|Project Rationale and Linkage to Country/Regional Strategy
The Asian Development Bank (ADB) approved on 29 September 2008 a grant of $14.72 million from its Asian Development Fund (ADF) for the Agriculture and Rural Development Project (current project). The revised closing date of the current project grant is 31 December 2015. The current project was supported by associated TA of $2 million from the Japan Special Fund for agricultural marketing and brand development. The current project aims at a reliable supply of premium-value agricultural products to niche markets by selected enterprises. It comprises two outputs: (i) value chains able to deliver unique, premium-value products to niche markets; and (ii) fully defined process and institutional arrangements for collaborative brand development and management developed and demonstrated.
Agriculture sector is the backbone of the Mongolian economy and considered a key for diversifying the economy, which relies too heavily on the mining sector. In 2013, Mongolian agricultural primary products accounted for 20.1% and processed products for about 11.1% of Mongolia's gross domestic product. They are also the second largest export products after mineral products, accounting for 8.2% of total exports by value in 2013. However, the agriculture sector is mostly concentrated on primary production and forgoing significant value addition in agriculture because of limited processing capacity. The bottleneck is lack of long-term financing, which has significantly hindered Mongolian agro-enterprises from making long-term investments to improve their productivity. As a result, Mongolia exports a significant portion of its agricultural products (e.g., wool, cashmere, and animal skins) after primary processing while it imports a substantial volume of processed or final products (e.g., dairy products). It is crucial for Mongolia to capitalize on the rich yet untapped resources of the agriculture sector, which employed 30% of the labor force in 2013. Development of the agro-processing industry will have a substantial impact on employment, in itself and through its backward linkages, in rural areas, where the poor comprised 33.3% of the population in 2012, and consequently contribute to sustainable and equitable development of the nation.
Performance of the current project. The current project is considered to be performing well based on the five standards stipulated in the relevant section of the operations manual.
(i) Output delivery. The current project made progress toward the outcome and largely accomplished outputs 1 and 2. Against the outcome, the current project enabled 12 project participating enterprises (PPEs) to start selling some of their products to international and domestic premium-value buyers, but establishment of business partnerships will take longer. Against output 1, the current project financed 12 PPEs to develop their respective value chains to deliver higher-value products. Those PPEs have realized noticeable improvements in product quality and productivity, and significant job creation directly at the enterprises and indirectly at the producers of raw materials. The current project also provided (a) equipment and supplies to livestock testing centers and veterinary service centers of six selected provinces; and (b) machinery, equipment, and agricultural inputs, as well as training to selected agricultural cooperatives to improve the quality and production of raw materials. Against output 2, the current project developed a framework for brand development, applied it to animal fiber and its products, and developed a Mongolian brand certification mark, Mongolian Noble Fiber. The certification mark has been registered at the intellectual property offices of Mongolia and 33 selected countries.
(ii) Implementation progress. Implementation progress is satisfactory: 98.9% of disbursements and 98.9% of contract awards against 93.6% of elapsed time as of 15 July 2015.
(iii) Safeguard compliance. Safeguard requirements have been met satisfactorily. Environmental and social safeguard screening procedures have been well established under the current project and applied to every subproject.
(iv) Management of risks. The report and recommendation of the President for the current project identified (a) inadequate capacity of the enterprises to implement their investment plans, (b) delays in procurement processes, (c) delivery delays by contractors, and (d) misuse of funds by enterprises. Project implementation support provided by the project management unit (PMU) successfully managed most of the risks by assisting the PPEs in ensuring that VCI subloan proposals are feasible and by closely monitoring the PPEs' implementation of the proposals.
(v) On-track rating. The performance of the current project is rated on track.
Additional financing eligibility criteria met. ADB's due diligence confirmed that the additional financing meets the eligibility criteria and standards. The additional financing is in line with the Government of Mongolia's action program for 2012 2016, which places the highest priority on employment generation. The additional financing will fully support ADB's interim country partnership strategy, 2014 2016 for Mongolia, which restores the core sector status of the agriculture, natural resources, and rural development sector; and highlights private sector development for employment generation and diversification of the mining-sector-driven economy. The additional financing is listed as a firm project for 2015 in ADB's country operations business plan, 2014 2016 for Mongolia. ADB is currently preparing two loan projects for Mongolia: Regional Upgrades of Sanitary and Phytosanitary Measures for Trade Facilitation, which will complement the project by assisting agricultural and food product trade; and Supporting the Credit Guarantee System for Economic Diversification and Employment Project, which will support the financing sector's lending to small and medium-sized enterprises (SMEs).
Additional financing priority met. The additional financing has a high degree of readiness since implementation capacity is well advanced and safeguard requirements have been met. The PMU's capacity for due diligence, including that for safeguards, built during the current project, adds a distinctive feature. The subproject selection criteria, approval procedure, and monitoring mechanism, established under the current project, will continue to be applied.
Changes in project scope. The additional financing will assist the government in scaling up and modifying the scope of the current project that is performing well. In response to a request from the government, the project will (i) include additional subsectors, (ii) adopt a regular onlending modality, and (iii) expand the range of subloans by lowering the minimum amount. The project will focus not only on export-oriented subsectors, but also on subsectors oriented for domestic markets, smaller-scale agro-enterprises, and cooperatives. Consequently, the focus of project impact and outcome was changed from the promotion of partnerships with premium-value buyers to economic diversification through higher value addition to agricultural resources.
Lessons from the current project were incorporated in the project design. First, it became clear that PPEs do not have sufficient technical and marketing capacity to establish business relationships with buyers of high-value products, particularly international ones. In response, two broad outputs under the current project were articulated into four outputs to factor in capacity improvement of agro-enterprises and primary producers in the project design. Second, the current project was implemented with three separate PMUs, according to project component, and experienced high costs of operation and difficult coordination between the components. To address such issues, the PMUs will be integrated into a single PMU with three s