Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 16242

IMPLEMENTATION COMPLETION REPORT

KENYA

SECOND AGRICULTURAL SECTOR ADJUSTMENT OPERATION (ASAO) II

(CR. 2204-KE)

January 16, 1997

Agriculture OperationsAfrica Region

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

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CURRENCY EQUIVALENTS

Currency unit = Kenya Shilling (KSh)US$1.00 (at appraisal) = KSh23.5

US$1.00 (end December 1995) = KSh55.85SDR1.00 (at appraisal) = US$1.35

SDR1.00 (end December 1995) = US$1.49

WEIGHTS AND MEASURES

Tons are metric tons of 1,000 kg (2,204 pounds)1 acre (ac) = 0.405 hectare (ha)

FISCAL YEAR OF BORROWER

1 July - 30 June

ABBREVIATIONS AND ACRONYMS

AfDB African Development BankAFC Agricultural Finance CorporationASAO Agricultural Sector Adjustment OperationASMP Agricultural Sector Management ProjectCBS Central Bureau of StatisticsCSRP Cereals Sector Reform ProgrammeDCA Development Credit AgreementDGA Development Grant AgreementDFC District Fertilizer CommitteeDPD Development Planning DivisionEU European UnionFAO Food and Agriculture OrganizationFAO/CP FAO/World Bank Cooperative ProgrammeFPMRP Fertiliser Pricing and Marketing Reform ProgrammeGTZ Gesellschaft fir Technische ZusammenarbeitHIID Harvard Institute for International DevelopmentICR Implementation Completion ReportIDA International Development AgencyIMF International Monetary FundKfW Kreditanstalt fir WeideraufbauKMDP Kenya Market Development ProgrammeM&E Monitoring and EvaluationMOA Ministry of AgricultureMOLD Ministry of Livestock DevelopmentMOALDM Ministry of Agriculture, Livestock Development and MarketingNCPB National Cereals and Produce BoardTA Technical AssistanceUSAID United States Agency for International Development

Vice President Mr. Callisto E. MadavoDirector Mr. Harold E. WackmanDivision Chief/Manager Ms. Sushma GangulyStaff Member' Mr. Gajanand Pathmanathan

FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORT

KENYA

SECOND AGRICULTURAL SECTOR ADJUSTMENT OPERATION (ASAO II)(CREDIT 2204-KE)

CONTENTS

PREFACE ........................................................ i

EVALUATION SUMMARY ................................................................... ii

PART I: PROJECT IMPLEMENTATION ASSESSMENT ..................................... 1A. STATEMENT/EVALUATION OF OBJECTIVES .......................... 1B. ACHIEVEMENT OF OBJECTIVES ........................................... 2C. MAJOR FACTORS AFFECTING THE OPERATION .................. .. 3D. OPERATION SUSTAINABILITY ............................................. 6E. IDA PERFORMANCE ...................................................... 7F. BORROWER PERFORMANCE ............................................. 8G. ASSESSMENT OF OUTCOME ................................................. 8H. FUTURE OPERATIONS ....................................................... 10I. KEY LESSONS LEARNED ...................................................... 10

PART II: STATISTICAL TABLES ....................................................... 12

APPENDICES ............................................. 28A. Aide -MemoireB. Map

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

IMPLEMENTATION COMPLETION REPORT

KENYA

SECOND AGRICULTURAL SECTOR ADJUSTMENT OPERATION (ASAO II)(Credit 2204-KE)

PREFACE

1. This is the Implementation Completion Report (ICR) for the Second Agricultural SectorAdjustment Operation (ASAO IT) for Credit 2204-KE, in the amount of SDR52.2 million (US$75 millionequivalent), which was approved on January 19, 1991 and became effective on May 21, 1991. The secondtranche of the credit amounting to SDR23.3 rnillion, (US$33.8 mnillion) was cancelled by IDA on December21, 1992, following the Government of Kenya's (GOK) reversal of policy with respect to movement ofmaize within the country.

2. Following a request by the Government in December 1995, the closing date of the credit wasextended to June 30, 1996, in order to allow implementation of the institutional strengthening componentsto be brought to an orderly closure. The suspension of disbursements imposed in September 1995 as aresult of non-compliance with the financial covenant requiring timely presentation of audited accounts waslifted on December 22, 1995, upon receipt by IDA of the outstanding audit reports. Final disbursementwas made on December 6, 1996, and SDR3.0 rmillion undisbursed was cancelled.

3. Co-financing of US$7.97 million (equivalent) for the operation was provided by the NetherlandsGovemment. The African Development Bank (AfDB), the United States Agency for IntemationalDevelopment (US AID), the European Union (EU), the Kreditanstalt f'ur Weideraufbau (KFW) and theGesellschaft fur Technische Zusanmuenarbeit (GTZ) provided parallel financing (amounts contained inAnnex 8B).

4. Preparation of the ICR was undertaken by a FAO/CP mission' which visited Kenya in October1995, coinciding with IDA's supervision mission. Inputs were provided by Gajanand Pathmanathan andDonna Criddle (AFTAI). Comments were also received from Jacomina de Regt (AFTOS 1). Commentshave been received from the borrower and have been incorporated in the report. Comments were notreceived from the co-financier, and the Govemment of Kenya did not prepare a separate evaluation of theproject.

5. The ICR is based on discussions with the project management, material in the project files, thePresident's Report, the Development Credit Agreement (DCA), the Development Grant Agreement (DGA)2 ,supervision reports, discussions with staff of concemed govemment agencies as well as informationprovided by private sector millers, merchants and importers. The ICR was reviewed by Sushma Ganguly,Technical Manager, Agriculture Operations 1, Eastem and Southem Africa.

'Messrs. J. H. Weatherhogg, Mission Leader and F. M. Stubenitsky, Economist (Consultant).

2 Between the Govemment of Kenya and IDA as administrator on behalf of the Minister for DevelopmentCooperation of the Netherlands.

iiIMPLEMENTATION COMPLETION REPORT

KENYA

SECOND AGRICULTURAL SECTOR ADJUSTMENT OPERATION (ASAO I)(Credit 2204-KE))

EVALUATION SUIlMMARY

Introduction

1. ASAO n1 incorporated the experiences from the First Agricultural Sector Adjustment Operation3completed in 1988 and subsequent studies by both GOK and IDA. At GOK's request, project preparationstarted during FY89, the appraisal began in June 1990, the credit was negotiated in November 1990, signedin February 1991 and became effective in May 1991. In addition to the IDA credit of SDR52.2 million(US$75 million), parallel and co-financing for balance of payment support was expected to totalapproximately US$100 million. An estimated 89 percent ofthe IDA credit was allocated for financingagricultural imports and 11 percent for sectoral management support.

Operation Objectives

2. The main goals of the operation were to (a) accelerate agricultural growth through smailholders;(b) contribute to fiscal stabilization; (c) improve public sector resource use in agriculture; (d) begin toassist lower income groups who are vulnerable to climatic and economic shocks; and (e) improveagricultural sector institutional capacity.

3. Strategies to achieve accelerated agricultural growth included improved maize producer incentivesand increased market competitiveness; rationalization of maize stocks, compatible with market needs;increased input supply, particularly of fertilizer, and promotion of its efficient use. Fiscal stabilization andimproved public sector resource use was pursued through improvement in the efficiency and composition ofpublic expenditures. Assistance to vulnerable groups was attempted through the development of targetedmeasures to protect vulnerable groups. Finally, improvement of agricultural sector institutional capacitywas pursued by supporting improved policy planning, project preparation and implementation in theMinistries of Agriculture (MOA) and Livestock Development (MOLD) and then continued after the mergerof the two ministries in the Ministry of Agriculture, Livestock Development and Marketing (MOALDM).

4. ASAO II aimed to make substantial advances in three policy areas (maize, fertilizer and publicexpenditure), representing a deepening of reforms begun under ASAO I, as well as initiatives in two other

' The first ASAO Credit 1717-KE of SDR52.8 million and was fully disbursed in November 1988.

iiiareas, namely, steps towards assisting vulnerable groups and building capacity for policy analysis. Thesefive aspects constituted the immediate objectives of ASAO H.

5. To realize the operation's strategies with respect to maize and fertilizers, a number of policymeasures, were conceived as conditions for release of balance of payments support to the Government.These measures included liberalization of the maize and fertilizer markets, and reduction of the NationalCereals and Produce Board's (NCPB) monopolistic role in agricultural produce marketing. Forinstitutional capacity building within the agricultural ministries, technical assistance and supply ofequipment focused on the following areas:

improved public sector management, by the introduction of financial management control systems,backed-up by provision of computers, technical assistance and training,

improved performance reporting systems to allow monitoring and evaluation of projectperformance, supported by equipment, technical assistance and training, and

improved management information system for fertilizers to encourage fertilizer use at smallholderlevel.

Finally, assistance to lower income groups was to be formulated on the basis of impact studies onvulnerable groups and drought assistance strategies.

Implementation Experience and Results

6. Upon credit effectiveness GOK effectively freed the fertilizer market from public control. Maizeliberalization proceeded more slowly. Initial relaxation in a phased manner of maize movement controlsand waiving of NCPB's monopoly on maize procurement and its role as purchaser of wheat and minorcrops, such as beans, proceeded slowly in 1991 and 1992. However, GOK reimposed maize movementcontrols in November 1992. As a result of this policy reversal, [DA canceled the second tranche of thecredit allocated for the finance of agricultural inputs. However, IDA's cancellation of the second trancheshould be seen in the context of an overall dialogue with the Government as part of the economic reformagenda. Subsequently, in December 1993 GOK announced full liberalization of maize movement andmarketing. Implementation of the institutional strengthening components proceeded slowly for a variety ofreasons, including very restricted budget releases in 1992 and 1993, problems in recruiting consultants forthe policy analysis activities and suspension of the IDA credit for the whole of the 1995 calendar year dueto failure to submit audits of the project accounts. Following GOK's request, IDA agreed to extend thecredit closing date to June 30, 1996 to enable completion of the institutional strengthening components.

7. SDR23.3 million were canceled in December 1992. SDR 25.86 million was disbursed, which is49.5 percent of the original credit amount and 89.4 percent of the revised credit amount. Parallel financingprovided by the ather donors was also affected by GOK's decisions in late 1992 to reimpose marketcontrols. Despite this, total funding provided by other donors is estimated at around US$126 million.

8. The ASAO II overall project rating at closure is rated as marginally satisfactory. If the essentialobjective of an adjustment operation is to fundamentally change the approach of Government involvementin the sector, with the focus being on gradual public sector disengagement, then the ASAO II operation can

ivprobably be termed a success. The Government's philosophy in the sector is now decidedly private sectororiented and the commitment to the liberalization process has deepened. This is evidenced by reforms beingundertaken in others subsectors such as dairy, tea, and coffee and in fundamental realignment of the role ofagricultural cooperatives. ASAO II provided a framework for a dialogue which extended beyond the statedobjectives of the project, and thus did indirectly play a role in improving the general policy environment asfar as the sector is concemed.

9. The immediate primary objectives of maize and fertilizer market liberalization have been achievedeven if the former occurred after cancellation of the second tranche of the credit and following furtherdiscussions with IDA and the Intemational Monetary Fund (IMF). In fact the liberalization has progressedfurther than was envisaged under ASAO II. The private sector is now emerging as the dominant player inmaize trading, and NCPB's role has been consequently reduced. GOK has reiterated on a nunber ofoccasions its policy of reducing government controls and encouraging an increase in the private sector'srole. The short-term impact on smallholder farmers has been mixed with farmgate prices reflecting the sizeof the harvest dictated by rainfall. However, farmers selling to private traders have unambiguously beenable to receive prompt payment which was not the case with respect to deliveries made to NCPB. Over thelong-term, as smallholders gain increasing confidence in the market to supply their domestic maizerequirements they will likely substitute higher income eaning crops for maize. This shift in productionpattems (some evidence of this has been documented in the high population density Kakamega district4 )will have important positive implications for smallholder farmer productivity and incomes.

10. The fertilizer liberalization goal of the operation appears to have been successfully achieved. Thisconclusion is supported by a recent study35 The private sector is now responsible for fertilizer importationand distribution. A competitive market has developed and fertilizer is available in most rural markets.Fertilizer use by smallholders is still hampered by the lack of quality standards, and extensive soil testing inorder to provide specific recommendations to individual smallholders has not been implemented. Whilefertilizer use on small farms was affected by drought and uncertain policy framework in the early 1990s, itimproved in 1995 and 1996.

11. The contribution of ASAO I to fiscal stabilization should also be evaluated in the context of theincreased emphasis the Bank has placed in its dialogue with Government on the need to maintain fiscaldiscipline and allocate scarce budgetary resources to priority activities. The impact of ASAO II on its ownis uncertain, though the concept of "core" projects and the need to fully finance such projects wasintroduced under ASAO II. Reduction of government budget expenditures through the price supportoperations of NCPB should ultimately prove beneficial. The goal of assisting lower income groupsvulnerable to climatic and economic shocks have so far been confined to carrying out surveys and

4 Monitoring Farmer' Responses to Market Reform in Kakamega by Joseph 0. Owour: Paper prepared fora conference on "Fine Tuning Market Reforms For Improved Agricultural Perfprmance" - September 25,1996.

The Evolution of Fertilizer Marketing in Kenya by Gem Argwings-Kodhek: Paper prepared for aconference on "Fine Tuning Market Reforms For Improved Agricultural Perfpnrnance" - September 25,1996

v

preparation of contingency plans. These initiatives are now being supported, particularly by the droughtmanagement component, of the IDA financed Arid Lands Resource Management Project (Credit 2797-KE). Considerable progress has been made towards improving agricultural sector institutional capacitythrough review of the government's agricultural project portfolio; studies on staffing norms; design andcommencement of improved budgetary, and monitoring and evaluation systems; strengthening policyanalysis; and training relevant to all of the above.

12. MOALDM's performance in implementing the institutional strengtheming components washampered by staffing changes, particularly at the senior management level. Regrettably, a high proportionof the staff already trained by the project have been transferred to other departments within MOALDM orto other ministries or have entered the private sector. Thus, although the training component wasimplemented satisfactorily, the professional capacity of the Development Planning Division (DPD) hasdecreased, while some of DPD's staff are using their capabilities in other parts of the Ministry. WhileMOALDM was generally successful in implementing the various components, difficulties were experiencedwith the Monitoring and Evaluation component with respect to tendering contracts. The Policy Analysiscomponent encountered substantial difficulties in recruiting the necessary technical assistance, which wasremedied by modification of the scope of work. Submission of audit reports was generally late and thedisbursements were suspended from January 1995 until December 1995 due to overdue audits of theproject accounts.

13. IDA performance was generally satisfactory throughout the process of identification, appraisal andm supporting GOK to carry out its policy of market liberalization of maize and fertilizers. Staff from theresident mission provided continuing support during implementation. Project design benefited from thelessons leamed from the ASAO I credit 1717-KE. ASAO I concentrated on financing studies, policypapers and restructuring plans rather than on implementation. ASAO II was designed to deepen the reformsm key areas (improved incentives for smallholder maize producers, fertilizer availability and efficiency ofpublic expenditures) and capacity building for policy analysis and for improved project implementation.Uneven implementation performance in ASAO I led to a better design of monitoring arrangements, fewerconditions and a common framework for donor support. However, ASAO II contained a number ofrelatively minor components, such as capacity and institution building, budget management and studiesrelated to the Ministry's organizational structure, vulnerable groups and land inventory system whichrequired extensive management from MOALDM and supervision by IDA. IDA's cancellation of thesecond tranche, though regrettable, ultimately may have helped GOK win over opponents to itsliberalization policies.

14. GOK initially took the right decisions both for maize, fertilizers and the reduction of NCPB's role.However, the reimposition of movement controls for maize in November 1992 effectively put a stop to theadjustment component of ASAO H. The institution of a NCPB Performance Contract with the Ministryclarified NCPB responsibilities, but both NCPB and the Ministry failed to carry out their respectiveobligations. Also, NCPB's eventual role in the maize market was not clearly defined in the project design.Overall country non-compliance with audit covenants had been the focus of discussions between theMinistry of Finance and IDA on numerous occasions from 1994 through March 1995, and as indicatedabove, the credit was suspended for approximately one year as a result of long overdue audits. For theremaining secondary objectives, support was satisfactory from MOALDM, the main beneficiary, butrestricted govemment budgets provided inadequate resources for the institution building components.

vi

Summary of Findings, Future Operations and Key Lessons Learned

15. As a result of ASAO II and the policy discussions which followed the cancellation of its secondbalance of payments component, the Government has progressively liberalized the maize market. Also, anagricultural strategy based on public sector ownership and/or heavy involvement in the sector has beenreplaced with a private sector focused strategy with the Govemment increasingly playing only an enablingrole. This is a major positive effect of ASAO II.

16. For future operations, already being prepared and/or appraised, IDA will continue to support theGovernment's startegy to further liberalize the economy. This is important, as the momentum couldotherwise be lost and a degree of government control reimposed. Continued financial support for theinstitutional strengthening is also vital for the continuation of the work already prepared by consultants,which was assisted by the decision to extend the project until June 30, 1996.

17. Key lessons leamed from project implementation are as follows:

(i) The sustained impact of policy and institutional changes which are supported byadjustment operations and capacity building programs may only become apparent in the longerterm and should be assessed in that time frame.

(ii) Normal investment components should not be packaged with adjustment operations. Theytend to detract from the main focus of the adjustment operation and in the event of a cancellation ofa policy based tranche, are left vulnerable to the overall lack of commitment which resulted in thecancellation. If such components are necessary then it would be better to finance such componentsthrough a parallel but separate investment operation.

(iii) A monopoly public sector agency's future role in a liberalized environment should be fullyexplored before the liberalization process embarks on assisting that agency to adjust to theliberalized environment.

(iv) Performance contracts between Govemments and public sector agencies may be usefultools to clarify mutual obligations, but unless the Govemment (a) is willing to carry out itsobligations and (b) sanctions the public sector agency for not carrying out its obligations, thecontract will not have a positive impact in modifying the operating behavior of the targeted agency.

(v) When the Government disengages from controlling the purchase and distribution ofcommodities such as fertilizer, it does not mean that it abrogates its regulatory oversight role. Inthe fertilizer sector the Govemment should introduce strong quality control regulations in parallelto liberalizing the trade.

(vi) The design of technical assistance packages should not be complex and ambiguous. Theletter of invitation packages should clearly set out the scope of work expected by the bidding firm.Also, Government institutional strengthening through technical assistance has to be a sustainedundertaking, which therefore needs to be scheduled for the long term, generally exceeding theduration of a project or adjustment operation. Fortunately, for this operation, the availability of

viifunding under the ASMP II, and the future Sector Investment Project, will continue to supportlocal capacity building for institutional strengthening.

(vii) Inclusion of covenants must receive more up-front thought during project design andnegotiations to ensure that coverants relate to critical policy and institutional change issues andimplementation actions. Supervision and project implementation of ASAO II would have beenhelped by better focusing of the large number of covenants included in the Development CreditAgreement (DCA).

IMPLEMENTATION COMPLETION REPORT

KENYA

SECOND AGRICULTURAL SECTOR ADJUSTMENT OPERATION (ASAO II)(Credit 2204-KE)

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. STATEMENTIEVALUATION OF OBJECTIVES

I . ASAO II was both a sector adjustment and investment project. In addition to the IDAcredit of SDR52.2 million (US$75 million), parallel and co-financing largely for balance of paymentsupport from the Netherlands Government, AfDB, the EU, GTZ, KFW and USAID was not defined butwas expected to total approximately US$100 million. The IDA credit was to be allocated 89 percent(SDR46.6 million, or US$67 million) for financing agricultural imports, including fertilizers, pesticides,chemicals and seeds, agricultural machinery equipment and spare parts, veterinary supplies and petroleumproducts. This balance of payments support was to be disbursed in two equal tranches of SDR 23.3million. The balance of 11 percent (SDR 5.6 million, or US$ 8 million) was allocated to sectoralmanagement support, including improvement in the efficiency of public expenditures, development oftargeted programs to protect vulnerable lower income groups and to increase preparedness for droughts andstrengthening the capacity of the then separate Ministries of Agriculture (MOA) and LivestockDevelopment (MOLD)6 in policy analysis. The operation aimed at substantial advances in three policyareas -- maize market liberalization, fertilizer market liberalization and public expenditure rationalization.These represented a deepening of reforms begun under the first Agricultural Sector Adjustment Operation(Cr. 1717-KE) completed in June 1988.

2. The main goals of the operation were to (a) accelerate agricultural growth through smallholders;(b) contribute to fiscal stabilization; (c) improve public sector resource use in agriculture; (d) begin toassist lower income groups who are vulnerable to climatic and economnc shocks; and (e) improveagnrcultural sector institutional capacity. Strategies to achieve accelerated agricultural growth includedimproved maize producer incentives and increased market competitiveness; rationalization of maize stocks,compatible with market needs; increased input supply, particularly of fertilizer, and promotion of itsefficient use. Fiscal stabilization and improved public sector resource use was pursued throughimprovement in the efficiency and composition of public expenditures. Assistance to vulnerable groups wasattempted through the development of targeted measures to protect vulnerable groups. Finally,improvement of agricultural sector institutional capacity was pursued by supporting improved policyplanning, project preparation and implementation in MOA and MOLD and then continued after the mergerof the two ministries in MOALDM.

6Now combined in the Ministry of Agriculture, Livestock Development and Marketing (MOALDM).

23. Effectively, ASAO Ifs immediate objectives were the liberalization of maize and fertilizermarketing, including removal of maize movement controls, removing the National Cereals and ProduceBoard's (NCPB) monopoly in maize procurement and cessation of trading in minor crops such as beans;complete freedom for the private sector to import and distribute fertilizer; and improvement in the capacityof the ministries associated with the sector (later merged into a single ministry), especially in allocation offinance and budgeting, monitoring and evaluation and policy analysis.

4. The choice of objectives was relevant to the Govenmuent's overall policies and strategy fordevelopment of the agricultural sector which has increasingly moved away from government control togreater involvement of the private sector in all aspects of agricultural production, processing anddistribution. In addition the objectives stressed the need for more fiscal discipline which was alsoincreasingly in line with the macroeconomic reforms being undertaken by the Government. The objectiveswere also the natural follow-up in terms of implementation to the much broader range of refonrs andanalytical work supported under ASAO I. Project design was clear regarding the major objectives formaize and fertilizers. The project design stressed the need for a "phased approach." Project progress was,perhaps inevitably erratic as a result of the difficulty of the political decisions involved

B. ACHIVEMENT OF OBJECTIVES

5. A slight delay in meeting conditions of effectiveness was due to a less than timely start of studieson staffing norms, privatization opportunities and impacts on vulnerable groups, and full staffing andoperationalization of the Fertilizer Inputs Unit in MOA. The credit became effective in May 1991. Thisproject was implemented during a fairly turbulent economic management period in Kenya which saw adeteriorating economic policy framework in the early 1990s and a consequent overall decline in new IDAcommitments to Kenya. After the general elections held in late 1992, however, the economic policyfr,amework steadily improved which resulted in IDA's approval of a Structural Adjustment Credit (SAC2884 -KE) for Kenya in June 1996 just before ASAO II closed. Kenya also experienced a major droughtin late 1992/early 1993 which had a marked adverse impact on agricultural production. This relativelyturbulent period was reflected in the sector's performance; the agricultural sector growth rate averaged anegative 1.4 percent per annum from 1990-1993 before improving to 3 percent in 1994 and 5 percent in1995.

6. The steady progress towards attaining the project's maize liberalization objectives was abruptlyreversed when the Government reintroduced maize movement controls in November 1992. IDAaccordingly canceled the second tranche of the balance of payments component of the Credit in December1992 and similar action was taken by the other agencies financing the project, in particular the EuropeanUnion (EU), United States Agency for Intemational Development (USAID) and African Development Bank(Aff)B). Discussion on maize movement issues was, however, not limited to the context of ASAO II butwas also included in the overall dialogue with the Govemment as part of the economic reform agenda.IDA's cancellation of the second tranche of ASAO I1 should be seen in that context as well. The maizemarketing issues continued to be part of the "core" set of issues discussed by the Bank and the InternationalMonetary Fund (IMF) with Govemment. These discussions subsequently led to the Government of Kenya(GOK) fully liberalizing maize marketing, including imports and exports in December 1993.

37. Unlike in maize marketing, the Govemment moved quickly to fully liberalize the import offertilizer and marketing in 1992. Fertilizer use on small farms, however, in the early 1990s was affected bythe drought and the uncertain policy framework before improving in 1995 and 1996. Fertilizer use has alsobeen influenced by availability of credit and slow payment by parastatal agencies (which has improved overtime). Also, with market liberalisation taking root and faced with uncertain prices, famers have beencautious im making decisions about input use and cropping pattems. Lack of quality standards have alsohad an impact. A study was financed under ASAO I to establish quality control standards and regulatorycriteria and the recommendations are being considered for adoption by Govemment. The program ofextensive soil testing with a view of formulating specific recommendations for individual smallholders hasnot been fully implemented, though the Kenya Agricultural Research Institute (KARI) has begun todisseminate the recommendations.

8. The contribution of ASAO II to fiscal stabilization should also be evaluated in the context of theincreased emphasis the Bank has placed in its dialogue with Govenmment on the need to maintain fiscaldiscipline and allocate scarce budgetary resources to priority activities. The impact of ASAO I on its ownis uncertain, though the concept of "core" projects, and the need to fully finance such projects wasintroduced under ASAO II. Reduction of govemment budget expenditures through the price supportoperations of NCPB should ultimately prove beneficial. The goal of assisting lower income groupsvulnerable to climatic and economic shocks have so far been confined to carrying out surveys andpreparation of contingency plans. These initiatives are now being supported, particularly by the droughtmanagement component, of the IDA financed Arid Lands Resource Management Project (Credit 2797-KE). Considerable progress has been made towards improving agricultural sector institutional capacitythrough review of the government's agricultural project portfolio; studies on staffing norms; design andcommencement of improved budgetary, and monitoring and evaluation systems; strengthening policyanalysis; and training relevant to all of the above.

C. MAJOR FACTORS AFFECTING THIE OPERATION

(a) Factors Not Generaily Subject To Government Control

9. The problem of the highly sensitive nature of the objective of maize market liberalization wasfurther compounded by variable climatic conditions and fluctuating harvests during the project period.Poor rainfall years in 1990/91 and 1991/92 had resulted in maize production of respectively 2.25 milliontons and 2.34 million tons, or around 20 percent below normal levels. As a result, maize stocks weredrawn down and 1992/93 was also a poor crop7 year. Political pressure for Government to take action tomanage the maize market so as to avoid any serious shortage in the country's staple food thereforeincreased. Similarly in the 1993/94 crop year crop forecasts indicated a very low production of only 1.6million tonss which increased pressure on Governnent to allow extensive importing of maize. In the event,production was significantly better than forecast at 2.10 million tons. One of the difficulties, both in regard

7 In the event 1992/93 was better than forecast at 2.43 million tons.

' Here also the forecasts proved to be pessimistic and the eventual harvest was estimated at 2.1 milliontons.

4

to achievement of adequate maize prices for farmers in the west and south-west of Kenya and inpreparation of reliable crop forecasts, is the apparently fluctuating, but unknown and unrecorded, importsof maize from Uganda and Tanzania, both of which have generally lower costs of production than Kenya.

10. In addition to IDA, other donors also actively supported the overall liberalization objectives,including long term assistance by USAID in development and liberalization of fertilizer and maize markets,the support of GTZ in fertilizer marketing and training; and the restructuring and reform of NCPB, whichbecame the focal point of the EU's involvement in the Cereals Sector Reform Program. However, bothUSAID and EU withdrew their support following the cancellation of the second tranche of the IDA credit.In retrospect, the withdrawal of this donor support, and in particular of the EU, may well have furtherdelayed the restructuring of NCPB, still not completed to this date.

(b) Factors Subject To Government's Control

11 The main policy objectives of ASAO 11 were the liberalization of the maize and fertilizer markets,as well as also removing beans and minor crops from NCPB's marketing monopoly. The Government wascommitted to liberalization of commodity markets, and for crops other than maize and wheat it enacted thenecessary liberalization measures with only minor delays. After the initial freeing of maize movementsbetween districts of 1991 and early 1992, full controls were re-introduced in November 1992, leading tocancellation of the second tranche of the IDA Credit allocated for the finance of agricultural inputimportation. The Government took this decision to re-introduce maize movement controls notwithstandingIDA objections and warnings about possible consequences. The cancellation of the second tranche of theCredit did not affect IDA.financing of the non-policy based, largely technical assistance components of theproject. However, the cancellation of the second tranche, for some time at least adversely affected theimplementation of the non-adjustment components.

12. As mentioned above the liberalization of the maize market formed part of the core set of issueswhich were subject to discussion by the Government and the Bank. In late 1993, and in the context of thesediscussions with the IMF and the Bank, the Government removed all controls on maize marketing. Wheatprocurement by NCPB was terminated in February 1993. In this manner the liberalization conditionsimposed under the ASAO H credit were fully satisfied, even if no longer in the actual context of thatoperation.

13. GOK actions in response to anticipated maize shortages, both in reimposing maize movementcontrols in late 1992 and in encouraging large imports of maize over the period June-December 1994,damaged the confidence of the nascent private grain traders. Regarding imports, GOK had introduced avanable duty system in December 1992. This duty was to be levied according to the difference betweencalculated import and domestic reference prices. However, there was a provision for the duty to be waived

5for a variety of reasons - e.g. food aid for refugees, or for use by govefmnent agencies.9 As a result,application of the controls proved problematic. At the same time as GOK liberalized maize marketing inDecember 1993, control of retail prices of maize flour was also removed. With indications in March 1994of likely shortages of maize later in the year, GOK was understandably anxious to avoid any further crisisin supply of the country's staple food. ° GOK's encouragement to the private sector to import maizeresulted in large quantities arriving as the successful 1994 season crop was being harvested which had animpact on lowering farmgate prices.

14. GOK suffered from a donor suspension of balance of payments support which was effective fortwo years from late 1991 to late 1993. As a result, government budget resources were scarce and releasesto MOALDM were inadequate and slowed down the implementation of the institutional strengtheningcomponents.

(c) Factors Under Implementing Agency Control

15. MOALDMs performance in implementing the institutional strengthening components washamrpered by staffing changes, particularly at senior management level. The Director of Agriculture wastransferred halfway through project implementation and the head of the DPD, which has a key role in theimplementation of ASAO II, was replaced three times in four years. In addition, DPD staff trained underthe project were almost systematically moved to other departments or to other ministries, while some left towork in the private sector. As a result, even though the training component of the project was implementedin a satisfactory manner, the professional capacity of DPD is now probably below the pre-project level;though from the Ministry's perspective, some of DPD's staff are working in other parts of the Ministry.

16. While MOALDM was generally successful in implementing the various components, althoughconsiderably more slowly than anticipated at appraisal, particular difficulties were experienced with the

9 Maize production trade, stocks and consumption estimates over the period 1991/92 to 1994/95 are asfollows:

i~~~~~~~199._.BJ.. E 934 -.L9-J I-R gk('000 tons)

Opening stocks 318 40 200 100Production 2,500 2,650 2,100 2,970Imports 120 430 600 580Exports 48 - - -

Total Supply 2,890 3,120 2,900 3,650Consumption 2,850 2,910 2,800 2,850Closing stocks 40 210 100 800

The estimates indicate the critically low stocks at the beginning of the 1992/93 year and the over-supplysituation due to continued importing of maize and adequate domestic production in 1994/95.

10 Some estimates suggest as much as 70 percent of calones in the average diet in Nairobi is derived frommaize.

6monitoring and evaluation, and policy analysis components. For the first of these, two virtually identicalcontracts were assigned, one for MOA and the other for MOLD' I . The ministries had merged by the timethe work was completed. As a result of this work a project performance monitoring system was installed inthe Department of Agriculture (named PROMPT) and a separate one in the Department of Livestock(named PPM). Further work is being done to merge the two systems so that one system can be used for allMOALDM projects. For the policy analysis component there were substantial difficulties in recruiting asuitable firm to provide the requisite technical assistance. The whole technical assistance package wasrather complex, and ambiguities in the Letter of Invitation package sent to a short list of firms led todifficult contract negotiations which ultimately could not be concluded between the Government and theselected firm. The Government, then subsequently sought and obtained IDA concurrence to modify thescope of work and to recruit individual consultants to undertake specific work. This hiatus delayed thestart of implementation of the component until September 1994.

17. The Ministry's provision for the audit of the project accounts was generally late, and the failure tosubmit the audits finally resulted in suspension of the remaining credit in relation to institutionalstrengthening in January 1995. The suspension remained in force until December 1995.

D. OPERATION SUSTAINABILITY

18. Given ASAO Ufs objectives im maize market liberalization, i.e., abolition of maize movementcontrols, greater involvement of the private sector in maize purchase and trading and a reduction ofNCPB's role, the prospects of the changes being permanent and sustainable are good. In fact theliberalization has progressed further than was envisaged under ASAO II. The private sector is nowemerging as the dominant player in maize trading, and NCPB's role has been consequently reduced. GOKhas reiterated on a number of occasions its policy of reducing government controls and encouraging anincrease in the private sector's role. The final issue is to clarify NCPB's future role in operating a strategicmaize reserve and its relationship to the private sector, and steps are being taken to do this. All theseaspects are the subject of continuing discussions between GOK, IMF and IDA.

19. The sustainability of liberalization of the fertilizer market is highly likely, with importers/traders,stockists and retail outlets having taken on the responsibility of supplying farmers' requirements. Theincreased dissemination of fertilizer use recommendations by KARI will also assist smallholder farmers tomake informed economic choices about fertilizer use. In addition, it is also likely that quality control willimprove with the Government implementing the recommendations of the study financed under ASAO II.The impact of these initiatives will be more long-term.

20. The technical assistance element of the operation was intended to assist MOALDM to strengthenits policy analysis, to improve budgetary procedures, to rationalize its staffing and to implement amonitoring and evaluation system of its development projects. While the implementation of theseobjectives was largely successful, the loss of trained staff, the suspension of disbursements during 1995and the limited time span of TA services, particularly in computerization, has so far restricted the benefits.

I IIn 1993 the Ministry of Agriculture (MOA) and Ministry of Livestock Development (MOLD) merged tobecome MOALDM.

7Concerted and well-financed follow-up action is necessary to ensure the sustainability of the relativelymodest achievements of ASAO II. The Government is undertaking a major restructuring of MOALDMunder the IDA financed Second Agricultural Sector Management Project (ASMP II Credit 2445-KE). Thework done under ASAO II is feeding into this restructuring initiative. MOALDM's restructuring is alsobeing addressed under the civil service reform focus of the SAC. MOALDM has been selected as thefront-runner for the restructuring program. The Government and IDA have recognized that institutionaldevelopment is a long term objective and have made provisions for ASAO H's initiatives to be supportedunder ongoing and future IDA and other donor funded programs. The sustainability of the institutionaldevelopment components financed under ASAO II is therefore likely.

E. IDA PERFORMANCE

21. IDA's performance has been satisfactory in supporting GOK in carrying out its policy of marketliberalization of maize and fertilizers and in helping to obtain unified support for these policies among theother donors. Design of the operation benefited from the lessons leamed from ASAO I and in particular theadvantages of reducing and defining more clearly the operation's scope. Even so ASAO II included, inaddition to its main liberalization objectives, a large number of other components such as capacity andinstitution building, budget management and rationalization, and studies on the Ministr-ys organizationalstructure, on vulnerable groups and on the organization of a land inventory system. These componentsdemanded, in retrospect, an inordinate amount of management input by MOALDM and of supervision byIDA, which may have detracted from the principal objectives. In retrospect it could be argued that normalinvestment components should not be included in an adjustment operation; such initiatives may be betterfinanced through a parallel but separate investment operation.

22. Project design was clear regarding the major objectives for maize and fertilizers. The project designstressed the need for a "phased approach." Project progress was, perhaps inevitably, erratic as a result ofthe difficulty of the political decisions involved and the fluctuations in production.

23. For fertilizers, the project design assumed that timely and efficient soil testing -- a crucialcomponent in the drive to higher fertilizer consumption -- would be available from KARI or from theprivate sector. Unfortunately, KARI was unable to provide the necessary services as planned and, whileprivate sector soil testing has been initiated by a major fertilizer company, its capacity is inadequate for thecountry's needs. Consequently, the positive impact of the fertilizer reforms has only emerged in the last twoyears.

24. IDA's supervision was adequate, and staff from the resident mission provided continuing supportduring implementation. Supervision and project implementation would have been helped by better focusingof the large number of covenants included in the Development Credit Agreement (DCA).

25. IDA's cancellation of the second tranche of the credit, though regrettable, appears to have beencorrect in the circumstances and may ultimately have helped GOK in winning over opponents to itsliberalization policies. IDA's agreement to extend the loan closing date by six months was correct andshould significantly increase the chances of sustamability of the institution strengthening components.

8

F. BORROWER PERFORMANCE

26. The performance of the Government has to be judged bearing in mind the highly sensitive politicalnature of the maize market, the difficulties of moving from a public sector monopoly to a free marketsituation, the pressure exerted by individuals and sections of the population and the destabilizing effect ofsharp fluctuations in production as a result of changing weather conditions. Utimately the Government didhave the strength of will to introduce limited liberalization in 1991 and early 1992. However, thereintroduction of full controls in late 1992, just before the general elections, undoubtedly had a negativeeffect in undermining the confidence of private sector maize dealers and millers that the Government wasserious in its liberalization policy.

27. Full removal of controls on the maize market, including imports, was effectively accomplishedtoward the end of 1993. However, the timing of maize imports entering the Kenya market in 1994depressed domestic prices and damaged farmers' confidence in maize as a profitable crop. The subsequententry of NCPB into the market, buying at well above the market price, but with inadequate finance toredeem its pledges for the 1994 season crop, created further difficulties.

28. The institution of a NCPB Performance Contract with the Ministry was supported by the projectand appears to have been useful in clarifying NCPB responsibilities and the Ministry's expectations.However, the performance contract failed in that both parties to the contract failed to live up to theirmutual obligations. NCPB did not adhere to the agreements on disengaging from the maize market and theGovernment did not adequately, and in a transparent manner finance NCPB to carry out activities on itsbehalf. Also, NCPB's eventual role in the maize market was never clearly articulated in project design. Itwas perhaps implied that the agency would only be responsible for managing the strategic reserve; it wasnever fully made clear whether the agency would ever have a commercial role. In this context, aperformance based contract has recently been signed with a firm to assist in the commercialization ofNCPB's activities; under the new rules NCPB would also manage the strategic maize reserve on theGovernment's behalf for a fee.

29. The provision of audited project accounts has presented difficulty throughout the implementationperiod and led to suspension of disbursement in 1995. Overall country non-compliance with auditcovenants has been the focus of discussions between the Ministry of Finance and IDA under the 1994Country Portfolio Performance Review, mini CPPR review of March 1995 and the Government'ssubsequent ongoing Action Plan.

30. Budget constraints of MOALDM, imposed by Treasury, resulted in problems with the continuationof consultancy services for developing system computerization, affecting the project's budgeting exercise,as well as the monitoring and evaluation programs.

G. ASSESSMENT OF OUTCOME

31. If the essential objective of an adjustment operation is to fundamentally change the approach ofGovernment involvement in the sector, with the focus being on gradual public sector disengagement, thenthe ASAO II operation can probably be termed a success. The Government's philosophy in the sector isnow decidedly private sector oriented and the comrnitment to the liberalization process has deepened. This

9is evidenced by reforms being undertaken in others subsectors such as dairy, tea, and coffee and infundamental realignment of the role of agricultural cooperatives. ASAO II provided a framework for adialogue which extended beyond the stated objectives of the project, and thus did indirectly play a role inimproving the general policy environment as far as the sector is concemed. With regard to maizemarketing, the domestic market has been fully liberalized and private sector involvement is now substantial.The short-term impact on smallholder farmers has been mixed with farmgate prices reflecting the size ofthe harvest dictated by rainfall. However, farmers selling to private traders have unambiguously been ableto receive prompt payment which was not the case with respect to deliveries made to NCPB. Over the long-term, as smallholders gain increasing confidence in the market to supply their domestic maize requirementsthey will likely substitute higher income eaming crops for maize. This shift in production pattems (someevidence of this happening has been documented in the high population density Kakamega district12 ) willhave important positive implications for smallholder farmer incomes.

32. For fertilizers, the major objective was to promote its use by the smallholder farmers in aliberalized market environment. The Government, in effect, entirely liberalized the fertilizer markets during1991, and the private sector is now fully responsible for importation, packaging and marketing offertilizers. At present, the only administrative requirement is to register imports with the authorities both forstatistical purposes and to assure minimum quantities of imported lots so as to benefit from economies intransport costs.

33. The market for fertilizers has thus been opened up to the private sector and fertilizer is generallyavailable, even in smaller packed quantities (10 kg and 25 kg bags) in most of the agricultural productioncenters. A recent study'3 has suggested that the objectives of fertilizer market liberalization have beenlargely achieved. At the same time, MOALDM was, and remains responsible for action to (i) promote andmonitor the safe use of fertilizers; (ii) develop private and co-operative dealers' marketing skills; (iii)improve soil testing facilities; and (vi) develop quality standards for fertilizers. The Ministry wassuccessful in organizing, at the district level, regular meetings between the extension service,traders/stockists and farmers to disseminate information on fertilizers .14 Some training in fertilizer use hastaken place, both for extension staff and private traders.

34. The outcome of the other components of the ASAO H operation is discussed below:

(i) The Public Expenditure Management component has supported reform of financialmanagement, including budget allocation, expenditure control and cost center budgeting through

12 Monitoring Farmer' Responses to Market Reform in Kakamega by Joseph 0. Owour: Paper prepared fora conference on "Fine Tuning Market Reforms For Improved Agricultural Performance" - September 25,1996.

13 The Evolution of Fertilizer Marketing in Kenya by Gem Argwings-Kodhek; prepared for a conferenceon "Fine Tuning Market Reforms For Improved Agricultural Performance" - September 25, 1996.

14 This included formation of a National Fertilizer Development Committee and District FertilizerCommittees (DFC) both with private sector representation. The DFC appear to have been active at thestart of ASAO II but now rarely meet and may have accomplished their purpose.

10

improvements to the budgeting system (notably computerization) and an extensive program oftraining. The services have been provided by technical assistance from the Harvard Institute forIntemational Development (HHID) as well as by local consultants. A whole range of systems hasbeen introduced, but only partly adopted for lack of adequate numbers of trained staff. The localconsultants were retained in order to provide technical back-up, continuity and training capacity toallow an adequate build up in numbers of staff to run the system.

(ii) The Performance Reporting System component to provide for monitoring and evaluation(M&E) has been largely implemented though its benefits are not yet apparent. Its eventual utilitywill depend on the success of merging the two systems into one which can be used by the Ministryas a whole. It appears that capacity exists both at ministry headquarters and in the districts tooperationalize the system and this is to be supported under ASMP II.

(iii) The project's program of training has been generally satisfactorily completed. Continuedlocal training is required for staff in both budget management and Monitoring and Evaluation In-house training courses for staff to improve their policy analysis capability have been started. It isintended to continue these courses under ASMP II.

(iv) Arrangements to set up a Management Information System (MIS) for fertilizers have beencompleted and the system is operational. However, recommendations on establishment of aregulatory framework by MOALDM for fertilizer quality control have not yet been finalized.

(v) ASAO II financed useful studies on the impact of the policy changes on vulnerable groups.It is proposed to carry out a follow-up survey to again examine the effect of policy changes on

vulnerable groups as part of the National Welfare Monitoring Survey undertaken by the CentralBureau of Statistics (CBS). The project also financed the development of a Food Security ActionPlan and a Drought Contingency Action Plan, which remain relevant to development of appropriatestrategies in both areas. The latter plan was in fact useful in the formulation of the IDA financedArid Lands Resource Management Project (Credit 2797-KE) which became effective on July 12,1996. Studies and training proposed in land policy and administration have not so far beenimplemented.

H. FUTURE OPERATIONS

35. Following up with the ASAO II project, GOK and IDA have continued discussions onliberalization in the context of the dialogue on overall policy and economic issues. Regarding technicalassistance and studies aimed at the realization of the institutional development objectives, ASMP II iscontinuing assistance provided under ASAO IH after June 1996.

L KEY LESSONS LEARNED

36. Key lessons leamed from project implementation are as follows:

11

(i) The sustained impact of policy and institutional changes which are supported byadjustment operations and capacity building programs may only become apparent in the longerterm and should be assessed in that time frame.

(ii) Normal investment components should not be packaged with adjustment operations. Theytend to detract from the main focus of the adjustment operation and in the event of a cancellation ofa policy based tranche, are left vulnerable to the overall lack of commitment to theproject/program. If such components are necessary then it would be better to finance suchcomponents through a parallel but separate investment operation.

(iii) A monopoly public sector agency's future role in a liberalized environment should be fullyexplored before the liberalization process embarks on assisting that agency to adjust to theliberalized environment.

(iv) Performance contracts between Governments and public sector agencies may be usefultools to clarify mutual obligations, but unless the Government (a) is willing to carry out itsobligations and (b) sanctions the public sector agency for not carrying out its obligations, thecontract will not have a positive impact in modifying the operating behavior of the targeted agency.

(v) When the Government disengages from controlling the purchase and distribution ofcommodities such as fertilizer, it does not mean that it abrogates its regulatory oversight role. Inthe fertilizer sector the Government should introduce strong quality control regulations in parallelto liberalizing the trade.

(vi) The design of technical assistance packages should not be complex and ambiguous: Theletter of invitation packages should clearly set out the scope of work expected by the bidding firm.Also, Government institutional strengthening through technical assistance has to be a sustainedundertaking, which therefore needs to be scheduled for the long term, generally exceeding theduration of a project or adjustment operation. Fortunately, for this operation, the availability offunding under the ASMP II, and the future Sector Investment Project, will continue to supportlocal capacity building for institutional strengthening.

(vii) Inclusion of covenants must receive more up-front thought during project design andnegotiations to ensure that covenants relate to critical policy and institutional change issues andimplementation actions. Supervision and project implementation of ASAO II would have beenhelped by better focusing of the large number of covenants included in the Development CreditAgreement (DCA).

12PART II: STATISTICAL TABLES

TABLES

1. Summary of Assessment2. Related Bank Loans/Credit3. Project Timetable4. Credit Disbursement: Cumulative Estimated and Actual5. Credit Indicators for Project Operations6. Key Indicators for Project Operations7. Studies Included in the Project8A. Project Costs8B. Project Financing9. Economic Costs and Benefits10. Status of Legal Covenants11. Compliance with Operational Manual Statements12. Bank Resources: Staff Inputs13. Bank Resources: Missions

13Table 1: Summary of Assessments

A. Achievement of obiectives Substantial Partial Negligible Not Applicable

el) Cl) Cl) Cl)Macro policies 7 N I

Sector policies E 7 F O

Financial objectives I- FT]

Institutional development E]

Physical objectives FT ]Poverty reduction FTl

Gender issues El E E

Other social objectives T ] E E

Environmental objectives E E E E

Public sector management El 0 El

Private sector development l El E

Other (specify) E E E [

B. Project sustainabilitv Likely Unlikelv Uncertain(-) C (')El El E

HiehlyC. Bank Performance satisfactory Satisfactorv Deficient

Identification El EL

Preparation assistance El E E

Appraisal E El El

Supervision E El E

14

HibhlyD. Borrower performance satisfactory Satisfactory Deficient

v() (V)Preparation L J 4W

Implementation O EC1 0

Covenant compliance F 7 EC

Operation (if applicable) E

Highly HigJlyE. Assessment of outcome satisfactory Satisfactorv Unsatisfactory unsatisfactory

(4) (4 ) 4 i

Table 2: Related Bank Loans/Credits

I Lam/credit tile Purpose Year uf approval Status 1JPreceding operations

1.Cr.1717-KE. Support for Policy and 1986 Completed 1988Institutional Change inthe Agricultural Sector

2. Cr. 2797 - KB Improve Arid Lands 1996 OngoingResource ManagementProject

Following operations

1. Cr. 2445-KE Support for Institutional 1992 OngoingChange and CapacityBuilding

2. Cr. 2884-KE Structural Adjustment 1996 OngoingCredit

15Table 3: Project Timetable

Steps in project cycle T Ite planned Date actu 1L. - -- - -.-... tt j t ertimate

Identification (Executive Project Summary) Draft 10/17/89 12/10/89

Preparation 1989

Appraisal (begin) 5/3/90 9/90

Negotiations 10/1/90 11/90

Letter of development policy 11/90 11/90

Board presentation 12/18/90 1/17/91

Signing 1/91 2/21/91

Effectiveness 3/91 5/21/91

First tranche release 2/91 5/91

Midterm review (if applicable)

Second tranche release 3/92 -

Project completion 12/31/95 6/30/96

Credit closing not specified 6/30/96

C Canceled December 22, 1992 due to non-fulfillment of all conditions for tranche release.

Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual(US$ Million)

. Bank/lDA FYIJI FY92 FY93 FY94 FY95 FY96 FY417

Appraisal estimate 34.0 70.0 72.5 75.0 -

Formally Revised 17.2 31.4 31.7 35.5 39.5 41.5

Actual 4' 17.2 31.4 31.7 32.4 33.1 33.8 34.1

Actualas%of appraisalestimate 505.6 44.8 43.7 43.2 44.1 45.1 45.5

Actual as % of formally revised 100.0 100.0 100.0 91.2 83.8 81.4 82.2

Date of final disbursement: December 6, 1996

W The second tranche of SDR 23.3 million (US$33.5 million) was canceled in December 1992.

Table 5: Key Indicators for Project Implementation

The President's Report listed no performance indicators for implementation, beyond indicating that the componentof the credit allocated for imports would be released in two tranches, the first upon credit effectiveness, expected in March

161991 and actually achieved in May 1991, and the second tranche released 12 months after the first (Table 3). Release of thecredit was subject to compliance with covenants listed in Table 10.

Table 6: Key Indicators for Project OperationAs of February 1995

_ _._.~_______ __________ ___ '

!j CwponeounL'ask Cempkdon CompledonDate | Date

Maize Maize producer prices to be reviewed and re-adjusted using the new 2/91 1/94(a) methodology(b) Maize movement controls to be relaxed further to permit transportation of 2/91 Decernber 1993

up to 8 tons (90 bags) of maize without a permit; a date during 1992 forremoving all controls on domestic maize movement to be agreed withIDA; NCPB's guaranteed share of the secondary (sifted millers) demandfor maize to be reduced to 60 %, beans to be rescheduled.

(c) The Performance Contract, acceptable to IDA to be financed for the years 11/92 Non1992/93 to 1994/95 and signed for 1992/93 _ Compliance 1/

Fertilizer Selected institutional mechanism to lower the costs of fertilizer imports 11/91 N/A 2/(a) and a timetable to make it operational to be agreed with IDA(b) The policy paper on donor "in-kind" fertilizer aid to be finalized, and an 11/91 7/93

exchange of views to take place with IDA on proposed measures.(c) Action plans for soil testing, fertilizer promotion, and training to be 11/91 1/92

finalized for all Districts following review by the Fertilizer Development________Committee (FDC)

Public A project Performance Reporting System and a Project Review Committee 11/91 (a) 4/95Expenditures in MOA and MOLD to be established (b) the MOA and MOLD core (b) 7/96(a) investment program in the 1992/93 Annual Budget to be fully financed and

l_____________ included in the estimates in the 1992/93-1994/95 Forward Budget(b) Staffing norms to be finalized, and implementation to be commenced on 11/91 during 1997

staaffing and non-salary operating expenditure norms in key activities, with 31consequential adjustments to the intake of trainmg institutions.

(c) Implementation of an action plan to increase collection of user charges 11191 during 1995 3/would be commenced

(d) Performance of the improved budget and payment system would be 11/91 9/95evaluated, and views exchanged with IDA on the findings

Assistance to (a) Implementation of action plans to be commenced for: drought 11/91 (a) late 1995 4/Vulnerable contingency, food/nutrition, (b) addressing possible adverse impacts of (b) variouslyGroups am marketing reforms, and household momtonng. undertakenCapacity Recruitment of Technical Assistance Personnel 6/91 3/94building inAgriculture

1/ PC was signed without IDA concurrence2/ Given current situation, not applicable3/ Implementation under ASMP 11 project4/ Implementation under ALRMP

17Table 7: Studies Included in Project

Purpose as defined at

Study appraisal/redefined Status Impact of study

1. Ministry of To establish a staffing completed The study is being used inAgriculture Staffing structure and determine defining the 'new'Norms staffing inconsistencies structure of the combined

Ministries of Agriculture,Livestock Developmentand Marketing supportedunder ASMP II.

2. Ministry of Livestock To establish a staffing completed The study is being used inDevelopment Staffing structure and determine defining the 'new'Norms staffing inconsistencies structure of the combined

Ministries of Agriculture,Livestock Developmentand Marketing supportedunder ASMP 11.

3. Impact of reforms on To formulate an action plan completed The initial survey foundthe vulnerable groups to address any adverse that the impact was

effect on vulnerable groups positive. This wasas a result of the market expected to be followed upreforms. by a systematic monitoring

of impact which has notyet been done.

4. Fertilizer Quality Not defined at appraisal. completed Government is consideringControl in Kenya Was included as it became the recommendations of

apparent that this was the study.necessary as the marketwas liberalized.

18Table 8A: Project Costs Al

Appraisal est;niate (USSM) Aualatest ea3mal (USSM) |

Local Foreign Total Local ForeignCosts Costs Costs Costs Total

1. Fertilizer - 24.95 24.95 - 16.68 16.68

- Pesticides; chemicals and seeds - 10.00 10.00 - 5.72 5.72

2. Agricultural machinery, - 20.00 20.00 - 4.28 4.28equipment and spare parts

3. Veterinary Supplies - 2.00 2.00 - 0.09 0.09

4. Petroleum products - 10.00 10.00 - 4.09 4.09

5. Consultants' services 0.60 1.20 1.80 0.53 1.06 1.59

6. Training 1.10 3.30 4.40 0.16 0.49 0.65

7. Vehicles and equipment 0.42 1.26 1.68 0.14 0.44 0.58

8. Incremental-non-salary operating costs 0.17 - 0.17 0.08 - 0.08

Total - . .. ....... .. . _ 2.29 72.l. 75.00 0.91 32.85 33.76w

a/ Appraisal Estimates derived from the DCA and Actual/Latest Estimate from the WB Loan DisbursementSystem report on Cr.2204-KE of August 25, 1996. Fee % for consultant services assumed to be 66%, and fortraining and vehicles and equipment 75%.

bI The balance of Special Account Fund A has been fully recovered. Special Account Fund B has a balance ofUS$147,204, which is in the process of being recovered. The undisbursed credit balance is US$5.02million.

19Table 8B: Project Financing

~~~~~~. ... .. . '. . .._..___________________ Appraisl estiate (LSSM) ActuWA1les tia (SM

Loral Foreign Total Local Foreign TotalSource costs costs costs costs

IDA 2.29 72.71 75.00 0.66 32.25 32.91

Co- or Parallel Financiers

Netherlands Government - - - - - 8.77 b/

AfDB - - - - - 33909

USAID - - - - - 70.10d/

EU - - - - - 3.66 e

KfW 7 - - -7

GTZ - - 1.77e

Sub-Total I- 100.00" - - 126.18

TOTAL I- - 175.00 _ - 159.09President's Report estimate of finance likely to be provided by other donors.

-i Netherlands Government Grant of NLG15 million transferred to IDA on 5 December 1991 and administered by IDA. Asecond grant might have been made if the progress of ASAO II had been more satisfactory.As reported by AfDB on 31 January 1996, 14.12 million Units of Account (UA), or using the 1992 average conversion rateof I UA = USS1.375, about US$19.41 million were disbursed up to and including 1992, leaving an undisbursed balance of13.04 million UA, which assuming a conversion rate of I UA = US$1.450 is equivalent to US$13.04 million.

d1 USAID financed two projects whose objectives partially overlapped those of ASAO n. These were the Kenya MarketDevelopment Program (KMDP) and the Fertilizer Pricing and Marketing Reform Program (FPMRP). KMDP was a fiveyear program starting in 1990 and consisted of US$40 million in Title m Food Assistance, US$10 million in Non-ProjectAssistance (NPA) and USS5 million in Project Assistance. In late 1995 USS20 million of the Food Assistance had beendisbursed and US$2 million of the NPA. Project Assistance expenditure is estimated at US$2 million, making a totaldisbursement for KMDP of US$24 million. The FPMIRP was a five year program starting in 1989 and total USAIDfinancing was US$46.1 million.EU financed the Cereals Sector Reform Program (CSRP) starting in April 1988. Over the period 1988-1990 this disbursedECU35.92 million (US$40.48 million). Over the period 1991-1995 CSRP disbursements were ECU2.95 million (USS3.66million).

f/ In 1991 KfW allocated DM29.0 million (US$17.48 million). Upon cancellation of the second tranche of the IDA creditKfW suspended DM16.5 million (US$10.6 million). Total disbursements to Novemaber 1995 are therefore DM12.18 million(US$7.98 million) and the undisbursed balance DM 16.82 million (US$ 1 1.88 million).

' For the GTZ supported Fertilizer Extension Project (FEP). Disbursements as reported by GTZ on 1 March 1996 wereDM1.043 million (US$0.637 million) in FY 1994, DM0.842 million (USS0.55 rnillion) in FY 1995 and are estimated atDM0. 831 million (US$0.579 million) in FY 1996.

Table 9: Economic Costs and Benefits

The President's Report made no estimate of economic costs and benefits of the operation. In view of thesectoral nature of the operation and the much larger contributions made by the private sector, Government andother donors, it would be extremely difficult to identify economic costs and benefits attributable to ASAO 11 andthe accuracy of any result would be highly questionable.

20Table 10: Status of Legal Covenants

KENYASecond Agricultural Sector Adiustnent Operation (ASAO 11)

(Credit 2204KE)

DCA Covenant type Present Original Revised Description of covenant ComnmentsSection status fulfilment date fufilment date2.02 (a) CD 3/91 5/91 The Borrower shall, for the purposes of the Program, Two special accounts were opened-

open and mamtain in dollars two special depositaccounts (Special Account A and Special Account B)in the Central Bank of Kenya on terms an conditionssatisfactory to this Association, including appropriateprotection against set-off, seizure or attachment.Deposits into, and payments out of, the SpecialAccounts shall be made in accordance with theprovisions of Schedule 4 to this Agreement

CD The Borrower and the Association shall from time to The exchange of views was partially suspended3.01 (a) time at the request of either party exchange views on when GOK reintroduced movement controls on

the progress achieved m carrying out the programme maize m late 1992.and the actions specified m Schedule 3 release of theSecond Tranche ofthe credit and were as follows).

Schedule 3

I Maize

(a) CD 2/92 12/93 The Borfowerhas:carried out inprovements ofthe maize pricing systemtaking into account parity prmciples, stock levels andanticipated production and impact on the Borrower'sbudget and has adjusted maize producer prices maccordance with such imnprovements;

(b) CD 11/91 11/93 published regulations, satisfactory to the Association After some initial relaxation, the maizepermitting the transportation of up to 8 tons of maize movements controls were re-inposed inwithout a permit; November 1992 with consequent cancellation of

the Second Tranche of the credit (c) CD 11/91 11/93 established a date durig 1992 satisfactory to the

21DCA Covenant type Present Original Revised Description of covenamt Comments

Section status fulfilment date fulfilment dateAssociation for the removal of all controls on themovement of maize within the country;

(d) CD 11/91 11/93 takenstepstoreduceNCPB'sshareto600/oof thesited maize miller's intake of maize;

(e) CP 11/92 entered into a Performance Contract, satisfactory to The Perfonnance Contract betwen GOK andthe Association, with NCPB to regulate NCPB's NCPB was signed, but without IDA concurrmce.activities for 1992/93-1994/95. The PerformanceContract shall include, inter alia the followingelements the Borrower's policy statement on maize,NCPB's revised role and responsibilities, reservestock target levels and guidelines for the managementthereof decision rules for market stabiisation, theBonower's budgetary allocations to compensateNCPB ftly for losses incurred on food security andmarket stabilisation operations, and monitorableperformance targets for NCPB; and removed beansfrom NCPB's Scheduled List

(1) CD 11/91 6/92Schedule 3 Fetilisers

2

The Borrover has:(a) CD 11/91 7/93 finalised the policy paper to reduce distortions created

by in-kind donor-sppLied fetiliser and has exchangedviews with the Association on the proposed measures;

(b) Not 11/91 - completed the study on mechanisms to lower the costapplicable of fertiliser imports in the private sector and has

e 3exchanged view with the AssociatAon on tbe proposedmeasuresb

(c) CD 11/91 1/92 finalised action plans, satisfactory to the Associationfor soil testing, tramnig of offices anal fertiliserpromotion for all major fertiliser consummg districtsin the country._

Schedule 33 Public EV!!!ditures

22DCA Covenant type Present Original Revised Description of covenant Comments

Section status fulfilment date fulfihnent date

The Borrower: has:(a) CD 11/91 4/95 funished to the Association a lst ofprojects for MOA

and MOLD, satisfactory to the Association, forinclusion into the Borrower's core investmentprogramnne;

(b) CD 11/91 7/96 funished to the Association, evidence satisfactory to Progress was severely constrained by GOKthe Association showing that the list of projects in the budget difficulties in 1992 and 1993.core investmnent programme rderred to in (a) abovehas been included in the Borrower's Annual Estimatesfor 1992/93 and Fonrwd Budget for 1992/93-1994/95.

(c) SOON 11/91 - comnpleted a review of staffing norms and adopted and Proposals developed wider ASAO 11 are likely tostarted to implement an action plan, satisfactory to the be implemented wider the Second AgriculturalAssociation on (i) achieving tevised staffing levels in Sector Management Project (ASMP I).MOA and MOLD, (ii) raising the ration ofnon-salaryto salary operatmg expenditures m key agriculturalactivities, and (iii) regulating student enrolment inMOA and MOLD trainmg institutions;l

(d) SOON 11/91 9//96 evaluated performance of improved budget and As part of the preparation of the proposedpayment system as it relates to MOA and MOLD and Agricukural Sector Investment Programexchang view with the Association; and

(e) SOON 11/91 adopted and implemented an action plan for improving To be implemented under ASMP 11.the collection of user charges from farmers.

Schedule 3 Vulnerable Groups4

(a) SOON 11/91 - The Borrower has finalised and started to implement To be iruplemeited under the And Landaction plans, satisfactory to the Association, on (a) Resources Management Project (ALRMP)..

(b) SOON 11/91 - drought contigency measures, (b) food/nutrition, (c)possible negative impacts of the present grain

(c) SOON 11/91 - marketing system, and (d) household welfaremonitoring survey.

(d) SOON 11/913.03 CP The Bofrower shall strnghen the capabilities of (a) Generally proceeded much slower than originally

MOA, MOLD, MSM, MOF, MLHPP, CBS and anticipated, Many of the staff tramed have beenNCPB in the areas of data collection and policy transferred to other departments or ministries.analysis through the provision of technical assistance, Separate, but identical, contracts were let forshoit term training courses, advanced local and M&E development by MOA an MOLD and the

23DCA Covean type Presat Original Revised Descripton of covaimt Comments

Section stats fiulfilmnat date fiffilment dateovrsas tamin, veuicbs and equipmnt; (b) the system desiged for MOLD is now beingProject Pefomance Rorting System of 1he Project modified to make it suitable for agcituralDevelopment and Monitoring Division of MOA, PMU projects.m MOLD and ovefal budget and financialmnagemaet pracices m MOA and MOLD throu&i On fatilishs, MOA has managed liltle on qualitythe provision of tewmnical assistance, training, vehicles control and soil testing suppost is belowand equipmaet; and (c) MOA to promote and monitor requirennts. Recnitmet of suitable cdlantssafe ferbliser use, develop the private and co-operative for policy analysis strgthag was a majordealers, fatilisor markmting skills, improve soil testig difficulty and all acvtes suffaied from GOKflcilities and quality sandards offatilisms hrou& budgot constraints in 1992 and 1993. As dtafted,provision oftechnial assistance, local and overses the covaant was unwieldy and proved inetivetraimni vehicls and equipmait To that end the and difficult to monitor.Borrower shaU employ consmltants whosequalifications, expaince, and terms and conditions ofempboymeit shaUl be satisfictory to the AssociationL

3.04 (a) C The Bonwoa shaU maintam or cause the CentralBk of Kenya to maintain records and accountsadequae to relect im acconce with csisttlymaintaied sound acoounting practies, theepaditures financed out of the poceeds of the credit

3.04 (b) SOON The Bonower shall: Provision of audit accouts was consistently a(i) have the records and accounts referred to in para. problem for the ASAO IL GenaaUly, the(a) of this Section, including those for the Special problem seemed to be due to a delay mAccouaits for each fiscal year audited, in accordance submtting accounts for audit - tating more thanwith apprepriate auditing principles consistently 9 months after the year and wAien it was difficultapplied, by mdependent auditors acceptable to the or impossible to find the necessary documentationAssociation and also the problem of District Accounants

(respnsible to the Treasury) rainig vouches(ii) fiunish to the Association as soon as available, but wich could rot thafore be submitted with them any case not later than six mnaths after the and of consolidated accouts As a result; auditedeach such year, with respect to Categories (1) and (2) accounts became tw years in afears and theand nime mths after the end of each such year with credit was suspended for the whole of 1995 untrespect to Categories (3) and (4) of the table in para . 1 the reorts we retceived The rets forof Schedule 1 to the DCA, a cedtied copy ofthe FY94/95 are now overdue.report of such dutail as the Assocation shall havereasonably requeted; and

24DCA Covenant type Present Original Revised Description of covenant Comments

Section status fullfilment date fulfilment date(ii) finmsh to the Association sud other informationconceming said records and accounts and the auditthereof as the Association shall from time to tinereasonably request

3.04 (c) C For all pendit with respect to whiuc withdrawalsfrom the Credit Account were made on the basis ofstatements of expenditure, the Borrower shall:

(i) maintain or cause to be maintained in accordancewith pars. (a) of this Section, records and accountsrelectig such expenditures;

(ii) rtain, unit at kast one year aRter the Associationhas received the audit repoft for the fiscal year mwhich the last withdrawal from the credit Account wasmade, all records (conrtacts, orders, invoices, bills,receipts and other documents) evidecing suchmpenditus;

(iii) enable the Association's representatives toexamme such records; and

(iv) ensure that such records and accounts are includedim the annual audits i'ared to in para. (b) of thisSection and that the report of such audit contains aseparate opiion by said audiors as to whtdher thestatements of expeditue submitted during such fiscalyear, togeher with the procedures and internalcontrols imvolved in their prepartin, can be reliedipon to support the related withdrawals

4.01 Pursuant to Secimi 6.02 (k) ofthe General As a result of GOK re-imposition on maizeCondtions, the following additional even is specified, movement controls in November 1994, IDAnamely, that a situstion has arisen which shall make cancelled the Second Tranche of the creditit improbable that the Programme, or a significant partthereof; will be carried out.

C = covenant complied with; CD = covenant complied with aRfer delay;

25CP = complied with partially; NC = Not comphed with;SOON = compliance expected shortly

26Table 11: Compliance with Operational Manual Statements

: ¢ .90 iE:i0-E ..8#. !........1. OP 13.40 Suspension of Disbursements Failure to comply with IDA conditions or auditing of

project accounts led to suspension of disbursement for allof the 1995 calendar year.

Table 12: Bank Resources: Staff Inputs

stage of' Panzid Revised Actualprojec cycle

Preparation to n.a. n.a. n.a. n.a. 227.5 430.1appraisal

Appraisal n.a. n.a. n.a. n.a. 54.5 105.3

Negotiationsthrough n.a. n.a. n.a. n.a. 9.6 22.5Board approval

Supervision n. a. n. a. n. a. n. a. 138.6' 284.6"

Completion na n.a. n.a n.a. 12.02' 46.8w'

TOTAL n..na am.442.3 SB9SL . n .W.l.l.l...UWEU I..W... I .m...e .n I .. ..... .....

NOTE: n.a = Not available.' Includes 18.6 weeks (US$40,400) for Netherlands Trust Fund supervision.b/ Estimate.

27Table 13: Bank Resources: Missions

Performancerating k

proj,ectcycle I eor _r fld represoted St&*$ objud pre

Through appraisal d/

Appraisal through 6/90 5 na7 (18) SC,A,E,F,M - -

Board approval .

Supervision 1 9/91 6 9 SC,E(2),F 2 2 F,M(2),M

Supervision 2 10- 3 9 E(2),SC -

11/91

Supervision 3 1/92 2 3 E(2) C

Supervision 4 10/92 1 5 DC - - C

Supervision 3 5/92 4 na (8) SC,E,F,M 2 2 F,M

Supervision 3 10/93 3 na (10) E(2),F 2 2 F,M,C

Supervision 4 2/95 3 na (8) E,F,P S S C,F,M

Supervision 5 10/95 5 na (6) E,F,P U S C,F,M

Completion FAO/CP 10/95 2 1 3 AE,E .

L' A = agriculturist bI 1 = minor problemsAE = agricultural economist 2 = moderate problemsE = economist 3 = major problemsF = financial specialist S = satisfactoryM = management specialistP = procurement specialist 9/ C = legal covenantsSC = Section Chief F = financialDC = Division Chief M = management

d/ IDA assisted GOK in preparation of the project, through assistance with economic work providing asthe basis for the sector adjustment operation. This was provided by a number of visits by IDA Washington staff aswell as continuing assistance from the Resident Mission in Nairobi. As indicated in Table 12 above, this totaledaround 228 staff weeks.

e/ na = not available, figures in brackets are mission estimates.

KENYA: Second Agricultural Sector Adjusanent Operation (ASAO 11)Appendix A: Mission's Aide-Memoire

1. A mission from the FAO/World Bank Cooperative Programnme (FAO/CP) consistingof Messrs. J. H. Weatherhogg, Agricultural Economist and Mission Leader, and F. M.Stubenitsky, Economist Consultant, visited Kenya from 14-27 October to prepare the ICR on theabove project. The mission overlapped with the fmnal supervision mission, led by the World Bank(WB) Task Manager, Mr. Gajan Pathmanathan.

2. The mission had discussions with concerned staff of the Ministry of Agriculture,Livestock Development and Marketing (MOALDM) and the National Cereals and Produce Board(NCPB), as well as with private sector millers, grain dealers, fertilizer suppliers and farmers. Twoshort field visits were made to the Thika/Sagana area and to Nakuru. The mission is most gratefulfor the assistance provided in arranging the programme of meetings and field visits.

3. The Aide-Memoire is based on a draft prepared by the mission as a basis fordiscussion at their final meeting. This finalised version incorporates the comments and suggestionsof the Government and of the WB.

MISSION'S FINDINGS

Project Design

4. The project supported Government's policies for liberalization of maize and fertilizermarketing and for strengthening and improving the efficiency of the agricultural ministries,including improved manpower and staffing norms, prioritisation of projects and streamlining ofproject activities, enhanced policy analysis and provision of assistance to vulnerable groups. Thechoice of objectives was relevant to the Government's overall policies and strategy for developmentand a natural follow-up from the rather broader range of reforms supported under ASAO I, as wellas the EU supported Cereals Sector Reform Programme (CSRP). However, with the benefit ofhindsight, the mission believes that a project of this kind should have included agreements onputting in place adequate maize import/export control mechanisms, without which liberalization ofthe domestic market could result in considerable, unwelcome price fluctuation.

5. Also, the proposals as outlined in the President's Report appear to have underestimatedthe difficulties of transferring responsibility for handling grain from the NCPB to private traders ina "phased approach". Presentation of the particular covenants included in the project could alsohave been improved. The number of covenants could have been reduced and the individualcovenants made more clear cut and easier to monitor.

1

KENYA: Second Agricultural Sector Adjustment Operation (ASAO 11)Appendix A: Mission's Aide-Memoire

Implementation

6. Credit effectiveness was three months later than planned due to a delay in meetingconditions and the credit became effective in May 1991. Initial progress in implementation wasreasonably successful with reduction of NCPB operations in minor crops, some relaxation of maizemovement controls and dismantling of controls on fertilizer marketing.

7. The programme for preparation of studies, increased training, reorganizing thebudgeting procedures of the Ministry of Agriculture (MOA) and Ministry of LivestockDevelopment (MOLD) so as to concentrate on a smaller number of "core projects", as well asprogress in assisting vulnerable groups, all moved much more slowly than anticipated at projectappraisal.

8. The steady progress towards attaining the project's liberalization objectives wasabruptly reversed when Government reimposed maize movement controls in November 1992. IDAaccordingly cancelled the second tranche of the Credit in December 1992. Since then only thecomponent for strengthening MOALDM has continued and even for this component disbursementshave been suspended since provision of audited project accounts is more than two years in arrears.

Project Costs

9. As appraised, it was estimated that in addition to the US$75 million IDA credit, otherdonors would contribute a further US$100 million to the project. Discussions with some of thedonors indicate that the allocation of funds to the project may well have exceeded this amount.With the exception of the Netherlands, which entered into an agreement with IDA to administertheir Development Grant, the other agencies, including USAID, EU, AfDB and KfW, providedparallel financing. At the same time as IDA cancelled the second tranche of the credit, some of theother donors, notably the EU, also cancelled their funding. Consequently, total disbursements byIDA up to early October 1995 are around US$33.2 million, or about 44% of the estimated fundingat project appraisal. Of this, about half has been used for purchase of fertilizers and about 42% forimport of pesticides, chemicals, seeds, agricultural machinery, equipment, spare parts andpetroleum. About SDR 3.97 million, or 7.6%, of the original credit amount, with a present valueof about US$5.9 million, remains undisbursed. Actual disbursements by the other donors areprobably of the order of an additional US$60 million and will be further detailed in the ICR.

2

KENYA: Second Agricultural Sector Adjustment Operation (ASAO II)Appendix A: Mission's Aide-Memoire

Project Performance

10. Information on the project's achievements in studies financed and number of stafftrained is being compiled to MOALDM and will be presented in the ICR.

11. Regarding both maize marketing and fertilizer supply liberalization, the presentsituation exceeds the targets set at project commencement. Movement of maize within Kenya isnow without any restriction and NCPB's future operations are expected to be largely directed atmanaging strategic reserves of maize, possibly combined with some support buying during periodsof low prices.

12. Fertilizer importation and subsequent trading and supply of fertilizer to farmers areentirely without restriction. However, use of fertilizers is still constrained by its high price relativeto maize, also, the programme of soil testing with a view to formulating specific recommendations,has not been implemented.

13. The project can, therefore, be considered broadly successful in attaining its objectives.In the maize market liberalisation and reduction of NCPB's role, the ASAO II objectives were to:(i) discontinue NCPB operations in numerous loss-making minor crops; (ii) allow a phasedreduction in the proportion of maize that the larger (sifted flour) millers had to procure from NCPBto around 60%; and (iii) dispense with maize movement controls. All three have been achieved -NCPB has ceased trading in minor crops, millers can buy freely from farmers, dealers or NCPBwithout restriction and maize movement controls have been completely abolished. However, muchstill requires to be done before liberalization of the maize market can be considered satisfactory andthe full benefits are felt by producers, consumers and the country's economy. This would includethe development of a vigorous network of private grain dealers, merchants and millers, operation ofadequate storage owned by farmers, dealers, merchants and millers, as well as protecting the maizemarket from low priced and untimely imports of maize. Government has recently announcedfurther maize policy reforms, including steps to divest/privatise NCPB, as part of an overalloperational plan to fully commercialise the maize sub-sector.

14. Performance of the institution strengthening components has been slower thananticipated in project design. The Public Expenditure Management component has supportedreform of MOALD financial management, including budget allocation, expenditure control andcost centre budgeting through improvements to the budgeting system (notably computerisation) andan extensive programme of training. The work has been supported by technical assistance from theHarvard Institute for International Development (HIID) as well as local consultants. A whole rangeof systems has been introduced but only partly adopted for lack of adequate numbers of trained

3

KENYA: Second Agricultural Sector Adjustment Operation (ASAO 11)Appendix A: Mission s Aide-Memoire

staff. The local consultants have been retained in order to provide technical back-up, continuityand training capacity to allow an adequate build up in numbers of staff competent to run thesystem. Adequate funding to extend the contracts of the local consultants is not assured without theproject's assistance (and with disbursements suspended) and this could reduce the chances of theproject's sustainability. Recommendations of studies financed by ASAO II to examine staffinglevels and prioritisation of projects in MOALDM are expected to be useful in the furtherrestructuring of MOALDM, which is being implemented under the Second Agricultural SectorManagement Project (ASMP II).

15. The Performance Reporting System component to provide for monitoring andevaluation (M&E) was financed by the project for the then existing Ministry of Agriculture (MOA)and Ministry of Livestock Development (MOLD) through two separate contracts. Both consultantshad virtually identical terms of reference but followed different approaches. Now that each formerministry has become a department within MOALDM, work has been undertaken to merge the twosystems and make them fully operational. However, it now appears that MOALDM willstandardise on the system originally developed for M&E of livestock projects and additionalconsultancy input is being used for this purpose. At present, the M&E system for livestock projectshas been tried in three districts. Further implementation is delayed since operating a system forM&E for both agriculture and livestock projects will require increased computer memory, anextension of the local consultant contract for adapting the system to cover agriculture projects, andincreased local training of staff to operate the system. Difficulties have also been experienced invehicles intended for M&E purposes being diverted for use by the agricultural extension service.Additional support is likely to be required after end-December 1995 to finance further training andevaluation of the system and for provision of additional computer equipment. As with the earliercomponent, the lack of assured financing for these activities required to make the component fullyoperational could seriously reduce the chances of the component's sustainabilty.

16. The programme of training, financed by the project, has been generally satisfactorilycompleted. As already mentioned, local training is required for staff in both budget managementand M&E. Also, some training programmes for fertiliser dealers and traders have yet to beconducted. Initial training courses for staff to improve their policy analysis capability have beenstarted, but as yet no proposals have been formulated for continuation of this activity after closureof the credit.

17. Arrangements to set up a management information system (MIS) for fertilisers havebeen completed and the system is operational. However, recommendations on establishment of aregulatory framework by MOALDM for fertiliser quality control have not yet been finalised.

4

KENYA: Second Agricultural Sector Adjustment Operation (ASAO 11)Appendix A: Mission's Aide-Memoire

18. ASAO II financed useful studies on the impact of the policy changes on vulnerablegroups. It is proposed to carry out a follow-up survey to again examine the effect of policychanges on vulnerable groups as part of the National Welfare Monitoring Survey undertaken by theCentral Bureau of Statistics (CBS). The project also financed the development of a Food SecurityAction Plan and a Drought Contingency Action Plan, which remain relevant to development ofappropriate strategies in both areas. Studies and training proposed in land policy and administrationhave not so far been implemented.

19. The performance of the Borrower, Government of Kenya (GOK) has to be judgedbearing in mind the highly sensitive political nature of the maize market, the difficulties of movingfrom a public sector monopoly to a free market situation, the pressure exerted by individuals andsections of the population and the destabilizing effect of sharp fluctuations in production as a resultof changing weather conditions. Ultimately GOK did have the political strength of will to carrythrough its policy of liberalization. However, the reintroduction of controls in late 1992,undoubtedly had a negative effect in undermining the confidence of private sector maize dealers andmillers that GOK was serious in its liberalization policy" . Similarly, the poorly coordinated anduncontrolled imports of maize in 1994 depressed domestic prices and damaged farmers' confidencein maize as a profitable crop. The subsequent entry of NCPB into the market, buying at well abovethe market price, but with inadequate finance to redeem its pledges for the 1994 season crop,created further difficulties. The institution of an NCPB Performance Contract with the Ministrywas supported by the project and appears to have been useful in clarifying NCPB responsibilitiesand the Ministry's expectations. Direct Government instructions to NCPB by-passed the contractand provisions for adequate financing for NCPB were also not observed. Provision of auditedproject accounts has presented difficulty throughout the project and has led to suspension ofdisbursement.

It also led to cancellation of the second tranche of the IDA credit as well as loss of substantial otherdonor funding.

5

KCENYA: Second Agricultural Sector Adjustment Operation (ASAO 11)Appendix A: Mission's Aide-Memoire

20. IDA performance has been satisfactory in supporting GOK in carrying through itspolicy for maize market liberalisation and in helping to obtain unified support for these policiesamongst the other donors. However, the project design omitted any reference to trade in cerealsand therefore lacked actions to control imports, without which the stability of the domestic marketcannot be assured. Also, the project design laid stress on the need for a "phased approach". In theevent, project progress was, perhaps inevitably, erratic as a result of the difficulty of the politicaldecisions involved and the fluctuations in production. IDA's main preoccupation and effortstherefore seem to have become helping GOK to push through privatisation of maize marketing withinadequate attention to the poorly developed trader and storage situation in the private sector. Withthe benefit of hindsight, it might have been better to have sought to achieve the project's objectivesby further additional means. These could have included funding through the project to provideinducements over a transitional period of, say three years, for both NCPB and the millers/dealers totake over and operate part of the NCPB's storage capacity. Finally, the Development CreditAgreement (DCA) includes a large number of covenants, these could have been better focused witha view to their subsequent easier monitoring.

Lessons Learned

21. At this point in preparation of the ICR the main lessons learned appear to the missionto be as follows:

(i) At the time of project design, all imports and exports ofcereals were banned and it is, therefore, understandable that no mentionwas made regarding regulation of trade. However, the experience ofproject implementation has shown the danger of not having satisfactorymeans for regulation of imports in a situation where the domestic marketis being liberalised and changing from long established state operatedprocurement to as yet not fully developed private sector dealers andmillers. Future projects with similar aims of domestic marketliberalisation need to also include introduction of adequate means toregulate imports and exports.

6

KENYA: Second Agricultural Sector Adjustment Operation (ASAO 11)Appendix A: Mission's Aide-Memoire

highly likely that this will become modified due to political pressure andevents outside the control of government. Emphasis appears required onother aspects which may assist the change in policy as well as to thepolicy change itself. At the time of the design of ASAO II, it wasexpected that NCPB would continue to play a major role in maizemarketing. However, from the outset it was clear that the private sectorwas going to take a much larger share in maize trading. From this itfollowed that the private sector would operate more storage capacity andNCPB need less. The project could have helped this transition throughfinancial inducements for a limited period for both private traders/millersand NCPB. The lesson learned for any similar future project is that inaddition to supporting government in undertaking such an adjustmentprogramme, during the design aspects which are likely to be particular,critical, physical constraints should be identified and funding included toremove them or to mitigate their effects.

Follow-Up

22. The mission will prepare a draft ICR for submission to WB. The Planning Division ofMOALDM will also prepare an evaluation of the project from government's perspective.Suggestions for the scope and content of this are set out briefly in Attachment 1.

Rome, 17 November 1995.

7

KENYA: Second Agricultural Sector Adjustment Operation (ASAO 11)Appendix A: Mission's Aide-Memoire

Attachment 1

Guidance on Government's Contribution to the ICR

Government's own final evaluation of the project implementation is an important partof an ICR. It is attached, unedited, to the ICR sent to the WB Board. It can be selective in itscoverage and should address issues and lessons learned in project implementation from theBorrower's perspective. Topics to be covered can be the same as in the ICR, namely projectdesign, appraisal, implementation and project results. At each stage of the project, the contributionshould comment on both IDA and the implementing agencies' performances, with the observations,where possible, supported by evidence or reasoned argument.

For project design, the contribution could address such questions as theappropriateness of the project's objectives, the policy changes and supporting actions and scope ofthe investmnents proposed, aspects of design leading to easy (or difficult) implementation and theeffect on government institutions.

For project appraisal, comments should concentrate on any significant changes in theobjectives, size and scope of the project and whether these were appropriate.

Project implementation should be divided into an assessment of IDA performance insupporting and supervising the project and the performance of the implementing agencies.

Project results include an assessment of the direct benefits (or disbenefits) arisingfrom the policy changes. The contribution could most usefully comment on the effect of the policychanges from the Government's perspective. Such an analysis would be a most useful contributionto the ICR.

Based on the foregoing sections the contribution should list the main lessonls learnedfrom the implementation experience and arising from the above analysis.

WB suggest that if the contribution is more than ten pages, it should include asummary. The latter is recommnended for all but the shortest contributions .

The mission will be happy to provide any further elaboration or clarification requiredto assist in preparation of the contribution.

8

MAP SECTION

IBRD 26150

S U D A N

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rikN \ To Addis Abab. 4.

RIfT .. /-) VALLEY EASTERN N R K

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NATIONAL CAPITAL To A-h Oc

MAIN ROADSLID

~+ NATIONAL AIRPORTS

I~~ ~ ~~~~~ I T.f /A-hO

* , INTERNATIONAL AIRPORTS

DISTRICT BOUNDARIES

INTERNATIONAL BOUNDARIES 50S ZA5IREtiInet~>.o 50 1MI 10 , 20Nil-t-

The bound-res, colors, denominatons and any other infor-ation T.TAZANIA

|~ ~ ~~~~1 h D., E,,) S,: . Y... AS

sho.n o th,s ap do ot impy, on t e port of The World BankGroup, any udgmen1 on the legal stat.s of any territory, or ny

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i

IMAGING

Report No.: 16242Type: ICR