Mongolia: Agriculture Sector Development Program and Project

Transcription

1 Completion Report Project Numbers: and Loan Numbers: 1821 and 1822 August 2009 Mongolia: Agriculture Sector Development Program and Project

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3 i CURRENCY EQUIVALENTS Currency Unit togrog (MNT) At Appraisal At Project Completion $1.00 = MNT1,086 MNT1,165 MNT1.00 = $ $ ABBREVIATIONS AADF Aimag Agriculture Development Fund ADB Asian Development Bank ADTA advisory technical assistance ASDP Agriculture Sector Development Program/Project BOM Bank of Mongolia COS country operational strategy EA executing agency FMD foot and mouth disease ha hectare IA implementing agency IDI interest during implementation JICA Japan International Cooperation Agency M&E monitoring and evaluation MDF Microfinance Development Fund MOF Ministry of Finance MOFA Ministry of Food and Agriculture MOFE Ministry of Finance and Economy MOU memorandum of understanding MTR midterm review NGO nongovernment organization OIE Office International des Epizooties O&M operation and maintenance PFI participating financial institution PIU project implementation unit PMU project management unit RRP report and recommendation of the President SSIA State Specialized Inspection Agency SWRF soum well rehabilitation fund TCR technical assistance completion report GLOSSARY aimag province, the largest administrative unit dzud severe winter with heavy snow and strong wind soum first administrative unit under an aimag NOTES (i) (ii) The fiscal year of the Government and its agencies ends on 31 December. In this report, "$" refers to US dollars.

4 Vice-President C. Lawrence Greenwood Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director A. Ruthenberg, Country Director, Mongolia Resident Mission, EARD Team leader A. Tsetsegmaa, Economics Officer, Mongolia Resident Mission, EARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

5 CONTENTS Page BASIC DATA i MAP I. PROGRAM AND PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Outputs 5 C. The Program and Project Loan Costs 10 D. The Program and Project Loan Disbursements 10 E. The Program and Project Loan Schedules 10 F. The Program and Project Loan Implementation Arrangements 11 G. Conditions and Covenants 11 H. Related Technical Assistance 12 I. Consultant Recruitment and Procurement 12 J. Performance of Consultants, Contractors, and Suppliers 13 K. Performance of the Borrower and the Executing Agency 14 L. Performance of the Asian Development Bank 14 III. EVALUATION OF PERFORMANCE 15 A. Relevance 15 B. Effectiveness in Achieving Outcome 15 C. Efficiency in Achieving Outcome and Outputs 16 D. Preliminary Assessment of Sustainability 16 E. Impact 16 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 17 A. Overall Assessment 17 B. Lessons 17 C Recommendations 18 APPENDIXES 1. Assessment of Compliance with Conditions of the Policy Program Project Framework Agriculture Sector Development Project (Loan 1822-MON): Actual versus Report and Recommendation of the President Implementation Schedule Status of Compliance with Major Loan Covenants (Investment Project Loan) Implementation of Consulting Services Inputs List of Major Procurement Contracts Economic and Financial Analyses 50 SUPPLEMENTARY APPENDIXES A. PCR for Green Revolution Subcomponent B. PCR for Well Rehabilitation Subcomponent C. PCR for Veterinary Services Subcomponent D. PCR for Credit Line Subcomponent

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7 BASIC DATA A. Loan Identification 1. Country 2. Loan Numbers 3. Loan Title 4. Borrower 5. Executing Agency 6. Amounts of Loans 7. Program/Project Completion Report Number Mongolia 1821 MON (SF) and 1822 MON(SF) Agriculture Sector Development Program/Project Government of Mongolia Ministry of Finance and Economy/ Ministry of Food and Agriculture SDR 5,440,000 program loan SDR 7,771,000 project loan MON 1109 B. Loan Data 1. Appraisal Date Started Date Completed 2. Loan Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness In Loan Agreement Actual Number of Extensions 6. Closing Date (program loan) In Loan Agreement Actual Closing Date (project loan) In Loan Agreement Actual Number of Extensions 7. Terms of Loan Interest Rate Maturity Grace Period 8. Terms of Subsidiary Lending (Project Loan) Interest Rate Maturity (number of years) Second-Step Borrower 9. Terms of Onlending (project loan) Interest Rate Maturity (number of years) Third-Step Borrowers 29 March April November November December February May June September December September October % (grace period); 1.5% thereafter 24 years 8 years 2.5% annual 6 years Bank of Mongolia 5.5% annual (local currency) 1 year (quarterly installments) Zoos, Savings, Khas, Khan, Post and Anod commercial banks of Mongolia

8 ii 10. Disbursements a. Dates Loan 1821 Loan 1822 Initial Disbursement 21 June July 2001 Final Disbursement 11 December September 2007 Time Interval 30 months 74 months Loan 1821 Loan 1822 Effective Date 20 June June 2001 Original Closing Date 30 September September 2006 Time Interval 27 months 63 months b. Project Loan Amounts ($'000) a Category or Subloan Original Last Revised Amount Undisbursed Allocation Allocation b Disbursed Balance 01 Civil Works Equipment,Vehicles,Furniture 1, , , Training 1, Credit Line 4, , , Consulting Services 1, , , Materials Operation and Maintenance , Interest During Implementation (9.2) 09 Unallocated Total 10,000.0 SDR 7, , ,845.3 SDR 6, ,210.9 SDR ( ) = negative. a Conversion rate of special drawing rights to US dollar was SDR at appraisal and SDR at completion (30 March 2007). b Latest date of category reallocation is 31 May Program Loan Tranche Release - First Tranche Release 21 June 2001 $3,396,700 - Second Tranche Release 11 December 2003 $3,915, Project Local Costs (Financed) - Amount ($'000) Percent of Local Cost 36.7% - Percent of Total Cost 9.5% C. Program/Project Data 1. Program/Project Cost Cost ($ million) Appraisal Estimate Actual A. Program Loan Foreign Exchange Cost B. Project Loan Foreign Exchange Cost Local Currency Cost Total

9 iii 2. Financing Plan ($ million) Cost (project loan) Appraisal Estimate Actual Implementation Costs Borrower/Beneficiary Financed ADB Financed Subtotal IDI Costs Borrower Financed ADB Financed Total ADB = Asian Development Bank, IDI = interest during implementation. 3. Cost Breakdown by Project Component ($ million) Component Appraisal Estimate Actual Production and Marketing Support Green Revolution Program Veterinary Services Well Rehabilitation Cooperative Development Rural Communication Links Credit Credit Line Capacity Building for PFIs and Subborrowers Project Management Contingencies Interest During Construction Total Item 4. Program/Project Schedule Appraisal Estimate Actual Date of Contract with Project Management Unit and 1Q Feb 2002 Consultants Civil Works Contract Date of Award of the First Contract 2Q Q 2003 Completion of Work various various Equipment and Supplies various various Dates First Procurement various 13 Sept 2002 Last Procurement 21 Dec 2006 Completion of Equipment Installation various various Start of Operations Completion of Tests and Commissioning Beginning of Start-Up

10 iv 5. Program/Project Performance Report Ratings Implementation Period Ratings Development Objectives Implementation Progress Program Loan From 31 Dec 2000 to 31 Jan 2001 Highly Satisfactory Satisfactory From 01 Feb 2001 to 31 Aug 2003 Satisfactory Satisfactory From 01 Sept 2003 to 11 Dec 2003 Satisfactory Highly Satisfactory Project Loan From 31 Dec 2000 to 31 Jan 2001 Highly Satisfactory Satisfactory From 01 Feb 2001 to 31 Aug 2003 Satisfactory Satisfactory From 01 Sept 2003 to 30 Nov 2003 Satisfactory Highly Satisfactory From 01 Dec 2003 to 31 May 2005 Highly Satisfactory Highly Satisfactory From 01 Jun 2005 to 30 Jun 2005 Highly Satisfactory Satisfactory From 01 Jul 2005 to 28 Feb 2007 Satisfactory Satisfactory D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person- Days Specialization of Members 1 Fact Finding 18 Jan 14 Feb a, b, d, e, g Appraisal 29 Mar 25 Apr a, k, h Project Specific Consultation 12 Sept 6 Oct a, g, h Review Mission Dec a, b Review Mission 2 22 Feb 4 Mar a, b Midterm Review Mission 13 Jun 8 Jul a, b, d, l, m Special Administration Mission Mar a Review/Handover Mission Jun a, b, d, h Review Mission Aug a, d Project Completion Review 2 6 Jan 6 Feb a, n, o 1 a mission leader/project officer, b project analyst, c counsel, d economist, e gender and development specialist, f control officer, g economics officer, i environmental specialist, j social development specialist, k lead financial specialist, h senior programs officer, l consultant (K. Krug), m consultant (P. Tasker), n staff consultant (A. Rijk), o staff consultant (B. Erdenebileg). 2 The project completion report was prepared by A. Tsetsegmaa, economics officer, Mongolia Resident Mission; and A. Rijk and B. Erdenebileg (staff consultants).

11 96 o 00'E 111 o 00'E R U S S I A N F E D E R A T I O N MONGOLIA AGRICULTURE SECTOR DEVELOPMENT PROGRAM AND PROJECT (as completed) Hanh 50 o 00'N Ulaanbayshint Dayan Tsengel BAYAN- OLGIY Yarant UVS Nogoonnuur Olgiy Olgiy Hovd Uyench Naranbulag Manhan HOVD Ulaangom Dariv Togrog Tayshir Burgastay Tes Tudevtey ZAVHAN Altay GOVI-ALTAY Tsagaan-Uul Tsahir Uliastay Buutsagaan Hatgal HOVSGOL Bayanhongor BAYANHONGOR Altanbulag Moron Suhbaatar BULGAN SELENGE Selenge Darhan Hutag-Ondor Erdenet DARHAN-UUL Bulgan ORHONSumber ARHANGAY HENTIY ULAANBAATAR Hishig Ondor Lun ULAANBAATAR Battsengel Batnorov Baganuur Tsetserleg Harhorin Arvayheer Nariynteel OVORHANGAY TOV Zuunmod Nalayh Maanit Choyr Mandalgovi DUNDGOVI Ondorhaan GOVISUMBER Saynshand Bayan-Uul DORNOD Choybalsan Monhhaan Baruun-Urt Ereentsav Matad Erdenetsagaan Bichigt SUHBAATAR Havirga Tamsagbulag 50 o 00'N Tsogt-Ovoo DORNOGOVI Dalanzadgad Zamyn-Uud Project Area with Production, Marketing Support and Credit Component 42 o 00'N OMNOGOVI Bayan-Ovoo Gashuun Suhayt Project Area with Credit Components National Capital 42 o 00'N N PEOPLE'S REPUBLIC OF CHINA Provincial Capital City/Town Main Road Provincial Road Kilometers Railway River Provincial Boundary HR 96 o 00'E International Boundary Boundaries are not necessarily authoritative. 111 o 00'E

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13 I. PROGRAM AND PROJECT DESCRIPTION 1. The Agriculture Sector Development Program/Project (the ASDP) was approved by the Asian Development Bank (ADB) on 21 December The ASDP comprised an integrated package of policy and institutional reforms, sector investments, and advisory technical assistance to develop a more market-oriented, efficient and sustainable agriculture sector and reduce poverty by increasing income opportunities. It consisted of (i) a policy program loan of $7 million equivalent (the program loan); (ii) an investment loan of $10 million equivalent (the project loan); and (iii) an attached advisory technical assistance (ADTA) grant of $695,000 equivalent. 2. The program loan supported activities to achieve targets in seven areas of policy reform. The main objectives of the reforms were to: (i) reduce price and other distortions in the agriculture sector; (ii) promote competitive markets for agricultural inputs and outputs; (iii) improve access to credit for the rural population; (iv) rationalize tax incentives to promote investments in rural areas; (v) improve productivity and sustainability of livestock production; (vi) strengthen agricultural research and extension; and (vii) mitigate risks in agriculture and ensure food security, income, and employment for vulnerable groups. 3. The project loan had three components: (i) production and market support, (ii) rural credit, and (iii) project management. The attached ADTA provided assistance for cooperative development, by training cooperative members on a range of relevant topics, and supported the establishment of herder groups to manage pastures in four western aimags. For the well rehabilitation activity, it demonstrated aspects of community participation for pasture management and well operations by herder groups. 4. The ASDP agreements were signed on 16 February 2001 and became effective on 30 June The executing agency (EA) for the program loan was the then Ministry of Finance and Economy (MOFE) and the EA for the project loan was the then Ministry of Food and Agriculture (MOFA). The program loan was closed in December 2003, while the project loan was closed on 24 October 2007 after a 9-month extension of the original loan closing date. The Government submitted its comprehensive project completion report (PCR-G) for the project loan on 16 January The technical assistance completion report (TCR) was circulated to the Board in July II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 1. Program Loan 5. The program loan was highly relevant in supporting the Government s key objectives and policy reforms for economic, social, rural and regional development, and poverty reduction, and it was in line with ADB s country operational strategy (COS). 1 The policy program covered seven policy areas involving second-generation reforms to deepen, refine, and more extensively implement the policy and legal framework for a market-oriented agriculture sector. During the pre-transition period, the state carried out a broad range of functions, including supply of inputs, processing and marketing of outputs, and provision of financial services. Therefore, the MON: ADB Country Operational Strategy. Manila.

14 2 emphasis of the program loan was on redefining the Government s role as a provider of essential support services and establishing a favorable environment for the private sector to undertake functions more effectively. 6. The policy matrix for the program loan was diverse and had a total of 35 policy measures. (Appendix 1). Implementation of five measures was a condition for consideration of the program loan by ADB s Board of Directors, while nine conditions had to be complied with before the release of the second tranche. Eighteen measures were to be taken before the expected date of the second tranche, but none of these was indicated as a condition for its release. However, two conditions had to be fulfilled before the end of the program. The thrust of the program loan remained highly relevant throughout implementation, including after a change in government. 7. The management structure of the program loan was a design weakness. Out of seven key policy areas, only one was within the mandate of the MOFE, the EA for the program loan, and this was cooperative taxation regulations. Other policy issues were under the jurisdiction of the MOFA, which had not received any of the policy loan s funds. As such, the focus on policy issues was diminished for MOFA and it was more by chance that the policy changes were effected. A more appropriate design would have had MOFA as the EA for the policy program loan. 2. Project Loan 8. The Government s medium-term objectives for regional and rural development focused on improving the living standards of rural inhabitants by promoting economic development, improving infrastructure, and developing rural credit policies. The interventions proposed under the project loan were intended to support the Government in fulfilling its objectives. They included support for: (i) (ii) (iii) (iv) (v) (vi) the national Green Revolution Program, which sought to expand vegetable production and raise the incomes of small farmers; cooperative development for herders and farmers; animal disease control and livestock production exports; rehabilitation of water points in pasture areas and a reduction in overgrazing; improved risk management for the agriculture sector; 2 and improved communication facilities to provincial centers. 9. Through support for these interventions, the project loan was able to address the major constraints identified in the COS, which were undermining the performance of the agriculture sector. The focus on production and marketing for livestock, which is the most important agricultural subsector, was particularly important. Other highly relevant initiatives of the project loan included re-orientating the green revolution towards the poor and unemployed around aimag and soum centers, thereby supporting ADB s poverty reduction strategy, and improving the supply of credit to rural areas. 2 Inadequate risk management became apparent during the livestock disaster in the winter of 1999/2000 and the following winter.

15 3 10. Soundness of Design. The green revolution subcomponent needed to be revised during implementation because nongovernment organizations (NGOs) could not deliver technical advisory services as envisaged in the report and recommendation of the President (RRP). 3 In addition, the use of the agro-parks for demonstration and extension proved infeasible. The subcomponent was supposed to focus on vulnerable groups, but no mechanism was proposed to ensure that concessional funding would be selective and limited to these groups. The mechanism and terms for extending loan funds to beneficiaries of the green revolution subcomponent, in particular for capital investments, were not clearly specified. Subsequently, loan funds for onlending to beneficiaries were channeled through the Aimag Agricultural Development Funds (AADF) rather than through the rural commercial banking system. The administration of the AADF was the responsibility of the aimag agricultural department, which had little or no expertise in sustainable rural finance principles, and the repayment of these funds became problematic. Because of the emphasis on poverty reduction, supply of inputs was free or at concessional terms, and a small amount was allocated; this subcomponent may have been more suitable for ADB grant funding. 11. The veterinary services subcomponent was generally well conceived, but the proposed training needed some modification during implementation to prevent duplication with a GTZfunded project. 4 The well rehabilitation subcomponent was implemented as designed. However, participatory procedures for prioritizing rehabilitation and stakeholders interest, and for ensuring beneficiary contributions for repair costs and operation and maintenance (O&M) for these wells, were not originally included in the subcomponent design but were incorporated during implementation. 12. The design of the cooperative development subcomponent did not take into account the history and actual state of cooperative development in Mongolia. The beneficiaries main reason for participation in this subcomponent was reportedly to gain access to funds. 5 The design of the subcomponent did not specify adherence to market costs and sound economic and financial principles for capital investments. The participating financial institutions (PFIs) considered the cooperatives to have a high credit risk and extended only a few loans to them. When the subcomponent was formulated, ADB policy was very firm on channeling investment funds through the formal banking system. However, concessional lending for the cooperatives was undertaken through the AADFs because the RRP did not contain a clear description of the funding mechanism for the cooperatives. 13. The concept of secondary cooperatives was too advanced, given the situation of cooperatives in the western aimags. As a prerequisite for secondary cooperatives to function, successful primary cooperatives must first exist, but they were too few, widely spread, and with interests that were too diverse for them to derive mutual benefit. In addition, two of the four aimags had already received significant support for the development of cooperatives through a GTZ-funded project. 6 Therefore, much of ADB s involvement in training for cooperatives was 3 ADB Report and Recommendation of the President to the Board of Directors on Proposed Loans to Mongolia for the Agriculture Sector Development Program. Manila (Loan 1821/22-MON, for $7 million (program loan) and $10 million (an investment loan), approved on 21 December). 4 The GTZ-funded Mongolian Veterinary Sector Privatization Project ( 3.33 million) covered two of the four ASDP aimags, and provided extensive veterinarian training in technical areas and business development for veterinary practices. 5 See information provided in Back-to-Office Report (BTOR) of D. Teter, Mongolia Resident Mission (MnRM) dated 18 June 2002, and the Government's Project Completion Report (PCR-G). 6 GTZ-funded Self Help Organizations in Rural Areas Project, implemented between 1998 and 2004, covered two of the four target aimags of the ASDP.

16 4 considered unnecessary, and this resulted in a significant loan reallocation in May Similarly, the establishment of cooperative training centers and national cooperative wholesale centers was considered unjustified in the absence of prerequisite conditions, and therefore this was not implemented as designed. 14. The rural communication links subcomponent was considered largely redundant when the project started and was not implemented. 7 Efforts to use the funds for alternative improvements to rural communication were not supported by the then Ministry of Infrastructure which was the implementing agency responsible for the subcomponent. 15. The design of the rural credit subcomponent was highly relevant. Implementation of the credit line was successfully achieved through selected formal financial institutions. Training on rural finance and agriculture subloan appraisal at these institutions was crucial. The subcomponent also contributed to reducing the opportunity for direct lending. However, by its design, and given the high real interest rates at that time, the subcomponent only catered for relatively small loans with a maximum duration of 12 months, even though this was extended to a maximum of 24 months during implementation. At the time of the ASDP preparation, it was well recognized that medium- to long-term capital investments were urgently needed to increase production and productivity at crop farms and agribusiness enterprises, but very high real interest rates made capital investments financially nonviable. The rural credit subcomponent as designed did not address this issue of medium-term capital investment for the agriculture sector. There was no provision in the RRP or in the loan agreement on the use of the credit line funds after completion of the ASDP, but this was rectified by the time of completion. 16. The design of the project management subcomponent is considered satisfactory. The heavy dependence on loan-financed consultants for technical inputs made the project management unit (PMU) costly, considering that the ADTA also provided technical expertise for investment subcomponents. It was unclear why some training and consultant expertise were provided from the loan, while other training and expertise were funded under the ADTA. Some of the ADTA work was clearly related to project loan subcomponents, and confusing implementation arrangements caused significant coordination problems during implementation. The PMU was instrumental in implementing remedial measures as implementation of the project progressed. 17. The objective of the ADTA was to provide support for well rehabilitation and cooperative development subcomponents. For the well rehabilitation, it sought to demonstrate aspects of community development for pasture management and well operations by herder groups. For the cooperative development, the goal was to train trainers to deliver training to cooperative members on various topics. Neither has worked satisfactorily as there were coordination difficulties between the ADTA and the PMU. The concept of self-funded trainers being made available through aimag cooperative training centers proved to be an impractical and unsustainable solution to training requirements. While the Government appreciated efforts to support the main project loan through grant assistance for capacity building, it would have been preferable to have included the ADTA activities under the project loan and to have used the technical assistance funds for the financing of implementation consultants. 7 The Japan International Cooperation Agency (JICA) provided radio phones to establish communications between aimag and soum centers that was completed in In addition, JICA funded the establishment of a nationwide short wave radio network that covered more than 96% of the country by 2001.

17 5 18. The quality of the project preparatory TA was unsatisfactory. 8 The performance of the consultants was unsatisfactory and the contract was ultimately terminated and other consultants were employed to complete the job. Formulation of the ASDP took 3.5 years, mainly because of a need to provide substantial additional consulting inputs and change in consultants. An overall concern with the design was the broad nature of the proposed project, which covered a full range of production activities, infrastructure development, and rural credit, which was itself a specialized and difficult area at that time in Mongolia. The interventions were individually appropriate, but the links between the activities were less obvious. The design assumed a higher level of understanding and knowledge than proved to be available, particularly in the aimag centers where the majority of the implementation was to be undertaken, and hence the high level of consultancy and training inputs included under the project loan and the ADTA. A further weakness in the design was that the project loan was spread too thinly. The allocation for the green revolution activities was only $485,000, 9 and the average annual investment for the green revolution subcomponent was about $23,000 per aimag. Similarly, about 42,000 water points were spread out over pasture land, and about 50% of these were considered in need of repair. The project loan covered only 1% of this much-needed rural infrastructure. The project loan and its ADTA could have been justified and used solely for this purpose. B. Outputs 1. Program Loan 19. The program loan made progress on major policy reforms, including liberalization of the trade regime to promote exports of agricultural products, privatization of crop farms, elimination of budgetary support to agricultural enterprises, and strengthening of veterinary and extension services to support the private sector. However, the program loan failed in key reforms, such as improving efficiency in the use of funds generated from the sale of commodity aid, and minimizing state intervention, subsidies and concessional loans to private businesses. In fact, directed and highly concessional lending by MOFA remains a serious concern. 20. Under the first area of reform, which sought to reduce price and other distortions in the agriculture sector, procedures for the application of export licenses have been simplified and made more transparent. Requirements for licenses were reduced from about 600 at the beginning to about 94 at the end of the ASDP. Procedures for the export and import of plants and animal products were amended and brought under the State Specialized Inspections Agency (SSIA). The second area of reform related to the promotion of competitive markets for agricultural inputs, outputs, and processed goods. The main achievements were: (i) budgetary support for many strategic enterprises was eliminated; (ii) the National Council responsible for the implementation of the Cooperative Development Program was reconstituted to include stakeholders and representatives of all cooperative associations as voting members; (iii) the annual budget for the Cooperative Development Program was substantially increased; and (iv) subsidies have generally been eliminated, except for investments under the subcomponents of the project loan and the Government's Crop Support Program. The Crop Support Program is a continuation of heavily subsidized inputs and directed lending through a fund operated by MOFA, and is in conflict with the objective of the ASDP. 8 ADB Technical Assistance to Mongolia for Agriculture Sector Development Program. Manila (TA2819-MON, $492,000, approved on 27 June) 9 Or less than 5% including the allocation for consultancy inputs for production support, business management and agro-processing.

18 6 21. The third area of reform involved the delivery of financial services and provision of improved access to credit in rural areas. During the ASDP formulation, the future of the Agricultural Bank looked bleak and liquidation was likely. The restructuring of the Agricultural Bank was completed in 2001, new management was put in place, and the bank was sold to private investors, 10 the bank has become profitable and has the widest national coverage, with about 400 branches in every aimag and soum. This achievement can only partly be credited to the ASDP, as other bilateral and multilateral donors and financing institutions greatly contributed to the recovery of the financial sector in Mongolia. In the fourth area of reform, which related to the rationalization of tax incentives to promote investments in rural areas, the Economic Entities and Organizations Tax Law has been amended to support the specific requirements of cooperatives. 22. The fifth area of reform related to the improvement of productivity and sustainability in extensive livestock production. The Government adopted the Office International des Epizooties (OIE) classification system under its Law on Animal Health and the Gene Pool. 11 Meat inspection regulations and procedures for accreditation and certification of abattoirs and processing plants were established in 2001 and 32 meat inspectors were employed by the SSIA. Laws related to land and water resources and pasture management were approved. Well rehabilitation has been supported with an emphasis on herder responsibility for O&M. 23. The sixth area of reform involved the strengthening of agricultural research and extension to support the private sector. A Council of Science and Technology Research, responsible for agricultural research priorities, was created in 2002, and procedures for submission and approval of research priorities were established soon after. A medium-term development program for agricultural extension up to 2010 was approved in However, the extension services remain limited because of inadequate budget allocations. The seventh area of reform aimed to mitigate risks in agriculture to ensure food security, income generation, and employment opportunities for vulnerable groups. Risk management has been a central feature of several policy statements and programs, with elements that were included in various new and amended laws. The National Emergency Management Agency was established in 2005 incorporating the former State Reserves Agency. The Agricultural Insurance (Daatgal) company was fully privatized in The ASDP sought to raise the impact of the national Green Revolution Program, particularly with respect to poorer groups, who had not been evident among the early beneficiaries. Although involvement of local NGOs was limited because of a lack of local expertise, the program has worked closely with several NGOs Project Loan a. Green Revolution Program 24. This subcomponent aimed to improve the knowledge base of producers through demonstrations of new production technologies such as greenhouses and plastic tunneling, black plastic sheet mulch (ground cover), crop diversification, improved production techniques including improving water and pest management, fertilizer regimes, nursery techniques, and 10 In 2001, the name of the bank was changed to Khan Bank. 11 The Office International des Epizooties is now known as the World Organisation for Animal Health. 12 For instance, the Association of Women Farmers was contracted to undertake training sessions and field demonstrations. Cooperation has also taken place with foreign NGOs such as ADRA, World Vision, and Norwegian Relief, including assistance for the multiplication of seeds and seedlings. NGOs have also been involved in media presentations through TV and radio.

19 7 processing. Target outputs at design were for: (i) 4,400 person-days training; (ii) study tours for 180 farmers; (iii) 14 annual shows; and (iv) a 10% increase in horticultural production by project completion. Most of these targets were achieved: (i) 8,495 person-days of training were delivered to 5,264 farmers; (ii) three study tours to neighboring People s Republic of China were undertaken by farmers and soum and aimag agronomists, involving 172 people for 20 days; (iii) 14 rural demonstrations were supported; and (iv) 1,648 jobs were created with the area grown under plastic greenhouses being increased by 30%. Project Framework is in Appendix While the area planted with the main vegetable crops (potatoes, carrots, and cabbage) has not changed much since 2000, total production increased significantly because of increased yields, thereby clearly demonstrating the impact of new technologies. In particular, improved potato seeds have increased yields by 30% 50%. The rate of adoption of other inputs and new technologies is less clear. Having demonstrated the benefit of water management technologies, the Government incorporated trickle and sprinkler irrigation equipment as part of its national Green Revolution Program 2. Impact surveys have recorded significant increases in earnings from horticultural production in households that participated in training activities. b. Veterinary Services 26. The goal of this subcomponent was to reduce losses from animal diseases, and to meet the requirements of potential livestock and meat importing countries. Planned outputs under the subcomponent included: (i) training on international standards for 24 meat inspectors and an operative state abattoir inspection service; (ii) three training courses for 240 public and private veterinarians on animal husbandry, clinical treatment, and business management; and (iii) provincial livestock disease surveys and strengthening of veterinary laboratories in Ulaanbaatar and four western aimags. 27. These targets were mostly achieved. The project loan helped to develop training modules for meat inspectors and delivered training to 20 aimag-based inspectors from Hovd and Uvs. Training was repeated in Zavhan for a further 18 trainees and inspectors from Zavhan, Govi-Altay, Bayan-Olgiy, and SSIA. Some 125 private veterinarians in the western aimags received training in (i) survey techniques and procedures, (ii) survey protocols, (iii) sample handling and management, and (iv) microscope diagnoses for rabies and anthrax. Training in veterinary practice management was provided to 75 veterinarians covering business development planning. 28. The aimag veterinary laboratories were upgraded and staff was trained in the techniques and standards of the OIE. The rehabilitated serum laboratories have established serum banks for tests. The introduction of micro-titre techniques and modern test kits has established the capacity to undertake disease diagnoses. The model adopted by ASDP has been replicated by other donors (the International Fund for Agricultural Development, JICA, and the United States Agency for International Development) in other aimags' veterinary laboratories. The epidemiological survey, involving 33,163 serum samples taken in accordance with OIE standards, was conducted to identify economically significant diseases, and train the veterinarians in sampling techniques, sample handling, collection and processing of blood samples, and verification and interpretation of data. c. Well Rehabilitation 29. A total of 328 wells out of 400 planned were rehabilitated in four western aimags at an average unit cost of $3,279. Participatory procedures were developed to identify suitable wells

20 8 for rehabilitation, and operator-ownership agreements were formulated. Cost recovery procedures were piloted, while beneficiaries were required to pay for O&M costs. The Initial 50% cost recovery was reduced to 10% under revised regulations from MOFA. As a result soum well rehabilitation funds (SWRFs) became depleted. 13 Soum governments contributed $100,300 for well housing, while herders contributions to the SWRFs were 81% of the target (a 10% contribution) amounting to MNT92.1 million. Collection of water user charges was problematic as herders disputed their legality. 14 A total of MNT74.3 million was collected as water user charges from herder groups to meet O&M costs. To identify priority wells for rehabilitation, 2-day workshops were held at aimag level, involving 434 people, while 143 person-days of training were delivered to water companies' staff on the preparation of bidding documents. In addition, 728 person-days of training were provided to 328 well operators on routine O&M requirements, maintenance of well logbooks, and water user charge collection arrangements. d. Cooperative Development 30. The cooperative development subcomponent was intended to improve the joint action of herders groups by formalizing associations with common interests as cooperatives. It was intended to provide extensive training in association with the ADTA in the roles and responsibilities of cooperatives as business entities and provide credit to assist cooperatives to start their operations on a commercial basis. Nine secondary cooperatives were planned to improve their members bargaining and purchasing power. The subcomponent was also designed to establish a cooperative wholesale center to improve the market information and market power of the cooperatives. 31. Achievements under this subcomponent werenegligible. In total, 14,000 person-days training were provided on various aspects of cooperative development, including business development planning, budgeting, accounting and auditing. Considerable training was conducted by trainers prepared under the ADTA. But many of the trainers were found to be ineffective. Few trainers survived the period of implementation, either reverting to other incomeraising activities in aimag centers or relocating to other provinces in search of employment. It was also assumed that cooperatives that had received training would be better placed to gain access to rural credit provided under the Project. This did not occur as the participating financial institutions (PFIs) assessed lending to cooperatives to be highly risky. As a result, lending to the cooperatives was pursued through the AADF. A total of MNT451.7 million was disbursed as direct investment loans under the cooperative development subcomponent and MNT96.8 million under the green revolution subcomponent. Average repayment rates for the cooperative and green revolution subcomponents were 31.6%. 32. Establishment of secondary cooperatives was considered unrealistic, given the insecure and underdeveloped state of primary cooperatives in the western aimags. Through various activities, the Project supported six secondary cooperatives in the four western aimags, two of which were operating successfully. Cooperatives were seen as a means for improving agricultural marketing for herders, and stronger cooperatives were expected to play a greater role in the aggregation and sale of livestock and products of livestock origin. Since the cooperatives were extremely weak, it was unrealistic to expect them to adopt such functions on 13 SWRFs were established in soums where rehabilitation work took place, with the purpose of creating a resource for future rehabilitation activities. When beneficiary contributions were 50% of the rehabilitation cost initially, sufficient funds could have been amassed for further rehabilitation works. At 10%, the funds were insufficient and the funds were amalgamated in the Aimag Consolidation Fund, also referred to as the AADF. 14 Under the Mongolian constitution, water is a free commodity but delivery can be charged.

21 9 a commercial basis. Only one of the so-called secondary cooperatives has assumed marketing functions for herders by establishing a meat storage facility early during implementation. However, the marketing links did not extend to herders but stopped at the aimag enterprise. e. Rural Communication Links 33. This subcomponent was considered redundant and the loan funds were reallocated during the midterm review (MTR) mission. 15 Proposals to use the loan funds for other activities, such as establishing small studios to produce programs and information services, and upgrading telephone and internet facilities, were not accepted by the then Ministry of Infrastructure. f. Rural Credit 34. The subcomponent was expected to provide: (i) 5,000 loans with a total value of $5.5 million, and (ii) 3,200 person-days of training for PFI staff. Six PFIs participated in the disbursements of the rural credit line and each contributed 20% of funds from their own resources. 16 Initially, loans were allowed for up to the equivalent of $10,000 and for up to 12 months, with the interest rate and repayment arrangements determined by the PFIs. These conditions were relaxed in 2005 to allow loans of up to $20,000 over a 24-month term, but the average size remained about $1,000 and most was much smaller. ADB disbursed a total of $4.8 million (equivalent to SDR3.39 million) for the rural credit subcomponent. 35. A total of 30,156 subborrower loans have been extended through the revolving fund, amounting to MNT 34.9 billion. 17 The credit fund revolved more than 5 times. Khan Bank was the most active of the PFIs, reflecting its greater branch network, and accounted for 60.8% of loans, followed by Khas Bank (17.3%), Mongol Post Bank (16.8%), Zoos Bank (3.5%), Savings Bank (1.1%), and Anod Bank (0.6%). More than 95% of the loans were extended to individuals, and 60% were loans to herders. Loans were used to cover essential household expenses such as education, heath services, marketing of livestock products (16.4%), vegetable production (8.1%), and cereal cropping (4.6%). Fifty six percent were one-off borrowers, 31% borrowed twice, while 13.7% borrowed three or more times. At the time of the MTR, some 30% of borrowers were first-time borrowers, indicating that the ASDP had contributed to better access for rural households. Access was a more important issue than the interest rate. Monthly interest rates declined during implementation from 4% 5% to 2.8% 3.5% in the case of Khan Bank, and 2.8% to 2% 2.6% in the case of Mongol Post Bank. Loan recovery rates exceeded 98%. 36. During a review mission in 2007, an agreement was reached between the Ministry of Finance (MOF), the Bank of Mongolia (BOM), MOFA, ADB, and the World Bank to transfer the accumulated funds in the revolving fund under the rural credit component to the Microfinance Development Fund (MDF) 18 so that such funds could continue to be used for agriculture related activities in rural areas. However, against a backdrop of declining revenues and fiscal 15 The MTR mission was fielded from 13 June to 8 July The PFIs included Anod Bank, Khan Bank (previously Agriculture Bank), Mongol Post Bank, Savings Bank, Khas Bank, and Zoos Bank. 17 The number of aimags was extended to eight after the MTR to include Bayanhongor and Bayan-Olgiy, which together accounted for 12.3% of the total loans. 18 MDF was established under the World Bank-assisted Sustainable Livelihoods Project to expand the outreach of financially and institutionally sustainable microfinance services to poor and vulnerable non-poor households and individuals in rural Mongolia.

22 10 constraints due to a global financial downturn, the MOF used all the funds from the revolving fund to finance budget shortfalls in C. The Program and Project Loan Costs 37. The cost of implementation of the program loan on policy reforms was estimated at $7 million (equivalent to SDR5.44 million) and this amount was fully disbursed in two tranches of $3.5 million each. The cost of the activities financed by the project loan were $11.6 million. ADB financed $9.8 million (equivalent to SDR6.99 million), consisting of all foreign exchange costs, which totaled $8.6 million, and $1.2 million of local costs. Total costs were affected by higher than estimated rehabilitation cost per well 19 and increases in equipment, materials and operational costs. Cost reductions occurred because of the cancellation of the rural communication subcomponent, the scaling down of the cooperative development subcomponent, and a reduction in overall training. ADB financed 84.5% of total costs, 100% of foreign costs and 42% of local costs. Additional availability of funds from currency fluctuations were used to extend the credit line to two adjoining provinces in the western region. 20 D. The Program and Project Loan Disbursements 38. The first tranche of the program loan was released on 21 June 2001, the day after the loan became effective, and the second tranche on 11 December 2003, once the Government had fulfilled the conditions for its release. Disbursements for the project loan were very low in the first year because consultants had not yet been appointed. For the second year, delays in undertaking field activities occurred because of seasonal considerations, and so disbursements remained low. However, this improved once the project activities in the field began and the procurement system was established. At the request of MOFA, the imprest account was increased from $200,000 to $500,000. Imprest fund and statement of expenditure procedures were properly applied and facilitated timely disbursements. Use of statement of expenditure was sufficient with adequate supporting documentation being maintained to support claims to ADB for replenishment of expenditures incurred. 21 The disbursement schedule was modified after the MTR, when the MOFE requested a cancellation of $290,000 initially allocated for the rural communication links component and other minor adjustments. The total amount disbursed under the Project was about $9.8 million (equivalent to SDR6.99 million). An undisbursed balance of $1.2 million (SDR781,100 equivalent) was cancelled at the project loan closing date. E. The Program and Project Loan Schedules 39. The program loan account was closed in December 2003, less than three months later than the original closing date of 30 September The project loan became effective on 20 June 2001, only 1 month later than originally planned, but because of a delay of almost 1 year in the engagement of the Project and ADTA consultants, first year implementation was also delayed by about 1 year against the original plan in the RRP. It also took time to set up payment arrangements, aimag cooperation agreements, and mechanisms for the provinces to assume 19 Originally estimated to be $2,000 per well, but was in the order of $3,300 per well on account of the fact that a higher portion of deep wells was rehabilitated. 20 Bayanhongor and Bayan-Olgiy aimags. 21 Confidence Audit LLC and Auditor's Report on the Project Financial Statements. Mongolia.

23 11 ownership of the assets. 22 As a result, there were further delays in implementation during 2002, and activities completed in that year were carried out hastily without thorough preparation The MTR was delayed from the anticipated date of September 2004 to July Significant revisions in implementation activities were proposed by the MTR mission, mainly related to the cooperative subcomponent. The MOFA did not support these proposals and subsequently requested a further review of the recommended changes by another consultant. It took almost 1 year for the issue to be resolved. The project loan was completed on 30 June 2007 after a 9-month extension of the original loan closing date of 30 September The project loan account was closed on 24 October The implementation schedule is in Appendix 3. F. The Program and Project Loan Implementation Arrangements 41. The then MOFE (currently MOF) was the EA for the program loan, while the then MOFA (currently Ministry of Food, Agriculture and Light Industry) was the EA for the project loan. Implementation proceeded based on the approved annual plans both at aimag and national levels. Annual review meetings were held in the aimags and the aimag coordination committees approved future initiatives, while nationally both the credit working group and the project steering committee met on an as required basis, but not always at least once every 3 months as envisaged in the loan agreement. A national project director from MOFA headed the PMU. 42. The PMU implemented a computerized system to monitor activities for each aimag component. However, the focus of the system was on inputs and outputs rather than on outcomes and impacts. The PMU provided direction and effectively supervised the daily operations of the aimags' project implementation units (PIUs). Coordination between BOM, MOFE, MOFA, and other members of the steering committee and credit working group was satisfactory. However, coordination between PMU and ADTA activities was unsatisfactory. Communication between the EAs and ADB was at times inadequate on important issues that required ADB approval and advice such as: lending through aimag funds and their highly concessional terms; one procurement issue; cost recovery mechanisms; policy dialogue; and submission of quarterly reports on the implementation of the program loan. The BOM effectively managed implementation of the rural credit line through its proficient supervision of the PFIs. G. Conditions and Covenants 1. Program Loan 43. The main conditions and covenants for the program loan related to the implementation of the policy reforms. The progress report for the release of the second tranche indicated that eight of the nine tranche conditions had been complied with. 24 The MTR Mission considered that for 20 of the 35 conditions in the policy matrix was less than complete 2.5 months after completion of the Program. MOFA agreed with the overall policy objectives but did not fully 22 Preferably, these agreements could have been established prior to effectiveness. 23 The drilling of the first 25 wells was identified under the attached ADTA to provide incentives for the communities participation in pasture management work. The first year wells were completed without establishing the necessary agreements for counterpart contributions, for rules of operation and for contributions to the soum well rehabilitation fund. 24 ADB Progress Report: Release Second Tranche to the Mongolia, for the Agriculture Sector Development Program. Manila (Loan 1821/22-MON, approved on 12 November)