Document of

The World Bank

FOR OFFICIAL USE ONLY

AA/-36 5 i5- A V

Report No. 12295-LV

STAFF APPRAISAL REPORT

LATVIA

AGRICULTURAL DEVELOPMENT PROJECT

DECEMBER 10, 1993

MICROGRAPHICS

Report No: 12295 LVType: SAR

Nataral Resources Management DivisionCountry Department IVEurope and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EOUIVALENTS

Currency Unit = Latvian Ruble (LVR)Currency Unit = LAT (introduced May 1993)US$1 130 LVRUS$1 = 0.60 LAT (As of November 1993)LVR 1 0.008 US$LAT 1 = 1.667 US$LAT I = 200 LVR

Fiscal Year

January 1 - December 31

Abbreviations and Acronyms

AFC Agricultural Finance CompanyBITS Swedish Board for Investment and Technical SupportBOL Bank of LatviaCEM Country Economic MemorandumCPF Counterpart FundsEBRD European Bank for Reconstruction and DevelopmentEC PHARE European Community Assistance Program for Eastern EuropeFSU Former Soviet UnionGDP Gross Domestic ProductGOL Govermnent of LatviaHa HectareIBL Investment Bank of LatviaICB Intemational Competitive BiddingIESC International Executive Service CorpsIMF International Monetary FundLAAS Latvia Agricultural Advisory ServiceLAT Latvian currency unitLL Latvijas LabibaLVR Latvian RubleMOA Ministry of AgricultureMOF Ministry of FinanceNGO Non Governmental OrganizationPCR Project Completion ReportPFI Participating Fiaancial InstitutionPMU Project Management UnitSLS State Land ServiceSOE Statement of ExpenditureTA Technical AssistanceTOR Terms of ReferenceVOCA Volunteers in Overseas Cooperative Assistance

FOR OMCIL USE ONLYSTAFF APPRAISAL REPORT

IATVIA

AGRICULTURAL DEVELOPMENT PROJECT

Table of ContentsPate No.

LOAN AND PROJECT SUMMARY ...............

1. BACKGROUND ................................. 1A. Introduction ................................. IB. Stabilization and Reforms ................................. 1C. Project Background ................................. 3

11. THE AGRICULTURE SECTOR .................................. 4A. Background .... .. 4B. Climate, Topography, and Soils ... . 4C. Population, Farm Size, and Land Use ... . 5D. Recent Performance and Trends in Production .. 6E. Agricultural Inputs .... 7F. Agricultura Support Services ... 9F. Agriua lSpoprt evcessn .......................................... 10. estry and Forest Industries .........................................H. AgroErocessing. . SYSTEM........................................ 10I. Inteational d ......................................... 11

HIB. THE RURAL FINANCIAL SYSTEM ....................................... 13A. Background.13 ............ ..................................... 13B. 7heBanking System. .............. ................ ............... 13C. Present AgriEtural Fincing Options ................................... 14D. Bank Strategy for Assistance to Ficial Sector............................. 15

IV. THE for .................................................... 16A. Project Objectives.16B. Rationale for Bank In~volvement.i16

C. ty rojct esciption ......................................... 1C. Summary Project Desdpion17D. Detailed Features .......................................... 17E. Status of Preparation ......................................... 21F. Implementation Schedule ......................................... 22G. Cost Estimates . ......................................... 22H; Finaiing .......................................... 23

This report is based on the fidings of an appraisal mission in July 1993. Members of the appraisal teamincluded H. Kim (mission leader), K. Gilbertson, R. Chalk, H. Ochs, J. Intrator, C. Cronberg, and R.Finnegan. Editorial support was provided by A. Zuschlag. Swedish and Finnish TA teams assisted theGovemment in agro- and forest industry component preparation. Peer reviewers included J. Goldberg, K.Brooks, E. Chobanian, and T. Schilthom. The division chief is Geoffrey Fox and the department director isBasil Kavalsky.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents -may not otherwise be disclosed without World Bank authorization.

Table of Contents (continued)

1. Procurement ..................... 23J. Disbursements ...................... < 25

V. PROJ'CT IMPLEMENTATION .. 27A. PiJcct Coordination and Management ................................... 27B. Credit Operations .................. 27C. Accounts and Audits .................. 32D. Reporting and Evaluation. .................. 32E. Bank Supervision ................................................. 33P. Environment .33

VI. BENEFITS, JUSTIFICATIONS, RISK, AND ENViRONMENTAL IMPACT . .34A. Benefits .34B. Justificaions .34C. Ris ... 36D. Environmental Impact .,. 36

VII. AGREEMENTS REACHED AND RECOMMENDATIONS .38

TABLES IN TEXT

2.1. Land Resources. 54.1. Agro- and Fores Industry Subprojects .184.2. Project Cost Swnmary ............................................ 234.3. Project Financing Plan.234.4. Procurement Metods ....................................... 244.5. Disbursement ....................................... 25

ANNEXES

A. Agricultural Finance Company ....................................... 39B. Investment Bank of Latvia ....................................... 50C. Economic and Financial Data ....................................... 53

C.1 Ptices ........................................ . . . . 53C.2 Crop Budgets ....................................... 54C.3 Cropping Patrns, Yields & Production .......... .................. 55C.4 Livestock Budgets ....................................... 56C.5 Cattle Herd Projections ....................................... 57C.6 Representative Farm Models . .................................. 58

D. Agro- and Forest- Induslty Subprojects . ................................... 60E. Technical Assistance Program ....................................... 64

E. 1 Parallel TA Program ....................................... 64E.2 Equipment to be Procured for Land Cadastre ........ ................. 65

P. Disbursement Schedule ....................................... 68G. Docments in Pile ....................................... 69

CHARTS1. Implentation ............................................. 702. Key Monitoring indicators ........................................... 713. Project Management Unit Orgnizational Chart ......... ..................... 72

MAP: IBRD 24950

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AGRICUL1TURAL DEVELOPMENT PROJECT

Loan and Projeet Summary

Borrower: Republic of Latvia

Executing Aaencv: Ministry of Agriculture (MOA)

Beneficiary: Private Farmers, Selected Private Agro- and Forest- Industries and State LandService.

Amount: US $25 million

Terms: Seventeen years including four year of grace at standard IBRD rates

Onlendin Terms: From the Govemment (MOF) to the financial intermediaries in dollars with amargin of at least 10% of the Bank rate; from the financial intermediaries toindividual borrowers at the MOF rate plus a margir sufficient to coveradministrative costs and lending risks, and to be reviewed annually.

Objective: Project objectives are to support private agricultural development by providingcritically lacking investment credit to nevily-emerging private farmers andinvestment funds for expansion and technological upgrading to private agro- andforest-industries. The project would also support implementation of theGovernment's reform program in the agricultural sector and it would assist theMOA and otier agencies in the removal of key constraints limiting thetransformation to a market-based agricultural economy. Specific supports includethe implementation of land reforms, gradual privatization of state processing anddistribution monopolies, strengthening of the rural fincial system, and improvingthe extension service, training and applied research. Other objectives areimprovements in developing the sector policy framework and in Govemment policymaking capacity through suitable pricing, legal, fiscal and institudonal reforms.

Descrintion: The main components of the project are: (a) Farm credit for on-farm productionand development. A financing company, the Agrcultural Finance Company (AFC)is being established to idenmify investment opportunities, appraise viability, assesscredit-worthiness, and channel funds to individual sub-borrowers; (b) Support forprivate small and medim scale agro- and forest- industries through long-terminvestment funds. Priority would be given to commercial viability, exportpotential, and management capacity; and (c) TA support for sector reform programincluding development of human and institutional skills necessary for a marketeconomy through support for agricultural advisory services, training of technicians,managers, and workers/farmers and strengthening of market information, land-survey, registration and titling services.

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8enefits: The project's potential benefits include an iamediate short-term impact onproduction, income and employment generation, and foreign exchange earnings.The project would serve as a vehicle for further reforms in agnculture and wouldaccelerate the move to a market oriented system based on private ownership of landand other productive assets. Direct benefits from the project would includeicreased production of various crops and livestock products, diversified andimproved quality in processed goods, increased export revenues, and economicstabilization in nrual areas. The project would help improvu institutional structuresconducive to smoothing the transition to a market economy. The project wouldalso improve agro-chemical management, soil conservation, and agro-industrialeffluent control, and thus contribute to enviromnental protection.

The risks associated with the project are: (a) macroeconomic instability; (b) politicaiinstability; (c) possible reintoduction of import tariff and/or export duties; (d)delays in implementation of land tiling, registration, and fully functioning landmarkets; (e) high financial risk inherent in new private farming; (f) slower thanexpected start-up of the AFC; and (g) market flucations, particularly for thosesub-projects requinng long gestation periods. Given a sincere commitment by theGovernment to continue economic reforms, the first three risks are somewhatmitigated. For market and financial risks, the project would strengthen institutionalcapacities in credit assessment and market analysis, and risk is likely to bemitigated by careful analysis of each of the sub-projects on future market potential.nstdtutional risks are minimzed by technical assistance already in place to estab]H

the AFC and in strengthening the financial intermediaries. Substantial TA isincorporated in the project to strengthen agricultural extension and training and thefm business management capabilities of the project beneficiaries, blnce mitigatingthe risks in lending to new private farmers.

oerl Category: Not applicable.

EstimatedPoject US$45.1 million

Pinamcingan PIBRD US$ 25.0 millionDonors US$ 4.9 millionFinancial Intermediaries US$ 4.5 millionSub-Borrowers US$ 10.7 millionTOTAL US$ 45.1 million

Esmtd ive FY94 US$ 2.0 millionDisbursaent: FY95 US$ 10.0 million

FY96 US$ 20.0 millionFY97 US$ 25.0 million

Closing Date: December 31, 1997

Economic Rates of Retum: Minimum of 15% for subprojectsIRR oL. selected subprojects range from 16% to35%IBRD 24950

LATVIA

STAFF APPRAISAL REPORT

AGRICULTURAL DPE-VELOPMENT PROJECT

1. BACKGROUND

A. Introduction

1.1 The Republic of Latvia lies on the eastern coast of the Baltic Sea sharing borders withEstonia, Lithuania, Belarus and Russia. Its territory, 65,000 km2, is roughly equivalent in size toSwitzefland. One million of Latvia's 2.7 million population live in the capital city of Riga. Only 30% ofthe population live in rural areas.

1.2 Latvi began to industrialize toward the end of the nineteenth century. In the rapid post-World War II industrializtion, Latvia developed some of the most sophisticated industries in the formerSoviet Union (FSU), including, machine building, chemicals, electronics, wood, paper, food processing,and light industries. The agricultural sector was also under intensive production. Latvia was alreadyexportng agrnaultual commodities to We tern Europe before the War, and continued to export meat, dairy,and fish products to the rest of the Soviet Union. The highly skilled labor force and general efficiency ofthe Latvian economy, allowed it to enjoy one of the highest living standars li the FSU, with per capitaincomes almost 30% greater than the rest of the Soviet Republics. Latvia regained independent in August1991.

B. StabizaLtion and Reforms

1.3 SLabilization Program. In July 1992, Latvia launched a formal stabilization programsupported by an IMT standby arrangement. Since then, Latvia has been successful in containing the rateof inflation, which has declined from double digit monthly figures through October 1992, to an averagemonthly rate of 2% for the first half of 1993 and continues to decrease during the latter half of 1993.Contribufting to this drop has been a tight monetary and fiscal policy as well as suppordng income policymeasures which have resulted in a substantial fall in real wages. The currency system has been successfullydelinked from the Ruble area with the introduction of a new currency, the Lat.

1.4 Price Liberalization. In December 1991, the Govermment of Latvia liberalized allagricultural commodity prices. In the immediately following months it then set minimum prices to supportfarmers. However, by mid 1992, the farm-gate prices had exceeded the minimum floor prices and are nowfully market determined. Input prices have also been liberalized. Price reform was largely completed in1992, with price subsidies remaining in only a few areas such as heating and rent.

1.5 Financial Sector Reform. In mid-1992, legislation was passed to separate the commercialbanking functions of the Bank of Latvia (BOL) from its functions as a Central Bank. In December, 1992the 49 commerial branches of BOL were placed under the control of the Bank Privatization Committee.

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Recently, some of the individual branches have been converted into joint-stock companies and others havebeen sold to private commercial banks. It is planned to create a "core bank" comprising the 18 renainingbranches of BOL. No definite plans have been formulated for the restructuring and/or evenual privatizationof the Savings Bank. With IMF assistance, progress has been made in establishing a prudential regulationand supervision system for banks. However, further changes in regulation in somne key areas are needed,such as foreign exchange exposure and bankl holdings of enterprise equity and real estate. The BankGroup's ongoing financial sector restructuring work is designed to address these issues as well as thecoordination of donor assistance in institutional development for the core bank.

1.6 Labor Market and Social Safety Net. The Government has adopted active labor marketpolicies such as retraining, job search assistance, and public works. The unemployment rate is on the rise,reaching 6% in August 1993 and may reach 12-15% by the end of 1993. Under-employment remains highand exceeds official unemployment rmes. The rising cost of unemployment is expected to put strongpressure on fiscal resources.

1.7 Privatization. The privatization process is well advanced in the agricultural sector.Individual laws governing the privatization of milk, meat, grain and other agro processing iniustries havebeen passed. Some small plants have already been privatized and the remaining plants are expected to beprivatized by early 1994, with the exception of large scale state enterprises. Spimilarly, a vast majority ofsmall enterprises under the jurisdiction of local authorities had been privatized. However, the privadzadonof large-scale state owned entities still faces significant obstacles and has been at a virtual standstill since1991. This delay was initially caused by the lack of important pieces of legislation such as the voucher andleasing laws, which have been approved only recently. Now that the basic legislative framework is in place,the main reason for the delay appears to be institutional procedures requiring the intervention andinvolvement of several ministries ir. privatizadon decisions without a uniform approach. The Governmentintends to establish a Privatization Agency with centralized authority over the privatization of largeenterprises, including those in the agriculture sector.

1.8 Land Reform. Land reform is fairly well advanced in that land restitution and privatizationhas been largely completed. Under the November 1990 law, all holders of agricultural land as of July 21,1940, or their heirs, were eligible to reclaim land nationalized after that date. The law also includedprovisions for those with current use rights to file ownership claims. Since then, more than 210,000 claimshave been made, of which over 100,000 claims were acalaly registered under the land restitution law.

1.9 The process of land restitution and privatization has beer. divided into two phases: therestoration of land user rights to former owners; and the restoration of ownership rights including the rightto sell and to mrortgage the property. Phase One of the reform has progressed quite rapidly, though itremains incomplete. Land use rghts have been awarded to private individuals on 46% of all arable land.This includes over 52,000 private farmers (average holding 16.7 hectares). However, progress has beenslow for Phase Two of the reform which involves transfer of ownership rights (including the right to sellor mortgage the property). The first properties were registered in the newly registered Land Book Officesonly in June, 1993. As of July 1993, only 10 properties (8 rural, 2 urban) have been titled and registered.It is estimated that less than a thousand properties would be titled and registered by January 1, 19,94.

1.10 Slow progress in land titling and registration threatens to constrain the development of thesector. Although many farmers now have the right to use the land, they cannot at present sell or mortgage

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their property. A functioning land market does not yet exist and consolidation of ownership cannot takeplace. Agricultural credit development is hampered by the inability to use land as collateral. A majorconstraint to acceleraing the titling process is a lack of funds to purchase equipment for adequate landsurvey and cadastre prior to titling. Until a functioning land market exists, efficient producers areconstrained and face great difficulties to expand their operations.

C. Project Bkround

1.11 The proposed project is the first investment project to be supported by the Bank in Latviaand the first Bank-supported project in the agriculture sector for the Baltic. The first Bank loan to Latvia,the Rehabilitation Loan (Ln 3525-LV) approved by the Board on October 22, 1992, was to supportimportation of critically needed inputs. The total loan amount is US$ 45 million, of which about US$ 14.5million has been earmarked for imnport of agricultural inputs.

1.12 The Bank's lending strategy in agriculture is to support Government efforts to carry outreform of the agriculture sector and to assist in its transformation to a market driven system. The proposedproject is the first operation conceived within the above mentioned strategy to support the emergingagricultural private sector with critically needed investment funds and to support Government policyformulation. Rapid implementation of the project is important because of the urgent need for bothinvestment, and access to convertible currency resources, in the emergent private sector. This project hasbeen prepared following the agricultural sector review mission and is consistent with the mission's findingsand recommendations.

1.13 Bank involvement in this project bridges a critical financing gap. It is anticipated that theproject would elicit a supply response in agricultu :which has been disrupted by a lack of access to i4putsand financing since the reform period began. The project would strengthen the policy framework andGovernment policy-making and implementation capability. Furthermore, the proposed project would alsohave inter-sectoral implications by contributing to enterprise and banking sector reforms through trainingof staff in credit evaluation through the credit component of the project, and establishment of theAgricultural Finance Company (AFC). The project draws on the Bank's previous experience in agriculturaldevelopment projects in Eastern European countries, e.g. Hungary, Romania, Poland, etc. Bankinvolvement on policy framework and its reform would promote the efficient use of limited resources, helpimprove technologies for crop and livestock production, and upgrade agro-processing technology andoperations, and enhance environmentally sound agricultural development by improving current practices andintroducing protective measures.

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II. TIE AGRICULTURE SECTOR'

A. BAck round

2.1 Historically, the agricultural sector has been one of Latvia's main sources of income,employment, and foreign exchange earnings. Today, the sector occupies more than 40% of the country'sland area, accounts for nearly a quarter of the GDP, and employs about 17 percent of the Latvian laborforce. The sector traditionally produced an exportable surplus t'hat was delivered to the other republics ofthe former Soviet Union (FSU). Over one third of the livestock production of Latvia was destined forexport to the east, supplying about 2 percent of all livestock products in the FSU.

2.2 Based on land and climate potential, and market and trade prospects, agriculture could onceagain become a reliable source of income and foreign exchange earnings for the rural population. This-would require reform-driven structural adjustments in the sector. Latvia can develop competitive agriculturedue to its relatively good overall agro-ecological conditions, and low cost land and labor, compared toWestern standards. However, at present, Latvia's agricultural potential is severely under-exploited. Withimproved teahnology and better extension services, provision of inputs and training of farmers, yields ofmost crops and livestock could be doubled.

2.3 Like the economy as a whole, the agricultural sector in Latvia is undergoing a difficultadjustment period. Since indeperndence in 1991, Latvia's agricultural prooaction declined each year by morethan 30% on average. Following the severe drought of 1992 and the drop in inter-republic trade,production in 1993 declined once again. Particularly hard-hit are the livestock and agro-processingsubsectors where outputs have declined by as much as 50% due to drops in domestic demand and thedisruption of FSU trade. Exports have been slow to develop due to poor product quality and weakmarketing channels. Profitability is down as inputs prices have risen far more than output prices. Thenumber of workers being discharged from agro-industries is on the rise and many private farmers are under-employed as their land remains iae due to lack of equipment and other productive assets, and the lack ofseasonal and long-term capital. The present conditions indicate that a robust recovery of the economyoverall, much less within the agricultural sector, is not likely to occur in the near-term.

B. Climate Togog=ahv and Soils

2.4 Average annual rainfall in Latvia is about 680 mm. The wettest months are April throughSeptember, coinciding with the highest crop demand for moisture. There is thus sufficient rainfall for mostcrops, particularly summer crops. Severe droughts, like the one in 1992, are rare,

1/ For more detals, see Latvia: In Transition to Private Agriculture, an agricultural sector review report. EC4NR,World Bank, 1993.

2.5 Mean annual temperatures (54 degrees Celsius) are relatively mild for the country's latitude, dueto the influence of the Baltic Sea. Relatively high minimum temperatures permit successful production ofwinter cereals in most years, while relatively low annual maximum temperatures generally guaranteesuccessful production of spring sown small grains and oilseeds. The relatively short growing season of 120to 150 days, however, presents considerable problems for reaching high yields of potatoes, sugarbeet,maize, fruits, vegetables, and alfalfa, as available varieties are not sufficiently bred for cultivation this farnorth.

2.6 Soil quality varies considerably. Podzolized soils constitute 54.5%, and deep fertile organicloam soils account for about 7 % of total agricultural land, with the rest belonging to less fertile categories.Recent soil maps on a 1:10,000 scale are available for virtually all agricultural land. Average soil qualityis 4 on a scale of 10 points, with 7% falling i i the highest quality. Soil quality is thus relatively low, andso is soil humus content, averaging no more than about 1.7%. Widespread soil compaction anddeteriorating drainage systems are amplifying the imnact of relatively low soil quality on soil productivity.

2.7 Insufficient and deteriorated drainage systems have led to the abandonment of large areasof agricultural land. At least 200,000 ha of drainage works need rehabilitation and most of the remaining1.5 million ha require comprehensive repair and maintenance. However, rehabilitation and/or maintenanceworks have been drastically scaled down due to insufficient funding.

C. Pom,lation. Fam Size and Land Use

2.8 Agriculture, including inputsupply, agro-processing, administration, training Table 2.1 Lad Resources (ha usands)

and research, employed about 250,000 people in1992. About 70% of the agricultural labor Resource 1935 1992 %Chaqge

forc is directly or indirectly employed in the AgriculualLnd 3,775 2,530 -33%

livestock sub-sector. The number of private ArablelAnd 2l14 1,688 -20%

farms in Latvia has grown rapidly from 7,296 in ,November 1990, to 52,000 in June 1993, and Pastres 751 597 -21%

these now occupy over 40% of the agricultural Meadows 905 317 -65%

land in Latvia. The average farm size is 16.7 Forss 1,747 2,815 +61%

ha. In addition, there are nearly 100,000 Oor a t0 1private household plots averaging 4.4 ha in size. Other Land andWater 1,507 1,114 -26%

Private farms and plots cover over half of the Agricultual 1.93 0.95 5S%

country's agricultural land. land/capita(heapita)

2.9 Labor productivity in the Surce Misty of Agricultureagricultural sector is estimated to be 5 to 8 times lower than in most Western countries, mainly due to lowcapitalization per worker and low quality of capital inputs. Low labor motivation and the lack of managerialskills and authority, combined with an aging workforce and a marked outflow of young and technicallyskilled laborers over the past decade, has further reduced labor productivity.

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2.10 Lad Use Latvia has 2.6 million ha of agricultural land, of which nearly 1.7 million hais arable. Most of Latvia is a flat coastal plain, with substantiai forest coverage. During the past 50 years,about 1.2 million ha of agricultural land has been abandoned, 80% of which has been converted to forestSand. During the past decade, cereals accounted for rougly 43 % of arable land, potatoes and vegetables7XZ, industrial crops (mainly sugarbeet and flax) and orchards 2% each, and forage crops accounted for37%. Fallow is negligible, covering only 10,000 to 12,000 ha; but in recent years it has been risingsubstantially. Permanent grassland covers about one-third of all agricultural land.

D. Recent Perfonnance and Trnds In Crop and Livestock Production

2.11 Crop production has averaged roughly 30% of total agricultural output for most of the pastdecade. The bulk of this production has been in grains. Spring barley presently accounts for over 50%of all grain production and 21% of all arable land. It is primarily used for animal feed and beer production.Other grains include winter wheat, winter rye, barley and oats. Crop production peaked in 1984 when totalgrain production reached nearly 1.7 million tons. Yields have varied considerably since then but showeda dramatic decline in 1992 when cereal production dropped by over 30% from 1990 levels and forage cropsdropped by over 50%. These changes not only reflect the severe drought of 1992, but also the macro-economic difficulties that have led to cutbacks in subsectoral investments, subsidies, and inputs. Yields forall grains are low compared to those in the West and by using better seed stock, more optimal amounts offertilizers and pesticides, and improved cultivation and harvesting techniques, they could easily be doubled.

2.12 Forage crops have received low prinrity compared to directly marketable field crops. Theheavily subsidized manufactured feedstuffs and feed grains made forages, including nahtral grasslands,relatively expensive feedstuffs. As a result, forage production and practices remain well behind Westernstandards. Sugarbeets, potatoes, legumes and veg-+ables comprise the bulk of non-grain crops in Latvia.These crops would also show substantial rises in 3 .-lds if improved seed stock and modern cultivationtechniques were introduced.

2.13 Livestock Production. Because Latvia was heavily dependent on imports of subsidized grainand protein concentrates for feed fiom other Republics, pre-independence livestock production masked trueprofitability and allowed for large-scale concentrated production. With the removal of subsidized feed grainand manufactured feeds, Latvian livestock production fell significantly and the trend is expected to continuebeyond 1993. Particularly hard hit have been state owned pig and poultry production.

2.14 Since 1989 the private sector share in livestockproduction has st-adily increased, accountingin 1992 for over 40% of all production. The most dramatic increase in private sector participation is in pigraising, which correspondingly shows the largest drop in share of the state sector. This illustrates theflexibility of private farmers in adopting and substituting feed grains with non-grain feed and forages, whilestate farms are unable to change from their grain-intensive feeding practices. As a whole, livestockproduction is moving awa) from intensive state-run production toward semi-intensive private productionwhile adjusting to a more efficient and manageable scale.

2.15 Tqnns of Trade. Agricultural producers suffer from a severe deterioration in terms of trade.In 1992 alone, agricultural inputs and machinery prices dramatically increased from their formerly

subsidized levels to market prices, up on average by about 30 times and manufactured feed and diesel fuelprices were up by 20 and 150 times respectively while farnigate prices of livestock products increased onaverage by only about 3 times. This trend has begun to reverse, terms of trade for agriculture began toimprove, albeit slowly, in 1993. This trend has already improved the profitability of crop and livestockproduction.

E. Aaieultural Inputs

2.16 Seeds. Latvian seed production is performed exclusively by public institutions. Seed qualityis reasonable and is controlled by the Ministry of Agriculture. New seed legislation based on the EuropeanEUPOV-system was introduced in the spring of 1993. All cereal and potato seed is multiplied in Latvia,but seed for forage maize is imported from Moldova and the Ukraine. Seed for peas, sunflowers andsugarbeets also come from the Ukraine, alfalfa from Kyrgyzstan, and vegetables from several FSU andWestern countries.

2.17 Many farmers use their own seed and are not prepared to pay a premium for quality seed.There has been a dramatic drop in the use of quality seed materials since 1990 and the use of imported seeddropped by roughly half in 1992, compared to the 10-year period 1982-1991. A Seed Fund supported bySweden (5,000 tons) and the Government budget (2,000 tons) is making food grain seed available tofarmers. This fund however, was able to provide only about one-fifth of private farmers' 1993 springcereal seed requirements.

2.18 Fertilizer. All chemical fertilizers are imported from Russia. Total chemical fertilizerapplication in 1992 dropped by 50 % compared to the late 1980's and again by another 35% in 1993. Themajor reason behind this drop is the increase in prices by over 75 times during 1991/1992. Russia is nowdemanding world market prices and an advance payment in hard currency. In addition, an almost completelack of seasonal credit for fertilizer purchases has further depressed fertilizer application. Still, comparedwith other FSU countries, Latvian fertilizer application rates have been relatively high and had much betterbalanced nutrient supply than Ukraine and Russia.

2.19 Pesticides. Virtually all pesticides used in Latvia come from Russia or Ukraine. Recently,prices have increased by 7 to 170 times, resulting in a drastic drop in pesticide usage. High-qualitypesticides manufactured in the West have also entered the market, but are too expensive for the majorityof farmers. As a result there is little herbicide use at present. To combat increasingly severe weedinfestation, access to credit to purchase modern herbicides is urgently needed.

2.20 Fertilizer and pesticide storage, distribution, and spraying used to be under the responsibilityof Agrokhimia, a state monopoly. In 1992, their activity has collapsed to about 10% of the normal workvolume, due to equipment and fuel shortages, and lack of demand by farmers, who claim that they can dothis type of work cheaper and better than Agrokhimia. Most of the field application of pesticides is stilldone by former State and co!lective farms as most of the private farmers lack the necessary equipment andknowledge.

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2.21 VeXin&ay pplies. AU essential veterinary supplies have to be imported into Latvia. Dueto the high prices of veterinary supplies, the 1992 sales level dropped to only about 10% of the levels inthe past. In early 1993, Latvijas Zoovetpgade, the state agency in charge of procurement and distributionof veterinary supplies, estimated large shortfalls of required veterinary drugs, medicines, and vaccines.Latvia has obtained some veterinary supplies from relief agencies, and procurement of agro-chemnicals andveterinary supplies was financed under the Bank's Import Rehabilitation Loan. The most urgently neededveterinary supplies include drugs for treatment of internal and external parasites, wide spectrum antibiotics,and some essential reagents and chemicals for diagnostic work, particularly for leucosis detection.

2.22 Veterinary Services. Until recently, veterinary services were provided exclusively by thepublic sector. Latvia plans to privatize all clinical veterinary treatments, vaccination, and drug distribution.A law on privati2ation of veterinary services had been passed in June 1992, but licensing of privatevetinarians had already started as early as January 1992. By the end of 1992 about 1,000 licenses hadbeen issued. Very few private veterinarians have opened up full-scale veterinary offices however, due tolack of funds and the fact that practicing veterinary medicine under the presently distressed conditions oflivestock producers is risky.

2.23 Livestock Feedstuffs. Compared to the 3-year period 1987-89, when livestock productionpeaked, overall feed production, e.g. silage, forages, hay, and manufactured feedstuffs fell by about 50%in 1992 due to the combined impact of economic uncertainties and the 1992 drought. Latvian feedstuffquality is inferior to that used in the west, resulting in a lower overall livestock production performance.Manufcred feed had relatively low protein and feed additive content, often combined with an energycontent too low to guarantee satisfactory feed conversion efficiency. The quality of mamnactured feeddeteriorated dramatically in 1992. Pelleting, for example, has been discontinued due to the rise in energycosts.

2.24 Fam MiKgine. At present, most farm machinery is outdated and too large for the smallerrms being created by land reform and privatizatiozi. The number of smaller tractors has increased

somewhat during the past two years as land privatization has progressed. However, a lack of long-termcredit for agriculture has prevented most of the newly emerging private farmers from purchasing newtractors. Meanwhile, the number of harvesters and most other machinery and equipment declined steadilysince the mid-1980's. Much of the Latvian machinery fleet needs replacement, particularly the forageharvesters.

2.25 Rual astructure. About 62% of all agricultural land has open ditch or tile drainage,but most of the drainage systems are over 15 years old and would require substantial rehabili4ion inaddition to the necessary expansion of the system. Extensive networks of highways and main roads are wellestablished in Latvia. However, presently existing rural access roads and the electrification network of thecountry would have to be expanded to facilitate newly established private farmers. The buildings andphysical assets inherited by private farmers from state or collective farms are in reasonably good shape, butmany new farmers are in need of new buildings and other physical infrastructure.

F. Africulg turlSUp Soervce

2.26 Agricultural Research. With de-collectivization and the continued implementation of landreform, Latvia's research infrastructure needs substantial strengthening and reorientation to respond to theneeds of new private famiers. Most pressing needs include imrroved access to research results and transferof technology from other parts of the world as well as concentration on adaptive research. This wouldrequire training of Latvian scientists, support for expatriate visiting professors in Latvia, establishment ofan up-to-date agricultural library, including up-to-ate subscriptions to scientific journals and literature, andcontinuation of varietal field testing and demonstration work on individual fanns and fainners' fields.

2.27 Agricultural Extension. In 1992, Latvia established an independent agricultural extensionservice, the Latvian Agricultural Advisory Service (LAAS). LAAS has a two-tier organizational structure;the National Advisory Cenier and 18 local Advisory Centers with a total of 260 advisors. The AdvisoryService plan calls for a total stafi of 670 by 1998, which would permit at least one advisor for each of the500 districts plus regional advisors and specialists. It is well suited to Latvia's relatively well developedinrastructure and agricultumal technology levels. LAAS has been receiving substantial TA assistance frombilateral and multilateral sources. These TA projects still need to be better coordinated and adjusted to meetthe critical needs of the country. Under the proposed project agriculture advisors would work closely withstaff of the Agriculture Finance Company (AFC) to provide combined technical and financial support tofarmers.

2.28 Effective and far-reaching extension services would be critical to the success of the privateagricultural sector in Latvia as many practices that were used in the former collective system would haveto be changed. The new private farmers do not yet comprehend the dynamics of a market economy.Trining in record keeping, marketing, agricultural finance, and in other areas of farm management wouldbe essential. New farmers with little previous experience would require more technical advice.

2.29 Livestock Artificial Insemination (AD has also declined. Al coverage, formerly 90% to95%, has fallen to only 60% to 70%, mainly because many farmers use their own bulls to save money andto avoid cumbersome Al procedures. While the cost of AI service is quite cheap by intemationalcomparison, farmers still consider it excessively high. Realistically however, it remains the only costeffective way of improving the genetic stock of Latvian farm animals.

G. Forestry and Forest Industiies

2.30 Latvia has rich forest resources which, with proper development and utilization, can playa key role in the country's economic reform program. However, at present Latvian forests are under-utilized. Forestry is one of the few subsectors for which there are immediate export possibilities. Althoughtotal wood volume is not large in comparison to many other countries, the tree species are well suited toindustrial uses, the quality of the logs is good, and the logging terrain generally favorable. It has beenestimated that with proper management, the anmual allowable cut could be increased to about 11 million

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m3/yr, compared with the currerA harvest of about 4 million n9/yr. The shot-term prospects are good,provided that deforestation is properly managed and monitored.

2.31 Most of the forest is owned by the state, but about 30% is on agricultural land recentlyreturned to its original private owners through the nation-wide program of restitution. Many privateoperators, having obtained the right to harvest through a system of open biddirng on parcels of forest landput up for auction by the state, are already involved in harvesting the forest.

2.32 The forestry processing subsector is presently operating well below its installed capacity,primarily because of low consumer demand in the domestic market and in the traditional export marketsof the FSU. Some parts of the subsector have the potential to be competitive in Western markets becauseof the high quality of the raw material, but other parts have no apparent export potential and shouldconcentrate on domestic markets. Production of sawnwood, panel products, and converted products suchas firniture, have good potential if they are properly dried, dimensioned, and designed.

2.33 The pulp and paper industry is operating at a small fraction of its capacity using outdatedequiplnent and processes, and has no basic competitive advantage as an exporter. The largest pulp mill usesthe sulphite pulping process with no chemical recovery system, thus posing a serious enviromnental threat.

EL h

2.34 Agro-processing, like other agricultural subsectors in Latvia, was geared toward serving theFSU market. Due to high dependence on imported raw materials, the plants using large quantities of sugar,chemicals and other additives have been most affected by the reduction of FSU raw material supplies. Themeat, dairy, and leather processing industries have been affected by the recen contraction of livestockpopulations.

2.35 The above shortages combined with the loss of FSU markets have reduced capacityutilization by 30-50%. Agro-processing plants employed about 30,000 people in 1992, downby 30% from42,000 in 1990. The technology is generally 1960's PSU vintage and is characterized by low energy andmaterial efficiency, high losses, oversized plants with inappropriate design and operational flows which aremostly too highly specialized to be flexible for developing new products. The average output per employeein the food industry is only about 10% of the output for equivalent industries in the West. The value addedin the industry is also low when compared to similar plants in the West. The future outlook for thesubsector is gloomy unless a near complete overhaul of the subsector is carried out.

2.36 The dairy, meat and grain subsectors dominate agro-processing in Latvia. Dairy processinghas undergone the most rapid and extensive restructuring to-date. Sixteen state-owned processing plantsdistributed across the country have collectively dominated the subsector and individually dominated theirrespective regional markets with satellite networks of smaller intermediate processing plants and milkcollection stations. Privatization of larger plants expected to be completed this year. Meat processing hasundergone restructuring at a slower rate. There are fourteen major meat processing plants. While the largeplants are being restructured, small-scale private processing plants are being established and the number isgrowing.

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2.37 Grain processing is the largest and most vertically integrated processing subsector in Latvia.It has also been the last subsector to initiate significant restructuring efforts. This subsector has been undercontrol by a state monopoly, Latvia Labiba (LL), which used to own and operate a group of 28 enterprisescomprised of flour and feed mills, grain elevators, seed plants, and bakeries. Since January 1, 1993, theLL has been dissolved and two interim entities with distinct and scparate functions have been created.Labibas Birojs, is a regulatory agency which provides gover_nental services and regulations; and LatvijasDzirnavas, which is a joint stock holding company designed to oversee and supervise commercial activitiesand manage the privatization process. Individual enterprises are to operate independently and wouldeveally be privatized. This is a positive and significant step towards privatizing the grain sector.

2.38 Enviromnental protection needs to be improved and better monitored. Many meat plantsand tanneries are not equipped with adequate waste treatment and discharge facilities and pose health andpollution risks to their urban environments. The agro- and forest industry subprojects to be financed underthe project would have adequate funds far appropriate waste treatment facilities. There are ongoing, albeitsmall-scale, TA projects to assist Latvian enterprises in improving environmental standards.

2.39 Product quality must be improved for new export markets. The low quality products,packaging, and product mix previously produced to serve the PSU markets are clearly inadequate for newexport markets. Products are often over-processed and have lost taste and nutritional values. Packagingis traditional and unappealing. Control and measuring systems are simple and in many cases not workingat all. In most cases, processes need to be upgraded to meet the food inspection requirements of exportmarkets. The industry also needs to identify marketable product mixes and brand strategies (includingprivate labels) in order to penetrate export markets.

2.40 In order to overcome the loss of markets and inputs, many enterprises are looking to theWest for joint venture partners to bring in capital, expertise, and market outlets. While so far Westernfirms have been hesitant because of their perception of high political and financial risk in Latvia, there areseveral joint ventures in potato starch, edible oil, and forest product processing.

I. Inernatonal Trade

2.41 Due to its relatively small size, Latvia has a high trade/GDP ratio. Exports at current pricesaccounted for 43 percent of GDP in 1989 and in 1990. Import dependence was even higher; ratios ofimports in the GDP were around 50 percent during the late 1980s and early 1990s.

2.42 Latvia is relatively richly endowed with open land and would therefore be expected to havea comparative advantage in agricultural and forestry products. This expectation is borne out in the highshare of agricultural and forestry products in total trade. The share of (unprocessed) agricultural products,food industry products and wood and paper products in total exports amounted to almost 30% in 1990.Agriculture used to be a net-earner of foreign exchange.

2.43 Prior to independence, agricultural exports were wholly directed to the FSU, and thus weresignificantly affected by the economic collapse in these countries. To compensate for such loss, Latvia is

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in the process of negotiating free trade agreements with the other Baltic States and some western Europeancountries. However, the relevant agreements among the Baltic States have not yet been reached becauseof political problems. An agreement with Sweden has been ratified and others with Norway, Finland, andAustria are still in process. These agreements however do not entail concessions for free trade inagricultural products, particularly in EC narkets. Meanwhile, trade to the East has, in general, beenreduced to triangular transactions.

2.44 The Latvian export regime for agricultural products has been widely liberalized. Whereasexport taxes apply for many industrial goods, only exports of rawhide, leather, and leather products aretaxed. There are no formal restrictions for other exports of agricultural products. At the time of priceliberalization in December 1991, export licensing was established to control the outflow of food products.In June 1992 these restrictions were removed. Exporters still have only to pay the normal sales tax of 6%that is also charged for sales on the domestic market. In most other countries however, this sales tax is aconsumer tax that is charged for domestic sales only.

2.45 In contrast to the export regime, the import regime has become more protective over timesince price liberalization. The Council of Ministers approved a specific import tariff schedule on July 31,1992. In general tariffs are set lower for raw products than for processed products. Moreover, tariffs arespecified in US dollars per unit, leading to highly non-uniform tariff rates. These tariffs are currently underrevision, and a tariff committee is considering applications of domestic producers who are requesting highertariff rates. The Bank Group is currently assisting the Govemment in evaluating tariff levels and structureso as to avoid re-introduction of excessive tariffs designed to protect inefficient domestic producers.

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III. THE RURAL FINANCIAL SYSTEM

A. Background

3.1 In 1988, the Soviet authorities initiated reforms in the financial sector, establishing a two-tierbanking system, separating the commercial banking operations from the State Bank (Gosbank), and creatingspecialized banks. The Agriculture Bank, the Industry and Construction Bank, and the Social Bank wereestablished as se arate banks and permission was granted to create private commercial banks. The otherpreviously existing specialized institutions, the Savings Bank and the Foreign Trade Bank, continued theirformer operations.

3.2 Latvia began to restructure the financial system immediately after it declared independence.In September 199i 'he regional branches of the Soviet specialized banks were "nationalized" and placedunder authority of the Bank of Latvia (BOL). The Savings Bank was the exception and remainedindependent of the BOL. In June 1992, Parliament passed legislation that separated BOL commercialbanking functions from its functions as the Central Bank.

3.3 In December 1992, the 49 commercial branches of BOL were transferred to the control ofthe Bank Privatization Committee, consisting of representatives of the BOL, the Ministry of Finance andparliament. The objective of the committee was to privatize the branches as quickly as possible. Initally,each of these branches operated as an independent bank. In the second quarter of 1993, privatization beganto move ahead quite rapidly; some of the former branches of BOL have been privatized individually, andsome have been sold to existing commercial banks. The committee plans to create one "core' bankincorporating 18 former BOL branches. The World Bank is actively involved in this effort to coordinatethe insdtutional development for the "core" bank so that it can be privatized as soon as possible.

B. The Banldng System

3.4 At the end of 1992, the banking system comprised four main components: the BOL, theformer commercial branches of the BOL, the newly formed commercial banks and the Savings Bank. Inaddition, the Investment Bank of Latvia (IBL) was in the process of being established with the assistanceof the Nordic Investment Bank and the European Bank for Reconstruction and Development (EBRD). IBLhas initiated lending operations in April 1993. The 49 former commercial branches of BOL accounted forabout 65 percent of total bank assets and for about 88 percent of credit. The Savings Bank with 37branches (and about 500 sub-branches) and holding the bulk of household deposits, had about 27 percentof total assets, but only 1.6 percent of credit. The commercial banks held 7.7 percent of assets and about10 percent of total credit. Although, currently, over 40 commercial banks have been licensed, only anestimated 30 are operational. Many have very low capital levels and even the largest of these banks onlyhas capital equivalent to US$ 1.5 million. Only a very few have capital exceeding US$ 0.5 million. Totalcapital for all the commercial banks was about US$ 10.0 million. After the reform of 1988, the ownersof these banks were mainly the public sector enterprises, and while private involvement is increasing, asignificant number are "agent" banks for enterprises or individuals who are also shareholders. The scopeof their banking activity is narrow and most of the commercial banks concentrate at present only on theprovision of short-term trade financing which carries little r.sk and very high interest spreads.

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3.5 At end-1992, the consolidated balance sheet of the 49 former BOL branches showed totalassets of LVR 45.0 billion and total outstanding credit of LVR 22.2 billion, which represent about 88percent of total credit in the banking system. The ratio of capital and reserves to assets was only 1.6percent, before taking into account the creation of provisions to cover potential losses. A comprehensiveportfolio review, which was carried out by expatriate consultants and completed in March 1993, concludedthat in view of the poor quality of the loan portfolio, the branches would require a capital injection of LVR10.0 billion (US$ 80.0 million) to achieve an adequate level of capitalization. In 1993, privatizationproceeded rapidly, following a multi-track approach, which involved the conversion of some individualbranches into joint stock companies and the sale of others to private commercial banks. In April 1993,Government created a Mortgage Bank which has ambitious plans for an extensive branch network and awide range of banking services. This bank is not yet operational.

3.6 The Savings Bank occupies a unique position in the Latvian banking system. It is the largestfnancial institution in terms of the number of branches and still holds the bulk of the household depositswhich are effectively guaranteed by Government. However, its financial position has been seriouslydisturbed and its liquidation inpaired because assets held by the former Soviet Savings Bank in Moscow(50% of total) were not repatriated after independence. The bank has sought to remedy its problems bycontinuing to repress the rates of interest paid to depositors and by developing a commercial lendingportfolio of high yielding, but potentially risky, assets. It has continued lending to enterprises in therapidly changing economic environment, without having the necessary expertise in lending in general, andin credit appraisal techniques in particular. Analytic work is in progress which would provide the basis forpreparation of a longer term strategy for the institution.

3.7 Key Structural Issues. The most pressing issues at present revolve around the recovery ofthe banking system. Strategies need to be developed to deal with the bad loans on the books of theremaining branches of the BOL (which would now be in the core bank). The future of the Savings Bankmust also be addressed urgently, focussing first on resolving the problem of the assets held in Moscow.Finally, the future of the significantly undercapitalized commercial banks and their narrow ownershipstucture needs to addressed. There is a need to continue to strengthen, through technical assistance, thecapacity of the BOL to conduct sound monetary policy through mnarket-based mechanisms and to provideeffective prudential supervision of the banking system. The infrastructure of the financial system, (i.e. thelegal, regulatory and supervisory framework, the payments system and accounmg, auditing, andfinancial/banking training) is in need of substantial attention.

C. Present Aictural Financing Ontions

3.8 A&ericuItura Credit from the Banlding System. By end-1992, total credit from the bankingsystem to the agricultural sector amounted to about LVR 5.0 billion (US$ 30.0 million), equivalent to about25% of total credit to the economy. About 90 percent of this amount was in short-term credits and theremaining balance was classified as medium- and long-term loans. The share of private farmers was 11percent, comprising 6% of short-term and 50% of investment credits. Credit to the agricultural sector wasprovided by the former BOL branches and credit from the emerging private banks is practically non-existent. Assuming that only 2,500 private farmers (equivalent to 5 % total of private farmers) benefittedfrom institutional credit, the average outstanding loan per borrower would amount to US$ 1,200 equivalent.

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3.9 The currently available credit to the private sector is likely to decrease following theprivatization and restructuring of the BOL branches, and private commercial banks would not becomepurveyors of credit to the sector in the foreseeable fubure, given the fact that they lack resources, bankingskdlls, branch networks, and are averse to assuming the lending risks. Generally, during the first half of1993, there has been disintermediation from the former BOL branches as well as from the Savings Bank.Commercial banks have offered higher interest rates to attract deposits, and are able to lend at veryprofitable margins for quick turnover trade transactions.

3.10 Other Sources of Financing. In May 1992, Govemment through MOA, established aparastal joint stock company, AGROINVEST, to make loans to private farmers, and deposited in thecompany LVR 175 million (about US$ 1.0 million) from the proceeds of the US food aid program. Withan office in Riga and a staff of four, Agroinvest made about 800 loans to individual private farmers,averaging about US$ 1,200 per loan. The bulk of the funds, about 70%, were utilized to finance thepurchase of agnculuWal machinery, and the balance fnanced construction of farm buildings, homeimprovements and the purchase of assets from state and collective farms. Despite its accomplishments,Agroinvest lacks an appropriate credit delivery system, has exhausted its available resources, and shouldbe considered as a temporary or an ad-hoc arrangement made to fulfil GOL's conmnitment to the U.S.authorities regarding the use of counterpart fiuds.

3.11 In April 1992, AGROLEASING was established by Govermnent as a joint venture withthree Finnish companies producing tractors and other agricultural machinery. With an export credit ofabout US$ 12.0 million from Finland and a guarntee by GOL, Agroleasing has already imported and leasedto farmers 90 grain combines (costing about US$ 46,000 each), 60 grain dryers, and was planning to importabout 250 tractors during the second quarter of 1993. Leasing charges are payable in foreign exchange andbecase of the high prices of the imported equipment and the associated lease charges, Agroleasing is notexpected to play a major role within the credit system serving the private sector. It is likely to continueoperations with a narrow and high income stra of private farmers considered capable of servicing largedebts for agricultural machinery, which, by Latvian standards, is considered very expensive.

D. Bank Strae for A to nancal Sector

3.12 The Bank is assisting the Government in developing the needed reforms targeted atperformance improvement in the banidng sector, addressing the key structural issues mentioned in thepreceding paragraphs, and plans to provide financial assistance i direct support of these activities. DirectBank technical assistance would continue to focus on policy advice and on identifying weaknesses in theinstitutional framework which are imping the creation of an efficient banking system. Furthermore, theBank has agreed to act as coordinator among mulidlateral and bilateral donors of the various technicalassistance programs to establish the "core" bank and Government's financal restructuring strategy. A Bank'operation, to support the overall and specific refortms in the entrprise and banking sectors, is presentlyuxder preparation.

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IV. THE PROJECT

A. Project Obiectives

4.1 The rain objectives of the project are to help newly-emerged private farmers and to enhanceon-going privatization of agriculture, the agro-processing, and forest industries through provision ofinvestment credit that is virtually lacking at present. These efforts would raise agricultural output, increaseefficiency of production, generate employment, increase exports, and improve the standard of living. Theproject aims to achieve this through: (a) financing credit to private farmers for on-farm investment andincremental working capital in order to create viable private farming units and increase production; (b)credit for the development, modernization, or rehabilitation of private/privatized agro- and forest industries;and (c) an insdtutional development technical assistance program to be financed in part by various donorsand in part from the proceeds of the Bank loan. Within this broad framework, the project would supportfiancially and economically viable sub-projects in private sector enterprises, including those where amajority stake in the company is privately owned (more than 50 percent).

B. Rationale for Bank Involvement

4.2 The Government has requested the Bank's timely assistance for the agricultural sector.Latvia was one of the first of the FSU countries to enter into an IMF stand-by agreement, and theGovernment has made a serious commitment to economic stabilization. With such initiatives, the BankGroup should be pro-active in providing early guidance on the course of reforms and the design of futureinvestment programs, and advising the Government on short- and medium-term development strategies forthe sector. These efforts would require significant technical and financial assistance from the internationalcommunty in the short- and medium-term.

4.3 Crucial to the stabilization program, however, are policy reforms that increase the efficiencyof production and expenditures. The first Bank rehabilitation loan to Latvia is suppordng such policyreforms, and the proposed agricultural loan, with specific investment supports, would help limit the declinein output and employment resulting from the disruptions in the inter-republic trade of the FSU while theGovernment is formulating and implementing its structural reform program. Key areas for early action torehabilitate agriculture include: (a) the strengthening of the rural financial system; (b) the elimination ofagricultural production and marketing monopolies; (c) price and agricultural trade liberalization; and (d) theprompt implementation of the land privatization law.

4.4 The Country Economic Memorandum (CEM) and subsequent sector work, as well as thepreparation and appraisal of this project, have confirmed that agriculture is likely to remain an importantsector in Latvia in the long run, and in the short term it has the potential to be an important engine foreconomic growth. The CEM set the agenda for reform and laid the basis for policy dialogue which iscomplemented by the Sector Review and the proposed lending operations. Bank intervention in these areasis proposed within the framework f a medium-term strategy aimed at continuing privatization of the sector

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and at promoting stability, production efficiency, and profitability. Bank involvement is also expected tocatalyze financial support from other lenders and bilateral sources.

C. Summary Project Description

4.5 To achieve the above objectives the project would support the following activities:

(a) Credit to Faers: The project would provide both on-farm investmnent credit andinitial working capital credit to private farmers. In the absence of a suitablealternative financial intermediary capable of serving the new private farmers, atemporary financial institution, the Agicultural Finance Company (AFC), wouldbe established to channel the World Bank funds (see Annex A).

(b) Credit Support for Agro-and Forest-Industries: The project would provideinvestment credits and initial working capital to small and medium-scale privateenterprises. Enterprises with a majority stake (more than 50 percent) of privateownership would also be eligible for financing under the project.

(c) Institutional Development TA Program: The project would support priority TAprograms which would directly enhance the viability of the project. In addition,parallel TA activities for general sectoral development would also be supported.The underlying principle of TA would be to enhance both human and institutionalskills required in a market economy.

D. Detailed Features

4.6 Credit to Farmers nent. The proposed credit program to farmers would providefinancing of medium- and long-term investment credit, including initial incremental working capital toprivate farmers with the objective of creating viable family farm units, increasing crop and livestockproduction, and raising prodtiction efficiency. Given the expected large number of beneficiaries, theaverage size of the subloans is expected to be around US$ 5,000. Main on-farm investment categorieswould include:

(a) farm buildings and other construction, including rehabilitation and modernization oflivestock stables, hay, silage, and machinery storage sheds as well as provision of fencesand livestock watering facilities;

(b) machinery and equipment, such as tractors and ancillary machinery and equipment,including hay-making equipment and forage choppers, as well as milking and milk coolingdevices;

(c) livestock, including cows and heifers, sheep, egg and broiler production, etc.; and

(d) seeds, fertilizer, and other high quality inputs as necessary.

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4.7 Agro- and Eorest- Industries. The project would support small and medium scale private agro-and forest-industries. Agro-industry investments would include privately-owned meat and dairy processing,feed mill, potato and starch processing, and vegetable and fruit processing. Forest-industry investmentincludes saw mills, plywood mills, and furniture making. Selection of final beneficiaries would be basedon the findings of feasibility studies, availability of self-contributed funds, financial and economic viability,and repaymnent capacity.

4.8 The Government, with help of the Swedish and Finnish TA teams, has been carrying outselection and appraisal of agro- and forest- industries subprojects. This work is continuing and feasibilitystudies are under preparation for joint Government and Bank review, and the Investment Bank of Latvia's(IBL) final approval. Appraisal of already identified subprojects as well as new projects in the pipelinewould continue throughout the project implementation period. Since the project was announced by theMinistry of Agriculture earlier this year, approximately 250 agro- and 75 forest- industry proposals havebeen submitted for consideration. They represent a wide variety of activities and investment requirements,ranging from small bakeries and mediam-sized milk and meat processing units, to a number of large-scaleprocessing plants.

4.9 It is anticipated that about 16 subprojects in forest industries, and about 40 subprojects in agro-industries with an loan amount ranging from US$14,000 to about US$1,000,000 would be supported. Alist of pre-appraised subprojects for which feasibility studies are under preparation is provided in AnnexD and summarized below.

Table 4.1 Agro- and Forest Ildustry Subprojects

Type of Business Number of Sub- Approx. total TotalProjects Project Cost Sublmans

(US$00) (US$00)

AGROPROCESSG

Dairy 7 1,640 1,130

Meat 10 2,760 1,920

Grain 4 240 160

Other 3 1,540 1,080

Subtotal 24 6,180 4,290

FOREST INDUSMIES

Sawnwood 3 3,800 2,320

Particleboard 1 900 600

Veneer 1 7,100 1,000

Odter 3 4,200 2,410

Subtotal 8 16,000 6,330

TOTAL 32 22,180 10,620

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4.10 The Investment Bank of Latvia (IBL) has been selected to be the financial intermediary forthe agro- and forest-industry component. The IBL would re-appraise the sub-projects pre-appraised by thetwo TA teams and would have full autonomy for final selection. Risk would be borne by the IBL. Severalagreements have been reached with the IBL management. An agreement was reached at negotiationsreaarding IBL's on-lening anagmt and other modalities as follows:

(a) IBL would reassess the investment proposals as necessary and select the final sub-projects from the package.

(b) IBL would have the full autonomy to approve, revise, or reject any of the sub-projects but would advise and consult with the Bank about those which IBL decidesto reject from the original package.

(c) IBL would complete the reassessment of the original package before consideringany new investment proposals.

(d) For those new proposals, IBL would send to the Bank for prior review the firstthree proposals irrespective of the sub-loan size and any additional sub-loans inexcess of US$200,000 equivalent.

(e) IBL would maintain a separate project account which would be audited byindeendent auditors.

(t) IBL has agreed that there will not be any minimm size restriction on sub-loans tobe financed ;nder the project.

4.11 1h1 A. The TA component would be provided through collaboration of theBank, EC-PHARE and BITS of Sweden. The Bank would provide equipment necessary for land reforms;the EC-PHARE would, among others, complement the Bank's support for land reforms by providing TAand training in utiliaiDg the equipment; and BITS of Sweden would provide various TA for advancingprivatization of the agricultural sector. A three-year TA program for 1993-1995 critical for the success ofremainig reforms has been identified. Key TA activities include support for land reform and creation ofa land market, strengthening of Agricultural Advisory Services, applied research, training of techniciansand farmers, improvement of the agricululral information basis including market and prices information,establishment of an up-to-dae agricultal library including subscriptions to trde journals, varietal fieldtesdng and demonstation work on private farmers' fields, and increasing competition among marketing,transportation and distribution system.

4.12 The main TA components are as follows:

(a) Support for Land Reforms: The proposed project would provide TA to the StateLand Serces (SLS) which is responsible for overall land (both urban and rural)reforms and privatization. Some support would also be provided to the Ministryof Justice for land registration, but SLS would e;ecute and manage the TA support.The proposed project would provide support for purchasing equipment for landcadastre, registration, and iding. Institutional support and training for land

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cadastre and registration, including legal reforms would be provided by EC-PHAREand a bilateral source (BITS) under the supervision of SLS. Such collaborationbetween the Bank (in providing equipment) and the donors (in providing theconsultants and training) was necessary due to restrictions placed on the donors inthe procurement of equipment, while no such restrictions existed for grant financingof consultants and training. The total requirement for equipment amounts to overUS$ 5 million over the period of five years. The project, during the three yearimplementation period, would provide about US$ 1.2 million equivalent to supportequipment purchases necessary for land reforms. This TA component would befinanced by the Bank. However, there is a possibility for a bilateral financing ata lower rates. Once such a financing arrangement is completed, the Governmentwould be able to choose the cheaper financing source and the loan proceeds wouldbe reallocated (see Annex E. 1 for complete list of equipment). The Goverunent'sminimum targets for titling and registration of private farms are the following -500 farms to be registered by January 1, 1994; 10,000 by January 1, 1995; and20,000 by January 1, 1996. Upon registration, the owners of these farms wouldenjoy full ownership rights including the right to sell, mortgage or otherwisetransfer the property.

(b) EC-PHARE Parallel TA Support for Agriculture: A preliminary agreement hasbeen reached on the pastllel three year TA program for agriculture which wouldbe implemented by EC-PHARE. The total TA support by EC-PHARE between1993-1995 (from 92-94 funds) would be about US$3.82 million equivalent. Themain elements of ihe parallel TA component include:

e hImediate and long-term support for AFC management (1993-1995);O Agricultural Research: defining of research priorities and directions, and

establishment of a joint research library and information basis;O Agricultural Extension: training, field support, information technology and

statistical basis;° Agricultural Marketing and Distribution system: assessment of systematic

constraints, development of wholesale mnarkets, and establishment of acompetition unit in the MOA.

(c) Swedish BITS Parallel TA Support for Agriculture: Preliminary agreements havebeen reached with BITS that over the three year period (1993-95), BITS couldprovide support for parallel TA projects in agriculture for a total of about US$ 0.9million. Their support would focus on land privatization, cadastre and registration,for which BITS has already been providing support.

4.13 TA Coordination with NGOs for Agricultural Sector. In addition, voluntary services suchas Volunteers in Overseas Cooperative Assistance (VOCA), International Executive Service Corps (IESC),Enterprise Support Center (UAC-supported by EC-PHARE), and the Peace Corps have pledged theirsupport for the project and agreed to provide on-site, hands-on TA support to final beneficiaries of theproject for farm business management, financial accounting, marketing, etc.

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4.14 TA Coordinator for the Sector. To ensure that the proposed TA programn would beimplemented efficiently, EC-PHARE also has agreed to set up a TA coordinator for the agricultural sectorwithin the project management unit (PMU), and tendering of a bid has already begun. The coordinatorwould be responsible for designing, coordinating, and managing implementation of all TA work in theagricultural sector and would liaise closely with the central aid coordinator. The coordinator would beassisted by local staff and would report directly to the director of the PMU. The TA unit would helpimplement and supervise the TA directly assisted under the Bank project in addition to all other TAactivities in the sector. Bank supervision missions would work closely with this TA unit.

E. Status of Preparation

4.15 Summary of Suipport during Project Preparation. Since this is the first project for theagricultural sector, the counterpart has a tremendous learning-curve to overcome. Nevertheless, theGovernment has been commnitted to project preparation and processing. Since Latvia lacks the technical,financial, and marketing skills necessary for proper project preparation, the Bank has arranged for twoforeign consultant teams to assist the Government in preparation of agro- and forest industry sub-projectswith support of bilateral TA grants from Sweden and Finland. In addition, a Dutch bilateral TA grant hasbeen obtained to assist in establishing an Agricultural Finance Company (AFC), a temporary financialintermediary to channel funds to newly emergent private farmers. TA coordination with EC-PHARE andother bilateral interests has been arranged. Much of this work has already been implemented.

4.16 The Government has also set up a Project Management Unit (PMU) located in the Ministryof Agriculture. The staff represent the MOA and non-governmental institutions. The management teanof the PMU has fully been staffed and they are in the process of recruiting local staff for further training.In addition to local sources, EC-PHARE has committed support to strengthen the PMU. The project wouldalso provide a limited amount for project management during the project implementation period.

4.17 Establishment of Agricultural Finance Companv (AFC). There is a general consensus thatthere is an urgent need for a fmancial institution to support the production and development of the emergingprivate agricultural sector. In the absence of a well-functioning banking system which has the necessaryskills and is prepared to provide credit to the private agriculture sector, a financial intermediary would beestablished to channel funds to a large number of new private farmers. The Government has alreadyapproved establishment of the AFC. The Bank is also playing an instrumental role in coordinating externalassistance from multilateral (EC-PHARE), bilateral, public, and private sources in AFC establishment. Theactivities to establish AFC began in mid-1993. An outline which describes the proposed legal status,organizational structure, financing arrangements and operating procedures of the AFC has been preparedand approved by the Government. By early December 1993, the General Manager and key personnel arein place, location of the headquarters and the first four satellite offices have been established, staff trainingand other preparatory activities are continuing. The target date for start-up operation of the AFC is January1994. This work would be closely coordinated with ti- - Bank Group's financial sector restnvcturing workto minimize risk of diverting valuable resources from long-term agendas.

4.18 A team of experts from a major Dutch bank has been cooperating with the Bank to assistthe Government to establish the AFC and also to assist the AFC management during the initial years of

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operation. An expatriate banldng expert has been in Latvia on an EC-PHARE contract since the beginningof October to assist the AFC with it's day-to-day preparation work for the start of lending operations.Long-term TA support during the initial phase of its lending operations would be critical for successful AFCoperations. EC-PHARE, with the agreement of the Government, has already included support for theAFC in its 1993-1995 TA program and tendering has begun. A Special Govermnent Commission issupervising the establishment of the AFC until the full Board of Directors for the AFC is in place.

4.19 EC-PHARE's hmnediate Support for APC and PMU: EC-PHARE has provide short-term,immediate support for the AFC and PMU from the Counterpart funds (CPF). With the Council ofMinisters' approval, the PMU has been managing the CPF which has provided, among other things, officeand communication equipment and training of local staff.

4.20 Investment Bank of Latvia (IBL). The IBL was established in 1992 by a cooperativeagreement between the Govermnent of Latvia and the Nordic Ministers of Finance. During its frs yearthe IBL was assisted by the Nordic Investment Bank, and the European Bank for Reconstruction andDevelopment (EBRD). The Govermment of Latvia has subscribed DM 6,475,000 to the bank's statutorycapital and has approved an additional DM 6,750,000. Negotiations with the EBRD are expected to bingan additional US $3.5 million, which would raise the statutory capital to about US$ 10.0 million total. TheEBRD and Nordic Investment Bank have also pledged roughly ECU 10 million to provide for technicalassistance. After experiencing some initial difficulties, the IBL is fully staffed and is expected to resumenormal lending operations. A more complete discussion of the IBL is found in Annex B.

F. Imulementation Schedule

4.21 Preparatory work to set up the AFC has already begun. The AFC would start partialoperation within one month from the Board approval (tentativel-' January 1994) then grdually build-up itsoperation in rural areas. The Credit component to support fan. s would be implemented over three years(1994-1996). The agro- and forest-industries component would oe implemented over three years unless thepre-selected investments are not fully implemented and substitute new investments are needed. In such acase, the implementation would take place over four years. TA activities would take place over three yearsand scheduling of specific TA activities would depend on the duration and urgency of the activities. Theproject is expected to be completed on or before December 31, 1996 and the closing date is expected to beDecember 31, 1997.

G. Cost E:ats_

4.22 The total project cost is estimated at $45.1 million. The Bank loan would finance 55% ofestimated total project costs which is equivalent to about 83% of the projected foreign exchange componentof the project. The project costs do not include taxes or duties as these are not currently levied on goodsprojected to be financed under the project. Imported materials or equipment are exempt from duties forBank financed projects. (Cost estimates are based on prelmiary designs and unit prices currenlyprevailing in Latvia along with machinery and equiment prices lists from local and intemational sources).Estimated costs are summarized in Table 4.2 below.

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Table 4.2: Project Cost Summary

Local I Foreign I Total Local |FPoreign I Total F Foreign % BaseExchange Cost

(LVR Mn) (US$ Mn)

Farm Credit 988 1,469 2,457 7.6 11.3 18.9 60% 42%

Agro- and ForestIndustries 980 1,833 2.613 6.0 14.1 20.1 70% 45%

TechnicalAssinace 156 637 793 1.2 4.9 6.1 a/ 80% 13%

Total Project Cost 1,924 3,939 5,853 14.8 30.3 45.1 67% 100%

a/ Inchudes US4.9 equivalent paralel TA by EC-PHARE and Swedih BITS.

H. j dLang

4.23 The proposed Bank loan of $25 million would cover 55% of the project cost. Theremaining 45% would be financed by sources summarized in Table 4.3. Of the sub-borrowers, the farmer'sshare, including contributions in kind, would range from 20 to 25%. The industrial sub-borrowers wouldcontribute at least 30% of the project costs.

Table 4.3: Project Financing P}lan($ million)

Sources Total % of Total,___________________ (US$m)

EBRD 25.0 55%

Donrs 4.9 11%

Financial Intermediaries 4.5 10%

Sub-Borrowers 10.7 24%

Total 45.1 100%

I. Procurement

4.24 A major portion of the credit component under the project would be directed toward a largenumber of small and medium-size private farmers and private enterprises. These project beneficiaries wouldgenerally be free to purchase tractors, combines, and other farm machinery in accordance with their ownchoice. The beneficiaries would be expected to carry out procurement of goods and equipment usingnormal local commercial practices. It is expected that the purchaser would obtain at least three competitivebids in order to select the lowest price consistent with quality and service of the goods and equipment. Withsufficiently liberalized import regulations, foreign suppliers are already active in the Latvian market on acompetuive basis. The credit and commercial risk in private entities would accelerate development of

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private initiatives and gradually reduce the role of the government. Through TA and support from NGOs,the project would contribute to the development of a competitive network of private dealers/factory agentsof agricultural equipment. In addition to small equipment, other goods likely to be financed would includeconstruction material, farn inputs, livestock for breeding or fattening, etc. Given the large variety of itemsto be procured and the estimated small size of an average of US$ 5,000 per farm, grouping of orders in bidpackages would not be possible and the procurement procedures described above for agriculturai goodswould be applied.

4.25 The project would support about 56 small and medium sized privately owned agro- andforest industries. Goods and services required for investments in agro- and forest industries would beprocured as follows. Contracts up to US$ 100,000 equivalent each, would be procured on the basis of atleast three price quotations from qualified suppliers. Contracts from US$ 100,000 to US$ 1.0 million wouldbe executed on the basis of at least three price quotations from three countries. All contracts above US$1 million would be procured under the simplified international competitive bidding (ICB) procedures.Procurement of Bank-fianced goods and services would follow the Bank's procuremen' guidelines (1992)and use of the Bank's Standard Bidding Document for Goods (May 1993) would be mandatory for all ICBprocurement.

Table 4.4: Procurement Methods($ Million)

ICB a/ Others b/ NBF d/ Total Costs

I. Fann Credit 18.9 18.9Component (1 1.9) (11.9)

1I. Agro- & Forest- 3.5 16.6 20.1Industry Component (2.4) (9.5) (11.9)

jlI. T.A. 1.2 c/ 4.9 6.1(1.2) (0.0) (1.2)

Total 3.5 36.7 4.9 45.1(2.4) (22.1) (0.0) (25.0)

a/ SImplified ICB for contracts above US$ 1 milllon up to US$ 2.4 mMion.b/ Local shopping for conracts up to US$ 100,000 to the aggregate of US$ 133 million and international shopping

for contrcts between US$ 100,000 to US$ 1 million up to the agregate of US$ 8.8 mHoDn.c/ TA amount of $1.2 miion Includes procurement of goods.dl Not Bank financed. Includes USS 4.9 milon equivalent of paralel TA program financed by donors.

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J. Disbursements

4.26 The proposed Bank loan of US$ 25.0 mnillion would be disbursed over a period of threeyears (1994 - 1996) and the expected project closing date would be December 31, 1997. A mid-termevaluation would be undertaken by the Bank and the Borrower during the last quarter of calendar year 1995or when the disbursement reaches 50% of the total loan amount, whichever is earlier, to examine the paceof implementation and the flow of loan funds. Commitments for major contracts would be approved untilJune 30, 1996.

4.27 Up to US$ 2 million would be financed retroactively for eligible subloans approved anddisbursed by PFIs starting from September 1, 1993 provided all lending criteria including procurementguidelines were followed. A schedule of the estimated disbursement of the proposed Bank loan is shownin Annex F.

4.28 Loan funds allocated to finance credit for on-farm development and for agro- and forestindustries would be disbursed as follows: 100% of eligible subloans approved in the first year; 85% ofeligible subloans approved in the second year; and 70% of eligible subloans approved in the third year andlater. These disbursement percentages are necessary because both financial intermediaries are newinstitutions and would not be in a position to raise internal resources at inception of their lending operations.As the AFC and IBL build up equity and their own funds over the years from retained earnings,repayments and other sources, these intermediaries' share would gradually increase up to 30% of subloansto be approved in year 3. Loan disbursements for the TA component would be 100% of foreignexpenditures and 80% of local expenditures (see table 4.5).

Table 4.5: Disbursement

Category Loan % of Expenditure to beAllocation financed(US$ million)

I. On-Farm 11.9 100% eligible subloansCredit approved in the first year;Development 85% in the second; and

70% in the third year.

I. Agro- and 11.9 100% eligible subloansForest Industries approved in the first year;

85% in the second; and70% in the third year.

HI. TA 1.2 100% of foreign and 80%of local expenditures.

Total Loan 25.0

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4.29 The first year represents the period of one year beginning on the dates that the AFC andIBL each have approved their first subloan for on-farm development or agro- and forest industriesrespectively. The percentage calculations are based on the assumption that subloan approvals would amomntto US$ 8.5 million in the first year, US$ 10.0 million in the second, and US$ 9.8 million in the third andfinal year. Various indicators show that the demand for credit is considerably higher than the proposed loanamount of US$25 million. Therefore, it is reasonable to assume that the proposed project could beimplemented in three years.

4.30 Statements of expenditures (SOEs). All withdrawal applications for category I & II wouldbe made on the basis of certified statments of expenditures (SOEs), except for contracts above US$ 250,00for which withdrawals would be based on full documenaon. All supporting documentation would beretained by MOF, AFC and IBL and consolidated by the PMU for at least one year after receipt by theBank of the audit report for the year in which the last disbursement was made. This documentation wouldbe made available for review by the auditors and by visiting Bank missions.

4.31 Snecial Account. To facilitate disbursements, the Bank would provide funds to the MOFto establish a Special Account in a bank acceptable to the Bank. This Special Account would be maintainedin US dollars and managed by the PMU under supervision of MOP. An aareement was reached atnegotiations that the SpecWa_ Account uR to US$2 million would be established at a forei-n bank acceptableto the Bank. The PMU would prepare and submit applications to the MOF for replenishment of the SpecialAccount monthly or whenever the account has been drawn down to half of its initial deposit amount,whichever comes first.

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V. PROJECT IMPLEMENTATION

A. Project Coordination and Manaement

5.1 The Ministry of Agriculture (MOA), through a Project Management Unit (PMU), wouldbe responsible for coordinating project implementation and maintaining overall financial control, based onaccounts and reports submitted to the PMU by the Ministry of Finance (MOP) and the participatingimplementing agencies. The PMU would be headed by a director, who would have a full-time deputydirector, to manage day-to-day affairs, and clerical staff as considered necessary. A World Bank ProjectManagement Commission (the Commission) chaired by the Minister of Agriculture and with representativesof Ministries of Agriculture, Finance, Environment and Regional Development, Economics, and the Bankof Latvia has been established. Th.e main function of the commission is to provide policy guidelines andto supervise the activities of the PMU, monitor the operations of the participating agencies and facilitateinter-ministerial coordination and problem solving. The MOF would administer the Bank Loan, and theAgricultural Finance Company (AFC) and the Latvian Investment Bank (IBL) would onlend Loan proceedsto ultimate project beneficiaries. Loan proceeds for financing technical assistance would be made availableby MOF to the respective Government agencies under normal Government budgetary financing procedures.An a_reement was reached at negotiations that the Government would maintain the PMU during thc lifetimeof the project.

5.2 The project would be implemented with the aid of existing institutions and agencies, andwould assist in the establishment of the AFC. Given the present status of the banking system and thecomplete lack of institutional credit to the emerging private agricultural sector, the speedy establishmentof the AFC is considered necessary to temporarily fill the gap in financial services support for theprivatization of agricultural production.

B. Credit Operations

5.3 Institutional Arrangements. The MOF would on-lend these funds to the AFC and IBL(Anmex A and B), which would in turn extend subloans to ultimate beneficiaries. At present, because ofthe ongoing restructuring of the banking system, these arrangements are considered to be the mostappropriate for channelling loan funds to individual private farmers and processing industries. However,it is envisaged that with the development and strengthening of the commercial banking system, one or morecommercial banks would be in a position to meet the eligibility criteria detailed in para 5.6 and alsoparticipate in the project. Furthermore it is intended that the AFC, or branches (satellites) of the AFC, withtheir respective loan portfolios and liabilities, would be transferred to and taken over by eligiblecommercial banks (see Annex A, para 1).

5.4 Subsidiary Loan Agreements. Each of the two participating institutions would sign aSubsidiary Loan Agreement with the MOF, satisfactory to the Bank. This agreement would, inter alia,specify that both the AFC and IBL would:

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(a) undertake lending operatiors in accordance with lending guidelines and proceduresacceptable to the MOF and the Bank;

(b) submit to the Bank for prior review the first three subloan proposals, irrespectiveof the subloan size, and any additional subloan proposals in excess of US$ 200,000equivalent. An agreement was reached at negotiations on the prior-review criteria;

(c) ensure that funds provided under Project-financed subloans are used by sub-borrowers for the purposes intended and that appropriate procurement proce uresare followed;

(d) supervise subprojects as appropriate and provide the PMU and the Bank withperiodic reports on the status of subprojects and subloans, including information onloan recovery perfonmance;

(e) provide the MOF, PMU, and the Bank with such information as they mayreasonably request; and

(f) maintain all necessary documentation.

5.5 Conclusion of Subsidar Loan A&ments between the MOF and at least one of eitherthAFC or the LBL would be a condition of Loan effectiveness.

5.6 Eligibility Cr teria for Financial Intermediaries: Selection criteria for the participatingfmancial institutions (PFI) was as follows:

(a) good standing with regulatory agencies;

(b) sound financial policies, satisfactory to the Bank, particularly with regard to creditadministration and asset and liability management, and satisfactory capital structureaccording to BOL requirements;

(c) a technical unit, specialized in medium- and long-term investment lending,adequately staffed, trained, and considered capable of undertaking loan appraisal,supervision and monitoring;

(d) an adequate network of branch offices/agencies in the rural area for the farm-creditcomponent;

(e) presentation of annual financial statements audited by independent auditors inaccordance with international auditing standards; and

(f) a statement of lending policy and procedures, acceptable to the Bank, designed tofacilitate the efficient conduct of PFI operations and affairs, including the carryingout of its activities under the Project.

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5.7 MOF Operating Procedures. The principal functions to be performed by MOF with regardto the Project would be as follows:

(a) maintain the Loan and Special Accounts and the consolidated Project Accounts;

(b) consolidate reimbursement applications received from the AFC and IBL (para 5.1),submit withdrawal applications to the World Bank, onlend and channel the Loanfunds to the PFIs and maintain adequate records of all project related expenditures;

(c) maintain the loan accounts for AFC and IBL, and collect principal, interest, andother charges payable by AFC and IBL on their respective shares of the Loan;

(d) ensure compliance with audit requirements, as stipulated in the Loan Agreement;and,

(e) provide the PMU and the Bank with such information on the above as they mayreasonably request.

5.8 Eligibilityof Beneficiaries and Subloan Financing. Loan funds would be onlent to individualprivate farmers and agricultural processing, marketing and service enterprises, operating as joint stockcompanies, farmers' associations, cooperatives, partnerships or individuals. The Loan would not be utilizedto finance public sector activities or enterprises in which the majority shareholding is public. However,majority privately owned (more than 50 percent) enterprises would be eligible for financing under theproject. Activities eligible for financing would include on-farm investments and incremental working capitaland investments in agro- and forest industries (limited to mechanical wood processing and excluding thepulp and paper industry), storage, marketing and agro-services. The Loan would not be utilized to financeland purchase or lease, amd housing construction or improvement. Preference would be given to investmentsubprojects which conserve energy, improve energy consumption, and have a positive impact on theenvironment.

5.9 Investment subprojects in agro- and forest industries, storage, marketing and agro-serviceswould have to satisfy the following eligibility criteria:

(a) subprojects must be expected to be completed within 18 months from the date ofsignature of subloan agreement;

(b) the financial and economic rates of return for any proposed subproject should eachbe not less than 15%;

(c) appraisal projections should demonstrate a debt service coverage ratio of at least 1.3over the life of the project, calculated on the basis of the entity's total debts;

(d) sub-borrower's contribution of own funds towards subproject cost would be no lessthan 30% for new investment subprojects and no less than 20% for investments inmoderni7zaion, rehabilitation, expansion, etc. of existing facilities;

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(e) each beneficiary of a subloan exceeding US$ 500,000 would introduce anappropriate cost accounting and management information system not later than 12months after subloan approval by the AFC/IBL, and a commitment to this effectwould be included in the subloan agreement; and

(f) no safety hazard or environmental deterioration should result, directly or indirectly,from any investment to be financed under the Project.

5.10 Eligibility criteAia, as stipulated in para. 5.9, sub-paras. (b), (c) and (f) would also beapplied to subprojects for on-farm development. However, for these subprojects, the sub-borrower'scontribution towards subproject cost would be no less than 15 %.

5.11 Appraisal Methodology. Subloan applications for investments in agro- and forest industrieswould be supported by detailed feasibility studies and appraisal reports. These studies would cover thefollowing:

(a) the technical feasibility, financial viability, commercial soundness and economicjustification of the proposed investment. Particular emphasis would be placed onassessing the marketing possibilities for the incremental production of thesubproject;

(b) an evaluation of the proposed scale of the subproject, the need and adequacy of thecivil works and equipment to be procured, the location of the enterprise, its layoutand design, and the estimated investment costs in domestic and foreign currencies;and of compliance with pollution control and other environmental protectionguidelines set by the authorities; and,

(c) an evaluation of the sub-borrower's ownership structure, creditworthiness,organization, management and financial position, and of the technical staff andknow-how available for implementing the subprojects and its operation.

5.12 Simplified appraisal procedures would be applied to subprojects with an estimated cost notexceeding US$ 100,000 equivalent, for replacement of equipment, modernization, expansion, etc. Theseprocedures would include, as applicable:

(a) review and assessment of the viability and financial soundness of the enterprise andits capacity to service the subloan; and

(b) the technical verification that the equipment, materials and spare parts to bepurchased are appropriate and are intended to be used in the existing productionprocess, to break any existing production bottleneck, increase efficiency of theexisting process or contribute to improving quality and meet higher productstandards.

5.13 An agreement was reached at negotiations that participating financial institutions wouldadhere to the eliibbility criteria and appraisal procedures as described in paras. 5.8 through 5 12 above.

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5.14 Terms and Conditions of Financin . The MOF, on behalf of Government, would onlendthe proceeds of the loan in US dollars to the AFC and IBL. (para 5.3). However, the Subsidiary LoanAgreement with AFC (para. 5.4) would stipulate that for the first US$ 1.0 million withdrawn by the AFCand for amounts equivalent to 15 percent of each subsequent withdrawal from the Loan account, the AFCwould allocate shares to Govenmment. The shares would be denominated in LAT and would be equivalentto the amounts withdrawn in US$ on the date of each withdrawal. The share capital of the AFC would notform a part of the subsidiary loan and would not be repayable by the AFC. The onlending interest ratecharged by the MOF to the AFC and IBL would be based on the Bank's variable interest rate, which is resetsemi-annuaiiy, plus a margin of at least 10% of the Bank's rate to cover the commitment fee, the MOF'scross currency risk between the Bank's currency pool and the US dollar exchange rates, and MOFadministrative expenses.

5.15 The AFC and IBL would make subloans to ultimate beneficiaries denominated and repayablein US dollars equivalent at variable interest rates which would reflect the cost of funds paid by the AFCand IBL to the MOF (para 5.14) and their spread based on the risk assessment made in each case.

5.16 There is no comparable reference rate for on-lending rates, as there is a complete absenceof long-term credit for agriculture in Latvia today. The financial sector conditions are such that there areno discount rates for inter-bank borrowing nor markets for certificate of deposits which could serve as areference rate to compare the project's on-lending rate. The on-lending rate for the project would bepositive in real terms. Furthermore, all on-lending interest rates would be reviewed annually by the MOF,the Bank, and PFIs to ensure that they are mintaind at a level which is not unduly onerous to thebeneficiary, but adequate to cover the AFC and IBL's operating expenditures and leading risks and theMOF's cross currency risks and administrative expenditures.

5.17 Repayment schedules of funds on-lent by the MOF to the AFC and IBL would be based onthe amortization schedule of the Bank loan. Repayment schedules of project financed subloans would differfrom the amortization schedule of the Bank loan. Subloans would have a term of up to 12 years, inclusiveof grace periods of up to 3 years. Grace and amortization periods would be based on the type of investmentfinanced and the projected cash-flow and be commensurate with the repayment capacity of sub-borrowers.Repayment periods would not exceed the usefil life of the investment financed. Any amounts of principalrepaid by sub-borrowers to the APC or IBL, and that are not immediately needed for repayment of the Bankloan, would be kept by the AFC and IBL in a separate rollover account which would be utilized by themto finance additional investments aimed at pursuing the objectives of the projects, and conforming with theagreed terms, conditions and eligibility criteria for the Project. Lending risks would be borne byparticipating financial institutions.

5.18 Subloan Processing and Administration. For farm credit, the AFC would be responsiblefor identifying prospective sub-borrowers and for determining the type of subproject to be financed,following the eligibility criteria for investments and subloan beneficiaries described in paras 5.8 and 5.9above. Subloan applications, farm plans, feasibility studies, etc. would be prepared by beneficiaries withassistance of mobile credit officers of the AFC and the staff of the Latvian Agricultural Advisory Services(LAAS), in accordance with the AFC's lending procedures and the cooperation arrangements establishedbetween the APC and LAAS.

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5.19 For agro-processing and forest industry subprojects, detailed feasibility studies are beingprepared by teams of expatriate consultants in coordination with the Bank appraisal mission for investmentsubprojects in agro-processing enterprises and forest industries. The package of pre-appraised subprojectswould be given to the IBL for further processing. Given the time that has elapsed since preparation of thefeasibility studies, the rapidly changing agribusiness enviromnent in Latvia and the likely changes that mayhave occurred in the original assessmeAls of viability, marketing possibilities financial coniditions ofprospective beneficiaries, etc., the IBL would reassess the investnent proposals and feasibility studies asnecessary, and select the subprojects which would be financed by the IBL. The IBL would have fullautonomy to approve, revise, or reject any of the pre-appraised subprojects; however, the IBL wouldcomplete the reassessment of the pre-appraised subprojects before considering any new investmentproposals.

C. AccQou and Audit

5.20 Financial statements of participating financial institutions would be audited for each fiscalyear by independent auditors acceptable to the Bank. These audits would be in accordance withinternational standards and would also conform with requirements of the MOF and the BOL. The MOF'sproject accounts, the Special Account and statements of expenditure would also be audited by independentauditors acceptable to the Bank. The auditors' reports would be of such scope and in such detail as theBank shall reasonably request, and should contain, inter alia, separate opinions on the special account andthe statements of expenditure. At negotiations. an agreement was obtained that copies of the auditedaccounts relating to the Proiect and the Bank Loan. as well As thLe audited financil sWtatmet of the AFCand IBL. would be submitted to the Bank within six monhls of the end of each fiscal year. AMro- andforest-industr entelry ses would be required to submit eriodicallv to the IBL financial and other reportsincluding their annmal financial staemens. These documents would be made available tc, Bank supervisionmissions for review.

D. Reportg and Evaluation

5.21 The PMU, in cooperation with the AFC and IBL, would be responsible for monitoring andevaluating the impact of the project. The AFC and IBL would supervise the physical subprojectimplementation at the farm/enterprise levels through field visits and review of documents, invoices and keyindicators provided by sub-borrowers and identify bottlenecks, problems, and constraints affecting projectimplementation and its expected impact and results, and take appropriate remedial actons considerednecessary. The AFC and IBL would also keep the PMU informed of their findings and the actions takenor proposed to be taken.

5.22 fepr. Based on information collected from the MOF, and the AFC and IBL, the PMUwould prepare a semi-anmnal progress report (June and December each year) wlich would be submitted tothe Bank within 30 days of the end of the period under review. These reports would include a copy of theproject account, a summary stement of the financial status of the project and the Bank loan, and a briefdescriptive section on the physical implementation of subprojects and on the problems encountered duringimplementation. An agreement was reached at negotiations that the PMU would coWly with all reportingreLuarements.

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5.23 Proiect Completion Report (PCR). Promptly after completion of the project, but no laterthan six months after the closing date, the PMU, with the collaboration of the MOF and the AFC and IBL,would prepare and furnish to the Bank the required data, as would be prescribed by the Bank, for thepreparation of a PCR. The information to be submitted to the Bank would also include an assessment ofthe performance of the various participating institutions and agencies in discharging their respectiveobligations under the project.

E. Bank Supervision

5.24 Intensive, semi-annual Bank supervision would be required, focusing particularly on: (a)AFC/IBL capacity for project implementation and loan servicing; (b) reviewing the performance of theagricultural sector and the progress in privatization of production and processing; (c) the adequacy of agreedlending terms and conditions and compliance; (d) the possibility of involving commercial banks in Projectimplementation, and the transfer of the AFC to one or more restructured commercial banks; and (e)reviewing progress in implementation of project-related technical assistance activities financed by variousdonor agences and their impact on the Project.

F. Envrnment

5.25 The AFC and IBL would stipulate in subloan agreements that sub-borrowers using projectfunds should comnply with all laws and regulations of Latvia related to environmental protection and theywould also supervise compliance. An agreement was reached at negotiations that the appraisal reports forar and forest-industr subnrojects would contain a section describing the environmental analvsisgieformed and the enviromnental imac of the Lronsd_ investment, (Mm 5.2 (t) and 5.1 1 (b.

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VI. BENEFITS, JUSTIFICATION, RISK, AND ENVIRONMENTAL IMPACT

A. I-emdlts

6.1 The project's potential benefits include increased production of various crops and livestockproducts, diversified and improved quality in processed goods, increased export revenues, and economicstabilizaton in rural ares. This would be achieved by providing credit which is currently lacking forfinancially sound private investments in agriculture, agro-processing, and forest-industries. The projectwould also serve as vehicle for further reform in agriculture that would lead to private ownership of landand other productive assets through enhancing compedtion and allowing for new entries in the sector whileimproving the efficiency of existing enterprises. The project would also improve agro-chemicalmanagement, soil conservation, and agro-industrial effluent control, and thus contribute to environmentalprotection.

6.2 Additionally, the project would provide the basis for creating a financial system to servethe private agricultural sector, especially the emerging private farme,. It would establish operatingprocedures and banfldng skills necessary for investment lending and produce a team of trained creditofficers. The procedures, as developed and tested by the AFC, could be replicated by commercial banksand skilled staff could be transferred to commercial or any other banks after the AFC has completed itsdesignaed role.

6.3 Lending to private farmers would be closely linked to intensive technical assistance, whichwowd provide farm and financial nmnagement sldlls in addition te production technology. It would alsoeducate/itill crekdit repayment discipline as a condition for continued access to institutional credit anddevelop a pattern of sound financial management. Agriculture advisors and the AFC credit officers wouldwork closely together to achieve these objectives. Similarly, technical assistance would be provided to theprivate or privatized agro- and forest- industries, focussing on those skills needed in a highly competitivemarket economy, including; management, planning and budgeting, accounting and cost control, andmanagement information systems.

6.4 Support for land cadastre, land dtling, and registration would accelerate the establishmentof legal property rights and a finctioning land market. Secure land tenure would foster long-terminvestment and provide farmers with the ability to offer land as collateral in financing agreements.Technical assistance for the LAAS would strengthen the technical support which is indispensable for thesuccess of the emerging private farming community. The AFC and LAAS would work closely together atthe frm level, thus providing farmers with combined TA support in farm" business management as well asin technical areas.

B. Jtiflmdo ons

6.5 Demand for credit, particularly for medium- to long-term credit is likely to be high inLatvia. The agricultural sector has not received, either from public nor private sources, any long-terminvestnent credits for some time. As farms are going through structural and ownership changes, the

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requirement for farm restructuring and recapitalization with appropriate equipment and fixed assets isenormous. During the project preparation period, the Govermnent of Latvia announced that support by theWorld Bank for the agricultural and agro- and forest-industry was likely. Following the announcement,more than 300 agrn- and forest-industry proposals were submitted and more than 430 private farmerssubmitted the initial loan application to the Ministry of Agriculture in a 5 week period (late April-May,1993). The total demand based on this initial round of inquiry was in excess of US$ 200 million.Although the initial show of interest was not based on precise information, and not all the applications meritfinancial support, it does illustrate the magnitude of credit demand in the economy. The actual subprojectsto be supported under the project would be selected based on a careful analysis of not only financial andeconomic viability, but also marketing prospects. Based on much of the ground work already completedon subproject pre-screening, the actual disbursement could exceed the rates assumed in para. 4.28 andAnnex F.

6.6 Latvia is a low cost producer of most of its major agricultural products and consequentlyagriculture shows a good returns on investment. A per hectare base crop oudget has been prepared for the10 most commonly grown crops in Latvia. Under the assumption that farmers would have access tonecessary inputs and farm management would improve with the help of extension services. The "withproject" case Benefit:Cost (B:C) ratios for wheat, rye, rapeseed variety "00", potato, and forage maize are1.58, 1.93, 1.69, 1.81 and 1.93 respectively. Marginal benefit for every LVRI of investment range fromLVR1.31 for wheat, to 2.99 for fodder beet, and 2.92 for rapeseed.

6.7 Commercial farming (as opposed to part-time farming) operations are likely to prevailbecause such operations can and would provide the driving force required to substantially restructure andupgrade the overall farmning sector. Mixed farming (crop and livestock/dairy) was chosen for severalreasons - this mixed farming is typical for smaller private farms, it affords reasonable security since failureof any one product is likely to be offset by others, it affords higher levels of on-farm employment thancropping alone at a time when rural unemployment is high, and it provides a more balanced cash flow tosupport the farner throughout the year. Furthermore, such a small- to medium mixed-farming base couldbe flexible and responsive to developing trends in Latvian competitiveness. As the demands of Latvianconsumers and agro-industries change, and as sources of longer term competitive advantage for Latvianproduction enterprises become more clear, it is likely that a farming sector composed of such farms wouldbe well suited to shift and/or consolidate production to complement the changing profile of demand.

6.8 Based on the above assumptions, in order to illustrate the economics of additionalinvestment, integrated farm-models for typical farms have been developed which illustrate a substantialincrease in farmers' income indicating the financial strength of supporting farmers. The farms evaluatedrange in size from 10 ha to over 50 ha and usually have integrated production patterns including crops andsome livestock. The models are based on underlying assumptions that include major changes in presentcrop mixes, an increase in perennial forage legumes, introduction of modern forage maize production,intensification of permanent grassland use, and additional fixed investment such as building, equipment,animal stock, etc. The rates of return for selected farm models range between 16% to 31%. The cropbudget, farm models, and input and output prices are in Annex C.

6.9 An economic analysis was carried out for selected subprojects. This project would only supportinvestments which on average were likely to show expected economic and financial rates of -etum in excessof 15%. The total economic investment costs include physical contingencies but exclude price

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contingencies, subsidies, poverty grants and taxes. Local financial prices have been adjusted for the purposeof economic analysis by distinguishing outputs and inputs as tradeable and non-tradeable. World Bank priceprojections or average export prices actually realized in Latvia were used to estimate the farm-gate economicprices in 1993 constant terms for traded inputs and outputs. Based on these assumptions and an assumedproject life of 15 years, the base case ERRs for selected processing sub-projects range between 18% to35%.

C. ,Risi

6.10 Risks associated with the project are: (a) macroecononmic instability; (b) political instability;(c) possible reintroduction of excessive import tariffs and/or export duties; (d) delays in implementation ofland titling, registration, and fully functioning land markets; (e) high financial risk inherent in new privatefarming; (f) slower than expected start-up of the Agricultural Finance Company (AFC); and (g) marketfluctuations, particularly for those sub-projects requiring long gestation periods. Given the commitmnent bythe Government to continue economic reforms, the first three risks are somewhat mitigated. For marketand financial risks, the project would strengthen institutional capacities in credit assessment and marketanalysis, and risk is likely to be reduced by careful analysis of future market potential of each sub-project.Institutional risks are minimized by technical assistance already in place to establish the AFC and strengthenthe financial intermediaries. Substantal TA is incorporated in the project to strengthen agriculturalextension and training and the farm business management capabilities of the project beneficiaries, hencereducing the risks in lending to new private farmers.

D. Envirownental impac

6.11 The environmental impact resulting from the project would be limited. All necessaryprecautionary measures would be included to promote an environmentally sustainable agricultural sector.However, as in all other agricultural projects, there would be increased application of agro-chemicals andpotential industrial enviromnental effects, e.g. air, water and noise, to be managed.

6.12 The potential environmental impact from agro-chemical application is likely to be decreasedhowever, with the use of modem application methods, better equipment, and training in application andequipment use. The need to pay higher world market agro-chemical prices would ensure less wastage offertilizers and pesticides and adherence to minimum application rates necessary for adequate cropproduction. Animal waste disposal and nitrogen and ammonia buildups resulting from intensive livestockproduction are also likely to be reduced substantially with the breakup of large state-owned feed lots andproduction facilities.

6.13 The complete sub-project list has not been finalized, but during the selection process, thefinal selection criteria would include enviromnenal criteria to ensure that adequate preventative measuresuild be taken. To minimze any potential environmental impacts, the Bank's guidelines on pesticide usewould be followed, and all sub-projects in the agro- and forest-industries component would be selected

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based on satisfactory compliance with local environental standards acceptable to the Bank. TheGovernment's decision to liberalize the prices of fertilizer and pesticides has induced farmers to bettermanage agro-chemica) application. The industrial component would include adequate funds for propereffluent and air discharge and treatment of waste water. In light of this focus, this project has been ratedCategory B.

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VII. AGREEEMENS REACHED AND RECOMMENDATIONS

7.1 During negotiations, agreements were obtained on the following:

(a) On-lending arrangement and other lending modalities with the IBL/AFC (Para.4.10).

(b) The amount and managemern arrangement of the Special Account (para. 4.31)

(c) Maintenance of the PMU during the lifetime of the project (para 5.1).

(d) Submission of the first three subloans and any additional subloan in excess ofUS$200,000 equivalent (para. 5.4(b)).

(e) Eligibility criteria for beneficiaries and investment and subloan appraisalmethodologies (para. 5.13)

(f) Compliance with accounting and auditing requirements (para. 5.20).

(g) Compliance with reporting requirement-semi annual progress report (para. 5.22).

(h) Conformance to environmental standards acceptable to the Bank (Pan. 5.9(f0,5.11(b), and 5.25).

7.2 Condition for effectiveness of the proposed loan would be conclusion of Subsidiary LoanAgreements between the MOF, AFC, or the IBL (para. 5.5).

7.3 Subject to the above agreements, the proposed project would be suitable for a Bank loanof US$ 25.00 million for 17 years, including 4 years of grace period, at the standard variable interest rate.The Borrower would be the Government of the Republic of Latvia.

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ANNEX APage 1 of 11

LATVIA

Agricultural Development Proiect

The Agricultural Finance Companv (AFC'

1. Rationale and Objectives. Privatization of agricultural production, which started in1988/89, greatly accelerated in 1992, and according to official statistics the number of private farmholdings, exceeded 50,000 by December 1992. In light of the present status of the financial sector, i.e.,given the uncertainties surrounding the future of the public banks (the former Bank of Latvia (BOL)branches) and the fact that the private commercial banks are still in their initial stages of development,institutional credit to support the land reform process and to provide start-up capital for private farmersis practically non-existent. Because of the urgent need to provide the supporting services for the ongoingprivatization of agricultural production and the absence of any alternative financial institution, agreementhas been reached with Goverment to establish the Agricultural Finance Company (AFC), which couldbe organized in a relatively short time and could become operational by January 1994. It should be notedthat the AFC should be considered as a temporary solution to a pressing problem. It is envisaged thatafter completion of the restrcturing and strengthening of the commercial banking system, AFC's lendingactivities, its outstanding loan portfolio, as well as its trained specialized staff, would be taken over byone or more commercial bank.

2. The pr; ipal and short-term objective of the AFC is to assist the beneficiaries of theongoing reform and ; .vatization program, through short, medium and long-term credits for on-farmdevelopment and working capital. This would be coupled with intensive technical assistance, to beprovided by the La - '*n Agricultural Advisory Service (LAAS), in an effort to increase the efficiency ofproduction and create viable prvate owner-operated farming enterprses.

3. The proposed APC organizational set-up, staffing, operating procedures, and sources offinancing, are briefly outlined in the following paragraphs. However, it should be noted that these arenot intended to establish hard and fast rules for any of the subjects addressed and AFC managementwould have to be very alert in carefully monitoring its operations, testing the systems and procedures,and introducing changes considered necessary. The guiding principle should be that AFC would beorganized and operate as a lean, efficiently functioning, cost-effective and financially viable andsustainable institution.

4. Lea Status. The AFC would be registered as a joint stock company, with Government,initially being the sole shareholder. It is, however, the intention of Government to give farmers andfarmers' organizations, and some private commercial banks interested in cooperation or co-financingarrangements with the AFC, the opporunity to purchase AFC shares in order to take part in an institutioncreated to serve the farming community. Detailed programs for promoting the sale of AFC shares to thepublic, and the terms and condidons of such offer of shares would be developed

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ANNEX APage 2 of 11

by AFC management in consultation with the Bank. The AFC would not be a licensed bank (and wouldnot accept deposits from the public or from its borrowers) and would operate and be registered andlicensed by the BOL as a non-bank financial institution and be subject to supervision of the Central Bank,as applicable to non-bank financial institutions. However, the AFC would observe the rules andregulations applicable to banks with regard to capital adequacy ratios, exposure limits, classification ofloan portfolio and loan provisioning.

5. Share-Caital. The AFC's initial registered share capital would be US$ 4 to 5 millionequivalent. Government would subscribe to shares equivalent to about US$ 2.5 million and pay for theshares using, in part, the proceeds of the World Bank loan and about US$ 1 million currently investedin AGROINVEST's loan portfolio (see para. 26).

6. Board of Directors. The AFC would have an "active" Board, comprising five to sevenmembers. The Board would convene at least once a month and would delegate some of its authority andresponsibilities to commtees, including a Loan Committee of three members, which would meet morefiequenty to ensure the fast and efficient operation of lending activities. The first members of the Boardwould be appointed by Government and would include representatives of the private sector, from botharmers' organizations and leading commercial banks. Subsequently, directors would be elected by theshareholders, according to procedures established in the statutes of the company. The expatriate consul-tants assisting in setting up of the AFC would prepare and conduct induction seminars for board membersto advise them about the responsibilities of elected directors and to make them familiar with the AFCsopeating procedures, loan evaluation, financial planning, budgeting, western accounting and auditingstandards, and other related operational matters.

Qganizatiod Strucxre.

7. AFC Management. The AFC head office would be located in Riga, and be staffedinitially by 18 to 20 employees (including all management positions). The nmber of head office staffcould increase gradually to about 25, cording to work requirements. Organization of the head office(see Attachment 1) would be as follows:

(a) General Manager(b) Financial Controller - responsible for finance, accounting, electronic data

processing and information systems;(c) Manager - Credit Operations;(d) Manager - Internal Operations;

8. Satelite Offices, The AFC would establish satellite offices in most regions/districts ofthe country; each such office would be staffed initially by a team of two "mobile development/creditofficers" (MCO). Each team would consist of one senior and one junior MCO. At least the seniorMCO is expected to be a university graduate - preferably in agricultural economics and

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ANNEX APage 3 of 11

have had practical experience in managing farming activities. Experienced agricultural technicians wouldalso be considered for the positions of junior MCO. The senior MCO is expected to spend at least 60%of his time in the field, maintaining contact with potential and actual borrowers, identifying investmentopportunities, evaluating loan applications, and monitoring borrowers' activities, etc. It is projected that,in the first year, each team would deal with at least 50 borrowers and that this number would graduallygrow to about 200 per team. Once the numbers of borrowers of a satellite office exceeds 200, anadditional senior MCO would be posted to that office, raising the number of staff to three, with the juniorMCO assisting two senior MCOs. The Manager - Credit Operations (see para 7 above) would have oneAssistant (Chief Credit Officer) and three Senior Credit Officers (SCO), each to be in charge of a certainregion (comprising a number of districts) and supervising, guiding and training up to five teams ofMCOs. With the increase in the number of satellite offices, the number of SCOs would growaccordingly.

9. Each satellite office would be provided with a rented one-room office, to be located,preferably, on the premises of a local bank or, alternatively, in the office of the local agriculturaladvisory (extension) service, or even in the home of the MCO. Each satellite office would be equippedwith one (or two in case of 2 senior MCOs) four-wheel drive vehicle, one PC and a telephone/ fax.

10. The establishment of 10 satellite offices is planned in the first year and these should beoperational by January 1994. Information regarding the number of potential clients in each district hasalready been collected and the tentative locations for the first group of satellite offices has beendetermined. Ultimately, by the end of year three, about 30 to 35 satellite offices would be in operation.The AFC would closely monitor the performance of each satellite office to ensure financial viability andthat the number of clients and volume of lending justifies maintining a satellite office.

11. Salary Structre. In order to attract highly qualified staff, the AFC would establish asalary structure which would be competitive with those of financial and other similar institutions.Remuneration of staff would consist of basic salary and bonus schemes based on measurable performanceindicators which would include, among others, the number of clients served, quality of loans andrepayment performance of borrowers. Total basic salaries would amount to about 70 percent of total staffremuneration, leaving 30 percent for distribution of premiums to staff based on annual performancereview and evaluation.

12. Lending Operations. The AFC would provide medium/long term investment credit foron-farm development and short-term/seasonal working capital loans, to private farmers - beneficiaries ofthe current land reform and privadzation. investment lending would be diversified and includeconstruction of farm buildings, purchase/breeding of livestock, land improvements, agriculturalmachinery and equipment, etc. and any other investments assessed to be economically and financiallyviable and within the capacity of the beneficiary to undertake and manage. The AFC would not fimanceagro-industries, processing, agri-businesses and services. Loan evaluations would have to demonstrateeconomic and financial viability of the investments to be financed and satisfactory debt service coverageratios, and include an agreed farm/production plan (see para 14). Loan repayment periods would bebased on the projected cashflow and borrowers' repayment capacity, but not exceed the useful life of theinvestment financed. Until the economic situation stabilizes and inflation is brought under control, loanswould be

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ANNEX APage 4 of 11

denominated in either German marks or US dollars and bear interest at market rates plus an adequatespread for the AFC. It is estimated that lending nterest rates would, initially, range around 12 to 13percent.

13. Eligible Borrowers. As mentioned above, borrowers would include private farmers nowin the process of establishing a farming enterprise. Priority would be given to already existing orpotential full-drne farmers who have been allocated land or whose rights to land have been restituted but,for lack of start-up capital, have not yet started production or are in the initial phase of establish-ment/development of their farming enterprises. The AFC would lend not only to irdividual farmers butalso encourage the formation of farmers' groups for economic activities of conmnon interest (for examplethejoint purchase of agricultural machinery), including partnerships, associations and farning enterpriseslegally registered as companies. Part-time farmers who produce marketable surplus would also be eligibleto borrow from the APC; however, lending to this categ ,ry snould start at a later date and possibly bedone through group lending to reduce costs and provide isk sharing arrangements in the form of mutualguarantees by group members.

14. Cooperation with LaIan Agricultural Advisory Service (LAAS). MCOs would performtheir functions and responsibilities in close coordination and cooperation with the local agriculturaladvisory staff, who would participate ii the preparation of annual farm plans and be continuouslyinvolved in providing technical assistance and guidance to borrowing farmers in farm planning andmanagement, optimal land use, production technology, marketing and prices, etc. An agreement wouldbe drawn up between the AFC and LAAS which would clearly define and delineate the respectivefunctions of MCOs and extension agents, to ensure cooperation and coordination, and prevent duplicationand overlapping. Borrowers' compliance with agreed farm plans and guidance from extension agentswould be a condition for borrowing from the APC and would be stipulated in loan agreements.

15. Collateral for Loans. Repayment capacity of a borrower should be determined by the appraisalof the productive capacity of his holdings and this should constitute the principal security for AFClending. However, borrowing from the AFC would not be a one-time operation and the AFC shouldendeavor to create permanent ("floating") securities, in order to save time, cost, registration, etc.. Thesewould include a mortgage on the farnholding and pledges (liens) on moveable assets. Until legalregistration of mortgages is possible, borrowers should be required to give the AFC an irrevocable powerof attorney authorizing the AFC to register and receive title, on behalf of the borrower, to his/her landand, simultaneously register a first mortgage in favor of the AFC to secure current and future debts. Inaddition, borrowers should be required to open an account in a commercial bank and instruct the bankto transfer to the AFC, according to payment notices issued by the AFC and on maturity dates, theinstallments of principal and interest fallen due for repayment.

16. Loan Approval and Onerating Procedures. Initial appraisal of loan application would bedone by MCOs and submitted to the head office for review and approval. Approval limits would beestablished for a head office loan committee, consisting of the General Manager or, in his absence, theFinancial Controller, the Manager for Lending Operations and the SCO responsible for the area. Loansexceeding the above limit would be submitted to the Board loan comnmittee for consideration.

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ANNEX APage 5 of 11

17. During the initial phase of operations, loan approval authority would not be delegated andwould be concentrated in the head office. During this phase the head office loan comniittee wouldconvene at least once weeldy (or more often, if required, to speed up the loan approval process). Thedocuments required by the loan committee (as stipulated in AFC lending guidelines) would be submittedby the respective teams of MCOs to the SCO in charge of the area (or group of MCOs), accompaniedby the team's joint recommendation. During this initial phase, tiie head office loan committee wouldinclude all the SCOs. Joint review and discussion of all loan applications would be part of the on-the-jobtraining and would contribute to ensuring coordination and uniformity in a4plication of lending proceduresand decision-making.

18. With the objective of decentralizing decision-making, it is envisaged that in the laterphase, after about 15 to 18 months of the AFC operations, to the extent possible, the SCOs would movefrom the head office to their respective areas of responsibility and have their offices in one of the satelliteoffices. At that time, "area" loan committees would be established, each comprising the SCO and at leasttwo MCOs of the area, and these committees would be accorded approval authority within specified limitsand for specified purposes of financing.

19. MCOs would be authorized to reject, for valid reasons, loan applications without referringthem to their supervisors (SCO) or a higher level of authority. However, MCOs would be instructed tomaintain brief records of all rejected applications, indicating also the reason for rejection. These recordswould be inspected periodically by SCOs and their supervisors.

20. Loan agreements would be signed in the satellite office, or, even in the field, during thevisit of the MCO. Disbursement instructions would be given by the MCO and disbursements wouldgenerally be made through transfers to the account of the borrower in a commercial bank. All loanaccounts would be kept in the head office; auxiliary records would be maintained in the satellite offices,which would be provided with monthly printouts (or diskettes) showing the status of their portfolio.Satellite offices however, would maintain detailed information on each borrower, using the PCs at theirdisposal. The initial source for this information would be the loan application which would include adetailed list of all assets, details on loan use, etc. and this infonnation would be updated periodically.

21. Accounts and Audit. AFC accounts would be maintained in accordance with westernaccounting practices and standards, applying the new chart of accounts for commercial banks prescribedby the Central Bank (BOL), and financial statements would be audited by independent auditors. Asmentioned above, the AFC would also follow BOL instructions regarding loan classification andprovisioning.

22. Cost of Administration and Sustainability. Preliminary estimates and projections ofadministrative costs, based on the organization structure described above, 10 satellite offices, an averageloan portfolio per satellite office equivalent to US$ 1.5 million with about 200 borrowers and a staff oftwo, would be less than 3 percent of the total average annual portfolio. With the increase in the numberof offices and the volume of lending, costs should gradually decrease (costs calculations include salaries,

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ANNEX APage 6 of 11

rents and all operating expenditures and depreciation vehicles and office equipment, but do not includethe cost of expatriate technical assistance). A spread averaging 5 percent above the cost of funds to beearned during the initial phase of operations, and decreasing subsequently to about 4 percent should besufficient for achieving positive financial results. However, given the specific nature of prospectiveborrowers, consisting of newly settled peasant farmers who lack capital, farm management experience,credit history, guarantees and collateral customarily required by banks, it is difficult to assess the amountof provisions required for doubtful debts and the likely loan losses which could affect the AFC's incomeand financial viability. Operating procedures would be tailored to deal with the type of borrowersdescribed above and all efforts would be made to ensure sound lending and satisfactory loan repayment.Various donor funds have beer. secured to cover the cost of organization prior to start-up as well as theexpatriate technical assistance for the setting up and the initial phases of AFC operation.

23. Expatriate Technical Assistance. Expatriate advisers, for a total period of about 36 man-months (not continuousiy) would be required to assist AFC management in the setting up of the AFC andduring the first two years of operation. The success of the AFC hinges on the xjuality and continuity ofthe technical assistance. An agreement has been reached with a Dutch Consulting company to providethe necessary technical assistance. The first consultant team visited Latvia in May 1993, agreed withGovernment and the Bank on a detailed program of activities to be carried out during the comning monthsand leading to the start-up of operations by January 1994.

24. One adviser, or team of advisers, specialized in organization and management of lendingoperations, including computerization and selection of appropriate software, would assist in establishingall operating systems and procedures for loan processing, disbursements, collection, computerizedbudgeting, accounting and information systems, including fine-tuning the systems during the initial periodof operation and training of staff.

25. The second team, comprising agricultural credit specialists with extensive experience inlending and supervised credit operations to peasant farmers, would assist in establishing loan evaluationand loan servicing procedures, including formats for loan applications, farm plans, feasibility studies andthe design of a computerized informadon system on borrowers. This team would also prepare andconduct training courses for MCOs and SCOs, supervise their activities and performance after inceptionof operations, and actively participate in loan appraisal (on-the-job training) and quality control of loanevaluations prior to approval. Both teams mentioned above, would jointly prepare a brief and conciselending operations and procedures manual, conduct training seminars for members of the Board, andparticipate in the selection of candidates for the key management and SCO and MCO positions.

26. AGROII4VEST. At the inception of its operations, the AFC would take over themanagement of Agroinvest's loan portfolio (amounting to about US$ 1 million equivalent, and describedin para. 3.7 of the SAR). According to a resolution of the Council of Ministers, Agroinvest would beliquidated after its loan portfolio has been transferred to the AFC. In managing the portfolio the AFCwould act as an agent and would not assume any lending risks. For its services, including loanaccounting,

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ANNEX APage 7 of 11

collection, monitoring borrowers' performance and financial position, administering collateral for loansand maintaining information on borrowers, the AFC would receive a monthly management fee to beagreed upon by the AFC and Government (estimated at 0.2 percent per month calculated on theoutstanding monthly balances of principal). Collected principal and interest (less the management fee)would be used by Government to pay for its shares in the AFC.

Schedule of AFC Lending Operations Start-Up

27. The current schedule for the AFC start-up of lending operations to private sector farmersis outlined below. Lending is sent to start in January 1994. The program lists the principal activitiesand is not exhaustive as the details for each of the activities would have to be established by the team ofconsultants, the PMU, and the key AFC management staff after it has taken up its positions.

Mlay 1993

1. PMU to appoint interim supervisory committee to temporarily guide the activities for setting upof the AFC, until the company has been registered and the first board of directors has beenelected.

2. A team of consultants from Holland, providing technical assistance to the AFC, would start itsactivities.

June/July 1993

3. Rent temporary office accommodation for about three months.

4. Establish job descriptions and required qualifications for the different categories of staff andprepare appropriate application forms (including CV) to be completed by candidates. Preparepropoal for grade and salary structure.

5. Advertise to fill the key head office positions, general manager, financial controller and managerof lending operations, and three to four senior credit officers (SCOs). Review of job applicationsand conduct interviews with prospective candidates.

6. Prepare lending operations guidelines.

7. Prepare chart of accounts for AFC, following BOL instructions on accounting for banks.

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ANNEX APage 8 of 11

8. Prepare nmster plan for computerized accounting and management information system, includingspecifications for required EDP equipment and software. Master plan to define information needsof satelite and head offices, reporting requirements, including details and frequency of reportsand communication linkages between head office and satellites. Assume growth of AFC to 40satellite offices, 25,000 borrowers (active and inactive) and 40,000 to 50,000 active loanaccounts.

August 1993

9.. Appoint law office to prepare statutes for Joint Stock Company - AFC. Register companyaccording to procedures established in the new law on Joint Stock Companies and, afterregistration, submit application for licensing to BOL.

10. Finalize lending operations guidelines and translate into Latvian.

11. Design and prepare training programs and training material, including case studies, based, interalia, on above guidelines.

12. Determine locations for ten (the exact number may vary) satellite offices.

13. Start search for suitable office space for satellite offices, enter into rental agreements, with rentalstarting in October, 1993.

14. Finalize arrangements for permanent office accommodation for head office, enter into rentalagreement and initiate adaptation of offices to AFC needs.

IS. Prepare specifications for procurement of office equipment and vehicles for head office and 10satellites and initiate procurement - prepare timetable for deliveries. Arrange for telephoneconnections according to timetable.

16. Advertise to fill positions of about 25 mobile credit officers (MCOs), conduct interviews withprospective candidates; endeavor to find candidates who are residents of locations selected, asmentioned above (para. 13).

17. Start training of SCOs, based on lending operations guidelines, and also train SCOs as trainers.

18. Finalize specifications for procurement of EDP equipment and required software.

Septaber 1993

19. Complete selection of candidates for 25 MCO positions; first group of about 15 to start work(training) by mid-September, 1993.

20. Make procurement arrangements for EDP equipment, for delivery in September, 1993.

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ANN-EN APage 9 of 11

21. Conduct first trining course for MCOs.

22. Finalize chart of accounts for AFC.

23. Establish procedures for preparation of administrative budget and for monitoring implementationand intenal controls.

October 1993

24. First meeting of shareholders - Election of board of directors and appointment of independentauditcrs. PMU interim committee (para. 1) handing over finctiops and responsibilities to boardof directors.

25. Conduct taining semirar for members of board of directors (senior head office staff toParticipate).

26. Fill positions of two accountants in head office.

27. Second group of about 10 MCOs to join AFC.

28. Continme training for SCOs, MCOs and head office staff, focusing and lending procedures, loanprocessing and loan servicing.

November 1993

29. MCOs to move to and occupy satellite offices. Continue training in lending procedures. MCOsto carry out case studies in loan appraisal and processing.

30. Conduct (mock) meetings of head office loan committee to review and discuss appraisal casestudies and similar training activities.

31. Start training forj Laff in use of PC and computer programs.

32. Run tests on computrzed accouning and information systems; interact with satellite offices.

33. Prepare budget for administrative expenses for first six months (January - June 1994) andestimated budget for 1994.

34. (End-October) First meetng of board of directors - ratification of lending operations guidelines,approval of budget for administrive expenditures; discuss first proposal prepared bymanagemet on lending program and lending priorities.

35. Establish and open fixed wet register.

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ANNEX APage 10 of 11

December 3

36. SCO and MCO to continue training in lending procedures and use of data processing equipment.

37. Fine-tune computerized accounting and information system.

38. Prepare proposal for personnel policy (staff regulations), grades and salary structure, bonussystem, benefits,etc.

39. MCO and SCO to become familiar with their respective areas of operations, updating basicinformation on farm units, total inventory, production potential, markets, etc.

40. MCO, in coordination with MOA, advisory staff and other relevant agencies, to collect data forpreparation (and periodic updating) of technical norms for their areas of operation - averageyields, production costs and farmgate prices, etc.

41. MCO, should identify specific problems faced by farmers in their respective areas and proposeremedial actions. All information to be conveyed to head office.

Janumy 1994

42. 10 satellite offices to be established and fully staffed, each with two MCOs. MCOs to becomeacquainted with their respective areas of responsibility, including local authorities, farmers'organizations, marketing agencies, etc.; MCOs participate in activities of extension agents andin village meetings, etc.; establish contacts with prospective borrowers, identify lendingopportunities, guide and assist borrowers in preparation of loan applications and relateddocumentation and initiate appraisal of loan applications.

43. Head office accounting department to open loan accounts for Agroinvest portfolio, submit tosatellite offices statements of loans (borrowers, outstanding amounts and amounts due forrepayment on January 1, 1994 and of aiTears) and instructions on actions to be taken by MCO.Further test computerized loan information system using Agroinvest portfolio.

44. Head office to present to Board for approval preliminary lending program for 1994 (or for firstsemester of 1994J including lending priorities and terms of repayment (short-term and mediumterm).

45. Upon completion of first round of training, head office to carry out interim evaluation ofemployees and their suitability for carrying out their respective tasks; release staff consideredunsuitable for AFC (if not previously dismissed).

46. Based on initial experience, prepare training program and material for more advanced trainingof lending staff (SCO and MCO).

- 49 -

ANNEX APage II of 11

February 1994

47. By above date AFC should have an adequately staffed, trained and equipped head office -including 3 to 4 SCOs responsible for about 10 already established satellite offices, each of whichshould be staffed by two MCOs who have participated in basic training activities (lendingoperations and use of computers), have been equipped wiLh one vehicle, PC and other officeequipment.

48. AFC to initiate lending operations - Approval of first batch of about 20 to 25 subloans, for a totalof about US$ 100,000, according to lending priorities established by AFC management.

49. On above date, the Agroim est loan portfolio would be formally transferred to and taken over byAFC, on terms and conditions as specified.

- 50 -

ANNEX BPage 1 of 3

LAT_VIA

Agricultural Development Project

The Investment Bank of Latvia

Badkgromd

1. The Investment Bank of Latvia (IBL) was first incorporated in April 1992 as part of theBaltic Investment Program developed by the Nordic Ministers of Finance in order to assist the Balticcountries in their transition to a market economy. As the bank's role in providing medium and long-termforeign and domestic credits to small and medium sized businesses required special legal provisions notfound in existing legislation, a special law creating the IBL was adopted by the Latvian Parliament onMarch 30, t993.

2. The first year of the bank's existence has been a period of organizational development,corporate planning, recruitment and training of staff, and preparation of its operating systems andprocedures. In these efforts IBL has been assisted by a wide array of foreign expertise including theNordic Investment Bank, the European Bank for Reconstruction and Development (EBRD), Den NorskaBank, the Kreditanstalt flr Wiederaufbau of Germany, the Soros Foundation, and others. Currently, thebank's total staff numrbers about 20, many of whom have been educated in universities in the U.S. andCanada. An international accounting firm has recently been hired to review and analyze IBL's internalmanagement structure and information systems and to recommend improvements deemed necessary.

3. The bank's share capital is denominated in German Marks. Currently, its statutory capitalof DM 6,475,000 has been subscribed by Government of Latvia and a fiuther capital injection of DM6,750,000 has already been approved by the Government. Negotiations are continuing with EBRDregarding an equity contribution in IBL equivalent to about US$ 3.5 million, which would raise thestatutory capital to about US$ 10.0 mnillion equivalent, with EBRD holding about 35 percent of the sharecapital.

4. The IBL is also exploring other sources of financing. The EBRD and the NordicInvestnent Bank have allocated ECU 30 million for technical assistance, equity contributions and linesof credit for the three Baltic Investment Banks. Close cooperation and possible funding has also beendiscussed with the Swedish Export Credit Institutions and similar negotiations with the Danish counterpartare contemplated for the near future.

- 51 -

AN=B BPage 2 of 3

Prdnpal Objeives

5. According to the IBL's business plan, its principal objectives are:

mobilizing and attracting medium- and long-term foreign and local capital fromboth external and domestic sources; particular attention will be devoted toattracting foreign investment;

channelling these resources to economically viable and financially profitableinvestment projects in the Latvian private sector, with an emphasis on small andmedium sized enterprises, and in companies undergoing privatization;

engaging in co-financing activities with other financial institutions prepared tosupport productive investments in Latvia; and,

providing financial advisory services on a fee basis, mainly to prospectiveinvestors, but also to financial institutions, government donor agencies, and toother parties engaged in private sector development activities.

Lendlng Prioridtes

6. In line with the above objectives, the IBL would initially concentrate on those sectorsgenerally recognized as the most promising in this period of economic transition. These include:

wood processing (furniture, building materials but not pulp and paper);tourism and services (hotels, restaurants, etc.);food and agricultural industries;computer software;textiles and shoe manufacturing; andtransportation and related services.

7. In order to further reduce the risk involved in Latvian investment projects, certain criteriawould be considered when weighing the viability of projects even in the most promising sectors. Prioritywould be given to m in projects if:

there exist reasonable marketing arrangements to purchase the product inconvertible currency (whether domestically or abroad);production utilizes local raw materials;the enterprise is already operating and products are being exported; andthe project does not involve serious foreign exchange risks.

-52 -

ANNEBXBPage 3 of 3

Lending Opeaions

8. Preparation of feasibility studies and appraisal of loan applications were initiated in thefirst quarter of 1993. Actual loan disburseme started in mid-1993 with the first loan of US$ 220,000for an investment project in a wood processing enterprise. In July 1993, twelve other investmenm projectswere under active consideration by IBL management.

July 1993

53 ANNEX C

Page I of 7

LDAAAgracu!ural Dveloment Prolect

Composr n of LA t World Prces

1922 1993 lartn pie as % o£WoddLatva Word Lavia World Lavia WorldPrIe Price Prie¢ Price Price Price

Wheat 106 119 85 110 89 77Barley NA 105 92 100 NA 92Rye NA 90 too 88 NA 114Potatoes 82 100 77 90 82 8500 Rape 117 336 208 330 35 63Flax NA 364 138 350 NA 40

4diDc 36 150 77 140 24 5See f 139 2210 308 2100 6 15

Pork 211 1122 8S8 1050 19 77Pouluy 600 2080 1700 1900 29 89E-gS 300 692 770 670. 43 11S

PFt-Nitrogen 70 146 108 140 48 77Fert-Phosphate 40 164 104 160 25 65Plant protecio 7222 7222 1000 1000 100 100Dieseim 35 140 42 120 25 35Elecuic. (kwh) 0.02 0.04 0.03 0.04 57 86

180 LVR-USSI130 LVR- USS1

;

AGIICULTWIAL DEVELMPMENT PROJECTCrop .atdget

(LVII)

Wiih Wifd Wil W Wilitoe Wil W Iboe Wish ost WYW iQ Wit Widwit Wdh Wilis Wwl Wiho Wil WOirOti Wih WibAu

PISCon SL.W0 11.00 13.000 53.000 12.000 M20oo0 27.000 27.000 10.00 10.000 6,000 4D000 1,200 1.200 11.000 18.000 o0 2.000tt o 2.000. 2,000vwdd IItl* 3.50 .7 2.50 2.50 2.60 C.0 2.40 1.40 10.00 MO0 25.00 16.00 34.00 21.00 1.00 120 3300 25.00 30.00 2Z0TdlVk UAW50 29.700 45.500 322.00 33.600 22680 64.000 37,00XO 10 t00 20,00o t5,00 t06000 40.600 30.000 32.400 21,COD 7.o0o 50.000 7200 44u00l

Ceqlb 220.O 15.00 20.00 15.00 ts.o 14.00 910.00 9tU100 20.00 14.00 420.00 42200 70.00 70.00 4.00 43.80 450.00 450.00 40oo 20.0kg 240 240 200 200 220 220 6 03 .00 3,500 0 6 6 8 10 #tO tO tO 35 40loWCost 4,600 M 360 4.000 3600 360 300 460 5,460 7O00 49000 3.30 3J3 56 S 4,900 4.0 4,500 4.00 4.0O 3o0

lAbese VosUerIsCoSnVIU 1130 14.00 3.36 14.00 13.24 14.00 13.64 14.00 13.31 - 13.45 4.0 t3.74 - 1a21 1350 1400 - 14.00 14.00ion lequrod 420 *t00 420 10o 330 50 700 000 400 0 50 200 30 0 350 100 2 0 40a 20J

TOCSIu 5,60 1.400 S,820 1,400 4.370 700 9550 4.200 6.325 0 2 600 5.20 0 4.0 1.350 Z.OO 0 5.AW 2.0 t

MbledCOS110t.r 1.300 1.300 1.300 IW3O 1.300 1.300 1.300 1.300 t,00 0.300 1.300 t0 1,30 1.300 1.300 1.300 OM0 1.0 1.300 .00Lt d8 *t**wd 2.00 t.00 2.00 1.00 2.00 0.50 5.00 Z.0 8.00 2.00 0.00 2.00 2.00 0.0 3.00 0.0o 3.0 0.00 2.0o O.ODTtal C.st .600 1.3t0 2,E00 1.3DO 260o 050 50 2.000 10.400 t20 10,400 2,00 20o6 0 3.000 0 3.900 0 2.600 0

fEacis MchJEuL. 0.2 0.22 00.2220O.m to0 t1.222 15.722 15.7 5.197 12.ts7 02Jtr U2.9 t1.2 12 10.547 10.547 11f.26 11.261 11.267 #1.261

Ekidscy. *atm. lolw 0 0 0 0 0 0 0 0 0 0 0 0 0 0 450 450 0 0 0 0

TU 1.008 t1 LOSS Jm 1O6 1t011 106 lift 7.54 5.529 065 9,000 733 YU 3.752 2.s"4 oes tO1SS 3.752 I.72

TOlaCes 24t0 t7.6to 23.530 17.010 2.240 15.740 30.320 269.070 O5J 69.k325 43,3 30.37r 19.334 11.514 20.224 20.161 33.323 26.623 31.219 18,B61

edl Wan 14,170 12.000 21.670 tS,490 11.360 7,060 26.460 6,730 64,74 60,675 10B,42 7r,0 21.466 *6.466 4.176 L,439 3.617 23.3 34.761 25.391

SassbCOeeTl o v ts. 1.69 1 1.|S1 1.51 1.45 tA9 5.0 1.01 1.73 3.45 3.60 t11 261 1.S 1.07 2.10 1.66 1.3 2.3

Udflmefftt'milWad.OLV1If 1.31 to 5.s 2. 1.0 3.11 1.38 1.34 2. 1.61

taor _uu4 5t hO 5. 3.0 50 GA 6o 40 0. 60 0. 3. 3. 20 5 60.0 60.0 20.0 20.0

Ilobm*oaon*V 2*34 t416 4.304 3.096t 22 1,4*2 5.216 1,746 2,t10 1,t 1,774 155 7,155 162 s ett 3ll 3 1,9 UM

VToWPuUUW9dSSdMdSdbVT., _ ... PUSS. 2k... _he Sdd~ssw.slw w.hr,_ . .eoowbul; mdr a ss mg npshsstdoobl,emse ,lle

t} Z tt} ^ tt w t _ _ t _~~~~~~~~~~~~~~~~~~~~bt_ - * , , g |~~~~~~~~~~~~~~~~~~~~~~~~~~~~7

55 AS= C

LATA Page 3 Of 7AGRICULT RAL tU EVELOPMENT PROJECT

30 Ha Mixed Farm OperadonCropping Pattem, Yields. and Quanti of Crop Production

etoro feat Yont Yeat Yeat Yoat Yost Yoti

CATEGORIES Oet.. 1 2 3 4 5 1 7-10

A. CROPPING PATTERN (Ha.)

Food C_oosWinter Wheat 0.0 0.0 6.0 6.0 6.0 6.0 8.0 8.oWinter Rye 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0laley & Ots 4.0 4.0 a .0 ao3.0 3.0 3o 3oRspe'00 na na L0 a.0 L0 2.0 3.0 .0Potatoes 2.0 2.0 1.0 1.0 1.0 1.0 2.0 2.0Sugarbeets 1.0 1.0 1.0 1.0 1.0 1,0 1.0 1.0

Forage CropsPtennial Fomsgomsas IAI.b 1.0 2.0 2.0 2.0 2.0 2.0 2.0AnnualFPgerOmaass nf na .1.0 1.0 1. 1.0 na noPoddotbeets 1.0 1.0 na na na "a n' napodder/Forage Maize na na 2.0 *2.0 .0 2.0 2.0 2.ONatural GrasslandMeadows 8.0 8.0 L0 5.0 B.0 50 3.0 a.oPastres 4.0 4.0 1.0 1.0 1.0 1.0 0.0 0.0Forest 2.0 2.0 2 LO la 2.0 La LO

S. CROP YIEWS (Tons/ha.)

Food Crooswinter Wheat . 2.7 2.7 3.0 3.3 3.1 3s 3.8Winter Rye Ls 2.t 2.8 3.2 35 * 3.8 6 &3warly &Osca 1.9 1.9 2.4 Lo 28 &0 3.0 3.

RapsOO 1.4 1.4 2.0 2.2 2.4 s 2gJ 2.sPottoes t2.0 12.0 16.0 16o 119.0 21.0 21.0 21.0Sugrbeets 18.0 16O 22.0 230 25.0 20.0 25.0 26.0Forace CroosPerenial FPoielrases VAbit) 25.0 25.0 25.0 30.0 34.0 34.0 34.0 34.0Annual Poragowfrasm 22. 22.0 22.0 28. 20.0 20.0 30.0 30.0feddarbeats 26.0 25.0 30.0 33.0 33.0 50 35.0 350Fodder/Forage Maize 22.0 22.0 32.0 34.0 38.0 36.0 3.0 36.0Natural GrasslandMeadows 150 15.0 20.0 22.0 25.0 25.0 25.0 25.oPastures 10.0 10.0 13.0 14.0 1.0 1.0 18.0 15.0

Production MTons)

Food CropsWinter Wheat 16.2 16.2 1t.0 10.8 21.0 22.6 30.4 30.4Winter Rye 10.0 10.0 11.2 12.8 14.0 1.2 15.2 15.2Oalcy & Oats 7.0 7.0 7.2 7.8 64 0.0 9.0 9.0Rape '00' no na 4.0 4.4 4.0 9.0 7.s 7.5Potatoes 1, 24.0 24.0 16.0 1L0 19.0 21.0 42.0 42.0Sugrwbota 16.0 15.0 22.0 23.0 25.0 26.0 260 26.0

Forace CrOsDPrwe l FeraeuGtaassw OHM" 25.0 25.0 80.0 60.0 6O8 6L60 0 8.0 8oaoAnnual ForagoaGrSe na na 22.0 26.0 30.0 30.0 na nsFodderbeats 25.0 25.0 na na "a na na nafodderForae Maize "a na 64.0 68.0 72.0 72.0 72.0 72.0

Natural GrasslandMeadows 66.o 0O 100.0 110.0 125.O 12. 7.0 7Pastures 40.0 40.0 13O 14.0 15.0 16L0 0.0 0.0

56

AGRCULTURALf 7 OOVOPMENT PROJECT Page 4 of 7LiveStock Budget ag xo

(LVR)

10 Cow c1tnO Onwalcn 5-1 0 Pla F8TUfmI f waOtlaf 10 f'la f 1f

Wmin Prlect _ Wt t project , a fW f1&Axed AlXQdlimanstwe mLiud hgDMO n19fitst" Mizid hftgdu1?8niN

Mwd Composmansize Oreac)

ctwvFJigs 10.0 10.0 10.0 IC 10 10 100 Ica 100catwiglez a.s 8.0 e.o 10.4 10.4 10.4 102 106 106C^WLg MOJItW ZOS% 2.5% 251% 2.0% 2.0% 2.0% Z% 6.0% 6.0%C.tsmng lit 10.0% 15.0% 10.0% 4.0% 4.0% 4.0% 2.C% 6.0% 6.0%

IqewnueIsles

Priceai00 10.00 8.O0 6.00Liart Yield/-ow 3500 270 2700TCJ VUalue 3546000 216,000 218,030

f.W,c 5alesPorkH5al -- 10 10 *.8 s8 94 94

KlfcOlead 100 100 100 100 100P'rice?00 _ _ _ 100.00 1w0.00 100.00 110.00 100.00 100.co1-al2 Vlue ' _ _ 100,000 100,000 S8,000 1,078,000 9410;0 944000

Bee? Salesead 15 1.5 1.5

Klemteed 450 400 400PAfteCxi 40.00 40.00 40.00Tctal Value 27,000 24,000 24,000

veal salesNeed 6.0 5.0 5.0lOop-ead 40 35 3SPrica-lead 2500.00 20000 2200.00Tcal Valu 15.000 11,000 11,000

TctW Revenu,Sa966sTCW valuse 392,00 2s5,0o 251,00 100,OOO 100,0Coo S9,o0o 1.073,000 9400 940

Offpstng A=&tvr 8.5 8.0 e.o 10.4 10.4 10.4 102 106 106

cosWHee 250000 250000 250000 2000.00 200Qt 2000.00 200000 2000.00 2000Tc:l Cost 0 0 0 20,800 20,00 20,800 . 204,010 212,000 212,O

ccmw. Feed 1C;osKllO 14.00 14.00 14.00 12 12 12 16 12 tKUotHeld 400 200 200 400 400 b00 380 SO 50

TC-l Cost 560lo0 28,000 26,000 48000 48000 56800 5850 584000 564000;nee7~FeedBanded Valuello 11 1.55 1 1 1 i 1 1Bendead Co 0 0 1.55send K0ls4d 1650 12400 12400 400 400 300 300 . 300 300

TclCOst C o0 0

Blerided cosHead 1700.00 150. 65LQOTotma Cost 17,000 8,500 8,500 1500 1s0 1500 30000 1500 15000

hyesud La.Tatal MwCays 220 220 220 40.0 40.0 40. 10C.0 1000 100O

Vataede CosoTo:ae Cos 145,852 57,6Z2 202642 83,354 a, 9284 907,120 88Zss 8M3,OM

Fae Coat C5 91

TOtal Cos 160= 1100o0 172500 m1,m0 I1,500 11,500 150.000 75,000 112,50T1'ol Cor/Evermses

Tca C.osr 328.862 207,m2 465,142 94,654 S4,854 109794 1,05,120 98.095 #59 S

Wvanoe imMNlTctal Value 248,148 153,376 (41,6 4 16,646 18,64 170, S 5 56

ToW Value 66,148 43,376 p14.14C J46 5,145 (1,> ,8 (18ASt

enef:l at Pura= 1.07 1.04 0.46 1.05 105 0.9 1.02 S 094

wlainatl enefit Pwehnested LVR (c) 1.19 135

p) bzaeese hn Tcal FWIU9~S5 dMd~ by hcse hi Tow CosU/

£slenses (due 00 adoc0fl dlnp'sod t n l w aces).

57

AGRICULTURAL OEVELOPMENT PROJECT Page S of 730 Ha Mbied Farm Operation

Cattle Herd Projections With Project(ioo farms)"

Befom Year Year Year Year Year Year YearCATEGORIES Unit Develoe 1 2 3 4 5 6 7-10

Herd ComoositonCows No. 385 576 577 603 725 8e0 s8o 0 10In-Calf Heifers No. itS 164 167 292 270 194 ISO 190Male Catves (4 ms.) No. 92 0 0 0 0 0 0 0Female Cales (9 mos) No. 164 320 297 300 361 402 404 404Herifes 1-2yrs. No. 189 169 298 276 279 338 374 376Total Numberm: No. 945 1229 1339 1471 1635 1736 1778 1780Total Animal UnIts:w No. 666 937 1012 1161 1270 1322 1345 1347

Cavles BomMale Calves No. 200 348 314 316 381 423 425 425Female Calwvs No 200 348 315 31S 380 423 425 425'rotal Births: 400 ge8 829 632 761 846 850 50

PurchasesIn-Calf Helfe.m/YoungCows No. 0 300 0 0 0 0 0 0

MortalityCows No. 15 24 1S 1S 18 26 20 20In-CaH Heiferm No. 5 5 2 6 6 6 7 7Mahle Calves No. 8 14 9 6 8 8 9 9Frale Calves No. 16 28 18 18 19 21 21 21Heifers (I-2 yn.) No. 8 6 a 6 6 7 8 a

oung Bulls (1 -2 yrs. No. 3 3 0 0 0 0 0 0Total Mortality: S3 80 50 49 57 62 65 6s

alescull Cows No. 100 200 148 126 152 189 170 170In-Calf Heifers No. 49 0 0 0 0 79 139 177Male Calves No. 100 334 305 310 373 415 418 410CullHeifers (1-2yr.) No. 9 9 16 1S 1S 16 20 20Young Bulls (1-2 yrs.) No. 89 89 0 0 0 0 0 0Totl Sales: 347 832 489 451 540 681 745 763

Production CoeffIcetCaMng Rate %80 87 8s 8s 85 05 65 8SMoalty Raes - Mailes Cahes % 4 4 3 2 2 2 2 2

- FematosCalves % 8 a 5 a 5 S 5- Adub % 3 3 2 2 2 2 2 2

CullingRate -Cows % 20 25 20 17 17 17 17 17- Hefers % 5 5 5 5 5 5 5 5

Total Output Rates 3 38.7 8 51.4 35.0 30.7 33.7 .39.2 41.9 44.0MilktCowNear kg 3000 3000 3400 3600 3800 3800 3800 3600

Outut/Production Volume gar FamMkl kg 20,070 27.270 35,428 42,1S 48,412 50.768 52212 52Beef kg 911 1401. 968 967 1226 1721 2021 2154Pork kg 110 550 50 S00 80 5 5W 5W

NOTES:Catde herd assumptlo based on 100 Em uniL. All itslme at erd of year

v Aniral Unit = AU.; cows and heifer 2-3 yrs. =1 AU. hles 1-2 yts. = 0.6 AU; male calves =0.1 AU4 andfemale cales - O.3U

58

AG- CULURAL 2ELPMENP Page6 of 7Fum Mader

(30 mg whod ruam Opeauost)

Unit Gout oto Tone Tour vaeG your your Oar yCATEGORIES _gJ LM 22,eogm 2 a 4 5 8 7-10

A. INCREMENTAL INVESTMENTCOATS

Go*6 ei Cvl- WoNwd -- 1.000 1.00 _ _ _ _ _Cow 8an 100142 10112 1.000 - - - - - -PIt SOd -- as - - _ _ _ _f mlrMau 1IA w 0 - - - - - -Silage Pit 210 2 - - - - - -

S&b-Total 2.413

Trot, 4SHPd -- d_ - _ _ _ _ _SukMetMdM Madch -- 80 50 - _ - _ _ _Mul CooIlng -- 30 30 - - - - - -ACurant Wat -_ 40 40 _ _ a _ _ _Misoergeeus Eqipmt -- so ft _ _ _ _ -

Sub-Totl

ToWal Constuofin uSEquipment Cotsb .,105

Low': Avwage PreOevdopn-tOn-Form rivgsns sm

Inmmment Constuaon andEquipment Co

tn-Calf He f SHead lM4esd 46 - - --

bmrmenta WWdng Capt -- -- - - - - - -

Tota Irmental Investnet Cts 1,879 a - - - -

S. OPERAKNG COSTV

Ctopsfld Wood aa -a - 910 US 680 852 547 044 1.017 -. 1t7

Cad and Daby - - 1St 213 230 1 29 3900 31 315Pigs la 52 52 52 52 52 52 a2Tota Openg Cost s - 1.071 1.164 1.141 1.165 1.186 1.196 1,834 1.334

A5SUMPTION&A AbilIy of five edbnwhb $Opas d8 abp .ci cii work laed ehablfmdftoef jdtg B9Una W mafdma ad tam acosstomad "ban, req*ied

m&es ods whene requird

Assums aenragefre a opl ato h oa4Based on averpg orkti cpitl eq rmen Iout fr soppo cou

Mu4e of increae atalot agpftL

59ANNEX

LATVIA Page 7 of 7AGRICULTURAL DEVELOPMENT PROJECT

30 Ha Mixed Farm OperationFinancial Analysis (000 LVR)

-efore Year Year Year Year Yeat ' Yeaw YearCATEGORIES Develop 1 2 3 4 5 6 7-10

A. COST/8ENEFIT ANALYSIS

BenefitsCrops 747 747 83 915 83 1.057 1,419 1,419Wood 20 20 20 20 20 20 20 20Milk 221 300 390 464 533 58 574 575

ee 36 47 27 24 30 43 51 54Pork 12 81 55 SS 55 58 55 55Total Beneffts 1,038 1,175 1,322 1,478 1.621 1.733 2,119 2.123

Incremental Benefts -- 139 288 442 585 697 1.083 1,067

CostsTotal Invesrrent Costs -- 1,879 - - - - -Operating Costs 1,071 1.164 1,141 1,165 1,188 198e 1384 1,385Total Costs 3043 1141 1165 1188 1196 1384 1385

Incremental Costs -- 1.972 70 94 117 12S 313 314

Incremental Net 1enefits (Costs)Total -- (1,833) 216 348 468 572 770 773

BaseCase- 24% Saem I 42% Sons"t 2u 31%

B. CASH FLOW ANALYSIS

inflow

SalesOf Products __ 1,175 1,322 1.478 1,821 1,733 Z119 642Subloan Obtained. -- 1,315 - - - - -Total Inflow 2,490 1,322 1.478 1.621 1,738 2,119 8492'

Outflow

lnvesOnentCashCostiw -- 1,315 - - - - - -OpeoingCosts -- 1,164 1,141 1,165 1,188 1,190 1,384 50Det Sevc of Subloan-Principal -- - - - 219 219 219 W8'- lnteste -- 171 171 171 171 142 114 172Total OuUtiw 2479 1312 1336 1578 1557 1717 83700

Eblh an_ee

Annual -- 11 10 142 43 176 402 2122Cummulative -- 11 21 163 206 -3s2 784 2oV

NOTE:Bus CE assumes cunta Lan inpuoutput prces and us the rest of the aswaptoapteseated in the ed eaxlubits Senuitiv I equires M0 of thfe invesM aount tued i BaseSensity2 requits isa estmnts amount BaseB CO utbuses u irwt world msrkt prices for nPutand outpqtaCash proceeds of loan equal to 70% of vestment mot 3 0 tio -d ba

of hm easse poriod withsequbt skiYyeartpmtperot. Total tc ofloa -= n eys"s.W Anual inte mate on all ows. in dg g capital, @13%.

A gegate total am*ort for7, 7.8,9 and I0

- 60-

ANNEX DPage 1 of 4

LATVIAAgricultural Development Project

A,rno and Forest Industries Subprojects

1. The industrial component of the Project would include a wide variety of subprojects inagro-processing and forest industries, many of which have been pre-appraised by technical assistanceteams from Sweden and Finland or by directly by the LIB, the agency through which the industriallending would be channelled. Total r tential lending for projects already appraised is just over US$10million. A list of the preappraised projects is included at the end of this annex and a general descriptionof the project types follows below.

Mllig of Grain and Bakenes

2. There are 6 subprojects in this category. Three of these would mill rye and wheat on asmall scale for a local market, two are bakeries serving the local market and surrounding area, and onewould be a combined mill and bakery. The milling units would produce about 1500 tons per year each,and the bakeries about 500 to 700 kg/day of various types of bread.

3. The investors are typically small entrepreneurs, normally a family, which already havea shop and want to expand their activities. Investment levels range from US$30,000 to 50,000. Thesesmall plants would be operated by the family owners and would provide good quality bread to the nearbyareas. Until now, these communities are served by one of five large state-owned bakeries and by the tinebread reaches the consumer it is no longer fresh.

4. Total employment in this category would be about 50 persons. Although the job creationis low, these new units would form a nucleus for further development, and are a good start for newlyemerging entrepreneurs.

Meat Procsing Plants

5. There are ten units in this category, all of which would be established by farmers, manyof whom obtained land during the first attempts at privatization in 1989. Production is primarily in pigs,and in some cases also cattle. Farmers are inclined to establish processing facilities because of low pricesand late payment for animals by existing state slaughter houses, even though the price of meat toconsumers is relatively high. The small processing plants would typically slaughter 10 to 15 pigs or 3to 4 cattle per day, and process the meat into sausages and smoked meat. Retail sales would be in themain cities, especially Riga, and for export to Russia, Belarus, and Ukraine. Several of the investorshave good relations with the FSU and it is expected that a relatvely large part of the processed meatwould be exported to the East, either directly or through barter deals.

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ANNEX DPage 2 of 4

6. All the investors have experience in slaughtering and processu..b, and would manage theplants themselves. A typical plant would employ 12 persons. The average investment ranges fromUS$100,000 to 200,000 which is mainly for slaughtering equipment and sausage and smoking units. Theaverage plant would produce about 400 tons/year of various products, selling for LAT960 to 1400/tonof finished product.

7. The main benefits from establishing small meat processing plants is that they would beable to pay higher prices for animals because of lower overhead and administrative costs, and higherutilization of the installed capacity than the existing large state-owned slaughter houses.

Mk Procing

8. Investments in milk processing plants would be mainly to improve existing pre-processingplants, which earlier collected and pre-processed milk by separating the cream and returning skim milkto the farmers for pig and cattle feed. Several of these plants have now been taken over by previousmanagers, workers and farmers, and would employ about 50 to 80 persons in a typical plant. The plantsneed equipment to allow packaging of milk for the consumer market. The market demand and profitmargins are high for pasteurized liquid milk. The dairies would produce some 10,000 liters/day of milkfor sale in nearby cities and Riga.

Modified Starch Procig

9. A large Swedish company would enter into a joint venture as a minor partner (35%) withan existing starch factory owned by the manag.-nent and several other private shareholders, and wouldprovide know-how and technical assistance. The factory currently processes about 10,000 tons/year ofpotatoes supplied by some I500 farmers and collective farms, into 1500 tons/year of starch, of which80% is exported. Investment in equipment is planned to produce modified starch for food products andfor the paper industry. Modified starch comnands a price of about US$600/ton compared with normalstarch at about US$280/ton. The subproject would produce about 1000 tons/year of modified starch.The expected markets would be the Baltic Republics and other FSU countries. The Latvian market aloneis estimated at 300 to 500 tons/year.

Frit Juice Procing

10. The existing factory of Agro-Skibe in the Dobele district owns a relatively large appleorchard and has a new press with which it produces apple juice in 10 liter glass containers. However,the market is disappearing due to competition from imports which provide juice in one liter papercontainers preferred by the consumers. It is therefore proposed to provide equipment for sterilization,separation, and aseptic packaging of apple juice in one liter laminated paper containers. The enterprisewould then be able to produce juice of a quality equal to imports, and plans to export about 50% of itsoutput to Russia, particularly St. Petersburg where it has good connections with distributors. During the

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ANNEX DPage 3 of 4

off season, the factory would use its facilities to re-constitute orange juice concentrate. Total productionof all juices would be about 2 million liters/year.

11. The enterprise is managed by several of its shareholders which bought the factory froman earlier collective farm.

Vegetable Freezing

12. Latvia has a good production of blueberries, cranberries, raspberries, and blackberries,much of which is grown wild and uses a large labor force to harvest. Installation of freezing facilitiesin an existing plant for these berries as well as for vegetables is proposed. Most of the output would beexported to Western Europe where marketing contacts have already been established. The new freezingplant would process some 500 to 700 tons/year of berries and vegetables, focusing or labor intensiveproducts. The existing enterprise is owned by former employees who have a long tradition of canningvarious types of vegetables.

Forest Industries

13. A wide range of investments are proposed in the forest industries subsector, includingthree sawniill developments, and one subproject each to produce veneer, particleboard, furniture, joinery,and edge-glued boards. Investments range from US$200,000 to over US$7 million. The larger projectsare for plants already under construction, for which much of the equipment and civil works has beencompleted and paid for, but which need additional investment in equipment to make them operational.The emphasis on all subprojects is quality improvement in order to add value and improve exportpotential.

14. Three of the subprojects would be undertaken in formerly state-owned enterprises whichare now being operated as private companies formed by a combination of former employees, local privateinterests, and foreign joint venture partners. Most of the subprojects have sales connections with WesternEuropean and Scandinavian companies of international stature in forest industries.

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ANNEX DPage 4 of 4

LATVIAAgricultural Development Project

List of Pre-Appraised Agro- and Forest-Industry Subprojects

1. AGRO-PROCESSINGInvestment US$'000

Name District Type Total LoanLazdona Madona Milk 100 70Bezdeligas Aizkraukle Milk 225 157Jaungulbene Gulbene Milk 25 15Okte Talsi Milk 720 500Lejnieki Ventspils Milk 110 74Arajs Bauska Milk 310 215Talsi Talsi Milk 150 100Kalnini Liepaja Mill & Bakery 60 40Dzirkali Cesis Bakery 100 67Kainenes Saldus Bakery 20 14Kalna Ventinieki Kuldiga Bakery & Mill 60 42Priedes Balvi Meat 160 110Krams Dobele Meat 540 377Dukuri Valmiera Meat 45 30Viga Jurmala Meat 550 385Silzemnieks Valka Meat 90 62Druva Jelgava Meat 572 400Valcis un Petersons Talsi Meat 338 236Vetras Dobels Meat 190 130Dumbraji Bauska Meat 60 41Zviedrkalni Limbazi Meat 215 150Zloja-Starkelsen Limbazi Starch 430 300Agro-Skibe Dobele Fruit Juice 725 505Valgrunde Fruit/Berries 385 270

Subtotal 6,180 4,290II. FOREST INDUSTRIESOsis Ogres Sawmill 200 120Riga Veneer Riga Peeled Veneer 7,100 1,000Vecmilgravis Riga Sawnwood 2,000 1,000Ventspils Koks Ventspils Particleboard 900 600Gustavs Saldus Sawnwood 1,600 1,200Skonto Tukums Furniture 2,400 1,000Perle Tukums Joinery 200 110Abrene Riga Solid Board 1 600 1.300

Subtotal 16,000 6,335

GRAND TOTAL 22.180 10.620

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LATVIA ANNEX E. 1Agricultural Development Proiect Page 1 of I

Technical Assistance Program

--Year of Implementation--1993 1994 1995 DONOR Status

1. PROJECT PREPARATION AND MANAGEMENT

1.1 Froject Management UnitTA Coordinator (External TA, trainingl 57,500 460,000 345.000 EC-PHARE Frelim. agreement reachedPMU Start-up Cost. Equipment 80,500 TBD TBD CPF ApprovedDisbursement Training 0 0 0 IBRD No cost to borrower

1.2 Ag-iculture Finance CompanyContinuation of Establishment Activities 115.000 0 0 EC-PHARE Prelim. agreement reachedLocal Staff Training, equipment 80.500 0 0 CPF ApprovedLong-term Assistance during implementation 0 287,500 287.500 EC-PHARE Prelim. agreement reached

1.3 Assistance in Commercial ProcurementPreparation and Review of Technical Specs 75,000 75.000 0 BITS Prelim. agreement reachedPost-installation Monitoring/Assistance 0 50,000 100,') BITS Prelim. agreement reachedOn-Site Support for SM-scale Farms and industy 0 100,000 100.00( BITS Prelim. agreement reached

2. LAND REFORM AND PRIVATIZATION

2.1 Legal Framework for Simplification of Title Requiremrents 100,000 0 0 BITS Prelim. agreement reached

2.2 Equipment to Speed TidingZemesprojekt (Survey/Cadastre) 0 1,000,000 0 IBRD Prelim. agreement reachedLand Book Offices (Ministry of Justice) 0 200,000 0 IBRD Prelir. agreemnent reached

2.3 On-going Staff TrainingZemesprojekt(Survey/Cadastre) 0 300,000 0 BITS Prelim. agreement reached

2.4 Demonopolization and Privatizationof Grain Monopoly (LL) 0 230,000 0 EC-PHARE Prelirn. agreement reached

3 AGRICULTURAL RESEARCH AND EXTENSION

3.1 Agricultural ResearchDefrnition of Research Priorities/Organization 0 57,500 0 EC-PHARE Up to 200,000 if required (TEMPUS)Establishment of Joint Research Library 0 115,000 0 EC-PHARE Being discussed (TEMPUS)

3.2 Agticultural Extension/Statistics/nformation Technology 57,500 460,000 345,000 EC-PHARE Prelim. agreement reached

4. DEVELOPMENT OF MARKETING AND DISTRIBUTION CHANNELS

4.1 Markedng and Distribution SystemAssessment of Marketng and Distributon System 0 115,000 0 EC-PHARE Prelim. agreement reachedStudy-Feasibility of Est. Wholesale market 0 115,000 0 EC-PHARE Prelim. agreement eachedEst. of Competition Monitoring Unit 0 115,000 0 EC-PHARE Prelim. agreement reachedFood Quality Control and Cerdfication 0 287.500 368,000 EC-PHARE Prelirn. agreement reached

ANNUAL TOTALS 566.000 3.967.00 1.545.500GRAND TOTALS 6,079.000IBRD (Project) 1.200.000ECPHARE 3,818,000CPF (Counterpart Funds) 161,000BTS 900

GRAND TOTAL 6.079.00

Note: TA for Privatizng large-scale dairy and meat processing is under consideration by USAID.Additional supplementary support for agro-processing support for additional enterprises may be forthcoming from EC-PHARE.Based on the prevailing mate of I ECU = US$1.5.

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ANNEX E.2Page 1 of 3

LATVIAEOUIPMENT REOUIREENT FOR LAND CADASTRAL SYSTEM

I. REGIONAL CADASTRAL SUBSYSTEMS - to be maintained by regional offices of State Land Service.Main Functions:

* technical support of land surveying network;o surveying data processing;o production of property plans;* registration of land units;o registration of real properties (together with regional Landbook office);o monitoring of land reform process and checking of cadastral changes;* supplying with information of local governments and other clients.

A: FIVE REGIONAL CENTERS

Hardwarea one PC/486 computer $5000.00o Al size digitizer $3000.00o laser printer $1500.00* uninterruptable power source $140.00o one simple PC (PC/386SX) for text processing and data capture $1200.00o pencil plotter $9000.

Subtotal $19,840.00

Software* Microstation software for property plans drawing $5000.00o survey programs $1000.00o data base management system (DataFlex, Dbase or other) $800.00* Wordprocessing $500.00

Subtotal $7300.00

Surveying equipmento 1 total station with accessories Subtotal $10,000.00

SUB TOTAL (I)for each regional center $37.140.00in total for 5 regional centers $185.70Q.00

B: 21 REGIONAL OFFICES

Hardwareo one PC/386SX computer $1200.00o laser printer $1500.00uninterruptable power source $140.

Subtotal $2840.00

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ANNEX E.2Page 2 of 3

Softwaree survey data processing $1000.00o WordPerfect or similar for text processing $500.00

Subtotal $1500.00Surveying equipment

o I total station with accessories Subtotal $10,000.00

SUB TOTAL (II)for each regional office $14.340.00in total for 21 regional offices $301.140.00

H. CENTRAL CADASTRAL SYSTEM

Main Functions:9 supervising and control of surveying network9 .support of surveyors by methodology and information* renewing and maintenance of national geodetic network* nmaintenance of database of coordinates* registration of land units (cadastre register)* designation of land units for referencing in another register* verification of land units data* legal control of cadastral changes* land and property valuation* supplying state, credit etc. institutions by land information* issuing of statistical reports about land use* establishment of digital cadastral maps

establishment of a Land Information system (together with Landbook offices,Property valuation and inventory offices, Forest surveying institutions, etc.)

A. REQUIRED HARDWARE AND SOFTWARE

Hardware0 Dataserver for 20-30 workstations, data storage equipment for

amount 10Gb data backup units, equipment for communication $145,000.00* 15 workstations for digital mapping ($15000x15) $225.000.00

Subtotal $370,000.00

SoftwareMultiuser database management system $55,000

Survey Equipment* 5 total stations with accessories ($8200x5) $41,000.00* 3 high precision total stations with accessories (8000x3) $54.000.00

Subtotal $95,000.00

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ANNEX E.2Page 3 of 3

SUB TOTAL (III) $520,000.00TOTAL I & II $1,006,840.00

111. LAND REGISTRATION SYSTEM

A. OFFICE EQUIPMENT FOR LANDBOOKS (photocopiers, etc.) $200,000.00

GRAND TOTAL (I + 11 + III) $1,206,840

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ANNEX FPage 1 of 1

LATVIA

AGRICULTURAL DEVELOPMENT PROJECT

Estimated Disbursement Schedule

Cumulative PercentFiscal Year Amount Amount

(US$ Million) (US$ Million)

P 19943rd Quarter 1.0 1.0 44th Quarter 1.0 2.0 8

FY 1995Ist Quarter 1.5 3.5 142nd Quarter 2.0 5.5 2223rd Quarter 2.0 7.5 304th Quarter 2.5 10.0 40

FY 19961st Quarter 2.5 12.5 502nd Quarter 3.0 15.5 623rd Quarter 2.5 18.0 724th Quarter 2.0 20.0 80

FY 19971st Quarter 2.0 22.0 882nd Quarter 1.5 23.5 943rd Quarter 1.5 25.0 100

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ANNEX GPage 1 of I

LATVIA

AGRICULTURAL DEVELOPMENT PROJECT

SELECTED DOCUMENTS AVAILABLE IN THE PROJECT FILE

1. Consultant report on Crop & Livestock, July 1993.

2. Consultant report on Agroprocessing, July 1993.

3. Consultant report on Prices and Policy, March & July 1993.

4. Consultant report on Marketing, July 1993.

5. Consultant report on International Trade, March 1993.

6. Consultant report on Rural Finance and Banking, March, July 1993.

7. Technical notes on forestry and forest industry, privatization, land reforms.

8. Draft Feasibility Studies on Agro- and Forest-Industry Subprojects, July 1993.

9. EC-PHARE TA program for 1993-1995.

10. BITS TA program for 1993-1994.

11. Draft Agricultural Sector Review, EC4NR, August 1993.

12. Farm models, Crop budget, Prices, August 1993.

13. Draft Statutes and Operational Manual for AFC.

14. A RABO proposal submitted to EC-PHARE for TA support for AFC.

15. Corporate Plan and Financial Projection of Latvian Investment Bank.

16. Government Approval for AFC establishment.

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LATVIA Chart IAgricultural Development Project

Implementation Plans

1993 1994 1995 19964 1 2 3 4 1 2 3 4 1 2 3 4

AFC. Preparation of Operational Manual

. Staffing and Training

. Establishment of the first-act of Sateilite offices

. Subsidiary loan agreements

. Start accepting loan applications

. Mid-term Review

H!. IBL. Subsidiary loan agreements

Review of feasibility studies

Start accepting loaw applications.~~~~~~~~ . . N : _ _:c. _;

* Mid-term Review

Hi. Technical Assistance. Procurement of land equipment

. TA for AFC- Procurement of Equipment

- Interim TA (expatriate)

- Long-term TA (expatriate)

. TA for Poject Management Unit- Procurement of Equipment

- Staffing and Training

* LAnd Reform:- Simplification of legal framework

. TA for land cadastre & registration- Survey/Cadastre

- Training

. TA for Demonopotization & Privatization

TA for Wholesale market feasibility study

. TA for Quality Control

* TA for Extension services

Design and Preparation Implementation

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LATVIA Chart 2Agricultural Development Project

Key Monitoring Indicators

1994 1995 1996Unit 1 2 3 4 1 2 3 4 1 2 3 4

I. On-farm Development

. Subloans Submitted No.

.Subloans Approved N".

TOTAL Subloan Amount $

. Loan Recovery Rate

- Interest %

- Interest & Principle %

I. Technical Indicator

. Crop-Planted Area (by type) ha- Yield ton/ha

. Livestock (by type) head- Yield kghead

. Fertilizer Use kg/ha

. Pesticide Use kg/ha

ml1. Processing Industries

F Food Processing Subproject- Submitted No.

- Approved No.

F Forest Inlustry Subproject- Submitted No.

- Approved No.

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Chart 3

PROJECT MANAGEMENT UNIT ORGAN'IZATIONAL CH-ART

Staff: Director, Deputy Director, and five local staff

MAIN ACTIVITIES:

1) Project management of World Bank agricultural developmentprojects in agriculture.

2) Coordination of project management unit and overalltechnical assistance program in agriculture.

3) Management of other capital or technical assistanceprojects as required.

AGRICULTURAL DEVELOPMENT PROJECT (WORLD BANK)

. II in

Farm Credit Agro-Processing and Technical AssistanceForest Industries Coordination and

Management Unit(Small Private (Private Sector)

farm Developmen-) For all TA from:1) World Bank2) EC Commission4) Bilateral and other

Multilateral agencies

I IAgricultural Investment

Finance Bank ofCompany Latvia

Agro-ProcessingFarmers and Forest

Industry