Uzbekistan - Cotton Sub-Sector Improvement Project

Document of The World Bank Report No. 13805-UZ STAFF APPRAISAL REPORT REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IM4PROVEMENT PROJECT MAY 2, 1995 Agriculture, Industry and Finance Division Country Department III Europe and Central Asia Region  Currency Equivalents (as of July 1, 1994) Sum per US$1 July 1994 US$1 = 9 Sum December 1994 US$1 = 25 Sum September 1994 US$1 = 15 Sum March 1995 US$1 = 26 Sum Weights and Measures Metric System Abbreviations and Acronyms AOSCA Association of Official Seed Certifying Agencies CIU Component Implementation Unit GDP Gross Domestic Product GOSKOMPROGNOZSTAT State Committee on Forecasting and Statistics (Planning Agency) HVI High Volume Instrument (Cotton grading equipment) IPM Integrated Pest Management ISS Irrigation Scheduling System ISTA International Seed Testing Association MFERT Ministry of Foreign Economic Relations and Trade MOA Ministry of Agriculture MOF Ministry of Finance MWI Ministry of Water and Irrigation PIU Project Implementation Unit SA Special Account SIFAT Enterprise for Standardization and Certification of Cotton SOE Statement Of Expenditures STF Systematic Transformation Facility UPOV International Union for Protection of Plant Varieties UZAGROINFORM Uzbekistan Information Division (in MOA) UZKHLOPKOPROM Uzbekistan Cotton Ginning Organization UZNIIZR Uzbekistan Institute of Crop Protection UZOPTBIRZHETORG Uzbek Association of Wholesale and Commodity Exchange Traders Uzbekistan - Fiscal Year January 1 - December 31  ii STAFF APPRAISAL REPORT REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT CONTENTS Page No. Loan and Project Summary.o .Chowdhury.(Consultants. iv ri. SECTOR BACKGROUND.1 guidance.. Michael.A. G A. INTRODUCTION .................. B. THE AGRICULTURAL SECTOR............. 3 C. THE COTTON SLUB-SECTOR.............. 4 II. BANK LENDING ExPERIENCE AND STRATEGY FOR UZBEKISTAN ...... . 9 A. BANK LENDING ExPERIENCE ..............9 B. BANK STRATEGY IN AGRICULTURE............11 C. RATIONALE FOR BANK PARTICIPATION IN THE PROJECT......13 III. THE PROJECT.......................14 A. PROJECT RATIONALE ................14 B. PROJECT DEVELOPMENT OBJECTIVES ...........14 C. PROJECT SUMMARY DESCRIPTION ............14 D. DETAILED PROJECT DESCRIPTION ............15 IV. PROJECT COSTS AND FINANCIAL ARRANGEMENTS...........25 A. PROJECT COSTS..................25 B. FINANCING PLAN .................25 C. SPECIAL AcCOUNT.................27 D. FLOW OF LOAN FUNDS ...............28 E. ON-LENDING TERMS ................29 F. COST RECOVERY .................29 G. PROCUREMENT..................31 H. DISBURSEMENT..................36 I. ACCOUNTING...................37 J. REPORTING ...................37 K. AUDITING....................39 [This report is based on the findings of an appraisal mission (October/November 1994) led by Salem Gafsi (Task Manager). The report was prepared by the core Bank team of Salem Gafsi (EC3AI), Gulnaz Abdukadir and Frank Kenefick (Consultants). Sergei Haritonov (RMU) and Viren Sirohi (EMTEN). Others who participated in the Bank mission and/or contributed to ths report include Jorge Garcia- Garcia (EC3AI), Ger-ard Fischer and Farook Chowdhury (Consultants). Elton Thigpen (TECIT and John Hayward (EMTIWU) were peer reviewers. Claude Bianchi (ECAVP) and Marc Blanc (EC3DR) provided operational guidance. Michael A. Gould and Yukon Huang are respectively the managing Division Chief and Departrnent Director for this operation.  iii V. PROJECT MANAGEMENT, IMPLEMENTATION AND SUPERVISION ......... ... 40 A. PROJECT MANAGEMENT ............................ 40 B. PROJECT IMPLEMENTATION .......................... 41 C. IMPLEMENTATION SCHEDULE ......................... 44 D. SUPERVISION PLAN ............................... 46 VI. BENEFITS AND RISKS ..................................... 47 A. PROJECT BENEFITS ............................... 47 B. ECONOMIC AND FINANCIAL ANALYSIS ................... 48 C. PROJECT BENEFICIARIES . ........................... 50 D. RISKS ..... 50 E. ENVIRONMENTAL ASSESSMENT ........................ 50 VII. AGREEMENTS AND RECOMMENDATION .......... .. .............. 52 A. AGREEMENTS .................................. 52 B. RECOMMENDATION ............................... 54 TABLES Table 4.1: SUMMARY OF PROJECT COSTS ...................................... 26 Table 4.2: PROJECT FINANCING PLAN ......................................... 26 Table 4.3: SUMMARY OF PROCUREMENT ARRANGEMENTS ........ ................. 32 Table 4.4: DISBURSEMENT SCHEDULE ......................................... 37 ANNEXES A. IMPLEMENTATION PLAN AND PERFORMANCE INDICATORS .55 B. PRIVATE SEED INDUSTRY - AGREEMENTS REACHED WITH GOVERNMENT .60 C. A SAMPLE OF SEED FARMS INTERESTED IN FORMING SEED COMPANIES .64 D. PROJECT COSTING DATA .65 E. SEED COMPONENT - FINANCIAL TERMS AND ELIGIBILITY CRITERIA .76 F. PROCUREMENT SCHEDULES .79 G. DISBURSEMENT ACCOUNTS BY FINANCIERS .82 H. PROJECT IMPLEMENTATION UNIT .91 I. SUPERVISION PLAN AND SCHEDULE .92 J. LIST OF DOCUMENTS AVAILABLE IN THE PROJECT FILE .97 MAP IBRD 25454  iv REPUBLIC OF UZBEKISTAN COrrON SUB-SECTOR IMPROVEMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Uzbekistan. Beneficiaries: Private Seed Companies and associated private seed farms, Ministry of Agriculture (Institute of Crop Protection: UZNIIZR and Information Division: UZAGROINFORM), State Enterprise for Cotton Certification (SIFAT). Poverty Category: Not applicable. Amount: US$66.0 million. Terms: 20 years, including 5 years of grace at the Bank's standard variable interest rate. Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Onlending Terms: The proceeds of the loan will be channeled in two ways: First, funds to Government agencies involved in the project will be channeled as grants through the regular budgetary process. Second, funds to private seed companies and associated private seed farms will be on-lent in US$ by the Government through a commercial bank on an agency basis. The sub-loans will have a maximum repayment period of 10 years, including a three-year grace period. The on-lending interest rate will be equal to the long term dollar rate (US 10-year Bond rate) in effect at the time of the sub-loan (the base rate) plus a margin of 3.0 percent. The Government will bear the default risk and the cross-currency exchange risk in the Bank Loan. The sub-borrowers will bear the exchange risk between the US dollar and the Sum. Financing Plan: See paragraph 4.3. Net Present Value: The net present value is calculated on 86 percent of project costs and is estimated at US$110.4 million. ERR = 34 percent. Staff Appraisal Report: Report No. 13805-UZ. Map: IBRD 25454. Project IED Number: UZ-PA-9122   REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT STAFF APPRAISAL REPORT I. SECTOR BACKGROUND A. INTRODUCION 1.1 The Government of Uzbekistan has requested World Bank assistance to finance a project to improve the productivity of the cotton sub-sector. The proposed project will support policy reforms, finance priority investments and initiate a process of institutional change that will contribute to the development of a market economy in Uzbekistan. The proposed project will be the first Bank-financed investment in Uzbekistan and the first for agriculture. 1.2 Since the country's independence, the Government has taken a gradual approach to reforming the economy to maintain stability and protect the interests of those likely to unduly suffer due to rapid change. As conditions have permitted, the Government has accelerated the pace of reform. On January 22, 1994, a Presidential Decree was issued which called for broader reforms, including acceleration of privatization and enterprise reform, development of the private sector, reduction of the state orders, and liberalization of foreign exchange controls. These changes aim at stabilizing and adjusting the economy, eliminating distortions and fostering a market economy. The changes conform to the policy reforms that the Government and the World Bank discussed in the context of economic and sector work and in connection with the Rehabilitation Loan. Agricultural reforms under the Rehabilitation Loan include: (i) progressive reduction in state orders for grains and cotton; (ii) progressive increase in the procurement price of grain and cotton; (iii) phasing out of subsidies on agricultural inputs; and (iv) streamlining of the export licensing system. 1.3 Reforms under the proposed cotton sub-sector improvement project will complement the above reforms by supporting implementation and deepening of all the reforms affecting the agricultural sector in general and those aimed at fostering the growth of a market economy, in particular. More specifically, reforms agreed by the Government under the project include: * liberalizing prices for cotton seed (gin-run and planting seed) at the onset of the project; * bringing the price paid to producers for lint marketed under the state order system progressively closer to international prices, starting with 50 percent of the world price for the 1995 crop; * phasing out of the state order system for cotton by the 1998 production season; * streamlining of the cotton export licensing system, starting with the 1995 production season; * creating a private cotton planting seed industry;  2 * elimination of input subsidies; and * shifting from barter-based to cash-based export of cotton lint, as the state order system is phased out. 1.4 The proposed project supports high priority, selective interventions which have high potential returns and lay the basis for future, more comprehensive investments: (a) Seed Industry. This component will help improve the quality of cotton planting seed by supporting the establishment of a private cotton seed industry, along with marketing channels and a reliable system for seed certification and quality control, and for development of improved varieties; (b) Cotton Marketing. This component will introduce a system of grading cotton which will generate information about the characteristics of Uzbek cotton to give it a recognizable identity in the international markets, resulting in higher prices for cotton and, ultimately, higher quality cotton lint for export; (c) Integrated Pest Management. This component will help establish the cost- effectiveness of biological pest control through the development and production of improved technology for rearing and dispersal of beneficial insects in conjunction with environmentally safe use of chemicals; (d) Irrigation. This component will introduce irrigation scheduling equipment and practices to help reduce on-farm water consumption and, thus, increase crop yields and prevent environmental degradation; and (e) Project Management and Program Design. This component will help strengthen and expand the implementation capacity in the agencies executing this project, and will provide for the preparation of investment programs suitable for future international financing in support of agricultural development. 1.5 The proposed project is part of a broader World Bank assistance strategy. The Country Assistance Strategy (CAS) Report No. 14019-UZ, dated March 3, 1995, is designed to: (i) support macroeconomic stabilization and structural and sectoral reforms with focussed analytical inputs and lending; (ii) strengthen market incentives particularly in the two key sectors of agriculture and energy; (iii) protect vulnerable groups through the establishment of an effective social safety net and more efficient targeted service delivery; and (iv) strengthen the Government's institutional capacity. This strategy combines support for: (i) policy reforms to facilitate the transition to a market economy; and (ii) specific investment programs to address priority development needs and help maintain and strengthen the existing production capacity in the country. Given the agricultural sector's importance in the economy, the Bank has been closely involved with the Government in identifying an approach for fundamental structural change in agriculture. To allay concerns about possible adverse effects on employment and productive capacity during the transition, the Bank agreed with the Government on a phased program of sectoral interventions, beginning with the establishment of an appropriate incentive framework followed by investments geared to redress key sectoral constraints. The first two operations prepared under this strategy are the Rehabilitation Loan and the Cotton Sub-sector Improvement Project.  3 Subsequently, shifting control of land resources and ownership of farm assets to private producers will be crucial to ensure efficient agricultural production in the medium-term. The proposed Farm Restructuring and Development Project, tentatively scheduled for FY97, would support institutional arrangements and intra-farm organizational arrangements to enhance productivity and sectoral efficiency. The loan would finance basic infrastructure and inputs, strengthen agricultural services and develop models for privatization and farm restructuring. The Bank is evaluating the Government's approach to land reform in the Agricultural Sector Review. This analysis will be deepened in the context of the Farm Restructuring and Development Project. A number of options for subsequent sectoral investments will be considered in view of the findings of the Agriculture Sector Review, now under preparation. Possibilities include, a Sector Investment Loan, and an Export Development Project for fruits and vegetables and sericulture. B. THE AGRICULTURAL SECTOR 1.6 Agriculture accounts for over one-third of the country's GDP, generates about three- quarters of the country's foreign exchange earnings, mainly from cotton, and employs about half of the labor force. Through a complex pricing system for inputs and outputs, agriculture has been transferring about 50 percent of the income it generated to the Government and urban sectors. Land and water resources are limited. Only 10 percent of the land area can be cultivated, and 95 percent of that uses irrigation. The total cultivated area of about 4.5 million hectares (ha) has been on average used as follows: 33 percent in cotton, 33 percent in grain crops, 6 percent in fruit orchards, 5 percent in vegetables, and 23 percent in fodder and other crops. 1.7 Cultivable land is organized around 1,966 collective farms, and 14,250 private farms, occupying about 3.6 million ha, and 0.9 million ha, respectively. The State owns the land and most farm assets, sets production targets, determines and allocates inputs for collective and state farms, and sets input and output prices. Private farmers have a 10-30 year lease contracts on the land allocated to them. They do not have to meet state orders, and can sell freely what they produce. 1.8 Gross agricultural product increased at 1.6 percent per year between 1976 and 1990 (in constant 1983 prices). The growth was primarily attributable to the livestock sub-sector. Since independence, agricultural production in Uzbekistan faltered but did not collapse. Gross agricultural product in 1992 and 1993 was only 6 percent lower than in 1990 and 1991, and preliminary results for 1994 indicate that gross agricultural product remained at the 1993 level. 1.9 Expansion of agriculture between 1960 and 1990 was primarily attributable to an increase in the cultivated area. Irrigation works made it possible to expand cultivated area from 2.3 million ha to 4.5 million ha, at an average of 70,000 ha per year. Besides increasing production, the expansion in area reduced the pressure of population on arable land, and made it possible to keep in the rural sector the growing population, thus avoiding undue strain on urban infrastructure and keeping at a minimum the problems associated with rural/urban migration. 1.10 Yields grew little during the expansion period, as the country increasingly specialized in producing cotton and extended that production to less and less fertile soils. In the absence of any substantive technological innovations and in an attempt to prevent a decline in yields, the Government tried to increase soil fertility and combat pests by distributing large quantities of fertilizers and pesticides to collective and state farms. It also concentrated on developing new cotton varieties of the expense of other crops. This strategy appeared to succeed in the early years of the expansion. As irrigated area  4 continued to expand, however, and as the use of chemicals intensified, the quality of soil and water in the country began to decline. The strategy led to the reverse of its intended impact; it became clear that the selected strategy could not be sustained. As the Government became aware of the extent of the land and water contamination, and as the country's dependency on imported food grew, the Government started to decrease the area planted in cotton from a peak of about 2 million ha in the mid-1980s to about 1.5 million ha in 1994. Government's current intention is to stabilize the area under cotton at about 1.2 million ha. 1.11 Crop yields are lower than in other countries with similar climatic and technological conditions. For example, Uzbek yields have averaged 2.7 tons per ha for seed cotton, 3.2 tons per ha for paddy rice, 8.8 tons per ha for potatoes. 4 tons per ha for maize, and 5.4 tons per ha for grapes. These yields are respectively about 25, 70, 35, and 50 percent lower than in other countries that produce these products under similar conditions. These relatively low yields contrast with the excessive amounts of chemicals fertilizer and water used. Farms used on average about 220 kg. of fertilizer per ha in the early 1990s, a high rate of usage when compared with most cotton-growing countries, which apply between 120 and 150 kg. per ha under irrigation. Water consumption reached about 13,000 cubic meters per ha, almost double the 7,000 cubic meters per ha used in other cotton-growing countries. Pesticide consumption, on the other hand, has fallen sharply; the expansion of biological methods of pest control and, more recently, the lack of foreign exchange to import pesticides, have reduced pesticide use from its peak of over 10 kg/ha in the mid-1980s. a lot higher than other countries, to less than 1 kg/ha in 1994, much lower than in other cotton-producing countries. C. THE COTrON SUB-SECTOR 1.12 Cotton has been the most important commodity in the Uzbekistan agricultural economy. It has accounted for about 40 percent of the gross value of agricultural products and has been the main source of income, employment and foreign exchange. The cotton sub-sector has also generated about 80 percent of the Government tax revenue. 1.13 During the 1980s, cotton production averaged about 5 million tons, and the area planted averaged about 2 million ha. Low lint yields and low quality of lint were typical. Although the varieties planted have had the potential to generate higher yields and better quality, that had been prevented by technical, economic and institutional factors which discouraged efficient farming and ginning practices and lowered yields and quality. Lint yields ranged around 850 - 900 kg/ha compared to 1,500 kg/ha in Australia, 900 - 1,100 kg/ha in China, and 1,100 - 1,500 kg/ha in the U.S. Ginning out-turn fluctuated around 32 percent, compared to 33 to 40 percent in other countries. Yields also showed a wide variance across and within regions. 1.14 Decisions on how much cotton to produce have traditionally been taken by the Forecasting and Statistics Committee GOSKOMPROGNOZSTAT (former GOSPLAN), the Ministry of Agriculture (MOA) and the Ministry of Water and Irrigation (MWI). The chain of command went from the Forecasting Committee to the farm. The Forecasting Committee decided on the overall needs of the country for food and foreign exchange, and in agreement with MOA and MWI, established the desired amount and composition of agricultural production. These plans were then passed on to the regions and from there to the districts where implementation plans were drawn and orders given to farms on what, how much, and how to produce. 1.15 The Ministry of Finance (MOF) has had primary responsibility for pricing cotton.  5 Producer prices were established separately from production quotas, often after planting, and played little part in determining production levels. The government, however, compensated farmers for the difference between production costs and planned income. either through budgetary transfers (the State Farms) or through input subsidies (the collective farms). Moreover, only those farms that had agreed on a production plan with the government were assured of inputs at subsidized prices. Price response has, thus, been nonexistent because of a lack of incentives to increase production and/or efficiency. State production orders, highly subsidized fixed input prices, and fixed output prices determined artificial profits pre-set for each farm. 1.16 State enterprises have distributed agricultural products and inputs internally. In addition, state enterprises or official "contractors" have been responsible for all international trade--import and export--of agricultural products controlled by the Ministry of Foreign Economic Relations (MFER). Barter has been the principal mechanism to effect international trade. Bureaucratic hurdles made access to export licenses very difficult. The law prohibited individuals from exporting, and required independent firms to deal through state trading companies. Collective farms had no access to markets and could not deal with traders. 1.17 At the farm level, cotton production has suffered from poor quality planting seed, low quality (and in the past, excessive application) of pesticides and defoliants and excessive use of water and fertilizers. In addition, extending cotton production to unsuitable land has led to large differential in yields. Under similar cropping conditions, 15 percent of the area produced less than 2 tons/ha, 50 percent produced 2-3 tons/ha, and 35 percent produced more than 3 tons/ha. 1.18 The planting seed supply system handles about 40 varieties, but has no mechanism for maintaining varietal purity beyond the Elite Seed Farms. No facilities exist for grading planting seed, for testing them for vigor, or for treating and properly storing them. As a result, resowing tends to be the rule and the sowing rates tend to be up to 10 times those normally used in other countries. Mixed varieties and uneven plant stand due to multiple sowing contribute to the poor quality of the seed cotton supplied at the farm level. 1.19 Although the Elite Seed Farms appear to have well organized seed operations, no laws and regulations and no independent mechanisms exist for disinterested seed testing, certification and quality control. Information tends to flow in one direction from varietal breeders to seed multiplication farms. This has not allowed for feed back on varietal performance which could provide the basis for the removal and replacement of old varieties with better, newer releases. 1.20 During the 1970s and early 1980s, pesticide use in Uzbekistan was extremely intensive. Aerial spraying of large quantities of toxic pesticides with inefficient spraying equipment resulted in high concentration of suspended pesticides in the air in cotton growing areas. Both surface and ground water supplies were also contaminated. As the impact on the population of such contamination became apparent, the Government and researchers started focusing on developing alternative means of controlling agricultural pests. The Central Asian Institute for Crop Protection was created to perform that task. The Uzbek IPM program developed to the point that in 1993 over 2 million ha were treated with 304 releases of beneficial insects. In parallel, the use of pesticides has decreased substantially. Since Uzbekistan's independence, however. funding for the IPM program has decreased to the point where it is currently insufficient to finance the operation and maintenance of existing facilities. In addition, the restructuring of the Uzbek economy and the low efficiency of the on-going manual IPM operations raise doubts about the economic viability of the existing labor intensive biological control technology, thus creating the need  6 for intensive research to develop mechanized technologies for the production and dispersal of beneficial insects. Moreover, further reduction in pesticide use requires the mass rearing and release of additional types of insects to control a wider range of pests. 1.21 Water has been overused on all crops, including cotton. Farmers irrigated when the authorities delivered the water rather than when the plants needed it. Over-irrigation during harvesting and heavy post-harvest irrigation--to leach out accumulated salts from heavy doses of fertilizers-- aggravated waterlogging and soil salinity and reduced soil fertility. Excessive irrigation raised the water table and encouraged vegetative growth on the cotton plants late in the season, thereby creating defoliation problems and increasing the trash content of machine-picked cotton. All crops grown in Uzbekistan, including cotton receive excessive amounts of irrigation water. The results of over-irrigation have been: (i) increased use of fertilizers to compensate for leached nutrients; (ii) soil pollution by the leached nutrients; (iii) rising water tables; (iv) salinization of soils; and (v) discharge of saline drainage water into rivers. The Government has already recognized the problems associated with over-irrigation and has issued two decrees. Decree No. 4, of January 6, 1993 calls for improved irrigation design and layout and provides for its application on an initial area of 50,000 ha per year for 1993 and 1994, to be subsequently increased to 100,000 ha per year. Decree No. 385, of August 3, 1993 restricts the amount of water that farms can have and calls for fining farms for any water used in excess of their allocated quota. 1.22 Organizationally, the production, processing and marketing of cotton have been totally controlled from the Center. Government Departments and Government-controlled trading organizations have held full responsibility in all segments of the production and marketing chain for cotton from the allocation of acreage up to the export of lint. The chain has been regimented and inflexible and has not allowed market forces to bring buyers and sellers together to determine the price and the size of the cotton crop. 1.23 Starting with production, the target size of each year's crop has been traditionally determined by the Government on advice from GOSKOMPROGNOZSTAT. This target production has then been assigned to oblasts, rayons, districts, and then down to individual farms on the basis of past performance and land productivity. Government then assigned state orders to the target levels of production to be delivered to the Government at the Government's procurement price. It has been Government policy that the portion of a crop between the state order level and the target level production and production over and above the target level of production would be the property of the farm to be disposed of at the discretion of the producers but within the constrictions of prevailing Government policy. In return for fulfilling state orders, the Government managed an input supply system which guaranteed farmers equipment and inputs at subsidized prices. No alternative system for the supply of inputs and equipment existed. 1.24 As the seed cotton is picked, it is delivered to Government-owned regional cotton storage stations in trailers. After testing, seed cotton is stored in "bunts' (modules) of between 350 tons and 500 tons on a basis of farm, variety, and grade as determined by a set of standards determined each year by the Government cotton classing department (SIFAT). 1.25 The Government-owned ginning organization - UZKHLOPKOPROM - has controlled all ginning activities. It has owned most gins and performed ginning services on behalf of the Government, not farmers. Gin managers have had a very limited role in decision making at the gins. Their primary function has been to achieve budgetary and production targets set by Government. The ginning season  7 has tended to be artificially extended to a ten to eleven month period, reportedly to maintain constant employment. 1.26 The Ministry of Foreign Economic Relations has been responsible for negotiating and settling all cotton contracts for export. UZKHLOPKOPROM provided MFER with quality estimates on the forthcoming crop by undertaking quarterly reviews of information which flowed through the gin laboratories and other regional offices such as the regional oblast offices of UZKHLOPKOPROM. MFER approved each export contract on the basis that the sale price was equal to, or greater than, the CIS quote in the Cotlook "A" index on the day of the sale less the relevant selling costs. The quotes published by Cotlook represented an average of about 10 quotes from the leading cotton buyers. As such, it was the buyers who determined the purchase price as it was they who submitted the quotes that made up the Cotlook "A" index. Once MFER concluded a contract, it passed all responsibility for delivery on to UZKHLOPKOPROM. Here the regional offices were advised to allocate a set number of bales of the quality prescribed in the contract. Most export contracts tended to have a range of quality requirements allowing some flexibility in delivery. 1.27 Uzbek cotton has been selling at an estimated 15 percent discount compared to other cotton of similar quality because most of it has been traded through barter arrangements. Government agencies have had to rely on such trade practices because they lacked experience in dealing in the international market both for buying and selling. Another major reason has been that the international market lacked reliable information on the fibre characteristics and on the spinning performance of the Uzbek cotton. 1.28 Production and marketing of cotton have been controlled through the state order system. In 1993, the state order system required farners to sell 80 percent of their allocated quota to the Government at fixed prices, which were about 20 percent of the international price. Above-quota cotton is marketed through the sate controlled Uzbek Association of Wholesale and Commodity Exchange Traders (UZOPTBIRZHETORG), which operates through regional joint stock companies, and exports lint for cash or barter. This organization has the monopoly on necessary export licenses and rail cars required for the export of lint. Although the system allowed for farmers to receive about 70 percent of the international price for above-quota cotton, in reality farmers are often coerced to participate in barter arrangements which deprive them of the true value of their cotton but which are the only means for them to access to certain inputs. 1.29 The Government regulates all steps in the production and trade of cotton, and taxes the sub-sector harshly. The Bank estimated that such taxation reached an estimated US$800 million in 1993, about 50 percent of the value of lint output, and financed Government expenditures and income transfers to the urban sector. 1.30 Ginneries can increase turnout by 4 percentage points and produce a better quality of lint. In order to meet standards demanded by the Government, ginneries over-clean cotton, remove large amounts of fiber, and increase short fiber content. Moreover, the current system biases grading towards lower categories and makes it difficult to market cotton in Western markets. The grading system groups different types of cotton in one broad category, and underrates cotton quality. It is estimated that exporters can gain an extra US$50-US$100 per ton of cotton sold in Western markets by improving cotton grading and by making the characteristics of Uzbek cotton known in the international market.  8 1.31 Cotton research is concentrated on the genetic aspects of cotton production. It has no links with cotton producers or users. In addition, there are no organized channels for farm technology development and supply. As a result, on-farm production practices are deficient. Although Uzbekistan has a well developed plant breeding program in cotton, the farmers and the country do not benefit from it as much as they could because the country does not have the capacity to produce quality planting seed that would allow farmers to take advantage of the productive potential of the generic material developed. Farmers plant poor quality seed because the system supplies only ungrained seed that cotton gins produce. Since gins do not delint the seed, they cannot separate (gravity grade) the weak from the strong seed, and cannot treat the seed with chemicals. The deficiencies in seed production and processing lead to variety mixing, loss of varietal purity, and low seed quality. Low-quality seed germinates poorly, and produces weak plant stands and low yields. Because the seeds that are planted have different characteristics, each field produces a mixture of varieties and qualities of cotton, which reduces the efficiency of harvesting, ginning and marketing. 1.32 Government control and lack of well-defined property rights have prevented the sector from achieving higher output and efficient growth. Producer prices are established separately from production quotas, often after planting, and play little part in determining production levels. Only those farms that have agreed on a production plan are assured of inputs at subsidized prices. The Government pays ginneries a fixed fee per ton of ginned seed cotton. Because the Government does not pay fees according to performance (quality and out-turn delivered), ginneries are not motivated to achieve higher out-turn and produce better lint. Thus, neither farmers nor ginners respond to prices because prices do not represent a basis for decision making about production level and efficiency. Institutional and economic barriers discourage export and the emergence of a group of skilled traders. The law prohibits individuals from exporting, and independent firms have to export through state trading companies.  9 II. BANK LENDING EXPERIENCE AND STRATEGY FOR UZBEKISTAN A. BANK LENDING EXPERIENCE 2.1 The Bank began only recently to support agricultural projects in countries of the Former Soviet Union, and has limited experience with projects in countries with economies in transition. The Bank has, however, supported in other parts of the world, diverse agricultural projects with objectives similar to those of this project. The paragraphs below summarize Bank experience in projects from which lessons were drawn while designing this project. 2.2 Bank experience in irrigation, seed and agricultural marketing projects shows that appropriate project preparation, local involvement and strong institutional support, proper training, adequate incentives, a satisfactory legal framework, and the correct distribution of responsibilities between the public and private sectors contribute to the success of projects. More specifically, it has been demonstrated that project success has been closely linked with: (a) local ownership of project design and commitment to its implementation; (b) strong, tailor-made training programs for planners, high- and mid-level managers, and grassroots decision-makers and producers in support of technology transfer; (c) agreement on and implementation of effective procurement procedures to ensure the timely supply of equipment, goods and services and the execution of civil works needed for meeting project objectives; and (d) favorable and stable macroeconomic conditions and policies. 2.3 The Bank shared this experience with Government. As a result, Government took full responsibility for project design. All ministries and institutions concerned participated in project design from the onset. MOA, the Crop Protection Institute, The Uzbekistan Cotton Production and Marketing Institute (UZKLOPKOPROMSBYT), collective seed farms, SIFAT and MWI worked together with GOSKOMPROGNOZSTAT, as the coordinating agency, to design the project. A team consisting of Government personnel, collective farm managers, and lint testing specialists involved in project preparation and execution came to the U.S.A. on a study tour to visit the cotton industry, and gather information about the technology available for cotton production, processing seed, and marketing lint. With the information gathered during this study tour and the support of the technical assistance procured through an advance under the Project Preparation Facility (PPF), Government was in a position to identify the primary weaknesses in the cotton sub-sector and to design the project to address them. 2.4 With specific reference to seeds, the Bank's experience shows that: (a) producing seeds of the required quality does not need overly sophisticated seed processing technology which is beyond the local capability to operate and maintain, both physically and financially;  10 (b) a vigorous varietal breeding program that releases superior genetic quality seed is fundamental to sustain the seed industry; (c) private sector has a comparative advantage over the public sector in seed processing and marketing; (d) quality seeds do not require subsidies from Government to be accepted by farmers; (e) market determined prices for seed are a prerequisite for financial viability of the seed industry; (f) a favorable legal and policy framework is essential for attracting long-term investments in the seed industry; and (g) an autonomous and effective public sector seed certification and quality control service is necessary to promote efficient growth of the seed industry. 2.5 Uzbekistan has had a strong varietal breeding program, which has produced many cotton varieties, all of which continue to be used in the country. Although there is a need for screening these varieties and maintaining the breeding program, the more urgent need identified by Government is to improve seed processing to ensure access by farmers to quality seeds of the variety of their choice. The seed component was, thus, designed to primarily improve seed processing taking into account the above identified lessons. 2.6 One major lesson from the Bank's world-wide experience as well as from Uzbekistan's own experience relates to the impact of development programs on the environment. Uzbekistan learned the hard way that agricultural development that is detrimental to the environment, not only cannot be sustained, but also leads to the destruction of the very basis of development, namely land, water, and human resources. Thus, although project design started with the primary economic objective of increasing foreign exchange earnings from cotton, two components were added specifically to address environmental concerns while improving productivity. These are the irrigation and the integrated pest management components. 2.7 With regard to irrigation, experience shows that: (a) effective irrigation practices combined with proper use of inputs and cultural practices can mitigate any potential harmful effect on the ecology; (b) investment in irrigation has to be justified on empirically demonstrated economic potential of irrigation in the project area; (c) beneficiary participation in the design of irrigation programs is critical to their success, and is a prerequisite to developing and implementing a cost recovery mechanism for public sector investment in irrigation infrastructure; and  11 (d) support services such as extension, input supply and marketing enhance the profitability of investment in irrigation and, thus, motivate farmers to engage in such investments. 2.8 Government prepared the on-farm irrigation scheduling component with information gathered from a well tested pilot program in which several collective farms from the Tashkent area participated. The pilot program was designed and implemented with full participation of the farms selected for the test. 2.9 With regard to pesticide use, experience shows that: (a) economic benefits derived from the use of excessively toxic pesticides are outweighed by their harmful impacts on the ecology and the people who handle them; (b) even pesticides known to be less toxic can cause major ecological harm if not used at the proper rate and with the right equipment; and (c) properly applied pesticides can be an effective element in a package of integrated pest management practices involving beneficial insects and cultural practices. 2.10 The above concerns were the basis for including an integrated pest management component under the project targeted at developing alternatives to pesticides, selectivity in pesticide use, developing equipment for proper use of pesticides, and training farmers in their handling and use. 2.11 In cotton projects in general, Bank experience indicates that: (a) complex project design hinders project implementation; (b) open access to markets, along with a market-based pricing system, are essential for enhancing production efficiency at the farm and gin levels and the quality of lint; and (c) the generation and dissemination of information about the characteristics of cotton is essential for attracting buyers, enhancing the market value of cotton in both the local and international markets, and motivating farmers and gin operators to preserve the intrinsic quality of their product. 2.12 The cotton marketing component was designed by Government with due consideration given to the above lessons. The primary objective selected for this component was the generation and dissemination of information about the characteristics of cotton. The component's design was simplified by focussing on specific actions to increase the country's foreign exchange earnings from cotton. B. BANK STRATEGY IN AGRICULTURE 2.13 The Government has identified agriculture as an important sector requiring assistance from the World Bank. Such assistance is expected to help in providing an impetus for quick supply  12 response, support the transition to a market economy, demonstrate tangible benefits from the reform program, and build the basis for a sustained, long term supply response. The Bank, through its continued dialogue with Government, has played an important role in helping build the foundation for designing and implementing priority structural reforms in the agricultural sector. An important contribution of the Bank has been in facilitating the exposure of key policy makers and key players in the management of agriculture to market principles, and in working with them in the design of basic reforms to accelerate transition to a market-based, private sector led agriculture. The Government's recent actions in the agricultural sector appear to be driven by their concern over the possibility of: (i) loss of employment opportunities in the rural areas, in general, and in the agricultural sector, in particular; (ii) further deterioration of the sector's current production capacity; (iii) further deterioration of the sector's primary physical production assets - land, water; and (iv) the absence of an operational mechanism to take over from the Central Government the responsibility for the supply of agricultural services and inputs. 2.14 The Bank agrees with these concerns. Its strategy has been to help put in place the fundamental building blocks which would protect against further deterioration in the sector while initiating actions that would reverse the trend and initiate the process of building a market-oriented agricultural sector. To that end, the Bank's strategy gives priority to the creation of an enabling environment, including effective policies, a legal framework, and an institutional capacity to serve a well functioning market agriculture and to facilitate the effective implementation of agricultural reforms. The Agricultural Sector Review (under preparation) will provide the basis for developing a consensus on how to facilitate the creation of such an enabling environment and future investment programs will support agreed actions and reforms. 2.15 In support of these goals, the Bank's lending strategy in agriculture as described in the CAS focuses on financing operations that would: (i) foster development of a more supportive policy regime; (ii) help develop critical institutions and infrastructure to support a market-driven rehabilitation and restructuring of production units; (iii) promote long term, sustainable development in agriculture; and (iv) enhance the development of management skills and flows of market information to guide production decisions. Such investments would require substantial technical assistance and training which the Bank expects to support through direct lending and co-financing arrangements supplemented by ongoing and planned economic and sector work. 2.16 The project is consistent with the CAS. It complements three other operations in the Bank's current lending program for agriculture for the period FY95 - FY97: (a) the agricultural component of the Rehabilitation Loan helps create a supportive policy environment. It supports removal of State orders, liberalization of the price of cotton, and introduction of automatic export licenses for cotton; (b) the Drainage Project planned for FY97 aims to develop the means for the safe disposal of drainage water in the Amu Darya basin in Uzbekistan. In the process, the project will lead to improved water quality and enhanced agricultural production; and (c) the Farm Restructuring and Development Project planned for FY97 aims at developing farm infrastructure and support services, and replicable and sustainable models for restructuring state farms in a manner that would improve farming efficiency along the lines of a market-based agricultural system.  13 2.17 Through the integrated pest management and irrigation scheduling interventions, the project also supports the environmental objectives of the Aral Sea Program. C. RATIONALE FOR BANK PARTICIPATION IN THE PROJECT 2.18 The Government, working with the Bank in the context of Economic Work and the Rehabilitation Loan, and with the IMF in the context of the STF, has introduced important reform measures to accelerate the transition to a market economy. This project will provide the framework for putting those reforms to work on a sustained basis, thus giving them the chance to have a lasting impact. The project will also build on the reform measures already adopted and deepen their penetration at all levels of the cotton sub-sector. It will support the removal of critical institutional constraints which currently impede private sector initiative and participation in the cotton industry. The project will also provide an added medium for maintaining the policy dialogue and contribute to the prospects for continuing the policy reform process.  14 III. THE PROJECT A. PROJECT RATIONALE 3.1 This is the first investment project in Uzbekistan supported by a World Bank loan. The cotton sub-sector represents the most important part of agriculture in terms of its development potential in the foreseeable future. The Government selected this project on the basis of the potential short-term impact of interventions in the cotton sub-sector on: (i) enhancing the country's foreign exchange earning capacity; (ii) developing an approach for addressing environmental concerns in agriculture; and (iii) building a basis for effective transition to market-oriented agriculture. By design, the project concentrates on a few critical interventions intended to open the door for the broad range of possible future investments in the cotton industry which would target all stages of production, marketing and processing. B. PROJECT DEVELOPMENT OBJECTIVES 3.2 This project starts the process of modernizing the Uzbek cotton sub-sector by supporting selective critical interventions that would open it up to the world market and build the basis for improving its efficiency. It supports: (i) the elimination of state orders, the liberalization of prices, and the privatization of the seed industry in the cotton sub-sector; (ii) the development/introduction of technology to help avert negative impacts on the environment and productivity of past irrigation and pest control practices; and (iii) the enhancement of the cotton sub-sector's foreign exchange earning capacity. Performance indicators are given in Annex A. C. PROJECT SUMMARY DESCRIPTION 3.3 To help achieve the above development objectives, the project supports five components. These are summarized below: (a) Seed Industry: This component supports the creation of private seed companies to process and market about 25,000 tons of planting seed produced by private Seed Companies in association with privatized seed farms. It will also support the strengthening of seed quality control agencies and help introduce reliable policy and institutional arrangements in the public sector for seed quality control, seed certification, and continued development of new improved cotton varieties; (b) Cotton Marketing. This component supports the introduction of cotton grading technology to determine the characteristics of Uzbek cotton in conformity with internationally recognized standards. It also supports the development of a system for the dissemination (to potential buyers, the spinning industry, gin operators, farmers and researchers) of information generated through the grading system; (c) Integrated Pest Management: This is an applied research and development component. It provides for equipment and technical assistance for the development of insect rearing and dispersal technologies that will allow the country to economically broaden biological control of cotton pests. It also supports the development of improved pesticide spraying equipment to allow the  15 integration of biological and chemical control of pests with proper cropping practices in a manner that will mitigate the impact of pest control on the environment; (d) Irrigation. This component provides for equipment and training to introduce irrigation scheduling technology and demonstrate effective ways to reduce water use in cotton production, while improving land productivity and avoiding water- based damage to the environment; and (e) Project Management and Program Design. This component supports the strengthening and development of the capacity of agencies involved in this project to help them implement their respective components and contribute to the design of future investment programs in agriculture. It also supports specific preparation activities for investment programs for which Government intends to seek external financial support. D. DETAILED PROJEcT DESCRITON Seed Industry Objectives 3.4 The objectives of the seed component are twofold: (i) create the enabling policy and institutional framework for the development of an effective seed industry in the private sector; and (ii) improve the quality of planting seed as a means to improving yields and fiber quality and value. Detailed Features 3.5 The seed component has two sub-components. The first deals with creating/strengthening the institutional (legislative, administrative and policy) framework to enable private seed companies to perform their functions effectively, and the second deals with creating a private seed industry. 3.6 Institutional Framework. This sub-component supports the strengthening of the seed quality control functions of public sector agencies. Provisions under this sub-component assume that the seed companies to be established will strive to build confidence in their products among farmers and will, thus, perform their own internal quality control functions. External quality control is intended to guarantee that seed producers operate within the framework of the country's seed law and policy, and that the seeds farmers buy possess the characteristics as described on the label which is issued by the seed certification agency. 3.7 National Seed Policy and Seed Law. Draft proposals were prepared by the Government for a National Seed Policy and a new Seed Law. These draft proposals include articles, procedures and practices as defined or recommended by international bodies, such as the International Seed Testing Association (ISTA), the International Union for Protection of Plant Varieties (UPOV) and the Association of Official Seed Certifying Agencies (AOSCA). The draft National Seed Policy provides direction for Government agencies, research institutes, breeders, seed producers and farmers for the long-term development of seed. By enacting such a policy, Government will be able to provide a framework for  16 the development of a seed industry. The draft Seed Law proposes regulatory procedures for ensuring quality of seed at the stages of production, marketing, certification, importation and breeding. The Plant Variety Protection Law was prepared based on the Model Law on Plant Variety Protection developed by the UPOV. This draft law provides the legal basis for the seed breeders' rights. The draft Seed Policy and Seed Law were discussed during negotiations. Their enactment will be a condition of disbursement against the public sector part of the Seed Component. 3.8 Seed testing and Certification. Present seed testing and certification practices are far behind ISTA standards. Laboratories which are located at the ginneries are poorly equipped and staffing is minimal. Staff of laboratories are employed by the MOA and seed certification personnel are employees of the seed producers, i.e. elite seed farms, seed farms and ginneries. Thus, under the present organization and system, farmners cannot be sure of the purity and germination of seed which they are ordered to plant. The seed certification organization and activities need to be upgraded as follows: (a) The central and regional seed certification offices and laboratories need to be autonomous (including ultimately financial autonomy) and independent of seed producers and/or seed buyers. They need to be able to work independently, free from interference from vested interests; (b) All planting seed (elite and multiplication) needs to be certified. Since this will increase the requirements for seed certification, there is a need to increase the staff and their skills and to provide more and better quality equipment; and (c) New standards and procedures need to be introduced. The new agency will follow the procedures for seed certification and testing of the International Seed Testing Association (ISTA). This should be done not only for the cotton sector, but also for the whole agricultural sector. This will provide a standard and uniform system of seed testing and will greatly improve the trade in seeds and plant material and the comparison of test results. 3.9 Under the project, external quality control will be the responsibility of a single Govermnent seed certification, testing and quality control agency, using procedures tested and proven in other countries. The MOA Cotton Seed Department through the Central Seed Certification and Seed Law Agency and the Oblast Seed Certification and Seed Law Units will: (i) certify cotton seed fields, gins, plants and seed lots to ensure varietal purity; (ii) test seed destined for the market and farms, to ensure high seed quality; and (iii) sample and test seed in the market, sold to farms, etc. to ensure that it meets established standards. The Plant Variety Protection Office under the MOA Commission of Agricultural Crops Sort Testing will: (i) test varieties and disseminate the testing results to allow private seed companies to decide on which varieties to maintain and varieties to discontinue; and (ii) implement plant variety protection rules and regulations. Activities related to external quality control include establishing: (a) a quality, development-oriented Seed law; (b) a development-oriented National Seed Policy; (c) adequate Plant Variety Protection rules;  17 (d) Seed Certification rules and procedures, with built-in protection against misuse; and (e) establishing and equipping one Central Referee seed testing laboratory and 5 Regional Service seed testing laboratories. 3.10 Improving external quality control will also require organizing and equipping an integrated unit in MOA to implement the above external quality control operations. This will require extensive training along with technical assistance to help establish, plan, and manage operations and develop proper procedures. 3.11 The administratively-combined external quality control structure to be established under the project will include: (i) the Seed Certification and Seed Law Agency with a Central and Referee Seed Testing Laboratory; and (ii) five oblast Seed Certification and Seed Law Units with service testing laboratories. These agencies will be under the administrative oversight of the Cotton Seed Department of MOA. The Plant Variety Protection Office will be under the State Commission of Agricultural Crops Sort Testing in MOA. 3.12 The Seed Certification and Seed Law Agency will be responsible for the implementation and coordination of the seed certification and seed law. Their central laboratory will serve as a referee, an import/export testing station, a coordinator, a supervisor and a training institute for the oblast organizations. The Oblast Seed Certification and Seed Law Units, each with their own oblast laboratories, will serve as inspector, certification agency, monitoring agent of the quality control department of the seed producers, and trainer of seed producers. 3.13 Once fully established and operational, the seed certification agencies should derive a major part of their income by charging a fee for their services. Government confirmed during negotiations that no later than June 30, 1998, the Seed Certification and Seed Law Agency will under terms of reference satisfactory to the Bank, prepare and furnish to the Bank a plan for the full cost recovery of its services. Thereafter, this plan will be finalized taking into consideration the Bank's views and will be implemented starting no later than June 30, 1999. 3.14 Plant Variety Protection and Cotton Research: Four organizations are currently active in cotton breeding: the Cotton Seed Breeding Institute, the Institute of Experimental Biology, the Uzbek Cotton Production Research Institute, and the Institute of Genetics. Presently there are about 40 cotton varieties released for planting. Some varieties are grown on less than 10,000 ha and it is not clear whether farmers would continue to grow them if they were given the opportunity to select their own varieties. The Plant Variety Protection office will be strengthened to register new varieties on the basis of advice from breeders, the Seed Certification and Seed Law Agency, seed producers, and cotton producers. 3.15 The project will support the strengthening of the Central and Oblast seed certification and Seed Law offices, and the Plant Variety Protection Office. It also provides funding for equipment and training for cotton breeding institutes which are interested in close cooperation with the seed industry. The project will provide for: (i) upgrading equipment required for testing, certification and registration; (ii) specialized technical training and study tours to facilitate interaction with international bodies involved in cotton breeding, seed certification, and seed production and marketing; and (iii) technical assistance to make up for the absence in Uzbekistan of the requisite expertise to establish and manage a private seed  18 industry (details are given in Annex 1 of the Implementation Volume). In order to encourage cooperation between researchers and seed producers, the project provides for limited training and technical assistance for cotton research agencies involved in seed breeding to help them initiate a reorientation of the research system to make it user responsive and to help develop links between the research and production systems. 3.16 Seed Companies and Seed Farms. This sub-component consists of a line of credit to support the establishment of private seed companies and the transformation of collective seed farms into private seed farms. Agreements reached with Government during appraisal relating to private seed companies and seed farms are summarized in the Government letter in Annex B. The line of credit is necessary because this component represents a test case for privatization in the agricultural sector for which there is no alternative source of credit to support the development of a private seed industry. The sub-loans will be provided to eligible, legally constituted private seed companies, on the basis of a detailed business plan which describes the company (ownership, assets, liabilities), proposed operations, and documents the technical, institutional and financial features of the proposed investment. The business plan may cover the credit requirements of both seed companies and the working capital requirements of the seed farms associated with them for purposes of seed multiplication. Credit to seed farms will, thus, be channeled through the seed companies in the form of supplier credit. The seed companies will be responsible for appraising the credit requirements of their associated seed farms. They will also be responsible for allocating to seed farms their part of the loan and for its repayment. The line of credit will be administered by the Project Implementation Unit (PIU) in GOSKOMPROGNOZSTAT. The PIU will be responsible for sub-loan appraisal (para 5.9). The sub-loans will be channeled to sub-borrower seed companies using a commercial bank acting as the agent for accounts, disbursements and collections. Estimates of financing requirements over the project period are based on a seed processing capacity to produce 25,000 tons of clean planting seed which should be sufficient to meet the country's requirements once the planting rate is adjusted to reflect the improved seed quality and once the area under cotton is stabilized around the country's long tern target of around one million ha. A processing unit of 5,000 ton capacity is expected to require about US$5 million. The actual capacity of individual seed companies to be created under the project will, however, be decided by the investors themselves. 3.17 Seed cotton will be produced by privatized seed farms, acting as contract growers for the seed companies. These contract growers, which can be shareholders in a seed company, will operate under the technical guidance of the seed company to: (i) produce stock seed for re-multiplication by owner/member farms; (ii) multiply certified seed; and (iii) deliver to the seed company all seed cotton produced. 3.18 Seed companies will be equipped to receive and gin seed cotton owned by the participating seed farms. At the end of the ginning process, they will buy the cotton seed from the seed farms and return the lint, unless a prior arrangement exists for the seed company to act as the selling agent for the lint, in which case, the companies will be given automatic licenses to export the lint as marketing agents of the seed farms. They will then delint, condition, treat, bag, store, distribute and market the seed found suitable for planting and dispose of any seed found unsuitable for planting through the oil mills. To ensure proper cultural practices and varietal purity, the seed companies will assist the seed farms in the preparation of production plans, in the certification of their seed, and in getting necessary supplier credit for spare parts, equipment and pesticides as provided for under the line of credit. 3.19 About 50 farms were consulted on their interest to join a partnership to create seed companies. A sample of those which expressed a clear interest is given in Annex C. To do that, these  19 and other seed farms need to become legally registered as fully private farms. The number of farms interested in participating in seed companies is likely to be much higher as many other seed farms exist which have not been informed about the project and many of these which were contacted have not had time to reflect on it. Interest has also been expressed by international seed companies to enter into joint venture arrangements with local interests, including privatized seed farms to create seed companies. 3.20 The demand for quality seeds is expected to develop in tandem with the supply. Crop budget analysis demonstrates farmers' ability to pay substantially higher prices for quality seeds than they do at present, especially once the price of lint has been fully liberalized. The price of certified cotton seed in other countries is in the range of US$800 to US$1200/ton. Since suitable varieties are already available in the country, the seed industry can operate, at least for few years, with a low overhead by taking advantage of the sunk cost associated with variety development. On this basis a price as low as US$150 to US$200/ton would allow the seed industry to break even in the early years without affecting the profitability at the farm level, especially given the fact that quality seeds will decrease the planting rate to 10 to 20 percent of the current planting rates and will eliminate the need for resowing. The seed industry can, therefore, charge relatively low prices in the early years and adjust them progressively as farmers learn the advantages of quality seeds, and as their cost structure requires. 3.21 The line of credit will finance the requirements of seed companies in relation to civil works, ginning, seed processing, laboratory equipment, and incremental working capital. It will also finance spare parts, urgent equipment and pesticides for seed farms. The list of pesticides to be financed under the project will be mutually agreed between the Government and the Bank. Funding for pesticides will be channeled through the Institute of Crop Protection for the first year and, thereafter, through the line of credit. Given the current weakness of the banking system, the line of credit will be channeled through an agent bank under the overall administrative responsibility of the Project Implementation Unit, pending the strengthening of a suitable banking institution to take over this responsibility as soon as possible. 3.22 The size of the line of credit was estimated on the basis of a seed processing capacity of 25,000 tons of certified seed to meet the requirements for planting a cotton area in the order of 1 to 1.2 million ha. The line of credit in the amount of US$38.8 million is expected to be on-lent through 4 to 6 sub-loans. The exact number of sub-loans will depend on the processing capacity individual seed companies would decide to install, given the overall objective of developing a system that would supply 25,000 tons of planting seed annually. Cotton Marketing Objectives 3.23 The objective of the Cotton Marketing component is to improve the marketability of the Uzbek cotton and its value in the international market. Information generated on fibre characteristics will provide the basis to more accurately identify and differentiate the Uzbek cotton and enhance sellers' and buyers' knowledge about its quality and spinability. An associated objective of this component is to improve the quality of the Uzbek cotton in the long term through research and better ginning practices. Using the information on fiber characteristics, cotton breeders will be able to select varieties more responsive to market and industry needs. Gin operators will also use the information to preserve the fiber quality by adjusting ginning speeds, the amount of cleaning carried out, and the engineering of the  20 machinery used in the ginning process. Fiber property information will also facilitate a tighter selection of cotton qualities used in domestic spinning, thus improving the efficiency of the spinning industry and providing feedback to breeders and farmers on the industry's requirements. Detailed Features 3.24 The Cotton Marketing component consists of three sub-components: a High Volume Instrument (HVI) cotton grading system; an information processing and dissemination system; and Training and associated Technical Assistance. 3.25 HVI Cotton Grading System. The project will support the installation of 34 HVI lines in 16 regional and one central classing centers. Each of these classing centers will incorporate data from manual classing techniques for color, preparation, and leaf content of raw cotton to internationally recognized United States Department of Agriculture (USDA) standards with data on fiber property from HVI testing. The central classing center in Tashkent will play the dual role of the central quality control and research laboratory, as well as, that of the regional classing center for the Tashkent area. The center will be operated by the cotton quality control agency SIFAT. Through a check test program, SIFAT will maintain vigilance on the testing performance and accuracy of the regional classing centers. The HVI fiber testing devices to be installed in the central and regional testing laboratories will have the capacity to test for the following parameters: color, elongation, span length, fineness (micronaire), length uniformity and strength, and leaf content. 3.26 Information Processing and Dissemination. Information generated through HVI tests along with manual classing data will become available for each bale of cotton produced. This information will be useful to those involved in cotton production, raw cotton marketing, cotton spinning, ginning, and cotton seed breeding. The system will allow the allocation of individually tagged bales by grade to sales contracts. It will also provide feedback to the gins and farmers about the impact of their production/handling practices on the characteristics, and thus, the price of their cotton. A computerized system will be installed that will allow automatic sharing of information between various operations, such as growers' supplies, gin inventory, gin processing, bale inventory, marketing information, warehousing, stock location management, and sales contracts management. In addition, the research section of the central classing center will produce and disseminate information on fiber characteristics and on market performance of various varieties for researchers to use in making their work more relevant to the needs of cotton producers and cotton processors. All information generated under this project will, initially, be made available by SIFAT, as a public good to demonstrate its utility during the first two cropping seasons, and create a demand for the grading service. The objective, however, is for SIFAT to recover the full cost of the service from users. To that end, a proposal will be prepared by SIFAT about alternative approaches to effective cost recovery. Agreement was reached during negotiations that this proposal will be submitted to the Bank for review by June 30, 1998. This plan will be finalized taking into consideration the Bank's views and its implementation will start no later than June 30, 1999. 3.27 Training and associated Technical Assistance. To ensure effective introduction and operation of the cotton classing system, the project will provide for establishing a central Cotton Grading and Marketing School, with possible branches in the Regions, if necessary. The curriculum in these schools will cover, inter alia,: (i) HVI operation; (ii) operation of other fiber testing instruments in the central laboratory; and (iii) cotton classing. The training programs will address the needs of SIFAT personnel in the central and regional classing centers, personnel of cotton trading and cotton processing  21 agencies, gin operators, cotton producers, and cotton research personnel. To ensure the operational orientation of training, the same specialits involved in establishing the cotton grading system will also be responsible for providing the training. 3.28 The training will consist of classroom training in the Grading and Marketing Schools, on- site training at the classing centers, and study tours abroad for key laboratory personnel. The primary emphasis in training will be on introducing and on making effective use of a standardized system of cotton quality evaluation which complies with the internationally accepted grading system. In parallel to that, the training program will seek to facilitate the utilization of the information generated by the cotton classification system in improving the practices/processes of handling the raw material, ginning, warehousing, marketing, and spinning. 3.29 To support the introduction of the HVI technology, the project will provide for a training program to create or strengthen the local skills in the areas of expertise which include HVI operations, technical repair and maintenance; classing techniques; computer system design, operation and management; data analysis and interpretation, and information dissemination. The emphasis on training will be on rapid, on-the-job transfer of knowledge and skills. Terms of reference for the technical assistance are provided in Annex 2 of the Implementation Volume. Integrated Pest Management Objectives 3.30 The Integrated Pest Management (IPM) Component is an applied research component aimed at developing the technology for strengthening and expanding the use of IPM techniques which integrate biological and chemical methods along with cultural practices to control cotton pests and diseases. Its ultimate goal will be to define a set of insect control practices that will contribute to increasing cotton yields and quality with minimal negative impact on the ecology and the health status of the people involved. Specifically, the project will support the development of technology that will make feasible: (i) an expanded use of biological control through mass release of beneficial insects and the conservation of those already in nature; and (ii) selective and reduced use of pesticides through effective application practices and improved equipment. The project will also support the preparation of a national strategy for the use of pesticides in agriculture and the development of a farmer pesticide handbook to inform farmers on appropriate and safe ways to select and use pesticides. Detailed Features 3.31 The IPM component has four sub-components: development of automated mass rearing technology, development of mechanized dispersal technology, development of effective equipment for application of pesticides, and training and technical assistance. 3.32 Automated mass rearing technology. The current breeding method for beneficial insects, developed in the early 1970s, involves substantial manual handling, resulting in heavy losses. The project will provide for: (i) the preparation of plans and specifications for mass automated rearing units; (ii) the production and trial of a prototype automated mass rearing unit; and (iii) the development of 45 new automated mass rearing units - 15 for Trichogramma, 15 for Bracon, and 15 for Crysopa to be used in strategic breeding locations.  22 3.33 Mechanized dispersal technology. Currently, dispersal of all beneficial insects is done by hand. One person can cover 7 to 10 ha per day with deposition points 10 m apart. This system does not allow for uniformity in coverage, nor does it allow for quick spread of beneficial insects to find their targets. Possible solutions to be tried and, if found successful, developed include dispersal by aircraft, by tractor, and by ultra-light aircraft. A prototype disseminator for aircraft was developed and successfully tested in one district. Under the project, the Institute for Crop Protection will provide for building six such disseminators for further testing and evaluation in six oblasts using leased aircrafts. A prototype disseminator for dispersal by tractor was also developed and tested in one district. The project will provide for building twelve such prototype disseminators for further testing and evaluation by the Institute for Crop Protection in six oblasts. Dissemination by ultra-light aircraft has not been tried in Uzbekistan. The project will provide for the purchase of an ultra-light aircraft to be modified and tested for the distribution of beneficial insects, possibly as a more economic alternative to regular aircrafts. 3.34 Equipment for application of pesticides. The current technology for application of pesticides uses air-blast sprayers which give excessively large droplets. It is estimated that about 80 percent of the pesticides applied is lost and ends up polluting the environment. Moreover, the 20 percent which reaches the plants is too poorly distributed to be effective in controlling the targeted cotton pests. An alternative technology has been under development using a boom spray with a redesigned nozzle. With this technology, the fluid is mixed with air and the mixture is dispersed with an air jet. The development of this technology is advanced, but further work is needed. The project will provide for completing the development of the boom spray, the production of prototypes for testing in different regions, and the import and testing of equipment known to have the characteristics desired for Uzbekistan. 3.35 In parallel to supporting the development of equipment, the project will support the preparation and the dissemination of a "Farmers Pesticide Handbook" intended to help farmers with the selection of pesticides, and spraying equipment to make the application of pesticides an environmentally safe integral part of the IPM program. The project will also provide for the development of a national strategy for the use of pesticides in agriculture, including regulatory options, handling, disposal and application. Terms of reference for the preparation of the Farmers Pesticide Handbook and the National Pesticide Policy are included in Annex 3 of the Implementation Volume. The Policy and the Handbook will be prepared by the Institute for Crop Protection with technical assistance, as needed, and will be submitted to the Bank before they are finalized. 3.36 Training and Technical Assistance. To support the IPM technology development program described above, the project will provide for on-the-job training and study tours for scientists and IPM technicians, both in Uzbekistan and abroad. It will also provide for technical assistance to support the development of the technology and the base for manufacturing it. Terms of reference are provided in Annex 4 of the Implementation Volume. On-Farm Irrigation Scheduling Objectives 3.37 The objective of the irrigation component is to improve the management of irrigation water at the farm level. More specifically, the component will aim to: (i) introduce irrigation practices  23 that would lead to a substantial reduction in the amount of water used to irrigate cotton; (ii) increase awareness of the economic value of irrigation water among farm managers and technicians; and (iii) reduce environmental pollution due to excessive use of water. Detailed Features 3.38 The On-Farm Irrigation Scheduling component has two sub-components. The first supports the development and operation of a computer-based irrigation scheduling system, and the second supports training and technical assistance to develop a capability to run the systemn and expand its application. 3.39 The Irnigation Scheduling System (ISS). The basis of the ISS is a computer software that UZAGROINFORM has developed, validated and tested on eight farms in the Pskent District covering 18,000 ha of irrigated land where the water table is deeper than 3 m, which is the case for about 60 percent of the irrigated land. The project will support expanding the use of this system to cover an area of 200,000 to 300,000 ha, and enhancing its capability by adding a feature for monitoring soil and plant water status in order to check the validity of the computer predictions and the efficiency of water application at the farm. The monitoring technology consists of tensiometers and pressure chambers which will provide feedback on plant water status to ensure that the ISS is maintaining water in the soil at adequate levels. The project will also support the introduction of a more powerful computer program developed by UZAGROINFORM which, in addition to monitoring the water level, calculates the water balance in each layer of the soil, calculates the vertical and horizontal water flow, and determines the movement of salts and nutrients in the soil and down into the water table and the drainage system. These added features will enable the system to estimate salinity hazards and to manage salinity and nutrient pollution. Priority for the introduction of irrigation scheduling will be given to areas where: (i) supporting investments needed are minimal; and (ii) the need to conserve water is very strongly felt for cost and/or environmental reasons. 3.40 Training and Technical Assistance. The pace at which the use of the ISS can be expanded will be closely connected to the pace at which on-the-job training can be provided. As the technology to be used was developed in Uzbekistan, the training will be primarily on-the-job. It will involve engineers operating the ISS at the district level who, in turn, will train their support staff and the staff involved in irrigation at the farm level. The project will also provide for technical assistance to support the evaluation of the use of tensiometers and alternative technology for the control of water application, and help design and implement the training program. Terms of reference are given in Annex 5 of the Implementation Volume. Project Management and Programn Design Objective 3.41 This component has three objectives: (i) to provide the project coordinating agency - GOSKOMPROGNOZSTAT - with critically needed institutional support to help the agencies involved and the private sector implement this project; (ii) to strengthen the capacity of Departments which were assigned responsibility for implementing project components; and (iii) to support the necessary analytical work to design future investment programs for potential funding by international financial institutions.  24 Detailed Features 3.42 The Project Management and Program Design Component has two sub-components; the first deals with managing the implementation of this project, and the second deals with the design of future investment programs. 3.43 Project Management. Existing Government Departments will be responsible for the implementation of the public sector part of the project. Each Department will constitute within their existing structure a Component Implementation Unit (CIU) to manage the implementation of each component. In addition, given the limited experience individual Departments have in implementing joint programs and in dealing with external funding agencies, the Government has established a Project Implementation Unit (PIU) to coordinate project implementation. The PIU is located in GOSKOMPROGNOZSTAT and is headed by a Project Director who answers to the Deputy Chairman of GOSKOMPROGNOZSTAT. The PIU will oversee and monitor project implementation and assist the public agencies involved in the execution of their respective components. The PIU will also manage the studies aimed at designing future investment programs. In addition and in cooperation with a commercial bank, the PIU will administer the line of credit supporting the seed component to be executed by the private sector. The PIU will perform its coordination function with support from a Project Working Group (PWG) consisting of senior officials from Government agencies participating in the project under the chairmanship of the Deputy Chairman of GOSKOMPROGNOZSTAT. The seed industry component will be implemented by the private sector. The project will provide for equipment, training and technical assistance for the PIU and the CIUs (Chapter V). 3.44 Design of future programs. This sub-component will support the analytical work needed for the Government to prepare feasibility studies for investments in support of the intensification of agricultural production. Areas, so far, identified by Government for potential investment include: collective farm restructuring and development, agricultural support services (research, extension, marketing, farm management), irrigation rehabilitation, modernization of the cotton ginning industry, rehabilitation and development of pasture resources, and development of agricultural exports (fruits, vegetables, silk, grapes, berries, etc). The project provides a US$1.9 million lump sum allocation for that purpose, including about US$0.6 million for pilot activities in support of project preparation. These resources will be allocated to specific feasibility studies on the basis of detailed proposals prepared by PIU and carried out through consulting services. The studies will be mutually agreed between the Government and the Bank. An assurance to that effect has been given by Government during negotiations.  25 IV. PROJECT COSTS AND FINANCIAL ARRANGEMENTS A. PROJECT COSTS 4.1 Total project costs, including contingencies and applicable taxes and duties, are estimated at US$84.6 million. This estimate covers expected expenditures in foreign exchange in the order of US$62. 1 million (73.4 percent of total costs) and expected expenditure in local currency, other than taxes, equivalent to US$22.5 million (26.6 percent of total costs). Taxes and duties are estimated at the equivalent of US$6.1 million (7.2 percent of total costs). Table 4.1 summarizes project cost estimates by component and category of expenditures. Details on project costs are given in Annex D. (Additional project cost information is contained in Annex 6 of the Implementation Volume). The line of credit supporting the private seed industry amounts to US$38.7 million, equivalent to about 46 percent of project costs. 4.2 Cost estimates were derived from mission analysis based on discussions with Government officials and intended project beneficiaries, and on the feasibility study and preparation reports submitted by Government. Price contingencies are based on official Bank projections as of December, 1994. Physical contingencies are estimated at 10 percent of base costs for civil works and equipment in line with established Bank practice and experience under similar projects. Taxes and duties were estimated at 10 percent of base costs of equipment and civil works. This is the least firm estimate as Government has not yet adopted a tax policy, nor made a decision on the tax status of externally supported development programs. Assurance was given by the Government that any tax liability associated with public sector project activities beyond the amount already covered will be financed by Government through their annual budgetary process. B. FINANCING PLAN Sources of Funds 4.3 A Bank loan of US$66.0 million will finance 100 percent of expected expenditures in foreign exchange and about 17.3 percent of expected expenditures in local currency. Bank financing of incremental expenditures in local currency is needed because the project requires substantial and rapid buildup of expenditures which Governrment is not yet organized to meet. Bank financing of recurrent expenditures for the public sector part of the project will be provided on a declining basis (25 percent for the first two years, 15 percent for the third and fourth year, and 0 percent in year five) in such a way that Government will assume full funding responsibility through the normal budgetary process for all recurrent expenditures associated with project activities in the public sector, starting with the fifth year of the project period. The Bank loan to the Republic of Uzbekistan will have a maturity of 20 years, including a 5-year grace period, at the Bank's standard variable interest rate. The Government, through GOSKOMPROGNOZSTAT, will finance about 47 percent of local costs, including payment of applicable duties and taxes for the public sector components and sub-components. Similarly, the participating private enterprises will finance about 34.7 percent of local costs, including applicable duties and taxes, for the private sector components and sub-components. Table 4.2 summarizes the project financing plan.  26 TABLE 4.1: SUMMARY OF PROJECT COSTS (US$ MILLION) Project Costs Foreign Component Foreign Local Total exchange % of total exchange currency % of total Project Component Seed Industry Seed companies and 28.0 10.7 38.7 72.3 45.8 farms Seed quality control 3.4 1.7 5.1 66.7 6.0 Marketing 20.8 7.1 27.9 73.2 33.0 Integrated Pest Management 3.6 1.5 5.1 70.6 6.0 Irrigation 2.5 1.1 3.6 69.4 4.2 Project Implementation Unit 1.9 0.4 2.3 82.6 2.7 Program Design 1.9 - 1.9 100.0 2.2 Total 62.1 22.5 84.6 73.4 100.0 Category of Expenditures Civil works 3.2 0.8 4.0 80.0 4.7 Equipment 21.8 5.3 27.1 80.4 32.0 Training 1.2 - 1.2 100.0 1.4 Technical Assistance 5.2 0.1 5.3 98.1 6.3 Program Design 1.9 - 1.9 100.0 2.3 Line of credit 28.0 10.7 38.7 72.4 45.7 Recurrent costs 0.8 5.6 6.4 12.5 7.6 Total Costs 62.1 22.5 84.6 73.0 100.0 TABLE 4.2: PROJECT FINANCING PLAN (US$ MILLION) Foreign Local Percent Sources of Funds exchange currency j Total of Total IBRD 62.1 3.9 66.0 78.0 Governnent - 10.8 10.8 12.8 Private sector - 1 7.8 | 7.8 | 9.2 Total 62.1 22.5 84.6 100.0__1 Percent of Total 73.4 26.6 100.0 -- 1  27 Counterpart Funds 4.4 Timely implementation of public sector components and sub-components depends, to a large extent, on the availability and timely flow of budgetary resources to the executing agencies. The counterpart funds will be included in the approved annual budgets of the respective executing agencies in conformity with provisions under the project, and will be made available to them at the beginning of each budget year to give them the management flexibility and real authority to commit resources and sign contracts in a timely manner. The Government provided assurances during negotiations to this effect and that a line item will be introduced in the national budgetfor the cotton project, with all budgetary allocations under that line item restricted for the sole use of the project. The executing agencies, in turn, will allocate and transfer resources to their representative units at the level of Oblast and District in a manner that will allow them to make timely decisions and give them unrestricted working authority to enter into contractual arrangements. To facilitate the flow of budgetary contributions to the project, a Project Account in the name of the PIU will be established to receive all counterpart funds in conformity with provisions under the project. This revolving account will be established in a commercial bank with an initial deposit of a minimum of US$0.5 million equivalent. The PIU will channel the funds in this account to the executing agencies in conformity with the provisions under the project or any subsequent agreements between Government and the Bank modifying such provisions. The Government will replenish this account promptly on the basis of documentation covering eligible project expenditures. Loan effectiveness will be conditional upon the Project Account being established and the initial deposit of US$0.5 million being made into it. Co-Financing 4.5 Training, technical assistance, and program design represent, respectively 1.4, 6.3 and 2.3 percent of total project costs. If the Government identifies a source of grant funds to finance part or all of such expenditures, the use of Bank funds for that purpose will be reduced correspondingly and reallocated to other project components on the basis of a joint review and mutual agreement between Government and the Bank. C. SPECIAL AccouNT 4.6 To facilitate project implementation, the Borrower will establish a Special Account (SA) in US dollars in a commercial bank on terms and conditions satisfactory to the Bank to cover the IBRD's share of expenditures. The commercial bank selected should have the capacity to perform the services required under the project. To that end, the bank selected should have: (i) a significant foreign correspondence network covering all major currencies; (ii) reasonable capacity and experience for issuing letters of credit, for making direct foreign payments and other international transactions; (iii) the capacity to perform a wide range of banking services, at local domestic branches, including cash payments, transfers to other domestic banks, issuance of debit notes, application of conversion rates from foreign currencies; (iv) the capacity to maintain adequate accounts for the SA as required by the World Bank and provide monthly bank statements to the PIU; (v) the willingness to issue a Comfort Letter to assure that amounts deposited in the SA will not be set off or otherwise seized or attached to satisfy amounts due to the commercial bank by the Borrower; and (vi) the willingness to charge competitive rates for their services and provide reasonable interest income on balances held.  28 4.7 The commercial bank selected to manage the SA will also manage the sub-loans accounts under the line of credit for the Seed Component. The bank's primary responsibility in relation to the sub- loans will be limited to disbursement of sub-loan proceeds and collection on behalf of the Government of loan repayments. Approval of the sub-loans will be the responsibility of the finance department of the PIU. Selection procedures for a bank to manage the SA were confirmed during negotiations. Agreement between the Government and the World Bank on the commercial bank to effectively maintain, disburse and collect projectfunds, and the signing of an agency agreement between this bank agent and PIU will be a condition of disbursement against the private sector part of the seed component. 4.8 The authorized allocation to the SA will be US$1.0 million, representing about four months of average expenditures effected through the SA. The SA will not be used for payments in foreign currency over US$50,000 which will be made through direct payments from the Loan Account. At the request of the Borrower and, based on the project needs, the World Bank will make an initial deposit or deposits into the SA up to the amount of the authorized allocation. Applications for the replenishment of the Special Account may be submitted by PIU to the Bank on a monthly basis or when one-third of the balance has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment will follow the usual Bank procedures. In addition, monthly bank statements of the Special Account which have been reconciled by the PIU will accompany all replenishment applications. D. FLOW OF LOAN FUNDS 4.9 The proceeds of the loan will be channeled in two ways (see Annex 11 of the Implementation Volume). First, funds to public sector implementing agencies will be received by the Central Bank and channeled as special line items through the budgetary process. Second, due to lack of established financial intermediation mechanisms, and due to the importance of supporting the establishment of a seed industry in the private sector at this time, the funds earmarked for the line of credit for private seed companies and their associated seed farms will be channeled by the Government through the agent bank under a sub-loan agreement acceptable to the Bank. Under the latter arrangements, the selected commercial bank will serve as an agency bank primarily to disburse funds, maintain accounts and recover sub-loans on behalf of the Government in exchange for a commission. The Government will bear any default risk. The PIU, through the Credit Committee constituted by its Finance department, will be responsible for the appraisal of sub-loans. PIU staff and their advisors will, upon request, arrange for independent technical assistance to help sub-loan applicants develop business plans and determine funding requirements to support their planned seed operations. The PIU Finance department, assisted by the specially appointed Credit Commnittee, will appraise credit applications and determine the conformance of such applications to the agreed sub-loan criteria. Once the appraisal is completed and the eligibility for the sub-loan established, each credit application will be submitted to the World Bank for review and clearance. Bank review will cover all technical, financial, institutional, and environmental considerations related to the sub-loans. Following receipt of a "No Objection" from the World Bank and on the basis of agreed eligibility criteria and terms of sub-loans (Annex E), the Deputy Chairman GOSKOMPROGNOZSTAT will formally approve sub-loans upon the recommendation of the PIU and concurrence by the cooperating commercial bank. The Government and the seed companies benefiting from sub-loans will enter into sub-loan agreements specifying the terms and conditions of sub- loans, security arrangements in case of default, procedures for withdrawal and utilization of loan proceeds, monitoring and reporting arrangements, repayment schedule, and independent financial audit. These arrangements were confirmed during negotiations.  29 4.10 A high proportion of the World Bank loan will be used for payments to foreign suppliers of goods and services, either through the Special Account or direct from the World Bank by order from the PIU. Financing of local, Bank-financed project expenditures will be on a reimbursable basis: the agency incurring the expenditure will first make a payment for the eligible goods or services, submit a withdrawal application to PIU which will authorize reimbursement from the loan-funded Special Account. 4.11 The PIU will include, in its accounting arrangements, procedures for recording all project funding, whether as sub-loans to individual seed companies, direct contribution by seed companies, and/or funds through budgetary process for public sector executing agencies to cover agreed project expenditures. GOSKOMPROGNOZSTAT, on behalf of the Government, will enter into an agency agreement with an agency bank to monitor disbursement of the line of credit and recover repayment (principal and interest) of the sub-loans, including the part borrowed by the seed companies on behalf of their associated seed farms. 4.12 The Government share of financing will be channeled directly through the budgets of the executing agencies concerned in accordance with normal Government procedures, with appropriate accounting, reporting and audit arrangements for the project. The expenditures to be financed through the contribution of private seed companies and private seed farms will be financed directly by them, with appropriate records maintained and subject to independent audit. E. ON-LENDING TERMS 4. 13 The prevailing macroeconomic situation makes it difficult to devise appropriate Sum-based on-lending terms. Accordingly, the Government and the World Bank agreed that the sub-loans to private seed companies will be denominated in US dollars. The interest rate to sub-borrowers will be the long term dollar rate (US 10-year Bond rate) in effect at the time sub-loans are made (the base rate) plus a margin of 3.0 percent. This margin will cover administrative costs, including commissions to the commercial bank for processing disbursements and the recovery of sub-loans, the cost to the PIU for administering the line of credit, and the Government cross-currency exchange and default risks. The sub- loans to private seed companies will have a maximum maturity period of 10 years, including a three-year grace period. Financial terms of the sub-loans and eligibility criteria are given in Annex E. Since the amount outstanding and the repayment will be in US dollars, the exchange risk (between the US$ and the Sum) will be borne by the private seed companies. The Government will bear the cross-currency risk between the basket of currencies in the Bank loan and the US dollar. The private seed companies are expected to be able to bear the foreign exchange risk because these companies and the private seed farms associated with them are expected to have access to foreign exchange from export sales of lint, and to be commercially viable (para 6.8) at the liberalized market price for cotton seed and lint. In case the activities of seed companies are limited to the processing and sale of planting seed on the local market, arrangements will be made in the sub-loan agreement for repayment of the sub-loan to be made in the local currency - Sum equivalent. During the World Bank's five-year grace period, reflows from sub- loan repayment will be used for the same purpose as specified under the project for the private seed industry. F. COST RECOVERY 4.14 Private sector activities will account for about 47 percent of the loan proceeds. These funds will be repaid with interest to the Government within the agreed terms of individual sub-loans  30 which will not exceed 10 years. The remaining 53 percent of loan proceeds will finance priority public sector activities aimed at facilitating the transition of the cotton sub-sector into the market economy. The value to potential beneficiaries of the services emanating from these public sector activities will not be obvious to them at the onset of the project, and possibly not even during the project period. Accordingly, no provision is made under the project for the recovery of the cost of the public sector components. The project, however, will be instrumental in introducing the principle of "fee for service" under the marketing and the irrigation components, and under the seed testing and certification sub-components and provides for technical assistance for that purpose. Although their potential value to the cotton sub-sector as a whole is obvious, individual beneficiaries will take time to recognize how such services affect the profitability of their individual operations, and thus attach a financial value to each service. It will not, therefore, be practical to expect beneficiaries to start paying for the services at the onset of the project, nor will it be practical to expect Government develop the capacity and workable mechanisms to recover the full cost of those services during the project period. Accordingly, the following provisions are made for cost recovery under the public sector part of the project: Seed Testing and Certification 4.15 It will take two to three years for the first seed companies and the associated seed farms to become operational. It will also take two to three years for Government to develop a capacity for cost- effective seed testing and certification. A period of learning and experimentation will be needed. The Seed Certification and Seed Law Agency will, therefore, concentrate during the first three years of the project on establishing an effective testing and certification system and on demonstrating to seed producers, processors and users the value to them of seed testing and certification. By the end of the third project year (June 30, 1998), this agency will prepare a plan for the full recovery of the costs of their services and submit it to Government and the World Bank for review and approval. It is expected that cost recovery will start in the fourth year of the project period (June 30, 1999). Cotton Marketing 4.16 The cotton grading system is expected to be introduced in three phases to accommodate the need for training the staff in the use of equipment and in the interpretation and dissemination of the information generated. The first phase, which is critical for defining work procedures and standards, involves the installation of a limited cotton grading capacity. The bulk of the classing equipment is expected to be installed during the third and fourth years of the project period. For these reasons, and in order to allow SIFAT to assess the true costs of the cotton grading services, SIFAT will not be required to concentrate on the cost recovery issue until the third year of the project period. A plan to that effect will be prepared by June 30, 1998 and submitted to Government and the World Bank for review and approved. The plan will be implemented, starting the fourth cropping season under the project (June 30, 1999). Irrigation Scheduling 4.17 The concept that water has a financial cost is alien to farmers in Uzbekistan. The project aims to introduce irrigation water saving practices on about 5 percent of the irrigated area. The Government hopes that, through the demonstration effect of this intervention, farmers will learn how to address the problems associated with excessive use of water and will recognize the benefits to them from effective irrigation. In addition, to motivate farmers to use water economically, Government will introduce measures to recover the cost of irrigation water from farmers. To that end, UZAGROINFORM  31 will use the experience gained during the first two years of the project to prepare a plan for the recovery of the cost of irrigation water to be submitted to Goverrnment and the World Bank by June 30, 1997 for review and approval. The agreed plan will provide the basis for pricing of irrigation water under this and future projects supporting irrigated agriculture, and for initiating the collection of water charges under this project no later than June 30, 1998. This will assist Government in realizing their objective to introduce water charges in irrigation as stated in the letter of Development Policy sent to the Bank in conjunction with the Rehabilitation Loan. G. PROCUREMENT 4.18 The procurement of all goods funded from the loan proceeds will be in accordance with the Bank's "Guidelines for Procurement under IBRD Loans and IDA Credits (January, 1995) ". Local goods will be eligible for a preference as provided in the Guidelines. The Bank's standard bidding and contracting documents for the Procurement of Goods and the construction of (Smaller) Works will be used for International Competitive Bidding (ICB), Direct Contracting (DC) and National Competitive Bidding (NCB). Consultants hired for training and technical assistance will be employed in accordance with the Bank's Guidelines "Use of Consultants by World Bank Borrowers and the World Bank as Executing Agency (August 1981)". The methods of procurement under the project are summarized in Table 4.3. Details for procurement arrangements are provided in Annex F hereto and Annex 7 of the Implementation Volume. 4.19 Primary responsibility for overseeing implementation of procurement procedures will rest with the PIU. (See Annex H for details). It will be guided by a Procurement Specialist, financed under the Loan, familiar with Bank procedures, and if needed, other donors' rules and procurement guidelines. The program of assistance will include general training for PIU and appropriate staff of executing agencies on procedures and contract administration to support the procurement of the indicated equipment, civil works and technical assistance. PIU staff will provide advice regarding the preparation of necessary documentation and implementation of the Bank's Standard Bidding and Procurement documentation, with needed addenda or supplements, as approved by the Bank, prior to solicitation, evaluation and contract negotiation, as appropriate. Terms of reference for technical assistance and vendor lists will be routed to the Bank, as appropriate, for needed reviews, concurrence or no-objection. The PIU will include information on its procurement activities in periodic reports to the Bank. (See Annexes H and I hereof.) 4.20 The project will include procurement by private sector seed processing companies and their associated seed multiplication farms, and procurement by public sector agencies. Private sector activities under the credit line will constitute about 45 percent of overall, non-tax expenditures for capital and recurrent costs. Within the private sector portion, about 38 percent is expected to involve purchases under International Competitive Bidding, 51 percent will be purchased using International Shopping and the balance (11 percent) will be expended using Local Shopping. The public sector portion will involve 55 percent of non-tax project costs and will be divided between equipment and works expenditures (about 68 percent), recurrent costs (14 percent), and training, consultant services and program design (about 18 percent). About 58 percent of public sector purchases of equipment will be done through International Competitive Bidding. Although there will be different procurement method thresholds for the public and private sector elements of the Project, the PIU will administer reviews and process documentation for both segments.  32 TABLE 4.3: SUMMARY OF PROCUREMENT ARRANGEMENTS (US$ MILLION) Procurement Method Expenditure Category ICB* NCB* Other Total Civil works - 4.0"1 4.0 (3.2) - (3.2) Equipment 15.8 - 11.3' 27.1 ___________________________ ~~~(12.6) __ _ _ _ _(9. 1) (21.7) Training =- 1.2) 3 1.2 _____________ ~~~~~~(1.2) (1.2) Technical Assistance - 4.8 3 4.8 (4.8) (4.8) Program Design - - 1.93/ 1.9 (1.9) (1.9) Line of Credit 14.5 - 24.24' 38.7 (12.5) (18.5) (31.0) Recurrent Costs - 6.35' 6.3 (1.6) (1.6) Project Preparation Facility - - 0.66/ 0.6 (0.6) (0.6) Total 30.3 4.0 50.3 84.6 (25.1) (3.2) (37.7) (66.0) * ICB: International Competitive Bidding; NCB: National Competitive Bidding, per Bank Guidelines. i/ Competitive (sealed bid) procurement of construction services for public sector cotton/seed grading facilities. 2/ Includes Direct Contracting (DC) for proprietary computer software, spare parts, etc. purchased under the Guidelines (US$.980 million). Also included are International Shopping (IS) purchases for off-the-shelf items (US$8.3 million), and Local Shopping (LS) (US$2.0 million), in accordance with the Bank's Guidelines, January, 1995. 3/ Training and study tours (US$I.2 million), and program design and project support/consulting services ($6.7 million) shall be procured in accordance with World Bank Guidelines: Use of Consultants, 1981. 4/ Goods and materials (including ancillary installation services) and seed multiplication inputs procured under the Credit Line: IS for off-the-shelf items (US$19.9 million); Local Shopping for small value, locally available equipment and construction inputs (US$1.0 million). Also included are US$3.3 million for taxes and/or incremental recurrent costs procured using Local Shopping and Statements of Expenditure, approved by the Bank as elements of annual component budgets. 5/ Public sector taxes (US$2.8 million) and miscellaneous purchases/incremental recurrent costs approved by the Bank as part of annual budget reviews (US$3.5 million), procured using Local Shopping and Statements of Expenditure. 6/ Project Preparation Facility (PPF) - US$550,000 - financing initial consulting services, start-up equipment, supplies, communications, and misc. expenses for PIU and CIU units.  33 Public Sector Procurement Goods and Equipment 4.21 Procurement actions by public sector agencies for goods and equipment are expected to be undertaken within the following guidelines: (a) ICB Procurement. International Competitive Bidding (ICB) will be conducted in accordance with Section 11 of the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits, dated January, 1995 (the Guidelines). ICB procedures will be used for all public sector equipment and materials purchases expected to exceed US$300,000 per contract. In this manner, out of a total of approximately US$27.1 million (about US$21.7 million of Loan funds) allocated for the purchase of goods and equipment, about US$15.8 million (US$12.6 million in Loan funds) or 58 percent will be obtained using ICB procedures. Principal categories for ICB procurement are seed testing and certification equipment, HVI lines, cotton classing and marketing equipment, and materials and equipment for the Irrigation component. In the comparison of bids for equipment purchased under ICB, domestic goods will be allowed a preferential margin over the competing price of imports, as provided for in Appendix 2 of the Bank Guidelines. The public sector element is expected to have about six ICB contracts, averaging approximately US$2.64 million each; (b) Direct Contracting. Direct contracting is expected because some computer netware and materials testing components would need functional compatibility and standardization for training, operations and spare parts purposes. Such equipment, software and spares would only be available from a proprietary source. These purchases would be implemented in accordance with the Guidelines and are expected to involve two contract actions, totaling approximately US$1.0 million (US$800,000 in Loan funds). The Bank will review and clear ICB and DC procedures, bid documentation, evaluations/awards and resulting contracts on an ex-ante basis; and provide "No-Objections" as provided for in the Guidelines; (c) International Shopping. International Shopping (IS) may be authorized for readily available, off-the-shelf purchases valued at under US$300,000 per contract. International Shopping will be based on quotations from at least three suppliers, from at least two different eligible Bank-member countries, as indicated in the Bank's Guidelines. International Shopping is expected to total about US$8.3 million (US$6.6 million in Loan funds) and involve approximately 35 purchases averaging about US$238,000 each. Procurement and contracting actions would be cleared by the PIU and subject to review by Bank staff on an ex-post basis during supervision missions; and (d) Local Shopping. To support project needs for minor equipment and materials, office support and supplies, transport, communications, etc., it is expected that the PIU and CIUs will need to initiate small value purchases using Local  34 Shopping techniques described in the Guidelines. Local Shopping will also be the method for procuring miscellaneous supplies and services that are part of recurrent costs. These purchases are expected to cover contracts under US$50,000 equivalent each and be effected by obtaining at least three price quotations from different eligible suppliers. These purchases (expected to average about US$36,300 each) will be used for small value and readily available, off-the-shelf items. Such purchases are expected to number about 55 transactions over the life of the project and involve about US$2.0 million (US$1.6 million in Loan funds). Small value purchases will be subject to ex-post documentation reviews, with payments being reimbursed by Special Account and Statement of Expenditure. Civil Works 4.22 Procurement actions by public sector agencies for renovation of buildings and construction of small inspection and testing facilities are expected to be geographically dispersed and, because they are low in value, would probably not be of interest to foreign contractors. Nevertheless, to promote competitive procurement, the PIU will help the CIUs implement informal, but structured procurement procedures to obtain these construction services. These small civil works activities are expected to involve about twenty contracts, averaging about US$205,000 each. The total for public civil works would be about US$4.0 million (US$3.2 million in Loan funds). All civil works contracts shall be procured locally on a competitive basis, following procedures acceptable to the Bank. For contracts above US$250,000 equivalent, national competitive bidding procedures shall be used. This procedure will be consistent with Section 3.4 of the Guidelines and include the use of the Region's standard bidding documents (for works over US$250,000), dated July 1994. At the option of the Government, the procedure may include payments in local currency, publications and documentation in the local language, and local procedures for the settlement of disputes. Works contracts under US$250,000 each (estimated to involve about US$2.1 million in loan funds) would use the Region's standard Local Competitive Bidding (small works) documentation, dated June 1994. To avoid inefficiencies in the administration of these small value (under US$250,000) works activities, project participation would follow a more stream- lined procedure. While competition among interested finns, obtaining sealed bids, public bid opening and structured evaluations would be in accordance with Section 3.4 of the new Guidelines, this under US$250,000 procedure would also include, for small value (e.g. renovation) works, the option of procurement based on comparison of the least three bids from qualified contractors that was a feature of local shopping in the former Guidelines. Such procedures will be acceptable to the Bank. Except for the first two works bid packages and all those over US$600,000, documentation and procurement steps subject to ex-post review. Public sector works procurements not getting prior Bank review would be subject to examination during supervision missions or audits. If post-qualification is used, it would be based on specific requirements clearly stated in the bidding and evaluation documents. Consulting Services 4.23 Professional and technical services will be obtained to assist PIU and CIU staffs with the planning, implementation and monitoring of project activities. Services will also be purchased for training and for the design of future investment programs. The use of local consulting firms and personnel will be encouraged to develop domestic capabilities. Firms and individual experts will be engaged in accordance with the Bank's Guidelines: Use of Consultants by World Bank Borrowers and the World Bank as Executing Agency, published in August, 1981. Terms of Reference for all consultant  35 assignments, solicitation methods and all documentation and contracts for consultant services valued at greater than US$100,000 each for firms and US$50,000 each for contracts with individuals will be subject to prior Bank review and approval. These are expected to be about thirteen consulting services contracts under the public sector portion of the project, totaling approximately US$8.3 million and averaging about US$610,000, that will be subject to prior Bank review and approval. It is expected that three contracts with individuals, averaging about US$140,000 will also be subject to prior Bank review. Where practicable, technical assistance, such as that needed for systems installation and/or maintenance services, will be sought as part of procurement packages to improve accountability and reduce costs and administrative burdens. Private Sector Procurement 4.24 The project will include a US$38.7 million credit line for the private seed companies to use for seed plant construction and equipment and to improve production activities of their associated seed multiplication farms. Procurement under this credit line will be the responsibility of the private sector with guidance, as needed, provided by the PIU Procurement Advisor and staff. Procurement procedures and documentation will be reviewed by the PIU and the Bank as part of the sub-loan application approval process. Equipment, materials and site improvements for the seed plants, and farm machinery and inputs to improve seed multiplication, will be purchased from international and domestic sources. Details on such procurements will be included in sub-loan applications and annual business plans. Local taxes will be financed by sources other than loan funds. 4.25 The threshold for ICB equipment procurement under this credit line will be US$3.0 million per contract. Purchases above this threshold will be implemented in accordance with the Guidelines and Schedule 4, Part B, of the Loan Agreement. Items or groups of items estimated to cost the equivalent of less than US$3.0 million per contract will be procured on the basis of procedures acceptable to the Bank. Private sector procurement plans, procedures and, as needed documentation will be reviewed and approved in advance by the Bank. The construction or modification of seed processing facilities by the private seed companies is expected to be handled by the owners or their equipment suppliers. Turnkey plant contracts could be used, but are not contemplated at this time. If construction contracting is needed in some facilities, it would be carried out using the procedures and threshold for civil works described in paragraph 4.22. Requests for proprietary contracting authority will be considered by the Bank, as required. Recurrent costs - utilities, consumables, parts, etc. - of the seed plants and farms may be eligible for financing if they are included in the firms' annual operating plans, approved in advance by the Bank, be procured using procedures acceptable to the Bank. Procurement plans and documentation will be included in the sub-loan applications and annual budgets. These plans will be reviewed by the Bank for each sub-loan; comments or "No-Objection" will be given by the Task Manager. 4.26 In view of the lack of experience of private sector importers with international purchasing, the PIU Procurement Specialist will also be available to assist private sector project participants develop procurement procedures, market searches, pre-qualification, specifications development, bid documents, evaluations, contracts, logistics controls, and payment procedures. 4.27 An expatriate Procurement Specialist will be engaged under the Loan to help the PIU develop procurement plans and establish procurement procedures. The specialist will help prepare documentation and, via consultations and site visits, guide PIU and CIU staffs with planning, bid  36 packages, solicitations, evaluations, contracting and reporting requirements. The procurement specialist will also help coordinate documentation flows needed to secure the World Bank's clearances and "No- Objections" on consultants' TORs, equipment packages, and other documentation needing prior reviews. In addition, the Bank will monitor procurement activities, contract administration and project record keeping during periodic supervision missions. 4.28 In summary, public sector ICB and DC purchases will be subject to prior Bank reviews and "No-Objections", as provided for in the Guidelines. This procurement plan will result in the Bank's prior reviews of approximately 62 percent of Bank's funds committed for materials and equipment. Bank prior reviews of private sector ICB procurement will comprise about 41 percent of loan funds supporting the Credit Line. In addition to reviewing TORs, reviews of contracting actions for consulting services will cover an estimated 94 percent of total Bank funding for public sector consulting services inputs. H. DISBURSEMENT 4.29 The project is expected to be completed within a five-year period, the completion date being June 30, 2000. The disbursement profile for the project is based on Bank experience with similar projects in other countries. Disbursement will follow normal World Bank procedures, as summarized in the Disbursement Handbook. Loan proceeds will be disbursed against eligible categories of project expenditures: (i) by means of special commitments to support letters of credit issued by the borrower's bank in favor of foreign suppliers of goods; (ii) directly to suppliers; or (iii) by way of reimbursement against eligible expenditures already incurred by Government agencies/private companies participating in project execution (Annex G). 4.30 The loan will finance 100 percent of the foreign exchange expenditures. It will also finance about 20 percent of incremental local currency expenditures, net of taxes. In the aggregate, the loan is expected to be disbursed against 80 percent of the expenditures associated with the public sector components and the one associated with the private sector component. Disbursements will be made in the ratios indicated below against total expenditures actually incurred under the project: (a) Civil Works (US$4.0 million). The Bank will disburse against 80 percent of total expenditures; (b) Equipment (US$27.1 million). The Bank will disburse against 100 percent of foreign expenditures, 100 percent of local expenditures ex-factory cost, or 80 percent of local expenditures for imported equipment procured locally; (c) Training (US$1.2 million) and technical assistance (US$7.1 million). The Bank will disburse 100 percent of total expenditures; (d) Program Design (US$1.9 million). The Bank will disburse against 100 percent of total expenditures; (e) Line of Credit (US$38.7 million). The Bank will disburse against 100 percent of foreign expenditures, 100 percent of local expenditures ex-factory cost, or 80 percent of local expenditures for imported equipment procured locally;  37 (f) Recurrent costs (salaries, communications, office equipment and maintenance, vehicles operation and maintenance, travel related to public sector components (US$6.3 million). The Bank will disburse against 25 percent of total expenditures for the first two years, and 15 percent for the third and fourth years. No recurrent costs will be financed from the Bank loan during the fifth year; and (g) Refinancing of PPF. Amount due to the Bank US$0.55 million. Disbursements will be fully documented except that Statement of Expenditures (SOE) will be used for: (i) contracts for goods, civil works and consulting companies costing less than US$250,000 equivalent; and (ii) contracts for individual consultants and training programs costing less than US$50,000 equivalent. All other disbursements will be fully documented. Full documentation in support of SOEs will be retained by the PIU for at least two years after disbursement. This information will be available for review by World Bank missions during supervision and by auditors. The minimum application size for direct payments, special commitments or replenishment of the Special Account will be US$50,000. The estimated disbursement of the IBRD Loan by years is indicated below and in Annex G. TABLE 4.4: DISBURSEMENT SCHEDULE (US$ MILLION ) Bank Fiscal Year (ending June 30) 1996 1997 1998 ( 1999 2000 | Annual 3.5 12.0 22.0 18.0 10.5 | Cumulative 3.5 15.5 37.5 55.5 66.0 I. AcCOUNTING 4.31 The project will have sound accounting and internal control systems capable of reliably recording and reporting all financial transactions. (See Annex 10 of the Implementation Volume.) Accounting and internal control systems acceptable to the Bank will be put in place to allow PIU to determine that procurement procedures are being followed and that only eligible expenditures are included in disbursements and replenishments through the Special Account. This system must be operational when project expenditures begin. For the use of Statements of Expenditures, the PIU will process and maintain SOE documentation. For the Special Account mechanism, the PIU and the depository commercial bank will introduce arrangements for proper accounting of receipts, payments, and submission of disbursement documentation to the World Bank for replenishment of the account. J. REPORTING 4.32 The PIU will establish and maintain a Management Information System (MIS) to track activities under the public and private sector elements of the loan. The information system should enable  38 the PIU to determine that procurement procedures are being followed and that only eligible expenditures are included in the Government's Special Account reimbursement requests. Such information will allow the PIU to monitor critical project activities, provide the basis for its periodic and project completion reporting, and support project accounting and audit needs. PIU will provide quarterly reports to the World Bank covering the financial and physical performance of the project. 4.33 The financial status will be reported through the quarterly and annual accounts which will reflect the cash receipts from all sources and expenditures related to each component and category and the overall financial performance of the project. The detailed annual accounts for the project will not only include expenditures directly financed by the World Bank Loan, but also the expenditures financed by the participating private entities and the government agencies. These reports will reflect actual project expenditures versus budgeted expenditures for the most recent fiscal quarter, fiscal year-to-date, and project inception-to-date. The Project's annual audited financial statements will be prepared following the generally accepted accounting principles as prescribed by the Laws of Uzbekistan. It will comprise a balance sheet, a statement of income and expenditures, a statement of cash flows, and notes to financial statements, together with any additional information that may be required by the World Bank. 4.34 As Special Accounts and SOEs will be used in this project, the PIU will be requested to submit, together with accounts for the project, on a quarterly basis: (i) a schedule of SOE expenditures; and (ii) a summary of the Special Account activity and reconciliation with the Special Account balance in the commercial bank account and a summary of the activity in the project account. All unaudited quarterly reports will be submitted to reach the World Bank no later than 30 days after the end of the quarter in question. 4.35 The annual audited financial statements that will be required of participating private companies will comprise a balance sheet, a statement of income and expenditures, a statement of cash flows, and comprehensive notes to financial statements. The financial statements will be prepared by the participating private companies on an annual basis, following the generally accepted accounting principles as prescribed by the laws of Uzbekistan, together with any additional information that may be required by the World Bank. In addition, the participating private companies will provide to the PIU, on a quarterly basis, unaudited accounts for the seed operations summarizing the cash receipts and expenditures, by components and categories financed (e.g., civil works, equipment). The account will include not only the expenditures directly financed by the World Bank through the sub-loans, but also the expenditures financed by the participating private companies themselves. The account will reflect activity for the most recent fiscal quarter, fiscal year-to-date, and project inception-to-date. All unaudited quarterly reports will be submitted to reach the World Bank no later than 30 days after the end of the quarter in question. (See Annex 12 of the Implementation Volume.) 4.36 Quarterly project reports on the physical performance of the project showing actual and planned performance for the quarter and progress todate will also be prepared and submitted to the Bank. These reports, also submitted to reach the Bank no later than 30 days after the end of each quarter, will include comments highlighting project progress and significant bottlenecks, showing an action plan for remedial actions where necessary. Detailed reporting requirements will be finalized during the project launch workshop and will include key physical and financial indicators. In addition, a comprehensive joint mid-term review will be carried out by the PIU and the World Bank, within three months from the end of 30 months from project effectiveness. Agreement on reporting procedures, accounts for the project, financial statements and monitoring targets will be reached during negotiations.  39 K. AUDITING 4.37 Annual reports for the project accounts, including SOEs and Special Account for each fiscal year, will be audited in accordance with generally accepted auditing standards by an independent auditor, acceptable to the World Bank. The sub-borrowers will also provide, to the PIU, annual financial statements and accounts for the sub-projects which are audited in accordance with generally accepted auditing standards by an independent auditor, acceptable to the World Bank. 4.38 The auditors will be appointed annually by the PIU and sub-borrowers at the beginning of the fiscal year, so that the auditors may commence reviews sufficiently early in the fiscal year to complete the audit in a timely manner. The auditors will prepare and submit an annual Engagement Letter, which will be discussed and accepted by the World Bank prior to commencement of the audit. The financial statements and the auditors' opinion and auditors' management reports, including PIU's response to the auditors' comments should be submitted to the World Bank no later than six months after completion of the fiscal year in question.  40 V. PROJECT MANAGEMENT, IMPLEMENTATION AND SUPERVISION A. PROJECT MANAGEMENT 5.1 The Government Planning Agency GOSKOMPROGNOZSTAT, acting through the Project Implementation Unit (PIU), will be responsible for coordinating project implementation. It will also administer the line of credit and support the Component Implementation Units (CIUs) in the execution of their respective project components. The Cotton Quality Control Agency SIFAT, through its CIU, will be responsible for implementation of the cotton marketing component. The Institute of Plant Protection UZNIIZR, through its CIU, will be responsible for implementation of the Integrated Pest Management Component. The Ministry of Agriculture, acting through its Seed Department, will oversee the implementation of the seed component by the Central and regional Seed Certification and Seed Law Units, the Plant Variety Protection Office, and, in connection with the adherence to the provisions of the Seed Policy and Seed Law, the private seed companies. The Ministry of Agriculture, acting through UZAGROINFORM, will also be responsible for implementation of the Irrigation component. 5.2 The PIU was established in GOSKOMPROGNOZSTAT as part of the capacity building effort under the project. The PIU will be fully integrated in this agency. The need for the PIU is justified on the basis that the project involves multiple agencies at the national and regional levels, all of which have not had experience with the implementation of externally funded programs. For that reason, the Government gave the PIU responsibility to coordinate the management and implementation of the project. A Project Working Group (PWG) consisting of senior officials from agencies participating in the project was established to assist and advise PIU to coordinate project implementation. The PWG is chaired by the Deputy Chairman of GOSKOMPROGNOZSTAT and includes representatives from MOA (Seed Department and UZAGROINFORM), UZNIIZR, and SIFAT. The membership of the PWG will be expanded to include a representative of the private seed companies once such companies are constituted, a representative of the Ministry of Finance, and a representative of the commercial bank handling the project accounts. The PWG will meet periodically at the request of PIU to address implementation problems that require inter-agency coordination and intervention. 5.3 The Project Director heading the PIU reports to the Deputy Chairman GOSKOMPROGNOZSTAT. Under the project, the Director will have the authority and associated accountability to: (i) recruit, manage and supervise qualified staff; (ii) open and operate accounts in local and foreign currencies; (iii) select and supervise professional consulting services; and (iv) decide on and execute operational plans. The PIU will consist of four departments: (i) Finance; (ii) Procurement; (iii) Monitoring, Evaluation and Program Design; and (iv) Administration and Personnel. Each of these departments will be headed by a deputy director to be appointed by the Deputy Chairman GOSKOMPROGNOZSTAT. Agreement reached during appraisal on the detailed organizational structure, functions, staffing plans, operational procedures and scope of authority of the PIU were confirmed by Government during negotiations (Annex H). Further details on the PIU are given in Annex 8 of the Implementation Volume. 5.4 The Finance department of the PIU will be responsible for: (i) maintaining overall project accounts; (ii) all disbursement activities, including management of the Special Account; (iii) administration of the line of credit for the seed component until a suitable financial institution is identified to take over that responsibility; and (iv) monitoring the project accounts and initiating action for their replenishment. The Finance department staff, with sufficient technical experience and qualification, will,  41 on demand, assist private seed companies and associated seed farms in the preparation of loan applications supported by business plans to meet requirements under the line of credit. They will also cooperate with the participating commercial bank in developing an effective system for timely processing of applications for sub-loans. An international financial management specialist, with experience in accounting and in managing credit operations will provide the Finance department with necessary support in managing project accounts and organizing the use of the line of credit (18 staff months). An international business development/organization specialist will help the finance department with promoting the effective use of the line of credit by the private sector (24 staff months). The two international specialists will work with the deputy director Finance and will report to the Director PIU. In addition, a credit specialist will be attached to the agency bank for a period of 18 months to assist in the development and introduction of procedures for administering the line of credit. 5.5 The Procurement department will assist CIUs in organizing procurement in conformity with World Bank guidelines. This assistance will be in the form of: (i) training; (ii) dissemination of information on guidelines and procedures; (iii) arranging for collective procurement of items of a similar nature such as computers and vehicles to attract lower prices and minimize overhead procurement costs; and (iv) monitoring adherence to World Bank procurement guidelines. An international procurement specialist with familiarity with World Bank procedures will provide the procurement department with the necessary support in overseeing and supporting procurement activities under the project (18 staff months). The international specialist will work with the deputy director Procurement and will report to the Director PIU. 5.6 The Monitoring, evaluation and program design department will coordinate and monitor the implementation of various project components and sub-components. The department will also organize and manage the studies intended to serve as the basis for designing future investment programs. Quarterly and yearly progress reports will be prepared by this department based on their monitoring and evaluation activities and on the reporting received from the CIUs. An international agricultural economist with experience in monitoring and evaluation and in project design will provide this department with needed support to develop its internal capacity to perform their functions (18 staff months). The international agricultural economist will work with the deputy director Monitoring, evaluation and program design and will report to the Director PIU. 5.7 The Director PIU has been appointed. The deputy directors will be appointed prior to loan effectiveness. Arrangements (Terms of reference and short list agreed with the Bank of Firms invited to submit proposals) for the engagement of a fi7n/organization to supply the international staff for PIU will be in place prior to loan effectiveness. B. PROJECT IMPLEMENTATION 5.8 GOSKOMPROGNOZSTAT will be responsible for coordinating project implementation through PIU which will coordinate all the work related to budgeting, procurement, disbursement, audit, monitoring and evaluation, reporting, and appraisal of the sub-loans. Actual implementation of project components and sub-components will be the responsibility of individual CIUs located within the executing agencies, in the case of public sector components, and the responsibility of the management of individual seed companies in the case of the private sector component. As part of the capacity building under the project, the core part of each executing department will constitute the CIU for its respective component.  42 The CIU managers will be selected and appointed prior to loan effectiveness. GOSKOMPROGNOZSTAT will take the necessary steps to secure appropriate assurances for project support from the authorities concerned in the Regions. Seed Industry 5.9 Coordination of the on-lending program and monitoring the flow of funds to seed companies will be the responsibility of the PIU in cooperation with the participating agent bank. A credit committee constituted by the Finance department of PIU will appraise the sub-loan applications submitted by seed companies. The Credit Committee will include, inter alia, the PIU Finance Department Director, the Financial Management Specialist, the Credit Specialist, a representative of the Ministry of Finance, and a representative of the agent Bank. This committee will ensure that the proposals meet the eligibility criteria as specified in Annex E and, on that basis, make recommendations to the Director PIU on the advisability of approving the sub-loan. Those recommendations will be reported in an evaluation report prepared by the Credit Specialist, in his/her capacity as Committee Secretariat. The PIU Director will then submit each sub-loan application, along with the evaluation report to the World Bank for review. Bank review will cover the technical, financial, institutional and environmental considerations related to the sub-loan. The final approval will be given by the Deputy Chairman GOSKOMPROGNOZSTAT following receipt of a no-objection from the World Bank. Once the sub-loan is approved and the subsidiary loan agreement is signed, funds will be released by the participating agent bank following an agreed disbursement schedule. PIU and the participating agent bank will cooperate in all activities related to accounting, reporting, and recovery of sub-loans. The day-to-day implementation activities and associated decisions in establishing and operating the seed companies will be the responsibility of their respective management appointed by their respective boards of directors in conformity with their constituting charters. Seed Quality Control 5.10 The Seed Certification and Seed Law Agency under the Cotton Seed Department, and its associated Oblast Seed Certification and Seed Law Units will operate as an autonomous agency to provide disinterested and impartial oversight on the application of the national seed law and seed policy, and to ensure that seed produced have the characteristics stated on their label. The Plant Variety Protection Office will establish variety protection rules and maintain a registry of cotton varieties. Agreement on transforming the Seed Quality Control Agency into an autonomous unit was confirmed by Government during negotiations (paras. 3.14 and 4.15). 5.11 To assist the Seed Certification and Seed Law Agency in ensuring timely and effective project implementation, the project provides for technical assistance. Terms of reference are given in Annex 1 of the Implementation Volume. This includes: (a) one seed certification specialist (18 staff months) to train and assist the local staff during the first three years of the project; (b) one seed testing and laboratory management specialist (18 months) to help the agency introduce ISTA testing procedures, and set up a management scheduling system for seed testing and for reporting test results. The specialist will also train local staff to help them take over responsibility for these functions within the first three project years; and  43 (c) short term specialists (12 staff months) to meet project requirements in specialized subjects as the need arises. Cotton Marketing 5.12 SIFAT will be responsible for implementing this component. It will establish facilities with sufficient capacity for grading all cotton produced in the country. It will organize the training of sufficient staff to run those facilities and interpret and disseminate the information generated to potential users. Training for the HVI operation during the installation period should be made part of the contract for the supply of the instruments. In addition, because HVI machines operate at high speed through a combination of hydraulic robotics, electronic circuit boards, integrated computer data collection systems, and manual operation, they are susceptible to breakdowns and malfunctions. Training in malfunction diagnostics and repair procedures will, therefore, be essential. This training will be in the form of study tours to participate in internship type programs and workshops abroad, as well as on-the-job training provided by international specialists. These specialists' primary function will be to train local staff in the classing schools and by working with them at different stages of project implementation. The specialists needed will include an HVI technical repair and maintenance specialist (18 staff months), a classing specialist (27 staff months), a classing systems specialist (18 staff months), a computer systems analyst/senior programmer (21 staff months), a database administrator/management specialist (18 staff months), a cotton marketing specialist with HVI expertise (3 staff months), and a ginning specialist with HVI experience (12 staff months). Indicative terms of reference for these specialists are given in Annex 2 of the Implementation Volume. In addition to training staff in charge of grading cotton, major emphasis will be given to training industry-related personnel (marketing, spinning, ginning, seed breeding) in the use of the data generated to its full advantage. A training program, along with a timetable for hiring the international specialists will be part of the annual work program for the HVI component which will be discussed and agreed with the Bank. In order to ensure the operational orientation of the training at the classing school, the same specialists hired for on-the-job training in the labs will provide the needed support in the classing school. Integrated Pest Management 5.13 UZNIIZR will be responsible for implementing this component. Since this component involves technology development type work, implementation has to take place in stages involving close monitoring, continuous evaluation, and when necessary adjustment in program design. To ensure integration and complementarity of biological and chemical approaches to pest control, UZNIIZR will be responsible for the development of the technology for rearing and dispersing beneficial insects as well as for developing or adapting equipment for safe spraying of pesticides and the preparation and dissemination of a handbook for educating farmers on effective and safe use of pesticides. UZNIIZR will also take the lead in developing a national pesticide policy. Annexes 3 and 4 of the Implementation Volume provide additional details. To assist UZNIIZR in implementing this component, the project provides for technical assistance, including: (a) international experts to help finalize prototype equipment for aerial and tractor- mounted dispersal of beneficial insects and test the effectiveness (9 staff months); (b) an international specialist in technology application (9 staff months) to help design and evaluate pesticide spraying equipment;  44 (c) one international pest control economist (9 staff months) to help with field trial evaluations to assess changes in pest infestation from biological and selective pesticide treatments, and to evaluate their costs; and (d) short term specialists (9 staff months). Irrigation 5.14 UZAGROINFORM will be responsible for implementation of the Irrigation component. Its staff will work closely with the Department of Irrigation in the MOA, which deals with on-farm water related issues, and with the Ministry of Water Management, which deals with irrigation water distribution system up to the farm gate. Provision is made under the project for technical assistance (16 staff months) to help evaluate the use of tensiometers and alternative technology for the control of water application, and to assist with the training of staff, particularly in the use of the soil and plant water status monitoring equipment. Annex 5 of the Implementation Volume provides terms of reference. C. IMPLEMENTATION SCHEDULE 5.15 Project implementation is scheduled to proceed at a pace determined by the implementation capacity of the executing agencies. The schedule is based on an assessment of the expected implementation capacity made at the time of appraisal. The CIUs will prepare annual work plans, including technical assistance requirements and training programs, based on their own expectations and assessment of their work environment. These plans will be collated by PIU and discussed with the Bank before the beginning of each project year. The work plans will include financial and physical targets, resource requirements and performance indicators against which to assess progress. Further details on the implementation plan and performance indicators are given in Annex A. Work plans and associated budgets for the first project year will be prepared by PIU and submitted for Bank review prior to loan effectiveness. Cotton Marketing 5.16 The HVI component will be implemented in three stages. The first stage will be critical as it will determine when the second stage can conunence. During this stage, three regional labs (Tashkent, Andijan, and Samarkand) and the central lab will be established to start testing lint. A review of the first stage will be undertaken about one year after the commencement of testing at the Stage One labs. The first season of testing will be used as a learning device through the operation of the central and two regional classing centers. The information generated on fiber quality from the three regions will be collated and studied. Operational procedures will be reviewed and improvements introduced as needed. Once convinced that the new classing system is fully operational in the first three regions, SIFAT will proceed with extending the system to the rest of the country, keeping in mind the need for continued evaluation of the system and its adjustment as the learning process and the pace of training allow. The second stage will commence once: (i) the lessons are drawn from the stage one experience and adjustments introduced in the design of stage two labs; and (ii) all equipment and personnel are fully operational and functioning as a cohesive and integrated unit with one year of testing experience in stage one labs.  45 5.17 The installation of the remaining equipment has been split into two stages (two and three) to ensure that there is adequate supervisory staff and logistical support during the equipment installation period and that pre-installation training has been completed adequately. About eighteen months have been allowed during Stages Two and Three for the development of a central warehousing and handling facility. The tender process for Stage One equipment will also include the later supply of all equipment for the remaining two stages. This will ensure that all HVI equipment will be compatible and the necessary support and service available from one manufacturer and supplier. This point is particularly important in view of the necessity to ensure consistency and repetition of test results. For uniformity and efficiency reasons, the equipment for the Classing and Marketing School will be included in the tender for the supply and installation of equipment for the HVI Component. 5.18 Computing equipment will be installed in each laboratory at the same time as the HVI equipment. As with the HVI equipment, the tender for all the computing equipment will be undertaken during stage one to ensure that the same equipment will be used by each laboratory. The tender for the HVI and computing equipment will not be combined into one as this may restrict the competition for the supply of computing equipment. The technical assistance will be started at the commencement of the project. Irrigation Scheduling 5.19 The key determinant of the pace of implementation of the irrigation component is rate of recruiting and training proficient project irrigation engineers. Emphasis will, therefore, be on training from the onset of the project. A review of the component will take place at the end of the second full year of the project to determine how effectively the tensiometers are being used and the need for any adjustment in component design, and to propose a basis for introducing water charges to motivate farmers to use water saving technology and practices. Integrated Pest Management 5.20 The IPM component will be implemented over five years through the UZNIIZR. Essentially the program is applied research and development oriented. It aims to produce improved breeding lines for predator insects and to research and develop methods for their distribution. It also aims to develop and introduce improved equipment and practices for the safe use of pesticides. The annual work plans will, therefore, be developed on the basis of progress in the research work. Seed Industry 5.21 Implementation of the private sector part of this component will be strictly demand driven. PIU will endeavor to develop such a demand by disseminating information about project objectives and Government actions to create the enabling environment for an effective and profitable cotton seed industry. PIU will also arrange for assistance, on demand, for seed farms during their privatization process and the seed companies in the course of their incorporation. Timely implementation of the public sector part of this component is critical for the timely startup of the private sector part.  46 D. SUPERVISION PLAN 5.22 As this project represents the first investment operation in Uzbekistan, three Bank supervision missions will be required during the first project year, followed by two supervision missions during each of the ensuing three years and three supervision missions during the last year (Annex I). To cover all aspects of the project, each mission will last for three weeks and will review the institutional, financial and physical aspects of the project. They will also review the implementation targets and procedures agreed in the context of the annual work plans, identify implementation constraints and agree on remedial actions. The supervision missions are expected to involve the task manager, at least three specialists from Headquarters, as well as a project officer and a procurement officer from the Resident Mission. This input will be supplemented by local consultants on an as needed basis. About 45 staff weeks will be required the first year in addition to the project launch workshop, followed by about 30 staff weeks for each year 2 to 4, and 50 staff weeks for the last year. 5.23 The supervision mission in the last quarter of each project year will assess progress during the previous year and discuss the work plan and budget for the next year. A detailed mid-term review will be carried out about 30 months after the loan becomes effective and will involve the Bank and all agencies involved in project implementation. 5.24 Benchmarks for measurement of progress in project implementation will include: (i) the operational status of the PIU and the CIUs; (ii) progress in implementation of training and technical assistance packages; (iii) privatization of seed farms and creation of private seed companies; (iv) operational status of the seed testing and certification agency; (v) installation of HVI lines; (vi) extent of dissemination of information on cotton characteristics; (vii) area covered by the irrigation scheduling system; and (viii) equipment developed and tested for biological and chemical pest control.  47 VI. BENEFITS AND RISKS A. PROJEcT BENEFITS 6.1 The project's potential benefits include increased production of cotton, better seed and fiber quality, reduced water consumption, reduced costs and risks associated with pesticides, improved environment, higher farm income, and higher foreign exchange earnings. As importantly, this project will lay the foundation for future policy reforms in the agricultural sector and will help accelerate the implementation of ongoing reforms. The successful implementation of the Cotton Sub-sector Improvement Project will benefit future projects in the country by introducing procedures and operational guidelines mutually acceptable to the Government and the Bank which will facilitate the implementation of future projects. Marketing 6.2 The Marketing Component will produce higher foreign exchange earnings through greater gin turnout and better quality of fiber. First, better cotton grading is expected to increase foreign exchange earnings by about US$38 million per year, once the project is fully implemented. Second, information from the testing laboratories to the ginneries will help ginners increase gin turnout and improve cotton quality. Third, information on fiber characteristics will improve the penetration of Uzbek cotton in international markets. This information will also assist local spinners to increase productivity and improve the quality of the cotton textiles produced. Seed 6.3 A modem planting seed industry will bring, among others, the following benefits: First, certified seed will prevent varietal mixture and the use of low germination seed, thus increasing yields by 5 to 10 percent. Second, uniform varieties will improve fiber quality and uniformity, enhancing Uzbekistan's cotton marketability in international markets; uniform varieties will also help reduce the content of lint in short fibre, neps, and seed coat fragments left during the ginning process. This is expected to increase the value of lint by about US$24 million per year, once the project is fully implemented. Third, seed testing and certification will permit farmers to reduce planting rates and replanting, saving up to 60 percent of currently planted seed for oil mill use. This is valued at over US$1 million per year. Fourth, as delinted seed can be precisely treated with lower rates of chemicals, the use of field pesticides will be reduced. On-Fann Irrigation Scheduling 6.4 Better timing of irrigation is expected to increase the current yield of seed cotton by at least 10 percent. It will reduce water use by an estimated 25-30 percent, and will substantially reduce the current excessive tail-water discharge. This amounts to savings in the order of 3300 cu m water per ha which can be valued in terms of: (i) cost to the Ministry of Irrigation to supply the water; (ii) the opportunity cost of water for production of cotton or other crops; and (iii) the environmental value of decreased run off and soil salinization. Moreover, the irrigation scheduling system, by relating field water use and fertilizer availability in the crop, will reduce fertilizer requirements and the contamination of underground water.  48 Integrated Pest Management 6.5 The main benefit from this component will come from the development of automated technology for biological pest control that will allow its expansion nationwide, along with the development of improved equipment and the introduction of improved practices for the safe application of pesticides. A well-designed IPM program will help reduce environmental pollution due to excessive or improper use of pesticides by integrating biological and chemical approaches to pest control. This approach will help shift research emphasis in the direction of variety resistance to pests and diseases, thus reducing insect mutation pressure. It will also help to reduce expenditures of hard currency on pesticide imports, and costs and risks associated with pesticide application. The IPM component could also help develop an important marketing tool for Uzbek cotton since the market for pesticide-free grown cotton has been increasing internationally. B. ECONOMIC AND FINANCIAL ANALYSIS 6.6 The economic and financial analysis indicates that investments in private seed companies, in seed farms, in developing the cotton grading system, and in introducing improved irrigation are viable Details are given in Annex 9 of the Implementation Volume. The combined economic rate of return for these four components is estimated at 34 percent. The analysis assumes that Government will fully liberalize the price and marketing of cotton seed and lint, including the export licensing system. It also assumes that Government will eliminate institutional barriers to import/export and to financial transactions by the private sector. Seed Companies 6.7 Uzbekistan has a comparative advantage in the production of cotton seed. The direct production costs (excluding variety development costs, and with the current lower technological input) are currently less than 20 percent of production costs in Australia or the United States due to lower development costs of parent line seed, lower capital input, low wages and low processing costs. The cost of production may increase substantially as a result of the introduction of improved technology and rising wages. Sensitivity analysis shows that Uzbekistan will, nevertheless remain competitive. 6.8 The economic analysis was done on the basis of a hypothetical production capacity of 8,000 tons of cleaned seed for a company. Investments were assumed to take place over a four year period allowing the company to reach full operating capacity in the fifth year. The economic rate of return is 33 percent. Sensitivity analysis was undertaken to evaluate the impact of cost increase and benefit decline. The economic rate of return remains in the range of 19 to 30 percent for increases in costs in the range of 10 to 35 percent. It is, however more sensitive to decline in benefits, with the ERR falling to 17 percent when benefits decline by 25 percent. The financial rate of return (FRR) for a 8,000 ton capacity seed processing operation is estimated at 28 percent. Revenues from the proposed investments will be adequate to enable sub-borrowers to repay the loan within a maximum period of 10 years with a 3 year grace period. Sensitivity analysis shows that investment in seed companies is resilient to an increase in costs. Increase in costs in the range of 10 to 35 percent result in FRR in the range of 15 to 25 percent. With regard to seed farms, assuming a 5 percent increase in yields as a result of better quality seeds and decreased need for replanting, the ERR for investments in seed farms is estimated at 35 percent. Sensitivity analysis indicates that the ERR remains in the range of 27 to 33 percent when  49 costs increase by 10 to 35 percent or benefits decline by 10 to 35 percent. The FRR for seed farms is estimated at 29 percent. Cotton Marketing 6.9 Market analysis undertaken in the context of project preparation indicates that Uzbekistan could increase the average price it gets for cotton lint by about 20 percent by selling it through the normal international market channels. The primary requirement for that to happen will be to grade the cotton according to internationally recognized standards. 6.10 The economic analysis was done on the basis of a total production of 600,000 tons of lint. About 500,000 ton will be graded to international standards and exported. The economic rate of return for the marketing component is 35 percent. Sensitivity analysis was undertaken to evaluate the impact of changes in investment costs, operating costs, total costs and benefits. Results indicate that this component is resilient to an increase in project costs. For instance, an increase in investment, operating and total costs by 35 percent yields economic rate of return of 30 percent, 35 percent, 30 percent, respectively. The economic viability of the marketing component is more sensitive to a decrease in benefits, but remains viable. A 35 percent decline in benefits yields a rate of return of 28 percent. Furthermore, sensitivity analysis, expressed in terms of switching values using an opportunity cost of capital 12 percent shows that this component could withstand a 75 percent decline in revenues. 6.11 The financial analysis was done on the basis that SIFAT will operate on a full capacity starting with the project fifth year. The financial rate of return on the marketing component is estimated at 32 percent. With regard to financial autonomy, financial projections indicate that SIFAT can generate the revenues to cover their capital and operating costs, and start generating a positive cash flow starting with the fifth year. SIFAT would have to charge a fee of about US$0.41 per bale tested to recover its capital and operating costs when the laboratories test the entire crop (the international price of a bale of cotton is over US$300). When the laboratories are not operating at full capacity, SIFAT has to subsidize part of the cost. For example, when the laboratories are operating at 20, 40, 60 percent of their capacities, the subsidies will be US$1.35, 0.62, 0.28 per bale respectively. Irrigation 6.12 Improved irrigation scheduling has been shown to lead to a yield increase of over 10 percent and save a minimum of 25 percent of the current water use per ha. Given the complexity of allocating increases in yield to one particular factor of production, the economic analysis was undertaken on the basis of a 8 percent increase in yield as a result of improved irrigation and a saving of 15 percent in current water use per ha. The analysis was limited to 200,000 ha expected to be covered under the project. The economic rate of return is estimated at 30 percent. Sensitivity analysis indicates that the economic rate of return is strongly affected by decreases in benefit and moderately affected by increases in costs. For example, rates of return of 25 percent and 19 percent are obtained if the total cost increased or benefit declined by 35 percent respectively. Furthermore, the analysis indicates that the component would have to suffer a shortfall in benefits by 52 percent or increase in total cost by 149 percent before the rate of return falls to the level of the opportunity cost of the capital. 6.13 UZAGROINFORM would have to charge about US$4.63 per hectare to recover its operating and capital costs. Assuming that the farmers get 80 percent of international cotton price and  50 are able to market 80 percent of their cotton at that price, the financial rate of return is estimated at 19 percent. C. PROJECT BENEFICIARIES 6.14 The primary beneficiaries of the project will be cotton producers, cotton processors, private seed farmers, and private seed companies. The Government decision makers, policy makers and private traders will benefit from increased availability of timely information related to cotton quality. In the medium to long run, the nation will benefit through increased cotton production, higher quality fiber, increased foreign exchange earnings, and a safer environment. D. RisKs 6.15 The project does not face any significant risk associated with the technology and practices being introduced. It finances internationally well known and tested seed processing, cotton grading, and irrigation scheduling technologies. The main risk facing the project relates to the country's capacity to implement it in an effective and timely manner. Factors that could cause problems in project implementation include: the possible delay in Government decision making on liberalizing the cotton market, limited interest by the private sector in creating seed companies, lack of counterpart funds, and lack of personnel with the skills needed under the project. The maintenance of a free market for the sale of cotton seed and lint is critical for the commercial viability of participating private seed companies and seed farms. This is also critical for cotton farmers at large since the profitability of seed companies will depend on the level of demand for higher priced quality seeds. Availability of counterpart funds and trained personnel will determine the availability of public services in support of project objectives, both in the public and private sectors. The project introduces the necessary measures to minimize these risks in the form of legal covenants, provision for training and technical assistance and provision for close monitoring and regular review of project activities. The establishment of a strong Project Implementation Unit with appropriate support for project management, procurement, and accounting is expected to help mitigate project risks. In addition, the project will be intensively supervised (including a Project Launch Workshop, reviews of annual work programs, and a comprehensive mid-term review) in order for timely action to be taken to overcome implementation problems. E. ENVIRONMENTAL ASSESSMENT 6.16 The project is expected to have a positive impact on the environment. The move toward private sector control of cotton farming is expected to foster more prudent use of water, land and chemical inputs. The use of pesticides on cotton will be reduced and their application will be integrated with biological control methods. The use of chemical fertilizers will be reduced as a result of more effective irrigation. 6.17 The irrigation component will help introduce a technology to deliver water according to plant requirements, thus significantly reducing the effect of irrigation on salt accumulation and rising water table. This will also reduce the leaching of chemicals into the ground water and the drainage system. 6.18 The seed component will help replace the current outdated technology used in seed production and processing with technology (equipment and inputs) that meet international environmental  51 and safety standards, including those related to dust control inside and outside work areas, and to the use of pesticides in seed processing. The list of pesticides to be financed under the project will be mutually agreed between the Government and the Bank and the Seed Companies will comply with that agreement. 6.19 The Integrated Pest Management Component will have a beneficial impact on the environment through decreased use and more effective use of pesticides. To that end, it will help develop more effective ways of raising and releasing beneficial insects to substitute for pesticides. It will also support the development of a national pesticide policy covering the use of all pesticides, the preparation and dissemination of a "Farmers' Pesticide Handbook", and the introduction of improved spraying equipment. 6.20 The Project has a "B" environmental assessment category.  52 VII. AGREEMENTS AND RECOMMENDATION A. AGREEMENTS 7.1 In a letter of Development Policy signed by the Deputy Prime Minister dated April 27, 1995 and through the agreed Minutes of Negotiations, the Government confirmed that: (a) The State Order system for cotton will be eliminated before the 1998 crop session; (b) Privatized seed farms will be exempt from any obligations under the State Order system; (c) Sub-loans under the line of credit will be denominated in US$ and disbursed in US$ or Sum as requested by sub-borrowers; (d) Government will amend the Statute of SIFAT, and the Seed Certification and Seed Law Agency to allow them to become managerially autonomous and ultimately financially self reliant; (e) In addition, Draft Seed Policy and Seed Law were submitted to the Bank for review and comments were provided by the Bank; and (f) responsibility for the Line of Credit administration will be transferred to a suitable banking institution as soon as one becomes ready. 7.2 Assurances were obtained from Government during Negotiations that: (a) The Seed Certification and Seed Law Agency will prepare a cost recovery plan to be discussed with the Bank no later than June 30, 1998. Implementation of the agreed cost recovery plan will start no later than June 30, 1999 (paras 3.13 and 4.15); (b) SIFAT will prepare a cost recovery plan to be discussed with the Bank no later than June 30, 1998. Implementation of the agreed cost recovery plan will start no later than June 30, 1999 (paras 3.26 and 4.16); (c) The PIU will prepare and submit for Bank review and approval proposals for feasibility studies to be funded under the program design component of the project (para 3.44); (d) Any tax liability associated with public sector project activities beyond the amount already covered under project cost estimates will be financed by Government through their annual budgetary process (para 4.2);  53 (e) Counterpart funds for the public sector components and sub-components will be included in the approved annual budgets of their respective implementing agencies in conformity with provisions under the project and will be made available to them at the beginning of each budget year (para 4.4); (f) A line item will be introduced in the national budget for the project and the use of all allocations under that line item will be restricted to project activities; (g) Sub-loans will be approved on the basis of eligibility criteria and terms of sub- loans agreed between Government and the Bank (para 4.9); (h) UZAGROINFORM will, no later than June 30, 1997, prepare and submnit for Bank review a plan for the recovery of the cost of irrigation water and will initiate the collection of water charges no later than June 30, 1998 (para. 4.17); (i) The PIU will operate on the basis of agreed detailed organizational structure, functions, staffing plans, procedures, and scope of authority agreed with the Bank (para. 5.3); and (j) Work plans including training, technical assistance programs, and associated budgets will be prepared and submitted for Bank review before the beginning of each project year (para. 5.15). 7.3 Loan effectiveness will be conditional upon: (a) A Project Account being opened in the name of the PIU with an initial deposit of a minimum of US$0.5 million equivalent (para. 4.4); (b) Appointment of Deputy Directors for the PIU and finalization of arrangemens for engaging a firm/organization to supply international staff to PIU (para. 5.7); (c) CIU managers appointed (para. 5.8); and (d) Submission by PIU for review by the Bank of work plans and associated budgets for the first project year (para 5.15). 7.4 Loan disbursement will be conditional upon: (a) Adoption of the seed policy and enactment of the agreed Seed Law will be a condition of disbursement against the public sector part of the seed comnponent (para 3.7); and (b) Agreement between the Govemrnent and the Bank on the banking entity to serve as an agent bank under the project, the signing of an agency agreement between this agency bank and the PIU, and approval of the sub-loans on the basis of agreed criteria and procedures will be a condition of disbursement against the private sector part of the seed component (para 4.7).  54 B. RECOMMENDATION 7.5 The Cotton Sub-Sector Improvement Project constitutes a suitable basis for an IBRD Loan of US$66.0 million equivalent to the Republic of Uzbekistan for a period of 20 years, including a five- year grace period, at the Bank's standard variable interest rate.  55 Annex A REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX A IMPLEMENTATION PLAN AND PERFORMANCE INDICATORS A. CRITICAL START-UP TASKS 1. Project Implementation Unit. Making the PIU operational, establishing the CIUs and staffing them are the most critical steps to initiate project implementation. 2. Training. Arrangements need to be made to start training activities soon after loan negotiations, or following Board approval at the latest. 3. Technical Assistance. Technical assistance for the PIU should be on board shortly following loan effectiveness. To that end, arrangements to select a firm/agency to supply that technical assistance should be made prior to loan effectiveness. Plans for hiring the TA under various project components should be part of the annual work plan to be submitted to the Bank for review prior to loan effectiveness. B. MARKETING COMPONENT Phase I 4. On the basis of a detailed work plan, SIFAT will organize its administrative and accounting system, recruit needed personnel and technical assistance and set up its computer system. SIFAT will install the Central and two Regional Laboratories and initiate HVI testing. An intensive training program will be undertaken. Once the system is fully operational in these three laboratories and once enough staff are trained, SIFAT will move to Phases 11 and 111. Phase II and III 5. During these phases, SIFAT will build its reputation as an objective cotton grading agency. It will become managerially autonomous and ultimately financially independent by adopting a "fee for service" approach in its operations. During this phase, SIFAT will install HVI equipment in the regions at a pace that will ensure that trained staff are available to operate the new laboratories. C. IRRIGATION COMPONENT 6. UZAGROINFORM will strengthen its CIU (already established) on the basis of a detailed work plan. Staff trained at the Tashkent central office will be placed in the offices of AGROPROM in the Districts where the system will operate. UZAGROINFORM will monitor the effectiveness of the system. The information generated will be used after two full production seasons to evaluate the effectiveness of the system and to introduce any needed adjustments in program design before continuing program implementation.  Annex A 56 D. SEED COMPONENT 7. Between loan negotiations and loan effectiveness, PIU will undertake an information campaign to inform seed farms and other interested parties about the objectives of the seed component. Interested Seed Farms will be assisted in organizing themselves into private farms, in developing business plans, and in creating private seed companies (if they are so inclined to do). GOSKOMPROGNOZSTAT will enter into an agency agreement with an agent bank mutually agreed with the World Bank. 8. Following credit effectiveness, GOSKOMPROGNOZSTAT will appoint representatives from the PIU, a selected commercial bank, and the Ministry of Finance as members of a committee responsible for appraising sub-loan applications. E. PERFORMANCE INDICATORS 9. The detailed implementation plans are presented below in the form of Gantt charts for each component. Physical and financial progress will be monitored on the basis of those charts. Performance indicators for the project development objectives will include: (a) Government actions on: * State orders * Price of lint * Price of seed (b) Privatization of Seed Farms (c) Creation of private seed companies (Processing capacity created) (d) Area covered under the irrigation scheduling program, water use per ha, fertilizer use per ha. (e) Number of prototypes developed and successfully tested under the IPM program, pesticide use. (g) Volume of cotton graded and sold at international prices through the open market channels.  57 Annex A E. PROJECT IMPLEMENTATION SCHEDULE 10. Implementation of the project is expected to proceed according to the following schedule. However, it is implicit that the speed and efficiency with which initial project establishment activities are brought on-stream, and the effectiveness of implementing and moving project management and technical activities, will influence implementation schedule. Activity Year I Year 2 Year 3 Year 4 Year 5 _ 112 2/2 1/2 2/2 12 2/2 1/2 2/2 1/2 2/2 Project Implementation Unit Appoint Project staff X Set up accounting, reporting, audit procedures X Submit reports, accounts, fund requests, etc. X X X X X X X X X x Systematic monitoring, support to components X X X X X X X X X x Intervene as required to ensure progress X X X X X X X X X x Appraise and monitor sub-loans X X X X X X X x HVI Component Phase I Establish component offices, assign staff X X X X Prepare component operating procedures X X Set up new SIFAT structure, admin. system X X X Identify sites of Phase 1 labs & classing schools X Plan lab and school buildings, space, layout X X Issue tender to construct labs and schools X X Contract with firms, construct labs and schools X X Hire, assign lab and school staffs X X Prepare equipment specifications X Issue tender for equipment X Contract with equipment supplier(s) X X Equipment delivered, installed, tested X X X Conduct intensive English language training X X X X X X X X X x Train personnel overseas X X X X X X X X X x Train personnel in-country X X X X X X X X X x Establish quality control lab & system X X Develop quality control procedures X X X Develop grading standards, procedures X X X Establish computer system X X X Test fiber of cotton crop X X Review Phase 1, plan Phase 2 X X  Annex A 58 Actvity Year I Year 2 Year 3 Year 4 Year 5 I______________________________ 11/2r 2/2 1/2 2/2 1/2 2/2 1/2 2/2 1/2 2/2 Phase 2 and 3 Identify locations of labs X Plan lab building, space, layout X Issue tender to construct labs X Contract with firms to construct labs X X Determine lab staff requirements X Hire, assign lab staff(s) X Prepare equipment specifications X X Issue tenders for equipment X X X Contract with equipment supplier(s) X X X X Equipment delivered, installed, tested X X X X Conduct intensive English language training X X X X X X X X Train personnel overseas X X X X X X Train personnel in-country X X X X X X X Test fiber of cotton crop X X X X Seed Component Establish CIU office X Issue tender to contract technical assistance X X Technical assistance in place X X X X X X Short-term technical assistance provided X X X X X X X X Enact Seed Legislation, Certification X Issue tender for quality control equipment X Sign contract for quality control equipment X Quality control equipment delivered, installed X X Quality control in operation X X X X X X X Establish plant variety protection (PVP) unit X X Design, construct PVP offices, labs X X PVP in operation X X X X X X X X Conduct overseas training X X X X X Conduct in-country training X X X X X X X X X Seed Cos. organized X X X X Seed Cos. produce, supply seed X X X X X X X  59 Annex A Activity Year I Year 2 Year 3 Year 4 Year S 1/212/2 1/2 [ 2/2 1/2 1 2/2 1/2 1 2/211/2! 2/2 On-Farm Irrigation Scheduling Establish component office, admin. system X Restructure UZAGROINFORM x X Plan working system, procedures X X Hire UZAGROINFORM staff and TA as required x X X Train UZAGROINFORM staff X X X X Train farm staff X X X X X X X X X X Identify farms & areas to include each year x X X X X X X X X X Prepare equipment specifications x Issue tender for equipment x Contract supplier for equipment X Equipment delivered X Apply irrigation scheduling on farms X X X X X X X Use and improve computer models X X X X X X X X X IPM Component Implementation Schedule: Establish project management office x Issue tender for technical assistance X Sign contract for technical assistance X Technical assistance in place, as required X X X X X X X X Complete design of equipment X Prepare specs. for materials, equipment X Issue tender for materials, equipment X X Materials and equipment delivered X X X Fabricate prototypes, equipment in-country X X X X X X Conduct trials to evaluate, compare biological and X X X X X X chemical technologies Complete evaluation, comparison of technols. X X X Produce entomophagus insects X X X X X X Distribute entomophagous insects X X X X X Develop pesticide strategy X X X Develop Farmers Pesticide Handbook X X Disseminate Farmers Pesticide Handbook X X X X X X   60 Annex B REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX B LETTER OF DEVELOPMENT POLICY FOR AGRICULTURE Dear Mr. Thalwitz: Development of the Cotton Sub-sector and Strategy for Agricultural Development Uzbekistan has initiated a comprehensive reform program aimed at moving the agricultural sector toward the market economy. We are appreciative of World Bank support to our endeavors in this sector through the Rehabilitation Loan and the Cotton Sub-sector Improvement Project Loan. We also look forward to continued World Bank support in the process of transforming our agriculture into a sector that would effectively and economically enhance the well-being of our people. The imperative to make the best to serve our people with the limited resources available to us dictates that we motivate our private sector to participate to the full extent of its potential in the development process. It also dictates that we create the appropriate incentives to ensure that our resources are used economically and effectively. In order to facilitate the transformation of the cotton sub-sector into a market-based sub-sector, the Government confirms the following decisions: (a) The seed companies will be fully private and owned by one or more of the following: * one or more former collective farms or farm association units once fully privatized (i.e., farm workers, technicians and managers would own shares in the privatized collective farm on which they work). The shareholders would have the right to unrestricted sale of their shares without the need for any permission or right of first refusal by other shareholders. Shareholders would also have the unrestricted right to bequeath their shares; * other private individual or private company, private cotton-producing farms, cotton-producing units, private farmers and private farmers' associations which can create their own seed companies and/or initially subscribe or purchase shares in seed companies being established; * foreign investors; and * existing ginning companies, once privatized. (b) Prvatized collective farms through their individual shareholders or members will be given long term (99 years) transferable leases on the land they currently cultivate, and will be allowed to procure their inputs and to sell their products freely in the market;  Annex B 61 (c) Seed companies will be given long-term (99 years) leases by the Government on land needed for administration buildings, operating facilities, and ginning and seed processing plants. They will also be allowed to procure their inputs and sell their products freely in the market. A line of credit will be established to support the creation of seed companies. It will be administered by the Project Implementation Unit using a Commercial Bank as an agent to disburse sub-loans denominated in US$ and collect repayments in local currency or in US dollars; (d) Decisions to create the seed companies, invest in necessary equipment and materials, and to operate the enterprises will be made exclusively by the shareholders and the management they select; (e) Charters of seed companies and articles of association of privatized seed farms and other terms and conditions of incorporation will ensure effective governance by shareholders, operational autonomy, financial autonomy and accountability of the managers selected by the representative of shareholders; (f) The Government will not have any role in selecting the management of the seed companies and the privatized seed farms or in the making of their managerial decisions. Government will, however, facilitate efficient implementation of those decisions in all respects as provided for in the charter of the production units. Government facilitation will include, inter alia, timely issuance of licenses for import and export of equipment and commodities, use of currencies and accounts, and related activities and transactions; (g) The price of planting seed and gin-run seed will be completely free by the end of the 1996 cropping cycle. Free price means that each seed company and all other entities producing gin-run seed will be free to sell the seed they produce to domestic and other parties at a price determined by the market. Local or central government agencies will not intervene in such sales and in the determination of prices; (h) The Government will decrease the state order system for all cotton progressively, and will abolish it completely starting with the 1998 cotton cropping cycle. The Government will also increase progressively the procurement price for cotton remaining under the state order, initially to 50 percent of world prices for the 1995 crop and will reach the level of the World market price at the time state order is eliminated; (i) In order to facilitate the creation of planting seed companies and considering the expected burden of sub-loan repayments, starting with the 1996 cropping season, the Government will leave out of the state order all the cotton lint produced by privatized seed farms; (j) Although all farms producing seed cotton have officially been given the right to market an increasing share of their production (currently 40 percent) in the open market, in practice it has proven difficult for them to exercise fully that right.  62 Annex B The Government has decided that farmers can access export markets directly and that cotton sold through the commodity exchange is exempt from export licenses. The Government has also introduced a simplified procedure for granting export licenses for cotton not sold through the commodity exchange. Under this procedure, a license will be granted within 10 days after receipt by the Ministry of Foreign Economic Relations of a prepared contract, and other documents confirming the existence of the cotton; (k) A draft national seed policy and a draft seed Law covering seed marketing, seed certification, variety registration, seed import, and plant variety protection are being considered by the relevant Government bodies. These documents will be subsequently sent to the Bank for review and discussion before they are submitted to Parliament for consideration; and (1) In order to guarantee quality to farmers using seed cotton, the Government will transform the Republic Seed Inspection Service into an autonomous Agency and will not allow interference into its activities by special interests. This agency will consist of a Central Seed Certification and Seed Law Unit with a Central and Referee seed testing laboratory, and five Oblast Seed Certification and Seed Law Units with Service Seed Testing Laboratories. The quality control functions will be unified within a single Seed Certification, Testing and Quality Control Agency under the overall direction of the Ministry of Agriculture. The process to liberalize the output and input markets has already been initiated and it is our intention to complete that process as soon as feasible. Under the Cotton Sub-sector Improvement Project, we intend to introduce the principles of "fee for service" and develop methodologies and practical plans for recovering the cost of services/inputs supplied through public channels such as seed certification, cotton grading, and irrigation water. Although our intention is to move as swiftly as possible on these matters, we want to move with enough caution to make sure that our actions are right and sustainable. We also intend to encourage our private sector to develop a market-based supply system that is cognitive of our country's environmental concerns, and production support systems covering the whole gamut of activities from planting to harvesting to storage, to transportation, processing and marketing. We recognize the complexity involved in changing our system of production and we intend to proceed with promoting change methodically and systematically. The agricultural sector is the backbone of our economy. We intend to develop its potential in a sustainable and environmentally safe manner. Our first priority is to correct past distortions. The state orders system will be terminated in the next two to three years. The old centralized system of production by directive is being replaced by a participatory farming system whereby farmers control their factors of production and make all decisions as to what to produce, how much to produce, and how to dispose of their products. Prices are being liberalized, input subsidies are being removed, and responsibility for output marketing and input supply is being shifted to the private sector. The mandate of the Government machinery is being redefined from one of control to one of support and motivation. Through these actions, we hope that we will succeed to have in place in the near future the conditions that will motivate farmers to intensify production and the private sector to invest in revitalizing our agri-business complex.  Annex B 63 The foreign exchange earning capacity of agriculture is currently built almost exclusively around cotton. We need to expand the export potential in other sub-sectors. Uzbekistan has a comparative advantage in the production of fruits, vegetables, berries, grapes, and silk for which a ready demand exists in the world market. We also need to develop self-reliance in food in the country through an optimum combination of domestic production and import. To help develop our production system to the full extent of its potential, we intend to invest in building the necessary infrastructure to support the rehabilitation and restructuring of our farms. In addition, our agri-business complex needs to be rebuilt our agro-industry to enhance the value added in the sector and create productive and sustained employment for our people. Our grazing lands need to be rehabilitated and restored. Our animal husbandry needs to be developed. The productive potential of land resources needs to be protected and the economic potential inherent in our water resources needs to be realized. We need to do all this while protecting our environment and providing equal opportunity for all our people. In order to make more effective and environmentally sustainable use of our water resources, we have started a process to diversify our agriculture by shifting land from cotton in favor of crops requiring less water. We also plan to introduce water charges to motivate farmers to use water more economically. We look forward to continuing our dialogue and hope that the Cotton Project will usher in an era of close and productive cooperation between the Republic of Uzbekistan and the World Bank. Sincerely, Bakhtiar A. Khamidov Deputy Prime Minister  64 Annex C REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX C A SAMPLE OF SEED FARMS INTEREsTED IN PARTICIPATING IN THE CREATION OF SEED COMPANIES Region Seed Farms Area under Cotton Bukhara Madaniat 1,400 Dustlik 900 Uzbekistan 1,200 Khamza 800 Namangan Soliev 1,000 Uzbekistan 600 Ahunbabaeva 900 Konobad 600 Navoy 700 Surkhandarya Baimatov 2,500 Mirzaev 1,600 Ulyanov 1,200 Kumkurgan 700 Tashkent Khakikat 1,100 Yangi Turmush 700 Uzbekistan 800 Kaytmas 600 Fergana Kulam 1,200 Pakhakor 900 Soybkor 400 Obod 2,100   REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX D ExPENDITURE ACCOUNTS PROJECT COST SUMMARY I__ ___ __ ___ __ _ _ (Sum '000) _US_ W )i % % Total % % Total Foreign Base Foreign Oas Local Foreign Total Exchang Costs Local Foreign Total Exchange Costs L. Investment Costs A. Civil Works 15,312.5 65,057.3 81,369.9 80 5 709.2 2,828.6 3,537.8 80 5 B. Equipmenl 105,659.7 434,432.1 540,091.8 80 32 4,593.9 18,888.4 23,482.3 80 32 C. Training - 26,128.0 26,128.0 100 2 - 1,136.0 1,136.0 100 2 D. Technical Assistance 1,656.0 155,319.0 156,975.0 99 9 72.0 6,753.0 6,825.0 99 9 E. Investment Credit 155,152.3 550,591.3 705,743.5 78 41 6,745.8 23,938.8 30,684.5 78 41 Total Investnent Costs 278,780.5 1,231,527.6 1,510,308.1 82 88 12,120.9 53,544.7 65,685.6 82 88 11. Recurrent Costs A. Salaris 42,542.6 4,727.0 47,269.6 10 3 1,849.7 205.5 2,055.2 10 3 B. Communuicadon 8,445.6 938.4 9,384.0 10 1 367.2 40.8 408.0 10 1 I C. Equipment Operatlon & Maintenance 5,779.4 642.2 6,421.6 10 - 251.3 27.9 279.2 10 - E. SuppLies 6,313.5 701.5 7,015.0 10 - 274.5 30.5 305.0 10 - F. Staff Travel Expenses 4,761.0 529.0 5,290.0 10 207.0 23.0 230.0 10 H. Services 2,173.5 241.5 2,415.0 10 - 94.5 10.5 105.0 10 - I. Other 49,082.0 8,234.0 57,316.0 14 3 2,134.0 358.0 2,492.0 14 3 J. Inves tment Credit 57,960.0 6,440.0 64,400.0 10 4 2,520.0 280.0 2,800.0 10 4 Total Recurrnt Costs 177,057.7 22,453.5 199,511.2 1 1 12 7,698.2 976.2 8,674.4 1 1 12 Total BASELUNE COSTS 455,838.2 1,253,981.2 1,709,819.3 73 100 19,819.1 54,520.9 74,340.0 73 100 Physical Contingencies 30,909.4 100,891.1 131,800.5 77 8 1,343.9 4,386.6 5,730.5 77 8 Price Contingencies 1,526,523.5 3,683,785.2 5,210,308.7 71 305 1,334.2 3,189.7 4,523.9 71 6 rTota PROJECT COSTS 2,013,271.1 5,038,657.4 7,051,928.6 71 412 22,497.1 62,097.2 84,594.3 73 114  REPUBUC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT COMPONENTS PROJECT COST SUMMARY (Sum 000) _ I (US$S 00) _ % % Totai % % Total Foreign BTase Foreign Base Local Foreign Total Exchang Costs Local Forelgn Total Exchang Costs A. Project Implementaton Unit 8,686.6 40,710.5 49,397.1 82 3 377.7 1,770.0 2,147.7 82 3 B. Seed Component 1. Seed Variety Breeding 460.0 7.820.0 8,280.0 94 20.0 340.0 360.0 94 - 2. Seed Testing & Certification 29,778.1 59,353.8 89,131.9 67 5 1,294.7 2,580.6 3,875.3 67 5 3. Plant Variety Protection Office 4,625.3 2,527.7 7,153.0 35 - 201.1 109.9 311.0 35 - 4. Seed Multiplication 74,584.4 239,489.8 314,074.2 76 18 3,242.8 10,412.6 13,655.4 76 18 5. Seed Processing & Marketing 138,527.9 317,541.5 456,069.3 70 27 6,023.0 13,806.2 19,829.1 70 27 Subtotal Seed Component 247,975.7 626,732.8 874,708.4 72 51 10,781.6 27,249.3 38,030.8 72 51 C. Classing Component 1. Classing and Marketing Schools 16,733.9 54,455.7 71,189.6 76 4 727.6 2,367.6 3,095.2 76 4 2. HV1 127,705.2 366,079.5 493,784.7 74 29 5,552.4 15,916.5 21,468.9 74 29 o Subtotal Classing Component 144,439.1 420,535.2 564,974.3 74 33 6,280.0 18,284.1 24,564.1 74 33 o7 0. Irrigation Scheduling Component 21,363.3 51,566.2 72,929.6 71 4 928.8 2,242.0 3,170.9 71 4 E. Integrated Pest Management Component 33,373.5 73,036.5 106,410.0 69 6 1,451.0 3,175.5 4,626.5 69 6 F. Program Design - 41,400.0 41,400.0 100 2- - 1.800.0 1,800.0 100 2 Total BASELINE COSTS 455,838.2 1,253,981.2 1,709,819.3 73 100 19,819.1 54,520.9 74,340.0 73 100 Physical Contingencies 30,909.4 100,891.1 131,800.5 77 8 1,343.9 4,386.6 5,730.6 77 8 Price Contingencies 1,526,523.5 3,683,785.2 5,210,308.7 71 305 1,334.2 3,189.7 4,523.9 71 6 Total PROJECTS COSTS 2,013,271.1 5,038,657.4 7,051,928.6 7 1 412 22,497.1 62,097.2 84,594.3 73 114  RuPUiLC OF UZUEKTAN COTTON 5U346CFoR _1Rov0UEN PROJECT ExPm ACCOUN BREAKDOW Cant Pksa Base Cost hsical Contnanchs Prik Confnenc * s Total Ind. Cont Base Costs PriCe Local Local Local + Pice Cont. on (Excl. Dutis & (Excl. Duties & (Excl. Duties a (Excl. Dutis & Cont on Physical For. Exch Taxes) Taxes Total For. Exch Taxes) Taxes Total For. Exch Taxes) Taxes Total or. Exch Taxes) Taxes Total Base Costs Cont 1. Investment Costs A. Civi Works 2,828.6 387.6 321.6 3,537.8 282.9 38.8 32.2 353.8 138.5 18.5 15.7 172.7 3,249.9 444.9 369.5 4,064.3 3,694.9 369.5 B. Equipment 18,888.4 2,459.2 2,134.8 23,482.3 1,888.8 245.9 213.5 2,348.2 1,058.9 137.7 119.7 1,316.2 21,836.1 2,842.7 2,467.9 27,146.7 24,678.8 2,467.9 C. Trahinig 1,136.0 - 1,136.0 10.0 - 10.0 49.2 - 49.2 1,195.2 - - 1,195.2 1,184.9 10.3 D. Tedcmical Asssance 6,753.0 72.0 - 6,825.0 15.0 - 15.0 323.7 3.4 - 327.1 7,091.7 75.4 - 7,167.1 7,151.6 15.5 E. Invesment Credit 23,9388 3,956.3 2, 30,684.5 2,168.91 370.6 254.0 2,793.5 1,546.9 2641 181.1 1,992.1 27,654.5 4,590.9 3,224.5 35,470.0 32,510.8 2,959.2 Total Investment Costs 53,544.7 6,875.0 5,245.9 65,66S.6 4,365.6 655.3 499.6 5,520.5 3,117.2 423.7 316.5 3,857.4 61,027.5 7,954. 6,061.9 75,043.4 69,220.9 5,822. II. Recurrent Costs A. Salaries 205.5 1,849.7 - 2,055.2 15.0 134.6 . 149.5 220.5 1,984.2 - 2,204.7 2,204.7 B. CommunicatIon 40.8 367.2 408.0 . . 2.8 25.4 28.3 43.6 392.6 436.3 436.3 C. Equipment Operation & Maintenance 27.9 251.3 279.2 . . . 1.9 17.2 19.1 29.8 268.5 298.3 298.3 - C E. Supplies 30.5 274.5 305.0 1.4 12.5 13.8 31.9 287.0 318.8 318.8 - F. Staff Travel Expenses 23.0 207.0 230.0 1.4 12.6 14.0 24.4 219.6 . 244.0 244.0 - H. Services 10.5 94.5 105.0 . 0.8 6.8 7.5 11.3 101.3 112.5 112.5 1. Other 358.0 2,134.0 2,492.0 - 24.3 160.31 184.6 382.3 2,294.3 2,676.6 2,676.6 J. Investment Credit 260.0 2,520.0 2,800. 21.0 189.0 210.0 25.0 224.7 249.7 326.0 2933.7 3,259.7 3,032.3 227.4 Total RecurrentCosts 976.2 7,698. 8674.4 21.0 0 2 72.5 594.1 - 666.5 ; 848i.2 1069, -2 7.4 Total 54,520.9 14,573.2 5,245.9 74,340.0 4,386.6 844.3 499.6 5,730.5 3,189.7 1,017 .7 316.5 4,523.9 62,097 82 16,481.2 6,061 i0 9323 38,544.5 227.49, __ __ __ _ __ __ __ _ __ __ - 7 2 5.246_ 74__ __7 4,2.9 6,076 06 8 5 43 7 544.5 6, 9.  Annex D 68 REPUBLIC OF UZBEKISTAN CoTrON SUB1SECTOR IMPROVEMENT PROJECT EXPENDITURE ACCOUNTS BY YEARS - TOTALS INCLUDING CONTINGENCIES (USS '000) Totals Includin I Contingen as 1996 1997 1998 1999 2000 Total I. Investment Cosb A. Civil Works 766.3 837.5 2,454.0 6.6 - 4,064.3 B. Equprmnt 4,435.0 7,291.0 9,511.5 4,637.9 1,271.3 27,146.7 C. Traning 308.1 454.4 227.8 101.2 103.8 1,195.2 D. Technical Assitance 893.9 2,757.4 2,257.0 1,158.4 100.4 7,167.1 E. lnvestnent CredIt 1,411.0 8,544.4 17,315.9 5,109.8 3,088.9 35,470.0 Totl Investnmnt Cos 7,814.1 19,884.7 31,766.2 11,013.9 4,564.5 75,043.4 II. Rocurrent Costs A Salaries 165.2 357.3 533.2 551.2 597.7 2,204.7 B. CommunIcation 50.5 71.3 98.5 106.6 109.4 436.3 C. Equipment Operaton & Maintenance 38.9 49.1 62.5 73.1 74.8 298.3 E. Supplies 70.7 103.3 79.5 59.8 5.6 318.8 F. Staff Travel Expenses 30.3 62.0 63.6 43.5 44.6 244.0 H. Services 10.1 17.6 27.5 28.3 29.0 112.5 1. Other 188.9 424.5 609.3 690.7 763.3 2,676.6 J. Investment Credit 130.3 310.9 683.5 935.4 1,199.7 3,259.7 Total Recurrent Cosb 684.9 1,395.8 2,157.6 2,488.6 2,824.1 9,550.9 otal PROJECT COSTS 8,499.0 21,280.5 33,923.8 13,502.5 7,388.5 84,594.3  69 Annex D REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT PROJECT COMPONENTS BY YEAR - INVESTMENTIRECURRENT COSTS (USS '000) 1316 1 tS7 1998 1999 2000 Total A. P I*c npra Unit Iheebuent Costs 557.0 594.9 355.0 244.7 - 1,751.8 RcunWent Cost 95.3 108.9 104.3 105.7 91.3 505.5 Subal Proct Implementation Unit 652.4 703.8 459.2 350.5 91.3 2,257.1 S. S"d Compo_et 1. ed Vaty Brredhg hnwbet Coes 409.0 - - 409.0 . Sed T_eng & Catkllcon Irwent Coats 208.2 1,252.3 1,796.4 97.9 3,354.9 Recurrent Costs 49.5 205.5 218.3 238.2 250.0 961.5 Subal Sd Tetng & CeDficaion 257.7 1,457.8 2,014.7 338.1 250.0 4,318.3 3. PS"t Vslty Proteton Office Iweebuent Coet 146.7 14.7 Recwret Cost 37.8 38.8 37.5 38.5 39.5 189.9 SubtO PbentV Vwkty Proctlon OlMce 184A 36.6 37.5 38.5 39.5 335.5 4. Sed MapU caon Investment Costs 1,411.0 3,179.7 3,947.1 4,548.5 2,839.3 15,723.8 S. Sed Proelng & Mlriating : Invstent Coets - 5,364.7 13,368.8 563.3 449.7 19,748.4 Recunt Costs 130 310.9 683.5 935.4 1,199.7 3,259.7 Subtl Sed Pro_oueng & Marketng 130.3 5,675.5 14,052.3 1,498.7 1,849.3 23,006.1 Subtl Sed Component 1,983.4 10,758.6 20,051.6 6,419.8 4,578.1 43,791.5 C. Cleng Componnt 1. CinIng nd Mwkedng Schools Investment Coets 1,035.0 46.5 2,028.7 - - 3,110.1 Recurent Coes 30.7, 35.5 98.8 110.1 112.9 388.0 SubtldlaC ng andMekengSchoob 1,065.7 82.0 2,127.4 110.1 112.9 3,498.1 2 HVI Invebtmnt Coats 3,537.8 6,627.5 7,008.0 4,096.6 678.7 21,948.5 Recumrdnt Coats 121.2 347.0 842.1 859.1 878.3 2,445.7 Sub',tal HVI 3,659.0 6,974.5 7,648.1 4,755.7 1,355.0 24,392.3 Subtotal Claing Comnpoent 4,724.7 7,056.5 9,775.5 4,865.8 1,467.9 27,890.4 D. rlgipon Schodulig Component Inveelment Costs 169.7 663.1 564.1 710.0 793.5 2,900.2 Recurrnt Costs 39.8 75.21 114.7 187.1 290.4 707.1 Subtotl irrigation Scheduling Compnent 209.5 738.2 678.7 897.0 1,083.8 3,807.3 E. ntgratd Pet Mangemet Comnponwt Innvesent Coats 746.8 1,127.4 2,084.4 102.3 3.3 4,048.4 Recurrent Cost 180.3 276.3 258.5 214.5 164.0 1,093.6 Subttabl Intgraed Ptd Mnagmwnt Component 929.1 1,403.7 2,323.0 316.81 187.4 5,140.0 F. Progrm Deelgn Investment Comb - 619.7 535.8 652.6 . 1,908.0 Subotal Program Dolgn - 619.7 635.8 652.6 - 1,908.0 Tobl PROJECT COSTS 8,49.0 21,280.5 33,923.8 13,502.5 7,388.5 84,594.3 Tota Irwetment Cots 7,814.1 19,884.7 31,768.2 11,013.9 4,564.5 75,043.4 Total Recument Costs 664.9 1,395.8 2,157.6 2 2,824.1 9,550.  REPUBUC OF UZBEKISTAN COTTON SUB4ECTOR IMPROVEMENT PROJECT EXPENDITURES ACCOUNTS BY COMPONENTS - TOTALS INCLUDING CONTINGENCIES (US$ i00) t SWz Component Cbming Cemponent Plumt dmining Inead Prcoc S"d Sed Teng Valey Seed ard ron Post Implementation Variety Protcon Seed Processing Maretng Schedubg Management Progrm Un__B____________ lndfta C rtifcaton Office S Schools HVI Component Copon Cben ToUtl I. nveatment Cosal A. CNi VAbka 24.4 - 67Z8 - 151.5 86.5 - 2,349.4 4,064.3 B. EqinIO 165.1 125.0 1,928.8 146.7 2,711.0 18.903.5 2,225.3 941.6 27.14t.7 C. Trat*rg 62.3 113.6 - - 62.6 336.3 423.5 196.9 1,195.2 D. Tednlc AAaltance 1,499.8 170.4 753.7 185.1 1,840.3 251.4 568.4 1,906.0 7,167.1 E. I mnane Cd - -' 15,723.6 19,746.4 .- - - 35,470.0 Total Iwonveala coeta 1,751.6 409.0 3,364.9 148.7 15.723.6 19,748.4 3,110.1 21,946.5 2,900.2 4.046.4 1,906.0 75.043.4 I. Recurrnt Coesx A. Salas 122.0 . 172.8 76.4 - 170.4 1,239.0 255.7 166.4 2,204.7 B. Cowvrn1cabn 74.5 96.5 21.2 - 23.7 157.2 64.1 436.3 C. Equiprnen Opera-in &Makfte - - - - 298.3 296.3 E. Suppis 318.8 318.8 F. SUall Travl Expenses - - 244.0 244.0 H. Service 10.6 15.9 17.1 68.8 - 112.5 I. Other 296.3 - 693.1 76.3 - - 176.8 960.7 451.4 92,678.6 _1 J3. Itweinteit Crada - - -. 3,259.7 3,250.7 O TotA Recurrent Co4t 505.5 961.5 189.9 3,259.7 388.0 2.445.7 707.1 1,093.t 9,560.9 TotaIPROJ.ECT COSTS 2,257.1 409.0 4,316.3 336.5 15,723.6 23,006.1 3,498.11 24,392.3 3,6073 6100 ,980 454. TaXe 17.2 11.4 236.5 13.3 1,429.4 1,795.1 200.2 1,797.3 202.3 299.2 6,061.9 Forlgn Exdep 1,853.4 368.2 2,897.2 121.2 11,972.7 16,007.6 2,686. 18,140.6 2,666.3 3,667.4 1,908.0 82,07.2  71 Annex D REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT COMPONENTS BY FINANCIERS (USS '000) Participating Private The Govemment of World Bank Total Enterprise Uzbekistan _____________________________________ Amount Amount Amount Amount A. Project Implementation Unit 331.5 1,925.6 2,257.1 B. Seed Component 1. Seed Variety Breeding 22.7 386.2 409.0 2. Seed Testing & Cerlification 1,205.3 3,111.0 4,316.3 3. Plant Variety Protection Office 178.2 158.3 336.5 4. Seed Multiplication 2,696.2 0.0 13,027.4 15,723.6 5. Seed Processing & Marketing 5,028.1 0.0 17,978.0 23,006.1 Subtotal Seed Component 7,724.3 1,406.3 34,660.9 43,791.5 C. Classing Component 1. Classing and Marketing Schools 760.7 2,737.4 3,498.1 2. HVI 5,928.5 18,463.8 24,392.3 Subtotal Classing Component 6,689.2 21,201.2 27,890.4 D. Irrigation Scheduling Component 965.3 2,642.0 3,607.3 E. Integrated Pest Management Component 1,357.7 3,782.3 5,140.0 F. Program Design - 1,908.0 1,908.0 Total Disbursement 7,724.3 10,749.9 66,120.0 84,594.3  Annex D 72 REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT LOCALIFOREIGN TAXES BY FINANCIERS (USS '000) Participating Private Enterprise The Government of Uzbekistan World Bank Total Amount Amount Amount Amount 1. Foreign _ _ 62,097.2 62097.2 11. Local (Excl. Taxes) 4,499.8 7,912.6 4,022.8 16435.2 111. Taxes 3,224.5 2,837.4 . 606l.9 Total Project 7,724.31 10,749.9 66,120.0 S4594.3  REPUBLIC OF UZBEKISTAN COTrON SUB-SECTOR IMPROVEMENT PROJECT ALLOCATION OF LOAN PROCEEDS WORLD BANK (US$ '000) Suggested Allocation of Loan Proceeds Loan Amounts Loan Amount Disbunement Totl Project Cost Averag* Disbursemnt % Unallocated Allocated # Total Local Foreign Total Local Foreig Total Total Local Foreign Total Local Foreign 1. Civil Works 2,954.5 80.0 4,054.3 814.4 3,249.9 80,0 - 100.0 3,249.9 295.4 - 295.4 2,954.5 2,954.5 2. Equipment 19,854 .1 80.4 27,146.7 5,310.6 21,836.1 80.4 0.1 100.0 21,839.5 1,9e5.4 0.3 1,985.1 19,854.1 3.1 19,851.0 3. Training 1,184.9 100.0 1,195.2 - 1,195.2 100.0 . 100.0 1,195.2 10.3 - 10.3 1,184.9 1,184.9 4. Technical Assistance 7,161.6 100.0 7,167.1 75.4 7,091.7 100.0 100.0 100.0 7,167.1 15.5 - 15.5 7,151.6 75.4 7,076.2 5. Investrnent Credit 28,441.6 80.1 38,729.7 10,749.2 27,980.5 80.1 28.1 100.0 31,005.3 2,563.7 244.0 2,319.7 28,441.6 2,780.9 25,660.8 6. Recurrent Costs 1,662.9 26.4 6,291.2 5,547.5 743.7 26.4 16.6 100.0 1,662.9 - - - 1,662.9 919.2 743.7 Unallocated 4,870.4 - - - - - - - - - Total 66,120.0 7a.2 84,5S4.3 22,497.1 62,097.2 , -= -= 66,120.0 4,870.4 244.3 4,626.1 61,249.7 3,778.6 57.471.1  Anex D 74 REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT EXPENDITURE AcCOUNTS BY FINANCIERS (US$ '000) Participating The Govemment World Bank Total Private of Enterprise Uzbekistan Amount Amount Amount Amount 1. Investment Costs A. Civil Works 814.4 3,249.9 4,064.3 B. Equipment 5,307.2 21,839.5 27,146.7 C. Training , 1,195.2 1,195.2 D. Technical Assistance 0.0 7,167.1 7,167.1 E. Investment Credit 5,140.4 0.0 30,329.6 35,470.0 Total Investment Costs 5,140.4 6,121.6 63,781.3 75,043.4 11. Recurrent Costs A. Salaries 1,667.8 536.9 2,204.7 B. Communication 323.3 112.9 436.3 C. Equipment Operation & Maintenance - 219.9 78.4 298.3 E. Supplies 207.6 111.3 318.8 F. Staff Travel Expenses 173.9 70.1 244.0 H. Services 84.5 28.0 112.5 1. Other 1,951.3 725.3 2,676.6 J. Investment Credit 2,583.9 -0.0 675.7 3,259.7 Total Recurrent Costs 2,583.9 4,628.3 2,338.7 9,550.9 Total DISBURSEMENT 7,724.3 10,749.9 66,120.0 84,594.3  75 Annex D REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT PROJECT COMPONENTS BY YEAR - TOTALS INCLUDING CONTINGENCIES (US$ '000) 1996 1997 1998 1999 2000 Total A. Project Implementation Unit 652.4 703.8 459.2 350.5 91.3 2,257.1 B. Seed Component 1. Seed Variety Breeding - 409.0 - - - 409.0 2. Seed Testing & Certification 257.7 1,457.8 2,014.7 336.1 250.0 4,316.3 3. Plant Variety Protection Offioe 184.4 36.6 37.5 38.5 39.5 336.5 4. Seed Multiplcation 1,411.0 3,179.7 3,947.1 4,546.5 2,639.3 15,723.6 5. Seed Processing & Marketing 130.3 5,675.5 14,052.3 1,498.7 1,649.3 23,006.1 Subtotal Seed Component 1,983.4 10,758.6 20,051.6 6,419.8 4,578.1 43,791.5 C. Classing Component 1. Classing and Marketing Schools 1,065.7 82.0 2,127.4 110.1 112.9 3,498.1 2. HVI 3,659.0 6,974.5 7,648.1 4,755.7 1,355.0 24,392.3 Subtotal Classing Component 4,724.7 7,056.5 9,775.5 4,865.8 1,467.9 27,890.4 D. Irrigation Scheduling Component 209.5 738.2 678.7 897.0 1,083.8 3,607.3 E. Integrated Pest Management Component 929.1 1,403.7 2,323.0 316.8 167.4 5,140.0 F. Program Design - 619.7 635.8 652.6 - 1,908.0 Total PROJECT COSTS 8,499.0 21,280.5 33,923.8 13,502.5 7,388.5 84,594.3  76 Annex E REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX E SEED COMPONENT FiNANCIAL TERMS AND ELIGIBILITY CRITERIA 1. Financial Terms for Loans to Sub-Borrowers. The following financial terms will apply for lending to the sub-borrowers: (a) A loan ceiling of US$5.0 million would be established (this would meet the financing requirement, excluding equity capital) for an expected seed production capacity of 5,000 ton seed processing units. The loan ceiling will be adjusted correspondingly for lower or higher capacity; (b) A maximum of 25 percent of the loan may be utilized for the purposes of working capital needs; (c) The sub-loans to seed companies would be given for a maximum period of 10 years, including a three-year grace period, at the long term Dollar rate (US Treasury 10-year Bond rate) in effect at the time sub-loans are made (the base rate) plus a margin of 3 percent to cover administration costs and default risks; (d) A maximum loan ceiling of US$700,000 will be established for borrowings by a seed company on behalf of any one associated seed farm to meet the credit requirement of that seed farm for the purposes of spare parts, equipment and pesticides; (e) Loans to seed farms would be for a maximum 6 years, with a two-year grace period, carrying the same interest rate as above; (f) The exchange risk between the US dollar and the Sum would be borne by the sub-borrowers, the cross-currency risk between the US dollar and the basket of currencies in the World Bank loan would be borne by the Government, the default risk would be borne by the Government; (g) If Sum is drawn instead of US dollars, the principal addition will be calculated in US dollars on the basis of the exchange rate in effect at the time of such drawdown; (h) Repayment schedules for sub-loans will be calculated in US dollars. Repayment of principal and interest will be made in US dollars, or in Sum equivalent based on the foreign exchange rate prevailing on the repayment date;  Annex E 77 (i) Repayment of principal and interest will be made by the sub-borrowers and will be deposited for credit through an agreed account in a commercial bank to be designated by the Government; (j) Any reflows during the World Bank five-year grace period (the difference between borrower's repayment obligations to the Bank and sub-borrower's repayments to the borrower) will be held in a separate account for use by the Ministry of Finance. These funds will be used on a revolving basis, and on similar terms and conditions, to finance similar private sub-projects acceptable to the Bank; and (k) Collateral (in the form of assets) will be required from the participating private enterprises in favor of the government as a preferred creditor and will be specified in the sub-loan agreement. 2. Eligibility Criteria For Loans To Sub-Borrowers. Loans to sub-borrowers will be approved on a first-come-first-serve basis. Sub-borrowers must meet the following criteria before loan approval would be processed: (a) Seed companies and eligible seed farms must be fully private legal entities; (b) The charter and other terms and conditions of incorporation of the seed companies and privatized seed farms will have to ensure freedom of governance by their shareholders, and operational autonomy and financial accountability of their managers; (c) Sub-borrowers and seed farms will possess legal long-term leases on farm land and land needed for ginning and seed processing plants, and for administrative buildings; (d) Planned minimum statutory capital for a seed company will be at least the Sum equivalent of US$40,000; paid in capital will be at least the Sum equivalent of US$25,000. Equity funding of the total capital requirement must be at least 15%; (e) Sub-borrowers must prepare a comprehensive and acceptable business plan, including: * descriptions of marketing and distribution channels; * technical soundness, including descriptions of machinery to be purchased and layout of the plant; * financial analysis and viability of the investments; * management capability and effective organization of the project; and * compliance with internationally recognized environment and health standards.  78 Annex E (f) Sub-borrowers must demonstrate their capacity for the preparation of adequate financial accounts and property controls, and meet independent audit requirements; (g) The sub-loan agreement must provide sub-borrowers with on-demand export and import licenses to support their operations and guarantee on-demand convertibility of Sum into US dollars for the purpose of making US dollar interest and principal repayments; and (h) Each sub-borrower must sign a subsidiary sub-loan agreement with GOSKOMPROGNOZSTAT acting through PIU as administrator of the loan, with the commercial bank as the channel for disbursement and collector of repayment. The agreement will stipulate the terms of the loan, security arrangements in case of default, procedures for withdrawal and utilization of loan proceeds, monitoring and reporting arrangements, repayment schedule, and provision for independent financial audit. The Deputy Chairman GOSKOMPROGNOZSTAT will sign the agreement on behalf of Government following review of the sub-loan by the Bank. The Director of the PIU and a representative of the commercial bank will countersign the agreement as an indication that appropriate arrangements exist for the respective agencies to carry out their responsibilities for monitoring compliance with the contractual provisions on the seed companies' use of the sub-loan proceeds and their repayment.  79 Annex F REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX F SUMMARY OF PROCUREMENT ACTIVITIES Categ-Contracts Ce Loan Funds GOUIPSCo Total (USSxOOO) Technical Services 18 8,362 0 8,362 PIU AdminlTech. Services I 1,500 0 1,500 Strat. Analyses & Sector Studies 6 1,908 0 1,908 HVI & Class-Mkting Technical Assistance 1 1,840 0 1,840 Irrigation Tech. Assistance 2 251 0 251 IPM Tech. Assistance 1 558 0 558 Seed Certification Tech. Assist. 1 754 0 754 Seed Breeding TA 1 170 0 170 Training I Study Tours 3 1,195 0 1,195 Other Consulting Contracts 2 186 0 186 Equipment & Goods 98 21,840 5,307 27,147 ICB 6 12,720 3,120 15,840 DC 2 785 195 980 IS 35 6,670 1660 8,330 LS 55 1,665 332 1,997 Civil Works 20 3,250 814 4,064 HVI Labs 6 693 173 866 IPM Facilities 5 1,880 469 2,349 Other Small Works 9 680 7,724 849 Investment Credit Line 28 31,005 7,724 38,729 Gin / Seed Buildings & Connections 6 300 100 400 Equipment 17 30,705 4,364 35,069 Pvt. Sector Recurrent Costs 0 3,326 3,260 Other Recurrent Costs N/A 1,543 4,749 6,292 Program Totas 164 66,000 18,594 84,594  Annex F 80 REPUBUC oF UZBEKISTAN COTTON SUB-SECTOR DEVELOPMENT PROJECT PLAN AND SCHEDULE FOR MAJOR PROCUREMENTS CdaeVi Itcm, 0 Conlraci Buidges Prom Procurement Sche4Adk Issre Bid Gre p Package Anw_ ont Method Documents Bid Recipt Comnract Award Begn Ddeihw Teocnical Servk' I P)U Tadmcl Saice _ 1500 Shoam List/lndivs. 4/95 * 9/95 _ 695 - 11193 95 - 2J96 0/95 - 4/96 2 tresvi& eey&olicyPaEn 2,908 Shot Lists 4/95 - 1/97 6/95 - 3/97 8/95 - 5/97 1095 - 6W97 3 HVI / ms-Miing TA 1,840 Share Lits 6/95 - 9/96 95 -11/96 095 - 2W97 196 - 497 4 lnd Tedunodg 251 ledivi 7/1/95 1/1/95 10/1/95 1/11_5 5 IPM Tedu] Assistance 555 Shot Lists 7/95 - 4/96 9195 - 6/96 11/95 - V/96 1/96 - 10/96 6 Soed CaufiteiosSpedalit 754 Sht Lists 9/1/95 11/1/95 I/1/96 3/1/96 7 Saed BeedngTA 170 lndivs 12//95 V1/96 4/1/96 I/296 I Tain4lnStuy Tounr 1,195 Shotn Lists 6195 - 9/96 8/95 - 11/96 I0O5 - 2/97 /95 -3/96 9 Ofm Cowltdng Contracts 186 Short Lists 6195 - tl95 M/95 - 10195 10/95 - 12/95 IW95 - 2/96 __________ ~~~~~~~suab-total 8.32 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Equipment and Goods to Sed Tet & Centific. Equipment 955 ICB 4/2/96 6/1/96 t/1/96 201/96 1 1 Seed Te & Certifir Equinau 945 is, 6/95 - 3/97 V/95 - 5/97 9/95 - 7/97 9IIM - 897 22 lead Pcung&M ketnnglEqfip. 2,370 ICB- 3/15196 5/15/96 7/15/96 101/296 13 Seed Proceedan&MrhedngEquip. 12790 ICBE 10/1/96 12/1/96 21/97 4/2/97 14 Seed Pocesirg&Mrketing Equip. 3,300 IC' 6/1197 8/l/97 10/1/97 I1V5S97 Is Seed Procesing&MorkatingEquip. 2,350 ICB- 1/25/98 10/21598 12/1598 V1599 16 S.,d Procssing&Mrkeing Plant 2,260 Is. 10/1/96 IV1196 2V/97 41197 17 Seed Pmcsing & Marketing Plsnt 2,260 is, 611/97 8/197 28/2/97 12/2/97 Is Seed Processing&Mvkesing PIant 2X260 IS, 6/1/98 1/1/98 101/9tm 1215/9 19 Se*d Proneesing A MSrkieing PlAet 2,260 IS 3/1/98 5/1/98 7/1/98 9/119 20 Seed Pmceuing&MerkesngPlAnt 600 LS 8/2/96 9/2/96 11/1(96 1211S6 21 Seed Fem Equip. (20Sets) 4.00 IC- 39 - 6/97 5/96 - U97 796-10/97 9S6 - fV97 22 Sed Fwm Equip. (20 Sets) 4.790 IS 2/97 - 5/98 4/97-719S 6/97 - 9/9 /97 1-/9 23 SedltFweoCropInpuus 2,100 _ S _ 2/96-6/98 4/96-8l9S 696-lOi9t /96-2298 24 Seed Pam CropTputs 1,900 IS, 2/96-6/98 4/96-8/98 6/96- [209 V896-12/98 25 Seed Fns Crop Inpus 2,030 IS 2/96 - 6198 4/96 - /98 6/96 - lO91 U96 - 129 26 HVI Equipmemt and Materials 6.100 ICCB 1/5/96 3/1/96 V/I26 7/2/6 27 HVI Equipmsent nd Mmteials 2,700 IC 3/1197 5//917 7//97 9//97 28 HVI Equipment nd Materias 2.200 ICB 3115/97 5/15/97 7115/97 9/15197 29 HVI Equipment ed Materials 1,370 IS, 6/95 - 3/97 8/95 - 5/97 9/95 - 7/97 2I/95 - S7 30 HVI Equipenent ndMeteiels 205 LS 3/96 6/96 5/96 - 96 7/96 -1096 9/96 - 12/96 31 HVI EupsnemutadMaterisls 980 DC 10/1/96 I221/96 VI97 4/1/97 32 HVI Eq!2pnutsnd Mauels 1,435 IS, 6/2/96 1/U/96 10/1/96 IVIS6 33 HVI EqlpnmetandMsteeials 975 IIS 6/95 - IS96 n95 - 396 /IO95 - 5/6 I225 - 7/96 34 /VI_ E2mtKndMeusis 12650 IS. 7/96-10/96 9/96-12296 I/96.2/7 1/97.4S97 35 HVI E mspnentsd Maeids 805 IS, 9/2/96 II/I2S6 1/1/97 3/1197 36 Clas /MktIn Schools 2,460 ICB S/1196 10/1/96 22/2/96 V21197 37 Clus/Mbitng Schools 250 IS 6/96 - 9/96 6 - 11/96 0/9 - W97 12/96 -4/97  81 Annex F REPUBUC OF UZBEKiSTAN CoTToN SUBSECTOR DEVELOPMENT PROJECT PLAN AND SCHEDULE FOR MAJOR PROCUREMENTS Ciatgery Item I Contrad t Bued Proc. Procurement Schedule ________ Group e P m Amnow Medw&d Decumlents Did Receit Contrat Award Begin Deive 31 Inipdm Sdediin 1425 ICB VI9 __/1/95 S12il95 2/S96 39 Inig eSdiadli 255 IS, 1/l/95 1O/I95 1V195 2V1t96 40 hIgdinSdali,g 460 LS 695 - I96 5/93 - 3/6 10/95 - 5/96 12/95 - 7:96 41 1n1 _adPMMp tM4ans 615 IS 1/1197 3/1/97 3/1/97 7/1/97 42 _ PFM hgua1_1a 295 IS 1/197 311i97 5/1/97 7/lS7 43 Sftd i3m_% 90 is lOil195 12/1/95 21/i96 4/1/96 SWPWt 6i1 CavII Works 44 SWdTTN" & cSuflbm 570 NO 6i1/96 Vl/96 10/1/96 1211/96 45 Gin I 1.d Bldg MoUft300LS 30 L 397 - S91 5i97 - 7/9 7/97-9/91 9/97 - 11/9 46 HV Lsbuuiu N05 NCR 6/1/96 1/196 1011,96 12/1196 47 CW4lMt Sd cbooh&P PIU 176 NCB VlM/S 1/01/95 12/1/96 2/1/96 41 1PM Fadilu 2,350_ NCB 10d1/96 V12i/96 _ Vl/97 4/11/97 Sb-btId 4.,U ___ Recrrae _ CoetadTaxes 49 PubiSc Seem, Salmi. 2,205 F/A _ _ __ _ 50 Otr RopeK CTIIco/rm 4.016 IS4L _ _ _ __ 5I_ Pit Scbrbw.C omtrame 3.260 U LS __ Sub-ted 9.551 _ Tee U,354 .   82 Anne G REPUBUC OF UZBEMSTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX G DISBURSEMENT AccouNTs By FINMCIERS (US$ MO) Participating The Government World Bank Totla Private of Enterpise Uzbekistan Amount Amount Amount Amount 1. Clvil Wborks 814.4 3,249.9 4064.3 2. Equipment - 5,307.2 21,839.5 27,146.7 3. TraIning - 1,195.2 1,1962 4. Technical Assistance 0.0 7,167.1 7,167.1 5. Investment Credit 7,724.3 0.0 31,005.3 38,73.7 6. Recurent Costs - 4,628.3 1,662.9 6,291.2 Total 7,724.3 10,749.9 66,120.0 84,504.3 REPUBUC OF UZBEKISTAN COTTON SUB-8ECTOR IMPROVEMENT PROJECT DISBURSEMENT BY SEMESTERS AND GOVERNMENT CASH FLOW (USS '000) _______________ __________ Financing Avible | Parucipang Private World Bank Total Costs to be The Government of Uzbeldstan _________ ________ Financed Amount Amount Amount Project Cash Fbow Cumulade _Costs Cash Flow I - - - 4,249.5 -4,249.5 *4,249.5 2 188.7 3,451.5 3,620.2 4,249.5 429.3 -4,878.8 3 168.7 3,451.5 3,620.2 10,640.2 -7,020.0 -11,8J9.8 4 694.6 8,806.7 9,501.3 10,640.2 -1,138.9 -13,037.8 5 694.6 8,806.7 9,501.3 16,961.9 -7,460.6 -20,496.4 6 1,386.2 13,900.3 15,286.5 16,961.9 -1,675.4 -22,173.8 7 1,386.2 13,900.3 15,286.5 6,751.3 8,535.2 -13.638.5 8 808.3 4,850.2 5,658.6 6,751.3 -1,092.7 -14,731.2 9 808.3 4,850.2 5,658.6 3,694.3 1,964.3 -12,766.0 10 804.3 2,051.3 2,855.6 3,694.3 -838.6 -13,6065. 1 1 804.3 2,051.31 2,855.6 - 2,855.6 -10,749.9 rowaI 7,724.3 66,120.0 73,844.4 84,594.3 -10,749.9 -10,749.9   83 Annex H REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX H A. PROJECT IMPLEMENTATION UNIT 1. The Project Implementation Unit (PIU), will report to the Deputy Chairman GOSKOMPROGNOZSTAT through its Director. It will be responsible for daily direction and coordination of project activities, assisting participants with implementation requirements, administering funding flows, monitoring progress under the components, and reporting to the Goverrnment, World Bank and other donors, as appropriate, on progress with project implementation. 2. The PIU was established under GOSKOMPROGNOZSTAT during CY1994 and expects to be fully staffed and ready for operations by mid-CY 1995. It is expected that the PIU will operate at full capacity for about three years during the stages of project start up and initial implementation. It will then be scaled back in phases to a smaller staff needed for monitoring, accounting and reporting for the remaining two years. The PIU will be staffed by Uzbek nationals and some foreign advisors, who will help initiate operations while training their local counterparts. In later stages, PIU functions will be absorbed into relevant Government organizations, completing the objectives of institutionalization. 3. The proposed organizational structure and funding channels for the project are illustrated in the following chart. 4. The Government will require technical assistance for establishing and running the PIU. While the PIU will have a qualified Director who would be an employee of the Government, foreign consultant assistance will be expected to be a principal resource, in the beginning, for ensuring prompt and efficient implementation of the PIU's technical, administrative and advisory functions. Foreign technical assistance will also be provided for advising in business development/credit operations, project accounting and procurement functions. Some equipment will be provided to support PIU office operations. A foreign advisor will be engaged to assist the Agent bank(s) with credit application reviews and approvals and administration under the credit line component of the project. 5. The counterpart staff will be trained by the expatriate advisors to perform unit functions and otherwise prepare themselves for lead responsibility for PIU actions. Therefore, support functions and duties of expatriate staff during the first year or two will shift to the counterpart staff during the second and third years. Expatriates' roles will correspondingly evolve from operations and training to that of being counselors and coaches. Their service levels will phase down as their individual counterparts become capable of executing daily operations. Certain units (procurement, accounting) may be capable of such changeovers earlier than in the general management and business development areas. At later stages of the program, and as the Uzbek banking system evolves, PIU business advice and credit oversight functions could be transferred to one or more of the banks that function as credit intermediaries. It might also be appropriate for the PIU, if requested, to arrange for guidance to project participants (seed companies, seed multiplication units) in financial and legal matters.  Annex H 84 Proposed Organizational Structure and Funding Channels for the Project |~~ _ __ _____ - Loan Project Working l Group Project Implementation Unit Participating K \ Director Credit-Line Payments to Bank(s) Consutants & Suppliers and ; |Admin. Fnc Prc Mon. Spec. Acct. ____________________ |Irigation IPM HSeed Certif Plant Protection] Seed Companies lfams ee/ Sedfam See frs Seed arms Seed fam ee m  85 Annex H 6. PIU departments will be providing guidance and operations oversight to subsidiary implementation units in each of the Government-managed project components. The PIU will also be providing them, and the seed companies and seed farms, with administrative support regarding procurement and funding actions, and World Bank approvals associated therewith. The PIU will also be responsible for setting up the overall project accounting system and arranging for periodic audit services, as required by the World Bank. B. PIU ORGANIZATIONAL STRUCTURE 7. The PIU consists of a management section and three functional service units: Finance, Procurement, and Administration and Monitoring. PIU MANAGEMENT 8. The PIU will be headed by a full-time Director with overall responsibility for project administration. The Director will be an employee of the GOU and appointed by, and reporting directly to, the Deputy Chairman of GOSKOMPROGNOZSTAT. To fulfill his assigned responsibilities, the Director will be authorized to recruit, manage and supervise the PIU's domestic employees and its expatriate consultants, and to decide and execute PIU operations. The Director will be assisted by the expatriate advisors. The PIU may also reserve some funds for other expatriate assistance, such as for solving unforeseen technical problems, conducting analyses or e.g., legal services. The Director may also engage other technical assistance, such as for required periodic audit services. The Director will regularly liaise with the World Bank's project staff and visiting supervision missions. 9. The Director's primary focus will be to direct the overall program and supervise the consultant team which will be supporting the PIU's functional units. The PIU loan committee will review and, as appropriate, endorse credit applications and submit them to the World Bank for its review and "No-objection. Finance Department staff will assist the bank(s) with initial administration of these loans, including preparation of typical documentation, periodic specification of interest rates and tracking repayments of principal and interest to the commercial bank(s) and the MOF. The Finance Department will also be responsible for setting up disbursing procedures, a program accounting system, and helping participants with accounting and reporting. Project accounting activities will include helping the bank(s) with the installation of a system to track the incidence of expenditures under the credit line and post them to the respective sub-borrower's loan principal. The Procurement Department will provide advice and assistance to GOU project participants to effect bidding, contracting and payment actions, and lender approvals, and could organize combined solicitations and transactions for groups of like items. This Department will also advise and assist, as requested, on external procurement actions by Seed Companies and seed farms and, if appropriate, regarding domestic purchases. The Procurement Department will also organize transmittal of documents to the World Bank for review and clearance and will maintain a database on all procurement activities. The Administration and Monitoring Department will be responsible for assisting Government and private project participants with actions to engage technical services (such as refining terms of reference, locating suitable candidates, evaluating offers, obtaining visas, making payments) for their components, and the efficient application and supervision of these resources.  Annex H 86 10. PIU duties and responsibilities can be grouped in three broad categories: PIU Program Service Activities * assistance, as requested, with institutional strengthening and control systems within participant components; * assistance, as requested, in coordinating activities under these packages, and between departments, to ensure timely and efficient implementation; * providing advice and guidance, as requested, to participants and potential participants on project implementation procedures and requirements, focusing on planning, procurement activities, project accounting, reporting requirements and preparations for periodic GOU or Bank supervision visits; * promoting the credit line component by providing information to potential applicants and providers of goods and services regarding steps for participating in the activities; * maintaining an information database on procurement services, audit and accounting services, technology services, suppliers of equipment, World Bank procurement and disbursement guidelines, standard and model bidding documents, and other resources needed by participants; * organizing training for participant staffs on procurement planning, and basic procurement and logistics management procedures; * assisting project staff, as requested, in learning about World Bank project documentation and procedures for obtaining needed clearances; * where appropriate, arranging for consolidated procurement on behalf of participants in cases of standardized and semi-standardized equipment; and * as requested, providing technical advisory services or assisting in the identification and procurement of such services. Project Administration Activities * Pre-review and approval of commitment and disbursement requests for small- value procurement transactions and referral of documentation to the World Bank for larger procurement; * clearing disbursement request packages, maintaining project accounting according to World Bank requirements, and arranging for regular audits of project activities; and  87 Annex H * arranging for transmittal of documents between participants and the World Bank, as appropriate, to ensure that proper and timely clearances are received. Project Reporting Activities * Monitoring and reporting on overall project implementation, e.g., progress in technical assistance, procurement of goods and services purchased through the Loan, disbursements, and audit activities; * assisting the World Bank supervision missions by collecting and processing participants' progress reports; * monitoring and reporting on disbursements under the Loan, including the administration of the Special Account; and repayments made by participants which are involved in the credit line aspect of the project; * highlighting implementation problems as they arise and offering recommendations for resolution; * preparing and forwarding periodic reports to the Government and, as required, the World Bank; and * preparing the overall Project Completion Report, which will be submitted to the World Bank. PIU UNIT FUNCTIONAL RESPONSIBILITIES 11. Finance Department. The Finance Department will be responsible for all matters dealing with project accounts, disbursement requests and loan administration of the line of credit. This Unit will also be responsible answering questions from potential loan applicants, ensuring understanding of and conformance with eligibility criteria, and helping the participating bank(s) with developing criteria and a system for processing sub-loans. Development of the accounting system for project components and credit line activities will take place in this Department as well. Specifically the Finance Department will be required to, inter alia: * Prepare and negotiate the Credit Line service agreement to be executed with the participating bank(s); * Work with Seed Companies, seed multiplication entities, project participants and the credit-line bank(s) to help promote good business planning and the use of the credit line; * prepare and distribute an operations handbook which advises potential sub- borrowers about environmental parameters that must be met within their seed multiplication and processing activities;  Annex H 88 * Review candidates' business plans and credit application proposals and confirm their consistency with project requirements and sub-loan criteria; * Work with the bank(s) regarding their administration of the Credit Line and sub- loan agreements - including collaborating with them and sub-borrowers, as necessary, regarding committed/undisbursed balances, posting of principal increments, interest rates, and processing and recording repayments of principal and interest by sub-borrowers and by the bank(s) back to the MOF; * Refer to the World Bank all final sub-loan applications for clearance; * Confirm satisfaction of sub-loan criteria, including environmental matters, if appropriate, of sub-projects based on GOU and World Bank requirements; * Analyze and consolidate sub-loan portfolio management reporting, including arrears; * Develop and administer the project's overall accounting, auditing and reporting procedures; Establish Special Account(s) according to World Bank criteria and procedures; Engage an accounting firm to review project accounts, accounting system, documentation controls, data bases covering financial, technical and procurement information, etc., as required for periodic audits; Make or arrange for disbursements and payments to participants, suppliers and contractors, and arrange for periodic replenishment of the World Bank Special Account and the project's local currency resources; Collect and submit documentation for contracts above US$250,000; Submit Statements of Expenditures for contracts under US$50,000; and * Prepare documents and submit withdrawal applications to the Bank for: (i) direct payments to third parties for contracts of US$250,000 and above; and (ii) replenishments of the Special Account. 12. Procurement Department. While project participants will be responsible for the procurement of most goods and services under the Loan and sub-loans, the PIU will assist them by providing procurement services, such as information on guidelines and procedures, assistance with document preparation, and the provision of technical support on a case-by-case basis. The Department will also assist participants, where appropriate, by arranging for collective procurement for items of a similar nature, especially those purchased from external suppliers. The Procurement Department will establish an information base on potential suppliers of goods and services which can be utilized by the participants. The Department will also provide information and data as needed to the World Bank for purposes of procurement supervision.  89 Annex H The Procurement Department will be required to, inter alia: * Set up the project procurement system and basic operations manual, including essential steps for different procurement modes: Local/International Shopping, NCB, DC, ICB actions; * help project participants develop procurement strategies, bidding packages, solicit for major program purchases and answer questions about the process; * provide or help arrange advice or technical support, as needed, for participants market searches, solicitations, procurement/contracting and/or inspection and other logistics management actions; * carry out collective procurement activities on behalf of participants, based on identification by the Administration and Monitoring Department of standard and semi-standard equipment; * develop and implement training for project participants in basic procurement, evaluation, contracting and logistics management practices; * outline a procurement plan and develop documentation packages for PIU solicitations and purchases of goods and services, (e.g., technical services, office/operations equipment, audit support, staffing contracts); * carry out Local Shopping/IS/ICB/DC actions for PIU and, as requested, other participants' purchases; and e prepare and transmit procurement packages to the World Bank for all required "No Objection" Letters on behalf of participants. 13. Administration and Monitoring Department. This department will be responsible for assisting project participants with actions to engage technical services for their components, and the efficient application, support and supervision of these resources. The Department will coordinate with the Procurement and Finance Departments and assist component staffs and participants by: * Helping assess problems or shortcomings, planning actions and budgets for technical assistance and developing appropriate terms of reference for needed consultants or technical specialists; * Researching possible sources of technical services and/or potential candidates for short-lists; * Developing solicitation packages, including the use of standard formats and contracting instruments, as appropriate; * Advertising for or contacting potential providers of technical services; * Receiving service/consulting proposals and conducting evaluations of offers;  Annex H 90 X Obtaining, if appropriate, GOU and World Bank clearances of invitation packages, evaluations and negotiated contracts; * Making arrangements for the arrival, establishment, application and efficient direction of the technical assistance contractors, as well as the quality, positioning and operational availability of their Uzbek counterparts; * Assisting directors and consultants of different components coordinate their plans and efforts so maximum program efficiencies and benefits are achieved; * Ensuring timely arrangement of payment mechanisms, physical support of contractors and clearances of payments for work completed; and * Reviewing and accepting final contract deliverables, and conducting contract close-outs, audits and contractor evaluation actions.  91 Annex H PROJECT IPLEMENTATION UNIT STAFFING CONCEPT Item Number of Three Year Foreign or People Input Requirement Local Staff (months) l Higher Level Staff | Director 1 36 Local Organization/Business Development 1 24 Foreign Specialist Assistant Manager 1 36 Local Economist 1 36 Local Technologist / Planning Specialist 1 36 Local Credit Officer 1 36 Local Procurement Specialist 1 18 Foreign Procurement Officer 1 36 Local Procurement Specialist 2 60 Local Financial Management Specialist 1 18 Foreign Senior Accountant 1 36 Local Disbursement Specialist 2 72 Local Credit Specialist for Agency Bank 1 18 Foreign Agricultural Economist 1 18 Foreign Assistant Level Staff | Credit Assistant 1 36 Local Technology Assistant 1 36 Local Planning / Reporting Assistant I 36 Local Accounting Assistant 2 72 Local Support Staff 6 216 Local   92 Annex I REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX I SUPERVISION PLAN AND SCHEDULE 1. Introduction. This project involves four components with participation of different institutions and enterprises at dispersed locations. Timely implementation and adherence to agreed project objectives and activities will require an effective supervision plan. 2. PIU Supervision. The PIU is expected to play an important role in project supervision, since it is primarily responsible for coordinating all the work related to implementation, budgeting, procurement, disbursement, audit, reporting, monitoring and evaluation and appraisal of all sub-loans. It will prepare quarterly supervision reports to be submitted to the World Bank for review. The component-specific implementation units will be responsible for the day-to-day implementation and supervision of their respective work programs as agreed in the annual work plans. Bank Supervision 3. Supervision Schedule. The proposed Bank supervision plan and supervision schedule for the project are summarized in the table below. 4. Project Launch Workshop. The main objective of the project launch workshop is to reinforce project implementation strategies of the various components. This will be carried out by holding a project launch workshop in Tashkent in June, 1995. It will bring together various representatives from institutions and enterprises responsible for implementation of each component. The main topics to be covered will be: (a) detailed description of each component's objectives, sub-components and detailed features; (b) implementation schedule; (c) mechanism to obtain project funds; (d) procurement procedures; (e) loan conditions and covenants; (f) PIU and Bank supervisory scope and content; and (g) monitoring and evaluation and performance indicators. 5. Supervision Missions. Periodic Bank supervisions will be undertaken by Bank staff assisted by appropriate technical specialists. The supervision missions will be supplemented by follow up activities to be undertaken by Agriculture Office staff at the Resident Mission. Local consultants will also be used to supplement supervision efforts on a continuing basis. Although this may likely result in higher than Bank average supervision coefficients, the emphasis will be placed on combining supervision missions with other Bank related activities to ensure cost-effectiveness and minimize manpower requirements. 6. The supervision missions will follow established Bank guidelines (Operational Directive No. 13.05). Thus, the Bank supervisions will focus on the following key indices:  Annex I 93 (a) compliance with project development objectives, legal covenants, project management performance, availability of counterpart funds; (b) compliance with procurement guidelines; (c) implementation schedule, project cost, and disbursements; (d) special account operations; (e) audit and accounts; (f) training and technical assistance; (g) environmental aspects; and (h) compliance with technical standards, sub-loan management, and financial health of the private sector seed companies and seed farms. 7. The implementation plan presented in Annex A will provide the basis for Bank supervisions, which will be reviewed during negotiations. 8. Mid-Term Review. A mid-term assessment of the project status, design, objectives, detailed features, organization and management, expected benefits in relation to costs and implementation will be carried out during the first quarter of 1998. The purpose of this assessment is to determine what has worked and what has not, constraints to channeling funds, delivery of technical assistance and training, implementation bottlenecks, technical, organization and management aspects. Following this mid-term review, appropriate changes, as required, both in scope and size, will be made to ensure timely completion of the project and achievement of project objectives. 9. Project Completion Report. A project completion report will be prepared at the close of the project in accordance with standard Bank guidelines.  94 Annex I TABLE 1: PROPOSED SUPERVISION PLAN AND SCHEDULE Approximate Date of Input Staff (mo/yr) Activity Expected Skill Requirement Weeks June 1995 Supervision mission Task Manager 24 (FY95) Project launch Irrigation Specialist workshop HVI Specialist IPM Specialist Seed Specialist Financial Analyst Procurement Specialist Disbursement Specialist September 1995 Supervision mission Task Manager 15 (FY96) HVI Specialist Seed Specialist Financial Analyst Procurement Specialist Institutional Dev. Specialist January 1996 Supervision mission Task Manager 15 (FY96) Irrigation Specialist HVI Specialist Seed Specialist Procurement Specialist Financial Analyst June 1996 Supervision mission Task Manager 15 (FY96) HVI Specialist Financial Analyst Seed Specialist Procurement Specialist Institutional Dev. Specialist September 1996 Supervision mission Task Manager 13 (FY97) Financial Analyst Seed Specialist Institutional Dev. Specialist  Annex I 95 Approximate Date of Input Staff (mo/yr) Activity Expected Skill Requirement Weeks March 1997 Supervision mission Task Manager 18 (FY97) (mid-tern review) Irrigation Specialist HVI Specialist IPM Specialist Seed Specialist Financial Analyst Procurement Specialist Disbursement Specialist September 1997 Supervision mission Task Manager 14 (FY98) HVI Specialist Seed Specialist Financial Analyst March 1998 Supervision mission Task Manager 15 (FY98) Financial Analyst Procurement Specialist Seed Specialist Irrigation Specialist September 1998 Supervision mission Task Manager 15 (FY99) HVI Specialist IPM Specialist Seed Specialist Financial Analyst March 1999 Supervision mission Task Manager 15 (FY99) HVI Specialist Seed Specialist Financial Analyst Irrigation Specialist September 1999 Supervision mission Task Manager 15 (FY2000) HVI Specialist Seed Specialist Financial Analyst Irrigation Specialist  96 Annex I Approximate Date of Input Staff (mo/yr) Activity Expected Skill Requirement Weeks January 2000 Supervision mission Task Manager 15 (FY2000) HVI Specialist Seed Specialist Financial Analyst Irrigation Specialist June 2000 Supervision mission Task Manager 20 (FY2000) and PCR preparation HVI Specialist IPM Specialist Seed Specialist Financial Analyst Irrigation Specialist  97 Annex J REPUBLIC OF UZBEKISTAN COTTON SUB-SECTOR IMPROVEMENT PROJECT ANNEX J LIST OF DoCumENTS AVAILABLE IN THE PROJECT FiLE 1. Government of the Republic of Uzbekistan: Uzbekistan Cotton Sub-sector Improvement Project supported by World Bank -- Feasibility Report, September-October 1993. 2. Charles L. Sciple: Uzbekistan Cotton Sub-sector Improvement Project, Pre- Implementation Study -- Government of the Republic of Uzbekistan, Report, July-August 1994. 3. Draft Proposal for Official Seed Policy; Draft Proposal for Seed Law. 4. Regulations on Joint Stock Companies; Memorandum of Association of Seed Companies. 5. Cameron/Hearn: Uzbekistan Cotton Sub-sector Improvement Project -- Integrated Pest Management Component, Draft Report, August 1994. 6. Donald N. Baker: Uzbekistan Cotton Sub-sector Improvement Project -- Real Time On- Farm Irrigation Scheduling, Mission Report, June-July 1993. 7. Cotton Sub-sector Improvement Project -- On-Farm Irrigation Scheduling Component, August 1994. 8. John Cameron: Uzbekistan Cotton Sub-sector Improvement Project, 1st and 2nd Preparation Missions -- Financial & Economic Assessment, Cotton Production Efficiency and Project Components, Report, July 1993. 9. Fred E. M. Gillham: Cotton Production, Research and Marketing in Uzbekistan, Report, January 1994. 10. Gillham/Mathews: Cotton Pest Management in Uzbekistan. 11. Integrated Pest Management Task Force: Integrated Pest Management in Developing Countries -- Experience and Prospects, Consultants' Report, 1992. 12. United States Department of Agriculture, Agricultural Research Service: Cotton- Integrated Pest Management -- Proceedings of a Symposium, September 1990. 13. Dennis Wilchelns: Economic Evaluation of Agricultural Water Resources in Uzbekistan, Report, November 1994.  Annex J 98 14. BMB Management Consulting for Development BV: Development of the Seed Industry, Uzbekistan, Mission Report, December 1994. 15. Roger J. Tomkins: Uzbekistan Cotton Sub-sector Improvement Project, Pre- Implementation Study -- HVI and Classing Systems, Report, August 1994. 16. Stephen Brown: Uzbekistan Cotton Sub-sector Improvement Project, Pre-Implementation Study -- Ginning, Report, August 1994. 17. John P. Farish: Uzbekistan Cotton Sub-sector Improvement Project -- Computer Management Support System, Report, July-August 1994. 18. Implementation Volume: Table of Contents - Seed Component - Technical Assistance; Marketing Component and Classing Schools - Technical Assistance; Terms of Reference for Development of Pesticide Policy; Integrated Pest Management Component - Technical Assistance; Irrigation Scheduling - Technical Assistance; Project Costing Data; Procurement Schedules ; Project Implementation Unit; Economic and Financial Analysis; Accounting and Financial Reporting Procedures; Flow of Funds; and Procedures for IBRD Loan Disbursements.   IBRD 25454 USSIAN~~~~~~~~~~~~~~~~RUSA 60' . \X~~~~~~~~~~~~~SSIAN EEDUERALTION 60' ~~~~~~~~~~~~~~~FD. ERaAIJAN KAZAKHSTAN A~~~~~~~~~~~~\ s < KCL2SP;Cn SeG < > \L ~~~~~~~~~~~~~~~~~~~~~LOke L3.Ik-Sh m GOLIA a/ Sea~~~~~~~~~~~~~C~po ~ KAZA K H STA N { \ \ / ) D CHIOA Mu a ~~~~~~~~~~~~~~~~~~~~~~~~~~~~CHINA \ | a Muynrn7t \ 25e ~~~~~~~~~~~~~ ~~~~~~~~~~~AFGHANISTAN > PAKIS. 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