Ukraine - Seed Development Project

Document of The World Bank Report No. 13228-UA STAFF APPRAISAL REPORT UKRAINE SEED DEVELOPMENT PROJECT APRIL 21, 1995 Natural Resources Management Division Country Department IV Europe Central Asia Region  CURRENCY EQUIVALENTS Currency unit: Karbovanets (Krb) Exchange rates: Krb per U.S. dollar September 1993 16,460 = US$1 March 1994 30,153 = US$1 September 1994 48,954 = US$1 December 1994 108,367 = US$1 January 1995 125,000 = US$1 WEIGHTS AND MEASURES Metric system FISCAL YEAR January 1 to December 31 Abbreviations and Acronyms BPD Bread Products Department of the MOAF BOU Bank Ukraina DUS Distinctness, Uniformity and Stability (of plant varieties) ERR economic rate of return FRR financial rate of return FSU Former Soviet Union GNP Gross National Product IA Implementing Agencies ICB International Competitive Bidding ISTA International Seed Testing Association LA Loan Agreement MOAF Ministry of Agriculture and Food MOF Ministry of Finance PMU Project Management Unit PSC Project Steering Committee SAR Staff Appraisal Report SCSQC State Commission for Seed Quality Control SCTPPV State Commission for Testing and Protection of Plant Varieties SENATECH Commercial Enterprise of UAAS for Sugarbeet Seed Production SU Seed Ukraine - Association of seed breeders and producers UAAS Ukrainian Academy of Agricultural Sciences UKRSACHAR Parastatal Ukrainian Sugar Production Corporation UkrExImBank Ukraine Export Import Bank UPOV Union Pour le Protection des Obtentions Vegetale (International Union for the Protection of New Varieties of Plants) VAT value added tax VCU Value for Cultivation and Use of Plant Varieties  UKRAINE SEED DEVELOPMENT PROJECT TABLE OF CONTENrS Page No. LOAN AND PROJECT SUMMARY .................................... I. BACKGROUND ..................1................... A. Introduction .............................1......... B. Recent Economic Developments . ............................1 C. The Agricultural Sector ................................... 2 D. National Seed System ................................... 4 E. Bank Assistance Objectives and Strategy ....................... 12 F. Lessons from Previous Bank Involvement ...................... 12 HI. THE PROJECT ................ .. ................... 14 A. Project Objective ..................................... 14 B. Rationale for Bank Involvement ......... ................... 14 C. Summary Description ................................... 15 D. Detailed Features ..................................... 15 E. Project Cost ..................................... 20 F. Financing ...................................... 20 G. Flow of Funds ........................... 22 H. Terms and Conditions for Onlending ....... .................. 22 1. Procurement ..................................... 23 J. Disbursements ..................................... 26 HI. PROJECT IMPLEMENTATION ................................... 29 A. Organization and Management . ............................ 29 B. Schedule of Implementation . .............................. 31 C. Accounts and Audits ................................... 33 D. Reporting and Evaluation ................................. 33 E. Bank Supervision ..................................... 33 This report is based on the findings of an appraisal mission in September 1994 which included A.H. Uhlig (Task Manager), M. LAIndell (Agro-Industrial Specialist) and M.C.-E. Buechting (Seed Enterprise and Marketing Specialist). The project was identified by a joint Bank and FAOABRD Cooperative Program mission in August 1993. Project preparation was carried out by two Bank missions (October/November 1993 and March 1994) led by the Task Manager and which included 0. Honisch (Agriculturist). M. Lundell (Agro- lndustrial Specialist). M.C.-E. Buechting (Seed Enterprise Specialist). P.G. Dickie (Plant Breeding Specialist). W. Couvillion (Financial Analyst) and A.R. Craft (Business Management and Banking Specialist). Peer Reviewers included J.P. Srivastava and L. Engstnnd. The Division Chief is Geoffrey Fox and the Department Director is Basil Kavalsky. -1-  -i'- IV. BENEFITS AND JUSTIFICATION .................................. 35 A. Benefits ....................................... 35 B. Justification ....................................... 36 C. Risks. ...................................... 37 D. Environmental Aspects ..................... .... ..... . . 38 V. AGREEMENTS REACHED AND RECOMMENDATIONS ....... ........... . . . 39 A. Agreements Reached During Negotiations ...................... 39 B. Recommendation ...................................... 40 ANNEXES 1. Seed Market Prospects .................................... 41 A. Sunflower ........................................ 41 B. Sugarbeet ........................................ 42 C. Maize ........................................ 43 2. Profiles on Seed Enterprises ............... ................. 45 A. Maize Seed Production Company ....... .................... 45 B. Sunflower Seed Production Company ........................ 53 C. Sugarbeet Seed Production Company ......................... 61 3. Detailed Cost and Phasing ..69 4. Financial and Economic Analysis ..75 5. Terms of Reference for Technical Assistance and Training . .81 6. Project Implementation Plan ..104 7. Procurement Plan and Schedule ..107 TABLES IN TEXT: 1.1 Agriculture Production Development. 3 2.1 Estimated Project Cost .21 2.2 Financing Plan .22 2.3 Summary of Procurement Arrangements .25 2.4 Estimated Schedule of Disbursements .27 3.1 Implementation Schedule .32 4.1 Estimated Project Seed Production and Markets ..................... 36 FIGURES: 3.1 Project Organization ............................... 30 MAP: Project Sites (IBRD 26088-R)  UKRAINE SEED DEVELOPMENT PROJECT LOAN AND PROJECT SUiMMARY Borrower: Ukraine Beneficiaries and Executing Agencies: Private Seed Production Companies; Regulatory Agencies of the Ministry of Agriculture and Food (MOAF); and Institutes of the Ukrainian Academy of Agricultural Sciences (UAAS). Loan Amount: US $32.0 million Terms: Standard IBRD terms with 17 years maturity including five years of grace. Onrending Terms: Subloans to the seed production enterprises ($US 23.9 million, 75% of Bank loan proceeds) would carry an interest rate spread that is 4.30 percentage points above the Bank's lending rate and would be repayable in up to eleven years, including a maximum of four years of grace. Loan funds benefitting public regulatory agencies, the UAAS and the Project Management Unit (PMU) and technical assistance to the seed enterprises would be passed on as budgetary allocations (25 % of Bank loan proceeds). Objectives: (a) Improvements in agricultural productivity and agricultural export earnings through the supply of quality hybrid seeds for maize, sunflower and sugarbeet; and (b) development of a competitive seed system through privatization of seed production. Description: The proposed project would provide financing, technical assistance and training for: (a) the development and initial operation of three private hybrid seed production enterprises; (b) improvements in the regulatory framework of the national seed system; and (c) the strengthening of the germplasm maintenance and improvement. Benefits: The expected benefits from the seed production component would be the demonstration of the viability of private seed production. The quality hybrid seeds produced under the project would increase agricultural productivity through lower seeding rates and higher yields. It would also increase agricultural exports and/or substitute for imports. The improved regulatory framework would facilitate the international competitiveness of the Ukrainian seed system through improved plant breeders' rights, variety registration and better access to foreign sources of germplasm. It would also stimulate the development of a private seed industry. The germplasm maintenance and improvement program would benefit domestic seed breeding and, in so doing, assist domestic seed production and seed exports in the medium and long term. The technical assistance for a study  -iv- of the agricultural research system would be a first step towards the development of a sustainable agricultural research system. Risks: The main risks for meeting the project's objectives are: (a) limited local experience in managing commercial seed production enterprises in a market-oriented economy; (b) Government's propensity to "overregulate" the domestic seed industry; and (c) the lack of experience in implementing Bank supported projects on the part of all implementing entities. These risks are worth taking in light of the robust financial and economic benefits of the project. They would be minimized by obtaining assurance from Government for establishing and maintaining a liberal pricing marketing and trade system for seed; by providing technical assistance and training for needed improvements in the seed regulatory framework; and by establishing a PMU supported by technical assistance. Environment: In supporting the production of hybrid seeds, the project would provide a type of agricultural input which would allow for substantial increase in agricultural production and productivity without embarking on environmentally taxing technologies. The potential occupational hazards through the generation of dust and the handling of hazardous chemicals in the project's seed plants would be mitigated by appropriate plant designs. Est. Project Cost: US $ 63.3 million (of which 48% is foreign cost and 52% local cost) Financing Plan: IBRD US$ 32.0 million Seed Enterprises US$ 31.3 million Total US$ 63.3 million Est. Cumulative Disbursements: FY96 US$ 13.0 million FY97 US$ 27.5 million FY98 US$ 30.0 million FY99 US$ 31.5 million FY2000 US$ 32.0 million Closing Date: September 30, 2000 Economic Rate of Return: 19% Poverty Category: N.A. Enviromnental Categeorv: "B" Map: IBRD 26088  UKRAINE SEED DEVELOPMENT PROJECT I. BACKGROUND A. Introduction 1.1 With a land area of 0.6 million km2 and a population of 52 million, Ukraine is the second largest country in Europe (after the Russian Federation), and the fifth largest in terms of population. GNP per capita was estimated at US $1,912 for 1993 down from US $2,359 in 1992, and from US $2,635 in 1991. 1.2 Ukraine declared its independence from the Soviet Union in August 1991. It now faces the immense challenge of creating the institutions of a sovereign state, and at the same time securing the transition from a centrally planned to a market-based economy. Until recently, efforts at stabilization and structural reform have been piecemeal; under the newly elected government, Ukraine's first comprehensive reform program has been formulated in an attempt to deal with the critical issues of macroeconomic instability and restructuring of the economy, including the acceleration of agricultural transformation. B. Recent Economic Developments 1.3 The economic decline since independence has been dramatic. By the end of 1993, the cumulative fall in real GDP since 1989 reached 40%. This trend accelerated in 1994: officially recorded industrial output declined almost 40% in January-April compared with the same period in 1993. The rate of inflation rose to almost 5,000% in 1993 up from 1,445% in 1992. In 1994, the inflation rate came down markedly, reaching 4 to 5% per month in the second and third quarters, primarily on account of flagging demand, itself the result of a large drop in real wages and a more stringent credit policy. 1.4 While external shocks, mostly brought on by the collapse of the former Soviet Union (FSU), have contributed to the economic decline, so too have past policies of the Government. Up until October 1994, Ukraine lacked a coherent macroeconomic stabilization and structural reform program. The Government resorted to administrative measures to manage the economy. Price controls (including fixed administered prices, advance notification of price adjustments, and an array of controls on profit margins) were imposed; the state order system controlled the flow of key commodities; the scope of export quotas and licenses was extensive; and the compulsory surrender of foreign exchange earnings at exchange rates well below market levels was enforced.  2 Ukraine Seed Development Project 1.5 In his inaugural speech to Parliament on October 12, 1994, the President announced Ukraine's first comprehensive economic reform program. This program has stabilization aspects which aim to bring about a reduction in inflation by implementing tight fiscal and monetary policies. Structural reform measures focus on promoting enterprise restructuring and competition by: (a) removing the inhibiting role of the state towards the private sector and letting markets function; (b) transforming state enterprises into commercial entities; and (c) hardening the budget constraint on enterprises. Specific measures include the lifting of most price controls, the unification of the exchange rate, the elimination of most export quotas, a sharp reduction of subsidies on bread and public utilities, the adjustment of imported energy prices to full cost recovery levels, as well as the implementation of a more targeted social safety net. The package of policy and structural reforms should create a conducive environment for implementing reforms and privatization in the agricultural and food sectors. C. The Agriculture Sector' 1.6 Agriculture has historically been an important sector in the diversified Ukrainian economy, together with a large industrial sector and a relatively small service sector. Currently, agriculture contributes about 30% to Net Material Product (NMP), employs some 20% of the labor force, and contributes approximately 30% to Ukraine's total merchandise trade. Given the country's abundant natural resources, agriculture should continue to play a significant role in the country's economic development. Resources and Land Tenure 1.7 Out of Ukraine's total land area of 60.4 million ha, 41.9 million ha are classified as agricultural land. Much of this land has highly productive deep black soil. Ukraine's climate is mainly temperate, and it has a flat to moderately rolling topography, allowing large-scale mechanized agricultural production systems. As of 1992, about 4.8 million people or about 20% of the labor force were directly employed in agriculture. The size of the agricultural labor force has declined over the last two decades both in terms of absolute numbers and in its share of the total labor force. During the Soviet regime, agricultural land was operated under three basic types of tenure: (a) centrally controlled collective farms, or kolkhozes, in which output and all assets, except land, was jointly owned by the members; (b) centrally controlled state farms, or sovkhozes, in which output and all assets were owned by the state; and (c) private "individual subsidiary farms," consisting of household plots of kolkhoz or sovkhoz members, and gardens and vegetable plots allocated to urban workers. I A detailed review of Ukraine's agriculture and current policy issues is presented in "UKRAINE-Food and Agriculture Sector Review" June 30, 1994. Report No. 11880-UA.  Chapter 1 3 1.8 Since independence in 1989, various forms of private land tenure have emerged, and the structure of tenure continues to change. The total number of agricultural enterprises has grown and continues to increase substantially, largely due to the entrance of 35,000 new individual private farms and, to a lesser extent, the splitting of large collective farms into smaller units. Agricultural land in individually managed private farms and household plots is currently equivalent to about 13% of total farmland and contributes about one-third of Ukraine's agricultural output. Performance 1.9 Although agricultural production grew until the late 1980's at an average rate of about 2 % per annum, factor productivities remained low, despite some of the best land resources within the temperate climate zone. Crop yields and conversion factors in the livestock industry are 25-50% lower than in developed countries with comparable resource endowments. Inefficiencies in the system of central economic management and collective agriculture, along with an increasingly outdated production technology, low-quality inputs (including seeds) and a poorly performing agricultural marketing and processing system, prevented the sector from realizing its high potential. 1.10 Agricultural output decreased by about 20% between 1990 and 1992 (Table 1.1). The production of principal crops such Table 1.1: Agriculture Production Development as cereals, sugarbeets, and (1%61970 = 100) sunflowers, for example, declined 1971/80 1980/90 1991 1992 1993 between 1986/90 and 1992/93 by Total Agnculture 121 133 120 110 108 11% percent, 28%, and 18%, Public Enterprises 126 143 123 101 95 respectively. Declines in the Private Enterprises 108 114 114 128 135 population and production of livestock were even higher, reaching about 30% during that period. 1.11 With the decline in domestic production, the breakdown of the inter-republican trade system, and the adoption of extensive trade restrictions, foreign trade in agricultural products declined dramatically to a fraction of its pre-independence level. During the late 1980's, Ukraine exported some five million tons of grains, two million tons of dairy products, and between three and four million tons of sugar. It also had been a significant exporter of improved germplasm to the FSU and Eastern Europe. By 1993, these exports had declined by more than 80%. During the same period, imports consisting mainly of feed grains declined by about 50%. 1.12 This reduction in production and trade undermined the traditional role of agriculture as a domestic source of food, employment, and export income. The decline also  4 Ukraine Seed Development Project compromised agriculture's potential role in the reconstruction of the country's economy. In addition, as a result of heavy subsidization of food consumers, agriculture became a growing fiscal burden and a significant factor in macroeconomic destabilization. Policies 1.13 Until recently, the Government of Ukraine made only small steps to reform agriculture because the sector's problems were widely assumed to be transitory and surmountable with greater access to advanced technology, better management, and temporary subsidies. The Government also moved slowly because of the fear that rapid reforms could lead to a collapse of production. However, macro-economic instability and the deterioration in 1993-94 of the financial and organizational capacities of the public sector to substitute for market relations between enterprises in the farm, input supply, and output marketing sectors made it clear that profound liberalization and privatization in agriculture (as well as in the rest of the economy) are essential for the country's economic recovery and development of agriculture. 1.14 The agricultural reform program introduced by the current administration is consistent with the recommendations made in the Bank's Food and Agricultural Sector Review and meets the essential requirements for the viability of the proposed Seed Development Project. Agricultural factor and product prices are being liberalized, state orders for agricultural produce are to be discontinued, and the State will procure the goods it needs for its budgetary organizations (ministries, armed forces, schools, hospitals, etc.) though competitive tender on the market. Virtually all export quotas on agricultural products are being abolished.2 These measures have been adopted in other sectors of the economy as well. The Seed Development project would be the first vehicle for the Bank to support the implementation of these reform measures in the agricultural sector. D. National Seed System Historical Background and Role 1.15 Ukraine has a long tradition in plant breeding and in supplying improved germplasm to Western and Eastern Europe. Prior to World War I, most West European seed breeders operated in Ukraine because the dry weather at harvest time helped produce seeds of superior quality, compared with those in Western Europe. After 1917, Western involvement in 2 Temporary quotas are still in place on food wheat exports. In addition, discriminatory taxation practices against private domestic and foreign trade enterprises are to be discontinued, infrastructure for handling the flow of agricultural inputs and outputs are to be included in the country's privatization programs, and land privatization and the establishment of a legal framework for the development of a land market are to be accelerated.  Chapter 1 5 Ukrainian seed production came to an end, and exports were only continued to the republics of the Soviet Union, for which Ukraine became a major supplier of germplasm and foundation seeds,3 especially for maize and sugarbeet seeds, and to a lesser extent for sunflower seeds. Today, with the mounting economic difficulties since independence, plant breeding has suffered significantly, the production of quality seed has declined, and with it the capacity to maintain levels of crop production and exports of grains and seeds. 1.16 Seed is an important input for crop production for two reasons. First, it normally represents about 10% of the variable production cost of crops, and second, the quality of the seeds used determines decisively the productivity of crop production through seeding rates and yields. Varietal improvements are generally estimated to have contributed 60% of the increase in crop yields in Ukraine, which averaged about 1 to 2% per year. All crop producers in Ukraine use improved seeds extensively. The percentage of crops planted with hybrid seed is 100% for maize, 40% for sunflower, and about 30% for sugarbeet. However, the physical and genetic quality of both open-pollinating seed varieties and hybrids is mixed and to a large extent responsible for the high seeding rates and relatively moderate yield levels prevailing in Ukrainian agriculture. 1.17 The domestic seed system annually produced about 6-7 million tons of seeds for grains, oilseeds, vegetables, and fodder crops. In addition, 5-6 million seed units (100,000 seeds per unit) of sugarbeet seeds and 3.5 million tons of seed potatoes were produced. This met the domestic demand for seed potatoes and allowed for significant exports, mainly to Russia, of sugarbeet, maize, and winter wheat seeds. Since independence in 1990, however, seed exports have declined drastically. Drought reduced the production of maize seeds in 1993 and left the country with a need to import while exports of sugarbeet foundation seeds ceased because of trade restrictions imposed by the Government. Currently, Ukraine exports annually 90,000 tons of Fl (first generation hybrid of two different parent lines) and open-pollinating seed and between 5,000 and 10,000 tons elite seed mainly to the FSU republics. Almost 70,000 tons of these are exported under trade agreements between the Government of Ukraine and the governments of other FSU states.4 Development of Varieties 1.18 Varietal development and maintenance of seed stocks is the responsibility of the Ukrainian Academy of Agricultural Sciences (UAAS), which was established as an independent 3 Foundation seed is the seed population used to produce the seeds planted by the farmer (commercial seeds). Foundation seed is also known as parent seed, basic seed, or elite seed. 4 The Fl and open-pollinating seeds consist of about 40,000 tons of seed for peas and oats, 25,000 tons of maize seed, and 3-4,000 tons of seed for sugarbeet and oil crops. The total value of these seed exports is approximately $90 million. The value of elite seed exports (com, sugarbeet, and some small grains) was about $50 million in 1993.  6 Ukraine Seed Development Project Academy in 1991. It has 51 research institutes and a network of 126 experimental stations specializing in testing new plant varieties. The most important research institutes are in Kyiv (sugarbeet, maize, and soybeans), Dnipropetrovsk (maize and oilseeds), Odesa (cereals, maize, and sunflower), Mironovskij (wheat), Kherson (fodder crops), and Kharkiv (maize and gene bank). The UAAS has about 7,000 scientists; about 300 of them have Ph.D. degrees, and more than 3,000 have Candidate of Science degrees. Foundation Seed Production 1.19 The production of breeder and foundation seeds is carried out by 228 experimental stations associated with the research institutes. These farms' primary responsibility is to produce breeder and foundation seeds as directed by the institutes. The farms are allowed to engage in other business, including food processing, as long as this does not interfere with their seed production responsibility. Most of these farms have drying, conditioning, and storage facilities to handle the seed crop. Commercial Seed Production 1.20 The production of commercial seeds involves the multiplication of foundation seeds into commercial generations, as well as the cleaning, sizing and chemical treatment of seeds. The multiplication of all but sugarbeet seeds is currently carried out by specialized farms licensed by the Ministry of Agriculture and Food (MOAF), and the seed processing of major crops is done in seed plants owned by the Bread Products Department of the MOAF. In the case of sugarbeet seeds, the multiplication is done by seed farms contracted by UKRSACHAR, a state owned conglomerate of the Ukrainian sugar industry, and by three seed plants owned by UKRSACHAR. Private seed production continues to be limited to a few joint ventures between multinational seed companies and local partners, including public entities. Seed Pricing 1.21 Seed prices used to be established by the MOAF. Prices for the breeder (UAAS), the seed producer, conditioners and the ultimate seed users (farmers) were set at a fixed percentage of the state procurement price established for the respective commodity for which the seed was used. These percentages for the various types of seed (breeder, foundation, commercial, etc.) were small in comparison to ratios of seed prices to output prices in Western seed markets. In general, this meant low prices to the breeder, moderate to very attractive prices to the seed-producing farms, low output prices for seed conditioning companies, and hence low commercial prices to the farms as the final seed users. As a result, seed prices did not reflect real demand and supply, and seed breeding and production was generally not a financially self- sustaining activity, but rather dependent on public funding and considered an activity producing a public good.  Chapter 1 7 1.22 Although seed pricing has been officially decontrolled, the fact that state contracting still accounts for over 70% of all seed marketing means that prices still reflect the old structure of controlled margins. The main reason for this is that the funds allocated for the purchases under the state contract system were budgeted on the basis of the old seed price structure, which made these budget per-ton-of-seed allocations into de facto maximum prices for publicly procured seeds. The removal of price controls throughout the economy and reduction of state contracts under the 1994 reform program will aid in reducing the MOAF's informal ability to impose price regulations. By limiting state purchases to meet the needs of budgetary organizations only, the Government is expected to withdraw from making purchases for all but small quantities of commercial seeds. Thus, price formation in the foundation and commercial seed markets will have to rely on the interaction of domestic supply and demand and Ukraine's deeper integration into foreign seed markets. Seed Marketing 1.23 The current system of marketing foundation and commercial seeds is changing from one based on state orders to one of contractual arrangements between farmers and seed suppliers, such as public entities (UAAS), state owned enterprises, collectives, and a few private seed producers. Although formal price regulation and public control of seed marketing is no longer mandated by law, practices still follow, to a considerable extent, the MOAF-administered system of the past because of the monopolistic behavior of the largely public agents involved in seed marketing and the lack of MOAF confidence in and experience with the workings of an uncontrolled market. Foundation seed produced and conditioned by the experimental farms is sold to the producers of commercial seeds (both hybrid and open-pollinated), who in turn sell these seeds to the seed conditioning plants. It is estimated that in 1993 about 70% of these transactions were subject to the state contracts but government involvement varies from crop to crop. 1.24 In 1992/93, excess capacity at the UAAS seed conditioning plant at Trostianets arose as a result of losing the foundation seed export market in Russia. The Institute for Sugarbeet therefore decided to enter into the production of commercial seed at this facility and formed the seed production association SENATECH5, which produces both foundation seed for UKRSACHAR, as well as commercial hybrid seeds which are sold in Ukraine and abroad (mostly Russia, Belarus, and Kazakhstan). SENATECH's sales of hybrid seeds reached about 1000 tons in 1993. 1.25 For sugarbeet seed, the primary customer for foundation seed (until 1992 the only customer) is UKRSACHAR. It purchases the foundation seed, places it with state and collective farms for the production of commercial seeds under contract, conditions the commercial seed at one of its three seed plants, and sells it to the sugarbeet producers. UKRSACHAR then buys SENATECH is an open joint stock company for the production of sugarbeet seed.  8 Ukraine Seed Development Project the sugarbeets from these producers and processes them into sugar. While UKRSACHAR pays the producer of commercial seed at contract terms it has not always paid SENATECH the agreed price for foundation seed. 1.26 For maize seed, the foundation seed produced by the UAAS institutes is sold to state and collective farms for the production of F1 hybrid seeds (commercial seeds). While the MOAF projects seed demand and supply for the following year, the institutes are effectively free to sell their foundation seed to those organizations and companies who are prepared to enter into contracts under the institutes' terms.6 1.27 The farms producing the Fl hybrid seeds sell their production (also under state contracts) to the 105 seed plants belonging to the MOAF Department for Bread Products. The seed plants dry and condition the seed and sell it to maize producers. The plants have an average annual capacity of between 1,000 and 10,000 tons each. Most of them were constructed in the 1950's and, with one exception, were never refurbished or modernized. This outdated and badly maintained equipment causes significant damage to the seeds during processing in these plants compromising germination and seeding rates. Contracts between the seed producing farms and the seed plants are entered into at the beginning of the production season. These contract prices are heavily influenced by government recommended commodity prices. 1.28 For sunflower seed, the system is less developed than in the other crops. The two institutes in Odesa and Zaporizhzhia have small, outdated seed plants with a capacity of about 1,500 tons each. These plants sell the foundation seed to producers of commercial seed (both hybrid and open-pollinated varieties), and then purchase the production of the foundation seed back from the seed producers, condition it, and sell it to the sunflower producers either directly or through the offices of the MOAF in each district. In 1993, these two plants produced between 3,000 and 4,000 tons of hybrid seeds equivalent to about 50% of the country's annual sunflower seed requirements. The rest of the seed requirements of the country are met mostly with open-pollinated varieties, the production of which is organized by the MOAF in the different districts of the country according to the seed needs forecasted by the MOAF for these districts. 1.29 Recent developments have started to change the structure of the market. For example, in sugarbeet seeds, SENATECH broke the monopoly of UKRSACHAR and increased the degree of hybridization. It has also reopened some of the important export markets for hybrid seeds, particularly in Russia and Kazakhstan. In maize, a U.S. company entered the market in 1991/92 with a seed production plant near Rivne and later also built a seed dryer near Cherkasy. Two private seed companies developed out of this venture, both of which are competing with the seed plants of the MOAF. The UAAS Institute in Odesa started to produce 6 Seed Ukraine is a quasi-govermmental association of Ukrainian seed breeders and producers. Among other duties, it is responsible for allocating commercial seed production for field crops (except sugarbeet) and for issuing export licenses for seeds.  Chapter 1 9 maize seeds using fertile germplasm, which requires detasseling7 instead of using the traditional male-sterility method. It was successful in managing the detasseling operations; it obtained higher-quality seeds, and secured higher prices than those used for transactions under the state contract system. Maize foundation and hybrid seed is also increasingly imported from other republics of the FSU at prices comparable to those in other heavily discounted world markets. 1.30 In 1995, state orders have been discontinued for all products, including seeds. Since Government purchases will be confined to those which meet the needs of budgetary organizations (and no budgetary organizations are involved in seed reproduction and processing) government seed purchases should include only small quantities of commercial seed. The vast bulk of seed marketing is expected to take place under contracts between enterprises, with the MOAF no longer expected to play an allocational or financial role. Deviations from the pricing guidelines of the old MOAF system will become the norm rather then the exception as state- owned enterprises are corporatized and become independent of MOAF directives. Seed Trade 1.31 Import and export of seed is largely confined to the FSU and is done mainly via intergovernmental agreements between the FSU republics. Seed imports have not been under quota but are subject to licensing. Almost all seed exports have been handled under a quota and licensing system.8 Under intergovernmental agreements, Fl hybrid exports in 1994 were set at 700 mt of sunflower seed and 12,500 tons of maize seed. The overall quotas for elite seeds for 1994 were 4,300 tons for grains and 27 tons for sunflower seed. Quotas for Fl seeds for sunflower and maize (as well as other grains) are apparently not differentiated from the overall quotas for grain and sunflower seed exports (2.5 million and 100,000 tons, respectively). 1.32 Export quotas used to be determined by the Cabinet of Ministers by estimating seed production and subtracting expected "domestic needs." The MOAF was responsible for ensuring the availability of seed to meet the planned export levels under intergovernmental agreements. Seed Ukraine (SU), an association of seed breeders and producers, was given responsibility for verifying the quality of seed for export and for administering the Ministry's quotas on seed exports. Licenses for export were issued by the Ministry of Foreign Economic Relations. In addition to the quota and licensing systems, agricultural commodities, including seed, were subject to export taxes ranging from 10-30% in 1993. The export taxes for maize seed and sunflower seed were 30%. These tariffs were eliminated in 1994. In addition to the licensing procedures and export taxes, seed exports have been hampered by surrender 7 Detasseling: Method of removing the male part (tassel) from the maize plant which has been designated as female parent. a With the exception of sugarbeet seed exports, which have been under license but not subject to quantitative restrictions.  10 Ukraine Seed Development Project requirements on foreign currency earnings (with conversion at Government-controlled exchange rates). 1.33 As of November 1, 1994, quotas on most exports from Ukraine were abolished: seed exports are no longer subject to any quotas or licensing restrictions. The exchange rate has been unified at the market rate; the surrender of foreign exchange earnings has been reduced and this conversion is done at the inter-bank currency exchange rate. As a result, the anti-export bias to which seeds have been subjected, appears to have been largely removed. The Regulatory Framework 1.34 The formal regulatory framework for the seed system has evolved gradually since the breakup of the FSU. Its most important elements include: (a) seed certification and laboratory testing for seed quality, administered by the State Commission for Seed Quality Control of the MOAF; (b) phytosanitary inspection service, administered by the Central State Inspection of Plants of the MOAF; (c) registration of new plant varieties and testing for distinctness to determine eligibility for plant variety protection, administered by the State Commission for Testing and Protection of Plant Varieties of the MOAF; (d) the Plant Variety Protection System, administered by the Patent Office; and (e) the registry of seed producers, administered by SU. The most pertinent legislation regulating the industry consists of the recently adopted Seed Law and the Law on Plant Variety Protection. The Seed Law is not considered fully satisfactory by international standards. Performance of the Seed System and Issues 1.35 The long-term performance of the seed system is probably best reflected in the prevailing yield levels in crop production and the level of seed exports. While yields are obviously influenced by systemic management problems at the farm level and the lack of timely available recurrent inputs, it is clear that the yield gap of 25% to 50%, in comparison to countries with similar ecological conditions, is at least partially attributable to the relatively low quality of the domestic seeds. Over and above the mediocre performance during the Soviet period, the system currently shows clear signs of deterioration, with the distinct possibility of losing its capacity to supply improved seeds to the domestic producer and export markets. In terms of reduced availability of improved seeds and lower agricultural production, the impact of such a turn of events could be a decrease in domestic crop production and annual export revenues on account of declining yields, resulting from the increasing use of degenerated open- pollinated seeds. The loss in gross value of agricultural production associated with these reductions are estimated to be equivalent to about $1 billion.9 9 The use of degenerated open pollinating seed is assumed to reduce yields by 20% or more in 1-2 years. (continued...)  Chapter 1 11 1.36 The seed system has suffered from institutional, financial, and technical problems similar to those of the agricultural sector as a whole. They are reflected in an inadequate quality and quantity of improved seed available for domestic producers and for export. Factors peculiar to the seed system which particularly affected the performance of seed breeding and production include: (a) the isolation of breeding from international scientific developments and its protection from international competition; (b) heavy dependence on public funding, which limits the allocation of resources to levels that, under the current fiscal crisis, severely curtail further seed development, the maintenance of the existing germplasm and breeding infrastructure and the retention of specialized scientific staff; and (c) the increasingly outdated capital stock used by the seed industry. 1.37 The Government is well aware of the importance of the seed industry for the productivity of agriculture and it also recognizes the critical state in which the seed industry finds itself. However, the MOAF tends to view technological backwardness as its main problem and underestimates the pervasive constraints imposed on the seed system by administratively determined access to seed breeding, production and processing, by administratively controlled seed pricing, marketing and trade, and by the weak incentives of the prevailing public ownership structure. 1.38 The Government has moved on establishing a legal basis for the seed system's regulatory framework by passing in 1993 a law on Plant Variety Protection and a Seed Law regulating the principles of seed production, release, and utilization. It is necessary, however to harmonize these laws and regulations with related international conventions and to free the domestic seed system from excessive public sector control if Ukraine is again to become a major supplier of germplasm and seeds to the world markets, as well as a beneficiary of international developments in the seed industry. To this end, plant variety protection legislation should be harmonized with the International Union for the Protection of New Varieties of Plants (UPOV), and the Ukrainian regulations for seed certification and seed testing should be harmonized with OECD and the International Seed Testing Association (ISTA) conventions. The system of variety registration currently in place appears inefficient and overly expensive. Services for registration and variety testing should be increasingly based on a self-financing basis by introducing a system of user fees. In addition, the Seed Law would need to be adjusted to fully reflect the liberalization of breeding, production, pricing, marketing and trade of seed in accordance with the Government's economic reform program. 1.39 In 1993, as a result of the mounting problems in the supply of seeds, the Government decided to embark on an investment program to construct ten new seed plants for maize and sunflower seeds. The cost for the program was estimated at US $70 million, of which about 90% were estimated to be foreign cost for imported equipment and machinery to be 9(. . continued) This would reduce grain production by 8 million tons ($600 mnillion), sugar production by 900,000 tons ($300 million), and oilseed production by 600 thousand tons ($100 million). Other field crops would also suffer falls in production.  12 Ukraine Seed Development Project financed by external borrowing. The Government requested financial support from the Bank for the establishment of three of the ten plants, while the remaining seven of the program were to be financed by bilateral and private foreign investment and operated as public enterprises under the MOAF and SU. The proposed project responds to this Government request. Construction of the parallel public program was scheduled for 1994, but financing difficulties have delayed its implementation. E. Bank Assistance Objectives and Strategy 1.40 The objective of Bank assistance to Ukraine is to support the transition to a market economy. Economic and sector work, and project financing are focused on establishing an economic and institutional environment conducive to: (a) private sector development; (b) transferring public assets to the private sector; (c) realizing the agricultural potential; (d) developing the financial sector; and (e) establishing a social safety net. 1.41 In agriculture, the immediate Bank objectives are to support continued market and price liberalization, to establish competitive input-output marketing systems, and to assist in providing essential inputs and technologies for the development of an efficient agricultural production system. In parallel, but with results expected more in the medium term, as reforms take hold, Bank support to agriculture would focus on promoting land tenure reform and the establishment of a functioning land market, building sustainable extension and advisory services for restructuring, and supporting privatized agricultural production, marketing, and processing enterprises. F. Lessons from Previous Bank Involvement 1.42 So far, experience in implementing Bank-supported projects in Ukraine is confined to an Institution Building Project and a Rehabilitation Loan. Accordingly, there is only limited country specific implementation experience on the Bank side and practically no exposure of the Ukrainian institutions to the specific procedures governing the implementation of Bank investment operations. These factors have been taken into account and are reflected in the modest scope of the proposed project, the introduction of a Project Management Unit (PMU), and the provision of technical assistance to the implementing agencies, including the PMU. The mutual lack of experience in working with each other may require a supervision intensity exceeding standard Bank allocations. 1.43 The Bank's experience worldwide with seed development projects suggests that: (a) interventions should embrace, to the extent practical, the whole seed system and be oriented towards long-term growth as opposed to short-term, ad hoc involvement;  Chapter 1 13 (b) seed sector policies should be conducive to the development of a self-sustaining seed industry and the active participation of the private sector; (c) the linkages between the seed system and agricultural research need to be reinforced; (d) free-standing seed projects have performed better than interventions based on a component approach; and, (e) investments in institutional development, technical assistance, and training have generally been decisive elements for good performing seed projects.  II. THE PROJECT A. Project Objective 2.1 The principal objective of the project is to improve the national seed system's capacity to produce high quality seed efficiently. In the short-term, the project aims to arrest the decline in the domestic availability and exports of quality seed by supporting the establishment of private production of high quality commercial seed using domestic and imported germplasm. The project would facilitate the development of a competitive seed system in the medium term by demonstrating the efficiency and effectiveness of private seed production, by improving the regulatory framework for the seed system, and by assisting in the establishment of a sustainable and efficient system for germplasm maintenance and plant breeding. With the liberalization of pricing, marketing, and export (recently agreed with the Bank under the Ukraine Rehabilitation Loan), domestic seed prices will rise substantially over the medium term reflecting the contribution of quality seed to crop yields, thereby allowing seed production and processing to become a financially self-sustaining activity. The seed enterprises will also enhance their viability by exporting part of their output, mainly to FSU markets where Ukraine has a demonstrated ability to sell quality hybrid seed. B. Rationale for Bank Involvement 2.2 Following the Bank-Government discussions of the findings and recommendations of the Food and Agriculture Sector Review, the Minister of Agriculture requested Bank assistance for the rehabilitation of hybrid seed production. Such a project was identified as the first possible Bank operation in agriculture because of: (a) the Government's priority for modernizing seed production and its preparedness to liberalize seed pricing and marketing and to open up seed production and marketing to the private sector; and (b) the attractive and robust economics of producing and using hybrid seed, which protects the viability of such a project even under the difficult economic circumstances in the country. In the absence of a well- functioning financial intermediation system, the proposed project is confined to one processing plant for each of the three major crops grown on the basis of hybrid seed. The project would assist in the creation of new private enterprises to process commercial seed. These new enterprises will be the direct competitors of the state enterprises under the MOAF, which have monopolized commercial seed production. In addition to developing private seed production, the Bank's intervention would also facilitate seed trade by strengthening the variety protection and seed testing system and would pave the way for private plant breeding by strengthening plant breeders' rights and introducing royalty payments to seed breeders. 2.3 The private sector approach of the proposed project is recognized by the Government to be experimental and is seen as a vehicle to test and demonstrate the effectiveness of an alternative model of seed production, marketing, and trade. Bank involvement would be critical because the emphasis on privatization and on the requisite improvements in seed pricing, marketing, and trade and in the regulatory framework are not sufficiently addressed. Bringing about these changes in the institutional, economic, and regulatory framework would be beyond  Chapter 2 15 the reach of the private sector, without the formal agreement on these aspects reached with the Govermnent within a Bank supported project. Bank participation would also be justified to help ensure effective implementation in an environment in which there is no experience with externally supported investment projects, and considerable policy and administrative instability. These institutional, policy-building, and production objectives of the project are consistent with the Bank's Country Assistance Strategy. C. Summary Description 2.4 The size and complexity of problems facing the national seed system and the risks in effectively implementing a large multi-component project by institutions with largely untested implementation capacity necessitate a small project based on selective interventions in the seed system. The proposed interventions have been selected in light of their potential effectiveness in meeting the stated project's objectives and the feasibility of their implementation in the existing country environment. 2.5 To meet the project's short term objective of improving the supply of quality seed for the domestic and export market, the project would provide financial and technical assistance for: (a) the development of three private enterprises specializing in the multiplication of domestic and imported parent hybrid seed for maize, sunflower, sugarbeet, and their processing and marketing; and (b) the germplasm maintenance and development for three leading domestic suppliers of hybrid maize, sunflower, and sugarbeet seed. To help meet the project's medium term objective of developing a competitive seed system, the project would provide financial and technical assistance for: (a) improving the regulatory framework for the seed system; (b) the development of an agricultural research strategy and plan; and (c) the Ukrainian Institute for Agro-Ecology and Biotechnology. In addition to these specific interventions in the seed system, the liberalization of seed pricing, marketing, and trade implemented within the context of the Government's economic reform program, would establish the enabling policy environment to enhance the efficiency of the national seed system. To facilitate efficient project implementation, the project would also support a Project Management Unit (PMU) which is legally a part of the Ministry of Finance. The geographical location of the proposed investments are indicated in the attached map. D. Detailed Features Hybrid Seed Production Component (US $46.60 million) 2.6 The project would provide fiancing to three newly established private seed production enterprises for: (a) the equipment and civil works required to operate the seed conditioning facilities; (b) certain auxiliary agricultural equipment and machinery for seed multiplication; (c) working capital; and (d) technical assistance and training. Initially, these companies would each concentrate their activities on the production of only one type of hybrid  16 Ukraine Seed Development Project foundation and commercial seed, i.e. one each for maize, sugarbeet, and sunflower. After gaining managing and marketing experience they would be expected to expand vertically and horizontally into the production of other types of seed as well as engage in breeding, as is customary for traditional seed companies in Western countries. 2.7 All three enterprises would invest mainly in seed plant machinery and equipment in order to establish seed conditioning operations which are capable of producing the quality of seed needed to compete in world markets. Adequate buildings are available for the sugarbeet and sunflower companies in which this new machinery and equipment can be installed with small additional adjustments. New facilities will be constructed for the maize seed company, however. It will also be necessary to purchase field machinery and equipment to enable the maize and sugarbeet companies to ensure the efficient multiplication of parent seeds on contract seed multiplication farms. 2.8 During the first two years of operation, all three enterprises will have significant local borrowing requirements to cover initial working capital needs. Most of the working capital in the first year of the project is needed to cover the value added tax payments to be made in local currency on imported equipment. In the second year of the project, the main working capital needs are for payments to contract farmers for multiplying foundation seed. Financial projections (Annex 2) indicate that these borrowing requirements will cease in the third year of operation, as profits accrue and become sufficient to cover working capital needs. 2.9 To ensure that the new companies are managed efficiently, the qualification of their key management staff will have to be satisfactory to the Bank, and they will receive training and technical assistance during the first two years of operation. Profiles of the three prospective seed production enterprises, and terms of reference for the proposed technical assistance and for training are presented in Annexes 2 and 5 respectively. 2.10 Maize Subcomponent (US $22.65 million). Construction of a seed conditioning plant to handle 5,000 tons of Fl hybrid seeds annually. This includes: (a) construction management and supervision, and acquisition of the equipment necessary for receiving, sorting, drying, shelling, bulk storage, cleaning and sizing, treating, bagging, and storing the seed, as well as supply of the most important spare parts (about US $9.00 million); (b) equipment to refurbish existing facilities to handle 2,000 tons of foundation seed annually, including eight huskers, three gravity tables, three shellers (about US $0.34 million); (c) auxiliary equipment for field operations such as seed maize harvesters (US $0.77 million); (d) laboratory equipment, including seed counters, germination chambers, cold test chambers, and moisture testers (about US $0.04 million); (e) computers, printers, and software (US $0.01 million); (f) civil works for preparing the construction site and construction of buildings for administration, laboratory, seed sizing and storage, and all foundations (equivalent to about US $1.5 million); and (g) training for nine person-months and technical assistance in general management, plant management, financial management, and seed quality management (about US $0.30 million). The plant's quarterly working capital requirements are estimated to reach a maximum of about US $8.21 million in the second quarter of the first year of operation. Over the pre-operational year of the  Chapter 2 17 enterprise, the value added tax (VAT) payments on imported equipment generate most of working capital needs. In the first two quarters of the first operational year, payments to farmers for multiplying foundation seed (which the plant then processes for final sale) boost quarterly working capital requirements (in local currency) to an equivalent of about US $8.2 million. By the end of this first year, accrued profits are sufficient to cover working capital requirements. 2.11 Sunflower Subcomponent (US $9.65 million). Acquisition and installation of machinery and equipment into an existing building to condition 3,910 tons of hybrid and 90 tons of foundation sunflower seed annually. This includes installation management and supervision, and all machinery and equipment for receiving, drying, precleaning, bulk storage, sizing, treating, bagging, and storing the seed, as well as supply of the most important spare parts (about US $3.80 million); computers, printers, and software (about US $0.01 million); civil works for the preparation of the land and renovation of the existing building as well as construction of scales (about US $0.67 million); training for nine person-months and technical assistance in general management, plant management, financial management, and seed quality management (about US $0.30 million). The plant's quarterly working capital requirements are estimated to peak at about US $3.93 million in the second quarter of the first year of operation. In the first year of the project, working capital requirements are generated largely by VAT payments on imported equipment. In year two, payments to farmers for multiplying foundation seed to be processed and sold are the main source of working capital needs. 2.12 Sugarbeet Subcomponent (US $14.29 million). Acquisition and installation of machinery and equipment into existing buildings to condition 1,450 tons of hybrid and 56 tons of foundation sugarbeet seed annually. This includes installation management and supervision, and all machinery and equipment for receiving, drying, precleaning, bulk storage, sizing, treating (and pelletizing), bagging, and storing the seed, as well as the most important spare parts (about US $4.12 million); auxiliary machinery and equipment to handle the field operations of seed production, including seed drills, sprayers, steckling harvesting and planting machines and combines, (about US $0.61 million); dryers US $0.3 million; computers, printers, and software (US $0.01 million); civil works for refurbishing the existing facilities and the yard (about US $0.42 million); training for nine person-months and technical assistance for general management, plant management, financial management, and seed quality management (about US $0.30 million). The plant's quarterly working capital requirements are estimated to peak at about US $7.32 million in the second quarter of the first year of operation. In the first year and a half of the project, the plant's largest working capital needs are to pay for foundation seed multiplication before processing for final sale, and to pay VAT on equipment imported to refurbish the plant. Regulatory Framework Component (US $2.34 million) 2.13 The project would finance equipment, technical assistance, and training for the regulatory agencies responsible seed quality control and for the testing and protection of plant varieties. These elements of the seed system need upgrading to allow the development of an  18 Ukraine Seed Development Project efficient, internationally competitive, and sustainable seed industry. Terms of reference for the technical assistance and training are given in Annex 5. 2.14 Equipment (US $2.21 million). Equipment would be provided for seed certification laboratories managed by the State Commission for Seed Quality Control (about US $0.24 million), and laboratory and field equipment for the variety testing system under the State Commission for Testing and Protection of Plant Varieties (US $1.97 million). Procurement of the laboratory and field equipment for the variety testing system would be subject to submission of a plan, satisfactory to the Bank, for modernizing the system following the review (by September 30, 1995) of the plant variety testing system under the technical assistance program proposed in paragraph 2.15. Assurances to this effect have been obtained during negotiations. 2.15 Technical Assistance (US $0.11 million). Specialized consultant services would be provided for reviewing the seed legislation (US $0.02 million) and the plant variety testing system (US $0.04 million); and for assisting in improving Distinctiveness, Uniformity and Stability (of varieties) (DUS) testing and seed certification (US $0.03 million); for upgrading the crop inspection system (US $0.01 million); and for operating electrophoretic equipment (US $0.01 million). Following the review of the seed legislation, the MOAF and the UAAS would provide the Bank with plans to amend or modify the existing legislation to implement the recommendations of the review. Assurances to this effect have been obtained during negotiations: this plan would be submitted to the Ukrainian Parliament by March 31, 1996. 2.16 Training (US $0.03 million). External training would be provided for three Ukrainian technicians in the organization and management of seed certification trials. Germplasm Maintenance and Improvement Component (US $2.91 million) 2.17 The project would provide for critical investments and training for the germplasm maintenance and improvements in UAAS research institutes in Kyiv, Odesa, and Zaporizhzhia. This would help sustain a flow of quality breeder and foundation seed to the seed-producing enterprises under the project. In addition, this component would provide technical assistance for a review of the Ukrainian agriculture research system to identify a suitable strategy for agricultural technology generation and a program for adjusting the structure and focus of the current system to Ukraine's needs and to ensure its efficiency, effectiveness, and sustainability. 2.18 Sugarbeet Institute (US $0.96 million). Acquisition of precision plot machinery including about four harvesters, four tractor-mounted, four-row seeders (US $0.62 million); laboratory instruments, such as betalyzers, automatic polarimeters, seed quality testing equipment (US $0.10 million); glassware, reagents, spare parts and scientific literature (US $0.06 million); 10 computers and specialized software (US $0.04 million); and 12 months of external training (US $0.15 million). 2.19 Plant Breeding and Genetics Institute (US $0.68 million). Precision mechanization for field trials including about two plot harvesters with maize equipment, two  Chapter 2 19 tractor-mounted, four-row precision seeders, and two stationary precision plot threshers, plus necessary spare parts (US $0.41 million); laboratory instrumentation, reagents, glassware, and scientific literature (US $0.11 million); five sets of computers and specialized breeding and experimental software (US $0.02 million); and 12 months of training (US $0.15 million). 2.20 Oilseeds Institute (US $0.65 million). Acquisition of field experimental machinery consisting of two precision plot combine harvesters with sunflower equipment, two stationary precision plot threshers, and two precision seeders, all delivered with a supply of most frequently needed spare parts (about US $0.37 million); laboratory equipment, such as small growth chambers, oil and N autoanalyzers, pH meters, dryers, seed counters, glassware, and reagents (US $0.02 million); scientific journals and literature (US $0.06 million); about five computers and specialized biometric and breeder software (US $0.02 million); and 12 months of training (US $0.15 million). 2.21 Agro-Ecology and Biotechnology Institute (US $0.40 million). Acquisition of laboratory equipment (US $0.20 million); chemicals and reagents (US $0.10 million); and technical assistance (US $0.10 million) for advanced methods for genetic definition of plant varieties. 2.22 Agricultural Research Review (US $0.22 million). Provision of about 225 days of foreign and 450 days of local consultant services, subsistence expenditure for external consultants, and local transport. Project Management Component (US $0.34 million) 2.23 To ensure efficient and timely implementation, the project would provide the PMU with office equipment (US $0.01 million); a project manager, an assistant, and one bilingual support staff member for a period of three years (US $0.03 million); operations expenses for the PMU including external audits of project accounts and statements of expenditures (US $0.07 million); and 16-month technical assistance to the PMU (US$0.23 million). Seed Marketing and Trade Policy Measures 2.24 The Government of Ukraine has embarked on a broad economic reform program which includes the liberalization of production, marketing, and trade of all seeds from state orders, price controls, and export quotas. The effective implementation of these liberalization measures in the seed sector and their maintenance would be monitored. Assurances have been obtained during negotiations that the seed marketing and trade liberalization measures specified for the seed sector in the Seed Policy Letter by the Minister of Economy (dated September 9, 1994) would be fully applied and maintained. These measures include elimination (for hybrid seeds for maize, sunflower, and sugarbeet) of seed pricing restrictions, restrictions on purchase and sale of seed, and quantitative export and import restrictions governing seed trade.  20 Ukraine Seed Development Project E. Project Costl' 2.25 The total cost of the project, is estimated at US $47.8 million, excluding taxes and duties of US $15.5 (Table 2.1). About US $30.7 million of the total are foreign costs and US $17.1 million are local expenditures." These estimates are based on March 1994 prices prevailing in the international market and on local cost and price data gathered in March 1994. Local costs were updated to December 1994 cost levels in line with domestic inflation and changes in the exchange rate. Domestic sales prices were also revised to reflect December 1994 levels. Physical contingencies of 18% and price contingencies in accordance with Bank guidelines'2 have been added to the base cost. Physical and price contingencies amount to approximately 21 % of the project's base cost. Because public sector entities are exempted from inport duties, import taxes are included in the project cost only for the imported equipment benefitting the private seed production enterprises. Including import duties and value-added taxes, the project cost is US $63.3 million. F. Flnancing 2.26 The Bank loan of US $32.0 million would be equivalent to the project's foreign exchange (US $30.65 million) and about 4% (US $1.35 million) of its local expenditures. The Bank loan would finance 51 % of total project costs including taxes and duties: this is equivalent to 67% of project costs net of value-added taxes and import duties. The loan would finance the cost of: (a) investment for equipment and machinery and technical assistance and training for the seed production companies, the regulatory framework component and the germplasm maintenance program; (b) 50% of the civil works cost for the maize seed production plant; and (c) the cost of the PMU including related technical assistance. The participating seed enterprises would finance the civil works cost (except for one half of the civil works cost of the maize plant, which would be funded by the Bank loan), VAT and import taxes on imported equipment, and working capital requirements through initial share holders equity and domestic borrowing of the equivalent US$31.3 million (49% of total project cost). Bank Ukraina (BOU), a local bank, has agreed to provide the short-term funds for covering part of the companies' working capital, estimated at about US $19.5 million. to Project costs are calculated in U.S. dollars only because the instability of the karbovanets makes it impractical to quote prices in domestic currency. "Value-added taxes and import duties equivalent to US $15.5 million are included in total local cost estimates in Table 2.1 12 March-December 1994 (for foreign costs only): I%; 1995: 1.5 %; 1996: 1.8%; 1997: 2.6%; 1998: 2.5%; 1999: 2.5%.  Chapter 2 21 TABLE 2.1: ESrTMATED PROJECr COSmS (US$ millions) % of Base Foreign Local Total Cost HYBRID SEED PRODUCTION: Maize: Equipment & machineiy 10.15 2.49 12.64 Civil works 1.50 1.50 Working capital 8.21 8.21 Technical assistance and training 0.30 0.30 Sunflower: Equipment & machinery 3.81 0.94 4.75 Civil works 0.67 0.67 Working capital 3.93 3.93 Technical assistance 0.30 0.30 Sugarbeet: Equipment & machinery 5.03 1.22 6.25 Civil works 0.42 0.42 Working capital 7.32 7.32 Technical assistance 0.30 0.30 Subtotal 19.89 26.70 46.60 90 Equipment & machinery 18.98 4.65 23.63 Civil works - 2.59 2.59 Working capital - 19.46 19.46 Technical assistance 0.91 0.91 REGULATORY FRAMEWORK Equipment 2.21 2.21 Technical assistance & taining 0.14 0.14 Subtotal 2.34 2.34 4 GERMPLASM MAINTENANCE: Equipment 2.13 0.13 2.26 Technical assistance & training 0.62 0.03 0.65 Subtotal 2.75 0.16 2.91 5 PROJECT MANAGEMENT: 0.28 0.06 0.34 1 TOTAL BASE COST 25.26 26.92 52.19 100 CONTINGENCEES: Physical contingencies 4.55 4.85 9.40 18 Price contingencies 0.84 0.87 1.70 3 TOTAL PROJECT COST 30.65 32.64 63.30 121 Including value-added taxes and import duties equivalent to US $15.48 million. 2.27 Grant cofinancing possibilities are being discussed with several donors, which have indicated interest in providing for the cost of the PMU and for the technical assistance needs and training, equivalent to approximate US $2.0 million. These cofinancing possibilities  22 Ukraine Seed Development Project need confirmation. Agreement has been reached during negotiations that once such grant resources become available, the Borrower and the Bank would determine whether to allocate the corresponding loan funds to other categories or to cancel the funds. G. Flow of Funds 2.28 Loan proceeds would be channeled through the Ministry of Finance (MOF) which would, on behalf of the Borrower, transfer these funds to the implementing entities in the following ways: (a) investment funds allocated to the three private seed production companies would be administered by UkrExImBank, acting as a financial agent between the Ministry of Finance and the seed production enterprises; and (b) investment funds allocated to the regulatory agencies of the MOAF, the UAAS breeding institutes and the PMU would be channeled through a Special Account (SA) to be established in a commercial bank (para. 2.39). 2.29 The financial agency arrangement was chosen because of the lack Table 2.2: Financing Plan of an effective system for financial Amount % of intermediation and because Government line Sources USS Total agencies lack experience in acting as a IBRD 32.00 SI financial agent. This arrangement is Seed Enterprises 31.30 49 justified by the pilot nature of this project establishing seed enterprises outside the TOTAL 63.30 100 public sector. The Borrower has confirrned the financial agent (UkrExImBank) and a financial agency agreement will be signed between the MOF and UkrExlmBank. H. Terms and Conditions for Onlending 2.30 About US$ 23.9 million, or about 75 % of the loan proceeds, would be passed on by the borrower to the Project's financial agent which would pass on these funds as subloans to the private seed enterprises. Since almost all of these funds would be used for payments for imported goods and services and given the prevailing monetary instability in the country, these subloans will be made in US dollars, and payment of interest and principal would be made in US dollars or in local currency equivalent at the exchange rate used for converting export earnings into local currency at the time of repayment. The MOF as the representative of the Borrower will pass on the loan proceeds to the financial agent at an interest rate of 4 percentage points above the standard Bank's lending rate. UkrExImBank would pass on to the seed  Chapter 2 23 enterprises at a rate not to exceed 4.30 percentage points above the Bank's base rate to cover the financial agent's administrative cost. The credit risk would be borne by the Government. The cost of the default risk to the Government would be defrayed by the 4% interest rate spread earned by the Government, which in addition to the cost of the intennediation, would approximately cover the commercial risk of the sub-borrowers. The financial agent would be responsible for: (a) preparation of subloan agreements between the Government, the financial agent, and the sub-borrowers specifying the terms and conditions for onlending, including suitable collateral arrangements; (b) the maintenance of subloan accounts and subloan supervision; and (c) recovery of the subloans on behalf of the Government. The Borrower would pay the financial agent a fee of 0.30 percentage points of the sub-borrowers' outstanding loan balances accruing interest and one half of one percent of the value of the principle collected. Upon full recovery of the subloan, the Borrower would pay the financial agent a premium equivalent to one half of one percent of the subloan amount as an incentive to collect. Subloans are expected to carry not more than four years of grace and be recovered within not more than eleven years. The subsidiary loan agreements between the Borrower and the seed enterprises would stipulate inter alia that no dividends would be paid to the shareholder unless the sub-borrowers are current in their debt service and unless the company has reached a debt equity ratio not exceeding three to one. The distribution of dividends could not exceed 50% of the company's net profit until the its debt equity ratio has reached one to one. Loan recoveries would be used, in agreement between the Borrower and the Bank, for improvements in the national seed system, including lending to private seed production and processing entities other than the three which originally benefitted from the project. 2.31 Agreements on the flow of funds (paras. 2.28) on the terms and conditions for onlending Bank loan proceeds and restrictions on dividend payments by the seed enterprises (para. 2.30) have been obtained during negotiations. I. Procurement 2.32 Procurement of goods, works, and services under the project will amount to the equivalent of US $39.7 million.'3 The equivalent of US $32.0 million will be Bank loan financed, and US $7.7 million will be financed by equity contribution of the shareholders of the seed production enterprise and local borrowings. Procurement of goods and civil works would follow the Bank's guidelines for procurement under IBRD loans and IDA credits, and the Borrower will use the Bank's standard bidding documents. A margin of preference (up to 15 percent as defined under the Guidelines for Procurement under IBRD Loans) in the evaluation of bids under ICB procedures will be offered to goods manufactured in Ukraine. Employment of consultants financed by bilateral sources on a grant basis will follow the respective donors 13 US $23.6 million working capital for the seed production plants is not included in the procurement plan, since they are expected to be financed through shon-term local borrowing.  24 Ukraine Seed Development Project regulations, with terms of reference and qualifications satisfactory to the Bank. The proposed procurement arrangements (Table 2.3) are described below: (a) The design, construction, and the supply and installation of seed processing equipment for the three seed plants (US $28.7 million) would be procured through ICB in three separate turnkey contracts following the latest draft of the Bank's Standard Bidding Documents for the Supply and Installation of Plant and Equipment and using the two stage bidding approach. The invitation for bids would be grouped for the three seed plants, but bids and contracts could be made individually for each of the plants. (b) The procurement of agricultural equipment for the three seed production enterprises (US $3.0 million), machinery for the Regulatory Framework Component (US $2.5 million), and the Germplasm Maintenance Program (US $2.5 million) would be grouped to the extent possible and would follow International Competitive Bidding (ICB) procedures using the Bank's Standard Bidding Documentsfor Goods. (c) Laboratory equipment, chemicals, and data processing equipment for the Regulatory Framework Component and the Germplasm Maintenance Program (US $0.8 million) would be procured under International Shopping (IS) procedures based on a comparison of price offers from at least three suppliers from at least three different countries, with a threshold for individual contracts of US $300,000 and an aggregate ceiling of US $1,000,000 (to allow for contingencies). Procurement of these items under ICB is impractical because it will occur over an extended period, the items benefit five different entities, the items' nature is very heterogeneous, and hence requires a multitude of suppliers. (d) Consultant and training services for the seed companies, the regulatory agencies. the UAAS Institutes and the agricultural research review (US $1.9 million) are expected to be grant financed by bilateral agencies. In such cases, the selection would follow donor guidelines. However, the Bank would be given an opportunity to comment on short-listed consultants, the provision of services would follow the terms of reference provided by the Bank, and the qualification of the consultants would be acceptable to the Bank. In the case that sufficient bilateral cofinancing of the projects technical assistance were not to become available, Bank loan funded consultant services would follow the Bank's Guidelines for the use of consultants. Consulting contracts exceeding US $100,000 with firms and exceeding US $50,000 for individual contracts would be subject to prior review by the Bank. The selection of the manager of the PMU and the external auditor(s) of the project accounts and the financial statements of the three seed enterprises would also have to be acceptable to the Bank.  Chapter 2 25 Table 2.3: Sutmmary of Procuremeent Arrangements (US$ millions equivalent) Component Procurement Method NBF TOTAL ICB LCB Other Turnkey Contracts Construction of one and refurbishing of 2 28.7 28.7 seed plant buildings and equipping 3 seed plants (21.5) (21.5) Goods Agricultural machinery for three seed companies 3.0 3.0 (2.5) (2.5) Agricultural machinery & equipment for three UAAS 2.5 2.5 institutes (2.5) (2.5) Machinery and equipment for regulatory agencies 2.5 2.5 (2.5) (2.5) Laboratory equipment, chemicals, and data processing 0.8" 0.8 equipment for regulatory agencies and the UAAS (0.8) (0.8) Consultancies Technical assistance and training to seed plants, 1.7" 1.7 regulatory agencies, and UAAS (1.7) (1.7) Technical assistance for Agr. Res. Review 0.22' 0.2 (0.2) (0.2) Technical assistance for PMU 0.2v 0.2 (0.2) (0.2) Miscellaneous Operating expenses for PMU 0.1" 0.1 (0.1) (0.1) Working capital 23.6e 23.6 36.7 3.0 23.6 63.3 TOTAL (29.0) (3.0) (32.0) Figures in parentheses indicate expected Bank disbursements. I/ - International Shopping 2/- According to Bank Guidelines. 3/- Local Shopping 4/ - Local borrowings by seed companies. (e) Miscellaneous items (US $0.1 million) including office supplies, equipment, and incremental operating costs of the PMU, would be procured under Local Shopping, on the basis of three quotations with a threshold of $50,000.  26 Ukraine Seed Development Project 2.33 All invitations for bids, and all bid evaluation and award proposals for turnkey procurement, ICB, and IS, which would be about 96% of the Bank financed contracts, would be subject to prior review and approval by the Bank. 2.34 Assurances have been obtained during negotiations that procurement would follow the procedures outlined in paras. 2.32 and 2.33. Selective post review of awarded contracts below the threshold levels will be carried out. Arrangements for monitoring procurement are included in para. 3.9. J. Disbursements 2.35 The Bank loan would be expected to be disbursed over a period of 66 months. The loan is expected to become effective in mid-1995. Invitations for bids for the construction and supply of the three seed plants under turnkey contracts would be issued following Board presentation. The contracts could be awarded by late 1995 and plant and equipment deliveries could commence by the second quarter of 1996. Bidding and supply for the other equipment and machinery would commence in late 1995 and be completed in mid-1997. Technical assistance would continue to be executed through early 2000. Under these assumptions, project completion could be expected before March 2000, as estimated in Table 2.4. 2.36 This schedule suggests a faster completion of loan disbursements than the Bank's average sectoral or regional experience. This assumption is justified in light of the fact that about 75 % of the loan funds would be deployed for the three seed plants, the procurement of which would be on the basis of turnkey contracts, for which bids would be invited immediately following Board presentation. For most of the remaining items to be financed by the loan, procurement would be expected to be completed by June 1997. The bidding documentation has been prepared through pre-project technical assistance and is currently being evaluated by the seed enterprises and the MOF. 2.37 The proceeds of the loan would be used to finance: (a) 100% of the expenditures for the goods and equipment of the turnkey contracts for the sugar beet and the sunflower seed plant; (b) 100% of the expenditures for goods and equipment, and 50% of the related civil works, of the turnkey contracts for the maize seed plant; (c) 100% of the foreign cost, 100% of local ex-factory cost, or 75% of local expenditures for other items, of the auxiliary field equipment for the maize and sugarbeet seed companies; (d) 100% of foreign expenditures, 100% of local ex-factory expenditures, and 75% of local expenditures of other items, for equipment, machinery, laboratory  Chapter 2 27 equipment, chemical reagents, data processing equipment for the Germplasm Maintenance Component and the Regulatory Framework Component; and (e) 100% of the operating expenditures of the PMU. Table 2.4: Estimated Schedule of Disbursements Disbursements (US$ millions) Semester since Loan disbursement Cumulative Disbursement profile - % approval This semester cumulative total ) Sectora Regionalb FY 1996 Dec 95 0.5 0.5 2 0 0 Jun 96 9.5 13.0 41 6 3 FY 1997 Dec 96 8.5 21.5 67 14 6 Jun 97 6.0 27.5 86 22 14 FY 1998 Dec 97 2.0 29.5 92 34 18 Jun 98 0.5 30.0 94 50 30 FlY 1999 Dec 98 1.0 31.0 97 62 38 Jun 99 0.5 31.5 98 78 46 FY 2000 Dec 99 0.3 31.8 99 90 58 Jun 2000 0.2 32.0 100 94 66 a. Agriculture Credit-Bankwide. b. Agriculture-ECA. 2.38 All contracts for goods and equipment are subject to the Bank's prior review, except contracts for goods, equipment, and operating costs of the PMU in the amount not exceeding US $50,000, which will be financed on the basis of statement-of-expenditures (SOEs). Individual applications for direct payment would not be smaller than the equivalent of US $50,000. Disbursements for eligible expenditures by the PMU and equipment procured would  28 Ukraine Seed Development Project be made against Statements of Expenditures, which would be retained by the PMU for review by Bank supervision missions and auditors for at least two years after disbursement. 2.39 To facilitate project implementation, the Borrower would establish a Special Account (SA) in a major foreign commercial bank on terms and conditions satisfactory to the Bank to cover the Bank's share of expenditures. The authorized allocation would be US $300,000, representing about four months of average expenditures disbursed through the Special Account. At the request of the Borrower, and based on the project needs, the Bank would make an initial deposit or deposits of US $200,000 into the SA up to the amount of the authorized allocation. Applications for the replenishment of the Special Account would be submitted monthly or when one-third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would foliow the Standard Bank procedures. In addition, monthly bank statements of the Special Account which have been reconciled by the Borrower would accompany all replenishment applications. 2.40 At negotiations, agreement have been reached that the disbursement arrangements would follow the procedures specified in paras. 2.37, 2.38 and 2.39.  IE. PROJECT IMPLEMENTATION A. Organization and Management 3.1 The main component of the project is the design, supply, and installation of three seed processing and treatment plants for hybrid seed. This component would be implemented by three private joint stock companies specializing in the production and marketing of hybrid maize, sunflower, and sugarbeet seed. These companies are in the process of being established and would procure the plants, including the related civil works through turnkey contracts under ICB. This would greatly facilitate efficient implementation of this component. The shareholders of these new companies are private individuals, privatized collective farms, associations of farms, Ukrainian corporate interests, joint ventures, and public entities involved in the seed industry. There is considerable interest on the part of foreign firms in joining these enterprises, and commitments by two foreign firms to participate have been made prior to Board presentation. Agreement has been reached with the Government that public entities would not hold more than 49% of the shares in each of the seed companies. Feasibility studies, charters and shareholder agreements have been worked out for the three new enterprises. These enterprises have been recently legally registered. The signing of Subsidiary Loan agreements by two of the three enterprises with the Ministry of Finance is a condition of Effectiveness. Foreign companies are expected to become shareholders in these companies. The contributions of these prospective foreign partners to the companies' share capital, estimated at the equivalent of about US $500,000 each, would be applied to cover part of the companies' working capital needs. 3.2 The improvements in the regulatory framework for the seed industry supported by the project would be the responsibility of the corresponding regulatory agencies of the MOAF, the State Commission for Seed Quality Control (SCSQC), and the State Commission for Testing and Protection of Plant Varieties (SCTPPV). 3.3 The germplasm maintenance program, including the proposed review of the agricultural research system would be the responsibility of the UAAS, which would be supported in that review by suitably qualified consultants whose terms of reference and qualifications are satisfactory to the Bank. 3.4 A Project Management Unit (PMU) is responsible for: (a) liaising between the implementing agencies, the Government, and the Bank; (b) ensuring compliance with World Bank requirements for reporting on implementation progress, financial control, audits of project and enterprise accounts, and monitoring of project impact; (c) determining eligibility of disbursements for project and loan funds; (d) providing assistance to the implementing entities in matters of procurement and disbursements; and (e) administering the project's technical assistance and training component. The establishment of this unit in the Ministry of Finance (Figure 3.1) and the nomination of a Project Manager with qualification and terms of reference satisfactory to the Bank are a condition of Effectiveness.  30 Ukraine Seed Development Projea Figure 3.1: Project Organization PROJECT STEERING J Minsty ofr= External Auditor Special : Proe'c't ... nana'ement' Un i't"'v Account :E.EA.: ':.T, ...,{" ; Implementing Agencies Financial Entities Coordinating Agencies The PSC consists of representatives trom MOF, MOAF, UAAS. UkrExImBank, Bank Ukraina, and the three private seed enterprises  Chapter 3 31 3.5 The PMU's project manager will be supported by one assistant, one administrative staff, and a suitably qualified technical assistant, for a total of 16 months. Qualification and terms of reference for this technical assistant would be satisfactory to the Bank. The project manager is responsible to the Project Steering Committee, which has been established with representatives of the MOF, the MOAF, the UAAS, BOU, UkrExImBank, and a representative from the Board of Directors of each of the three seed enterprises. The Steering Committee is chaired by a Deputy Minister of Finance. B. Schedule of Implementation 3.6 The core elements of the project are the establishment of the three private seed production plants, including the design of the plants, the manufacturing and supply of plant machinery and equipment, the construction or refurbishing of buildings housing the plants, and the start-up of their operation. This part of the project, which constitutes some 90% of project costs, will be procured on the basis of turnkey contracts using a two-stage approach. The remaining components of the project are confmed to procurement of machinery and equipment and technical assistance for the regulatory agencies of the seed system, UAAS institutions responsible for germplasm maintenance, and the PMU. All bidding documents have been prepared and invitations to bid for the seed plants and the UAAS breeding institutes will be issued following loan approval by the Board. 3.7 Completion of the project is estimated to take about 60 months, and loan closing could be contemplated within 66 months after Board approval of the proposed loan, or by September 30, 2000 (Table 3. 1, Implementation Schedule). This relatively short implementation period is justified because: (a) the project essentially consists of the procurement of goods on a turnkey basis, shielding implementation from the borrower's limited experience in implementing Bank-supported projects; and (b) bidding documents for most project sub- components have already been prepared and tenders will be invited shortly after Board presentation (see paras. 2.35 and 2.36) A Project Implementation Plan indicating responsibilities and timing of key implementation steps is given in Annex 6.  Table 3.1: Implementation Schedule _ = ~~~~~~~~~~~~~~~ta _ = . SEED PRODUCTION Seed P1mb:----------- -ssue of Genera drocurmen Notice_-_ _________ ______ _ ___ ___._- __ ___ ____ ___ _ fPersn vosidmdosaDdtwurn lo bids __ ____ _ _ _ .__.__ ____ _ _ __ __ __ __ -Bid evaluation and awards _ _ _ __ __ __ __ tghC,h,,MlCh - e------------------- ___ ____ ___ _ ___ _ _ _ ___ ___ _ ___ ___ ___ ___ _ -S~y~otoupmnt an tril run Civi_ works............o Preparab-.of b-ddi-k-douotems_ __ _-__ __.-J-]-. ---- A - nv--aiio- to bids,-bid review nd ards --- -- Sup,% nmAcines _ - - ---------------. ----|_|_ ____ -_ - - --- ---------------|--- -~- ~~ -~ ~~ ~~ T L c_ 1. C! _,t v -!An ---------~ ~~~~ -- ---|----- --- |- - ---- ----_-- _ _ ~~ __ _ __ _ __ __ ShnW hs1andAC -------------------------2------- _ $ ,____L __ _L__ ____ __ __ __ ContIT! ________________________-------------- --- I - - - _ ~r~ _ _. _ _ _ Stc lit and invitation ----------- ---------------------------__ __ --4-2---- ----- _ ---;-- L_,_L_____________ - -Ide--if-ca-onofTranirn- Instinwte ---- -------- Tria ~~- --------------------- ----- ~ ------ -----_ L__ ____ __ __ REGULATORY FRAMEWORK Trehnicl AsItane: - Short list an invitatFoE Tr*l!s ---------------------___________ ___ --_ __0 5 __ _ _ L _ - -- -- !Tpjemcn=cvn ---------- -- ~ ~ ~ ~ ~ ~ ~ ~ ~ - ---Select-o- of candidaes- - ---------- . i; ;fiu -s-----------------d-------tito-- --o--r---i .--t -__ _ -------------------------------__.l _.l_ -- - -- - -- - -__ _ _ + + _ _ . _--- -- F-- F _ _ _ _ _ _ _ _ Al boTsyLF->-t-t--i- ___-- ---- -- -- -- - --- - - ---------------_ _ _ _L_ _ L_ _ ____ _ _ __ ---------------------------------------------__----------__ _ ____ _ __ _ _ 13id evalua_ion and a -wards---------------- * Prejuratos f biddinkdocs and invisa..o. bids - . | _ _ ; 1 F... F 3 Bid evaluation and awards i - ...