Document of The World Bank Report No: 65110-KZ RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SECOND AGRICULTURAL POST-PRIVATIZATION ASSISTANCE (APL PHASE 2) PROJECT, P058015 LOAN 4763 KZ DECEMBER 13, 2004 IN THE INITIAL AMOUNT OF US$35 MILLION AND A RESTRUCTURED AMOUNT OF US$15.4 MILLION TO THE REPUBLIC OF KAZAKHSTAN NOVEMBER 15, 2011 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS AND ACRONYMS APPAP II Second Post-privatization Assistance Project DA Designated Account FMS Financial Management Specialist IBRD International Bank for Reconstruction and Development MFI Microfinance Institution MOA Ministry of Agriculture PAD Project Appraisal Document PDO Project Development Objective PFI Participating Financial Institution SME Small and Medium Sized Enterprise TA Technical Assistance TOC Team of Consultants Regional Vice President: Philippe Le Houerou Country Director: Motoo Konishi Sector Manager: Dina Umali-Deininger Task Team Leader: Sandra Broka 2 KAZAKHSTAN SECOND AGRICULTURAL POST-PRIVATIZATION ASSISTANCE PROJECT (APL PHASE 2) P058015 CONTENTS Page A. SUMMARY ............................................................................................................... 4 B. PROJECT STATUS ................................................................................................. 4 C. PROPOSED CHANGES .......................................................................................... 5 ANNEX 1: RESULTS FRAMEWORK AND MONITORING.................................... 7 ANNEX 2: DRAFT SUPPLEMENTAL LETTER …………….……………………………..……….10 3 SECOND AGRICULTURAL POST-PRIVATIZATION ASSISTANCE PROJECT (APL PHASE 2) RESTRUCTURING PAPER SUMMARY This Restructuring Paper seeks approval for the partial cancellation of the project financing for the Second Agricultural Post-privatization Assistance Project (APPAP II), cancellation of the Price Risk Management subcomponent from the Agricultural Risk Management component, and making the corresponding changes to the Performance Monitoring Framework. It is proposed to cancel a total US$8,474,500 from the undisbursed balance of US$8,563,515.66 of the US$15,409,275 IBRD loan. The project is less than three months from its Closing Date of December 31, 2011 and full disbursement of the original project amount during the remaining period of the project is deemed unfeasible. PROJECT STATUS APPAP II was approved by the Board on December 13, 2004 and became effective on February 28, 2006. The project’s revised closing date is December 31, 2011 and will not be affected by this restructuring. Project’s Development Objective. APPAP-II’s principal objective is to enhance the access to commercial financial services by farmers and small/medium size rural enterprises. The project has five components: (i) Rural Financial Advisory Services, (ii) Agricultural Risk Management, (iii) Rural Outreach by the Mainstream Financial Institutions, (iv) Rural Micro Finance Development, and (v) Project Management. The original project amount (excluding contributions from beneficiaries and co-financing by participating financial institutions) was US$71.4 million of which US$35 million (or 49%) was provided by the International Bank for Reconstruction and Development (IBRD), and US$36.4 million (51%) is from the Republic of Kazakhstan (hereinafter referred to as Borrower). Upon the Government’s request, in October 2010 part of the loan in amount of US$19,590,725 was cancelled. The cancellation was agreed between the Bank and the Borrower in view of the slow disbursements, the low likelihood of full disbursement of the project funds, and the need for the Bank to optimize its loan portfolio. The PDO was not revised as a result of the partial cancellation. However, to ensure consistency between the PAD and the Supplemental Letter on Performance Monitoring Indicators for the two affected components, these indicators were revised, added or dropped, as necessary. 4 The remaining loan amount of US$15.4 million finances a credit line in the amount of US$15.0 million and US$0.4 million for microfinance activities. To date, overall disbursements under the project amount to UZS$6.845 million, including US$6.436 million under Component 3 and US$0.409 million under Component 4. The project has achieved good results in provision of the technical assistance: (i) under Component 1, 660 rural financial advisors have been trained and provide services to rural entrepreneurs; (ii) under Component 3, about 800 staff of the PFIs and other financial intermediaries have been trained in ‘Investment Lending and Leasing in Agriculture’ and ‘Structured Finance in Agriculture’; and (iii) under Component 4, 300 microfinance specialists from over 100 MFIs have been trained in various microfinance-related subjects, and four MFIs have qualified for participation in the implementation of the microfinance credit line as a result of the TA extended to them. However, implementation of the credit lines under components 3 and 4 experienced delays from the beginning of the project implementation due to various factors (as explained in the previous Restructuring Paper). After the restructuring of the credit line and partial cancellation in October 2010, disbursement under the credit lines improved slightly for Component 3. Unfortunately, notwithstanding all the efforts made, the pace of disbursement fell significantly short of expectations due to the fact that after the financial crisis of 2008 many interested banks could not meet eligibility criteria for participation and were excluded. To date, only US$6.44 million have been disbursed under the credit line through the participating commercial banks. Given the short time before the project closes, it is not expected that any new disbursements would be made under the credit line, thus the MOF has requested a cancellation of the entire amount available for the credit line under the Component 3 of the project. As for component 4, after providing an advance for the micro-credit line in the amount of US$409,169.92, there was no demand for the funds, and the full amount was returned to the special account on December 28, 2010. Ratings for progress with both implementation and achievement of PDO are Moderately Unsatisfactory due to the credit lines failure and will remain so until project closure. Financial Management Status. The project has no significant financial management issues. The project audit report for 2010 with an unqualified (clean) opinion has been received. It has been reviewed by the Bank’s FMS and deemed satisfactory. PROPOSED CHANGES 1) Partial Cancellation of the Project Funds. It is proposed to cancel US$8,474,500 from category “Sub-loans and lease financing under Part C.2 of the project�, as requested by the Borrower in the letter, dated September 7, 2011. The Borrower also sent a letter, dated August 27, 2011 requesting cancellation of US$ 409,169.92 from category “Micro sub-loans under Part D.2 of the project�. Unfortunately, the cancellation of this amount cannot be done as the US$409,169.92 refunded by the Borrower to the DA, as mentioned above, were not refunded to the loan account. The current undisbursed balance under 5 category 2 is US$0.08, which does not allow for processing of the amount requested by the Borrower. 2) Dropping of the Price Risk Management subcomponent from the Agricultural Risk Management component – Amendment to Loan Agreement. Implementing Agency (Ministry of Agriculture) informed the Bank that, as a result of the Government’s decision, dealing with commodity price risk management issues has been removed from the responsibilities of the MOA. Consequently, this subcomponent is proposed to be cancelled in order to increase the financing for the production risk management sub- component, importance of which has significantly increased over the last few years. As a result of this change, the Loan Agreement will need to be amended to delete paragraph B.2 of Schedule 2. The Agricultural Risk Management component is fully financed from the government budget, thus does not require a reallocation on the Bank’s side. 3) Changes to the Indicators of the Three Components Affected by the Partial Cancellation and Cancellation of the Sub-component. The Borrower suggested amending project monitoring indicators in its letter dated August 23, 2011. In accordance with the letter and to reflect the impact of the proposed partial cancellation on the results and indicators of the three affected components the team prepared a new results framework and monitoring table attached in the Annex 1 to this Paper. The draft revised Supplemental Letter on Performance Monitoring Indicators is attached as an Annex to the Letter to the Borrower on Partial Cancellation and Amendment to the Loan Agreement and Supplemental Letter No. 2. However, no revisions are proposed to the Project Development Objective (PDO) as a result of this restructuring. This cancellation only affects one of the project activities, i.e., the credit line. The other project components and activities, which have been implemented successfully (in particular, the rural finance advisory service, training of Participating Financial Institutions (PFIs) in agricultural investment lending, capacity building of microfinance institutions to design and deliver new financial products for rural areas, as well as the proposed improvements to the country’s crop insurance program), have all contributed towards achieving the PDO. In addition, the one PFI – Eurasian Bank, which has remained qualified under the credit line since 2009 – has disbursed more than 70 sub-loans to rural borrowers, thus contributing towards enhancing the access to finance in rural areas. The final Project Costs table (taking into account consequent cancellation of the co- financing from the Republican Budget) will look as follows: 6 Project Costs (US$m.)* Components/Activities Current Proposed Rural Financial Advisory Services 1.68 1.37** Agricultural Risk Management 1.93 1.70** Rural Outreach by Mainstream Financial 45.60 17.48 Institutions Rural Microfinance Development 2.13 0.59 Project Management 0.46 0.77** Unallocated/Contingencies 0.00 0.00 Total 51.80 21.91 * The Project Costs exclude contributions by Beneficiaries and PFIs. ** These amounts have been adjusted from the Current amounts to reflect the actual cost of the component. The Expenditure Categories (Schedule 1 to the Loan Agreement) will be affected as follows: Expenditure Category Amount Proposed, US$ Currently Allocated to the Loan, US$ (1) Sub-loans and Lease Financings under Part C.2 of the Project 15,000,000 6,525,500 (2) Micro-Sub-loans under Part D.2 of the Project 409,275 409,275 (3) Unallocated 0 TOTAL 15,409,275 6,934,775 7 ANNEX 1: KAZAKHSTAN: AGRICULTURAL POST-PRIVATIZATION ASSISTANCE 2 PROJECT (APL PHASE 2) Results Framework and Monitoring Project Development Objective (PDO): APPAP II’s principal objective is to enhance the access to commercial financial services by farmers and small/medium size rural enterprises. APPAP II will build on APPAP I achievements by: (a) building capacity for viable rural businesses though strengthening and expanding the rural advisory services program; (b) supporting agricultural risk management initiatives; (c) facilitating the development and implementation of new financial instruments by commercial banks and leasing companies for deepening rural financial outreach; and (d) supporting sustainable rural micro-finance schemes for providing financial services to rural micro entrepreneurs that are currently excluded from the formal banking sector. Revised Project Development Objective: N/A D=Dropped Cumulative Target Values** C=Continue Core PDO Level Results N= New Unit of Data Source/ Responsibility for Baseline Frequency Indicators* R=Revised Measure YR 1 YR 3 YR 5 YR 7 Methodology Data Collection Indicator One: Growth in C % 0 - 5% 10% 10% Annual Portfolio reports TOC rural lending due to the project by PFIs INTERMEDIATE RESULTS Intermediate Result (Component One): Number of farmers using the private consultants Revised Intermediate Result (Component One): N/A Intermediate Result indicator N Number 0 20 200 600 600 Quarterly Consultant TOC One: Number of consultants reports trained to provide rural financial advisory service Intermediate Result indicator R Number 0 - 3,000 7,000 17,000 Quarterly Consultant TOC Two: Number of farmers using reports the private consultants Intermediate Result (Component Two): The cop insurance program is operational; Commodity Exchanges start to grow Revised Intermediate Result (Component Two): N/A Intermediate Result indicator D Number 0 - 2,500 4,000 7,000 Annual Statistical data TOC One: Number of crop insurance contracts issued Intermediate Result indicator D Number 0 - 5,000 10,000 15,000 Annual Statistical data TOC Two: Number of contracts traded on the Commodity Exchange Intermediate Result indicator N Number 0 - - - 8 Annual Consultant TOC One: Number of oblasts where reports insurance scheme analyzed and recommendations developed Intermediate Result indicator N Number 0 - - - 6 Annual Consultant TOC Two: Number of rayons where reports agricultural weather stations were equipped and upgraded Intermediate Result (Component Three): Growth in long-term rural lending Revised Intermediate Result (Component Three): N/A Intermediate Result indicator R Number 0 - 20 60 100 Quarterly Reports from TOC One: Number of loans and PFIs leases disbursed from the credit facility Intermediate Result indicator C % 0 - 98% 98% 98% Quarterly Reports from TOC Three: Repayment rate of 98% PFIs Intermediate Result indicator R US$ mil 0 - 0 3.0 6.5 Semi-annual Reports from TOC Four: Volume of Bank Support Yes PFIs/TOC – lines of credit to SMEs Intermediate Result indicator C US$ mil 0 - 0.15 0.32 0.321 Semi-annual Reports from TOC Five: Volume of Bank Support Yes TOC – Institutional Development - SME Intermediate Result (Component Four): Growth in MFI rural outreach Revised Intermediate Result (Component Four): N/A 1 The Cumulative Target Value here represents the actual amount spent on training of banks and leasing companies on SME lending. 9 Intermediate Result indicator C Number 0 - 1 3 42 Quarterly Reports from TOC One: Number of MFIs that AMFOK graduate into superior performance where they qualify for borrowing from commercial sources Intermediate Result indicator D % 0 - 95% 95% 95% Quarterly Reports from TOC Two: Repayment rate of 95% PMFIs Intermediate Result indicator D US$ mil 0 - 0.2 0.4 0.43 Semi-annual Reports from TOC Three: Volume of Bank Yes PFIs/TOC Support – lines of credit to Microfinance Intermediate Result indicator C US$ mil 0 - 0.20 0.53 0.534 Semi-annual Reports from TOC Four: Volume of Bank Support Yes TOC – Institutional Development - Microfinance *Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators) **Target values should be entered for the years data will be available, not necessarily annually 2 The Cumulative Target Value here represents the actual number of MFIs which have been qualified for borrowing from commercial banks upon completion of the TA program. 3 The Cumulative Target Value here represents the actual amount disbursed under the project for on-lending to MFIs from the IBRD funds. 4 The Cumulative Target Value here represents the actual amount spent on training of microfinance institutions. 10 11