Moldova - Emergency Drought Recovery Project

I-AV 6:7 " Dometof The World Bank FOR OFMCIAL USE ONLY -c.rp-.i't. Nwv :r'-- iC;il!-Mis T' ir.: ifU l.t.l: ;MbHrP;F7ri('Y I:...i-;<fllHrT f(V1F+l 'rh. A1h AT A, 1R. m rc NEKRANUMAND RECOMMENDATION OF THE PRESIDENT OF THE iT IIAL BAN FOR NSTR I AND DEVLOPMT ON A PROPOSED LOAN is AN AMOUNT BQUIVALERT TO US$26 MILLION TO THE REPUBLIC OF W)LDOVA FOR AN EMERGECY DROUGUT RECOVERY PRUJECT FEBRUARY 18, 1993 Tis doc_uent bas a rced distibuto ad y be wed by redits ooly in the performane of heir offa duies. Its conns may not otherwi be isclosed without World Ban saoation.  CWRUEY EOUVALEN3S (Febnuary 1993) US$ 1.00 = Rubles 640 ABBREVIATlONS AND ACRONYM CIS Commonwealth Of Independent States DPNER State Department for the Protection of the Environment and Natural Resources FSU Former Soviet Union GDP Gross Domestic Product ICB international Compeitive Bidding LCB Locl Competitive Bidding PPF Project Preparation Facility SDR Special Drawing Right METRIC EOUIVALENTS 1 meter (m) 3.28 feet I square meter (sq.m) = 10.76 square feet 1 kilometer (km) 0.62 miles I square kilometer (sq.km) = 0.386 square miles GOVERNNM> QF MOLI)OVA FISCAL YEAR January 1- December 31  FOR :FMCIAL USE ONLY 13MEROENY DIOau = EY Boffower: Republic of Moldova Amounlt: US$ 26 million Terms: Payable over 17 years, Including 5 years of grace, at standard variable interest rate Economic Rate of Return: Not applicable FianEing Pln: US$ million Government of Moldova 5.2 IBRD 26.0 Total 31.2 Staff Appraisal RC=rt: ITere is no separate Staff Appraisal Report. A Technical Annex is attached. This report is based on the findings of a single Preparation and Appraisal Mission which visited Moldova in January-February 1993, comprising Messrs./Ms. Jonathan Walters (country economist and mission leader), Claude Blanchi (senior operations advisor), Radwan Al-Jabri (awyer), Karen Brooks (agricultural economist), Oskar Honisch (principal agriculturalist), Marek Michalski (consultant, procurement specialist), Gathoni Mungai (consultant, disbursement specialist), Don Stromabom (consultant, procurement specialist), and 1jaart Schillhorn-van Veen Oivestock specialist). Oxana Zadorojnaya provided translation and secretarial services to the mission. Documens were reviewed by an ad hoc advisory group, consisting of Michel Pommier (CODOP), Hans Binswanger (LATDR), Jean-Louis Ginnsz (CODPR), Geoffrey Fox (EC4NR), and Andrew Ewing (EMIE). This document has a restricted disttibu;lon anM may be used by recipients only in the perfonrmnce of their offlcial duties. Its contents may i iot ott er*ise be dislosed without World Bnk authoriation.  TABLE OF CONTENTS Page No. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF MOLDOVA FOR AN EMERGENCY DROUGHT RECOVERY PROJECT ...... I Badgound .I.... I A. Overview ..................... I B. 'Te Agricultural Sector in Moldova and the Impact of the 1992 Drought ... I C. TheSeoorFramework ................ 3 D. Government's Response to the Emergency ........ .............. 4 Projet Objeiv..................................... 4 Projec Desciption .................................... 5 Prjetnpentt .................... S A. Overall Management and Administration ........ ............... 5 B. TechnicalAssistance ................................... 6 Project Sustainabilty ............ ....................... 6 Lesons Learned from Predous Bank Involvern ....................... 6 RatlonaleforBank nvolvenent ................................... 6 Areed Acdons ......................... 7 Eavhonmenta Aspes ........................ 7 ProjedtfBe"tsand Ris ........................ 7 Recommendation .8.............................. 8 Schedule A .............................. 9 ScheduleB .............................. 10 Schedule C .............................. 12 TECHNICAL ANNEX .............................. 13 I.BadykroundandStrate ............................. 13 A. Nahre of the Emergency ........... .................. 13 B. Damage Assesment and Economic ImpWat ........................... 13 C. Agricultural Refbrm and the Drought .............................. 15 D. Govenment's Response to the Emergency ........................... 17 I. Bank Response and Stra .............. .......................... 19 M. Detailed Projec Desaipdon ..................................... 19 A. Crop Protion and Pesicides .................................. 19 (i) Priority on Modern, Safe Pesticides .......................... 19 (ii) AmountofPesdcidesNeeded .............................. 19 (iii) Quality and Safety of Pesticides, Environmental Effect ...... ........ 20 (lv) Pesticides to be Supplied Under Project ....................... 20 (v) The Distribution System ................................. 21 (vi) Advisory and Supervision Services .......... .. .............. 21  (vi) P cideRegulations ................................ 21 B. Seeds ..................... .. 22 C. Agricutural Spare ..................... 24 D. InputsfrtheAnimalndustry ..... ................. 24 (I) SectorBadcground ............................. 24 Qi) TheImpactofDrougtontheAmal ndtry................... 26 (ii) InputsRequiredby tiePoultrySubsector . . ................... 28 IV. Indstdonl Arrngements and Pirojed IplmentatIon ..................... 29 A. Overal Maement andAdministration . . ................... 29 B. TeniAssistance ..................... . 30 C. Vroceme andDisbunement ..................... 31 D. lnportlggandDistribuion Costs...................... 31 E. Dbstuitonto theFnFMUsers .............. 31 P. Accountsand Audit ..................... 32 V. FUIndal and Ecoondc Justificadon ..................... 32 MRA MBRD No. 24285  LEET OF TABLES Page No. TABLE 1.: Selianinov HydrothermlcCoefficient 9M .......................... 14 TABLE 2.: npact of the Drought of 19 .. ................................ 15 TABLE3.: Prodwcen oi MainSeed slsn2IM(tow) ......(to .. ................... 23 TABLE 4.: Percentge Change In (Juy 1) livestock invetoy on state/collective fams ...... 25 TABLE5.: Producdionand exrt ofanlnimaproducts(tonsx 1000) .. ................. 26 TABLE6.: Mortity duetodlsease iiddeficiency ............................. 27 TABLE7.: Fee andforageproduction d lmportsin Moldova(intosx 1000) . .... ..... 28 TA3LE8.: TentadvefeWdgra pplyduing193. ......lnauppld..................u... 28  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE IBD TO THE EECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBUC OF MOLDOVA FOR AN IMERGENCY DROUVHT tRECOVERY PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Republic of Moldova for the equivalent of US$ 26 million to help finance a project for Emergency Drought Recovery. The loan would be at the Bank's standard variable interest rate, with a maturity of 17 years, including 5 years of grace. Background A. Overiew 2. The Republic of Moldova became independent on August 27, 1991, at a time of severe economic dislocation as a result of the disintegration of the USSR. This dislocation was exacerbated by a civil war in the Trans-Diwester region (where the Russian minority Is stongly represented) from March to July 1992, and a massive terms of trade shock as Russian energy prices rose towards world levels (Moldova being almost totally dependent on imports for its energy supplies). In the summer of 1992, the situation was compounded by the worst drought since 1946. Moldova's membership of the Ruble Area meant that these developmeats took place against the background of considerable macroeconomic instability. By the end of 1992, IDP was estimated to have declined by over 40 percent since 1990, and inflation had reached 1500 percent on an anmual basis. 3. Against this background the Govenment has attempted to address the severe structural imbalances in the economy through a program of reforms designed to facilitate a progressive transition to a market economy. A number of key laws have been adopted (e.g. on agrarian reform, privatition, land reform, privatization, bankruptcy, property, and foreign investment) which envisage a substantial reduction in the role of government in the economy. However, implementation of the reforms provided for in those laws has been generally slow due to political factors and to capacity constraints in the administration. Nevertheless, progress has been made on the liberalization of prices and interest rates, foieign exchange allocation, and land privatization. 4. The Government has also attempted to offset the instability emanating from the Ruble Area by restricting its fiscal deficit (the estimated outturn for 1992 at 7 percent of GDP being better than for many countries of the former Soviet Union), since continued membership of the Ruble Area effectively limits macroeconomic stabilization options to the fiswal area. The establishment of a national currency is under consideration, but due weight will have to be given in this decision to the likely evolution of trading relationships within the former Soviet Union, and on reaction in the Trans-Dniester region. B. The Agricultural Sector in Moldova and the Impact of the 1992 Drought 5. Moldova is a densely settled rural country in which agriculture and food processing directly support more than half of the population. Agriculture contributes approximately 40% of GDP, more than half of the population of 4.4 mi!lion lives in rural areas, and food processing is a major employer within the industrial sector.  6. The year 1992 was a pardcularly unwvorable one for agricultur production In Moldova. A combination of mid and late summer drougt, coupled with much higher than averg tempetures, and an unusually high Incidence of days wit hot dry whids (sukhovel), inflicted heavy damage on the long season annu alops, and also on fts and vineyards. In July and August, some of Moldova's dWicts received less than 20% of their normal monthly rainl; hardest hit were the southem districts, but also many districts In the center and north were badly affected. Ile men temprtures In August averaged 4.20 C above normal, with at least one district reporting 5.80 C above normal. At least 8 meteorological stations, out of 15, reported more than 10 days of hot dry winds for the month of August.' 7. As a result of this unfortuate combination of meteorological effects, overall cereal production declined by 32%, of which maize by 58%. Further serious decreases in yield and production occurred In sugarbeet, by 14%, tobacco 37%, soybeans 73%; fruits are reportd to have yielded only some 30-40%, and grapes only half of their normal yields. Valuation of the direct loss in output in the crop sector at domestc prices prevailing on average in 1992 (approximately third quar 1992 prices) yields a loss of approximately 40 billion rubles or approximately 16% of Moldovan GDP in 1992. The fall in real G(DP in 1992 is estimatd to have been approximately 30%. In other words, without the drought the drop in GDP might have been on the order of 15%, or somewhat less than average for the former Soviet Union. 8. In the absence of drought, the economic dislocations attendant on the disintegration of the USSR, would have had a lesser impact on the Moldovan economy than on the rest of the FSU, since the horticultural products, wine, and tobacco that Moldova produces and traditionally exported to the Russian market retain a high value in money and barter trades. The loss of physical product associated with the drought reduced Moldova's ability to purchase agricultur iputs and inputs for the processing industry. 9. The large quantitative loss coming at a time of profiond political and economic change has had a further impact through a slowing of the momentum of economic reform. Because neifther the farms nor the govenment has reserves with which to finance commercial imports either in rubles or in dollars, the state has taxed the farms in kind to procure products to exchange for imports. Agricultural chemicals, fuel, fertilizer, and spare parts are predominantly imported. Most imports traditionlly came from the former Soviet Union, but some western imports were transshipped through Moscow. Bilateral assistance in this year of crisis has taken the form primarily of credits for purchase of grain, or supply of grain on a grant basis. Little financing is available for import of agricultural inputs needed for the coming season, but the country cannot aford to risk the large loss likely if vines and orchards already weakened by last year's drought are expose anprotected to this season's diseases and pests. 1/ Govrment's agroclimatology deptmet reports precipitation/tatur reations in the form of a "hydrothermic coefficient'; a comfortable coefficient is 1, when the coefficient reahes less than 0.7, plants suffer from drought. In July 19, only one meteorological station out of 17 reported 0.7, all others repwrted less (as low as 0.2); and in August only one station dsowed more than 0.7, with all others leas, even as low as 0.1. 2  C. ne Sector Framewo4c 10. Despite apparent difficulties, some progress has been achieved in price policy, and a program of land reform and farm restuctuing is bing implemented. The land reform is proceeoing in several stages. The first (from Februay, 1991 to approximately November, 1992) is largely complet, arid consisted of the enlargement of household plots and transfer of these plots to private ownership. Approximately 10% of the total Moldovan agricltural area has been so distibuted. Since 200,000 hectares were held In household plots In 1990, the first stage of the land reform has twasferred ownership of these plots to the households that worked them, and has in addition enlarged the area in plots by about one half. 7he land reform households received ownership of their land instead of the former use right, but land camot be sold until 2001. 11. The second stage of the land reform began in November, 1992. This stage includes both farm commercialization and additional land reform. Farms may restructure in one or a combination of three main forms: 1) joint stock holding company, either closed or open; 2) producers' cooperative or association of producers; and 3) individual private farms and small businesses. Most collective and state farms are expected to eregister as closed stock holding companies. Shareholders will receive non- transferable shares both of land and assets. Asset shares will be distributed to workers and pensioners, usually according to the amount of labor Invested in the farm. After valuation of the assets of the farm the shares will be denominated and distributed. 12. Land commissions in each of the forty disicts will supervise the distribution of land shares. The commissions will draw up lists of people eligible to receive shares of collective and state farm lands and will inventory the land on each farm. Docments affirming rights to a number of hectares will be distributed. Tbis relative share of land will in most cases not be divided or even physically demarcated, but will entitle the owner to a proportionate share of reurns to land manged collectively. Although the size of land shares varies by farm, most shares in the collective farm sector will be less than five hectares per person. Shareholders who want to leave the state and collecdve farms can request that their shares be given in physically demarcated plots. This land can be withdrawn between November and March of any year. The land reform and farm restructuring is expected to proceed rather slowly. The current emphasis is on reregistration of farms as joint-sck companies, rather than restructuring. 13. The government's reform program in agricultuire has been most successful in the area of price adjustment, and this has paradoxically been in part in response to the drought. The government does not have enough resources to provide major subsidies for grain imports coming in at world prices, and the concept of cost recovery is increasingly accepted as a matter of necessity. Grain prices, which moved up toward 50 rubles per kllo at the end of 1992, are, In tUrn, influencing prces of other crops and accelerating contraction of the livestock industry. Although many distortions remain and there is great uncertainty about future prices, the price structure for tradeables not available within the ruble area is moving toward world levels more rapidly than is the case in Russia, for example, where budgetary reserves for agricultural subsidies are perceived to be more ample. 14. Although prices are moving toward world levels at the now unified exchange rate, Moldovan agricultural producers still face output prices pressured both by depressed domestic demand and price distortions within the main market areas of the former Soviet Union. In the near term, therefore, agricultural inputs imported at world prices will require a high physical marginal return in order to compensate for residual price distortions. The fertle soil of Moldova, responsiveness of many horticultural products to yield-enhancing inputs, and degree of progress already achieved in moving 3  toward world prices may make Moldova a better candidate for imported Inputs than most of the former Soviet Union. 15. In other areas including privatizaon, demonopolization, nterie restructuring off fms, and flnancial reform, Moldova does not yet have a tblHy developed strategy of agricultural adjustment. The lack of consistent forward progress in agrculture reflects severad realities. Absence of an effective domestic stabiization program and the high inflation rate in the ruble area has preduded advantages that a stable macroeconomic enviroment provides the agricultua sector. The general economic downun, due In part to the drought, has drawn antion of sectoral manage toward short term crisis management. Lack of political consensus has retarded design of a coherent economic reform program. While in the medium tem there will need to be further institional and policy refms, In the short term exena assistauce should be targeted to arresing the deterioration in the agricultural sector, and restoring productive capacity, without worsening current distortions. The proposed emergency assistance for drought recovery is such an activity. It addresses a . A created by an acute meteorological emergenc. It does not Interfere with adjustment and reform that is underway; e.g., movement toward a price structure more consistent with world prices. Although assistance is not intended primarily to promote reform, targeting financing away from activities with negative value added will accelerate the restrutuing process. Financing provided for purchase of inputs will reduce the need to resort to tax in kind and to barter trade to secure imported inputs. D. Government's Respone to the Emergency 17. Moldova is in an area of relatively risky agriculture, and mild drought is relatively frequent. The country insured against the impact of drougt in the past through participation in inter- republic trade at interna transfer prices, which incorporated high Implicit subsidies that muted the financial impact of any decrease in production. In 1992 the drought was unusually severe, and the traditional approach to insurance (both at the national and farm levels) had broken down. The financial Impact of the drought is thus of an order of magnitude with which the government did not have to cope in past years. 18. The Government's response to the drought has consisted of three main activities; a. Efforts to secure fm;acing of co_msatory imports, primarily of food grain; b. Intervention in the livestock industry to cope with reduced feed supply; C. Efforts to secure availability of inputs for the 1993 crop season. Project Objectives 19. The Bank's objective in proposing this loan is to provide the Government of Moldova with urgently needed resources to assist recovery from the drought. The project will ircrease the 4  availability of food for the domestic economy and exports, and facilitate the reduction of poverty, through restwring production in the most important sector of the economy. It will do so by providing inputs that are essendal for the coming agricultural season (beglning in Match 1993). At the same time the proposed loan would assist in narowing the balance of payments gap resultinp from substantial incremental food imports and the sharp decline in agricultural exports resulting from the drought. Project Description 20. The proposed project would finance inputs for the 1993 agricultural season, targeted towards those sectors which appear to have a long-term comparative advantage. It would provide (i) US$15.7 million of pesticides essential to the 1993 fruit, vegetable and grain crops; (ii) US$ 6.0 million for poultry feed; (iii) US$ 2 million for seeds and seeding equipment; (iv) US$ 2 million for spare parts for agricultural machinery; and (v) up to US$ 300,000 for technical assistance for procurement and disbursement (any unused fimds on this portion to be reallocated to another category). A positive list of goods has been agreed for each of the first four categories. These inputs would be within the framework of a program of imports of agricultural inputs by the Goverment ad Its agencies. Retroacve finanming amounting to US$ 5.2 million has been included. The final beneficiaries would be fully responsible for the local costs of the project, which consist of the costs of storage and distribution, esimated at 20 percent of the value of the Inputs financed by the proposed project, or US$ 5.2 mfllion. Project financing is summaized in Schedule A. Schedule B shows the amounts and methods of procurement and disbursement. Schedule C gives the dates of key processing events. Project Impementation A. Overall Manaement and Administration 21. The Borrower will be represented by the Ministry of Finance. The Ministy for Foreign Economic Relations and the Ministy of Finance will be responsible for the implementation of the operation, and will supevise the functions of the Importing and Distribution Agents (see below). A Vice- Minister has been put in charge of the operation. 22. The Miistry for Foreign Economic Relations has appointed MOLDEXIM, one of its agencies, as the Importi Agent, responsible for the procement ad importion of all goods procured under the loan. Tecnical Assistmce will be procured directly by the Miistry for Foreign Economic Relato 23. The Imporling Agent will transfer the imported goods to the Distribution Agetas, who will be responsible for their distribution to the final users;. Te Government has identified the following Distribution Agents, which are all Government agencies: FERTILITATEA, for the agro-chemicals, ZI When imported goods are distrbuted to a single final user, as nisy bt the cae for poultry feed, ar when a single user is tking a large order, condo ca be given to trnserring direy from the Importing Agent to the inal user to save t cost of distribon. S  CEREALE, for the seeds, seed equipment and poultry feed, ARCA MOLDOVA for the agricultu spare parts. B. TechicWal Assistance 24. Since neither the importdng agent nor the Govermment bave any experience in procurement and disbursement for World Bank operations, it has been agreed with Government that Technical Assistance is essentdal to ensure speedy implemenion of the project. A Procurement and Disbursement Consultant has been identified and recruited under a PPF. Govenment has decided that the Consultant will report to the Ministry for Foreign Economic Relations and will assist MOLDEXIM. Project Sustainablity 25. The project aims to restore production in the agricultural sector rapidly by mainly providing essential inputs rather than capital assets. The sustainabiity of the aicultu sector depends in the medium term on progress in policy reform and economic restructuhig. The project contibutes to sustain "ity in that it reduces the risk that the restucturing process will be retarded or even reversed (this issue is addressed under the risks section below). Lessons Learned from Previous Bank Involvement 26. The Republic of Moldova joined the l3ank on August 12, 1992. The proposed loan would be the first to be made to the county. There have been five Bank missions to Moldova and a Country Economic M ndum, based on a Bank mission of October 1992, is currently under preparation. The missions have worked in very close collaboration with the Moldovan authorities, and a fruitvidi policy dialogue has developed. The missions have been consisteny impressed by the professionalism of an overburdened administion, laboring with the herculean task of creating an independent ste. Radonale for Bank Involvement 27. The sudden dislocation of the Moldovan economy following the disintegration of the USSR has left Moldova unable to cope with recovery from the drought without exena assistance. The breakdown of the interrepublican trade and payments system, combined with political factors relatig to the status of Moldova within the Commonwealth of Independent States (CIS), have greatly restricted the country's access to its traditional support mechaoisms in Russia. ' Moldova's relative lack of economic and political relations with counties outside the former Soviet Union, has made it difficult for the country to raise tenal financing. Th1 proposed loan would both help to redress an emergency situation and act as a catalyst to support by her donors. It should also help counteract the trend to slow down liberalization of the economy L ne face of shortages of essent inputs. If the program of economic Y/ Moldova has observer st in the CaS. Al&ough Moldova has not dgned the political chare, it does participate in the mic a nts of the CIS. lbe situation is complcated by the uncertain steas of the si region of Trn-Dniester, and by continued support in some quartes for the unification of Moldova with Romani 6  reform and restructwring progresses, then the Bank could consider financial support in the form of rehabilitation, adjustment and Investment loans. 28. In i related operation, the IMF is providing SDR 13.5 millioi under the cereals component of its \. mntingency and Compensatory Financing Facility to compensate for the abnormal level Imports of grais in 1992/93 expected as a result of the drought. In addition, the European Community and the US Government are providing financial assistance for grain imports. Agreed Acdons 29. The Government has agreed to undertake a number of actions within the framework of the proposed project. Goods financed under the loan would be sold to end users at border prices, converted at the official exchange rate (prevailing on the Moscow Interbank Foreign Currency Exchange), plus a margin for fill internal distributlon costs. Any subsidies on bank credit for input purchase will be kept to a minimum, and will be paid from the Government budget. Receipts from the sale of inputs will be collected and placed in a fimd to be designated by the Government. Any agrochemicals purchased under the project will be on the list of approved chemicals of both the Republic of Moldova and the World Bank, and will be transported, stored and handled according to natonal and World Bank standards. Technical assistance will be financed under the loan for procurement and disbursement expertise. En'fronental Aspects 30. The use of pesticides in Moldova has given rise to major environmental issues. However, by procuring outside the FSU, the project will provide much safer and more efficient pesticides, requiring much lower quantites of active ingredient per unit area, than have been available in the past. In addition, pesticide use is declining due to improvements in pest management, rising prices for agrochemicals as subsidies have been phased out, an increasingly influential enviromental movement, and shortages of supply. Moreover, the pesdcide regulations, which are already quite strict by intnational standards, are being made more rigorous. The certification mechanism appears to be quite effective, and the State Departe for the Protection of the Environment and Natural Resources (DPNER) acts as a watchdog in environmental matters. The project has been placed in Category B for the purposes of Operational Directive 4.01 on Evironmental Assessment. Projec Benefits and Risks 31. The rub benefit of the proposed project would be to resore agricultural production In an economy highly dependent on its agricultural sector. hbis will help slow the decline in natio Income, increase the availability of foreign exchange, enhance food secrity, and maintain momenaum on the resructuing of the economy. The main risk for the proposed loan is that political factors will retard the reform and restructuring pross, and the recovery of agricultural production may then not be sustainable beyond 1993. However, the Government is endeavoring, in consultation with the Bank and the IMP, to pilot a comprehensive economic and legal reform program through Parliament. It is envisaged at the reform program will be supported by futre Bank loans. An associated risk is that the project would finance stuctures with no long-term comparative advantage. This risk has been addressed by either excluding from the project subsectors in need of major restuctring Cn the case of pig 7  production), or by restricting the project's contribution in such subsecors to the maitennce of the breeding stock (in the case of poultry farming). The third risk is that the inexperience of the Government and its agencies in international procurement, and the requirements of the Bank, will delay the arrival of inputs unt;i late in the aicultural season. This risk is being addressed by the inclusion of technical assistance for procurement and disbursement under the loan, and by intensive supervision by Bank staff. The fouth risk Is that commodities imported under the project would be reexported to neighboring countries; however, this risk is minimal given the Government's policy of selling inputs at border prices plus Internal distribution costs. The fifth risk is that the ma im-term financial viability of the agricultural and banking systems will be undermined by provision of inputs and credit in a risky environment. Ibis is being addressed by credit subsidies being granted in a transparent manner from the Government budget (within the framework of fiscal and monetary policy formulated in consultation with the IMF and the Bank) rather than being borne by the financial sector, and by the progressive liberalization of producer prices that commenced in early 1992. Recommendatlon 32. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend hat the Executive Directors approve it. Lewis T. Preston President Attadchents February 18, 1993 Washington D.C. 8  MuhlkA MOIDOVA EMMGENCX D)-tOUGHTr RQECONDY n Estlmated Costs and Flnandng Plan (in US$ millon) Locl Foreign Total FsffXted Prp3e!rt Codst Agricultural Chanials 3.2 15.7 18.9 Seeds & seed equipment 0.4 2.0 2.4 Agricultural spare parts 0.4 2.0 2.4 Poultry Feed 1.2 6.0 7.2 Temnical Assstance (including office equipment) 03 0.3 Financing Plan IBRD - 26.0 26.0 3endicaries S.2 - 5.2 Total Finandng JU > 312 A/ Sovkhozes, kolkhozes and pnvate famers will pay full import pdces plus intemal distrbution costs. 9  Schedule-B (page 1 of 2) PROCUREN MEllIODS US$ (million) EloetEment La OT mER NF,AV Agro-chemicals - - 15.7 3.2 18.9 Poultry Feed 6.0 - - 1.2 7.2 Seeds and Seeding Equipment - 2.0 0.4 2.4 Agric. Spare Parts - - 2.0 0.4 2.4 Technical Assistance Procurement/Disbursement Consultants - - 0.3 - 0.3 TOTAL 6.0 - 20.0 5.2 31.2 I/ *O&hero includes international shopping (US$ 16.9 million) and diret contacting (USS 3.1 milion). _/ Not Bank - financed. 10  (page 2 of 2) MOLDOVA E:1EGENX DRMQLN RECAOVERY DLSBIJRSEENT gory Amount Percentage of (US$) ExenditRm to be Financed (1) Goods 25,700,000 100% of foreign expenditures (2) Consultants' 150,000 100% serices (3) Refinancing 150,000 Amount due of Project pursuant to Preparation Section 2.02 Advance (b) ofthe Loan Agreement TOTAL 26,000,000 Estimated Disbursements: Bank Fiscal Year (US$ million) i199 1994 Annual 20 6 Cumulative 0 26 11  Shgd Lf IEPWU QF MOLlDOVA EMERGENCY DROUGHT RECOVERY PROJECT Timeable of Key rcesing Events (a) Time taken to prepare: 2 months (b) Prepared by: EC4 (c) Preparation and Appraisal Mission: Jan.16 - Feb.1, 1993 (d) Negodations: February 24, 1993 (e) Planned date of effectiveness: March, 1993 (t) List of relevant PCRs and PPARs: Not applicable 12  TECHNCAL ANNEX 1. BadIground and Strategy A. Nare of the Emergency 33. Moldova experienced a combination of drought, high temperatures, and high winds in the summer months of 1992. For much of the month of May, lower than average temperatures combined with low reserves of moisture in the soil in many districts reduced the quality of the winter grain crops and noiirrigated lucerne, and caused loss of fruit blossoms. In June precipitation increased, and the quality of many crops improved. In early July warm and relatively dry weather developed, and by the last third of July the weather was hot and dry. The average temperature for July was close to the norm of 20.5-22.5 degrees C. During the month of July the number of days with maximum temperature of 30 degrees or higher was 6-9 in the northern districts (depending on reporting staion), and 10-16 in the center and south, which is 1.5 times the usual. 34. Total precipitation in July over most of the territory was 11-45 mm, or 20-70% of normal precipitation. In some districts precipitation was as little as 5-10 mm, or 8-15% of usual. Relative humidity during daytime fell to 20-30% in most places. Hot dry winds (makbD.xei) blew for 3-16 days (depending on reporting station), which is 2-3 times the usual duration. Moisture reserves in the soil at one meter depth on July 28 constitued 50-100 mm, and in some areas had fallen to 25-40 mm. 35. Hot and dry weather prevailed throughout August. The average monthly temperature was 23.1-25.4 degrees, or 3.74.6 degrees greater than normal. The maximum temperature was 34-38 degrees, which is 1-3 degrees below the maximum recorded over the 100 years for which records have been kept. The temperature remained above 30 degrees for 23-26 days, or twice the usual duration. The number of days with temperature in excess of 35 degrees ranged from 8-14. This temperature regime has been observed once in 50 years. 36. The number of days with relative humidity less than 30% in August ranged from 10-16. Total precipiaion in August over most of Moldova ranged from 5-35 mm, or 10-65% of usual. In Kameaskom and Bessarabskii districts monthly precipitation was 60-110 mm, or 153-216% of usual precipitation. Soil moisture reserves fell over much of the country to 15-35 mm at one meter depth, and in places to 0. 37. Similarly severe agrometeorological conditions were observed only in August 1946. 38. A summary index (Selianinov hydrothermic coefficient), according to which 1.0 expresses adequate moisture, 0.7 indicates dryness, 0.6 drought, and 0.5 severe drought is displayed below in Table 1. In usual years the value of this index in Moldova ranges from 0.7 in the south to 1.2 in the north. B. Damage Assement and AconomIc Impact 39. Moldova is a densely settled rural country in which agriculture and food pcsing directly support more than half of the population. Agriculture contributes approximately 40% of GDP, although price distorto and ambiguities in national accounts obscure precise mesurement of 13  TABLE 1.: Selianinov Hydrothermic Coefficieot 1992 station index Briohany 0.0 1.8 1.5 0.5 0.4 0.9 Chisinau 0.8 1.2 1.3 0.4 0.3 0.9 Timapol 0.6 0.7 1.0 0.5 0.2 0.5 KCagul 1.S 0.8 0.6 0.5 0.3 O.S Source: Main Hydrometeorological Adm i _tt, Moldova agriculture's contribution. More than half of the population lives in rural areas, and food processing is a major employer within the industrial sector. A major shock to agricultural output has a deep and broad impact on levels of living. 40. Grains and horticultural products, sugar beets, and tobacco are the main products of the crop sector, and all, with the partial exception of winter grain crops and grapes, were adversely affected by the drought. The fall in production between 1991 and 1992 is shown in Table 2 below, although it should be noted that production of fruits, berries and grapes was already below trend in 1991. 41. A small portion of the shortfall can be attributed to an early frost on October 6, 1992, and a slightly larger portion to the impact of the war in the Trans-Dniester. Some of the reduced output in 1992 can be attributed to reduced use of fertilizer and other inputs associated with higher prices and interruptions in supply. Production of sunflower, potatoes, and grapes, although higher than in 1991, was substantially less than average for recent years. 42. Within the grain sector, the corn crop was harder hit than the earlier harvested crop of winter wheat. In Moldova wheat is the main food grain, supplemented by corn and other grains. Most of the corn is fed to livestock, and domestic feed is traditionally supplemented by imports. Since the drought was generalized in incidence across the country and affected horticultural and feed crops more than the main food grain, the shortfall in pro'uction did not create a geographically concentrated group of people whose nutition was threatened. Instead the economic impact of the drought is spread throughout the agricultural sector, and, through the trade accounts, to the economy as a whole. 43. Valuation of the direct loss in output in the crop sector at domestic prices prevailing on average in 1992 (approximately third quarter 1992 prices) yields a loss of approximately 40 billion rubles. An alternative valuation of loss in farm income includes only foregone sales (imstead of lost production), but also includes indirect effects through reduction in livestock marketing. This second calculation again yields a loss of approximately 40 billion rubles compared to marketing in 1991 (in constant 1992 prices). 44. Neither of these calculations purports rigorously to patiton the separate effects of economic and meteorological shock. The hydrologic data presented above document the incidence of severe shock. Its impact is heightened by occurrence at a time of economic dislocation. In the absence of drought, the economic dislocations would have had a much lesser impact on Moldovan agriculture, and on the economy more generally, since the horticultural products, wine, and tobacco that Moldova produces and traditionally exported to the Russian market retain a high value in money and barter trades 14  TABLE 2.: Impact of the Drought of 1992 within the former Soviet Union. Processed foods and raw agricultural products comprised 46% of Moldovan total exports in 1991, and more than half of the total in years prior to Ptodution (in '000 1991. A small portion of Moldovan _ _ _ processed food has traditionally been exported to hard currency markets, but Russia is the 1991 1992 Shorfall main trading partner. Russia, Belarus, and c- 3 - Ukraine have also been major suppliers of Ceds 3203 2176 32 agricultural inputs, including fertilizer, Sugar Bees 2262 1948 14 chemicals, fuel, and spare parts. The loss of physical product associated with the drought Sunflower 170 193 reduced Moldova's ability to purchase Tobacco 63 40 37 agricultutal inputs and inputs for the Potats 291 310 - processing industry. The performance of the production system in 1992 was adversely Vegetables 989 745 25 affected, and access to imported inputs needed Frts and for 1993 is reduced. Davies 698 546 22 45. Fortybihlionrublesrepresents es 774 814 - approximately 16% of Moldovan GDP in SourceniMtiy of Agricuture, Moklova. 1992. 'e fall in real GDP in 1992 is estmated to have been approximately 30%. These assessments imply that the drought accounted for approximutely half the fall in economic activity. In other words, without the drought the drop in GDP might have been on the order of 15%, or somewhat less than average for the former Soviet Union. Since the economic diocation throughout the region is greatest in the defense, heavy industry, and livesunck sectors, Moldova's advanage in horticulture and food processing might, in the absence of the drought, have provided an element of relief from the full force of the downturn. Deficiencies in the data make it difficult to derive a rigorous estmae of the quantitative inpact of the drougbt, but an esdmate of 10% to 15% of GDP (at 1992 domestic prices) appears to be a reasonable range. 46. Forty billon rubles repre from $133 million to $80 million, dending on whether the value is converted at the exchange rate of 300 rubles at mid year or 500 at the end. In either case, this value is significandy below that derived if the physical loss is valued at world trading prices, since domestic prices Iagged world prices at the official unified exchange rate. Valuation of the physical loss in the crop and horticultura setrs alone (excluding indirect effects on the livestock sector) yields approximately $200 million, $110 million of which is in the grain sector. C. Agricultural Reform and the Drou 47. The Irge quattative loss coming at a time of profound political and economic cne has led the Govenment to take measues that un counter to market-oriented reforms. Because neither the farms nor the government has reserves with which to fina comeci imports either in rubles or in dollars, the state has, in the face of scarcity, retained taxes in kind to pror product for interstate 15  barter in exchange for imports. Moldova's future strength must lie In agricutral exports, and an institutonal foundation to support private commercial trade must be built. The retention of taxes in kind tD barter for inputs retards development of such an instItutIonal environment. Even with increased intermediation of the state, agricultural producers will not have access to amounts of inputs that would be economially justifiable under the current pricing stucture. 48. Despite these difficulties, some progress has been achieved in agricultural price policy, and a program of land reform and farm restrucuring is being Implemented. The reform program in agculture has been most successful in the area of price adjustment, and this has paradoxically been in part in response to the drought. The government does not have resources substantially to subsidize grain imports coming in at world prices, and the concept of cost recovery Is increasingly accepted as a matter of necessity. Grain prices moving up toward 50 rubles per kilo at the end of 1992 are, in turn, influencing prices of other crops and accelerating contraction of the livestock industry. Although many distortions remain and there is great uncertainty about future prices, the price structure for tradeables not available within the ruble zone is moving toward world levels more rapidly than is the case in Russia, for example, where budgetary reserves for agricultural subsidies are perceived to be more ample. 49. Although prices are moving toward world levels at the unified exchange rate, Moldovan agicult producers stll face output prices pressured both by depressed domestic demand and F ice distortions within the main market areas of the former Soviet Union. In the near term, therefore, agricultural inputs imported at world prices will require a high physical marginal return in order to compensate for residual price distortions. The fertile soil of Moldova, responsiveness of many horticultural products to yield enhancing inputs, and degree of progress already achieved in moving toward world prices makes Moldova a better candidate for imported inputs than is the case in most of the former Soviet Union. 50. The land reform is proceeding in several stages. Thefrsti (fom February, 1991 to approximay November, 1992) is largely complete, and consisted of the enlargement of household plots and transfer of these plots to private ownership. Approximaty 10% of the total Moldovan agricultural area has been so distributed. Since 200,000 hectares were held in household plots in 1990, the first stage of the land reform has transferred ownership of these plots to the households that worked them, and has in addition enlarged the area in plots by about one balf. The land reform households received ownership of their land instead of the former use right, but land camnot be sold until 2001, which substantially reduces the impact of the reform. 51. Ihe second stage of the land reform began in November, 1992. This stage includes both farm restructuring and additional land reform. Farms may restructure in one or a corabination of three main forms: 1) joint stock holding company, either closed or open; 2) producers' cooperative or association of producers; and 3) individual private fams and small businesses. Most collective and state farms are expected to reregister as closed (i.e. new members cannot be admitted) stock holding companies. Shareholders will receive shares both of land and assets. Asset shares will be distributed to workers .d jensioners, usually accordig to the amount of labor invested in the farm. After valuation of the asseZat ohe farm the shares will be denominat and distuted. 52. Land commissions in each of he forty districts will supervise the distribution of land ses. Ihe commisions wfll draw up lists of people eligible to receive shares of collecdve and state farm lands and will inventory the land on each farm. Documents afiming rights to a number of hectares will be distributed. This relative share of land will in most cases not be divided or even physically 16  demacated, but wil entide the owner to a proportonae sbare of returns to land managed collectively. Although the size of land shares varies by farm most shares In the collective fm sector will be less than five hectares per person. Shareholders who want to leave the state and collective fams can request that their shares be given in physically demactd plots. This land can be withdrawn between November and March of any year. lhe land reform and farm restructring Is expected to proceed rather slowly. The current emphasis is on reregistration of farms, rather than restru;turing. 53. In other areas Including demonopolization, enterprise restructuring off farms, and financial reform, Moldova does not yet have a fully developed strategy of agricultural adjustment. The lack of consistent forward progress in agriculture reflects several realities. Ihe general economic downturn, due in part to the drought, has drawn attention of sectoral managers toward short term crisis management. Lack of political consensus has retarded design of a coherent economic reform program. Absence of a domestic stabilization program and the high inflation in the ruble area has precluded advantages that a stable macreconomic environment provides the agricultural sector. However, Moldova's agricultre has a better chance than that of most countries of the FSU to become competitive at world prices. External assistance should be targeted to arresting the deterioration In the agricultural sector, and restorng productive capacity, without worsening current distortions. 54. Drought recovery is such an activity. It addresses a need created by an acute meteorological emergency. It does not inerfere with adjustment and reform that is underway; e.g., movement toward a price structure more consistent wit world prices. Although assistance is not intended primarily to enhance reform, targeting away from activities with negative value added will enhance the adjustment. Financing provided for purchase of inputs will reduce the need to resort to tax in kind and barter trade to secure imported inputs. D. Government Rnonse the Emergncy 55. Moldova is in an area of relatively rlsky agriculture, and mild drought is relatively frequent. The country insured against the Impact of drought In the past ftrough participation in inter- republic trade at internal transfer prices that muted the financial impact of annual variations in production. In 1992 the drought was unusualy severe, and with the collapse of the FSU, the traditional approach to insuce (botlh at the national and farm levels) had broken down. The financial impact of the drought is thus of an order of magnitude with which the government did not have to cope in past years. 56. The Government's response to the drought has consisted of three main activities: a. Efforts to secure financing of compensatory imports, primarily of food grain (see Table 8.); b. Intervention in the livestock industry to cope witb reduced feed supply; c. Efforts to secure availability of inputs for thae 1993 crop season. 57. The drought has exacerbated the contraction in the livestock industry that was already underway in response to falling demand and new relative prices. The decline in production and numbers has been more severe than in the rest of the former USSR. Since many livestock are in large complexes that are state enterprises and supplied with feed through administrative allocation, the nature of the 17  contraction of the livestock industry In part eiects government policy. This policy las bee to favor hog production over poultry. In consequence the poultry industry is essentially shut down, and bog numbers are still higher than the level that can be fed efficleady. There are economic and environmental questions with regard to the advisability of the uarent allocation of scwae feed. 58. The difficulties of the livestock industry In this year of drought and adjument are great. Moreover the managerial dhllenges of guiding a contracion to minimize loss and reorient the industry to new economic realities are new to policy makers and enteprise maagers. Policy with regard to the livestock sector does not yet reflect a strategic vision of the needed adjustment, nor a program of Implementation to assure efficient use of current inputs going into the livestock sector. 59. The goverament is undertaking intensive efforts to monior availability of agricultral Inputs for the 1993 crop year, and to inrvene if acute shortage is likely. Shortages are expected in agricultural chemicals, vetnary mredicines, feed, and spare parts. Fertilizer use is expected to continue to decline in 1993. Felizer will be purchased within the ruble zone. Use is eeed in 1993 to be 45 thousand tons of active ingredients, compared to 232 thousand tons active ingredients in 1990. The drop in anticipated fertilizer use reflects a decision to rely this year on the natu fertility of the soil, which is enhanced somewhat by the reduced crop growth last year. Approximately ten million tons of organic fertilizer will supplement the reduced application of mineral fertilizer. 60. Moldova is traditionally an exporter of high quality seed within the ruble zone, especily corn seed. Because of the drought, domestic production of seed is reduced, and seeds will be imported in 1993. Fuel use is not expected to decline, and major efforts are underway to secure fuel, all of which is imported from within the rumble zone. Orders have been placed for quantities considerably in excess of expected utilization, on the assumption that not all orders will be filled. 61. Because horticultural products are so important to Moldovan agriculture, plant protection agents are correspondingly important. Ihe application of pesticides and herbicides in active ingrediens per hectare has been less a in horticulunral production in Western Europe, and most plant protection agents have been Soviet products of comparatively low quality, both with regard to efficiency and environmental safety. Traditionally agriculturd chemicals were purchased within the Soviet Union, although some foreign products were purchased through Moscow and allocated inally to Moldova. Within the portfolio of inputs needed for 1993 that must be imported into Moldova, the difference in quality between products available within the ruble zone and those available outside is greatest in the plant protection agents. The higher quality of wes products gives higher physical yield increments per unit of active ingredient, and allows application of a lower dose of active ingredient per hectare. The Government of Moldova is aware of the need for cost recovery of imported inputs, and moreover, in the longer run, supports the switch to a chemical regime that is ecologically responsible and requires use of less total active ingredient per hectare. 62. For both economic and environmental reasons, impd western plant protection agents are the best use of dollars available for purchase of agricutural inputs for 1993 recovery from the prior drought. High quality plant protection agents will moreover protect vines and orchards weakened by last year's drought. Should the drought continue, proper application of high quality herbicides will reduce the diversion of scarce moisture to weeds. 18  II. Bank Response and Strategy 63. The Bank's strategy is described In the Memorandum of the President under "Rationale for Bank Involvement'. Briefly, the strategy is to provide exteral financing in an emergency situation and in the absence of other sources of funding. Tbis should also serve to maintain momentum on the progr of reforms and restructuring, which could eventually be supported by rehabilitation, adjustment and investment loans from the Bank. III. Detailed Project Desiption A. Crop roeo d Pesticides 64. World-wide it is estimated that about 35% of all crop production is annually lost to pests; of this, some 10% are lost due to weed competition, almost 12% are foregone due to diseases, and about 14% are lost to insect pests. Most of the high value crops, notably vegetables, fruits and grapes, are usually even more susceptible to pests than many other crops, and require a more sophisticated regime of crop protection. Although precise figures for Moldova are not known, there Is no reason to believe that losses would be lower than the world average, without a systematic effort for crop protection. 65. In Moldova there is an additional elemeot which will contribute to the need for a potentally more efficient crop protection of perennial crops in 1993, and that is the fact that fruit trees and vines will be going into the coming vegetative period weakened by last year's drought, and in addition by an inadequate moisture supply in the root zone (depth 40-80 cm), existing in some areas in Januay 1993. A weakened organism is more susceptible to infection, insect damage and weed competition than a strong one. It will be equally important, however, to provide adequate protection to all other crops, to ensure better productivity than was achieved in 1992. 0) Priority on Modern, Safe Pesticides 66. For these reasons Government is putting a high priority on availability of good pesticides for the 1993 season. The desire is to make available to agriculture an increased proportion of ecologically safe pesticides, with high efficiency, low application rate of active ingredient (a.i.), and fast biodegradability. 01) Amount of Pestlddes Needed 67. Pesticide use in Moldova declined over the past decade from some 53,000 t used in 1984 to only 20,000 t in 1991, and the preliminary estimate of the amount used In 1992 is 14,000 t. Main reasons for this development are that: (i) PSU agrochemical fatories started producing by about the mid- 1980s more efficient pesticides; (iH) more attention was paid to elements of integrated pest management (IPM), such as closer pest monitoring, scouting, and use of biological methods of control; Moldova has an Institute of Biological Methods of Crop Protection (Institute Biologitcheskich Method Zashchity Rastenii) which is producing some biological pesticides; (iii) in the latter half of the 1980s government abolished agrochemical subsidies which led to much more judicious procurement and use; (iv) an 19  increasinly strong environmetal lobby; and (v) parcurly in the pst 2-3 year psicides wero simply not available In adequ quantities. 68. nou tow amout of sicides tlawed to beoeed fbr 1993 stands at 25,000 t of physical weight, all of which would need to be Imported. Out of this, about 1,400t would be financed under the prped project at an estimated cost of $ 15.7 million, and some 22,000 t have been planned to be procured from the countries of the Ruble Area. Of the latter, to-date some 50% is reported to have been contracted for. 011) Quaty and Safety of Psiddes, Eninmental Effect 69. At this stage of pesticide development technology, there is a great qualitative diffeenc between sicides produced in countries of the FSU, and westen counties. The latter are much safer, much more efficient, and require much lower quantities of active ingredient (ai.) per unit area. Some of the best pesticides use only sgveral hundred grams, or even less, of a.i. per ha, while in many of the FSU pesticides 5-8 kg/ha must be still applied, and In extreme cases even well over 30 kg/ha of a.l., to achieve the desired pest control effect. 70. Moldovan crop protection speciaists estimate that if the county could procure the whole natonal requirement of pesticides in the state-of-the-art class, the total annual quanty needed would Shink to around 5,300. to 5,600 t of physical weight (ready made fotmulatio) only, Istead of the curreny required 25,000 t. From the above assessment it is clear that pesticides imported under the proposed project would have a significantly posive env I Impact, and that the goa of Moldovan agrochemistry has to be a speedy conversion of the crop protection saegy to modern pesficides with high safety standards. (lv) Pesticides to be Supplied Under Project 71. A tentative list of pesticides to a total value of US$ 15.7 million to be financed under the proposed project has been prepared, giv their primary producers, quantes required, main crops In which pesticides will be used, and estmated cost of the modern, safe pesticides. All the pestcides proposed have been reviewed by the World Bank for environmental considerations, and have been fond admissible under the WHO 'Guidelines to Classification of Pesticides" and acceptable for use with respect to the concentrations proposed. 72. The great majority of the pesticides will be required for crop protection at the begining and during the early mouths of the spring planting season Since time for placing ordets and getting the procurement under way is of the essence, a list has been worked out in cooperation with specalists of FERTILITATEA (former SELKHOZKHIMIA), the Moldovan agrochemicals supply and distribution company, giving six different dates at which, from the point of view of the agriculturil calendar, the various pesticides will be needed in the field. 73. The Moldovan environmental legislation requires that only tested and registered pesdcides be used in the country. It is still to be detemined whether this will allow only the purchase of previously-used brand names in the time available, or whether equivalent formulations can be admitted. 20  If the latter is permissible, procurement will be by internWonal shopping or by limited inteional bidding. (v) The Distribution System 74. The pesticides would be distributed by FERTILfTATEA, aparasttal company responsible for supply of agrochemicals down to farm level. lhe company's headquarters is in Chisinau and it has Agrochemical Stations, and Crop Protection Stations In all the 40 districts in the country. Further, it has 16 regional Supply Units, equipped with storage and handling facilities, wbich serve on the average 2 to 3 districts. The company is competent, has a long experience with distribution of agrochemicals, and has adequate storage and transportation capacity. (vi) Advisory and Supervison Sevices 75. The Crop Protection Stations (CPS) at district level have the muldple functions of advice, suevsion, early warning for pest infestations, and pest monitoring. The CPS consists of two units - a Pest Control Advisory Serice, and a Pest Forecasting and Monitoring Service. The former consists on the average of three crop protecton graduates (plant pathologists and entomologists), who advise farms (kolkhozes, sovkhozes) on crop proteon technology, timing of applications, and supervise safe handling of pesticides at farm level. The latter service consists usually of two graduate crop protection specialists, and is responsible for pest phenology, pest idendficadon, and forecasting. All farms are equipped with approprit sprayers and have operators experienced In their use. 76. In addition, the CPS organize in all districts -Ecology Commissions" at the local municipal council, which supervise all aspects of agrochemicals in all farms of the district. The commissions go so far as to issue 'certificates' to farms, and only those which satisfy the commission with their safe level of handling pesticides get these Ocertficates". Farms and other facilities are not isued a *certificate", and hence are not allowed to use pesticides, until they correct any faults found during the commission's inspection visits. It has been agreed with FERTIL1TATEA that pesticides procured under the project would be handled only in "certified" facilities and farms, confrming to national standards. (vii) Psddd Rrgltons 77. The FSU used to issue excellent Pesicide Regations, which underwent a major update for each five-year plan, and were almost anmually updated with smaller publications reflectng newest pesicide developmen. The last such regulation was issued in Moscw by an independent Agrochemical Commission (Gosudarstvena Komisia po lmltchesilm Sredstvam Borby s VredWtieliami, Bolezniami Rasei I Sorniaami) in 1987 and covers the period 1986-90. Moldova to-date uses this regulation as its principal guidine In dealing with pesdcides, while it is paing its own sticter guidelines, which should become available in a few months. Apart from that, Govenm is preparing an "Environmental Plan" with a perspective upto the year 2010. 78. The Pesticide Regulations (Spisok Khimitcheskich i Biologltcheskich Sredstv Borby s Vrediteliami, Bolezniami RasteDil I Sornakami i Regulatorov Rasta Raste"i, Razreshennykh dlia 21  Primenenia v Selskom Khoziastve na 1986-90 Gody) are to a degree stmctured after the WHO Guidelines and contain an assessment of about 600 different FSU and western produced pesticides. The FSU Regulations give for each product: - the common pesticide name, - the international name of the a.i., - the recommended application rate per ha of the pesticide, - the recommended application rate per ha of the a.i., - the crop(s) on which the pesticide should be used, - the main pests the pesticide is going to control, - the recommended time and technology of application, - the last permitted time of application (in days before harvest), and - the maximum number of applications per season. 79. The Regulations give a number of other very important guidelines, which should be, but are not, available in many other national pesticide regulations. To mention just a few, they give specific instructions on use of pesticides in medicinal plants, grain and other warehouses, flour mills, greenhouses; the maximum allowed pesticide levels in foodstuffs, waters (fish farms, reservoirs for municipal supply), feedstuffs, soil, air; restrictions for use of pesticides near contamination susceptible areas (human habitats etc.); and last but certainly not least, the earliest permitted entry (in days after treatment) into pesticide treated areas by humans, separately for those riding in agricultural machines (tractors, combines) and those entering by foot. 80. The Regulations do not have the force of a law, however, and serve merely as guidelines. According to FERTIHATEA, the recommendations of the Reguaions are largely respected in Moldova because of a strong environmental lobby, and also because of the activities of the "Ecology Commissions" in the districts. B. Seeds 81. Predictably, seed production has been equally badly affected by the 1992 drought, and with a similar patten, as overall crop production. Total seed shortfall is estimated at about 25%, and with the exception of spring barley and oats, seed of all other crops is in deficit. Table 3, below, gives an overview of the seed situation in 1992, as compared to the mean production of the pentade 1986-90. Maize is not included in the information presened in the table, but generialy the Ministry of Agriculture plans for an annual production of about 65,000 to 70,000 t, while the 1992 production was only 22,000 t. Much of this goes for export, however, since Moldovan agriculture does not need more than about 17,000 t at the most (calculated at a very high sowing rate of 40 kg/ha). 82. Some of the seed shortfalls are in reality less threatening tham they look, since in emergency situations seed stocks of small grain, in pardcular, can be temporarily replaced (at some loss to productivity, though) with commercial grain. Government carefilly considered the national seed balance for 1993, and after discounting seed that can be replaced locally and seed that can be procured in the Ruble Area, requested the BanWk's assistance for procurement of some hybrid sugarbeet seed, accompanied with some precision seeders, which are an essential element of the complex technology of modern sugarbeet production, and fiuther for some soybean seed. The total cost of this component is 22  TABLE 3.: Production of Main Seeds in 1992 (tons) estmated at $ 2 M. The planned sugarbeet area for 1993 is 80,000 ha, and the planed soybean area 15,000 Crops 19"-90 19 ha. ha. All grain crops of which 17,509 13,413 83. The total seed Winter wheat 10,647 7,410 package woud include 6,150 unit (at Winter barley 2,604 2,148 an anicipated seed rate of 1 to 1.5 Rye 126 57 units per ha) of the varieties "Lena", mter VOt 6 - "mea and 'Extra of German Spring barey 891 1,242 origin. Moldova expermented with Oas 165 241 these varieties over the past 2-3 Buckwheat 11 11 years, and they gave convincingly Peas 2,934 2,252 superior results when mead BeDs 52 27 against performance of the standard Vetch 73 25 variety "Moldavskaya 41". In Soybeans 772 53 research and several kolkhozes these Alfidfa 109 71 three varieties consistendy outyielded 17 - the standard by 11-15 q of sugar per Sudags 48 24 ha (10-12 t/ha of beet), when sowing Subeea gow) 1,770 676 was done with precision seeders : Mistry of Agridultus ustd to the calibration of this seed. The seed would be used on _ about 4,100 ha in 13 districts by about 27 selected farms around Moldova's eight sugarbeet factories, as a large-scale demonstra-!on of advanced sugarbeet technology. Tbis seed would cost about $ 310,000. 84. Precision seeding is one of the cornerstones of modern sugarbe Producdon (as well as maize, soybean and sunflower cltivation), but Moldova has virtly no satactory preciion seeders. The project would finance about 25 precision seeders plus spare parts, esmaed to cost about $ 430,000, and 100 seed units only, esdmated to cost $ 260,000. Ihe use of more modem technology than hitherto available will allow the full benefit of the higher quality seed to be realized. The seed units would be uWsed for abrication of complete seeders, which would be done by BELTSELMASH, an experienced agricultura machinery factory in Beltse. Prowrement of the above items is best done through direct contracting due to the excellent experience with this technology in Moldova, the limited time available, and the relatively small amount involved. 85. About 13,350 units, good for about 10,000 ha, of additional sugarbeet seed of as yet unspecdfied varieties, which would, however, be adjustd to Moldovan conditions, would be impored as well. At about $ 60/unit, this seed is estlat to cost $ 800,000. About 100 t of soybean seed would also be proed, at an estimated cost of $ 200,000. This seed should be procured, due to the relatively small amounts involved and the need to get it quickly, under inteational shopping with quotations from at least three suppliers in two eligible countries. 86. Distribution of goods procured under this component would be done by SAKHAPROM, a company responsible for organizing primy production and processig of sugabeet, icluding upstream and downstream supply and procurement. All supply stations of SAKHARPROM are on the railway network, the company is equipped with adequate transport and stoage, and has plenty experience in this 23  kind of operaions. The seed and seeders are ee to be sold to farms under the prvailing rules, i.e. at cost plus 20% handling charges. C. Agricultral Spare Parts 87. ITe spare parts that are included for project financing consist above all of spares for those machines which will be required for field work or other necessary support operations at the beginning or very early in the coming growing season. 88. This component would include spare parts mainly for sowing machines, liquid fertilizer distributors, crop protecon sprayers, green forage harvesters, and some other smaller machines and equipment, and batteries. The cost of the component is esdmated at $ 2 million. Of this, about $ 1.8 million would be for machinery spares (some $ 500,000 for seeders, sprayers, fertilizer distributors and other smaller machines, and about $ 1,300,000 for forage harvesters), and the esdmated cost of batteries would be about $ 200,000 and would include in the first istance batteries for field ators, agricultura trucks, and field and storage loaders. Technical specifications for all the spare parts have been worked out. The spares for the existing machines would have to be procured from the original producerz since nobody else is producing them, while the batteries would be procured under interaional shopping. All the spare parts are intended for supply to kolkhozes and sovkhozes, and would be sold at cost plus 20% handling charges. 89. The company responsible for managing this component would be ARCA MOLDOVA (formerly SELKHOZTEKHNIKA), which has in all the 40 districts agricultural machinery supply stations, as well as repair and maitenance statons, and has additionally throughout the country 12 highly specialized repair workshops concentrating on, for example, major repairs of engines, hydraulic systems, transmissions, fuel injectors, specific more complex makes of tractors and trucks, and other specialized machines). The company has a lot of experience in all services related to agriculu m io is reasonably well equipped, appears to have good management and seasoned personnel. The company can handle the supply and distribution of this component with competence. D. Iuts for the Animal Induty O) Secto Background 90. Until the sixties, livestock production in Moldova was concentrated in the collective and state farms, with some production, mainly for home consumption, in the villages. This changed considerably when, in the early seventies, the government initated a program to build large scale units for the production of, mainly, pork and beef. These production units ("complexes"), built in nearly each rayon, were supposed to be supplied with fodder and feed grains by the surrounding state and collective farms, and were to export their products to other parts of the former Soviet Union. The feed base in the country, however, was insufficient to provide iese complexes with feed, focing the country to Import between 1 and 1.5 mfllion tons of feed grain from other parts of the FSU. 91. lhis production scheme stared to become more difficult with the breakup of the FSU, when feed imports became more expensive (becas payment was requwred in hard currency or hard currency equivalent), and when the external market for animal products contracted. The domestic market 24  TABLE 4.: Percena Change in (July 1) livestock inventory on stat'collectlve farms Average annual decline Decline during 1989-92 1991-92 July-Dec.92 Cattle 6.2 8.2 8.6 Cows 4.1 6.2 11.0 Pigs 8.5 14.3 16.0 Poultry 12.1 32.3 38.5 Source: Ministry of Agriculture also contracted with the removal of consumer subsidies for most agricultural products, and the sector, especially the supply from state and collective fars, has been in decline since 1990. The goverment has bee tying to support the production system, among other means through the provision of credit and mrough a selective allocation of animal feed. However, the Government has not been able to support the livestock industry completely and is realizing that it has to be selective. This decision became especially urgent during 1992 when fodder resources became increasingly scarce. For various reasons7 it was decided hat the inensive swine production should receive priority in the supply of grains, over the poultry and dairy production systems. 92. Ihe private sector, mainly household plots, received virtually no government support but has been inerwoven with the state and collective farms, which either provided some inputs or assisted in the marketing. The small scale private sector has contnued to expand, albeit slowly; the main limiaion is the lack of access to land, capital and to a lesser extent markets. Most of the produce from pnvate farmers was used for home consumption; state procurement from these farms varied between 10 to 35,000 tons/yr. 93. The overall contribution of the livestock sector to agricultural domestic production is approximately 38%. Exports, traditionally to other FSU counties, have declined, however. Previous trading arrangements have been pardy replaced by barter trade of meat or butter for fuel or grain, either by government trade organizations or by the producing fams themselves. As a result, the import of grain for animal feed has also declined (see figure 1.). The feed grain supply has become even more difficult in 1992-93 when local production declined, due to the drought, and imports became increasing difficult due to the lack of foreign exchange and the declining availability of tradeable agricultural products (including butter and meat). 7/ As far as could be determined by the mission, this reasoning was based on the fct that (i) pork was the most prefened meat by dte populaon; (ii) rumnmants could survive on forago; (iii) poultsy production, with the lower generaton interval of chickens, could conrat and restw more rapidly than swine; and (iv) the country had, in the previous two decades, invested in intensive pig production. 25  TABLE 5.: Production and export of animal products (tons x 1000). Produdm Daby Producb * 1174.6 1242.9 1267.1 1228.7 1004.6 Meat 372.1 380.8 3933 401.6 310.3 Eggs 843.9 871.4 8273 811.4 728.0 EXPORt Daity Produce * 102.2 120A 122.0 79.6 168.9 Meat 77.0 63.9 70.4 36.8 33.2 Bggp 90.3 101.3 69.2 S5.0 9.4 - Daity products in mik equivalen 94. The feed shortages are complicated by the poor quality of animal feed, especially the underfeeding of protein and mineral/vitamin supplements. The lack of a balanced dXat forces a ls to compensate by a higher intake of grain, leading to poor feed conversion rates. The feed conversion in the intensive swine industry is preseny approximately 4.5-6 kg feed for each kg growth, compared to 3 kg in western Europe; conversions in the poultry industry, which should be below 2 kg feed/kg gain, are between 2 and 3. Although this may in part be related to inferior genetic stock, it can mainly be attributed to poorly balanced rations. 95. The overall quality of the technology used in the livestock sector is mediocre. The tehology in the itensive pig and poultry industry is fairly new, but is energy inefficient, prone to equipment breacdowns, and still fairly labor intensive. Moreover the swine production systems present considerable difficulties in developing an envronmenally acceptable method of waste disposal. In addition, the large complexes are highly dependent on third parties (suppliers, millers, railways etc.) to provide feed, and as such vulnerable to breakdowns. (1i) The Impact of Drought on the Animal Industry 96. The feed supplies for the livestock sector consist mainly of forage for ruminat and grain for swine and poultry. The drought has caused a shortfall in corn, protein feed (sunflower, soybeans) and in forage crops such as silage corn, alfalfa and fodder-beets (see table 7). This shortage comes at a vulnerable moment when the livestock sector is tring to adjust to changing conditions in the FSU. 97. As such, the effects of the drought in the livestock sector have to be separated from the overall contraction of the sector due to the changing market conditions in the FSU. The decline in the production of meat, milk and eggs in the pre-dtought years 1989-1992 was respectively 18.6, 19.1 and 16.5%, or approximately 6% per year. Broiler production was especially affected with a decline of 67.6 % or 22% per year. Livestock inventories declined in a similar fashion. The contraction in animal U/ Animals in the ste and coective sector are generaly kept stabled throughot Xt year and rary, if ever, kept in pashues. Privately owned livestock, especially ruminants, are herded on communal vilagJ fields, and along roads and nvers. 26  numb.ers Inhe last six months of 1992 (see table 4) doubled for catde and pigs and tripled for now" poultry. This increased contaion can be to attributed to the dfects of the drought e.g. a "O %\ low shortage of grain and forage and a shift of grain, xw WAm a weli as some forage, from use in cate to pigs. A \ / v 98. Uvestocknumbers,however,only 10 *, ssprovide a lmitd view of the efects of the 0 s drought. Of equal importance are the quality and * s condition of the surviving herd. As was observed e. "during farm visits, the condition of most animals 90 s(catle as well as pigs) was poor. Dairy cows and j% heifers appeared to be (10-20%) underweight, as ,- * ais ii_ were sows and pigs in the complexes. Farm managers were well aware of their animals' condition, but explained that they were stretching rIure 1. Production, use and impors of food gniu the available fodder sources and shiftn, where Moldova 1987-1992. necessay, to lower quality feeds. (Sows in a breeding farm, for example, were fed corn silage Intended for cattle). The farmers antibipate that they have to hold out til the following havest will be available (August-Sepembe). 99. Their poor condton made these animals more vulnerable to diseases, and mortality rates, which appaed fairly high by Western stadards, incrased (see table 6) during 1992 and early 1993. 100. The feed shortage, however, is in part a result of a still oversized livestock industry. The drought has exacerbated this situadon. Assessment of available stocks is difficult Most collective farms are trying to hold on to their stocks to feed their own animals (mainly dairy catde and pigs), but the state farms and especially the complexes, which do not have their own feed sources, are completely dependent on state managed feed supplies. It appeas that the severe shortage this year threatens not only the production system in general but also the breeding stock. Most of the farms visited had empty feed bins and claimed that their short term supplies were generally enough for only one or two days. Especally in the poultry industry, where the broiler production has been halted since the fall, the lack of feed not only threatens the layer population but also the, staegically more important, breeding stock. 101. The shortages in feed and fodder TABLE 6.: Mortality due to disease and were, under the FSU system, compenated by deficiency. imports from other parts of the Union. The changing market conditions (declining exort Of Animal type 1990 1991 1992 animal products), as well as the lack of revenue from other export crops, did not allow the countryto importfeed gain. Someof itspotential Cate 7.2 7.2 7.8 grain suppliers, notably Ukraine, were also Pigs 21.7 21.6 27.7 somewhat affected by the dry conditons in 1992. Sheep/gt 3.8 3.7 3.6 As a reslt the country is increasingly looking for western suppliers. 27  TABLE 7.: Feed and forage production and impots in Moldova (in tons x 1000). 1989 1991 1992 Decine(%) 1991-1992 Eoduggon Hay 324.0 280.6 152.6 45.6 Haylage 826.3 971.4 608.1 37.4 Silage 4489.4 4075.0 2324.3 43.0 Grain 566.2 587.5 377.0 38.3 Fodderbeets 2056.8 1264.0 730.0 42.2 Imam: Grain 743.9 1178.8 361.8 69.3 Source: Ministry of Agriculture 102. The EEC and the US are comnmtted to spp ly 205 tons of feed grain in early 1993. The other supplies (table 8) are less secure and, given the financial situation of the country, are unlikely to be provided before the summer. TABLE 8.: Tentive feed grain supply during 1993. Type of grain Supplier Amount Notes Expected in tons delivery Feed barley EEC 34 Early 1993 Corn USA 71 PL480 Early 1993 Feed wheat USA 100 PL 416 ? Concentrate or Russia 70 Repayment for ? wheat seed supplied 1990191 Wheat Russia 52 Support for ? Trans-dniester Source: Ministry of Foreign Ecoinomic Relations and Cereale. (iii) Inputs Required by the Poultry Subsector 103. Although all branches of the livestock sector were severely affected by the drought, the poultry industry experienced the greatest contraction especially in the later half of 1992 (see table 4). Broiler production was terminated in the fail of 1992, and the reduction of the layer population has resulted in a decline in egg production. The production system would be able to start up again in a 28  relatively short time as long as the breeding stock (both layer and broiler parent and grandparent population) is maintained. As such it Is important to assure feed supplies for this population till September 1993. 104. At present the poultry industry is paying full market prices for animal feed (in early January they paid Rb. 55,000-60,000/ton which, at the exchange rate of late December, would be slightly below the world market price of USS 160/ton). A brief analysis indicates that, even with the mediocre conversion rate, production costs were close to world market levels. The charging of market prices and the potential competiveness combined with the fact that poultry are the most efficient users of feed grain all constitute a strong basis to support feed supply for the breeding stock. In addition, I. the industry has contracted considerably (50% in animal inventory and respectively 40% and 68% in output of eggs and meat in the stecollective sector), and is mainly producing for the domesdc market; 2. the breeding stock is essential for a rapid start-up when feed shortages are eased after the 1993 harvest; 3. eggs produced by the breeding stock can either be sold for domestic consumption or, to a limuted extent, exported; and 4. the breeding stock is providing eggs which will be incubated in the spring of 1993 to provide 30-50 million day-old chicks to be sold to the public (e.g. private house-plot owners). 105. Preservation of the 600,000 breeding stock from April till September, 1993 would, according to government officials, require approximately 180 tons of feed/day or a total of 27,000 tons. The feed could be procred in components (grain and concentrate) or whole feed. At present world market prices, the grain would cost approximately US$ 140/ton (excl. shipment); the cost of concentrate depends on the quality (protein ontent) but is expected to be around S250-275/ton. The price of whole feed, as quoted by local poultry specialists, would be USS 180-200/ton. 106. An estmate of total costs of the component would be: Feed appr. 27,000 tons 0 195 US$ Million 5.25 Transport (Europe delivery = approx. 14%) 0.75 Total 6.00 107. The feed would be procured th iternational competitive bidding, imported by MOLDEXIM and mflled and disributed by the grain milling and distrbuting parastal company CEREALE, in cooperton with the parastal responsible for poultry production AVICOLA. IV. InstuIonal Arrangemnts and Project Implementation A. Qverall Mana=gment and Administraion 108. The Borrower will be represented by the Minity of Finance. The Ministry for Foreign Economic Relations and the Ministry of Finance will be responsible for the implementation of the opeaion, and will supervise the f&nctons of the hnporting and Disbution Agents (see below). A Vice- 29  F* 2. Pioteon of chice-mme (in tons x 100), eg (0o) and cosutmof food (m tons x 1000) durbg 1M9. M9inister has been put in dunre of the operadon. 109. The Uhnistry for Foreign Economic Relations has appointe MOLDMM, one of its agencies, as the Importing Agent, responsible for thie proest and importation of all goods proued uncier the loanl. Technical Assistance will be procured directy by thie Minstry for Foreign Economic Relations 110. Ihe Importig Agent will tranfer thie imported goods to the Distribution Agents, who will be responsible for thieir distron to the finf useraP. Ihe Govaen has ideltffied the bllowing Distibution Agents, which are all Govenlment agenicies: FERTILIATERA, for thie agro-chemicals, CEREALE, for the seeds, seed uidpment and poultry feed, ARCA MOLDOVA for the agiulturi spa part. B.Technic sisac Ill. Sinco neiter the imVorft1 aBefi nor the Goveent have anly e3peclensIn prote and disbusment for World Banlc oprons, it has been agreed with Govelment dfig Technical Assisunce is e set to emur speedy imlm nof the project. A P _oenm and ibemn 2I Whe impoded Jgoods ane distVibubd to a Wu&Dg finial _;i as may be tbec o r poulty ffot, or when a sing1e user is blXo a largo are, _conoukmc be ie o ftnhrlg diredy fiom the, gnotik AgeS to fOm fina wer to wedoc of distno"o. 30  Consultant has been identfied and recruited under a PPF. Government has decided that the Consultant wUi report to the Minstry for Foreign Economic Relations and will assist MOLDEXIM. C. PmuLM=ndDh_ 112. The items to be procured and the proposed proueme metiods are speeified in Section III: Detailed Project Desciption of this Annex. 113. lhe Impotig Agt will be responsible for all aspects of the procment process. He will be guided on all steps by the Consultant. Eoglish language versions of the World Bankrs model bidding docments for goods and commodities, adapted for Moldovan conditions and approved by the Bank, will be used in this project. Ihe Imporing Agent, with the assistance of the Consultant, will prepare and issue bidding documents for each purchae, under international competitive bidding and limited inteationl bidding, and conduct public bid opening in accordace with the Bank's requirements. Bidding documents wil be submtted to the Bank for i*s prior authorization before -sance. 114. A Technical Committee including a reesentatve each of the Ministry for Foreign Economic Riaton (dcareo), the Miny of Agricultue, the Miny of Finance, the Importing Agent and the Distution Agent concerned, will evaluate and compare the bids. The Procment Conltant wi advie and assist the techical committ. The Icommee will select the lowest evaluated bid and recommed award of the contract to that bidder. All contracts, irepective of the procurment method used, wil be reviewed by the Bank before signing. After receiving the Bank's no objection, the Importi Agent wil sign the contact. 115. lhe Import Agent will carry out on behalf of Government all usual activities related to intenat procurem inluding contra signing, handling all docume ad garane ta may be requred, a g shipm bnipo as appro", recevng and delivei goods to the Dtlriting Agen or final user, and payig any itera taxes and duties. 116. Ike . i - -- p n -wil be fully documented; no special account or s of expenditure wil be necesay sin only medium to larg conrac will be finnced. D. ImptUn and Distnution CMsts. 117. All local cost incwred by the Imporig and Distuion Agents will be covered by the final beeficiaies. have been reached that Govnment will make sure tat the Agents have access to the nesary local currency resources to pro-fice their intervention cost (mncluding taxes and duties), which will be incrated in te sale prices to tie final use. E. Ditb o the Final timers. 118. Govermn wi remain te legal owner of the goods uni their sae to the fina users. The Agent wll snl them an a csn baos. The cost in Ruble equivalent of each imported item will be cacuad ad recorded by the Imporg Age Upon cash ale to the fnal user, the 31  Distribution Agents will promptly repay ibe import value of the itms sold to the account designated to that effect by Government. Material and financial accouting of those transactions will be organized and controlled by the nom control mechaisms of Government F. Accounts and Audit 119. Audited accounts of the finmcial transactions up to the transfer of imports to the Distribudon Agent will be prepared. No auditing of the transactions between the Distribution Agents and the final users is required, but Government will cause its Agents to Inform the Bank on the sales to final usen and on the return of fiuds to Governments account. V. niumdal and Economic Justificadon 120. The intent of the current project is to provide inputs necessary to assist in recovery of Moldova's agriculture from the drought of 1992. As with other emergency operations, the returns are expected to be larger than with investment projects, but not as rigorously quantifiable. The more quatifiable returns are finacial, and can be roughly e. . '-d by epected marginal increments in output realized through application of lnputs financed undef * iject. The less quantifiable retums relate to slowing the downturn of the economy so that substantl progress on economic reform and restmctuing can be made. 121. Moldova's economic decline in 1992, at approximately 30%, is very steep. The schedule according to which policy based lending will begin in Moldova's case is not yet clear. An emergency operation carefully targeted to assist recovery in a key sector by building toward the future strength of the sector offers the highest economic return to exteral assistance available at the current time. A secondary benefit wfll be its material contribution to an environment more conducive to reform. Developments in the fall of 1992 suggested that lack of financing for purchase of agricultural inputs constrained removal of the tax in kind and other hindrances to commercial marketing. The project contributes toward easing that constraint 122. Moldovas comparative advantage lies maWinly in hotivcultural products and annual field crops. Resources under the project are targeted exclusively to products for which value added is positive and substatia under a range of normal weather conditions. Of the crop products included in the project, only sugar beets and pota raise questions with regard to long term competitiveness. In the short term each of these has ready marets withi Moldova and more generally in the FSU. Tobacco has been excluded from the project, even though its contribution to Moldovan agricultural GNP is substaial. 123. The financial return to the actvities financed under the operation is likely to be high under most cimstances. The plant protection agents impofd under the operation will be applied to approximately 15% to 20% of Moldovas agricultural area, and a higher proportion of the land intensively used in perennial and row creps. Ihe crps include sugar beet, maize, peas, soybeans, onions, winer wheat, winer barley, tomatoes, potoes, apples and pears, and wine grapes. Yield increases on treaed areas on the order of 30% to 50% are expected. Ihese are large increases, but not unreasonable, given recent yield levels under normal weather conditions, and field trials. Essentially all of the additional producdton can be attributed to the plant protectio agent, since no additional expenses 32  ar Incurred In switching from a lower qualiy to a higher quality product. lbere may be some savings In fiel ad labor If fewer applications are needed. 124. Plant protecdon agen for maize and grapes wil be the major plant protection agents financed under the operatio. Yield Inreases of 30% for maize, or one ton per hecae under normal local conditions may be expected. This would yild approximately a $100 ret to a $30 additional cost per hectare, over a base of approximatly 200,000 hectares. It is likely th maize will sell for approximately world pries within Moldova, or could be exported elsewhee within the CIS for $100 per ton, or its ruble equivalent at the market exchange rate. lTus even a lower physical marginal increase in yield would repay the initial investment for maize. 125. lTe rern to protection of grWes would be a combination of higher yields and prevention of loss on the vine. Additional production of three tODns of grapes per bectare is estianed to derive from proper plant protecn practices. The average purchase price for grapes in 1992 was approximately 17,000 rubles per ton, and processors reported in October paying 25,000 rubles per ton, or approximately $60 per ton. If this domestic price stays consut in dollar terms, with physical marginal retuns somewhat below the esthnated three tons per hectare, the plant protection agents for graes would be likely to yield three times their value in additional output. Increased quantities and improved qualities of grapes would have important secondary effects on rural employment Although rigorous cost benefit ratios need not be estimated for the purposes of this operation, It Is likely that the plant protection component will yield financial rers approximately three times the size of the inidal purchase. 126. Other items included In the project are important, and have been included because in the assessments of the Government and staff they yield an economic return exceeding their cost. Returns to these components are difficult to quantify, such as maintining the productive core of the poultry industry, and purchasing seeds to replace those lost through drought. As long as the plant protection items constitute more than half of the value of the project, the retun to these items should bring an adequate financial return to the entire project. 33  IORD 24285 28' ,_ One-st,*, X hX MO LDO VA \5 ifMogilav- ~~U K R A I N E 0 SELECTED CITIES _4S t~~~~ridiony f\1 * NATIONAL CAPITAL Sorok >.~ RIVERS ROADS INTERNATIONAL tfz ? Rybn' l; BOUNDARIES -0V. )> > ><SiNAU 4 >\~~~~~~~~~~IIN R O M A N I A T Od*" > t / ( )rTo r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~o{ < 46 g l ( c>itD ~~~~~~~~~~~~ ~ ~~ ~~~~~U K R A i N E 4 e KILOMETER 25 5 o, 2snL so 1<% tLES MARCH 1993