ANNEX. MALAWI 2011 Annual Action Programme for the Accompanying Measures for Sugar Protocol Countries DCI-SUCRE/MW/

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1 ANNEX 1. IDENTIFICATION Title MALAWI 2011 Annual Action Programme for the Accompanying Measures for Sugar Protocol Countries DCI-SUCRE/MW/ Total cost Aid method EUR EU contribution Project approach Partially decentralised management DAC-code Sector Agro-Industries: Industrial crops / Export crops (including sugar) 2. RATIONALE 2.1. Sector context Malawi s overarching policy document is the Malawi Growth and Development Strategy (MGDS). The MGDS highlights sugar as one of three core sub sector in terms of revenue, Gross Domestic Product (GDP), employment and foreign exchange earnings and looks to maximise the performance of the sugar sector in the short to medium term. The Government of Malawi sees sugar as a crop to facilitate its efforts to diversify away from tobacco as the key export commodity. Sugar accounts for 8% of GDP and 9% of national exports, making sugar the second largest earner of foreign exchange. The phasing out of EU sugar subsidies and quotas has created a realignment of sugar production worldwide. Malawi is one of the few potential winners in this realignment, given its comparative advantage in the sector, that is: low cost production, excellent cane growing conditions, and the presence of adequate water and land resources. Recent studies 1 established that with appropriate development and finance, smallholder sugar cane production is financially and economically viable and provides significant positive direct and indirect social and economic impacts in terms of farmer income, employment, food security, SME service supply. Illovo Sugar Company Limited, currently the only operational milling company in Malawi, is embarking on a considerable expansion programme involving an investment of $350M. Other private companies are investing in setting up new mills. This expansion reflects the increasing demand from the European market and will see annual sugar production increase from the current 300,000 tons to 460,000 tons by The Government of Malawi National Adaptation Strategy 2006 (NAS) proposes a number of actions to address short-term challenges and to exploit the opportunities linked to the changes in the EU sugar regime. While the Government of Malawi NAS includes development actions across the whole value chain, EU actions focus mainly on poverty alleviation and food aspects in their support on sugar cane out grower production. The Government of Malawi continues to follow a strategy of promoting economic growth and developing physical, economic and social infrastructure to achieve its objective of poverty alleviation. However, in order for Malawi to realise its full potential in the sugar sector a number of issues need to be addressed. These include a major reliance on rain fed agriculture, a lack of skilled personnel, an ineffective extension service and lack of access to credit. Due to the current land ownership, future out-growers schemes are likely to be on customary land. The advantage of out growers schemes is that, by including small holder farmers, they are able to contribute to poverty reduction more effectively than estate production. However, out-growers schemes are complex organisations, 1 a) ODI/London School of Economics study "Who gains from sugar quotas" ODI-DESTIN DV406 Research Project, London. b) 2004 LMC International's annual sugar reports.

2 bringing together hundreds of poorly educated and often illiterate individual farmers, and hence require a higher degree of organisational management, often delivered through trusts. Also, due to climatic conditions and in order to achieve high yields, sugar cane in Malawi should be grown under irrigation, with a preference for pivot irrigation systems for all new developments. This, however, requires significant upfront capital investment. Credit continues to be difficult to access, particularly for poor small holder farmers. There are currently few incentives for establishing new out-growers schemes using commercial credit, despite the underlying financial and economic feasibility Lessons learnt The EU support to the sugar sector in Malawi has been through the development of a Multi Annual Support Strategy for Malawi for the period to support the measures as outlined in Malawi s National Adaptation Strategy (NAS) of The NAS has been supported by the EU through the Multi-Annual Adaptation Strategy ; the Multiannual Indicative Programme (MIP) which was translated into various Annual Action Programmes (2006, 2007, 2008), and through STABEX (2009). The support mainly concerned the development of and support to smallholder sugar cane out-growers through the financing of sugar cane irrigation schemes and through capacity building of the smallholders. A Result Oriented Monitoring (ROM) mission was carried out in March 2010 for the EU supported sugar cane expansion scheme for out-growers in Kasinthula (funded under Accompanying Measure for Sugar Protocol countries Accompanying Measure Sugar Programme (AMSP) The mission rated the project as good in terms of relevance, impact prospects and potential sustainability. Efficiency of implementation and effectiveness were still to be determined at that stage. In May 2011 a combined mid-term and final review mission was carried out. The final review concerned Technical Assistance provided under AMSP 2006 and the sugar cane expansion project in Dwangwa financed under STABEX. The mid-term review covered the AMSP 2007 and reviewed the Capacity Building project for out-growers (signed in December 2009); the out-growers expansion project in Kasinthula (signed March 2009), and a feeder road project for Dwangwa (signed December 2010). Overall project relevance has been rated as good: the projects are suited to the priorities and policies of Malawi, the industry sector and the target group recipients. However, it was too premature to determine the projects impact, but the review considers that there are good opportunities to deliver sustainable, long term outputs and results by the projects in terms of: increased incomes, capacity and management information systems, community development (Fair Trade), and the creation of an apex organisation of out-growers. The prospects of the projects long term effects on poverty reduction are considered high. The review mission recommended to ensure a longer implementation phase (noting the delays due to land disputes), and the need for timely financial, economic and commercial project analyses (to ensure a short time span between costing and implementation and thus limit the need for changes in technical designs). Land disputes have caused implementation delays due to the lack of a land tenure strategy. These delays have affected efficiency and effectiveness, although the mission anticipated generally good prospects in terms of impact. The review mission further recommended to enhance social mobilization and community participation activities; to continue investing in technical capacity of the implementing organisations and contractors; to strengthen the linkages between key stakeholders of the out-grower expansion schemes/trusts (factories; the concerned line ministries; local government structures including Traditional Authorities); to carry out an independent review of land allocation Complementary actions Activities under the AMSP 2007 are still ongoing. Under AMSP 2008 a restricted Call for Proposal (CfP) was launched in March The EU will award maximum two grant contracts (EUR each) for the creation of new and/or the expansion of existing out-grower schemes. The two Grant contracts will be awarded before the end of The African Development Bank (AfDB) is currently carrying out a preparation study for a 1,200 ha expansion of an out-growers scheme in Dwangwa. Investment costs are estimated at US$ 15 M. In

3 2008 the AfDB completed a 522 ha out-growers scheme in Dwangwa (700 ha projected), currently in full operation. World Bank (WB) supported Kasinthula through a drought relief grant in 2004 of MK 200M. Both the AfDB and the WB have commenced a joint investigation into the development of a high level canal that would support the sugar industry in the Shire Valley (where the Kasinthula outgrower expansion project is located). Future development of the sugar cane out-growers expansion schemes is directly linked to the processing capacity of the two Illovo sugar mills in Dwangwa and Nchalo. Illovo plans to expand their mill capacity in Nchalo, and could be in a position to accept additional cane from out-growers during the 2013 season. Illovo further indicated that if the expansion cannot be completed on time, the company is prepared to manage its own cane supplies (equal to about 90% of total cane supply) in such a manner to accommodate the additional cane supply from future out-grower expansion schemes in Kasinthula. Regarding the Illovo sugar mill in Dwangwa, the mill is already at full capacity with the current cane growing developments on own land and from the Dwangwa out-growers. Any further outgrower expansion in Dwangwa would only be accommodated by potential factory expansions from the 2015 season. Various new private sugar mill investments are being pursued in the north and central regions of Malawi, providing competition and new opportunities for potential sugar out-growers in these areas. Activities proposed in this Annex are complementary to other EU funding: (i) Farm Income Diversification Programme Phase II (FIDP), which amongst others, focuses on soil and water conservation; (ii) Rural Infrastructure Development Programme (RIDP); (iii) Support to the ASWAp/Green Belt Initiative (currently being finalised); (iv) Backlog Road Maintenance Programme, (v) Rural Feeder Roads Programme; and (vi) the Capacity Building towards Trade and Private Sector Development. The programme envisages a direct link to RIDP which will build capacity of the irrigation sector and undertake feasibility studies as a foundation for future irrigation investments, thus providing technical assistance and synergies to proposed Results Area A Donor coordination There is a clear division of labour between the EU and Member States (UK, DE, FR, IRL), including Flemish Cooperation and other development partners in Malawi with the EU as the largest development partner in the agricultural sector. Structures are in place to facilitate both development partner coordination, through the Donor Committee on Agriculture and Food Security (DCAFS), as well as for the coordination between development partner and Government. 3. DESCRIPTION 3.1 Objectives Overall Objective: To reduce poverty through increased income. Specific objectives: To build the capacity of smallholder out-growers through increased productivity, comprehensive training and development and to increase industry efficiency and competitiveness by improving the environmental, social and economic stability of the sugar industry Expected results and main activities In order to achieve the overall and specific objectives, the two expected main results of the programme will be as follows: Result Area A: improved livelihood of smallholders out-growers To attain this result, main activities are foreseen in: (i) Providing support to rural infrastructure development and rehabilitation; and (ii) The expansion of existing and the development of new schemes for out-growers.

4 Regarding support to rural infrastructure development and rehabilitation, activities will mainly concentrate in the construction or rehabilitation of core infrastructure (e.g. haulage roads) as requested by the out-growers to improve and sustain management efficiencies and reduce associated costs of production. In respect of sugar expansion schemes for out-growers, emphasis is placed on the increased production of sugar (cane and processed product), which is beneficial for the macro-economic situation, as well as increasing the incomes of the current and new out-growers. The main programme activities will be carried out in the expansion of existing schemes and the development of new schemes for out-growers through a works contract. To avoid potential delays in project implementation due to land disputes, and to ensure optimal mainstreaming of cross cutting issues, the integration of social mobilisation and community participation will be an integral part of the design of any future expansion projects. Baseline studies on proposed new schemes will be undertaken within the context of the EIA and SIA with data assistance supplied by Concern Universal. In addition to works contracts, TA for design and supervision of funded works will be provided. Results Area B: Improved Industry Sustainability In order to improve the sustainability of the sugar industry, main activities are foreseen in: (i) The provision of technical support for industry development; (ii) Support to industry regulation and diversification; and (iii) Support to out-grower sustainability and market intervention. The provision of technical support for industry development will involve funding of technical studies, assistance and programme coordination/facilitation. This could include, for example: - a study on the modalities for land allocation and registration, encompassing compensation and resettlement for future expansion projects (to address the land dispute issues); - environmental and social impact assessments on proposed irrigation and core infrastructure development sites; - a study on the feasibility of the establishment of "food crop agro-industry clusters" within the cane expansion schemes and the value of inter cropping within the cane areas; - support to out-grower sustainability and market access intervention; - the introduction and development of certification initiatives (Bonsucro - Better Sugar Initiative) for the sugar industry and continuation of support to out-growers to meet the standards of Fair Trade; - study on the minimum hectares per out-grower required for economically viable sugarcane production and the degree to which the number of beneficiaries could be increased in this way; - a study on the establishment of a seed cane production (to ensure supply to out-growers) The project will continue to provide capacity building initiatives of new out-growers and their organisations. This support will also aim at improving governance and transparency. It will include the development of a comprehensive civil education programme to address social issues related to sugar cane development in order to benefit all commercial sugarcane growing areas, so as to improve community understanding and reduce potential disputes. A sugar coordinator/facilitator is also foreseen to continue to support the development of the regulatory framework and the development of the apex body (leading to the development of a comprehensive industry representative organisation based on the recommendations of the 2009 EU/Government of Malawi sugar regulatory framework study) Risks and assumptions The following assumptions and risks that can affect the projects have been identified: Assumptions : The Government of Malawi/Sugar Industry is committed to implementing the National (Sugar) Adaptation Strategy. The Government of Malawi is committed to promote a more business friendly environment (e.g. availability of forex, fuel).

5 Commitment of the Government of Malawi to improve and maintain infrastructure (main transport routes to borders and ports) and ensure no significant increase in transport costs Illovo (private sector) is committed to its expansion schemes of Nchalo and Dwangwa and remains committed (force majeure aside) to its cane agreements with current and future out-growers. Global and regional sugar prices remain stable (this is supported by the current supply trends and the growing regional market demand). Willingness of all stakeholders to contribute towards the formulation and implementation of the regulatory framework (such as the establishment of the above-mentioned out-grower apex body, as well as and industry agreements). Community interest and willingness to develop their land and engage in sugar production. Risks : Delays in the approval and implementation of the Land Bill may lead to continuing land disputes over ownership and development. (The proposed Land Bill is encouraging Customary Land decentralisation of the land administration. This implies that issues of land allocation and disputes will be resolved by communities through Community Land Bureaus that will be formed at the local level. In addition, the Customary tenure is encouraging legislation of the land). Adverse weather conditions (drought and flooding). In order to mitigate this risk, development partners actively support the Government of Malawi in its effort to promote disaster risk reduction strategies. Increase in electricity costs with continued irregular supply. Co-generation by existing millers could offer some level of mitigating effect by selling surplus electricity to the national grid. Social conflicts within communities continue without being addressed, demanding the development of a civil education programme. The prevailing difficulties in the economic, investment and business climate continue or worsen (foreign exchange, skills and fuel shortages). The issues above form part of the dialogue between EU and the Government of Malawi. Dialogue amongst stakeholders is vital to ensure that these assumptions are implemented and that risks are mitigated. In this context, the role of the Sugar Steering Committee is extremely important (and thus far has been considered effective). In addition, the proposed establishment of an apex body for the outgrowers will further reinforce risk mitigation by securing a coordinated out-grower input into the dialogue process and secure the validity of the above mentioned assumptions Crosscutting Issues By respecting national regulations on environmental and social issues, proposed rural infrastructure development and rehabilitation projects and out-grower scheme projects will be subject to environmental and social impact assessments when necessary. Gender, HIV/AIDS and climate change activities will be mainstreamed wherever appropriate throughout the various activities. Given the scale of the impact of HIV/AIDS in Southern Africa, the EU Delegation has drawn up guidelines for actions to mainstream HIV/AIDS in agriculture projects, to be implemented by all EU funded projects. To ensure optimal mainstreaming of these issues, community sensitisation and mobilisation and community participation are to become an integral part of the project design by ensuring the presence of adequate environmental and social expertise during project implementation Stakeholders Stakeholders are the Ministry of Finance, Ministry of Agriculture and Food Security, Ministry of Irrigation and Water Development, Ministry of Gender, Children and Community Development, Ministry of Lands, Housing and Urban Development and Ministry of Industry and Trade; Traditional Local Government Structures; other development partners (AfDB and WB); sugar cane companies (Illovo, currently the only cane processing company; and two ethanol producers, Ethco and Presscane), as well as other private companies (civil works, design, supervision, suppliers, etc). The direct beneficiaries are the existing and future cane farmers (usually organised through Trusts/out-grower

6 associations and companies) and the surrounding communities. The role of the Trust is to represent the out-growers. The role of the companies is to manage the day to day operations of the irrigated block farms and manage the inputs of the farmers at technical level. The Trusts and companies are well established but require further capacity building. Future farmers will be chosen, where possible, for their farming experience, land ownership and capacity, with preferably at least 30% being female headed households. There is a very active Sugar Steering Committee (SSC) which includes both the AfDB and the EU as the main development partners in the sector, the existing two out-grower Trusts (Dwangwa Cane Growers Trust and Shire Valley Cane Growers Trust), Illovo Sugar Malawi, the National Authorising Office Support Unit (NAOSU) as Chair, Ministry of Agriculture and Food Security, Ministry of Industry and Trade, ethanol manufacturers and civil society (Concern Universal). As industry initiatives develop, other stakeholders (i.e. future out-grower organisations and millers) will participate. The SSC undertakes the role of overall steering, monitoring and coordinating the implementation of the NAS and will support the initial industry plans to strengthen and formalise the SSC as the first step towards developing an industry regulating body. The Chair of the SSC is currently in dialogue with relevant ministries to broaden participation and ownership. 4. IMPLEMENTATION ISSUES 4.1. Method of implementation The Programme will be implemented under partially decentralised management through the signature of a Financing Agreement with Republic of Malawi in accordance with Articles 53c and 56 of the Financial Regulation. The Ministry of Finance (National Authorising Officer NAO) will be the Contracting Authority. The Commission controls ex ante all the procurement and grant procedures. Payments are executed by the Commission. The change of management mode constitutes a substantial change except where the Commission "recentralises" or reduces the level of tasks previously delegated to the beneficiary country, international organisation or delegate body under, respectively, decentralised, joint or indirect centralised management. The programme reflects the Aid Effectiveness principles. It is fully aligned with the Government of Malawi policies and priorities, notably the Malawi Growth Development Strategy and Agriculture Sector Wide Approach which call for enhancing the contribution of agriculture to facilitate economic growth and the diversification of exports (currently dominated by tobacco); as well as the Green Belt Initiative which calls for the expansion of irrigation schemes. The programme is also aligned with EU support (notably the EU funded Rural Infrastructure Development Programme which promotes small to medium scale irrigation) and with African Development Bank interventions in the sugar sector. The programme has been partially decentralised to the Ministry of Finance (who is also the National Authorising Officer for the EDF) to promote future sustainability. The Technical Assistance contracted to carry out design and supervision and works will report to the Contracting Authority. Other shortterm inputs by relevant experts (for example to undertake specific advisory services to promote the sustainability of the industry) will be mobilised on a demand driven basis. 4.2 Procurement and grant award procedures 1) Contracts All contracts implementing the action must be awarded and implemented in accordance with the procedures and standard documents laid down and published by the Commission for the implementation of external operations, in force at the time of the launch of the procedure in question. Participation in the award of contracts for the present action shall be open to all natural and legal persons covered by Regulation (EC) 1905/2006 of (DCI). Further extensions of this

7 participation to other natural or legal persons by the concerned authorising officer shall be subject to the conditions provided for in Articles 31(7) and (8) DCI. 2) Specific rules for grants The essential selection and award criteria for the award of grants are laid down in the Practical Guide to contract procedures for EU external actions. They are established in accordance with the principles set out in Title VI 'Grants' of the Financial Regulation applicable to the General Budget. When derogations to these principles are applied, they shall be justified, in particular in the following cases: Financing in full (derogation to the principle of co-financing): the maximum possible rate of cofinancing for grants is the maximum possible rate of co-financing for grants is 80% of the total accepted costs of the Action. Full financing may only be applied in the cases provided for in Article 253 of the Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of the Financial Regulation applicable to the General Budget. Derogation to the principle of non-retroactivity: a grant may be awarded for an action which has already begun only if the applicant can demonstrate the need to start the action before the grant is awarded, in accordance with Article 112 of the Financial Regulation applicable to the General Budget. The capacity building activities will be implemented through a grant awarded to Concern Universal (CU) for EUR CU has developed a strong foundation and network within the sugar industry and designed a range of industry specific capacity building tools that will greatly assist in the role of future out-growers in the new programme. CU is a local organisation & has built up an efficient and effective core team. Considering that, this is an action with specific characteristics that require a particular type of body on account of its technical competence and its high degree of specialisation a prior approval for award without a call for proposal is required based on article f) of the Implementing rules of the Financial Regulation applicable to the General Budget of the European Communities Budget and calendar The total project cost is estimated at EUR which is the entire allocation under MIP , and shall be entirely financed from the Development Cooperation Instrument. Categories EU contribution Total EUR EUR Improved livelihood for smallholder outgrowers (service, supplies, works) Improved sustainability of the sugar industry (service and grant) Monitoring, External Evaluation Audit Contingencies TOTAL The execution period of the project is 84 months consisting of an implementation period of 60 months and a closure period of 24 months.

8 Short term/part time technical assistance will be provided through framework contracts (managed by the Commission on behalf of the Beneficiary). Long term technical assistance will be provided through a restricted tender for the design and supervision of the works contracts. Open procedure to be used for the works contract. Direct award is envisaged to Concern Universal. Audit, evaluation are managed in a centralised manner Performance monitoring Responsibility for the overall monitoring of the programme lies with the Ministry of Finance (National Authorising Office) and the Sugar Steering Committee. A dedicated sugar monitoring and evaluation system has been set up in the Ministry of Agriculture and Food Security Food and Nutrition Security Task Force Technical Secretariat and current out-grower scheme managements have been fully trained on its use and how to feed their data into the system. The EU will provide external monitoring (including ROM). The performance monitoring of the AAP 2011 will be carried out on the basis of a logical framework specific to it that will include objective verifiable indicators of achievement (OVIs) that refine, quantify and qualify those that are in the Logframe. Exchange of information with the Malawi National Statistical Office will be encouraged to provide more accurate and comparable indicators to benchmark results achieved and to monitor the progress of the activities implementation Evaluation and audit A mid term evaluation will be undertaken by independent consultants and/or a final evaluation of the programme, if deemed necessary. Technical audits of the works are foreseen and a final financial audit will be undertaken during closure phase of the programme. Specific allocations have been set to this end (EUR for monitoring and evaluation including technical audits; EUR for audits) Communication and visibility The Government of Malawi will ensure that programme visibility actions are undertaken in compliance with the relevant EU Guidelines for Visibility for External Actions. Works contractors will also have to implement visibility measures based on the EU Guidelines. The EU Delegation will continue to carry out well established bi-annual meetings on visibility of EU projects and programmes. Communications and Visibility are mandatory within grant contracts and will feature as a budget line/activity in any works/supply contracts. No other procurement in communications and visibility are foreseen.