Colombia - Productive Partnerships Support Project

Report No. PID3072 Project Name Colombia-Productive Partnerships Support... Project Region Latin America and Caribbean Region Sector Other Agriculture; Institutional Development; Community Action Program Project ID COPE41642 Borrower(s) REPUBLIC OF COLOMBIA Implementing Agency Address MINISTRY OF AGRICULTURE AND RURAL DEVELOPMENT Address: Avenida Jimenez No. 7-65, Piso 3; Bogota, Colombia Contact Person: Dr. Rodrigo Villalba Mosquera (Minister), Dr. Jorge Mario DUaz (Director Agricultural Policy) Tel: (57-1) 341-9005 Fax: 243-4785 Email: minagricultura.gov.co Investment Fund for Peace Address: Calle 8a, No. 6-63; Bogota, Colombia Contact Person: Dra. Olga Isabel Echeverri Fregui, Presidential Council Tel: (57-1) 566-2070 Environment Category B Date PID Prepared May 30, 2001 Projected Appraisal Date March 23, 2001 Projected Board Date October 15, 2001 1. Country and Sector Background Main Sector IssuesPoverty. Poverty in Colombia remains a critical problem with strong rural and regional dimensions. As a result of the economic crisis, the gains made in the area of poverty reduction in the early to mid-1990s have been eroded in recent years. The incidence of poverty and extreme poverty in rural areas was 80t and 58t respectively in 1998 as compared to 55t and 27t in urban areas (Wodon, et. al, 2001). A farm/household survey carried out as part of the project preparation process and focusing on agricultural producers found that the incidence of poverty among this group was as high as 80t (see Annex 14). Seventy percent of the population with incomes below subsistence live in rural areas. Three regions in particular have especially high levels of poverty: the Caribbean, Pacific Coast, and the Amazon; however, throughout the country one may find pockets of misery. In spite of reductions in the level of poverty, income inequality remains an issue with a GINI coefficient of approximately .55 which has remained stagnant over the past two decades. In spite of the constitutionally mandated universality of  education and health services, they along with other financial and technical assistance programs, either do not reach rural areas or have minimal impact due to lack of institutional capacity. Any poverty reduction campaign based on productive projects must take into consideration the limited education and business skills of the rural population, and must include actions to remedy these limitations.Rural violence. Colombia ranks among the countries with the highest incidence of violence. Violence in the countryside is particularly acute with an estimated 1.9 million persons displaced over the last decade. The causes of political violence in Colombia are manifold, including: (i) unequal access to economic power (especially land and natural resources); (ii) exclusion from political power; and (iii) available funding through access to illicit drugs proceeds by the guerrilla and paramilitaries. The World Bank sector work on violence recognizes the complexity and the central role of violence in impeding development in the country. The nation has three main guerrilla groups, the FARC, ELN and EPL as well as half a dozen other groups, which in mid 1990s had an active presence in 56t of municipalities, a dramatic increase from 1987 when their presence was found in only 17t of municipalities. Paramilitaries started acting as an organized group through the AUC in 1984 and have recently begun claiming the same political recognition given to guerrillas. According to the DefensorUa del Pueblo, 41- of displacements are caused by the paramilitaries, 28t by guerrilla groups, 13t by the armed forces and police, and 18t by a combination of the actions of the aforementioned groups. The resulting loss of the sense of belonging, hope, and confidence in government institutions are among the many obstacles to the educational and social development of displaced persons, which are necessary to achieve a participatory nation and socioeconomic development.The insecurity caused by the violence reduces the incentive to invest in agriculture and, more importantly causes a bias in the pattern of investment towards activities that are relatively non-intensive in the use of labor which may encourage landowners to invest in livestock rather than crops. With the growth of the paramilitary movement and increased buying up of land in rural areas by drug traffickers, the problem has become increasingly complex with land having become even further concentrated in the hands of the old elite and drug traffickers as evidenced by the proportion of large land holdings over 500 hectares which increased from holding 32t of total lands in 1984 to 45t in 1997. Trade reforms in the last decade have opened up previously protected markets for some agricultural products and lowered their price. This together with the large land owner's preference for cattle ranching has subverted the traditional agricultural development model in many rural areas, reducing the land planted to food crops, altering the ecological balance, and lowering rural employment opportunities (see Annex 14). At the same time, those peasants who move to remote and marginal areas such as the Amazon to avoid the violence, often participate in growing illicit crops. These in turn are sprayed with chemicals that harm the environment and damage health. Untapped agricultural production. The liberalization of the economy coupled with an overvalued peso and falling world prices for grains and other commodities has led to a re-composition of agricultural production. This is evidenced by a decline over the last decade of more than a quarter in the production of annual crops, an area equivalent to 870,000 hectares. During the same period, perennial crop production increased by 20t or 200,000 hectares. Other factors such as the high cost of and limited access to capital, as well as the prevalence of rural - 2 -  violence (see preceding paragraph) have impeded further cultivation of perennial crops leaving the nation's potential production of these high-margin crops untapped. In the case of palm oil, only 5t of the potential land is currently cultivated, that is 148,360 out of 2,500,000 hectares. The challenge of the rural sector is to increase its competitiveness in a market economy context. With the recent depreciation of the peso to levels comparable with the early 1990s in real terms, the rural sector for the first time since the partial liberalization of the economy in 1991, has a more level playing field to increase its competitiveness vis-a-vis foreign players. This is especially important as it is expected that developed countries will make a serious effort in opening up their markets for agricultural products from developing countries in the context of on-going trade negotiations coordinated by the WTO in the coming years. The government seeks to promote perennial crops and thereby lower unemployment levels as a development option in rural areas. This goal requires a mixed strategy based on farming systems that combine both perennial crops (agro-ecological conditions permitting) with subsistence and annual crops as well as animal husbandry. This strategy allows farmers to reduce debt levels, diversify risk and increase short-term income. Access to finance. Lending in Colombia has virtually come to a standstill in all sectors of the economy. Supply has been affected by the large loan loss provisions required of banks to cover their past due portfolio while demand has been limited by the extremely high nominal and real interest rates. Agricultural lending has been particularly hard hit, with lending to small farmers dropping more than 80t from 1996 levels. Although loan levels have recovered slightly, this is due in large part to a government debt forgiveness program, which required that a portion of the past due loans be restructured. Historically, a large proportion of loans has been financed with forced investments, which are then rediscounted to banks as directed loans at lower than market rates. Banks' own funds and cooperatives supply a smaller portion of agricultural lending. The Caja Agraria, the government owned and controlled agrarian bank, stopped lending in the second semester of 1998 when, already technically bankrupt, its cash flows could no longer cover liabilities. It has been in the process of liquidation since mid-1999, although the Banco Agrario was created to replace the defunct Caja Agraria. Dozens of cooperatives have been liquidated, and the bank with the second most important presence in the countryside, Banco Cafetero, has had to be recapitalized. The lack of credit is particularly acute for smaller farmers who have little or no collateral and for those producers interested in making long-term investments in perennial crops. Although the government provides a fund that guarantees up to 80t of the principal of loans to farmers, banks are still reticent to lend to this group. A case in point is the Banco Agrario which has adopted extremely conservative lending policies requiring 100w in admissible guarantees and will not accept land as collateral; although forward contracts are accepted. The lack of guarantees for the remaining 20t of principal have all but closed lending to producers of crops not directly and formally linked to commodity markets.Long-term financing is all but unavailable due to structural issues that include a history of high albeit decreasing inflation and constant bouts of illiquidity. Despite a fall in inflation from 32t in 1990 to an estimated 8t in 2001, real interest rates have not fallen and remain at 15 to 25t for agricultural and consumer lending respectively. The 15t real interest rate charged for agricultural loans reflects a ceiling imposed by the Government-owned agriculture bank - -3 -  FINAGRO. High interest rates inhibits investment in long-term projects. This situation has led various government institutions to study the engineering of financial instruments that may provide long-term finance alternatives for institutional investors. These include capital markets initiatives such as securitization and hedge instruments. However, in the short-term, traditional lending through financial intermediaries as well as financing through input suppliers, distributors and agribusiness are more viable, flexible and accessible alternatives. The project aims to build on these alternative by supporting partnerships between small farmer producer organizations and agribusiness that will facilitate access to markets for small farmers. Unequal land access. Concentration indices in the Colombian economy are among the highest in the world, and land ownership is no exception as evidenced by a GINI coefficient of 0.84. The provinces with the highest proportions of large farms are located in the Caribbean coastal lowlands and in the Orinoco savanna region east of the Andes. Inequitable distribution of land in rural areas has been reinforced and exacerbated by various factors including: (i) tax incentives for investments in agriculture which stimulated the purchase of land by rich individuals in order to off-set taxes related to nonagricultural enterprises; (ii) legal impediments to the smooth functioning of the land rental and sales markets; (iii) credit and interest rate subsidies plus disproportionate protection of the livestock subsector which provided incentives for agricultural cultivation with very low labor intensity and (iv) the use of land for money laundering purposes. In spite of more than half a century of land reform, land distribution has not improved and may have worsened. Efforts to redistribute land within the agricultural frontier were unsuccessful, and most land reform has been conducted on the frontier through government directed and spontaneous colonization; however, the GINI coefficients for land ownership in these areas are not better than the national average. For example, in Caqueta, an area of intensive government-directed colonization financed with World Bank funds in the late 60's and 70's the GINI coefficient is .74 as measured in terms of land productivity. By passing Law 160 in 1994, Colombia embarked on a new strategy of voluntarily negotiated land reform that aims to provide the poor with grant and loan assistance to buy the land that they themselves have identified and negotiated and which gives greater power to local institutions, reducing the role of INCORA. Detailed features of voluntarily negotiated land reform include: (i) poor beneficiaries are given a subsidy to cover 70 percent of the cost of establishing a family farm; the remaining 30 percent of the cost would be financed by bank loans; (ii) establishment of a family farm is considered more than just the mere transfer of land and includes the cost of purchasing land, on-farm infrastructure, housing and technical assistance; (iii) beneficiaries identify properties they wish to buy and negotiate directly with landowners; (iv) proposals for the establishment of family farms are competitively evaluated, based on their economic viability; and land reform procedures are decentralized, giving power to local governments and communities to influence the pace and direction of land reform. A World Bank supported land reform pilot successfully applied this approach in five municipalities in 1997-98. However, as far as government-directed programs go, corruption, inefficiency and the unwillingness to utilize market mechanisms to establish land prices have resulted in an odd sort of speculation where poor land is bought and held until public funds become available to sell at a price established between the owner and - 4 -  bureaucrats. Government strategyRural Sector Policy. The rural policy framework established by the Ministry of Agriculture and Rural Development is based on the overall National Development Program of the Government which pursues integration of the rural sector in the national economy through policies that generate favorable conditions for increasing its competitiveness, equality and sustainability, while taking into account its diversity and complexity. A guiding principle in the formulation of this policy framework is the view that the roles of the public and private sector are complimentary and the rejection of a dichotomy between regulation and liberalization. In this context, it is explicitly stated that resolving the existing profound socioeconomic inequalities in the rural sector can not be left entirely to the free play of market forces and requires an active role of the state in specifically defined areas. At the same time, it is recognized that the effectiveness of rural policies is conditioned by factors that are not entirely under control of the Ministry of Agriculture and Rural Development. These factors include: (i) progress in the peace process as determinant for risks associated with private sector investment in rural areas; (ii) macro-economic environment, particularly exchange and interest rate, as determinants of financial feasibility of investment opportunities; (iii) the need to maintain coherency between internal policy and international agreements as limiting factor in the choice of instruments; and (iv) fiscal situation as determinant for available resource envelope to implement rural policies.In general terms the rural policy framework in Colombia consists of four pillars. The first pillar includes instruments aimed at promoting investment in the sector by: (i) promoting the availability of venture capital for the sector; (ii) providing incentives for capital investments; (iii) subsidizing land improvements in irrigation and drainage; (iv) reducing risks through crop insurance and investment guarantees; and (v) restoring creditworthiness of farmers through support for farm debt restructuring. The second pillar consists of instruments that aim to promote agricultural technology development and animal health. Under this pillar, support is provided to agricultural research, extension and training, phytosanitary services and environmental management. There is a general trend towards making support provided under this pillar more demand-driven and to improve quality by relying on more competitive selection processes. The third pillar includes instruments that are aimed at promoting rural development through targeted interventions focusing on the poor and marginal groups. Under this pillar, attempts are made to address the highly unequal distribution of land in Colombia through voluntary negotiated land reform in the context of the implementation of productive projects aimed at establishing viable family farms. Another important initiative is the provision of subsidized housing for low income rural households. Other measures under this pillar include the promotion of micro-enterprises and the stimulation of rural employment. The fourth pillar of the rural policy framework deals with both foreign and domestic trade. With respect to foreign trade, the rural policy framework is clearly embedded in the foreign trade agenda of the country which seeks to ensure stable access of consumers to affordable products of appropriate quality, while recognizing the rights of rural producers as an integral part of the Colombian society based on a dynamic relationship between city and countryside. In that sense, trade liberalization and integration of the rural sector in the international economy is not seen as an objective in itself, but a mean to capitalize on comparative advantages of the sector. In practical terms this implies - 5 -  that in international trade negotiations Colombia continues to seek consolidation of reasonable levels of protection for the most sensitive food crops, maintains a preference for incremental and gradual changes, and keeps working on correcting distortions and unfair practices by other nations.An interesting twist to the rural policy framework is the attempt by the Ministry of Agriculture and Rural Development to integrate its implementation in the Programa de Oferta Agropecuaria, PROAGRO, that uses the value-chain as a transversal axis to define the application of instruments and allocation of incentives based on Sector Competitiveness Agreements (Acuerdos Sectoriales de Competividad) with the private sector. Under these Agreements, the relevant parties in a specific value chain prioritize actions to increase production and improve competitiveness of the product in question. Agreements have been specified for poultry, eligible oils, dairy, potato, cacao, cotton, fruits and forestry products. The potential advantages of this approach are twofold. First, it ensures that the application of instruments and allocation of incentives becomes more demand-driven and properly aligned with (sub)-sector specific constraints, thereby improving the effectiveness of the rural policies that are pursued. Second, by entering into agreements with the private sector, public resources available to implement rural policies could be leveraged with contributions from the private sector. This is important as the sum of domestic support measures, price support and export subsidies amounted to less than 29 of the value of agricultural production in 1998. The need for leverage became even more acute in 1999 when the budget for domestic support, which made up 85% of the total in 1998, was slashed by 40% in 1999.No ESW has been conducted recently to assess the effectiveness of the rural policies pursued by the Ministry of Agriculture and Rural Development. However, based on the facts presented in the preceding section and available anecdotal evidence, the following picture is thought to be roughly adequate in qualitative terms:n Despite efforts to increase access of rural producers to capital, it is widely acknowledged that the lack thereof continues to be a serious constraint. With the closure of the Caja Agraria in 1999, which used to provide 90% of all credit to small farmers, and the subsequent consolidation of its activities in the Banco Agrario, the situation of small farmers in this respect might have worsened. This also evidenced by the fact that despite an increase in the credit amount financed through FINAGRO (second-tier financial institution), the number of loans actually fell by 14%. n Despite efforts to make land reform more effective by promoting voluntary negotiated schemes in the context of productive projects, the existing institutional framework has not been conducive in bringing about significant improvements in the distribution of land which is generally regarded as an important condition to stimulate the sector, activate employment, increase rural income and reduce poverty and emigration.n Although the focus on the value chain as a conceptual tool to integrate the implementation of rural policies is valuable, this initiative has stopped short of realigning the existing institutional framework in accordance with this new focus. The institutional framework therefore remains far too complex and fragmented to effectively deliver results on the ground while at the same time imposing significant transaction costs on rural producers who try to access instruments and incentives provided under the system.n By having a specific pillar for rural development within the rural policies framework, there is a certain degree of compartmentalization between instruments and incentives for small farmers on one hand and medium- and large farmers on the other hand. The value - 6 -  chain approach promoted under PROAGRO aims to bridge this division, although up till now there has been a tendency to particularly work with medium- and large farmers in the formulation of the Acuerdos Sectoriales de Competividad.n Even if policies would be exactly right and their implementation as effective and efficient as they could be, it should most probably be fair to recognize that with an annual budget that amounts to less than 2t of agricultural GDP, the Ministry of Agriculture and Rural Development faces an enormous challenge to bring about changes at the aggregate level.Peace Process. The Government strategy to stimulate rural development is embedded within the broader peace process of the country. The Government of Colombia and the FARC agreed in November 1998 to establish a 42,000 square kilometer demilitarized zone ('zona de despeje') in the south-eastern department of Caqueta. The rationale behind the creation of the zone was to facilitate peace talks with the FARC. These talks were formally inaugurated in January 1999, but yielded few tangible results. The perception was rather that the demilitarized zone quickly had become a kind of sanctuary for the FARC, allowing them to set-up a de facto local government and the opportunity to undertake a major rearmament program. Faced with this situation the Government of Colombia developed a Plan for Peace, Prosperity and Strengthening of the State (Plan Colombia) which was presented in September 1999. Plan Colombia is an integrated strategy that seeks: (i) to promote the peace process; (ii) revive the economy; (iii) combat the narcotics industry; (iv) strengthen the democratic pillars of the Colombian society; (iv) promote reform of the justice system; (v) protect human rights; and (vi) foster greater democratization and social development. The Plan calls for an expenditure of US$7.5 billion over a four year period of which some US$3.15 billion would be allocated within the central budget and US$4.35 billion is sought from the international community as well as domestic sources. The US Congress in June 2000 approved a US$1.3 billion aid package; most of which for military support, but about US$250-280 million has been earmarked for social development programs. At a meeting in Bogota in October 2000, the EU, its member states and other donors pledged their own support to the peace process, amounting to about US$500 million. In addition, the World Bank and the IMF have allocated about US$900 million to social development, employment and job training programs under the Plan. Hence, with current commitments at US$2.7 billion, there remains a gap of US1.65 billion to be filled. The EU and Latin governments as well as many NGOs have expressed serious reservations about Plan Colombia. Also the guerrilla groups have repeatedly denounced the package. Aspects of concern include: (i) lack of a clear strategy for peace; (ii) focus on a military response to the conflict; (iii) focus on eradication of drugs which are feared will have a negative impact on human rights and democracy; and (iv) environmental impact of coca spraying, including allegations that it is killing food crops and causing health problems and water contamination. The ELN has sought to participate in the peace process on equal footing with the FARC, but the Government of Colombia has opted to deal with it separately in parallel peace talks. The ELN is prepared to discuss the issue of a cease-fire and the Government agrees in principle to grant the group a 'safe-haven' in northern Colombia to conduct negotiations. With the peace process stalled for most of the second semester of 2000, a meeting between the Government and the FARC on February 8, 2001 resulted in the extension of the life of the demilitarized zone for a further nine months and an agreement to return to negotiations, to begin with the discussion of a cease-fire under an -7 -  accelerated timetable, thereby revitalizing the process. Although it is difficult to asses what the future will bring, there are a number of factors that are most likely to somehow shape the peace process. n Since Plan Colombia can only be fully implemented if the EU and its member states are prepared to increase their financial contribution, this is expected to give them considerable influence in the direction of the program which they could use by insisting on a less militarized approach.n The extent to which the new US Government is susceptible to criticism that its current support has militarized the fight against illicit drugs by supporting the Colombian army rather than the Colombian National Police.n With the end of his four-year term approaching in 2002, time will be increasingly against the President of Colombia to reach a breakthrough under which both guerrilla groups agree on a cease-fire and commit themselves to respect international humanitarian law.n Although the peace talks still enjoy the support of important civil sectors, including the church and NGOs, there is an apparent shift in public opinion in Colombia towards a more hardening stance.Following Law 487, the Investment Fund for Peace was established in 1998. The objective of this Fund is to capture and channel resources to finance the productive and social aspects associated with Plan Colombia. The Fund has no judicial status and is ascribed to the Administrative Department of the Presidency. For the purpose of promoting productive investments in areas that are particularly affected by the violent conflict, it has created the program "Campo en Acci6n". This program builds on the concept of productive partnerships as envisaged under the Project. 2. Objectives The project development objective is to establish a successful program of productive partnership subprojects between agribusiness and small farmer producer organizations. It will do so by providing an integrated package of incentives and assistance for the development and implementation of demand-driven, sustainable, productive partnership subprojects which generate income and employment opportunities for rural communities. In achieving this objective, it is expected that the project would contribute to: (i) reactivating the rural economy; (ii) improving the welfare of poor rural inhabitants; and (iii) generating an enabling environment for the peace process in the country; although the project would not actively resolve social or armed conflict.Under the project, a productive partnership subproject is considered any collaborative arrangement between a small farmer producer organization and an agribusiness enterprise that aims to reduce technical, commercial, financial and/or social risks associated in pursuit of potential productivity and income gains in a particular value-chain in such a manner that creates a win-win situation for all participating parties. Based on the experience of prototype partnerships developed as part of the project preparation process, this typically means that by entering into a productive partnership, members of small farmers producer organizations obtain access to relevant markets; usually output markets, but also critical inputs (e.g. high quality seed) or factor inputs (particularly credit for working capital purposes). The advantages for agribusiness firms to enter into partnerships with producer organizations typically include opportunities to expand food processing activities by securing supplies from small producers that meet certain predetermined quality standards, without the need to expand own production capacity. -8-  3. Rationale for Bank's Involvement The economic and political situation in Colombia today is clearly one fraught with challenges. A strong argument can be made for the World Bank to step up assistance at this time of need and provide support to the Government for projects promoting development and peace - especially when private and foreign investments have been reduced. In effect, the Bank has done so last year when it pledged its support to the social aspects of the Plan for Peace, Prosperity and Strengthening of the State.Bank participation would leverage international expertise in demand-driven rural investment programs, crop production models, partnerships between local communities and the private sector, formation of social capital (e.g. strengthening farmer cooperatives) and land reform. Both the acquisition of loans by producer organizations as well as the proposal that at least a portion of the modular incentive be repaid to the trust for further investment either in the project or social investments deemed necessary by the Steering Committee of the Partnership, require that microfinance mechanisms be introduced into the development and implementation phases of the subprojects. Colombia has had relatively few successful microfinance experiences particularly in rural areas, and the project will need apply results from other Bank experiences in this area. This should be done in coordination with microfinance development currently being coordinated between the Bank, DNP and the Ministry of Agriculture and Rural Development. Moreover, the project would build upon the Bank's significant experience in the rural development sector in Colombia: community participation and monitoring and evaluation mechanisms in the Magdalena Medio LIL; negotiated land reform through initial preparation of a proposed Market-Assisted Land Reform Support investment project; and demand-driven rural investment programs in the Peasant Enterprises LIL. Finally, the Bank's involvement in the project also reflects an increasingly important partnership with the Colombian Government to address issues of rural violence and can draw upon the recently completed sector work on violence: Violence in Colombia: Building Sustainable Peace and Social Capital. 4. Description 1. Preparation of Productive Partnership Subprojects 2. Implementation of Productive Partnership Subprojects 3. Project Implementation Arrangements and Knowledge Management 5. Financing Total ( US$m) Total Project Cost 51.82 6. Implementation Implementation Period. The loan is expected to become effective November 15, 2001 for a five year period through November 2006.Guiding Principles for Institutional Framework. The nature of the project with its focus on facilitating partnerships between agribusiness and small farmer producer organizations that are economically feasible and sustainable, implies the need for up-front recognition of a rather limited role of the public sector in the implementation of the project. It is this premise, while taking into account the experiences generated by the institutional innovations in other projects in the Colombia portfolio, that provides the building block for the proposed institutional framework of the Productive - 9-  Partnership for Peace Project. The implementation structure of the project is based on three principles: (i) responsibilities of public sector are specified in terms of orientation and coordination of the project; (ii) execution of project activities is completely decentralized and transferred under the umbrella of the private sector; (iii) ample scope for participation by relevant stakeholders is structured through a clear distribution of roles and responsibilities that takes into account recognized competences and capacities of each party. At the same time, operational procedures are designed to provide transparent rules of the game, clear eligibility criteria for the identification of beneficiaries and allocation of resources, efficient flow of funds and adequate supervision arrangements.Borrower and Executing Agency. The Borrower of the loan to finance the project would be the Republic of Colombia represented by the Ministry of Finance. The Executing Agency would be the Ministry of Agriculture and Rural Development. Since the Project would also tap into the fiscal space of the Investment Fund for Peace to finance productive partnership subprojects in areas prioritized under Plan Colombia, this Fund, through the Administrative Department of the Presidency, would be co-Executing Agency for the purposes of the Project. Project Oversight and Policy Guidance. Project oversight would be conducted by a National Technical Committee established in the Ministry of Agriculture and Rural Development. This Committee would be presided by the Minister of Agriculture and Rural Development or his/her delegate (Vice Minister of Agriculture or Director of Agricultural Policies). Other members of the Committee would include the Director of Agricultural Development in the National Planning Department; the Executive Director of the Investment Fund for Peace or his delegate for agricultural affairs; and a representative of the International Cooperation Agency, contracted for the administration of project resources. To facilitate participation of a relevant range of stakeholders at the strategic level of the Project, a representative of the financial sector, a representative of agricultural producers organizations and a representative of small farmers (campesino) organizations would also be included in the National Technical Committee. The Minister of Agriculture and Rural Development would appoint these representatives, following criteria specified in the Project Administrative Manual. In case counterpart funds for the purchase of land under productive partnership subproject originate from INCORA, a representative of this institution would also participate in the National Technical Committee for this particular purpose. In general terms, the National Technical Committee would ensure consistency of project implementation with agreed conceptual and technical design. By doing so, it would approve Annual Operative Plans and Project Manuals, review project monitoring reports, appoint the project management team and formally assign the Modular Incentive to productive partnership subproject that meet established eligibility criteria. Project Management. The coordination of project implementation at the operational level would be the responsibility of the Project Coordination Group to be established in the Ministry of Agriculture and Rural Development. This Group would consist of a team of dedicated professionals with relevant disciplinary backgrounds for the purposes of the project and headed by the Project Manager. The Project Manager would report to the National Technical Committee in general and to the Minister of Agriculture and Rural Development in particular. The Project Coordination Group would have the following functions: (i) elaborate Annual Operative Plans and ensure their execution once approved; (ii) elaborate semestral monitoring reports - 10 -  with approved Annual Operative Plan as reference; (iii) elaborate and propose modifications to Project Manuals and Guidelines; (iv) establish a long list of eligible Technical Assistance Providers; (v) conduct a public information campaign regarding the objectives and rules of the game of the project; (vi) select productive partnership ideas presented jointly by interested partnership participants for pre-investment support; (vii) arrange for the contracting of Technical Assistance Providers for facilitating the preparation and implementation of productive partnerships; (viii) arrange for the contracting of experts for the evaluation of detailed productive partnership proposals; (ix) establish agreements with representatives of approved productive partnerships and trust fund companies for the administration of the modular incentive; (x) arrange for the contracting of the external auditors of the project; (xi) arrange for the contracting of an independent firm to evaluate the effects and impacts of productive partnerships; (xii) ensure compliance with agreed norms and procedures specified in the Loan Agreement; and (xiii) interact with the World Bank regarding all project related themes, including the preparation and presentation of reports and no-objection requests and the coordination of supervision missions.Project Implementation. To support the preparation of productive partnership proposals and to facilitate the implementation of approved productive partnership subprojects, Technical Assistance Providers would have an important role under the project. These organizations would be preferably NGOs or consulting firms and comply with minimum eligibility criteria established in the Operational Manual of the Project Productive partnership participants could select eligible Technical Assistance Providers from a long list established by the Project Coordination Group. Technical Assistance Providers would be contracted by the International Cooperation Agency, following instructions from the Project Coordination Group. Technical Assistance Providers may either form consortiums with other organizations or request that the PCG permit the outsourcing of to subcontract some specialized services in the preparation of productive partnership proposals for which they would not have in-house capacity (detailed eligibility criteria and TORs are presented in Annex 2 and Annex 11).Productive Partnerships. In order to put in practice the principle of self-management by productive partnership participants, the modular incentive provided under the project through Cost Sharing Transfers would be disbursed into a trust fund account hold in a Trust Fund Agency supervised by the Superintendent of Banks. The beneficiaries of this trust would be the members of the small farmer producer organization participating in the approved productive partnership. The trust fund would receive instructions from the Partnership Steering Committee, consisting of two members of the small farmer producer organization and two representatives of the participating agribusiness. This Committee would have authority to use the resources of the trust fund according to the approved investment plan of the productive partnership. Beneficiaries would have a share in the trust, which they would lose if they leave the partnership before the implementation plan has been completed. Said plan would most likely outlive the spending of the modular incentive, and most likely last during the life of any loans guaranteed by the trust and would be previously agreed upon by the various partners. Once the partnership subproject has been implemented according to the Cooperation Agreement signed with the project, ownership of the assets will be distributed among the beneficiaries in accordance with their shares unless another agreement is reached; e.g. distribution of all assets to a cooperative.Procurement. - 11 -  The Ministry of Agriculture and Rural Development, through the Project Coordination Group, would be responsible for procurement. An International Cooperation Agency would be contracted to assist in procurement and administrative services (except for Cost-Sharing Transfers), following a competitive process acceptable to the Bank.Under the Cost-Sharing Transfers to support Productive Partnership subprojects, funds would be transferred into a trust fund account held in the name of the productive partnership beneficiaries at a trust fund agency supervised by the Superintendent of Banks. The trust fund agency would effect disbursements according to the terms contained in the Cooperation Agreement signed by the productive partnership associates and the Project Coordination Group. The partnership through its Partnership Steering Committee would carry out the needed procurement of works, goods and services being financed according to the agreed implementation plan. A Project Operational Manual for Productive Partnerships will contain, in addition to eligibility criteria and other aspects, the procurement procedures to be followed. Such procedures will require price comparison of three price quotations, allowing sole-sourcing in cases where only one supplier exists in the area. Depending on the size of individual contracts to be financed under the partnerships, a threshold for open competition may be set during appraisal. Accounting, Financial Reporting and Auditing Arrangements. The Ministry of Agriculture and Rural Development, through the Project Coordination Group would be responsible for all financial management aspects of the project. During Appraisal, a financial management assessment has been conducted to define the required support to the Ministry to effectively assume all financial management functions along the lines as spelled out in Annex 6. An action plan has been agreed that would bring the financial management capacity of the Ministry in line with Bank requirements. 7. Sustainability The economic and financial analyses will provide information on the overall viability of the productive partnership subprojects. The cost recovery mechanism that will be promoted for the Modular Incentive will take advantage of the flexibility of trust law, which, in lieu of the onerous restrictions applied by Colombian banking law to community savings vehicles could provide an alternative to better link small farmers with the formal financial sector, thereby contributing to the creation of a more conducive financial environment for future investments. The application of beneficiary eligibility criteria will help ensure that the benefits of these subprojects accrue to low-income and other disenfranchised groups. This focus will help ensure that the subprojects are viewed favorably by insurgent groups and thereby reduce the risk of their interference. With respect to the environment, detailed guidelines have been specified as to the requirements for EA review and approval for subprojects (see Annex 13). It is also believed that the long term viability of productive partnership subprojects will be enhanced by taking into account the labor, financial and environmental track record of interested private sector partners in the subproject selection process. 8. Lessons learned from past operations in the country/sector The project design integrates several important development themes based in part on lessons learned from related projects. These lessons include:Rural development. The project specifically build on lessons learnt from the Rural Development Investment Program (RDIP) in Colombia - 12 -  which was financed by the Bank from 1990-94 Implementation Completion Report No. 16721; Colombia - Rural Development Investment Program (Loan 3250-CO). These are as follows: (i) a flexible, open design is needed for programs targeted to local governments due to the enormous diversity of capacity and socio-economic conditions in Colombia; (ii) a simple monitoring and control system should be in place from the start of the operation in order to rapidly identify and correct problems; (iii) it is advisable to separate monitoring and evaluation functions, and rely on an independent agency to conduct periodic impact evaluations; and (iv) the process of designing subprojects should be highly participatory, drawing on the contributions of municipal governments and local campesino organizations.Social capital. A main objective of the project is to develop social capital in conflictive areas in Colombia. The Magdalena Medio and Peasant Enterprise Zones LILs highlight a number of challenges on this topic. One of the most important is the complexity of the armed conflict and difficulties in overcoming ideological differences and creating mutual interest around development programs. The importance of identifying an impartial group (like the Consortium) in getting a close feel of the dynamics with a particular location should not be underestimated.Violence. The recent sector work on violence in Colombia sheds light on the key development constraint in the country today. The report provides a conceptual framework that identifies a continuum of violence, their underlying causes, and interventions recommended to reduce violence. The importance of partnerships and small-scale, 'bottom-up' projects are two important findings from the report that have been incorporated into the project design.Land ownership. The proposed project design is based upon several lessons learned from recent experience in Colombia on market-assisted land reform. These lessons stress the importance of: (i) implementing land reform through voluntary deals between willing buyers and interested sellers rather than through administrative procedures followed by bureaucrats; (ii) providing a subsidy for a package of investments including land, on-farm complementary infrastructure, inputs and technical assistance aimed at the establishment of viable family farms rather than only subsidizing a transfer of land; (iii) using mechanisms of social control in a decentralized setting for transparent selection of beneficiaries rather than administrative procedures applied in far-away bureaucratic and politicized agencies; (iv) avoiding that beneficiaries are forced to farm collectively; and (v) ensuring an enabling policy and regulatory environment to avoid that land reform is only a one-time redistribution. Agriculture and Partnerships. The setting up of a development process based on Productive Partnerships requires that proper mechanisms are set in place to provide participating farmers with "independent" sources of technical assistance that can be used to counterbalance excessive monopoly situations and relationships with suppliers and buyers. It is also necessary to define the contractual and arbitration and conflict resolution mechanisms, which would guarantee the implementation of the partnerships, as well as operational methodologies and monitoring and supervision mechanisms that would ensure transparency in financial transactions and provision by government of matching grants. 9. Program of Targeted Intervention (PTI) Y 10. Environment Aspects (including any public consultation) Issues : During project preparation, six environmental - 13 -  assessments for the pilot productive systems were prepared by local consultants, under TORs acceptable to the Bank. The reports consisted of an Environmental Impact Assessment, an Alternative Technology Assessment and an Environmental Mitigation Plan. The lessons learned from contracting, implementing and reviewing these EAs have been used to design the environmental assessment methodology for the project and to design specific environmental activities which were identified as priorities. This project will likely result in both a shift in crop cultivation to high-margin, permanent crops and expansion of agricultural lands. One objective of the project is to reduce pressure on land caused by environmentally unsustainable agricultural practices, such as misuse of agro-chemicals, cultivating annual crops in frontier areas and raising livestock in an unsustainable fashion. Nevertheless, production and expansion of both permanent and transitory crops could result in negative environmental impacts from, among others, construction of roads and other infrastructure, technology changes in processing phases, changes in use of pesticides, potential encroachment on natural habitats, etc. Many negative effects of subprojects will be avoided by following a detailed methodology for environmental screening and assessment. Any remaining negative impacts will be mitigated through use of operational manuals, guidelines and development of environmental management plans, all to be financed by the project. Where appropriate, these guidelines will detail requirements for IS09000 certification. 11. Contact Point: Task Manager Martien Van Nieuwkoop The World Bank 1818 H Street, NW Washington D.C. 20433 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending June 1, 2001. - 14 -