Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB2260 Project Name Cotton Sector Recovery and Poverty Reduction Project Region EUROPE AND CENTRAL ASIA Sector Central Government Administration (30%); Crops (20%); Agro- industry (20%); Agricultural marketing and trade (20%); Other domestic and international trade (10%) Project ID P098889 Borrower(s) GOVERNMENT OF TAJIKISTAN Implementing Agency Mr. Matlubhon DAVLATOV, State Adviser to the President of the Republic of Tajikistan on economic policy Executive Administration of the President of the Republic of Tajikistan 80, Rudaki Avenue 734023, Dushanbe, Tajikistan Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared March 16, 2006 Estimated Date of Appraisal Authorization September 14, 2006 Estimated Date of Board Approval November 30, 2006 1. Key development issues and rationale for Bank involvement The cotton sector’s crucial role in the Tajik economy derives not only from its contribution to agricultural output (60%), export earnings (15%), and tax revenue (35%); but also because it supports 75% of the rural population, and uses 45% of irrigated arable land. The government of Tajikistan (GOT) accords a high priority to the sector for these reasons. Cotton production increased steadily from 2000 to 2004, but productivity remains low and producers have accumulated a massive, overdue debt estimated by GOT at $US 280 million. Recent sector analysis by the Bank shows that cotton sector growth was much lower than growth in other crops and livestock production, and that rural poverty is deepest and most pervasive in cotton areas. Further analysis showed that resolution of the debt crisis is indeed a pre-condition for sector recovery, but that current policies affecting competition and land use are more fundamental constraints to sustainable growth. The accumulation of debt is a result of producer exploitation by cotton processing and marketing monopsonies, which also control credit and input supply. The rents they extract reduce producer share of the cotton value chain, producer incomes, and the profitability of seed cotton production. Inappropriate local government intervention facilitates these monopsonies, and also restricts the ability of producers to use their land freely. This intervention is symptomatic of deeper weaknesses in the overall capacity for policy formulation and implementation. It also reflects the weak capacity of producers to organize alternative processing and marketing outlets. Page 2 Acutely aware of the implications of poor cotton sector performance, the GOT has set debt resolution as the top priority for the agriculture sector. This commitment was followed by GOT formation of an Independent Commission to manage debt resolution. GOT has also explicitly requested the Bank’s assistance to resolve the debt crisis and address wider, relevant policy issues. This request was endorsed by the President during the recent meeting with the ECSSD Sector Manager in February. The Bank has already begun to analyze the modalities for debt resolution, under the auspices of a new Land Registration and Cadastre System for Sustainable Agriculture Project. GOT’s acceptance of the need for wider reform is clear in national policy. The National Development Strategy (NDS) for 2006-2015 identifies development of the private sector and the agricultural sector as national priorities, together with a commitment to limit involvement of the state in private sector activity. Relevant sector level commitments in the NDS include priority for “reform of the cotton sector targeted towards resolution of the debt crisis,” and the “formation of competitive production and sustainable growth.” A stronger commitment to agriculture sector reform is expected in the Poverty Reduction Strategy for 2006-2008, which is now in preparation. The project’s focus on cotton sector recovery responds directly to the newly completed agriculture strategy which identifies land reform and cotton sector recovery as the two pillars of future sector growth. The Bank already has an active program addressing the first of these themes, but little direct action has been taken on the second. The project also responds to the first objective of the Country Partnership Strategy (CPS) to improve business opportunities in rural areas, including a reduction of the rent extraction in cotton. The inclusion of measures to halt inappropriate government intervention and improve policy formulation respond to the CPS’ quest to improve government capacity and reduce discretionary control; and its emphasis on producer empowerment responds to CPS support for measures to encourage participation of users in service provision. Consistent with the CPS’ requirement for projects that make best use of limited overall support, the project is sector specific and high impact. It is considered that it will be essential to attract other donors to become part of the strategy and thus assume responsibility for implementation and funding of some of the interventions. It is also foreseen that the project will work closely with and complement current World Bank projects operating in the sector as well as other donor programs. There is strong donor support for the project, including a planned ADB project to strengthen cotton marketing and processing through the modernization of grading systems and certification procedures, and the introduction of warehouse receipts; a SIDA project to reform seed regulation and strengthen seed breeding and multiplication; and a Dfid project to establish an arbitration system, which will be at the disposal of the debt resolution process. Another purpose of the project will be to interact closely with the Government’s debt resolution strategy and the recently established Independent Commission. 2. Proposed objective(s) The primary development objective of the project is to revitalize the cotton sector and increase its contribution to farm income and poverty reduction. The underlying objective of the project is Page 3 to improve rural welfare in the project area. The project development objective(s) will be complemented by one or more specific targets from those listed below once the project area is agreed with the Government. · Increase farm incomes · Increase farmer share of cotton value chain · Increase competition in cotton sector · Increase freedom of land use · Increase cotton yields · Improve access to farm credit (after debt resolution) Cotton producers are the primary target group for the project. They represent 75% of all farmers, and 80% of the rural poor. At the end of the project they will obtain higher incomes and farm profitability and an increased share of the cotton value chain as a result of: debt resolution; increased competition among cotton processors and marketing agents; and a more rational and efficient use of land, labor and capital, and higher consequent productivity. Government is the second target group. At the end of the project it will benefit from a policy environment conducive to growth in cotton production, and a stronger capacity for policy formulation; conversion of the current cotton debt to bonds that can be used as source of capital for agriculture; increased export earnings and tax revenue; and increased foreign direct investment in cotton processing and marketing. 3. Preliminary description Preliminary project design is based on four areas of activity, plus a project management unit (PMU). The first two activities focus on debt resolution; and the second two activities on building farmer capacity to engage in processing and marketing activities and government capacity to formulate and monitor policy. A. Debt Resolution. Debt resolution will be implemented at farm level, on a case-by-case basis. Decisions on the final approach will be based on the results of a three month pilot study initiated in February to determine: the approach to debt assessment, levels of debt, the extent to which negotiation will be required to reach settlement, and the parameters to be used as the basis for negotiation. The aim is to develop a debt resolution process that is transparent, equitable, and easy for producers to understand; and which does not compromise the ability of efficient producers to raise productivity and incomes, and to invest. B. Debt Conversion. Project preparation will include an analysis of the feasibility and modalities of rapid resolution of the repayment issue on a basis that will be affordable for all indebted farmers and which can be applied on a rules-based basis. The debt conversion instrument (s) will be used t o remove the repayment of debts off the farms’ balance sheets to allow for alternative channels of financing and output sales by “de-linking” them from their creditors. Secondly, due to current levels of profitability and financial situation of most indebted farmers, the current levels of the audited seasonal debt will be converted to long term ones. In the event that this is deemed feasible, and government supports this initiative, the project would Page 4 establish the legal and administrative basis for the issue and management of these bonds but would leave the transformation of the resultant financial flows into a source of capital for agriculture, for a subsequent project. C. Farmer Participation in the Cotton Value Chain. The project will introduce a sustainable and professionally organized farmer participatory financing system through the creation of either a cotton ginning or input supply cooperative enterprise. The objective of this system is to provide a viable and more equitable alternative to that which is currently operating in the Tajik cotton sector. The project can cover 3 districts with the greatest concentration of alleged debts and poverty and is expected to cover 30-35% of the cotton area in Khatlon region – the largest cotton growing region and the main locus of alleged debts and rural poverty. Project preparation will focus on the identification of ways to increase farmer participation and ownership of cotton processing, input supply and associated activities; and eliciting joint ownership and participation in these activities by foreign companies with an established record in cotton processing and marketing. Design of this project component will draw on analysis of the preferences and capacity of cotton producers, the experience of IFC Farm Ownership projects in Tajikistan, and lessons learned from other relevant projects in Central Asia and Africa. D. Policy Support and Impact Analysis. The project’s impact at national level will depend heavily on the capacity of government to act decisively in the areas of debt resolution, competition, land use and local government activity. In response to this need the project will appoint a senior policy adviser to work with designated counterparts in the President’s Office. This input has been directly requested by the President. To further strengthen capacity and guide reform, this component will conduct an annual analysis of the impact of policy decisions and project activity on farm productivity, farm incomes and farmer share of the cotton value chain. Data for this analysis will be drawn from annual surveys of producers in the three districts chosen for project activity, plus two “control” districts with similar characteristics. E. Project Management Unit. A Project Management Unit (PMU) will be set up in the Independent Commission. It will be responsible for project management, including procurement and financial management. The core team will comprise a project manager, a coordinator for the debt resolution process, and a coordinator for the farmer participation activities. These staff will be recruited locally. 4. Safeguard policies that might apply This is a “low risk” Category B which will require a succinct and focused Environmental Management Plan to guide due diligence on typical investments such as acquisition of pest management products, fertilizers and rehabilitation or addition of new cotton gins. Regarding other safeguards, the interventions are not expected to convert/affect critical natural habitats, forests or cultural property. Funds will not be used for land acquisition nor will the project deter access to income. 5. Tentative financing Source: ($m.) BORROWER/RECIPIENT 2 Page 5 Co-financing (TBD) 15 IDA Grant/Credit 15 Total 32 6. Contact point Contact: Bekzod Shamsiev Title: Agric. Economist Tel: (202) 458-2009 Fax: (202) 614-0696 Email: bshamsiev@worldbank.org