Pakistan: Agribusiness Development Project

Validation Report Reference Number: PVR-354 Project Number: 33364 Loan Number: 2171 November 2014 Pakistan: Agribusiness Development Project Independent Evaluation Department

ABBREVIATIONS ADB ASF DALPMG FSCRD HPU LDDB MINFA MINFAL PCR PFI PHDEC PICC PIO PMU PSC RRP SBP Asian Development Bank agribusiness support fund Department of Agriculture and Livestock Product Federal Seed Certification and Registration Department horticulture production unit Livestock and Dairy Development Board Ministry of Food and Agriculture Ministry of Food, Agriculture and Livestock project completion report participating financial institution Pakistan Horticulture Development and Export Company project implementation coordination committee project implementation office project management unit project steering committee report and recommendation of the President State Bank of Pakistan NOTE In this report, $ refers to US dollars. Key Words adb, asian development bank, agriculture, agribusiness finance, agricultural products, agriculture markets, business development services, horticulture, horticultural products, exports, pakistan, value-addition, value chain The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of IED management, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, IED does not intend to make any judgments as to the legal or other status of any territory or area.

PROJECT BASIC DATA Project Number: 33364 PCR Circulation Date: 14 Sep 2012 Loan Number: 2171 PCR Validation Date: Nov 2014 Project Name: Agribusiness Development Project Country: Pakistan Approved ($ million) Actual ($ million) Sector: Agriculture and Total Project Costs: 49.00 21.59 natural resources ADB Financing: ADF: 31.00 Loan: 31.00 12.99 ($ million) Borrower: 6.90 8.60 OCR: 0.00 Beneficiaries: 0.00 0.00 Others: a 11.10 Cofinancier: Total Cofinancing: 0.00 0.00 Approval Date: 19 May 2005 Effectiveness Date: 12 Sep 2005 9 Jan 2006 Signing Date: 14 Jun 2005 Closing Date: 31 Mar 2011 30 Sep 2011 Project Officers: Validator: Peer and Quality Reviewer: M. M. Mongiorgi B. Wilkinson H. Woldring B. Tambunan D. A. Walton B. Prakash, Consultant E. Gozali, Principal Evaluation Specialist, IED1 Location ADB headquarters ADB headquarters ADB headquarters ADB headquarters Pakistan Resident Mission Director: From May 2005 May 2006 Aug 2007 Jan 2010 Feb 2010 W. Kolkma, IED1 To Apr 2006 Jul 2007 Dec 2009 Jan 2010 Sep 2011 ADB = Asian Development Bank; ADF = Asian Development Fund; IED1 = Independent Evaluation Department, Division 1; OCR = ordinary capital resources; PCR = project completion report. a From agribusiness enterprises, private sector institutions, and contributions from beneficiaries. A. Rationale I. PROJECT DESCRIPTION 1. Agriculture has always been an important sector of Pakistan s economy. However, years before the loan approval in 2005, agricultural productivity was declining even as agricultural jobs accounted for the bulk of jobs in the rural areas. Emphasis on poverty reduction in the country necessitated a greater value addition in the sector so that the economy could grow more rapidly and generate more jobs. The agribusiness development project 1 aimed to increase the commercial value of agricultural products, especially horticultural output and related exports, including dairy development. The project sought to remove credit constraints, introduce innovative practices and new varieties of products, and upgrade the skills and competency levels of farmers and entrepreneurs producing and marketing commercial agricultural products. 1 ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Pakistan for the Agribusiness Development Project. Manila.

2 B. Expected Impact 2. The expected impact of the project was to promote growth of agrobusiness activities in the country. Compared with the baseline estimate of December 2005, the share of agribusiness in gross domestic product was expected to increase by 30% in September 2010. Correspondingly, the number of new and expanded agro-enterprises was projected to increase by about 2,000 and to generate jobs of up to 100,000 person-years by September 2010. C. Objectives or Expected Outcome 3. The main objective of the project was to make Pakistan s agribusiness more competitive and sustainable by (i) improving the managerial, production, and processing skill levels of entrepreneurs and farmers; (ii) supporting increased agribusiness lending through participating financial institutions (PFIs); (iii) reorienting government institutions to facilitate agribusiness development through publicprivate partnerships; (iv) making the policy and regulatory environment more responsive to the needs of private sector engaged in agribusiness; and (v) establishing the framework and standards necessary for Pakistan s agribusiness to comply with increasingly stringent international standards (project completion report [PCR], para. 1). 2 The project sought to establish vertical integration in the value chain (from the field to the consumer) in the agribusiness subsector (report and recommendation of the President [RRP], para. 33). D. Outputs 4. The project outputs were distributed across five project components: (i) (ii) (iii) Provision of support services to facilitate increased access to business development services for agribusiness enterprises, which included establishing an agribusiness support fund (ASF) and upgrading technical, managerial, financial, and marketing skills. Agricultural extension, research, and training support were also to be developed and provided to the agribusiness subsector. These support services were to be extended with the support of nongovernment organizations addressing the needs of the private sector farmers and entrepreneurs. Agribusiness finance development to help PFIs understand the potential agribusiness finance market and enhance their capacity to undertake agribusiness lending. The PFIs were to develop business plans, showing enhanced agribusiness financing opportunities. The State Bank of Pakistan (SBP) was responsible for implementing this component. 3 A capacity-building component that included a comprehensive package of six subcomponents: (a) rationalizing and restructuring the Ministry of Food, Agriculture, and Livestock (MINFAL), which was subsequently restructured as the Ministry of Food and Agriculture (MINFA), with its offices and agencies responsible for alignment with World Trade Organization regulations and international product standards; (b) promoting and providing agribusiness market information to the public and private sectors; (c) strengthening the capacity of the Department of Agriculture and Livestock Product Marketing and Grading 2 ADB. 2012. Completion Report: Agribusiness Development Project in Pakistan. Manila. 3 To support agribusiness lending by the PFIs, a partial credit guarantee facility was to be established under another ADB project, Small and Medium Enterprise Sector Development Program, but this subcomponent was not implemented.

3 (iv) (v) (DALPMG) for export quality certification; (d) strengthening the seed and planting material certification by the Federal Seed Certification and Registration Department (FSCRD); (e) providing training to build the capacity of agribusinesses implementing project activities; and (f) establishing the Livestock and Dairy Development Board (LDDB) as a corporate entity. Development of a policy and enabling environment that is appropriate to private sectorled growth of agribusiness in Pakistan. Project coordination and management support envisaged to ensure the achievement of the above-mentioned four outputs. E. Provision of Inputs 5. At appraisal, the project s total cost was $49.0 million. The Asian Development Bank (ADB) provided a loan of $31.0 million from its Asian Development Fund. Agribusiness enterprises were to finance $10.4 million and the remaining funds were to be sourced from the government ($6.9 million) and $0.7 million from private sector institutions and beneficiaries. At completion, the total cost was only $21.6 million or 44.1% of the amount envisaged at appraisal, as many of the envisaged activities could not be completed. ADB financed about $13.0 million (60%) of the actual costs. The government financed $4.3 million (20%), and agribusiness enterprises contributed $4.3 million (20%). F. Implementation Arrangements 6. MINFAL was designated as the executing agency of the project. A project steering committee chaired by the MINFAL secretary was to coordinate the project. A project management unit was to be established in DALPMG to manage and implement the project. A project implementation and coordination committee was to be established under the director general of DALPMG. The project steering committee and the project implementation and coordination committee were to meet every 6 months during project implementation. 7. A horticulture production unit (HPU) was to be set up in the Pakistan Horticulture Development and Export Board to support project activities in horticulture and hortibusiness. Seven project implementation offices (PIOs) were to be established one each for the four provinces and three special areas of Pakistan. The PIOs were to coordinate with the various provincial agencies involved in the horticulture, livestock, and dairy agribusiness. 8. During implementation, changes in ministerial arrangements caused the project to deal with three federal ministries involved in agriculture, commerce, and livestock; six implementing agencies (ASF, DALPMG, FSCRD, LDDB, Pakistan Horticulture Development and Export Company [PHDEC], and SBP); and seven PIOs. 9. Payments under the project were made through an imprest account using direct payment procedures. The project originally established four imprest accounts for the ASF, MINFA, PHDEC, and the SBP. During implementation, a minor change in implementation arrangements was agreed upon by ADB to open an imprest account for the LDDB and eight second-generation imprest accounts for the PIOs and the HPU. However, the executing agency did not proceed with the second-generation imprest accounts. 10. To assist in implementing the project, 221 person-months of international consulting services and 128 person-months of domestic consulting services were to be engaged. Subsequently, one more national consultant was added to coordinate the recruitment and

4 management of these consultants. Notwithstanding, most consulting services were generally delayed and fragmented in their support. 11. The project had 33 loan covenants in Schedule 6 of the loan agreement. The borrower, the executing agency, and the implementing agencies were to comply with these covenants (PCR, Appendixes 5 to 8). Quite a number of loan covenants were partly complied with, including those requiring the borrower s compliance with (i) the submission of audited accounts and quarterly progress reports; (ii) timely establishment and staffing of the project management unit (PMU); (iii) timely meetings of the project steering committee and the project implementation coordination committee; and (iv) the adoption of the national agribusiness policy and horticulture policies by the provinces and special areas. The covenants also included the submission to the Cabinet and the Parliament of amended federal laws aligned with the borrower s World Trade Organization commitments, and the timely provision of requisite counterpart funds. Covenants that were not complied with were (i) the timely establishment of a gender-disaggregated project performance monitoring system; and (ii) the submission of the borrower s project completion report and project progress reports, audited financial statements from PHDEC and the LDDB, and the majority of SBP covenants. 12. To expedite implementation, ADB provided a small-scale technical assistance to (i) identify key personnel from the private sector who could be recruited for the project; (ii) work with the executing and implementing agencies, the Ministry of Finance, and the SBP; (iii) assist in the procurement; (iv) identify accounting firms for undertaking an independent audit; (v) prepare the ASF s articles of association, standard operating procedures, business plan, and code of conduct for the board of directors and staff; and (vi) identify potential project staff. II. EVALUATION OF PERFORMANCE AND RATINGS A. Relevance of Design and Formulation 13. The PCR rated the project partly relevant. The project was consistent with the country program and strategy, 20022006 and had the potential to contribute to economic growth and increase rural jobs in Pakistan. The project noted a global expectation relating to the need to improve the quality of agricultural products. Consumer demands about food safety, packaging, and traceability of food source were rising. Despite having identified a potentially promising investment opportunity and rightly pointing out the need to improve the associated value chain, the project did not fare well during implementation, largely because of some design limitations. The PCR itself noted that the project design overestimated the government s implementation capacity (para. 30). The gap between project design goals and the implementation capability of the executing agency was so wide that it could not be resolved during implementation, despite some attempts. 14. This validation notes that the project design was overstretched across the entire value chain from producers to consumers and lost its focus in addressing the critical components. The length of the value chain necessarily involved a number of layers of decision makers and did not only cut across the public and private sector divide but also entailed different government agencies and local versus central governments. Several players were required to synchronize their activities so as to succeed in value addition; but there were no apparent champions to lead the cause. Consequently, coordination costs and risks increased exponentially. This validation also assesses the project less than relevant.

5 B. Effectiveness in Achieving Project Outcome and Outputs 15. The PCR rated the project ineffective. The main targeted outcome was to create a competitive and sustainable agribusiness sector, but the project had over-reached and failed to deliver the requisite outputs and track the project-related outcomes. As principal beneficiaries for the project outputs, farmers, agribusiness entrepreneurs, and agencies were to improve their capacities. As planned, the ASF and nongovernment organizations implementing component 1 (agribusiness support services) supported the small farmers entry into agribusiness by forming farmer enterprise groups and providing business development support (training, extension, research, and start-up funding). The component completed the planned extension programs; and the ASF provided seed funds for 586 farmer enterprises, which partially accomplished the appraisal target of 705. Component 2 (agribusiness finance development) did not proceed very far. The component was intended to assist the SBP and the PFIs to better target lending opportunities to agro-enterprises and expand lending portfolio to agribusinesses. The component did not manage to retain the international consultants necessary to guide the component s activities, mainly because of security concerns and high cost to field them. The component s output was assessed as negligible. 16. Six diverse subcomponents under component 3 (agribusiness capacity building) experienced varying degrees of success in implementation as detailed in the PCR (paras. 7 14). Subcomponent 1, which aimed to restructure three units of the MINFA, managed to produce recommendations but these were not acted upon. Subcomponent 2 aimed to support private sector business to provide wholesale market data, but did not succeed as there was not enough interest from businesses and capability within the implementing agency to promote this new business. The project design also underestimated the complexity of the data business, which had to be preceded by the establishment of a good and widely accepted product grading system. The third subcomponent, which aimed to establish export quality certification, had some success in the capacity building of DALPMG (training and improving certification standards), but only two of the planned seven testing laboratories were upgraded. At project completion, none of the revised new export standards developed under the project were used because regulatory support was lacking. Subcomponent 4 (seed and planting material certification) was partly successful and made inroads in improving testing facilities and standards. Subcomponent 5 (horticulture development and export) was implemented too slowly and considered unsatisfactory in developing the agribusiness curricula and helping improve the technical and managerial skills in private agro-enterprises. Subcomponent 6, which mainly supported the LDDB, was successful in converting the board into a corporate body tasked to promote investments in the livestock and dairy sectors. However, the continuity of the board became uncertain as the Ministry of Livestock and Dairy Development, to which the board belonged, was devolved (PCR, para. 14). Progress under component 4 (agribusiness policy and enabling environment) was slow. The planned national agribusiness policy framework was developed, but not approved. Similarly, out of the planned seven provincial horticultural policies, only two had been approved and adopted. The component envisaged amendments to laws intended to establish quality and certification requirements for local products. At completion, the revised laws had not been submitted to the Cabinet for further submission to the Parliament. 17. In summary, project activities suffered either from overambitious aims, or from too many activities being pursued, and slow implementation emanating from either a lack of ownership or simply the concerned public sector agencies unfamiliarity with the task of fostering private sector enthusiasm and investment in agribusiness. Given the lack of output completion in many areas,

6 it is difficult to attribute project activities with progress in improving project outcomes. This validation concurs with the PCR and rates the project ineffective. C. Efficiency of Resource Use in Achieving Outcome and Outputs 18. The PCR rated the project inefficient. The project RRP had not estimated the project s economic internal rate of return (EIRR). It had noted (para. 49) that as the project-supported provision of business development services was entirely demand driven, the precise mix and scale of project outputs were difficult to predict. Hence, it considered a full financial and economic analysis of the overall project impractical. The PCR made estimates of the economic benefits from the few project achievements, and came up with an estimate for the whole project at 4%; on this basis, it pronounced the project inefficient. 19. Regarding process efficiency, the project started experiencing delays from the beginning. The loan inception mission itself had noted that implementation arrangements were not being followed as planned. The PIOs were reporting to the PMU instead of the HPU. ADB then suggested that they report administratively to the PMU but functionally to the HPU. This made project implementation even more complicated. The PCR observed that the implementation schedule was unrealistic (PCR, para. 21), noting that at the midterm review in March 2008, when about 50% of the loan period had elapsed, the overall loan disbursement was only 15%. Based primarily on the low rate of economic return, this validation also assesses the project inefficient. D. Preliminary Assessment of Sustainability 20. The PCR rated the project less likely sustainable. Several institutions engaged under the project needed to be supported by policy reforms and resources to further the intent of promoting agribusiness. MINFA needed to adopt policy reforms and restructure itself to be able to serve the interests of agribusinesses more effectively. The PCR noted that the LDDB was distracted by its possible liquidation. PHDEC struggled with financial resources. The FSCRD had its staff capability and facilities upgraded under the project but it faced a shortage of resources to operate. In this sense, the prospect for continued capacity building of these institutions was uncertain. One positive development was that the ASF seemed to be functioning robustly, and was reasonably governed and managed. It was receiving adequate funding support from development partners and was able to providing services as envisaged. 4 This validation assesses the project less than likely sustainable. E. Impact 21. Before it was launched, the project did not have clear benchmarks for agribusiness. The contribution of agribusiness to gross domestic product was not fully known, making it difficult to estimate the project s impact precisely. Project implementation in any case resulted in the limited achievement of outputs and outcomes. As such, the project s impact on social, institutional, and environmental factors was likely to be low. The PCR noted a 2010 survey conducted by the Lahore University of Management Sciences, 5 which found that the ASF 4 After the project, the ASF continued to be assisted by the United States Agency for International Development through the latter s Agribusiness Project. See ADB. 2013. Country Assistance Program EvaluationPakistan: 20022012 Continuing Development Challenges. Manila: Independent Evaluation Department. 5 Lahore University of Management Sciences. 2010. Program Evaluation of the Agribusiness Support Fund: Estimating the Effects of Treatment on Farmer Groups, Agribusinesses, and Business Development Services Market in Pakistan. Lahore.

7 caused the farmers incomes to rise (PCR, footnote 14). This validation assesses the project s impact moderate. 22. The project s environmental assessment category was FI (financial intermediary). The project had no classification risks or issues pertaining to involuntary resettlement and indigenous people. No safeguard issues were encountered during implementation (PCR, Appendix 5). III. OTHER PERFORMANCE ASSESSMENTS A. Performance of the Borrower and Executing Agency 23. The PCR rated the performance of the borrower and the executing agency unsatisfactory. The executing agency (MINFA) underwent a number of changes during project implementation. Project implementation problems began with the project appraisal report of the borrower as it did not strictly correspond to the loan agreement attached to the RRP. Significant policy reform decisions were either substantially delayed or could not be implemented in time for the project. Prepared policy frameworks and drafts were not processed or submitted for the consideration of higher authorities. Project management was complicated and resulted in nonperformance, even in routine activities like submission of audited accounts and periodic progress reports. The executing agency could not ensure the timely procurement of consulting services so that an additional national consultant had to be engaged to coordinate across consulting services. The handling of the imprest account was unsatisfactory, and when ADB tried to rectify the situation by suggesting that secondgeneration imprest accounts be established, the decision was not supported. Different project agencies faced the problem of financial resources availability as counterpart funds were not released on time. This validation also rates the performance of the borrower and the executing agency unsatisfactory. B. Performance of Asian Development Bank 24. The PCR rated ADB performance unsatisfactory. Apart from the complexity of the project design, the PCR noted that the project design and monitoring framework, especially its indicators, lacked clarity. It was difficult to track project implementation progress. Baseline data preparation itself took a long time and was completed only in 2009. The preparation and finalization of the project administration memorandum was delayed and was accomplished only in 2009, i.e., a 4-year delay (PCR, para. 22). The frequent changing of project officers (four in 5 years) fragmented ADB support of the project. While ADB did well to disallow payments for procurement of vehicles and equipment where relevant, ADB guidelines were not followed, and according to the PCR, its follow-up of the executing agency s omissions was ineffective. During the post-midterm period, fewer missions were regularly fielded. ADB did provide small-scale technical assistance to assist in implementing the project, but this was too small to make any impact. This validation assesses ADB s performance unsatisfactory. IV. OVERALL ASSESSMENT, LESSONS, AND RECOMMENDATIONS A. Overall Assessment and Ratings 25. The PCR rated the project unsuccessful with underlying subcriteria being less than relevant, ineffective, inefficient, and less than likely sustainable. This validation finds the project innovative in emphasizing the value chain of the agribusiness. However, it was overly ambitious

8 and focused instead on the value chain across the country. The project could have first opted to pilot in one subsector in one province. Upon attaining success, the project could then have been easily replicated, as policy makers would have gained confidence in view of its performance. The project design did not serve the project objectives well; it misjudged the implementation capacity of the executing agency. The project did not engender adequate confidence among the policy makers, except for the ASF section. This validation agrees with the PCR, and rates the project unsuccessful. The table gives a detailed breakdown of the performance. Overall Ratings Criteria PCR IED Review Reason for Disagreement and/or Comments Relevance Partly relevant Less than relevant Effectiveness in Ineffective Ineffective achieving project outcome and outputs Efficiency in achieving Inefficient Inefficient outcome and outputs Preliminary assessment of sustainability Less likely sustainable Less than likely sustainable Overall assessment Unsuccessful Unsuccessful Impact Not rated Moderate See para. 21. Borrower and executing Unsatisfactory Unsatisfactory agency Performance of ADB Unsatisfactory Unsatisfactory Quality of PCR Satisfactory See para. 29. ADB = Asian Development Bank, IED = Independent Evaluation Department, PCR = project completion report. Note: From May 2012, the Independent Evaluation Department views the PCR's rating terminology of "partly" or "less" as equivalent to "less than" and uses this terminology for its own rating categories to improve clarity. Source: ADB Independent Evaluation Department. B. Lessons 26. The PCR identified several important lessons. The project design needs to be cautious of interlinked project components and institution works. This validation notes that the lack of further financing support under component 2 stifled the momentum of progress in forming farmer enterprise groups. The lack of success in grade standardization and certification hindered progress in developing the wholesale market database under component 3. The project experience showed that planned regulatory reforms often take longer time and resources to be realized as compared with investment activities. The PCR also noted that the project attempted to work along the entire value chain, which made project tasks more difficult than if it had concentrated only on a few key links. This validation concurs with this lesson. Regarding the complexity of the project, this validation notes that introducing and promoting such an ambitious and transformative undertaking require substantial preparation and investment to communicate the interrelation between the project s activities and outputs to raise buy-in among project agencies and beneficiaries and gain their confidence in the possible attainment of project outcomes.

9 C. Recommendations for Follow-Up 27. The PCR gave a number of project-specific recommendations and some general recommendations. Project-specific recommendations relate to the role of the new Ministry of Food Security and Research. The PCR suggested that the ministry publish product quality standards. It also suggested that the ASF carry out some case studies on the nonfarm parts of the product value chain. It recommended a revision in the financial arrangements of the FSCRD so that it could remain operational. It also suggested putting in place sustainability plans for the LDDB and PHDEC. At the policy and institutional reform level, the PCR recommended that additional work and more attention be given to policy reforms initiated under the project, especially those seeking to harmonize national and international standards in agricultural products. These are valuable recommendations and this validation supports them. V. OTHER CONSIDERATIONS AND FOLLOW-UP A. Monitoring and Evaluation Design, Implementation, and Utilization 28. The PCR did not comment on the monitoring and evaluation design of the project. The RRP had mentioned the baseline study that was to be prepared within the first 6 months of the project but which took more than 3 years. The project was also expected to monitor performance on a gender-disaggregated basis. The monitoring system was to be used to detect any discrepancy between the project plan and its execution. While the RRP detailed these (para. 46), the PCR did not discuss whether the monitoring and evaluation system was indeed set up and functional. B. Comments on the Project Completion Report s Quality 29. The PCR was prepared well. It generally followed the broad outline of the PCR guidelines. It analyzed the project situation candidly and presented its observations and findings succinctly and convincingly. It should have commented on the monitoring and evaluation arrangements. The main body of the PCR text, however, did contain comments on the baseline study. Overall, the quality of PCR is assessed satisfactory. C. Data Sources for Validation 30. This validation reviewed the project s RRP, the PCR, reports of the loan review missions, and related documents. D. Recommendation for Independent Evaluation Department Follow-Up 31. No recommendation is made for the Independent Evaluation Department to follow-up on the project.