Malawi - Agricultural Services Project

Document of The World Bank FOR OFFICIAL USE ONLY gY ' g W Report No. 11602-MAI STAFF APPRAISAL REPORT REPUBLIC OF MALAWI AGRICULTURAL SERVICES PROJECT MAY 24, 1993 FILE COPY Report No.:11602-MAI Type: (SAR) Title: AGRICULTURAL SERVICES PROJECT Author: ANSON, RICHARD Ext.:34397 Roorn:J11167 Dept.:AF6AG Southern Africa Department Agriculture and Environment Operations Division This document has a restricted distribution and may be used by recipiei ts only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Malawi Kwacha (MK) US$1 = MK 4.0 MK1 = US$0.25 ACRONYMS ADB African Development Bank ADD Agricultural Development Division ADMARC Agricultural Development and Marketing Corporation ARC Agricultural Research Council ASP Agricultural Services Project ASSC Agricultural Sector Steering Committee CAETO Chief Agricultural Officer CARO Chief Agricultural Research Officer CMEU Central Monitoring and Evaluation Unit CVO Chief Veterinary Officer DAET Department of Agricultural Extension and Training DAHI Department of Animal Health and Industry DAR Department of Agricultural Research DO Development Officer DOI Department of Irrigation EC European Community EEC European Economic Community EPA Extension Planning Area FA Field Assistant FATOT Field Agricultural Training of Trainers FHA Farm Home Assistant FNU Food and Nutrition Unit GTZ German Agency for Technical Cooperation ICB International Competitive Bidding LCB Local Competitive Bidding MOA Ministry of Agriculture NARP National Agricultural Research Project NGO Non Governmental Organization NRDP National Rural Development Program NSCM National Seed Corporation of Malawi NSO National Statistical Office PM Program Manager (ADD) PO Project Officer PS Principal Secretary PSC Project Steering Committee PSIP Public Sector Investment Program RDP Rural Development Project SFFRFM Smallholder Farmer Fertilizer Revolving Fund of Malawi SMS Subject Matter Specialist SSI Small Scale Irrigation TMS Transport Management System VA Veterinary Assistant VAS Visual Aids Section  MALAWI FOR OFFICIAL USE ONLY AGRICULTURAL SERVICES PROJECT TABLE OF CONTENTS CREDIT AND PROJECT SUMMARY .......................... i I. BACIKGROUND ....................................... 1 A. Introduction . .................................... 1 B. Macroeconomic Setting ............................. 2 C. Agriculture Sector: Key Features and Performance .... ........ 3 D. Smallholder Constraints and Potential .................... 5 E. Government Sectoral Objectives and Strategy ............... 7 F. IDA Assistance Strategy ............................ 7 HI. AGRICULTURAL SERVICES: ARRANGEMENTS, ISSUES AND STRATEGIES .................................... 8 A. Institutional Arrangements ........ ................... 8 B. Agricultural Research .......... .................... 10 C. Agricultural Extension .11 D. Livestock Field Services .......... .................. 12 E. Input Supply and Agricultural Produce Marketing .... ......... 12 F. Small-Scale Irrigation . .............................. 14 HI. THE PROJECT...................................... 14 A. Project Design Considerations .14 B. Project Rationale, Objectives and Summary Features .... ....... 16 C. Detailed Features . ................................ 17 IV. PROJECT COSTS AND FINANCING ........ .. ............ 28 A. Financing .28 B. Procurement ........... 29 C. Disbursements ................................... 31 D. Accounts and Audits ................ 32 This report is based on the findings of an appraisal and post-appraisal mission which visited Malawi in July and November of 1992, which comprised Messrs/Mmes R. Anson (Mission Leader, Sr. Agricultural Economist); E. Gadzama (July mission, Women in Agriculture); R. Gopalkrishnan (Sr. Procurement Specialist); S. Hiwa (Ag. Program Officer, Resident Mission); Z. Matmor (Sr. Extension Specialist); P. M'buka (Sr. Ag. Services Specialist, Resident Mission); V. Scarborough (November mission, Ag. Economist); L. Schwartz (July mission, Ag. Economist); V. Venkatesan (July mission, Sr. Extension Advisor); A. Yates (Sr. Research Specialist). In addition, several GTZ (Germany) consultants participated in the mission to assist MOA finalize the design of several subcomponents. C. Dickerson (IFAD) participated in the post-appraisal mission. Messrs/Mmes A. Spurling (Principal Research Specialist) was the Lead Advisor; A. Rioust-de-Largentaye and K. Saito were peer reviewers. C. Helman is managing Division Chief and S. Denning Department Director for the operation. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  V. PROJECT ORGANIZATION AND IMPLEMENTATION .... ...... 32 A. Overall Arrangements .............. ................ 32 B. Research ...................................... 33 C. Extension ..................................... 34 D. Input Supply .................................... 35 E. Institutional Strengthening .......... .. ............... 35 F. Monitoring, Evaluation and Beneficiary Assessment .... ....... 36 G. Training and Technical Assistance .......... ............. 36 H. Implementation Schedule ............. ............... 37 I. Fiscal Impact ..................................... 37 J. Environmental Impact ........... ................... 37 VI. BENEFTIS AND RISKS ................................ 38 A. Benefits ....................................... 38 B. Risks ........................................ 40 VI. ASSURANCES AND RECOMMENDATIONS ................. 41 ANNEXES 1. Summary Features of Malawi's Agricultural Sector ...... ........ 44 2. Organization Charts ................ .................. 53 3. ASP Plan of Action .................................. 56 4. TOR for Public Sector Procurement Reform Program ..... ........ 62 5. ASP Performance Indicators ............ ................ 67 6. Cost Tables ...................... ................. 69 7. Financing Tables ................ ................... 77 8. Medium Term Public Investment Program for MOA and Incremental Extension Operating Costs ....... .. ............ 80 9. Disbursement Schedule ........ ....... ................. 82 10. Improved Accounting Guidelines ............ .............. 83 11. Terms of Reference for Technical Assistance ...... .. .......... 90 12. Terms of Reference for ASP Evaluations ....... .............. 116 13. ASP Implementation Schedule ...11................. l8 14. Supervision Plan ................................. 123 15. Letter of Sectoral Policies and Strategies ......... ............ 124 16. Benefits Analysis: Methods, Assumptions and Results ..... ........ 130 17. Documents in Project File .............. ................ 137 IMPLEMENTATION MANUAL (available on request) Section 1 Review of MOA Organization, Staffing and Functions Section 2 Commodity Research Action Plans Section 3 Extension - Agriculture Section 4 Extension - Livestock Section 5 Extension - Training Section 6 Food and Nutrition Section 7 Program Budgeting and Activities Planning System Section 8 Transport Management Section 9 Agricultural Policy Analysis Training Section 10 Small Scale Irrigation Section 11 Monitoring and Evaluation  i REPUBLIC OF MALAWI AGRICULTURAL SERVICES PROJECT CREDIT AND PROJECT SUMMARY Borrower: The Republic of Malawi. Credit Amount: SDR 33 million (US$45.8 million equivalent) Terms: Standard, with 40 years maturity. Project Description, The Project is designed to help formulate and implement institutional and management reforms in the national research, extension and input supply systems. The Project's key aims are to provide cost-effective and sustainable technologies suitable for a range of smallholders; and to improve smallholder incomes and food security by increasing productivity and diversification, especially among female and resource poor farmers. The ASP is part of a longer-term program to reform and integrate key agricultural services for smallholders. The recent development of two improved hybrid maize varieties and some low cost technologies relevant to smallholders' constraints, and Government commitment to integrating key policy reforms and supporting investments, make it particularly timely to implement this Project. It has been prepared in close collaboration with the Government of Malawi and includes a comprehensive list of performance indicators and key targets, as well as a detailed implementation manual for each component. The project will be implemented over six years and include four components: (i) Agricultural Research will: support priority agricultural research action plans; strengthen research- extension-farmer linkages to ensure the development of appropriate technologies; diversify participation in publicly funded research; activate an umbrella body to help set and update national research priorities and advise Government on allocating public resources; improve research management systems; and enhance researchers' career structures, motivation and accountability; (ii) Agricultural Extension will cover five areas: crops/agro-forestry; livestock; land resources and conservation; small-scale irrigation; food and nutrition. The component will: increase the efficiency of extension delivery through streamlining staffing and organizational arrangements; expand the coverage of smallholders through separating credit from extension, promoting low-cost and proven technologies, strengthening research-extension-farmer linkages, increasing the number of female field assistants, and  ii training field assistants in gender-related issues, particularly nutrition; increase effectiveness through improved and more interactive training, encouraging better quality and consistency of field supervision supported by adequate operational funding, closer monitoring of supervision and rewarding good performance; (iii) Inut= Supply will increase the availability of improved seeds and fertilizers to, and their use by smallholders through supporting the formulation and implementation of seed and fertilizer policy reforms and financing incremental fertilizer; and (iv) Institutional Strengthening of the Ministry of Agriculture to deliver improved agricultural services and technologies in an efficient, effective and sustainable manner to ensure the realization of benefits through changes in the research, extension and input supply systems. The Project will improve: planning and financial management; transport management; procurement; agricultural policy analysis (in-country training); the development of small scale irrigation; and monitoring and evaluation. Project Benefits: The Project will provide two types of benefits: production related and institutional. Production benefits will include: increased adoption of improved seeds, particularly hybrid maize; more efficient and profitable application of fertilizer; use of fertilizer by a larger number of smallholders; wider adoption of agro-forestry, nitrogen-fixing rotations and water and soil conservation methods, and the development and replication of viable technologies for small-scale irrigation. Institutional benefits will include improved institutional mechanisms and capacity to sustain more efficient research and extension, which is responsive to smallholders' needs, especially those of women and the resource poor; improved financial, transport and monitoring capacity to support agricultural services; and a better motivated and trained research and extension staff. The net value of smallholder agricultural production is expected to increase by 35% in real terms by 2002/3 as a result of the Project. The ASP benefits will also be enhanced by several parallel donor projects which aim to provide additional assistance through the ASP framework. Risks Limited Government capacity to formulate and implement the required policy and institutional changes would adversely affect project implementation. This risk will be minimized by ensuring realistic project scope, developing phased implementation action plans prior to project start-up, and providing in-service training and carefully designed technical assistance to build local capacity. A deterioration in economic performance and budgetary funding could undermine the required non-salary recurrent funding of key services. These  iii risks are countered by developing improved methods for allocating recurrent funding, financing incremental funds on a declining basis to ensure phased absorption by MOA, close monitoring, and biennial evaluations. In addition, ASP will provide a framework and mechanisms for more effective donor funding support and collaboration. Economic Rate of Return: Not applicable  iv PROJECT COST SUMMARY Estimated Project Costs Local Foreign Total US$ Milion- Research 9.6 6.0 15.6 Extension 16.2 3.9 20.1 Fertilizers 0.0 9.0 9.0 Institutional Strengthening 4.6 5.3 9.9 Project Preparation 0.2 1.0 1.2 Physical Contingencies 1.4 0.4 1.8 Price Contingencies 4.5 2.7 7.2 Total 36.5 28.3 64.8 Project Financing Plan Local Foreign Total -US$ Million- IDA 26.3 19.5 45.8 ADB 3.9 8.8 12.7 Government 6.3 0.0 6.3 Total 36.5 28.3 64.8 Estimated IDA Schedule of Disbursement Project Year FY94 FY95 FY96 FY97 FY98 FY99 FY2000 TOTAL Annual Disbursements (US$ Million) 5.4 11.4 9.8 6.6 7.3 3.5 1.8 45.8 Cumulative Disbursements (US$ Million) 5.4 16.8 26.6 33.2 40.5 44.0 45.8 45.8  1 MALAWI AGRICULTURAL SERVICES PROJECT I. BACKGROUND A. Introduction 1.1 An Agricultural Services Project (ASP) is needed to support the generation, adaptation, dissemination and adoption of new agricultural technologies and practices in order to increase the productivity of smallholders, particularly among the 75% who are not being reached by current services. To stay ahead of population growth (3.5% in 1991), agriculture must grow at least 4% per year. This calls for a concentrated and sustained effort to address production constraints, including land pressure; poor access to production inputs; low levels of purchasing power; too narrow a range of technology for the differentiated farming environment; declining soil fertility and soil erosion. 1.2 ASP will address these constraints by supporting agricultural research and extension services; increasing the availability of improved seed and fertilizer and strengthening the institutional capacity of the Ministry of Agriculture (MOA). The integrated rural development projects of the 1970s and 1980s devoted considerable resources to expanding rural infrastructure and staffing to improve agricultural services. However, due to inefficient resource allocation, ineffective management and policy constraints, the impact of these interventions has been limited. ASP is different from past projects in the following four ways: (a) ]t will build on Government ownership of its design and implementation. Such ownership was facilitated by several activities including a multi-donor and Government agricultural strategy workshop held in March, 1992. A second workshop was held in November, 1992 to develop consensus on detailed project design, implementation arrangements and action plans. (b) The ASP has been designed in parallel with the preparation of an Agricultural Sector Memorandum and the latter has provided the analytical basis for the Project. It will integrate key policy changes with project investments, to further enhance the adoption of improved technologies. These policy changes include the liberalization of seed and fertilizer markets, activating the Agricultural Sciences Committee, delinking credit and extension, rationalizing the public investment portfolio and improved forward planning in recurrent expenditures. (c) 'he ASP will support promising smallholder technologies which have been recently developed and field tested with success, and which show good prospects of being widely adopted. These include improved "flint" maize hybrid varieties (MH17 and MH18), which have a yield potential of about 3,000 kg./hectare with fertilizer and which could lead to a mini-green revolution in Malawi. In addition, a number of low-cost, productivity enhancing technologies, suitable for resource poor farmers, are now ready for dissemination.  2 (d) The Project will promote improved approaches to the generation and dissemination of technologies to ensure they respond to the varying characteristics of smallholders. Key mechanisms for this include: strengthening research-extension-farmer linkages; improving the criteria for preparing annual research work plans; adopting participatory approaches to training; expanding the role of non-public sector bodies in research and extension (e.g., through contract research and the inclusion of a range of community groups and NGOs in extension), and increasing the accountability of, and incentives for, research and extension staff. B. Macroeconomic Setting 1.3 Malawi is a small, land-locked country with a total area of approximately 119,100 square kilometers, of which 24,200 square kilometers is lake surface. It is bordered on the north and northeast by Tanzania; to the east, south, and southwest by Mozambique and to the west by Zambia. The land area consists of three topographical regions: the northern mountainous region, the central plateau, and the southern lowlands. The population of Malawi is estimated at 8.8 million (1991) and is growing at an annual rate of about 3.5%. The country has one of the highest population densities in Africa with 93 inhabitants per square kilometer of land surface, and 170 inhabitants per square kilometer of arable land. Much of the population suffers from malnutrition, and only two out of three children survive beyond five years of age. Agricultural production has been severely constrained by drought, cassava mealy bug infestation (now largely controlled), the high cost of agricultural inputs such as fertilizers, and increased transport costs due to the civil war in Mozambique. This civil war has also driven some 1,000,000 refugees into Malawi. 1.4 Country Policies. Despite a series of adjustment programs, Malawi remains one of the poorest countries in the world with a per capita GNP of US$240 (1991) and it is extremely vulnerable to external shocks because of its land-locked position and narrow resource base. Although the country has made considerable progress on the macroeconomic front over the past four years, the medium-term economic outlook is highly uncertain due to: * the external shocks and the adverse impact of an unprecedented drought in 1992; and * deteriorating relations with bilateral donors as a result of unresolved issues related to governance. 1.5 Malawi's period of strong growth came to a halt in the early 1980s when the country faced a combination of unfavorable terms of trade, high interest rates, weather-related shocks, and major domestic policy weaknesses. The first series of adjustment operations was a response to this set of shocks. However, while the Government of Malawi (GOM) was adjusting to these shocks, the country was hit, in the mid-1980s, by a worsening of the war and civil strife in neighboring Mozambique which led to a major increase in international transportation costs; increased security-related expenditures and a large influx of refugees. This caused a sharp deterioration in the macroeconomic environment. Despite the partial reopening of the Nacala rail route through Mozambique in October 1989, and recent peace overtures, the Mozambican situation has not eased and remains uncertain. Certain policy responses to this second and more dramatic set of shocks, including expanded fiscal deficits  3 and implementation of import controls, have compounded the difficulties and discouraged private sector investment. The situation was further exacerbated by the severe drought in 1992 which reduced the maize crop by nearly 60 percent. Widespread poverty and food insecurity have resulted in additional foreign exchange requirements of US$236 million for maize imports. Drought-related expenditures for the internal distribution of emergency food aid, water supply rehabilitation, and health programs will further worsen the Government's fiscal difficulties. 1.6 At the May 1992 Consultative Group Meeting held in Paris, bilateral donors and the EC refrained from pledging additional external assistance to Malawi due to governance issues. To close the resulting fiscal and external financing gap, the Malawian authorities implemented an austerity package in June 1992, comprising a 22% devaluation of the Kwacha, strict expenditure controls, and a tightening of the monetary stance. The measures have helped the economic reforms to remain broadly on track. Nevertheless, timely resumption of bilateral and EC external support (eg., balance of payments support) is crucial for the successful continuation of the adjustment program. 1.7 Economic Performance. Throughout the 1980s the Government undertook a broad- based structural adjustment program. These reforms and improvements in short-term macroeconomic management have created a stable macroeconomic environment. After negative growth in 1986 and 1987, GDP (at market prices) grew by 4.8% in 1990 and 7.8% in 1991, restoring per capita GDP growth to a positive level. Agriculture grew at 15% in 1991. Inflation decelerated sharply from an average of about 30% in 1987-88 to 16% in 1989 and 12% in 1991. Real wages have declined. In fact, labor has borne a significant part of the adjustment burden. The fiscal deficit has been brought under control, with net negative domestic credit financing of Government in 1988/89, 1989/90, and 1990/91. This improvement allowed growth in private sector credit of 26%, 59%, and an estimated 38%, respectively in these three years. 1.8 In spite of the breadth of policy reforms and the restoration of macroeconomic stability, significant structural weaknesses remain that impede the development of a sustainable supply response. The productivity of the economy is low, while increased financial flows to the private sector have not resulted in stimulating non-traditional activities. As a result, foreign savings continue to be of critical importance to the economy, with a current account deficit reaching 13.4% of GDP in 1989, and nearly 10% in 1991. In addition, export responsiveness has been impeded by the stagnation of smallholder agricultural productivity and continued population pressure. While the external situation may improve, Malawi must ensure maximum use of its potential to sustain growth. C. Agriculture Sector: Key Features and Performance 1.9 Malawi has 43,400 square kilometers (2.4 million hectares) of arable land. It has limited mineral resources and a climate which only allows for one cropping season a year. However, the country is endowed with moderately fertile soils and ample water resources. 1.10 Agriculture continues to be the economy's backbone, supporting about 85% of the population and accounting for 35 % of GDP and 90% of foreign exchange earnings (1991). Crop production accounts for about 93%, and livestock 7%, of the total value of agricultural output. Exports primarily consist of tobacco (68% of total export revenue in 1991); tea  4 (13%); sugar (9%) and coffee (2%). Maize is the dominant crop and staple food and occupies about 80% of cultivated land. Much of this maize consists of low-yielding local varieties. Other important crops include groundnuts, cassava, cotton, rice, sorghum, millet, legumes, and tree crops. The dominance of maize, coupled with an acute land shortage and low levels of fertilizer use, has resulted in excessive extraction of nutrients from the soil. This has caused a decline in fertility, particularly in the densely populated south. Livestock production includes cattle (Malawi Zebu), goats, sheep, pigs, chickens and rabbitsY 1.11 Since Independence growth in agricultural GDP has varied, averaging about 5% during the 1970s, 1% during the early 1980s, and 2.7% during 1987-90. Throughout the 1980s, agricultural growth was slower than population growth. The main source of growth has been expansion of area under cultivation. Increases in yields have been of secondary importance. Since much of the arable land is already cultivated, future growth will have to come from the introduction of higher yielding technologies. 1.12 Malawi's agricultural sector is characterized by smallholders and estates, differentiated by regulations concerning production, marketing, pricing and land tenure. There is, however, considerable variation within each of these two broad categories. The smallholder sector accounts for about 25% of GDP, 75% of agricultural GDP and 90% of agricultural labor, while the estate sector makes up about 9% of GDP, 25% of agricultural GDP, and 10% of agricultural labor. (Annex 1 provides more details on the agricultural sector, particularly the smallholder sub-sector.) 1.13 The smallholder sector comprises about 1.8 million families, operating under customary tenure on 1.75 million ha, and producing about 80% of food production (mostly for subsistence) and 10% of exports. About 55% of smallholder households cultivate less than 1.0 ha, 31% between 1 ha and 2 ha, and 14% above 2 has' Size of holding is inversely correlated with levels of food insecurity and poverty. Table 1 provides a typology of smallholders, which highlights the need to generate a range of technologies suitable for different socioeconomic groups and agro-climatic conditions. 1.14 Women comprise about 70% of full-time farmers and have primary responsibility for providing family food. About one-third of rural households are headed by women, who face particular constraints regarding access to land, labor, credit, seed, fertilizer and extension. To raise agricultural productivity in Malawi, special efforts must therefore be made to improve the access of female farmers to these inputs. VI According to the 1989 Livestock Census (Department of Animal Health and Industiy (DAHI)) herd and flock figures are: 0.8 million cattle; 0.8 million goats; 0.09 million sheep; and 0.2 miUion pigs. Census figures show considerable annual variation. During the 1980s, livestock populations recorded by the National Statistical Office (NSO) and DAHI were substantially differet. See Government of Malawi, Ministry of Agriculture/Arup Atkins Intenational Limited (1988), National Livestock Development Study. a/ 25% of smallholdors are cultivating less than 0.5 ha (avenge 0.25 ha), and 30% cultivate between 0.5 ha and 1 ha.  5 TABLE 1. A TYPOLOGY OF SMALLHOLDERS IN MALAWI Ae cuWtived (ha) per household by ADD, North to Soulh Houehold characteristics _ Kanga Mzuzu Kaugu Ilongwe Sali- liwonde B]antyre Ngabu 1. Emerging/lurphuamallholdeuwith > 1.50 > 1.00 > 1.00 > 1.50 > 2.00 > 2.00 > 1.50 > 3.00 enough land to produce a surpua (14 %).' l 2. Smallholdeu with enough land to produce 0.75-1.50 0.75-1.00 0.50-1.00 1.00.1.50 1.00-2.00 1.25-2.00 0.75-1.50 1.75.3.00 sufflcient to meet food reuirements (31%).' l 3. Food-deficit Sporadicallydeficit 0.50-0.75 0.25-0.75 0.50-0.50 0.50-1.00 0.50-1.00 0.50-1.25 0.50-1.50 1.00-1.75 househods (55 %). ChronicaUly deficit < 0.50 < 0.25 < 0.50 < 0.50 < 0.50 < 0.50 < 0.50 < 1.00 Source: Naftonal Sample Suney of Agriculburc, MA at Refer to rough estmate of proportion of total rural households. 1.15 The estate sector comprises about 18,000 farms, occupying about 19% of the cultivated area. Average estate size is 42 ha, but only 24% of estate land is cultivated. The sector produces mostly flue-cured and burley tobacco (about 40% of estate cropped area) and maize (about 34%). Other crops grown by estates include tea, sugar, coffee and tree nuts. Until 1991, only estates were granted licenses to grow burley tobacco. They also have easier access to fertilizer and credit, and they have security of tenure which motivates higher levels of investment (and thus higher yields) than are found in the smallholder sector. Due to a rapid expansion of burley tobacco production, the relative contribution of estates to agricultural output has increased over the last five years. Growth in this sector has always been faster than in the smallholder sector (except between 1984 and 1986), reflecting preferential Government policies; better servicing by client-financed research for tobacco and tea; the movement of more productive smallholders into the estate sector, and higher risk exposure among smallholders. During the 1980s and early 1990s, the number of estates grew from 8,400 to 18,000, as smallholders pooled their resources to form a landholding of at least 10 hectares in order to register as an estate. However, many of these 'graduated smallholder' estates have characteristics similar to farmers remaining in the smallholder sector. 1.16 Given this economic structure and these sectoral characteristics, it is not surprising that about 55% of Malawi's population is poor3'. About 78% of the poor are smallholders and 20% are estate workers. The urban poor (2%) are those earning less than minimum wages. Women are disproport- ionately represented among the poor. Female-headed households constitute about one-third of this group and almost half of perennially food-deficit households (i.e. the core poor). D. Smallholder Constraints and Potential 1.17 Slow growth in the smallholder sector has been partly caused by an incentive structure that discriminates against it (e.g., low producer prices and restrictions on growing and selling tobacco) and partly by inadequate agricultural services and technologies. Given small farm sizes and low yields (averaging 800kg/ha for maize), about 75% of households run out of maize three months before the harvest in a normal rainfall year. On smaller holdings, continuous cropping without supplementary nutrients has become the norm, particularly in areas of high population density. Also, 2/ Poor is defined hers as an inability to meet minimum nutritional requimments, equivalent to USS40/year.  6 marginal land, which is not very fertile and often susceptible to soil erosion, is increasingly cultivated. On the majority of small farms soil fertility is declining. However, smallholders with larger holdings (more than 1.5 ha) have been able to use new technologies, like higher-yielding maize varieties and fertilizers. 1.18 Technology. The availability of suitable technology is critical to increasing growth and incomes in the smallholder sector. In the past, insufficient attention has been paid to the particular constraints faced by different types of smallholders. Until recently, dent hybrids and fertilizer were the only higher-yielding technologies available for maize production. These hybrids have been grown mainly as a cash crop due to adverse storage and pounding characteristics, which the hard-flint varieties, MH17 and MH18, introduced in 1991, may overcome. Other important productivity- enhancing prospects include location-specific fertilizer recommendations; new varieties of groundnut and field beans; self-nodulating Magoye soybeans; agro-forestry, and improved land husbandry and cultivation practices. The ASP will support the adaptation, dissemination and adoption of all of these. Recent policy changes which have made burley tobacco accessible to smallholders, also offer considerable potential for growth in incomes. 1.19 Hybrid flint maize grown on smallholders' fields in trials is yielding about 3,000 kg/ha (with fertilizer) and about 1,500 kg/ha (without fertilizer). Maize composites average about 1,500 kg/ha, with fertilizer. The daily return to labor in producing hybrid flint maize with fertilizer is estimated to be about MK3-4.00 (1991/2 prices), compared to MK5-7.00 for burley tobacco. The cash outlays are about MK385/ha for hybrid maize and fertilizer and about MK770/ha for tobacco (with fertilizer) - considerable sums for smallholders with average annual incomes of MK810. Access to cash or credit is clearly an important prerequisite for the adoption of either of these crops. However, field trials also demonstrate that non-fertilized hybrid flint maize results in higher returns than local maize. This is important for smallholders without access to credit. The development and dissemination of location- specific fertilizer recommendations should also increase the returns to farmers' use of this input. 1.20 Groundnut and bean production is primarily technically constrained, particularly by disease susceptibility, and further research is required, which ASP will support. Improved soa bea produce more energy per hectare than maize, provide valuable protein and fix nitrogen in the soil. Previous varieties required inoculation with nitrifying bacteria, a difficult and expensive process. However, a new variety, Magoye, which does not require inoculation has been developed in Zambia and was introduced officially into Malawi in 1992. 1.21 Agro-Forestry. The Department of Agricultural Research (DAR) has shown that alley cropping with Leucaena sp. increases maize yields by 30-350%, depending on soil type. However, it only grows in certain areas and is subject to termite attack. Alternatively, maize yields under the canopy of Acacia albida are between 50-200% higher than crops grown on the same soils in the open. Such agro-forestry packages will be particularly important for farmers who cannot afford marketed inputs. 1.22 Cultural practices and land husbandry techniques which could increase productivity, as well as promote soil conservation, include realignment of ridges, improved ridge and plant spacing, planting vetiver grass hedges and more timely planting and weeding. All these will be promoted under the ASP. 1.23 In addition to land-saving technologies, labor-saving technologies are needed to raise productivity, particularly among female farmers, whose labor input per hectare far exceeds that of male farmers. Women also spend much time processing food, collecting wood (average 5  7 hours/week) and gathering water (8.5 hours/week). Female farmers typically work 14-17 hours a day. Their labor constraints, especially at peak-demand seasons, are critical. Labor-saving technologies in agro-processing and transportation would contribute greatly towards increasing their productivity and the research component of the ASP will support these efforts. E. Govermnent Sectoral Objectives and Strategy 1.24 The objectives for Malawi's agricultural development are outlined in the Government's Statement of Development Policies (1987-1996). They are: (a) improving and maintaining food self- sufficiency; (b) expanding and diversifying agricultural exports, while conserving natural resources; (c) raising farm incomes and promoting economic growth; and (d) improving social welfare. These objectives are being pursued through programs undertaken with support from IDA and several other donors (IFAD, UNDP, USAID, GTZ, ODA, EEC) within a broad framework of promoting private sector involvement; improving incentives through liberalizing pricing and marketing; increasing producer prices for export crops and rehabilitating rural infrastructure. The importance of improving food security and social welfare in the Government's development objectives is demonstrated in the Food Security and Nutrition Policy Statement.# This emphasizes growth based on increased agri- cultural productivity, especially on holdings of less than one hectare; increasing employment opportu- nities; improving human resource development, and increasing income transfers to the vulnerable in the short term, pending the achievement of longer-term objectives. 1.25 Government strategies for promoting a dynamic supply response from smallholders include: maintaining macroeconomic stability in the domestic and external accounts, maintaining export competitiveness, and ensuring that macroeconomic policies promote an efficient and dynamic agricultural sector; strenigthening the research and extension systems to promote the adoption of yield- augmenting technologies (especially flint maize hybrids); expanding the role of the private sector through increased reliance on open markets for agricultural inputs and outputs and encouraging private sector export diversification; expanding smallholder access to cash crops (especially burley tobacco); promoting small livestock production; expanding access to financial services in rural areas; promoting environmentally sustainable resource use; rationalizing public sector expenditures, and enhancing public sector employee accountability and incentives. While both the estate and smallholder sectors will play an important role in these strategies, emphasis will be placed on revitalizing the smallholder sector and Government's strategy stresses the need to consider fully the constraints, as well as the potential, of households with different socioeconomic characteristics. F. IDA Assistance Strategy 1.26 IDA's activities over the past decade have consisted of lending operations, underpinned by sector and economic work. Three Structural Adjustment Lending operations have provided essential resources to relieve balance-of-payment pressures and support private sector import requirements; an agricultural adjustment operation has focused on deepening key macroeconomic and sectoral reforms; and 10 investment projects have aimed at increasing smallholder productivity and rural incomes. IDA has also been instrumental in coordinating donor assistance and mobilizing substantial amounts of external resources. 41 Office of the President and Cabinet, Department of Economic Planning and Development (1990), Food Security and Nutrition Policy Statement - Supplement to the Statement of Development Policies.  8 1.27 IDA's current assistance strategy builds on past lessons and supports Government's medium- term development strategy. The primary goal is to continue to support economic growth and poverty reduction through macroeconomic management and natural resource conservation. Within this broad framework, IDA's agriculture sector strategy focuses on supporting Government's formulation and implementation of the strategies outlined in para 1.25. IDA, in close collaboration with the Government, is currently preparing an Agricultural Sector Memorandum (ASM). The preliminary findings and recommendations of this ASM have guided the design of the ASP and the proposed Rural Financial Services Project, and has provided an underpinning to other proposed projects (e.g. Agricultural Diversification Project and Environmental Support Project). Another key element in IDA's strategy is to improve the performance and impact of on-going agricultural projects in Malawi and to ensure that the lessons learned from previous operations are incorporated into new projects. In this context, IDA places priority on providing implementation assistance, maintaining constant contact with project beneficiaries, and close collaboration and coordination with other donors supporting agricultural programs in Malawi (para 1.24). II. AGRICULTURAL SERVICES: ARRANGEMENTS, ISSUES AND STRATEGIES A. Institutional Arrangements 2.1 Ministry of Agriculture. MOA plays a major role in agricultural policy formulation and service delivery, and it oversees the operations of public sector agricultural marketing corporations and crop authorities. It is comprised of four technical departments (agricultural research; agricultural extension and training; animal health and industry; and irrigation); a planning division; a food and nutrition unit; a land resources and conservation branch and a smallholder credit administration (see Annex 2, page 1 for organizational chart). In the current Public Sector Investment Program, MOA is allocated about 13% of total planned investments (fourth in terms of Government revenue expendi- ture).Y For FY1992/93, MOA's allocation is MK 61.4 million, of which MK 42 million is from the development budget and the remainder from the revenue budget. Relative to the complexity of the agricultural sector and the large and decentralized operations of MOA, the institution has been characterized by staff, management and organizational weaknesses. MOA senior management is currently in the process of addressing these weaknesses. 2.2 Organizational Structure of Agricultural Services. The agricultural field services of MOA are organized through eight Agricultural Development Divisions (ADDs), each headed by a program manager (PM). The ADDs, from north to south, are Karonga, Mzuzu, Kasungu, Lilongwe, Salima, Liwonde, Blantyre and Ngabu. For service delivery, each ADD is divided into 2-5 rural development projects (RDPs), of which there are 30 in total. Each RDP is divided into about five extension planning areas (EPAs) (with a total of 146), which in turn are divided into sections (total 1,808). Each section is served by one agricultural field assistant (FA). The criteria used for establishing EPA/section boundaries are numbers of farmers and similarity of agroecological conditions. Livestock services, however, are arranged around dip-tank catchment areas, and these do not coincide with EPAs. 2.3 Agricultural Research. MOA's Department of Agricultural Research (DAR) conducts most national agricultural research, except for that on tobacco, tea and sugar, which is undertaken by 5/ From 1988/89 to 1991/92, the annual budget allocation to MOA bas varied bdween 4.3% and 4.6% of total GOM Revenue Budget.  9 specialist units.9' In addition, some NGOs have now begun farm-level adaptive research in certain crops and livestock. DAR's activities are divided into five commodity-based programs: cereals; grain legumes, oil seeds and fibers; livestock and pastures; horticulture; and soils and land husbandry. In addition, there is an adaptive research program and a technical services program. 2.4 Agricultural Extension. National responsibility for smallholder extension rests with MOA's Department of Agricultura Extension and Training (DAET). Within this the Land Resources and Conservation Branch (LRCB) is responsible for improving the use of natural resources and promoting improved methods of soil and water conservation. Some NGOs also conduct agricultural extension activities. The estate sector is covered separately by the Estate Extension Service Trust, a private organization formed in 1991. There is also a separate forestry extension service under the Ministry of Forestry and Natural Resources. 2.5 Department of Animal Health and Industry. DAHI is responsible for all aspects of animal production and disease control, including livestock marketing and the provision of improved livestock inputs, animal health research and disease investigation. 2.6 Department of Irrigation. DOI is responsible for developing irrigation in the country, advising all other departments on irrigation activities, and promoting farmer knowledge of irrigation practices. DAR is responsible for carrying out irrigation research, although relatively little has been done. 2.7 Smallholder Agricultural Credit Administration. The Smallholder Agricultural Credit Administration (SACA), established within MOA in 1988, provides credit to smallholders. Field operations are managed by the ADDs, with specific staff assigned to credit activities. However, FAs undertake a large part of credit processing, supervision and recovery and use an average of 40% of their working time in doing so. Currently, there are plans to separate extension and credit and to restructure SACA into a limited liability company with the aim of making it more self-sustainable. This plan is being carried out under the proposed Rural Financial Services Project. 2.8 Agricultural Development and Marketing Corporation. ADMARC is responsible for distributing fertilizers and improved seeds to smallholders, managing Malawi's food security reserves, and marketing strategic crops based on floor and ceiling prices. Although the marketing of smallholder agricultural produce was liberalized in 1987, ADMARC continues to play a dominant role, especially in the maize market. 2.9 Smallholder Farmer Fertilizer Revolving Fund of Malawi. Established in 1983, the SFFRFM is responsible for the procurement of fertilizer required by smallholders; managing the Fertilizer Buffer Stock Project; and arranging the distribution of fertilizer provided under commodity aid agreements. Operating as a separate unit within ADMARC, the fund was transformed into a trust corporation under Government control in 1988. 2.10 Private Com=anie j. Fertilizer for the estate sector is supplied by private companies through direct imports or local granulation, and some larger estates import fertilizer themselves. The supply 6J DAR also produces breeder seed; propagates and distibutes cultivars of fruit trees; provides plant quarntine, inspection and protection services; does soil surveys and analywse, and seed testing. Other bodies which undertake research include: the Department of Aniral Health and Industry (DAHI); the Tobacco Research Institute of Malawi (TRIM); the Tea Research ]Foundation (TRF); the Tree Nut Authority; the University of Malawi; and two sugar estates.  10 of seeds and agro-chemicals for both the estates and smallholders also originates in the private sector. The National Seed Company of Malawi, (NSCM) is the main supplier of certified seeds, which are then distributed by ADMARC and private retailers. A number of private trading companies also supply imported pesticides and herbicides, of which there is no Malawian production. Private companies also play a significant role in processing and exporting agricultural products. B. Agricultural Research 2.11 The Department of Agricultural Research (DAR). Throughout the 1980s, agricultural research was a priority investment for both human and financial resources under the IDA-funded National Agricultural Research Project (NARP) and the USAID-funded Malawi Agricultural Research and Extension Project (MARE), with DAR as the main beneficiary. Its present structure has been in place since 1985, when research activities were reorganized into commodity research teams under the leadership of national research coordinators. DAR produced its first national research master plan in 1988. It is currently completing a major planning and priority-setting exercise, the output of which includes a comprehensively revised master plan and seven-year action plans for each of the commodity teams. These will be the basis for improvements in the research system. 2.12 The Agricultural Research Council (ARC) was established in 1985, with a mandate to orient the direction of research, approve programs and budgets, and approve funding levels for DAR. The ARC has focused on timely budget submissions and work programs, but has not been able to mobilize additional government funds for DAR; improve conditions of service, or adapt the research master plan to reflect national priorities and capacity.7' The ARC is now in the process of being revitalized, and its mandate will be narrowed to focus on strengthening the coordination of research activities within MOA. 2.13 In 1990, Government established the National Research Council of Malawi (NRCM) in the Office of the President and Cabinet to coordinate all types of research, set national priorities, and advise Government on the use of public funds for research. The establishment of an Agricultural Sciences Committee (ASC) to serve as a technical arm of NRCM was proposed. However, to date, such a committee has not functioned. Government is now taking steps to activate the ASC in order to fulfill some of the functions originally envisioned for the ARC, but which require a greater degree of independence than is possible through the ARC. 2.14 Constraints. Despite major investment in infrastructure, training and institutional support during the past decade, progress has been very slow in generating technologies which are useful to small farmers (apart from improved maize varieties). Poor management systems (scientific, personnel, financial and administrative); disruption caused by an intensive training program; low morale; a high rate of attrition among researchers and managers, and unreliable and/or inflexible funding have all contributed to this poor performance. 2.15 Issues. The basic issue confronting ASP is how to increase the efficacy of publicly funded research (measured by improved smallholder productivity), without significantly increasing total expenditure. Resolution of this problem will require: more efficient resource utilization; better targeting of research; improved management systems; and the gradual commercialization and 7/ The research master plan describes other msearch organizations, but only identifies a research progam for DAR. Consequently the plan fails to take into account the activities and abilities of other resarch organizations.  11 privatization of components of researchY Changes in this direction conform with the policies outlined in the Framework for Action developed by the Special Program for African Agricultural Research (SPAAR)2' in association with regional organizations in Africa, including the Southern Africa Development Community (SADC). 2.16 Increasing the efficiency of resource utilization will require, first and foremost, a clear definition of national research priorities. It will also require increasing productivity and avoiding duplication of efforts, effectively coordinating donor activities and making use of all available facilities. This implies encouraging private sector participation and increasing collaboration with national, regional and international research units. Increased efficiency will also require improving the morale, motivation and accountability of researchers and their managers, and strengthening the links between research, extension and farmers. Inflexible management and limited salary, career and promotional structures associated with the Civil Service, together with unreliable recurrent funding, are major causes of low morale. Other managerial weaknesses exacerbate this situation.-L' 2.17 Improved management is required at two levels: first, strengthening institutional mechanisms to define and advise Government on national research priorities and the allocation of public funds; and second, improved personnel, financial, administrative, and scientific management within DAR, including revitalizing the ARC to ensure that research-extension-farmer links lead to relevant messages and that crop,, livestock and land husbandry messages are integrated. (See paras 3.13 - 3.20 for ways in which the ASP will address these issues and constraints.) C. Agricultural Extension 2.18 Overview. The extension service has been expanded and upgraded under the National Rural Development Project (NRDP). Through the IDA-funded Malawi Agricultural Extension and Planning Support project and the USAID-funded MARE project, substantial efforts have been devoted to extension planning, staff training, and expanding the Block Extension System (which focuses on small areas). The number of field staff has increased by 33% to 2,234 under these activities. However, due to growth in the number of farm families, from 1.4 million in 1984/85 to 1.8 million in 1991/92, the ratio of FAs to farm families has remained about the same over this period.'" Current staff deployment does not reflect a well-defined policy, but an organizational review currently underway could provide the basis for allocating staff more efficiently throughout the MOA/ADD structure. 8/ As has been done for tea and tobacco and is being done for tree nuts. 2/ In summary, the SPAAR policies call for: the planning of resarch prograns based on national Master Plans and their subsequent development towards a regional context; ensuring that research is responsive to farmners' needs and that researchers are made accountable; the proper dissemination of research findings; broadening the institutional base of research; coordinating all sources of funds for publicly funded research and improving incentive structures and management. 10/ For example, poor *iirection results in projects being undextaken which are of low priority, and/or are badly targeted, and/or duplicat,- other work; ineffective accounting systems result in inefficient use of funds; and inadequate reporting means that results are not properly used. 11/ These figures do not include Senior Field Assistants, Farm Home Assistants, Land Husbandry Assistants or Field Assistants assigned to duties other than front-line extension work. The total number of field staff (STA/TA grade) is 2,750, excluding veterinary staff. The ratio of FAs to farm families in 1984/5 was 1:792 and in 1991/2 was 1:816.  12 2.19 There is little evidence that extension has had a significant impact on productivity. Increases in output to date have largely resulted from expansion of cultivated area. Moreover, the extension system has bypassed the majority of smallholders - especially women and those with holdings of less than 1.5 ha. Extension staff currently reach about 25% of smaliholders, mainly through credit groups. Extension work plans need to give greater priority to non-credit recipients, livestock (especially small ruminants) and low-cost, labor- and land-saving technologies and practices. 2.20 Constra . The effectiveness of extension is limited by: (a) inadequate funding of operating costs; (b) poor management and lack of good quality work plans; (c) poor research-extension-farmer linkages; (d) poor transportation management leading to limited mobility in the field; (e) skewed incentives which emphasize administrative duties rather than field staff supervision; (f) poor quality training for field staff, and (g) the heavy involvement of FAs in credit activities, rather than extension. The combined effect of these constraints is low morale and lack of motivation among FAs, limited relevance of technical messages, and limited coverage of smallholders, especially the resource-poor. 2.21 The Five-Year Extension Strategy Plan was prepared as an outline of proposals for dealing with the constraints and deficiencies of the extension service. Its objectives are ambitious, but insuffi- cient attention is paid to recurrent cost burdens and constraints faced by smallholders not currently reached. It is therefore necessary for MOA to (a) define extension priorities within realistic budgetary constraints, and (b) develop and disseminate alternative technologies/practices for poorer smallholders. (See paras 3.21 - 3.30 for ways in which the ASP will address extension issues and constraints.) D. Livestock Field Services 2.22 Overview. Key problems in livestock field services are: (a) unclear organizational, supervisory and reporting arrangements (e.g., DAHI is responsible for livestock extension messages, but livestock field staff are integrated into the ADD structure and controlled by the PMs); (b) the inconsistency between EPA/section boundaries and dip-tank catchment areas, and (c) a skewed staffing structure, with too many field staff positions established, and too few subject matter specialists (SMSs) to train veterinary assistants. 2.23 Need for Reorganization. There is a need to consider an alternative organization of field services to address livestock issues more effectively. DAET and DAHI have worked out a mechanism to do this. FAs will provide simple livestock messages, VAs will provide specialized messages in areas with high livestock populations, and livestock SMSs will provide in-service-training to FAs and VAs. DAHI will provide technical supervision in close coordination with the ADD PMs and supervisors. (Implementation Manual, Section 4, provides further details.) E. Input Supply and Agricultural Produce Marketing 2.24 Inu Supply. The key agricultural inputs in Malawi are improved seed (particularly maize) and fertilizer. The NSCM, whose majority shareholder is Cargill, is the sole source of certified hybrid and composite seeds on the smallholder market, although the seed is produced on contract by farmers and another company has recently expressed interest in engaging in this market. Hybrid maize seed accounts for 85% of NSMC's business. ADMARC retails 90% of NSCM's seed at a subsidized rate to smallholders; the remaining 10% is sold through the private sector. All prices  13 along the marketing channel are set by Government. The subsidy on improved maize seed rises to 43%, depending on variety. Following the release of varieties more suited to farmers' preferences (i.e., MH17 and MH18), NSCM's supply has not met demand. To encourage increased production and lower prices, Government plans to liberalize seed production, pricing and marketing. 2.25 Fertilizer. With the disruption of transport networks through Mozambique, external transport costs now constitute up to 55% of the landed cost of fertilizers in Malawi. This led Government to subsidize smallholder fertilizer prices during the 1980s and early 1990s. The rate of subsidy in 1992/3 is zero on low-analysis fertilizers and 15.3-17% on high-analysis ones. (GOM intends to eliminate all remaining subsidies by 1995/6.) Despite high costs, fertilizer consumption by smallholders increased by 100% between 1986 and 1991.'1 However, less than 40% of smallholders use fertilizer. The SFFRFM currently has a monopoly over imports of fertilizers for the smallholder sector and ADMARC sells it to farmers on a consignment basis. Smallholder demand has invariably exceeded SFFRFM's import capacityL'Y and MOA predicts that demand will grow by about 5% per year. To address this supply constraint and to increase the efficiency of the fertilizer market, Government intends to liberalize the smallholder fertilizer market and encourage private sector importation and distribution. The operational details for this liberalization process are contained within a GOM/MOA position paper and outlined in paras 3.31 - 3.35 below. 2.26 Agricultural Produce Pricing and Marketing. During the 1980s, Government progressively liberalized its pricing and marketing policies for smallholder crops, with the support of IDA. Currently, Government sets floor prices for smallholder maize, groundnuts, rice, cotton, tobacco, soybeans, guar beans and cashew nuts, but all other crops have been descheduled. Government also sets a ceiling price for maize.A' Since 1987, private traders have been allowed to buy and sell all smallholder crops, except cotton and tobacco. The marketing restrictions on these two crops were lifted in 1991. Thus, actual producer prices can, and in fact do, vary according to supply and demand, although they are not supposed to exceed the limits set by ADMARC prices. Government is also refining the role of ADMARC as a buyer and seller of last resort for staple food crops. A Memorandum of Understanding (MOU) has been prepared which outlines the principles for identifying the social roles undertaken by ADMARC and calculating the costs of these roles. It also specifies the arrangements for ADMARC's reimbursement by Treasury for fulfilling social roles and defines specific performance targets to ensure that ADMARC is efficient in carrying out its social functions. 2.27 The supply response from smallholders will increasingly hinge on non-price factors, particularly the availability of more suitable technologies. To date, the supply response to price changes has been limited to the estate sector, 25% of the better-off smallholders, and substitution between crops. However, lifting remaining constraints on the private trading sector will also encourage increased production, diversification and a more efficient resource allocation. These include administrative controls over exportation; the limited supply and high price of transport 12/ With a shift toward high-analysis fertilizers, smallholder consumption of nitrogen has increased by 140% over the same period, and of phosphate by 220%. 13/ Smallholder demand in 1991/92 was estimated at 151,000 metric tons, while the Fund's import capacity was 95,000 tons. The shortfall was partly met through commodity aid agreements, which provided 29,000 tons. 14/ In setting these prices, it uses a methodology, developed with IDA assistance, aimed at aligning producer prices with border-price equivalents, except for maize. Due to its low value-to-volume ratio, maize is treated as a non- tradable commodity, with pricing policy aimed at equating domestic supply and demand.  14 services, limited access to finance, and lack of market information. Under the IDA-supported Agricultural Marketing and Estate Development Project, Government is taking steps to address the last two of these constraints. F. Small-Scale Irrigation 2.28 The 1992 drought highlighted the importance of developing strategies and low-cost technologies for tapping Malawi's irrigation potential. About 200,000 ha (or 15%) of cultivable land can be irrigated, of which about 50% is suitable for small-scale irrigation. Currently, only 10,000 ha is under irrigation. Low cost small-scale irrigation schemes offer the most appropriate approach to realizing Malawi's irrigation potential. Experience in Malawi and other countries suggests that the traditional 'top-down' approach to irrigation development has not worked. A focus on small-scale irrigation (SSI), with an emphasis on involving the beneficiaries at an early stage, could expand the crop, technology and income generating options available to smallholders. 2.29 The main constraints to the development of cost-effective and sustainable SSI can be attributed to five factors: (a) weak planning Oack of data, appropriate and proven technologies, coordination among donors, NGOs, government, private parties); (b) environmental factors (water-borne diseases, degradation of catchment areas); (c) inadequate management (inadequately skilled experts, lack of documented irrigation experience, inadequate knowledge of irrigation practices by farmers); (d) implementation issues Oand tenure, low animal power utilization, absence of credit for SSI activities); and (e) marketing characteristics Oimited purchasing power in the domestic market, and limited export experience). There are also shortcomings in the Department of Irrigation (DOI), partly because Government and donors have not devoted much attention to developing irrigation programs or building capacity in this area. 2.30 Currently, there are several isolated irrigation projects supported by a number of donors. Some of these initiatives confirm the potential for further irrigation development and farmer interest in, and ability to adopt, irrigation technology. This limited experience also highlights the need for Government to develop a more coherent strategy to irrigation development, with an emphasis on small-scale, self-help, low cost schemes; field testing promising technologies; farmer management and operation of the schemes; strengthening the capacity of the DOI to help develop and implement a coherent strategy framework; and appropriate technologies and organizational forms for supporting farmers. This will also require strengthening the linkages with the research and extension systems. (Paras 3.44 - 3.45 provide details on the ways in which the ASP will address these shortcomings.) IH. THE PROJECT A. Project Design Considerations 3.1 Macroeconomic and Sectoral Policies and Constraints. Macroeconomic reforms, started in the 1980s, are expected to lead to an improved operating environment for agriculture in the 1990s, provided follow-up measures are implemented. The ASP was designed in parallel with the preparation of an Agricultural Sector Memorandum and with the close collaboration of GOM (para 1.2). As a result, GOM's strategy with respect to the agricultural sector and further sectoral reforms have been integrated into the Project design, with the aim of enhancing project performance. The 1992 drought had an adverse effect on the economy, although Government, assisted by donors, is  15 taking appropriate steps to re-establish positive growth and good maize and tobacco crops are expected in 1993. 3.2 Budgetary Constraints. The agricultural sector is constrained by a shortage of revenue to implement development projects. MOA needs to prioritize its investment program and reduce exist- ing commitments to a more realistic level. This is taking place in parallel with a review of overall ceilings for budget expenditures. The following are under discussion with Government: (a) ways of accommodating the injection of funds from ASP into the budget over the next three years; (b) terminating, by end-FY1992/93, all projects two years past their original completion date; (c) the relevance of smaller lprojects providing technical assistance to the overall program; and (d) reducing counterpart funding commitments to on-going projects. Given the pressures arising from the drought, ASP's implementation and costs have been phased to reduce the budgetary burden in the initial years. 3.3 The development of an improved program budgeting system for recurrent cost funding in MOA (HQ and ADDs) is being closely coordinated with the on-going review of staff levels and job descriptions. Operating costs at the field level are a priority area and a detailed plan is being prepared to indicate how recurrent cost allocations under ASP will be sustained. Project support for incremental non-salary operating costs will be provided on a declining basis to facilitate sustainability of project activities. 3.4 Household Typology Framework. ASP is designed to take into consideration the needs of different smallholders and agro-ecological areas. It should improve the focus of research and extension services to adapting technologies to the various agro-climatic and socioeconomic conditions in the country, and therefore their impact on smallholder productivity. 3.5 Lessons Learned from Agricultural Service Projec. Relevant projects in Malawi include: the Smallholder Fertilizer Project (Cr. 1352); several projects under the National Rural Development Program in the 1970s and 1980s; the National Agricultural Research Project (Cr. 1549); the Agricultural Extension and Planning Support Project (Cr. 1626); and the Agricultural Sector Adjustment Credit (Cr. 2121). The lessons from these, and similar projects in sub-Saharan Africa, include: (a) project scope must be kept simple and adjusted to realistic budgetary constraints; (b) institutional reforms require a long-term commitment and should be phased, and based on detailed action plans and a broad-based consensus; (c) multi-component projects require an effective coordinating mechanism to ensure timely implementation of day-to-day activities; (d) overseas degree training should not be emphasized, especially when incentives are weak in the public sector, as in Malawi; (e) strong Government/MOA procurement arrangements and capacity are essential; and (f) credit and extension services should be separated at the field level so that extension reaches beyond credit recipients. 3.6 The design of the ASP has taken into account IDA's strategy in Malawi (para 1.27) and the above lessons by focusing on the most critical services, developing consensus during preparation, supporting a phased program of institutional reform (including the delinking of credit and extension), expanding the reliance on private/non-public sector agencies, supporting in-service and domestic training, and complementing other relevant donor-supported projects. In addition, the design of the Project has included the development of a comprehensive list of performance indicators in relation to project objectives and the introduction of quantified performance targets for some of the important  16 outputs (see Annex 5), as well as a detailed implementation manual for each of the components and sub-components1W. B. Project Rationale, Objectives and Summary Features 3.7 Project Rationale and Strategy. In the 1970s and 1980s, Government, with multi-donor assistance, made substantial investments in agricultural development through thirty area-based rural development projects. Most of the investments concentrated on providing physical infrastructure and on establishing research, extension and credit systems, accompanied by increases in staff. While these investments provided a needed base for tapping Malawi's agricultural potential and generated benefits to the better-off smallholders (about 25% of total), they did not lead to wide-spread agricultural growth in the smallholder sector. The majority of smallholders, especially the resource poor, have been by-passed by these investments and resultant services. The main constraints to smallholder growth include a deficient interpretation of the technological needs of smallholders operating under different agro-ecological and socioeconomic conditions and inadequate supplies of, and access to, key inputs and finance. 3.8 Government strategy now recognizes that growth and income increases are possible for a large number of smallholders in Malawi, if supported by integrated and more appropriate agricultural services, and if smallholder access to inputs (including credit) and cash crops is improved. In recent years, Malawi has made good progress in establishing a smallholder credit system with high recovery rates; developing promising maize varieties with the potential to substantially enhance food security, and testing successfully a Training and Visit 5T&V) extension system adapted to Malawi conditions. It is also beginning to use farmer community groups and NGOs as a means of expanding the coverage of extension services and promoting low-cost technologies. These initiatives have been aided by separate IDA-supported projects which are now coming to a close, but which have not addressed some of the underlying institutional and policy constraints. 3.9 Building on past investments and the above promising initiatives, the Project strategy to reach at least 60% of all smallholders is to focus on all farmers' groups, rather than only credit groups; better motivate, train, and support field staff; promote improved maize hybrids, as well as more appropriate, low cost technologies, and to integrate all agricultural messages (e.g., crop, agro-forestry and livestock - see paras 3.21 - 3.30). This strategy in turn has the potential to benefit all smallholders as the successful initiatives are replicated. At negotiations, Government presented a draft letter of sectoral policies which was discussed and agreed (see Annex 15). The letter provides Government's latest policy and strategy framework for the agricultural sector and the Project. It emphasizes improved strategies for agricultural services and the medium term public sector investment program. Government finalized this letter of agricultural policies, satisfactory to IDA, before Board presentation. 3.10 Project Objectives. ASP's key objectives are to: (a) support institutional and management reforms in research, extension and input supply, with the aim of providing cost-effective and sustainable technologies for different types of smallholders and agro-ecological zones; and Q) enhance smallholder incomes and food security by increasing the productivity of smallholder agriculture, especially that of female and resource-poor farmers. The ASP is the first phase of a longer-term IS/ The implementation manuals were writen jointly by members of the IDA project appruisal team and the implementing agencies in the Ministry of Agriculture of Malawi.  17 exercise to reform and integrate research, extension and input supply services. Accordingly, a secondary objective is to provide a policy and operational framework for channeling and coordinating assistance to agricultural services from other donors, in order to overcome past patterns of fragmented assistance and inconsistent strategies. 3.11 Summary Features. The main aims of ASP are to: * Improve the focus, cost-effectiveness and impact of agricultural research and extension activities; * Support seed and fertilizer marketing reforms to increase supply and use, and provide foreign exchange for importing incremental fertilizer; and * Strengthen planning and financial management, transport management, procurement, agricultural policy analysis, small-scale irrigation development, and monitoring and evaluation in MOA and constituent ADDs. 3.12 The ASP complements a proposed parallel IDA-supported Rural Financial Services Project which will expand access to credit in rural areas and involve separating extension from credit. The ASP also provides a program framework for mobilizing and coordinating multi-donor assistance in key agricultural services. For example, the African Development Bank (ADB) is co-financing the Project, and the International Fund for Agricultural Development (IFAD) is finalizing the preparation of a parallel project targeted to food insecure households. The IFAD project is a pilot activity which will involve providing inputs for cash and food crops (e.g., burley tobacco and hybrid maize) to food insecure households. By combining inputs for cash and food crops, these households will become credit-worthy, which will enable them to purchase improved agricultural inputs on credit, thus ensuring that food security is improved in a manner which is self-sustaining. This initiative, an on- going Agricultural Sector Adjustment Program, supported by USAID, and the ASP are complementary in erhancing smallholders' ability to adopt higher yielding technologies on a sustainable basis. C. Detailed Features Agricultural Resear ch (Base Costs of US$15.6 million, or 28% of total) 3.13 The fundamental objective of this component is to develop a cost-effective and sustainable research system that will generate technologies responsive to farmers' needs, especially those of the resource-poor, many of whom are women. It will build on the infrastructure developed and staff trained under previous projects and the principles supported by SPAAR (para 2.15). In particular, the ASP will support: (a) the formulation and implementation of research action plans; (b) strengthening of research-extension-farmer linkages; (c) diversifying participation in publicly funded research and the commercialization of some research activities;  18 (d) improving the definition of research priorities and the allocation of funding by strengthening the DAR and activating the Agricultural Sciences Committee (ASC); and (e) improving DAR's management systems and the motivation and accountability of its researchers. 3.14 Research Action Plans. As part of the ASP, seven-year action plans for the seven research groups in DAR have been prepared. The Implementation Manual, Section 2 provides details.-L' These action plans reflect national priorities and budgetary ceilings and form the basis for detailed annual research plans and budgets. To ensure that the action plans reflect and integrate smallholder needs, DAR plans to strengthen the mechanisms for incorporating the views of other MOA departments/units into their development. The action plans will be revised periodically in response to changing conditions and priorities as reflected in the national research master plan. 3.15 Government/MOA will submit to ASC and IDA, for review, the revised research action plans which should: be consistent with the national research master plan and realistic budgetary ceilings; take into account the existing state of knowledge; estimate anticipated impact at farm level; ensure that technologies are environmentally sound; cover the entire spectrum of work from the laboratory to the farmers' fields; be based on transparent cost estimates; define types of cooperation planned with other research units and with extension, and list verifiable objectives. At negotiations. assurances wereot1aWi from Government that DAR will annually update the research action plans in accordance with the above criteria; and submit them to the ASC and IDA not later than September 15 (beginning in 1993), as part of the annual budgetary review (para 7.1(a)). It is understood that Government's allocation of funds will be influenced by the recommendations of the ASC regarding the annual research plans. DAR completed the research action plans in accordance with agreed criteria before Board presentation. 3.16 Research-Extension-Farmer Linkages. The ASP will give special emphasis to strengthening formal linkages between research, extension and farmers, with DAR and DAET being jointly responsible for the implementation of improvements. DAR, in liaison with DAET and DAHI, has prepared an action plan to strengthen these links, based on the following elements: (a) making a senior researcher responsible for routine contact with a defined group of ADDs (for example, by attending regular monthly training workshops with SMS's to assist in identifying solutions to farmers' problems and disseminating the feed-back to other researchers); (b) conducting on-farm trials at three levels of complexity, namely researcher-, extension worker- and farmer-managed, with the appropriate person taking primary responsibility for each type; (c) increasing the number and effectiveness of field days at which experimentation at research stations is exposed to examination and comment by extension personnel and farmers; (d) establishing joint committees (with extension and farmers, where possible) to review experimental results and plan the next year's program; and (e) promptly disseminating research results in publications suited to the relevant audiences. The ASP will provide adequate funds (mostly for incremental, non-salary operating costs) to ensure implementation of the plan to strengthen research-extension-farmer links. At negotiations. assurances were obtained from Government that MOA will implement and closely monitor the research- extension-farmer linkage action plan, satisfactory to IDA, beginning in 1993/94, and that it will 16/ Some important areas of research include: location-specific fertilizer recommendations; locally adapted, pest - and disease-tolerant/resistnt varieties of the major food crops; tree crops with export potential; soil fertility and conservation, including agro-forestry, and labor-saving technologies, particularly for female-headed households.  19 annually update the action plan, and provide it to IDA for review not later than September 15 (beginning in 1993) (para 7.1(b)). 3.17 Diversification of Research Bodies. In order to increase the efficiency of resource use in research, the ASP will support the expanded use of contract research with other suitably qualified research bodies, such as Chancellor College, Bunda College and the Tea Research Foundation. Currently, about 2% of DAR's total research budget is used to finance contract research. Under the ASP, DAR will strengthen its capacity to supervise and direct contract research. Project funds will be used to finance the contract research directly and to strengthen DAR's capacity to supervise it. Al negotiations, assurances were obtained from Government that MOA/DAR will ensure that progress reports on contracted research are prepared and submitted to DAR (by May 1, as outlined in the Plan of Action) and that Government (ASC/DAR) will attempt to expand the amount of contract research annually, subject to implementation experience, requirements and outside capacity, by promoting an 'enabling environment' and advertising all contract research opportunities by July 1, every year, beginning in 1993 (para 7.1(c)). 3.18 Research Priorities, Funding and the ASC. The ASC will be an advisory body to GOM on all matters pertaining to agricultural research. Its main functions will include: converting the present research master plan into a comprehensive national research master plan; periodically revising the national master research plan; monitoring research programs funded by the public sector (including donors); promoting the use of improved accounting systems; advising Government on the allocation of public funds to program and research units (including private bodies); and fostering stronger links with regional and international research bodies. The ASC will be comprised of senior representatives of public and private sector entities involved in agricultural research. It will meet three times a year to review progress and provide guidance in the above areas. The ASP will support the establishment and strengthening of a small secretariat to assist the ASC in fulfilling its functions. Government/Department of Research and Environmental Affairs (DREA) has prepared and submitted to IDA, for its review, a proposal of the main functions, method of operation and composition of ASC, and an action plan (including the establishment of a small secretariat and work program). Al negotiations. assurances were obtained from Government that: (a) the proposal on the main functions, method of operation, composition and action plan of the Agricultural Sciences Committee was satisfactory to IDA; (b) DREA will implement the action plan for ASC's operations beginning mid- 1993; and (c) DREA/ASC will update a work plan for ASC on an annual basis and submit it to IDA for review by September 15 (beginning in 1993) (para 7.1(d)). A condition of credit effectiveness is the appointment, by DREA, of the head of the technical secretariat of the ASC, with qualifications and experience satisfactory to GOM and IDA, and formal approval of the method of operation and work plan for 1993/94 (para 7.2(a)). 3.19 DAR ManageInent and Staff Motivation. The ASP will support improvements in administra- tive, financial, personnel, and scientific management within DAR. Improved cost accounting systems will be required to facilitate monitoring by the ASC and to increase the efficiency of resource utilization. Additionally, Government has endorsed MOA's proposal to establish a Professional Interviewing Board (PIB) to strengthen the independent assessment of researcher performance as a basis for promotion. 'This and other improvements will be monitored closely during implementation. If tangible improvements are not evident by Project Year 3, other institutional options will be examined (e.g., transition to a semi-autonomous agricultural research institute). The Project will provide funds for studies necessary to review the situation; to prepare detailed action plans and to undertake any training that may be needed. Terms of reference (TOR) have been prepared outlining the action plans which need to be developed for further improving DAR's structure and research system. MOA is preparing action plans for improving DAR's management systems, staff morale and  20 accountability and the TOR and timetable for the above mentioned study of the research system (Annex 3, Item 1 outlines the main elements and timetable of the final action plan). At negotiations. assurances were obtained from Government that DAR will implement, beginning in 1993/94, the action plans, satisfactory to IDA, involving improved research management systems; career structures and staff motivation, and that it will update proposals to improve the management systems annually, based on implementation experience, and submit the updated proposals to IDA for review (by September 15, beginning in 1993)(para 7.1(e)). Before Board Presentation, Government approved improved researcher career structure and incentives which included the following key elements: enhanced career structure for professional and technical staff; improved mechanisms for promotion and tenure; commitment to provide adequate funding of non-salary operating costs of priority research, and steps to develop and implement clear guidelines and mechanisms for further enhancing researcher incentives and linking them to performance, involving: sabbatical leave and secondment; workshops, symposia and seminars; consultancies, and training. 3.20 Use of ASP Funds. ASP funds will help cover all categories of expenditure (other than salaries) related to the approved research programs, institutional support and management improvements (e.g., costs of construction, vehicles, equipment, training and technical assistance, contract research experts and incremental non-salary recurrent expenditures). IDA support for incremental recurrent expenditures will be on a declining basis and the national research organizations are expected to balance these reductions through attracting other means of support and/or through privatizing components of research. Agricultural Extension (Base Costs of US$20.1 million, or 36% of total) 3.21 Continued support of MOA's national extension system will be provided under the ASP. It will build on the experiences of the IDA-supported pilot T&V initiative, and of other organizations (including NGOs), in an attempt to make the public extension system more efficient and effective. The main thrust will be to expand coverage of smallholders by-passed by the current system. 3.22 The extension component will cover five technical areas: crops/agro-forestry; livestock; land resources and conservation; irrigation; and food and nutrition. It will support three main objecti which cross-cut these areas: * increasing the efficiency of service delivery through restructuring and streamlining all operations and staffing levels, functions and capacities; * expanding the coverage of smallholders, particularly resource-poor and female farmers, through separating credit administration from extension work; promoting more relevant and affordable technologies/practices; strengthening research-extension- farmer linkages; integrating technical messages; collaborating with NGOs involved in extension; upgrading all farm home assistants (FHAs) to FAs, and training all FAs in gender-related issues, particularly nutrition and the labor constraints faced by many female-headed households; and * increasing the effectiveness of service delivery through improving field staff training; using more interactive teaching methods, and encouraging better quality and consistency of field supervision by providing adequate operational funding, more closely monitoring supervision and rewarding better performance in this area.  21 3.23 Management and O)perations. The national extension system, based on T&V principles tailored to Malawian conditions, provides an adequate framework for the management and operation of extension under ASiP. Thus, field services for all technical areas will remain within the ADD structure. However, GCovernment has decided that FAs will no longer administer credit, which currently consumes about 40% of their time. In late 1992, MOA initiated a pilot scheme for delinking or separating the credit activities of SACA from those of extension. So far, results have been positive and this separation is to be expanded nation-wide by October, 1993. Not only will this lead to FAs spending more time on extension activities, but it will also encourage the expansion of coverage beyond crediit recipients. The expansion of the separation of credit from extension will be closely monitored to ensure that high rates of credit recovery are maintained. At negotiations. assurances were obtained from Government that it will implement, in 1993/94, an action plan, satisfactory to IDA, to delink credit and extension throughout the country, consistent with the ASP Plan of Action, taking into account the implementation experience of the on-going pilot scheme (para 7.1(u)). 3.24 A review of the extension service's staffing levels, job descriptions, and non-salary recurrent expenditures has been carried out, and MOA is finalizing an action plan to rationalize these areas (refer to Implementation Manual, Section 1). This review will provide the basis for increasing the efficiency and cost-effectiveness of service delivery. Assurances were obtained at negotiations from Government that it will begin implementing, by mid-1993, an action plan, satisfactory to IDA, to streamline MOA's organizational structure and staffing, and that it will update this action plan on an annual basis, in conjunction with work plans and budgetary allocations, by September 15, beginning in 1993 (para 7.1(f)). 3.25 Extension Coverage and Content of Messages. In order to expand coverage of resource- poor smallholders, the content of messages and the channels for their dissemination will be altered. The content of extension messages under ASP will include: (a) more integrated information on farm management, land resources and conservation, agro-forestry, livestock (animal husbandry and health), and nutrition; and (b) more targeted information relative to local conditions and types of smallholders.-' The use of mini-plots on farmers' fields, as a mechanism of dissemination, will be expanded. These efforts have had positive results in pilot activities. Block garden demonstrations will be continued, but progressively reduced. In addition to delivering messages, field staff will introduce topics on their own initiative and in response to farmers' requests, as part of the action plan to strengthen research-extension-farmer linkages. The ASP will also support a shift in focus from credit groups to a wider range of smallholders, through church, mosque and other community groupsX!, and greater coordination with local NGOs which have been successfully transferring low- 17/ For example, five low-cost technologies are promising and messages about them will be disseminated in initial years: prevention of soil and water loss by re-aligning ridges under an 'A' frame on sloped land; planting vetiver grass hedges to stabilize contour bunds on steeper slopes; promoting use of organic fertilizers; cultivating on-farmn tree nurseries (i.e., Faidherbia albida for building soil fertility and Gliricidia for soil fertility and firewood); and planting Magoye soybean, a self-nodulating variety, to enhance diets and soil fertility. ASP would support the establishment of vetiver grass nurseries. Efforts would also be made to disseminate labor-saving technologies responsive to women's time constmints (especially in food processing, fuel collection/use and transport). 18/ Church congregations alone cover approximately 60% of the population. In addition, NGO experience indicates that people who are nolt members of a specific church group will often attend church-basd agricultural meetings.  22 cost technologies to resource-poor farmers.' (Annex 3 provides a summary action plan of the extension subcomponent and the Implementation Manual, Section 2, provides further details.) 3.26 Training. Removing the credit function from FAs work, and changing the focus of extension to low-cost messages and targeting a wider segment of the population, will require reorientation training for extension staff. The ASP will support this in-country training, for which initial proposals have been prepared (see Implementation Manual, Section 5; for a summary action plan, see Annex 3).2' Two training activities are aimed at reaching female farmers: (a) courses to complete the upgrading of farm home assistants (FHAs) to the level of FAs or VAs; and (b) reorientation training to bring women's issues into the mainstream.2t' The newly formed Food and Nutrition Unit (FNU) in MOA will be responsible for training extension staff in matters related to nutrition. The FNU has prepared a draft Implementation Manual, including an action plan (see Implementation Manual, Section 6, and Annex 3 for a summary action plan). The ASP will also provide livestock and environmental training to farmers. At negotiations. assurances were obtained from Government that the extension training action plan, as outlined in the Plan of Action, Annex 3, and satisfactory to IDA, will be implemented beginning in 1993/94 (para 7.1(f)). 3.27 To increase staff motivation, and thus the effectiveness of extension, the Project will seek to improve field supervision and program budgeting and planning. To this end, adequate provision will be made for staff transportation and for appropriate incentives to reward good field supervision.2W Also, the preparation and implementation of annual program budgets and work plans will be adopted. At negotiations. assurances were obtained that MOA will develop an action plan to improve the supervision of field staff and extension staff motivation, satisfactory to IDA, and that this will be implemented, beginning June 30, 1993 (para 7.1(g)). The effectiveness of these improvements will be closely monitored by the Central Monitoring and Evaluation Unit (CMEU). 3.28 Improved Access to Transport. The ASP will support increased access to vehicles and bicycles, to ensure that extension staff have sufficient mobility to fulfil their responsibilities. Emphasis will be given to ensuring that female extension staff gain equal access to transport facilities. Existing vehicles will be replaced (following proof that the vehicle being replaced is beyond repair and/or written off and a review of actual requirements) and a user-purchase program for motorcycles will be introduced on a pilot basis.2' MOA has agreed with Treasury on the terms and conditions of the motorcycle ownership scheme. At negotiations. assurances were obtained from Government 19/ An MOA/NGO workshop, aimed at identifying specific mechanisms for closer collaboration, is planned for miid- 1993. 20/ In addition, there would be: (a) cornpletion of the Field Agricultural Training of Trainers (FATOT) coure for Fas and Vas, which began under previous projects and (b) trining in animal husbandry for aU Vas. Higher-level training would be kept to a minimum, but would include: (a) new staff at supervisory level in trauining of trainers; (b) line managers and SMSs to improve managerial sdkl and efficiency; and (c) SMSs to upgrade technical knowledge and training skills relevant to the target group. ASP also makes a provision for strengthening the institution which trains most field staff. 21/ To avoid the re-margination of women in this process, clos monitoring of the gender characteristics of field staff and recipients of their services would be undertaken as part of the monitoring and evaluation of ASP. 22/ Incentives may include adequate recurrent funds to carry out field services; promotions; opportunities for overseas tauning and/or non-monetary recognition (awards, pres coverage). 23/ Motorcycle users would buy their motorcycles through installments and receive a fuel allowance and sone funds for maintenance.  23 that the final terms and conditions of the motorcycle ownership scheme were satisfactory to IDA, as well as the action plan to begin implementing the scheme in 1993/94 (para 7. 1(h)). 3.29 The Project will also provide limited funds for the construction of houses for field staff (in areas where there has previously been an underinvestment in housing, like Mwanza) and for the building of office/training facilities at the EPA level.34 Low-cost designs used in other projects will be used in order to minimize the budgetary burden. Prior to project start-up, MOA, in cooperation with Ministry of Works, will prepare a detailed construction plan, taking into account likely staff transfers. 3.30 The Extension Aids Branch (EAB) and the Visual Aids Section (VAS) of the ADDs reinforce and support field extension and extension training. Under the ASP, mass media activities will be strengthened and focused on reaching resource-poor farmers. Project support will include upgrading and modernizing equipment in all EAB sections, providing additional equipment for the VAS and expanding the use of radio to reach a larger number of resource-poor farmers (e.g., listening groups, solar radios). Input Supplv (Base Costs of US$9 million, or 16% of total) 3.31 This component will support the increased availability of improved seeds (especially hybrid flint maize) and fertilizer to smallholders and the expanded use of these inputs by smallholders. An important constraint orn the adoption of improved maize seed is limited supplies, partly due to inappropriate seed pricing and distribution policies. MOA has prepared a policy proposal for encouraging an expanded supply of seeds through liberalizing the production and marketing systems. This will lead to increased competition; more choice for buyers and a lowering of prices. At negotiations. assurances were obtained from Government that it would finalize, formally approve, implement and monitor these seeds policy reforms and review with IDA, on an annual basis, progress in their implementatiorL (not later than September 1, beginning in 1993) (para 7.1(i)). Before Board presentation, Government formally approved and announced seed policy reforms, satisfactory to IDA and consistent with the principles of increasing private sector participation and competition in the seed markets; removing all subsidies on improved seed (by 1994/5), and expanding supplies and consumer choice. The Pricing and Marketing Unit in MOA's Planning Division will be responsible for coordinating the impleimentation of these reforms. It is anticipated that Government's seed policies will be reviewed and updated periodically, as needed. 3.32 The fertilizer subcomponent will: (a) support the formulation and implementation of reforms to further liberalize importation, pricing and distribution (in line with a program currently being considered by the EC),; (b) improve donor coordination; and (c) provide foreign exchange to help finance incremental fertilizer imports on a commercial basis. 3.33 The main fertilLizer policy reforms will involve: Further deregulating imports, in a phased and managed manner, with the aim of progressively limiting Government's role to establishing guidelines on types to be imported; operating a simple registration system for importers (to provide information 241 It is proposed to construct a total of 80 EH10 class houses, mainly for FAs and FHAs. In addition, 4 EPA centers; 4 class rooms; 12 store rooms and 60 office units would be constrcted.  24 on supplies, whilst ensuring easy entry and avoiding the importation of unsuitable fertilizers); and transforming the SFFRFM into a commercial organization. * Reducing the cost of imports through continuing the emphasis on high-analysis fertilizers and procuring through international competitive bidding, with documents specifying the delivery of bagged fertilizer to a specific destination. * A fertilizer pricing policy based on a single maximum target retail price for each type of fertilizer. * Liberalizing domestic distribution to encourage private sector entry into wholesale and retail trade and thus increasing competition in this market, including permitting all private traders to purchase fertilizers from the SFFRFM and ADMARC. * ADMARC becoming a seller of last resort and defender of the target maximum retail prices on the open market. ADMARC's costs in fulfilling this function will be reimbursed by Treasury, subject to the fulfillment of performance criteria, as outlined in the Memorandum of Understanding between Government and ADMARC. 3.34 Government has prepared a fertilizer policy reform paper which is consistent with the above principles. It is anticipated that, eventually, competition among importers and retailers will make it unnecessary to have target maximum retail prices and will lead to a reduction in the role of the SFFRFM and ADMARC, but they will be retained in the initial phase of liberalization. Likewise, the reforms will initially focus on domestic market liberalization. At negotiations. assurances were obtained from Government that it will implement and monitor the approved fertilizer policy reforms beginning in 1993/4, and review progress in implementation, with IDA on an annual basis (not later than September 1, beginning in 1993) (para 7.1(i)). Before Board presentation, Government formally approved and announced fertilizer policy reforms (which included a supporting action plan), satisfactory to IDA, and consistent with the principles of further liberalizing the importation, pricing and distribution of fertilizers. Government will amend the relevant legislation accordingly. The Pricing and Marketing Section of the Planning Division in MOA will be responsible for managing and monitoring the implementation of the reforms. Disbursement of IDA funds for fertilizer will be contingent on Government implementation of agreed policy measures and supporting action plan satisfactory to IDA (para 7.3(a)). 3.35 Under the ASP, IDA will finance an estimated 12,500 metric tons of high-analysis fertilizer (about 1.5% of total requirements during ASP's implementation) to supplement anticipated assistance from other donors. The ADB is expected to finance an additional 18,750 metric tons of high-analysis fertilizer. These foreign exchange funds will be made available to private importers through the Reserve Bank of Malawi for the procurement of fertilizer for the smallholder sector based on simplified ICB procedures. The Project will also provide a framework for helping to mobilize additional donor funding for fertilizer imports. At negotiations, assurances were obtained that the IDA funds for fertilizers will be made available to private sector smallholder fertilizer suppliers through the Reserve Bank of Malawi (para 7. 1(j)). Institutional Strengthening (Base Costs of US$9.9 million, or 18% of total) 3.36 Overvie. The objective of this component will be to strengthen the capacity of MOA to deliver agricultural services in an efficient, effective and sustainable manner, in order to ensure the realization of benefits to smallholders from the extension, research and input supply systems. It will  25 support the following siabcomponents: (a) planning and financial management in MOA/ADDs; (b) transport management; (c) procurement; (d) agricultural policy analysis training; (e) small scale irrigation; and (f) sectoral and project monitoring and evaluation. Project funds will provide technical assistance, training, vehicles, equipment and incremental, non-salary recurrent funds. 3.37 Planning and Financial Manazement. Funds will be provided to strengthen MOA's planning and financial management through improved systems of project planning and accounting. Technical assistance and practical in-service training will be provided at MOA HQ and the ADDs on: (a) portfo- lio management related to the Public Sector Investment Program (PSIP); (b) work plans linked to budget preparation within ADDs; (c) project planning and budgeting; and (d) an improved accounting system. A comprehensive report has been prepared which assesses budgetary and financial management in MOA (especially in DAR and DAET) and outlines detailed action plans for the implementation of the above. Annex 3, Item 5 provides a summary of the action plan for this sub- component and the Implementation Manual, Section 7 provides further details. At negotiations. assurances were obtained from Government that MOA will implement the action plan contained in the ASP Plan of Action, satisfactory to IDA, to improve its financial management and accounting, beginning by July, 1993 (para 7. 1(f)). 3.38 Transport Management System. The absence of an organized approach to transportation management within MOA/ADDs reduces staff mobility and thus the efficiency and effectiveness of service delivery.21' Funding will be provided for the introduction of a MOA/ADD Transport Management System (I`MS) over a three-year period, including: (a) training in transport operations and workshop management; (b) using private sector maintenance services on a pilot basis; (c) the provision of workshop equipment and computer hardware and software; and (d) technical assistance in transportation management. An action plan, based on a recent review of ADD transport management, has been prepared and discussed with IDA. Annex 3, Item 9 provides a summary of this action plan. Further details are provided in the ASP Implementation Manual, Section 8. At negotiations. assurances were obtained from Government that it will implement the action plan contained in the ASP Plan of Action, satisfactory to IDA, beginning in 1993/94 (para 7.1(f)). 3.39 Procurement. Procurement delay in Malawi is the most intractable constraint on timely project execution. The reasons for delay include: procurement procedures based on colonial documents; over-centralized decision-making and weak accountability; lack of trained personnel to prepare and evaluate bidding documents; inadequate coordination within Government, and local guidelines that conflict with IDA guidelines in several areas (e.g., foreign currency payments, evaluation criteria, public bid openings). A multiplicity of donors and limited organizational capacity aggravate these problems. 3.40 The ASP will support Government's initiative to rationalize public sector procurement and supply management across all ministries. To achieve this goal, a study will be implemented in four phases over 18 months to ensure that the findings are internalized by the relevant agencies. Annex 4 contains the TOR agreed with Government for the study, which will develop a comprehensive action plan aimed at building procurement capacity. Government is finalizing the solicitation package in order that early selection of the consultants can take place. 25/ Although about 45% of MOA's total budget revenue is allocated to ADDs for fuel and lubricants, there is no defined authority or adequate senior-level training for transportation management.  26 3.41 Given that an improved procurement system will not be in place before the start-up of the ASP, the Project will also support specific strengthening of MOA procurement. MOA will appoint a procurement agent to handle the procurement of civil works and goods, including the preparation of technical specifications and tender documents, tender evaluations, contracting and the supervision of delivery. This agent will also formulate and implement a program (mostly in-service and on-the-job training) to strengthen the capacity of MOA to handle procurement matters. At negotiations. assurances were obtained from Government that MOA will implement the procurement action plan contained in the ASP Plan of Action, satisfactory to IDA (para 7.1(f)). 3.42 Agricultural Policy Analysis Training. Strengthened capacity in the analysis, formulation and planning of agricultural policies in Malawi is essential. Since a training program based exclusively on overseas courses leads to unacceptably high attrition rates, capacity will be enhanced through local non-degree and post-graduate training. It will be organized in a manner that links MOA with the Rural Development Department of Bunda College of Agriculture and thus strengthens both institutions. 3.43 The training will be based on 3-4 week modules, covering the following areas: (a) commodity, market and price analysis; (b) food security and nutrition policy; (c) the policy analysis matrix; (d) environmental and natural resources policy; (e) project preparation and management; and (f) monitoring and evaluation. Initial participants will be directly involved in agricultural sector analysis and primarily from MOA (HQ and ADDs), Treasury, and the Economic Planning and Development Department. After about 3 years, subject to project review findings, the program will be opened up to the private sector and to participants from other countries in the region. Bunda College will implement the program on behalf of Government, with the assistance of international expertise satisfactory to IDA.R' The ASP will provide funds for constructing accommodation facilities, a mini-bus, micro-computers and consultants. Bunda College, in association with MOA, has prepared an Implementation Report (and supporting action plan) and a draft Memorandum of Understanding (MOU). For details, see Implementation Manual, Section 9. The action plan is summarized in Annex 3, Item 10. At negotiations. assurances were obtained that: (a) the detailed design of the policy analysis training program, as outlined in the Implementation Manual, will be fmalized and submitted to IDA for review, and implemented beginning in 1993 in accordance with the ASP Plan of Action (para 7.1(f)); and (b) the draft MOU between MOA and Bunda College (and any subcontracting of consultants) will be in accordance with TOR and terms and conditions satisfactory to IDA (para 7.10) and 7.1(r)). 3.44 Small-Scale Irrigation. SSI provides a potential means of increasing smallholder agricultural incomes and employment opportunities, provided there is appropriate technology and organization, especially among the participating smallholders. The constraints to developing sustainable and viable irrigation warrants a phased approach in building the planning, organizational and technological capacity of the DOI and beneficiaries. 3.45 The ASP will follow this phased approach through supporting four components: (a) an assessment of recent SSI experience and lessons learned, followed by the preparation of a national SSI program, within the framework of an irrigation development strategy currently being developed by 26/ These were identified as priority areas with MOA at the ASP workshop in November 1992. 271 The International Food and Policy Research Institute (IFPRI) is currently assisting the Rural Development Department to improve its degree curriculum, and in view of its recent establishment of an outreach program, is ideally suited for this assistance.  27 Government; (b) provision of training and on-scheme research; (c) design, implementation (including DOI and farmer training) and operation of SSI pilot schemes based on low cost technologies;-, and (d) essential improvernents to DOI facilities. Annex 3, Item 11 summarized the SSI subcomponent action plan. At negotiations. assurances were obtained that the DOI will implement the SSI subcomponent in accordance with the action plan outlined in the ASP Plan of Action (para 7. l(f)). Before Board presentation, the DOI completed a comprehensive Implementation Report, satisfactory to IDA, to guide this implementation of this subcomponent (see Implementation Manual, Section 10). 3.46 Monitoring and Evaluation (M&E) and Beneficiary Assessment. MOA is currently rationalizing its reporting and monitoring system for HQ and the ADDs. The detailed design of the M&E system will be evolutionary and responsive to the requirements of implementing managers, planners, policy makers and donors. The ASP will assist project management in the identification of such needs. The Pro ject will also harness the existing system's potential through: (a) streamlining survey and reporting systems (eliminating duplication and ensuring coordination); (b) increasing analytical rigor by developing quantitative indicators and targets (see Annex 5) and employing tighter, more in-depth surveys, using rapid rural appraisal techniques;22' (c) strengthening M&E capacity and motivation at the ADD level through training and increasing the possibilities of promotion; (d) providing computers ito enhance timeliness and productivity; (e) increasing management accountability, and thereby its demand for data; (f) providing for beneficiary and local problem assessments (including obtaining farmer feedback on their satisfaction with agricultural services), and (g) disaggregating monitoring indicators by gender and farm size. 3.47 ASP evaluatio2n (in project years 2,4 and 7) will be done on a contract basis with an independent local institution. MOA/CMEU has prepared an Implementation Report for the M&E subcomponent (Implementation Manual, Section 9), including key performance indicators to be monitored and quantified performance targets; TOR for the ASP evaluation studies, and a detailed action plan for the first year. A summary action plan is contained in Annex 3, Item 10; Annex 5 lists the key performance indicators to be used in monitoring and evaluating ASP performance, as well as initial performance targets and the TOR for project evaluations are contained in Annex 12. At negotiations, assurances were obtained that: the M&E action plan, as contained in the ASP Plan of Action, is satisfactory to IDA, and will be implemented beginning in the first year, including the preparation of reports by Government to enable periodic project evaluations by GOM/IDA (para 7. 1(f)) and that Government will prepare, and submit to IDA within six months of project closing, a Project Completion Report describing the costs, benefits and lessons learned for the next phase (para 7.1(s)). 28/ Including some 30 pilot schemes covering a total of about 50 ha and involving stream diversion schemes; drip irrigation, basin/furrow irrigation, and "backyard" drip irrigation. 29/ Under ASP the frollowing would be developed for project monitoring: (a) three national, annual core surveys (crop production estimates, food security, nutrition and incomes, and extension) and (b) ad hoc local studies aimed at specific ADD problemns. In addition, an improved Annual Work Plan and Budget and Reporting cycle would be developed as a management information, planning and coordination instrument.  28 IV. PROJECT COSTS AND FINANCING 4.1 Proect Costs. Total project costs are estimated to be MK257.1 million (US$64.8 million), including physical and price contingencies. Donor-supported projects have a tax-free status in Malawi, so project costs are not subject to taxes and duties. The foreign exchange component is about US$28.2 million, or 43.6% of project costs. Base costs are estimated in mid-1992 prices. Physical contingencies are as follows: civil works 15%; vehicles and office equipment 5%; training and technical assistance 5%; input supplies 5% and recurrent costs 5%. Price contingencies for both local and foreign costs have been added, based on projected price increases in international and local economies.3a Estimated project costs are summarized below (with detailed cost tables in Annex 6). TABLE 1: PROJECT COST SUMMARY' |Malawi Kwacha miLLion USS miLLion % Total X Foreign Base Component Local Foreig Total Local Foreign Total Exchange Costs n I__ _ _ _ _ _ _ _ _ _ _ A. Research 35.3 21.9 57.2 9.6 6.0 15.6 38.2 28.0 B. Extension 59.7 14.5 74.2 16.2 3.9 20.1 19.5 36.1 C. Input Supply 0.0 33.0 33.0 0.0 9.0 9.0 100.0 16.1 D. Instit. Strengthening 16.8 19.5 36.3 4.6 5.3 9.9 53.8 17.7 E. Project Preparation 0.9 3.5 4.4 0.2 1.0 1.2 80.0 1.2 TOTAL BASELINE COSTS 112.7 92.4 205.1 30.6 25.2 55.8 45.0 100 Physical Contingencies 5.3 1.7 7.0 1.4 0.4 1.8 23.7 3.4 Price Contingencies 27.0 18.0 45.0 4.5 2.7 7.2 37.6 12.8 TOTAL COSTS 145.0 112.1 257.1 36.5 28.3 64.8 43.6 116.2 A. Financing 4.2 The ASP will be financed by Government; IDA and the African Development Bank (ADB). The IDA credit of US$45.8 million equivalent will cover 69% of foreign costs and 72% of local costs, which combined, constitute 70% of total project costs. The ADB credit of US$12.7 million equivalent will cover 31% of foreign costs and 10.7% of local costs, or 20% of total project costs. The ADB will co-finance selected sub-components on a parallel basis, thereby simplifying the implementation process. The remaining US$6.3 million equivalent (10% of total project costs) will be covered by Government. Total costs and phasing have been reduced to a level which can be absorbed within the likely budgetary ceilings of MOA. Also, Government's financing share of incremental recurrent expenditures will be increased during implementation to help ensure project sustainabiity. Table 2 summarizes the financing plan by component. Further details are provided in Annex 7. At negotiations. assurances were obtained from Government that it will: (a) review with IDA on an annual basis the proposed budgetary allocations for the Project and the improved method for calculating non-salary operating expenses (see Annex 8, page 2), not later than September 15 (beginning 1993); (b) make annual budget allocations and timely releases to the participating agen- cies/departments consistent with the agreed yardsticks for non-salary operating expenditures, project implementation expenditure schedule and approved work plans; (c) over the course of ASP 30/ Local infation has been projected at 10.5% in the first year of the project and 5% thereafter; foreign inflation has bcen projected at 3.9% in the first two years of the project and 3.8% thereafter.  29 implementation, progressively increase its share of financing for non-salary operating expenditures at a rate commensurate with the decrease in IDA's financing of incremental recurrent expenditures as stipulated in the disbursement provisions; and (d) allocate budgetary resources according to its medium-term agricultural investment program satisfactory to IDA, and update the investment program not later than the third year of the ASP (para 7.1(k)). TABLE 2: PROPOSED FINANCING Plan (US$ million) Conponent IDA ADB |GOM Total A. Research 15.8 0.0 2.3 18.1 B. ]Extension 17.2 3.9 3.1 24.2 C. Input Supply 4.0 6.0 0.0 10.0 D. [nstitutional Support 7.6 2.8 0.9 11.3 E. Project Preparation 1.2 0.0 0.0 1.2 Total 45.8 12.7 6.3 64.8 B. Procurement 4.3 Table 3 indicates the procurement methods to be followed for the main expenditure categories. The procurement of items financed by IDA will follow IDA guidelines. The civil works (US$5.9 million) are relatively small, labor-intensive, geographically dispersed in areas with limited access and spaced over the life of the project. High mobilization costs, coupled with small value, may not be attractive to international bidders and will therefore be carried out under contracts issued through local competitive bidding procedures (LCB) satisfactory to IDA: advertising, public bid opening, and clearly stated evaluation criteria. Foreign bidders, if interested, will not be precluded from participation. The first three contracts awarded under LCB will be subject to prior review by IDA to ensure that the quality of LCB procedures is maintained. 4.4 Office equipment, supplies and vehicles/equipment (US$6.3 million equivalent) will be bulked into packages aggregating to more than US$100,000 suitable for ICB. Procurement of vehicles and equipment under all components will be managed through a procurement specialist, selected by Government on the basis of selection procedures and TOR acceptable to IDA. Fertilizer will be procured by commercial importers following simplified ICB procedures satisfactory to IDA. Small off-the-shelf items, costing less than US$25,000 each and aggregating to US$100,000, which are urgently required by the project, may be purchased by prudent shopping after obtaining at least three independent quotations. There will be requirements, spread over time, for a variety of components and spare parts for various types of goods used by beneficiaries throughout the country. These are proprietary spares and small value items for which ICB is not appropriate and which can be obtained efficiently by the use of direct contracting or prudent shopping. The total amount for these two categories of procuremnent is estimated at US$1.0 million. Direct contracting can be used only for proprietary equipment: (costing US$5,000 each and aggregating to US$25,000) or where compatibility with existing equipment requires the acquisition of standardized equipment or spare parts, and will be cleared with IDA before its acquisition. 4.5 Training components will be implemented in accordance with an agreed TOR and training plan. Consultants for TA and for carrying out studies will be selected according to agreed TOR  30 (Annex 4, 11 and 12) and to IDA guidelines. Goods, works and consultancy services, involving firms and costing less than US$100,000 per contract will not require prior review by IDA, but will be subject to post review by IDA supervision missions. If IDA funds these items and services, any taxes levied will be borne in their entirety by Government. 4.6 The incremental, non-salary operating costs include fuel and lubricants, vehicle maintenance, subsistence and field/hotel allowances for MOA staff, and these items will be procured according to Government procedures, satisfactory to IDA. 4.7 Nearly 50% of project expenditures financed by IDA, excluding non-salary operating funds, will require prior review. IDA supervision missions will review procurement processes to ensure compliance with the agreed Procurement Guidelines. TABLE 3: PROCUREMENT SCHEDULE (US$ million with IDA funding in parentheses) |Expenditure Category ICB LCB Other- Total Civil Works 5.9(4.0) 5.9(4.0) Vehicles and Equipment 5.3(2.9) 1.0(0.9) 6.3(3.8) Technical Assistance 5.9(5.4) 5.9(5.4) Training 13.2(11.1) 13.2(11.1) Fertilizers 10.0(4.0) 10.0(4.0) Incremental Operating Costs 22.3(16.3) 22.3(16.3) Refmancing of PPFbl 1.0(1.0) 0.2(0.2) 1.2(1.2) TOTAL COSTS 16.3(7.9) 6.1(4.2) 42.4(33.7) 64.8(45.8) % IDA Financing 48 69 80 71 a/ Includes direct contracting and prudent shopping, see para 4.4 above for explanation bi Project Preparation Facility 4.8 Prior to ASP start-up, MOA will prepare a detailed procurement schedule, based on the project's implementation schedule. At negotiations. assurances were obtained that Government will follow IDA Procurement Guidelines for procuring IDA-financed works, goods and IDA Guidelines for selection of consultants (para 7.1(1)). Procurement information will be collected and recorded as follows: (a) prompt reporting of contract award information by the borrower; (b) comprehensive quarterly reports to IDA by the borrower (assisted by consultants), indicating: (i) revised cost estimates for individual contracts and the total project;  31 (ii) revised timing of procurement actions, including advertising, bidding, contract awards, and completion time for individual contracts; and (iii) compliance with the aggregate limits on specified methods of procurement. C. Disbursements 4.9 The proceeds of the US$45.8 million IDA credit will be disbursed as follows: Amount of Credit Allocated % of Expenditures to be Cat goy US$ Million Financed 1. Civil Works 4.0 90% 2. Consultants' Services and Training 16.5 100% 3. Vehicles, Equipment and Supplies 3.8 100% of foreign expenditures and 80% of local expenditures 4. Fertilizers 4.0 100% 5. Incremental Operating Costs 16.3 100% through December 31, 1996 and 60% thereafter 6. Project Preparation Facility 1.2 100% 4.10 Disbursements for all expenditures will be made against full documentation, except for expenditures below US$25,000 equivalent. These items will be based on certificates of statements of expenditure (SOEs). Full supporting documentation with respect to SOEs will be retained by the borrower and made available for inspection by IDA (during project supervision) and external auditors. 4.11 The disbursement period of six and one-half years is less than the eight year IDA profile for agricultural projects in Malawi and similar southern African countries. The ASP is supporting a time- slice in on-going national programs and the proposed time period is considered adequate to implement the various institutional reforms. Since previous operations have been hindered by the delayed disbursement of funds, the Project makes provisions for short-term consultants to assist in financial management and procurement and a Special Account will be established. A disbursement action plan has been prepared which is expected to guide improvements in disbursement performance for the ASP and MOA (see Annex 3, Item 13). Annex 9 contains an indicative schedule of disbursement. The completion date for the Project will be March 31, 1999, and the closing date will be six months later. 4.12 Special Account. To ensure that funds for the project are available when needed, and to reduce the number of disbursement claims to be processed, Government will establish a Special Account in US dollars with a commercial bank, to be administered by MOA. Such funds will be used to finance eligible expenditures of less than US$50,000 per contract. Upon credit effectiveness, IDA will make an advance deposit of US$1.0 million into this account to pay for any expenditures to  32 be financed by IDA. This amount is consistent with an anticipated 3-4 month rate of disbursement. IDA will make further deposits to replenish the Special Account against withdrawal applications which are supported by appropriate documentation. At negotiations. assurances were obtained from Government that the Special Account will be implemented in accordance with procedures satisfactory to IDA (para 7.1(m)). D. Accounts and Audits 4.13 MOA, through the Chief Accountant, will be responsible for preparing financial statements and accounts relating to the disbursement of ASP funds. Financial statements will be consolidated on the basis of returns for each component prepared by the responsible implementing agency within MOA. Such statements will relate to expenditures incurred through the disbursement of funds in accordance with the normal Government regulations (Treasury Instructions). In addition, it will be necessary to prepare SOEs on goods and service contracts, for which disbursements have been made through direct drawings or through the Special Account. Under the ASP, the MOA's Finance Division will be strengthened to ensure improved capacity for preparing the financial accounts for ASP and other investment programs. Annex 10 outlines the improved accounting guidelines which will be utilized by the MOA and ADDs. At negotiations. assurances were obtained from Government that MOA will implement these improved guidelines as outlined in the Plan of Action (Annex 3) beginning in the first year of the project (para 7.1(f)). 4.14 Consolidated project accounts, SOEs and the Special Account will be audited by the Auditor General or independent auditors acceptable to IDA. Assurances were obtained at negotiations that the audit reports and audited statements will be submitted to IDA within nine months of the close of the fiscal year (para 7.1(n)). V. PROJECT ORGANIZATION AND IMPLEMENTATION A. Overall Arrangements 5.1 MOA will have overall responsibility for project implementation, with the CMEU responsible for day-to-day activities. Nearly all of the project activities are a part of the on-going programs being carried out by line departments or the private sector. Individual components and subcomponents are generally self-contained and will be implemented by the following agencies: research - DAR and ASC; extension - DAET, DAHI, LRCB and FNU; input supply - Pricing and Marketing Section and fertilizer importers; and institutional strengthening - Planning Division, Finance Division, Bunda College of Agriculture, Treasury, and DOI. Close coordination among these agencies will be emphasized and will, together with project monitoring, be based on strengthened MOA organizational and management systems. 5.2 Sector/ASP Coordination. An Agriculture Sector Steering Committee (ASSC) will be formalized and made effective to coordinate the implementation of all MOA programs/projects involving agricultural services. The ASSC will be chaired by the principal secretary (PS) of MOA and will be comprised of the heads of involved departments/units and ADD program managers. Senior officers from Treasury and the Economic Planning and Development Department will also participate. The committee will meet quarterly to review the status of project implementation, based  33 on progress reports from the CMEU.A It will resolve policy and coordination issues and review and approve annual work plans and budgets for ASP components. MOA's strengthened finance unit will be responsible for consolidating all ASP accounts. Since project activities will be implemented by a number of different departments, the managerial burden on each is deemed to be reasonable. 5.3 At negotiations. assurances were obtained from Government that, prior to the start-up of the ASP, MOA will revive the ASSC to meet on a quarterly basis to perform the functions outlined above (para 7.1(o)) and that it will assign one senior officer from CMEU to be responsible for the requirements of the ASP (para 7.1(o)). A Condition of Credit Effectiveness is the issuance of an administrative circular by the MOA formalizing the role of the ASSC and indicating the meeting schedule for 1993/94 (para 7.2(b)). 5.4 Implementation Manuals and Plan of Action. To facilitate project implementation, each implementing department has prepared a Implementation Report for its component/ subcomponent (see Implementation Manual). Each Implementation Report contains details concerning activities, organization and management; cost estimates; performance indicators, and a supporting action plan. Prior to negotiations Government prepared a Plan of Action satisfactory to IDA. Annex 3 contains this Plan of Action and outlines agreed key actions for each component and subcomponent, with an emphasis on the first year activities. At negotiations. assurances were obtained from Government that it will implement the Plan of Action with actions and timetable consistent with Annex 3 and satisfactory to IDA (para 7. 1(f)). The Implementation Reports for the food and nutrition and small scale irrigation subcomponents, and the research action plans for the research component, satisfactory to IDA, were completed before Board presentation. 5.5 Annual Workc Plans and Budget. The official(s) responsible for each component/sub- component will update an annual work plan and budget in accordance with the Implementation Manuals and MOA's project planning and budgeting cycle. The work plans will detail: the activities planned, budgetary and human resources required, and achievement indicators. The budgets will detail the allocation of funds to investment and recurrent costs. For activities within ADDs, the concept of program budgeting will be further developed, particularly with a view to separating the administrative expenditures of ADDs and RDPs from those on agricultural extension. At negotiations, assurances were obtained from Government that, as outlined in the Plan of Action, by September 15, beginning in 1993, draft annual work plans and supporting budget estimates for the following fiscal year for each component/subcomponent will be prepared by the implementing departments/agencies and will be submitted to the ASSC and IDA for review (para 7.1(f)). B. Research 5.6 The ASP will support agreed subprograms of research, whether undertaken by DAR or other research institutions. For the first year of the Project, funding will be based on DAR's commodity action plans. Annex 11, Appendix 1 provides TOR for a research management specialist who will help implement managerial improvements in DAR and build capacity to sustain them. DAR will secure the services of the National Library Services to assist in managing the library. To benefit 311 The CMEU will assign a senior officer (Level 7) to take day-to-day responsibility for this task. The Chief Planning Officer, with the assistance of the CMEU and department heads, will be responsible for preparing the ASSC agenda and rlevant lprogress reports.  34 from specialization, DAR will also contract out selected research activities to other research bodies in Malawi. 5.7 In the event that internal reforms are insufficient to retain key DAR researchers and managers and it is necessary to retain the services of staff due to retire, the Project will finance the cost of hiring the latter on a contract (or technical assistance) basis. The TOR and terms and conditions of contract staff will need to be satisfactory to IDA. The research plan of action should indicate the requirements for such staff, if any, beginning in 1993/94. 5.8 Research programs and priorities will be revised in line with a national research master plan, to be produced in the first year of the project and periodically revised under the direction of the ASC. The master plan will include an evaluation of research capacity outside DAR. The activities to be undertaken by the ASC in its first year of operation will include development of the national research master plan and appropriate adjustments to individual research action plans. Annually, DAR will prepare commodity research action plans, to be reviewed by the ARC, ASC, and IDA as part of the budgetary cycle (beginning in 1993/94). C. Extension 5.9 Organization of Agricultural Extension. ADD PMs will be responsible for implementing extension activities within their respective divisions, but the Chief Agricultural Extension and Training Officer (CAETO) will have national responsibility. MOA has defined the role of other department and unit heads regarding field services. It has also prepared an action plan aimed at improving supervision of field staff. A review of staffing levels and job descriptions by the Department of Personnel Management and Training (DPMT) will be the basis for changes in MOA's staffing structure (see Section 1 of the Implementation Manual). At negotiations. assurances were obtained from Government that MOA will implement an action plan to improve extension management and responsibilities satisfactory to IDA, beginning in the first year of the project, as outlined in the Plan of Action (para 7.1(f)). 5.10 Budgeting. The system of program budgeting, initiated by MOA in FY1991/92, will be further developed in order to improve budgetary control. Program budgeting will be introduced for each cost center (i.e., ADD management units and RDPs) through: (a) the allocation of salary costs to each center and program; and (b) the allocation of operational funds to each program (e.g., administration, extension, land husbandry, livestock, farm management, training, nutrition, women's program). This system of program budgeting will apply to all funds, including those allocated under the ASP. 5.11 Planning and implementation of the extension training program will be the responsibility of the MOA Training Branch. A Extension Training Plan has been prepared in collaboration with the CAETO, who will be responsible for coordinating implementation of field staff training. (For further details, see Annex 3 and Implementation Manual, Section 5.) To assist MOA in the implementation of this plan, an extension training expert will be engaged (IrOR are contained in Annex 11, Appendix 2). Expertise will also be provided to strengthen extension training at the Natural Resources College and Bunda College (Annex 11, Appendix 8). 5.12 Nutrition Program. The action plan for this subcomponent will be carried out by the Food and Nutrition Unit in MOA. It will be strengthened with the assistance of a nutrition education specialist (for TOR, see Annex 11, Appendix 4).  35 5.13 Extension Aids. This subcomponent will be implemented by the Extension Aids Branch and the Visual Aids Branch. D. Input Supply 5.14 Improved Seed. The Pricing and Marketing Unit, MOA, will have primary responsibility for monitoring the implementation of the policy reforms to liberalize seed production, pricing and marketing, in a way which will encourage increased private sector entry, market competition, lower prices and more consumer choice. This unit will also be responsible for updating Government seeds policies, based on implementation experience. 5.15 Fertilizer. MOA's Pricing and Marketing Section will be responsible for coordinating and monitoring the implementation of the reforms detailed in Government's Fertilizer Reform Policy paper. MOA's capacity to sustain the program is being strengthened with the assistance of UNDP/FAO, and more comprehensive assistance is being discussed between the Government and the European Commission. E. Institutional Strengthening 5.16 Planning and Financial Management. Financial management within MOA is the responsibility of the Chief Accountant, who heads the Finance Division. The Financial Coordinator is also critical to project budgeting and financial reporting. Technical assistance will be provided to strengthen the capacity of MOA to implement improved accounting and financial management systems (see Annex 11, Appendix 6). 5.17 Transportation Management. MOA will assign to a senior HQ official (eg., Deputy Secretary for Administration) the task of transportation management to coordinate and monitor all ADD transport operations. Additionally, the task of managing all aspects of transport (including maintenance) at the AI)D level will be assigned to the Deputy Program Manager (para 7.1 (v)). Annex 11, Appendix 5 provides TOR for a transport management systems advisor who will help MOA build its capacity to implement and sustain improvements in transport management (as outlined in the action plan). As a condition of credit effectiveness, MOA will appoint the transport systems advisor (para 7.2(d)). Prior to the advisor's appointment, MOA will finalize the responsibility of transport management coordination in MOA/HQ and each ADD. 5.18 Procurement. Procurement activities under the ASP will be handled by MOA's Procurement Unit, which will obtain assistance from the Ministry of Works for civil works and a procurement agent, with qualifications and TOR satisfactory to IDA (see Annex 11, Appendix 7 for the TOR). This is consistent with a Government proposal for strengthening procurement in all ministries in the medium term. TOR for this ministry-wide procurement assistance have been prepared (Annex 4) and Government is taking steps to appoint the consultants by mid-1993. Treasury will supervise the cross-ministry procurement study. 5.19 Agricultural Policy Analysis Training. MOA will contract Bunda College of Agriculture to implement this subcormponent. Initially, the Rural Development Department will be responsible, with assistance from a quali[fied international institution. Bunda College has prepared a draft MOU which outlines its role and responsibilities in carrying out this training. Bunda College and the international institution will enter into a separate contractual arrangement (see Annex 11, Appendix 8). The  36 Economic Development Institute (EDI) of the World Bank will also collaborate in this subcomponent, in sharing relevant cross-country experience with Bunda College. 5.20 Small Scale Irrigation. The SSI subcomponent will be carried out by the DOI, private contractors and farmer groups. The DOI will be responsible for evaluating past SSI experience and preparing a SSI strategy paper, incorporating inputs from farmers, NGOs and DOI field staff. The main activity will involve implementing pilot schemes, which will be carried out by a multi- disciplinary task forces. This decentralization will help ensure a "bottom-up" approach; involvement of the beneficiaries from the planning stage, and the selection and design of the schemes which conform to agreed socioeconomic criteria. The SSI Implementation Report provides further details (see Implementation Manual, Section 10). An irrigation specialist with relevant cross-country experience will provide implementation assistance and training for DOI staff and farmer groups (see Annex 11, Appendix 9, for the TOR). F. Monitoring, Evaluation and Beneficiary Assessment 5.21 The CMEU in MOA's Planning Division will be responsible for implementing this subcompo- nent. The following arrangements are envisioned: (a) monitoring of activities by each Implementing agency, with assistance from the CMEU and associated ADD evaluation officers, based on an agreed program satisfactory to IDA; (b) beneficiary assessments and impact studies being undertaken by CMEU; and (c) evaluations (in project years 2,4 and 7) being contracted out to a suitably qualified local institution, based on TOR and contracts satisfactory to IDA (see Annex 12 for TOR). At negotiations, assurances were obtained from Government that (i) the biennial and terminal evaluations of the performance of the ASP will be contracted to a suitably qualified institution based on TOR and selection procedures satisfactory to IDA (para 7. 1(p)); and (ii) that MOA/CMEU will prepare and submit to IDA progress reports every six months, with a separate account on each component, as well as a general overview of disbursements of funds prepared by the Financial Coordinator (para 7.1(q)). G. Training and Technical Assistance 5.22 The ASP will provide 410 person-months (p/ms) of technical assistance. Of this, about 166 p/ms will be for periodic inputs of less than a year; 144 p/ms will involve inputs of one year or more, and 100 p/ms will be for the ministry-wide procurement strengthening exercise. All of the training and technical assistance is geared towards building the capacity of the implementing agencies to sustain the improvements. Each implementing department/unit will have main responsibility for recruitment and supervision of TA. TOR for all TA have been prepared and discussed with the relevant implementing agencies (see Annexes 4, 11 and 12). At negotiations. assurances were obtained from Government that the selection procedures, TOR, and qualifications and experience of all technical assistance experts will be satisfactory to IDA (para 7.1(r)). A Condition of Effectiveness is Government appointment of key technical assistance experts (procurement, transport systems advisor, planning and financial management) with qualifications and experience satisfactory to IDA (para 7.2(c)).  37 H. Implementation Schedule 5.23 The ASP will be implemented over a six year period commencing July 1993. Detailed preparatory work for iimplementation has already started and is reflected in the ASP Implementation Manual. An indicative implementation schedule of key actions for project activities and each component/subcomponent is outlined in the Plan of Action (Annex 3). The actions have been phased to reflect project priorities and implementation capacities of the responsible agencies. The Project Implementation Schedule highlights the more important actions (Annex 13). I. Flscal Impact 5.24 Effective implementation of the ASP is expected to generate substantial fiscal savings in some areas, while in other areas an increase may occur in order to expand output. The net effect is not easy to quantify, but savings will result from the introduction of a Transport Management System, and these could be substantial. Present ADD vehicle maintenance and operation expenditure levels are about MK6.0 million (1991/92). A 10% reduction in expenditure (a conservative prediction) would therefore generate an annual saving of MKO.6 million. Incremental operating costs for research and extension will amount to about MK8.0 million annually (or about 12% of MOA's budget in 1992/3). Total operating costs for extension will increase by about MK4.1 million (1992/3 prices, see Annex 8, page 2 for details). However, annual costs per family reached, assuming that 60% of smallholders are covered, will fall from MK1 1.43 to MK8.57 . Similarly, although the Project will result in greater fertilizer utilization, it is expected that fertilizer subsidies will be eliminated by 1995/6. The fiscal impact of phasing out fertilizer subsidies will be about US$6 million a year equivalent (based on the level of subsidy and prices in 1992/3). The annual cost of housing and office construction under the project amounts to MK3.9 million, assuming a maintenance cost of 1% of total construction cost. The replacement cost of vehicles amounts to MK17.0 million. J. Environmental Impact 5.25 Fertilizer use remains low in Malawi and water pollution from this source is not expected to pose an environmental threat for some time. Nevertheless, disseminating information on optimal application rates and timing will promote more efficient use of fertilizer. Increased and improved use of fertilizer, coupled with expanded organic nitrogen-fixing practices, will help contain Malawi's serious declining soil fertility. Both the research and extension components will generate extension messages on improved soil and land management, water conservation, agro-forestry, nitrogen-fixing rotations and cultivation practices. While the Project will not finance pesticides or herbicides, the extension component will provide advice on the environmentally sound use of these products. Government has established a special environmental unit to integrate environmental issues into its planning process. Currently, this environmental unit is preparing a National Environmental Action Plan (NEAP) which will provide an improved framework for promoting sustainable development and will include actions to further strengthen the capacity of this unit to fulfill its role. The ASP will use this unit to monitor thef environmental impact of the project. At negotiations, assurances were obtained from Govermnent that it will take appropriate steps to ensure that the Project does not have adverse environmental effects (para 7.1(t)). To this end, the project's monitoring system will develop clear guidelines and witll include appropriate performance indicators.  38 VI. BENEFITS AND RISKS A. Benefits 6.1 Overview. It is difficult to isolate the benefits of investments in agricultural services from other factors. The discussion here focuses on production benefits, that result from lifting constraints on smallholder productivity, and institutional benefits. Research eases technological constraints on increased productivity, while extension relieves information constraints. Recent research by the Bank has demonstrated that investment in T&V extension systems in Africa yields very high rates of return. In addition, the effects of the ASP on smallholder cropping patterns, levels of production and incomes have been estimated using farm budgets and linear programming. Institutional benefits (increased effectiveness, efficiency and sustainability of support services) are primarily qualitative. 6.2 Production benefits include increased adoption of improved seeds, especially hybrid maize seed; more efficient utilization of fertilizers; use of fertilizer by a larger number of smallholders; and more widespread adoption of agro-forestry, nitrogen-fixing rotations and water and soil conservation practices. Production benefits will have an important incremental impact on female and resource-poor farmers not currently being reached by agricultural services. In addition, female farmers will benefit from low-cost, labor-saving technologies being researched and the integration of more female FAs into the extension system. 6.3 Economic and Beneficiary Assessment of Proiect Imnact. An attempt has been made to assess the overall effect of the project on smallholder cropping patterns and incomes. This analysis forms part of the on-going preparation of the Agricultural Sector Memorandum (para 1.27). Representative farm budgets were constructed for each of the cells in the smallholder typology shown in Table 1, page 5. The data for the farm budgets was taken from the MOA's Annual Survey of Agriculture (ASA). The farm budgets were then used in a linear programming analysis to determine smallholder agricultural production patterns with and without the project. Trends in the ASA data for 1990/1 were extrapolated to estimate cropping patterns and income levels in 2002/3 without the project, while the effects of the adoption of hybrid flint maize, Magoye soybean and Acacia Albida rotations, and improved cultivation practices (including more efficient fertilizer application) were examined to estimate the situation in 2002/3 with the project. The assumptions made throughout the exercise were conservative and total research and extension project costs were included. (More details concerning the methodology, assumptions and results of this analysis can be found in Annex 16). 6.4 The outcome of this indicative analysis shows that the project has the potential to generate an internal rate of return of 23.8% over 20 years. The net value of smallholder agricultural production (based on gross margin analysis and constant 1992/3 prices) is expected to increase by MK214.5 million by 2002/3 with the project (relative to continued trends without the project). The main changes in income estimated in the model are brought about through substitution away from local maize and maize/pulse intercropping towards hybrid maize and agro-forestry and soybean/maize rotations, as well as modest increases in gross margins due to improved cultivation practices. In particular, it is estimated that with the project, by 2002/3, an additional 450,000 smallholders will adopt hybrid maize with fertilizer (of which about 95% will be in the small category); an additional 115,000 smallholders will use fertilizer on local maize varieties and an additional 149,000 will adopt nitrogen-fixing rotations in combination with local maize. All these figures are relative to the situation which would obtain in 2002/3 if current trends were continued. Thus, with the project, it is estimated that in total about 84% of smallholders will adopt hybrid flint maize, in pure stands, in rotation with soybeans and/or in combination with agro-forestry techniques. This, in combination with  39 other changes3', leads to an estimation that the net value of smallholder output will increase by 35 % in real terms by 2002/3. 6.5 Institutional benefits. A major thrust of the ASP is to strengthen the institutional capacity of the national research, extension and input supply systems in order to increase the cost-effectiveness and sustainability of smallholder service delivery. Benefits include an enhanced capacity to formulate policies and to plan, budget, manage and report on agricultural projects; a better motivated and trained staff, especially in the field, and broader coverage of smallholders. It is difficult to measure these benefits directly, but the M&E system includes various performance indicators, which will be closely monitored, on the implementation of reforms under the ASP and their impact at the farm level in terms of productivity and income levels (see Annex 3 and the Implementation Manual, Section 7). 6.6 Research. The incremental benefits stemming from the research component are difficult to predict initially. During the periodic evaluations some quantification of benefits would be carried out, focusing on increased food production, especially among the resource-poor. Changes in these indicators would, however, also reflect investments in prior research and extension's role in promoting the adoption of new technologies and practices. 6.7 Increased Adoption of Hybrid Maize Varieties. The adoption of the hard flint maize varieties, MH17 and MH18, is primarily constrained by inadequate seed supply. The benefits of seed production and marketing reforms will be evidenced through monitoring the quantity of hybrid improved seed produced and sold each year. It is difficult to project the rate of smallholder adoption of these varieties if adequate quantities of seed become available, as income/cash constraints would then become binding. However, using farm budgets and linear programming, it has also been estimated that with the project, if seed supply is not constraining and if smallholders' access to credit and cash crops is substantially increased, nearly 2 million smallholders (of an estimated population of 2.4 million) will adopt hybrid maize by 2002/3. 6.8 Increased smallholder production of burley tobacco and soybeans, and/or the adoption of agro-forestry techniques, are likely to relieve the income constraint on the adoption of HYVs to some extent, either by increasing incomes directly (and therefore credit worthiness) or by reducing the amount of fertilizer necessary to generate economically viable yields from HYVs. 6.9 Increased Use of Inorganic Fertilizers and Improved Application Practices. Based on recent trends, Government predicts that fertilizer use will increase by 5% a year, regardless of the ASP. The future price of fertilizer, and its relation to maize prices, will depend on the transport situation, as well as the effects of policy reforms. Market liberalization, and its effects on the domestic quantities of fertilizer available, as well as on retail prices, will be closely monitored. Aside from the supply constraint, inefficient use of fertilizer (suboptimal application and inappropriate timing) lowers the profitability of its use. This is partly the result of information constraints, and these will be addressed by the Project. 6.10 Increased Use of Nitrogen-Fixing Cultivation Practices. Extension services will demonstrate the benefits of these practices; sell agro-forestry seedlings and Magoye soybean seeds; help farmers' groups set up nurseries; work with research to adapt new technologies and practices to different farmers' needs, and inform researchers of farmers' problems in adopting these packages. Benefits 32/ Examples of these other changes include increased burley production; increased efficiency of, and hence greater returns to, fertilizer application; wider adoption of soil conservation practices.  40 will be identified through monitoring the adoption rate of agro-forestry and soybean rotations, and the impact of these on crop yields. DAR has shown that agro-forestry can increase yields by up to 350%, depending on soil type. The benefits analysis for the ASP indicates that by the year 2002/3, the Project could lead to the adoption of nitrogen fixing rotations/mixes by about 240,000 farmers. 6.11 Soil Conservation and Land Husbandry. Under the ASP, FAs will be able to spend more time on soil conservation and land husbandry issues, because credit administration will be removed from their duties. The Project will support the dissemination of improved land conservation messages. In addition, it will ensure coordinate with other donors (UNDP) which are providing specific support for soil conservation and improved land use planning. The benefits from this are difficult to quantify, but are important in controlling soil erosion and degradation, especially in the face of increasing land shortages and cultivation of more marginal lands. 6.12 Small Scale Irrigation. The major benefits of the SSI subcomponent will be derived from the field testing (under smallholder conditions) and dissemination of technologies suitable for small scale irrigation schemes. In the initial phase of the project, the pilot schemes will cover about 50 hectares and involve about 100 smallholders, male and female. During the project implementation period, it is expected that the schemes will be expanded to cover about 500 ha and 1000 smallholders, as well as provide the basis for wider replication in future years. The major production benefit is that the schemes will enable participating smallholders to diversify into cash crops (mostly vegetables for the local market) and thereby increase their incomes substantially. The Project's monitoring and evaluation system will assess the production and income benefits of the pilot schemes and identify the technologies which have the greatest potential for wider adoption. The evaluation will focus on the financial, economic and environmental viability of the various technologies used. The SSI subcomponent will also provide important institutional benefits in helping to reorient and strengthen the capacity of the DOI to promote farmer led SSI development. 6.13 Focus on Female Farmers. The ASP, together with the UNDP-supported Fifth Country program, will emphasize reaching female farmers with appropriate messages. Under the ASP, research will be conducted on affordable labor-saving food processing and transport technologies; FHAs will be retrained to work as FAs, thus the number of female FAs will be increased; FAs will receive training on gender-related issues, particularly nutrition; explicit efforts will be made to include informal women's groups in extension; the number of demonstrations will be increased relative to verbal message delivery and the mobility of female staff at EPA and RDP levels will be ensured. In addition, since many female-headed households are resource-poor, the Project's focus on developing and promoting technologies and agricultural practices to improve the productivity of this group will benefit a large number of women. Performance indicators will be disaggregated by gender, where appropriate, in order to monitor the effect of the ASP on the productivity of female farmers. B. Risks 6.14 Proect Risks: - Limited Government/MOA capacity to formulate and implement the required policy and institutional changes would adversely affect project implementation. This risk has been minimized by ensuring realistic project scope, phasing implementation, developing action plans prior to project start-up, and providing in-service training and carefully designed technical assistance to build local capacity. Deterioration in economic performance and budgetary funding could undermine the required non-salary recurrent funding of key services. These risks are countered by developing improved and agreed methods for calculating levels of recurrent funding required, financing incremental operating costs on a declining basis to ensure phased absorption by MOA, forward  41 planning of recurrent budgets, and close monitoring on an annual basis. The proposed improvements in research and extension may not generate affordable solutions to the constraints faced by resource poor smallholders, but priority will be placed on ensuring a rapid flow of remunerative and accessible technologies; strengthening research-extension-farmer linkages; and close monitoring and evaluation of farmer adoption rates. Other donor project involving agricultural services may diffuse budgetary and management resources, but the ASP provides a framework and mechanisms to help mobilize and better coordinate donor funding support. VII. ASSURANCES AND RECOMMENDATION 7.1 At negotiations assurances were obtained that: (a) DAR will update the research action plans annually in accordance with agreed criteria, satisfactory to IDA, and submit them to the ASC and IDA not later than September 15 (beginning in 1993), as part of the annual budgetary review (para 3.15); (b) MOA will implement and closely monitor the research-extension-farmer linkage plan satisfactory to IDA, beginning in 1993/94, annually update it, and provide it to IDA for review not later than September 15 (beginning in 1993) (para 3.16); (c) MOAMDAR will ensure that progress reports are prepared and submitted to DAR (by May 1) on contracted research, and Government (DAR/ASC) will attempt to expand the amount of contract research annually in accordance with increased capacity of the participating agencies by promoting an 'enabling environment' and advertising all contract research opportunities by July 1, every year, beginning in 1993 (para 3.17); (d) (i) the final proposal on the main functions, method of operation, composition and action plan of the Agricultural Sciences Committee will be satisfactory to IDA; (ii) DREA will implement the action plan for ASC's operations beginning in 1993, satisfactory to IDA; (iii) DREA/ASC will update a work plan for ASC annually and submit it to IDA for review by September 15 (beginning in 1993) (para 3.18); (e) MOA/DAR will implement, beginning in 1993/94, the action plans satisfactory to IDA regarding improved research management systems and staff motivation, update them arnually based on implementation experience, and submit them to IDA for review (by September 15, beginning in 1993) (para 3.19); (f) the relevant implementing agencies will: (i) carry out the ASP Plan of Action (and constituent action plans) according to actions and timetable listed in Annex 3 (para 5.4); (ii) update annually the individual action plans and annual work plans as part of the budgetary review process, and provide the action plans to the Agricultural Sector Steering Committee and IDA for review by September 15 (beginning 1993) (paras 3.24; 3.26; 3.37; 3.38; 3.41; 3.43; 3.45; 3.47; 4.13; 5.4; 5.5; and 5.9); (g) MOA will, by June 30, 1993, develop, begin to implement and closely monitor an action plan to improve the supervision of extension field staff and the motivation of extension staff.more generally, satisfactory to IDA (para 3.27);  42 (h) the final terms and conditions of the motorcycle ownership scheme were satisfactory to IDA and that Government will begin its implementation in 1993/94 (para 3.28); (i) Government will implement and monitor the approved seeds and fertilizer policy reforms beginning in 1993/94, and review with IDA on an annual basis the progress in their implementation (not later than September 1, beginning in 1993) (paras. 3.31 and 3.34); 0j) IDA funds for fertilizers will be made available to private sector smallholder fertilizer importers through the Reserve Bank of Malawi (para 3.35); (k) Government (i) will review with IDA on an annual basis the proposed budgetary allocations for the project, not later than September 15 (beginning in 1993), and review the application of the improved yardsticks for non-salary operating expenses; (ii) will make annual budget allocations and timely releases to the participating agen- cies/departments consistent with agreed yardsticks for non-salary operating expenditures, the Project implementation expenditure schedule, approved work plans and overall budgetary ceilings; (iii) over the course of ASP implementation, Government will progressively increase its share of financing for non-salary operating expenditures; the increase in Government's share of funding of recurrent costs will be commensurate with the decrease in IDA's financing share of recurrent expenditures as stipulated in the disbursement provisions; and (iv) will allocate budgetary resources according to its medium-term agricultural investment program satisfactory to IDA, and update the program not later than the third year of ASP (para 4.2); (I) Government will follow IDA Procurement Guidelines for procuring IDA-financed works, goods and IDA Selection Guidelines for Consultants (para 3.43 and 4.8); (m) the special account will be implemented in accordance with procedures satisfactory to IDA (para 4.12); (n) the audit reports and audited statements will be submitted to IDA within nine months of the close of the fiscal year (para 4.14); (o) MOA will (i) revive the ASSC to meet on a quarterly basis to perform the functions outlined above, and (ii) assign one senior officer from CMEU to be responsible for the monitoring and reporting requirements of the ASP (para 5.3); (p) ASP's biennial and terminal evaluations will be contracted to a suitably qualified institution based on TOR and selection procedures satisfactory to IDA (5.21); (q) MOA/CMEU will prepare and submit to IDA progress reports every six months, with a separate account on each component, as well as a general overview of disbursements of funds prepared by MOA's Financial Coordinator (para 5.21); (r) the selection procedures, TOR, and qualification and experience of all technical assistance experts will be satisfactory to IDA (para 3.43 and 5.22);  43 (s) Government will prepare and submit to IDA within six months of project closing a Project Completion Report describing the project benefits and costs and lessons learned for the next phase (para 3.47); (t) Government will take appropriate steps to ensure that the Project will not have adverse environmental effects (as defined by guidelines to be developed, satisfactory to IDA) (para 5.25); (u) Government will implement, in 1993/94, an action plan satisfactory to IDA to delink credit and extension throughout the country, consistent with the ASP Plan of Action, taking into account the implementation experience of the on-going pilot scheme (para 3.23); and (v) prior to the transport systems advisor's appointment, MOA will assign a senior officer in MOA HQ the responsibilities of transport coordination management and assign the PM in each ADD transport management responsibilities (para 5.17). 7.2 Conditions of Credit Effectiveness are be as follows: (a) appointment by the Department of Research and Environmental Affairs (DREA) of the head of the newly established technical secretariat of the Agricultural Sciences Committee, with qualifications and experience satisfactory to GOM and IDA, and formal approval of the method of operation and work plan for 1993/94 (para 3.18); (b) Issuance of an administrative circular by the Ministry of Agriculture formalizing the role of the ASSC and indicating the meeting schedule for 1993/94 (para 5.3); (c) MOA appointment of key technical assistance staff (i.e. procurement specialist, trans,port systems advisor, planning and financial management specialist) with qualification and experience satisfactory to IDA (para 5.17 and 5.22). 7.3 A Condition of Disbursement for the inputs component is: (a) Government's implementation of the policy reforms outlined in the fertilizer policy paper and of an action plan satisfactory to IDA (para 3.34). 7.4 With the above assurances, the proposed Project will be suitable for an IDA credit of US$45.8 million on standard IDA terms with 40 years maturity.  ANNEX-1 Page 1 of 9 MALAWI AGRICULTURAL SERVICES PROJECT Land Resources, Customary Land and Population by Region (Areas in Km2 Unless Otherwise Indicated) Region North Central South Total Total Land Base Less: 26,931 35,592 31,753 94,276 Settlements and Infrastructure 216 575 660 1,451 National Parks andl Game Parks 4,134 4,118 2,661 10,913 Forest Reserves 2,850 2,890 2,920 8,660 Non-Agric. Land 12,776 9,233 7,847 29,856 Suitable for Agriculture Less: 6,955 18,776 17,665 43,396 Estates 1989 1,052 5,686 1,736 8,474 Customary Land for Smallholder 5,903 13,090 15,929 34,922 Cultivation Population ('000) 966 3,319 4,215 8,501 Density/Km2 all land 36 93 133 90 Density/Km2 Cust Land 164 254 265 243 Customary Land Pler Capita, ha 0.61 0.39 0.38 0.41 Source: Ministry of Agriculture (after World Bank, 1989): Esates; Mkandawire at. al. (1990); Population: 1989 projections on the basis of Malawi Population and Housing Census of 1987. Note: Figures for estata land only available up to 1989. EtimAtes therefore baeed on the aituation in 1989. It is assumed that estates have expanded fIrther during 1989-1991.  ANNEX-1 45 Page 2 of 9 MALAWI AGRICULTURAL SERVICES PROJECT Esdmated Maize Yields on Smallholder Land 1983/84 - 1990/91 (Kg/ha) Year Hybrid Composite Local 1983/84 2,757 1,787 1,037 1984/85 3,111 1,746 1,034 1985/86 2,941 1,729 958 1986/87 2,706 1,635 953 1987/88 2,667 1,199 1,094 1988/89 2,855 1,760 1,052 1989/90 2,555 1,400 813 1990/91 2,908 1,417 872 Source: Minsty of Agcultum Cop Etmates.  ANNEX 1 46 Page 3 of 9 MALAWI AGRICULTURAL SERVICES PROJECr Aggregated Household Production Levels by HodidDg Size Calculated from the 1987/S8 Annual Survey of Agriculture HoldingSize 0<0.5 0.5<1 1<1.5 1.5<2 2<2.5 2.5<3 >3 Number of Households 405,617 468,020 312,013 171,607 78,003 46,802 78,003 Percent of Households 26 30 20 11 5 3 5 Avenge Holding (ha) 0.3 0.73 1.22 1.72 2.22 2.72 3.95 Household Size 3.8 4.3 4.7 5.2 5.8 6.3 7.3 Household production (Kg) lmproved Maize 21 52 147 270 571 504 978 Unimproved Maize 310 721 1,111 1,422 1,694 2,079 2,509 All Maize 331 773 1,258 1,692 2,265 2,583 3,487 Millets/Sorghum/Roots 49 75 103 129 173 242 291 Rice 26 57 66 122 111 172 254 All Food 737 1,678 2,685 3,635 4,814 5,580 7,519 Tobacco 1 3 IS 34 52 67 99 Cotton 7 31 53 S0 103 150 341 Groundnuts 6 32 98 183 265 405 442 Beans 1 1 3 5 7 12 19 All Cash Crops IS 67 170 302 427 634 901 Attendance block % HH 4 7 10 12 17 16 10 Contact with Extension % HH 6 10 14 16 21 23 22 Area Cash Crops (ba) 10,465 47,832 82,222 79,990 57,665 44,301 113,386 As % of Area Cultivated 8.6 14 22 28 34 34 40 % Total Area UnderCash 2.4 11.0 18.9 18.4 13.2 10.2 26.0 Area Food Crops (a) 110,003 288,015 288,538 203,073 109,442 83,001 168,538 As % of Aea CuWivated 91.4 36 7S 72 66 66 60 Area Cultivated (ha) 120,468 335,84 370,759 283,062 167,106 127,301 281,923 % Area Cultivated 7.1 19.9 22.0 16.8 9.9 7.5 16.7 Source: Government of Malawi 1987/88 Annual Survey of Agriculture.  ANNEX 1 Page 4 of 9 MALAWI AGRICULTURAL SERVICES PROJECT Cropping Pattemn by Holding Size 19S7/88 ASA HoldingSize(heotars) 0<0.5 0.5<1 1<1.5 1.5<2 2<2.5 2.5<3 >3 Tota Pewcent of Atu Planted to Maize Local Maize 52.2 52.2 53.4 49.7 48.1 47.1 38.1 48.9 Hybrid Maize 1.6 1.7 3.2 4.5 7.9 5.5 6.S 4.1 Composite Maize 1.3 1.2 1.7 1.8 2.3 1.9 3.2 1.9 Maize/Groundnut 7.0 6.1 4.1 4.8 3.6 2.3 23 43 MaizelPulsea 11.9 12.1 8.6 5.9 3.5 6.6 6.3 8.0 Maize/Roots 4.7 2.2 0.9 0.6 0.3 0.6 0.5 1.2 Maize/Mil/Sorgh 3.2 3.1 2.0 0.7 1.3 1.1 0.9 1.S AU1 Maize 81.9 78.6 73.9 68.0 67.0 65.1 58.1 70.2 Other Food Crops MiHlet Purestand 0.6 0.9 1.2 1.6 1.5 1.S 1.2 1.4 Sorghum Purestnd 0.3 0.7 0.6 0.4 0.7 0.8 0.8 0.6 Cassava PS 6.2 3.1 2.1 1.8 1.5 1.6 1.2 23 SweetPotatoesPS 0.7 0.7 0.8 0.6 0.9 1.1 1.1 0.9 Blue Bonnet Rice 0.1 0.4 0.4 0.7 0.7 1.2 0.9 0.6 Faya Rice 0.5 0.5 0.8 0.9 0.8 0.6 1.3 0.8 Local Rice 3.0 2.3 0.9 1.1 0.3 0.4 0.1 1.1 Other Food 11.4 S.6 6.8 7.1 6.4 7.5 6.6 7.7 All Food Crops 93.3 87.2 80.7 75.1 73.4 72.6 64.7 77.9 Cash Crops NDDF Tobacco 0.2 0.6 1.9 2.8 3.6 3.4 2.8 2.1 Sun Air Tobacco 0.0 0.2 0.2 0.2 0.4 0.1 0.1 0.2 Oriental Tobacco 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other Tobacco 0.2 0.0 0.4 0.9 0.7 1.4 2.1 0.8 All Tobacco 0.4 0.8 2.5 3.9 4.7 4.9 5.0 3.1 Cotton 3.0 5.3 5.4 5.8 5.8 6.9 10.8 8.6 Chalimbana GN PS 1.4 4.2 8.5 113 12.8 16.0 12.2 9.2 Manipita PS 0.7 0.6 0.2 0.3 0.2 0.2 0.0 0.3 All Groundaut PS 2.1 4.8 8.7 11.6 13.0 16.2 12.2 9.5 Beans PS 0.4 0.4 0.7 0.6 0.7 0.9 1.0 0.7 All Cash Crops 5.7 11.1 16.7 20.8 23.1 27.4 26.8 21.9 Source: Government of Maawi 1987/88 Aal Sumey of Agrictore  ANNEX-1 48 Page S of 9 MALAWI AGRICULTURAL SERVICES PROJECT Summary of Crop Margins and Returns per Labor Day Crop Crop Crop Input Finance Crop Labor Return to Yield Revenue Costs Charge Gross Day Labor Margin Input (Mkl/ha) (MkWha) (Mlcha) (k/ha) (Ml/ha) (days) (Mk/day) Local Maize (no fertilizer) 800 238 16 0 221 113 2.0 Local Maize (with fertlizer) 1,500 446 163 17 266 120 2.2 Hybrid Maize (with fertilizer) 2,750 817 366 37 414 135 3.1 Hybrid Maize (high fertilizer) 3,500 1,040 384 38 618 153 4.0 Burley Tobacco (SH) 800 2,200 765 86 1,348 275 4.9 Burley Tobacco (Ten) 2,019 3,633 1,284 0 2,349 250 9.4 Incremental Production & Financial Returns: Local Maize (with fertilizer) 700 208 147 17 45 7 6.4 Hybrid Maize (with fertilizer) 1,950 579 350 37 193 22 8.8 Hybrid Maize (high fertilizer) 2,700 802 368 38 396 40 9.9 Burley Tobacco (SH) - 1,962 749 86 1,127 162 7.0 Source: DARUDEC Preparation Report, April 1992.  ANNEX 1 49 Page 6 of 9 MALAWI AGRICULTURAL SERVICES PROJECT Farm and Household Models for Smallholder (Present Situation) Indicative Models Item (0 - 0.5 ha) (0.5 - 1.0 ha) (1.0- 2.0 ha) (2.0 plus ha) Average Holding Size (ha) 0.25 0.75 1.43 2.78 Average Family Size (no) 4.00 4.00 5.00 6.00 PRESENT SITUATION Indicative Cropping (%) (1) Maize Local - no fert. 60% 60% 50% 50% Maize Local - low fert. 10% 10% Maize Hybrid - low fert. 20% 20% Maize hybrid - high fert Other Food Crops (2) 30% 30% 30% 30% Cash Crops (3) 0% 0% 0% 0% Total 100% 100% 100% 100% Household Maize (kg/yr) Est. Requirement (4) 920 920 1,150 1,380 Eat. Production (5) 15S 473 1,354 2,645 Surplus/(Deficit) (762) (447) 204 1,265 Cash Flow (Mk/yr) Maize Gross Surplusl(Deficit) (226) (133) 61 376 Input Costs (ex labor) 7 20 116 226 Fmance Charges 0 1 10 20 Net Surplus/(Deficit) (233) (154) (65) 130 Cash Crop (5) Crop Reserve Input Costs (ex labor) Finance Charges Gross Margin 0 0 0 0 Off Farm Income (6) 250 160 70 0 Total Cash Flow 17 6 5 130 Notes: (1) Indicative model based on ASA results to 1985/86. (2) Household usage, no sales. (3) Assumed no growth for present situation. (4) Average household size as per ASA results and per capita caloric requirement of 230 kg/yr. (5) See note (3) above. (6) Minimum cash requirement to purchase balance of maize requirement.  ANNEX 1 50 Page 7 of 9 MALAWI AGRICULTURAL SERVICES PROJECT Farm and Household Models for Smaliholder (Improved Situation) Indicative Models Item (0 - 0.5 ha) (0.5 - 1.0 ha) (0.5 - 1.0 ha) (1.0 - 2.0 ha) (2.0 Plus ha) Average Holding Size (ha) 0.25 0.75 0.75 1.43 2.78 PROJECTED SlTUATION Indicative Cropping % Maize local - nc fert 20% 20% 20% Maize local - low fert 25% 25% 0% 10% 10% Maize hybrid- low fert 25% 25% Maize hybrid- high fert 25% 32% 51% Other Food Crops 30% 30% 30% 30% 24% Cash Crops 0% 0% 26% 28% 15% Total 100% 100% 100% 100% 100% Household Maize (kg/yr) 920 920 920 1,150 1,380 Est. Requirement Est. Production 920 920 920 1,150 1,380 Surplus/(Deficit) (614) 3 (150) 660 4,000 Cash Flow (MkfYr) Maize Gross Surplus/(Deficit) (182) 1 (45) 196 1,190 Input Costu (ex labor) 34 102 74 198 591 Fmance Charges 3 10 7 20 58 Net Surplus/(Deficit) (219) (111) (126) 22 541 Cash Crop (tobacco) Crop Revenue 0 0 440 880 880 Input Costs (ex labor) 0 0 153 306 306 Finance Charges 0 0 17 34 34 Gross Margin 0 0 263 539 539 (219) (111) 137 561 1,080 Off Farm Incorme (1) 250 160 0 0 0 Total Cash Flow 31 49 137 361 1,000 Note: (1) Minimum cash requirement to purchase balance of maize requirement. Source: DARUDEC Preparation Report.  ANNEX 1 51 Page 8 of 9 MALAWI AGRICULTURAL SERVICES PROJECT Proportion of Smallholder Area and Households Using Fertilizers by ADD ADD % of all 1980181 1981/82 1982/83 1983/84 1984/85 1987/88 1989/90 1990/91 Households Malawi Malawi 100 26.3 33.1* 28 26 27 40 40 Karonga 2 12.7 41.9* 15 14 29 Mzuzu 7 45.6 47.5* 58 56 52 Kasungu 13 33.8 44.7* 35 34 34 Salima 7 24.9 45.6* 18 16 19 Lilongwe 21 31.6 28.4* 32 35 31 Lilongwe 24.8* 21.4* 22.4* 34.6* 41.6* Liwonde 21 23.0 23.0* 14 17 20 Blantyre 23 21.2 25.9 24 10 14 Ngabu 6 0.5 2.5* 0.3 0.4 2 Small- 49.11 57.21 41.71 57.0 68.5 81.2 99.1 112.2 holder Fertilizer Sales: (000t) Notes: *1981/82 Agricultual Sample Survey showed houscholds using ferilizer; also Lilongwe ADD reported households using fertilizer from 1982/83. Source: National Agricultural Sample Surveys 1980/81, 1981/82, 1982/83, 1983/84 and 1984/85. Ferlizer sals from Nadonal Statistical Office, or Ministry of Agriculture/ADMARC.  ANNEX 1 52 Page 9 of 9 MALAWI AGRICULTURAL SERVICES PROJECT Sales of Hybrid Maize Secd, Fertilizer, and Maize Output 1983/84-1990/91 Year Est. Maize Est hybrid Est fertilizer Est maize Units per ha ara planted seed sales sales production Seed Fert Output (000 ha) (tons) (tons) (000 tons) (all in kg per hectare) 1983/84 1,174 1,277 57,000 1,398 1.09 48.6 1,191 1984/85 1,145 1,440 68,500 1,355 1.26 59.9 1,183 1985/86 1,193 1,375 64,300 1,295 1.15 53.9 1,085 1986/87 1,182 900 67,300 1,202 0.76 56.9 1,017 1987/88 1,215 1,390 81,200 1,427 1.14 66.8 1,174 1988/89 1,271 1,880 87,400 1,509 1.48 68.8 1,187 1989/90 1,344 3,740 99,100 1,343 2.79 73.7 999 1990/91 1,292 5,200 112,200 1,590 4.02 86.8 1,231 Note: If hybrid seed and frtilizer are influencing maize yield then columns 6 and 7 should be strongly correlated with column 8. 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