Document of The World Bank

Public Disclosure Authorized FOR OFFICIAL USE ONLY

Report No: 33009-NI

PROJECT APPRAISAL DOCUMENT

ON A Public Disclosure Authorized

PROPOSED CREDIT

IN THE AMOUNT OF SDR 8.3 MILLION (US$12 MILLION EQUIVALENT)

TO THE

REPUBLIC OF NICARAGUA

FOR A

SECOND AGRICULTURAL TECHNOLOGY PROJECT Public Disclosure Authorized November 1,2005

Environmentally and Socially Sustainable Development Central America Country Management Unit Latin America and the Caribbean Region Office

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

Public Disclosure Authorized World Bank authorization. CURRENCY EQUIVALENTS

(Exchange Rate Effective 4 July, 2005)

Currency Unit = Cordoba 16.72 Cordobas = US$1

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

APL Adaptable Program Loan ATP Iand I1 Agricultural Technology Project Iand I1 AS1 Agricultural Sector Institutions BCN Central Bank of Nicaragua CAS Country Assistance Strategy CCAD Central American Commission of the Environment and Development CFF Common Fiduciary framework ATLMP Agricultural Technology and Land Management Project CFAA Country Financial Accountability Assessment CFF Common Financial Framework CGR Comptroller's General Office CGIAR Consultative Group on International Agricultural Research CONAGRO National Advisory Council for (agricultural) Production CTI Investments Technical Committee CUT Treasury Single Account DAC Development Assistance Committee DANIDA Danish International Development Agency DGAF General Financial Management Directorate DR-CAFTA Dominican Republic-Central American Free Trade Agreements EFA/FTI Education for All Fast Track Initiative FAITAN Support Facility for Nicaraguan Agricultural Technological Research FA0 Food and Agriculture Organization FAT Support Facility for Technical Assistance (Fondo de Asistencia Tecnica) FISE Social Emergency Investment Fund FM Financial Management FMR Financial Monitoring Report FONADEFO Sustainable Forest Management Facility FUNICA Nicaraguan Agricultural Technology Development Foundation GEF Global Environment Facilities GoN Government of Nicaragua HA&A Harmonization, Appropriation and Alignment IADB Inter American Development Bank IDR Rural Development Institute IFAD International Fund for Agricultural Development IDA International Development Association IICA Inter-American Institute for Agricultural Cooperation IMF International Monetary Fund INAFOR National Forestry Institute INATEC National Technology Institute INIFOM Nicaraguan Institute of Municipal Development INTA Nicaraguan Agricultural Technology Institute IPSAS International Public Sector Accounting Standard IRR Internal Rates of Return JFA Joint Financing Agreement LSMS Living Standards Measurement Survey MAGFOR Ministry of Agriculture, Livestock and Forestry MARENA Ministry of Environment and Natural Resources M&E Monitoring and Evaluation MHCP Ministry of Finance and Public Credit MIC Integrated Crops Management Plan MIFIC Ministry of Development, Industry and Commerce MINREX Ministry of Foreign Affairs MOE Ministry of Education MOU Memorandum of Understanding MTEF Medium Term Expenditure Framework NDP National Development Plan NPV Net Present Value OECD Organization for Economic Cooperation and Development PA Protected Area PAG Government Action Plan PAM Performance Assessment Matrix PIP National Public Investment Plan PDO Project Development Objective PND National Development Plan PND-0 Operational National Development Plan PROFOR Sustainable Forestry Investment Promotion Project PRORURAL Sector-wide Productive Rural Development Program PRSC Poverty Reduction Support Credit PRSP Poverty Reduction Strategy Paper QER Quality Enhancement Review RAAN North Atlantic Autonomous Region RAAS South Atlantic Autonomous Region R&E Research and extension SA Social Assessment SDC Swiss Development and Cooperation Agency SECEP Secretary for Coordination and Strategies of the Presidency SIA Agricultural Information System S IGFA Integrated System for Financial Management and Auditing SIL Specific Investment Loan - iv -

SINIA National System for Environmental Information SINTAR National System for Agricultural and Rural Technology SISEVA Monitoring, Evaluation and Learning System SNIP National Public Investment System SPAR Agricultural and Rural Public Sector SWAp Sector Wide Approach program TGR National Treasury TF Trust Fund UPOV Union for the Protection of New Varieties of Plants

Vice President: Pamela Cox Country Managermirector: Jane Armitage Sector Manager: John Redwood Task Team Leader: Pierre Werbrouck -v-

NICARAGUA Second Agricultural Technology Project

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE ...... 1 1. Country and Sector Issues ...... 1 2 . Rationale for Bank Involvement ...... 4 3 . Higher Level Objectives to which the Project Contributes ...... 4

B. PROJECT DESCRIPTION ...... 5 1. Lending Instrument ...... 5 2. Project Development Objective and Key Indicators ...... 5 3 . Project Components ...... 6 4 . Lessons Learned and Reflected in the Project Design ...... 9 5 . Alternatives Considered and Reason for Rejection ...... 11

C. IMPLEMENTATION ...... 11 1. Partnership Arrangements ...... 11 2. Institutional and Implementation Arrangements ...... 11 3 . Monitoring and Implementation of Outcomes/Results ...... 12 4 . Sustainability ...... 13 5 . Critical Risks and Possible Controversial Aspects ...... 14 6 . Loan / Credit Conditions and Covenants ...... 15

D. APPRAISAL SUMMARY ...... 15 1. Economic and Financial Analysis ...... 15 2. Technical ...... 16 3 . Fiduciary ...... 19 4 . Social ...... 20 .vi .

5 . Environment ...... 21 6 . Safeguard Policies ...... 21 7 . Policy Exceptions and Readiness ...... 22

Annex 1: Country and Sector or Program Background ...... 23

Annex 2: Major Projects Financed by the Bank and/or other Agencies ...... 29 Annex 3: Results Framework and Monitoring ...... 30 Annex 4: Detailed Project Description ...... 36 Annex 5: Project Costs ...... 46 Annex 6: Implementation Arrangements ...... 48 Annex 7: Financial Management and Disbursement Arrangements ...... 51 Annex 8: Procurement Arrangements ...... 59 Annex 9: Economic and Financial Analysis ...... 65 Annex 10: Safeguard Policy Issues ...... 75 Annex 11: Projects Preparation and Supervision ...... 83 Annex 12: Documents in the Project File ...... 84 Annex 13: Statement of Loans and Credits ...... 86 Annex 4: Country at a Glance ...... 87 Annex 5: Monitoring and Evaluation ...... 88 Map IBRD No 34322 -1-

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Nicaragua’s 2004 per capita GDP of US$813 is the second lowest in Latin America. In 2001 46 percent of people lived in poverty - 15 percent in extreme poverty. Poverty in rural areas (64 percent) was more than double that of urban areas (29 percent) (IDA-IFC 2005). And although the percentages of poor and extremely poor people have both declined, the absolute number of people in poverty has increased. The agricultural sector. Nicaragua has one of the most agriculture-dependent economies in Latin America, with agriculture accounting for about 20 percent of GDP and 40 percent of employment. World Bank work suggests that agriculture strongly contributed to economic growth and poverty reduction in the past decade. However, the basis of this growth - high export commodity prices, the availability of unoccupied land and the return to normalcy after a decade of civil war - cannot be expected to sustain growth without new stimuli. The reason is that increased production has not come from improved productivity through technology and innovation but from the use of marginal lands. This has caused watershed destruction and deforestation. Buffer zones around protected areas such as the Bosawas Reserve are particularly at risk. Trade integration. There is consensus that the country needs to integrate economically with its neighbors and improve basic economic and social infrastructure: roads, energy, telecommunications, water and others. The Nicaraguan General Assembly ratified the Dominican Republic-Central America Free Trade Agreements (DR-CAFTA) on 11 October 2005. The agreement will enter into effect in January 2006. The DR-CAFTA promises significant opportunities for export-led growth and employment creation. A new Bank regional study indicates that DR-CAFTA is expected to have a positive impact on trade and investment in Nicaragua - and thus ultimately on growth and poverty alleviation - as it will increase market access and strengthen domestic reforms. While DR-CAFTA offers unprecedented opportunities it also constitutes a tremendous challenge: to switch from traditional commodities toward higher value-added, diversified, non-traditional commodities. The transition requires clear policies, stronger institutions, and increased effectiveness of public spending (90 percent of agricultural public spending is currently financed by external resources). Parts of the agricultural sector, especially small and indigenous farmers, are expected to be adversely affected: DR-CAFTA will gradually reduce prices of crops grown by the poorest producers and indigenous people (e.g., maize, beans, and rice). Recent Bank work shows that this will benefit the vast majority of the population (including the poor) because most Nicaraguans are net purchasers of basic food staples. But vulnerable groups may require temporary support in the transition to an environment of increased competition. The Second Agricultural Technology Project (ATP-11) intends to support agricultural research and extension both to diversify crops and to improve agricultural technology and productivity to help small farmers prepare to face this competitive environment. Government administrative responsibilities for rural development. The agricultural and rural public sector is comprised of four agencies: the Ministry of Agriculture, -2-

Livestock and Forestry (MAGFOR), the National Institute for Agricultural Technology (INTA), the National Forestry Institute (INAFOR) and the semi-autonomous Rural Development Institute (IDR). The Ministry of the Environment and Natural Resources (MARENA) has responsibility for environmental oversight and regulation, natural resource management and protected areas. Law 2901,promulgated in 1998, defines the roles and responsibilities of the agricultural public sector institutions. This makes MAGFOR the lead agency formulating agricultural and forestry policies and strategies. INTA generates and transfers agricultural technology. INAFOR manages the forestry sector and maintains the National Forest Registry and Inventory. IDR executes strategies, programs and projects in sustainable rural development with an emphasis on productive rural investments. It answers directly to the Executive under the policy guidance of MAGFOR. (For institutional budgets see Annex 1.) The National Development Plan 2005-2009. The Government is preparing a draft of a second-generation Poverty Reduction Strategy Paper (PRSP) - the country’s National Development Plan 2005-2009 (PND 05-09) - which will be presented to the IMF and IDA later in 2005. The draft PND 05-09 places greater emphasis on economic growth: policy actions and reforms to support the private sector and increased spending on economic infrastructure. It emphasizes improving the investment climate by increasing the use of technology for agricultural production and promoting environmentally sustainable growth. PRORURAL. On the basis of PND 05-09, the rural sector agencies have prepared a sector-wide Productive Rural Development Program: PRORURAL. This program, along with a Medium-Term Expenditure Framework (MTEF), supports improved coordination and complements cooperation agencies’ assistance in sustainable agriculture and forestry for the period 2005-2009. Civil society and private sector were consulted through the sector round-table during the development of PRORURAL and the MTEF. The main components of PRORURAL are: (1) Technical Innovation; (2) Food Safety and Animal Health; (3) Sustainable Forest Development; (4) Financial Support Services; (5) Infrastructure; (6) Institutional Modernization and Strengthening; and (7) Forest and Agricultural Policy and Strategy. The estimated cost of PRORURAL is US$411.5 million for the period 2005-2009 (US$83million/year), of which about 50 percent is financed with fiscal and external sources (grants and loans). ATP-I1would finance more than two-thirds of the technology innovation component (1) of PRORURAL and a smaller portion of components (3), (6) and (7). The Governments of Finland, Sweden and Switzerland intend to contribute with US$3 1.7 million through a common fund. The Government is seeking additional support from other cooperation

Under the framework of the sector policy document : “Una Ruta para modernizar la Nicaragua Rural” (1998), Law 290 specifies: (i)the existence of several actors working in the development of rural areas among which the State acts as regulator and facilitator; (ii)the need to coordinate with the private sector; (iii)a preference for the design and execution of projects that yield higher economic and/or more equitable distribution of income; (iv) priority of public investment in agricultural development as the engine of growth, and (v) the need for partnerships with the international community through specific funds. -3- agencies. There is a gap of US$217.9 million between the proposed budget and the existing funding (see Table 1). PRORURAL Financing (US$ million) Table 1. PRORURAL Medium-Term ExpenditureFramework and Financing by Component, 2005-2009

6 Institutional Modernization and Streng 81.5 35.2 46.3 2.5 0.5 3.0 10.5 13.5 -32.8 7 Forest and Agricultural Policy and Sur 5.7 2.2 -3.5 0.4 0.4 0.8 3.0 3.8 0.3 TOTALMTEFDEMAND 411.5 193.6 -217.9 12.0 8.2 7.2 27.4 31.7 25.0 84.1 -133.8 % 47% -53% 6% 4% 3% 13% 15% 11% 39% 61%

(For more information see Annex 1.) The fulfillment of the MTEF will require stronger national financial management and information systems within the sector: the National System of Public Investments, the Integrated Financial Management and Audit System, and monitoring and evaluation. Government is currently preparing terms of reference for a monitoring, evaluation and learning system that will address the specific needs of PRORURAL and that will be part of the institutional strengthening component of ATP-11. In addition, the Government is developing specific target indicators to ensure consistency with the Millennium Development Goals. Financing of PRORURAL will encompass different fiduciary arrangements that will be spelled out in a Memorandum of Understanding to be signed by the Government and international cooperation agencies. These arrangements include budget support, common funds, projects and delegated cooperation. The Bank supports PRORURAL by: (i)financing the agricultural technology component (already supported under ATP-I) while (ii)strengthening the Government institutionally. Relations with international cooperation agencies. There are approximately 17 international cooperation agencies supporting PRORURAL. The Government recently signed a Code of Conduct (GoN) with several cooperating agencies (Japan, Switzerland, Sweden, Denmark, Finland, IICA, FAO, World Bank, IADB). The Code of Conduct guides the relationship between the Government and Development Partners in the process of harmonization and alignment. A Memorandum of Understanding will be signed at a later date specifying fiduciary and financial mechanisms to regulate PRORURAL. Some other examples of that cooperation include: (i)the establishment of a common fund by the governments of Finland, Sweden and Switzerland; (ii)active participation of agencies in developing the PRORURAL and MTEF proposals; (iii)the current ATP co-financing between the World Bank and IFAD; (iv) frequent and regular communications and sharing of operational information and reports among agencies; and (v) joint Government-cooperation agency missions in October 2004, February 2005 and September 2005. -4-

2. Rationale for Bank involvement

The project is fully compatible with the objectives of the current IDA Interim Strategy Note (Report No 32570-NI) approved by the Board on August 4,2005. The interim strategy aims to promote growth and poverty reduction and foresees two operations for the rural sector: the Second Agricultural Technology Project (US$l2M, FY06) and the GEF-financed NicaragudHonduras Corazon Transboundary Biosphere Reserve Project (US$6M corresponding to Nicaragua, FY06). In response to the Government’s initiatives to reform the agricultural sector under PRORURAL, the proposed operation broadens the original scope by (i)positioning the Bank as a knowledge provider (rather than just a direct financer) of strategic technical assistance to the institutions in charge of implementing PRORURAL; and (ii)by aligning IDA resources directly to PRORURAL and MTEF priorities and institutions. The World Bank has a strong comparative advantage in implementing this project. The Bank financed the first Agricultural Technology Project (henceforth ATP-I) that closed in June 2005. The proposed project was initially foreseen as a second leg of an Adaptable Program Loan (APL). The Government, however, changed priorities and wanted to launch a Sector-Wide Approach program (SWAP) PRORURAL. Before joining the SWAP the Bank determined that the Government needs to upgrade the quality of the fiduciary mechanisms in financial management and procurement, as well as its environmental and social safeguards. Hence the Bank decided that it would be more appropriate to support PRORURAL by: (i)financing specific elements (already supported under ATP-I); while (ii)strengthening the Government institutionally to help comply with fiduciary (financial management) and safeguard aspects and to develop a PRORURAL monitoring and evaluation system. This proposed project builds on other Bank operations in rural areas with increasing co- financing and donor funding alignment, in particular ATP-I, the Sustainable Forestry Investment Promotion Project (PROFOR) and the Atlantic Biological Corridor Project. In the last decade the Bank has also consolidated a record of policy advice and financing to the rural sector in Nicaragua, including studies and policy documents that helped develop the sector’s conceptual framework. The Bank is well positioned to assist in this harmonization, appropriation and alignment effort.

3. Higher level objectives to which the project contributes

The higher level objectives reflect PRORURAL goals, including enhancing the production of competitive and environmentally sustainable agricultural goods and services, and maintaining and expanding participation in national and international markets. The proposed credit will support PRORURAL by strengthening the institutional framework and the financial management system, and by financing Components 1, 3,6 and 7 of the program. -5-

B. PROJECT DESCRIPTION 1. Lending instrument The project will support a broad approach to agricultural development and particular public sector activities through a Specific Investment Loan (SIL). Financing Plan. The project will be financed by a US$12 million IDA credit over a period of four years (2006-2009); a DEG 5 million (US$8.25 million) loan from the International Fund for Agricultural Development (IFAD), US$7.25 million from the Government and US$1.5 million from the beneficiaries2 Total project costs are estimated at US$29 million.

SOURCES OF FINANCING (US$ ,000) No. COMPONENTS IDA IFAD GOV’T BENEFICIARIES TOTAL Innovation and adoption of agricultural and I 8,950 8,250 6,350 1,500 25,050 forestry technology I1 Institutional modernization and strengthening 3,050 ______900 _---____ 3,950 Total PROJECT COST 12,000 8,250 7,250 1,500 29,000

2. Project development objective and key indicators The Project Development Objective (PDO) is to provide rural households and communities with broader access to sustainable agricultural,forestry and natural resource management sewices and innovations, thereby stimulating higher agricultural productivity. The objective of the project is aligned with PRORURAL’Sobjectives of promoting the development of and improving access to agricultural technology as key factors in agricultural development. The proposed project would contribute to (i)increasing agricultural productivity of project beneficiaries through innovations in environmentally friendly technology (research, transfer, technical assistance and extension); and (ii)the strengthening and modernization of agricultural public sector institutions especially in relation to their performance within the framework of PRORURAL and the Medium-Term Expenditure Framework. Key Indicators ATP-11’s outcome and result indicators will contribute to the higher targets set by PRORURAL (see Annex 3). By the end of the project it is expected that:

0 The INTA innovation technology portfolio is increased by 42 validated technologies supporting export commodities, food safety and security, and environmental sustainabili ty.

0 At least 50 percent of farmers participating in agricultural and forestry extension services have adopted at least two new production andor processing technologies.

* IFAD entered the second phase (2005-2008) of Loan Agreement #529-NI in July 2005. -6-

Productivity indices of participating farmers have increased on average by 15 percent. At least 80 percent of the project stakeholders express satisfaction with the research and extension services received. The Planning, Monitoring and Evaluation unit of MAGFOR is fully operational and producing regular reports. 100 percent of salaries and operating costs financed under the project are paid with domestic resources by 2010.

3. Project components To achieve the above objectives, the project will: (i)enhance agricultural and forestry technology innovation and adoption; and (ii)strengthen and modernize the institutions involved in PRORURAL. Component I:Innovation and Adoption of Agricultural and Forestry Technology (Total Project Cost: US$ZS.OM or 86.4 percent of total project cost. IDA Contribution: US$9.0M). The main objective of this component is to accelerate relevant technology generation and transfer, with an increased focus on marketing, competitiveness, sustainability and natural resource management. INTA, INAFOR and FUNICA will provide agricultural research and development, technical assistance and extension services, foundation seed production, post-harvest and marketing services, certification, training and dissemination activities, adoption and innovation of forest technology, and competitive grants for technical assistance and sustainable forest management. The adoption of new production, marketing, management and post-harvest technologies would directly benefit approximately 50,400 farmers through new technologies and technical assistance schemes (see Annex 4). The component will finance works, goods and services, extension grants, technical staff, consulting services and operating costs for INTA and INAFOR. Activities under this component will continue the activities of INTA, INAFOR and FUNICA started under ATP-I, including: (i)Research and Development. Under ATP-I, INTA developed and validated 134 new farming technologies. Under ATP-11, INTA will further develop and validate an additional 42 new technologies. Technology validation will continue on farmer plots. Collaborative research with international centers and networks as well as with universities and private firms, will be further increased. INTA will focus on products and techniques with a competitive edge in domestic and export markets within the CAFTA framework, as well as on important food crops (see Annex 4). (ii)Extension. Under ATP-I, INTA developed a mixture of public and private extension methodologies, and this will continue under ATP-I1 targeting 35,000 farmers. Public extension will be free to the poorest farmers and will be provided by 140 extension agents in 20 offices, mainly in the North Atlantic Autonomous Region (RAAN). The main focus will be to reduce the advancement of the agricultural frontier and to manage the buffer zones. Three offices in RAAN will serve different indigenous groups, namely in Waspan, Siuna and Rosita (Miskitos and Mayagnas). INTA will target 20 percent of -7- its extension efforts to indigenous female producers. Private extension will target meaudairy, coffee, oleaginous producers, vegetables and basic grain clusters in 20 municipalities. Private extension will be provided by technical assistance companies, following a co-financing model where producers pay 40 percent and INTA 60 percent of the cost (INTA cost-sharing transfers). This approach creates incentives for a gradual transition to a market-based (pluralistic) system where private companies will provide extension services. Under this gradual reform, INTA is expected to continue its withdrawal from public extension that will be replaced by private providers. (iii)Foundation seed production and certification. The public sector has the mandate to produce foundation and registered seeds. Production of (certified) commercial seed is the responsibility of the private sector. INTA sells foundation and registered seeds to commercial farmers who in turn produce certified seed. This sub-component will help INTA to produce high quality seeds and address weaknesses observed in the INTA seed unit. The sub-component will focus on improving seed quality norms, legally protecting varieties, and enhancing the market intelligence of the seed unit. (iv) Market development and post-harvest technical assistance. This sub-component will address farmers’ needs in post-harvest handling and marketing. INTA’s traditional array of technologies was limited to production technologies. Through ATP-I, INTA has been successful in increasing farmers’ market access. The post-harvest and marketing unit will further enhance its methodology of providing market intelligence and information. The unit will provide training for producer groups, with a special focus on women in processing of agricultural products, establishing and managing small enterprises, and facilitating the link between sellers and buyers. The focus will also be on involving women in all cycles of agricultural production and guaranteeing food security by promoting appropriate technology so as to avoid harvest losses. The unit will continue to support the research stations and the seed unit with cost calculations and setting prices for seeds and services to be sold. (v) Certification, training and dissemination. INTA’ s training and dissemination unit has been quite successful in organizing and implementing training modules for its own and other organizations’ technical staff and service providers. It has also a good track record of selecting the right candidates for overseas training. Under ATP-I1 the unit will support institutional strengthening of the indigenous organizations instrumental in developing indigenous technologies and forest seed collection as part of the Indigenous Peoples Development Plan (see Annex 10). The support to this unit will include building its capacity as a certifying body for private training and technical assistance providers. In the medium term, INTA aspires to become the national accreditation entity for such service providers. This intention is consistent with the paradigm shift of INTA towards a second-tier center of excellence in an open and competitive market for agricultural technology. The unit is also responsible for communication and coordinating INTA’ s activities with other relevant institutions. INTA’s communications efforts have been consistent in all types of media, producing high visibility and surpassing 90 percent recognition in rural areas. (vi) Innovation and adoption of forestry technology. This sub-component responds to the objectives of PRORURAL, which targets 3,000 producers in community agro- forestry and by developing sustainable forestry technology. INAFOR is committed to -8- increase its resource mobilization capacity to capture other sources of financing for this sub-component as well. Under this sub-component INAFOR will provide training in forest and agro-forestry management to 200 agricultural and forest producers in the buffer zones of the Bosawas Reserve and the Pacific and Northern parts of the country. Activities include the rehabilitation of the center for genetic improvement and the forest seeds bank, the transfer of forest production technologies, and a national forest assessment. (vii) Administration of competitive funds for technical assistance (FAT) by FUNICA. This sub-component is a direct continuation of the activities financed by IFAD under ATP-I. Matching grants will fund technical assistance and extension proposals submitted by applicants under competitive procedures open to producers, producer groups, Government research institutions, universities, the private sector, NGOs and other institutions active in agricultural research, extension, and innovative forestry technology. Project funds will target areas also supported under the Corazon Project (buffer zones of the Bosawas Reserve). The facility promotes market development of technical assistance services and the emergence of new service providers for technical assistance under a grant scheme. This grant is channeled through farmer groups that qualify for FAT, who contract their service providers. The sub-component will improve efficiency in resource use and allocation, stimulate innovative mechanisms for agricultural and forestry services, and provide incentives for sustainable agriculture and forestry management. Component 11: Institutional Modernization and Strengthening (Total Project Cost: US$3.9M or 13.6 percent of total project cost. IDA contribution US$3.0M). The objective of this component is to improve the Government’s capacity to formulate sector policies and strategies and carry out the administrative and financial coordination needed to implement the activities under PRORURAL. The Credit will finance works, goods, technical staff, consultants, training and operational costs of MAGFOR, INTA and INAFOR. The IFAD credit will finance similar expenditures for FUNICA. (i)The activities will strengthen MAGFOR’s capacity to formulate strategies, plans and programs and to implement administrative, procurement, financial management and monitoring systems. The component will also help MAGFOR to develop a financial monitoring reporting system compatible with national budget procedures and will help with the harmonization and alignment of all donor financing. By the end of the project, MAGFOR will have the staff, procedures, methodologies and the institutional experience to coordinate agricultural public sector institutions activities under a shared MTEF. The Planning, Monitoring and Evaluation unit of MAGFOR will be fully operational. MAGFOR will have the necessary management capacity to administer and monitor external resources from donors and the National Treasury according to national financial mechanisms and those of the donor agencies, achieving transparency, accountability and efficiency. In terms of policy formulation and implementation, the National Advisory Council for (agricultural) Production (CONAGRO), the Rural Development Roundtable (Submesa de Desarrollo Rural Productivo) and the National Council for Production (Consejo Nacional de la Produccion) will also be fully operational. -9-

(ii)INTA’s capacities will be strengthened in terms of financial administration procedures, procurement, and accounting, planning monitoring and evaluation. By the end of the project, INTA will have consolidated its activities under a pluralistic and competitive system of agricultural service provision. It will also have adopted an approach that is sensitive to indigenous peoples’ concerns. (iii)INAFOR’s technical capacities will be enhanced through training of technical staff to improve dissemination, planning, monitoring and evaluation. INAFOR would manage forest resources and deliver services as mandated by the new Law of Conservation, Promotion and Development of the Forestry Sector (Law 462). (iv) FUNICA will serve as a forum for the higher participation of stakeholders in the formulation and application of sector policies, with an emphasis on technology and innovation for the sector. Through the FAT, efficiency in resource use and allocation will have improved, innovative mechanisms for agricultural and forestry extension services will have been tested, and incentives for sustainable agriculture and forestry management will be in place. As an indicator of increasing efficiency, the technical: non-technical staff ratios will have increased in all agencies (see Annex 3).

4. Lessons learned and reflected in the project design

ATP-I was an important learning ground for support to the rural development sector, and it is vital that these successes are built upon and not lost. The lessons learned fall into three broad areas: technology development, institutional capacity, and the policy environment. Technology development is a key component of ATP-11. INTA’s Research and Development (R&D) Unit performed beyond expectation, validating 134 technologies that helped farmers (including women) to be more productive. In ATP-I1the Unit will focus even more strongly on ensuring that technologies are high quality and relevant, but there is recognition now that it isjust as important to consider technology in the broadest sense and along the entire production-storage-marketing chain. Sustainable forestry management, for example, requires not only enforcement of regulations but also incentive mechanisms and new technologies. PROFOR’S matching-grant mechanisms proved that beneficiaries will adopt profitable new technologies. The research agenda will move towards the cluster and production chain approach as specified in PND 05-09. More effort will be made to ensure that all sectors of the community, including women and indigenous people, are benefiting from new technologies and able to access appropriate extension services. In addition the project will take into account the role that social and cultural attitudes play in innovation and technology adoption. In terms of institutional development, important lessons were learned about what kind of support and capacity-building is most effective. ATP-I and PROFOR tested a variety of grant facilities managed by FUNICA. The FAT’Scomplex administrative procedures were slow and costly. This was expected in the beginning, when demand for private sector technical assistance was unknown and many small proposals were being received - 10- from poor and extremely poor farmers, but will now improve through streamlining procedures and better management. Duplication of work (and waste of resources) across ATP-I and PROFOR was eliminated by centralizing administrative functions from the two projects Project Implementation Units (PIUS)in MAGFOR’s Administrative Directorate. The process will continue with other sector projects, so the Directorate will be strengthened to cope with the increased workload and new PRORURAL responsibilities. Further gains were made in this area when ATP-I helped MAGFOR to streamline the procurement and financial management procedures of donor-supported projects. ATP-I1 supports the Government approach to progressively rely on national procedures to disburse and account for funds. This will not only reduce transaction costs, but achieve better results. Finally, developing an extension service that combines private sector provision to commercial farmers and free extension to subsistence and poor farmers is quite a challenge. During ATP-I the close cooperation between INTA (public) and FUNICA (private) was critical. To build on this success INTA will continue to provide free extension services to the poor, and will establish an accreditation system and certify qualified service providers for the private extension sector. Understanding the policy environment and responding to its needs and changes is crucial. ATP-1’s flexible communication strategy ensured that the project’s work had a high profile with both the public and policymakers, and that important processes were open and transparent. This ensured broad-based support. It also ensured the groups that can be easily marginalized remain part of the process and receive the share of benefits. INTA’ s successful radio campaign among indigenous peoples provided technical assistance to remote communities, along with farmers who are not currently served by other programs. Miskito extension agents were hired, breaking cultural barriers between extension agents and indigenous communities. On the national scale, unexpected changes in project design tested the resilience and sustajnability of ATP-I. The project survived the withdrawal of a co-financer (Netherlands), the incorporation of the Libra x Libra Program3 and the move from a 12- year APL to a project approach. The latter in particular created uncertainty and confusion among the sector institutions. So it was important to manage transitions in a transparent and coherent fashion. Institutions need to be a permanent part of public sector planning, including having salaries as part of the national budget to ensure sustainability and stability.

A direct seeds transfer to farmers incorporated later in the project design under the Institutional Modernization Component. This program not only distorted market signals and performance but also caused an “over execution” of 140 percent of the component and drained badly needed project resources for other activities. -11-

5. Alternatives considered and reasons for rejection

INTA and FUNICA have essentially the same objectives: agricultural research and extension services. INTA has lower costs and focuses on the ‘public good’ nature of agricultural services, but its services are rather supply-driven. FUNICA is demand- driven and contributes to the financial sustainability of agricultural services both from the supply side (financing private provision of such services) and from the demand side (requiring financial contributions from beneficiaries). FUNICA also provides a forum for the private sector to influence public policy and the design of agricultural technological innovation. Therefore, the services are complementary. The Bank will continue to finance INTA, while IFAD will finance FUNICA. The project uses both assistance mechanisms, lowering the costs of FUNICA’ s services while ensuring the responsiveness to demand and financial sustainability of INTA. The Bank will continue to provide assistance to FUNICA as the supervising institution of the FAD credit. The Government requested international cooperation agencies to harmonize and align their activities and resources under PRORURAL. The Governments of Switzerland, Denmark and Sweden are pooling their resources in a common fund to support PRORURAL. The Bank will not be part of the common fund because there are some fiduciary procedures that are not up to the standards of international best practice. Therefore, the Bank has decided to support PRORURAL in a “project mode” while building the necessary institutional national capacity to enable the Government to further develop a PRORURAL sector-wide approach and to upgrade its fiduciary, procurement and safeguard standards and systems.

C. IMPLEMENTATION 1. Partnership arrangements IDA and IFAD will support the project through parallel financing arrangements, sharing a common fiduciary framework (see Annex 7). Expenditures financed by IDA and IFAD will follow the same financial management and procurement procedures, under arrangements that have been refined based on lessons learned from ATP-I. IFAD has earmarked its contribution to finance the FAT implemented by FUNICA and coordinated by MAGFOR. The FAD-financed program in FUNICA will be monitored and supervised by the Bank. IDA and IFAD will also be active partners in PRORURAL, as shown by the recent signing of the Code of Conduct between Government and cooperating agencies to achieve better harmonization and alignment.

2. Institutional and implementation arrangements MAGFOR will be the Government agency responsible for coordination and overall implementation of the project and to this purpose the Ministry of Finance (MHCP) and MAGFOR will sign a subsidiary agreement. Specifically, MAGFOR will be responsible for implementing Component 11.1. MHCP, MAGFOR and INTA will enter into an implementation agreement for the implementation of Component I.1-5 and 11.2, while MHCP, MAGFOR and INAFOR will enter into an implementation agreement with - 12-

INAFOR for the implementation of Component 1.6 and 11.3. Draft implementation agreements were prepared by negotiations. FUNICA will be responsible for the execution of the FAT under component 1.7. in accordance with the FUNICA Operational Manual and the FAT Operational Regulations under a tripartite (MHCP, MAGFOR, FUNICA) subsidiary agreement to be updated as needed. A Coordinating Committee established under ATP-I and presided over by MAGFOR will continue to coordinate project implementation. MAGFOR’s Policy Directorate will be responsible for the overall planning and monitoring of the project, but the specific activities will be managed in a decentralized manner by INTA, INAFOR and FUNICA. Overall financial management and administration will be the responsibility of MAGFOR’s Administrative Directorate. These arrangements have been piloted successfully under ATP-I. To ensure that the technical, economic, fiduciary, social and environmental issues are being adequately addressed, Government will prepare annual implementation plans to be commonly reviewed, discussed and agreed with the Bank so that the project development objectives will be reached and implementation issues can be ironed out. The project operational manual, developed under ATP Iis being updated to take into account the new institutional, financial and procurement arrangements as well as the existence of the FUNICA operational manual. Financial management arrangements. The basic premise of ATP-I1 financial management arrangements is that these will be based on financial management reports and be connected to Government’s public financial management systems and procedures, with additional safeguards where needed (Annex 7). Procurement arrangements. Each implementing agency will be responsible for its own procurement, but MAGFOR will employ a qualified procurement specialist to assist all agencies with procurement issues and supervise and consolidate all procurement reports (Annex 8).

3. Monitoring and evaluation of outcomeshesults The Planning, Strategy and Rural Development Unit at MAGFOR General Policy Directorate will be responsible for a monitoring and evaluation (M&E) system (see Annex 15) within the framework of PRORURAL’S SISEVA - Learning, Impact Evaluation and Monitoring System. Each agency will monitor qualitative and quantitative indicators, while MAGFOR’s M&E unit will provide overall analysis and summaries. An independent M&E agency will evaluate overall project implementation process, outcome and impact. During a first phase, MAGFOR will establish an M&E system accessible to all implementing agencies, focusing on indicators detailed in Annex 3. Later, a fully compatible system will expand to include reporting from regional and zonal offices and other agencies, including MARENA and other donors. Baseline data will come from: (i)ATP-1’s evaluations; (ii)INTA’s M&E system; (iii)the INAFOR and PROFOR information systems; and (iv) ATP-1’s Agricultural Information System (SIA). The first impact evaluation will be conducted after two years, the second - 13 - during the final months of project implementation. The first evaluation will be the basis for a possible expansion of the M&E system to cover the agricultural sector as a whole under PRORURAL. Bank monitoring and supervision. The Bank and IFAD will monitor the project through regular supervision missions and yearly agreements on annual project implementation plans with each of the implementing agencies. Between the 24th and 36th month after effectiveness the Bank, IFAD and the Government will carry out a mid-term review to adjust the components where necessary.

4. Sustainability Nicaragua is, and in the medium term will remain, highly dependent on foreign resources to finance its rural development projects. However IDA’Sfinancing of salaries of technical staff (researchers, extension staff, policy and management staff) and operating costs of MAGFOR and INTA will decline (see Table 2) and Government will contribute US$7.25 million as counterpart funds. Table 2: Approximate Government Contribution towards the Financing of MAGFOR and INTA Technical Staff and Operating Costs

The main project component (Innovation and Adoption of Agricultural and Forestry Technology) builds on ATP-1’s successes: improving access to markets; providing appropriate technology; increasing beneficiaries’ farm investments; improving value- added at farm level and securing better prices for farmers. New post-harvest technology and management also contributed to better product quality. Together these gains will help increase farmers’ incomes and, in turn, pay for private technical assistance. INTA will gradually be replaced by private providers - initially under the private technical assistance scheme and eventually by FAT’Scompetitive funds for technical assistance. INTA and FUNICA will help farmers diversify to reduce risk and produce more stable incomes. The project cost-benefit analysis shows the sustainability of project impact to be high even after considering sensitivity and switching values. The Institutional Modernization and Strengthening Component will also contribute to the Government’s gradual harmonization of external resources. Existing institutional tasks will be aligned under PRORURAL without creating new organizational layers or contracting new staff. The new M&E system will support institutional weaknesses in this area (and eventually cover all PRORURAL agencies). IFAD is committed to funding FUNICA for eight years (2005-2012). Swiss Development Cooperation (SDC) and the Government of Denmark have agreed both to support FAT’Sexpansion to the Las Segovias region and to implement a Technologies Market initiative (US$% 1 million during 2004-2008). Other agencies may finance a - 14- pluralistic system of agricultural research and service provision through FUNICA, so institutional sustainability will be maintained through the foreseeable future. Post-project stakeholder benefits are expected to be sustainable, since research and extension activities will not only increase productivity, but respond to changing market conditions and increase on-farm added value.

5. Critical risks and possible controversial aspects The risk level of this project is moderate. This is a follow-up project to ATP-I and most of the risk factors have been adequately addressed.

Risks Risk Mitigation Measures Risk Rating To project development objective Changes in Government Ongoing dialogue with Government and civil S administration, causing society to ensure that development objectives adjustment in development remain valid. priorities and PRORURAL components (general elections are due in Nov 2006). To component results MAGFOR: (i)unable to Donor coordination levels are being strengthened M implement the project due to to provide TA to MAGFOR. This includes depletion of qualified staff and increased capacity building and strengthening to institutional weakness; and (ii) implement a sector-wide approach over time. fails to put in place and expand Close follow-up and evaluation of activities to a M&E system to cover establish an M&E system as proposed by the additional public sector project, including an integrated financial institutions and regional monitoring system. organizations.

INAFOR: (i)unable to acquire INAFOR has been included in the plan for enough institutional capacity to institutional reforms which proposes the S fulfill its mandate; and (ii) incorporation of INAFOR staff into the national unable to mobilize additional budget. Assist INAFOR to obtain additional resources to implement the resources from other interested donors. national forest assessment.

INTA: (i)finds it difficult to Close and timely supervision and systematic achieve the increased technical: follow up of the annual work plans and INTA’s non-technical staff ratio goals; institutional restructuring plan. Continue support M and (ii)is unable to comply with to INTA’s micro-watershed management proposed IPDP. approach and use funds to complement the state’s technology innovation agenda with private service providers.

FUNICA: (i)does not achieve Increased focus on more strategic asDects and - 15-

strategic and managerial building alliances with other foundations and- M proficiency to fulfill its goals. strategic partnerships. Enhanced Bank supervision and assistance.

Institutional responsibilities Continuous dialogue with Government; increased among agricultural and rural support to the AH&A efforts and a clarification of public sector institutions remain each agency’s responsibilities under Law 290, and M undefined, creating overlapping a commitment from the agencies to apply and of responsibilities and respect the law. duplication of roles.

Counterpart funds not available Negotiating with the Ministry of Finance the in a timely fashion. inclusion of permanent and qualified professionals of the different agencies in the national budget payroll system so as to reduce dependency on S external resources. Adjustment of annual project implementation plans to the availability of countemart funds and fiscal mace. Overall risk rating M

6. Loadcredit conditions and covenants The following are effectiveness conditions.

1, The signing of the subsidiary agreement between MHCP and MAGFOR; and

2. The signing of the implementation agreements between MHCP, MAGFOR and INTA and MHCP, MAGFOR and INAFOR;

3. The updating of the PTA IProject Operations Manual to reflect the new institutional, financial management and procurement arrangements.

An important project covenant is the yearly agreement between the IDA and the Government on the annual project implementation plan, including the availability of fiscal space and counterpart funds. The Government financing on an increasing basis of MAGFOR and INTA salaries and operating costs according to the agreed scale is a legal covenant.

There is retro-active financing from July 1,2005 onwards up to twelve months prior to the signature of the financing agreement up to a maximum amount of US$2 million.

D. APPRAISAL SUMMARY

1. Economic and financial analysis A detailed description of the economic and financial analysis is presented in Annex 9. Simple cost-benefit analysis was used to estimate Net Present Values (NPV) and Internal Rates of Return (IRR), as the project is designed to increase productivity and reduce - 16- production costs. The analysis provides a framework for INTA research planners, managers and scientists to gauge the impact of their work in terms of costs and benefits, which will lead to more efficient allocation of scarce resources and to the selection and design of research and extension (R&E) activities that better contribute to the welfare of Nicaraguans. Summary of Benefits and Costs. Since most project investments would directly support agricultural R&E, benefits were estimated at the level of relevant crops and production systems. Expected benefits include: (i)strengthened public institutions and technical capacity; (ii)the adoption of new production, marketing, management, and post-harvest technologies directly benefiting approximately 50,400 poor farmers; (iii)new products, process and market opportunities, increased exports, improved quality, and adequate alternatives for economic development; and (iv) the introduction of environmentally friendly and sustainable production practices. Financial Analysis. The financial analysis confirms that: (i)the improved technologies should be highly attractive to beneficiaries since their income would be substantially increased; (ii)positive impacts will be attainable in all different regions and agro- ecological zones; and (iii)marginal returns to labor through improved production practices compares positively with the opportunity cost of family labor for the regions involved. Economic Analysis. The aggregation of incremental physical quantities and economic values of inputs used and production at the farm level for the 50,400 beneficiaries of the proposed project provide the basis for quantifying benefits and related agricultural production costs. The resulting economic indicators and the pertinent switching values (as shown below) indicate that the project has an estimated ERR of 17 per cent and an NPV (with 12 per cent as social discount rate) of US$51.9 million. The estimated family labor used would increase by 23 per cent, reducing the levels of underemployment in rural areas where poverty is highest. Switching Values. As the value at which the project’s NPV becomes zero the critical variables were also estimated: (i)benefits should drop by 25 per cent; (ii)project costs should increase by 250 per cent; (iii)project and farm production costs should increase by 34 per cent; and (iv) the adoption process should be delayed by one and a half years (in addition to the assumed four years) with no delay in project costs. Sustainability of project benefits is expected to be high.

2. Technical

The technical analysis focuses on the institutional assessment of the participating agencies (MAGFOR, INTA, INAFOR) and on ATP-I experiences that deserve to continue into ATP-11. Project components are based on: (i)a PRORURAL diagnosis showing the need to improve productivity and competitiveness by accelerating innovation and adoption of relevant technology tailored to the needs of a heterogeneous clientele, including indigenous peoples and women; (ii)an institutional assessment; (iii)lessons learned - 17-

(specifically ATP-I); and (iv) Government’s decision to gradually adopt a sector-wide approach. Investments in agricultural and forestry technology innovation and adoption increase the efficiency of agricultural production. Nicaragua needs this to respond to new competitive markets resulting from regional integration and free trade agreements (DR-CAFTA) and, at the same time, to guarantee food security for those who will not benefit from the trade agreement. Better productivity will also curb encroachment into forests and ecologically fragile areas. a. Relationship to the first Agricultural Technologv__ Project (ATP-I)

Component 1 builds on ATP-I, which set out to “establish efficient agricultural knowledge, innovation and technological systems, driven by demand.” Strategic aims included reducing poverty, developing a pluralistic system and supporting both commercial agriculture and small and medium-sized producers. In June 2005 the first phase ended, and progress was made in key areas: Producers. Participating producers had higher land and labor productivity than non- participants, particularly for corn and rice. Metal silos reduced post-harvest losses and increased average producer prices. Research. Different research models have been developed in several areas. Research has intensified in partnership with NGOs, producer groups and (to a lesser degree) universities. INTA and FUNICA need to better define strategy and research priorities for a holistic research agenda, including technical and financial coordination. Technical Assistance. 41,200 producers received assistance - fewer than planned, primarily because of cutbacks of INTA technical staff. Women clients featured well at both INTA (27 percent) and FAT (36 per cent). FAT was initially expensive and slow, but improved over time while creating the mechanisms and structure for successful investments complementing other institutions, such as the Rural Development Institute (IDR). An independent assessment (T. Ammour 2005) indicates that INTA has not sufficiently emphasized organic crop management technologies. Training. Technical assistance education centers became more demand driven. Farmer field schools initiated teaching methods that multiplied knowledge by training producers to teach others. Access to participatory technical training must be improved, however, as demand-driven education requires technical and commercial knowledge that technical staff may not already know. ATP-I1 has dropped the technical education component originally designed and implemented under ATP-I through agricultural, knowledge and information systems (AKYS) approach. Technical education is now under the Ministry of Education (MoE) instead, so high-level coordination (MAGFOR/MoE/INATEC (National Institute of Technology) is key to safeguarding knowledge from ATP-I. Agricultural Information System (SIA). Despite some advances in establishing the structure, functioning and specific utilities of the SIA, few institutions have adopted it and outputs are not being used systematically. The eight tele-centers performed poorly because of budgetary cuts. - 18-

Public and private extension services. INTA began the private sector technical assistance (TA) scheme as the public sector was under-resourced and not demand driven. Public-private TA was co-financed for sectors with greater resources, and producers paid part of the costs. This demand-driven model was efficient, effective and stimulated exports, and will continue in ATP-11. INTA’s free public sector technical assistance for poorer clients will also continue under ATP-11. This public-private combination is providing high-quality, appropriate TA, driven by farmers’ demands. b. Institutional analysis

Main issues. An institutional assessment indicated that although Law 290 specifies that MAGFOR formulates policies and strategies and other agricultural public sector agencies (INTA, INAFOR, IDR) execute projects and programs, there are weaknesses and gray areas. MAGFOR has not been very effective setting policies and strategies due to fiscal restrictions, a lack of qualified professionals and a leadership vacuum. Moreover, MAGFOR increasingly implements projects, competing with IDR, INAFOR and INTA for external resources. Given that the sector-wide approach is new to Nicaragua, there is clearly a need to improve institutional capacity to respond to the new way of working. INTA is financed almost entirely by external resources, making it vulnerable unless Government commits to funding its salaries in the future. While INAFOR is moving from using sanctions to manage forestry to using incentives it cannot carry out important responsibilities granted by Law 462, Decree 73-2003, that is to oversee the forestry regime of the nation. INAFOR is badly under-resourced and competes with MARENA to manage forest resources and grant use permits. Both ATP-I1 and the GEF Corazon project aim to help overcome this. Salaries across public sector agencies are inconsistent and highly variable and unequal, depending on funding sources. Geographical areas are not treated equally, and there is no coordinated system of monitoring and evaluation at the field level. Rationale for strengthening the agricultural public sector institutions. Government has been committed to the formulation of the National Development Plan 2005-2009 and PRORURAL, with an emphasis on territorial coordination and the harmonization and alignment of international cooperation on the basis of a medium-term expenditure framework. PRORURAL, DR-CAFTA and other trade agreements (possibly with China and Taiwan) will mean a greater workload for all these agencies and a greater need for programming, monitoring, sub-contracting, coordination and follow up at the central and territorial (local) levels. To overcome these challenges some key areas need to be strengthened: (i)a clarification of each agency’s responsibilities under Law 290 and a commitment from the agencies to apply and respect the law; and (ii)the inclusion of permanent and qualified agency professionals in the national budget payroll system to reduce dependency on external resources. - 19-

The institutional strengthening of MAGFOR is crucial for the design of policies and programs and to the evaluation of the PRORURAL interventions. This involves (i)including staff in the national payroll system so as to reduce incentives for MAGFOR to finance its salary gap by executing projects; (ii)strengthening its capacity to formulate rural productive development policies and establishing a monitoring and impact evaluation system, including an integrated financial reporting system; (iii)continuing to support INTA’s micro-watershed management approach and use of grants to complement the state’s technology innovation agenda with private service providers; and (iv) establishing clear functions and facilitating dialogue with the private sector in view of regional integration and trade agreements. Roles of INTA and FUNICA. One of ATP-1’s main achievements was establishing a pluralistic agricultural innovation system with public and private service providers. INTA is the main public institution focusing on the “public good” nature of agricultural services. FUNICA provides a forum for the private sector to influence public policy and it responds to the demands of poor and marginal producers. According to a recent evaluation (MAGFOR, 2005), INTA remains the key public institution for leading change. FUNICA is a non-profit organization created in November 2000 comprised of private- public institutions, NGOs, universities, farmer’s organizations and other associations. FUNICA’s greatest strength is that it provides a space for the concerted participation of stakeholders in the technological development of the agriculture and forestry sectors in Nicaragua. Under ATP-11, FUNICA will target farmers in areas where INTA is slowly pulling out as part of its restructuring strategy (to a micro-watershed approach). FUNICA will eventually focus on licensing and training service providers. The FAT will continue to be administered by FUNICA as this is part of the loan agreement with IFAD. INTA and FUNICA can perform an important complementary role in agricultural innovation and require strengthening to respond to an agricultural research agenda based on the priorities established by the National Development Plan 2005-2009 with a medium to long-term vision.

3. Fiduciary

Financial management. The Bank has assessed the suitability of using Government’s public financial management systems and procedures, to the extent possible, as the basis of ATP-I1 implementation. Additional safeguards have been incorporated into project design, and an action plan has been agreed. The details can be found in Annex 7. Procurement. The Bank has assessed the capacity of the implementing agencies to carry out procurement. The main recommendation of the assessment is that MAGFOR should replace the procurement specialist who left at the end of ATP-I with another specialist or resource person who could assist the agencies with the few bidding packages still to be prepared and implemented. The procurement risk is MEDIUM. - 20 -

4. Social

Since the project will be executed in the entire national territory (including the Atlantic Region where most of the indigenous population resides) the Government has carried out two social assessments (SA) and prepared an Indigenous Peoples Development Plan (IPDP). The purpose of the PDP is not to mitigate possible negative impacts since it is expected that the project will have positive social impacts by bringing appropriate technology to help increase productivity and by reaching out to isolated communities. The SA consultations were held with key stakeholders such as indigenous regional organizations and community liaison organizations. Government’s Indigenous Peoples Development Plan (IPDP) addresses indigenous peoples’ specific needs. The SAs show significant cultural differences between socio-economic groups and ethnic farmers across the country. Of the nine indigenous groups (9 percent of the population), five live in the Atlantic Region and four in the Pacific and central regions and in the north. The Atlantic Region, formed by the North Atlantic Autonomous Region (RAAN), the South Atlantic Autonomous Region (RAAS) and the Departments of the San Juan River, is the most cultural and ethnically diverse territory, wherein the Miskito, Sumo-Mayanga and Rama are the prevalent ethnic groups. About 70 percent of Miskitos are poor, compared to 43 percent of the rest of the population. The SAs suggest that INTA should adjust its technical assistance and technology transfer to the cultural and social structure and needs of the indigenous communities. Some of the recommendations of the consultations suggest that indigenous peoples need more strategic and targeted interventions. Measures to increase access by indigenous people. Include: (i)strengthening INTA regional offices by (a) contracting more agricultural technicians and extension agents locally and (b) training and strengthening community organizations to make technical assistance accessible to more people; (ii)building storage facilities to facilitate access to certified seed; (iii)ensuring sound market information systems; (iv) introducing silvo- pastoral techniques to reduce intensive use of livestock; (vi) providing financial support to increase impact of “reference farms,” particularly on the Atlantic Coast; (vi) adjusting the technical assistance strategy to take into account a typology of beneficiaries; (vii) training and disseminating information in indigenous languages; and (viii) increasing emphasis on research, development and dissemination of improved sustainable indigenous technologies, Gender issues. INTA recognizes that women are producers too and need agricultural technology adapted to their specific constraints. INTA’ s Gender Unit oversees the application of the gender approach in all extension processes, building on work from PROGENIAL, the World Bank’s Program for Gender and Institutional Innovation in Latin America, which defines a series of indicators to measure progress on gender. ATP-I1 incorporates and updates INTA’s gender policy and strategy, which will be implemented across all agencies (INTA, INAFOR, FUNICA) and enhance women’s social capital. Women will be involved in decision-making about production activities, management of natural resources and in food, fruit and dairy processing and other market-related activities. - 21 -

5. Environment

The first project component isjudged to have limited environmental impact potential but raises some minor concerns about environmental risks. The institutional strengthening component will have a positive impact on the environment through the improvement of Government regulatory and monitoring capacity. Good practices for environmental and natural resources management will be applied throughout project implementation. Environmentally hazardous technologies are excluded from the project. INTA designed and adopted an Integrated Crop Management Plan (MIC) (INTA, 2005a) developed under ATP-I. The MIC was recently evaluated and updated in an INTA workshop with the participation of technical and managerial staff from the decentralized offices and research centers (INTA, 2005b). The MIC includes a list of forbidden agrochemicals. The MIC is consistent with Bank Integrated Pest Management Policies, will avoid the promotion of environmentally hazardous agrochemicals and will promote the adoption of sustainable agricultural techniques for pest control. INTA's services are now organized by watershed, an advantage in promoting environmentally sustainable agricultural technologies. FAT sub-projects will be screened for environmental impact and have financing for environmental mitigation measures where necessary. In addition, the FUNICA monitoring system intends to capture the cumulative environmental effects of sub- projects in the same ecological area. FUNICA will recruit a part-time environmental specialist to review and update the existing screening mechanism and introduce environmental monitoring into the FUNICA monitoring system. INAFOR will carry out a forest inventory to assess current forest reserves and monitor environmental impact of forestry activities. It will help to promote community reforestation and the institutional strengthening component will have a positive environmental impact on the management of forest activities.

6. Safeguard policies

Safeguard Policies Triggered bv the Proiect Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [XI [I Cultural Property (OPN 11.03, being revised as OP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI [I Forests (OPBP 4.36) [XI [I Safety of Dams (OPBP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60)* 11 [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI

* By supporting theproposedproject, the Bank does not intend to prejudice the final determination of theparties' claims on the disputed areas - 22 -

The project is classified as Category B. In accordance with OP 4.01, an Environmental Analysis (EA) was carried out to determine potential environmental impacts and develop appropriate mitigation measures. All FAT projects will be subject to environmental and social screening before financing. Findings and recommendations from the EA are integrated into project design (see Annex lo). The project triggers OP 4.09, Pest Management, and will develop and transfer new technologies that may increase the use of agrochemicals. ATP-I measures to reduce health and environmental risks from agrochemicals were updated for ATP-11. ATP-1’s ICMP has also been updated. As per OP 4.09, this plan recommends focusing on cultural practices and biological and integrated pest and disease controls. The ICMP lays out guidance for training in safe pesticide use, handling and disposal. The project triggers OP 4.36 (Forests), as it supports community forestry activities through the development of innovative new technologies. The project will not finance commercial logging operations, only community forestry activities permitted within the buffer zones of the protected areas. Community forestry groups will receive TA and training in PA management plans and new sustainable forestry techniques. Sub-projects will comply with OP 4.36. The project has been designed with the provisions of the World Bank policy related to Indigenous Peoples (OP 4.20 being revised as OP 4.10). All safeguard documents are public information and are posted on the MAGFOR and INTA websites as well as being available at the project office (see Annex 10).

7. Policy Exceptions and Readiness

No policy and readiness exceptions are foreseen, - 23 -

Annex 1: Country and Sector or Program Background NICARAGUA: Second Agricultural Technology Project

1. Key Features of the Rural Economy. Located in the middle of Central America, Nicaragua’s economy was, until the 1970’s, one of the fastest-growing in the sub- continent. But in the last 35 years Nicaragua has fallen victim to civil war, natural disasters, economic mismanagement, large-scale corruption and political instability. This combination of events has taken a heavy toll on society and today Nicaragua is the second poorest country on the continent, with a per capita Gross Domestic Product (GDP) of US$813 in 2004. Nicaragua has made good progress in poverty reduction as assessed by the nationwide Living Standards Measurement Surveys (LSMS) carried out in 1993, 1998, 1999 and 2001. The share of the total population living in poverty fell from 50 percent in 1993 to 46 percent in 2001, while the proportion of those living in extreme poverty declined from 19 to 15 percent over the same period. The incidence of poverty was more than twice as high in rural areas (64 percent) as in urban areas (29 percent). Despite a consistent decline in poverty ratios, however, the absolute number of people in poverty increased - although there were notably fewer people in extreme poverty. The country has one of the most agriculture-dependent economies in Latin America, with agriculture alone accounting for about 20 percent of GDP and providing 40 percent of total employment. Many indicators reveal a high degree of income and asset inequality - urban-rural and rural-rural, as reflected by a Gini-coefficient index of 60.3 (1998) - and an inequitable distribution of agricultural land and other income- generating assets. The share of total public expenditure allocated to increasing productivity in rural areas has been declining and is not commensurate with the challenges of combating pervasive rural poverty: it was about 20 percent in 1999 and about 12 percent in 2004 (about US$50 million, and about 1.2 percent of GDP in 2003). Recent studies and assessments generally recognize that the overall developmental impact of the Government’s current support to the agriculture and rural productive sector is minimal, mainly due to inefficient allocation and management of public expenditures. 2. Government Poverty Reduction Strategies! The Government is completing its final consultations on a draft of a second-generation Poverty Reduction Strategy Paper (PRSP), the country’s National Development Plan 2005-2009 (Plan Nacional de Desarrollo 2005-2009, henceforth PND 05-09 or PRSP II),which will be presented to the International Monetary Fund (IMF) and the International Development Association (IDA) later this year. The draft PND 05-09 reflects a rethinking of the country’s development path that started with the Proposal for a National Development Plan (PPND) in 2003 and was further elaborated in the Operational National Development Plan (PNDO) in 2004. The draft PND 05-09, presented to the international cooperation community in late April 2005, places greater emphasis on economic growth for poverty reduction than the first PRSP. It includes policies and reforms to support the private sector and increased spending on economic infrastructure. For human capital development, the draft PND 05-09 aims to improve the balance between central government interventions and local-level responsibilities, in order to accelerate progress

This section draws on IDA-IFC Interim Strategy Note For The Republic of Nicaragua, Report No. 32570-NI (2005). - 24 -

in social indicators while maintaining fiscal discipline. The draft PND 05-09 targets five key overarching objectives, supported by four strategic areas. One of those areas refers to economic growth for poverty reduction (Area I).Within that area, the emphasis is on improving the investment climate by, among others, increasing the use of technology for agricultural production and promoting environmentally sustainable growth. 3. Government Administrative Responsibilities for Agricultural and Rural Development. The agricultural and rural public sector (SPAR for its acronym in Spanish) is comprised of four agencies: the Ministry of Agriculture, Livestock and Forestry (MAGFOR), the National Institute for Agricultural Technology (INTA), the National Forestry Institute (INAFOR) and the semi-autonomous Rural Development Institute (IDR). There is also a Ministry of the Environment and Natural Resources (MARENA), which has responsibility for environmental oversight and regulation, as well as for natural resource management, particularly of the country’s extensive protected areas. Law 290, promulgated in 1998, defines the roles and responsibilities of the agricultural public sector institutions. This makes MAGFOR the lead agency for formulating policies and strategies for agricultural and forestry development. INTA is responsible for the generation and transfer of state agricultural technology based on MAGFOR’s policy guidelines. INAFOR has the main responsibility for generating statistical information about the forestry sector and administering and maintaining the National Forest Registry and Inventory of all forest resources. IDR is in charge of executing strategies, programs, and projects in sustainable rural development, with an emphasis on productive rural investments. It answers directly to the Executive under the general policy guidance of MAGFOR. Institution’s Budgets (Planned and Executed) (in Millions of Cordobas)

lr)Execution between January and September 2005 Source: MAGFOR September 2005 4. Sector-wide Productive Rural Development Program (PRORURAL). On the basis of the National Development Plan 2005-2009, the four institutions that comprise the agricultural and rural public sector have prepared a sector-wide Productive Rural Development Program known as PRORURAL. This program, along with a Medium- Term Expenditure Framework (MTEF), supports improved coordination and complements international cooperation assistance in sustainable agriculture and forestry for the period 2005-2009. Civil society and the private sector were consulted about PRORURAL and the MTEF within a sector roundtable, the Sub-Mesa de Desarrollo Rural Productivo y Agroforestal. 5. PRORURAL outlines policy instruments that aim to reduce poverty, based on an asset- based typology of rural and urban households. It includes the creation of institutional conditions and practical support for developing a set of “competitive clusters’’ that are - 25 -

based on area comparative advantage for specific sub-sectors or enterprises. The ultimate goals of the competitive cluster strategy are to create sustainable economic growth, build wealth, improve quality of life, and provide employment opportunities for all. These goals are extremely important for a country such as Nicaragua, where poverty, particularly in rural areas, is widespread and deep, and extreme inequality is stark. Research has shown, however, that unless the assets of poor households are strengthened, they may not benefit from cluster-based ~trategies.~The major thrust of the macro-based rural development strategy is to accelerate the transformation of the rural sector so that it becomes more competitive through both a diversification and export-oriented strategy and supporting investment programs (both public and private sectors). A confidence- boosting development was the August 2004 negotiation and signature with the United States, the Dominican Republic and other Central American economies of an agreement to form a free trade area (DR-CAFTA). The Nicaragua General Assembly ratified DR- CAFTA on 11 October 2005. The agreement will enter into effect in January 2006. DR- CAFTA provides an important context for this strategic focus. At the end of PRORURAL, it is expected that increased rural productivity, food security and sustainable natural resource management will have contributed to the increased livelihood of about 400,000 rural households. 6. PRORURAL Components. The main components of PRORURAL are: (1) Technical Innovation; (2) Food Safety and Animal Health; (3) Sustainable Forest Development; (4) Financial Support Services; (5) Infrastructure; (6) Institutional Modernization and Strengthening; and (7) Forest and Agricultural Policy and Strategy. The estimated cost of PRORURAL is US$411.5 million for the period 2005-09 (US$83million/year), of which about 50 percent is financed with fiscal and external sources (grants and loans). PRORURAL Financing (in US$ million) PRORURAL Medium Term Expenditure Framework and Financing by Component 2005-2009

IADB Funds are to be distributed US $15 million to IDR and US $10.0 million to the other institutions of the SPAR 7. The Project makes a significant contribution to component (1) of PRORURAL and to a lesser extent to components (3), (6) and (7). The governments of Finland, Sweden and Switzerland intend to contribute US$31.7 million to a common fund. The Government is seeking additional support from other donors and from technical assistance and finance institutions. There is a gap of US$217.9 million between the proposed US$411.5 million budget and the existing funding of PRORURAL.

World Bank. Report No. 31193-Nl. Drivers of Sustainable Rural Growth And Poverty Reduction In Central America. Nicaragua Case Study. - 26 -

8. The main and current sources of external financing for the sector are the European Union, the Inter-American Development Bank, the World Food Program, the World Bank and the government of Japan. These five sources account for approximately 90 percent of investment finance. There are currently 42 projects being implemented and the financing is distributed as follows: 38 percent of funding goes to IDR, 24 percent to MAGFOR, 24 percent to the General Directorate for Agricultural and Animal Health and Protection (DGPSA), 12 percent to INTA and 2 percent to INAFOR. The Government is currently reviewing its portfolio, including those projects that have more than a year to run. It will review their objectives, components and corresponding implementation arrangements to ensure that they are compatible with PRORURAL’S objectives, components and indicators. The Government has also requested that the international community harmonize and align external resources under PRORURAL. Since 2003, the World Bank, the International Fund for Agricultural Development (FAD), the governments of Finland and Switzerland, and RUTA have been assisting the Government, civil society, private sector, and international cooperation agencies in their efforts to advance rural productive development in a more integrated, transparent and efficient fashion. 9. The financing of PRORURAL will encompass several fiduciary arrangements, and these will be spelled out in a Memorandum of Understanding to be signed by the Government and Development Partners later this year. These modalities include budget support, common funds, projects and delegated cooperation. The World Bank is supporting PRORURAL through a project. Before entering into a sector-wide program, the Bank determined that the Government needs to upgrade the quality of its fiduciary mechanisms in financial management and procurement, as well as its environmental and social safeguards. Hence the Bank decided that it would be more appropriate to support the long-term PRORURAL program by: (i)financing some specific elements of PRORURAL (already supported under ATP-I), while (ii)strengthening the Government institutionally to help it both to comply with fiduciary and safeguard aspects as well as to develop a PRORURAL monitoring and evaluation system (see Annexes 4 and 7). 10. The fulfillment of the medium-term expenditure framework requires significant efforts in the areas of planning, pre-investment, project formulation and management, and monitoring and evaluation. The plan will require stronger national financial management and information systems within the sector. Special attention will be given to strengthening the National Public Investment System (SNIP), the Integrated Financial Management and Audit System (SIGFA) and the evaluation of programs and projects at the sector level. Government is currently preparing terms of reference for a monitoring, evaluation and learning system (SISEVA) that will address the specific needs of PRORURAL and that will be part of the institutional strengthening component of ATP- 11. In addition, Government is developing specific target indicators to ensure consistency with the Millennium Development Goals and to implement the program in a harmonized fashion among national, sector, and cooperation agencies. 11. At the national level, the Ministry of Finance (MHCP) has made substantial advances in standardizing the public expenditure accounting system which links most government agencies. There are on-going efforts to consolidate and expand a comprehensive public sector information and expenditure system as part of improving the management and impacts of public expenditures, The Ministry of Foreign Affairs (MINREX) is leading a - 27 -

harmonization, appropriation and alignment (HA&A) initiative, based on a major law approved in 2003 which established a system of sector-based Cabinets and which aims to coordinate inter-institutional and donor cooperation. The emerging Government/ international cooperation harmonization system is based on a “Global Roundtable” (Mesa Global) to coordinate national level strategies and issues, with high-level Government and cooperation agencies’ representatives, and a number of sectoral/thematic “roundtables” (mesas). The main objective is to provide an instrument to help ensure effective policy and aid management and coordination, especially given the dominant role played by international cooperation agencies in financing Government expenditure. The Ministry of Development, Industry and Commerce (MIFIC) presides over a Productivity and Competitiveness Roundtable (Mesa de Competitividad) which coordinates various first-tier roundtables, including a Sub-mesa Agroforestal, presided over by the Ministry of Agriculture and Forestry (MAGFOR). 12. At the sector level, MAGFOR’s strategy under PRORURAL aims to “. . .generate wealth and increase the incomes and well-being of the rural population, in a sustainable manner, and based on the security, legality, and association of farmer groups, competitiveness, increased value-added, labor-intensive, local development, and conservation of the environment and natural resources” (MAGFOR, 2004). In line with the National Development Plan 2005-2009, it gives special emphasis to differential asset-based household strategies and programs, and to stimulating agricultural exports. Several producer organizations representing small, medium and large-scale farmers and some NGOs have expressed concern and some opposition to both the export-oriented thrust of the rural development strategy and the consultation process. In response, in early 2005, the Government established the National Advisory Council for (agricultural) Production (CONAGRO) to create a space for constructive dialogue and collaboration. 13, Relations with international cooperation agencies. Several coordination efforts are underway in Nicaragua, including: (i)government-led sector-coordinating boards in several sectors, (ii)cooperation agencies efforts to agree on sector-wide approaches in education, health, agriculture, and public sector management, and (iii)a Joint Financing Agreement (JFA), along with a common Performance Assessment Matrix (PAM), among all cooperation agencies providing budget support. The Bank has signed the JFA and has committed to prepare the Poverty Reduction Support Credit I1(PRSC 11) on the basis of the common PAM. It has also committed to harmonize the monitoring and evaluation processes of its programmatic budget support operations with the corresponding PAM monitoring (Interim Strategy Note, 2005). As part of the Monterrey Consensus (2002) and as set out in the Rome Declaration (2003) and the recent Paris Declaration (2005), the international development community has made a commitment to deliver and manage aid more effectively so as to increase development impact. An ambitious program of action was developed, led by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD). Nicaragua is a pilot for the OECDDAC donor harmonization initiatives. The Bank is supporting these efforts, especially in the areas of public financial management, establishment of sector- wide approaches, information sharing, joint missions, joint diagnostic studies, harmonized consultants’ remuneration policy, reduction of project implementation units and joint budgetary support. - 28 -

14. There are approximately 17 international cooperation agencies supporting PRORURAL6. The Government recently signed a Code of Conduct with several cooperating agencies (Japan, Switzerland, Sweden, Denmark, Finland, IICA, FAO, World Bank, IADB). The Code guides the relationship between the Government and Development Partners in the process of harmonization and alignment. A Memorandum of Understanding will be signed at a later date specifying fiduciary and financial mechanisms to regulate PRORURAL. Some other examples of that cooperation include: (i)a common fund by the governments of Finland, Sweden and Switzerland; (ii)active participation of agencies in developing the PRORURAL and MTEF proposals; (iii)the current ATP-I1 co- financing between the World Bank and IFAD; (iv) frequent and regular communications and sharing of operational information and reports; and (v) joint Government- cooperation agencies missions in October, 2004, February, 2005 and September, 2005. 15. PRORURAL was officially launched on 22"d September 2005. At that time the Government invited the international cooperation community to sign a Code of Conduct7 that had been developed through broad consultation with the agencies. The Code of Conduct is an ethical document that guides the relationship between the Government and international cooperation agencies in the process of harmonization and alignment. It does not constitute a legally binding document. Several cooperation agencies have signed the Code of Conduct, including the World Bank, as a demonstration of commitment and support to the Government initiatives.* It is expected that a Memorandum of Understanding will be signed at a later date between the Government and the cooperation agencies that will be supporting PRORURAL. This document will establish fiduciary arrangements and it will be signed mainly by those agencies that commit to the financial and fiduciary procedures proposed by the Government.

The donor working group for Rural Development includes the following agencies: European Commission, Inter-American Development bank (IDB), Japan International Cooperation Agency (JICA), Government of Japan, Inter-American Institute for Cooperation in Agriculture (IICA), German Technical Cooperation (GTZ), World Bank (WB), Food and Agriculture Organization (FAO), Austrian Cooperation for Development, Swiss Cooperation for Development (SCD), Swedish International Development Agency (SIDA), Danish Agency for Development Assistance (DANIDA), UK Department for International Development (DFID), Finland Department for International Development Cooperation, United States Agency for International development (USAID), Spanish Agency for International Cooperation (AECI), and the International Fund for Agricultural Development (IFAD). Codigo de Conducta que Defne las Relaciones entre el Gobierno de Nicaragua, por medio del Ministerio Agropecuario y Forestal, Instituciones Adscritas, el Instituto de Desarrollo Rural y 10s Socios para el Desarrollo Rural Productivo. Signatories to the Code of Conduct: Governments of Japan, Switzerland, Sweden, Denmark, Finland. IICA, FAO, IDB and the World Bank. Other development agencies have indicated their willingness to sign the Code in the near future. - 29 -

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies NICARAGUA: Second Agricultural Technology Project The Bank portfolio in Nicaragua contains eight recent and ongoing projectskredits with development objectives directly supporting PRORURAL and sustainable agriculture and forestry. 1. Agricultural Technology Project (ATP I) (ID: P064915). The DO is to establish an efficient and demand-driven system of agricultural technology promotion. The Government institutions involved are MAGFOR, INTA, FUNICA and INATEC. This project was rated Satisfactory and closed on June 30,2005. 2. Second Rural Municipality Development Project (ID: P055823). The DO is to improve the performance of rural municipalities in sustainable local development. The executing agencies are MHCP, INIFOM, MARENA and CGR. This project is rated Satisfactory and will close on June 30,2006. 3. Land Administration (ID: P056018). The DO is to improve the security of land tenure, boost agricultural investment, promote the sustainable use of natural resources and increase municipal revenue collection. The responsible Government institution is MHCP. The project is rated Satisfactory and will close on December 31, 2007. 4. Sustainable Forestry Investment Project (ID: P052080). The DO was to improve local capacity while developing alternative forestry approaches. The executing agencies were MAGFOR and INAFOR. This project was rated Satisfactory and closed on December 30,2004. 5. NI Competitiveness LIL (ID: P070016). The DO is to foster private-public consensus on business environment issues, to pilot IT-based business development services, and to increase public participation in policy reforms. The executing agency is MIFIC. This project was rated Satisfactory and closed on June 30,2005. 6. Atlantic Biological Corridor Project (ID: P041790). The DO is to promote the integrity of a biological corridor along the Atlantic slope of Nicaragua through the sustainable use of biological resources. MARENA is the responsible institution. The project is rated Satisfactory and will close on September 30,2005. 7. Natural Disaster Vulnerability Reduction (ID: P064916). The DO was to improve Nicaragua’s local and national disaster management capacity. The institution responsible is the Executive Secretariat for Disaster Prevention. The project is rated Satisfactory and closed on March 3 1,2005. 8. Nicaragua Poverty Reduction Strategy Credit I (ID: P082885). The DO is focused on the priority subject areas contained in the four pillars of the PRSP. The Government institution responsible for this credit is MHCP. Complementary projects in the sector financed by other international agencies include: FAD’s PRODESEC that focuses on small rural production, employment and rural financial services; Denmark’s PASA-DANIDA project that focuses on agricultural production; Finland’s project PROAMBIENTE for environmental protection and resource management; the IDB-financed project “Improvement of Plant, Animal and Forest Health Services”; and several integrated rural development projects financed by the European Commission. - 30 -

Annex 3: Results Framework and Monitoring NICARAGUA: Second Agricultural Technology Project Results Framework Outcome Indicators Use of Outcome PDO [nformation To provide rural 1. At least 80% of the project I‘o ensure that households and stakeholders (farmers, NGOs, service :omplementary activities :omunities with providers and sector-related businesses) .ncluded in project design broader access to express satisfaction with the research ire functioning as sustainable and agricultural services received. :xpected. Identify any sgricultural, forestry nissing elements that and natural resource 2. Productivity indices of participating might have a tangible management services farmers have increased on average by at :negative) impact and take md innovations, least 15%. iecessary corrective thereby stimulating ictions. higher productivity. 3. At least 50% of the 50,400 farmers participating in agricultural and forestry By the end of Y2: conduct extension services have adopted at least MTR and make the two new production andor processing necessary adjustments to technologies. xsure achievement of PDO.

Intermediate Results Results Indicators for Each Use of Results One per Component Component Monitoring Component One: Component One: Component One: Technology At least 50,400 rural producers Based on the innovation and receive technical assistance, of which assessment, adjust dissemination are at least 35,000 are involved through priorities, financing accelerated and INTA, 15,200 through FAT and 200 and/or service provision consistent with through INAFOR. as appropriate to ensure PRORURAL’S that targets are met. strategic choices. INTA’s innovation technology portfolio is increased by 42 validated To benchmark project technologies supporting export supervision to annual commodities, food safety and food targets. security, and environmental sustainability . To ensure that incremental benefits are Annual foundation and registered aligned with financial seed production of food grains flows of grant schemes. exceeds 230 metric tons, while vegetable, pasture and tuber seed production covers more than 230 ha.

At least 2,500 producers are trained in food processing, and/or business - 31 -

administration and marketing. [NTA has certified at least seven service providers according to accepted standards and INTA has Zstablished an operational system of accreditation.

30% of the producer organizations that participate in TA activities through FAT have access to finance and are linked to product markets. 20% of INTA’s indigenous people clients are women.

National forest inventory and valuation exercise completed and information made available for planning and management of forestry sector.

Component Two: Component Two: Component Two: Agricultural sector On average, at least 80% of the By end of Y2: Assess institutions (ASIs) Government institutions involved the feasibility of involved in and participating donors rate expanding the M&E PRORURAL are PRORURAL’S implementation and system to cover strengthened and monitoring arrangements as additional institutions modernized. satisfactory. and regional organizations. The Planning, Monitoring and Evaluation unit of MAGFOR is fully By end of Y2: All operational and producing regular implementing agencies reports. using the M&E system to report project The technicahon-technical staff progress. ratio of MAGFOR, INTA, INAFOR and FUNICA has increased. Assess progress achieved in the capacity 10 additional forest management to implement plans are approved. PRORURAL under a multi-donor framework. The Government budget integrates 75 percent of MAGFOR, INAFOR and INTA’s salaries and operating costs (partially financed under the project). n 2 ri i

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Annex 4: Detailed Project Description NICARAGUA: Second Agricultural Technology Project

1. The Project Development Objective (PDO) is to provide rural households and communities with broader access to sustainable agricultural, forestry and natural resource management services and innovations, thereby stimulating higher agricultural productivity. The objective of the project is aligned with PRORURAL’S objectives of promoting the development of and improving access to agricultural technology as a key factor in agricultural development. To achieve the above objectives, the Project will: (i)enhance agricultural and forestry technology innovation and adoption; and (ii) strengthen and modernize the institutions involved in PRORURAL. 2. Component I:Innovation and Adoption of Agricultural and Forestry Technology (Total Project Cost: US$25.OM or 86.4 percent of total project cost. IDA Contribution: US$9.0M).1° The main objective of this component is to accelerate relevant technology generation and transfer, with an increased focus on marketing, competitiveness, sustainability, and natural resource management. Activities under this component aim to continue the activities of INTA, INAFOR and FUNICA which began under ATP-I, including: (i)research and development, (ii)technology extension, (iii)the production of foundation and registered seeds, (iv) market development and post-harvest technical assistance; (v) training and dissemination; (vi) rehabilitation of a forest seeds bank, transfer of reforestation technology and a forest inventory implemented by INAFOR; and (vii) administration of competitive funds for technical assistance (FAT) implemented by FUNICA. 3. Sub-component 1-1: Research and Development (R&D) - (US$3.0M). Under ATP-I, INTA described and validated 134 new technologies. These newly validated technologies have social benefits for productivity, employment generation and gender. INTA has given priority to research on basic grains, soil and water management, integrated pest management, and various crops. Under the proposed project, INTA will develop 42 additional technologies, enhance the quality of the existing technologies and improve their relevance. Research trials and technology validation in producers’ plots will continue to be the rule. Collaborative research with international centers and networks, as well as with universities and private firms, will be further increased. INTA will focus on products and techniques with a competitive edge in domestic and export markets within the framework of CAFTA, as well as on important crops for food security. 4. INTA’s researchers will continue to generate tangible outputs in products that are important for food security and desirable because of their high nutritional value, including quality protein maize, sweet potatoes, manioc, and the processing of fruits and dairy products. Environmentally focused technologies will continue to enjoy a high priority in the areas of integrated crop management, soil and water management, agro- forestry and simple technologies related to animal feed and fodder. INTA will increase its focus on forest research and organic crop management technologies in response to

loIncludes price contingencies. - 37 -

recent evaluations. The sub-component will fund R&D activities, including partnerships with international networks, CGIAR Centers and private sector stakeholders, as well as a systematic scientific upgrading of both research staff and biotechnology labs. Partners include local and foreign universities as well as farmer Apex organizations. The sub- component will finance INTA works, goods, consulting services, training, salaries of technical staff, and operating costs. 5. Sub-component 1-2. Extension (US$9.9M). The ATP-I helped INTA to clarify its approach to different extension methods and to be more responsive to farmers' and market needs. A strategic component of ATP-I was to broaden the base of extension service providers by contracting out to private TA providers. This approach entails co- financing with small farmers the cost of the service when it targets private goods. At the same time INTA provides free TA extension services to those farmers whose productive activities are considered public goods, such as food security and the improvement and protection of natural resources. INTA provides public and private extension services to 35,000 farmers. The sub-component will finance grants, operating costs and consultants to provide technical assistance to farmers. 6. Public technical assistance. This mechanism targets poor families and farmers located in areas that are marginal due to climatic conditions (low rainfall) and scarce or poor natural resources (soil, water, forest). Their income is not sufficient to cover basic food needs and they are at a high risk of experiencing natural disasters. They have very limited access to assets, services (electricity, education, drinking wate;, health, financing) and markets. It is based on group TA and the farmer: extension agent ratio is 200: 1. Public TA under the proposed project will cover 21 micro-watersheds nationwide and will be provided free to the poorest farmers by 140 extension agents in 20 extension offices. In addition, this mechanism will target the MAN. The main focus will be to reduce the advance of the agricultural frontier and manage the buffer zones of the Bosawas Reserve. The three offices in the RAAN will each focus on different indigenous groups, namely in Waspan, Siuna and Rosita (Miskitos and Mayagnas)." An additional office will be located in the Cruz del Rio Grande where operations will begin in 2006 targeting 3200 producers. INTA will also target 20 percent of its technical assistance to indigenous women producers.12 7. INTA will establish strategic alliances with other public and private agencies in the area to promote inter-institutional coordination, up-to-date technical knowledge, technology transfer and improved TA. The project will establish inter-institutional links with the Central American Commission of the Environment and Development (CCAD) - the implementing agency of the GEF Corazon project - and the Technical Secretariat of Bosawas (SETAB), its coordination unit in Nicaragua. 8. INTA's agricultural technical assistance strategy for indigenous communities in the Pacific Coast of Nicaragua (2005-2009) include ensuring the participation of indigenous people in the management of activities that reduce pressure on the forests of the Atlantic

l1See Annex 10 for safeguard issues regarding indigenous peoples. l2INTA (2005). Estrategia de Asistencia Tecnica Agropecuaria a Comunidades Indigenas del INTA Ubicadas en la Costa Caribe de Nicaragua. Period0 2005-2009. - 38 -

through the stabilization of agricultural activities on the agricultural frontier, and the promotion of sustainable management of renewable natural resources, while respecting dignity, human rights and cultural identity. The strategy proposes the creation of two research centers before the end of 2008, one in Siuna and the other in Waspan, to serve as local training centers. Also before the end of 2008, the goal is to update and automate the geographic and ecological information from the zone, and translate into indigenous languages 10 technical guides about subjects such as Integrated Crops Management and agro-forest topics. 9. Private technical assistance. This mechanism focuses on small and medium farmers who carry out commercial agriculture. It targets favorable agro-ecological zones with greater productive potential, less risks and with good access roads to guarantee the timely delivery of inputs and farmer’s produce. Farmers are entrepreneurs who demand intensive technologies appropriate to their socio-economic and productive conditions. They can share the cost of the TA and have access to both conventional and unconventional credit. This service will be carried out by extension agents hired by private technical assistance companies, following a co-financing model where the producers cover 40 percent of the cost and INTA the remaining 60 percent. The firms are certified and supervised by INTA and they can also be contracted out by INTA. The technological approach used under this mechanism is that of intensification and diversification of production. Under the proposed project this extension modality will target meat and dairy, coffee, oleaginous products, vegetables and basic grains clusters as defined by PRORURAL in 20 municipalities. The approach provides incentives for a gradual transition to a market-based (pluralistic) system where private agricultural services provision will provide direct extension services while differentiating between producers. Under this gradual reform, INTA is expected to continue to withdraw from public technical assistance (mainly on the Pacific Coast and in the Central Region towards the new agricultural frontier area of the North-East) and be replaced by private providers under the private technical assistance scheme and eventually by competitive funds for technical assistance administered by FUNICA (see component 1-7 below). 10. Sub-component 1-3 - Seed production and certification (US$1.2M). Production of (certified) commercial seed is the responsibility of the private sector. The public sector has the mandate to produce foundation and registered seeds. These activities require high levels of investment and in Nicaragua, where the seed market is volatile, the risk is high. In the case of certified seeds most producers are supported by government or NGO programs and have guaranteed buyers. Thus, INTA’s legal obligation is to produce foundation and registered seed to be sold to commercial farmers to produce certified seed. If seed demand increases to a sustainable level the Government will pull out of registered and eventually foundation seed production. 11. This sub-component will address weaknesses observed in the seed unit, identified during the implementation of ATP-I. INTA was able to improve its capacity to supply enough foundation and registered seed for maize, beans, sorghum and rice under the nationwide quality seed promotion scheme “Libra por Libra”. The availability of seed in these categories was instrumental in increasing the number of national providers of commercially certified seeds. This sub-component will support INTA’s seed unit in addressing: (i)the preparation of internal norms to liberate only new varieties with - 39 -

clearly distinct traits over existing ones; (ii)the legal protection of outstanding breeding outputs according to the UPOV treaty, of which Nicaragua is a signatory; (iii)the improvement of the seed unit’s market intelligence to limit the production and supply of foundation and registered seed to real demand and to reflect full production costs so that expensive and rare seeds are not traded below cost; (iv) the progressive inception of producing selected vegetable seeds and other plant material; and (v) the annual foundation and registered seed production of food grains. The sub-component will fund works, goods, and salaries of technical staff and operating costs for INTA’s seed unit and for seed production and processing. 12. Sub-component 1-4 - Market development and post-harvest technical assistance (US$O.SM). This sub-component will address farmers’ needs in post-harvest handling and commercialization. INTA’s traditional array of available technologies was limited to production technologies, with only a few exceptions. Through ATP-I, INTA has been successful in increasing farmers’ market access. 13. The sub-component will finance consultants, salaries of technical staff and operating costs of the post-harvest and marketing unit established with the support of ATP-I in response to the weaknesses in agricultural marketing. The post-harvest and marketing unit will enhance its methodology for providing market intelligence and information. The unit will provide training for producer groups, with a special focus on women in the processing of agricultural products, establishing and managing small enterprises, and facilitating the linkage between sellers and buyers. The focus will also be on involving women in all cycles of agricultural production and enhancing food security by promoting appropriate technology so as to avoid harvest losses. The unit will continue to support the research stations and the seed unit with cost calculations and price settings for the seeds and services to be sold. 14. Sub-component 1-5 - Certification, training and dissemination (US$0.9M). This sub- component will finance training, salaries of technical staff and dissemination services of the training and dissemination unit of INTA, which has been quite successful in organizing and implementing training modules for its own and other organizations’ technical staff and service providers. It also has a good track record of selecting the right candidates for overseas training; the medium-term desertion rate under the first project was only slightly more than 10 percent, and women made up 40 percent of overseas trainees. Under ATP-I1 the unit will support institutional strengthening of indigenous organizations instrumental in developing indigenous technologies and forest seed collection as part of the Indigenous Peoples Development Plan (see Annex 10). The support to this unit will include building its capacity as a certifying body for private training and technical assistance providers. In the medium term, INTA aspires to become the national accreditation body for certifiers of such service providers. This intention is consistent with the paradigm shift of INTA toward a second-tier center of excellence in an open and competitive market for agricultural technology. 15. The unit is also responsible for communications and for coordinating INTA’s activities with other relevant institutions. INTA’ s communications efforts have been consistent in all types of media, producing high visibility, surpassing 90 percent recognition in rural areas. Under sub-component 1-5, about 50 percent of the budget is assigned to -40-

maintaining and enhancing the visibility and effectiveness of INTA with the target population and the public at large. 16. Sub-component 1-6 - Innovation and adoption of forestry technology (US$O.SM). This sub-component corresponds to PRORURAL’S target of involving 3,000 producers (including women and indigenous populations) in community agro-forestry by developing sustainable forestry technology. INAFOR is committed to increasing its resource mobilization capacity to capture other sources of financing for this sub- component as well. The main objective of the sub-component is to improve the development, conservation and preservation of forest resources in the country. INAFOR will provide training in forest and agro-forestry management to 200 agricultural and forest producers in the buffer zones of the Bosawas Reserve and the Pacific and Northern parts of the country. This sub-component will finance consulting services, equipment, training, services, salaries of technical staff, and operating costs for the first two years of INAFOR participation in this project. Some specific activities under this sub-component include: 17. Rehabilitation of the Center for Genetic Improvement and the Forest Seeds Bank. The project will finance the elaboration of a strategy for forest genetic improvement and marketing of seeds. The credit will finance two consultancies to advance the planning and formulation of a strategy to develop better genetics in the laboratory and in the field. Another consultancy will be assigned to the formulation of a marketing strategy for forest seeds and plants, with an emphasis on identifying national and international marketing channels. 18. Transfer of forest production technolonies. The project will finance training in: (i) production diversification through agro-forestry systems; (ii)exchange of experiences to facilitate the introduction of agro-forestry systems appropriate for the surrounding conditions; and (iii)sustainable forest management focusing on soil and water conservation. Specialists in the above themes will coordinate training sessions with outside experts, for which the Project will finance logistical and technical support. 19. National forest assessment. This activity will be co-financed by the IDA Credit (40 percent of the total cost) and other sources of funding to be identified. The assessment will apply a methodology developed by the United Nations Food and Agriculture Organization (FAO) that has already been validated in other Central American. The methodology is cost-efficient; it serves to collect forest data, trees of forest and environmental services, at the same time that it contributes to national capacity building. Main activities will also include (i)quantification of the forest mass per department and municipality; (ii)assessment of the volume of commercial wood; and (iii)training of technical staff in forest inventory techniques, arcview and arcinfo software and the use of Global Positioning Systems guaranteeing accuracy of field work. 20. Sub-component 1-7 - Administration of competitive funds for technical assistance (FAT) by FUNICA (US$8.9M). This sub-component is financed entirely by FAD. ATP-I and PROFOR were an important learning ground for a variety of grant facilities managed by FUNICA, including the Support Facility for Technical Assistance (FAT). The facility promotes the market development of technical assistance services and the emergence of new service providers for technical assistance under a grant scheme. This -41 -

grant is channeled through farmer groups that qualify for FAT, and who contract their own services directly instead of the project subsidizing selected service providers. 21. Under ATP-I, FAT began to work in 2001 in the dry areas of Leon and Chinandega. Evaluations indicate that the competitive fund provided direct TA to 7,847 producers organized in 254 groups, surpassing the original goal of 5,600 producers. FAT was later expanded to Las Segovias with a grant from the Danish government. FUNICA also established other competitive funds, such as the Agriculture and Forest Technical Research Fund (FAITAN) financed by Swiss Development Cooperation (SDC) and a technology market development fund. 22. Under the proposed project FAT will be strengthened by improving efficiency in resource use and allocation, stimulating innovative mechanisms for agricultural and forestry services, and providing incentives for sustainable agriculture and forestry management. Grants would fund proposals submitted by applicants under competitive procedures open to producers, producer groups, public research institutions, universities, the private sector, NGOs and other institutions active in agricultural research, extension and innovative forestry technology. The FAT will continue to operate in 12 municipalities of Leon and Chinandega and one municipality of Managua. It is expected that the FAT will be extended to other municipalities in Leon, Chinandega and Managua totaling 22 municipalities by 2009. 23. The new operation will attempt to address the following challenges so as to improve the implementation and impact of the FAT. It will adjust to the new sector-wide approach of PRORURAL, along with its objectives and indicators, and orient itself towards improving competitiveness, partnerships and market access for small and medium poor producers. The strategy will respond to the heterogeneity of producers, strengthening synergies and considering different types of users and territories, including expanding into new municipalities in the region. This expansion would be agreed upon by IFAD, the Government, the IDA and FUNICA. The organizational structure of the FAT will be improved so as to enhance implementation and capacity to verify appropriate performance of objectives and to simplify instruments and procedures to facilitate access to resources and management of funds by beneficiaries. 24. In this area FUNICA, along with IFAD and MAGFOR, will review and adjust their respective procedures so that they respond to the following principles: (i)public funds used under the framework of FAT will have the objective of reducing poverty, improving competitiveness in the agricultural and livestock sector, and improving conditions for private investment; and (ii)public funds will be used to create incentives for greater competitiveness in rural production, increase access to internal and external markets, facilitate access of small and medium rural producers to assets and services, coordinate among different actors in the value-added chain, and promote innovation in products and production processes. 25. FUNICA will be responsible for developing innovative instruments to promote businesses (such as competitive funds, good practices, rule compliance and conditions for market access, promotion of products in fairs, business practice strengthening) and to amplify and transfer these tools to other actors. - 42 -

26. MAGFOR will be responsible for monitoring and evaluating results, agreeing with FAD on an annual basis the indicators to measure results. An environmental audit will be carried out once a year, supervised by the monitoring and evaluation unit of MAGFOR. 27. FUNICA is in charge of environmental screening which is one criterion for the evaluation of proposals. FUNICA will recruit an environmental specialist to establish a screening mechanism, train technical assistance providers and introduce environmental monitoring into the FUNICA grant approval and monitoring system. These adjustments will be reflected in the new agreement established between the Ministry of Finance (MHCP), MAGFOR and FUNICA. 28. Component 11: Institutional Modernization and Strengthening (Total project cost: US$3.9M or 13.6 per cent of total project cost. IDA contribution US$3.0M).13 ATP-I1 responds to some of the institutional challenges mentioned in the technical and institutional analysis by improving the Government’s capacity to both formulate sector policies and strategies and carry out the administrative and financial coordination and procedures needed to implement the activities to be executed under the PRORURAL framework. The activities will focus on strengthening MAGFOR’s capacity to formulate strategies, plans, and programs, and to carry out administrative procedures, procurement, disbursements, and monitoring. INAFOR will be strengthened in terms of its technical, training, dissemination, planning, monitoring and evaluation capacities. INTA will be strengthened in terms of financial administration procedures, procurement, and accounting. This component will finance works, goods, office equipment, consulting services, services, salaries of technical staff, training, workshops and operating costs for the following sub-components: 29. Sub-component 11-1 - MAGFOR Institutional Strengthening (US$l.SM). MAGFOR will be the lead agency responsible for coordinating the implementation of PRORURAL. This sub-component will strengthen MAGFOR’s capacity to coordinate the activities of participating agricultural sector institutions, administer resources, monitor and evaluate project implementation, and develop and implement a communication for development strategy. MAGFOR will maintain appropriate links with other Government agencies (in particular the Secretary for Coordination and Strategies of the Presidency and the Ministry of Finance) and with existing important forums (such as CONAGRO and the Mesa Sectorial). The credit will finance MAGFOR to strengthen its functions in five key areas: (i)policy dialogue (formulation of forest and agricultural policies and strategies); (ii)planning, monitoring and impact evaluation; (iii)financial management and procurement; (iv) coordination with other agencies; and (v) information and communication. 30. Policy dialogue. The MAGFOR Policy Directorate played a lead role in the formulation of PRORURAL and the medium-term expenditure framework (MTEF). In order to strengthen and maintain its capacity to formulate and develop strategies and policies for the forest and agricultural sector, the Directorate will need trained human resources to coordinate interventions in the agricultural sector and liaise with the private sector and donors. The Directorate activities will be supported by an Agricultural Information System (SIA) that will be strengthened under the planning, monitoring and evaluation

~~

l3It includes price contingencies. -43 -

unit (see below). Under this sub-component, a strategic communication plan will be formulated and implemented. 3 1. Planning, monitoring and impact evaluation. These functions are the responsibility of MAGFOR’s Policy Directorate. This activity will support the strengthening of planning capacity both at the national and territorial levels by establishing and implementing a monitoring and evaluation (M&E) system. The establishment of the M&E system and its related tasks are among the operational activities that ATP-I1 will contribute within the framework of PRORURAL. The M&E system supports the harmonization of monitoring, evaluation and reporting of project implementation in the agricultural sector. It will be a functional system using the existing infrastructure of the executing agencies. It will also finance activities that aim to enhance territorial coordination among the participating institutions (MAGFOR, INTA, INAFOR, and FUNICA) with local governments under agreed Territorial Plans. MAGFOR will be responsible for administering the M&E system. MAGFOR will coordinate the monitoring of implementation progress and the contracting of independent evaluation studies of project impacts. 32. The credit will contribute to the cost of maintaining and improving the Agricultural Information System (SIA) developed under ATP-I. By the end of the second year of project implementation, MAGFOR will have established a compatible platform in all participating institutions and will expand the system to include regional offices of the participating institutions. The M&E system will serve as an important instrument to gauge progress towards achieving the project’s development objectives, to provide current and reliable information to decision-makers, and to support joint donors’ annual supervision of the PRORURAL. After the first year of project implementation, the Bank will support MAGFOR and the executing agencies in reviewing the need for an additional system if necessary. 33. Financial Management. MAGFOR’s Administrative Directorate is responsible for financial management and procurement. The Administrative Directorate has been successfully strengthened under ATP-I by centralizing the administrative functions previously executed independently by separate project implementation units. The Administrative Directorate will be furthered strengthened to handle the expected increase in the level of responsibilities that the unit will face under PRORURAL framework and to implement the new financial reporting system (see Annex 7). Following the mechanism established under ATP-I, project implementation units of other sector projects are likely to gradually phase out, leaving MAGFOR with an increased responsibility for managing external resources at the centralized Administrative Directorate. This entails training personnel, and defining standard procedures and operational manuals that will be both in line with the national legal framework and acceptable to donor agencies. This sub-component will help prepare operational manuals, maintaining and updating financial records, information systems, audits, and other administrative and financial operational activities. 34. Coordination with other agencies of the Agricultural and Rural Public Sector (SPAR). Effective coordination and policy dialogue are critical for implementing PRORURAL. This sub-component will improve and strengthen the mechanisms of dialogue and policy formulation created under the new sector-wide approach. Activities -44-

will focus on policy dialogue and formulation, communications, information flow and coordination mechanisms among the Productivity and Competitiveness Round Table (MIFIC), the Rural Productive sub-Roundtable (MAGFOR), CONAGRO, Government, donors, public and private sector and civil society, the MAN, and the South- and North- Central Pacific regions. The goals are to (i)organize, discuss, reach consensus and coordinate decision-making more efficiently regarding political strategies, programs and projects in the rural productive sector under PRORURAL at the national level (Consejos de la Produccion) and the regional level (Mesas paritarias); (ii)facilitate the debate on the technical cooperation, financing and public investment necessary for the sector through the sub-Roundtable on Rural Productive Development, as well as identifying sources of funding in a more proactive fashion among donors and; and (iii)follow up the agreed PRORURAL implementation objectives and timetable. This sub-component will provide technical assistance and training in policy dialogue, leadership and negotiation techniques. 35. Communication and dissemination. MAGFOR’S information and communication unit will develop a communication strategy to support PRORURAL. The strategy is based on the identification and implementation of activities in three different levels: (i) institutional - institutions will develop their own communications activities directed at interested groups under the coordination of PRORURAL’S communications specialist and an inter-institutional communications team with representatives from MAGFOR, INTA, INAFOR and FUNICA; (ii)inter-institutional - the information and communication unit and the communication specialist for PRORURAL will develop, with the communications team, communications products that give a corporate image and achieve receptivity from public opinion and the subsequent sustainability and credibility of the program vis-h-vis the national and international community; (iii)intra- governmental - communications activities will be coordinated with other Government instances, such as MIFIC, SECEP and PRORURAL activities and the economic development agenda of the country. This sub-component will provide a communications specialist for PRORURAL and contribute to implementing the strategy. The strategy will be financed by other external resources as well, possibly the Inter-American Development Bank. 36. In addition, this sub-component will focus on strengthening and consolidating the national system of agricultural statistics. MAGFOR coordinates the collection of data with the Central Bank of Nicaragua and the National Institute of Statistics and Census. The system is very important for the efficient performance of the planning, monitoring and evaluation unit. This activity involves two to four national surveys per year. 37. Sub-component 11-2 - INTA Institutional Strengthening (US$1.6M). This sub- component will finance equipment, software and training, and salaries of technical staff to strengthen the (i)procurement, finance and accounting unit; and (ii)the planning and monitoring and evaluation unit. The modernization of the Procurement, Finance and Accounting Unit will allow correct and timely processing through the automation of project financial and implementation reports and the consolidation of automated reports on procurement administration. To achieve these goals, it will be necessary to rely on proficient accounting, finance and procurement staff, an integrated system that generates - 45 -

the required project reports, and the preparation of financial monitoring reports according to the operating plan of the institution. 38. The Planning, Monitoring and Evaluation Unit has been and continues to be instrumental for the implementation of the INTA institutional reform agenda. The unit is also responsible for assuring that transversal themes such as gender equality are included in technology design and extension methodologies. Besides the routine tasks of preparing annual plans and reports, the unit will increase its ability to quickly consolidate a broad range of technology validation and adoption studies, and will be the principal actor in assuring that the output and outcome indicators related to INTA are compiled, processed and reported on a timely and transparent basis. 39. Sub-component 11-3 - INAFOR Institutional Strengthening (US$0.6M). INAFOR is responsible under Law 462 (Decree #73-2003) for overseeing the compliance of the forestry regime for the whole country. To do this will require the strengthening of its capacity to apply relevant laws and regulations which guarantee the sustainable use of national forests. The principal objective of the sub-component is to (i)strengthen INAFOR’s capacity to mobilize and disburse external resources; and (ii)promote activities related to the conservation and preservation of forest resources. 40. The sub-component will finance: (i)formal training for district and municipal delegates from INAFOR, focusing on improving public management capabilities; (ii)the preparation of operation manuals for external forest audits and the contracting of audit firms; (iii)improving the operative capacity for monitoring, regulating and controlling forest activities to reduce illegal activities, particularly in the buffer areas of protected areas (Bosawas, Indio Maiz, Cordillera Dipilto) and areas with major forest cover, such as the MAN, MAS, Nueva Segovia and Rio San Juan; (iv) draft and implement a communications strategy for sustainable forest development which supports the implementation of forest laws and policies; and (v) improve the administrative and financial capacity for the administration and execution of external funds, accompanied by a financial audit. The project will finance training, consultancies, communication systems (radios), computer equipment and operating costs. - 46 -

Annex 5: Project Costs NICARAGUA: Second Agricultural Technology Project

Table A.5.1 Cost Summary by Compohent

Components Project Cost Summary (US$ '000) Local Foreign Total A. Innovation & Adoption of Agricultural & Forestry Technology 1. Research and Development 2,497 381 2,878 2. Extension 8,712 537 9,249 3. Seed Production 907 191 1,098 4. Market Development and Post-Harvest Technical Assistance 417 34 451 5, Certification, Training and Dissemination 814 98 913 6,Innovation and Adoption of Forest Technology a. Center for Genetic Improvement and the Forest Seeds Bank 28 8 36 b. Transfer of Forest Production Technologies 17 7 24 c. National Forest Assessment 400 0 400 Subtotal innovation and Adoption of Forestry Technology 445 15 460 7,Administration of Competitive Funds for T.A. (FAT) by FUNICA FAT FUNICA-IFAD 6,248 2,624 8,871 Subtotal of Innovation & Adoption of Agricultural Forestry Technology 20,041 3,879 23,920 B. institutional Modernization and Strengthening 1,MAG-FOR Institutional Strengthening 1,546 88 1,635 2. INTA Institutional Strengthening 1,169 31 9 1,488 3. INAFOR Institutional Strengthening 347 165 512 Subtotal institutional Modernization and Strengthening 3,062 573 3,634 Total BASELINE COSTS 23,102 4,452 27,554 Physical Contingencies 1,101 164 1,265 Price Contingencies 29 149 178 24,232 4,765 28,997 Total PROJECT COSTS

Identifiable taxes and duties are US$5.1 million, and the total project cost, net of taxes, is US$23.9 million. Therefore, the IDA share of project costs net of taxes is 50.3% and the total share of taxes is 17.6%. NbatObcococorn 0” co” r”t o mor

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Annex 6: Implementation Arrangements NICARAGUA: Second Agricultural Technology Project

General Project Coordination Arrangements 1. Under Law 290, MAGFOR is the lead sector agency and will be responsible for policy and strategy formulation, planning, monitoring and coordination under PRORURAL. 2. The Ministry of Finance (MHCP) and MAGFOR will sign a subsidiary agreement with, inter alia, the following provisions: (i)MHCP’s obligation to transfer to MAGFOR, through budgetary allocations, the proceeds of the Credit in amounts sufficient to carry out the MAGFOR sub-component II-1; (ii)MHCP delegating to MAGFOR project implementation and creating the conditions to allow MAGFOR to implement the project; (iii)MAGFOR’s obligation to comply with detailed monitoring, evaluation and reporting requirements; (iv) MAGFOR’s obligation to carry out the project with due diligence and efficiency and in conformity with appropriate administrative, financial, procurement, auditing, environmental and social standards and practices; and (v) MAGFOR’s obligation to use the Credit funds exclusively for the purposes of the project. 3. The Ministry of Finance (MHCP), MAGFOR and INTA will sign a tripartite implementation agreement confirming that the MHCP will transfer the Credit funds to INTA through budgetary allocations and the obligations of INTA to (i)use the Credit funds exclusively for the purposes of sub-components I-1,I-2,1-3,I-4,I-5 and 11-2; (ii)carry out those parts of the project with due diligence and efficiency and in conformity with appropriate administrative, financial, procurement, auditing, environmental and social standards and practices; and (iii)comply with detailed monitoring, evaluation and reporting requirements. 4. The Ministry of Finance (MHCP),MAGFOR and INAFOR will sign a tripartite implementation agreement confirming that the MHCP will transfer the Credit funds to INAFOR through budgetary allocations and the obligations of INAFOR to (i)use the Credit funds exclusively for the purposes of sub-component 1-6 and 11-3; (ii)carry out those parts of the project with due diligence and efficiency and in conformity with appropriate administrative, financial, procurement, auditing, environmental and social standards and practices; and (iii)comply with detailed monitoring, evaluation and reporting requirements. 5. MAGFOR will maintain appropriate links with other agencies (in particular the Secretary for Coordination and Strategies of the Presidency - SECEP - and the Ministry of Development, Industry and Commerce) and with existing important forums (such as CONAGRO and the Mesa Sectorial) as well as with cooperating agencies supporting PRORURAL. - 49 -

Specific Coordination Arrangements 6. A Coordinating Committee, established under ATP-I and presided over by MAGFOR, will further coordinate project implementation among the implementing agencies. The functions of the Coordinating Committee are the following:

0 Ensure consistency among project activities, objectives and overall policy and strategy. Ensure that executing agencies act in a coordinated manner. Review project operational plans and monitoring and evaluation reports.

0 Approve financial reports, audit statements, and any other report required for project implementation.

0 Evaluate project performance. Management Arrangements 7. The Policy Directorate of MAGFOR will be responsible for the overall planning and monitoring of the project, but the specific implementation activities will be managed directly by the implementing agencies in their respective areas of responsibilities. Administrative tasks will be assigned to each agency, however certain cross-cutting activities such as consolidation of procurement plans, financial reports, and contracting of external audits will be undertaken by MAGFOR. There will be annual agreements between MAGFOR, the implementing agencies and the Bank on the proposed annual work plan (POA) and corresponding budget. 8. The ATP-I operational manual is to be updated to reflect the project’s financial management and disbursement arrangements, the modifications in the procurement arrangements and the procedures for reporting, monitoring and evaluation. In an Annex, the manual will include the INTA cost-sharing transfer procedures as well as the procedures for environmental and social screening of the INTA program (such as the Integrated Crop Management program). 9. For the implementation of activities to be undertaken by FUNICA, the tri-partite subsidiary agreement on the use of the IFAD-funds between MHCP, MAGFOR and FUNICA will be further updated as needed. Specific Agency Responsibilities 10. MAGFOR will be responsible for implementing component 11.1. It will also provide agricultural technology policy and strategy orientation, and supervise the monitoring of the social and environmental impacts of the Support Facilityfor Technical Assistance (FAT) implemented by FUNICA. MAGFOR’S environmental management unit will monitor the environmental aspects of FAT. 11. INTA will be responsible for the implementation of most of the activities under Component I(Sub-components 1-5) and Sub-component 11-2. Sub-components I.1-5 will be executed through a mix of direct implementation by INTA, contracting of some extension activities, and collaboration with key actors in the sector. - 50 -

12. INAFOR, in coordination with INTA, will be responsible for implementing Sub- component 1-6 and its corresponding activities as described in Annex 4. It will also be responsible for the implementation of Sub-component 11-3. 13. FUNICA, in coordination with INTA and MAGFOR, will be responsible for carrying out Sub-component 1-7 as follows: FUNICA will design and manage the Support Facility for Technical Assistance (FAT) according to the updated FUNICA Operational Manual and the FAT Operational Regulations. MAGFOR will be responsible for monitoring and evaluating FUNICA results. MAGFOR, FUNICA, IFAD and the Bank will agree on an annual FUNICA work plan. - 51 -

Annex 7: Financial Management and Disbursement Arrangements

NICARAGUA: Second Agricultural Technology Project

1. Introduction. The financial management (FM) arrangements and action plan contained here take into account the findings of (i)the Country Financial Accountability Assessment (CFAA); (ii)the results of a preparation mission to the Ministry of Agriculture and Forestry (MAGFOR), the Nicaraguan Institute for Agricultural Technology (INTA), and the Nicaraguan Institute of Forestry (INAFOR); (iii)discussions with officials from the Ministry of Finance and Public Credit (MHCP), the Secretariat of Strategy and Coordination of the Presidency (SECEP), and various donor agencies; and (iv) a PRORURAL FM diagnostic contracted out by the Government under terms of reference (TORS) agreed with IDA.

2. The basic premise of the FM arrangements for IDA’Sproposed financing of an Agricultural Technology Project (ATP-11) is that these arrangements will be based on the Government’s public financial management systems and procedures, with additional safeguards where needed. Accordingly, the sectoral arrangements fall under the umbrella of the overarching Government public financial management modernization plans (Le., the Plan de Accidn Gubernamental - PAG), and the correlated policy dialogue with the donor community (e.g., the Performance Assessment Matrix under discussion with the Budget Support Group).

3. Common Fiduciary Framework. IDA and FAD have agreed to co-finance ATP-I1 with parallel financing arrangements under a common fiduciary framework (CFF). In other words, each co-financier will fund specific activities within ATP-11 (which in turn is part of PRORURAL), but harmonize to the extent possible the fiduciary arrangements.

4. With their focus on country systems, the ATP-I1 financial management arrangements have been designed as a possible basis for a CFF that could be adopted for PRORURAL. A CFF may significantly reduce the transaction costs of meeting the diverse requirements of donors; however, CFF procedures can impose transactions costs of their own, which raises the need for a simple and gradual approach, In a first stage, it is likely (and recommended) that the CFF will be adopted by a limited number of donors and participating entities (MAGFOR, INTA and INAFOR).

A. Organizational Arrangements

5. The Borrower for the IDA credit will be the Republic of Nicaragua. Each Implementing Entity will be directly responsible for the implementation of ATP- I1activities falling under its responsibility. Accordingly, FM tasks will be assigned to each Implementing Entity General Financial Management Directorate - 52 -

(DGAF). However, certain cross-cutting activities, such as consolidation of financial reports and contracting of external audits, will be undertaken by MAGFOR. The ATP-II operational manual, properly endorsed by the Implementing Entities and the MHCP, will lay down the intra and inter- institutional responsibilities,

6. The credit would finance qualified incremental technical assistance as required by the DGAFs, such technical assistance to be absorbed gradually by the Implementing Entities.

7. For the implementation of activities to be undertaken by FUNICA, an agreement will be drawn up between MAGFOR and FUNICA establishing, among others, the terms of payments to FUNICA. These activities will be financed by IFAD.

B. Budget Planning

8. During the second quarter of the year, each Implementing Entity will prepare its Investment Program for the next year. The program will be consistent with the overall budget policy framework provided by the MHCP.

9. The ATP-I1 Investment Programs will be presented to SECEP for their prompt evaluation and incorporation into the National Public Investment Plan. In accordance with applicable regulations, the PIP would be subject to two levels of approval: (i)the inter-ministerial Investments Technical Committee (CTI); and (ii)the Government’s Economic Cabinet.

10. The approved ATP-I1 Investment Programs will be reflected in the Implementing Entities’ annual budget proposals, which would also include recurrent expenditures financed by the ATP-11. Therefore, all ATP-11-related expenditures will be clearly identified in the budgets of each Implementing Entity.14These budgets, in turn, will be incorporated by the MHCP into the national budget for the President’s submittal to the National Assembly in October. The Assembly would approve the budget by December.

11. On the basis of the approved budget, the Implementing Entities will adjust their overall annual work plans, which will include the ATP-I1 annual work and procurement plan (PONATP-11). The latter will be reviewed by IDA and IFAD.

C. Accounting and Financial Reporting

12. Accounting Policies and Procedures. The main FM normative framework for the ATP-I1 will consist of (i)the Budget Regime Law, which establishes procedures for the formulation, approval, and execution of the budget; (ii)the Annual Law of the General Budget of the Republic, which specifies the Revenue

l4The Government’s integrated financial management and auditing system (SIGFA) allows tagging of expenditures (‘‘marcaje de seguimiento de proyecto especifico”) at different levels of expenditure classification. - 53 -

and Expenditure Budgets and expands on the general rules laid down in the Budget Regime Law; (iii)the annual Norms and Procedures for Budget Execution and Control issued by the MHCP; and (iv) the manuals and rules developed under the Integrated Financial Management and Auditing System (SIGFA) project.

13. FM arrangements specific to ATP-I1 that are not contemplated in the regulations cited above will be documented in a concise FM section of the project’s manual, the operational regulations of the Support Facility for Technical Assistance (FAT), financed by FAD and managed by FUNICA.

14. Information Systems. The Implementing Entities will execute their ATP-I1 budgets through SIGFA, at the stages of expenditure commitment (cornpromiso) and accrual (devengado). The National Treasury (TGR) will execute the transfers and major payments (pagado) on the basis of accruals entered by the Implementing Entities. In accordance with applicable regulations, other minor payments (such as in the case of competitive funds through FAT) will be executed by the Implementing Entities via the revolving fund system (Fondos Rotatorios Especiales).

15 MAGFOR will maintain a simple consolidated financial reporting system for ATP-11. While accounting records will be maintained in SIGFA, the financial reporting system will allow MAGFOR to: (i)extract budget execution data from SIGFA to prepare the financial statements referred to in the next paragraph; and (ii)collect, maintain and report physical progress information.

16. Financial Reporting. On a quarterly basis, MAGFOR will prepare and submit to IDA and IFAD an ATP-I1 consolidated Financial Monitoring Report (FMR) containing: (i)Statement of Sources and Uses of Funds (with expenditures classified by sub-component) and Cash Balances; (ii)Statement of Budget Execution per sub-component (with expenditures classified by the Government’s budgetary economic lines); (iii)Physical Progress Report; and (iv) Procurement Monitoring Report. The FMR format will be flexible enough to satisfy the needs of the Government, IDA and IFAD.” The FMRs will be submitted to IDA not later than 45 days after the end of each quarter.

17. On an annual basis, MAGFOR will prepare ATP-I1consolidated Financial Statements that will include cumulative figures, for the year and as of the end of that year, of the financial statements cited in the previous paragraph. The Financial Statements will also include explanatory notes in accordance with the Cash Basis International Public Sector Accounting Standard (IPSAS), and the Implementing Entities’ assertion that credit funds were used in accordance with the intended purposes as specified in the Credit Agreement. These financial statements, once audited, will be submitted to IDA and FAD not later than six l5An annex to the FMR will contain data specific to IDA disbursements: (i)Special Account Act!vity Statement (including a copy of the bank statement); (ii)Summary Statement of Special Account Expenditures for Contracts subject to Prior Review; and (iii)Summary Statement of Special Account Expenditures for Contracts Not subject to Prior Review. - 54 -

months after the end of the Government’s fiscal year (which coincides with the calendar year).

18. The supporting documentation of the quarterly and annual financial statements will be maintained in the Implementing Entities’ premises and made easily accessible to IDA and IFAD supervision missions and external auditors.

19. The financial reporting arrangements described in the previous paragraphs could be adopted for financial monitoring at PRORURAL level. This monitoring responsibility could fall under the responsibility of an inter-institutional Finance Committee whose terms of reference would be agreed formally by the Participating Entities and Donors.

D. FundsFlow

20. IDA Disbursement Method. Credit proceeds will be withdrawn on a quarterly basis under the report-based disbursement method. During implementation, the Implementing Entities will (a) sustain satisfactory FM arrangements to be verified through IDA supervision; (b) submit FMRs consistent with the agreed form, content and due date (see para 15); and (c) submit acceptable audited financial statements by their due date (see para 16). If the Implementing Entities do not continue to meet these criteria, the method will be changed to transaction-based disbursements only (provided IDA does not suspend disbursements because of non-compliance with the obligation to maintain an adequate FM system).

21. IDA Special Account. The TGR will open and maintain a dedicated special deposit account in US Dollars in the Central Bank (BCN), to be used exclusively for deposits and withdrawals of credit proceeds for eligible expenditures. After the conditions of effectiveness have been met, and the special deposit account has been opened, MAGFOR will submit the first disbursement request (Form 1903B) to IDA, together with the expenditure and financing needs forecast for the next six months. For subsequent withdrawals, the MAGFOR will submit Form 1903B to IDA, along with the FMR for the quarter just ended.

22. IDA other Procedures. By appraisal, no need has been identified for the use of IDA direct payments and special commitment procedures. Should the need arise during implementation, IDA will evaluate it and, if granted, agree to the use of the cited procedures with the Borrower through a modification of the Disbursement Letter.

23. Flow of Funds. The TGR will execute payments ordered by the Implementing Entities (see C3) out of the national Treasury Single Account (CUT) for transfers and major expenditures. Minor expenditures would be executed by the Implementing Entities through the revolving fund mechanism.

24. On a periodic basis, the TGR will verify the amounts spent under the ATP-I1 tagged budget lines (see para 20), which is possible as SIGFA produces real-time data on budget execution. On the basis of ATP-I1 expenditures incurred under the - 55 -

IDA financing source, the TGR will reimburse the CUT from the special deposit account16. In other words, withdrawals from the special deposit account will be to cover expenditures pre-financed out of the CUT.

25. The exceptions to para 29 and para 30 would be payments to foreign providers in foreign currency, which can be made directly out of the special deposit account. When calculating the next reimbursement request to the CUT (para 30), an amount equivalent to such payments would not be withdrawn from the special deposit account.

26. The sub-project grants allocated on a competitive basis by FUNICA will be financed by FAD and regulated by contracts between FUNICA and the recipients. These contracts would be entered into on the basis of the FAT Operational Manual. l7

E. IDA Disbursement Schedule (in ’000 US)

Category Amount of the Percentage of Financing Allocated Expenditures to be (expressed in SDR) Financed

(1) Works 100%

(2) Consultants’ services 1,500 100%

(3) Services (Other than 400 100% Consultants’ services)

(4) Training 600 100%

(5) Goods and 1,500 100% Equipment

(6) Agricultural Inputs 800 100%

100% until December 3 1, 2006,75% until December 3 1, 2007, 50% until December 31,2008,25% until December 31,2009 and 0% thereafter

I

l6As needed, loan proceeds may finance specific support to the TGR for the operation of these transactions. l7These could include - provided there is previous IFAD approval - the arrangements for sub-project eligibility, formal cost estimates, and the defined outcome or delivery of end product. Lump-sum based grant payments could be made against the contract provisions, including a reasonable advance and tranches connected to physical progress. The contract templates, including procurement and recordkeeping responsibilities of the recipients, could also be part of the operational regulations. - 56 -

(8) INTA Cost-Sharing 1,100 100% of disbursed amount Transfers

(9) Operational Costs 1,100 100% until December 3 1, 2006,75% until December 3 1,2007,50% until December 31,2008,25% until December 3 1, 2009, and 0% thereafter

(10) Unallocated 300

TOTAL AMOUNT 12,000

(i> Works include rehabilitation and upgrading of existing buildings.

(ii) Services include production of publications and communications materials and surveys.

(iii) Training includes costs of training facilities, transport and per diem of trainees, training fees, training materials, costs related to attendance of international congresses, study tours, and workshops.

(iv) Goods and Equipment include computers, agricultural machinery, audio-visual equipment, laboratory equipment and agricultural tools.

(v) INTA Cost-Sharing Transfers means the grants made to Eligible Farmers to finance 60% of the cost of the technical assistance services provided by private extension agents.

(vi> Agricultural inputs include seeds, fertilizers, and chemical products for research and extension by INTA.

(vii) Operational Costs means reasonable expenses incurred by the participating agencies for the implementation, management, coordination and supervision of Project activities, including inter alia insurance, vehicle and equipment operation, communication expenses, office supplies, utilities, materials, labor, and laboratory expenses.

(viii) Incremental salaries are salaries of technical staff of MAGFOR, INTA and INAFOR, including inter alia, researchers, providers of extension services and policy and management staff - 57 -

F. Audits

27. Internal Audit. In the course of its regular internal audit activities vis-&vis the institutional budget, the Implementing Entities’ Internal Auditors may include ATP-I1 activities in their annual work plan. The Participating Entities will provide IDA and FAD with copies of internal audit reports covering ATP-I1 activities and financial transactions.

28. External Audit. The annual ATP-I1 Financial Statements will be audited in accordance with International Standards on Auditing (ISA) by an independent firm and in accordance with terms of reference (TORS)acceptable to both IDA and FAD. A single audit opinion, containing a reference to the eligibility of expenditures, will cover all ATP-I1 Financial Statements.

29. In addition, operational audit reports (under ISRS 4400 “Engagements to perform agreed-upon procedures regarding financial information”) on the procedures followed in execution of ATP-I1 expenditures will be produced annually during implementation.

30. While the audit reports are to be issued annually, the external auditors are expected to perform at least one review visit per semester during implementation, producing memoranda on internal controls (“management letters”) accordingly.

3 1. The audit work described in para 34 and 35 will be co-financed with credit proceeds. MAGFOR will appoint the external auditors within three months after credit effectiveness, in accordance with selection procedures agreed to by the Participating Entities. Each audit contract is expected to cover at least two reporting periods. Audit costs will be distributed proportionately among the Participating Entities.

Document Due Date Ref.

Annual ATP-I1 Investment Program June 30, previous year B1 Annual Budget Proposal Oct. 15, previous year B3 Approved budget, annual work and As soon as the budget is approved (or B4 procurement plan (PONATP-II) comes into effect) Quarterly Financial Monitoring Reports 45 days after the end of each quarter C5 (FMRs) Annual financial audit report 6 months after the end of the year F2 Annual operational audit report 6 months after the end of the year F3 - 58 -

H. Financial Management Action Plan

I. IDA Financial Management Supervision Plan.

An IDA FM Specialist should perform a supervision mission prior to effectiveness. After effectiveness, the FM Specialist must review the annual audit reports, should review the financial sections of the quarterly FMRs, and should perform at least one supervision mission per year.

J. Retroactive Financing. There is retro-active financing for all payments under the Credit up to US$2 million equivalent for expenditures made for project eligible expenses within a period of 12 months prior to the signing of the financing agreement and after July 1,2005. - 59 -

Annex 8: Procurement Arrangements

NICARAGUA: Second Agricultural Technology Project

1. Procurement for the proposed project would be carried out in accordance with the World Bank’s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004, Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and the time frame should be agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. Procurement of Works. Works required for the project, which would include rehabilitation and upgrading of existing buildings, would be procured using the Bank’s Standard Bidding Documents (SBD) for all International Competitive Bidding (ICB) and SBD agreed with the Bank for national competitive bidding (NCB) and shopping (model Request for Quotations - RfQ).

3. Procurement of Goods. Goods procured under this project will include computer hardware and software, office furniture and equipment, vehicles and motorcycles, agriculture equipment and materials, etc. The goods will be procured using the Bank’s Standard Bidding Documents (SBDs) for all ICB and SBD agreed with the Bank for NCB and shopping (model Request for Quotations - RfQ).

4. Procurement of Non-Consulting Services. Non-Consulting Services required for training activities such as workshops, logistics and transportation services, communications, as well as other services as needed will be procured using SBD or model RfQ agreed with the Bank.

5. Selection of Consultants. Consulting firms and individual consultants will be hired under the project to provide services such as rural planning, commercialization strategies, impact evaluation studies, diagnostics, financial and procurement audits, advisory services from individual consultants, supervision, etc. Advertisements requesting expressions of interest will be published in either national or international newspapers, depending on the estimated amounts of the contracts, and NGOs will be selected through a competitive process as per the WB Consultant Guidelines.

6. Training. Training would include costs of training facilities, transport and per diem of trainees, training fees, training materials, costs of logistics, transportation, materials, etc. and would be procured to the extent possible following Bank procurement procedures applied to goods using agreed standard documents for NCB or RfQ.

7. Operational Costs. Operational costs have been identified in the procurement plan. - 60 -

8. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Project’s Operations Manual.

9. Thresholds recommended for the use of each method discussed above are identified in the table below. These thresholds will be reviewed annually when MAGFOR’s and all other implementing entities’ capacity is reassessed during procurement post-review missions. As indicated in paragraph 1 above, the agreed procurement plan will determine which contracts will be subject to Bank prior review.

Thresholds for Procurement Methods and Prior Review

Contract value Expenditure threshold category (US$ ’000) Procurement method Contracts subject to prior review >1,500 ICB All ...... 150 to 1,500 NCB First two contracts Works 450 Shopping First two contracts

Regardless of value Direct Contracting All >150 ICB All 50 to 150 NCB First contract Goods 40 Shopping First contract

Regardless of value I Direct contracting All ...... >200 QCBS/QBS/FBS/LCS/ Consulting <200 QCBS/QBS/FBS/LCS (firms) a /cos All TORS>$25,000 Regardless of value Single Source All Consulting Regardless of value Section V in the All contracts above $50,000 (individual) a Guidelines All TORs>$30,000

Note: QCBS = Quality- and Cost-Based Selection QSS = Quality-Based Selection FBS = Fixed Budget Selection LCS = Least-Cost Selection CQS = Selection Based on Consultants’ Qualifications - 61 -

B. Assessment of the agency’s capacity to implement procurement

10. An assessment of the capacity of MAGFOR to implement procurement actions for ATP-I was carried out by a Bank Procurement Specialist in 1999. Since then, Bank procurement specialists have been carrying out procurement supervision for the implementation of the project. During 22-26 August 2005 a Bank procurement specialist visited MAGFOR and all the other implementing entities to assess the present situation as it concerns present staff available to work with the proposed Support to PRORURAL. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement and MAGFOR’s Administrative Directorate. The assessment reviewed the two main components of the program, plus operational costs. These components will require procurement of small civil works, consulting services and goods.

11. Overall financial management and administration will be under the responsibility of MAGFOR’s Administrative Directorate. In this context, MAGFOR will be responsible for supervising the implementation of all procurement for the project. These arrangements have worked well under the ATP-I and throughout the implementation of the project the staff at MAGFOR acquired excellent procurement capacity. However, one of the Procurement Specialists at MAGFOR has left and MAGFOR will have to hire one additional procurement specialist who will assist with procurement in MAGFOR, INTA and INAFOR. The specialist will be contracted before January 3 1,2006.

12. Decentralized implementation under MAGFOR’s supervision should include:

0 INTA: Has good procurement capacity but needs assistance from the above- mentioned specialist.

0 INAFOR: Has very limited procurement capacity and will need intensive assistance from the above-mentioned specialist.

13. Taking the present capacity at MAGFOR, the following issuedrisks have been identified: a. Need for one additional qualified staff to manage project procurement at MAGFOR, INTA, and INAFOR.

14. The corrective measures, which should be agreed with the government at negotiation, include:

b. Addition of one qualified staff to assist MAGFOR, INTA, and INAFOR. c. Review by the Bank of the annual procurement plan and quarterly updates. d. In addition, the Bank and Government authorities would need to agree on the following to organize procurement processes and transactions under this project: - 62 -

e. All the purchases and procurement processes carried out by the decentralized implementing agencies would be supervised by MAGFOR’ s unit. f. Purchases of goods, works and consulting services financed totally or partially with IDA-financed funds would be procured following WB Guidelines.I8

15. Law 32 (the National Procurement Law) permits exceptions when procurement is subject to an agreement with a foreign government or international organization. The legal agreement between IDA and the Government would constitute such an agreement.

16. In light of the past experience of MAGFOR with Bank-financed projects, the overall project risk for procurement is MEDIUM.

C. Procurement Plan

17. The Borrower has developed a procurement plan for project implementation that provides the basis for the procurement methods. This plan will be agreed between the Borrower and the Project Team prior to negotiations. It will be available in the project’s database and in the Bank’s external website. The procurement plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

18. In addition to the prior review supervision to be carried out from Bank offices and although the overall risk assessment has been rated as MEDIUM, it is recommended that procurement supervision take place every six months during the first year of the project and once a year thereafter, and that the capacity of the PCU to carry out procurement is reassessed after one year in order to review the prior review thresholds.

E. Action Plan

19. The following actions are recommended to address weaknesses identified by the Bank and to increase the capacity at MAGFOR, INTA, and INAFOR in order to ensure that all entities have the capacity to implement procurement:

1. hiring of one additional procurement staff with Bank-financed procurement experience; and 2. procurement training.

Considering an eventual gradual transition towards the use of national systems for procurement of goods, works and services, the following inconsistencies between the National Procurement Law and World Bank policies would have to be mitigated: (i)registration requirements; (ii)evaluation systems; and (iii) consulting services. - 63 -

20. Procurement Cycle Management. The Procurement Plan will be finalized and approved prior to negotiations and included in the Operations Manual for the project. Standard bidding documents for all procurement methods must be prepared for use by the project and should be based on the Bank’s SBDs in the case of ICB. Bidding documents for NCB and model Requests for Quotations (RfQ) for Goods and Works must also be prepared, approved by the Bank, and included, along with the other SBDs, in the Operations Manual. During project launch, all staff concerned should be trained in the use and application of the SBDs. Close supervision by the Bank is recommended during the initial stages of project implementation, especially in the area of contract administration, which is considered weak.

21. Organization, Staffing and Functions. It has been agreed that procurement staff with relevant Bank-financed procurement experience will be hired by MAGFOR by January 31,2006. It will be MAGFOR’s responsibility to coordinate all procurement activities for the project and provide assistance to the implementing agencies as needed. Priority should be given to updating the Operations Manual.

22. Support and Control Systems. MAGFOR and the other entities have auditing procedures in place. MAGFOR has a good database for monitoring procurement activities.

23. Record Keeping. All entities have proper record keeping but, as the volume of procurement increases, it will be necessary to define additional physical areas to keep all records and files of the procurement processes under the project.

24. Details of the Procurement Arrangement Involving International Competition.

(a) Goods and Works and Non-consulting Services.

i. List of contract Packages which will be procured following ICB and Direct contracting.

1 2 3 4 5 6 7 8

Ref Contract Estimated Procurement P-Q Domestic Review Expected No. (Description) Cost Method Preference by Bank Bid- (yeslno) (Prior I Opening Post) Date 1 Motorcycles $485,000 ICB No Prior Sept. 2006

ii. ICB Contracts estimated to cost above US$150,000 per contract and all Direct contracting will be subject to prior review by the Bank. - 64 -

(b) Consulting Services.

(9 List of Consulting Assignments with short-list of international firms.

1 2 3 4 5 6

Ref. No. Description of Estimated Selection Review Expected Assignment Method by Bank Proposals cost (Prior I Submission Post) Date 1 Forest $400,000 QCBS Prior March Inventory 2006

(ii) Consultancy services estimated to cost above $100,000 per contract and Single Source selection of consultants (firms) will be subject to prior review by the Bank. Terms of reference of consulting assignments exceeding US$30,000 will also be subject to review.

(iii) Short lists composed entirely of national consultants. Short lists of consultants for services estimated to cost less than $200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. - 65 -

Annex 9: Economic and Financial Analysis NICARAGUA: Second Agricultural Technology Project

Introduction

1. The main purpose ofthe economic analysis is to help select and design project activities that contribute to the welfare of the country. The Innovation and Adoption of Agricultural and Forestry Technology component of the proposed project (86.4 percent ofproject total costs) would strengthen a sustainable and client-driven agricultural and forestry technology system that would facilitate the generation and transfer oftechnological innovation to small farmers in Nicaragua, increasing productivity, alleviating poverty and promoting natural resource conservation. It would also contribute to poverty alleviation through household food security and improved nutrition and family income in rural areas by intensified research and extension (R&E) services. The rural economy will be stimulated through expanded markets for goods and services, which will have direct and indirect employment effects from increased production and lower prices ofbasic foods for consumers.

2. The objective ofinvestments in agricultural R&E is to increase the efficiency of agricultural production. Not less important goals are to provide equity and to'enhance security. In other words, they aim to increase total income, improve income distribution, and reduce income variability. The challenge is to measure these benefits and to link them to specific investment projects in agricultural R&E. Measurement ofresearch benefits is complicated because (i)benefits are spread geographically and vertically in markets for goods and services; (ii)research can affect product quality; (iii)some research is not commodity oriented; (iv) some investment is aimed at modifying institutions and/or generating externalities; and (v) research can be relatively basic without immediate application. Investments in areas related to institutional development and capacity building, natural resources management, integrated farming systems, and social sciences research, usually produce benefits that are difficult to quantify.

3. Several ex-post analyses have shown worldwide that agricultural R&E investments yield high rates ofreturn. A 1998 report by the International Food Policy Research Institute (Alston and others, 1999) reviewed 294 studies ofreturns on investments in agricultural research and development (including extension). After eliminating extremes, the report found that the remaining 1,760 estimates indicated an average return of 73 percent per year, confirming the conventional view that returns on investments in agricultural R&E are high. Returns averaged 88 percent on investments in research alone, 79 percent on extension alone, and 45 percent on R&E combined. The lower estimate for R&E combined was explained because the corresponding studies captured more ofthe total costs ofthe technology innovation process. It found no evidence of a decline in rates ofreturn in recent years and little consistent difference among regions. Rates ofreturn were similar across all research - 66 -

categories except for natural resources research, where lower rates of return were mainly due to longer production cycles.

4. An ex-ante economic and financial analysis was prepared for the proposed ATP-I1 and a description, including parameters assumed, financial and economic prices and tables for each activity and farm model, are presented and details available in the project files. The economic analysis also provides a framework for INTA research planners, managers and scientists to think about the impact of their actions in terms of costs and benefits, thereby leading to a more efficient allocation of scarce resources and for the selection and design of R&E activities that better contribute to the welfare of Nicaragua.

Summary of Benefits and Costs 5. Since most project investments would directly support agricultural R&E, benefits were estimated at the level of relevant commodities and production systems (grains, beef, milk, coffee, fruits and vegetables, etc.). The combined results of both research and extension are being taken into account. Extension impacts would also include impacts from existing research findings as some recommended technologies have been available for some time without having been adopted because of existing gaps in the adoption process. The analysis assumes that the project is technically sound, socially acceptable, and financially viable for all participants; that institutional arrangements will be effective during implementation; and that environmental and natural resource impacts are adequate. 6. Simple cost-benefit analysis was used to estimate Net Present Values (NPV) and Internal Rates of Returns (IRR)19 as one basis for justifying the project, considering that it was designed to increase productivity and reduce production costs. All ATP-I1 (supporting PRORURAL) direct costs for the activities and management overheads are considered. The expected benefits from the proposed project include: (a) Strengthened public institutions and technical capacity that would become more pluralist, efficient, and responsive to small farmers demands for the agricultural and forestry sector, facilitating the response of the country’s agricultural sector to the greater competitive demands resulting from the on- going regional integration process.

(b) The adoption of new production, marketing, management, and post- harvest technologies directly benefiting approximately 50,400 poor farmers.

(c) The development of technologies will open new products, processes and market opportunities, increase exports, improve food and other product quality, and provide adequate alternatives for economic development.

~~ l9The NPV is the sum of all costs and benefits over the life of the investment, discounted at the opportunity cost of capital (assumed to be 12%). The expected NPV takes account of the entire range of possible NPVs by weighting project outcomes with their corresponding relative frequencies or probabilities. The IRR is the interest rate at which the NPV equals zero-that is, at which the investments break even. - 67 -

(d) The introduction of more environmentally friendly and sustainable production practices which will benefit future natural-resources-based human activities.

7, The financial analysis is aimed at determining the financial viability and attractiveness for the target group to engage in the productive changes to be supported. Additionally, since incentives would be involved to help poor farmers to improve their production systems with fiscal costs for the country, the economic analysis is aimed at testing the viability of the project for the country’s economy as a whole considering also the costs of those incentives not included in the financial analysis.

Financial Analysis 8. Detailed financial analysis undertaken on representative farms tested the attractiveness of the proposed interventions for beneficiaries in the two extension programs implemented by INTA (with a watershed approach) and FUNICA (through FAT). Crop budgets were considered per “manzana” (mz) (equivalent to 0.7 hectares (ha)) for the following field and fruit crops: maize, beans, sorghum, rice, sesame, bell pepper, onion, gourd, celery, tomatoes, carrots, watermelon, sweet potatoes, potatoes, yucca, coffee and cacao. Budgets for beef, milk and small livestock production complete the diversified activities within the complex farming systems in the project areas.

9. Actual farm-gate prices were used in calculating production costs and benefits (Appendix 1, Table 1: Economic Analysis Working Document available in the Project Files). The supply of labor is not a major constraint to agricultural development in the project areas except during limited peak demand periods. Family labor available would largely meet the farm requirement. Expected incremental yields to be obtained as a result of project activities have been phased over three to four cropping years. The yields and income before and after labor costs for the various crops, as well as detailed crop budgets, are given in Appendix 1 Tables 2-1 8, and summarized in the following Table A9.1. 10. Estimates of the incremental impact of the proposed ATP-I1 on individual farmers as compared with the without-project alternative are based on 15 farm models covering the most relevant activities of subsistence and small commercial household production units to be supported by the project. As can be seen in Table A9.2, the models illustrate the likely effect of the expected introduction of improved sustainable production practices into the family household systems. Conservative estimates of attainable changes were defined (including progressive and limited productivity increases, expansion of herds and/or reduced changes in prevailing cropping patterns), taking into account the subsistence nature and risk-minimizing strategy, typical of the targeted population and previous experiences on INTA and FAT-FUNICA’s R&E activities. Labor family availability, existing and new activities’ requirements, and returns per family-day of labor were also considered in the farm budget models. - 68 -

Table A9.1. Crop budgets: Yields and Income after Labor Costs

Maize 21.6 35 -459 -3 Broad beans 9 15 1,440 1,720 Sorghum 28 45 1,200 1,640 Rice 50 70 2,211 2,651 Sesame 8.5 12 1,260 1,520 Bell peppers 55 70 2,330 4,360 Onions 350 440 696 1,628 Gourds 650 1,000 1,596 3,206 Celery 440 500 1,543 2,766 Tomatoes 320 400 3,692 5,135 Carrots 240 300 1,543 3,026 Watermelons 120 150 2,233 3,441 Sweet potato “Camote” 140 220 2,160 3,549 Potato 220 270 3,089 4,982 Yucca 65 100 956 1,596 Coffee 20 30 1,394 3,031

11. Fifteen farm models (Appendix 1 Tables 19 to 33) were developed for representing beneficiaries to estimate incremental family incomes due to the project interventions:

Tecomapa (5mz) represents the dry region in northern Leon with farms producing basic grains (maize, sorghum), sesame, some vegetables, fruits, meat and milk. Leon (15 mz) represents a diversified production system in Leon with basic grains . (maize and sorghum), some vegetables, 2 to 3 cows producing milk and meat, and about 20 small animals. Subsistence Households (2 mz) is included as the typical beneficiary of the FAT- FUNICA program in the Central Pacific area and are mainly dedicated to maize and beans and small animal production activities. Somotillo (12 mz) is dedicated to fruits and vegetables (mainly plantain and bell peppers) combined with pastures, one or two cows, and small animals. Ochomogo ( 10 mz) corresponds to the Southern Pacific region producing maize, beans, rice, sorghum, tomatoes, meat, milk, fruits, yucca and sweet potatoes (camote). Jiguina (12 mz) in the Northern Central (NC) region represent farms characterized by production systems based on coffee, vegetables, basic grains, roots and tubers, small animals and cows. Jucuapa (5.2 mz) also in the NCregion shows similar production systems to Jiguina but - 69 - with smaller subsistence farms, mainly between 3 and 10 mz. San Rafael North (30 mz) also in the NC region includes 5 mz with coffee, 2 with maize, 1 with vegetables, 3 with beans, 5 with pastures and 10 with forests. Apompua (60 mz) is in the Southern Central region where livestock is the dominant activity, along with some production of basic grains and vegetables. Aguas Calientes (12 mz) in Las Segovias belongs to a dry region with serious water scarcity and low productivity levels. Basic grains and small and large livestock under combined treedpasture production systems are dominant. Waspan (8 mz) also in Las Segovias represents farms that include forests, maize, beans and small animals. San Carlos (20 mz) where the main activity is milk and meat production (about 5 cows) combined with some basic grains (maize, rice and beans). Nueva Guinea (10 ~nz)again in Las Segovias includes livestock as the main activity and basic grains (maize and beans), yucca and subsistence activities. Rivas (18 mz) represents farms that include basic grains (maize, beans and rice), fruit crops (plantain and papaya) and milk and meat production.. Matiguas (30 mz) is mainly dedicated to milk and meat production with half of the farm under pastures, and about 6 mz with basic grains and some fruit crops. Table A9.2 summarizes the expected family income among beneficiaries with and without the project due to planned activities, including INTA and FAT-FUNICA extension programs. Table A9.2 - Financial Results over Representative Farm Models

12. Detailed features of these farm models including financial budgets and production and input parameters are presented in Appendix 1, Tables 19 to 33. The financial analysis confirms that: (i)the improved technologies should be highly attractive to beneficiaries since income would be increased between 37 and 100% due to foreseen - 70 - activities; (ii)the positive impact would apply to all different regions and agro-ecological zones; and (iii)marginal returns to labor through improved production practices compares positively with the opportunity cost of family labor for the regions involved.

Economic Analysis

13. An estimate of the expected economic results was completed in June 2005, considering the intended direct beneficiaries of the ATP-I1 extension programs. The exercise was also instrumental for agreeing with INTA’s preparation team on the methodology to be used for the economic and financial analysis of R&E activities. Table A9.3 shows the implementation pace of farms entering into the extension programs assumed for this evaluation.

Table A9.3. Farmer IncorporationPlan for ATP-I1 Extension Programs (number of farms)

INTA Extension Programs Tecomapa (Leon) 0 600 900 1,200 900 3,600 Ochomogo (South Pacific) 0 1,000 1,500 2,000 900 5,400 Aguas Calientes (Somoto) 0 800 1,100 1,300 800 4,000 Jucuapa (Matagalpa) 0 200 300 500 400 1,400 Jiguina (Jinotega) 0 500 800 1,100 800 3,200 San Rafael 0 300 400 600 300 1,600 Apompua (Juigalpa) 0 400 600 1,000 800 2,800 Waspan 0 500 800 1,100 800 3,200 san Carlos 0 200 300 300 200 1,000 Nueva Guinea 0 250 350 350 250 1,200 Rivas 0 200 300 300 200 1,000 Matiguas 0 200 300 300 200 1,000 Sub Total INTA Programs 0 5,150 7,650 10,050 6,550 29,400 FAT-FUNICA Extension Program Tecomapa (Leon) 0 800 1,200 2,000 701 4,701 Leon 0 800 1,000 1,200 756 3,756 Somotillo 0 600 700 700 327 2,327 SmallFarm (Central Pacific) 0 300 400 400 116 1,216 Sub Total FAT-FUNICA Programs 0 2,500 3,300 4,300 1,900 12,000 TOTAL ATP II Extension Programs 0 7,650 - 10,950 14,350 8,450 41,400 14. The aggregation of incremental physical quantities and economic values of inputs used and production at the farm level for the 50,400 beneficiaries of the proposed project (35,000 through INTA and 15,200 through FAT) provides the basis for the quantification of benefits and related agricultural production costs. However, to be on the conservative side in estimating benefits, it was assumed that about 18 percent of the farmers using the extension services will not adopt the expected improvements, and only about 41,400 beneficiaries (29,400 from the INTA extension services and 12,000 of those attended by -71 -

FUNICA) would respond with the reasonable average improvements described in the respective farm models. To the latter, all project R&E costs were considered for the analysis to assess whether the project would be desirable for the country’s economy in terms of the pertinent social parameters (opportunity costs). Project-tradable inputs and products and non-tradable goods and services were valued at market prices since the Nicaraguan economy is considered to be widely open and in line with international prices. The only exception was with labor costs which were assumed to have a social conversion factor of 0.7. Even at periods of peak demand for labor the local working population would not be fully used. All prices were assumed to remain constant in real terms throughout the life of the project (with a time horizon for appraisal of 25 years).

15. Table A9.4 shows the result of the economic analysis, considering only the direct beneficiaries of INTA and FAT-FUNICA programs. The most relevant economic benefits of the project would be: (i)more sustainable and positive effects on natural resources; (ii)increased net income, food security, nutrition and health as a result of increased and diversified production; (iii)strengthened farmer’s and community organizations; and (iv) improvements in human and social capital. Only ,a few of those benefits are measurable and were quantified, and include mainly expected increments on value of production and lower unit production costs.

16. As can be seen in Table A9.4, the internal economic rate of return (ERR) was estimated by weighted aggregation of expected farm model incremental net benefits, the related project costs, including productive expenses at the farm level, and technical support investments (R&E expenses). The resulting economic indicators and the pertinent switching values (as shown below) show that ATP-I1 is economically feasible. The estimated ERR is 17 per cent and a NPV (with 12 per cent as social discount rate) was estimated at 845.5 million Cordobas (US$51.9 million). Economic return calculations include the cost of all project components: (i)incremental research and extension investments; (ii)on-farm productive investment and recurrent expenditure for the adoption of sustainable agricultural production systems to be adopted; and (iii) institutional strengthening and project administration costs.

17. Tables 34 to 39 in Appendix 1 show the detailed economic budget for the project costs and benefits, the expected levels of production and quantities of inputs to be used “with” and “without” project, the number of participating farms (per model and per year), the labor to be required in both scenarios, and the production technology summary for all crops considered in the analysis, respectively. The estimated family labor used would increase by 23% from 11.6 million person-days to 14.4 million (Appendix 1, Table 37), reducing the levels of underemployment in rural areas where poor people concentrate. -72-

Table A9.4. Second Agricultural Technology Project Economic Analysis

Main Production Basic grains 364,618 429,423 364,618 216,743 632,277 659,605 659,605 Oil seeds 19,922 21,168 19,922 10,246 29,067 29,884 29,884 Vegetables 404,355 441,951 404,355 226,909 539,134 551,285 551,285 Fruits 31,776 32,918 31,776 47,982 139,271 107,119 89,523 Export products 89,600 89,600 89,600 45,120 159,586 216,800 216,800 Other products Patio 69,403 69,403 69,403 107,541 153,213 153,213 153,213 Livestock products 671,730 699,275 671,730 798,078 1,173,997 1,181,345 1,181,345 Other products 22,556 22,556 22,556 40,735 84,036 245,736 646,596 Sub-total Main Production 1,673,960 1,806,293 1,673,960 1,493,353 2,910,581 3,144,987 3,528,251 Production Cost Investment Purchased Inputs Fertilizers 40,916 25,402 20,026 Patio inputs 6,991 Agrochemicals 2,567 429 257 Seeds 33,675 26,829 26,509 Services 9,150 1,732 193 improved pigs 3,161 Other inputs 18,722 12 Sub-Total Inputs 163,960 58,794 47,538 Labor Labor 33,063 2,653 1,339 Sub-total Investment Costs 197,023 61,446 48,877 Operating Purchased Inputs Fertilizers 96,564 107,957 96,564 145,260 281,802 277,787 261,923 Patio inputs 15,400 15,400 15,400 22,408 30,800 30,800 30,80C Agrochemicals 116,473 130,957 1 16,473 85,741 185,292 189,052 186,334 Seeds 139,611 150,046 139,611 88,716 182,568 184,353 184,352 Services 66,506 66,828 66,506 65,353 77,449 78,094 78,21 E Other inputs 94,258 108,865 94,258 84,987 187,206 189,822 181,96E Sub-Total Inputs 528,811 580,052 528,811 492,465 954,759 949,907 984,372 Labor Labor 348,242 354,214 348,242 363,997 463,402 458,171 453,155 Sub-total Operating Costs 877,054 934,266 877,054 856,461 1,418,161 1,408,078 1,437,527 Sub-Total Production Cost 877,054 934,266 877,054 1,053,485 1,479,607 1,456,955 1,431,527 Other Costs Project Costs 71,847 21,776 10,000 10,000 10,ooc OUTFLOWS 877,054 934,266 948,901 1,075,261 1,489,607 1,466,955 1,447,527 Cash Flow 796,906 872,027 725,059 418,092 1,420,974 1,678,032 2,080,721

IRR = 17.0%, - 73 -

Main Assumptions

18. As only activities identified and presented by potential beneficiaries were considered by the project, an ex-ante determination of costs and benefits of productive investments would not be feasible. Consequently, economic return estimates had to be based on a representative sample of fifteen farm models, being incorporated into the scenarios for the regions involved, and at ‘whole project’ levels, by aggregation of the farms represented. This aggregation considered the relative importance of the various on-farm productive improvement proposals as indicated by historical demand patterns in each region. The analysis was built on: (i)the technical experience of MAGFOR, INAFOR, MARENA and INTA experts; and (ii)the evaluation of the economic aspects of existing extension programs sponsored and managed by INTA and FUNICA in Nicaragua under previous projects. Yield, production cost, and gross margin values increased significantly between the base and project completion in previous projects’ ex-post analysis.

19. For the evaluation FARMOD software was used and a scenario approach was adopted, modeling a selection of crop and activity budgets for recommended prototype production system changes, and farm budgets typical for regions and agro- ecological zones where project extension activities are to take place. Models covered some of the typical alternative situations that the beneficiaries would face, and compare with and without project results in order to measure the possible changes to be induced by the proposed project. Models take into account recommended minor on-farm improvements, production parameters, recurrent costs, family labor availability and farm requirements. The use of expected on-farm net income increases (before family labor costs) and its NPV are preferred as indicators of financial results as shown in Table A9.2, since most of the project-induced changes will basically deal with inexpensive technology and production practices, improvements to existing situations, and the use of available family labor.

20. The main assumptions for the analysis were: (i)social discount rate 12 percent; (ii)time horizon: 25 years; (iii)constant December 2004 labor, input and output prices; and (iv) real exchange rate constant at: Cr$16.7 per US$. The opening of the economy that has been taking place in the last two decades, together with the market determination of the exchange rate reflecting its real value, allows one to assume that domestic prices tend to correspond to border economic values. In general, it is considered that there are few distortions on agricultural input and output prices in Nicaragua, as they bear limited taxation and subsidies. Although the project would increase on- and off-farm employment in the selected areas, the existing high un- and under-employment levels would not be significantly changed. Therefore, a conservative conversion factor of 0.70 was used to reflect the opportunity cost of labor. - 74 -

Sustainability

21. Sustainability of project benefits is expected to be high, given that the new practices and technologies to be adopted and the resulting increased productivity levels would be reflected in higher income for beneficiaries. Improved production competitiveness and new commercial activities including small enterprises are expected to develop, which would also have a positive impact on marketing opportunities and local employment. The project would also promote private-sector technical assistance and the development of other services to communities, which is expected to enlarge the impact of the project-financed R&E investments far beyond the estimated results.

Sensitivity and Switching Values

22. Because the economic analysis of R&E activities is based on uncertain future events, the measurement of costs and benefits inevitably involve explicit or implicit probability judgments. The tool used for assessing the risks concerned in the assumptions is a sensitivity analysis. The variables that most influence the project’s net benefits are the estimated costs and benefits and the effects of adoption delays, as well as the extent of their influence. In assessing those risks it was found that if (i) gross value of production were reduced by 20 per cent (due to reduced prices or productivity), the ERR would drop to 13.3%; (ii)project costs were increased by 100% due to increased salaries and investment costs, the ERR would be 14.6%; (iii) all project investment and agricultural production costs were increased by 20 per cent, the ERR would be reduced to 14.1%; (iv) the above worst adverse events were to occur at the same time the ERR would be reduced to 9.7%; and (v) benefits were delayed by two years, the ERR would be 12.4%.

23. Switching Values. As the value at which the project’s NPV becomes zero (or the IRR equals the discount rate) of the critical variables were also estimated: (i)benefits should drop by 25%; (ii)project costs should increase by 250%; (iii)project and farm production costs should increase by 34%; and (iv) the adoption process should be delayed by one and a half years (in addition to the assumed four years) with no delay in project costs. - 75 -

Annex 10: Safeguard Policy Issues NICARAGUA: Second Agricultural Technology Project

1. In accordance with the safeguards identified by the project team, and agreed upon in a Quality Enhancement Review (QER) meeting (28 March, 2005)’ the project is classified as Environmental Category “B”. The Bank’s safeguard responsibilities would be limited to the ATP-I1 project and not to the entire PRORURAL.

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I Cultural Property (OPN 11.03, being revised as OP 4.11) [XI Involuntary Resettlement (OP/BP 4.12) 11 [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI [I Forests (OPBP 4.36) [XI [I Safety of Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) 11 [XI

Environmental Assessment (OP/BP/GP 4.01)

2. In accordance with OP 4.01, an Environmental Assessments (EA) was carried out during June-August 2005.20The EA evaluated the appropriateness of INTA’s: (i) micro-watershed approach; (ii)the Integrated Crops Management Plan2* (MIC); and (iii)the legal and institutional capacity of the participating implementation agencies (INTA, INAFOR, MAGFOR and FUNICA) to guarantee compliance with the World Bank’s environmental safeguards requirements. The results are included in the Project files and have been posted on MAGFOR’s and INTA’s webpages. The recommendations have been integrated into the project design.

3. Component I. Six out of seven sub-components have been classified as Category LLC 99 . The extension sub-component has been rated as Category “B” because of potential larger environmental impacts on some of the project sites. The project design includes appropriate mitigation activities to reduce the potential for environmental risks and negative impacts. Component I1will have a positive impact on

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the arties’ claims on the disputed areas MAGFORMAGFOR (2005). Evaluacion Ambiental - Proyecto De Tecnologia Agropecuaria en Apoyo a1 PRORURAL. C. A. Espinosa y E. Ramirez. Managua, Nicaragua. ’’ MIC: a more comprehensive and holistic approach to IPMP. - 76 -

environmental and natural resources management through the strengthening and modernization of the Government’s regulatory and monitoring capacity.

4. The EA shows that: (i)most of the project investments will not be carried out in environmentally sensitive areas; (ii)risk of pressure on natural resources or reduction of biodiversity will be avoided by promoting technology transfer and adoption only on existing agricultural land; and (iii)no new agricultural areas will be brought under production. In addition, the proposed credit will not finance activities that may cause (i)deforestation of native forests for timber and/or fuel wood production; (ii) environmental pollution due to the use of forbidden pesticides or those classified as extremely toxic by the World Health Organization, or by inappropriate processing of agricultural products (such as coffee); (iii)soil erosion due to cultivation on steep slopes; (iv) negative impact on protected areas; or (v) that might encourage road construction or improvement within natural forests.

5. Important findings from the EA were integrated into project design, and useful recommendations will be incorporated into the operational manuals of INTA, INAFOR and FUNICA. The EA emphasizes the importance of setting up strong and effective M&E systems. Planning for these systems has been incorporated into project design.

6. The EA assessed the safeguards screening mechanisms of FAT competitive grants (sub-component 1-7) to ensure that sub-projects adequately comply with Bank’s safeguard procedures, national laws and regulation and to avoid environmentally hazardous practices. The set of basic guidelines to be used as a screening mechanism for sub-project eligibility, defined under ATP-I, was reviewed and considered adequate for meeting safeguards. Monitoring and follow-up of sub-projects implementation will be strengthened to further ensure compliance with environmental safeguards.

7. The above-mentioned guidelines are included in FUNICA’ s Operational Manual. The Manual incorporates EA recommendations for the inclusion of proper screening measures for sub-project formulation, approval, follow-up and evaluation, and in particular: (i)methodology for the assessment of direct and indirect impacts, and induced environmental risks of project proposals; (ii)evaluation of possible cumulative environmental impacts and (iii)any environmental management and/or mitigation plan that could be requested as a precondition for financing in case the sub-project is considered to pose a risk to the environment.

8. The environmental M&E plan will be strengthened and incorporated as part of the Operational Manual. It will define mechanisms for sub-project follow-up and assessment procedures as well as the performance indicators, reporting procedures and timeframe. By defining standard M&E tools, the plan will provide the basis to assess the direct, indirect and cumulative impacts of sub-projects as well as the effectiveness of mitigation measures adopted and possible adjustments.

9. Although the environmental management capacity of FUNICA is considered adequate for project implementation, the environmental M&E plan will specify institutional arrangements needed to ensure proper implementation and follow-up of mitigation, -77-

monitoring and evaluation activities. It will also define actions (training) to strengthen the above-mentioned capacity where necessary.

10. An environmental specialist will be part of the evaluation committee (Panel) of sub-project proposals presented for approval by the FAT.

Pest Management (OP 4.09)

11. Although the project will not directly finance large-scale purchases of agricultural inputs and agrochemicals, technology innovation and adoption may produce an increased use of inputs including toxic pesticides, triggering OP 4.09. The reduction of toxic pesticides used in agricultural production will be directly addressed through the application of Integrated Pest Management techniques wherever pest management issues may be potentially harmful to human health and the environment.

12. The proposed project builds on lessons learned from ATP-I and particularly from the Integrated Pest Management Plan (IPMP) developed and adopted. The Plan has been recently updated and expanded to include an Integrated Crops Management Plan (MIC), a more comprehensive and holistic approach to IPMP.22The MIC is available as a separate document that, consistently with O.P. 4.09, provides guidance on cultural practices, biological controls for insects and diseases, and information on integrated pest management.

13. Should biocide use prove to be necessary, the MIC provides guidance on how to ensure the lowest possible environmental impact, and training in safe pesticide use, handling and disposal (according to WHO and FA0 guidelines for pesticide classification and usage). The MIC includes a list of prohibited agrochemicals which will be forbidden under the project and sub-projects under the FAT competitive funds.

14. INTA’s MIC and other related documents are available on INTA’s webpage (http://www.inta.gob.ni).

Forests (OPBP 4.36)

15: The project triggers OP 4.36 Forests as it provides support to community forestry activities through the development of innovative new technologies in this. sector. The Project will not finance commercial logging operations and will only fund community forestry activities where legally permitted in the buffer zones of protected areas. The project will provide technical assistance and training to community forestry groups so that they comply with the relevant protected area management norms and regulations, and provide technical assistance to promote more sustainable forestry techniques. These activities will be in full compliance

22 Update of the Integrated Pest Management Plan for Technology Development promoted by INTA - Workshop - Managua, May 27,2005. - 78 -

with OP 4.36 and are designed to replace less sustainable techniques and forest management strategies currently in use in Nicaragua. Sub-projects to be financed under the FAT competitive funds (Sub-component 1-7) will be carefully screened to ensure their compliance with OP 4.36 as in the previous section.

Indigenous Peoples (OD 4.20, being revised as OP 4.10)

16. A key element of project implementation consists in the participation of the beneficiaries in order to establish a close relationship between their demands and public interventions. This is achieved through the application of the social evaluation and participatory methodologies developed during project preparation. In this respect, the participation of the population will be an integral part of project execution regardless of the socio-economic, gender or ethnic characteristics of that population.

17. The regions under the project present diverse socio-economic characteristics and in each case technical assistance will reflect the particular heterogeneous profile of the region’s population, seeking appropriate social inclusion.

18. The current Nicaraguan legal framework includes consideration of social issues, and will be an integral part of the activities carried out under the project. The project will use the country’s institutional framework and capabilities while meeting all Bank standards and requirements. Key Nicaraguan entities involved in social matters (MAGFOR, INTA and INAFOR)23will provide counterpart support to ensure the application of the normative and legal framework and the carrying out of capacity-strengthening activities at the national and regional level.

19. Safeguard issues. The project will be executed in the entire national territory, including the Atlantic Region where the Corazon Project would be executed and where most of the indigenous population resides. Even though the majority of beneficiaries are non-indigenous, the Government has produced two social assessments, and Indigenous Peoples Development Plan (IPDP). The project has been designed with the provisions of the World Bank policy related to Indigenous Peoples (OP 4.20 being revised as OP 4.10). All safeguard documents are public information and are posted on the MAGFOR and INTA websites (www.inta.gob.ni; www.MAGFOR.gob.ni) and are available at the project office.

20. Indigenous Peoples. In compliance with the World Bank OP 4.20 the term “indigenous peoples, is used to describe social groups with a social and cultural identity distinct from the dominant society that makes them vulnerable to being disadvantaged in the development process.”

21. Methodology. The IPDP builds on the Indigenous Peoples Annex prepared for ATP-I. Participatory consultations included indigenous farmers of both genders who have and have not benefited from ATP-I. The preparation of the IPDP was

23 And MARENA in the case of the Corazon Project. - 79 -

based on: (a) in-depth interviews and focus groups with community members and semi-structured interviews with institutional employees; (b) INEC documents such as the 2001 Household Survey, 2000 Agricultural and Population Census, poverty profiles, and indigenous peoples profiles; (c)AMICA and Sukawala documents on the situation of indigenous peoples; (d) 2000 Qualitative Poverty Assessment; (d) 2000 and 2001 Quantitative Poverty Assessments; (e) CONAGRO statistical information by regions; (f) OPS’ research on indigenous peoples;24 (g) INTA, FUNICA, INAFOR, MAGFOR, and MARENA internal reports and publications; and (h) World Bank and other donor reports. The study analyzed the demographic and socioeconomic conditions of indigenous and non- indigenous populations, and also took into account gender issues.

22. The main common issues addressed by indigenous peoples were the need to:

settle the land demarcation issue; enforce the laws to stop invasion to their land; proceed with titling and sanitation of their land; enforce the law to stop forest devastation; help to reduce their vulnerability to drought in the summer and flooding in the winter; develop a larger storage capacity to reduce their vulnerabilities to changes in the market and price for basic grains; involve indigenous communities in natural resources and forest conservation plans; train indigenous peoples to learn about the law as a mechanism to help governmental agencies to enforce the law; and establish a financial system to facilitate revolving credits to the communities.

Who are the beneficiaries?

23. The main beneficiaries of the IPDP are indigenous peoples across all regions, with particular emphasis on those living in the Atlantic region, where most indigenous people live, and where communities are found in the core, transition and buffer zones of the Bosawas Reserve. ATP-I1 will carry out activities in the buffer zone of the Bosawas Reserve (Waspam, Siuna and Rosita). And in the MAN, where indigenous people make up the majority.

24. Indigenous Peoples and Protected Areas (Bosawas). About 14,000 Miskitos and 6,500 Mayangnas live in Bosawas Reserve. Most indigenous peoples have preserved their culture (language, beliefs, forms of organization and production). Indigenous people live in six territories from three ethnic groups:

Miskito Indian Tasbaika Kum = 683.4 km2 (Rio Coco arriba, Wiwill)

24 “Estudios Cornparativos entre 10s Pueblos Indigenas Mayanga y Miskito y la Comunidad Etnia Creole en 10s Municipios de Puerto Cabezas y Bonanza”, - 80 -

Kipla Sait Tasbaika = 1,073.7 km2(Rio Coco, Waspam) Li Lamni Tasbaika Kum = (Cuenca media Rio Coco, Waspam) Mayangna Sauni As = 1,668 km2 (Cuenca del Rio Waspuk, Bonanza) Mayangna Sauni Bu = 1,024.5 km2(Cuenca de Rio Bocay, Cua-Bocay) Mayangna Sauni Bas = 40.1 km2(Cuenca del Rio Uli, Siuna) These ethnic groups have been linked directly and indirectly to protection and conservation activities in their territories, which make up about 85 percent of the Core area of Bosawas.

25. Indigenous people make up only 9 percent of the Nicaraguan population but they are disproportionately poor and typically live in areas that have been neglected by the authorities. The current Nicaraguan legal framework includes a Lawfor the Communal Property Regime, but does not include an integral legal framework to foster inclusion of indigenous peoples within the benefits of economic development.

26. Socio-economic characteristics. Five of Nicaragua’s nine indigenous live in the Atlantic Region (Miskito, Mayanga, Ramas Creoles and Garifunas), and four in the Pacific, Central, and Northern region (Cacaoperas, Nahuatl, Chorotega and Hokan Xiu). The specific characteristics of these individual groups must be taken into account when planning training activities and institutional strengthening, along with some general characteristics. For example, agriculture in indigenous families is usually carried out on communal lands, with simple tools and no inputs other than family labor. Miskito communities traditionally do not plow or use ox carts. They till using hoes. Typically there are no irrigation systems or storage and limited soil conservation management and pest control management. Cattle ranching is a growing activity. Land titling is still a core problem for indigenous peoples. Indigenous communities have local forms of organization, such as the “Sindico,” which represents the community in land and natural resources management issues and it is also in charge of managing collectively owned resources. The implementing agencies, in preparation for the project, are attempting to tailor various mechanisms for promoting appropriate technological innovation to these diverse groups of clients. One advantage is that local INTA extension staffs are Miskito, speak the language and know the client’s culture. Nonetheless, the number of local agricultural extension agents should be increased to guarantee better and appropriate coverage.

27. Gender is an important aspect of service provision and must be taken into account, but gender roles are not homogeneous across different groups. In Miskito communities, for example, women have traditionally been very active in community affairs, having recognized influence in organizations such as the Council of Elders. In contrast, women in Mayanga communities tend to play a secondary role in social organizations. The gender approach is well institutionalized within INTA, and INTA’ s Gender Unit oversees the application of the gender approach in all extension processes. - 81 -

Main activities under the Indigenous Peoples Development Plan (IPDP)

28. The social assessment evaluates each of the components and sub-components of ATP-I1 and rates their potential for meeting the requirements of the Indigenous Peoples Safeguard (OD 4.20, being revised as OP 4.10). Nine out of 10 sub- components were judged to have high potential for complying with the safeguard, with the remaining competitive funds component being deemed non-applicable because the FAT - administered by FUNICA and financed by FAD - will not be executed in indigenous areas, or in the buffer zones of Bosawas. For each sub- component, mitigation measures were identified to ensure that the requirements of the safeguards are met. The IPDP also provides detailed descriptions of proposed activities and performance indicators to guarantee compliance with World Bank safeguards.

29. Based upon on the findings of the Social Assessment, MAGFOR, INTA and INAFOR must ensure that the following actions are executed: (i) They must seek the participation of indigenous peoples’ local organizations, particularly of the Sindico, which represents the community in land and natural resources management issues and it is also in charge of managing collectively owned resources; (ii) They have an understanding that participatory processes and must follow and bottom-up approach; (iii) They and/or consultants hired by these institutions must include indigenous peoples in all activities including the design, execution, and evaluation of sub-projects to support sales of agricultural products; and (iv) They andor consultants hired by these institutions must ensure that all personnel possess the necessary language and cultural skills for carrying out activities using a culturally appropriated methodology. 30. Activities included in the IPDP amount to a total of US$190.000. They focus on (i> training indigenous peoples’ leaders (Sindicos, for example) about project scope, objectives and components; training indigenous leaders - both Miskitos and Mayagnas - on legal issues; (ii) training indigenous communities in natural resource management; (iii) increasing the coverage of communities and households benefiting from INTA’s technical assistance by improving the Regional Units’ material resources and increasing the number of extension workers;

(iv) organizing culturally appropriate activities (workshops, model farms, etc) to train producer groups in both processing agricultural products and increasing value-added of agricultural and forestry products (harvest, storage and commercialization); - 82 -

(VI designing and executing technical assistance that is appropriate to the climate and soils of the Atlantic Region,

(vi) ensuring that indigenous peoples receive - in a timely fashion - certified and appropriate seeds for the type of soil and climate; (vii) using a participatory monitoring and evaluation system aimed at evaluating process, impacts and results; and (viii) establishing a network of promoters/innovators in agro-ecology, silvo- pastoral techniques, sustainable livestock management, sustainable use of non-wood products, and post-harvest storage and commercialization. - 83 -

Annex 11: Project Preparation and Supervision NICARAGUA: Second Agricultural Technology Project

Planned Actual PCNreview November 2,2004 Initial PID to PIC February 1,2005 Initial ISDS to PIC February 1,2005 Appraisal September 5,2005 September 9,2005 Negotiations October 17, 2005 October 17,2005 BoardRVP approval November 29,2005 Planned date of effectiveness March 15,2006 Planned date of mid-term review March 15,2008 Planned closing date March 15,2010

Key institutions responsible for preparation of the project: Ministry of Agriculture and Forestry (MAGFOR) 0 Nicaraguan Institute for Agricultural Technology (INTA)

Bank staff and consultants who worked on the project included:

Name Title Unit Pierre Werbrouck Lead Agricultural Economist LCSER Norman Piccioni Sr. Agriculture Economist LCSER Douglas J. Graham Sr. Biodiversity Specialist LCSEN Francisco Pichon Sr. Natural Res. Mgmt. Spec. LCSER Samuel Taffesse Operations Officer LCSER Manuel Vargas Sr. Financial Management Spec. LOCA bani Escolano Procurement Specialist LCOPR Daniele Calabrese Communications Officer EXTCD Carolina Hammond Program Assistant LCSEO Teresa Genta-Fons Sr. Counsel LEGLA Mary Lisbeth Gonzalez Consultant LCSEO Patricia E. Parera Consultant LCSER Grissel Prieto Program Assistant LCSES

Bank funds expended to date on project preparation: 1 Bank resources: US$225,548.14 2 Trust funds: US$339,264.66 3 Total: US$564,812.80

Estimated Approval and Supervision costs: US$110,000 1 Remaining costs to approval: US$25,000 2 Estimated annual supervision cost: US$ 100,000 - 84 -

Annex 12: Documents in the Project File NICARAGUA: Second Agricultural Technology Project

A. Project ImplementationPlan 1. Plan for Institutional Strengthening - MAGFOR 2. Draft Implementation Plan PRORURAL - MAGFOR/INTA 3. Operational Manuel PRORURAL- MAGFOR (Pending)

B. Bank Staff Assessments 3. Assessment of Financial Management Arrangements - Manuel Vargas 4. Communication Program Assessment - Daniele Calabrese and Michele Bruni 5. Procurement Assessment - Irani Escolano 6. Social Analysis- Mary Lisbeth Gonzalez 7. Environmental Analysis-Eric Ramirez 8. Public Expenditure Analysis of the Rural Productive Sector - Emma Budinich 9. Monitoring and Evaluation Plan - Samuel Taffesse 10. Institutional Analysis Agricultural Public Sector - Carlos Arce 11. Economic Analysis - Jorge Caballero, Juan Morrelli (FAO)

C. Other 1. Project Concept Note 2. Minutes of the Project Concept Note Review Meeting Nicaragua PRORURAL (P087046). November 2,2004 3. Integrated Safeguards Data Sheet - Concept Stage 4. Project Information Document (PID) - Concept Stage 5. Project Preparation Facility- INTA 6. Harmonization and Alignment Nicaragua Case Study. GDPRD February, 2005. 7. Cost Tables 8. MAGFOR, 2004. Annual Management Report Period January- December 2003. 9. MAGFOR, 2003. Production of Principle Agricultural Products 1996/96-2003/04, 10. MAGFOR, 2004. Production Monitoring - Report regarding Basic Grains 2003 11. INTA 2004 Annual Report. June 2005 12. Ministry of the Treasury and Public Credit. General Budget of the Republic - 2000, 2001,2002,2003,2004. 13. Website PRORURAL: http://swap-rp.municipiosnicaragua.org.ni 14. IDA-IFC, 2005. IDA-IFC Interim Strategy Note for the Republic of Nicaragua, July 2005 (32570-NI). 15. World Bank, 2003. Nicaragua: Promoting Competitiveness and Stimulating Broad- Based Growth in Agriculture (25 115-NI). 16. GoN 1, Codigo de Conducta que Define las Relaciones entre el Gobierno de Nicaragua, por rnedio del Ministerio Agropecuario y Forestal, Instituciones Adscritas, el Instituto de Desarrollo Rural y 10s Socios para el Desarrollo Rural Productivo. - 85 -

17. World Bank, 2003. Agricultural Competitiveness, Drivers of Rural Growth, Rural Investment Climate, Nicaragua Poverty Assessment 2003, and Land Markets. 18. MAGFOR, 2005. Sistematizacidn y Lecciones Aprendidas del Proyecto De Tecnologia Agricola de Nicaragua by T. Ammour 19. FAO, 2004. Andisis comparativo de las modalidades de asistencia te'cnica del INTA. Enfoques y modelos de extensidn, estructuras de costos y beneficios generados. Infomze Final, R. Ortiz. 20. Gonzalez, M. L. 2005. Social Assessment, Indigenous Peoples Development Plan. PRORURAL, Nicaragua 2005. Ramirez E. et al. (August 2005). Paper commissioned by MAGFOR: Evaluacion Social. Proyecto de Tecnologia Agropecuaria en Apoyo a PRORURAL. The SA has been conducted in close collaboration with the Corazon Project team. http://www.MAGFOR.gob.nilservicios/descargas/Evaluacion%2OSocial.pdf 21, Ramirez et a1 2005b Ramirez et a1 (August 2005) Anexo 2, Consulta Previa, Libre e Infomzada. 22. OPS, 2004. Evaluacidn Nacional de Decenio de Salud de 10s Pueblos Indigenas y Comunidades Afrocaribes de Nicaragua (1995-2004). OPS. Nicaragua. 23. INTA, 2005a. Plan De Manejo Integrado De Cultivos Para El Desarrollo Tecnoldgico Promovido Por INTA. Base conceptual y elementos asociados. w ww .inta. gob. ni/nuias miplnuias mip.html 24. INTA, 2005b. Update of the IPMP for Technology Development promoted by INTA -Workshop - Managua may 27,2005. - 86 -

Annex 13: Statement of Loans and Credits NICARAGUA: Second Agricultural Technology Project

Difference between expected and actual Original Amount in US$ Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d PO78990 2005 NI - EDUCATION 0.00 15.00 0.00 0.00 0.00 15.96 0.36 0.00 PO77826 2004 NIBroad-Based Access to Finan Services 0.00 7.00 0.00 0.00 0.00 7.36 0.58 0.00 PO78891 2004 NI PUBLIC SECTOR TA 0.00 23.50 0.00 0.00 0.00 20.68 3.23 0.00 PO82885 2004 NICARAGUA PRSC I 0.00 70.00 0.00 0.00 0.00 36.03 10.64 0.00 PO73246 2003 NI Offgrid Rural Electrification (PERZA) 0.00 12.00 0.00 0.00 0.00 10.97 4.45 0.00 PO75194 2003 NI Off-Grid Rural Electrification 0.00 0.00 0.00 4.02 0.00 3.74 1.99 0.00 PO56018 2002 NI LAND ADMINISTRATION PROJECT 0.00 32.60 0.00 0.00 0.00 32.28 4.07 0.00 PO64906 2001 NIPoverty Red.&Local Dev. FISE 0.00 60.00 0.00 0.00 0.00 14.63 7.02 -11.31 PO70016 2001 NI Competitiveness LIL 0.00 5.00 0.00 0.00 0.00 2.62 1.80 0.73 PO55823 2001 NI SECOND RURAL MUNICIPAL DEV. 0.00 28.70 0.00 0.00 0.00 9.38 15.73 0.00 PROJECT PO64916 2001 NI Natural Disaster Vulnerability Reduc 0.00 13.50 0.00 0.00 0.00 10.10 8.13 0.00 PO68673 2001 NI Road Rehab. and Maintenance I11 0.00 75.00 0.00 0.00 0.00 13.43 -0.44 0.00 PO649 15 2000 NI AG TECHN & RURAL EDU (APL) 0.00 23.63 0.00 0.00 0.00 0.00 5.92 0.00 PO56087 2000 NI Pension and Financ. Market Reform TA 0.00 8.00 0.00 0.00 0.00 0.80 -6.18 0.99 PO55853 2000 NI-TelecommunicationReform 0.00 15.90 0.00 0.00 0.00 0.43 1.05 0.00 PO506 13 2000 NI SECOND BASIC EDUCATION 0.00 52.50 0.00 0.00 0.00 0.99 1.92 0.00 PROJECT

PO4 1790 1997 GEF NI Atlantic BiologicalI Comdor 0.00 0.00 0.00 7.10 0.00 0.51 7.16 6.42 Total: 0.00 442.33 0.00 11.12 0.00 179.91 67.43 - 3.17

NICARAGUA STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed IFC IJ?C FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2004 Confia 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 1998 Frutan 0.36 0.36 0.00 0.00 0.36 0.00 0.00 0.00 1998 La Colonia 1.oo 0.00 0.50 0.00 1.oo 0.00 0.50 0.00 1999 SEF Dicegsa 0.33 0.00 0.00 0.00 0.33 0.00 0.00 0.00 Total portfolio: 6.69 0.36 0.50 0.00 6.69 0.00 0.50 0.00

~ Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00 - 87 -

Annex 14: Country at a Glance NICARAGUA: Second Agricultural Technology Project Nicaragua '

PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Inflation (%) Domestic prices (%change) 80 7 Consumer pnces 31.0 20.4 4.0 7.3 60 Implicit GDP deflator 11.0 20.4 5.3 6.1 40 Government finance 20 (%of GDP, includes current grants) 0 Current revenue 20.1 14.9 16.7 98 99 00 01 02 0: Current budget balance -11 -1.9 0.8 * GDPdeflator -0-CPI Overall surplus/deficit -7.6 -8.7 -6.9 -

TRADE 1983 1993 2002 2003 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 452 270 596 596 2,000 7 Coffee 153 32 73 Shnmpand lobster l7 27 76 1500 Manufactures 64 91 81 214 1000 Total imports (cif) 806 744 1,796 1,624 l79 Food t31 500 Fuel and energy 146 *)4 Capital goods 204 184 401 0 97 98 99 00 01 02 03 Export price index (895=WO) 67 70 73 79 Import price index(1995=W0) 59 96 116 e9 exports mlmporis Terms of trade (B95=WO) 10 73 63 61 I

BALANCE of PAYMENTS 1983 1993 2002 2003 (US$ millions) Exports of goods and services 498 364 918 936 Imports of goods and services 873 862 1,974 1,971 Resource balance -375 -498 -1,057 -1,035 Net Income -2e -432 -193 -195 Net current transfers 0 25 464 507 Current account balance -567 -905 -785 -723 Financing items (net) 549 604 634 708 Changes in net reserves 38 n1 -49 15 Memo: Reserves including gold (US$ millions) 221 88 454 447 Conversion rate (DEC, local/us$) 2.39E-9 6.1 14.3 15.1

EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 :omposition of 2003 debt (US$ mill.) (US$ millions) Total debt outstanding and disbursed 4,098 11,303 6,485 6,629 87 0 0 IBRD 146 G 569 I IDA 57 86 811 998 B 998

Total debt service n7 t35 151 76 2 13 IB RD t3 29 0 0 IDA 1 3 2 3 Composition of net resource flows Official grants 49 207 218 260 42 155 162 Official creditors 1,750 Private creditors 28 -5 32 -26 Foreign direct investment 0 39 74 Portfolio equity 0 0 0 World Bank program Commitments 0 93 33 27 \. IBRD E- Bilateral Disbursements 24 15 72 1P 3. IDA D - Other multilateral F - Private Principal repayments 6 21 0 0 :-IMF G- Short-termI . - 88 -

Annex 15: Monitoring and Evaluation System

NICARAGUA: Second Agricultural Technology Project

1. The purpose of the M&E system is to provide donors, project coordinators, policy makers and other stakeholders with current and relevant information on project implementation and progress and facilitating a learning environment. For stakeholders and external users, the information generated from the M&E system would be accessible through the Agricultural Information System (SIA) and periodic reports.

2. The M&E systems in four institutions (MAGFOR, INTA, INAFOR & FUNICA) are at varying level of development and are not linked to each other. A DOS (operating system) based M&E system called MEVA is operational within INTA under the Planning, Monitoring and Evaluation department. The system has served well the institution in the past ten years. Within MAGFOR there are two competing systems (the SIA system and SNIP - National System of Project Investment). MAGFOR has managed (with the support of ATP I)the SIA system and closely exchanges information with SNIP. In addition, a promising GIs-based monitoring system with information at micro-watershed level and that will be accessible to local staff of MAGFOR and INTA is under development. INAFOR, for its part, has developed an information system but still lacks a functioning M&E system. FUNICA has its own M&E system.

Establishment of an Integrated M&E System

3. The establishment of a compatible system among the participating institutions will have an additional impact of reducing transaction cost of information flows and reporting by participating institutions and donors alike. The system to be established will be simple, compatible and cost effective. Compatibility will be addressed through the deployment of a single operating system that would run on existing infrastructure of the participating institutions. The M&E system that will be established at MAGFOR will be accessible, for purpose of reporting, by each reporting unit of the implements agencies. MAGFOR, in coordination with other PRORURAL implementing agencies, will lead the design and establishment of the Program’s SISEVA -Learning, Impact Evaluation and Monitoring System. It is expected that once the system demonstrates its effectiveness, it will be rolled-out in such a way that the same system would be adapted and replicated by all participating units in execution of PRORURAL.

4. The project will use existing hardware to install the system. The M&E system would be established in two phases. During the first-phase that corresponds to the first two years of project implementation, the system will be established with the collaboration of four institutions (MAGFOR, INTA, INAFOR and FUNICA) and in coordination with PRORURAL’s SISEVA team. Throughout the first two years, the system will give priority to the M&E activities related to the implementation of the Components - 89 -

and sub-components of PRORURAL directly supported by ATP 11. During this period, it might also incorporate other institutions that execute components of PRORURAL once the system is established and become functional. The M&E system will be updated directly by participating institutions for activities they are responsible. In addition, after the first two years of implementation, the new system will be deployed in each participating institution to harmonize the systems that exist among the different institutions. 5. During the third year, the most important activity will be the expansion of the M&E to include decentralized organizational structures of the project. Local organizations of project execution agents will be able to use the systems for reporting directly to the responsible unit for M&E system within MAGFOR, in addition to their responsibility of reporting to their respective central organizations. The second phase also would provide training in the use of the system, strengthening the harmonization of physical and financial indicators, and the integration of the M&E system with SIA.

M&E Responsibilities

6. Coordinating project monitoring and evaluation would be the responsibility of MAGFOR. However, each participating institution will be responsible for monitoring and reporting on its respective activities. In each institution, an independent unit for M&E system will be established. MAGFOR would contract an independent and qualified consultant to evaluate project progress in the second year of project implementation. The final evaluation will also be the basis for the preparation of project Implementation Completion Report (ICR). 7. MAGFOR, in cooperation with participating institutions, will be responsible for: (i) designing Management Information Systems for M&E; (ii)preparing reporting formats, (iii)establishing frequency of reporting; and (iii)training of staff during the deployment of the system. Based on the information from participating institutions, quarterly reports will be prepared by the M&E unit in MAGFOR that will cover progress in physical implementation, the use of project funds, the progress towards the achievement of project objective and realization of impacts. Each participating institution may opt to prepare its appropriate quarterly report to serve as an input to the preparation of the project’s quarterly reports. The quarterly reports will be consolidated by MAGFOR into half-yearly progress reports to be submitted to the Bank and donors one-month before each supervision mission. 8. In addition to progress made in project implementation during the preceding six- months period, the six-month progress reports will also include adjustment to indicators, if necessary, an implementation plan and work program for the next six months following the reporting period. Lessons learned, with recommendations for any improvements, would be used to assess the need for restructuring the project. The report also will include assessment of project risks (identified during preparation) including actions taken and new risks identified, if any. - 90 -

9. To put in operation the establishment of the M&E system, a Memorandum of Understanding (MoU) will be signed among the participating institution. The memorandum of understanding, among others, will detail the type of information each institution will be responsible for reporting, the frequency of reporting, assigning responsible unit in each executing agencies, commitment to expand the system to include regional and zonal offices. The information flow and the rolling- out of the system will follow the schematic flow given in the diagram below.

Indicators

10. The M&E system will have outcomehmpact, process and financial indicators. These indicators will be organized in two-sets that are distinct but mutually reinforcing. The first set is limited to the main indicators included in the Results Framework and Monitoring of the project (See Annex 3 of the PAD). However, to a large extent, the M&E system would focus on indicators included in the Result Framework that will be further refined during appraisal. In order to ensure that the system established is dynamic (in contrast to static) and that maintains a learning environment, the list of indicators would be reviewed constantly to reflect new realities as project implementation progresses. Updating the Results Framework will be crucial given that several agencies and donors would participate as the implementation of PRORURAL progresses. The second set of indicators developed before project appraisal are important to gauge and review activities of PRORURAL and would be discussed with the Bank mission and participating donors to refine and establish an agreement between the Government and donors. - 91 -

Schematic representation of M&E system establishment and flow of information

MAGFOR 1Departments

Sector Institutions Districts Office of

Operational within six months of project effectiveness

Operational after the system functionality among the 4 institutions is 001 ensured --b Operational in the 2"dyear of M&E establishment MAP SECTION 11 12 13 14 15

° ° ° ° °

Fonseca Gulf of Diriamba La Concepción La Conquista San Marcos Dolores Santa Teresa Mateare El Rosario MANAGUA CHINANDEGA

Masatepe

OCEAN El Realejo PACIFIC Niquinohomo Corinto

JINOTEPE

Santo Tomás del Norte Nandasmo CHINANDEGA Nindirí

San Pedro del Norte Choluteca El Viejo La Paz de Carazo Posoltega Tonala

Nandaime

San Rafael del Sur Tisma To MASAYA Chichigalpa

Catarina To Choluteca San Juan de Oriente Cinco Pinos 87 Diriomo Diría ° Villanueva LÉON 87 ° HONDURAS GRANADA La Paz Centro Quezalguaque Somotillo Villa Carlos Fonseca A. del Norte Francisco Malpaisillo

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Santa Rosa del Peñón MADRIZ

Totogalpa

For detail, San José de Cusmapa

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Islands Cayos 11 12 13 14 15 ° ° ° ° ° MEXICO 18 10 14 ° ° ° GUATEMALA SECOND AGRICULTURAL

TECHNOLOGY PROJECT

This map was produced by the Map Design Unit of The World Bank. h onais oos eoiain n n other information shown denominations and any The boundaries, colors, on this map do not imply, the part of The World Bank Group, any ugeto h ea ttso n ertr,or any endorsement status of any territory, judgment on the legal acceptance of such boundaries.

PACIFIC OCEAN SALVADOR 90 90 02040 ° ° EL BELIZE HONDURAS INTERNATIONAL BOUNDARIES REGION BOUNDARIES DEPARTMENT OR AUTONOMOUS MUNICIPAL BOUNDARIES NATIONAL CAPITAL DEPARTMENT CAPITALS UNPAVED ROADS PAVED ROADS TECHNICAL ASSISTANCE FUND - FUNICA COFINANCED TECHNICAL ASSISTANCE - INTA PUBLIC TECHNICAL ASSISTANCE - INTA NICARAGUA NICARAGUA 86 86 KILOMETERS ° ° COSTA RICA 60 82 82 0100 80

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PANAMA Sea NOVEMBER 2005 COLOMBIA 78 IBRD 34322 ° 10 14 18 ° ° °