Argentina - Small Farmer Development Project

Document of The World Bank Report No: 16620 -AR PROJECT APPRAISAL DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$75 MILLION TO THE ARGENTINE REPUBLIC FORA SMALL FARMER DEVELOPMENT PROJECT June 27, 1997 Natural Resources, Environment and Rural Poverty Division Country Department I Latin America and the Caribbean Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective April 1997) Currency Unit = Argentic peso US$1.00 =- A$ 100 FISCAL YEAR January I - Decemnber 31 ABBREVIATIONS AND ACRONYMS ADR - Rural Development Area CAS - Country Assistance Strategy CCN - National Coordinating Committee (Comision Coordinadora Nacional) CDR - Rural Development Commission (Comision de Desarrollo Rural) CFA - Federal Agricultural Council (Consejo Federal Agropecuario) CP - Provincial Coordinator of PSA (Coordinador Provincial) DPyDA - Directorate of Planning and Agricultural Development (Direcci6n de Planeamicnto y Desarrollo Agropecuario) ETA - Provincial Technical Unit (Equipo Tecnico de Apoyo) FAIR - Rural Investment Fund (Fondc de Apoyo a Iniciativas Rurales) GATT - General Agreement on Tariffs and Trade IDB - Inter-American Development Bank IFAD - International Fund for Agricultural Development INTA - National Agricultural Technology Institute (Instituto Nacional de Tecnologia Agropecuaria) M&E - Monitoring and Evaluation MERCOSUR - Southern Cone Common Market (Mercado Comun del Sur) MIS - Management Information System NBI - Unsatisfied Basic Needs (Necesidades Basicas Insatisfechas) NGO - Non-Governmental Organization PCD - Project Concept Document POA - Annual Operating Plan (Plan Operativo Anual) PRODERNEA - Northeast Rural Development Program (Programa de Desarollo Rural del Nordeste) PSA - Social Agricultural Program (Programa Social Agropecuario) SAGPyA - Secretariat of Agriculture, Livestock, Fisheries and Food (Secretaria de Agricultura, Ganaderia, Pesca y Alimentacion) SIEMPRO - Social Programs Monitoring and Evaluation System (Sistema de Informacion, Evaluacion y Monitoreo de Programas Sociales) SIF - Social Investment Fund TA - Technical Assistance UL - Local Unit (Unidad Local) UNC - National Project Coodination Unit (Unidad Nacional de Coordinacion) UP - Provincial Coordinating UJnit of PSA (Unidad Provincial) UTCN - National Technical Coordination Unit of PSA (Unidad Tecnica de Coordinacion Nacional) Vice President S.J. Burki Director G.T. Nankani Division Chief C. Bernard Task Manager S. N. Schonberger  ARGENTINA SMALL FARMER DEVELOPMENT PROJECT TABLE OF CONTENTS PROJECT FINANCING DATA ................................................................1 BLOCK 1: PROJECT DESCRIPTION .................................................................2 1. Project development objectives ................................................................ 2 2. Project components .................................................................2 3. Benefits and target population .................................................................2 4. Institutional and implementation arrangements .......... .................................................3 BLOCK 2: PROJECT RATIONALE ................................................................4 5. CAS objectives supported by the project ................................................................ 4 6. Main sector issues and Government strategy ...............................................................4 7. Sector issues to be addressed by the project and strategic choices ................................5 8. Project alternatives considered and reasons for rejection ..............................................5 9. Major related projects financed by the Bank and/or other development agencies ...........6 10. Lessons leamed and reflected in the project design .....................................................7 11. Indicators of borrower commitment and ownership ....................................................7 12. Value added of Bank support ................................................................7 BLOCK 3: SUMMARY OF PROJECT ASSESSMENTS ......................................................8 13. Economic Assessment ................................................................8 14. Financial Assessment ................................................................8 15. Technical Assessment ................................................................8 16. Institutional Assessment ................................................................9 17. Social Assessment. ............................................................... 10 18. Environmental Assessment ............................................................... 10 19. Participatory Approach ............................................................... 11 20. Sustainability ............................................................... 11 21. Critical Risks ............................................................... 12 22. Possible Controversial Aspects ............................................................... 12 BLOCK 4: MAIN LOAN CONDITIONS ............................................................... 13 23. Loan effectiveness conditions ............................................................... 13 24. Other . .............................................................. 13 BLOCK 5: COMPLIANCE WITH BANK POLICIES ........................................................ 13 List of Annexes 1. Project Design Summary ............................................................... 14 2. Detailed Project Description and Implementation Arrangements ................................ 17 3. Estimated Project Costs ............................................................... 21 4. Cost Benefit Analysis Summary . ............. ................................................. 22 5. Financial Summary ............................................................... 25 6. Procurement and Disbursement Arrangements ........................................................... 26 7. Project Processing Budget and Schedule ............................................................... 32 8. Documents in the Project File . . ............................................................. 33 9. Status of Bank Group Operations in Argentina ................................... .... ..... ...... 34 10. Argentina at a Glance ............................................................... 37   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Latin America and the Caribbean Regional Office Country Department I Project Appraisal Document Argentina Small Farmer Development Project Date: June 27, 1997 [ ] Draft [X] Final Task Manager: Steven N. Schonberger Country Director: Gobind T. Nankani Project ID: AR-PA-6041 Sector: Agriculture Lending Instrument: Specific Investment Loan PTI: [X] Yes I ] No Project Financing Data [XI Loan I[] Credit [ Guarantee I I Other tSpecifyl For Loans/Credits/Others: Amount (US$m/SDRm): US$75.0 million Proposed Terms: [ Multicurrency [X1 Single currency (US dollar) Grace period (years): 5 [ Standard Variable [ I Fixed [X1 LIBOR-based Years to maturity: 15 Commitment fee: 0.75% Financing plan (US$m): Source Local Foreign Total Government 25.0 0.0 25.0 Beneficiaries 8.0 0.0 8.0 IBRD 69.4 5.6 75.0 TOTAL 102.4 5.6 108.0 Borrower: Argentine Republic Guarantor: N/A Responsible agency: Secretariat of Agriculture, Livestock, Fisheries, and Food (SAGPyA) in the Ministry of Economy, Public Works and Services Estimated disbursements (Bank FY/US$M): 1998 1999 2000 2001 2002 2003 Annual 8.3 23.2 21.4 12.4 7.8 1.9 Cumulative 8.3 31.5 52.9 65.3 73.1 75.0 Retroactive financing of up to US$ 7.5 million (10% of the Loan amount) for eligible expenditures incurred after July 1, 1997 (but not earlier than 12 months before loan signing) is recommended. Expected effectiveness date: October 1997 Closing date: June 30, 2003  ProJect Apprisal Document Page 2 Country: Argentina Project Title: Small Farmer Development Block 1: Project Description 1. Project development objectives (see Annex 1 for key performance indicators): The main project development objective is to increase the productive and organizational capacity in participating poor, rural communities as indicated by: (i) improved production-oriented infrastructure; (ii) increased production of food for family consumption; (iii) diversification of productive activities; (iv) increased value added of production; and (iv) conversion or integration of beneficiary groups into organizations. The related subsidiary project development objective is to increase emphasis on rural poverty issues in government's sectoral agenda and to improve coordination of rural development policies and programs as indicated by: (i) the preparation of national and provincial strategies which reflect concerns of broader stakeholders and incorporate available statistical information on rural poverty; and (ii) the incorporation of coordination mechanisms in the operational procedures of SAGPyA and provincial government rural development programs. 2. Project components: Comwnent Cateeorv Cost Incl. % of Contineencies (USSM) Total Rural Investment: Physical, Institution- 95.8 88.8 Rural Investment Fund to finance small grants for demand- Building based sub-projects (civil works, goods, technical assistance); Support Services, including training, marketing information system and implementation of Participation Action Plan and Indigenous Peoples Strategy (training and studies); Management of Rural Investment Activities at the national, provincial and local levels (technical assistance and equipment). Strengthening Rural Development Policy: Institution-Building 8.8 8.1 National Strategy Development (studies, establishment of CDR and rural development database in SAGPyA); Provincial Strategy Development (demand-driven studies and technical assistance); Training for sub-national and national agencies; Appropriate Technology Development (studies and competitive research grants); Institutional Strengtheningfor DPyDA to manage component activities (equipment and technical assistance). Project Administration and Monitoring and Evaluation: Project Management 3.4 3.1 Technical assistance, studies and equipment to establish project coordination unit and carry out M&E. Total 108.0 100.0 3. Benefits and target population: Target Population: The target population consists of the 130,000 economically-active rural poor households in Argentina. The economically-active rural poor consist primarily of small-holder farmers and rural laborers. Most households combine both activities in their survival strategies. The project's coverage is nation-wide; however, funds would be allocated among provinces based on the proportion of the target population in each province. Targeting Mechanisms: Due to the interspersion of poor and non-poor households in many rural communities in Argentina, three types of specific mechanisms would be utilized to target poor households: (i) geographic targeting would prioritize departments within each province with rural poverty rates above the provincial average; (ii) beneficiary screening for participant households based on application of easily verifiable criteria which reflect basic needs characteristics (housing, access to water and sanitation), rural residence and productive assets would permit screening by community associations, project staff and intermediaries; and (iii) participation requirements, including community management of subprojects and limits on the level of benefits per family, have been designed to encourage self-targeting by beneficiaries as well as facilitate social control mechanisms. Benefits: The project is expected to directly assist at least 30,000 households comprising 150,000 direct beneficiaries. Participating beneficiaries are expected to increase their household incomes which can be applied to satisfy the unsatisfied basic  Project Appralsal Document Pag 3 Country: Argentain Project Title: Small Farmer Developmant needs which define poor households in Argentina. By increasing their asset base - human and physical capital - the benefits are expected to be sustainable beyond the life of the project. Improved social organization, in addition to reducing input and marketing costs, would increase participation of small-scale rural producers in rural economic growth by facilitating access to financial and other privately provided business services. Incidence: The project has been designed to ensure that at least 60% of project resource transfers flow directly to the target population to support investments managed by poor, rural households, and an additional 20% would finance complementary services (training, preinvestment and TA) provided directly to targeted beneficiaries. Based on beneficiary assessments, indigenous groups, women and rural youth are expected to be significant beneficiaries of project activities and special mechanisms have been designed in the operational procedures (promotional activities, preinvestment, technical assistance, training and project management) and participatory monitoring and evaluation to ensure participation by these groups. 4. Institutional and implementation arrangements: Project implementation period: 5 years. Executing Agencv: The Secretariat of Agriculture, Livestock, Fisheries and Food (SAGPyA) would implement the project in accordance with the project Operational Manual. Implementation would be guided by the annual operating plans (POAs), presented to the Bank for its no-objection by November 15 of the previous year, which reflect project output and development objectives. Implementina Agencies: The Rural Investment Component would be implemented by SAGPyA's Social Agricultural Program (PSA). PSA would manage the Rural Investment Fund and associated support services through its existing national and provincial units. The Strengthening ofRural Policy Component would be implemented by the Direction of Agricultural Planning and Development (DPyDA) in SAGPyA which would establish a Rural Development Area (ADR) composed primarily of existing DPyDA staff supported by specialized, limited term consultants. Project Administration: SAGPyA would establish a project coordination unit (UNC) within its existing internationally financed project management structure which would provide administrative and technical assistance to PSA and DPyDA and would have primary responsibility for coordinating project-wide implementation issues including development of a project promotional strategy, project monitoring, reporting and evaluation, assisting implementing agencies with procurement and associated communication with the Bank, managing financial record keeping, the Special Account and disbursements. Proiect Oversight: Project activities would be presented to the Federal Agricultural Council (CFA),which is comprised of the 23 provincial agricultural ministers or their equivalents. The National Coordinating Committee of PSA (CCN) is chaired by the Secretary of Agriculture and includes representatives of UNC, PSA, DPyDA, other SAGPyA rural assistance programs, NGOs and beneficiaries. CCN would review summary POAs for the Rural Investment Fund activities, as well as biannual progress reports. UPs would carry out a similar oversight function in each province. In addition, the Secretariat of Social Development, through its SIEMPRO unit, monitors all poverty-reduction programs. The Social Council, chaired by the Secretary of Social Development serves as a coordination mechanism across sectoral programs and includes representatives of SAGPyA. Accounting. financial reporting and audits: UNC would have responsibility for financial accounting, reporting and audits. PSA and DPyDA would be responsible for accounting at the component level and would maintain separate project accounts in accordance with sound and accepted accounting practices, acceptable to the Bank. An audit of the financial status of the program would take place once a year, carried out by an independent auditor acceptable to the Bank according to terms of reference based on the Bank's "Financial Accounting and Reporting and Auditing Handbook" (January 1995). Monitoring and Evaluation: UNC would have overall responsibility for monitoring and evaluation (M&E), working in collaboration with PSA and DPyDA. Monitoring and evaluation would occur: (i) through internal controls incorporated into the project's Management Information System (MIS), which would generate Monthly Implementation Reports to be reviewed by UNC and provided to the Bank no later than 15 days after the end of each month; (ii) through semi-annual progress reports covering implementation during the first six months and second six months of each calendar year which describe progress against output objectives stipulated in POAs and key monitoring and evaluation indicators; (iii) through annual external financial audits; (iv) through biannual Bank supervision missions; (v) through annual implementation evaluations of subprojects under the Rural Investment component which would focus on compliance with targeting, subproject evaluation and procurement procedures as well as progress towards project output objectives; and (vi) through mid-term and end-of-project external evaluations which would assess project environment, objectives, mechanisms, implementation performance, and progress towards development objectives.  Projet Appraisal Document Pae 4 Country: Argentina Project Title: Small Farmer Development Block 2: Project Rationale 5. CAS objective(s) supported by the project: The proposed project fully supports the following objectives of the Argentina CAS (Memorandum of the President of the International Bank for Reconstruction and Development to the Executive Directors on a Country Assistance Strategy of the World Bank Group for the Argentine Republic, Report No. 16505-AR, discussed by the Board of Executive Directors on May 15, 1997): (i) Enhance social development, including poverty alleviation and human resource development: As indicated in the above- referenced CAS, the proposed project would finance investments in human and physical capital to increase the returns to the economic activities of the rural poor. The project would complement other Bank-supported poverty reduction activities which support provision of basic social services and safety nets for children, the aged and the unemployed; (ii) Improve the performance and institutional capacity of government, particularly subnational governments, to deliver key, social, infrastructure and environmental services: The proposed project would strengthen public sector institutions oriented toward providing the private sector with essential services by improving the technical capacity of public agencies (SAGPyA, provincial and local government) to analyze the needs of small-scale producers in poor, rural communities, develop assistance strategies and competitively contract appropriate assistance to decentralized service providers. 6. Main sector issues and Government strategy: Rural Poverty: Rural poverty has generally been overlooked in Argentina, due in large part to the dispersion of the rural poor in the regional economies outside of the Humid Pampa Region, far from the major urban centers. The rural population (very narrowly defined as those living in communities of less than 2000 inhabitants) represents only about 13% of the total population but includes 28% of Argentina's poor. According to the 1991 population census, the incidence of poverty amongst rural households, according to the unsatisfied basic needs (NBI) approach, is about 36% (1.5 million people), 2.5 times the urban poverty rate. Although no income or consumption-based measures of poverty are available, other indicators such as the percentage of farms classified as "rninifandios" or poor indicate a similar poverty rate within the subcategory of farm families. About 60% of the rural poor are classified as economically active and 40% as inactive (Argentina's Poor: A Profile, World Bank Report no. 13318). The economically active rural poor employ a diverse set of survival strategies combining on-farm and off-farm activities, reflecting Argentina's varied agro-ecological zones and social structures. Although NBI indicators show that rural poverty, like urban poverty, declined from 1980 to 1991, reductions were less evident in rural areas, increasing the proportion of the country's poor located in rural areas. More recent case studies, beneficiary assessments and survey information from the Buenos Aires Metropolitan Area indicate that the current recession has reduced off-farm labor opportunities. Seasonal work has diminished due to increased mechanization of larger farms, and sharp employment reductions in local government and in privatized state-owned enterprises has constrained the traditional urban migration safety-valve, leading to civil unrest and some reverse migration back to rural areas. Sectoral Environment: Argentina's rural sector is undergoing an important restructuring process which should leave it well- positioned to exploit its comparative advantage and maintain strong growth in output and exports. Macroeconomic stabilization has improved the overall investment climate and Govermnent has significantly reduced its role in the agricultural sector over the past five years (Alberto Valdes and Barry Schaeffer, Surveillance ofAgricultural Price and Trade Policies, A Handbookfor Argentina, World Bank Technical Paper, no. 294). Export taxes on key commodities have been eliminated, marketing boards dismantled, and the provision of government financed research and extension services reduced. This process is continuing with the gradual reduction or elimination of crop price supports and protective tariffs under GATT and MERCOSUR accords, and the decentralization of service provision to subnational governments. Macroeconomic and sectoral liberalization, accompanied by sharp appreciation of the Argentine peso has forced the sector to diversify production and increase productivity in order to maintain international competitiveness. This restructuring process, initiated in the Humid Pampa Region, has recently been extended to the regional economies where most of the rural poor are located, demonstrating the ability of these subsectors to significantly increase their production and exports in response to favorable international prices. However, the participation of small-scale rural producers in this positive growth scenario has been constrained by their limited access to the resources necessary to adjust their production systems to the new incentive structure (Lucio G. Reca, "El Impacto del Nuevo Marco Macroeconomico sobre el Sector Agropecuario Argentino" (Washington, D.C.: International Food Policy Research Institute, 1996)). Government's Rural Development Strategy ("Estrategia de Desarollo Rural Hacia el Siglo XX" (Buenos Aires: Secretaria de Agricultura, Pesca y Alimentacion, 1996)) acknowledges the potential productivity advantage of small-scale producers and identifies several opportunities to improve the business climate in poor, rural communities consistent with Government's reduced  Project Appraisal Document Peg 5 Country: Argentina Project Title: Small Farmrw Devebpmet role in the sector: (i) Development of community organizations - user groups, farmier associations, cooperatives - to allow producers to benefit from economies of scale in input supply (including technical assistance and information) and output marketing; (ii) Provision of appropriate technical assistance and training services to transfer productivity-enhancing technology, improve natural resource management, diversify production and improve businiess mr anagement; (iii) Provision of targeted financial assistance for physical investments required to implement improved technology; (iv) Rehabilitation of deteriorated community physical infrastructure - roads, warehouses, town miarkets, small-scale flood c,ntrol and irrigation works - to improve resource management and access to input and output markets; (v) Regularization of lard teniure - particularly among indigenous groups - to improve incentives to undertake on-farm investments to maiartaiit the producPuivy of land and water resources. Government's Poverty Reduction Strategv: The objectives of Governiment's social policy are to satisfy the basic needs of the population and guarantee equality of opportunity by providing opportunities to'- the population to participate in the process of economic development and to overcome the causes and manifestations of pov'eny (Letter of Social Policy from Dr. Domingo Cavallo, Minister of Economy and Public Works and Services to A-. jamnes i). iVolfensohn, dated October 10, 1995). Government's poverty reduction activities fall into three categories: (i) Improving thie quality and coverage of basic social services; (ii) providing direct transfers to maintain the income and nutritional levels of the ec;onomically active poor; and (iii) investing in the self-help productive activities of the economically active poor to gen-erate income which can be used to satisfy their basic needs. In the past, Government assistance to the economically active rural poor -wvas provided through price subsidies and protective tariffs on the crops which small-holders produce - mainly import substitutes such as cotton, tobacco and sugar. However, as these programs formed part of a general program to offset the effects of dircci and indirect taxation of agriculture, a large percentage of the benefits of these expenditures and welfare transfers went to large producers and intermediaries. Programs to improve sectoral productivity, such as sectoral credit lines and extension assistance, we.e explicitly targeted to larger, export-oriented producers resulting in a large technology gap between small-holders and large farmers. In 1987, Government initiated a decentralized, beneficiary demand-driven approach to channel technical assistanrcdi rbiecy to poor, rural conumunities (Programa de Minifundio). This approach was extended through the Programa Social Agropecuario, Programa Pro-Huerta, PPNEA and PROSUB. Given the absence or weakness of official structures to assist the rural poor, NGOs are: conitracted as intermediary institutions in addition to the national and provincial extension services and local goveirtnents. Waile these programs are generally credited with being the first to effectively reach rural communities with packages of assistance designed to meet their needs, the weakness of community organizations, absence of supporting infrastructure and absence ol qualified interniediaries in many rural communities has limited effectiveness and coverage. Government has requested Bank assistanfce to bluild on these experiences to provide a more comprehensive program of support to poor, rural communities cuinsisteii with sectoral policy objectives. 7. Sector issues to be addressed by the project and strategie choices- The proposed project would be the first Bank-financed project to support implementation of the Govermient's poverty reduction strategy in rural areas with targeted assistance to increase the pionuctiv'Pc Zir the economically active rural poor. The project would expand the scope of the PSA program to include rural laborers ia iie targeted population and by supporting investments in community infrastructure and other off-farm activities. The project's prociaction -oriented strategy is consistent with the results of a rural household survey carried out by SAGPyA with Bank assistance, which confirmed the productivity advantage of small farms but which also identified the importance of rural organizations, such as producer cooperatives, as a means of transferring technical and managerial skills. The project would build upon Governme.ri'ss ,lceintratized. demand-driven approach which provides the necessary flexibility to adjust interventions to local needs and conditions 71hile introducing improved targeting, reporting and financial control mechanisms to avoid leakage of assistance to the ru al non-poor The proposed project would support Government's decentralization efforts by assisting provincial gavernanerias in i-tral development analysis and strategy development and by developing the capacity of these institutions to eventually assume increased responsibility for project administration and implementation. As a large proportion of service provision would be carried out by NGOs and other non-public service providers under contract, the project would be consistent with a reduced state sectoi and encouragement of private sector service provision. Regularization of land title would not be financed directly by the prDjica, houwcve, technical assistance would be provided to provincial governments to assess titling needs and identify lower-cost titinig proc edures. 8. Project alternatives considered and reasons for rejection. (i) General socialfund: Government has other programs in3 place tmnd to basic social needs in rural areas (Education Social Program, Potable Water Social Program, Maternal and Child Hlealth and Nuttrition Program, Housing Program, Social Investment Fund). Government wishes to complement these basic social assistance programs with extended and improved production assistance best carried out by specialized technical agencies. Project preparation has been coordinated with other sectoral agencies and it is expected that the project would provide assistance to these c;thei pr ogams in reaching the rural poor;  Project Appraisal Document Page 6 Country: Argentina Project Title: Small Farmer Development (ii) Geographically restricted project: During the pilot phase, PSA, the primary implementing agency, already has opemted with national coverage and its presence in each province serves an important promotional role for investment and non-investment activities oriented toward the rural poor. As funds are allocated in proportion to the percentage of poor, rural households in each province, the primary efficiency trade-off concerns the higher administrative costs incurred in provinces with lower numbers of beneficiaries, however this would be offset by the use of PSA's existing administrative structure; (iii) Rural fund without policy component: While almost 90% of project flunds would be utilized for the Rural Investment Fund and associated support services, the 8% of funds dedicated to improving rural policy at the national and provincial levels is necessary to help Government achieve its objectives of (i) ensuring that the concerns of poor, rural communities are integrated into policy formulation and analysis; and (ii) increasing decentralization of project implementation responsibility (operational and financial) to subnational governments as fiscal status and accountability improves; (iv) Extension assistance without investment finance: Bank economic and sector work to identify constraints faced by rural producers indicated that a major impediment to adoption of improved technology is the inability to finance the necessary lumpy investments in small-scale equipment and construction from own-savings; (v) Directed credit project: Worldwide, Government-sponsored credit projects for the rural poor have not performed well, due in large part to (i) the actual or expected reluctance of Government to enforce repayment; (ii) the tendency for the non-poor to expend resources to capture what are generally below market-rate loans; and (iii) the precariousness of the cash-flow, particularly relative to repayment of long-term loans. International experience also indicates that a grant-based program, carefully targeted to the poor, can provide an initial capital infusion which permits sufficient capital accumulation to move towards "bankability". In order to accelerate this process, the Bank is carrying out studies with Governement to assist Government in the removal of constraints to broadening the provision of financial services through bank and non-bank financial service providers; (vi) Land reform activities: Other than the provision of technical assistance to local goverrments and beneficiary groups, no specific land-reform activities have been included in the project because: (i) land tenure is consistent across farm sizes with 75% ownership; and (ii) for those groups which lack tenure, primarily indigenous groups, a number of well-financed government programs are already being implemented. The project would therefore assist local governments in better using existing resources to improve the tenure status in poor, rural coninunities; (vii) Provision of small-farmer assistance on an individual, rather than group basis (i.e.: INDAP in Chile): While many of the positive lessons learned from INDAP's 30 years of experience assisting small farmers are being incorporated into the project, including the contracting of private sector technical assistance providers, the high costs of providing individual assistance to farmers and the required administrative framework precluded this alternative on cost-effectiveness grounds; (viii) Pre-designed area projects: The heterogeneity of the agro-ecological and socio-economic conditions associated with rural poverty in Argentina require flexible mechanisms to address the differing needs of beneficiaries. A demand-based approach carried out through experienced, local intermediaries permits Government to capitalize on the experience of NGOs, beneficiary groups and local government agencies already working with the rural poor. Studies carried out by DPyDA as part of the Strengthening Rural Development policy component and the implementation experience of the Rural Investment Fund would be drawn upon to develop regional and micro-regional rural development strategies; (ix) Lending directly to provinces: Provincial governments are currently undergoing a severe fiscal adjustment process and local governments have little experience addressing rural poverty. However, the provinces would be required to provide technical staff for the provincial-level management units for all rural investment activities and where provincial extension services already exist, they would provide technical assistance to community groups and receive intermediary training. Provincial-level rural development strategies would be prepared by the provinces, with project support, in order to adapt geographic targeting, beneficiary screening criteria and promotional strategies to the priorities and existing assistance programs of the province. Proposed modifications to the operational manual emerging from these strategies would be reviewed by the UNC and the Bank in order to ensure consistency with project objectives; (x) Further decentralization of subproject evaluation and oversight to the municipal level: Further decentralization is limited by concerns regarding local capacity and transparency. These would be tested during the project through establishment of pilot, local level project units based on the successful Brazil experience and training for local governments, beneficiary associations and NGOs. 9. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector issue Proiect Latest Form 590 Ratings IP DO Bank-financed Provision of basic agricultural services - Agricultural Services and Institutional S S phytosanitary and research. Development Project (Ln. 3297-AR - ongoing) Basic agricultural services and productive Provincial Agricultural Development Project NA NA infrastructure - targeted to small- and medium- (Ln. 4150-AR - not yet effective)  Projct Appralsal Document Pae 7 Country: Argentina Project Title: Small Farmer Devopment sized (not smallholders) commercial farmers. Decentralized social assistance - health. Maternal and Child Health and Nutrition Project S S (Ln. 3643-AR - ongoing) Decentralized social assistance - social fund. Social Protection Project (Ln. 3957-AR - ongoing) S S Other development anencies Technical assistance and credit provided to IFAD financed Small-Farmer Assistance Program small farmers. for the Northeastern Region of Argentina 10. Lessons learned and reflected in the project design: OED's evaluation of World Bank experience with rural development from 1965-86 identified a number of problems which accounted for the poor performance of Integrated Rural Development Projects including: adverse policy environment, lack of government commitment, lack of locally proven appropriate technology, neglect of institutional development due to "enclave" nature of projects, lack of beneficiary participation and difficulties in coordinating a wide range of activities across sectoral ministries. More recently successful projects (i.e., Aga Khan Rural Support Program) have verified the importance of flexibility and grass-roots emphasis, in particular, the value of beneficiary and NGO participation, at every stage of the project and level of implementation in order to build ownership and the foundations of long-term institutions. In order to apply these lessons, the Bank has supported participatory, demand-driven transfer mechanisms to channel assistance to poor, rural communities. The Social Investment Funds (SIFs), which emerged in the 1980s as a rapid response to the social impacts of macroeconomic adjustment, reached their target populations more efficiently than previous programs. As a result, the "fund approach" has evolved into a mainstream transfer mechanism. Experience with SlFs and SEF-like rural development programs supported by the Bank (Columbia Fondo DRI, Mexico Solidaridad, Brazil PAPP) has yielded several important lessons which have been reflected in the design of the proposed project: (i) incorporation of transparent and objective targeting and participation criteria, distribution formulas and operating procedures combined with social control mechanisms to avoid politicization and misuse of funds; (ii) decentralization and streamlining of project processing to permit rapid response to requests for funds; (iii) targeting of promotional activities and technical assistance to poorest communities which often lack capacity to identify, prepare and submit appropriate sub-project proposals; (iv) provision of training to ensure availability of technically proficient intermediaries familiar with group-based, participatory activities; and (v) provision of on-going TA and establishment of O&M arrangements as part of sub-project preparation to improve the sustainability of investments in community infrastructure. Although Argentina has limited experience with targeted assistance to poor, rural communities, recent govermnent programs and the on-going experience of the projects indicated in Section 9 above confirms the validity of a decentralized, demand-driven, participatory approach in Argentina. Implementation lessons which have emerged from related projects in Argentina are: (i) the importance of well-staffed project coordination units; (ii) the variability among provinces in terms of institutional capacity; and (iii) the positive impact on institutional development resulting from decentralization of project implementation to the local levels. 11. Indications of borrower commitment and ownership: PSA, the main implementing agency, was created by SAGPyA, without external financing, to pilot a decentralized, demand driven, approach to provide technical and financial assistance to poor, rural producers. The borrower has used own-funds, in addition to a Japanese PHRD Grant, for preparation, including a comprehensive beneficiary assessment exercise. Borrower has also prepared a Rural Development Strategy which provides the context and rationale for the proposed project. The local preparation team for the project and the Rural Development Strategy included SAGPyA staff so as to ensure the project's consistency with Government's policies and activities in the sector. 12. Value added of Bank support: (i) Bank support (including organization of study tours, exchange of operational manuals and round-table discussions) has facilitated the incorporation of experience from similar projects worldwide, particularly the phasing-in of community-level project management (Brazil), a greater focus on product marketing (Chile) and community infrastructure (Mexico); (ii) Bank participation would reduce uncertainty regarding the level and availability of funding; (iii) Emphasis on implementation of an improved MIS system, reporting and monitoring and performance and impact evaluation is expected to accelerate improvement of PSA's administrative capacity; (iv) Bank support of other poverty reduction and natural resources focused operations would allow the Bank to support Government's coordination of related activities across sectors.  Project Appraisal Document Page 8 Counby: Argentina Project Title: Small Farmer Development Block 3: Summary Project Assessments (Detailed assessments are in the ect file. See Annex 8) 13. Economic Assessment (see Annex 4): Cost-Benefit Analysis IERFR = 19.0% based on projection of model subprojects whose IERR rang;es from 3 6% te 33 5%"O Internal Rate of Return Estimates of the internal economic rates of return (TEPR) ye s calcel d -ilne pilot subprojects which cover representative geographical areas, and which span the different types of anticipated inter ,'entions and technical assistance requirements. In order to test the feasibility of the demand-driven mechanism for subproject identification and preparation, proposals for these subprojects were developed by groups of beneficiaries as part of a comprehensive beneficiary assessment, and reflect their views regarding which interventions could be undertaken to improve their present situationi. PFrices and technical coefficients were obtained from PSA and INTA technical agents in the respective provinces. Estimated IERRs FoI the market-oriented pilot subprojects range between 14.2% and 33.5%. Considering the projected annual number of subprojects, atn average IFRR of 26.3% for all types of subprojects was estimated for the matching grant assistance under the Rural Investment component. An average IERR of 19.0% was calculated for the overall project when the costs of activities under Rural Investnient Ftnd administration and support services, Strengthening of Rural Policy component and Project Administratioin and Monitoring ani :valuation component are included. Fiscal imDact Calculation of fiscal impact was based on the pilot subprojects models. The analysis quantified for each case the balance between the subsidy provided and the amount of VAT generated on incremental operating costs and incremental value of production where applicable. The main assumptions made to calculate the present value of the net financial fiscal flows were the same as for the economic analysis: 20 year time horizon and 12% discount rate. From the calculated fiscal impact for the nine pilot subprojects, it was estimated that the rate of return on matching granls for investirnf .r1tsv would be 95.1% over 20 years. 14. Financial Assessment (see Annex 5): FRR= 13 5%/ Fiscal Sustainabilitv The project has been designed such that government support ear be completed by project completion and that further activities could be carried out by beneficiaries. Nonetheless, the project does unddertake wbstantial capacity building investments in the executing agencies (PSA and DPyDA) and provincial governments which coul(d be etilized to expand coverage of the beneficiary population folowing project completion. Feasibility of project continuation eith.'r by SAGPyA at the national level, or the provinces after the five year implementation period was analyzed based on the projeet's * hal of budget and the value of agricultural product. At the proposed activity level, project costs represent 0.07% of the overa'! hbnx.ge, of the national government, and 7.1% of SAGPyA's annual budget. In order to test the feasibility of decentralizatcon &.f 'finq.n{ ing to provincial governments, based on available provincial budget data for the last two years, it was estirtiated that oect.r rtien of the proiect would increase present overall provincial expenditures by an average of 0.12% (0.5% for 1.. v17rt '-Inflr l case) 15. Technical Assessment: The use of a fund-type mechanism to transfer financial and t '' -S ance is based on the PSA pilot, other programs in Argentina and successful international experience. Tbe or te O *s- periences by increasing the participation of beneficiaries and intermediaries at the provincial and 'entiona. pr'C'ject n