benefit of the community as a whole and formalized in a CPMLDP by the participating Pasture Users Cooperatives. The model has been developed taking into account the practical improvements that could be made to the existing pasture and livestock practices. A typical PUC model was built based on average values from 55 CPMLDPs formed during the implementation of the CARMAC project. The model is indicative and underestimated as it does not fully capture the probable expansion of livestock numbers (due to the enhanced live weight of animals, the livestock unit (LU) value is higher). The typical PUC has about 2,009 ha of pastures, of which 1,909 ha (95%) are available for cattle and sheep feeding. Around 60% of pastures are not used due to the limited access and/or lack of infrastructure. About 1,084 head of cattle and about 1,451 sheep belong to an average of approximately 361 households. The population of the typical PUC is about 1,345 persons. The key livestock parameters are presented in Table 2.

Table 2: Key Livestock Parameters

Item Unit

Cattle Sheep

WOP WP Incremen

tal, % WOP WP

Incremental, %

LW (cow, ewe, mare) kg 350 455 30% 50 60 20% LW (offspring) kg 150 173 15% 13 15 15% Milk yield - daily average lt 7.1 7.5 5% 2.50 2.75 10% Milk yield - total lactation lt/head 1428 1800 26% 150 165 10%

9. A model of the feed/forage balance includes productivity estimates for pasture and forage areas put in the context of the feed/forage demand in the PUC. The model shows that the typical PUC can provide only 36% of the annual feed/forage demand, resulting in low livestock productivity. CPMLDPs include possible project activities (fodder crop production, pasture improvement activities, provision of machinery, and veterinary services) that can improve the feed/forage balance of the typical PUC. On average, an additional 27 ha are proposed for fodder production to reduce by a month the period spent on pasture in order to prevent overgrazing. Approximately 0.55 ha of pastures are subject to radical improvements and controlled grazing introduced on about 764 ha of nearby pastures. As a result of the implementation of CPMLDPs, the feed/forage provision of the typical PUC is assessed to increase up to 203% of the current annual demand. Together with the improved animal health interventions, this would allow to increase production of meat and milk by 54% and 24% and consumption by 3% and 26%, respectively. Sales of meat would grow by 58%. Households’ annual net income would increase by US$450 on average, from US$1,279 to US$1,729 per household. 10. Summary. The financial analysis of the CPMDP shows: (i) an increase in incremental income of 15%; and (ii) a benefit/cost ratio of 4.2 and an IRR of 34.1% demonstrate the attractiveness of the investments. Table 3 presents a summary of the CPMLDP model.

64

Table 3: Summary of CPMLDP Model

Items

Unit

Without With Project Incremental Project Full Development Value %

Livestock number (in Livestock Units) LU 1 055 1 345 290 28% Production Meat Kg 39 766 62 658 22 893 58% Milk Kg 687 037 851 852 164 815 24% Revenues Meat US$ 278 359 438 607 160 248 58% Milk US$ 309 167 383 333 74 167 24% Total Revenues US$ 587 526 821 940 234 414 40% Average Household's Benefits Milk consumption lt/capita 222.6 280.6 58.0 26% Meat consumption kg/capita 27.3 28.2 0.8 3% Annual net income from livestock US$/hh 1 279 1 729 450 35%

Improvement Activities Pasture Improvement: Radical improvement Ha 0.5 Controlled grazing (CG) Ha 763.5 Other operations Machinery package a/ Set 0 1 Vet services, vaccination b/ LU 528 1 345 Improved access to pasture Ha 0 1 145 Payment to shepherd c/ LU 1 055 1 153 Cost of 3-year Improvement Plan US$ 172 123 Hh 477 Total Investment Costs US$ 354 238 Total Net Income US$ 461 832 588 928 127 096 28% Benefit/Cost Ratio 4.7 4.2 Incremental Net Income US$ 127 096 Incremental annual net benefits per USD1 of investment US$ 0.36 NPV (@12%) US$ 472 711 IRR % 34.1%

Switching Values: - Incremental Revenues % -37% - Incremental Production Costs % 58% - Incremental Investments % 162% Value Chain Development (VCD) Models 11. The project would support existing food business operators (production cooperatives, associations and small rural businesses) along the value chain in various activities connected to market access improvement and food safety activities. Three indicative models were prepared for marketing investments to illustrate the potential returns. (i) Milk Collection/Cooling Centre (MCCC) Model 12. Dairy processing factories in the project area are increasing their demand for whole milk supply which is reflected in the price. However, the majority of small farmers are not able to

65

provide a stable supply of consistent quality milk. Milk collection and cooling points as well as training on animal health, feeding and hygiene may be a solution for small-scale producers. The model estimates plausible returns over time to a small farmer cooperative obtaining an investment package for setting up a collection/cooling center amounting to about US$37,500. The financial analysis summarized in Table 4 below demonstrates that an MCCC supplying 2 tons/day of milk for 300 days would have an annual incremental benefit of AMD 5.9 million (US$14,786) and produce an IRR of 27% over a period of ten years. (ii) Model of improved apple grading in orchard 13. The model demonstrates an opportunity for apple producer to obtain a premium price for larger and more uniform apples. To do so, producer would need to hire another 18 seasonal workers (4.5 person-years) to perform proper grading of 200 tons of apples over a short period. Also, investing US$100,000 in replacement of old wooden containers with the more durable and smooth plastic ones would substantially reduce losses during storage. The financial analysis demonstrates that improved grading would have an annual incremental benefit of AMD 13.1 million (about US$32,686) and produce an IRR of 56% over a period of ten years. (iii) Honey marketing model 14. This model represents a possibility to promote Armenian honey in the international market through improved packaging, certification and product promotion. It would require US$30,000 of investments in package design and consulting services in promotion. The producers would also carry increased expenditures on packaging and certification. It is assumed that potential honey producer would produce 17.6 ton annually of which 7.6 tons would be dedicated to domestic market and export remaining 10 tons. The financial analysis summarized in Table 4 demonstrates that improvements in honey marketing would generate an annual incremental benefit of AMD 7.2 million (about US$18,000) and produce an IRR of 150% over a period of ten years.

Table 4: Value Chain and Income Diversification Models Summary

Model Investment Costs, US$

Annual Net Benefits (US$)

Incremental annual net

benefits per US$1 of

investment (US$)

Benefit/ Cost Ratio

IRR (%) NPV (US$) Without

Project

With Project -Full

Development Incremental

Milk Collection 37 500 0 14 786 14 786 0,4 1,1 27% 25 457 Apple grading 100 000 18 259 50 945 32 686 0,3 1,7 56% 104 237 Honey marketing 30 000 47 250 65 250 18 000 0,6 1,6 150% 74 918

ECONOMIC ANALYSIS 15. The period of analysis is 20 years to account for the phasing and gestation period of the proposed interventions. The scenario presented in the economic analysis is conservative; the analysis that appears below is indicative and demonstrates the scope of profitability originated from the conditions prevailing at the time of the design. The analysis attempts to identify

66

quantifiable benefits that relate directly to the activities undertaken following implementation of the components, or that can be attributed to the project’s implementation. 16. Price estimates for tradable commodities are based on the World Bank Commodity Price Data (November 2013). All local costs were converted into their approximate economic values using a Standard Conversion Factor (SCF) of 0.9. 17. The incremental quantifiable benefit stream comprises two elements: (i) Community Pasture Management and Livestock Development Plans (CPMLDP) and (ii) Value Chain Development activities (VCD). The illustrative models described above have been used to calculate the overall benefit stream on the basis of economic prices. The summary of economic benefits of the demonstrated CPMLDP and VCD models are presented in Tables 5 and 6.

Table 5: Summary of CPMLDP Model (Economic)

Cost of 3-year Improvement Plan US$ 155,072 hh 430 Total Investment Costs US$ 319,301 Total Net Income US$ 404,794 515,263 Benefit/Cost Ratio 4.3 3.8 Incremental Net Income US$ 110,469

Incremental annual net benefits per USD1 of investment US$ 0.35 NPV (@12%) US$ 397,713 IRR % 32.5%

Switching Values: - Incremental Revenues % -35% - Incremental Production Costs % 53% - Incremental Investments % 151%

Table 6: Summary of VCD Grant Models (Economic)

Model Investment Costs, USD

Annual Net Benefits (USD) Incremental annual net

benefits per USD1 of

investment (USD)

Benefit/ Cost Ratio

IRR (%) NPV

(USD) Without Project

With Project -Full

Development Incremental

Milk Collection 37 500 0 14 786 14 786 0.4 1.1 27% 25 457 Apple grading 100 000 18 259 50 945 32 686 0.3 1.7 56% 104 237 Honey marketing 30 000 47 250 65 250 18 000 0.6 1.6 150% 74 918

18. The following were considered in calculating the overall benefits from the above two elements:

Allowing the illustrative examples as a reasonable assumption of the investments likely to be implemented, estimated average incremental annual net benefits per US$1 of investments were used.

In particular, an average indicator for the incremental annual net benefits per US$1 of investments equals to US$0.35 for the CPMLDP and to US$0.52 for the VCD.

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The incremental net benefits were calculated by multiplying these indicators by the amount of estimated investments, but considering the gradual increase of such benefits over the period of ten years.

An 80% success rate was applied to the models, i.e. it was assumed that only 80% of the investments would achieve the estimated returns.

No financing flows were undertaken in the calculations as they represent transfer payments (grants, contributions and taxes).

19. Summary of Project Economic Benefit. The project would reach about 89,000 households from 100 targeted PUCs (assuming around 361 households per PUC on average, and reaching about 80%). About 200,900 ha of pasture would be improved (2,009 ha per PUC). Implementation of the Community Pasture Management and Livestock Development Plans and Value Chain Development activities would result in incremental production, consumption and sales of meat and milk which in turn improves nutrition status of rural population in the project districts and increases their income. 20. Cost Stream. The incremental economic costs were calculated by the removal of price contingencies and taxes/duties. Recurrent costs and replacement of equipment were assumed for year 6 and onwards. 21. Summary. Given the above benefit and cost streams, the base case internal rate of return (IRR) is estimated at 18.1%. The base case net present value of the project’s net benefit stream, discounted at 12%, is US$15.2 million. 22. Sensitivity Analysis. Economic returns were tested against changes in benefits and costs and for various lags in the realization of benefits. In relative terms, the IRR is equally sensitive to changes in costs and in benefits. In absolute terms, these changes do not have a significant impact on the IRR, and the economic viability is not threatened by either a 20% decline in benefits or by a 20% increase in costs. The switching values shows that the project would be economically viable even if benefits decreased by 31% and investment costs increased by 46%. A one-year delay in project benefits reduces the IRR to 15%. With a two-year delay in project benefits, the IRR falls to approximately 13%. The results are presented in the following table:

Table 7: Sensitivity Analysis

Sensitivity Analysis ( 20-year period)

Base case Costs Increase

Increase of Benefits

Decrease of Benefits Delay of Benefits

+10% +20% +50% +10% +20% -10% -20% - 30% 1 year 2 years

IRR 18% 16% 15% 12% 20% 22% 16% 14% 12% 15% 13%

NPV (000'US$) 15,159 11,846 8,532 -1,408 19,989 24,818 10,330 5,501 671 8,919 3,347

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This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 10 20 30 40

0 10 20 30 Miles

50 Kilometers

IBRD 33364

SEPTEMBER 2004

ARMENIASELECTED CITIES AND TOWNS

PROVINCE (MARZ) CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE (MARZ) BOUNDARIES

INTERNATIONAL BOUNDARIES