Uzbekistan SECOND AGRICULTURAL PUBLIC EXPENDITURE REVIEW Europe and Central Asia Region © 2021 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyrighted. 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Table of Сontents Acknowledgements..........................................................................................vii Abbreviations and Acronyms.........................................................................viii Executive Summary...........................................................................................1 Chapter 1: Introduction......................................................................................7 Chapter 2: Level of Agricultural Public Expenditures in Uzbekistan..................................................................................10 Chapter 3: Agricultural Public Institutions..................................................14 Chapter 4: Functional Composition of Agricultural Public Expenditures..................................................................................17 Chapter 5: Irrigation Water Management...................................................26 Chapter 6: State Fund for Agricultural Support........................................29 Chapter 7: Other Providers of Agricultural Credit....................................33 Chapter 8: Development Partners................................................................37 Chapter 9: Market Price Support..................................................................41 Chapter 10: Outlook for Agricultural Public Expenditures.....................46 Chapter 11: Analysis of the Livestock Subsidies.......................................51 Chapter 12: Analysis of the State Program for Drip Irrigation..............59 Chapter 13: Analysis of the State Programs for Smallholder Farms...............................................................................................75 Chapter 14: Conclusions and Recommendations....................................80 Annex 1: Agricultural Strategy’s Directions for Repurposing the Agricultural Public Expenditures in Uzbekistan during 2020-2030.........................................................................................87 Annex 2: Uzbekistan: Agrifood Sector Development Partner Projects...............................................................................................89 Annex 3: Legislation for Agricultural Credit Supported by the SFES.......................................................................................94 Annex 4: Medium-Term Expenditure Framework and Agricultural Budget Planning: Example from Ukraine.................................96 List of Boxes Box 1: Australian experience in drip irrigation for cotton production........... 61 Box 2: AKIS in Uzbekistan.......................................................................................... 77 List of Figures Figure 1: Uzbekistan: Agricultural growth in 2017-2021................................... 8 Uzbekistan: Aggregated functional composition of agricultural Figure 2:  public expenditures, OECD framework, 2016-2020....................... 20 Figure 3: Uzbekistan: Public expenditures on irrigation water management, US$/ha of irrigated land, 2015-2019....................... 26 Uzbekistan: Interest rates for working capital loans from SFAS Figure 4:  to cotton and wheat growers, % per year, 2016-2020................... 31 Uzbekistan: Shares of main economic sectors in GDP and Figure 5:  banking loans, percent of total, 2020................................................. 36 Figure 6: Agricultural market price support: selected countries, 2017-2019....................................................................................................... 42 Figure 7: Uzbekistan: Farm support with and without price taxation, 2016-2020..................................................................................................... 44 Figure 8: Beef meat retail prices in selected countries, 2018-2021............. 54 Ukraine: Presentation of selected agricultural programs, 2020- Figure 9:  2023............................................................................................................... 97 List of Tables  zbekistan: Proposed actions to improve effectiveness and Table 1: U impacts of agricultural public expenditures........................................ 5 Uzbekistan: Total GoU-financed agricultural expenditures, Table 2:  absolute terms, 2016-2020...................................................................... 11 Uzbekistan: Total GoU-financed agricultural expenditures, Table 3:  relative terms, 2016-2020......................................................................... 12 Uzbekistan’s agricultural public spending in global comparison: Table 4:  selected countries in % of GDP............................................................... 12 Table 5: Importance of agriculture in selected countries, 1995–2016........ 13 Table 6: Uzbekistan: Agricultural public expenditures by institution, 2020................................................................................................................. 14 Anticipated impacts of public expenditures on long-term Table 7:  agricultural growth....................................................................................... 19 Uzbekistan: Detailed functional composition of agricultural Table 8:  public expenditures, OECD framework, 2016-2020, billion Soums.................................................................................................... 21 iv Table 9: Comparison of Uzbekistan’s functional composition of agricultural public expenditures with other countries, in percent.............................................................................................. 23 Table 10:  OECD countries: Evolution of the structure of public expenditures, in percent, 1986-2017.................................................... 24 Non-OECD countries: Evolution of the structure of public Table 11:  expenditures, in percent, 1995-2017..................................................... 25 Table 12: Uzbekistan: The SFAS’s finances, trillion Soms, 2016-2018......... 29 Table 13: Uzbekistan: The SFAS’s interest rate subsidy for cotton, 2016-2018................................................................................................. 30 Table 14: Uzbekistan: The SFAS’s finances, trillion Soms, 2016-2020........ 31 Table 15: Uzbekistan: Summary of key changes in the SFAS, 2016-2021.. 32 Table 16: Uzbekistan: Commercial loans, 2019-2021........................................ 34 Table 17: Uzbekistan: The SFES’s financing, 2018-2021.................................. 34 Table 18: Uzbekistan: The Farmer Council’s financing, 2018-2020............. 35 Table 19:  Uzbekistan: Projects of the agricultural development partners, 2015-2030.................................................................................................... 38 Table 20:  Uzbekistan: Functional composition of the donor-supported projects, million US$, 2015-2030......................................................... 38 Table 21:  Uzbekistan: Credit lines vs. other expenditures in the donor- supported projects, million US$, 2015-2030..................................... 39 Table 22: Uzbekistan: Cotton market price support, 2016-2020................. 42 Table 23: Uzbekistan: Wheat market price support, 2016-2020.................. 43 Table 24: Uzbekistan: Total farm support, 2016-2020..................................... 44 Table 25:  Uzbekistan: Outlook for agricultural public expenditures, million US$, 2021-2025........................................................................................ 47 Table 26:  Uzbekistan: Projections for the SFAS’s expenditures, 2020- 2025......................................................................................................... 49 Table 27:  Uzbekistan: Outlook for the structure of agricultural public expenditures, in percent, 2020 vs. 2021-2025............................... 50 Table 28: U  zbekistan: Outlook for livestock output subsidies, 2021- 2025............................................................................................... 52 Table 29: U  zbekistan: Large farms in meat and milk production, %, 2016-2019.................................................................................................. 53 Table 30: Uzbekistan: Import of livestock, 2016-2020..................................... 54 Table 31: Uzbekistan: Changes in milk productivity under the LSDP.......... 55 Table 32: Uzbekistan: Livestock sector productivity, 2016-2020................. 56 Table 33:  Uzbekistan: Matching grants for investments in various water- efficient and water-saving technologies, Soums/ha in 2020...... 61 Table 34:  Uzbekistan: Public investments in cotton’s drip irrigation, 2019- 2021................................................................................................................ 63 Table 35:  Uzbekistan: Economic costs and benefits of drip irrigation’s adoption....................................................................................................... 64 v Uzbekistan: Cost and benefit analysis of investing in drip Table 36:  irrigation, farm budget, 2019................................................................. 65 Table 37: Uzbekistan: Sensitivity analysis of costs and benefits................... 69 Uzbekistan: Recommendations for improving effectiveness Table 38:  and impacts of agricultural public expenditures............................. 85 Ukraine: Key programs for direct farm support, billion Table 39:  Ukrainian hryvnia, 2020-2023.............................................................. 96 vi Acknowledgements This report was written by the team led by Sergiy Zorya (co-Task Team Leader, Lead Agriculture Economist, SCAAG) and Madhur Gautam (co-Task Team Leader, Lead Agriculture Economist, SAGGL) and included Teklu Tesfaye (Senior Agricultural Economist, SCAAG) and Sandjar Babaev and Parkhod Nazarov (World Bank consultants). Oksana Varodi (IFC) and Azad Abdulhamid (Lead Water Resources Management Specialist, SCAWA) provided inputs on irrigation water management, and Eskender Trushin (Senior Economist, EECM1) ensured consistency with the overall Public Expenditure Review. Overall guidance was provided by Frauke Jungbluth (Practice Manager, SCAAG), Jane Ebinger (Program Leader, SCADR), and Marco Montanelli (Country Manager for Uzbekistan). The report was peer reviewed by Animesh Shrivastava (Lead Agriculture Economist, SEAAG) and Vikas Choudhary (Senior Agriculture Economist, SEAAG). The authors wish to thank Luisa LaFleur for editing the report and Alex Polikanin for help with the design and layout of this report. vii Abbreviations and acronyms ADB Asian Development Bank AgPER Agriculture Public Expenditure Review AKIS Agricultural Knowledge and Innovations System AMP Agriculture Modernization Project COFOG Classification of the Functions of the Government DFP Direct Farm Payment GDP Gross Domestic Product GoU Government of the Republic of Uzbekistan GSS General Support Services EU European Union FAO Food and Agriculture Organization of the United Nations LSDP Livestock Sector Development Project MoA Ministry of Agriculture of the Republic of Uzbekistan MoEDPR Ministry of Economic Development and Poverty Reduction of the Republic of Uzbekistan MoF Ministry of Finance of the Republic of Uzbekistan MoWR Ministry of Water Resources of the Republic of Uzbekistan MPS Market Price Support MTEF Medium-Term Expenditure Framework OECD Organization for Economic Development and Cooperation ODA Official Development Assistance O&M Operations and Management R&D Research and Development SCVLD State Committee on Veterinary and Livestock Development of the Republic of Uzbekistan SFAS State Fund for Agricultural Support, MoF SFSE State Fund for Supporting Entrepreneurs, MoEDPR SSCU State Statistical Committee of the Republic of Uzbekistan WCA Water Consumers’ Association WBG World Bank Group USAID United States Agency for International Development viii Executive Summary 1. Public expenditures matter a lot for agricultural growth, food and nutrition security, sustainable food systems, and other developmental outcomes. The level of agricultural public spending is important as small budgets can rarely deliver results. Yet, global experience also shows that although greater spending on agriculture is important, it does not always guarantee better outcomes unless: (i) funds are allocated to the ‘right’ programs/functions, that is, they target well identified market failures or deliver critical public goods1 (i.e. allocative efficiency); (ii) the right programs are being implemented well (i.e. implementation efficiency); and (iii) public expenditures are supported by market-friendly agricultural policies (i.e. avoid market price distortions) to create the right incentives to achieve intended development outcomes. Spending more on agriculture without making progress on the above-mentioned conditions is not recommended, because higher public spending will not deliver the desired progress on agricultural development, which in turn could amplify fiscal, inflation, exchange rate, and other macroeconomic risks. Mistargeted public expenditures would backfire on the agriculture sector itself over the medium to long run by distorting the patterns of agricultural growth, undermining the sustainable of productivity growth, and degrading the natural resource base. The quality of public spending is, therefore, an important issue, which has become even more urgent during and in the aftermath of the COVID-19 crisis and the associated build up in fiscal pressures. 2. Agricultural growth in Uzbekistan has accelerated in response to recent economic reforms. The importance of realigning public policies to deliver better growth is evident from Uzbekistan’s own recent experience. After stagnant growth in 2017–2018, the agriculture sector grew by 3.1 percent in 2019, despite a 2.2 percent reduction in the total area of planted crops that year. In 2020, despite the COVID-19 pandemic, agriculture emerged as a pillar of resilience, driving the overall economy with growth of 3.0 percent vis-à-vis gross domestic product (GDP) growth of 1.6 percent. In 2021, agricultural growth is projected at 3.1 percent. The recent higher agricultural growth has been a response to economic reforms that began in 2017¬¬–2018 and included the removal of many market- distorting policies for the horticulture subsector, initial reforms in the cotton and wheat subsectors, and a repurposing of some agricultural public expenditures. 3. The Government of Uzbekistan (GoU) seeks to accelerate agricultural growth rates, given the country’s high potential in this sector and the experience of higher growth in other countries that transitioned from planned to market economies, such as China and Vietnam. Getting public policies and expenditures right is critical to accelerate agricultural growth. The second Agricultural Public Expenditure Review (AgPER), which builds on the first AgPER completed in 2019, seeks to improve the GoU’s understanding of the strengths and weaknesses of current and anticipated agricultural public expenditures and how to better align them with the objectives of Uzbekistan’s Strategy for Agriculture Development 2020–2030 (hereafter Agricultural Strategy) that was approved in 2019. 1 Provision of public goods is a precondition for sustainable economic development. 1 Uzbekistan: Second Agricultural Public Expenditure Review 4. The analysis in this AgPER shows that Uzbekistan’s agriculture sector continues to receive significant budget support. Between 2016 and 2018, the period analyzed by the first AgPER, agricultural budget expenditures accounted for 2.1 percent of GDP and 7.1 percent of total public expenditures, without including the legacy farm debt write-offs in 2017 and 2018. In 2019–2020, agricultural public expenditures increased in importance in terms of both GDP and total public expenditures to 2.3 percent and 8.9 percent, respectively. Agricultural public spending temporarily declined in 2020 compared to 2019, as a result of the COVID-19 crisis, but expenditures are projected to keep increasing over the next five years. 5. Uzbekistan’s agricultural public expenditures are large in comparison to other countries. A large share of such expenditures has been used for the irrigation electricity subsidy, amounting to about 0.6 percent of GDP. But even without this subsidy, Uzbekistan’s agricultural spending is substantial compared to other countries. The Organization for Economic Cooperation and Development (OECD) countries spend about 0.2 percent of GDP on agriculture. Data from 10 large non-OECD countries show that they rarely spend more than 1.0 percent of GDP on agriculture, and with a majority of them spend 0.5 percent of GDP on this sector. The implication for Uzbekistan is that its level of agricultural public expenditures would need to eventually decrease over the long run to create more fiscal space for other important public programs. Yet, achieving the objective of reducing the long-term agricultural public expenditures would require their increase for some programs, in particular irrigation modernization and general support services such as AKIS, in the short to medium run, along with the repurposing of some expenditures. 6. An important finding of this AgPER, however, is that neither the enabling policy environment nor the allocative efficiency of the public funds are yet fully conducive to generate high, climate-resilient, and inclusive agricultural growth in Uzbekistan. Cotton and wheat producers continue to be underpaid for their outputs as the administered prices are kept below market prices, although the rate of price taxation for these producers has declined substantially in recent years. In 2016–2018, farmers are estimated to have lost 4.0 trillion Soums or 1.3 percent of GDP annually due to the low state-set farmgate prices for cotton and wheat. In 2019–2020 these losses declined to 2.2 trillion Soums or 0.4 percent of GDP. The COVID-19 pandemic triggered the introduction of new food market regulations and export restrictions, which is expected to increase the tax on these commodities, although these are expected to be dropped when the global pandemic ends. Uzbekistan’s agricultural public expenditures are still dominated by support for traditional, energy-intensive irrigation systems and subsidized credit for growing cotton and wheat, while spending on agricultural knowledge and innovations systems (AKIS), such as education, research and advisory services and other general support services (GSS) programs, has remained small. Other low-income countries with successful agricultural development programs tend to spend about 0.5 percent of their agricultural GDP on agricultural research and advisory services (a part of AKIS). Uzbekistan spent about one- tenth of this amount, or 0.06 percent of agricultural GDP for this purpose in 2020. 7. The recent shifts and repurposing of agricultural public expenditures, however, are encouraging. In addition to the reduction in agricultural price taxation and plans to eliminate this taxation entirely in the future, the following positive shifts in public expenditures aligned with and inspired by the Agricultural Strategy have recently taken place: 2 Executive Summary a. Support to farmers through advance working capital was extended to vegetable producers starting from 2021. For several decades, such support was granted only to cotton and wheat growers. b. The interest rate subsidy for working capital to cotton and wheat growers increased every year between 2016 and 2019. Yet, in 2020, the subsidy was more than halved compared to 2019 as a result of the increase of the interest rate paid by beneficiaries. c. Direct payments to farmers for growing cotton on poor soil were discontinued in 2019, as part of the agricultural diversification strategy and alignment of land to its most productive use. d. Several programs to support fixed capital formation through matching grants were introduced in 2019, including support for the adoption of drip irrigation for cotton, horticulture, and fodder production, investments in the viniculture sector, and land reclamation. These programs support the modernization of farm assets to promote modern technology adoption and increased productivity and are globally considered a better kind of direct farm payment to farmers than output and variable input subsidies. Some of these matching funds and credits have recently become accessible to small dekhan and household farms, which was not the case before. e. Support for small farms has grown in recent years, through direct financial support (subsidized credit, matching grants, and capacity building) and indirect support (farm cooperatives, productive partnerships, and leasing). f. Public spending on animal health and other sanitary measures increased tenfold and on forestry activities threefold between 2016 and 2020. g. Public spending on AKIS doubled between 2016 and 2020 but remains at a very low level. In 2020, the staff of several public agricultural research institutes started to receive wages from the national budget. Prior to that their institutes had to generate commercial income to pay wages. As a result, most research institutes engaged in agricultural production for profit, and were not able to conduct applied research and development. h. Investment projects financed by development partners have become more diverse, shifting from predominantly credit lines accompanied by little capacity building to a more balanced mix of credit lines and larger investments to strengthen the capacity of agricultural public institutions. 8. These expenditure shifts are conducive to making Uzbekistan’s agricultural growth more inclusive and climate resilient in the future. They are aligned with the 2019 Agricultural Strategy, which sets priorities aligned with the objectives of achieving more inclusive, job-creating, climate-resilient, and sustainable agricultural development. The 2021–2025 outlook for agricultural public expenditures, prepared as a part of this report, predicts a continuation of some of these positive trends, with more funds being shifted to the desirable programs within an only slightly larger agricultural budget, which is constrained by a tighter fiscal space in the aftermath of the COVID-19 crisis. 3 Uzbekistan: Second Agricultural Public Expenditure Review 9. But the risks for more efficient and impactful agricultural public expenditures in Uzbekistan remain high. These risks include: (i) a slower-than-planned elimination of agricultural price taxation; (ii) weak coordination among various ministries in budget planning and implementation; (iii) a lack of strategic planning and implementation of investments through projects financed by development partners; (iv) weak implementation of the ‘right’ GSS programs; (v) unsustainable expansion of livestock subsidies; (vi) lack of progress in reducing the cost of electricity for irrigation and modernization of irrigation and drainage infrastructure; and (vi) little progress in scaling up more tailored support to smallholders. 10. Success in mitigating the above-mentioned risks will determine the value for money of agricultural public expenditures in Uzbekistan during the next decade. The  report proposes key recommendations divided into agricultural policy, allocative efficiency of public expenditures, and implementation efficiency of public programs that focus on mitigating these risks, including the following: a. Improve the agricultural policy incentives: i. Ensure that farmers receive the market prices for their produce. ii. Complete the liberalization of cotton and wheat subsectors and launch the second- generation reforms of agricultural land and capital markets. b. Improve the allocative efficiency of public expenditures: i. Use the medium-term expenditure framework (MTEF) to coordinate agricultural public investment planning and implementation. ii. Integrate the projects financed by development partners into the MTEF. iii. Invest in irrigation modernization with the objectives of reducing high electricity bills and improving service provision to farmers. The public expenditures in irrigation would need to increase in the short to medium run to enable a reduction of irrigation expenditures in the long run. iv. Revert the livestock sector’s subsidy dependency by repurposing output subsidies as investment support and GSS programs. c. Improve the implementation efficiency of public programs: i. Spend more budget resources on enhancing the capacity of public institutions to design and deliver agricultural services in order to justify an increase in future budgets for GSS programs. ii. Pursue a more integrated approach in supporting the adoption of modern farming technologies such as drip irrigation by better assessing the needs and incentives of farmers and complementing financial support with more technical assistance to farmers. iii. Maintain the momentum in supporting smallholder farmers through a mix of fit-for- purpose instruments. 4 Executive Summary 11. Table 1 presents a summary of specific actions for key recommendations. These are grouped into short-term actions, to be enacted during the next two years, and medium-term actions, to be enacted during the next three to five years. Table 1. Uzbekistan: Proposed actions to improve the effectiveness and impact of agricultural public expenditures Medium-term (3–5 Short-term (1–2 years) years) - Abolish the administrative state - Reform the cotton farmgate price for wheat procure- market’s cluster orga- ment and procure wheat for state nization to ensure the Abolish agri- purposes (e.g., strategic reserves) at competitive, mar- 1 cultural price market prices ket-based determina- taxation - Ensure that minimum cotton tion of cotton prices farmgate prices closely follow export - Refrain from any parity prices agricultural and food product price controls - At the central level, introduce the - Ensure that MTEF MTEF for the agriculture sector with budget requests are the inclusion of all expenditures underpinned by a Strengthen (recurrent and capital) and all public description of past coordination in institutions managing agricultural achievements and key 2 expenditures performance indica- the agriculture sector - At the local level, strengthen coor- tors/targets dination among agriculture-related public institutions through regional AKIS centers - Include recipient-executed projects - Include all projects Integrate do- financed by development partners financed by develop- nor-financed and implemented by agricultural ment partners and im- projects in public institutions into the MTEF and plemented by agricul- agricultur- 3 overall public investment manage- tural public institutions al finance ment into the MTEF planning and - Ensure the inclusion of future recur- implementa- rent budgets in programs (e.g., AKIS) tion initiated by donor projects - Carry out internal organizational - Adopt an M&E system improvements in agricultural public for assessing the qual- institutions to improve the quality ity of implementation Enhance the of the implementation of existing and generating data capacity of programs for public expendi- public institu- ture/MTEF planning 4 - Integrate climate-related consid- tions to deliver erations in any actions or services agricultural provided services - Take a strong institutional role in implementation of donor-financed projects 5 Uzbekistan: Second Agricultural Public Expenditure Review Medium-term (3–5 Short-term (1–2 years) years) - Invest more in GSS programs such - Remove the crop as animal nutrition, AKIS, veterinary placement system to services, artificial insemination, and support market-orient- local livestock breeding ed farmland use and Increase the - Replace livestock output subsidies more fodder produc- allocative with matching grants for fixed capital/ tion 5 efficiency of asset formation - Provide incentives livestock sup- - Refrain from significantly increasing and regulations to port support for the import of livestock reduce the country’s breeds livestock herd - Improve the quality of implementation of GSS programs - Prioritize the allocation of expendi- - Increase the efficiency tures for required repairs and mainte- of irrigation systems nance to the most critical assets and through the modern- prepare their mapping in a ‘preven- ization, reconstruction tive repair and maintenance plan’ and repair of irrigation - Support farmers in addressing con- and drainage systems straints for maximizing the benefits of using highly efficient drip irrigation support programs irrigation technologies Invest in irriga- - Accelerate the pace of implementa- - Pilot the installation of 6 tion modern- tion of ongoing projects to reduce volumetric metering ization electricity consumption at water between district water facilities and introduce effective management orga- methods for regulating the operation nizations and water of pumping stations consumers’ associ- - Invest more in building human capital ations (WCAs) and on irrigation management between WCAs and farms to prepare the irrigation systems for volumetric payments - Maintain a mix of the support in- - Scale up programs struments for smallholders beyond for the integration Strengthen subsidized credit of smallholders into support to - Assess the needs of small farms and modern agrifood 7 smallholder target some AKIS services to the value chains and farms specific needs of smallholder farmers to strengthen their human capital devel- opment Source: World Bank assessments. 6 1 Introduction 12. Public expenditures matter a lot for agricultural growth, food and nutrition security, sustainable food systems, and other interlinked developmental outcomes. The level of agricultural public spending is important as small budgets can rarely deliver results, let alone drive any transformation of the sector. Yet, global experience clearly shows that although greater spending on agriculture is important, it does not always guarantee better outcomes unless: (i) funds are allocated to the ‘right’ programs/functions, which help address market failures and deliver public goods (i.e. allocative efficiency); (ii) the right programs are being implemented well (i.e. implementation efficiency); and (iii) public expenditures are supported by market-friendly agricultural policies (i.e. no agricultural price distortions).2 Spending more on agriculture without making progress on all of the above-mentioned conditions is not recommended, because higher public spending without progress on agricultural development could result in fiscal, inflation, exchange rate, and other macroeconomic risks, which would backfire on the agriculture sector itself in the medium to long run. The quality of public spending is, therefore, an important issue, which has become even more urgent during and in the aftermath of the COVID-19 crisis. The crisis required Uzbekistan to make substantial unforeseen public expenditures, which resulted in the larger public borrowing and lower fiscal space in the future.3 13. Agricultural growth in Uzbekistan has accelerated in response to recent reforms. After stagnant growth in 2017–2018, the agriculture sector grew by 3.1 percent in 2019 (Figure 1), despite a reduction in the total planted area by 2.2 percent that year. In 2020, despite the COVID-19 pandemic, agriculture was a driver of the overall economy’s growth, growing by 3.0 percent vis-à-vis GDP growth of 1.6 percent. In 2021, agricultural growth is projected at 3.1 percent. The recent increased agricultural growth was a response to economic reforms, which began in 2017-2018 and included the removal of many market-distorting policies for the horticulture subsector, initial reforms in the cotton and wheat subsectors, and a repurposing of some agricultural public expenditures. 14. The GoU seeks to accelerate the agricultural growth rate, given the high agricultural potential of the country and the experience of other countries that transitioned from planned to market economies. Agriculture in China and Vietnam, for example, during their initial reform period of 1990 to 2000, grew on average by 4 percent a year. The authorities there were adjusting their public investments and policies, along with 2 World Bank. 2011. Practitioners’ Toolkit for Agriculture Expenditure Review Analysis. Washington, D.C. 3  zbekistan’s debt to GDP ratio increased from 29.4 percent in 2019 to 37.9 percent in 2020. This is projected U to increase further to 44.3 percent in 2022 before declining to 43.9 percent in 2023, according to World Bank estimates in March 2021. 7 Uzbekistan: Second Agricultural Public Expenditure Review Figure 1. Uzbekistan: Agricultural growth, 2017–2021 Note: * World Bank projection. Source: State Statistics Committee of the Republic of Uzbekistan (SSCU) and World Bank estimates. administrative procedures, to inject more market principles into agricultural production (supply side) and better respond to the rapidly evolving needs of consumers and the agrifood sector (demand side).4 Getting the public policies and expenditures right is also critical to accelerate agricultural growth in Uzbekistan. 15. This report presents a review of Uzbekistan’s AgPER to contribute to the policy dialogue on the repurposing of public expenditures and getting more value for money. This is the second AgPER for Uzbekistan prepared by the World Bank in the last three years. The first AgPER was completed in 2019.5 It fed into the Agricultural Strategy, which was being prepared at that time and later approved in October 2019.6 It set the 2016–2018 baseline of agricultural public expenditures for the Agricultural Strategy, underpinning Annex 4 (see Annex 1 in this report), which presented the direction of the major repurposing of agricultural public expenditures by 2030. The expenditure repurposing encompassed the phasing out of direct subsidies coupled with production conditions and a move toward more efficient farm support instruments, such as climate-smart direct farm support and investments in general support services to increase the developmental impact of public expenditures. The first AgPER presented global lessons about the impacts of various types of agricultural public expenditures (for example, their functional composition) on developmental outcomes in the agriculture sector, which were considered in preparation of Annex 4 of the Agricultural Strategy. 4  orld Bank. 2021. From Plan to Market 2.0: Assessing Uzbekistan’s Agricultural Transition. Background report W for the Systematic Country Diagnostic. Washington, D.C. 5 World Bank. 2019. Uzbekistan: Public Expenditure Review. Chapter 7: Agriculture. Washington, D.C. 6 Decree of the President of the Republic of Uzbekistan No. 5853 “About Approval of the Strategy of Agricultural  Development of Uzbekistan during 2020-2030,” dated October 23, 2019. 8 Introduction 16. This AgPER offers the following value additions to the first review: a. An expansion of the review period from three to five years (2016–2020) and the inclusion of additional agricultural public expenditure items in total budget estimates, which were omitted in 2019. b. An analysis of cotton and wheat pricing to determine whether the initial reforms removed farm price taxation observed in 2016–2018. c. A deep dive into the ex-post and forward-looking analysis of the expenditures executed by the State Fund for Agricultural Support under the Ministry of Finance (MoF), which averaged 3.5 percent of GDP in 2016–2018. d. An analysis of the evolution of instruments and support directions in the donor-financed projects (for example, a shift from mostly credit lines to a mix of more conditional credit lines, budget support, technical assistance, and investment in agricultural general support programs/public goods). e. An outlook for agricultural public expenditures by 2025 using the MTEF approach. f. An assessment of the alignment of ongoing and anticipated agricultural public expenditures with the plans outlined in Annex 4 of the Agricultural Strategy. g. An analysis of the implementation efficiency of selected public programs, such as livestock subsidies, drip irrigation for cotton production, and support to smallholder farms. 17. The report begins with an estimation of the level of agricultural public expenditures in Uzbekistan during 2016-2020. Chapter 2 compares these expenditures with those in other countries and Chapter 3 presents the public institutions in Uzbekistan that execute agriculture-related expenditures. Chapter 4 analyzes a functional composition of Uzbekistan’s agricultural public expenditures and benchmarks them with a group of countries belonging to the OECD and non-OECD countries, which are regularly monitored by the OECD Secretariat for Agricultural Sector Monitoring. Uzbekistan’s two major agricultural public expenditures, irrigation and state support for cotton and wheat production, are analyzed in Chapters 5 and 6, respectively. Chapter 7 presents the programs supporting the provision of subsidized loans for agricultural products other than cotton and wheat. Chapter 8 analyzes the agricultural projects of development partners. Whether the agricultural output price environment enables public expenditures to generate the highest impact is analyzed in Chapter 9. Chapter 10 presents a forward- looking outlook for Uzbekistan’s agricultural public expenditures by 2025, which includes an analysis of their alignment with the Agricultural Strategy. The following three chapters are devoted to an analysis of the implementation efficiency of selected programs, namely livestock subsidies, drip irrigation for cotton growing, and smallholder support. Chapter 14 presents conclusions and recommendations. 9 2 Level of Agricultural Public Expenditures in Uzbekistan The definition of agriculture for the purpose of this public expenditure review, which follows the internationally recognized Classification of the Functions of the Government, includes crops, livesto0ck, forestry, fisheries, and irrigation/drainage. In recent years, the level of Uzbekistan’s agricultural public expenditures has been growing in both nominal and real terms, reflecting the GoU’s high focus on food security, rural jobs, and agricultural diversification. As a share of GDP, the agricultural support stayed stable and high, averaging 2.2 percent of GDP during 2016-2020. Most peer countries spend less than a half of that share. It implies that any future expansion of agricultural public expenditures in Uzbekistan should be fiscally responsible, with priority given to repurposing the public expenditures from low to high-impact sustainable programs, increasing the quality of these programs, and increasing some spending in the short run only if they help reduce the fiscal bill in the longer run. 18. Estimating the level of agricultural public expenditures in Uzbekistan is not an easy task. Expenditures are spread across several ministries, agencies, and committees (Chapter 3), and MoF budget reports do not provide sufficient details to derive the total agricultural expenditures from there. Capital and recurrent expenditures are presented separately. Budget breakdowns by programs/functions must be collected from individual ministries/agencies/committees and often from various departments within these institutions. Donor-financed expenditures, which make a significant contribution to some agricultural programs, are not included in the MoF’s regular budget reports by sector, even if they are recipient-executed. Instead, donor-financed expenditures and their detailed budget breakdowns were collected from each donor. 19. Thus, the budget figures presented in this report are World Bank estimates based on data received and collected from various public institutions, official publications, and development partners. They might be slightly different from official figures and they might exclude some expenditures, which could be classified as agricultural public expenditure, but unavailable to the World Bank during the report’s preparation. In any case, any omitted expenditures would account for a small share of total agricultural expenditures. 20. The definition of agricultural public expenditures in this AgPER report follows the internationally recognized Classification of the Functions of the Government (COFOG). Agricultural public expenditures under COFOG include spending on crops, 10 Level of Agricultural Public Expenditures in Uzbekistan livestock, fisheries, forestry, and irrigation/drainage. They do not include spending on, for example, rural development (such as, rural infrastructure, except for agriculture- related infrastructure such as agri-logistics, among others), food safety, nutrition health programs unrelated to agricultural production, and social safety nets. In a broader sense, these expenditures can also be considered agricultural. However, to make international comparisons and benchmark Uzbekistan with other countries, such expenditures were not included in the agriculture budget in this report. 21. In nominal terms, the agricultural public expenditures financed by the GoU increased from 5.2 trillion Soums in 2016 to 12.1 trillion Soums in 2020. Thus they more than doubled, growing by 134 percent (Table 2).7 In real terms, when adjusted for inflation, the value of agricultural public expenditures doubled. In the dollar equivalent, however, they declined by 33 percent, reflecting the unification of the exchange rate in 2017 and its consequent depreciation during the review period. Compared to 2018, however, agricultural public expenditures in dollar equivalents in 2020 were 6 percent larger. 22. Agricultural public expenditures show a large year-to-year increase in 2017 and a decline in 2020. In 2017, the GoU wrote off 5.8 trillion Soums of cotton/wheat farm debts and 1.6 trillion Soums of the debts of agricultural input suppliers. An additional 200 billion Soums of farm debts were written off in 2018. Without the debt write-offs, total expenditures in 2017 were 6.0 trillion Soums. The decline in agricultural spending in 2020 was a result of the COVID-19 crisis, which led to a budget consolidation and a shift in spending to public health, social safety nets, and short-term supports for the economy. Table 2. Uzbekistan: Total GoU-financed agricultural expenditures, absolute terms, 2016–2020 2016 2017 2018 2019 2020 Total nominal expenditures, trillion Soums 5,178 13,324 8,897 12,976 12,133 Total real expenditures, trillion Soums 5,178 11,844 7,515 10,858 10,450 Total US$ expenditures, million $ 1,744 2,592 1,103 1,438 1,169 Source: World Bank estimates. 23. In relative terms, agricultural public expenditures were stable. Relative to the country’s GDP they stayed at 2.2 percent, when deducting the debt write-offs in 2017 and 2018 (Table 3). As a share of total public expenditures, agricultural expenditures averaged 8.5 percent. They were about 7.8 percent of agricultural value added and 5.8 percent of the value of gross agricultural output 24. Many countries spend much less on their agriculture sectors as a share of GDP than Uzbekistan, but many of them are not its suitable peers. High-income countries, such as the OECD members, spent 0.2 percent of GDP on agriculture on average in 2015– 2017 (Table 4). In 1995–1997, they spent not much more than they spent in 2015–2017, on average 0.3 percent of GDP. Other countries spent a bit more, depending on the size 7 The data in the first AgPER did not include debt write-offs in 2017 and 2018. Other figures were largely the same. 11 Uzbekistan: Second Agricultural Public Expenditure Review Table 3. Uzbekistan: Total GoU-financed agricultural expenditures, relative terms, 2016–2020 2016 2017 2018 2019 2020 Average In % of GDP 2.1 4.4 2.2 2.5 2.1 2.7 [2.2] In % of total public expenditures 9.1 18.8 8.5 9.0 7.5 10.6 [8.5] In % of gross agricultural production 4.5 9.0 4.8 6.0 4.8 5.8 [4.8] In % of agricultural value added 7.0 14.7 7.9 9.9 8.0 9.5 [7.8] Note: The figures in [x] do not include debt write-offs in 2017 and 2018. Source: World Bank estimates. Table 4. Uzbekistan’s agricultural public spending in global comparison: selected countries, % of GDP 1995–1997 2015–2017 OECD countries, average 0.3 0.2 Selected non-OECD countries: Brazil 0.7 0.2 China 1.1 0.8 Israel 0.4 0.1 Kazakhstan 0.1 0.9 Philippines 0.4 0.6 Russia 1.8 0.3 Ukraine 1.2 0.3 Uzbekistan (2016–2020) n/a 2.2 Vietnam 1.0 0.4 Tajikistan (2019) n/a 1.0 Source: World Bank estimates using data from the OECD and the MoF. of their agriculture sector in their economy and their fiscal prioritization. Countries with a relatively large fiscal space such as China and Kazakhstan spent on agriculture much more (0.8–0.9 percent of GDP) in 2015–2017. Many others spent 0.4–0.6 percent of GDP. 25. The importance of agriculture in the economy, in terms of GDP and employment, greatly varies across countries. Agriculture is “small” in OECD countries— in 2016 it accounted for 3 percent of GDP and 6 percent of the labor force (Table 5). It is also relatively small in other countries, especially in more recent years and especially regarding farm labor. China and the Philippines in 1995 and Vietnam in 2016 are more suitable peers for Uzbekistan, with its high share of agriculture in GDP and employment. These countries also spend a large amount of funds on irrigation, similar to Uzbekistan. 12 Level of Agricultural Public Expenditures in Uzbekistan Table 5. Importance of agriculture in selected countries, 1995–2016 Agriculture in % of GDP Farm labor in % of total labor 1995 2016 1995 2016 OECD countries (average) 5.1 3.1 12.0 6.2 Brazil 5.8 5.0 26.1 13.9 China 19.8 8.9 52.2 27.8 Israel 2.0 1.3 2.9 1.0 Kazakhstan 12.9 4.8 26.7 18.0 Philippines 21.6 9.7 44.1 29.1 Russia 7.2 4.7 15.7 6.7 Ukraine 15.4 13.7 22.5 15.3 Uzbekistan 28.0 30.8 26.8 25.0 Vietnam 27.2 18.1 70.0 43.6 Source: World Bank estimates using data from the OECD and the SSCU. 26. Yet, even when compared to these more suitable peers, Uzbekistan still spends more than others on agriculture as a share of GDP. The agricultural public expenditures of the above-mentioned peers reach 1.0 percent of GDP, while the average in Uzbekistan is 2.2 percent of GDP. Agricultural sector expenditures alone, without irrigation and drainage, reach 0.7 percent of GDP in Uzbekistan, which is higher than the total agricultural and irrigation budget together in most countries listed in Table 4. 27. The high fiscal cost of farm support in Uzbekistan has important implications. The quality of spending becomes a precondition for yielding significant economic and social benefits. Without high quality, the global experience shows that high agricultural public spending creates macroeconomic imbalances, causing lower GDP growth and weaker demand for farm products. Thus, an expansion of future agricultural public expenditures in Uzbekistan is to be balanced with fiscal discipline, with the main focus to be on quality and on repurposing public expenditures from low to high-impact programs for long-term and climate-resilient productivity growth rather than on significantly increasing agricultural spending per se. This is discussed more in Chapter 4 and continued in Chapter 10. 13 3 Agricultural Public Institutions The implementation of public support programs to Uzbekistan’s agriculture remains fragmented, with the Ministry of Agriculture accounting for a small share of total public spending. More than 60 percent of all agricultural public expenditures are executed by the Ministry of Water Resource Management and 14 percent directly by the Ministry of Finance. Proactive inter-ministerial coordination is essential for effective programs’ planning and implementation, which is already recognized as critical in the Agriculture Strategy, and it needs to be more proactively pursued in practice. 28. In Uzbekistan, agricultural public expenditures are executed by several public institutions. The Ministry of Water Resource Management (MoWR) managed the most agricultural public expenditures, 61 percent, in 2020 (Table 6). The second largest was the MoF (14 percent), followed by the MoA (11 percent). The State Committee on Veterinary and Livestock Development (SCVLD) accounted for 6 percent, while other remaining institutions managed slightly more than 8 percent of total public expenditures. Table 6. Uzbekistan: Agricultural public expenditures by institution, 2020* Institution Amount, billion Share in total, % Soums Ministry of Water Resource Management 7,360 60.7 Ministry of Finance (State Fund for Agricultural 1,740 14.3 Support) Ministry of Agriculture 1,271 10.5 State Committee on Veterinary and Livestock 682 5.5 Development Cabinet of Ministers (Plant Quarantine Inspection 158 1.3 and Agroinspection) State Committee on Forestry 149 1.2 Ministry of Economic Development and Poverty 413 3.4 Reduction (State Fund for Supporting Entrepreneurs) Ministry of Higher, Secondary Special, and 269 2.2 Vocational Education (agricultural and irrigation colleges and universities) 14 Agricultural Public Institutions Institution Amount, billion Share in total, % Soums Ministry of Innovative Development/MoA/MoWR 91 0.8 Council of Farmers, Dekhan Farms, and Household 13 0.1 Units Total 12,133 100.0 Note: * Actual expenditures executed by each ministry could significantly differ from these estimates due to the frequent institutional changes and a lack of transparent budgeting. Source: World Bank estimates. 29. The MoWR is responsible for investments in irrigation and drainage infrastructure and their operation and management (O&M). The country’s irrigation and drainage infrastructure serve about 4 million hectares (ha), out of which 2.4 million ha are irrigated by electrical pumping stations.8 The MoWR operates 1,687 pumping stations with more than 5,000 pumps, while about 10,280 pumping units are operated by water consumers’ associations that mainly serve large agricultural farms. A large share of the MoWR’s irrigation O&M covers electricity bills. Irrigation systems in Uzbekistan require drainage to control waterlogging and salinization and about 50 percent of irrigated lands are salinized, which impacts crop yields. The country has approximately 1.3 million ha (30 percent of total irrigated land) of artificially drained land with a total length of 143,000 km of drains. Chapter 5 provides details of the public expenditures executed by the MoWR. 30. The MoF houses the State Fund for Agricultural Support (SFAS). Until recently, its main task was to finance the state quota system for cotton and wheat. It provided the advance working capital to cotton and wheat farmers at a low interest rate and financed the state procurement of cotton and wheat. In recent years, the composition of its expenditures has been changing. In 2020, the state procurement of cotton was eliminated, and the state procurement of wheat at administrative prices is soon to be replaced by wheat purchases for public food stocks at market prices. The interest rate, at which the advance working capital was provided, rose in 2019 and 2020. The MoF also plans to expand its credit coverage to vegetable production (in 2021). Chapter 6 presents a detailed description of the changes and outlook for SFAS expenditures. 31. The credit flows to agriculture from several sources. The State Fund for Supporting Entrepreneurship (SFES) under the Ministry of Economic Development and Poverty Reduction (MoEDPR) is one of them, providing 3 percent of total agricultural public expenditures in 2020. Since 2018, it subsidizes the loans to entrepreneurs, including farmers and agribusinesses, and offers them partial credit guarantees. It also provides low-interest loans for installing drip irrigation for cotton production. Another organization providing low-interest loans to agriculture is the Council of Farmers, Dekhan Farms, and Household Units (hereafter, the Farmers Council). It targets the smallest of farms, such as dehkans and household units, providing microloans. Table 6 presents an estimate of the interest rate subsidies these organizations provide. Note that it does not include principle credit amounts, which must be repaid by beneficiaries, not taxpayers, and therefore they are not considered public expenditures. See Chapter 7 for more details. 8  orld Bank. 2021. Uzbekistan: Second Public Expenditure Review. Chapter 5: Irrigation Water Management. W Washington, D.C. 15 Uzbekistan: Second Agricultural Public Expenditure Review 32. The share of the MoA in total agricultural public expenditures grew over time. In 2018, it accounted for 8 percent of total sector expenditures. In 2020 this share grew to 11 percent. The main MoA expenditures include agricultural research and education, crop protection and locust control, horticulture and viniculture development, and land reclamation. Some expenditures, such as for plant protection, land reclamation or research grants are only associated with the MoA, but they often originate from other ministries or agencies. But as the organization receiving the budget in 2020 reported to the MoA, their budgets are reflected as part of total MoA budget. In addition, “other expenditures” classified by MoF as agricultural are also included in the MoA budget in this report. Yet, whether they were all indeed executed by MoA could not be confirmed.9 33. Prior to 2020, the Ministry of Higher, Secondary Special, and Vocational Education financed agricultural and irrigation education in universities and colleges. In 2020, the financing of these educational institutions switched to the MoA, MoWR, and SCVLD.10 Uzbekistan has three central agricultural universities—Tashkent Institute of Irrigation Agricultural Mechanization, Tashkent Agrarian University, and Samarkand Veterinary Institute—and their regional branches. The number of agri-colleges was significantly reduced in recent years. With the revitalization of 10th and 11th grades in the country’s high schools and the abolishment of mandatory vocational education, about 265 agri-colleges have closed since 2017. Sixteen agri-colleges were transferred to the MoA and the MoWR and they continue to operate. 34. The Ministry of Innovative Development provides grant financing for public agricultural research institutes and is the largest source of financing for these institutes. It accounts for 1 percent of total agricultural public expenditures. Starting from 2020, some of the research institutes began to receive budget financing for salaries of core staff, which is included in the MoA and MoWR budgets. More agricultural research institutes are anticipated to be covered by these public expenditures over the coming years. This change was triggered by the Agriculture Strategy, which emphasizes centralized public financing for agricultural research and development. 35. The SCVLD is responsible for public expenditures for livestock development and animal health. The financing of livestock disease stations, veterinary education, vaccinations, and other veterinary services account for the largest part of their budget. The SCVLD started to manage the subsidy for the import of breeding livestock in 2020 and the livestock output subsidy in 2021 (see Chapter 11 for details). 36. There are two agriculture-related institutions under the Cabinet of Ministers. The State Plant Quarantine Inspection agency is responsible for the provision of phytosanitary services11, while the Agroinspection service provides seed quality assurance and other agricultural sector monitoring services. 9 n 2020, the MoA reported the budget of less than 300 billion Soums compared to 1.2 trillion Soum estimate I in Table 6. 10  Table 6 still shows the Ministry of Higher, Secondary Special, and Vocational Education due to the lack of budget data by ministry/committee in 2020. 11 In July 2021 the Inspection was transformed into the Agency for Plant Protection and Quarantine. 16 4 Functional Composition of Agricultural Public Expenditures The GoU has started repurposing some public expenditures in line with the Agriculture Strategy’s priorities. The GoU increasingly recognizes that “what” is financed is much more important than the total size of support to the sector. Since 2019, more funds were allocated to investment support of farmers through better access to finance and matching investment grants and to GSS such as AKIS, which show globally a high potential to generate large rates of economic return. While the functional composition of Uzbekistan’s agricultural public expenditures has started to improve and converge with that in other countries, the expenditure shifts/repurposing should accelerate, from the farm support that stimulates production and input use, which still dominates public expenditures, to the farm support that facilitates on-farm investments and general support services. 37. The functional composition of agricultural public expenditures is of great importance for agricultural growth. Spending the resources on the right programs has become even more important given the growing debts and the economic crisis triggered by the COVID-19 pandemic. Many empirical studies conducted globally find a much lower impact of aggregate spending on agricultural growth than of separate expenditures, implying that all investments are not equal.12 Governments sometimes spend on things that are not public goods, for example output and input subsidies, and spend too little on agricultural knowledge and innovations. This hurts agricultural growth. A study of ten countries in Latin America and the Caribbean during the 1985–2000 period found that agricultural public spending on public goods was much more productive than public spending on private goods.13 The study found that reallocating 10 percentage points of public expenditures from private goods to public goods increased per capita agricultural income by 2.3 percent. This increase was obtained without raising total expenditures. 12 M  ogues, T., B. Yu, S. Fan, and L. McBride. 2012. The Impacts of Public Investment in and for Agriculture: Synthesis of the Existing Evidence. International Food and Policy Research Institute Discussion Paper 1217, Washington, D.C. 13  López, R. 2005. Why Governments Should Stop Non-Social Subsidies: Measuring the Consequences for Rural Latin America. University of Maryland at College Park; and World Bank Group. 2019. Harvesting Prosperity: Technology and Productivity Growth in Agriculture. Washington, D.C. 17 Uzbekistan: Second Agricultural Public Expenditure Review This was a significant impact because it captured both the positive effect of increasing the budget for public goods and reducing the distortions created by subsidies, which negatively affected the quantity and quality of private investments. 38. The presentation and analysis of the functional composition of Uzbekistan’s agricultural public expenditures follow the framework used by the OECD. This framework differentiates between direct farm payments (DFP) and general support services (GSS). The DFP include: (i) payments based on outputs, inputs, fixed capital investments, and on- farm services; (ii) coupled payments per hectare or animal; (iii) decoupled payments per hectare or animal;14 and (iv) other payments. The GSS include: (i) agricultural knowledge and innovations (AKIS); (ii) inspections and control; (iii) development and maintenance of infrastructure; (iv) marketing and promotion; (v) cost of public stockholding; and (vi) miscellaneous. 39. In addition to enabling cross-country comparisons,15 the OECD framework allows a differentiation of public expenditures with potentially high versus low impact on long-term agricultural growth (e.g., allocative efficiency). All GSSs are considered public goods, implying that if implemented well, they would generate high rates of return from public investments in agriculture.16 Investments in AKIS are especially considered to generate high benefits for agriculture globally.17 But the impacts of some of these programs depend on their objectives and implementation quality (Table 7). For example, while government support for improving the quality assurance of seeds or fertilizers could build farmers’ trust in labeling, which in turn would increase demand for these inputs and encourage their adoption, too much government control and inspection could create unnecessary costs, depressing private sector and farm activities. In this case, inspections and controls could have a low or even negative impact on agricultural growth. The same is true for public food stocks. If they are relatively small, focused on smoothing out excessive price spikes but not intended to influence the average market price, and their management is market oriented, the cost for such strategic reserves could be substantially reduced and they can make a significant positive contribution to agricultural growth. But if they are too big and are used to keep prices too low or too high for prolonged periods of time, such public food stock programs tend to slow down agricultural growth and become a huge burden on the budget, crowding out other needed growth enhancing expenditures.18 40. Most DFPs are provided as subsidies or public financing of private goods, which distort farmer incentives and tend to slow down long-term agricultural productivity.19 But some DFPs are better than others in supporting agricultural productivity as shown in Table 7. Payments for fixed capital formation, for example, could support farm asset modernization and mechanization, which in turn could help spur long-term, 14 C  oupled payments require the production of subsidized products, while decoupled payments do not require the production of a specific product. Farmers can produce what they and the market want while receiving decoupled payments for compliance with good agricultural practices, for example, as in the European Union. 15 The OECD provides annual estimates of farm support in all OECD countries and selected non-OECD countries,  which have a large impact on world agricultural markets. These non-OECD countries are the following: Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Israel, Kazakhstan, the Philippines, Russia, South Africa, Ukraine, and Vietnam. 16 World Bank. 2011. Practitioners’ Toolkit for Agriculture Expenditure Review Analysis. Washington, D.C. 17 World Bank. 2019. Harvesting Prosperity: Technology and Productivity Growth in Agriculture. Washington, D.C. 18  World Bank. 2020. Public Grain Stocks in Uzbekistan: How Should They Look Like? Just-in-Time Policy Note, Washington, D.C.; and World Bank. 2012. Using Public Foodgrain Stocks to Enhance Food Security. Economic and Sector Work Report 71280-GLB, Washington, D.C. 19 OECD. 2021. Making Better Policies for Food Systems. Trade and Agriculture Directorate, Paris. 18 Functional Composition of Agricultural Public Expenditures Table 7. Anticipated impacts of public expenditures on long-term agricultural growth Public goods Impact on ag. growth Direct Farm Payments Payments based on outputs No Low to negative Payments based on variable input use No Low to negative Payments for fixed capital formation Conditional Yes Neutral to positive Payments for on-farm services Conditional Yes Neutral to positive Payments per hectare or animal (coupled) No Low to negative Payments per hectare or animal (decoupled) Conditional Yes Neutral to positive Payments based on non-commodity criteria No Low to negative General support services Agricultural knowledge and innovations Yes High Inspections and control Yes High to low Development and maintenance of infrastructure Yes High Marketing and promotion Yes High Cost of public stockholding Yes High to low Miscellaneous Yes High to low Source: World Bank assessment. climate-resilient growth if these payments are conditional on the use of climate-resilient construction materials or the adoption of good agricultural practices and they are not captured by a small group of large, mostly affluent farmers. Similarly, payments for on-farm services, for example vouchers to pay for advisory services provided by either public or private companies, could also stimulate agricultural growth. Payments per hectare or animal without commitment (decoupled) of production for specific commodities could also have a positive impact on agricultural growth as they provide income to farmers without dictating what to produce. Farmers make production decisions based on market opportunities, access to inputs, and knowledge and skills, among other factors. Receiving decoupled payments is often subject to meeting climate-smart farming practices. 41. The analysis of the functional composition and allocative efficiency of public expenditures in Uzbekistan is guided by the global experience presented in Table 7. In 2016, 40 percent of Uzbekistan’s agricultural public expenditures were used as DFPs. Most of these expenditures had a potentially low impact on long-term agricultural growth (Figure 2). In 2020, the share of DFPs in the total budget grew to 49 percent. Payments based on variable input use, mainly interest rate subsidies to cotton and wheat farmers and the irrigation electricity subsidy, accounted for 85 percent of all DFPs in 2020. The largest GSS’s expenditure item was development and maintenance of irrigation infrastructure. 19 Uzbekistan: Second Agricultural Public Expenditure Review Figure 2. Uzbekistan: Aggregated functional composition of agricultural public expenditures, OECD framework, 2016–2020 Source: World Bank estimates. In 2016 it accounted for 64 percent of the GSS budget, declining to 55 percent in 2020. Investments in AKIS, the most important program for agricultural productivity growth, declined from 13 percent of the GSS budget in 2016 to 6 percent in 2020. 42. While Uzbekistan’s agricultural public expenditures continue to be dominated by spending on irrigation, including electricity subsidies, and credit support to cotton and wheat growers (Table 8), the allocative efficiency of overall public expenditures has improved in several ways in recent years. Between 2016 and 2020, a number of positive shifts occurred: a. The interest rate subsidy for working capital to the growers of cotton and wheat increased every year between 2016 and 2019. But in 2020, it was reduced by more than half compared to 2019. This decrease was a result of the rising interest rate paid by the ultimate beneficiaries of the working capital (for more details, see Chapter 6). b. Direct payments to farmers for growing cotton on poor soils were discontinued in 2019, as part of the agricultural diversification strategy and the alignment of land to its most productive use. c. New direct payments to support fixed capital formation were introduced in 2019, including support for the adoption of drip irrigation for cotton, horticulture, and fodder production; investments in the viniculture sector; and land reclamation. Some of these funds have recently become accessible to small dekhan and household farms, which was not the case before. d. Public spending on animal health and other sanitary measures increased tenfold and on forestry activities threefold between 2016 and 2020. 20 Functional Composition of Agricultural Public Expenditures e. Public spending on agricultural research and development (R&D) doubled between 2016 and 2020, although it remains at a very low level. f. In 2020, the core staff of several public agricultural research institutes started receiving public salaries. More research institutes will be included in state financing over the coming years, changing the previous practice under which the research institutes had to conduct commercial activities to earn income to cover all their costs, including salaries, themselves. Table 8. Uzbekistan: Detailed functional composition of agricultural public expenditures, OECD framework, 2016–2020, billion Soums 2016 2017 2018 2019 2020 DIRECT FARM PAYMENTS 2,045 8,261 3,893 5,827 5,928 Payments based on variable input use 1,646 1,997 3,198 5,196 5,033 Interest rate subsidy for advance working 231 317 1,241 2,256 1,088 capital provided to cotton and wheat growers Subsidy for covering the cost of irrigation 1,415 1,680 1,834 2,687 3,500 pumping on main irrigation canals and systems Irrigation electricity subsidy for farmers (on- - - 123 254 445 farm pumping electricity costs) Payments for fixed capital formation 123 171 398 631 896 Interest rate subsidy for subsidized credit to - - 4 68 320 farmers and agribusinesses other than cotton and wheat Interest rate subsidy for credit to dekhan - - 23 43 13 farms Support for the import of breed livestock - - - - 57 Subsidy to buy and lease locally produced 123 171 372 233 97 agricultural machinery and equipment Mechanization subsidy for cotton harvesting - - - 6 58 in selected regions with labor deficits Co-financing of investments in drip irrigation - - - 120 218 Interest rate subsidy for financing drip - - - 52 60 irrigation for cotton and horticulture Investment support from the Viniculture Fund - - - 140 40 Payments per hectare or animal (coupled) 275 297 107 0 0 Payments for growing cotton on poor soils 275 297 107 - - Payments based on non-commodity criteria 0 5,797 191 0 0 Write-off of farm debts - 5,797 191 - - GENERAL SUPPORT SERVICES 3,133 5,063 5,004 7,149 6,205 (i) Agricultural knowledge and innovations 411 447 430 660 361 Agricultural education 370 401 379 587 269 21 Uzbekistan: Second Agricultural Public Expenditure Review 2016 2017 2018 2019 2020 Agricultural research 42 47 51 73 91 Agricultural advisory services 0 0 0 0 0 (ii) Inspections and controls 110 154 293 662 784 Crop protection (inc. locust control) 10 21 21 127 73 Plant quarantine - - 21 14 17 Animal health and other sanitary measures 86 108 212 464 612 Agricultural inspections (quality assurance of 15 25 40 57 82 seeds, fertilizers, machines) (iii) Development and maintenance of 2,015 2,192 3,080 4,453 3,462 infrastructure Capital investments in irrigation/drainage 1,329 1,381 2,149 3,002 2,098 O&M of irrigation/drainage infrastructure 686 810 932 1,452 1,364 (excluding electricity costs) (iv) Marketing and promotion* - - - - - (v) Cost of public stockholding 7 8 9 11 12 (vi) Miscellaneous 589 2,262 1,192 1,363 1,585 Accounting services to farmers - 33 38 92 77 Disaster risk management - - 100 120 120 Administrative costs of MoA and MoWR 25 33 61 118 116 Land cadaster and land monitoring 26 30 45 71 105 Hydrometeorology 24 28 32 39 62 Forestry activities 52 59 73 117 149 Financing of state-owned enterprises 28 32 24 21 16 Maintenance of MoA and MoWR housing 29 15 112 30 28 assets Write-off of debts of input suppliers - 1,558 - - - Subsidy to flour mills to compensate for - - - 372 39 increases in wheat prices Co-financing of donor-financed projects - 1 1 2 1 Support from the COVID Anti-Crisis Fund - - - - 244 Reimbursement of expenses for land - - - 151 173 reclamation Other expenses on agriculture 404 473 707 230 457 TOTAL BUDGET SUPPORT 5,178 13,324 8,897 12,976 12,133 TOTAL BUDGET SUPPORT, million US$ 2,796 9,272 3,316 12,060 8,477 Note: * The Export Promotion Agency of the Ministry of Investment and Foreign Trade finances some agriculture- related marketing and promotion expenditures. The World Bank could not obtain detailed information on these expenditures in time. Source: World Bank estimates. 22 Functional Composition of Agricultural Public Expenditures 43. Despite the above-mentioned improvements, Uzbekistan is still an outlier in terms of its functional composition of agricultural public expenditures vis-à-vis other countries. In relative terms, not necessarily in absolute terms (see Chapter 5), Uzbekistan’s spending is heavily concentrated in irrigation and low-interest credit for cotton and wheat farmers, which stimulates the use of variable inputs, compared to the averages for the group of OECD and non-OECD countries (Table 9). Uzbekistan also spends a significant share of its resources on other statutory expenses as “Other expenses on agriculture” in the Miscellaneous category in Table 8 without clearly defined objectives compared to other countries. Table 9. Comparison of Uzbekistan’s functional composition of agricultural public expenditures with other countries, in percent Uzbekistan OECD Non-OECD 2016 2020 2015- 2015-2017 2017 Direct farm payments 39.5 48.9 76.0 60.4 Payments based on outputs - - 2.2 4.4 Payments based on variable input use 31.8 42.0 6.4 6.0 Payments for fixed capital formation 2.4 7.7 6.0 17.4 Payments for on-farm services - - 4.4 3.2 Payments per hectare or animal (coupled) 5.3 0.0 25.7 23.7 Payments per hectare or animal (decoupled) - - 29.6 3.5 Payments based on non-commodity criteria - - 1.7 2.2 General support services 60.5 51.1 24.0 39.6 Agricultural knowledge and innovations 7.9 3.0 7.5 10.0 Inspections and control 2.1 6.5 2.3 2.2 Development and maintenance of 38.9 28.5 10.7 10.6 infrastructure Marketing and promotion - - 2.4 0.6 Cost of public stockholding 0.1 0.1 0.3 15.8 Miscellaneous 11.4 13.1 0.8 0.3 TOTAL 100.0 100.0 100.0 100.0 Source: World Bank estimates using data from the MoF, SSCU, and OECD. 44. Other countries place a different emphasis on the types of agricultural public expenditures compared to Uzbekistan. In OECD countries, farm support is dominated by decoupled payments per hectare or animal. Decoupled payments are less distortive than payments for stimulating input use and output increases or coupled production payments because they allow farmers to respond to market opportunities rather than respond to government plans. Decoupled payments can be considered income support that is 23 Uzbekistan: Second Agricultural Public Expenditure Review subject to meeting good agricultural and environmental practices. That is why many OECD countries switched to this kind of support instrument (Table 10). In addition, the OECD countries tend to support fixed capital formation and on-farm services, which are the two programs with potentially the largest positive impact on structural transformation. In the 1986–1988 period, when their farms were less capitalized, the share of these programs was 20 percent. In more recent years (2015–2017), as they became more capitalized, the share of these budget payments declined to 14 percent. 45. The structure of GSS in OECD countries has also evolved over time in response to the needs of farmers and the society. These countries increased spending on GSS programs as these investments empirically showed high rates of economic return. They boosted investments in agricultural R&D and advisory services (AKIS), the share of which grew from 18 percent of the GSS budget in 1986–1988 to 31 percent in 2015–2017. The development and maintenance of infrastructure remains important, accounting for 45 percent of the total GSS budget in 2015–2017, but it dropped from its peak in the 1990s. With consumers paying more attention to the quality, safety, and sustainability of farm and food products, the OECD countries invested more in inspections, control, marketing, and promotion, while phasing out investments in strategic food reserves, which became obsolete with the growing income of their population, open markets coupled with a secure availability of food on global markets, and changed focus in these countries from food security (which was associated with access to cereals, including through strategic reserves) to nutrition security. Table 10. OECD countries: Evolution of the structure of public expenditures, in percent, 1986–2017 1986–1988 1995–1997 2015–2017 Direct Farm Payments 100 100 100 Payments based on outputs 22 9 3 Payments based on variable input use 16 13 8 Payments for fixed capital formation 13 9 8 Payments for on-farm services 7 7 6 Payments per hectare or animal (coupled) 38 52 34 Payments per hectare or animal (decoupled) 1 7 39 Payments based on non-commodity criteria 2 4 2 General support services 100 100 100 Agricultural knowledge and innovations 18 18 31 Inspections and control 4 4 9 Development and maintenance of infrastructure 41 54 45 Marketing and promotion 9 12 10 Cost of public stockholding 23 8 1 Miscellaneous 5 4 4 Note: Red means a reduction in importance. Green means an increase in importance. Source: OECD. 24 Functional Composition of Agricultural Public Expenditures 46. In non-OECD countries, farm support instruments also evolved over time. In 2015–2017, they resembled the OECD countries in 1996–1998 by spending a lot on payments based on variable input use (Table 11). But they also spent a lot on promoting fixed capital formation to accelerate structural change and they moved from output subsidies to per hectare/animal coupled payments, which are less distortive. In addition, the non-OECD countries spent 41 percent of their total farm support on GSS programs in 2015–2017 (Table 9), and almost half of the GSS budget was spent on AKIS. In 1995–1997 this share was only 30 percent. This is a sign of the increased recognition of the role that AKIS plays in increasing agricultural productivity and strengthening agrifood value chains. Over time, more funds were also allocated for inspections and control, while infrastructure and ad hoc miscellaneous programs received less funding. The budget for the latter decreased from 16 percent of the GSS budget in 1995–1997 to 5 percent in 2015–2017. In this regard, the status of the miscellaneous (often ad hoc) budget in Uzbekistan looks like that in the non-OECD countries about 25 years ago (Table 9 and Table 11). Table 11. Non-OECD countries: Evolution of the structure of public expenditures, in percent, 1995–2017 1995–1997 2015–2017 Direct Farm Payments 100 100 Payments based on outputs 11 7 Payments based on variable input use 49 36 Payments for fixed capital formation 33 40 Payments for on-farm services 2 3 Payments per hectare or animal (coupled) 1 11 Payments per hectare or animal (decoupled) 0 0 Payments based on non-commodity criteria 4 2 General support services 100 100 Agricultural knowledge and innovations 30 47 Inspections and control 5 9 Development and maintenance of infrastructure 40 33 Marketing and promotion 1 2 Cost of public stockholding 7 5 Miscellaneous 16 5 Source: SSCU. 47. The next three chapters will analyze two of the largest agricultural public expenditures in Uzbekistan in 2020 from Table 8 and one growing expenditure. The first is the MoWR’s expenditures on irrigation water management. The second are expenditures from the SFAS under the MoF. The third is the credit support provided by the SFSE under the MoEPR and the Farmers Council. 25 5 Irrigation Water Management20 The expenditures on irrigation and drainage account for a large share of total agricultural public expenditures. The recurrent electricity expenses for water pumping absorb the most budget, crowding out the spending for maintaining and modernizing the existing irrigation and drainage infrastructure. Lowering the electricity bill in the longer run would require a mix of investments in gravity irrigation, modernization of water pumps, better operation and maintenance of the infrastructure, and capacity building of human capital. 48. The expenditures on irrigation water management account for a large share of total agricultural public expenditures. They constituted 39 percent of total agriculture- related expenditures in 2016, declining to 29 percent in 2020 (Table 8). Level of these expenditures as a share of GDP declined slightly from 1.4 percent to 1.2 percent during this period. Per hectare of irrigated land, they increased from $99 in 2017 to $156 in 2019 (Figure 3).21 O&M is the largest expenditure item, accounting for 75 percent of total expenditures in 2017 and 64 percent in 2019. During 2017–2019, the biggest increase Figure 3. Uzbekistan: Public expenditures on irrigation water management, $/ha of irrigated land, 2015–2019 Source: World Bank estimates. 20 T  his chapter provides a short summary based on World Bank. 2021. Uzbekistan: Second Public Expenditure Review. Chapter 5: Irrigation Water Management. Washington, D.C. 21 The comparisons make more sense after the unification of the exchange rate in 2017. 26 Irrigation Water Management was for capital expenditures in irrigation infrastructure (185 percent). Capital expenditures in drainage infrastructure grew by 59 percent, and O&M expenditures increased by 36 percent. 49. Yet, despite the recent increase in expenditures and their large relative value, a modernization of Uzbekistan’s irrigation and drainage infrastructure and their O&M is likely to require more expenditures during the next decade, not less. Without spending more in the medium term, it will be difficult to lower the long-term expenditure amounts for irrigation water management. The main reason for the high expenditures on irrigation water management is the high value of electricity costs in total costs that has resulted from the sector’s reliance on ageing water pumping stations. Irrigated agriculture in Uzbekistan is highly electricity-consuming, as 56 percent of irrigated land uses lift irrigation with electrical pumps. The MoWR’s pumping stations account for 16 percent of the country’s electricity use. In 2020, the total electricity cost amounted to 3.5 trillion Soums, from 1.4 trillion Soums in 2016 (Table 8), accounting for 70 percent of the annual O&M budget. The dominance of electricity expenditures crowded out spending in other O&M current and capital repairs, as well as capital investments in irrigation and drainage. 50. The economic efficiency of O&M expenditures is lower in the regions dominated by pump irrigation. The average return on O&M expenditures in four provinces with predominantly gravity irrigation schemes (Karakalpakstan, Khorezm, Samarkand, and Syrdarya) is five times higher than the return on O&M expenditures in four provinces with predominantly electrical pumping irrigation (Bukhara, Kashkadarya, Navoi, and Surkhandarya). The average O&M expenditures per 1,000 m3 of irrigation water with gravity is 6.2 times lower than that of electrical pumping irrigation. Therefore, increasing water use efficiency in irrigated crops in Uzbekistan is critical for the entire country, but especially in provinces with predominantly lift irrigation schemes. 51. Without electricity costs, the annual O&M budget is small in international comparison. It was only $30/ha in 2019, while the good practice requirement is $80/ha. The low rate of collection of water fees has added further pressure on O&M budgets. Actual collection rates by Water Consumers’ Associations (WCAs) from their members (individual farms) for water services are less than 40 percent on average, and in many cases less than 30 percent of the planned value.22 This amount may be enough to cover the low wages of WCA staff engaged in O&M activities, but it makes it hard to avoid further deterioration of irrigation and drainage infrastructure at the WCA level. While most farms can afford WCA fees, the low collection rate may be the result of low transparency, limited accountability to farmers, non-participatory governance of WCAs, and low profitability of cotton production.23 In all of the WCAs studied, irrigation fees below cost-recovery levels are lowest for the crops that use the most irrigation water—cotton and wheat, the main state-mandated crops. 22  o address the lack of WCA financing, from January 1, 2020, at least 1 percent of total bank loans for wheat T and 2 percent of total bank loans for cotton, are recommended to cover WCA water delivery services to farms (Cabinet of Ministers Resolution #982 of December 12, 2019). So far farmers have not been willing to allocate these funds to the WCAs. 23 In the Shakhrykhansay basin of Ferghana Valley, for example, the O&M cost of WCAs in 2017 of $6.6/ha was  only 1.0 percent of the total production costs of individual farmers and 0.2 percent of farm profits. In the Aksu Basin of the Kashkadarya region (Kitob, Shakhrisabz, and Yakkobod districts), the O&M cost of WCAs in 2017 of $10.2/ha was 1.2 percent of total cotton production costs and 0.3 percent of farm profits. See more details in Full Cost Recovery on Operation and Maintenance of Irrigation Systems in the Pilot Basins (2019). Project Report of the EU Programme on “Sustainable Management of Water Resources in Rural Areas of Uzbekistan”, Tashkent, p. 34-50. 27 Uzbekistan: Second Agricultural Public Expenditure Review 52. Subsidization of electricity costs for pumping and low water fees reduce incentives for farmers to adopt more water-efficient technologies. In 2019, the MoWR started a support program for drip irrigation in cotton production, complemented by similar programs to support drip irrigation in horticulture and fodder production (Table 8). In 2020, water-efficient technologies were adopted on about 50,000 ha, according to the MoWR, including 43,000 ha with drip irrigation. However, this is slightly more than 1 percent of irrigated land in the country and considered slow by the GoU. Chapter 10 analyzes the implementation efficiency of the support program for cotton drip irrigation and recommends a strategy for its sustainable scale up. 53. Capital investments in irrigation and drainage grew in recent years (Figure 3), but they continued to be crowded out by large electricity expenditures. This has led to chronic underinvesting in capital replacement and modernization of irrigation and drainage infrastructure. According to the MoWR, about 66 percent of main canals require anti-filtration cover, 75 percent of the existing drainage area requires reconstruction, 70 percent of drainage pumps require capital repairs, and 30 percent of irrigated lands require additional drainage. All these need significant investments to build new and rehabilitate existing infrastructure to maintain service quality over time. The World Bank estimated in the first AgPER that an annual investment of $400 million would be needed over the next 10 years to maintain water infrastructure at the current service level. Furthermore, at least the same annual amount would be required to modernize the system. For comparison, in 2020, total capital expenditures on irrigation and drainage were $200 million (Table 8). 54. Human capacities and knowledge management for sustainable water management also require strengthening. Such challenges include: (i) low proportion of water sector specialists with higher education; (ii) unavailability of training courses for the secondary specialized and workers’ education in the water sector; (iii) irrigation water workers’ wages are below the average wage level in Uzbekistan; (iv) inadequate funding for R&D, innovation, and training activities, including in water-efficient and water-saving technologies; and (v) lack of advancement in research on optimizing the energy regime with an irrigation regime of reservoirs and rivers in the Aral Sea Basin. 28 6 State Fund for Agricultural Support The recent reforms of the State Fund for Agricultural Support (SFAS) under MOF have been driven by the ongoing reforms in cotton and wheat subsectors. While the SFAS continues to finance the production of cotton and wheat, two strategic commodities, it has been bringing the interest rate for production loans closer to the CBU’s refinancing rate, expanding the loan portfolio to vegetable production, and supporting the leasing of agricultural machinery and equipment. The role of SFAS should continue to evolve along the transition of agriculture from the state-led to the market-based economy. 55. The second largest agricultural public expenditure presented in Table 8 and analyzed in this chapter is executed by the SFAS. In the first AgPER, which covered the period between 2016 and 2018, the SFAS’s main task was to provide finance to enable the state production quota system for cotton and wheat.24 It financed the working capital for production of these commodities at very low interest rates and the procurement of cotton and wheat outputs at administrative prices. In 2016, the volume of the advance working capital for the production of cotton and wheat was 2.2 trillion Soums. By 2018, this volume grew to 6.0 trillion Soums (Table 12). In addition, the SFAS spent 5.0 trillion Soums in 2016 to finance the procurement of cotton and wheat, and this volume increased to 7.7 trillion Soums in 2018. It also provided low-interest capital for leasing transactions with locally manufactured agricultural machinery. In 2016, the SFAS operated with a total of 7.3 trillion Soums, equal to 3.0 percent of GDP. By 2018 that volume increased to 16.1 trillion Soums, equal to 3.9 percent of GDP.25 Table 12. Uzbekistan: The SFAS’s finances, trillion Soums, 2016–2018 2016 2017 2018 Advance credit for production of cotton and wheat 2.2 2.9 6.0 Procurement of cotton and wheat 5.0 7.0 9.8 Financing leasing of locally produced ag machinery 0.1 0.2 0.2 Total funds 7.3 10.1 16.1 In % of GDP 3.0 3.3 3.9 Source: World Bank estimates based on MoF data. 24  orld Bank. 2019. Uzbekistan’s State Funds for Agricultural Support: Reform Roadmap. Just-in-Time Policy W Note, Washington, D.C. 25 The actual annual volume of the fund is probably smaller than reported in Table 12, because some of the repaid  working capital could be used to finance the procurement of cotton and wheat in the same year. 29 Uzbekistan: Second Agricultural Public Expenditure Review 56. The SFAS’s credit provision, procurement financing, and financing of leasing transactions for agricultural machinery are not the same as agricultural public expenditure. These funds cannot be just added to Table 8. This is because they are repaid by beneficiaries and they are used over many years by the SFAS as revolving funds. From time to time, the defaulted loans are written off, as was the case in 2017 and 2018 (Table 8). But in most cases, the funds are repaid to the SFAS and reinvested in the sector. However, the interest rate subsides are considered agricultural public expenditures. They are financed by taxpayers, not by credit beneficiaries. The SFAS loans are provided at below-market interest rates, providing direct benefits to farmers. In 2016, these benefits amounted to 217 billion Soums, increasing to 1.1 trillion Soums in 2018 (Table 8). 57. The estimate of the interest rate subsidy for cotton growers, as an example, is presented in Table 13.26 In 2016, cotton farmers received working capital, which financed about 60 percent of their production costs, at a 3 percent annual interest rate. The loan had to be repaid after 8 months. The 3 percent interest rate consisted of 2 percent charged by the SFAS and 1 percent charged by Agrobank, which solely provided subloans. The prevailing market interest rate for short-term capital at that time was 18.7 percent. The resulting interest rate subsidy was 15.7 percent, which translated to 158 billion Soums. By 2018, this subsidy grew to 1.11 trillion Soums due to the increase in the market interest rate, the length of credit use (from 8 to 14 months), and cotton production costs, which led to the correspondent increase in the volume of the required advance working capital. Table 13. Uzbekistan: The SFAS’s interest rate subsidy for cotton, 2016–2018 2016 2017 2018 Advance working capital provided by SFAS, trillion Soums 1.51 2.17 5.01 SFAS’s advance interest rate (inc. Agrobank margin), % per 3.0 3.0 3.0 year CBU refinancing rate, % per year 9.0 14.0 14.0 Prevailing market interest rate, % per year 18.7 19.4 22.0 Maximum terms of use of the advance credit, months 8 8 14 Interest rate subsidy estimate, billion Soums 158 237 1,111 Source: World Bank estimates based on MoF data. 58. In recent years, the SFAS has begun to implement reforms that aim to bring agricultural finance closer to market conditions, support agricultural diversification, and phase out state procurement financing.27 By 2021, the SFAS had achieved a lot, including the creation of the strong foundation for future reforms underpinned by the February 2021 President’s Decree.28 In 2019, the interest rate for advance working capital was increased from 3 percent to 5 percent, growing further to 10 percent for cotton production loans 26 The calculations for wheat follow the same logic. 27  hese reforms largely followed the recommendations in World Bank. 2019. Uzbekistan’s State Funds for T Agricultural Support: Reform Roadmap. Just-in-Time Policy Note, Washington, D.C. 28 Decree of the President of the Republic of Uzbekistan No. 6179 “About Improvement of the Operation of the  State Fund for Agricultural Support under the Ministry of Finance” dated February 26, 2021. 30 State Fund for Agricultural Support and 12 percent for wheat production loans in 2020 (Figure 4). The state procurement of cotton was eliminated in 2020 and the volume of state wheat procurement, which is due to be phased out in 2021, declined from 3.5 million tons in 2019 to 3.2 million tons in 2020. Note that in all previous years since 2016 the volume of state wheat procurement increased. Moreover, in 2019 the SFAS paid 372 billion Soums to the state-owned flour mills so they could moderately increase the price of flour after doubling the administrative prices of wheat under the state production quota system. In 2020, that subsidy declined to 23 billion Soums, and it is planned to be discontinued in 2022. As a result of all these changes, the SFAS’s total outlays were 26 percent lower in 2020 than in 2019 (Table 14). Figure 4. Uzbekistan: Interest rates for working capital loans from the SFAS to cotton and wheat growers, % per year, 2016–2020 Source: World Bank estimates based on MoF data. Table 14. Uzbekistan: The SFAS’s finances, trillion Soms, 2016–2020 2016 2017 2018 2019 2020 Advance credit to cotton growers 1.5 2.2 5.0 7.1 8.0 Advance credit to wheat growers 0.7 0.7 1.0 3.6 3.6 Total advance credit 2.2 2.9 6.0 10.7 11.6 Procurement of cotton 3.6 5.5 7.4 6.5 0.0 Procurement of wheat 1.4 1.6 2.3 5.1 4.8 Total procurement 5.0 7.0 9.8 11.6 4.8 Financing leasing of locally produced ag machinery 0.1 0.2 0.2 0.2 0.1 Total funds 7.3 10.1 16.1 22.5 16.6 Source: SSCU. 31 Uzbekistan: Second Agricultural Public Expenditure Review 59. The February 2021 Decree of the President of Uzbekistan outlined further SFAS reforms and measures, which would support agricultural growth. Beginning in 2022, the Decree moves the starting month for cotton farmers to get advance working capital from January-February to November, giving farmers finance for land preparation and initial fertilizer applications. Furthermore, the Decree adds vegetables to a list of eligible commodities in the SFAS’s working capital portfolio. Starting from 2021, farmers can request advance working capital for the production of vegetables, which they can use for nine months, in an amount of up to 40 percent of their production costs at the CBU refinancing rate. Starting from 2022, the SFAS will also compensate the interest rate difference between the prevailing market and the CBU refinancing rate to the state and commercial banks, which provide commercial loans for vegetable production. And lastly, the Decree authorizes the SFAS to buy and sell wheat for state needs at market prices through the commodity exchange. This is a significant departure from the approach that prevailed until 2021 when the SFAS could finance the procurement of wheat only at administrative (below market) prices. Table 15 presents a summary of the key changes in the SFAS between 2016 and 2021, while Chapter 10 presents the outlook for agricultural public expenditures by 2025, including those executed by the SFAS. Table 15. Uzbekistan: Summary of key changes in the SFAS, 2016–2021 2016-2017 2020 2021-2022 Note: The changes are highlighted in red. Source: World Bank estimates. 32 7 Other Providers of Agricultural Credit Availability and affordability of agricultural finance have increased in recent years through the programs complementary to the SFAS, which in the past was the only formal source of agricultural finance. Despite the recent increase, the supply of agricultural loans has remained below the needs in terms of volume and diversity of financial services. As the GoU further fills the gap, the complementary programs such as general support services would also be necessary to increase the rates of economic return from improved access to finance. 60. While the SFAS overshadows other providers of credit for agriculture, they (for example, the SFES and the Farmers Council) are worth mentioning for several reasons. First, they largely support investments in fixed capital formation rather than in working capital for variable input use as the SFAS does, which is an improvement. Second, they are growing in size, which is likely to continue in the future. Third, they are available not only to larger farms, but also to small dehkan and household farms. And fourth, they are indicative of the GoU’s strong preference for using subsidized credit over other farm support instruments, such as matching grants or GSS. Therefore, they are presented as a separate chapter. 61. Since 2019 the nominal value of the SFES-financed loans through commercial banks to support entrepreneurship development more than tripled. They increased from 2.7 trillion Soums in January 2019 to 8.7 trillion Soums in March 2021 (Table 16). While still relatively a small part of the total bank loan portfolio, their share increased from 1.6 percent to 3.1 percent, respectively. Together with microloans for individuals and microcredits for legal entities, they grew from 6.0 percent of total loans in January 2019 to 8.8 percent of total loans in March 2021. Credit/loans for developing entrepreneurships were also supported by development partners’ projects (see Chapter 8). 62. The SFES was established in 2018 to support entrepreneurship by improving access to finance for small and medium enterprises.29 It pays an interest rate subsidy that is calculated as the difference between the interest charged for these loans (market interest rates) and the CBU’s refinancing rate, and it provides partial credit guarantees. Most of the SFES support goes to agriculture, supported by extensive legislation (Annex 3). In 2020, it accounted for 40 percent of all loans, for which interest rate subsidies were paid, and 64 percent of paid subsidies (Table 17). The subsidy estimate included in Table 8 was 413 billion Soums in 2020, increasing more than fourfold from 89 billion Soums in 2018. Other SFES support, presented in Table 17, is not considered public expenditure per se as discussed earlier. 29 R  esolution of the President of the Republic of Uzbekistan No. 3225 “On Establishment of the State Fund for Supporting Entrepreneurship” dated August 17, 2018. 33 Uzbekistan: Second Agricultural Public Expenditure Review Table 16. Uzbekistan: Commercial loans, 2019–2021 Jan. 1, June 1, March 1, March 1, 2019 2019 2020 2021 Loans to individuals 24,247 30,936 42,158 55,338 Mortgage loans 13,805 15,306 21,880 28,970 Consumer loans 7,025 8,454 10,735 11,938 Microloans 928 2,417 3,597 5,723 Loans for developing entrepreneurship 2,669 4,759 5,946 8,707 Loans to legal entities 142,964 173,019 173,656 224,876 Loans to state-owned enterprises 133,509 159,866 158,337 206,862 Leasing and factoring 2,254 2,165 2,155 2,090 Interbank loans 103 1,388 1,594 1,860 Microcredits 6,462 8,617 9,089 10,303 Syndicated loans 636 983 2,521 3,761 Total loans, billion Soums 167,391 203,955 215,814 280,214 % of loans for developing entrepreneurship in 1.6 2.3 2.8 3.1 total loans Source: CBU. Table 17. Uzbekistan: The SFES’s financing, 2018–2021 2018 2019 2020 2021 (forecast) Total commitment to pay interest rate 147.7 [60] 854.6 [70] 2,821.4 [64] subsidy [% for agriculture and irrigation], billion Soums Annual payment of interest rate subsidy 6.2 [60] 97.2 [70] 497.9 [64] [% for agriculture and irrigation], billion Soums Number of loans for which subsidy was 1,273 [30] 3,364 [82] 14,902 [40] paid [% for agriculture and irrigation] Annual interest rate subsidy for loans to 21.4 92.2 198.0 install drip irrigation, billion Soums Number of recipients of interest rate 269 932 3,199 subsidy for drip irrigation Value of partial credit guarantees, billion 343 407 2,096 1,500 Soums Number of beneficiaries of partial credit 435 536 2,853 5,000 guarantees Source: World Bank estimates based on the data provided by the MoEPR. 34 Other Providers of Agricultural Credit 63. The number of loan recipients in agriculture and irrigation is projected to double in 2021 compared to 2020. Most of these beneficiaries invest in horticulture and livestock fixed capital formation such as greenhouses, cold storage, processing and handling, intensive orchards, cattle, and livestock equipment, similarly to investments supported by credit lines from development partners (see Chapter 8). The value of the SFES’s partial credit guarantees and SFES outreach also rose, from 435 beneficiaries and 343 billion Soums in 2018 to the projected 5,000 beneficiaries and 1.5 trillion Soums in 2021. 64. The Farmers Council is a much smaller player in the area of agricultural financing. But it is an important one for supporting small dehkan farms, who often cannot obtain other financing due to their lack of collateral and small size. Similar to the SFES, it began to provide subsidized credit in 2018, complementing it with technical assistance and service provision to subloan beneficiaries. The low interest rate of 7 percent, compared to the market rate of 22 percent in 2018 and 24 percent in 2019, stimulated the demand for credit, resulting in an increase in the interest rate subsidy from 22.5 billion Soums in 2018 to 42.5 billion Soums in 2o19 (Table 18). But in 2020, the interest rate for all credit provided by public institutions was adjusted upwards, equalizing it with the CBU refinancing rate, which was set at 14 percent in 2020. The resulting demand for credit has dropped, along with the interest rate subsidy. In 2020 the interest rate subsidy was estimated to reach 13.2 billion Soums. The Farmers Council also administers agriculture-related subsidies and microloans financed from the State Fund for Employment Facilitation. Table 18. Uzbekistan: The Farmers Council’s financing, 2018–2020 2018 2019 2020 Loans provided (inc. revolving), billion Soums 300 250 220 Loan interest rate, % per year 7.0 7.0 14.0 Interest rate subsidy, % (compared with market) 15.0 17.0 6.0 Estimate of interest rate subsidy, billion Soums 22.5 42.5 13.2 Source: World Bank estimates. 65. Despite the recent increase, the agriculture sector continues to receive fewer bank loans than its share in GDP suggests. In 2020, the sector generated 27 percent of GDP but received only 11 percent of bank loans (Figure 5). Industry, transport, storage, and ICT received a larger share of bank loans than their shares in GDP. This shows an opportunity and the need for further increases in agricultural sector financing. 35 Uzbekistan: Second Agricultural Public Expenditure Review Figure 5. Uzbekistan: Shares of main economic sectors in GDP and bank loans, percent of total, 2020 Source: World Bank estimates using CBU data. 36 8 Development Partners Development partners add about 10 percent to Uzbekistan’s agricultural public expenditures, but their role is larger for selected programs, on which they focus. Most projects financed by the development partners support agricultural diversification through development of horticulture and livestock subsectors, and more than half of their resources during 2015-2020 was used for credit lines. A more diverse expenditure mix in the donor-financed projects during the next five years could create a foundation for more resilient agricultural growth and institutional ownership; yet it creates new challenges and tasks for public institutions to be more involved in project implementation and planning, which in turn could require organizational changes in the public institutions to perform these duties effectively. 66. Prior to the launch of economic reforms in 2017, Uzbekistan received limited amounts of official development assistance (ODA). Since then, however, ODA volumes have increased, with a large share of this increase going to the agriculture sector. In 2018, 22 percent of all ODA received by Uzbekistan went to this sector, a level far above the global average of 5 percent.30 During the period from 2015 to 2020, the cumulative ODA for agriculture is estimated to have amounted to $1.9 billion, and a similar amount has already been committed for 2021–2025 (Table 20). Ongoing and committed ODA during the period from 2015 to 203o is estimated to reach $4 billion. 67. ODA for agriculture in Uzbekistan is represented by many development partners. The largest volumes are provided by two multilateral financial institutions, the World Bank Group ($1.9 billion) and the Asian Development Bank (ADB) ($900 million). Bilateral partners and governments provided another $1 billion, including $161 million from the European Union, $170 million from French AFD, $282 million from the European Investment Bank, and $339 million from Japanese JICA and the Japanese government (Table 19). Details for each ODA project as of December 2020 are presented in Annex 2. 68. ODA has mainly financed investments in the horticulture and livestock sectors and in irrigation/drainage infrastructure and management. During the 2015–2020 period, one half of the ODA for agriculture was used for horticulture sector development (Table 20). The World Bank-financed and the European Union-co-financed Horticulture Development Project ($671 million) accounted for the lion’s share of that support (Annex 2). It was followed by irrigation and drainage projects (29 percent of total), livestock sector development projects (15 percent), and other projects (7 percent). The annual average ODA spending during 2015–2020 was estimated at $322 million. The slightly higher annual 30 Kovach, O. 2020. External Finance for Rural Development. Country Case Study: Uzbekistan. ODI, London. 37 Uzbekistan: Second Agricultural Public Expenditure Review Table 19. Uzbekistan: Agricultural development partners’ projects, 2015–2030 Million US$ % of total Multilateral financial institutions 3,000 74.5 ADB 914 22.7 International Fund for Agricultural Development 70 1.7 Islamic Development Bank 90 2.2 WBG 1,926 47.8 Bilateral partners and governments 1,029 25.5 AFD 170 4.2 FAO 23 0.6 European Investment Bank 282 7.0 EU 161 4.0 German Government 16 0.4 JICA/Japanese Government 339 8.4 Korean Government 3 0.1 Turkish Government 3 0.1 USAID 34 0.8 TOTAL 4,028 100.0 Source: World Bank estimates based on the database of the EU Agricultural Budget Support Project. Table 20. Uzbekistan: Functional composition of the donor-supported projects, million US$, 2015–2030 2015- 2021- 2026- Av. 2015- 2020 2025 2030 2030 Irrigation and drainage projects 561 466 110 1,138 Horticulture sector development projects 948 519 - 1,467 Livestock sector development projects 289 222 - 511 Other projects 132 697 83 912 Total for the period 1,930 1,904 194 4,028 Total per year 322 381 39 252 Source: World Bank estimates based on the database of the EU Agricultural Budget Support Project. volumes of ODA for agriculture are already committed by the development partners for 2021–2025, with a total amount of $1.9 billion. The forward-looking breakdown of ODA financing is more diverse. Horticulture development and irrigation/drainage investments are projected to account for 51 percent of total ODA, down from 78 percent in 2015–2020. The share of livestock projects is expected to stay about the same as before, at 12 percent 38 Development Partners of total ODA. Yet the share of projects, supporting a wide range of agricultural subsectors and public institutions, is expected to grow to 37 percent, supported by the World Bank- financed Agriculture Modernization Project (AMP, $500 million) and the European Union Agricultural Budget Support Project (€40 million). 69. The majority of ODA for agriculture has been in the form of credit/loans for the recipient GoU, most of which financed credit lines implemented through participating financial institutions (such as state and private commercial banks). Credit/ loans accounted for 94 percent of total ODA financing during the 2015–2020 period and they will maintain the same share in the next 10 years (Table 21). The size of the average agricultural project in Uzbekistan financed through a credit/loan is relatively large because they often financed credit lines (56 percent of total ODA volume). These credit lines are not public expenditures per se as they must be repaid by subloan beneficiaries, not by taxpayers.31 The actual agricultural public expenditures financed by development partners (and to be repaid by taxpayers) were relatively small. During the 2015–2020 period they averaged $141 million per year and are projected to increase to $242 million per year during the 2021–2025 period. This means that they were only about 10 percent of the value of agricultural public expenditures financed by the GoU during the 2015–2020 period (recall Table 2). Due to their small volume and a lack of accessible data, their functional composition is not analyzed in this report. Chapter 10, however, presents an outlook for agricultural public expenditures during the 2021–2025 period, which includes the ODA for agriculture, showing the expected shift from predominantly credit lines accompanied by small capacity building investments to a more balanced mix of credit lines and larger investments to strengthen the capacity of agricultural public institutions underpinned by the Agricultural Strategy. Table 21. Uzbekistan: Credit lines vs. other expenditures in donor-supported projects, million US$, 2015–2030 2015–2020 2021– 2026– 2015– 2025 2030 2030 Type of donor financing: Credit/Loans 1,823 1,765 192 3,799 Grants 108 139 2 249 Credit lines 1,081 694 0 1,776 % of credit line in total financing 56 36 0 44 Donor financing less credit lines 849 1,210 194 2,252 Per year 141 242 39 141 Source: World Bank estimates based on the database of the EU Agricultural Budget Support Project. 31  axpayers would repay these loans only in case of defaults/non-performing loans, which so far have been T relatively low in ODA projects. 39 Uzbekistan: Second Agricultural Public Expenditure Review 70. A more diverse expenditure mix in the donor-financed projects during the next five years will create the foundation for more resilient agricultural growth; yet it creates demand and new challenges requiring greater public institution involvement in project implementation and for strategic planning on the sustainability of financing. The credit line projects are being implemented through participating financial institutions, in which the role of public institutions is largely limited to monitoring and evaluating the compliance of these banks and their subloans with the development partners’ requirements and legal agreements. The roles and responsibilities of public institutions may vary with regard to the implementation of the donor-financed projects, which finance public investments. A project that finances investments in the regional AKIS centers, for example, requires the hands-on involvement of the staff of the MoA and other public institutions at the local and central levels, and strong collaboration among them. It also requires strategic budget planning for the MoA and MoF to ensure the sustainability of investments, and for example, that the assets and knowledge created by donor-financed projects are effectively used and maintained over time. This requires the inclusion of the regional AKIS centers’ recurrent operational budget in the future local and central government budgets. These are the evolving new considerations/tasks for the GoU related to the effective use of agricultural public expenditures in Uzbekistan. 40 9 Market Price Support Despite the recent improvements, the GoU continues to tax farmers through the state purchase of cotton and wheat at the administrative prices, which are below the market level. In 2016- 2018, Uzbekistan’s farmers were used to lose 1.3 percent of GDP annually. In 2019-2020, the average loss declined to 0.4 percent of GDP, but the price taxation has not disappeared. As a result, this practice continues to reduce the impact of agricultural public expenditures on economic growth and farm incomes and stifles innovations. The GoU should urgently eliminate this practice by liberalizing cotton and wheat production and trade. 71. As mentioned in Chapter 1 and elaborated in detail in the first AgPER, public expenditures on agriculture do not guarantee strong impacts unless they are supported by market-friendly agricultural policies. This corresponds to making sure that farmgate prices are determined by the market, not the government. Farmgate prices below market levels are especially damaging as they decrease incentives for farmers to increase agricultural output over the long run. That is why very few countries left that still ‘tax’ their farmers through policy actions that artificially lower farmgate prices below the prevailing market prices. Among the countries monitored by the OECD, only Argentina and India (and less significantly Vietnam) still use agricultural and trade policies that lead to domestic farmgate prices that are lower than the reference export or import parity prices, thereby resulting in negative Market Price Support (MPS). The countries with negative MPS are depicted in Figure 6 with red bars. In a large number of countries, from New Zealand to Brazil, the MPS is zero meaning that domestic farmgate prices correspond to market level prices. In many countries, farmers are supported and have positive MPS (blue bars in Figure 6), via high import tariffs, other import restrictions, and high administrative farm prices (mainly China). This positive market price support is also a form of subsidy, but a subsidy that is paid by consumers (who face higher food prices) to farmers, instead of the taxpayers paying famers through the public expenditures. Besides hurting consumers, this indirect subsidy also has long term consequences as the artificially higher prices encourage farmers to overproduce the supported commodities and over-use inputs with potentially damaging long-term consequences on productivity through natural resource degradation, overuse of water, and excess environmental emissions. 72. In the 2016 to 2018 period, when the first AgPER was conducted, Uzbekistan was on the list of countries with negative MPS. During that time, the GoU set up administrative procurement farmgate prices for cotton and wheat, which were much below market level.32 It significantly undermined the impact of public expenditures provided to farmers. 32 The prices of other agricultural products did not deviate from market price levels. 41 Uzbekistan: Second Agricultural Public Expenditure Review Figure 6. Agricultural market price support: selected countries, 2017–2019 Source: OECD.* * OECD. 2021. Making Better Policies for Food Systems. Trade and Agriculture Directorate, Paris. 73. Has the situation in Uzbekistan changed in recent years? The taxation of cotton farmgate prices in Uzbekistan declined in recent years. The negative cotton MPS presented in Table 22 declined from an average of 2.5 trillion Soums in 2016–2018 to an average of 1.2 trillion Soums in 2019–2020. Per hectare of grown cotton, the rate of price taxation was halved, from 2.2 million Soums in 2016–2018 to 1.2 million Soums in 2019– 2020. In 2016–2018, the state farmgate price was much below the estimated export parity price.33 In 2019, the last year the state farmgate price was announced, was closest to the Table 22. Uzbekistan: Cotton market price support, 2016–2020 2016 2017 2018 2019 2020 State farmgate price, ‘000 Soums/ton 1,218 1,880 3,250 4,300 4,550 Estimated reference market farmgate price, 1,621 2,800 4,887 4,497 5,221 ‘000 Soums/ton* Price difference, ‘000 Soums/ton 403 920 1,627 197 671 State price as % of the market reference price 75 67 67 96 87 Raw cotton production, ‘000 tons 2,959 2,854 2,286 2,692 2,900** MSP, billion Soums -1,192 -2,626 -3,719 -530 -1,946 MSP, million US$ -402 -511 -461 -59 -188 Note: * Average prices for October-December. ** WB estimates using USDA reports. Source: World Bank estimates using data from the MoF and SSCU. 33 T  he export parity price estimate is based on cotton lint prices at the New York Cotton Exchange and the conversion of this price into the farmgate price for raw cotton in Uzbekistan using average prices, quality adjustments, ginning outturns for the industry, and adjustment for transport and transaction costs. The average conversion factor between the farmgate price in Uzbekistan and the New York lint price is 0.35. See more details in World Bank and International Cotton Advisory Committee. 2020. Cotton Pricing after 2020 Cotton Sector Reform in Uzbekistan. Policy Note for Official Use. Washington, D.C. 42 Market Price Support export parity level, with a price gap of 5 percent. But in 2020, when the state production quota was removed and the minimum farmgate price was introduced, the price gap increased to 15 percent. In summary, cotton farmgate prices in 2019–2020 seem to have been subject to a lower level of taxation than in 2016–2018, but cotton taxation has not yet disappeared, and continues to reduce the impact of agricultural public expenditures on agricultural developmental outcomes such as production, export, jobs, and incomes. 74. The taxation of wheat prices in Uzbekistan almost disappeared in 2019 but reappeared again in 2020. Similarly to cotton, during 2016–2018, state farmgate prices were set below market levels, resulting in a negative MPS, which reached 1.8 trillion Soums in 2018 (Table 23).34 In contrast to cotton, however, the state only procures one half of the country’s wheat output; the remaining part is sold freely at market prices, which serve as reference market prices.35 The size and dynamics of wheat taxation were about the same as for cotton. In 2019, the increase in the state farmgate price for wheat and the increase in wheat production36 resulted in an almost full convergence of administrative and market wheat prices. That was the year during the review period with a negative MPS below $100 million. In 2020, however, a significant divergence in prices returned. The state farmgate price was 36 percent lower than the market farmgate price. As a result, in 2020, the negative MPS reached 1.7 trillion Soums or 1.2 million Soums per ha of the wheat growing area. The increase in the negative MPS in 2020 was the GoU’s response to the uncertainty created by the COVID-19 pandemic, which triggered hoarding and panic buying of wheat and export restrictions in Kazakhstan, the sole exporter of wheat and flour to Uzbekistan. The GoU increased the wheat procurement volume from 1.7 million tons (planned before COVID-19) to 3.1 million tons at the moderately higher procurement price. Table 23. Uzbekistan: Wheat market price support, 2016–2020 2016 2017 2018 2019 2020 State farmgate price, ‘000 Soums/ton 504 550 750 1,450 1,550 Estimated reference market farmgate price, ‘000 Soums/ton* 934 1,051 1,350 1,571 2,102 Price difference, ‘000 Soums/ton 430 501 600 121 552 State price as % of the market reference price 54 52 56 92 74 Wheat state procurement, ‘000 tons 2,761 2,850 3,102 3,200 3,100 MSP, billion Soums -1,190 -1,427 -1,862 -386 -1,710 MSP, million US$ -401 -278 -231 -43 -165 Note: *Due to the absence of statistics of market farmgate prices, the reference market farmgate price is assumed at 70 percent of the retail national average market price. Source: World Bank estimates using data from the MoF and SSCU. 34 Wheat export is prohibited, that is why the cheaper wheat is available only for domestic consumers. 35 More appropriate reference market price would be an import parity price derived from the prices of Kazakh  wheat. Uzbekistan annually imports between 2 and 3 million tons of wheat and flour (in wheat equivalent) from Kazakhstan. Yet, a lack of data on transportation and transaction costs and on wheat quality adjustment between Kazakh and Uzbek wheat make it difficult to make a precise estimate of the import parity price. 36 In 2018, Uzbekistan’s total wheat production was 5.4 million tons, according to the SSCU. In 2019 it grew to 6.1  million tons, which is 13 percent more than in 2018. 43 Uzbekistan: Second Agricultural Public Expenditure Review 75. The negative MPS canceled out a large part of DFPs and total agricultural public expenditures. Total farm support, which included MPS and agricultural public expenditures, was much smaller during the review period (Table 24) than agricultural public expenditures alone (Table 8). In 2016 and 2018, the Producer Support Estimate, which shows the ratio of direct assistance provided to farmers via MPS and DFPs in the value of gross agricultural output, turned negative. Overall, the negative MPS washed out an average of 2 percent of the gross agricultural output every year during 2016–2020. The actual value of agricultural public expenditures was very much reduced by the continued taxation of cotton and wheat prices, even if it declined compared to 2016–2018 (Figure 7). Table 24. Uzbekistan: Total farm support, 2016–2020 2016 2017 2018 2019 2020 MPS -2,382 -4,053 -5,582 -916 -3,656 Direct farm support 2,045 8,261 3,893 5,827 5,928 General support services 3,133 5,063 5,004 7,149 6,204 Total farm support, billion Soums 2,796 9,271 3,316 12,060 12,133 Total farm support, million US$ 942 1,804 411 1,337 817 % of Producer Support Estimate (PSE) -0.3 (1.8) 2.8 (5.6) -0.9 (2.1) 2.3 (2.7) 0.9 (2.4) Note: PSE in (x) shows the PSE without MPS. Source: World Bank estimates using data from the MoF and SSCU. Figure 7. Uzbekistan: Farm support with and without price taxation, 2016–2020 Source: World Bank estimates using data from the MoF and SSCU. 44 Market Price Support 76. The task remains for the GoU to eliminate the negative MPS. This could be achieved by: (i) sparking more competition among the organizers of cotton-textile clusters to ensure a market-driven formation of cotton farmgate prices;37 and (ii) eliminating the state quota system for wheat and moving to the procurement of wheat for public food stocks at market prices.38 Without these actions, the value for money of agricultural public expenditures and their impact on agricultural outcomes will continue to be suboptimal. 37 S  ee more in World Bank Group. 2021. Cotton-Textile Clusters in Uzbekistan: What is Next? Just-in-Time Power Point Presentation, Washington, D.C. 38 See more in World Bank. 2019. Reforming the Wheat Sector. Just-in-Time Policy Note, Washington, D.C.; and  World Bank. 2020. Public Grain Stocks in Uzbekistan: How Should They Look Like? Just-in-Time Policy Note, Washington, D.C. 45 10 Outlook for Agricultural Public Expenditures As the agriculture sector is to be included in the Medium-Term Expenditure Framework (MTEF), the 2021-2025 outlook for agricultural public expenditures offers an example of the sectoral MTEF, which aligns public expenditures with the Agricultural Strategy’s priorities and accounts for the firm commitments in both GoU and the donor investment pipelines. The proposed MTEF brings together capital and recurrent expenditures, as well as the GoU and donor funds, presenting a comprehensive and integrated picture of the projected agricultural public expenditures in Uzbekistan. 77. This chapter presents the World Bank’s outlook for Uzbekistan’s agricultural public expenditures. Using 2020 as a baseline, this outlook is for the next five years (2021–2025). The main assumptions are derived from Annex 4 of the Agricultural Strategy (see Annex 1 of this report). It uses the estimate of the firm commitment of development partners’ projects and the assumption that the GoU-financed expenditures will be based on the 2020 budget with annual growth of expenditures ranging between 5 and 20 percent depending on the expenditure. This is not an official outlook, but rather an attempt by the World Bank to make a projection within the MTEF using the information available at the time of the review on the GoU and the Agricultural Strategy’s priorities. The MoA and other agricultural public institutions described in Chapter 3 are expected to adopt the MTEF approach for budget planning in the near future, so they can build on this projection. 78. Currently, the budget requests that Uzbekistan’s agricultural public institutions submit to the MoF are not detailed. They include the previous year’s budget and the requested budget for the new year. Information on the objectives of the program/measure, past achievements/impacts, and anticipated end targets, among other indicators, is not included. This undermines the ability of the MoF to make informed decisions on the prioritization of expenditures. Annex 4 shows what Ukraine’s Ministry of Agriculture includes in its sector budget requests and its MTEF projections, which could serve as an example for Uzbekistan to follow. 79. Uzbekistan’s agricultural public expenditures are projected to increase by 20 percent, from $1.35 billion in 2020 to $1.62 billion by the end of 2025.39 If the negative MPS for cotton and wheat is abolished during the 2021¬–2025 period, the effective farm 39 T  he outlook is presented in dollars to remove the risk of exchange rate fluctuations, which is difficult to predict at time of the review. The exchange rate for 2021–2025 is assumed to equal that in 2020—10,375 Soums/$. 46 Outlook for Agricultural Public Expenditures support would increase by 63 percent, from $1.00 billion in 2020 to $1.62 billion in 2021¬– 2025 (Table 25). The DFPs are projected to increase by 33 percent, while the GSS budget is expected to increase by 11 percent. Table 25. Uzbekistan: Outlook for agricultural public expenditures, million US$, 2020–2025 2020 2025 Change, Assumption % of increase in GoU funds, % MARKET PRICE SUPPORT -352 0 DIRECT FARM PAYMENTS 571 761 +33 Payments based on outputs 0 61 Livestock output subsidy 0 61 Payments based on variable input use 485 504 +4 Interest rate subsidy for advance working 105 113 +7 capital provided to cotton and wheat growers Interest rate subsidy for advance working 0 45 capital provided to vegetable growers Electricity subsidy for irrigation pumping 337 305 -10 -2 (off-farm) Irrigation electricity subsidy for farmers (on- 43 41 -4 -2 farm) Payments for fixed capital formation 86 196 +127 Interest rate subsidy for subsidized credit for 31 77 +149 +20 capital formation (horticulture, livestock) Interest rate subsidy for credit to dekhan 1 2 +28 +5 farms Support for import of livestock breeds 5 8 +46 Subsidy to buy and lease locally produced 9 15 +61 +10 agricultural machinery and equipment Mechanization subsidy for cotton harvesting 6 13 +128 +10 in selected regions with labor deficit Co-financing of investments in drip irrigation 21 52 +149 +20 Interest rate subsidy for financing drip 9 22 +149 +20 irrigation for cotton and horticulture Investment support from the Viniculture Fund 4 8 +101 +15 GENERAL SUPPORT SERVICES 778 860 +11 (i) Agricultural knowledge and innovations 72 85 +19 Agricultural education 26 33 +28 +5 Agricultural research 12 44 +273 +5 47 Uzbekistan: Second Agricultural Public Expenditure Review 2020 2025 Change, Assumption % of increase in GoU funds, % Agricultural advisory services 8 8 +3 US1m (ii) Inspections and controls 76 100 +31 Crop protection (inc. locust control) 7 11 +56 +5 Plant quarantine 2 3 +72 +5 Animal health and other sanitary measures 59 76 +28 +5 Agricultural inspections (seed, fertilizer, 8 10 +28 +5 machinery testing/quality assurance) (iii) Development and maintenance of 465 534 +15 infrastructure Capital investments in irrigation/drainage 333 306 -8 +5 O&M of irrigation/drainage infrastructure 131 212 +61 +10 Agri-logistical centers 0 16 - (iv) Cost of public stockholding 1 2 +61 +10 (v) Miscellaneous 164 142 -14 Other public programs (land, disaster risk 62 76 +23 +10 management, hydrometeorology, forestry) Subsidy to flour mills for compensating 4 0 -400 -74 increase in wheat prices Reimbursement of expenses for land 17 27 +61 +10 reclamation Other expenses on agriculture 54 24 -56 TOTAL BUDGET SUPPORT 1,349 1,621 +20 TOTAL FARM SUPPORT 997 1,621 +63 Source: World Bank estimates. 80. Based on the assumptions from Table 25, the DFPs are projected to increase to $761 million by the end of 2025 compared to $571 million in 2020, the baseline year. This increase would come from several sources: (i) the interest rate subsidy for working capital to produce cotton and wheat will be pushed upwards by the increase in farm production costs as farm input and service prices adjust to the market level in Uzbekistan and the increase in the length of credit use, being partially countervailed/pushed downward by the projected increase in the interest rate of the subloans, the decline in the CBU refinancing rate, and the decline in the prevailing market interest rate (all assumptions and estimates for the interest rate subsidy for loans managed by SFAS are presented in Table 26); (ii) the pumping electricity subsidy for irrigation provided to both the MoWR and farmers is projected to decline annually by 2 percent, following the GoU’s policy to reduce subsidies for water use and increase expenditures to modernize irrigation infrastructure; (iii) the subsidy for purchasing or leasing locally manufactured agricultural machinery is projected to increase annually by 10 percent, responding to the ambitious production localization targets; 48 Outlook for Agricultural Public Expenditures Table 26. Uzbekistan: Projections for the SFAS’s expenditures, 2020–2025 2020 2021 2022 2023 2024 2025 Advance working capital provided 8.0 8.0 8.8 9.7 10.6 11.7 for cotton production by SFAS, trillion Soums Advance interest rate, % per year 10 10 12 12 14 14 CBU refinancing rate, % per year 14 14 12 10 9 9 Prevailing market interest rate, % 20 20 20 20 18 18 per year Maximum time to use the advance 12 19 19 17 15 14 credit, months Interest rate subsidy estimate for 800 1,267 1,115 1,097 799 820 cotton, billion Soums Advance working capital provided 3.6 5.2 6.0 6.9 7.9 8.7 for wheat production by SFAS, trillion Soums Advance interest rate, % per year 12 12 12 14 14 14 Maximum time to use the advance 12 12 12 12 12 12 credit, months Interest rate subsidy estimate for 288 416 479 413 317 348 wheat, billion Soums Total interest rate subsidy, billion 1,088 1,683 1,594 1,510 1,115 1,168 Soums Total interest rate subsidy, 105 162 154 146 107 113 million US$ Source: World Bank estimates. (iv) the subsidy to encourage mechanized cotton harvesting is also projected to increase annually by 10 percent to fully eliminate the use of forced labor in cotton harvesting; and (v) public investments in promoting drip irrigation are likely to increase, by 20 percent annually, reflecting the ambition for an accelerated adoption of this technology. 81. The next five years are likely to see more support for livestock production on larger farms. The livestock output subsidy will average $43 million per year (see details in Chapter 11). The objective of that support will be to shift meat production to farms, which have their own fodder supply base and can afford the introduction of improved animal husbandry practices, animal feeding, animal health protection, and sustainable manure treatment and utilization.40 In 2020, the GoU allocated 57 billion Soums to co-finance the import of livestock breeds (Table 8). Starting from July 1, 2021, it will begin paying livestock output subsidies to the registered cattle, poultry, and fish farms, the payers of value-added tax, in addition to providing them with several tax exemptions. Given that these subsidies are new and that access to cheaper livestock products remains an important GoU priority, they are expected to continue during the outlook period. 40 In 2019–2020, about 95 percent of livestock output was produced by dehkan and household farms. 49 Uzbekistan: Second Agricultural Public Expenditure Review 82. The next five years are also projected to see an increase in spending on GSS programs. They are projected to increase from $778 million in 2020 to $860 million in 2025. This increase will be supported by the development partners and GoU-financed expenditures. The increase is anticipated for all major programs, which is a positive step to create conditions for more resilient and inclusive long-term agricultural growth. 83. Overall, the allocative efficiency of future agricultural public expenditure in Uzbekistan is expected to improve. The positive expenditure shifts include: (i) more investments in fixed capital formation (from 6.4 percent to 12.1 percent of the total budget) (Table 27); (ii) an increase in the AKIS budget in absolute terms, and only a slight decline in relative terms (to 5.2 percent of the total budget from 5.3 percent); and (iii) an expected increase in the expenditures for the GSS programs, with the largest aimed at the development and maintenance of infrastructure to be repurposed towards the modernization of the country’s irrigation/drainage infrastructure and agrilogistics. Payments for variable input use are projected to remain high and will be complemented by newly introduced livestock output subsidies (Chapter 11). The spending on AKIS is projected to remain modest. Based on the global experience, the higher output and input subsidies and the low AKIS spending are likely to reduce the impact of public expenditures on resiliency, inclusiveness, and sustainability of agricultural growth in Uzbekistan. Table 27. Uzbekistan: Outlook for the structure of agricultural public expenditures, in percent, 2020 vs. 2025 2020 2025 Direct Farm Payments, % 42.4 46.9 Payments based on outputs 0 3.7 Payments based on variable input use 36.0 31.0 Payments for fixed capital formation 6.4 12.1 General support services, % 57.6 54.2 Agricultural knowledge and innovations 5.3 5.2 Inspections and control 5.6 6.1 Development and maintenance of infrastructure 34.4 32.9 Cost of public stockholding 0.1 0.1 Miscellaneous 12.2 8.7 Total Public Expenditures, % 100.0 100.0 Source: World Bank estimate. 84. The positive shifts in expenditure mentioned above would bring results only if the supported (right) programs are well implemented. This is stressed in the following chapters. After the analysis of livestock subsidies in Chapter 11, Chapter 12 takes a deep dive into assessing the quality of implementation of the program supporting drip irrigation in cotton growing and deriving recommendations for its enhancement. It is followed by Chapter 13, which analyzes the emerging support to smallholder farmers and how to improve it. 50 11 Analysis of Livestock Subsidies As public expenditures for Uzbekistan’s livestock subsector have been growing in recent years, the analysis in this report warns about spending too much on production subsidies and importation of animals. It identifies the programs such as animal nutrition, AKIS, artificial insemination, and local livestock breeding, for which more funds to be spend by repurposing the recently launched meat production subsidies. In the longer run, the impact of public expenditures on the livestock subsector will depend on the removal of crop placement system, which limits feed and fodder production, the incentives for reducing the livestock herd and adoption of low-carbon production possibilities, which can contribute to lower the high environmental footprint, and the increase in quality of general support services to farmers, which are currently low, limiting the impact of the public programs. 85. The next five years are likely to see more public support for livestock production on larger farms. Such support will include payments based on livestock outputs (output subsidy) and payments for importing breed livestock. The objective of this support will be to shift more meat production to larger and more commercial farms, which have their own fodder supply base and can afford to introduce improved animal husbandry practices, animal feeding, animal health protection, and sustainable manure treatment and utilization. In 2020, the GoU allocated 70 billion Soums to co-finance the import of livestock breeds through matching grants (Table 8). Starting from July 1, 2021, it will begin paying livestock output subsidies to registered cattle, poultry, and fish farms, the payers of value-added tax, in addition to providing them with several tax exemptions. These farms will receive 2,000 Soums per kg of beef sold, 200 Soums per kg of milk sold by cattle beef specialized farms,41 800 Soums per kg of poultry meat, 50 Soums per egg, and 1,000–3,000 Soums per kg of fish.42 Given that these subsidies are new and that access to cheaper livestock products remains an important GoU priority, they are expected to continue during the outlook period. The breeding livestock import subsidy is projected to increase from $7 million in 2020 to $10 million annually during 2021–2025 (Table 25). The livestock output subsidy is projected to average $43 million a year during the 2021–2025 period, as presented in Table 28. 86. With the introduction of the livestock output subsidy, Uzbekistan has entered a new era. In the past, the farmgate prices of some agricultural products, notably wheat, were kept below market levels through administrative controls. This helped to stimulate the consumption of cheaper bread but discouraged farmers from increasing their wheat 41 It excludes milk sold by dairy farms, implying that subsidies will cover a small share of milk production. 42 Resolution of the President of the Republic of Uzbekistan “About Additional Measures for Further State Support  to the Livestock Sector” dated March 3, 2021. 51 Uzbekistan: Second Agricultural Public Expenditure Review production. With limited land and water resources, market and price liberalization to stimulate an increase in agricultural production was inevitable. This liberalization began in 2017, resulting in a substantial reduction in the taxation of wheat prices (Chapter 8). More active regional and international trade integration has resulted in the convergence of Uzbekistan’s prices for horticulture and livestock products with that in other countries, pushing it up compared to the prices that prevailed in the past. The livestock output subsidy is an effort to respond to a persistent increase in meat and milk prices. It seeks to stimulate import substitution and reduce the domestic prices of livestock products by subsidizing rather than taxing livestock producers. This is a new approach for Uzbekistan, which, however, is unlikely to achieve its intended objective of lower prices for livestock products, as international experience has shown. Table 28. Uzbekistan: Outlook for livestock output subsidies, 2021–2025 2019 2020 2021 2023 2025 actual actual forecast forecast forecast All meat production by farms, tons* 125,700 130,870 143,957 182,106 240,835 Change in production per year, % 15 4 10 15 15 Beef/poultry meat subsidy, Soum/kg 1,760** 1,760 1,760 Subsidy estimate, million Soums 88,678 224,354 296,708 Egg production, million pieces 1,143 1,135 1,192 1,442 1,907 Change in production per year, % 6 -1 10 15 15 Egg subsidy, Soum/piece 50 50 50 Subsidy estimate, million Soums 29,794 72,101 95,353 Fish production by farms, tons n/a 64,195 70,615 89,327 118,135 Change in production per year, % 10 15 10 Fish subsidy, Soum/kg 2,000*** 2,000 2,000 Subsidy estimate, million Soums 70,165 178,655 236,271 Total subsidy estimate, million 189,086 475,110 628,333 Soums Total subsidy estimate, US$ million 18.2 45.8 60.6 Note: *SSCU does not provide a breakdown of produced meat (i.e., beef, poultry, lamb). The subsidy estimate assumes 70 percent of meat to be beef and poultry. **Subsidy is a weighted average of subsidy amounts with 80 percent allocated to beef and 20 percent to poultry meat. *** Average for fish subsidy. Source: World Bank estimates using SSCU and MoF data. 52 Analysis of the Livestock Subsidies 87. Output subsidies are surrounded by many problems. This is why so many countries have phased them out (Table 10 and Table 11). In the short run, they may indeed stimulate an increase in agricultural production and could lead to a short-term reduction of meat prices. Over the medium term, however, output subsidies increase the cost of production and reduce the efficiency of agricultural producers. To continue competing with others, these producers will lobby for increases in subsidies again and again. As soon as the GoU decides to phase out the subsidy, they might quickly become uncompetitive. The recent example of the poultry industry in Kazakhstan is illustrative in this respect. For many years, poultry producers received output subsidies that helped turn the country from a net importer of poultry meat and eggs to a net exporter of these products. In 2019, the subsidy ended due to the achievement of the subsidy’s objective, namely, a reduced dependency on imports. However, after the subsidy ended many poultry factories began to close, as they were no longer able to compete without the subsidy. The COVID-19 crisis increased the fear of food insecurity in Kazakhstan, and the subsidy for poultry outputs was reinstated in 2020. 88. In Uzbekistan, even if meat production from subsidized farms increases significantly, domestic prices will not necessarily decline. The new price level will depend on the changes in the share of production in domestic consumption, changes in consumers’ income, and changes in imported meat prices. Large farms still account for a small share of livestock production in Uzbekistan, although their importance has increased in recent years (Table 29). Thus, it will take time for a larger volume of supply from these farms to impact the total production of meat and milk, thereby affecting the average meat and milk prices. Table 29. Uzbekistan: Large farms in meat and milk production, %, 2016–2019 2016 2019 Beef meat 2.9 5.1 Eggs 10.7 14.7 Milk 3.6 4.3 Source: World Bank estimates using SSCU data. 89. Furthermore, because it is a net importer of meat, Uzbekistan cannot isolate itself from price dynamics on the regional market. Uzbekistan imports live animals and livestock products from Kazakhstan and the Kyrgyz Republic. When the prices in these countries change, they also change in Uzbekistan (Figure 8). Thus, as long as Uzbekistan continues to import meat, even if the import volume declines, its domestic prices will be affected by changes in regional prices. 90. A better way to support a sustainable increase in livestock production, which would not depend on recurrent subsidies, is to support investments in fixed capital formation through matching grants and GSS programs for livestock sector development. Uzbekistan has initiated some of these investments. The credit lines from development partners provide funds for fixed capital investments, including livestock imports (Table 30). In 2020, the GoU started a program to stimulate the import of livestock breeds through a 53 Uzbekistan: Second Agricultural Public Expenditure Review Figure 8. Beef meat retail prices in selected countries, 2018–2021 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 Source: FAOGIEWS and SSCU data. Table 30. Uzbekistan: Livestock imports, 2016–2020 2016 2017 2018 2019 2020 No US$m No US$m No US$m No US$m No US$m Cattle 687 0.22 0 0 39,175 19.50 121,173 70.10 23,364 12.00 Breed cattle 9,080 23.54 11,500 29.90 16,499 40.27 24,519 52.36 36,584 78.58 Sheep 2,567 0.13 0 0 18,677 0.97 242,392 19.53 15,982 1.69 Breed sheep 0 0 32 0.05 4,050 0.70 11,536 1.80 20,634 3.24 Goats 0 0 0 0 0 0 2,086 0.24 28 0.02 Breed goats 1,396 0.52 2,148 1.11 3,370 0.76 2,315 0.61 3,655 0.80 Breed 1,197 6.45 1,595 8.35 1,534 8.82 1,783 9.68 2,095 10.25 chicken, ‘000 Total, US$ 30.86 39.41 71.02 154.32 106.58 million Total, billion 91.6 202.6 573.1 1,392.1 1,105.8 Soums Source: World Bank estimates using MoEPR data. matching grant. The draft strategy for livestock sector development (to be adopted soon) calls for more investments in animal health, feeding, breeding, and good animal husbandry practices, all of which are GSS programs needed for sustainable livestock development. Similar to other subsectors, however, the success of these programs will be determined by the quality of their implementation. 54 Analysis of the Livestock Subsidies 91. Replacing the output subsidy with a one-time payment (matching grant) for fixed capital investments could improve the effectiveness of state support. Currently, farmers have access to subsidized loans to invest in fixed assets, but this does not seem to lead to significant investments. Many countries disburse matching grants, similar to the support for drip irrigation in Uzbekistan discussed in Chapter 12, to complement subsidized loans. The use of matching grants would not only bring more certainty to farmers but also allow less affluent farmers to modernize their livestock assets. Better and more productive assets, supported by a one-time matching grant, have a greater chance of enhancing the long-term competitiveness of livestock production than recurrent output subsidies, which could be discontinued at any moment of fiscal stress. 92. Improving the quality of ongoing public programs is also important. The starting task is to take a critical look at the programs stimulating the import of higher-productivity animals. In theory, the import of more productive animals could increase the country’s average livestock productivity. Furthermore, importing breed animals and crossing them with local breeds could strengthen local animal breeding programs and accelerate livestock replacements. In 2020, the matching grant subsidy for importing breed animals amounted to 57 billion Soums, and supported the import of 18,939 breed cattle livestock, 8,380 breed sheep, 405 breed goats, and 1.5 million breed chickens. The share of the subsidy in the total cost of the animals ranged from 9.3 percent of breed cattle to 25.4 percent of breed sheep. It seems to have encouraged more imports of breed animals in 2020 compared to 2019 (Table 30). 93. The import of animals has helped increase livestock productivity for the beneficiary farmers. Farmers, who, for example, used the credit under the World Bank- financed Livestock Sector Development Project (LSDP) to import cattle, and benefited from other investments and trainings, saw their farms’ average milk productivity increase by 31 percent within a year (Table 31).43 The average productivity of indirect project beneficiaries and non-beneficiaries of the projects also increased during this period, but by 10 percentage points less than that of the LSDP’s credit line beneficiaries. Table 31. Uzbekistan: Changes in milk productivity under the LSDP No. of respondents 2018 2019 % change Project credit line beneficiaries 200 3,891 5,078 30.5 Indirect project beneficiaries * 200 2,936 3,531 20.3 Non-beneficiaries of the project 400 2,976 3,538 18.9 Note: * Indirect project beneficiaries are farmers, working in partnerships with agribusinesses and lead farms, who are the LSDP’s credit line beneficiaries. Source: World Bank estimates. 94. However, the observed increase in productivity of the imported animals remains lower than anticipated and the importation of animals has not yet resulted in an overall productivity increase for the livestock sector. By the end of 2020, imported 43  ykan Group. 2020. Impact Evaluation of the Livestock Sector Development Project for the Mid-Term Review. A Report prepared for the World Bank and the SLDVC. Tashkent. 55 Uzbekistan: Second Agricultural Public Expenditure Review animals during the 2016–2020 period accounted for only 2.1 percent of the country’s cattle herd, 1.5 percent of the country’s herd of sheep and goats, and 9.1 percent of the country’s chicken inventory. Imported animals have hardly had an impact on livestock productivity, which remained stagnant in the case of milk and declined in the cases of meat and eggs (Table 32). As the draft strategy for livestock sector development aims to rapidly increase the import of animals (for dairy and beef cattle from 3 percent in 2019 to 22 percent in 2025 and 40 percent in 2030), a thorough analysis of past experience is needed to ensure that if materialized, a higher share of imported livestock indeed translates into a significant productivity increase. Table 32. Uzbekistan: Livestock sector productivity, 2016–2020 2016 2017 2018 2019 2020 Average growth, % Inventory, ‘000 Cattle 12,181 12,471 12,814 12,950 13,189 2.0 Cows 4,217 4,337 4,626 4,664 4,744 3.0 Sheep and goats 19,698 20,641 21,581 21,907 22,499 3.4 Chicken 67,038 74,870 86,375 87,860 90,132 7.8 Production Meat, ‘000 tons 2,173 2,287 2,431 2,474 2,526 3.9 Milk, ‘000 liters 9,703 10,048 10,466 10,714 11,010 3.2 Eggs, millions 6,153 6,333 7,459 7,771 7,825 6.4 Productivity Meat production, kg/unit* 22.9 22.1 20.9 21.0 20.9 -2.3 Milk production, liter/cow 2,301 2,317 2,263 2,297 2,321 0.2 Egg production, units/chicken 91.8 84.6 86.4 88.5 86.8 -1.3 Note: * Meat productivity is derived from meat production divided by the number of beef cattle, goats, sheep, and chicken. The SCCU does not report meat production by meat types, making more precise productivity measurement impossible. Source: World Bank estimates using SSCU data. 95. This limited impact is a reason to pay attention to several issues surrounding the animal import program: a. The first and most important issue is the lack of adequate access to affordable animal feed. The GoU’s policy of favoring the production of cotton and wheat ‘taxes’ fodder production. Land, recently freed from cotton growing, is likelier to move to horticulture than forage production. The country’s animal feed growing areas declined from 333,500 ha in 2016 to 267,600 ha in 2019, or from 9.0 percent to 8.1 percent of total arable land. In 2019, the production of animal feed in the equivalent of dry matter in Uzbekistan was estimated to be less than one-half of what is required to 56 Analysis of the Livestock Subsidies maintain the existing livestock population—not considering any growth in the livestock population as has been the case in the last five years (Table 32). As a result of the low fodder/feed supply, there is not enough high-quality feed that is required for imported animals, leading to suboptimal animal feeding practices and the resulting lower-than- anticipated productivity increase. Unless the country’s forage area is significantly increased and the existing low-productive herd is significantly reduced, importing many more animals would be a very low-value public investment. b. The second issue is the lack of advisory services to help farmers obtain information and knowledge on animal feeding, animal health, artificial insemination, climate- resilient barn design, and sustainable manure management, among other topics. The LSDP beneficiaries report that through the project they have received trainings on the above-mentioned topics, and some 84 percent of beneficiaries responded that they have applied this knowledge in practice.44 They stated that such trainings need to be continued, however getting access to information and knowledge is not possible outside of the LSDP. The SCVLD should step up to provide such services, in partnership with the regional AKIS centers being established by the MOA. c. The third issue is to improve the implementation of the animal importation program itself. The World Bank’s discussions with LSDP beneficiaries and several experts revealed the following problems: (i) a lack of selection criteria for breed animals such as breed quality and their adaptability and suitability to Uzbekistan’s conditions;45 (ii) about 5 percent loss of animals during transportation and during their adaptation period in Uzbekistan; (iii) up to 10 percent animal loss due to poor animal husbandry practices and a lack of good quality veterinary services; (iv) lack of information for program participants regarding barn quality/infrastructure and access to fodder, which are critical for animal productivity and fertility rates; and (v) little progress in the local breeding and artificial insemination programs, which further limit the value of imported animals for the livestock sector, thereby reducing the value for money of the public expenditures. 96. Achieving a 40 percent ratio of productive animals in the total herd, as envisaged by the draft Livestock Sector Development Strategy, would require significant additional credit and budget resources to accelerate importation. The credit requirement for dairy cattle alone is estimated to reach $4 billion by 2030 to import about 1.6 million animals at the average price of $2,500/head. Additional matching grants could reach $400 million, assuming the share of a 1o-percent subsidy in the animal cost. This would imply an increase in public expenditure requirements for matching grants from $7 million in 2020 to $40 million each year during the 2021–2030 period. This assumption, along with the high credit requirement, does not seem to be achievable. In Table 25, this public expenditure is projected to average $9 million a year during the 2021–2025 period. The existence of many significant development needs in Uzbekistan and the country’s fiscal weakness, which has been further hampered by the COVID-19 crisis, would prevent a significant scaling-up of the budget allocation for animal imports. Moreover, the readiness 44  ykan Group. 2020. Impact Evaluation of the Livestock Sector Development Project for the Mid-Term Review. A Report prepared for the World Bank and the SLDVC. Tashkent. 45 The requirements for cattle import, for example, set by the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan N0. 280 from May 12, 2020, include a weight of at least 450 kg, being less than 6-month’s pregnant, and being younger than 30 months. These conditions are relatively simple, and they do not set any requirements related to breed quality and suitability to the conditions in Uzbekistan. 57 Uzbekistan: Second Agricultural Public Expenditure Review of development partners to offer new projects with credit lines such as LSDP has been declining, as they focus more on financing GSS programs to increase the sustainability of livestock production and reduce its large environmental footprint,46 which often requires reducing, not increasing animal numbers, and pursuing a One Health approach to improve animal health services.47 97. To make the breed animal import program more successful, the GoU would need to keep the budget for this program relatively small, improve its implementation, and complement it with other programs. The main recommendations include the following: a. Phasing out the livestock output subsidy and replacing it with payments for fixed capital formation would help modernize livestock barns and equipment and invest in livestock manure management. These in turn would maximize the use of imported animals. b. Moderately increase the budget for animal importation, subject to improving its implementation quality. Improving the quality of the animal importation program requires adding more scientific requirements on breed quality and suitability of animals for Uzbekistan’s conditions such as the BLUP index, the Animal Model used by the European Union, and other good international practices. c. Increase support for strengthening animal health (using the One Health approach), animal feeding, and other sustainable livestock development programs as projected in Table 25. d. Revitalize the local animal breeding program to make the best use of imported breed animals to ensure the long-term, resilient, and sustainable development of Uzbekistan’s livestock sector. 46 L  ivestock accounts for more than 85 percent of Uzbekistan’s agricultural sector greenhouse gas emissions, according to FAOSTAT. 47 The One Health approach recognizes that the health of humans, animals, and ecosystems are interlinked and  thus requires an integrated approach for addressing them. 58 12 Analysis of the State Program for Drip Irrigation Using irrigation water more efficiently has become a GoU priority supported by the public expenditures in recent years. In addition to promoting drip irrigation for production of fruits and vegetables, irrigation is also promoted for production of cotton. Since 2019 the GoU has been using a mix of credit and investment grants to reduce the water use in cotton production, which is the major user of irrigation water in the country. The analysis in this report shows the promising early results on the ground, largely on using water more efficiently, but it warns that generating sector-wide benefits and sustaining them over time would be possible only under a more integrated approach for promoting drip irrigation. Support to farmers would need to better address their needs, constraints, and risks associated with adoption of water-efficient technology, which has implications for public policy and expenditures. Without complementary programs and better land tenure security for farmers, a significant scale up in public expenditures for credit and matching grants would not generate the anticipated outcomes. 98. This chapter analyzes the implementation of the public program supporting the adoption of drip irrigation in cotton production. The program started in 2019 and is expected to continue over the next several years. It is an example of the “right” type of program from the point of view of the allocative efficiency of public expenditures. If it is implemented well, it should be scaled up. And, as more resources are allocated for such programs, the quality of implementation becomes critical to ensure value for money in the context of rising fiscal constraints following the COVID-19 pandemic. This is why an analysis of such programs should become an important part of the Agricultural Strategy’s implementation. 99. Uzbekistan is the most naturally water scarce country in Central Asia (on a per capita basis). It has only 22 percent of the region’s renewable freshwater resources and water availability per capita is 57 percent of the regional average. Over 80 percent of Uzbekistan’s water originates in upstream countries and the country is vulnerable to upstream changes in hydrology and water resource developments that impinge on regional water sharing agreements, as well as projected changes in climate. Water withdrawal rates are unsustainably high, at over 90 percent of the total renewable resource. They 59 Uzbekistan: Second Agricultural Public Expenditure Review are exceeded by only three countries in the world on a per capita basis, one of which is Turkmenistan. By 2040 Uzbekistan is projected to become one of 33 countries globally with the largest water scarcity.48 100. Agriculture is the sector with the largest water footprint, accounting for almost 90 percent of total freshwater withdrawals. Around 80 percent of agricultural production depends on irrigation. Climate change already poses a serious risk to agriculture with expected increases in crop water demand as the climate warms. Temperature rises of 2.2°C and 3.1°C by the 2050s in the mountainous areas of Tajikistan could reduce glacial mass by 36 percent to 45 percent relative to 2013.49 As glaciers recede, seasonal patterns of river flow are expected to change with peak flows shifting from the summer to the spring.50 A mean runoff reduction for the main tributary of the Amu Darya river during July and August is projected at 25 percent51 and there is some evidence that the same seasonal shift is affecting the Zarafshan river. If this trend were to continue, it would put pressure on Uzbekistan’s irrigated agriculture. 101. Cotton is the largest user of irrigation water in Uzbekistan. The country has recently accelerated agricultural diversification by shifting land from cotton and, to a lesser extent, wheat to horticulture and fodder crops, to increase the efficiency of irrigation water use. The cotton growing area declined by 18 percent, from 1,255,000 ha in 2016 to 1,030,000 ha in 2020. Additional reductions in the cotton growing area are, however, anticipated to be more gradual, and the share of cotton in total arable land could stay high, between 25 percent and 30 percent, for a long time. In most cases, agricultural diversification increased the value of agricultural production, but did not necessarily reduce water use. In fact, the shift from cotton to some higher value-added crops, such as potatoes and vegetables, could increase the demand for water, even if it would substantially increase agricultural water productivity (i.e., generate more output per unit of water). For example, when one hectare of land shifts from cotton (using 6,300 m3/ha of water during a vegetation period) to half a hectare for fruits (4,400 m3/ha) and half a hectare for vegetables (11,500 m3/ha), water use will increase (to 7,950 m3/ha).52 This example shows that agricultural land use diversification alone would be insufficient to reduce the volume of water used. Adding the impact of a persistently large share of cotton in total arable land on high water use requires agricultural reforms to be accompanied by measures stimulating the adoption of water-efficient and water-saving technologies. 102. This is recognized by the GoU. In late 2018, they introduced a program to accelerate the adoption of drip irrigation in cotton production. In 2019–2020, they added a program to support drip irrigation in horticulture, rice, fodder, and mulberry. All these programs are executed by the MoWR at the central level and hokimiyats at the district level. Public expenditures for these programs cover: (i) a one-time, lump-sum per 48  orld Bank. 2021. Sustainable Development in Uzbekistan: Supporting a Green Transition. Background W Note for the Systematic Country Diagnostic, Washington, D.C. and World Bank. 2021. Uzbekistan’s Public Expenditure Review: Irrigation and Water Management. Washington, D.C. 49 Hagg, W., M. Hoelzle, S. Wagner, E. Mayr, and Z. Klose. 2013. Glacier and Runoff Changes in the Rukhk Catchment, upper Amu-Darya Basin until 2050. Global and Planetary Change. 110. 10.1016/j.gloplacha.2013.05.005. URL: https://pubag.nal.usda.gov/catalog/841237 50 USAID. 2018. Climate Risk Profile – Uzbekistan. www.climatelinks.org/sites/default/files/asset/document/ Uzbekistan_CRP_Final.pdf 51  Novikov, V. and C. Kelly. 2017. Climate Change and Security in Central Asia. Geneva: ENVSEC. www.osce.org/ secretariat/355471?download=true 52 This example uses 2018 data on water use norms by commodity from the MoWR. 60 Analysis of the State Program for Drip Irrigation hectare investment matching grant (8 million Soums/ha for cotton; 1.5 million Soums for vegetables and potatoes; 1.3 million Soums for melons; 2.5 million Soums for fodder, oil plants, and beans; 6 million Soums for fruits; and 8 million Soums for wine grapes); (ii) access to a credit line (of up to 20 million Soums/ha until 2020 and 25 million Soums/ ha from 2021), as well as a 10 percentage point interest rate subsidy for credits in Soums and 3 percentage points for credit in dollars; and (iii) an exemption from payment of the unified land tax for five years and 0.7 coefficient for water tax (land tax: 160,000 Soums/ha/ year and water tax: 40 Soums/ha/year). Support is also provided for other types of water- efficient and water-saving technologies that are summarized in Table 33. 103. While drip irrigation for horticulture production has proven to be profitable around the world as well as in Uzbekistan, the business case for drip irrigation in cotton production has been less clear. Australia, for example, tried but abandoned the use of drip irrigation in cotton production, replacing it with other technologies (Box 1). Cotton Table 33. Uzbekistan: Matching grants for investments in various water-efficient technologies, Soums/ha in 2020 Cotton Grains Vegetables Melons Fodder Fruits* Wine grapes* Drip irrigation 8,000 - 1,500 1,300 2,500 6,000 8,000 Wide-coverage - 6,000 1,200 - 2,500 - - irrigation Sprinkler - 8,000 1,000 - 2,000 - - Discrete irrigation 2,000 - - - - - - Laser planning** 1,000 1,000 1,000 1,000 1,000 - - Mobile irrigation - 2,000 500 - 2,000 - - Note: * As part of investments in intensive orchards; ** If laser planning is used in combination with other water-saving technologies that receive subsidies, a farmer is not eligible for the laser planning subsidy. Source: World Bank estimates. Box 1. Australian experience in drip irrigation for cotton production Sub-surface and surface drip irrigation systems have been trialed extensively for cotton production in Australia. In almost every case, they have been abandoned or replaced with other systems. While technically drip irrigation provides water savings when compared with flood and spray systems, the most significant issues blocking the adoption of drip irrigation for cotton growing included: (i) high capital cost (>US$10,000/ha); (ii) problems with soil wetting (subbing), particularly in soils similar to those in Uzbekistan; (iii) inability to provide enough water at the peak crop demand period at the end of the growing season (at the end of the summer); and (iv) high maintenance costs. Australian farmers use other water-saving technologies such as siphons, pivots, and laterals for sprinkler irrigation, and bankless irrigation. Source: IFC. 61 Uzbekistan: Second Agricultural Public Expenditure Review profitability in Uzbekistan is among the lowest compared to other crops, while investment costs for drip irrigation can reach 25–30 million Soums/ha (an equivalent of $2,400-2,900/ ha). Does drip irrigation in cotton production have a future in Uzbekistan? This chapter presents the initial results/impacts of investments in drip irrigation, assesses the stimulus created by public expenditures, and makes recommendations to increase the value for money from these expenditures in the future. 104. In 2020, according to MoWR data, water-efficient technologies were adopted on 49,500 ha. Drip irrigation covered most of the area (43,040 ha), followed by discrete irrigation (4,249 ha) and sprinkler irrigation (2,210 ha). Cotton accounted for one half of the drip irrigation area (20,650 ha), most of which (17,104 ha) received GoU support. In 2019, the cotton area, which received the GoU-support for installing drip irrigation, was about 15,000 ha. In 2021 in the area used for cotton production is projected to increase between 25,000 ha (using the 2021 budget allocation for this purpose) and 160,000 ha (using the 160,000 ha target set in the Decree of the President No. 4919) (Table 34). In any case, it is evident that this public program has stimulated private investments in cotton sector drip irrigation, creating demand from farmers and clusters on the one hand, and business opportunities for equipment suppliers on the other. 105. Previous GoU efforts to promote investments in cotton sector drip irrigation were less successful because they were not underpinned by sufficient public funds. In 2012, farmers who adopted drip irrigation were exempted from paying the unified land tax for five years.53 Due to the low amount of land tax collection, about 140,000 Soums/ha in 2017 and 160,000 Soums/ha in 2019 against the cost of investment in drip irrigation, from 25¬–30 million Soums/ha in 2019, technology adoption was nonexistent. In 2013, some farmers could access a subsidized credit from the Melioration Improvement Fund, along with the right to use saved water for crops other than cotton and wheat.54 Nevertheless, only after the issuance of the 2018 Presidential Resolution,55 investment in cotton sector drip irrigation accelerated, in response to incentives (Table 34). 106. In 2019, total public spending on cotton sector drip irrigation was estimated to reach 184 billion Soums or $20 million (Table 34). It is projected to increase to 306 million Soums or $30 million in the 2021 budget. Achieving the ambitious coverage target of 160,000 ha would require up to 2 trillion Soums or about $190 million. The main part of the package, or about 65 percent of the total, is a one-time investment grant provided to technology adopters in the amount of 8 million Soums/ha. The interest rate subsidy, estimated at 3.5 million Soums/ha over the period of three years, accounts for 28 percent of total spending. Land tax exemption over five years generates support to technology adopters at 0.8 million Soums/ha, constituting 7 percent of total spending. As a result of the GoU program, the area with drip irrigation is projected to reach 57,000 ha (conservative estimate)- 200,000 ha (optimistic estimate) by the end of 2021, though it is only between 6 and 20 percent of the cotton growing area in the country. 53  ecree of the President of the Republic of Uzbekistan No. UP-4478 “About Measures for Further Improvement D and Development of Farming in Uzbekistan,” October 24, 2012. 54 Resolution of the President of the Republic of Uzbekistan No. PP-1958 “About Measures for Improvement of  Melioration of Irrigated Lands and Effective Use of Natural Resources during 2013-2017,” April 19, 2013. 55 Resolution of the President of the Republic of Uzbekistan No. PP-4087 “About Urgent Measures to Create  Favorable Conditions for Wide-Scale Adoption of Drip Irrigation in Cotton Production,” December 27, 2018. 62 Analysis of the State Program for Drip Irrigation Table 34. Uzbekistan: Public investments in cotton sector drip irrigation, 2019–2021 2019 2020 2021* Actual Actual Budgeted Plan Matching grant for adopting drip irrigation, 120.0 132.0 199.0 1,280.0 billion Soums Interest rate subsidy, billion Soums 52.3 59.6 86.7 527.9 (commitment/future liability) Exemption from land tax for adopters (for 5 12.0 13.7 19.9 128.0 years), billion Soums Total estimated public expenditures, billion 184.3 205.3 305.6 1,935.9 Soums Total estimated public expenditures, million 20.4 19.8 29.5 186.6 US$ % of GDP 0.04 0.04 n/a n/a Target area for drip irrigation installation 15,000** 17,104 24,875** 160,000*** with GoU support, ha Note: * Plan; ** Estimate based on the budget allocated; *** Presidential Resolution No. PP-4919 sets the target of 160,000 ha in 2021. Source: World Bank estimates based on data from the MoF and MoWR. 107. Covering one half of the country’s cotton area (1 million ha) with drip irrigation, for example, would require at least 1 percent of GDP. Achieving this coverage rate in 10 years translates to annual public spending of 0.1 percent of GDP. So far, however, the GoU has spent only 0.04 percent of GDP per year (Table 34). At this pace, half of the country’s cotton area would be equipped with drip irrigation in 25 years. Should public investments in cotton’s drip irrigation be scaled up and accelerated? 108. Uzbekistan’s public support for cotton sector drip irrigation is underpinned by the assumptions of the significant financial and economic benefits these investments would generate. Based on information from the MoA and the Khorezm regional office of MoWR,56 the use of drip irrigation could lead to a 40 percent reduction in water use and a 30 percent reduction in the cost of fertilizers, fuel, and mechanization, while raising the cotton yield by 50–65 percent. Demand for drip irrigation by farmers and agribusinesses stimulates private sector investments in supplies of irrigation equipment and services. The official number of firms supplying drip irrigation equipment is not available, but anecdotal evidence suggests a large increase in such firms in the last two years. In the Kashkadarya region alone, for example, 54 firms are engaged in this business. These are significant economic benefits for the national economy and the people of Uzbekistan. If realized, they would more than cover public expenditures, justifying the scale up of the program. 109. Table 35 shows that, in theory, the country’s net economic benefits per hectare in real terms could reach 23 million Soums vis-à-vis the total public cost of the program of 12.0 million Soums over five years. Eighty percent of the total benefits presented in 56 R  udenko, I. 2019. Analysis of Costs and Benefits of Adopting Drip Irrigation with the Government Support. Prepared for the Global Environmental Fund and the United Nations Development Program. 63 Uzbekistan: Second Agricultural Public Expenditure Review Table 35 would come from the cotton yield increase, averaging 1.5 tons/ha. Even if the yield increase is 1.0 ton/ha, the net gain would still be significant, reaching 14 million Soums/ha. Thus, one can say that the area of 57,000 ha already under drip irrigation generates net economic gains between 792 billion Soums (at 1 ton/ha yield increase) and 1.33 trillion Soums (at 1.5 tons/ha yield increase). Benefits increase further with the inclusion of gains from irrigating other crops using saved water. In the case of irrigating 0.25 ha of tomato, for example, net gains could increase to 40 million Soums (Table 35). Table 35. Uzbekistan: Economic costs and benefits of drip irrigation adoption Year 1 Year 2 Year 3 Year 4 Year 5 Total Benefits (‘000 Soums/ha): ** 12,375.3 11,250.2 10,227.5 9,297.7 8,452.6 51,602.9 Fuel savings 413.3 375.7 341.5 310.5 282.3 1,723.2 Mechanization 405.0 368.2 334.7 304.3 276.6 1,688.8 Fertilizers 933.0 848.2 771.1 701.0 637.3 3,890.5 Labor savings -149.2 -135.7 -123.3 -112.1 -101.9 -622.2 Yield increase 6,825.0 6,204.5 5,640.5 5,127.7 4,661.6 28,459.3 Income from improved watering of other crops* 4,000.0 3,636.4 3,305.8 3,005.3 2,732.1 16,679.5 Costs (‘000 Soums/ha): 9,611.7 1,435.3 673.7 136.3 109.3 11,966.3 Matching grant 8,000.0 8,000.0 Interest rate subsidy 1,451.7 1,289.8 541.5 16.1 3,299.1 Land tax exemption 160.0 145.5 132.2 120.2 109.3 667.2 Net gain for cotton (‘000 Soums/ha) -1,184.6 6,225.6 6,290.8 6,195.1 5,646.6 23,173.3 Net gain for cotton and other crops (‘000 2,815.4 9,862.0 9,596.6 9,200.4 8,378.7 39,852.8 Soums/ha) Note: Annual inflation of 10 percent is assumed to estimate real costs and benefits. *Net margin for tomatoes per 0.25 ha land plot. Source: World Bank estimates based on data from the MOF, MOA, and MOWR. Anticipated benefits also include water savings. But the practice shows that this benefit is rarely achieved. Most benefits are related to more **  efficient use of water, not water saving. 110. The financial analysis from a farmer’s perspective (Table 36) provides more details about costs and benefits used in Table 35. The financial analysis uses the example of a farm budget “with” and “without” drip irrigation in the Khorezm region in 2019 prices for an investment period of five years.57 A typical drip irrigation system for 10 ha includes a 500 m3 water reservoir, pump, and filter station, underground waterpipes, flexible surface waterpipes, and drip ribbon. Depending on the circumstances, it could also include an electricity transformer, electricity lines, and soil works, among other items. An average investment is 26 million Soums/ha, including 20 million Soums/ha of subsidized credit from Agrobank and 6 million Soums/ha of own funds. Annual operation and maintenance (O&M) costs can reach 10–15 percent of investment costs for electricity, reservoir repairs, annual replacement of flexible pipes, labor costs for O&M, and equipment repairs. 57  etails are provided in Rudenko, I. 2019. Analysis of Costs and Benefits of Adopting Drip Irrigation with the D Government Support. Prepared for the Global Environmental Fund and the United Nations Development Program. 64 Table 36. Uzbekistan: Cost and benefit analysis of investing in drip irrigation, farm budget, 2019 Without With With With With With With irrigation irrigation irrigation irrigation irrigation irrigation irrigation (year 1) (year 2) (year 3) (year 4) (year 5) (total) BENEFITS Raw cotton yield, tons/ha 3.11 4.67 4.67 4.67 4.67 4.67 Average raw cotton farmgate price, Soums/ 4,300,000 4,300,000 4,300,000 4,300,000 4,300,000 4,300,000 ton Revenue from raw cotton, Soums/ha 13,373,000 20,059,500 20,059,500 20,059,500 20,059,500 20,059,500 100,297,500 Yield of cotton stems (guzapaya), units/ha 700 1,040 1,040 1,040 1,040 1,040 Price of cotton stem, Soums/unit 1,200 1,200 1,200 1,200 1,200 1,200 Analysis of the State Program for Drip Irrigation Revenue from cotton stems, Soums/ha 840,000 1,248,000 1,248,000 1,248,000 1,248,000 1,248,000 6,240,000 Yield of cotton bolls (feed), kg/ha 300 445 445 445 445 445 Price of cotton bolls, Soums/kg 1,200 1,200 1,200 1,200 1,200 1,200 Revenue from cotton bolls, Soums/ha 360,000 534,000 534,000 534,000 534,000 534,000 2,671,200 Revenue from drip pipe returns, Soums/ha 800,000 1,300,000 1,500,000 1,725,000 1,983,000 7,308,750 Total Revenue, Soums/ha 14,573,000 22,641,500 23,141,500 23,341,500 23,566,500 23,825,250 116,516,250 DRIP IRRIGATION COSTS Matching grant, Soums/ha 8,000,000 8,000,000 Agrobank credit, Soums/ha 20,000,000 20,000,000 Repayment of the credit principal, Soums/ha 2,666,667 8,000,000 8,000,000 1,333,333 20,000,000 Repayment of interest rate (24%), Soums/ha 3,484,055 3,289,425 1,358,904 45,521 8,177,905 65 66 Without With With With With With With irrigation irrigation irrigation irrigation irrigation irrigation irrigation (year 1) (year 2) (year 3) (year 4) (year 5) (total) Interest rate subsidy (10%), Soums/ha 1,451,689 4,418,813 595,653 17,717 3,483,872 Additional investments, Soums/ha 6,000,000 O&M (10% of investment), Soums/ha* 3,000,000 3,300,000 3,630,000 3,993,000 13,023,000 FARMING COSTS* Labor costs, Soums/ha 4,120,000 2,884,000 3,172,400 3,489,640 3,838,604 4,222,464 17,607,108 Labor costs for additional cotton picking, 1,250,220 1,375,242 1,512,766 1,664,043 1,830,447 7,632,718 Soums/ha Labor costs for O&M of drip irrigation, Soums/ 135,000 148,500 163,350 179,685 197,654 824,189 ha Seeds, Soums/ha 487,000 487,000 535,700 589,270 648,197 713,017 2,973,184 Fertilizers, Soums/ha 2,330,300 1,631,210 1,794,331 1,973,764 2,171,141 2,388,255 9,958,700 Chemicals, Soums/ha 350,000 350,000 385,000 423,500 465,850 512,435 2,136,785 Mechanization services, Soums/ha 1,350,000 945,000 1,039,500 1,143,450 1,257,795 1,383,575 5,759,320 Fuel, Soums/ha 1,389,000 972,000 1,069,200 1,176,120 1,293,732 1,423,105 5,934,157 Payment to water user associations, Soums/ 62,700 62,700 68,970 75,867 83,454 91,799 382,790 ha Electricity cost, Soums/ha 88,000 44,000 48,400 53,240 58,564 64,420 268,624 Additional electricity cost, Soums/ha 541,000 541,000 Unified land tax, Soums/ha 160,000 160,000 Uzbekistan: Second Agricultural Public Expenditure Review Without With With With With With With irrigation irrigation irrigation irrigation irrigation irrigation irrigation (year 1) (year 2) (year 3) (year 4) (year 5) (total) Other costs, Soums/ha 1,650,000 1,650,000 1,815,000 1,996,500 2,196,150 2,415,765 10,073,415 Total Costs, Soums/ha 11,987,000 13,651,163 24,323,185 24,661,081 18,848,750 19,326,375 100,720,854 Gross Profit (with VAT), Soums/ha 2,586,000 8,990,037 -1,181,685 -1,319,581 4,717,750 4,588,875 15,795,098 Net Profit (less incoming and outgoing VAT), 1,034,413 10,829,722 -2,733,305 -2,871,201 3,166,130 3,037,256 11,428,602 Soums/ha** Note: *These items are adjusted for annual inflation of 10 percent; ** with the incoming VAT for irrigation equipment and outgoing VAT for the sale of output deducted from the profit. Analysis of the State Program for Drip Irrigation Source: World Bank estimate based on data from the MOA and Rudenko (2019). 67 Uzbekistan: Second Agricultural Public Expenditure Review 111. Additional revenue as a result of using drip irrigation may come from several sources. A higher cotton yield would be a major contributor. In Table 36 it is assumed that the cotton yield would increase by 50 percent, an optimistic assumption. The average farmgate price of raw cotton in 2019 was 4.55 million Soums/ton. More income could also be expected from selling cotton stems and bolls for feed,58 as well as from returning/ utilizing the flexible irrigation pipes. Note that to produce conservative estimates, income is kept stable over time, and is not adjusted upward for inflation. It implies that future prices of cotton and its subproducts are projected to decline annually by 10 percent in real terms, in line with the projected rate of inflation. Farm expenses, on the other hand, are adjusted upwards by inflation and are shown in real terms. 112. The use of drip irrigation is expected to reduce the use of fertilizers, fuel, and mechanization services. Their values are projected to decline by 30 percent. Annual electricity costs could also decline, but additional investment in connecting to the electricity grid would incur extra electricity costs in the first year, which is reflected in Table 36. Farmers with drip irrigation are also exempted from paying the unified land tax for five years, which further reduces their costs. 113. Labor costs, on the other hand, increase with the use of drip irrigation. They account for 35 percent of total cotton production costs, accruing mainly during harvest times. Most cotton in Uzbekistan is still picked manually. Adoption of drip irrigation could reduce the use of labor required for irrigation water delivery, weeding, and application of fertilizers, but it increases demand for and, thus the cost of labor needed to pick extra cotton and install/uninstall irrigation pipes each year. In balance, labor costs could increase as a result of investment in drip irrigation (Table 35 and Table 36). 114. In summary and hypothetically, farmers can almost double their profits with drip irrigation. With drip irrigation, net profits can reach 2.3 million Soums/ha/year, while without it, net profits over five years average 1.0 million Soums/ha/year (Table 36). Achieving this gain, however, hinges on many assumptions, which still need to be realized in practice. If the cotton yield were to increase by 20 percent, and not by 50 percent as in Table 36, investment in cotton sector drip irrigation becomes unattractive. The average per hectare net profit would turn negative (Table 37). 115. Other things may also be different in reality, not just lower cotton yields. Table 37 presents various scenarios of changing costs and benefits. Assumptions different from the baseline scenario are highlighted in orange. A lower yield may be amplified by lower cotton prices, higher inflation, higher investment costs in drip irrigation, higher O&M, and a lower reduction in the use of variable inputs resulting from drip irrigation. Even in all separate cases, the average profit without drip irrigation would be higher than with drip irrigation. When several factors come together, farm profitability after investing in drip irrigation looks very low. 58  ver the medium run, farmers should be encouraged not to sell crop residues but to incorporate them into the O soil to reverse soil depletion, which has been taking place during the last 30 years. Cotton stalks have very low energy and nutritional value as feed for cattle. It would be better to leave these residues in the fields and introduce a more sustainable crop rotation system as part of soil conservation practices to bring organic matter into the soil to improve its structure and water holding capacity. 68 Analysis of the State Program for Drip Irrigation Table 37. Uzbekistan: Sensitivity analysis of costs and benefits Baseline Yield Price O&M Investment Input cost Add. crop with drip change change change cost change irrigation change Yield 50% 20% 50% 50% 50% 50% 20% Price 4,300,000 4,300,000 3,870,000 3,870,000 4,300,000 4,300,000 4,300,000 Income from add. 0 0 0 0 0 0 5,621,613 crop (tomato) Add. investments 6,000,000 6,000,000 6,000,000 6,000,000 10,000,000 6,000,000 10,000,000 % of O&M 10% 10% 10% 15% 15% 10% 15% Fertilizers -30% -30% -30% -30% -30% -20% -20% Fuel -30% -30% -30% -30% -30% -15% -15% Average profit, 2.29 -0.50 0.68 -0.86 -0.38 1.75 1.23 million Soums/ha/ year Profit compared 47.3 -132.3 -56.1 -155.5 -124.2 12.9 -20.6 to without drip irrigation, % Source: World Bank estimate. 116. Irrigating more crops from water saved by drip irrigation changes the equation. Adding the net profit from irrigating 0.25 ha of tomato over 5 years would increase the farm profit to 5.62 million Soums/ha. But when adjustments are made for lower yields and higher costs, even that additional income does not necessarily justify investments in drip irrigation (the last column of Table 36). 117. Thus, the expansion of public investments in supporting drip irrigation for cotton growing should proceed carefully. Such investments need to be expanded gradually, targeted to farmers and clusters who can afford it, and accompanied by other public investments to improve the quality of seeds and deliver advisory services to farmers, which would increase yields and profits. Ensuring that the cotton farmgate price is close to the export parity price is another important task for the GoU. The per hectare support package cannot be reduced by lowering the amount of matching grants or interest rate subsidies. When the investment matching grant is reduced by one half, to 4 million Soums/ ha, for example, the average profit with drip irrigation becomes 4 percent lower than without this investment. In other words, it becomes unprofitable for farmers to invest in drip irrigation in the context of Uzbekistan, where irrigation water charges remain very low. The support package per hectare needs to remain high enough to stimulate investments in drip irrigation. 118. The consistent, statistically significant, empirical impact evaluations to support the above recommendation are, unfortunately, still lacking. The rapid field assessment carried out by the World Bank in February 2021 in four regions (Andijan, Kashkadarya, 69 Uzbekistan: Second Agricultural Public Expenditure Review Samarkand, and Tashkent), the discussion with experts, and the study of the Khorezm region in 2019 provide some useful insights to confirm it, however. Key positives on the actual situation on the ground and the areas requiring improvement are summarized below. Initial positive outcomes of investments in drip irrigation 119. The main observed positive outcomes of the recent investments in drip irrigation include the following: (i) the demand for drip irrigation has triggered an increase in a number of local and foreign firms supplying drip irrigation equipment and related services. In the Kashkadarya region alone, for example, 54 firms are engaged in this business; (ii) information about the state program is available in rural areas and farmers can receive support from the local administrations to apply for subsidies and credits; (iii) the adoption of drip irrigation increases water availability, which can then be used for other crops in addition to cotton; (iv) yield increases, but not by one half as anticipated in Table 36. In most cases the yield increase reaches 0.5 tons/ha or 20 percent. In the rare cases it goes up by 1.6 tons/ha (v) fuel use was reduced, but by less than 30 percent; (vi) liquid fertilizers needed for drip irrigation are not available so the reduction in fertilizer use has not yet materialized; and (vii) the number of workers needed for watering declined from three workers to one worker, but some labor costs increased to install and uninstall flexible waterpipes. 120. Farmers and clusters continue to be interested in drip irrigation. The Indorama cluster, for example, is beginning a pilot program for drip irrigation on 98 ha with NETAFIM. This company will provide turn-key services, including preparation and design of investments, civil works to install drip irrigation, provision of equipment, and provision of O&M support services for several years. The use of drip irrigation will be supervised by Indorama’s agronomists from Australia and other countries, which should ensure the maximization of the agricultural outcomes described in Table 35 and Table 36 . In other words, this pilot will shed light on the true magnitude of achievable benefits from using drip irrigation in Uzbekistan’s cotton production. Thus, it needs to be monitored to inform future public policy and program changes. Areas requiring improvements 121. Many benefits shown in Table 35 and Table 36 remain unrealized on the ground. The reported cotton yield increase could be a result of using better seeds, predecessor crops, or improved farm management, and not necessarily because of the use of drip irrigation. As this public program is relatively new, rigorous impact evaluations, which could explain the role of drip irrigation in yield change vis-à-vis other factors, are still lacking. If an impact evaluation is to be carried out now, however, it could misrepresent the actual picture. The reality is that many farmers who recently adopted this technology are new farmers who received land in 2018–2019. Many of them have other businesses outside of agriculture. They have more capital than ‘average’ farmers and can recruit agronomists to help increase yields. Thus, they are better-off farmers, who were selected by local hokimiyats to pioneer the use of this irrigation technology. ‘Average’ farmers are likely to generate benefits more gradually or at a lower level. A rapid scaling up of this technology to traditional farmers, therefore, could leave these farmers indebted. 70 Analysis of the State Program for Drip Irrigation 122. In most cases field interviews show that cotton yield increase and production cost reduction have been insufficient to service the loans. Many farmers say that the loan repayment for installing drip irrigation is being serviced by income received from other businesses or secondary crops, in cases where these were allowed to be grown. Cotton alone does not offer sufficient profitability to justify this investment, which is confirmed by the financial analysis presented in Table 37. To be profitable, it needs to be considered as an investment to increase water availability for diversified crop production, not only for cotton production. In this case, saved water is used for other crops, turning drip irrigation from water-saving in theory to water-efficient in practice. 123. Liquid fertilizers needed for the smooth and efficient functioning of drip irrigation systems are not yet in sufficient supply. Except for ammonium nitrate, other traditional fertilizers are hard to turn into liquid, reducing the value of drip irrigation.59 124. Farmers know what drip irrigation can offer in theory, but practical knowledge on its efficient utilization and the maximization of agricultural outcomes is lacking. There is no capacity-building program on the ground to train farmers to optimize the use of drip irrigation (organized seminars were only one-time advertisement meetings). Farmers need to adjust irrigation to soil types – on the sandy soils drip irrigation is much less efficient than on clay soils, for example. The regional AKIS centers, planned to be established in each region, along with the organizers of cotton-textile clusters, could play this advisory and technology demonstration role. 125. The financial weakness of most farmers and their poor access to finance increases the cost of investment per hectare. Very few farmers have the resources to cover 40–50 ha with drip irrigation. Even before installing drip irrigation, to service 40 ha, farmers would need to invest in a pumping station (175 million Soums), reservoir (30 million Soums), electricity transformer (30 million Soums), and electricity lines for 1–2 kilometers to connect to the grid (100 million Soums), bringing the per hectare investment average to 6.3 million Soums. When only servicing 20 ha, the per hectare investment doubles to 12.5 million Soums, hurting farm competitiveness. 126. Connecting to the electricity grid is another big hurdle. Stable electricity is critical to maximize the outcomes of drip irrigation. Connecting to the grid, however, is not only expensive in Uzbekistan, as mentioned above, and time consuming, but also bureaucratic. Farmers sign the service contracts with district electricity providers at the beginning of the year. These contracts fix monthly electricity limits available to farmers. Drip irrigation is usually installed in the spring and summer months. After installing irrigation equipment farmers need to adjust their electricity contracts, including monthly limits, but they face difficulties in doing so. The resulting overuse of electricity limits leads to penalties. One farmer interviewed in the Samarkand region was penalized 26 million Soums in 202o for using electricity in excess of limits after installing a drip irrigation system. 127. The existence of many companies offering irrigation equipment and services does not guarantee quality or cost efficiency. Many companies cannot provide turn- key services, starting from the design of investments to carrying out works, and installing equipment to provide O&M services during the first several years. As a result, installed drip 59 he ongoing reforms of Uzbekistan’s fertilizer/chemical sector would, hopefully, create the necessary T conditions for the private sector to invest in manufacturing the fertilizers needed for more efficient farming. 71 Uzbekistan: Second Agricultural Public Expenditure Review irrigation generates suboptimal outcomes. Farmers report many cases where the contracts are not fulfilled or supplied equipment is unsuitable for the particular farm’s needs. In most cases, a blanket design for irrigation systems is used, disregarding farm specifics. 128. In some cases, local hokimiyats impose on farmers specific private and public companies. For example, the water reservoir must be constructed by the state-owned enterprise “MahsusSuvKyrilish,” which is owned by the MoWR. In the Kashkadarya and Samarkand regions, one half of all contracts for installing drip irrigation systems supported by the GoU ended up with one company, “Omad Start.” Another company, “Agro New Drip,” is being promoted by district hokimiyats in the Andijan and Tashkent regions. This is despite the fact that farmers in the U’rta Chirchiq district of Tashkent and the DjalaQuduq district of Andijan reported delays (up to July), overcharges (farmers had to pay value-added tax and custom duties), and contracts that did not include design and installation (contracts were only for supplies, they were not turn-key contracts). Very few companies discuss with farmers the possible options to reduce investment costs. There have been no minimum requirements for companies providing equipment and services to provide tailored turn-key services, for example, and local hokimiyats do not exercise control over contract implementation and/or the performance of private/public companies. 129. Uncertain land tenure security reduces incentives for investment in drip irrigation. Hokyms have almost uncontrolled powers to cancel land lease contracts, even after the abolishment of the state production quota for cotton. Investment in drip irrigation brings returns in the long run, at least after five years. What if a land lease contract is canceled earlier than that? Cancelled land leases could be subject to compensation, but it rarely occurs in practice.60 130. Few companies offer services to exchange flexible surface waterpipes. Where these services exist, exchanged waterpipes are sold at a 50 percent discount and can reach as high as 80 percent in Kashkadarya region. The absence of such an opportunity in other locations hurts farmers. When they purchase three-year use waterpipes, about 30 percent of them are reported to last only one year. Thus, many farmers prefer one- year use waterpipes, but do not have affordable access to them. At full cost, replacing waterpipes on one hectare, including labor costs, can equal the value of 0.5–1.0 ton of raw cotton. Unfortunately, companies benefiting from the demand created by the public program for drip irrigation are not required to have the capacity to supply replacement waterpipes to their clients/farmers that have purchased irrigation equipment. 131. Finally, drip irrigation is a priority technology that receives public support to enhance water use efficiency. Other types of water-saving irrigation may be more efficient for cotton growing in those places where drip irrigation does not work, but they receive little public support. When equipped with long tubes and “socks”, pivots and laterals can deliver water to the roots of the crop with savings almost equal to those of drip irrigation. This technology is used in Texas and Arizona in the United States. Overhead systems do not require furrow or bed development, thus reducing land preparation requirements and 60 U  zbekistan’s Minister of Justice mentioned in a recent interview that 25,000 cases out of 27,000 cancelled lease contracts the lessors (in both urban and rural areas) did not receive any compensation yet. The GoU’s debt for property demolition compensation is estimated to be more than 1 trillion Soums, but the 2021 State Budget allocated only 150 billion Soums for this purpose. 72 Analysis of the State Program for Drip Irrigation increasing suitability to other crop options. Other types of water-saving and water-efficient technologies also exist with promising effects, but they have not yet been rigorously tested with scientific approaches. Recommendations 132. Public support for the adoption of cotton sector drip irrigation should continue. Due to many implementation weaknesses, however, public expenditures for scaling this program up should remain modest and increase substantially only when most of the anticipated benefits from using drip irrigation can be achieved on the ground. Expanding the program from 15,000 ha in 2020 to 160,000 ha in 2021, as currently planned, would be risky and unpractical. 133. Participation in this program should be strictly voluntary. Farmers with sufficient capital and fields suitable for the adoption of drip irrigation can participate. However, farmers with less capital and with fields requiring large investments for preparation and electricity access could be mired in debt if forced to invest in drip irrigation against their will and capacity. 134. Farmers should be put in the driver’s seat. They need to have the freedom to select any company that meets program requirements (see below) and should insist that service starts with the preparation of the design of the investment, not with the procurement of equipment. Farmers must have a say in the final design and selection of equipment. 135. The GoU could develop a set of minimum standards for suppliers to comply with to be able to participate in the program, which benefits from public expenditures. They should have the capacity to deliver tailored turn-key services to farmers, including service provision for at least two years and offer discounted replacement waterpipes for at least three years after installing the drip irrigation system. The creation of public companies to deliver irrigation equipment and services to compete with private companies should not be allowed. This would bring corruption and create economic waste. The GoU should crowd in private businesses and ensure their compliance with agreed requirements, not to replace them and support farmers in getting access to a flexible electricity supply. 136. Permitting farmers to grow secondary crops or reduce their cotton growing area would increase the rates of return from drip irrigation. When limited to only cotton production, investments in drip irrigation in Uzbekistan are hard to make profitable. Although this would reduce water-savings, it would increase irrigation water use efficiency, which is still better than doing nothing. 137. Adding more public programs to increase farmers’ knowledge about water- saving technologies, alternative energy sources, and related agronomy on various soils is also critical. The organizers of cotton-textile clusters could be encouraged with tax breaks and other public support to advance the adoption of drip irrigation on farm fields by providing technical and agronomic advice and demonstrating technology on such fields. Supporting the use of solar panels in areas without a traditional electricity supply could be encouraged as part of the investment package. The MoA’s regional AKIS centers, to be established in each region, should provide demonstration and advisory services to farmers 73 Uzbekistan: Second Agricultural Public Expenditure Review to raise their interest and ensure the realization of the benefits of drip irrigation. Farmers should be encouraged to adopt soil conservation practices, which includes incorporating cotton crop residues into the soil instead of selling them. 138. Guarantees for farmers to maintain their land lease contracts to at least five years after investment in drip irrigation would increase the interest of farmers in this investment. 139. In 2022–2023, the GoU should conduct a rigorous impact evaluation of investments in drip irrigation. By that time, the program would have enough beneficiaries with at least 2–3 years of experience to study the actual costs and benefits achieved across the country. This evaluation, together with lessons learned from the ongoing investments in the clusters such as Indorama or Silverleaf, would inform the future of this program. 74 13 Analysis of the State Programs for Smallholder Farms Smallholder dekhan farmers were not receiving any public support for decades. The adoption of the Agricultural Strategy in 2019 helped raise attention to the importance of this group of farmers and their specific needs. The COVID-19 pandemic triggered more support to them, largely through credit provision. But support to smallholders also included other instruments such as matching investment grants, integration of smallholders into agrifood value chains, and technical assistance (through AKIS and the Farmers Council). This is the right mix of support, which needs to be fully rolled out (i.e., AKIS), well implemented, and underpinned by increased public financing for such programs over the medium term. 140. This chapter analyses the recent programs seeking to support smallholder farms. Most of these programs are very new, so their impact cannot be evaluated. This chapter, therefore, makes a short presentation of these programs and provides initial recommendations for strengthening their potential impacts. 141. Smallholder farms are the main agricultural producers in Uzbekistan. They include dekhan farms and household plots. As of January 1, 2021, there were 4.94 million dekhan and household farms, cultivating 820,065 ha (20 percent of the arable land) with an average size of 0.17 ha. Together they generated 68 percent of the gross agricultural output (GAO), 44 percent of crop production, and 91 percent of livestock production in 2020. These large shares in agricultural output are mainly due to the fact that small farms produce higher-value horticulture and livestock products, which compensate for their small size. They operate outside of the cotton and wheat production systems that are overseen by the government, and thus have been excluded for decades from state support. Although this has also brought many advantages—such as allowing small farms to be responsive to the needs of their households, their skills, and their knowledge in selecting their agricultural production, access to inputs, and market developments—a lack of state support kept many commercially oriented small farms from the benefits offered by the market liberalization and economic reforms that began in 2017. 75 Uzbekistan: Second Agricultural Public Expenditure Review 142. Before the COVID-19 crisis, small farms were mostly invisible with regard to state support. Many small farms do not have legal entity status and bank accounts, so they could not benefit from public programs. Moreover, a lot of agricultural support has been provided through subsidized credit, for which most small farms either do not have bankable collateral or their small size does not make them interesting to the banks. The only recent state programs that are targeted to small farms have been the Every Family is an Entrepreneur program, which provides microloans, and the subsidized credits from the Farm Council (see Chapter 7). 143. But lately the situation has started to change. During the COVID-19 pandemic in 2020, small farmers were included in anti-crisis economic and social programs. It was acknowledged that small farms have problems providing acceptable collateral for bank loans, and thus they were granted one-time matching grants to co-finance the purchase of small greenhouses, installation of drip irrigation, and procurement of horticulture seed and seedlings financed by the State Fund for Employment Assistance of the Ministry of Labor Relations and Employment.61 They also received support for contributing their shares in farm cooperatives (up to 2.23 million Soums) and full coverage of the costs of trainings and other capacity-building programs. In June 2020, the small dekhan farms and rural households received access to matching grants from the COVID-19 Anti-Crisis Fund to cover 70 percent of the costs of well drilling for livestock water supply. The Law on Dekhan Farms approved on March 12, 2021 allowed such farms to lease up to 10 ha of arable land from the public land reserves or reclaimed (brought back) into farming and sublease farmland from farmers in between growing cotton and wheat. In the past, dekhan farmers were not allowed to legally lease or sublease farmland and could farm only on their small plots, which have an average size of 0.17 ha and rarely exceed 1 ha. In addition, this Law permitted dekhan farms to have up to 1o livestock units, which had previously been restricted due to the lack of land for pasture and fodder. 144. Small farms are also being considered by and included in other public programs. Acknowledging the difficulties that small farms face in qualifying for bank loans, the MOA has recently initiated several programs to offer them opportunities to get access to other types of finance and improve access to markets, modern value chains, and knowledge. These programs/measures are still in the early stages of implementation, but they promise to provide more economic opportunities for smallholders and to address their varied constraints. The first example of such programs is the promotion of farm cooperation and productive partnerships between farmers and lead farms/firms, as a way of supporting the collective actions needed to integrate smallholders in modern agrifood value chains. Under the AMP, for example, credit will be provided only for such farm cooperatives and productive partnerships in horticulture value chains, in contrast to the previous practices of many credit line projects, under which credit provision were not conditioned by collective actions or integration of smallholders in agrifood value chains.62 The second example is the AMP pilot to establish intensive fruit orchards for the benefit of smallholders through private-public partnerships. The project will support the establishment of modern orchards with the help of recruited private companies in 10 regions on a total of 3,000 ha, who will manage them during the first several years critical for their successful development, and later pass them to a group of farmers through leasing arrangements. This pilot is 61  he matching grant for greenhouses is up to 6.7 million Soums, for drip irrigation up to 2.2 million Soums, and T for seedlings up to 0.7 million Soums. See the Resolution of the President of the Republic of Uzbekistan PP- 4716 “On Additional Measures for Support to Household Farms and Employment,” dated May 18, 2020. 62 The AMP became effective in August 2020. Preparations are underway to launch the project credit line and  other activities, which will be implemented during 2020–2026. 76 Analysis of the State Programs for Smallholder Farms a response to: (i) the lack of small farms’ bankable collateral to borrow for investments in intensive orchards;63 and (ii) the poor record of establishment of such orchards by local farmers without professional help. If successful, this pilot should be scaled up. The third example is the establishment of the AKIS centers, which, once they are set up, will be well positioned to provide regular trainings, advisory services, and market and agrometeorological information to all types of farmers (Box 2). Box 2. AKIS in Uzbekistan AKIS stands for agricultural knowledge and innovations system. Many countries seek to promote the AKIS approach that explores synergies to bring together agricultural education, research, and advisory services. The European Union’s Common Agricultural Policy, for example, provides a budget for supporting AKIS in its member states. In Uzbekistan, the AKIS concept was first mentioned in the Agricultural Strategy approved in October 2019. In February 2021, the President of the Republic of Uzbekistan signed the Decree to establish the AKIS for the agriculture sector, with a roadmap for 2021–2025. The central AKIS center in the Tashkent region opened in March 2021, and preparations are underway to open regional AKIS centers in each region (12) over the next two years, with AMP support. The AKIS centers will bring together agricultural education, research, and advisory services to provide more integrated and innovative information and knowledge support to farmers and other agri-entrepreneurs. Regarding service delivery to farmers, regional centers will provide: (i) information on various state programs using a one-window approach; (ii) agriculture-related testing of soils, pesticide residue, and plant protection, among others; (iii) space and opportunities for trainings, workshops, and other capacity-building programs; and (iv) advisory services on farming practices, climate-smart agriculture/good agricultural practices, market and agrometeorological information, and marketing opportunities, among others. 145. The impact of AKIS centers on smallholders will depend on many factors. The AKIS concept is new for Uzbekistan. Advisory services as part of the AKIS are another new concept. It will take time for AKIS’s advisory service officers/staff to be trained, including with the support of donor projects, accepted and requested by farmers, and to be able to tailor services to the specific needs of diverse groups of farmers, ranging from dekhan farms producing a wide variety of agricultural products to larger farms producing mainly cotton and wheat. Shifting from the supply-driven and administrative approach of agricultural management to market-oriented and demand-driven advisory services will be another hurdle to overcome. 63 M  ost intensive orchards in Uzbekistan in recent years were established by businessmen not by farmers, who lacked the collateral to borrow from credit line projects. 77 Uzbekistan: Second Agricultural Public Expenditure Review 146. From the fiscal perspective, the main challenge will be to ensure the financial sustainability of the AKIS centers. Relatively small farms should be the main target of AKIS advisory services. Large commercial farms, especially those in clusters, can and should hire their own agronomists and private-sector advisors to increase their profits. Uzbekistan is not unique in this respect. The same situation is observed globally. Small farms cannot afford to pay for advisory services provided by the private sector. As a result, they significantly underperform in terms of productivity, profitability, and sustainability, leading to many market failures that could be corrected by AKIS. Given that most farmers will not pay for advisory services, in order for the AKIS centers in Uzbekistan to be successful, their operational/recurrent costs must be covered by public expenditures, shared between central and regional governments. The AKIS centers could probably cover 15¬–20 percent of their operational costs, for example through provision of soil and other tests and specialized advisory services. The remaining 80–85 percent will need to be covered by the state budget. As the regional AKIS centers are being established with the support of capital investments from development partners, they will need to receive a budget allocation from the MoF and other sources to maintain their activities and use their assets efficiently. The GoU’s expected future financing of the AKIS centers’ operational budget is reflected in Table 25. 147. AKIS and collective actions for smallholders receive particular emphasis because these are potentially powerful programs, which could provide real support to this group of farmers. They are critical to bring ‘willing’ smallholders to a new level. The emphasis is on ‘willing’ farmers, because not all smallholders want to be more commercial and/or export oriented. Their participation in such programs should be strictly voluntary. But these public programs are important. Take the example of horticulture. Uzbekistan’s small farms know how to produce horticulture products and they can easily increase production by getting access to more land, capital, cold storage and logistics, and higher output prices. But they can’t produce more in a way that satisfies overseas customers and competes with other exporters. The recent decline in horticulture exports is excellent proof of this. In 2019, exports of Uzbek horticulture (fruits and vegetable) products almost doubled ($1.1 billion) compared t0 2017 ($6oo million). Farmers and agribusinesses responded to economic reforms, the exchange rate correction, and deregulation of the horticultural trade, which started in 2017. However, in 2020, horticulture exports declined by 12 percent on a year-on-year basis, due mainly to the COVID-19 crisis. It created many supply and transportation disruptions and led to a decrease in consumers’ purchasing power in its major markets, namely Kazakhstan and Russia. In the first quarter of 2021, Uzbekistan’s horticulture exports continued to decline. While the distortions triggered by the COVID-19 crisis contributed to this decline, other factors may also be at play. In order to maintain and increase its export market share, Uzbekistan has to change and improve its seed and seedlings quality, adopt good agricultural practices, adjust its growing season to meet the best export opportunity periods, better protect against early frosts, and improve the aggregation, sorting and packing of produce, among other things. These are quality, not quantity, improvements. Small farmers cannot individually implement these changes, they need to join others in farm cooperatives or productive partnerships with lead firms with the support of the above-described state programs. Doing this would be good for farmers, and also for the Uzbek economy, which would benefit from a better performing horticulture sector, the export revenues it generates, and the many jobs it creates. 78 Analysis of the State Programs for Smallholder Farms 148. The following are the implications for future agricultural public expenditures to support smallholders. The traditional model of supporting agriculture through subsidized credits in Uzbekistan is less suitable for the development of smallholder farms, which should be supported through a mix of micro-credits, matching grants for fixed capital formation, and GSS programs such as AKIS, and productive partnerships that are tailored to their needs and in most cases should be provided free of charge. Several such important programs have recently begun, as mentioned above. They need to be fully rolled out, well implemented, and underpinned by increased public financing for such programs over the medium term. 79 14 Conclusions and Recommendations Conclusions 149. The agriculture sector in Uzbekistan continues to receive significant budget support. During the first AgPER in 2016–2018, agricultural budget expenditures accounted for 2.1 percent of GDP and 7.1 percent of total public expenditures, even without considering the debt write-offs of 2017 and 2018. In 2019–2020, agricultural public expenditures increased in importance in terms of both GDP and total budget, to 2.3 percent and 8.9 percent, respectively. They slightly declined in 2020 compared to 2019 due to the COVID-19 crisis but they are projected to gradually increase over the next five years. 150. The agricultural budget is large in international comparison. A large share of the budget has been used for the electricity subsidy for irrigation and amounts to approximately 0.6 percent of GDP. But even without this subsidy, Uzbekistan has spent a lot on agriculture compared to other countries. OECD countries spend about 0.2 percent of GDP on agriculture. Non-OECD countries rarely spend more than 1.0 percent of GDP on agriculture, and the majority of them spend 0.5 percent of GDP on this sector. 151. The larger concern is that either the enabling policy environment or the allocative efficiency of these funds are not yet fully able to generate high, climate-resilient, and inclusive agricultural growth in Uzbekistan. Cotton and wheat producers continue to be underpaid for their outputs due to the use of below-market administrative prices, although the rate of agricultural price taxation for these producers declined substantially in recent years. In 2016–2018, farmers lost 4.0 trillion Soums or 1.3 percent of GDP annually due to the low state farmgate prices for cotton and wheat. In 2019–2020 this taxation declined to 2.2 trillion Soums or 0.4 percent of GDP. The COVID-19 crisis triggered new food market regulations and export restrictions, although these are expected to be dropped once the global pandemic ends. Agricultural public expenditures are still dominated by spending on traditional and energy-intensive irrigation systems and subsidized credits for the production of cotton and wheat, while spending on AKIS and other GSS programs remains very small. Other low-income countries with successful agricultural development programs spend about 0.5 percent of agricultural GDP on agricultural research and advisory services (a part of the AKIS). Uzbekistan spent one-tenth of this amount, about 0.06 percent, for this purpose in 2020. 152. However, the recent shifts and repurposing of public expenditures in the right direction are encouraging. In addition to the reduction in agricultural price taxation and the plans to eliminate it entirely in the future, recent years have seen the following positive shifts in public expenditures aligned with and inspired by the Agricultural Strategy: 80 Conclusions and Recommendations a. Support to farmers through advance working capital was extended to vegetable producers starting from 2021. For several decades such advances were granted exclusively to cotton and wheat growers. b. The interest rate subsidy for working capital to the growers of cotton and wheat increased every year between 2016 and 2019. In 2020, it was less than half compared to 2019 as a result of the increase in the interest rate paid by beneficiaries. c. Direct payments to farmers for growing cotton on poor soils was discontinued in 2019, as part of the agricultural diversification strategy and the alignment of lands to their most productive use. d. Several programs to support fixed capital formation through matching grants were introduced in 2019, including support for the adoption of drip irrigation for cotton, horticulture, and fodder production, investments in the viniculture sector, and land reclamation. These programs support the modernization of farm assets and are globally considered a better kind of direct farm payment than output and variable input subsidies to support sustainable agricultural growth. Some of these matching funds and credits have recently become accessible to small dekhan and household farms, which was not the case before. e. Support to small farms has grown in recent years, through direct financial support (subsidized credits, matching grants, and capacity building) and indirect support (farm cooperatives, productive partnerships, and leasing). f. Public spending on animal health and other sanitary measures increased tenfold and on forestry activities threefold between 2016 and 2020. g. Public spending on AKIS doubled between 2016 and 2020, although it remains at a very low level. In 2020, the staff of the public agricultural research institutes started to receive wages from the national budget. Prior to that their institutes had to generate income to pay wages. As a result, most research institutes engaged in agricultural production for profit, not applied research and development. h. Projects financed by development partners have become more diverse, shifting from predominantly credit lines accompanied by small capacity building investments to a more balanced mix of credit lines and larger investments to strengthen the capacity of agriculture public institutions (for example, AMP). 153. These expenditure shifts are conducive to making Uzbekistan’s agricultural growth more inclusive and climate resilient in the future. They are very much in line with the Agricultural Strategy approved in 2019. The 2021–2025 outlook for agricultural public expenditures predicts a continuation of some of these positive trends, with more funds being shifted to the desirable programs within the only slightly larger agricultural budget that is constrained by the tight fiscal space in the aftermath of the COVID-19 crisis. 154. But the risks to more efficient and impactful public expenditures remain high. They include: (i) a slower-than-planned elimination of agricultural price taxation; (ii) weak coordination among the various ministries involved in budget planning and implementation; (iii) a lack of strategic planning and implementation of investments made 81 Uzbekistan: Second Agricultural Public Expenditure Review through the projects financed by development partners; (iv) weak implementation of even the ‘right’ programs; (v) unsustainable expansion of livestock subsidies; (vi) lack of progress in reducing the cost of electricity for irrigation subsidies; and (vi) little progress in scaling up more tailored support to smallholders. Recommendations 155. Success in mitigating the above-mentioned risks will determine the value for money of agricultural public expenditures in Uzbekistan during the next decade. Proposed recommendations focus on mitigating these risks, including the following: a. Ensure that farmers receive the best market prices for their produce. b. Use the MTEF approach to coordinate agricultural public investment planning and implementation. c. Integrate the projects financed by development partners into the MTEF. d. Enhance the capacity and organization of public institutions for designing and delivering agricultural services in order to increase future budgets of GSS programs. e. Revert the subsidy dependency of the livestock sector by repurposing output subsidies into investment support and GSS programs and reforming the crop placement system. f. Invest in irrigation modernization with the objectives of reducing the high electricity bill and improving service provision to farmers. g. Maintain the momentum in supporting smallholder farmers through a mix of fit-for- purpose instruments. 156. Table 38 provides a summary of specific actions for these recommendations, differentiating between short and medium-term priorities. The main actions are summarized below: a. Abolishing agricultural price taxation: This is a priority agricultural policy task to ensure that farmers are fairly rewarded for their hard work and that agricultural public expenditures generate high rates of economic and social return. Removing agricultural price taxation (e.g., negative MPS) in the short run would require: (i) the abolishment of administrative state farmgate prices for wheat; (ii) the procurement of wheat for state purposes (e.g., for strategic grain reserves) only at market prices; and (iii) ensuring that minimum cotton farmgate prices stay close to estimated export parity prices. In the medium run, it will require: (iv) reforming the cotton market cluster organization to allow cotton prices to be determined by market and competition among clusters; and (v) refraining from any agricultural and food product price controls. b. Strengthening coordination in the agriculture sector: The effectiveness of agricultural public expenditures is reduced by the fragmentation of the agricultural public institutions presented in Chapter 3 and their weak coordination. It has not improved much since the adoption of the Agricultural Strategy, which sought to 82 Conclusions and Recommendations achieve it. Coordination at the central level could be enhanced by the introduction of the MTEF for the sector covering the COFOG areas, as part of the monitoring of the Agricultural Strategy’s implementation. At the local level, better coordination among various agricultural public institutions could be built around regional AKIS centers as part of the integrated delivery of agricultural services. In the medium term, the quality of integrated public investment management should be improved by adding the requirement to accompany budget requests under the MTEF with the presentation of past achievements and key performance indicators for future investments. This additional information would help the MoF make more informed decisions regarding budget allocations. c. Integrating donor-financed projects in agricultural finance planning and implementation: With the increase in donor-financed agricultural expenditures for non-credit lines, it is recommended that recipient-executed projects be included in the agriculture sector’s MTEF so that they become part of the overall public investment management. These are the projects financed by international financial institutions such as the World Bank-financed AMP but implemented by public institutions such as the MoA. Incorporating such investment projects into the MTEF would help facilitate the inclusion of future recurrent expenditures in the programs (e.g., AKIS), which are currently mostly financed by donors but would later need to be financed by the GoU. In the medium term, the agriculture sector’s MTEF should include all donor-financed projects, irrespective of whether they are executed by public institutions or donors through subcontract arrangements. d. Enhancing the capacity of public institutions to deliver agricultural services: Since the adoption of the Agricultural Strategy many ‘right’ programs such as AKIS have been initiated in Uzbekistan. The challenge has changed from “what to finance” to “how to implement” such programs properly, effectively, and climate smart so that public investments pay off. For the MoA, for example, ensuring high quality implementation of new programs would require an internal organization and reassignment of more staff to work on selected programs, which receive substantial financing (for example, from the AMP and European Union budget support). The agricultural public institutions should take greater institutional ownership of the implementation of donor-financed projects, which is currently not always the case. They still tend to delegate most work to project implementation units, staffed with consultants, who are recruited to help, but not lead, the implementation of project activities. This results in significant delays and inefficiencies in project implementation, and foregone institutional memories of lessons learned. In the medium term, agricultural public institutions are recommended to establish M&E systems and utilize them to assess the quality of implementation, correct implementation approaches where needed, and generate valuable data for public expenditure/MTEF planning and execution. e. Increasing the allocative efficiency of livestock support: It is recommended that institutions rethink the newly emerged approach to livestock sector development, which emphasizes output subsidies and livestock importation. Achieving sustainable livestock development would actually require reducing the subsidy dependency by replacing livestock output subsidies with matching grants/investments for fixed capital formation (for example, livestock farm modernization). It is also recommended to 83 Uzbekistan: Second Agricultural Public Expenditure Review refrain from a significant increase in support for livestock breed importation, focusing instead on improving the quality of this program. Saved expenditures would be better invested in GSS programs such as animal nutrition, AKIS, veterinary services, artificial insemination, and local livestock breeding, which is needed to increase the value for money from the current livestock breed importation program. In the medium term, the GoU would need to: (i) remove the crop placement system to support market- oriented farmland use and more fodder production; (ii) provide incentives to farmers coupled with regulatory restrictions to reduce the livestock herd and replace less productive and less resilient animals; and (iii) improve the quality of implementation of GSS programs. f. Investing in irrigation modernization: Irrigation expenditures account for a very large share of total agricultural public expenditures. Increasing the impact of irrigation on agricultural outcomes and reducing a long-term burden on public expenditures for maintaining irrigation and drainage infrastructure are two major objectives for the sector. Based on the recently completed Irrigation PER,64 the critical short-term reforms include: (i) prioritizing the allocation of required repair and maintenance expenditure by good practice’s norms to the most critical assets and prepare their mapping in a ‘preventive repair and maintenance plan’; (ii) supporting farmers in addressing constraints to maximize the benefits of drip irrigation support programs; (iii) acceleration of the pace of implementation of ongoing projects to reduce electricity consumption at water facilities and introduce effective methods to regulate the operation of pumping stations; and (iv) more investment in building human capital for irrigation management. In the medium term, priority reform actions should include: (i) increasing the efficiency of irrigation systems through the modernization, reconstruction, and repair of water management irrigation and drainage systems using highly efficient irrigation technologies; and (ii) piloting the installation of volumetric metering between district water management organizations and WCAs and between WCAs and farms to prepare the irrigation system for volumetric payments. g. Strengthening support to smallholder farms: The recent inclusion of small farms in agricultural state support is a welcome development, which needs to be continued and further strengthened. Over the coming years, it will be important to maintain a mix of support instruments for smallholders (such as matching grants, training and other capacity building, farm cooperation, and productive partnerships) beyond subsidized credit, the use of which is limited due to the lack of bankable collateral and the small size of their operations. Targeted assessments of smallholder farms’ needs should be initiated to design AKIS support services to meet the requirements of smallholder farmers. In the medium term, successful programs to integrate smallholders into modern agrifood value chains and their human capital development should be scaled up. 64 W  orld Bank. 2021. Uzbekistan: Second Public Expenditure Review. Chapter 5: Irrigation Water Management. Washington, D.C. 84 Conclusions and Recommendations Table 38. Spectrum of actions in the agri-food sector of Uzbekistan to deliver more jobs Short-term (1–2 years) Medium-term (3–5 years) - Abolish the state administrative farmgate - Reform cotton market price for wheat procurement cluster organization to - Procure wheat for state purposes (e.g., ensure the competi- strategic reserves) at market prices tive, market-based de- Abolish agricultural termination of cotton 1 - Ensure that minimum cotton farmgate price taxation prices prices closely follow export parity prices - Refrain from any agricultural and food product price controls - At the central level, introduce the MTEF - Ensure that the MTEF for the agriculture sector with inclusion budget requests are of all expenditures (recurrent and capital) underpinned by a Strengthen coordi- and all public institutions managing agri- description of past 2 nation in the agricul- cultural expenditures achievements and ture sector key performance - At the local level, strengthen coordination among agriculture-related public institu- indicators/targets tions through regional AKIS centers - Include the recipient-executed projects - Include all projects financed by development partners and financed by devel- Integrate donor-fi- implemented by agricultural public insti- opment partners nanced projects in tutions into the MTEF and overall public and implemented by 3 agricultural finance investment management agricultural public planning and imple- institutions into the mentation - Ensure the inclusion of future recurrent expenditures in programs (e.g., AKIS) MTEF initiated by donor projects - Carry out internal organizational improve- - Adopt M&E systems ments in agricultural public institutions to to assess the quality improve the quality of implementation of of implementation Enhance the capaci- the existing programs and generate data for ty of public insti- - programs public expenditure/ 4 tutions to deliver MTEF planning agricultural services - Integrate climate-related considerations in any actions or services provided - Take strong institutional ownership in implementing donor-financed projects - Invest more in GSS programs such as - Remove the crop animal nutrition, AKIS, veterinary services, placement system to artificial insemination, and local livestock support market-orient- breeding ed farmland use and - Replace livestock output subsidies with more fodder produc- Increase the alloc- matching grants for fixed capital forma- tion 5 ative efficiency of tion - Provide incentives livestock support - Refrain from significant increases in sup- and regulations to port to livestock breed importation reduce the country’s livestock herd - Improve the quality of implementation of GSS programs 85 Uzbekistan: Second Agricultural Public Expenditure Review - Establish priorities in the allocation - Increase the efficiency of required repair and maintenance of irrigation systems expenditures by good practice’s norms through moderniza- to the most critical assets and prepare tion, reconstruction, their mapping in a ‘preventive repair and and repair of irrigation maintenance plan’ and drainage systems - Support farmers in addressing constraints using highly efficient to maximize the benefits of drip irrigation irrigation technologies Invest in irrigation 6 modernization support programs - Pilot the installation of - Accelerate the pace of implementation volumetric metering of ongoing projects to reduce electricity between district water consumption at water facilities and intro- management orga- duce effective methods for regulating the nizations and WCAs operation of pumping stations and between WCAs - Invest more in building human capital on and farms to prepare irrigation management irrigation systems for volumetric payments - Maintain a mix of support instruments for - Scale up programs for smallholders beyond subsidized credit integration of small- Strengthen support - Make needs assessments and target holders into modern 7 to smallholder farms some AKIS services to the specific needs agrifood value chains of smallholder farmers and their human capi- tal development Source: World Bank assessments. 86 Conclusions and Recommendations Annex 1. Spectrum of actions in the agri-food sector of Uzbekistan to deliver more jobs Functional composition In % of total agri- Future repurpos- cultural expendi- ing tures in 2018 Priority 1: Enhancing food security Public foods stocks 0% New expenditures, increase Priority 2: Improving enabling environment for agribusiness and value chains Interest rate subsidy for cotton production 9.2% Gradual decrease Interest rate subsidy for wheat production 1.9% Gradual decrease Support to agricultural mechanization 5.4% Gradual decrease Support to seed production and quality control 0.1% Gradual increase Support to livestock and fishery production 0.2% Gradual increase Support to horticulture sector 0% New expenditures, increase Support to agri-logistical services 0% New expenditures, increase Support to development of farm cooperatives and other 0% New expenditures, forms of cooperation increase Priority 3: Reducing the role of the state in agriculture Support for the modernization and diversification of 0% New expenditures, agriculture increase Support to private-public partnerships 0% New expenditures, increase Priority 4: Ensuring the sustainable use of natural resources Support to farmers producing cotton on low-quality soils 1.4% Gradual decrease Support for the adoption of Good Agricultural and 0% New expenditures, Environmental Practices increase Forestry management and protection 1% Gradual increase Capital investments in new and existing irrigation and 18.3% Gradual increase drainage infrastructure Operations and management of the irrigation and 17.5% Gradual increase drainage infrastructure Subsidy for electricity use in irrigation 23.0% Gradual decrease Priority 5: Developing modern state support instruments Inspection services (sanitary and phytosanitary 0.2% Gradual increase measures) Crop protection 0.3% Gradual increase Veterinary services 3.9% Gradual increase Food safety 0% New expenditures, increase Disaster risk management 1% Gradual increase 87 Uzbekistan: Second Agricultural Public Expenditure Review Functional composition In % of total agri- Future repurpos- cultural expendi- ing tures in 2018 Priority 7: Strengthening research, education, and advisory and extension services Agricultural research and development 0.5% Gradual increase Agricultural education 5.9% Gradual increase Advisory and extension services 0% New expenditures, increase Priority 8: Supporting rural development Rural development programs 0% New expenditures, increase Priority 9: Developing accurate and transparent information and statistics Establish the agricultural market information system 0% New expenditures, increase Other agricultural expenditures 10.2% Gradual decrease 88 Annex 2. Uzbekistan: Agrifood Sector Development Partner Projects # Project title US$ Grant/ Develop- Government Implementing agency Start End (million) Credit ment Partner Partner date date   TOTAL ONGOING PROJECTS (US$4,000 million)           (A) Irrigation and drainage projects (US$1,137.6 million)          1 Sustainable management of water re- sources in rural areas in Uzbekistan 2.26 Grant EU MoWR GIZ-led Consortium 2016 2020 (Component III) Conclusions and Recommendations 2a Amu Bukhara Irrigation System Rehabili- 215.00 Credit ADB MoWR MoA (former UZAIFSA) 2014 2021 tation 2b Amu Bukhara Irrigation System Rehabili- 113 Credit JICA MoWR MoWR 2015 2025 tation 3 Improvement of Water Resources man- 89.60 Credit IsDB MoWR MoWR 2015 2020 agement in Surkhandarya Region 4 South Karakalpakstan Water Resource 214.00 Credit WB MoWR MoWR (former UZAIFSA) 2016 2022 Management Improvement Project 5 Fergana Valley Water Resource Manage- 145.00 Credit WB MoWR (former UZAIFSA) ment Project 2 MoWR 2017 2024 16.70 Grant EU MoWR (former UZAIFSA) 6 Water Services and Institutional Support 281.8 Credit EIB EIB/ MoWR (former UZAIFSA) Programme in Uzbekistan, Phase 1 MoWR 2019 2028 12.68 Grant EU EIB/ MoWR (former UZAIFSA)  (B) Horticulture related projects (US$1,467.1 million)          1 Sustainable Development in Rural Areas 11.11 Grant EU MoA GIZ-led Consortium 2015 2020 of Uzbekistan 2 Horticulture Development Project 150.00 Credit WB MoA (former UZAIFSA) MoA 2015 2023 25.00 Grant EU MoA (former UZAIFSA) 4 Climate adaptation and mitigation pro- MoA (former UZAIFSA) 14.00 Credit WB MoA 2017 2020 gram for the Aral Sea Basin 89 90 # Project title US$ Grant/ Develop- Government Implementing agency Start End (million) Credit ment Partner Partner date date 5 Horticulture Sector Value Chain Infra- MoA (former UZAIFSA) 197.00 Credit ADB MoA 2019 2022 structure Project 6 Horticulture Development Project, Phase MoA (former UZAIFSA) 500.00 Credit WB MoA 2018 2022 II 7 Horticulture Value Chain Development MoA (former UZAIFSA) 352.00 Credit ADB MoA 2017 2021 Project 8 Horticulture Value Chain Promotion Proj- MoA (former UZAIFSA) 218.00 Credit JICA MoA 2015 2025 ect (C) Livestock related projects (US$510.6 million)          1 Dairy Value Chain Development Pro- Credit / 23.88 IFAD MoA SLDVC (former UZAIFSA) 2016 2022 gramme* Grant 2 Livestock Sector Development Project 150.00 Credit WB SLDVC (former UZAIFSA) MoA 2018 2022 17.26 Grant EU SLDVC (former UZAIFSA) 3 Livestock Value Chain Development Proj- 150.00 Credit ADB MoA SLDVC (former UZAIFSA) 2019 2025 ect 4 Livestock Sector Development Project* 169.50 Credit AFD MoA SLDVC (former UZAIFSA) 2017 2021 5 Establishment of a Network on Priority Livestock Diseases in Central Asia (PLD- 0.42 Grant FAO SLDVC SLDVC (former UZAIFSA) 2019 2021 CA) (D) Other agrifood related projects (US$836.4 million)         1 Sustainable Cotton Supply Chain Devel- Uzpakhtasa- 5.00 Grant IFC IFC 2017 2023 opment in Uzbekistan noatexport 2 Sustainable Forest Management in 3.60 Grant FAO/GEF MoA MoA 2016 2021 Mountain and Valley Areas in Uzbekistan Uzbekistan: Second Agricultural Public Expenditure Review # Project title US$ Grant/ Develop- Government Implementing agency Start End (million) Credit ment Partner Partner date date 3 Agriculture Diversification and Modern- 46.50 Credit IFAD MoA MoA (former UZAIFSA) 2018 2022 ization Project 4 Ecosystem-based land management and conservation of ecosystem at the lower 2.38 Grant German Govt MoA GIZ 2017 2020 course of the Amu Darya river 5 Technical Assistance to the Ministry of 0.69 Grant EU MoA Linpico/Landell Mills 2020 2020 Agriculture Conclusions and Recommendations 6 EU Budget Support for Agriculture 39.29 MoF/MoA MoA / Coordi- EU Budget Support for Agriculture com- Grant EU 2020 2024 8.33 nation Council MoA plementary technical assistance 7 Skills Development for Employability in MoA, MoLR, Rural Areas 11.43 Grant EU UNESCO 2020 2023 MoHSE 8 Improved Public Service Delivery and En- Min of Local hanced Governance in Rural Uzbekistan 11.67 Grant EU UNDP 2019 2024 Government 9 Supporting the Implementation of Inclu- 0.10 Grant FAO MoA FAO 2020 2021 sive Agricultural Policies 10 National Overview and Strategy for the Aquaculture Sector and the Fish Value 0.25 Grant FAO MoA/SLDVC FAO 2019 2021 Chain 11 Support for Sustainable Development of 0.34 Grant FAO MoA/SLDVC FAO 2019 2021 Beekeeping 12 Strengthening the Administrative Sys- 0.10 Grant FAO MoA FAO 2019 2020 tem to Manage and Maintain Sustainable Geographical Indications 91 92 # Project title US$ Grant/ Develop- Government Implementing agency Start End (million) Credit ment Partner Partner date date 13 Support for the Production and Manage- 0.10 Grant FAO MoA FAO 2020 2022 ment of Rice Crops 14 Strengthening the Capacity of Price and 0.42 Grant FAO MoA FAO 2020 2022 Market Information and Policy Monitoring Systems in Response to COVID-19 and Other Shocks 15 Sustainable Natural Resource Use and 6.21 Grant GEF MoA UNDP 2017 2022 Forest Management in Key Mountainous Areas Important for Globally Significant Biodiversity 16 Ferghana Valley Rural Enterprise Devel- 200.00 Credit WB MoA MoA (former UZAIFSA) 2019 2024 opment Project 17 Agriculture Modernization Project 500.00 Credit WB MoA MoA (former UZAIFSA) 2020 2026 (E) Other Regional Agrifood related projects (US$49.1 million)        1 Competitiveness, Trade and Jobs (CTJ) 24.00 Grant USAID MoFA/MoA DAI Global 2016 2021 2 Smart Waters 10.00 Grant USAID MoWR CAREC 2015 2020 3 Integrated natural resources manage- ment in drought-prone & salt-affected MoA/Uzhy- 10.98 Grant FAO/GEF MoWR/Uzhydromet 2016 2021 agricultural production systems in Central dromet Asia & Turkey 4 “D-TEX”- Digitalization of supply chains in Uzbekistan Digital Commer- 1.29 Grant EU MoA 2019 2023 the textile industry in Central Asia cial Association 5 Resource Efficiency in Agri-food Produc- Regional Environmental tion and Processing (REAP) 2.82 Grant EU MoA Center for Central Asia As- 2020 2024 sociation Uzbekistan: Second Agricultural Public Expenditure Review # Project title US$ Grant/ Develop- Government Implementing agency Start End (million) Credit ment Partner Partner date date 6 Project for Improvement of Locust Man- JICA/Japanese 7.55 Grant MoA FAO 2020 2025 agement (Phase II) Govt 7 Smart Farming for the Future Generation 3.41 Grant Korean Govt MoA FAO 2020 2024 8 Sustainability and Value Added in the 3.57 Grant German Govt MoA GIZ 2019 2023 Cotton Economy 9 Ecologically-Oriented Development of 9.60 Grant German Govt MoA GIZ 2020 2024 Conclusions and Recommendations the Aral Sea Region 10 Capacity Building for Sustainable Fisher- ies and Aquaculture Management in Cen- 1.00 Grant Turkish Govt MoA FAO 2020 2022 tral Asia – FishCAP 11 Reduction of Food Loss and Waste in the 0.50 Grant Turkish Govt MoA FAO 2019 2021 SEC Countries 12 Strengthening regional collaboration and national capacities for management of 1.07 Grant Turkish Govt MoA FAO 2020 2024 wheat rust diseases Source: World Bank estimates using data from the European Union Agricultural Budget Support Project, December 2020. 93 Uzbekistan: Second Agricultural Public Expenditure Review Annex 3: Legislation for Agricultural Credit Supported by the SFES 1. Resolution of the President of the Republic of Uzbekistan No. 4579 “On Measures for Further Development of the Poultry Sector,” from November 13, 2018. 2. Resolution of the President of the Republic of Uzbekistan No. 4020 “On Measures for the Creation of Additional Conditions for Greenhouse Development,” from November 20, 2018. 3. Resolution of the President of the Republic of Uzbekistan No. 4579 “On Additional Measures for the Support of Accelerated Development of the Silk Sector,” from December 4, 2018. 4. Resolution of the President of the Republic of Uzbekistan No. 4087 “On Urgent Measures for the Creation of an Enabling Environment for Wide Adoption of Drip Irrigation in Cotton Production,” from December 27, 2018. 5. Resolution of the President of the Republic of Uzbekistan No. 4239 “On Measures for the Development of Farm Cooperation in the Horticulture Sector,” from March 14, 2019. 6. Resolution of the President of the Republic of Uzbekistan No. 4579 “On Measures for Further Development and Support of the Livestock Sector,” from March 18, 2019. 7. Resolution of the President of the Republic of Uzbekistan No. 4246 “On Measures for Further Development of Horticulture and Greenhouses in Uzbekistan,” from March 20, 2019. 8. Resolution of the President of the Republic of Uzbekistan No. 4337 “On Measures for the Expansion of Mechanisms of Financing and Insuring Export Activities,” from May 24, 2019. 9. Decree of the President of the Republic of Uzbekistan No. 5742 “On Measures for the Efficient Use of Land and Water Resources in Agriculture,” from June 17, 2019. 10. Resolution of the President of the Republic of Uzbekistan No. 4406 “On Additional Measures for Deep Processing of Agricultural Products and Further Development of the Food Processing Industry,” from July 29, 2019. 11. Resolution of the President of the Republic of Uzbekistan No. 4499 “On Measures for the Expansion of Mechanisms for Stimulation and Adoption of Water-Saving Technologies,” from October 25, 2019. Resolution of the President of the Republic of Uzbekistan No. 4517 “On Measures for 12. Accelerated Livestock Development in the Karakalpakstan Region,” from November 7, 2019. 94 Conclusions and Recommendations Resolution of the President of the Republic of Uzbekistan No. 4549 “On Additional 13. Measures for the Development of Horticulture, Creation of Value Chains,” from December 11, 2019. Resolution of the President of the Republic of Uzbekistan No. 4767 “On Additional 14. Measures for Improving the Use of Household Plots,” from June 30, 2020. Decree of the President of the Republic of Uzbekistan No. 4579 “On Measures for 15. Further Development of Silk and Karakul Production in Uzbekistan,” from September 2, 2020.  95 Uzbekistan: Second Agricultural Public Expenditure Review Annex 4: Medium-Term Expenditure Framework and Agricultural Budget Planning: Example from Ukraine 1. Agricultural public expenditures in Ukraine are presented as a part of the Medium-Term Expenditure Framework (MTEF). The proposed budget for the upcoming year is presented along with the budget for the previous year and the forecast budget for two future years. At the end of 2020, for example, the Ministry of Agriculture submitted its budget request to the Ministry of Finance together with the actual agricultural budget in 2020, the planned/requested budget for 2021, and forecast budgets for 2022 and 2023. Table 39 presents major programs with direct farm payments to Ukrainian farmers. In 2020, the direct farm payments were provided through five programs, amounting to $151.3 million. For 2021, the requested budget is $312.9 million, which includes two new programs. Table 39. Ukraine: Key programs for direct farm support, billion Ukrainian hryvnia, 2020–2023 2020 2021 2022 2023 Actual Plan Forecast Forecast 1 Livestock sector development 1.00 3.63 3.43 3.37 2 Agricultural credit and insurance 1.20 2.25 2.14 2.17 3 Investment subsidy for partial 1.00 0.96 1.13 1.33 compensation of the cost of locally manufactured agricultural machinery and equipment 4 Support to small farms 0.48 0.73 0.77 0.94 5 Support to horticulture 0.40 0.41 0.47 0.64 development 6 Support to selected food security 0.00 0.30 0.30 0.30 products 7 Support to potato production 0.00 0.16 0.25 0.25 Total, billion UAH 4.08 8.44 8.48 8.99 For information: Total in million 151.26 312.91 314.76 333.67 US$ Source: Ministry of Finance of Ukraine. 2. The budget request is underpinned by descriptions, objectives, end targets, and past performance of the main programs. Figure 9 presents the examples of information provided for the programs on livestock sector development (Program 1), agricultural credit (Program 2), and support to horticulture development (Program 5). This information is available to the public, who can use it to better understand the objectives and targets of agricultural public expenditures and whether these targets are achieved. 96 Conclusions and Recommendations Figure 9. Informality of jobs in selected developing countries 97 Uzbekistan: Second Agricultural Public Expenditure Review 98