Colombia - Productive Partnerships Support Project

Document of The World Bank Report No: 23246-CO PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$32 MILLION TO THE REPUBLIC OF COLOMBIA FOR A PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT December 14, 2001 Environmentally and Socially Sustainable Development Colombia, Mexico and Venezuela Country Management Unit Latin America and Caribbean Region  CURRENCY EQUIVALENTS (Exchange Rate Effective November 30, 2001) Currency Unit = Pesos 1 Peso = US$0.0004347 US$1 = 2,300 Pesos FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy EA Environmental Assessment EIA Environmental Impact Assesment EMP Environmental Management Plan ERR Economic Rate of return ESW Economic and Sector Work FINAGRO Government Agricultural Finance Institution FRR Financial Rate of Return IDB Inter-American Development Bank IFAD International Fund for Agricultural Development IMF International Monetary Fund INCORA Colombian Institute for Agrarian Reform IPM Integrated Pest Management LIL Learning and Innovation Loan MADR Ministry of Agriculture and Rural Development NGO Non-Governmental Organization NPV Net Present Value MIS Monitoring and Information System M&E Monitoring and Evaluation PAD Project Appraisal Document PCG Project Coordinating Group PHRD Project and Human Development Grant PMR Project Management Report PPS Productive Partnership Subproject PROAGRO Agriculture Program (Programa de Oferta Agropecuaria) RDIP Rural Development Investment Program SIIF Integrated Financial Information System SMLM Legally Minimun Monthly Salary (Salarios Minimos Legales Mensuales) SOE Statement of Expenditures TA Technical Assistance TOR Terms of Reference Vice President: David De Ferranti Country Manager/Director: Olivier Lafourcade Sector Manager/Director: John Redwood Sector Leader: Adolfo Brizzi Task Team Leader/Task Manager: Martien van Nieuwkoop/Pierre Werbrouck  COLOMBIA PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 8 C. Project Description Summary 1. Project components 10 2. Key policy and institutional reforms supported by the project 12 3. Benefits and target population 12 4. Institutional and implementation arrangements 14 D. Project Rationale 1. Project altematives considered and reasons for rejection 16 2. Major related projects financed by the Bank and other development agencies 17 3. Lessons leamed and reflected in the project design 17 4. Indications of borrower commitment and ownership 18 5. Value added of Bank support in this project 19 E. Summary Project Analysis 1. Economic 19 2. Financial 20 3. Technical 21 4. Institutional 21 5. Environmental 22 6. Social 24 7. Safeguard Policies 26  F. Sustainability and Risks 1. Sustainability 27 2. Critical risks 27 3. Possible controversial aspects 28 G. Main Loan Conditions 1. Effectiveness Condition 29 2. Other Conditions 29 H. Readiness for Implementation 30 1. Compliance with Bank Policies 30 31 Annexes Annex 1: Project Design Summary 32 Annex 2: Detailed Project Description 37 Annex 3: Estimated Project Costs 44 Annex 4: Cost Benefit Analysis Summary, 45 Annex 5: Financial Summary 51 Annex 6: Procurement and Disbursement Arrangements 52 Annex 7: Project Processing Schedule 64 Annex 8: Documents in the Project File 65 Annex 9: Statement of Loans and Credits 67 Annex 10: Country at a Glance 69 Annex 11: Social Analysis 71 Annex 12: Environmental Analysis 78 MAP(S) IBRD 31251  COLOMBIA PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT Project Appraisal Document Latin America and Caribbean Region Environmentally and Socially Sustainable Development - LCSES Colombia, Mexico and Venezuela Country Management Unit Date: December 14, 2001 Team Leader: Pierre Werbrouck Country Director: Olivier Lafourcade Sector Director: John Redwood Project ID: P041642 Sector(s): AY - Other Agriculture, BI - Institutional Development, MC - Community Action Program Lending Instrument: Specific Investment Loan (SL) Theme(s): Rural Development; Poverty Reduction Poverty Targeted Intervention: Y Program Financing Data [XI Loan [ ] Credit [ Grant []Guarantee l Other: For Loans/Credits/Others: Amount (US$m): 32.0 Proposed Terms (IBRD): Fixed-Spread Loan (FSL) Grace period (years): 8.5 Years to maturity: 13.5 Commitment fee: 0.85% p.a. during first 4 years; 0.75% Front end fee on Bank loan: 1.00% thereafter Financing Plan (US$m): Source Local Foreign Total BORROWER 18.00 2.32 20.32 IBRD 24.00 8.00 32.00 Total: 42.00 10.32 52.32 Borrower: REPUBLIC OF COLOMBIA Responsible agency: MINISTRY OF AGRICULTURE AND RURAL DEVELOPMENT Address: Avenida Jimenez No. 7-65, Piso 3; Bogota, Colombia Contact Person: Ms. Maria Clara Rodriguez Tel: (57-1) 334-038 Fax: 243-4785 Email: minagricultura.gov.co Estimated disbursements ( Bank FYIUS$m): FY 2002 2003 2004 2005 2006 2007 2008 Annual 1.30 3.30 6.70 8.10 6.70 5.10 0.80 Cumulative 1.30 4.60 11.30 19.40 26.10 31.20 32.00 Project implementation period: 5.5 years Expected effectiveness date: 03/31/2002 Expected closing date: 09/30/2007 Retroactive financing would be allowed for eligible expenditures incurred since April 1, 2001 (but not earlier than 12 months before loan signing), up to an arnount not to exceed USS 3 million.  A. Project Development Objective 1. Project development objective: (see Annex 1) The objective of the project is to generate income, create employment and promote social cohesion of poor rural communities in an economic and environmental sustainable manner through the development and implementation of a demand-driven, productive partnership scheme with the private sector. In achieving this objective, it is expected that the project would contribute to: (i) reactivating the rural economy; (ii) improving the welfare of poor rural inhabitants; and (iii) generating an enabling environment for social peace. Under the project, a productive partnership subproject is considered any collaborative arrangement between a small farmer producer organization and an agribusiness enterprise that aims to reduce technical, commercial, financial and/or social risks associated in pursuit of potential productivity and income gains in a particular value-chain in such a manner that creates a win-win situation for all participating parties. Based on the experience of prototype partnerships developed as part of the project preparation process, this means that by entering into a productive partnership, members of small farmers producer organizations obtain access to relevant markets, usually output markets, but also to critical inputs (e.g. high quality seed) or factor inputs (particularly credit for working capital). The advantages for agribusiness firms to enter into partnerships with producer organizations include opportunities to expand food processing activities by securing supplies from small producers that meet certain predetermined quality standards, without the need to expand own production capacity. 2. Key performance indicators: (see Annex 1) At the development objective level, the success of the project will be monitored along different dimensions including income and employment generated through the subprojects; beneficiary targeting and diversity. At the project output level, the project will be monitored by indicators such as the number of expressions of interest, subproject profiles evaluated, financial performance of subprojects and efficiency indicators for the project coordinating group. The most important performance indicators could be categorized in the following manner: * During 2002-2006 producers participating in productive partnerships increase their income by 20% compared to the baseline * By the end of the project, an increase of 50% in employment in the participating production units of which 40% is employment for women. * By the end of the project, agricultural productivity in production units has increased on average by 20% compared to regional indicators * 100 productive partnerships are formalized, consolidated, are operating in a sustainable manner and contain conflict resolution schemes * 100 productive partnerships reimburse their commercial bank credit (if any) on time and at a recovery rate of 90% or more * Productive partnerships investments present an intemal rate of return of 15%. * Project monitoring and evaluation system properly operating and updated. - 2 -  B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R97-233 Date of latest CAS discussion: 11/06/97 The CAS puts forward a development agenda which aims to ensure that Colombia achieves its full economic growth potential and focuses on reducing poverty, improving social conditions, and ensuring sustainable development. Within this agenda, the CAS identifies six areas of strategic importance where the Bank should play a catalytic role in assisting Colombia's development process. The project contributes to these strategic areas in the following four ways: (i) promoting rural development: the project will improve production of pennanent and transitory crops and strengthen the capacity of rural organizations. These initiatives will lead to increased income and employment opportunities and ultimately to improved standards of living for rural households. (ii) promoting social cohesion and development: productive partnership subprojects may help overcome some of the structural obstacles to economic violence by providing income and employment opportunities to the poor. The strengthening of farmer organizations, relationships between farmers and the private sectors, and establishing informal conflict resolution mechanisms may develop greater social cohesion and reduce violence. (iii) ensuring sustainable development: promoting the production of crops best suited to the local supply of natural resources, creating employment opportunities for the rural poor, and utilizing more efficient agricultural practices help to reduce pressures on environmentally fragile lands and thereby improve sustainable agriculture. (iv) developing human capital: Strategic alliances and technical assistance packages will help low-income farmers improve knowledge in agricultural production, develop business skills (e.g. marketing, management, etc.), and enhance their ability to structure and operate cooperatives. A CAS Progress Report (R99-201) was presented to the Board on November 18, 1999. This update reinforced the strategic priorities of the CAS as outlined above. The Productive Partnership Support project has been included in the base-case lending program for Colombia. 2. Main sector issues and Government strategy: Sector Issues Poverty. Poverty in Colombia remains a critical problem with strong rural and regional dimensions. As a result of the economic crisis, the gains made in the area of poverty reduction in the early to mid-1990s have been eroded in recent years. Rural poverty in Colombia declined until the beginning of the nineties but then it basically stagnated at a very high level of 79%. Sector performance during the nineties was considerably less than during previous decades. Moreover, the incidence of poverty in rural areas was almost 80% in 1999 as compared to 55% in urban areas. Households that face the largest relative risks of poverty are large, linked to the agricultural sector, and have low skill levels and low employment rates (Colombia Poverty Report, 2001). A farm/household survey carried out as part of the project preparation process and focusing on agricultural producers found that the incidence of poverty among this group was as high as 80%. Seventy percent of the population with incomes below subsistence live in rural areas. Three regions in particular have especially high levels of poverty: the Carribean, Pacific, and the Amazon; however, throughout the country one may find pockets of misery. In spite of reductions in the level of poverty, - 3 -  income inequality remains an issue with a Gini coefficient of approximately .50 which, despite some improvement between 1988 and 1995, now stands at an all time high. In spite of the constitutionally mandated universality of education and health services, they along with other financial and technical assistance programs, either do not reach rural areas or have minimal impact due to lack of institutional capacity. Any poverty reduction campaign based on productive projects must take into consideration the limited education and business skills of the rural population, and must include actions to remedy these limitations. Rural violence. Colombia ranks among the countries with the highest incidence of violence. Violence in the countryside is particularly acute with an estimated 1.9 million people displaced over the last decade. The causes of political violence in Colombia are manifold, including: (i) unequal access to economic power (especially land and natural resources); (ii) exclusion from political power; and (iii) available funding through access to illicit drugs proceeds by the guerrilla and paramilitaries. The World Bank sector work on violence recognizes the complexity and the central role of violence in impeding development in the country. The insecurity caused by the violence reduces the incentive to invest in agriculture and, more importantly causes a bias in the pattern of investment towards activities that are relatively non-intensive in the use of labor which may encourage landowners to invest in livestock rather than crops. With the growth of the paramilitary movement and increased buying up of land in rural areas by drug traffickers, the problem has become increasingly complex with land having become even further concentrated in the hands of the old elite and drug traffickers as evidenced by the proportion of large land holdings over 500 hectares which increased from holding 32% of total lands in 1984 to 45% in 1997. Those peasants who move to remote and marginal areas such as the Amazon to avoid the violence, often participate in growing illicit crops. These are sprayed with chemicals that harm the environment and damage health. Untapped agricultural production. In overall terms, the agriculture sector grew at half the rate of the economy as a whole in the 1990s. As a consequence it saw its proportion of GDP fell from 18% in 1990 to about 14% in 1999. Nevertheless, despite this decline, agriculture still is among the most important sectors in the economy. It also employs about 23% of the labor force and contributes to about 28% of foreign exchange earnings. The liberalization of the economy coupled with an overvalued peso and falling world prices for grains and other commodities has led to a re-composition of agricultural production. This is evidenced by a decline over the last decade of more than a quarter in the production of annual crops, an area equivalent to 870,000 hectares. During the same period, perennial crop production increased by 20% or 200,000 hectares. Other factors such as the high cost of and limited access to capital, as well as the prevalence of rural violence (see preceding paragraph) have impeded further cultivation of perennial crops leaving the nation's potential production of these high-margin crops untapped. In the case of palm oil, only 5% of the potential land is currently cultivated, that is 148,360 out of 2,500,000 hectares. The challenge of the rural sector is to increase its competitiveness in a market economy context. With the recent depreciation of the peso to levels comparable with the early 1990s in real terms, the rural sector for the first time since the partial liberalization of the economy in 1991, has a more level playing field to increase its competitiveness vis-a-vis foreign players. This is especially important as it is expected that developed countries will make a serious effort in opening up their markets for agricultural products from developing countries in the context of on-going trade negotiations coordinated by the WTO in the coming years. Difficult access to finance. Lending in Colombia has virtually come to a standstill in all sectors of the economy. Supply has been affected by the large loan loss provisions required of banks to cover their past - 4 -  due portfolio while demand has been limited by the extremely high nominal and real interest rates. Agricultural lending has been particularly hard hit, with lending to small farmers dropping more than 80% from 1996 levels. The Caja Agraria, the government owned and controlled agrarian bank, stopped lending in the second semester of 1998 when, already technically bankrupt, its cash flows could no longer cover short-term liabilities. It has been in the process of liquidation since mid-1999, although the Banco Agrario was created to replace the defunct Caja Agraria. Dozens of cooperatives have been liquidated. The lack of credit is particularly acute for smaller farmers who have little or no collateral and for those producers interested in making long-term investments in perennial crops. Although the government provides a fund that guarantees up to 80% of the principal of loans to farmers, banks are still reticent to lend to this group. A case in point is the Banco Agrario which has adopted extremely conservative lending policies requiring 100% in admissible guarantees and will not accept land as collateral; although forward contracts are accepted. The lack of guarantees for the remaining 20% of principal have all but closed lending to producers of crops not directly and formally linked to commodity markets. Long-term financing is unavailable due to structural issues including a history of high inflation and constant bouts of illiquidity. Real interest rates remain at 15 to 25% for agricultural and consumer lending respectively. The 15% real interest rate charged for agricultural loans reflects a ceiling imposed by the Government-owned second-tier agricultural bank - FINAGRO. High interest rates inhibits investment in long-term projects. In the short-term, traditional lending through financial intermediaries as well as financing through input suppliers, distributors and agribusiness are more viable, flexible and accessible alternatives. The project aims to build on these alternatives by supporting partnerships between small farmer producer organizations and agribusiness that will facilitate access to markets for small farmers. Unequal access to land. Concentration indices in the Colombian economy are among the highest in the world, and land ownership is no exception as evidenced by a GIM coefficient of 0.84. Inequitable distribution of land in rural areas has been reinforced and exacerbated by various factors including: (i) tax incentives for investments in agriculture which stimulated land purchases by rich individuals to off-set taxes related to nonagricultural enterprises; (ii) legal impediments to the smooth functioning of the land rental and sales markets; (iii) credit and interest rate subsidies and a disproportionate protection of the livestock subsector; and (iv) the use of land for money laundering purposes. Moreover land is useful as a hedge against inflation and currency devaluations and provides a safe savings mechanism. In spite of more than half a century of land reform, land distribution has not improved and may have worsened. Efforts to redistribute land within the agricultural frontier were unsuccessful, and most land reform has been conducted on the frontier through government directed and spontaneous colonization; however, the GNI coefficients for land ownership in these areas are not better than the national average. For example, in Caqueta, an area of intensive government-directed colonization financed with World Bank funds in the late 60's and 70's the GINI coefficient is .74 as measured in terms of land productivity. By passing Law 160 in 1994, Colombia embarked on a new strategy of voluntarily negotiated land reform that aims to provide the poor with grant and loan assistance to buy the land that they themselves have identified and negotiated and which gives greater power to local institutions, reducing the role of INCORA. Detailed features of voluntarily negotiated land reform include: (i) poor beneficiaries are given a subsidy to cover 70 percent of the cost of establishing a family farm; the remaining 30 percent of the cost would be financed by bank loans; (ii) establishment of a family farm is considered more than just the mere transfer of land and includes the cost of purchasing land, on-farm infrastructure, housing and technical assistance; (iii) beneficiaries identify properties they wish to buy and negotiate directly with landowners; (iv) proposals for the establishment of family farms are competitively evaluated, based on their economic viability; and -5 -  land reform procedures are decentralized, giving power to local governments and communities to influence the pace and direction of land reform. A World Bank supported land reform pilot successfully applied this approach in five municipalities in 1997-98. However, as far as government-directed programs go, corruption, inefficiency and the unwillingness to utilize market mechanisms to establish land prices have resulted in an odd sort of speculation where poor land is bought and held until public funds become available to sell at a price established between the owner and bureaucrats. Government Strategv Rural Sector Policy. The rural policy framework established by the MADRpursues integration of the rural sector in the national economy through policies that generate favorable conditions for increasing its competitiveness, equality and sustainability, while taking into account its diversity and complexity. A guiding principle in the formulation of this policy framework is the view that the roles of the public and private sector are complimentary and the rejection of a dichotomy between regulation and liberalization. In this context, it is explicitly stated that resolving the existing profound socioeconomic inequalities in the rural sector can not be left entirely to the free play of market forces and requires an active role of the state in specifically defined areas. At the same time, it is recognized that the effectiveness of rural policies is conditioned by factors that are not entirely under control of the Ministry of Agriculture and Rural Development (MADR). These factors include: (i) progress in the peace process as determinant for risks associated with private sector investment in rural areas; (ii) macro-economic environment, particularly exchange and interest rate, as determinants of financial feasibility of investment opportunities; (iii) the need to maintain coherency between internal policy and international agreements as limiting factor in the choice of instruments; and (iv) fiscal situation as determinant for available resource envelope to implement rural policies. In general terms the rural policy framework in Colombia consists of four pillars. The first pillar includes instruments aimed at promoting investment in the sector by: (i) promoting the availability of venture capital for the sector; (ii) providing incentives for capital investments; (iii) subsidizing land improvements in irrigation and drainage; (iv) reducing risks through crop insurance and investment guarantees; and (v) restoring creditworthiness of farmers through support for farm debt restructuring. The second pillar consists of instruments that aim to promote agricultural technology development and animal health. Under this pillar, support is provided to agricultural research, extension and training, phytosanitary services and environmental management. There is a general trend towards making support provided under this pillar more demand-driven and to improve quality by relying on more competitive selection processes. The third pillar includes instruments that are aimed at promoting rural development through targeted interventions focusing on the poor and marginal groups. Under this pillar, attempts are made to address the highly unequal distribution of land in Colombia through voluntary negotiated land reform in the context of the implementation of productive projects aimed at establishing viable family farms. Another important initiative is the provision of subsidized housing for low income rural households. Other measures under this pillar include the promotion of micro-enterprises and the stimulation of rural employment. The fourth pillar of the rural policy framework deals with both foreign and domestic trade. With respect to foreign trade, the rural policy framework is clearly embedded in the foreign trade agenda of the country which seeks to ensure stable access of consumers to affordable products of appropriate quality, while recognizing the rights of rural producers as an integral part of the Colombian society based on a dynamic relationship between city and countryside. In that sense, trade liberalization and integration of the rural sector in the international economy is not seen as an objective in itself, but a mean to capitalize on comparative advantages of the sector. In practical terms this implies that in international trade negotiations Colombia continues to seek consolidation of reasonable levels of protection for the most sensitive food crops, - 6 -  maintains a preference for incremental and gradual changes, and works on correcting distortions and unfair practices by other nations. An interesting twist to the rural policy framework is the attempt by MADR to integrate its implementation in the Programa de Oferta Agropecuaria, PROAGRO, that uses the value-chain as a transversal axis to define the application of instruments and allocation of incentives based on Sector Competitiveness Agreements (Acuerdos Sectoriales de Competividad) with the private sector. Under these Agreements, the relevant parties in a specific value chain prioritize actions to increase production and improve competitiveness of the product in question. Agreements have been specified for poultry, eligible oils, dairy, potato, cacao, cotton, fruits and forestry products. The potential advantages of this approach are twofold. First, it ensures that the application of instruments and allocation of incentives becomes more demand-driven and properly aligned with (sub)-sector specific constraints, thereby improving the effectiveness of the rural policies that are pursued. Second, by entering into agreements with the private sector, public resources available to implement rural policies could be leveraged with contributions from the private sector. This is important as the sum of domestic support measures, price support and export subsidies amounted to less than 2% of the value of agricultural production in 1998. The need for leverage became even more acute in 1999 when the budget for domestic support, making up 85% of the total in 1998, was slashed by 40% in 1999. Although the focus on the value chain as a conceptual tool to integrate the implementation of rural policies is valuable, this initiative has stopped short of realigning the existing institutional framework in accordance with this new focus. The institutional framework therefore remains far too complex and fragmented to effectively deliver results on the ground while at the same time imposing significant transaction costs on rural producers who try to access instruments and incentives provided under the system. Peace Process. The Government strategy to stimulate rural development is embedded within the broader peace process of the country. In September 1999, the Government developed a Plan for Peace, Prosperity and Strengthening of the State (Plan Colombia). This plan is an integrated strategy that seeks: (i) to promote the peace process; (ii) revive the economy; (iii) combat the narcotics industry; (iv) strengthen the democratic pillars of the Colombian society; (iv) promote reform of the justice system; (v) protect human rights; and (vi) foster greater democratization and social development. The World Bank and the IMF have allocated about US$900 million to social development, employment and job training programs under the Plan. Following Law 487, the Investment Fund for Peace was established in 1998. The objective of this Fund is to capture and channel resources to finance the productive and social aspects associated with Plan Colombia. The Fund has no judicial status and is ascribed to the Administrative Department of the Presidency. For the purpose of promoting productive investments in areas that are particularly affected by the violent conflict, it has created the program "Campo en Acci6n". This program builds on the concept of productive partnerships as envisaged under the project. - 7-  3. Sector issues to be addressed by the project and strategic choices: The proposed project would address several of the issues confronting rural development in Colombia. In line with the implementation strategy of the MADR for its rural policy framework, the project would address above issues in a holistic manner by facilitating the establishment of productive partnerships that bring together small farmer producer organizations and agribusiness with the support of financial institutions, Government, and civil society. Models of collaboration have been tested during project preparation through six prototype productive partnerships. These prototype partnerships included: (i) dairy products (60 members); (ii) vegetables (28 members); (iii) oilpalm (70 members); (iv) com-cocao (56 members); (v) oilpalm (100 members) and (vi) agroforestry (50 members). A key condition for these efforts was an explicitly stated joint interest by the small farmer producer organization or smaller informal groups and the agribusiness to explore an opportunity that could potentially generate mutual benefits. In all cases a participatory process was followed under which producer organizations and respective agribusiness worked together in the formulation of a detailed productive partnership proposal. This process was facilitated by a third party, usually an NGO or a consultant. As a reflection of the learning-by-doing approach, the facilitator also provided training to partnership participants in critical areas such as farm management, accounting, quality control, sustainable natural resource management and conflict resolution. As a result of the prototype partnership preparation process, six detailed proposals have been formulated and incorporated in a common format that covers the following aspects: (i) description of the productive partnership in terms of problems being addressed, solutions being pursued, outputs being expected, and long term vision being realized; (ii) feasibility of the productive partnership from a financial, social, technical and environmental point of view; (iii) implementation arrangements both in terms of own contributions as well as external assistance; and (iv) assessment of the external environment (e.g. municipal context) in which the productive partnership will be realized with a view to identify possible risks and define corresponding risk mitigation measures. Based on the required external assistance, the project would support these partnerships by providing a set of incentives that are tailored to the specific business objectives for each partnerships. A detailed description of all prototype productive partnerships has been included in the project files. The holistic treatment of issues facing producer organizations and agribusiness through a demand-driven approach has emerged as a key lesson from the prototype partnerships. The project is built on the results of the farm and household surveys which indicate that the constraints facing farmer producer organization and agribusiness are varied: access to long-term finance; access to productive land, availability of attractive growth markets; a safe and peaceful sociopolitical context; and availability of well-qualified technical assistance. The project therefore proposes a Modular Incentive (or cost-sharing transfer) to address the fragmentation of the public support system by offering a one-stop shop for small farmers participating in productive partnerships. The modular incentive can be applied to a wide range of possible investments rather than the limited focus of existing subsidies and incentives. Given the limitations of public sector institutions making decisions at the operational level, small farmers organized in producers organizations will be empowered to actually manage the modular incentive through their own organizations. In addition to the Modular Incentive, the project design contains several important characteristics that aim to address many of the sector constraints identified above: (i) Finance. The Modular Incentive provides which seed capital (subsidized) for productive partnership subprojects that meet agreed financial, social and environmental eligibility criteria. In order to address the financial sector's concerns that incentives for rural projects oriented towards the poor might generate moral hazard in investment decisions, the project has taken care to design the incentive in such a way that it - 8 -  demands resources from the private sector and producers to complement financing needs. The project also contains several features that improve access to secure commercial loans including a long-term sales contracts between the producer organization and agribusiness; projects structured to minimize bank lending by relying on other sources of financing (e.g. loans provided by agribusiness, supplier credits, etc.); fund flow arrangements that direct revenue generated into a trust fund that will be first used to repay bank debt; and at times lending to groups as opposed to individuals. The support provided under the Modular Incentive would close the financing gap of subprojects after other potential sources have been explored, rather than as a point of departure. Hence, subprojects would be prioritized according to the amount of required support provided under the Modular Incentive per beneficiary. (ii) Social capital and peace. Strengthening social capital among farm conimunities may help address some of the determinants for economic and social violence in rural Colombia. The project will place particular emphasis on helping create and strengthen production cooperatives by providing a local capacity and training program tailored to the needs of each subproject. By empowering stakeholders to take the implementation of productive partnership subprojects in their own hands, the project also sets the stage for resolving existing multiple constraints by mobilizing local knowledge. (iii) Technical assistance. The technical demands of modem agriculture in a global economy require not only quality, but also quantity and timeliness in the delivery of products. Agribusiness must clearly communicate its needs to the peasants who participate in the partnerships, and based on these needs and the agricultural potential of the land, technological assistance programs will be developed to facilitate the planting, cultivation, harvest, and post-harvest handling. The project recognizes the limitations of the public sector as a service deliverer to support the establishment and subsequent implementation of productive partnership at the operational level. Consequently, under the project, support to the provision of technical assistance to small farmers by participating agribusiness firms in the productive partnerships rather than by public sector agents is emphasized. By doing so, the concept of productive partnerships provide participating partners to seize responsibility as agents of change, thereby putting in practice the participatory model of empowerment for development. (iv) Land access and use. While land tenure is an important element for strengthening farmer commitment to agro-industrial ventures and for facilitating financing by banks, it is not always necessary for achieving the objectives of this project. Given the distortions in land prices due to the nonagricultural based benefits of land ownership, land rental with an option to purchase may enhance project profitability by lowering initial costs. In addition, the project is considering the reactivation of abandoned or under-utilized plots which were the subject of past land reform efforts, considerably lowering investment requirements. When land purchase is required, the project may assist farmers in negotiating land purchases according to the general principles set out in the Agrarian Reform law and the Productive Partnerships Subproject Manual which takes into account the experiences in several municipalities that participated in the Bank supported market-assisted land reform pilot program. In addition, by focusing mainly on perennial and annual crops in the context of productive partnerships, the project would contribute to putting in place a strategy of sustainable intensification as a key to unlock untapped production potential in the rural sector. (v) Markets. Crops and individual projects will be prioritized based on their long-term national and international competitiveness and their social impacts. The project will rely on government and private entities that research international trade opportunities and review of local regulations and international trade agreements to recognize the attractiveness and potential distortions in the respective market for each crop. This information will be used to help evaluate project proposals. While these are important considerations, the demand-driven nature of the project will give priority to those subproject proposals where markets have been identified and parties jointly express a willingness to construct a partnership. -9-  C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): IndicAtive Bank- % Of Component! Sector Costs % of 1financing Bank- (US$M) Toltal (US$M) financing 1. Preparation of Productive Community Action 6.20 11.9 4.00 12.5 Partnership Subprojects Program 2. Implementation of Productive Agro-Industry & 41.10 78.6 24.10 75.3 Partnership Subprojects Marketing 3. Project Management Institutional 4.70 9.0 3.90 12.2 Development Total Project Costs 52.00 99.4 32.00 100.0 Front-end fee 0.32 0.6 0.00 0.0 Total Financing Required 52.32 100.0 32.00 100.0 Component 1: Preparation of Productive Partnership Subproiects. Under this component, the project would finance technical assistance and training for activities that are associated with: (i) information sharing; (ii) mobilization and screening of interest; (iii) pre-investments; (iv) ex-ante evaluation of detailed productive partnership subproject proposals; and (v) studies. The objective of the information-sharing sub-component is to inform potential productive partnership participants and other relevant stakeholders about the scope and the rules of the game of the project. It is expected that interested potential participants as a result of these activities, would enter the program with realistic expectations. The objective of the mobilization and screening sub-component is to generate dual expressions of interest from potential productive partnership participants and subsequently screen these by using an agreed set of eligibility criteria specified in the Productive Partnerships Subproject Manual. The result of this activity is to establish a pool of productive partnership subproject profiles that are eligible for support under the pre-investments sub-component of the project. Pre-investment assistance may take the form of technical advice, feasibility and design studies, social assessments, environmental assessments, market information, geo-referenced maps, building of management capacity, and establishing or fortifying links with potential partners and financiers. The project would contract TA providers to assist productive partnership participants for this purpose. Preparation of detailed productive partnership subproject proposals is considered a process of learning-by-doing. For this purpose, the TA provider will also provide training to small farmers involved in the preparation process in critical areas such as farm management, administration and accounting, sustainable natural resource management, quality control, conflict resolution and other training that might be deemed necessary. To facilitate ex-ante evaluation of productive partnership subproject proposals, the project would finance external experts with relevant qualifications, experience and independence to ensure that the allocation of project support in the subsequent implementation stage is done on strict technical grounds and in an objective manner. In case there is considerable interest for subprojects in a particular value-chain, - 1 0 -  subsector specific studies could be carried out under this Component as well. Component 2: Implementation of Productive Partnership Subprojects. Under this component, the project would support the implementation of productive partnerships by financing: (i) cost sharing transfers as a financial incentive (Modular Incentive) for participating small farmers producer organizations; and (ii) technical assistance and training to productive partnership participants. The Modular Incentive has an integrated nature that is managed by beneficiaries themselves for a range of purposes that they themselves consider most critical for the establishment of productive partnership subprojects and that have been specified in the corresponding investment plan. Applications include: (i) on-farm infrastructure such as irrigation canals, aquaculture facilities, greenhouses, storage facilities; (ii) durable goods such as machinery, equipment, tools, fences; (iii) vegetative materials for nurseries; (iv) operational inputs such as fertilizers and chemicals that do not appear on the negative list; (v) services such as land leveling; special studies, surveys, laboratory analyses and inventories; insurance; publicity, market and communication services; (vi) labor usually in the form of remuneration to the beneficiary or his family (this is particularly important for organic crops); and (vi) purchase of land (financed from counterpart funds). The maximum value of the Modular Incentive is 40% of the required investment for a viable family production enterprise with a cap of 6 million pesos (approximately US$ 2,600) when beneficiaries already own land. In case of participating beneficiaries that do not own land and who choose to rent land, a cap of 8.5 million pesos (US$ 3,700) would be established. When land purchase is deemed necessary, the ceiling of the Modular Incentive would be 17.5 million pesos (JS$ 7,600) of which no more than 11 million pesos ($5,000) would be available for the purchase of land, under the condition that the total cost of land and its preparation would not exceed 35% of the required investment for the establishment of the project. The different caps placed on the incentive as well as the requirement that land be held in trust rather than titled individually are designed to allow landless peasants to participate in the project either through rental markets or land purchase while at the same time making participation in the subproject solely for the purpose of land acquisition less attractive. The terms and conditions of the Modular Incentive are based on the financial analysis of the prototype productive partnerships. In addition, the Modular Incentive takes into account other incentives and subsidies geared towards the rural sector to ensure that it is within a reasonable range. Along similar lines as under the pre-investments sub-component, the project will finance technical assistance and training during the implementation period of the productive partnership. Component 3: Project Management. Under this component, the project would finance technical assistance, goods and equipment and incremental operating costs for the establishment and operation of a Project Coordinating Group (PCG) in MADR, the establishment of a management information system, and design and implementation of monitoring, evaluation and learning arrangements. A consistent effort would be made to establish a web-based interface between the project, beneficiaries and TA providers which would facilitate two-way communications. By doing so, it is expected that travel by stakeholders for the purpose of project implementation could be reduced, thereby reducing security risks associated with project operations. - 1 1-  2. Key policy and institutional reforms supported by the project: To better tailor the financing needs of small farmers to the integrated character of productive partnership subprojects, the project proposes the establishment of the Modular Incentive. This incentive provides seed capital for approved productive partnership subprojects, that can be applied to a range of investment items and is managed by the productive partnership stakeholder themselves, following a participatory model of empowerment. Since both in terms of orientation and implementation, this Incentive is new, it would be formalized following a new regulation of Law 101 of 1993 signed into effect through a Presidential Decree (Decreto Presidencial). A draft Decree, endorsed by MADR has been presented to the Bank before Negotiations. Signing of the Decree would be a condition of disbursement of the Cost Sharing Transfer category of the loan. Based on the principles of the Agrarian Reform Law (Law 160) of 1994 that establishes the basic framework for voluntarily negotiated land reform for those subprojects where a transfer of land is required, the project would seek to implement its support by adopting the procedures established in the pilot for land reform which was carried out from 1997-1999. The Presidential Decree for the Modular Incentive would formalize disbursement of the land purchase portion of the Modular Incentive (financed from counterpart funds) under Clause 7 of Law 101 rather than Law 160. 3. Benefits and target population: Economic benefits. The project will promote the cultivation of cash crops within the context of sustainable production systems. Subprojects will aim to provide net profits of at least 0.5 SMLMs in excess of family labor costs at on-going market rates in the subproject areas. Plot size per family (unidad agroempresarial) would be calculated accordingly. This contrasts with the current method for calculating the size of family production systems, which establishes as a parameter for plot calculation actual rather than optimal use, and favors hired over family labor. Initial incomes would be less, especially in the case of perennial crops, but they would increase over the long run as financing costs of capital investments decrease. Farmers and their families involved in subprojects would benefit directly from the program while the creation of employment, another priority of the project, would indirectly benefit others. Agribusiness would benefit from increased local supply of necessary inputs of better quality and sufficient quantity. National benefits include a reduced dependence on some tradable commodities that may be produced locally and increased production of exportable crops. In aggregate this would improve the country's trade balance. The project also provides opportunities for more diversified crop production thereby reducing production and commercial risks at the national level. Social benefits. The emphasis on forming partnerships (especially with traditionally marginalized groups) produces stronger social and economic bonds among different institutional actors within and between communities. This enhanced social cohesion may help reduce rural violence. Moreover, the income generation and employment opportunities presented to small farmers through cultivation of crops may help foster greater financial independence and empowerment. In addition, efforts to include all family members in the decision-making process would create an opportunity to voice concerns and propose solutions regarding domestic violence, the double shift for women and the effects of migration of youth either to seek employment in urban areas or to avoid recruitment by paramilitaries or guerilla groups. Environmental benefits. The project proposes diversified farm systems to avoid both the economic and environmental risks associated with mono-cultures. The project would also promote sustainable agriculture in part by supporting the generation of crop revenues from green/organic labels, which usually provide long-term contracts at more stable prices. The efficient use of land resources through land rental markets, which price land according to agricultural-based returns, will also be supported by the project. This method - 12-  of land access would result in the establishment of viable family farms on lands that are better suited for agricultural production. With respect to environmental costs, technical assistance is crucial to the viability of the subprojects as mismanagement of pesticides, herbicides, fungicides and fertilizers causes damage to water resources, soils, wildlife and the crops themselves rendering the project unsustainable. Integrated pest management and utilization of alternative technologies for fertilization will be incorporated into project activities. The project considers technical assistance not as a cost to the project, but as an investment since inappropriate use of agrochemicals results in excessive production costs. Reduced Risks. By linking up small farmers producer organizations with agribusiness in productive partnerships there is considerable potential to reduce various types of risks. First, commercial risks would be reduced for small farmer producer organizations through the establishment of a better secured marketing channel and better access to market intelligence, including knowledge about product quality standards. Second, technical risks would be reduced through the provision of technical guidance and assistance by participating agribusiness in order to secure supplies under agreed quality standards. Third, financial risks would be reduced through more flexible financing provided by agribusiness, the use of trust companies as retention agents for interest and debt service payments from the small farmer producer organization to debt financing providers and the signing of forward contracts which could serve as loan collateral. Target population. The target population consists of low-income small-holders with under-exploited plots, rural day-laborers without land, and displaced families. The population will also likely be a member of a cooperative and demonstrate strong entrepreneurial skills in agriculture and related activities. The eligibility criteria for project participation that have been agreed, include the following: (i) poor male and female heads of household with or without land, (ii) between 18-50 years old, (iii) at least one family members with complete primary schooling or participating in adult education programs, (iv) at least three years of agricultural experience relevant to the proposed partnership activity, (v) willingness to participate in the training programs provided by the project, (vi) assets of not more than 200 minimum wages, and (vii) with 75% of the income derived from agricultural activities up to a total (including off-farm income) of no more than 4 minimum wage per month. The project can be classified as a poverty-focused operation as the population of potential applicants has a significantly larger proportion of low-income people than the country's overall population. This is in part a result of the highly skewed rural-urban poverty distribution. Although the project will not specifically target special population groups because of its demand-driven nature, the project will accommodate the special conditions and needs of indigenous peoples, Afro-Colombians and the internally displaced populations. Interested indigenous communities could participate through their Cabildos, provided the land tenure of the area of the Resguardo to be cultivated under the subproject is not in conflict. The beneficiary eligibility criteria would not be applied, rather participants would be selected by their Cabildos according to its own selection process. The Afro-Colombian population would have access to the project benefits through the established criteria for productive partnerships if they live mixed with the rest of the population of the locality. If they live in community, in a collectively owned territory, they could participate through their own organizations in a similar fashion to the indigenous communities. The displaced population could access the project through their existing or new organizations, keeping in mind the norms of the government policy for the internally displaced. According to household surveys conducted as part of the project preparation process, the incidence of poverty among rural households is approximately 80%, based on the index of "Unsatisfied Basic Needs". Consequently, there will be plenty of eligible participants throughout the country. This situation offers an -13-  opportunity to achieve two objectives simultaneously: (i) reduce the risk associated with the armed conflict; and (ii) increase the quality of the proposed productive partnerships. In effect, by avoiding a geographic targeting, the partnership approach and methodology will be spread out in the country in regions of high, medium and low intensity of conflict. This itself would become, on the one hand, a good dissemination strategy of the model across the country; on the other hand, a risk mitigation measure by not concentrating all efforts on difficult regions. In addition, by opening up the opportunity to participate to interested parties from the whole country, the pool of productive partnership proposals will be larger, and consequently, project management will have more choice to select the best proposals. 4. Institutional and implementation arrangements: Implementation Period. The loan is expected to become effective March 31, 2002 for a 5.5 year period through September 30, 2007. Guiding Principles for Institutional Framework. The nature of the project with its focus on facilitating partnerships between agribusiness and small farmer producer organizations that are economically feasible and sustainable, implies the need for up-front recognition of a rather limited role of the public sector in the implementation of the project. It is this premise, while taking into account the experiences generated by the institutional innovations in other projects in the Colombia portfolio, that provides the building block for the proposed institutional framework of the Productive Partnership for Peace Project. The implementation structure of the project is based on three principles: (i) responsibilities of public sector are specified in terms of orientation and coordination of the project; (ii) execution of project activities is completely decentralized and transferred under the umbrella of the private sector; (iii) ample scope for participation by relevant stakeholders is structured through a clear distribution of roles and responsibilities that takes into account recognized competences and capacities of each party. At the same time, operational procedures are designed to provide transparent rules of the game, clear eligibility criteria for the identification of beneficiaries and allocation of resources, efficient flow of funds and adequate supervision arrangements. Borrower and Executing Agency. The Borrower of the loan to finance the project would be the Republic of Colombia represented by the Ministry of Finance. The Executing Agency would be the Ministry of Agriculture and Rural Development (MADR). The project would also tap into the fiscal space of the Investment Fund for Peace to finance productive partnership subprojects but only as counterpart funds to the project. Project Oversight and Policy Guidance. Project oversight would be conducted by a National Technical Committee established in MADR. This Committee would be presided by the Minister of Agriculture and Rural Development or his/her delegate (Vice Minister of Agriculture or Director General). Other members of the Committee would include the Director of Agricultural Development in the National Planning Department; and the Executive Director of the Investment Fund for Peace or his delegate for agricultural affairs. To facilitate participation of a relevant range of stakeholders at the strategic level of the project, a representative of the financial sector, a representative of agricultural producers organizations and a representative of small farmers (campesino) organizations would also be included in the National Technical Committee. The Minister of Agriculture and Rural Development would appoint these representatives, following criteria specified in the project administrative manual. In case counterpart funds for the purchase of land under productive partnership subproject originate from INCORA, a representative of this institution would also participate in the National Technical Committee for this particular purpose. In general terms, the National Technical Committee would ensure consistency of project implementation with agreed - 14 -  conceptual and technical design. By doing so, it would approve annual operative plans and project manuals, review project monitoring reports, appoint the project management team and formally assign the Modular Incentive to productive partnership subproject that meet established eligibility criteria Project Management. The coordination of project implementation at the operational level would be the responsibility of the Project Coordinating Group (PCG) to be established in MADR. PCG would consist of a team of dedicated professionals with relevant disciplinary backgrounds for the purposes of the project and headed by the project Manager. The project manager would report to the National Technical Committee in general and to the Minister of Agriculture and Rural Development in particular. PCG would have the following functions: (i) elaborate annual operation plans and ensure their execution once approved; (ii) elaborate semestral monitoring reports with approved annual operation plans as reference; (iii) elaborate and propose modifications to project manuals and guidelines; (iv) establish a long list of eligible TA providers; (v) conduct a public information campaign regarding the objectives and rules of the game of the project; (vi) select productive partnership ideas presented jointly by interested partnership participants for pre-investment support; (vii) arrange for the contracting of TA providers for facilitating the preparation and implementation of productive partnerships; (viii) arrange for the contracting of experts for the evaluation of detailed productive partnership proposals; (ix) establish agreements with representatives of approved productive partnerships and trust fund companies for the administration of the Modular Incentive; (x) arrange for the contracting of the external auditors of the project; (xi) arrange for the contracting of an independent firm to evaluate the effects and impacts of productive partnerships; (xii) ensure compliance with agreed norms and procedures specified in the Loan Agreement; and (xiii) interact with the World Bank regarding all project related themes, including the preparation and presentation of reports and no-objection requests and the coordination of supervision missions. Project Implementation. To support the preparation of productive partnership proposals and to facilitate the implementation of approved productive partnership subprojects, TA providers would have an important role under the project. These organizations would be preferably NGOs or consulting firms and comply with minimum eligibility criteria established in the PPS Manual of the project. Productive partnership participants could select eligible TA providers from a long list established by PCG. TA providers would be contracted by the Cooperation Agency, following instructions from PCG. TA providers may either form consortiums with other organizations or request that PCG allows outsourcing to subcontract some specialized services in the preparation of productive partnership proposals for which they would not have in-house capacity (detailed eligibility criteria and TORs are presented in Annex 2 and Annex 11). Productive Partnerships. In order to put in practice the principle of self-management by productive partnership participants, the Modular Incentive provided under the project through cost sharing transfers would be disbursed into a trust account managed by a trust company supervised by the Superintendent of Banks. The beneficiaries of this trust would be the members of the small farmer producer organization participating in the approved productive partnership. The trust company would receive instructions from the Partnership Steering Committee, consisting of two members of the producer organization and two representatives of the participating agribusiness. This committee would have authority to use the resources of the trust fund according to the approved investment plan of the productive partnership. Beneficiaries would have a share in the trust, which they would lose if they leave the partnership before the implementation plan has been completed. Said plan would most likely outlive the spending of the Modular Incentive, and most likely last during the life of any loans guaranteed by the trust and would be previously agreed upon by the various partners. Once the partnership subproject has been implemented according to the cooperation agreement, ownership of the assets will be distributed among the beneficiaries in accordance with their shares unless another agreement is reached; e.g. distribution of all assets to a cooperative. - 15 -  Procurement. MADR, through PCG, would be responsible for procurement. A Cooperation Agency would be contracted to assist in procurement and administrative services (except for cost-sharing transfers), following a competitive process. Under the cost-sharing transfers to support productive partnership subprojects, funds would be transferred into a trust fund account held in the name of the productive partnership beneficiaries at a trust company. The trust company would effect disbursements according to the terms contained in the cooperation agreement signed by the Partnership Steering Committee and PCG. The Partnership Steering Committee would cany out the needed procurement of works, goods and services being financed according to the agreed implementation plan. The PPS Manual will contain, in addition to eligibility criteria and other aspects, the procurement procedures to be followed. Accounting, Financial Reporting and Auditing Arrangements. MADR, through PCG, would be responsible for all financial management aspects of the project. During project appraisal, a financial management assessment has been conducted in accordance with OD/BP 10.02 to define the required support to MADR to effectively assume all financial management functions along the lines as spelled out in Annex 6. An action plan has been agreed that would bring the financial management capacity of MADR in line with Bank requirements. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Three other project alternatives were considered but were rejected largely because they addressed the development objectives of the project in a non-integral way. The first alternative consisted of a project focused on market-assisted land reform and the impact it would have on income and assets of eligible land reform beneficiaries. This alternative was not pursued because the Government does not consider land reform as the key driver of its rural development policy as presented in the National Development Plan 1998-2002. However land reform is not completely out of the picture, as the project envisages to facilitate access to land for the landless rural population involved in productive partnership subprojects. The second alternative was to propose a rural finance project as access to long-term capital has been cited as a leading constraint to more productive agriculture in the country. The reason for rejection centered around the realization that finance is an important but not sufficient condition to ensure agricultural growth though the promotion of productive projects. In this context, it should be noted that FINAGRO did lend $1.02 trillion pesos of the $1.2 trillion pesos (US$522 million) allocated in 2000. And while this represents a significant increase over the previous two years; approximately 23% of the loans represented restructured debt that formed part of a debt forgiveness program designed to promote agricultural growth. In addition, this project alternative did not address the issue of violence which is critical if sustainable growth in the countryside is to be achieved. The third alternative was to design a project that involved exclusively the public sector and would not aim to stimulate private investment in agriculture. However, it was soon recognized that the public sector did not have the financial resources nor technical experience to provide the conditions necessary to facilitate productive agricultural projects. The private sector would be able to provide these resources and - 16 -  knowledge in a more cost-effective manner. It was also recognized that the private sector may also be unwilling to invest in certain areas where the perceived risks are too high. In these cases farmer organizations and Government would need to assume greater responsibility. The project design provides this flexibility. Rationale for Lending Instrument. Although it was originally proposed to develop an Adaptable Program Loan that could be used as a vehicle to implement agreements for rural development reached in the context of the peace negotiation process, this idea was dropped during project preparation as the volatility of the peace negotiation process made it impractical to define a realistic long term vision for rural development in Colombia. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Poverty reduction and peace Colombia: Magdalena Medio S S (4371) Poverty reduction and peace Colombia: Peasant Enterprises S S LIL Violence Violence in Colombia: Building Sustainable Peace and Social Capital; ESW Rural development Colombia: Rural Development S S Investment Program (3250) Rural development Colombia: Rural Development Investment Program (3250) Agriculture Colombia: Agriculture S S Technology (6880) Other development agencies IDB - peace and poverty reduction Investment Fund for Peace IDB - poverty reduction Micro-enterprise Program IDB - poverty reduction Employment Generation Program IFAD - poverty reduction Rural Micro-enterprise Development Project 1P/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: The project design integrates several important development themes based in part on lessons learned from related projects. These lessons include: Rural development. The project specifically build on lessons learnt from the Rural Development Investment Program (RDIP) in Colombia which was financed by the Bank from 1990-94 ICR No. 16721; Colombia - Rural Development Investment Program (Loan 3250-CO). These are as follows: (i) a flexible, open design is needed for programs targeted to local governments due to the enormous diversity of capacity - 17 -  and socio-econoniic conditions in Colombia; (ii) a simple monitoring and control system should be in place from the start of the operation in order to rapidly identify and correct problems; (iii) it is advisable to separate monitoring and evaluation functions, and rely on an independent agency to conduct periodic impact evaluations; and (iv) the process of designing subprojects should be highly participatory, drawing on the contributions of municipal governments and local campesino organizations. Social capital. A main objective of the project is to develop social capital in conflict areas in Colombia. The Magdalena Medio and Peasant Enterprise Zones LILs highlight a number of challenges on this topic. One of the most important is the complexity of the armed conflict and difficulties in overcoming ideological differences and creating mutual interest around development programs. The importance of identifying an impartial group (like the Consortium) in getting a close feel of the dynamics with a particular location should not be underestimated. Violence. The recent sector work on violence in Colombia sheds light on the key development constraint in the country today. The report provides a conceptual framework that identifies a continuum of violence, their underlying causes, and interventions recommended to reduce violence. The importance of partnerships and small-scale, 'bottom-up' projects are two important findings from the report that have been incorporated into the project design. Land ownership. The proposed project design is based upon several lessons learned from recent experience in Colombia on market-assisted land reform. These lessons stress the importance of: (i) implementing land reform through voluntary deals between willing buyers and interested sellers rather than through administrative procedures followed by bureaucrats; (ii) providing a subsidy for a package of investments including land, on-farm complementary infrastructure, inputs and technical assistance aimed at the establishment of viable family farms rather than only subsidizing a transfer of land; (iii) using mechanisms of social control in a decentralized setting for transparent selection of beneficiaries rather than administrative procedures applied in far-away bureaucratic and politicized agencies; (iv) not obliging beneficiaries to farm collectively; and (v) ensuring an enabling policy and regulatory environment to avoid that land reform is only a one-time redistribution. Agriculture and Partnerships. The setting up of a development process based on Productive Partnerships requires that proper mechanisms are set in place to provide participating farmers with "independent" sources of technical assistance that can be used to counterbalance excessive monopoly situations and relationships with suppliers and buyers. It is also necessary to define the contractual and arbitration and conflict resolution mechanisms, which would guarantee the imnplementation of the partnerships, as well as operational methodologies and monitoring and supervision mechanisms that would ensure transparency in financial transactions and provision by government of matching grants. 4. Indications of borrower commitment and ownership: The project fits well within the rural policy framework established by MADR as it aims to facilitate investments in agriculture by building on the concept of partnerships as pursued under the PROAGRO program. In a larger context, the project is related to the Countryside in Action Program (el Campo en Acci6n) coordinated by the Investmnent Fund for Peace within the context of the Plan for Peace, Prosperity and Strengthening of the State as defined by the Government of Colombia in 1999. The formulation of prototype productive partnerships by the Agricultural Development Unit in the National Planning Department (NPD) together with MADR as part of the project preparation process has generated strong interest both at the local as well as the national level from the private sector as well as participating - 18-  campesino organizations. The presentation and discussion of these prototypes in the Consultative Committee has been met with favorable reactions from the financial sector, national producer organizations and other public sector organizations involved in rural development. This experience has enabled the NPD and MADR put the concept of productive partnerships in the priority list for public investments in an otherwise constrained public budget. The latter is evidenced by the fact that the project has been allocated fiscal space to initiate its operation in 2002. 5. Value added of Bank support in this project: The economic and political situation in Colombia today is clearly one fraught with challenges. A strong argument can be made for the World Bank to step up assistance at this time of need and provide support to the Government for projects promoting development and peace, specially when private and foreign investments have been reduced. In effect, the Bank has done so last year when it pledged its support to the social aspects of the Plan for Peace, Prosperity and Strengthening of the State. Bank participation would leverage international expertise in demand-driven rural investment programs, crop production models, partnerships between local communities and the private sector, formation of social capital (e.g. strengthening farmer cooperatives) and land reform. Both the acquisition of loans by producer organizations as well as the proposal that at least a portion of the modular incentive be repaid to the trust for further investment either in the project or social investments deemed necessary by the Steering Committee of the Partnership, require that microfinance mechanisms be introduced into the development and implementation phases of the subprojects. Colombia has had relatively few successful microfinance experiences particularly in rural areas, and the project will need apply results from other Bank experiences in this area. This should be done in coordination with microfinance development currently being coordinated between the Bank, DNP and MADR. Moreover, the project would build upon the Bank's significant experience in the rural development sector in Colombia: community participation and monitoring and evaluation mechanisms in the Magdalena Medio LIL; negotiated land reform through initial preparation of a proposed Market-Assisted Land Reform Support investment project; and demand-driven rural investment programs in the Peasant Enterprises LIL. Finally, the Bank's involvement in the project also reflects an increasingly important partnership with the Colombian Government to address issues of rural violence and can draw upon the recently completed sector work on violence: Violence in Colombia: Building Sustainable Peace and Social Capital. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$ million; ERR = 12 % (see Annex 4) O Cost effectiveness O Other (specify) The economic argument for this project is that the package of incentives and interventions will encourage farmers and agribusiness to undertake productive agricultural projects as partners. The direct effects of this investrnent consist of income and employment opportunities for farmers and subsequent improvements in standards of living. Indirect effects such as enhanced social cohesion or environmentally-friendly approaches to agriculture will not be valued at this time but will be identified and described qualitatively. Because of the demand-driven nature of the project and given the range of possible productive partnership subprojects, it is not known at the onset of the project which type of subprojects will actually be financed an in which proportion. Therefore, a total of six different prototype productive partnerships were formulated as part of the project preparation process to form the basis for the economic and financial - 19 -  analysis. These partnerships included a variety of crops/products, including palm oil, cacao, dairy, agro-forestry and vegetables. After conducting a financial analysis at the prototype level, the economic analysis was conducted by making two adjustments: (i) inclusion (or exclusion) of certain costs and benefits and (ii) revaluation of costs and benefits to their social opportunity costs. More specifically, these adjustments are including costs borne by the municipality or by the project, removing transfer payments such as those resulting from financing, taxes, or subsidies, and using shadow prices to convert financial flows to economic flows in order to reflect the social opportunity cost of land and labor. The NPV of the economic resource flows was calculated using a 12% discount rate. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = 15 % (see Annex 4) The financial analysis was conducted from the perspective of an individual farmer based on data collected from field observations and discussions with the farmer cooperatives and agribusiness. The cost of land was derived from local land sale or rental markets (where available). The analysis includes conservative estimates of the fixed costs related to the preparation and improvement of the land and the variable costs associated with the cultivation of the crops. The benefits were determined also based on conservative estimates of long-term productivity and crop prices. The financing required was also estimated for each prototype and may include a commercial loan, a loan from the agribusiness firm in the partnership, farmer savings (if available), and the incentivo modular. The net cash flow and liquidity ratio (ability of the farmer to adequately meet debt repayments) was also calculated. The net present value (NPV) of the financial cash flows (before and after credit and other supports) was calculated using a 12% discount rate. The results of the financial analysis indicate that the FRR for all prototype partnerships exceeds 15%. Although the analysis shows that there are viable investment opportunities in the rural sector, small farmers have difficulties accessing credit from commercial banks to finance these opportunities. This apparent paradox on one hand is caused by imperfections in the rural credit market and on the other hand by the fragile security situation in the rural areas which imposes an external cost to these opportunities. To the extent that productive partnership subprojects contribute in improving the security situation, as well as favorable environmental impacts resulting from better planning that optimizes the use of scarce natural resources, thereby generating an external benefit, public sector support as proposed through the Modular Incentive, could be justified to break the vicious circle which exist in credit markets and land use. Under the project, productive partnership subproject proposals would be evaluated based on their economic and financial viability. Each subproject proposal would contain a simplified financial and economic analysis based on a pre-defined template. Key assumptions would be assessed and a minimum FRR and ERR of 15% and 12% respectively would be required as well as positive NPVs at 15 and 12% discount rates. Sensitivity Analysis: Sensitivity analysis was conducted on both the financial and economic analysis. The following major risks were assessed through sensitivity analysis: (i) crop price; (ii) exchange rate; and (iii) interest rate. Multiple risk analysis was also conducted to estimate more accurately the expected economic and financial returns of the prototype partnerships. Fiscal Impact: Over a five year implementation project implementation period, the Government of Colombia would contribute US$20.3 million of which US$1.4 million would be covered through recuperation of income and - 20 -  sales taxes levied on the expenditures made under the project. Income tax revenues from incremental profitability of on-farm production would be negligible given the low level of income of the target population and the plethora of tax exemptions for agricultural activities. 3. Technical: The experience generated under the prototype productive partnership subprojects has enabled the development of specific instruments that are being incorporated in the PPS Manual. These include: (i) an appropriate format for the presentation of productive partnership subprojects, including procedures for the various type of assessments to be conducted in the subproject preparation stage; (iii) evaluation criteria to assess the feasibility of productive partnership subproject proposals; (iii) a standard cooperation agreement to be signed between project and productive partnership associates; and (iv) proposed training guidelines for productive partnership associates. The experience under the prototype productive partnership subprojects has also generated a large number of lessons learned that are being used to further specify and refine the PPS Manual These include: * The need for independent technical assistance and training to small farmers participating in productive partnerships to counterbalance existing market power of buyers and suppliers. * The need for conflict resolution procedures to be included in the productive partnership agreements. * The need for including post-harvest losses in the underlying farm models for the financial analysis. * The need to explicitly specify the time frame required to obtain expected results. * The need to differentiate the proposed technology to different typologies of beneficiaries, in case they represent a wide range of different groups. * The need to specify the responsibilities of the technical assistance provider to the productive partnerships vis-a-vis the technical advice from input suppliers to productive partnership associates; this in light of the recommendations from the Global IPM Facility. 4. Institutional: 4.1 Executing agencies: In order to keep all institutional institutions options open, it was decided by the Government of Colombia that the National Planning Department would take a lead in the preparation of the Project. This was done through the Agricultural Development Unit in this institution. During project preparation it became clear that MADR would be the most appropriate executing agency as the project would fit well with its PROAGRO program. The Agricultural Development Unit has maintained close collaboration with the Ministry during the project preparation process. MADR has experience with Bank financed projects and currently has two projects under implementation: (i) Agricultural Technology Development Project; and (ii) the Peasant Enterprise Zones Development LIL. 4.2 Project management: A Project Coordination Group (PCG) in MADR would be responsible for project execution at the operational level. PCG would consist of a team of dedicated professionals with relevant disciplinary backgrounds for the purposes of the Project. In order to maintain a strictly technical focus at this level of the project, operational procedures to be included in the Project Administrative Manual would be designed in such a way that: (i) the selection of professionals is done on an objective basis in a transparent and competitive manner; and (ii) PCG has the authority to operate independently within the agreed annual operative plans. Since most activities supported by the project will in fact be implemented by external parties such as - 21 -  technical assistance providers, councils of partnership associates, trust companies and the like, it is important that PCG has sufficient and adequate public communication skills and capacity to systematically convey project operational procedures and their rationale. In light of the fragile security situation, web-based project-stakeholder interfaces should be explored to the extent feasible. 4.3 Procurement issues: MADR, through PCG, would be responsible for procurement. A procurement assessment was conducted during project appraisal and has been incorporated in the project files. The assessment indicates the necessary staffmng of PCG and steps to be taken to comply with Bank procurement requirements. The overall procurement risk assessment rating is Average. A Cooperating Agency would be hired for contracting and payment purposes under the project. Hiring of such agency would follow a competitive process. Given the decentralized nature of the productive partnership subproject implementation arrangements, management and administration of the cost sharing transfer would not be handled by the Cooperating Agency. Procurement of goods and services under the productive partnership subprojects would be carried out by the Productive Partnership Steering Committee with the support of technical assistance providers contracted under the project. Procedures would be specified in the PPS Manual. These procedures would typically require price comparison of three price quotations, allowing sole-sourcing in cases where only one supplier exists in the area. Contracting and payment of service providers and suppliers would be done by trust companies contracted under the project to manage individual trusts. The PPS Manual would include: (i) standard cooperation agreements acceptable to the Bank between the project and productive partnership associates; and (ii) contracts between the project and trust companies. Expenditures under the cost sharing transfer category of the loan would be subject to approval of the Productive Partnership Subproject Manual by the Bank. 4.4 Financial management issues: A financial management assessment was carried during appraisal and conducted in accordance with OD/BP 10.02 (see Annex 6 and Project Files for details). For the purposes of financial management, it was agreed that the Project Administrative Manual would include, inter alia: (i) specification of the responsibilities of PCG in financial management; (ii) a chart of accounts in accordance with Bank requirements; (iii) design of an assets and inventory management and control system; (iv) design of intemal controls regarding staffing, transactions, accounting, etc.; and (v) training program on financial management for relevant project personnel. A financial management action plan, which aims to bring the financial management capacity of the MADR in line with the requirements of the Bank regarding the use of PMRs through the establishment of an integrated financial information system by March 31, 2003 was also agreed. The Cooperating Agency would have a financial management system acceptable to the Bank. To facilitate agility in the implementation of productive partnership subprojects, special attention would be paid to ensure that the cooperation agreement between the partnership associates and PCG specifies financial management responsibilities in accordance with the notion of empowerment and self-management. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. During project preparation, six enviTonmental assessments for the pilot productive systems were prepared by local consultants, under terms of reference acceptable to the Bank. The reports consisted of an -22 -  environmental impact assessment, an alternative technology assessment and an environmental mitigation plan. The lessons learned from contracting, implementing and reviewing these EAs have been used to design the environmental assessment methodology for the project and to design specific environmental activities which were identified as priorities. This project will likely result in both a shift in crop cultivation to high-margin, permanent crops and expansion of agricultural lands. One objective of the project is to reduce pressure on land caused by environmentally unsustainable agricultural practices, such as misuse of agro-chemicals, cultivating annual crops in frontier areas and raising livestock in an unsustainable fashion. Nevertheless, production and expansion of both permanent and transitory crops could result in negative environmental impacts from, among others, construction of roads and other infrastructure, technology changes in processing phases, changes in use of pesticides, potential encroachment on natural habitats, etc. Many negative effects of subprojects will be avoided by following a detailed methodology for environmental screening and assessment. Any remaining negative impacts will be mitigated through use of operational manuals, guidelines and development of environmental management plans, all to be financed by the project. 5.2 What are the main features of the EMP and are they adequate? Most negative environmental impacts will be mitigated through the implementation of guidelines and manuals. However, all subprojects will undergo at least an initial screening of potential negative environmental impacts. The underlying premise of the proposed environmental assessment methodology is to keep the environmental assessment procedure simple and effective. The methodology relies heavily on the use of checklists and matrices, and only in rare cases requires in-depth environmental assessment. The environmental assessment responsibilities are divided amongst various institutions in order to ensure adequate capacity. This division of labor will also serve as a system of checks and balances. The project includes an environmental awareness and education campaign for the communities requesting funds. Prior to effectiveness, the project team will work with the environmental specialist in PCG to fully develop the specific tools (such as matrices, etc.) to be used during the EA process. The EA methodology is detailed in the Environmental Annex to the PAD (Annex 12). Following the guidance set forth in the Environmental Guidelines for Social Funds, the project will: i) check subproject against certain eligibility criteria (including the negative list of category A projects, and others that the Bank does not finance, i.e. tobacco); ii) review the subproject to ensure it is in accordance with the land use plans of the area; iii) use a predefined matrix which identifies possible environmental impacts of various production activities, determining whether an EIA is required (rare), a limited EA (common), or no EA at all (rare); and, (iv) undertake the EIA or limited EA and come up with an environmental management plan based on the results. Monitoring of the EMP will be done by the community, with oversight from PCG and technical assistance providers. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: June 30, 2001 All productive partnerships subprojects will be those that the Bank normally classifies as either B or C; all subprojects that would normally be classified as A by the Bank will be excluded from financing. The detailed institutional framework and EA methodology for this is described in the Environmental Annex (Annex 12). 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Since the subprojects are demand-driven, most stakeholders will be involved from the onset. However, in - 23 -  the EA process, numerous opportunities exist to expand the audience, but at the least, the EIAs and limited EAs will be publicly discussed. Additionally, environmental impact monitoring plans will be managed in large part by the communities. An educational campaign is planned which will reach beyond the immediate beneficiaries of the project. Reporting on environmental performance will be made public. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? PCG will follow up on all identified mitigation measures, ensuring proper implementation and potentially negotiating with communities for additional activities, should unforeseen environmental impacts occur. The environmental specialist in PCG will decide on the reporting requirements from each of the subprojects (to be part of the EMP) in order to effectively monitor implementation. In turn, PCG will produce semi-annual reports on the EA process and monitoring success. These reports will be submitted to an independent extemal evaluator in order to facilitate the impact evaluation of the project, and also to the Bank as part of supervision missions. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. As part of the preparation process for the project, a social assessment was conducted for each of the six productive partnership prototypes. The reports of these assessments with detailed information on each of the prototypes can be consulted in the Project Files. A detailed synthesis is presented in Annex 11. In general terms, the results of the social assessments indicate that productive partnerships provide participating partners the opportunity to satisfy their own interest in a relationship that is interdependent and creates a win-win situation for all parties involved. That is, the need for higher levels of productivity and competitiveness of the firms, and the need for more secure levels of income and access to productive assets by the small producers. The partnership is more than a contract to the extent that it assumes convergence of interests, complementarity of contributions and shared risks to achieve the objective. More specifically, the studies show some common features: (i) the interest of all parties is notorious in the establishment of a partnership which has the potential to help solve the problems of the different parties of the value chain and is fueled by the interest to receive support from the project; (ii) the degree of collaboration between the agribusiness firms and producer associations varies, but the tendency is for the associations to allow the firms to lead; (iii) the specific requirements of the business itself impose conditions to which all have to concede, particularly those with less power; and (iv) there is awareness on the side of the firms that their contribution to the partnerships goes beyond the provision of a contract to the associations. In addition, they recognize that this type of collaborative arrangement has the potential to improve the living conditions of the rural poor and to mitigate social tensions. This view is widely shared by the members of the associations and other relevant stakeholders. The experience of the social assessments conducted under the prototype productive partnership subprojects has also generated a number of lessons leamed that are being used to further specify and refine the PPS Manual. These include: * In order for productive partnerships to be models of collaboration there is a need to define partnerships beyond mere contractual arrangements through the definition of a shared long term vision, while at the same time expected contributions of participating associates to realize this vision should be based on realistic projections of improvements in existing capacity to do so. * Timing of the social assessment is important as there is a tendency by the partnership associates to - 24 -  focus on the technical and economic aspects of the partnerships. * There is a need to go beyond a static description of the social aspects related to productive partnerships to a more dynamic analysis that based on the expected responsibilities of small farmer producer organizations in the implementation of agreed productive partnerships indicates institutional strengths and weakness and corresponding priorities for local capacity building. * Given the potential conflicts of interests between productive partnership associates, there is a need to incorporate a well-defined conflict resolution mechanism in the cooperation agreement between project and partnership associates. During appraisal the lessons of the experience of the social assessments of the prototype partnerships were examined. Based on those lessons, project beneficiary eligibility criteria were confirmed as well as social selection and prioritization criteria for subproject profiles and proposals (see Annex 11 for details). In order to improve the probability of success of subprojects, the track record (e.g. labor, financial, environmental) of the participating firm as well as its commitment to transfer knowledge and information to the participating small farmer producer organization were also included in the subproject eligibility criteria. Model terms of reference for social assessments have been specified and will be incorporated in the Productive Partnerships Subproject Manual. As the project is designed to be implemented in a demand-driven fashion, participation is entirely voluntarily. Given the low level of education of the rural poor, care has been taken so that beneficiary eligibility criteria do not put too much weight on education as a minimum qualifying criteria in order to avoid that too many potential participants would disqualify; rather, the technical assistance provider should help identify alternatives accessible to farmers and focus beneficiary selection on efforts to comply with educational requirements. To promote the inclusion of landless poor as beneficiaries in the project, the Modular Incentive provides an additional incentive for the purchase of land in the context of agreed productive partnerships. To promote the participation of organized indigenous groups, Afro-Colombians and displaced people, the project would adopt a policy of affirmative action under which compliance with beneficiary eligibility criteria would be waived so as to not break the cultural norms that bind them together. These productive partnerships would foster empowerment and self-management for project implementation. However, the project would not directly resolve social or armed conflict. It creates a niche within a territory in which productive activities are undertaken as a joint venture between peasants and agribusinesses. Partnerships of this type create social capital, contributing to the reduction of social tensions . 6.2 Participatory Approach: How are key stakeholders participating in the project? The primary stakeholders of the project are poor rural families who will select themselves to enter into partnerships with firms and the firms themselves. Productive partnerships empower stakeholders to take the implementation of the activities in their own hands and to seize the responsibility as agents of their own change. The construction of the partnership is itself a participatory process which involves intense interaction among the partners, capacity building to gain understanding and abilities, and negotiation of the rules of action for the enterprise. At the end, there is a formal agreement signed by the parties, which includes a conflict-resolution mechanism agreed upon by them. The participatory model of empowerment for development embedded in the productive partnership concept emphasizes a group approach. It focuses on the formation or strengthening of producer associations leading to self-management by stakeholders at the local level. It establishes linkages with private enterprises through a variety of collaborative arrangements that create a win-win situation for all participating parties. Overall, it contributes to the fornation of social capital, to the increase of rural household incomes, and to the reduction of social, political and economic violence. - 25 -  6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? At the national level, a Technical Committee would be established in MADR. The National Technical Committee would ensure consistency of project implementation with agreed conceptual and technical design. This Committee would also include a representative of small farmer organizations and a representative of agricultural producer organizations. At the local level, the project would rely on NGOs and other service providers to provide technical assistance to small farmers producer organizations as associates in preparation and implementation of subprojects. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? As a critical factor in the promotion of this participatory approach of partnership building, the project would include an information sharing and communications strategy to motivate primary stakeholders, and promote public support and social control of project activities. This strategy would ensure that (i) potential beneficiaries know the eligibility criteria, their rationale and ways of accessing the project benefits; (ii) relevant stakeholder leam and become familiar with how the project works and how to fulfill their role in it; and (iii) citizens exercise control over project activities. The project would be positioned as an instrument of providing development assistance aimed at creating opportunities for those capable to meet the minimum requirements and with a certain entrepreneurial vocation. The operational arrangements of using trust accounts managed by the partnership associates to implement the productive partnership subproject is in line with the empowerment and self management model promoted under the project. 6.5 How will the project monitor performance in terms of social development outcomes? The productive partnership subproject proposal itself would provide a baseline that could be used as a benchmark for monitoring conducted by the TA provider during the implementation stage of the subproject. The frequency in the use of the agreed conflict resolution mechanisms would also enable the project to closely follow-up whether approved productive partnership subprojects are moving in the right direction or not. In addition, it is foreseen that the project would contract and independent evaluator to assess the effects and impacts of productive partnerships, once completed. This assessment would involve participation of project beneficiaries through focus group discussions and would be complemented with quantitative impact analysis methods. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy Applicability Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes 0 No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No Forestry (OP 4.36, GP 4.36) O Yes * No Pest Management (OP 4.09) * Yes C No Cultural Property (OPN 11.03) 0 Yes 0 No Indigenous Peoples (OD 4.20) O Yes * No Involuntary Resettlement (OP/BP 4.12) 0 Yes 0 No Safety of Dams (OP 4.37, BP 4.37) C Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. - 26 -  The project would not finance productive partnership subprojects that would imply an environmental category A classification. Proposed location of subprojects would be verified with municipal land use plans (planes municipales de ordenamiento territorial). Project procedures and eligibility criteria would be widely disseminated through a public information campaign. Productive partnership subproject proposals would be evaluated by a panel of external experts, including an environmental specialist. PCG would include a professional with environmental assessment expertise. F. Sustainability and Risks 1. Sustainability: The economic and financial analyses will provide information on the overall viability of the productive partnership subprojects. The cost recovery mechanism that will be promoted for the Modular Incentive will take advantage of the flexibility of trust law, which, in lieu of the onerous restrictions applied by Colombian banking law to community savings vehicles could provide an alternative to better link small farmers with the formal financial sector, thereby contributing to the creation of a more conducive financial environment for future investments. The application of beneficiary eligibility criteria will help ensure that the benefits of these subprojects accrue to low-income yet disenfranchised groups. This focus will help ensure that the subprojects are viewed favorably by insurgent groups and thereby reduce the risk of their interference. With respect to the environment, detailed guidelines have been specified as to the requirements for EA review and approval for subprojects (see Annex 12). It is also believed that the long term viability of productive partnership subprojects will be enhanced by taking into account the labor, financial and environmental track record of interested private sector partners in the subproject selection process. 2. Critical Risks (reflecting the failure of critical assurnptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective The armed groups prevent partnerships H Effective public information campaign about all from working effectively. relevant aspects of the project. Promote geographical dispersion of productive partnerships portfolio . Project benefits do not accrue to rural S Effective public information campaign to poor due to poor targeting and/or the fact communicate eligibility criteria to interested that partnerships reinforce asymmetry in potential participants. power and farmers find themselves in "patron-client" relationships with private Training to small farmers who participate in firms. productive partnership subprojects. Independent technical assistance as "countervailing power". Technical assistance providers M PCG to be very selective on the contracting of insufficiently knowledgeable about TA providers, which would be encouraged to agribusiness and participatory planning. form alliances with overseas companies in case they would lack expertise There is not sufficient social capital to S Invite expressions of interest for the preparation agree on a common and shared vision for of subprojects from a large audience in order to - 27 -  local development. have more choice in the selection of pre-investment support. Banking sector unwilling to provide H Structure productive partnership subprojects in long-term finance for crop production. such a way as to minimize debt financing. Structure required debt financing based on group lending and using participating agribusiness as retention agent. From Components to Outputs Timely availability of counterpart funds. M Counterpart funds would be primarily used to finance purchase of land. Lack of counterpart funds therefore would not affect overall project implementation, but hamper participation of landless poor in the project. Budget allocation and execution M Participation of Director of NPD in the National procedures are time-consuming and Technical Committee might facilitate timely complex. conclusion of burdensome budgeting process. Lack of commitment to maintain highest S Ensure competent staff hiring and adequate professional standards in project staff training through an agreed objective and selection. transparent process. Overall Risk Rating 5 Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: Producer organizations receiving costs sharing transfers as seed capital for productive partnership subprojects may misuse the funds and generate public controversies. The use of trust fund companies for contracting and payment of service providers and suppliers and the use of Technical Assistance Providers to endorse disbursement requests from the partnerships to the project are geared to mitigate this risk. In case productive partnership subprojects do not generate the expected results and positive outcomes, conflict may arise between participating associates and other relevant parties (e.g. banks that provided a loan). This might worsen the already fragile security situation in rural areas. In order to reduce this risk, the project would aim to generate a large pool of subprojects by not restricting its geographical coverage. By doing so it would be in a position to select those proposals that have the highest chance of success. In addition, the project would not support productive partnership subprojects with financing plans that indicate excessive levels of indebtedness by participating small farmers. Also the public information campaign supported under the project will raise awareness and knowledge regarding financial obligations, particularly those related to debt acquired with commercial banks, among interested small scale producers. - 28 -  Elements of project management may become corrupted thereby damaging the credibility of the project. This risk is mitigated by applying objective and transparent criteria in the selection process of professionals for PCG and by conducting a public information campaign which provides relevant stakeholders with sufficient information to exercise control over project activities. G. Main Loan Conditions 1. Effectiveness Condition * Adoption of the Project Administrative Manual acceptable to the Bank. * Presentation of the first year Project Implementation Plan acceptable to the Bank. * Effectiveness of the Cooperating Agency agreement acceptable to the Bank. * Establishment of the Project Coordination Group with staff acceptable to the Bank. 2. Other [classify according to covenant types used in the Legal Agreements.] Appraisal: Based on available draft documentation presented by the National Planning Department, the following aspects were agreed during appraisal: * Confirmation of composition of National Technical Committee. 3 Confirmation of the composition of PCG and selection procedures. 3 Confirmation of draft TORs an contractual arrangement for TA providers for both the preparation and implementation of productive partnerships subprojects. 3 Confirmation of terms and conditions of Cooperation Agreement between partnership associates and the project; including composition of Productive Partnership Steering Committee. 3 Confirmation of draft TORs for trust companies with respect to the management of cost sharing transfers. 3 Confirmation of draft TORs for Expressions of Interest by TA providers for the purpose of establishing a long list of qualified institutions. 3 Confirmation of beneficiary eligibility criteria for special population groups, and draft TORs of social assessment. i Confirmation of the methodology for financial and economic analysis of productive partnership subprojects. * Confirmation of the scope and seize of the Modular Incentive, including procedures to support the purchase of land. * Confirmation of the environmental assessment methodology and actions to ensure appropriate institutional capacity at the project level. * Confirmation of draft TORs with respect to the panel of external experts for the evaluation of productive partnership subproject proposals. * Confirmation of draft TORs for the contracting of an external institution for effect and impact evaluation. * Confirmation of procurement plan and procurement procedures by conducting a procurement assessment. * Confirmation of draft TORs of external auditors and specification of other financial management aspects (reporting, plan of accounts, internal controls etc.) through a financial management assessment. - 29 -  Negotiations: The following documents were received before negotiations * Draft Productive Partnerships Subproject Manual * Draft Project Administrative Manual * Draft Presidential Decree to formalize agreement (scope, size, implementation arrangements) regarding Modular Incentive Disbursement Conditions Expenditures to be made under the cost sharing transfer category of the loan would be subject to: * Adoption of the Productive Partnerships Subproject Manual, acceptable to the Bank; * Establishment of an integrated financial management in accordance with Bank requirements; and * Signing of the Modular Incentive Decree regulating the cost sharing transfer system. H. Readiness for Implementation O 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 0 1. b) Not applicable. OI 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. O 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. O 4. The following items are lacking and are discussed under loan conditions (Section G): Finalization and adoption of the Project Administrative Manual, the first year implementation plan, effectiveness of the Cooperation Agency agreement and the establishment of the PCG. - 30 -  1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. [ 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. _ _ _ _ _ _ _ _ _ _ _ ez Q L4e ) jS _ _ _ _ _ _ _ _ _ _ _ Pierre Werbrouck Redwood Olivier Lafourcade Team Leader Sector Director Country Director - 31 -  Annex 1: Project Design Summary COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT A KeyPerformance; Data Collection Strategy Hierarchy of Objectives Indicators _ _ _ _ Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Improve living conditions of Unemployment in Government statistics and Despite fiscal crisis, the rural poor by addressing subproject areas reduced by household surveys macro-economic and sector the causes of poverty and 10% in comparison with policies are not biased violence 2001 regional indicators against the rural poor. People living under the Household surveys, poverty Higher income and poverty line within studies employment added to subproject area is reduced strengthened social cohesion by 20% reduces forms of economic and social violence Increased collaboration Agricultural sector reports between small farmers and agribusiness in rural areas Agricultural sector reports Increased know-how of small farmers through strategic alliances - 32 -  Key Performance Data Collection Strategy Hierarchy of Objectives Indicators | Critical Assumptions Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: To generate income, create During 2002-2006 Subproject baseline and Armed conflict does not employment, and promote producers participating in monitoring results interfere with project social cohesion of poor productive partnerships activities rural communities in an have increased their income economic and environmental by 20% compared to the Macro economic policies sustainable manner through baseline favor rural development the development and implementation of a By the end of the first Subproject baseline and Intemational markets demand-driven, Productive subproject year, small monitoring results remain accessible for Partnership scheme with the producers / beneficiaries Colombian products and private sector have increased their income prices remain attractive by two monthly minimum salaries Project benefits do not accrue to rural poor due to By the end of the project, Subproject baseline and poor targeting and/or the employment in the monitoring results fact that partnerships production units has reinforce asymmetry in increased by 50% of which power and farmers find 40% is employment for themselves in . women. "patron-client"relationships Subproject baseline and with private firms By the end of the project, monitoring results agricultural productivity in production units has increased on average by 20% compared to regional indicators Project reports 100 productive partnerships are formalized, consolidated, are operating in a sustainable manner and contain conflict resolution Monitoring reports schemes. All environmental mitigation measures are being implemented in subprojects - 33 -  Hlerarchyof Objectives Indcators [ Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: Small rural producers, 500 expressions of interest Project records Sufficient social capital to producer organizations, received of which 50 come agree on a common and local government, the from special groups shared vision for local agribusiness and financial (indigenous, development. sectors are afro-colombians, and adequately informed about displaced people) scope, objectives and procedures of the Project 300 subproject profiles presented of which 30 from excluded groups 225 subproject profiles are adequate to enter into pre-investment studies Productive subprojects 150 subprojects formulated Project records and TA providers sufficiently designed in a and evaluated with the right monitoring and evaluation knowledgeable about participatory manner, financial backing taking into system reports agribusiness and evaluated to be feasible at account social and participatory planning the economic, financial, environmental criteria social and environmental level. Productive Partnerships 100 Productive Partnerships Project records Banking sector willing to established and operating in established with 10,000 provide long-term finance an economic, financial, beneficiary families of Monitoring and evaluation for crop production. social and environmental which 1000 are headed by reports sustainable way women Private sector is interested External evaluations to invest in high-risk environments and develop Productive Partnership Audit reports productive partnerships investments present an internal rate of return of at Beneficiaries are sufficiently least 15% with a maximum organized and empowered to bank credit of 35% of total resolve problems on their liabilities own and avoid paternalistic relationships. 100 productive partnerships reimburse their commercial bank credit (if any) on time and at a recovery rate of 90% or more - 34 -  Project coordinated in an Monitoring and evaluation Bank supervision missions Technical Committee does efficient and cost effective system properly operating not interfere with manner and updated operational responsibilities of PCG. Timely and unqualified audits Low staff turn over (<10% per year) Adherence to operational manuals and loan agreement Project implementation according to plan Subproject time cycle properly monitored Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Preparation of Productive Timely availability of Partnerships Subprojects counterpart funds 1.1 Public Information $200,000 Feedback from focus Campaign, information groups sharing regional workshops, distribution of written material, web site 1.2 Mobilization and $300,000 screening of interest, regional workshops, training of potential participants 1.3 Pre-Investment studies - $4,000,000 contracts signed with TA Contracts registry providers 1.4 Evaluation of $1,400,000 Productive Partnership Proposals received Proposals $300,000 - 35 -  1.5. Thematic Studies Studies 2. Implementation of Productive Partnership Subprojects 2.1 Cost Sharing Transfers $ 39,600,000 Subproject approval records Budget allocation and execution procedures are 2.2 Technical Assistance to $ 1,500,000 Semestral monitoring quick and simple both on Productive Partnership reports paper and in practice Projects Ex-post procurement reviews Feedback from Technical Assistance Providers Disbursement records of Cost Sharing Transfers 3. Project Management 3.1 Project Coordination $1,500,000 Management and financial Government commitment to Group reports, procurement maintain highest records, contracts, audits professional standards in 3.2. Management $220,000 and evaluation reports project staff selection. Information System 3.3. Monitoring and $369,500 Evaluation System 3.4. Financial Management $120,000 System 3.5 Economic, financial, $300,500 environmental and social screening 3.6 Project Preparation and $2,190,000 Pilot Operations - 36-  Annex 2: Detailed Project Description COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT Project Background The design of the project finds its roots in a pilot operation which focused on voluntary negotiated land reform implemented under MADR with support from the World Bank from 1997-99 in five municipalities (Fuente de Oro, Rivera, Puerto Wilches, Montelibano and San Benito Abad). Lessons learned stress the following critical factors for the successful establishment of viable family farms: (i) adequate capacity for self-management and conflict resolution by land reform beneficiaries; (ii) detailed description and assessment of proposed production system; and (iii) access to relevant markets. In 1999, with the Pastrana Administration stressing reactivation of the rural economy driven by the private sector rather than a more narrowed focus on land reform for the rural poor, the emphasis shifted towards preparing a program that would generate conditions for a more dynamic small-holder sector by stimulating partnerships between small farmer producers organizations and agribusiness. Under the coordination of the National Planning Department (NPD), with participation from MADR, a pragmatic approach to the preparation of the new project was adopted by focusing on the establishment of a number of prototype partnerships, or life cases, that would serve as vehicles for learning-by-doing. A total of six prototype partnerships were developed during 1999-2000, including a total of about 400 small farmers with six agribusiness firms, covering a variety of different products (dairy, agro-forestry, oil-palm, vegetables, corn and cacao) in different regions of Colombia (Meta, Cundinamarca, Huila, Cesar, and Bolivar). To ensure that the project preparation process itself reflected the spirit of partnership between the public and private sector, a consultative committee was formed with participation of private firms, producer organizations and relevant public entities. The committee met on a regular basis to review progress with respect to the preparation of prototype partnerships and provide feed-back to the preparation team in NPD. The experiences generated through the prototype partnerships along with the involvement of the consultative committee, provide the building blocks of the design of the project as presented below. Project Concept Since productive partnerships are the primary vehicles to achieve the stated objectives of the project, there is a need to clarify them in conceptual terms. Under the project, a productive partnership is considered any collaborative arrangement between a small farmer producer organization and an agribusiness firm that aims to reduce technical, commercial, financial andlor social risks associated in pursuit of potential income gains in a particular value-chain in a manner that creates a win-win situation for all participating parties. Based on the experience of the prototype partnerships, this typically means that by entering into a productive partnership, members of producer organizations obtain access to relevant markets, usually output markets, but also critical inputs (e.g. high quality seed) or factor inputs (particularly credit for working capital purposes). The advantages for agribusiness firms to enter into partnerships with producer organizations typically include opportunities to expand food processing activities by securing supplies from small producers that meet certain predetermined quality standards, without the need to expand own production capacity. The project aims to support small farmers producer organizations in entering productive partnerships with interested agribusiness firms. Value chain analysis is a useful tool to identify to what extent the success of one party in the value-chain depends on the success of others and vice-versa. Making these inter-dependencies more visible under the - 37 -  project generates incentives for collaboration rather than confrontation. Productive partnerships supported by the project are the visible results of recognizing these opportunities for collaboration by the different parties in a particular value-chain. The concept of productive partnerships takes current approaches to rural development a step further by using the value chain rather than the farm as the analytical framework to assess the feasibility of potential income generating opportunities for small farmers. By doing so, there is a greater chance that efforts to support productivity increases at the farm level could be translated into income gains for rural families trying to make a living from these farms. The project design recognizes the limitations of the public sector as a service deliverer. Consequently, support to the provision of technical assistance to small farmers by participating agribusiness firms in the productive partnerships rather than by public sector agents is envisaged. By doing so, the concept of productive partnerships provides participants the opportunity to seize responsibility as agents of change, thereby putting in practice the participatory model of empowerment for development. The role of the public sector is focused on providing incentives in the form of seed capital to build the asset base of the participating producer organizations in productive partnerships. These incentives are justified given the fact that security risks in most of the rural areas in Colombia currently constrain private investments in agriculture and given the positive externalities that might be generated through productive partnerships by generating a climate of collaboration. By Component: Project Component I - US$6.20 million Supiport to the Preparation of Productive Partnerships Under this component the project would support activities that are associated with: (i) information sharing; (ii) mobilization of expressions of interest and subproject profile screening; (iii) pre-investment studies; (iv) ex-ante evaluation of detailed productive partnership subproject proposals; and (v) thematic studies. Information Sharing. This sub-component is to inform potential productive partnership participants and other relevant stakeholders about the scope and the rules of the game of the project. To achieve this objective, the project would finance: (i) publication of brochures and user-friendly versions of the PPS Manual; (ii) organization of workshops and forums aimed at rural municipalities, producers organizations and chambers of commerce; (iii) transmission of radio spots; (iv) direct mail campaign; and (v) development and operation of a productive partnership web site. It is expected that, as a result of these activities, interested potential participants enter the program with realistic expectations. The information provided to relevant stakeholders will enable them to exercise social control (e.g. regarding the application of eligibility criteria by project management) and provide them with opportunities for feedback, thereby contributing to local empowerment and project ownership. Mobilization and Screening. This sub-component is to mobilize expressions of interest from potential productive partnership participants and subsequently screen these by using an agreed set of eligibility criteria specified in the PPS Manual. Expressions of interest will be mobilized by inviting requests for productive partnership profiles. Profiles will be presented following a standard format included in the PPS Manual. Using this standard, expressions of interest provide information regarding: (i) problems that the proposed productive partnership aims to address; (ii) identified opportunities to resolve these problems; (iii) participating parties and their proposed contributions and commitments to the productive partnership; and - 38 -  (iv) location of the proposed productive partnership. Expressions of interest will be screened based on the following criteria: * presentation of productive partnership profile by producer organization of small farmers and private sector firm(s) should be in the form a joint proposal; * compliance of members of small farmers producer organization with project beneficiary eligibility criteria; * statement by corresponding municipal authority that the nature of the proposed productive partnership is in line with the Municipal Land Use Plan (Plan de Ordenamiento Territorial); and * appropriateness of the proposed solution in relation to the relevance and scope of the stated problem(s) that the productive partnership aims to address. The screening of the productive partnership profiles will be conducted by PCG. Once selected, profiles will be further developed into detailed productive partnership proposals with technical assistance financed under the project (see below: pre-investments). Detailed productive partnership profile eligibility criteria were agreed during appraisal and are included in the PPS Manual. Given the productive focus of the project and the use of public funds to provide incentives for the formation of productive partnerships, beneficiary eligibility criteria are geared towards targeting poor, rural families with working experience in the agricultural sector. Beneficiary eligibility criteria as specified in the PPS Manual cover social, economic as well as technical aspects, including: i) poor male-female heads of household with or without land, (ii) between 18-50 years old, (iii) at least one family members with complete primary schooling or participating in adult education programs, (iv) at least three years of agricultural experience relevant to one of the partnership activities; (v) participating in the regional training provided by the project, (vi) with assets of not more than 200 minimum wages, and (vii) with 75% of the income derived from agricultural activities and wages of no more than up to 4 minimum wages per month. Pre-Investment Studies. After completing the screening of productive partnership profiles, the objective of this sub-component is to assist eligible participants in the preparation of detailed proposals that will allow an informed decision about their feasibility from a technical, financial, social, and environmental perspective. To achieve this, the project would finance technical assistance and training. Technical assistance for the preparation of these proposals would be provided by eligible TA providers selected by productive partnership participants from a long list established by PCG. TA providers could be consulting firms, NGOs or universities. The long list will be established following an invitation for expressions of interest published by PCG. In order to be included in the long list, interested TA providers will comply with the following eligibility criteria, included in the PPS Manual : (i) registration as legal entity; (ii) proven track record in rural development projects; (iii) availability of a multi-disciplinary team of professionals with capacity in relevant fields such as financial analysis, environmental assessment, social analysis, agribusiness and agronomy; (iv) installed institutional capacity for logistics and support (vehicles, telephones, computers etc.); and (v) proven competency in administration and financial management with appropriate internal controls. The long list will be updated by PCG on a regular basis. TA providers would enter into a contract with PCG and assist eligible productive partnership participants in the preparation of a detailed proposals. A model contract has been developed for this purpose and included in the PPS Manual. Presentation of detailed productive partnership proposals will follow the format included in the manual. This format consists of four parts: (i) description of the productive partnership in terms of problems being addressed, solutions being pursued, outputs being expected, and - 39 -  long term vision being realized; (ii) feasibility of the productive partnership from a financial, social, technical and environmental point of view; (iii) implementation arrangements both in terms of own contributions as well as external assistance; and (iv) assessment of the external environment (e.g. municipal context) in which the productive partnership will be realized with a view to identify possible risks and define corresponding risk mitigation measures. Once completed, the detailed productive partnership proposal will be embedded in a formal cooperation agreement to be signed between the participating parties and PCG once the initiative has been approved. To express the commitment of the participating parties to sign the cooperation agreement once the detailed productive partnership proposal has been given the green light, they will sign a letter of intent that will accompany the proposal to the approving authority. Draft formats of cooperation agreements and letter of intents have been prepared and will be included in the PPS Manual . Preparation of the detailed productive partnership proposal is considered a process of learning-by-doing. For this purpose, the TA provider will also provide training to small farmers involved in the preparation process in critical areas such as farm management, administration and accounting, sustainable natural resource management, quality control, and conflict resolution. The PPS Manual will include specifications of the guidelines for training modules supported by the project in these areas. Ex-ante Evaluation of Detailed Productive Partnership Subproject Proposals. Detailed productive partnership proposals will be evaluated by a panel of independent experts contracted under the project. Detailed TORs have been prepared and will be included in the PPS Manual . Experts on the panel will have relevant qualifications and sufficient independence to ensure that evaluation of proposals is done on technical grounds and in an objective manner. The panel of experts would typically consist of four individuals, including a social scientist, an environmental specialist, an agriculturist and a financial analyst. Evaluation of detailed productive partnership proposals is done on the basis of minimum eligibility criteria as objective benchmarks. From a financial perspective, proposals should show an IRR of at least 15%, based on reasonable assumptions as demonstrated by appropriate sensitivity analysis. From a social perspective: (i) participants should comply with beneficiary eligibility criteria as indicated above; (ii) responsibilities to be assumed by the small farmers producer organization in the implementation of the productive partnership as indicated in the draft Cooperation Agreement should be reasonably in line with the results of a strengths-weaknesses analysis of the organizations carried out as part of the social assessment; and (iii) there should be an agreement among participating parties regarding the functioning of a conflict resolution mechanism. From an agronomic perspective, proposals should be based on technical parameters that are reasonable for the agro-ecological conditions under which the productive partnership will be implemented. From an environmental perspective, proposals: (i) should be appropriately classified; (ii) should include mitigation measures that correspond closely with proposed environmental classification and institutional capacity for implementation; and (iii) should include provisions that ensure adequate implementation and monitoring of the mitigation measures. Detailed subproject eligibility criteria were agreed during appraisal and will be incorporated in the PPS Manual . Based on the results of the evaluation of proposals by the panel of experts, PCG submits the proposal to the Technical Committee for approval of the allocation of the Modular Incentive. This incentive will be financed under the project as a cost-sharing transfer. Studies. In cases where there is significant interest to prepare and implement subprojects that focus on particular crops and/or regions, the project could finance the implementation of studies of strategic importance that go beyond the individual subproject level. This would be particularly important for - 40 -  investment decisions where up front investments are high and could imply significant switching costs. Other studies may include impact studies on rural poverty and studies of a general nature which could benefit project impact. Project Component 2 - US$41.10 million Support to the Implementation of Productive Partnerships Under this component, the project would provide: (i) cost sharing transfers as seed capital for participating small farmers producer organizations; and (ii) technical assistance and training to productive partnership participants. Modular Incentive and Cost Sharing Transfer. Under this sub-component, the project would finance cost sharing transfers that would allow participating small farmers to set-up family production units within the context of the proposed productive partnerships. Family production units are defined as production systems that have the potential to generate monthly profits of 0.5 SMLMs (salarios minimos legales mensuales) over a period of at least 12 years. The Modular Incentive has an integrated nature that could be used by beneficiaries for a range of purposes that they themselves consider most critical for the establishment of family production units within the context of productive partnerships. Applications include: (i) on-farm infrastructure such as irrigation canals, aquaculture facilities, greenhouses, storage facilities; (ii) durable goods such as machinery, equipment, tools, fences; (iii) vegetative materials for nurseries; (iv) operational inputs such as fertilizers and chemicals that do not appear on the negative list; (v) services such as land leveling; special studies, surveys, laboratory analyses and inventories; insurance; publicity, market and communication services; (vi) labor usually in the form of remuneration to the beneficiary or his family (this is important for organic crops) and (vii) access to land (financed from counterpart funds). The maximum value of the Modular Incentive is 40% of the required investment for the establishment of the family production unit with a cap of 6 million pesos (approximately US$2,600) per beneficiary when beneficiaries already own land. In case of participating beneficiaries that do not own land and who choose to rent land, a cap of 8.5 million pesos (US$3,700) per beneficiary would be established. When land purchase is deemed necessary, as would be the case for many subprojects involving perennial crops, the ceiling of the Modular Incentive would be 17.5 million pesos ($7,600) per beneficiary of which no more than 11.5 million pesos (US$5,000) per beneficiary would be available to support the purchase of land, under the condition that the cost of land and its preparation does not exceed 35% of the required investment for the establishment of a subproject. The terms and conditions of the Modular Incentive are based on the financial analysis of the prototype productive partnerships and taking into account other competing incentives and subsidies that are geared to the rural sector. The proposed Modular Incentive offers a one-stop shop for small farmers participating in productive partnerships. Recognizing the holistic nature of establishing family production units in the context of productive partnerships, the Modular Incentive can be applied to a range of possible investments rather than just one as is the case with the existing subsidies and incentives. Given the limitations of public sector institutions in making decisions at the operational level, small farmers organized in producers organizations will be empowered to actually manage the Modular Incentive. Once approved by PCG, the Modular Incentive will be disbursed in advance rather than being available on a reimbursement basis. The Modular Incentive will disbursed into a trust account (patrimonio aut6nomo). The trust fund will be administered by a trust company that falls under the jurisdiction of the superintendent of banks. The trust -41 -  company will be selected by PCG following a competitive process. A contract specifying rules of the game for the management of the trust and indicating the functions of the trust company in the administration of the said trust will be signed between the trust fund agency and the project. The beneficiaries of the trust will be the members of the small farmers producer organization as one of the associates of the productive partnership. Decisions about the allocation of resources and the use of assets in the trust fund will be taken by the Partnership Steering Committee consisting of representatives of the small farmer producer organization, and representatives of the participating agribusiness firm in the productive partnership. One representative of the trust company and one representative of MADR could participate as observers in the Partnership Steering Committee. Technical Assistance and Training. Along similar lines as presented in the case of pre-investment studies, the project will contract TA providers for technical assistance and training during the implementation period of the productive partnership. During this period, TA providers will ensure that the decisions of the Productive Partnership Steering Committee regarding the application of the Modular Incentive reflect the approved productive partnership proposal. The TA provider will also monitor progress regarding the implementation of the productive partnership and inform PCG accordingly. In case the Modular Incentive is disbursed in multiple installments from the project to the trust account, the TA provider will certify the use of funds in light of the agreed implementation plan for the productive partnerships based upon which PCG would authorize disbursement of the subsequent payment. Project Component 3 - US$ 4.70 million Project Manaeement Project Coordination Group. Under this component, the project would finance consultant costs and equipment for the establishment of a small Project Coordinating Group (PCG) in MADR. PCG core staff would include a director, technical specialists (financial analyst, agribusiness expert, social scientist and environmental specialist), administrative staff (procurement and financial management) and a M&E expert. Since implementation of most of the activities of the project will be contracted out (TA providers, panel of experts, fiduciaries), PCG may also include a communications expert and an IT specialist. The project will support a comnmunications program which seeks to ensure that all relevant stakeholders have ample opportunities to be well informed about the rules of the game deployed under the project and be in a position to provide feedback. Management Information System. To facilitate project coordination, a MIS would be prepared and installed. This system would contain planning, monitoring, evaluation, human resource, communications and productive partnership subproject modules. An effort would be made to establish a web-based interface between the project, service providers and beneficiaries which would facilitate two-way communications. By doing so, it is expected that travel by stakeholders for the purpose of project implementation could be reduced, thereby increasing security. Proiect Administration. Administrative and procurement functions of the project will be carried out by a Cooperation Agency. Except for the cost sharing transfers, which will be managed by specialized trust companies, all expenditures will be channeled through the Cooperation Agency. Monitoring and Evaluation. Given the innovative nature of the project, special attention will be paid to the establishment and operation of an adequate M&E system. This system will consist of five elements. First, TA providers will monitor implementation of productive partnerships based on the agreed implementation plan and up-date the MIS on a monthly basis. Second, an independent consulting firm will be contracted to -42 -  assess the effects and impacts of the project. This will be done by comparing baseline information obtained during the pre-investment stage of the productive partnerships with the actual situation after project support to the implementation of productive partnerships has been completed. Third, focus group discussions with productive partnership participants will also be organized by the independent consulting firm to obtain their views and perceptions about the extent to which the expectations they had at the preparation stage of the partnership (and documented in the proposal) have been realized at the end of the project support to the implementation of the productive partnership. Fourth, annual audits will be carried out by a specialized firm to review the fiduciary aspects of the project. Fifth, Bank supervision missions will be carried on a six-months basis to review project implementation on the basis of the agreed annual operative plan. Proiect Preparation. About US$2.2 million has been used to prepare the project as well as the pilot operations. -43 -  Annex 3: Estimated Project Costs COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT Local FrinTotal Proect cost ByComponent US $milli UStlmillion US $miilion 1. Preparation of productive partnerships subprojects 5.00 1.10 6.10 2. Implementation of productive partnership subprojects 32.05 8.05 40.10 3. Project management and cost of project preparation 3.80 0.60 4.40 Total Baseline Cost 40.85 9.75 50.60 Physical Contingencies 0.31 0.10 0.41 Price Contingencies 0.84 0.15 0.99 Total Project Costs' 42.00 10.00 52.00 Front-end fee 0.32 0.32 Total Financing Required 42.00 10.32 52.32 Identifiable taxes and duties are 1.4 (US$m) and the total project cost, net of taxes, is 50.92 (US$m). Therefore, the project cost sharing ratio is 62.84% of total project cost net of taxes. -44-  Annex 4: Cost Benefit Analysis Summary COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT Summary of Economic Analysis (in Colombian pesos per hectare) Prototype Rivera: Multiple Parate- Cota: Zambrano: San Rivera: Partnership Crops bueno: Vegetables Agro- Alberto: Cacao 75 farners Oilpalm 28 farmers forestry Oilpalm 25 farners 70 farmers 50 farmers 70 farmers PV of Benefits 52,077,876 11,370,963 86,361,891 6,707,746 13,677,387 15,901,248 PV of Costs 43,173,405 7,646,234 55,694,664 3,613,252 9,705,347 12,981,848 Net Present Value 8,904,472 3,724,729 30,667,227 3,094,493 3,972,040 2,919,400 Economic Rate of 48% 21% 156% 22% 21% 18% Return Summary of Financial Analysis (in Colombian pesos per hectare) Prototype Rivera: Parate- Cota: Zambrano: San Rivera: Partnership Multiple bueno: Vegetables Agro- Alberto: Cacao Crops Oilpaln 28 farmers forestry Oilpalm 25 farmers 75 farmers 70 farmers 50 farmers 70 farners PV of Benefits 52,077,876 11,370,963 86,361,891 6,707,746 13,677,387 15,901,248 PV of Costs 49,156,800 8,683,940 61,655,357 3,763,819 13,232,856 14,373,562 Net Present Value 2,921,077 2,687,022 24,706,534 2,943,927 444,531 1,527,687 Financial Rate of 23% 17% 181% 22% 13% 16% Retum Net Present Value for the economnic and financial analysis discounted at the standard rate of 12%. Summary of Benefits and Costs: Benefits The main benefit of the project quantified is increased production of agricultural crops. In each of the prototype partnerships, one or several crops (e.g. palm oil, chocolate, vegetables, agro-forestry, etc.) will be cultivated by farmers. Several important benefits that are difficult to quantify also result from the project: increased social capital through the formation of farner cooperatives often in socially fragile areas of the country; human capital development of farmers through training and capacity-building; and improved social cohesion and collaboration between various stakeholders and the effect this may have in - 45 -  helping foster a climate of peace. Summary of Major Benefits Productive Partnership Crop Yields Crop Price (in C$) (average) (average) Rivera: Multiple Crops (75 farners) -Tabaco 2.5 tons/ha 3,150,000/ton -Maize 3.2 tons/ha 351,000/ton -Soya 2.7 tons/ha 531,000/ton Paratebueno: Oil Palm (70 farmers) - Oil palm 19.3 tons/ha 630,000/ton (386 tons in 20 years per ha) - Maize 2.25 tons/ha 330,000/ton Cota: Vegetables (28 farmers) -Lettuce 25,000 kilos/ha 440/kilo -Spinach 28,000 kilos/ha 500/kilo -Broccoli 14,000 kilos/ha 700/kilo Zambrano: Agro-forestry (50 farmers) -Timber 152 m3/ha 168,000/m3 San Alberto: Oil Palm (70 farmers) - Oil palm 20.0 tons/ha 630,000/ton (399 tons in 20 years per ha) Rivera: Cacao (25 farmers) - Cacao 1,043 kilo/ha 2,214/kilo Costs The main costs included in the financial analysis are the costs of the land itself; preparation of land for the cultivation of the respective crop(s); variable costs associated with the production of the crop (e.g. fertilizer); administrative and management costs of the partnership; and corresponding taxes. The economic analysis converts financial costs into economic costs using shadow prices, does not take into consideration transfers (e.g. taxes), but does include other costs associated with the partnership (e.g. costs assumed by the municipality related to the partnership such as upgrading of roads; project costs related to supporting the establishment of the partnership itself). For the latter, a pro-rata share of the estimated project costs (except for the incentivo modular sub-component) are assigned to each prototype partnership. The assumption is that the costs of helping establish the partnership should be incorporated into the economic analysis. The incentivo modular is a subsidy provided by the Government recognizing the limited access of farmers to affordable long-term finance. As it is a subsidy, this sub-component is excluded from the economic analysis. The economic analysis assumes that the prototype partnerships do not impose negative environmental extemalities based on compliance with the proposed environmental mitigation plans. - 46 -  Summary of Major Costs (in Colombian pesos per hectare) Prototype Rivera: Parate- Cota: Zambrano: San Alberto: Rivera: Partnership Multiple bueno: Vegetables Agro- Oilpalm Cacao Crops Oilpalm 28 farners forestry 70 farmers 25 farmers 75 farners 70 farners 50 farmers PV Financial Costs 49,156,800 8,683,940 61,655,357 3,763,819 13,232,856 14,373,562 Land 2,992,600 1,559,620 5,904,732 - 896,333 3,811,250 Preparation of land 100,000 106,720 375,000 792,625 539,000 Cultivation 42,790,089 4,057,110 44,772,513 2,647,447 10,095,649 10,562,312 Administration 3,274,110 2,960,490 10,603,112 323,747 1,701,874 PV Economic Costs 43,173,405 7,646,234 55,694,664 3,613,252 9,705,347 12,981,848 Land 1,496,300 779,810 4,192,360 205,082 448,167 1,905,625 Preparation of land 100,000 106,720 375,000 792,625 458,080 Cultivation 38,563,759 3,783,975 37,453,785 2,193,022 7,599,570 10,088,455 Admninistration 2,793,841 2,811,101 8,620,154 323,747 1,058,230 Infrastructure Project-costs 219,504 164,628 5,053,365 98,777 141,301 987,768 -47 -  Financing Plan for Prototypes (in Colombian pesos per hectare) Prototype Rivera: Parate- Cota: Zambrano: San Alberto: Rivera: Partnership Multiple bueno: Vegetables Agro- Oilpalm Cacao Crops Oilpaln 28 farmers forestry 70 farmers 25 farmers 75 farmers 70 fanners 50 farmers Financine Required Bank Credit 2,816,000 1,581,478 - 1,584,275 1,465,457 1,820,000 Agribusiness Credit 144,000 1,429,190 2,477,200 1,284,104 1,081,080 Farmer Savings ??? 360,000 8,698,000 - 288,000 11,289,000 Incentivo Modular 1,077,000 2,002,000 2,379,780 736,500 2,002,000 1,777,000 Total debt per 13,813,333 30,106,680 1,769,429 57,367,580 25,465,3700 7,280,000 farmer Total incentivo 5,026,000 20,020,000 1,699,843 14,730,000 20,200,000 7,108,000 modular per farmer Total debt is estimated by adding the principal amount of bank credit and agribusiness credit multiplied by the number of hectares for each farmer. Main Assumptions: The main assumptions in the economic and financial analysis include: a. Yields and price of crop: The analyses assume a conservative estimate of crop yields. National and local estimates of productivity (where available) were obtained to help determine production estimates. Long-term forecasts for major crop prices were also reviewed. Perhaps the most important risk in the profitability and sustainability of the partnerships is based on crop price risk. The sensitivity analyses have taken a wide range of crop prices in evaluating the economic and financial viability of the proposed pilot partnerships. b. Exchange rate: The Colombia peso/US$ exchange rate has been used to translate international prices of crops into local currency. For example, payments to farmers for palm oil is based on the international price of palm oil subsequently converted into pesos. The exchange rate used for the analyses has been fixed at 2,100 pesos per US dollar throughout the life of the partnership. The recent devaluation of the peso to the dollar suggests that the assumption is conservative as further devaluation of the peso will increase cash inflows to farmers. c. Project costs including cost of land: The costs in each of the pilot partnerships was based on detailed technical discussions and analyses with the farmer cooperatives. Unless noted, the conversion factor (i.e. shadow price) for land was estimated at .5 and for labor at .8. - 48 -  d. Inflation and loan characteristics: The evaluation of the economic and financial viability of the prototype partnerships correctly does not take into consideration the type and amount of financing required. However, the financial analysis conducted assesses cash flows to the farmer based on certain assumptions on loans to be assumed. If the cost of these loans are higher than anticipated, careful attention will be required to ensure that farmers have sufficient cash flow to meet debt repayments. Methodology The financial analysis was conducted from the perspective of an individual farmer based on data collected from field observations and discussions with the farmer cooperatives and agribusiness. The cost of land was derived from local land sale or rental markets (where available). The analysis includes conservative estimates of the fixed costs related to the preparation and improvement of the land and the variable costs associated with the cultivation of the crops. The benefits were determined also based on conservative estimates of long-term productivity and crop prices. The financing required was also estimated for each prototype and may include a bank loan, a loan from the respective agribusiness firm, farmer savings (if available), and the incentivo modular. The net cash flow and liquidity ratio (ability of the farmer to adequately meet debt repayments) was also calculated. The net present value (NPV) of the financial cash flows (before and after credit and other supports) was calculated using a 12% discount rate. In the economic analysis, two main adjustments were made to the financial analysis: (i) inclusion (or exclusion) of certain costs and benefits and (ii) revaluation of costs and benefits to their social opportunity costs. More specifically, these adjustments are including costs borne by the municipality or by the project, removing transfer payments such as those resulting from financing, taxes, or subsidies, and using shadow prices to convert financial flows to economic flows in order to reflect the social opportunity cost of land and labor. The NPV of the economic resource flows was calculated also using a 12% discount rate. -49 -  Sensitivity analysis / Switching values of critical items: Sensitivity analysis was also conducted on both the financial and economic analysis. The following major risks were assessed through sensitivity analysis: Major Risks Evaluated using Sensitivity Analysis Productive Partnership Performance Indicators FRR / Financial NPV ERR / Economic NPV Rivera: Multiple Crops 2,921,077 8,904,472 -Crop prices down 15% (5,758,569) 224,426 -Crop yields down 15% (5,758,569) 224,426 -Prices and yields each down 15% (12,991,608) (7,008,213) -Cultivation costs up 25% (9,368123) (1,888,879) Paratebueno: Oil palm 17% 21% -Crop prices down 15% 14% 17% -Crop yields down 15% 14% 17% -Prices and yields each down 15% 10% 14% -Cultivation costs up 25% 2% 16% Cota: Vegetables 181% 156% -Crop prices down 15% 118% 112% -Crop yields down 15% 101% 101% -Prices and yields each down 15% 42% 62% -Cultivation costs up 25% 72% 82% Zambrano: Agro-forestry 22% 22% -Crop prices down 15% 19% 19% -Crop yields down 15% 20% 20% -Prices and yields each down 15% 17% 17% -Cultivation costs up 25% 18% 18% San Alberto: Oil palm 13% 21% -Crop prices down 15% 10% 17% -Crop yields down 15% 11% 17% -Prices and yields each down 15% 6% 13% -Cultivation costs up 25% 7% 15% Rivera: Cacao 16% 18% -Crop prices down 15% 10% 15% -Crop yields down 15% 11% 13% -Prices and yields each down 15% 4% 8% -Cultivation costs up 25% 10% 13% - 50-  Annex 5: Financial Summary COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT Years Ending Year 1 Year 2 Year 3 j Year 4 Year 5 Year 6 Year 7 Total Financing Required Project Costs Investment Costs 1.9 6.2 14.0 18.0 8.7 1.0 0.0 Recurrent Costs 0.4 0.4 0.4 0.4 0.4 0.2 0.0 Total Project Costs 2.3 6.6 14.4 18.4 9.1 1.2 0.0 Front-end fee 0.3 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing 2.6 6.6 14.4 18.4 9.1 1.2 0.0 Financing IBRDIIDA 1.4 4.0 9.0 11.0 5.6 1.0 0.0 Government 1.2 2.6 5.4 7.4 3.5 0.2 0.0 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 2.6 6.6 14.4 18.4 9.1 1.2 0.0 Main assumptions: The project supports up to 40% of the implementation costs of productive partnership subprojects. Assuming that this maximum would hold for all productive partnership subprojects, the project would generate approximately US$70 million of investments financed by productive partnership associates. Since these investments would not be consolidated in the project accounts and would not be subject to the audits conducted under the project, they have not been included in the costs of the project. However, the magnitude of the accompanying investments by productive partnership associates would be quantified through the Monitoring and Evaluation arrangements of the project. - 51 -  Annex 6: Procurement and Disbursement Arrangements COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT Procurement Procurement for the proposed project would be carried out in accordance with World Bank "Guidelines: Procurement Under IBRD Loans and IDA Credits", published in January 1995 (revised January/August 1996, September 1997 and January 1999); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" published in January 1997 (revised in September 1999 and January 1999), and the provisions stipulated in the Loan Agreement. Procurement Capacity Assessment A capacity assessment was conducted in March 2001. The outcome, summarized below, has been discussed and approved by the Regional Procurement Adviser's office on April 24, 2001, and is the basis for the procurement arrangements. The Project would be managed by a Project Coordinating Group (PCG) within the Ministry of Agriculture and Rural Development (MADR). PCG would contract a Cooperating Agency which would carry out all procurement and payments other than the cost sharing transfers that would finance beneficiaries through a trust company. PCG would comprise: a Project Director, an Administrator/Procurement Manager, and Accountant/Financial professional, possibly an Information Systems staff and technical experts. The administrative team (Administrator/Procurement and Accountant/Financial), already in place as part of the preparation team, would remain throughout project implementation. Although these two professionals have experience in procurement, contract management and financial matters in the public sector, they do not have experience with Bank-financed projects. An Administrative Manual would guide PCG's functions to manage the Project as a whole; and a Productive Partnerships Subproject Manual would contain conditions and procedures for the cost sharing transfers. Risk Assessment: AVERAGE Action Plan. The following actions were agreed: 1. Organization and composition of PCG to be formally agreed at negotiations. 2. Formal appointment of an Administrator/Procurement Manager as part of the PCG would be a condition of Loan effectiveness. If the staff already in place does not remain, the candidate specialist should have procurement experience and a CV satisfactory to the Bank. 3. Preparation of a Project Administrative Manual, acceptable to the Bank, outlining PCG's organization, individual responsibilities and procedures. With regards to procurement, it would describe the role of the Cooperating Agency, methods and steps to be followed for the types of applicable procurement and contracting, thresholds for Bank's prior review, and procedures for planning procurement actions and reporting. Annexes to the Manual should include internal forms and standard Bank documents - 52 - .  (Requests for Proposals and contract for small assignments). The draft manual has been prepared for negotiations and finalized by loan effectiveness. 4. Preparation of a PPS Manual to set guidelines for the cost-sharing transfers. The manual would contain, among others, aspects on eligibility and procurement requirements applicable to subprojects. Such requirements would follow commercial practices based on price comparison of three price quotations for acquisition of goods and works whenever possible. Direct contracting would have limits specified in the manual. Purchases and contracts under the cost sharing transfers above US$300,000 would be subject to prior review. Presentation of this manual in final form would be a condition of disbursements for the corresponding category. 5. Presentation of an updated procurement plan for the first year of project implementation by loan effectiveness. 6. Putting in place appropriate software, as part of the financial management package, to report procurement operations for PMR-based disbursements. Procurement Methods The methods described below and their estimated amounts, are summarized in Table A. The threshold contract values for the use of each method are presented in Table B. Works The Project would finance small civil works for remodeling office space for the Project Coordination Group at a cost of approximately US$5,000. The contract would be procured under lump-sum, fixed price contracts awarded on the basis of quotations obtained from at least three qualified domestic contractors in response to a written invitation. Goods Goods to be procured include computers and minor office equipment and furniture for the operation of the PCG. Total costs for goods financed under the Project are estimated at US$20,000. Contracts would be awarded through national shopping procedures from at least 3 qualified suppliers. Consulting Services and Training The project would finance consulting services: (i) to design and carry out public information campaigns; (ii) to carry out pre-investment studies; (iii) to evaluate productive partnership subproject proposals; (iv) to support implementation of productive partnership subprojects; (v) to monitor and evaluate the project; (vi) to provide administrative and financial management support; (vii) to audit the project; and (viii) to carry out specific thematic studies. Training would include financing of facilitators, training fees, rent, materials, meals, and transportation expenses for participants. Firms. Universities and NGOs. Contracts are expected to be relatively small, not exceeding US$200,000 in value. Traditional consultants' assignments estimated at US$100,000 or more would be procured using the Selection Based on Fixed Budget method up to an aggregate amount of US$1.6 million; selection based on consultants qualifications method would be used for tasks estimated at under US$100,000 up to an aggregate amount of US$4 million. The Least Cost Selection method would be followed for assignments of - 53 -  a straightforward nature. Individuals. Individual consultants would be selected in accordance with the provisions of paragraphs 5.1 through 5.3 of the Consultant Guidelines. Cost Sharing Transfers The project includes cost sharing transfers for productive partnership subprojects proposed by agribusiness and small-farmer producer organizations. The average size of the transfer is estimated at $300,000; an upper limit per beneficiary is stated in the Productive Partnerships Subproject Manual. This manual would specify procurement requirements for works, goods and services based on commercial practices which would call for comparison of three price quotations (for works and goods). Consultants' qualifications would be the basis for selecting technical assistance and other consulting services. The PPS Manual would allow procurement direct contracting (sole-sourcing) for contracts of US$2,000 or less; and for cases where it is not possible to get the three quotations, it would be mandatory to have explicit prior authorization from PCG. The Manual would also spell out procedures for community participation in procurement. In this regard, it would require that clear responsibilities, contributions to be made, supervision aspects, etc., of the involved parties are stated in the cost sharing transfer agreements. It is expected that most subprojects would be community-executed. The cost sharing funds would be administered by at least one trust company to be selected competitively according procedures satisfactory to the Bank. A framework agreement would be signed by MADR with the trust company setting out pertaining conditions. The trust company would effect payments, maintain accounts, and keep the documentation submitted by beneficiaries supporting expenses under cost sharing transfer contracts. The documentation and accounts would be available in a central location for auditing and post-review. PCG would have responsibility to oversee that the agreed procedures specified in both the PPS Manual and the Project Administrative Manual are followed. Works, goods and services to be financed under this sub-component do not form part of the aggregate amounts stated for these categories. Incremental Operating Costs Incremental Operating costs financed by the Loan include sundry items such as office supplies and maintenance, communications, transportation and other expenses related to day-to-day project management. Supplies and some of the services would be procured on the basis of price comparison to the extent that is practical. Procurement methods (Table A) - 54 -  Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method 2 Expenditure Category ICB NCB Other N.B.F. Total Cost 1. Works 0.00 0.00 0.01 0.00 0.01 (0.00) (0.00) (0.01) (0.00) (0.01) 2. Goods 0.00 0.00 0.02 0.00 0.02 (0.00) (0.00) (0.02) (0.00) (0.02) 3. Services 0.00 0.00 9.10 0.80 9.90 Consultants and Training (0.00) (0.00) (6.58) (0.00) (6.58) 4. Costs Sharing Transfers 0.00 0.00 27.00 12.60 39.60 (0.00) (0.00) (23.00) (0.00) (23.00) 5. Front-end fee 0.00 0.00 0.32 0.00 0.32 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Incremental Operating 0.00 0.00 0.28 0.00 0.28 Costs (0.00) (0.00) (0.20) (0.00) (0.20) 7. PPF Repayment 0.00 0.00 2.19 0.00 2.19 (0.00) (0.00) (2.19) (0.00) (2.19) Total 0.00 0.00 38.92 13.40 52.32 (0.00) (0.00) (32.00) (0.00) (32.00) "Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. vIncludes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local govermment units. - 55 -  Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Selection MBthod Consultant Services Expenditure Category QCBSS QBS: SFB LCS CQ Other N.B.F. Total Cost A. Firms 0.00 0.00 1.60 2.10 4.00 0.20 0.00 7.90 (0.00) (0.00) (1.00) (1.90) (2.78) (0.00) (0.00) (5.68) B. Individuals 0.00 0.00 0.00 0.00 0.00 1.00 1.00 2.00 (0.00) (0.00) (0.00) (0.00) (0.00) (0.90) (0.00) (0.90) Total 0.00 0.00 1.60 2.10 4.00 1.20 1.00 9.90 (0.00) (0.00) (1.00) (1.90) (2.78) (0.90) (0.00) (6.58) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Loan. - 56 -  Prior review thresholds (Table B) The proposed thresholds for prior review are indicated in Table B. In addition assignments of a critical nature, and amendments raising contract values above these thresholds would also be subject to prior review. Table B: Thresholds for Procurement Methods and Prior Review' Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) 1. Works 50 or less Shopping None 2. Goods 50 or less Shopping First contract only $0.02 3. Services Firms over 100 Fixed budget All $1.50 under 100 Consultant Qualifications or First contract only Least Cost $0.40 Individuals over 50 Section V of Guidelines All under 50 Section V of Guidelines (None expected) Key staff in Project Management Group $1.16 over 20 All Methods for Firms and Individuals TORs only $0.20 Productive Partnership over 300 Commercial practices 30 for $12 Subprojects Total value of contracts subject to prior review: US$15.28 m. Overall Procurement Risk Assessment Average Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post-review/audits) Procurement Plan An indicative procurement plan for the 5-year period of project implementation has been prepared and is the basis for the aggregate amounts presented in Table A. A specific Procurement Plan for the first year of project implementation has also been prepared. A project launch workshop will be organized at effectiveness with the objective to familiarize key stakeholders with project procurement, disbursement, reporting and auditing requirements. - 57 -  Procurement Supervision In addition to Bank ex-post review missions, compliance with agreed procurement arrangements would also be reviewed by an independent procurement audit carried out once a year under terms of reference and contracting procedures acceptable to the Bank and included in the Project Administrative Manual. The annual procurement audit report will be submitted to the Bank within six months of each fiscal year. Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 58 -  Disbursement Allocation of loan proceeds (Table C) The proposed Bank loan would be disbursed over a period of 5.5 years, beginning the fourth quarter of FY02 trough the end of the first quarter of FY08. The Project is expected to be completed by March 31, 2007 and the closing date of the loan is September 30, 2007. Disbursements would not be made for works, goods and services which have been procured from ineligible sources or which have not been procured according to the Bank's corresponding procurement and consultants' guidelines. The proceeds of the loan would be disbursed against eligible expenditures as indicated in Table C. Table C: Allocation of Loan Proceeds Expenditure Category Amount in US$million Financing Percentage 1. Works 0.01 85% 2. Goods 0.02 85% 3. Consultant Services & Training 6.30 100% 4. Costs Sharing Transfers 22.00 100% of disbursed amounts 5. Incremental Operating Costs 0.20 85% 6. PPF 2.19 100% 7. Unallocated 1.28 100% Total Project Costs 32.00 Front-end fee Total 32.00 Note: Exact front-endfee amounts to US$320,000 and will be paid directly by the Government Use of statements of expenditures (SOEs): Until a Project Management Report (PMR) compliant financial management system is in place the project would follow traditional disbursement procedures for the withdrawal of funds under the loan agreement in accordance with the guidelines set in the Disbursement Procedures Handbook. Statements of Expenditures (SOEs) would be used for: (i) contracts for consulting services and training valued below US$100,000 for firms and US$50,000 for individuals; (ii) all contracts for goods except the first contract; (iii) contracts for works costing US$50,000 or less; (iv) all cost sharing transfers for productive partnership subprojects for contracts below US$300,000; (v) all incremental operating costs. All other disbursement requests would be accompanied by full documentation. Documentation supporting SOEs would be retained by MADR through PCG and made available for examination by Bank staff as requested. Transition to the use of PMRs would take place once the financial management system complies with the requirements of the Loan Administration Change Initiative (LACI) and is certified accordingly by the Bank. Under LACI, the use of SOEs would be replaced by a system whereby disbursements (including the amount of the Special Account) would be granted on the basis of a set of agreed-upon quarterly PMRs. These reports would detail progress in the financial, physical and procurement activities of the project versus agreed targets. PMRs would be submitted to the Bank within 45 days from the preceding quarter. An action plan which will put in place the necessary capacity for the use of PMR was agreed during appraisal and the likely date for initating PMRs is March 31, 2003 - 59 -  Special account: The Bank would disburse the proceeds of the loan into a Special Account in US$ in name of the project and held by the General Directorate of the Treasury in the Central Bank. The Special Account would operate following procedures acceptable to the Bank. The authorized allocation of the Special Account would be US$2.0 million, with an initial advance of US$750,000 until the aggregate amount of withdrawals from the Loan Account has reached US$5 million. For PMR-based disbursements, the maximum amount would not exceed US$6 million. Presentation of supporting documentation would be effectuated within 30 days of payment within the trust accounts of the beneficiaries under the productive partnership subprojects. For the cost sharing transfers, the General Directorate of the National Treasury would be responsible to make payments from this account. PCG would be authorized by the National Technical Committee to instruct the General Directorate of the National Treasury to pay costs sharing transfers into trust accounts at a trust company and established in the name of eligible beneficiaries of approved productive partnerships. This transfer would be done on the basis of a cost sharing transfer agreement signed between MADR and a Productive Partnership Steering Committee, representing the partnership between small farmers and agribusiness. The trust company would contract and pay service providers and suppliers following procedures detailed in the Productive Partnerships Subproject Manual. The cost sharing transfer of an approved productive partnership subproject would be disbursed in installments as specified in the implementation plan of the subproject attached to the cost sharing transfer agreement. Installments would be disbursed on request of the Productive Partnership Steering Committee through the trust company to the PCG. This request would be accompanied by a certificate of verification signed by the technical assistance provider contracted under the project to assist implementation of the productive partnership subproject. Based on the execution of the cost sharing transfer agreement, PCG would consolidate the corresponding project accounts for resources disbursed as cost sharing transfers. PCG would prepare withdrawal requests for the replenishment of the Special Account which would be presented to the Bank following procedures described in the Project Administrative Manual. Disbursements for cost sharing transfers would become effective once PCG has: (i) presented the PPS Manual acceptable to the Bank; and (ii) installed a financial management system acceptable to the Bank; and (iii) the Presidential Decree regulating the cost sharing transfers has been signed. For all other expenditures, the General Directorate of the National Treasury would transfer monthly amounts from the Special Account to the Cooperating Agency to pay for works, goods, services, training, technical assistance and incremental operating costs during the next 30 days. PCG would instruct the Cooperation Agency to contract and pay consultants and suppliers from their allocation. Once the goods and services contracted and paid, PCG would receive the supporting documentation and consolidate the corresponding project accounts. It would also be possible for the Borrower to pay the Cooperating Agency directly in local or foreign currency from the loan account in the Bank. Disbursements into the Special Account will only take place from the moment the Borrower has shown that (i) MADR has direct and immediate access to the SA, through SIIF (integrated financial information system) to pay project eligible expenditures; (ii) through SIIF, MADR will authorize payment directly to the trust companies responsible for delivering the cost sharing transfers to eligible participants and other contractors; and (iii) the relevant staff has been trained on the proper use of SIIF. Before this is the case, the government will pre-finance all operations and claim reimbursement from the Bank through the SOE procedure accompanied by the relevant documentation. Counterpart Funds. MADR would open an Account in C$ (Local Account) in the Central Bank for the - 60 -  purpose of financing counterpart fund expenditures under the Project. The General Directorate of the National Treasury would be responsible to make payments from this account. Following procedures specified in the Project Administrative Manual, PCG would instruct the General Directorate of the National Treasury, on the basis of an agreement signed between MADR and the Productive Partnership Steering Committee to pay costs sharing transfers (including land purchase support) into trust accounts managed by a trust company and established in the name of small farmer producer organizations representing eligible beneficiaries of approved productive partnerships. Based on the execution of this agreement, PCG would consolidate the corresponding project accounts as expenditures authority(ordenador del gasto)for resources disbursed as cost sharing transfers for the purpose. Retroactive Financing Retroactive financing of up to US$3.0 million would be permitted for eligible expenditures made in accordance with procurement procedures agreed under the project from April 2, 2001, provided that the loan is signed not later than April 1, 2002. If the loan is signed at a later date, the initial date for eligibility of expenditures for retroactive financing would be modified so that the period covered by retroactive financing would not exceed more than one year. Retroactive financing is recommended to ensure that the six prototypes developed during preparation could be implemented thereby given credibility to the project, pre-investments could be initiated and project implementation arrangements could be put in place in anticipation of the project effectiveness date, thereby ensuring a head-start in the first year of project implementation. It would also allow MADR to initiate support to the implementation of a number of productive partnership subprojects. Financial Management A financial management assessment was carried out by a financial management specialist in accordance with OD/BP 10.02. The following issues have been agreed: Organization. PCG would be responsible for all financial management aspects of the project. For this purpose, PCG would be staffed with qualified professionals, with clear delineation of responsibilities within the organizational structure as outlined in Section C.4 of the PAD. Detailed TORs for professionals working on the financial management aspects of the project are included in the Project Administrative Manual. Main responsibilities of the Administrative and Financial Management area of PCG include: (i) manage, control and supervise the efficient use of financial resources, as well as transparency and compliance with World Bank procedures and sound financial practices; (ii) supervise that procurement of goods and services complies with all World Bank guidelines and procedures along with the operating plans of the project; (iii) prepare all financial information on the project including sources and uses of funds, budget execution, transfer, etc.; (iv) control and efficiently manage the budget, keep records, reports and files of the financial management of the project; (v) coordinate the preparation of funds' cash flows every three month, as well on an annual basis; (vi) supervise the update of procedures and controls for disbursement, accounting and budget; (vii) supervise the development and implementation of a system of financial management to administer the project, as well as all required procedures and controls for disbursement and budget, making sure that the project is adequately monitored; (viii) coordinate and control the flow of funds, reporting to authorities about disbursements and any other relevant financial information required for the adequate execution of the project; (ix) prepare and provide all the financial information required by external auditors; (x) train PCG staff to ensure compliance with the World Bank guidelines on financial management, including requests of funds, reports of expenditures, establishment of internal controls and reports on the disbursements of the SA funds. PCG would use the services of a Cooperating Agency with a financial management system acceptable to the Bank. PCG would use the - 61 -  services of one or more trust companies, acceptable to the Bank, to manage and disburse cost sharing transfers into trust accounts established in the name of eligible project beneficiaries. Budgeting. PCG would present by November 15 of each year an annual operating plan for the subsequent year to the Bank for review and approval. The plan would include an annual budget specified according to project components, expenditure categories and disbursement accounts, including counterpart funds provided by the Government. Contributions from productive partnership participants would not be included in the project budgeting and accounting system. However, for M&E purposes, PCG through contracted technical assistance providers, would maintain records of both public and private investments realized under productive partnerships as a base to assess effects and impacts. Accounts. PCG would establish and maintain project accounts to record all project transactions. The accounts shall be maintained in accordance with intemationally and locally recognized accounting principles and practices satisfactory to the Bank. The accounting system would be organized by project component, expenditure category and disbursement account and would consolidate these accounts to prepare financial reports. PCG would also maintain a register of assets purchased with project funds, although this would not include assets purchased under productive partnership subprojects through cost sharing transfers. Supporting documentation would be kept by PCG and by the trust companies in case of expenditures under costs sharing transfers for at least one year after the last disbursement of funds for the project and until its has been examined by the project's auditors. The information will be available at any time for review by the Government, World Bank missions and independent auditors. For all contracts requiring the Bank's prior review, full documentation will accompany disbursement request until disbursement is based on PMR's. Internal Controls. The proposed outsourcing of procurement and disbursement functions to the Cooperation Agency and trust companies would be an important element to achieve an adequate separation of administrative responsibilities. Furthermore, the procedures under the Financial Management Section of the Project Administrative Manual would ensure: (i) clear specification of required supporting documentation before payment authorization; (ii) verification of budget allocation and availability of funds before payment authorization; (iii) operation of a project procurement committee; and (iv) reduced number of persons authorized to sign checks, while ensuring dual control. Moreover, the project would establish and use social control mechanism to improve transparency in the decision-making process and increase accountability of project personnel. Reporting. The project would be allowed to use SOE's until March 31, 2003 and in parallel will prepare PMR's in order to prepare the project to produce information only through PMR's after April 1, 2003 on a regular and timely basis. PCG will prepare and forward to the Bank quarterly PMR's (respectively by January 31, April 30, July 31 and October 31 of each year). By December 31 of each year beginning in 2003, PCG would prepare and forward to the Bank an annual implementation plan detailing project activities contemplated for the subsequent calendar year. Hence loan disbursements will be made on the basis of PMR's. As part of the reporting requirements, MADR would also conduct a physical counting of assets on hand and compare these with the accounting records. Audits. MADR would hire independent private auditors satisfactory to the Bank under a multiple year contract to audit on an annual basis the financial statements, the Special Account and SOEs. In addition, the auditors would prepare a (long-form) report on project management. The audit reports would convey the auditor's opinion and comment as necessary on the methodology employed in the compilation of the SOEs, their accuracy, the relevance of supporting documentation, eligibility for financing in termns of the project's legal agreements and standards of record keeping and intemal controls related to the foregoing. - 62-  Copies of the audit reports would be provided to the Bank within six months after the end of each fiscal year. The final version of the Financial Management Section of the Project Administrative Manual would include detailed terms of reference for the extemal auditors, following the guidelines in the World Bank's Financial Accounting, Reporting and Auditing Handbook. The firm selected for performing the project audit would be hired 90 days after loan effectiveness. - 63 -  Annex 7: Project Processing Schedule COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT ;Projeict Scheduletit ljt00000i:4000;.)$: 0? 0:000 ;X Planned Actual Time taken to prepare the project (months) 9 24 First Bank mission (identification) 11/26/1999 11/26/1999 Appraisal mission departure 05/30/2000 03/26/2001 Negotiations 08/15/2000 11/19/2001 Planned Date of Effectiveness 12/15/2000 03/31/2002 Prepared by: Government of Colombia: Agricultural Development Unit in the National Planning Department in collaboration with the Ministry of Agriculture and Rural Development Preparation assistance: TF025829 FAO/CP Bank staff who worked on the project included: Name Speciality Martien van Nieuwkoop Sr. Natural Resource Economist/Task Manager up to negotiations Natalia Gomez Operations Officer/Institutional Aspects Jairo Arboleda Sr. Social Scientist/Social Assessment Manish Bapna Economist/Economic and Financial Analysis Kirsten Oleson Operations Analyst/Environmental Assessment Carmen P. Nielsen Procurement Analyst/Procurement Aspects Luis Schwarz Financial Management Specialist/Financial Management Aspects Mariana Montiel Legal Counsel Cornelis van der Meer Peer Reviewer (RDV) Shelton Davis Peer Reviewer (LCSES) Ryo Eguchi Peer Reviewer (CAGGR) Pierre Werbrouck Task Manager from negotiations onwards Erika Felix-Castaneda Project Assistant (Washington) Clemencia Medina Project Assistant (Colombia) Note: Planned project schedule reflects agreement at PCD stage. -64 -  Annex 8: Documents in the Project File* COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT A. Project Implementation Plan 1. Productive Partnerships Subproject Manual 2. Project Administrative Manual 3. Implementation Plan, including Procurement Plan B. Bank Staff Assessments 1. Social Assessment 2. Environmental Assessment 3. Technical Assessment of Productive Partnership Prototypes (FAO/CP) 4. Institutional Analysis and Project Implementation Mechanism 5. Financial Analysis of Productive Partnership Prototypes 6. Project Costs (COSTAB) 7. Procurement Assessment 8. Financial Management Assessment 9. Mission Aide-Memoires: - July 30, 1999 - December 3, 1999 - May 20, 2000 - October 24, 2000 - April 2, 2001 C. Other Documents Prepared by Project Preparation Team in the National Planning Department Description of Productive Partnership Prototypes: Dairy products, AGANAR, producer organization (60 members) with Nestle de Colombia S.A.; Granada, Meta Vegetables, Asociacion de Empresarios Campesinas de COTA (28 members) with the Farm S.A., Semillas Arroyave S.A. and Dupont de Colombia S.A.; Cota, Cundinamarca. Oil Palm, Asociacion de Productores de Palma (70 members) with Unipalma S.A.; Paratebueno, Cundinamarca Corn-Cacao, Cooperativa Multiactiva de Beneficiarios de Reforma Agraria (56 members) with La Nacional de Chocolates, S.A.; Rivera, Huila Oil Palm, Cooperativas Palmares (73 members) and El Topacio (27 members) with Industria Agraria La Palma, S.A.; San Alberto, Cesar. - 65 -  Agro-Forestry, Local producers to be organized in Asociaci6n de Productores (+/-50 members) with Pizano, S.A.; Zambrano, Bolivar. Description of existing incentives and background note on Modular Incentive. Financial Management Action Plan Farm/Household Survey Methodology and Results. Competitive Profile of Palm Oil in Colombia. TORs and guidelines for Project Consultative Committee. Market Assisted Land Reform Operational Manual. *Including electronic files - 66 -  Annex 9: Statement of Loans and Credits COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd P044140 2000 CARTAGENA WATER SUPPLY & SEWERAGE 85.00 0.00 0.00 75.75 14.05 0.00 P050578 2000 ENVIRO 20.00 0.00 0.00 19.78 2.20 0.00 P057326 2000 CO- RURAL EDUCATION 5.00 0.00 0.00 4.77 -0.23 0.00 P063643 2000 SIERRA NEVADA SUSTAINABLE DEVELOPMENT 506.00 0.00 0.00 212.99 0.00 0.00 P065263 2000 CO-FSAL 225.00 0.00 0.00 103.86 5.52 0.00 P068762 2000 EARTHQUAKE RECOVERY 100.00 0.00 0.00 99.00 12.33 0.00 P039082 1999 CO- COMMUNITY WORKS (MANOS A LA OBRA) 137.00 0.00 0.00 100.00 100.00 0.00 P050576 1999 TOLL ROAD CONCESSION 5.00 0.00 0.00 3.18 2.52 0.00 P046112 1998 CO- YOUTH DEVELOPMENT 7.20 0.00 0.00 4.17 2.64 0.00 P053243 1998 CO- PASTO EDUCATION 5.00 0.00 0.00 3.46 1.80 0.00 P006891 1998 PEASANT ENTERPRISE Z 40.00 0.00 0.00 31.71 16.86 0.00 P006861 1998 CO- ANTIOQUIA EDUCATION 75.00 0.00 0.00 57.32 16.16 0.00 P006864 1997 URBAN INFRASTRUCTURE 15.00 0.00 0.00 10.52 9.80 0.00 P040102 1997 FINANCIAL MARKETS DEVELOPMENT 12.50 0.00 0.00 6.77 4.27 0.00 P006887 1996 REG.REF.TA 249.30 0.00 0.00 19.00 15.66 1.54 P006872 1996 POWER MARKET DEVELOPMENT & ENERGY (TA) 65.00 0.00 0.00 4.16 3.33 1.16 P039291 1996 URBAN TRNSPRT 20.00 0.00 0.00 3.39 3.39 -0.95 P006894 1996 URBAN ENVIRONMENT TA 145.00 0.00 0.00 64.87 62.91 0.00 P006880 1995 SANTAFE I (WaterlSupply) 36.00 0.00 0.00 15.95 13.85 -4.35 P006893 1995 AGRICULTURE TECHNOLO 11.00 0.00 0.00 0.47 0.47 0.00 P006889 1994 ENERGYTECHNICALASSISTANCE 30.00 0.00 0.00 1.94 1.94 0.00 P006866 1994 CO PUBLIC FINANCIAL MAN 90.00 0.00 0.12 0.06 0.18 -3.76 P006854 1993 CO- SECONDARY EDUCATION 50.00 0.00 2.12 0.09 1.56 2.22 CO- MUNICIPAL HEALTH SERVICES Total: 1934.00 0.00 2.24 843.22 291.23 -4.15 - 67 -  COLOMBIA STATEMENT OF IFC's Held and Disbursed Portfolio Mar-2001 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1969/85/88/93/95 CF del Valle 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1963/90 Coltejer 6.02 0.00 0.00 0.00 6.02 0.00 0.00 0.00 1995/99 Corfinsura 25.00 0.00 25.00 0.00 0.00 0.00 25.00 0.00 1999 Harken 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1987 PRODESAL 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 1977/89/92/94/96 Promigas 6.88 0.00 0.00 14.58 6.88 0.00 0.00 14.58 1994/95 Promisan 0.00 0.23 0.00 0.00 0.00 0.23 0.00 0.00 1996 Proyectos 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 1997 Suleasing 24.82 0.00 0.00 0.00 2.25 0.00 0.00 0.00 1999 Surenting 0.00 5.10 0.00 0.00 0.00 2.50 0.00 0.00 Total Portfolio: 92.72 10.92 25.00 14.58 15.15 8.32 25.00 14.58 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2001 Tolcemento 3333.33 0.00 0.00 10666.67 2001 CHMC 0.00 10000.00 30000.00 0.00 2001 Cementos Caribe 4047.62 0.00 10000.00 12952.38 Total Pending Commitment: 7380.95 10000.00 40000.00 23619.05 - 68 -  Annex 10: Country at a Glance COLOMBIA: PRODUCTIVE PARTNERSHIPS SUPPORT PROJECT Latin Lower- POVERTY and SOCIAL America middle- Colombia & Carlb. Income Development diamond' 1 999 Pnnijlation, mid-vaar (millions) 41.5 509 2.n04 Life expectancy GNP oar canita (Atlas method. USS 21170 3.840 1.200 G,NP (Atlas method. USS billions) 90.0 1.955 2. 513 Averaae annual arowth. 1993-99 Pnmilatinn (%I 1.s 1.6 1.1 Labor force (%) 2.7 2.5 1.2 GNP / Gross Most recent estimate (latest vear available. 1993-99) capita nrnilmrnf Povertv (% of Donulation below national Dovertv linel 21 Urban nontilatinn (% of total oooulationl 73 75 43 Life exoectancv at birth (vears) 70 70 69 Infant mnrtalitv foer 1000 ive birthsl 23 31 33 Child malnjtrition (% of children under 5) 8 a 1 5 Access to safe water Access to imoroved water source (% of DoDulation) 78 75 86 Illiteranyv (% of oooufation aoe 15+) 9 12 1 fi Gross nrimarv enrollment /% ofschool-aoeDoDulationl 113 113 114 Colombia Mala 113 .. 114 Lower-middle-income group Famala 112 116 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1979 1989 1998 1999 Economic ratioa' GDP (USS billions) 27.9 39.5 99.1 86.6 Grnsr dnmastic invastmpntlGDP 18.2 1R.5 19.5 13. Exnnrts of nnnds and servieaslG DP 15.2 18 0 150 178 Trade Gross domestic savinaslGDP 19.9 22.7 13.6 11.0 rsross natinnal savinnolGDP 192 19.R 12 3 90 Current account balance/GDP 1.4 -0.5 -5.3 -1.1 Interest navmants/GDP n A 4.0 1 8 2.1 Domestic Investment Total dabt/GDP 21.0 42.7 33.6 39.9 Savings Total debt service/exoorts 14.3 48.4 30.5 43.2 PrAsent valua of dAhtlGDP .. . 32 7 45 1 Present value of debt/exoorts .. .. 216.5 255.6 Indebtedness 1979-89 1989-99 1998 1999 1999-03 (averaoe annual arowth) GDP 3.4 3. 4 n5 -4.3 2.f Colombia GNP ner eanita O.R 1.8 -0.9 -7.1 1.0 Lower-middle-income group Exoorts of aoods and services 5.a 5.8 5.9 4.7 3.6 STRUCTURE of the ECONOMY 1979 1989 1998 1999 Growth of investment and GDP (%) (% of GDP) 50. Anriciltmere 22 n 1fi f 13 3 12 2 Industrv 30.3 38.2 25.7 24.8 30 Maniufartcirino 23.0 21 6 14.2 12.9 _ Services 47.7 451 61.0 62.9 0_ Private consnjmntion 70.7 fi. 1 67.5 67.9 -30 - . _ Ganeral novarrnmnt nonsitmntion 9 3 92 18.9 21 1 GDl GDP Imoorts of aoods and services 13.5 13.8 20.9 19.5 1979-89 1989-99 1998 1999 Growth of exports and imports(%) (averaoe annual ore wIhi Aoricuiltuure 2.5 -2.1 0.6 -0.2 40 Industrv 4.7 1.9 -1.8 -11.0 Mantifar.tirina 2.8 -1.7 -0.3 -12.4 20 Services 3.0 5.3 -5.5 -0.7 Private consnimntion 2.6 3. 0.8 -5.1 0 4 95 96 57 Ganeral novarnmant nonsimntinn 4 3 84 0.9 4 3 9 Gross domestic investment 2.3 5.7 -5.7 -30.1 |20 - Imnorts nf ooons and sarvicas n.R 13 2 -2.R -1356 Exports mports Gross national oroduct 2.9 3.6 1.0 -5.5 Note: 1999 data are preliminary estimates. The diamonds show four kev indicators in the countrv tin bold) comnared with its income-aroun averaoe. If data are missina. the diamond will ha inrnmniAtA. - 69 -  Colombia PRICES and GOVERNMENT FINANCE Domestic prices 1979 1989 1998 1999 Inflation (%) (% change) 30 Consumer prices 24.7 26.1 16.7 9.2 20 Implicit GDP deflator 24.1 24.7 15.5 12.5 Govemment finance (% of GDP, incdudes current grants) o - Currentrevenue .. 10.2 11.9 12.6 94 90 96 97 98 Current budget balance .. 1.2 -3.1 -4.7 GDP deflator CPI Overall surplus/deficit .. -0.5 -5.3 -6.5 TRADE (US$ millions) 1979 1989 1998 1999 Export and Import levels (USS mill.) Total exports (fob) 3,441 6,031 11,494 12,044 20,00 Coffee 2,005 1,476 1,896 1,325 Petroleum 146 1,400 2,333 3,761 15,000 - Manufactures 1,224 2,145 6,588 3,922 _ Total imports (cit) 2,978 4.558 14,836 10,311 10J0 Food 254 219 1,655 1,415 5 Fuel and energy 322 316 158 270 Capital goods 1,077 1.595 5,522 3,651 0 93 94 95 96 97 98 99 ExDort Doce index (1995=100) 5 36 112 117 lmoort once index (1995=1001 4 43 116 116 *Exports KImports Terms of trade (1995=100) 123 82 96 101 BALANCE of PAYMENTS fUSS millions) 1979 1989 1998 1999 Current account balance to GDP (%) Exports of goods and services 4,532 7,330 13,560 13,959 0 Imports of goods and services 3,919 6,411 17,542 13,595 Resource balance 613 919 -3,982 363 -2 Net income -277 -2,019 -1,735 -2,123 Net current transfers 66 898 444 796 'I 'll', Current account balance 402 -201 -5,273 -964 4 Financing items (net) -487 350 6,663 1,387 Changes in net reserves 85 -149 -1,390 -423 _ Memo: Reserves includina oold tUSS millions) . .. 8.741 8.103 Conversion rate (DEC. localIUSS) 42.5 382.6 1,426.5 1,757.0 EXTERNAL DEBT and RESOURCE FLOWS 1979 1989 1998 1999 (USS millions) Composition of 1998 debt (US$ mill.) Total debt outstanding and disbursed 5,869 16,886 33,263 34,519 IBRD 838 3,808 1,740 1,958 A: 1,740 B: 9 IDA 22 15 9 8 G:6,232 D: 2,801 Total debt service 703 3,905 4,565 6,596 E: 1,397 IBRD 124 640 347 391 IDA 0 1 1 1 Composition of net resource flows Official grants 10 37 61 Official creditors 137 102 107 923 Private creditors 542 -10 566 995 Foreign direct investment 127 576 3,038 1,008 Portfolio equity 0 0 26 663 F: 21,084 Word Bank program Commitments 331 330 227 591 A - IBRD E - Bilateral Disbursements 139 361 184 499 B - IDA D - Other multilateral F - Private Principal repayments 52 333 233 271 c- IMF G - Short-term Net flows 87 28 -48 228 Interest payments 73 308 115 123 Net transfers 14 -280 -164 105 Development Economics B/29/00 - 70 -  Additional Annex 11 Social Analysis COLOMBIA: PRODUCTIVE PARTNERSHIP SUPPORT PROJECT Introduction The project aims to stimulate establishment of collaborative arrangements between poor small scale producer associations and agribusiness firms in a particular value chain. The primary beneficiaries of the project are members of the producer associations who demonstrate vocation and capacity relevant for the business partnership. This vocation and capacity imply that, even though poor, they are not necessarily among the poorest of the poor in the rural area. The collaborative arrangements or productive partnerships provide participating partners the opportunity to satisfy their own interest in a relationship that is interdependent and creates a win-win situation for all parties involved. This type of partnership is one of the strategies proposed in the National Development Plan, Cambio para Construir la Paz, as a means to improve living conditions and decrease tensions in rural areas. The partnership is more than a contract to the extent that it presupposes convergence of interests, complementarity of contributions and shared risks to achieve the objective. The Productive Partnership Support project creates an innovative type of relationship between different partners providing conditions for a more peaceful coexistence. Partnerships of this type create social capital, which contributes to the reduction of social tensions as well as to the generation of economic gains as demonstrated in several experiences in various parts of the country. Cases such as Indupalma and worker cooperatives in San Alberto, Monterrey and the association of producers in Puerto Wilches or Agroactuar and small scale producers of horticulture in Marinilla are good examples. Political and social violence have decreased. As part of the preparation process of this project, a series of productive partnership prototypes were prepared and tested in order to learn and apply the lessons to the final project design. Social Assessment of Prototypes A social assessment was conducted for each of six prototypes developed in different regions of the country, following a methodology and terms of reference designed by the project team. Using a combination of secondary data and qualitative methods, the objective of the assessment was to collect information on the following: (i) the social and economic characteristics of the locality and of the prospective members of producer associations; (ii) their interests and motivation in the formation of partnerships; (iii) the context of the relationship between small producers and agribusinesses and the potential of a prospective partnership to satisfy the diverse interests of the partners; (iv) the level of commitment of the participating parties to the common objective and the mutual benefits; (v) the adequacy and applicability of the eligibility criteria; (vi) the institutional capacity of the locality, the level of education and experience of associations and of their members to fulfill the agreements; (vii) the potential of the productive partnership to contribute to mitigate the conflict and improve security in the area, and (viii) if land purchase was involved, the assessment of any - 71 -  negative impact on those living in the land to be purchased. The reports of these social assessments with detailed information on each of the prototypes can be consulted in the project files. However, the following paragraphs provide an overview of the social assessment of the six prototypes. It provides information on the productive activities, on the social and economic characteristics of the families affiliated with the prototypes, and on features of the partnership. Productive inforrmation The proposed projects are located in municipalities of different regions of the country: Paratebueno and Ariari in the eastem region, Cota in the central region, Rivera in the south, San Alberto and Zambrano in the Atlantic Coast region. The productive activities include plantation products such as oil palm and cacao, dairy products, agroforestry and horticulture. In each of the farms these cash crops are combined with traditional crops for self-consumption and for the local and regional markets. This combined system guarantees food security of the families and some income for the small farmers while the cash crops come into production. The potential area of production covers about 18,000 hectares. Of these, 5,000 hectares are proposed to be cultivated during the first phase of the project. The key partners are national or intemational agribusinesses specialized in one or several aspects of the value chain, associations of small producers and the Government through the project. Other partners include local governments, universities, Regional Development Corporations, specialized NGOs, and the Catholic Church. The farmers are familiar with some of the business partners. This is the case of Unipalma in Paratebueno, Indupalma in San Alberto, and Monterrey in Zambrano, all with a tradition of operations in the region and relatively good relationships with the small producers. Others are new in the specific locality such as Dupont and The Farm in Cota and Rivera, and Nestle in Ariari. Social characteristics of key beneficiaries About 1,600 peasants participated in the induction to the project. The induction process consisted of a variety of activities including workshops, informal meetings with small groups, visits to individual families and farms over a period of three to six months. These activities were promoted and coordinated by staff of the preparation team in association with local govermments and staff of regional and national entities specialized in the agricultural sector. The families that are affiliated with the six prototypes are 347 or about 22% of those who went through the induction process. This number is the result of self-selection based on the application of eligibility criteria and other factors. Some families dropped out during the induction due to migration or the demands of the process. Others were unable to provide the required documentation on the property of the land or unable to fulfill potential credit requirements. Still others preferred to avoid the risk and take a wait and see attitude. Based on the social assessment documents, there is no tension between those who are affiliated with the prototypes and those who are not. One of the factors for this favorable situation was the self-selection process, which breaks with a tradition of government employees influencing the participation of people in government funded activities. The average family size of the 347 families affiliated with the prototypes is 5 members. The distribution of age of the head of the family is as follows: 7.5% under 20 years, 59.6% between 20 and 40 years old, 32.9% over 40 years old. Regarding education, 11% of the family heads has up to three years of primary schooling, 44% between 4 and 8 years, 17.3% between 8 and 10 and only 8.6% are high school graduates or have some university education. - 72 -  There are no families of indigenous peoples, afro-Colombians or internally displaced, except for very few Indian families from a nearby Cabildo, participating as individuals in the project prototype of Cota. Of the total number of families only 7% are headed by women. The income level of these families is low or very low. The affiliated families from Paratebueno and San Alberto make the equivalent of the minimum wage (about US$ 125) which is a low income for Colombian standards. The families from Cota make about 70% of the minimum wage, and those from Rivera, Ariari and Zambrano make from 30% to 50% of the minimum wage, which reflects a critical situation for those families. In summary, the families involved in the prototypes are young, with 67% under forty years of age. They have an acceptable level of education, 70% has over 4 years of schooling. And all are poor or very poor. The age and level of education represent a good prospect for these families. Evidence from other World Bank studies (e.g. Lockheed Marlaine E. and Verspoor Adrian, Improving Primary Education in Developing Countries, 1991.Oxford University Press) show that four years of education is associated with higher agricultural productivity of about 9% and favor attitudes towards change. Relationship between small producers and agribusinesses The reports of the social assessment of the prototypes show that the interest of all parties is notorious in the establishment of the partnership. This partnership, on the one hand, has the potential to help solve the problems of the different parties of the value chain. That is, the need for higher levels of productivity and competitiveness of the firms, and the need for more secure levels of income and access to productive assets by the small producers. On the other hand, it is a mechanism to access the incentives of the project. As pointed out before, the degree of familiarity between the firms and the producer associations varies. Some have worked together with satisfactory results in the past, particularly in the production of oil palm. Others are new and there are high expectations for a positive relationship. The asymmetry of the relationships between owners and workers is a factor to take into consideration. Even though, the project staff or the Technical Assistance Provider work with the parties in the establishment of an adequate relationship, the tendency is still for members of the associations to allow the firms or the project staff to take the lead. To some extent, this may be justifiable in view of the fact that specific requirements of the business itself such as international prices or quality standards impose conditions to which all have to concede, particularly those with less experience or knowledge. Becoming familiar with those requirements is part of the evolution of the partnership and the responsibility of the Technical Assistance Provider in its work with small producers. In this respect, there is awareness on the side of the firms that their contribution to the partnerships goes beyond the provision of a contract to the associations. For example, Unipalma will provide soft loans and special conditions for the purchase of seeds, free technical assistance in the production cycles, and quality control over the purchase of agricultural inputs. Dupont, in turn, offers certified seeds, technical assistance and commercialization services to small farmers in the production of corn and soy beans before the palm oil enters into its production phase. However, small scale farmers also need assistance directed towards the best use of the limited resources available, improving risk management, planning capacity, farm management and financial management. This kind of assistance is critical for the success of the project. This type of assistance will provided by Technical Assistance Providers in conjunction with the organizations of the sector present in the region such as Umatas (extension agents). - 73 -  Value and use of the information Despite the value of the information collected, the quality and completeness varies across the prototypes. Furthermore, the timing of the social assessment did not allow for its full use in the design of the prototype. In general, the information became available when the partnership and the project was already quite advanced in its design. Despite this lack of match, the prototypes benefited from the social assessment in at least two ways: (i) the information from the formal assessment regarding expectations and the history of the relationships between partners was used in the design of the formal agreement. (ii) the guidance provided by the project preparation team during the early stages of preparation of the prototype, regarding the characteristics of the value chains and the potential of small producers to become part of those chains proved very valuable in the induction of small scale producers. Social Assessment of Subproject Design and Implementation During appraisal the lessons of the experience of the social assessments of the prototypes were examined. Based on those lessons, the following criteria and terms of reference for the social assessment of productive partnerships were agreed upon and will be incorporated in the project design as reflected in the Productive Partnerships Operational Manual. Eligibility The project is all inclusive of the rural population. The social and economic eligibility criteria are the following: (i) poor men-women heads of household with or without land, (ii) between 18-50 years old, (iii) with at least one family member with complete primary schooling, (iv) with at least three years of agricultural experience relevant to the partnership activity, (v) having participated in the regional training provided by the project, (vi) with assets of not more than 200 minimum wages, and (vii) with 75% of the income derived from agricultural activities for up to 4 minimum wage per month. Special population groups The project will accommodate the special conditions and needs of indigenous peoples, Afro-Colombians and the internally displaced population. The indigenous communities will participate, provided the land tenure of their Resguardo is not in conflict. The social and economic eligibility criteria will not apply. The Afro-Colombian population will have access to the project benefits through the established criteria for productive partnerships if they live mixed with the rest of the population of the locality. If they live in community, in a collectively owned territory, they can participate through their own organizations in a similar fashion to the indigenous communities. The displaced population can access the project benefits through their existing or new organizations, keeping in mind the norms of the government policy for the internally displaced. Targeting According to household surveys conducted. as part of the preparation process for a land reform support project, the incidence of poverty among rural households is approximately 80%, using the index of "Unsatisfied Basic Needs". Consequently, there will be plenty of eligible participants throughout the country. This situation offers an opportunity to achieve two objectives simultaneously, one reduce the risk associated with the armed conflict, and two increase the quality of the proposed productive partnerships. In effect, by avoiding a geographic targeting, the partnership approach and methodology will be spread out - 74 -  in the country in regions of high, medium and low intensity of conflict. This itself becomes, on one hand, a good dissemination strategy of the model across the country; on the other hand, a risk mitigation measure by not concentrating all efforts on difficult regions. In addition, by opening the opportunity to participate to the whole country, the pool of proposals will be larger, and consequently, project management will have more choices for the best proposals. Finally, the project makes a distinction between humanitarian assistance and development assistance. In this regard, it is important to realize that the project addresses the needs of poor people but not necessarily of the poorest of the poor, who require humanitarian assistance as a priority. This project provides development assistance and thus creates opportunities for those capable of meeting the requirements and with an entrepreneurial vocation. Information and Communication The information and communication strategy will target the general public and potential beneficiaries. It will make sure that the public becomes aware of the existence of the project, and the potential beneficiaries become familiar with the objective and incentives of the project and how to access them. The strategy will use a variety of methods and means of social communication appropriate to the diverse audiences to inform on objectives, benefits, rules of the game, procedures and expected results. For its implementation the strategy will use local civil society organizations and promoters from the regions who are knowledgeable of the beneficiaries. In the cases of indigenous and afro-Colombian communities questions of language, culture and ways of communication will be taken into consideration. The supervision of the application of the strategy will be the responsibility of the social specialist of the Project Coordination Group. It was agreed that a specialized firm will be contracted for the design and implementation of the strategy for the first round of subprojects. From then on, the Technical Assistance Providers will take such responsibility. Preparation and Evaluation of Profiles The subproject profiles will be evaluated, from the social point of view, using the following indicators: (i) Is there evidence in the profile cover letter of mutual interest and commitment of the partners to form a partnership around the proposed subproject? (ii) Is there a list with the names and identity of the small scale producers interested in the partnership? (iii) Do potential beneficiaries fulfill the eligibility criteria? (iv) Is the labor, fiscal, commercial, financial and environmental track record of the firm acceptable for its participation in the project? (v) Does the profile indicate the involvement of several family members from each of the producer's family; or of members of one of the special population groups? (indigenous peoples, afro-Colombians, intemally displaced, women heads of family) (vi) Are the small scale producers members of an association with at least two years of experience? The first 4 indicators, to be graded as yes or no, represent minimum eligibility criteria for the profile; number 5 is a priority criterion of the project to ensure that some of the partnerships include special populations. Number 6 is a preference criterion for the first round of subprojects in order to increase the probability of success which is considered critical to establish a solid track record at the early stages of the project. - 75 -  Preparation and Evaluation of Subproiects To determine the social viability of the subproject and of the partnership, and to ensure the benefits for the partners, particularly of the small scale producers, the following criteria will be used in the evaluation of subprojects. (i) The members of the association of producers must fulfill the beneficiary eligibility criteria; (ii) The subproject should clearly specify the expected benefits for the partners from their participation if the partnership; (iii) The social and political context in which both the activity and the partnership will develop should be favorable. In particular: (a) the subproject should not generate high friction between those who participate and those who do not; (b) the armed conflict should not seriously interfere with the implementation of the activities; (iv) Technical and organizational capacity should exist to fulfill the commitments acquired in the agreement of the partnership. If not, there should be a plan which should allow to achieve it within a reasonable time; (v) Small scale producers should be aware and know well their responsibilities and financial obligations; particularly the debt acquired with the commercial bank or with the firm; (vi) The firm should make a commitment to the producers to transfer knowledge and information. There should be specific learning mechanisms for such transfer to take place; (vii) All risks associated with the proposed activities should be shared; (viii) There should be an appropriate mechanism to resolve conflicts within the partnership; (ix) There should be a participatory mechanism for decision-making in the internal affairs of the partnership; (x) There should be a qualified Technical Assistance Provider which is capable of: accompanying all aspects of the formulation of the subprojects, strengthening the capacity of the small scale producers, mediating the negotiation of the terms of the partnership with the firm; (xi) There should is not be any foreseen negative impact on a group or special population. If there were, all adequate mitigating measures have been taken. Monitoring and Evaluation The Monitoring and Evaluation system will include indicators to assess the following: (i) the critical factors in the establishment of the alliance, (ii) the degree of compliance of the participating partners with the agreements, (iii) the level of empowerment of the producer associations, (iv) the impact of the partnership in the reduction of violence, (v) the participation of indigenous peoples, afro-Colombians and displaced populations in the project. Participatory Approach The primary stakeholders of the project are: (i) poor rural families who will select themselves to enter into partnerships with firms; and (ii) participating agribusiness firms in productive partnerships. The concept of productive partnerships as conceived by the project, empowers stakeholders to take the implementation of the activities in their own hands and to seize the responsibility as agents of their own change. This approach puts into practice a participatory model of empowermentfor development. At the national level, the spirit of participation and partnership between the public and private sector has been ensured during project preparation by a consultative committee formed with the participation from - 76 -  private firms, producer organizations and relevant public entities. Under agreed terms of reference the committee has met to review progress in the preparation of productive partnerships and to provide feed back to the project management team. By allowing for participation of the private sector and small farmer producer organizations in the National Technical Committee, this spirit of participation and partnership will be ensured in an even more systematic manner during project implementation. At the local level, the construction of the partnership is itself a participatory process which involves intense interaction among the partners, capacity building to gain understanding and abilities, and negotiation of the rules of action for the enterprise. The individual and social capacity building includes themes such as working in partnership, the art of association, farm management, quality control, costing of productive activities, the elements of the value chain, and conflict resolution. At the end, there is a formal agreement signed by the parties, which includes a conflict-resolution mechanism agreed upon by them. The participatory model of empowerment for development embedded in the productive partnership concept emphasizes a group approach. It focuses on the formation or strengthening of producer associations leading to self-management by stakeholders at the local level. It establishes linkages with private enterprises through a variety of collaborative arrangements that create a win-win situation for all participating parties. Overall, it contributes to the formation of social capital, to the increase of rural household incomes, and to the reduction of social, political and economic violence. Other stakeholders are NGOs, professional groups, universities, municipal governments and state agencies involved in the provision of technical assistance and training. As a critical factor in the promotion of this participatory approach of partnership building the project is developing an information sharing and communications strategy to motivate primary stakeholders, and promote public support and social control of project activities. This strategy will ensure that (i) potential beneficiaries know the eligibility criteria, their rationale and ways of accessing the project benefits, (ii) the NGOs leam and become familiar with how the project works and how to fulfill their role in it, and (iii) citizens exercise control over project activities. The information and communication strategy so defined should lead to local empowerment and project ownership. - 77 -  Additional Annex 12 Environmental Analysis COLOMBIA: PRODUCTIVE PARTNERSHIP SUPPORT PROJECT During project preparation, six environmental assessments (EA) for the pilot productive systems were prepared by local consultants, under TORs acceptable to the Bank. The reports consisted of an Environmental Impact Assessment (EIA), an Alternative Technology Assessment and an Environmental Management Plan (EMP). The lessons learned from contracting, implementing and reviewing these EAs are being used to design the environmental assessment methodology for the project and to design specific environmental activities which were identified as priorities. Environmental Assessment Methodology The underlying premise of the proposed EA methodology is to keep the EA procedures simple and effective. The methodology relies heavily on the use of checklists and matrices, and only in rare cases requires in-depth EA. The EA responsibilities are divided amongst various institutions in order to ensure adequate capacity. This division of labor will also serve as a system of checks and balances. The project will support the needed capacity building in all of the designated institutions, and includes an environmental awareness and education campaign for the communities requesting funds. Prior to effectiveness, the project team will work with the environmental specialist in PCG to fully develop the specific tools (such as matrices, etc.) to be used during the EA process. Screening Initial screening of the subprojects will be done by PCG, to ensure that they meet the environmental criteria. No subprojects in the annexed Negative List may be financed by the project. The list includes subprojects under EA category "A", and crops as tobacco, which the Bank is prohibited from financing. Secondary screening will involve a review by the municipality to ensure that the subproject is in accordance with the land use plans. This step will ensure that the subprojects will not have any negative effect on natural habitats, including established and proposed parks, reserves, etc. The municipality's approval will be submitted to PCG as a prerequisite for continuing the proposal processing. A third screening will use a predefined matrix which identifies possible environmental impacts of various production activities. This screening will be undertaken by the TA provider along with the requesting community. The outcome of the screening matrix will determine if a full Environmental Impact Assessment is required, or if a Limited Environmental Assessment will suffice. This screening matrix will be submitted to the PCG for review and clearance. All TA providers are expected to have a minimumn environmental screening and assessment capacity, and will follow a short training on implementing the methodology for EA/screening. - 78 -  Environmental Assessment A few entities, or independent consultants, will be trained in EA methodologies and requirements. These consultants would then be used for all subproject EAs to ensure that all subprojects have similar environmental analyses. Environmental Impact Assessment. In rare cases where the screening identifies significant impacts of the proposed subprojects, an EIA will be prepared by the trained consultants/entities in coordination with the TA providers. Draft TORs for the EIAs (to include a detailed EMP) will be prepared by the TA providers, and submitted to PCG and Bank for clearance. The EIA will be discussed with the partnership and with the community. The full ELA/EMP will be submitted to PCG, and the results of the EIA will form part of the proposal. The Panel of Independent Experts will be charged with reviewing the EIAs/EMPs. During the first year of project implementation, ELAs will be submitted to the Bank for review. Limited Environmental Assessment. (LEA) Using the screening matrix, the LEA does more in-depth analysis, quantifying and/or qualifying the subproject impacts. The LEA will result in a prioritization of mitigation activities and suggestions for "good operating procedures". The LEA will be done by the approved EA entities, in coordination with the TA providers and the communities. Together, they will develop a detailed monitoring plan. The LEA and monitoring plan will be submitted to PCG for review, and will form part of the proposal submitted to the Panel of Independent Experts for their consideration. During this phase, the TA provider will hold a one- to two-day workshop with the partnership to build environmental awareness, disseminate good practice, discuss environmental impacts of the projects, and to develop a community-based monitoring plan. PCG will develop a model agenda for these workshops. Furthermore, agreement by the Partnership, TA provider and PCG on the EMP (including activities to avoid, mitigate and monitor negative impacts) will be a condition of subproject financing. Monitoring and Evaluation PCG will follow up on all identified mitigation measures, ensuring proper implementation and potentially negotiating with communities for additional activities, should unforeseen environmental impacts occur. PCG will decide on the reporting requirements from each subproject (to be part of the EMP agreement of the Partnership with the PCG) in order to effectively monitor implementation. PCG will also produce semi-annual reports on the EA and monitoring process. These reports will be submitted to the Independent External Evaluator in order to facilitate the impact evaluation of the project, and also to the Bank as part of supervision missions. Operational guidelines for 5 types of production systems * The operational guidelines will ensure that the most common production systems have best practice design, construction, operation and oversight procedures in place. Where appropriate, these guidelines will detail requirements to meet ISO 9000 standards. Having standard guidelines will improve efficiency and consistency. The guidelines will also suggest monitoring plans. As a first step, guidelines will be produced for palm oil production, after which the success of application and use of the guidelines will determine whether guidelines for other systems should be produced. * Consultant, overseen by Environmental Expert in PCG * Operational guidelines produced for 5 production systems (palm oil, organic coffee, etc.) - 79 -  Agrochemical Guidelines * General guidelines will be produced that enumerate best practice in pest management plans, building on analytical work done during project preparation. The plan will stress non-chemical means of pest management, as well as good practice in other agrochemical use. The guidelines will cover the entire life-cycle of the agrochemicals, including procurement, transport, storage, application and disposal. These guidelines will be used in the training programs. * Consultant, overseen by Environmental Expert in PCG * Guidelines and training materials produced Environmental Education * All TA providers are expected to have minimum environmental screening and assessment capacity, and will be required to undergo a short training in the use of the environmental screening and assessment methodology set forth by PCG. The entities that will perform the EAs will also be required to undergo training. This is in order to ensure similar EA throughout the country, across all productive systems. Additionally, the partnerships will be required to undergo a one- to two-day workshop in order to receive financing; the cost for this is considered in the cost of EA preparation. This subcomponent is a mix of training the trainers, developing training materials, and public outreach. * Consultant and/or environmental expert in PCG * 2 training courses given annually to TA providers; all partnerships having attended a workshop; EA entities trained and producing satisfactory EAs - 80 -  APPENDIX 1 Negative list The project will not finance any subproject which will be classified as category A under the Bank's EA policy, or subprojects which are implemented in violation of Colombia's environmental laws and environmental impact assessment procedures, or Colombia's laws on treatment of cultural heritage. Specifically, subprojects involving the following activities will be excluded from financing: 1. Dam construction, reconstruction, rehabilitation or strengthening, with the exception of irrigation dams or rural electrification dams no more than 3 meters in height, with a reservoir size of no more than 10 hectares. 2. Activities negatively affecting natural protected areas recognized by national, departmental or municipal governments (or buffer zones thereof), other than as required to mitigate damage caused by a natural disaster. 3. Land reclamation (i.e., drainage of wetlands or filling of water bodies to create land). 4. Land clearance and leveling (when affecting critical natural habitats and natural land contours, natural habitats for this purpose being those water or land areas where most of the original plant and animal species are still present). 5. Hazardous waste management and disposal, as well as manufacture, transport and use of pesticides and other hazardous and/or toxic materials (except small amounts of solvents, degreasing materials, paints, fuels and the like used during construction). 6. Use of pesticides that are eligible to be financed are limited to those that are approved by the Colombian Agriculture Institute (Instituto Colombiano de Agricultura), are not prohibited by Colombian Law, are not in the World Health Organization lists (i.e., are not formulated products within classes IA and IB, or are formulations of products in Class II of WHO Guidelines), and are not know threats to wildlife or public health. 7. River training (i.e., realignment, contraction or deepening of an existing river channel, or excavation of a new river channel). 8. Activities involving industrial plants (large-scale) and industrial estates, except activities involving agro-industrial plants. 9. New road construction or major upgrading or realignment of roads (major means: changing the road category, such as from seasonal to all-weather or secondary to primary; adding new lanes; or changing road surface). 10. New irrigation, drainage and flood control works which have a command area greater than 200 hectares. 11. (a)Activities which, when being carried out, would affect, or involve the use of, water of rivers or of other bodies of water (or their tributaries) which flow through or are bordered by countries other than Colombia, in such a manner as to in any way adversely change the quality or quantity of water flowing to or bordering said countries; and (b) activities involving the installation or construction of facilities which, when operated after their construction or installation, would affect, or involve the use of, water of rivers or of other bodies of water (or their tributaries) which flow through or are bordered by countries other than Colombia, in such a manner as to in any way adversely change the quality or quantity of water flowing to or bordering said countries (unless such bordering countries have formally expressed in writing to the Bank and to the Borrower their no-objection to the activities referred to in (a) or (b) herein). 12. Activities relating to forestry production that negatively effect existent primary forests. 13. Development of new, or expansion of existing, ports and harbors. - 81 -  14. Mariculture or large-scale aquaculture activities, or aquaculture which would introduce aggressive non-native species to any natural water bodies where they are not already long-established 15. River basin development activities. 16. Development of new, or expansion of existing, thermal power and hydropower facilities, except for small rural electrification projects. 17. Infrastructure works estimated to cost over $300,000 equivalent or greater than 20% of the Productive Partnership Subproject's budget. 18. Activities of any type classifiable as category A for environmental purposes pursuant to Annex B of the Bank's December 1998 policy document entitled Good Practices (GP) 4.01. 19. Conversion or degradation of critical natural habitats (as defined in the Bank's September 1995 Operational Policy (OP) 4.04, Annex A, on natural habitats). 20. Any civil works which would adversely affect significant cultural property, including archeological and historical sites. 21. Activities relating to, or in preparation for, exploitation of any plant or animal species listed in the Convention of International Trade in Endangered Species of Fauna and Flora (CITES), except that such activities may be carried out as part of a Productive Partnership Subproject if the individual plant or animal specimens in question: (i) are of a species not listed in CITES Appendix I or qualify as part of CITES Appendix II pursuant to CITES Article VII (4); (ii) qualify for the issuance of certificates pursuant to CITES Article VII (5) and are bred or propagated from parent specimens that also qualify for the issuance of such certificates; and (iii) are to be placed in trade or otherwise disposed of in a manner consistent with the terms of CITES. - 82 -   IBRD 31251 780 4 L .N\<< ' t 70' lL .1.2 - 0 , Ca / i rib bea \,. - Sea Ria7kaca fgCOLOMB u S X t f t;0 \ 00 \> A NT I 1) U I A S A N 7 _fJ Ri CasRnArrZ\. ) PAN A 80~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~0 PACl F U CCH+A_% ~ OCEAN DA CUNDINAMARcA nia * CASANARE~~~~~~~~~~~Te owoie, olrs iniaiosan ay d iknato ~~~~~~~~~~~~~DO shopoonth MF,,awtknp1yonJoee 40~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~8 17 c6ctARIG *encioU A V I A Rny COLOMBIA = 0 Departmnent Capitals <AMAZONASf