INDEPENDENT EVALUATION OF US GOVERNMENT AGRICULTURE SECTOR ACT IVITIES IN ARMENIA REVIS ED FINAL REPORT CONTRACT No. PCE –1-00-98-00014-09 TASK ORDER No. PCE-1-18-98-00014-00 October 2006 This publication was produced for review by the United States Agency for International Development. It was prepared by CARANA Corporation. i TEAM MEMBERS Gleyn Bledsoe, MBA, PhD, and CPA. Chief of Party and Agriculture Production Specialist, (Land Grant University Representative, Michigan State University) Armen Asatryan, PhD., Armenian Representative (Production & Marketing) Conrad Fritsch, PhD, Agriculture Marketing Specialist Garnik Sevoyan, Armenian Researcher (Production & Marketing) Erik Streed, US Government Representative (USDA, seconded to USAID) Julie Lankford, Researcher Ara Khachatryan, Researcher Eduardo Tugendhat, Reviewer i Glossary of Terms AAA Armenian Agricultural Academy (now known as the Armenian State Agrarian University) ACBA Agricultural Bank of Armenia ACDI-VOCA Agricultural Cooperative Development International and Volunteers in Overseas Cooperative Assistance administers the Farmer-to-Farmer Program in Armenia AI Artificial Insemination AMD Armenian Dram ARID Armenian Improved Dairygoat Research Center ARSP World Bank Agricultural Reform Support Project ASAU Armenian State Agricultural University (new name for AAA) ASME USAID Armenia SME Market Development Project <www.armeniaag.org> ATC Agribusiness Teaching Center CADI Caucasus Agribusiness Development Initiative, Armenia & Georgia <www.usda.am> CARD: USDA Center for Agribusiness and Rural Development <www.card.am> CBA Central Bank of Armenia CFR Code of Federal Regulation CIS Commonwealth of Independent States CITES Convention on International Trade of Endangered Species CJSC Closed Joint Stock Company CREES USDA Cooperative Research, Education and Extension Service EU European Union ES Extension Service FAO Food and Agricultural Organization of the United Nations FARA Foundation for Applied Research and Agribusiness FDA Food and Drug Administration (US Department of Health and Human Services) FOB Freight on Board FSU Former Soviet Union FtF Farmer to Farmer Program (See ACDI-VOCA) GAP Good Agricultural Practices G&S Grades and Standards GMO Genetically Modified Organism GMP Good Manufacturing Practices GOA Government of Armenia GOST Government Common Standards, G&S system of the former USSR and now that of the Commonwealth of Independent States HACCP Hazard Analysis Critical Control Point ICARE International Center for Research and Education ISO International Organization for Standardization IT Information Technology LGU Land Grant University LLC Limited Liability Company MA Ministry of Agriculture MAP USDA Marketing Assistance Project Marze The country is divided into 10 regions or provinces that are called “Marzes”. The capital city of Yerevan independently has the status as a province. MASC Marz Agriculture Support Center MCA Millennium Challenge Account <www.mcc.gov> ii MCC Millennium Challenge Corporation <www.mcc.gov> MFI Micro Finance Institute MSE Ministry of Science and Education MEDI USAID Micro Enterprise Development Initiative MFED Ministry of Finance and Economic Development MHS Ministry of Health MOA Ministry of Agriculture MRL Maximum Residue Level NAIS National Agriculture Information Services NGO Non Governmental Organization NISIR National Institute for Scientific and Industrial Research NORAD Norwegian Agency for Development Cooperation OIE Office International Des Epizooties PCA EU/Armenian Partnership and Cooperation Agreement RASC Republican Agricultural Support Center SFWMRC Small Farm Water Management Research Center SGS Société Générale de Surveillance SOFRECO Société Française de Réalisation, d’Etudes et de Conseil SPS Sanitary and Phytosanitary Standards SSOP Sanitation Standard Operating Procedures TACIS Technical Assistance Commonwealth of Independent States TBT Technical Barriers to Trade TQM Total Quality Management UNDP United Nations Development Program UNCTAD United Nations Center for Trade and Development UNICEF United Nations Children’s Fund USAID United States Agency for International Development USDA United States Department of Agriculture USG United States Government VAT Value Added Tax VISTAA Volunteers in Service to Armenian Agriculture WB World Bank WTO World Trade Organization iii TABLE OF CONTENTS TEAM MEMBERS.........................................................................................................................i EXECUTIVE SUMMARY...........................................................................................................vi I. INTRODUCTION......................................................................................................................1 II. DESCRIPTION AND ASSESSMENT OF ACTIVITIES.....................................................4 A. USDA FUNDED PROGRAMS.................................................................................................4 1. Overview...........................................................................................................................4 2. Project Phases...................................................................................................................5 3. Program Results..............................................................................................................11 B. USAID AGRICULTURE SME MARKET DEVELOPMENT PROJECT (ASME)........................12 1. Overview.........................................................................................................................12 2. Project Components........................................................................................................13 3. Program Results..............................................................................................................15 C. USAID MICRO ENTERPRISE DEVELOPMENT INITIATIVE (MEDI).....................................18 D. FARMER TO FARMER AND VISTAA PROGRAMS................................................................19 III. OTHER DONOR ACTIVITIES...........................................................................................21 A. MILLENNIUM CHALLENGE CORPORATION.........................................................................21 B. THE PEACE CORPS..............................................................................................................21 C. WORLD BANK.....................................................................................................................22 D. EUROPEAN UNION/TACIS..................................................................................................23 E. INTERNATIONAL FUND FOR AGRICULTURAL DEVELOPMENT (IFAD)...............................23 F. FOOD AND AGRICULTURE ORGANIZATION (FAO).............................................................24 IV. ASSESSING IMPLEMENTATION, IMPACT AND SUSTAINABILITY......................25 A. INTRODUCTION...................................................................................................................25 B. IMPLEMENTATION...............................................................................................................25 1. Have USG activities in the agribusiness/ agriculture sectors been properly targeted to identify and support products that satisfy local demand, compete against imports, and hold potential for export?.........................................................................................25 2. Additionally, have these efforts improved the safety and quality of food products in the marketplace?.............................................................................................................31 3. What are the main strengths and weaknesses of USG assistance to date?.....................32 4. What are the major constraints facing assistance? How can constraints be reduced or mitigated?...................................................................................................................34 5. Have activities been well coordinated with other donor organizations and focused on achieving mutually agreed objectives economically and efficiently? Have iv activities been coordinated effectively between USAID and USDA to take advantage of economic opportunities in the agriculture and agribusiness sector?.........................35 6. Have the positive and negative experiences resulting from activities been adequately recorded, validated, and otherwise made available for future use?.............37 C. IMPACT...............................................................................................................................38 1. Is the assistance achieving or helping to achieve the desired results, both in terms of the projects’ own targets, and in terms of USG objectives in general?..........................38 2. How and to what extent have the activities contributed to income generation and job creation?...................................................................................................................40 3. To what extent have the activities had a positive effect on the market, increasing competitiveness, efficiency and growth potential, etc.?..................................................41 4. Have the activities had a negative effect on the market through market distortion, unintended side effects on other segments, subsidy of non-competitive or unsustainable products?..................................................................................................41 5. How did good practices and innovations introduced by the activities spread beyond the direct beneficiaries?..................................................................................................43 D. SUSTAINABILITY....................................................................................................................43 1. Are the institutional and legislative environments supportive of agricultural and agribusiness development?.............................................................................................43 2. Is the assistance effective in building local capacity to carry on and sustain development after USG funded technical assistance is ended?......................................45 3. Will the businesses and products that have benefited from USG assistance be viable and competitive in the absence of the assistance?..........................................................45 4. Is there a credible exit strategy that will allow USG funding to be phased out efficiently and without undue transition problems?........................................................46 APPENDIX I. INTERVIEW RESULTS FROM SELECTED BENEFICIARIES................48 APPENDIX II. AGRICULTURAL CREDIT MARKETS IN ARMENIA.............................52 APPENDIX III. SCOPE OF WORK..........................................................................................57 APPENDIX IV. INDIVIDUALS CONTACTED AND/OR INTERVIEWED........................63 v EXECUTIVE SUMMARY This report contains the findings and recommendations called for under The Evaluation of US Government Agriculture Sector Activities in Armenia, funded through USAID Contract No. PCE -1-00-98-00014-09, Order NO. PCE -1-18-98-00014-00, and was initiated on April 17, 2006. Armenian agriculture was transformed, almost overnight during 1991-92, from some 840 centrally managed and highly subsidized State and collective farms into some 440,000 decentralized and unsubsidized small holdings. Distribution systems and linkages to markets, processing and financing collapsed. The US Government (USG) has invested over $80 million dollars in agribusiness and agricultural development in Armenia during nearly 12 years of technical assistance to facilitate the transition to a market economy. This assessment was commissioned by the US Embassy with joint involvement by USDA, USAID, MCC and the Embassy’s Political and Economic Section, and funded under a USAID contract. It has three principal objectives: • To conduct an assessment of USG assistance to Armenian agriculture and agribusiness in terms of effectiveness, sustainability and market impact. The principal activities reviewed were several programs funded by USAI-- the Armenia SME Market Development Project (ASME), aspects of the USAID Micro Enterprise Development Initiative (MEDI) and the Farmer-to-Farmer program; and by USDA-- especially the USDA Marketing Assistance Project (MAP) which has evolved into the USDA Center for Agribusiness and Rural Development (CARD) Project and other initiatives under the Caucasus Agricultural Development Initiative (CADI). • To recommend areas and activities that hold the most promise for stimulating agricultural production, agribusiness development, and ultimately an increase in broad-based income generation and employment. • To identify problem areas in activity design and implementation and to recommend remedial steps. The evaluation responds to 16 key questions in the general areas of Implementation, Impact and Sustainability of the programs. Based on interviews with program beneficiaries, implementers and business service providers, and a review of results associated with the programs, the following are some of the principal conclusions: • USG efforts have been very helpful in easing the transition process, in particular by supporting the emergence of new systems and capabilities needed in a market economy. Financial and technical assistance to processors, development of new financial services and access to financing, exposure to new markets and market information, and strengthening of business support systems have all been important. • Programs have generally achieved their objectives, although except for ASME most lack quantifiable targets and performance measures. USDA is adding a monitoring and evaluation component to its program. • Agriculture and agribusiness have generally grown, especially in response to domestic market opportunities. Exports have grown modestly, while imports have also continued to increase. vi • Enterprises supported by USG programs have often grown very fast, especially in the domestic market, and particularly when financing has been linked with technical assistance. While there have been some successes with exports, the consensus is that most Armenian agribusinesses must make a quantum leap in terms of scale and quality throughout the supply chain. • Sustained rapid growth in the sector to generate needed jobs and incomes will require significant levels of new investment in opportunity areas where Armenia has some comparative advantage. Greenhouse and aquaculture based opportunities are examples, as are fruit and dairy based niches. Improved infrastructure, especially transport and water management - the focus of the MCC compact - are critical to further investment, as are major improvements in logistics services. • Larger catalytic agribusinesses, with USG program support, are critical in solving systemic constraints for producers, such as access to markets, know-how and financing. Private and non-governmental associations that cluster small producers and firms, as well as business service providers, have begun to emerge and provide valuable services, but sustainability is likely to be variable. This report is organized into four sections. Section I, “Introduction”, provides a background of the Armenian agriculture and agribusiness sector, as well as the context under which USG technical assistance programs were formulated and eventually implemented in the country. Section II, “Description and Assessment of US Government Programs”, describes the implementation strategies, project components and results achieved for each of the four activities that are the subject of this assessment. Section III, “Other Donor Activities”, describes the scope and programmatic content of other international donor assistance programs that are actively involved in supporting and advancing Armenia’s agriculture and agribusiness sector. Lastly, Section IV, “Assessing Implementation, Impact and Sustainability, ” provides direct responses to the 16 key questions posed in the Scope of Work for this assignment as they relate to Implementation, Impact and Sustainability of the USG programs assessed. Appendices provide a summary of beneficiary company interviews, and a more in-depth review of agribusiness financing. vii I. INTRODUCTION Armenian agriculture was transformed, almost overnight during 1991-92, from some 840 centrally managed and highly subsidized state and collective farms (generally one in each village) into some 440,000 decentralized and unsubsidized small holdings owned by former collective farm workers and other rural residents. These include some 100,000 families living in rural towns and villages that were employed in dispersed manufacturing facilities and subsequently had little experience or understanding of farming. The collapse of non-farm industries forced some 440,000 families or as many as 1.8 million people (out of a 1992 population of approximately 3.5 million) into subsistence level farming practices. Average wages dropped in the early 1990’s to $20-30 per month and today remain between $40- 50 per month in rural areas, although wages in urban areas, particularly in Yerevan, have improved to a much greater extent. In recent years the contribution of agriculture to the Armenian GDP has ranged from 37 to 39%. To put this in perspective, the second largest contributor to GDP is remittances, which accounts for 33% of GDP. It is also estimated that current employment in agriculture represents 47% of the labor force. Currently there are very few off-farm employment opportunities in Armenia so rural inhabitants depend heavily on their small farms for survival. While agriculture is of relative economic importance, Armenia is not well positioned for agriculture. Quality and quantity of farmland is not generally a source of comparative economic advantage for Armenia. Much of the country is mountainous and arid with only 46.7% considered arable and much of this land is worn-out and noted for poor production. The primary area of agricultural production is the Ararat Valley where nearly 80% of the arable soils are located. Even in the Ararat Valley, low productivity and high levels of salinity characterize many fields. Armenia is still a large net importer of food, importing almost a third of food consumption. The production of food for human consumption and compound feeds to support its livestock industry does not begin to meet its domestic needs. Further, there are no agricultural chemical manufacturing plants (e.g. fertilizer) located within its borders, nor are high protein supplement feeds produced within the country. Most farms are too small and/or spread out to be economically viable in their present state. The formula used for distribution of privatized state farms in most regions provided families of 1-3 people with one unit of land, families of 4-6 with two units of land and so on. Depending upon the production potential of the land, the units varied from 0.6 hectares (1.5 acres) of land in the poorer regions to 0.4-0.5 hectares in the more productive Ararat Valley. The majority of the new landowners lacked adequate training in agricultural methods and this condition persists today. The livestock was distributed in a similar manner to families living within collective farm villages. Thus, the commercial viability of many farms is questionable. Armenia is further constrained as a land-locked country without formal trading access with Turkey on the west and Azerbaijan on the east, because of political constraints, and limited road and rail access to Georgia in the north and Iran in the south. In this context, the US Government (USG) has invested over $80 million dollars in agribusiness and agricultural development in Armenia during nearly 12 years of technical assistance. The United States Department of Agriculture (USDA) interventions efforts started in 1992 with the signing of a Memorandum of Understanding between the USDA and Armenia’s Ministry of Agriculture. As part of that agreement, a USDA Armenian Project Team headed by Dr. Vivan M. 1 Jennings, Deputy Administrator of Agriculture, visited Armenia with an “Armenian Project Development Team” to determine the state of agriculture, the agricultural infrastructure, the agricultural institutional base (including extension services), and to address needed agricultural related reforms for a market economy to function within the country. Dr. Jennings and his team focused on the following needs in a report to the US Department of State, US Agency for International Development (USAID), and the USDA: 1. Major macro-economic reforms to free prices, monetary and fiscal policy, the credit and banking system and the legal framework to allow privatization and commercialization of state industries. 2. Agricultural sector reforms to initiate the evolution of a market based agricultural system, including policies regarding agricultural infrastructure and support services, addressing issues of economic literacy, utilization of resources and technology, a system for financing agriculture and the transition to and mix of public/private resource ownership. 3. Working linkages and communications within and between elements of the Armenian agricultural production, processing, and marketing system, including linking privatization with commercialization, a data collection and analysis system to support policy formulation and individual decision makers, and Western linkages with private sector agribusinesses. 4. Reorganization of agricultural research to allow for integration of institutes with extension, adoption of a priority setting process, establishment of financing strategies and an accountability system, and definition of private/public sector responsibilities. 5. An extension system to provide a sound knowledge and information base for farmer decision-making, including support with financial planning and business management skills, and linkages with U.S. farmers and agribusiness. These recommendations provided the framework for subsequent USG assistance. In 1993, the USDA began to implement the Armenian/American Extension Project (AAEP), which was completed in 1995. USDA initiated the Armenian Marketing Assistance Program (MAP) in 1996. This program and now its successor Center for Agribusiness & Rural Development (CARD) have made up the largest portion of international development funds invested in Armenia’s agriculture sector. The United States Agency for International Development (USAID) Armenia Small to Medium Enterprise Market Development Project (ASME) was launched in 2000 with similar objectives (albeit not exclusively for agribusiness) and has been complemented by the Micro Enterprise Development Initiative (MEDI), another USAID project that targets micro and small enterprises, including the agriculture sector. This evaluation was commissioned and funded by USAID in order to: • Inform future programming decisions by identifying the most promising areas for further development as well as interventions that have not been as effective. • Examine the market impact of USG agriculture sector interventions, including any positive impacts (i.e., increases in efficiency or growth rates) and negative ones (i.e., introduction of market distortions or promotion of non-competitive products). • Review the portfolio of USG activities in terms of internal “division of labor” and coordination issues, as well as coordination with other donors active and potentially with the Millennium Challenge Account Armenia. • Analyze the sustainability of interventions and the existence of an effective exit strategy in anticipation of the phasing out of USG assistance in the future. 2