Completion Report

Project Numbers: 31212-01 and 31212-02 Loan Numbers: 1821 and 1822 August 2009

Mongolia: Agriculture Sector Development Program and Project

i

CURRENCY EQUIVALENTS

Currency Unit – togrog (MNT)

At Appraisal At Project Completion

$1.00 = MNT1,086 MNT1,165 MNT1.00 = $0.000921 $0.000858

ABBREVIATIONS

AADF – Aimag Agriculture Development Fund ADB – Asian Development Bank ADTA – advisory technical assistance ASDP – Agriculture Sector Development Program/Project BOM – Bank of Mongolia COS – country operational strategy EA – executing agency FMD – foot and mouth disease ha – hectare IA – implementing agency IDI – interest during implementation JICA – Japan International Cooperation Agency M&E – monitoring and evaluation MDF – Microfinance Development Fund MOF – Ministry of Finance MOFA – Ministry of Food and Agriculture MOFE – Ministry of Finance and Economy MOU – memorandum of understanding MTR – midterm review NGO – nongovernment organization OIE – Office International des Epizooties O&M – operation and maintenance PFI – participating financial institution PIU – project implementation unit PMU – project management unit RRP – report and recommendation of the President SSIA – State Specialized Inspection Agency SWRF – soum well rehabilitation fund TCR – technical assistance completion report

GLOSSARY

aimag – province, the largest administrative unit dzud – severe winter with heavy snow and strong wind soum – first administrative unit under an aimag

NOTES

(i) The fiscal year of the Government and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars.

Vice-President C. Lawrence Greenwood Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director A. Ruthenberg, Country Director, Mongolia Resident Mission, EARD Team leader A. Tsetsegmaa, Economics Officer, Mongolia Resident Mission,

EARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

BASIC DATA i

MAP

I. PROGRAM AND PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Outputs 5 C. The Program and Project Loan Costs 10 D. The Program and Project Loan Disbursements 10 E. The Program and Project Loan Schedules 10 F. The Program and Project Loan Implementation Arrangements 11 G. Conditions and Covenants 11 H. Related Technical Assistance 12 I. Consultant Recruitment and Procurement 12 J. Performance of Consultants, Contractors, and Suppliers 13 K. Performance of the Borrower and the Executing Agency 14 L. Performance of the Asian Development Bank 14

III. EVALUATION OF PERFORMANCE 15 A. Relevance 15 B. Effectiveness in Achieving Outcome 15 C. Efficiency in Achieving Outcome and Outputs 16 D. Preliminary Assessment of Sustainability 16 E. Impact 16

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 17 A. Overall Assessment 17 B. Lessons 17 C Recommendations 18

APPENDIXES 1. Assessment of Compliance with Conditions of the Policy Program 20 2. Project Framework 36 3. Agriculture Sector Development Project (Loan 1822-MON): Actual versus Report and Recommendation of the President Implementation Schedule 40 4. Status of Compliance with Major Loan Covenants (Investment Project Loan) 41 5. Implementation of Consulting Services Inputs 48 6. List of Major Procurement Contracts 49 7. Economic and Financial Analyses 50

SUPPLEMENTARY APPENDIXES A. PCR for Green Revolution Subcomponent B. PCR for Well Rehabilitation Subcomponent C. PCR for Veterinary Services Subcomponent D. PCR for Credit Line Subcomponent

BASIC DATA A. Loan Identification 1. Country 2. Loan Numbers 3. Loan Title 4. Borrower 5. Executing Agency 6. Amounts of Loans 7. Program/Project Completion Report Number

Mongolia 1821 MON (SF) and 1822 MON(SF) Agriculture Sector Development Program/Project Government of Mongolia Ministry of Finance and Economy/ Ministry of Food and Agriculture SDR 5,440,000 program loan SDR 7,771,000 project loan MON 1109

B. Loan Data

1. Appraisal – Date Started – Date Completed

2. Loan Negotiations

– Date Started – Date Completed

3. Date of Board Approval 4. Date of Loan Agreement

5. Date of Loan Effectiveness

– In Loan Agreement – Actual – Number of Extensions

6. Closing Date (program loan) – In Loan Agreement – Actual

Closing Date (project loan) – In Loan Agreement – Actual – Number of Extensions

7. Terms of Loan – Interest Rate – Maturity

– Grace Period

8. Terms of Subsidiary Lending (Project Loan)

– Interest Rate – Maturity (number of years) – Second-Step Borrower

9. Terms of Onlending (project loan)

– Interest Rate – Maturity (number of years) – Third-Step Borrowers

29 March 2000 25 April 2000 20 November 2000 21 November 2000 21 December 2000 16 February 2001 17 May 2001 20 June 2001 1 30 September 2003 11 December 2003 30 September 2006 24 October 2007 1 1% (grace period); 1.5% thereafter 24 years 8 years 2.5% annual 6 years Bank of Mongolia 5.5% annual (local currency) 1 year (quarterly installments) Zoos, Savings, Khas, Khan, Post and Anod commercial banks of Mongolia

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10. Disbursements a. Dates

Loan 1821 Loan 1822

Initial Disbursement 21 June 2001 09 July 2001

Final Disbursement 11 December 2003 27 September 2007

Time Interval 30 months 74 months

Loan 1821 Loan 1822

Effective Date 20 June 2001 20 June 2001

Original Closing Date 30 September 2003 30 September 2006

Time Interval 27 months 63 months

b. Project Loan Amounts ($'000)a

Category or Subloan Original Allocation

Last Revised Allocationb

Amount Disbursed

Undisbursed Balance

01 Civil Works 194.8 121.0 87.1 33.9 02 Equipment,Vehicles,Furniture 1,350.0 1,663.8 1,581.9 81.9 03 Training 1,102.6 667.2 589.8 77.4 04 Credit Line 4,400.0 4,870.5 4,799.9 70.6 05 Consulting Services 1,573.0 1,613.4 1,509.6 103.8 06 Materials 62.1 176.5 163.3 13.2 07 Operation and Maintenance 833.7 1,078.8 824.2 254.6 08 Interest During Implementation 245.3 280.3 289.5 (9.2) 09 Unallocated 238.5 584.9 0.0 584.9

Total 10,000.0 SDR 7,771.0

11,056.3 9,845.3 SDR 6,989.9

1,210.9 SDR 781.0

( ) = negative. a Conversion rate of special drawing rights to US dollar was SDR1.2868 at appraisal and SDR1.4228 at completion (30 March 2007). b Latest date of category reallocation is 31 May 2006.

Program Loan Tranche Release

- First Tranche Release 21 June 2001 $3,396,700 - Second Tranche Release 11 December 2003 $3,915,600

11. Project Local Costs (Financed) - Amount ($'000) 1.1 - Percent of Local Cost 36.7% - Percent of Total Cost 9.5% C. Program/Project Data

1. Program/Project Cost

Cost ($ million) Appraisal Estimate Actual A. Program Loan

Foreign Exchange Cost

7.0

7.3 B. Project Loan Foreign Exchange Cost

6.6

8.7

Local Currency Cost 6.5 1.1 Total 13.1 9.8

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2. Financing Plan ($ million)

Cost (project loan) Appraisal Estimate Actual Implementation Costs Borrower/Beneficiary Financed 3.08 1.9 ADB Financed 9.75 9.5 Subtotal 12.83 11.4 IDI Costs Borrower Financed 0.00 0.0 ADB Financed 0.25 0.29 Total 13.1 11.6

ADB = Asian Development Bank, IDI = interest during implementation.

3. Cost Breakdown by Project Component ($ million)

Component Appraisal Estimate Actual Production and Marketing Support 4.41 4.33 Green Revolution Program 0.43 0.71 Veterinary Services 0.64 0.75 Well Rehabilitation 1.12 2.08 Cooperative Development 1.39 0.80 Rural Communication Links 0.82 0.00 Credit 6.30 6.15 Credit Line 5.50 6.00 Capacity Building for PFIs and Subborrowers 0.80 0.15 Project Management 1.43 1.33 Contingencies 0.69 0.00 Interest During Construction 0.25 0.29

Total 13.1 11.6

4. Program/Project Schedule

Item Appraisal Estimate Actual

Date of Contract with Project Management Unit and Consultants

1Q 2001 1 Feb 2002

Civil Works Contract Date of Award of the First Contract 2Q 2002 3Q 2003 Completion of Work various various Equipment and Supplies various various Dates First Procurement various 13 Sept 2002 Last Procurement 21 Dec 2006 Completion of Equipment Installation various various Start of Operations Completion of Tests and Commissioning Beginning of Start-Up

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5. Program/Project Performance Report Ratings

Ratings Implementation Period

Development Objectives Implementation Progress Program Loan From 31 Dec 2000 to 31 Jan 2001

Highly Satisfactory

Satisfactory

From 01 Feb 2001 to 31 Aug 2003 Satisfactory Satisfactory From 01 Sept 2003 to 11 Dec 2003 Satisfactory Highly Satisfactory Project Loan From 31 Dec 2000 to 31 Jan 2001

Highly Satisfactory

Satisfactory

From 01 Feb 2001 to 31 Aug 2003 Satisfactory Satisfactory From 01 Sept 2003 to 30 Nov 2003 Satisfactory Highly Satisfactory From 01 Dec 2003 to 31 May 2005 Highly Satisfactory Highly Satisfactory From 01 Jun 2005 to 30 Jun 2005 Highly Satisfactory Satisfactory From 01 Jul 2005 to 28 Feb 2007 Satisfactory Satisfactory

D. Data on Asian Development Bank Missions

Name of Mission Date No. of Persons

No. of Person-

Days Specialization of Members1

Fact Finding 18 Jan–14 Feb 2000 12 120 a, b, d, e, gAppraisal 29 Mar–25 Apr 2000 15 140 a, k, h

Project Specific Consultation 12 Sept–6 Oct 2000 10 176 a, g, hReview Mission 1 11–22 Dec 2003 1 11 a, bReview Mission 2 22 Feb–4 Mar 2005 2 20

a, b

Midterm Review Mission

13 Jun–8 Jul 2005 5 116 a, b, d, l, m

Special Administration Mission

11–18 Mar 2006 1 7 a

Review/Handover Mission 3

5–10 Jun 2006 4 20 a, b, d, h

Review Mission 4

16–21 Aug 2007 2 10 a, d

Project Completion Review2 6 Jan–6 Feb 2009 4 72 a, n, o 1 a – mission leader/project officer, b – project analyst, c – counsel, d – economist, e – gender and development

specialist, f – control officer, g – economics officer, i – environmental specialist, j – social development specialist, k – lead financial specialist, h – senior programs officer, l – consultant (K. Krug), m – consultant (P. Tasker), n – staff consultant (A. Rijk), o – staff consultant (B. Erdenebileg).

2 The project completion report was prepared by A. Tsetsegmaa, economics officer, Mongolia Resident Mission; and A. Rijk and B. Erdenebileg (staff consultants).

Hatgal

Hanh

Erdenet

Darhan

Baganuur

Nalayh

Altanbulag

Maanit

Tsogt-Ovoo

Bayan-Ovoo

Gashuun Suhayt

ErdenetsagaanBichigt

Zamyn-Uud

TamsagbulagMatadMonhhaan

Batnorov

Bayan-Uul

Havirga

Ereentsav

Hutag-Ondor

Hishig Ondor

Harhorin

Nariynteel

BattsengelLun

Selenge

Sumber

Olgiy

Tsengel

Ulaanbayshint

Nogoonnuur

Dayan

Naranbulag

Manhan

Dariv

UyenchYarant

Togrog Buutsagaan

Burgastay

Tayshir

Tudevtey

Tsahir

Tsagaan-UulTes

Ulaangom

Olgiy

Hovd

Altay

Uliastay

Moron

Tsetserleg

BayanhongorArvayheer

Dalanzadgad

Zuunmod

BulganChoybalsan

Baruun-Urt

Ondorhaan

ULAANBAATAR

Mandalgovi

Choyr

Suhbaatar

Saynshand

GOVI-ALTAY

ZAVHAN

UVS

HOVD

BAYAN-OLGIY

BAYANHONGOR

OVORHANGAY

ARHANGAY

HOVSGOL

HENTIY

DORNOGOVI

SUHBAATAR

DORNOD

DUNDGOVI

GOVISUMBER

SELENGE

ORHON

BULGAN

ULAANBAATAR

DARHAN-UUL

TOV

OMNOGOVI

R U S S I A N F E D E R A T I O N

PEOPLE'S REPUBLICOF CHINA

National Capital

Provincial Capital

City/Town

Main Road

Provincial Road

Railway

River

Provincial Boundary

International Boundary

Boundaries are not necessarily authoritative.

Project Area with Production,Marketing Support andCredit Component

Project Area withCredit Components

MONGOLIA

AGRICULTURE SECTOR DEVELOPMENT PROGRAM AND PROJECT

(as completed)

Kilometers

0 50 100 200 250150

N

09

-26

51

HR 111 00'Eo

111 00'Eo

96 00'Eo

96 00'Eo

42 00'No 42 00'No

50 00'No50 00'No

I. PROGRAM AND PROJECT DESCRIPTION

1. The Agriculture Sector Development Program/Project (the ASDP) was approved by the Asian Development Bank (ADB) on 21 December 2000. The ASDP comprised an integrated package of policy and institutional reforms, sector investments, and advisory technical assistance to develop a more market-oriented, efficient and sustainable agriculture sector and reduce poverty by increasing income opportunities. It consisted of (i) a policy program loan of $7 million equivalent (the program loan); (ii) an investment loan of $10 million equivalent (the project loan); and (iii) an attached advisory technical assistance (ADTA) grant of $695,000 equivalent.

2. The program loan supported activities to achieve targets in seven areas of policy reform. The main objectives of the reforms were to: (i) reduce price and other distortions in the agriculture sector; (ii) promote competitive markets for agricultural inputs and outputs; (iii) improve access to credit for the rural population; (iv) rationalize tax incentives to promote investments in rural areas; (v) improve productivity and sustainability of livestock production; (vi) strengthen agricultural research and extension; and (vii) mitigate risks in agriculture and ensure food security, income, and employment for vulnerable groups.

3. The project loan had three components: (i) production and market support, (ii) rural credit, and (iii) project management. The attached ADTA provided assistance for cooperative development, by training cooperative members on a range of relevant topics, and supported the establishment of herder groups to manage pastures in four western aimags. For the well rehabilitation activity, it demonstrated aspects of community participation for pasture management and well operations by herder groups. 4. The ASDP agreements were signed on 16 February 2001 and became effective on 30 June 2001. The executing agency (EA) for the program loan was the then Ministry of Finance and Economy (MOFE) and the EA for the project loan was the then Ministry of Food and Agriculture (MOFA). The program loan was closed in December 2003, while the project loan was closed on 24 October 2007 after a 9-month extension of the original loan closing date. The Government submitted its comprehensive project completion report (PCR-G) for the project loan on 16 January 2008. The technical assistance completion report (TCR) was circulated to the Board in July 2008.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

1. Program Loan

5. The program loan was highly relevant in supporting the Government’s key objectives and policy reforms for economic, social, rural and regional development, and poverty reduction, and it was in line with ADB’s country operational strategy (COS).1 The policy program covered seven policy areas involving second-generation reforms to deepen, refine, and more extensively implement the policy and legal framework for a market-oriented agriculture sector. During the pre-transition period, the state carried out a broad range of functions, including supply of inputs, processing and marketing of outputs, and provision of financial services. Therefore, the

1 2000 MON: ADB Country Operational Strategy. Manila.

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emphasis of the program loan was on redefining the Government’s role as a provider of essential support services and establishing a favorable environment for the private sector to undertake functions more effectively. 6. The policy matrix for the program loan was diverse and had a total of 35 policy measures. (Appendix 1). Implementation of five measures was a condition for consideration of the program loan by ADB’s Board of Directors, while nine conditions had to be complied with before the release of the second tranche. Eighteen measures were to be taken before the expected date of the second tranche, but none of these was indicated as a condition for its release. However, two conditions had to be fulfilled before the end of the program. The thrust of the program loan remained highly relevant throughout implementation, including after a change in government. 7. The management structure of the program loan was a design weakness. Out of seven key policy areas, only one was within the mandate of the MOFE, the EA for the program loan, and this was cooperative taxation regulations. Other policy issues were under the jurisdiction of the MOFA, which had not received any of the policy loan’s funds. As such, the focus on policy issues was diminished for MOFA and it was more by chance that the policy changes were effected. A more appropriate design would have had MOFA as the EA for the policy program loan. 2. Project Loan

8. The Government’s medium-term objectives for regional and rural development focused on improving the living standards of rural inhabitants by promoting economic development, improving infrastructure, and developing rural credit policies. The interventions proposed under the project loan were intended to support the Government in fulfilling its objectives. They included support for:

(i) the national Green Revolution Program, which sought to expand vegetable production and raise the incomes of small farmers;

(ii) cooperative development for herders and farmers;

(iii) animal disease control and livestock production exports;

(iv) rehabilitation of water points in pasture areas and a reduction in overgrazing;

(v) improved risk management for the agriculture sector;2 and

(vi) improved communication facilities to provincial centers.

9. Through support for these interventions, the project loan was able to address the major constraints identified in the COS, which were undermining the performance of the agriculture sector. The focus on production and marketing for livestock, which is the most important agricultural subsector, was particularly important. Other highly relevant initiatives of the project loan included re-orientating the green revolution towards the poor and unemployed around aimag and soum centers, thereby supporting ADB’s poverty reduction strategy, and improving the supply of credit to rural areas.

2 Inadequate risk management became apparent during the livestock disaster in the winter of 1999/2000 and the

following winter.

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10. Soundness of Design. The green revolution subcomponent needed to be revised during implementation because nongovernment organizations (NGOs) could not deliver technical advisory services as envisaged in the report and recommendation of the President (RRP).3 In addition, the use of the agro-parks for demonstration and extension proved infeasible. The subcomponent was supposed to focus on vulnerable groups, but no mechanism was proposed to ensure that concessional funding would be selective and limited to these groups. The mechanism and terms for extending loan funds to beneficiaries of the green revolution subcomponent, in particular for capital investments, were not clearly specified. Subsequently, loan funds for onlending to beneficiaries were channeled through the Aimag Agricultural Development Funds (AADF) rather than through the rural commercial banking system. The administration of the AADF was the responsibility of the aimag agricultural department, which had little or no expertise in sustainable rural finance principles, and the repayment of these funds became problematic. Because of the emphasis on poverty reduction, supply of inputs was free or at concessional terms, and a small amount was allocated; this subcomponent may have been more suitable for ADB grant funding.

11. The veterinary services subcomponent was generally well conceived, but the proposed training needed some modification during implementation to prevent duplication with a GTZ- funded project.4 The well rehabilitation subcomponent was implemented as designed. However, participatory procedures for prioritizing rehabilitation and stakeholders’ interest, and for ensuring beneficiary contributions for repair costs and operation and maintenance (O&M) for these wells, were not originally included in the subcomponent design but were incorporated during implementation.

12. The design of the cooperative development subcomponent did not take into account the history and actual state of cooperative development in Mongolia. The beneficiaries’ main reason for participation in this subcomponent was reportedly to gain access to funds.5 The design of the subcomponent did not specify adherence to market costs and sound economic and financial principles for capital investments. The participating financial institutions (PFIs) considered the cooperatives to have a high credit risk and extended only a few loans to them. When the subcomponent was formulated, ADB policy was very firm on channeling investment funds through the formal banking system. However, concessional lending for the cooperatives was undertaken through the AADFs because the RRP did not contain a clear description of the funding mechanism for the cooperatives.

13. The concept of secondary cooperatives was too advanced, given the situation of cooperatives in the western aimags. As a prerequisite for secondary cooperatives to function, successful primary cooperatives must first exist, but they were too few, widely spread, and with interests that were too diverse for them to derive mutual benefit. In addition, two of the four aimags had already received significant support for the development of cooperatives through a GTZ-funded project.6 Therefore, much of ADB’s involvement in training for cooperatives was 3 ADB. 2000. Report and Recommendation of the President to the Board of Directors on Proposed Loans to

Mongolia for the Agriculture Sector Development Program. Manila (Loan 1821/22-MON, for $7 million (program loan) and $10 million (an investment loan), approved on 21 December).

4 The GTZ-funded Mongolian Veterinary Sector Privatization Project (€3.33 million) covered two of the four ASDP aimags, and provided extensive veterinarian training in technical areas and business development for veterinary practices.

5 See information provided in Back-to-Office Report (BTOR) of D. Teter, Mongolia Resident Mission (MnRM) dated 18 June 2002, and the Government's Project Completion Report (PCR-G) .

6 GTZ-funded Self Help Organizations in Rural Areas Project, implemented between 1998 and 2004, covered two of the four target aimags of the ASDP.

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considered unnecessary, and this resulted in a significant loan reallocation in May 2006. Similarly, the establishment of cooperative training centers and national cooperative wholesale centers was considered unjustified in the absence of prerequisite conditions, and therefore this was not implemented as designed.

14. The rural communication links subcomponent was considered largely redundant when the project started and was not implemented. 7 Efforts to use the funds for alternative improvements to rural communication were not supported by the then Ministry of Infrastructure which was the implementing agency responsible for the subcomponent.

15. The design of the rural credit subcomponent was highly relevant. Implementation of the credit line was successfully achieved through selected formal financial institutions. Training on rural finance and agriculture subloan appraisal at these institutions was crucial. The subcomponent also contributed to reducing the opportunity for direct lending. However, by its design, and given the high real interest rates at that time, the subcomponent only catered for relatively small loans with a maximum duration of 12 months, even though this was extended to a maximum of 24 months during implementation. At the time of the ASDP preparation, it was well recognized that medium- to long-term capital investments were urgently needed to increase production and productivity at crop farms and agribusiness enterprises, but very high real interest rates made capital investments financially nonviable. The rural credit subcomponent as designed did not address this issue of medium-term capital investment for the agriculture sector. There was no provision in the RRP or in the loan agreement on the use of the credit line funds after completion of the ASDP, but this was rectified by the time of completion.

16. The design of the project management subcomponent is considered satisfactory. The heavy dependence on loan-financed consultants for technical inputs made the project management unit (PMU) costly, considering that the ADTA also provided technical expertise for investment subcomponents. It was unclear why some training and consultant expertise were provided from the loan, while other training and expertise were funded under the ADTA. Some of the ADTA work was clearly related to project loan subcomponents, and confusing implementation arrangements caused significant coordination problems during implementation. The PMU was instrumental in implementing remedial measures as implementation of the project progressed.

17. The objective of the ADTA was to provide support for well rehabilitation and cooperative development subcomponents. For the well rehabilitation, it sought to demonstrate aspects of community development for pasture management and well operations by herder groups. For the cooperative development, the goal was to train trainers to deliver training to cooperative members on various topics. Neither has worked satisfactorily as there were coordination difficulties between the ADTA and the PMU. The concept of self-funded trainers being made available through aimag cooperative training centers proved to be an impractical and unsustainable solution to training requirements. While the Government appreciated efforts to support the main project loan through grant assistance for capacity building, it would have been preferable to have included the ADTA activities under the project loan and to have used the technical assistance funds for the financing of implementation consultants.

7 The Japan International Cooperation Agency (JICA) provided radio phones to establish communications between

aimag and soum centers that was completed in 2000. In addition, JICA funded the establishment of a nationwide short wave radio network that covered more than 96% of the country by 2001.

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18. The quality of the project preparatory TA was unsatisfactory. 8 The performance of the consultants was unsatisfactory and the contract was ultimately terminated and other consultants were employed to complete the job. Formulation of the ASDP took 3.5 years, mainly because of a need to provide substantial additional consulting inputs and change in consultants. An overall concern with the design was the broad nature of the proposed project, which covered a full range of production activities, infrastructure development, and rural credit, which was itself a specialized and difficult area at that time in Mongolia. The interventions were individually appropriate, but the links between the activities were less obvious. The design assumed a higher level of understanding and knowledge than proved to be available, particularly in the aimag centers where the majority of the implementation was to be undertaken, and hence the high level of consultancy and training inputs included under the project loan and the ADTA. A further weakness in the design was that the project loan was spread too thinly. The allocation for the green revolution activities was only $485,000,9 and the average annual investment for the green revolution subcomponent was about $23,000 per aimag. Similarly, about 42,000 water points were spread out over pasture land, and about 50% of these were considered in need of repair. The project loan covered only 1% of this much-needed rural infrastructure. The project loan and its ADTA could have been justified and used solely for this purpose.

B. Outputs

1. Program Loan

19. The program loan made progress on major policy reforms, including liberalization of the trade regime to promote exports of agricultural products, privatization of crop farms, elimination of budgetary support to agricultural enterprises, and strengthening of veterinary and extension services to support the private sector. However, the program loan failed in key reforms, such as improving efficiency in the use of funds generated from the sale of commodity aid, and minimizing state intervention, subsidies and concessional loans to private businesses. In fact, directed and highly concessional lending by MOFA remains a serious concern.

20. Under the first area of reform, which sought to reduce price and other distortions in the agriculture sector, procedures for the application of export licenses have been simplified and made more transparent. Requirements for licenses were reduced from about 600 at the beginning to about 94 at the end of the ASDP. Procedures for the export and import of plants and animal products were amended and brought under the State Specialized Inspections Agency (SSIA). The second area of reform related to the promotion of competitive markets for agricultural inputs, outputs, and processed goods. The main achievements were: (i) budgetary support for many strategic enterprises was eliminated; (ii) the National Council responsible for the implementation of the Cooperative Development Program was reconstituted to include stakeholders and representatives of all cooperative associations as voting members; (iii) the annual budget for the Cooperative Development Program was substantially increased; and (iv) subsidies have generally been eliminated, except for investments under the subcomponents of the project loan and the Government's Crop Support Program. The Crop Support Program is a continuation of heavily subsidized inputs and directed lending through a fund operated by MOFA, and is in conflict with the objective of the ASDP.

8 ADB. 1997. Technical Assistance to Mongolia for Agriculture Sector Development Program. Manila (TA2819-MON,

$492,000, approved on 27 June) 9 Or less than 5% including the allocation for consultancy inputs for production support, business management and

agro-processing.

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21. The third area of reform involved the delivery of financial services and provision of improved access to credit in rural areas. During the ASDP formulation, the future of the Agricultural Bank looked bleak and liquidation was likely. The restructuring of the Agricultural Bank was completed in 2001, new management was put in place, and the bank was sold to private investors,10 the bank has become profitable and has the widest national coverage, with about 400 branches in every aimag and soum. This achievement can only partly be credited to the ASDP, as other bilateral and multilateral donors and financing institutions greatly contributed to the recovery of the financial sector in Mongolia. In the fourth area of reform, which related to the rationalization of tax incentives to promote investments in rural areas, the Economic Entities and Organizations Tax Law has been amended to support the specific requirements of cooperatives.

22. The fifth area of reform related to the improvement of productivity and sustainability in extensive livestock production. The Government adopted the Office International des Epizooties (OIE) classification system under its Law on Animal Health and the Gene Pool. 11 Meat inspection regulations and procedures for accreditation and certification of abattoirs and processing plants were established in 2001 and 32 meat inspectors were employed by the SSIA. Laws related to land and water resources and pasture management were approved. Well rehabilitation has been supported with an emphasis on herder responsibility for O&M.

23. The sixth area of reform involved the strengthening of agricultural research and extension to support the private sector. A Council of Science and Technology Research, responsible for agricultural research priorities, was created in 2002, and procedures for submission and approval of research priorities were established soon after. A medium-term development program for agricultural extension up to 2010 was approved in 2003. However, the extension services remain limited because of inadequate budget allocations. The seventh area of reform aimed to mitigate risks in agriculture to ensure food security, income generation, and employment opportunities for vulnerable groups. Risk management has been a central feature of several policy statements and programs, with elements that were included in various new and amended laws. The National Emergency Management Agency was established in 2005 incorporating the former State Reserves Agency. The Agricultural Insurance (Daatgal) company was fully privatized in 2002. The ASDP sought to raise the impact of the national Green Revolution Program, particularly with respect to poorer groups, who had not been evident among the early beneficiaries. Although involvement of local NGOs was limited because of a lack of local expertise, the program has worked closely with several NGOs.12

2. Project Loan

a. Green Revolution Program

24. This subcomponent aimed to improve the knowledge base of producers through demonstrations of new production technologies such as greenhouses and plastic tunneling, black plastic sheet mulch (ground cover), crop diversification, improved production techniques including improving water and pest management, fertilizer regimes, nursery techniques, and

10 In 2001, the name of the bank was changed to Khan Bank. 11 The Office International des Epizooties is now known as the World Organisation for Animal Health. 12 For instance, the Association of Women Farmers was contracted to undertake training sessions and field

demonstrations. Cooperation has also taken place with foreign NGOs such as ADRA, World Vision, and Norwegian Relief, including assistance for the multiplication of seeds and seedlings. NGOs have also been involved in media presentations through TV and radio.

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processing. Target outputs at design were for: (i) 4,400 person-days training; (ii) study tours for 180 farmers; (iii) 14 annual shows; and (iv) a 10% increase in horticultural production by project completion. Most of these targets were achieved: (i) 8,495 person-days of training were delivered to 5,264 farmers; (ii) three study tours to neighboring People’s Republic of China were undertaken by farmers and soum and aimag agronomists, involving 172 people for 20 days; (iii) 14 rural demonstrations were supported; and (iv) 1,648 jobs were created with the area grown under plastic greenhouses being increased by 30%. Project Framework is in Appendix 2.

25. While the area planted with the main vegetable crops (potatoes, carrots, and cabbage) has not changed much since 2000, total production increased significantly because of increased yields, thereby clearly demonstrating the impact of new technologies. In particular, improved potato seeds have increased yields by 30%–50%. The rate of adoption of other inputs and new technologies is less clear. Having demonstrated the benefit of water management technologies, the Government incorporated trickle and sprinkler irrigation equipment as part of its national Green Revolution Program 2. Impact surveys have recorded significant increases in earnings from horticultural production in households that participated in training activities.

b. Veterinary Services

26. The goal of this subcomponent was to reduce losses from animal diseases, and to meet the requirements of potential livestock and meat importing countries. Planned outputs under the subcomponent included: (i) training on international standards for 24 meat inspectors and an operative state abattoir inspection service; (ii) three training courses for 240 public and private veterinarians on animal husbandry, clinical treatment, and business management; and (iii) provincial livestock disease surveys and strengthening of veterinary laboratories in Ulaanbaatar and four western aimags.

27. These targets were mostly achieved. The project loan helped to develop training modules for meat inspectors and delivered training to 20 aimag-based inspectors from Hovd and Uvs. Training was repeated in Zavhan for a further 18 trainees and inspectors from Zavhan, Govi-Altay, Bayan-Olgiy, and SSIA. Some 125 private veterinarians in the western aimags received training in (i) survey techniques and procedures, (ii) survey protocols, (iii) sample handling and management, and (iv) microscope diagnoses for rabies and anthrax. Training in veterinary practice management was provided to 75 veterinarians covering business development planning.

28. The aimag veterinary laboratories were upgraded and staff was trained in the techniques and standards of the OIE. The rehabilitated serum laboratories have established serum banks for tests. The introduction of micro-titre techniques and modern test kits has established the capacity to undertake disease diagnoses. The model adopted by ASDP has been replicated by other donors (the International Fund for Agricultural Development, JICA, and the United States Agency for International Development) in other aimags' veterinary laboratories. The epidemiological survey, involving 33,163 serum samples taken in accordance with OIE standards, was conducted to identify economically significant diseases, and train the veterinarians in sampling techniques, sample handling, collection and processing of blood samples, and verification and interpretation of data.

c. Well Rehabilitation

29. A total of 328 wells out of 400 planned were rehabilitated in four western aimags at an average unit cost of $3,279. Participatory procedures were developed to identify suitable wells

8

for rehabilitation, and operator-ownership agreements were formulated. Cost recovery procedures were piloted, while beneficiaries were required to pay for O&M costs. The Initial 50% cost recovery was reduced to 10% under revised regulations from MOFA. As a result soum well rehabilitation funds (SWRFs) became depleted.13 Soum governments contributed $100,300 for well housing, while herders’ contributions to the SWRFs were 81% of the target (a 10% contribution) amounting to MNT92.1 million. Collection of water user charges was problematic as herders disputed their legality.14 A total of MNT74.3 million was collected as water user charges from herder groups to meet O&M costs. To identify priority wells for rehabilitation, 2-day workshops were held at aimag level, involving 434 people, while 143 person-days of training were delivered to water companies' staff on the preparation of bidding documents. In addition, 728 person-days of training were provided to 328 well operators on routine O&M requirements, maintenance of well logbooks, and water user charge collection arrangements.

d. Cooperative Development

30. The cooperative development subcomponent was intended to improve the joint action of herders groups by formalizing associations with common interests as cooperatives. It was intended to provide extensive training in association with the ADTA in the roles and responsibilities of cooperatives as business entities and provide credit to assist cooperatives to start their operations on a commercial basis. Nine secondary cooperatives were planned to improve their members’ bargaining and purchasing power. The subcomponent was also designed to establish a cooperative wholesale center to improve the market information and market power of the cooperatives.

31. Achievements under this subcomponent werenegligible. In total, 14,000 person-days training were provided on various aspects of cooperative development, including business development planning, budgeting, accounting and auditing. Considerable training was conducted by trainers prepared under the ADTA. But many of the trainers were found to be ineffective. Few trainers survived the period of implementation, either reverting to other income-raising activities in aimag centers or relocating to other provinces in search of employment. It was also assumed that cooperatives that had received training would be better placed to gain access to rural credit provided under the Project. This did not occur as the participating financial institutions (PFIs) assessed lending to cooperatives to be highly risky. As a result, lending to the cooperatives was pursued through the AADF. A total of MNT451.7 million was disbursed as direct investment loans under the cooperative development subcomponent and MNT96.8 million under the green revolution subcomponent. Average repayment rates for the cooperative and green revolution subcomponents were 31.6%.

32. Establishment of secondary cooperatives was considered unrealistic, given the insecure and underdeveloped state of primary cooperatives in the western aimags. Through various activities, the Project supported six secondary cooperatives in the four western aimags, two of which were operating successfully. Cooperatives were seen as a means for improving agricultural marketing for herders, and stronger cooperatives were expected to play a greater role in the aggregation and sale of livestock and products of livestock origin. Since the cooperatives were extremely weak, it was unrealistic to expect them to adopt such functions on 13 SWRFs were established in soums where rehabilitation work took place, with the purpose of creating a resource for

future rehabilitation activities. When beneficiary contributions were 50% of the rehabilitation cost initially, sufficient funds could have been amassed for further rehabilitation works. At 10%, the funds were insufficient and the funds were amalgamated in the Aimag Consolidation Fund, also referred to as the AADF.

14 Under the Mongolian constitution, water is a free commodity but delivery can be charged.

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a commercial basis. Only one of the so-called secondary cooperatives has assumed marketing functions for herders by establishing a meat storage facility early during implementation. However, the marketing links did not extend to herders but stopped at the aimag enterprise.

e. Rural Communication Links

33. This subcomponent was considered redundant and the loan funds were reallocated during the midterm review (MTR) mission.15 Proposals to use the loan funds for other activities, such as establishing small studios to produce programs and information services, and upgrading telephone and internet facilities, were not accepted by the then Ministry of Infrastructure.

f. Rural Credit

34. The subcomponent was expected to provide: (i) 5,000 loans with a total value of $5.5 million, and (ii) 3,200 person-days of training for PFI staff. Six PFIs participated in the disbursements of the rural credit line and each contributed 20% of funds from their own resources.16 Initially, loans were allowed for up to the equivalent of $10,000 and for up to 12 months, with the interest rate and repayment arrangements determined by the PFIs. These conditions were relaxed in 2005 to allow loans of up to $20,000 over a 24-month term, but the average size remained about $1,000 and most was much smaller. ADB disbursed a total of $4.8 million (equivalent to SDR3.39 million) for the rural credit subcomponent.

35. A total of 30,156 subborrower loans have been extended through the revolving fund, amounting to MNT 34.9 billion.17 The credit fund revolved more than 5 times. Khan Bank was the most active of the PFIs, reflecting its greater branch network, and accounted for 60.8% of loans, followed by Khas Bank (17.3%), Mongol Post Bank (16.8%), Zoos Bank (3.5%), Savings Bank (1.1%), and Anod Bank (0.6%). More than 95% of the loans were extended to individuals, and 60% were loans to herders. Loans were used to cover essential household expenses such as education, heath services, marketing of livestock products (16.4%), vegetable production (8.1%), and cereal cropping (4.6%). Fifty six percent were one-off borrowers, 31% borrowed twice, while 13.7% borrowed three or more times. At the time of the MTR, some 30% of borrowers were first-time borrowers, indicating that the ASDP had contributed to better access for rural households. Access was a more important issue than the interest rate. Monthly interest rates declined during implementation from 4%–5% to 2.8%–3.5% in the case of Khan Bank, and 2.8% to 2%–2.6% in the case of Mongol Post Bank. Loan recovery rates exceeded 98%.

36. During a review mission in 2007, an agreement was reached between the Ministry of Finance (MOF), the Bank of Mongolia (BOM), MOFA, ADB, and the World Bank to transfer the accumulated funds in the revolving fund under the rural credit component to the Microfinance Development Fund (MDF)18 so that such funds could continue to be used for agriculture related activities in rural areas. However, against a backdrop of declining revenues and fiscal

15 The MTR mission was fielded from 13 June to 8 July 2005. 16 The PFIs included Anod Bank, Khan Bank (previously Agriculture Bank), Mongol Post Bank, Savings Bank, Khas

Bank, and Zoos Bank. 17 The number of aimags was extended to eight after the MTR to include Bayanhongor and Bayan-Olgiy, which

together accounted for 12.3% of the total loans. 18 MDF was established under the World Bank-assisted Sustainable Livelihoods Project to expand the outreach of

financially and institutionally sustainable microfinance services to poor and vulnerable non-poor households and individuals in rural Mongolia.

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constraints due to a global financial downturn, the MOF used all the funds from the revolving fund to finance budget shortfalls in 2008.

C. The Program and Project Loan Costs

37. The cost of implementation of the program loan on policy reforms was estimated at $7 million (equivalent to SDR5.44 million) and this amount was fully disbursed in two tranches of $3.5 million each. The cost of the activities financed by the project loan were $11.6 million. ADB financed $9.8 million (equivalent to SDR6.99 million), consisting of all foreign exchange costs, which totaled $8.6 million, and $1.2 million of local costs. Total costs were affected by higher than estimated rehabilitation cost per well 19 and increases in equipment, materials and operational costs. Cost reductions occurred because of the cancellation of the rural communication subcomponent, the scaling down of the cooperative development subcomponent, and a reduction in overall training. ADB financed 84.5% of total costs, 100% of foreign costs and 42% of local costs. Additional availability of funds from currency fluctuations were used to extend the credit line to two adjoining provinces in the western region.20 D. The Program and Project Loan Disbursements

38. The first tranche of the program loan was released on 21 June 2001, the day after the loan became effective, and the second tranche on 11 December 2003, once the Government had fulfilled the conditions for its release. Disbursements for the project loan were very low in the first year because consultants had not yet been appointed. For the second year, delays in undertaking field activities occurred because of seasonal considerations, and so disbursements remained low. However, this improved once the project activities in the field began and the procurement system was established. At the request of MOFA, the imprest account was increased from $200,000 to $500,000. Imprest fund and statement of expenditure procedures were properly applied and facilitated timely disbursements. Use of statement of expenditure was sufficient with adequate supporting documentation being maintained to support claims to ADB for replenishment of expenditures incurred.21 The disbursement schedule was modified after the MTR, when the MOFE requested a cancellation of $290,000 initially allocated for the rural communication links component and other minor adjustments. The total amount disbursed under the Project was about $9.8 million (equivalent to SDR6.99 million). An undisbursed balance of $1.2 million (SDR781,100 equivalent) was cancelled at the project loan closing date.

E. The Program and Project Loan Schedules

39. The program loan account was closed in December 2003, less than three months later than the original closing date of 30 September 2003. The project loan became effective on 20 June 2001, only 1 month later than originally planned, but because of a delay of almost 1 year in the engagement of the Project and ADTA consultants, first year implementation was also delayed by about 1 year against the original plan in the RRP. It also took time to set up payment arrangements, aimag cooperation agreements, and mechanisms for the provinces to assume

19 Originally estimated to be $2,000 per well, but was in the order of $3,300 per well on account of the fact that a

higher portion of deep wells was rehabilitated. 20 Bayanhongor and Bayan-Olgiy aimags. 21 Confidence Audit LLC. 2006 and 2007. Auditor's Report on the Project Financial Statements. Mongolia.

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ownership of the assets.22 As a result, there were further delays in implementation during 2002, and activities completed in that year were carried out hastily without thorough preparation.23

40. The MTR was delayed from the anticipated date of September 2004 to July 2005. Significant revisions in implementation activities were proposed by the MTR mission, mainly related to the cooperative subcomponent. The MOFA did not support these proposals and subsequently requested a further review of the recommended changes by another consultant. It took almost 1 year for the issue to be resolved. The project loan was completed on 30 June 2007 after a 9-month extension of the original loan closing date of 30 September 2006. The project loan account was closed on 24 October 2007. The implementation schedule is in Appendix 3. F. The Program and Project Loan Implementation Arrangements

41. The then MOFE (currently MOF) was the EA for the program loan, while the then MOFA (currently Ministry of Food, Agriculture and Light Industry) was the EA for the project loan. Implementation proceeded based on the approved annual plans both at aimag and national levels. Annual review meetings were held in the aimags and the aimag coordination committees approved future initiatives, while nationally both the credit working group and the project steering committee met on an as required basis, but not always at least once every 3 months as envisaged in the loan agreement. A national project director from MOFA headed the PMU.

42. The PMU implemented a computerized system to monitor activities for each aimag component. However, the focus of the system was on inputs and outputs rather than on outcomes and impacts. The PMU provided direction and effectively supervised the daily operations of the aimags' project implementation units (PIUs). Coordination between BOM, MOFE, MOFA, and other members of the steering committee and credit working group was satisfactory. However, coordination between PMU and ADTA activities was unsatisfactory. Communication between the EAs and ADB was at times inadequate on important issues that required ADB approval and advice such as: lending through aimag funds and their highly concessional terms; one procurement issue; cost recovery mechanisms; policy dialogue; and submission of quarterly reports on the implementation of the program loan. The BOM effectively managed implementation of the rural credit line through its proficient supervision of the PFIs.

G. Conditions and Covenants

1. Program Loan

43. The main conditions and covenants for the program loan related to the implementation of the policy reforms. The progress report for the release of the second tranche indicated that eight of the nine tranche conditions had been complied with.24 The MTR Mission considered that for 20 of the 35 conditions in the policy matrix was less than complete 2.5 months after completion of the Program. MOFA agreed with the overall policy objectives but did not fully

22 Preferably, these agreements could have been established prior to effectiveness. 23 The drilling of the first 25 wells was identified under the attached ADTA to provide incentives for the communities’

participation in pasture management work. The first year wells were completed without establishing the necessary agreements for counterpart contributions, for rules of operation and for contributions to the soum well rehabilitation fund.

24 ADB. 2003 Progress Report: Release Second Tranche to the Mongolia, for the Agriculture Sector Development Program. Manila (Loan 1821/22-MON, approved on 12 November)

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concur with the basis for assessing compliance, and submitted its own comprehensive version of compliance. A subsequent special Loan Review Mission 25 acknowledged that since the ASDP design, the policy environment had changed, in part because of the ASDP implementation and in part for reasons not attributable to it. Considering this, compliance has been achieved for most of the conditions except key policy areas that relate to highly concessional direct lending by MOFA using so-called “commodity funds” or equivalents. This continues to cause inefficient allocation of budgetary resources and impinges on the nationwide development of an active inputs supply sector. Apart from noncompliance in this important policy area, overall compliance with the policy conditions can be considered satisfactory. The status of compliance with the policy reforms is presented in Appendix 1.

44. The loan agreement for the program loan explicitly specified that quarterly reports had to be furnished to ADB on the progress of the Program and its accomplishment of targets and actions in the policy reform matrix.26 No such reports were submitted and this has contributed to confusion and insufficient policy dialogue on important issues related to policy reforms.

2. Project Loan

45. Of the 27 major loan covenants, two became inapplicable because of the cancellation of the rural communication component, one was partly complied with, and the others were complied with. Partial compliance refers to the cost recovery mechanism for loans extended under green revolution and cooperative development subcomponents through AADF. A cost recovery mechanism was established, albeit without adequate consultation with ADB. This mechanism covered provisions on the percentage and terms of funds to be recovered and use of recovered funds, the possible involvement of a financial institution to administer the recovery of funds, and any other matters relating to the cost recovery mechanism. The implementation of such mechanism was not effectively pursued and recovery performance remains poor. There were no delays in submission of the audited financial reports under the Project. Appendix 4 provides details on compliance with the loan agreement for the project loan.

H. Related Technical Assistance

46. The TCR of the attached ADTA was circulated to the Board in July 2008. The TCR considers the performance of MOFA and ADB unsatisfactory. ADB's performance was assessed unsatisfactory because of frequent changes in the ADB supervision personnel and the transfer of implementation responsibility to the Mongolia Resident Mission when the ADTA was nearing completion. Overall, the TCR rates the ADTA partly successful based mostly on the outputs produced, although the impacts and outcomes are considered less than satisfactory.

I. Consultant Recruitment and Procurement

47. Recruitment of the implementation consultants funded by the project loan was conducted by the Government in accordance with ADB procedures. The Government requested assistance from ADB in conducting contract negotiations with the consultants because it was the first contract negotiation experience for MOFA. The presence of ADB Central Operations Services Office staff was very useful and supportive in ensuring adherence to ADB guidelines and procedures. The Institute for International Development Ltd., in association with Agriteam

25 11–18 March 2006. 26 Loan Agreement, Article IV, Section 4.5 (a) and (b).

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Canada Consulting Ltd., GTZ and MonConsult, were awarded two contracts to provide (i) consulting services to assist with implementation and provide technical expertise, and (ii) training services. Both contracts were financed out of the project loan.

48. The initial contract for implementation services and technical expertise amounting to $1.5 million was for 432 person-months of specialist inputs (46 international and 386 national). Actual total inputs provided under the contract amounted to 407.2 person-months, of which 45.9 person-months were for international specialists and 361.3 were for national specialists. The training services contract amounted to $167,000 and provided for 22.4 person-months of inputs (8.4 international and 14 national) in the fields of epidemiology, veterinary laboratory diagnostic services, and meat inspection. Details on the consultancy and training inputs provided through the project loan are provided in Appendix 5.

49. Procurement activities were carried out largely on time and in accordance with Government regulations and ADB requirements. International competitive bidding was not used, as there were no contracts likely to attract the interest of an international contractor. National competitive bidding procedures were adopted for the purchase of vehicles, pumping equipment and contract services for the rehabilitation of wells. Local shopping procedures were used for office equipment and other smaller contracts for services, and force account was used for O&M activities. There was one instance in which bidding procedures were challenged and as a result, the package was re-tendered.27 Procurement of civil works for rehabilitation of irrigation systems under the cooperative development subcomponent was done through local competitive bidding, as the amount was relatively small and sites were in remote areas. A list of major procurement contracts is provided in Appendix 6.

J. Performance of Consultants, Contractors, and Suppliers

50. Consulting inputs were provided for project management, cooperative development—meat and fiber marketing, water point rehabilitation—engineering design and socioeconomic aspects, and rural credit. There were seven contract variations for changes of staff for various technical positions and inputs in accordance with project requirements and Government requests. Variations amounted to $30,351 and did not increase the total value of the contract. However, total inputs amounted to 24.8 person-months less than originally designed. The implementation consultant provided comprehensive inputs for the annual reports and the Government's PCR (PCR-G). In general, the performance of the implementation consultants was highly relevant and generally satisfactory, and the reports were comprehensive and well presented.

51. The training services contract had three contract variations due to changes of staff. Variations amounted to $18,725 against contingencies. Inputs amounted to 0.15 person-month more than originally designed. Training services consultants were instrumental in designing the epidemiological survey, detailing rehabilitation for aimags' laboratories, and developing training materials for meat inspectors. Training specialists provided timely inputs in accordance with the schedule agreed at contract negotiations and performed satisfactorily.

52. Performance of the contractors was considered satisfactory. Aimag water construction companies received extensive training in bid preparation and were competent in submitting 27 A package for veterinary laboratory equipment and reagents valued at $190,000 was awarded by direct purchase.

Although this appears to have been justified (MTR memorandum of understanding, para. 140), MOFA did not seek ADB approval prior to contract award.

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proposals to undertake the work. They also provided technical confirmation that the identified wells could be rehabilitated and were responsible for developing technical specifications used in the invitations to tender for pumping equipment and generators. Most of the contracts were concluded in time for commissioning, including installation of necessary equipment. Late delivery of pumps and generators, which were under a separate supply contract, sometimes caused a problem, as rigs had to be relocated after the initial cleaning in order to cover all wells for rehabilitation. This incurred additional costs for the contractors, although they completed their work without requesting variations for this unexpected event.

K. Performance of the Borrower and the Executing Agency

53. MOFE was the Borrower for the ASDP and the EA for the program loan. Lack of compliance became a major issue for disagreement during the MTR when the program loan had already ended. Among seven key policy areas, only one was the mandate of the MOFE, while the others were the mandate of the MOFA. The PCR-G states that MOFA “had little to do with the Policy Loan,” and that “the focus on policy issues was somewhat diminished for MOFA and it was more by chance that the relevant policy changes were effected.” Apparently, the policy program loan steering committee did not function well. Quarterly progress reports, specified in the loan agreement, were never submitted to the ADB. MOFA should have been instructed to report to the steering committee on the progress of each reform under its responsibility. The performance of MOFE as the Borrower/EA for implementation of the program loan was unsatisfactory, but its performance for the project loan is considered satisfactory.

54. As the EA for the project loan, MOFA generally dealt promptly with formal requests and submissions, but steering committee meetings were too few. No baseline data were collected, and until November 2005, no single monitoring and evaluation (M&E) report had been received. MOFA failed to seek ADB's opinion and advice on some crucial implementation matters such as concessional lending to beneficiaries and cost recovery mechanisms. MOFA was ineffective in coordinating implementation of the project loan and the associated ADTA. The performance of MOFA as the EA for the project loan is considered partly satisfactory.

L. Performance of the Asian Development Bank

55. The performance of ADB is considered unsatisfactory for both the program and project loans. Implementation supervision suffered from frequent changes in project officer. Submission of quarterly progress reports for the program loan was not effectively pursued and none was submitted. Early review missions failed to raise concerns over implementation and compliance with program loan conditions and covenants. Disagreement with MOFA on how to proceed with the cooperative development subcomponent caused confusion and delays in implementation. ADB responded reasonably quickly to requests for approval of tender documents and other formal project agreements, such as onlending and subsidiary loan agreements, but there were delays with processing withdrawal applications during the early stages of implementation. Transfer of implementation responsibility to the Mongolia Resident Mission in 2006 involved another change in supervision staff and was not effective, as this transfer was at the end of implementation.

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III. EVALUATION OF PERFORMANCE

A. Relevance

56. The ASDP is assessed as relevant. Overall, the program loan interventions remained highly relevant both at the time of approval and completion. As for the project loan, the green revolution interventions became increasingly relevant by offering a meager subsistence to support livelihoods when a majority of the rural population suffered a severe loss of livestock through successive dzuds28 in the winters of 2000 through 2002. The veterinary subcomponent was also relevant, as it provided an improved vaccination program for diseases found in the western area and provided a model for future rehabilitation of veterinary laboratories. The well rehabilitation subcomponent was highly relevant as it allowed more access to grazing land and thus increased incomes, and reduced overgrazing around functioning wells. The cooperative development subcomponent proved mostly irrelevant as it failed to achieve cooperation between farmers for mutual benefit and development of cooperatives. The communication links subcomponent was redundant as many of the planned facilities already existed. The rural credit initiatives were highly relevant as they improved and expanded commercial banking operations to rural areas and improved herders' and farmers' access to rural credit.

B. Effectiveness in Achieving Outcome

57. The ASDP is assessed as less effective. Although most of the program loan conditions were achieved, some key policy areas were not fulfilled. In particular, the Government's recent Crop Support Program with a total allocation of MNT156 million for 2008–2010 is in direct conflict with key objectives of the ASDP. Other policy measures that were partly implemented relate to recovery of outstanding loans funded by the KR1 and KR229 commodity aid, charging of fees by private veterinarians, and taxation issues. Implementation of other policy conditions has generally further enhanced the reforms that supported open market conditions and the efficiency of the agriculture sector. Because of the significant adverse impact of directed concessional lending and MOFA involvement in input supply, overall the program loan has only been partly effective in achieving its outcome.

58. The main outcome under the project loan was an increase in the productivity and profitability of agricultural producers. The green revolution subcomponent has raised the yields of vegetable farmers that participated in the Project, improved their incomes, and reduced poverty. The veterinary services subcomponent has established capacity for disease surveillance and rehabilitated laboratory facilities. The well rehabilitation subcomponent has provided clearly visible outputs in infrastructure and additional grazing area.30 This has ensured additional income for herder households, and facilitated environmentally sustainable grazing by herder groups. The cooperative development subcomponent was more directed at development of the cooperative entity rather than addressing how cooperation might assist in improving producer returns or improving efficiency in produce marketing. The poor success rate of activities undertaken and low repayment performance have further contributed to the poor image that cooperatives already had, in particular with the formal financial institutions.

28 Severe winters in Mongolia with heavy snow and strong wind. 29 Aid programs financed by the Government of Japan: Kennedy Round 1 (KR1) is food supply program and Kennedy Round 2 (KR2) is provision of machinery and techniques to farmers. 30 In one case, reported to be as much as 30%.

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59. The rural credit component trained both producers and bank staff in various aspects of rural finance. The incentive for PFIs' participation paved the way for expanded rural lending and increased competition between institutions in the countryside. Based on the assessment of loan portfolios to the sector, short-term lending to the sector has increased, which reflects increased confidence in rural borrowers.

C. Efficiency in Achieving Outcome and Outputs

60. The Project is assessed as efficient. The Project benefits include (i) an increase in the income of participating households, (ii) an increase in pasture grazing land, (iii) the introduction of institutional reforms in the veterinary sector, and (iv) the creation of favorable conditions for rural credit. The efficiency of the investments has been assessed by financial and economic reevaluation of the activities following the approach used in the RRP. Calculations show the financial internal rate of return for the subcomponents related to livestock production is estimated at 31.0%, and the resulting net present value, discounted at 12%, is MNT3,340 million. The economic internal rate of return is 38.3% (using actual data collected during the project) which is similar to the analysis conducted during appraisal. The resulting net present value, discounted at 12%, is about MNT4,431 million. Details of the economic and financial analyses are presented in Appendix 7.

D. Preliminary Assessment of Sustainability

61. The sustainability of the ASDP is assessed as less likely. The green revolution program is hardly sustainable because of its focus on subsidized inputs, poor repayment of subsidized loans, and lack of a commercial input supply system. The sustainable operations of aimag veterinary laboratories are heavily dependent on the central government annual budgetary allocations. Two companies that supplied equipment for well rehabilitation established branches in the western aimags to service the pumps and generators. This contributes to technical sustainability because spare parts and service mechanics are available. However, financial sustainability remains a concern as the practice of collecting adequate user fees for O&M was not widely adopted nor enforced by the herder groups. Without an adequate mechanism and allocations for maintenance, the operating life of the pumps and generators will be reduced and rehabilitated wells could once again fall into disrepair.

62. The aimags’ training centers for cooperatives proved unsustainable during implementation as the capacity and willingness to pay by existing cooperatives is weak. Trainers engaged by these centers were not receiving sufficient work to allow them to remain on a full-time basis in the training centers and training center facilities were not used sufficiently. Lending for capital investments made to cooperatives experienced significant defaults in repayments. The rural credit initiatives are sustainable because the formal financial sector is involved in their implementation, market rates were applied and herders proved that they can be reliable borrowers. Commercial banks, in particular Khan Bank continue to extend rural credit using their own funds.

E. Impact

63. The ASDP components aimed to have an impact on poverty by benefiting poorer groups. A thorough analysis of the impact on poverty was constrained by the lack of reliable data, but field visits and the project M&E system's data confirmed significant benefits to participating rural households. The green revolution subcomponent has shown the most viable benefits, with participating household incomes documented to have increased by 10%–60%.

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The larger vegetable growers are likely to engage more casual labor for harvesting as yields have increased significantly. The veterinary services subcomponent has had a significant institutional impact. It will have a positive impact on the production and productivity of the livestock sector in the future. Well rehabilitation has added about 2.1 million hectares of grazing area available to herders, thereby improving their income, while at the same time having a positive impact on the environment by reducing overgrazing. Rehabilitated wells benefited about 4,500 herder families and provided potable water to 1.14 million animals. The M&E report shows that the average income of herders' families increased by 20%–40% between 2002 and 2005. Seasonal pasture maps developed by the ADTA demonstrated the value of mapping herder group movements and pasture access rights, and of organizing herder groups for mutual benefit. The rural credit component will have a lasting positive impact on the provision of rural credit.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

64. Overall, the ASDP is rated partly successful.31 It is considered relevant, less effective in achieving its outcome, efficient and less likely to be sustainable.

65. The ASDP was the ADB's first combined program and project loan in the agriculture sector and was implemented in the most remote western aimags of Mongolia. These aimags were among the least developed in terms of infrastructure, have most migration from rural to urban areas, were most affected by the harsh winter conditions of 2000–2002, and because of the loss of animals in dzuds had the highest occurrence of poverty and unemployment. No other major investment project in the agriculture sector has been implemented in this region up until now.

66. The ASDP has partially achieved its targets in providing timely support to the Government budget, supporting the agriculture sector in its adoption of market principles, and developing a competitive market for agricultural products. However, it was too thinly spread to show any real impact over a wide geographical area. It failed to adjust to new developments that occurred in the country during implementation, and some components such as cooperative development and rural communication were poorly designed and managed. Other components were successfully implemented and increased the access of the rural population to financial credits and served as good examples for replication.

B. Lessons

67. Lessons learned from the implementation of the ASDP are:

(i) design of the project loan was too complicated with five subcomponents, originally six, to be implemented in the most distant aimags of Mongolia;

(ii) for projects with complex design, more attention must be given to the roles and responsibilities of executors and implementation consultants for each part;

31 In accordance with ADB. 2006. Guidelines for Preparing Performance Evaluation Reports for Public Sector

Operations. Manila, the overall performance was rated based on the four core evaluation criteria (relevance, effectiveness, efficiency, and sustainability).

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(iii) consulting services should be provided by the TA while the cost of other activities could be financed from the loan proceeds;

(iv) institutional development should be linked with the achievement of specific tangible outcomes;32

(v) training provided under projects should be demand driven and based on beneficiaries' proposals for investment activities; and

(vi) participatory procedures should be included in the design of the project whenever cost recovery and contribution for O&M is required from private beneficiaries, in order to involve beneficiaries in identification of sector activities and obtain their commitment to cost recovery.

C. Recommendations

1. ASDP Related

68. Future Monitoring. Responsibility for administering the AADFs was handed over to aimag agriculture departments. The latest status report on repayment of credits channeled under the cooperative development and green revolution subcomponents shows no improvement in collection of outstanding loans extended to cooperatives. The Government needs to develop a mechanism for recovery of outstanding loans extended through the AADFs and report the status to ADB.

69. Additional Assistance. The veterinary services subcomponent and disease surveillance was mainly based on delivery of a public good, namely animal and public health services. No system for sustainable funding was designed to ensure adequate resources for continuation after the termination of the Project. The system could be funded through a purpose specific levy on export marketing or processing of meat and wool with revenue deposited in a special account for the sole purpose of veterinary health. Such systems were not considered under the ASDP but may be further explored and discussed during future ADB operations.

70. Short-term rural lending has been supported in Mongolia by various donors. Any future lending operations for the rural sector need to focus on understanding and addressing the issues involved in medium-term rural lending and come up with effective modalities for medium-term lending through the commercial banking system.

71. Timing of the ASDP Performance Evaluation Report. It is recommended that a performance evaluation be conducted for the ASDP in 2011, 5 years after completion.

2. General

72. To improve quality and ensure institutional memory during implementation, the processing of loans should involve at least two staff from the same project division, one of whom should have technical knowledge about the interventions proposed. The mission leader should have substantial experience with ADB operations and with the country and sector to which a loan relates. Furthermore, in order to benefit from institutional memory on the design process, a mechanism should be considered in which staff involved in the design, remain informed about developments during implementation regardless of their movement within the

32 For instance, cooperative development should have been focused on specific economic activities rather than

promoting cooperatives as an ideology.

19

ADB. This may be achieved, for example, by copying back–to–office reports to staff that were involved in the design of a project to keep them abreast of developments.

73. The handing over of implementation responsibility to a resident mission when implementation is almost completed is not effective. It would be beneficial if the resident mission were closely involved when the loan is being conceived rather than at the time of fact-finding and appraisal. This would ensure that country specific issues are taken into account and institutional memory is established within the resident mission.

Appendix 1

20

ASSESSMENT OF COMPLIANCE WITH CONDITIONS OF THE POLICY PROGRAM

1. The program loan was intended to support the achievement of targets in seven areas of policy reform. The main objectives of these reform areas were to: (i) reduce price and other distortions to improve resource allocation and efficiency in the agriculture sector; (ii) promote competitive markets for agricultural inputs, outputs, and processed goods; (iii) ensure the delivery of financial services and provide improved access to credit for the rural population; (iv) rationalize tax incentives to promote investments in rural areas; (v) improve productivity and sustainability in extensive livestock production; (vi) strengthen agricultural research and extension to support private sector agriculture; and (vii) mitigate risks in agriculture and ensure food security, income, and employment for vulnerable groups.

2. The policy matrix had 35 measures in total. Implementation of five policy measures was a condition for consideration of the program loan by the Board of Directors of the Asian Development Bank, and a further nine measures had to be complied with before the release of the second tranche (expected in March 2003). In addition, 18 measures were to be taken before this date but none of these was indicated as a condition for second tranche release. However, two conditions had to be fulfilled prior to the end of the program (expected in March 2005). The initial five measures as the condition for Board consideration related to: (i) establishment of a working group to improve the financial management and accountability of counterpart funds generated by the sale of commodity aid; (ii) initiating the process of transferring the counterpart funds to accounts of the Ministry of Finance and Economy at the Bank of Mongolia, and a provision that any new account for counterpart funds required the prior approval of the Ministry of Finance and Economy; (iii) the reconstitution of the National Council responsible for the implementation of the Cooperative Development Program; (iv) amendment of the charter of the National Council to include relevant stakeholders; and (v) development of a time-bound business plan, acceptable to the Asian Development Bank, for Agricultural Development Bank for the restoration of lending services.

3. The Midterm Review Mission reported compliance was less than full in some 20 of the 35 measures stated in the policy matrix, 2.5 months after completion of the program. The Ministry of Food and Agriculture agreed with the overall policy objectives but did not fully concur with the basis for assessing compliance, and submitted its own comprehensive version of compliance. Implementation of the measures has been assessed again at the time of the Program/Project Completion Mission and findings have been summarized in the policy matrix table.

A

ppendix 1 21

Table A1: POLICY MATRIX

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

Reduce Price and Other Distortions to Improve Resource Allocation and Sector Efficiency

1.1 The trade regime has been substantially liberalized, but nontariff and informal barriers discourage export growth.

1.1.1 The Government has established clearer procedures for the application for and issuance of export licenses for agricultural products and informed the public about these procedures through the public media.

Progress reports.

December 2001 (Condition for end

of program)

Complied. Procedures for the application of export licenses have been simplified and made more transparent (see Government Resolutions 54/2001 and 173/2003). The requirement for many licenses has been eliminated, numbers falling from around 600 early in the ASDP period to around 94 at the time of the MTR.

Procedures for the export and import of plant and animal products were amended 15 July 2003, bringing them in line with the transfer of border and other inspection responsibilities to the State Specialized Inspection Agency (SSIA) from the start of that year.

Procedures for importing and exporting plant, livestock, and goods of animal origin were combined with border control procedures and responsibility was assigned to the SSIA in 2003.

1.2 The procurement and sale activities of Government agencies (including the State Reserve Agency, the Wheat Fund, and strategic enterprises) and sales of food commodity aid should be carried out without influencing the market determination of prices.

1.2.1 The Government has taken necessary actions so that the procurement and sales at national and local level are carried out based on competitive bidding in quantities and on a schedule designed to minimize the influence on market prices.

Progress reports.

December 2001 (Condition for end

of program)

Partly Complied. The procedures for the sale of commodities from aid grants have been improved, with sales split into manageable lots and sold through a form of competitive bidding. Government procedures have been clarified through a number of resolutions (Government Resolution 43/2001, MOFA Resolution 309/2002), and transparency has much improved.

Local businessmen have taken over the role of importing and distributing commodities that were previously part of commodity aid (sugar and rice—items that are not produced locally). Because private importers (of wheat flour) may import all year round, there may be little incentive for farmers to store their crop to realize better prices later in the season.

The Government procures equipment for the Green Revolution program and distributes this on highly concessional terms. This impinges on the establishment of a private input supply and maintenance system. For example, importers of tractors withdrew from the market when the Government procured and distributed large quantities of tractors.

The Government’s heavily subsidized “Crop Support Program (MNT156 million over 2008–2010) which is funded from KR1 commodity sales and tax revenue adversely affects the emergence of a competitive private sector agricultural machinery importation, distribution and maintenance network. Under this program, equipment is imported by the Government and distributed at highly concessional rates, for example, tractors and combine harvesters at 50% subsidy and 0% interest to be repaid in 3 years.

1.3 More efficient use of financial resources is

1.3.1 The Government has established a working

Copy of order of Ministry of

October 2000 (Condition for

Complied. This condition is covered by the legal statute of “Law on Management of Foreign

22 Appendix 1

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

needed in the institutions supporting agriculture, particularly for asset and financial management.

group to improve the financial management and accountability of counterpart funds generated by the sale of commodity aid.

Finance and Economy (MOFE).

Board submission). Loans and Grants” (12 June 2003), the Government resolution on Management of Development Loans and Grants” (No. 93, 16 June 1999) and “Government resolution on the Re-establishment of Council” (No. 152, 27 September 2000). “Procedure for the Management Council” contains purpose, structure, duties, responsibilities and activities of the Council. Procedures for the generation of funds from the sale of commodity aid, registrations, distribution and increase of effective use of the funds are also to be found in the regulation. “Management/Coordination Procedures for Development Loans and Grants that the Mongolian Government has received from foreign countries and international organizations” was approved by Government resolutions No. 93 and the Council has been re-established by Government Resolution No. 152, with responsibility for making effective use of foreign development grants and to harmonize a common policy for utilization of the grants. “Procedures for the management of foreign loans and grants by the Council” was also approved.

1.3.2 In accordance with

Resolution 116/1998, the Government has (i) commenced the process of transferring the counterpart funds to the accounts of MOFE at the Bank of Mongolia (BOM), and (ii) provided that the opening of any new account for future counterpart funds requires the prior approval of the Minister of Finance and Economy.

Opening of accounts at BOM.

October 2000 (Condition for Board submission).

Complied. Management of all counterpart funds (such as Kennedy Round 1 (KR1) is food supply and Kennedy Round 2 (KR2) is provision of machinery and techniques to farmers, aid programs financed by the Government of Japan, and Italy; Chinese wheat monetization goes direct to the state budget) rests with MOFE (2003 Law on Aid Coordination), which seeks to keep tight control over such resources. Since January 2005, all loans and grants are to be signed by MOFE state secretary or his second, the head of Treasury. Use of the Wheat Fund is to be decided by MOFE, previously it was MOFA.

However, MOFE is only now in the process of establishing accounts for these funds under its control. These are not at Mongol Bank but at commercial banks where the relevant donors can also have access to information. Furthermore, discussions with MOFE indicate that, at present, new accounts can still be opened by such agencies as MOFA, and without prior approval of MOFE.

1.3.3 The Government has

provided for a financial and management audit of these counterpart funds by an independent auditor.

Auditor's report. December 2001 (Condition for second tranche release).

Each of these funds, and their use, is to be audited on an annual basis by the National Audit Office, many of them also by independent auditors (e.g., Itgelt). Independent audit is increasingly built into several donor agreements on commodity aid (Japan’s KR programs were audited in early 2004, and the requirement for audit is built into the April 2005 proposal from Mongolian Agriculture Fund (MAF). Audit reports are available for both Government and the relevant donor.

1.3.4 MOFE is managing

the recovery of loans made with counterpart funds in accordance with a loan recovery plan.

Copy of loan recovery plan, and progress reports.

December 2001 (Condition for second tranche release).

Partly Complied. MOFE is not managing a loan recovery plan to recover nonperforming loans under KR1 and KR2 or any other agricultural counterpart funds. The rationale for the Ministry of Finance (MOF) participation was based on the prior transfer of the funds from MOFA to MOFE. Since this has not occurred as at the MTR (conditions 1.3.1 and 1.3.2) and management of the loans remains with MOFA, MOFE argued that it is illogical for them to have taken over the responsibility for and thus the risk of recovery. Following the withdrawal of several banks from

Appendix 123

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

participating at risk in the activities of loans made from counterpart funds by MOFA, loan recovery was passed to Khan Bank and other banks on a commission basis. Khan Bank has withdrawn from this process, as most of the loans are unrecoverable. An outstanding balance of nonperforming loans of around MNT4.5 billion is reported mid-2005 for the wheat fund, and a total of MNT10 billion including Japanese KR2 (though down from a total of MNT27 billion in the late 1990s).

2. Promote Competitive Markets for Agricultural Inputs, Outputs, and Processed Goods

2.1 Most crop farms and small and medium-sized enterprises have been privatized, but the process needs to be completed

2.1.1 In the five crop farms with national Government majority shareholdings, the State Property Commission (SPC) has completed the disposal of these majority shareholdings.

SPC records. January 2003 (Condition for end of program)

Partly complied. Only two of the five farms were reported as having a majority state holding at the time the ASDP agreement was finalized, Orgil and Bayantolgoy. The former was transferred in 2003 to Khan Bank through a court decision to recover overdue borrowing. The second was privatized in October 2000, after the state holding was reduced by the transfer of a nucleus herd from the farm’s assets to the state (but still under SPC). However, when the buyer saw the damaged and dilapidated state of the farm, the buyer decided not to go through with the purchase. The same was reported for Atar, sold in November 2000 (SPC Resolution 553). SPC also attempted to sell Juramt, but this farm was a limited company so shares could not be offered for public sale but only to the owners of the company. Although offered several times, the owners did not express any interest in taking up the minority (30%) share still owned by the state, so SPC transferred this to the province. State shareholding in Orgil and Chandman (SPC Resolution 84/2002) has also now been transferred to the province (see condition 2.1.2). Only Orgil and Bayantolgoy were reported by SPC as still actively farming, the other three were essentially non-operational. Note: Although not listed as a specific issue under this key area of policy reforms, the Government heavily distorts the competition for input supply under its Green Revolution Program and the “Crop Support Program (MNT 156 million over 2008-2010), started in 2008.

2.1.2 In the 18 crop farms with provincial Government majority shareholdings, the SPC has completed the disposal of these majority shareholdings.

SPC records. January 2003 (Condition for end of program)

Complied. According to informed sources, no state farms are presently de facto owned by state or province. They either have been disposed of or have ceased to exist.

2.2 Enterprises remaining in the public sector, such as Biokombinat, a factory that produces vaccines for combating animal diseases, should operate autonomously and compete fairly with the private sector.

2.2.1 The Government has prepared a plan, acceptable to ADB, on measures to be taken so that strategic enterprises, in particular Biokombinat, can achieve operational and financial autonomy and cease to receive

Copy of plan. January 2002 (Condition for end of program)

Complied. The Government has not specifically prepared a plan, but has successfully eliminated budgetary support for many strategic enterprises, several of which, despite their declared ‘strategic’ status have subsequently been divested. Subsidies have generally been eliminated.

24 Appendix 1

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

subsidies. 2.2.2 The Government has

implemented the plan for Biokombinat.

Audited financial reports of Biokombinat.

January 2003 (Condition for end of program)

Complied. No specific plan for the restructuring of BioKombinat was prepared and agreed with ADB. However, the State Property Commission (SPC) did pass a resolution on 6 December 2001 (No. 681) supporting the technical reform of the company. Measures to be taken following an evaluation of the company followed in Resolution 367 of 6 June 2002. In addition, each year, a financial or business plan is agreed with SPC (e.g., Resolution 681, 6 December 2001 for 2002; and Resolution 87, 20 February 2003 for 2003). BioKombinat produces most major vaccines and other veterinary medicines (over 70 products), almost exclusively for the Government’s animal health program. Prices paid by MOF for BioKombinat products were some four to five times less than similar products on the international market. It seems important for the future of BioKombinat and for the efficiency and effectiveness of the animal health system (a fundamental element in the viability of both extensive and intensive livestock systems) that prices be allowed to reflect true costs, including retained earnings for reinvestment, and indeed that bidding for veterinary medicines be done in a transparent open manner that allows for competition from the private sector.

2.3 The Cooperative Law adopted in 1998 aims at increasing the competitive strength of agricultural producers, and provides for cooperative associations to be self-regulating bodies. To carry out these functions, cooperative associations need a condusive regulatory framework and support for their organizational development.

2.3.1 MOFA has reconstituted the National Council, which is responsible for the implementation of the Cooperative Development Program, to include relevant stakeholders (with representatives of all cooperative associations as voting members and representatives of relevant donor agencies as advisers).

The then Ministry of Agriculture and Industry (MAI) amendment of the resolution on the Cooperative Development Program.

October 2000 (Condition for Board submission).

Complied. The Cooperative Development Program (for 1998–2003) was approved on 12 August 1998 (Government Resolution 145/1998) to promote cooperative development under the auspices of the Cooperative Law approved 8 January 1998. The National Council, established to implement the program, was intended to include representatives from the major cooperative associations as well as from relevant Government agencies. This situation was amended by Government Resolution No.170 of 8 November 2000, which appointed the presidents from each of the six major cooperative associations then in existence and the acting director of the cooperative training center to the Council, as well as representatives from statistics, the media, and MOFA, and five vice-ministers from interested ministries under the chairmanship of the minister for food and agriculture (representing compliance also for condition 2.3.2). Amendments to the Law were approved on 2 December 2002, 2003 was declared the ‘Year of Cooperatives’, and a new program covering 2004–2008 was approved on 1 October 2003 (Government Resolution No.220/2003).

2.3.2 The National Council

has amended its charter to include relevant stakeholders (with representatives of all cooperative associations as voting members and representatives of relevant donor agencies as advisers).

Copy of amended charter.

October 2000 (Condition for Board submission).

Complied. See condition 2.3.1. The Council membership was reconstituted on 8 November 2000 (Government Resolution No.170/2000)

2.3.3 The Government Copy of action December 2001 Complied.

Appendix 125

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

through the National Council has prepared a time-bound action plan, acceptable to ADB, and has provided the necessary budgetary funds to implement all provisions of the 1998 Cooperative Law and the 1998 Cooperative Development Program.

plan, and progress reports.

(Condition for second tranche release).

Until the amendment of the law in December 2002 (see condition 2.3.1), the Cooperative Program remained largely unimplemented and devoid of budgetary resources. In 2003, the ‘Year of Cooperatives’ a budget of MNT100 million was approved within the state budget for implementation of the program. This was followed in October by approval of a new 5-year program for 2004–2008, budgeted at MNT1.82 billion. Annual action plans are approved by the National Council, but delivery of the program requires not only central Government funding but also the allocation of appropriate resources in province budgets. Execution of expenditure during 2003 and 2004 was in line with budgetary provisions.

3. Ensure the Delivery of Financial Services and Provide Improved Access to Credit in Rural Areas 3.1 Lack of access to financial services, in particular credit, continues to be a fundamental constraint to rural development. Agricultural Bank, which has the largest network of rural branches, is now being restored as a commercially viable entity that can be privatized and/or sold.

3.1.1 The restructuring plan for the Agricultural Bank has been implemented in a manner acceptable to ADB.

Restructuring of the Agricultural Bank, and progress reports.

July 2002 (Condition for second tranche release).

Complied. During ASDP formulation, the future of the Agricultural Bank had looked bleak and liquidation likely. Yet for 2004, the Bank (trading as Khan Bank since 2001) reported pre-tax earnings of MNT4.65 billion, a return on assets of 2.6%, and a return on equity of 38.8%. This was compared with a loss of MNT0.34 billion for 2000.

The restructuring of the Agricultural Bank was agreed in 2000 and the initial stages completed in 2001. Internal procedures were amended on 29 November 2001 (SPC Resolution No. 662/2001), and a new management regime approved on 20 February 2003 (SPC Resolution No. 96/2003). On 13 March 2003, the Bank was sold by the Government (SPC Resolution No. 130/2003) through open bidding to H. S. Securities of Tokyo for $6.85 million. In July 2003, H. S. Securities invested another $2 million in the Bank and sold a 40% stake to a Mongolian company, ‘Tavan Bogd’. In December 2004, the International Finance Corporation (IFC) invested $1.2 million and DAI, a US consulting company $0.3 million, which together with retained earnings brought the Bank’s capital to MNT12.8 billion by the close of 2004 (compared to negative equity of MNT0.59 billion in 2000. DAI, a US consulting company, has had the management contract for the Bank since 2000 (with the support initially of the United States Agency for International Development (USAID)), and this was extended in 2004 until 2008. Technical assistance in the form of two advisers was also provided by EBRD under a 2-year program (2004–2006).

3.1.2 Agricultural Bank has

developed a time-bound business plan, acceptable to ADB, for the restoration of lending services.

Copy of business plan.

October 2000 (Condition for Board submission).

Complied. At the time of ASDP formulation, the Bank had suspended new lending and all its activities were concentrated on recovery of outstanding loans, many of which were nonperforming. Lending began again in early 2001. Net lending rose rapidly from MNT9.8 billion in 2001 to MNT78.3 billion in 2004. By mid-2005, net lending was around MNT90.0 billion. At the end of March 2005, some 160,000 loans were outstanding, of which only 4.65% were overdue. Deposits have also risen rapidly. Demand and time deposits, introduced in 2003 for business and individual customers and paying interest from 1.2% to 18.0% p.a., amounted to MNT108.1 billion by the end of 2004. Current accounts, earning no interest, amounted to a further MNT14.0 billion.

26 Appendix 1

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

3.1.3 Agricultural Bank has initiated lending operations in rural areas.

Progress reports.

January 2001 (Condition for end of program)

The Agricultural Bank was never the only bank in the rural areas, but it has always had a dominant position in terms of rural outreach. Since the late 1990s, there has been considerable growth in the outreach of several banks, and the ASDP for instance used five other banks as well as Khan Bank for delivery of its credit program. However, no other bank was present with sub-branches at district level and Khan Bank has the widest and strongest national coverage, having 394 outlets with branches in every province and district center.

4. Rationalize Tax Incentives to Promote Investment in Rural Areas

4.1 The 1998 Value-Added Tax Law exempts agricultural, forest and hunting primary raw materials from value-added tax. This prevents producers from recovering the VAT on their inputs.

4.1.1 The current exemption from value-added tax for agricultural, forest and hunting primary raw materials has been repealed and replaced with an exemption that applies to primary producers rather than products. Large primary producers have been permitted to register on a voluntary basis.

Enactment by Parliament of an amendment to the Value-Added Tax Law.

December 2001 (Condition for end of program)

Not Complied. The Tax Code, Section 9, on Exemptions from Value Added Tax, reports that ‘Agricultural, Forest, and Hunting primary products produced in Mongolia are to be exempted’ and that ‘this chapter refers also to primary producers’. Further, it reports that the law was amended to reflect this on 29 June 2001 (para. 9.2.9). The ASDP made a strong point in favor of a zero VAT rate as opposed to exemption. However, there have been different opinions among advisors concerning this issue. The Government took the advice of the IMF which, while recognizing the benefits of the argument, concluded that at this stage of Mongolia’s development a zero rate would be “administratively burdensome” (IMF Review of proposed tax reforms, 2005) because of all the small rebates that would have to be considered, and the difficulties of monitoring compliance.

4.2 Under a 1997 amendment to the 1992 Economic Entities and Organizations Tax Law, crop farms are provided with a 50% exemption from income tax. At the same time, depreciation for most items of equipment is spread over 10 years and based on historic purchase costs which discourages investment

4.2.1 For stimulating agricultural investment, the 50% exemption from income tax for crop farms has been replaced with accelerated depreciation or investment tax credits to encourage investment in agriculture.

Enactment by Parliament of an amendment to the Economics Entities and Organizations Tax Law.

December 2001 (Condition for end of program)

Partly Complied. The objective of this condition was to encourage investment in agriculture by both producers and others. Business interest in agriculture in part results from the concessional tax treatment. More significantly, those involved have no incentive to reinvest profits in agriculture. Rather the current tax regime encourages companies to take their profit out of the business. The objective was to reward investment in agriculture through tax concessions in the form of accelerated allowances, thus enabling businesses to offset investment expenditure against profit in 1 or 2 years rather than the normal depreciation period of 5 years for equipment and 20 years for buildings. The net effect is to enable companies to still have discounted tax liabilities but as a reward for new investment rather than a withdrawal of funds from the sector. Although there was reportedly agreement on accelerated depreciation provisions, there also was a significant dispute over other areas of the tax reform. Within the tax reforms being developed, the Government planned to eliminate exemption for most primary producers, but with some exceptions. MOF decided not to introduce accelerated depreciation allowances but a simple 5% tax credit for investment (essentially a credit against tax of 5% of qualifying investment costs. MOF considers this administratively simpler, recognizing that there are severe limitations to the capacity of the tax collection system to handle, and verify, what it sees as sophisticated allowances, an issue of both manpower capacity and governance.

4.2.2 For stimulating

financial leasing of Enactment by Parliament of a

September 2002 (Condition for end

Complied. An attempt in 2002/3 to introduce legislation for financial leasing was overturned

Appendix 127

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

agricultural equipment, a financial leasing law which provides incentives for agricultural equipment leasing has been enacted.

financial leasing law.

of program) when the Ministry of Justice determined that such a law was unnecessary. However, with the help of technical assistance under an IFC project, the Leasing Law was approved in 2005.

4.3 The contribution of cooperatives to economic development is largely because their members are both owners and suppliers/customers. This should be reflected in the tax legislation.

4.3.1 With respect to cooperatives, the Economic Entities and Organizations Tax Law has been amended to provide for tax exemption of reserve funds, and continues to allow for tax exemption for patronage refunds. With respect to dividends on the equity of cooperative members, the Personal Income Tax Law has been amended to provide for tax exemption of these dividends from 2001 onwards.

Enactment by Parliament of amendments to the Economic Entities and Organizations Tax Law and the Personal Income Tax Law.

December 2001 (Condition for end of program)

Complied. Both these laws have been amended to remove the anomaly of double taxation for members of cooperatives. The Economic Entities and Organizations Tax Law was amended by Parliamentary Resolution 18/2003 on 24 April 2003 by the addition of a phrase in Article 1, Part 1, Provision 5 allowing cash assets put into risk covering funds by savings and loan cooperatives, reserve funds of other cooperatives, and cooperatives generally to be deducted from taxable income. Article 5, Part 1, Provision 4 of the Personal Income Tax Law which sets the tax on dividend and interest income at the rate described in Article 8 was amended with effect from 1 January 2003 (Tax Code Article 12)

4.4 Most of the investment activities are taking place in a few urban centers.

4.4.1 The Government has studied options for promoting investment in disadvantaged rural areas, and prepared an action plan satisfactory to the ADB to address these issues.

Copy of action plan.

December 2001 (Condition for end of program)

Complied. The Government has considered proposals for promoting investment in disadvantaged rural areas, including the use of tax and other concessions and benefits for those investing in such areas, thereby adding to the rate of return, offsetting risk, and rewarding performance. An amendment to the corporate income tax law introduced favorable tax rates for such areas (however determined) but IMF indicated that it was against favorable tax rates for such difficult areas. Tax policy, therefore, offers the same tax rates and exemptions for investment in accessible as in disadvantaged rural areas, and provides little by way of concessions to offset the disadvantages inherent in remote and poorly endowed areas.

However, the broad objectives of the Government’s Policy on Food and Agriculture (Parliamentary Resolution 29, 15 June 2003, and supportive Action Plan, Resolution 245, 25 November 2003), the Economic Growth Support and Poverty Reduction Strategy (EGSPRS, published September 2003), and the Government’s Action Plan for 2004–08 (Government Resolution 245, October 2004) all highlight the approach of poverty reduction through economic growth, and the importance of a balance between rural and urban development. The Regional Development and Coordination Law (approved by Parliament in 2003), and the Regional Development Concept Paper (Parliamentary Resolution 57, 14 June 2001) and Medium Term Strategy for Development of Regions of Mongolia (Parliamentary Resolution 24, 12 June 2003) on which the Law is based

28 Appendix 1

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

concentrate attention, and investment, on a limited number of larger regional centers or pillars, backed by subsidiary local focal points. These represent rural growth centers or those areas with good market and connectivity potential rather than the more disadvantaged areas.

4.4.2 The Government has

implemented a program to enhance regional development and promote investment in disadvantaged rural areas.

Progress reports.

July 2004 (Condition for end of program).

Complied. Although no specific action plan for promoting investment in disadvantaged areas was prepared (because it was opposed by IMF), Parliament and the Government of Mongolia have implemented a package of policy and programs to enhance regional development and increase and support investment to support this objective. Amongst others, the Mongolian Parliament and Cabinet implemented the following relevant measures. (i) “Concept of regional development ” (Parliament resolution No. 57, 14 June

2001) (ii) “Establishment of ‘Altanbulag’ free trade zone” (Parliament resolution No.

38, 28 June 2002) (iii) “Establishment of core regional centers” (Parliament resolution No. 01, 2

January 2003) (iv) “Implementation procedures of management and administration structure

of regional development concept” (Parliament resolution No. 21, 21 May 2003)

(v) “Law on approval of strategy for midterm development of regional centers” (Parliament resolution No. 24, 12 June 2003)

(vi) “Law of Free Zones” (28 June 2002) (vii) “Legal environment of establishment of ‘ Altanbulag ’ free trade zone” (28

June 2002) (viii) “Implementation procedures of management and administration structure

of regional development concept” (30 May 2003) (ix) “Zamiin Uud” free economic zone (20 June 2003) (x) “Tsagaannuur” free trade zone (18 December 2003) (xi) “Approval of regional development programs” (Government resolution No.

202, 28 September 2005) (Western, Hangai, Central and Eastern regional development programs).

5. Improve Productivity and Sustainability in Extensive Livestock Production 5.1 Constraints in the state budget preclude Government control of all Office International des Epizooties (OIE) List B animal diseases and external and internal parasites by the free provision of veterinary inputs to herders.

5.1.1 MOFA has designated the animal diseases with public health hazards for which the state is responsible, and is providing adequate budgetary funds for the distribution of the necessary veterinary inputs to all herders. MOFA has assigned primary responsibility for the control of all other

MOFA regulation July 2002 (Condition for second tranche release).

Complied. The Government adopted the OIE classification system by the Law on Animal Health and the Gene Pool, of 7 June 2001, classifying diseases according to their severity in terms of infectiousness and danger to human health and identifying those for which control will be covered by the state budget. Control of lists A and B diseases is usually considered a public responsibility, whereas list C consists of economic diseases usually considered the responsibility of the individual animal husbandry. 15 diseases are classified as list A diseases (including importantly for Mongolia foot and mouth disease (FMD), Arian Influenza, and Newcastle Disease); and 25 diseases are in list B (including Brucellosis, Tuberculosis, and Anthrax). In Mongolia, both list A and list B diseases are fully funded by the state, not only the medicines or vaccines but also the cost of application by veterinarians. For list C diseases, including many

Appendix 129

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

animal diseases to the private sector.

parasites, the state also provides the medicines but herders must pay veterinary fees for their application.

This means that the budgetary cost of veterinary services, especially given the size of the herd, is very high. Although by law all the required expenses are financed by the central government and local budgets, during the PCR Mission, concerns were expressed about the lack of budget to maintain all aimag laboratories.

5.2 Fees to be charged by private veterinary practitioners for their services are determined by decree.

5.2.1 MOFA has repealed all regulations concerning fees to be charged by private veterinary practitioners for their services, except concerning those fees for public services to be paid by the Government.

Copy of business plan

October 2000 (Condition for Board submission).

Partly Complied. MOFA Resolution 59; A/18 of 6 March 2003 repealed Resolution 392/A16 of 14 November 1997 which set fees for veterinary and breeding services. However, it also empowered local assemblies to set such fees. As a result, fees for such services, now set by province assemblies, vary widely across the country. Despite this, the Government, when paying veterinarians for services under list A and B arrangements, pays the same across the country, based on a low average of the fees set by the assemblies, but determined by the availability of budget.

5.3 The absence of standards and qualified, licensed state and private veterinarians to supervise meat hygiene and production is constraining the development of the meat and meat products industry for exports.

5.3.1 MOFA has (i) issued regulations setting forth the minimum standards for meat hygiene services at premises where meat or meat products are processed; (ii) established a licensing system, so that those veterinarians who, after receiving training under the investment Project, possess the necessary knowledge and skills for supervising meat hygiene and production can be licensed; and (iii) taken all necessary actions to ensure that such licensed veterinarians can perform their services in an independent manner, including establishment of a system under which such veterinarians are paid for their services through service charges imposed on the meat or meat products-processing

MOFA regulations and progress reports

June 2002. (Condition for end of program)

Complied. MOFA Resolution No.A/43 in 2001 established the Meat Inspection Procedures under MOFA and its procedures for accrediting and certifying all abattoirs and processing plants. The level of charges was also set at this time. In 2001, Agricultural Cooperative Development International/Volunteers in Overseas Cooperative Assistance (ACDI/VOCA) supported the training of 32 meat inspectors, subsequently employed by the agency. 2001–2002 was a peak period for meat exports to the Russian Federation and accreditation was set to meet Russian standards. Inspectors were stationed in processing factories during the 2 months of peak processing for export. Inspectors were also engaged in the inspection of sales of meat at markets and in restaurants. Meat inspectors were also trained in western aimags through the ASDP. From 1 January 2003, responsibilities for inspection were passed to SSIA under the Prime Minister. Meat inspection also passed to SSIA. The meat inspection unit is expected to be self-financing (all costs are to be covered by fees charged to processing plants).

30 Appendix 1

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

premises. 5.4 The public needs to be protected from unqualified veterinary practitioners, and professional standards need to be ensured and maintained.

5.4.1 MOFA has approved the establishment of a secretariat charged with the accreditation, registration, and discipline of private veterinarians and paraveterinarians, and is providing for the necessary operating expenses.

MOFA regulation September 2001. (Condition for end of program)

Complied. MOFA Resolution No. A/60 of 22 April 2002 approved a pilot procedure for the certification of veterinarians, establishing not a secretariat but a Veterinarian Accreditation Council for the purpose. This resolution was amended by MOFA Resolution No.51 of 14 April 2005, including the composition of the Council (including veterinarians from the Veterinary Department in MOFA, the State Specialized Inspection Agency, the School of Veterinarians, and the Veterinary Association). By this latter resolution, accreditation became the responsibility of the Veterinary Department within MOFA, established in December 2004 in the place of the previous autonomous State Veterinary Department. Once accredited, units or practices in which the veterinarians work are licensed for 5 years and the individual veterinarians are registered, the register being held within the Veterinary Department.

5.4.2 The secretariat has

established a register for all veterinarians and para veterinarians.

Publication of register.

January 2004 (Condition for end of program)

Complied. The register is held within the Veterinary Department of MOFA, no separate secretariat having been established (see condition 5.4.1). Para veterinarians are not registered as none are working as veterinarians.

5.5 Overgrazing particularly near urban centers and major transportation routes contributes to pasture degradation. Improved land management systems and institutions as well as effective well rehabilitation are urgently needed.

5.5.1 Based on the 1994 Law on Land, MOFA with TA support has assisted in developing land management plans for improving pasture land use and management, including innovative arrangements for conflict resolution mechanisms through herders associations.

Progress and TA reports.

November 2002 (Condition for second tranche release).

Complied. A revised Land Law was approved 7 June 2002 and a Law on the Allocation of Land to Mongolian Citizens for Ownership approved 27 June 2002. Further amendments to the Land Law were made. Also relevant is the Law on Water approved 22 April 2004. Based on this legislation, several donor-supported projects (including ADB’s ADTA) have been working towards mechanisms for the management of pasture and water resources based on development plans through herder groups in association with local district and bag authorities. Pilot land and water use agreements have been drafted, resolving issues related to resource management and establishing a procedure for disputes. While still at an early stage of development, these promise, with some amendment to the legislation, more sustainable management of pasture and water resources. These issues were discussed in a wide forum at the National Conference on Pastureland Legislation organized by the UNDP Sustainable Grasslands Management Project on 14–15 December 2004.

5.5.2 MOFA, with support

under the investment Project, has reoriented the Well Rehabilitation Program by implementing mechanisms for ensuring that benefiting herders are taking care of operation and maintenance costs, and by introducing a cost

Progress reports.

November 2002 (Condition for second tranche release).

Complied. Well rehabilitation is supported through a number of donor initiatives, including ASDP. In each case an emphasis on herder responsibility for operation and maintenance, usually through the creation of a fund derived from water charges, is a central feature. However, wide variation has existed with respect to recovery of the rehabilitation cost, with the degree of recovery ranging from 50% under ASDP to zero under the International Fund for Agricultural Development. Other projects sponsored by a variety of other donors have been within that range. However, in none of these cases has a legal basis for cost recovery been

Appendix 131

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

recovery mechanism. established.

Joint order 101/189/194 of the Minister of Food and Agriculture, the minister of Finance and the Minister of Nature and Environment was issued on 15 July 2005. The order approved “Procedures on Utilization, Ownership, Finance, Construction and Rehabilitation of Engineering Wells and Water Points”. According to the procedure, stakeholders should contribute 10% of rehabilitated and 5% of newly constructed wells. However, adequate payment for operation and maintenance costs may become an issue.

6. Strengthen Agricultural Research and Extension to Support Private Sector Agriculture 6.1 To support private sector development, agricultural research services need to be responsive to the demands of producers and processors, and adequately organized and funded.

6.1.1 MOFA has established an independent Science and Technology Council (including representatives of producer and agribusiness organizations, and research and extension agencies) to explore measures for increasing research funds, to determine research priorities and the allocation of research grants, and to ensure that research results are made available to producers and processors.

Charter of Council.

December 2001 (Condition for end of program)

Complied. A Council of Science and Technology Research (Research Council) responsible for agricultural research priorities was created on 19 March 2002 (MOFA Resolution A38/2002), and procedures established on the 24 May (MOFA Resolution A75/2002). The Research Council was established under the Science and Technology Law as part of the policy on science and technology determined by the Ministry of Education and Science (MES). Proposals for research are discussed within the Research Council and a shortlist of perceived priorities forwarded to the National Council of Science and Research. The National Council decides upon which of these and other submissions from other sectors will be funded under the state budget for that year. A framework for determining priorities in agriculture is provided by a research program to 2010, itself linked to the food and agriculture policy to 2015 approved by Parliament in 2003. In 2005, some 21 research projects were developed for implementation in 2006.

The condition specified that membership of the Research Council should include representatives drawn from the private sector, particularly those expected to benefit from the findings of the research: producers and processors. The rationale for this was to move away from research priorities determined by the researchers themselves, with their own interests and academic objectives a priority, towards research that responded to the needs of the beneficiaries. In 2005, by MOFA Resolution No. 5 of 11 January, the composition of the Research Council was amended. The head, deputy, and secretary remained unchanged in terms of their positions. There remained another four members drawn from MOFA, three from Mongolian National Agriculture University (MNAU), and one from MES. The other two positions were filled by a representative from the Science and Technology University and the director of Hunstech, a food research and production corporation. Research Council membership does not adequately strike a balance between academic and Government officials with private sector representatives of producers and processors. The National Council, under the Prime Minister, is similarly heavily comprised of Government and academic officials, although with one private member from the Chamber of Commerce. The condition also suggests that it should be a vehicle for raising money for research from sources other than the state budget. However, this has been difficult to achieve.

32 Appendix 1

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

Despite these shortcomings, it is clear that producers and processors do exert an influence on the selection of research priorities. The Research Council reports contact with producers through the extension service and other institutional links, resulting in numerous suggestions being passed to the Research Council for consideration. Of all research proposals finally considered, the Research Council reported that some 30% came from producers and processors, a similar proportion from academicians, with the balance being proposed by MOFA and its agencies. The proportions of those finally selected for implementation could not be established. Many of the academicians are also members of professional and trade associations.

6.2 Agricultural producers lack technical advice and business development support.

6.2.1 The then Ministry of Agriculture and Industry (MAI) has established a working group for formulating a program on agricultural extension.

Progress reports.

December 2001 (Condition for end of program)

Complied. At the time of the formulation of the ASDP, it was evident that the extension service was extremely limited and that this put a constraint on the technology and business skill transfer necessary for the development of a strong private sector led agriculture. An agriculture extension center at the national level had been set up outside of MOFA (then MAI). Outreach was being expanded through the support of the Technical Aid to the Commonwealth of Independent States (TACIS) Crop Project for at first three, then five, province level centers, designed to be fully independent and self-financing. However, it was evident that without adequate funding from the state budget, both the local and province centers would be unable to meet the important need for responsive information dissemination. Already the local centers were reduced to such expedients as photocopying to raise revenue to pay expenses and a salary for a single staff member and dependent upon voluntary work by specialists for training, demonstration and other information exchange. It was clear that the requirement to be fully self-financing was inappropriate at this stage of Mongolia’s development. Hence condition 6.2.1 emphasizes ‘local level’ extension, ‘realistic’ cost recovery, and ‘adequate’ budgetary funding for a ‘fully costed’ program.

A working group was established in 2003 to develop an extension program. The group included representatives from the province agricultural extension centers (AECs) then in existence (there are now 21) as well as from within the National Agricultural Extension Center (NAEC) and MOFA. The program was approved by MOFA Resolution A/141 of 31 December 2003 (see condition 6.2.2).

6.2.2 Based on the results

of the working group, (i) MAI has adopted a fully costed medium-term program, acceptable to ADB, with a focus on strengthening extension at the local level and achieving a realistic level of cost recovery; and (ii) the Government has

Copy of the program and Government budget allocations.

October 2002 (Condition for end of program)

Partly Complied. A ‘medium term development program for agricultural extension’ was approved by MOFA Resolution No. A/141 on 31 December 2003. The program covered the periods from 2004 to 2007 and from 2008 to 2010. The program made reference to the Government’s commitment under the ASDP loan agreements to ‘establish an agricultural extension service and to set up a rural extension network’. The strong demand for training and information by producers and the need for improved linkages between research establishments, specialists and producers is recognized, as is the absence of an existing extension network down to bag level, a legal basis for extension, resources to allow independent operation of local centers, and the capacity and willingness of most producers

Appendix 133

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

allocated adequate budgetary funds for these activities.

and processors to pay for advisory services (all features of the ASDP rationale for a new approach). The program proposes the expansion of extension capacity to district and bag level, and the financing of province and district centers through the central state budget. Financial sources for the program implementation are supposedly (i) state budget (certain portion of expenses will be allocated in the state

budget), (ii) donors and international organizations’ assistance and grants, (iii) revenues from extension services fees, (iv) donations from partner organizations and sponsorship, and (v) national and international projects/programs coordination. However, according to informed resources, an inadequate budget has been allocated for extension services and there remains an urgent need for a comprehensive, detailed, and generous budget for such services to allow for future development and expansion of outreach and services.

7. Mitigate Risks in Agriculture and Ensure Food Security, Income, and Employment for Vulnerable Groups 7.1 The agriculture sector is subject to particular recurrent risks, which discourage investment and increase the vulnerability of herder and farming households.

7.1.1 The Government has issued a resolution on the policy on risk management in agriculture, including public and private responsibilities.

Government resolution.

July 2002 (Condition for second tranche release).

Complied. The issue of risk management has been a central feature of several policy statements and programs (including ‘Support for the Protection of Livestock from Dzud’, Government Resolution No 47 of 13 March 2001), with elements included in various new and amended laws. Issues include the vulnerability of crops and livestock to climate and disease, reflected both in plant protection and veterinary service programs and in technology and breed selection.

A central feature of risk management has been the operations of the State Reserve Agency and the systems for response to, and preparation for, climatic and economic emergencies. Disaster preparedness and emergency response management has tended to be realigned after each election over the last 15 years in an attempt to find a cost efficient but effective mechanism. In 1996, responsibility shifted from the President to the Ministry of Defense, only to be placed under the Prime Minister in 2002 (Resolution No. 162/2002). In 2004, a separate disasters management ministry was proposed, incorporating the former State Reserve Agency (Government Resolution 1/2004), but this approach was eventually adjusted in early 2005 and the name changed to the National Emergencies Management Agency. However, a more transparent policy, together with the justification for levels of reserve stocks and the mechanisms for rollover of perishables, would be useful, particularly as part of a dialogue on reducing state interventions in agricultural sector markets.

7.1.2 Based on an analysis

of the constraints to the provision of agricultural insurance, the Insurance Law has been amended, as appropriate.

Enactment of Parliament of the Agricultural Insurance Law.

December 2002 (Condition for end of program).

Complied. Analyses were made of insurance with respect to both crops and livestock. The World Bank assisted Index-Linked Livestock Insurance Project, approved in March 2005, aims to pilot an approach to livestock insurance over a 5-year period. The project includes elements to address legislative and regulatory issues as well as providing a measure of insurance for herders in participating districts over the period. Crop insurance proposals have not progressed, however, as insurance companies consider the risks unacceptable at affordable

34 Appendix 1

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

premiums. The Agricultural Insurance (Daagtal) company was fully privatized in 2002, resolving issues of ownership between the state and the cooperatives movement dating from its transfer to the Ministry in October 1994 (Resolution 178).

7.2 Initiatives such as the Green Revolution Program, which assists vulnerable groups by promoting small-scale vegetable production, need to be assessed regarding their effectiveness and associated subsidies.

7.2.1 MOFA, with support under the investment Project, has reoriented the Green Revolution Program in a manner acceptable to ADB, by (a) strengthening the involvement of NGOs by awarding them contracts for program implementation, (b) focusing benefits on vulnerable groups, (c) including a broader range of activities beyond vegetable production, (d) introducing cost recovery, and (e) establishing a mechanism at the provincial level to ensure that the different programs targeted at vulnerable groups are coordinated.

Progress reports.

March 2002 (Condition for second tranche release).

Partly Complied. At the time of the evaluation for second tranche release, the lack of NGO involvement in this program was held to represent non-compliance, but argued as insufficient to justify postponement of tranche release. Moreover, it proved difficult to find NGOs that possessed the required competencies and capacity.

The Green Revolution was initiated 24 September 1997 (Government Resolution No. 199), with phases commencing 1997, 1998, and 2000. A fourth phase, or second stage, targeting greenhouse development (to mitigate against climatic risks and broaden market opportunities), was approved in August 2004 (Government Resolution No.169/2004) and runs from 2005. The Program has consistently been considered one of the more positive achievements of the Government within the sector, with widespread planting of small vegetable plots supporting food security and income generation objectives. However, the additionality of the program, and particularly some of its components, has been hard to compute, as has its likely sustainability once free or concessional inputs are eliminated. Nonetheless, an estimated 127,000 households (28% below target) were reported to have been helped by the end of the third phase in 2004 (MOFA Evaluation February 2005), and an additional MNT0.2 million was generated in household income (37% above target).

ASDP formulation sought to raise the impact of the Green Revolution, particularly with respect to poorer groups, who had not been evident among the early beneficiaries. Use of NGOs was proposed to expand the implementation capacity of the program and to improve its sustainability. Cost recovery was expected to improve self-reliance and distance participants from the perception of Government hand-outs, while expansion of the range of activities (in terms of crops, small livestock, and perhaps small processing and service activities) was expected to safeguard incomes by broadening markets and rendering benefits less susceptible to periodic oversupply, whether from low cost, mainly Chinese, imports or from the success of the program itself.

The status with respect to the various sub-conditions is as follows

(i) Although NGOs could not be contracted directly to implement the program either in terms of component or area, the program has worked closely with several NGOs on various issues. For instance, the Association of Women Farmers (supported by the provision of equipment, a tractor and greenhouse, on concessional (50%) terms) was contracted to undertake training sessions and field demonstrations. Cooperation has also taken place with foreign NGOs such as The Adventists Development and Relief Agency (ADRA), World Vision, and Norwegian Relief including in the multiplication of seeds and seedlings. NGOs have also been involved in media presentations through television and radio, providing the NGO as

Appendix 135

Previous Reform Measures and Issues:

Policy Measures under the Program

Monitoring Arrangements

(Notes)

Timeframe Compliance with Policy Measure at end of Program, as assessed by PCR Mission

well with promotion. Nonetheless, the cooperation and involvement of local NGOs remains limited (perhaps because of a genuine lack of local expertise and presence). The benefit of using NGOs for implementation has yet to be fully recognized.

(ii) MOFA considers that the Green Revolution is targeted at the vulnerable people insofar as it works with rural households rather than companies. Distribution of free seeds through province agricultural departments, chemicals and greenhouse materials through UB agricultural department, and suchlike are seen as evidence of support for the vulnerable. However, according to the PCR-G, there is little indication that the beneficiaries are more than the average poorer or lower income households. Distribution of concessional tractors, for instance, is managed by MOFA selecting from lists provided by the provinces, based on lists provided by the districts, in each case supported by the local Governor. There is no mechanism to ensure that distribution is based on need, capability, or relative poverty;

(iii) The program has expanded beyond simple vegetable and potato production into fruit and berries, poultry, pigs and apiaries. Commercial seedling and seed producers, supported by Green Revolution inputs and equipment, have been used to generate saplings and seeds for distribution to support fruit growing. However, the MOFA evaluation report (2004) highlighted low fruit yields, and limited small livestock activity, as well as the vulnerability of vegetables to climatic events, suggesting attempts at diversification had been largely unsuccessful;

(iv) According to the PCR-G, tractors, watering equipment, and greenhouse materials have been distributed on concessional terms at 50% of cost and repayment over several years. Recovery rates are as low as 30% under the ASDP, as has been the case with concessional lending to cooperatives.

(v) ASDP wanted to see the Green Revolution adopted as part of a coordinated suite of measures to address rural poverty and household food insecurity and become sustainable. Such an approach (envisaged in condition 4.4.1) does not seem to have been adopted. The PCR-G has doubts about the sustainability of the program (see main text of the PCR). However, piecemeal coordination at the local level has occurred, both through working together with international NGOs and through the active participation of district Governors.

ADB= Asian development Bank, ASDP = Argiculture Sector Development Project , BOM = Bank of Mongolia, MAI= Ministry of Agriculture and Industry, MOF= Ministry of Finance, MOFE = Ministry of Finance and Economy, MOFA = Ministry of Food and Agriculture, MTR= midterm review, NGO = nongovernment organization, PCR = Project Completion Review, PCR–G= Government's Project Completion Report, SPC = State Property Commission, VAT= Value Added Tax

36 Appendix 2

PROJECT FRAMEWORK

Design Summary

Performance Indicators/Appraisal

Monitoring Mechanisms

Assumptions and Risks

Revised Performance Indicators

PCR Evaluation of Accomplishment

Goal Develop a more market oriented, efficient and sustainable agricultural sector Reduce poverty by providing increased income opportunities.

Agricultural production in four western provinces (Zavkhan, Gobi Altay, Khovd, and Uvs) and the two northern central provinces (Darkhan-Uul and Selenge) increased and sustained. Poverty among participating households with herds and households involved in horticulture production in the four western provinces reduced.

Project surveys Government statistics Project monitoring and evaluation system Household income and expenditure surveys (Baseline data to be developed by a survey in the early stages of the investment Project)

No change.

There is little evidence that the project has resulted in a more market oriented, efficient and sustainable agriculture sector. Cooperative development interventions have failed to show a viable strategy to achieve this goal. Recent substantial direct government interventions in the crop sector are evidence of an insignificant change in the attention of policy makers to efficient and open market principles. The PMU implemented a comprehensive monitoring system to report on Project performance during implementation. Custom designed software has been developed for the Project that monitors the activities in each province by component, type of activity etc., recording the number of beneficiaries and the overall objective for the activity. Monitoring of project outputs was highly satisfactory, but monitoring of impact inadequate. A set of indicators and necessary baseline data have not been developed and collected at the commencement of the Project. Some impact surveys for different Project components were carried out in the final years of the project. The Information, Monitoring and Evaluation Department of MOFA received training on M&E Efficiency and Effectiveness.

Purpose Increase productivity and profitability of agricultural producers.

Average productivity of herder households participating in cooperative marketing increases (for wool and cashmere by 15% and animals sold by 10%). Average income of herder households participating in cooperative marketing

Project surveys Progress reports Review missions Project completion report

Continued support for and timely implementation of the reform program. Stakeholders respond adequately to reforms. Macroeconomic conditions are stable or improved.

No change.

The green revolution component has shown to be able to raise yields by 10%-60%, which likely increases income and reduces poverty. At MTR, it was estimated that 1,648 jobs had been created and income levels of households participating in the green revolution component increased by an estimated average of 25%. Well rehabilitation equally had a positive impact on herders' income. The

Appendix 237

Design Summary

Performance Indicators/Appraisal

Monitoring Mechanisms

Assumptions and Risks

Revised Performance Indicators

PCR Evaluation of Accomplishment

increases by more than half from productivity and marketing gains. Nutrition and income of households participating in horticulture production (Green Revolution Program) improves. Farmers borrowing for improved wheat seed increase wheat yields by 20%.

Financial sector and banking reform continues. Domestic and export markets stable. No extraordinary seasonal conditions. Implementation capacity of agricultural agencies improves.

veterinary health component has potential for increasing livestock production and productivity. The cooperative development component has not yielded a significant impact. Sustainability for some components is a concern. The credit line provided short-term credit for direct household needs, but these were not production related.

Outputs 1. Policy and Institutional Reform 2. Production and Marketing Support 2.1 Green Revolution Program reoriented and expanded 2.2 Veterinary services improved

Improved agricultural policies implemented, with time frames provided in the policy matrix. Institutional reforms in agricultural agencies implemented, with timeframes provided in the policy matrix. About 4,400 person-days training and workshops provided; 180 farmers participated in study tours; 14 annual shows organized. Horticulture production in the four western provinces increases by 10% year 5; 1,000 households are participating. State abattoir hygiene services operative by year 3 with about 24 trained inspectors. 3 courses provided for 80 veterinarians (one from each district).

Progress reports Review missions Legislation Progress reports Review missions Progress reports Review missions Progress reports Review missions Progress reports Review missions Progress reports Review missions Progress reports

Parliament will act positively on proposed legislation. Sufficient consensus exists among key stakeholders on reforms. Participants are willing to adopt and practice improved horticultural production and marketing techniques. Govt. and industry support sufficient to maintain standards. Veterinarians have incentives for improving services.

Veterinary training component was redesigned to take into account the assistance provided by GTZ to veterinary services in the ASDP project area

Achievements of the policy loan are described in detail in Appendix 1. The policy area where there has been no achievement relates to highly concessional and directed lending to the crop subsector, as well as providing unfair competition to suppliers of agricultural inputs. A total of 8,495 person/days of training were delivered to 5,264 farmers; 3 study tours to the People’s Republic of China were undertaken by farmers, soum and aimag agronomists, involving 172 people for 20 days; 14 rural shows were supported. Information suggests that vegetable production has not expanded in area but yield has increased by over 50%. Training was delivered to 38 meat inspectors, who were provided with inspector kits. .Aimag laboratories were upgraded and 14 serologists were trained. 125 private veterinarians were trained for the epidemiological survey. Another 75 veterinarians were trained in veterinarian practices and business management.

38 Appendix 2

Design Summary

Performance Indicators/Appraisal

Monitoring Mechanisms

Assumptions and Risks

Revised Performance Indicators

PCR Evaluation of Accomplishment

2.3 Wells rehabilitated. 2.4 Cooperatives developed. 2.5 Rural communication links improved 3. Rural Credit 3.1 On-lending to

Provincial livestock disease survey conducted. 400 wells rehabilitated by year 5. 6,000 person-days training at national level and 18,000 at local level. Nine secondary cooperatives equipped and operative. About 2,400 herder households using cooperative marketing services by year 5. Three provincial radio stations operative by year 2.

Review missions Progress reports Review missions Progress reports Review missions Progress reports Review missions Progress reports Review missions Progress reports Review missions Progress reports Review missions

Information will contribute to a more effective Govt. veterinary program. Herders take responsibility for operation and maintenance Current and new cooperative members are willing to intensify collective action. Technical and programming issues can be tackled.

Participatory procedures needed to be included. The cost for well rehabilitation was estimated at $2,000 on average during appraisal, but higher proportions than envisaged were deep wells. Hence costs per well increased to $3,300 on average. Targets were reduced in 2006 at the request of the Government. No more training was recommended at the national level. In addition, local level training was downsized. Investment for nine secondary cooperatives was revised and it was recommended that no further investment would be needed as recovery rates are very low. The component was cancelled, largely because it had become irrelevant owing to JICA’s investments in rural communication. In addition to the five original aimags two additional aimags

An epidemiological survey was carried out following standards and procedures of the OIE, and 33,163 serum samples were collected and processed. In total, 328 wells were rehabilitated. Herders' responsibility for O&M has only partly been achieved. 14,000 person/days training were provided on various aspects of cooperative development. Six secondary cooperatives were assisted but reportedly without much success. A large investment in wool washing plant ($200,000) remains very underutilized and no loan repayment has been made. A total of 4,000 ha of surface irrigation have been rehabilitated but reportedly cooperative members failed to organize themselves into effective water users’ groups. The cooperative subcomponent has largely failed to achieve its objects, outcome and impact. Since the component was cancelled, no outputs were produced. Six PFIs participated in the disbursements of the credit line. PFIs considered cooperatives high credit risk, and provided few loans to them. Subsequently the aimags operated so- called development funds for lending to the green revolution beneficiaries and to cooperatives. Repayment of these loan funds have been in the order of

Appendix 239

Design Summary

Performance Indicators/Appraisal

Monitoring Mechanisms

Assumptions and Risks

Revised Performance Indicators

PCR Evaluation of Accomplishment

subborrowers provided 3.2 Staff at participating financial institutions (PFIs) and potential subborrowers trained

Approx. 5,000 loans worth $5.5 million in credit provided by year 5. 3,200 person-days in-house training for PFI staff. Service providers are providing effective advice to potential subborrowers.

PFI reports Progress reports Review missions PFI reports Progress reports Review missions

Individuals and cooperatives are able to borrow and repay. Staff is provided with incentives to improve operations. Terms and conditions are attractive to borrowers.

were included namely, Bayankhongor and Bayan Ulgii that together accounted for 12.3% of the total loans.

30%. Through the credit line revolving fund, a total of 30,156 subborrower loans have been extended amounting to MNT34.9 billion. The credit line revolved more than 5 times. Training was provided to PFI staff and to borrowers on a variety of rural finance matters. Repayment of the loans extended through PFIs was higher than 98%.

4. Project Management 4.1 Effective project management systems established.

Project implementation on schedule System reports on project status and contracts submitted in a timely manner.

Progress reports Review missions Review missions

Consultants are fielded and staff appointed in a timely manner. Consultants provide effective support. Cooperation between provincial and national agencies is effective.

Project implementation was delayed largely because of a delay in the recruitment of consultants.

Once the loan consultants were on the job, implementation generally proceeded well. PMU operations benefited from a computerized monitoring system. Coordination with the attached ADTA was problematic, mainly because the PMU and the ADTA came under different units in the MOFA. Consultation with ADB on important implementation issues (for example directed and concessional lending) was insufficient.

ADB = Asian Development Bank, ADTA = advisory technical assistance, ASDP = Agriculture Sector Development Program/Project, JICA = J apan International Cooperation Agency, GTZ = German Agency for Technical Cooperation, M&E = monitoring and evaluation, MOFA = Ministry of Food and Agriculture, MTR = midterm review, OIE = Office International des Epizooties, PCR = Projecy Completion Review, PFI = participating financial institutions, PMU = project management unit

40 Appendix 3

Project Component and Key Activity 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4A. Production and Marketing Support

1. Green Revolution ProgramTraining Provincial and District Agronomists and Agricultural ProducersSupporting Demonstration Sites and Miniprojects

2. Veterinary ServicesEstablishing State Abattoir Hygiene Service and TrainingEstablishing Veterinary Epidemiology Unit and TrainingProvincial Livestock Disease SurveysTraining and Business Advice to Private VeterinariansEstablishing and Operating Register of Veterinarians

3. Well RehabilitationPlanning Wells Rehabilitation and Management ProceduresWell Rehabilitation

4. Cooperative PromotionTraining at National Provincial CentersEstablishing Marketing and Input Supply Secondary Cooperatives

5. Rural Communication LinksSetup of Radio Transmitter Stations and Upgrading Telephone ConnectionsProviding Provincial Radio Programs

B. Credit1. Credit Line

Approval of Initial Participating Financial Institutions (PFIs)Onlending to Subborrowers

2. Capacity Building for PFIs and SubborrowersTraining for Staff of PFIsTraining for Subborrowers

C. Project ManagementEstablishing Project Management Unit and 4 Project Implementation UnitsProject Monitoring

At project appraisal (Report and Recommendation of the President) Actual Implementation Extension

2006

AGRICULTURE SECTOR DEVELOPMENT PROJECT (Loan 1822-MON): ACTUAL VERSUS REPORT AND RECOMMENDATION OF THE PRESIDENT IMPLEMENTATION SCHEDULE

20052001 2002 2003 2004

Appendix 4 41

STATUS OF COMPLIANCE WITH MAJOR LOAN COVENANTS (INVESTMENT PROJECT LOAN)

Covenant

Reference

Status/Remarks Imprest Accounts

Part B.1 (Credit Line) Except as the Bank may otherwise agree, the Borrower shall establish immediately after the Effective Date, an imprest account at BOM with respect to Part B.1 (Credit Line) of the Project. The imprest account shall be established, managed, replenished and liquidated in accordance with the Bank's "Loan Disbursement Handbook" dated June 1996, as amended from time to time and detailed arrangements agreed upon between the Borrower and the Bank. The initial amount to be deposited into the imprest account shall not exceed the equivalent of $200,000.

Loan Agreement, Schedule 3 paras. 8

Complied with. The Loan Agreement between the Government and ADB dated 16 February 2001 was ratified by the Mongolian Parliament on 17 May 2001. MoFE opened an Imprest account with respect to Part B. 1 in amount of $200,000 on 1 July 2001 at Bank of Mongolia (BOM). Since the on-lending activities exceeded the planned volume, the ceiling of the imprest account had been increased by $300,000 on 20 November 2002.

Part A (Production and Marketing Support ) and Part B2 (Cap Bldg for PFIs and Subborrowers)

Except as the Bank may otherwise agree, the

Borrower shall establish immediately after the Effective Date, an imprest account at a commercial bank acceptable to the Bank with respect to Part A (Production and Marketing Support) and Part B.2 (Capacity Building for PFIs and Sub-borrowers) of the Project. The imprest account shall be established, managed, replenished and liquidated in accordance with the Bank's "Loan Disbursement Handbook" dated June 1996, as amended from time to time and detailed arrangements agreed upon between the Borrower and the Bank. The initial amount to be deposited into the imprest account shall not exceed the equivalent of $200,000.

Loan Agreement, Schedule 3 paras. 9

Complied with. The imprest account with respect to part A and Part B. 2 was opened with Trade and Development Bank on 1 July 2001. However, Project implementation commenced on 1 March 2002. Due to high disbursements turnover for project activities than initially estimated, the ceiling of the imprest account was increased by $300,000 on 1 July 2003.

Statement of Expenditures (SOE) Procedures. The SOE procedure may be used for reimbursement of eligible expenditures and to liquidate advances provided into the imprest accounts referred to in paras. 8 & 9 of Sched. 3, in accordance with Bank's "Loan Disbursement Handbook" dated June 1996, as amended from time to time, and detailed arrangements agreed upon between the Borrower and the Bank. Any individual payment to be reimbursed or liquidated under the SOE procedure shall not exceed the equivalent of $50,000.

Loan Agreement, Schedule 3 paras. 10

Complied with. Disbursements and replenishment of the imprest accounts are carried out in accordance with ADB procedures and approved by relevant officials at MOF and MFA.

Conditions of Withdrawals from the Loan Account Notwithstanding any other provision of this Loan

Agreement, no withdrawals shall be made from the Loan Account for:

Loan Agreement, Schedule 3, para. 11

(a) any item of expenditure to be financed by Loan proceeds under Part A (Production and Marketing Support) or Part B (Credit Component) of the Project for any subcomponent relating to the Four Western Provinces until a Project Implementation Agreement (PIA), in form and substance satisfactory to the Bank, shall have been duly executed and delivered on behalf of MFA and such province, and shall have become fully effective and binding on the parties thereto in accordance with its terms.

Loan Agreement, Schedule 3, para. 11 (a)

Complied with. The MFA, on behalf of the Government, ratified the PIA with the Governor's Administration in each of the four western and Selenge provinces in May 2002. It is stipulated that "the implementation of the Agreement commences on 1 March 2002 and is valid for 5 years".

42 Appendix 4

Covenant

Reference

Status/Remarks

(b) Category 4: Credit Line until the following conditions shall have been satisfied: (i) a PFI Subsidiary Loan Agreement, in form and substance satisfactory to the Bank, shall have been duly executed and delivered on behalf of each of the parties thereto, and shall have become fully effective and binding on the parties thereto in accordance with its terms; and (ii) the rural credit expert consultants shall have been recruited and fielded.

Loan Agreement, Schedule 3, para. 11 (b)

Complied with. BOM and MOF signed the onlending agreement on 28 June 2002. Afterwards BOM and PMU selected PFIs in accordance with ADB's selection criteria. BOM and four PFIs made additional loan agreements in July 2002.

(c) any item of expenditure to be financed by Loan proceeds under Part A.5 (Rural Communication Links) of the Project until a joint order between MFA and MOI, in form and substance satisfactory to the Bank, shall have been duly executed and delivered, and shall have become fully effective and binding on the parties thereto in accordance with its terms.

Loan Agreement, Schedule 3, para. 11(c)

Complied with. Joint order of the Ministers of MOF and MOI No. A/195/86 dated 2 July 2002 established the composition of a working group in charge of the Rural Communication Links component.

(d) telephone connections under Part A.5 (Rural

Communication Links) of the Project until the Post and Telecommunication Authority Subsidiary Loan Agreement, in form and substance satisfactory to the Bank, shall have been duly executed and delivered on behalf of each of the parties thereto, and shall have become fully effective and binding on the parties thereto in accordance with its terms.

Loan Agreement, Schedule 3, para. 11 (d)

Not applicable because the subcomponent was cancelled. No disbursement has been made under this Component.

(e) Part B.2 (Capacity Building for PFIs and Sub-borrowers) of the Project until a joint order between MFA and MFE, in form and substance satisfactory to the Bank, shall have been duly executed and delivered, and shall have become fully effective and binding on the parties thereto in accordance with its terms.

Loan Agreement, Schedule 3, para. 11 (e)

Complied with. Joint order of Ministers of MFE and MFA No. A/95/203 dated 17 July 2002 on implementation of Capacity Building for PFIs and Sub-borrowers component was issued. Training for PFIs and sub-borrowers to strengthen their activity commenced in August 2002.

Project Executing Agency: As the Project Executing Agency, MFA shall be

responsible for coordinating the overall implementation of the Project, in cooperation with BOM, MFE, MOI, the PFIs, the Post and Telecommunication Authority, and the associations of cooperatives. The Deputy Minister of Food and Agriculture shall be the National Project Director. To ensure interagency coordination on Project implementation, the Borrower shall ensure that the Project Executing Agency is assisted by a Steering Committee. The Steering Committee shall be chaired by the Deputy Minister of Finance and Economy, with the Deputy Minister of Food and Agriculture acting as the deputy chair. The Steering Committee shall include representatives from BOM and MOI and additional representatives from MFE and MFA (including the PMU Director who shall serve as the secretary of the Steering Committee). The Steering Committee shall be responsible for monitoring and reviewing implementation of the Project, supervising the activities of the PMU, and providing necessary guidance as appropriate. The Steering Committee shall meet at least once every 3 months, and as often as necessary.

Loan Agreement, Schedule 6, para. 1

Complied with. The Project Steering Committee (PSC) was established by MFE Minister's order No. 08 dated 15 January 2001. The PSC meetings were held though not on a quarterly basis but whenever it is needed and its decisions were useful in project monitoring and overall coordination.

Project Management Unit The Borrower shall ensure that the PMU, which

Loan

Complied with. The PMU was

Appendix 4 43

Covenant

Reference

Status/Remarks

has been established under the Minister of Food and Agriculture, is responsible for the day-to-day coordination and implementation of the Project, including bidding for procurement and construction supervision; procurement of equipment and materials; selection, engagement and management of consultants; and liaison with the Bank on Project-related matters. The Borrower shall also ensure that under the supervision of the National Project Director, the PMU is headed by a PMU Director, and includes a Project adviser (international consultant for the first 2 years of Project implementation), a Project implementation officer, an accountant, an officer responsible for procurement and office management, and a driver.

Agreement, Schedule 6, para. 2

established based on order of the State Secretary of MFA dated 4 March 2002 under ref. No B/41.

Working Group The Borrower shall ensure that a Working Group is

established under the Steering Committee with respect to the implementation of Part B.1 (Credit Line) of the Project. The Working Group shall be comprised of representatives of MFA, MFE and BOM, and shall include a representative of the Bank as an observer. The Working Group shall be chaired by the representative of MFA. The Working Group shall be responsible, among other matters, for the approval of PFIs and for ensuring that the PFIs continue to meet the eligibility criteria agreed between the Borrower and the Bank. The Working Group shall meet at least once every 3 months, and as often as necessary.

Loan Agreement, Schedule 6, para. 3

Complied with. The working group was established by MFA Minister's order No. A/21 dated 17 February 2001. Due to changes in the Government structure, the composition of the working group was changed by order No. A/34 dated 11 March 2005. A representative from the ADB Resident Mission was assigned as observer. Meetings of the working group were not carried out on a quarterly basis but as and when required, due to unavailability of some members. This does not seem to have affected implementation of the Credit Line.

Project Implementation Units The Borrower shall ensure that a PIU is

established under the Governor of each of the Four Western Provinces. The PIUs shall supervise the day-to-day implementation of Project activities in their respective provinces. The PIUs shall maintain close coordination with the PMU, including consultation with the PMU on Project design and implementation, and shall be responsible to and report to the PMU. Each PIU shall be headed by a PIU Director who will be a staff member from the provincial government. The PIU Director shall be responsible for the day-to-day management of the PIU. Each PIU shall also be comprised of an implementation officer, an office assistant responsible for procurement and office management, and a driver. The Borrower shall ensure that a representative from a PIU may attend a meeting of the Steering Committee, if the Director of such PIU so requests. The Borrower shall also ensure that the PIUs are informed about the issues discussed during meetings of the Steering Committee.

Loan Agreement, Schedule 6, para. 4

Complied with. The PIUs were established under the Governor of each of the Four Western Provinces in March 2002. The PIUs supervise the daily implementation and organization of training activities. The PIUs maintain close coordination and regular reporting to the PMU. Each PIU is headed by a PIU Director. The PMU confirmed that PIUs are informed about the issues discussed during PSC meetings.

PIU Advisory Committees The Borrower shall ensure that a PIU Advisory

Committee is established in each of the Four Western Provinces. The PIU Advisory Committees shall be responsible for providing guidance to their respective PIUs and for monitoring and reviewing Project implementation in their respective provinces and supervising the functioning of their respective

Loan Agreement, Schedule 6, para. 5

Complied with. The PIU Advisory Committees were established in each of the Four Western Provinces. Each PIU Advisory Committee is chaired by the Governor of the provincial government, and includes

44 Appendix 4

Covenant

Reference

Status/Remarks

PIUs. Each PIU Advisory Committee shall be chaired by the Governor of the provincial government, and shall include representatives from the State Administration Department, the Planning, Budget and Economic Policy Department, the Agriculture Division, the provincial assembly, and the PIU. The PIU Advisory Committees shall meet at least once every 3 months, and as often as necessary.

representatives from the State Administration Department, the Planning, Budget and Economic Policy Department, the Agriculture Division, the Provincial Parliament, and the PIU. The PIU Advisory Committees held quarterly meetings.

Green Revolution Committees With respect to the Four Western Provinces, the

Borrower shall ensure that in accordance with the implementation schedule of the Project (a) a Green Revolution Committee with qualified members has been established and is operational; and (b) qualified staff; including provincial and district agronomists have been allocated and assigned to implement the Project.

Loan Agreement, Schedule 6, para. 6

Complied with. A Green Revolution Committee in each of the four provinces has been operational even before loan effectivity. Agronomists at provincial and district levels have been appointed to implement the Project

Nongovernment and Other Organizations The Borrower shall ensure that the selection and

engagement of any nongovernment or other domestic firms or organizations as consultants under the project take place in a timely manner in accordance with the implementation schedule of the Project.

Loan Agreement, Schedule 6, para. 7

Complied with. Cooperative trainers were selected and engaged for project training activities from provincial cooperative training center and cooperative association.

Counterpart Requirements Without limiting the generality of Section 4.02 of

the Loan Agreement, the Borrower shall ensure that annual budget allocations are made, so that the counterpart funds required for the implementation of the Project are available on a timely basis in accordance with the implementation schedule of the Project. The Borrower shall also ensure that other counterpart requirements, including the provision of adequate office space and support services for the PMU and the PIUs, are provided during implementation of the Project.

Loan Agreement, Schedule 6, para. 8

Complied with. The EA received adequate budget allocations for implementation.

Without limiting the generality of Section 4.02 or Section 4.09 of the Loan Agreement, the Borrower shall ensure that sufficient budgetary allocations have been made to cover operation and maintenance costs of the radio transmitter stations to be established in Dzavhan, Hovd and Uvs.

Loan Agreement, Schedule 6, para. 9

Not applicable. The Rural Communication Links subcomponent has been cancelled.

Cost Recovery - Establishment of Secondary Cooperatives

With respect to Part A.4(b) (Establishment of Secondary Cooperatives) of the Project, during the first year of Project implementation, the Borrower shall develop a mechanism for cost recovery acceptable to the Bank, including provisions with respect to the percentage of funds to be recovered from the secondary cooperatives, the period over which such recovery is to take place, the use of recovered funds to establish additional secondary cooperatives, the possible involvement of a financial institution to administer the provision and recovery of funds provided to such cooperatives, the fees to be paid to any such financial institution, and any other matters relating to such cost recovery mechanism.

Loan Agreement, Schedule 6, para. 10

Partly complied with. A cost recovery mechanism that involved provincial agricultural development funds was established but without adequate consultation with ADB. Recovery performance has been poor.

Cost Recovery – Well Rehabilitation With respect to Part A.3 (Well Rehabilitation) of the

Loan

Complied with. A cost recovery

Appendix 4 45

Covenant

Reference

Status/Remarks

Project, during the first year of Project implementation, the Borrower shall develop a mechanism acceptable to the Bank for recovering a portion of the costs for well rehabilitation under the Project and using recovered funds to rehabilitate additional wells. Such mechanism may include the establishment of a well rehabilitation funds to be administered by a financial institution, which would be responsible for recovering such costs.

Agreement, Schedule 6, para. 11

mechanism for rehabilitated wells has been established. However, the implemented mechanism was later on overturned by a joint order from MoFA, MFE, and MoE, and this latter cost recovery mechanism is considered inadequate to ensure sustainability.

Training for Veterinarians in International Meat Inspection Standards

The Borrower shall cause MFA to ensure that the training program for public and private sector veterinarians in international meat inspection standards is carried out under the Project as agreed by the Borrower and the Bank, including the delivery of such training by the veterinary inspectors selected from the Veterinary Inspection Agency of MFA to participate in the overseas training-of-trainers program in such standards.

Loan Agreement, Schedule 6, para. 12

Complied with. National inspectors were trained in meat and plant hygiene and meat inspection procedures that to be adopted in export abattoirs to comply to international standards. A training module was delivered to the state inspectors and private veterinary meat inspectors. The consultants also prepared a modularized training manual that can be used in the future for follow up training of new meat inspectors engaged by the Agency.

Monitoring and Evaluation The Borrower shall that a comprehensive program

for monitoring and evaluation acceptable to the Bank is carried out to generate input and output data for each subcomponent under the Project. Such program shall include socioeconomic and environmental data to monitor and measure the Project impacts. A set of indicators and the necessary baseline data shall be developed and collected at the commencement of Project implementation by the PMU, the PIUs, and their consultants, in consultation with the PFIs, cooperative associations, and other local stakeholders. The Borrower shall ensure that the Information, Monitoring and Evaluation Department of MFA will work closely with the PMU, and will receive PMU support and training to ensure that monitoring and evaluation activities continue beyond the Project implementation period. The Borrower shall also ensure that the PIUs provide support and training at the provincial level to ensure that monitoring and evaluation activities continue beyond the Project implementation period. The Borrower shall ensure that each PIU prepares annual monitoring and evaluation reports and that these reports are consolidated and submitted to the Bank through the PMU.

Loan Agreement, Schedule 6, para. 13

Complied with. The PMU implemented a comprehensive monitoring system to report on Project performance during implementation. Custom designed software has been developed for the Project that monitors the activities in each province by component, type of activity etc., recording the number of beneficiaries and the overall objective for the activity. Monitoring of project outputs was highly satisfactory, but monitoring of impact inadequate. A set of indicators and necessary baseline data have not been developed and collected at the commencement of Project. Some impact surveys for different Project components were carried out in the final years of the project. The Information, Monitoring and Evaluation Department of MFA received training on M&E Efficiency and Effectiveness.

46 Appendix 4

Covenant

Reference

Status/Remarks

Review of the Implementation of the Credit Line With respect to Part B.1 (Credit Line) of the

Project, the Borrower shall ensure that the Working Group, together with the Bank, conducts reviews 6 months and 12 months after the date when the first PFI Subsidiary Loan Agreement is executed. During such reviews, the Working Group and the Bank shall assess matters relating to implementation of the credit line, including the percentage of Loan proceeds disbursed, the types of Sub-borrowers, the uses by the Sub-borrowers of the onlent Loan proceeds, the geographical location of the Sub-borrowers, the interest rates under the PFI Subsidiary Loan Agreements and the PFI Onlending Agreements, and the performance of the PFIs. The Borrower shall ensure that the findings of such reviews are taken into account in the further implementation of Part B.1 (Credit Line) and Part B.2 (Capacity Building for PFIs and Sub-borrowers) of the Project.

Loan Agreement, Schedule 6, para. 14

Complied with. The Credit Working Group has conducted meetings at to review the implementation of the Credit Line component. However, ADB was not involved in the reviews 6 months and 12 months after the first subsidiary loan agreement was executed.

Audited Financial Statements The Borrower shall (i) maintain, or cause to be

maintained, separate accounts for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to the Bank; (iii) furnish to the Bank, as soon as available but in any event not later than 9 months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the Loan proceeds and compliance with the covenants of this Loan Agreement as well as on the use of the procedures for imprest account/statement of expenditures), all in the English language; and (iv) furnish to the Bank such other information concerning such accounts and financial statements and the audit thereof as the Bank shall from time to time reasonably request.

Article 4, Section 4.06(b)

Complied with. Independent auditor conducted audit on financial statements of the project accounts every fiscal year. Performance of auditors were generally satisfactory, however, audit of project accounts for 2002 and 2003 did not include the auditor’s opinion on compliance with the covenants of the Loan Agreement as well as on the use of the procedures for imprest account/statement of expenditures. This was rectified on later audits.

A total of 56 person-months of international consulting and 406 person-months of domestic consulting will be provided.

The international consultants will have expertise in (i) veterinary services, covering the areas of veterinary meat inspection and abattoir hygiene, veterinary epidemiology, and veterinary diagnosis, (ii) international classification standards for cashmere and wool classing and marketing, as well as for livestock marketing; (iii) water resource economics and well rehabilitation; (iv) rural credit; and (v) project management. The domestic consultants will have expertise in similar areas as the international consultants. They will also provide expertise in horticulture production, marketing and processing, and related business practices.

In addition, the investment loan will provide for two

service contracts: one for providing advice to horticulture producers under the subcomponent on the Green Revolution Program, and one for carrying

Complied with. Consulting services have generally been provided in accordance with the negotiated contracts with the Institute for International Development Ltd (IID) and MonConsult Company (one main contract for all project components and another for veterinary training).

Consulting services under these components are being carried out under the main contract with IID and MonConsult Company.

Appendix 4 47

Covenant

Reference

Status/Remarks

out training for potential subborrowers under the subcomponent on capacity building for PFIs and subborrowers.

Quarterly Proress Report

Borrower shall furnish, or cause to be furnished, to the Bank, quarterly reports on carrying out the Project and on operation and management of the Project facilities. Such reports shall be submitted in such form and such detail and within such period as the Bank shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy problems, and proposed program of activities and expected progress during the following quarter.

Article 4, Section 4.07 (b)

Complied with. The PMU submitted quarterly reports and annual progress reports on a timely basis. However, better reporting may have been done on problems encountered and steps taken or proposed to be taken to remedy problems.

Project Completion Report Promptly after physical completion of the Project,

but in any event not later than 3 months thereafter or such later date as may be agreed for this purpose between the Borrower and the Bank, the Borrower shall prepare and furnish to the Bank a report, in such form and in such detail as the Bank shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by the Borrower of its obligations under this Loan Agreement and the accomplishment of the purposes of the Loan.

Article 4, Section 4.07 (c)

Complied with. The Government submitted on 16 January 2008 a very comprehensive PCR.

48 Appendix 5

Table A5.1: IMPLEMENTATION OF CONSULTING SERVICES INPUTS

Final Revision Actual Inputs

Expert Name Initial Contract

Field Inputs

Home Inputs

Total Inputs

Field Inputs

Home Inputs

Total Inputs

International 46.0 46.9 0.0 46.9 45.9 45.9 Mr. Kevin Rutter Team Leader 24.0 24.5 0.0 24.5 24.5 0.0 24.5

Mr. Lindsay Furness Water Engineer 2.0 1.7 0.0 1.7 1.7 0.0 1.7

Dr. Peter Seibert Socioeconomist 4.0 3.5 0.0 3.5 3.5 0.0 3.5

Mr. Ted Scarlett Fiber Marketing 1.0 1.0 0.0 1.0 1.0 0.0 1.0

Mr. John Leake Meat Marketing 1.0 1.0 0.0 1.0 1.0 0.0 1.0

Ms. Maaike van Hoeflaken Rural Credit 14.0 14.1 0.0 14.1 14.1 0.0 14.1

Ms. Ingrid Fischer Cooperative 0.0 1.0 0.0 1.0 0.0

Local 386.0 317.9 317.9 315.4 315.4 Mr. Turmandakh 6.0 9.0 0.0 9.0 7.5 0.0 7.5 Mr. Dashnyam 6.0 6.1 0.0 6.1 6.1 0.0 6.1 Mr. Byambadorj 6.0 5.7 0.0 5.7 4.7 0.0 4.7 Mr. Ulziibayar 56.0 53.8 0.0 53.8 52.8 0.0 52.8 Mr. Mandakh 9.0 3.0 0.0 3.0 3.1 0.0 3.1 Mr. Batjargal 9.0 3.5 0.0 3.5 3.5 0.0 3.5 Mr. Shombodon 14.0 24.5 0.0 24.5 24.5 0.0 24.5 Mr. Badamkhatan 56.0 54.4 0.0 54.4 54.4 0.0 54.4 Ms. Munkhjargal 56.0 48.8 0.0 48.8 48.8 0.0 48.8 Mr. Gaitav 56.0 50.9 0.0 50.9 50.9 0.0 50.9 Ms. Tungalag 56.0 50.6 0.0 50.6 50.6 0.0 50.6 Mr. Togtokhbayar 56.0 54.5 0.0 54.5 54.5 0.0 54.5 Total Services 432.0 364.8 0.0 364.8 361.4 0 361.4

Source: The Project Implementation Consultants, March 2007, Project Completion Report, Mongolia

Table A5.2: TRAINING SERVICES INPUTS

Final Revision Actual Inputs Expert Name Initial

Contract Field

Inputs Home Inputs

Total Inputs

Field Inputs

Home Inputs

Total Inputs

International

Dr. Peter Henning Clausen Laboratory Specialist

3.5 3.2 0.0 3.2 3.4 0.0 3.4

Dr. David Hadrill Epidemiologist

2.8 2.9 0.0 2.9 2.9 0.0 2.9

Dr. Elizabeth Calanta Meat Inspection Specialist

2.0 2.1 0.0 2.1 2.1 0.0 2.1

National Dr. Sodnomdarja 6.0 8.8 0.0 8.8 7.6 0.0 7.6 Dr. Batsaikhan 5.0 0.0 0.0 0.0 0.0 0.0 0.0 Dr. Batsuukh 0.0 3.2 0.0 3.2 3.2 0.0 3.2 Dr. Batstetseg 3.0 3.2 0.0 3.2 3.2 0.0 3.2 Total Services 22.3 23.5 0.0 23.5 22.4 0.0 22.4

Source: The Project Implementation Consultants, March 2007, Project Completion Report, Mongolia

Appendix 6 49

LIST OF MAJOR PROCUREMENT CONTRACTS

Contract

Nature Contractor Contract

Amount ($) Mode of

ProcurementCommencement

Date

PCSS Procurement

of vehicles Hyundai & Kia Co. Ltd

90,000.00 Direct Contracting

22 Jan 2003 0007

Procurement of veterinary laboratory equipment

Jamomed Co. Ltd

161,500.00 Limited International

Bidding

9 July 2003 0013

Procurement of computers

Sky C&C Co. Ltd

12,980.00 Direct Contracting

18 Oct 2003 0015

Provision of cutters and sprinklers

EcoCrop Co. Ltd

34,080.00 Direct Contracting

24 May 2004 0022

Provision of well equipment and tractors

Prestige Engineering Co. Ltd

75,041.00 NCB 04 Aug 2004 0024

Civil works for well rehabilitation

Tesiin Burd Co. Ltd

20,349.00 Direct contracting

20 Jun 2005 0035

Civil works for well rehabilitation

BTB MSS Co. Ltd

23,730.00 NCB 20 Jun 2005 0036

Civil works for well rehabilitation

Us Altay Co. Ltd 26,085.00 NCB 20 Jun 2005 0037

Equipment for well rehabilitation

Shandiin Bulag Co. Ltd

68,561.00 Direct Contracting

20 Jun 2005 0038

Civil works for well rehabilitation

Khovdyn Tulga Co. Ltd

17,476.00 NCB 27 Jun 2005 0040

Provision of well equipment

Prestige Engineering Co. Ltd

125,819.60 NCB 1 Jan 2004

NCB = national competitive bidding, PCSS = Project Contract Summary Sheet. Source: ADB, April 2009, Disbursement Data, Manila

50 Appendix 7

FINANCIAL AND ECONOMIC ANALYSES

1. The Agriculture Sector Development Project components aimed to have an impact on poverty by benefiting poorer groups. A thorough analysis of the impact on poverty is constrained by the lack of reliable data, but field visits and the project monitoring and evaluation system's data confirmed significant benefits to participating rural households. The green revolution subcomponent has shown the most viable benefits with participating household incomes documented to have increased by 10%–60%. The larger vegetable growers are likely also to engage more casual labor for harvesting as yields have increased significantly. The veterinary services subcomponent has had a significant institutional impact, also because of replication by other donors throughout Mongolia. It will have an impact on the production and productivity of the livestock sector. 2. Well rehabilitation has added about 2.1 million hectares of grazing area available to herders and thereby improved their income, while at the same time having a positive impact on the environment by reducing overgrazing. Rehabilitated wells benefited about 4,500 herder families and provided potable water to 1.14 million animals. The monitoring and evaluation report reports that average income increased by 20%–40% for herder families between 2002 and 2005, but it is unclear to what extent this may be attributed to the Agriculture Sector Development Project or to other factors such as favorable weather conditions. Seasonal pasture maps developed under the advisory technical assistance demonstrated the value of mapping herder group movements and pasture access rights, and the organization of herder groups to mutual benefit. The cooperative development activities appear to have yielded few positive impacts and may have adversely affected the general view on cooperatives. Through the credit line revolving fund, a total of 30,156 subborrower loans have been extended, amounting to MNT34.9 billion. The credit line revolved more than 5 times. A. Livestock Production 3. Financial and economic analyses were conducted to determine the financial and economic rate of return to livestock production affected by the veterinary services and well rehabilitation subcomponents of the Project. The data from National Statistics, data collected during project implementation from Uvs aimag “representative herders”, and data from the state budget were used in the analysis (Table 7.1). 4. The major assumptions used in the analysis of livestock production include the following:

(i) Market prices were used in the financial analysis in Table 7.2. (ii) The prices of tradable commodities were taken from statistical bulletins

issued by the National Statistical Office of Mongolia. (iii) The analyses were based on a comparison with and without project situations

over 20 years. Mongolian currency togrog (MNT) was applied throughout the analyses.

5. The veterinary service costs for herder households were based on estimates of MNT100 per animal provided by representatives of Ministry of Food, Agriculture and Light Industry (MOFALI). 6. The table in Appendix 7 shows the financial and economic analysis for the subcomponents related to livestock production. The financial internal rate of return is estimated at 31.0%, and the resulting net present value, discounted at 12%, is MNT3,340 million.

Appendix 7 51

7. The economic internal rate of return is 38.3% (using actual data collected during the project), which is similar to the analysis conducted during appraisal. The resulting net present value, discounted at 12%, is about MNT4,431 million.

52 Appendix 7

Stock

Fiber Cut/Head

Stock Consumed

Stock Sold

Average Weight Dressing

Dressed Weight

Skins Sold

Fiber Sold

Meat Value/kg

Fiber Value/kg

Skin Value/Piece Value

Cash Revenue

Species (number) (kg) (number) (number) (kg) (percent) (kg) (number) (kg) (MNT) (MNT) (MNT) (MNT) (MNT)

A. Financial Performance1. Without projecta

Sheep 208 0.95 5 9 35 50 245 5 197.6 2,500 600 3,500 748,560.0 529,810.0Goat 152 0.28 2 6 25 50 100 2 42.56 1,900 30,000 6,000 1,478,800.0 1,431,300.0Cattle 15 1 2 234 46 215.28 1 3,500 12,000 1,142,220.0 765,480.0Horse 8 1 1 200 50 100 1 1,800 7,000 367,000.0 187,000.0Totalb 383 9 18 660.28 9 240.16 3,736,580.0 2,913,590.0

2. With Productivity Gains including Summer Weight Gain with Project Interventionc

Sheep 208 1.20 5 9 37 50 259 5 249.6 2,500 600 3,500 814,760.0 583,510.0Goat 152 0.3 2 6 28 50 112 2 45.6 1,900 30,000 6,000 1,592,800.0 1,539,600.0Cattle 15 1 2 245 46 225.4 1 3,500 12,000 1,195,350.0 800,900.0Horse 8 1 1 210 50 105 1 1,800 7,000 385,000.0 196,000.0Total 383 9 18 520 701.4 9 295.2 3,987,910.0 3,120,010.0

B. Economic Performance1. Without Project

Sheep 208 0.95 5 9 35 50 245 4 197.6 2,500 600 3,500 745,060.0Goat 152 0.28 2 6 25 50 100 2 42.56 1,900 30,000 6,000 1,478,800.0Cattle 15 1 2 250 46 230 1 3,500 12,000 1,219,500.0Horse 8 1 1 200 50 100 1 1,800 7,000 367,000.0Total 383 9 18 675 8 240.16 3,810,360.0

2. With Productivity Gains including Summer Weight Gain With Project InterventionSheep 208 1.40 5 9 37 50 259 4 291.2 2,500 600 3,500 836,220.0Goat 152 0.3 2 6 28 50 112 2 45.6 1,900 30,000 6,000 1,592,800.0Cattle 15 1 2 260 46 239.2 1 3,500 12,000 1,267,800.0Horse 8 1 1 210 50 105 1 1,800 7,000 385,000.0Total 383 9 18 715.2 8 336.8 4,081,820.0

Source: Mongolian Statistical Bulletin 2007 and ASDP Monitoring Data 2002–2006.a Based on Statistics data.b Based on model average household.c Based actual performance of model project household.

Table A7.1: FINANCIAL AND ECONOMIC PERFORMANCE OF REPRESENTATIVE HERDER HOUSEHOLD

Appendix 753

Item 1 2 3 4 5 6 7 8

A. Financial Analysis1. Incremental benefits

Herder households affected by projecta 37,376 37,318 37,820 38,265 38,500 38,500 38,500 38,500 Household with productivity gains (%) 0 3 4 5 8 10 12 15 Productivity gains for respresentative HH (MNT '000) 0 251 251 251 251 251 251 251 Incremental benefits from productivity gains (MNT '000] 0 281,005 379,713 480,226 773,080 966,350 1,159,620 1,449,525

2. Project costs [MNT '000]b

Veterinary services center 60,000 324,000 83,000 11,400 0 0 0 Well Rehabilitation 78,600 291,400 287,800 162,200 21,100

Subtotal (A2) 138,600 615,400 370,800 173,600 21,100 0 0 0 3. Other operating costs [MNT '000]c 49,000

Veterinary Service Cost 0 385,870 385,870 385,870 385,870 385,870 385,870 385,870 Supplementary feeding costs 0 77,795 78,842 79,769 80,259 80,259 80,259 80,259 Well Maintenane cost 24,528 24,858 25,150 25,305 25,305 25,305 25,305

Subtotal (A3) 0 488,193 489,569 490,790 491,434 491,434 491,434 491,434 Incremental Net Benefit (138,600) (822,588) (480,657) (184,164) 260,546 474,916 668,186 958,091

Financial Internal Rate of Return 21.50 Net Present Value at 12% Discount Rate 718,226

B. Economic Analysis1. Incremental benefits

Herder households affected by projecta 37,376 37,318 37,820 38,265 38,500 38,500 38,500 38,500 Household with productivity gains (%) 0 3 4 5 8 10 12 15 Productivity gains for respresentative HH [MNT '000) 0 271 271 271 271 271 271 271 Incremental benefits from productivity gains [MNT '000] 0 303,395 409,969 518,491 834,680 1,043,350 1,252,020 1,565,025

2. Project costs [MNT '000] Veterinary services center 60,000 324,000 83,000 11,400 0 Well Rehabilitation 78,600 291,400 287,800 162,200 21,100

Subtotal (B2) 138,600 615,400 370,800 173,600 21,100 0 0 0 Other operating costs [MNT '000] 49,000 Veterinary costs 0 385,870 385,870 385,870 385,870 385,870 385,870 385,870

3. Supplementary feeding costs 0 29,921 30,324 30,681 30,869 30,869 30,869 30,869 Subtotal (B3) 0 415,791 416,194 416,551 416,739 416,739 416,739 416,739 Incremental Net Benefit (138,600) (727,796) (377,025) (71,660) 396,841 626,611 835,281 1,148,286

Economic Internal Rate of Return 30.83 Net Present Value at 12% Discount Rate 1,393,421

Source: Mongolia. 2006. National Statistics Book, 2006. Ulaanbaatar.a Based on Statistics data.b Data from Project, exchange rate used as of average for each year.c Data from State Budget, MoFA.

Number of household is taken from Statistic and next 10–20 years is assumed as constant (no increase)

Year

Table A7.2: FINANCIAL AND ECONOMIC INTERNAL RATE OF RETURN TO LIVESTOCK PRODUCTION

54 Appendix 7