Document of The World Bank FOROFFICIAL, USEONLY ReportNo: 41419-PY PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN INTHE AMOUNT OFUS$37.5 MILLION TO THE REPUBLIC OF PARAGUAY FOR A SUSTAINABLE AGRICULTURE AND RURAL DEVELOPMENT PROJECT December 21,2007 SustainableDevelopment Argentina, Chile, Paraguay, Uruguay Country Management Unit Latin America and the CaribbeanRegion 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. CURRENCY EQUIVALENTS (Exchange Rate EffectiveNovember 15,2007) CurrencyUnit = Guarani Guarani4,800 = US$1 FISCAL YEAR January 1 - December31 ACCRONYMS AND ABBREVIATIONS AOM Administrative Operational Manual BNF National Development Bank (Banco Nacional de Fomento) CAS Country Assistance Strategy CDG Community Development Group (Comite` Vecinal de Microcuenca) CFAA Country FinancialAccountability Assessment CIS Community Development Groups Investment Subproject COC Community Organization Coordinator DEAG MAG's Directorate of RuralExtension DGJ MAG's Directorate of Gender and Youth DGP MAG's Directorate ofPlanning DIA MAG's Directorate ofAgriculturalResearch DINCAP MAG's Directorate for the Coordination and Administration of Projects DIPA MAG's Directorate of Livestock Research EA Environmental Assessment EE Environmental Education EIRR Economic Internal Rate of Return EMP Environmental Management Plan ENPAB National Strategy and Action Plan for the Conservation o f Biodiversity FAP Fiduciary Action Plan FDRS Sustainable Rural Development Fund (Fondo de Desarrollo Rural Sostenible) FIDES RuralDevelopment Investment Fund FIS Individual Small-scale Farmer Investment Subproject FM Financial Management FMR Financial Monitoring Report FOCORN PARN-supported Grants Fund GIS Geographic Information System GOP Government of Paraguay IA Indigenous Association ICB International Competitive Bidding ICDP Indigenous Community Development Plan INDERT NationalRuralDevelopment and LandInstitute INDI Indigenous People's Institute of Paraguay IPPM Integrated Production and PestManagement JBIC JapanBank for International Cooperation FOROFFICIAL USEONLY JSDF Japanese Social Development Fund M A G MinistryofAgriculture and Livestock MDC Micro-catchment Development Committee (Junta de Desarrollo de Microcuenca) MDG MillenniumDevelopment Goal MDP Micro-catchment Development Plan MEC Ministry of Education MH Ministry of Treasury MIP Municipal Investment Plan MIS ManagementInformationSystem MSC MunicipalSteeringCommittee NCB NationalCompetitive Bidding NCC NationalCoordination Committee NRM NaturalResourcesManagement PARN ParaguayNaturalResourcesManagementProject PMU F M Project ManagementUnitFinancial Management PMU Project ManagementUnit POA Annual Operating Plan PRODECO Pilot Community Development Project (Proyecto Piloto de Desarrollo Cornunitario) PRODERS Paraguay SustainableAgriculture and Rural Development Project (Proyecto de Desarrollo Rural Sostenible) PRODESTAL Program to Support the Development of Small Cotton Farms QAT Quality Assurance Team RIS Rural Investment Service SAT SafeguardAssurance Team SEAM Secretary of the Environment SENACSA National Service for Animal Health and Quality SOE Statementof Expenses SRDP Financial ManagementArrangements for the Project SUB-UAF Sub-Administrative and Financial Unit TMS Technical Management Service UBN Unsatisfied Basic Needs uoc ProcurementUnit VMG Vice Ministry of Animal Husbandry WBI World Bank Institute zcu Zone Coordination Unit Vice President: PamelaCox Country ManagedDirector: Pedro RodriguedPedro Alba Sector Manager: EthelSennhauser Task Team Leader: Gerard0 Segura This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. PARAGUAY PARAGUAY: SustainableAgriculture and RuralDevelopmentProject CONTENTS Page A.STRATEGIC CONTEXT AND RATIONALE ..................................................................... 1 1. Country and Sector Issues ....................................................................................................... 1 2 .Rationale for Bank Involvement.............................................................................................. 5 3. Higher Level Objectives to whichthe Project Contributes ..................................................... 8 B PROJECT DESCRIPTION . ..................................................................................................... 9 1. Lending Instrument.................................................................................................................. 9 2 . Project Development Objective and Key Indicators ............................................................... 9 3 Project Components............................................................................................................... . 10 4. LessonsLearned and Reflected inthe Project....................................................................... 15 5. Alternatives Considered and Reasons for Rejection ............................................................. 16 C IMPLEMENTATION . ............................................................................................................ 17 1. PartnershipArrangements ..................................................................................................... 17 2 .Institutional and ImplementationArrangements................................................................... 17 3. Monitoring and Evaluation of Outcomes/Results ................................................................. 19 4. Sustainability ......................................................................................................................... 20 5. Critical Risks and Possible Controversial Aspects ................................................................ 21 6.Loadcredit Conditions and Covenants................................................................................. 23 D APPRAISAL SUMMARY . ..................................................................................................... 24 1. Economic and Financial Analyses......................................................................................... 24 2. Technical ............................................................................................................................... 24 3 Fiduciary ................................................................................................................................ 25 . 4 . Social..................................................................................................................................... 25 5. Environment .......................................................................................................................... 27 6. SafeguardPolicies ................................................................................................................. 27 7 . ProjectCompliance with Applicable SafeguardPolicies...................................................... 28 8 Policy Exception and Readiness............................................................................................ . 29 Annex 1: Country and Sector Background ............................................................................... 30 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies ..................36 Annex 3: Results Frameworkand Monitoring ......................................................................... 37 Annex 4: DetailedProjectDescription ...................................................................................... 53 Annex 5: ProjectCosts................................................................................................................ 77 Annex 6: ImplementationArrangements .................................................................................. 78 Annex 7: FinancialManagementand DisbursementArrangements ..................................... 84 Annex 8: Procurement Arrangements ....................................................................................... 98 Annex 9: Economicand Financial Analysis ............................................................................ 105 Annex 10: SafeguardPolicy Issues ........................................................................................... 111 Annex 11:Project Preparationand Supervision .................................................................... 114 Annex 12: ImprovedGovernanceFramework ....................................................................... 116 Annex 13: Summary of Social Assessment .............................................................................. 124 Annex 14: Summary of IndigenousPeople's Strategy ........................................................... 135 Annex 15: Documents inthe ProjectFile ................................................................................ 153 Annex 16: Statementof Loansand Credits ............................................................................. 155 Annex 17: Country at a Glance ................................................................................................ 156 Annex 18: Map IBRD 35799 ..................................................................................................... 158 PARAGUAY SUSTAINABLE AGRICULTURE AND RURAL DEVELOPMENT PROJECT PROJECT APPRAISAL DOCUMENT LATINAMERICA AND CARIBBEAN LCSAR Date: December 21,2007 Team Leader: Gerard0 Segura Country Director: Pedro Alba Sectors: Generalagriculture, fishing and forestry sector Sector Manager: Ethel Sennhauser (100%) Director: Laura Tuck Themes: Land administration and management (P); Water resourcemanagement(P);Participation and civic engagement (P);Improving labor markets (P);Rural policies and institutions (S) Project ID: PO88799 Environmental screening category: Partial Assessment Lending Instrument: Specific Investment Loan Project FinancingData [XI Loan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other: For Loans/Credits/Others: Total Bank financing (US$m.): 37.5 M. Proposedterms: FSL, 5 years of grace, 23 years maturity BORROWER 3.86 0.00 3.86 INTERNATIONAL BANK FOR 34.08 3.42 37.50 RECONSTRUCTION AND I I I DEVELOPMENT BENEFICIARIES 3.39 0.00 3.39 OTHER 2.00 0.00 2.00 Total: 43.33 3.42 46.75 Frontend fee 0.00 0.09 0.09 Total: 43.33 3.51 46.84 Borrower: Republicof Paraguay MinistryofFinance(Ministeriode Hacienda) Palma y Chile 128 Asuncion, Paraguay Facsimile 595 (21) 448-283 Responsible Agency: Ministry of Agriculture andLivestock (Ministerio de Agriculturay Ganaderia) Directorate for Administration and Coordination of Projects-DINCAP PresidenteFranco y 14de Mayo Asuncion, Paraguay Telephone/Facsimile 595 (21) 449-951 hmulativel 1.4 1 8.9 I 19.8 I 30.4 I 35.8 I 37.5 I Project implementation period: Start July 12008 End:June 28,2013 Expected effectivenessdate: September 1,2008 Expected closing date: December 30, 2013 Does the project depart from the CAS incontent or other significant respects? Ref: PADA.3 [ [ No Does the project require any exceptions from Bank policies? Ref:PAD D.7 [ ]Yes [XINO Have these beenapproved by Bank management? [ ]Yes [XINO I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project includeany critical risksrated "substantial" or "high"? Ref: PAD C.5 [XIYes [ ]No Doesthe project meet the Regional criteria for readiness for implementation? Ref: PAD D.7 [XIYes [ ]No Project development objective Ref: PAD B.2, TechnicalAnnex 3 The project development objective is to improve the quality of life of small-holder farming community and indigenous communities inthe project areas inSan Pedro and Caaguazu departmentsina sustainablemanner,by supporting actionsthat will: (a) strengthencommunity organization and self-governance; (b) improve natural resources management; and (c) enhance the socio-economic condition of the target population, and (d) address animal healthissues inthe project areas. Project description Ref: PAD B.3.a, TechnicalAnnex 4 The project has four main components: (a) Community Organization Development and Capacity Building that aims to: (a) organize beneficiariesto participate actively inlocal decision-making structures; and (b) prepareproject, staff for the implementation of the project technical strategy. (b) Rural Extensionand Adaptive Researchthat aims to assist small-holder farmers, community groups and indigenous communities to shift from existing non-sustainableagricultural practices to sustainablelivelihood strategies which enhance natural resources management and reduce rural poverty. (c) SustainableRuralDevelopment Fundthat will finance demand-driven investments identified inthe context ofthe Micro-catchment Development Plans (MDP) andthe Indigenous Community Development Plans (ICDP) which are based on aparticipatory local-level diagnostic andplanning processsupported underthe RuralExtension sub-component. 11 .* (d) Animal Health Improvementto assist Paraguay to initiate animal health improvement measures and to contribute to the regional strategy for animal healthmanagement. (e) Project Management, and M&E that aims to put inplace a functional and effective project management team. Which safeguard policies are triggered, ifany? Re$ PAD 0.6, TechnicalAnnex 10 Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Indigenous Peoples (OP/BP 4.10) Forests (OP/BP 4.36) Significant, non-standard conditions, if any, for: Re$ PAD C.7 Board presentation: None Loadcredit effectiveness: (a) Sub-UAF and UOC established and financial management and procurement specialists selected. Covenants applicable to project implementation: (a) INDI and SENACSA Participation Agreements, and INDERT Agreement signed. (b) Carry out environmental screening of subproject on Component 3. (c) Authority to audit Component 3 has been hiredand the Project's Management Information System i s inplace and acceptable by the Bank. (d) HumanResources firm selected. ... 111 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues Country Context 1. Economic Recovery. Following a long period of stagnation beginning in the 199Os, Paraguay's economy has maintained general improvement in recent years: (i)the econom returnedto positive growth rates in 2003, with real GDP growing at an estimated 3.5% in2006 r: (ii) exchangeratehasremainedstablewithinflationbeingheldtosingledigitssince2004; the and (iii) public sector now enjoys both overall and primary surpluses. This recovery was the prompted by a combination of developments, which included a pronounced expansion in agricultural output driven by the exceptionally high commodity prices, as well as the adoption of more rational spending policies and enhancements in tax administration. Importantly, the economic turnaround has led to a significant decline in external public debt, which stood at 30.5% of GDP in 2006, down from 50% just three years earlier. The outlook for 2008 is for a continuation of these trends with a forecast GDP growth rate of 4%. 2. Ineaualitv. Despite the ongoing economic improvement, per capita GDP in 2006 was at the same level as over a quarter century ago. As a result, the moderate rates of GDP growth projected for the medium term (3.5%) remain insufficient to compensate for the under- performance of the secondhalf of the 1990swhen poverty rates and income inequality increased considerably. Inequality is also high in Paraguay relative to other countries in the region. National surveys point to a Gini coefficient of 0.53 for the country as a whole. The wealthiest 10% consumes 90 times what the poorest 10% consumes, one of the worst ratios in the world. This is partly a reflection of extreme inequality in land ownership. Ten percent of the rural population owns two-thirds of the land, while 30 percent o fthe population is landless. 3. Poverty. One of the most pressing social issues in Paraguay today is poverty, especially inthe country's Eastern Region where 97% of the population lives and of which 47% reside in rural areas. In 2005, 32% of the 5.9 million Paraguayans lived below the poverty line; this number reached40% inrural areas. At the same time, while 17% of the total population lived in extreme poverty, 22% of the rural population lived such conditions. In concrete terms, over 1.2 million people in rural areas live in poverty, including virtually all of Paraguay's 86,000 indigenous people, andwith more than 650,000 people live inextreme poverty. 4. Governance. Since mid-2003 the current government of Paraguay has sought a recovery of confidence in state institutions by a sustained fight against corruption, improved procurement and financial management in all government institutions, and greater participation of civil society. While recent assessments note progress, many challenges remain. RuralSector Context 5. Agricultural Sector. While important inroads are being made in the country's service sector, especially intrade and finance, Paraguay's economy is essentially rural, and still depends All economic figures usedinthis section are ffom the International Monetary Fund. on agricultural and livestock production, which account for 25% o f GDP, generate the bulk of total exports (over 85%) and employ about 45% of the country's labor force. 6. Paraguay's agricultural sector can be divided into two sub-sectors: (a) an emerging sub- sector o f capitalized entrepreneurial agriculture which is responsive to market signals, and i s primarily responsible for growth within the broader sector in recent years; and (b) a small-scale farmer sub-sector characterizedby low-productivity, family agriculture whose main products are subsistence crops and a few heads of cattle and other livestock, with a connection to the market economy primarily through cotton and with very limited access to land, capital and technology as well as to social and human capital resources. The expansion of modern agriculture has left these 300,000 mostly poor small-scale farmers behind, and they continue with subsistence farming supplementedby cotton production. 7. Given Paraguay's economic dependence on agriculture and livestock and the importance of these activities the livelihoods of many Paraguayans, the use and management of land has a notable impact on production, livelihoods and natural resources. The land situation in Paraguay today is characterized by significant inequality in tenancy and extensive titling irregularities. This situation not only makes it extremely difficult for small-scale farmers to diversify their production and thus improve food security and increase incomes, but it is also a major disincentive to investing resources in environmentally friendly productive practices on the land to protect the basis of the country's economy. 8. Livestock Sector. This sector is one of the most dynamic ones in the rural economy of Paraguay. The livestock export market has significantly increased inthe last few years. Only in 2007 (November 30) total exports have reached US$437 million. Given this volume of exports, which is expected to continue increasing, Paraguay needs to become a more active and engaged party o f the regional initiative of animal health, which focuses on foot and mouth, and other common trans-boundary diseases. The country still faces important constraints in controlling animal health, mainly as a result of inadequate infrastructure inthe regulatory agency network of clinics and laboratories. Other significant constraints include the lack o f adequate extension services relating to appropriate animal health and husbandry practices and the lack of adequate livestock working facilities in small-scale farms, which account for about 20 % of the overall cattle figures, and 90% o f the livestock units. 9. Environmental Degradation. Paraguay i s home to part of the Atlantic Forest which, with only 7% of its original area still extant, is regarded as one of the most threatened ecosystems in the world and characterized by a high degree of fragmentation. Less than 30 fragments larger than 10,000 ha and 12 larger than 20,000 ha existed in 1997; only one of the latter is under effective protection (the Mbaracayu Forest Natural Reserve, which is being managed with assistance from a World Bank GEF grant) while another large fragment, San Rafael National Park, has received assistance from a prior Bank loan and a GEF grant to the Secretary of the Environment. Several other ecosystems of Paraguay are considered o f global and regional importance for conservation including the Cerrado and Misiones Grasslands, the Pantanal and HumidChaco wetlands, andthe increasingly threatenedDryChaco forests. 10. Despite its ecological importance, Paraguay suffers from severe environmental degradation. This includes accelerated erosion, loss of soil fertility, loss o f biological diversity, 2 decreased quantity and quality of water resources, and severe deforestation, all of which highlight the needto maintain the fragile productive resourcebase. 11. One of the principalcauses of this environmental degradationhas beenParaguay's model of agricultural development which has predominantly promoted short-term profits over long- term environmental sustainability. Some of the major practices which contribute to this degradation include the expansion of the agriculture frontier through the colonization of new lands, slash-and-burn agriculture, extensive grazing and the practice of mono-cultivation of cotton and, more recently, soy. 12. The frontier has basically vanished in the eastern region as the push to expand soy production has resulted in nearly total deforestation of native forests (less than five percent remain). As a result of deforestation, Paraguay has reachedthe point of becoming a net importer of wood, creating an unneeded drain on the balance of payments, not to mention the loss of employment inthe previously strong forestry sector. Government Strategy 13. The Government's overall Development Strategy has the following three objectives: (a) Sustainable growth through agro-industry and export diversification; (b) Increasedhumancapital through policies that enhance equity and increasedaccess to basic services, and well-targeted poverty reduction programs to include the most vulnerable groups; and (c) Facilitate greater participation o f civil society inthe formulation o f public policy andthe control of public expenditure; 14. A Poverty Assessment carried out in 2001-02 recommendedthat: (a) the principal focus of poverty reduction efforts should be inrural areas; (b) efforts should include improved delivery of public services to rural communities; (c) there should be a strong focus on technical assistance inagriculture; and(d) basic health services, includingwater and sanitation, should continue to be expanded. 15. The Government of Paraguay (GOP) has recognized the need to address poverty in rural areas, the need to include vulnerable groups, and the agricultural and environmental challenges, andhas shown a highdegree of commitment through initiatives at three levels: (a) At the policy level, through the creation of the Social Cabinet, under the Presidency, for joint ministerial solutions to Paraguay's major social problems. This is a clear indication of government commitment to the reduction of poverty and social exclusion; (b) At the sector level, through GOP's development strategy, which stresses two programmatic focal points relating to agriculture and social issues: (i) "Sustainable economic growth" which includes actions to strengthen agricultural 3 production and agro-industry; and (ii) "Combating overty and social exclusion" which includesvarious poverty reduction programs {and (c) At the operational level, through the preparation of the National Strategy and Action Plan for the Conservation of Biodiversity by the Secretariat of the Environment (SEAM), which highlight sound natural resource planning, and sustainable agriculture and pasture management, as a means to ensure the sustainableuse of biodiversity. 16. To operationalize the sectoral focal points, GOP is currently implementing the following initiatives: (a) National Strategy for the Fight against Poverty, Inequality and Social Exclusion3; (b) Agricultural and Rural Development Plan (2004-2008); (c) National Plan to Revive Family- based Agriculture (2003-2008); (d) National Agricultural Sector Development Programme4,and (e) the 2004 law (2524) that prohibits transformation and conversion of forested areas in the Eastern Region of Paraguay. Critical also to the success of these policy instruments is Paraguay's Agrarian Statute, which was established in 2002. It is designed to promote rural development with the goal of incorporating rural farming families and landless peasants into the country's agricultural economy, through a strategy that integrates productivity, environmental sustainability and distributive equity. Key Challenges Facing the Rural Sector 17. Various rural development projects in Paraguay, including the recently-completed Bank- financed PARN project, have clearly demonstrated that agriculture continues to remain a viable proposition for small-scale farmers with landholdings of less than 20 hectares. However, as indicated below, there are some aspects which need to be strengthened to better realize this potential. In addition, there exist critical inter-dependent issues relating to agriculture, environmental degradation, and rural poverty, some of which have been provided below. It is also important to recognize that there could be some geographical areas and some very small land-holdings which may not be viable, and population groups which are landless. This will require a focused attention interms of capacity building to transition such groups into alternative rural non-farm employment opportunities. These initiatives could be covered through a separate project, and are therefore not includedinthis project. (a) Lack of Social Organization and Participation. Despite the relatively large number of community andproducer organizations inParaguay's rural areas, these groups often lack social organization and the participatory method skills required to play a successful role in sustainable rural development as well as a means to scale up production, access information andmarkets with greater effectiveness; (b) Access to Technology Services. Despite some advances in recent years, agricultural and livestock research and extension remain weak in their technical * As presented inthe San Bernandino Declaration signedon November 26,2004. Also known as the "Jahapo'o Teko Asy" Plan, it was introduced by the Social Cabinet of the Presidency in July 2004. The latter three programs were designed and are currently being implemented by the Ministry of Agriculture and Livestock. 4 strategy and in their response to the demands by small-scale farmers who comprise 60% o f the rural population. The little research carried out rarely takes into account small-scale production systems and rationale, and the coverage and focus o f official technical assistance services is very limited. Coverage o f official technical assistance services reaches only about 11% o f small-scale farmers (those with fewer than20 hectares); Lack of Adequate Land-use Planning. The degradation o f soil and forest resources caused by unsustainable land use has been exacerbated by inadequate planningo f productive endeavors at the national and local levels; Access to Credit. It i s exceedingly difficult for small-scale farmers to gain access to credit. Seventy percent o f farmers with fewer than 20 hectares o f land are unable to obtain credit. O f those who are able to access credit, 16% receive it from the formal public sector, 8% from cooperatives and producers' organizations, and 72% from the informal sector of middlemen, wholesalers, factories and truckers; Livestock Sector. There i s a need to improve the field level infrastructure relating to clinics and laboratories, cool chain and livestock working facilities, specially for small livestock units, to contain foot and mouth and other transboundary diseases, and strengthen the nodal agency, the National Service for Animal Health and Quality (SENACSA) and the Vice Ministry o f Animal Husbandry (VMG) to be able to manage this effort vigorously and effectively; Inadequate Infrastructure and Unmet Basic Needs. Interms of infrastructure, the population's access to basic infrastructure services i s limited. Only 23% o f all roads are paved and less than 43% o f these paved roads are in good condition. Only 70% and 37% of the population in urban and rural areas, respectively, are served by water supply. The coverage of sanitation networks i s much less; and Weak Institutional Framework. MAG and other sectoral institutions have historically been deficient in policy setting, although they are introducing improvements intargeting poverty-oriented strategies. 2. Rationale for Bank Involvement 18. There are three value propositions which place the Bank in a position o f comparative advantage to operate inpartnership with the government o f Paraguay: (a) an integrated portfolio o f which the project i s an important part, and which can benefit considerably from the synergies of the projects being implemented as an integrated portfolio; (b) country and international experience on various aspects o f the project approach; and (c) learning from approaches of other internationally financed projects. 19. Strategic Fit o f the Project and Linkages with other Bank/GEF/JSDF-financed Rural Sector Projects. Building on previous experiences under the Natural Resources Management Project (PARN) and the Pilot Community Development Project (PRODECO), as well as, string 5 of rural water supply and sanitation projects under implementation since 1970's and national road maintenance projects, PRODERS is central to the Bank's rural sector inter-linked operations portfolio inParaguay that include:(a) the GEF Paraguay BiodiversityProject which is a partly blended operation with the project; (b) the Bank's Japanese Social Development Fund (JSDF) Indigenous Land Regularization Project; (c) additional financing for PRODECO; (d) the recently approved JSDF Indigenous Community Development Project; (e) the Forestry Project; and (f) the Land Administration Project. 20. Although PRODERS will maintain a sharp focus on its specific objectives and not attempt to completely resolve Paraguay's land tenure, indigenous or biodiversity issues, it will collaborate with other initiatives, where these issues converge with the project's focus. More specifically, the project will: (a) Closely coordinate its activities with the JSDF Indigenous Land Regularization Project in Caaguazu where the two projects will jointly prepare indigenous peoples' annual work plans and targets for land titling and will collaborate on updating informationon indigenous landsinthe project area; (b) Link up with the JSDF Indigenous Community Development activities to be carried out inCaaguazu; and (c) Work closely with the Bank's proposedForestry Project and LandAdministration Project in Paraguay to establish the groundwork for collaboration, through local organizations' strengthening. 21. At the project level (for the two departments), this will be a specific responsibility of the Project Management Unit. At the country level, this collaboration and linkage will be assured though an Integrated Technical Unit operating under the Vice Minister of Agriculture. 22. The GEF/Bank Paraguay Biodiversity Project will overlap in some municipalities and micro-catchments in the two project departments of San Pedro and Caaguazu in Eastern Paraguay. An estimated US$4.5 million of PRODERS' on-farm investment subprojects will comprise counterpart funding for the GEF project. As part of those micro-catchment investment plans that overlap with biodiversity corridors supported by the GEF project, PRODERS will facilitate the investing of nearly US$2.0 million of the GEF project's funds in conservation- related activities. These activities will be aimed at the incorporation of a biodiversity aspect in the proposed project's training and extension activities and the integrated management of biodiversity in the productive endeavors of beneficiary small-scale farmers in areas where the largest and most important forest remain. Matrixes of technical and operational complementarities have beendrafted by MAG and SEAMwho are responsible for implementing the proposedGEF intervention; these details will be reflected inthe project operational manual. Details of coordination betweenthe two projects are describedinAnnex 4, Appendix 3. 23. Relevant Country and International Experience in this Sector. The Bank's comparative advantage lies in its unique experiences as a multilateral donor in executing projects with a similar focus and, specifically, with local-level capacity building and planning for natural resource management. In Paraguay, this includes the enriching experiences of PARN which 6 promoted an integrated model o f natural resources management and agricultural technical assistance. The two poorest departments o f San Pedro and Caaguazu were incorporated into PARN towards the end o f the project and therefore did not benefit from the project. It seems logical to now focus on these two departments to deepen the processes introduced under PARN and to initiate micro-catchment management interventions. 24. The Bank has also supported various micro-catchment area-based sustainable rural development projects in the Brazilian states o f Santa Catarina, Paranh, Rio Grande do Sul and Sfio Paul0 which are proving very effective. Given the numerous socio-economic, cultural and technical similarities between the two countries, this experience is very relevant and enriching. Inparticular, the participatory diagnostic focus inthe more recent o fthese Brazil projects, which will be an essential focus o f the project, is much more inclusive and integrates the environmental, social and productive aspects inrural areas more effectively. 25. The Bank has been working with other countries in the Latin American Region and elsewhere in the world to manage the incidence o f food and mouth and other trans-boundary diseases. It i s working closely with MERCOSUR to introduce similar animal health initiatives in other countries such as Argentina, Bolivia, Brazil, Chile and Uruguay. This puts the Bank in a synergistic position o f being able to coordinate animal health related activities at the regional level. 26. Moreover, the Bank has promoted a series o f learning activities betweenrelated projects in Paraguay and South-Southeast Brazil including: (a) the establishment of an informal network for technical exchanges; (b) several international conferences for technical exchanges on projects' experiences; and (c) a proposed Bank study on comparative experiences. These experiences have been reflected in the design o f this project, and will also be useful in assisting the government's project team to successfully implementthe project activities. 27. Learning from Initiatives o f other Agencies. While no other projects are addressing sustainable rural development issues in the same manner as this project, there are a number of relevant ongoing initiatives in the sector. The approaches developed under the following projects could be reviewed, discussed and adapted through information exchange seminars which the Bank is eminently positioned to facilitate, including developing innovative investment scale- upproposals for assistanceunder the project's Rural Development Fund: (a) KfW's Sustainable Management ofNatural Resources Project, whose objective is to introduce sustainable agricultural and forestry management systems on small- scale farms, by sharing best-practices for conservation agriculture, particularly no-tillage; (b) IFAD's Paraguay Rural Project, by sharing experiences in the creation o f social capital through training for beneficiaries and their organizations for collective commercialization o f agricultural products; (c) the GTZ-executed Caazapa Rural Development Project, which is focused on the sustainable management o f natural resources, the diversification o f production 7 and the improvement of local and regional public management, by sharing experiencesinproduct diversification; and (d) IDB's Modernization of Agricultural Public Management project, a follow-up operation to the recently closed Program to Support the Development of Small Cotton Farms (PRODESAL), by sharing information and promoting coordination on best-practices and technologies for the small-holder sector. 3. HigherLevel Objectivesto whichthe ProjectContributes 28. The objectives of the CAS are aligned closely with the government's development priorities, and are grouped along four main pillars. The first pillar indicates the need for fiscal and financial stabilization as the sine qua non for regaining confidence in the economy and getting back to a sustainable growth path. The second pillar focuses on the need to restore confidence in state institutions by improving governance and transparency in public administration. Improved governance is another critical ingredient for growth interms of raising the confidence of the private sector to increase investment. The third pillar indicates the needto achieve sustainable growth through improved infrastructure and increasing the productivity of the rural sector, in particular that of small-scale farmers among whom poverty is highest. And, the fourth Pillar focuses on the need to expand the coverage and efficiency of basic social services (education, public health, water and sanitation), in order to help Paraguay meet its millenniumdevelopment goals. 29. The project clearly supports the third and the fourth pillars of the CAS. It focuses on San Pedro and Caaguazuwhich are two of the poorest departments in Paraguay, focuses on the rural areas and small-scale farming community, and provides assistance to: Increase agricultural productivity of small-scale farmers through technology adaptation, diversification and production systems improvement, soil conservation and forest rehabilitation, value-added agro-processing schemes, and horticultural nurseries; Deepen the rural roads network, includingimproved maintenance; Reducethe unmetbasic needs gap relating to water supply and sanitation; Introduce interventions specifically for the vulnerable indigenous peoples' communities; Improve livestock health and husbandry management through focused infrastructure and institutional capacity building, including specific decentralized animalhealth improvement investment proposals; and Enhance the level and quality of social participation at all stages of project implementation from diagnostics, planning, and investment through monitoring and evaluation. 8 30. The project also supports the GOP's global strategy to combat rural poverty, and is inline with the objectives of the National Strategyfor the Fight against Poverty, Inequality and Social Exclusion. It will also contribute directly to the objectives of the Agricultural and Rural Development Plan (2004-2008) which are to: (a) achieve a good standardof living for the needy population in the rural sector; (b) raise the level of competitiveness of small-scale farmers and large-scale agriculture; and (c) maintain, improve and conserve renewable natural resources. 31. The project incorporates actions to meet the objectives enshrined in the government's Development Strategy relating to enhanced civil society participation, diversification and export- orientation of agriculture, andtargeting vulnerable groups for assistance. 32. The project contributes clearly to the achievement of the following MDGs: (a) MDG 1: which aspires to eradicate extreme poverty and hunger; and to reduce extreme poverty by half; and (b) MDG 7: which aspires to ensure environmental sustainability by reversing loss of forest cover, to halve population without access to potable water and sanitation. B. PROJECT DESCRIPTION 1.LendingInstrument 33. Specific Investment Loan. IBRD Loan of US$37.5 million, with the following features: (a) Fixed Spread Loan; (b) Variable interest rate; (c) Front-end Fee of 0.25% of Loan to be paid by Borrower from own funds; (d) Level repayment with a five year grace period, and 23 years maturity; and (e) Conversion Options: all (currency, interest rate, caps/collars). 34. The GOP will provide the remaining financing of US$3.86 million. In addition, the project will be partially blended with a GEF grant of US$4.5.million approved by GEF Council inNovember 2007 andscheduledto be appraisedandnegotiatedinearly 2008. 2. ProjectDevelopmentObjectiveand Key Indicators(see Annex 3 for details) 35. The pro-iectdevelopment ob-iectiveis to improve the quality of life of small-scale farmers and indigenous communities in the project areas in San Pedro and Caaguazu departments in a sustainable manner, by supporting actions that will: (a) strengthen community organization and self-governance; (b) improve natural resourcesmanagement; and (c) enhance the socio-economic condition of the target population. 36. The expected principal outcomes for the primary target group (small-scale farmers and indigenous communities) are: (a) greater capacity and active participation in the planning and implementation of sustainable agriculture and rural development activities at the farm, community and micro-catchment levels; (ii) increased local managementcapacity to support this implementation; and (iii)improved incomes, living conditions, food security, and management of environmental resources. 37. The achievement of the project's principal outcomes will be assessed using the following key performance indicators (see Annex 3 for details): 9 CDGs, MDCs, MSCs and IAs established, strengthened and participating in the management o f rural sustainable development in at least 80% o f the target micro- catchments and indigenous communities in the project area with participation of women and rural youth in decision-making (appropriate level o f participation to be agreed by the organizations), measured by number established, number trained and number submittingsubproject proposals; At least 50% of the target farms increase their agricultural incomes by 30%. O f these, at least 40% obtain an agricultural income above the poverty line; Production o f crops for domestic consumption increased by 20% in 50% o f the poorest beneficiary families; Productivity o f land (by hectare) increased by an average o f 25% in 10,000 farms through the application o f productive practices promoted by the project; The incidence o f poverty (measured in UBN) reduced by 50% in the assisted small-scale farmers and indigenous communities; 65% o f beneficiary households assisted with at least one subproject for home improvement and sanitation; 20% o f indigenous communities without formal landtitles at project start acquire titles and 50% o f small-scale farmers without title receive assistance toward acquiring titles; Environmental conditions (soil, water quality, vegetation cover) improved in at least 70% o f the 84 target micro-catchments and 73 indigenous communities; Greater awareness among 50% o f project beneficiaries o f land degradation and the potential contribution o f sustainable natural resources and landmanagement to improved livelihoods inthe project area5;and Greater awareness among 70 % o f project beneficiaries o f the importance o f good animal health management and husbandry.6 3. ProjectComponents(see Annex 4 for details) 38. The project area will cover the 39 municipalities in the two poorest departments o f the country's Eastern Region, Caaguazfi and San Pedro. Project interventions will be concentrated in84 micro-catchments (about 10% o fall micro-catchments inthe two departments) withinthose 39 municipalities. Direct project beneficiaries will be small-scale farmers (with fewer than 20 5To measurethese indicators a baseline attitude survey will be conductedat the beginning of the project and another one at the end in order to evaluate changes inperception. See footnote No. 5. 10 hectares of land), indigenous communities and rural workers in the two target departments who will benefit from extension services, capacity building and investment finding. 39. It is estimatedthat the project will reach 16,8007small-scale farmers inan estimated600 communities, and 2,030 indigenous families in 73 indigenous communities. In addition, larger- scale farmers inthe selected micro-catchments, rural school teachers and students, technical staff and managers from municipal governments and MAG, and producer and civil society organizations will benefit from training and environmental education services. 40. The project is expected to cost US$46.84 million (Bank share: US$37.5 million, including a US$1.29 million contingency, and a US$0.09 million front-end loan processing fee; Government of Paraguay share: US$3.86 million; beneficiaries share: US$3.39 million; stakeholders share: US$2.00 million), and have a duration of 5 years, starting July 1,2008. 41. The project is designedto operationalize the micro-catchment area-based project strategy to address rural poverty and natural resource degradation. It uses a highly participatory and decentralized demand-driven approach to poverty amelioration and natural resources management, and a production support process for rehabilitating and attaining sustainability of degraded and low productive farming systems. The project has five main components: (a) Community Organization Development and Capacity Building; (b) Rural Extension and Adaptive Research; (c) Sustainable Rural Development Fund; c) Animal Health Improvement; and (d) Project Management, and M&E. 'Although the targeted universe for the project is to reach 16,800 small-scale-scale farming families and 2,030 indigenous families in 84 micro-catchments and 73 indigenuos peoples communities, and at least education and outreach activities are expected in all o f these, more specific targets have been formulated for diagnostic, planning and investment activities as detailed text and specifically inAnnex 3. 11 ComDonents bv Financiers (in US'C IO) World Bank GOP Beneficiaries lNDERT/FlDES Total ~~ - - COMPONENTS Amount % Amount % Amount % Amount % Amount % 1.CommunityOrganization, 2,226.49 83.6 437.80 16.4 2,664.29 5.7 Development and Capacity Building 2. Rural Extension and 9,137.87 84.1 1,7315 4 15.9 10,869.41 23.3 Adaptive Research 3. Sustainable Rural 19,497.25 78.3 3,387.75 13.6 2,000.00 8.0 24,885.00 53.2 Development Fund 4.AnimalHealth 3.378.72 80.7 811.OO 19.3 4,189.72 9.0 Improvement - 5. Project Management and 3,279.86 79.4 850.00 20.6 4,129.86 8.8 Monitoring - - TOTAL 37,500.03 80.2 3,850.51 8.2 3,387.75 7.4 2,000.00 4.3 46,738.29 100.0 Front-end Fee - 93.75 Total PROJECT COSTS 37,500.03 80.2 3,850.51 8.2 3,387.75 7.4 2,000.0 4.3 46,832.04 101.0 42. Component 1: Community Organization Development and Capacity Building; (US$2.7 Million, 5.7% of Total Project Cost). The objectives of this component are to: (a) organize beneficiaries to participate actively in local decision-making structures both within and outside of the project; and (b) prepare project staff for the implementation of the project technical strategy aimed at adopting sustainable agriculture and rural development activities in micro- catchments. It has three sub-components: Training, Community Organization Development, and Environmental Education. 43. The first sub-component, Training, includes activities to build awareness and capacity relating to project strategy and approach in project technical staff (including extension agents, extension agents for indigenous communities and social organization technicians), as well as for small-scale farmers, indigenous communities and others. 44. The second sub-component, Community Organization Development, includes applying the targeting criteria to micro-catchments andcommunities for their selection andparticipation in the project, establishing and strengthening Micro-catchment Development Committees (MDC), Indigenous Associations (IA) and Municipal Steering Committees (MSC), as well as related training and institutional strengthening activities. 45. The third sub-component, Environmental Education, supports education efforts focused on environmental problems to increase stakeholder awareness in dealing with these issues to improve their livelihoods. 46. Main Outcomes. Beneficiary (municipal, micro-catchment and community) organizations institutionally strengthened for sustainable rural development management; Project staff trained to executeproject actions. 12 47. Component 2: Rural Extension and Adaptive Research (US$10.9 Million, 23.3% o f Total Project Cost). The objective o f this component i s to assist small-scale farmers, community groups and indigenous communities to overcome specific technical, socio-economic and environmental constraints to allow them to shift from existing non-sustainable agricultural practices to sustainable livelihood strategies which enhance natural resources management and reduce rural poverty. It has two sub-components: Rural Extension, and Adaptive Research and Studies. 48. The first sub-component, Rural Extension, supports: (a) beneficiaries to prepare Micro- catchment Development Plans (MDP), Indigenous Community Development Plans (ICDP) and Municipal Investment Plans (MIP); (b) participatory identification o f community demands for social, technical and financial support arising from those plans; (c) implementation at the community level; and (d) training indigenous community and micro-catchment-level community promoters to facilitate the process o f knowledge management for adopting the project strategy at their respective community levels. 49. A second set o f activities focuses on providing project beneficiaries specific and specialized technical assistance relating to agricultural and environmental practices, including: (a) sustainable land management; (b) product intensification and diversification; (c) processing and marketing; (d) environmental protection; and (e) management skills. 50. For the provision o f specialized technical assistance, a roster o f private service providers will be created by selecting local consulting firms, NGOs and individuals that have the experience and qualifications in all the technical areas o f the project, and who would be interested inproviding their services to project beneficiaries. The roster will be prepared by the HumanResources firm that will be hired for selecting project staff. It will be made available in the Projects web site in MAG, and directly to project beneficiaries, who will select the provider that best responds to their needs and interests. 5 1. The second sub-component, Adaptive Research, will finance practical technology validation and information needs to better address production and marketing issues o f the project's primary target beneficiaries (small-scale farmers and indigenous communities), as well as policy studies o f special interest to decentralized local (departmental and municipal) and national sectoral institutions. 52. Main Outcomes: Small-scale farmers, indigenous communities and the rest o f the micro- catchment population trained in planning and implementing development plans and investment proposals for sustainable micro-catchment management, supported by rural extension and relevantresearch initiatives. 53. Component 3: Sustainable Rural Development Fund (US$24.9 Million, 53.2% o f Total Proiect Cost). The objective o f this component is to finance demand-driven investments identified in the context of the Micro-catchment Development Plans (MDP), the Indigenous Community Development Plans (ICDP), and Municipal Investment Plans (MIP) which are based on a participatory local-level diagnostic and planning process supported under the Rural Extension sub-component. 13 54. Investment Subprojects are grouped in five categories based on the type o f beneficiary: (i)IndividualSmall-scaleFarmer,targetedtofinancebasichomeimprovementsandsanitation (up to US$500.00 for subproject); (ii) Individual Small-scale Farmer targeted to improve farm production and productivity (up to US$2,000.00 for subproject); (iii) Community Development Group targeted to improve agricultural and livestock production and productivity (up to US$lO,OOO.OO for subproject); (iv) Indigenous Community (up to US$25,000.00 for subproject); and (v) Municipal (up to US$40,000.00 for subproject). 55. The proposals for subprojects are to be prepared by eligible project beneficiaries with support from project extension agents, screened first by Micro-catchment Development Committees (MDC) or in the case o f indigenous people by Indigenous Associations (IA). Applications will then be evaluated by the PMU. Once awarded, grant funds will be transferred to beneficiaries for implementation through their legal associations. Beneficiary representatives and regional and national project staff will be responsible for subproject monitoring. 56. In most cases, the grant will finance a maximum of 85% o f investment cost, with the grantees contributing the 15% in-kindcontribution. 57. In an estimated 12 micro-catchments, project activities would overlap and complement with the implementation o f the proposed Paraguay Biodiversity Project with which the project would be partially blended. The beneficiaries o f these 12 micro-catchments which are located in the biodiversity conservation corridor (project area o f Paraguay Biodiversity), would receive PRODERS support for NRMand sustainable productionpractices at the farm level, which would be combined with specific investments for restoration or maintenance o f connectivity and sustainable use o f biodiversity to be funded by the GEF. 58. Main Outcomes: Individual Small-scale Farmer Investment Subprojects, Community Development Group Investment Subprojects, Indigenous Community Investment Subprojects and, andMunicipal InvestmentSubprojects financed. 59. Component 4: Animal Health Improvement (US$4.2 Million, 9.0% o f Total Project Cost). The objectives o f this component are to assist Paraguay to initiate animal health improvement measures and to contribute to the regional strategy for animal health management. It has two main sub-components: (a) Strengthening the nodal implementing agency for this component - SENACSA; and (b) Strengthening the Vice Ministry o f Animal Husbandry(VMG). 60. Under the first sub-component, the project would finance software and information systems, lab and office equipment, communication services, small works, consulting and training to increase the capacity o f SENACSA to implement animal health improvement measures in the country, with emphasis in the areas along Paraguay's borders with neighboring countries (Argentina, Brazil and Bolivia) and with small-scale farmers and indigenous communities assisted in the project area, all this consistent with the actions comprising the Regional Strategy for Eradicationo f Transboundary Diseases inMercosur. 61. The second sub-component would strengthen the VMG with office and clinic equipment, small works, consulting and training to monitor and manage the animal health and animal husbandry initiatives effectively. 14 62. Main Outcomes: Improved Animal Tracking and Information systems, laboratory facilities and field operations established and managed effectively by SENACSA and the VMG to ensure highnational standardsof animal health. 63. Component 5: Pro-iect Management, Monitoring and Evaluation (US$4.1 Million, 8.8% of Total Proiect Cost). The objectives of this component put in place a functional and effective project management team. It has three subcomponents: (a) Project Management; (b) Monitoring andEvaluation; and (c) Communication and Information Dissemination. 64. The first sub-component, Strengthening of SENACSA, finances software and information systems, lab and office equipment, communication services, small works, consulting and training to improve the performance of SENACSA to implement an effective animal health strategy for Paraguay. 65. The first sub-component, Project Managementand Capacity Building for MAG, finances management services, office equipment, and all administrative and operational expenditures to improve MAG'Sorganizational skills-mix to effectively manage the project. 66. The second sub-component, Monitoring and Evaluation, finances the design and implementation of a M&E system to support project management. Specific objectives of the system include: (i)monitoring project implementation in relation to overall objectives, baseline situation, inputs and outputs; (ii)providing and receiving feedback from stakeholders; and (iii) generatinginputsfor dissemination of project results and lessons learned. 67. The third sub-component, Communication and Dissemination, supports the dissemination of project information to provide project stakeholders with systematized knowledge for the management of natural resources and rural poverty reduction throughout the country's Eastern Region. 68. Main Outcomes: Project management structure, including the Project Management Unit (PMU) at the central level and four Zone Coordination Units (ZCU), and units of MAG: Established, and functioning effectively, executing and monitoring project activities, and integrating them with the activities o f other sustainablerural development programs. 4. Lessons Learned and Reflected inthe Project 69. The project design incorporates lessons learned in PARN as well as other Bank funded poverty alleviation and natural resource management projects in Brazil and elsewhere in the world. In addition, experiences generated through the Paraguay Pilot Community Development Project (PRODECO), which has been testing a decentralized, participatory approach to improve the quality of life and social inclusion of poor rural and marginal urban communities along Paraguay's southernborder, have also beenparticularly valuable. The main lessons incorporated inthe project designare summarizedbelow: (a) Micro-catchment area-based projects aimed at improving sustainable natural resources management, rural poverty alleviation and income generation in poor communities should: (i)include an effective and transparent process of 15 participatory and decentralized planning and decision-making; (ii)be demand- oriented; and (iii) combine actions facing relevant issues (Le., natural resources, production and social needs) faced by poor communities inan integrated way; There should be strong support from technical agencies to the beneficiary groups in the area of planning, implementation, monitoring, and management o f completed investmentsfor successful project implementation; It is vital for micro-catchment area-based projects to create and/or strengthen beneficiary organizations at the local and regional level and to involve local governments and organized civil society. This furthers decentralization o f decision-making; It is critical to work with and strengthen indigenous organizations, respecting the culturally-defined decision-making mechanisms o f each ethnic group to ensure active participation o f organizations and communities in project implementation. Project technicians must respect the processes o f indigenous development and adapt the project to the needs and demands that arise from communities without imposing pre-established packages, timing or modalities o f work that are foreign to the communities; It is crucial to establish strict criteria for targeting beneficiaries and areas, as well as clear and transparent eligibility criteria and decision-making processes, to allocate resources to defined subproject investment groups; Funds for investment in subprojects should be transferred to the beneficiaries directly with participatory administration o f funds, and effective control mechanisms; and An effective strategy to foster good governance could focus on: (i) strengthening the implementationandmanagement system capacity o fthe executing agency; (ii) mitigating fiduciary risks as best as possible; and (iii)incorporating measures to enhance public accountability and transparency. It is necessary to improve the capacity o f government institutions to address animal health control and monitoring, and develop a sound animal husbandry strategy for small-scale farmers, which includes the development and implementation o f a tracking system o f livestock units and cattle. 5. Alternatives Consideredand Reasons for Rejection 70. The project scope and design i s shaped by a number o f factors, including the outcomes o f the PARN project. Key alternatives considered and rejected for scoping or designing the project are provided below. 71. Adopt a Project Design that Considered either Strictly Environmental Actions or Purely Poverty Alleviation Actions. Given the links between poverty and environmental degradation, 16 and the recognition that neither can be sustainably addressed in rural areas without considering the other, it was important to pursue both inan integrated fashion. Alternative adopted integrate poverty alleviation and environmental management initiatives inthe project. 72. Provide Micro-Credits to Producers, rather than Grants, to FundBeneficiary Subprojects. This was clearly an option, but the poor credit and repayment environment, the need to build beneficiary capacity to manage and repay a loan, and the time required to create this "willingness to repay" climate would take longer than the project period. The earlier PARN project's pilot credit component did not take off at all and had to be canceled at the mid-term review. Alternative adopted provide matching grants to beneficiaries (maximum 85% o f subproject cost) and seek their commitment through the remaining 15% contribution. 73. Targeting, the Proiect's Activities over a Larger Part o f the Eastern Region or even all o f Paraguay. Ten departments in Paraguay were covered under the PARN project. San Pedro and Caaguazu were incorporated into the project towards the end o f the project period. There i s a need to deepen the participatory processes in these two departments which are the poorest in Paraguay, and focus on the needs o f small-scale farmers and indigenous communities. Alternative adopted situate the project in San Pedro and Caaguazd, and focus on small-scale farmers and indigenous communities. C.IMPLEMENTATION 1. PartnershipArrangements No other international agencies are financing this project. 2. InstitutionalandImplementationArrangements(see Annex 6for details) 74. Proiect Duration, Execution and Oversight. The project will have a five-year duration. Overall project management and implementation will be the responsibility o f the Ministry o f Agriculture and Livestock (MAG) inpartnership with key rural development and environmental institutions, including the National Land and Rural Development Institute (INDERT), and the Indigenous People's Institute o f Paraguay (INDI). 75. At the national level, the project will be headed by a Director General in DINCAP (in MAG). He will have the accounting and financial management function directly reporting to him, and he will monitor the implementation of project activities through a Project Manager. A National Coordination Committee (NCC) will be established to facilitate coordination o f project execution consistently throughout the life of the project and ensure the alignment of the work program with project objectives and GOP policies. An Integrated Technical Unit will also be established under the Vice Minister, Agriculture, to coordinate and link activities and initiatives under various Bank and other donor-financed projects to ensure that there is no duplication and that there i s an exchange o f tested modalities across financing agencies. 76. At the project level, a central PMU will be established within MAG'SDirectorate o f Rural Extension (DEAG) prior to effectiveness to coordinate the project implementation in the two departments o f San Pedro and Caaguazu. The central P M U will be headed by the Project 17 Manager, who will have the responsibility for overall technical and administrative management o f the project, including coordination with the partner institutions - INDI, INDERT and SEAM. H e will have six units reporting to him: (a) the Technical Management Services to handle activities relating to the Rural Development Fund, and the coordination o f the four zonal units. This unit will be headed by the Technical Director; (b) Coordinator o f IP micro-catchments; (c) Administrator to be in charge o f all administrative matters o f the project; (d) the Planning and M&E Manager to prepare Action Plans, and manage the M&E system; (e) the Communication and Dissemination Service Manager to disseminate project information and materials; and (f) three advisors for specific functional guidance relating to extension and adaptive research, environmental management, and social organization and capacity building. The Technical Manager will have four zonal coordinators, in charge o f implementing the project in the two departments, reportingto him. 77. At the department level, the project implementation arrangements consist of the four decentralized Zone Coordination Units (ZCU). Unlike the central PMU, the ZCUs will be eminently operative and responsible for the field work in the entire project area. Each Zonal Coordinator will have a range o f experts to integrate the activities across the two departments in each o f the following areas: (a) rural investment subprojects; (b) community organization and training; (c) environmental and GEF project related-micro-catchment aspects; (d) adaptive research and extension; (e) indigenous communities' development; (f) micro-catchment development; and experts in sustainable agriculture, marketing and planning functions. At the department level, CDA Director and his staff will provide the necessary support to the Zonal Coordinators. 78. At the local level, the bulk o f the project activities will be implemented ina participatory manner through Micro-catchment Development Committees (MDC), Indigenous Peoples Associations (IA), and Municipal Steering Committees (MSC). The project will work through 8- 10 firms to coordinate the work o f diagnostics, planning, implementing, monitoring, and reporting in GEF-and-project overlapping micro-catchments and the IP area catchments. The rest of the micro-catchments will be served through individually retained consultants. At the local level, ALAT staff will provide the support and coordination with the field teams. 79. Accounting and Financial Management (FM) System. With regard to Financial Management (FM) arrangements, Annex 7 provides the details on flow o f funds and accountabilities. The proposed arrangements take into consideration: (i)previous project experience managing a Bank-funded operation; (ii)the high degree o f commitment and ownership o f the P M U FM staff; (iii)MAG's increased FM capacity to execute beneficiary transfers via the National Development Bank (BNF)8; (iv) analyses o f Paraguay's FM institutionsg; and (v) the inherent FM risks and weaknesses related to the project (detailed in Annex 7). These are reflected inthe FMdesign o fthe proposed project through the creation o f a Sub-UAF and a RIS to execute FM activities as well as inthe development o f a comprehensive Fiduciary Framework (Annex 7) and an Improved Governance Framework (Annex 12). * This is a result of MAG's ongoing experience in implementingrural development projects, in particular with the IDBandGTZ. See Victor Hugo Zufliga Rodriguez. Contribucidn a1 Diseiio Institucional Para la Ejecucidn del Proyecto de Desarrollo Rural Sostenible (PRODERS). Febrero 2007. 18 80. Procurement Arrangements. Annex 8 provides the details with regard to Procurement Arrangements. The proposed arrangements take into consideration: (i)previous project experience managing a Bank-fundedoperation; (ii)analyses of Paraguay's Procurement Legal and Institutional Framework; (iii) the country procurement risk and (iv) the fact that most of the project procurement would be done through CDD procedures. These are reflected in the design o f the proposed project through: (a) resorting to the extent possible on traditional procurement methods, which includes the employment of the Country Procurement Portal (SICP -Sistema de Informacidn de Contrataciones Ptiblicas), (b) the inclusion in the Loan Agreement of several Special Procurement Provisions and Covenants aimed at mitigating procurement risk, (c) the implementation of an oversight mechanism over CDD subprojects through a concurrent audit, (d) the hiring of a Human Resources firm to support the hiring of individual consultants, and (e) the hiring of the project Procurement Specialist andAssistants. 3. MonitoringandEvaluationof OutcomesKtesults(see Annexes 3 and 4 for details) 81. A decentralized Monitoring and Evaluation (M&E) system to support project planning and management is proposed for the project. Specific objectives of the system are to: (a) track changes towards the project objectives, outputs and inputs, and make changes in the project if necessary during implementation to provide a basis for informed and effective project-related decision-making; (b) promote accountability for resource use against objectives; (c) provide and receive feedback from stakeholders; and (d) generate inputs for dissemination of project results and lessons learned. 82. The M&E system will be implemented by: (a) monitoring the project's day-to-day activities, includinga system of physical and financial monitoring to track project execution; (b) monitoring project outcomes and impact; (c) undertaking special evaluation studies (including ex-ante, mid-term and ex-post evaluations as well as regular environmental monitoring); (d) undertaking internal and external auditing; and (e) pursuing participative monitoring and evaluation of project activities and results from the perspective of the beneficiaries. The M&E system will include indicators for the evaluation of achievement of objectives and the monitoring of outputs and outcomes to allow for changes to be made as necessary during implementation thereby contributing to inform and effective project-related decision-making. It will also be used to generate inputs for dissemination of project results and lessons learned. 83. The M&E systemwill be supportedby a computerized Management InformationSystem (MIS) which will include project activities, inputs and outputs and will constitute a tool for planning, coordinating, providing transparency and monitoring the project's physical and financial implementation progress. 84. The PMU's M&E Unit will be responsiblefor operating and coordinating M&E activities bothwithin the project and with other projects, directly for the GEF/Bank Paraguay Biodiversity Project or through DGP for other projects. However, the following parties will also be involved in data collection, processing and reporting: (a) project staff (particularly extensionists); (b) beneficiary organizations (MDCs, IAs and MSCs); (c) beneficiary groups through biannual client satisfaction evaluations; and (d) reports from implementation partners. In addition, key groups of stakeholders, particularly indigenous communities and small-scale farmers living inthe micro- 19 catchments, will participate in data generation through monitoring social and environmental aspects o f the project. 4. Sustainability 85. Government Commitment to the Project. The GOP has confirmed that rural poverty reduction and environmental protection are government priorities and has requested Bank support through the implementation of a follow-on project to PARN. This project constitutes a step towards these objectives intwo o f Paraguay's poorest departments. The proposed operation i s part of a longer-term strategy that would initially focus on two departments, and, based on performance, could possibly be scaled-up to extend to other departments by means o f an Additional Financing or a parallel "repeater" operation. 86. During preparation, MAG continually reaffirmed the GOP's commitment to this operation. Further commitment i s evidenced by INDERT's agreement to coordinate some o f the activities supported by its rural development find (FIDES) with this new operation by complementing investments (roads, schools, etc.) in the municipalities covered by the project. Finally, the decision to allocate scarce DEAG staff to project implementation at the national, departmental and local level i s a further demonstration o f the GOP's commitment to sustainable rural development and to the project's strategy. 87. Sustainabilitv of Outcomes. The project builds on the experiences o f PARN, and incorporates all o f the success factors in the design: (a) focusing on increasing capacity of beneficiary organizations and producer groups; (b) utilizing existing institutional structures to organize and undertake project activities; (c) involving national and local government institutions inorder to facilitate follow-up; (d) capitalizing on existing coordination mechanisms, particularly those which were established by PARN, including public-private-civil society partnerships; (e) extensive use of experts to support the local beneficiary teams; (f) adaptive research more focused on small-scale farmers; and (8) an integrated approach to micro- catchment management, capacity building, among others. 88. Technical Sustainabilitv. The project will further the innovative conservationist technologies developed and implemented under PARN, which resulted inmore environmentally- sustainable production systems, lower production costs, lower labor requirements, higher productivity and, therefore, more economically and socially-sustainable systems. Also, the improvement o f animal health and husbandry management among small-scale farmers and indigenous communities, and the development o f a tracking system for livestock units and cattle will provide more secure ways to improve animal production and commercialization. This is expected to ensure the technical sustainability o f the project. 89. Institutional Sustainabilitv. The PARN project had a positive impact on MAG. In particular, MAG'S expanding experience and mainstreaming o f participatory approaches to natural resource management was notable. MAG still requires further institutional strengthening that i s being addressed through this project. At the local and municipal levels, many PARN project achievements are attributable to the strengthening o f these development institutions. Boththese initiatives are being deepened under this project. 20 90. Financial Sustainability. The analysis o f expected benefits at the farm level indicates that improved practices will yield greater returns per hectare than traditional ones (see Annex 9). Improved financial returns, the ability for product diversification and access to new markets will act as important incentives for farmers to continue employing project practices. The financial viability o f these production and investment models has already been amply validated under the PARNproject. 91. For indigenous communities and micro-catchments, the participatory development o f sustainable agriculture and rural development plans applied to local agro-ecosystems will integrate the objective o f sustainable natural resources management with traditional objectives o f production for domestic consumption and sale, thus fostering long-term sustainability. 5. Critical Risks and Possible ControversialAspects 92. The main critical risks and mitigation measures are presented inthe followingtable. 21 Risks (to Project Development Risk Rating Objective) Risk Mitigation Measures W/ Mitigation* Institutional weakness ofMAG with The project's ffamework for good governance inadequate financial and other includes institutional strengtheningand management systems causes improvementof financial and other management S inefficient andunsatisfactory project systems. erformance. Mitigationmeasures include: (i) the Bank's ownership and failure to provide verification ofthe highpriority and interest across regular counterpart funds. the political spectruminrural poverty reduction and environmentprotection; (ii) significant consultations, public accountability and transparency during preparationas well as M included for implementation; (iii)use of FIDES funds as a significant portionof counterpart funds required; and (iv) implementation of administrative capacitybuilding activities for enhanced financial planning. ~ Project fails to deliver on its Mitigation measures include: (i) use ofrigorous decentralizedhighly participatory and transparent targetingcriteria; (ii)extensive approacheither becauseof insufficient training oftarget population and local local organizational strengtheningand organizations contributing to capacity building, poor public accountability or due to empowermentand creationof social capital, and time required for community tempering expectationof quick results form the development. project; (iii)extensivetraining ofproject staff on M participatory methodologies;(iv) extensive information campaignsto ensure the target population is well informed about the project's objectives, opportunities and procedures;and (v) beneficiary representativeson decision-making bodies andparticipatory monitoring. Lack of consultations, participation, The indigenous strategy ofthe project, which calls and ownership of indigenous for very participatory processes will be communities assistedby the project, incorporatedinto the Operational Manual in its as aresult of MAG'Sweak attention entirety. M&Eby the project will also focus on S to and capacity for Indigenous this issue, ensuringcareful supervision by the Peoples issues. Bank team. A covenantwill also be included in the loan agreement to condition disbursements to acceptable progresson indigenousactivities. Insufficient procurement capacity and During preparation, a Bank procurementspecialist risky country procurement conducted a capacity assessment of MAG and environment developed atime-bound action plan to build procurementexpertise. Special provisions and covenants will be included inLoan Agreement. A H HumanResourcesfmwill be hired for the selectionofproject staff, as well as a concurrent audit. Duringpreparation, a Bank F M specialist F M capacity on the part of MAG zonducteda capacity assessment o fMAG and hindersproject execution leveloped atime-bound action planto build its institutional capacity and mitigate risk. H Zoncurrentaudits will be contracted. F M qecialist would participate in supervisions 22 1 Risks (to Project Development RiskRating Objective) Risk Mitigation Measures W/ Mitigation* missions to proactively address F M concerns during project execution. ~~ From Components to Outputs Local institutions not sufficiently prepared or provided with technical Mitigation measures include: (i)extensive training assistance for planning, o f project facilitators and extension agents; and (ii)directtrainingtostrengthenlocal M implementation and monitoring o f project activities. organizations. Lack o f land titles impedes the involvement o f small-scale farmers Project includes support for landtitling assistance and indigenous communities in for indigenous communities and small-scale M adoption o f more sustainable natural farmers. resource and productive practices. I Overall Risk Rating S *H= High; S = Substantial; M=Modest; L/N= Lowmegligible 93. As further described in Annexes 7, 8 and 12, the project is considered a high risk operation from a fiduciary point o f view. This high FM risk rating is mainly a result of: (a) the inherent risk from the country and ministry fiduciary environment; (b) the transfer of funds to community subprojects; (c) a high control risk due to the level o f internal control; and (d) the potential time-lag and suspension of inception activities between project effectiveness and Congress approval. The detailed risk analysis is provided in Annex 7. The high Procurement risk rating is the result o f (a) the risky country procurement environment, mainly due to the weaknesses of control institutions and lack of competitiveness of the market; (b) the fact that most of the procurement would be done through CDD procurement procedures and the hiring of individual consultants and (c) the lack of experienced procurement staff. The detailed risk analysis is provided inAnnex 8. 94. No issues have beenidentifiedthat might be controversial or pose any reputational risk to the Bank. 6. LoadcreditConditionsand Covenants 95. Condition of Effectiveness: The Sub-Administrative and Financial Unit (Sub-UAF) and Procurement Unit (UOC) have been duly established, and a financial management specialist for the Sub-UAF, and a procurement specialist for the UOC, both assigned to work for the Project, have beenselected, all ina manner acceptableto the Bank as provided inthe Operational Manual and LoanAgreement. 23 D.APPRAISAL SUMMARY 1. Economicand FinancialAnalyses (see Annex 9for details) 96. Overall, the project will improve natural resource management (soil conservation practices) and productivity on 10,000 farms". O f these farms, 5,000 are also expected to develop innovative and diversified sustainable production systems consistent with land capabilities and 5,000 are expected to diversify production. In addition, 2,030 indigenous households will be assisted for improving natural resources management and increased food production. 97. Farmers' net income with and without the project were estimated on the basis o f illustrative farm models. Net incremental income could vary from 24% to over 100% depending on the farmers' initial conditions, the cropping pattern and the farmers' own dynamics to go beyond the rehabilitation stage and adopt practices o f sustainable production. According to the analysis carried out, all farm models are expected to ensure incomes above the rural poverty line, inaddition to the benefits derived from improved natural resources management, increased food availability and better housing and sanitation conditions. 98. The overall internal economic rate o freturn(EIRR) o fthe project is estimated to be 17%. This estimate is conservative since it does not take into account some benefits accrued from the project that are extremely difficult to quantify such as: (i) improved water quality, biodiversity conservation and decreased soil erosion; (ii)increased well-being as a result o f more food availability and improved social services; and (iii)the long-term effects o f strengthened community organization and self-management, 2. Technical 99. Overall, the project i s deemed technically sound given that the main constraints to improved socioeconomic conditions and management o f natural resources by small-scale farmers and indigenous communities have been adequately identified throughout the implementation of PARN and during the preparation o f the proposed project. They have been addressed in the organization and capacity building approach for participatory, community-based development work and in the technical strategy o f the project. PRODERS will maintain PARN's technical strategy o f promoting practices that maximize soil protection from rainfall, contributing to improved water infiltration by enhancing soil structure and safely handling rainfall runoff, by taking the micro-catchment into account in the planning and implementation unit. Basic technology for simple diversification and post-harvest improvements to the production systems o f small-scale farmers i s well known inParaguay and already promoted by MAG. Adaptation to the local agro-ecological conditions and circumstances o f indigenous communities and the poorest small-scale farmers continues to be a challenge and will be undertaken under the project research and development programs. lo Based on past experience, it is expected that about 80% of targeted small-scale-scale producer population (Le. approximately 8,000 farmers) will effectively become involved inthe project productive activities. The total area of micro-catchments eligible to receiveproject assistance is 353,35 1hectares. 24 3. Fiduciary 100. (see Annexes 7 and 8 for more information on the Financial Management and Procurement Assessments, respectively). 101. The Financial Management Arrangements for the Proiect (SRDP) Meet Bank Requirements. The proposed FM and audit arrangements, mitigations measures and action plan will be implementedto mitigate FMrisk. Despite the mitigation measures, the residual risk level was rated high particularly due to: (i)the high level o f inherent risk in Paraguay; (ii)MAG'S weak control environment and insufficient FM capacities; (iii)the transfer o f funds to final beneficiaries (FDRS); and (iv) the potential time-lag and suspension o f inception activities betweenproject effectiveness and Congress and approval. 102. A comprehensive Fiduciary Framework is planned for this project in order to comply with project development objective and mitigate the high FM risk. This will also contribute to the ImprovedGovernance Framework for the project (described inAnnex 12). 103. For the sustainability purpose o f project results, the project under Bank FM supervision will provide support to strengthen the Financial and Administrative functions o f MAG (Project Component 5). The objective is to increase the capacity o f MAG'Streasury and procurement functions, through the creation o f the Sub-UAF within DINCAP, which were outsourced under PARN. 104. The project FMarrangements and mitigating measures are described inAnnex 7. Due to the highlevel o f risk, additional measures were incorporatedto ensure proper mitigation. 105. Procurement Assessment. An assessment of MAG'S capacity to implement project procurement was carried out and included a review o f the organizational structure for project implementation, the procedures inuse, the capabilities o f personnel assigned to procurement and the nature o f the procurement to be carried out. The overall project risk for procurement is high, which is the result of: (a) the risky country procurement environment, mainly due to the weaknesses o f control institutions and lack o f competitiveness o f the market; (b) the fact that most o f the procurement would be done through CDD procurement procedures or through the hiring of individualconsultants and (c) the lack o f experienced procurement staff. To minimize this risk, a set of actions are recommended to mitigate risks and build procurement expertise, which will be implemented within the planned project institutional structure. These include spelling out in the Loan Agreement a set o f Special Procurement Provisions and Covenants, resorting on a concurrent audit for oversight purposes, hiring a human resources firm to support the process of hiring o f individuals and hiring a procurement specialist for the PMU and procurement assistants for the ZCUs. 4. Social (see Annex I 6for details) 106. The social assessment identified the following challenges facing the target population: (i) deepening o f rural poverty inrecent years; (ii)inadequate provision o f sanitation and other basic services including water; (iii)degradation o f natural resources; (iv) lack o f attention to indigenous issues; (v) lack o f access to resources and technical information necessary to 25 undertakeimprovedproductive practices; (vi) insufficient awareness o f participatory methods by rural technicians and beneficiaries; (vii) absence o f market opportunities for small-scale farming production, especially the need to introduce alternatives for beneficiaries, accompanied by proper marketingsupport; and (viii) poor integration of policies and programs at the local level. 107. Stakeholder Participation. Stakeholders will include small-scale farmers, local community organizations, indigenous communities and Indigenous Associations (IAs), rural laborers, rural school teachers and students, technical staff and managers from local governments, main government agencies implementing projects related to poverty reduction, natural resources management and sustainable rural development, producer and civil society associations, and staff from MAG-DEAGand other relevant directorates. 108. Duringproject preparation, consultation workshops were held with project stakeholders to identify and prioritize problems to be addressed by the project as well as resources and constraints to bear in mind during project preparation and implementation. In addition, PARN extension agents were consulted to learn from their direct, on-the-ground experience and to determine areas in which PARN succeeded and failed, especially in regard to targeting, extension and delivery o f services so as to strengthen the designo f PRODERS. 109. Stakeholders will play a key role in project implementation and decision-making through the CDGs and project steering committees. Some o f their roles will include: participation in the elaboration of MDPs and ICDPs and annual operation plans, as well as inassuring social control. Indigenous groups will play a determining role inthe implementationo f project activities intheir communities ranging from elaboration to approval and implementation o f the indigenous community investment proposals (see Annex 6 for further details). 110. Indigenous Peoples. Approximately 2,030 indigenous families living in 73 communities will benefit from project activities. In addition to living in conditions o f extreme poverty with severe degradation o f their natural resources, many lack legal title to their land and/or have insufficient lands to meet the community's needs. Moreover, historically, inadequate attention has been givento addressing the concerns o f Paraguay's indigenous communities, especially ina manner consistent with their traditional beliefs and organizational structures. Thus, the proposed project will work with all 73 communities located in the two target departments to mainstream them inall ofthe project's components. They will receive the same project benefits as their non- indigenous counterparts but these will be prepared and implemented in such a way as to respect their specific cultural characteristics, including language and community leadership structures (see Annex 14 for the project's detailed Indigenous People's Development Plan). 111. Women. Women, who comprise 49% o f the population in rural areas, play an important role as agricultural producers. Moreover, studies have shown that women are much more receptive than men to adopting technological innovations, especially when presented with a positive relationship between such innovations and improvement o f the situation o f the family. Despite this, little effort has beenmade to directly and differentially target women with technical and financial assistance. PRODERS will work to buildcapacity o f local women andpromote the establishment o f Women's Associations. The project will also ensure that women play a role in the day-to-day functioning o f the project through representation on the CDGs and MDCs. In addition, through technical assistance and assistance in obtaining land titling, it will work to 26 increase awareness of a recent law requiring that the titling of landholdings be in the name of bothhusbandandwife, even inthe cases of common-law marriages. 112. Youth. Few efforts have been made to effectively integrate Paraguayan youth into development. Youth organizations are also sorely lacking in capacity. To overcome these challenges, PRODERS will promote youth integration into regional development by increasing their capacity with specific focus on improving youth employability in the agricultural and livestock sectors. Moreover, young people will be representedin the organizations responsible for the basic management of the project (CDGs, MDCs and MSCs). Inaddition, the project will support the formation of Youth Associations inthe micro-catchments. 113. Monitoring of Main Social Impacts. The beneficiary perception o f project performance will be monitored closely through a number of events that will be encouraged by project and DEAG extension agents. Activities will include periodic workshops with project participants to assess project implementation and plan future actions as well as quarterly and semi-annual evaluation meetings of MDCs and MSCs, respectively. In addition, the entire participative strategy pursuedby PRODERS will allow for a permanent feedback process between the project staff and the beneficiary population. 5. Environment 114. Positive environmental impacts are a basic objective of the project, especially relating to the improved management and conservation of natural resources and the reversal and control of land degradationprocesses (i.e. through improved soil and water conservation, adoption of agro- forestry techniques, restoration of riparian forests, water source protection and domestic sanitation). The monitoring and evaluation system will incorporate specific means to measure impacts. Some of the expected direct positive impacts in the project area include: (i) improved soil fertility; (ii)improved water quality (both surface and ground water); and (iii)greater biodiversity within riparian zones. In addition, project-supported activities for environmental education and improved inter-institutional coordination are expected to generate substantial environmental benefits for the project area. 6. Safeguard Policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management(OP 4.09) [XI [I Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [XI Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples(OD 4.20; revised as OP 4.10) [XI [I Forests(OP/BP 4.36) [XI [I Safety of Dams (OP/BP 4.37) [I [XI Projects inDisputedAreas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI * By supportingthe proposedproject, the Bank does not intendto prejudice the final determination ofthe parties' claims on disputedareas 27 115. Environmental Rating: B - Partial Assessment. The Project is designated as Category B project based on the above assessment of potential impacts. On November 23, 2004, the Bank PCN (which partially forms the basis for this document) was reviewed by the Quality Assurance Team (QAT), which agreed with the proposedCategory B rating. The QAT also agreed that the project is "an environmentally positive project which primarily aims to introduce more environmentally friendly technologies and productive activities". See Annex 10 for details regarding the triggering of safeguardpolicies. 7. ProjectCompliancewith ApplicableSafeguardPolicies 116. Environmental Assessment. The project is classified as Category B. It was designed to ensure compliance with the requirements of the Bank umbrella policy on Environmental Assessment (OP 4.01). Positive environmental impacts are a basic objective of the project. Some project activities will have potential environmental impacts and will mostly be those financed by the FDRS to support the adoption of improved land use practices, community and municipal subprojects and works. In conformity with Bank policy and GOP legislation on Environmental Assessment, an Environmental Assessment (EA) was conducted, and an Environmental Management Plan (EMP) was prepared. Strict environmental evaluation procedures and environmental licensing mechanisms, as well as proposing mitigation measures, are built into the EMP and the Operational Manuals of the FDRS. A negative list of activities that are not eligible for funding will also be incorporated into the EMP and the Operational Manual inregardto subprojects fundedthrough the FDRS. 117. The draft EA and respective EMP were submitted by the borrower in December 2005. The final EA will be sent to the Infoshop before Appraisal. 118. For the environmental monitoring and impact evaluation, a number of output and impact indicators will be measured and supported under the M&E subcomponent which will include a systematic socio-environmental monitoring of 10 pilot micro-catchments (see Annex 3 for details). 119. Pest Management. The project will not finance the procurement of any pesticides or other chemical amendmentsthat will trigger the Bank policy on Pest Management (OP 4.09) nor will it promote increased use of agricultural chemicals. Nevertheless, it should be noted that small amounts of pesticides will probably continue to be used by a small portion of micro-catchment farmers for which disposal of containers may be requested by communities to reduce health and environmental risks associated with pesticide use. This disposal will follow the guidelines set forth under OP 4.09 Bank guidelines. Inaddition, pertinentnational laws and regulations inthis regardwill also be followed. 120. The project will support technical assistance for the adoption of proven, economically and environmentally sustainable Integrated Pest Management practices (IPM), an approach designed to increase farmer productivity (yields) while reducing input costs, human health risk and adverse environmental impacts through the virtual elimination of pesticide use. The IPM approach further increases sustainability of agro-ecosystems by focusing on improving the knowledge and skills of farmers to enable better management of resources. Finally, IPM programs are economically sustainable as they reduce farmers' dependenceon procured inputs. 28 121. Indigenous Peoples. The proposed project will specifically target indigenous peoples in the project area. Thus, during project preparation, consultations were heldwith IAs to determine their priorities andneeds. Project activities will be implemented with the full participation o fthe communities and will be carried out in a manner respectful o f their cultural characteristics. To ensure this, extension agents working with indigenous populations will have prior training and experience working with indigenous communities. In addition, an anthropologist will be employed by the project to consult on indigenous and other social issues. Moreover, an Indigenous Peoples Development Plan has been preparedto orient the project's interaction with indigenous communities and can be found in the project files. See Annex 17 for more information. 122. Forestry. The proposed project will primarily support environmentally protective activities and those which are supportive o f small-scale farmers (i.e., farm and community forestry). No logging activities, charcoal or fuelwood production will be supported through project funding although these activities take place within the project region and micro- catchments. The project will finance investments focused on reforestation or regeneration o f natural forests to protect water sources and waterways, and reforestation for productive purposes in beneficiary small-scale farmers to reduce impacts on native forests. N o large scale reforestationactivities with exotic species will be carried out and the use o f native species will be promoted. The total area o f plantations or enrichment activities inthe project area i s estimated at 10,000 hectares. 123. Natural Habitats. The project, as well as the semi-blended GEF project, seeks to increase sustainability, maintain and enhance habitat for biodiversity conservation, and provide environmental goods and services for rural communities. No significant conversion or degradation o f natural habitat is expected from the project investments. Improvements innatural resource use and management should provide an important for the maintenance o f connectivity in the landscape. Critical natural habitats and protected areas have been identified within the project area and precautions will be taken through the EMP which provides for an environmental review framework to ensure that natural habitats are not adversely affected and positive effects are maximized. 8. Policy Exception and Readiness 124. The proposed project does not require any exceptions from Bank policies. 29 Annex 1: Countryand Sector Background PARAGUAY: SustainableAgricultureand Rural DevelopmentProject 1.Economic and Sector Background 1. Paraguay has a total area of 406,752 km2and an estimated population of 5.9 million inhabitants. Some 43% of Paraguayansinhabit rural areas, makingParaguaythe most rural of all South American countries. The Paraguay River divides the country into 2 sections, the Eastern (Regidn Oriental) and Western (Regidn Occidental or Chaco) regions. While the country's Eastern Region represents only 39% of the national territory, over 97% of all Paraguayans live there, including virtually all of Paraguay's small-scale farmers. 2. The EasternRegion is comprised of 14 departments, of which two, selected on the basis of a national poverty index", represent the proposedproject area (see Annex 18 for a map of the project area). These two departmentsare home to 762,851 people, including 9,687 of Paraguay's 85,674 indigenouspeople. 3. Economv. Paraguay's economy has beenlargely stagnant since the 1990s. This is due to a variety of factors including successive banking crises as well as the recent weaknesses in the economies of neighboring countries that have affected the country. Since 2003, however, economic performance has maintained general improvement: (i)the economy returned to positive growth rates in 2003, with real GDP growing at an estimated 3.5% in 200612;(ii)the exchange rate has remained stable with inflation being held to single digits since 2004; and (iii) the public sector has enjoyed both overall and primary surpluses. This recovery was prompted by a combination of developments, which included a pronounced expansion in agricultural output driven by the exceptionally high commodity prices, the institution of more rational spending policies and enhancements in tax administration. The economic turnaround has also led to a significant decline inexternal public debt, which stood at 30.5% of GDP in 2006, down from 50% just three years earlier. The outlook for 2007 is for a continuation of these trends. 4. On the external front there is the usual risk of a terms-of-trade shock either owing to further increases in world oil prices or to a downturn in commodity prices. While the regional economy appears strong, there could be macroeconomic shocks in the much larger neighboring economies that will depress external demand. There is also the possibility of deteriorating conditions for emerging capital markets which could worsen market sentiment and thus reverse recent capital inflows. 5. Macroeconomic prospects are positive given the government's commitment to follow prudent fiscal policies and the supportive external environment. The political stalemate - due to differences over constitutional reform to allow re-election of the President - with opposition parties, however, slowed the structural reform agenda. Casualties of the stalemate included "ThePLIPEXindex, proposedin2004byParaguay'sSecretariatfor SocialAction, is amethodfor targeting and prioritizing territorial areas in which to implement social investmentsaimed at the reductionof extreme poverty. Its values derive from acombinationof income levels andUBN. l2All figures used inthis sectionare derivedfrom the InternationalMonetaryFund. 30 bilateral and multilateral credits (which in Paraguay need to be approved by Congress) and draft laws presentedto Congress. 6. The recent growth of the economy reverses the long-term steep decline in per capita incomes, where per capita GDP, measured inconstant 2000 US dollars, fell at an average annual rate o f 0.8% between 1981 and 2002. However, despite the recent economic improvement, per capita GDP in 2006 was about equal to its level over a quarter of a century ago, in 1979. As a result, the moderate rates of GDP growth projected for the medium term (3.5%) remain insufficient to compensate for the underperformance of the second half of the 1990s when poverty rates and income inequality increasedconsiderably. 7. Agricultural Sector. While important inroads are being made in the country's service sector, especially in trade and finance, Paraguay's economy still ultimately rests on agricultural and livestock production, which account for close to 25% of GDP, generate the bulk (over 85%) of total exports and employ about 45% of the country's labor force. Nearly 80% of all export goods fit into five categories: cotton, soy bean, vegetable oils, meat and wood; a significant part of the national industry i s based on the processing of these commodities. Sixty-five percent of total exports correspond to just two categories: soy and cotton (either unprocessedor with some degree of processing). However, inrecent years there has been a marked shift away from cotton andtowards soy. 8. The principal crops grown inthe EasternRegion, as well as inthe proposedproject area, are soy (cultivated primarily by medium and large enterprises), corn (cultivated both by larger enterprises and small-scale farmers), manioc, cotton and wheat, with tobacco, oranges, pineapple and tomato all important for small-scale farmers. However, cotton, which forms the basis of small-scale farmers' livelihoods, has experienced a sustained drop in returns (including a 64% drop in the area plantedwith cotton from 1996 to 1999) which has had a severe impact on the domestic economies of these producers. 9. The most important livestock production is beef based on a stock of 10.5 million head of cattle. There are 230 thousand livestock units in Paraguay o f which almost 80 % are small-scale farmers with 3 to 5 heads per unit accounting for almost 15 % of total cattle population. There is a substantial gap in animal productivity between medium and large livestock farms and small- scale farmers with a few head of cattle. 2. Sector Issues 10. Poverty. Poverty is one of the most pressing social issues inParaguay today, especially in the Eastern Region where most Paraguayan live. In 2005, 32% of the total population lived below the poverty line, a percentagethat increasedto 40% inrural areas. Inthe same year, 17% o f the population lived in extreme poverty, a figure that increasedto 22% inthe rural population. This means that in rural areas approximately one million people lived in poverty, including virtually all of Paraguay's 85,674 indigenous people, with one in every 3.5 rural inhabitants living inconditions of extremepoverty. 11. Small-scale Agriculture Issues. Poverty and natural resource degradation are closely related to the situation and current trends of the country's agricultural sector. Paraguay's 31 agricultural sector can be divided into two sub-sectors: an emerging sub-sector o f capitalized entrepreneurial agriculture which has been able to respond to market signals and i s primarily responsible for the growth within the broader sector in recent years; and a small-scale farming sub-sector characterized by low-productivity, family agriculture whose main products are subsistence crops, with a connection to the market economy primarily through cotton, and livestock products obtained from a few number o f animals per unit which are badly cared o f in terms o f animal health and husbandry.. Poverty is widespread in this population and i s linked to a very limited access to land, capital and technology as well as to social and human capital resources. Substandard housing, overcrowding, lack o f sanitation services, polluted water supplies and food insecurity are widespread among small-scale farmer and indigenous community households. 12. Due to Paraguay's economic dependence on agriculture and livestock and the reliance o f many Paraguayans on those sectors for their livelihoods, the way that land is managed heavily impacts production, livelihoods and the management o f natural resources. In particular, the question o f land in Paraguay today has two primary elements: (i)extreme inequality in land tenancy; and (ii) extensive irregularities inlandtitling. 13. The existing distribution o f land in Paraguay is grossly unequal and is one o f the most inequitable in Latin America. Inthe Eastern Region, where most poor farmers live, 16% o f rural landholdings account for 86% o f the land; in the five project-targeted departments, 85% o f all landholdings have fewer than 20 hectares with half o f these properties comprising 5 hectares or less. Further complicating the situation, land tenancy among small-scale farmer households is plagued by lack o f titles, a situation that affects about 60% o f Paraguay's population, and numerous cadastral problems. In addition, only 50% o f the indigenous communities present in the project area hold legal title to their lands, although even in these cases the size of the landholding i s often not sufficient to meet the needs o f the community (nor commensurate with the number o f hectares dictated by law). Furthermore, these communities often do not receive sufficient technical assistance. This land situation not only makes it extremely difficult for small-scale farmers to diversify their production, thereby improving food security and increasing income, it i s also a major disincentive to invest resources inenvironmentally friendly productive practices on the land. 14. Livestock Sector. This sector i s one o f the main contributors o f foreign exchange. In years 2006 and 2007 livestock products exports will amount almost 500 million US$ per year which has been increasing along the last decade. Paraguay needs to be a part o f the regional initiative focused on animal health (foot and mouth and other trans-boundary diseases) and diminish as much as possible the risks o f having animal health limitations in export markets. This is constrained mainly by the inadequate infrastructure inthe regulatory agency network of clinics and laboratories, the existence o f a large number o f cattle without registration and poor animal health and husbandry management by small-scale farmers and indigenous communities. Another significant constraint i s the lack o f adequate extension services in the MAG relating to appropriate animal husbandry practices, and the provision o f improved genetic material and sound forage seeds insmall-scale farming communities. 15. Environmental Degradation, Paraguay is home to part o f the Atlantic Forest, which i s regarded as one o f the most threatened ecosystems inthe world with only 7% o f its original area 32 still extant. Paraguay's Eastern Region represents a unique bio-geographical transitional zone where the Upper Parana Atlantic Forest merges with the Cerrado and the Humid Chaco eco- regions. Paraguay's Atlantic Forest is a subtropical forest that originally covered eastern Paraguay, northeastern Argentina and southwestern Brazil. The Humid Chaco is a complex of savannahs which are characterized by periodic flooding, while the Cerrado is characterizedby a low-lying undulating topography primarily composedof sandy soils. 16. Despite its ecological importance, the EasternRegion suffers from severe environmental degradation. This includes deforestation, accelerated erosion, loss of soil fertility, loss of biological diversity, and decreased quantity and quality of water resources. In terms of forest resources, deforestation has been particularly severe, with current estimates indicating that nearly 5 million hectares of forest cover have beenlost inthe EasternRegion since 1945 (this represents 60% of the existing forest cover in the Region in that year). Presently, there are approximately 3.5 million hectares of forest inthe EasternRegion, covering 22% of the Region's area, of which 765,500 hectares correspond to productive forests (defined as being of sufficient quality and quantity to warrant their sustainable managementthrough forest management plans). At present, the annual loss intotal forest cover is an estimated 90,000 hectares. More recently, devastating wildfires have degraded natural resources in the Eastern Region, especially remnant forests, and have also impacted rural communities' crops and fuelwood sources. 17. One of the principal causes of environmental degradation in Paraguay is the country's model o f agricultural development which has promoted short-term profits over long-term environmental sustainability. Some of the major practices which contribute to this degradation include: (i) expansion of the agriculture frontier through the colonization of new lands; (ii) the slash-and-burn agriculture; (iii) extensive grazing; and (iv) the practice o f mono-cultivation of cotton and, more recently, soy. Failure to employ appropriate soil conservation and management measures as part of a sound landuse planning framework have further aggravated deforestation, erosion and loss of soil fertility inthe EasternRegion. Inturn, non-sustainablelanduse practices are contributing to decreasedproductivity and falling incomes which most heavily impact small- scale farmers who have the least ability to adjust to these trends. Reduced farming income and increasing demand for wood and charcoal within Paraguay and neighboring Brazil have also put pressure on remaining forest fragments. 3. Policy,InstitutionalandRelatedConstraints 18. Various rural development projects in Paraguay, including the recently-completed Bank- financed PARN project, have clearly demonstrated that agriculture continues to remain a viable proposition for small-scale farmers with landholdings of less than 20 hectares. However there are some aspects which need to be strengthenedto better realize this potential. In addition, there exist critical inter-dependentissues relating to agriculture, environmental degradation, and rural poverty, some o f which have been provided below. It is also important to recognize that there could be some geographical areas and some very small land-holdings which may not be viable, and population groups which are landless. This will require a focused attention in terms o capacity building to transition such groups into alternative rural non-farm employment opportunities. These initiatives could be covered through a separate project, and are therefore not included inthis project: 33 Lack o f Sound Land-use Planning and Enforcement. The degradation o f soil and forest resources caused by unsustainable land use has been exacerbated by inadequate planning o f productive endeavors at the national and local levels as well as by weak enforcement o f environmental laws; Weak Generation or Adaptation and Transfer o f Applied Technology. The government's agricultural and livestock research and extension services are weak. In addition to financial and budgetary constraints, this can be attributed to a constant drain o f technicians who move to the private sector due to inadequate remuneration. Another problem stems from the huge extension staff being close to retirement. The little research carried out (mostly adaptive in nature) rarely takes into account the needs o f small-scale farmers or their production systems and rationale. Coverage o f official technical assistance services i s very limited and it is estimated that it reaches only 11% o f small-scale farmers (those with fewer than 20 hectares); Access to Credit. It i s exceedingly difficult for small-scale farmers to gain access to credit. Seventy percent o f farmers with fewer than 20 hectares o f land are unable to obtain credit. Of those who are able to access credit, 16% receive it from the formal public sector, 8% from cooperatives and producers' organizations, and 72% from the informal sector o f middlemen, wholesalers, factories and truckers; Lack o f Social Organization and Participation. Despitethe relatively large number o f community and producer organizations in Paraguay's rural areas, these groups generally lack the degree o f social organization and knowledge o f participatory methods necessary to play a successful role in sustainable rural development, especially since they are faced with a government that has yet to implement any sort o f consistent set o f policies aimed at them; Weak Institutional Framework. MAG, and the other sectoral institutions, have historically had deficiencies in policy management, but they are making improvements infocalizing poverty-oriented strategies; and Livestock Sector. There is a needto improve the field level infrastructure relating to clinics and laboratories to contain foot and mouth and other transboundary diseases, and strengthen the nodal agency, the National Service for Animal Health and Quality (SENACSA) and the Vice Ministryo f Animal Husbandry (VMG) to be able to manage this effort vigorously and effectively specially in border areas and small-scale farmers andindigenous communities. 4. Rural Sector Development Strategy 18. FA0 and the Bank have identified a number o f action areas for the development of the rural sector in Paraguay. The following matrix provides a summary o f the complementary initiatives that are either under implementationor at planningstage. 34 IdentifiedAction Area Projects/StudiesSupporting the Initiative Maintainand expandmodernizationof agriculture PRODERS (throughstrengtheningof MAG), Studies Developthe agriculturesector PRODERS, GEF BiodiversityProject, Studies Improvefactor productivity PRODERS, GEF BiodiversityProject, Studies Diversify production PRODERS, Studies Develop technologies that support value-addition to PRODERS, GEF BiodiversityProject, Studies products, generate employment, and are environmentallysustainable Promoteregionalequilibrium PRODERS, Studies Improvelandtitling andtenancy PRODERS, LandAdministrationProject, Studies Decentralize the sector and improve the agricultural PRODERS, LandAdministrationProject, Studies policies 19. The studies indicated inthe above matrix are proposed to be financed under PRODERS. A broad definition ofthese studiesis provided below: Study to prepare a policy note on the Limitations for the Development of the Rural and Agricultural sectors in Paraguay. This study aims at identifying the main barriers and challenges of the agricultural sector, and give recommendations to the new administration on strategies and policies to promote the development of the sector. (This study is currently being conducted); Study to identify an operational strategy for rural development in Paraguay. Based on the findings and recommendation of the policy note, this study will identify a series of strategies and instruments to promote rural development in Paraguay. (June -September, 2008); Study to evaluate current extension practices in Paraguay. This study will compare strengths and limitations of extension models and methodologies that have beenused inParaguay inrecent years and compare these with those used by PRODERS. An outcome of this study would be a series of recommendations of a new systemof extension servicesfor Paraguay(First semester of2009); and Study on strategiesto address rural poverty inParaguay. This study will be based on the positive experiences documented by the PRODERS Project and other relevant initiatives to identify a new strategy to address rural poverty among small-scale-farmers inParaguay. (Secondsemester of2009). 35 Annex 2: Major Related ProjectsFinancedby the Bank and/or other Agencies PARAGUAY: SustainableAgriculture and RuralDevelopmentProject Pilot Community Development Project S S Additional Financing (P106433) (under preparation) OtherDevelopment Agencies Empowerment of Rural Poor Organizations IFAD and Harmonization of Investments (Paraguay Rural) Project (I-667-PY) KfW Sustainable Management of Natural Resource Phase Iand proposed Phase I1 JBIC Strengtheningof the Agricultural Sector I1 (PG-P 14) Modernizationo f Agricultural Supports Public Management (PR-L1001) IDB Diversification of Agricultural Production (PR0084) Cotton Small-scale Farm Development Program (PR0082) (closed) 36 Annex 3: Results Frameworkand Monitoring PARAGUAY: Sustainable Agriculture and Rural DevelopmentProject ProiectDeveloDment Use of Outcome 0"bjective(PDO) ProjectOutcome Indicators Information [mprove the quality of By PY06: (a) PY03: Review project life of small-kale (a) CDGs, MDCs and MSCs or U s established, strengthened implementationstrategy farmers and and participating inthe managementof rural sustainable micro-catchment if indigenous development in at least 80% o f the target micro-catchments and incorporation rate does :ommunities inthe indigenous communities inthe project area with participation not meet 70% of target. xoject area ina o f women and ruralyouth in decision-making (appropriate (b) PY06: Evaluate Sustainable manner, by level o f participation to be agreed by the organizations). project performance. supporting actions that (b) At least 50% ofthe target farms increasetheir agricultural w i l l strengthen local incomes by 30%. O fthese, at least 40% obtain an agricultural xganization and self- income above the poverty line. Zovernance, improve (c) Production of crops for domestic consumption increasedby iatural resources 20% in 50% o f the poorest beneficiary families. nanagement and (d) Productivity of land (by hectare) increasedby an average o f improve the socio- 25% in 10,000 farms through the application of productive xonomic condition of practices promoted by the project. :he target population. (e) The incidence of poverty (measured in UBN) reduced by 50% in the assistedsmall-scale-farmer and indigenous communities. (065% ofbeneficiaryhouseholdswith accessto at leastone additional basic service aimed at home improvements. (g) 20% of indigenous communities without formal land titles at project start acquire titles and 50% of small-scale farmers without title receive assistance toward acquiring titles. (h) Environmental conditions (soil, water quality, vegetation cover) improved in at least 70% of the 84 target micro- catchments and 73 indigenous communities. (i)Greaterawarenessamong50% ofprojectbeneficiariesof land degradation and the potentialcontribution of sustainable natural resources and land managementto improved livelihoods inthe project area. j) Greater awarenessamong 70 % ofproject beneficiaries ofthe importance o f good animal healthmanagementand husbandry Intermediate Use of Results Outcomes IntermediateOutcomeIndicators Monitoring Component 1: Subcomponent1.1andEducation1.3: Trainingand Environmental (a) PY02: Reevaluatethe Community environmental education Organization By PY06: strategy ifthe achieved Developmentand (a) 290 technicians trained and operating inthe project area target for any CapacityBuilding including 120 PRODERS technicians, 70 DEAGtechnicians stakeholder group is less and 100technicians from municipal and departmental than 80%. Reevaluate Outcome: governments as well as other relevant institutions. group formation and Greater community (b) Environmentaleducation program implemented and community organization participation inthe reaching about 8,000 people, includingteachers, students and strategy ifthe achieved implementation of membersfrom local organizations (i.e,, municipal government target for any sustainableagriculture sector offices and medium and large-scale farmers' stakeholder group is less and rural development organizations). than 50%. activities and increased (c) Beneficiariesdirectly trained by the project, including 800 (b) PY03: Reevaluate the local management rural laborers and youth, as well as members from the 84 training strategy ifthe capacity to support this Micro-catchment Development Committees and 39 Municipal achieved target for any implementation. Steering Committees. stakeholder group is less 37 :han80%. Subcomponent 1.2: Community OrganizationDevelopment Bv PY06: (5;) At least 600 Community Development Groups, 73 IndigenousAssociations, 84 Micro-catchmentDevelopment Committees and 55 MunicipalSteering Committees established and strengthened. Inaddition,the establishment ofthe NationalCoordinationCommittee. (b) Participationof stakeholders(male and female farmers, ruralyouth, indigenouspeople, rural laborers) inmeetingsof project-supportedgroups (CommunityDevelopmentGroups, Micro-catchmentDevelopmentCommittees, Indigenous Associations andMunicipal Steering Committees). Component 2: Rural Subcomponent 2.1: RuralExtension `a) PY02: Adjust efforts Extension and By PY06: iffewer than30 AdaptiveResearch (a) Elaborationandexecution of: participatorydiagnostic - 84 Micro-catchmentDevelopmentPlans, 12,600 Farm activitiesor 20 Micro- Outcome: InvestmentProposalsand 480 CommunityInvestment catchmentDevelopment Small-scalefarmers Proposals. Plans are preparedor and indigenous - At least 60 IndigenousCommunityDevelopmentPlans, underway.Review communitiesplanning includinginvestments in income generation, landtitling, adaptive research and implementing ruralhome improvements, food security, and improved strategy iffewer than 10 sustainable agriculture landand naturalresourcesmanagementpractices. practicesare tested and and ruraldevelopment - 39 MunicipalInvestmentProposalsdevelopedand validatedby PY02. activities at the farm, implementedwith the communitiesto supportthe improved community andmicro- managementof naturalresources(i.e., improvementof catchment levels, with existingruralroads establishment of nurseries, construction technical support from of facilities for recyclingpesticide containers). ruralextensionand (b) 3,200 farms diversify commercial activities. researchinstitutions. (c) Producersorganized for purposesof marketingin 30 percentofthe targetedmicro-catchments, (d) At least 13,500 small-scalefarmers and 73 indigenous communities assistedby ruralextensionists(87 inthe project area including84 extensionistsat the micro-catchment and municipallevels, and3 extensionistsinindigenous communities). (e) About 17,100 menandwomen beneficiariesdirectlytrained by the project including: 13,500 small-scalefarmers, 1,650 indigenouscommunities, 1,200 medium-scaleproducers(with more than 20 hectares), 600 communitypromoters and 150 indigenous community promoters. Subcomponent2.2: Adaptive Researchand Studies By PY06 (a) 20 on-farmtechnology validationtrials implemented. (b) 9 marketstudies for new products(3 for indigenous products). (c) 16 feasibilitystudies for the development ofnew products. (d) 6 studies aimedat addressingspecific issues raisedby indigenouscommunities(2 on landtenure). (e) 5 demand-drivenstudies aimedat addressingspecific issues raisedby micro-catchmentand indigenouscommunities, including3 studies to overcometechnical, socio-economicand environmental problems and 2 studies to generate awarenessof environmental issues. (02 policyharmonizationstudiesdeveloped. (g)Base studies and proposal for follow-upoperation developed. 38 Component 3: (a) Subtxoiects stemming from Farm Investment Proposals [a) PY03: Review project Sustainable Rural implementedto increase)roductivity and adopt sustiinable implementation strategy DevelopmentFund productive systems in 12,600 farms, diversify production in snd intensify efforts if 3,200 farms, improve living conditions in rural homes through fewer than 3,200 on-the- Outcome: inter alia water supply and basic sanitation in 65 percent of ground investments have Small-scale farmers project homes, and improve access to markets for 100 producer been identified through and indigenous groups. the CIPs and FIPs or if communities (b) 480 Community Investment Proposals implemented in fewer than 1,600 have implement investments water supply facilities, agro-processing and artisanal micro- begun implementationby designed to achieve enterprises, equipment for improved agriculture and land-titling End of PY02. improved incomes, assistance. rural home (c) At least 60 indigenous communities benefited through improvements, food subprojects from Indigenous Community Development Plans in security, animal health land titling (whenever required), improvement of rural homes, and reduced food security, improved production systems and sustainable environmental land managementpractices, and income generation. degradation. (d) 39 municipalities receive support inthe implementation of subprojects stemming from Municipal Investment Plans in improvement of rural roads, establishment or improvement of nurseries (fruits and trees) and construction of recycling facilities for agro-chemicals. (e) Natural resource management practices improved in the 84 micro-catchments and 73 indigenous communities including at least 12,000 ha under sustainable land management practices and 5,000 ha of forests recovered through reforestation with native species or natural regeneration. Component 4. Animal Subcomponent 4.1 Strengtheningof SENACSA Health Improvement SIGOR system with improved coverage incorporating4 new units reaching 76 local units; on line information Outcome: available for 100 % o f information load with an average Animal tracking and registering delay o f 2 to 4 days instead of current figures of information system 25 % load and 1 month registeringdelay; information on (SIGOR) improved and livestock movements available within a week instead of covering the whole current delay o f about 1month; livestockunitsregistration range of livestock covering 100 % of cases compared to current figures of units, laboratories about 95 %. facilities for high A new highsafety laboratory providinghighquality and safety, biotery and beef safe pathogen agents sample processing and vaccines chemical residues analysis. analysis functioning A biotery laboratory producinghigh quality and adequate efficiently and field quantities of biological inputs for the high safety operations of both laboratory and other demanding laboratories. SENACSA and Vice- A chemical residues analysis laboratory using 100% of its ministry of livestock potential instead o f current performance of 10 % of production established potential. and functioning Improvement of animal health control practices on 22 efficiently to ensure internal movements control posts and 6 border livestock high national standards entries control posts; cool chain involving management of o f animal health. vaccines functioning adequately throughout the whole country; a complete vaccination coverage of small-scale farmers with livestock unitswithin the 84 micro- catchments; an adequatetraining program for SENACSA staff extended to the whole country. Subcomponent4.2 Strengtheningof the VMG a) Provision o f highquality genetic material of cattle, sheep, 39 milk cows and goatsto small livestock unitsinthe 84 micro-catchments. b) Small-scale farmers and indigenous communities of the 84 micro-catchments trained on animal healthmanagement, genetics, artificial insemination, and livestock and pasture management. c) Improvement of highquality pasture availability in the 84 micro-catchments through the provision of improved pasturesseeds to sow 0,25 has in each livestock unit. d) Promotion of alternative enterprises such as poultry, pig and honey production among small-scale farmers as a way to diversify risks. Component 5: Project Subcomponent 5.1: ProjectManagement :a) PYOI; Confirm if Management, (a) Project Management Unit established inMAG and :fficient project Monitoringand facilitating effective Project implementation by PYO1. nanagement is inplace Evaluation :b) Effective collaborationand coordinationundertaken :oensure high-quality :hrough MAG in a systematic manner with other projects and Implementation. Intensify Dutcome: initiatives, including the GEF/WB proposed Paraguay :fforts ifMIS is not fully 'roject management Biodiversity ,the WB's Indigenous Land Regularization Functionalby project structure established, sroject, KfW's Natural Resource Management, FIDA's start-up. Intensify efforts Tunctioning and able to Paraguay Rural and the IDB's Modernization of Agricultural if SIG is not fully :ffectively execute Public Management. 3perational. iroject activities and :c) Annual Operating, Procurement and Disbursement Plans :b) PY02; Evaluate ntegrate them with the srepared and submitted ina systematic manner throughout the :reation of coordinating ictivities of other life of the project. sodies and participation ustainable rural Ifkey stakeholders levelopment programs. Subcomponent 5.2: Monitoringand Evaluation "egarding project (a) Management Information Systemdesigned and operating :xecution if less than 30 from PYO1. MDCs and 3 MSCs :b) Geographic Information Systemoperational and providing :stablished by the end of :ethnical information and mappingfor project implementation PY02. Adjust project 'rom early PYO1. lissemination campaign :c) System to monitor project activities, results and impacts f less than 50% oftarget 'ully operational in PY02 with participation of local ndicator is achieved. stakeholdersand local project staff. [ncreaseefforts ifthe :d) Project implementationand M&E reports prepared and Jroject impact submittedto the World Bank, MAG and to the project nonitoring system is not nanagement throughout the life of the project. lefined or sufficiently letailed. Subcomponent 5.3: Communication and Dissemination (c) PY03: Conduct mid- 'roject communication and dissemination strategy elaborated term evaluation and nPYOl and implementedincluding: one communication and readjust project lissemination strategy designed and implemented; three launch implementation if workshops; 10 informational workshops at the departmental necessary. evel; two national promotional campaigns; 15 department and oca1level campaigns; and 5 animal health campaigns at lePartment level. 40 3 0 3 0 V w 3w 0 0 3 0 3 0 0 0 3 0 3 0 > 0 0 0 0 I O 0 I 0 0 > 0 0 0 0 3 0 0 I 0 0 0 0 3 0 0 0 I I 0 0 0 0 0 0 0 0 8 N d 0 iD N z M d d o v) 0 g o oo - ? m m '0 m N C l m 0 0 0 0 0 0 0 c 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 .-= y1 vi lag lag.E % %E % %E E 8 E 8 E % E% E% E% I 0 0 0 0 0 0 0 0 0 0 I 0 0 0 0 0 0 0 0 0 0 vi v, N 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 u ?0r C??Z"" -% 0 0 00 8 0 0 0 x2 0 S 0 0 0 s s s 0 M m 0 N 0 ti i k l 3 0 0 0 0 0 01 I 0 0 0 0 0 0 I 0 0 0 0 0 0 I N m Appendix 2 ProjectMonitoringand Evaluation 1. Overview 1. A decentralized Monitoring and Evaluation (M&E) system to support project planning and management will be implementedby the project. Specific objectives o fthe system are to: (i) track changes towards the project objectives, outputs and inputs, and make changes inthe project ifnecessary duringimplementationto provide a basis for informed and effective project-related decision-making; (ii) promote accountability for resource use against objectives; (iii)provide and receive feedback from stakeholders; (iv) and generate inputs for dissemination o f project results and lessons learned. 2. Progress in the fulfillment of the project objectives and outcomes will be monitored in accordance with MAG and Bank procedures, and will be based on the project Results Framework. The M&E system will be supported by a physical and financial monitoring system, a Management Information System (MIS). In addition, a Geographical Information System (GIS)will be made operative building on PARN's efficient GIS and will be designed to provide technical information for project implementation, including mapping. 2. GuidingPrinciples 3. The project M&E will be guided by the following principles: (i)project results framework approach (detailed earlier in this Annex); (ii)participatory evaluations and beneficiary assessments to enable stakeholders to share their feedback; (iii)full transparency and participation in project information management; and (iv) integration o f the M&E system into MAG'S information systems to provide information to guide decisions on MAG policies and operations. 4. To achieve its outcomes, the M&E system will cover the following lines o f actions: (a) Monitoring the day-to-day activities and outputs of the project, based on the project annual operational plans and on the selection o f indicators and methodologies for the different project dimensions (socioeconomic and environmental) providing periodic reports (at least quarterly); (6) Monitoringproject outcomes to determine impacts on poverty and environmental conditions over the life o f the project, including community involvement and behavior change indicators. Using information stemming from the MIS, together with a continuous quantitative and qualitative monitoring o f 10 pilot micro- catchments and approximately 20 indigenous communities, this activity will measure the intermediate and final outcome indicators specified in the Results Framework. The measurements in these pilot areas will include a detailed monitoring in 5 micro-catchments and a simplified monitoring in 5 micro- catchments, covering indicators and methodologies for the following project dimensions: socio-economic features, soil conservation and management, forestry 50 and biodiversity, surface water resources, and ground water resources. With regard to indigenous communities, this will include an assessment o f the planning and implementation ofthe IndigenousCommunity Development Plans (ICDP); (c) Undertaking special evaluation studies to guide decisions and to measure the effectiveness o f project performance, hence providing feedback and helping improve the effectiveness o f the project. Project impact evaluations will complement the above-mentioned monitoring activities (which will allow the comparison o f actual performance with expected performance) and will include: a Ex-ante evaluation: The baseline information and respective ex-ante evaluation will be based on information to be obtained from different data sources. They will include: (i)socio-economic and environmental surveys, covering representative samples that take into account the diverse types o f beneficiary groups as well as the typical production systems and environmental conditions o f the project area, before project implementation; (ii)baseline information obtained from micro-catchment participatory diagnostics; and (iii) specific studies. This information will be useful for comparing progress during the mid-term review and for assessing final project performance at completion. a Mid-term evaluation: An independent external mid-termevaluation will be carried out at end o f PY03. This evaluation will provide an in-depth analysis o f progress towards achieving project outcomes and the identification o f possible adjustments where warranted. The evaluation will focus on the effectiveness in achieving project results and in meeting the implementation schedule, identifying areas and components which need adjustments and emphasizing lessons learned upto that point which could guide actions inthe project's final phase. a Ex-post evaluation: An independent external evaluation will be carried out at the end o f the project, focusing on the same questions and indicators as the mid-term evaluation. The final evaluation will aim to identify project impacts, sustainability o f project results and the degree o f achievement o f long-term results. (d) Internal and External Auditing: The project will be subject to internal auditing by MAG'SInternal Auditing Directorate. Yearly external audits will follow the Bank's new audit policy and guidelines issued by the Financial Management Sector Board in2003 (see Annex 7 for details). 5. The MIS will facilitate the availability o f information for many o f the aforementioned performance evaluations. The project MIS will be web-based in order to allow participation o f local actors and will be designed to be performance-oriented and user-friendly. In addition, given the decentralized nature of the project and to ensure timely budgetary and expenditure information for the Bank and other stakeholders, the MIS will incorporate internal controls, records o f project assets, procurement, accounting, auditing and means to reconcile the project's account that will conform with Bank guidelines. Monitoring intermediate project inputs and outcomes will be part o f the MIS, thus allowing a real-time tracking o f micro-catchment and 51 indigenous community development plans and related investments being implemented on the ground. The MIS design will also include the following capabilities: (i) reporting from project staff (particularly extensionists) and beneficiaries, in particular MDCs and MSCs; (ii) recording planned and executed activities (physical, financial, and procurement information), in accordancewith the directives inthe Operational Manual, at all levels (state, regional, municipal, and micro-catchment); (iii) providing information on financial management; and (iv) reporting on occasionalreports regarding impact evaluations. 3. ImplementationArrangements 6. The PMU's M&E Unit will be responsible for operating and coordinating M&E (see Annex 6 on Implementation Arrangements) with the project's Zonal Coordination Units, with CAD and other partner agencies (INDI, INDERT, SEAM) exchanging information. Key stakeholder groups, particularly those indigenous groups and small-scale farmers living inthe 10 pilot micro-catchments, will also participate in data generation through monitoring social and environmental aspects of the Project. 52 Annex 4: DetailedProjectDescription PARAGUAY: SustainableAgriculture and RuralDevelopmentProject 1. Overview 1. The Project's development objective is to improve the quality of life of small-scale farmers and indigenous communities in the project area in a sustainable manner, by supporting actions to strengthen community organization and self-govemance, improve natural resources management and enhance the socio-economic condition o f the target group. 2. The project will be implemented over five years in the two poorest and most environmentally degraded departments o f the country's Eastern Region, selected according to poverty-based targeting criteria using the national PLIPEX index (a prioritization method to target areas for social investments which are aimed at the reduction o f extreme poverty). These departments are Caaguazu and San Pedro. Project interventions in these departments will be concentrated in specific micro-catchments in 39 previously identified municipalities, the latter selected through the application o f a combination o f environmental and socio-economic criteria. Activities will be supported in an estimated 84 micro-catchments (about 10% o f all micro- catchments inthe two departments) projected to cover approximately 353,35 1 hectares o f land. 3. The total cost (with contingencies) o f this proposed five-year project is an estimated US$46.8 million, of which the Bank will finance about 80.1%. 4. Direct project beneficiaries will be small-scale farmers (with fewer than 20 hectares o f land), indigenous communities and rural workers in the two target departments who will benefit from extension services and investment funding. It i s estimated that the project will reach 16,800 small-scale farming households and 73 indigenous communities (2,030 indigenous families). Appendix 1to this Annex summarizes key targeting criteria. 5. In addition to the above, larger-scale farmers in the selected micro-catchments, rural school teachers and students, technical staff and managers from municipal governments and the Ministry o f Agriculture and Livestock (MAG), and producer and civil society organizations will benefit from training and environmental education services. 2. Sector Issues to be Addressed by the Project 6. Project components have beendesigned so that, acting separately or in synergy, they will address the issues inthe project area as follows. 7. Rural Poverty and Natural Resources Degradation. To reduce rural poverty in a sustainable manner, the project will employ clear criteria to target the rural poor (see Appendix 1 to this Annex). The project strategy emphasizes: (a) A highly participatory and decentralized demand-driven approach to poverty alleviation and natural resources management. It proposes: (i)the adoption o f community development initiatives and participatory management mechanisms; (ii)strongtrainingprogramtoinducetechnicalandsocialdevelopmentchanges a 53 and mechanisms; and (iii)promoting and strengthening effective participatory local steering and social control monitoring; and (b) A production support process for rehabilitating and attaining sustainability o f degraded and low productive farming systems, including biodiversity conservation. It will involve a two step process: rehabilitation o f degraded and low productive farming systems, and sustainable production, which will benefit both groups o f farms and communities (mostly indigenous people). The strategy foresees: (i)rehabilitation and conservation o f natural resources; (ii)use o f appropriate and more productive/profitable farming practices/methods; (iii) introduction o f more diversified production patterns; and (iv) improved commercial mechanisms. Specifically, the project will: (a) Provide seed capital, technical assistance and information needed to overcome barriers to the adoption o f more sustainable and productive land use practices; (b) Promote the adoption o f a decentralized approach to sustainable rural development through a focus on local decision-making. The project will employ rural participatory assessments at micro-catchment and community levels. This will mitigate the lack o f coordination in the flow o f resources to the target population; (c) Address environmental degradation: Small-scale farmer group subproject proposals and individual farm household subproject proposals stemming from the micro-catchment approach will address critical agronomic and ecological processes. Such investments will propose short, medium and long-term solutions, through collaborative land and water management and conservation activities, while, at the same time, increasing soil fertility and farmproductivity and income; and (d) Promote the improvement o f animal health and husbandry among small-scale farmers and indigenous communities. Subprojects proposals will also address issues related to animal registration, working facilities and sound management o f vaccination programs. 8. Land Titling. The project will work with the Indigenous People's Institute o f Paraguay (INDI) to complete the regularization and titling process of indigenous communities' lands in areas o f the project where this process has not been completed. Project land titling activities with small-scale farmers will aim at the regularization of land tenure by revising the cadastre of the National Rural Development and Land Administration Institute (INDERT) for settlements located inthe target micro-catchments, and providing support and promoting better institutional coordination for the titling o f lots of project beneficiaries. 9. Indigenous Issues. The project proposal mainstreams indigenous peoples' issues in the design o f all components and activities bearing in mind their values, knowledge and 54 technologies. On a demand-driven basis, and in coordination with the INDI, the project will assist indigenous communities in addressing key social and productive issues. The project will also strengthen indigenous peoples' representation by supporting indigenous organizations and promoting strong indigenous participation in project management decisions. The provision o f technical assistance to indigenous communities will be undertaken in a culturally appropriate manner by specialized extensionists and community promoters. Indigenous communities will benefit from general project training, as well as from specialized training designed to directly address specific issues relevant to these communities. See Annex 14 for details. 10. Social Inclusion. The project will seek to mitigate negative impacts on the well-being o f small-scale farmers and indigenous communities from substandard housing, lack o f sanitation and polluted domestic water supplies through technical assistance and grants to provide water, sanitation or waste disposal as well as minor structural improvements to housing. See Annex 13 for details. 11. Unequal Access to Markets. The project will promote participative marketing arrangements and economic diversification thereby helping poor small-scale farmers and indigenous communities to achieve greater economies o f scale, and address the lack o f market opportunities and weak bargaining power. Specifically, the project will support market studies and capacity building of extensionists to provide them with the necessary skills to assist farmers inproductiondiversification, product processing, marketingandmarketingorganization. 12. Women. Approximately 20% o f small-scale farmer families in the project area are female-headed. Thus, an important element o f the project will be the provision o f capacity building, through training for the empowerment of the project's female beneficiaries in project decision-making structures and insustainable rural development. 13. Youth. An estimated 67% of the project area's rural population is under 30 years old. Thus, the project will pay special attention to training and capacity building.of rural youth to integrate them into the labor market andthe project's decision-making structures. 3. ProjectImplementationStrategy 14. The proposed project will pursue an approach based on the creation and consolidation o f sustainable development management capacity at the local and central level, and the integration o f the sustainable management o f resources and poverty alleviation efforts with environmental education efforts. To ensure the most effective use o f project resources and the most appropriate coverage o f project activities, project area targeting criteria were based on degree of poverty, type o f land use, and level o f natural resources degradation. These criteria recognize the links between low productivity o f small-scale farming systems, environmental degradation, rural poverty, and traditional non-sustainable cultivation practices. 15. Activities in indigenous communities will be planned around the physical and leadership structures o f communities in coordination with their respective Indigenous Associations. Each indigenous community's access to the project's various types o f support (e.g. diagnostic, development and implementation of Indigenous Community Development Plans, training activities, and land titling) will vary. Support will depend on individual community needs, 55 which will be determined with the assistance o f an "Indigenous Peoples Land Access and Natural Resources Use Index," designed by the project team to target the most relevant activities in each community. As direct project beneficiaries, indigenous communities will benefit from all components. See Annex 14 for further details. 16. Inthe remainingproject areas, the physical planningand implementationunit will be the micro-catchment. Experience from PARN and Bank-financedprojects in South-Southeast Brazil shows that the micro-catchment represents a natural stepping stone in the effort to aggregate individual farm plans and achieve larger policy objectives associated with natural resources management and rural poverty reduction. The micro-catchment provides an appropriate forum for local participation in priority-setting and decision-making, as well as a discrete area for handlingwater and soil-related issues. 17. Participatory micro-catchment planning and management will foster beneficiary organization and ownership. It will involve the establishment of Micro-catchment Development Committees (MDC) as the main investment planning and management cells and, whenever required, o f Municipal Steering Committees (MSC) with representation from micro-catchment representatives, the municipal government and civil society. Participatory development plans will be preparedfor 84 micro-catchments that will determine social and technical measures to be taken and set priorities for environmental protection, sustainable improvements to social and productive infrastructure, and capacity building. The plans will also include proposals for the adoption o f techniques and practices for sustainable land management, product diversification, processing and marketing. These will be implemented with technical assistance provided by the project. 18. The productive strategy to rehabilitate farm and community natural resources, and promote sustainable production provides for farm improvements and the adoption o f sustainable production practices. It i s estimated that at least 80% o f beneficiary farmers will rehabilitate their farming systems, and about 50% o f that group will adopt further sustainable agricultural practices. The technological proposal involves simple but efficient practices, which are not foreign to the project area but are not currently within farmers' reach due to a lack o f financial incentives and technical assistance. Farming systems will undergo a process o f transformation from no rotation, soil management based on extracting nutrients without replacement, chemical pest management, etc., to soil improvement, level curves, subsoiling, liming, green fertilizer and further, for the more dynamic farmers, to summer and winter rotation crops, zero tilling cropping, integrated pest management, post-harvest management, improved domestic livestock production, development o f forestry and agro-forestry systems, etc. In addition, assistance will be provided to diversify production systems to supply existing markets, introduce innovative procurement and marketing mechanisms aimed at reducing transaction costs, and improving access to new markets, and develop alliances to improve value chains. 19. Investments for socio-economic, agricultural and environmental development identified duringthe community-based planningprocess (small-scale farmers and indigenous communities) will be funded through a rural investment fund (see Component 3 below). 20. In addition to supporting the adoption o f sustainable agricultural practices, the project will provide assistance and training in food processing, conservation and storage. It will also 56 promote crop and small livestock production for domestic consumption, and home and school gardens, where appropriate, using sustainable technologies. It will provide access to clean water and sanitation, as well as basic housing improvements, and will promote environmentally sustainable activities designed to alleviate threats to food security, such as degradation of land and aquatic-basednatural resources, pests and erosion of agro-biodiversity. 21. The project will work to generate sustainable income opportunities through improvements inagricultural and small business management skills, productivity and production, and marketing linkages, through innovative and participatory demand-driven extension and training activities. Specific activities will include identification, adaptation and validation of new technologies and practices, marketing, small agro-industries, and small rural enterprise support. 22. A partnershipagreement has beenmade with INDERT to harmonize rural investments in the target micro-catchments undertaken by the government's existing Rural Development Investment Fund (FIDES), under INDERT's administration, and those financed by the proposed project. In principle, FIDES will mostly concentrate on the improvement of local roads and water supply. 4. DetailedDescriptionof ProjectComponents 23. The proposed project will be implemented through the following components and subcomponents: Component 1: Community Organization Development and Capacity Building (US2.7 Million, 5.7% of TotalProjectCost) 24. The objectives of this component are to: (i) organize beneficiaries to participate actively in local decision-making structures, and (ii)prepare project staff for the implementation of the project technical strategy, aimed at adopting sustainable agriculture and rural development activities in micro-catchments and indigenous community territories. There are 2 subcomponents: (1.1) Training and Environmental Education, and (1.2) Community Organization Development. 25. Main Outcomes. Beneficiary organizations at the community, micro-catchment and municipal levels institutionally strengthenedfor sustainable rural development management, and project staff trainedto execute project actions. 26. Target Group. All project beneficiaries will benefit from this component but in different ways. Whereas small-scale farmers and indigenous communities will be assisted to develop and strengthen local community organizations, municipal governments, MAG and project staff will be strengthenedto undertake sustainable rural development activities. Rural school teachers and students, producer and civil society organizations, inaddition to the above, will also benefitfrom environmental education activities. 27. Subcomponent 1.1: Training and Environmental Education. This subcomponent will: (i) train project extensionists (micro-catchment, indigenous community and social organization 57 technicians) and other project staff (including MAG staff involved inthe project) as well as rural workers and youth; and (ii) designand implementanenvironmental educationprogram. 28. Training. Project staff and other technical staff involved in project implementation will be trained in new modes o f operation and changes in attitudes that are implicit in the participatory, demand-ledapproach to sustainable rural development. It will cover the following broad areas: (i) conceptual and methodological aspects o f the project; (ii) project administrative procedures; (iii)community development and Strengthening o f local organizations; (iv) principles and practice o f participatory rural assessments, group formation and operation, participatory planning, and stakeholder monitoring; (v) sustainable natural resources management practices; (vi) on-farm production and off-farm income generation; and (vii) gender and youth sensitization. 29. Training activities will include: (i) identification and recruitment o f trainers o f trainers; (ii)training of project staff, including micro-catchment extensionists, social organization technicians (see subcomponent 1.2) and extension agents for indigenous communities; and (iii) production o f didactic materials. Inaddition to general project training, indigenous communities will benefit from specialized training designed to address specific issues o f these communities. Training will be supplemented by an annual Project Management Unit (PMU) managers' seminar to review progress inproject implementationas part o f the activities o f Component 5. 30. Environmental education (EE) will increase stakeholder awareness o f the need to address environmental problems as a way to improve rural livelihoods. It will support education efforts in the project area directed at developing environmental awareness and promoting a sense of personal responsibility toward the environment. EE activities will be implemented in rural schools, indigenous communities (upon request by the community) and at the micro-catchment level in close coordination with training events and activities in other project subcomponents, in particular the rural extension and rural investment components. The Ministry o f Education will facilitate EE activities inrural schools. 31, Main Outputs. (i) 290 technicians and managers trained and operating in the project area duringthe life of project, including 120 project technicians at the central and regional levels (84 micro-catchment extension agents, 17 social organization technicians, 3 extension agents for indigenous communities and 16 specialists), 70 DEAG technicians and 100 municipal and department staff; (ii) youth and rural laborers; (iii)10 workshops or short trips to exchange 800 experiences with similar projects; and (iv) an environmental education program implemented and reaching 130 rural schools, including 8,000 teachers and students, and members from local organizations. 32. Subcomponent 1.2: Community Organization Development. This subcomponent will build the basis for the implementation of participatory management mechanisms that will give greater control o f decisions and resources to local groups. Utilizing a highly participatory approach, the subcomponent will promote the creation and strengthening o f local and community organizations and the establishment o f local project steering committees. It will provide the framework for channeling resources to the community and farm levels, and for increasing ownership and appropriation o f development activities and o f their investments. 58 33. Specific activities will include: (i)identification o f the micro-catchments and indigenous communities to be targeted by the project in accordance with the project selection criteria (see Appendix 1 to this Annex for criteria); (ii)support to the strengthening and establishment o f Community Development Groups (CDGs) (Comitks Vecinales de Microcuenca), starting with rural participatory assessments o f the communities and their existing organizations to facilitate a better understandingo f problems, conflicts and interests; (iii) suppor the establishment o f Micro- catchment Development Committees (MDCs) (Juntas de Desarrollo de Microcuenca), which will be integrated by representatives o f CDG's, and other producers groups and local stakeholders located in micro-catchments; (iv) support the strengthening and establishment o f Municipal Steering Committees (MSC); and (v) support the legal recognition of CDGs and MDCs. A team o f 17 social organization technicians will work inthe project micro-catchments to facilitate training and strengthening o f community organizations. 34. The project will build the capacity o f women and youth and ensure their full integration into the project through promoting the establishment o f Women's Associations and Youth Associations, strengtheningtheir role inexisting entities, and promoting their participation inthe project decision-making structures. 35. Main Outputs. (i)84 MDCs established; (ii)39 MSCs strengthened and operative; and (iii) CDGsestablishedwherenoneexistandstrengthenedinareaswheretheyalreadyexist. 600 36. Staffing. A Community Organization Coordinator within the PMU's Technical Management Service will be responsible for this subcomponent. The field work will be carried out through the Zone Coordination Units (ZCU) (see Annex 6) which will include 17 social organization technicians with each extensionist working infive micro-catchments. Component 2: Rural Extension and Adaptive Research (US$10.9 Million, 23.3% of Total Project Cost) 37. The objective o f this component is to assist individual small-scale farmer households, producers groups, and indigenous communities to overcome specific technical, socio-economic and environmental constraints to allow them to shift from existing non-sustainable agricultural practices to sustainable livelihood strategies enhancing natural resources management and reducing rural poverty. 38. Main Outcomes. Small-scale farmers, indigenous communities, and other local stakeholders trained; planning and implementing management plans and investment proposals for sustainable development supported by rural extensionand research. 39. Target Group. Rural extension (including training o f beneficiaries) and adaptive research activities likely to be supported under this component will primarily benefit small-scale farmers and indigenous communities. The component will also benefit rural workers, extensionists and artisans who utilize natural resources. Although the project financial incentives (Component 3) to fund small investment subprojects will only be directed at small-scale farmers and indigenous communities, the participation o f all farmers in the micro-catchment, including larger farmers, i s 59 essential for successfully introducing new and sustainable practices, and will be promoted by the project. Larger farmers in the micro-catchment will benefit from training, organization and technical assistance in order to help them to introduce the sustainable natural resources practices proposed by the project. 40. Subcomponent 2.1: Rural Extension. Objectives and conceptual framework: Rural extension will be a pivotal element o f the project. Through the adoption o f methodological tools tailored to small-scale farmers and indigenous community needs in the various agro-ecological and socio-economic contexts o f the project area, this subcomponent will: (i) provide technical assistance and training to the project beneficiaries; (ii)assist beneficiaries to prepare micro- catchment development plans (MDPs), Indigenous Community Development Plans (ICDPs), and Municipal Investment Plans (MIP); (iii) assemble community demands for social, technical and financial support arising from those plans; (iv) help with implementation o f the plans at the small-scale farm and indigenous community level; and (v) train indigenous community promoters and small-scale farmer promoters at the micro-catchment level to facilitate the process o f knowledge management for adopting the project strategy by beneficiaries. Technical assistance and training will cover techniques to improve agricultural and livestock production, the sustainable management o f natural resources, product intensification and diversification, processing or marketing, environmental protection, and developing management skills. 41, Organization o f the Extension System. The extension system in Paraguay i s weak, with limited operational budgetary allocations, a small 300 staff complement half of which is near retirement, and inadequate supporting infrastructure. Under the PARN project, the arrangement focused on deploying consultants as technical experts which resulted inhuge benefits with some savings in costs. During the past year, DEAG has established Centers for Ag Development (CDAs) at the department level and Local Technical Assistance Agencies (ALATs) at the local level. The project will work closely with these new agencies. 42. A Rural ExtensionCoordinator withinthe PMU's Technical Management Service will be responsible for the project's extension services. Consultants in specific technical fields (e.g. non traditional crops, marketing, agro-industries) will be appointed by the Rural Extension Coordinator according to needs. The extension network will operate through the ZCUs (established in the CDA) with one extensionist for each micro-catchment and 3 specialized extensionists for the indigenous communities (87 extensionists intotal). Inaddition, the project extension work will be supported by about 600 voluntary micro-catchment community promoters (about 7 per micro-catchment) selected amongst the most progressive farmers, and 150 indigenous community promoters selected with the same above criterion. These field level extension staff will work closely with ALATs. While small-scale farmers will not pay for the extension service received under the project, it i s expected that the project will: (a) support a sufficiently large cadre o f good extensionists, including local level enterprises, with adequate capacity to continue to provide the required services; and (b) demonstrate the benefits from relevant demand-drivenextension through income increases, which would be adequate to create a demand for the local level private extension services. 43. Technical Strategy. The farming systems o f the target population are characterized by low productivity, non sustainable land management practices leading to soil erosion and loss o f 60 nutrients, little use o f chemical or organic fertilizers, chemical pest control, manual or mechanical weeding, and absence o f any on-farm investments for land improvements. The crop pattern i s dominated by food crops associated with some cash crops, mainly cotton. Diversification i s very limitedbecause o f capital andmarketing constraints, as well as seasonable agricultural work and weak agricultural services. 44. Within that context, practices to be transferred through the project include sub-soiling, terracing, appropriate fertilizing, direct planting and integrated pest management, which will have an impact on improving soil and water conservation and management. The introduction o f diversified cropping patterns and crop rotation will also be promoted. With regard to post- harvest activities, the project will assist farmers in product conservation and to improve marketingmechanisms and access to marketinformation, including helpfor building-upstrategic alliances both for traditional and new markets and products. 45. Indigenous communities will be assisted through specific modalities that take into account their traditions and particular collective mode o f production. For that purpose the project will strengthen existing Indigenous Associations and promote their legal recognition. The project will also promote food production for domestic consumption and cash crops inthose communities that have already started diversification. Other products, such as crafts and medicinal herbs, will also be promoted. 46. For the provision o f specialized technical assistance, a roster o f private service providers will be created by selecting local consulting firms, NGOs and individuals that have the experience and qualifications in all the technical areas o f the project, and who would be interested in providing their services to project beneficiaries. The roster will prepared by the HumanResources firm that will be hiredfor selecting project staff, andwill be made available in the Project's web site inMAG, anddirectly to project beneficiaries, who will select the provider that best responds to their needs and interests. The performance o f roster members will be evaluated periodically by MAG and the beneficiaries, and the results o f this evaluation will be made available to project beneficiaries in the Project's web site. The Operations Manual will includethe guidelinesand rules for the participation o ftechnical service providers inthe roster. 47. Activities under this subcomponent will cover 84 micro-catchments and 73 indigenous communities and will include: (i) carrying out a project information workshop in each selected micro-catchment involving small-scale farmer households and producer groups, indigenous communities, rural youth, women's groups, rural laborers and landless farmers; (ii) participatory rural appraisals (PRAs) in selected micro-catchments (with four PRA workshops per micro- catchment); (iii)complementary socioeconomic and environmental diagnostic surveys/census undertakenby the micro-catchment extension agent with support from the project GIS team; (iv) resource mapping o f micro-catchments (fed into GIS software) prepared by the project GIS team with inputs from farmers (maps o f land capability, at a 1:15,000 or other appropriate scale suitable for soils for use as cropland, land use, and environmental and social dynamics); (v) formulating Micro-catchment Development Plans (MDPs) and Indigenous Community Development Plans (ICDPs); (vi) preparing investment subprojects at individual-farm and Community Development Group (CDG) levels based on MDPs and ICDPs; (vii) formulating Municipal Investment Plans (MIPS) with community participation via Municipal Steering 61 Committees (MSCs) and in line with micro-catchment diagnostics (see Annex 6); (viii) regular technical assistance and training for implementing beneficiary investment subprojects, adopting the productive and environmental management practices, and marketing improvement; (ix) land titling for indigenous communities and support to land titling for small-scale farmers; (x) field trips for information dissemination and exchange of experiences between the farmers/communities undertaking on-farm trials (subcomponent 2.2) and the remaining farmers/communities of the project; and (xi) coordination and integration between extension and researchactivities (the latter implementedunder subcomponent 2.2) with both rural extensionists andtechnical staff involvedinresearchtrials at the farm level. 48. Extension activities will not be implemented in all micro-catchments or indigenous communities simultaneously. Rather, they will be gradually introduced according to the following preliminary schedule: Target Beneficiaryor Activity PY1 PY2 PY3 PY4 PY5 Total Small-scale farmer households benefited by extension services 700 3.000 4.900 3.800 1.100 13.500 Indigenous communities benefited by 7 15 25 15 11 73 extension qervices Micro-catchmentsbenefited by extension services 8 17 22 20 17 84 Micro-catchmentDevelopmentPlans 18 38 28 84 Indigenous Community Development Plans (ICDP) 15 20 15 10 73 MunicipalInvestment Plans (MIP) 0 9 17 10 3 39 Individual Small-scale Farmer-Investment Subprojects (FIS) 700 2.800 4.400 3.600 1,100 12.600 CommunityDevelopment Group InvestmentSubDroiects (CIS) 27 108 171 133 41 480 Indigenous Community Investment SubDroiects 1 0 1 0 1 2 0 1 3 0 1 1 0 1 60 Municipal InvestmentSubprojects ( 0 1 39 49. Main Outputs. The subcomponent will provide technical assistance to about 13,500 families (including small-scale farmers and indigenous communities) inthe 84 micro-catchments and 73 indigenous communities. In addition, producers will be organized for purposes of marketing agricultural products in at least 25 micro-catchments. With regard to training, this subcomponent will reach about 600 community promoters, 150 indigenous community promoters, 10,000 small-scale farmers, 800 rural laborers and youth, and members from 600 CDGs, 84 MDCs and 39 MSCs. Inaddition, there will be field trips to 10 small-scale farms with on-going technology validation trials to exchange experience among farmers. 50. Subcomponent 2.2: Adaptive Research and Studies. This subcomponent will respond to specific, practical technology validation and information needs to better address production and marketing issues of small-scale farmers and indigenous communities. Policy studies will also be financed to address regional issues affecting small farmers and evaluate the effectiveness of different government sectoral strategies and program. Researchtrials and marketing studies will 62 benefit the primary project beneficiaries, whereas policy studies will be o f special interest to decentralized local (department and municipal) and national government and other local institutions and civil society organizations. A major part o f the on-farm adaptive research activity themes and studies have been pre-identified during project preparation; the remaining themes, activities and studies will be identified by the project beneficiaries and other local stakeholders duringthe micro-catchment and indigenous community planningprocess. 51. Activities will include: (i)on-farm technology validation trials for the improvement and validation o f existing agricultural production technologies and practices aimed at diversifying production and addressing farming issues raised by communities, and for the adaptation and validation of existing productive systems to local agro-ecological conditions and/or to small- scale farming systems; and (ii)thematic studies to address technical and social constraints, including: (a) studies to identify, develop or access specialized markets (e.g. organic products, non-timber forest products and ecoturism); (b) land tenure assessments; (c) policy studies to support mainstreaming o f natural resources management and rural development and poverty strategies into national policy; (d) feasibility studies to identify opportunities for newproducts in selected project areas; (e) assessing alternative financial mechanisms for sustainable follow-up o f development assistance to project beneficiaries; (0 other demand-driven studies aimed at addressing specific issues raised by project beneficiaries (such as related to regional animal health and necessary plant and animal phytosanitary improvements); and (g) base studies and development o f a proposal for a follow-up operation. 52. Based on the research themes identified through the micro-catchment and indigenous community diagnostics and on departmental priorities, an overall research plan would be prepared by the Rural Extension Coordinator. Proposals for technology validation would be invited from public and private research institutions, and evaluated by a Technical Committee. Grants would be assigned on a competitive basis for research to be validated following a public- private partnership approach. The final reports would be analyzed and evaluated by the Technical Committee before the results are disseminated for adoption by the farmers. 53. Main Outputs. An estimated 20 on-farm technology validation trials, nine market studies for new products (three for indigenous products), 16 feasibility studies for development o f new products, six studies aimed at addressing specific issues raised by indigenous communities (two on land tenure), two policy harmonization studies, one environmental study analyzing micro- catchment ecosystems, two environmental studies aimed at forest conservation, five demand- driven studies aimed at addressing specific issues raised by micro-catchment communities, and one study analyzing options for project sustainability will be carried out during project implementation. Component 3: Sustainable Rural Development Fund (UW24.9 Million, 53.2% of Total ProjectCost) 54. The objective o f this component is to implement a financial incentive mechanism to facilitate the adoption o f the project strategy within the benefited micro-catchments. The Sustainable Rural Development Fund (FDRS) will finance demand-driven investment subprojects identified in the context o f the MDPs, ICDPs, and MIPS. The proposals will be 63 preparedby eligible project beneficiaries with support from project extensionists. Inmost cases, the FDRS grant will finance a maximum o f 85% of investments included in the subproject. Grantees will provide at least 15% in-kindcontribution to cover the rest. 55. As part o f the Sustainable Rural Development Fund, INDERT in coordination with MAG, and based on an agreement to be signed between the two institutions for the execution of the project, will finance, through its rural development fund (FIDES), complementing investments (e.g. construction of basic hydraulic infrastructure and rehabilitation o f roads) inthe municipalities covered by the project. 56. In an estimated 12 micro-catchments, project activities would overlap and complement with the implementation o f the proposed Paraguay Biodiversity Project with which the project would be partially blended. The beneficiaries o f these 12 micro-catchments which are located in the biodiversity conservation corridor (project area o f Paraguay Biodiversity), would receive PRODERS support for NRMand sustainable production practices at the farm level, which would be combined with specific investments for restoration or maintenance o f connectivity and sustainable use o f biodiversity to be funded by the GEF. 57. Main Outcomes. Individual Small-scale Farmer Investment Subprojects, Community Development Group Investment Subprojects, Indigenous Community Investment Subprojects and, andMunicipal Investment Subprojects financed. 58. Categories of Subprojects Eligiblefor Grant Subprojects under the FDRS There will be five categories o f subprojects to be financed under the FDRS: (i) Individual Small-scale Farmer Investment Subprojects targeted to finance basic home improvements and sanitation (up to US$500.00 for subproject); (ii) Individual Small-scale Farmer Investment Subprojects targeted to improve farm production and productivity (up to US$2,000.00 for subproject); (iii) Community Development Group Investments Subprojects targeted to improve agricultural and livestock production and productivity (up to US$l0,000.00 for subproject); (iv) Indigenous Community Investment Subprojects (up to US$25,000.00 for subproject); and (v) Municipal InvestmentSubprojects (upto US$40,000.00 for subproject). 59. Common topics to be considered for FDRS investment subprojects include, but are not limitedto: (i) sustainable land use practices, increased crop and small livestock production, and post-harvest food processing and storage; (ii)animal health (vaccination) and livestock identification (tagging) activities, and infrastructure for working with cattle; (iii) forest and water conservation and management at the farm, micro-catchment and community levels; (iv) production diversification and improved production systems to increase income; (v) land titling for indigenous communities and support to land titling for small-scale farmers; (vi) community investments for small-scale farmers that include minimum tillage equipment, water supply and processing micro-enterprises; and (ix) municipal investments in target micro-catchments, including rehabilitation o f roads, establishment o f nurseries, and construction o f facilities for disposal and recycling o f pesticide containers. Detailed information on activities eligible under each investment category can be found inAppendix 2 to this Annex. 60. Main Outputs. The main outcome o f Component 3 will be the financing o f the different types o f subprojects, which will be fully demand-driven and will stem from the participatory 64 development plans of the beneficiaries. Because the demand-driven nature of the FDRS is not yet possible to determine the number of subprojects that will be funded in each category. However, estimations were made with regard to the number of beneficiaries in each category. A list of these estimations, as well as a table showing upper thresholds for grant applications, i s includedinTable 1of Appendix 2 to this Annex. 61. The management and administration of subprojects will be the responsibility of the project beneficiaries, following CDD guidelines. For a description of subproject beneficiaries, eligibility criteria, regulations governing the fund and responsibilities for selection, approval, implementation and monitoring of the FDRS, see Appendix 2 to this Annex. Component4: Animal HealthImprovement(US$4.2 Million,9.0% of TotalProjectCost) 62. The objectives of this component are to assist Paraguay to initiate animal health improvement measures and to contribute to the regional strategy for animal health management. It has two main sub-components: (a) Strengthening the nodal implementing agency for this component - SENACSA; and (b) Strengthening the Vice Ministry of Animal Husbandry(VMG). 63. Sub-component 4.1. Strengthening of SENACSA. This subcomponent would finance : a) the improvement of the information system SIGOR by means of extending the communication network to cover the whole country with 76 local units, buying new adequate software, training its technical staff, managing livestock information on stocks and movements 100 % on line, diminishing the delays inthe incorporation of informationinthe system, keeping updated information on livestock units with geo-references, connecting SIGOR with the tracking system currently under the responsibility of the Asociacion Rural del Paraguay and incorporating a Geographical Information System; b) the organization of a high safety laboratory able to deal with exotic pathogen material and with vaccine analysis; c) the improvement of the biotery laboratory which will provide animal inputs for biological research; d) improvement o f the residues laboratory updating its capabilities of dealing with heavy metal, anabolics andpesticides analysis; and e) the improvement of its 22 control posts along the country and 20 local units in the Chaco region, providing generators, cool chain inputs, vehicles and staff training, and specially supporting and strengthening the 6 border control posts along Paraguay's borders with its neighboring countries (Argentina, Brazil and Bolivia) consistently with the actions comprising the Regional Strategy for Eradication of TransboundaryDiseasesinMercosur. 64. Sub-component 4.2. Strengthening o f the VMG. This subcomponent would finance a) office and clinic equipment, small works, infrastructure for working with animals and a group of inputs for both the research station in Barreritos and the experimental unit of the Faculty of Veterinary in Asuncion; b) the improvement of the genetic program for small holders considering cattle, sheep, milk cows and goats; c) the improvement of training programs on animal husbandry, animal health, artificial insemination, processing of agricultural products for small-scale farms; and d) the improvement o f pastures programs for small-scale farmers and indigenous communities through the provision o f high quality forage seeds and training on pasturemanagement. Main Outcomes: Improved Animal Tracking and Information systems covering the whole range of livestock units and animals, three major laboratory facilities inoperation for dealing with high 65 risk operations, animal inputs production and residues analysis, two research and experimental units owned by VMG and Faculty of Veterinary updated for the provision of sound genetic material, training and pasture seeds to small-scale farmers and indigenous communities and field operations established and managed effectively by SENACSA and the VMG to ensure high national standards of animal health consistent with the Regional Strategy and sound animal husbandrymanagement. Component 5: Project Management, Monitoring and Evaluation ((US$4.1 Million, 8.8% of Total Project Cost) 65. This component includes overall management, financial and project management capacity building at MAG, and monitoring and evaluation of the project as well as dissemination andcoordination with other related projects and programs. 66. Main Outcomes. (i)an established project management structure, including the Project Management Unit (PMU) at the central level and four Zone Coordination Units (ZCU) at the departmental level; (ii)adequately organized units of MAG, where relevant, with civil servants trained to effectively, efficiently and autonomously manage the financial aspects of Bank-funded operations; and (iii)an effective implementation and monitoring of project activities capable of integrating them with the activities of other sustainablerural development programs. 67. Subcomponent 5.1: Proiect Management. This subcomponent will finance management services, office equipment and all administrative and operational expenditures necessary to contribute to the improvement of MAG'S administrative and financial organization skills to effectively and autonomously manage a Bank-funded operation, and ensure the effective implementation ofproject activities and managementof resources. 68. Activities. The subcomponent will establish and operate the PMU at the central level and four ZCUs (see Annex 6). Operative planning, supervision, administrative and financial management, and the general oversight of project implementation will be under the responsibility of the PMU. The ZCUs will mainly coordinate field operations. 69. Project management will be supported by a Management Information System (MIS) that will incorporate records of project implementation progress, procurement, accounting, auditing, etc. The technical assistance strategy of the project will include specialized advisory services, trainers and services to support project administration and monitoring. When appropriate, these will require contracting individual consultants or firms, the former involving a delegation of responsibility to athird party (Annex 8). 70. The sub-component will also provide resources for: (i) training in project management, public sector accounting, treasury management, Paraguay public sector characteristics, financial control and organization to be delivered to a selection of civil servants from MAG; and (ii) technical assistance, studies and advisory services in public sector organization, financial management, accounting and treasury processes in the public sector. The types of training and advisory activities will be based upon the Bank Fiduciary Action Plan resulting form the IntegratedFiduciary Assessment under implementation. 66 71. Main Outputs. (i)a P M U established in MAG and facilitating effective project implementation; (ii)Annual Operating Plans, Monitoring and Evaluation (M&E) Reports, Procurement Plans and Disbursement Plans prepared and submitted in a systematic manner throughout the life o f the project; (iii) collaboration and coordination undertaken in a systematic manner with other relevant projects and initiatives in the sector; and (iv) organized units o f MAG, where relevant, with staff trained to manage the financial aspects of Bank-funded operations. 72. Subcomponent 5.2: Monitoring and Evaluation. The subcomponent will design and implement a M&E system to support project management. Specific objectives o f the system include: (i)monitoring project implementation in relation to overall objectives, baseline situation, inputs and outputs; (ii) providing and receiving feedback from stakeholders; and (iii) generating inputs for dissemination o f project results and lessons learned. Progress in the fulfillment o f the project objectives and outcomes will be monitored in accordance with MAG and Bank procedures and will be based on the Results Framework (Annex 3) as an essential tool that will facilitate results-oriented project implementation and sound M&E. The M&E system will be supported by the above-mentioned MIS. In addition, the M&E unit will operate a GIS building on the existing GIS system used by PARN. It will be designed to provide technical information for project implementationincluding resource mapping. 73. Activities. The subcomponent will cover the following activities (see Annex 3 for detailed project M&E approach and activities): (i) monitoring day-to-day activities, including a system o f physical and financial monitoring to track project execution; (ii) monitoring project outcomes; (iii)undertaking special evaluation studies (ex-ante, mid-term and ex-post evaluations; (iv) undertaking internal and external auditing; and (v) pursuing participative monitoring and evaluation o f project activities and results with beneficiary input. 74. MainOutputs. (i) designed, operating and providing information for any necessary MIS adjustments to project implementation; (ii) regular monitoring and evaluation of project progress and impacts with participation o f local stakeholders; (iii) project reports prepared and submitted to project managers, MAG, World Bank and project steering committees at all levels in a systematic way throughout the life o f project; and (iv) an operational GIS providing technical information for project implementation, including mapping o f the 84 micro-catchments and 73 indigenous communities. 75. Subcomponent 5.3 : Communication and Dissemination. This subcomponent will support the dissemination o f project information, sharing experiences and results both within and outside the project, to provide project stakeholders with systematized knowledge for the management o f natural resources and rural poverty reduction throughout the country's Eastern Region. To implement the communication strategy within the project area, it will build on existing capacities to promote and strengthen effective social networking and collaboration across project steering committees and other groups. Information dissemination and exchange o f experiences among the farmers/communities undertaking on-farm technology validation trials (subcomponent 2.2) and the remaining farmers/communities o f the project area will be supported under the capacity building subcomponent 1.1 (this includes activities such as field days and trips). Early in PYOl 67 there will be an information campaign involving promotional activities (mainly workshops) to increase awareness among target beneficiary groups, government officials, NGOs and other civil society organizations. 76. Main Outputs. (i)One communication and dissemination strategy designed and implemented; (ii) three project-launch workshops (one national and two at the department level); (iii)ten informational workshops at the departmental level; (iv) two national promotional campaigns; (v) fifteen department and local level campaigns; and (vi) five animal health campaigns at department level. 77. The following dissemination media will be employed by the project: (i)home page (project news, technical information, results attained, etc.); (ii) printedperiodic reports (project annual reports and project news sent to the project-targeted departments, municipalities and micro-catchments); (iii)news for the media (print, radio and television); (iv) promotional campaigns to be transmitted by radio; (v) educational programs on videotape to be shown on localhegional television and used in meetings and courses; (vi) printed material for distribution especially in target micro-catchments (booklets, folders, reports); and (vii) other media to be determined duringthe course o f the project, including audiovisual. 68 Appendix 1 Targeting Criteria for Project Beneficiaries 1. OverallTargeting Strategy 1. The proposed project will use objective criteria applied at the department, municipal and micro-catchment levels to target activities to best achieve project objectives. The micro- catchment boundaries are to be treated as flexible and where required would be "adjusted" to cover other more natural, existing administrative or organizational boundaries. 2. Targeting Criteria to Select Priority Departments 2. The project will be implemented inthe two poorest departments o f the country's Eastern Region (Caaguazu and San Pedro), which were selected according to poverty-based targeting criteria using the national PLIPEX index (a prioritization method for targeting areas for social investments aimed at the reduction o f extreme poverty). The PLIPEX index measures poverty levels according to income and Unsatisfied Basic Needs (UBN). It was calculated in 2004 by Paraguay's Secretariat o f Social Action. 3. Targeting Criteria to Select Priority Municipalities 3. The two departments under consideration encompass a total o f 39 m~nicipalities'~. Targeting criteria to select priority municipalities include socioeconomic and environmental factors and land use. The municipalities were classified under four levels o f priority (High, MediumHigh, MediumLow andLow) based on the combinationo fthe following factors: (a) Density o f Rural Poor. Evaluated in terms o f UBN and Subsistence Capacity based on information from the General Bureau o f Statistics, Surveys and Censuses. Because there i s no up-to-date data on rural poverty by income at the municipal level, UBN was usedto measure this concept. UBN data was utilized to determine Subsistence Capacity, which refers "to the probability o f insufficient household income, related to the existence or nonexistence o f a wage-earner, the educational level o f the head o f household, and the number o f dependents per wage-earner." This UBNi s the best approximation o f the concept o f poverty with regardto the level o f earned income; (b) Loss o f Forest Cover. Percentage deforested in2003 compared to 1999; and (c) Conflicting Use o f Soils. Based on the percentage o f area, by municipality, with annual crops on soils o f classes IV through VIII, which are the soils least suitable for agriculture and most susceptible to damage if used for agricultural purposes (according to the United States Department o f Agriculture's land capability classification). l320 municipalities inCaaguazu and 19 in San Pedro. 69 4. According to these criteria, there are 3 High Priority, 11 Medium High, 12 Medium Low and 12 Low Priority municipalities inthe project area (see Table 1 below). The levels o f priority determine the intensity o f project intervention in each municipality. It is proposed that no municipality be excluded, but a different number o f micro-catchments will be assisted in each depending on the degree o f priority with the greatest number o f micro-catchments assisted in highpriority municipalities and gradually decreasing inthe other categories. Table 1: MunicipalityPriorities Low MediumLow Medium High Total Department Priority Priority High Priority Municipalities Prioritv I Caarzuazu 1 5 6 I 6 1 3 1 20 tm+-+k San Pedro 6 I 5 1 0 1 19 12 11 3 3 9 4. TargetingCriteriato Select the Number o f Micro-catchmentsper Municipality 5. The diagnostic performed during project preparation indicates the existence o f a total o f 953 micro-catchments in the 3 9 municipalities. However, the rural population (and rural producers) i s not uniformly distributed among the 953 micro-catchments; there are zones of higher population concentration that indicate the presence o f clusters o f small-scale farmers and large vacant zones that denote the presence o f large-scale farms. 6. The number o f micro-catchments assisted per municipality will differ depending on the municipality's level o f priority. However, because the land area o f municipalities is highly variable, as is that o f micro-catchments, it is not advisable to determine a single number o f micro-catchments to be assisted under each priority level. A second criterion will therefore be applied: in High Priority municipalities, up to 5 micro-catchments will be assisted; up to 4 Medium High Priority; up to 3 in Medium Low Priority; and up to 2 in Low Priority. Thus, the number of micro-catchments to be assisted by the project in each o f the 39 municipalities is determined, but which ones they will be is not determined. This task will be the responsibility o f potential beneficiaries at the start o f project execution, based on pre-determined criteria. These criteria will be discussed and agreed with stakeholders in the Project and with potential beneficiaries at regional workshops. 5. TargetingCriteriato Select PriorityMicro-catchmentswithin Selected Municipalities 7. The proposed targeting criteria to select priority micro-catchments within selected municipalities will give: (a) Sixty percent weight to a socioeconomic measure combining four parameters: (i) number of households per micro-catchment; (ii)UBN in Subsistence Capacity (density o f inhabitants/km2); (iii) percentage o f the population with two or more UBN; and (iv) presence ofINDERTsettlements; and 70 (b) Forty percent weight to environmental factors represented by: (i) deforestation in the 1999-2003 period; (ii) percentage o f land area o f soil classes IV to VI11 with annual crops; (iii)existence of micro-catchments located in the headwaters o f river basins; and (iv) existence o f micro-catchments located in the recharging zone o f the GuaraniAquifer. 8. The combined total o f the above criteria will have an established maximum score. In each municipality, micro-catchments with the highest score will be selected, up to the maximum number o fmicro-catchments established for each municipality provided that 70% o f its residents have expressed their agreement to participate in the project and the corresponding municipality has provided its support. Further details will be includedinthe Operational Manual. 6. Focus on IndigenousCommunities 9. The 73 indigenous communities in the project are considered High Priority due to the high incidence o f poverty and the degree to which the natural resources on which they depend for survival are degraded. Thus, they will all be project beneficiaries. However, the access o f each indigenous community to the various types o f support to be offered by the project will vary according to the application o f the Indigenous Peoples Land Access and Natural Resources Use Index designed by the project. This index will be applied to all indigenous communities in the first year o f the project and will be updated inits third and fifth years. The communities with the highest rankings will be able to access more o f the project's activities determined by each community's Indigenous Community Development Plan. This index will be prepared jointly with the communities and their associations. 10. The Indigenous Peoples LandAccess and Natural Resources Use Index will be generated as a result o f information obtained ineach indigenous community based on the following: (a) The ensuing questions, if affirmative, will generate points: (i)Does the community know where its lands are located? (ii)Are the community's lands delimitedand surveyed? (iii) the community have legal status? (iv) Does the Does community have title to its lands? and (v) Does the community live on and utilize the landthat is inits name?; and (b) The ensuing questions, if affirmative, will subtract points: (i) there conflicts Are on the use o f land in terms o f physical occupation?; and (ii) Are there problems with regard to litigation or other types of claims?. 11. If,after the index is applied, it is detected that a community needs assistance to title its lands, it may be eligible for landtitling support, as a first step, under Component 3 o f the project. Ifthe community has resolved its landproblem, it will then be able to access the participatory planning activities (participatory diagnostic and preparation o f Indigenous Community Development Plans, Subcomponent 2.1) and the implementation o f community investments (Component 3). With regard to training activities, all communities will be beneficiaries o f training programs (Subcomponent 1.1). 71 Appendix 2 DetailedDescriptionof the SustainableRuralDevelopmentFund(FDRS) 1. Overview 1. The Sustainable Rural Development Fund (FDRS) will finance demand-driven investments identified in the context o f the Micro-catchment Development Plans (MDP), Indigenous Community Development Plans (ICDP), and Municipal Investment Plans (MIP). Subproject proposals will be prepared by eligible project beneficiaries with support from project extensionists. The Fundwill provide financial support to farmers to improve social inclusion, to adopt more sustainable land use practices (which contribute to improving crop production, farm productivity and income), to improve animal health and husbandry management, and to diversify production systems, among other topics. 2. FDRS Beneficiaries 2. Within project indigenous communities or selected micro-catchments, Fundbeneficiaries will include: (a) Individual Small-scale Farmers. Small-scale farmer households who possess no more than 20 hectares o f land in micro-catchments where the project will be implemented. These beneficiaries will be eligible to two types of subprojects: (i) home improvement; and (ii) production and productivity improvement. (b) Community Development Groups (CDGs). Legally recognized groups o f individual farmers (with fewer than 20 hectares) and/or landless rural workers living inthe micro-catchment, and composed o f a minimum o f 8 members (other farmers, with more than 20 hectares, will be eligible to join the group only when in association with at least 85% of the target population). Existing cooperatives or other types o f producer associations located in the selected micro-catchments, and which meet the criteria o f owning less that 20 hectares per member, may also be considered as eligible CDGs to receive grants. CDGs that do not have a legal personality will be eligible to receive assistance form the project (Component 2a), to obtain such legal personality. (c) Indigenous Communities. Indigenous communities located in the project area whether overlapping or not with the 84 micro-catchments to be selected for project support. (d) Municipalities. Municipalities which include at least one selected micro- catchment and comply with all requirements to be established in the Project's Operational Manual, such as preparation and approval o f a Municipal Investment Plan (MIP; see other requirementsbelow). 72 3. Subproject grants will finance a maximum o f 85% o f investments. Beneficiaries will provide at least 15% in-kindcontribution to cover the rest. 3. Main Outputs, Number of Subprojectsand Upper Thresholdsfor Grant Applications 4. As all investment subprojects financed under the Fund will be fully demand-driven and will stem from the participatory development plans o f the beneficiaries, it is not yet possible to determine the number o f subprojects and beneficiaries in each category. However, estimations were made with regard to the number of subprojects for each category o f beneficiary and expected type o f activity, and a maximum grant amount for each category was determined (see Table 1). According to estimations made on the basis o f the P A W experience and the farm models, the maximumamount o f individual small-scale farm investments subprojects range from US$500.00 to US$2,000.00. Maximum amounts for Community Development Group, Indigenous Community and Municipal Investmentsubprojects are US$10,000.00, US$25,000.00 and US$40,000.00 respectively. Table 1:Categoriesof FDRS Subprojects,Activities, Costs and Upper Thresholds 1 . A.raxi mum 2 . Estimated . AverageCast Category of SubprojectlActivity Type Number of of Subproject Grant Subprojects (1) (US) Amount (US$) 1 Inrlhidu2tlSmall-scale Farmer Investment 500 Subprojects(Home improvement) -- -. __ - ._*._ -- - I I _II I Home improvementsand sanitation (e.g. minor structural I improvementsto housing, septic tanks and other home 11,200 300 sanitation, improved wood stoves) Individual Small-scale Farmer I f l ~ ~ s ~ ~ ~ f l t I 2,000 Water supply, minimum tillage equipment, value-added conservation, production diversification and improved production systems, value-added schemes (e.g. agro- I Erosion control along ruralroads, fruits and trees 40,000 nurseries, recycling facilities for pesticidecontainers. 39 (1) This estimation of number of activities was made for the sake of project designand evaluationpurposesand they are not binding as far as implementation is concerned; grant proposalsresult from a demand-drivenprocess. 73 4. Responsibilitiesfor Selection, Approval, Implementationand Monitoring 5. The FDRS will be characterized by a decentralized project review process to facilitate a rapid response to assistance requests and maintain closer contact with potential participant's needs. Subproject grant applications, prepared by project beneficiaries with the support of project extensionists (for micro-catchments and indigenous communities), will be revised initially by the Micro-catchment Development Committees (MDCs), and when involving indigenous communities, by the corresponding Indigenous Association (IA). After proposals are submitted by the MDCs and IAs to the PMU's Rural Investments Service (responsible for the operation o f the fund; see Annex 6 for details), an assessment will be carried out by the PMU's Technical Management Service after which the proposal may be approved and the grant processed. This component (Component 3) will be coordinated by a grant administrator in the PMU. Once awarded, grant funds will be transferred directly to the beneficiary's bank accounts. Municipal Steering Committees and staff from the executing offices at the national and regional levels (PMU and ZCUs) will be responsible for monitoring the use o f grants. 5. RegulationsGoverningthe FDRS 6. The FDRS will be administered by the same procedures and financial arrangements of the other components of the project. Beneficiaries will open accounts with local banks (private or government) to receive the resources approved annually for disbursement. Through its Rural Investment Service, the P M U will be responsible for the overall management and supervision o f the FDRS. The operation o f the FDRS will be governed by a set o f regulations that will be detailed inthe Operational Manual. 6. Requirementsfor Eligibility and Subsequent Selection of Grant Proposals 7. To be eligible, subproject proposals must be consistent with activities designated as priorities inthe corresponding MDPs, ICDPs and MIPS. They must also fit under the categories and types o f subprojects deemed eligible inthe Operational Manual. 7. Eligibility Criteria for Beneficiaries 8. The following requirements will be applied for eligibility o fbeneficiaries: (a) Individual Small-scale Farmers. (i)actively participate in the definition o f priorities o f the M D P and in local steering committees foreseen under the project participatory management process; (ii) prepare a subproject proposal based on the priorities o f the corresponding M D P and have it approved; (iii)sign terms of commitment to execute the plannedactivities according to the approved proposal; and (iv) be included in the list of eligible beneficiaries incorporated in the project's annual operational planprepared by the MDCs for the micro-catchment; (b) Community Development Groups (CDGs). (i)proof of legal personality, (ii) actively participate in the definition o f priorities o f the M D P and in other group activities foreseen under the project participatory management process; (iii) 74 prepare a subproject proposal based on the priorities defined inthe corresponding M D C and have it approved; (iv) sign terms o f commitment to execute the proposed activities according to the approved proposal; and (v) ensure that the approved subproject is included in the project's annual operational plan prepared at the departmental level; (c) Indigenous Communities. (i) o f legal personality, (ii) proof actively participate in local project steering committees foreseen under the project participatory management process; (ii)prepare a subproject proposal based on the priorities defined in the ICDP and have it approved; (iii)sign terms o f commitment to execute the proposed activities according to the approved subproject; and (iv) be included inthe list of eligible beneficiaries incorporated in the annual operational planofthe Regional Sub-unit; and (d) Municipalities. (i)cover at least one project-selected micro-catchment; (ii) prepare a subproject proposal based on the priorities defined inthe MIP and have it approved; (iii) hold/sign a cooperation agreement with MAG; (iv) ensure that the approved subproject i s included in the project's annual operational plan prepared at the regional level; and (v) commit to execute the proposed activities according to the approved subproject. 75 Appendix 3 Coordinationwith the Proposed GEF/BankParaguay BiodiversityProject 1. The Atlantic Forest in general, and the Upper Parana Atlantic Forest inparticular, is one of the most endangered biomes globally and the biodiversity it holds is highly threatened. The survival of this biodiversity greatly depends on the conditions the land is being managed outside protected areas and by integrating biodiversity into the productive systems at the farm level. Based on this particular situation, the proposed project would be associatedto a proposed Bank- implemented GEF Project (Paraguay Biodiversity). This association would result in the integration of NRM and biodiversity conservation efforts in selected areas of the PRODERS' Project. 2. The Paraguay Biodiversity project would be implementedinan area of approximately 1-1 million hectares, representing a north-south conservation corridor along six departments of EasternParaguay. Within this area, implementation of PRODERS would overlap in 12 of the 84 micro-catchments that would be assistedby this project. 3. Inthese micro-catchments, financial resources form PRODERS would be applied, as in the rest of the project area, to implementNRMand sustainableproduction practices at the farm level which would provide the basis for the subsequent implementation of appropriate biodiversity conservation practices financed by Paraguay Biodiversity with GEF funding. The allocation of financial resources by PRODERS, estimated at U$S 5.9 million would partially represent the counterpart contribution of the Government of Paraguay. 4. In addition to above described cofinancing, for the arrangements at the field level, the GEF project would aim at achieving the objective of mainstreaming biodiversity conservation in the productive landscape by financing a series of activities oriented at the incorporation of biodiversity in the activities of MAGSrural extension by providing training and technical assistance to extensionists. 5. GEF resources would also be used for training the project's staff in the promotion of biodiversity conservation and sustainable use, for awareness activities aimed at project beneficiaries within the micro-catchments with respect to the importance of biological diversity, and educational programs including workshops and seminars on legal issues, conservation and sustainable use of biodiversity, identification of local flora and fauna, and planning of income generation activities such as ecotourism activities, organic production, and traditional crops, among others. 6. During the final stage of project preparation, bothproject units strengthenedtheir relations ina continuous and effective way. This resultedinagreements for project activities in the overlapping area andadvantagesofjointly developed operational tools. These agreements will be accordingly reflected inthe institutional arrangements, time planning andother related matters inthe operational manual, which will be coveringjoint actions inthe micro-catchments of Paraguay Biodiversity. 76 Annex 5: Project Costs PARAGUAY: SustainableAgriculture and Rural DevelopmentProject Local Foreign Total ProjectCost By Componentand/or Activity US$ US$ US$ million million million 1. Community Organization, Development and Capacity Building 1.97 0.42 2.39 2. RuralExtensionand Adaptive Research 8.18 2.00 10.18 3, Sustainable Rural Development Fund 24.89 0.00 24.89 4. Animal Health Improvement 4.09 0.00 4.09 5. Project Managementand Monitoring 3.26 0.64 3.90 Total Baseline Cost 42.39 3.06 45.45 Physical Contingencies 0.25 0.08 0.33 Price Contingencies 0.69 0.28 0.97 Total Project Costs' 43.33 3.42 46.75 Interest during construction Front-end Fee 0.09 0.09 TotalFinancingRequired 43.33 3.51 46.84 'Identifiable taxes and duties are US$m 1.7, and the total project cost, net of taxes, is US$m 45.1. Therefore, the share of project cost net of taxes is 96%. 77 Annex 6: ImplementationArrangements PARAGUAY:SustainableAgricultureandRuralDevelopmentProject 1.ProjectManagementStructure 1. Overall project management and implementation will be the responsibility o f the Ministry of Agriculture and Livestock (MAG) in partnership with key rural development and environmental institutions including the National Land and Rural Development Institute (INDERT), the Indigenous People's Institute of Paraguay (INDI), the Secretary o f Environment (SEAM), the Secretary o f Animal Health (SENACSA), the Faculty of Veterinary, as well as the Ministries of Education, Justice and Labor. MAG will sign cooperative agreements with these institutions no later than twelve months after Loan Effectiveness. Whenever necessary, the project will also develop partnerships with civil society organizations in the project area to implement key collective activities foreseen under the project. Within MAG, the following Directorates will play an active role in the execution o f project activities in the areas o f management, capacity building, rural extension, agricultural research and studies: the directorates of Planning (DGP), Rural Extension (DEAG), Agricultural Research (DIA), Livestock Research (DIPA) and Gender and Youth (DGJ). 2. Inaddition to the executive structure, and buildingon the experience of PARN, the bulk of the project participatory managementstructure will be at the micro-catchment and municipal levels. This will help maximize participation and decision-making by the beneficiaries and facilitate the transfer of these responsibilities and project accountability to the lowest practical implementation levels. Maximizing local participation, in combination with executive and deliberative bodies (described below), i s critical to ensuring the sustainability o f beneficiary gains achieved under the project. 3. Project Executive Structure. MAGwill act as the National Director o f the project and will delegate implementation responsibilities to its Directorate for the Coordination and Administration of Projects (DINCAP). The Director General in DINCAP will have the Sub- UAF reporting to him directly. In addition, a Project Management Unit (PMU) will be established within DINCAP, headed by the Project Manager, and composed o f a team o f qualified professionals dealing with general management (planning, coordination, administration, etc.) and technical and normative functions, as follows: (a) Technical Director. Who will be responsible for the Rural Investment Fund, and for all field level activities through the four coordinating zonal units; (b) Coordinator o f IP Micro-catchments. Who will be responsible for the micro- catchment operations in the IP communities, and for interaction with IP-related catchment development institutions; (c) Administrator. Who will manage all administrative and office-related functions o f the PMU; 78 (d) Planning and M&E Service (PMES) Adviser. Who will be responsible for disseminating project procedures and guidelines as well as for preparing the project's Annual Operational Plan (POA) and running the M&E system. It will adopt a bottom-up approach starting at the indigenous community and micro- catchment levels and moving on to the municipal, departmental and then national levels. Informationmanagement will be carried out through the establishment of a physical and financial information system (MIS). A Geographic Information System (GIS) group will be attached to this unit to support the implementation and maintenance of the GIs. The GIS will be built on the experience of P A W ' S GIS system, which will require a minor technical upgrade. The PMES will also work closely with DEAG . and SENACSA. Here, an institutional exchange will occur as PMES receives technical and methodological support with the elaboration of the POAs and DEAG strengthens and internalizes its evaluation capacity, particularly relating to micro-catchments and indigenous issues; (e) Communication and Dissemination Service Adviser. Who will coordinate the implementation and dissemination of project information and materials to promote understanding and transparency across executive, Departmental and Municipal levels, including the maintenance of a webpage, the distribution of promotional videos, folders and posters, etc., and the execution of media campaigns to divulge the project; and (0 Four Coordinators. Who will coordinate activities relating to the following four areas: (a) Extension and Adaptive Research; (b) Environmental Management (to link up with the 12 micro-catchments where GEF and project activities are inter- linked and overlap); (c) Capacity Building and Social/Community Organization and Development; and (d) Livestock Development. 4. Proiect Ouerational Structure. The executive structure of the project will be accompanied by four Zone Coordination Units (ZCU). Whereas the central PMU will be mostly normative and responsible for technical and administrative management, the ZCUs will be eminently operative and responsible for the field work inthe entire project area, includingat the municipal, micro-catchment and indigenous community levels. Two ZCUs will be established in both Caaguazu and San Pedro which will be physically based in DEAG's Agriculture Development Centers (the departmental operating bases). Through a strong presence of project technician^'^^ the ZCUs will carry out extension and organization strengthening activities with beneficiaries, coordinate field work and linkages with other activities, monitor adaptive research and investments, andassure overall quality assurance o f project implementation. 5. Each ZCU will be managed by a Zone Coordinator, who, under the authority o f the PMU's Technical Director, will be responsible for guiding and supervising the work o f the l4Project technicians will be huedthrough a competitive process open to public and private candidates. A company specializing in the contracting of human services, to be determined by an open bidding contest, will carry out the selection process, which will be supervised by the PMU's Technical Manager and approved by the Directive Committee. Candidates will be compensated according to legal stipulations to avoid salary conffontations between "public" and "private" individuals. Any technician who fails to meet performancestandards will be replaced. 79 extensionists and specialists, as well as for quality control o f the investment proposals. The four ZCUs will be staffed by a total o f 84 micro-catchment extensionists (one per micro-catchment), 17 social organization technicians (one for every 5 micro-catchments) and 3 extensionists for indigenous communities. In addition, the ZCUs will be staffed with a number o f specialists including soil, agribusiness, sustainable agriculture, livestock, information system management, fund management, and fiscal matters. Extensionists, organization technicians and ZCU staff may include staff seconded by DEAG. Local/municipal staff from INDERT and other DEAG staff will also provide support to the project in land titling (INDERT) and specific technical and marketing subjects (DEAG, DIA and DIPA). 6. DEAG Collaboration. At the executive level, DEAG will be responsible for interacting with the GOP regarding overall project progress and direction while it will simultaneously work with the PMU's Planning M&E Service to give general strategy advice, revise and approve POAs, and provide technical support. At the Departmental level, DEAG's Agriculture Development Centers will support the ZCUs with the planning, implementation and monitoring o f project activities, including institutional, capacity building and logistical support and equipment. At the Municipal level, DEAG's Local Technical Assistance Agencies will coordinate with and support the project's extensionists and social organization technicians through trainings, managing information, social monitoring, implementing rural and indigenous activities as identified inthe POA, andparticipating inthe Municipal Steering Committees. 2. ParticipatoryDecision-makingBodies 7. Beneficiaries will participate extensively in project management through decision- making structures established, or strengthened inthe case of existing structures, for the purposes o f the project. This will include execution committees and steering committees which will operate incoordination with the MAG-led project executive structure. 8. Beneficiary Implementation Structure. The project will promote the establishment and consolidation o f Micro-catchment Development Committees (MDC) in each o f the project- supported micro-catchments as the central unit for beneficiary participation in project decision- making and implementation. Inthe indigenous communities, that function will be performed by the existing IndigenousAssociations (IA) which the project will work to strengthen. 9. MDCs and IAs will be legally established and serve as development committees to represent their members prior to receiving any financial support under the project. The MDCs (one for each benefited micro-catchment) will be composed o f project beneficiaries and medium and large-scale producers living in the micro-catchments. MDCs will: (i)on the basis o f participatory social, economic and environmental diagnoses and beneficiary demands, participate in the preparation of the Micro-catchment Development Plans (MDP; assisted by the micro- catchment extensionist) or Indigenous Community Development Plans (ICDP; assisted by the indigenous community extensionist) which will include, inter alia, the consolidated local demands for project financing; (ii)promote and organize project events (MDC management meetings and workshops and focus groups associated with M D P preparation and implementation); (iii)discuss MDPs with concerned Municipal Steering Committees (MSC) for coordination; (iv) submit investment proposals to the P M U through the project micro-catchment 80 extension agent; (v) oversee MDP implementation; and (vi) monitor and evaluate results o f the subprojects. 10. Wherever they exist, the Community Development Groups (CDG), pre-existing organizational structures o f small-scale farmers, women, youth, indigenous people, rural workers, etc., will be the basis for organizing the MDCsjust as they were the basic planning and budgetary entity in PARN. Therefore, support for the consolidation, and creation if necessary and feasible, of CDGs is regarded as crucial. In addition to their roles as the primary unit for developing the MDCs, the CDGs will be important actors in the dissemination o f project information, identification o f community investment needs and evaluation o f demands eligible for project financing. 11. To deliver the services o f the project and provide external coordination to facilitate the integration o f project activities with those being carried out by other programs, provide overall guidance and address potential conflicts, the project will have the support o f the following project steering committees at the various levels o f project implementation: (i)steering committees in each of the municipalities selected for project implementation (MSCs); and (ii) a National Coordination Committee (NCC). See chart below showingthe relations with the PMU. 12. Municipal Steering Committees (MSC). MSCs will be created to act as a forum for local participation and to gather local perspectives o f the project to strengthen the implementation processes at the municipal and national levels. The major functions o f the MSC will include: (i) monitoring and evaluating project implementation performance in their respective municipalities; (ii)consolidating demands from MDCs; (iii)setting priorities for Municipal Investments Plans (MIP) and implementing them (Le., erosion control systems, establishmenthtrengthening of nurseries, construction o f disposal facilities for pesticide containers, etc.); (iv) coordinating activities o f other relevant projects at the micro-catchment level; and (v) presenting the local realities o f project implementation to the NCC through a representative. MSCs will include: one representative from each o f the concerned MDCs, one representative from the civil society o f the municipality, one representative o f the indigenous communities if they are present inthe municipality, one representative o f DEAG, the mayor and one o f the project's micro-catchment extension agents working inthe municipality who will act as the MSC's Executive Secretary. To ensure that development is demand-led, at least 50% o f the participants inMSCs will be members o f the target group or their representatives. 13. National Coordination Committee (NCC). The NCC will be established at the national level early in PYO1. It will have approximately 10 members and will be responsible for: (i) promoting the active participation o f relevant partner institutions in project activities; (ii) facilitating the integration o f project outputsAessons learned into national strategies; (iii) validating project implementation policies and priorities; and (iv) reviewing and approving POAs and respective fund allocations proposed by the PMU. The NCC will be chaired by MAG or a designated representative and will include a senior manager each from INDI, INDERT and SEAM; one representative from the departmental governments; one representative from the municipal governments; one or two representatives from the MDCs; one indigenous leader representative; and one representative from the MSCs (see below). 81 14. See Figure 1 below for the broad organizational structure proposed for the project at different levels. 82 M 00 Annex 7: FinancialManagementandDisbursementArrangements PARAGUAY: SustainableAgricultureandRuralDevelopmentProject 1.SummaryConclusionof FinancialManagementAssessment 1. The Financial Management (FM) arrangements for the project (SRDP) meet with Bank requirements. The proposed F M and audit arrangements, mitigations measures, and action plan and will be implementedto mitigate the FMrisk. Despite the mitigation measures, the residual risk level was rated HIGHparticularly due to: (i) high level of inherent risk inParaguay; (ii) the MAG'S weak control environment and insufficient F M capacities; (iii) transfer of funds to the final beneficiaries (FDRS); and (v) the potential time-lag and suspension of inception activities betweenproject effectiveness and Congress approval. 2. A comprehensive Fiduciary Framework is planned for this project in order to comply with project development objective and mitigate the high FM risk. The main Fiduciary and Governancemeasures are summarized as follows: Bank compliant reporting system and control framework linking disbursementto service output to final beneficiary; Coordination with IntegratedFiduciary Assessment activities; Plannedincorporation of coming Paraguay Fiduciary Action Plan (FAP); Social monitoringof project implementation; FM Capacity building & Governance and Transparency Workshops with Project Stakeholders and FDRS Beneficiaries Concurrent Audit of the mechanisms of fund transferred to final beneficiaries (FDRS); Institutional and capacity building of MAG unitsrelevant to the project; Bank Fiduciary staff advice to MAG; and EnhancedF M arrangementsand supervision. 3. Management o f Project Funds and Sustainable Rural Development Fund (FDRS). All project funds and the FDRS will be implementedthrough MAG. A Project PMU will be created within the National Directorate for the Coordination and Administration o f Projects (DINCAP). The Sub-UAF that will be created inDINCAP will be responsible for the financial management, disbursementsfunctions ofthe project. 4. All uses of funds will be processedby the PMU and supported by external third party documentary evidence, and the related goods and services will be procured in line with Bank guidelines. The PMU will be responsible for the SRDP, making payments to suppliers, 84 obtaining loan disbursements, and accounting and financial reporting. These arrangements include the FDRS which will also entail specific measures to enhance F M accountability to beneficiaries groups. The project implementation will be guided by an Administrative Operational Manual (AOM). 5. Proiect Assets. The assets to be procured during the Project will be incorporated into the Project and recorded in its asset registry. Assets to be acquired from beneficiaries subprojects will be part of the beneficiary's assets and not maintained into the SRDP asset ledger. 6. Lessons Learned and Governance Workshops. As part of the lessons learned from other projects recently prepared in Paraguay, it is planned to have accountability and governance/transparency workshops with project stakeholders groups to identify measures to improve implementation transparency, foster social control of project funds and mitigate project F M risk. Bank F M staff delivered the first seminar on 24 February 2006. These Governance Workshops will be complemented by FM capacity building and training to Community Beneficiaries from the FDRS. 7. Strengthening of MAG Financial and Administrative Functions. For the sustainability purpose of project results, the project under Bank FM supervision will provide support to strengthen the Financial and Administrative functions of MAG (Component 5). Thus, PRODERS will continue to build on MAG'S treasury and procurement capacities through strengtheningthe Sub-UAF(functions which were outsourcedduring PAW). 8. FM Arrangements and Mitigating Measures. The project FM arrangements and mitigatingmeasures are summarized inthe table below. Dueto the high level of risk, additional measures were incorporated to ensure proper mitigation. 85 Standards for High Risk Project Additional Supervisionsite visits at leastthree times a year. Review ofthe concurrent auditreport. FMRsreviewedbi-annually. Review of the specific conditions to release Annual review ofthe Audit reports. FDRS (See Annex 7 FDRS section). ProgressReview o f MAG FMcapacities Bank specific FMtraining for project staff and Governance Workshops. Standards for High RiskProject Additional Annual Report on the Audit of Project Financial Concurrent Audit Opinion (For details, see Statements. Annex 7, external audit section). Annual Report on the Special Opinions: -SOE: Opinion on the eligibility of expenditures reportedandthe correct use of Loan funds. -SpecialAccount. 2. Country Issues 9. The Paraguay Country Financial Accountability Assessment (CFAA), March 2004, and the Country Assistance Strategy (CAS), November 2003, raised the problems of governance and institutional weaknesses in Paraguay. The CAS states that Paraguay is renowned for corruption and contraband. Perceptions of corruption have increased during the past decade and Transparency International has consistently rankedParaguayamong the ten most corrupt nations. 10. The management and control systems o f Government are also weak or non-existent. Within the central administration, the personnel management system is in an embryonic stage and is only now pulling together a master roster of all civil servants. A much larger task is to embark on the professionalization of the civil service including competitive entrance exams, career streamingand training. 11. The main weaknesses and shortcomings identified by the CFAA in terms of financial accountability include: 86 Weak control environment and control framework; Numerous exceptions in the application o f the financial administration law and regulation; Disproportionate share o f time and resources that the Auditor General devotes to ad hoc review requests; Congressional introduction o f budget increases without provision for corresponding financing; Trade liabilities incurred by execution agencies, but unrecorded ifthey exceed the authorized cash program; and Numerous exceptions to generally accepted accounting standards including financial statements non-compliant with the Government's own regulations. 12. According to the CFAA, the inherent and control risks are highandthe advances made in the modernization o f Paraguay's public financial management system do not compensate the effects o f the deficient control environment. 13. The Bank's country portfolio review o f October 2003 also identified the main issues affecting portfolio implementation in Paraguay. These include: (i)high staff turnover in the project implementation units; (ii) o f timely and adequate availability o f counterpart funds; lack (iii) cumbersome procedures for the flow o f funds to the projects; (iv) delays in effectiveness and project start-up; and (v) limiteddisbursement capacity and knowledge o f Bank procedures. 3. RiskAssessment and Mitigation 14. As detailed in the table below, the project residual FM risk remains high and will be subject to the FMregional Manager review. Conditions of Risk Risk RiskMitigating Measures Incorporated Negotiation, Rating into Project Design Board or Effectiveness Inherent Risk High Country Level High (i)IncorporationbytheprojectofParaguayFAP measures (ii)MAGorganizationalandhumanresourcesmeasures to cover the risk of delays betweeneffectivenessand Congress approval of the loan Entity Level (MAG) High (i)StrengtheningMAGFMcapacities(project By dated component 5) and re-activation of the MAG Sub-UAF covenant MAG processesand (ii)CompetitiveRecruitmentofstafftore-activatethe capacities for administrative Sub-UAF & financial functions are weak (iii) Capacity Programto support the re-activation of the DINCAP Sub-UAF ProjectPMU Level High (i)PMUproposedstaffingandorganizationsatisfactory By dated 87 ~~ to the Bank covenant The size and capacity of the currentPMUadministration (ii) Administrative Operational Manual (AOM) to By Dated & finance capacities remain include internal control procedures, PMU staffing & Covenant insufficientfor the new organization satisfactory to the Bank, job descriptions, operation. FMRs & financial statement formats, specific FDRS procedures, description of FDRS management specific staffing, project audit terms of reference (iii) Capacity building in F M Project - Sustainable Rural (i)Governance&Transparencyworkshops Initiated by Development Fund (FDRS) Negotiations The funds' transfer to (i)FDRSspecificMISmoduleacceptabletotheBankis By Dated beneficiaries and its size included inproject MIS and operational before FDRS Covenant reinforce the complexity release and risk level of the project (ii)TermsofReferenceofconcurrentauditspecificto FDRS acceptable to the Bank (to be included in AOM) (iii)FDRSdisbursementconditionedbyBankapproval of FDRS concurrent audit (iv) Specific supervision of FDRS mitigating measures (See Annex 7 FDRS section paragraph20) - - Conditions of Risk Risk RiskMitigatingMeasuresIncorporated Negotiation, Rating into Project Design Board or Effectiveness Control Risk High Budgeting Modest State budget includes specific budget lines for the project Accounting High F M specific module acceptable to the Bank is included in project MIS Internal Control High (i)IncludedetailedFMprocessesandlevelof By Dated responsibility in the Operational Manual Covenant Insufficient capacities of the PMU Administrative & (ii)EnhancedSupervision(seeAnnex7-Supervision Financedepartment to Plan) undertakethe completeF M management of the project Funds Flow High (i) Flexible alternatives based upon MAG capacities: treasury fimctions within Ministry structures or managed The capacitiesofMAG and by an international organization PMU Admin. & Fi department are insufficient (ii)Documentmonthlyreconciliationbetweenpotential By Dated to manage autonomously InternationalOrganization reportingand project Covenant the paymentprocess accounting -The Operational Manual should describe this control Auditing Modest - Project Audit acceptable to the Bank (TORSto be By Negotiation See Annex 7 External - Audit Section -includedspecific inAOM) FDRS concurrent audit Overall High 4. StrengthsandWeaknesses 15. Strengths. Previous and ongoing project experience in managing fund transfers; high degree o f commitment and ownership o f P M U FM staff. 88 16. Weaknesses. Main weaknesses include: (i) high level o f inherent risk; (ii) weak the MAG control environment and insufficient FM capacities; (iii) required reinforcement o f the P M U the FM and risk management resources to manage a more substantial project; (iv) the transfer of funds to beneficiaries (FDRS); and (v) the potential time-lag and suspension of inception activities betweenproject effectiveness and Congress approval. These weaknesses are mitigated through the proposed measures, in particular the specific concurrent audit, the staff increase in FM and risk management activities, the capacity development actions and the enhanced FM supervision, to ensure appropriate use o f funds. 5. FDRSFiduciary Framework (Component3) 17. The PMU is responsible for the management and the implementation o f the FDRS and will includea specific team dedicated to the management o fthe fund. 18. The FDRS represents a significant proportion o f the total loan amount with US$24.9 million or 51% o f the total loan amount. This fund will finance investments proposed by rural community associations, local NGOs and municipalities in support o f subproject investments for improved natural resource and environmental management inthe project area. The grants would be demand-driven and support the costs o f needed investments in small-scale infrastructure, technical assistance, and other goods, and services. A subproject grant would typically range from US$950 to US$lO,OOO as the maximum size for which eligible beneficiaries would contribute at least 15% of total subproject cost in-kind. The FM arrangements are therefore designed to mitigate the high fiduciary risk generated by the management o f funds by poorly capacitated communities ina weak control environment. The overall FDRS procedures designed inthe project preparation andthe FMspecific measures are mutually complementary and concur to the same development and fiduciary objectives. (See Annex 4, Appendix 2 and Annex 6 for further details). The project will include a positive and negative list o f activities for funding. 19. The following FMspecific measures for the FDRS will be adopted and implemented: (a) The project preparation process should include transparency and governance seminars targeting staff from MAG and consultant preparing the projects (first seminar carried out on February24,2006); (b) Governance and Transparency seminars should be extended to the final beneficiaries o f the project (NGOs and Municipalities) and be complemented by FMcapacity building andtraining; (c) Conditions and scope o f grants to Communities will be formalized in a written agreement betweenthe Community and MAG; (d) FDRS disbursement is conditioned by the existence o f a reliable control framework down to the level o f outputhervice delivery to final beneficiary and by the identification o fbeneficiaries andthe training ofthe relevant stakeholders; 89 (e) The operational manual chapter on FDRS should include detail description o f the following processes: (i)selection o f beneficiary organization, in particular the preliminary requirements to be selected (for instance, satisfactory evaluation of the administrative and financial capacity o f pre-selected municipality); (ii) required planning documents to determine the annual grant to each selected organization; (iii) opening procedure for the project specific bank account by the beneficiary; (iv) implementation and control procedures o f the FDRS; (v) upper and lower limit of transfer o f funds; (vi) the special procedure to authorize transfers above the threshold; the required documents and level o f disbursement o f the previous transfer to release the next transfer o f funds to the N G O or Municipality; (vii) the description of the financial/project management training to be delivered to beneficiary organizations; (viii) FDRS specific accounting process for the PMU/Project accounting (inparticular the accounting rule to register cash transfers); (ix) the FDRS specific reporting requirements; (x) the description o f the functionalities o f the FDRS module of the project Management Information System; (xi) the description (staff and functions) o f the P M U team dedicated to the management o f the FDRS; and (xii) the terms o f reference o f the concurrent audit specifically covering the FDRS; and (0 The above-mentioned operational manual requirements related to the FDRS will have to be approvedby the Bank FMteam. 20. Periodic reporting by an external concurrent financial audit acceptable to the Bank that will monitor on a continuous process the transactions and records from sub projects will be part o f the measures to mitigate the FDRS fiduciary risk. This audit will be conducted in addition to the Project annual audit. The contracting o f the concurrent auditor will be a condition o f disbursement for the expenditure category Community Grants. The terms o f reference o f the concurrent audit will require the auditor to provide: (i) opinion on the use o f FDRS funds in an subprojects; (ii)an opinion on the uses o f funds statements sent by the sub projects; (iii)an opinion on the justification o f pending balances from subprojects and its antiquity; and (iv) conclusions and recommendations for modifying processes and improve accountability and transparency o f FDRS financial framework. Opinions, conclusions and recommendations will be provided every six months. 21, Prior to the release o f the FDRS, the following requirements must be fulfilled and will be reviewed and approved by the Bank FMteam: (a) The FDRS module o f the project MIS i s implemented and operational; (b) The P M U specific team dedicated to the FDRS is staffed and operational; (c) The identification and initial training o f beneficiary organizations has been carried out; and (d) The concurrent audit TORSi s acceptable to the Bank. 90 22. If the last three requirements are fulfilled and the MIS module is not yet operational, during project year 1, the Bank FM team may authorize fund release provided a transitory mechanism compliant with Bank FMrequirements i s operational. 6. ImplementingEntity and Staffing 23. The current P M U FM staff arrangements need to be strengthened. The management o f the Administration and Finance Department has experience in Bank-funded operations. However, the technical skills, particularly inaccounting and internal control shouldbe reinforced through capacity building. The P M U FMhuman resources should also be increased and adapted to the magnitude o f the newproject andmeasures should cover the risk o f delays betweenproject effectiveness and loan approval by the Congress. The management o f the FDRS should be carried out by specific staff from the PMU. The proportion o f civil servants should be increased to improve sustainable capacity development. The administrative operational manual will define the FM and FDRS staff strength, the processes and functions, which will be subject to Bank FM reviewby negotiations. 24. MAG organization and operational capacities are weak and generated fiduciary and implementation issues in the previous project. Specific capacity building activities for MAG staff and for the Administration and Finance P M U staff will be designed and implemented throughout the project life. The purpose o f these activities i s to develop sufficient MAG sustainable capacity to manage efficiently project financial management aspects. The Governance and Transparency workshops will also benefit to the MAG and P M U FM staff. The Component 5 o f the project will also provide technical assistance and advice in administration and finance to MAG (see Annex 4). Progress in MAG FM capacity building will be subject to Bank FMmonitoring. Changes to the FMimplementation arrangements will be subject to Bank FMapproval. 7. Budgeting 25. The Head o f the PMU Administration and Finance Team in consultation with the PMU Planning Manager will prepare the budget annually according to Bank Format and National Budget format. The annual project budget is submitted to the Ministry for approval. The national budget, the national FMIS (SIAF), shall include specific lines for the project budget. The budget process i s acceptable to the Bank. 8. Accountingand Reporting 26. The P M U will be responsible for keeping accounting records for Project activities at the Project level. Project Accounting i s on cash basis and will comply with international standards. Transactions will be recorded inthe FM module of the Project Management Information System (MIS) acceptable to the Bank to allow adequate reporting and SOEs control. Project financial statements will disclose funds transferred to the FDRS andjustification for pending balances. 27. The P M U will issue annual financial statements and semiannual Interim Financial Reports (IFR). The proposed format for the IFRs will be part o f the Operational Manual and will include: 91 (a) Source and uses o f funds, for each semester and cumulative (uses by category); (b) Uses of funds by component; and (c) Physicalprogress report for each semester by Project component. 28. The FDRS reporting will be incorporated in the Project Financial Statements and Financial Monitoring Reports. The format o f the FDRS IFRs will be part o f the Administrative Operational Manual and will include: (a) Use o f FDRS funds per sub-component (each beneficiary organization), for each semester and cumulative; (b) Use o f FDRS funds by category for each semester and cumulative; and (c) FDRS Physical progress report for each semester. 29. The trigger for recording FDRS expenditures i s the fund transfer to beneficiary organizations. The A O M will provide detailed accounting procedures for this type o f transactions. 9. InternalControland InternalAuditing 30. The project internal control is weak. The function o f the internal controller from the previous project consists o f ex-ante control and accounting checking. There i s a lack o f updated and monitored summary balances and controls. For instance, the FM assessment mission observed that the register of asset was not consolidated and that, for a random selection, the reconciliation with monthly payment report was not documented. The manual o f procedures i s incomplete and a number o f procedures lack supporting documentation. The Head o f Administration and Finance i s experienced and committed. However, several PMU FM staff lack skills or autonomy, which affects the control capacity. 3 1. Measures to mitigate internal control risk include: (i)increase o f and provision o f training to P M U FM staff; (ii) design and incorporation o f an FM module acceptable to the Bank in the new project MIS; (iii)enhanced project supervision; (iv) systematical documentation and archiving o f the reconciliation between project accounting and project bank accountkreasury and systematic documented justification o f any difference; (v) incorporation o f FAP additional measures; and (vi) continuous capacity buildingo f MAG staff. 10. Flow of Funds 32. Since the completion o f P A W , in which the flow o f funds was managed by UNDP through a Designated Account, MAG has improved its FM capacity through its experience in implementing projects with the IDB and GTZ. In general, MAG will make payments for three 92 components, except for payments done under FDRS subprojects (component 3) which will be made directly by the eligible beneficiaries o fthe subprojects (under the CDD guidelines). Flow of FundDiagram World Bank Loan in US% I BNF I ' reimburseable Transferred to Beneficiaries Accountsin BNF 33. Funds will be withdrawn from the Designated Account at Central Bank and then transferred to the Project Account at BNF as required from time to time for short-term payments to suppliers, consultants, and for transfers to eligible grant beneficiaries. 34. As explained above, the average size grant is US$1,500, and the maximum anticipated is US$lO,OOO. Taking into consideration the high number o f small value grants to be financed during the life o f the project, and to facilitate an adequate and timely implementation and monitoring o f these grants in the current risk environment, the following flow of funds will be followed once an agreement is signed between MAG and the eligible grant beneficiaries: (i) MAG will deliver the beneficiary registry to the BNF; (ii) eligible beneficiaries will open bank 93 accounts in BNF exclusively to receive funds for the implementation o f the community investment subprojects; (iii)the RIS will request advance payments to the MH which will deposit these in the project account in BNF; (iv) after beneficiaries meet the requirements to receive resources, MAG will inform BNF who will transfer the funds in one tranche from the project account to the beneficiary individual bank accounts, and (v) beneficiaries will make payments to suppliers and services for the subprojects activities. In cases o f community investment subprojects above US$lO,OOO, the transfer of fund to the beneficiary account could be made in more than one tranche, and the first disbursement will be an advance based on the needs o f the subproject for a determined period o f time; and subsequent disbursements will be made based on physical and financial progress. Disbursements for community investment subprojects will only be made up to the project completion date, i.e., six months prior to the loan closing date. 11.DisbursementArrangements Allocationof LoanProceeds (in US%'OOO) Expenditure Category Amount financed in US$ Bank's Financing Percentage' 1. Goods, works, non consultant services, consultants' services, 1,900 100% OperatingCosts and Training for Part 1 of the Project 2. Goods, works, nonconsultant services, consultants' services, 8,700 100% OperatingCosts andTraining for Part 2 of the Project 3. Goods, works, non consultant servicesand consultants' services 19,500 100% of amountsdisbursed financed by CommunityGrants 4. Goods, works, non consultant services, consultants' servicesand 2,900 100% training for Part 4 of the Project 5. Goods, works, nonconsultant services, consultants' services, 3,200 100% OperatingCostsandTraining for Part 5 of the Project 6. Unallocated 1,300 I TOTAL I 37,500 I 35. WB Disbursement Method. Loan proceeds will be withdrawn by MAG using the advance method supported by documentation showing that the Loan proceeds previously withdrawn have been used to finance eligible expenditures. Supporting documentation will be in the form o f Statement o f Expenditures (SOEs), at least initially, with the exception o f payments related to contracts above the SOE threshold, which will be reimbursed against full supporting 94 documentation. Once the system for producing IFRs has been tested and found satisfactory to the Bank,the supporting documentationmaybe changedto interimun-audited IFRs. 36. Other Procedures. By appraisal, no need has been identified for the use o f special commitment procedures. Should the need arise during implementation; the Bank will evaluate it and ifgranted, agree to their use via an amendmentto the Disbursement Letter. The project may use reimbursementor direct payments. 37. WB Designated Account. MAG through the Ministry o f Finance will open a segregated Designated Account in the Central Bank in US dollars, to be used exclusively for deposits and withdrawals o f the Loan proceeds for eligible expenditures. After the conditions o f Effectiveness have been met, and the Designated Account has been opened, MAGwill submit its first disbursement request to the Bank, together with the expenditure and financing needs forecast for the next six months. For subsequent withdrawals, SAG will submit the disbursement request, along with the supporting documentation (SOEs or IFRs). 38. Disbursement Deadline Date. Four months after the Closing Date specified in the Loan Agreement. All consolidated SOEs documentation will be maintained by the P M U for post- review and audit purposes for up to one year after the final withdrawal from the loan. The Project will request access to the Bank's Client Connection webpage to access the 2380 Form and to perform the reconciliation process periodically between their bank account and the resources receivedfrom the different sources. 39. Retroactive Financing. The Bank would finance up to a maximum o f US$3.75 million for eligible expenditures under the proposed project incurred after January 1, 2008, but no more than one year from signing. 12. ExternalAudit 40. Previous Proiect External Audit. Acceptable audit reports were submitted to the Bank in the previous project (PARN Project P007918) implementedby the PMU o f MAG. As a result of the 2000 audit and subsequent supervision mission, mitigating measure have been adopted to address audit and FM supervision findings and identified internal control weaknesses. The nature o f the 2001 and 2004 audit qualifications did not indicate substantial FM issues. For the 2002 and 2003 exercises, audit opinions have been unqualified. The following chart indicates for the previous project the audit opinion and the name o f the auditors for the previous five years. 95 41. SRDP Annual Audit. Project financial statements will be subject to an annual financial audit under Terms o f Reference and by auditors acceptable to the Bank within six months o f each fiscal year. Annual audit will cover all funding and expenditures reported in the project financial statements. For audit purposes, the fiscal year will be the calendar year. 42. SRDP Expanded Scope o f Audit. Due to the high level o f risk o f the project under preparation (in particular the transfer of funds to beneficiaries), a financial concurrent audit o f the FDRS sub projects' execution will be carried out on a bi-annual basis to ensure proper use o f funds and adequate reporting. This concurrent audit will include a random selection of beneficiaries for physical output control. The Terms o f Reference of the concurrent audit will have to comply with the Bank guidelines and the scope acceptable to the Bank. The concurrent audit shall provide an opinion on the FDRS financial statements and reports. Audit Report DueDate 1. Project Financial Statements June 30 of each year 2. SpecialOpinion June 30 of eachyear - SOE: an opinion on the eligibility of expendituresreported and the correct use ofLoan funds 3. Concurrent Audit on FDRS, with an opinion on: - Use of FDRS funds in subprojects - Use of funds statements and reporting by subproject - Thejustification ofpendingbalances from subprojectsandtheir justification - FDRS internal control procedures - FDRS follow-up onrecommendations I 13. Action Plan Action ResponsibleEntity EstimatedCompletionDate ProposedPMU staffing andorganization satisfactory to the Bank MAG By DatedCovenant MIS, including FMandFDRSspecific modulessatisfacton, to the bank MAG By Effectiveness Transparency andAccountability workshops to be carried out as input for Initiated beforeNegotiation (first specific governancearrangementsto be MAG Workshop in 24 February 2006) included in OperationalManual Project OperationalManual acceptableto the Bank that includes inter alia:Chart of By Negotiations Accounts, FMRs formats and a specific MAG sectionon FDRS 96 Project auditterms of reference for concurrent audit acceptable to the Bank I MAG By DatedCovenant (to be includedin AOM) Projectauditterms of reference acceptable to the Bank (to be includedinAOM) MAG By DatedCovenant 14. Supervision Plan Type Timing Mechanism 0bjective Visit At least Integratingproject Reviewof International Organization three times a team supervision or DesignatedAccount reconciliation; year missions. uses of funds; Follow-upon External Audit recommendations/raised issues. Review InternalControlprocedures Bank FMtrainingto Annually Through Developthe capacity of PMUFM staff; FM staff supervisionmission Update-thePMuFMstaff in new or specific FM regulations& practices; Improved seminar control ofthe FMrisk Governance Seminars To be agreed Seminars Raiseawarenesson projectgovernance issues Reviewof MAGFM Annually Integratedin project Contributeto the re-integrationof capacity development on site supervision outsourced functions FMR Review Bi-annually Over the FMR Review FMR informationconsistency submittedto the Bank Audit Review Annually Over the Audit ReviewAudit Report Reportsubmitted to the Bank Concurrent Audit Bi-Annually Over the Concurrent Reviewof concurrent audit report and Review Audit Report on follow-up of previousyear FDRS submittedto recommendations the Bank Reviewof pre- Inthecourse Concurrentaudit Ensure that the pre-conditionsfor the conditionsfor FDRS of project review and implementationofthe FDRS are disbursement vear 1 sunervisionvisit fulfilled 97 Annex 8: ProcurementArrangements PARAGUAY: SustainableAgriculture and Rural DevelopmentProject 1. Introduction 1. Procurement for the proposed project will be carried out in accordance with: (i)the World Bank's "Guidelines: Procurement under IBRD Grants and IDA Credits" and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers", both published in May 2004 and revised inOctober 2006; (ii) "Guidelines On Preventing and Combating Fraud and the Corruption inProjects Financedby IBRD Loans and IDA Credits", dated October 2006; and (iii) the provisions stipulated inthe Loan Agreement. The general description o f various items under different expenditure categories are described below. For each contract to be financed by the Loan, the different procurement methods, the need for pre-qualification, estimated costs, prior review requirements, and time-frame have been agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated and extended annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity. 2. Procurement o f Works. The project will finance small civil works for the rehabilitation of project offices, which will be procured following N C B and Shopping procedures. The Paraguayan legislation describes two alternatives for N C B and two alternatives for Shopping, which are acceptable to the Bank if: (i)they are slightly amended to permit that foreign companies not registered in the Country be allowed to participate in NCB; and (ii)terms to submit bids and quotations be extended to make them consistent with Bank recommendations, as displayed in the table below. Local-law thresholds for N C B and Shopping are lower than the maximum accepted by the Bank, as also illustrated inthe table that follows. Acceptance o f these thresholds will bring benefits in terms of: (a) facilitating project implementation through harmonization with local procedures; and (b) taking advantage o f increased transparency and competition resulting from lower N C B thresholds. SBD for N C B and Requests for Quotations agreed with or satisfactory to the Bank be used inall cases. Local Law Methods Applicable to the Project Maximum Bank Thresholds for Methods below the ICB threshold Method Threshold (US$) Amended Term Method Threshold (US%) (days) NCB" 100,000 30 NCB 250,000 (Works) ShortenedNCB16 20,000 20 50,000 (Goods) Shopping17 2,000 10 Shopping NIA ShortenedShopping 200 5 3. Procurement o f Goods. Goods procured under this project would include laboratory equipmentand information systems, office equipment, information systems and vehicles. To the I5Licitacidn Pziblica Nacional: Local NCB procedures comply with paragraphs 3.3 and 3.4 of the Procurement Guidelines, exception made of the requirements for foreign biddersto be registeredinthe Countrybefore submitting bids. 16Licitucidnpor Concurso de Ofertas: is an NCB process with reducedtermto submit bids. "Contrutacidn Directu:is arequestfor quotationsthat isadvertisedthroughthe SICP.Threequotationsarerequiredbefore award. Contratucidn Directu complieswith paragraph3.5 of the ProcurementGuidelines. 98 extent possible, goods would be grouped inpackages above US$250,000 that would be procured through ICB procedures. Contracts for goods estimated to cost below the US$250,000 in aggregatemay be procured using NCB and Shopping procedures as discussedabove. 4. Procurement of non-consultinp services: Non-consulting services procured under this project would include information system maintenance, and services to implement the Communication and Dissemination Campaign. ICB processes are not foreseen, packages amounting below US$250,000 in aggregate may be procured using NCB and Shopping procedures as discussed above. 5. Selection of Consultants: Individual Consultants hired under the project would include trainers; extension agents; social organization technicians; agricultural, institutional and environmental experts; and project management staff. These individuals would be selected through a HumanResources firm due to the high number involved (around 150) and in order to add transparency and professionalism to the process. The project will hire consultant firms to: (i) coordinate the work of diagnostics, planning, implementing, monitoring, and reporting in GEF- and-project overlapping micro-catchments and the IP area catchments under the above- mentioned components; and (ii) support the selection of individual consultants, design a M&E system, and provide financial audit and concurrent audit services. Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Consulting Firms would be selected following QCBS or LCS while individuals through the comparison o f 3 CVs. 6. Training. Training would includeexpenditures (other thanthose for consultants' services) incurred by the Borrower to finance logistics for workshops, meetings and seminars, and reasonable transportation costs and per-diem of trainees and trainers (if applicable), training registration fees, and rental of training facilities and equipment. The procurement would be done using NCB and Shopping procedures as discussed above. Direct Contracting (paragraph 3.6 of the ProcurementGuidelines)may be used:(a) for the payment of registration fees, up to a ceiling amount to be established annually in the Procurement Plan, and (b) for individual transactions amounting below $200, up to a ceiling amount to be included annually in the Procurement Plan and to the extent that local procedures known as "Revolving Fund"" be followed. 7. Operating,Costs. The Project will finance Operating Costs consisting of travel expenses, per-diem and consumables required for managing and supervising the project. These items would be procured NCB and Shopping procedures as discussed above. Direct Contracting (paragraph 3.6 of the Procurement Guidelines) may be used for individual transactions amounting below $200, up to a ceiling amount to be included annually in the Procurement Plan and to the extent that local proceduresknown as "Revolving Fund" be followed. 8. Subpro-iects. The Loan will finance small grants (US$l,500 each on average) to rural beneficiaries on a demand-driven basis for implementation of subprojects. Procurement under subprojects would follow a CDD approach (paragraph 3.17 of the Procurement Guidelines), as further elaborated inthe Operational Manual. Under this approach, goods and services will be `8Fondo Rotatorio. 99 procured on the basis o f standard documentation and procedures, utilizing commercial practices. Group investments estimated to cost US$5,000 or more will be procured using Shopping. The CDD default approach notwithstanding, the P M U will identify opportunities for benefiting from the employment o f local law procurement procedures and its associated Procurement Portal (SICP - Sistema de Informacidn de Contrataciones Pziblicas) in order to gain additional transparency and competitiveness whenever information systems were available at the local level. A proposal on using the SICP or not will be included in the proposed FIPs, CIPs, ICDPs and MIPS,andwill be further reviewedand approvedby the Project Procurement Specialist. The first three proposals / plans o f each type will be additionally prior-reviewed by the Bank. B. Assessment of the Agency's Capacityto ImplementProcurement 9. Organization and Staffing. Project Project implementation will be the responsibility o f the Ministry o f Agriculture and Livestock (MAG). An assessment o f MAG's capacity to implement project procurement was carried out and included a review of the organizational structure for project implementation, the procedures inuse, the capabilities o f personnel assigned to procurement and the nature of the procurement to be carried out. As available resources and experience o f dealing with Bank-financed project in the unit i s limited, a Project Management Unit (PMU) will be established within MAG's Directorate o f Rural Extension (DEAG). The P M U will be in charge o f coordinating project activities, including procurement. In addition, in order to add transparency to the hiring o f individuals, the project will resort to a Human Resources Firm acceptable to the Bank to support this activity. Giventhe decentralized nature of the project, four Zone-Coordination Units (XU) will be established. The staff of the central P M U should include a full-time procurement specialist during the entire project implementation period, to provide for overall procurement supervision and control, process procurement bidding and consultant hiring; and coach the rest o f staff involved inprocurement. The Rural Investment Service (RIS), the sub-unit o f the P M U responsible for the operation o f the FDRS, will work with the procurement assistants in the ZCUs to assist beneficiaries in the carrying out of the procurement required by Component 3; which will be conducted under the oversight of a concurrent audit acceptable to the Bank. 10. Country Procurement Assessment. A CPAR led by the IADB was conducted in 2006 based upon the indicators developed by the OECD/DAC-Issue # 419. It assesses the capacity o f the public sector procurement system based on 12 baseline indicators with their respective compliance/performance indicators, organized around four pillars: (i)legal and regulatory framework; (ii) institutional framework and management capacity; (iii) procurement and market practices; and (iv) procurement integrity and transparency. The conclusion was that pillars (i) and (ii) improvement, while pillars (iii) (iv) require substantial improvement. On the require and other side, the country risk i s high due to weaknesses in control environment and in market practices (i.e., indications of collusion in some sectors). The above notwithstanding, the high scores obtained for pillar (i) it possible the employment of amended local law methods for made low value procurement (below the ICB threshold). l 9The "Methodology for Assessment of National Procurement Svstems (version 4)" was published in July 2006 under the auspices of the joint World Bank / OECD Development Assistance Committee (DAC) Procurement RoundTable initiative. 100 11. The overall project risk for procurement is high, which is the result of: (a) the risky country procurement environment, mainly due to the weaknesses o f control institutions and lack o f competitiveness o f the market; (b) the fact that most o f the procurement would be done through CDD procurement procedures or through the hiring o f high number of individual consultants and (c) the lack o f experienced procurement staff. 12. The corrective measures which have been agreed are: a) resorting to the extent possible on traditional procurement methods, which includes the employment o f the Country Procurement Portal (SICP - Sistema de Informacidn de Contrataciones Pziblicas), (b) employment the SEPA (Sistema de Ejecucidn de Planes de Adquisiciones) for all project activities, (c) inclusion in the Loan Agreement o f the Special Procurement Provisions listed in Section F and o f the Covenants listed in Section G, (d) implementation o f an oversight mechanism over CDD subprojects through a concurrent audit, (e) hiring o f a Human Resources firm to select individual consultants and (0hiringo fthe project Procurement Specialist and Assistants. C. ProcurementPlan 13. The Borrower, at appraisal, developed a Procurement Plan for project implementation that provides the basis for the procurement methods (the initial Procurement Plan). The initial Procurement Plan has been agreed between the Borrower and the Project Team on December 11, 2007 and will be available at the SEPA www.iniciativasepa.org on or before loan effectiveness. D. Frequencyof ProcurementSupervision 14. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended biannual supervision missions to visit the field to carry out post review o f procurement actions. 1:5 contracts, subprojects and grants will by post-reviewed by the Bank. E. Detailsof the ProcurementArrangementsInvolvingInternationalCompetition (a) List o fcontract packages to be procured following ICB and direct contracting: 1 2 3 4 5 6 7 8 9 Ref. Contract Estimated Procurement P-Q Domestic Review Expected Com- No. (Description) cost Method Preference by Bank Bid- ments US$ (yesho) (PriorPost) Opening Date 1 Equipmentfor 390,000 ICB No Yes Yes March Animal Health 2009 Laboratory 2 Equipmentfor 390,000 ICB No Yes Yes September Animal Health 2009 Laboratory 3 Equipmentfor 790,000 ICB No Yes Yes March Animal Health 2010 Laboratory 101 4 Equipmentfor 790,000 ICB No Yes Yes September Animal Health 2010 Laboratory (b) Contracts for Works, Goods and Non-Consulting Services estimated to cost above $250,000 and all direct contracting (if any), the first three (3) processes carried out under each procurement method and category, and the first three (3) proposals/plans for FIPs, CIPs, ICDPs and MIPS,will be subject to prior review by the Bank. 15. Consulting Services (a) List of consulting assignmentswith short-list of international firms; 1 2 3 4 5 6 7 ~ Estimated Review Expected Ref. Descriptionof cost Selection by Bank Proposals Comments No. Assignment US$ Method (PriorPost) Submission Date 1 SENACSA 60,000 QCBS No June 2009 Biotechnology Laboratory- Designof refurbishment and upgrading works. (b) Consultancy services estimated to cost above US$lOO,OOO per contract, single source selection of consultants (if any), recruitment of key staff (as determinedby the Bank when reviewing Procurement Plans), the process for the concurrent audit, the process for the humanresources firm and the first three (3) processes of each selection method will be subject to prior review by the Bank; and (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph2.7 of the Consultant Guidelines. F. SpecialProcurementProvisionsand other Covenants (a) All procurement shall be done using standard bidding documents, standard requests for proposals, model bid evaluation forms, model proposal evaluation forms and contract forms previously agreedwith the Bank; (b) Foreign contractors, service providers, consultants and suppliers shall not be required: (a) to register; (b) or establish residence in Paraguay; and (c) or enter into association with other national or international bidders as a condition for submitting bids or proposals; 102 Minimumterms for submittingbidsand quotations shall be the following: 45 days for ICB, 30 days for N C B procedures amounting US$lOO,OOO and above, 20 days for N C B procedures amounting US$20,000 and above, 10 days for Shopping processes amounting US$2,000 and above, and 5 days for Shopping procedures amounting below US$2,000; The Borrower: (a) will feed the Bank publicly accessible Procurement Plans Execution System (SEPA) within 30 days o f Negotiations with the information contained in the initial Procurement Plan; and (b) will update the Procurement Plan at least biannually or as required to reflect the actual project implementation needs and progress and will feed the Bank Procurement Plans Execution System (SEPA) with the information contained in the updated Procurement Plan immediately thereafter; The mechanism o f direct payment from the Treasury for payments in local currency will be followed, as established by local regulations; however, payments inforeign currency to be made accordingto the BankProcurement andConsultant Guidelines will be done through bank transfers to the suppliers' or consultants' accounts abroad; Bidderswill not be requiredto prove the purchase o fthe biddingdocuments; and Procurement for subprojects will be done usingthe SICP (Sistema de Informacidn de Contrataciones Pziblicas) and local-law procurement methods whenever possible. G. Procurement-RelatedCovenants Inorder to disseminate project implementation requirementsandprocedures, and define roles, responsibilities, mechanisms, schedules and accountability arrangements, the Borrower will prepare a Project Operational Manual, to be submitted to the Bank before appraisal. It will include, inter alia, the project's institutional arrangements and operational, accounting, procurement and disbursement procedures. The approval by the Bank o f the Project Operational Manual will be a condition for LoanNegotiations; The selection o f individual consultants will be done with the assistance o f a Human Resources Firm, to be hiredby the Project to this endeavor. The hiringo f this Firmhas beenpresented as a dated covenant inthe LoanAgreement to be complied within three months after effectiveness; The P M U will be staffed at all times by a Procurement Specialist and four Procurement Assistants (one per ZCU) acceptable to the Bank. They shall be hired before the publication o f the first Request for Expressions o f Interest or the first Specific Procurement Notice, as the case may be; 103 (d) The Project will contract a concurrent audit, both for administrative and physical control, under TORSsatisfactory to the Bank. The hiringo f the concurrent audit firm shall take place prior to the approval ofthe first Subproject to be financed with Loanproceeds; (e) Within one (1) year counting from Loan Effectiveness, the Project will implement an integrated project management system acceptable to the Bank, including internal administrative steps tracking, project progress monitoring and consultants performance evaluation. The systems will include ad-hoc red-flag mechanisms. Either the system currently beingdeveloped by SENACSA or the one under implementationat M E C may be used as a basis; (f) Within one (1) year counting from Loan Effectiveness, the Project will implement digital files to store both the documentationrelated to the procurement process and to contract management (guarantees, payment certificates, invoices, receipts, etc.). The filing system developed by SENACSA or the one at MEC may be used as a model; and (g) Within one (1) year counting from Loan Effectiveness, the Project will create a web page to disseminate its most significant project information*'. See for example www.prodeco.org;.pv and www.senacsa.gov.pv. 20For example, the Operational Manual, Bidding Documents and Standard Request for Proposal, technical background, designs, specifications and drawings of the works to be financed, terms of reference of the works to be executed with project funds; subprojects to be financed; beneficiaries of such subprojects; opportunities for scholarships, agreementswith thirdparties andprogress and monitoring reports. 104 Annex 9: EconomicandFinancialAnalysis PARAGUAY: SustainableAgriculture andRuralDevelopmentProject 1.ProjectBenefits 1. To attain the project's objectives, its implementation strategy will be based on the following elements: (a) Rehabilitationand conservation o f natural resources; (b) Use o f appropriate and more productive and profitable farming practices and methods; (c) Introductiono f more diversified production patterns; and (d) An improvedcommercial mechanisms. 2. Poor crop yields, low farm incomes and food insecurity among poor small-scale farmers and indigenous communities on one hand and environmental and soil degradation, on the other, are connected phenomena which are strongly related to the prevalence o f inappropriate agricultural practices and cropping patterns. The conversion to a more profitable and sustainable system will involve a gradual process aimed at reaching, first, productive rehabilitation, and, second, sustainable, diversifiedproduction, though this will be a path that not all farmers will be able to complete during the project period. 3. Rehabilitation (Le., restoration o f the natural productive capacity) o f farming systems which present environmental degradation and low productivity i s the highest priority. Simple but efficient technological practices, such as use o f lime to lower soil acidity, basic fertilizing, contour cropping, etc. will have great productive and environmental impacts. Achieving sustainable farming systems is a higher and more ambitious goal, under which households will reach levels o f production, income and food availability above the poverty line in a context o f preservation o f natural resources. Innovation and product diversification are crucial elements o f the project's strategy to achieve this. Technologies andmarkets requiredfor crop diversification, vegetables for instances, are available locally, and the additional volumes to be put inthe market will be marginal. 4. It is estimated that activities to rehabilitate farming systems will cover at least 80% of target households inthe concerned micro-catchments. It i s expected that a maximum o f 50% o f those households will progress beyond this rehabilitation and adopt practices o f sustainable production (including innovation and diversification) to lead to sustainable production systems duringthe five years ofproject implementation 5. The table below details the mainfeatures and objectives of the current and the proposed conversion stages. 105 Agriculturaland Socialexclusion Production,marketing, employmentand income nat present): Seasonalagriculture Little community organization. Low productivity, no Soil managementbasedon Insufficient access to social diversification, limitedmarket- extractingnutrients without services. oriented production. replacement. Unsecured land tenure. Traditional marketing and high Chemical pest control. Low quality housing and transaction costs absorbedby Manual and mechanic weed sanitation. intermediaries. control. Food insecurity. Low occupation of labour force No investments in environmental (underemployment). Low incomes. IEnvironmentProtection Degraded soils: soils Social awarenessactivities and Development of more diversified improvement; contour cropping training. production systems (crop rotation (slopes >2%); subsoiling (crop Promotionof community and and association). lines); acidity correction - liming micro-catchment organization. Promote innovative procurement (as needed); basic fertilizing; Community participation in and marketing mechanisms green fertilizing (eg: Cumanda diagnostics, planning and aimed at reducingtransaction yvyra'i). execution of project actions. costs and improving access to Non-degraded soil: soils new markets. improvement; contour cropping (slopes >2%); deep tillage. PhaseTwo Strategy for a( iievingSustainabilitythrough Di .ersificationand Innovation - (Degraded and non degraded Consolidationof local Associative management of soils) organization in its different levels marketing, market information, Summer and winter rotation (community, micro-catchment, community investments, etc. crops for soil protection and municipality) and improved self Commercial alliances for fertilizing. management. accessingnew markets and Zero tillage cropping. Fullparticipation of beneficiaries products. Integrated pest management. inproject planning, monitoring Economic diversification. Forestry and agro-forestry and evaluation and systems. implementation. Post-harvest management. Improved domestic livestock production. 6. Overall, the project will improve natural resource management (soil conservation practices) and productivity on 16,800 farms2'. Of these farms, 5,000 are also expected to develop innovative and diversified sustainable production systems consistent with land capabilities and 5,000 are expected to diversify production. In addition, 2,030 indigenous households will be assisted for improving natural resources management and increased food production. 2. Illustrative Farm Models and Financial Analysis 7. To assess the financial and economic impact o f the above indicated project strategy, nine farm models representative o f individual agricultural farming and one representing collective indigenous production in the project area were identified. They represent a working hypothesis 21Based on past experience, it is expected that about 80% of targeted small-scale-scale producer population (Le. approximately 11,545 farmers) will effectively become involved in the project productive activities. The total area of micro-catchments eligible to receive project assistance is 353,35 1hectares. 106 of likely beneficiary choices made in response to the proposed project activities and incentives towards the adoption of agricultural practices andimplementation o f investments. 8. Small-scale farming models were constructed on the basis o f the following criteria: household income above or below the poverty line22'prevailing production patterns and present crop yields (as indicative o f soil degradation). The sizes of farm models did not exceed 20 hectares as, according to a recent survey, 90% o f poor households have holdings smaller than that size. Inaddition, the financial support and most o f the technical assistance and organization support provided by the project i s directedto that group. 9. About 40% o f small-scale farmers (less than 20 hectare) cultivate cotton which represents the main source o f monetary income for over half of them. They devote part of the available farming area to food crops for domestic consumption (maize, beans, cassava, vegetables, etc.) and very often raise poultry and livestock for egg and milk consumption. Those that do not grow cotton are mainly concentrated infood crops and peanuts and grow other crops such as castor-oil plant or sesame. The different farm models tend to be representative o f one or many different areas in the two departments. An indigenous model i s also considered for IP communities, which assumes communities to be living almost at subsistence level, with a combination o f individual and collective assets and farming activities. 10. The main assumptions for the financial analysis are: (i)constant mid-2005 labor, input and output prices; (ii)constant real exchange rate; (iii)100% o f investment costs (excluding labor) included in farm models, financed by the project investment fund (FDRS); and (iv) 40% o f farmers ineach model achieving innovative and diversified sustainable production systems. 11. Incremental costs considered in the farm financial analysis include incremental on-farm productive investment and recurrent expenditure for the adoption o f sustainable agricultural production practices and other expenditures related to post-harvest activities. 12. The result of the financial analysis in terms o f net incremental income o f the different indicative farm models i s summarized for PY06 inthe table below. The models are presented in pairs indicating the options for rehabilitation and sustainable production systems. Average on-farm income at full development Net incrementa, Type of Farm Model (US$) income I I 1 1Cotton -Degraded Soils M1-1 Rehabilitation 992 1,624 632 64% 2 1. Cotton- Degraded Soils M1-1 Innovative and diversified sustainableproduction systems (IDSPS) 992 2,121 1,129 114% 3 2. Cotton-Non-degraded Soils M1-2 Rehabilitation 1,391 2,132 741 53% 4 2. Cotton-Non-degraded Soils M1-2 IDSPS 1,391 2,548 1,157 83% 22Data collected from the 2003 Household Survey (Encuesta de Hogares, 2003). 107 Average on-farm income at full development Net incremental Type of Farm Model (US$) income 13. Under the project, farmers' net incomes are forecast to increase anywhere between 24% and 123% (excluding the model with a minimum o f agricultural activity), depending on the farmers' initial conditions, the cropping pattern and the farmers' own dynamics to go beyond the rehabilitation stage and adopt practices of sustainable production. All farm models will assure incomes above the rural poverty line (US$1,270 per household per year23), in addition to the benefits derived from improved natural resources management, increased food availability and better housing and sanitation conditions. 14. Income impact o f mostly market oriented models 2 (cotton), 8 and 16 (diversified with vegetables) inthe sustainable production systems i s expected to be particularly high. The impact is in part associated to their already "improved" initial situation and/or particularly good agro- ecological and economic framework. The new natural resources and crop management practices to be adopted by model 2's project beneficiaries will allow them to overcome the initial soil degradation and low yields situation and to increase cotton production close to its potential. The vegetable production models will involve farmers that have already undergone an intensification and diversification process (Le. tomato), and with assistance from the project will reinforce their farm production capacity. They are located mostly inareas o f Caaguazu and San Pedro. 23Calculatedon the basis of a consumptionbasket. DGEEC, Encuesta de Hogares, 2004. 108 15. On the other hand, producers with off-farm livelihood strategies (models 11 to 14), where food production and small livestock raising prevail over market crops, will likely benefit less from good practices and have lower income impact than those that are market-oriented. Households represented by model 17, who have minimum farming activity, will mainly benefit from housing improvements and other social services, training and family gardens. Benefits derived from agricultural improvements, mainly food production, are expected to be small in absolute value, although very significant in relative terms because o f the expanded area. It should be noted that off-farm livelihood strategies in the project area are not unusual but not necessarily widespread. According to the 2003 Household Surveys, 70% o f household family members in the project area are only employed on-farm and a mere 3% are only employed off- farm (22% are designated as "other situation" which involves a number of unexplained employment modalities). 16. The financial internal rate o f return was not considered relevant for assessing the project's expected financial impact, as investments and technical assistance services are provided to the beneficiaries as grants and hence the model results do not reflect the actual market cost- benefit. 3. EconomicAnalysis and Sensitivity 17. The overall internal economic rate o freturn(EIRR)o fthe project is estimated to be 17%. This estimate is conservative, since it does not take into account some benefits accrued from the project that are extremely difficult to quantify such as: (i)positive environmental externalities at the micro-catchment and community level, including improved water quality, biodiversity conservation, etc.; (ii)better nutrition and health as a result o f increased and diversified production; (iii)long-term effects o f strengthened community organization and self management; and (iv) improvements in social services. 18. The expanded agricultural activities will also create new on-farm employment opportunities for the equivalent o f 8,670 man-years annually, in PY6. However, the model showed that the on-farm labor requirements derived from the proposed technologies are well below the availability o f family labor, therefore it i s not expected that the project will have a significant impact on hired labor. As shown above, households with mostly off-farm livelihood strategies are not many and most probably this i s associated to the lack o f job opportunities in rural areas in the project departments. Therefore, under these circumstances, the increased demand for labor resulting from the project will be a valuable economic benefit. 19. The cost stream for the economic analysis is based on four elements: (i)on-farm investmentandrecurrent costs (all); (ii) extension to farmers; (iii) community development costs and training; (iv) community and municipality investments; and (v) partial costs o f project administration. Costs utilized were the base costs plus physical contingencies. 20. Incremental net benefits were estimated on the basis o f the farm models (increased agricultural production and farmers' income) and the prices adjusted to reflect the economic opportunity cost, while all transfers including taxes and subsidies were excluded from the analysis. It should be noted that the latest estimation o f shadow prices inParaguay was done in 109 the 1970s. The rate of exchange is currently determinedinthe open market and, as there are no noticeable trade restrictions in Paraguay, domestic prices tend to correspond to border prices. While the project will increase on-farm and off-farm labor use in the areas where it will be implemented, unemployment and under-employment will not be eliminated. Therefore, shadow prices for unskilledlabor were estimatedat 0.70% of the market wage rate. Inthe case of skilled labor, the market rate was assumed to reflect its opportunity cost. All other inputswere adjusted by the standardconversion factor (0.90) to account for taxes. The time horizonis 20 years. 21. Analyses were performed on the EIRR to measure its sensitivity to the estimated expected benefits and costs and the stream of benefits. These indicated that were benefits to fall by 15% from their expected estimates, the EIRR will be 11%, and, similarly, were costs to exceed their expected values, the EIRR will be marginally lower, 12%. Finally, were both situations to occur simultaneously at 10%change, the EIRRwill fall to 10%. Alternative Outcomes - EIRR --- Basic Internal Economic Rate of Return 17% Benefits reducedby 15% 11Yo - Costs increasedby 15% 12 % Combination of both changes (10%) 10% 4. FiscalAnalysis 22. According to the analysis, the fiscal impact of the project will initially be negative, as direct impacts stemming from revenue generation are likely to be small. However, experience from similar projects indicates that, in the long run, fiscal impact of these types of investments may be expected to be recuperated at least partially due to the improved financial situation of some beneficiaries and its effect on their purchasing power and expenditure patterns and, consequently, on fiscal revenues. Most importantly, it is expected that there will also be budgetary savings as a result of the decreased need for local governments to provide economic support to the beneficiary population. In addition, based on experience from PARN, the maintenance cost of rehabilitated roads is expected to be reduced significantly by better erosion control andthe project's innovative road design. 110 Annex 10: SafeguardPolicyIssues PARAGUAY: Sustainable Agriculture and RuralDevelopmentProject 1.Overview Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.0 1) [X 1 [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [XI [I Cultural Property (OPN 11.03; revised as OP 4.11) [I [XI Involuntary Resettlement(OP/BP 4.12) [I [XI Indigenous Peoples(OD 4.20, revised as OP 4.10) [XI [I Forests(OP/BP 4.36) [XI [I Safety of Dams (OP/BP 4.37) [I [XI Projects inDisputedAreas (OP/BP/GP 7.60)* [I [XI Projects on LnternationalWaterways (OP/BP/GP 7.50) [I [XI *By supporting the proposedproject, the Bank does not intendto prejudice the final determinationofthe parties' claims onthe disputedareas 1. Environmental Rating. B - Partial Assessment. The Project is designated as Category B project, based on the above assessment of potential impacts. On November 23, 2004, the Bank PCN (which partially forms the basis for this document) was reviewed by the Safeguard Assurance Team (SAT), which agreed with the proposed Category B rating. The SAT also agreed that the project i s "an environmentally positive project which primarily aims to introduce more environmentally friendly technologies and productive activities". All relevant SAT documents can be found inthe project files. Subsequent QER review on January 24,2006 by the SAT team also highlighted the Indigenous Peoples safeguardsmechanisms as "innovative and an example of good practice." 2. Project Compliancewith Applicable SafeguardPolicies 2. Environmental Assessment (OP/BP/GP 4.01). The project is classified as a Category B. It was designed to ensure compliance with the requirements of the Bank umbrella policy on Environmental Assessment (OP 4.0 1). Positive environmental impacts are a basic objective of the project. Some project activities will have potential environmental impacts and will mostly be those financed by the FDRS to support the adoption of improved land use practices, community and municipal subprojects and works. In conformity with Bank policy and GOP legislation on Environmental Assessment, an Environmental Assessment (EA) was conducted, and an Environmental Management Plan (EMP) was prepared. Strict environmental evaluation procedures and environmental licensing mechanisms, as well as proposing mitigation measures, are built into the EMP and the Operational Manuals of the FDRS. Three levels or categories of projects have been established based on their environmental risk or potential for impacts and a framework for review, approval, supervision, and monitoring has been established within the EMP. A guide for mitigation measures has been includedinthe EA based on F A 0 guidelines in 111 this regard.24 The project also has been formally licensed by the Secretary o f the Environment as set forth under national law and regulations in regard to environmental impact assessment. The license was issued inJanuary 2006 and is renewed every two years. 3. A negative list o f activities that are not eligible for fundingwill also be incorporatedinto the EMP andthe OperationalManual inregardto subprojects fundedthrough the FDRS. 4. The draft EA and respective EMP were submitted to the Bank in December 2005. The final EA will be sent to the Infoshop before Appraisal. In addition the EA will be posted on the MAG website. Consultations, including stakeholder meetings, workshops preparation, presentation events, and interviews were held duringthe preparationperiod. 5. For the environmental monitoring and impact evaluation, a number o f output and impact indicators will be measured and supported under the M&E subcomponent which will include a systematic socio-environmental monitoring o f 10 pilot micro-catchments (for details, see Annex 3). Training has also been incorporated into the EMP and the program for project management, field personnel, and stakeholders include several environmental thematic areas including: Environmental assessment and management, land-use planning and watershed management, and other thematic areas that may result from local needs duringproject implementation. Study tours and exchanges also are included to improve understanding and mainstreaming of environmental and micro-catchment management. 6. Pest Management (OP 4.09). The project activities seek to reduce use and dependence on harmful agricultural chemicals and will not significantly increase use o f pesticides or promote their use to any important level; therefore a pest management plan has not beenprepared. Small amounts o f veterinary antiparasitic chemicals and vaccinations will be procured for the activities related to strengthening animal health. In those cases, the Bank will provide its no-objection based on the request for procurement. These substances will conform to Bank OP 4.09 standards in this regard, specifically only class I11 and IV substances as classified by the WHO can be procured. 7. Inaddition, it should be notedthat small amounts o fpesticides will probably continue to be used by a small portion o f micro-catchment farmers for which disposal o f containers may be requested by communities to reduce health and environmental risks associated with pesticide use. This disposal will follow the guidelines set forth under OP 4.09 Bank guidelines, in particular FA0 Guidelines for Packaging and Storage o f Pesticides (Rome, 1985), Guidelines on Good Labeling Practice for Pesticides (Rome, 1985), and Guidelines for the Disposal o f Waste Pesticide and Pesticide Containers on the Farm (Rome, 1985). In addition, pertinent national laws and regulations inthis regard will also be followed. The EMP procedures indicate a 8. The project will support technical assistance for the adoption of proven, economically and environmentally sustainable Integrated Pest Management practices (IPM), an approach designed to increase farmer productivity (yields) while reducing input costs, human health risk 24 Guia para la Formulacidny Evaluaci6nde PequeAas Inversiones Rurales- RuralInvest - Serie de Publicaciones Ruta-Centro de Inversiones, FA0 por Aidan Gulliver, Dino Francescuttiy KatiaMedeiros- San JosC, Costa Rica- Mayo 2000. 112 and adverse environmental impacts through the virtual elimination o f pesticide use. The I P M approach further increases sustainability o f agro-ecosystems by focusing on improving the knowledge and skills o f farmers to enable better management o f resources. Finally, IPM programs are economically sustainable as they reduce farmers' dependence on procured inputs. 9. Indigenous Peoples (OD 4.20, revised as OP 4.10). The proposed project will specifically target indigenous peoples in the project area. Thus, during project preparation, a social assessment o f the indigenous population was carried out and consultations were held in2005 and 2006 with indigenous leaders (representing 13 indigenous associations), INDI technical staff, technicians working in the previous project's indigenous component, and representatives o f indigenous NGOs working in the area, to discuss the project with them and to determine indigenous communities' priorities and needs. When the project target area was decreased to two departments, additional consultations were carried out with indigenous leaders in 2007. Their concerns were subsequently incorporated in the project's Indigenous Strategy (equivalent o f an Indigenous Peoples Planning Framework or IPPF). Project activities will be implemented with the full participation of the communities and will be carried out in a manner respectful o f their cultural characteristics. To ensure this, extension agents working with indigenous populations will have prior training and/or experience working with indigenous communities. In addition, an anthropologist will be employed by the project to consult on indigenous and other social issues. Moreover, an Indigenous Peoples Planning Framework has been preparedto orient the project's interaction with indigenous communities, can be found in the project files, and is summarized inAnnex 14. 10. Forestry (OP/BP 4.36). The proposed project will primarily support environmentally protective activities and those which are supportive o f small-scale farmers (Le., farm and community forestry). N o logging activities, charcoal or fuelwood production will be supported through project funding although these activities take place within the project region and micro- catchments. The project will finance investments focused on reforestation or regeneration o f natural forests to protect water sources and waterways, and reforestation for productive purposes inbeneficiary holdings to reduce impactsto native forests. N o large scale reforestationactivities with exotic species will be carried out and the total area of plantation or enrichment activities is estimated under 5000 hectares. 11. Natural Habitats (OP/BP 4.041. The project, as well as the semi-blended GEF project, seeks to increase sustainability, maintain and enhance habitat for biodiversity conservation, and provide environmental goods and services for rural communities. N o significant conversion or degradation o f natural habitat is expected from the project investments. Improvements innatural resource use and management should provide an important for the maintenance o f connectivity in the landscape. Critical natural habitats and protected areas have been identified within the project area and precautions will be taken through the EMP which provides for an environmental review framework to ensure that natural habitats are not adversely affected and positive effects are maximized. 113 Annex 11: ProjectPreparationand Supervision PARAGUAY: SustainableAgriculture and RuralDevelopmentProject P1anned Actual PCNreview 11/24/2004 Initial PID to PIC 01/05/2006 Initial ISDS to PIC 01/04/2005 Appraisal 11/29/2007 11/29/2007 Negotiations 12/12/2007 12/18/2007 Board/RVP approval 01/29/2008 Planneddate of effectiveness 09/01/2008 Planneddate of mid-termreview 09/01/2010 Plannedclosing date 12/28/2013 Key institutions responsible for project preparation include: Paraguay's Ministry of Agriculture and Livestock (MAG), Paraguay's Secretary of Environment (SEAM) and the United Nations Food and Agriculture Organization (FAO). A Japanese PHRD grant for US$482,600 (TF053772) was received, and approximately 50% of the available resources were usedso far. Bank staff and consultantswho worked onthe project included: Name Title - (Init Gerard0 Segura Task Team Leader, Senior RuralDevelopmentSpecialist LCSAR Harideep Singh Senior RuralDevelopment Specialist LCSAR ReynaldoPastor Senior Counsel LEGLA Michael Carroll LeadNaturalResourcesManagementSpecialist LCSAR Alexandre Arrobbio Senior FinancialManagement Specialist LCSFM Andres Mac Gaul Senior Procurement Specialist LCSPT Jose Janeiro Senior FinanceOfficer LOAFC Frank Fragano EnvironmentalConsultant LCSAR Marcel0Sili Consultant LCSAR Teresa Roncal Operations Analyst LCSAR Diana Rebolledo LanguageProgramAssistant LCSAR Alvaro Soler Senior RuralDev Specialist LCSAR Diego Paysse RuralDevelopment Specialist Consultant NestorBragagnolo Agronomist, Micro-catchmentSpecialist Consultant JudithLisansky Senior Anthropologist LCSEO Maria IsabelBraga Senior EnvironmentalSpecialist LCSEN Emilio Rodriguez Senior Procurement Specialist Consultant KamineJorge Senior Counsel LEGLA KarenRavenelle-Smith LanguageProgramAssistant LCSEN Graciela Lituma RuralDevelopment Specialist Consultant Humberto Costa RuralDevelopment Specialist Consultant Matthew Cummins Junior ProfessionalAssociate LCSER Jorge Caballero FAO/CP, Economist FAOICP Katia Medeiros FAO/CP, Sr. EnvironmentalSpecialist FAO/CP TakayukiHagiwara FAO/CP, CommunityDevelopment Specialist FAO/CP 114 Total Bank funds expended to date on project preparation: US$400,867.44 EstimatedApproval and Supervision costs: 1. Remaining costs to approval: US$40,000 2. Estimated annual supervision cost: US$lOO,OOO 115 Annex 12: Improved GovernanceFramework PARAGUAY: SustainableAgriculture and RuralDevelopmentProject 1.GovernanceIssues 1. The efficiency of public expenditure depends highly on the governance environment and practices. Therefore any effort to improve resource allocation must be accompanied by an enabling governance framework that facilitates efficiency and inhibits corrupt practices. 2. The World Bank Institute (WBI) defines governance as the traditions and institutions by which authority ina country is exercised for the common good. This includes: (i) process by the which those in authority are selected, monitored and replaced; (ii) capacity o f the government the to effectively manage its resources and implement sound policies; and (iii) respect o f citizens the and the state for the institutions that govern economic and social interactions among them. Corruption on the other hand, i s generally defined as "the abuse o f public office for private gain." In an environment o f weak governance, it is believed that corruption may thrive. However, weak governance itself i s not necessarily synonymous with corruption, but rather with different manners o f inefficiencies. For instance, due to budgetary structure, bureaucracy, scarce resources or inadequate management capacity, agencies may distort priorities or otherwise not adequately prepare programs (all o f which lead to inefficiency, but not necessarily as a result o f or to corrupt practices). Thus it i s important to distinguish betweencorruption (intent and action for private gain with public goods) and a range o f governance failures that likely provide opportunities ifnot inducements for rent seeking behavior. 3. With this in mind and following the government's initiatives o f improving transparency and governance overall, this project was designed to foster good governance practices by the project with special attention to the lead implementing agency, the Ministry o f Agriculture and Livestock (MAG). The approach adopted i s an Improved Governance Framework. Therefore, this annex describes the major elements o f weak governance in Paraguay, assesses weak governance risk areas specific to the rural sector and presents the resulting ImprovedGovernance Framework for the project. 2. Paraguay Country Context 4. Paraguay Governance Diaanostic. Paraguay was ranked in the 11lth among 163 place nations by Transparency International's 2006 Corruption Perceptions Index,up from 144thplace in 2005. Paraguay also continually scores as one o f the lowest in the world with respect to governance by the WBI. In2005, the WBI noted that Paraguay's control o f corruption indicator was inthe lowest place for the Latin American countries studied. Domestic reports by watchdog groups25 are also highly critical and conclude that there is ample room for improvement regarding these issues in Paraguay. Critical reviews conclude that key contributing factors are "Reportssuchas "Political Culture andDemocraticGovernance Practices" published in 2004 by the Centro de Informaci6n y Recursos para el Desarrollo2', a well known Paraguayan civil society organization focused on democracy, and "Index o f Transparency, Integrity and Efficiency" and "A National Survey on Conuption" published in 2005 by Transparency Paraguay. 116 that public institutions in Paraguay lack adequate management systems, public accountability and transparency. 5. Current Governance Improvement Initiatives. Since mid-2003 the current government has sought a recovery o f confidence in state institutions by means o f a sustained fight against corruption, and specifically greater participation o f civil society in the formulation o f public policy and the control o f public expenditures. Paraguay has adopted international conventions26 against corruption and, with technical support from WBI, established an anti-corruption commission, the National Integrity Council (CISNI), which focuses primarily on three areas: customs, the judiciary and public procurement. The Commission developed a program o f institutional reforms for each area during 2000 and, following a period of public consultation, has since been actively promoting the adoption o f these reforms. The most outstanding accomplishment o f these efforts i s the implementation o f the new Law o f Public Procurement. The implementation o f the new customs code has also been crucial for substantive improvement of an area repeatedly assessedas the most corrupt inParaguay. In2005, CISNI and the national statistics agency, with technical assistance from WBI, started additional monitoring and evaluation o f efforts to date. 6. Despite efforts, much remains to be done. For example, basic legislation to improve public accountability (such as access to public information, regulation o f declaration o f public officials' assets, civil society participation and modification o f civil service) have not been adopted despite the close lobby and follow-up o f several civil society organizations. 3. Assessment of Weak GovernanceRiskAreas 7. Country-wide Governance Assessment.*' The country risksas defined inthe CAS may be summarized as follows: (i)existence of corruption; (ii) basic governmental management weak systems; (iii) special groups pressure to persuade the government to accommodate their interests; and (iv) decline o f the rule o f law. Bank assessments noted other specific risks, including high risko fmisuseof funds and a weak control environment that indicatedthe need for reforms inthe areas o f internal controls, external audits and control o f decentralized entities. 8. The most recent Country RiskReview concludedthat significant progress had been made on procurement and financial management in all GOP institutions, which are confirmed by 26 Including Inter-American and United Nations Conventions Against Corruption. These conventions foresee several measuresthat impose the countries an agenda to improve their fight against corruption such as: (i)enabling greater public access to information, especially about public expenditures; (ii) civil service reform, including public declaration of assets and code of ethics for governmental officials; (iii)improvement of institutional control of the judiciary system, procurement, customs, etc.; (iv) enhancement of accountability of political parties; and (v) increase incivilsocietyparticipationinpublicsphere, amongothermeasures. "Thissectiondrawsonassessmentscarriedoutinpreparationof the Country Assistance Strategy (CAS) and, in particular, the Country Financial Accountability Assessment (CFAA) and the Country Procurement Assessment Review (CPAR) of2002 and the Paraguay Country Risk Review, World Bank, April, 2006. 117 external reviews. Thus, having achieved satisfactory progress on the Procurement Action Plan andthe FinancialAction Plan, at presentParaguay remains inthe CAS base case scenario28. 9. Sector and Proiect Specific Governance Assessment. Rural sector governance issues can be extrapolated from the analysis in the Implementation Completion Report (ICR) for the Paraguay-Natural Resources Management Project (PARN), as well as lessons learned in other rural operations. The following governance issues were identified as risks for PARN, including: (i)institutional weakness including government institutions with inadequate management systems leading to inefficiencies; (ii) inadequate FM management contributing to inappropriate FM or procurement practices, insufficient internal controls and weak control of decentralized entities; (iii)lack o f experience with approaches that foster high public accountability and transparency, specifically (a) civil society participation; and (b) broad access to public information. The Improved Governance Framework for PRODERS is designed to address these specific governance challenges. 4. Improved GovernanceFramework 10. The project's development objective is to improve the quality o f life o f small-scale farmers and indigenous communities in the project area in a sustainable manner, by supporting actions that will strengthen community organization and self-governance, improve natural resources management and enhance the socio-economic condition o f the target group. The micro-watershed area-based approach emphasizes highly participatory diagnostics that enable better assessment o f local needs, improved planning and implementation that facilitate more efficient and effective use o f resources that generate larger social, environmental and economic impacts. The micro-watershed area-based approach is by design a highly participatory approach designed to foster a high degree o f public accountability, particularly in terms o f participation, demand-drivenactivities and broad access to public information. 11. The project's Improved Governance Framework, drawing on the aforementioned governance assessments and specific governance issues relating to the rural sector, must also address governance issues relating to institutional weakness and lack o f adequate management and risk mitigation systems in Paraguay as well as strengthening mechanisms for public accountability. Its overall aim i s to facilitate efficiency and inhibit corrupt practices. 12. Specifically, the PRODERS Improved Governance Framework i s designedto: (A) carry out institutional strengthening and improvement o f management systems; (B) mitigate fiduciary risks; and (C) enhance public accountability and transparency by means o f a highly participatory approach and improved access to public information. In addition, the project will be closely supervisedwith (D) an improved governance supervision approach. 28 To pass to the high case, the triggers included: (i) enactment of revised legislation on asset declaration, the including enforcement mechanism; and (ii) the revision of the civil service law and establishment of merit-based criteria. 118 A. InstitutionalStrengtheningandImprovedManagement 13. PRODERS will support strengthening MAG and improving its management systems to more effectively and transparently manage its resources at boththe central level, via the PMU in DINCAP/MAG, and at the regional level primarily through sub-units of DEAGIMAG (see Annex 6 for further details). This will be accomplished through: capacity building for improved management, the use of improved management systems, improved coordination and decentralized demand-driven management, and results-focused decentralized monitoring and evaluation. 14. Capacity Building. Well targeted capacity building activities will enhance MAG'Sability to more effectively manage resources according to Bank standards and implement the project. The project will support (i)training in project management, public sector accounting, treasury management, Paraguay public sector characteristics, financial controls and organization to be delivered to a selection of civil servants from MAG with special attention to DINCAP and DEAG. It will also support (ii)the provision of technical assistance, studies and advisory services in public sector organization, financial management, accounting and treasury processes in the public sector. The types of training and advisory activities will also be linked to the Bank's Fiduciary Action Plan for Paraguay (currently being drafted). See also Section B Fiduciary Risk Management Measures below. 15. Improved Management Systems. MAG's institutional capacity will also be strengthened through the establishment of a Management Information System (MIS). The MIS will incorporate records of project implementation progress, procurement, accounting, auditing, etc. and is supported by a technical assistance strategy that includes specialized advisory services, trainers and services to support project administration and monitoring (See Annex 8 for further details). The MIS will also facilitate improved coordination and information exchange with other MAG programs and activities as well as facilitating inter-ministerial exchange. In addition, a Geographical Information System (GIS), building on PARN's successful experience, will be made operative and designed to provide technical information (including resource mapping, better targeting of project support to beneficiaries as well as avoidance of duplication of benefits) to further increaseMAG's management effectiveness. 16. Improved Coordination and Demand-Driven Decentralized Management. It has been agreed that DEAG at the central, departmental and local levels will play a stronger role in implementation as well as in coordinating project activities as well as linking PRODERS with other relevant programs and projects. See Section C Public Accountability below for more details on project decentralized structures. 17. New Paradigm for RuralExtension. Basedon the PARN experience, the proposedproject will provide further in-depth training for DEAG/MAG and other rural extension agents in the new bottom-up sustainable land management approach to rural extension that differs from traditional top-down extension approaches that emphasize the delivery of pre-set technological tool-kits. All DEAG extension agents will be trained as well as all DEAGand other extension agents operating inthe two departments. The newer extension paradigm assigns a much greater role to community involvement, participation and to local knowledge for a better assessment of 119 producers' needs, more integrated technical assistance solutions covering social, environmental and production concerns, more effective use of resources and greater impacts. This approach will also contribute to enhancing the public accountability of project activities. 18, Results-Focused Decentralized Monitoring and Evaluation. The project will implement a robust results-focused decentralized Monitoring and Evaluation (M&E) system (detailed in Annex 3) to support project planning, management and implementation. One o f the explicit objectives o f the project's M&E system i s to promote accountability for resource use against objectives. By focusing on results and performance, PRODERS will strengthen MAG'Sability to effectively manage resources. See also Broad Access to Project Information and Participatory Monitoring inSection C. B. Fiduciary RiskMitigation Measures 19. The proposed project streamlines a series o f fiduciary risk mitigation measures to improve MAG'S overall governance capacity. Because o f the high level o f inherent risk in Paraguay, MAG'S weak control environment and insufficient Financial Management (FM) capacities, and the transfer o f funds to final beneficiaries, the residual risk level o f the proposed project i s rated high despite the positive experience o f the previous operation, PARN, in this respect. Inresponse to these FMrisk factors, the proposed project has developed a two-pronged strategy: (i)incorporating a Comprehensive Fiduciary Framework; and (ii) introducing additional measures into the project's FM arrangements to ensure proper mitigation. See Annex 7 for more detailed information. 20. The Comprehensive Fiduciary Framework includes a series o f financial management measures including, among others: (i)FM capacity building at MAG; (ii)enhanced FM arrangements; (iii)Bank compliant reporting system and control framework linking disbursements to service output to final beneficiary; (iv) concurrent audit o f the mechanisms o f fund transfers to final beneficiaries; (v) enhanced FM supervision; as well as the following fiduciary measures: (vi) coordination with the integrated fiduciary assessments and linkages with the upcoming Paraguay Fiduciary Action Plan; and (vii) Bank fiduciary staff advice to MAG. 21. Additional measures for the project's FM arrangements includes: (i) o f a satisfactory use Administrative Operational Manual that contains (a) Chart o f Accounts for the project, (b) format and contents o f the annual financial statements and FMRs format for monitoring and evaluation purposes, (c) terms o f reference for the external auditing, (d) terms o f reference for the FDRS specific concurrent audit, and (e) specific section for FDRS implementation process; (ii)that project funds (including the FDRS)as well as treasury functions will be managed directly by the P M U o f MAG; (iii) that the project MIS will include an FM and a specific FDRS module acceptable to the Bank; (iv) that specific P M U staff will be dedicated to the management of the FDRS; (v) specific semi-annual reporting for the FDRS; (vi) governance and transparency workshops will be carried out from project preparation onward; and (vii) that FDRS release will be conditioned by the existence o f a functional specific MIS module acceptable to the Bank and with a satisfactory concurrent audit report. 120 22. In summary, while FM supervision standards for high risk projects includes: (i) supervision site visits at least three times a year; (ii)FMRs reviewed bi-annually; and (iii) Annual review o f the Audit reports, this project will also include additional supervision including: (iv) Review o f the concurrent audit report; (v) review o f the specific conditions to release FDRS (Annex 7); and (vi) Bank specific FM training for project staff and Governance Workshops. 23. Lastly the project would request the following expandedexternal audit scope: (i) Annual Report on the Audit o f Project Financial Statements; (ii) Annual Report on the Special Opinions including (a) SOE: Opinion on the eligibility o f expenditures reported and the correct use o f Loan funds and (b) Special Account; and (iii) Concurrent Audit opinion (external audit section in Annex 7). C.ImprovingPublicAccountabilityand Transparency 24. Participatory Approach. The majority o f the project's activities are focused on strengtheninglocal-level social organization and self-governance for poor small-scale farmer and indigenous communities in two o f the poorest departmentsin Paraguay using transparent socio- economic and environmental targetingcriteria, detailed inAnnex 4, Appendix 1. 25. Building on the experience o f the previous operation, PARN, other micro-catchment area-based approaches particularly in southern Brazil, and community-driven development approaches world-wide, the bulk o f the project participatory management activities will be decentralized at the micro-catchment and municipal levels. Beneficiaries will participate extensively in project management through decision-making structures established, or strengthened in the case of existing structures, for the purposes o f the project. This will include beneficiary execution groups and steering committees, which will operate in coordination with the MAG-led project executive structure, summarized below and further detailed in Annex 4, Project Description, and in Annex 6, Implementation Arrangements. In addition, annual governance and transparency workshops with project stakeholders andbeneficiarieswill be held. 26. Key project supported mechanisms for beneficiary involvement in planning, decision- making, implementation and monitoring will include the establishing and consolidating two kinds of beneficiary execution groups: (i) Micro-catchment Development Committees (MDC) in each o f the project-supported micro-catchments; and (ii)Indigenous Associations (IA) for indigenous communities (see Annex 4 for further details). MDCs and IAs are the entities that will, with technical assistance, participate indiagnostic activities and formulate Micro-catchment Development Plans and Indigenous Community Development Plans. 27. Subproject proposals developed based on the aforementioned plans will be screened and selected for grant financing under the project's Sustainable Rural Development Fund (described inmore detailinAnnex 4, Appendix 2). The subproject proposals will be reviewedand screened by the MDCs and IAs which provide their recommendations to the project's Rural Investment Service which finalizes grant decisions according to criteria and guidelines specified in the project Operational Manual. Once awarded, grant funds will be transferred directly to 121 beneficiaries through their legal associations. Implementation o f subprojects will be carried out by the beneficiaries, withproject technical assistance. 28. In addition, there will be three types of mixed governmental and civil society steering committees: (i) Municipal Steering Committees (MSC) to be comprised o f at least 50% members who are members o f the target beneficiary groups or their representatives and which will act as a forum for local participation; (ii)Departmental Development Committees (CODES); and (iii) the National Coordination Committee (NCC) to be comprised o f representatives from the federal, departmental and municipal agencies involved in the project, as well as micro-catchment and indigenous representatives. The MSCs' major functions will be to: (i)monitor and evaluate general project implementation performance in their respective municipalities; (ii)consolidate requests from MDCs and set priorities for municipal subprojects within the context o f Micro- catchment Development Plans; and (iii)monitor the implementation o f approved municipal subprojects. 29. It is expected that this combination o f executive and beneficiary deliberative organs, in addition to help maximizing local participation, decision-making and project accountability to the lowest practical implementation levels, will also be a major factor for achieving sustainability o f benefits after the project terminates. 30. Broad Access to Proiect Information and Participatow Monitoring. The project design will also promote social accountability and transparency by means of: (i)detailed results-based a framework for project monitoring detailed in Annex 3; (ii)monitoring o f main social, environmental and economic impacts; (iii) the project Management Information System (MIS); and (iv) the project's communication and dissemination strategy detailed in Annex 4, Subcomponent 5.3. The entire participation strategy pursuedby the project, based on the social assessment and indigenous peoples strategy (Annexes 13 and 14), i s designed to allow for a permanent feedback process between the project staff and the beneficiary population. 31. First, a results-focused decentralized M&E system (detailed in Annex 3) to support project planning and management will be implemented by the project. Specific objectives o f the system will include: (i) tracking changes towards the project objectives, outputs and inputs, to facilitate making changes as needed during project implementation, hence providing a basis for more informed and effective project-related decision-making while promoting greater accountability for resource use against objectives and work plans; and (ii)providing and receiving feedback from stakeholders and generating inputs for dissemination o f project results and lessons learned. 32. Second, the beneficiary perception o f project performance and impacts will be monitored closely. Extension agents from MAG'SDirectorate o f Rural Extension (DEAG), as well as from the project, will train MDCs and IAs in both understanding and monitoring perceptions. Such activities will include periodic workshops with project participants to assess project implementation and plan future actions, and quarterly and semi-annual evaluation meetings o f MDCs and MSCs, respectively. 122 33. Third, transparency and accountability will be further served by the project Management Information System that will incorporate records o f project implementation progress, procurement, accounting, auditing and other information. Information about producers benefited, status o f requests for support and proposals, and general implementation progress will be public. 34. Fourth, the project communication and dissemination strategy will support project information dissemination, and sharing experiences and results both within and outside the project. It is designed to bothprovide project stakeholders with systematized knowledge for the management o f natural resources and rural poverty reduction, as well as to facilitate monitoring o f project progress and expenditures by beneficiaries thus enhancing long-term sustainability. In addition to a project home page, printed materials and use o f print, radio and television media i s plannedto promote project transparency and accountability. D. ImprovedGovernanceSupervisionApproach 35. The Bank team has formulated an improved governance supervision approach that will entail more intensive than usual supervision on the part o f the Bank. Lessons learned in numerous operations world-wide indicate that it i s especially critical for the Bank to maintain close supervision in situations o f weak overall governance as is the case in Paraguay. The successful implementation o f the proposed project is critically linked to the implementation o f the improved governance framework outlined above, and i s especially critical during the start-up period o f the project when training, capacity building, establishment o f improved management and monitoring systems, and the set-up for improved public accountability needs to be made operative. Hence, a multi-disciplinary Bank team will supervise initially on the average during the first year o f the project at least three times a year, and subsequently two to three times a year depending upon project performance. 123 Annex 13: Summary of Social Assessment PARAGUAY: SustainableAgricultureand RuralDevelopmentProject 1.Introduction 1. A social assessment was carried out in the two target department^^^ during project preparation. Its focus was on determining: (i) the principal socio-economic issues of the area with specific attention to poverty and the environment; (ii) primaryconcerns and demands o f the the target population; (iii) causes o f the principal socio-economic issues of the target area; the and (iv) possible options to address them. Prior to the initiation o f investment activities, a participatory diagnostic will be carried out in each o f the 84 micro-catchments and the 73 indigenous communities targeted by the proposed project to ascertain more closely the specific demands of each community and how best to address them in a manner consistent with the project's philosophy. The full Social Assessment can be found inthe Project Files. 2. The Social Assessment was based on workshops with focus groups, in-depthinterviews, as well as a review o f relevant secondary sources. Field research centered around: (i) visits with municipal authorities and public and private development institutions in the area; (ii)general surveys o f communities in the study area; (iii)community meetings to inform and involve communities and raise their awareness o f the characteristics and objectives o f the work; and (iv) identification o f leaders incommunities (producers, youth). 2. Socio-economicIssues 3. Overview. Paraguay i s home to an estimated 5.9 million inhabitants, 97% of whom live in the country's Eastern Region, and has a population density of 12.7 inhabitants per km2. In 2006, the population growth rate was estimated to be 2.45%30. O f the country's total population, 56.7% lives in urban areas and 43.3% lives in rural areas. The country has the highest rate o f population growth and i s the most rural in South America. 4. Paraguay i s a Multicultural and Bilingual Country. Its official languages are Spanish and Guarani. In82.5% o f rural households, the predominant language is Guarani compared to 8.5% for Spanish. Inurban areas, Spanish i s commonly spoken in 54.9% o f households. The current indigenous population is 85,674, representing 1.6% o f the country's total p ~ p u l a t i o n ~At~ .7.8%, the illiteracy rate is one o f the highest in Latin America32. The infant mortality rate is 19 per thousand births, and the childhood mortality rate i s 25 per thousand. The maternal mortality rate is 163 per thousand births. 29 An initial social assessment was carried out in five departments:Caaguani, Caazapa, Canindeyh, Concepci6nand San Pedro, with follow-up attention to the two departments targeted for this operation, Caaguazu and San Pedro. The other three departments would be consideredfor possible future scaling-up. 30 CIA World Factbook, 2006 estimates, last updated 19 September 2006. 3 1GeneralBureauof Statistics, Surveysand Censuses.2002 Indigenous Census. Fernandode la Mora, August 2003. 32 For population age 10 and over. DGEEC, op. cit. 2004. 124 5. Economy. Paraguay's economy is highly dependent on agricultural and livestock production, which account for close to 25% of the GDP, generate nearly 85% of exports and employ 45% of the country's labor force. Nearly 84% of all export goods fit into five categories: cotton, soy bean, vegetable oils, meat and wood; a significant part of the national industry is based on the processing of these commodities. Sixty-five per cent of total exports correspondto just two categories: soy and cotton (either unprocessed or with some degree of proce~sing)~~. However, inrecent years there has beena markedshift away from cotton andtowards soy. 6. Poverty. One of the most noteworthy characteristics of the country's social situation has been the worsening of poverty in recent years. The population living in poverty has been steadily increasing since 1995. In 2005, 32% of the total population lived below the poverty line, and in rural areas that number reached 40.1%. At the same time, 17.1% of the total population lived inextreme poverty, and 22.8% of the rural population lived in extreme poverty. In concrete terms, this means that in rural areas over 1.0 million people lived in poverty, including virtually all of Paraguay's 85,674 indigenous people, with one in every 3.5 rural inhabitants living inconditions of extreme poverty. 7. Income Distribution and Land Tenancy. Closely linked to poverty are the country's severe inequality in income distribution and land tenancy. In 2002, the Gini coefficient for income was 0.5834 making Paraguay one of Latin America's most inequitable countries. Moreover, according to the 2006 UNDP Human Development Report, Paraguay ranked below the world average of human development, placing 91" in a ranking of 177 countries and dropping two places from the previous rnea~urement~~.With regard to land tenancy, vast tracts of land are concentrated in the hands of a few owners while the average size of small landholdings continues to shrink. Indeed, 1.1% of rural landholdings account for 84% of the land, while 30% of the rural population owns no landat all. 8. Inthe EasternRegion, where 97% ofall Paraguayanslive, 84% ofrural farms have fewer than20 hectares. Ofthese, nearly halfhave fewer than 5 hectares. Addedto this situation is the fact that approximately 60% or more o f small-scale farms inthe EasternRegion lack title deeds. This lack of land tenure regularization creates insecurity and a consequent lack of incentives for investments both in farm and home improvements, as well as difficult access to formal credit. Without legal security of land, it is difficult to make on-farm investments to increase land productivity and promote the sustainableuse of natural resources. 9. Agriculture. Paraguay's agricultural development has been characterized by the exploitation of natural resources and a dynamic change in land use, where the constant has been the replacement of forest ecosystems with agricultural crops and pastures that have eliminated vast forest zones and affected the environment, inturn limiting options for possibilities of future use. Deforestation and the incorporation of new lands for agriculture, together with the application of inappropriate technologies and unsustainable crop practices, have contributed to the deterioration of natural resources. The loss of a significant part of forest wealth is one of the most negative features of the country's environmental deterioration. 33UNDP, 2003, "National Report on Human Development: Paraguay." 34UNDP, 2006, Human Development Report, Table 15: Inequality inIncome or Expenditure. 35Ibid, Table 1: HumanDevelopment Index. 125 10. Environmental Resources. Paraguay is home to part of the Atlantic Forest, which is regarded as one of the most threatened ecosystems inthe world with only 7% of its original area still extant. Despite its ecological importance, Paraguay suffers from severe environmental degradation. This includes accelerated erosion, loss of soil fertility, loss of biological diversity, decreased quantity and quality of water resources and severe deforestation. 11. The Eastern Region possesses forest ecosystems with very rich biodiversity, represented by varied and extensive plant communities that are appreciated around the world. These constitute national assets that must be conserved, due to their enormous capacity to generate economic, social, and environmental benefits for the entire population. It is worthwhile to mention the presence in the region of an important part of the Guarani Aquifer, one of the world's largest underground reserves o f fresh water, which requires rational management to sustainably supply drinking water to the population. 12. The current forest cover of the Eastern Region is approximately 3,500,000 hectares of which only 765,000 hectares correspond to productive forests. Unless these environmental deterioration processes are corrected, they will increasingly affect the population's well-being and will be felt even more harshly by the very poor, particularly in terms of their quality of life andtheir sources of employment. 3. The Rural Population inthe Eastern Region 13. Most of the rural population inthis region, which includes the project's target group, are poor small-scale farmers who use traditional production methods including intensive use of family labor. 14. The region has a total of 255,573 landholdings with fewer than 20 hectares, 4,370 "farm" units (between 50 and 200 hectares), 354 large-scale agricultural enterprises (over 200 hectares) and 4,627 livestock units (over 500 hectares). 15. The project's concentrated area of operation includes a large presence o f what various authors have called the "colonization region," corresponding to the development of uncultivated lands from the late 1950sto the mid-l980s, which involved around 120,000 families intotal and enabled the migration of a large contingent of peasant families from the old stagnant communities of the Central Regionto new settlements or colonies. 16. The most numerous settlements of these families are located in the Departments of San Pedro and Caaguazu, and in large zones of Concepcih. Basically, the classic peasant production model was constructed there: a productive strategy basedon the combination of some five to eight average agricultural categories, chiefly manioc (cassava), cotton, corn (maize) and beans (inthat order). 17. Another important aspect of this type of production is the weakening of the historical matrix of combining agricultural and livestock production. There are fewer small-scale farms with beef and dairy cattle than in other departments and regions, which may indicate a 126 weakening in the reproductive capacity of traditional small-scale farming. Meat and dairy production was always a source of food security and the possibility of monetary income from the sale of products or animals intimes of poor harvests or low agricultural prices. 18. Another regional context is that of "non-inclusive agricultural modernization" which corresponds to the Department of Canindeyu. Under this context, small-scale farmers are encountering greater obstacles to production because they cannot compete with medium-scale agricultural enterprises. 19. Finally, another regional scenario is the "traditional context" with the predominance of a bimodal classic agrarian structure composed of large cattle ranches and small-scale farmers on which peasant communities in most cases hold remote historical claims. This is present in Caazapaand inthe more traditional zones of Concepcih. 20. The EasternRegion is also the traditional territory of an indigenous population of 44,135 distributedamong ethnic groups belonging to the Tupi-Guarani linguistic family. Similar to the non-indigenous population, they live inconditions of extreme poverty with severe degradationof their natural resources and, in many cases, lack of legal title to their lands. Contemporary Guarani production is characterizedby four main systems: (i)vegetable gardens, (ii) hunting and fishing, (iii)gathering; and (iv) salaried work and sale of artesanal goods. See Annex 14 for more information on the indigenous population inthe project area. 4. Definitionof Target Population 21. The target population consists of some 16,800 small-scale farmer households and approximately 2,030 indigenous households in the Departments of Caaguazu and San Pedro, which were identifiedfor project actions inaccordance with the national PLIPEX36index. 22. The following prioritization indicators were considered: (i) density of rural poor (interms of UBN by subsistence capacity); (ii)land use conflicts (percentage of annual crops on soils inappropriate for crops); and (iii)loss of forest cover between 1999 and 2003 (percentage deforestedin2003 compared to 1999). 23. In the two project departments, the following were used to select the targeted municipalities: (i) maps of the survey of deforestation between 1999 and 2003 classified in four levels of deforestation; (ii) soil use maps (1995); (iii)maps of land use conflicts, classified in four levels of conflict; and (iv) map of poverty density per km2,indicating four levels of priority. This data was used to distribute the municipalities among four priority groups is described in Table 1below. ~ ~~~ 36The PLIPEX index, proposed in 2004 by Paraguay's Secretariat for Social Action, i s a method for targeting and prioritizing territorial areas inwhich to implement social investmentsaimed at the reduction of extremepoverty. Its values derive from a combination of income levels and UBN. 127 Table 1:Distributionof Micro-catchmentsAccordingto the EstablishedLevelof Priority Priority Level Number of Micro-catchments Total Micro- Municipalies Assisted catchmentsAssisted High 3 up to 5 MediumHigh 11 up to 4 MediumLow 12 upto 3 I TOTAL 38 84 24. Two types o f criteria will be considered in the identification o f the specific 84 micro- catchments to be assisted by the project: (i)a poverty criterion with a weight o f 60%' utilizing the housing map by micro-catchments (fewer than 150, up to 250, and over 250 houses), UBN, and the presence o f INDERT settlements/colonies; and (ii) environmental criteria with a weight o f 40% considering deforestation, soil use conflicts, and the existence o f micro-catchment located inthe headwaters o f river basins. 25. As an initial requirement for project involvement in a micro-catchment, at least 70% o f its residents must agree to participate, and the corresponding municipality must provide its support. 5. PrincipalResultsof the SocialAssessment 26. Key Social Issues. The social assessment and the diagnostic carried out by the project preparation team highlight the principal problems facing Paraguay's rural region: (i) deepening poverty in the country's rural sector in recent years; (ii)the low quality o f housing, lack o f sanitary facilities, and contamination o f water sources, which have negative effects on the rural population's quality o f life; (iii)degradation o f natural resources, which negatively affects the productivity o f small-scale farmers' lands and worsens poverty; (iv) lack o f resources and technical information among the rural population to provide the necessary equipment and information on productive practices and conservation measures; (v) insufficient understanding and implementation of participatory methods by rural project technicians and beneficiaries; (vi) insufficient implementation o f local development policies and programs; and (vii) the absence o f market opportunities for small production, especially the need to introduce alternatives for beneficiaries, accompanied by proper marketingsupport. 27. Cultural Features o f the Rural Population. Several social aspects that relate to small-scale farmers' culture may have a positive or negative impact for development should be considered in the project. These include: (a) The cultural features o f Paraguayan small-scale farmers include the isolation of rural communities from nearby cities and especially from modern, globalized world markets. This population, the largest social group in the country, i s characterized by cultural features that may be called "conservative."; and 128 (b) The Guarani-mestizo culture is part o f the country's heritage and i s thus an asset that must be retained to promote sustainable development by transforming the small-scale farmers from a passive, manipulated object to the protagonist o f his own development. This cultural heritage is o f an essentially community-oriented, participatory, supportive, and spiritual nature. 28. Women. Women, who comprise 49% of the population in rural areas, play an important role as agricultural producers. Moreover, studies have shown that women are much more receptive than men to adopting technological innovations, especially when presented with a positive relationship between such innovations and improvement o f the situation o f the family. Despite this, little effort has beenmade to directly and differentially target womenwith technical and financial assistance. The project will work to build capacity o f local women, promote the establishment of Women's Associations, and will ensure that they play a role in the day-to-day functioning o f the project through representation on the Community Development Groups (CDG) and Micro-catchment Development Committees (MDC). In addition, through technical assistance and assistance in obtaining land titling, it will work to increase awareness o f a recent law requiring that the titling o f landholdings be in the name o f both husband and wife, even in the cases o f common-law marriages. 29. Youth. Few efforts have been made to effectively integrate youth into development. Youth organizations, while present at the secondary school and university levels, are sorely lacking in capacity. Thus, the project will work to integrate youth into regional development by working to increase their capacity with specific focus on improving their employability in the agricultural and livestock sectors. Moreover, young people will have representation in the organizations responsible for the basic management o f the project, CDGs, MDCs and Municipal Steering Committees (MSCs). In addition, the project will promote the formation of Youth Associations inthe micro-catchments. 30. Indigenous Peoples. Approximately 2,030 indigenous people living in 73 communities will benefit from project activities. Similar to the non-indigenous population o f the targeted population, they live in conditions of extreme poverty with severe degradation o f their natural resources. However, in addition to this, they are faced with a number o f problems specific to their status as indigenous communities. O f the 73 communities, only 24 hold legal title to their lands, although even inthese cases the size o f the landholding is often not sufficient to meet the needs o f the community (nor commensurate with the number o f hectares dictated by law). Moreover, inadequate attention has been given to addressing the concerns o f Paraguay's indigenous communities, especially in a manner consistent with their traditional beliefs and organizational structures. Thus, the proposed project will work with all 73 communities located inthe two target departments to mainstreamthem inall of the project's components. They will receive the same project benefits as their non-indigenous counterparts but these will be prepared and implemented in such a way as to respect their specific cultural characteristics, including language and community leadership structures. 31. Principal Social Challenges in the Proiect Area. Some o f the principal social challenges inthe departments surveyed during field work for the social assessment may be summarized as follows: 129 The lack of representation by poor rural communities in citizens' and demographic participation bodies, and the lack of a social structure for participation and accountability in municipal and government agencies. Some organizations have little capacity for management and participation in decentralization and local development processes. Most poor small-scale farming communities lack community or social organization; Food security problems inmost poor ruralhouseholds; The fragmentation of families and communities in relation to their support networks and economies and the ongoing exodus of youth and middle-aged adults to cities and other countries; Lack of basic infrastructure insmall-scale farms and communities: poor quality of sanitation services, absence of serviceable roadsto transport production, etc.; Lack of productive skills development and training for small-scale farmers and their families to design and execute a sustainable farm plan and a family business planstrengthenedby means of amethodological and unifiedintervention strategy; Progressive deterioration of the environment and degradation of the soils of small-scale farms which steadily decrease their productivity; and Land tenure problems, lack of titling and of landtenure regularization, and lack of security as a result of land-related conflicts. 32. Principal Demands and Concerns of Beneficiaries. Consultation workshops were held with beneficiaries and other actors inall five departments initially considered for the project area and included the following participants: representatives of small-scale farms and indigenous communities, the RuralAssociation of Paraguay, cooperatives, universities, NGOs, departmental governments, municipalities, government institutions such as MAG, DEAG, SENACSA, and INDERT, representatives of programs working in the zone such as GTZ, PROCESAL, PROAGRO, and representativesofthe media. Follow-up consultations were also heldinthe two departmentstargeted for the initialphase of the operation: Caaguazuand San Pedro. 33. Indigenous Peoples' Needs and Demands.At the consultation workshops, representatives of all ethnic groups in the project zone stated that their principal concerns and needs are related to: (i)support to the regularization of land tenure; (ii)reinforcement of communities' food security by improving subsistence farming; (iii) technical assistance in agricultural production, project administration and management, recovery and conservation of communities' natural resources; (iv) development of income-generating activities; (v) improvement of housing and sanitary conditions; (vi) provision of appropriate mechanisms for indigenous representation in the public arena in general and within the project; and (vii) the need to strengthen indigenous organizations so that their demands are heardinthe public sphere and duly met. 130 34. They expressed great interest in technical assistance and investment funds to support the self-sufficiency o f communities and the preservationo f their natural resources. 35. With regardto work with the indigenouspopulation, one o f the project's basic principles will be to use a participatory methodology that respects the indigenous development process, based on the principle of cultural pluralism and respect for the environment. No separate indigenous component is envisaged, rather the indigenous population's participation in all project components, with differentiated actions determined according to their demands, taking into account their cultural, organizational, and economic characteristics. 36. Needs and Demands o f Small-scale Farmers and Other Stakeholders. Some o f the principal demands o f small-scale farmers and other stakeholders refer to: (i) the development o f a comprehensive socioeconomic model that includes small-scale farmer organizations and reinforces the sustainable production o f small-holdings and income generation; (ii)the development o f a comprehensive technical assistance intervention model that includes the training and active participation o f beneficiaries, technical assistance for agricultural production and for the recovery and conservation o f natural resources incommunities and on farms; (iii) the establishment o f conflict resolution strategies and the regularization and titling o f land; and (iv) the need to establish clear mechanisms for participation in and social control o f the project, and the strengthening and training of community organizations andneighborhood associations. 6. Lessons LearnedFrom PARN and Built Into Project Design 37. The project's aim is to make use o f the lessons learned from PARN's implementation, learning from its experiences and integrating those lessons into the designand implementation o f the proposedproject. Lessons learned with specific relevance to social issues include: (a) The micro-catchment is a particularly appropriate physical unit for land use planning, since it reflects all the problems occurring on a larger scale with natural resources and economic and social systems. As in PARN, the new project will prepare micro-catchment development plans following a participatory diagnostic that defines the communities' objectives regardingsustainable development; (b) The participation of local and civil society organizations is crucial for project sustainability. As was done in PARN, the proposed project will promote their participation in diagnostic and participatory planning work and, later, in project implementationand M&E; (c) Some of the lessons learnedfrom PARNS Indigenous Component and integrated inthe design of the proposed project are: (i)the need to provide proper technical assistance to indigenous communities, with staff trained to work with different cultures and with the sensitivity to respect cultural features. In this regard, both technicians who worked with PARN are being contracted to train project staff to work with indigenous peoples; (ii)the need to respect indigenous development processes, adapting the project to the needs and demands arising from the communities themselves, without imposing pre-established agendas or working 131 paces and modalities that are foreign to these communities; and (iii)the importance o f working with indigenous organizations, respecting the decision- makingmechanisms of each ethnic group and promoting the active participation o f indigenous organizations inproject implementation; and (d) Finally, to preempt some o f the difficulties experienced by PARN, the project will: (i)promote greater participation o f beneficiaries in project decision-making mechanisms; (ii)work with technicians trained to jointly handle social, productive, and environmental aspects; and (iii)through its highly participatory approach and extensive beneficiary training, promote community empowerment and social capital, thereby encouraging broader project acceptance by beneficiaries. 7. The Project's ParticipatoryApproach 38. The work methodology will be based along three lines: (i)except for in indigenous communities, the project planning and implementation units will be the micro-catchment or sets o f adjacent micro-catchments, as the socio-environmental land unit for planning and intervention, with a view to its inclusion in a broader strategy and operation that involves the rural area; (ii)emphasis will be placed on the active participation o f beneficiaries in project implementation, on training for technicians and beneficiaries inparticipatory methodologies, and on the inclusion o f beneficiaries inproject decision-making; and (iii) care will be taken to special implement programs that are culturally appropriate for indigenous communities. Inthis regard, special emphasis will be placed on the proper training o f technicians who will work with these communities, and on careful monitoring o f project actions by anthropologists. In addition, activities inindigenous communities will be planned around the physical and leadership structure o f the communities inconjunction with their respective IndigenousAssociations. 39. The project will focus on various social issues or obstacles to development and empowerment. These include beneficiary mistrust o f development assistance programs and a general lack o f awareness o f development opportunities. Second, the paternalistic relationship between poor small-scale farmers and indigenous communities and other sectors o f society i s a major obstacle to the establishment o f programs that promote self-management. Changes will be introduced through the project's highly participatory focus. Inthis regard, a change in the rural extension paradigm will be sought, aimed at replacing the traditional paternalistic focus with one o f mutual learning and empowerment o f beneficiaries. A wide-ranging training program and the creation o f decision-making bodies among beneficiaries will be some o f the means by which the project will try to change the prevailing social perception and create trust between project beneficiaries and technicians. 40. An intensive, wide-ranging project dissemination and communication program is envisaged, aimed at the population in the two departments that form the project area. Through this dissemination program, the project's objectives, strategies, and procedures will be explained to all levels o f rural society, including potential beneficiaries, executors, cooperators, local and department governments, and other stakeholders. Second, the training and mobilization o f stakeholders will begin long before and continue throughout project implementation. The 132 content, place, and duration o f training sessions, courses, and information events will be adjusted to the various types o f audiences: small-scale farmers, indigenous communities, local and departmental governments, NGOs, etc. Third, there will be different levels of decision-making, rangingfrom the community level to municipal, departmental, and national levels. Beneficiaries or their representatives will be included at each level. Fourth, the project's operational procedures will be geared toward ensuring that decisions are made democratically and that consensus is sought. 41. Stakeholder Involvement. Community organization will empower project beneficiaries to express their opinions and participate in decision-making. Organizational strengthening for self- management will support the development o f social capital in micro-catchments. All o f the project's components will be undertaken in highly participatory manner and micro-catchment and indigenous communities will play a key role inthe planningand execution o f management and investmentplans for sustainable development. 8. DesignImplications of the Social Assessment 42. Lessons learned both from previous projects and the Social Assessment have been carefully considered and constitute an important contribution to project design. Thus, the project's work methodology and participatory approach (outlined above) are reflected in the design o f the project's components, including: 43. Component 1 - Community Organization Development and Capacity Building. This component will support training for the management o f sustainable rural development in community organizations and local institutions in the area o f intervention and will promote the creation o f CDGs and MDCs in each micro-catchment, as well as deliberative and consultative agencies at the municipal and departmental levels. It will promote the creation and strengthening o f beneficiary networks and associations and will promote their operation and self-management. These community organizations will play an important role in the formulation o f community diagnostics and plans and inproject monitoring and evaluation. 44. Subcomponent 2.1 - Rural Extension. Through this subcomponent, beneficiaries will prepare development plans and implement eligible investment subprojects with the assistance o f project extensionists (financing will be provided through the Sustainable Rural Development Fund under Component 3). This subcomponent will contribute to the establishment and improvement of trust between project beneficiaries and technicians, responding to the social demands o f communities as well as their technical and financial assistance demands. 45. Component 3 - Sustainable Rural Development Fund (FDRS). This subcomponent will fund approved beneficiary subprojects. It will be the instrument used in encouraging the adoption o f the project strategy in the beneficiary micro-catchments and indigenous communities. These funds will be used in accordance with the Micro-catchment Development Plan or Indigenous Community Development Plan prepared by the relevant community. In this regard, the Investment Fundwill seek to respond to the needs felt by communities and individual families, rather than imposing pre-established projects. 133 46. Subcomponent 5.3 - Monitoring and Evaluation. The M&E system will be highly participatory and will include a wide range o f stakeholders, especially beneficiaries and their representatives at different levels. The results will be widely disseminated, especially among beneficiary communities. Regular meetings and workshops will be held so that participants can identify the project's obstacles and problems, especially if difficulties arise in achieving the project's objectives. 47. MonitorinP o f Main Social Impacts. The beneficiary perception on the project performance will be monitored closely through a number o f events that will be encouraged by the project extensionists. They include annual meetings with project participants to assess project implementation and plan future actions; and quarterly and half-year evaluation meetings o f M D C and MSC respectively. In addition, the entire participative strategy pursued by the project will allow for a permanent feed back process between the project staff and the beneficiary population. 134 Annex 14: Summary of IndigenousPeople's Strategy3' PARAGUAY: SustainableAgriculture and Rural DevelopmentProject 1. Introduction 1. According to recent census data38there are 85,674 indigenous people (IP) in Paraguay (1-5% of the country's total population) who are divided into 17 ethnic groups and five linguistic families: Guarani, Lengua-Maskoy, Matako, Guaicuni, and Zamuco. Thirteen of the 17 ethnic groups live inthe Chaco and four inthe EasternRegion. 2. Inthe two departments of the EasternRegion selectedfor project implementation, there are slightly more than 9,700 IP (2,030 households) in the 73 communities. The ethnic groups living in the selected departments belong to the Guarani linguistic family: the Mbya, the Pai Tavytera, the Ava Guarani, and the AchC (see Attachment 1). 3. These Guarani peoples currently live by carrying out a combination of economic activities including subsistence farming, hunting, fishing, gathering, occasional paid labor, and handicrafts (see Attachment 2). It is important to note that the lands currently occupied by these aboriginal people no longer provide sufficient natural resources traditionally needed for the communities' survival due to the widespread exploitation of their territories by others. 4. The IP population in Paraguay is grouped in communities that are legally recognized according to Law 904/81 on "Indigenous Communities." of the 73 communities existing in the proposedproject area, 24 have lands titled intheir names and 49 occupy lands belonging to third parties (see Attachment 3 on land tenure). 5. The IP who inhabit the proposed project implementation area, similar to their poor small- scale farmer neighbors, live in a state of extreme poverty and with considerable degradation of their natural resources. Considering that the proposed project's fundamental objectives are strengthened community organization, poverty reduction and the sustainable management of natural resources, indigenous people, one o f Paraguay's most vulnerable populations, were naturally considered as project beneficiaries. The proposed project has been designed to incorporate IP concerns that focus primarily on food security, the protection of their environment and lands, and the strengthening of their community organizations. It is not anticipated that the proposedproject will generate any negative effects on IP that will need to be mitigated. 6. It is important to note that this will be the first large-scale sustainable development project targeting the indigenous population ever undertaken by the Paraguayan Government. However, the Ministry of Agriculture and Livestock has already carried out initial work with indigenous communities through a previous Bank operation, PARN, in the departments of Alto Parana and Itapua Norte, specifically an extension and technical assistance program to improve communities' production activities and to protect and conserve their natural resources. The 37The complete stand alone project Indigenous Peoples DevelopmentPlan is available inthe project files in Spanish and English. 38ParaguayNational Census of Population and Housing, 2002. 135 proposed project will build on the PARN experience and lessons learned and expand the geographic scope to the five poorest departments inthe Eastern Region. 7. Some o f the lessons learned from PARN's Indigenous Component were the importance of: (i)appropriate technical assistance to indigenous communities, with staff trained to work with different cultures and with the sensitivity to respect unique cultural aspects; (ii) respecting the processes o f indigenous development, adapting the project to the needs and demands that may arise from the communities themselves without imposing pre-established formulas or paces and modalities o f work that are foreign to the communities; (iii)working with indigenous organizations, respecting the decision-making mechanisms o f each ethnic group and promoting the active participation of organizations in project implementation; and (iv) actively involving communities inthe development and implementation o f community development plans. 8. One o f the proposed project's basic principles i s to work with the beneficiary indigenous population in a participatory manner, respecting the indigenous development process and based on the principles o f cultural pluralism and respect for the environment. Rather than create a separate indigenous component (as was the case inthe previous operation, PARN), the proposed project considers the indigenous groups as beneficiary populations for all project components, with appropriate differentiated activities specifically for or adjusted to indigenous people as needed, taking into account their cultural, organizational, and economic characteristics. 9. The present project will offer various types o f support to beneficiary IP, including: (i) assistance to strengthen community organization (Component 1); (ii)specific studies and diagnostics and community development plans (Component 2); (iii) technical assistance for the implementation o f specific community development plans in each indigenous community (Component 2); (iv) communities' access to the Sustainable Rural Development Fund (FDRS) to finance activities to increase production, protect environmental resources, improve housing and health and promote income generation andthe regularization o f landtenure (Component 3); and (v) IPparticipation inproject management and monitoring (Component 5). 10. Duringproject preparation consultations were held in2005 and 2006 with 13 indigenous organizations representing the four ethnic groups who live in the initially proposed project area. Interviews were also held with agricultural technicians who worked in PARN's indigenous component, technical staff o f the National Indigenous Institute (INDI) and representatives o f NGOs. Based on the 2002 Indigenous Census database, recent data was also collected on the economic, social, and land tenure status o f IP. Follow-up consultations were held with indigenous organizations inCaaguazu and San Pedro in2007. 11. Duringthe National Indigenous Congress held inMarch 2005 inAsuncibn, sponsored by the Inter-American Development Bank (IDB) and INDI, the project preparation team held a workshop to consult with indigenous leaders from the Eastern Region about the proposed project. 12. The consultations with IP revealed the strong interest o f indigenous leaders in actively participating in project implementation and assembled the beneficiary communities' principal demands and needs which have since been incorporatedinproject design. 136 13. The indigenous leaders expressed their interest in receiving technical assistance in areas such as the sustainable management of natural resources, increasing production to ensure food security and income generation, assistance in regularizing lands and strengthening their organizations. At various times during consultations, the IP expressed that they were pleased with the proposed project's participatory methodology and emphasized their desire that the project's decision-making structures include the participation of indigenous organizations. They also expressedtheir interest inworking with MAG, particularly intechnical assistance. 14. The project's action strategy for indigenous communities is conceived as a process that seeks to maximize IP's access to and incorporation in the project's various activities by making the necessary adjustments so that indigenous socio-cultural values and political organization are respected and strengthened during project development. It will especially keep in mind the protection of indigenous communities' natural resources, and measures will be taken to implementspecific monitoring of project activities relatedto IP. Annual plans will be established with specific targets andactivities that will be monitored and evaluatedto ensure compliance. 15. During project preparation the demands presentedby indigenous communities have been taken into account and these coincide with the objectives of the project (Le., to improve the quality of life of small-scale farmers and indigenous communities in the project area in a sustainable manner, by supporting actions that will strengthen community organization and self- governance, improve natural resources management and enhance the socio-economic condition of the target population). The IndigenousPopulationof Paraguayin General 16. Paraguay's IP, affected by a persistent series of problems, comprise the most impoverished segment of the population. They lack adequate health assistance with only 26% of communities having access to a health post or center. Child mortality totals 93.9 per thousand. 94.1% of the population over the age of 15 is illiterate. There are 331 schools and 314 teachers for a total of 496 communities. Ninety-three percent of dwellings lack sanitation facilities or drinking water. 17. Out of a total of 394 communities surveyedinthe 2002 Indigenous Census, 247 own and have title to their land, 56 own lands but lack titles, and 91 communities own no land. Considering that land is the basis for ethnic and economic development, it may be stated that the basic condition for the survival of nearly half of Paraguay's indigenous communities is not guaranteed. 18. These results are alarming when one considers that only a small number of the indigenous communities has land of sufficient quality and quantity. Innumerable anthropological and other studies carried out among Paraguay's diverse ethnic groups conclude that most indigenous communities with assured lands are overpopulated and their environment does not allow the practice of traditional economic strategies for subsistence, nor do they guarantee, inmany cases, agricultural practices that can support basic nutritionalneeds. 137 19. The habitat occupied by many communities in recent years has been undergoing deforestation and consequent environmental deterioration, and in many cases cannot provide communities with a significant part of their sustenance. There have also been cases of the occupation of indigenous lands by landless peasants who have then extracted timber and cleared forests. 20. As a consequenceof the problems mentioned above, many indigenous people migrate to cities and settle in marginal zones, often living by begging. Alcohol and drug abuse problems, especially by children and adolescents, are increasing. EthnicGroupsResidingin SelectedDepartments 21. There are four traditional ethnic groups in Paraguay's Eastern Region: the AchC, Pai Tavytera, Mbya Guarani, and Ava Guarani or Chiripa. Inaddition, other ethnic groups from the Chaco have inhabitedthe EasternRegion for several decades: the Maka, a Chiriguano group, and several Chamacoco families, but with the exception of the Maka who live near Asuncion, the other groups are limitedto a small numberof families. 22. The first four ethnic groups mentioned above speak four different and distinct languages all of which belong to the Tupi Guarani linguistic family39. This linguistic family is composed of a population of 46,215 individuals throughout the country. The Mbya, Ava Guarani, Pai Tavytera, and AchC ethnic groups, originally from the Eastern Region, and the Guarayo and Guarani fiandeva, originally from the Chaco, also belong to this linguistic family. The AchC, whose language is the most different from those of the other three ethnic groups, were until the early 1970s nomadic hunters and gatherers who suffered major persecution; only a small population has survived and they are becoming farmers. The other three Guarani-speaking ethnic groups were organized in small groups that practiced hunting, gathering, and horticulture in a vast territory. Many of these groups also speak ParaguayanGuarani. The groups from the Chaco who migrated to the Eastern Region, especially the Maka and the Chamacocos, have adapted to urban life and the Chiriguano group lives in an indigenous colony in the department of Canindeju. 23. Despite their lengthy contact with the Paraguayan population, all these ethnic groups maintain their own culture, languages, social and political organization, economy, and especially their religion, which are different from those ofthe majoritypopulation. The Guarani emphasize the need to maintain their culture and establish peaceful relationships of cooperation, respect, and equality with Paraguayansociety. 24. The Mbva. The current population of this ethnic group totals 14,324. The Mbya are known inthe ethnographic literature as Caagua, or inhabitants of the rainforest. They occupy a vast territory from north to south in the Eastern Region. Until about 30 years ago, the Mbya in Paraguay were divided into about six geographic and sociopolitical units. Each unit had a zone 39 Many erroneously assume that in Paraguay the national version of Guarani (Paraguayan Guarani) is the same language as the languages spoken by all IP and all Gaurani groups. However, this is not the case. Each ethnic group speaks a separate and distinct language. For example, during one visit to an Ache community, it was observed that the community leader was fluent inthree languages:AchC, ParaguayanGuarani, and Spanish. 138 leader and its territories were well delimited. Currently, with the disappearance of the older leaders and the loss of their traditional lands, the Mbya are divided into three geographic and sociopolitical units: the Mbya of the north who mostly inhabit the departments of San Pedro, Concepcion, and Canindeju; those of the central region, living in the departments of Caaguazu, Alto Parana, and Guaira; and those of the south, living inthe departments o f Caazapa and Itapua. 25. The Ava Guarani. Their current population is 13,419. The Ava are also called Chiripa, Ava Katuete or "true men" in the ethnographic literature. They move within an area of approximately 10,000 km2. Their traditional territorial boundaries encompass the Jejui River to the north, the Acaray River to the south, the ParanaRiver to the east, andthe Corrientes River to the west. 26. Their communities have maintained a distinct ethnic identity and social organization, despite their ongoing and occasionally intense relations with national society. Currently the largest Ava Guarani population is concentrated inthe departments of Canindeju and Alto Parana, although there are also some Ava communities inCaaguazuand San Pedro. 27. The Ache. Their current population is 1,190. The Ache were pejoratively called Guajaki by the Paraguayan population which has persecuted them since Paraguay's independence. Traditionally, they occupied the high hills of the Eastern Region, a zone measuring approximately 5,000 h2. These IPSspeak a language related to the Guarani linguistic family buttheir traditional economy and culture are basedon hunting and gathering. 28. The Ache formerly avoided all contact with national society and lived a nomadic life, scattered in small groups. Since the 1950sthey have been systematically persecuted by various sectors of the national society until finally being reduced to a handful of settlements. This constant persecution, which sometimes resultedinterrible slaughter, explains their low numbers. They have had to abandon their life of hunting and gathering to become sedentary farmers and paid laborers on large farms. There are Ache communities in Canindeju, Alto Parana, and Caaguazu. 29. The Pai Tavytera. Their population totals 13,132. The Pai Tavytera, a name that means "dwellers of the center of the Earth," is one of the most traditional Guarani peoples. Their communities are found from north of the Jejui River to the Amambay mountain range. A noteworthy cultural characteristic is their community organization. To date, despite multiple pressures from the national society, they continue to organize themselves around a handful of principal communities whose political and religious leadership not only organizes life withinthe communities but who also act as liaisons with the outside world. 30. Ethnic Groups from the Chaco inthe EasternRegion. The ethnic groups from the Chaco who reside inthe Eastern Region (the Toba and the Maskoy) are mostly rural workers. With the exception of several Toba Qom families who have formed relatively stable agricultural communities, the other families have come to the EasternRegion as a result of the bankruptcy o f tanneries at the end of the 1970s and work mostly as occasional paid laborers in agricultural and livestock companies or in the city of Concepcih, and in the sale of handicrafts. The Maskoy population totals approximately 250, while the Toba population totals 133. 139 Socioeconomic Status of the Guarani 31. Social Organization. The basis of the social organization of three Guarani groups (the Mbya, Pai Tavytera, and Ava Guarani) is the extended family headed by a male elder. Various leaders of extended families meet in an assembly or Aty Guasu, with consultative and deliberative functions. This assembly is headedby a chief or leader who traditionally acted also as the religious leader and who has broad influence. 32. Long ago, each Guarani ethnic group in the Eastern Region was grouped around five or six zone leaders. Each zone leader had his permanent residence in a Tekoha Guaszi (large village), around which were located various Tekoha (small villages). These Tekoha (a word that means "the place where we live according to our culture"), formed by groups of extended families, were sometimes located several kilometers from the principal village. Each small village also had its own political and religious leaders. 33. Although the large zone leaders have disappeared, their former function is currently replaced by the various indigenous associations which bring together the political and religious leaders of each Tekoha inregional assemblies or meetings (Aty Guasu) who carry out the former duties of traditional zone leaders. There are numerous indigenous associations among the Mbya, such as fiogueroi Pavei which brings together the indigenous peoples of Caaguazu, Caazaph, and Guaira; among the Pai the Pai Reta Joaju Association which brings together most of the Pai Tavytera communities; the Ava Guarani are organized under the Noovusu Association and two other regional organizations. Thirteen o f these indigenous organizations were consulted during project preparation. 34. The political-religious leadershipis related to a determinedgeographic area. The concept of territoriality for the Guarani Indians is closely linked to the Tekoha Guaszi, which has physical, geographic, sociopolitical, religious, and economic connotations. The size and characteristics of the Tekoha Guaszi formerly permitted full economic subsistence based on hunting, fishing, gathering, andhorticulture. 35. The Tekohaoften usedto occupy geographic areas with determinedfeatures: high forest, swamps, rivers, and streams suited for hunting, gathering, and fishing; forest, suited for clearing and planting, and the place allocated for houses and the ceremonial house (opy). This form of geographic occupation was and continues to be the principal point of interethnic conflict between the Guarani and Paraguay's national society whose concept of land is very different. 36. Although political and religious leadership traditionally coincide, at present there is a division between both authorities in most communities. This may be due to the fact that religious leaders remain distanced from national society, causing political leaders to be strengthened so as to become liaisons with Paraguayanauthorities. However, religious leaders continue to play an important role as the principal executors of religious ceremonies and hold great prestige and power in Guarani society. Thus, at the same time that indigenous organizations were formed, bringing together political leaders, associations were also formed to 140 bring together the different religious leaders and both types of organizations work in coordination. 37. Inthe case of the Guarani it is essentialto understandthe role of religion inthis people's way of life4'. Otherwise, any type of collaboration with these ethnic groups may fail. Religion plays a predominant role at all levels of Guarani life. All economic and social activities are subordinate to it. According to Shaden4',the annual economic cycle is basically and primarily a cycle of religious life, a type of "ecclesiastic year" that accompanies the principal subsistence activities, especially the various phases of corn (maize) cultivation. Among the Guarani, the planting, weeding, and harvesting of agricultural products, a cooperative work festival, departure for travel, and initiationrites all serve as motives for prayers and ritual dances42. 38. Economy. The Guarani are forest dwellers, small-scale farmers whose principal products are corn and sweet manioc; hunting and gathering are important complements. The contemporary Guarani economy is characterized by four fundamental systems: (i)subsistence swidden horticulture with average size plots of half a hectare; (ii)hunting and fishing, undertaken exclusively by men; (iii) gathering of forest resources ranging from yerba mate to medicinal plants to fibers for handicraft^^^; and (iv) sources of cash income which include paid labor (usually temporary) andthe sale of handicrafts. 39. The current status of indigenous territories, now reduced to very small areas, makes it impossible to carry on the traditional practices of hunting, fishing, and gathering and to enjoy the natural wealth of biodiversity. The destruction of the ecosystem surrounding communities results in extreme nutritional need in Guarani families and directly influences their state of physical deterioration, the consequencesof which are endemic diseases. 40. Despite the economic changes that these societies are experiencing, they continue to uphold certain values that greatly differentiate them from small-scale farming societies. Land and natural resourcesbelong to the community, rather than being owned by individuals, although all members have use rights. However, it should be noted that the household production and consumption unit is the nuclear family. 41. Land Tenure. Access to land and natural resources is vital for the life and cultural survival of indigenous peoples, although half of the indigenous communities in the project area lack legalized lands. Other communities whose lands have been demarcated and titled have 40Well documented in many ethnographic studies, as well as some studies focusing on their mythology and their messianicmovements. 4'ShadenEgon. Aspectos fundamentais da cultura Guarani. Sao Paulo. 1974.P. 44. 42ShadenOp. Cit.: 45. 43These gatheringactivities have beencharacterizedas "extensive extraction," organizedaroundthe biotic resources of natural harvests scatteredthroughout the rainforest. Three important aspects characterize the resources exploited. First, natural growth is spread throughout the rainforest. Second, these forest resources are renewable. Third, their production requires only rudimentary processing.Indigenous peoples have carried out this type o f work for decades, probably for centuries, without destroying the rainforests that they use for hunting and crops. See Reed, Richard: Perspectivas ecoldgicas de las relaciones de fronteras en el Paraguay. Suplemento Antropoldgico. Vol XXIV, No1, Asuncion 1989. 141 insufficient lands or do not know what to do with them because they have not received technical assistance related to agricultural, as opposed to horticultural, practices. 42. O f the 73 communities existing in the project area, 24 have land titles in their name and 49 occupy lands belonging to third parties (see Attachment 3). The land tenure status o f those communities occupying land without titles in their name i s highly varied: 25 communities occupy lands that are titled to the Paraguayan Institute for Indigenous Peoples (INDI) or INDERT, while the rest live on lands belonging to farms or ranches, churches, NGOs, etc. (see Attachment 4). 43. The proposed project includes specific activities for IP land titling, described in detail in the Section entitled "Targets for Activities with Indigenous Communities". 44. Legal Framework for Indigenous Lands in Paraguay. The International Labour Organization's-Convention 169 and Paraguay's 1992 National Constitution recognize the right o f indigenous peoples to their traditional lands and to the development o f their own cultures and forms of organization. Article 64 o f the Paraguayan National Constitution recognizes that: "Indigenous peoples have the right to own land in sufJicient quantity and quality for the conservation and development of their unique ways of life. The State shall freely provide them these lands which will be non-attachable, indivisible, non-transferable, inalienable, non-leased, and tax exempt. The removal or transfer of their habitat without their express consent is prohibited." 45. Article 1 o f Law 904/81, the "Statute o f Indigenous Communities," guarantees land tenure to indigenous communities; Article 14 specifies that the settlement must be on land traditionally occupied by indigenous peoples; Article 20 specifies that the land title shall be communal; and Article 18 stipulates a minimumo f 20 hectares per family inthe Eastern Region anda minimumo f 100hectares per family inthe Western Region44. 46. Law 904/81 establishes the mechanisms for titling lands in the name o f indigenous communities and creates the Paraguayan Institute for Indigenous Peoples (INDI) as the institution in charge o f ensuring compliance. Although years have passed since this law was enacted, INDI and INDERT still hold in their name a good number o f property titles that have not yet been transferred to the communities, even though the Law obliges them to do so once the communities have been legally recognized. 47. Taking the context into account, the proposed project will collaborate closely with INDI to complete the regularization o f indigenous lands. Eligibility and activities are described in detail in the Sections entitled "Project Targeting with Regard to Indigenous Communities" and "Targets for Activities with Indigenous Communities". 44Prieto, Esther. 1987. Algunas consideraciones sobre el Estatuto de las Comunidades Indigenas. National Mission Team. Paraguayan Episcopal Conference. Asunci6n. 15ff. 142 ProjectTargetingwith Regardto IndigenousCommunities 48. Taking into consideration the status of indigenous communities as describedabove, all 73 indigenous communities inthe project area are consideredhighpriority due to the high incidence of poverty and the high level of degradation of their natural resources upon which they depend for their survival. Therefore, all of them may be beneficiaries of the proposed project. However, each indigenous community's access to the project's various types of support (diagnostic, development and implementation of Indigenous Community Development Plans, training activities, land titling, etc.) will be different depending on the application of the Indigenous Peoples LandAccess andNaturalResourcesUse Index. 49. This index will be applied to all indigenous communities in the first year of the project and will be updated in its third and fifth years. The communities with the highest rankings on this index will be able to access more of the project's activities determined according to each community's Indigenous Community Development Plan. This index will be prepared jointly with the communities and their associations so that all who are involved in the project clearly understand the selection criteria and may access the project's benefits in the best possible manner. 50. The Indigenous Peoples LandAccess and Natural ResourcesUse Index will be generated as a result of information obtained in each indigenous community, in response to the following questions: 51. Questions which, if affirmative, will generate points: (i)Does the community know where its lands are located? (ii) Are the community's lands delimited and surveyed? (iii) Does the community have legal status? (iv) Does the community have title to its lands?and (v) Does the community live on and utilizethe land that is inits name? 52. Questions which, if affirmative, will subtract points: (i) there conflicts on the use of Are land in terms of physical occupation? and (ii)Are there problems with regard to litigation or other types of claims? 53. If,afterthe index is applied, it is detectedthat acommunity needs assistanceto regularize its lands, it will benefit from the activity related to Support to Land Titling, under Component 3 of the Project. Ifthe community has resolved its land problem, it will then be able to access the participatory planning activities (participatory diagnostic and preparation of Indigenous Community Development Plans, Subcomponent 2.1) and the implementation of community investments (Component 3). With regard to training activities, all communities will be beneficiaries of training programs (Subcomponent 1.1). 54. Targets for Activities with Indigenous Communities. The following targets have been - establishedfor project activities related to indigenous communities: ActivitiesNear 1 2 3 4 5 Total ApplicationIndigenous PeoplesLand Access andNatural Resources Use Index 73 73 - 73 73 ComDletionof titling Drocess (Como. 3) 6 9 9 6 30 143 Specific training activities (Subcomponent 1.2) for indigenous communities* 12 15 15 15 5 62 Planning and participation (diagnostic and Indigenous Community Development 15 20 20 5 60 Plans) (Subcomponent 2.1) Implementation of Subprojects (Comp. 3) 15 20 20 5 60 *These calculations for the training activities refer to training aimed specifically at indigenous communities (see the section on Training). These targets do not include more general training under the project which will also benefit indigenouscommunities. ProjectDesignConsiderationsfor IP LandTenureActivities 55. The major challenges related to indigenous landtenure are: (i) need to acquire and/or the expand lands for indigenous communities; (ii) the titling o f lands in the name o f indigenous communities; and (iii)land conflicts which are often related to the occupation o f indigenous lands by third parties, survey problems, insecurity with regard to the boundaries o f indigenous lands, etc. 56. Acquisition or expansion o f indigenous communities' lands i s outside the scope o f the proposed project. However, with 24 o f the project communities occupying lands whose titles are held by other parties (see Attachments 3 and 4), the proposed project will support activities to address the second and third challenges, namely titling and conflict resolution. 57. LandTitling Activities under the Pro-ject.The project has formulated a target to complete the process o f titling in a total o f 30 communities. It will first address the titling o f those lands that are in the name o f INDVINDERT (25 communities) and those in the name o f NGOdchurches (6 communities) which, inaccordance with Law 904/81, should be transferred to the name of indigenous communities. At project start-up, plans are to carry out a study to evaluate access to land and the use o f natural resources by the 73 communities and to prepare a list o f those communities that will need assistance in the titling process. Given previous experiences, it i s expected that the target o f titling six to nine communities per year during the project's five-year period is attainable. The hiring o f a lawyer to supervise the process is also proposed. Detailed steps for titling are summarized inAttachment 5 to this Annex. 58. Given INDI's responsibilities for indigenous landtitling, the project will collaborate with INDIto implement this activity. Under the project's management structure, INDIforms part o f the National Coordination Committee. The project will also collaborate with the Bank-funded Indigenous Land Regularization Project financed by a grant from the Japanese Social Development Fund, to be carried out inthe department o f Caaguazu and involving INDI and the NGO Oguasu. It i s anticipated that IP annual work plans and targets for land titling will be jointly prepared by the project, INDI, and Oguasu for the department o f Caaguazu. In addition, the two projects will also collaborate on updatinginformation on indigenous lands inCaaguazu and in the other four project departments. This information will be uploaded on a web page to facilitate access by indigenous peoples, NGOs, state and international agencies, and other interested parties. This will be a way o f making transparent and disseminating all information related to indigenous land tenure inParaguay. 144 59. Conflict Resolution. A study will be carried out at the beginning of the project on the most frequent conflicts and their possible solutions. This study will serve as a basis for evaluating proposed project conflict resolution activities. The project will support the establishment of forums for dialogue on conflict situations and training for indigenous leaders on conflict resolution. ProjectDesignConsiderationsfor IP-RelatedTrainingActivities 60. While IP will be eligible for general project-sponsored training, it has been agreed that the project will also support: (i)special training for technicians who will work with indigenous communities; and (ii)trainings requested by and/or adapted to the situations and realities of indigenous communities. 61. Training o f Technicians. The Project Management Unit will select and train an adequate number of project technicians as well as firms and/or NGOs selectedto work or provide services to indigenous communities. At the same time, it is expected that these technicians will train indigenous promoters working at the local level. At project start-up a training course will be offered for all technical staff working in the project's indigenous or small-scale farmer communities. This one-day course will consist of an introduction to Guarani culture and an introduction to appropriate forms of intervention in indigenous communities. For those technicians who will work with indigenous communities, more specific training will be provided to ensure that technicians, firms and/or NGOs have: (i) understanding of the project objectives and participatory methodology, and (ii)sufficient knowledge and understanding to work with different cultures and are able to work in an environment of mutual respect. Curriculum details have beenpreparedand will be included inthe project Operational Manual. 62. Training for Indigenous Communities. During preparation, seven specific training areas were identified and requested by indigenous communities. In addition, IP will be eligible for other training activities under the project (for more details, see Annex 4). Briefly summarized, the seven training areas specifically for IP, to be described in more detail in the Operational Manual, are: (i)Legal training on land issues; (ii)Forming and legalizing indigenous associations; (iii) Administration and finance for associations and communities; (iv) Carrying out community diagnostics and planning; (v) Formal and on-the-job training for indigenous agricultural and environmental promoters; (vi) Citizenship and conflict resolution methods; and (vii) Computer skills. 63. Project Design Considerations for Indigenous Community Development Plans (ICDP). The project will assist communities in the preparation and implementation of 60 ICDPs. The ICDPs will be carried out once the Indigenous Peoples LandAccess and Natural ResourcesUse Index has been applied to define the criteria for whether or not is eligible for the project planning activities andthe implementation ofthe ICPDs. 64. The preparation of the ICDPs will be carried out by the indigenous communities in the following manner: 145 (a) An indigenous community and a project technician will hold information meetings on the project and prepare a prior, comprehensive diagnostic o f the community's situation. These meetings and broad discussions will help to identify andprioritize the community's economic, social, and environmental concerns; (b) Based on this community diagnostic, several alternative solutions to the problems will be identified and discussed at community meetings. Based on these alternatives, priority activities and actions on social, economic, and environmental issues will be identified. The proposed solution, the necessary steps, responsible parties and a timetable will be identified for each priority action. All this information will be included in the ICDP. The ICDP will also include a basic map, the identification o fthe technicianandcommunity leaders and a budget; (c) The micro-catchment's Association o f Indigenous Communities, which will be associated with the micro-catchment's Community Development Groups (CDGs), will review and approve the ICDP. This type o f organization must be discussed in accordance with each local situation. In some cases the indigenous associations are strong enough to participate on equal footing with the other micro-catchment associations. In other cases, an Indigenous Micro-catchment Association may need to be formed to strengthen indigenous participation. These CDGs receive and handle requests for financing that are reviewed and approved by the central technical staff; (d) The objective of these ICDPs is to formulate an appropriate planfor beneficiaries. It is a flexible document that may be utilized as well to monitor problems and actions and may be periodically revised andupdated; (e) Based on an ICPD, the indigenous community will develop activities that may be financed by the project in areas such as environmental education, training, organizational strengthening, and technical assistance under Components 1 and 2. They may develop subprojects for financing under Component 3. Subprojects will be reviewed and approved by the CDG and endorsed by the PMU (each o f these levels i s specified inthe Operational Manual). Special care will be taken to ensure that the committees studying the ICPDs have sufficient indigenous representation. Ifthis is not possible, measures will be taken to ensure that these decisions are made at a higher level of the project; , (f) For Indigenous Community Development Plans financing inthe form o f a project grant will cover up to 90 percent o f the cost. The indigenous community must contribute at least 10percent o f the cost; (g) Indigenous community projects will be executed and administered by the Micro- catchment Development Committee or its equivalent Association o f Indigenous Communities, as well as by the beneficiary communities themselves, depending on their administrative management capacity; and 146 (h) The exact contents o f each Indigenous Community Development Plan will depend on the respective community diagnostic. However, during consultations with IP, the following priority areas were identified: (i)food security o f communities through improvements to subsistence farming; (ii) rehabilitation and conservation o f communities' natural resources; (iii)development o f income-generating activities; and (iv) improvement o f housing and environmental protection in the communities. ImplementationArrangements 65. The Ministry o f Agriculture and Livestock (MAG) is the government entity responsible for project execution with regard to: (i)assistance to strengthen community organization (Component 1); (ii)specific studies and diagnostics and Micro-catchment Development Plans (Component 2); (iii)technical assistance for the implementation o f specific Indigenous Community Development Plans in each indigenous community (Component 2); and (iv) communities' access to the FDRS to finance activities such as the improvement o f production, the environment, housing, as well as environmental protection, income generation, and regularization o f communities' land tenure (Component 3). MAG has had some experience working with IP during the previous operation, PARN. For the proposed project, the P M U will include a specialist in indigenous issues (anthropologist) who will be in charge o f coordinating, monitoring, and supervising project actions with regard to indigenous peoples. In addition, firms, NGOs and consultants will be contracted as needed. 66. Project implementation will facilitate cooperation and partnerships with local and regional governments and with NGOs that work in the area and have experience working with indigenous communities. Infact, during the preparation o f this project several NGOs expressed their desire to establish future cooperation. Local governments, especially several departmental governments, have established Secretariats o f Indigenous Affairs that operate with varied success. One positive experience i s the collaboration o f the PARN indigenous component with the Secretariat o f IndigenousAffairs o f Itapua and with indigenistNGOs inAlto Parana. 67. Under Law 904/81on indigenous communities, the institution responsible for indigenous issues is the Paraguayan Institute for INDI. INDI has the specific function o f landregularization and should also coordinate the actions carried out by other government institutions and NGOs with indigenous peoples. INDI is currently receiving support from the IDB for institutional strengtheningwhich is expected to yield positive results inthe future. 68. The project will seek to coordinate its actions with INDI. A General Agreement on Project Coordination and Execution i s expected to be signed. This will include MAG and various government institutions, including INDI. Some o f the objectives o f the Agreement will be to facilitate knowledge and understanding o f the project, clarify institutional responsibilities and commitments for project execution, define management mechanisms, etc. 69. Most o f the IP living in the project area are organized in Indigenous Associations (IAs) whose coverage varies. Some are departmental organizations; others are small and limited to a group o f neighboring communities. The project will work closely with these associations during 147 its implementation. It should be noted that prior to working with these associations the project will evaluate their representativeness, administrative capacity, legal status andother aspects. 70. The project will also collaborate closely with the Indigenous Land Regularization Project inthe department ofCaaguazu financed by the Japanese Social Development Fund. IndigenousParticipationinthe Project 71. Indigenous Participation during Proiect Preparation. The Indigenous Peoples Development Strategy was developed to respond to World Bank Operational Directive 4.20 and to maximize effective indigenous participation inthe project. The project preparation team held consultations in 2005 and 2006 with indigenous leaders, INDI technical staff, technicians working inthe PARN indigenous component, and representatives o f indigenistNGOs working in the area. Information and consultation workshops on the project were held with representatives o f 13 indigenous associations in the project area45. In addition, follow-up consultations were heldinCaaguazu and San Pedro in2007. 72. Needs and concerns identified during the consultations focused on: (i)land tenure problems; (ii)strengthening the food security o f the communities through improvement o f subsistence farming; (iii)technical assistance in agricultural production, project administration and management, recovery and conservation o f communities' natural resources; (iv) development o f income-generating activities; (v) improvement o f housing and environmental protection in communities; (vi) ensuring appropriate mechanisms for indigenous representation in the general public arena and within the project; and (vii) the need to strengthen indigenous organizations, ensuring that their demands are heard inthe public arena and are duly met. 73. The leaders consulted expressed their wish that the project take place while respecting the cultural, political, and social characteristics o f indigenous peoples and serve to strengthen ethnic identity. They expressed great interest intechnical assistance and investment funds to support the self-sufficiency o f communities and the preservation o f their natural resources. During consultations it was explained to the leaders that the project will not be able to purchase lands for indigenous communities but it could facilitate and support land regularization programs. 74. Indigenous Participation inthe Project. The project is designed to ensure the participation o f beneficiaries, including indigenous peoples, inthe process o f planning, execution, monitoring, and evaluation of actions. The participation o f indigenous peoples in the project will signify a mutual learning experience for technical staff and for the indigenous peoples. It should be noted that each one o f the ethnic groups living in the project area has its own unique characteristics. These IP are not a homogenous population and therefore appropriate methodologies and processes must be developed for each particular group. The aim will be to minimize 45Association of Indigenous Peoples of Caazaph: "Jeka'ha Yma Pave"; Association of Leaders of the Yacy CaAy District; Association of AvB Guarani Indigenous Communities o f the Alto Canindeju Zone; Association of Indigenous Communities of San Pedro (ACISPE); Association o f Guarani Communities of Alto Paranh;. Organization o f Indigenous Peoples of the North; Encuentro Hacia la Tierra sin Mal Organization; Pai Tavytera People's Association; Association of Pay Tavytera Educational Leaders of the Department of Amambay; Mbya Guarani Association of Caaguazu; Mbya Reko Katu; Association of Acht Communities; Acht Organization: "Linaje"; Nogueroi PaveiAssociation o f Caaguazu. 148 intermediaries between beneficiaries and the project, to maximize local indigenous participation, andto utilize existing organizations andmechanisms that have provento be effective. 75. The project's action plans will be consulted annually with the indigenous communities and associations and annual targets will be established jointly with these communities and associations, taking into account the project objectives as a whole. At the same time, a joint annual evaluation o f activities will be carried out. These evaluations will involve representatives of the various indigenous communities and/or associations that are beneficiaries o f the project. 76. The project's philosophy is aimed at favoring the involvement o fbeneficiaries inall areas o f the project and in a transparent management system that fosters mutual trust between project technicians and indigenous communities and associations. According to the project's design, it i s expected that all 73 indigenous communities in the project area will benefit, depending on their needs and priorities. Thus, some communities will receive support for the titling o f their lands, other communities will be trained in various areas, and others will receive support in the preparation and implementation o f Indigenous Community Development. The criteria used so determine what kinds o f benefits each community receives will be transparent and widely disseminated. 77. The technicians working with IP will be properly trained inthe use o f a participatory and inclusive methodology, and especially in respect for the cultural forms o f indigenous participation, such as community decision-making mechanisms, types o f community leadership, the role of women indecision-making, etc. This will help to ensure, to the extent possible, that indigenous participation i s really effective. 78. The project's organizational structure includes an organization at the level o f the micro- catchment or indigenous area, and organizations at municipal, departmental, and central government levels. Measures will be taken to ensure that IP are represented at the micro- catchment level as well as at municipal and departmental levels. Indigenous communities will also be represented on the project's National Coordinating Committee. Monitoringand Evaluation 79. The project's annual participatory evaluation will include beneficiary indigenous communities and associations as well as the project's technicians and anthropological adviser. At these annualmeetings, the work carried out inaccordance with the project's objectives will be evaluated, and the year's targets for work with indigenous peoples will be set. These meetings will also define which communities will be beneficiaries of certain project activities. These targets will be clear to all involved and the mechanisms used to determine targets will be disseminated among beneficiaries in order to provide greater transparency in management and the active participation o fthe indigenous communities themselves. 80. The Indigenous Community Development Plans and related subprojects will also be monitored and evaluated annually by means o f a participatory process by project beneficiaries andtechnicians. Financial and results monitoring will be implemented at the same time. 149 81. The staff and agencies that carry out project activities will be trained inbasic monitoring systems and evaluation techniques. Based on these evaluations, the technicians working with IP will regularly submit reports on project implementation to the PMU. These reports will be reviewedby the project's indigenous adviser. 82. An independent evaluation of activities with indigenous communities will also be carried out for the project's midtermand final evaluations. 83. Project evaluation and monitoring for IP will include: (a) Periodic evaluation o f project implementation to ensure that it i s suited to the targets and timetables planned for indigenous communities. This evaluation should also include suggestions for modifications or adaptations to improve activities andwill be based on technicians' reports and on community evaluations, as well as on field visits ifneeded; (b) Financial evaluation: The flow o f the project's financial resources and the financial management o f resources will be monitored to ensure adherence to project regulations; (c) Participation: Indigenous participation at different levels o f the project will be continuously monitored and possible modifications will be proposed if needed; (d) Evaluation o f staff working with indigenous peoples, technicians, extensionists, anthropologists; (e) Collection o f reliable data for the regularization o f indigenous lands in the five departments; (0 Studies o f land use and environmental challenges in the indigenous communities o f the five departments. This study will be performed at the project's start-up and completion to measure its impact; and (g) Baseline additional studies needed: socioeconomic and social organization indicators, etc. 84. Studies and Research. The proposed project also includes studies needed to ensure the success o f work with indigenous communities (Subcomponent 2.2)46. See Subcomponent 2.2 Studies and Research for more details on these studies and their timetable. 46The proposedstudies are: (i) study to create a databaseon the status of indigenous lands inthe two departments; a (ii)datacollectiontofocusonandselectthecommunitiesintheprojectarea; (iii)astudyofthetypesofconflicts over land and natural resources existing in indigenous communities and their possible solutions (this study will be performed at project start-up and completion as a means of measuring the project's progress on this issue); (iv) technical studies of possible markets for indigenous products such as handicrafts or medicinal plants; and (v) the study of ways to improve the traditional subsistence economy. 150 Annex 14 Attachments Attachment 1:Indigenouspopulationandhousinginthe selected departments Department No. of Houses Population Communities Men Women Total Caaguazu 54 1,468 3,674 3,25 1 6,925 San Pedro 24 562 1,438 1,324 2,762 Subtotal 73 2,030 5,112 4,575 9,687 Country Total 412 17,309 45,031 42,068 87,099 Housing Census, 2002." Attachment 2: EconomicActivities of IndigenousCommunitiesby Department CAAGUAZU SAN PEDRO 54 communities 24 communities Hunting: 91.O% Hunting: 92.3% Gathering: 89.4% Gathering: 92.3% Handicrafts: 4.5% Handicrafts: 73.1% Agriculture: 90.3% Agriculture: 90.8% Farm workers: 7.6% Farm workers: 10.3% Explanation: Data on the fist three activities (Hunting, Gathering, and Handicrafts) were obtained from the Community Questionnaire of the 2002 Indigenous Census. The others (Agriculture, Farm Workers, etc.) were obtainedfrom the Individual Questionnaire. Source: Prepared by the project preparationteam based on the 2002 National Indigenous Population and Housing Census, DGEEC: 2003. Attachment 3: LandTenureStatus in the Selected Departments Department Total Communities Communities ~ Communities wlo titled lands w/ titled lands Caaguazu 54 40 7 San Pedro 24 9 17 Total 73 49 24 Attachment4: Institutionsthat OwnLandsOccupiedby IndigenousPeoples (Number of communities) INDY NGO Farm/ Church Other Unknown/ Total Fiscal Ranch no response Caaguazu 21 1 12 5 1 - 40 San Pedro 4 - 3 - 2 - 9 151 Attachment 5: Stepsfor TitlingIndigenousLands -Regularization of the status of indigenous communities for landtitling Periodic updating o f data on the indigenous population - Survey of data inindigenous communities - - Recognition of leaders Preparationand submission of documentation on changes or recognition of leaders - Fieldwork to verify requests for changes inleaders - Monitoringof document processing inINDIuntil the resolution is issued -- Issuanceo f the resolution Delivery of the resolutionto those affected. 2. Achievement of legal status by the indigenous community - - Preparationand submission of documentation on legal status Fieldwork to verify requests for legal status - Monitoringof document processing inINDIuntilthe resolution i s issued - Monitoring of document processing in the Ministry of Education and Culture and other institutions until the decree is issued. 3. Titling of lands inthe indigenous Community's name - Exemption from real estate tax - Administrative survey and identification and definitionof property lines - Administrative processing of documentation in INDIfor the issuance of the transferal - resolution Document processing and monitoring inthe Government's Notary Office - Travel by leaders to Asunci6n to sign the transferal document - Transferal of title inthe community's name. 152 Annex 15: Documentsinthe ProjectFile PARAGUAY: SustainableAgricultureandRuralDevelopmentProject 1.ProjectImplementationPlan Evaluacibn Ambiental (Project's Environmental Assessment). October 2005. 2. BankStaffAssessments OTHERS World Bank and United Nations Food and Agriculture Organization. Paraguay; Rural Sector Assessment.April 4,2007. Victor Hugo Zuiiiga Rodriguez. Contribucibn a1 Diseffo Institucional Para la Ejecucibn del Proyecto de Desarrollo Rural Sostenible (PRODERS). Febrero 2007. Comision Economics para AmCrica Latina (CEPAL). Paraguay; Resultados de las Reformas (2003-2005) y sus Perspectivas. Enero 2007. Paraguay, Fiscal Space. Garcia, Valeriano. August 2005. World Bank. Poverty Reduction and Economic Management Unit, LAC. Republic of Paraguay Institutional and Governance Review Breaking with Tradition: Overcoming Institutional Impediments to Improve Public Sector Performance. Report No. 31763. June 2005. World Bank. Country Management Unit Argentina, Chile, Uruguay and Paraguay. Paraguay: Public Expenditure Review. June 2005. World Bank and Inter-American Development Bank. Paraguay s Country Financial Accountability Assessment.August 26,2004. World Bank. Country Management Unit Argentina, Chile, Uruguay and Paraguay. Paraguay 's Country Procurement Assessment Report. Report No. 25908. January 31,2004. Banco Mundial, Red de Desarrollo Social y Ambientalmente Sustentable. Paraguay; Temas de desarrollo social para el alivio de la pobreza. Documentos sobre Desarrollo Social No. 63. Enero 2004. World Bank. Country Assistance Strategyfor Paraguay. Report No. 27341. November 26,2003. Banco Mundial, Oficina Regional para Argentina, Chile, Paraguay y Uruguay. Paraguay: Creando las condiciones para un crecimiento sustentable, Opciones de Politicapara la Nueva Administracibn. Junio 2003. 153 Banco Mundial, Oficina Regional para Argentina, Chile, Paraguay y Uruguay. Republica del Paraguay: Evaluacidn del Sistemade Contratacidn Publica. Informe No. 25908. Enero 2003. World Bank, Poverty Reduction and Economic Management Unit, LAC. Paraguay: Attacking Poverty. Vols. 1and 2. November 26,2001. PRODERS: Medidaspara Estimular la Transparenciay Gobernabilidad. Plan de Fortalecimiento Institucional de la DINCAP basado en recomendaciones del Andlisis SECI. Paraguay Biodiversidad : Documento del Proyecto Documentos de 10s Consultores Dr. Luis Acuna e In. Agr. Diego Paysse':Fortalecimiento de SENACSA y Vice Ministerio de Ganaderiay Plan Piloto de SanidadAnimal para las 84 microcuencasdel PRODERS 3. BackgroundStudies/Documents GOVERNMENT OF PARAGUAY'SREPORTS GOVERNMENT OF PARAGUAY'SLAWS, REGULATIONSAND DECREES Republica del Paraguay, Poder Legislativo. Ley No. 2530, Ley de Presupuesto General de la Nacionpara el Ejercicio Fiscal 2005. Diciembre30,2004. Republica del Paraguay, Poder Legislativo. Ley SIVIPAR (Sistema de Infraestructura Vial del Paraguay), 2003. Ministerio de Hacienda. Decreto No. 4810 reglamentando la Ley No. 2530/2004 de Presupuesto Generalde la Naci6npara el Ejercicio Fiscal 2005. Enero 28, 2005. Ministerio de Hacienda. Decreto No. 7070 reglamenta la Ley No. 2869/2005 de Presupuesto General de laNaci6npara el Ejercicio Fiscal 2006. Decreto No. 8225,27 Septiembre2006. OTHERS Banco Interamericano de Desarrollo (BID) Instituto Paraguay del Indigena (INDI).Resumen de - las Politicaspara Pueblos Indigenas del Paraguay. Noviembre 2004. The Economist Intelligence Unit (UK).Country Report Paraguay at a Glance 2006-2007. 154 Annex 16: Statementof Loansand Credits PARAGUAY: SustainableAgriculture and RuralDevelopmentProject Differencebetween expectedand actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO82026 2007 PY RoadMaintenance 74.00 0.00 0.00 0.00 0.00 74.00 15.09 0.00 PO73526 2004 PY- EDUCATION REFORM PROJECT 24.00 0.00 0.00 0.00 0.00 8.98 8.98 0.00 PO69269 2002 PY Pilot CommunityDevelopmentProject 9.00 0.00 0.00 0.00 0.00 1.07 1.07 0.24 Total: 107.00 0.00 0.00 0.00 0.00 84.05 25.14 0.24 PARAGUAY STATEMENT OF IFC's Heldand DisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 Telecel Paraguay 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 Total portfolio: 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic ~ ~ ~ ~~ ~ Total pendingcommitment 0 00 0 00 0 00 0 00 155 Annex 17: Country at a Glance PARAGUAY: SustainableAgriculture and RuralDevelopmentProject Latin Lower- POVERTY and SOCIAL Amerlcn middle. Paraauav 6 Carib. -~ Income Development dlamond' 2006 Population,mid-year(millions) 6 0 556 2,276 GNIpercapIta(Atiasmethod, US%) 1400 4.767 2,037 Life expectancy GNI (Af/as mefhod, US$ bili/ons) 6.4 2,650 4,635 Average annual growth, 2000-06 Population (4 2.0 13 0.9 Laborforce (%) 3.3 2.1 14 capita i+j enrollmentpnmaryGross M o a t recent eatlmate (latest year avallable, 2000-06) Poverty (%of populationbeiownafionalPO verfyilne) Urbanpopulation(%of tofalpopulalion) 59 78 47 Lifeexpectancyat birth (pars) 71 73 71 Infantmortality(per IOOOiivebirfhs) 20 26 31 Childmalnutrition (%ofchildren under5) 5 0 Access to improvedwatersource Access to an improvedwatersource (%ofpopulation) 86 91 81 Literacy (%ofpopulafionage ?5+) 93 90 89 Gross primaryenrollment (%of schoo/-age population) D4 tB n3 -Paraguay M ale 06 QO M Lower-middle-incomegroup Female a3 m in KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986 1996 2006 2006 Economlc ratlos' GDP (US$ biiiions) 3.5 6.7 7.3 9.1 Gross capital fonnationlGDP 25.0 25.5 22.1 213 Exports of goods and services/GDP 26.5 50.3 46.9 50.1 Trade Gross domestic savings/GDP 8.5 0.6 15.1 4.2 Gross national savingslGDP 8.6 8.9 i7.1 9.0 Current account balance1GDP -5.4 -4.0 2.4 -3.7 Interest paymentslGDP 2.5 0.8 15 Domestic Capital Total debt/GDP 58.9 29.3 42.6 savings formation Total debt servicelexports 213 5.1 0.9 Present valueof debt/GDP 422 1 Present valueof debt/eqorts 68.8 Indebtedness 1986-96 1996-06 2006 2006 2006-10 I (averageannuaigrowth) GDP 3.9 12 2.9 3.9 3.4 -Paraguay GDP percapita 11 0.6 10 1.9 14 Lower-mrddie-incomegrow Exports of goods and services 14.1 0.0 2.7 142 2.9 STRUCTURE of the ECONOMY 1986 1996 2006 2006 Growth of capltal and GDP (Oh) (%of GDP) Agnculture 272 206 22 1 213 2o T Industry 226 233 8 3 8 7 Manufactunng 142 8 0 124 Q O Services 502 562 586 60 0 Householdfinal consumption expenditure 736 756 74 5 67 0 20 1 Generalgov't final consumption expenditure 6 6 i l 8 0 4 8 6 Imports of goods and services 320 622 53 9 67 2 -GCF -GDP 1986-96 1996-06 2006 2006 Growth o f exporta and Imports (%) (averageannualgrowth) Agriculture 4 7 3 3 0 1 3 5 45 T Industry 4 1 0 2 3 1 3 5 M anufactunng -07 0 2 2 6 3 5 Selvices 3 5 0 7 4 3 4 3 Householdfinal consumption expenditure 3.7 0.5 4 2 157 Generalgov't final consumption expenditure ni -15 7 6 -9 1 Gross capitalformation 6.8 -18 0 5 6 4 Imports of goods and services 15.5 -2.7 4 6 33 3 Note 2006 data are preliminaryestimates This tablewas producedfrom the Development Economics LDB database 'Thediamonds showfourkeyindicators in thecountry(inbold) comparedwthits income-groupaverage If dataaremissing thediamondwil beincomplete 156 Paruguay PRICES andGOVERNMENT FINANCE 1986 1996 2005 2006 Domestic prices I (%change) Consumer pnces 317 9 8 6.8 96 Implicit GDP deflator 316 0.1 5.9 9 1 Government finance 1 5 (%of GDP,includes current grants) Current revenue 6.3 18.6 188 Current budget balance 2 0 4.8 4 9 Overall surplusldeficit -11 07 0 3 TRADE 1986 1996 2006 2006 I ~ x p o rand kmport levels t (us$ mill.) (US$ millions) Total exports (fob) 752 3,797 3,493 4 026 Soy products 46 324 815 977 Cotton 81 218 40 30 Manufactures 519 2,753 1.805 1500 Totel imports (cif) 9% 4,382 3,788 5 363 Food 1,532 1,367 1415 Fuel andenergy 97 235 5x) 765 Capital goods 921 1,077 2 077 00 01 02 03 04 05 06 Export pnce index(2000=00) Import pnce index(2000-00) gExports slmports Terms of trade (20OO=WO) BALANCE o f PAYMENTS 1986 1996 zoos 2006 p < c c o u n t balance to GDP (Oh) (US$ millions) ~xportsof goods and services 978 4,397 4,274 4 926 Imports of goods and services 104 5,042 4,238 5 705 1 4 1 Resource balance -156 -645 36 -779 Net income -48 113 -81 23 Net current transfers 11 182 223 415 Current account balance -192 -353 777 -341 Financing items (net) 137 3% -329 268 Changes innet reserves 86 39 152 73 Memo: Reserves including gold (US$ mll/iOns) 460 1,061 1,297 1370 Conversionrate (DEC./ocal/US$j 517 4 2,057.0 6.178 0 5,6355 EXTERNAL DEET and RESOURCE FLOWS 1986 1996 2005 2006 Composition o f 2005 debt (US$ mill.) (US$ millions) Total debt outstanding and disbursed 2 087 2,565 3,120 IBRD 315 t38 223 234 A'223 IDA II 45 34 21 19 G 513 B 21 Totaldebt service 223 247 489 IERD 47 45 35 38 IDA 1 2 2 2 Compositionof net resource flows Officialgrants I4 21 20 Officialcreditors 131 65 -33 Pnvatecreditors 29 54 2 Foreigndirect investment (net inflows) 1 I49 64 Portfolio equity (net inflows) 0 0 0 World Bank program commitments 0 22 15 6 Disbursements 27 27 17 32 B IDA . D .Other rml!ilat&-ai F Private - Principal repayments 22 35 27 26 C-IMF Net flows 5 -8 -13 4 Interest payments 26 P 13 P Net transfers -21 -19 -20 -7 Note This table was producedfrom the Development Economics LDB database 9/28/07 157 Annex 18: Map IBRD35799 PARAGUAY: SustainableAgriculture andRuralDevelopmentProject 158 MAPSECTION, IBRD 35799 62W 60W 58W 56W 54W PROJECT DEPARTMENTS CONCEPCION PROJECT DISTRICT BOUNDARIES Concepción AMAMBAY ELIGIBLE MICROCATCHMENTS UNDER THE PROJECT 18S 18S ELIGIBLE MICROCATCHMENTS UNDER THE PROJECT WITH INDIGENOUS COMMUNITIES TACUATI B O L I V I A DEPARTMENT CAPITALS NUEVA GERMANIA PAVED ROADS UNPAVED ROADS PARAGUAY SAN PEDRO DEL SANTA ROSA DEL AGUARAY OTHER DEPARTMENT BOUNDARIES YCUAMANDIYU INTERNATIONAL BOUNDARIES Capitán Pablo LIMA To Lagerenza 20S Santa Fé Puerto 20S San Pedro GRAL. ISIDORO Pedro Juan Cerro León Bahía Negra RESQUIN Caballero (1,000 m) ANTEQUERA SAN PABLO CHORE To General Eugenio Boyuibe A. Garay Fortín PRES. S A N P E D R O CANENDIYU Madrejon Fuerte Olimpo GRAL. HAYES ELIZARDO GUAYAIBI AQUINO B R A Z I L Fortín Carlos A. Lopez YRYBU CUA VILLA DEL To ROSARIO ITACURUBI Fortín W E S T E R N Puerto Tres Palmas Campo DEL ROSARIO Infante Rivarola Kilómetro Grande 160 o SAN ESTANISLAO VAQUERIA Mariscal c 22S Estigarribia a Puerto CAPIIBARY Doctor R E G I O N La Victoria To Pedro P. Peña C h Dourados 25 DE DICIEMBRE YATAITY Filadelfia DEL YHU Pilcomayo r a n Puerto Pinasco Pedro Juan UNION NORTE Caballero SANTA ROSA Aquidabán Yby Yaú DEL MBUTUY SAN Fortín GVerde SIMON JOAQUIN Leonida Escobar BOLIVAR Fortín Ávalos Pozo DR. CECILIO Sánchez Colorado Concepción Capitán Bado See detail BAEZ CAAGUAZU RAUL ARSENIO MCAL FRANCISCO Fortín Monte Lindo at right CORDILLERA OVIEDO General CARAYAO 3 DE LOPEZ Díaz Fortín Teniente San Lima LA ORA FEBRERO To Rojas Silva 24S Las Lomitas ParaguaPedro S A N Salto del 24S PAST DR. JUAN M. Guairá FRUTOS DR. J. y RA3 CORRALES Pilcomayo P E D R O Caacupé EULOGIO Rosario Curuguaty AVEUN SERDNOL Coronel Oviedo CAAGUAZU ESTIGARRIBIA Ciudad CORONEL JOSE del Este SAN JOSE OVIEDO DOMINGO E A S T E R N DE LOS OCAMPOS ALTO San ARROYOS Estanislao Paraguari REPATRIACION Itaquayry A R G E N T I N A Villa Hayes CENTRAL PARANA Coronel CAAGUAZU ASUNCIÓN Caacupé Oviedo To Cascavel 62W 60W Ita R E G I O N Paraguari Cerro Pero Ciudad del Villarrica BRA ZIL (842 m) Este PARAGUAY To GUAIRA Formosa Villarrica Santa Abaí Rita SUSTAINABLE AGRICULTURE 26S Villa Oliva Caazapá 26S PARAGUARI AND RURAL DEVELOPMENT San Juan PROJECT Bautista San Pedro Paraná del Paraná Pilar San Ygnacio Caazapá Desmochado PROJECT DEPARTMENTS Coronel CAAZAPA Bogado Encarnación SELECTED CITIES AND TOWNS Paraná DEPARTMENT CAPITALS To Santo Tomé NATIONAL CAPITAL 28S RIVERS This map was produced by the Map Design Unit of The World Bank. ITAPUA ROADS The boundaries, colors, denominations and any other information San Juan Bautista RAILROADS shown on this map do not imply, on the part of The World Bank 0 50 100 150 Kilometers GEF CORRIDORS Group, any judgment on the legal status of any territory, or any 0 25 50 75 Kilometers INDIGENOUS COMMUNITIES REGION BOUNDARY endorsement or acceptance of such boundaries. MISIONES WITHIN THE GEF CORRIDOR 0 50 100 Miles INTERNATIONAL BOUNDARIES 0 10 20 30 40 50 Miles INDIGENOUS AREAS 58W 56W 54W DECEMBER 2007