5. Assessment of Bank and Borrower Performance

Document of The World Bank

Public Disclosure Authorized Report No: ICR00001899

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-42070 IDA-42080 TF-56730)

ON A

Public Disclosure Authorized CREDIT

IN THE AMOUNT OF SDR 20.1 MILLION (US$29.2 MILLION EQUIVALENT)

TO THE

REPUBLIC OF AZERBAIJAN

FOR A

SECOND AGRICULTURAL DEVELOPMENT AND CREDIT PROJECT IN SUPPORT OF Public Disclosure Authorized THE SECOND PHASE AGRICULTURAL DEVELOPMENT AND CREDIT PROGRAM

June 25, 2012

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

CURRENCY EQUIVALENTS

(Exchange Rate Effective October 25, 2011) Currency Unit = New Azerbaijani Manat AZN 0.78 = US$ 1 US$ 1.59 = SDR 1

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ABTC Azerbaijan Bank Training Center ISR Implementation Status and Results ACDP Agricultural Development and Credit IS Interim Survey Project AKIA Azerbaijan Credit Union Association M&E Monitoring and Evaluation APL Adaptable Program Lending MICH Market Information and Commercial Hub AZN New Azerbaijan Manat MIS Management Information Systems AZVET National Animal Disease MoA Ministry of Agriculture Information System BG Borrowers Group MoF Ministry of Finance CES Completion Evaluation Survey CGP Competitive Grants Program MTR Mid-Term Review CGS Competitive Grants Scheme NGO Non-Governmental Organization CIA Credit Implementing Agency NPV Net Present Value CIMMYT International Maize and Wheat NRICH National Research Institute for Crop Improvement Center Husbandry and Crop Diversification CPS Country Partnership Strategy OM Operational Manual CU Credit Union PA Private Advisors DTRA Defense Threat Reduction Agency PAD Project Appraisal Document EEE External Environment Effects PC Price Collector EMP Environmental Management Plan PDO Project Development Objective ERR Economic Rate of Return PFI Participating Financial Institutions FM Financial Management PMU Project Management Unit FOE Follow-on effects (from ADCP-II PRSC Poverty Reduction Support Credit groups) FPP Farm Privatization Project PVU Private Veterinary Units FY Financial year RAC Regional Advisory Committee GDP Gross Domestic Product RIG Rural Investment Guidelines GoA Government of Azerbaijan SAAC State Agency for Agricultural Credits IAS Information and Advisory Services SDR Special Drawing Rights ICARDA International Center for Agricultural SIG Special Interest Groups Research in the Dry Areas ICR Implementation Completion and SPPRED State Program on Poverty Reduction and Results Report Economic Development IDA International Development SVS State Veterinary Service Association

IBRD International Bank for USAID United States Agency for International Reconstruction and Development Development IFC International Finance Corporation USDA United States Department of Agriculture IPGRI International Plant Genetic VFU Veterinary Field Unit Resources Institute

Vice President: Philippe H. Le Houerou Country Director: Asad Alam Sector Manager: Dina Umali-Deininger Project Team Leader: Rufiz Chirag-zade ICR Team Leader: Malathi S. Jayawickrama

AZERBAIJAN

SECOND AGRICULTURAL DEVELOPMENT AND CREDIT PROJECT

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 4 3. Assessment of Outcomes ...... 8 4. Assessment of Risk to Development Outcome ...... 17 5. Assessment of Bank and Borrower Performance ...... 19 6. Lessons Learned...... 21 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners...... 23 Annex 1. Project Costs and Financing ...... 24 Annex 2. Outputs by Component...... 25 Annex 3. Economic and Financial Analysis ...... 42 Annex 4. Bank Lending and Implementation Support/Supervision Processes ...... 52 Annex 5. Beneficiary Survey Results ...... 54 Annex 6. Stakeholder Workshop Report and Results ...... 59 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ...... 60 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ...... 68 Annex 9. List of Supporting Documents ...... 69 MAP IBRD No. 33365 ...... 70

A. Basic Information

AGRICULTURAL DEVELOPMENT Country: Azerbaijan Project Name: AND CREDIT PROJECT-II IDA-42070,IDA- Project ID: P090887 L/C/TF Number(s): 42080,TF-56730 ICR Date: 07/18/2012 ICR Type: Core ICR GOVERNMENT OF Lending Instrument: APL Borrower: AZERBAIJAN Original Total XDR 20.10M Disbursed Amount: XDR 19.47M Commitment: Revised Amount: XDR 20.10M Environmental Category: F Implementing Agencies: PMU under State Agency of Agricultural Credits, Ministry of Agriculture Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 12/13/2005 Effectiveness: 12/29/2006 12/29/2006 09/06/2010 Appraisal: 04/11/2006 Restructuring(s): 05/30/2011 Approval: 06/27/2006 Mid-term Review: 01/15/2009 05/12/2009 Closing: 05/31/2011 02/29/2012

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Moderately Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Satisfactory Overall Borrower Moderately Satisfactory

i Performance: Performance:

C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any Quality of No None time (Yes/No): Supervision (QSA): DO rating before Satisfactory Closing/Inactive status:

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Agricultural extension and research 10 10 Agro-industry 55 55 Agro-industry, marketing, and trade 35 35

Theme Code (as % of total Bank financing) Rural markets 33 33 Rural non-farm income generation 33 33 Rural policies and institutions 17 17 Rural services and infrastructure 17 17

E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Henry G. R. Kerali D-M Dowsett-Coirolo Sector Manager: Dina Umali-Deininger Juergen Voegele Project Team Leader: Rufiz Vakhid Chirag-Zade Frauke Jungbluth ICR Team Leader: Malathi S. Jayawickrama ICR Primary Author: Malathi S. Jayawickrama

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The main objective is to further increase rural productivity and incomes by enhancing the access of farmers and small and medium rural enterprises to rural business and

ii agricultural support services including financial, advisory and veterinary services and by stimulating market-oriented investments in rural areas.

Revised Project Development Objectives (as approved by original approving authority)

(a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Incomes of participating farmers and rural entrepreneurs increased by 20% Indicator 1 : through improved access to services and through vertical integration. Average net income of farmers according to the Average net income of Incomes of Value completion survey farmers according to the farmers and rural quantitative or results was AZN baseline survey results enterprises to be Qualitative) 4481 (increased in was AZN 3211 increased by 20% comparison with BLS period by nearly 40%) Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % achievement) Production marketed for cash increased by 20% as a result of increased quantity Indicator 2 : and improved quality of production. Production marketed for cash Production marketed for according to the Value cash according to the 20% increase over interim survey was quantitative or baseline survey was base levels 76.6% (increased in Qualitative) 60.2% comparison with BLS period by 27%) Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % achievement)

iii (b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Improved outreach and financial performance of CUs--At least 10,000 persons Indicator 1 : accessing credit through CUs. 14,216 members in Value 3,000 persons accessed 10,000 clients 55 CUs of persons (quantitative credit through CUs served accessed credit or Qualitative) through CUs Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % achievement) Greater outreach to rural areas by PFIs (commercial banks and leasing companies), leading to increases in their rural loan portfolios. Rural outstanding Indicator 2 : loan portfolio as a percentage of Agricultural GDP increased by 2.5 % over base level. Rural outstanding loan portfolio as a Rural outstanding Value Rural outstanding loan percentage of loan portfolio is (quantitative portfolio is 8.4 % of Agricultural GDP 11.3 % of or Qualitative) Agricultural GDP increased by 2.5 % Agricultural GDP over base level Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % achievement) High quality innovations linking farmers and markets introduced by rural Indicator 3 : business entities. Around 90 rural business innovations conducted satisfactorily, with improved practices demonstrated to at least 150 rural business entities. Around 90 rural business 74 grants for innovations introducing and Value conducted transferring (quantitative 0 rural business entities satisfactorily, with improved or Qualitative) improved practices technologies demonstrated to at awarded. least 150 rural business entities Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments Grant recipients are carrying out the technology transfer activities satisfactorily. (incl. % Some 7000 entrepreneurs and farmers out of which about 150 rural business achievement) entities and other business groups participated in technology transfer activities. Additional 20% of persons benefited from services in the old regions targeted Indicator 4 : during ADCP-I. Value About 277,000 farmers Base plus 20% Some 438,720

iv (quantitative (around 55 % of total farmers in five or Qualitative) farmers in the five ADCP-I regions regions) received (base plus 58%) advisory services in the received advisory five existing regions in services under ADCP-I ADCP-II during Jan 1 2007- March 31 2011. Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % This represents a 58% increase. achievement) Around 50% of farm households reached in the new regions through training Indicator 5 : courses, demonstrations and individual advisory services. Some 264,630 farmers (69.5% of total number of Value About 380,000 farmers farmers) received 50% of farmers of (quantitative reside in the new five advisory services in the total covered or Qualitative) regions the new five ADCP II zones during Jan 1 2008- March 31 2011 Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % achievement) Indicator 6 : RACs recovered up to 20% of their operational costs in the old regions. By the end of 2010 Value 10% of operational cost 20% of operational about 20% of the (quantitative recovered in the five costs operational cost or Qualitative) existing regions was recovered. Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % achievement) Indicator 7 : RACs recovered up to 10 % of operational costs in the new regions. By the end of 2010 Value 10% of total cost about 12% of the (quantitative 0% in the new regions in new regions operational cost or Qualitative) was recovered. Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % achievement) Around 75% of VFUs recovered their operational costs, and livestock owners Indicator 8 : satisfied with services received. Value All established and Not available 75% of VFUs (quantitative supported 55 PVUs

v or Qualitative) are recovering their operational costs Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % achievement) Indicator 9 : Brucellosis controlled effectively, shown by 25% reduction in human cases. Taking into account the delay in the commencement of the pilot project proxy indicator Value 25% drop from the (abortion rate of (quantitative Not available base animals) was used or Qualitative) instead of original one. Therefore abortion rate decreased by around 70% Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments (incl. % achievement) Around 35% of farmers satisfied with quality of locally adapted seeds and Indicator 10 : seedling varieties. According to the completion survey results 71% of Value farmers somehow (quantitative Not available Not available benefited by the or Qualitative) ADCP II satisfied with locally available seeds and seedling varieties Date achieved 12/29/2006 12/29/2006 06/30/2011 Comments These farmers in comparison with non project groups prefer to buy seeds and (incl. % seedlings from specialized research institutes and companies. achievement)

G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 08/23/2006 Satisfactory Satisfactory 0.00 2 01/18/2007 Satisfactory Satisfactory 0.00 3 05/21/2007 Satisfactory Moderately Satisfactory 1.00 4 08/09/2007 Satisfactory Moderately Satisfactory 1.76

vi 5 08/23/2007 Satisfactory Moderately Satisfactory 1.76 6 04/04/2008 Satisfactory Satisfactory 3.45 7 10/09/2008 Satisfactory Satisfactory 8.44 8 02/03/2009 Satisfactory Satisfactory 13.04 9 09/24/2009 Satisfactory Satisfactory 20.95 10 01/21/2010 Satisfactory Satisfactory 24.62 11 10/08/2010 Satisfactory Satisfactory 27.48 12 06/27/2011 Satisfactory Satisfactory 29.48 13 03/01/2012 Satisfactory Satisfactory 30.05

H. Restructuring (if any)

ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions reallocation of additional funds 09/06/2010 S S 27.48 to ensure sufficient funding for all activities Project extension, reallocation 05/30/2011 S S 29.48 of funds and for preparation of ADCP-III

I. Disbursement Profile

vii

viii

1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

1. Driven by the oil boom, Azerbaijan’s per capita income rose from a post- independence low of US$470 in 1995 to US$1,240 in 2005. The country had achieved macroeconomic stability over the years prior to appraisal, and the increasing oil and gas revenues provided significant prospects for further GDP growth. The Government of Azerbaijan (GOA), however, also faced a major challenge in terms of using its oil revenues to stimulate sustainable and broad-based growth to generate jobs, equity and reduce poverty. Ensuring non-oil sector growth, and, in particular, preventing the loss of competitiveness of the agricultural sector, which employed about 45 percent of the workforce, and enhancing rural sector growth were seen as critical to enhancing food security and providing opportunities for expanding incomes of Azerbaijan’s poor.

2. Agriculture accounted for approximately 12.3% of GDP in 2004, and was the third largest economic sector after oil and construction. In addition, agro-industry, including textiles, represented over 50 percent of total manufacturing employment. Agriculture was also an important source of income and stability for rural areas where the benefits of the country’s petroleum wealth were much less evident. Further, the share of expenditures on food by Azerbaijani households was high (75%), and even higher for the rural poor (81%). While rural households produced half of their food consumption, the reliance on own consumption was even higher (65%) for the poorest households (PAD, June 2006).

3. The State Program on Poverty Reduction and Economic Development (SPPRED) of 2003 articulated the Government’s strategy to promote more balanced, private sector- led growth and reduce poverty. Against this background, in 1998, GoA requested World Bank support for agriculture, through a multi-phase Adaptable Program Lending (APL) instrument to address the medium-term development goals of the rural sector. The first phase, ADCP-I (1999-2006, US$30 million), sought to raise agricultural productivity by consolidating land reform, agricultural extension, and credit elements of the Bank’s Farm Privatization Project (FPP, 1997) covering a wider geographic area. ADCP-II was to build on ADCP-I’s achievements, and strengthen the credit union system, expand the outreach of rural advisory services, improve access to adapted technologies, and fill the gap between rural producers and higher-end markets by assisting value-added business activities. ADCP-II was approved on June 27, 2006 and became effective on December 29, 2006.

1.2 Original Project Development Objectives (PDO) and Key Indicators

4. The overall development objective of the three-phase Program as a whole was to return Azerbaijan’s farming areas to former levels of productivity under a new system characterized by private family and group farms operating in private markets. Within this Program objective, the PDO of ADCP-II was to further increase rural productivity and incomes by enhancing the access of farmers and small and medium rural enterprises to

rural business and agricultural support services including financial, advisory and veterinary services and by stimulating market-oriented investments in rural areas. The project was to build on ADCP-1’s achievements by: (i) strengthening the credit union system established under ADCP-I and stimulating commercial financial services suited for agricultural businesses; (ii) expanding the outreach of the rural advisory services established under ADCP-I; (iii) developing private veterinary services and modernizing and streamlining the State Veterinary Services; (iv) improving access to adapted technologies by one or possibly two selected agricultural research institutes; and (v) assisting producers and processors in marketing and improved product quality.

Key Performance Indicators (KPIs):

(i) Incomes of participating farmers and rural entrepreneurs increased by 20% through improved access to services and through vertical integration; and (ii) Production marketed for cash increased by 20% as a result of increased quantity and improved quality of production.

1.3 Revised PDO and Key Indicators, and reasons/justification. Not Applicable.

1.4 Main Beneficiaries

5. The primary project beneficiaries were expected to be individual farmers, farmer groups, rural micro-entrepreneurs, and the small to medium agro-processors. Secondary beneficiaries anticipated to benefit included: participating financial institutions (PFIs), through improved skills and a diverse menu of suitably adapted financial products and services, and the Credit Union network; the national network of advisory services, through training and technical support; the State Veterinary Service, through strengthened capacity for disease diagnosis; the National Research Institute for Crop Husbandry and Crop Diversification (NRICH) and its experimental stations, through modernization and reforms.

1.5 Original Components

6. Component 1: Agricultural Business Services (US$42.1m) sought to support rural businesses to improve the linkages between their production and markets, and to enhance access to financial services by small and medium rural enterprises (including farmers), agro-processors, and other forms of agribusinesses, through: (a) capacity building in PFIs in order to improve their staffs lending skills and to promote new financial products; and (b) providing badly needed funds for lending to their clients. Component 1 included four sub-components: (i) Financial Services for Small Agribusiness/Credit Unions; (ii) Financial Services for Medium Agribusinesses/Banks and Leasing Companies; (iii) Development of Efficient Rural Market Links; and (iv) Rural Business Advisory and Market Service.

7. Component 2 - Agricultural Support Services (US$14.33m) aimed to enable farmers to improve their productivity and quality of production by expanding the outreach

of the advisory system, strengthening the provision of private veterinary services, and improving access to adapted technologies. It included three sub-components: (i) Information and Advisory Services (IAS), to build on the foundations established under ADCP-I and further develop the advisory system to cover a wider geographical area using a similar approach; (ii) Veterinary Services, to enhance access to quality veterinary services throughout the country by expanding and strengthening the private Veterinary Field Unit (VFU) system, supporting the privatization of the State Veterinary Service (SVS) field services staff, strengthening the disease surveillance and preparedness systems, and implementing an agreed control program against at least two priority diseases; and (iii) Improved Access to Adapted Technologies, where ADCP-II was to build on the experience gained under ADCP-I and provide one or two selected research institutes to improve their capacity to develop and demonstrate adapted technologies, focusing on variety improvement and crop husbandry.

8. Component 3 - Project Management (US$1.28m) sought to support the establishment and operation of a Project Management Unit (PMU) under the Ministry o f Agriculture and to build on the structures established under ADCP-I.

1.6 Revised Components. Not Applicable.

1.7 Other significant changes

9. Reallocation of Funds and Extension of Closing Date. ADCP-II was restructured on September 6, 2010 (based on a review in March 2010 of the financial status of project components) to ensure sufficient funding for the remaining activities. Rapidly rising prices had resulted in increasing costs for most IAS sub-component activities and project operation costs and necessitated reallocation of additional funds to these categories.1

10. The project was restructured again in May 30, 2011 in response to a request from GOA to: (i) extend the project closing date from May 31, 2011 to February 29, 2012, to complete remaining project activities; and to (ii) reallocate funds to support agreed activities and ensure the most effective use of undisbursed credit funds under the proposed extension. In particular, the reallocation was to continue funding the pilot brucellosis program and develop the animal disease information system, provide additional TA for specialized studies on seeds and food safety standards, and develop and expand private veterinary services. The extension was also to allow building into the project as many activities as possible to help prepare for ADCP-III.2

1 The reallocation (of SDR 691,500) is set forth in paragraph 2 of Section IV.A of Schedule 2 to the Financing Agreement (Restructuring Paper, August 31, 2010). 2 The reallocation of SDR 386,000 and these changes were set forth in Section IV.B.2 and in paragraph 2 of Section IV.A of Schedule 2 to the Financing Agreement (Restructuring Paper, May 26, 2011).

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

11. Project preparation activities to underpin ADCP-II commenced during ADCP-I, and integrated experiences from the first phase. For example, the Competitive Grants Program (CGP) established under ADCP-I had helped to instill a famer-oriented and problem-specific approach to promoting agricultural technology, and this was further improved, with strong support from Government. ADCP-II also planned to expand activities based on the positive experiences of private sector participation under ADCP-I. GoA expressed strong commitment and ownership, and participated actively in project preparation and design of Phase II. For example, at the Government’s urging, ADCP-II shifted the CGS sub-component from the research institute-focused grant program to a more market-led and demand-driven program to address requests from various rural business enterprises and thus emphasize constraints identified by beneficiaries. GoA’s commitment is also demonstrated by its contribution of approximately US$9 million for completing the rehabilitation of the National Research Institute for Crop Husbandry and Crop Diversification (NRICH) main building and its regional facilities (in addition to ADCP-II funds for limited essential upgrading of NRICH labs).

12. ADCP-II incorporated several key lessons in its design, from ADCP-I and other donor activities in Azerbaijan and the region. These were: (i) the need to promote a wider outreach and to enhance the capacity of participating financial institutions (PFIs) and offer a greater range of financial instruments; (ii) the need to strengthen the linkages between producers and processors, as weak links remained an impediment to agricultural growth; (iii) that while advisory services offered under ADCP-I had led to a strong impact on productivity and incomes, it was necessary to create a sustainable national network with an increased focus on business development; (iv) that farmers were willing to pay for private services, as indicated in previous experience, but that private veterinary services needed more income-generating opportunities in order to become self-sufficient; and (v) that while the CGS generated high interest, the functional linkages between the research and advisory systems and with producers and rural entrepreneurs needed to be better defined and improved.

13. The project’s design included surveys to measure outcomes, which were undoubtedly useful, especially in assessing less quantitative outcomes such as farmer views on the benefits from different components. The design also considered the potential project risks and introduced mechanisms to mitigate their effects. Country-level inherent risks were considered high, while the project-level control risk was considered moderate. The project level control risk mitigation measures included the separate FM arrangements under the project; the use of external auditors acceptable to the Bank; and establishment of internal control system.

14. The Market Information and Commercial Hub (MICH) activities could have been better thought through. It seems at appraisal neither the Bank nor the client had much experience nor was well informed on the costs of setting up such a system. The estimated

budget for MICH quite insufficient and became an issue, which delayed implementation and resulted in a scale down of planned MICH activities.

2.2 Implementation

15. Overall, ADCP-II experienced a smooth start up, except in a few areas, where bottlenecks delayed progress towards laying the ground for good implementation.

16. The Ministry of Finance (MoF) signed the new Agency Agreement governing the Credit Union Funds after long delays, and with extensive changes to the Agreement, which deviated from the draft agreed to by all parties. The project team worked closely with MoF to overcome this issue and amend the signed Agreement. This delayed activities under the rural finance part of the Agricultural Business Service component, which finally got underway in early 2008.

17. MoF also delayed in approving the Rural Investment Guidelines (RIG) and subsidiary loan agreements under the Credit line for agribusiness, stalling the start of this sub-component. The PMU worked closely with MoF to finalize the guidelines and disbursements finally commenced in May 2008.

18. Establishment of the MICH was severely delayed, and affected implementation. The first procurement round failed (due to the financial proposal being far in excess of the amount budgeted for this activity) and MICH activities had to be scaled down. Eventually, a local company was contracted in July 2009. Overall, start-up activities to test approaches and methodologies before a full-scale commissioning of MICH commenced only in mid-2010, almost three and a half years into project implementation. The MICH has also experienced problems with respect to price collection, due to the insufficient quality of training initially provided to price collectors in 2010.

19. The Veterinary Services sub-component experienced several problems that resulted in an unsatisfactory rating at the beginning of the project implementation. The main issue was the lack of commitment to follow the ADCP-II Implementation Manual (IM) for the PVU sub-component. The selection of veterinarians and contract procedures diverged from the IM. The market survey was also inadequate, leading to some mis- interpretation and was subsequently modified. An action plan was prepared to improve performance and this was mostly completed by the mission in August 2007, and the rating was upgraded. As a result the project adopted a more sustainable approach to supporting PVUs with steep reductions in financial support over time and, by the end of the project, resulting in self-sufficient operations in all but one of the PVUs. This approach is being subsequently adopted by other projects and modified accordingly based on ADCP experience.

20. At the MTR, the newly-established licensing fees for private veterinary practice and drug production were seen as seriously undermining the project’s efforts to establish private veterinary services, as the fees were high and prohibitive for developing the private sector. Although the Bank’s mission had raised this issue with Government, it was

not resolved. The licensing fees and the reported subsequent harassment from tax authorities’ restricted operation of the PVUs supported by the program and was becoming a significant risk to their sustainability. The mission discussed the licensing issue with the MoA and subsequently with the SVS and the Agribusiness Department of the Cabinet of Ministers, and gave serious consideration to suspending the component. The Bank finally took up this issue with the Prime Minister’s office to resolve it. The Presidential Decree about the fees was amended and fees were reduced to acceptable levels--from AZN 3000 to AZN 150 for private veterinary activities and from AZN 2000 to AZN 220 for drug sale. This was a significant commitment on the part of the Government to support the sustainability of the PVU activities through policy reforms.

21. The MTR identified certain shortcomings in the implementation of environmental safeguards. An action plan was agreed on and implemented to remedy the problems (see Section 2.4 below).

22. The poor and deteriorating quality of Credit Union (CU) lending portfolio put a severe strain on the profitability of the Credit Implementing Agency (CIA) and on the CUs, and affected the implementation of the small agribusiness/CU sub-component. While most CUs were performing well, a small group of CUs demonstrated weak governance, and the repayment rate of this group (with two CUs accounting for more than a half of bad loans) remained a concern. CIA’s CU portfolio as risk (30 days) increased from AZN 0.19 million in December 2009 to AZN 1, 86 million in September 2011. Although the project satisfactorily met the target intermediate outcome indicator of over 95% financial recovery rate, by achieving an overall financial recovery rate of 97.42% as of September 30, 2011, CIA management needs to improve loan underwriting and collections in order not to jeopardize its future. Further institutional training of CUs is also needed, as governance continues to be an issue in some CUs.

23. Factors that contributed to successful implementation include: (i) the familiarity of PMU members with Bank agriculture projects in Azerbaijan (see Section 2.4 on Financial Management); and (ii) the flexibility shown by Government and the Bank in responding to emerging needs and in reallocating funds accordingly within the project’s objectives and scope, i.e. project support to the computerized National Animal Disease Information System (AZVET) established initially under the Avian Influenza project and now operational in all regions, and project activities in upgrading the veterinary faculty of the Ganja Agriculture University through involving students in the pilot brucellosis program and project supported training activities.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

24. The project’s M&E system was well-designed. The Results Framework was comprehensive and included relevant indicators to capture the project’s activities under each component. The reporting formats for each component and sub-component were based on the annual performance targets and monitoring indicators as shown in Annex 3 of the PAD. The design did not include triggers for the next phase of ADCP (APL III). The design included outcome evaluation surveys, which were a strong aspect. The

Baseline Survey, 2006 (BLS); the Interim Survey, 2008 (IS); and the final Completion Evaluation Survey 2011 (CES) were well done, and the IS and CES used a similar questionnaire to the BLS, collected information on the same impact indicators, and covered most (88.5%) of the same groups and households.

25. The M&E system achieved considerable results. The PMU provided regular monitoring of project implementation, and the quarterly Progress Reports clearly reflected the status of implementation based on the performance indicators under each component. This information was utilized to both track progress and problems and served as a useful management tool, for example, in tracking changes in loan portfolio quality ratios of CIA, drafting relevant training materials for CUs, in assessing the demand for project- sponsored veterinary services and why some farmers did not avail themselves to these services, farmer satisfaction levels, and on how to expand the brucellosis program. The CES, which covered five regions where project activities commenced in 2006/07 and three regions where project activities started in 2008/09, should now serve as a baseline for continued project activities under ADCP-III.

2.4 Safeguard and Fiduciary Compliance

26. ADCP-II was assigned an environmental category Financial Intermediary (FI). To ensure that the project met the Bank’s environmental safeguard policies (OP4.01), an Environmental Management Plan (EMP) was prepared and disclosed in April 2006, prior to the project appraisal.

27. At the MTR, implementation of environmental safeguards showed key shortcomings. Due to inconsistencies between the Rural Investment Guidelines (RIG) and the EMP, many agribusiness sub-projects financed through the participating commercial banks were under-categorized, and consequently, were not properly treated in terms of environmental impact mitigation. Operational manuals for operating the CGS and lending to CUs had only very brief reference to management of environmental impacts and missed references to the EMP and environmental management regulations to be applied. The Bank downgraded Environmental Safeguards to moderately unsatisfactory at the MTR and agreed on an action plan with the PMU to improve the environmental management system. Actions to be taken included: amendments to EMP to provide a clearer determination of sub-projects categories; amendments to the environmental section of the RIG to bring it in line with the EMP; the preparation of sample sub-project EMPs for the activities typically financed under the credit line to medium agribusiness in order to strengthen the capacity of PFIs in environmental screening and monitoring of sub- projects; and more close on-site monitoring of selected sub-projects financed through both bank credits, CUs, BGs and Competitive Grant Scheme, to be undertaken by the PMU Environmental Specialist. These actions were completed following the MTR.

28. The final mission in March 2011 found that the environmental management and monitoring system for the credit line to medium agribusinesses was fully operational, and the revised RIGs were being followed. The PMU environmental specialist was also assisting PFIs and applicants throughout the cycle of implementing sub-projects. Under

the CGS and the credit lines to CUs and BGs, environmental management was proceeding satisfactorily. Environmental management capacity of PFIs, CIA and CGS has been enforced by a series of training sessions delivered in 2009-2011. No major issues were reported as a result of monitoring visits.

29. Financial Management (FM). ADCP-II’s financial management system remained satisfactory throughout implementation. The PMU already had the experience and capacity to implement ADCP-II, having implemented ADCP-I. FM staff of the PMU had also received training. The PMU maintained accurate accounting records of the project, and quarterly IFRs and annual audit reports were timely submitted and acceptable to the Bank.

30. Procurement. Procurement has been carried out in compliance with the Bank’s procedures. At the beginning, there was a case of mishandling of procurement rules in relation to the IAS sub-component (as the PMU signed contracts without the Bank’s no objection) but this was resolved. The procurement specialist was well acquainted with the World Bank’s procurement procedures. The project carried out three post review missions. No major issues were identified.

2.5 Post-completion Operation/Next Phase

31. As foreseen in the PAD, a follow-on project, ADCP-III is being prepared as a third phase of APL, and will build on the lessons learned during implementation of the current phase of ADCP and the substantial progress made to date under the ADCP-II. The project is expected to: support the development of market-driven agri-food value chains; continue the process of expanding financial services for rural enterprises through commercial banks; and scale up the privatization of veterinary services while continuing to upgrade and modernize the State Veterinary Service to support public health functions. The project would also contribute to improving the regulatory and institutional basis for food quality and safety systems.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

32. ADCP-II’s objectives are relevant to GOA’s “State Program on Poverty Reduction and Sustainable Development 2006-15” (SPPRSD), which sets out a vision where oil and gas would continue to play a critical role but would be accompanied by growth and income-generating opportunities in the non-oil sector. SPPRSD views agriculture as vital to food security and increasing employment and trade. ADCP-II is also consistent with the joint IDA/IBRD/IFC Country Partnership Strategy (CPS) for Azerbaijan (FY11- FY14), which emphasizes fostering a competitive non-oil sector.

33. ADCP-II’s components were clearly linked and relevant to the PDO. Although the multi-activity approach led to a complex design and called for intensive supervision, these interventions were essential for building on activities initiated during ADCP-I to establish

new market relations for emerging small farmers and rural entrepreneurs following the comprehensive privatization and reform process. Project activities were also well-linked in terms of their implementation. For example, while advisory and extension services under Component 2 provided vital access for farmers to knowledge and technology in order to make informed investment decisions, the first Component increased the availability of rural financial services to farmers and small entrepreneurs for working capital requirements, and long-term credit for investment purposes.

34. The three-phase APL or incremental approach with flexibility to support long-term development goals also reduces risk and raises the likelihood of successful outcome, as later projects can be designed based on lessons and results from earlier phases.

3.2 Achievement of Project Development Objectives

35. Achievement of the PDO is rated as satisfactory. The two outcome indicators listed in Section 1.2 and below were well defined and reflected the project’s PDO.

36. Three surveys were conducted to measure the project’s achievements (see Section 2.3). The CES was conducted in the first quarter of 2011 and covered economic indicators and productivity for 2010. About 88.5% of the respondents were involved in all three surveys. The sample consisted of three main groups: ADCP-II groups and two control groups (flow-on effects--FOE, and external environment effects--EEE). The CES results are reported separately for five regions where ADCP-II activities started in 2006/07, and for three regions, where ADCP-II activities started only in late 2008-09. In the three regions, where project activities started in late 2008-2009, a survey was also conducted in 2008, which can be considered its baseline. Since the timeframe for fully measuring the impact of ADCP-II activities in these three regions is not sufficient, the achievement of the overall PDO is judged mainly by outcomes achieved in the five original regions.3 However, the results of this 2008 survey for the two PDO outcome indicators are also reported below (i.e. progress from late 2008-09 to end-2010). Details of outputs by component that helped to achieve the PDO are presented in Annex 2.

PDO Outcome #1: Incomes of participating farmers and rural entrepreneurs increased by 20% through improved access to services and through vertical integration.

Increase in incomes • In the five original regions, the net (mean) income from general agricultural activities of farmers who participated in ADCP-II activities increased from AZN (manats) 3211 in 2006 to 3518 AZN in 2008 and to 4481 in 2010. This represents a 27.3% increase from 2008 to 2010, and a 39.5% increase in 2010

3 The CES methodology is described in Annex 5 and in the respective reports. See ‘Outcomes of Completion Evaluation Survey 2011’ (Masalli, Makhchivan, Ganja, Sheki and Beylagan), and ‘Outcomes of Completion Evaluation Survey (for 2008 to 2011) -- Salyan, Goychay, Khachmaz’, Azerbaijan Republic State Agency on Agricultural Credits under the Ministry of Agriculture.

over the base year (Table 1). In terms of total income from agricultural activities of all respondents, this increased from AZN 2904991 in 2006 to 3333700 in 2008 and to 3724392 in 2010, representing an increase of 28.2% from 2006 to 2010.

• In the three regions where activities started in late 2008-09, the total income from agricultural activities of ADCP-II groups increased from AZN 985944 in 2008 to 1150952 in 2010 (represending a 17.7% increase over two years) while the incomes of FOE/EEE groups increased from AZN 144311 in 2008 to 153930 in 2010 (a 6.6% increase).

• As a result of access to finance, the average income of the sub-borrowers who borrowed from the ADCP-II Credit Line has doubled, from AZN 50- 60 thousand before the financing, to AZN 100-150 thousand.

Table 1: Increase in net (mean) income of per ADCP-II farmer (AZN Manat)

Cattle- Plant- Other Income breeding growing agric. level from Average growth % Surveys incomes incomes activities general of incomes per Amount Amount Amount agricultural farmer AZN AZN AZN activities +27.39% (in comparison to 2008) 2010 CES 1978.6 2085.2 418.0 4481.8 Mean – +39.57% (in on comparison to 2006) responses 2008 IS 1635.0 1473.0 410.0 3518.0 +9.56% 2006 BS 1550.0 1261.0 400.0 3211.0

37. With respect to profit-making activities, 62.8 % of the CES respondents derived profits only from private farming activities (compared to 50% in 2006 and 58.3% in 2008).

38. The CES highlights significant improvements in access to services (including advisory, veterinary and financial services) and market-oriented investments that contributed to the increases in production and income. These include in the use of individual and group services of Private Advisors (PAs) and RACs in project areas, greater opportunities to invest in inputs, equipment, processing facilities etc. as a result of services of CUs, the availability of high-quality seeds, and in utilizing marketing channels for output sales. Activities under Component 2 aimed to help farmers to increase their productivity and quality of production by expanding the outreach of the advisory system, provision of private veterinary services, and improving access to adapted technologies. The project provided training to Private Advisors (PAs) and Regional Advisory Centers (RACs) who were then expected to then extend the information and advisory services to farmers. The project also worked with PVUs established under ADCP-I and established 30 new PVUs.

39. Improved access to Advisory Services: Of the CES respondents, 93.5% indicated having used individual services of ADCP-II while 92.8% had derived benefits from group

services. With respect to farmer satisfaction with the different components of services, the majority of respondents who received advisory services provided by the project noted that they were either satisfied or highly satisfied. Farmers reported impressive increases in agricultural production as a result of PA/RAC services, with 22%, 55% and 2.7% of respondents indicating increases of between 1-10%, 10-25% and greater than 25% respectively compared to 2006.

40. Improved access to Veterinary Services: With respect to Private Veterinary Services (PVS), 85.8% of farmers had used PVS. The majority of the 14.2% who did not use the opportunities of PVS stated that they had no need for the services. Farmers who used the PVS reported satisfaction and productivity increases, with 36.3%, 26.1% and 10.3% of farmers indicating production increases of between 1-10%, 10-25% and greater than 25% respectively compared to 2006. The State Veterinary Service has now requested that the PVU program be scaled up country-wide and to incorporate 800 additional veterinarians to provide better animal health services to farmers and as a means to promote reduction in the salaried veterinary field staff at the village level as has been recommended in several project reports and the OIE evaluation of the veterinary services.

41. The Brucellosis Control program was implemented as a demonstration of the practical application of the operational aspects of the national disease surveillance and control programs which were being promoted under the project in close collaboration with the Avian Influenza Project and other donor projects. Through the program the project supported vaccination for a total of 490,000 sheep and goats. Other outputs included the procurement of more than 4 million doses of Rev 1 for the national control program. According to the census data, 5.1 million ewes and an expected 1.5 million immature females were eligible for vaccination in 2011. The abortion rate, which was selected as a proxy indicator for the evaluating the results of vaccination program, decreased by 60- 70%. It can be safely assumed that this contributed to the increase in livestock assets of farmers discussed below and would lead to a reduction of the incidence of human brucellosis, a significant benefit of the program. The program has now been adopted by the Government to be scaled up country-wide.

42. The project, in cooperation with the Avian Influenza Project, also supported the establishment of the National Animal Disease Information System which was evaluated in the brucellosis pilot regions and has been subsequently scaled up country-wide with project support. This was an unexpected outcome of the project.

43. Improved access to Adapted Technologies: The project also provided better access to adapted technologies by modernizing and reforming NRICH, as described in Annex 2, including its research plans to suit the needs of farmers. The collaborative demonstration program between NRICH and RACs has been very successful in transferring new technologies to farmers. In the 2010/11 cropping season, 37 on-farm demonstrations were conducted by the Institute and RACs in 30 villages of 22 regions to show the performance of new varieties, efficient agronomic practices, water-saving technologies, conservation agriculture with wheat, barley, maize, chickpea and lentil both

under irrigated and rain-fed farming systems. Field days were also conducted for farmer groups.

44. NRICH’s production of super-elite and elite seeds is presented in Annex 2. Overall, the distribution of these seeds to seed growers, and on-farm demonstration of technologies has led to significant yield increases. Even in 2010, which was unfavorable for crop production, wheat in 40 farmer fields gave a yield of 3.5 ton/ha, while the yield of progressive farmers near the demonstration plots was only 2.1 ton per hectare. The use of new varieties and production technologies increased profitability by 43.2%. On-farm demonstration of new chickpea variety “Narmin” was organized in 5 farms of 5 regions. Cultivation of this variety by farmers has enabled them to harvest 0.3 ton more yield per hectare and increase their profits by 31.5%. Overall, the seeds of new varieties of wheat, barley, maize, chickpea and lentil have been produced at experimental stations and by private commercial seed growers for rapid dissemination to farmers. 71% of ADCP-II groups were satisfied and indicated that the quality of the seeds were either good or very good, compared to 51% of the FOE/EEE groups.

45. As a complement to the CES, a separate survey was conducted in May 2011 and covered private seed farms (PSFs) in ten regions. Seed producing activities are the main income- generating activities of PSFs. PSF mainly get seeds of wheat, maize, barley, beans and clovers from the Regional Experimental Stations of NRICH in order to conduct their seed producing activities. The PSFs achieved average productivity of 4560 kgs per hectare during 2010, and sold on average to 14,324 farmers during the same year. 94% of the surveyed PSFs indicated that profits have increased after joining the seed sale system.

46. Improved Vertical Integration: Under Agricultural Business Services (Component 1), which sought to enhance links between production and markets, and through access to financial services, as described in Annex 2, the Credit Union (CU) sub- component provided over 46,000 loans in the total amount of AZN 61.86 million to 23,600 members of Borrowing Groups (BGs) and CUs to help investments in livestock, crop and retail/trade as of March 31, 2011. The number of people accessing credit through CUs was estimated at 14,216 as of September 30, 2011 (compared to the baseline of 3,000). Farmers who obtained credit through the CUs comprised 47.5% (in comparison to 37.8% in 2008).

47. Previous research in ADCP areas had shown that farmers had a need for credit. The CES respondents indicated that they were fully free to use credits for different areas, and that their production had increased as a result of being able to obtain credit. Farmers who engaged in livestock production prevailed in terms of getting credit. Farmers used credit for the following purposes: livestock breeding (73% of farmers); livestock fattening (58%); and stock feed (47%). In terms of the average quantity of livestock assets in ADCP-II districts between 2006 and 2010, these increased, for example, for sheep and goats, 16.95 (2006), 23.36 (2008) and 38.3 (2010). (See CES for other types of livestock and poultry).

48. In terms of agricultural production, 42% of CES respondents used credit obtained from CUs for crop seed, 35% for crop inputs, and 17% and 23% respectively for farm machinery and transport equipment. 6.3%, 17% and 6.7% of the farmers respectively reported increases in agricultural production of between 1-10%, 10-25% and over 25% as a result of credit provided by the project. The main reasons why farmers did not use CU services include the high interest rates and too short a loan period.

49. ADCP-II also extended financial services to medium agribusinesses and provided training to commercial banks. Through this program, sub-loans were disbursed to several sectors, with 29.6%, 25.5% and 15.4% of the total disbursements going to animal breeding and orchards and agro-processing respectively (see Annex 2, Table 3).

50. The competitive grants program (CGP) awarded small grants for introducing testing and transferring new and improved technologies emphasizing better market accessibility, storage and small-scale processing. Farmers used grants for a range of improved technologies for production, storage, grading, packaging, labeling, small-scale processing and canning of different high-value products such as vegetables, citrus, mushrooms, grapes, honey, seed, potatoes and strawberries. Grants were also used to establish new storage and processing facilities, improve milk processing and poultry technologies, develop efficient fish-raising techniques and introduce new drip irrigation methods. The beneficiary contribution in the CGP at an average of 45% demonstrates high ownership. Beneficiaries indicate that these activities have significantly influenced the transfer of innovative technologies. 4 To demonstrate the technologies to other potential adopters, each grant is required to carry out a program of technology transfer, such as workshops, field days, publication of information leaflets, and television emissions. The availability of credit has also encouraged farmers to integrate vertically. Examples of this include: a nut processing/packaging company that went into paste making; planting of hazelnut orchards; borrowers who bought more sheep to expand into sheep milk production; a strawberry producer who bought processing equipment for jams; and agricultural producers building storage facilities.

PDO Outcome #2: Production marketed for cash increased by 20% as a result of increased quantity and improved quality of production.

51. ADCP-II activities also helped farmers to market their increased production in crops and livestock.

52. The percentage of total production marketed for cash by participating farmers has increased from 60.1 in 2006 to 75.5 in 2008, and to 76.6% 2010 (a 27% increase), with the greatest rise seen in crops sold for cash (from 48.4% in 2006 to 74% in 2010) compared to cattle. In comparison, FOE/EEE groups marketed 57.5% of their production for cash in 2010. The breakdown by crop, livestock, and by region for ADCP-II participants, FOE and EEE groups is discussed further in the respective surveys. With

4 See CES 2011, p. 27 for details on the overall use of credit in terms of cattle-breeding methods, crop cultivation etc.

respect to the use of fertilizer, agricultural equipment (mainly farm machinery) used in cultivation, and the use of pastures, there are substantial differences between ADCP-II groups and FOE/EEE groups, with higher use among project participants.

53. With respect to sources of information and marketing channels, as detailed in Annex 2, under Component 2 (Agricultural Support Services), by the end of 2008, ADCP- II had a network of 10 RACs and 201 Village Training Rooms covering the entire country with IASs. In 2007 and 2008, ADCP-II successfully carried out the information campaign on “Processing and marketing of agricultural products” and the campaign on “Campaign on buffalo production” respectively. There were also training programs for PAs. Overall, ADCP-II realized the following physical outputs: 4711 Special Interest Groups were formed and consequently advisory projects have been implemented; and 38,288 demonstration fields and 32,636 training courses have been established and carried out. Moreover, about 6,666 farmers have used individual advisory services. In total, some 706,026 farmers have benefited from information and advisory services.

Table 2: Percentage of produce and livestock marketed for cash, 2006, 2008, and 2010 BLS – 2006 Internal – 2008 Final – 2010

Regions Sold-marketed products Sold-marketed products Sold-marketed products Average Average Average Crop Cattle Crop Cattle Crop Cattle Total Total Total Masallı 53.3 77.7 93.3 87.9 94.3 89.4 Beylagan 41.5 70.1 62.5 72.9 64.8 73.5 Ganga 53.7 77.9 64.3 85.8 66.2 86.8 60.15 75.48 76.56 Nakchivan 49.5 69.6 71.5 81.9 72.2 82.3 Shaki 43.8 64.2 71.8 62.8 72.4 63.7 Total 48.4 71.9 72.68 78.27 73.98 79.14

Table 3: Crop harvesting of ADCP groups in 2008 and 2010 Results of CES in 2010 Results of IS in 2008 (Kg)

Total production (Kg) Personal use Sold product Total production Cereal 2 955 061 1196072 2368907 3564979 Maize 171 500 62920 419680 482600 Legume 11 462 333270 1476734 1810004 Potato 2 114 163 417250 907730 1324980 Tomato and other 942 705 372220 920520 1292740 vegetables Fruits and walnut trees 199 614 99888 629815 729703 Cotton 0 3250 335830 339080 Other 584 953 72246 209684 281930 Total 6 979 458 2557116 7268900 9826016

54. Under Component 1, sub-component 4, which aimed to introduce a greater market focus into the programs, ADCP-II established the Market Information and Commercial Hub (MICH), although it was severely delayed. MICH’s objective was to provide farmers with market information. Hence, 10 large markets covering large areas of the country were selected for MICH, and information is being collected on a daily basis on key variables such as wholesale and retail prices, farmer prices etc. There is also a website in three languages. The project trained farmers on the MICH’s SMS and IVR services, which were provided by the RAC’s private advisors. There are now about 201 private advisors in 9 regions of the country and each advisor was expected to train 120-130 farmers, so about 24,000 of the farmers were trained in total. CES respondents indicated that the MICH has created awareness in them. Prior to the MICH, farmers lacked full information on sale prices, and were often selling their produce at very low prices. Now, farmers can find out about demand and supply, and, if there is over-supply in Baku for example, then farmers can choose to take their produce to a market that is offering higher sale prices. Most farmers indicated that they use the IVR system. Since MICH started in 2010, it has reached about 3% of farmers, or a total of about 870,000 households.

55. In the CES, farmers indicate that the most important technical information sources are Private Advisors (70%), brochures and other written materials produced by RACs (7.5%, and information obtained directly from RACs (5.1%) and Veterinary Field Units (1.7%). The most important sources on prices of agricultural facilities again are RACs and PAs. Generally, when all sources are summarized, local markets, other farmers, agricultural producers and TV are of great importance as information sources.

56. Farmers in ADCP-II areas use different channels to sell their cultivated and produced plant-growing yields. Local markets (78%), local traders (58%), regional markets (33%) and major urban areas (23%) are used the most. Very little differences exist in the channels used for the sale of cattle-breeding yields (see CES, 2011, for further on the specific marketing channels).

3.3 Efficiency

57. The PAD estimated project economic rate of return (ERR) was 16.0%, and the net present value (NPV) of the project’s net benefit stream, discounted at 12%, was US$4.1 million. The quantified incremental benefits used in the PAD analysis were based on: (a) strengthened and expanded advisory services and improved access to new adapted technologies; (b) strengthened and expanded veterinary services; and (c) models of likely sub-projects to be implemented under the Competitive Grant Scheme (CGS).

58. The evaluation at completion shows that the ERR is 20.5% and the NPV US$25.74 million. Investments in the Agricultural Advisory Services components give an ERR of 18.5% and a NPV of US$8.3 million, while the Veterinary Services shows an ERR of 34.8% and a NPV of US$3.7 million. The CGP shows direct economic net benefits with an ERR of 33.3% and a NPV of US$4.1 million. The support to medium and large agribusiness through the project credit line channeled by financial intermediaries (commercial Banks) is averages an ERR of 19% with a NPV of US$9.6 million. All

assumptions used for this economic analysis were definitively conservative. Annex 3 presents the detailed analysis on the financial and economic benefits stemming from conditions developed by the project at the time of the ICR preparation.

3.4 Justification of Overall Outcome Rating Rating: Satisfactory

59. ADCP-II was relevant at the time of appraisal and continues to be relevant. Its components were also clearly linked and relevant to the PDO, as described in Section 3.1. As presented in Section 3.2, the achievement of the PDO was satisfactory, with the project exceeding all of the project outcome targets, and in most cases by a significant margin. The final outcome survey showed that the proportion of project participants who obtained credit, adopted improved crop and livestock technologies, obtained advisory services, and used various marketing channels is consistently higher than individual farmers (FOE groups) in the villages where the survey was held but not covered by the project. The project farmers also had corresponding differences in production, crops sold on the markets, incomes and profits. In terms of efficiency, the ERR and NPV at the time of the ICR exceed those estimated in the PAD.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development 60. The CES provides evidence of reduced poverty through improved household food security, welfare and incomes. For example, for ADCP-II beneficiaries the average for ‘the value of crops consumed at home’ was 919 AZN compared to EEE/FOE groups, which indicated 554.8 (CES 2011, p. 57). Average profits from sales of animal and animal products were 1978.6 AZN for ADCP-II farmers and 1176.9 for EEE/OFE groups. Compared to 2006, project farmers also increased their incomes from ‘own farm’ activities and from ‘working on other farms’. In terms of welfare indicators, in all five regions sampled, farmers’ possession of household assets (separate kitchens, piped water supply in house, electricity inside house, regular and cell phone) improved substantially from 2008 to 2010. Women also benefited from training and access to credit from CUs and BGs. In discussions with farmers, a common view was that BGs (compared to CUs), with their small size and members from the same community tended to favor integration of women sometimes to a very large extent. (Project Performance Assessment Report, July 28, 2008, p. 20).

(b) Institutional Change/Strengthening 61. ADCP-II contributed to building long-term capacity in many areas. The project provided technical assistance for developing recommendations for improving the legal and regulatory framework for CUs, although it is yet not known if these recommendations would be adopted (as they are still under review by the Central Bank); training was provided for institutional strengthening of CUs, which are stronger than before, however, governance remains an issue for some CUs; CIA and AKIA were strengthened through review and adjustment of lending manuals for CIA and for AKIA, for establishing CUs. These too need further strengthening to bring them up to the level capable of managing

the CU sector independently, i.e. after ADCP-II. The Law on Information and Advisory Services in Agriculture was drafted by IAC, which was a part of ADCP-II, and the draft is being currently reviewed by Parliament.

62. Overall institutional capacity of Azerbaijan’s Veterinary Services was boosted through several activities under Component 2 (as described in Annex 2). These included training programs, the brucellosis control program, scaling up of the National Animal Disease Information System (AZVET), and strengthening of the Veterinary Faculty of Ganja Agricultural University and the State Veterinary Service.

63. As discussed in Annex 2, ADCP-II helped to build national capacity in terms of strengthening technological linkages and enhancing the dissemination of adapted technologies through reforming and equipping NRICH. For example, before reforms the Institute had a common research program, while after reforms it has five research programs that suit the new mandate, relevant research topics and staff, implementing agencies and experimental stations, collaborating organizations, annual financing, and expected outcomes. Staff capacity and the skill mix at NRICH have been enhanced considerably through training programs and technical assistance. The project’s other institutional development impacts cover areas such as developing procedures and instruments required to supervise the compliance of CUs, strengthening the long-term capacity in Azerbaijan’s agricultural certified seed system, expanding the extension and advisory services, especially RACs, and the private sector’s ability to provide veterinary services.

(c) Other Unintended Outcomes and Impacts (positive or negative) 64. Implementation of the modernization program at NRICH has exerted significant influence on cooperation with the public and private sectors and collaboration with international research centers like ICARDA, CIMMYT and IPGRI. The Institute’s strive to strengthen partnerships towards developing scientifically-grounded technologies have paved the way for combining efforts of scientists and businessmen. The Institute has started to collaborate with “Azertoxum”, which was established recently and is considered a big seed producing company. The Institute is also collaborating with a number of enterprises and institutions in the public and private sectors in implementing the consolidated research plan. Good partnerships have been established with the Genetic Resources Institute, Research Institute of Soil Sciences and Agro-chemistry (Academy of Sciences), regional branch offices of Agrarian Science Center and other research Institutes of the Ministry of Agriculture.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

65. ADCP-II conducted a Completion Evaluation Survey (CES) in the first quarter of 2011, which covered economic indicators and productivity of 2010. A summary of the CES findings are detailed in Annex 5.

4. Assessment of Risk to Development Outcome Rating: moderate

The institutional risk to development outcome is moderate. As described in Section 3.5(b) and in Annex 2, ADCP-II has built institutional capacity through training at every stage of the agricultural activity. Project beneficiaries are likely to receive additional support under ADCP-III, further reinforcing these local institutional structures. There are two areas, however, where there is a moderate risk. First, the national extension services may be at risk if GoA does not take a timely decision on maintaining the RACs, which have proved to be effective in delivering extension services. There are options for the delivery of extension services after project closing that have been proposed. These were reviewed by the Working Group formed by the Presidential decree with the objective of working out the recommendations for institutional strengthening of agricultural administration. The proposed institutional set up for the extension services is being considered as an integral part of the overall reform of the agricultural administration in the country. Therefore, the mechanisms for future delivery of extension services will be included in the new institutional structure for the agricultural sector in the country. However, it is important to take a decision quickly to avoid a long gap in funding of the extension services system, as otherwise, the survival of the model established under ADCP II will be at risk. The second area of risk relates to developing private veterinary services, which is limited, as the current veterinary law restricts private vets from providing public sector goods and services such as vaccination, blood testing, inspections etc. While SVS is interested in reforming the veterinary law and promoting private vets, the decision-making process on key issues is slow and the capacity for overall upgrading the veterinary system is limited (Operational Risk Assessment Framework, ADCP-III). On (i) above, MoA is working closely with the Cabinet of Ministers and the Ministry of Finance to consider options to ensure sustainability of the extension services and the information and advisory system.

66. The financial risk to development outcome is moderate. As described in Section 2.2, the repayment rate of a small group of CUs continues to be of concern. The weak governance in some CUs is also a concern. CIA management needs to improve loan underwriting/loan collections and monitoring of CUs. Strong vigilance by AKIA and CIA in strengthening the CU internal control systems would be essential to ensure the sustainability of the CUs over the longer term. If needed, legal procedures against wrong doers should be encouraged. The government is yet to develop an exit strategy, including mechanisms for further lending to CUs after the project life.

67. The environmental risk to development outcome is low. Since the MTR identified key environmental shortcomings as discussed in Section 2.4, the environmental management system has improved, trainings have been successful, and substantial efforts have been made to enhance the monitoring of sub-projects.

68. The social risk to development outcome is low. It is likely that increasing agricultural productivity and incomes of farming households will improve food security, and the socioeconomic status of the poor and other vulnerable sections of Azerbaijan’s rural population.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory

69. The Bank team continued to work closely with the client to prepare this second phase of ADCP. The team included consultants as relevant, built on ADCP-I activities and achievements, took into account lessons from the previous project, identified risks, and incorporated appropriate risk mitigation measures. Specifically, the Bank did well in designing several inter-linked project interventions, which made ADCP-II complex and challenging in terms of supervision, but were necessary to address the linkages and the main constraints to agricultural growth in Azerbaijan. The outcome indicators and the Results Framework were well designed and relevant to the PDO. The MICH sub- component, however, could have been better thought through (see Section 2.1).

(b) Quality of Supervision Rating: Satisfactory

70. The Bank was proactive in supervising ADCP-II and provided continuous guidance for implementation. Supervision teams included the relevant specialists, including from the FAO, to focus on the various component activities and to increase the intensity of supervision when needed. The team is commended for the careful follow up in ensuring improved implementation of environmental safeguards. Project Aide Memoires and ISR documents were very comprehensive, especially with respect to reporting on the Results Framework, and candid in terms of the ratings on overall achievement of the PDO, implementation progress, and on safeguards. For example, following the very first mission after project effectiveness, the IAS and veterinary services sub-components were downgraded due to mishandling of procurement rules. The team engaged closely with the PMU in these cases to come up with a workable action plan to resolve issues.

71. The CGP got off to a slow start. The approval process for the CGP could have possibly been accelerated if the Bank had been more proactive in providing the PMU with more training on how to evaluate proposals. At the MTR, when the licensing fees for private veterinary practice and drug production presented a serious concern as it undermined the project’s efforts to establish private veterinary services, the Bank took this up with the Prime Minister’s office to resolve it in a suitable manner. The Quality Assurance Group (QAG) panel for review of the Azerbaijan portfolio considered the MTR for ADCP-II as Good Practice.

Rating: Satisfactory This rating reflects the ‘S’ rating for both Quality and Entry and Supervision.

5.2 Borrower Performance

(a) Government Performance Rating: Moderately Satisfactory

72. The Government of Azerbaijan engaged closely in project identification and preparation, and actively discussed the contents of each component and their costs. The commitment was not always sufficient, however, to overcome administrative inertia and there were delays, as discussed in Section 2.2, on the approval of some key project documents. For example, MoF delayed in signing the Agency Agreement and in approving the RIGs at the start of the project. Although these were resolved successfully, these in turn delayed progress towards laying the foundation for good implementation.

73. Recent observations suggest SAAC’s attempts to interfere in the implementation of the CU sub-component, and, as a result, increasing tensions between SAAC and the AKIA. The ground rules for regulating the relationship among the various parties are clearly articulated in the Agency Agreement. The core assumption is that private ownership and governance of the AKIA and CIA should be free of any administrative interference. The existing tensions, if not addressed, could undermine this still fragile system.

74. The introduction of a very high fee for licensing private veterinarians, as discussed in Section 2.2, was another factor, which undermined the project’s efforts to establish private veterinary services. This issue took time to resolve, and involved the Bank having to finally take it up with the Prime Minister’s office. The key issues that remain to be addressed by the Borrower are: establishing of mechanisms and ensuing adequate funding for sustainable provision of extension services after the project life; developing an exit strategy for the CU sub-component; and improving the CU governing legislation.

(b) Implementing Agency or Agencies Performance Rating: Satisfactory

75. The State Agency for Agricultural Credits (SAAC) within the Ministry of Agriculture was responsible for the implementation of agricultural projects, with the Project Management Unit under the SAAC specifically responsible for ADCP-II. In general, the PMU was proactive and carried out their duties in an efficient and timely way. Having become familiar with Bank procedures during the implementation of previous Bank projects (FPP and ADCP-I), the PMU performed efficiently under ADCP- II. The PMU managed suitable financial, accounting and reporting systems that provided adequate and timely information for implementation and review. There was strong teamwork and commitment to high quality standards that contributed to successful implementation. There were a couple of procurement issues (most notably, moving ahead with the contracts for the private sector entities to continue operating the existing RACs before no objection had been received, however, these may have been more an error of enthusiasm, and were resolved successfully.

76. It should be noted that for the advisory services, CGP and veterinary services, most of the M&E was carried out by the units responsible rather than by the PMU M&E unit, which was primarily a receiver of information. The effectiveness of the M&E system was substantially enhanced by strong internal M&E programs built into several of the components, rather than relying on a project M&E unit alone. It should also be noted that implementing agency performance was enhanced by the establishment of strong units within the PMU – notably the IAC and the CGP Secretariat, which were effectively given independence and responsibility to carry out their programs.

(c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 77. This reflects the ‘MS’ rating for Government and the ‘S’ rating for the Implementing Agency performance.

6. Lessons Learned

With respect to lessons learned under the different activities, these are:

78. Advisory Services: (i) The value of long-term involvement (by the World Bank) in the development of a sustainable advisory system is evident; (ii) a system that contracts private sector providers of advisory services can be a very effective means to provide information and knowledge to small farmers; (iii) a strong control and M&E system is an essential element to maintain quality. As mentioned above, M&E was done directly by the IAS, and not by the M&E unit of the PMU; (iv) clear performance targets for the contracted private sector providers are an essential element; and (v) the use of a range of mechanisms, including farmer training courses, field demonstrations, working through special interest groups, and information campaigns was effective.

79. Competitive Grants Program: (i) The CGP was effective in supporting emerging rural businesses and farmer groups to introduce and test innovative technologies and initiatives. It was also effective in demonstrating and providing examples to a broader audience of potential rural entrepreneurs and beneficiaries and, thus, to support the process of linking production and processing. The CGP approach proved responsive to the needs of the clients (farmers and rural businesses); (ii) the wide information-sharing and publicity program, and support to potential applicants during the application stage, led to improvements in the quality of proposals and encouraged emulation and adoption of successful technologies; (iii) clear and transparent procedures and criteria are an essential element; (iv) a dedicated Secretariat, with continuity throughout the project, was a key element; (v) regular feedback through a strong M&E program carried out by the Secretariat enabled adaption and improvement of procedures and methodologies. Again, as above, the M&E was carried out directly by the Secretariat rather than the M&E unit of the PMU; (vi) the impact was most likely greater due to innovative ideas coming from different fields rather than through selection of specific value chains.

80. MICH: Under ADCP-I, a market information system was started that collected market prices both in Baku markets and in the RACs. The information was collated by the IAC in Baku and then sent back to the RACs to make available to the Private Advisors and farmers. The PAs would normally display the information in their advisory rooms. Although this system was not particularly effective, but it represented a start - in fact the RACs continued price collection activities under ADCP-II. Under ADCP-II, the MICH was intended to streamline this to include an SMS system and to try to put it on private sector basis. While in principle this was a good idea, it might have been better to have continued to work through the IAC and build on what had already been done, rather than establishing a new unit. (The MICH unit was placed along with the Research and Competitive Grants, and became an "orphan" there). Important lessons here are the need to more effectively build on previous efforts, and to conduct an information campaign in advertising and promotion of the system to increase customer base that will eventually make the system more sustainable.

81. NRICH: The requirement that NRICH linked with the advisory services increased relevance and outreach of the demonstration program and was an important factor in its successful implementation.

82. Overall Lessons: The Government should use the concept of public-private partnerships and promote such partnerships in other areas. Under ADCP-II, public-private partnerships in the dissemination of information, for example, in extension services, was innovative and worked well. As described in Annex 2, collaboration with the public and private sectors in implementing the modernization program of NRICH, the consolidated research plan, and in getting periodical information to and from farmers provide good examples.

83. Under ADCP-I, the Competitive Grant Program covered only research. ADCP-II extended the Program and further developed it to give resources to enterprise development. The CGP is well-established and has worked well overall. The CGP/matching grants schemes could be used more extensively in ADCP-III, and in general.

84. The decision to choose only one research institute for reform and modernization, pursue reforms (although initially there was some resistance, and progress was slow) and do it properly provides a valuable lesson. The reform of NRICH was well-designed, well- executed, and, overall, very successful. Azerbaijan now plans to continue with such reforms at other institutes. Other countries (for example, Uzbekistan and Georgia) have also expressed interest in emulating this example.

85. Another lesson is the value of rapid reaction to evolving needs, and inclusion of new activities within the scope of the project objectives, such as the activities under AZ- VET, which were not originally envisaged by the project, but were included later to scale- up the system established under the Avian Influenza project.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies

(b) Cofinanciers

Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD (USD millions) Appraisal millions) Agricultural Business Services 37.65 37.5 99.47 Agricultural Support Services 13.62 16.96 124.52 Project Management 1.40 1.70 121.43

Total Baseline Cost 52.67 56.11 106.53

Physical Contingencies 0.00 0.00 0.00

Price Contingencies 0.00 0.00 0.00 Total Project Costs 52.67 56.11 106.53 Front-end fee PPF 0.00 0.00 0.00 Front-end fee IBRD 0.00 0.00 0.00 Total Financing Required 52.67 56.11 106.53

(b) Financing Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Cofinancing (USD (USD Appraisal millions) millions) Borrower* 12.60 15.89 126.11 International Development 29.23 29.33 100.34 Association (IDA) JAPAN: Ministry of Finance - PHRD 1.61 1.33 82.61 Grants Borrowing Country's Fin. 4.70 4.60 97.87 Intermediary/Intermediaries Local Sources of Borrowing Country 9.56 9.56 100.00 *The Government share was increased at the expense of the IAC component and allocated for the modernization of NRICH.

Annex 2. Outputs by Component

Component 1: Agricultural Business Services

This component sought to support rural businesses to improve the linkages between their production and markets, and to enhance access to financial services by small and medium rural enterprises (including farmers), agro-processors, and other forms of agribusinesses, through: capacity building in PFIs in order to improve their staffs lending skills and to promote new financial products; and providing badly needed funds for lending to their clients. The component included four sub-components: (1) Financial Services for Small Agribusiness/Credit Unions; (2) Financial Services for Medium Agribusinesses/Banks and Leasing Companies; (3) Development of Efficient Rural Market Links; and (4) Rural Business Advisory and Market Services.

Three key performance indicators (KPIs) were specified under this component. Achievements under each KPI by component are given in Annex 2 Appendix 1.

Under ADCP-I, 30 CUs and 1,300 joint liability borrower groups (BGs) had been created, and together, the BGs and CUs had provided credit to around 31,000 farmers and rural businesses. The recovery rate had been estimated at 95%. The number of clients accessing CUs was about 3,000. Building on these gains, ADCP-II was to support an additional 20-30 CUs, and was expected to reach about 10,000 CU members at the end of the project. Lending to BGs was to continue under ADCP-II, however, in the later stages, lending to BGs was to be phased out to allow sufficient funding and growth of the CU network, given that lending through BGs was not sustainable in the absence of further funding support, while the CU network could become sustainable.

Outputs:

Component 1, sub-Component (1). ADCP-II provided over 50,700 loans in the total amount of AZN 71.10 million to 23,600 members of Borrowing Groups (BGs) and CUs to help investments in livestock, crop and retail/trade as of September 30, 2011. The number of people accessing credit through CUs was estimated at 14,216 as of September 30, 2011 (compared to the baseline of 3,000). Demand for loans continues to be very high. Lending to CUs increased by 92% from AZN 27 million in December 2009 to AZN 51.9 million in September 2011. The average loan size was around AZN 640 to members of BGs and about AZN 2460 per individual member of CU. The portfolio to BGs continues to decrease, albeit slowly (from ANZ 2.56 million on December 30, 2009 to AZN 1.6 million on September , 2011), which is a positive development, as ADCP II aimed to move lending from BGs to CUs. The overall financial recovery rate increased from the baseline of 95% to 97.42% as of September 30, 2010. However, as mentioned in Section 2.2, the problems with repayments in some of the CUs affected the financial status of the Credit Implementing Agency (CIA).

Capacity Building for CUs. ADCP-II also supported technical assistance for: legal and regulatory reform; training, updating the CU MIS; and for expanding the CU network.

The objective of legal and regulatory reform was to create an environment for effective supervision of CUs in order to progressively and effectively introduce deposit-taking services. These reforms were delayed, however, the PMU hired an international expert to review and make recommendations to modernize the legal and regulatory framework for CUs. The consultant’s recommendations are being reviewed by the Central Bank of Azerbaijan

CU Training. A training plan was designed by AKIA (Azerbaijan Credit Union Association) based on the needs identified during the technical review of CUs. The draft training materials were prepared and finalized by the international consultants hired by the PMU to deliver the training. All training materials were expanded to include case studies and useful real life examples, and the project delivered training in all four main topics (Table 1).

Table 1: Summary of Training to Credit Unions*

Period of Number of Total number Training topic delivery CUs of participated participants Delinquent loans collection; Policy and Jul 2010; 61 150 Loan Underwriting Oct-Nov 2010 Accounting, Budget Planning, Financial Jul-Aug 2010 48 90 Analysis Promotion of share mobilization, new Oct-Nov 2010 62 125 product development and marketing Governance of Credit Unions Jan-Feb 2011 57 163 *Source: AKIA, Aide Memoire, February 7-18 and March 4-12, 2011

Updating the CU management information system (MIS). These outputs were delayed considerably due to procurement delays. However, the MIS has now been installed and the trainings on software have been completed. The overall objective in acquiring this software was to improve the quality and accuracy of the data and information collected, and to standardize the information system. Some CUs have requested additional trainings, therefore at present, additional trainings are being provided to several CUs.

Expanding the CU network. ADCP-II successfully facilitated the creation of 20 new CUs and expanded the activities of the 30 that existed at the end of ADCP-I by extending the credit line, capacity building (trainings, international and national technical assistance) and provision of MIS software.

Component 1, sub-Component (2). ADCP-II, through the second sub-component, was to provide a credit line for use by banks and leasing companies to extend investment loans/leases to agribusinesses. It was also to support capacity building to participating financial institutions (PFIs) to improve their skills in appraising rural and agriculture- related medium and long-term investments, in risk assessment and management, and in product innovation.

Sub-sectors financed. As shown in Table 2, the three PFIs issued a total of 116 sub-loans, including 99 from the credit line directly and 17 from the revolving fund. PFIs have financed a broad range of sub-sectors to ensure the appropriate diversification of the portfolio. Although initially the sub-loans were concentrated in financing livestock and sheep breeding for milk and meat, the project managed to agree with authorities to limit lending to one subsector to 30% of each PFI’s project portfolio and hence diversify business activities supported by the Credit Line. At the end of the project, livestock loans of the total Credit Line disbursements amount to 29.6%. Two of the PFIs achieved a share of livestock loans of 26.6% and 26.1%, while the share of livestock loans in portfolio of Technikabank remained at 36.3%, due to the very high concentration of such loans in this Bank’s portfolio at the initial stage of deployment of the project Credit Line.

Table 2: Summary of sub-loans disbursed (as of September 30, 2011) PFI Number Including, As a Amount Including, Average of sub- from percentage disbursed, from sub-loan loans reflows in of the total US$ mil reflows in size (in the PFI number of the PFI US$) and PMU sub-loans and PMU, US$ mil Turanbank 42 2 36% 5.24 0.17 124,700 Technikabank 33 2 28% 5.41 0.18 163,900 Muganbank 41 13 36% 7.17 1.94 174,800 Total 116 17 100.0% 17.82 2.29 153,600

Table 3: Distribution of sub-loans per sub-sector, including reflows

Sub-sector Number of Amount disbursed, As a share of total loans US$ million disbursements Animal breeding for meat and milk 34 5.3 29.6.% Orchards 30 4.6 25.5% Agro-processing 13 2.7 15.4% Poultry farming 12 1.7 9.4% Vegetable production and 10 1.9 10.9% Fish breeding 8 0.8 4.4% Bee-keeping 7 0.6 3.6% Warehouses 1 0.2 1.1% Agricultural machinery 1 0.02 0.1% Total 116 17.82 100%

The interest rates to the final borrowers were about 8%-13% in US Dollars and between 7- 11% in AZN. The average sub-loan size is around US$153,600. Overall, the sub-loans are well diversified in size, ranging from US$25,000 to US$300,000, and 35 of the 116 sub-loans provided were under US$100,000. Except for one three-year loan, all other sub-loans have maturities between 5 and 7 years, inclusive of a grace period of 2 – 3 years

(in a very few cases the grace period is between 12 and 18 months). There were no problems experienced with these sub-loans.

Key Impacts of the Credit Line: (i) 1,342 new jobs were created by the sub-borrowers; and (ii) the average income of the sub-borrowers has doubled, from AZN 50-60 thousand before the financing, to AZN 100-150 thousand.

PFI Training. ADCP-II was to provide training to PFIs on specifics of lending/leasing to agribusinesses, and, in particular, the appraisal of medium and long-term rural investments, including their associated risks. Training was also to focus on innovative financial projects in order to enrich their product offering. A complementary training program was designed for the PFIs under the project and covered training of about 90 loan officers and 60 branch managers in Investment Lending/Leasing in Agriculture and New Financial Products (structured finance) in Agriculture, as well as PFI staff training in Environmental Issues. Training in New Financial Products was also successfully completed. An international consultant delivered a seven-week training program to 97 staff representing 11 banks, Credit Implementing Agency and the PMU, including 27 branch managers and 46 loan officers from three PFIs (Appendix 2, Aide Memoire, March 2011).

Although delayed, the project delivered training in Investment Lending/Leasing in Agriculture during 2010. It followed the same approach as the training in new financial products. The training was delivered to 76 staff, including to 12 loan officers and 6 branch managers from PFIs and 50 loan officers and managers from 9 other banks and credit organizations. Eight staff members of SAAC and PMU also attended the training. Overall, the trainees were satisfied with the quality of the training and the professional skills of the trainers. (The results of post-training evaluation are summarized in Table 4, Annex 1, Aide Memoire, March, 2011).

Two staff members of the Azerbaijan Bank Training Center (ABTC), the local training provider hired under the project in the role of the National Consultant were also trained with the objective to take over the training of PFIs after the international consultant completed the assignment. A program of subsequent training on both topics was advertized in August 2010 and a number of training courses has already been delivered. In total, 14 branch managers and 64 loan officers from 32 banks and credit organizations participated in the courses. A series of training sessions on environmental aspects of credit line to agribusiness were delivered to the PFIs’ staff by the PMU environmental specialist. Twenty loan officers from the three PFIs received the training.

Study Tour to the Netherlands. The project supported a study tour to the Netherlands for the management of the PFIs with the objective of providing an opportunity to obtain knowledge on lending to the agriculture sector in a country with a developed agricultural lending system. The tour was organized by Rabo International Advisory Services and allowed the PFIs to learn more about the new financial products for agriculture (on which they have obtained theoretical knowledge during the training) in order to better service their customers in the agricultural sector, and risk management instruments. The agenda of the tour included topics such as value chain financing (including experience in

emerging market), overview of agricultural finance system in the Netherlands, visits to a local Rabobank and some of its primary agricultural clients, visits to an auction house, and a workshop to discuss how these practices can be implemented within Azerbaijan. Overall, the tour was valued very highly by participants.

Other Impacts of Component Activities on the PFIs. The main impact of the project on the PFIs has been the increased interest of the PFIs in agricultural lending. A new agricultural lending unit was established in Muganbank, on the basis of experiences obtained during the study tour to Rabobank. The agricultural portfolios in the PFIs have increased compared to the pre-project situation: in Muganbank, while loans for agriculture-related activities represented 7-8 % of the bank’s credit portfolio before the project, the share of agricultural loans has grown to 20-22%; in Turanbank, the share of agricultural loans has grown from 9-10% of the credit portfolio to 25-30%; and in Technikabank, the share of agricultural loans has increased from 5-6% of the credit portfolio to 15-18% of the total credit portfolio.

Component 1, sub-Component (3). This sub-component consisted of a Competitive Grants Program (CGP) that awarded small grants for introducing, testing and transferring new and improved technologies emphasizing improved market accessibility, storage and small-scale processing.

Competitive Grants Program (CGP). In total, 65 first, second, third and fourth-round grant projects have been completed. All projects from the first three rounds have been evaluated. The average grant amount was US$22,951, higher than the originally estimated amount partly due to rapidly increasing prices and changing exchange rates. The beneficiary contribution averages 44.83% of the total grant project cost. This high contribution is considered as a very positive indicator of the applicants’ “ownership” of the project activities and likely sustainability after project completion. The quality of proposals has improved with each subsequent round, as is mainly attributed to the rigorous information and intensive training program.

Table 4: Summary of CGS progress, first, second and third rounds September 30, 2011

First Second Third Fourth round Total Round Round Round (ongoing) Number of grants 9 26 27 12 74 Average grant amount (US$) 24,125 24,768 21,676 21,005 22,951 Total project cost (US$) 381,310 1,064,862 1,213,308 396,238 3,078,538 Grant amount (US$) 217,128 643,969 585,250 252,060 1,698,406 Beneficiary contribution (US$) 164,182 420,893 628,058 144,178 1,380,132 Number of direct beneficiaries 45 139 149 60 370 Actual grant disbursement 216,114 641,251 572,744 229,198 1,659,309 (US$)

Grant topics. The grants cover a range of improved technologies for production, storage, grading, packaging, labeling, small-scale processing and canning of different high-value

products such as vegetables, citrus, mushrooms, grapes, honey, seed, potatoes and strawberries. Grants are also being used to establish new storage and processing facilities, improve milk processing and poultry technologies, develop efficient fish-raising techniques and introduce new drip irrigation methods. 47.3% of grant projects deals with crop production and 52.7% with animal husbandry. The projects focusing on small-scale processing, marketing, packing, and storage of agricultural commodities constitute about 30% of all sub-projects. Technology transfer. To demonstrate the technologies to other potential adopters, each grant is required to carry out a program of technology transfer, such as workshops, field days, publication of information leaflets, and television emissions. These activities have influenced significantly the transfer of the innovative technologies. Different rural business groups covered by technology transfer activities have already demonstrated their interest in introduction of demonstrated technologies. Performance of grant projects and ex-post evaluation. All first, three round sub- projects were completed and evaluated. The evaluations include an assessment of the achievements including success in developing the technology; the extent of dissemination and adoption of the technology by other indirect beneficiaries; the actual and potential impact on direct beneficiaries’ incomes; and the effect on productivity, institutional capacity and market linkages. A cost-benefit analysis of the technology used was also included in each evaluation for only one year. Overall, fifteen grants were rated highly satisfactory, twenty one were rated satisfactory, twenty five were rated moderately satisfactory and only one was less than satisfactory. During the evaluation of the second and the third round projects attention was paid to the indicators such as: identification and evaluation of rural marketing linkages created under the project; sustainability of project activities; economic impact of the project for a period over 3 years compared with the initial estimation; technology demonstration and transfer in the area followed by examples.

Publicity. Booklets have been published and widely distributed, the preparation of the book containing the final evaluation for grant projects and the CGP implementation was started. A national workshop is planned for January 2012 to discuss the progress with ADCP-II implementation. The first national one-day workshop was carried out successfully in April 2009. The workshop focused on CGS application procedures and criteria, presentations on progress of the grant program by the CGS Secretariat, and inputs from grant winners and/or their service providers. The results from 62 completed grant projects will be presented at the project final workshop scheduled for February 2012. In addition to the workshop, a booklet has been prepared by the PMU to publish evaluation of the completed projects. The booklet will be widely disseminated to interested institutions including banks, NGOs, government organizations including the Ministry of Agriculture, the advisory system including the RACs, and other donors. Information on the CGS has also been posted on the website and in national newspapers.

Component 1, sub-Component (4). This activity aimed to further develop the information and advisory services by introducing a greater market focus into the programs and by developing a market information system, the Market Information and Commercial Hub (MICH). The MICH was substantially delayed, as the first procurement round failed

as the Turkish company selected for establishing the Market Information and Commercial Hub (MICH) submitted a financial proposal of US$2.3 million, far in excess of the US$280,000 budgeted for this activity. Therefore, the TORs for establishing MICH and the Operational Manual were modified to scale down MICH activities. A local company (Azerbaijan Marketing Society) was selected and contracted out on July 21, 2009 for the implementation of MICH-related activities on the basis of modified TOR. Some preliminary activities such as: development of methodologies for developing agricultural commodities grading, price collection in 9 regions, conduct studies, contract a communication service company, select suitable software and testing of some activities have been implemented. Also a market survey has been completed. Based on the findings of the survey, thorough methodology for the price collection and primary data processing has been developed. The development of software for the MICH website (http://agrobusiness.az/agro/az/), IVR system and SMS services have also been finalized.

A 4 digit call number (6599) has been procured and is already operational and the system has been tested. At present, any person in Azerbaijan with a mobile phone can enter into this system and obtain information regarding the prices of agricultural products from Baku and 9 regional markets.

Farmer training. The training program for farmers on the MICH’s SMS and IVR services has been provided by the private advisors (PAs). Altogether, about 24,000 farmers have been trained. During the training, the MICH’s SMS and IVR services were offered free of charge to facilitate trial use of the services by farmers participating in the trainings.

Study tours. The project supported a study tour to Cambodia for staff of MICH and the PMU to provide them with the opportunity to learn from the experience of the Cambodia Agricultural Market information Project (CAMIP) jointly funded by the Canadian International Development Agency (CIDA) and the Government. The objectives and activities of CAMIP are very similar to what is envisaged under the MICH and therefore this project was selected as the most relevant to visit. The participants reported that the study tour was successful as it provided an opportunity to learn in more practical terms about the SMS-based MIS and other features of the project, such as Farmer Marketing Schools as a good experience in stimulation of the demand for MIS's services.

Component 2. Agricultural Support Services

This component sought to help farmers to improve their productivity and quality of production by expanding the outreach of the advisory system, strengthening the provision of private veterinary services, and improving access to adapted technologies. It included three sub-components: (1) Information and Advisory Services, to build on the foundations established under ADCP-I and further develop the advisory system to cover a wider geographical area using a similar approach; (2) Veterinary Services, to enhance access to quality veterinary services throughout the country by expanding and strengthening the private Veterinary Field Unit (VFU) system, supporting the privatization of the State Veterinary Service (SVS) field services staff, strengthening the disease surveillance and

preparedness systems, and implementing an agreed control program against at least two priority diseases; and (3) Improved Access to Adapted Technologies, where ADCP-II was to build on the experience gained under ADCP-I and provide one or two selected research institutes to improve their capacity to develop and demonstrate adapted technologies, focusing on variety improvement and crop husbandry.

Outputs:

Component 2, sub-Component (1). Within the Information and Advisory Services (IASs) sub-component, contracts with the RACs which had been established during ADCP-I (Gandja, Sheki, Masalli, Nakchivan and Beylagan) were renewed during 2007 for a period of 2 years. The National Advisory Board was established on July 24, 2007 by the degree N 197 of the Ministry of Agriculture. In 2008, five more RACs covering 27 administrative districts were contracted out and these became operational. Therefore, as of the end of 2008, the network of 10 RACs and 201 Village Training Rooms covered the entire country with IASs.

In 2007 and 2008, ADCP-II successfully carried out the information campaign on “Processing and marketing of agricultural products” and the campaign on “Campaign on buffalo production” respectively. Three training programs for Private Advisers (PAs) in agro-marketing, farm business management and food security issues were carried out in the five ADCP I RACs. The farm business management course was also conducted in five of the new RACs. 99 PAs from ADCP I RACs’ were selected and provided with notebooks. Training courses on computer use for the new RACs PAs was also provided in 2009.

Overall, ADCP-II realized the following physical outputs: 5485 Special Interest Groups were formed and consequently advisory projects have been implemented; and 39,776 demonstration fields and 32,636 training courses have been established and carried out. Moreover, about 8,264 farmers have used individual advisory services. In total, some 736,302 farmers have benefited from information and advisory services.

Table 5: Outreach of RACs

Project Years

RACs indicators 2011 2007 2008 2009 2010 (six Total month)

Number of farmers participated in the field demonstrations 76531 127292 138005 143342 61307 522620 out of them repeated 18779 30811 27924 34797 13797 120683 Number of farmers participated in the training courses 52800 71901 86292 95509 39070 330659 out of them repeated 13814 15641 21151 25470 9394 82396

Number of farmers participated in the advisory projects 9176 9912 19866 21593 20876 81423 Number of farmers received individual services 0 1405 1326 2228 3305 6666 Total 138507 210510 245489 262672 124558 981736 Total excluding repeated participation 103880 156293 186772 200507 88850 736302 The internet site of the Information Advisory Center was established and became fully operational with an address of www.agro-imm.az. Also web sites for all RACs were developed and are fully operational.

Table 6: Number of SİGs, trainings and field demonstration on 10 RACs (2007-2011) Project years 2011 Total (six 2007 2008 2009 2010 month) Number of SİGs 484 603 1204 1282 1912 5485 Number of trainings 5280 6796 8612 9536 4324 34548 Number of field demonstration 6216 7706 10454 11044 4356 39776 Individual services 0 1405 1326 2228 3305 8264

Component 2, sub-Component (2). The following outputs were achieved under the Veterinary Services sub-component.

Private Veterinary Units (PVUs). The Project continued to work with the initial 25 PVUs established under ADCP-I and extended this to establish 30 new PVUs in six regions (Tovuz, Goychay, Devechi, Ismailli, Yevlakh and Salyan). All PVUs have been provided with required induction trainings, facilities, equipment and medications, and each of them has completed the survey on disease surveillance and livestock productivity. The PVUs have all essentially graduated from the support program and are sustainable,

but continue to benefit from the ADCP-II training program. The PVUs are all fully operational as planned with the total program of 55 PVUs now comprising some 160 veterinarians. All PVUs achieved the defined performance milestones and are deemed to be operationally self-sufficient, which indicate potential for the PVUs to become fully sustainable (see Aide Memoire, March 2011). Overall, the use of the service seems to be increasing gradually and has had a positive impact on livestock production. Surveys indicate that 90% of livestock owners using the PVU services are satisfied with the quality of the services. The request by the Government to scale this program up country-wide and to incorporate an additional 800 veterinarians is an acknowledgement of its results.

Training program for the PVUs is underway. There were several areas identified for practical and applied training of PVUs related to: (i) basic business practices (ii) clinical practice including diagnosis and treatment of farm animals including surgical procedures, (iii) pharmacology including application and availability of improved veterinary medications, and (iv) simple field necropsy and laboratory examination methods. Training courses have been delivered by an international veterinary clinical specialist to a total of 260 veterinarians from 56 regions. A national conference of PVUs and private practitioners is scheduled for December 2011 to share the experience with the private veterinary practices, to discuss the lessons learned and to lay the groundwork for the establishment of an association of private veterinarians.

Brucellosis Control program. ADCP-II started to support a pilot program for the control of brucellosis in cattle and sheep to reduce the incidence of human brucellosis. It was initially focused on Balakan, Zagatala, Gakh and Sheki regions. An international epidemiology specialist drafted a detailed plan for the implementation of this program and to initiate the vaccination program as part of this plan. In this regard the brucellosis serological survey was completed on April 20, 2009, encompassing 20 randomly selected villages and households in four designated regions and a report was developed. According to the survey results, the infection rate in livestock was significant and varying from 1.2% to up to 11.8%. Moreover blood samples from people at potential risk (about 342 from Zagatala and 235 from Balakan) were tested; according to the results 8.8% were serologically positive in Zagatala and 6.4% in people in Balakan were positive reactors. Based on extensive experience in other countries in the region, such levels of brucellosis in livestock and related high sero-prevalence in people would be expected to be accompanied by significant level of human infections and clinical cases. The project is in the process of analyzing concurrent human data and economic impact related to livestock production and human health. A joint seminar was organized for veterinarians and public health specialists to highlight the issue.

It has also been noted that the animal health component and brucellosis control program have been designed and implemented in close collaboration with other projects and donors including: (i) the WB-financed avian influenza project, (ii) the US-DTRA project for laboratory upgrading and (iii) the USAID-funded STOP AI program for avian influenza. Comprehensive and practical training materials were developed under the STOP AI program, for example, published under the ADCP II project and distributed to all veterinarians, PVUs and to the university faculty. These have been used by PVUs to

provide training and extension to farmers and, as reported to the SPN missions have stimulated farmer interest, interventions and created revenues for the PVUs. Upgrading of laboratories throughout the country was strategically shared between the DTRA Project and ADCP II investment.

The vaccination program has been established and is working well. The program was started in April 2009 in four regions, with initial vaccination of a total of 490,000 sheep and goats. An additional 270,000 doses of REV-1 vaccines were procured and used in the region during 2009 and 2010. The SVS has also procured about 4 million doses of Rev 1 for a national control program starting in 2011 which will be based on whole flock vaccination of sheep and goats and replacement females. According to official census data there are 5.1 million ewes and an expected 1.5 million immature females that would be eligible for vaccination in 2011. The abortion rate in small ruminants was selected as a proxy indicator for the evaluating the results of vaccination program. Accordingly this indicator has decreased by 60-70%. Although the abortion rate in small ruminants is a good surrogate measure of results, reduction in human cases and repeat of the serological survey three years after the start of vaccination is a much better measure of results and will be carried out by the Government under a proposed follow-on project.

National Animal Disease Information System (AZVET). The AZVET was fully operational in twenty regions, including the brucellosis pilot regions, and training was provided. However, the adoption of the system for data collection and reporting has been very slow. The project supported a study tour to Turkey to review the national system there and the TURKVET system as a basis for further development of AZVET. The project encountered particular problems in trying to integrate the AZVET with the DTRA EIDSS system which was being concurrently and misleadingly promoted by DTRA as a national system. The SVS has since adopted the approach to link the EIDSS as a module for dangerous pathogens in the overall AZVET system which is recognized as a national system

The Veterinary Faculty of Ganja Agricultural University (GAU-VF). The project has been successfully cooperating with the VF in close coordination with other donors (FAO, USDA) and WB-funded Avian Influenza operation. The AI Project supported the development of a faculty self-assessment tool that is intended to direct reforms and upgrading. The VF completed its strategic development plan with support of AI Project and began to implement it with significant and impressive results. ADCP –II subsequently provided resources to establish a PVU at the VF to provide hands-on farm service training for students. This IT facility has been used for training students and SVS staff country- wide on the use of the AZVET system under the ADCP II. The project also provided practice opportunities for students and faculty, many of whom were involved in the brucellosis control program to gain hands-on experience and the VF is working closely with the more successful PVUs to expose students to this work as a career option after graduation. This approach to faculty upgrading has been used as a case study and the approach endorsed by the OIE as the basis for future work in other countries.

Component 2, sub-Component (3). The project supported the modernization of the National Research Institute for Crop Husbandry and Crop Diversification (NRICH), which was selected by the MOA as the pilot institute for reform. Following the requirements of the Modernization Program, NRICH was re-organized to meet needs of farmers and market competitiveness and to ensure better services. The Advisory Board representing all stakeholders was established for the first time. The Board takes responsibility that research works meet farmers’ needs and carried out in accordance with standards. The Board includes leading scientists from outside the Institute, representatives of appropriate ministries, committees, and other relevant bodies, as well as private sector representatives’ and farmers. The Chairman represents private sector. Eight crops out of 12 have been removed from the Institute’s mandate and the new mandate includes only 4 crops including wheat, barley, maize and food legumes. More attention is given to crop diversification.

Consolidated research plans. The Institute now has a consolidated research program for the period of 2010-2014. Research plans have been prepared by each department and laboratory of NRICH. The plans envisage participation of beneficiaries in the studies and attach importance to farmer participatory investigations. Experience of the Competitive Grant Program implemented under ADCP I has been taken into consideration in developing the research plans. Research objectives meet basic needs of farmers and have been transferred to research projects reflecting research methods, budget and work plans.

Upgrading of NRICH facilities. The main building of NRICH was renovated in late 2010, with additional financial support provided by the Government of Azerbaijan. In addition, the seed storage house of Tartar Experimental Station was also rehabilitated on the project account. All necessary equipment, including lab equipment has been procured. The project has also provided 42 items of farm and seed equipment, for the Institute and five Regional Experimental Stations.

On-farm demonstrations of technologies. There is a good collaborative demonstration program between the NRICH and the RACs. This program is considered very important and successful in transferring new agricultural technologies to farmers. In the 2010/11 cropping season, 37 on-farm demonstrations were conducted by the Institute and RACs in 30 villages of 22 regions. These demonstrations were conducted to demonstrate the performance of new varieties, efficient agronomic practices, water-saving technologies, conservation agriculture with wheat, barley, maize, chickpea and lentil both under irrigated and rain-fed farming systems. Future plans include conducting several field days, workshops and discussion groups with farmers, local officials, PAs employed by RACs, and Research and Extension members of the Board. The results will be analyzed in the fall of 2011and posted on the Institute’s website, and will be considered in planning the 2011/12 demonstration program.

In the 2010 cropping season, which was unfavorable for crop production, wheat demonstrations at 40 farmer fields gave a yield of 3.5 ton/ha, while the yield of progressive farmers near the demonstration plots was only 2.1 ton per hectare. The use of new varieties and production technologies increased profitability by 43.2%. Cultivation of

this variety by farmers enabled them to harvest 0.3 ton more yield per hectare and increase their profits by 31.5%. On farm demonstration of maize has been arranged in 3 farms that yielded good results.

Provision of new varieties and seeds. Since 2007 nine crop varieties 5 have been officially registered by State Commission for Testing and Protection of Breeding Achievements and are already under commercial cultivation. Based on their grain yield, disease resistance and quality 2 new wheat varieties, 1 barley variety, 1 maize variety, and 1 lentil variety were also registered in 2009. Some of the varieties commonly grown by farmers have become highly susceptible to yellow rust and therefore it has become all the more important to rapidly replace these varieties with yellow rust resistant new varieties that were recently registered. The availability of good quality chickpea and lentil will also contribute to crop diversification. Furthermore, 7 new crop varieties, including 4 wheat, 2 barley and 1 chickpea varieties have been submitted to the State Commission for Testing and Protection of Breeding Achievements in the course of the last 4 years. The experimental stations have already produced good quantities of super-elite and elite seeds of these varieties and they have been provided to seed growers in 2010. For example in 2009, 70 tons elite seed of new bread wheat variety Aran and Gobustan were produced at the experimental stations and given to 16 seed growers who are producing commercial seed of this variety in around 350 hectares. Similarly, the seeds of other new varieties of wheat, barley, maize, chickpea and lentil are being produced at the experimental stations and by private commercial seed growers for rapid dissemination of these varieties to farmers. In 2010, NRICH farms produced 769 ton super-elite and elite seeds of which 681 tons were wheat seeds and 88 tons were barley seed.

Table 7: Production of super-elite and elite seeds (in tons)

Regional experimental stations Years 2006 2007 2008 2009 2010/a Tartar 264.4 273.1 325.4 399.3 226.6 Gobustan 94.0 337.1 330.9 356.0 314.8 Jalilabad 102.6 106.9 117.1 109.6 61.4 Shaki 16.3 56.1 73.7 80.4 72.6 Zahatala 2.2 10.1 39.6 116.9 86.5 Absheron 0.0 40.4 6.0 39.0 7.2 Total 479.5 823.7 892.7 1101.2 769.1

There were also 10.6 tons of maize seeds and 1 ton of chickpea seeds that were produced. The reduction in seed production compared to 2007-2009 is related to climate changes (cold weather in early spring and dry hot weather in summer). Compared to 2006, seed production increased by 60.4%. The seeds produced were provided to 82 certified seed growers for fall sowing in 2010. 90 private seed growers and 22 state seed producing farms received 1189 ton super elite and elite seeds produced by the Institute in 2009.

5 Including 5 bread wheat, 1 durum wheat, 1 barley, 1 maize and 1 lentil variety.

According to survey results 12 thousand first reproduction seeds of cereals produced by seed growers were sold to 9520 farmers. These farmers have produced 70908 tons of R2 seeds, which have been provided to 47600 cereal producers. Such distribution of seeds contributes to dissemination of new resistant and high yielding crop varieties.

Training and human resources development. One of the most valuable resources of the Institute is its staff. In accordance with the training program six young scientists of NRICH have received training at ICARDA on crop breeding (2 staff), plant physiology and biotechnology (1 staff), grain quality analysis (2 staff), and on soil and plant analysis (1 staff). Thirteen scientists from the Institute and Experimental Stations have attended in- country crop breeding training courses. In addition, 24 scientists have completed training courses on computer skills and 25 scientists on English language.

The Institute has established close ties with several universities and research stations abroad. There is good cooperation with international crop research centers like ICARDA and CIMMYT. In the course of the last 3 years, 81 scientists from NRICH have attended 29 different international events. A large number of breeding materials and research results have been exchanged. Seventeen researchers have attended short and long-term training courses at the international agricultural centers over the last 3 years. NRICH staff has also received training in the use of lab equipment.

Contribution of the Institutes research outputs (new varieties of wheat, barley, maize and food legumes) to the country’s food security. The State Program on “Reliable provision of the population of Azerbaijan Republic with foodstuff in the course of 2008- 2015 years” aims to extend crop area under cereals up to 900 thousand hectares and produce a total of 2.8 million tons of cereals from this area by increasing the average productivity of cereals to 3.2 ton. Hence, importance is attached to development of new high yielding crops, their testing, registration and introduction of efficient production technologies. In this view, research works being carried out at NRICH assume great importance. At present nearly 80-85% of wheat fields, 100% of barley fields, 90% of maize fields and food legumes 85% fields were sown with varieties released by NRICH. Almost 72% of 54 crop varieties (24 bread wheat, 9 durum wheat, 8 barley, 6 maize, 5 chickpea and 2 lentil varieties) registered by State Commission for Testing and Protection of Selection Achievements were released by NRICH for which patents were granted. Almost 90% and 65% of the requirement of super elite and elite seeds for 2009 and 2010 have respectively been met in the country by Regional Experimental Stations of NRICH.

Liaisons with private and public sector. Implementation of modernization program of NRICH has exerted significant influence on cooperation with the private sector. With the purpose of establishing close cooperation with the private sector and for building up partnerships, representatives of the private sector were included on the new Advisory Board of NRICH to ensure consideration of producers’ needs when developing research plan of the institute. Close relations have been established with RACs established in the framework of the Project and PAs employed by RACs. Farmer participatory development and implementation of demonstration plans, farmers’ participation in workshops, field days and on-farm demonstrations and live contact established between researchers and

farmers enabled to get periodical information on farmers’ needs. The Institute has gained the possibility to direct its research plan towards meeting farmers’ needs, to production packages and services that could be offered to private sector. In addition, the institute is interested in providing private sector with information on its research potential, services and research outputs that could be offered. Discussions held with managers of the Institute revealed that NRICH strives for strengthening partnership towards developing scientific grounded production. All these pave the way for combining efforts of scientists and businessmen, their cooperation and sharing benefits by mutual consent. The institute is collaborating with a number of enterprises and institutions in public sector along with the private sector in implementation of the consolidated research plan. Good progress has been made in establishing partnerships with Genetic Resources Institute, Research Institute of Soil Sciences and Agro-chemistry (Academy of Sciences), regional branch offices of Agrarian Science Center and other research institutes of Ministry of Agriculture.

Appendix 1

Project Outcome Indicators Baseline Completion Development Objective Incomes of participating Average net income Average net income of farmers and rural To enhance the access of of farmers farmers according to the entrepreneurs increased farmers and rural according to the completion survey results by 20% through improved entrepreneurs to rural business baseline survey was AZN 4481 (increased access to services and and agricultural services results was AZN in comparison with BLS through vertical including financial, advisory 3211. period by nearly 40%). integration. and veterinary services and to Production marketed for Production Production marketed for stimulate market-oriented cash increased by 20% as marketed for cash cash according to the investment in rural areas. a result of increased according to the interim survey was 76.6%

quantity and improved baseline survey was (increased in comparison quality of production. 60.2%. with BLS period by 27%). Intermediate Results Results Indicators for Each Component Component I: Component I: At least 10,000 persons 3,000 persons 14,216 members in 55 CUs Improved outreach and accessing credit through accessed credit of persons accessed credit financial performance of CUs. CUs. through CUs. through CUs. Greater outreach to rural areas Rural outstanding by PFIs (commercial banks Rural outstanding loan Rural outstanding loan loan portfolio is 8.4 and leasing companies), portfolio increased to 2.5 portfolio is 11.3 % of % of Agricultural leading to increases in their % of Agricultural GDP. Agricultural GDP. GDP. rural loan portfolios. 74 grants for introducing and transferring improved technologies have been awarded. Grant recipients Around 90 rural business are carrying out the innovations conducted High quality innovations technology transfer satisfactorily, with linking farmers and markets 0 rural business activities satisfactorily. improved practices introduced by rural business entities. Some 7000 entrepreneurs demonstrated to at least entities. and farmers out of which 150 rural business about 150 rural business entities. entities and other business groups participated in technology transfer activities.

Component II: Component II: About 277,000 farmers (around Some 438,720 farmers in Additional 20% of 55% of total five ADCP-I regions (base persons benefited from farmers in the five plus 58%) received services in the old regions regions) received advisory services under targeted during ADCP-I. advisory services in ADCP-II during Jan 1

the five existing 2007- March 31 2011. regions in ADCP-I. Around 50% of farm About 380,000 Some 264,630 farmers households reached in the Capacity and outreach of the farmers reside in the (69.5% of total number of new regions through information and advisory new five regions. farmers) received advisory training courses, system enhanced to provide services in the new five demonstrations and To be specified technical and business ADCP II zones during Jan individual advisory further by a baseline advisory and market services. 1 2008- March 31 2011. services. survey. 10% of operational RACs recovered up to By the end of 2010 about cost recovered in 20% of their operational 20% of the operational cost the five existing costs in the old regions. was recovered. regions. RACs recovered up to 20% of their operational By the end of 2010 about 0% in the new costs in the old regions 12% of the operational cost regions. and up to 10 % in the new was recovered. regions. Around 75% of VFUs Network of private All established and recovered their veterinarians expanded and supported 55 PVUs are operational costs, and trained. recovering their livestock owners satisfied operational costs. with services received. Improved disease surveillance Brucellosis controlled Taking into account the & preparedness functions of effectively, shown by delay in the SVS, including the upgrade of 25% reduction in human commencement of the pilot brucellosis program. cases. project proxy indicator (abortion rate of animals) was used instead of original one. Therefore abortion rate decreased by around 70%. Increased availability of Around 35% of farmers According to the locally adaptable new satisfied with quality of completion survey results technologies to farmers and locally adapted seeds and 71% of farmers somehow farm business. seedling varieties. benefited by the ADCP II satisfied with locally available seeds and

seedling varieties (because they in comparison with non project groups prefer to buy seeds and seedlings from specialized research institutes and companies).

Annex 3. Economic and Financial Analysis

Introduction

The development objective of the project was to further increase rural productivity and incomes by enhancing the access of farmers and small and medium rural enterprises to rural business and agricultural support services. It would be achieved through financial, advisory and veterinary enhanced services and by stimulating market-oriented investments in rural areas. The project cost estimated at US$57.7 million during appraisal has already reached by June 30, 2011 to about US$64.2 million, including the reinvestment of funds recuperated from the credit subcomponent. The PAD estimated project economic rate of return (ERR) was 16.0%, and the net present value (NPV) of the project’s net benefit stream, discounted at 12%, was US$4.1 million. The quantified incremental benefits used in the PAD analysis were based on: (a) strengthened and expanded advisory services and improved access to new adapted technologies; (b) strengthened and expanded veterinary services; and (c) models of likely sub-projects to be implemented under the Competitive Grant Scheme (CGS).

The evaluation at completion shows that the ERR is 20.5% and the NPV US$25.74 million. Investments in the Agricultural Advisory Services components are resulting in an ERR of 18.5% and a NPV of US$8.3 million, while the Veterinary Services shows an ERR of 34.8% and a NPV of US$3.7 million. The CGP show direct economic net benefits with an ERR of 33.3% and a NPV of US$4.1 million. The support to medium and large agribusiness through the project credit line channeled by financial intermediaries (commercial Banks) is averaging an ERR of 19% with a NPV of US$9.6 million. All assumptions used for this economic analysis were definitively conservative. The analysis that is presented below confirms the financial and economic benefits stemming from conditions developed by the project at the time of the ICR preparation.

Methodology

Since the initial project design and objective remained unchanged over the project implementation period, the current analysis re-estimated the project benefits from the strengthened and expanded advisory and veterinarian services, jointly with the improved access to new adapted technologies following the appraisal methodology. Assumptions on future yields were based on a conservative interpretation of the findings from the Completion Evaluation Survey (CES). In addition, representative schemes and subprojects actually supported under the CGP and the agribusiness loans through commercial banks were analyzed. Actual performance in terms of production, services provided, costs and revenues was updated with beneficiaries.

The financial analysis estimated some of the direct net incremental returns attributable to the project by comparing returns in the without project (WOP) scenario and with project (WP) scenario over 15 year project life (e.g., 2007-2023). The period of analysis allowed accounting for the phasing and gestation period of the interventions. The net incremental benefits were estimated at the crop/activity level and at the farm household level. The

analysis was cross-checked with the results of the CES that has been conducted in the first quarter of 2011 covering economic indicators and productivity for 2010. The financial analysis used 2010 constant prices for all inputs and outputs for the entire project period.

In the economic analysis, the financial prices were converted into economic prices by removing taxes and subsidies from prices. Non-tradable items were assumed to have a conversion factor of 1. For the financial analysis, family labor was valued at AZM 10 per day which might be considered above the existing level but is representative of the daily agricultural wage during the peak season. A shadow wage rate of 0.7 was used to convert the financial cost of labor to its opportunity cost. The Government’s hectare based direct subsidies for crops were excluded from the financial and economic analyses and a 0.7 conversion factor for the price of wheat was used.

Agricultural and Veterinarian Support Services

Good progress was made during ADCP-II in expanding a responsive and decentralized information and advisory system that reaches a large number of farmers and is having a substantial impact. Yields for all major crops and livestock activities were assumed to increase around 10% in the without project scenario, and by about 20% in the with project scenario. At appraisal it was assumed that the total adoption rate would be 20% in the project area. For this analysis it was considered that the project reach an adoption rate of about 15% of the project areas. This might again underestimate the project impact and coverage, but takes into account that other programs and projects are overlapping portions of the ADCP areas, and that there is a natural trend of improvements that also would work under the without-project scenario. This approach contributes to a more accurate estimation of the incremental benefits deriving solely from Project activities. Anyway, a sensitivity analysis considering the adoption rate reaching 10 and 20% of the farmers was done and presented below.

Six activity crop models and budgets were prepared to represent the main crops and livestock activities typical for the project area as well as the results being obtained with the interventions implemented under the project. They all show increased income per hectare or per animal production as a result of agricultural technology testing and dissemination, and of improved veterinary services. Wheat (averaging irrigated and rain fed conditions) was used to represent cereal crops, cotton representing industrial crops, tomato for vegetables, apples for fruits and grapes, and alfalfa to represent all fodder crops. A one cow/buffalo and a flock based on 3 ewes model was used to represent the project areas’ livestock patterns and project results in the field of veterinary services. The summary of these models are presented in Table 1, while the details can be found in Working Paper (on file).

The analysis shows that activities in agricultural technology testing and dissemination, together with the improved access to credit for small farmers have resulted in increased incomes: the improved application of inputs and seeds on crops increased their yield by an average 9.1% over what could be expected without the project, resulting in incremental margins in a range from US$23/ha to US$355/ha or 5.4% to 204% increase over non

beneficiaries. Improved veterinary and animal husbandry for cattle reduce mortality of adults and increase milk production in the participating farms from 1,100 to 1,200 liters per head per year, and meat from 110 to 120 kg on average. These improvements resulted in incremental benefits of almost US$20 per cow per year. Improved feeding and veterinary services for sheep also led to a reduced mortality of adults and to an increase in benefits per head or additional margins of US$5 per flock of 3 ewes. All detailed crop and activity budgets WOP and WP are present in the project working files (ADCP_Sep3.xls).

Table 1: Summary of Activity Models (at maturity – financial values)

Vegetables Fodder Fruits Cattle 1 Item Wheat Cotton, (tomato), (alfalfa), (apple), cows and 3 1 ha 1 ha 1 ha 1 ha 1ha sheep Yields Year 1 1.9 1.4 13 6.2 8.6 1136 WOP Year 4 2.09 1.54 14.3 6.82 9.46 1250 WP Year 4 2.28 1.68 15.6 7.44 10.32 1364 Incremental (%) 9.1 9.1 9.1 9.1 9.1 9.1 Gross Output, US$ Year 1 765 840 3900 868 5160 817 WOP Year 4 842 924 4290 955 5676 899 WP Year 4 918 1008 4680 1042 6792 980 Incremental (%) 9.1 9.1 9.1 9.1 9.1 9.1 Total Costs, US$ Year 1 601 863 1720 580 1220 572 WOP Year 4 653 903 1900 600 1361 572 WP Year 4 707 944 2160 663 1522 640 Incremental (%) 8.3 4.5 13.7 10.5 11.8 11.8 Margin before Labor, US$ Year 1 265 377 3180 408 4440 695 WOP Year 4 299 441 3490 475 4866 777 WP Year 4 332 504 3770 539 5271 791 Incremental (%) 11.0 14.3 8.0 13.4 8.3 1.8 Net Margin after Labor, US$ Year 1 165 -23 2180 288 3940 245 WOP Year 4 189 21 2390 355 4316 327 WP Year 4 212 64 2520 379 4671 341 Incremental (%) 12.2 204.8 5.4 6.8 8.2 4.3 WOP – without project, WP – with project

Farm Models

Three farm models of about 2 hectares were built to represent and quantify the financial benefit of the project on farmers’ family income. In the case of the beneficiaries of the agricultural services the increase in income was estimated to be 5%, from US$3,700 to US$3,890. The farmers benefiting from the PVU as regular clients would have an increase of 21%, from US$3,300 to US$4,150. In this case, the herd has increased from 2.8 cows to 4.8 cows as shown in the CES while without project it showed an increase of only one cow. The third farm model shows the case of a farmer benefitting from both

types of project services, but without increasing his stock of animals as in the second model. The family income in this case was estimated to grow by 6%, from US$3,326 to US$3,925. Further details are shown in the working files.

In calculating the overall benefits from the advisory and research activities, the main assumption at appraisal was that while an average coverage rate would be 50% (50% of farmers were to be contacted by the end of the project in the project area), out of whom about 40% would put knowledge into practice, thus resulting in a total adoption rate of 20%. The adoption rate used for this ICR analysis was 15%. This coverage reduction is based on the fact that the advisory services were delayed in their start up, and by the moment discontinued since mid 2011, waiting for the government decision to continue to finance the program. In the case of the veterinarian services, it was assumed that the new 30 PVU are benefiting about 300 farmers each or 9,000 farmers in total, which represents a coverage of about 2.1% of the livestock heads in the country. Based on the cultivated area of representative crops in 2010 in the project area, and applying the assumed adoption rates, the following volumes and value of benefits were derived for each of the adoption models, or acreages of crops where farmers would be adopting improved farm management technologies:

Table 2: Estimation of Benefits from the Agricultural Advisory Services

Area (ha) Incremental Incremental Adoption Area/volume Adoption models Livestock margin net benefit rates, % ha/ton (head) (US$) (US$'000) Cereals (wheat) 900,000 15 135,000 7,182 Industrial crops (cotton) 52,600 15 7,890 7,563 Fodder (alfalfa) 260,000 15 39,000 3,775 Vegetables (tomato) 80,000 15 12,000 7,199 Fruits (apples) 71,000 15 10,550 11,099 Livestock (cows/buffalos) 1,270,000 15 26,400 6,837 Livestock (sheep ewes/goats) 3,750,000 2.1 79,200 1,363,000 ha Total 5,020,000 head 43,655 8,684

Based on the above assumptions, the annual incremental benefits from the agricultural research and technology dissemination activities at full development (year 9 or 2016) are estimated at around US$7.3 million, while the veterinarian services would be having annual incremental benefits of US$1.7 million. Tables 3 and 4 show the detailed analysis for the two sub-components in the agricultural and livestock sectors. The ERRs were estimated at 18.5% and 34.8% and the NPVs at US$8.3 million and US$3.7 million respectively.

Table 3: Agricultural Support Services for Small Farmers ECONOMIC BUDGET (AGGREGATED) (In US$ Million) Without Project With Project 1 2 3 4 to 15 1 2 3 4 5 6 to 15 Main Production Cereals 71.8 74.2 76.6 79.0 71.8 74.0 78.3 83.7 86.2 86.2 Fruits 55.0 56.8 58.6 60.4 55.0 57.0 61.5 65.1 65.9 65.9 Industrial Crops and Products 6.6 6.9 7.1 7.3 6.6 6.8 7.2 7.8 8.0 8.0 Fodder 34.6 35.7 36.8 38.0 34.6 35.7 37.6 40.2 41.4 41.4 Vegetables 46.8 48.3 49.9 51.5 46.8 48.5 52.6 55.6 56.2 56.2 Sub-total Main Production 214.8 221.9 229.0 236.2 214.8 222.0 237.2 252.4 257.7 257.7 Production Cost Investment Support to Credit Unions (Component 1 - - - - 4.0 5.0 5.0 5.0 3.5 - PMU (Component 3) - - - - 0.2 0.3 0.3 0.3 0.2 - Technical Assistance - - - - 2.5 3.2 3.2 3.2 0.7 - Sub-total Investment Costs - - - - 6.7 8.5 8.5 8.5 4.4 - Operating Sub-Total Purchased Inputs 102.9 105.6 108.1 110.8 102.9 105.6 111.0 117.3 119.7 120.7 Labor 30.9 31.8 32.7 33.5 30.9 31.8 34.1 36.7 37.8 37.8 Sub-total Operating Costs 133.9 137.4 140.8 144.4 133.9 137.4 145.1 154.0 157.5 158.5 Sub-Total Production Cost 133.9 137.4 140.8 144.4 140.6 145.9 153.6 162.5 161.9 158.5 OUTFLOWS 133.9 137.4 140.8 144.4 140.6 145.9 153.6 162.5 161.9 158.5 Cash Flow 80.9 84.5 88.2 91.8 74.2 76.1 83.6 89.9 95.7 99.1

______IRR = 18.5%, NPV = 8.33

Table 4: Veterinarian Support Services

ECONOMIC BUDGET (AGGREGATED) (In US$ Million) Without Project With Project 1 2 3 4 to 15 1 2 3 4 5 6 to 15

Main Production Cereals 1.5 1.5 1.6 1.6 1.5 1.5 1.6 1.6 1.6 1.6 Industrial Crops and Products 0.9 1.0 1.0 1.0 0.9 1.0 1.0 1.0 1.0 1.0 Fodder 2.4 2.5 2.6 2.6 2.4 2.5 2.6 2.6 2.6 2.6 Milk 6.2 7.5 8.9 9.2 6.2 7.6 9.5 12.0 12.5 12.6 Meat (cow) 4.6 5.6 6.7 6.9 4.6 5.7 7.1 9.0 9.4 9.5 Meat (sheep/goat) 1.3 1.6 1.9 1.9 1.3 1.6 2.0 2.5 2.6 2.7 Wool (sheep/goat) 0.1 0.2 0.2 0.2 0.1 0.2 0.2 0.3 0.3 0.3 Sub-total Main Production 17.0 19.8 22.8 23.5 17.0 19.9 23.9 29.2 30.1 30.3 On-Farm Use Fodder 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.4 0.4 0.4 Net Value Of Production 16.8 19.6 22.6 23.3 16.8 19.7 23.7 28.8 29.7 29.9 Production Cost Sub-Total Purchased Inputs 4.8 5.2 5.5 5.6 4.8 5.2 6.2 7.8 8.3 8.5 Labor Labor Costs 6.4 7.4 8.4 8.4 6.4 7.4 8.6 10.2 10.4 10.4 Sub-Total Production Cost 11.2 12.6 13.9 14.0 11.2 12.6 14.8 18.0 18.6 18.8 Other Costs O&M of Veterinarian Services ------0.1 0.4 Technical Assistance - - - - 0.7 1.0 0.8 0.8 0.6 - Sub-Total Other Costs - - - - 0.7 1.0 0.8 0.8 0.7 0.4 OUTFLOWS 11.2 12.6 13.9 14.0 11.9 13.6 15.6 18.8 19.3 19.2 Cash Flow 5.7 7.1 8.7 9.3 5.0 6.1 8.1 10.0 10.4 10.7 ______IRR = 34.8%, NPV = 3.69

Competitive Grants Program (CGP)

Schemes included introduction of better production technologies (drip irrigation); better storage for grapes; improved handling and packing of vegetables, fruit and honey to access higher value markets; canning of vegetables; processing milk into cheese; and quality and safe slaughtering of animals. In each model, conservative assumptions regarding returns and uptake were made.

The CGP was assessed through the analysis of 10 of the 74 supported schemes after a selection process undertaken in four rounds completed in May 2011. The sample was selected at random from the first two rounds for allowing results to be consolidated and stabilized. Proponents were asked to update their scheme performance and a detailed cost benefit analysis was prepared showing the value of improvements that were actually achieved as a result of their CGS activities. Estimated financial Rates of Return ranged from more than 40% to more than 100%, and their economic rates of return (ERRs) ranged from 20.2% to 67%. Table 5 summarizes the results of the 10 sampled CGP cases and Table 6 provides the weighted average of all CGP schemes, assuming the sample represents adequately the type of activities supported by the program. The CGP his showing an ERR of 33.3% and a NPV of the economic net benefits of US$4.1 million.

Table 5: Performance of a Sample of CGP Schemes Incremental CGPScheme (# round.# project) Investment Grant Annual Income FRR ERR Cost Provided for Proponents (%) (%) Canning of Vegetables (1.2) 27.144 24.200 15.900 45.9 46.3 Drip Irrigation vegetables (1.4) 21.780 19.780 5.535 > 100 22.0 Packing Tomato for Export (1.6) 26.930 26.713 12.113 > 100 33.6 Cold Storage for Grapes (1.8) 43.800 26.062 18.800 63.4 32.2 Drip Irrigation for Strawberries 27.130 24.330 6.660 > 100 19.3 (2.2) 46.350 28.100 19.550 62.6 38.5 Milk Processing into Cheese 41.080 26.000 28.040 84.0 67.0 (2.6) 27.150 27.150 7.500 >100 21.1 Meat Mincing & Packing (2.9) 37.002 26.602 7.300 41.2 28.0 Cold Storage for Grapes (2.12) 25.660 25.660 6.800 >100 20.2 Packing for Honey (2.15) Cold Storage for Grapes (2.18)

Table 6: Competitive Grant Program Subcomponents Subproject Model

ECONOMIC BUDGET (AGGREGATED) Without (In US$ '000) Project With Project 1 to 15 1 2 3 4 5 6 7 8 to 15 Main Production Fruits 67 67 67 110 304 662 1,007 1,178 1,212 Industrial Crops and Products - - - 99 598 1,575 2,553 3,052 3,151 Vegetables 484 484 484 502 575 700 815 873 886 Sub-total Main Production 551 551 551 711 1,477 2,937 4,374 5,103 5,249 Production Cost Investment Sub-Total Purchased Inputs - - 622 1,556 1,556 622 - - - Labor - - 15 39 39 15 - - - Sub-total Investment Costs - - 638 1,594 1,594 638 - - - Operating Sub-Total Purchased Inputs 177 177 178 264 676 1,464 2,247 2,648 2,730 Labor 72 72 72 77 98 137 176 195 199 Sub-total Operating Costs 249 249 250 341 774 1,602 2,423 2,844 2,929 Sub-Total Production Cost 249 249 888 1,935 2,368 2,239 2,423 2,844 2,929 OUTFLOWS 249 249 888 1,935 2,368 2,239 2,423 2,844 2,929 Cash Flow 302 302 -337 -1,224 -891 697 1,952 2,260 2,320 ______ERR = 33.3%, ENPV = 4,128.98

Agribusiness Credit Support through Commercial Banks

At appraisal the credit component was not included in the calculation of project benefits because the probable loans for the different income generating activities could not be known. By June 30, 2011, 99 subprojects have been financed with the original credit allocation for medium and large agribusiness with US$15.53 million dollar in sub-loans disbursed (about US$156,895 per sub-loan). Also, 13 additional loans were provided with US$1.42 million recovered from the previous loans. A total of seven cases were selected to represent the subcomponent which accounted for more than 26% of the project costs. The seven credit schemes from the randomly selected sample included two schemes in the animal breeding for meat and milk production sector; two schemes in the fruit orchard production sector; one in the processing sector (fruit juices production); one in vegetable sector involving greenhouse production for export; and the last one in the poultry and bee keeping/honey sectors. Table 7 summarizes the main parameters resulting from the updated performance of these sampled loans disbursed between 2008 and 2009.

Table 7: Performance of a Sample of Agribusiness Schemes FRR ERR Agribusiness Schemes Investment Loan Provided (%) (%) Cost New Orchard (Apple, pears, Cherry) 144,820 100,000 19.8 20.6 New Orchard (Apples in Trellises) 335,524 200,000 30.8 25.1 Livestock Farm I 150,000 90,000 18.0 18.0 Livestock Farm II 123,000 80,000 17.5 17.0 Greenhouse Vegetable Production 100,000 70,000 18.9 26.2 Poultry and Bee Keeping 111,000 100,000 25.2 32.7 Fruit Processing (Juices) 330,000 300,000 40.3 27.0

The financial NPVs after financing for the various models ranged from US$22,324 to US$333,927, while the ERRs ranged from 17% to more than 40%. Results show in all cases: (i) a sufficient increase in gross and net returns for each of the schemes; (ii) adequate financial and economic rates of return demonstrating the success of the subcomponent; and (iii) extremely high loan recovery rates of more than 99%. Table 8 shows the overall subcomponent’s result by expanding the sampled cases according to the share of each supported sector in the ADCP 2 credit for the agribusiness portfolio. The weighted average result of aggregated net benefits shows an ERR of 19% and an economic NPV of US$9.6 million.

Table 8. Support to Medium Agribusiness - Credit through Commercial Banks

ECONOMIC BUDGET (AGGREGATED) Without (In US$ '000) Project With Project 1 to 15 1 2 3 4 5 6 10 15 Main Production Fruits - - - 163 629 1,349 2,237 4,320 4,368 Industrial Crops and Products 3,750 3,750 3,834 4,209 4,959 6,000 6,958 7,500 7,500 Fodder 458 479 493 753 805 1,257 1,395 2,510 2,531 Vegetables 1,694 1,694 1,986 2,351 2,862 3,373 3,811 3,811 3,811 Milk 2,880 2,880 3,312 3,960 4,716 5,472 6,120 6,120 6,120 Meat (cow) 1,296 1,296 1,301 1,383 1,543 1,800 1,876 2,754 2,754 Meat (sheep/goat) 706 706 806 958 1,134 1,310 1,462 1,462 1,462 Wool (sheep/goat) 67 67 77 91 108 125 139 139 139 Poultry 377 377 460 791 1,307 1,865 2,382 2,795 2,795 Chick (3 day old) 683 683 783 1,183 1,808 2,483 3,107 3,608 3,608 Honey/ Bee Families 58 58 83 140 230 326 416 488 488 Manure 42 42 49 58 69 80 90 90 90 Sub-total Main Production 12,021 12,042 13,182 16,039 20,169 25,440 29,991 35,595 35,664 On-Farm Use Fodder 458 425 466 684 718 1,113 1,233 2,201 2,213 Net Value Of Production 11,563 11,617 12,716 15,355 19,451 24,326 28,759 33,394 33,452 Production Cost Investment Sub-Total Purchased Inputs - 4,055 6,148 7,244 7,244 5,389 - - - Labor - 82 142 166 173 132 41 - - Sub-total Investment Costs - 4,137 6,289 7,410 7,417 5,521 41 - - Operating Sub-Total Purchased Inputs 4,103 4,165 4,771 6,113 8,296 10,456 12,558 13,103 13,097 Labor 3,170 3,263 3,583 4,081 4,768 5,509 6,081 6,521 6,530 Sub-total Operating Costs 7,273 7,428 8,355 10,195 13,064 15,965 18,639 19,624 19,627 Sub-Total Production Cost 7,273 11,565 14,644 17,605 20,481 21,486 18,680 19,624 19,627 OUTFLOWS 7,273 11,565 14,644 17,605 20,481 21,486 18,680 19,624 19,627 Cash Flow 4,290 52 -1,927 -2,250 -1,030 2,840 10,079 13,770 13,824 ______ERR = 19.0%, ENPV = 9,593.52

The success of this subcomponent is also confirmed by the increase in investments in fixed assets in the Azeri agricultural sector, that grew from AZM 58 million in 2006 to AZM 431 million in 2010 (740% increase), while the same type of investments in the overall economy grew from AZM 6.2 billion to AZM 9.9 billion (59%). As a consequence, agricultural sector investments increased its share from 0.7% to 4.4% of total investments in fixed assets. The project has contributed to this successful process by providing funds earmarked for agriculture and providing training to banks, and demonstrating that the high risk perceptions involved were not realistic. Commercial banks are now diverting their

own funds to the agricultural sector, and at reasonable cost (6% – 13%). One of the beneficiaries of the project’s credit line had obtained a US$1 million loan before the project line was available in 2008 at an interest rate of 22%. The same borrower in 2009 obtained a project’s US$200 thousand loan at 12%, and in 2010 he accessed a third non- project loan at 6%, showing that in only 3 years the access to agricultural commercial long-term credit (5 to 7 years) in Azerbaijan has completely changed led by the ADCP-2 interventions. This change has been instrumental for the sector development, since 22% interest rates were upholding investments as very few legal activities can afford those huge costs.

Overall Project Results The project as a whole is yielding a financial incremental net benefits with a NPV of US$60.9 million and an IRR of 47.3%. The economic analysis demonstrate that the project is generating an economic NPV of US$25.7 million and an ERR of 20.5% reaching higher results than expected at appraisal (ERR 16% and NPV of US$4.1 million). Results are shown in Table 9.

Table 9: Project Summary Economic Budget (In US$ Million)

Without Project With Project 2007 2008 2009 2010-22 2007 2008 2009 2010 2011 2012 2016 2017-22 Main Production Cereals 73.3 75.7 78.2 80.6 73.3 75.6 79.8 85.3 87.8 87.8 87.8 87.8 Fruits 55.0 56.9 58.7 60.5 55.0 57.0 61.7 66.0 68.0 69.2 71.5 71.5 Industrial Crops and Products 11.3 11.6 11.8 12.1 11.3 11.6 12.5 14.4 16.5 18.5 19.6 19.6 Fodder 37.4 38.6 39.8 41.1 37.4 38.6 40.9 43.7 45.3 45.5 46.6 46.6 Vegetables 49.0 50.5 52.1 53.7 49.0 51.0 55.5 59.0 60.2 60.8 60.9 60.9 Milk 9.0 10.4 11.8 12.1 9.0 10.9 13.4 16.8 18.0 18.8 18.8 18.8 Meat (cow) 5.9 6.9 8.0 8.2 5.9 7.0 8.5 10.6 11.2 11.4 12.3 12.3 Meat (sheep/goat) 2.0 2.3 2.6 2.6 2.0 2.4 3.0 3.7 3.9 4.1 4.1 4.1 Other Livestock Products 1.4 1.4 1.5 1.5 1.4 1.6 2.5 3.8 5.2 6.4 7.4 7.4 Sub-total Main Production 350.6 361.9 373.2 384.5 350.6 362.9 386.7 414.0 428.9 436.8 442.7 442.7 On-Farm Use Fodder 0.6 0.6 0.7 0.7 0.6 0.7 0.9 1.1 1.5 1.6 2.6 2.6 Net Value Of Production 243.7 253.7 263.7 271.6 243.8 255.0 276.9 302.1 314.7 320.7 326.3 326.4 Production Cost Investment Sub-total Investment Costs - - - - 11.5 16.3 18.5 18.1 10.7 - - - Labor Labor Costs - - - - 0.1 0.2 0.2 0.2 0.1 - - - Sub-total Investment Costs - - - - 11.6 16.5 18.7 18.3 10.8 - - - Operating Sub-Total Purchased Inputs 112.0 115.1 118.0 120.7 112.1 115.8 123.6 134.0 140.3 144.4 145.4 145.5 Labor Labor Costs 40.6 42.4 44.3 45.2 40.6 42.9 46.8 51.8 53.9 54.5 54.9 55.0 Sub-total Operating Costs 152.6 157.5 162.3 165.9 152.7 158.7 170.5 185.8 194.2 198.9 200.3 200.5 OUTFLOWS 152.6 157.5 162.3 165.9 164.3 175.1 188.8 204.2 205.0 198.9 200.4 200.4 Cash Flow 91.1 96.1 101.5 105.7 79.5 79.9 88.2 98.0 109.6 121.8 125.9 126.0 ______ERR = 20.5%, ENPV = 25.74 FRR = 47.3%, FNPV = 60.94

Sensitivity Analysis Sensitivity analysis assessed the effects of variations in the coverage of the agricultural services assumed to be 15% of farmers in the project areas. A fall in services coverage to 10% would reduce the estimated ERR to about 9.3% while if the coverage would have reached the 20% of farmers in the project area assumed at appraisal, the ERR would result in an ERR of 31%.

Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members Names Title Unit Lending Eustacius N. Betubiza Country Program Coordinator AFCCD Rufiz Chirag-zade Senior Operations Officer ECSS1 Joseph R. Goldberg Consultant C3PME Sarah Leigh Hammill Senior Program Assistant ECSSD Lynn C. Holstein Consultant ECSSD Senior Rural Development Economist (TTL Frauke Jungbluth AFTEN until July 2008) David Gordon Lugg Consultant ECSSD Ida N. Muhoho Senior Financial Management Specialist ECSO3 Helen Z. Shahriari Senior Social Scientist AFTCS Gurcharan Singh Senior Procurement Specialist TWICT Jitendra P. Srivastava Consultant SASDA

Supervision/ICR Brian G. Bedard Senior Livestock Specialist ECSS1 Eustacius N. Betubiza Country Program Coordinator AFCCD Monnie Markal Biety Consultant ECSS1 Sandra Broka Senior Rural Finance Specialist ECSS1 Senior Operations Officer (TTL since July Rufiz Chirag-zade ECSS1 2008) Norpulat Daniyarov Financial Management Specialist ECSO3 Gulana Enar Hajiyeva Environmental Specialist ECSS3 Sarah Leigh Hammill Senior Program Assistant ECSSD Malathi Jayawickrama Senior Operations Officer, TTL ICR ECSS1 Ida N. Muhoho Senior Financial Management Specialist ECSO3 Gurcharan Singh Senior Procurement Specialist TWICT Jitendra P. Srivastava Consultant SASDA Hiwote Tadesse Senior Program Assistant ECSSD Coral Bird Program Assistant ECSSD

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY05 28.06 137.09 FY06 44.50 288.65 FY07 0.00 0.00 FY08 0.00 0.00 Total: 72.56 425.74 Supervision/ICR

FY05 0.00 0.00 FY06 0.00 0.00 FY07 26.10 122.98 FY08 26.93 111.38 FY09 25.41 120.96 FY10 18.36 98.50 FY11 27.41 109.85 FY12 9.82 35.75 Total: 134.03 599.42

Annex 5. Beneficiary Survey Results6

The Completion Evaluation Survey was held in administrative districts covered by Nakhchivan AR, Masalli, Sheki, Ganja and Beylagan RACs. The survey covered three groups: (i) farmer groups that had already taken part in ADCP-II and Special Interest Groups (SIGs) formed from individual (household) farms within the project framework since 2007; (ii) individual farmers (Flow-on Effects from ADCP-II groups) in ADCP-II villages who were not covered by project; and (iii) some individual farmers not covered by the project in the outer villages (External Environment Impacts groups). Information was collected in the first quarter of 2011 and covered economic indicators and productivity for 2010.

The CES was carried out in accordance with the requirements in the terms of reference. 72 farmer groups were selected from 69 villages in the 5 regions for CES. The average size of each group was 14.65 persons.

Out of the 1052 respondents, 883 (83.9%) were men and (16.1%) were women. Although in the EEE and FOE groups men prevailed, the number of women in the EEE groups was higher, at 1/3rd of the total respondents. Overall, 66.8% were family heads (74.2% men and 28.4% women). 95% of the respondents were married and 3.8% were single.

62.8 % of the respondents made profits from only their private farms, while 28.8% made a profit from own-farm and from non-farm activities. 5.8% made profits from own farm and also worked on other farms. (See CES 2011 for the regional breakdown of these variables.)

Of the CES respondents, 93.5% indicated having used individual services of ADCP-II while 92.8% had derived benefits from group services. With respect to farmer satisfaction with the different components of services, the majority of respondents who used PAs and RACs noted that they were either satisfied or highly satisfied. Altogether 13.7% of the farmers did not derive profits from any services from ADCP-II during the last 2 years. For comparison purposes, the corresponding figure in the interim Survey carried out in 2008 was 17.2%.

Farmers reported impressive increases in agricultural production as a result of PA/RAC services, with 22%, 55% and 2.7% of respondents indicating increases of between 1-10%, 10-25% and greater than 25% respectively compared to 2006.

With respect to Private Veterinary Services (PVS), 85.8% of farmers had used PVS. The majority of the 14.2% who did not use the opportunities of PVS stated that they had no need for the services. Farmers who used the PVS reported satisfaction and productivity increases, with 36.3%, 26.1% and 10.3% of farmers indicating production increases of between 1-10%, 10-25% and greater than 25% respectively compared to 2006. The highly

6 This report is titled, “Outcomes of Completion Evaluation Survey”, rather than Beneficiary Survey. It samples ADCP-II participants and others not in the project as described.

satisfied farmers were in Nakchivan, Masalli and Sheki. The highest increases in productivity were in Masalli and Nakchivan districts. Only 0.2% of the respondents experienced ‘no increase’ in productivity.

One of the main components of ADCP-II was credit. Initial research on ADCP’s participants had shown that farmers have a need for credit and they were users of credit components of projects. Farmers who obtained credit through Credit Unions (CUs) comprised 47.7 %, compared to 37.8% in the IS in 2008/09. 62.2% of farmers did not use CUs. The majority of those who did not use CUs listed high interest rates (listed by 19.3% of the respondents), too short a loan period (15.3) and BG/CU services not available in the village (6.5) as the reasons. The greatest increases in production attributed to opportunities created through the use of CU services were in Nakchivan. Though the use of CU services was low in Masalli and Ganga, the services still resulted in increases in production averaging 15%.

With regard to the use of credit, the results attained in 2011 were similar to the patter seen in the IS in 2009 - farmers who wanted to get credit were mostly involved in activities related to livestock, compared to needing credit for the purchase of cropping seeds and agricultural inputs (fertilizer, chemical substances etc.)

Table 1: Number of respondents stating the intention of credit use for different purposes

Total Field Purposes % Persons Livestock breeding 72.7% 604 Livestock fattening 58.5% 486 Livestock Stock feed 46.6% 387 Other Stock costs 32.3% 268 Crop seed 42.4% 352 Crop Inputs 35.1% 292 Crop Crop harvesting 16.5% 137 Other crop costs 20.7% 172 Farm machinery 17.3% 144 Machinery Transport Equipment 23.3% 194 Personal Family Personal 4.7% 39

The SIGs established in the framework of ADCP-II sell their cultivated crops in different ways. The marketing channels used are presented in Table 6.5 of the CES. New local markets, local traders and regional markets are the channels used mostly. Farmers also consume a significant part of their production or sell (give) these products to neighboring farmers. The marketing channels used for sale of livestock products are similar to those used in the sale of crops.

Previous studies in ADCP districts have shown that cattle-breeding is a rapidly developing area in districts. According to the results of CES (see Table 8.1 in CES), the increase in the livestock assets of ADCP-II groups was much greater than seen in FOE and EEE groups. The greatest increase from 2006 to 2010 was seen in the categories, ‘Cows and Buffalo’ and ‘Sheep and Goats’.

As for the technological methods used in cattle-breeding, the number of farmers using “systems used by most” (the most accepted method) was higher in ADCP SIGs relative to FOE and EEE groups. Though the number of farmers engaged in livestock husbandry through “the best, advanced method” is lower, there were no farmers who engaged in these methods in the FOE and EEE groups.

The main crops cultivated by farmers are grain, legume, fruits and vegetables.

Table 2: Crop harvesting scope of ADCP groups in 2008 and 2010

Results of CES in 2010 Results of IS in 2008 (Kg) Total production (Kg) Personal Sold Total use product production Cereal 2 955 061 1196072 2368907 3564979 Maize 171 500 62920 419680 482600 Legume 11 462 333270 1476734 1810004 Potato 2 114 163 417250 907730 1324980 Tomato and other vegetables 942 705 372220 920520 1292740 Fruits and walnut trees 199 614 99888 629815 729703 Cotton 0 3250 335830 339080 Other 584 953 72246 209684 281930 Total 6 979 458 2557116 7268900 9826016

The CES indicates that farmers get seeds and seedlings mainly from local markets and neighboring farmers. The number of farmers getting seeds and seedlings from specialized research institutes and companies among ADCP/SIGs is greater than seen among EEE and FOE groups. Perhaps because of this, the number of farmers who are satisfied with the quality of seedlings and seeds among ADCP/SIGs is high. ADCP groups use high quality reproductive seeds than EEE and FOE groups and they are more prepared in technical and natural difficulties during the cultivation and harvesting. Due to the use of improved seeds in comparison to old seeds during the cultivation of wheat, barley, maize and pulse ADCP groups achieved greater increases in income and output. Productivity increased on average by 46% and gained income increased by 26%.

One of the potential dangers that farmers engaged in cattle-breeding encounter is brucellosis. Information regarding preparedness for this disease indicates that the majority (93.5% of the 777 farmers) of cattle-breeders (96.1%) had their livestock passed brucellosis control compared to 87.7% of EEE/FOE groups. 33.9 % out of 777 farmers (who keep mainly small and large cattle) having a need for pasture have a chance of using

pastures. The chances of farmers from FOE and EEE groups using pastures are rather limited in relation to ADCP groups.

Cultivation, livestock and in general the sale of agricultural products increased during the last 2 years. Table 3 presents the percentage of crop and livestock sold on the market.

Table 3: Percentage of production marketed for cash, 2006, 2008 and 2010

BLS – 2006 Interim Survey – 2008 Final – 2010

Regions Sold-marketed products Sold-marketed products Sold-marketed products Average Average Average Crop Cattle Crop Cattle Crop Cattle Total Total Total Masallı 53.3 77.7 93.3 87.9 94.3 89.4 Beylagan 41.5 70.1 62.5 72.9 64.8 73.5 Ganga 53.7 77,9 64.3 85.8 66.2 86.8 60.15 75.48 76.56 Nakchivan 49,5 69.6 71.5 81.9 72.2 82.3 Shaki 43.8 64.2 71.8 62.8 72.4 63.7 Total 48.4 71.9 72.68 78.27 73.98 79.14

According to the results of the Interim Survey gained overall income of ADCP-II groups in 2010 constituted 4380146 AZN. Gained income of farmers only from agricultural activities constituted 3724392 AZN.

Agricultural incomes increased by an amount of 390692 AZN from 2008 to 2010, representing an increase of 10.49%. Gross incomes (gained from all sources) increased by an amount of 7249000 AZN (16.55%). In general agricultural incomes of farmers during the project implementation period in comparison to 2006 increased by 819400 AZN or 22%. Table 4: Income Dynamics 2006-2010

Agricultural Non agricultural Total

incomes incomes income Income recievd 2904991.90 431247.00 3336238.90 Income recievd 2006 BLS AZN - - - and difference difference % - - - Income recievd 3333700.10 321546.00 3655246.10 Income recievd 2008 İS AZN 428708.20 -109701.00 319007.20 and difference difference % 12.86 -34.12 8.73 Income recievd 3724392.40 655754.00 4380146.40 Income recievd 2010 CES AZN 390692.30 334208.00 724900.30 and difference difference % 10.49 50.97 16.55 Income recievd 9963084.40 1408547.00 11371631.40 income dynamics on Income recievd AZN 819400.50 224507.00 1043907.50 2006 – 2010 and difference difference % 22.00 34.24 23.83

Table 5: Income increases, 2006, 2008 and 2010

Other Income Livestock Cropping Increase of agricultural level of Incomes incomes income on Surveys activities total average head of Quantity Quantity Quantity agricultural farmer % AZN AZN AZN activities 2010 +27,39% (2008) 1978.6 2085.2 418.0 4481.8 Mean – CES +39,57% (2006) average on 2008 IS 1635.0 1473.0 410.0 3518.0 +9,56% answers 2006 BS 1550.0 1261.0 400.0 3211.0

Annex 6. Stakeholder Workshop Report and Results

Not Applicable

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

LETTER FROM THE MINISTER OF AGRICULTURE, DATED FEBRUARY 8, 2012 ADDRESSED TO THE WORLD BANK COUNTRY OFFICE

We appreciate your providing the draft Implementation Completion Report for the Second Agricultural Development and Credit Project. On behalf of the Government, the Ministry of Agriculture agrees with the assessment of the Project effectiveness presented in the ICR. The report objectively reflects both positive and problematic issues being arisen in the course of the Project implementation. On our side we as the Ministry of the Agriculture have prepared this short report on the ADCP II which reflects our vision and feedback.

1. The background, rationale and the scope of the Second Agricultural Development and Credit Project (ADCP II)

One of the greatest challenges of economic management in the country is to diversify the economy in the face of growing dependence on the oil sector. The Government of Azerbaijan (GOA) recognizes that diversified development of the non-oil sector is a key for generating jobs and equity and reducing poverty. Therefore, development of rural areas is a priority for Azerbaijan with the agricultural sector being a key to this development. The agricultural sector is the most important source of employment in Azerbaijan. Summarizing all of the above mentioned issues and impacts on agricultural sector is very important for diversification of economy, ensuring the food security and reduction of rural poverty. In this aspect, the ADCP II was very much responsive in achieving the development of agriculture and rural areas. The current development strategies in Azerbaijan and their associated policies showed that the strategy, approach and objectives of ADCP II were correct and relevant.

The very challenging objective of the ADCP II, which was to further increase rural productivity and incomes by enhancing the access of farmers and small and medium rural enterprises to rural business and agricultural support services including financial, advisory and veterinary services and by stimulating market-oriented investments in rural areas, according to the realized outcomes and results of the independent surveys was adequately achieved.

The most important key factors of successful implementation of the ADCP II were the following: (a) the ADCP II was built on achievements of ADCP 1 and lessons learned from ADCP 1 other donor activities in the country; (b) the good coordination, relevance and integration between Project components and subcomponents; (c) the full commitment and strong interest of the Government and of all implementing agencies; (d) implementation of some Project activities gained momentum in cooperation between public and private sector and (e) very good cooperation between World Bank and Azerbaijan Government (during both preparation and implementation) (f) relevance with Government Development Strategies and Programs.

2. Achievements and outcomes of the Project / Sustainability of the Project

The Ministry of Agriculture on behalf of the Government of Azerbaijan rates the project effectiveness as satisfactory. Overall the ADCP II has achieved its development objectives and positively contributed to the socio-economic development of the country. Thus achievement by the Project of its main two Project Development Objective indicators concerning the increase of income and production marketed for cash of farmers substantiate this statement. Moreover within the major three Project components the following main outcomes and impacts have been realized and achieved:

• The project has certainly succeed in expanding the outreach of Credit Unions network to more communities and building capacity of supported Credit Unions; • Participatory Commercial Banks’ (PSBs) disbursements completed within the first two years of deployment of the project Credit Line and started to use allocations of the revolving fund. This proves that commercial banks became interested in crediting agricultural sector and showed interest to continue financing agricultural sector. Therefore it could be considered as a very positive impact of the project. PFBs have financed a broad range of sub-sectors to ensure the appropriate diversification of portfolio; • By means of 74 competitive grants, project has introduced, tested and transferred new and improved technologies with emphasis of better market accessibility, storage and small-scale processing; • The project modernized and reformed the NRICH and its research plan and provided to farmers the better access to adapted technologies. For present time the scientists and staffs of the Institute are working in a very nice and fully equipped building. By means of conducted in collaboration by the Institute and RACs on- farm demonstrations the performance of new varieties, efficient agronomic practices, water-saving technologies, conservation agriculture with wheat, barley, maize, chickpea and lentil both under irrigated and rain-fed farming systems was shown to local producers; • The project succeeded in establishing and supporting the network of 10 Regional Advisory Centers (RACs) and 201 Village Training Rooms, which cover the whole country and provide effective role in delivering to local farmers’ advisory service alongside with Government extension institutions. RACs have obtained international experience through international technical assistance provided by the Project and modern facilities including the operational website has been provided. • The Project gave very positive impetus to the development of Private Veterinary Practice in Azerbaijan and for present time there is a network successfully operational private veterinary units in Azerbaijan; • Within the Pilot Brucellosis Program the significant information regarding the status of infection rate has been revealed and necessary actions including vaccination, serological survey with close collaboration with other line international projects have been carried out. • One of the innovations of the Project was establishment of the National Veterinary Information System (AZVET), which now was fully operational in forty five rayons, including the brucellosis pilot regions.

• The Veterinary Faculty of Azerbaijan State Agricultural University (AU-VF) was supported by the Project - created Private Veterinary Unit at the Faculty; • Enhanced veterinary education capacities through submitting training materials prepared within the framework of the Project; • One of the innovations of the Project was introduction of Market Information and Commerce Hub (MICH) by means of which farmers and entrepreneurs could easily obtain information regarding the agricultural products’ prices and realize the market information dissemination activities. We consider that the Project established very good base for the public involvement in this niche of agricultural business; • And in general enhanced knowledge and skills of the stakeholders through implementation of training courses, seminars, workshops and other events for veterinary staff, health workers, and spokespersons from priority sectors.

It is important to stress that the specified outcomes and the overall objectives were achieved in close and good collaboration between Azerbaijan Government and World Bank. This approach has shown very good results as it has allowed introducing modern practices respecting the local realities, coordination of all the activities in order to achieve their highest effectiveness and to cover all the important issues.

3. Lessons Learned

(i) International experience provided by experts (e.g. from FAO under the program) and from the World Bank (in preparation and during project supervision) are critical to knowledge development and dissemination of international practices; (ii) Designed appropriately, the Project provided a very good platform for sound dialogue between international technical assistance, national expert panels and local institutions which also enhances local capacity and ownership of outcomes. Project activities were also well-linked in terms of their implementation. For example, while advisory and extension services under Component 2 provided vital access for farmers to knowledge and technology in order to make informed investment decisions, the first Component increased the availability of rural financial services to farmers and small entrepreneurs for working capital requirements, long-term credit for investment purposes. However it is absolutely necessary to allocate more time and effort to design all Project interventions in order to ensure that the proposed arrangements are real, workable and realistically budgeted (in order to avoid in the future such case as it was with the establishment of the MICH); (iii) Engagement of private sector in future project implementation should also be considered as a priority issue; (iv) In order to ensure sustainability of obtained development trend it is absolutely necessary to improve capacity of local implementing partners. As it was successfully achieved in the cases of NRICH, SVS, PVUs and PFIs

within the ADCP II. This will be real driving force for the future improvement and efficiency increase in their respective operations; (v) For some particular activities such as future upgrade and modernization of the SVS and food quality and safety issues it is necessary to improve their respective regulatory and institutional basis; (vi) The ADCP II proved that Private Veterinary Practice is very effective and efficient arrangement for the extension and development of Animal Health Service in general and Government should consider more targeted support to development of Private Veterinary Practice; (vii) Taking into account that production aspect of agricultural in the country is adequately addressed by ADCP II, during the next phase of the Adaptable Program Lending the more emphasis should be placed on standards of production, marketing and processing aspect of agricultural sector; (viii) Strengthening technological linkages and enhancing the dissemination of adapted technologies through reforming and equipping of NRICH proved to be very good experience and Government should build on this practice and replicate the same approach for the modernization of other agricultural research institutes; (ix) The Project's flexibility is critical to ensure that enough flexibility to be built in to enable adjustments to be made as circumstances change.

LETTER FROM THE MINISTER OF FINANCE, DATED FEBRUARY 17, 2012 ADDRESSED TO THE DEPUTY PRIME MINISTER

Re: Report on the results of the Agricultural Development and Credit Project-II

Implementation Completion and Results Report on the World Bank financed Agricultural Development and Credit Project II which is nearing its completion Bank was reviewed accordingly by the Ministry of Finance.

With regard to the points about delays by the Ministry of Finance in finalizing the Rural Investment Guidelines and Four partite Agency Agreement for provision of loans to credit unions and borrower groups, we would like to inform you that the Rural Investment Guidelines deals with provision of commercial loans to agribusinesses, while the Four partite Agency Agreement is a framework document governing provision of loans to credit unions and borrower groups, and the Ministry has some suggestions and recommendations concerning certain provisions of these documents such as loan management arrangements, terms and conditions of loans, provision of collateral, selection of agent banks, etc). Accordingly, detailed discussion of these aspects with the implementing agency and the World Bank, and their incorporation in the Agency Agreement and Guidelines took some time which had led to the said delay.

With regard to other statements in the report, we would like to inform that relatively high proportion of the credit and counterpart financing went to piloting some agricultural initiatives such as establishing regional advisory centers, borrower groups and credit unions, rural private veterinary services. But the World Bank report contains a number of criticisms concerning the above said activities.

We would like to suggest finding out and comprehensively analyzing very important issues like the reasons why a quality of implementation, the current status and the objectives of the referred activities have not been fully achieved, and the results achieved after the implementation of these pilot activities and the ways of providing their sustainability in our country and so on with the relevant agencies as well as preparing final report accordingly.

LETTER FROM THE MINISTER OF ECONOMIC DEVELOPMENT, DATED FEBRUARY 21, 2012, ADDRESSED TO THE DEPUTY PRIME MINISTER

Re: Comments and Recommendations of the Ministry of Economic Development on the presented Report on the Agricultural Development and Credit Project II

1. Preparation works of the proposed ADCP III is also included to the objectives of the extension of the implementation period of the current ADCP II in the Restructuring Section (Table H) on the 11th page of the presented Report. In this regards, we would like to mention that we consider necessary to finance the preparation works of the new project from the other sources.

2. The agricultural sector was mentioned as the second largest sector after oil in 2004 (para 2 of sub-section 1.1). In this regard, we would like to mention that the agricultural sector was the 3rd one (after oil and construction sectors) in that period, and the fourth one at present (after oil, construction and trade sectors). We would suggest verification of statistical information with the relevant government institutions while collecting data on the country.

3. The dependence of poor rural families on own consumption in Azerbaijan was assessed as 65% in the 2nd paragraph of the same Section. We consider necessary to give us information about how this indicator has been estimated by the Bank.

4. The 31th paragraph of Section 2.5 of the Document stipulates that the works of the proposed ADCP III will be based on the experience gained in ADCP II. We suggest organizing the Joint Working Team consisting of the representatives of the related agencies while preparing the new project in order to prevent the repetition of difficulties experienced under ADCP II (Credit Component, Regional Advisory Centers, and Market Support Service) in the proposed project.

5. The achievement of the Project Development Objective was assessed as satisfactory and the progress in many areas was emphasized in para 59 of Section 3.4 of the Report. The monitoring visit of the Ministry of Economic Development and Bank representatives to Goychay, Agdash and Barda districts was organized by the PMU on September 12-14, 2011 and the information about the positive and negative instances occurred during the project implementation was presented to the Cabinet of Ministers with the letter number IIN-X/O-1700/2011, dated November 15, 2011:

• The objective of the “Information and Advisory Services” subcomponent is to create opportunities for the farmers to improve quality and productivity of their products by expanding the outreach of the advisory services. The positive aspects such as regular participation of the advisors in the training courses in Regional Advisory Centers (RAC) and field demonstrations for farmers organized by advisors were observed. At the same time, the shortcomings such as few numbers of the contracts between private advisors and beneficiaries,

non-coordination of the RAC activity with the other components of the project were observed during the monitoring. The sustainability of the RAC activity was not ensured either. As a result, future activities of the RACs after the end of financing under the current project are under question.

• The objective of the “Veterinary services” subcomponent is to develop private veterinary services, to expand the system of Private Veterinary Units and to create better conditions for the livestock owners to use high quality veterinary and livestock services in the country. The positive aspects like the extended variety and low prices of medicines, and participation of veterinaries in the training courses in Goychay and Agdash Private Veterinary Units were observed. In addition, insufficiency of workshops and training courses, as well as lack of professional veterinaries in districts can be assessed as deficiencies.

• The objective of the “Competitive Grant Programs” subcomponent is to establish efficient rural markets through application of modernized mechanisms encouraging sustainable relationships among the developing rural enterpsies, agro-processors, and farmers. As a consequence of the monitoring held in Goychay the shortcomings like a bad infrastructure of the premise, where the equipment located (the infrastructure of the premise restricts full operation of the applied technology), lack of the appropriate electric cabling, financing of the project without establishing necessary pre-conditions, as well as non-operational equipment were identified. As a result of the assessment of the subcomponent in Barda district functioning equipment was defined as a positive side, but non-registration of the grant under the applicable regulations was identified as shortcoming.

• The objective of the “Financial Services to Small Agro-Business/Credit Unions” subcomponent is to support rural businesses and business activities. As a result of the assessment in Agdash it was observed that though CU was established in 1998 with 106 members, no funding from the Credit Implementing Agency (CIA) was made available to this CU. A large number of the granted loans from the funds of the CIA and a small number of overdue credits in Barda can be noted down as positive instances. Some Credit Unions do not know their rights and it is considered as a deficiency. We were informed during the discussion with the Credit Union that the collateral requirement for the loans up to 5000 AZN poses some difficulties. In particular, preparation of the collateral related documents requires some expenditure that makes 5000 AZN loan costly for people.

• The objective of the “Market Support Program” is to provide the farmer products with the access to the markets and prevent the deceiving cases of farmers by resellers while selling their products. As a result of assessment in Barda participation of price collector in training courses is considered as positive side, but expensive Azercell customer services and lack of back up communication equipment can be identified as deficiency.

• Generally, lack of coordination among the project components has been observed. Thus, the farmers getting loans through the project’s “Agricultural Business Services Component” must be coordinated and benefit from the services rendered within the project’s “Agricultural Support Services Component”. At the same time, the supervision over financial subcomponents of the project must be strengthened and sound programming must be followed in providing the sustainability of advisory programs.

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

None

Annex 9. List of Supporting Documents

World Bank Documents ADCP, Implementation Completion Report No.35935, December 30, 2005 ADCP, Project Performance Assessment Report No.44831, July 28, 2008 ADCP II, Project Appraisal Document, Report No. 36335-AZ, June 5, 2006 ADCP II, Project Information Document, Report No. AB2245, June 29, 2006 ADCP II, Restructuring Paper, Report No.56445-AZ, August 31, 2010 ADCP II, Implementation Status Report, Numbers 1 to 13, August 2006 to March, 2012 ADCP II, Aide Memoires and Back-to-Office Reports of Implementation Support Missions, FY2005-FY2012 ADCP II, Restructuring Paper, Report No. 56445-AZ, August 31, 2010 ADCP II, Restructuring Paper, Report No. 62105-AZ, May 26, 2011

Government Documents ADCP II, Azerbaijan Republic, State Agency on Agricultural Credits under the Ministry of Agriculture, Outcomes of Interim Evaluation Survey (Masalli, Nakhchivan, Sheki, Ganja, Beylagan), January to May, 2009 ADCP II, Azerbaijan Republic, State Agency on Agricultural Credits under the Ministry of Agriculture, Project Status Report, January to December, 2010 ADCP II, Azerbaijan Republic, State Agency on Agricultural Credits under the Ministry of Agriculture, Project Status Report, January to March, 2011 ADCP II, Azerbaijan Republic, State Agency on Agricultural Credits under the Ministry of Agriculture, Outcomes of Completion Evaluation Survey (Masalli, Nakhchivan, Sheki, Ganja, Beylagan), January to April, 2011 ADCP II, Azerbaijan Republic, State Agency on Agricultural Credits under the Ministry of Agriculture, Outcomes of Completion Evaluation Survey (Salan, Goychay, Khachmaz), January to April, 2011 ADCP II, Azerbaijan Republic, State Agency on Agricultural Credits under the Ministry of Agriculture, Outcomes of Evaluation Survey Among Seed Producing Farms, May 2011

69 SEPTEMBER 2004 SEPTEMBER 39 40 41

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

YIT Khyrdalan Khyrdalan AZERBAIJAN BAKU INTERNATIONAL BOUNDARIES RAYON BOUNDARIES RAILROADS MAIN ROADS RIVERS NATIONAL CAPITAL CAPITAL OF AUTONOMOUS REPUBLIC RAYON CAPITALS 50 °

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