(us$17 us$4€¦ · · 2016-07-15lesson learned and reflected in project design ... detailed...

Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 39846-YF

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF EUR 12.50 MILLION (US$17 MILLION EQUIVALENT)

AND A

GLOBAL ENVIRONMENT FACILITY GRANT

IN THE AMOUNT OF US$4.5 MILLION

TO

THE REPUBLIC OF SERBIA

FOR A

TRANSITIONAL AGRICULTURE REFORM PROJECT

May 25,2007

Sustainable Development Unit South East Europe Country Unit Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 25, 2007

Currency Unit = Serbian Dinar (RSD) 60.21 RSD = US$ 1

BASP CAP CAS DEP DGR DRDES EAR EU FADN GAO GAP GDP GoS HACCP IACS IBRD IPA IPARD IPN ISAA LAG LFA LPIS M&E MAFWM MoS NGO PA PIT PRSP PS RDGP SAA SA0 SARD SASAP SPNP SPS SRDPPS

FISCAL YEAR

January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

Biodiversity Strategy and Action Plan Common Agricultural Policy Country Assistance Strategy Directorate for Environmental Protection (MSEP) Division for Genetic Resources Department for Rural Development and Extension Services European Agency for Reconstruction EU) European Union Farm Accounting Data Network Gross Agricultural Output Good Agricultural Practices Gross Domestic Product Government o f Serbia Hazard Analysis and Critical Control Point Integrated Administration and Control System International Bank for Reconstruction and Development Instrument for Pre-Accession Assistance Instrument for Pre-Accession Assistance for Rural Development Institute for Protection o f Nature Institute for Science Application in Agriculture Local Action Group Less favored areas Land Parcel Identification System Monitoring and Evaluation Ministry o f Agriculture Forestry and Water Management Ministry o f Science Non-government Organization Protected Area Project Implementation Team Poverty Reduction Strategy Paper Payment system Rural Development Grants Program Stabilization and Association Agreement Sector for Agrarian Operations Sector for Agriculture and Rural Development Sector for Analytics, Statistics and Agrarian Policy Stara Planina Nature Park sanitary and phytosanitary Support to a Rural Development Programming and Payment System

Vice President: Shigeo Katsu Country Director: Orsalia Kalantzopoulos Sector Manager: Marjory-Anne Bromhead

Task Team Leader: Julian Lampietti

FOR OFFICIAL USE ONLY

SERBIA Transitional Agriculture Reform Project

CONTENTS

A . STRATEGIC CONTEXT AND RATIONALE .................................................................. 5

1 . Country and sector issues ....................................................................................................... 5

2 . Rationale for Bank and GEF involvement ............................................................................. 8

3 . Higher level objectives to which the project contributes ....................................................... 9

B . PROJECT DESCRIPTION ................................................................................................ 10

1 . Lending instrument ............................................................................................................... 10

2 . Program objectives and phases ............................................................................................. 10

4 . Project components ............................................................................................................... 10

5 . Lesson learned and reflected in project design ..................................................................... 14

6 . Alternatives considered and reasons for rejection ................................................................ 15

3 . Project development objective and key indicators ............................................................... 10

C . IMPLEMENTATION ......................................................................................................... 15

1 . Partnership arrangements ..................................................................................................... 15

2 . Institutional and implementation arrangements ................................................................... 15

3 . Monitoring and evaluation outputs ....................................................................................... 16

4 . Sustainability and Replicability ............................................................................................ 17

5 . Critical risks .......................................................................................................................... 18

6 . Loan conditions and covenants ............................................................................................. 19

D . APPRAISAL SUMMARY .................................................................................................. 21

1 . Economic and financial analysis .......................................................................................... 21

3 . Fiduciary ............................................................................................................................... 23

2 . Technical .............................................................................................................................. 21

4 . Social .................................................................................................................................... 24

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

5 . Environment ......................................................................................................................... 25

6 . Safeguard Policies ................................................................................................................ 26

7 . Policy Exceptions and Readiness ......................................................................................... 27

Annex 1: Country and Sector o r Program Background .......................................................... 28

Annex 2: Major Related Projects in Serbia Financed by the Bank: 2002-2005 .................... 40

Annex 3: Results Framework ..................................................................................................... 41

Annex 4: Detailed Project Description ...................................................................................... 48

Annex 5: Project Costs ................................................................................................................ 58

Annex 6: Implementation Arrangements .................................................................................. 59

Annex 7: Financial Management and Disbursement Arrangements ..................................... 61

Annex 8: Procurement Arrangements ....................................................................................... 70

Annex 9: Economic and Financial Analysis .............................................................................. 77

Annex 10: Safeguard Policy Issues ............................................................................................. 81

Annex 11: Project Processing ..................................................................................................... 83

Annex 12: Documents in Project Fi le ........................................................................................ 85

Annex 13: Statement o f Loans and Credits ............................................................................... 86

Annex 14: Country at a Glance .................................................................................................. 88

Annex 15: Incremental Cost Analysis ........................................................................................ 90

Annex 16: STAP Roster Analysis ............................................................................................... 98

Annex 17: Map: IBRD 34847 ................................................................................................... 103

SERBIA

TRANSITIONAL AGRICULTURE REFORM PROJECT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSSD

Date: May 25,2007 Team Leader: Julian A. Lampietti Country Director: Orsalia Kalantzopoulos Sector ManagedDirector: Marjory-Anne Bromhead Project ID: PO94212 Lending Instrument: Specific Investment Loan

Global Supplemental ID: PO93545 Lending Instrument: Specific Investment Loan Focal Area: B-Biodiversity Supplement Fully Blended?: Yes

Sectors: Payment systems, securities clearance and settlement (40%); General agriculture, fishing and forestry sector (30%); Agricultural extension and research (30%) Themes: Public expenditure, financial management and procurement (P);Rural policies and institutions (P);Other rural development (S);Biodiversity (S) Environmental screening category: Partial Assessment Team Leader: Julian A. Lampietti Sectors: General agriculture, fishing and forestry sector (40%); Sub-national government administration (30%); Agro-industry (1 5%); Agricultural extension and research (1 5%) Themes: Biodiversity (P);Rural markets (P);Other environment and natural resources management 6) v \ I

Project Financing Data [XI Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$ m.): 17.0 Proposed terms: Fixed-spread Euro denominated loan, repayable within 17 years, with a 5 year

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Total:

Borrower: Republic o f Serbia

14.84 7.3 1 22.14

Responsible Agency: Ministry o f Agriculture, Forestry and Water Management Nemanjina 22-26 1 1000 Belgrade Serbia Tel: 011 361 62 74

4nnual Clumulative

Estimated disbursements (Bank FY/Euro) I I I I I I I I I

1.01 1.45 1.09 0.95 0.00 0.00 0.00 0.00 0.00 1.01 2.46 3.55 4.50 4.50 4.50 4.50 4.50 4.50

’Y 1 8 1 9 1 1 0 1 1 1 1 0 1 0 1 0 1 0 1 0 4nnual I 3.85 I 3.28 I 2.75 I 2.62 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00

’Y 1 8 1 9 1 1 0 1 1 1 1 0 1 0 1 0 1 0 1 0

Does the project require any exceptions from Bank policies? Ref: PAD D. 7 Have these been approved by Bank management?

[ ]Yes [XINO [ ]Yes [XINO

I s approval for any policy exception sought from the Board? [ ]Yes [ x j ~ o [XIYes [ ] N o Does the project include any critical risks rated “substantial” or “high”?

Ref: PAD C.5 .I

[XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? Ref: PAD D. 7 .I

Project development objective Re$ PAD B.2, Technical Annex 3 The project development objective i s to enhance the competitiveness o f Serbian agriculture.

Global Environment objective Ref: PAD B.2, Technical Annex 3 The global environmental objective i s to conserve the globally important eco-system in the Stara Planina mountainous area.

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I Project description [one-sentence summary of each component] Ref: PAD B.3.a, Technical Annex 4 The project objectives will be achieved through a series o f strategic public investments that aim to: (i) improve and strengthen the GoS system for transparently delivering rural development investment grants and evaluating their impact; (ii) improve the knowledge and capacity o f agricultural producers and processors to make the best use o f these funds; and (iii) improve management o f the SPNP, including i t s flora and autochthonous livestock breeds, in partnership with local communities and other stakeholders. Which safeguard policies are triggered, if any? Ref: PAD D. 6, Technical Annex 10 OP 4.0 1 'Environmental Assessment' OP 4.04 Natural Habitats' OP 4.36 'Forests'

Significant, non-standard conditions, if any, for: Ref: PAD C. 7 Board presentation: NIA

Loadgrant effectiveness:

(1) The Operational Manual, including the Financial Management and Stara Planina Rural and Biodiversity Conservation Grant Manuals, satisfactory to the Bank has been adopted by MAFWM and submitted to the Bank.

(2) Acquisition o f acceptable accounting software to be used for project accounting.

(3) The Project Implementation Team and GEF Program Implementation Team have been established in a manner and with the composition and terms o f reference satisfactory to the Bank.

Covenants applicable to project implementation:

Financial management covenants (1) The implementing entity will maintain a financial management system acceptable to the Bank. The project financial statements and the Designated Account will be audited by independent auditors acceptable to the Bank and on terms o f reference acceptable to the Bank. The annual audited project financial statements and audit report will be provided to the Bank within six months o f the end o f each fiscal year. The project audit will be required to extend the scope to include performance review at least on a sample basis to ensure that agreed outputs are delivered in an efficient manner with respect to grant facility.

(2) The audits will be conducted in accordance with International Standards on Auditing (ISA) as issued by the IFAC and on terms o f reference acceptable to the Bank.

Implementation Covenants (1) The Borrower will maintain throughout project implementation MAFWM, including the DRDES. SARD. DGR and SAO. with sufficient human. technical and financial resources,

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satisfactory to the Bank, to manage al l aspects o f project implementation.

(2) The Borrower shall ensure that, by no later than March 3 1 , 2008, the MAFWM has contracted the ISAA to administer contracts for applied research and extension support under terms and conditions satisfactory to the Bank.

(3) The MAFWM will establish and maintain throughout Project implementation the PIT within i t s structure, including the GEF Program Implementation Team, with composition, terms o f reference and resources satisfactory to the Bank. The PIT will be headed by a Project Coordinator, and staffed with, inter alia, a project administrator, a senior finance specialist and a procurement specialist, al l with qualifications, experience and terms o f reference satisfactory to the Bank.

(4) The Borrower will implement the project in accordance with the criteria, policies and procedures set forth in the Project Operational Manual, and will not amend, or waive, or permit to be amended or waived, any provision o f the Project Operation Manual, except with prior written approval o f the Bank.

(5) The Borrower will (a) take al l measures necessary to carry out the measures identified under the Environmental Management Plan at al l times in a timely manner, ensuring that adequate information on the implementation o f said measures i s suitably included in the Project reports to be prepared; and (b) ensure that the E M P or any o f i t s provisions, will not be amended, suspended, abrogated, terminated or waived or permitted to be amended, suspended, abrogated, terminated or waived, except with the prior written approval o f the Bank.

Withdrawal covenants (1) No withdrawal will be made for support o f the extension service and applied research contracts unless the Borrower has adopted an Agricultural Extension Strategy satisfactory to the Bank.

(2) No withdrawal will be made for Rural Development Grants unless Borrower/Recipient has established the Stara Planina Advisory Committee, with composition and terms o f reference satisfactory to the Bank.

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A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Agriculture and rural development

1. Serbia has significant comparative advantages in agriculture, thanks to an abundance o f high quality agricultural land, a strategic trading location, and an educated workforce. Primary agricultural production and agro-processing was estimated to be 15 percent o f GDP and 20 percent o f exports in 2005. About 0.8 million ha, or 15 percent o f the arable land consists o f about 1050 large corporate farms and agro-kombinats. Privately owned commercial farms, averaging about 10 ha, account for another 46 percent o f agricultural land. The remaining 39 percent comprises over 600,000 small private farms, most under five ha and often consisting o f several fragmented parcels o f land, which produce agricultural products primarily for their own use and depend heavily on non-farm income. There i s significant regional variation in production systems and products. The low-lying and fertile Vojvodina region i s dominated by large, mostly market-oriented private farms and partially privatized Agro-kombinats producing field and industrial crops and pigs, cattle and poultry. Central Serbia i s characterized by hil ly topography, small farms and diverse farm production systems including high-value f ru i ts and vegetables and dairy cattle. Southern Serbia, the poorest and least developed region, i s characterized by mountainous geography, extensive tracts o f pasture and forest, small and fragmented arable areas, very limited commercial production and high rates o f out-migration.

2. The agriculture sector i s supported by a publicly funded extension service delivered primarily by 34 contracted, socially owned Agricultural Stations but also some private and NGO providers. Under the 199 1 Law on Agriculture Departments, the Institute for Science Application in Agriculture (ISAA) i s tasked with coordinating extension management, however, the Ministry o f Agriculture, Forestry and Water Management (MAFWM) has fulfilled this role in recent years. In 2006, M A F W M extension contracts valued at about US$3 million US$ financed extension agent and farmer capacity building, a market price information service and statistical reporting. Extension contracts are milestone based and, increasingly, contestable, however there i s no formal stakeholder participation in extension planning or management. Agriculture research i s primarily funded by the Ministry o f Science (MoS) through 4-year contracts for basic research and technology improvement projects and 6- 12 month contracts for technology innovation. Total public research funding, however, i s very low, with salaries absorbing up to 90% o f funding and most research stations relying on income from product sales and service contracts for their survival.

3. In late 2000, the Government o f Serbia (GoS) launched an ambitious reform program to improve the business environment, increase transparency and create a vibrant private sector, with the objective o f achieving EU accession by 2013. The market forces thus unleashed are applying pressure on the agri-food sector to improve productivity and quality, for which they are poorly prepared. The predominantly small-scale Serbian farms and small, domestically-oriented processing plants risk being overwhelmed by strong regional and international competition and by stringent food quality and safety requirements.

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4. The GoS Agricultural Strategy (August 2005) sets out a road-map for growth and competitiveness based on: (i) completing the move to a competitive market economy, including abolishing remaining production subsidies and adopting World Trade Organization (WTO) principles; (ii) increasing Serbia's share o f EU markets by harmonizing'with EU sanitary and phytosanitary (SPS) and quality and agro-environmental requirements; (iii) improving competitiveness through adoption o f modern, cost effective production technologies; and (iv) promoting rural development, especially in poor regions, through transparent, EU-type rural development grant mechanisms. The GoS's EU Integration Strategy for Serbian Agriculture lays out an ambitious three-phase plan for moving away from market and production support towards rural development support, EU standards, and integration with the EU Common Agricultural Policy (CAP). The Strategy i s backed up by key legal and institutional reforms, improved planning, reorientation o f expenditures, improved transparency and an increase in the agricultural budget.

5. The CAP channels EU spending on agriculture and rural development through two streams: Pillar 1, which currently forms 70% o f funding and covers direct income support to farmers and the remaining market-related subsidies, and Pillar 2, which forms 30% o f funding and provides investment grants for rural development, including aspects such as farm modernization, food safety and quality, environmental management and animal welfare, and special assistance to marginal farming areas. By the beginning o f the next decade the majority o f EU CAP support will be through Pillar 2. Similarly, GoS policy aims to facilitate agri-food sector growth and competitiveness by moving away from price and input subsidies to structural support' , using EU harmonized financial delivery systems in anticipation o f receiving EU pre- accession (and eventually CAP) funds. Like the current EU CAP Pillar 2, the GoS 2006 Rural Development Grants program measures, in addition to farm modernization, include support for agro/eco-tourism, development and marketing o f specialized local agricultural products and crafts, conservation and promotion o f cultural, sociological and economic customs and values, special provisions for marginalized areas and farmer retirement incentives. Access to EU markets will also require harmonization with EU policies such as the Common Agricultural Policy, the Habitats Directive and the acquis communautaire. Experience in accession countries highlights the importance o f a proactive approach to achieving these outcomes.

6. The European Agency for Reconstruction (EAR) currently implements 6 EU financed projects in the agricultural sector. These include: support for agricultural policy development; strengthening Payment system procedures and rural development planning; capacity building within the MAFWM Phytosanitary and Veterinary Directorates; alignment o f the Serbian wine sector with the EU acquis communautaire; and support for the reform and restructuring o f the management of agriculture and food laboratories. These EAR projects mostly focus on capacity building and institutional and regulatory reform, providing a base for improved effectiveness and transparency in agriculture and rural development, but will require additional capital investments to fully impact on Serbian agriculture. A number o f other donors (USAID, FA0 and the Governments o f Germany, Austria, Italy and the Netherlands) have programs to address different aspects to help Serbia successfully access EU pre-accession instruments. Within this context, the MAFWM has requested World Bank support in improving the design, administration, and

' Market support i s scheduled to fall from 40 percent o f the budget in 2004 to 20 percent in 2008.

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transparency o f i t s structural support program and the development and dissemination o f knowledge capital. This provides an opportunity to provide medium term support for a progressive reform agenda.

Biodiversity and nature protection

7. Conservation o f biodiversity, including biodiversity important for agriculture, was identified as one o f Serbia's priorities for environmental protection in the GoS adopted report titled "State o f the Environment in 2000 and priorities in 2001+ for Serbia". A national Biodiversity Strategy and Action Plan i s under preparation, but the GoS already has a number o f programs and mechanisms to support biodiversity conservation, both in natural areas and within agro-ecosystems.

About five percent o f Serbia's territory i s designated as protected area (PA), including five National Parks, 120 nature reserves, 20 nature parks, 470 natural monuments and one Biosphere Reserve, and an application i s under preparation for UNESCO designation o f a second Biosphere Reserve (covering the trans-boundary West Stara Planina area, currently designated as a Nature Park in Serbia). The total area under protection i s expected to increase to ten percent by 2010. There are, however, gaps and inefficiencies in P A management, in some cases arising from unclear or overlapping roles o f different institutions. Nature protection and protected areas as a whole fall under the MSEP Directorate for Environmental Protection (DEP), while the MAFWM i s responsible for managing forests, fish and water resources within the PAS. The MSEP/DEP Institute for Protection o f Nature (IPN) i s responsible for nature protection research, monitoring and planning. The Republic Institute for Urban Planning and Architecture and the Republic Institute for Spatial Planning, in consultation with municipalities, are responsible for preparing spatial plans for the PAS. The IPN has, however, overall responsibility for the spatial plans, including approving them and monitoring their implementation.

8. Ninety seven o f the PAs2 (including the Stara Planina Nature Park (SPNP)) are managed by the Public Enterprise for Forests (Srbijasume). The spatial plan for the SPNP reflects a diverse set o f objectives for the park, including nature conservation, habitat restoration, small- scale livestock husbandry and agriculture, and sustainable tourism. Srbijasume's responsibilities relating to non-forest areas within PAS, however, remains undefined and the organization has l i t t l e experience or capacity in ecosystems management (such as pastures), other land uses (such as tourism), or participatory approaches. In addition, the 1997 law establishing the SPNP only defines i t s outer boundaries, although a recently prepared spatial plan now defines land use within the park.

9. Concerning agro-biodiversity, in 2002 the Parliament approved a strategy "to preserve locally adapted breeds that are becoming extinct, for social and economical purposes and for future scientific research and education purposes." The strategy emphasizes in situ conservation and a defined role for autochthonous (indigenous) breeds within the overall livestock sector. Key elements include protecting wild relatives o f these breeds and their habitats, monitoring populations o f endangered local breeds and providing incentives for maintaining them, raising

Excluding national parks, which are managed by individual Public Enterprises established for this purpose 2

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public awareness, training personnel in modern conservation technologies and the development o f supporting, EU-aligned legislation and regulations. The M A F W M Division for Genetic Resources (DGR) i s responsible for implementation o f this strategy, including data collection and reporting, advising farmers and breeders’ associations, channeling Government subsidies to them, and direct support for in situ conservation activities. Local Non-government Organizations (NGOs) also contribute to the effort, including providing a connection to regional and international agro-biodiversity programs. The efforts to preserve this national heritage, however, remain severely limited by capacity and funding constraints.

10. Country eligibilityfor GEF: The Union o f Serbia and Montenegro (SAM) ratified the Convention on Biological Diversity (CBD) in 2002. The Republic o f Serbia has inherited this commitment. ,

11. Local NGOs, municipalities, the IPN branch in NiS and the recently formed Council for Sustainable Rural Development o f Dimitrovgrad, have led strong initiatives to preserve in an integrated way the Stara Planina region’s cultural and natural heritage, much o f which i s characterized by traditional extensive farming systems leading to the identification o f investment needs and opportunities to preserve the biodiversity and traditional agricultural landscapes o f the SPNP. In January 2004, the GEF Focal Point for Serbia and Montenegro, and the Minister for the Protection o f Natural Recourses and Environment, requested World Bank assistance in preparing a project for submission to the GEF.

2. Rationale for Bank and GEF involvement

12. The World Bank has experience with supporting agricultural competitiveness, sustainable land use and environmental management within the context o f EU accession programs in a number o f countries (Romania, Croatia, Slovakia, etc.). The objective i s always to integrate these objectives within the broader economic development agenda.

13. In Serbia, the World Bank Country Assistance Strategy (CAS) for 2005-2007 emphasizes building a vibrant and competitive private sector and a responsive and transparent public sector. I t i s built on two complementary government strategies: the EU Stabilization and Association Agreement (SAA) process and the Poverty Reduction Strategy Paper (PRSP). Based on these and the GoS Agricultural Strategy, the Bank has developed a comprehensive program o f support for agriculture and rural development. The proposed operation represents an important element o f th is program, complimenting the ongoing land project and irrigation projects, which are helping to create the necessary initial conditions for growth. Consistent with emerging lessons from transition economies and in accordance with the first three elements o f the GoS Agricultural Strategy, this third project will focus on agri-food sector competitiveness, the introduction o f modern technologies and harmonization with EU requirements and norms. The CAS also includes a Global Environment Facility (GEF)-financed “In-situ Agro-biodiversity” project to promote economic development based on sustainable land use and conservation o f ecosystems and agro- biodiversity, with a focus on the SPNP area. This i s consistent with GoS and EU policies to promote agri-environmental activities and also supports the GoS rural poverty alleviation objectives by targeting the poorest rural area in the country. In recognition o f the many areas o f

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convergence and complimentarity, the GEF and International Bank for Reconstruction and Development (IBRD) operations have been fully blended into a single operation.

14. The 2006 Bank ESW study “Supporting Serbia’s Agricultural Strategy” identifies improved producer access to high quality inputs and technologies, greater commercialization o f farms, land consolidation, improved output quality and strengthened farmer association as important constraints in the sector. Key actions recommended by the study include the: (i) increased financing o f research and extension systems more closely aligned with farmers’ needs; (ii) development o f the institutions and capacity to benefit from EU pre-accession funds; (iii) compliance with international food safety and standards requirements; (iv) continued shifting o f public resources from market support into structural support programs; and (v) increased public expenditures facilitating land consolidation and farmer retirement programs. The STAR project would directly support recommendations (i)-(iv), and indirectly support recommendation (v) through improved capacity for public expenditure management, monitoring and evaluation. The Bank Real Estate Cadastre and Registration Project also indirectly supports land consolidation.

15. The project complements other World Bank support to Serbia for regional integration. This includes the Danube River Pollution Project (GEF, FY05), which seeks to reduce nutrient pollution from livestock production and slaughterhouses, in keeping with the EU environmental acquis (Nitrates directive). The Bank also participates, together with the European Commission, in the Infrastructure Steering Group for South East Europe, which promotes a regional strategic approach to infrastructure development. The proposed project will help to strengthen cooperation between the World Bank and other donors, including the European Agency for Reconstruction (EAR), which is a key partner in promoting reforms linked with the SAA. The focus o f this project i s on supporting rural development, both structurally and substantively, in ways that echo Pillar 2 o f the CAP.

3. Higher level objectives to which the project contributes

16. The project contributes to higher-level objectives given in the major strategic documents, including the CAS, the PRSP, the Supporting Serbia’s Agricultural Strategy study and the State programs for agriculture and rural development and for environment protection.

17. The project will help to enhance the competitiveness o f Serbian agricultural products in local and international markets, increasing their contribution to GDP and foreign exchange earnings as well as reducing imports. It will improve the effectiveness, efficiency, transparency and accountability o f the ongoing GoS public expenditure for sustainable rural development while also helping Serbia to benefit from EU pre-accession funding and move towards EU membership. Building o f f the work o f the EAR funded Support to Rural Development Programming and Payment System (SRDPPS) project, the Project will facilitate the implementation o f an SRDPPS designed, EU-compatible national payment system and increase capacity for the transparent distribution, use and monitoring o f funds for rural development under the CAP Pillar 2. The GEF funded component will also support community-based rural development initiatives through pi lot investment grants in the Stara Planina region.

18. The project i s submitted under the GEF Operational Program (OP) # 13 (Conservation and Sustainable Use o f Biological Diversity Important to Agriculture). I t i s in conformity with

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the Biodiversity Strategic Priority o f “Mainstreaming Biodiversity in Production Landscapes and Sectors” and, because the GEF project area i s a legally designated Nature Park (equivalent o f IUCN Category V), wi l l contribute to the Strategic Priority o f “Catalyzing Sustainability o f Protected Areas.” The project supports OP #4 (Mountain Ecosystems) as it wi l l help to support conservation o f the globally important Stara Planina mountain and i t s endangered species. It wi l l also contribute to OP #15 (Land Degradation) through support for the development and implementation o f a pasture management plan.

B. PROJECT DESCRIPTION

1. Lending instrument

19. The total estimated project cost o f EUR 16.3 million would be funded by an IBRD Loan o f EUR 12.5 million, a US$ 4.5 million (EUR 3.3 million equivalent) GEF grant and a Local Community contribution o f EUR 0.46.

2. Program objectives and phases

20. NIA

3. Project development objective and key indicators

21. The project development objective i s to enhance the competitiveness o f Serbian agriculture. The global environmental objective i s to conserve the globally important ecotsystem in the Stara Planina mountainous area.

22. Key outcome indicators would include: (i) improved MAFWM ability to target the use o f rural development funds, disburse them transparently and evaluate their impact on the agri-food sector; (ii) an increased number o f agricultural producers and processors using competitive, market oriented agriculture technologies and practices; and (iii) expanded areas under ecological management andor restoration within the SPNP and surrounding area.

4. Project components

23. The project objectives wi l l be achieved through a series o f strategic public investments that aim to: (i) improve and strengthen the GoS system for transparently delivering rural development investment grants and evaluating their impact; (ii) improve the knowledge and capacity o f agricultural producers and processors to make the best use o f these funds; and (iii) improve management o f the SPNP, including i t s flora and autochthonous livestock breeds, in partnership with local communities and other stakeholders. I t wi l l build on and enhance existing Government systems and programs to help the agri-food sector fully benefit from the new opportunities arising from the GoS market-oriented reform agenda, and accelerate the harmonization o f these systems with EU requirements. This includes support for the implementation o f an efficient, transparent and EU-compatible farm payment system and for the implementation o f a rural development program consistent with Pillar 2 o f the EU Common Agricultural Policy. The project would also develop a system for the competitive contracting and delivery o f extension and applied research outcomes consistent with beneficiary needs and

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empower stakeholders to oversee this process. GEF co-financing will increase capacity and incentives for agricultural producers and processors to engage in activities that support agro- biodiversity conservation and sustainable land use, and to support ecosystem restoration and management in the SPNP. GEF support will be focused on the multiple use zones o f the SPNP, supporting economic activities that are compatible with and contribute to maintaining the conservation values o f the park as a whole. For example, extensive livestock grazing will be used as a tool for grassland restoration and management, and improving access to premium markets for organic agricultural products and eco-tourism wil l help to link economic benefits with maintaining the ecological and cultural values o f the SPNP.

Component 1: Strengthening the Agriculture and Rural Development Support System (EUR 4.4 million (US$6 million equivalent), of which EUR 4.4 million (US$6 million equivalent) from Bank)

24. The Government o f Serbia provides several types o f support for the agriculture and rural development sector, totaling about € 200 mi l l ion in 2006. O f this amount, over € 120 mil l ion was for structural support including € 28 mil l ion in the form o f matching grants for which individuals can apply, based on certain eligibility criteria (see Annex 4). As part o f i t s overall economic reform and in l ine with the process o f moving towards EU accession, the GoS i s progressively de-emphasizing price subsidies and shifting resources towards investment grants and income support.

25. This component will support the shift towards structural support. I t will involve building capacity for processing and administering the national rural investment grant program. The project would fund development and implementation o f data processing software across the Payment system. Technical assistance would be used to design the national PS integrated administration and control system (IACS), a pilot land parcel information system (LPIS) and a risk management program. In PY3, the project will support the updating o f the national rural development plan and support measures. This component complements the work o f European Agency for Reconstruction (EAR) SRDPPS project, which i s supporting the development o f an EU-compatible fiduciary system within the MAFWM and the preparation o f a national rural development plan and supporting measures.

Component 2: Building Knowledge and Capacity o f Agricultural Producers and Processors (EUR 7.4 million (US$lO.l million equivalent), of which EUR 7.4 million (US$lO.l million equivalent) from Bank)

26. This component will help develop and disseminate the knowledge and technology needed for agricultural producers and processors to raise agricultural production and competitiveness and to access and make effective use o f the structural support provided by the MAFWM. Adopting best practice EU measures, this component will build upon and enhance existing GoS systems, in which research and extension activities are carried out through transparent, competitively awarded contracts including private sector delivery. While extension delivery must be tailored to specific country environments, systems such as those in the UK and Holland, where government funds up to 70% o f the privately delivered advisory services, provide working models for Serbia.

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27. The component will include:

(i) Improve Agricultural Extension Delivery (EUR 5.0 million (US$6.8 million equivalent))

a. Strengthening o f MAFWM capacity: the project will support the establishment and capacity building o f a Department for Rural Development and Extension Services (DRDES) within the MAFWM to oversee the Serbian applied research and extension system, with responsibility for adopting an Agricultural Extension Strategy and approving contracts and making payments to Extension Service Providers. Project inputs will include office and computing equipment and vehicles for the DRDES, technical assistance and capacity building in extension management and effective communication for DRDES staff and trainers and support for annual workshops and training programs.

b. Incremental funding for extension services contracts: over the project l ife, existing funding for contracts to service providers for training o f extension contractors, extension services to farmers and for facilitating farmer’s rural development grant applications will be doubled. Demand driven extension contracts financed by the project will be awarded on a competitive basis to certified3 service providers, including restructured agricultural stations, academic institutions (e.g., agricultural schools), NGOs, private companies and private individuals.

(ii) Improve Applied Research Delivery (EUR 2.2 million (US$3 million equivalent)): A national Advisory and Applied Research Fund would be established as defined in the 1991 Law on Agriculture Departments. The Project would finance applied research programs through competitively awarded contracts based on EU best practice, including:

a. Capacity building for applied agricultural research: to strengthen the relevance and effectiveness o f the applied research program, the Project will support technical assistance and training in applied research management and implementation and regional study tours for the members o f a project supported Applied Research and Extension Council.

b. Incremental funding for applied research contracts: up to €0.7 mi l l ion will be provided annually for financing contracts for demand driven applied agricultural research, which will be awarded on a competitive basis to accredited research institutes and, at a lower level o f funding, to innovative farmer, agro-industry and c iv i l society groups for technology testing and demonstration;

(iii) Development o f stakeholder representation (EUR 0.3 million (US0.4 million equivalent)): The MAFWM extension and applied research program will be overseen by

“Certified” extension providers will require certificates proving their competency in the areas of extension 3

management and effective communication, farm financial management and rural development grant processing.

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a multi-sectoral Agricultural Extension and Applied Research Council including representatives o f the MAFWM, MSEP , civ i l society and target beneficiaries (agricultural producers and processors). The project will also support the establishment o f a system supporting democratic, gender-balanced stakeholder representation in local extension and applied research management. Project inputs will include a consultation and communication package on the development o f stakeholder representative bodies and TA and capacity building in support o f effective representation. The project will also fund TA and capacity building in applied research management at both scientific and Council levels and funding for national Council operations.

Component 3: Management o f the Stara Planina Nature Park (EUR 3.3 million (US$4.5 million equivalent), of which EUR 2.8 million (US$3.8 million equivalent) from G E F and EUR 0.5 million (USS0.63 million equivalent) from Local Communities)

28. Component 3 will support aspects o f improved management and biodiversity conservation and sustainable natural resource use within the non-core conservation areas (Zones 2 and 3) o f the SPNP. This includes TA, training and some equipment for the management authority (Srbijasume) and support for preparation o f management and operational plans for the SPNP, public awareness raising, strengthening o f cooperation with local authorities and communities, strengthening trans-boundary cooperation, ecological restoration o f priority sites (particularly degraded high elevation meadows), development and certification o f “SPNP- branded” products based on sustainable use o f natural resources, incentives to male and female farmers for maintaining rare indigenous livestock breeds, small scale infrastructure to support rural/eco-tourism, and establishing an ecological monitoring system. Establishment o f a practical and meaningful ecological monitoring system i s a key to effective P A management, and an estimated $150,000 would be allocated for this purpose (using the GEF Tracking Tool as a basis). GEF co-financing will be used to strengthen MAFWM capacity in areas such as agro- environmental production and agro-tourism. While targeted toward the SPNP, these competencies will be applicable anywhere in the country.

29. In the Stara Planina area € 1.8 million (US$2.5 million) will be applied as competitive grants to support the global objectives o f promoting sustainable land use (particularly well- managed extensive grazing), ecological restoration, sustainable rural tourism and related enterprises, and preservation o f natural and agro-biodiversity, including using the LEADER approach where appropriate. Twenty five percent o f the grant amount will be paid by local communities (€ 0.5 million) and 75 percent will be financed by the GEF grant (€ 1.3 million). This will supplement the limited funds available from GoS for these purposes (in 2005, approximately €103,000 equivalent went to farmers in the 4 Stara Planina municipalities). The GEF investment grants will fund up to 100% o f investment costs, to encourage recipients to undertake activities with a high public goods element (such as ecological restoration) or higher than usual financial risk.

30. The grants, to be managed through a Stara Planina Advisory Committee, will support integrated strategies for sustainable local development, prepared through decentralized, integrated and bottom-up approaches. In the agriculturally marginal SPNP area, GEF funds will

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help to pilot approaches to introduce sustainable farming and forestry practices and to diversify household and local economies.

Component 4: Project Management and Coordination (EUR 1.1 million (US$1.5 million equivalent), of which EUR 0.6 million (US$0.8 million equivalent) from the Bank and EUR 0.5 million(US$ 0.7 million equivalent) from GEF)

31. The project will be managed as an integral program o f MAFWM, without the establishment o f an independent project implementation unit. This component will support incremental costs o f consultant services, training, equipment and operations to facilitate project implementation including procurement and financial management, monitoring and evaluation and reporting. A Project Implementation Team within MAFWM, working under the direction o f a MAFWM Project Manager, will provide technical, procurement and financial management support to participating MAFWM Sectors. A small technical advisory team will be located in the Stara Planina area to support MAFWM and Srbijasume in implementation o f the GEF-financed activities, particularly under Component 3. Day-today implementation o f the project sub- components will be the responsibility o f the associated MAFWM Divisions, Directorates and Sectors and Srbijasume in the case o f for the SPNP program. The project M&E system will be designed to provide timely and concrete information to project managers, based on the Results Framework.

32. Retroactive Financing: The Government o f Serbia will make available up to € 1.6 mi l l ion equivalent out o f i t s own funds to initiate Project activities funded through the World Bank Loan. An additional amount o f US$ 0.55 mi l l ion equivalent will be made available by GoS to initiate Project activities funded through the GEF Grant. Government funds will be reimbursed by the Bank from the proceeds o f the IRBD Loan and the GEF Grant provided that: (i) expenditures are eligible under the Loan; and (ii) procedures for procurement o f consultant services, goods or works fol low the Bank’s Procurement and Consultant Guidelines. The period o f retroactivity runs from May 25, 2007 to the date o f the signing o f the Loan Agreement. Retroactive financing will apply to the following: (i) incremental operating costs and training o f PITs; (ii) goods for the Payment System, DRDES and PITs; and (iii) for supporting the Payment Systems and Rural Development consultants.

5. Lesson learned and reflected in project design

33. Experience from several countries demonstrates the importance o f harmonizing national systems and policies with those o f the EU, in advance o f EU accession. EU agricultural/rural development and environmental policies and requirements have proven to be among the most difficult and time-consuming to meet. Therefore, the GoS i s interested in starting the harmonization process as soon as possible using i t s national rural development program as a building block for future IPARD program implementation.

34. Experience gained from other projects aimed at improving agricultural growth and competitiveness within the EU framework has shown the importance o f improving male and female agricultural producers’ and processors’ knowledge o f modern methods, standards and market requirements, as well as initial capital to enable them to put this knowledge into practice.

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3 5. The successful implementation o f structural payment measures requires sufficient, well trained and equipped administrative staff and systems and the early introduction o f systems approximating the EU IACS, including a modern LPIS.

6. Alternatives considered and reasons for rejection

36. Initial concepts targeting support to a few high-poverty regions o f the country, or to a limited number o f pre-selected product/location combinations and types o f investments (based on supply chain analysis to be carried out during project preparation) were rejected in favor o f strengthening the GoS agriculture/rural development support system to operate efficiently and transparently, consistent with EU regulations and to respond to opportunities identified by prospective beneficiaries. An exception has been made in the case o f GEF co-financing which i s targeted particularly to supporting extensive livestock husbandry based on locally adapted breeds and rural/eco-tourism in the Stara Planina area, in order to pilot innovative approaches to rural development in LAGS and achieve particular national and global benefits.

37. The IBRD and GEF projects were initially separate, but have been blended both for administrative efficiency and to facilitate better integration o f agri-environmental objectives and capacity within the agricultural sector in Serbia.

C. IMPLEMENTATION

1. Partnership arrangements

38. Several partners are supporting programs to assist Serbia to harmonize i ts programs and institutional structures with EU requirements. In particularly, the EAR i s helping the MAFWM to develop an appropriate fiduciary system for an EU-compatible national Payment system and to prepare a national rural development plan and associated IPA-RD compliant rural development measures. The STAR project focuses on strengthening technical aspects o f the administration o f the rural development planning and payment systems and building capacity within government and among target beneficiaries to use the funds effectively and transparently and to monitor and evaluate the impacts. The EAR is also assisting Serbia to put in place key elements o f a sanitary and phytosanitary control and food safety system at a national level (e.g., institutional capacity building, standards, laboratories), The GEF project also compliments work by the U N D P (under a GEF Enabling Activities grant) in developing a national Biodiversity Strategy and Action Plan (BASP) and EC support for the development o f an EU compliant environmental acquis.

39. program i s expected to provide significant grant support to Serbian agriculture in coming years.

The Project i s designed for flexibility in implementation, recognizing that the EU I P A

2. Institutional and implementation arrangements

40. The project will build on and expand existing World Bank project implementation capacity within the MAFWM. The technical aspects o f project support for rural development payments will be overseen by the MAFWM’s Sector o f Agrarian Operations (SAO), with the

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Sector for Agriculture and Rural Development (SARD) responsible for rural development planning and researcWextension services, and the DGR (within the SARD) responsible for agro- biodiversity aspects. A new Division responsible for agriculture extension and applied research policy and programming will be established in the MAFWM SARD, building of f an existing Extension Unit. The Institute o f Science Application in Agriculture (ISAA) will be restructured and contracted by the MAFWM to administer the applied research and extension support program, which will be implemented on the basis o f competitively awarded contracts. For the implementation o f the rural development and biodiversity conservation GEF financed grants, SARD will also establish Stara Planina Advisory Committee that will include representatives o f MAFWM, Local Government and non-governmental stakeholder groups. The MAFWM will appoint a Project Manager who will coordinate project activities across al l components and a Project Implementation Team (PIT) for day-to-day planning and management support, including a support team in the Stara Planina area. The PIT, located within MAFWM, will provide technical and administrative support to the S A 0 and SARD, which will be responsible for the management o f their respective components o f the STAR project. As the project i s implemented almost entirely within the MAFWM, the existing MAFWM management structures will take responsibility for project implementation, obviating the need for a Steering Committee. Activities within the SPNP such as ecological restoration and development o f small scale tourism-related infrastructure will be implemented by MAFWM in coordination with Srbij asume and local municipalities.

41. The workload o f the core MAFWM staff currently exceeds i t s capacity due to the competing demands o f the regular MAFWM work program and the numerous donor funded programs. The project will mitigate this absorption capacity constraint by mobilizing long term national consultants who will reinforce relevant MAWFM units (e.g., grant management and administration, rural development planning and extensionhesearch management). Subject to their satisfactory performance, these consultants will be converted to regular MAFWM positions by project-end. The DGR and Srbijasume will be strengthened to support implementation o f the GEF-financed activities (Component 3), with particular attention to increasing public participation, introducing ecosystem management objectives and supporting the development o f sustainable rural tourism.

42. Stakeholder participation, both male and female, in agriculture extension and applied research management will be strengthened through the establishment o f a network o f farmer and agri-business representation linked to a tiered research and extension governance structure including a national Applied Research and Extension Council. The Council will review and approve the annual work plan and budget o f the DRDES and monitor i t s impact.

3. Monitoring and evaluation outputs

43. term growth and poverty reduction, with the ultimate goal o f European integration.

Performance indicators are linked directly to the CAS goal to achieve sustainable long-

44. Overall monitoring o f the project’s implementation, as well as assessing the development impact o f the project would be the responsibility o f the MAFWM PIT, with technical assistance support and the contracting o f some monitoring activities. A specialized project M&E /

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management information system will be prepared to the satisfaction o f IBRD, as well as procedures for data collection and reporting. M&E will be based on direct reporting by institutions involved in project implementation (SAO, SARD, ISAA, Srbij asume and farmers), relevant data collected on a systematic basis for other purposes, participatory assessments, user satisfaction surveys (e.g. , in extension delivery), income surveys, and targeted data collection (among others through the IACS), as established in the project implementation manual. The PIT will commission two evaluations o f project output and impact indicators, at mid-term and at completion.

45. The MAFWM STAR PIT will be responsible for submitting to IBRD semi-annual progress reports on the project. Progress reports will focus on (i) key performance outcome, output and input indicators as indicated in the project logframe; (ii) progress in procurement; (iii) progress in implementation o f institutional reforms; (iv) progress on technical assistance and training; (v) status o f disbursements o f rural development and biodiversity conservation grants; (vi) progress on stakeholder and community sensitization and mobilization; (vii) progress with outcome based contract implementation; and (viii) work plans for the next six months.

46. The project will help to put in place a transparent and efficient system for tracking payments made through the GEF funded rural development and biodiversity conservation grant system, and for monitoring and evaluating the impact o f those grants in relation to the objectives o f Component 3. This will provide the MAFWM with essential information for improving the grant system itself, as well as identifying additional policy reforms that may be needed for nationwide expansion o f the pilot measures.

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47. The project will support the development o f an ecological monitoring system for the SPNP. The GEF Tracking Tool for Biodiversity Strategic Priority 2 (Mainstreaming Biodiversity in Production Landscapes and Sectors) wil l be used because, while the SPNP i s a legally designated PA, the project focus i s on biodiversity conservation in production landscapes outside the core conservation zones. The Tracking Tool was completed for the first time (baseline) during project preparation and will be repeated at mid-term and at the close o f the project. Because increased stakeholder participation is a major objective o f improved management o f the SPNP, the M&E approach will also include a strong emphasis on participation.

48. the end o f the second year o f project implementation.

An internal mid-term review will be conducted joint ly by the MAFWM and the IBRD at

49. IBRD a project Implementation Completion Report (ICR).

N o later than six months after the credit closing date, the MAFWM will provide to the

4. Sustainability and Replicability

50. A core objective o f the project i s to enable Serbian farmers and agricultural processors to find their place within a rapidly growing regional market. Serbian agriculture can only sustain i tse l f and contribute to the sustainability o f the national economy by becoming more competitive within this context. The project minimizes the creation o f potentially unsustainable programs

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and institutional structures by supplementing and building the capacity o f existing ones, to which the GoS has already demonstrated a strong commitment, particularly as they represent an important part o f the process toward EU accession. This will represent an important f i rs t step towards establishing the much greater capacity that the MAFWM will require in order to absorb EU pre-accession funds.

5 1. The GoS agricultural research and extension services are already partially delivered through milestone based contracts. The project will improve the relevance and sustainability o f this approach through democratic stakeholder participation in setting agricultural knowledge priorities and strategy and supervising and monitoring their implementation. The project will also assist service providers to restructure and commercialize, will build individual and institutional capacities and accredit individual service providers in areas o f core competencies.

52. The GEF co-financing will support the GoS strategy for conservation o f agro- biodiversity, which aims to preserve autochthonous varieties not through ex situ or artificial “museum” approaches, but by integrating them into the overall livestock sector by taking advantage o f their special properties such as adaptation to local conditions and suitability for unique products (e.g., dairy products o f indigenous Pirot sheep). It will also support environmentally, economically and socially sustainable land use and rural development in southern Serbia, providing urgently needed alternatives to unsustainable activities such as intensive livestock production and ski resorts.

5. Critical risks

53. The main risks to project implementation and achievement o f i t s objectives are:

RISK Limited institutional capacity could slow or constrain implementation o f the project

Law on Agriculture not yet passed by Parliament

RATING S

M

MIT IGATION Institutional strengthening needs are being identified and incorporated in the project design. Long-term national consultants engaged to increase the absorption capacity o f MAFWM departments involved in the project (subject to satisfactory performance, they will be converted to MAFWM permanent staff by end-project). The MAFWM i s gaining familiarity and experience with Bank procurement and financial management procedures through the implementation o f the Serbia Danube River Enterprise Pollution Reduction Project and preparation o f the STAR project.

L a w on Agriculture i s already before parliament and, considering i t s non-controversial content, is expected to be supported by any incoming government; Existing laws provide an adequate base for moving forward with project implementation.

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RISK

Farmer and agro- industry stakeholders are poorly organized and will struggle to form cohesive, democratic institutions to represent their interests.

The scope and impact o f the GoS investment grants scheme may be limited by interested parties’ resistance to further reform including the delayed reorientation o f traditional product- based agricultural subsidies towards project-based rural development support

Incentives and assistance provided (by GEF) may not be sufficient to motivate many people to remain in the SPNP area and engage in environmentally sustainable economic activities

RATING

S

M

S

MITIGATION

The project wi l l use electoral processes to establish democratically elected rural representative bodies, while continuing to build capacity for farmer and agro-industry association and rural community representation, the latter particularly through the EU LEADER approach.

Anticipation o f EU pre-accession funding gives the GoS strong motivation to develop an EU-compliant support system for agriculture/rural development as quickly as possible Impact evaluation o f the on-going rural development grant program wi l l demonstrate i t s economic merit compared to more traditional price support measures.

The objective i s to maintain a modest resident population, not to attract large numbers o f new residents. Under-utilized farms in the project area represent a valuable economic asset, particularly given high urban unemployment rates

6. Loan conditions and covenants

Conditions of Effectiveness

54. The Borrower has adopted and submitted to the Bank, the Project Operational Manual, including the Financial Management and Stara Planina Rural and Biodiversity Conservation Grants Manuals, satisfactory to the Bank.

55. The Borrower has acquired accounting software for the Project acceptable to the Bank.

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56. The Borrower has established the Project Implementation Team and GEF Program Implementation Team in a manner, and with composition and terms o f reference, satisfactory to the Bank.

Disbursement condition

57. No withdrawal will be made for support o f extension service and applied research contracts unless the Borrower has adopted an Agricultural Extension Strategy satisfactory to the Bank.

58. N o withdrawal wil l be made for Rural Development Grants unless the Borrowerkhe Recipient has established the Stara Planina Advisory Committee, with composition and terms of reference satisfactory to the Bank.

Other legal covenants

59. the DRDES, SARD, DGR and SAO, with sufficient human, technical and financial resources.

The Borrower shall, throughout Project implementation, maintain MAFWM, including

60. The Borrower shall ensure that, by no later than March 31, 2008, the MAFWM has contracted the ISAA to administer contracts for applied research and extension support under terms and conditions satisfactory to the Bank.

61. The MAFWM shall, throughout Project implementation, establish and maintain the PIT within i t s structure, including the GEF Program Implementation Team, with composition, terms o f reference and resources satisfactory to the Bank. To this end, the PIT shall be headed by a Project coordinator, and staffed with, inter alia, a Project administrator, a senior finance specialist and a procurement specialist, all with qualifications, experience and terms o f reference satisfactory to the Bank.

62. The Borrower shall implement the Project in accordance with the criteria, policies and procedures set forth in the Project Operational Manual, and shall not amend, or waive, or permit to be amended or waived, any provision o f the Project Operation Manual, except with prior written approval o f the Bank.

63. The Borrower shall (a) take all measures necessary to carry out the measures identified under the Environmental Management Plan at all times in a timely manner, ensuring that adequate information on the implementation o f said measures i s suitably included in the Project reports to be prepared pursuant to the provisions o f Section 1I.A o f this Schedule; and (b) ensure that the EMP or any o f i t s provisions, shall not be amended, suspended, abrogated, terminated or waived or permitted to be amended, suspended, abrogated, terminated or waived, except with the prior written approval o f the Bank.

64. The implementing entity will maintain a financial management system acceptable to the Bank. The project financial statements and the Designated Account will be audited by

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independent auditors acceptable to the Bank and on terms o f reference acceptable to the Bank. The annual audited project financial statements and audit report will be provided to the Bank within six months o f the end o f each fiscal year. The project audit will be required to extend the scope to include performance review at least on a sample basis to ensure that agreed outputs are delivered in an efficient manner with respect to grant facility.

D. APPRAISAL SUMMARY

1. Economic and financial analysis

65. The economic and financial analyses are based on the underlying assumption that the project will (i) contribute to the more effective use and absorption o f Serbian Government structural funds for agriculture (ii) improve farmer access to appropriate technology, raising the profitability and competitiveness o f Serbian agriculture; and (iii) in the case o f the SPNP, pi lot profitable conservation-based farming practice having wider application in Serbia.

66. Farm productivity data in Serbia i s limited, however, statistical trends and data from a recent farming systems analysis are available and have been used to model possible extension research outcomes. The modeling results, which show an incremental benefit o f EUR 110 mi l l ion over a ten year period, should be read as a minimum impact that i s expected from Project implementation.

67. Additional un-quantified benefits will accrue from (i) improved rates o f return on better targeted national rural development fund investments supported by an invigorated research and extension continuum; (ii) subject to external conditionalities, accelerated access to EU IPA rural development funding up to the value o f EUR 66 mil l ion per annum together with an increased absorption capacity; and (iii) a range o f environmentally sustainable community based economic activities with the potential to diversify rural income sources; and (iv) associated with points (ii) and (iii) an increased capacity for government to alleviate the pressure on farmers as they move to a more open market environment following an S A A agreement and W T O accession.

68. The GEF investment in sustainable farming in the SPNP is o f a pi lot nature and includes the reintroduction o f traditional breeds and products, for which there i s l i t t le available financial information, overlaid with conservation and agri-tourism measures. The financial and economic viability o f these investments will be monitored over the project and contribute to a wider analysis o f opportunities for conservation based farming in southern Serbia,

69. Based on economic models for the selected commodities, the minimum economic benefits o f the Project are estimated to amount to about EUR 100 mi l l ion reflecting both Serbia’s competitiveness in maize and oilseed production, translating into an IRR o f 12%.

2. Technical

70. The GoS Agricultural Development Strategy prioritizes enhancing Serbia’s access to, and competitiveness in, international markets, particularly the EU. The agricultural sector, however, is facing multiple challenges, including access to technology, extension services, land, credit and

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other factors o f production and the establishment o f effective and transparent support measures. The public sector has an important role in providing public goods and appropriate support to farmers and processors and in creating an operating environment that facilitates private sector investments. The public sector i s negotiating an EU stabilization and association agreement and working toward future accession requirements, including the creation o f a rural development plan and an EU compliant Payment system. Serbia also has national and international obligations to support biodiversity conservation, both in natural areas and within agro-ecosystems. To meet these challenges MAFWM needs to better align i t s agriculture support measures with the EU CAP, improve transparency and accountability in the payment system and develop and extend sustainable technology for improved competitiveness. To this end, the borrower has requested assistance in improving the institutional capacities o f the MAFWM, particularly i t s payment and researcWextension management systems and to pi lot biodiversity conservation. This has informed the design o f the project, including supporting the evolution o f an EU compliant national Payment system and rural development Management Authority, developing a more market oriented stakeholder driven agricultural knowledge system and the conservation o f the globally important Stara Planina mountain and i t s endangered species.

7 1. The first component, strengthening rural development program implementation, i s aimed at strengthening the GoS system for transparently delivering rural development investment grants and evaluating their impact. Building on EU regulations and the experience o f new EU member states the project will improve grant efficacy and pave the way for future EU IPARD funding. The second component, building knowledge and capacity o f agricultural producers and processors, will support the emergence o f a competitive commercial farming sector that wil l create growth and employment in the rural sector. The third component, sustainable land use and ecological management o f the SPNP, will build capacity across key institutions for meeting international treaty obligations and the requirements o f the EU environment acquis.

72. The project will introduce a range o f technical and scientific innovation including new software systems and information databases and production, processing and environment protection technology, supported by competency-based training. Serbia i s well positioned to receive these new technologies and approaches; however, foreign technical assistance will be needed to introduce some programs. MAFWM Payment system software will be designed with international support, but programmed locally. Serbia has the skills and resources to upgrade the PS IT system and mostly local consultants will be employed for i t s maintenance. Extension reform has already been initiated, however, the introduction o f EU best practice for contracting extension and applied research outcomes will require technical support and improved service provider capacities to respond to more market oriented delivery systems. Environment and biodiversity management i s a relatively new field in Serbia and will require pi lot approaches and substantive technical assistance and training to become entrenched in key GoS agencies.

73. Activities for ecological restoration, biodiversity conservation and sustainable agriculture and tourism development under Component 3 will be funded on the basis o f experience from ongoing programs (such as conservation and breeding programs for indigenous livestock) livestock breeds) and by detailed studies undertaken during project preparation on grassland management needs, rural tourism potential, and production and marketing o f specialty agricultural products from the Stara Planina region.

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3. Fiduciary

Procurement

74. actions for the project was carried out in April, 2007

An assessment o f the capacity o f the implementing agency to implement procurement

Fin an cia1 Management Review

75. MAFWM will be in charge o f overall implementation o f the project through the Fiduciary Center (FC) within MAFWM and specifically assigned to implement the project. Financial management officer within the F C possesses adequate qualifications and experience. Financial management arrangements for the project are overall acceptable. Financial management conditions o f negotiation have been met, namely acquisition o f acceptable software to be used for project accounting has been initiated and draft financial management manual was prepared.

76. The annual audited project financial statements will be provided to the Bank within six months o f the end o f each fiscal year and also at the closing o f the project. The audits will be carried out by private audit firm acceptable to the World Bank. The project audit will be required to extend the scope to include performance review at least on a sample basis to ensure that agreed outputs are delivered in an efficient manner with respect to grant facility. There are no overdue audits in this sector in Serbia. The FC will submit a full set o f interim un-audited financial reports (IFRs) for each calendar quarter throughout the l i fe o f the project. Acceptable accounting software to be used for project accounting and for generation o f quarterly IFRs will be acquired by project negotiation.

77. Appropriate systems o f internal controls for the project are instituted for the project. Internal controls and procedures will be clearly described in Financial Manual (as integral part o f Operations Manual). Draft Financial Manual was prepared by project negotiation. In addition, appropriate internal control procedures to be applied for the competitive grant facility are to be described in Grant Manual to be prepared and adopted before effectiveness o f the project.

78. Serbia has a high perceived corruption as measured by the Bank’s Business Environment and Enterprise Performance (BEEP) Survey and by Transparency International. Serbia i s ranked as number 90 with a score o f 3.0 out o f 10 in the 2006 index. An Anti-Corruption strategy has been developed spear-headed by the Anti-Corruption Council, but much remains to be done and a strong support from the new government i s needed to make tangible progress in this area, including institutional strengthening for the Anti-Corruption Council, establishment o f the Supreme Audit and audit o f government’s financial statements, improvements for institutions overseeing procurement, improvements o f protection o f “whistle-blowers”, improvements in the judiciary system etc. On the project level measures to be taken in order to mitigate the risk o f corruption and ensure use o f funds for intended purposes include describing in details key controls and procedures to be applied under the project in an FM Manual to be developed prior to negotiation. This will minimize risk o f an error, safeguard project’s assets and ensure use o f funds for intended purposes. Application o f the controls and procedures in practice will be verified by the Bank’s supervision. Application in practice o f the controls and procedures

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described in the Manual will be verified during Bank FM supervision. Further measures include use o f private audit firm for auditing the project and regular supervision by the Bank’s Financial Management Specialist.

79. commercial bank acceptable to the Bank.

The Designated Account for administering the project funds will be opened in a

Monitoring and Evaluation

80. A project monitoring and evaluation plan will be prepared pre-project with PHRD support. Project monitoring will be contracted out to independent suppliers, with the Applied Research and Extension Council responsible for contracting the monitoring o f agricultural knowledge activities. The monitoring and evaluation o f agriculture and rural development grants will be implemented through EU compliant ex-ante and post-ante evaluations o f grants, on-the- spot control o f at least 5 percent o f grants and the establishment o f a stakeholder-based rural development grant Monitoring Committee. As the management authority for the SPNP, Srbijasume will implement the GEF Tracking Tool for biodiversity conservation. The project team will be responsible for collating monitoring and evaluation reports for submission to the Bank and MAFWM.

4. Social

8 1. Social impacts are expected to be positive overall, with improved incomes in rural areas. Serbia i s among the most rural countries in Europe with 43% o f the total population living in rural areas. Agriculture plays a critical role in the rural economy, contributing to employment, income and, particularly for the poor, food. More then 75% o f private farms are small scale farmers with highly fragmented land. Insecure markets, poor rural infrastructure and fragmented land led to farms with diversified production system dominate the sector. Surveys that were conducted among rural household in the context o f project’s social assessment study showed that the number o f rural households with agriculture as a main income source is higher than the number o f registered farms (agricultural households). This proves that for a number o f households in rural areas agriculture i s s t i l l the most important contributor to economic and social stability irrespectively o f the income generated from non-agricultural activities.

82. Overall, the achievement o f the project objective, to create an efficient and transparent rural development program consistent with EU pre-accession rural development programs, will be positive for the sector, including the rural poor. In the longer term, the project should contribute to a reduction in rural-to-urban migration in marginalized areas, which should have positive social impacts, as many o f the rural people currently going to urban areas wind up unemployed or underemployed and living in unhealthy and insecure environments. Also, some positive social impact o f encouraging younger people to remain in or return to rural villages, providing a support system for the rapidly aging population o f these villages (both informal (family) and formal (increased population)) will result in increased social services provided by the State.

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83. Commercial farmers have difficulties with inadequate rural financial services, but also with accessing the existing financial services, which limits their investment capacity. During the survey the respondents among commercial farmers pointed out marketing o f product surpluses and fluctuation o f prices as the main reason for diminishing interest in agriculture production.

84. The project i s designed to respond to the needs identified among agriculture producers. The respondents to the survey recognized the importance o f knowledge and information sharing in order to overcome difficulties in the agricultural production. For those that can not easily access the public advisory service, i t s role i s not clear. Those respondents that have access to advisory service are willing to participate in various training opportunities and adopt advises on technology, farm management and marketing.

85. There i s some risk o f exclusion o f farmers/producers who are unable or unwilling to adopt new technologies or cannot be easily reached by public service agencies. The knowledge building component o f the project aims to minimize this by assisting as many target beneficiaries as possible to participate at least to some extent. Recognizing the weakness o f c iv i l society in rural areas, this includes building leadership sk i l ls and capacities amongst smallholders to organize to achieve greater efficiency and economies o f scale. Components o f the applied research and extension programs will support subsistence farming including information on product quality and safety and the development o f Designation o f Origin for some specialized products. In addition, much o f the increased production supported by the project i s likely to be export-oriented, with minimal impact on local markets on which such producers mainly rely. Some o f the production will contribute to import substitution, increasing the affordability o f products in the local market

5. Environment

86. The project i s rated Category B: Environmental impacts are expected to be limited, and mainly positive or neutral. The objective o f facilitating harmonization with EU requirements and accessing EU markets with the associated cross-compliance requirements, in itself, promotes movement towards more environmentally sound methods. This will be supported by research and extension on aspects such as integrated crop management, organic production and reduction in pollution from processing plants.

87. The project will supplement and strengthen the GoS’s existing provisions for supporting agri-environmental activities and sustainable tourism. The Rural Development Plan developed for the GoS Rural Development Grant Scheme will include a section addressing environmental aspects o f grant proposals, such as the use o f agricultural inputs and management o f processing effluents. The project will also directly support improved management and ecological restoration in the SPNP, which i s a globally significant biodiversity area. While the project aims to increase livestock numbers within the SPNP, there i s l i t t le risk o f triggering overgrazing as current livestock populations are substantially below historical levels and the objective i s to encourage restoration o f traditional, sustainable extensive grazing in selected high elevation meadows which are suffering from bush encroachment due to under-utilization. Also, while the project aims to help develop markets for livestock products, the increased production wil l be from a very l o w base. Furthermore, the project will emphasize development o f niche products

25

whose market value wi l l depend directly on certification as being ecologically friendly and supporting the sustainable use o f the nature park. The project wi l l also support a sustainable, ecologically friendly and socially supportive tourism development model, providing an alternative to current pressures for an unsustainable, infrastructure-intensive model based on ski resorts. Any tourism-related infrastructure to be supported by the project wi l l be small scale (e.g., visitor centers in towns, hiking and riding trails) and consistent with the SPNP management plan, as well as being subject to prior environmental assessment.

6. Safeguard Policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) 1x1 [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [XI Involuntary Resettlement (OP/BP 4.12) [ I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI Forests (OP/BP 4.36) [XI [I Safety o f Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI

[ I

[ I

88. Compliance with the OP 4.01 wi l l be achieved through including appropriate provisions in the Rural Development Plan for the GoS Rural Development Grant scheme, as well as in the project's EINEMP , which has already been publicly disclosed. Investments financed under Component 3 rather than the Grant scheme wi l l be subject to environmental screening and assessment as required, consistent with national law and following procedures to be specified in the Operational Manual. Tourism infrastructure investment within SPNP will be limited to rehabilitation o f a limited number o f existing access roads and existing buildings and construction o f hiking trails in accordance with the park management plan. The impacts on natural habitats and forests are expected to be positive. While the project will promote grazing in natural mountain grasslands, this will be in accordance with a pasture management plan that uses extensive grazing as a tool to restore and maintain biodiversity. Compliance with the OP 4.04 will be achieved through support for preparation and implementation o f the SPNP management plan.

89. OP 4.09 on Pest Management i s not triggered by the project because the subprojects wi l l not finance purchase o f any agricultural inputs, including pesticides. The project wi l l also support integrated pest management approaches to be mainstreamed in the agriculture advisory program.

90. The project also triggers OP 4.04 on Natural Habitats. The policy i s triggered since the project wi l l support investments that will improve the conservation o f Stara Planina Nature Park,

* By supporting the proposed project, the Bank does not intend to prejudice the final determination o f the parties' claims on the disputed areas

26

including restoration o f priority sites such as degraded high elevation meadows. No critical natural habitats are expected to be converted.

91. OP 4.36 applied since the project aims to bring about changes in the management o f Stara Planina Nature Park, which has about 40% forest cover (with the remainder being pasture and cultivated land). The project wi l l provide general support for strengthening the capacity o f the responsible authority (Srbijasume) to manage the nature park, but the emphasis wi l l be on the pasture and cultivated lands as these are currently being neglected. The project will not finance exploitation or planting in the forested area.

7. Policy Exceptions and Readiness

92. The Project does not require any exceptions from Bank policies.

93. Readinessfor implementation: The policyAegislative environment i s adequate for project implementation. Recent policy reforms have created a positive environment for agricultural businesses to develop. The project wi l l be implemented by government agencies and departments, privately owned enterprises and NGOs that are largely already in place, and wi l l use and strengthen existing systems. Furthermore, project implementation will be relatively uncomplicated in that there wi l l be no large scale procurement o f works or equipment. The existing extension law provides an adequate framework for the proposed researcWextension reform, while the Law on Agriculture, which relates to the project in terms o f establishing a Payment system, i s expected to be supported by the new Parliament and only formalizes an institutional framework that, in practice, i s already operational. Plans for the structure o f the PS have recently finalized with EAR support, which wil l also assist the establishment o f a rural development strategy and plan by October 2007.

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Annex 1: Country and Sector o r Program Background

SERBIA: TRANSITIONAL AGRICULTURE REFORM PROJECT

1. Serbia’s regional trade opportunities are expanding rapidly, driven by economic recovery in the post accession countries, a proliferation o f bilateral free trade agreements and plans for WTO accession and an EU Stabilization and Association Agreement. In order to capitalize on these trade opportunities, in late 2000 the Government o f Serbia launched an ambitious reform program to improve the business environment and create a vibrant private sector. The program i s producing the desired results and the country was recently voted the world’s number one overall reformer on a variety o f measures relating to business regulations and their enforcement.

2. Serbia has significant comparative advantages in agriculture. The country has large amounts o f agricultural land, high quality soils, a strategic trading location, and an educated workforce. Almost hal f o f Serbia’s population o f 7.5 mil l ion lives in rural areas. Agriculture sector performance has been mixed in recent years mainly due to highly varying weather conditions, with growth in two o f the last five years. Although agriculture share o f GDP i s declining due to the rapid rise o f the services sector, it nevertheless remains an important part o f the economy, accounting for 11 percent o f GDP in 2005. With agro-processing, i t s contribution rises to over 15 percent o f GDP. About 66 percent o f Serbia’s total area i s agricultural land4 (5.1 mi l l ion ha), including about 3.4 mi l l ion ha o f arable fields, 0.3 mi l l ion ha o f permanent crops (orchards and vineyards), 0.6 mi l l ion ha o f meadows and 0.8 mi l l ion ha o f pastures. A further 25 percent o f Serbia’s total area i s under forests (1.9 mi l l ion ha). About 0.6 mi l l ion ha (1 5 percent o f the total cultivated area) i s comprised o f large corporate and cooperative farms, most o f which have been partly privatized as shareholding “mixed enterprises.” The remainder consists o f small private farms which may be commercial or subsistence level. There are about 700,000 private farms, including about 600,000 mostly subsistence farms under five ha in size with fragmented holdings and limited market-oriented production. These households depend heavily on non-farm income. The emerging group o f about 100,000 commercial family farms, predominantly located in central Serbia, tends to be involved in mixed farming o f high-value crops (berries, orchards and vineyards) and animal production and account for about forty six percent o f the total arable land.

3. There i s significant regional variation in production systems and products. For example, agriculture in the low-lying and fertile Vojvodina region i s dominated by field and industrial crops, notably wheat, maize, sugar-beet and sunflower, as well as the production o f pigs, cattle and poultry, mainly in large, partially privatized and/or employee-owned Agro-kombinats. Producers in this region are more strongly market-oriented than in the rest o f the country. By contrast, Central Serbia i s characterized by hilly topography, small farms and diverse farm production systems, with fairly intense production o f high-value f ru i ts and vegetables. Livestock production in the Central region i s dominated by dairy cattle. Southern Serbia, the poorest and least developed of the three regions, has mountainous geography and i s characterized by small, fragmented arable areas and extensive pasture and forest. I t i s most suitable for extensive or semi-intensive production o f ruminant livestock, but in recent decades, government policies have

Agricultural land includes cultivable areas, pastures and fish ponds. Cultivable area consists of arable land and 4

gardens, perennial crops (orchards and vineyards), and meadows.

28

promoted intensive production o f cattle and pigs. This can provide high short-term yields but i s not environmentally sustainable over the long term.

4. The GoS Agricultural Development Strategy prioritizes enhancing Serbia’s access to, and competitiveness in, international markets, particularly the EU. Gross Agricultural Output (GAO) has risen about 10% since 2000, with about 40% growth in plant output and static livestock output. The crop sub-sector, however, i s vulnerable to climatic variations, which in turn makes agricultural production depended on weather conditions, as implied by declines in G A O in drought years (2000 and 2003) and floods (2005)5. At the same time, cultivated areas o f most crops are not increasing substantially, which points to improving productivity. Fruit (especially plums, sour cherries, and peaches) and industrial crops (mostly sugar beet, sunflower, industrial paprika, and soybean) have significant increases in total production. Decreasing livestock numbers (as much as 30 percent decrease since 2000) combined with static levels o f total livestock production also indicate improving animal productivity (especially eggs and cow milk), although to a lesser degree than for crops.

5. Despite increasing productivity, however, yields s t i l l remain below EU levels, largely due to l o w levels o f fertilizer and agro-chemical use (in 2004, fertilizer use was hal f the EU average), the often poor quality o f domestically produced seeds and outdated on-farm technologies. This i s especially true for such major field crops as wheat, maize, and sugar beet. Yields for these crops are 30-40 percent lower than the EU average, while yields for sunflower seeds, sour cherries, plums, and raspberries are comparable or higher. As with crops, animal productivity i s l ow compared to EU levels, with meat and milk productivity, for example, about 20 and 60 percent respectively lower than in the EU. L o w productivity levels suggest that better input use and investments in agriculture and animal husbandry are necessary to bring agricultural productivity in line with EU levels.

6. Agri-food exports accounted for about 20 percent o f total exports during 2002 - 2005. Serbia’s main export commodities are cereals (maize, wheat), raw and processed fruit (frozen raspberries, prunes), refined sugar and some livestock and meat products. Agro-processing accounts for about 80 percent of total agricultural exports. The key trade partners for Serbia are the EU-25 and i t s neighboring countries (mostly Bosnia and Herzegovina and FYR Macedonia). Although agriculture has decreased as a share o f total exports recently (down from 25 percent in 2002), in real terms it grew by an impressive 71 percent between 2002-2005 and has the potential to grow further by taking advantage o f expanding regional trade opportunities. During the same period agricultural imports grew at a slower pace in real terms (40 percent) and played a smaller role in total imports (about 7 percent in 2005). The faster growth o f agricultural exports compared to imports resulted in Serbia’s first agricultural trade surplus in 20056. Numerous free trade agreements are contributing to the positive agricultural trade balance, but the surplus i s largely driven by import protection rates o f up to 30 percent, and even higher effective rates for many key agricultural products including dairy and pork. Further trade liberalization and

’ Over the observed period (2000-2005), Serbia has experienced overly dry (2000, 2002, 2003) and humid years (2005). To reduce the sector’s weather dependence the government has recently started to implement project focusing on irrigation and drainage rehabilitation.

The agricultural trade surplus o f US$lSO million obtained for the first time in 2005 contributed to reversing the trend of ever-growing economy-wide trade deficit (in 2004 at i t s highest US$7.5 billion). 6

29

removal o f tariffs will require significant improvement in sector competitiveness in order to sustain the positive trade balance. ’

7. The market forces being unleashed on the country after decades o f economic and political isolation are applying pressure on the agri-food sector to improve productivity, quality and traceability. However, the recent history o f isolation from competitive markets has not prepared the sector to respond to these rapid changes or to take advantage o f the opportunities created by the reform process. The predominantly small scale Serbian farms and small, domestically- oriented processing plants risk being overwhelmed by strong regional and international competition and by stringent food quality and safety requirements. The legacy o f isolation has also resulted in a sector marred by underdeveloped land, physical and social capital and input markets. This contributes to inadequate investment in the physical, institutional, and knowledge capital necessary to be competitive in the new market environment.

8. The GoS Agricultural Development Strategy (August 2005) sets a road-map for growth and competitiveness. Key elements include: (i) completing the move to a competitive market economy, including abolishing remaining production subsidies and adopting W T O principles; (ii) harmonizing with EU SPS and quality and agro-environmental requirements to increase Serbia’s EU market share for meat, dairy, and fruit and vegetables; (iii) improving competitiveness through adoption o f modern, cost effective production technologies; and (iv) promoting rural development, especially in poor regions o f the country, through EU-type rural development grant mechanisms.

9. The GoS Agricultural Development Strategy takes into account the evolving nature o f the EU Common Agricultural Policy (CAP). In the beginning (early 1 9 6 0 ~ ) ~ the CAP offered subsidies and guaranteed prices to farmers as incentives to increase production. Later it added support for investment to increase farm size and to adopt new technologies. As agricultural surpluses became a major factor, the CAP entered a new phase (the “Agenda 2000 reforms”), in which direct income support for farmers increased while price support decreased, and a comprehensive rural development policy was introduced to encourage diversification into other kinds o f rural initiatives. In i t s current version (begun in 2003), most o f the CAP aid has been de-linked from the volume o f production, and direct income payments (through a single farm payment scheme) are being linked to farmers’ meeting standards in areas such as environmental protection, food safety and animal welfare. The new CAP also places stronger emphasis on support for diversified rural development. EU spending on agriculture and rural development i s now channeled through two streams: Pillar 1 (decreasing in importance) covers direct income support to farmers and the remaining market-related subsidies, while Pillar 2 (increasing in importance) provides grants to encourage measures for environmental management, higher food quality standards and animal welfare and to provide assistance to marginal farming areas.

10. The GoS agricultural support parallels this structure, with one stream providing subsidies and income support and another providing grants for rural development. The centerpiece o f the Government’s program to implement i t s Agricultural Development Strategy and facilitate the transition to market competitiveness in the agri-food sector, i s a move away from price and production support towards income and structural support. Driven by trade agreements, market support i s to fall from 40 percent o f the budget in 2004 to 20 percent in 2008. Furthermore, the

30

GoS intends to deliver the structural support in a manner, which i s compatible with EU, in anticipation o f receiving EU pre-accession funds and, eventually, support under the CAP. In addition to beginning a shift away from price and production support and working towards a single payment system, the GoS has incorporated key elements o f the CAP’S Pillar 2. Eligible activities under the 2006 Rural Development Grants Program (RDGP) include agro/eco-tourism, development and marketing o f specialized local agricultural products and crafts, and conservation and promotion o f cultural, sociological and economic customs and values. Like the CAP Pillar 2, the RDGP also includes special eligibility provisions and better financial terms for “Less Favored Areas” and areas subject to environmental constraints, including flood prone areas, mountains and nature protection areas (see Table 1).

11. The GoS also aims to target i t s support efficiently to facilitate Serbian producers’ entry into the world’s largest agricultural market. This means working toward harmonization with EU policies such as the Common Agricultural Policy, the Habitats Directive and the agricultural and the environmental acquis. Experience in accession countries highlights the importance o f a proactive approach. For example, 70 percent o f meat produced in Hungary i s sold into the EU compared to 30 percent for Poland. In Poland, at the time o f accession, 50 percent o f al l meat processing plants were unable to export into the EU because they failed to meet food safety and other requirements.

12. The GoS approach to rural development also places great importance on decentralized decision making with regards to environmental protection, use and protection o f valuable natural resources, management o f agricultural land, keeping and protection o f domestic and exotic animals, and tourism development. In keeping with this principle, the process o f developing a Strategy for Agricultural Development, which was coordinated by the MAFWM, involved 20 stakeholder workshops. Also in l ine with the Government’s position on bottom-up and broad- based rural development i s the fact that eligibility for rural development grants provided by the government i s open not only to farmers, but also to local NGOs whose number has been increasing in recent years, parallel to the democratization o f Serbia.

13. While the overall thrust is for agricultural intensification, the GoS also strongly supports social protection for rural communities and the adoption o f agri-environmental practices as well as nature protection and conservation o f biodiversity in rural areas. For example, the agricultural support program provides grants to assist farmers to retire from farming, convert to organic production, to diversify into non-agricultural income sources such as tourism in areas where agricultural intensification is not desirable or possible (such as in mountainous areas), and to maintain autochthonous varieties o f livestock. It also provides special incentives and assistance, such as more flexible eligibility criteria and a higher percentage o f grant funding, for farmers and communities in marginalized (“Less Favored” areas such as southern Serbia. The Serbia Transitional Agriculture Reform (STAR) project will support these important GoS priorities.

14. A number o f donors (EU, USAID, FA0 and the Governments o f Germany, Austria, Italy and the Netherlands) have programs to address different aspects to help Serbia successfully access EU pre-accession instruments. Within this context, the MAFWM has requested World Bank support in improving the design, administration, and transparency o f i t s structural support

3 1

program and the development and dissemination o f knowledge capital. This provides an

Grant Description

Import of livestock for breeding Agricultural machines Renovation/building of stables Storage facilities, coolers, drying facilities, and other equipment for finalization of

Percentage of co-financing (%) Less Favored Areas’ Other parts of Serbia

50 40 50 30 50 30 60 40

Rural infrastructure (electricity supply, water supply, local and village roads, water supplying, waste water system, renovation of village cultural centers, equipping of resource rural development centers, business incubators etc Diversification of rural households activil

60 50

es aiming to achieve alternative sources of income

Renovation and building of houses, equipping houses for agro/eco/rural tourism Equipment and adaptation of buildings for traditional crafts

50 40

50 40

sociological values of the area Capacity building in field of rural development and organization of rural populationlcommunity

Promotion and designation of origin/designation of geographical indication Conservation and promotion of. rural customs, economical, cultural and

60 50

60 50

’ “Official Gaz. of R. Serbia, No 106105 and 108/05”

Education on strategic planning and on implementation of rural development

Total budget for Rural Development Program for 2006 i s approx. EUR 8 million. Farmers aged 40 and under are a

eligible (55 and under in LFAs). Maximum grant amount i s EUR 22,000 per farmer and EUR 55,000 per legal entity.

LFA refers to marginalized rural areas, which are defined according to elevation, soil quality, erosion, flooding threats, etc. Nature protection areas are also included as they present constraints to agricultural development. 49 municipalities are classified as marginalized areas, including three of four Stara Planina municipalities (except Zaj eEar).

9

50 50

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have link with organic farming Cooperation, study tours, visits to fairs related to organic farming

Biodiversity Conservation and Nature Protection

50 40

15. Serbia hosts a large variety o f ecosystems ranging from South European deciduous forests, and coniferous woods typical o f the Euro-Siberian and North American regions, to freshwater bodies ecosystems. This makes Serbia one o f the 6 European centers o f biological diversity, and one o f the world’s 158 biodiversity centers. The exceptional richness o f plant and animal species and their communities i s illustrated by the existence o f around 3,562 vascular plant species (Pterydophyta, Pinophyta, Magnoliophyta) with a density o f 4.03 species per 100 km2, 35,000 species o f insects (Insecta), 132 species o f Amphibia and Reptilia, 127 species o f

33

fish (Osteichthyes), 382 species o f birds and 94 species o f mammals. Almost 17 percent of Balkan endemic flora, or 287 o f Balkan endemic species are located in Serbia, with 59 species registered as local endemics. There are more than 44,200 species registered in Serbia, but scientists believe that there could be more than 60,000 species. One thousand six hundred wild plant and animal species o f international importance inhabit Serbia. While Serbia covers just 2.1 YO o f European territory, i t hosts 39% o f i t s vascular plants flora; 5 1 % o f i t s fish fauna; 49% o f i t s reptiles and amphibian species; 74% o f i t s bird species and 67% o f i t s mammal species.

16. The GoS has made a strong commitment to conservation o f biodiversity, both in natural landscapes and within agricultural systems. The former Serbia and Montenegro ratified the Convention on Biological Diversity in 2002, and the Government o f the Republic o f Serbia adopted biodiversity conservation as one o f i t s priorities for environmental protection as laid out the report titled "State o f the Environment in 2000 and priorities in 2001+ for Serbia". The INP has prepared a draft medium term Plan for Biodiversity Protection, and a national BSAP i s under preparation with support from a GEF Enabling Activities grantlo. The BSAP i s expected to address, among other things, the impact that agricultural intensification has had on biodiversity conservation, in particular through overgrazing in mountain areas. I t will emphasize the need for active, multi-sectoral stakeholder participation to ensure cross-sectoral integration for biodiversity conservation, and the need for strengthening capacity for ecosystem conservation planning to complement the traditional focus on preservation o f individual rare or endangered species.

17. About five percent o f Serbia's territory i s designated as protected area, including five National Parks, 120 nature reserves, 20 nature parks, 470 natural monuments and one Biosphere Reserve. The Republic's Landscape Management Plan anticipates the area under protection to increase to 10 percent by 2010.

18. In the area o f agro-biodiversity, in 2002 the Federal Government adopted a strategy to preserve locally adapted breeds that are becoming extinct, for social and economical purposes, as well as future scientific researches and education purposes. The strategy was later adopted by the Republic o f Serbia. As reflected in the "First report [to FA01 on the State o f Animal Genetic Resources in the Federal Republic o f Yugoslavia," the strategy gives priority to preserving the breeds that are most severely endangered. I t s main elements are:

i) Identification o f animals, their wild relatives and habitats, as well as the potential for their in situ conservation in an economically viable manner;

ii) Characterization with respect to the scope, distribution, main characteristics and current state, including the identification o f the most endangered breeds;

iii) Clear definition o f the role, utilization and conservation o f locally adapted breeds in the overall livestock sector;

iv) Enhancement o f the communication and information system on available pure breeding ' materials; v) Establishment o f permanent programs for monitoring breeds that are kept on farms and

their wild relatives which may have economic, cultural or scientific value;

UNDP i s the Implementing Agency for the BSAP 10

34

19. The West ~ ~ l k a ~ ~ ~ o ~ n ~ a i n Rimge, situated on the ( ~ o ~ t h e a s t e r ~ i ~ border o f Serbia and ~ u ~ ~ a ~ i a , i s known in both c o u ~ ~ r i e s as '"Stars ~ ’~an ina l f ,*’ (see Map I ). t i s part ofthe ~ a ~ k a ~ ~ o ~ ~ i ~ a ~ 1 1 s ~ i o d i ~ e r s i t y Center, which i s one of six ~ e ~ p e r ~ t e centers o f b iod i ve rs~ t~ in Europe. Xt i s known for i t s rich b i o l o ~ ~ c a ~ and ~eological d ~ ~ e ~ s i t ~ as well as i t s ~ u l ~ u r a l heritage. Xn 1996 the ~ o ~ e r n ~ ~ n t s o f B ~ l ~ a r ~ ~ and Y ~ ~ o s l a v ~ a signed a ~ ~ e ~ 1 ~ r ~ n d u ~ n o f a ~ r e e ~ ~ e n t to work ~ o ~ ~ ~ r d ~ the creation of a t r a n s - ~ o ~ n d a r ~ Stara l ~ l ~ i n a Peace Park. ~ h ~ l e the e s t a ~ ~ i s h ~ e r i t o f thc t ~ a ~ s - ~ Q u ~ d ~ r ~ park has not yet beer1 achieved, in 1997, the GoS ~ s t a ~ l ~ s h c d the Stara ~ ’ l ~ ~ ~ i ~ ~ ~ ~ Nature Park ~ S P N P ~ on an area covering 142,220 ha in four i ~ u n i ~ i p a l ~ t i e s (I%x)t, ~ i n i ~ t r ~ ~ ~ ~ ~ ~ d ~ Xajetar and ~ ~ . ~ ~ ~ e ~ ~ ~ c ~ . The SI’NP, ~ ~ h ~ ~ h falls under Category V 13, within the IUCN Pin, c a t e ~ o r i ~ a ~ i ~ r i system, ~ u a l ~ ~ ~ ~ s as ‘ ~ i i a ~ u ~ a l resource o f the utn~ost i n i p o ~ a ~ ~ e ” under ~ e r b ~ a n law. ‘The ~ ~ ~ ~ e ~ i ~ ~ e n t of” Scrbia i s in the process o f p r e p ~ r ~ ~ i ~ a prop~sa~ for the SPNP to be d e s i ~ ~ i ~ ~ ~ e ~ as a ~ iosphere Reserve under the ~ ~ N ~ S C ~ Man and ~ i o s ~ ~ i e r e ~ r o ~ r a ~ . On the E 3 ~ i ~ ~ a r i a ~ side there are 17 p r o ~ ~ ~ t ~ d areas o f ~ a t ~ o ~ ~ l or ~nternationa~ ~ ~ ~ ~ ~ ~ c e , i n ~ l L ~ d i n ~ n o t ~ ~ b l y the ~ ~ u ~ r e n e ~ iosphere Reserve, the ~ e ~ o ~ r a d c h i s h ~ ~ Skali Nature ~ o ~ i ~ ~ n e ~ ~ ~ ” the Kopreri-Tri Chuki ~ ’ r ~ ~ t ~ ~ t ~ d Area, aiid the ~ o ~ a t ~ Koriya Strict ~ a t u r c Reserve. A ~ r o p o s a ~ to e s ~ a b ~ j s ~ a ~ a t ~ r e Park on the B u l g a r i ~ side i s c ~ ~ ~ e ~ i t ~ ~ ~ n d c ~ the review by thc ~ i n ~ s t ~ ~ r o f ~ ~ i ~ ~ i r o n ~ ~ e n ~ and U’ater,

35

20. About 8,700 people now live in the SPNP, while the total population o f the four municipalities i s almost 178,281 (2002 census). The main land uses are agriculture (53% o f the territory land) and forestry (41% land). About 13,000 hectares o f the agricultural land are used for crop cultivation in small private holdings on lower elevations in the outskirts o f the park. The significance o f this activity declined during the socialist times with the advent o f large socially-owned farms (agro-kombinats) and with the out-migration. Between 1948 and 1991 the population o f the SPNP decreased by about 75%, as the younger generation moved to urban areas within these municipalities and beyond. As in Serbia’s other rural areas, however, the link with the land remained strong. In recent years, as a result o f industrial collapse and widespread unemployment, there i s a trend o f urban dwellers returning to the land on a part-time basis to cultivate food for their own use. A small number are also moving back to the area and trying to restart commercial production o f agricultural products, but they require assistance to develop viable enterprises in the face o f barriers such as remoteness, fragmented land holdings, and outdated technology and infrastructure. The spatial plan for the SPNP reflects a diverse set o f objectives for the park, including nature conservation, habitat restoration, small-scale livestock husbandry and agriculture, and sustainable tourism.

21. The SPNP combines the elements o f nature protection and agro-biodiversity. The area i s known for i t s rich biological and geological diversity as well as its cultural heritage. The traditional agricultural production systems in the Stara Planina region were both shaped by and helped to conserve i t s biodiversity. For centuries, in the absence o f national boundaries, south- north transhumant livestock production characterized the region’s economy. After the emergence o f nation states in the 19th Century, transhumance survived in vertical form, following vegetation dynamics by moving to high elevation in the summer and low elevation in the winter. This type o f livestock production was based mainly on locally adapted animal breeds. A rich diversity o f vegetation in the mountain meadows developed as a result o f moderate grazing pressure, and large areas o f the SPNP are covered with this vegetation.

22. While there i s a general appreciation among the Serbian public for beautiful mountain landscapes and local products such as dried meet and cheeses, there i s little understanding o f the linkages with sustainable land use and biodiversity conservation, or o f the threats to these valued landscapes and products. During the past few decades, development has become linked in peoples’ minds with agricultural intensification and large scale construction, even in unique natural areas, with little emphasis on preserving natural resources or ecological systems and services. This i s reflected for example in the growing problem o f unregulated tourism development, and also in local support for construction o f environmentally damaging facilities such as downhill ski resorts. Introducing more environmentally friendly alternatives can have both direct and indirect benefits for the area’s biodiversity. For example, properly managed extensive livestock husbandry i s a proven tool for maintaining grassland diversity. Organic and other types o f low-impact agriculture can yield direct biodiversity benefits, such as reducing pesticide and fertilizer run-off into sensitive wetlands. However, these approaches usually involve lower production volumes and turnover, and higher per unit production costs. These costs must be compensated by higher sales prices in order to compete. One approach i s to tap premium markets within the EU and elsewhere for environmentally friendly and culturally associated “brands” o f local dairy, meat and other products.

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23. Starting in the mid-1 950s, government policies favoring high-yield, intensive livestock production in large scale Agro-kombinats and cooperative farms began to displace the village- based extensive grazing system. The intensive production was concentrated in low elevation areas year-round, leading to overgrazing there and to the disuse o f many higher elevation pastures. The latter has been aggravated by an overall trend o f out-migration from the area: the sheep population on the mountain has declined from about 200,000 to 5,000 in recent years. The practice o f early mowing has also grown to provide fodder for intensive production. The decline o f traditional agricultural practices has resulted in a number o f negative ecological impacts:

24. Loss of grassland biodiversity: The combination o f over- and under-grazing and early mowing has resulted in invasion o f many mountain grasslands by junipers and other shrubs and the loss or decline o f a number o f economically important species, including alpine and sub- alpine communities o f Poion violaceae and Seslerion coerulantis, and populations o f Gentianella bulgarica, Crocus veluchensis, Lilium jankae, Campanula moesiaca, Thymus vandasii, Hypochoeris maculata ssp. pelivanovicii, Achillea lingulata and others. There i s also a strong impact on some very rare species, many o f which are endemic to the Stara Planina, Serbia or the Carpathian-Balkan region. Examples include Veronica bellidioides, Veronica baumgartenii (Carpathian-Balkan endemic), Veronica balcanica (Balkan endemic), Campanula moesaiaca (Moesian endemic), Campanula kladniana (South Carpathian-Moesian endemic, which is new for Serbian flora) Cerastium alpinum and Campanula alpina. One affected species o f particular social significance i s Gentiana lutea, an important but rare medicinal plant.

25. Changes in peat bog vegetation. There are early signs o f eutrophication in peat bogs as a result o f intensive livestock production. A key indicator for the nitrification i s the appearance o f plant communities such as Rumicetum alpinae which have started to appear in some sections o f the peat bogs. In addition to their intrinsic ecological value, peat bogs play an important role in ecological succession in that they establish favorable conditions for other plant communities, such as Geum coccinei-Deschampsietum caespitosae and Deschampsietum subalpinum. The former i s characterized by a large number o f endemic and rare breeds, such as Geum coccineum, Pseudorchis albida, P. friwaldii, Dactylorhiza cordygera, Saxifraga stellaris, Soldanella alpine and Senecio pancicii, and i s found only in highest mountainous areas o f Serbia on Stara Planina and Shar Planina. The latter appears around water creeks and forms a specific floral community that i s characterized as rare in Serbia.

26. Loss of Autochthonous Animal Breeds. Most o f the locally adapted livestock breeds characteristic o f the Stara Planina region are now rare, endangered or threatened by extinction. Examples include the Mangolitsa pig which has a risk status o f “endangered - maintained” with a current population within the area o f 64 animals. Other local pig breeds that have a “critical risk” status and declining populations include the Morava and the Resava pigs with estimated local populations o f 30 or less. The Pirot’s Zackel sheep, widely known for the production o f Pirot cheese and Pirot carpets, i s also endangered, with an estimated population size o f 200 (only 10 breeding males) and a decreasing population trend. Other breeds whose Serbian populations are a matter for concern include the Vitoroga Zackel sheep, and the Balkan goat, pony and donkey.

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27. In addition to loss o f genetic diversity among domestic species, wild species are also negatively affected by over- and under-utilization o f grasslands and meadows. This includes wild relatives o f crop, forage and medicinal plants and fruits. The diversity o f wild fauna i s also strongly affected because o f the decline o f meadows and pastures. Meadow birds and insects (including numerous butterfly species) decline due to loss o f wild flowers which provide nectar and seeds. In addition, many birds o f prey (e.g., imperial and golden eagles, vultures) rely heavily on the presence o f domestic livestock in high elevation pastures.

Causes of Biodiversity Loss

28. The decline o f agro-biodiversity can be attributed both to incentives to intensify agriculture and livestock production, and barriers faced by producers o f products that can be produced in biodiversity-friendly agricultural systems. For the most part, such products must target premium niche markets as they cannot compete with the products o f intensive cultivation for standard markets. This requires the introduction o f accepted and uniform quality standards for both produce and packaging and, frequently, a corresponding certification program for specialty local products. Small scale production which i s vulnerable to climatic and other disruptions i s another barrier, as it can prevent the establishment o f linkages with distributors and markets that require a reliable stream o f high quality products.

29. There are also shortcomings in policies directly related to nature conservation and biodiversity. For example, the existing draft medium-term Plan for Biodiversity Protection i s nearly exclusively oriented to protection o f threatened species, rather than the development o f an ecosystem approach and integration o f conservation spatial and sectoral plans such as agriculture, infrastructure, forestry and tourism. As in many natural areas, tourism i s regarded as having great potential for economic development in the Stara Planina area. However, there i s a serious risk o f inappropriate tourism development, particularly in the face o f an intensive debate over establishing winter ski resorts and runs in some o f the most biologically important and fragile areas, which the INP has proposed should be classified as Zone 1 (core conservation area). In the absence o f these approved plans it i s virtually impossible to stop uncontrolled residential and tourism development within the park. The INP (in collaboration with other responsible agencies and local government) i s in the process o f developing such a plan, which envisages three internal zones and an external buffer zone. The plan will define the management regimes to be implemented in each o f the zones following international best practice. The INP estimates that less than 10% o f the area o f the SPNP should be classified as Zone 1 where no human activities except for research should be carried out. Around 23% would be defined as category 2 where only limited traditional, bio-diversity friendly activities, including sustainable grazing would be permitted. The rest o f the park area would be classified as Zone 3 where most sustainable farming, agro-processing and eco-tourism activities would be permitted as long as they are not in conflict with the conservation o f the autochthonous species and breeds.

30. Preparation o f a management plan i s necessary but not sufficient, as there i s also need for institutional capacity to implement it. The Serbian Public Enterprise for forest management, Srbijasume, i s responsible for managing the SPNP because it contains large amounts o f both state-owned and privately owned forest. Srbijasume i s primarily a forestry enterprise with an emphasis on timber management. I t has the mandate and interest, but not yet the capacity, for a

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more integrated, ecologically based and participatory approach to management o f the area. For example, it has no capacity or experience in grasslands management. Aside from timber harvesting schedules, i t s main management activity at present i s to monitor and report occurrences o f illegal development or land use (e.g., conversion o f pasture to cropland).

3 1. areas for institutional strengthening include:

With respect to institutional support for agro-biodiversity conservation, some o f the key

improving the capacity o f Advisory Services to provide advice and training to farmers on the breeding and keeping o f locally-adopted animal breeds; on extensive farming in general, including agro-forestry activities; and on business plan development, loan applications, and market opportunities for specialized agricultural products as well as opportunities for business diversification, such as agro-tourism and traditional food processing (although adapted to food safety standards); increasing stakeholder participation in the maintenance o f herd books and providing information on available breeding stock to farmers; mechanisms for providing certification and brand security for specialized niche products that are biodiversity-friendly; improving capacity within Government for the proper identification, characterization and monitoring o f endangered locally adapted breeds and their wild relatives.

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Annex 2: Major Related Projects in Serbia Financed by the Bank: 2002-2005


Support for agricultural policy development Strengthening Payment system procedures and rural development planning Capacity building within the M A F W M Phytosanitary and Veterinary Directorates Alignment o f the Serbian wine sector with the EU acquis communautaire Support for the reform and restructuring o f the management o f agriculture and food laboratories

Donor Timeline European Agency for Ongoing Reconstruction (EAR) European Agency for Ongoing Reconstruction (EAR) European Agency for Ongoing Reconstruction (EAR) European Agency for Ongoing Reconstruction (EAR) European Agency for Ongoing Reconstruction (EAR)

IP/DO ratings scale i s the following: HS (Highly satisfactory), S (Satisfactory), MS (Marginally Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

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Annex 3: Results Framework


PDO Project Outcome Indicators

To enhance the Improved h4AFWM ability to disburse and

'use of Project Output Information

PY 1-4. Ensure quality o f :ompetitiveness o f Serbian agriculture.

3LOBAL OBJECTIVE

track the use o f rural development funds and to evaluate their impact on the agri- food sector;

Improved farmer access to appropriate technology;

To conserve the globally mportant eco-system in the jtara Planina mountainous rea.

~

Expanded areas under ecological management and/or restoration within the

1 Stara Planina Park and surrounding area.

PY 1. Ensure spatial planning i s completed and operational. If not apply additional TA to support process.

PY 3. Evaluate financial and economic impact o f agriculture and non-farm business development activities. If unsuccessful, review with entrepreneurs and business advisors

End-PY4. Provide evaluation

implementation and implementation impact.

PY2. Evaluate progress toward EU compliant RD program. Convene national workshop if progress unsatisfactory

PY3. Evaluate progress toward the establishment o f s competitive applied research and extension system. Convene national workshop if progress unsatisfactory

End-PY4. Provide evaluatior o f project results in strategies and actions plans to Government for assessing need and design o f future

[ investment.

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c NTERMEDIATE ESULTS Zomponent 1: itrengthening Rural Ievelopment Paying iystem)

a) Government's system or agriculturalh-ural levelopment payments i s ransparent and compatible

RESULTS INDICATORS

EU compliant rural development program operational, including management, monitoring and payment institutions and mocedures.

he knowledge and echnology needed for gricultural producers and irocessors to access and nake effective use of the tructural support provided JY the MAFWM

)f project results in strategies md actions plans to 3overnment for assessing ieed and design of future investment.

established within MAFWM, overseen by a democratically appointed multi-stakeholder governing body.

Consultative and result oriented applied research and extension funding systems awarding outcome based contracts and

Use of Intermediate Outcome Monitoring

Annually: confirm progress after implementation o f project activities, and adjust intervention strategy if required

Early PY2. Evaluate effectiveness and transparency of the PA. If inadequate, raise TA support and training program and review policies with PA/MAFWM management

End PY 3. Review PA/MA procedures for EU compliance. If not achieved review policies with MAFWM management.

Annually: confirm progress after implementation o f project activities, and adjust intervention strategy if required

MTR evaluate reform o f extension and amlied

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Component 3: Sustainable land use and !cological management in iPNP)

a) Restoration o f declining invironmentally sustainable and uses in Stara Planina .rea

b) Increased investment in ctivities and enterprises elating to sustainable land ise and agro-biodiversity ctivities idaround Stara 'lanina Nature Park

monitoring their impact

%rea o f abandoned and degraded pasture (ir iriority areas as identified in SPNE nanagement plan) restored to active use foi :ontrolled grazing

SPNP management plan and ecological nonitoring program developed and being mplemented by SPNP manager

ncrease in number and diversity o f RD grants twarded to residents of SPNP municipalities.

research delivery. If successful, appraise shift to zonal competitive contracts. If not, review program with MAFWM management.

At MTR: evaluate establishment o f elected stakeholder representatives. If successful, appraise shift to zonal extension boards. If not, review program with h4AFWM management

At PY3: evaluate progress ir increasing livestock use o f previously abandoned pastures. If not as expected, Government to review and adjust support and incentive measures in consultation with local farmers.

Annually: confirm progress after implementation of project activities, and adjust intervention strategy if required

At mid PY2: Functioning mechanisms for local participation in SPNP management and implementation o f an ecological monitoring system. If not, review progress with IPN and Srbijasume and apply additional TA and kaining if required

4t mid PY3: evaluate xogress on brush

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Management) Project progress and financial reports are initiated and submitted in a timely manner;

Project audits and monitoring reports, and procurement and financial supervision missions report uniformly good results;

Administrative leadership o f implementing team recognized by institutional counterparts.

Beneficiary surveys indicate awareness o f project and overall satisfaction with project activities (mechanisms in place to receive and resolve complaints)

_____

:learing and restoration if grazing in pilot iastures. If not meeting argets, review reasons Nith Srbijasume, ivestock owners and jairies and adjust support ind incentives as ippropriate. .

MTR. review progress with targeted rural jevelopment grant jelivery to SPNP.

[f number and diversity of RD grants does not increase at expected rate, MAFWM will investigate reasons for low uptake together with local Zommunities and propose measures to adjust the approach (better targeted zxtension and training, stronger incentives, removal o f barriers, etc.)

PY 1. Implementing team i s fulfilling procurement and financial management responsibilities. If not, applj corrective measures.

PY2. Ensure timely preparation o f mid-term review inputs.

PY4. Ensure timely transfer o f project employed consultants to various project supported institutions before project closure.

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Annex 4: Detailed Project Description


1. The project combines institutional capacity building, knowledge generation and dissemination, and direct investment to achieve several important objectives: (i) to increase the efficiency and transparency o f use o f public funds (structural support for agriculture and rural development) through EU pre-accession and, eventually, CAP funding mechanisms; (ii) to enhance the competitiveness o f Serbian agricultural products in local, regional and international (particularly EU) markets, thereby increasing rural incomes and strengthening rural economies; and (iii) to preserve biodiversity in natural and agri-ecosystems and promote sustainable land use through reinforcement o f traditional agriculture and cultural practices in ecologically fragile areas.

2. Objective (iii) applies particularly to the mountainous Stara Planina area o f southern Serbia, an area known for i t s r ich biological and geological diversity as well as i t s cultural heritage. It i s also the poorest region o f Serbia, and has been undergoing economic decline, population loss and ecological degradation in recent years. The GEF-financed activities, which are targeted primarily to conserving biodiversity through sustainable land use in the agro- ecosystems and production landscapes o f the Stara Planina Nature Park, were initially proposed as a separate operation (Serbia and Montenegro, In-situ Agro-biodiversity Project, Pipeline Entry and PDF-B approval August 9, 2005). They have now been integrated with IBRD-financed activities into a fully blended project.

3. The overall strategy for achieving these important objectives i s to improve the efficiency, effectiveness and impact o f the Government o f Serbia’s (GoS) support for agriculture and rural development. Like many countries, Serbia has in place a variety o f subsidy and support programs aimed at assisting farmers and residents o f rural areas to improve their productivity, incomes and living conditions. Consistent with European Union (EU) policies and international trends, the GoS i s in the process o f shifting this support from traditional commodity-based subsidies to income support and structural support for investment in improved agricultural and agro-processing technology, improved land care and environmental management, and diversification o f rural economies. This transition requires the development o f new systems, new knowledge and investment capital on the part o f the Government agencies which provide the support and on the part o f the target beneficiaries. The project aims to support strategic public investments to help meet these needs.

4. In the Stara Planina region, the traditional economic system o f extensive livestock grazing and small-scale (garden) farming effectively maintained the biologically r ich landscape mosaic o f forest and natural pasture. This economic system, however, has declined precipitously over the past few decades as a result o f government policies favoring intensive cultivation and livestock production as well as declining services and living conditions. With the near disappearance o f the locally adapted livestock that once used the high elevation pastures for seasonal grazing, brush encroachment and invasion by exotic plants has decreased both the economic and ecological value o f these areas. At the same time, lower elevation areas have

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become overgrazed and degraded through excessive and poorly managed use. In this region, the project has two complimentary objectives: to restore and develop economically viable activities in order to improve local livelihoods and stem the tide o f out-migration, and to support biodiversity conservation and sustainable use in accordance with the goals o f the park. The project will aim to achieve these objectives by developing incentives and capacity for sustainable land use management and in-situ conservation o f agro-biodiversity, The particular emphasis in this area will therefore be on developing and marketing o f environmentally friendly niche products based on indigenous livestock varieties grazing in mountain meadows, and on developing environmentally sustainable rural tourism as a supplementary source o f income for the local population. The project may also support the development o f enterprises based on environmentally sustainable natural resource use to complement and enhance the viability o f these main economic activities.

Component 1: Strengthening the Agriculture and Rural Development Support System (EUR 4.4 million, of which EUR 4.4 million from Bank)

5. The Government o f Serbia provides several types o f support for the agriculture and rural development sector, totaling about € 200 mi l l ion in 2006. Of this amount, over € 120 mi l l ion was for structural support including € 28 mi l l ion in the form o f matching grants for which individuals can apply, based on certain eligibility criteria. In the 2006 Rural Development Grant program, these criteria reflect priorities that are consistent with those o f Pillar 2 o f the EU Common Agricultural Policy (CAP). The RD Grant program also makes special provisions to increase the accessibility o f these funds to farmers in marginalized or “Less Favored Areas,” which include areas o f high elevation, poor soil quality and high erosion or flood risk, and areas for nature protection. Forty nine municipalities in Serbia are classified as marginalized areas, including three o f the four municipalities which comprise the SPNP. Additional structural payments included € 43 mi l l ion in early retirement packages and € 53 mi l l ion in subsidized short and medium term loans.

6. The value o f this potentially very important structural support program for agriculture and rural development i s undermined by a weak system for targeting and administration o f the grants. Because the emphasis in the past has been on price and production subsidies, the grants scheme i s relatively new and undeveloped. There i s currently inadequate strategic or operational guidance to ensure that the funds are allocated to their highest value and most efficient use, too few staff with too l i t t le training, insufficient transparency in the process o f grant approval and distribution, limited engagement o f rural communities in grant processes and no mechanisms in place to track the effectiveness or impact o f the grants in relation to the sectoral objectives o f improving competitiveness o f agricultural products or strengthening rural economies and communities. The fiduciary aspects o f the paying system are also weak. In addition to l imit ing the impact o f the grants already being provided by the GoS, these systemic shortcomings mean that the grants scheme does not currently meet the requirements for an EU-certified paying system, and would not be able to receive or absorb the EU pre-accession funds that GoS anticipates being eligible for within a few years.

7. This component aims to help address these constraints by building o f f the work o f the EAR SRDPPS to establish an efficient, transparent and EU-certifiable national rural

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development support program and paying system, and to increase the availability o f funds for certain purposes. It will achieve this through two subcomponents:

Strengthening the system for providing rural development support:

8. The objectives o f this subcomponent include building capacity for managing and administering nationally financed rural development investment grants, thereby improving the accessibility and transparency o f granting processes; and monitoring and evaluating the distribution, use and impact o f investment grants. This component will focus on technical aspects, complementing and building of f the recommendations and fiduciary systems and manuals under preparation by the ongoing European Agency for Reconstruction (EAR) Support to a Rural Development Programming and Payment System (SRDPPS) project which i s helping to prepare a rural development plan and establish an EU-compatible fiduciary system. The project will:

support the publication o f the operational manuals and dissemination o f information concerning the rural development grants program, providing clear and transparent criteria and procedures for the submission o f grant applications, their review and approval, disbursement o f funds, and monitoring the use and impacts o f the funds with particular reference to the objectives o f the GoS Agricultural Development Strategy and Rural Development Plan, the latter scheduled for completion in October 2007 with SRDPPS support.

0 strengthen the M A F W M Payment system, Managing Authority and Program Monitoring Committee responsible for rural development grant administration through payment systems and institutional development and by training staff. Support will be provided to strengthen the nascent rural development program Managing Authority and Program Monitoring Committee within the M A F W M to achieve EU compliance in rural development planning and management. The project wi l l assist the Payment system to develop software and procedures for national grant administration including the establishment o f an EU-equivalent IACS. Using short term national and international consultants, the project wi l l provide training for the Management Authority staff in both procedural/administrative and technical aspects. M A F W M I T services wil l be strengthened and Inspection Services wi l l be provided with basic equipment and training to bring grant on-the-spot control to EU levels. In PY3, the project wi l l assist the Managing Authority to review i t s rural development program and prepare an updated IPA-RD compliant rural development plan.

Component 2: Building Knowledge and Capacity o f Agricultural Producers and Processors (EUR 7.4 million, of which EUR 7.4 million from Bank)

9. This component wi l l help develop and disseminate the knowledge and technology that Serbian agricultural producers and processors need. The GoS currently supports agricultural research and extension through a system o f partially competitively awarded contracts. The process for determining research priorities, however, i s weak and i s mainly focused on traditional agricultural issues and technologies (e.g., developing more productive crop and

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livestock varieties), and most o f the research and extension grants are awarded to official research institutes and agricultural stations, which in many cases are under-staffed, under- resourced and out-dated.

10. In the EU, extension services are seen within a wider rural development agenda and are increasingly expected to address natural resource and environment management and the non agricultural needs o f increasingly diversified rural communities with a view to maintaining productivity in rural areas, minimizing negative environmental externalities and ensuring a basis for future productivity and improved quality o f rural life. E C Regulation 1782-2003 states that “it i s necessary that Member States establish a comprehensive system offering advice to commercial farms. The farm advisory system should help farmers to become more aware o f material flows and on-farm processes relating to the environment, food safety, animal health and welfare without in any way affecting their obligation and responsibility to respect those standards”. I t further states that “the advisory activity shall cover at least the statutory management requirements and the good agricultural and environmental requirements” o f the EU. EC Directive 1698-2005 makes provision for public and private delivery o f extension services, but limits government support to advisory services to 80% o f cost and the maximum eligible amount to EUR 1,500. In most EU countries, extension delivery i s now a pluralistic m i x o f public and private services with extension providers typically financed by 60-70 percent from public funds and the balance paid privately.

11. This component will build upon and strengthen the existing GoS system, while introducing the core elements o f EU extension systems o f pluralism, competition and public- private financing, to help ensure that the applied research and extension meet the pressing needs o f farmers and agro-processors seeking to operate and compete in the new market environment. This includes broadening the range applied research and extension topics beyond agricultural production technology, to include aspects such as agricultural processing, packaging, marketing, business and financial planning, and economic, social and farming systems analysis. One important aspect, to be supported in part with GEF funds, i s environmentally sustainable practices, integrated pestlcrop management, production for organic and other niche markets, extensive livestock breeding and husbandry, pasture management, agro-forestry, soil conservation, effluent reduction, etc.). There i s also an urgent need for capacity building for those interested in becoming involved with rural tourism. Another important objective o f the component i s to expand and diversify the pool o f eligible service providers, both by bringing in NGOs, private companies, associations and private individuals to supplement the research institutions and agricultural stations that traditionally receive these contracts and will be reformed under the project, and by strengthening local sk i l ls and capacity in the less traditional knowledge areas. Importantly, the project would also strengthen systems for democratic stakeholder representation in applied research and extension priority setting and management including the establishment o f elected farmer Committees at Okmg level and a national Applied Research and Extension Council having mostly elected farming and agro-industry stakeholder membership.

12. The component will support:

(a) Improved Agricultural Extension Delivery

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(i) Strengthening of MFWM capacity: including capacity building o f staff within the MAFWM DRDES to administer both the applied research and extension programs14, including setting extension policy and adopting an Agricultural Extension Strategy in partnership with stakeholder representatives; awarding and paying contracts; and monitoring contract implementation and results. This Division will be guided by an elected multi-sectoral Applied Research and Extension Council, which will approve the annual extension and applied research work program and budget. Both the Council and the staff o f the Division will receive training and technical support to increase their knowledge and skills for optimal performance. Additional project inputs would include office and IT equipment and vehicles and support for program monitoring and evaluation. Long term national consultants would fill specific technical gaps in the Division. The MAFWM would contract the ISAA to act as a National Coordinator for Agricultural Extension and Applied Research, preparing the draft Agricultural Extension and Applied Research Strategy; leading the development o f extension modules; working with Extension Service Providers to prepare draft contracts; managing the contracts with Extension Service Providers; organizing the training and qualification o f extension workers; running an expanded Agricultural Market Information Service (STIPS) and farming systems analysis program and providing advice and information through the national media and web-based information services. The f i rst multi-annual extension strategy will include the following modules: Farm Management; Arable Crops; Horticulture; Grazing Livestock; Intensive Livestock; and Farm Diversification. Each module will comprise the following elements:

a program for knowledge acquisition, typically including (i) cooperation and contracts with national research institutions; (ii) cooperation and contacts with international research institutions, extension services and information services and (iii) applied research and demonstration; a program for development o f extension materials, such as: books, brochures and leaflets, posters, newspaper and magazine articles, TV and radio programs, videos and Powerpoint@ presentations and worksheets and spreadsheet templates, all o f which would be available in hard copy and on the Web; a program for training o f extension workers in relevant knowledge and in use o f the extension materials; a program o f extension delivery to farmers through al l appropriate means, such as: group meetings, farm visits, field demonstrations, mass media, literature distribution and presentations at agricultural fairs; and a program o f monitoring, evaluation and farmer feedback to assess the real impact o f the module in increasing farm profitability, and to ensure its continuing relevance to the farming community.

(ii) Incremental funding for contracts for extension/advisory service delivery: the project would provide up to € 1.3 mi l l ion o f incremental fbnding annually for co-financed

Based on a planned transfer responsibility for applied agricultural research from the Ministry o f Science to 14

MAFWM

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contracts for extension services, to be competitively awarded to local service providers, including existing agricultural stations, academic institutions (e.g., agricultural schools), NGOs, private companies and private individuals. Contractors will develop suitable informational materials and provide information and advice on technologies and methodologies emerging from the applied research program, including a particular emphasis on areas that are important for enhancing competitiveness in the modern marketplace, such as international food safety and quality standards, cost cutting through improved efficiency, accessing organic and other premium and niche markets, organizing production to obtain advantages o f scale, and building effective linkages between producers and processors. They will also advise and assist clients in the preparation o f proposals and business plans needed to access the GoS structural support funds and other sources o f financing. In view o f the limited technical and business capacity in many rural areas, the project will also support short- term, competency-based training to extension contractors to enhance their abilities to reach, advise and assist clients. The Government has initiated the process for the privatization o f Agriculture Stations. In the process o f supporting the emergence o f a network o f private, professional, competitive extension service providers, the project will support the restructuring o f the Agricultural Stations. The project would finance capacity building and change management processes that would lead to (i) the transference o f five laboratories and associated staff into the national laboratory network; and (ii) the establishment o f qualified private sector extension and animal breeding advisors, equipped through the privatization o f Agriculture Station moveable assets, supplemented by project grants. Agricultural Committees comprised o f elected local stakeholders would oversee the privatization process.

(b) Improve Applied Research Delivery

Capacity Building for Applied Research: Serbia has a strong history o f successful agriculture and livestock research, however, most research has focused on genetic improvement and been conducted at agricultural faculties and research institutes and stations, with l i t t le off-station applied research. The project will build scientific capacity to support applied research, in particular the establishment o f multi-locational and multi- factorial research trials testing improved and newly introduced plant varieties and plant and animal management technologies and systems. This will include training in applied research management and statistical analysis, farm financial management and effective communication o f research results. The project will also provide study tours for scientists, DRDES staff and members o f the Applied Research and Extension Committee to experience applied research planning and management systems in neighboring countries.

(ii) Incremental funding for contracts for applied research: the project would provide up to € 0.7 mi l l ion annually for financing applied research grants. Likely areas for project support include improvement o f crops and livestock (taking into account not only straight productivity but also production costs and targeting for specific markets), integrated crop management, mixed farming systems, practical improvements in production, storage, processing and packaging technologies, food safety, environmental management, etc. Applied research priorities would be identified through farmer and agro-industry focus group discussions, farming systems and socio-economic analysis and through the

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participation o f elected farmer representatives on research and extension committees and council. All applied research projects would be competitively tendered with bids evaluated by peer reviewers and assessed and ranked by a technical panel, with contracts awarded by the National Applied Research and Extension Council. The DRDES within the MAFWM would manage the bidding and contracting process and monitor and evaluate applied research implementation and outcomes.

(c) Development o f stakeholder representation:

13. The MAFWM DRDES will be supervised by an Applied Research and Extension Council including representatives o f the MAFWM, MSEP , civil society and target beneficiaries (agricultural producers and processors). The Council will provide strategic direction to the applied research and extension program, approve annual work plans and budgets, build national and international relations and contract the independent assessment o f program impact. The project wil l support the establishment o f a system that ensures democratic stakeholder representation. The project will build stakeholder capacity to establish research and extension priorities and oversee their implementation. Council members will receive a modest project financed stipend.

14. The project would assist government to support the development o f representative farmer organizations Women play an important role in Serbian agriculture through farm management and agriculture labor and in adding value to raw commodities, the latter being a particularly important income source for poorer households. The project would ensure that women farmers and representatives o f women’s farming organizations are fairly represented on any stakeholder management bodies.

Component 3: Management of the Stara Planina Nature Park (EUR 3.3 million, of which EUR 2.8 million - US$3.8 million equivalent -from GEF and EUR 0.5 million from Local Communities)

15. The GoS established the Stara Planina Nature Park in 1997 to help preserve the unique natural and cultural values o f the area, but the declaration o f a protected area i s not enough to reverse the ongoing ecological decline. I t will require a combination o f measures to bring back the traditional land uses to the extent possible, and well-informed, active ecological management. Component 2 will, inter alia, support research, extensiodadvisory services aimed at giving residents o f the SPNP the knowledge, incentives and means to adopt environmentally sustainable land use and agricultural production and processing practices. It i s not possible, however, to simply turn back the clock and re-establish the physical, cultural and economic landscape o f past centuries. Variations on traditional practices need to be developed which are viable in the modern socio-economic context, including developing and marketing high-value niche agricultural products, handicrafts and rural tourism offers based on the ecological, cultural and aesthetic values o f the Stara Planina area.

16. Component 3 will compliment the investment and advisory support under Component 2 by providing targeted technical and material assistance to Srbijasume and local communities to improve both the management o f the SPNP and the capacity to use its natural resources in environmentally sustainable and profitable ways.

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17. In the Stara Planina area € 1.8 mi l l ion (US$ 2.4 million) (€1.3 mi l l ion o f GEF funds and €0.5 mi l l ion o f community contribution) will be provided as competitive grants to support the global objectives o f promoting sustainable land use (particularly well-managed extensive grazing), ecological restoration, sustainable rural tourism and related enterprises, and preservation o f natural and agro-biodiversity, including using the LEADER approach where appropriate. This will supplement the limited funds available from GoS for these purposes (in 2005, approximately €103,000 equivalent went to farmers in the 4 Stara Planina municipalities). The GEF investment grants will fund up to and including 100% o f investment costs, to encourage recipients to undertake activities with a high public goods element (such as ecological restoration) or higher than usual financial risk.

18. The Stara Planina Rural and Biodiversity Conservation Grant Manual, to be developed by the Stara Planina Advisory Committee and adopted by MAFWM, will determine the eligible investments (measure) and beneficiary co-financing requirements. The Manual will be accompanied by a Beneficiary Guide and Public Procurement Guide that will describe the purpose o f the measures, the criteria for project selection, eligible and non-eligible expenditures, investment financial feasibility criteria, application, evaluation, payment and procurement procedures and control and inspection o f the grant. These procedures will be subject to appraisal by Bank fiduciary staff.

19. The Institute for Urban Planning and Architecture has prepared a Spatial Plan for the Tourist Region and Stara Planina Nature Park, which has been accepted by Srbijasume and approved by the Institute for Nature Protection and will soon be approved by Government. The plan divides the Nature Park into zones with specific management objectives including a core conservation zone (Zone l), a buffer zone (Zone 2) and a transitiodeconomic zone (Zone 3). Project activities will focus on Zones 2 and 3, where substantial portions o f the land are privately owned, and management objectives focus on maintaining biodiversity within agricultural landscapes and sustainable use o f natural resources. The project will provide technical assistance, training, equipment and civ i l works (rehabilitation) to help Srbijasume prepare and implement a detailed management plan and annual operational plans for SPNP; involve local stakeholders in park management and develop partnerships with local landowners and authorities; clear invasive plants in selected high elevation pastures; rehabilitate selected access roads needed for park management purposes, and develop small scale infrastructure to facilitate sustainable tourism. Ecological restoration will be undertaken in three pi lot high elevation pastures which have become degraded through under-utilization owing to their remoteness coupled with declining livestock populations in the area.

20. In addition to labor-based removal o f woody invasive plants, the project will provide grants to local livestock owners to bring their animals back to graze in these areas during the summer season, under controlled and monitored conditions. Incentives will include support for collection, processing and marketing o f dairy products from these flocks, accommodation and facilities to enable flocks and shepherds to remain in the high pastures during the grazing season, and (where needed) direct payment for grazing services.

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2 1. An important part o f the strategy for conservation and sustainable development o f the SPNP i s to encourage and assist local residents and municipalities to develop ecologically friendly agricultural products and rural tourism. Most o f the technical and financial support for this purpose will be provided through Component2 and the competitive grants scheme. However, in view o f the specialized and innovative nature o f the economic activities which the project i s intended to support in the SPNP (e.g., development o f certified and branded niche products, tourism enterprises), there i s a need for specially targeted and sustained technical assistance to help local residents identify and take advantage o f these types o f economic opportunities. This Component will therefore support selected consultant services in target areas such as rural tourism, organic production and certification, product branding, breeding and maintenance o f indigenous livestock species, etc. These consultants will be engaged directly by MAFWM, complimenting the more general advisory services being provided country-wide under Component 2. They will work closely with Srbijasume, local Municipalities and local tourism associations, the multi-stakeholder Regional Association for the Development o f Stara Planina, and NGOs active in environmental management and sustainable rural development in the area.

22. Given the length o f time it takes to build local capacity and establish and develop an area as a tourism destination, it is also important to begin investments in key tourism infrastructure as soon as possible. Therefore particular measure under the competitive grants scheme will support the development o f a rural tourism product in three pilot villages. This includes rehabilitation of some public infrastructure and assistance to homeowners to do small scale renovations o f their homes to create one-star tourist accommodations. The project will provide materials for these renovations while homeowners will provide the labor (an arrangement which will represent on average a 5050 split o f the renovation costs).

23. Another important element o f the global objective i s the preservation o f autochthonous livestock varieties, which represent an important genetic (agro-biodiversity) heritage. The project will supplement ongoing MAFWM (DGR) programs providing financial incentives to farmers to maintain and breed autochthonous livestock varieties. These include grants to co- finance purchase o f animals to build up purebred herds, and a “fostering” program in which the Ministry contracts with farmers to maintain Ministry-owned animals in exchange for ownership o f the progeny o f those animals. The competitive grants scheme will also co-finance related farmer investments such as expanding or improving stables, fencing, etc. (project providing materials; farmers providing labor). Project support for these activities will fol low GoS and regional and international strategies for the conservation o f locally adapted, indigenous breeds.

24. The SPNP i s the Serbian portion o f a much larger trans-boundary area o f international significance. There i s a proposal to establish a trans-boundary Stara Planina Biosphere Reserve, including establishment o f a protected area on the Bulgarian side o f the border. The project will compliment ongoing government and N G O (e.g., Regional Environment Center) programs to strengthen trans-boundary cooperation, for example supporting Serbian participation in the Crossborder Euro-region Association and the development and promotion o f a joint Stara Planina logo.

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25. In addition to the monitoring and evaluation (M&E) o f overall project implementation and impacts, there will be a specific M&E plan relating to the global objectives. This will be implemented by MAFWM jointly with Srbijasume. The M&E plan will include use o f the GEF Tracking Tool for SP-2 (biodiversity conservation outside o f Protected Areas). Although the SPNP i s a designated PA, falling within the I U C N Category V15 , the focus on the project i s on conservation in the productiodsustainable use areas o f the park, rather than the core conservation areas. Therefore, using the Tracking Tool for SP-1 (sustainability o f P A systems) would not be appropriate given the objectives o f the project.

Component 4: Project Management and Coordination (EUR 1.1 million, of which EUR 0.6 million from the Bank and EUR 0.5 million - US$ 0.7 million equivalent - from GEF)

26. The project will be managed as an integral program o f MAFWM, without the establishment o f an independent project implementation unit. This component will support incremental costs o f consultant services, training, equipment and operations to facilitate project implementation (including procurement and financial management), monitoring and evaluation and reporting. This will include a Project Implementation Team within the MAFWM and a technical support team based in the Stara Planina area to strengthen implementation o f the GEF- financed activities, particularly under Component 3. Day-today implementation o f the project sub-components will be the responsibility o f the associated MAFWM Divisions, Directorates and Sectors and Srbijasume in the case o f for the SPNP program.

Is I U C N Category V Protected Area = Protected Landscape (or Seascape), defined as area o f land where the interaction o f people and nature over time has produced an area o f distinct character with significant aesthetic, ecological and/or cultural value, and often with high biological diversity. Safeguarding the integrity of this traditional interaction is vi tal t o the protection, maintenance and evolution o f such an area

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Annex 5: Project Costs


Project Cost by Component Strengthening Rural Development Program Implementation Building Agricultural Knowledge and Capacity 1. Agricultural Extension Service

Financing Plan

Local Costs Foreign Costs Total (EUR million) (EUR million) (EUR million)

1.96 2.05 4.00

4.85 2.42 7.27

3.19 1.65 4.84

The project would involve an IBRD Loan o f EUR 12.50 million, a GEF grant o f US$ 4.5 million (EUR 3.33 million equivalent), and a Local Community contribution o f EUR 0.46.

Delivery 2. Applied Agricultural Research 1.51 0.67 2.18

Note 1 : In the PAD Main text, and Annex 4, Contingencies are included in the Component costs.

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Annex 6: Implementation Arrangements


1. The duration o f the project i s 4 years, with completion expected at end-September 201 1. The project would be managed day-to-day by a Project Implementation Team (team) at the MAFWM under the overall direction o f a MAFWM Projects Manager. The team would be responsible for day-to-day management o f the planning and budgeting o f project activities, procurement including preparation o f procurement plans, preparation o f progress and project management reports, staff management and project monitoring and evaluation, which will be out-sourced. The project will be managed by a project manager, who has overall responsible for al l aspects o f the project. The team would also include a senior finance specialist, a procurement specialist and an office managerhecretary. In addition, a small GEF-financed technical support team (comprised o f a team leader, administrative assistant, agro-environment specialist and rural tourism specialist) will be administratively attached to the Center team but based in the Stara Planina region to provide ongoing technical support to Srbijasume, Municipalities and local communities). The implementing group will work with (a) the MAFWM Rural Development Managing Authority and Monitoring Committee; (b) the MAFWM Payment system; (c) the MAFWM Directorate for Extension and Applied Research; (d) the Institute for Science Application in Agriculture; (e) Srbijasume; (0 the Institute for Nature Protection and (0 Stara Planina Municipalities and local Associations and NGOs, Farmer and agri-business representatives at Okrug and national level would have oversight on the use o f applied research and extension funds. A Stara Planina Advisory Committee, comprising representatives o f c iv i l society, municipalities, Srbijasume and MAFWM in the SPNP area will allocate rural development grant funds through transparent and competitive processes.

2. The project monitoring and evaluation (M&E) program would be contracted to an outside agency. In pursuing its major developmental objectives, the project would target participation in the rural development, extension and community led programs. The Stara Planina Rural and Biodiversity Conservation Grant Scheme would be measured through the number o f farmers, businesses and municipalities receiving grant support and the diversity and value o f measures applied. The applied research program would be measured through the benefit and uptake o f technologies developed and demonstrated to farmers. MAFWM management and extension staff capacity would be measured against j ob “capacity profiles” using competency based training programs, with pre and post course testing and on-going evaluation o f the retention and adoption o f skil ls taught.

3. Baseline data would be collected at the beginning o f the implementation o f each subcomponent. The follow-up data collection would be largely secured through compulsory (regulatory) reporting to MAFWM databases developed by the project and through the implementation o f competency-based training programs. Progress would be monitored through regular reporting by the M&E contractor through the project implementing team and through project supervision missions. I t i s envisaged that reporting under the STAR project would be done through quarterly progress reports using agreed formats.

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4. Project sub-components would be implemented by the responsible M A F W M department or Institute. The rural development program would be implemented by the Rural Development Managing Authority within the M A F W M Sector for Agriculture and Rural Development overseen by a Program Monitoring Committee, including representatives o f government and i t s rural economic and social partners, supported by a small, permanent Secretariat. The applied research and extension program wi l l be managed by the Institute for Science Application for Agriculture, which would be contracted by the M A F W M and supported by project financed specialists. Applied research and extension programs would be implemented by contracted entities including private extension providers, NGOs and educational and research institutes. The management o f the Component “Sustainable Land U s e and Ecological Management o f the Stara Planina Nature Park” will be implemented by a strengthened DGR and by Srbijasume, supported by the local technical support team and by the ICN. The Stara Planina Rural and Biodiversity Conservation Grant Scheme wi l l be managed by the Stara Planina Advisory Committee.

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Annex 7: Financial Management and Disbursement Arrangements


Risk Mitigation Measures

Risks described on the left inhibit use o f country systems. Risk imposed by the SA1 not being established yet will be mitigated by using private auditor acceptable to the Bank for the project audit. N o reliance will be placed on internal audit either, and internal controls within the Government will serve as starting point supplemented by instituting additional internal controls for the project in order to create robust system o f internal controls. Designated Account will be opened in a commercial bank acceptable to the Bank. Stand alone accounting system will be used for project accounting and reporting.

The risk will be mitigated by instituting additional key controls to be applied during implementation o f the project. In addition, an action plan has been prepared, setting out clearly next steps that should be taken and time frame for their implementation. One of the principal actions described in the action plan i s preparation o f a financial manual. Draft FM Manual has been prepared prior to negotiation.

Summary of the Financial Management Assessment

Risk Rating afler

mitigation Measures

M

M

Financial Risk Analysis

1. Risk analysis. The overall financial management risk for the project i s substantial before mitigation measures, and with adequate mitigation measures agreed, the financial management residual risk i s rated moderate. Table below summarizes the financial management assessment and risk ratings o f this project:

Risk

Inherent Risk

Country level. Perceived corruption in the country i s high. State Audit Institution (SAI) has not been established yet, although the Law on SA1 has been passed in November 2005. Internal audit still has relatively low capacity and need to gain experience. Time bound plan for modernizing Treasury still has to be fully implemented in order to accomplish measurable and specific results. Internal controls are not always applied in practice. Entip level. System o f internal controls within the MAFWM i s assessed to need strengthening in order to create adequate system of controls over use of project funds (see internal controls section).

Project level. Software to be used for project accounting needs to be acquired. Internal controls and procedures for the project need to be strengthened further. Adequate controls and procedures need to be established for the competitive grant mechanism.

Risk Rating

S

S

S I M

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authorizations and approvals needed. Appropriate internal control procedures to be applied for the grant facility are to be described in Grant Manual which i s to be prepared and adopted prior to effectiveness o f the project. Application in practice o f the controls and procedures will be verified by the Bank’s supervision.

Overall Inherent Risk

Control Risk

1. Budgeting and Planning. Capacity for budgeting and planning i s adequate, and there i s experience in this respect. Care should be taken that variances o f actual versus budgeted figures are monitored on regular basis and appropriately analyzed and followed up. 2. Accounting. Software to be used for project accounting needs to be acquired.

3. Internal controls need further strengthening in order to ensure that project funds are used for intended purposes

4. Fundsflow

5. Financial reporting. Software to be used for project accounting and reporting needs to be acquired

6. Auditing. SA1 has not been established.

7. Staflng. F M hnction for the project i s appropriately staffed. Financial Officer for the project has adequate experience and gualifications.

Overall Control Risk

Overall FM Risk

S

S

S

S

M

S

S

M

S

S

The FC will document the follow up and corrective actions taken for any variances between budgeted and actual figures. The above wil l be verified by the Bank’s FMS during supervision.

The acquisition o f accounting software has been initiated prior to negotiation. This process wil l be monitored until i t s completion by the Bank’s FMS. Software which i s going to be purchased wil l be acceptable to the Bank with respect to reliability o f financial information and generation o f IFRs in the agreed format o f reporting. Additional internal controls to be applied for the project have been instituted. Those are described in Manual prepared for the project. Application o f controls in practice wi l l be verified during Bank’s supervision. No additional mitigation measures needed. Designated Account wi l l be opened in a commercial bank acceptable to the Bank. The acquisition o f accounting software has been initiated prior to negotiation. This process wil l be monitored until i t s completion by the Bank’s FMS. Software which i s going to be purchased wi l l be acceptable to the Bank with respect to reliability o f financial information and generation o f IFRs in the aueed format o f reDortiniz. Private audit firm acceptable to the Bank will perform audit o f the project. N o additional mitigation measures needed.

M

M

M

M

M

M

M

M

M

M

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2. Country Issues. The Bank’s recent assessment o f the PFM in the PEFA report i s that the credibility o f the budget, the comprehensiveness and transparency, and the policy-based budgeting are performing relatively well, as measured through the PEFA indicators. Variances between original budgets and outturns are small while arrears still are significant. Internal audit i s now starting to function, the capacity in terms o f staff assigned i s low and the Public Internal Financial Control (PIFC) environment that includes the internal audit needs to be developed in l ine with the EU requirements. Annual financial statements have not been published since 2001 and have not been externally audited as no supreme audit institution (SAI) i s yet in place although the law to establish it was approved in November 2005. The possibility o f hiring a private sector auditor to audit the government’s financial statements while waiting for the SA1 to be established has also not materialized yet. The lack o f a SA1 as well as the fact that the internal audit i s only just starting, point clearly to weaknesses in post-control over budget execution to ensure integrity and enhance efficiency in the use o f government funds. This i s a serious problem for the credibility o f the public spending and may in part be an explanation for the high perception o f corruption because an important part o f the “checks and balances” in the public financial management i s missing.

3. Based on the PEFA assessment the risk for the Bank portfolio i s assessed to be significant to high. Although the aim i s that new project implementation units are kept within the organizational hierarchy o f the implementing agencies, the considerable risk that the current lack o f a functioning external audit i s having, effectively makes use o f country systems in financial management impossible for the time being. The PEFA framework and the expected discussions between the government and donors on the remaining issues would provide for the continuation o f the PFM reform.

4. The weaknesses described above inhibit use o f country system. Individual implementation units for each investment project i s used (traditional PIU model), located within the relevant l ine ministries or project beneficiaries, to mitigate some o f the incremental risks.

5. Strengths. Certain level o f experience and knowledge o f the World Bank procedures was acquired during implementation o f the PPF. In addition, the project i s characterized by relatively low complexity of i t s design for implementation.

6. Weaknesses and Action Plan. Principal weaknesses observed related to the fact that accounting software was not in place at the moment o f appraisal and that system o f internal controls needed strengthening. In addition, clear procedures and controls to be applied relating to the competitive grant mechanism need to be defined.

7. In order to remedy the above weaknesses an action plan was agreed, which included financial management conditions o f negotiation. The conditions have been met, namely acquisition o f acceptable software to be used for project accounting has been initiated and draft financial management manual was prepared.

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Implementing Entity

8. MAFWM, through the Fiduciary Center (FC) which i s to be mandated with a specific assignment o f coordinating and managing the project, will act as the overall implementing agency for the project. The project will be managed by a project manager, who has overall responsible for all aspects o f the project. The F C team would also include a project coordinator, a project administrator, a financial specialist who will be assigned with the financial management function o f the project and a procurement specialist. The financial management specialist has adequate qualifications and prior experience and knowledge o f the World Bank procedures acquired during implementation o f the PPF.

Planning and Budgeting

9. The MAFWM has sufficient capacity for planning and budgeting in terms o f human resources, availability o f quality information and IT system. Staff has experience in budget preparation. Care should be taken that variances o f actual versus budgeted figures are monitored on regular basis and appropriately analyzed and corrective actions taken.

Accounting

10. Stafjng. Financial management function o f the project i s staffed with an experienced professional previously in charge o f the financial management in the course o f implementation o f the PPF.

11. Terms o f Reference for the financial management staff with detailed descriptions o f duties make part o f the Financial Management Manual. The implementing entity i s responsible for the project’s financial management arrangements and i t s accountant will provide supplementary expertise and time as will be required for the specificity o f World Bank procedures for accounting, reporting, disbursement, and as necessary, procurement procedures.

12. Information Systems. The F C within the MAFWM initiated acquisition o f acceptable software that will be used for project accounting. The software will provide reliable financial information and generate quarterly financial reports to be submitted to the Bank. Accounting records in the software should be up to date and each transaction should be accounted for at the latest eight days after i t s occurrence. Financial Management officer will be provided with guidance by the Bank’s FMS with respect to using the software once it has been acquired.

13. Accounting Policies and Procedures-The accounting books and records are maintained on cash basis with additional information on signed contracts. Project financial statements will be presented in EURO. The entity implementing the project applies in practice a set o f accounting policies and procedures which are available in written documents such as manuals and rulebooks.

14. policies used for Budget agencies) will include the following major assumptions:

- Additional accounting policies to be applied on the project (besides standard accounting

cash accounting as the basis for recording transactions;

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- - -

reporting should be done in EURO (reporting currency); consolidated IFRs should be prepared for al l donors funds and al l components; counterpart funds should be reflected in the financial reports.

Internal controls and internal audit

15. The latest update o f the CFAA found that the internal controls in budget users are weak. Finding o f both external audit and internal audit conclude that principal weaknesses relate to deficiencies in internal controls. There i s no appropriate segregation o f duties or authorization path. Controls checks are not performed on regular basis.

16. Robust system o f internal controls and procedures have been instituted for the project. The controls and procedures to be applied are described in the Financial Operations Manual. Key internal controls to be applied for the project include:

- appropriate authorizations and approvals; - segregation o f duties; - -

different persons being responsible for different phases o f transaction; reconciliations between records and actual balances, as well as with third parties should be performed on regular basis; complete original documentation should exist to support project transactions. -

17. When an invoice i s received by the FC, it i s immediately given to the project financial management specialist who registers the invoice in a simple log f i l e with name o f supplier, amount; and date o f payment. The Financial Management Specialist checks the invoice, the calculation o f the invoice, and finds the appropriate budget from which the amount will be charged (contract number, item number and program component). The accounting codes needs to be written on the invoice by the accountant. After putting hisher initials the invoice i s given to the project procurement staff. The procurement specialist verifies the invoiced amount versus the contract and in terms o f quality and quantity o f the goodshewices received versus invoiced. The procurement staff checks the invoice against the relevant contract number, if necessary attaches a copy o f the relevant paragraph on which the invoice i s based from the contract and signs. The project procurement specialist performs on site visits on regular basis and at least monthly in order to verify quality and quantity o f the goodshewices received. After verification as described above, the procurement specialist signs o f f the invoice. In addition to this, independent consultants should also be contracted to perform verification that goods, services or works have been delivered to acceptable level prior to payments.

18. The invoice i s then forwarded to the Project Manager. All relevant documentation shall be attached to the invoice enabling the Manager to immediately evidence that the necessary checks have been performed. The invoice i s finally received again by the project accountant. The receipt o f the approved invoice i s registered in the registry mentioned above ensuring that payment can be made as per the payment terms. Payment order and the invoice with al l designated approvals and signatories (Project Manager and AssistantDeputy Minister o f Finance or a designee with the same level o f authority) are submitted to the commercial bank where the Designated Account i s opened for payment or in case o f Direct Payment the application form for such method payment i s submitted to the Bank. After applying the eligible percentages the

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request for payment o f the counterpart contribution with al l designated approvals and signatories i s submitted to the Treasury by the project accountant. Bank Statements and Treasury report are received daily/weekly respectively by the FC. Based on the Treasury reports/Bank Statements the FC .Financial Management Specialist will record executed payments and perform due reconciliation o f the bank balances. The FC will prepare interim un-audited financial reports listed above quarterly in the agreed format and submit the reports to the Bank. The FM Manual describes in details further controls and procedures relating to financial management that will be applied for the project in order to ensure use o f funds for intended purposes.

19. Detailed description o f controls and procedures are included in Financial Management Manual that was developed for the project. The Manual sets out the financial management and internal control policies and procedures and i s intended to guide staff and minimize the risk o f errors and omissions, as well as delays in recording and reporting. These written standards also clarify responsibilities, including level o f authority, clear control over assets, cash, and bank accounts, and it ensures timely and accurate financial reporting.

20. The MAFWM i s in the scope o f work o f internal audit department within the Government. Internal audit i s a young function within the public sector in Serbia, hence the internal audit department, although rapidly developing, s t i l l lacks capacity and experience. Due to l o w human capacity in the internal audit department even larger budget users are not audited each year. Due to aforementioned no reliance will be placed on the work o f internal audit.

Reporting and Monitoring

2 1. Project management-oriented interim un-audited financial reports (IFRs) will be used for project monitoring and supervision. The format o f the IFRs will be agreed during negotiation and included in the Financial Management Manual. MAFWM will produce a full set o f IFRs for each calendar quarter throughout the l i f e o f the project. They will be due 45 days after each quarter ends. The IFRs will comprise the following reports presented in the agreed format:

- Statement o f Sources and Uses o f Funds; - Uses o f Funds by Activity; - Designated Account statement; - Unit o f Output by Activity; - Narratives to the reports.

22. commitments on signed contracts.

The accounting for the project i s cash basis with additional information provided for

External Audit

23. The project financial statements will be audited in accordance with terms o f reference acceptable to the Bank by a private sector audit firm acceptable to the Bank, and the audit report will be submitted to the Bank at the latest six months after the end o f the period audited. The project audit will be required to extend the scope to include performance/operational review at least on a sample basis to ensure that agreed outputs are delivered in an efficient manner with respect to grant facility. The annual cost o f the audits o f the project will be covered by the

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project funds. The financial statements are prepared on cash basis. Audits should be conducted in accordance with ISA.

Audit Report

24. the project implementation agency together with the due date for submission.

The following chart identifies the audit reports that will be required to be submitted by

Due Date

SpeciaUdesignated account. The PFSs include sources and uses o f f i nds by category, by components and by financing source; SOE statements, Statement o f designated account, notes to financial statements, reconciliation statement, and extend scope to performance/operational review o f implementation o f grants on sample basis

Entity financial statements I N A Project financial statements (PFS), including SOEs and I Within six months o f the end o f each

fiscal year and also at the closing o f the project

Funds Flow and Disbursement Arrangements

25. Project funds will f low from: (i) the Bank - either as an advance, via a Designated Account to be opened in a commercial bank acceptable to the Bank, which will be replenished under transaction based disbursement method, and managed as described below in the section on disbursement arrangements, or by direct payment on the basis o f direct payment withdrawal applications; or (ii) the Government.

26. The FC will be administering the Designated Account. The FC will prepare withdrawal applications for replenishment o f the Designated Account which ought to be signed by the Project Manager and AssistantIDeputy Minister o f Finance or a designee with the same level o f authority. Payments from the Designated Account are executed by the means o f payment orders. After al l the procedures with respect to flow o f documents, verifications and authorizations described in internal controls section are applied, payment order signed by the Project Manager and Assistant/Deputy Minister o f Finance or a designee with the same level o f authority i s submitted to the commercial bank where the Designated Account i s opened for payment. In the case o f Direct Payment the application form for such method payment i s submitted to the Bank with the same authorized signatories as described above. After applying the eligible percentages the request for payment o f the counterpart contribution with al l designated approvals and signatories i s submitted to the Treasury by the project accountant.

27. The Ceiling for this Designated Account i s defined in the disbursement letter. Applications for replenishment o f the Designated Account will be submitted monthly or when one-third o f the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would fol low standard Bank procedures as described in Disbursement Handbook. Monthly bank statements o f the Designated Account, which have been reconciled, would accompany al l replenishment requests.

Grant facility

28. Grant mechanism will be coordinated and monitored by Stara Planina Advisory Committee which will be established under the project. The Advisory Committee will provide

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technical and operational support in the process o f evaluation, implementation and monitoring o f grants, while the funds would f low directly to the grant beneficiaries. A Grant Manual will be prepared and prepared and adopted in form and substance acceptable to the Bank before effectiveness o f the project. The Manual will clearly describe processes, procedures and internal controls for the competitive grant mechanism.

Description The borrower will have adopted a Grant Manual, as part o f the Project Operational Manual, in form and substance acceptable to the Bank which clearly describes processes, procedures and internal controls for the grant mechanism

29. The Advisory Committee will perform evaluation o f grant applications and provide recommended grants to receive financing. The grants will be evaluated against the eligibility criteria which will be clearly defined. The ultimate selection and approval o f grants that will receive financing will be with the project’s designees with decision making powers.

Responsible entity Borrower

30. The grant funds will f low directly from the Designated Account to the beneficiaries in accordance with the procedures described above in internal controls and f low o f funds sections for other components and sub-components.

3 1. During implementation the Advisory Committee will ensure appropriate monitoring o f implementation o f the grants, including on site reviews o f quality and quantity goods and services procured, and they will report on regular basis on their findings and provide recommendations.

32. before grant facility can be disbursed are the following:

Key internal controls and procedures that need to be described in the Grant Manual

clear description o f eligibility criteria for beneficiaries; clear description o f eligibility criteria for projects; procedures and processes o f monitoring and evaluation o f the grants, including reporting; the procurement processes for the grants; f low o f funds relating to grant mechanism, including basis for transfer o f funds - invoice based or one or more tranches; time plan o f the number and allocated time o f professionals to perform activities relating to grant facility;

- - - - -

-

33. Extended scope o f the project audit described in external audit section will include performance/operational review o f implementation o f competitive grants by the beneficiaries at least on sample basis.

FM Conditions

34. below:

Financial management conditions o f effectiveness o f the project are presented in the table

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Supervision Plan

Catego ry

35 . During project implementation, the Bank will supervise the project’s financial management arrangements in two main ways: (i) review the project’s interim un-audited financial reports for each calendar quarter, as well as the project’s annual audited financial statements and auditor’s management letter; and (ii) perform on-site supervisions, review the project’s financial management and disbursement arrangements to ensure compliance with the Bank’s minimum requirements. The on-site supervision will include monitoring o f agreed actions, review o f randomly selected transactions, review o f internal controls, and other specific supervision activities. Supervisions will be performed by the Bank accredited Financial Management Specialist.

Amount allocated (EUR) % of expenditures to befinanced

Disbursement Arrangements

(1) Goods (2) Competitive researchl extension

(3) Consultant’s services, training tn

4.247.000 lW! 5,840,000 1WA

2’4 10,000 l W ?

Category Amount allocated (EUR) % of expenditures to befinanced 11 ) Civil works 41 1.000 l W ? (2) Goods 162.000 l W ? (3) Rural development grants 1,337,000 75%

37 . The allocation o f GEF grant proceeds for the Project i s the following:

(3) Consultant’s services, training

(4) Operating Costs <

1,352,000 lW?

45,000 1W?

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Annex 8: Procurement Arrangements


1. Procurement under the project will be carried out in accordance with the Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 (Procurement Guidelines), and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated May 2004 (Consultants’ Guidelines), and with the provisions stipulated in the Financing Agreement. The various items are described in general below. For each contract to be financed from the Loan proceeds, the different procurement and selection methods, estimated costs, prior review requirements, and time frame are agreed between the Recipient and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement o f Works

2. Works procured under this Project would include rehabilitation of: roads, visitors’ centers, tourists’ trails, protected area boundaries demarcation. All works estimated to cost up to EUR 750,000 equivalent, will be procured through National Competitive Bidding (NCB). Shopping procedures would be used for al l works contracts at the amount o f less than EUR 75,000. The procurement will be done using ECA regional documents for N C B and shopping. All documents will be agreed with the Bank.

National Competitive Bidding: Additional Provisions

(a) Registration

(i) Bidding shall not be restricted to pre-registered firms;

(ii) Where registration i s required, bidders (1) shall be allowed a reasonable time to complete the registration process, and (2) shall not be denied registration for reasons unrelated to their capability and resources to successfully perform the contract, which shall be verified through post-qualification; and

(iii) Foreign bidders not from the territory o f Serbia shall not be precluded from bidding. If a registration process is required, a foreign bidder declared the lowest evaluated bidder shall be given a reasonable opportunity to register.

(b) Advertising. Invitations to bid in Serbian shall be advertised in at least one widely circulated local daily newspaper available over the territory o f Serbia allowing a minimum o f 30 days for the preparation and submission o f bids.

(c) Participation by Publicly-Owned Enterprises. Publicly-owned enterprises shall be eligible to participate in bidding only if they can establish that they are legally and financially autonomous, operate under commercial law and are not a dependent agency o f

70

the contracting authority. performance security requirements as other bidders.

(d) documents for the procurement o f works or services, acceptable to the Bank.

(e)

Furthermore, they will be subject to the same bid and

Bidding Documents. Procuring entities shall use the appropriate standard bidding

Bid Opening and Bid Evaluation

Bids shall be submitted in a single envelope containing the bidder’s qualification information, technical and price bids, which shall be opened simultaneously at the public bid opening;

Bids shall be opened in public, immediately after the deadline for submission o f bids. The name o f the bidder, the total amount o f each bid and any discounts offered shall be read aloud and recorded in the minutes o f the public bid opening; Evaluation o f bids shall be made in strict adherence to the monetarily quantifiable criteria declared in the bidding documents. N o merit point system will be used;

Extensions o f bid validity will be allowed once only for not more than 30 days. N o further extensions shall be requested without the prior approval o f the Bank; and

Contracts shall be awarded to the qualified bidder having submitted the lowest- evaluated, substantially responsive bid and no negotiation shall take place.

(0 contain an appropriate price adjustment clause.

Price Adjustment. Civi l works contracts o f long duration (more than 18 months) shall

(g) Rejection of Bids

(i)

(ii)

All bids shall not be rejected and new bids solicited without the Bank’s prior concurrence. When the number o f bids received i s less than three, re-bidding shall not be carried out without the Bank’s prior concurrence.

(h) Securities. Bid security shall not exceed 3 percent o f the estimated cost o f the contract and performance security not more than 10 percent o f this cost. N o advance payment at the amount o f more than 10% o f the contract price shall be made to contractors without a suitable advance payment security. These securities shall be included in the bidding documents in a text and format acceptable to the Association.

(i) Small works estimated to cost less than EUR 75,000 equivalent will be procured through shopping procedures.

(ii) The procurement will be done using the Bank’s E C A regional bidding documents for N C B and shopping.

(iii) E C A Regional Sample Bidding Documents, modified as acceptable to the Bank, shall be used.

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(iv) All contracts at the amount o f EUR 75,000 equivalent or more and the f i rst two contracts at the amount o f less than EUR 75,000 equivalent per contract will be subject to Bank’s prior review. All other contracts will be subject to post review.

Procurement o f Goods and Services (other than consultants’ services)

3. Goods and services (other than consultants services) procured under this project would include: office equipment, data network equipment, information technology (IT), office furniture, and vehicles, materials and supplies and Information and communication packages.

4. cost estimates and sources o f supply:

The following methods o f procurement will be used depending on the packages, their

(a) amount o f EUR 75,000 equivalent or more.

International Competitive Bidding (ICB) procedures will be used for contracts at the

(b) equivalent per contract for supply o f field equipment and database software.

Shoppingprocedures will be used for contracts at the amount o f less than EUR 75,000

(c) Direct Contracting (DC) would be used, subject to the Bank’s prior approval, for procurement o f supply o f goods and services which meet requirements for direct contracting referred to in paragraph 3.6 o f the Procurement Guidelines.

(i) The procurement will be done using the Bank’s Standard Bidding Documents for all ICB’s and E C A regional documents for shopping. All documents will be agreed with the Bank.

All contracts at the amount o f EUR 75,000 equivalent or more and the first two contracts at the amount o f less than EUR 75,000 equivalent per contract and all direct contracts will be subject to Bank’s prior review. All other contracts will be subject to post review.

(iii) Commercial Practices: Goods and works estimated to cost less than EUR 50,000 equivalent per contract and to be financed under the Rural Development Grants may be procured in accordance with commercial practices described in an Operational Manual approved by the Bank.

(ii)

Selection o f Consultants

5. Consultants will be selected to provide international and local technical assistance and hiring of: procurement specialist; financial management specialist; technical staff, payment agency staffing; MAF WM management authority staffing; advisors for IACS , LPIS, M&E, Extension System; technical specialists; trainers; and for: preparation o f detailed design and supervision; Monitoring and Evaluation; Ecological Monitoring; Annual Rural Development Program Audit; and for project financial audit. The following methods for selection o f consultants would be followed:

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Quality and Cost Based Selection (QCBS) procedures will be used for selection o f a consultant Monitoring and Evaluation Contract

Least Cost Selection (LCS) procedures will be used for selection o f auditing firm for financial annual audits and Annual Rural Development Program Audit.

Selection Based on Consultants’ Qualifications (CQ) procedures will be used for very small consulting assignments at the amount o f less than EUR 75,000.

Individual Consultants (local and international) will be hired in accordance with the provisions o f Section V o f the Consultants’ Guidelines.

Single Source Selection (SSS) would be used, subject to the Bank’s prior approval, for selection o f ISAA for pi lot farm accountancy data network and some very specialized l ow value contracts which meet requirements for SSS o f the Consultants’ Guidelines.

Sole Source Selection would be used, subject to the Bank’s prior approval, for hiring of ‘the current procurement specialist, TA team leader, GEF team leader, GEF administrative assistant and financial controller who have been selected competitively under the project preparation grant and other individual consultants who meet requirements o f paragraph 5.4 o f the Consultants’ Guidelines.

6. The selections will be done using the Bank’s Standard Request for Proposal (RFP) and other regional sample documents agreed with the Bank. Short l i s ts o f consultants for services estimated to cost less than EUR 75,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

7. Requests for Proposals (RFPs), short lists, terms and conditions o f contracts, as well as evaluation reports and recommendations for award for the f i rs t two individual contracts and all individual contracts at the amount o f more than EUR 37,000 equivalent and f i rst two contracts with f i r m s and al l contracts with f i r m s at the amount o f more than EUR 75,000 equivalent and all SSS contracts wil l be subject to Bank’s prior review. All other contracts will be subject to post review.

Training

8. The Project will finance trainings (workshops, study tours) for PIU, Payment System staff, municipal staff, MAFWM Rural Development Management Authority staff, for non- MAEWM agencies. The trainings will be carried out according to training plans, which the project coordinator will revise semi-annually and submit to the IDA for approval prior to implementation. The expenses will be covered under training category and disbursed based on SOE.

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Assessment o f the agency’s capacity to implement procurement

9. actions for the project was carried out in April, 2007.

An assessment o f the capacity o f the implementing agency to implement procurement

10. Fiduciary Center for World Bank Projects at the MAFWM will be established and it will be in charge o f the overall project management and the procurement under project. The Center will be responsible for day-to-day project management including work planning, financial management, project procurement, progress and financial reporting, staff appointment and management and project monitoring and evaluation. The project team will be managed by a project manager and will also include a procurement specialist, senior financial specialist and office managerkecretary. The procurement specialist who i s currently dealing with the procurement under the project preparation grant has been selected competitively. She has gained experience in Bank’s procurement in the process o f the implementation o f the project preparation grant, Serbia Real Estate and Cadastre Project and attending different trainings on Bank’s procurement. It i s envisaged the current procurement specialist who has been selected competitively in the process o f the preparation o f the project, to be hired to handle the procurement under the project on SSS basis.

11. The CPAR (June 2002), Fiduciary Assessment Update (October 2005) and IPFMA (Integrated Public Financial Management Assessment, March 2006) have assessed the risks (legal framework, regulatory functions, enforcement regime, public sector institutions, corruption, etc.) that may negatively affect the ability o f the implementing agencies to carry out procurement and have rated it: significant risk. Therefore the prior review thresholds are those applicable to a significant risk country. The corrective measures which have been agreed are that the Bank procurement specialist will: (i) provide additional training to the Center procurement staff on the application o f the current procurement guidelines and the respective bidding documents; (ii) provide training to the staff on the preparation o f the technical parts o f the bidding documents (technical specifications); (iii) conduct a comprehensive procurement training for al l project related staff as part o f the project launch workshop; (iv) provide the procurement staff with the Bank’s Standard Bidding Documents and Requests for Proposals and ECA’s sample formats for small procurement. The Bank will monitor procurement activities. The Bank procurement specialist will conduct prior and post reviews and will provide guidance in all procurement related activities.

Procurement Plan

12. The Recipient, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement and selection methods, estimated costs, prior review requirements, and time frame. This plan has been agreed between the Recipient and the Project Team on May 25, 2007. I t i s available in the Project’s database and in the Bank’s external website.

13. The Procurement Plan will be updated in agreement with the project team annually or as required to reflect, the actual project implementation needs and improvements in institutional capacity.

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Frequency o f Procurement Supervision

14. The following frequency o f procurement supervision i s recommended: one supervision mission per six months to visit the field and to carry out post review o f procurement actions. The project procurement staff shall properly collect and maintain the procurement documentation.

Details o f the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services. L i s t o f contract packages to be procured following I C B and direct contracts.

1 1 2 3 4 5 6

Ref. No.

Estimated cost

EUR’000

Contract (Description)

Procurem Review Expected

Method Bank Date ent by Bid-Opening

(Prior I

1. 2.

Post) Vehicles 833 I C B Prior Computer Hardware and 1,4 18 I C B Prior

I networks I I I I

1 2 3 4 5 Estimated

Ref. No. Description of Cost Selection Review Assignment EUR’ 000 Method by Bank

(Prior I Post)

1. Financial Audit 47 LCS Prior 2. Monitoring and 330 QCBS Prior

3. Annual Rural 63 LCS Prior Evaluation contract

Development Program Audit

(Multiple) 4. International consultants 983 I C Prior

5. PIT Specialists 468 sss Prior

6. Extension Service 3,7 QCBS Prior Delivery Contracts

2. consultants and where SSS will be used.

Consulting Services. L i s t o f consulting assignments with participation o f international

6

Expected Bid-Opening

Date

March 2008 May 2008

March 2008

Multiple contracts throughout the project Multiple contracts throughout the project Multiple contracts

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7. Contracts

throughout the project

Applied Research 221 QCBS Prior Multiple contracts throughout the

8. project

Pilot Farm Accountancy 146 sss Prior January 2009 I Network

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Annex 9: Economic and Financial Analysis


1. The economic and financial analyses are based on the underlying assumption that the Project will (i) contribute to the more effective use and absorption o f Serbian Government structural funds for agriculture; (ii) improve farmer access to appropriate technology, raising the profitability and competitiveness o f Serbian agriculture; and (iii) in the case o f the SPNP, pilot profitable conservation-based farming practice having wider application in Serbia.

Absorption of EU structural funds for agriculture and rural development:

2. Structural support to agriculture in Serbia has increased from about € 11 mi l l ion in 2004 to a planned € 47 mil l ion in 2006 (Table 1). The structural support program i s directed to on- farm investments to improve productivity and competitiveness, and focuses on four areas: (i) investment in farms; (ii) improvement o f farm structures; (iii) rural development measures; and (iv) improvement in product quality. While the basic institutional structures and services to support Serbia’s agriculture and rural development thrust are emerging, they are increasingly at risk from limited institutional and staff capacity, operational inefficiencies, technology gaps and inadequate impact monitoring. Project investments (WB loan o f €12.5 mi l l ion and GEF grant o f €3.3 million) will directly address these urgent capacity and funding gaps by putting in place a comprehensive payment system, including a full package o f EU control measures and increased staff capacity to support national structural support payments. This will accelerate Serbia’s accession process and enable the country to more readily absorb I P A rural development support (CAP Pillar 11) funds when available.

Table 1. Structural support for agriculture increases (e’ooo) 2004 2005 2006 (planned) Structural Suwort 1 1,389 29.143 46.944 1. Farm investment support 6,329 12,309 9,011 Mechanization and equipment 0 5,445 0 Establishment o f new plums orchards 1,283 3,979 3,678 Establishment o f new vineyards 117 72 1 667 Land improvement and consolidation 4,928 2,164 4,667 2. Other farm structure support 0 2,404 22,561 Early retirement 0 0 20,339

3. Rural development support 4,144 9,044 8,360 4. Other measures to support produce quality 917 5,386 7,012 Source: MAFWM budget, 2006.

Land renting support 0 2,404 2,222

3. A separate rural development grant program was recently introduced and offers up to 60 percent co-financing to a range o f rural stakeholders for various activities that aim to improve rural areas, particularly marginalized or less favored areas (LFAs). Grants are provided to rural households for alternative sources o f income such as equipping houses for rural tourism, conservation and promotion o f rural customs, as well as to local governments for capacity building to develop rural development plans and for rural infrastructure projects such as village

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roads, and electricity and water supply. This program also includes agro-environmental measures such as support for waste management and agricultural practices that reduce erosion. While such structural lending and l o w interest rate loans are widely considered to be a primary driver o f Serbia's improving agricultural productivity and rapidly expanding agricultural export base, there i s no reliable ex-post analysis o f these investments to confirm that view. In the absence o f any reliable data, the project did not attempt to quantify the benefits o f project investments supporting the use and absorption o f national structural funds, however, project investment in the Payment System and associated rural development Managing Authority are expected to improve the amount and absorption o f structural grants and, in the long run, to accelerate Serbian access to EU pre-accession funds, leading to substantive structural and competitiveness gains in Serbian agriculture well beyond the project life.

4. The EU Instrument for Pre-accession (IPA), which i s designed to support actual and potential candidate countries to meet EU standards and policies pre-accession, succeeds previous EU pre-accession instruments (including Phare, ISPA, SAPARD and CARDS). I t comprises five components, for which Serbia, a potential candidate country, only has access to two: Transition Assistance and Institution Building, and Regional and Cross Border Cooperation. Funding scheduled for the two eligible IPA measures for all economic sectors for Serbia for 2007 to 2010 i s € 178.5 million, €179.4 million, 182.6 mi l l ion and €186.2 mi l l ion respectively.

5. When Serbia achieves candidate status, i t may receive each year anywhere from € 5 to € 13 per hectare o f agricultural land in I P A Rural Development funding. This projection i s based on the experience o f the new member states, where the average SAPARD allocation from 2000 to 2004 was € 9 per hectare o f agricultural land (Table 2). Estonia and Slovenia received the highest allocations and the Czech Republic, Hungary, and Slovakia received the lowest allocations.

Table 2: Annual SAPARD allocations ranged from € 5 to € 13 per hectare o f agricultural land

2000-2004 Average Agricultural Land Annual SAPARD SAPARD per ha of

('000 ha) allocation (€'OOO) agricultural land (e) Czech Republic 4,2 79 22,445 5 Hungary 5,854 38,713 7 Poland 18,413 17 1,603 9 Slovakia 2,44 1 18,606 8 Slovenia 518 6,447 12

Latvia 2,485 22,226 9 Lithuania 3,489 30,345 9 Bulgaria 5,582 53,026 9 Romania 14,857 153,243 10

Estonia 986 12,347 13

Average 5,890 52,900 9 Source: Supporting Serbia's Agricultural Strategy, ECSSD, World Bank, 2006.

6. IPARD allocations o f this magnitude will significantly increase public expenditures on agriculture in Serbia. A simple sensitivity analysis based on the information in Table 3 indicates

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that IPARD funding i s likely to be in the range o f € 25.5 to € 66.3 million per year. Depending on the scenario, this i s equivalent to 0.13 percent to 0.34 percent o f 2005 GDP or anywhere from 12 to 32 percent increase in agricultural expenditures (based on 2006 MAFWM budget).

Table 3: Rura l development expenditures wi l l increase significantly Projected IPARD Allocation Share of C D P in Share of 2006

(€ per year) 2005 Agricultural Budget

25,500,000 0.13% 12% Low case @ f 5 per ha Middle case @ € 9 per ha 45,900,000 0.24% 22%

66,300,000 0.34% 32% High case @ € 13 per ha Supporting Serbia’s Agricultural Strategy, ECSSD, World Bank, 2006

Farmer access to appropriate technology

7. The impact o f structural support measures i s closely aligned to farmer’s access to appropriate technology. Serbia’s agricultural knowledge and information systems are grossly under-resourced and there has been l i t t le determination o f the financial or economic benefits o f technology developments in Serbian agriculture. What has recently become available, however, i s a set o f farming systems data that provides a series o f parameters showing financial benefits to improved technology adoption. This database provides the best platform for estimating the likely benefits from project investment in agricultural knowledge systems. Using the aforementioned data, linear regressions o f gross margin vs. yield were fitted to each crop and used to estimate the gross margin at average yield. Gross margin per crop was subsequently estimated for (1) the Serbian average yield, (2) survey farm average yield, (3) survey top 1/3 farm yield. Maize, wheat, soybean, sugar beet and milk were selected from this database as representative commodities in Serbian agriculture that collectively form about 70% o f the value o f agricultural production.

8. There i s limited information available on the adoption o f new technology in Serbian agriculture. The Project has used a regression analysis o f growth in agricultural productivity for the selected crops since 2000 to provide a proxy for technology adoption in the sector. Adjusted for a drought year in 2003, the r2 for annual growth rate were generally quite high except for wheat and include maize (0.78), wheat (0.05), soybean (0.8), Sunflower (0.41) and milk (0.92). Evidence elsewhere suggests that investment in improved technology supported by stakeholder driven extension provides returns in excess o f 40% and frequently as high as 100%. For the purpose o f this analysis it i s assumed that one or more o f the project technology/extension package wi l l have an impact on 10% o f Serbia’s estimated 80,000-100,000 commercial farmers (> 5ha agricultural land) by end-PY2, growing to 25% by project end and will l i f t productivity amongst those farmers at a rate up to 15% per annum above the average productivity growth over the last 5 years. Gross marginha has been multiplied by estimated commercial crop area for each crop and adjusted for with and without researcWextension effects. The resulting cumulative financial benefit i s estimated at €1 10 over 10 years. To check this result, an alternative approach was taken using the difference between the average and top 113 yields o f the aforementioned gross margin analysis and the assumption applied that under a national extensionhesearch program one third o f farmers would progressively reduce this productivity gap by 15% over a 4

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year period commencing in PY2. The resulting financial benefit is estimated at €1 14 over 10 years.

9. The modeling results should be read as a minimum impact that i s expected from Project implementation. The Project leverage effect i s limited to the benefit o f the project research and extension components. Additional un-quantified benefits will accrue from: (i) improved rates o f return on expanding, better targeted national rural development fund investments supported by an invigorated research and extension continuum; (ii) accelerated access to EU IPA rural development funding up to the value o f €66 mi l l ion per annum together with an increased absorption capacity; and (iii) a range o f environmentally sustainable community based economic activities with the potential to diversify rural income sources.

10. Based on economic models for the selected commodities, the minimum economic benefit o f the project i s estimated to amount to about € 100 mi l l ion reflecting the significant potential for incremental maize and oilseed production for which Serbia i s economically competitive, which have diminished overall economic benefit. The minimum financial benefits o f the Project are estimated to amount to € 1 10 million, translating into a minimum FIRR o f 12%.

Table 4: Incremental Net Benefit from the Project (€ millions) Selected Project Measures PY1 PY2 PY3 PY4 PY5 PY6 PY7 PY8 PY9 PYlO Extensionhesearch Outcomes 0 1.4 3.6 6.4 9.3 12.2 15.0 17.9 20.7 23.6 TOTAL 0 1.4 3.6 6.4 9.3 12.2 15.0 17.9 20.7 23.6 Total Project Costs

Investment 8.6 10.5 13.2 14.6 Recurrent Cost 0.4 0.5 0.6 0.6 4.6 4.6 4.6 4.6 4.6 4.6 Total project cost 9.0 11.0 13.8 15.2 4.6 4.6 4.6 4.6 4.6 4.6 Incremental Net Benefit (FIRR) 12% -9.0 -9.6 -10.2 -8.7 4.7 7.6 10.4 13.3 16.1 19.0

Pilot proftable consewation-based farming practice

11. The GEF investment in sustainable farming in the SPNP i s o f a pilot nature and includes the reintroduction o f traditional breeds and products, for which there i s l i t t le available financial information, overlaid with conservation and agri-tourism measures. The financial and economic viability o f these investments will be monitored over the project and contribute to a wider analysis o f opportunities for conservation based farming in southern Serbia, however, due to the paucity o f data, benefits from this project component have not been included in this analysis. Also, see Annex 1.5 ‘Incremental Cost Analysis.

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Annex 10: Safeguard Policy Issues SERBIA: TRANSITIONAL AGRICULTURE REFORM PROJECT

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11 -03, being revised as OP 4.1 1) [XI Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI Forests (OP/BP 4.36) [XI [I Safety o f Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60)' [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI

[ ]

[I

1. Compliance with the OP 4.01 wi l l be achieved through including appropriate provisions in the Rural Development Plan for the GoS Rural Development Grant scheme. Investments financed under Component 3 rather than the Grant scheme wi l l be subject to environmental screening and assessment as required, consistent with national law and following procedures to be specified in the Operational Manual. Tourism infrastructure investment within SPNP will be limited to rehabilitation o f a limited number o f existing access roads and existing buildings and construction o f hiking trails in accordance with the park management plan. The impacts on natural habitats and forests are expected to be positive. While the project wi l l promote grazing in natural mountain grasslands, this wi l l be in accordance with a pasture management plan that uses extensive grazing as a tool to restore and maintain biodiversity. Compliance with the OP 4.04 wil l be achieved through support for preparation and implementation o f the SPNP management plan.

2. OP 4.09 on Pest Management i s not triggered by the project because the subprojects wi l l not finance purchase o f any agricultural inputs, including pesticides. The project wi l l also support integrated pest management approaches to be mainstreamed in the agriculture advisory program.

3. The project also triggers OP 4.04 on Natural Habitats. The policy i s triggered since the project wi l l support investments that will improve the conservation o f Stara Planina Nature Park, including restoration o f priority sites such as degraded high elevation meadows. No critical natural habitats are expected to be converted.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the

disputed areas

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4. OP 4.36 applied since the project aims to bring about changes in the management o f Stara Planina Nature Park, which has about 40% forest cover (with the remainder being pasture and cultivated land). The project will provide general support for strengthening the capacity o f the responsible authority (Srbijasume) to manage the nature park, but the emphasis will be on the pasture and cultivated lands as these are currently being neglected. The project will not finance exploitation or planting in the forested area.

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Annex 11: Project Processing


I Planned I Actual PCN Review 0512 712005 0410412 0 0 6 Initial PID to PIC 04/20/2006 Initial ISDS to PIC 04/20/2006 Appraisal 08/15/2006 05/03/2007 Negotiations 1011 512006 05/25/2007 BoardlRVP Approval 12/15/2006 06/20/2007 Planned Date o f Effectiveness 09/17/2007 Planned date of MTR 1 0/01/2009 Planned Closing date 1 213 112 0 1 1

Key Institutions Responsible for preparation o f the project: Ministry o f Agriculture, Forestry and Water Management (MAFWM)

Bank staff and consultants who worked on the project included:

I Title I Unit

Julian A. Lampietti Aleksandar Nacev Agnes K i s s Aleksandar Crnomarkovic Plamen Stoyanov Kirov Nicholay Chistyakov Darius Stangu Egli I l ic Ida Car Van Vu Nichols Olivera Jordanovic Natalia Otel Nikola I l l e Tijen Arin Solvita Klapare Paula Ly t le Pierre Olivier Colleye Sarah Leigh Hammill Garry Smith

Lead Specialist, Team Leader Senior Agriculturist Lead Ecologist Financial Management Analyst Procurement Specialist Senior Finance Officer Finance Analyst Finance Analyst Finance Assistant Portfolio Officer Operations Analyst Junior Professional Associate Senior Rural Development Specialist Senior Environmental Economist E T Consultant Senior Social Development Specialist Senior Microfinance Specialist Senior Program Assistant FA0 Consultant

ECSSD ECSSD ECSSD ECSPS ECSPS LOAGl LOAGl LOAGl LOAGl ACTCF ECSSD ECSSD ECSSD ECSSD ECSSD ECSSD ECSSD ECSSD F A 0

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Bank funds expended to-date on project preparation:

Bank Resources: US $226,481.57 BB/FAO US $129,800.00 Trust funds US $570,000.00 Total: US $926,28 1.57

Estimate Approval and Supervision Costs:

Remaining costs to approval: us $20,000 Estimated total supervision costs (FY06 and 07): US $80,000 per year

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1. 2.

3.

4.

5.

6.

7.

8. 9. 10.

11.

12.

13.

14.

15.

16.

Annex 12: Documents in Project File


Project Concept Note

Project Information Document

Integrated Safeguards Data Sheet

Agriculture Strategy; Republic o f Serbia, October 2004

Rural Poverty and Vulnerability in the Republic o f Serbia: The World Bank, August 2005

EU/EAR Policy Analysis Unit; Various reports - 2004-2007

EU/EAR Support to a Rural Development Programming and Payment System in Serbia; Various reports - 2006-2007

Supporting Serbia's Agriculture Strategy, The World Bank, August 2006

IPA Information Technology Report, September 2006

Review o f the M A F W M 2006 structural and rural development support measures and recommendations for changes; November 2006

A Chamber o f Agriculture and Forestry for Serbia, December 2006 Recommended Structure o f Serbian Agricultural Applied Research and Extension System to be Financed under the STAR Project STAR Environmental Impact Assessment. Government o f Serbia, April 2007.

STAR Social Assessment Study: Government o f Serbia, May 2007

IACP Rural Infrastructure Feasibility and Costing Study for the Stara Planina Mt. Nature Park: Government o f Serbia May 2007.

Supply Chain Analysis for the Area o f Stara Planina Mountain: Government o f Serbia May 2007.

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Annex 13: Statement of Loans and Credits


Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PO87964 2006 PO84604 2005

PO88867 2005 PO90418 2005

PO75207 2004 PO75343 2004 PO78311 2004 PO77675 2003 PO77732 2003 PO74090 2002 PO75189 2002

IRRIG/DRAINAGE REHAB (SERBIA) DANUBE ENTS POLLUT REDUC (GEF) (SERB 1A) ECSEE APL #2 (SERBIA) CNSLTD COLLECT & PENS ADM REF (SERBIA) TRNSPT REHAB (SERBIA) ENERGY EFF (SERBIA) REAL ESTATE CADASTRE (SERBIA) HEALTH (SERBIA) PRlV & REST OF BANKSENTPRS TA TRADE & TRANS FACIL IN SE EUR EDUC IMPRVMT (SERBIA)

Total:

0.00 25.00 0.00 0.00 0.00 23.64 2.72 0.00 0.00 0.00 0.00 9.02 0.00 8.52 2.67 0.00

0.00 21.00 0.00 0.00 0.00 20.43 1.11 0.00 0.00 25.00 0.00 0.00 0.00 24.25 4.82 1.73

0.00 55.00 0.00 0.00 0.00 36.36 12.15 0.00 0.00 21.00 0.00 0.00 0.00 14.34 7.73 0.00 0.00 30.00 0.00 0.00 0.00 22.96 2.42 0.00 0.00 20.00 0.00 0.00 0.00 8.59 6.29 1.36

0.00 11.00 0.00 0.00 0.00 2.13 0.74 0.00

0.00 6.76 0.00 0.00 0.00 1.02 -0.34 0.00 0.00 10.00 0.00 0.00 0.00 1.01 -0.67 -1.12

0.00 224.76 0.00 9.02 0.00 86.41 39.64 1.97

SERBIA - Statement of IFC’s Held and Disbursed Portfolio

In Millions of U S Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2006 2005 2006 1982 1987

2005 1985 2005 2005 2005 2005 2002 2002 2003

BANCA INTESA SPA 0.00 Continental Bank 2.97 Continental Bank 25.50 Gov Montenegerol 7.21 Gov Montenegerol 3.38 Gov Montenegro 2 1.46 HVB Serbia 38.13 Jugobanka 0.00 Opportunity I... 4.14 Panonska 4.74 Podgoricka Banka 6.37 Privredna Banka 1.47 Procredit KSV 0.00 ProCredit Serbia 1.94 Procredit Serbia 5.54 RBKO 12.75 RIB I1 50.99

51.26 76.49 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 1.1 1 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

86

0.00 1.46 0.00 0.00 0.00

0.00 0.00

1.19 0.00 2.33 0.00 0.72 0.00 0.00 0.00

0.00 0.00

0.00 37.24 2.97 0.00

0.00 0.00 7.2 1 0.00 3.38 0.00 1.46 0.00

12.63 0.00

0.00 0.00 2.87 0.00 4.74 0.00

6.37 0.00 1.47 0.00 0.00 1.11 1.94 0.00 5.54 0.00 0.00 0.00 3.82 0.00

76.49 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00

0.00

0.00 1.46 0.00

0.00 0.00 0.00

0.00 1.19 0.00 2.33 0.00 0.72 0.00

0.00 0.00 0.00

0.00

Raiffeisen Yug 12.55 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Raiffeisen Yug 2005 Raiffeisen Yug 2006 Raiffeisen Yug 2002 Tigar M.H. 2005 Tigar M.H. 1987 Vojvodjanska 2005 Vojvodjanska

Total portfolio:

0.00 2.37 0.00 0.00 0.00 2.37 0.00 0.00 0.00 2.76 0.00 0.00 0.00 2.75 0.00 0.00 0.00 5.41 0.00 0.00 0.00 5.41 0.00 0.00 0.00 0.00 4.11 0.00 0.00 0.00 4.11 0.00 0.00 3.92 0.00 0.00 0.00 3.92 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.48 0.00 0.00 3.67 7.48 0.00 0.00 3.67

186.62 66.83 80.60 9.37 61.88 52.80 80.60 9.37

FY Approval Company

Approvals Pending Commitment

Loan Equity Quasi Partic.

2006 Contibankaequity 0.00 0.01 0.00 0.00 2005 Vojvodjanska Res 0.01 0.00 0.00 0.00

Total pending commitment: 0.01 0.01 0.00 0.00

87

Annex 14: Country at a Glance


1985-95 1995-05 2004 2005 (average annualgrowth) Agriculture .. -2.9 8 . 2 2.0 Industry 1.9 7.5 3,5

Manufacturing Services .. 6.2 1.8 2.6

Household final consumption expenditure ,. 7.7 15.2 0.7 General gov't final consumption eqenditure .. -0.2 7.4 2.7 Gross capital formation .. #.4 23.6 8.3 Imports of goods and services .. 17.7 38.1 7.9

POVERTY and S O C I A L

G r o w t h o f expor ts and i m p o r t s (Oh) 50

25

00 01 02 03 04 05 -25

-50

-Exports -Imports I -

Serbia Europe 8 Lower- and Cent ra l mlddle-

Montenegro 2005 Population, mid-year (millions) 8.2 GNI per capita (Atlas method, US$) 3.280 GNI (Atlas method, US$ billions) 26.8

Average annual growth, 1999.05

Population (%) -4.4 Laborforce (%) -3.4

M o a t recent es t imate ( la tes t year avai lable, 1999-05)

Poverty (%of population belo wnationalpo verty line) Urban population (%of totalpopulation) 52 Life expectancyat birth (years) 73 Infant mortaiity(p8r lOOOlive births) t3 Child malnutrition (%ofchildren under5) 2 Access to an improved water source (%ofpopuiation) 93 Literacy (%ofpopulation age S+J 96 Gross primaryanrollment (%of school-age population) 98

Male 98 Female 98

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

I986 1995

GDP (US$ billions) .. 14.4 Gross capital formatlon/GDP Eqorts of goods and services/GDP Gross domestic savings/GDP Gross national savings/GDP

Current account balance/GDP Interest paymentslGDP .. 0.0 Total debt/GDP .. 74.6 Total debt servlce/eqorts Present value of debt/GDP Present value o f debtlexports

1985-95 1996.05 2004 (average annualgrowth) GDP 17 8.8 GDP percapita .. 5.4 8.9 Exports of goods and services .. P.3 38.2

Asla Income

41 3 4,lU 1,945

0 .o 0.6

' 84 69 28

5 92 97 D4 D5 D 2

2004

24.4 8.6

23.5 -11.1 4.5

- E 1 1.2

65.2 9.9

63.1 154.9

2,475 1,918

4,747

1.0 1.4

50 70 33 P

82 89 114 115 n3

2005

27.1 19.6

28.2 -5.5 8.2

-8.6

2005 2005-09

8 .O 4.9 5.7 2.1

29.8 15.9

Life eqectancy

GNI Gross

capita enrollment per primary

Access to improvedwatersource

-Serbia and M ontenegro Lo mr-middle-income group

E c o n o m i c ra t lo s *

Trade

Domestic Capital savings formation

Indebtedness

-Serbia and M ontenegro

Lower-middle-income gmup

STRUCTURE of the ECONOMY

(%of GDP) Agriculture Industry

Services Manufacturing

lgE5 Igg5 * O o 5 I G r o w t h o f cap i ta l and GDP (Oh) I 19.6 8 .0

38.4 32.3 .. 22.2 ?a8 .. 45.0 51.7

40

20

0

-20 Household final consumption eqenditure .. 93.3 87.8 General gov't final consumption expenditure l i ,9 17.7 Imports of goods and services 51.2 50.3

TRADE

IS85

74 1 89 8

$935

1995

2 8

199s

10 785 1252

0

47 D D

487 0 0

4s 0

D a 0 0 0 0

mu4

s s @ 8

44 2 2 3

2004

4 219

2 850 I 1 653

4

106 144 ?d

2004

5,718 12,459 -6 741

-293 4093

1

3 652 -713

4 302 58 4

2004

i 5 382 2 838

464

881 121

3

733 4 72

1191 986

0

181 162

U 152 124 38

2085

'14 3 17 4

42 3 4 I 1 3

2005

5 443

I a# 145 15

200$

2 319

3 54# 1 230

9 4

200s

2 466 51 B

133 4

88 20 69

i l a -49

E $90'

Annex 15: Incremental Cost Analysis


Overview

1. The main objectives o f the GEF Alternative are to support the conservation o f globally important agro-biodiversity and the important transboundary-ecosystem o f the Stara Planina, by promoting traditional sustainable and biodiversity-sensitive agricultural practices in and around the Stara Planina Nature Park. Integrated into a larger Government o f Serbia and Montenegro IBRD loan with a total project cost o f US$37.3 1 million, the GEF Alternative will:

(a) promote and support entrepreneurial and agricultural activities within the Stara Planina region which ensure the sustainability of natural resources and are compatible with biodiversity conservative objectives by

providing supplemental funds for the Government o f Serbia’s rural development grant program which will be used for specific environmental activities in the Stara Planina region such as the conservation o f agricultural biodiversity, conversion to organic agriculture, ecological restoration, or sustainable rural tourism; supporting research, training and extension services related to environmentally friendly land management practices, including extensive livestock breeding, organic farming, integrated pest and crop management, and sustainable tourism;

0

(3) help to protect biodiversity and natural resources within the Stara Planina Natural Park

0 providing capacity building and operational support for the Srbijasume16 management authority to develop and implement management plans; restoring ecological priority areas;

0 develop programs for the certification for locally-based organic agriculture and development o f rural eco-tourism; supporting the integration o f environmental principles into local rural development strategies; building public awareness o f local stakeholders o f sustainable natural resource management and biodiversity conservation; strengthening transboundary cooperation with Bulgaria for biodiversity conservation and sustainable tourism development; and establishing comprehensive monitoring systems

by

2. The GEF Alternative (US$17.96 million) intends to achieve these outputs at a total incremental cost of approximately US$9.11 million, o f which a grant o f US$5 million i s request from the GEF.

3. The GEF Alternative has been integrated into the larger Transitional Agricultural Reform Project, which has a total project cost o f US$37.3 1 million. O f the total US$25 million o f IBRD

l6 Serbia Public Enterprise for Forestry

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contribution to the project, an estimated US$9.06 mi l l ion will be specifically targeted to environmentally beneficial activities; US$6.32 i s considered part o f the Baseline, while an additional US$2.74 i s considered leveraged funds and part o f the GEF Alternative. The Government o f Serbia has committed to the financing o f US$5.00 mi l l ion o f i t s resources to the overall project, o f which approximately US$1.82 mi l l ion are specifically targeted to biodiversity objectives and US$0.69 are considered part o f the GEF Alternative. Local farmers and beneficiaries o f the IBRD and GEF grants are expected to contribute US$2.3 1 through matching grants and in-kind contributions, o f which US$1.04 will have specific biodiversity benefits. US$ 0.68 mi l l ion o f these matching grants are considered a part o f the GEF Alternative. Together, the GEF (US$5 million), IBRD (US$2.74 million) and local contributions from government and local beneficiaries (US$1.37 million) total US$9.11 mi l l ion contribution towards the GEF Alternative.

Context and Broad Development Goals

4. The biodiversity o f Serbia i s very high, both in ecosystems and species, with many relic and endemic species found in ice age refugia. The mountainous Stara Planina region in the southeast o f the country i s one o f i t s premiere locations for both natural and agricultural biodiversity. Falling within the trans-border West Balkan mountain range, it encompasses much o f the Serbian portion o f the Balkan Mountains Biodiversity Center, which i s one o f the six temperate centers o f biodiversity in Europe. The government established the Stara Planina Nature Park (SPNP) in 1997 to help preserve the area’s r ich biodiversity and cultural heritage, as well as signing a memorandum o f agreement with Bulgaria in 1996 to work towards the creation o f a transboundary Peace Park. An application i s under preparation for the SPNP to be designated as a Biosphere Reserve under the UNESCO M a n and Biosphere Program. The mosaic o f forests, mountain meadows and wetlanddpeat bogs hosts a wide range o f wild animal and plant species, including a number o f rare endemic species particularly in the alpine and sub- alpine communities. The Stara Planina region i s also home to wild ancestors o f several economically important species and to a variety o f locally adapted autochthonous livestock varieties, many o f them unique to the area or endemic to the Balkans, and endangered or threatened throughout their ranges. The richness o f the ecosystem was both maintained by, and supported the development of, these local breeds. This ecosystem, however, i s under threat from the expansion o f intensive agriculture at lower elevations, abandonment o f pastures at higher elevations, development o f inappropriate tourism infrastructure. Establishing natural resources management and the drafting and implementation o f protected areas management plans for this area will be critical to halting these threats to the ecosystem.

5. The proposed GEF Alternative focuses on the issue o f introducing more sustainable agricultural practices in the Stara Planina region. The National Environmental Strategy and Action Plan (as well as the Biodiversity Strategy and Action Plan currently under preparation) identifies priority areas for conservation and causes o f biodiversity loss. The SPNP area is identified as significant both for the richness o f i t s biodiversity and the potential for transboundary cooperation. In the SPNP, as in other mountain areas, threats include the decline o f agri-biodiversity and livestock varieties due to intensification o f farming with exotic varieties, poorly managed grazing, and tourism development which threatens even core protected areas.

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6. The Federal Government o f Serbia and Montenegro and the Government o f the Republic o f Serbia have taken important steps towards improved environmental management in recent years. These include passage in Serbia o f a several new environmental laws and development o f a new Forest Policy through a highly participatory process. In the agricultural sector, Serbia’s National Agricultural Strategy emphasizes enhancing competitiveness and harmonization with the European Union, in view o f the GoS objective o f European Union accession on a fast track. This includes aligning Serbia’s agricultural policies with those o f the EU. Like the EU Common Agricultural Policy, the GoS support to agriculture i s increasingly shifting from commodity subsidies to structural support for rural development, with a strong emphasis on agri- environmental measures, land care and conservation o f ecosystems and biodiversity, and conservation o f land and agricultural ecosystems. This i s demonstrated for example by the GoS rural development grant program, which includes provisions to encourage farmers to invest in environmental management and to promote sustainable land and resource use particularly in marginalized agricultural areas where conventional (intensive) farming may be inappropriate. The GoS policy also emphasizes capacity building and investment to meet other requirements for EU membership and access to EU markets, including in particular the environmental acquis. For example, a recently approved World Bank-financed project will support the upgrading of slaughterhouses and other agricultural processing facilities to reduce nutrient flows into the Danube River. With World Bank, GEF and other donor support, the Government aims to integrate environmental principles into i t s sectoral policies and activities, build institutional capacity and raise public awareness regarding sustainable management o f natural resources.

Baseline Scenario

7. Under the Baseline Scenario, i t i s expected that the Government o f Serbia and Montenegro and locally based expenditures related to environmental protection within the agricultural landscape and protected areas management in and around Stara Planina will financed mainly through the GoS (Ministry o f Agriculture, Forestry and Water Management) rural development grants program and annual budgets o f national and local government institutions concerned with agricultural development, natural resource management and nature protection. The Transitional Agricultural Reform Project, through IBRD financing, will also have significant environmental benefits and portions o f the Project which are likely to have been funded even without the GEF additional components, are considered part o f the Baseline.

8. Analysis matrix and are discussed below:

These, plus other programmatic contributions, are summarized in the Incremental Cost

0 The Serbian Ministry o f Agriculture, Forestry and Water Management’s Rural Development Grant Program i s expected to provide approximately US$140,000 - 200,000 per year, on the basis o f matching grants, to applicants in the four municipalities that comprise the Stara Planina region, for purposes including increasing agricultural productivity, development and marketing o f agricultural products and economic diversification (e.g., tourism development). It i s estimated that approximately 25% o f the grants (US$l 80,000) will be allocated to eco-agricultural and sustainable tourism activities, although i t i s expected that this percentage will increase as a result o f awareness raising,

92

research and capacity building supported by Component 2 o f the Transitional Agricultural Reform Project;

The Transitional Agricultural Reform Project, financed through the IBRD and counterpart funding from the M A F W M and local beneficiaries, will promote improved systems delivery for rural development grants implemented in the Stara Planina region, additional financing for Serbia’s grant program, research and extension / advisory services o f the total project cost (US$37.3 1 million), an estimated US$16.92 wi l l have environmental benefits. US$7.81 o f this amount can be considered as part o f the Baseline (with the remaining having been leveraged by the GEF component and i s considered part o f the GEF Alternative);

Governmental support for the management and administration o f the Stara Planina Nature Reserve, based on historical funds made available, will be approximately US$40,000 during the l i f e o f the Project;

Subsidies and project support from the GoS Directorate o f Genetic Resources for autochthonous breed producers i s expected to provide local farmers in the Stara Planina area with approximately US$25,000 per year;

0 The Loan Program for the Development of Agriculture for the Dimitrovgrad, Knjazevac, Pirot and Zajechar Municipalities i s expected to contribute US$540,000 towards agricultural development during the project duration, o f which approximately 15% (US$8 1,000) can be expected to support environmentally friendly agricultural practices. This percentage i s likely to increase as the awareness raising, research, and extension and advisory services under the Transitional Agricultural Reform Project progresses;

0 Agricultural Stations located in the municipalities in and around Stara Planina (Pirot and others) implement research, extension and advisory services, with an estimated 15% o f their budgets (US$256,000) likely to support improved and eco-agricultural practices;

0 The Regional Environment Center project for Transboundary Cooperation Through the Management o f Shared Natural Resources in West Stara Planina i s expected to contribute at least US$66,000 during the l i f e o f the project for local promotional events related to sustainable agriculture, rural development and rural eco-tourism.

0 The GoS Danube River Enterprise Pollution Reduction Project (GEF FY05) seeks to reduce nutrient pollution from livestock production and slaughterhouses. In the project region, it i s anticipated that approximately $300,000 wi l l be provided in the Stara Planina area for reducing effluents from slaughterhouses.

Local citizens are currently spending an estimated US$5,000a year in the project region to improve local tourism opportunities such as pensions, restaurants, etc.

9. Cost: Total expenditures under the Baseline Scenario are estimated at US$8.85 million, including US$1.78 million from the Government o f Serbia and Montenegro and municipal budgets.

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10. Benefits: Implementation o f the Baseline Scenarios will result in only limited protection o f biodiversity within the production landscape in and around Stara Planina and limited integration o f environmental sustainability measures into local agricultural practices. Many o f the initiatives listed under the Baseline Scenario are grant or loan programs for rural communities and farmers for basic rural development activities, and are consistent with the criteria under Pillar 2 o f the EU Common Agricultural Policy (CAP). However, since these programs are essentially demand-driven, the degree to which they will support sustainable rural activities such as eco-agriculture, eco-tourism and other environmentally-friendly entrepreneurial activities i s uncertain. Only very limited resources are available, mainly from local NGOs, for public awareness and planning activities to strategically guide and assist local stakeholders as they transition to environmentally friendly agricultural practices including maintenance o f agro- biodiversity. Management o f the SPNP currently focuses almost exclusively on timber production, with l i t t le capacity for or investment in ecological management, biodiversity protection or monitoring. Due to the extensive investment needs, existing governmental and other financing efforts in the project area will most likely not have a significant impact on the continuing damage to the agricultural landscapes and loss o f biodiversity. Thus, under the Baseline Scenario, these valuable landscapes will most likely continue to be degraded and provide limited environmental benefit over the next decade.

Global Environmental Objective

1 1. The GEF Alternative would provide the means (above and beyond the Baseline Scenario) to establish a foundation for sustainable rural development, conservation o f agro-biodiversity and protected areas management in the Stara Planina region, in particularly by integrating environmentally sound principles into several rural development programs which already exist in the Stara Planina region. The specific objectives o f the GEF Alternative are to promote and support appropriate entrepreneurial and agricultural activities within the Stara Planina region and to help protect biodiversity and natural resources within the Stara Planina Nature Park.

12. as follows:

Costs: The total cost o f the GEF Alternative, estimated at US$17.96 million, i s detailed

0 Support for Environmentally Friendly Agriculture and Rural Development: Incremental GEF and IBRD funds will complement existing rural development programs. Under this component, IBRD loans will be used to build the capacity for administering investment grant and subsidy programs, and provide additional investment grant funds for targeted objectives and areas - including sustainable agriculture and tourism. GEF funds will provide specific funding for a special window within the rural development grants scheme to support local communities to initiate activities with high environmental benefits, such as eco- agricultural, ecological restoration or tourism activities. (Total component cost US$l9.67 million, of which US$4.01 million considered part of the GEF Alternative; GEF financing US$2 million)

0 Building Knowledge and Capacity for Eco-Agricultural Producers and Processors: Incremental GEF, IBRD and governmental funds will support applied research, extension

94

and advisory services and public awareness activities for eco-agricultural and rural tourism activities. (Total component cost US$13.5 million, of which US$3.04 million considered part of the GEF Alternative; GEFJinancing US$1.2 million)

0 Sustainable Land Use and Ecological Management o f the Stara Planina Nature Park: Incremental funds will provide capacity building and operational support for the SPNP management authority (Srbijasume) and other stakeholders to develop and implement management plans and an ecological monitoring system; restore ecological priority areas; develop programs for the certification for locally-based organic agriculture and development o f rural eco-tourism; support the integration o f environmental principles into local rural development strategies; build public awareness o f local stakeholders o f sustainable natural resource management and biodiversity conservation; strengthening transboundary cooperation; and establish comprehensive monitoring systems (Total component cost o f USl. 73 million, all considered part of the GEF Alternative: GEF financing US$l. 5 million).

Project Management: Funds will be provided to support operating costs o f MAFWM and others, associated with the implementation o f project activities, including monitoring, reporting and audit. It will also include meet the costs o f a small project office in the Stara Planina region, in view o f the diversity o f activities to be undertaken (Total project management costs US$2.46 million, of which US$O.33 would focus on management of the GEF Alternative; GEFJinancing US$O. 3 million).

13. Benefits: Implementation o f the GEF Alternative would provide the means for mainstreaming environmental sustainability principals into rural development programs, and restore historical landscapes and agro-biodiversity in and around the Stara Planina Nature Park. Benefits generating from the project would include those classified as “national” as well as those considered “global” in nature - such as the protection o f internationally significant biodiversity. The GEF grant has helped to leverage funds from the IBRD, but perhaps most significantly will have a long-term impact on the conventional rural development programs o f Serbia.

Incremental Costs

14. The difference between the cost o f the Baseline Scenario (US$S.S5 million) and the cost o f the GEF Alternative (US$17.96 million) is estimated at US$9.11 million. This represents the incremental cost for achieving sustainable global environmental benefits. O f this amount, the Government o f Serbia’s Ministry o f Agriculture, Forests and Watersheds has committed an additional US$0.69 mi l l ion above and beyond the Baseline, and the IBRD loan component o f the larger project US$2.74 million. Local beneficiaries participating are expected to contribute approximately US$0.68 mi l l ion o f their own financing through matching grants and in-kind contributions.

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Incremental Cost Matrix

Support for Environmentally Friendly Agriculture and Rural Development

Building Knowledge and Capacity for

Agricultural Producers and Processors

ECO-

Sustainable Land Use and Ecological Management of the Stara Planina Nature Park

Project Management

Baseline

With GEF Alternative

Incremental Benefit Baseline





With GEF 4lternative Yncremental

3.9

7.9

4.0

4.6

7.65

3.03

0.04

1.77

1.73

0.29

0.62

0.33

Domestic Benefits

Functioning but inefficient service delivery for rural development programs

Improved service delivery for a l l rural development programs; increased agricultural production

Limited capacity for research, extension and advisory services, particularly for non- agricultural activities in rural areas Improved capacity agricultural production

Limited capacity to plan and implement protected area management in Nature Park; limited public awareness, no comprehensive strategy for improving natural resource management [ncreased opportunities for alternative income generation in rural Zommunities; increased sapacity to manage protected area; creation o f 3pportunities for education md nature oriented tourism

Vot applicable

Global Benefits

On a demand-basis some governmental rural development grants may be requested by local farmers for environmentally friendly agricultural activities Increased understanding and implementation of environmentally-friendly agricultural and rural development activities

L i t t le attention paid to raise understanding and awareness o f how to integrate environmental principles into landscape production areas

Dedicated research for eco- agricultural and sustainable tourism operations, which will have significant impact on not only other research and extension programs, but also the impact of national rural development grant schemes

Sustainable conservation management o f Nature Park natural resources; increased awareness and use o f biodiversity- friendly agricultural activities; transboundary collaboration with Bulgaria

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Annex 16: STAP Roster Analysis


(Review by Michael P. Wells)

Overview

1. (PAD) received on April 12,2006.

This STAR review has been based on a draft World Bank project appraisal document

2. The proposed project has been designed to complement an ambitious reform program launched in 2000 that aims to transform a declining agricultural sector formerly organized along socialist l ines into a modern, competitive and more efficient industry that i s capable o f benefiting fully from a steadily closer relationship with the European Union (EU).

3. The project aims to: (i) improve and strengthen the government system for delivering rural development investment grants and agricultural subsidies (this includes support for establishing an efficient, EU-compatible farm payment system as well as the implementation o f a rural development program consistent with the EU Common Agricultural Policy); (ii) improve the knowledge and capacity o f agricultural producers and processors to make the best use o f these funds; (iii) increase incentives to farmers to maintain traditional livestock breeds; and (iv) improve the management o f Stara Planina Nature Park (SPNP), an area described as having global biodiversity significance.

4. GEF co-financing wi l l provide incremental funds to increase capacity and incentives for agricultural producers and processors to engage in activities that support agro-biodiversity conservation and sustainable land use, and to support ecosystem restoration and management in SPNP.

5. The project i s submitted under GEF Operational Program (OP) #13 (Conservation and Sustainable Use o f Biological Diversity Important to Agriculture). Support for traditional extensive farming systems and the conservation o f locally adapted animal breeds i s also consistent with the Biodiversity Strategic Priority o f “Mainstreaming Biodiversity in Production Landscapes and Sectors”. The project wi l l also contribute to the Strategic Priority o f “Catalyzing Sustainability o f Protected Areas” by working around a national park, and wi l l also supports OP #4 (Mountain Ecosystems) and contribute to OP #15 (Land Degradation).

6. of US$5 million, and a contribution fiom the recipient o f US$4 million [is this$nal?].

The US$32 million project i s to be financed by an IBRD Loan of US$23 million, a GEF grant

7. The project i s to be implemented by the Ministry for Agriculture, Forestry and Water Management (MAFWM). The project wi l l support long term national consultants working under the direction o f M A F W M staff. A local NGO or firm wi l l be contracted to implement the GEF- financed activities and to support improved management o f the SPNP in collaboration with the responsible government agency, the Public Enterprise for Forests (Srbij asume). A Project

98

Steering Committee will be established to provide strategic guidance, be led by MAFWM and including representatives from local self-governance organizations, NGOs and other key ministries.

8. This i s an important project that provides GEF with an opportunity to influence and steer an innovative government program in a direction that should generate global environmental benefits.

The Project Proposal

9. Issues emerging from the draft Project Appraisal Document:

Broad Context

10. I t i s difficult to assess the viability o f the project in the absence o f information on the troubled recent history o f this region, the wrenching transitions experienced by the population, the considerable political uncertainties and the presumably traumatizing effect o f c iv i l strife on the population's ability or willingness to participate in govenunent-sponsored activities.

1 1. component 1. transparency would be improved by the project

The project places a strong emphasis on improving transparency, especially through I t would be useful if more specific information could be provided on how

Relationship to Agricultural Reform Program

12. As the proposed GEF-financed activities are an integral part o f a proposed World Bank loan-financed project, this STAP review includes some consideration o f issues raised by the latter. Furthermore, since the proposed World Bank loan and linked GEF project are closely linked to and based on the government's agricultural reform program, the STAP review also considers issues raised by the P A D description o f this program.

13. While the benefits o f the national agricultural reform program are fully described, the potential social and environmental costs receive less attention. The proposal i s articulate and persuasive on the benefits o f this program, which clearly follows a path World Bank i s enthusiastic about. Repeated mention i s made o f the strong reform emphasis on agricultural intensification and the adoption o f modern agricultural practices, while the challenges faced by small farmers are characterized as a barrier to sustainable development (e.g., page 26, para 3). Showing that this i s not development that i s oblivious o f social and environmental considerations, the proposal goes on to state that while " the overall thrust i s for agricultural intensification, the GoS also strongly supports adoption o f agri-environmental practices as well as nature protection and conservation o f biodiversity in rural areas" (page 3). The GEF funds are clearly to support the latter.

14. This raises the issue o f whether GEF funds are effectively being sought to mitigate negative social and environmental impacts arising from the government's donor-supported agricultural intensification program, described here in such relentlessly positive terms. An

99

alternative scenario to the rather rosy future picture o f reform presented here might be that food production for volatile and competitive export markets will become increasingly dominated by vertically-integrated privately-owned enterprises that will consolidate land holdings, wipe out smallholders or reduce them to casual laborers, destroy rural livelihoods and fue l further migration to towns, while offsite private sector farm owners with l i t t le concern for the environment will predominate, all with a disastrous effect on agricultural and wild biodiversity.

15. To conclude this point, i t i s suggested that the proposal be modified to include more information and analysis related to the strategic social and environmental issues that will surely arise from the ongoing agricultural reform program. Relevant experience from other countries could be drawn on for such an analysis. This should help the proposal make it clear that this project represents a relatively low-cost opportunity for GEF to steer a much larger investment project and a major reform program in a positive direction for the environment.

Lessons

16. Section 5 on lessons (page 11) should be developed in more detail, specifically concerning the GEF-funded activities.

Effectiveness of Grants

17. A significant portion o f the project funds will be disbursed in grants to support rural development. In the case o f the GEF funds, rural development activities that help conserve the environment will be supported. The proposal does not elaborate the safeguards in place to ensure that these grants will be used for their intended purpose. Considerable reliance seems to be placed on the development o f an operational manual that will specify how the grant program i s to be implemented, together with assurances o f transparency and accountability.

18. Several questions should be clarified before or during the project’s final appraisal, including how much (both GEF and non-GEF funds) i s to be disbursed as grants vs. supporting program costs, what the criteria are for these grants, what the maximum grant size will be, how the credentialshona fides o f applicants will be assured, who will select the grantees and how, how the project will ensure that these grants will not support activities that are environmentally damaging, and how tourism will be defined to ensure that environmentally-harmful tourism labeled as ecotourism will not be supported.

19. The proposal notes that the Government o f Serbia already provides significant financial support for various aspects o f agriculture and rural development through a program that this project aims to build on. I t would be useful to have more information on how this program has performed.

Stakeholder Consultations

20. are the intended beneficiaries.

There i s l i t t le information on consultations with stakeholders, including the farmers who

100

21. Since the GEF support targets supporting livestock husbandry based on locally adapted breeds and rural/eco-tourism in the Stara Planina area, it would be good to have some indication that there i s local interest in pursuing these opportunities.

Viability of Activities to be Supported

22. I t i s suggested that the proposal include any work done to assess the financial and economic viability o f the agricultural and tourism activities to be supported. Presumably the project hypothesis i s that these are potentially viable opportunities that simply need some seed money and technical support to become self-sufficient. I s there any evidence or analysis to support this?

Implementation Arrangements

23. The prospectshsks related to the implementation arrangements could be analyzed and documented in more detail than i s currently provided in the risks section on.page 14. There are at least three issues:

(9

(ii)

(iii)

Does MAFWM, described as fully stretched and no doubt already very absorbed with EU-related issues, have the capacity to manage this project effectively?

Are there established national NGOs or f i r m s in the area o f SPNP, or even elsewhere in Serbia and Montenegro, with the capacity to implement component 3 o f the project, which will require fairly advanced and diverse technical expertise (e.g., in unusual livestock breeds and ecotourism) as well as the ability to work with grantees and stakeholders likely to need considerable support?

H o w effectively will the park management agency Srbijasume, described as a forestry enterprise with an emphasis on timber management, be able to adopt modern conservation practices and collaborate effectively with MAFWM and a locally-hired NGO or firm?

Sustain ability

24. The proposal states that “The project will provide funds to engage a number o f long- term local consultants to assist in administration o f the program, with the expectation that most o f these consultants will be absorbed as regular MAFWM staff within two years.” This seems vague for such a fundamental aspect o f project sustainability. Should this be a covenant o f the loan? Subsequently (page 14), the proposal states: “subject to satisfactory performance, they will be converted to MAFWM permanent staff by the mid-term review”. Surely it i s the positions that need to become permanent, irrespective o f the performance o f the individuals that initially fill these positions.

25. found?

Can nationals with the requisite capacity who are ready to work at government salaries be

101

M o r e Detailed Comments on the Proposal

26. Page 27: This looks like an excellent l i s t o f key constraints to institutional support for agro-biodiversity conservation that the project wi l l need to overcome. It would be useful to show how the project wi l l address these.

27. Page 3 1 : It i s suggested that the indicators related to rural tourism or ecotourism could be made more environmentally specific so that, for example, poorly-planned ski resorts could not count as a positive development.

28. Annexes 2,3, 5-7, 8-1 1, 13 and 15 are s t i l l to be completed.

102

S E R B I AS E R B I A

K O S O V OK O S O V O

V O J V O D I N AV O J V O D I N A

ZZllaatt iibboorr

BBeell jjaanniiccaa

DDeell ii JJoovvaann

SSuuvvaa PPllaanniinnaa

ZZaaggllaavvaakk

SSaarr

KKooppaaoonniikk

JJuuhhoorr RRttaann

ZZeellggiinn

GGooll ii jjaa

RRaaddaann RRooggoozznnaa

CCeemmeerrnnoo

JJaavvoorr

MMaall jjeenn PPoovvlleenn

HHoommooll jj sskkee PPllaanniinnaa

VVeell iikkii

JJaass tt rreebbaacc

VVllaass iicc PP llaanniinnaa

FFrruusskkaa GGoorraa

BB aa ll kk aa nn MMtt ss ..

DaravicaDaravica(2656 m)(2656 m)

LjubotenLjuboten(2486 m)(2486 m)

TTiissaa

SSaavvaa

DDrriinnaa

BBeellii DDrriimm

ZZaappaaddnnaa MMoorraavvaa

JJuuzznnaa MMoorraavvaa

VVeelliikkii

SSiittnniiccaa

LakeLakeScutariScutari

VVeelliikkaa MMoorraavvaa

VucitrnVucitrnˇ

VrsacVrsacˇ

BackaBackaTopolaTopola

ˇ

BosilegradBosilegrad

SurdulicaSurdulica

VlasotinceVlasotince

SokoSokoBanjaBanja

MajdanpekMajdanpek

RaskaRaskaˇ

UsceUsceˇ

SjenicaSjenica

IvanjicaIvanjica

PozegaPozegaˇ

KladovoKladovo

PetrovacPetrovac

Ravni GajRavni Gaj

GolubacGolubac

GornjiGornjiMilanovacMilanovac

BujanovacBujanovac

KnjazevacKnjazevacˇ

ParacinParacin´

BorBor

DakovicaDakovica

NegotinNegotin

Novi PazarNovi Pazar

OrahovacOrahovacUrosevacUrosevacˇ

PribojPriboj

PresevoPresevoˇ

PrepolakPrepolak

AleksinacAleksinac

PrijepoljePrijepolje

BeloljinBeloljin

Velika-Velika-PlanaPlana

LoznicaLoznica

CacakCacakˇ CuprijaCuprija´

Bela CrkvaBela Crkva

KovinKovin

AdaAda

ApatinApatin

BajmokBajmok

KulaKula

SentaSenta

PrnjavorPrnjavorZminjakZminjak

RumaRuma

ObrenovacObrenovac

KanjizaKanjizaˇ

SidSidˇ

ZeleznikZeleznikˇ

AlibunarAlibunar

TemerinTemerin

BecejBecejˇ

BackaBackaPalankaPalanka

ˇ

IndijaIndija

SivacSivac

MladenovacMladenovac

BelaBelaPalankaPalanka

RogacicaRogacica

LjubovijaLjubovija

ElemirElemir

ZagubicaZagubicaˇ

BELGRADEBELGRADE

SomborSombor

SuboticaSubotica

ZrenjaninZrenjanin

SremskaSremskaMitrovicaMitrovica

KikindaKikinda

PancevoPancevoˇ

SabacSabacˇ

ValjevoValjevo

SmederevoSmederevoPozarevacPozarevacˇ

KragujevacKragujevac

JagodinaJagodina(Svetozarevo)(Svetozarevo) ZajecarZajecarˇUziceUziceˇ

KraljevoKraljevo

KrusevacKrusevacˇ

NisNis

ProkupljeProkuplje

PirotPirot

LeskovacLeskovac

VranjeVranje

PecPec

PrizrenPrizren

KosovskaKosovskaMitrovicaMitrovica

GnjilaneGnjilane

PristinaPristinaˇ

Novi SadNovi Sad

S E R B I A

K O S O V O

V O J V O D I N A

Vucitrnˇ

Vrsacˇ

BackaTopola

ˇ

Bosilegrad

Surdulica

Vlasotince

SokoBanja

Majdanpek

Raskaˇ

Usceˇ

Sjenica

Ivanjica

Pozegaˇ

Kladovo

Petrovac

Ravni Gaj

Golubac

GornjiMilanovac

Bujanovac

Knjazevacˇ

Paracin´

Bor

Dakovica

Negotin

Novi Pazar

OrahovacUrosevacˇ

Priboj

Presevoˇ

Prepolak

Aleksinac

Prijepolje

Beloljin

Velika-Plana

Loznica

Cacakˇ Cuprija´

Bela Crkva

Kovin

Ada

Apatin

Bajmok

Kula

Senta

PrnjavorZminjak

Ruma

Obrenovac

Kanjizaˇ

Sidˇ

Zeleznikˇ

Alibunar

Temerin

Becejˇ

BackaPalanka

ˇ

Indija

Sivac

Mladenovac

BelaPalanka

Rogacica

Ljubovija

Elemir

Zagubicaˇ

BELGRADE

Sombor

Subotica

Zrenjanin

SremskaMitrovica

Kikinda

Pancevoˇ

Sabacˇ

Valjevo

SmederevoPozarevacˇ

Kragujevac

Jagodina(Svetozarevo) ZajecarˇUziceˇ

Kraljevo

Krusevacˇ

Nis

Prokuplje

Pirot

Leskovac

Vranje

Pec

Prizren

KosovskaMitrovica

Gnjilane

Pristinaˇ

Novi Sad

H U N G A R Y

ROMANIA

ALBANIA

BULGARIA

FYRMACEDONIA

CROATIA

BOSNIAAND

HERZEGOVINA

MONTENEGRO

Tisa

Danube

Sava

Drina

Beli Drim

Zapadna Morava

Juzna Morava

Veliki

Sitnica

LakeScutari

Velika Morava

To Sarajevo

To Bijeljina

To Vinkovci

To Vinkovci

To Gorazde

To Podgorica

To Kiskoros

To Szeged

To Arad

To Timisoara

To Timisoara

To Carbunari

To Gura Vail

To Vidin

To Vidin

To Sofia

To Sofia

To Pernik

To Kumanovo

To Skopje

To Tetovo

To Kukes

Z lat ibor

Bel janica

Del i Jovan

Suva Planina

Zaglavak

Sar

P lanina

Kopaonik

Juhor Rtan

Zelgin

Gol i ja

Radan Rogozna

Cemerno

Javor

Mal jen Povlen

Homol jske P lanina

Vel ik i

Jas trebac

Vlasic P lanina

Fruska Gora

B a l k a n Mt s .

Daravica(2656 m)

Midzor(2168 m)

Ljuboten(2486 m)

19°E 20°E 21°E

19°E 20°E 21°E 22°E

43°N

44°N

45°N

46°N

43°N

44°N

SERBIA

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

0 25 50

0 25 50 Miles

75 Kilometers

IBRD 34847

AUGUST 2006

SERBIASELECTED CITIES AND TOWNS

OKRUG (DISTRICT) CAPITALS

POKRAJINE (PROVINCE) CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

OKRUG (DISTRICT) BOUNDARIES

POKRAJNE (PROVINCE) BOUNDARIES

INTERNATIONAL BOUNDARIES