Technical Assistance Consultant’s Report · 2014-09-29 · Technical Assistance Consultant’s Report This consultant’s report does not necessarily reflect the views of ADB or

Technical Assistance Consultant’s Report

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Project Number: 4217-UZB February 2007

Uzbekistan: Furthering Reform in the Grain Sector (Financed by the Japan Special Fund)

Prepared by

ANZDEC Limited in association UBI Consulting

For

Rural Restructuring Agency

Government of Uzbekistan

FINAL REPORT

FURTHERING REFORM IN THE GRAIN SECTOR

PREPARED FOR

Rural Restructuring Agency, Government of Uzbekistan and the Asian Development Bank

ANZDEC LIMITED

IN ASSOCIATION WITH

UBI Consulting

February 2007

TA 4217: Furthering Reforms in the Grain Sector Final Report

CURRENCY EQUIVALENTS (as at 1 February 2007)

Currency Unit – Sum (or Soum) US$1.00 = Sum1, 230

ABBREVIATIONS

AADP Ak Altin Agricultural Development Project

ADB Asian Development Bank

ADPF Association of Dehkan and Private Farmers AGCLRI Andijan and Galla Aral Cereals and Legumes Research Institute AIME Agricultural Institute for Mechanization and Electrification ASC Agricultural Service Center

CAIIR Central Asian Institute for Irrigation Research

COM Cabinet of Ministers COS country operational strategy CSPU country strategy and program update

DAWD District Agriculture and Water Resource Department DCF discounted cash flow EA Executing Agency

EIRR economic internal rate of return

FIRR financial internal rate of return FSU former Soviet Union GAP gender action plan GoU Government of Uzbekistan

GPIP Grains Productivity Improvement Project

ha hectare ICB international competitive bidding IDA irrigation deficit area

IEE initial environmental examination IMF International Monetary Fund km kilometer

MAWR Ministry of Agriculture and Water Resources

M&E monitoring and evaluation MOE Ministry of Economy MOF Ministry of Finance

MTP Machine Tractor Park NPV net present value

O&M operation and maintenance PFI participating financial institution

PGI Plant Genetics Institute PMO project management office PPI Plant Protection Institute PSC project steering committee

PSO project site office


PWG project working group RBAC Rural Business Advisory Center RESP Rural Enterprise Support Project (World Bank)

RRA Rural Restructuring Agency RRP Report and Recommendations to the President (of ADB) SCLR State Committee for Land Resources

TA Technical Assistance

GLOSSARY

Dehkan farms Farm plots of 0.20–0.35 ha given by the state to urban or rural households to augment household backyard plots. Employees of larger cooperative (shirkat) farms can also be dehkan farmers.

Elite seeds Progenies of super elite seeds. Elite seeds are produced by seed farms. F1, F2, F3 seeds Certified seeds. F1 seeds are progenies of elite generation seeds. F2 and F3 denote

succeeding generations after F1. Little genetic deterioration occurs between generations of wheat provided that adequate quality control standards are maintained in seed multiplication.

Grain shattering Breakage (shattering) of wheat head because of high temperature and lack of moisture commonly caused by late harvest in the summer. Once grains fall to the ground, they cannot be machine harvested, causing substantial harvest loss.

Irrigation-deficit area (reduced irrigation area)

Irrigated or irrigable areas that cannot be irrigated in June-August due to inadequate water at the source and inefficient water conveyance. This area cannot be used for cotton cultivation.

Oblast Province; also known as Wiloyat in Uzbek. Shirkat farm A large cooperative farm (1,500–2,500 ha), converted from a collective or state farm. State procurement quota

Obligatory harvest volume that must be sold to the state at prices determined by the state. Farmers are obliged to fulfill their quotas first before selling crops at local markets at negotiated prices.

Super elite seeds

Also known as foundation seeds, produced by research institutions and accredited (foreign joint ventures) seed companies. Seed imports generally comprise foundation and parent (breeder) lines.

NOTE(S)

“Soum” or “Sum” are used interchangeably. Russian and Uzbek languages are used in official documents. Spelling may vary between

the two languages (e.g., Sum, Soum or Tashkent, Toshkent or Wiloyat, Oblast). The fiscal year (FY) of the Government ends on 31 December.

In this report, “$” refers to US dollars.


CONTENTS

Page

EXECUTIVE SUMMARY 1 A. Background and scope of the TA 1 B. Organization and assessment of the RBACs 1 C. Principal activities of the TA 1 D. Outcome of TA Activities 2 E. Findings 3 F. Recommendations 5

II. BACKGROUND AND SCOPE OF THE TA 6 A. Background and scope of work 6 B. Organization of the TA and baseline assessment of the RBACs 9

III. PRINCIPAL ACTIVITIES OF THE TA 13 A. Consultants’ mobilization 13 B. TA facilities 14 C. Consultations and field visits 14 D. Official meetings 15 E. Workshops 15 F. Reports 17

IV. OUTCOME OF THE TECHNICAL ASSISTANCE 18 A. Achieving the TA objectives 18 B. Main work plan tasks and activities 20 C. Progress towards planned deliverables 23

V. FINDINGS 24 A. Completing the Terms of Reference 24 B. Organization and operations of the Unitary Company and the RBACs 24 C. Farmer outreach program 26 D. Demonstration farms 26 E. Provision of legal services 27 F. The Wheat Industry 28 G. Gender and ethnic minorities 31

VI. RECOMMENDATIONS 32 A. Further activities 32 B. Expected Outputs 33


1

EXECUTIVE SUMMARY

A. Background and scope of the TA

1. The TA was implemented to support the transition of, and reforms in, the agricultural sector of Uzbekistan. Uzbekistan became independent in 1991 and began a steady transition from a centrally planned economy to a managed economy. At the same time it was decided that the country should become self-sufficient in wheat production. However, the emphasis on a dual-crop (cotton and wheat) culture meant that yields per hectare fell. ADB provided a major loan to the GoU to cover the technical aspects of wheat productivity including development of new seed varieties, institutional strengthening of research institutes, development of demonstration farms and rehabilitation of irrigation works. However, it was understood that the structural aspects of farming would also need to be tackled. The GoU moved towards restructuring the major state farms (shirkats) and encouraging private farms (dekhans). Equally, the GoU supported changes in the processing of seed for planting. In certain designated areas GoU reduced the so-called “State Order” for wheat procurement (which attracts a low price). The role of the TA was to focus on the commercial aspects of the wheat industry and aimed at furthering existing reform processes through practical interventions at the field level. In particular the TA undertook work with the Unitary Company of Rural Business Advisory Centers, Kishlok Biznesi Uchun Maslakhat Khizmati, and its subsidiaries, three Rural Business Advisory Centers (RBACs) located in “focus areas” in Zomin district of Djizzak Oblast, Katturkurgan district of Samaqand Oblast and Quyi-Chirchik district of Tashkent Oblast. These three districts encompassed approximately 2,800 farms with an irrigated land area of 35,000 ha. At an average yield of about 4 tons of wheat per irrigated hectare, this area produced some 140,000 tons of wheat. The focus areas were highly representative of wheat production in the central regions of Uzbekistan and therefore provided an excellent proving ground for new initiatives in developing agriculture.

B. Organization and assessment of the RBACs

2. The RBAcs were subsidiary units of the Unitary Company. These were small (3 or 4-person staff) units closely working with the PIUs of the GPIP loan project. In general the staff of the RBACs was found to be experienced in various technical disciplines related to agriculture. However, they lacked business planning and other commercial skills. Office facilities were good, but lacked transportation and IT resources. The TA decided that the best results could be accomplished by working closely with the RBACs.

C. Principal activities of the TA

3. The TA mobilized a team of international and domestic consultants covering various disciplines including business management and planning, financial analysis, legal services, social and agricultural outreach. The TA worked closely with the main GPIP project but operated independently from a different suite of offices. As mentioned, the main role of the team was to strengthen business planning and related activities via the RBACs. The context of this was the changing economic and institutional structure of the wheat industry (i.e., change from shirkat to dekhan farms) and the development of so-called Agricultural Service Centres (ASCs) as independent business units providing mainly tractor and combine harvester services. The team started work in late March 2006 and worked through until December. Visits by the international team members (Business Management Specialist/Team Leader and Social Outreach Specialist) were made intermittently while the local consultants worked mostly full time.


2

4. The TA team established an operational office in Tashkent city adjacent to the office of the Unitary Company (in the same building) and near to the Executing Agency (RRA). This office provided a full support service including accounting, office support (email etc.) and document translation.

5. The TA team’s approach was to work via extensive consultations and field visits (to the RBACs, farms and other agricultural and related enterprises in the districts) and to support this activity by training and workshops. The following workshops were held:

• Inception Workshop - 3 May • Industry Strategy Review Workshop - 20 July • IT Training Workshop - 21 and 22 September • RBAC Capacity Strengthening Workshop - 3 and 4 October. • Business development and Investment Workshop - 14 December • Training in “1:S” accounting software - between 26 and 29 December

6. A feature of the TA was the regular reporting schedule. The following reports were submitted:

• Inception Report - 27 April 2006 • Progress Report - 5 July 2006 • Mid-term Report - 9 August 2006 • Progress Report - 10 October 2006 • Draft Final Report - 22 December 2006

D. Outcome of TA Activities

7. The TA was completed in two phases. The first half of the work of the TA (i.e. March to July) focused on fact-finding and establishing the needs of the various stakeholders (especially the RBACs). An understanding of the wheat industry policy environment was gained and recommendations were tabled for consideration by the RRA and ADB. From July until December the TA team focused on specific issues that were identified during the first phase of the work. In general, the TA progressed satisfactorily. However, the TOR proved to be ambitious in terms of available resources and the depth and magnitude of challenges to be tackled. Nevertheless, a solid basis of knowledge and trust was established with key stakeholders and working relationships were good. In particular the RRA provided considerable support for the work of the TA team. The TA delivered tangible advice and training. It was found that this work was valuable and could be an on-going activity through the period of the GPIP using local consultants.

8. In addition to considerable informal and personal contacts aimed at strengthening the capacity of the RBAC staff, the TA was able to achieve tangible outputs. These included:

• Reviews of existing business plans for combine harvesters • Development of a new business plan/ loan application template • Upgraded IT facilities in the RBAC offices • Improved accounting procedures • Information brochures on agriculture and legal services • Development of a strategy for an outreach program and input to development

of demonstration farms (under the GPIP) • Discussion papers on policy, production costs and machinery usage • Review of the Agricultural Service Sectors • A feasibility study and business plan for a medium-scale flour mill


3

E. Findings

9. As a result of these activities, the TA found a number of important issues that required attention by the Executing Agency and the ADB.

a. RBAC Operations

10. The RBACs confronted various institutional challenges including:

• A mixture of objectives and methods caused by their geographic and social situation

• Issues arising from the relationship between the RBACs and the PIUs, in terms of who were in charge of activities.

• The role of the Unitary Company for the three RBACS required clarification • The financing procedures of the RBACs required attention as did the company

accounts and management systems 11. The RBACs need continued and substantial support from other consultants or through the GPIP before they could be sustainable. A new approach needs to tackle the challenges mentioned above and empower the RBACs to develop into individually sustainable enterprises.

b. Farmer outreach and demonstration farms

12. The RBACs were very willing to undertake an outreach program. The main issue for the TA was how an outreach program could be developed given that many of the original social or cultural structures remain in place despite a progressive but slow transition to a market economy.

13. Inadequate transportation facilities within the program prevented the RBACs from properly interfacing with the farmers, ASCs and the banks and supervising their demonstration areas. This, in turn, has prevented them from successfully implementing any outreach program developed by the project.

14. The TA worked closely with GPIP personnel to improve planning and implementation of demonstration farms. Unfortunately planning and implementation of the farms was ineffective during the 2005-2006 season. It is unlikely, under current arrangements and available resources, that the farms will be successful in the coming wheat season (2006-07). The TA suggested that this season be used as a learning experience for all involved. Further, it has been recommended that additional international inputs be provided either through this TA or the GPIP.

c. Provision of legal services for farmers

15. Most farmers had little, if any, access to the justice system. The RBACs rightly identified this as an issue for the TA but had been unable to tackle it because of the lack of resources to employ lawyers directly. The TA undertook a series of actions aimed at improving the current situation. These included preparation of a brochure for farmers setting out aspects of contracts and other laws and decrees relevant to them. However, this is a major area of sufficient importance which would merit a separate approach under a different TA.


4

d. The wheat industry

16. Uzbekistan has adopted a capital-intensive and high-cost production model. Diminishing returns have set in and a new approach is needed. Despite efforts to change the structure of the industry, it remains centrally managed. The pace of change is slow. The State Order system remains a considerable disincentive to investment at the farm level, as does the overall role of UzDonMahsulot as a monopolistic provider of seeds and post-harvest services. The TA indicated that genuine transition starts with a transfer of ownership of rural resources, especially land, to rural dwellers. Local authorities must cease direct management of the industry, and privatization of official MTPs and the UzDonMahsulot system should continue.

17. The structure of the seeds sub-sector was found to be closely related to overall agricultural policy, the institutional structure of the MAWR and related institutes, and the role of UzDonMahsulot. At the farm level in the focus areas there was little incentive to invest in the resources needed to produce viable seed. There was considerable evidence from neighboring countries that the approach to seed treatment in Uzbekistan is wrong. The cleaning plants are too large, inefficient and wrongly located. Centralized management did not provide the right level of detailed care necessary to provide good seed. Seed application rates are generally too high precisely because of this. Elsewhere great success has been shown by introducing small-scale seed cleaning plants operated by the farmers or farm groups themselves. However, to undertake this approach in Uzbekistan would mean changing the entire institutional structure of UzDonMahsulot. To put this simply: the government has no business being in the wheat/flour milling business. This is quintessentially a private sector activity where individual flour mills or coherent groups of mills can work with local farmers for their supplies of wheat and with the local or regional market for flour. Private sector operators can also focus on technical efficiency and base investment plans on their own resources rather than on government budgets which are determined according to economic planning principles rather than commercial sense. This is not a question of changing the state order system at the margin, but a wholesale restructuring and privatization of the milling sector. Such reform will not come from UzDonMahsulot itself, but must be directed from the highest level of government. It is a major project worthy of donor assistance.

18. Consequently the TA reached a decision to work at the demonstration farms in the focus areas. This engagement has helped in providing evidence that farms in the focus areas are capable of producing high yields of high-quality wheat grain. In this sense, the demonstration farms, if properly organized and managed, can provide a working example of what a properly-run seed farm is like. This is the reason why it is essential for the demonstration farms to succeed and receive ongoing support from donors.

19. The inventory of agricultural machinery is old and obsolete and needs to be replaced. The TA review of the CLAAS combine procurement program indicated an overwhelming approval by farmers of the machine harvester based on its technical performance. No economic assessment was possible given the lack of data and the fact that this was the first year the machines were used.

20. Many tractors date back to the mid-1980s and are subject to long periods of downtime for repair and maintenance. Operating costs are probably high because of old engines (that consume more fuel), poor tires (that reduce traction), and the need for spares. The overall supply of tractor services is inadequate and the TA supported suggestions to replace the tractors in the focus areas with newer models.


5

e. Gender and ethnic minorities

21. While issues of ethnicity are pertinent to the agricultural sector in Uzbekistan, the regions selected as focus areas within the GPIP project do not exhibit any significant problems. No identifiable conflicts or discriminations have been identified. In general female farmers are treated equally by the RBACs.

F. Recommendations

22. Additional technical assistance is necessary to sustain the TA achievements. The reform process in the grain sector/industry remains slow and key institutions require further institutional strengthening, including capacity building. In particular, the development of demonstration farms (which are central to a successful outreach program), capacity building for Rural Business Advisory Centers (RBACs) and Agricultural Service Centers (ASCs), and more effective GPIP implementation, would require continued technical support and outside inputs if the desired changes are to be achieved.


6

II. BACKGROUND AND SCOPE OF THE TA

A. Background and scope of work

1. Background of the grain sector

23. Uzbekistan’s approach to improving the productivity of its agriculture, particularly in the grains sub-sector, has been described in the Terms of Reference and the RRP which led to the Grains Productivity Improvement Project1. Precursor PPTA work to these documents was undertaken in 2000, and provided detailed descriptions of the main elements of the grains industry, in particular research programs undertaken at various institutes, the seed industry, and the operations of other support industries, including Machine Tractor Parks (MTPs)2

24. In brief, agriculture in Uzbekistan has gone through considerable transition both in terms of the crops grown and organization of landholding and related farming arrangements. The grains sector has been developed since 1991 (on Uzbekistan gaining official independence) under a policy of self-sufficiency. The main effect of the reforms was the shift from a livestock-fodder-cotton pattern of production to a wheat-cotton rotation. Development was based on central planning of planted areas, the provision of heavily subsidized inputs, imposition of production targets (so-called State Orders), all without reference to commercial or economic efficiency. Since 1991, wheat production was developed both on rain-fed and/or irrigated lands, where wheat replaced cotton plantations. Concerns about the sustainability of this production and the country’s near total dependence on irrigated wheat crop3 led the GoU to consider the implementation of phased reforms to improve productivity. The overall reform strategy in the grain sector was directed at extensive cultivation and increased production of wheat on the rain-fed areas where yields are generally low, hence the selection by the Project of focus districts which are in the driest and lowest yielding parts of the country (i.e. Tashkent, Djizzak and Samarqand).

25. The following technical problems were tackled during the reform program:

• development of a locally oriented seed research and propagation industry • restructuring of the supply of other necessary agricultural inputs and post-

harvest arrangements • efficient management of soil and water, and use of irrigation systems

26. These reforms were to be associated with improvements in economic arrangements surrounding the industry, including the ownership of farmlands, business arrangements for the supply of seeds and other agricultural inputs, and processing and marketing/price arrangements for the final product. The entire value chain from land preparation through seed supply, cultivation, harvesting, post-harvest handling, and processing was to be considered for reform and increased investment. In this respect the matrix of interactions between different elements of the value-chain, and the participants (industry stakeholders) in the value chain, presents a considerable degree of complexity in which each individual has a critical part to play. The TA impacted at various levels of the industry. The principal aspects of this activity are discussed below in terms of one possible axis of the industry matrix, i.e., the technical progression from land preparation to final use of the wheat grain output. It should be noted that other possible axes of the matrix include financial agencies, 1 RRP: UZB 31577, Grains Productivity Improvement Project, 2003 2 ADB PPTA 3094, Grains Productivity Improvement Project, 2000, Consultants Final Report 3 Prior to 1990 almost all the wheat grown had been rain-fed with consequently very low yields – about 1 ton per hectare. Over 4 tons/ha. can be achieved under irrigation


7

government agencies, policy makers, and those directly involved in the industry (such as farmers and supply service centers). Appendix 6 provides a review of agricultural policy in Uzbekistan and Appendix 7 sets out findings related to wheat costs of production and farm machinery usage.

2. Scope of work

a. Land preparation and water supply

27. The wheat crop is threatened because of a high dependence on an irrigation system that is made to perform beyond its design capacity. Soil conditions worsened due to the excessive use of water (i.e., for two main crops – cotton and wheat), and there was a loss of humus in the soil. Improved land and water management is part of the work undertaken by the Grain Productivity Improvement Project with which this TA was associated.

b. Seed supply

28. The structure of the seed industry is a prime determinant of how this part of the grains industry develops in the future since it provides the context for the operation of individual seed businesses. There are two aspects of seed supply:

i. Seed multiplication

29. A significant problem facing Uzbekistan was the lack of suitable locally developed wheat varieties. Original seed (i.e., breeder and super-Elite) produced by the research institutes has not met international standards. Uzbekistan’s seed industry relies on imports of original seed to be multiplied by a relatively large number of specialized farms (over 500, 2/3 in the Fergana Valley). The concentration of seed multiplication in one geographical area causes high transportation, losses and heavy dependence. These farms produce Elite seed. Certified seed may be produced on regular farms, and the TA has assisted with business planning related to the production of certified seed through the provision of suitable cultivation equipment.

30. An important feature of any seeds industry is the close links between research and the downstream network of farm multiplication units. The Grains Productivity Improvement Project recognizes this fact and has an important capacity building element for the institutes. The production of seed for a new variety usually takes four -- five years. It will then take two -- three years for enough seed to be available for large-scale cultivation. In this respect the development of seed farms is a long-term and difficult business proposition. For this reason the organization of such farms is usually undertaken by large enterprises having the resources to undertake the work. There are relatively few major seed companies worldwide, and they do not concentrate on open-pollinated species (i.e., wheat) which farmers themselves can retain and re-plant. They prefer to focus on hybrid varieties that must be re-purchased annually. In Uzbekistan, seed farms come under the control of the MAWR and usually contract their output to a quasi-autonomous state-owned company (i.e. UzDonMahsulot) that provides seed treatment and supplies the seed to farmers for planting.

ii. Seed treatment and supply

31. UzDonMahsulot has been the planner and organizer of the seed industry. Under UzDonMahsulot, the quality of the wheat seed is poor, and management of seed supply is deficient. UzDonMahsulot seed cleaning and storage facilities fail to segregate varieties. In spite of these, many farms are not able to buy seed from other sources because UzDonMahsulot is the only source of credit. There is considerable over-capacity in the seed treatment sector (i.e., facilities where seeds are sorted, cleaned and treated with fungicide) in


8

the country. UzDonMahsulot reports that in the three focus areas of the project, two (Kuyi-chirchik in Tashkent oblast and Katta-Kurgan in Samarkand oblast) have overcapacity of 4,250 tons and 7,000 tons respectively. However UzDonMahsulot maintains that Zaamin in Djizzak oblast requires an additional 9,300 tons of capacity.

iii. Planting and cultivation

32. On-farm application rates for seed are too high (reported at 250 kg/ha – compared to a standard maximum rate worldwide of 160 kg/ha4). Farmers report that they are obliged to accept large amounts of seed from UzDonMahsulot, which provides the seed on credit (i.e., the seed is not paid for on delivery). The cost of the seed is deducted from the account that the farm would have at the Galla Bank, which is controlled by UzDonMahsulot, after payment is made post-harvest for the wheat grain which is bought by UzDonMahsulot). Private seed companies have to compete with this system of “free” credit, and the fact that UzDonMahsulot usually provides the only buyer of wheat grain. The local market also serves as alternative marketing channel. With regard to cultivation of wheat, most farms lack adequate machinery, and many have requested loans under the project for tractors and cultivators. These equipments can be provided from manufacturers in Uzbekistan, except for combine harvesters that need to be imported and are difficult to acquire due to lack of foreign exchange.

c. Harvesting

33. Uzbekistan’s climate and the characteristics of most of the wheat varieties mean that the harvesting window is short (some 20-30 days before shedding occurs; the harvest starts mid-June). Almost all of the harvest is carried out by the MTPs (usually there is one per district). MTPs are responsible for scheduling machinery use and providing fuel as part of a rental agreement. MTPs were equipped with a mixed inventory of harvesting equipment from old Russian Neva combines to modern Case IH axial flow combines. A JV agreement with Case IH, which included training mechanics at the Tashkent Institute for Irrigation and Agricultural Mechanization Engineers (TIIAME), had difficulties and closed. Case IH machines are expensive to maintain and often too large for the smaller fields found in Uzbekistan. The result was a thrust under the project to replace both Neva and newer Case IH combine harvesters with more appropriate machinery from CLAAS GmBh of Germany. These new machines are less complex that the Case IH and so easier to maintain and slightly smaller so they can operate on the smaller fields found in Uzbekistan (in contrast to Case IH which are designed for larger North American fields.

d. Post-harvest handling and processing

34. For most post-harvest services UzDonMahsulot has provided a “one-stop-shop” (i.e., from transport and provision of storage to grain milling and flour production). UzDonMahsulot is the dominant player in the grains industry in Uzbekistan5. Its position is entrenched because the company provides most of the built elevator storage and milling capacity in the country. Because UzDonMahsulot is the primary supplier of seed and buyer of wheat grain it can provide credit and other financial services for farmers and does so via the G’alla Bank6.

35. UzDonMahsulot has suggested that it provides the most efficient post-harvest service for farmers. It is capable of doing so because prices charged for its services (e.g., it offers some farms a “toll” milling services whereby it charges only the milling costs) do not include 4 E.g., in northern Iraq (Kurdistan), southern Turkey, and parts of Iran where agronomic conditions are similar. 5 After the initial project design at PPTA stage in 2000-01 none of the project documents make any mention of or

reference to UzDonMa, which is the single largest influence on the grain economy in Uzbekistan. 6 Despite efforts by the RRA and ADB, G’alla Bank decided not to participate in the project.


9

the cost of capital (since most of its facilities were built during the Soviet era). However, it has upgraded some processing facilities and has a reasonable degree of milling efficiency (75 percent yield of flour on grain milled).

36. In the focus areas, UzDonMahsulot operated a number of mills, including a total capacity of 400 tons/day in the area of Djizzak. Overall, there was excess capacity of milling in the focus areas, though the efficiency of at least one mill of 200 tons/day (in Djizzak town itself) is said to require improvement. While privately run mills do exist, these are small and cater only to direct farm needs. There are also examples elsewhere in Uzbekistan of specialty mills utilizing imported wheat grain of the durum variety used for pasta (not available from Uzbek farmers who grow soft wheat).

e. Agricultural support services

37. Farms obtain support from a number of external agencies. These include suppliers of fertilizers, agro-chemicals (pesticides, herbicides) and machinery. Farms also require specialized machinery for tilling the fields and for harvesting. Typically, in Uzbekistan machinery owned by the farms are old and poorly maintained. They require access to transport (to move the harvested grain) and storage warehouses or elevators. Farms also need specialized advisory services, including technical advice (e.g., soil testing) and business-related services which may help farmers plan crop rotations and a farm-gate sales strategy. Access to these services is provided mainly by government agencies (e.g. research institutes) or quasi-government enterprises. Because reform of UzDonMahsulot has been difficult to tackle, and because the MTPs are largely moribund and perhaps impossible to restructure, a strategy has been developed to introduce market mechanisms in the wheat sub-sector. This has led to the strengthening of existing RBACs and development of new ASCs proposed under the Loan Project. RBACs have been established under the Association of Dekhan and Private Farmers to act as “consulting companies”, providing a range of information and planning services. Agricultural Service Centers (ASCs) are planned to replace some of the functions of both the MTPs and UzDonMahsulot. The Terms of Reference said that the ASCs will undertake machinery hire and repair, oil extraction (from cotton and safflower) and flour milling. All these aspects have been investigated and developed by the TA.

B. Organization of the TA and baseline assessment of the RBACs

1. Implementation of the TA

38. The TA was implemented under the Head Contract with ADB, signed in February 2006. The ADB Uzbekistan Resident Mission (ADB URM) in Tashkent administered the TA implementation. The TA worked under the auspices of the Rural Restructuring Agency (RRA) as the Executing Agency appointed under Resolution of the Cabinet of Ministers of the Republic of Uzbekistan #492 dated 21st October 2004, and in close association with the Unitary Company of Rural Business Advisory Centers, Kishlok Biznesi Uchun Maslakhat Khizmati, and the Rural Business Advisory Centers (RBACs). Support from both agencies was excellent.

39. The RBACs are the territorial subsidiaries in each of the focus sites created under the Unitary Company, which in turn was established by the Association of Dehkan and Private Farmers (ADPF). The goal of these entities is to provide consulting services to farmers. As such they are the immediate counterparts of the TA team as well as being primary recipients of assistance under the TA. The RBACs are closely linked to the Project Implementation Units (PIU) which implement the provisions of the main Grain Productivity Improvement Project (GPIP — they share the same buildings in the project focus areas). All these entities are wholly financed by the ADB GPIP but are expected to become self-sustaining business


10

enterprises after project completion. The RBACs operated in the context of a changing institutional and commercial environment. The GoU has consistently stated that it understands the need for reform as part of the effort to improve agricultural productivity. In this aspect the RBACs provided a significant step towards developing small-scale professional advisory or consulting enterprises similar to those found in more developed countries. The TA, worked with the RBACs on fundamental issues, i.e. farmer outreach, business planning, and developing skill levels for the RBAC staff.

2. Benchmark assessment of the Rural Business Advisory Centres

40. The TA team undertook a preliminary assessment of the RBACs based on several visits to their site offices early in the TA period (in April and May). The purpose of this “benchmark” assessment was to establish a clear understanding of the circumstances and activities of the primary business units with which the TA was to work; in other words, to understand the operations of the agencies actually responsible for furthering the reform program. Field visits, discussions and direct observations were conducted. However a more structured approach was adopted through a questionnaire-based survey. Appendix 3 provides a summary of baseline data and results of the questionnaire survey.

41. The following aspects of the RBAC operations were assessed as benchmarks by the TA:

a. Location and logistics

42. The three Centers (RBAC and PIU) are located centrally in the focus areas. Road access is generally good and the location of the RBACs has made it feasible for farmers to contact staff e.g., when they came to market. However, transport at the RBACs remains inadequate because there is only one car available between the PIU (housed with the RBAC) and the RBAC itself. Usually the car is utilized by the PIU Director in each area while the RBAC staff had to use public transport or taxis (paid for by themselves).

b. Working conditions

43. Office accommodation had been rehabilitated in the three RBACs; there are well-equipped desks and computers. The buildings used by the RBACs had been reconstructed by the GPIP, except for the toilet facilities. In general, working conditions have been found to be good compared to other office buildings, especially in the countryside. From this perspective a career with the RBACs would be attractive and these units could be expected to retain staff.

c. Communications and management

44. The RBACs had no Internet connection and email. They communicated through telephone land lines, limited cell phone connections, and faxes. Lack of internet was a major constraint for any business development activity. The reason for the lack of internet services was that there are no service providers in the focus areas and long distance calls are expensive. It was apparent that the RBACs have been centrally directed from the Unitary Company (in Tashkent) which receive direction and/or guidance from the GPIP project management. The PIU Directors in the focus areas seemed to dominate the activities of the RBACs. For example, the use of the car in each area was directed by the PIU not the RBAC.

d. Staff

45. Personnel in the RBACs appeared to be experienced in agriculture. The professional staff were qualified in terms of disciplines (i.e., planners, economists, agronomists, M&E).


11

They appeared to have good knowledge of their immediate service domain. All persons required training in IT and business practices, especially business planning. In general, the TA team was impressed by the demeanor and positive outlook of the RBAC staff. By local standards salaries at the RBACs are good which could indicate that staff turnover would be low.

e. Outreach

46. Immediate farmer outreach was conducted by the RBACs via workshops, seminars, and training. Table 1 shows the outreach at the start of the TA.

Table 1: Farm Outreach Activities Activity Workshops Tuman

Wiloyat

Farms

No. w'shops

Persons

Persons/ farm

Persons/ Workshop

Kattakurgan Samarqand 941 22 673 0.72 31 Zamin Jizzak 1,373 27 1,977 1.44 73 K-Chirchik Toshkent 497 40 1,146 2.31 29 TOTAL/Average 2,811 89 3,796 1.35 43 Source: RBAC Report, March 2006 and previous 47. Some results were achieved leading to loan applications from the richer farmers and larger MTPs for farm machinery.

Table 2: RBAC Business Activities (March 2006) Tuman No.

farms Contracts

signed (a)

No.Plans prepared

(b)

As % signed (conversion)

(a/b)

As % No.

farms

Value USD

Value/plan USD

Kattakurgen 941 8 8 100.00% 0.85% 2,618,000 327,250 Zamin 1373 5 5 100.00% 0.36% 758,500 151,700 K-Chirchik 497 12 24 50.00% 2.41% 3,509,800 146,242 37 25 83.3.00% 6,886,300 186,116 Source: RBAC reports of March 2006 and previous 48. The RBACs make an effort to establish written communication with farmers (e.g., brochures, newsletter etc.). However the outreach program was constrained by lack of resources, especially transport (as mentioned above). The inadequacy of the outreach program became a central focus for TA activity.

f. Services provided by RBACs

49. All activities of the RBACs were directed to the preparation of business plans for combine harvesters and other equipments (tractors, cultivators). These plans were mainly for the CLAAS “Dominator 130” small combine harvester manufactured in Germany. The plans were based on inappropriate templates relating to large-scale public sector investment projects. They contained unnecessary detail (i.e., quantitative data) and were excessively long (60 pages in one case). The time taken to prepare the plans (up to 20 days/plan) was too long. The plans should preferentially be in Uzbek which is the language of choice of the local people and farmers.

50. Advice to farmers may have been provided on various aspects of tax and legal issues. However the TA team found the legal advisory service to be very inadequate. This was because there were no lawyers employed directly. At the same time access to


12

professional legal services (i.e., independent lawyers) was very restricted mainly because of cost.


13

III. PRINCIPAL ACTIVITIES OF THE TA

A. Consultants’ mobilization

51. During the period 21 March to 15 December 2006, the following consultants’ mobilizations and inputs were effected:

1. International consultant

52. The Team Leader/Business Planning Specialist mobilized on 21 March 2006, demobilized on 5 April for a scheduled visit to Pakistan for an ADB Fact-finding Mission7, re-mobilized on the 16 April and then de-mobilized on 16 May for a period of scheduled leave. He re-mobilized in Tashkent on 16 June 2006 and remained on-site until 14 August. He returned to the project on 5 September remaining until 8 November returning again on 25 November until 20 December.

53. The Social Outreach Specialist (SOS) mobilized on 29 June and remained in the country until 28 July for his first input. He re-mobilized on 7 September and completed his second and final input on 6 October.

2. Domestic consultants

54. The domestic consultants have worked throughout the period of the TA. The Legal Specialist Mr. Umid Ubaydullaev left the project to emigrate to Kazakstan and was replaced by Ms. Tamila Rakhmtullaeva under a contract variation. Mr. Karim Alibaev (Agricultural Outreach Specialist) was recruited to support the international Social Outreach Specialist.

Table 3: Summary of Consultants’ Inputs for the TA Period Name Position Mobilised Activity Demobilised

INTERNATIONAL CONSULTANTS 2006 Geoffrey J.Q. Bastin Team Leader/

Business Planning Specialist

21-Mar Inception meetings, field visits to RBACs, establish TA office, purchase equipment

5 April

17-Apr Initiate RBAC "fact-base" and reporting, supervise field visits and review reports

15 May

16-Jun Reviewed local consultants’ work, revised business plan format, undertook field visits, prepared policy and farm machinery evaluations.

14 August

5th September Continuation 8 November 25th

November Continuation 20 December

Steven P. Wright Social Outreach Specialist

29th June Field visits to RBACS, staff assessments, preparation of capacity building and outreach plan

28 July

7th September Field visits and training; assessment of demonstration farms, advisory for outreach. Workshop on RBAC Capacity

6 October

7 For the Sindh Coastal and Inland Communities Development Project as agreed with ADB Uzbekistan Resident

Mission.


14

Building

DOMESTIC CONSULTANTS Abdurazzak Khujabekov

Agricultural Economist

25-Mar Field visits and fact-finding on-going

Umid Ubaydullaev Legal Specialist

25-Mar Preliminary assessment of legal services

De-mobilized on 4 May

Tamila Rakhmtullaeva Legal Specialist

1-Sep Development of legal services via RBACs

22-Dec

Karim Alibaev Outreach Specialist

1-Sep Assisting SOS 22-Dec

Erkin Saidakbarov Business Planning Specialist

25-Mar Overall financial analysis and business planning

30th November

Source: Project Log, Timesheets and Consultants’ Reports B. TA facilities

1. Office accommodation

55. A functional and fully equipped TA office was established during the Inception Phase. An office of 80 sq. meters was provided which is conveniently adjacent to the offices of the Unitary Company in Tashkent on the third floor of 1a Mavlyanova Street.

2. Office equipment

56. Office equipment was purchased. A list of equipment was provided to the Executing Agency, and is shown in Table 4 below.

Table 4. Office equipment list Item Description Quantity

Desk-top Personal Computer

Pentium IV (Celeron 2400), DDR 256, HDD 80 Gbm CD, RW, FDD 3.5, Mouse, speakers, internal modem, LCD monitor

3

Laser Printer HP 1020 1 Color Printer HP 5943 1 Network Hub Not named 1 Fax Panasonic KX-FT907CX 1 Mobile Phone Nokia 2 Desk Telephone Panasonic 1

C. Consultations and field visits

1. Business planning specialists (International and Domestic)

57. The Team Leader/Business Planning Specialist (International) conducted a series of meetings both in the focus areas (i.e. RBACs) and in Tashkent with the business and government communities. Repeated field visits were made throughout the TA period to all three RBACs, and consultations were held with farmers, ASCs, “Official” MTPS and other stakeholders on an informal and ad hoc basis. Specific investigations were undertaken including a study of the use and requirement for farm machinery. The inquiry focused on the operational performance of combine harvesters provided under the ADB’s GPIP Line of Credit. Information was gathered on the procurement, logistics and financial aspects of the harvesters. The costs of wheat production and overall requirement for farm machinery were


15

also analyzed as background information for policy recommendations. The harvesters’ performance was evaluated by the TA, and reported on separately (see Section IV below).

58. The Business Management Specialist (Domestic) visited focus area offices (i.e. RBACs) and performed duties in accordance with his Terms of Reference. In particular he provided analytical and practical support to both the Team Leader and the Social Outreach Specialist during fieldwork.

2. Social/agricultural outreach specialists (International and Domestic)

59. The Social Outreach Specialist familiarized himself with the TA and the project by visiting the focus areas, meeting RBAC staff, and estimating the capacity of human resources and equipment. He collected baseline data, documented the weaknesses of, and threats to, the sustainability of the RBACs and agreed these with RBAC staff before developing his initial recommendations. He participated in a Strategy Review Workshop with the ADB, RRA, MAWR and the Unitary Company. He implemented a one-day workshop in each focus area to address the weaknesses, mitigate the threats, and initiate the capacity-building process. During his second input, the SOS visited each RBAC twice, visited each demonstration farm and undertook a workshop aimed at strengthening the capacity of the RBACs and their outreach program.

60. The Domestic Agricultural Outreach Specialist undertook a detailed questionnaire based survey of the RBACs and used this to prepare the format of the workshop referred to above. He was a resource person at the workshop.

3. Financial analyst (domestic)

61. The Financial Analyst undertook a program of regular visits to the RBACs. He focused on tasks related to the establishment of a method for assessing farm accounts (in order to assist with loan assessment), and preparation of a business plan outline and loan application template. A business plan template was drafted and sent to ADB and to the PFIs. An example of a completed business plan (for a flour mill) was prepared. In addition the FA developed a detailed business plan for a medium-scale flour mill in Zomin District

4. Legal specialist (domestic)

62. Two Legal Specialists were employed by the TA. The first undertook a review of legal issues and requirements at the RBACs during the Inception period, and provided a report on his findings. The second specialist reviewed contract documents and developed a plan for providing legal services. She also developed a brochure for publication by the RBACs which tells farmers their legal duties and rights related to farming activity.

D. Official meetings

63. The TA team met regularly with the RRA and the ADB in order to provide information to project management and to receive guidance. In particular official tri-partite meetings were held on 24 March (RRA and ADB inception Meetings), 12 May (Tripartite Progress Review) and 5 October (Mid-term Review Meeting).

E. Workshops

64. The work of the TA revolved around fieldwork that was then summarized and discussed in a series of workshops held in Tashkent and attended by all stakeholders as well as project management.


16

1. Inception Workshop

65. An Inception Workshop was held on 3 May and attended by persons from ADB, the RRA, the UC and the RRA. The workshop reviewed the business environment faced by the wheat industry and introduced possible opportunities identified by the TA for future financing. These included services by MTPs and ASCs and large-scale agribusiness (e.g. flour milling). In the context of training, the workshop reviewed business planning, legal services, farm economics and accounting and the provision of consulting services by RBACs.

2. Industry strategy review workshop

66. The workshop held on 20 July included discussion of the following subjects:

• Review of work of the TA to date • Competitive aspects of the wheat industry • Business strategies for general investment in the industry • Strategies for the Unitary Company • Planned approach to the RBACs and Outreach • Aspects of the GPIP (e.g., demonstrations farms, WUAs) as they impact on

overall reform process • Future proposed acquisitions of farm machinery under the ADB Line of Credit

(e.g. tractor loans)

3. IT Training Workshop

67. This workshop was held on the 21 and 22 September and delivered training in the following areas:

• Training in computer-based “tools” including e.g., Ms Word, Excel, PowerPoint. In particular the trainees learned to be capable of producing clean copy and delivering it in various formats.

• Internet Use: various modalities used to extract information of a technical nature from Internet-based technical and financial websites. Basic use of search engines such as Google was taught as well as up-grading of email skills.

• Selection and Installation in three separate locations of an ISP. The TA ensured that all the necessary hardware, software and contracts are in place in order for the RBACs to access the Internet.

4. RBAC capacity strengthening workshop

68. This was a two-day workshop held on 3 and 4 October. The first day focused on the internal needs of the RBACs while the second day discussed the development of the demonstration farms and an outreach program. Principle outcome of the workshop was the need for increased coordination between the RBACs and the research institutes on the development of the farms.

5. Business development and investment workshop

69. The workshop on 14 December was aimed to begin a business- and investment-oriented dialogue between the private sector and government. The goal was to begin to change attitudes among policymakers and to influence the commercial environment for investment in line with the overall reform objectives of the GoU supported by ADB.


17

F. Reports

70. A feature of the TA was the regular reporting schedule. The following reports were submitted:

• Inception Report – 27 April 2006 • Progress Report – 5 July 2006 • Mid-term Report - 9 August 2006 • Progress Report – 10 October 2006

71. No substantial issues or objections were raised by the Government of Uzbekistan as a result of these reports, so concurrence with the work activities was assumed by the TA.


18

IV. OUTCOME OF THE TECHNICAL ASSISTANCE

A. Achieving the TA objectives

72. The first half of the work of the TA (i.e. March to July) focused on fact-finding and establishing the needs of the various stakeholders (especially the RBACs). An understanding of the wheat industry policy environment was gained and recommendations were tabled for consideration by the RRA and ADB. Various informal and formal meetings and workshops were held. Based on a detailed needs assessment, a work plan for an outreach program was developed. Appendix 4 sets out basic data related to the focus areas.

73. From July until December the TA team focused on specific issues that were identified during the first phase of the work. The approach adopted was to use the RBACs as the main agent of operation since these three offices were conveniently located and provided a bridge between the Unitary Company and the RRA/GPIP (located in Tashkent) and the large population of farmers in the focus areas. Interaction with the farming community directly was restricted by the time and resources available to the TA and, more importantly, by the fact that farmers are constantly employed on their major crops; cotton and wheat. It should be noted that during the harvest periods for both crops the staff of the RBACs themselves were mobilized by the local governments to assist with the monitoring of harvesting and were often not available for work with the TA. In fact, there is no real objection to this procedure since it allows the RBAC staff to gain invaluable information about farming from working with farmers. In this respect the procedure actually strengthens the outreach program.

74. Opportunities for interaction with farmers were therefore limited by the practical constraints. As a result the overall thrust of the TA was aimed at strengthening the RBACs via a variety of interventions including trainings, workshops, visits by specialists (usually on a weekly basis) and general technical support (e.g., for upgrading IT facilities).

1. Assist potential investors in seed companies and ASCs to better define their business visions and strategies

75. The TA considered seed development and the seed sub-sector as a priority. TA specialists attended the National On-Site Workshop for Seeds. Seed costs in Uzbekistan are high and field surveys show that the typical seed rates are greater in Uzbekistan that in other countries. Typical drilling rates are around 250kg/ha while the global norm is 160 kg/ha8. This was an area that required considerable attention.

76. It became apparent to the TA that the seed industry is dominated by the government agency responsible for wheat processing; UzDonMahsulot. In general the agency is a monopolistic supplier of seed—often of the worst quality. Despite raising this issue repeatedly, the TA was unable to break through the apparent indifference of this agency to find a way of improving seed supply. A number of meetings were held with various officials of UzDonMahsulot both in Tashkent and in the field (at e.g., seed cleaning facilities, flour mills or storage facilities). These people were government officials and generally not empowered to discuss policy. At a more senior level (i.e., at head office in Tashkent) the officials’ stock response was that they worked for an executive agency and that policy was determined by “the Government”. It is apparent that by this was meant in general the Council of Ministers. No discussions were held at this level since it was felt that this would be beyond the scope of the TA. Equally it was unofficially made clear that interference with the operations of 8 There are frequent references to these rates, both surveyed and anecdotal. These rates are quoted from the

First Mission Report of the GPIP Agricultural Technology Expert, October 2006. The finding was rejected during the Strategy Workshop by the representative of MAWR Seeds Division, however it is generally recognized that seed rates are too high in Uzbekistan.


19

UzDonMahsulot would be unwelcome. This is an issue that needs to be dealt with at the level of ADB-GoU discussions. The principle bottleneck in attracting private investors to this sector is simple to describe: it is the overriding presence of UzDonMahsulot at every turn of the industry. No one with any commercial sense will invest in an industry on any scale unless the monopolist is removed or regulated. Of course there are specific exceptions where medium-scale operators have taken the risk to explore a niche opportunity, but these are the exceptions that prove the rule. The TA recommends the wholesale restructuring of the wheat processing industry, something far beyond its current scope.

77. As a result, a change of strategy was required. It was decided to approach the matter indirectly through the demonstration farms being developed under the GPIP and maximising their influence on the seed industry rather than relying on government reform. TA team members worked closely with GPIP staff on the planning and development of the three demonstration farms in the focus areas.

2. Assist potential investors to secure credit from commercial finance institutions

78. Credits are provided to farmers by the government-controlled banks, specifically the G’Alla Bank for wheat and the Paxta Bank for cotton. These are all credits made for specific input items and they are reconciled by the banks at the end of the harvest when paper transfers are made to the bank by UzDonMahsulot (which is affiliated to G’Alla Bank). No actual money is passed and the farmer has no control over this system. He is told how much to grow, where to grow it and provided with the physical means to grow it based on a notional bank credit. In this respect the GPIP line of credit was only slightly different. Although it could notionally be applied to anything the farmer wished to invest in, in fact it was directed from the top at farm mechanization. At GoU direction the RBACs were intensely focused on large-value loans principally for CLAAS combine harvesters as well as tractors and minor ancillary equipment. The TA restructured the existing business plan/loan application format. With ADB approval this new format was submitted to the participating commercial finance institutions and was accepted. At ADB’s request, the TA evaluated the farm machinery loan program. A discussion of the main findings and issues is found in Section IV below. In addition, the TA identified a project in the flour-milling sub-sector. Located in Zomin, this project aimed at doubling the capacity of a medium-sized flour mill. The new loan application format was used to apply for a $200,000 milling machinery loan under the ADB line of credit via the Paxta Bank.

3. Identify further reforms required to facilitate private sector investment in agro service and marketing enterprises

79. A review of the policy environment was undertaken and the findings were shared with stakeholders on an informal basis. A discussion of the main issues is provided in Section IV below. A workshop was held in December attended by policy-makers and business leaders in which these issues were discussed. Although senior officials (e.g., from the Council of Ministers and the Hokimiyats) were invited, they did not attend. Those who did were mid-level officials and business leaders which the TA had interacted with on a day-to-day basis. Although the workshop provided a useful forum for exchanging views among these persons (useful in itself) it is unlikely that it had much impact on policy formulation. The fact is that in Uzbekistan the policy-making function is not at all transparent and occurs between various influential persons at a high level and generally away from official bureaucratic channels. This policy-making function is not open to foreign influence, at least not via a conventional TA. What is required is a TA that has the buy-in of government at the ministerial level that can uniformly, bi-partisanly, support sector reform.


20

4. Assist in the Rural Business Advisory Centers in the focus rayons to recruit staff and develop business strategies to serve private entrepreneurs and private farmers

80. The TA undertook a detailed questionnaire-based survey of the RBACs in order to identify their principal requirements. The questionnaire sought to determine transport requirements, available resources, and RBAC Internet access. It also evaluated the human resource capabilities of the RBACs. The result of the survey is provided in Appendix 2, and the findings are discussed below in Section II, B 1. In addition a RBAC Capacity Building Workshop was undertaken on 2 to 3 October.

5. Assist the ASCs and seed enterprises to develop contract growing schemes and pre-production credit to farmers in the target rayons

81. The TA undertook a comprehensive survey of ASCs visiting as many as possible given constraints that often owners and operators were absent providing services to farmers. Issues relating to farm mechanization, specifically tractor services provided by the ASCs, are discussed in Section IV below. UzDonMahsulot, the agency that controls seed growing and contract schemes, already assists with pre-production credit (such credit is provided to all farmers via existing banking system). The TA addressed this issue through discussions and the Business Seminar. The TA prepared a series of discussion papers that are being used as background documents for policy revision.

B. Main work plan tasks and activities

1. Development of the Unitary Company and RBACs

82. From visits to the RBACs, discussions with their employees, and collection and analysis of baseline and other data the TA identified the areas set out in Table 5 for action by the project, the RRA, Unitary Company, GPIP and ADB.

Table 5. Activity table for resolving problems constraining the development of RBACs

Problem Solution Financed by Implemented by Lack of transport preventing RBAC staff from visiting farmers and demonstration sites

RBACs should rent a vehicle for the remaining life of the GPIP (41 months) and following the conclusion of the project take over the vehicles currently run by the PSOs

GPIP/ADB loan budget line for RBACs – ‘equipment rental’

Unitary Company

Low level of equipment for desktop publishing leading to production of unprofessional materials

There remains budget for office equipment which could purchase color printers, digital cameras, etc.

GPIP/ADB budget line for RBACs – ‘office equipment’

Unitary Company

Skills deficiency in desktop publishing

Short course (in Tashkent) for the nine employees of the RBACs

GPIP/ADB budget line for RBACs – ‘training’

TA

Poor enforcement of provisions of Uzbek law pertaining to farm privatization and production matters

Provision of a local legal consultant

The TA, under budget line – ‘domestic consultants’

TA


21

Source: TA interviews, field visits and questionnaire survey (see Appendix 2)

a. Business plans

83. The development of the business planning activity was a major focus for the TA conducted through consultations at the RBAC level. It was apparent that the planning activity was “top down” and various discussions took place to address this issue. At the same time, the TA developed a new “loan application” template that was simpler and easier to use by the RBAC staff. A copy of the template is provided in Appendix 5. More training is required in this area for the new approach to be properly understood and adopted by both RBACs and PFI’s.

b. Transport

84. RBAC staff complained constantly about this issue. There was no provision under either the TA or the GPIP for procurement of vehicles. The matter remains extremely urgent since failure to reach farmers in a timely manner prejudices the success of the RBACs as viable institutions. Equally, demonstration farms for which the RBACs are responsible are located more than 20km from the offices. RBAC staffs pay for taxis from their own salaries. Their transportation expenses are not reimbursed by the Unitary Company or the GPIP. Consequently they are reluctant to travel. This has resulted in improper service delivery and has undermined the reputation of the RBACs as reliable service providers. If the overall project is not able to deal with this issue, then most if not all other initiatives tackled by the TA will not succeed.

c. Printed information

85. The TA assisted the RBACs in developing and printing brochures. Quyi Chirchik RBAC was the main recipient of this assistance; a brochure providing information about the project and its purposes and how farmers could be assisted was completed. A brochure related to the legal rights and duties of farmers was prepared for publication by the TA.

d. Legal services

86. It is understood that access to the justice and legal system is a prerequisite to the successful development of any business. Issues relating to this have been analyzed by the TA and recommendations to address these issues have been formulated. These are discussed in Section IV.

e. Accounting services

87. The TA reviewed the accounting system used by the Unitary Company and RBACs, and appraised the skills available to the enterprises. The Financial Analyst had participated in training for the 1S accounting software. Additional work was required and a workshop was undertaken in December related to the 1S software.

Inability of the RBAC to act as a juridical body, open bank accounts, make contracts, etc.

Incorporate the RBACs into juridical bodies

Unitary Company Unitary Company

Lack of access to up-to-date technical information

Provide internet access for RBACs

GPIP/ADB budget line for RBACs – ‘recurrent costs’

TA/Unitary Company


22

f. IT training

88. The TA provided training. The workshop held on 21 to 22 September was attended by staff from the Unitary Company and RBACs. The workshop delivered a full range of information from basic email skills, internet search protocols, among others.

2. Development of the seed industry

89. Because of difficulties in involving UzDonMahsulot in detailed discussions, the TA decided to combine with the GPIP and focus on the development of demonstration farms in the three focus areas. In effect these farms are planned to show how high-quality seed can be multiplied. This would be a significant achievement in itself, but has some way to go before any results will be seen.

90. As far as seed cleaning is concerned, the main problem is that the existing facilities are centrally managed by UzDonMahsulot and often wrongly located. This entire sub-sector needs to be restructured but this is a major task in itself even were UDM to cooperate. Without cooperation and a total change in the way seed is procured, then it is unlikely that much can be done at this level.

3. Restructuring of Machine Tractor Parks (MTPs) and development of Agricultural Service Centers (ASCs)

91. At ADB’s request the TA evaluated the farm machinery loan program. A discussion of the main findings and issues is found in Section IV below. In addition, the TA identified a project in the flour-milling sub-sector. The TA undertook an evaluation of the business. The company (which is Uzbek and with ownership from Zamin district) wished to double its current capacity of 75 tons/day for wheat milling aimed at producing high-quality flour for export at a cost of $200,000. The TA provided assistance in preparing a business plan for this enterprise which is now being considered by Paxta Bank.

92. Issues relating to farm mechanization, specifically tractor services provided by the ASCs, are discussed in Section IV below. UzDonMahsulot, the agency that controls seed growing and contract schemes, already assists with pre-production credit (such credit is provided to all farmers via existing banking system). The TA addressed this issue through discussions and the Business Seminar. The TA prepared a series of discussion papers that are being used as background documents for policy revision.

93. Apart from the farm machinery program and the work with the Zomin flour milling company, the TA has not had a significant impact on overall private sector investment in the wheat industry. There are two main reasons for this: first, the RBACs typically only respond to direction from higher levels and this direction was focused on machinery loans; second, the industry offers few prospects for private investment so long as it is dominated by UzDonMahsulot. An exception to this case is the mill in Zomin which is only able to operate with cooperation from UzDonMahsulot.

4. Policy reform

88. While the GoU is undoubtedly committed to policy reform, the process has been very slow and much depends on the willingness of the Hokimiyat to apply reforms directed by central government. This area is not open to foreign intervention via a TA process since it is central to the political development of Uzbekistan. Given this circumstance, the best the TA could do was to raise specific policy issues (e.g., the State Order for wheat procurement) at whichever forum seemed appropriate. There is no doubt that as a result of these informal discussions, and more formal outputs from the workshops, that policy issues are on most


23

people’s agenda. In this sense the TA has been quite effective at drawing attention to the need for continuing reform and the application of new directives.

C. Progress towards planned deliverables

1. Detailed business model and plan for the Unitary Company and RBACs

94. The TA engaged the Unitary Company in a senior management level planning activity. However this focused principally on the accounting system and did not develop into more detailed strategic discussions about the future of the company. The main reason for this is that the UC is focused on the cotton industry where it has interests in the five RBACs sponsored under the World Bank’s activities in this area. It is understood that, whereas the UC can have revenues from these RBACs, the wheat area RBACs are cost centers. In this respect they are left much to themselves; the task of providing a revenue incentive for UC has yet to be done.

2. Identified seed farms and plan for their development

95. The demonstration farms have been selected partly on the basis that with improved technologies they could be seed multiplication farms. They have been comprehensively described in reports available to the GPIP. In brief, however, the TA found that the sites were not always appropriate and that there were issues related to land preparation and seed supply (e.g., the farm at Quyi Chirchik received seed with a 30% rejection rate).

3. Restructuring plan for seed treatment facilities

96. Discussions were held with the agribusiness industry but little progress was made due to the overwhelming influence of UzDonMahsulot in this sub-sector. The TA recommended future work in this area based on discussions.

4. ASC support programme

a. Demand and feasibility analysis for the establishment of full-fledged ASCs

97. The TA undertook a full survey of the ASCs in the focus areas. However because of the amount of time being spent by these enterprises on activities directed by the local authorities, there was insufficient time or availability of persons from the ASCs to undertake detailed planning. This works needs to be done in winter when there is more downtime. However, the TA was able to understand the structure of the ASCs and provide informal guidance to those persons that were met.

b. Selection of potential investors and ASCs

98. In general the private sector is not much interested in commodity crop agriculture in Uzbekistan. As mentioned repeatedly in this report, this is because of the pervasive influence of the government in every aspect of the industry. But there are notable exceptions. One important potential investor in the wheat industry was identified by the TA (in Zamin focus area). Several discussions were held with the company and the TA undertook an evaluation of the business. The company (which was Uzbek and with ownership from Zomin district) wished to double its current capacity of 75 tons/day for wheat milling aimed at producing high-quality flour for export at a cost of approximately $180,000. The TA provided assistance in preparing a business plan for this enterprise which is to be disbursed at the end of February. This is one unequivocal success that can be claimed by the TA for this item.


24

V. FINDINGS

99. The following issues are identified as important to the development of wheat productivity and related business in the focus areas:

A. Completing the Terms of Reference

100. In general, the TA progressed satisfactorily. However, the TOR proved to be ambitious in terms of available resources and the depth and magnitude of challenges to be tackled. However, a solid basis of knowledge and trust was established with key stakeholders and working relationships were good. In particular the RRA provided considerable support for the work of the TA team. The TA delivered tangible advice and training. It was found that this work was valuable and could be an on-going activity through the period of the GPIP using local consultants. The nature of support that was provided by the TA should ideally be on a long-term basis as a one-year period was too short to achieve sustainable outcomes.

B. Organization and operations of the Unitary Company and the RBACs

101. The RBACs were faced with the following institutional challenges:

a. There was a mixture of objectives and methods caused by the geographic and social situation of the RBACs. In particular the RBACs were closely associated with the local authorities (Hokimyat) and this was not seen as a positive aspect in the sense they were not viewed as independent and “farmer friendly” service provider organizations.

b. There were some issues to be resolved following from the relationship between the

RBACs and the PIUs, in terms of who was in charge of activities. It was found that the PIUs received priority of resources and that PIU Directors (especially in Quyi Chirchik) exerted considerable influence over the management of the RBACs. This reflected on the status of the RBACs, their confidence and how they were viewed by the farmers and the ASCs. Influence from the outside often resulted in the RBACs being unable to function as fully independent business units.

c. The role of the Unitary Company for the three RBACS required clarification. The UC

provided centralized accounting services and reporting, but otherwise seemed not to play a very direct role in the RBAC operations. While it was the case that the UC was needed to provide a legitimate place for the ownership of RBACs (i.e., outside the GPIP and independently from the PIUs) in practice this function seemed to be that of a coordinating body rather than providing operational management. In this respect the UC management needed to be strengthened by training, visits to other successful RBAC-type bodies9 and perhaps by additional advisory services.

d. One major role of the UC was financing. Financing of regional RBACs activities is

conducted from Tashkent and in some instances payment delays for institutes and other enterprises involved in focus farms occur. Such delays are often related to need to forward documents to Tashkent for approval. There was also a loss of flexibility in responses to farmers by the branch RBACs. One means by which this could be corrected is to employ qualified and experienced accountants at each RBAC. On a practical level, the UC’s accountant at Head Office in Tashkent required further support related to the use of 1S software.

9 in Russia but not financed by ADB as Russia is not ADB-member


25

e. The TA team undertook a detailed review of the accounts of the Quiyi Chirchik RBAC.

The report is included at Appendix 4. 102. The main findings of the analysis were:

a. Expenditures

• The main expenditure item of RBAC activity is employees’ wages. • Costs are covered by funds transferred from the UC in Tashkent and based on

the budget provided by the RRA under the GPIP costs and revenues balance indicating that disbursement is purpose-oriented and are not based on received revenue.

• Apart from wages, other cost expenditures were very small indicating that almost no real work activity is undertaken by the RBACs10.

• Transportation costs related to visits to farmers are not compensated. RBAC staff cover such expenses from their own salaries. RBACs have no vehicle and do not incur fuel and lubricant expenditures.

• No budget was provided for seminars and other activities.

b. Revenues

• The RBACs’ business is the provision of advisory services for the local farmer, machine tractor parks and other private firms. Such services include advisory on issues of obtaining loan, income tax calculation, disputes on accounts payable and accounts receivable, preparation of charter for emerging firms, preparation of business plans for the purchase of machinery, accounting for farmers etc.

• The RBACs were not able to present documental evidence of revenue proceeds. Due to fact that RBAC is part of Unitary company a single bank account is used for settlements by head office and all RBACs. Revenue proceeds from all of RBACs are being transferred to this account, which makes it difficult for RBACs to plan their activities.

• Although no actual disaggregated accounts were available, the RBAC reported that only 50 000 soums (USD 42) were received as revenue related to 60-70 farmer contracts; the actual receivable was about 10 times this amount.

• The RBACs said that the majority of its services were provided free to farmers. For this reason revenues did not cover costs. That said, the apparent policy is to consider each RBAC as a cost centre while receiving the revenues at national (UC) level. This could be changed to a system where each RBAC received its own revenue and managed it on site. However, this is a commercial decision for the RBAC and cost-centered business models can work when circumstances demand. Providing the UC’s own accounts indicate a viable business model, then in principle there is no reason why this approach should not be adopted so long as it is clearly understood.

103. RBAC strengthening is an ongoing activity. It is too early to provide a firm conclusion as to their long-term viability. However it is probable that they will need continued and substantial support from other consultants or through the GPIP before they could be sustainable. In part this will require a significant change of approach by senior management 10 For Quyi Chirchik, for the period January to September 2006 (figures provided by the RBAC) the total

expenditure was US$ 9,515 of which $9,000 was salaries and US$ 225 was communications.


26

especially at the Unitary Company. A new approach needs to tackle the challenges mentioned above and empower the RBACs to develop into individually sustainable enterprises.

C. Farmer outreach program

104. Under the command economy of the FSU, agricultural production in Uzbekistan was implemented through central planning via the local authorities (i.e., the Oblast Hokimiyat via the rayon Hokimiyat). Farm directors dealt only with physical values of input and output; financial aspects of margins or ideas of diminishing marginal returns were unknown, which is the only measure of success related to maximizing levels of output.

105. In general, the RBACs were found to be very willing to undertake an outreach program. With the exception of Zomin, which requires further capacity building, RBAC staff are capable and have reasonable understanding of the technical and agronomic aspects of their work.

106. The main issue for the TA was how an outreach program could be developed and then delivered, given that many of the original social or cultural structures remain in place despite a progressive but slow transition to a market economy. Little has changed in this system apart from the titles of the stakeholders.

107. Given this situation, the outreach strategy proposed by the TA included fostering the understanding that the farmers/ASC operators are clients who will provide the revenue that pay the salaries of the RBAC staff and contribute to the upkeep of their offices and other overhead costs. It will be important that RBAC personnel understand that their continued employment will depend upon his or her success as a consultant in terms of the quality of the advice given and the desire of the farmers to pay for it. The RBACs must aim to create a “farmer friendly” environment at the RBAC so that the farmers/ASC operators look forward to visiting, receive a professional and friendly service and come away with not only solutions to their problems but other information which will help them develop and diversify their farming operations. In reality RBACs have an advantage because they are not competing with other services providers. But they are not using this advantage in full, so eventually as real market competition opens they may lose their competitiveness unless they become more responsive by that time.

108. On a practical level a lack of transport prevented the RBACs from properly interfacing with the farmers, the ASCs and the banks and supervising their demonstration areas. This prevented them from successfully implementing any outreach program developed by the project. To date it was unclear that progress had been made in resolving this issue.

D. Demonstration farms

109. This is a program initiated under the GPIP whereby the RBACs have been assigned a leading role, primarily to coordinate resources available from research institutes. Under current institutional arrangements, it appears that RBACs are instructed on what to do by GPIP through the Unitary Company.

110. The TA worked closely with GPIP personnel in helping to improve planning and implementation of demonstration farms. The TA report on demonstration farms shows that planning and implementation of the farms have been ineffective. It is unlikely, under current arrangements and available resources, that the demonstration farms will improve their performance in the coming wheat season (2006-07). The TA suggested that this season be used as a learning experience for all involved. Further, it has been recommended that additional international inputs be provided either through this TA or the GPIP.


27

E. Provision of legal services

111. The TA conducted a comprehensive analysis of the provision of legal services to farmers. It was found that most farmers had little if any knowledge of how to cope with emerging legal issues and had limited access to legal service providers at local level. The RBACs rightly identified this as an issue for the TA but had been unable to tackle it because of the lack of resources to employ lawyers directly.

112. The following “problem tree” analysis (see over) illustrates how legal services and access to the justice system are important for productivity in agriculture. The TA undertook a series of actions aimed at improving the current situation. These included preparation of a brochure for farmers setting out aspects of contracts and other laws and decrees relevant to them. This brochure has been completed in draft, requires approval at the RRA level and needs an introduction to be written by a senior official before it is provided to farmers.


28

LEGAL SERVICES – PROBLEM ANALYSIS

National: Potential civil unrest, food security, Provincial: lack of investment, out-migration

Agriculture: Reduced output in all sub-sectors

Socio-economics: Political and labor discontent

Society: Communities rely on extra-legal settlements.

FARMERS HAVE VARIOUS LEGAL ISSUES THAT REQUIRE ATTENTION. FAILURE TO SOLVE THESE PROBLEMS REDUCES FARMERS INCENTIVES AND PRODUCTIVITY

Few legal specialists trained in rural law issues

Few lawyers available in focus areas

Insufficient funds

Education Failure to train enough qualified lawyers (?) Few lawyers are interested and specialized in agriculture or rural issues.

Economy Demand for legal services in more remunerative industrial sector (i.e., in cities) discourages working in countryside

Social/ Demographic Focus areas are not attractive locations. Remoteness of rural communities. Administrative system at national and local levels tend to substitute legal institutions.

Financial Lawyers need to be paid. There is a doubt whether farmers can afford legal services RBACs cannot provide free service

Deficient Sector Outputs

National/ Provincial Impacts

Sector Impacts

Core Area Problem

Main Causes

Law:Not respected in most rural communities

Over-reliance on administrative “advice” and influence

F. The Wheat Industry

1. Policy environment

113. In line with the TOR, Inception Report and Work Plan, the TA undertook discussions on agricultural policy related to the wheat grain industry. Uzbekistan has adopted a capital-intense and high-cost production model. Diminishing returns have occurred and a new approach is needed. Despite efforts to change the structure of the industry, it remains centrally managed. The pace of change is slow and there is a concern that current efforts to improve the productivity of the sector are not tackling the root causes of the problem.


29

114. Far from the problems of productivity being essentially technical, difficulties arise from the institutional structure of the industry. This issue was emphasized in the Inception Report (Section IV, B1). For example, necessary efforts to replace farm machinery are hampered by a “top down” system of procurement and centralized management. The State Order system remains a considerable disincentive to investment at the farm level as does the overall role of UzDonMahsulot as a monopolistic provider of seeds and post-harvest services.

115. The use of a capital intensive production model was questioned in the context of a large and under-employed rural population and high cost of capital. If constraints on the market are removed this situation will normalize. It was understood by the TA that transition has attendant risks, but continuing with the current approach of providing a semblance of change while maintaining the status quo has greater risks.

116. The TA indicated that genuine transition starts with a transfer of ownership of rural resources, especially land, to rural dwellers. Local authorities must cease direct management of the industry, and privatization of official MTPs and the UzDonMahsulot system should continue. A full discussion of the policy environment for the wheat grain sector is provided in Appendix 6. Appendix 7 sets out the economic background for policy, especially a discussion of wheat production costs and the use of farm machinery.

2. Seed farms and cleaning facilities

117. The structure of the seeds sub-sector was found to be closely related to overall agricultural policy, the institutional structure of the MAWR and related institutes, and the role of UzDonMahsulot. At the farm level in the focus areas there was little incentive to invest in the resources needed to produce viable seed because the entire structure of the industry was dominated by UzDonMahsulot and by established seed farms. At the same time, the financial/economic structure of wheat farming provided low profits. Except in Zamin, there was adequate capacity in the cleaning plants, but these are operated inefficiently by UzDonMahsulot. There is considerable evidence from neighboring countries that suggests the approach to seed treatment in Uzbekistan is inappropriate. The cleaning plants are too large and wrongly located. Centralized management did not provide the right level of detailed care necessary to provide good quality seed. Seed application rates are generally too high precisely because of this. Elsewhere great success has been shown by introducing small-scale seed cleaning plants operated by the farmers or farm groups themselves. But to undertake this approach in Uzbekistan would mean changing the entire institutional structure of UzDonMahsulot.

118. Consequently the TA reached a decision to work at the demonstration farms in the focus areas. This engagement has helped in providing evidence that farms in the focus areas are capable of producing high yields of high quality wheat grain. In this sense, the demonstration farms, if properly organized and managed, can provide a working example of what a properly run seed farm is like. This is the reason why it is essential for the demonstration farms to succeed. Without their example and data (technical and financial) collected from these farms, it is very unlikely that any other individual might be induced to invest, since a seed farm would require exactly the same level of investment that is currently being used on demonstration farms by the GPIP.

3. Farm machinery

119. Following the Inception Report (Section IV, B2) and at the request of ADB, the TA provided a preliminary evaluation of farm machinery use and needs in the three focus areas. This included a review of the CLAAS combine harvester program promoted by Government. For wheat (as for cotton) Uzbekistan appears to be a capital intensive agricultural producer.


30

In general the inventory of agricultural machinery is old and obsolete and needs to be replaced. A developed agricultural sector (and this includes wheat) must use a diversified and well-adjusted inventory of efficient machines so that each machine is fitted to a specific type of activities and used with limited downtime. Appendix 7 provides details.

a. CLAAS “Dominator 130” combine harvesters

120. A “needs assessment” undertaken by MAWR indicated that up to 100 harvesters were required to ensure timely wheat harvest countrywide. Uzbekistan is extremely dry during the summer with very low levels of humidity. Crops need to be harvested quickly to enable sowing for cotton, but also to avoid excessive heat and low humidity that cause early shattering and high losses11. Crops harvesting is therefore limited to approximately a 30-day window of opportunity. In order for this to be accomplished, a large number of machines and a very carefully planned harvest is required.

121. Finance for the order was provided by the Pakhta Bank. ADB agreed in principle that it would reimburse the part of the purchase related to the number of machines required in the three focus areas. The acquisition of these machines would be on the basis of individual loan applications submitted by farmers, entrepreneurs and existing/newly established machinery-tractor parks. The financial justification for the harvester purchase was made on the basis of using the machine to full capacity on a much larger area than that of the average farm borrower. A 12% FIRR would be achieved with a rental charge rate of just under US28/ha. (34,000 Soum/ha) and a harvested area of 450 ha12. The format of the business plans was reviewed by the TA and found to be overly long and complex and based on an inappropriate World Bank format for large investments rather than small-scale farm machinery. As a result a new format was developed and submitted to the PFIs for consideration. The procurement was undertaken successfully, and by 12 June 2006 harvest commenced with the CLAAS machines in full working order.

122. Forty-nine CLAAS harvesters were bought under the ADB Line of Credit. These machines harvested more than 53% of the total harvested area of irrigated wheat in the three focus areas. Farmers bought 60% of the machines. Their farm sizes averaged 67 hectares. One reason for this is that only larger farms had the collateral to secure large loans. The farmer-owned CLAAS machines harvested on average 389ha/unit – 86% of the target area and rated capacity of the machines.

123. Field interviews with owners, users and operators during the harvest period of June-July 2006 indicated an overwhelming approval of the CLAAS harvester based on its technical performance.

124. In summary: the CLAAS loans were never based on a rational agricultural analysis of the on-farm use by the borrower – the land areas were too small. Neither was the allocation of 49 harvesters to the focus areas based on a participatory needs assessment of what was required by farmers and ASCs in those areas. The machines were bought via a country-wide procurement by central government to be used on an oblast-wide basis with rents being charged via whatever agency organized the contract. In theory the owner-borrower would eventually receive his money (in fact nothing more than a paper transfer to a specified repayment line in his bank account); but in practice there is almost no way that these transactions can be fairly monitored. The machines were centrally managed through the

11 “Shattering” is the process whereby the grain seeds fall from the stem of the plant. Wild grasses are adapted

to dispersing their seeds by releasing them once ripe but grasses under cultivation, such as wheat, need to have seeds that are retained and only break off during the threshing process. Very dry conditions such as are found in Uzbekistan during the summer mean that if the grain is left too long it will fall and be lost.

12 The average charge was US$42/ha., providing an FIRR of 20%.


31

Hokimiyats and the logistics of their use were biased towards filling the SO first (hence the immediate removal of a harvester from the locality once the SO was filled) leaving grain capable of being sold privately at a higher price still in the field and subject to loss. In no way was this program a genuine business-oriented effort to transfer the use of important resources to farmers in reform areas, it was in essence an attempt to replace machinery or gain additional machinery that was always and remains centrally managed under the guise of “business loans” by individuals and financed on preferential terms by ADB.

b. Additional equipment needs

125. During 2006, the RBACs have been focused on tractor loans. Many of the loan applications submitted for combine harvesters included additional applications for the purchase of tractors. It is understood that this program is driven by analysis undertaken by MAWR. This matter was fully discussed in the Midterm Report and in a separate discussion paper submitted informally to ADB and the RRA.

126. Leaving aside the more general questions about the level of farm mechanization that should be adopted by a country with an agricultural profile like Uzbekistan, the inventory of existing tractors suggested an urgent need for their replacement. Many tractors date back to the mid-1980s and are subject to long periods of downtime for repair and maintenance. Operating costs are probably high because of old engines (that consume more fuel), poor tires (that reduce traction), and the need for spares. There is little doubt, therefore that perhaps with the exception of the newer CASE IH tractors used for plowing and mainly owned by government run MTPs, the overall supply of tractor services is deficient. On this basis, therefore, the TA supported the GPIP’s efforts to help replacing the tractors in the focus areas with newer models.

G. Gender and ethnic minorities

127. Gender and ethnic minority issues were examined by the TA. Based on a rapid field survey of the three focus areas, it was found that while issues of ethnicity are pertinent to the agricultural sector in Uzbekistan, the regions selected as focus areas within the GPIP project do not exhibit any significant problems. Zamin and Katta-Kurgan have extremely low populations of ethnic groups other than Uzbeks. Quyi-Chirchic has a very diverse ethnic population with the number of farmers representing other ethnic groups being too large to count. Nevertheless no apparent conflicts or discriminations have been identified.

128. There are 69 female farmers in the focus areas. There are 47 female farmers in Quyi-Chirchik, while there are 6 and 16 female farmers in Zamin and Katta-Kurgan, respectively. In general female farmers are treated equally by the RBACs. However, they require special training as their knowledge of agricultural practices is generally lower compared to male farmers however it was not within the scope of this TA to design gender-specific measures. It is recommended that gender be considered more thoroughly in future development of RBACs.


32

VI. RECOMMENDATIONS

129. The TA developed a solid basis of information and personal relationships from which to work and build on initial results. The TA provided training and management support to the RBACs, and in close collaboration with the GPIP, to research institutes involved in developing wheat demonstration plots. It has taken some time to build trust and working relationships with key stakeholders.

130. Additional technical assistance is necessary to sustain project gains. The reform process in the grain sector/industry remains slow and key institutions require further capacity building. In particular, the development of demonstration farms (which are central to a successful outreach program), capacity building for Rural Business Advisory Centers (RBACs) and Agricultural Service Centers (ASCs), and more effective GPIP implementation, would require continued technical support. There is a need to strengthen a dialogue with key decision-makers on future development of wheat industry in the country. This would require a longer-term involvement in policy advice and sharing of best international practices, which is difficult to tackle under a small stand-alone TA.

A. Further activities

131. There are a number of activities that could be continued.

a. Development of business plans and loan applications:

The TA has made progress in this area, but much remains to be done. A new loan application form has been developed but was tested only once using actual data. PFI officials (i.e. Paxta Bank) at the focus area level are not familiar with the new process. Further, RBAC staff require training on the new methodology.

b. Work with ASCs:

The TA has undertaken an appraisal of the ASCs. The next step would be to select specific ASCs for capacity building. In particular, those capable of seed cleaning should be included.

c. Commercial investment:

The TA started to work closely with an agribusiness company (i.e. “Don Riszk” in Zamin district). This demonstrated possibilities for promoting private sector development in the wheat industry, which could serve as a good example for further replication.

d. Strengthening RBACs:

RBACs require policy/function reforms as well as ongoing Institutional strengthening and capacity building programs. At the policy levels the transition from a cost centre to an enterprise unit is necessary. Organisational systems and procedures to support the provision of services is essential and needs to build on the systems introduced by the TA.

e. Farm outreach program:

RBACs are responsible for the coordination of demonstration plots. However, RBACs do not have the skills or operational capacity to undertake this critical work during the 2006-2007 season.


33

f. Agricultural policy reform:

The policy dialogue was started but requires continual reinforcement. This activity would further the reform process through discussions and engagement with senior government officials and key agencies.

g. Legal services:

A good start was made in this area (i.e., drafting of a brochure) but the mechanism for delivery of legal services requires more work. B. Expected Outputs

132. On the whole, the above recommended activities would ensure the sustainability of the RBAcs and a significant impact on grain productivity. The following outputs would be expected:

a. Development of Business Plans and Loan Applications: A completed and trialed training program for the new loan application process

b. Work with ASCs: ASCs with capacity to invest in seed cleaning are identified, and

their business plans developed

c. Commercial Investment: A completed feasibility study and loan application for the agribusiness company

d. Strengthening RBACs: IT and accounting services upgraded; further enhancement of

RBAC skills in these areas

e. Farm Outreach Program: An improved plan for an outreach program based on the successful development of the demonstration farms

f. Agricultural Policy Reform: Policy dialogue is continued with possibility for

accelerating policy reform

g. Legal Services: A planned and agreed mechanism for providing legal services to farmers


34

APPENDIX 1

A. WORK PLAN AND PERSONNEL SCHEDULE


35

1. Revised work program and personnel schedule


36

* ADB will select and engage a suitably qualified Grain Policy Expert to work with the TA team.


37

APPENDIX 2

A. Summary of baseline data and RBAC questionnaire

133. A. Baseline Information on RBACs, July 2006: Kuyi-Chirchik

Section 1: Information on Personnel Name of RBAC Kyiu-Chirchik Consultative Center on Agribusiness

(RBAC) Name of Director Akbarov Bakhtiyar Akbarovitch Qualification of Director Economist, University graduator Previous job of Director Director of the Rayon Organization on Silk

Procurement Name of M&E consultant Ismoilov Marif Qualification of M&E consultant Accountant-Economist, University graduator Previous job of M&E consultant Chief Accountant of Shirkat Name of Agronomist Igamberdyev Rakhimberdy Qualification of Agronomist Agronomist, University graduator Previous job of Agronomist Director of Organization-

Controlling Group of Rayon Khokimiyat

Section 2: Statistical Agricultural Information on Tuman Total cultivated land area 48,200 hectare Total irrigable area 36,196 hectare Total area under cotton 15,209 hectare Total cotton yield in 2005 38,389 tons Total area under wheat 12,642 hectare Total wheat yield in 2005 62,882 tons Estimated wheat yield for 2006 50,568 tons

Section 3: Sociological Information onTuman Total number of farmers 847 Are there woman farmers? 47 Are there farmers of other ethnic groups?

Russians, Kazakhs, Kyrgyz, Turks, Tajik, Koreans, Azerbaijani, Germans, Tatars

Total number of WUAs 6 Total number of ASCs 8

Section 4: Equipment of RBAC List the office equipment you have including computers Pieces Furniture set Conference table File shelves Chairs Safe PC Celeron Printer HP Laser Jet 3020 USP Panasonic KX-FP 343 RU Panasonic KX-TS 2350 RU

3 1 3 40 2 2 1 2 1 1

134. What are the logistical problems facing the operation of your centre?


38

• Non-availability of vehicles under the provision of services to farms located in remote areas.

• Non-availability of training and visual materials on various aspects of seed production and plant growing that are needed for the conduct of workshops.

• Non-availability of TV-set and videotape recorder to demonstrate educational clips.

• Non-availability of digital camera to prepare training materials. • Non-availability of color printer to develop training materials. • Non-availability of a qualified lawyer in the RBAC. • Non-availability of collections of legal publications and regulations published

for farmers and entrepreneurs. • Non-availability of cellular phones. • No access to Internet.

135. What do you think are the strengths of your centre?

• The RBAC is the only consulting center that is equipped rather well. The staff is complete, and the basic equipment is available to perform full-fledged activities.

• Convenient location in the center of the Rayon and along the main motorway. • Since the establishment of the RBAC nearly 75% of farmers have become

familiarized with the RBAC and are willing to co-operate. • The RBAC provide services not only to farmers but to entrepreneurs as well. • The RBAC provides services with respect to the development of business

plans, accounting and agrotechnical issues. • The RBAC does not use a command-manner for personnel management. • Specialists with substantial experience and qualifications work with the RBAC. • In future the RBAC shall be able to provide a bigger support to farmers and

entrepreneurs • There is a possibility to present various projects for consideration by donor

organizations. • There is a potential to cover a wider range of agribusiness. • Practical assistance is provided to different entities within the project.

136. What do you think are the weaknesses of your centre?

• The RBAC operates for less than a year. Lack of experience in the sphere of consulting.

• No access to Internet. • Special visual materials on various aspects of plant growing and agribusiness

are required. • Training on provision of brokers services to farmers is needed for the RBAC

Director. • The RBAC does not have its own seal and stamp. It also does not have a

bank account. • Impossibility to assist unemployed in job hunting. • Non-availability of a lawyer in the RBAC. • Currently the RBAC activities are limited. There is no possibility to provide

consulting with respect to marketing, fertilizers supply and other aspects.


39

B. Baseline Information on RBACs, July 2006: Katta-Kurgan

Section 1: Information on Personnel Name of RBAC Katta-Kurgan RBAC Name of Director Asadov Sunatullo Qualification of Director Economist, University graduator Previous job of Director Director of the College Name of M&E consultant Faizullaev Ulugbek Qualification of M&E consultant Banking Previous job of M&E consultant Deputy Chief Accountant of Rayon Branch of

People’s Bank Name of Agronomist Khudayberdiev Otabek Qualification of Agronomist Agronomist, University graduator Previous job of Agronomist Specialist on Plant Protection in Shirkat

Section 2: Statistical Agricultural Information onTuman Total cultivated land area 44,511 hectare Total irrigable area 25,255 hectare Total area under cotton 16,125 hectare Total cotton yield in 2005 38,468 hectare Total area under wheat 11,488 hectare

including 8,388 hectare of irrigated lands, and 3,100 hectare of rain-fed

Total wheat yield in 2005 49,929 tons including irrigated – 49,929 tons, and rain-fed – N/A

Estimated wheat yield for 2006 37,750 tons of which from irrigated lands – 37,750 tons and from rain-fed – N/A

Section 3: Sociological Information on Tuman Total number of farmers 1,261 Are there woman farmers? 16 Are there farmers of other ethnic groups?

N/A

Total number of WUAs 3 Total number of ASCs 16 of which

14 are alternative

Section 4: Equipment of RBAC List the office equipment you have including computers Pieces Furniture set Conference table File shelves Chairs Safe PC Celeron Printer HP Laser Jet 3020 USP Panasonic KX-FP 343 RU Panasonic KX-TS 2350 RU Modem Extensions

3 1 40 2 2 1 2 2 1 1 1


40


• No access to Internet. • Non-availability of cellular phones. • There are problems with payment of telephone bills. • Non-availability of vehicles to make trips to farms in order to analyze the site

situation. • Non-availability of visual materials and training materials to be used during

workshops. • Non-availability of TV-set and videotape recorder.


• Workshops held for farmers and WUAs at the demonstration sites. • The location of the RBAC is very convenient for farmers, and the RBAC is

equipped well. • Farmers express great interest in the obtaining of consultations and

assistance in the development of business plans. • Similar consulting services are not provided by other organizations. • The RBAC provides services not only to farmers but to entrepreneurs as well. • Prices for services are not high. Farmers agree to pay for consulting provided. • Nearly 40 different workshops and meetings with farmers were held. • This is the only RBAC in the Rayon. The RBAC has advantages (i.e.

specialists, equipment, facilities) compared with the State organizations. • It is not a regulatory authority but a consulting center. • By 2010 the number of farmers shall increase, and need in the RBAC services

increases along with that. • The sphere of the RBAC services shall expand: fertilizers sale, veterinary

services etc. • Consulting with respect to the sale of grain produced in excess of established

quotas is provided to farmers. 139. What do you think are the weaknesses of your centre?

• Lack of knowledge about the practice of international consulting centers affects negatively the RBAC operation.

• Non-availability of the lawyer in the RBAC. • There is no data base on legislation, taxes and prices for agricultural products. • Farmers are not able to pay fully for the services provided by the RBAC. Their

financial resources are scanty, and this situation shall impact on the RBAC operation.

• Mechanism of wheat production by quota needs improving. The RBAC does not participate in the mechanism improvement.

• Farmers fail to work keeping to the RBAC recommendations. • The level of farmers’ solvency is not high. Not all the farmers are able to pay

for services timely. • The RBAC just started implementing activities on farmers’ awareness about

the market situation. The RBAC does not have enough practical experience. • The RBAC has covered nearly 60 % of farmers in the Rayon. • Shortage of information on different preparations and herbicides. • There are no possibilities to perform monitoring of farmers activities. • Cooperation with farmers should be implemented on a contract basis.

Grounds should exist.


41

C. Baseline Information on RBACs, July 2006: Zamin

Section 1: Information on Personnel Name of RBAC Zamin RBAC Name of Director Darvishaliev Ural Qualification of Director Economist, University graduator Previous job of Director Economist of Shirkat Name of M&E consultant Tangirov Zafar Qualification of M&E consultant Economist, University graduator Previous job of M&E consultant Economist of Shirkat Name of Agronomist Kurbonov Shavkat Qualification of Agronomist Agronomist, University graduator Previous job of Agronomist Chief Agronomist of Shirkat

Section 2: Statistical Agricultural Information onTuman Total cultivated land area 67561 hectare Total irrigable area 30647 hectare Total area under cotton 12339 hectare Total cotton yield in 2005 18168 tons Total area under wheat 24831 hectare

of which irrigated lands – 13021 hectare and rain-fed – 11810 hectare

Total wheat yield in 2005 22317 tons

Estimated wheat yield for 2006 not completed

Section 3: Sociological Information onTuman Total number of farmers 1191 Are there woman farmers? 6 Are there farmers of other ethnic groups?

Kyrgyz (3)

Total number of WUAs 7 Total number of ASCs 1

Section 4: Equipment of RBAC Pieces Big table Small table Table for PC Cabinet File shelves Safe Chairs Monitor Hard disk Accumulator Key-board Printer Fax machine Telephone-set Drawers Conference table

3 3 3 9 3 2 40 2 2 2 2 1 1 1 3 1


42


• Non-availability of vehicles • No access to Internet. Problems with payment of telephone bills. • Complete set of office equipment is needed. • Shortage of visual and training materials. • Non-availability of video materials. • There are no reference books on pests and weed identification, and measures

for their eradication are not available. • There are no kits for making inexpensive analysis. E.g., assessment of grain

quality and others. Magnifier, chamber for the determination of seed germination rate, mini-meteo station, instruments for the assessment of soil salinity, level of soil moisture, refractometer etc. is needed.


• Consulting is provided to farmers with respect to the obtaining of loans and different agro-economic data.

• Link with the Tashkent RBAC was established. • Promotion of the RBC and its services was done. • The Agronomist and other specialists have substantial qualifications for

providing services to farmers. • The RBC commenced conducting workshops and arranging meetings with

farmers. The majority of farmers participated in the workshops. • The RBAC could operate independently, make decisions and respond to

farmers’ requests on a constant basis. 142. What do you think are the weaknesses of your centre?

• Farmers are not able to pay for the services provided by the RBAC. • Poor information base. Lack of informative and training materials. • Poor knowledge of international practice of similar centers. • Internet usage skills are not developed. • Non-availability of a lawyer. • Non-availability of idle and own funds. • No account with a bank. • Much time is spent on the implementation of the directives of Head Office and

local authorities. • While performing their activities farmers depend to a larger extent on other

organizations: seed suppliers, fuel and lubricants suppliers and others. The RBAC is not able to impact on production processes.

• The implementation of RBAC recommendations always depends on the capacity of supply entities. Accepting recommendations provided by the RBAC farmers always depend on the quality of work carried out by supply entities.

• The number of specialists working with the RBAC is not enough for coverage of all the farmers. It is necessary to expand the RBAC staff and improve the staff quality


43

APPENDIX 3

A. Basic data on three focus areas served by RBACs

Tuman Wiloyat Farm Type

Farms Shirkat Other TOTAL As % TOTAL Kattakurgan Samarqand 932 1 8 941 33.48% Zamin Jizzak 1,251 3 119 1,373 48.84% K-Chirchik Toshkent 493 3 1 497 17.68% TOTAL 2,676 7 128 2,811 100.00% As % TOTAL 95.20% 0.25% 4.55% 100.00% 33.48% Numbers as of April 1st 2006 Field visit 5-15th April Takeaway: Zamin has the largest number of farms, 49% Shirkats are very few in number K-Chirchik may do better because farms are larger


44

Tuman Wiloyat Area Seed Combine Yield Output Gross Value Cost of Net Value

Ha.(1) tons (2) Harvesters (3)

tons/ha (4) tons wheat US$ output (5) US$

Kattakurgan Samarqand 12,000 2,640 16 4 48,000 5,400,000 2,453,520 2,946,480 Zamin Jizzak 12,000 2,640 16 3 36,000 4,050,000 1,840,140 2,209,860 K-Chirchik Toshkent 11,000 2,420 15 4.5 49,500 5,568,750 2,530,193 3,038,558 TOTAL 35,000 7,700 47 133,500 15,018,750 6,823,853 8,194,898 Sources are TA Team estimates Note: (1) Assumed to be irrigated land for wheat Note: (2) Assumed to be 220kg/ha Note: (3) Assumed to harvest 750 ha. Per season/machine Note: (4) Irrigated area only Note: (5) Assumes $ cost of production/ha is $51/ton Takeaway: Zamin has lowest output All tuman's have similar areas for irrigated wheat, but Zamin has more farms (smaller farm areas) Seed demand requires total +/- 1,700 ha of seed farms Seed requires cleaning capacity of 25-30 tons/day Maximum number of combines required is 47 Cost of new combines is 4,186,000 Probable number is less given there are existing machines Output of wheat requires approx 450-475 ton/day milling capacity


45

APPENDIX 4

A. Financial analysis of Quyi Chirchik RBAC13

143. The financial condition and economic efficiency of RBAC is determined from analysis of financial and economic results of advisory services’ activities. Reports on receipts and expenses, accounting statements and other materials were used for this analysis. These documents were presented by Kuy-chirchik RBAC and head office of Unitary Company.

144. The Head Office of the Unitary Company provided reports on monthly receipts and expenses RBAC in three focus regions. The table below is prepared on the basis of mentioned reports. Units used in the table are US dollars.

145. As shown in the table, the main expenditure item of RBAC activity is employees’ wages, which for three RBAC in total amounts to USD3000. Other expenses according to reports by unitary company include per diems, communications, bank commission and other expenses, which make up 300-400 USD per month in average. Monthly receipt of funds by three RBACs together is in average USD3400. It is necessary to note that disbursement of funds for three RBACs is conducted by head office presumably in accordance with monthly budget approved by RRA. In order to analyze the efficiency of RBAC activity information on revenue proceeds to a single bank account of Unitary Company is necessary. Given information shows that none of three RBAC has remaining balance of funds at the end of each period. This indicates that disbursement is purpose oriented and are not based on received revenue by these three RBACs.

146. During the visit to Kuy-chirchik RBAC information on monthly expenditures starting from the beginning of the year (January 2006) was received. Also some data on completed work and revenues of Kuy-chirchik RBAC was received. According to the accountant of RBAC no accounting was kept in 2005. Nevertheless the reports presented by head office of unitary company provide such information on three RBACs together.

13 Report prepared by the domestic Financial Specialist


46

1. Expenditures of the RBAC.

147. Detailed information on account 10 (material expenses14) for the period from January to March 2006 and on accounts “fixed assets”, ”material expenses” and ”high-wear material goods/inventories” for the period from April to September 2006. According to the accountant of Kuy-chirchik RBAC-provided data is the only accounting information they have. He suggested requesting more information from the head office of Unitary Company.

148. Besides that, verbal information was received regarding monthly expenditures on communication and utilities (electric power) which is USD40 per month at average. Transportation costs related to visits to farmers are not compensated. RBAC staff covers such expenses from their own salaries. RBAC have no vehicle and does not incur fuel and lubricant expenditures. According to the accountant of RBAC there is no budget provided for seminars and other activities.

149. Below presented is a table of actual expenditures incurred during activity of Kuy-chirchik RBAC. Figures are presented in US dollars.

150. As shown in the table RBAC practically have no expenses except expenditures related to staff’s salary.

151. Leaving aside the issue of lack of transportation resources and budget for these purposes RBAC office is well equipped. As at September 2006 Kuy-chirchik RBAC has USD7400 worth of fixed assets in its possession (office furniture, equipment, etc.)

2. Revenues of Kuy-chirchik RBAC

152. RBAC’s business is provision of advisory services for local farmers, machine tractor parks and other private firms. Such services include advisory on issues of obtaining loans, income tax calculation, disputes on accounts payable and accounts receivable, preparation of charters for emerging firms, preparation of business plans for the purchase of machinery, accounting for farmers etc.

14 Material expenditures are expenses primarily related to procurement of office supplies (pens, office paper, files etc.). Fixed assets are assets which were purchased by RBAC for the price of more than 500 000 per one unit and which have operation life of more than one year (office furniture, personal computers, printers, etc.) High-wear material goods – are items purchased at price lower than 500 000 soums per unit.


47

153. Unfortunately RBAC was not able to present documental evidence of revenue proceeds. Due to fact that RBAC is part of Unitary company, a single bank account is used for settlements by head office and all RBACs. Revenue proceeds from all of RBACs are being transferred to this account. Documental confirmation of revenues can be obtained from bank statements for this account.

154. However, according to verbal information received from director and accountant of Kuy-chirchik RBAC income of the RBAC should be the revenue proceeds from fulfilling the contracts made with local farmers on provision of such services as accounting, preparation of business plans (particularly for the purchase of agricultural machinery). At present RBAC has made 60-70 Annual Contracts with farmers on provision of services during the year for the total amount of approximately USD4600. An Annual Contract is a contract made between two parties for provision of services or goods during the period stated in the contract. At present, according to director of RBC, out of this amount only 50 000 soums (USD42) were received as revenue. RBAC has outstanding accounts receivable at the amount of approximately USD2600. This amount was accrued as a result of provision of services on preparation of business plans for the purchase of 10 harvesters. The payment of this amount is expected by the end of this year. Besides this, according to director the RBAC plans to make contracts on preparation of business plans for the purchase of 40 tractors. Expected revenue from this activity is approximately USD3300. This amount is also expected to be paid by the end of the year. Thus the total expected revenue of RBAC for 2006 is estimated at approximately USD7500.

155. It is necessary to note that big volume of work, accomplished by RBAC is actually done on free basis. RBAC maintains a call-log where it registers all calls by farmers who require clarification (discussion) on various questions. According to log, RBAC receives 8-10 calls per day (230-240 per month). Such discussions are conducted primarily during field visits and within seminars. As was mentioned earlier that such visits are conducted at the expense of RBAC staff. It is necessary to draw attention to fact that transportation costs are not reimbursed to the farmers.

156. In this way, based on provided preliminary information from an economic point of view, Kuy-chirchik RBAC does not cover its own operational expenses. Total expenses of RBAC from the beginning of the year are approximately USD9500 against expected revenue by the end of this year of USD7500.

157. The main reason for this is insufficient volume of provided services. Out of 60-70 contracts made during this period the actual volume of services provided during the period from May to September mounted at approximately USD4600. RBAC provided services only on 10-15 contracts. And all of these contracts were related to preparation of business plans on purchase of agricultural machinery. Provision of services on these contracts generated income (accounts receivable) at the amount of USD3300. To achieve profitability and economic efficiency Kuy-chirchik RBAC needs to increase the volume of provided services by diversification of types of services, increase of customer base, improvement of quality of provided services, implementation of more active marketing strategy.

158. It is necessary to point out that a discrepancy existed in the reports provided by head office and by Kuy-chirchik RBAC. For instance some expenditure items which in reports provided by head office of unitary company showed expense while the information provided by RBAC reported no expense and vice versa, (office supplies, gasoline and lubricants). This can mean different approaches in accounting used by head office and the RBAC.


48

APPENDIX 5

A. Loan application and financial plan

[THIS DOCUMENT IS A PROFORMA OR TEMPLATE… INDIVIDUAL APPLICATIONS CAN USE ALL OR PART OF THIS FORMAT AND BE LONG OR SHORT DEPENDING ON REQUIREMENTS.]

1. Summary

159. [THIS IS AN EXECUTIVE SUMMARY OF THE LOAN APPLICATION………..]

This Application for Loan is proposed by the ……XYZ AMMT………… and prepared under the relevant legislation of the Republic of Uzbekistan and is directed at the XXXXXXXXX…………….Bank.

a. Purpose of the Proposed Loan

160. [THIS SECTION ESTABLISHES THE OVERALL PURPOSE OF THE LOAN]

“The purpose of this loan is to assist in the restructuring of the machinery services provided by the XYZ AMMT in ABC District of CDE Oblast of Uzbekistan. The aim of the restructuring is to reduce maintenance costs and increase revenues from the hire of tractors.”

b. Objectives

161. “The objective of the proposed loan is to replace 10 obsolete tractors with 5 new tractors of larger capacity…….. this change will reduce maintenance costs by a planned X%, direct costs of operation by Y% and increase company revenues by Z%”.

c. Proposed Loan and Amount

162. XYZ AMMT proposes to purchase 5 MMX tractors of type …. For a total of ….’000 Soum. ……”

d. Market Demand for Company Services

163. “The XYZ AMMT services 12,000 ha. of irrigated cultivated land and has an established customer base of 350 farm families; there is an annual requirement for tractor services comprising X hours or an equivalent land area of Z hectares………...”

e. Technology Aspects

164. “The proposed MMX tractors provide more surface traction and have a greater capacity (land area cultivated per day) than either the AMMT’s own pool of machines or competing types of tractor…”

f. Company Resources

165. [PROVIDE A SUMMARY DESCRIPTION OF HUMAN, FINANCIAL AND PHYSICAL ASSETS]

“AMMT management and infrastructure is more than sufficient to restructure its machinery inventory. …………details of the AMMT are provided in the document and the attached appendices. “


49

g. Financial Aspects

166. “The AMMT’s current Balance Sheet and Profit and Loss Statement are presented in the Appendix. These audited information shows that…………etc.”

h. Financing and Loan Repayment Plan

167. “The loan will be amortized over a 5 year period………”

B. Detailed loan application

1. Part A: Overview

a. Background

168. [PROVIDE A SHORT BUT RELEVANT DESCRIPTION OF THE ENTERPRISE]

“XYZ AMMT (Alternative Machine and Tractor Park) is located in the Katta-Kurgan Rayon. The entity was established on the basis of a shirkat. It has a variety of machines, mainly tractors, but also operates a mini-cotton processing plant. Ownership of the enterprise is divided between 54 farmers and 134 workers………...”

b. Business type and objectives

169. [PROVIDE A CLEAR GENERAL UNDERSTANDING OF WHAT THE BUSINESS IS ABOUT]

“XYZ AMMT is a service provider to local agriculture. The business focuses on providing machinery for hire by local farmers. The surrounding area of 12,000 hectares of irrigated land and 80,000 hectares of dry-land agriculture supports 1,250 farm families of which approximately 350 are in a position to rent farm machinery on a regular basis. The main crops are cotton and wheat. The AMMT wishes to up-grade and expand the range of farm machinery it is capable of providing in order to diversify its range of services and to increase revenues……..etc.”

c. Justification and immediate objectives

170. [DEFINE THE OBJECTIVES TO BE ACCOMPLISHED WITHIN THE SCOPE OF THE LOAN APPLICATION]

“The XYZ AMMT has an inventory of old and out-dated machines. It has a total of 97 tractors comprising 60 MTZ-80 tractors, 8 TTZ-80, 22 TTZ-28, 6 BT-6, and 1 Massimo (full details are provided in the Appendix). It also has 82 trailers. The oldest operational machine is 36 years old and the average age of the tractors is 20 years. The costs of repair and maintenance are high and breakdowns are frequent. As a result, the AMMT is unable to offer the quality and range of service required by its customers.

The immediate objective of the proposed loan is to retire the 10 oldest tractors and replace them with 5 larger capacity new machines. This will reduce maintenance costs by almost 60% and increase revenues by a projected 20%”.

C. Part B: External factors affecting the business

171. [THIS SECTION PROVIDES AN OVERVIEW OF THE COMMERCIAL/MARKET ENVIRONMENT OR CONTEXT IN WHICH THE PROPOSED LOAN IS TO BE UNDERTAKEN. IT WILL VARY DEPENDING ON THE TYPE OF BUSINESS. E.G.,


50

AGRICULTURE-BASED BUSINESSES MAY PROVIDE EXTENSIVE PHYSICAL AND AGRONOMIC DATA, WHEREAS PROCESSING BUSINESSES MAY FOCUS ON TECHNOLOGY. IN GENERAL, HOWEVER, THE SECTION WILL INCLUDE THESE ELEMENTS:]

1. Market situation (demand, supply and competition)

172. [THIS SECTION PROVIDES ANALYSIS OF DEMAND FOR THE SERVICE TO WHICH THE LOAN IS RELATED]

“The AMMT has 350 regular farm customers. The area of land under cultivation is……’000 ha… The average land area cultivated per tractor per year is currently ….X ha………. The cost hire per ha oer tractor is….’000 Soum…etc., etc..”

2. Technical factors

173. [THIS SECTION PROVIDES RELEVANT TECHNICAL MATERIAL]

“Tractors are the most essential piece of farm machinery, providing the locomotive power for a range of ancillary machines such as ploughs, seed drills…….. Failure to use tractors of sufficient power significantly impacts on the way the soil is treated during land preparation and cultivation…………… The AMMT has evaluated three manufacturers of the type of tractor required….. etc.”

3. Environmental factors

174. [DESCRIBE THE MAJOR ENVIRONMENTAL IMPACTS OF THE BUSINESS AND MEANS TAKEN TO COMPLY WITH GOVERNMENT AND OTHER REGUILATIONS. THIS SECTION MAY NEED TO REFERENCE AN OFFICIAL ENVIRONMENTAL IMPACT ASSESSMENT]

“The use of under-powered and lightweight tractors has affected the soil structure of the wheat growing areas in the following way…..”

4. Labor and social factors

175. [DESCRIBE E.G ANY MAJOR SOCIAL ISSUES THAT MAY IMPACT ON THE BUSINESS. THIS MAY INCLUDE SUPPLY AND DEMAND FOR LABOR, AVAILABLE SKILLS, TRAINING FACILITIES.]

“Reduction of the numbers of tractors will require a similar reduction in numbers of drivers. 5 drivers will be affected. Of these persons one is due for retirement and one is capable of re-training as a mechanic. The other persons will be found work outside the AMMT…. Etc.”

5. Government aspects

176. [DESCRIBE ANY GOVERNMENT INTERVENTION THAT MAY IMPACT THE LOAN OR ITS REPAYMENT]

The principal source of competition for AMMT’s are the Government Official MTPs, of which there is one in the rayon. This enterprise operates 25 CASE IH tractors. These are large, modern machines but expensive to operate. However, their operation is subsidized by the Government……etc.”


51

D. Part C: Detailed loan application

1. Current company operations

177. [DESCRIBE EACH ACTIVITY IN DETAIL WITH SUPPORTING INFORMATION.]

“In 2006 the AMMT provided tractor services as follows………………Direct costs of services were………… Revenues resulting were…….etc.”

2. Detailed description of the proposed loan

178. [DESCRIBE THE PROPOSED LOAN. THIS SECTION SHOULD INCLUDE DETAILS OF THE SPECIFICATIONS OF MACHINERY AND SOURCE OF ORIGIN TOGETHER WITH ANY COMPETITIVE BIDDING PROCEDURES UNDERTAKEN OR PLANNED.]

“AMMT propose to purchase 5 MMX tractors for a total cost of ….’000 Soum. The specifications of the machines to be purchased are:…………..

3. Technology aspects

179. [THIS SECTION DEPENDS ON THE TYPE OF BUSINESS MODEL: A SERVICE PROVIDER MAY HAVE LITTLE OR NO TECHNOLOGY; ALTERNATIVELY A PROCESSOR OF AGRICULTURAL MATERIALS MAY DEPEND HEAVILY ON TECHNOLOGY.

THIS SECTION MUST IDENTIFY THE KEY TECHNOLOGIES INVOLVED IN THE BUSINESS AND PROVIDE A COMPLETE ANALYSIS OF THE MAIN ISSUES AS THEY AFFECT THE OVERALL BUSINESS]

180. “The new tractors will allow the retirement of the following oldest tractors in the machine park. It is estimated that this will lead to a saving of …..’000 Soum in maintenance. However, the new machines will require an up-grading of the main service area and some purchase of new tools will be required. These are………etc.”

4. Economic aspects

181. [THIS SECTION SHOULD INDICATE THE PLANNED IMPACT OF THE LOAN ON THE BUSINESS AND IN MORE GENRAL TERMS ON THE MARKET. IT SHOULD PROVIDE AN ASSESSMENT OF THE OVERALL BENEFITS OF THE LOAN – IF POSSIBLE VIA NET PRESENT VALUE OR INTERNAL RATE OF RETURN CALCULATIONS]

E. Part D: Risk management

182. [THIS SECTION IDENTIFIES THE RISKS RELATED TO THE LOAN, BOTH IN TERMS OF TECHNICAL RISK AND REPAYMENT OF THE LOAN]

“The new tractors will not increase the risk to the business either from a technical or a financial perspective. Technically the management of a tractor park is something the AMMT is fully capable of undertaking. The maintenance of the new machines can be undertaken with the support of the manufacturer and additional training of operators and maintenance crews………… Repayment of the loan is not considered a risk area since the new tractors will attract an increased hire charge and generate additional revenue……"


52

F. Part E: Financial plan and analysis

1. Current financial position and resources of the company

[PROVIDE FULL AUDITED DESCRIPTION OF CURRENT FINANCIAL POSITION AND CAPITAL RESOURCES…. ALL SUPPORTING FINANCIAL STATEMENTS AS APPENDIXES]

2. Detailed company financial plans

[THIS SECTION PROVIDES COSTS AND REVENUES FOR EACH PLANNED ACTIVITY IN THE NEXT FINANCIAL YEAR AND PROJECTIONS FOR FUTURE YEARS. IT PROVIDES AN OVERVIEW OF THE COMPANY’S FINANCIAL FUTURE]

INDIVIDUAL PLANS MAY VARY E.G., CURRENT OPERATIONS MAY BE CONSIDERED DIFFERENTLY IN DETAIL FROM PLANNED NEW INVESTMENTS.

THE ANALYSIS FOR EACH ACTIVITY MUST INCLUDE:

• DETAILED COSTS BASED ON PRODUCTION PLAN • DETAILED REVENUES BASED ON SALES PLAN • SOURCE OF FINANCE (WORKING AND INVESTMENT) • CASH FLOW (PROFIT AND LOSS) • RATE OR RETURN ANALYSIS (NET PRESENT VALUE, FINANCIAL

INTERNAL RATE OF RETURN AND PAY-BACK PERIOD) • TAX SCHEDULES]

3. Financial aspects of the loan

[PROVIDE DETAILS OF HOW THE PROPOSED LOAN IS TO BE STRUCTURED AND REPAID, IT’S OVERALL IMPACT ON THE ENTERPRISE DEBT:EQUITY

G. [This appendix applies only to Uzbek companies]

[THE GOVERNMENT OF UZBEKISTAN REQUIRES CERTAIN INFORMATION IN APPLICATIONS FOR BUSINESS LOANS. SOME OF THIS INFORMATION MAY BE INCLUDED IN A GENERAL BUSINESS PLAN]

1. Legal Documents

The Statute of an entity that is a Borrower certified by Public Notary

The Statute should be registered with the governmental agencies of the Republic of Uzbekistan (RUz), and specify the title, legal address, legal status, objectives and operation subject, information about promoters, their rights and liabilities etc. The RBAC should check the correctness of the Statute execution; and the type of activities performed by the entity after the loan obtaining should be indicated in the clause on objectives and subject.

Constituent Agreement of an entity that is a Borrower enterprise certified by Public Notary

The Constituent Agreement is prepared, if the Borrower is established by several promoters, and it should indicate the title, location, legal status, objectives and subject, information about promoters, their rights, liabilities, relationship etc.

License confirming the right to implement the certain type of activities, if this type is included in the list of activities required a license

Licenses, permits or quotas should be submitted to the Bank, if this type of activities is included in the list of activities required a special license, permit and quotas. The RBAC should check, if this type of activities is included in the


53

list of activities required a special license, permit or quota. Licenses and other permits are issued by specialized national agencies or other authorized bodies.

Accounting statements confirmed by the Tax Inspection for the last two-three, if the Borrower is an entity in operation;

The accounting statement confirmed by the Tax Inspection should contain all the Forms: F-1, F-2, F-3, F-4 etc. that are approved by the Regulations for the sector, where the Borrower intends to operate. The RBAC should check the correctness of the prepared balance sheet, solvency of the Borrower, availability of fixed assets and working capital needed for the implementation of activities, and property that could be used as collateral.

2. Feasibility Documents

Feasibility Study Basing on the above documents the Feasibility Study is prepared by the Borrower, probably, under the RBAC assistance, and should contain all the available information concerning the project: information about the Borrower, its financial situation, about the partners (founders, suppliers of equipment, raw materials and materials, consumers of finished products), rate of return estimate, results of marketing study at raw materials and finished product/services markets etc.

Marketing research of raw materials and finished product/services markets

Marketing research of raw materials and finished products/services markets is performed by the Borrower, probably, with the RBAC assistance. Marketing research should contain data on the volume of output and materials required for the production, their availability, cost and quality. Markets for finished product/serves planned to be produced using procured equipment, cost and qualitative characteristics, as well as availability at the market should be also mentioned. When the Borrower provides own data on raw materials and finished product/services markets, the RBAC has to do its own marketing to verify the data provided by the Borrower.

3. Contractual / Credit related Documents

Information about partners: founders and equipment suppliers

Information about partners (founders and equipment suppliers) is provided by the Borrower, and should incorporate very detailed information about founders, equipment supplier, major suppliers of raw materials and consumers of finished product/services. The information about founders should include the data on basic activities implemented by each founder, its financial situation etc. Information about suppliers should include the date of the supplier establishment, supply of similar equipment to other clients, data on the performance of the equipment supplied earlier (clients’ comments) etc.

Contract or Letter of Intentions to start considering the Loan Application for the equipment procurement within the project;

The Contract or Letter of Intentions on Equipment Supply within the project should be signed by the Borrower prior to the preparation of the package of documents to be submitted to the Bank. The RBAC needs to check the correctness of this Contract or Letter of Intentions execution, and it should indicate the title of a supplier and a client, complete description of the equipment, its specifications: efficiency, power consumption etc., its cost taking into account delivery, assembly and commissioning, assembly and supply term, period and terms for the equipment payment, term of the Contract or Letter of Intentions etc.

Specifications or other documents for the equipment procured, comparative

Specifications or other documents for the equipment procured, comparative characteristics (competitive list) of similar equipment


54

characteristics (competitive list) of a similar equipment (i.e. cost, efficiency etc.);

(i.e. cost, efficiency etc.) are prepared by the Borrower, probably, with the RBAC assistance. The RBAC needs to check the specifications of procured equipment and their conformity with those specified in the previously signed contracts or letters of intention. The competitive list should contain not less than three bids of various suppliers of similar equipment; the conformity with the production capacity and its quality is a must.

4. Permits and Civil Work

Documents on the land allocation for civil works (Rent Agreement);

Documents on land allocation for civil works (Rent Agreement) should include documents confirming the permit for civil works within this area, if a new construction is planned, or documents confirming the ownership of existing buildings and structures. The RBAC should check the correctness of legal side of these documents.

Design estimates for construction (reconstruction, expansion, technological upgrading, rehabilitation);

Design estimates for the construction, reconstruction, expansion, technological upgrading, and rehabilitation should be submitted by the Borrower, if new construction or change of existing building structure is planned. Rehabilitation estimate is provided under the rehabilitation without the change of existing building structure. The RBAC should check the correctness of the legal execution of these documents

Permit of the Goscompriroda (Environmental protection ) Expertise

Permit of Goscompriroda Expertise is provided under the construction of a new object or arrangement of new production. The RBAC should to check the correctness of the legal side of this document.

Permit of Glavgorexpertise (Main City Expertise) of Goscomarchitectstroy (State Committee of Architecture and Construction).

Permit of Glavgorexpertise of Goscomarchitectstroy is provided under the construction of a new object or arrangement of a new production. The RBAC should to check the correctness of the legal side of this document


55

APPENDIX 6

A. Wheat production policy in Uzbekistan15

1. Executive summary

183. This paper provides a discussion of agricultural policy in Uzbekistan related to the wheat grain industry.

a. Capital intensive production is not appropriate

• Uzbekistan has adopted a capital intensive and high cost production model for wheat. Diminishing marginal returns have set in and a new approach is needed.

• The use of a capital intensive production model is questionable in the context of a large and under-employed rural population and a high cost of capital. If constraints on the market are removed this situation will normalize.

b. Pace of change is insufficient

184. The structure of the industry remains centrally managed. The pace of change is slow and current technical efforts to improve the productivity of the sector are not tackling the roots of the problem.

c. Institutional not technical aspects are the main constraint

185. Problems of productivity are not mainly technical. The difficulties arise from the institutional structure of the industry. For example,

• Farm machinery procurement is “top down” • The industry is still centrally managed • The State Order system limits farmers incentives and farm profits • Access to the legal or justice system is restricted for low income farmers

d. Lack of access for farmers to the justice system adversely affects productivity

186. A lack of access for farmers to the justice system via adequate legal services is a core problem affecting agricultural productivity. With consequently reduced food supply, the supply of labor is reduced with out-migration in favor of better jobs outside agriculture, respect for the law itself is diminished and ultimately there may be an increase in civil discontent. None of these outcomes are what is desired by a government that focuses solely on production volumes in an effort to avoid all or some of the above.

e. Transition is essential and must deal with fundamental issues

187. Genuine transition must start with a transfer of ownership of rural resources, especially land, to rural dwellers. Local authorities must cease direct management of the industry and there must be privatization of the official MTPs and the UzDonMahsulot system.

15 This paper is prepared as an informal discussion document for ADB TA 4217-UZB


56

Economic transition is risky, but providing a semblance of change while maintaining the status quo has greater risks.

2. Wheat production policy in Uzbekistan

a. Introduction

188. Uzbekistan has adopted a wheat production strategy that includes intensive use of irrigation and mechanization. The technology model is very similar to that adopted by the USA (see Table 1)

Table 1: Comparison of relative production costs Cost item USA UZB

% Selected Direct Costs

Seed 12.99 17.22 Fertilizer 41.15 49.51 Chemicals 12.69 0.00 Custom operations 12.12 19.29 Fuel, lube, and electricity 21.05 13.98 TOTAL 100.00 100.00 Source: Table 5, TA 4217-Uzb Discussion Paper “Wheat Costs of Production and Farm Machinery Inputs in Uzbekistan”. 189. These main inputs (especially fertilizer and machinery together with water) produce between 3 and 4 tons of wheat grain per ha in the irrigated areas. Yields in rain-fed areas are very low (less than 1 ton/ha) and barely cover production costs.

190. High production costs. Measured on the basis of only the basic inputs of seed, fertilizer, chemicals and fuel/lubrication oil, Uzbekistan is one of the world’s highest input/cost producer of wheat per unit of land with a cost of US$315/ha. This cost compares with the USA with US$474/ha. Regional comparisons prove this gap: the two low-input/low-cost producers Pakistan and Iraq have US$141 and $90/ha respectively.

191. Per ton of wheat costs US$87/ton to produce in Uzbekistan compared to US$150/ton in the USA. The country uses very high application rates for seed and (probably) understates the cost of machinery use16.

192. Centrally managed, State-owned, post-harvest grain handling. These facilities include primary grain collection, transport, seed treatment, storage and flour milling. The system is highly inefficient in every aspect. This inefficiency suggests that flour costs in Uzbekistan are higher than necessary.

b. Efforts to improve productivity

193. Under various programs but notably the Grains Productivity Improvement Loan (GPIP) efforts have been made to improve the productivity of the industry via:

• Strengthening seed and varietal research capability and capacity. This is a long-term research and training-based program that will take time to show

16 Wheat costs of production have been studied in depth by TA 4217-UZB and this data is presented in

a discussion paper entitled “Wheat Costs of Production and Farm Machinery Inputs in Uzbekistan”.


57

results. There are many research institutions all of which require strengthening.

• Improvement of irrigation infrastructure and development of WUAs. This work is being undertaken under the GPIP.

• Improving the capacity of seed multiplication and treatment. This sector is in process of restructuring, but progress is slow because of institutional constraints. Most seed treatment facilities are owned/operated by UzDonMahsulot the central government agency responsible for grains.

194. Improving the stock of farm machinery. Given a mechanized farming model the inventory of capital farm equipment needs to be kept up to date. In Uzbekistan machinery is generally old and out-dated and therefore inefficient. The GoU has undertaken various initiatives to replace machinery. One such program was the procurement of CLAAS combine harvesters from Germany. The GoU has an on-going program of replacing old and outdated farm machinery with the next farm loans focused on tractors and ancillary equipment.

195. Operationally the new CLAAS machines have been effective and grain losses may have been reduced by a small percentage (1-2% as a result of increased machine efficiency and the fact that increased capacity – more machines – enabled the crop to be harvested before seed shattering). For tractors, the main technical issue is to increase traction via the purchase of caterpillar tractors and wheeled tractors with new tires.

196. Demonstration farms in focus areas. Farm areas have been selected under GPIP in order to demonstrate improved techniques of irrigated wheat culture. Work has started preparing the demonstration farms in the fall of 2006 for the 2007 crop.

c. The current productivity improvement program17

197. The tangible result of these efforts has been the procurement and use of the CLAAS combines during the 2006 harvest. Anecdotal evidence based on farm and operator interviews indicates the machines have met with success on a technical level.

• For demonstration farms some start-up problems have been encountered and reported as follows18:

• Poor cooperation between the participating institutes, RBACs, GPIP and participating farmers

• Low confidence in the success of the activities by the participating farmers • Lack of control plots / treatments leading to subjective results without

comparative analysis • Poor selection of farms in terms of geographical location and quality of land

It is important to say that these problems reflect the intensely “political” struggle between agencies and between central and local government.

17 These notes reflect areas that the TA has been concerned about. GPIP reports formally and in full on a

quarterly basis 18 These issues were reported by the Social Outreach Specialist for TA 4217 and discussed at a workshop in

Tashkent on 4th October 2006


58

d. Capital intensive approach to wheat cultivation

198. Questions arise about the adoption of a capital intensive model of production in a country where the cost of capital is high relative to labor19, but the policy aspects are as follows: where the rural population is small and access to capital equipment is easy such as the USA, a highly mechanized technology is appropriate. One person in the USA can farm thousands of hectares using very advanced machines and supported by a very sophisticated infrastructure of service providers. Similarly in Kazakhstan, the technology profile may be different from the USA, but the enormous areas of low-yielding wheat are rain-fed, low-cost and farmed on a large scale.

199. This is not the situation in Uzbekistan. Satellite photographs of the three GPIP project focus areas show a pattern of smallholder agriculture like that found in South-east Asia. Equally, whereas the rural population in the USA is tiny (as a percentage of the total population), rural areas are the home to the majority of persons living in Uzbekistan. Small-scale land-holdings and a large population do not favor capital/machine-intensive cultivation. Wheat production may appear to the GoU from a technical and output-driven perspective to require emulation of large-scale farming, but it is an inappropriate approach to agriculture given an under-employed and poor rural population.

200. Given the agronomic conditions in most parts of Central Uzbekistan it is unlikely that additional yields can be squeezed from wheat production no matter how highly mechanized and no matter how much fertilizer is applied. The logic of the design of the GPIP was that the focus should be on rain-fed areas because the gain relative to cost of improvements would be better. GPIP design documents also highlighted the need for the re-structuring of the seeds industry in the context of an overall restructuring of UDM.

201. Possibly under pressure of the definition of wheat as a “strategic crop” the original and economic analysis of GPIP was amended in favor of a technical focus on irrigated wheat production. There is no clear economic reason why wheat should be regarded as “strategic” for Uzbekistan, since there are various means whereby the country could assure itself of a supply. That said, it is recognized that the commodity has a political and even “spiritual” role in the Uzbek psyche.

202. In Vietnam rice has an equivalent role to Uzbek wheat in the popular culture. Vietnam also has a highly centralized government system and until recently a command economy. Rice yields in Vietnam under this system were below world average and the country struggled to be self-sufficient. But after “doi moi” (reform) in the late 1980s and the return of land ownership to smallholders, yields tripled and from 2000 Vietnam emerged as a major exporter of rice on world markets (competing with major exporters Thailand and the USA). Under private ownership and a free market economy for agriculture, rice efficiency improved under pressure from the farmers for new technology and better practices. This example suggests that even when the crop has an essential and even sentimental role in the economy, the pull of the market can prevail.

203. The Vietnamese example also suggests that the transition from shirkats to dekhan farms is the right approach. Small farmers, if they own their land, usually make the right decisions about what to grow and how to grow it. But the transition in Uzbekistan is constrained by the fact that farmers do not own their land, it is simply granted to them on a temporary basis on condition that they grow the strategic crops of wheat and cotton. If the system was free, then farmers might grow wheat when and where the agronomic conditions

19 The overall question of farm machinery is considered in detail in another TA Discussion Paper “Wheat grain

costs of production and farm machinery inputs in Uzbekistan”, July 2006, TA 4217-UZB


59

and the price were right. But none of this applies in the case where the State Order exists and the entire wheat growing effort depends on coercion20.

204. All this is well known both to GoU and to the development agencies. The overall strategy of the GPIP (and the World Bank’s RESP) is based on the understanding that a slow transition will occur but that change has to be effected carefully and with sensitivity to the political constraints. However, it is clear that the pace of change is much slower than required even in the small areas selected under RESP and GPIP.

205. The problems of transition must not be understated. Land reform is an enormously difficult issue and experience in most countries is that it requires a major political effort of will of the entire population for this to occur. The abolition or major restructuring of other institutions that may be controlled by ethnic or clan groups is also near impossible unless it comes from within. The reason for the glacial pace of the restructuring effort lies in the political system as well as being related to the social composition of key government agencies, where officials are steeped in the command-style economy. Such aspects are outside the scope of the TA and should not be the concern of foreign development assistance.

e. Access to the system of justice

206. TA 4217 has identified a lack of access for farmers to the justice system via adequate legal services as a core problem affecting agricultural productivity. The problem arises from the following factors:

• Few legal specialists trained in rural law issues • Few lawyers available in focus areas • Over-reliance on administrative “advice” and influence • Insufficient funds to pay for legal services

207. As a result of these factors, agricultural output is reduced with consequently reduced food supply, the supply of labor is reduced with out-migration in favor of better jobs outside agriculture, respect for the law itself is diminished and ultimately there may be an increase in civil discontent. None of these outcomes are what is desired by a government that focuses solely on production volumes in an effort to avoid all or some of the above.

f. Possible solutions at a policy level

208. This analysis of the existing effort is not intended to be negative. The intention is to form a realistic understanding of a situation that is acknowledged by every participant in the industry including many officials. The result of an honest appraisal might be the discovery of acceptable solutions that are realistic in terms of cultural and political constraints.

209. Based on consideration of the elements of the industry discussed above, there may be two possible approaches:

210. Continue as before. In this case the GoU continues to persuade the rural population to produce strategic crops, extracting marginal increments of output at high cost (well beyond

20 The word “coercion” is a strong description. However, there is considerable evidence that this is the case in

Uzbekistan. The TA has direct experience (in Zomin) of farmers being threatened with the confiscation of land if the State Order is not delivered. There are also reports (not verified by this TA) that in the Fergana Valley non-farmers (e.g., teachers) have been required to deliver 20 kgs of personal wheat grain in order to make up the quantity required by the local authorities.


60

the point at which diminishing marginal returns have set in). This will ensure the continued poverty of the farmers and massive under-use of rural labor, most of which is young and ill-educated.

211. This approach can continue until there is a crop failure (which will occur inevitably given the high input regime used) and/or until rural poverty overcomes fear of coercion.

212. So far the GoU has done a good job of maintaining the status quo by paying some attention to the process of transition (e.g., breaking up shirkats) and gradually increasing state procurement prices for cotton and wheat while in practice maintaining existing institutions which are substantially unchanged in the five years since GPIP was designed.

213. There is ample evidence that while changes have occurred they are minor and do not in general deal with the main issues affecting the industry. For example, the State Order still takes approximately 65% of the crop at a mean price of $102/ton compared to a private sector price of $140/ton21. If the SO is not filled, the farmer will have his land confiscated22. There is evidence that loans for farm machinery (combines) were forced on farmers whose enterprises could in no way sustain such expense. There is evidence that irrigated yields are actually lower than reported, but that grain is taken from rain-fed areas to make up the target output (as well as the example of grain taken from non-farmers provided above). UzDonMahsulot has every intention of remaining the sole supplier of seed, the main provider of post-harvest facilities and the sole purchaser of by far the largest volume of wheat23.

214. Genuine change of the agricultural production system. In a real transition, ownership of agricultural resources (including land) would be transferred to rural dwellers and the market would be allowed to play its proper role in determining how these resources were applied to production. If farm machinery were to be replaced, loan applications would be based on demand from farmer’s own understanding of their specific needs and their genuine ability to repay the loan rather than on some artificial investment in machinery which disappears into the old MTP system24.

215. Such a genuine transition would require courage since it runs a the risk that farmers, left to themselves, may decide that they have better uses for irrigated land than growing low value commodities such as wheat. During the transition period the GoU assisted by the development agencies could put in place mechanisms to guarantee the supply until the transition had been made. Transitions such as this are not easy, but they are best made in a controlled way than forced by circumstances.

216. An important related element is the rule of law. All the RBACs have commented on the need for a strong legal advisory service. At a national level, rural dwellers must have recourse to independent tribunals that can decide disputes relating to land rights and other such matters. At some point the rule of the Hokim and his responsibility for agricultural outputs must be removed and replaced with modern local institutions that inspire the confidence of investors and rural dwellers alike.

21 Prices found in the field in the focus areas 22 The TA has spoken to farmers facing this situation 23 Interview with Mr. Kamilov Mirazasultan, Chief of Procurement and Seed Supply at UZDONMA and Mr.

Salimov Khayrulla, Head of Milling Division, 25th April 2006 24 For example, all the combine harvesters bought in Zamin were leased to other farmers via the official MTP. In

Kattakurgan by 29th June 2006 (12 days after commencement of the harvest) not one of the new CLAAS machines remained working in the focus area, although grain remained to be harvested.


61

APPENDIX 7

WHEAT GRAIN COSTS OF PRODUCTION AND FARM MACHINERY INPUTS IN UZBEKISTAN

A. Executive summary

1. This paper provides basic technical, operational, financial and economic data that will assist the Government of Uzbekistan in continuing its efforts to develop a more efficient wheat industry. It covers comparative production costs of wheat in Uzbekistan, in neighboring countries and “benchmarks” these against the USA. The paper also provides analysis of the farm machinery aspect of costs, which is a priority area for current investment in the industry.

1. Comparative wheat production costs

2. Wheat production costs are high in Uzbekistan compared to even the USA. These costs may understate the real cost of capital and certainly understate the cost of using irrigation water. Machinery and fertilizer use is probably inefficient and the Law of Diminishing Returns is operating.

2. Capital intensive, machinery-based production

3. Capital-intensive machinery-based production of commodity crops such as wheat makes little if any sense in Uzbekistan given a high density of rural population and relatively poor agronomic conditions for wheat.

3. Machinery procurement and usage

4. The GoU approach to recent harvester procurement and use was “top-down” and less than transparent. A similar program is in place for the purchase of further machinery based on a central planning assessment of needs and directions via regional agencies (RBACs) to canvass farmers and ASCs to apply for loans.

5. The procurement of the CLAAS combines left much to be desired. (ADB’s Direct Procurement procedure was used due to low size of individual contracts) It was apparently organized to take advantage of preferential ADB loan funds via a line of credit aimed at business development, not replacement of the machinery inventory.

6. Harvester requirements may have been overstated so that the machines could be used outside focus areas (thus reducing funds available for business development within these areas). Farm-based borrowers were persuaded to apply for loans and then their new machines were operated separately by other agencies. New machines were used oblast-wide.

4. Evaluation of technical and financial aspects

7. The technical results from the CLAAS harvesters were apparently good (though not measurably better than alternative machines and gains may be lost post-harvest), but no adequate financial justification is available for their purchase. The return on harvester rentals may be adequate to good, but it is uncertain if these returns finally benefit harvester owners. Purchase of expensive machinery by small farmers is not defensible on any grounds.


62

B. Wheat grain costs of production and farm machinery inputs in Uzbekistan25

1. Introduction

8. All structural reform and policy interventions in any industry must start from a basic appreciation of the costs and returns of producing a basic unit of output, whatever product that is. All too often in agriculture the focus of attention is on the technical parameters of production rather than the financial or economic reasons for pursuing some course of action.

9. This paper attempts to discover certain of the basic financial and economic data that will assist the Government of Uzbekistan in continuing its efforts to develop a more efficient wheat industry26.

2. Methodology

10. The document is narrowly focused on costs of production both inside Uzbekistan (and especially in the three so-called “Focus Areas” of the Grains Productivity Improvement Project – GPIP) and in neighboring countries. A benchmark is also taken against winter wheat production in the United States (as the producer of the world’s largest volume of wheat).

11. Comparative production cost analysis is difficult. Different agencies in different countries use various definitions and categorizations of costs. Data are available for some years in some countries and only sparsely in others. Data from the USDA may be trusted for accuracy, but data in other countries is subject either to political manipulation or to simple mistakes in collection or the imagination of field collection officials. Nevertheless, some attempt can be made to reach what might be a believable set of numbers without going to inordinate lengths to verify them by field collection in each place (something well beyond the scope of the present TA activity).

3. Aims

12. As stated, basic collection of input costs and the calculation of costs per weight unit of output and per unit of land area is a fundamental activity for any government agency concerned with agriculture and food policy. In this sense the first part of this paper is intrinsically useful. However, the goal of the GPIP and the subsidiary Line of Credit of US$10.1 million made available by ADB is to improve the efficiency of grain production. Although such efficiency has been broadly defined in technical terms (i.e., raising the output per land unit of planted area), it might be assumed that improved financial and economic efficiency would also be a valuable result. In this sense it is important to discover what might be the financial outcome of any policy or technical intervention. Presumably it is not the aim of the GPIP to raise output volumes at any cost, so some idea must be gained about where the impact of the law of diminishing returns starts to be felt.

13. The GPIP is making a number of interventions which will not be summarized in detail here. Broadly speaking, however, the GPIP seeks to intervene at the research level and perhaps down to the level of improved seed being made available to the farmer. Equally, there are socio-economic issues to be dealt with such as the development of Water User’s Associations (WUAs) which relate to the increasing shortage of water in the river basins feeding the Aral Sea. Rehabilitation of water management and delivery systems plays part in the project as does the provision of improved farm machinery. 26 “Wheat” refers to winter wheat, i.e., seed planted in October and harvested the following June and July and to

varieties of short soft red wheat, not durum wheat.


63

14. The latter is of special interest to a TA concerned with strengthening the Rural Business Advisory Centers (RBACs) since some $4 million of the LoC has been devoted to the purchase of new machinery, specifically combine harvesters. Other proposals (e.g., for tractors) are in the pipeline.

15. The stock of farm machinery in Uzbekistan is old and obsolete. Much of it holds over from the Soviet period – probably most agricultural machines are more than ten years old and there are tractors still in operation over 30 years old. Efficient machinery is critical in all farm operations and the continued replacement of machines that are out of service more often that not and that consume large amounts of fuel and oil relative to their output is essential. It is thus considered axiomatic that continued improvement of agriculture, including wheat, must depend on upgrading and replacing all types of machines for all farm operations from land preparation through cultivation to harvesting. Nothing stated in the paper should be taken as questioning the need for new and better machinery, however the research seeks to understand what machinery is required, how it is procured, how it is used and how the benefits of the new machines are distributed between the various stakeholders in the industry.

16. One final point of general comment: the wheat industry in Uzbekistan is centrally controlled27. There are historical reasons for this; some good, some bad. The GoU has made serious efforts to consider the entire structure of agriculture (for example, to move form collective farming to a greater emphasis on the private sector via the dekhan farms) and has made specific efforts to improve the structure of the wheat industry (e.g., via changes in government procurement arrangements).

17. Nevertheless, much of the old system remains. The research sector has a multiplicity of competing institutes and the operational side of the industry is circumscribed by the government agency UzDonMahsulot that provides farmers with seeds and services and buys back grain and seed for flour milling. Prices for a high proportion of the crop are set centrally by committee and local authorities (the Hokimiyat at both Oblast and Rayon levels) intervene on an almost daily basis.

18. This structure is largely outside the scope of this paper, though not of the TA, which has as its title “Furthering Reforms in the Grain Sector”. But for the purpose of this analysis the current system is taken as a given and static institutional structure. However, it is acknowledged that change is occurring and that may affect the findings of this paper as time progresses.

4. Comparative costs of wheat production

19. As indicated above, analysis of costs is subject to all kinds of caveats related to the provenance of the data. It is provided here as a “best effort” in the short time available to the TA in order to provide some perspective on the wheat industry in Uzbekistan and the industry, especially in the three focus areas. It provides the basis, for example, of a comparison of essential physical input costs and especially the costs of machinery applied to cultivation and harvesting

20. Table 1 (following page) provides operating costs for the USA (as benchmark) and for countries neighboring or near to Uzbekistan where agronomic conditions are fairly similar. In this sense while it might not be fair to compare Uzbekistan with the USA (because the

27 GoU officials will deny this, but it is overwhelming the case and is commented upon by every agency working in

the industry


64

production technology package differs considerably28) it should be fair to compare Uzbekistan with the Sindh Province in Pakistan where the main crops are cotton and wheat and where there are similar issues related to farm machinery replacement and water availability (in particular, wheat in Pakistan depends heavily on irrigation from the Indus River while in Uzbekistan irrigation water from the Amudarya and Syrdarya rivers is essential).

28 In more technical language, while the product for all the countries is the same – soft red winter wheat – the

production function differs widely from heavily mechanized and extensive agriculture in the USA to low input/low output production in e.g., Kazakhstan. The intention of presenting this data is to provide an indication of the varying production technologies and the results both in terms of yields and costs. It is important to understand that like is not being compared to like except in terms of the resulting product.


65

COST ITEM USA/1 Pakistan/2 Iraq/3 Turkey/4 Kazakstan/5 Uzbekistan

Official/6 Focus areas 2006/7

US Dollars per

Hectare 2,005.00 Q-

Chirchiq/8 K-

Kurgan/9 Zamin/10Operating costs: Seed 17.93 18.75 19.36 N/A N/A 42.24 47.23 45 25 Fertilizer 56.79 1.67 10.18 N/A N/A 121.44 44.26 88.08 0.00 Chemicals 17.51 40.83 N/A N/A 2.91 8.20 0.00 Custom operations 16.73 62.50 44.43 N/A N/A 47.32 36.93 74.40 24.59 Fuel, lube, and electricity 29.05 N/A N/A 34.30 40.00 39.66 5.74 Repairs 26.25 N/A N/A Purchased irrigation water and baling 1.63 2.61 N/A N/A Interest on operating inputs 2.63 N/A N/A Total, operating costs 168.52 126.36 73.96 N/A N/A 245.30 171.33 255.42 55.16 Allocated overhead: Hired labor 6.44 7 N/A N/A 41.21 56.79 0.01 11.48 Opportunity cost of unpaid labor 43.61 N/A N/A Capital recovery of machinery and equipment 128.67 N/A N/A Opportunity cost of land (rental rate) 98.79 N/A N/A Taxes and insurance 9.82 8.24 N/A N/A 27.98 13.68 0.90 General farm overhead 18.41 16.22 N/A N/A 29.47 Total, allocated overhead 305.74 15.24 16.22 N/A N/A 70.68 84.76 13.69 12.38 Total US$ per hectare, costs listed 474.26 141.60 90.18 240.00 66.67 315.98 256.10 269.12 67.53 Yield (tons/ha.) 3.16 2.44 0.80 2.16 0.9 3.63 3.60 4.5 0.37 Costs/ton wheat grain (US$) 150.08 58.03 112.73 111.11 60.00 87.05 71.14 59.80 182.52 Notes 1 USA – Reported by USDA, average 2000-06, all winter wheat 2 Pakistan - from ADB Sindh Rural Development Project, 2004, irrigated wheat


66

Source: Various as described in the notes above

3 From 3 governates in Kurdistan, 2005 crop, all rainfed winter wheat 4 Turkey - no figures available, total cost and yield from press reports 5 Kazakstan - no data available – these figures reported by USDA FAS as totals for 2004 6 Official data from Government of Uzbekistan, Ministry of Economics and Statistics, 2005 crop 7 Informal farm survey undertaken by the TA in July 2006 8 Quyi-Chirchik data is average of 3 farms 9 Kattakurgan - one farm 10 Zamin - one farm - the yield data is very low because of drought


67

21. The basic assumption of almost all development and assistance activity related to wheat in Uzbekistan is that production is inefficient. The GPIP emphasizes “productivity improvement”. The question arises, how inefficient is wheat production in Uzbekistan, and in what area does that inefficiency arise? What is being sought here is a definition of efficiency perhaps in absolute terms (i.e., against a set of technical parameters) but also against realistic and achievable outcomes and relative to costs of inputs.

22. The data shown in Table 1 shows that in simple terms of total US$ costs per land unit (hectare) the USA is the highest cost producer of wheat followed by Uzbekistan, then Turkey. These countries rely either on a high level of mechanization (i.e., the USA) or irrigation (Uzbekistan and Turkey) to produce their wheat. The lower cost countries (Pakistan, Iraq and Kazakhstan) do use irrigation but in general rely on rainfall; they also have low labor costs and rely less on mechanization (perhaps Kazakhstan is an exception, but there is a heavy fuel subsidy and this distorts the result).

23. Data on operating costs confirms this picture (although this level of cost detail is missing from Turkey and Kazakhstan), but with one important change: If only the basic inputs of seed, fertilizer, chemicals and fuel/lubrication oil are considered, Uzbekistan becomes the high-input/high-cost producer per unit of land with a cost of US$198/ha. This cost compares with the USA with US$121/ha. The two low-input/low-cost producers Pakistan and Iraq have US$ 61 and 30/ha respectively.

24. Turning this basic data into cost per ton of output (i.e., by including output yields in the calculation) shows that wheat costs US$87/ton to produce in Uzbekistan compared to US$150/ton in the USA. Kazakhstan’s costs per ton may appear to be a little higher than those for Uzbekistan, but since no disaggregated data exists, the comparison is discarded. Pakistan and Iraq produce wheat at a very low cost per ton.

25. What appears to be the case, therefore, is a conventional picture of two different production models; high-cost/high-output versus low-cost/ low-output producers. Uzbekistan has followed the US model and has pushed for maximum yields and disregarded the cost, while neighboring countries with much closer agronomic and social conditions to Uzbekistan have adopted a different model. The question arises whether in a poor country such as Uzbekistan which has limited water resources and a large rural population the model is appropriate. There is no simple answer. Water may be limited, but fertilizer is not – Uzbekistan has large gas and oil reserves and is a regional exporter of fertilizer.

26. What of the question of efficiency? If identical wheat yields of 3 tons/hectare are assumed for both the USA and Uzbekistan (i.e., two countries that rely on expensive inputs), then cost per ton of wheat in Uzbekistan becomes US$ 66/ton compared with $40/ton in the USA. To understand this we must look more closely at how costs are constructed in the two countries.


68

Table 2: Basic operating costs for wheat production

COST ITEM USA Uzbekistan

(US$/Ha.) (US$/Ha.)

Operating costs:

Seed 17.93 42.24

Fertilizer 56.79 121.44

Chemicals 17.51

Fuel, lube, and electricity 29.05 34.30

Total, operating costs 121.27 197.98

Source: Table 1 27. Table 2 shows that seed costs/ha. in Uzbekistan are nearly two and a half times more expensive than in the USA. This is because the application rates in Uzbekistan are around 250kg/ha. compared with 125kg/ha. or less in the USA. Fertilizer costs are twice those of the USA for the reason mentioned above. However Uzbekistan applies no chemicals for insect and disease control, so gains made in growth as a result of fertilizer application may be lost as a result of losses from factors that could be controlled but are not. Fuel costs are also higher in Uzbekistan than in the USA. This may be the result of several factors including the old and badly maintained inventory of machinery (that uses more fuel per unit of output than modern and well-maintained machines in the USA) and the fact that although Uzbekistan has crude oil it lacks refining capacity and so must import fuel oil.

28. Whereas most wheat in the USA is grown under rain-fed conditions, most of the productive wheat land in Uzbekistan is irrigated. In this sense, the production technology used in the respective countries is of course different. It appears that Uzbekistan has adopted a strategy of forcing grain production at almost any price irrespective of the costs both direct and indirect (such as soil degradation and misuse of increasingly scarce water). If this conclusion is true, it begs the question of what kind of technical efficiency the country should be pursuing. The original design logic of the GPIP was that varieties need to be adapted properly to local conditions (especially in rain-fed areas) and that seed should be improved so that these basic matters could be dealt with. There was no question in the project design that extra production should be squeezed out of land that is already over-used by application of more and more fertilizer and intensive use of machinery. This is a subject that is returned to later in this paper.

29. This analysis is not extended to a comparative/competitive advantage argument. That requires much more precise cost data on wheat and other competing crops and an extensive understanding of trade relations and logistics. It is beyond the scope of the paper. But that said, the original logic of the GPIP also acknowledged that there were some “real world” factors (including being a land-locked country and the cultural importance of bread in the diet) that made wheat production in Uzbekistan something that would be very difficult for the GoU to move away from entirely.


69

5. Costs of production in GPIP focus areas

30. The TA has gathered cost of production data directly from farms in the three focus areas. This has been based on brief interviews with a few farmers and is not a comprehensive survey. Nevertheless, the results are interesting29.

31. The average operating costs of the irrigated farms at $208/ha. are below the reported official costs for the entire country reported for 2005 ($ 245/ha). It must be remembered that the 2005 official costs also include data from the Fergana valley where inputs and yields are higher than for the central areas of Uzbekistan. Seed costs are roughly comparable between the 2005 official data and farms in the focus areas, but there is considerable difference in fertilizer costs. Both irrigated focus areas apparently employ considerably less fertilizer than the country average. This may be because of availability in these areas compared with Fergana where the wheat industry is more highly developed and where there is greater access to inputs.

32. The yield figures must be viewed with some skepticism. They are far too near the requirements for the State Order, and too high compared to what has been observed in the field. The TA suspects that what happens with output is that farmers “borrow” from rain-fed wheat areas in order to make the SO up to the required level. No proper yield measurements are taken in the field, so these comments must be taken as hypothesis rather than assertions of fact. Far more work would have to be undertaken on the overall cost question before comments could be made about yields with any confidence. The focus of this paper is on direct costs per hectare, not on costs per ton. These depend on yield data for the calculation.

33. The one rain-fed farm visited for this survey (in Zomin) produced quite poor crop results. The reason given by the farmer was drought. At a final output of 370 kgs/ha. the farmer received $34 for his crop30, a loss of $21 just on direct costs. The farmer with a rainfed crop would have to harvest roughly 750 kg/ha in order to break even on the basis of his total costs. This yield is possible, but not when the rain fails.

6. Returns to the farmer for wheat production

34. This discussion leads to a consideration of the overall returns to the farmer for growing wheat under the State Order system. Table 3 uses the official cost figures for 2005 and prices for 2006 to provide some estimate of what total financial returns for wheat farming in Uzbekistan might be like31.

29 It is a perennial source of surprise that in many developing countries very basic data on cost are not collected;

in this respect no policy analysis can sensibly proceed. Base line surveys are proposed under GPIP but it is not known if they include cost of production (or indeed any) economic data.

30 Based on the assumption he received the lowest State Order price of $91.48/ton grain 31 It must be understood by the reader that the analytical approach used in this paper is to model the approximate

costs and returns for the purpose of providing policy advice. It is not the purpose of the paper to report exact statistically accurate cost data; such a task would require more resources to enable extensive field research and is beyond the scope of the TA.


70

Table 3: Financial returns for wheat production Production

Total Harvested area 1.00 Yield in tons/ha 3.63 Total Output (tons wheat grain) 3.63

Costs US$

Cost per ha wheat grain

Seed 42.24 Labor 41.21 Fertilizers 121.44 Work and Services (Custom Operations) 47.32 Fuel / Oil / Lubricants 34.30 Other expenses 29.47 Total cost/ha wheat ($) 315.98

Total costs for area harvested 315.98

Price received (USD/ton):

70% Government Order ($/ton) 106.56 30% Government Order ($/ton) 91.48 Private ($) 139.34

Revenue

Proportion Government Order (%) 0.65 Proportion private sales (%) 0.35 Value GO grain sales ($) 70% 176.00 30% 64.75 Value Private grain sales ($) 177.04 Source: Official GoU statistics and Table 1 35. These numbers, if correct, suggest that on average under the SO system imposed in the focus areas, the financial return to wheat production would be a little over US$ 100/ha. assuming a yield of about 3.6 tons/ha. ($115/ton wheat). Based on these numbers a 50 hectare farm would make a profit of approximately $5,000 per crop. At this time there is insufficient opposing data to doubt this result, though aspects of it are open to question. In particular, some sources suggest that the cost figures overstate the total cost of machinery because some farmers use old machines that attract no hire charge. This matter requires further research.

7. Farm Machinery

36. The stock of farm machinery in Uzbekistan is very inefficient from a technical perspective. Various efforts have been and are being made to rectify this situation including in the 1990’s the development of a CASE IH assembly plant for tractors and harvesters. There are some local machinery manufacturers and others in neighboring countries, especially Turkey and the Russian Federation, who are eager to supply what is required. Equally, Uzbek farmers and machinery service providers prefer Russian machinery because it is cheap, reliable and spare parts are easy to obtain. In this respect the ADB procurement rule that excludes Russia since it is not a Member Country is not serving the purpose of the farmers. It could be the case (no calculation has been undertaken) that the extra cost of machinery imported e.g., from Germany outweighs any benefit from the preferential terms of


71

the LoC and may indeed outweigh the benefits of the supply of the actual machine itself. This line of reasoning is untested, but is probably worth following up. In any event, most discussants have mentioned that the use of expensive machinery imported from Developed Member Countries of the ADB is not something that they would support if procurement rules did not preclude other options32.

8. Capital versus labor intensity of production

37. For wheat (as for cotton) Uzbekistan appears to be a capital intensive agricultural producer. Once again, this is a hangover from the Soviet period of organization of large area collective farms considered as “factories” and from the consequent development of the land holding system. Some machines tend to be larger than required for small plots (this was a criticism leveled at the CSE IH program) and to be heavily reliant on spare parts imported form abroad. So long as tractors are bought from, say, Belarus (a favored supplier) this may not have been a constraint, but once the stock becomes dependent on more sophisticated machines from Europe or North America that changes. How machinery is procured and by whom is an important element in the development of agriculture. It is essential that the machinery is appropriate to the entire context in which it is operating and not considered ‘en masse’ as one simple input. A developed agricultural sector (and this includes wheat) must use a diversified and well-adjusted inventory of machines so that each machine is fitted to a specific use. The alternative (as is indeed the case in Uzbekistan) is that there is inefficiency built into the machine park irrespective of the fact that the individual machines might be the best available. Thus no one questions that in some circumstances CASE IH harvesters do an excellent job, but they are often unsuitable for small field sometimes found in Uzbekistan. The point being made here is that farm machinery should be selected by farmers if necessary with expert advice, not by officials who know little or nothing about the subject matter.

38. There is a more general element of this question of capital (machine) versus labor intensity in agriculture in Uzbekistan. Once again, there is no intention in straying too far from the purpose of the paper, but it may be worth passing comment and at least raising the issue for discussion in another forum.

39. Uzbekistan followed a Soviet and American approach to large agriculture. Both the USA and, say, Kazakstan, have enormous areas of land relative to their rural populations. One person in the USA can farms thousands of hectares using very advanced machines and supported by a very sophisticated infrastructure of service providers. The American wheat farmer can draw on satellite photography downloaded in real time to assess the fertilizer requirement on a specific area in one field and call an aerial crop spraying service to deliver the material. Similarly in Kazakhstan, the technology profile may be much different from the USA, but the enormous areas of low yielding wheat are rain-fed, low-cost and farmed on a large scale.

40. This is not in general the situation in Uzbekistan. A look at aerial photographs of the three project focus areas shows agriculture more like the smallholder pattern found in South-east Asia. Equally, whereas the rural population in the USA is tiny, it accounts for the majority of persons living in Uzbekistan. Small-scale land-holdings and a large rural population do not equate in any broad sense of economic efficiency with capital/machine intensive cultivation. Wheat production may appear from a technical perspective to require emulation of large-scale farming, but it can be argued that it is an inappropriate approach to agriculture given an under-employed and poor rural population.

32 Another related aspect that should be considered is why machinery is not considered from Developing Member

Countries. Turkey is one such which has a large machinery manufacturing industry, South Korea is another.


72

9. CLAAS “Dominator 130” Combine Harvesters

a. Procurement procedure

41. There was a lack of obvious transparency about the procurement of the CLAAS combines. This may be simply because the TA has failed to invite the right responses or because GoU officials simply consider the procurement as complete and therefore not worth discussing. As far as the TA has discovered, an appraisal was made by officials (presumably from MAWR) of the harvester capacity of the country based on experience of previous harvests. It is true that the Russian “Niva” harvesters were old when the MTPs were first reviewed by the GPIP PPTA in 2000 (see consultants’ report). The CASE IH machines date from the late 90s to about 2003 and have been criticized for some time (and by the PPTA) on the grounds their size and cost were not appropriate for Uzbekistan.

42. In any event, the MAWR needs assessment (which has not been seen by the TA) apparently indicated that up to 100 harvesters were required. Part of the justification apparently also rested on the short period of the harvesting season in Uzbekistan and weather conditions. The argument provided goes as follows: Uzbekistan is extremely dry during the summer with very low levels of humidity. Not only has the crop got to be harvested quickly to make way for cotton, but excessive heat and low humidity cause early shattering and high losses33. If these are to be avoided, then the crop has to be in within about 30 days staring in early to mid June; by mid July the harvest is over. In order for this to be accomplished, there is a need for a large number of machines and a very carefully (almost military planned) organized harvest. Nothing is left to chance. On this basis, even an excess capacity of harvesters might be justified in terms of the overall losses of grain if the harvest were delayed in any respect. The TA has not made the calculation, but intuitively this seems a reasonable understanding of the actual physical situation and seems to have been the rationale followed by GoU.

43. Once this decision was made, the Council of Ministers ordered the Paxta Bank to enter into an agreement with CLAAS for the immediate manufacture and delivery of 80-100 machines of the Dominator I30 type for arrival by May 2006 in time for the harvest. No information is available about why the CLAAS machines were selected and it is not known whether a competitive bidding process was followed (please see above). CLAAS GmBh of Germany is a highly respected and long-established company that manufactures and markets agricultural machinery worldwide, so there is no reason why it should not have been on a list of possible bidders. That said, there are a number of other machinery manufacturers located in qualified countries that could have bid for the supply34. No information is available on this aspect.

44. The Paxta Bank provided the finance and the ADB agreed that, in principle, it would reimburse that part of the purchase related to the number of machines required in the three focus areas. The acquisition of these machines would be justified via individual loan applications submitted by farmers.

45. At this stage, with a contract for harvester supply apparently in place CLAAS, there was some pressure to ensure that farmers applied for loans. This pressure (exerted from the MAWR to the RRA and on down to the RBACs) would have been to find farmers who were

33 “Shattering” is the process whereby the grain seeds fall from the stem of the plant. Wild grasses are adapted to

dispersing their seeds by releasing them once ripe but grasses under cultivation, such as wheat, need to have seeds that are retained and only break off during the threshing process. Very dry conditions such as are found in Uzbekistan during the summer mean that if the grain is left too long it will fall and be lost.

34 Seven Developed Member Countries manufacture combine harvesters together with China, India, Korea and Turkey


73

interested in taking on a loan for approximately $89,000 (the Dollar-equivalent price of a Dominator unit priced in Euros) together with additional machinery to make the loan up to a $100,000 loan threshold. Indeed, when the TA arrived in March 2006 and first visited the RBACs, there was intense activity related to the preparation of so-called business plans which in fact were loan applications from farmers or ASC’s either to the Paxta Bank or the Ipoteka Bank (the other participating financial institution). It can be said that whereas Paxta Bank was highly receptive to such applications, Ipoteka Bank apparently was not.

b. Business plans for CLAAS harvesters

46. Part of the scope of work for TA 4217-UZB is to assist the RBACs in developing business plans. At an early briefing the ADB URM said that their main concern was the disbursement of the $10 million line of credit to impact the entire value chain35. ADB felt that there was an excessive emphasis in the business plans received by the participating financial institutions (PFIs) on purchase of harvesting machinery (notably CLAAS combine harvesters). The TA was asked to help diversify the development of the wheat industry. At an inception meeting with the Team Leader of the GPIP, similar concerns were expressed36. It was also the case that the pressure to complete business plans meant that it was difficult for the TA to gain the attention of anyone else in the RBACs for any other subject.

47. By mid-April 2006 out of a reported 37 business plans that had been submitted, not one had been authorized by the commercial banks. And this remained the case when the TA gathered data about the status of the plans for a workshop on 3rd May. Meanwhile, the TA reviewed a sample of 10 plans and found very considerable deficiencies. The base format of the plans was inappropriate (using a World Bank or UNIDO format for large-scale investments, not micro-loans for farm machines), but it was clear that no “farm-based” analysis had been undertaken in terms of the ability of the single farm borrower to utilize the machine effectively or to repay the loan based on the operations of his farm. In some cases, old plans for CASE IH harvesters had simply been over-written with the technical capacity of the larger machine still being used as the basis for calculations for the smaller CLAAS Dominator 130 type of machine. Each plan was virtually identical and there was no indication that the borrower’s actual needs were reflected.

48. One plan (for an ASC) is typical and illustrative of the poverty of the approach used: The enterprise had X machines that in theory could cultivate or harvest Y area. A fee of $40/ha would be charged so profits would be high because the cost of fuel and labor for all these machines was less than the revenue of the service charge. On this basis the ASC in question proposed to place assets of all the old equipment they intended to replace as collateral together with old building inherited from a shirkat. There was no analysis of the real financial position of the ASC nor was there any analysis of the value of the machines to agriculture nor the willingness of farmers to actually pay the fees to be charged ($40/ha is comparable with charge rates in some European countries – it is a very high charge for small farmers making a minimal margin on around 4 tons of wheat/acre)37.

49. Another issue considered by the TA was the fair distribution of the loans between farms and other enterprises. It was clear that only larger farms and ASC/MTPS could afford to borrow and be able to repay given the costs of production and the revenues (this aspect is discussed in detail below). Given that 70% of farms were under the State Order requirement and might not be able to sell grain privately this made the situation worse. The legal point raised by the TA was that 10% of the business plans were secured by real estate, i.e., loans 35 23rd March 2006 36 27th March 37 In fact the farmers had no choice. As will be seen below, the harvesting plan was organized and executed

centrally and farmers charged a standard rate for the rayon.


74

against land rights (there is no title to land in Uzbekistan, all land is owned by the State). However, most farms were found to be technically insolvent. So only the few farms that were solvent could provide the 120% collateral against a given amount of loan. Given that most farms also have cash flow problems (and remembering that cash is advanced by UzDonMahsulot against specific expenditures, i.e., cash advances cannot be used to repay loans), there would be very few farms that could genuinely take advantage of the line of credit.

50. The reality of the situation, however, was that with the harvesters being landed in Uzbekistan and heading for the field, and with the time for harvesting to commence fast approaching, almost nothing could be done to arrest the process of authorizing the loans. Presented with a situation in which, while the TA had expressed some concerns and highlighted key issues, a thorough review of the plans had not been possible and with the commercial banks (mainly Paxta) willing to make the loans, ADB signed off on loan reimbursements in early May. By June 12th harvest 2006 commenced with the CLAAS machines in full working order.

c. Post-harvest situation regarding CLAAS harvesters

51. The CLAAS machine is technically excellent and indeed perhaps the best of its kind of small harvester. The “Dominator 130” is the smallest machine made by CLAAS GmBh of Germany and indeed is not available in some markets (e.g., the USA) where the size is not appropriate for the large-scale agriculture employed.

52. Field interviews with owners, users and operators during the harvest period of June-July 2006 indicated an overwhelming approval of the CLAAS harvester based on its technical performance. There were some matters raised, such as the size of the collector box (slight and small) and minor questions of technical adjustments, but the machine is found by those who use it to be the right size and generally capable of dealing with Uzbek field conditions.

53. It is too early to say anything about service support, costs of spares, reliability, life period, but there is no obvious reason to doubt the quality of a machine that comes from one of the best of Europe’s agricultural machinery suppliers. The Dominator 130 is not cheap, but it may be good value for money considered from a technical or engineering perspective. Compared to CASE IH, the CLAAS was said to be by far the better machine, though that may be bias related to the questioning process; it is certainly not a technical evaluation nor is it an endorsement of CLAAS over CASE – simply a report of what was said to TA interviewers in the field during harvest.


75

10. Operational evaluation of harvest performance

54. Table 4 is official data received via the RBACs and the Unitary Company.

Table 4: Summary of operational performance CLAAS combines

FOCUS AREA TOTALS Total Planted

Area (wheat,ha.)

Total Farms

(All types)

Average Farm size

(ha./farm)

Total Number of

CLAAS combines under the

ADB Project (Units)

Target Area for

ADB-CLAAS

combines (ha.)

Act.Area harvested by ADB-CLAAS

comb.(ha.)

"CLAAS" Area as % Total Area

(%)

Contract cost per ha. - All

enterprises (US$)

Quyi Chirchik 11,000 497 22 21 10,099 8,765 79.7 38.1 Zamin 12,000 1,373 13 16 5,880 5,880 49.0 50.8 Kattakurgan 12,000 941 9 12 5,451 4,160 34.7 37.1 TOTAL or AVERAGE 35,000 1,870 14.5 49 21,431 18,805 53.7 42.0


76

FARMS BUYING CLAAS COMBINES

CLAAS farmer-owners Total Farm

Area (ha.)

CLAAS farmer-owner's Average

Farm size (ha./farm)

CLAAS combines bought by farmers - 1 UNIT PER

FARM

CLAAS owner area harvested/ combine

(ha.)

Contracts signed by

CLAAS farmer-owners

Area contracted by CLAAS

farmer-owners

Contracted Area

harvested by CLAAS

farmer-owners

Total value of farmer-

owned CLAAS

contracts (US$)

Contract gross

revenue per

farmer-owned CLAAS

machine (US$)

Quyi Chirchik 705.0 54 13.0 54 254.0 5,639.1 4,890.8 186,419.7 14,340.0 Zamin 930.2 58 16.0 58 350.0 4,950.0 4,950.0 251,557.4 15,722.3 Kattakurgan 175.0 88 2.0 88 34.0 461.0 420.0 15,602.0 7,801.0

TOTAL or AVERAGE 1,810.2 67 31.0 67 638.0 11,050.1 10,260.8 453,579.0 12,621.1

MTPs or ASC BUYING CLAAS COMBINES

CLASS combines bought by

MTPs/ASCs

Contracts signed by

CLAAS MTP/ASC-

owners

Area contracted by CLAAS MTP/ASC-

owners

Contracted Area

harvested by CLAAS MTP/ASC-

owners

Total value of

MTP/ASC-owned CLAAS

contracts (US$)

Contract gross

revenue per

MTP/ASC CLAAS

machine (US$)

Quyi Chirchik 8 191.0 3,755.2 3,169.0 120,790.9 15,098.9 Zamin 0 0 0.0 0.0 0.0 Kattakurgan 10 353.0 4,815.3 3,565.3 132,442.1 13,244.2

TOTAL or AVERAGE 18 544.0 8,570.5 6,734.3 253,233.0 14,171.5


77

55. 49 CLAAS harvesters were bought by the same number of enterprises (i.e., one machine unit per borrowing enterprise) with loans under the ADB line of credit. These machines harvested more than 53% of the total harvested area of irrigated wheat in the three focus areas. This area corresponds very closely to the area reported as filling the State Order. It is the case that after the SO had been filled in the focus areas, the CLAAS combines were moved to other areas (as much as 100 km away). The target area for harvesting was 21,431 ha. corresponding closely to the rated capacity of the harvesters of 15 ha/day over a 30 day period (allowing for downtime). The actual area harvested was 18,805 ha. This matter is discussed in more detail below, however it appears that 49 machines were more than was required by the focus areas alone.

56. Borrowers for CLAAS machines fell into two groups. Farms and ASC/MTPs – enterprises constructed from the machine parks left from shirkats. The first group (farmer-borrowers) accounted for a very small part of the total area of the three focus areas (5%). Individually they were holders of large areas compared with the average. These enterprises averaged 67 hectares per farm compared with the overall average size of farms of 14.5 ha.; that is, the farms granted loans were 4.5 times the size of a normal farm. One reason for this is that only larger farms had the collateral to secure large loans (noted above).

57. These large-holders bought more than 60% of the total number of machines. They harvested their own farm land area of a total 1,810 ha. and a further 55% of the overall area contracted out to other farms (10, 361 ha.). The farmer-owned CLAAS machines harvested on average 389ha./unit.

58. The other group of borrowers was the ASC/MTPs. They bought fewer machines, undertook fewer contracts and harvested a smaller area than the farmer-owned machines. In many respects this was opposite of what might be expected, since it probably should be the case that businesses that depend on machine hire would do better than farms (i.e., whose business is primarily agriculture, not machinery hire).

59. There was another asymmetry in the structure of the purchase between the 3 focus areas. In Quyi-Chirchik, ASC’s bought 8 machines and the farms 13 – a reasonably balanced distribution of loans between farms and businesses. However, in Zamin all the units were bought by farms; apparently because there are either no ASC’s in Zamin or none were interested in the loan proposition. But the exact opposite situation was the case in Kattakurgan, where 10 units were purchased by ASCs and only 2 by farms.

60. In Zamin, although all the machines were bought by farms, they were entirely contracted via the official government MTP. An interview with the manager of this enterprise indicated that he considered the loan program ineffective and that he expected to take over both the loans and the machines within two years. In the meantime he would control the use of the machines via the leasing contract imposed on farmers by the Hokimiyat. The argument for this approach was that only the official MTP had the resources to develop contracts and organize the use of the machines. However, in Quyi-Chirchik, for example, there was no contact between the official MTP and CLAAS owners and the TA found genuine competition between CASE IH machines owned and hired out by the official MTP and ASC’s and farmers renting their new CLAAS machines38.

61. In Kattakurgan, although the ASCs had participated heavily in the loan program (10 units out of 12), certain puzzling facts emerged. Most ASC’s were reported to be insolvent, so it was unclear how they had been able to accept the loans; indeed when the TA first visited the Kattakurgan RBAC in April 2006, the business staff were certain that they would 38 The official MTP charged less for the rental of their CASE IH machines which have a larger capacity than

CLAAS but are more expensive to operate.


78

not be able to find a single borrower. They did a remarkable job in doing so between April and May when the machines arrived.

62. The harvesting contracts in K-K were mainly organized by the Hokimyat. ASC managers interviewed by the TA reported that they had little or no control over their machines. One ASC (the largest and apparently the most financially stable) had used its new machine to complete its “target” of 350 ha. and then the machine had been sent on the instructions of the rayon Hokimiyat to another location; the whereabouts of the machine were unknown to the owner. The RBAC staff confirmed that the CLAAS machines harvested the State Order in key areas first and were then allocated to other rayons to undertake the SO in those places. All 16 of the CLAAS combines had left Kattakurgan district by order of the Hokim to go to Jumboyi District which is the other side of Samarqand, more than 100 km away. They traveled at the owner’s expense under their own power by road39.

63. The machines may well have been used efficiently (although it is questionable whether combine harvesters should be driven long distances on hard roads in extreme heat) from the perspective of the overall total harvest in the oblast, but it is not clear they were used properly in the focus areas where the loans were made. Equally, using the new machines to take the SO first, then moving it to another SO location left the first farm (i.e., perhaps the actual owner of the machine) without a harvester for the remaining part of the crop that could be sold on the open market for a higher price. In other words, the SO (for which the farmer receives a low price) was harvested very efficiently and as a priority, while the private sector crop was left standing, perhaps at best suffering losses from excessive shattering or perhaps not being harvested at all.

64. This information indicates a problem with the data in the table. The machines apparently worked on average 25 days per unit during a 30-day harvest period. They harvested 53% or so of the area available in the three rayons (the remaining area would have been harvested by older Niva or CASE IH machines). In such case, i.e., if the CLAAS were used fully in the home rayons, why did the TA team receive reports that new CLAAS machines were operating in other rayons, some hundreds of kilometers from the home rayon? There is no clear answer and no easy way of finding out. But the question certainly arises about what was the real need for new harvesting machinery in the focus area rayons. If all the machines were needed, then they should not have been working outside the focus areas. If they were not all needed in the focus areas (as the evidence seems to suggest), then on what basis were preferential loans made under the ADB LoC?

65. What other conclusions can be drawn from this data? As will be indicated below, the size of farms, even the larger holdings, could not possibly justify the individual purchase of a machine costing $89,000. However, farmers purchased combines not only to cover their needs but also to provide services to others – this is part of ASC support program. The fact that the majority of borrowers also happened to own land is almost irrelevant (the land areas are individually and in total very small) except in the sense that the land might be considered collateral. However, as discussed elsewhere, how land that is not owned but rented by the farmer and subject to immediate confiscation if the SO is not covered can be used as collateral also remains a question40.

39 On 28th June at about 16.00 TA personnel saw a new CLAAS harvester in transit by road under its own power

between Zamin and Samarqand, some considerable distance (perhaps 25 km) from any focus area. It was not confirmed if this was a unit from either Zomin or Kattakurgan.

40 By law the land use right could be used as collateral by commercial banks. But the real answer is that the entire question of collateral is moot because no assets are genuinely owned by the enterprises; farmers have no guarantee of their land leases and the shareholdings of ASCs is confused, so title to assets may be difficult to establish.


79

66. The success of the harvester loan program therefore depends not at all on the relevance of a machine to a specific farm that has some spurious “business plan” to justify a loan, but in terms of the overall harvest in the oblast, or the possibility that the machine can be used to full capacity. Most (not all) borrowers were in no position to develop rental contracts (since contact between farms is very limited given lack of telecommunications, personal vehicle transport and major social institutions such as WUAs and farmer associations), so in this respect there could have been no increase in genuine private sector business activity. The fact that the rental cost per ha. was established centrally via the Hokimiyat is a reflection of the almost total lack of competition between machine owners. Even in Quyi-Chirchik, the rental charge difference between the official MTP and the new CLAAS machines was quite small (though it did exist). In Zamin the cost of the CLAAS was substantially higher than in the other focus areas and no explanation was provided beyond rent-seeking by the official MTP.

11. Financial and economic evaluation of the CLAAS machine program

67. A complete financial and economic evaluation of the CLAAS program would be a major accounting exercise and is probably beyond the scope of the TA41. Nevertheless, in the context of considering overall farm production costs and the role of farm machinery in those costs it is important to provide some indications of what the program has achieved in financial terms and what the financial/economic issues are relating to machinery acquisition.

68. There are various aspects to this and they will be dealt with systematically in as far as the information available to the TA allows the analysis to be done.

a. Machinery costs as a proportion of cultivation costs

69. As stated, Uzbekistan has adopted a capital intensive approach to wheat cultivation. This is part of an overall agricultural model that includes other major crops, especially cotton. It is therefore difficult to allocate total machinery costs very accurately between crops since, for example, the farm requires tractors for preparing land and towing ancillary equipment for all its crops. That said, Uzbekistan does have a system that allocates direct costs. This is quite open to analysis since for the most part machines are rented on a per hectare basis.

70. As far as wheat is concerned, however, we are not entirely satisfied that the reported machinery costs (apparently classed as “Work and Services, custom operations” – see Table 3) include both harvesting and land preparation charges. There is anecdotal evidence that land preparation (i.e., ploughing and harrowing) costs about $40-50/ha. Thus Table 3 may not include harvesting costs (which in some countries are considered outside direct costs of cultivation) If this is true, i.e., that harvesting costs need to be added in, then the number quoted in Table 3 would be nearer 90/ha, not $47 as currently stated. This is one important aspect that requires clarification.

71. Table 5 presents a comparison of the relative proportions of direct costs of wheat production in the USA and Uzbekistan (the capital intensive producers).

41 For example, we would need to gather data on the use of a significant sample of machines – say a minimum of

3 from each focus area – and understand the relative costs versus CASE IH and Niva combines together with exact data on yield per machine, actual operations etc. This could be done, but it would be time consuming probably requiring 2-3 weeks of intensive work, much of it in the field. Unless directed by ADB we will leave this approach for the moment.


80

Table 5: Comparison of relative production costs

COST ITEM USA UZB

% Selected Direct Costs

Seed 12.99 17.22 Fertilizer 41.15 49.51 Chemicals 12.69 0.00 Custom operations 12.12 19.29 Fuel, lube, and electricity 21.05 13.98 TOTAL 100.00 100.00 Source: Table 1 72. If this data is correct, then it will be immediately apparent that Uzbekistan’s direct wheat production cost structure is very similar to that of the USA (a point made already). What is particularly interesting is that the proportions of the machinery costs are almost exactly the same (around 33%) in both countries. But this is an odd result (unless it is pure coincidence) because the actual machinery stock is quite different in the respective countries. In the USA, machines are typically very large capacity, mostly modern and well-maintained. In Uzbekistan the machinery (especially tractors) is very old, small-scale (e.g., 75-80 HP tractors) and badly maintained.

73. One tentative conclusion from this result (if it is not some kind of statistical error) might be that if Uzbekistan replaced its capital stock, the machine costs might be higher. Another possibility is the high figure for Uzbekistan (based on old machinery) is a reflection of excessive charges being made for machinery usage. Both of these possibilities require further investigation and analysis42.

74. A final point has also been made previously. It is in the nature of a question of about whether a country with the social, economic and agronomic conditions found in Uzbekistan should have adopted a production technology almost identical to that of the world’s most advanced agricultural nation where the cost of capital relative to labor is significantly lower than in Uzbekistan?

12. Farm returns from new combines

75. As indicated above, very little serious analysis was conducted at the planning stage related to the financial costs and benefits of the new combine harvesters. For the most part, the analysis focused on simple revenue and cash flow analysis for ASC /MTPS. In one sense this was the right approach since analysis of the financial conditions for the farmer-borrowers indicates that the on—borrower-farm use aspect of the loans was unimportant.

76. To understand this point, take the example of one average sized “borrower” farm (see Table 6). The data on operational use of the machines (Table 4) show that the total area cultivated by farmer-borrowers was insignificant (only a total of 1,800 ha) but that it averaged 67 ha./farm. This is an important number as will be seen in the calculation that follows.

42 Another explanation is that the official numbers have been artificially generated using a US-based technology

function as a model.


81

77. What size of farm might justify the purchase of a harvester by the farm enterprise rather than renting a machine? The question of loan repayment is simplified to an identical repayment amount per year for 10 years of (rounded) $9,00043.

Table 6: Example returns per “borrower” farm Production

Total Harvested area 67.00 Yield in tons/ha 3.63 Total Output (tons wheat grain) 243.21

Costs

Cost per ha wheat grain

Seed 42.24 Labor 41.21 Fertilizers 121.44 Work and Services 9.32 Fuel / Oil / Lubricants 34.30 Other expenses 29.47 Total cost/ha wheat ($) 277.98

Total costs for area harvested 18,624.35

Price received (USD/ton):

70% Government Order ($/ton) 106.56 30% Government Order ($/ton) 91.48 Private ($) 139.34

Revenue

Proportion Government Order (%) 0.65 Proportion private sales (%) 0.35 Value GO grain sales ($) 70% 11,791.70 30% 4,338.31 Value Private grain sales ($) 11,861.47

Total value wheat grain sales ($) 27,991.48

Profit (loss) US $ 9,367.13 Source: Field survey and official cost data 78. The calculation in the above table assumes the yield reported for the 2006 crop in Quyi-Chirchik of 3.63 tons/ha. Costs/ha are as reported in field surveys by the TA and the prices are also calculated based on those reported to the TA. Note that the State Order does provide a preferential “bonus” price on 70% of the volume, but the average SO price is still below that of the free market. The other point to note is that the SO accounts for 65% of the total volume of sales because the Order is based on volume/weight not on a fixed proportion of the crop (i.e., if yields are lower than expected, the proportion of the total crop delivered against the SO is higher in order to cover the volume/weight requirement – this fact generally

43 The purchase price of the CLAAS combine is assumed to be US$89,700/unit over ten years and this is rounded

up for the calculation. The TA is aware that there is a “holiday” period applied to the loans.


82

negates the agreement that in the focus areas the SO should be no more than 50 % of the crop).

79. An important feature of this calculation is that on this particular imaginary farm, the Work and Services cost is negligible. The reason is that the model assumes that most farms of this size would use their own, old machinery which is fully depreciated. So in this model it is assumed that the farm has received a loan to buy a new CLAAS harvester and this loan is repayable from the profit.

80. The standard Gross Revenue minus Cost of Output calculation provides a Net Revenue to the farm of US $9,367. This is approximately the amount that would be required to pay back the loan in 10 years if this entire amount was applied to repayment of the harvester loan. In other words this simplified model shows the breakeven point for a given farm where the net value of the output just covers the repayments for the investment in the new equipment.

81. Given the cost of the CLAAS harvester and a 10-year repayment period it is surely no coincidence that both the area of the model needed to break even and the actual average area of borrowing farms reported by the RBACs are the same – 67 hectares44. It must have been the case, therefore that the plan for the farm-borrower was based not on the returns for the specific farm, but on the break even position for the farm harvest and then earning a return on renting the machine for the remainder of the harvest – 67 ha. would be completed within 5 days and this would allow the machine to be used elsewhere by the authorities – indeed as reported above.

82. This argument is made in order to make the point that no justification at all can be made for purchase of an $89,000 harvester on a harvested area of 67 ha. The entire financial justification for the harvester purchase is made on the basis of using the machine to full capacity on a much larger area than that of the average farm borrower.

13. Return to the hire of CLAAS combines

83. The previous section argued that that the financial justification of the CLAAS procurement (from the perspective of the borrower) could be made generally on the basis of renting the combine to farmers unable to afford their own machine.

84. Once again a theoretical modeling approach is taken to see what would be the parameters for repayment of a CLAAS loan over ten years. Correct economic analysis of a farm model would calculate farm returns with and without the machine and indicate reduction in harvest losses, gains in incremental revenue etc. based purely on the machine applied to the farm itself. By contrast, the “business” approach which it is suggested is the reality of the CLAAS program simply considers the combine harvester as any item of equipment for hire with a capital investment, repayment period and the need to show a return greater than the cost of capital (assumed at a standard 12% - though it is probably higher in Uzbekistan).

85. This calculation starts from the assumption that the harvester has a capacity of 15 ha./day and that the harvesting period lasts for 30 days – 450 ha. per machine per harvesting season. The charge rate is reported as an average 51,274 Soum/ha (US$ 42/ha)45.

44 For ease of presentation and to make the point explicit the calculation has been rounded to the nearest large

whole number; however the actual spreadsheet results are close enough to make the point. 45 Actual figures were 46,502 Soum in Q-C, 62,000 in Zamin and 45,000 in K-K converted at an exchange rate of

1,220 Soum = $1


83

86. Based on these numbers, a combine harvester rental business provides a Net Present Value of approximately $90,000 dollars – close to the actual investment cost of the new machine. Calculating the internal rate of return on the investment, a 12% FIRR would be achieved with a rental charge rate of just under US28/ ha. (34,000 Soum/ha.). This indicates that the rental enterprise is doing substantially better at a hire charge of US$42/ha. (FIRR 20%).

87. Is it a coincidence that the target area for harvesting in Quyi-Chirchik this year was 450 ha? The average target area was 557 ha. for the three rayon, which would have produced excellent results had it been achieved. However, the actual area achieved area per combine harvester was 384 ha. in the focus areas and that equates with an FIRR of 10%. Not an awful result, but one less than perhaps expected. However, the machines were apparently used elsewhere, so no information is available that describes the complete picture of the machine usage.

88. Part of the problem in achieving the target financial results appears to be the operational logistics of the machine use. 450 ha./unit is achievable if the machine is kept hard at work for the full 30 day harvesting season. It is unlikely that a CLAAS Dominator can do more than 15 ha./day in Uzbekistan, but perhaps 450 ha. is possible; the 500-720 ha. targeted in Zamin and Kattakurgan were never achievable. But the lower figure is impossible if the machine is taken 100 kilometers away to harvest in another rayon. Not only do operating costs rise sharply (since the machine is not designed for road travel over long distances) but the time available for actual harvesting would be reduced. This is almost certainly what occurred.

89. In summary: the CLAAS loans were never based on a rational agricultural analysis of the on-farm use by the borrower – the land areas were too small. Neither was the allocation of 49 harvesters to the focus areas based on a participatory needs assessment of what was required by farmers and ASCs in those areas. The machines were bought via a country-wide procurement by central government to be used on an oblast-wide basis with rents being charged via whatever agency organized the contract. In theory the owner-borrower would eventually receive his money (in fact nothing more than a paper transfer to a specified repayment line in his bank account); but in practice there is almost no way that these transactions can be fairly monitored. The machines were centrally managed through the Hokimiyats and the logistics of their use were biased towards filling the SO first (hence the immediate removal of a harvester from the locality once the SO was filled) leaving grain capable of being sold privately at a higher price still in the field and subject to loss. In no way was this program a genuine business-oriented effort to transfer the use of important resources to farmers in reform areas, it was in essence an attempt to replace machinery or gain additional machinery that was always and remains centrally managed under the guise of “business loans” by individuals and financed on preferential terms by ADB.

14. Additional equipment needs

90. The GoU via the MAWR and the RRA has estimated further equipment needs under both IBRD and ADB loans. Table 7 shows the estimates for the three ADB focus areas.


84

Table 7: Summary of officially estimated additional farm machinery Equipment Item Quyi-Chirchik Zamin K-Kurgan Total

Harvester combine 1 1 2 Plough tractor 40 15 21 76 of which: caterpillar tractor DT-75 30 2 19 51 wheeled tractor MX-140 CLAAS 10 13 2 25 wheeled tractor MTZ-1221 Tillage tractor NNZ-80, MTZ-80 75 12 29 116 Ancillary Equipments 384 26 67 477 of which: plough 40 14 21 75 harrow 125 4 129 disk 10 10 dominator-zirkon 4 4 cultivator 75 1 6 82 spreader 15 3 18 sprayer 15 2 17 chisel plow ChKU 4A-1 1 1 seeder 3 3 bailing machine 2 2 cutter (KIR-1.5) 1 1 carrier (4PTS) 100 5 30 135 TOTAL BY RAYONS 499 54 118 671

Source: RRA 91. The TA requested current estimates from the three RBACs and was provided with the following data (Table 8) based on loan applications already received:


85

Table 8: Current equipment requirements based on received loan applications in three focus areas

Quyi-Chirchiq

Zomin Katta-Kurgan

TOTAL MAWR/ RRA

estimate

EQUIPMENT ITEM

Units Tractor МХ-140 12 2 14 Tractor ВТ-150 2 2

Tractor ДТ-75 16 2 19 37

Tractor ТТЗ-80/11 15 10 19 44 Tractor ТТЗ-100 4 4

Tractor Shark Magnum 1 1

Agr

icul

tura

l mac

hine

ry

Tractor transport. ТТЗ-80/10 6 10 16

TOTAL 38 30 50 118 192 Plough 1 10 19 30 МХ-140 plough 3 2 5 ДТ-75 (shovel) 6 6 Cultivator 16 1 6 23 РМУ-0,5 3 3 Disk harrow 1 1 Harrow (set) 74 4 78 Trailer 4 ПТС 36 7 30 73 Chizel ЧКУ 4 А-1 2 2 Bailer "CLAAS" 2 2 Mowing machine. КИР 1,5 1 1 Grain seeders 7 4 11 ОВХ-600 3 0 2 5 Dispenser НРУ 1 1

Mou

nted

equ

ipm

ent

knapsack equipment ОРПД 12/м 1 1

TOTAL 139 30 73 242 477 Source: RBACs, TA 4217-UZB interviews, MAWR/estimates from Table…. 92. It must be noted that the quantities from the RBACs are provisional and subject to change going forwards from July 2006 (i.e., not all expected loan applications have been received and processed).

93. There are several points to note about these data from Tables 7and 8:

a. The MAWR/ RRA estimates are apparently the basis for the “loan applications” processed by the RBACs. In other words, the TA understands that the official MAWR estimates of requirements are official targets for procurement (following a similar path as the CLAAS harvester loans).

b. The total estimated requirement by MAWR/ RRA is significantly higher in each

category than the loan applications currently processed. This is one reason for the pressure being felt and expressed by the RBACs. Not only are the total unit values different, but there are wide differences between individual focus areas and between types of equipment.

c. Some specific questions arise about the official estimates: it is worth asking why

Quyi-Chirchik’s requirements are so much higher than for the other two focus areas when the cultivated areas are roughly similar. Quyi-Chirchik is also a richer area


86

(nearer to Tashkent) than either Zamin or Kattakurgan and so it could be expected that its stock of equipment might be in already better condition. But there is no answer at the time of writing this report and the matter is flagged for the future.

d. No values are provided for the equipment in the government numbers and these will

depend on the manufacturer’s price at the time of purchase. However, with assumptions based on international prices the TA estimated the cost of equipment at US$3 to 4 million; this is an approximate, based on the undetailed numbers provided from the RBACs. Whichever way the value of new equipment is calculated it is close to the amount remaining in the LoC.

e. The RBACs are reportedly executing this procurement “order”. The evidence for this

is that on repeated visits to the RBACs by TA-4217 personnel (approximately one visit per week to each office through the month of July), the principle activity of the RBAC business planning staff has been loan preparation for such equipment items combined with an expressed verbal concern that targets were not being met. Specifically the RBACs have requested help to prepare “tractor loans”46.

94. Estimates are essential for policy development. However, there is a serious danger of misallocation of resources if these estimates become targets that are forced upon farmers (as indeed the CLAAS harvester loans appear to have been). Equally, if the loan applications received by the RBACs are a true reflection of what the local needs actually are, then there is a significant problem in the analysis of machinery needs at the central planning level; alternatively, if the GoU is correct in its estimates, then the sector is significantly under-resourced. This may well be the case from a technical viewpoint, but may not be reflected in actual demand (hence the difference in the two sets of numbers) because farmers are unable to find the resources (e.g., in terms of collateral) to support the purchases.

C. Conclusions

95. Wheat production costs are high in Uzbekistan compared to even the USA. These costs may understate the real cost of capital and certainly understate the cost of using irrigation water. Machinery and fertilizer use is probably inefficient and the Law of Diminishing Returns is operating;

96. Capital-intensive machinery-based production of commodity crops such as wheat makes little if any sense in Uzbekistan given a high density of rural population and relatively poor agronomic conditions for wheat;

97. The GoU approach to recent harvester procurement and use was “top-down” and less than transparent. A similar program is in place for the purchase of further machinery based on a central planning assessment of needs and directions via regional agencies (RBACs) to canvass farmers and ASCs to apply for loans.

98. The procurement of the CLAAS combines left much to be desired. The competitive bidding aspects are unclear. It was apparently organized to take advantage of preferential ADB loan funds via a line of credit aimed at business development, not replacement of the machinery inventory.

99. Harvester requirements may have been overstated so that the machines could be used outside focus areas (thus reducing funds available for business development within 46 It is fair to say that some of the official estimate requirements may have already been included in loan

applications already submitted with the CLAAS combines in order to reach the $100,000 threshold set by ADB and since reduced.


87

these areas). Farm-based borrowers were persuaded to apply for loans and then their new machines were operated separately by other agencies. New machines were used oblast-wide.

100. The technical results from the CLAAS harvesters were apparently good (though not measurably better than alternative machines and gains may be lost post-harvest), but no adequate financial justification is available for their purchase. The return on harvester rentals may be adequate good, but it is uncertain if these returns finally benefit harvester owners. Purchase of expensive machinery by small farmers is not defensible on any grounds.