Document of

The World Bank

Report No. 13805-UZ

STAFF APPRAISAL REPORT

REPUBLIC OF UZBEKISTAN

COTTON SUB-SECTOR IM4PROVEMENT PROJECT

MAY 2, 1995

Agriculture, Industry and Finance DivisionCountry Department IIIEurope and Central Asia Region

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Currency Equivalents(as of July 1, 1994)

Sum per US$1

July 1994 US$1 = 9 Sum December 1994 US$1 = 25 SumSeptember 1994 US$1 = 15 Sum March 1995 US$1 = 26 Sum

Weights and Measures

Metric System

Abbreviations and Acronyms

AOSCA Association of Official Seed Certifying AgenciesCIU Component Implementation UnitGDP Gross Domestic ProductGOSKOMPROGNOZSTAT State Committee on Forecasting and Statistics (Planning Agency)HVI High Volume Instrument (Cotton grading equipment)IPM Integrated Pest ManagementISS Irrigation Scheduling SystemISTA International Seed Testing AssociationMFERT Ministry of Foreign Economic Relations and TradeMOA Ministry of AgricultureMOF Ministry of FinanceMWI Ministry of Water and IrrigationPIU Project Implementation UnitSA Special AccountSIFAT Enterprise for Standardization and Certification of CottonSOE Statement Of ExpendituresSTF Systematic Transformation FacilityUPOV International Union for Protection of Plant VarietiesUZAGROINFORM Uzbekistan Information Division (in MOA)UZKHLOPKOPROM Uzbekistan Cotton Ginning OrganizationUZNIIZR Uzbekistan Institute of Crop ProtectionUZOPTBIRZHETORG Uzbek Association of Wholesale and Commodity Exchange

Traders

Uzbekistan - Fiscal Year

January 1 - December 31

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STAFF APPRAISAL REPORT

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

CONTENTS

Page No.

Loan and Project Summary.o .Chowdhury.(Consultants. iv

ri. SECTOR BACKGROUND.1 guidance.. Michael.A. G

A. INTRODUCTION ..................

B. THE AGRICULTURAL SECTOR............. 3C. THE COTTON SLUB-SECTOR.............. 4

II. BANK LENDING ExPERIENCE AND STRATEGY FOR UZBEKISTAN ...... . 9A. BANK LENDING ExPERIENCE .............. 9B. BANK STRATEGY IN AGRICULTURE............11

C. RATIONALE FOR BANK PARTICIPATION IN THE PROJECT......13

III. THE PROJECT.......................14A. PROJECT RATIONALE ................ 14B. PROJECT DEVELOPMENT OBJECTIVES ........... 14C. PROJECT SUMMARY DESCRIPTION ............ 14D. DETAILED PROJECT DESCRIPTION ............ 15

IV. PROJECT COSTS AND FINANCIAL ARRANGEMENTS...........25

A. PROJECT COSTS..................25

B. FINANCING PLAN ................. 25C. SPECIAL AcCOUNT.................27

D. FLOW OF LOAN FUNDS ............... 28E. ON-LENDING TERMS ................ 29F. COST RECOVERY ................. 29G. PROCUREMENT..................31H. DISBURSEMENT..................36

I. ACCOUNTING...................37J. REPORTING ................... 37K. AUDITING....................39[This report is based on the findings of an appraisal mission (October/November 1994) led by Salem Gafsi (Task Manager). The report

was prepared by the core Bank team of Salem Gafsi (EC3AI), Gulnaz Abdukadir and Frank Kenefick (Consultants). Sergei Haritonov(RMU) and Viren Sirohi (EMTEN). Others who participated in the Bank mission and/or contributed to ths report include Jorge Garcia-Garcia (EC3AI), Ger-ard Fischer and Farook Chowdhury (Consultants). Elton Thigpen (TECIT and John Hayward (EMTIWU) were peerreviewers. Claude Bianchi (ECAVP) and Marc Blanc (EC3DR) provided operational guidance. Michael A. Gould and Yukon Huang

are respectively the managing Division Chief and Departrnent Director for this operation.

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V. PROJECT MANAGEMENT, IMPLEMENTATION AND SUPERVISION ......... ... 40A. PROJECT MANAGEMENT ............................ 40B. PROJECT IMPLEMENTATION .......................... 41C. IMPLEMENTATION SCHEDULE ......................... 44D. SUPERVISION PLAN ............................... 46

VI. BENEFITS AND RISKS ..................................... 47A. PROJECT BENEFITS ............................... 47B. ECONOMIC AND FINANCIAL ANALYSIS ................... 48C. PROJECT BENEFICIARIES . ........................... 50D. RISKS ..... 50E. ENVIRONMENTAL ASSESSMENT ........................ 50

VII. AGREEMENTS AND RECOMMENDATION .......... .. .............. 52A. AGREEMENTS .................................. 52B. RECOMMENDATION ............................... 54

TABLES

Table 4.1: SUMMARY OF PROJECT COSTS ...................................... 26Table 4.2: PROJECT FINANCING PLAN ......................................... 26Table 4.3: SUMMARY OF PROCUREMENT ARRANGEMENTS ........ ................. 32Table 4.4: DISBURSEMENT SCHEDULE ......................................... 37

ANNEXES

A. IMPLEMENTATION PLAN AND PERFORMANCE INDICATORS .55B. PRIVATE SEED INDUSTRY - AGREEMENTS REACHED WITH GOVERNMENT .60C. A SAMPLE OF SEED FARMS INTERESTED IN FORMING SEED COMPANIES .64

D. PROJECT COSTING DATA .65E. SEED COMPONENT - FINANCIAL TERMS AND ELIGIBILITY CRITERIA .76F. PROCUREMENT SCHEDULES .79G. DISBURSEMENT ACCOUNTS BY FINANCIERS .82H. PROJECT IMPLEMENTATION UNIT .91

I. SUPERVISION PLAN AND SCHEDULE .92

J. LIST OF DOCUMENTS AVAILABLE IN THE PROJECT FILE .97

MAP IBRD 25454

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REPUBLIC OF UZBEKISTAN

COrrON SUB-SECTOR IMPROVEMENT PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Republic of Uzbekistan.

Beneficiaries: Private Seed Companies and associated private seed farms, Ministry ofAgriculture (Institute of Crop Protection: UZNIIZR and InformationDivision: UZAGROINFORM), State Enterprise for Cotton Certification(SIFAT).

Poverty Category: Not applicable.

Amount: US$66.0 million.

Terms: 20 years, including 5 years of grace at the Bank's standard variableinterest rate.

Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days aftersigning, less any waiver.

Onlending Terms: The proceeds of the loan will be channeled in two ways: First, funds toGovernment agencies involved in the project will be channeled as grantsthrough the regular budgetary process. Second, funds to private seedcompanies and associated private seed farms will be on-lent in US$ bythe Government through a commercial bank on an agency basis. Thesub-loans will have a maximum repayment period of 10 years, includinga three-year grace period. The on-lending interest rate will be equal tothe long term dollar rate (US 10-year Bond rate) in effect at the time ofthe sub-loan (the base rate) plus a margin of 3.0 percent. TheGovernment will bear the default risk and the cross-currency exchangerisk in the Bank Loan. The sub-borrowers will bear the exchange riskbetween the US dollar and the Sum.

Financing Plan: See paragraph 4.3.

Net Present Value: The net present value is calculated on 86 percent of project costs and isestimated at US$110.4 million. ERR = 34 percent.

Staff Appraisal Report: Report No. 13805-UZ.

Map: IBRD 25454.

Project IED Number: UZ-PA-9122

REPUBLIC OF UZBEKISTAN

COTTON SUB-SECTOR IMPROVEMENT PROJECT

STAFF APPRAISAL REPORT

I. SECTOR BACKGROUND

A. INTRODUCION

1.1 The Government of Uzbekistan has requested World Bank assistance to finance a projectto improve the productivity of the cotton sub-sector. The proposed project will support policy reforms,finance priority investments and initiate a process of institutional change that will contribute to thedevelopment of a market economy in Uzbekistan. The proposed project will be the first Bank-financedinvestment in Uzbekistan and the first for agriculture.

1.2 Since the country's independence, the Government has taken a gradual approach toreforming the economy to maintain stability and protect the interests of those likely to unduly suffer dueto rapid change. As conditions have permitted, the Government has accelerated the pace of reform. OnJanuary 22, 1994, a Presidential Decree was issued which called for broader reforms, includingacceleration of privatization and enterprise reform, development of the private sector, reduction of thestate orders, and liberalization of foreign exchange controls. These changes aim at stabilizing andadjusting the economy, eliminating distortions and fostering a market economy. The changes conformto the policy reforms that the Government and the World Bank discussed in the context of economic andsector work and in connection with the Rehabilitation Loan. Agricultural reforms under theRehabilitation Loan include: (i) progressive reduction in state orders for grains and cotton; (ii)progressive increase in the procurement price of grain and cotton; (iii) phasing out of subsidies onagricultural inputs; and (iv) streamlining of the export licensing system.

1.3 Reforms under the proposed cotton sub-sector improvement project will complement theabove reforms by supporting implementation and deepening of all the reforms affecting the agriculturalsector in general and those aimed at fostering the growth of a market economy, in particular. Morespecifically, reforms agreed by the Government under the project include:

* liberalizing prices for cotton seed (gin-run and planting seed) at the onset of theproject;

* bringing the price paid to producers for lint marketed under the state ordersystem progressively closer to international prices, starting with 50 percent of theworld price for the 1995 crop;

* phasing out of the state order system for cotton by the 1998 production season;

* streamlining of the cotton export licensing system, starting with the 1995production season;

* creating a private cotton planting seed industry;

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* elimination of input subsidies; and

* shifting from barter-based to cash-based export of cotton lint, as the state ordersystem is phased out.

1.4 The proposed project supports high priority, selective interventions which have highpotential returns and lay the basis for future, more comprehensive investments:

(a) Seed Industry. This component will help improve the quality of cotton plantingseed by supporting the establishment of a private cotton seed industry, along withmarketing channels and a reliable system for seed certification and qualitycontrol, and for development of improved varieties;

(b) Cotton Marketing. This component will introduce a system of grading cottonwhich will generate information about the characteristics of Uzbek cotton to giveit a recognizable identity in the international markets, resulting in higher pricesfor cotton and, ultimately, higher quality cotton lint for export;

(c) Integrated Pest Management. This component will help establish the cost-effectiveness of biological pest control through the development and productionof improved technology for rearing and dispersal of beneficial insects inconjunction with environmentally safe use of chemicals;

(d) Irrigation. This component will introduce irrigation scheduling equipment andpractices to help reduce on-farm water consumption and, thus, increase cropyields and prevent environmental degradation; and

(e) Project Management and Program Design. This component will help strengthenand expand the implementation capacity in the agencies executing this project,and will provide for the preparation of investment programs suitable for futureinternational financing in support of agricultural development.

1.5 The proposed project is part of a broader World Bank assistance strategy. The CountryAssistance Strategy (CAS) Report No. 14019-UZ, dated March 3, 1995, is designed to: (i) supportmacroeconomic stabilization and structural and sectoral reforms with focussed analytical inputs andlending; (ii) strengthen market incentives particularly in the two key sectors of agriculture and energy;(iii) protect vulnerable groups through the establishment of an effective social safety net and moreefficient targeted service delivery; and (iv) strengthen the Government's institutional capacity. Thisstrategy combines support for: (i) policy reforms to facilitate the transition to a market economy; and(ii) specific investment programs to address priority development needs and help maintain and strengthenthe existing production capacity in the country. Given the agricultural sector's importance in theeconomy, the Bank has been closely involved with the Government in identifying an approach forfundamental structural change in agriculture. To allay concerns about possible adverse effects onemployment and productive capacity during the transition, the Bank agreed with the Government on aphased program of sectoral interventions, beginning with the establishment of an appropriate incentiveframework followed by investments geared to redress key sectoral constraints. The first two operationsprepared under this strategy are the Rehabilitation Loan and the Cotton Sub-sector Improvement Project.

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Subsequently, shifting control of land resources and ownership of farm assets to private producers willbe crucial to ensure efficient agricultural production in the medium-term. The proposed FarmRestructuring and Development Project, tentatively scheduled for FY97, would support institutionalarrangements and intra-farm organizational arrangements to enhance productivity and sectoral efficiency.The loan would finance basic infrastructure and inputs, strengthen agricultural services and developmodels for privatization and farm restructuring. The Bank is evaluating the Government's approach toland reform in the Agricultural Sector Review. This analysis will be deepened in the context of the FarmRestructuring and Development Project. A number of options for subsequent sectoral investments willbe considered in view of the findings of the Agriculture Sector Review, now under preparation.Possibilities include, a Sector Investment Loan, and an Export Development Project for fruits andvegetables and sericulture.

B. THE AGRICULTURAL SECTOR

1.6 Agriculture accounts for over one-third of the country's GDP, generates about three-quarters of the country's foreign exchange earnings, mainly from cotton, and employs about half of thelabor force. Through a complex pricing system for inputs and outputs, agriculture has been transferringabout 50 percent of the income it generated to the Government and urban sectors. Land and waterresources are limited. Only 10 percent of the land area can be cultivated, and 95 percent of that usesirrigation. The total cultivated area of about 4.5 million hectares (ha) has been on average used asfollows: 33 percent in cotton, 33 percent in grain crops, 6 percent in fruit orchards, 5 percent invegetables, and 23 percent in fodder and other crops.

1.7 Cultivable land is organized around 1,966 collective farms, and 14,250 private farms,occupying about 3.6 million ha, and 0.9 million ha, respectively. The State owns the land and most farmassets, sets production targets, determines and allocates inputs for collective and state farms, and setsinput and output prices. Private farmers have a 10-30 year lease contracts on the land allocated to them.They do not have to meet state orders, and can sell freely what they produce.

1.8 Gross agricultural product increased at 1.6 percent per year between 1976 and 1990 (inconstant 1983 prices). The growth was primarily attributable to the livestock sub-sector. Sinceindependence, agricultural production in Uzbekistan faltered but did not collapse. Gross agriculturalproduct in 1992 and 1993 was only 6 percent lower than in 1990 and 1991, and preliminary results for1994 indicate that gross agricultural product remained at the 1993 level.

1.9 Expansion of agriculture between 1960 and 1990 was primarily attributable to an increasein the cultivated area. Irrigation works made it possible to expand cultivated area from 2.3 million hato 4.5 million ha, at an average of 70,000 ha per year. Besides increasing production, the expansion inarea reduced the pressure of population on arable land, and made it possible to keep in the rural sectorthe growing population, thus avoiding undue strain on urban infrastructure and keeping at a minimumthe problems associated with rural/urban migration.

1.10 Yields grew little during the expansion period, as the country increasingly specialized inproducing cotton and extended that production to less and less fertile soils. In the absence of anysubstantive technological innovations and in an attempt to prevent a decline in yields, the Governmenttried to increase soil fertility and combat pests by distributing large quantities of fertilizers and pesticidesto collective and state farms. It also concentrated on developing new cotton varieties of the expense ofother crops. This strategy appeared to succeed in the early years of the expansion. As irrigated area

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continued to expand, however, and as the use of chemicals intensified, the quality of soil and water inthe country began to decline. The strategy led to the reverse of its intended impact; it became clear thatthe selected strategy could not be sustained. As the Government became aware of the extent of the landand water contamination, and as the country's dependency on imported food grew, the Governmentstarted to decrease the area planted in cotton from a peak of about 2 million ha in the mid-1980s to about1.5 million ha in 1994. Government's current intention is to stabilize the area under cotton at about 1.2million ha.

1.11 Crop yields are lower than in other countries with similar climatic and technologicalconditions. For example, Uzbek yields have averaged 2.7 tons per ha for seed cotton, 3.2 tons per hafor paddy rice, 8.8 tons per ha for potatoes. 4 tons per ha for maize, and 5.4 tons per ha for grapes.These yields are respectively about 25, 70, 35, and 50 percent lower than in other countries that producethese products under similar conditions. These relatively low yields contrast with the excessive amountsof chemicals fertilizer and water used. Farms used on average about 220 kg. of fertilizer per ha in theearly 1990s, a high rate of usage when compared with most cotton-growing countries, which applybetween 120 and 150 kg. per ha under irrigation. Water consumption reached about 13,000 cubic metersper ha, almost double the 7,000 cubic meters per ha used in other cotton-growing countries. Pesticideconsumption, on the other hand, has fallen sharply; the expansion of biological methods of pest controland, more recently, the lack of foreign exchange to import pesticides, have reduced pesticide use fromits peak of over 10 kg/ha in the mid-1980s. a lot higher than other countries, to less than 1 kg/ha in1994, much lower than in other cotton-producing countries.

C. THE COTrON SUB-SECTOR

1.12 Cotton has been the most important commodity in the Uzbekistan agricultural economy.It has accounted for about 40 percent of the gross value of agricultural products and has been the mainsource of income, employment and foreign exchange. The cotton sub-sector has also generated about 80percent of the Government tax revenue.

1.13 During the 1980s, cotton production averaged about 5 million tons, and the area plantedaveraged about 2 million ha. Low lint yields and low quality of lint were typical. Although the varietiesplanted have had the potential to generate higher yields and better quality, that had been prevented bytechnical, economic and institutional factors which discouraged efficient farming and ginning practicesand lowered yields and quality. Lint yields ranged around 850 - 900 kg/ha compared to 1,500 kg/ha inAustralia, 900 - 1,100 kg/ha in China, and 1,100 - 1,500 kg/ha in the U.S. Ginning out-turn fluctuatedaround 32 percent, compared to 33 to 40 percent in other countries. Yields also showed a wide varianceacross and within regions.

1.14 Decisions on how much cotton to produce have traditionally been taken by the Forecastingand Statistics Committee GOSKOMPROGNOZSTAT (former GOSPLAN), the Ministry of Agriculture(MOA) and the Ministry of Water and Irrigation (MWI). The chain of command went from theForecasting Committee to the farm. The Forecasting Committee decided on the overall needs of thecountry for food and foreign exchange, and in agreement with MOA and MWI, established the desiredamount and composition of agricultural production. These plans were then passed on to the regions andfrom there to the districts where implementation plans were drawn and orders given to farms on what,how much, and how to produce.

1.15 The Ministry of Finance (MOF) has had primary responsibility for pricing cotton.

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Producer prices were established separately from production quotas, often after planting, and played littlepart in determining production levels. The government, however, compensated farmers for the differencebetween production costs and planned income. either through budgetary transfers (the State Farms) orthrough input subsidies (the collective farms). Moreover, only those farms that had agreed on aproduction plan with the government were assured of inputs at subsidized prices. Price response has,thus, been nonexistent because of a lack of incentives to increase production and/or efficiency. Stateproduction orders, highly subsidized fixed input prices, and fixed output prices determined artificialprofits pre-set for each farm.

1.16 State enterprises have distributed agricultural products and inputs internally. In addition,state enterprises or official "contractors" have been responsible for all international trade--import andexport--of agricultural products controlled by the Ministry of Foreign Economic Relations (MFER).Barter has been the principal mechanism to effect international trade. Bureaucratic hurdles made accessto export licenses very difficult. The law prohibited individuals from exporting, and required independentfirms to deal through state trading companies. Collective farms had no access to markets and could notdeal with traders.

1.17 At the farm level, cotton production has suffered from poor quality planting seed, lowquality (and in the past, excessive application) of pesticides and defoliants and excessive use of water andfertilizers. In addition, extending cotton production to unsuitable land has led to large differential inyields. Under similar cropping conditions, 15 percent of the area produced less than 2 tons/ha, 50percent produced 2-3 tons/ha, and 35 percent produced more than 3 tons/ha.

1.18 The planting seed supply system handles about 40 varieties, but has no mechanism formaintaining varietal purity beyond the Elite Seed Farms. No facilities exist for grading planting seed,for testing them for vigor, or for treating and properly storing them. As a result, resowing tends to bethe rule and the sowing rates tend to be up to 10 times those normally used in other countries. Mixedvarieties and uneven plant stand due to multiple sowing contribute to the poor quality of the seed cottonsupplied at the farm level.

1.19 Although the Elite Seed Farms appear to have well organized seed operations, no lawsand regulations and no independent mechanisms exist for disinterested seed testing, certification andquality control. Information tends to flow in one direction from varietal breeders to seed multiplicationfarms. This has not allowed for feed back on varietal performance which could provide the basis for theremoval and replacement of old varieties with better, newer releases.

1.20 During the 1970s and early 1980s, pesticide use in Uzbekistan was extremely intensive.Aerial spraying of large quantities of toxic pesticides with inefficient spraying equipment resulted in highconcentration of suspended pesticides in the air in cotton growing areas. Both surface and ground watersupplies were also contaminated. As the impact on the population of such contamination becameapparent, the Government and researchers started focusing on developing alternative means of controllingagricultural pests. The Central Asian Institute for Crop Protection was created to perform that task. TheUzbek IPM program developed to the point that in 1993 over 2 million ha were treated with 304 releasesof beneficial insects. In parallel, the use of pesticides has decreased substantially. Since Uzbekistan'sindependence, however. funding for the IPM program has decreased to the point where it is currentlyinsufficient to finance the operation and maintenance of existing facilities. In addition, the restructuringof the Uzbek economy and the low efficiency of the on-going manual IPM operations raise doubts aboutthe economic viability of the existing labor intensive biological control technology, thus creating the need

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for intensive research to develop mechanized technologies for the production and dispersal of beneficialinsects. Moreover, further reduction in pesticide use requires the mass rearing and release of additionaltypes of insects to control a wider range of pests.

1.21 Water has been overused on all crops, including cotton. Farmers irrigated when theauthorities delivered the water rather than when the plants needed it. Over-irrigation during harvestingand heavy post-harvest irrigation--to leach out accumulated salts from heavy doses of fertilizers--aggravated waterlogging and soil salinity and reduced soil fertility. Excessive irrigation raised the watertable and encouraged vegetative growth on the cotton plants late in the season, thereby creating defoliationproblems and increasing the trash content of machine-picked cotton. All crops grown in Uzbekistan,including cotton receive excessive amounts of irrigation water. The results of over-irrigation have been:(i) increased use of fertilizers to compensate for leached nutrients; (ii) soil pollution by the leachednutrients; (iii) rising water tables; (iv) salinization of soils; and (v) discharge of saline drainage water intorivers. The Government has already recognized the problems associated with over-irrigation and hasissued two decrees. Decree No. 4, of January 6, 1993 calls for improved irrigation design and layoutand provides for its application on an initial area of 50,000 ha per year for 1993 and 1994, to besubsequently increased to 100,000 ha per year. Decree No. 385, of August 3, 1993 restricts the amountof water that farms can have and calls for fining farms for any water used in excess of their allocatedquota.

1.22 Organizationally, the production, processing and marketing of cotton have been totallycontrolled from the Center. Government Departments and Government-controlled trading organizationshave held full responsibility in all segments of the production and marketing chain for cotton from theallocation of acreage up to the export of lint. The chain has been regimented and inflexible and has notallowed market forces to bring buyers and sellers together to determine the price and the size of thecotton crop.

1.23 Starting with production, the target size of each year's crop has been traditionallydetermined by the Government on advice from GOSKOMPROGNOZSTAT. This target production hasthen been assigned to oblasts, rayons, districts, and then down to individual farms on the basis of pastperformance and land productivity. Government then assigned state orders to the target levels ofproduction to be delivered to the Government at the Government's procurement price. It has beenGovernment policy that the portion of a crop between the state order level and the target level productionand production over and above the target level of production would be the property of the farm to bedisposed of at the discretion of the producers but within the constrictions of prevailing Governmentpolicy. In return for fulfilling state orders, the Government managed an input supply system whichguaranteed farmers equipment and inputs at subsidized prices. No alternative system for the supply ofinputs and equipment existed.

1.24 As the seed cotton is picked, it is delivered to Government-owned regional cotton storagestations in trailers. After testing, seed cotton is stored in "bunts' (modules) of between 350 tons and 500tons on a basis of farm, variety, and grade as determined by a set of standards determined each year bythe Government cotton classing department (SIFAT).

1.25 The Government-owned ginning organization - UZKHLOPKOPROM - has controlled allginning activities. It has owned most gins and performed ginning services on behalf of the Government,not farmers. Gin managers have had a very limited role in decision making at the gins. Their primaryfunction has been to achieve budgetary and production targets set by Government. The ginning season

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has tended to be artificially extended to a ten to eleven month period, reportedly to maintain constantemployment.

1.26 The Ministry of Foreign Economic Relations has been responsible for negotiating andsettling all cotton contracts for export. UZKHLOPKOPROM provided MFER with quality estimates onthe forthcoming crop by undertaking quarterly reviews of information which flowed through the ginlaboratories and other regional offices such as the regional oblast offices of UZKHLOPKOPROM.MFER approved each export contract on the basis that the sale price was equal to, or greater than, theCIS quote in the Cotlook "A" index on the day of the sale less the relevant selling costs. The quotespublished by Cotlook represented an average of about 10 quotes from the leading cotton buyers. Assuch, it was the buyers who determined the purchase price as it was they who submitted the quotes thatmade up the Cotlook "A" index. Once MFER concluded a contract, it passed all responsibility fordelivery on to UZKHLOPKOPROM. Here the regional offices were advised to allocate a set numberof bales of the quality prescribed in the contract. Most export contracts tended to have a range of qualityrequirements allowing some flexibility in delivery.

1.27 Uzbek cotton has been selling at an estimated 15 percent discount compared to othercotton of similar quality because most of it has been traded through barter arrangements. Governmentagencies have had to rely on such trade practices because they lacked experience in dealing in theinternational market both for buying and selling. Another major reason has been that the internationalmarket lacked reliable information on the fibre characteristics and on the spinning performance of theUzbek cotton.

1.28 Production and marketing of cotton have been controlled through the state order system.In 1993, the state order system required farners to sell 80 percent of their allocated quota to theGovernment at fixed prices, which were about 20 percent of the international price. Above-quota cottonis marketed through the sate controlled Uzbek Association of Wholesale and Commodity ExchangeTraders (UZOPTBIRZHETORG), which operates through regional joint stock companies, and exportslint for cash or barter. This organization has the monopoly on necessary export licenses and rail carsrequired for the export of lint. Although the system allowed for farmers to receive about 70 percent ofthe international price for above-quota cotton, in reality farmers are often coerced to participate in barterarrangements which deprive them of the true value of their cotton but which are the only means for themto access to certain inputs.

1.29 The Government regulates all steps in the production and trade of cotton, and taxes thesub-sector harshly. The Bank estimated that such taxation reached an estimated US$800 million in 1993,about 50 percent of the value of lint output, and financed Government expenditures and income transfersto the urban sector.

1.30 Ginneries can increase turnout by 4 percentage points and produce a better quality of lint.In order to meet standards demanded by the Government, ginneries over-clean cotton, remove largeamounts of fiber, and increase short fiber content. Moreover, the current system biases grading towardslower categories and makes it difficult to market cotton in Western markets. The grading system groupsdifferent types of cotton in one broad category, and underrates cotton quality. It is estimated thatexporters can gain an extra US$50-US$100 per ton of cotton sold in Western markets by improvingcotton grading and by making the characteristics of Uzbek cotton known in the international market.

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1.31 Cotton research is concentrated on the genetic aspects of cotton production. It has nolinks with cotton producers or users. In addition, there are no organized channels for farm technologydevelopment and supply. As a result, on-farm production practices are deficient. Although Uzbekistanhas a well developed plant breeding program in cotton, the farmers and the country do not benefit fromit as much as they could because the country does not have the capacity to produce quality planting seedthat would allow farmers to take advantage of the productive potential of the generic material developed.Farmers plant poor quality seed because the system supplies only ungrained seed that cotton gins produce.Since gins do not delint the seed, they cannot separate (gravity grade) the weak from the strong seed, andcannot treat the seed with chemicals. The deficiencies in seed production and processing lead to varietymixing, loss of varietal purity, and low seed quality. Low-quality seed germinates poorly, and producesweak plant stands and low yields. Because the seeds that are planted have different characteristics, eachfield produces a mixture of varieties and qualities of cotton, which reduces the efficiency of harvesting,ginning and marketing.

1.32 Government control and lack of well-defined property rights have prevented the sectorfrom achieving higher output and efficient growth. Producer prices are established separately fromproduction quotas, often after planting, and play little part in determining production levels. Only thosefarms that have agreed on a production plan are assured of inputs at subsidized prices. The Governmentpays ginneries a fixed fee per ton of ginned seed cotton. Because the Government does not pay feesaccording to performance (quality and out-turn delivered), ginneries are not motivated to achieve higherout-turn and produce better lint. Thus, neither farmers nor ginners respond to prices because prices donot represent a basis for decision making about production level and efficiency. Institutional andeconomic barriers discourage export and the emergence of a group of skilled traders. The law prohibitsindividuals from exporting, and independent firms have to export through state trading companies.

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II. BANK LENDING EXPERIENCE AND STRATEGY FOR UZBEKISTAN

A. BANK LENDING EXPERIENCE

2.1 The Bank began only recently to support agricultural projects in countries of the FormerSoviet Union, and has limited experience with projects in countries with economies in transition. TheBank has, however, supported in other parts of the world, diverse agricultural projects with objectivessimilar to those of this project. The paragraphs below summarize Bank experience in projects from whichlessons were drawn while designing this project.

2.2 Bank experience in irrigation, seed and agricultural marketing projects shows thatappropriate project preparation, local involvement and strong institutional support, proper training,adequate incentives, a satisfactory legal framework, and the correct distribution of responsibilities betweenthe public and private sectors contribute to the success of projects. More specifically, it has beendemonstrated that project success has been closely linked with:

(a) local ownership of project design and commitment to its implementation;

(b) strong, tailor-made training programs for planners, high- and mid-levelmanagers, and grassroots decision-makers and producers in support of technologytransfer;

(c) agreement on and implementation of effective procurement procedures to ensurethe timely supply of equipment, goods and services and the execution of civilworks needed for meeting project objectives; and

(d) favorable and stable macroeconomic conditions and policies.

2.3 The Bank shared this experience with Government. As a result, Government took fullresponsibility for project design. All ministries and institutions concerned participated in project designfrom the onset. MOA, the Crop Protection Institute, The Uzbekistan Cotton Production and MarketingInstitute (UZKLOPKOPROMSBYT), collective seed farms, SIFAT and MWI worked together withGOSKOMPROGNOZSTAT, as the coordinating agency, to design the project. A team consisting ofGovernment personnel, collective farm managers, and lint testing specialists involved in projectpreparation and execution came to the U.S.A. on a study tour to visit the cotton industry, and gatherinformation about the technology available for cotton production, processing seed, and marketing lint.With the information gathered during this study tour and the support of the technical assistance procuredthrough an advance under the Project Preparation Facility (PPF), Government was in a position toidentify the primary weaknesses in the cotton sub-sector and to design the project to address them.

2.4 With specific reference to seeds, the Bank's experience shows that:

(a) producing seeds of the required quality does not need overly sophisticated seedprocessing technology which is beyond the local capability to operate andmaintain, both physically and financially;

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(b) a vigorous varietal breeding program that releases superior genetic quality seedis fundamental to sustain the seed industry;

(c) private sector has a comparative advantage over the public sector in seedprocessing and marketing;

(d) quality seeds do not require subsidies from Government to be accepted byfarmers;

(e) market determined prices for seed are a prerequisite for financial viability of theseed industry;

(f) a favorable legal and policy framework is essential for attracting long-terminvestments in the seed industry; and

(g) an autonomous and effective public sector seed certification and quality controlservice is necessary to promote efficient growth of the seed industry.

2.5 Uzbekistan has had a strong varietal breeding program, which has produced many cottonvarieties, all of which continue to be used in the country. Although there is a need for screening thesevarieties and maintaining the breeding program, the more urgent need identified by Government is toimprove seed processing to ensure access by farmers to quality seeds of the variety of their choice. Theseed component was, thus, designed to primarily improve seed processing taking into account the aboveidentified lessons.

2.6 One major lesson from the Bank's world-wide experience as well as from Uzbekistan'sown experience relates to the impact of development programs on the environment. Uzbekistan learnedthe hard way that agricultural development that is detrimental to the environment, not only cannot besustained, but also leads to the destruction of the very basis of development, namely land, water, andhuman resources. Thus, although project design started with the primary economic objective ofincreasing foreign exchange earnings from cotton, two components were added specifically to addressenvironmental concerns while improving productivity. These are the irrigation and the integrated pestmanagement components.

2.7 With regard to irrigation, experience shows that:

(a) effective irrigation practices combined with proper use of inputs and culturalpractices can mitigate any potential harmful effect on the ecology;

(b) investment in irrigation has to be justified on empirically demonstrated economicpotential of irrigation in the project area;

(c) beneficiary participation in the design of irrigation programs is critical to theirsuccess, and is a prerequisite to developing and implementing a cost recoverymechanism for public sector investment in irrigation infrastructure; and

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(d) support services such as extension, input supply and marketing enhance theprofitability of investment in irrigation and, thus, motivate farmers to engage insuch investments.

2.8 Government prepared the on-farm irrigation scheduling component with informationgathered from a well tested pilot program in which several collective farms from the Tashkent areaparticipated. The pilot program was designed and implemented with full participation of the farmsselected for the test.

2.9 With regard to pesticide use, experience shows that:

(a) economic benefits derived from the use of excessively toxic pesticides areoutweighed by their harmful impacts on the ecology and the people who handlethem;

(b) even pesticides known to be less toxic can cause major ecological harm if notused at the proper rate and with the right equipment; and

(c) properly applied pesticides can be an effective element in a package of integratedpest management practices involving beneficial insects and cultural practices.

2.10 The above concerns were the basis for including an integrated pest managementcomponent under the project targeted at developing alternatives to pesticides, selectivity in pesticide use,developing equipment for proper use of pesticides, and training farmers in their handling and use.

2.11 In cotton projects in general, Bank experience indicates that:

(a) complex project design hinders project implementation;

(b) open access to markets, along with a market-based pricing system, are essentialfor enhancing production efficiency at the farm and gin levels and the quality oflint; and

(c) the generation and dissemination of information about the characteristics of cottonis essential for attracting buyers, enhancing the market value of cotton in both thelocal and international markets, and motivating farmers and gin operators topreserve the intrinsic quality of their product.

2.12 The cotton marketing component was designed by Government with due considerationgiven to the above lessons. The primary objective selected for this component was the generation anddissemination of information about the characteristics of cotton. The component's design was simplifiedby focussing on specific actions to increase the country's foreign exchange earnings from cotton.

B. BANK STRATEGY IN AGRICULTURE

2.13 The Government has identified agriculture as an important sector requiring assistancefrom the World Bank. Such assistance is expected to help in providing an impetus for quick supply

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response, support the transition to a market economy, demonstrate tangible benefits from the reformprogram, and build the basis for a sustained, long term supply response. The Bank, through its continueddialogue with Government, has played an important role in helping build the foundation for designingand implementing priority structural reforms in the agricultural sector. An important contribution of theBank has been in facilitating the exposure of key policy makers and key players in the management ofagriculture to market principles, and in working with them in the design of basic reforms to acceleratetransition to a market-based, private sector led agriculture. The Government's recent actions in theagricultural sector appear to be driven by their concern over the possibility of: (i) loss of employmentopportunities in the rural areas, in general, and in the agricultural sector, in particular; (ii) furtherdeterioration of the sector's current production capacity; (iii) further deterioration of the sector's primaryphysical production assets - land, water; and (iv) the absence of an operational mechanism to take overfrom the Central Government the responsibility for the supply of agricultural services and inputs.

2.14 The Bank agrees with these concerns. Its strategy has been to help put in place thefundamental building blocks which would protect against further deterioration in the sector while initiatingactions that would reverse the trend and initiate the process of building a market-oriented agriculturalsector. To that end, the Bank's strategy gives priority to the creation of an enabling environment,including effective policies, a legal framework, and an institutional capacity to serve a well functioningmarket agriculture and to facilitate the effective implementation of agricultural reforms. The AgriculturalSector Review (under preparation) will provide the basis for developing a consensus on how to facilitatethe creation of such an enabling environment and future investment programs will support agreed actionsand reforms.

2.15 In support of these goals, the Bank's lending strategy in agriculture as described in theCAS focuses on financing operations that would: (i) foster development of a more supportive policyregime; (ii) help develop critical institutions and infrastructure to support a market-driven rehabilitationand restructuring of production units; (iii) promote long term, sustainable development in agriculture; and(iv) enhance the development of management skills and flows of market information to guide productiondecisions. Such investments would require substantial technical assistance and training which the Bankexpects to support through direct lending and co-financing arrangements supplemented by ongoing andplanned economic and sector work.

2.16 The project is consistent with the CAS. It complements three other operations in theBank's current lending program for agriculture for the period FY95 - FY97:

(a) the agricultural component of the Rehabilitation Loan helps create a supportivepolicy environment. It supports removal of State orders, liberalization of theprice of cotton, and introduction of automatic export licenses for cotton;

(b) the Drainage Project planned for FY97 aims to develop the means for the safedisposal of drainage water in the Amu Darya basin in Uzbekistan. In theprocess, the project will lead to improved water quality and enhanced agriculturalproduction; and

(c) the Farm Restructuring and Development Project planned for FY97 aims atdeveloping farm infrastructure and support services, and replicable andsustainable models for restructuring state farms in a manner that would improvefarming efficiency along the lines of a market-based agricultural system.

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2.17 Through the integrated pest management and irrigation scheduling interventions, theproject also supports the environmental objectives of the Aral Sea Program.

C. RATIONALE FOR BANK PARTICIPATION IN THE PROJECT

2.18 The Government, working with the Bank in the context of Economic Work and theRehabilitation Loan, and with the IMF in the context of the STF, has introduced important reformmeasures to accelerate the transition to a market economy. This project will provide the framework forputting those reforms to work on a sustained basis, thus giving them the chance to have a lasting impact.The project will also build on the reform measures already adopted and deepen their penetration at alllevels of the cotton sub-sector. It will support the removal of critical institutional constraints whichcurrently impede private sector initiative and participation in the cotton industry. The project will alsoprovide an added medium for maintaining the policy dialogue and contribute to the prospects forcontinuing the policy reform process.

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III. THE PROJECT

A. PROJECT RATIONALE

3.1 This is the first investment project in Uzbekistan supported by a World Bank loan. Thecotton sub-sector represents the most important part of agriculture in terms of its development potentialin the foreseeable future. The Government selected this project on the basis of the potential short-termimpact of interventions in the cotton sub-sector on: (i) enhancing the country's foreign exchange earningcapacity; (ii) developing an approach for addressing environmental concerns in agriculture; and (iii)building a basis for effective transition to market-oriented agriculture. By design, the project concentrateson a few critical interventions intended to open the door for the broad range of possible futureinvestments in the cotton industry which would target all stages of production, marketing and processing.

B. PROJECT DEVELOPMENT OBJECTIVES

3.2 This project starts the process of modernizing the Uzbek cotton sub-sector by supportingselective critical interventions that would open it up to the world market and build the basis for improvingits efficiency. It supports: (i) the elimination of state orders, the liberalization of prices, and theprivatization of the seed industry in the cotton sub-sector; (ii) the development/introduction of technologyto help avert negative impacts on the environment and productivity of past irrigation and pest controlpractices; and (iii) the enhancement of the cotton sub-sector's foreign exchange earning capacity.Performance indicators are given in Annex A.

C. PROJECT SUMMARY DESCRIPTION

3.3 To help achieve the above development objectives, the project supports five components.These are summarized below:

(a) Seed Industry: This component supports the creation of private seed companiesto process and market about 25,000 tons of planting seed produced by privateSeed Companies in association with privatized seed farms. It will also supportthe strengthening of seed quality control agencies and help introduce reliablepolicy and institutional arrangements in the public sector for seed quality control,seed certification, and continued development of new improved cotton varieties;

(b) Cotton Marketing. This component supports the introduction of cotton gradingtechnology to determine the characteristics of Uzbek cotton in conformity withinternationally recognized standards. It also supports the development of asystem for the dissemination (to potential buyers, the spinning industry, ginoperators, farmers and researchers) of information generated through the gradingsystem;

(c) Integrated Pest Management: This is an applied research and developmentcomponent. It provides for equipment and technical assistance for thedevelopment of insect rearing and dispersal technologies that will allow thecountry to economically broaden biological control of cotton pests. It alsosupports the development of improved pesticide spraying equipment to allow the

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integration of biological and chemical control of pests with proper croppingpractices in a manner that will mitigate the impact of pest control on theenvironment;

(d) Irrigation. This component provides for equipment and training to introduceirrigation scheduling technology and demonstrate effective ways to reduce wateruse in cotton production, while improving land productivity and avoiding water-based damage to the environment; and

(e) Project Management and Program Design. This component supports thestrengthening and development of the capacity of agencies involved in this projectto help them implement their respective components and contribute to the designof future investment programs in agriculture. It also supports specificpreparation activities for investment programs for which Government intends toseek external financial support.

D. DETAILED PROJEcT DESCRITON

Seed Industry

Objectives

3.4 The objectives of the seed component are twofold: (i) create the enabling policy andinstitutional framework for the development of an effective seed industry in the private sector; and (ii)improve the quality of planting seed as a means to improving yields and fiber quality and value.

Detailed Features

3.5 The seed component has two sub-components. The first deals with creating/strengtheningthe institutional (legislative, administrative and policy) framework to enable private seed companies toperform their functions effectively, and the second deals with creating a private seed industry.

3.6 Institutional Framework. This sub-component supports the strengthening of the seedquality control functions of public sector agencies. Provisions under this sub-component assume that theseed companies to be established will strive to build confidence in their products among farmers and will,thus, perform their own internal quality control functions. External quality control is intended toguarantee that seed producers operate within the framework of the country's seed law and policy, andthat the seeds farmers buy possess the characteristics as described on the label which is issued by the seedcertification agency.

3.7 National Seed Policy and Seed Law. Draft proposals were prepared by the Governmentfor a National Seed Policy and a new Seed Law. These draft proposals include articles, procedures andpractices as defined or recommended by international bodies, such as the International Seed TestingAssociation (ISTA), the International Union for Protection of Plant Varieties (UPOV) and the Associationof Official Seed Certifying Agencies (AOSCA). The draft National Seed Policy provides direction forGovernment agencies, research institutes, breeders, seed producers and farmers for the long-termdevelopment of seed. By enacting such a policy, Government will be able to provide a framework for

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the development of a seed industry. The draft Seed Law proposes regulatory procedures for ensuringquality of seed at the stages of production, marketing, certification, importation and breeding. The PlantVariety Protection Law was prepared based on the Model Law on Plant Variety Protection developed bythe UPOV. This draft law provides the legal basis for the seed breeders' rights. The draft Seed Policyand Seed Law were discussed during negotiations. Their enactment will be a condition of disbursementagainst the public sector part of the Seed Component.

3.8 Seed testing and Certification. Present seed testing and certification practices are farbehind ISTA standards. Laboratories which are located at the ginneries are poorly equipped and staffingis minimal. Staff of laboratories are employed by the MOA and seed certification personnel areemployees of the seed producers, i.e. elite seed farms, seed farms and ginneries. Thus, under the presentorganization and system, farmners cannot be sure of the purity and germination of seed which they areordered to plant. The seed certification organization and activities need to be upgraded as follows:

(a) The central and regional seed certification offices and laboratories need to beautonomous (including ultimately financial autonomy) and independent of seedproducers and/or seed buyers. They need to be able to work independently, freefrom interference from vested interests;

(b) All planting seed (elite and multiplication) needs to be certified. Since this willincrease the requirements for seed certification, there is a need to increase thestaff and their skills and to provide more and better quality equipment; and

(c) New standards and procedures need to be introduced. The new agency willfollow the procedures for seed certification and testing of the International SeedTesting Association (ISTA). This should be done not only for the cotton sector,but also for the whole agricultural sector. This will provide a standard anduniform system of seed testing and will greatly improve the trade in seeds andplant material and the comparison of test results.

3.9 Under the project, external quality control will be the responsibility of a singleGovermnent seed certification, testing and quality control agency, using procedures tested and proven inother countries. The MOA Cotton Seed Department through the Central Seed Certification and Seed LawAgency and the Oblast Seed Certification and Seed Law Units will: (i) certify cotton seed fields, gins,plants and seed lots to ensure varietal purity; (ii) test seed destined for the market and farms, to ensurehigh seed quality; and (iii) sample and test seed in the market, sold to farms, etc. to ensure that it meetsestablished standards. The Plant Variety Protection Office under the MOA Commission of AgriculturalCrops Sort Testing will: (i) test varieties and disseminate the testing results to allow private seedcompanies to decide on which varieties to maintain and varieties to discontinue; and (ii) implement plantvariety protection rules and regulations. Activities related to external quality control include establishing:

(a) a quality, development-oriented Seed law;

(b) a development-oriented National Seed Policy;

(c) adequate Plant Variety Protection rules;

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(d) Seed Certification rules and procedures, with built-in protection against misuse;and

(e) establishing and equipping one Central Referee seed testing laboratory and 5Regional Service seed testing laboratories.

3.10 Improving external quality control will also require organizing and equipping anintegrated unit in MOA to implement the above external quality control operations. This will requireextensive training along with technical assistance to help establish, plan, and manage operations anddevelop proper procedures.

3.11 The administratively-combined external quality control structure to be established underthe project will include: (i) the Seed Certification and Seed Law Agency with a Central and Referee SeedTesting Laboratory; and (ii) five oblast Seed Certification and Seed Law Units with service testinglaboratories. These agencies will be under the administrative oversight of the Cotton Seed Departmentof MOA. The Plant Variety Protection Office will be under the State Commission of Agricultural CropsSort Testing in MOA.

3.12 The Seed Certification and Seed Law Agency will be responsible for the implementationand coordination of the seed certification and seed law. Their central laboratory will serve as a referee,an import/export testing station, a coordinator, a supervisor and a training institute for the oblastorganizations. The Oblast Seed Certification and Seed Law Units, each with their own oblastlaboratories, will serve as inspector, certification agency, monitoring agent of the quality controldepartment of the seed producers, and trainer of seed producers.

3.13 Once fully established and operational, the seed certification agencies should derive amajor part of their income by charging a fee for their services. Government confirmed duringnegotiations that no later than June 30, 1998, the Seed Certification and Seed Law Agency will underterms of reference satisfactory to the Bank, prepare and furnish to the Bank a plan for the full costrecovery of its services. Thereafter, this plan will be finalized taking into consideration the Bank's viewsand will be implemented starting no later than June 30, 1999.

3.14 Plant Variety Protection and Cotton Research: Four organizations are currently activein cotton breeding: the Cotton Seed Breeding Institute, the Institute of Experimental Biology, the UzbekCotton Production Research Institute, and the Institute of Genetics. Presently there are about 40 cottonvarieties released for planting. Some varieties are grown on less than 10,000 ha and it is not clearwhether farmers would continue to grow them if they were given the opportunity to select their ownvarieties. The Plant Variety Protection office will be strengthened to register new varieties on the basisof advice from breeders, the Seed Certification and Seed Law Agency, seed producers, and cottonproducers.

3.15 The project will support the strengthening of the Central and Oblast seed certification andSeed Law offices, and the Plant Variety Protection Office. It also provides funding for equipment andtraining for cotton breeding institutes which are interested in close cooperation with the seed industry.The project will provide for: (i) upgrading equipment required for testing, certification and registration;(ii) specialized technical training and study tours to facilitate interaction with international bodies involvedin cotton breeding, seed certification, and seed production and marketing; and (iii) technical assistanceto make up for the absence in Uzbekistan of the requisite expertise to establish and manage a private seed

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industry (details are given in Annex 1 of the Implementation Volume). In order to encourage cooperationbetween researchers and seed producers, the project provides for limited training and technical assistancefor cotton research agencies involved in seed breeding to help them initiate a reorientation of the researchsystem to make it user responsive and to help develop links between the research and production systems.

3.16 Seed Companies and Seed Farms. This sub-component consists of a line of credit tosupport the establishment of private seed companies and the transformation of collective seed farms intoprivate seed farms. Agreements reached with Government during appraisal relating to private seedcompanies and seed farms are summarized in the Government letter in Annex B. The line of credit isnecessary because this component represents a test case for privatization in the agricultural sector forwhich there is no alternative source of credit to support the development of a private seed industry. Thesub-loans will be provided to eligible, legally constituted private seed companies, on the basis of adetailed business plan which describes the company (ownership, assets, liabilities), proposed operations,and documents the technical, institutional and financial features of the proposed investment. The businessplan may cover the credit requirements of both seed companies and the working capital requirements ofthe seed farms associated with them for purposes of seed multiplication. Credit to seed farms will, thus,be channeled through the seed companies in the form of supplier credit. The seed companies will beresponsible for appraising the credit requirements of their associated seed farms. They will also beresponsible for allocating to seed farms their part of the loan and for its repayment. The line of creditwill be administered by the Project Implementation Unit (PIU) in GOSKOMPROGNOZSTAT. The PIUwill be responsible for sub-loan appraisal (para 5.9). The sub-loans will be channeled to sub-borrowerseed companies using a commercial bank acting as the agent for accounts, disbursements and collections.Estimates of financing requirements over the project period are based on a seed processing capacity toproduce 25,000 tons of clean planting seed which should be sufficient to meet the country's requirementsonce the planting rate is adjusted to reflect the improved seed quality and once the area under cotton isstabilized around the country's long tern target of around one million ha. A processing unit of 5,000ton capacity is expected to require about US$5 million. The actual capacity of individual seed companiesto be created under the project will, however, be decided by the investors themselves.

3.17 Seed cotton will be produced by privatized seed farms, acting as contract growers for theseed companies. These contract growers, which can be shareholders in a seed company, will operateunder the technical guidance of the seed company to: (i) produce stock seed for re-multiplication byowner/member farms; (ii) multiply certified seed; and (iii) deliver to the seed company all seed cottonproduced.

3.18 Seed companies will be equipped to receive and gin seed cotton owned by theparticipating seed farms. At the end of the ginning process, they will buy the cotton seed from the seedfarms and return the lint, unless a prior arrangement exists for the seed company to act as the sellingagent for the lint, in which case, the companies will be given automatic licenses to export the lint asmarketing agents of the seed farms. They will then delint, condition, treat, bag, store, distribute andmarket the seed found suitable for planting and dispose of any seed found unsuitable for planting throughthe oil mills. To ensure proper cultural practices and varietal purity, the seed companies will assist theseed farms in the preparation of production plans, in the certification of their seed, and in gettingnecessary supplier credit for spare parts, equipment and pesticides as provided for under the line ofcredit.

3.19 About 50 farms were consulted on their interest to join a partnership to create seedcompanies. A sample of those which expressed a clear interest is given in Annex C. To do that, these

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and other seed farms need to become legally registered as fully private farms. The number of farmsinterested in participating in seed companies is likely to be much higher as many other seed farms existwhich have not been informed about the project and many of these which were contacted have not hadtime to reflect on it. Interest has also been expressed by international seed companies to enter into jointventure arrangements with local interests, including privatized seed farms to create seed companies.

3.20 The demand for quality seeds is expected to develop in tandem with the supply. Cropbudget analysis demonstrates farmers' ability to pay substantially higher prices for quality seeds than theydo at present, especially once the price of lint has been fully liberalized. The price of certified cottonseed in other countries is in the range of US$800 to US$1200/ton. Since suitable varieties are alreadyavailable in the country, the seed industry can operate, at least for few years, with a low overhead bytaking advantage of the sunk cost associated with variety development. On this basis a price as low asUS$150 to US$200/ton would allow the seed industry to break even in the early years without affectingthe profitability at the farm level, especially given the fact that quality seeds will decrease the plantingrate to 10 to 20 percent of the current planting rates and will eliminate the need for resowing. The seedindustry can, therefore, charge relatively low prices in the early years and adjust them progressively asfarmers learn the advantages of quality seeds, and as their cost structure requires.

3.21 The line of credit will finance the requirements of seed companies in relation to civilworks, ginning, seed processing, laboratory equipment, and incremental working capital. It will alsofinance spare parts, urgent equipment and pesticides for seed farms. The list of pesticides to be financedunder the project will be mutually agreed between the Government and the Bank. Funding for pesticideswill be channeled through the Institute of Crop Protection for the first year and, thereafter, through theline of credit. Given the current weakness of the banking system, the line of credit will be channeledthrough an agent bank under the overall administrative responsibility of the Project Implementation Unit,pending the strengthening of a suitable banking institution to take over this responsibility as soon aspossible.

3.22 The size of the line of credit was estimated on the basis of a seed processing capacity of25,000 tons of certified seed to meet the requirements for planting a cotton area in the order of 1 to 1.2million ha. The line of credit in the amount of US$38.8 million is expected to be on-lent through 4 to6 sub-loans. The exact number of sub-loans will depend on the processing capacity individual seedcompanies would decide to install, given the overall objective of developing a system that would supply25,000 tons of planting seed annually.

Cotton Marketing

Objectives

3.23 The objective of the Cotton Marketing component is to improve the marketability of theUzbek cotton and its value in the international market. Information generated on fibre characteristics willprovide the basis to more accurately identify and differentiate the Uzbek cotton and enhance sellers' andbuyers' knowledge about its quality and spinability. An associated objective of this component is toimprove the quality of the Uzbek cotton in the long term through research and better ginning practices.Using the information on fiber characteristics, cotton breeders will be able to select varieties moreresponsive to market and industry needs. Gin operators will also use the information to preserve the fiberquality by adjusting ginning speeds, the amount of cleaning carried out, and the engineering of the

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machinery used in the ginning process. Fiber property information will also facilitate a tighter selectionof cotton qualities used in domestic spinning, thus improving the efficiency of the spinning industry andproviding feedback to breeders and farmers on the industry's requirements.

Detailed Features

3.24 The Cotton Marketing component consists of three sub-components: a High VolumeInstrument (HVI) cotton grading system; an information processing and dissemination system; andTraining and associated Technical Assistance.

3.25 HVI Cotton Grading System. The project will support the installation of 34 HVI linesin 16 regional and one central classing centers. Each of these classing centers will incorporate data frommanual classing techniques for color, preparation, and leaf content of raw cotton to internationallyrecognized United States Department of Agriculture (USDA) standards with data on fiber property fromHVI testing. The central classing center in Tashkent will play the dual role of the central quality controland research laboratory, as well as, that of the regional classing center for the Tashkent area. The centerwill be operated by the cotton quality control agency SIFAT. Through a check test program, SIFAT willmaintain vigilance on the testing performance and accuracy of the regional classing centers. The HVIfiber testing devices to be installed in the central and regional testing laboratories will have the capacityto test for the following parameters: color, elongation, span length, fineness (micronaire), lengthuniformity and strength, and leaf content.

3.26 Information Processing and Dissemination. Information generated through HVI testsalong with manual classing data will become available for each bale of cotton produced. This informationwill be useful to those involved in cotton production, raw cotton marketing, cotton spinning, ginning,and cotton seed breeding. The system will allow the allocation of individually tagged bales by grade tosales contracts. It will also provide feedback to the gins and farmers about the impact of theirproduction/handling practices on the characteristics, and thus, the price of their cotton. A computerizedsystem will be installed that will allow automatic sharing of information between various operations, suchas growers' supplies, gin inventory, gin processing, bale inventory, marketing information, warehousing,stock location management, and sales contracts management. In addition, the research section of thecentral classing center will produce and disseminate information on fiber characteristics and on marketperformance of various varieties for researchers to use in making their work more relevant to the needsof cotton producers and cotton processors. All information generated under this project will, initially,be made available by SIFAT, as a public good to demonstrate its utility during the first two croppingseasons, and create a demand for the grading service. The objective, however, is for SIFAT to recoverthe full cost of the service from users. To that end, a proposal will be prepared by SIFAT aboutalternative approaches to effective cost recovery. Agreement was reached during negotiations that thisproposal will be submitted to the Bank for review by June 30, 1998. This plan will be finalized takinginto consideration the Bank's views and its implementation will start no later than June 30, 1999.

3.27 Training and associated Technical Assistance. To ensure effective introduction andoperation of the cotton classing system, the project will provide for establishing a central Cotton Gradingand Marketing School, with possible branches in the Regions, if necessary. The curriculum in theseschools will cover, inter alia,: (i) HVI operation; (ii) operation of other fiber testing instruments in thecentral laboratory; and (iii) cotton classing. The training programs will address the needs of SIFATpersonnel in the central and regional classing centers, personnel of cotton trading and cotton processing

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agencies, gin operators, cotton producers, and cotton research personnel. To ensure the operationalorientation of training, the same specialits involved in establishing the cotton grading system will also beresponsible for providing the training.

3.28 The training will consist of classroom training in the Grading and Marketing Schools, on-site training at the classing centers, and study tours abroad for key laboratory personnel. The primaryemphasis in training will be on introducing and on making effective use of a standardized system ofcotton quality evaluation which complies with the internationally accepted grading system. In parallelto that, the training program will seek to facilitate the utilization of the information generated by thecotton classification system in improving the practices/processes of handling the raw material, ginning,warehousing, marketing, and spinning.

3.29 To support the introduction of the HVI technology, the project will provide for a trainingprogram to create or strengthen the local skills in the areas of expertise which include HVI operations,technical repair and maintenance; classing techniques; computer system design, operation andmanagement; data analysis and interpretation, and information dissemination. The emphasis on trainingwill be on rapid, on-the-job transfer of knowledge and skills. Terms of reference for the technicalassistance are provided in Annex 2 of the Implementation Volume.

Integrated Pest Management

Objectives

3.30 The Integrated Pest Management (IPM) Component is an applied research componentaimed at developing the technology for strengthening and expanding the use of IPM techniques whichintegrate biological and chemical methods along with cultural practices to control cotton pests anddiseases. Its ultimate goal will be to define a set of insect control practices that will contribute toincreasing cotton yields and quality with minimal negative impact on the ecology and the health statusof the people involved. Specifically, the project will support the development of technology that willmake feasible: (i) an expanded use of biological control through mass release of beneficial insects andthe conservation of those already in nature; and (ii) selective and reduced use of pesticides througheffective application practices and improved equipment. The project will also support the preparation ofa national strategy for the use of pesticides in agriculture and the development of a farmer pesticidehandbook to inform farmers on appropriate and safe ways to select and use pesticides.

Detailed Features

3.31 The IPM component has four sub-components: development of automated mass rearingtechnology, development of mechanized dispersal technology, development of effective equipment forapplication of pesticides, and training and technical assistance.

3.32 Automated mass rearing technology. The current breeding method for beneficial insects,developed in the early 1970s, involves substantial manual handling, resulting in heavy losses. The projectwill provide for: (i) the preparation of plans and specifications for mass automated rearing units; (ii) theproduction and trial of a prototype automated mass rearing unit; and (iii) the development of 45 newautomated mass rearing units - 15 for Trichogramma, 15 for Bracon, and 15 for Crysopa to be used instrategic breeding locations.

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3.33 Mechanized dispersal technology. Currently, dispersal of all beneficial insects is doneby hand. One person can cover 7 to 10 ha per day with deposition points 10 m apart. This system doesnot allow for uniformity in coverage, nor does it allow for quick spread of beneficial insects to find theirtargets. Possible solutions to be tried and, if found successful, developed include dispersal by aircraft,by tractor, and by ultra-light aircraft. A prototype disseminator for aircraft was developed andsuccessfully tested in one district. Under the project, the Institute for Crop Protection will provide forbuilding six such disseminators for further testing and evaluation in six oblasts using leased aircrafts.A prototype disseminator for dispersal by tractor was also developed and tested in one district. Theproject will provide for building twelve such prototype disseminators for further testing and evaluationby the Institute for Crop Protection in six oblasts. Dissemination by ultra-light aircraft has not been triedin Uzbekistan. The project will provide for the purchase of an ultra-light aircraft to be modified andtested for the distribution of beneficial insects, possibly as a more economic alternative to regularaircrafts.

3.34 Equipment for application of pesticides. The current technology for application ofpesticides uses air-blast sprayers which give excessively large droplets. It is estimated that about 80percent of the pesticides applied is lost and ends up polluting the environment. Moreover, the 20 percentwhich reaches the plants is too poorly distributed to be effective in controlling the targeted cotton pests.An alternative technology has been under development using a boom spray with a redesigned nozzle.With this technology, the fluid is mixed with air and the mixture is dispersed with an air jet. Thedevelopment of this technology is advanced, but further work is needed. The project will provide forcompleting the development of the boom spray, the production of prototypes for testing in differentregions, and the import and testing of equipment known to have the characteristics desired forUzbekistan.

3.35 In parallel to supporting the development of equipment, the project will support thepreparation and the dissemination of a "Farmers Pesticide Handbook" intended to help farmers with theselection of pesticides, and spraying equipment to make the application of pesticides an environmentallysafe integral part of the IPM program. The project will also provide for the development of a nationalstrategy for the use of pesticides in agriculture, including regulatory options, handling, disposal andapplication. Terms of reference for the preparation of the Farmers Pesticide Handbook and the NationalPesticide Policy are included in Annex 3 of the Implementation Volume. The Policy and the Handbookwill be prepared by the Institute for Crop Protection with technical assistance, as needed, and will besubmitted to the Bank before they are finalized.

3.36 Training and Technical Assistance. To support the IPM technology developmentprogram described above, the project will provide for on-the-job training and study tours for scientistsand IPM technicians, both in Uzbekistan and abroad. It will also provide for technical assistance tosupport the development of the technology and the base for manufacturing it. Terms of reference areprovided in Annex 4 of the Implementation Volume.

On-Farm Irrigation Scheduling

Objectives

3.37 The objective of the irrigation component is to improve the management of irrigationwater at the farm level. More specifically, the component will aim to: (i) introduce irrigation practices

23

that would lead to a substantial reduction in the amount of water used to irrigate cotton; (ii) increaseawareness of the economic value of irrigation water among farm managers and technicians; and (iii)reduce environmental pollution due to excessive use of water.

Detailed Features

3.38 The On-Farm Irrigation Scheduling component has two sub-components. The firstsupports the development and operation of a computer-based irrigation scheduling system, and the secondsupports training and technical assistance to develop a capability to run the systemn and expand itsapplication.

3.39 The Irnigation Scheduling System (ISS). The basis of the ISS is a computer softwarethat UZAGROINFORM has developed, validated and tested on eight farms in the Pskent District covering18,000 ha of irrigated land where the water table is deeper than 3 m, which is the case for about 60percent of the irrigated land. The project will support expanding the use of this system to cover an areaof 200,000 to 300,000 ha, and enhancing its capability by adding a feature for monitoring soil and plantwater status in order to check the validity of the computer predictions and the efficiency of waterapplication at the farm. The monitoring technology consists of tensiometers and pressure chambers whichwill provide feedback on plant water status to ensure that the ISS is maintaining water in the soil atadequate levels. The project will also support the introduction of a more powerful computer programdeveloped by UZAGROINFORM which, in addition to monitoring the water level, calculates the waterbalance in each layer of the soil, calculates the vertical and horizontal water flow, and determines themovement of salts and nutrients in the soil and down into the water table and the drainage system. Theseadded features will enable the system to estimate salinity hazards and to manage salinity and nutrientpollution. Priority for the introduction of irrigation scheduling will be given to areas where: (i)supporting investments needed are minimal; and (ii) the need to conserve water is very strongly felt forcost and/or environmental reasons.

3.40 Training and Technical Assistance. The pace at which the use of the ISS can beexpanded will be closely connected to the pace at which on-the-job training can be provided. As thetechnology to be used was developed in Uzbekistan, the training will be primarily on-the-job. It willinvolve engineers operating the ISS at the district level who, in turn, will train their support staff and thestaff involved in irrigation at the farm level. The project will also provide for technical assistance tosupport the evaluation of the use of tensiometers and alternative technology for the control of waterapplication, and help design and implement the training program. Terms of reference are given in Annex5 of the Implementation Volume.

Project Management and Programn Design

Objective

3.41 This component has three objectives: (i) to provide the project coordinating agency -GOSKOMPROGNOZSTAT - with critically needed institutional support to help the agencies involvedand the private sector implement this project; (ii) to strengthen the capacity of Departments which wereassigned responsibility for implementing project components; and (iii) to support the necessary analyticalwork to design future investment programs for potential funding by international financial institutions.

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Detailed Features

3.42 The Project Management and Program Design Component has two sub-components; thefirst deals with managing the implementation of this project, and the second deals with the design offuture investment programs.

3.43 Project Management. Existing Government Departments will be responsible for theimplementation of the public sector part of the project. Each Department will constitute within theirexisting structure a Component Implementation Unit (CIU) to manage the implementation of eachcomponent. In addition, given the limited experience individual Departments have in implementing jointprograms and in dealing with external funding agencies, the Government has established a ProjectImplementation Unit (PIU) to coordinate project implementation. The PIU is located inGOSKOMPROGNOZSTAT and is headed by a Project Director who answers to the Deputy Chairmanof GOSKOMPROGNOZSTAT. The PIU will oversee and monitor project implementation and assist thepublic agencies involved in the execution of their respective components. The PIU will also manage thestudies aimed at designing future investment programs. In addition and in cooperation with a commercialbank, the PIU will administer the line of credit supporting the seed component to be executed by theprivate sector. The PIU will perform its coordination function with support from a Project WorkingGroup (PWG) consisting of senior officials from Government agencies participating in the project underthe chairmanship of the Deputy Chairman of GOSKOMPROGNOZSTAT. The seed industry componentwill be implemented by the private sector. The project will provide for equipment, training and technicalassistance for the PIU and the CIUs (Chapter V).

3.44 Design of future programs. This sub-component will support the analytical work neededfor the Government to prepare feasibility studies for investments in support of the intensification ofagricultural production. Areas, so far, identified by Government for potential investment include:collective farm restructuring and development, agricultural support services (research, extension,marketing, farm management), irrigation rehabilitation, modernization of the cotton ginning industry,rehabilitation and development of pasture resources, and development of agricultural exports (fruits,vegetables, silk, grapes, berries, etc). The project provides a US$1.9 million lump sum allocation forthat purpose, including about US$0.6 million for pilot activities in support of project preparation. Theseresources will be allocated to specific feasibility studies on the basis of detailed proposals prepared byPIU and carried out through consulting services. The studies will be mutually agreed between theGovernment and the Bank. An assurance to that effect has been given by Government duringnegotiations.

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IV. PROJECT COSTS AND FINANCIAL ARRANGEMENTS

A. PROJECT COSTS

4.1 Total project costs, including contingencies and applicable taxes and duties, are estimatedat US$84.6 million. This estimate covers expected expenditures in foreign exchange in the order ofUS$62. 1 million (73.4 percent of total costs) and expected expenditure in local currency, other than taxes,equivalent to US$22.5 million (26.6 percent of total costs). Taxes and duties are estimated at theequivalent of US$6.1 million (7.2 percent of total costs). Table 4.1 summarizes project cost estimatesby component and category of expenditures. Details on project costs are given in Annex D. (Additionalproject cost information is contained in Annex 6 of the Implementation Volume). The line of creditsupporting the private seed industry amounts to US$38.7 million, equivalent to about 46 percent ofproject costs.

4.2 Cost estimates were derived from mission analysis based on discussions with Governmentofficials and intended project beneficiaries, and on the feasibility study and preparation reports submittedby Government. Price contingencies are based on official Bank projections as of December, 1994.Physical contingencies are estimated at 10 percent of base costs for civil works and equipment in line withestablished Bank practice and experience under similar projects. Taxes and duties were estimated at 10percent of base costs of equipment and civil works. This is the least firm estimate as Government hasnot yet adopted a tax policy, nor made a decision on the tax status of externally supported developmentprograms. Assurance was given by the Government that any tax liability associated with public sectorproject activities beyond the amount already covered will be financed by Government through theirannual budgetary process.

B. FINANCING PLAN

Sources of Funds

4.3 A Bank loan of US$66.0 million will finance 100 percent of expected expenditures inforeign exchange and about 17.3 percent of expected expenditures in local currency. Bank financing ofincremental expenditures in local currency is needed because the project requires substantial and rapidbuildup of expenditures which Governrment is not yet organized to meet. Bank financing of recurrentexpenditures for the public sector part of the project will be provided on a declining basis (25 percent forthe first two years, 15 percent for the third and fourth year, and 0 percent in year five) in such a waythat Government will assume full funding responsibility through the normal budgetary process for allrecurrent expenditures associated with project activities in the public sector, starting with the fifth yearof the project period. The Bank loan to the Republic of Uzbekistan will have a maturity of 20 years,including a 5-year grace period, at the Bank's standard variable interest rate. The Government, throughGOSKOMPROGNOZSTAT, will finance about 47 percent of local costs, including payment of applicableduties and taxes for the public sector components and sub-components. Similarly, the participatingprivate enterprises will finance about 34.7 percent of local costs, including applicable duties and taxes,for the private sector components and sub-components. Table 4.2 summarizes the project financing plan.

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TABLE 4.1: SUMMARY OF PROJECT COSTS(US$ MILLION)

Project CostsForeign Component

Foreign Local Total exchange % of totalexchange currency % of total

Project ComponentSeed Industry

Seed companies and 28.0 10.7 38.7 72.3 45.8farms

Seed quality control 3.4 1.7 5.1 66.7 6.0Marketing 20.8 7.1 27.9 73.2 33.0Integrated Pest Management 3.6 1.5 5.1 70.6 6.0Irrigation 2.5 1.1 3.6 69.4 4.2Project Implementation Unit 1.9 0.4 2.3 82.6 2.7Program Design 1.9 - 1.9 100.0 2.2

Total 62.1 22.5 84.6 73.4 100.0

Category of ExpendituresCivil works 3.2 0.8 4.0 80.0 4.7Equipment 21.8 5.3 27.1 80.4 32.0Training 1.2 - 1.2 100.0 1.4Technical Assistance 5.2 0.1 5.3 98.1 6.3Program Design 1.9 - 1.9 100.0 2.3Line of credit 28.0 10.7 38.7 72.4 45.7Recurrent costs 0.8 5.6 6.4 12.5 7.6

Total Costs 62.1 22.5 84.6 73.0 100.0

TABLE 4.2: PROJECT FINANCING PLAN(US$ MILLION)

Foreign Local PercentSources of Funds exchange currency j Total of Total

IBRD 62.1 3.9 66.0 78.0

Governnent - 10.8 10.8 12.8

Private sector - 1 7.8 | 7.8 | 9.2

Total 62.1 22.5 84.6 100.0__1

Percent of Total 73.4 26.6 100.0 -- 1

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Counterpart Funds

4.4 Timely implementation of public sector components and sub-components depends, to alarge extent, on the availability and timely flow of budgetary resources to the executing agencies. Thecounterpart funds will be included in the approved annual budgets of the respective executing agenciesin conformity with provisions under the project, and will be made available to them at the beginning ofeach budget year to give them the management flexibility and real authority to commit resources and signcontracts in a timely manner. The Government provided assurances during negotiations to this effectand that a line item will be introduced in the national budgetfor the cotton project, with all budgetaryallocations under that line item restricted for the sole use of the project. The executing agencies, inturn, will allocate and transfer resources to their representative units at the level of Oblast and Districtin a manner that will allow them to make timely decisions and give them unrestricted working authorityto enter into contractual arrangements. To facilitate the flow of budgetary contributions to the project,a Project Account in the name of the PIU will be established to receive all counterpart funds inconformity with provisions under the project. This revolving account will be established in a commercialbank with an initial deposit of a minimum of US$0.5 million equivalent. The PIU will channel the fundsin this account to the executing agencies in conformity with the provisions under the project or anysubsequent agreements between Government and the Bank modifying such provisions. The Governmentwill replenish this account promptly on the basis of documentation covering eligible project expenditures.Loan effectiveness will be conditional upon the Project Account being established and the initial depositof US$0.5 million being made into it.

Co-Financing

4.5 Training, technical assistance, and program design represent, respectively 1.4, 6.3 and2.3 percent of total project costs. If the Government identifies a source of grant funds to finance partor all of such expenditures, the use of Bank funds for that purpose will be reduced correspondingly andreallocated to other project components on the basis of a joint review and mutual agreement betweenGovernment and the Bank.

C. SPECIAL AccouNT

4.6 To facilitate project implementation, the Borrower will establish a Special Account (SA)in US dollars in a commercial bank on terms and conditions satisfactory to the Bank to cover the IBRD'sshare of expenditures. The commercial bank selected should have the capacity to perform the servicesrequired under the project. To that end, the bank selected should have: (i) a significant foreigncorrespondence network covering all major currencies; (ii) reasonable capacity and experience for issuingletters of credit, for making direct foreign payments and other international transactions; (iii) the capacityto perform a wide range of banking services, at local domestic branches, including cash payments,transfers to other domestic banks, issuance of debit notes, application of conversion rates from foreigncurrencies; (iv) the capacity to maintain adequate accounts for the SA as required by the World Bank andprovide monthly bank statements to the PIU; (v) the willingness to issue a Comfort Letter to assure thatamounts deposited in the SA will not be set off or otherwise seized or attached to satisfy amounts dueto the commercial bank by the Borrower; and (vi) the willingness to charge competitive rates for theirservices and provide reasonable interest income on balances held.

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4.7 The commercial bank selected to manage the SA will also manage the sub-loans accountsunder the line of credit for the Seed Component. The bank's primary responsibility in relation to the sub-loans will be limited to disbursement of sub-loan proceeds and collection on behalf of the Governmentof loan repayments. Approval of the sub-loans will be the responsibility of the finance department of thePIU. Selection procedures for a bank to manage the SA were confirmed during negotiations.Agreement between the Government and the World Bank on the commercial bank to effectivelymaintain, disburse and collect projectfunds, and the signing of an agency agreement between this bankagent and PIU will be a condition of disbursement against the private sector part of the seedcomponent.

4.8 The authorized allocation to the SA will be US$1.0 million, representing about fourmonths of average expenditures effected through the SA. The SA will not be used for payments inforeign currency over US$50,000 which will be made through direct payments from the Loan Account.At the request of the Borrower and, based on the project needs, the World Bank will make an initialdeposit or deposits into the SA up to the amount of the authorized allocation. Applications for thereplenishment of the Special Account may be submitted by PIU to the Bank on a monthly basis or whenone-third of the balance has been withdrawn, whichever occurs earlier. Documentation requirements forreplenishment will follow the usual Bank procedures. In addition, monthly bank statements of the SpecialAccount which have been reconciled by the PIU will accompany all replenishment applications.

D. FLOW OF LOAN FUNDS

4.9 The proceeds of the loan will be channeled in two ways (see Annex 11 of theImplementation Volume). First, funds to public sector implementing agencies will be received by theCentral Bank and channeled as special line items through the budgetary process. Second, due to lack ofestablished financial intermediation mechanisms, and due to the importance of supporting theestablishment of a seed industry in the private sector at this time, the funds earmarked for the line ofcredit for private seed companies and their associated seed farms will be channeled by the Governmentthrough the agent bank under a sub-loan agreement acceptable to the Bank. Under the latterarrangements, the selected commercial bank will serve as an agency bank primarily to disburse funds,maintain accounts and recover sub-loans on behalf of the Government in exchange for a commission.The Government will bear any default risk. The PIU, through the Credit Committee constituted by itsFinance department, will be responsible for the appraisal of sub-loans. PIU staff and their advisors will,upon request, arrange for independent technical assistance to help sub-loan applicants develop businessplans and determine funding requirements to support their planned seed operations. The PIU Financedepartment, assisted by the specially appointed Credit Commnittee, will appraise credit applications anddetermine the conformance of such applications to the agreed sub-loan criteria. Once the appraisal iscompleted and the eligibility for the sub-loan established, each credit application will be submitted to theWorld Bank for review and clearance. Bank review will cover all technical, financial, institutional, andenvironmental considerations related to the sub-loans. Following receipt of a "No Objection" from theWorld Bank and on the basis of agreed eligibility criteria and terms of sub-loans (Annex E), the DeputyChairman GOSKOMPROGNOZSTAT will formally approve sub-loans upon the recommendation of thePIU and concurrence by the cooperating commercial bank. The Government and the seed companiesbenefiting from sub-loans will enter into sub-loan agreements specifying the terms and conditions of sub-loans, security arrangements in case of default, procedures for withdrawal and utilization of loanproceeds, monitoring and reporting arrangements, repayment schedule, and independent financial audit.These arrangements were confirmed during negotiations.

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4.10 A high proportion of the World Bank loan will be used for payments to foreign suppliersof goods and services, either through the Special Account or direct from the World Bank by order fromthe PIU. Financing of local, Bank-financed project expenditures will be on a reimbursable basis: theagency incurring the expenditure will first make a payment for the eligible goods or services, submit awithdrawal application to PIU which will authorize reimbursement from the loan-funded Special Account.

4.11 The PIU will include, in its accounting arrangements, procedures for recording all projectfunding, whether as sub-loans to individual seed companies, direct contribution by seed companies,and/or funds through budgetary process for public sector executing agencies to cover agreed projectexpenditures. GOSKOMPROGNOZSTAT, on behalf of the Government, will enter into an agencyagreement with an agency bank to monitor disbursement of the line of credit and recover repayment(principal and interest) of the sub-loans, including the part borrowed by the seed companies on behalf oftheir associated seed farms.

4.12 The Government share of financing will be channeled directly through the budgets of theexecuting agencies concerned in accordance with normal Government procedures, with appropriateaccounting, reporting and audit arrangements for the project. The expenditures to be financed throughthe contribution of private seed companies and private seed farms will be financed directly by them, withappropriate records maintained and subject to independent audit.

E. ON-LENDING TERMS

4. 13 The prevailing macroeconomic situation makes it difficult to devise appropriate Sum-basedon-lending terms. Accordingly, the Government and the World Bank agreed that the sub-loans to privateseed companies will be denominated in US dollars. The interest rate to sub-borrowers will be the longterm dollar rate (US 10-year Bond rate) in effect at the time sub-loans are made (the base rate) plus amargin of 3.0 percent. This margin will cover administrative costs, including commissions to thecommercial bank for processing disbursements and the recovery of sub-loans, the cost to the PIU foradministering the line of credit, and the Government cross-currency exchange and default risks. The sub-loans to private seed companies will have a maximum maturity period of 10 years, including a three-yeargrace period. Financial terms of the sub-loans and eligibility criteria are given in Annex E. Since theamount outstanding and the repayment will be in US dollars, the exchange risk (between the US$ andthe Sum) will be borne by the private seed companies. The Government will bear the cross-currency riskbetween the basket of currencies in the Bank loan and the US dollar. The private seed companies areexpected to be able to bear the foreign exchange risk because these companies and the private seed farmsassociated with them are expected to have access to foreign exchange from export sales of lint, and tobe commercially viable (para 6.8) at the liberalized market price for cotton seed and lint. In case theactivities of seed companies are limited to the processing and sale of planting seed on the local market,arrangements will be made in the sub-loan agreement for repayment of the sub-loan to be made in thelocal currency - Sum equivalent. During the World Bank's five-year grace period, reflows from sub-loan repayment will be used for the same purpose as specified under the project for the private seedindustry.

F. COST RECOVERY

4.14 Private sector activities will account for about 47 percent of the loan proceeds. Thesefunds will be repaid with interest to the Government within the agreed terms of individual sub-loans

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which will not exceed 10 years. The remaining 53 percent of loan proceeds will finance priority publicsector activities aimed at facilitating the transition of the cotton sub-sector into the market economy. Thevalue to potential beneficiaries of the services emanating from these public sector activities will not beobvious to them at the onset of the project, and possibly not even during the project period. Accordingly,no provision is made under the project for the recovery of the cost of the public sector components. Theproject, however, will be instrumental in introducing the principle of "fee for service" under themarketing and the irrigation components, and under the seed testing and certification sub-components andprovides for technical assistance for that purpose. Although their potential value to the cotton sub-sectoras a whole is obvious, individual beneficiaries will take time to recognize how such services affect theprofitability of their individual operations, and thus attach a financial value to each service. It will not,therefore, be practical to expect beneficiaries to start paying for the services at the onset of the project,nor will it be practical to expect Government develop the capacity and workable mechanisms to recoverthe full cost of those services during the project period. Accordingly, the following provisions are madefor cost recovery under the public sector part of the project:

Seed Testing and Certification

4.15 It will take two to three years for the first seed companies and the associated seed farmsto become operational. It will also take two to three years for Government to develop a capacity for cost-effective seed testing and certification. A period of learning and experimentation will be needed. TheSeed Certification and Seed Law Agency will, therefore, concentrate during the first three years of theproject on establishing an effective testing and certification system and on demonstrating to seedproducers, processors and users the value to them of seed testing and certification. By the end of thethird project year (June 30, 1998), this agency will prepare a plan for the full recovery of the costs oftheir services and submit it to Government and the World Bank for review and approval. It is expectedthat cost recovery will start in the fourth year of the project period (June 30, 1999).

Cotton Marketing

4.16 The cotton grading system is expected to be introduced in three phases to accommodatethe need for training the staff in the use of equipment and in the interpretation and dissemination of theinformation generated. The first phase, which is critical for defining work procedures and standards,involves the installation of a limited cotton grading capacity. The bulk of the classing equipment isexpected to be installed during the third and fourth years of the project period. For these reasons, andin order to allow SIFAT to assess the true costs of the cotton grading services, SIFAT will not berequired to concentrate on the cost recovery issue until the third year of the project period. A plan tothat effect will be prepared by June 30, 1998 and submitted to Government and the World Bank forreview and approved. The plan will be implemented, starting the fourth cropping season under theproject (June 30, 1999).

Irrigation Scheduling

4.17 The concept that water has a financial cost is alien to farmers in Uzbekistan. The projectaims to introduce irrigation water saving practices on about 5 percent of the irrigated area. TheGovernment hopes that, through the demonstration effect of this intervention, farmers will learn how toaddress the problems associated with excessive use of water and will recognize the benefits to them fromeffective irrigation. In addition, to motivate farmers to use water economically, Government willintroduce measures to recover the cost of irrigation water from farmers. To that end, UZAGROINFORM

31

will use the experience gained during the first two years of the project to prepare a plan for therecovery of the cost of irrigation water to be submitted to Goverrnment and the World Bank by June 30,1997 for review and approval. The agreed plan will provide the basis for pricing of irrigation waterunder this and future projects supporting irrigated agriculture, and for initiating the collection of watercharges under this project no later than June 30, 1998. This will assist Government in realizing theirobjective to introduce water charges in irrigation as stated in the letter of Development Policy sent to theBank in conjunction with the Rehabilitation Loan.

G. PROCUREMENT

4.18 The procurement of all goods funded from the loan proceeds will be in accordance withthe Bank's "Guidelines for Procurement under IBRD Loans and IDA Credits (January, 1995) ". Localgoods will be eligible for a preference as provided in the Guidelines. The Bank's standard bidding andcontracting documents for the Procurement of Goods and the construction of (Smaller) Works will beused for International Competitive Bidding (ICB), Direct Contracting (DC) and National CompetitiveBidding (NCB). Consultants hired for training and technical assistance will be employed in accordancewith the Bank's Guidelines "Use of Consultants by World Bank Borrowers and the World Bank asExecuting Agency (August 1981)". The methods of procurement under the project are summarized inTable 4.3. Details for procurement arrangements are provided in Annex F hereto and Annex 7 of theImplementation Volume.

4.19 Primary responsibility for overseeing implementation of procurement procedures will restwith the PIU. (See Annex H for details). It will be guided by a Procurement Specialist, financed underthe Loan, familiar with Bank procedures, and if needed, other donors' rules and procurement guidelines.The program of assistance will include general training for PIU and appropriate staff of executingagencies on procedures and contract administration to support the procurement of the indicatedequipment, civil works and technical assistance. PIU staff will provide advice regarding the preparationof necessary documentation and implementation of the Bank's Standard Bidding and Procurementdocumentation, with needed addenda or supplements, as approved by the Bank, prior to solicitation,evaluation and contract negotiation, as appropriate. Terms of reference for technical assistance andvendor lists will be routed to the Bank, as appropriate, for needed reviews, concurrence or no-objection.The PIU will include information on its procurement activities in periodic reports to the Bank. (SeeAnnexes H and I hereof.)

4.20 The project will include procurement by private sector seed processing companies andtheir associated seed multiplication farms, and procurement by public sector agencies. Private sectoractivities under the credit line will constitute about 45 percent of overall, non-tax expenditures for capitaland recurrent costs. Within the private sector portion, about 38 percent is expected to involve purchasesunder International Competitive Bidding, 51 percent will be purchased using International Shopping andthe balance (11 percent) will be expended using Local Shopping. The public sector portion will involve55 percent of non-tax project costs and will be divided between equipment and works expenditures (about68 percent), recurrent costs (14 percent), and training, consultant services and program design (about 18percent). About 58 percent of public sector purchases of equipment will be done through InternationalCompetitive Bidding. Although there will be different procurement method thresholds for the public andprivate sector elements of the Project, the PIU will administer reviews and process documentation forboth segments.

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TABLE 4.3: SUMMARY OF PROCUREMENT ARRANGEMENTS(US$ MILLION)

Procurement MethodExpenditure Category ICB* NCB* Other Total

Civil works - 4.0"1 4.0(3.2) - (3.2)

Equipment 15.8 - 11.3' 27.1___________________________ ~~~(12.6) __ _ _ _ _(9. 1) (21.7)

Training =- 1.2) 3 1.2

_____________ ~~~~~~(1.2) (1.2)

Technical Assistance - 4.8 3 4.8

(4.8) (4.8)

Program Design - - 1.93/ 1.9

(1.9) (1.9)

Line of Credit 14.5 - 24.24' 38.7

(12.5) (18.5) (31.0)

Recurrent Costs - 6.35' 6.3

(1.6) (1.6)

Project Preparation Facility - - 0.66/ 0.6

(0.6) (0.6)

Total 30.3 4.0 50.3 84.6(25.1) (3.2) (37.7) (66.0)

* ICB: International Competitive Bidding; NCB: National Competitive Bidding, per Bank Guidelines.

i/ Competitive (sealed bid) procurement of construction services for public sector cotton/seed grading facilities.2/ Includes Direct Contracting (DC) for proprietary computer software, spare parts, etc. purchased under the Guidelines (US$.980 million). Also included

are International Shopping (IS) purchases for off-the-shelf items (US$8.3 million), and Local Shopping (LS) (US$2.0 million), in accordance with theBank's Guidelines, January, 1995.

3/ Training and study tours (US$I.2 million), and program design and project support/consulting services ($6.7 million) shall be procured in accordancewith World Bank Guidelines: Use of Consultants, 1981.

4/ Goods and materials (including ancillary installation services) and seed multiplication inputs procured under the Credit Line: IS for off-the-shelf items(US$19.9 million); Local Shopping for small value, locally available equipment and construction inputs (US$1.0 million). Also included are US$3.3million for taxes and/or incremental recurrent costs procured using Local Shopping and Statements of Expenditure, approved by the Bank as elementsof annual component budgets.

5/ Public sector taxes (US$2.8 million) and miscellaneous purchases/incremental recurrent costs approved by the Bank as part of annual budget reviews(US$3.5 million), procured using Local Shopping and Statements of Expenditure.

6/ Project Preparation Facility (PPF) - US$550,000 -financing initial consulting services, start-up equipment, supplies, communications, and misc. expensesfor PIU and CIU units.

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Public Sector Procurement

Goods and Equipment

4.21 Procurement actions by public sector agencies for goods and equipment are expected tobe undertaken within the following guidelines:

(a) ICB Procurement. International Competitive Bidding (ICB) will be conductedin accordance with Section 11 of the Bank's Guidelines for Procurement underIBRD Loans and IDA Credits, dated January, 1995 (the Guidelines). ICBprocedures will be used for all public sector equipment and materials purchasesexpected to exceed US$300,000 per contract. In this manner, out of a total ofapproximately US$27.1 million (about US$21.7 million of Loan funds) allocatedfor the purchase of goods and equipment, about US$15.8 million (US$12.6million in Loan funds) or 58 percent will be obtained using ICB procedures.Principal categories for ICB procurement are seed testing and certificationequipment, HVI lines, cotton classing and marketing equipment, and materialsand equipment for the Irrigation component. In the comparison of bids forequipment purchased under ICB, domestic goods will be allowed a preferentialmargin over the competing price of imports, as provided for in Appendix 2 ofthe Bank Guidelines. The public sector element is expected to have about sixICB contracts, averaging approximately US$2.64 million each;

(b) Direct Contracting. Direct contracting is expected because some computernetware and materials testing components would need functional compatibilityand standardization for training, operations and spare parts purposes. Suchequipment, software and spares would only be available from a proprietarysource. These purchases would be implemented in accordance with theGuidelines and are expected to involve two contract actions, totalingapproximately US$1.0 million (US$800,000 in Loan funds). The Bank willreview and clear ICB and DC procedures, bid documentation, evaluations/awardsand resulting contracts on an ex-ante basis; and provide "No-Objections" asprovided for in the Guidelines;

(c) International Shopping. International Shopping (IS) may be authorized forreadily available, off-the-shelf purchases valued at under US$300,000 percontract. International Shopping will be based on quotations from at least threesuppliers, from at least two different eligible Bank-member countries, asindicated in the Bank's Guidelines. International Shopping is expected to totalabout US$8.3 million (US$6.6 million in Loan funds) and involve approximately35 purchases averaging about US$238,000 each. Procurement and contractingactions would be cleared by the PIU and subject to review by Bank staff on anex-post basis during supervision missions; and

(d) Local Shopping. To support project needs for minor equipment and materials,office support and supplies, transport, communications, etc., it is expected thatthe PIU and CIUs will need to initiate small value purchases using Local

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Shopping techniques described in the Guidelines. Local Shopping will also bethe method for procuring miscellaneous supplies and services that are part ofrecurrent costs. These purchases are expected to cover contracts underUS$50,000 equivalent each and be effected by obtaining at least three pricequotations from different eligible suppliers. These purchases (expected toaverage about US$36,300 each) will be used for small value and readilyavailable, off-the-shelf items. Such purchases are expected to number about 55transactions over the life of the project and involve about US$2.0 million(US$1.6 million in Loan funds). Small value purchases will be subject to ex-postdocumentation reviews, with payments being reimbursed by Special Account andStatement of Expenditure.

Civil Works

4.22 Procurement actions by public sector agencies for renovation of buildings and constructionof small inspection and testing facilities are expected to be geographically dispersed and, because theyare low in value, would probably not be of interest to foreign contractors. Nevertheless, to promotecompetitive procurement, the PIU will help the CIUs implement informal, but structured procurementprocedures to obtain these construction services. These small civil works activities are expected toinvolve about twenty contracts, averaging about US$205,000 each. The total for public civil workswould be about US$4.0 million (US$3.2 million in Loan funds). All civil works contracts shall beprocured locally on a competitive basis, following procedures acceptable to the Bank. For contractsabove US$250,000 equivalent, national competitive bidding procedures shall be used. This procedurewill be consistent with Section 3.4 of the Guidelines and include the use of the Region's standard biddingdocuments (for works over US$250,000), dated July 1994. At the option of the Government, theprocedure may include payments in local currency, publications and documentation in the local language,and local procedures for the settlement of disputes. Works contracts under US$250,000 each (estimatedto involve about US$2.1 million in loan funds) would use the Region's standard Local CompetitiveBidding (small works) documentation, dated June 1994. To avoid inefficiencies in the administration ofthese small value (under US$250,000) works activities, project participation would follow a more stream-lined procedure. While competition among interested finns, obtaining sealed bids, public bid openingand structured evaluations would be in accordance with Section 3.4 of the new Guidelines, this underUS$250,000 procedure would also include, for small value (e.g. renovation) works, the option ofprocurement based on comparison of the least three bids from qualified contractors that was a feature oflocal shopping in the former Guidelines. Such procedures will be acceptable to the Bank. Except forthe first two works bid packages and all those over US$600,000, documentation and procurement stepssubject to ex-post review. Public sector works procurements not getting prior Bank review would besubject to examination during supervision missions or audits. If post-qualification is used, it would bebased on specific requirements clearly stated in the bidding and evaluation documents.

Consulting Services

4.23 Professional and technical services will be obtained to assist PIU and CIU staffs with theplanning, implementation and monitoring of project activities. Services will also be purchased fortraining and for the design of future investment programs. The use of local consulting firms andpersonnel will be encouraged to develop domestic capabilities. Firms and individual experts will beengaged in accordance with the Bank's Guidelines: Use of Consultants by World Bank Borrowers and theWorld Bank as Executing Agency, published in August, 1981. Terms of Reference for all consultant

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assignments, solicitation methods and all documentation and contracts for consultant services valued atgreater than US$100,000 each for firms and US$50,000 each for contracts with individuals will be subjectto prior Bank review and approval. These are expected to be about thirteen consulting services contractsunder the public sector portion of the project, totaling approximately US$8.3 million and averaging aboutUS$610,000, that will be subject to prior Bank review and approval. It is expected that three contractswith individuals, averaging about US$140,000 will also be subject to prior Bank review. Wherepracticable, technical assistance, such as that needed for systems installation and/or maintenance services,will be sought as part of procurement packages to improve accountability and reduce costs andadministrative burdens.

Private Sector Procurement

4.24 The project will include a US$38.7 million credit line for the private seed companies touse for seed plant construction and equipment and to improve production activities of their associated seedmultiplication farms. Procurement under this credit line will be the responsibility of the private sectorwith guidance, as needed, provided by the PIU Procurement Advisor and staff. Procurement proceduresand documentation will be reviewed by the PIU and the Bank as part of the sub-loan application approvalprocess. Equipment, materials and site improvements for the seed plants, and farm machinery and inputsto improve seed multiplication, will be purchased from international and domestic sources. Details onsuch procurements will be included in sub-loan applications and annual business plans. Local taxes willbe financed by sources other than loan funds.

4.25 The threshold for ICB equipment procurement under this credit line will be US$3.0million per contract. Purchases above this threshold will be implemented in accordance with theGuidelines and Schedule 4, Part B, of the Loan Agreement. Items or groups of items estimated to costthe equivalent of less than US$3.0 million per contract will be procured on the basis of proceduresacceptable to the Bank. Private sector procurement plans, procedures and, as needed documentation willbe reviewed and approved in advance by the Bank. The construction or modification of seed processingfacilities by the private seed companies is expected to be handled by the owners or their equipmentsuppliers. Turnkey plant contracts could be used, but are not contemplated at this time. If constructioncontracting is needed in some facilities, it would be carried out using the procedures and threshold forcivil works described in paragraph 4.22. Requests for proprietary contracting authority will beconsidered by the Bank, as required. Recurrent costs - utilities, consumables, parts, etc. - of the seedplants and farms may be eligible for financing if they are included in the firms' annual operating plans,approved in advance by the Bank, be procured using procedures acceptable to the Bank. Procurementplans and documentation will be included in the sub-loan applications and annual budgets. These planswill be reviewed by the Bank for each sub-loan; comments or "No-Objection" will be given by the TaskManager.

4.26 In view of the lack of experience of private sector importers with international purchasing,the PIU Procurement Specialist will also be available to assist private sector project participants developprocurement procedures, market searches, pre-qualification, specifications development, bid documents,evaluations, contracts, logistics controls, and payment procedures.

4.27 An expatriate Procurement Specialist will be engaged under the Loan to help the PIUdevelop procurement plans and establish procurement procedures. The specialist will help preparedocumentation and, via consultations and site visits, guide PIU and CIU staffs with planning, bid

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packages, solicitations, evaluations, contracting and reporting requirements. The procurement specialistwill also help coordinate documentation flows needed to secure the World Bank's clearances and "No-Objections" on consultants' TORs, equipment packages, and other documentation needing prior reviews.In addition, the Bank will monitor procurement activities, contract administration and project recordkeeping during periodic supervision missions.

4.28 In summary, public sector ICB and DC purchases will be subject to prior Bank reviewsand "No-Objections", as provided for in the Guidelines. This procurement plan will result in the Bank'sprior reviews of approximately 62 percent of Bank's funds committed for materials and equipment. Bankprior reviews of private sector ICB procurement will comprise about 41 percent of loan funds supportingthe Credit Line. In addition to reviewing TORs, reviews of contracting actions for consulting serviceswill cover an estimated 94 percent of total Bank funding for public sector consulting services inputs.

H. DISBURSEMENT

4.29 The project is expected to be completed within a five-year period, the completion datebeing June 30, 2000. The disbursement profile for the project is based on Bank experience with similarprojects in other countries. Disbursement will follow normal World Bank procedures, as summarizedin the Disbursement Handbook. Loan proceeds will be disbursed against eligible categories of projectexpenditures: (i) by means of special commitments to support letters of credit issued by the borrower'sbank in favor of foreign suppliers of goods; (ii) directly to suppliers; or (iii) by way of reimbursementagainst eligible expenditures already incurred by Government agencies/private companies participatingin project execution (Annex G).

4.30 The loan will finance 100 percent of the foreign exchange expenditures. It will alsofinance about 20 percent of incremental local currency expenditures, net of taxes. In the aggregate, theloan is expected to be disbursed against 80 percent of the expenditures associated with the public sectorcomponents and the one associated with the private sector component. Disbursements will be made inthe ratios indicated below against total expenditures actually incurred under the project:

(a) Civil Works (US$4.0 million). The Bank will disburse against 80 percent of totalexpenditures;

(b) Equipment (US$27.1 million). The Bank will disburse against 100 percent offoreign expenditures, 100 percent of local expenditures ex-factory cost, or 80percent of local expenditures for imported equipment procured locally;

(c) Training (US$1.2 million) and technical assistance (US$7.1 million). TheBank will disburse 100 percent of total expenditures;

(d) Program Design (US$1.9 million). The Bank will disburse against 100 percentof total expenditures;

(e) Line of Credit (US$38.7 million). The Bank will disburse against 100 percentof foreign expenditures, 100 percent of local expenditures ex-factory cost, or 80percent of local expenditures for imported equipment procured locally;

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(f) Recurrent costs (salaries, communications, office equipment and maintenance,vehicles operation and maintenance, travel related to public sector components(US$6.3 million). The Bank will disburse against 25 percent of total expendituresfor the first two years, and 15 percent for the third and fourth years. Norecurrent costs will be financed from the Bank loan during the fifth year; and

(g) Refinancing of PPF. Amount due to the Bank US$0.55 million.

Disbursements will be fully documented except that Statement of Expenditures (SOE) willbe used for: (i) contracts for goods, civil works and consulting companies costing less than US$250,000equivalent; and (ii) contracts for individual consultants and training programs costing less than US$50,000equivalent. All other disbursements will be fully documented. Full documentation in support of SOEswill be retained by the PIU for at least two years after disbursement. This information will be availablefor review by World Bank missions during supervision and by auditors. The minimum application sizefor direct payments, special commitments or replenishment of the Special Account will be US$50,000.The estimated disbursement of the IBRD Loan by years is indicated below and in Annex G.

TABLE 4.4: DISBURSEMENT SCHEDULE

(US$ MILLION )

Bank Fiscal Year (ending June 30)

1996 1997 1998 ( 1999 2000

| Annual 3.5 12.0 22.0 18.0 10.5

| Cumulative 3.5 15.5 37.5 55.5 66.0

I. AcCOUNTING

4.31 The project will have sound accounting and internal control systems capable of reliablyrecording and reporting all financial transactions. (See Annex 10 of the Implementation Volume.)Accounting and internal control systems acceptable to the Bank will be put in place to allow PIU todetermine that procurement procedures are being followed and that only eligible expenditures are includedin disbursements and replenishments through the Special Account. This system must be operational whenproject expenditures begin. For the use of Statements of Expenditures, the PIU will process and maintainSOE documentation. For the Special Account mechanism, the PIU and the depository commercial bankwill introduce arrangements for proper accounting of receipts, payments, and submission of disbursementdocumentation to the World Bank for replenishment of the account.

J. REPORTING

4.32 The PIU will establish and maintain a Management Information System (MIS) to trackactivities under the public and private sector elements of the loan. The information system should enable

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the PIU to determine that procurement procedures are being followed and that only eligible expendituresare included in the Government's Special Account reimbursement requests. Such information will allowthe PIU to monitor critical project activities, provide the basis for its periodic and project completionreporting, and support project accounting and audit needs. PIU will provide quarterly reports to theWorld Bank covering the financial and physical performance of the project.

4.33 The financial status will be reported through the quarterly and annual accounts which willreflect the cash receipts from all sources and expenditures related to each component and category andthe overall financial performance of the project. The detailed annual accounts for the project will notonly include expenditures directly financed by the World Bank Loan, but also the expenditures financedby the participating private entities and the government agencies. These reports will reflect actual projectexpenditures versus budgeted expenditures for the most recent fiscal quarter, fiscal year-to-date, andproject inception-to-date. The Project's annual audited financial statements will be prepared followingthe generally accepted accounting principles as prescribed by the Laws of Uzbekistan. It will comprisea balance sheet, a statement of income and expenditures, a statement of cash flows, and notes to financialstatements, together with any additional information that may be required by the World Bank.

4.34 As Special Accounts and SOEs will be used in this project, the PIU will be requested tosubmit, together with accounts for the project, on a quarterly basis: (i) a schedule of SOE expenditures;and (ii) a summary of the Special Account activity and reconciliation with the Special Account balancein the commercial bank account and a summary of the activity in the project account. All unauditedquarterly reports will be submitted to reach the World Bank no later than 30 days after the end of thequarter in question.

4.35 The annual audited financial statements that will be required of participating privatecompanies will comprise a balance sheet, a statement of income and expenditures, a statement of cashflows, and comprehensive notes to financial statements. The financial statements will be prepared by theparticipating private companies on an annual basis, following the generally accepted accounting principlesas prescribed by the laws of Uzbekistan, together with any additional information that may be requiredby the World Bank. In addition, the participating private companies will provide to the PIU, on aquarterly basis, unaudited accounts for the seed operations summarizing the cash receipts andexpenditures, by components and categories financed (e.g., civil works, equipment). The account willinclude not only the expenditures directly financed by the World Bank through the sub-loans, but alsothe expenditures financed by the participating private companies themselves. The account will reflectactivity for the most recent fiscal quarter, fiscal year-to-date, and project inception-to-date. All unauditedquarterly reports will be submitted to reach the World Bank no later than 30 days after the end of thequarter in question. (See Annex 12 of the Implementation Volume.)

4.36 Quarterly project reports on the physical performance of the project showing actual andplanned performance for the quarter and progress todate will also be prepared and submitted to the Bank.These reports, also submitted to reach the Bank no later than 30 days after the end of each quarter, willinclude comments highlighting project progress and significant bottlenecks, showing an action plan forremedial actions where necessary. Detailed reporting requirements will be finalized during the projectlaunch workshop and will include key physical and financial indicators. In addition, a comprehensivejoint mid-term review will be carried out by the PIU and the World Bank, within three months from theend of 30 months from project effectiveness. Agreement on reporting procedures, accounts for theproject, financial statements and monitoring targets will be reached during negotiations.

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K. AUDITING

4.37 Annual reports for the project accounts, including SOEs and Special Account for eachfiscal year, will be audited in accordance with generally accepted auditing standards by an independentauditor, acceptable to the World Bank. The sub-borrowers will also provide, to the PIU, annual financialstatements and accounts for the sub-projects which are audited in accordance with generally acceptedauditing standards by an independent auditor, acceptable to the World Bank.

4.38 The auditors will be appointed annually by the PIU and sub-borrowers at the beginningof the fiscal year, so that the auditors may commence reviews sufficiently early in the fiscal year tocomplete the audit in a timely manner. The auditors will prepare and submit an annual EngagementLetter, which will be discussed and accepted by the World Bank prior to commencement of the audit.The financial statements and the auditors' opinion and auditors' management reports, including PIU'sresponse to the auditors' comments should be submitted to the World Bank no later than six months aftercompletion of the fiscal year in question.

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V. PROJECT MANAGEMENT, IMPLEMENTATION AND SUPERVISION

A. PROJECT MANAGEMENT

5.1 The Government Planning Agency GOSKOMPROGNOZSTAT, acting through the ProjectImplementation Unit (PIU), will be responsible for coordinating project implementation. It will alsoadminister the line of credit and support the Component Implementation Units (CIUs) in the executionof their respective project components. The Cotton Quality Control Agency SIFAT, through its CIU,will be responsible for implementation of the cotton marketing component. The Institute of PlantProtection UZNIIZR, through its CIU, will be responsible for implementation of the Integrated PestManagement Component. The Ministry of Agriculture, acting through its Seed Department, will overseethe implementation of the seed component by the Central and regional Seed Certification and Seed LawUnits, the Plant Variety Protection Office, and, in connection with the adherence to the provisions of theSeed Policy and Seed Law, the private seed companies. The Ministry of Agriculture, acting throughUZAGROINFORM, will also be responsible for implementation of the Irrigation component.

5.2 The PIU was established in GOSKOMPROGNOZSTAT as part of the capacity buildingeffort under the project. The PIU will be fully integrated in this agency. The need for the PIU isjustified on the basis that the project involves multiple agencies at the national and regional levels, allof which have not had experience with the implementation of externally funded programs. For thatreason, the Government gave the PIU responsibility to coordinate the management and implementationof the project. A Project Working Group (PWG) consisting of senior officials from agencies participatingin the project was established to assist and advise PIU to coordinate project implementation. The PWGis chaired by the Deputy Chairman of GOSKOMPROGNOZSTAT and includes representatives fromMOA (Seed Department and UZAGROINFORM), UZNIIZR, and SIFAT. The membership of the PWGwill be expanded to include a representative of the private seed companies once such companies areconstituted, a representative of the Ministry of Finance, and a representative of the commercial bankhandling the project accounts. The PWG will meet periodically at the request of PIU to addressimplementation problems that require inter-agency coordination and intervention.

5.3 The Project Director heading the PIU reports to the Deputy ChairmanGOSKOMPROGNOZSTAT. Under the project, the Director will have the authority and associatedaccountability to: (i) recruit, manage and supervise qualified staff; (ii) open and operate accounts in localand foreign currencies; (iii) select and supervise professional consulting services; and (iv) decide on andexecute operational plans. The PIU will consist of four departments: (i) Finance; (ii) Procurement; (iii)Monitoring, Evaluation and Program Design; and (iv) Administration and Personnel. Each of thesedepartments will be headed by a deputy director to be appointed by the Deputy ChairmanGOSKOMPROGNOZSTAT. Agreement reached during appraisal on the detailed organizationalstructure, functions, staffing plans, operational procedures and scope of authority of the PIU wereconfirmed by Government during negotiations (Annex H). Further details on the PIU are given inAnnex 8 of the Implementation Volume.

5.4 The Finance department of the PIU will be responsible for: (i) maintaining overall projectaccounts; (ii) all disbursement activities, including management of the Special Account; (iii)administration of the line of credit for the seed component until a suitable financial institution is identifiedto take over that responsibility; and (iv) monitoring the project accounts and initiating action for theirreplenishment. The Finance department staff, with sufficient technical experience and qualification, will,

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on demand, assist private seed companies and associated seed farms in the preparation of loan applicationssupported by business plans to meet requirements under the line of credit. They will also cooperate withthe participating commercial bank in developing an effective system for timely processing of applicationsfor sub-loans. An international financial management specialist, with experience in accounting and inmanaging credit operations will provide the Finance department with necessary support in managingproject accounts and organizing the use of the line of credit (18 staff months). An international businessdevelopment/organization specialist will help the finance department with promoting the effective use ofthe line of credit by the private sector (24 staff months). The two international specialists will work withthe deputy director Finance and will report to the Director PIU. In addition, a credit specialist will beattached to the agency bank for a period of 18 months to assist in the development and introduction ofprocedures for administering the line of credit.

5.5 The Procurement department will assist CIUs in organizing procurement in conformitywith World Bank guidelines. This assistance will be in the form of: (i) training; (ii) dissemination ofinformation on guidelines and procedures; (iii) arranging for collective procurement of items of a similarnature such as computers and vehicles to attract lower prices and minimize overhead procurement costs;and (iv) monitoring adherence to World Bank procurement guidelines. An international procurementspecialist with familiarity with World Bank procedures will provide the procurement department with thenecessary support in overseeing and supporting procurement activities under the project (18 staff months).The international specialist will work with the deputy director Procurement and will report to the DirectorPIU.

5.6 The Monitoring, evaluation and program design department will coordinate and monitorthe implementation of various project components and sub-components. The department will alsoorganize and manage the studies intended to serve as the basis for designing future investment programs.Quarterly and yearly progress reports will be prepared by this department based on their monitoring andevaluation activities and on the reporting received from the CIUs. An international agricultural economistwith experience in monitoring and evaluation and in project design will provide this department withneeded support to develop its internal capacity to perform their functions (18 staff months). Theinternational agricultural economist will work with the deputy director Monitoring, evaluation andprogram design and will report to the Director PIU.

5.7 The Director PIU has been appointed. The deputy directors will be appointed prior toloan effectiveness. Arrangements (Terms of reference and short list agreed with the Bank of Firmsinvited to submit proposals) for the engagement of a fi7n/organization to supply the international stafffor PIU will be in place prior to loan effectiveness.

B. PROJECT IMPLEMENTATION

5.8 GOSKOMPROGNOZSTAT will be responsible for coordinating project implementationthrough PIU which will coordinate all the work related to budgeting, procurement, disbursement, audit,monitoring and evaluation, reporting, and appraisal of the sub-loans. Actual implementation of projectcomponents and sub-components will be the responsibility of individual CIUs located within the executingagencies, in the case of public sector components, and the responsibility of the management of individualseed companies in the case of the private sector component. As part of the capacity building under theproject, the core part of each executing department will constitute the CIU for its respective component.

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The CIU managers will be selected and appointed prior to loan effectiveness. GOSKOMPROGNOZSTATwill take the necessary steps to secure appropriate assurances for project support from the authoritiesconcerned in the Regions.

Seed Industry

5.9 Coordination of the on-lending program and monitoring the flow of funds to seedcompanies will be the responsibility of the PIU in cooperation with the participating agent bank. A creditcommittee constituted by the Finance department of PIU will appraise the sub-loan applications submittedby seed companies. The Credit Committee will include, inter alia, the PIU Finance Department Director,the Financial Management Specialist, the Credit Specialist, a representative of the Ministry of Finance,and a representative of the agent Bank. This committee will ensure that the proposals meet the eligibilitycriteria as specified in Annex E and, on that basis, make recommendations to the Director PIU on theadvisability of approving the sub-loan. Those recommendations will be reported in an evaluation reportprepared by the Credit Specialist, in his/her capacity as Committee Secretariat. The PIU Director willthen submit each sub-loan application, along with the evaluation report to the World Bank for review.Bank review will cover the technical, financial, institutional and environmental considerations related tothe sub-loan. The final approval will be given by the Deputy Chairman GOSKOMPROGNOZSTATfollowing receipt of a no-objection from the World Bank. Once the sub-loan is approved and thesubsidiary loan agreement is signed, funds will be released by the participating agent bank following anagreed disbursement schedule. PIU and the participating agent bank will cooperate in all activities relatedto accounting, reporting, and recovery of sub-loans. The day-to-day implementation activities andassociated decisions in establishing and operating the seed companies will be the responsibility of theirrespective management appointed by their respective boards of directors in conformity with theirconstituting charters.

Seed Quality Control

5.10 The Seed Certification and Seed Law Agency under the Cotton Seed Department, and itsassociated Oblast Seed Certification and Seed Law Units will operate as an autonomous agency to providedisinterested and impartial oversight on the application of the national seed law and seed policy, and toensure that seed produced have the characteristics stated on their label. The Plant Variety ProtectionOffice will establish variety protection rules and maintain a registry of cotton varieties. Agreement ontransforming the Seed Quality Control Agency into an autonomous unit was confirmed by Governmentduring negotiations (paras. 3.14 and 4.15).

5.11 To assist the Seed Certification and Seed Law Agency in ensuring timely and effectiveproject implementation, the project provides for technical assistance. Terms of reference are given inAnnex 1 of the Implementation Volume. This includes:

(a) one seed certification specialist (18 staff months) to train and assist the local staffduring the first three years of the project;

(b) one seed testing and laboratory management specialist (18 months) to help theagency introduce ISTA testing procedures, and set up a management schedulingsystem for seed testing and for reporting test results. The specialist will alsotrain local staff to help them take over responsibility for these functions withinthe first three project years; and

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(c) short term specialists (12 staff months) to meet project requirements inspecialized subjects as the need arises.

Cotton Marketing

5.12 SIFAT will be responsible for implementing this component. It will establish facilitieswith sufficient capacity for grading all cotton produced in the country. It will organize the training ofsufficient staff to run those facilities and interpret and disseminate the information generated to potentialusers. Training for the HVI operation during the installation period should be made part of the contractfor the supply of the instruments. In addition, because HVI machines operate at high speed through acombination of hydraulic robotics, electronic circuit boards, integrated computer data collection systems,and manual operation, they are susceptible to breakdowns and malfunctions. Training in malfunctiondiagnostics and repair procedures will, therefore, be essential. This training will be in the form of studytours to participate in internship type programs and workshops abroad, as well as on-the-job trainingprovided by international specialists. These specialists' primary function will be to train local staff inthe classing schools and by working with them at different stages of project implementation. Thespecialists needed will include an HVI technical repair and maintenance specialist (18 staff months), aclassing specialist (27 staff months), a classing systems specialist (18 staff months), a computer systemsanalyst/senior programmer (21 staff months), a database administrator/management specialist (18 staffmonths), a cotton marketing specialist with HVI expertise (3 staff months), and a ginning specialist withHVI experience (12 staff months). Indicative terms of reference for these specialists are given in Annex2 of the Implementation Volume. In addition to training staff in charge of grading cotton, majoremphasis will be given to training industry-related personnel (marketing, spinning, ginning, seedbreeding) in the use of the data generated to its full advantage. A training program, along with atimetable for hiring the international specialists will be part of the annual work program for the HVIcomponent which will be discussed and agreed with the Bank. In order to ensure the operationalorientation of the training at the classing school, the same specialists hired for on-the-job training in thelabs will provide the needed support in the classing school.

Integrated Pest Management

5.13 UZNIIZR will be responsible for implementing this component. Since this componentinvolves technology development type work, implementation has to take place in stages involving closemonitoring, continuous evaluation, and when necessary adjustment in program design. To ensureintegration and complementarity of biological and chemical approaches to pest control, UZNIIZR willbe responsible for the development of the technology for rearing and dispersing beneficial insects as wellas for developing or adapting equipment for safe spraying of pesticides and the preparation anddissemination of a handbook for educating farmers on effective and safe use of pesticides. UZNIIZR willalso take the lead in developing a national pesticide policy. Annexes 3 and 4 of the ImplementationVolume provide additional details. To assist UZNIIZR in implementing this component, the projectprovides for technical assistance, including:

(a) international experts to help finalize prototype equipment for aerial and tractor-mounted dispersal of beneficial insects and test the effectiveness (9 staff months);

(b) an international specialist in technology application (9 staff months) to helpdesign and evaluate pesticide spraying equipment;

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(c) one international pest control economist (9 staff months) to help with field trialevaluations to assess changes in pest infestation from biological and selectivepesticide treatments, and to evaluate their costs; and

(d) short term specialists (9 staff months).

Irrigation

5.14 UZAGROINFORM will be responsible for implementation of the Irrigation component.Its staff will work closely with the Department of Irrigation in the MOA, which deals with on-farm waterrelated issues, and with the Ministry of Water Management, which deals with irrigation water distributionsystem up to the farm gate. Provision is made under the project for technical assistance (16 staff months)to help evaluate the use of tensiometers and alternative technology for the control of water application,and to assist with the training of staff, particularly in the use of the soil and plant water status monitoringequipment. Annex 5 of the Implementation Volume provides terms of reference.

C. IMPLEMENTATION SCHEDULE

5.15 Project implementation is scheduled to proceed at a pace determined by theimplementation capacity of the executing agencies. The schedule is based on an assessment of theexpected implementation capacity made at the time of appraisal. The CIUs will prepare annual workplans, including technical assistance requirements and training programs, based on their own expectationsand assessment of their work environment. These plans will be collated by PIU and discussed with theBank before the beginning of each project year. The work plans will include financial and physicaltargets, resource requirements and performance indicators against which to assess progress. Furtherdetails on the implementation plan and performance indicators are given in Annex A. Work plans andassociated budgets for the first project year will be prepared by PIU and submitted for Bank reviewprior to loan effectiveness.

Cotton Marketing

5.16 The HVI component will be implemented in three stages. The first stage will be criticalas it will determine when the second stage can conunence. During this stage, three regional labs(Tashkent, Andijan, and Samarkand) and the central lab will be established to start testing lint. A reviewof the first stage will be undertaken about one year after the commencement of testing at the Stage Onelabs. The first season of testing will be used as a learning device through the operation of the central andtwo regional classing centers. The information generated on fiber quality from the three regions will becollated and studied. Operational procedures will be reviewed and improvements introduced as needed.Once convinced that the new classing system is fully operational in the first three regions, SIFAT willproceed with extending the system to the rest of the country, keeping in mind the need for continuedevaluation of the system and its adjustment as the learning process and the pace of training allow. Thesecond stage will commence once: (i) the lessons are drawn from the stage one experience andadjustments introduced in the design of stage two labs; and (ii) all equipment and personnel are fullyoperational and functioning as a cohesive and integrated unit with one year of testing experience in stageone labs.

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5.17 The installation of the remaining equipment has been split into two stages (two and three)to ensure that there is adequate supervisory staff and logistical support during the equipment installationperiod and that pre-installation training has been completed adequately. About eighteen months have beenallowed during Stages Two and Three for the development of a central warehousing and handling facility.The tender process for Stage One equipment will also include the later supply of all equipment for theremaining two stages. This will ensure that all HVI equipment will be compatible and the necessarysupport and service available from one manufacturer and supplier. This point is particularly importantin view of the necessity to ensure consistency and repetition of test results. For uniformity and efficiencyreasons, the equipment for the Classing and Marketing School will be included in the tender for thesupply and installation of equipment for the HVI Component.

5.18 Computing equipment will be installed in each laboratory at the same time as the HVIequipment. As with the HVI equipment, the tender for all the computing equipment will be undertakenduring stage one to ensure that the same equipment will be used by each laboratory. The tender for theHVI and computing equipment will not be combined into one as this may restrict the competition for thesupply of computing equipment. The technical assistance will be started at the commencement of theproject.

Irrigation Scheduling

5.19 The key determinant of the pace of implementation of the irrigation component is rate ofrecruiting and training proficient project irrigation engineers. Emphasis will, therefore, be on trainingfrom the onset of the project. A review of the component will take place at the end of the second fullyear of the project to determine how effectively the tensiometers are being used and the need for anyadjustment in component design, and to propose a basis for introducing water charges to motivate farmersto use water saving technology and practices.

Integrated Pest Management

5.20 The IPM component will be implemented over five years through the UZNIIZR.Essentially the program is applied research and development oriented. It aims to produce improvedbreeding lines for predator insects and to research and develop methods for their distribution. It alsoaims to develop and introduce improved equipment and practices for the safe use of pesticides. Theannual work plans will, therefore, be developed on the basis of progress in the research work.

Seed Industry

5.21 Implementation of the private sector part of this component will be strictly demanddriven. PIU will endeavor to develop such a demand by disseminating information about projectobjectives and Government actions to create the enabling environment for an effective and profitablecotton seed industry. PIU will also arrange for assistance, on demand, for seed farms during theirprivatization process and the seed companies in the course of their incorporation. Timely implementationof the public sector part of this component is critical for the timely startup of the private sector part.

46

D. SUPERVISION PLAN

5.22 As this project represents the first investment operation in Uzbekistan, three Banksupervision missions will be required during the first project year, followed by two supervision missionsduring each of the ensuing three years and three supervision missions during the last year (Annex I). Tocover all aspects of the project, each mission will last for three weeks and will review the institutional,financial and physical aspects of the project. They will also review the implementation targets andprocedures agreed in the context of the annual work plans, identify implementation constraints and agreeon remedial actions. The supervision missions are expected to involve the task manager, at least threespecialists from Headquarters, as well as a project officer and a procurement officer from the ResidentMission. This input will be supplemented by local consultants on an as needed basis. About 45 staffweeks will be required the first year in addition to the project launch workshop, followed by about 30staff weeks for each year 2 to 4, and 50 staff weeks for the last year.

5.23 The supervision mission in the last quarter of each project year will assess progress duringthe previous year and discuss the work plan and budget for the next year. A detailed mid-term reviewwill be carried out about 30 months after the loan becomes effective and will involve the Bank and allagencies involved in project implementation.

5.24 Benchmarks for measurement of progress in project implementation will include: (i) theoperational status of the PIU and the CIUs; (ii) progress in implementation of training and technicalassistance packages; (iii) privatization of seed farms and creation of private seed companies; (iv)operational status of the seed testing and certification agency; (v) installation of HVI lines; (vi) extent ofdissemination of information on cotton characteristics; (vii) area covered by the irrigation schedulingsystem; and (viii) equipment developed and tested for biological and chemical pest control.

47

VI. BENEFITS AND RISKS

A. PROJEcT BENEFITS

6.1 The project's potential benefits include increased production of cotton, better seed andfiber quality, reduced water consumption, reduced costs and risks associated with pesticides, improvedenvironment, higher farm income, and higher foreign exchange earnings. As importantly, this projectwill lay the foundation for future policy reforms in the agricultural sector and will help accelerate theimplementation of ongoing reforms. The successful implementation of the Cotton Sub-sectorImprovement Project will benefit future projects in the country by introducing procedures and operationalguidelines mutually acceptable to the Government and the Bank which will facilitate the implementationof future projects.

Marketing

6.2 The Marketing Component will produce higher foreign exchange earnings through greatergin turnout and better quality of fiber. First, better cotton grading is expected to increase foreignexchange earnings by about US$38 million per year, once the project is fully implemented. Second,information from the testing laboratories to the ginneries will help ginners increase gin turnout andimprove cotton quality. Third, information on fiber characteristics will improve the penetration of Uzbekcotton in international markets. This information will also assist local spinners to increase productivityand improve the quality of the cotton textiles produced.

Seed

6.3 A modem planting seed industry will bring, among others, the following benefits: First,certified seed will prevent varietal mixture and the use of low germination seed, thus increasing yieldsby 5 to 10 percent. Second, uniform varieties will improve fiber quality and uniformity, enhancingUzbekistan's cotton marketability in international markets; uniform varieties will also help reduce thecontent of lint in short fibre, neps, and seed coat fragments left during the ginning process. This isexpected to increase the value of lint by about US$24 million per year, once the project is fullyimplemented. Third, seed testing and certification will permit farmers to reduce planting rates andreplanting, saving up to 60 percent of currently planted seed for oil mill use. This is valued at over US$1million per year. Fourth, as delinted seed can be precisely treated with lower rates of chemicals, the useof field pesticides will be reduced.

On-Fann Irrigation Scheduling

6.4 Better timing of irrigation is expected to increase the current yield of seed cotton by atleast 10 percent. It will reduce water use by an estimated 25-30 percent, and will substantially reducethe current excessive tail-water discharge. This amounts to savings in the order of 3300 cu m water perha which can be valued in terms of: (i) cost to the Ministry of Irrigation to supply the water; (ii) theopportunity cost of water for production of cotton or other crops; and (iii) the environmental value ofdecreased run off and soil salinization. Moreover, the irrigation scheduling system, by relating fieldwater use and fertilizer availability in the crop, will reduce fertilizer requirements and the contaminationof underground water.

48

Integrated Pest Management

6.5 The main benefit from this component will come from the development of automatedtechnology for biological pest control that will allow its expansion nationwide, along with thedevelopment of improved equipment and the introduction of improved practices for the safe applicationof pesticides. A well-designed IPM program will help reduce environmental pollution due to excessiveor improper use of pesticides by integrating biological and chemical approaches to pest control. Thisapproach will help shift research emphasis in the direction of variety resistance to pests and diseases, thusreducing insect mutation pressure. It will also help to reduce expenditures of hard currency on pesticideimports, and costs and risks associated with pesticide application. The IPM component could also helpdevelop an important marketing tool for Uzbek cotton since the market for pesticide-free grown cottonhas been increasing internationally.

B. ECONOMIC AND FINANCIAL ANALYSIS

6.6 The economic and financial analysis indicates that investments in private seed companies,in seed farms, in developing the cotton grading system, and in introducing improved irrigation are viableDetails are given in Annex 9 of the Implementation Volume. The combined economic rate of return forthese four components is estimated at 34 percent. The analysis assumes that Government will fullyliberalize the price and marketing of cotton seed and lint, including the export licensing system. It alsoassumes that Government will eliminate institutional barriers to import/export and to financial transactionsby the private sector.

Seed Companies

6.7 Uzbekistan has a comparative advantage in the production of cotton seed. The directproduction costs (excluding variety development costs, and with the current lower technological input)are currently less than 20 percent of production costs in Australia or the United States due to lowerdevelopment costs of parent line seed, lower capital input, low wages and low processing costs. The costof production may increase substantially as a result of the introduction of improved technology and risingwages. Sensitivity analysis shows that Uzbekistan will, nevertheless remain competitive.

6.8 The economic analysis was done on the basis of a hypothetical production capacity of8,000 tons of cleaned seed for a company. Investments were assumed to take place over a four yearperiod allowing the company to reach full operating capacity in the fifth year. The economic rate ofreturn is 33 percent. Sensitivity analysis was undertaken to evaluate the impact of cost increase andbenefit decline. The economic rate of return remains in the range of 19 to 30 percent for increases incosts in the range of 10 to 35 percent. It is, however more sensitive to decline in benefits, with the ERRfalling to 17 percent when benefits decline by 25 percent. The financial rate of return (FRR) for a 8,000ton capacity seed processing operation is estimated at 28 percent. Revenues from the proposedinvestments will be adequate to enable sub-borrowers to repay the loan within a maximum period of 10years with a 3 year grace period. Sensitivity analysis shows that investment in seed companies is resilientto an increase in costs. Increase in costs in the range of 10 to 35 percent result in FRR in the range of15 to 25 percent. With regard to seed farms, assuming a 5 percent increase in yields as a result of betterquality seeds and decreased need for replanting, the ERR for investments in seed farms is estimated at35 percent. Sensitivity analysis indicates that the ERR remains in the range of 27 to 33 percent when

49

costs increase by 10 to 35 percent or benefits decline by 10 to 35 percent. The FRR for seed farms isestimated at 29 percent.

Cotton Marketing

6.9 Market analysis undertaken in the context of project preparation indicates that Uzbekistancould increase the average price it gets for cotton lint by about 20 percent by selling it through the normalinternational market channels. The primary requirement for that to happen will be to grade the cottonaccording to internationally recognized standards.

6.10 The economic analysis was done on the basis of a total production of 600,000 tons of lint.About 500,000 ton will be graded to international standards and exported. The economic rate of returnfor the marketing component is 35 percent. Sensitivity analysis was undertaken to evaluate the impactof changes in investment costs, operating costs, total costs and benefits. Results indicate that thiscomponent is resilient to an increase in project costs. For instance, an increase in investment, operatingand total costs by 35 percent yields economic rate of return of 30 percent, 35 percent, 30 percent,respectively. The economic viability of the marketing component is more sensitive to a decrease inbenefits, but remains viable. A 35 percent decline in benefits yields a rate of return of 28 percent.Furthermore, sensitivity analysis, expressed in terms of switching values using an opportunity cost ofcapital 12 percent shows that this component could withstand a 75 percent decline in revenues.

6.11 The financial analysis was done on the basis that SIFAT will operate on a full capacitystarting with the project fifth year. The financial rate of return on the marketing component is estimatedat 32 percent. With regard to financial autonomy, financial projections indicate that SIFAT can generatethe revenues to cover their capital and operating costs, and start generating a positive cash flow startingwith the fifth year. SIFAT would have to charge a fee of about US$0.41 per bale tested to recover itscapital and operating costs when the laboratories test the entire crop (the international price of a bale ofcotton is over US$300). When the laboratories are not operating at full capacity, SIFAT has to subsidizepart of the cost. For example, when the laboratories are operating at 20, 40, 60 percent of theircapacities, the subsidies will be US$1.35, 0.62, 0.28 per bale respectively.

Irrigation

6.12 Improved irrigation scheduling has been shown to lead to a yield increase of over 10percent and save a minimum of 25 percent of the current water use per ha. Given the complexity ofallocating increases in yield to one particular factor of production, the economic analysis was undertakenon the basis of a 8 percent increase in yield as a result of improved irrigation and a saving of 15 percentin current water use per ha. The analysis was limited to 200,000 ha expected to be covered under theproject. The economic rate of return is estimated at 30 percent. Sensitivity analysis indicates that theeconomic rate of return is strongly affected by decreases in benefit and moderately affected by increasesin costs. For example, rates of return of 25 percent and 19 percent are obtained if the total cost increasedor benefit declined by 35 percent respectively. Furthermore, the analysis indicates that the componentwould have to suffer a shortfall in benefits by 52 percent or increase in total cost by 149 percent beforethe rate of return falls to the level of the opportunity cost of the capital.

6.13 UZAGROINFORM would have to charge about US$4.63 per hectare to recover itsoperating and capital costs. Assuming that the farmers get 80 percent of international cotton price and

50

are able to market 80 percent of their cotton at that price, the financial rate of return is estimated at 19percent.

C. PROJECT BENEFICIARIES

6.14 The primary beneficiaries of the project will be cotton producers, cotton processors,private seed farmers, and private seed companies. The Government decision makers, policy makers andprivate traders will benefit from increased availability of timely information related to cotton quality. Inthe medium to long run, the nation will benefit through increased cotton production, higher quality fiber,increased foreign exchange earnings, and a safer environment.

D. RisKs

6.15 The project does not face any significant risk associated with the technology and practicesbeing introduced. It finances internationally well known and tested seed processing, cotton grading, andirrigation scheduling technologies. The main risk facing the project relates to the country's capacity toimplement it in an effective and timely manner. Factors that could cause problems in projectimplementation include: the possible delay in Government decision making on liberalizing the cottonmarket, limited interest by the private sector in creating seed companies, lack of counterpart funds, andlack of personnel with the skills needed under the project. The maintenance of a free market for the saleof cotton seed and lint is critical for the commercial viability of participating private seed companies andseed farms. This is also critical for cotton farmers at large since the profitability of seed companies willdepend on the level of demand for higher priced quality seeds. Availability of counterpart funds andtrained personnel will determine the availability of public services in support of project objectives, bothin the public and private sectors. The project introduces the necessary measures to minimize these risksin the form of legal covenants, provision for training and technical assistance and provision for closemonitoring and regular review of project activities. The establishment of a strong Project ImplementationUnit with appropriate support for project management, procurement, and accounting is expected to helpmitigate project risks. In addition, the project will be intensively supervised (including a Project LaunchWorkshop, reviews of annual work programs, and a comprehensive mid-term review) in order for timelyaction to be taken to overcome implementation problems.

E. ENVIRONMENTAL ASSESSMENT

6.16 The project is expected to have a positive impact on the environment. The move towardprivate sector control of cotton farming is expected to foster more prudent use of water, land andchemical inputs. The use of pesticides on cotton will be reduced and their application will be integratedwith biological control methods. The use of chemical fertilizers will be reduced as a result of moreeffective irrigation.

6.17 The irrigation component will help introduce a technology to deliver water according toplant requirements, thus significantly reducing the effect of irrigation on salt accumulation and risingwater table. This will also reduce the leaching of chemicals into the ground water and the drainagesystem.

6.18 The seed component will help replace the current outdated technology used in seedproduction and processing with technology (equipment and inputs) that meet international environmental

51

and safety standards, including those related to dust control inside and outside work areas, and to the useof pesticides in seed processing. The list of pesticides to be financed under the project will be mutuallyagreed between the Government and the Bank and the Seed Companies will comply with that agreement.

6.19 The Integrated Pest Management Component will have a beneficial impact on theenvironment through decreased use and more effective use of pesticides. To that end, it will help developmore effective ways of raising and releasing beneficial insects to substitute for pesticides. It will alsosupport the development of a national pesticide policy covering the use of all pesticides, the preparationand dissemination of a "Farmers' Pesticide Handbook", and the introduction of improved sprayingequipment.

6.20 The Project has a "B" environmental assessment category.

52

VII. AGREEMENTS AND RECOMMENDATION

A. AGREEMENTS

7.1 In a letter of Development Policy signed by the Deputy Prime Minister dated April 27,1995 and through the agreed Minutes of Negotiations, the Government confirmed that:

(a) The State Order system for cotton will be eliminated before the 1998 cropsession;

(b) Privatized seed farms will be exempt from any obligations under the State Ordersystem;

(c) Sub-loans under the line of credit will be denominated in US$ and disbursed inUS$ or Sum as requested by sub-borrowers;

(d) Government will amend the Statute of SIFAT, and the Seed Certification andSeed Law Agency to allow them to become managerially autonomous andultimately financially self reliant;

(e) In addition, Draft Seed Policy and Seed Law were submitted to the Bank forreview and comments were provided by the Bank; and

(f) responsibility for the Line of Credit administration will be transferred to asuitable banking institution as soon as one becomes ready.

7.2 Assurances were obtained from Government during Negotiations that:

(a) The Seed Certification and Seed Law Agency will prepare a cost recovery planto be discussed with the Bank no later than June 30, 1998. Implementation ofthe agreed cost recovery plan will start no later than June 30, 1999 (paras 3.13and 4.15);

(b) SIFAT will prepare a cost recovery plan to be discussed with the Bank no laterthan June 30, 1998. Implementation of the agreed cost recovery plan will startno later than June 30, 1999 (paras 3.26 and 4.16);

(c) The PIU will prepare and submit for Bank review and approval proposals forfeasibility studies to be funded under the program design component of theproject (para 3.44);

(d) Any tax liability associated with public sector project activities beyond theamount already covered under project cost estimates will be financed byGovernment through their annual budgetary process (para 4.2);

53

(e) Counterpart funds for the public sector components and sub-components will beincluded in the approved annual budgets of their respective implementingagencies in conformity with provisions under the project and will be madeavailable to them at the beginning of each budget year (para 4.4);

(f) A line item will be introduced in the national budget for the project and the useof all allocations under that line item will be restricted to project activities;

(g) Sub-loans will be approved on the basis of eligibility criteria and terms of sub-loans agreed between Government and the Bank (para 4.9);

(h) UZAGROINFORM will, no later than June 30, 1997, prepare and submnit forBank review a plan for the recovery of the cost of irrigation water and willinitiate the collection of water charges no later than June 30, 1998 (para. 4.17);

(i) The PIU will operate on the basis of agreed detailed organizational structure,functions, staffing plans, procedures, and scope of authority agreed with the Bank(para. 5.3); and

(j) Work plans including training, technical assistance programs, and associatedbudgets will be prepared and submitted for Bank review before the beginning ofeach project year (para. 5.15).

7.3 Loan effectiveness will be conditional upon:

(a) A Project Account being opened in the name of the PIU with an initial depositof a minimum of US$0.5 million equivalent (para. 4.4);

(b) Appointment of Deputy Directors for the PIU and finalization of arrangemensfor engaging a firm/organization to supply international staff to PIU (para. 5.7);

(c) CIU managers appointed (para. 5.8); and

(d) Submission by PIU for review by the Bank of work plans and associated budgetsfor the first project year (para 5.15).

7.4 Loan disbursement will be conditional upon:

(a) Adoption of the seed policy and enactment of the agreed Seed Law will be acondition of disbursement against the public sector part of the seed comnponent(para 3.7); and

(b) Agreement between the Govemrnent and the Bank on the banking entity to serveas an agent bank under the project, the signing of an agency agreement betweenthis agency bank and the PIU, and approval of the sub-loans on the basis ofagreed criteria and procedures will be a condition of disbursement against theprivate sector part of the seed component (para 4.7).

54

B. RECOMMENDATION

7.5 The Cotton Sub-Sector Improvement Project constitutes a suitable basis for an IBRD Loanof US$66.0 million equivalent to the Republic of Uzbekistan for a period of 20 years, including a five-year grace period, at the Bank's standard variable interest rate.

55 Annex A

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX AIMPLEMENTATION PLAN AND PERFORMANCE INDICATORS

A. CRITICAL START-UP TASKS

1. Project Implementation Unit. Making the PIU operational, establishing the CIUs andstaffing them are the most critical steps to initiate project implementation.

2. Training. Arrangements need to be made to start training activities soon after loannegotiations, or following Board approval at the latest.

3. Technical Assistance. Technical assistance for the PIU should be on board shortlyfollowing loan effectiveness. To that end, arrangements to select a firm/agency to supply that technicalassistance should be made prior to loan effectiveness. Plans for hiring the TA under various projectcomponents should be part of the annual work plan to be submitted to the Bank for review prior to loaneffectiveness.

B. MARKETING COMPONENT

Phase I

4. On the basis of a detailed work plan, SIFAT will organize its administrative andaccounting system, recruit needed personnel and technical assistance and set up its computer system.SIFAT will install the Central and two Regional Laboratories and initiate HVI testing. An intensivetraining program will be undertaken. Once the system is fully operational in these three laboratories andonce enough staff are trained, SIFAT will move to Phases 11 and 111.

Phase II and III

5. During these phases, SIFAT will build its reputation as an objective cotton gradingagency. It will become managerially autonomous and ultimately financially independent by adopting a"fee for service" approach in its operations. During this phase, SIFAT will install HVI equipment in theregions at a pace that will ensure that trained staff are available to operate the new laboratories.

C. IRRIGATION COMPONENT

6. UZAGROINFORM will strengthen its CIU (already established) on the basis of a detailedwork plan. Staff trained at the Tashkent central office will be placed in the offices of AGROPROM inthe Districts where the system will operate. UZAGROINFORM will monitor the effectiveness of thesystem. The information generated will be used after two full production seasons to evaluate theeffectiveness of the system and to introduce any needed adjustments in program design before continuingprogram implementation.

Annex A 56

D. SEED COMPONENT

7. Between loan negotiations and loan effectiveness, PIU will undertake an informationcampaign to inform seed farms and other interested parties about the objectives of the seed component.Interested Seed Farms will be assisted in organizing themselves into private farms, in developing businessplans, and in creating private seed companies (if they are so inclined to do). GOSKOMPROGNOZSTATwill enter into an agency agreement with an agent bank mutually agreed with the World Bank.

8. Following credit effectiveness, GOSKOMPROGNOZSTAT will appoint representativesfrom the PIU, a selected commercial bank, and the Ministry of Finance as members of a committeeresponsible for appraising sub-loan applications.

E. PERFORMANCE INDICATORS

9. The detailed implementation plans are presented below in the form of Gantt charts foreach component. Physical and financial progress will be monitored on the basis of those charts.Performance indicators for the project development objectives will include:

(a) Government actions on:

* State orders* Price of lint* Price of seed

(b) Privatization of Seed Farms

(c) Creation of private seed companies (Processing capacity created)

(d) Area covered under the irrigation scheduling program, water use per ha, fertilizeruse per ha.

(e) Number of prototypes developed and successfully tested under the IPM program,pesticide use.

(g) Volume of cotton graded and sold at international prices through the open marketchannels.

57 Annex A

E. PROJECT IMPLEMENTATION SCHEDULE

10. Implementation of the project is expected to proceed according to the following schedule.However, it is implicit that the speed and efficiency with which initial project establishment activities arebrought on-stream, and the effectiveness of implementing and moving project management and technicalactivities, will influence implementation schedule.

Activity Year I Year 2 Year 3 Year 4 Year 5

_ 112 2/2 1/2 2/2 12 2/2 1/2 2/2 1/2 2/2

Project Implementation Unit

Appoint Project staff XSet up accounting, reporting, audit procedures XSubmit reports, accounts, fund requests, etc. X X X X X X X X X xSystematic monitoring, support to components X X X X X X X X X xIntervene as required to ensure progress X X X X X X X X X xAppraise and monitor sub-loans X X X X X X X x

HVI Component

Phase IEstablish component offices, assign staff X X X XPrepare component operating procedures X XSet up new SIFAT structure, admin. system X X XIdentify sites of Phase 1 labs & classing schools XPlan lab and school buildings, space, layout X XIssue tender to construct labs and schools X XContract with firms, construct labs and schools X XHire, assign lab and school staffs X XPrepare equipment specifications XIssue tender for equipment XContract with equipment supplier(s) X XEquipment delivered, installed, tested X X XConduct intensive English language training X X X X X X X X X xTrain personnel overseas X X X X X X X X X xTrain personnel in-country X X X X X X X X X xEstablish quality control lab & system X XDevelop quality control procedures X X XDevelop grading standards, procedures X X XEstablish computer system X X XTest fiber of cotton crop X XReview Phase 1, plan Phase 2 X X

Annex A 58

Actvity Year I Year 2 Year 3 Year 4 Year 5

I______________________________ 11/2r 2/2 1/2 2/2 1/2 2/2 1/2 2/2 1/2 2/2

Phase 2 and 3Identify locations of labs XPlan lab building, space, layout XIssue tender to construct labs XContract with firms to construct labs X XDetermine lab staff requirements XHire, assign lab staff(s) XPrepare equipment specifications X XIssue tenders for equipment X X XContract with equipment supplier(s) X X X XEquipment delivered, installed, tested X X X XConduct intensive English language training X X X X X X X XTrain personnel overseas X X X X X XTrain personnel in-country X X X X X X XTest fiber of cotton crop X X X X

Seed Component

Establish CIU office XIssue tender to contract technical assistance X XTechnical assistance in place X X X X X XShort-term technical assistance provided X X X X X X X XEnact Seed Legislation, Certification XIssue tender for quality control equipment XSign contract for quality control equipment XQuality control equipment delivered, installed X XQuality control in operation X X X X X X XEstablish plant variety protection (PVP) unit X XDesign, construct PVP offices, labs X XPVP in operation X X X X X X X XConduct overseas training X X X X XConduct in-country training X X X X X X X X XSeed Cos. organized X X X XSeed Cos. produce, supply seed X X X X X X X

59 Annex A

Activity Year I Year 2 Year 3 Year 4 Year S

1/212/2 1/2 [ 2/2 1/2 1 2/2 1/2 1 2/211/2! 2/2

On-Farm Irrigation Scheduling

Establish component office, admin. system XRestructure UZAGROINFORM x XPlan working system, procedures X XHire UZAGROINFORM staff and TA as required x X XTrain UZAGROINFORM staff X X X XTrain farm staff X X X X X X X X X XIdentify farms & areas to include each year x X X X X X X X X XPrepare equipment specifications xIssue tender for equipment xContract supplier for equipment XEquipment delivered XApply irrigation scheduling on farms X X X X X X XUse and improve computer models X X X X X X X X X

IPM Component Implementation Schedule:

Establish project management office xIssue tender for technical assistance XSign contract for technical assistance XTechnical assistance in place, as required X X X X X X X XComplete design of equipment XPrepare specs. for materials, equipment XIssue tender for materials, equipment X XMaterials and equipment delivered X X XFabricate prototypes, equipment in-country X X X X X XConduct trials to evaluate, compare biological and X X X X X X

chemical technologiesComplete evaluation, comparison of technols. X X XProduce entomophagus insects X X X X X XDistribute entomophagous insects X X X X XDevelop pesticide strategy X X XDevelop Farmers Pesticide Handbook X XDisseminate Farmers Pesticide Handbook X X X X X X

60 Annex B

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX BLETTER OF DEVELOPMENT POLICY FOR AGRICULTURE

Dear Mr. Thalwitz:

Development of the Cotton Sub-sector and Strategy for Agricultural Development

Uzbekistan has initiated a comprehensive reform program aimed at moving theagricultural sector toward the market economy. We are appreciative of World Bank support to ourendeavors in this sector through the Rehabilitation Loan and the Cotton Sub-sector Improvement ProjectLoan. We also look forward to continued World Bank support in the process of transforming ouragriculture into a sector that would effectively and economically enhance the well-being of our people.

The imperative to make the best to serve our people with the limited resources availableto us dictates that we motivate our private sector to participate to the full extent of its potential in thedevelopment process. It also dictates that we create the appropriate incentives to ensure that ourresources are used economically and effectively. In order to facilitate the transformation of the cottonsub-sector into a market-based sub-sector, the Government confirms the following decisions:

(a) The seed companies will be fully private and owned by one or more of thefollowing:

* one or more former collective farms or farm association units once fullyprivatized (i.e., farm workers, technicians and managers would ownshares in the privatized collective farm on which they work). Theshareholders would have the right to unrestricted sale of their shareswithout the need for any permission or right of first refusal by othershareholders. Shareholders would also have the unrestricted right tobequeath their shares;

* other private individual or private company, private cotton-producingfarms, cotton-producing units, private farmers and private farmers'associations which can create their own seed companies and/or initiallysubscribe or purchase shares in seed companies being established;

* foreign investors; and

* existing ginning companies, once privatized.

(b) Prvatized collective farms through their individual shareholders or members willbe given long term (99 years) transferable leases on the land they currentlycultivate, and will be allowed to procure their inputs and to sell their productsfreely in the market;

Annex B 61

(c) Seed companies will be given long-term (99 years) leases by the Government onland needed for administration buildings, operating facilities, and ginning andseed processing plants. They will also be allowed to procure their inputs and selltheir products freely in the market. A line of credit will be established to supportthe creation of seed companies. It will be administered by the ProjectImplementation Unit using a Commercial Bank as an agent to disburse sub-loansdenominated in US$ and collect repayments in local currency or in US dollars;

(d) Decisions to create the seed companies, invest in necessary equipment andmaterials, and to operate the enterprises will be made exclusively by theshareholders and the management they select;

(e) Charters of seed companies and articles of association of privatized seed farmsand other terms and conditions of incorporation will ensure effective governanceby shareholders, operational autonomy, financial autonomy and accountability ofthe managers selected by the representative of shareholders;

(f) The Government will not have any role in selecting the management of the seedcompanies and the privatized seed farms or in the making of their managerialdecisions. Government will, however, facilitate efficient implementation of thosedecisions in all respects as provided for in the charter of the production units.Government facilitation will include, inter alia, timely issuance of licenses forimport and export of equipment and commodities, use of currencies andaccounts, and related activities and transactions;

(g) The price of planting seed and gin-run seed will be completely free by the endof the 1996 cropping cycle. Free price means that each seed company and allother entities producing gin-run seed will be free to sell the seed they produceto domestic and other parties at a price determined by the market. Local orcentral government agencies will not intervene in such sales and in thedetermination of prices;

(h) The Government will decrease the state order system for all cotton progressively,and will abolish it completely starting with the 1998 cotton cropping cycle. TheGovernment will also increase progressively the procurement price for cottonremaining under the state order, initially to 50 percent of world prices for the1995 crop and will reach the level of the World market price at the time stateorder is eliminated;

(i) In order to facilitate the creation of planting seed companies and considering theexpected burden of sub-loan repayments, starting with the 1996 cropping season,the Government will leave out of the state order all the cotton lint produced byprivatized seed farms;

(j) Although all farms producing seed cotton have officially been given the right tomarket an increasing share of their production (currently 40 percent) in the openmarket, in practice it has proven difficult for them to exercise fully that right.

62 Annex B

The Government has decided that farmers can access export markets directly andthat cotton sold through the commodity exchange is exempt from export licenses.The Government has also introduced a simplified procedure for granting exportlicenses for cotton not sold through the commodity exchange. Under thisprocedure, a license will be granted within 10 days after receipt by the Ministryof Foreign Economic Relations of a prepared contract, and other documentsconfirming the existence of the cotton;

(k) A draft national seed policy and a draft seed Law covering seed marketing, seedcertification, variety registration, seed import, and plant variety protection arebeing considered by the relevant Government bodies. These documents will besubsequently sent to the Bank for review and discussion before they are submittedto Parliament for consideration; and

(1) In order to guarantee quality to farmers using seed cotton, the Government willtransform the Republic Seed Inspection Service into an autonomous Agency andwill not allow interference into its activities by special interests. This agency willconsist of a Central Seed Certification and Seed Law Unit with a Central andReferee seed testing laboratory, and five Oblast Seed Certification and Seed LawUnits with Service Seed Testing Laboratories. The quality control functions willbe unified within a single Seed Certification, Testing and Quality Control Agencyunder the overall direction of the Ministry of Agriculture.

The process to liberalize the output and input markets has already been initiated and itis our intention to complete that process as soon as feasible. Under the Cotton Sub-sector ImprovementProject, we intend to introduce the principles of "fee for service" and develop methodologies and practicalplans for recovering the cost of services/inputs supplied through public channels such as seedcertification, cotton grading, and irrigation water. Although our intention is to move as swiftly aspossible on these matters, we want to move with enough caution to make sure that our actions are rightand sustainable. We also intend to encourage our private sector to develop a market-based supply systemthat is cognitive of our country's environmental concerns, and production support systems covering thewhole gamut of activities from planting to harvesting to storage, to transportation, processing andmarketing. We recognize the complexity involved in changing our system of production and we intendto proceed with promoting change methodically and systematically.

The agricultural sector is the backbone of our economy. We intend to develop itspotential in a sustainable and environmentally safe manner. Our first priority is to correct pastdistortions. The state orders system will be terminated in the next two to three years. The oldcentralized system of production by directive is being replaced by a participatory farming system wherebyfarmers control their factors of production and make all decisions as to what to produce, how much toproduce, and how to dispose of their products. Prices are being liberalized, input subsidies are beingremoved, and responsibility for output marketing and input supply is being shifted to the private sector.The mandate of the Government machinery is being redefined from one of control to one of support andmotivation. Through these actions, we hope that we will succeed to have in place in the near future theconditions that will motivate farmers to intensify production and the private sector to invest in revitalizingour agri-business complex.

Annex B 63

The foreign exchange earning capacity of agriculture is currently built almost exclusivelyaround cotton. We need to expand the export potential in other sub-sectors. Uzbekistan has acomparative advantage in the production of fruits, vegetables, berries, grapes, and silk for which a readydemand exists in the world market. We also need to develop self-reliance in food in the country throughan optimum combination of domestic production and import. To help develop our production system tothe full extent of its potential, we intend to invest in building the necessary infrastructure to support therehabilitation and restructuring of our farms. In addition, our agri-business complex needs to be rebuiltour agro-industry to enhance the value added in the sector and create productive and sustainedemployment for our people. Our grazing lands need to be rehabilitated and restored. Our animalhusbandry needs to be developed. The productive potential of land resources needs to be protected andthe economic potential inherent in our water resources needs to be realized. We need to do all this whileprotecting our environment and providing equal opportunity for all our people.

In order to make more effective and environmentally sustainable use of our waterresources, we have started a process to diversify our agriculture by shifting land from cotton in favor ofcrops requiring less water. We also plan to introduce water charges to motivate farmers to use watermore economically.

We look forward to continuing our dialogue and hope that the Cotton Project will usherin an era of close and productive cooperation between the Republic of Uzbekistan and the World Bank.

Sincerely,

Bakhtiar A. KhamidovDeputy Prime Minister

64 Annex C

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX C

A SAMPLE OF SEED FARMS INTEREsTED IN PARTICIPATING IN THE CREATIONOF SEED COMPANIES

Region Seed Farms Area under Cotton

Bukhara Madaniat 1,400Dustlik 900Uzbekistan 1,200Khamza 800

Namangan Soliev 1,000Uzbekistan 600Ahunbabaeva 900Konobad 600Navoy 700

Surkhandarya Baimatov 2,500Mirzaev 1,600Ulyanov 1,200Kumkurgan 700

Tashkent Khakikat 1,100Yangi Turmush 700Uzbekistan 800Kaytmas 600

Fergana Kulam 1,200Pakhakor 900Soybkor 400Obod 2,100

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX DExPENDITURE ACCOUNTS PROJECT COST SUMMARY

I__ ___ __ ___ __ _ _ (Sum '000) _US_ W )i% % Total % % Total

Foreign Base Foreign Oas

Local Foreign Total Exchang Costs Local Foreign Total Exchange Costs

L. Investment CostsA. Civil Works 15,312.5 65,057.3 81,369.9 80 5 709.2 2,828.6 3,537.8 80 5

B. Equipmenl 105,659.7 434,432.1 540,091.8 80 32 4,593.9 18,888.4 23,482.3 80 32

C. Training - 26,128.0 26,128.0 100 2 - 1,136.0 1,136.0 100 2

D. Technical Assistance 1,656.0 155,319.0 156,975.0 99 9 72.0 6,753.0 6,825.0 99 9

E. Investment Credit 155,152.3 550,591.3 705,743.5 78 41 6,745.8 23,938.8 30,684.5 78 41

Total Investnent Costs 278,780.5 1,231,527.6 1,510,308.1 82 88 12,120.9 53,544.7 65,685.6 82 88

11. Recurrent CostsA. Salaris 42,542.6 4,727.0 47,269.6 10 3 1,849.7 205.5 2,055.2 10 3

B. Communuicadon 8,445.6 938.4 9,384.0 10 1 367.2 40.8 408.0 10 1 I

C. Equipment Operatlon & Maintenance 5,779.4 642.2 6,421.6 10 - 251.3 27.9 279.2 10 -

E. SuppLies 6,313.5 701.5 7,015.0 10 - 274.5 30.5 305.0 10 -

F. Staff Travel Expenses 4,761.0 529.0 5,290.0 10 207.0 23.0 230.0 10

H. Services 2,173.5 241.5 2,415.0 10 - 94.5 10.5 105.0 10 -

I. Other 49,082.0 8,234.0 57,316.0 14 3 2,134.0 358.0 2,492.0 14 3

J. Inves tment Credit 57,960.0 6,440.0 64,400.0 10 4 2,520.0 280.0 2,800.0 10 4

Total Recurrnt Costs 177,057.7 22,453.5 199,511.2 1 1 12 7,698.2 976.2 8,674.4 1 1 12

Total BASELUNE COSTS 455,838.2 1,253,981.2 1,709,819.3 73 100 19,819.1 54,520.9 74,340.0 73 100

Physical Contingencies 30,909.4 100,891.1 131,800.5 77 8 1,343.9 4,386.6 5,730.5 77 8

Price Contingencies 1,526,523.5 3,683,785.2 5,210,308.7 71 305 1,334.2 3,189.7 4,523.9 71 6

rTota PROJECT COSTS 2,013,271.1 5,038,657.4 7,051,928.6 71 412 22,497.1 62,097.2 84,594.3 73 114

REPUBUC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

COMPONENTS PROJECT COST SUMMARY

(Sum 000) _ I (US$S 00) _

% % Totai % % TotalForeign BTase Foreign Base

Local Foreign Total Exchang Costs Local Forelgn Total Exchang Costs

A. Project Implementaton Unit 8,686.6 40,710.5 49,397.1 82 3 377.7 1,770.0 2,147.7 82 3

B. Seed Component1. Seed Variety Breeding 460.0 7.820.0 8,280.0 94 20.0 340.0 360.0 94 -

2. Seed Testing & Certification 29,778.1 59,353.8 89,131.9 67 5 1,294.7 2,580.6 3,875.3 67 5

3. Plant Variety Protection Office 4,625.3 2,527.7 7,153.0 35 - 201.1 109.9 311.0 35 -

4. Seed Multiplication 74,584.4 239,489.8 314,074.2 76 18 3,242.8 10,412.6 13,655.4 76 18

5. Seed Processing & Marketing 138,527.9 317,541.5 456,069.3 70 27 6,023.0 13,806.2 19,829.1 70 27

Subtotal Seed Component 247,975.7 626,732.8 874,708.4 72 51 10,781.6 27,249.3 38,030.8 72 51

C. Classing Component1. Classing and Marketing Schools 16,733.9 54,455.7 71,189.6 76 4 727.6 2,367.6 3,095.2 76 4

2. HV1 127,705.2 366,079.5 493,784.7 74 29 5,552.4 15,916.5 21,468.9 74 29 o

Subtotal Classing Component 144,439.1 420,535.2 564,974.3 74 33 6,280.0 18,284.1 24,564.1 74 33 o7

0. Irrigation Scheduling Component 21,363.3 51,566.2 72,929.6 71 4 928.8 2,242.0 3,170.9 71 4

E. Integrated Pest Management Component 33,373.5 73,036.5 106,410.0 69 6 1,451.0 3,175.5 4,626.5 69 6

F. Program Design - 41,400.0 41,400.0 100 2- - 1.800.0 1,800.0 100 2

Total BASELINE COSTS 455,838.2 1,253,981.2 1,709,819.3 73 100 19,819.1 54,520.9 74,340.0 73 100

Physical Contingencies 30,909.4 100,891.1 131,800.5 77 8 1,343.9 4,386.6 5,730.6 77 8

Price Contingencies 1,526,523.5 3,683,785.2 5,210,308.7 71 305 1,334.2 3,189.7 4,523.9 71 6

Total PROJECTS COSTS 2,013,271.1 5,038,657.4 7,051,928.6 7 1 412 22,497.1 62,097.2 84,594.3 73 114

RuPUiLC OF UZUEKTANCOTTON 5U346CFoR _1Rov0UEN PROJECT

ExPm ACCOUN BREAKDOW

Cant PksaBase Cost hsical Contnanchs Prik Confnenc * s Total Ind. Cont Base Costs PriCe

Local Local Local + Pice Cont. on(Excl. Dutis & (Excl. Duties & (Excl. Duties a (Excl. Dutis & Cont on Physical

For. Exch Taxes) Taxes Total For. Exch Taxes) Taxes Total For. Exch Taxes) Taxes Total or. Exch Taxes) Taxes Total Base Costs Cont1. Investment CostsA. Civi Works 2,828.6 387.6 321.6 3,537.8 282.9 38.8 32.2 353.8 138.5 18.5 15.7 172.7 3,249.9 444.9 369.5 4,064.3 3,694.9 369.5B. Equipment 18,888.4 2,459.2 2,134.8 23,482.3 1,888.8 245.9 213.5 2,348.2 1,058.9 137.7 119.7 1,316.2 21,836.1 2,842.7 2,467.9 27,146.7 24,678.8 2,467.9C. Trahinig 1,136.0 - 1,136.0 10.0 - 10.0 49.2 - 49.2 1,195.2 - - 1,195.2 1,184.9 10.3D. Tedcmical Asssance 6,753.0 72.0 - 6,825.0 15.0 - 15.0 323.7 3.4 - 327.1 7,091.7 75.4 - 7,167.1 7,151.6 15.5E. Invesment Credit 23,9388 3,956.3 2, 30,684.5 2,168.91 370.6 254.0 2,793.5 1,546.9 2641 181.1 1,992.1 27,654.5 4,590.9 3,224.5 35,470.0 32,510.8 2,959.2Total Investment Costs 53,544.7 6,875.0 5,245.9 65,66S.6 4,365.6 655.3 499.6 5,520.5 3,117.2 423.7 316.5 3,857.4 61,027.5 7,954. 6,061.9 75,043.4 69,220.9 5,822.II. Recurrent CostsA. Salaries 205.5 1,849.7 - 2,055.2 15.0 134.6 . 149.5 220.5 1,984.2 - 2,204.7 2,204.7B. CommunicatIon 40.8 367.2 408.0 . . 2.8 25.4 28.3 43.6 392.6 436.3 436.3C. Equipment Operation & Maintenance 27.9 251.3 279.2 . . . 1.9 17.2 19.1 29.8 268.5 298.3 298.3 - CE. Supplies 30.5 274.5 305.0 1.4 12.5 13.8 31.9 287.0 318.8 318.8 -

F. Staff Travel Expenses 23.0 207.0 230.0 1.4 12.6 14.0 24.4 219.6 . 244.0 244.0 -

H. Services 10.5 94.5 105.0 . 0.8 6.8 7.5 11.3 101.3 112.5 112.51. Other 358.0 2,134.0 2,492.0 - 24.3 160.31 184.6 382.3 2,294.3 2,676.6 2,676.6

J. Investment Credit 260.0 2,520.0 2,800. 21.0 189.0 210.0 25.0 224.7 249.7 326.0 2933.7 3,259.7 3,032.3 227.4Total RecurrentCosts 976.2 7,698. 8674.4 21.0 0 2 72.5 594.1 - 666.5 ; 848i.2 1069, -2 7.4Total 54,520.9 14,573.2 5,245.9 74,340.0 4,386.6 844.3 499.6 5,730.5 3,189.7 1,017 .7 316.5 4,523.9 62,097 82 16,481.2 6,061 i0 9323 38,544.5 227.49,

__ __ __ _ __ __ __ _ __ __ - 7 2 5.246_ 74__ __7 4,2.9 6,076 06 8 5 43 7 544.5 6, 9.

Annex D 68

REPUBLIC OF UZBEKISTANCoTrON SUB1SECTOR IMPROVEMENT PROJECT

EXPENDITURE ACCOUNTS BY YEARS - TOTALS INCLUDING CONTINGENCIES(USS '000)

Totals Includin I Contingen as1996 1997 1998 1999 2000 Total

I. Investment CosbA. Civil Works 766.3 837.5 2,454.0 6.6 - 4,064.3B. Equprmnt 4,435.0 7,291.0 9,511.5 4,637.9 1,271.3 27,146.7C. Traning 308.1 454.4 227.8 101.2 103.8 1,195.2D. Technical Assitance 893.9 2,757.4 2,257.0 1,158.4 100.4 7,167.1E. lnvestnent CredIt 1,411.0 8,544.4 17,315.9 5,109.8 3,088.9 35,470.0

Totl Investnmnt Cos 7,814.1 19,884.7 31,766.2 11,013.9 4,564.5 75,043.4II. Rocurrent Costs

A Salaries 165.2 357.3 533.2 551.2 597.7 2,204.7B. CommunIcation 50.5 71.3 98.5 106.6 109.4 436.3C. Equipment Operaton & Maintenance 38.9 49.1 62.5 73.1 74.8 298.3E. Supplies 70.7 103.3 79.5 59.8 5.6 318.8F. Staff Travel Expenses 30.3 62.0 63.6 43.5 44.6 244.0H. Services 10.1 17.6 27.5 28.3 29.0 112.51. Other 188.9 424.5 609.3 690.7 763.3 2,676.6J. Investment Credit 130.3 310.9 683.5 935.4 1,199.7 3,259.7

Total Recurrent Cosb 684.9 1,395.8 2,157.6 2,488.6 2,824.1 9,550.9otal PROJECT COSTS 8,499.0 21,280.5 33,923.8 13,502.5 7,388.5 84,594.3

69 Annex D

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

PROJECT COMPONENTS BY YEAR - INVESTMENTIRECURRENT COSTS(USS '000)

1316 1 tS7 1998 1999 2000 TotalA. P I*c npra Unit

Iheebuent Costs 557.0 594.9 355.0 244.7 - 1,751.8RcunWent Cost 95.3 108.9 104.3 105.7 91.3 505.5Subal Proct Implementation Unit 652.4 703.8 459.2 350.5 91.3 2,257.1

S. S"d Compo_et1. ed Vaty Brredhg

hnwbet Coes 409.0 - - 409.0. Sed T_eng & CatkllconIrwent Coats 208.2 1,252.3 1,796.4 97.9 3,354.9Recurrent Costs 49.5 205.5 218.3 238.2 250.0 961.5

Subal Sd Tetng & CeDficaion 257.7 1,457.8 2,014.7 338.1 250.0 4,318.33. PS"t Vslty Proteton Office

Iweebuent Coet 146.7 14.7Recwret Cost 37.8 38.8 37.5 38.5 39.5 189.9

SubtO PbentV Vwkty Proctlon OlMce 184A 36.6 37.5 38.5 39.5 335.54. Sed MapU caon

Investment Costs 1,411.0 3,179.7 3,947.1 4,548.5 2,839.3 15,723.8S. Sed Proelng & Mlriating

: Invstent Coets - 5,364.7 13,368.8 563.3 449.7 19,748.4Recunt Costs 130 310.9 683.5 935.4 1,199.7 3,259.7

Subtl Sed Pro_oueng & Marketng 130.3 5,675.5 14,052.3 1,498.7 1,849.3 23,006.1Subtl Sed Component 1,983.4 10,758.6 20,051.6 6,419.8 4,578.1 43,791.5

C. Cleng Componnt1. CinIng nd Mwkedng Schools

Investment Coets 1,035.0 46.5 2,028.7 - - 3,110.1Recurent Coes 30.7, 35.5 98.8 110.1 112.9 388.0

SubtldlaC ng andMekengSchoob 1,065.7 82.0 2,127.4 110.1 112.9 3,498.12 HVI

Invebtmnt Coats 3,537.8 6,627.5 7,008.0 4,096.6 678.7 21,948.5Recumrdnt Coats 121.2 347.0 842.1 859.1 878.3 2,445.7

Sub',tal HVI 3,659.0 6,974.5 7,648.1 4,755.7 1,355.0 24,392.3Subtotal Claing Comnpoent 4,724.7 7,056.5 9,775.5 4,865.8 1,467.9 27,890.4

D. rlgipon Schodulig ComponentInveelment Costs 169.7 663.1 564.1 710.0 793.5 2,900.2Recurrnt Costs 39.8 75.21 114.7 187.1 290.4 707.1Subtotl irrigation Scheduling Compnent 209.5 738.2 678.7 897.0 1,083.8 3,807.3

E. ntgratd Pet Mangemet ComnponwtInnvesent Coats 746.8 1,127.4 2,084.4 102.3 3.3 4,048.4Recurrent Cost 180.3 276.3 258.5 214.5 164.0 1,093.6Subttabl Intgraed Ptd Mnagmwnt Component 929.1 1,403.7 2,323.0 316.81 187.4 5,140.0

F. Progrm DeelgnInvestment Comb - 619.7 535.8 652.6 . 1,908.0Subotal Program Dolgn - 619.7 635.8 652.6 - 1,908.0

Tobl PROJECT COSTS 8,49.0 21,280.5 33,923.8 13,502.5 7,388.5 84,594.3Tota Irwetment Cots 7,814.1 19,884.7 31,768.2 11,013.9 4,564.5 75,043.4Total Recument Costs 664.9 1,395.8 2,157.6 2 2,824.1 9,550.

REPUBUC OF UZBEKISTANCOTTON SUB4ECTOR IMPROVEMENT PROJECT

EXPENDITURES ACCOUNTS BY COMPONENTS - TOTALS INCLUDING CONTINGENCIES(US$ i00) t

SWz Component Cbming CemponentPlumt dmining Inead

Prcoc S"d Sed Teng Valey Seed ard ron PostImplementation Variety Protcon Seed Processing Maretng Schedubg Management Progrm

Un__B____________ lndfta C rtifcaton Office S Schools HVI Component Copon Cben ToUtl

I. nveatment CosalA. CNi VAbka 24.4 - 67Z8 - 151.5 86.5 - 2,349.4 4,064.3B. EqinIO 165.1 125.0 1,928.8 146.7 2,711.0 18.903.5 2,225.3 941.6 27.14t.7C. Trat*rg 62.3 113.6 - - 62.6 336.3 423.5 196.9 1,195.2D. Tednlc AAaltance 1,499.8 170.4 753.7 185.1 1,840.3 251.4 568.4 1,906.0 7,167.1E. I mnane Cd - -' 15,723.6 19,746.4 .- - - 35,470.0Total Iwonveala coeta 1,751.6 409.0 3,364.9 148.7 15.723.6 19,748.4 3,110.1 21,946.5 2,900.2 4.046.4 1,906.0 75.043.4

I. Recurrnt CoesxA. Salas 122.0 . 172.8 76.4 - 170.4 1,239.0 255.7 166.4 2,204.7B. Cowvrn1cabn 74.5 96.5 21.2 - 23.7 157.2 64.1 436.3

C. Equiprnen Opera-in &Makfte - - - - 298.3 296.3

E. Suppis 318.8 318.8

F. SUall Travl Expenses - - 244.0 244.0

H. Service 10.6 15.9 17.1 68.8 - 112.5I. Other 296.3 - 693.1 76.3 - - 176.8 960.7 451.4 92,678.6 _1J3. Itweinteit Crada - - -. 3,259.7 3,250.7 O

TotA Recurrent Co4t 505.5 961.5 189.9 3,259.7 388.0 2.445.7 707.1 1,093.t 9,560.9TotaIPROJ.ECT COSTS 2,257.1 409.0 4,316.3 336.5 15,723.6 23,006.1 3,498.11 24,392.3 3,6073 6100 ,980 454.

TaXe 17.2 11.4 236.5 13.3 1,429.4 1,795.1 200.2 1,797.3 202.3 299.2 6,061.9Forlgn Exdep 1,853.4 368.2 2,897.2 121.2 11,972.7 16,007.6 2,686. 18,140.6 2,666.3 3,667.4 1,908.0 82,07.2

71 Annex D

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

COMPONENTS BY FINANCIERS(USS '000)

Participating Private The Govemment of World Bank TotalEnterprise Uzbekistan

_____________________________________ Amount Amount Amount AmountA. Project Implementation Unit 331.5 1,925.6 2,257.1B. Seed Component

1. Seed Variety Breeding 22.7 386.2 409.02. Seed Testing & Cerlification 1,205.3 3,111.0 4,316.33. Plant Variety Protection Office 178.2 158.3 336.54. Seed Multiplication 2,696.2 0.0 13,027.4 15,723.65. Seed Processing & Marketing 5,028.1 0.0 17,978.0 23,006.1

Subtotal Seed Component 7,724.3 1,406.3 34,660.9 43,791.5C. Classing Component

1. Classing and Marketing Schools 760.7 2,737.4 3,498.12. HVI 5,928.5 18,463.8 24,392.3

Subtotal Classing Component 6,689.2 21,201.2 27,890.4D. Irrigation Scheduling Component 965.3 2,642.0 3,607.3E. Integrated Pest Management Component 1,357.7 3,782.3 5,140.0F. Program Design - 1,908.0 1,908.0Total Disbursement 7,724.3 10,749.9 66,120.0 84,594.3

Annex D 72

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

LOCALIFOREIGN TAXES BY FINANCIERS(USS '000)

Participating Private Enterprise The Government of Uzbekistan World Bank Total

Amount Amount Amount Amount1. Foreign _ _ 62,097.2 62097.211. Local (Excl. Taxes) 4,499.8 7,912.6 4,022.8 16435.2111. Taxes 3,224.5 2,837.4 . 606l.9

Total Project 7,724.31 10,749.9 66,120.0 S4594.3

REPUBLIC OF UZBEKISTANCOTrON SUB-SECTOR IMPROVEMENT PROJECT

ALLOCATION OF LOAN PROCEEDSWORLD BANK

(US$ '000)

Suggested Allocation of Loan Proceeds Loan Amounts

Loan Amount Disbunement Totl Project Cost Averag* Disbursemnt % Unallocated Allocated

# Total Local Foreign Total Local Foreig Total Total Local Foreign Total Local Foreign

1. Civil Works 2,954.5 80.0 4,054.3 814.4 3,249.9 80,0 - 100.0 3,249.9 295.4 - 295.4 2,954.5 2,954.5

2. Equipment 19,854 .1 80.4 27,146.7 5,310.6 21,836.1 80.4 0.1 100.0 21,839.5 1,9e5.4 0.3 1,985.1 19,854.1 3.1 19,851.0

3. Training 1,184.9 100.0 1,195.2 - 1,195.2 100.0 . 100.0 1,195.2 10.3 - 10.3 1,184.9 1,184.9

4. Technical Assistance 7,161.6 100.0 7,167.1 75.4 7,091.7 100.0 100.0 100.0 7,167.1 15.5 - 15.5 7,151.6 75.4 7,076.2

5. Investrnent Credit 28,441.6 80.1 38,729.7 10,749.2 27,980.5 80.1 28.1 100.0 31,005.3 2,563.7 244.0 2,319.7 28,441.6 2,780.9 25,660.8

6. Recurrent Costs 1,662.9 26.4 6,291.2 5,547.5 743.7 26.4 16.6 100.0 1,662.9 - - - 1,662.9 919.2 743.7

Unallocated 4,870.4 - - - - - - - - -

Total 66,120.0 7a.2 84,5S4.3 22,497.1 62,097.2 , -= -= 66,120.0 4,870.4 244.3 4,626.1 61,249.7 3,778.6 57.471.1

Anex D 74

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

EXPENDITURE AcCOUNTS BY FINANCIERS(US$ '000)

Participating The Govemment World Bank TotalPrivate of

Enterprise UzbekistanAmount Amount Amount Amount

1. Investment CostsA. Civil Works 814.4 3,249.9 4,064.3

B. Equipment 5,307.2 21,839.5 27,146.7

C. Training , 1,195.2 1,195.2D. Technical Assistance 0.0 7,167.1 7,167.1

E. Investment Credit 5,140.4 0.0 30,329.6 35,470.0

Total Investment Costs 5,140.4 6,121.6 63,781.3 75,043.4

11. Recurrent CostsA. Salaries 1,667.8 536.9 2,204.7

B. Communication 323.3 112.9 436.3C. Equipment Operation & Maintenance - 219.9 78.4 298.3E. Supplies 207.6 111.3 318.8F. Staff Travel Expenses 173.9 70.1 244.0

H. Services 84.5 28.0 112.51. Other 1,951.3 725.3 2,676.6

J. Investment Credit 2,583.9 -0.0 675.7 3,259.7

Total Recurrent Costs 2,583.9 4,628.3 2,338.7 9,550.9

Total DISBURSEMENT 7,724.3 10,749.9 66,120.0 84,594.3

75 Annex D

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

PROJECT COMPONENTS BY YEAR - TOTALS INCLUDING CONTINGENCIES(US$ '000)

1996 1997 1998 1999 2000 Total

A. Project Implementation Unit 652.4 703.8 459.2 350.5 91.3 2,257.1B. Seed Component

1. Seed Variety Breeding - 409.0 - - - 409.0

2. Seed Testing & Certification 257.7 1,457.8 2,014.7 336.1 250.0 4,316.3

3. Plant Variety Protection Offioe 184.4 36.6 37.5 38.5 39.5 336.5

4. Seed Multiplcation 1,411.0 3,179.7 3,947.1 4,546.5 2,639.3 15,723.6

5. Seed Processing & Marketing 130.3 5,675.5 14,052.3 1,498.7 1,649.3 23,006.1

Subtotal Seed Component 1,983.4 10,758.6 20,051.6 6,419.8 4,578.1 43,791.5

C. Classing Component1. Classing and Marketing Schools 1,065.7 82.0 2,127.4 110.1 112.9 3,498.1

2. HVI 3,659.0 6,974.5 7,648.1 4,755.7 1,355.0 24,392.3

Subtotal Classing Component 4,724.7 7,056.5 9,775.5 4,865.8 1,467.9 27,890.4D. Irrigation Scheduling Component 209.5 738.2 678.7 897.0 1,083.8 3,607.3

E. Integrated Pest Management Component 929.1 1,403.7 2,323.0 316.8 167.4 5,140.0F. Program Design - 619.7 635.8 652.6 - 1,908.0

Total PROJECT COSTS 8,499.0 21,280.5 33,923.8 13,502.5 7,388.5 84,594.3

76 Annex E

REPUBLIC OF UZBEKISTAN

COTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX ESEED COMPONENT

FiNANCIAL TERMS AND ELIGIBILITY CRITERIA

1. Financial Terms for Loans to Sub-Borrowers. The following financial terms will applyfor lending to the sub-borrowers:

(a) A loan ceiling of US$5.0 million would be established (this would meet thefinancing requirement, excluding equity capital) for an expected seed productioncapacity of 5,000 ton seed processing units. The loan ceiling will be adjustedcorrespondingly for lower or higher capacity;

(b) A maximum of 25 percent of the loan may be utilized for the purposes ofworking capital needs;

(c) The sub-loans to seed companies would be given for a maximum period of 10years, including a three-year grace period, at the long term Dollar rate (USTreasury 10-year Bond rate) in effect at the time sub-loans are made (the baserate) plus a margin of 3 percent to cover administration costs and default risks;

(d) A maximum loan ceiling of US$700,000 will be established for borrowings bya seed company on behalf of any one associated seed farm to meet the creditrequirement of that seed farm for the purposes of spare parts, equipment andpesticides;

(e) Loans to seed farms would be for a maximum 6 years, with a two-year graceperiod, carrying the same interest rate as above;

(f) The exchange risk between the US dollar and the Sum would be borne by thesub-borrowers, the cross-currency risk between the US dollar and the basket ofcurrencies in the World Bank loan would be borne by the Government, thedefault risk would be borne by the Government;

(g) If Sum is drawn instead of US dollars, the principal addition will be calculatedin US dollars on the basis of the exchange rate in effect at the time of suchdrawdown;

(h) Repayment schedules for sub-loans will be calculated in US dollars. Repaymentof principal and interest will be made in US dollars, or in Sum equivalent basedon the foreign exchange rate prevailing on the repayment date;

Annex E 77

(i) Repayment of principal and interest will be made by the sub-borrowers and willbe deposited for credit through an agreed account in a commercial bank to bedesignated by the Government;

(j) Any reflows during the World Bank five-year grace period (the differencebetween borrower's repayment obligations to the Bank and sub-borrower'srepayments to the borrower) will be held in a separate account for use by theMinistry of Finance. These funds will be used on a revolving basis, and onsimilar terms and conditions, to finance similar private sub-projects acceptableto the Bank; and

(k) Collateral (in the form of assets) will be required from the participating privateenterprises in favor of the government as a preferred creditor and will bespecified in the sub-loan agreement.

2. Eligibility Criteria For Loans To Sub-Borrowers. Loans to sub-borrowers will beapproved on a first-come-first-serve basis. Sub-borrowers must meet the following criteria before loanapproval would be processed:

(a) Seed companies and eligible seed farms must be fully private legal entities;

(b) The charter and other terms and conditions of incorporation of the seedcompanies and privatized seed farms will have to ensure freedom of governanceby their shareholders, and operational autonomy and financial accountability oftheir managers;

(c) Sub-borrowers and seed farms will possess legal long-term leases on farm landand land needed for ginning and seed processing plants, and for administrativebuildings;

(d) Planned minimum statutory capital for a seed company will be at least the Sumequivalent of US$40,000; paid in capital will be at least the Sum equivalent ofUS$25,000. Equity funding of the total capital requirement must be at least15%;

(e) Sub-borrowers must prepare a comprehensive and acceptable business plan,including:

* descriptions of marketing and distribution channels;* technical soundness, including descriptions of machinery to be purchased

and layout of the plant;* financial analysis and viability of the investments;* management capability and effective organization of the project; and* compliance with internationally recognized environment and health

standards.

78 Annex E

(f) Sub-borrowers must demonstrate their capacity for the preparation of adequatefinancial accounts and property controls, and meet independent audit requirements;

(g) The sub-loan agreement must provide sub-borrowers with on-demand export andimport licenses to support their operations and guarantee on-demand convertibilityof Sum into US dollars for the purpose of making US dollar interest and principalrepayments; and

(h) Each sub-borrower must sign a subsidiary sub-loan agreement withGOSKOMPROGNOZSTAT acting through PIU as administrator of the loan, withthe commercial bank as the channel for disbursement and collector of repayment.The agreement will stipulate the terms of the loan, security arrangements in caseof default, procedures for withdrawal and utilization of loan proceeds, monitoringand reporting arrangements, repayment schedule, and provision for independentfinancial audit. The Deputy Chairman GOSKOMPROGNOZSTAT will sign theagreement on behalf of Government following review of the sub-loan by the Bank.The Director of the PIU and a representative of the commercial bank willcountersign the agreement as an indication that appropriate arrangements exist forthe respective agencies to carry out their responsibilities for monitoring compliancewith the contractual provisions on the seed companies' use of the sub-loan proceedsand their repayment.

79 Annex F

REPUBLIC OF UZBEKISTAN

COTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX F

SUMMARY OF PROCUREMENT ACTIVITIES

Categ-Contracts Ce Loan Funds GOUIPSCo Total (USSxOOO)

Technical Services 18 8,362 0 8,362

PIU AdminlTech. Services I 1,500 0 1,500

Strat. Analyses & Sector Studies 6 1,908 0 1,908

HVI & Class-Mkting Technical Assistance 1 1,840 0 1,840

Irrigation Tech. Assistance 2 251 0 251

IPM Tech. Assistance 1 558 0 558

Seed Certification Tech. Assist. 1 754 0 754

Seed Breeding TA 1 170 0 170

Training I Study Tours 3 1,195 0 1,195

Other Consulting Contracts 2 186 0 186

Equipment & Goods 98 21,840 5,307 27,147

ICB 6 12,720 3,120 15,840

DC 2 785 195 980

IS 35 6,670 1660 8,330

LS 55 1,665 332 1,997

Civil Works 20 3,250 814 4,064

HVI Labs 6 693 173 866

IPM Facilities 5 1,880 469 2,349

Other Small Works 9 680 7,724 849

Investment Credit Line 28 31,005 7,724 38,729

Gin / Seed Buildings & Connections 6 300 100 400

Equipment 17 30,705 4,364 35,069

Pvt. Sector Recurrent Costs 0 3,326 3,260

Other Recurrent Costs N/A 1,543 4,749 6,292

Program Totas 164 66,000 18,594 84,594

Annex F 80

REPUBUC oF UZBEKISTANCOTTON SUB-SECTOR DEVELOPMENT PROJECT

PLAN AND SCHEDULE FOR MAJOR PROCUREMENTS

CdaeVi Itcm, 0 Conlraci Buidges Prom Procurement Sche4AdkIssre Bid

Gre p Package Anw_ ont Method Documents Bid Recipt Comnract Award Begn DdeihwTeocnicalServk' I P)U Tadmcl Saice _ 1500 Shoam List/lndivs. 4/95 * 9/95 _ 695 - 11193 95 - 2J96 0/95 - 4/96

2 tresvi& eey&olicyPaEn 2,908 Shot Lists 4/95 - 1/97 6/95 - 3/97 8/95 - 5/97 1095 - 6W97

3 HVI / ms-Miing TA 1,840 Share Lits 6/95 - 9/96 95 -11/96 095 - 2W97 196 - 497

4 lnd Tedunodg 251 ledivi 7/1/95 1/1/95 10/1/95 1/11_5

5 IPM Tedu] Assistance 555 Shot Lists 7/95 - 4/96 9195 - 6/96 11/95 - V/96 1/96 - 10/96

6 Soed CaufiteiosSpedalit 754 Sht Lists 9/1/95 11/1/95 I/1/96 3/1/96

7 Saed BeedngTA 170 lndivs 12//95 V1/96 4/1/96 I/296

I Tain4lnStuy Tounr 1,195 Shotn Lists 6195 - 9/96 8/95 - 11/96 I0O5 - 2/97 /95 -3/96

9 Ofm Cowltdng Contracts 186 Short Lists 6195 - tl95 M/95 - 10195 10/95 - 12/95 IW95 - 2/96

__________ ~~~~~~~suab-total 8.32 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Equipmentand Goods to Sed Tet & Centific. Equipment 955 ICB 4/2/96 6/1/96 t/1/96 201/96

1 1 Seed Te & Certifir Equinau 945 is, 6/95 - 3/97 V/95 - 5/97 9/95 - 7/97 9IIM - 897

22 lead Pcung&M ketnnglEqfip. 2,370 ICB- 3/15196 5/15/96 7/15/96 101/296

13 Seed Proceedan&MrhedngEquip. 12790 ICBE 10/1/96 12/1/96 21/97 4/2/97

14 Seed Pocesirg&Mrketing Equip. 3,300 IC' 6/1197 8/l/97 10/1/97 I1V5S97

Is Seed Procesing&MorkatingEquip. 2,350 ICB- 1/25/98 10/21598 12/1598 V1599

16 S.,d Procssing&Mrkeing Plant 2,260 Is. 10/1/96 IV1196 2V/97 41197

17 Seed Pmcsing & Marketing Plsnt 2,260 is, 611/97 8/197 28/2/97 12/2/97

Is Seed Processing&Mvkesing PIant 2X260 IS, 6/1/98 1/1/98 101/9tm 1215/9

19 Se*d Proneesing A MSrkieing PlAet 2,260 IS 3/1/98 5/1/98 7/1/98 9/119

20 Seed Pmceuing&MerkesngPlAnt 600 LS 8/2/96 9/2/96 11/1(96 1211S6

21 Seed Fem Equip. (20Sets) 4.00 IC- 39 - 6/97 5/96 - U97 796-10/97 9S6 - fV97

22 Sed Fwm Equip. (20 Sets) 4.790 IS 2/97 - 5/98 4/97-719S 6/97 -9/9 /97 1-/9

23 SedltFweoCropInpuus 2,100 _ S _ 2/96-6/98 4/96-8l9S 696-lOi9t /96-2298

24 Seed Pam CropTputs 1,900 IS, 2/96-6/98 4/96-8/98 6/96- [209 V896-12/98

25 Seed Fns Crop Inpus 2,030 IS 2/96 - 6198 4/96 - /98 6/96 - lO91 U96 - 129

26 HVI Equipmemt and Materials 6.100 ICCB 1/5/96 3/1/96 V/I26 7/2/6

27 HVI Equipmsent nd Mmteials 2,700 IC 3/1197 5//917 7//97 9//97

28 HVI Equipment nd Materias 2.200 ICB 3115/97 5/15/97 7115/97 9/15197

29 HVI Equipment ed Materials 1,370 IS, 6/95 - 3/97 8/95 - 5/97 9/95 - 7/97 2I/95 - S7

30 HVI Equipenent ndMeteiels 205 LS 3/96 6/96 5/96 - 96 7/96 -1096 9/96 -12/96

31 HVI EupsnemutadMaterisls 980 DC 10/1/96 I221/96 VI97 4/1/97

32 HVI Eq!2pnutsnd Mauels 1,435 IS, 6/2/96 1/U/96 10/1/96 IVIS6

33 HVI EqlpnmetandMsteeials 975 IIS 6/95 - IS96 n95 - 396 /IO95 - 5/6 I225 - 7/96

34 /VI_ E2mtKndMeusis 12650 IS. 7/96-10/96 9/96-12296 I/96.2/7 1/97.4S97

35 HVI E mspnentsd Maeids 805 IS, 9/2/96 II/I2S6 1/1/97 3/1197

36 Clas /MktIn Schools 2,460 ICB S/1196 10/1/96 22/2/96 V21197

37 Clus/Mbitng Schools 250 IS 6/96 -9/96 6 - 11/96 0/9 - W97 12/96 -4/97

81 Annex F

REPUBUC OF UZBEKiSTANCoTToN SUBSECTOR DEVELOPMENT PROJECT

PLAN AND SCHEDULE FOR MAJOR PROCUREMENTS

Ciatgery Item I Contrad t Bued Proc. Procurement Schedule

________ Group e P m Amnow Medw&d Decumlents Did Receit Contrat Award Begin Deive31 Inipdm Sdediin 1425 ICB VI9 __/1/95 S12il95 2/S96

39 Inig eSdiadli 255 IS, 1/l/95 1O/I95 1V195 2V1t96

40 hIgdinSdali,g 460 LS 695 - I96 5/93 - 3/6 10/95 - 5/96 12/95 - 7:96

41 1n1 _adPMMp tM4ans 615 IS 1/1197 3/1/97 3/1/97 7/1/97

42 _ PFM hgua1_1a 295 IS 1/197 311i97 5/1/97 7/lS7

43 Sftd i3m_% 90 is lOil195 12/1/95 21/i96 4/1/96

SWPWt 6i1

CavII Works 44 SWdTTN" & cSuflbm 570 NO 6i1/96 Vl/96 10/1/96 1211/96

45 Gin I 1.d Bldg MoUft300LS 30 L 397 - S91 5i97 - 7/9 7/97-9/91 9/97 - 11/9

46 HV Lsbuuiu N05 NCR 6/1/96 1/196 1011,96 12/1196

47 CW4lMt Sd cbooh&P PIU 176 NCB VlM/S 1/01/95 12/1/96 2/1/96

41 1PM Fadilu 2,350_ NCB 10d1/96 V12i/96 _ Vl/97 4/11/97

Sb-btId 4.,U ___Recrrae _

CoetadTaxes 49 PubiSc Seem, Salmi. 2,205 F/A _ _ __ _

50 Otr RopeK CTIIco/rm 4.016 IS4L _ _ _ __

5I_ Pit Scbrbw.C omtrame 3.260 U LS __

Sub-ted 9.551 _

Tee U,354 .

82 Anne G

REPUBUC OF UZBEMSTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX GDISBURSEMENT AccouNTs By FINMCIERS

(US$ MO)

Participating The Government World Bank TotlaPrivate of

Enterpise UzbekistanAmount Amount Amount Amount

1. Clvil Wborks 814.4 3,249.9 4064.3

2. Equipment - 5,307.2 21,839.5 27,146.73. TraIning - 1,195.2 1,1962

4. Technical Assistance 0.0 7,167.1 7,167.1

5. Investment Credit 7,724.3 0.0 31,005.3 38,73.7

6. Recurent Costs - 4,628.3 1,662.9 6,291.2

Total 7,724.3 10,749.9 66,120.0 84,504.3

REPUBUC OF UZBEKISTANCOTTON SUB-8ECTOR IMPROVEMENT PROJECT

DISBURSEMENT BY SEMESTERS AND GOVERNMENT CASH FLOW(USS '000)

_______________ __________ Financing Avible |

Parucipang Private World Bank Total Costs to be The Government of Uzbeldstan

_________ ________ FinancedAmount Amount Amount Project Cash Fbow Cumulade

_Costs Cash Flow

I - - - 4,249.5 -4,249.5 *4,249.5

2 188.7 3,451.5 3,620.2 4,249.5 429.3 -4,878.83 168.7 3,451.5 3,620.2 10,640.2 -7,020.0 -11,8J9.8

4 694.6 8,806.7 9,501.3 10,640.2 -1,138.9 -13,037.8

5 694.6 8,806.7 9,501.3 16,961.9 -7,460.6 -20,496.4

6 1,386.2 13,900.3 15,286.5 16,961.9 -1,675.4 -22,173.8

7 1,386.2 13,900.3 15,286.5 6,751.3 8,535.2 -13.638.5

8 808.3 4,850.2 5,658.6 6,751.3 -1,092.7 -14,731.2

9 808.3 4,850.2 5,658.6 3,694.3 1,964.3 -12,766.0

10 804.3 2,051.3 2,855.6 3,694.3 -838.6 -13,6065.

1 1 804.3 2,051.31 2,855.6 - 2,855.6 -10,749.9

rowaI 7,724.3 66,120.0 73,844.4 84,594.3 -10,749.9 -10,749.9

83 Annex H

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX HA. PROJECT IMPLEMENTATION UNIT

1. The Project Implementation Unit (PIU), will report to the Deputy ChairmanGOSKOMPROGNOZSTAT through its Director. It will be responsible for daily direction andcoordination of project activities, assisting participants with implementation requirements, administeringfunding flows, monitoring progress under the components, and reporting to the Goverrnment, World Bankand other donors, as appropriate, on progress with project implementation.

2. The PIU was established under GOSKOMPROGNOZSTAT during CY1994 and expectsto be fully staffed and ready for operations by mid-CY 1995. It is expected that the PIU will operate atfull capacity for about three years during the stages of project start up and initial implementation. It willthen be scaled back in phases to a smaller staff needed for monitoring, accounting and reporting for theremaining two years. The PIU will be staffed by Uzbek nationals and some foreign advisors, who willhelp initiate operations while training their local counterparts. In later stages, PIU functions will beabsorbed into relevant Government organizations, completing the objectives of institutionalization.

3. The proposed organizational structure and funding channels for the project are illustratedin the following chart.

4. The Government will require technical assistance for establishing and running the PIU.While the PIU will have a qualified Director who would be an employee of the Government, foreignconsultant assistance will be expected to be a principal resource, in the beginning, for ensuring promptand efficient implementation of the PIU's technical, administrative and advisory functions. Foreigntechnical assistance will also be provided for advising in business development/credit operations, projectaccounting and procurement functions. Some equipment will be provided to support PIU officeoperations. A foreign advisor will be engaged to assist the Agent bank(s) with credit application reviewsand approvals and administration under the credit line component of the project.

5. The counterpart staff will be trained by the expatriate advisors to perform unit functionsand otherwise prepare themselves for lead responsibility for PIU actions. Therefore, support functionsand duties of expatriate staff during the first year or two will shift to the counterpart staff during thesecond and third years. Expatriates' roles will correspondingly evolve from operations and training tothat of being counselors and coaches. Their service levels will phase down as their individualcounterparts become capable of executing daily operations. Certain units (procurement, accounting) maybe capable of such changeovers earlier than in the general management and business development areas.At later stages of the program, and as the Uzbek banking system evolves, PIU business advice and creditoversight functions could be transferred to one or more of the banks that function as credit intermediaries.It might also be appropriate for the PIU, if requested, to arrange for guidance to project participants (seedcompanies, seed multiplication units) in financial and legal matters.

Annex H 84

Proposed Organizational Structure and Funding Channels for the Project

|~~ _ __ _____ -

Loan

ProjectWorking

l Group Project Implementation Unit Participating

K \ Director Credit-LinePayments to Bank(s)

Consutants &Suppliers and ; |Admin. Fnc Prc Mon.

Spec. Acct. ____________________

|Irigation IPM HSeed Certif Plant Protection] Seed Companies

lfams ee/

Sedfam See frs Seed arms Seed fam ee m

85 Annex H

6. PIU departments will be providing guidance and operations oversight to subsidiaryimplementation units in each of the Government-managed project components. The PIU will also beproviding them, and the seed companies and seed farms, with administrative support regardingprocurement and funding actions, and World Bank approvals associated therewith. The PIU will also beresponsible for setting up the overall project accounting system and arranging for periodic audit services,as required by the World Bank.

B. PIU ORGANIZATIONAL STRUCTURE

7. The PIU consists of a management section and three functional service units: Finance,Procurement, and Administration and Monitoring.

PIU MANAGEMENT

8. The PIU will be headed by a full-time Director with overall responsibility for projectadministration. The Director will be an employee of the GOU and appointed by, and reporting directlyto, the Deputy Chairman of GOSKOMPROGNOZSTAT. To fulfill his assigned responsibilities, theDirector will be authorized to recruit, manage and supervise the PIU's domestic employees and itsexpatriate consultants, and to decide and execute PIU operations. The Director will be assisted by theexpatriate advisors. The PIU may also reserve some funds for other expatriate assistance, such as forsolving unforeseen technical problems, conducting analyses or e.g., legal services. The Director mayalso engage other technical assistance, such as for required periodic audit services. The Director willregularly liaise with the World Bank's project staff and visiting supervision missions.

9. The Director's primary focus will be to direct the overall program and supervise theconsultant team which will be supporting the PIU's functional units. The PIU loan committee will reviewand, as appropriate, endorse credit applications and submit them to the World Bank for its review and"No-objection. Finance Department staff will assist the bank(s) with initial administration of these loans,including preparation of typical documentation, periodic specification of interest rates and trackingrepayments of principal and interest to the commercial bank(s) and the MOF. The Finance Departmentwill also be responsible for setting up disbursing procedures, a program accounting system, and helpingparticipants with accounting and reporting. Project accounting activities will include helping the bank(s)with the installation of a system to track the incidence of expenditures under the credit line and post themto the respective sub-borrower's loan principal. The Procurement Department will provide advice andassistance to GOU project participants to effect bidding, contracting and payment actions, and lenderapprovals, and could organize combined solicitations and transactions for groups of like items. ThisDepartment will also advise and assist, as requested, on external procurement actions by Seed Companiesand seed farms and, if appropriate, regarding domestic purchases. The Procurement Department willalso organize transmittal of documents to the World Bank for review and clearance and will maintain adatabase on all procurement activities. The Administration and Monitoring Department will beresponsible for assisting Government and private project participants with actions to engage technicalservices (such as refining terms of reference, locating suitable candidates, evaluating offers, obtainingvisas, making payments) for their components, and the efficient application and supervision of theseresources.

Annex H 86

10. PIU duties and responsibilities can be grouped in three broad categories:

PIU Program Service Activities

* assistance, as requested, with institutional strengthening and control systemswithin participant components;

* assistance, as requested, in coordinating activities under these packages, andbetween departments, to ensure timely and efficient implementation;

* providing advice and guidance, as requested, to participants and potentialparticipants on project implementation procedures and requirements, focusing onplanning, procurement activities, project accounting, reporting requirements andpreparations for periodic GOU or Bank supervision visits;

* promoting the credit line component by providing information to potentialapplicants and providers of goods and services regarding steps for participatingin the activities;

* maintaining an information database on procurement services, audit andaccounting services, technology services, suppliers of equipment, World Bankprocurement and disbursement guidelines, standard and model biddingdocuments, and other resources needed by participants;

* organizing training for participant staffs on procurement planning, and basicprocurement and logistics management procedures;

* assisting project staff, as requested, in learning about World Bank projectdocumentation and procedures for obtaining needed clearances;

* where appropriate, arranging for consolidated procurement on behalf ofparticipants in cases of standardized and semi-standardized equipment; and

* as requested, providing technical advisory services or assisting in theidentification and procurement of such services.

Project Administration Activities

* Pre-review and approval of commitment and disbursement requests for small-value procurement transactions and referral of documentation to the World Bankfor larger procurement;

* clearing disbursement request packages, maintaining project accounting accordingto World Bank requirements, and arranging for regular audits of projectactivities; and

87 Annex H

* arranging for transmittal of documents between participants and the World Bank,as appropriate, to ensure that proper and timely clearances are received.

Project Reporting Activities

* Monitoring and reporting on overall project implementation, e.g., progress intechnical assistance, procurement of goods and services purchased through theLoan, disbursements, and audit activities;

* assisting the World Bank supervision missions by collecting and processingparticipants' progress reports;

* monitoring and reporting on disbursements under the Loan, including theadministration of the Special Account; and repayments made by participantswhich are involved in the credit line aspect of the project;

* highlighting implementation problems as they arise and offering recommendationsfor resolution;

* preparing and forwarding periodic reports to the Government and, as required,the World Bank; and

* preparing the overall Project Completion Report, which will be submitted to theWorld Bank.

PIU UNIT FUNCTIONAL RESPONSIBILITIES

11. Finance Department. The Finance Department will be responsible for all matters dealingwith project accounts, disbursement requests and loan administration of the line of credit. This Unit willalso be responsible answering questions from potential loan applicants, ensuring understanding of andconformance with eligibility criteria, and helping the participating bank(s) with developing criteria anda system for processing sub-loans. Development of the accounting system for project components andcredit line activities will take place in this Department as well.

Specifically the Finance Department will be required to, inter alia:

* Prepare and negotiate the Credit Line service agreement to be executed with theparticipating bank(s);

* Work with Seed Companies, seed multiplication entities, project participants andthe credit-line bank(s) to help promote good business planning and the use of thecredit line;

* prepare and distribute an operations handbook which advises potential sub-borrowers about environmental parameters that must be met within their seedmultiplication and processing activities;

Annex H 88

* Review candidates' business plans and credit application proposals and confirmtheir consistency with project requirements and sub-loan criteria;

* Work with the bank(s) regarding their administration of the Credit Line and sub-loan agreements - including collaborating with them and sub-borrowers, asnecessary, regarding committed/undisbursed balances, posting of principalincrements, interest rates, and processing and recording repayments of principaland interest by sub-borrowers and by the bank(s) back to the MOF;

* Refer to the World Bank all final sub-loan applications for clearance;

* Confirm satisfaction of sub-loan criteria, including environmental matters, ifappropriate, of sub-projects based on GOU and World Bank requirements;

* Analyze and consolidate sub-loan portfolio management reporting, includingarrears;

* Develop and administer the project's overall accounting, auditing and reportingprocedures;

Establish Special Account(s) according to World Bank criteria and procedures;

Engage an accounting firm to review project accounts, accounting system,documentation controls, data bases covering financial, technical and procurementinformation, etc., as required for periodic audits;

Make or arrange for disbursements and payments to participants, suppliers andcontractors, and arrange for periodic replenishment of the World Bank SpecialAccount and the project's local currency resources;

Collect and submit documentation for contracts above US$250,000;

Submit Statements of Expenditures for contracts under US$50,000; and

* Prepare documents and submit withdrawal applications to the Bank for: (i) directpayments to third parties for contracts of US$250,000 and above; and (ii)replenishments of the Special Account.

12. Procurement Department. While project participants will be responsible for theprocurement of most goods and services under the Loan and sub-loans, the PIU will assist them byproviding procurement services, such as information on guidelines and procedures, assistance withdocument preparation, and the provision of technical support on a case-by-case basis. The Departmentwill also assist participants, where appropriate, by arranging for collective procurement for items of asimilar nature, especially those purchased from external suppliers. The Procurement Department willestablish an information base on potential suppliers of goods and services which can be utilized by theparticipants. The Department will also provide information and data as needed to the World Bank forpurposes of procurement supervision.

89 Annex H

The Procurement Department will be required to, inter alia:

* Set up the project procurement system and basic operations manual, includingessential steps for different procurement modes: Local/International Shopping,NCB, DC, ICB actions;

* help project participants develop procurement strategies, bidding packages, solicitfor major program purchases and answer questions about the process;

* provide or help arrange advice or technical support, as needed, for participantsmarket searches, solicitations, procurement/contracting and/or inspection andother logistics management actions;

* carry out collective procurement activities on behalf of participants, based onidentification by the Administration and Monitoring Department of standard andsemi-standard equipment;

* develop and implement training for project participants in basic procurement,evaluation, contracting and logistics management practices;

* outline a procurement plan and develop documentation packages for PIUsolicitations and purchases of goods and services, (e.g., technical services,office/operations equipment, audit support, staffing contracts);

* carry out Local Shopping/IS/ICB/DC actions for PIU and, as requested, otherparticipants' purchases; and

e prepare and transmit procurement packages to the World Bank for all required"No Objection" Letters on behalf of participants.

13. Administration and Monitoring Department. This department will be responsible forassisting project participants with actions to engage technical services for their components, and theefficient application, support and supervision of these resources. The Department will coordinate withthe Procurement and Finance Departments and assist component staffs and participants by:

* Helping assess problems or shortcomings, planning actions and budgets fortechnical assistance and developing appropriate terms of reference for neededconsultants or technical specialists;

* Researching possible sources of technical services and/or potential candidates forshort-lists;

* Developing solicitation packages, including the use of standard formats andcontracting instruments, as appropriate;

* Advertising for or contacting potential providers of technical services;

* Receiving service/consulting proposals and conducting evaluations of offers;

Annex H 90

X Obtaining, if appropriate, GOU and World Bank clearances of invitationpackages, evaluations and negotiated contracts;

* Making arrangements for the arrival, establishment, application and efficientdirection of the technical assistance contractors, as well as the quality, positioningand operational availability of their Uzbek counterparts;

* Assisting directors and consultants of different components coordinate their plansand efforts so maximum program efficiencies and benefits are achieved;

* Ensuring timely arrangement of payment mechanisms, physical support ofcontractors and clearances of payments for work completed; and

* Reviewing and accepting final contract deliverables, and conducting contractclose-outs, audits and contractor evaluation actions.

91 Annex H

PROJECT IPLEMENTATION UNITSTAFFING CONCEPT

Item Number of Three Year Foreign orPeople Input Requirement Local Staff

(months) l

Higher Level Staff |

Director 1 36 Local

Organization/Business Development 1 24 ForeignSpecialist

Assistant Manager 1 36 Local

Economist 1 36 Local

Technologist / Planning Specialist 1 36 Local

Credit Officer 1 36 Local

Procurement Specialist 1 18 Foreign

Procurement Officer 1 36 Local

Procurement Specialist 2 60 Local

Financial Management Specialist 1 18 Foreign

Senior Accountant 1 36 Local

Disbursement Specialist 2 72 Local

Credit Specialist for Agency Bank 1 18 Foreign

Agricultural Economist 1 18 Foreign

Assistant Level Staff |

Credit Assistant 1 36 Local

Technology Assistant 1 36 Local

Planning / Reporting Assistant I 36 Local

Accounting Assistant 2 72 Local

Support Staff 6 216 Local

92 Annex I

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX ISUPERVISION PLAN AND SCHEDULE

1. Introduction. This project involves four components with participation ofdifferent institutions and enterprises at dispersed locations. Timely implementation andadherence to agreed project objectives and activities will require an effective supervision plan.

2. PIU Supervision. The PIU is expected to play an important role in projectsupervision, since it is primarily responsible for coordinating all the work related toimplementation, budgeting, procurement, disbursement, audit, reporting, monitoring andevaluation and appraisal of all sub-loans. It will prepare quarterly supervision reports to besubmitted to the World Bank for review. The component-specific implementation units will beresponsible for the day-to-day implementation and supervision of their respective work programsas agreed in the annual work plans.

Bank Supervision

3. Supervision Schedule. The proposed Bank supervision plan and supervisionschedule for the project are summarized in the table below.

4. Project Launch Workshop. The main objective of the project launch workshopis to reinforce project implementation strategies of the various components. This will be carriedout by holding a project launch workshop in Tashkent in June, 1995. It will bring togethervarious representatives from institutions and enterprises responsible for implementation of eachcomponent. The main topics to be covered will be: (a) detailed description of each component'sobjectives, sub-components and detailed features; (b) implementation schedule; (c) mechanismto obtain project funds; (d) procurement procedures; (e) loan conditions and covenants; (f) PIUand Bank supervisory scope and content; and (g) monitoring and evaluation and performanceindicators.

5. Supervision Missions. Periodic Bank supervisions will be undertaken by Bankstaff assisted by appropriate technical specialists. The supervision missions will be supplementedby follow up activities to be undertaken by Agriculture Office staff at the Resident Mission.Local consultants will also be used to supplement supervision efforts on a continuing basis.Although this may likely result in higher than Bank average supervision coefficients, theemphasis will be placed on combining supervision missions with other Bank related activities toensure cost-effectiveness and minimize manpower requirements.

6. The supervision missions will follow established Bank guidelines (OperationalDirective No. 13.05). Thus, the Bank supervisions will focus on the following key indices:

Annex I 93

(a) compliance with project development objectives, legal covenants, projectmanagement performance, availability of counterpart funds;

(b) compliance with procurement guidelines;

(c) implementation schedule, project cost, and disbursements;

(d) special account operations;

(e) audit and accounts;

(f) training and technical assistance;

(g) environmental aspects; and

(h) compliance with technical standards, sub-loan management, and financialhealth of the private sector seed companies and seed farms.

7. The implementation plan presented in Annex A will provide the basis for Banksupervisions, which will be reviewed during negotiations.

8. Mid-Term Review. A mid-term assessment of the project status, design,objectives, detailed features, organization and management, expected benefits in relation to costsand implementation will be carried out during the first quarter of 1998. The purpose of thisassessment is to determine what has worked and what has not, constraints to channeling funds,delivery of technical assistance and training, implementation bottlenecks, technical, organizationand management aspects. Following this mid-term review, appropriate changes, as required,both in scope and size, will be made to ensure timely completion of the project and achievementof project objectives.

9. Project Completion Report. A project completion report will be prepared at theclose of the project in accordance with standard Bank guidelines.

94 Annex I

TABLE 1: PROPOSED SUPERVISION PLAN AND SCHEDULE

ApproximateDate of Input Staff

(mo/yr) Activity Expected Skill Requirement Weeks

June 1995 Supervision mission Task Manager 24(FY95) Project launch Irrigation Specialist

workshop HVI SpecialistIPM SpecialistSeed SpecialistFinancial AnalystProcurement SpecialistDisbursement Specialist

September 1995 Supervision mission Task Manager 15(FY96) HVI Specialist

Seed SpecialistFinancial AnalystProcurement SpecialistInstitutional Dev. Specialist

January 1996 Supervision mission Task Manager 15(FY96) Irrigation Specialist

HVI SpecialistSeed SpecialistProcurement SpecialistFinancial Analyst

June 1996 Supervision mission Task Manager 15(FY96) HVI Specialist

Financial AnalystSeed SpecialistProcurement SpecialistInstitutional Dev. Specialist

September 1996 Supervision mission Task Manager 13(FY97) Financial Analyst

Seed SpecialistInstitutional Dev. Specialist

Annex I 95

ApproximateDate of Input Staff

(mo/yr) Activity Expected Skill Requirement Weeks

March 1997 Supervision mission Task Manager 18(FY97) (mid-tern review) Irrigation Specialist

HVI SpecialistIPM SpecialistSeed SpecialistFinancial AnalystProcurement SpecialistDisbursement Specialist

September 1997 Supervision mission Task Manager 14(FY98) HVI Specialist

Seed SpecialistFinancial Analyst

March 1998 Supervision mission Task Manager 15(FY98) Financial Analyst

Procurement SpecialistSeed SpecialistIrrigation Specialist

September 1998 Supervision mission Task Manager 15(FY99) HVI Specialist

IPM SpecialistSeed SpecialistFinancial Analyst

March 1999 Supervision mission Task Manager 15(FY99) HVI Specialist

Seed SpecialistFinancial AnalystIrrigation Specialist

September 1999 Supervision mission Task Manager 15(FY2000) HVI Specialist

Seed SpecialistFinancial AnalystIrrigation Specialist

96 Annex I

ApproximateDate of Input Staff

(mo/yr) Activity Expected Skill Requirement Weeks

January 2000 Supervision mission Task Manager 15(FY2000) HVI Specialist

Seed SpecialistFinancial AnalystIrrigation Specialist

June 2000 Supervision mission Task Manager 20(FY2000) and PCR preparation HVI Specialist

IPM SpecialistSeed SpecialistFinancial AnalystIrrigation Specialist

97 Annex J

REPUBLIC OF UZBEKISTANCOTTON SUB-SECTOR IMPROVEMENT PROJECT

ANNEX JLIST OF DoCumENTS AVAILABLE IN THE PROJECT FiLE

1. Government of the Republic of Uzbekistan: Uzbekistan Cotton Sub-sector ImprovementProject supported by World Bank -- Feasibility Report, September-October 1993.

2. Charles L. Sciple: Uzbekistan Cotton Sub-sector Improvement Project, Pre-Implementation Study -- Government of the Republic of Uzbekistan, Report, July-August1994.

3. Draft Proposal for Official Seed Policy; Draft Proposal for Seed Law.

4. Regulations on Joint Stock Companies; Memorandum of Association of Seed Companies.

5. Cameron/Hearn: Uzbekistan Cotton Sub-sector Improvement Project -- Integrated PestManagement Component, Draft Report, August 1994.

6. Donald N. Baker: Uzbekistan Cotton Sub-sector Improvement Project -- Real Time On-Farm Irrigation Scheduling, Mission Report, June-July 1993.

7. Cotton Sub-sector Improvement Project -- On-Farm Irrigation Scheduling Component,August 1994.

8. John Cameron: Uzbekistan Cotton Sub-sector Improvement Project, 1st and 2ndPreparation Missions -- Financial & Economic Assessment, Cotton Production Efficiencyand Project Components, Report, July 1993.

9. Fred E. M. Gillham: Cotton Production, Research and Marketing in Uzbekistan, Report,January 1994.

10. Gillham/Mathews: Cotton Pest Management in Uzbekistan.

11. Integrated Pest Management Task Force: Integrated Pest Management in DevelopingCountries -- Experience and Prospects, Consultants' Report, 1992.

12. United States Department of Agriculture, Agricultural Research Service: Cotton-Integrated Pest Management -- Proceedings of a Symposium, September 1990.

13. Dennis Wilchelns: Economic Evaluation of Agricultural Water Resources in Uzbekistan,Report, November 1994.

Annex J 98

14. BMB Management Consulting for Development BV: Development of the Seed Industry,Uzbekistan, Mission Report, December 1994.

15. Roger J. Tomkins: Uzbekistan Cotton Sub-sector Improvement Project, Pre-Implementation Study -- HVI and Classing Systems, Report, August 1994.

16. Stephen Brown: Uzbekistan Cotton Sub-sector Improvement Project, Pre-ImplementationStudy -- Ginning, Report, August 1994.

17. John P. Farish: Uzbekistan Cotton Sub-sector Improvement Project -- ComputerManagement Support System, Report, July-August 1994.

18. Implementation Volume: Table of Contents - Seed Component - Technical Assistance;Marketing Component and Classing Schools - Technical Assistance; Terms of Referencefor Development of Pesticide Policy; Integrated Pest Management Component -Technical Assistance; Irrigation Scheduling - Technical Assistance; Project CostingData; Procurement Schedules ; Project Implementation Unit; Economic and FinancialAnalysis; Accounting and Financial Reporting Procedures; Flow of Funds; andProcedures for IBRD Loan Disbursements.

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