Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD1901 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT PAPER ON A PROPOSED ADDITIONAL CREDIT IN THE AMOUNT OF US$7.5 MILLION AND PROPOSED GRANT IN THE AMOUNT OF SDR 5.4 MILLION (US$7.5 MILLION EQUIVALENT) TO THE REPUBLIC OF TAJIKISTAN AND RESTRUCTURING OF THE AGRICULTURE COMMERCIALIZATION PROJECT November 22, 2017 Agriculture Global Practice EUROPE AND CENTRAL ASIA This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective October 31, 2017) Currency Unit = Tajikistan Somoni TJS 8.7986 = US$1.00 US$1.405 = SDR 1.00 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ACP Agriculture Commercialization Project ADB Asian Development Bank AED PMU Agricultural Entrepreneurship Development Project Management Unit AF Additional Financing BDS Business Development Services CPS Country Partnership Strategy EC Evaluation Committee ECA Europe and Central Asia EMP Environmental Management Plan ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plans FA Financing Agreement FIL Financial Intermediary Lending FIRR Financial Internal Rates of Return GDP Gross Domestic Product GRM Grievance Redress Mechanism GRS Grievance Redress Service IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation LLI Leadership, Learning and Innovation M&E Monitoring and Evaluation MFI Micro-finance Institution MGP Matching Grant Program MOA Ministry of Agriculture MOF Ministry of Finance MSME Micro-, Small- And Medium-Sized Enterprise NBT National Bank of Tajikistan NGO Non-Governmental Organization NPV Net Present Value PDO Project Development Objective PFI Participating Financial Institution PIU Project Implementation Unit POM Project Operational Manual PWD Persons With Disabilities RISP Rural Investment and Services Program SA Social Assessment SLA Subsidiary Loan Agreement TA Technical Assistance USAID United States Agency for International Development USD United States Dollars Vice President: Cyril E. Muller Country Director: Lilia Burunciuc Country Manager: Jan-Peter Olters Senior Global Practice Director: Juergen Voegele Practice Manager: Julian Lampietti Task Team Leader: Sandra Broka, Bobojon Yatimov REPUBLIC OF TAJIKISTAN AGRICULTURE COMMERCIALIZATION PROJECT CONTENTS Page Project Paper Data Sheet I. Introduction ................................................................................................................................ 1  II. Background and Rationale for Additional Financing ................................................................ 1  III. Proposed Changes .................................................................................................................... 8  IV. World Bank Grievance Redress............................................................................................. 25  Annex 1: Results Framework and Monitoring.............................................................................. 26  Annex 2: Tajikistan Agriculture Commercialization Project ....................................................... 34  Annex 3: Implementation and Fiduciary Arrangements ............................................................... 43  Annex 4: Economic and Financial Analysis ................................................................................. 47  Annex 5: Social Issues in the AF to Agriculture Commercialization Project ............................. 55  ADDITIONAL FINANCING DATA SHEET Tajikistan Agriculture Commercialization Project Additional Financing (P158499) EUROPE AND CENTRAL ASIA . Basic Information – Parent Parent Project ID: P132652 Original EA Category: B - Partial Assessment Current Closing Date: 30-Jun-2021 Basic Information – Additional Financing (AF) Additional Financing Project ID: P158499 Restructuring Type (from AUS): Regional Vice President: Cyril E Muller Proposed EA Category: B – Partial Assessment Expected Effectiveness Country Director: Lilia Burunciuc 30-Mar-2018 Date: Senior Global Practice Juergen Voegele Expected Closing Date: 30-Jun-2022 Director: Practice Julian A. Lampietti Report No: PAD1901 Manager/Manager: Sandra Broka, Bobojon Team Leader(s): Yatimov Borrower Organization Name Contact Title Telephone Email REPUBLIC OF Abdusalom Minister of (992 37) 2211417 investdiv@mail.ru TAJIKISTAN Qurboniyon Finance Project Financing Data - Parent (TAJIKISTAN AGRICULTURE COMMERCIALIZATION PROJECT-P132652) (in USD Million) Key Dates Approval Effectiveness Original Revised Project Ln/Cr/TF Status Signing Date Date Date Closing Date Closing Date P132652 IDA-H9640 Effective 10-Jun-2014 30-Jul-2014 27-Feb-2015 30-Jun-2021 30-Jun-2021 Disbursements Undisb % Project Ln/Cr/TF Status Currency Original Revised Cancelled Disbursed ursed Disbursed P132652 IDA-H9640 Effective XDR 14.30 14.30 0.00 5.23 9.01 36.56 i Project Financing Data - Additional Financing ACP Additional Financing (P158499) (in USD Million) [ ] Loan [ ] Grant [ X ] IDA Grant [X] Credit [ ] Guarantee [ ] Other Total Project Cost: 15.00 Total Bank Financing: 15.00 Financing Gap: 0.00 Financing Source – Additional Financing (AF) Amount BORROWER/RECIPIENT 0.00 International Development Association (IDA) 15.00 Total 15.00 Policy Waivers Does the project depart from the CAS in content or in other significant No respects? Explanation Does the project require any policy waiver(s)? No Explanation Team Composition Bank Staff Name Role Title Specialization Unit Sandra Broka Team Leader Senior Agriculture Senior Agriculture GFA05 (ADM Economist Economist Responsible) Bobojon Yatimov Team Leader Senior Agriculture Senior Agriculture GFA03 Specialist Specialist Dilshod Karimova Procurement Procurement Procurement GGO03 Specialist (ADM Specialist Specialist Responsible) Niso Bazidova Financial Financial Financial GGO21 Management Management Management Analyst Specialist Analyst Arcadii Capcelea Safeguards Senior Senior Environmental GEN03 Specialist Environmental Specialist Specialist Victoria Strokova Team Member Economist Economist GPSJB Ekaterina Romanova Safeguards Social Development Social Development GSU03 Specialist Specialist Specialist ii Sofya Muradyan Team Member Private Sector Private Sector GTCID Specialist Specialist Hiromi Yamaguchi Team Member Consultant Operations Specialist GFA03 Izabela Leao Team Member Rural Development Rural Development GFA06 Specialist Specialist Nikolai Soubbotin Counsel Lead Counsel Country Lawyer LEGLE Ruxandra Costache Counsel Senior Counsel Country Lawyer LEGLE Jasna Mestnik Finance Officer Finance Officer Finance Officer WFALN Mohamed Ihsan Team Member Senior Economist Senior Economist GSP03 Ajwad Nodira Pirmanova Team Member Program Assistant Program Assistant ECCTJ Zarina Odinaeva Team Member Senior Financial Senior Financial GFM09 Sector Specialist Sector Specialist German Kust Safeguards Consultant Senior Environmental GEN03 Specialist Specialist Svetlana Sharipova Safeguards Consultant Social Development GSU03 Specialist Specialist Sitora Sultanova Team Member Private Sector Private Sector GTCEE Development Development Specialist Specialist Funda Canli Team Member Senior Program Senior Program GFA03 Assistant Assistant Extended Team Name Title Location Locations Country First Administrative Location Planned Actual Comments Division Tajikistan Viloyati Sughd Viloyati Sughd X Tajikistan Khatlon Viloyati Khatlon X Tajikistan Region of Region of X Republican Republican Subordination Subordination Institutional Data Parent (TAJIKISTAN AGRICULTURE COMMERCIALIZATION PROJECT-P132652) Practice Area (Lead) iii Agriculture Contributing Practice Areas Additional Financing ACP Additional Financing (P158499) Practice Area (Lead) Agriculture Contributing Practice Areas Finance & Markets, Social Protection & Labor, Trade & Competitiveness Consultants (Will be disclosed in the Monthly Operational Summary) Consultants Required ? iv I. Introduction 1. This Project Paper seeks the approval of the Executive Directors for provision of additional credit in the amount of US$7.5 million equivalent and additional grant in an amount of SDR5.4 million (US$7.5 million equivalent) to the Republic of Tajikistan, and restructuring of the Agriculture Commercialization Project (ACP; P132652), Grant Number H964-TJ. 2. The additional financing would help finance the costs associated with new activities proposed to be included in the project in response to needs identified as urgent and complementary, during the implementation of ACP. The proposed Additional Financing (AF) will finance activities critical to consolidate and expand project impacts, and assist the Government of Tajikistan to achieve broader impacts on jobs and micro-, small- and medium-sized enterprise (MSME) development. 3. The AF will finance new additional project activities in view of the expanded scope of the project. The project restructuring will, therefore, include: (i) a reformulation of the Project Development Objective (PDO); (ii) revisions to the project components, activities, and costs; and (iii) modification to the Results Framework. The restructuring will also include revisions to the Financing Agreement of the original ACP to the reflect the changes to the PDO and the revised title of the Component 2. To implement the expanded project, the Borrower has requested an AF to cover investment needs in the amount of US$15 million. II. Background and Rationale for Additional Financing A. Country Context 4. Tajikistan’s economy grew at a robust average of 7.9 percent per year during 2000-2014 before slowing down to still robust 6.0 percent in 2015 and 6.9 percent in 2016. Until 2009, growth was supported by rising export revenues and strong remittance inflows as both the global and regional economies expanded rapidly. However, exports of aluminum and cotton (key export commodities) declined sharply in the wake of the global financial crisis and Tajikistan’s economy became increasingly dependent on remittances, which peaked at over 50 percent of the GDP in 2013. High growth rates produced lower poverty rates, falling from over 80 percent to about 32 percent of the total population. With a gross national income per capita of US$1,2401 it remains one of the low-income countries in the Europe and Central Asia Region. 5. The stark decrease in remittances and return of large numbers of migrants, combined with limited domestic employment creation and the continued rising of prices have been limiting the growth of household consumption and could jeopardize the sustainability of gains in poverty reduction. Remittances represent a very high share of the country’s GDP, amounting to 29 percent of the GDP in 2015.2 The 2015-2016 slowdown of the economy in Russia (Russia is source of about 80 percent of remittance inflows in Tajikistan), coupled with tighter regulations on labor migrants, has resulted in a dramatic fall in remittances. According to the estimates of the Government of Tajikistan and the National Bank of Tajikistan (NBT), the value of remittance 1 World Bank, Atlas Method (current US$), 2015. 2 World Bank. 1 inflows fell by about 60 percent between 2014 and 2016. Coupled with a weakened global demand and a significant drop of prices for the country’s keys export commodities, forecasts reflect significant downside risks. B. Sector Context 6. Rapid economic growth in the last decade has not translated into robust job creation in the country. Years of strong economic and income growth did not produce significant improvements in the availability and quality of jobs, incentivizing emigration. Due in part to limited employment opportunities in the domestic labor market, about one million Tajikistani citizens (including one- third of men aged 20-39) have left the country in search of better jobs. Over the past few years, however, the worsening economic situation in Russia, and the imposition of more stringent migration policies by the Russian authorities have encouraged the return of Tajikistani migrants, intensifying pressure on the domestic labor market. 7. The significant decline in remittances, the second most important source of household income, has impacted the growth of household consumption – the drop in purchasing power was over 10 percent in 2015.3 Coupled with the lack of well-targeted social programs, households are vulnerable to economic shocks and forced to cut non-priority expenditures (such as education and health). The increasing return of unemployed young men to an economy that offers limited availability of jobs has been creating further social and economic pressures. 8. Primary agriculture remains the main provider of employment, with about 50 percent of all jobs (accounting for 75 percent of women’s employment compared to 41 percent of men’s)4 with many of the jobs seasonal, informal, or supporting subsistence farming. However, primary agriculture cannot continue providing half of the employment in the country going forward. Improving agricultural productivity is key to improving livelihoods, however, it would also result in less labor in primary production. The shift of jobs from primary agriculture to other sectors has lagged behind other countries in the region. 9. Although development of supply chains will create new opportunities, it may not fully compensate for the jobs lost in primary agriculture, given the high percentage of population engaged in the sector. Therefore, improved employment opportunities in Tajikistan’s domestic markets will sustain progress on poverty reduction and shared prosperity. This includes generation of new jobs and opportunities in rural non-farm sectors (services and manufacturing). The importance of development of non-farm rural economy has also been underscored in a recent Independent Evaluation Group (IEG) report which highlights that rural non-farm sector can, and often does, contribute to economic growth, rural employment, poverty reduction, and a more spatially balanced population distribution. There is also increasing evidence that rural diversification and secondary town development leads to faster poverty reduction and more inclusive growth patterns.5 3 World Bank Group. 2015. Tajikistan Economic Update, Fall 2015: A Moderate Slowdown in Economic Growth Coupled with a Sharp Decline in Household Purchasing Power. Tajikistan economic update No. 2: World Bank, Washington, DC. 4 CPS 5 Approach paper: Growing the Rural Non-Farm Economy to Alleviate Poverty, IEG, 2015. 2 10. Empirical studies have shown that MSMEs employ about 50 percent of workers in developing countries.6 There is significant entrepreneurial potential in Tajikistan which is not being fully utilized. Survey data suggests that the slow business creation is not a result of the lack of desire among Tajiks to become entrepreneurs: almost 40 percent of the labor force has a preference for self-employment.7 However, only about 55 percent of those who attempt to start a business succeed, compared to almost 64 percent in Europe and Central Asia (ECA) region as a whole, pointing to significant barriers to entrepreneurs in Tajikistan. 11. Access to finance is important to support MSME development and job creation,8 yet MSMEs face more constraints than large firms do. In the latest Doing Business Report (2016), Tajikistan ranked 109th out of 189 countries in terms of access to credit. Moreover, access to finance remains unequal: only 15.1 percent of small firms (5-19 employees) and 11.2 percent of medium size firms (20-99 employees) have a bank loan/line of credit, compared to 28.5 percent of large firms (more than 100 employees). Access to credit is more limited in rural areas.9 A recent study also shows that in addition to access to capital, access to information is important for decision making (market access and prices, innovation in business and production) and training opportunities. As discussions with the market participants have shown, business start-ups, women- led, youth, and Persons With Disability (PWD)10 owned enterprises find it particularly difficult to access financing and support services. 12. Business support to entrepreneurs and MSMEs is needed to improve the impact of access to credit for more sustainable business and employment creation. The capacity building of MSMEs is also important in improving their formal financial access and includes providing technical and business support services such as training, business development services, assistance in formalizing financial statements, and loan application preparation. Evidence shows that firms with better business practices tend to perform better (they have higher sales, profits, and productivity).11 13. Tajikistan’s financial sector is relatively small, comprised of 17 commercial banks which cover around 80 percent of financial sector assets (and 82 percent of outstanding loans) and around 120 non-bank financial institutions, principally Micro-Finance Institutions (MFIs) that hold the remaining 20 percent of financial sector assets (and 18 percent of outstanding loans). Some of the MFIs are among the best in Central Asia. Tajikistan’s financial sector is currently experiencing difficulties such as long-term liquidity shortages and worsening quality of the loan portfolio (due to loan repayments falling past due as a result of inability of local entrepreneurs to repay their dollar-denominated loans which have become more expensive following the devaluation of the 6 Ayyagari, Demirgüç-Kunt, and Maksimovic 2014. 7 Strokova and Ajwad, Tajikistan Jobs Diagnostic and Strategy. 8 A recent cross-country study of 50,000 firms across 70 developing countries found that increased access to finance results in higher employment growth, especially among MSMEs. Ayyagari et al., 2016. 9 A survey conducted by the Institute of Public Policy and Administration (IPPA) at the University of Central Asia found that while 45 percent of respondents in urban areas reported using credit, only about a quarter of rural respondents reported having credit obligations (See Tilekeyev, Kanat (2014) Micro-, Small and Medium Enterprises in Tajikistan: Drivers of and Barriers to Growth. University of Central Asia). 10 Certain regions of the country are characterized by pockets of high percentage of population with disabilities, predominantly as a result of inter-family marriages and/or poor early childhood nutrition. 11 Bloom, Van Reenen & coauthors; McKenzie and Woodruff. 3 local currency against the US dollar). The top six commercial banks (which represent about 80 percent of the banking sector assets) are most affected. It should be noted that none of the top six commercial banks participate in the implementation of the ACP credit line. However, difficulties, such as operational losses and worsening portfolio quality, have affected also some of the participating financial institutions of the ACP, and only four Participating Financial Institutions (PFIs) are active under the project at this time (Eskhata Bank, Micro-deposit Organization (MDO) Arvand, MDO Humo, and MDO Imon International). Further strengthening of the micro-finance sector is, therefore, one of the priorities of the government. C. The Agriculture Commercialization Project – Original IDA Grant 14. The ACP was approved on June 10, 2015, in the amount of an US$22 million International Development Association (IDA) grant. The project development objective is to increase the commercialization of farm and agribusiness products, by improving the performance of selected value-chains and productive partnerships through increased access to finance and strengthened capacity of project beneficiaries. Direct beneficiaries include: (i) commercially-oriented producer associations and farmers, agro-processors, agri-business enterprises and agro-input dealers engaged in the value-chains and productive linkages supported by the project; (ii) participating financial institutions; and, (iii) public and academic institutions. The current project closing date is June 30, 2021. 15. The project aims to increase the commercialization of agricultural products using a coherent and complementary approach by: increasing the capacity of farmers, traders, agri- businesses and agro-processors to engage in agricultural markets through access to knowledge and technical assistance; improving access to finance; and strengthening critical elements of the institutional framework and the sector’s academic knowledge base required to support commercial activity. Particular emphasis has been given to strengthening the ability of the new generation of small-scale, private farmers to engage in market activity. 16. The project has the following components: (i) Component I: Improvement of Technical Knowledge and Skills in Support of Commercialization (US$6.70 million, all IDA). This component aims to improve the technical knowledge and skills of participants in key agricultural value chains and productive partnerships. Support will be provided in the form of group-based interventions (training) and individual technical assistance (advisory services). (ii) Component II: Access to Finance for Agribusiness Enterprises and Small-Scale Commercial Farms (US$15.32 million, including US$11.4 million IDA) supports the commercialization of agricultural products by improving access to medium-term finance for the larger agri-business enterprises (US$8 million IDA), providing start-up capital in the form of grants for small-scale farms involved in productive partnerships (total funding US$3.0 million IDA), and by ensuring the availability of financing for value chain support. Investments include: improved on-farm technology, storage, processing, new products, marketing, quality enhancement and food safety. 4 (iii) Component III: Institutional Capacity Building and Project Management (US$3.90 million, all IDA). This component strengthens the critical elements of the institutional framework and the sector’s academic knowledge base required to support commercial activity: (i) support to the educational establishments in the agriculture sector; (ii) market information system for farmers and agribusinesses; (iii) support for policy and regulatory reform – strengthen the Ministry of Agriculture’s (MOA) capacity for policy and regulatory reform by funding selected studies on critical issues relevant to the commercialization of agriculture; and well as (iv) project management. The project is implemented by two Project Implementation Units (PIUs): the Agricultural Entrepreneurship Development Project Management Unit (AED PMU) reporting to the Ministry of Agriculture; and the Project Management Unit for Access to Green and Rural Development Finance set up under the auspices of the Ministry of Finance (MOF PMU). 17. The project supports the twin goals of the World Bank to reduce poverty and promote shared prosperity by (i) contributing to poverty reduction through increased farm incomes and employment generation; (ii) setting up systems (i.e. improved technological capacity in the productive and agro-processing sector, market information system, new financial products in the financial sector, etc.), which are expected to bring benefits to new beneficiaries after the project closes; and, (iii) targeting the people in rural areas, the major locus of poverty in Tajikistan, with providing access to the wider range of farming, business and employment opportunities generated by increased agricultural commercialization, raising incomes and reducing poverty. The project focuses on small and medium-sized farms, and has a special support window for very small farmers. The project is expected to reach roughly 16,000 beneficiaries, of which no less than 30 percent are expected to be women. D. Summary of Project Progress 18. The project underwent a difficult start-up period during the first 15 months of its implementation, however, the challenges have been resolved, and all project activities are moderately satisfactory. Disbursements under the project stand at 36 percent. Given the positive developments under the project for the past 18 months. Value chain development activities have already started (fresh and dried apricot, and dairy, have been selected as the first two value chains for support), and over 4,500 farmers have already been trained under the project in improved production technologies. A total of 6,600 beneficiaries (including the sub-borrowers) have been reached with project activities, including 2,400 women. 19. Under the credit line, US$3.77 million equivalent has been disbursed in 1,365 sub-loans by the four active PFIs (another PFI, which also has a portfolio of project sub-loans has been suspended given the worsening financial situation). Disbursements under the credit line have been moving very well, attesting to the significant demand for resources. Disbursements represent 41 percent of the total funds available for the credit line. Of the financed sub-loans, less than 25 percent have maturity up to 12 months; most loans have maturity above 12 months, and up to 48 months. Average sub-loan is about US$2,800 equivalent, indicating a significant demand for small loans and the fact that most of the active PFIs are micro-finance institutions with specific micro- and small clients. The share of sub-loans allocated to women represent about 13 percent. Training of the staff of the participating financial institutions (PFIs) has been completed, exceeding the target: 171 actual trained loan officers and branch manager versus the original estimate of 150. 5 20. Institutional capacity building activities to support the agricultural education establishments and the National Statistics Agency (TAJSTATCOM) are moving quite well. Both project management units are fully staffed and their capacity has been strengthened. E. Lesson Learned 21. The ACP is still in fairly early stage of implementation, therefore it is difficult to draw lessons from it. However, the team has drawn on lessons from other projects in the Region, in particular the Moldova Rural Investment and Services Program (RISP), which similarly supported non-farm businesses along with farm businesses, as well as experience of other donors, such as United States Agency for International Development (USAID). The lessons learned to date include: (i) The RISP program demonstrated that financial support to rural entrepreneurs and farmers is more sustainable when delivered with advisory and business development services. While investment decisions to pursue commercial opportunities rest with private farmers and rural entrepreneurs, access to knowledge, information, and customized business advice are important to minimize the risk for failure and to maximize chance for success. This approach ensured that the rural businesses supported by the RISP had a first-year survival rate of more than 95 percent. (ii) A similar, although more gender-specific lesson is highlighted in the ADB’s Tajikistan Country Gender Assessment regarding women’s entrepreneurial activities. It states that “There are many initiatives in Tajikistan to empower women economically; most focus on increasing women’s entrepreneurial activities through business training and, in some cases, small grants. The most effective initiatives combine basic business training with comprehensive assistance in developing business plans, followed by grants or credit lines that enable them to launch a business. Sustained support in the form of specialized training and information on marketing, legislation, taxation, regulations, and social fund payments, as well as mentoring, business incubators, small business support centers, and concessional loans, were also mentioned as aides for women growing their businesses.” (iii) If the credit line is to contain a grant portion, the project should ensure that there is clarity and consensus about the constraint that the grant is designed to address. Identification of such specific constraint helps ensure that the grant program is sufficiently tailored to address it, but also that the project can objectively measure its effectiveness. The detailed approach to the grant program implementation is then stipulated in the project operational manual. (iv) Training and advisory services for farmers and enterprises were found to be most effective when they were “flexible and demand-driven” (such as under Armenia Community Agriculture Resource Management and Competitiveness Project). The demand-driven nature of the interventions to support the growth and development of the agro-processing companies (the Kyrgyz Republic Agribusiness and Marketing Project) was a key success factor for the project’s achievements. 6 F. Rationale for Additional Financing 22. The proposed additional financing supports the government’s agenda of promoting private sector development, including a pathway to creating income and employment opportunities for the returning migrants, as well as other budding entrepreneurs (including women, youth, and PWD). Given the dire incomes and jobs situation for the rural population, the concepts developed under the original ACP would be expanded to other types of rural sub-sectors and businesses interested in creating employment. These could be business, income generation and employment creation opportunities as auxiliary products and services for agricultural value chains, off-farm opportunities, as well as other rural businesses. It should be noted that “rural” is defined as the entire country, except for the capital Dushanbe. 23. The additional financing instrument allows for a shorter response time to the government priorities, and will allow for scaling up and expanding the concepts already used in the ACP. There are also significant economies of scale in terms project management and implementation utilizing an existing line of credit under ACP. 24. The AF will consolidate and expand impacts of the ACP in terms of increasing the rate of commercialization of goods and services, covering not just agriculture, but also other rural products and services. The AF would thus enhance the impact of the original project, while improving the overall sustainability of knowledge service and investments. The AF will also build the “Tajikistan Jobs Diagnostic and Strategy” (World Bank, 2017) which provides the analytical background for this proposed operation; the ongoing World Bank-financed Strengthening the Financial Sector Project, which has done extensive household training in financial literacy matters, the Private Sector Competitiveness Project, which significantly eased the process of business registration, as well as other IFC-led efforts to improve the business environment, and the Leadership, Learning and Innovation’s (LLI) Youth Empowerment & Entrepreneurship Development, which has provided basic entrepreneurship training to 4,000 youth around the country, as well as the entrepreneurship awareness campaign. G. Scope of Additional Financing 25. Expected Beneficiaries. Consistent with the Government priorities to amplify support for MSME growth12 and investment opportunities, the project will focus on rural business development, covering underserved areas outside the capital city. MSMEs supported under the project will include individual entrepreneurs and micro-, small and medium size enterprises operating in a diverse array of sectors of the economy, including agricultural production, food processing, small-scale manufacturing, services, trade, and transport, among others. The AF will enable expansion of sectors covered as well as broaden coverage of the project, resulting in development outcomes of improved productivity and better jobs. The proposed expansion of access to credit for MSMEs is especially important during a time of constrained financing due to the economic downturn affecting an underdeveloped rural finance sector. The AF aims to increase access to more affordable lending products (complemented by matching grants) and advisory 12 Private sector development plays an important role in the country’s new National Development Strategy 2016-2030. 7 services to support rural investments, growth among MSMEs, productivity enhancements, and job creation. 26. Project activities and components will largely remain the same as in the original project design, with the suitable activities expanded to reach the broader rural beneficiaries. The specific changes to the components are described in the Proposed Changes Section below. III. Proposed Changes Summary of Proposed Changes The proposed restructuring and AF will scale up the impact of ACP and respond more quickly to support the government's priorities of private sector development and job creation. The restructuring and AF will comprise: (i) reformulation of the PDO; (ii) revisions to the Results Framework; (iii) revisions to components and costs; and (iv) revisions to the original ACP FA to reflect the revised PDO, changes to the title of the Component II and description of the credit line beneficiaries, as well as changes to other sections to the original FA in accordance with an Amendment Letter. Change in Implementing Agency Yes [ ] No [ X ] Change in Project's Development Objectives Yes [ X ] No [ ] Change in Results Framework Yes [ X ] No [ ] Change in Safeguard Policies Triggered Yes [ ] No [ X ] Change of EA category Yes [ ] No [ X ] Other Changes to Safeguards Yes [ ] No [ X ] Change in Legal Covenants Yes [ ] No [ X ] Change in Loan Closing Date(s) Yes [ ] No [ X ] Cancellations Proposed Yes [ ] No [ X ] Change in Disbursement Arrangements Yes [ ] No [ X ] Reallocation between Disbursement Categories Yes [ ] No [ X ] Change in Disbursement Estimates Yes [ ] No [ X ] Change to Components and Cost Yes [ X ] No [ ] Change in Institutional Arrangements Yes [ ] No [ X ] Change in Financial Management Yes [ ] No [ X ] Change in Procurement Yes [ ] No [ X ] Change in Implementation Schedule Yes [ ] No [ X ] Yes [ ] No [ X ] Other Change(s) 8 Development Objective/Results PHHHDO Project’s Development Objectives Original PDO The project development objective (PDO) is to increase the commercialization of farm and agri-business products, by improving the performance of selected value chains and productive partnerships through increased access to finance and strengthened capacity of project beneficiaries. Change in Project's Development Objectives PHHCPDO Explanation: The AF is to consolidate and expand impacts of the ACP in terms of increasing the rate of commercialization of goods and services, covering not just agriculture, but also other rural products and services. The PDO will be modified to adjust the coverage of beneficiaries. Proposed New PDO - Additional Financing (AF) The project development objective is to increase the commercialization of farm and agribusiness products and to support micro-, small and medium enterprise development in project areas by providing better access to finance and strengthened capacity of project beneficiaries. Change in Results Framework PHHCRF Explanation: Project outcome indicators will be expanded and/or adjusted to reflect the modified PDO as well as the changes of the Access to Finance component and the new Component IV. Other Changes Explanation: The Financing Agreement of the main ACP will be amended to reflect the following proposed changes: (i) the revised wording of the PDO, which will read: "The project development objective is to increase the commercialization of farm and agribusiness products and to support micro-, small and medium enterprise development in project areas by providing better access to finance and strengthened capacity of project beneficiaries."; (ii) to change the title of the Component II to "Access to Finance" in view of the broadened group of the potential sub-borrowers; (iii) reflect the broadened group of potential sub-borrowers in the Component II description; and (iv) introduce several smaller changes through an Amendment Letter. Compliance PHHHCompl Covenants - Additional Financing (ACP Additional Financing - P158499) Source Finance Recurr of Funds Agreement Description of Covenants Date Due Frequency Action ent Reference The Recipient shall carry out the Project in accordance with Institutional the requirements, criteria, Arrangemen organizational arrangements IDA ts, Schedule and operational procedures set New 2 of the FA, forth in the POM and the Section I.A ESMF and shall not amend, suspend, abrogate or waive any provisions of the POM or 9 the ESMF without prior written approval of the Association. The Recipient shall cause the MOF and MOA to maintain, until completion of the Project, arrangements, Institutional satisfactory to the Arrangemen Association, to ensure full IDA ts, Schedule New compliance of the Recipient 2 of the FA, with its safeguard related Section I.A responsibilities set forth in Section I.E of Schedule 2 to this Agreement utilizing the capacity of the AED PMU. The Recipient shall, until completion of the Project, maintain the MOF-PMU and shall ensure that it is adequately staffed by Institutional personnel and consultants Arrangemen with qualifications and under IDA ts, Schedule New terms of reference and 2 of the FA, functions, at all times, in Section I.A accordance with procedures necessary and appropriate for the carrying out of the Project, and acceptable to the Association. For the purposes of Component II.A of the Project, the Recipient shall ensure that eligible PFIs are Institutional selected, and Subsidiary Arrangemen Loans and Sub-loans are IDA ts, Schedule made in accordance with the New 2 of the FA, criteria and procedures and on Section I.B terms and conditions set forth in the Line of Credit Operational Manual and in Section I. C of the Original Financing Agreement. For the purposes of Institutional Component II.D of the Arrangemen Project, the Recipient shall IDA ts, Schedule ensure that eligible Sub- New 2 of the FA, borrowers are selected, and Section I.B Matching Grants are made in accordance with the criteria 10 and procedures and on terms and conditions set forth in the Matching Grant Program Manual. The Recipient shall not Institutional undertake any Project Arrangemen activities that involve land IDA ts, Schedule New acquisition or resettlement of 2 of the FA, people or loss of assets or Section I.C income. The Recipient shall: (a) ensure that the Project is implemented in compliance with applicable national legislation on child and forced Institutional labor, including ensuring such Arrangemen compliance by the PFIs, Sub- IDA ts, Schedule borrowers and Grant New 2 of the FA, Beneficiaries; (b) prepare, Section I.C prior to commencement of any works under Component II of the Project, a Sub- project-specific EMP, and, where required, PMP, in accordance with the ESMF. Covenants - Parent (TAJIKISTAN AGRICULTURE PHHCAFPPrj COMMERCIALIZATION PROJECT - P132652) Finance Agreeme Description of Ln/Cr/TF nt Date Due Status Recurrent Frequency Action Covenants Referenc e The Recipient shall carry out the Project in Institutio accordance nal with the Arrangem requirements, ents, IDA- criteria, CONTINUOU Complied Schedule No Change H9640 organizational S with 2 of the arrangements FA, and Section operational I.A. procedures set forth in the POM and the 11 ESMF and shall not amend, suspend, abrogate or waive any provisions of the POM or the ESMF without prior written approval of the World Bank. The Recipient shall, until completion of the Project, maintain the AED MU and MOF-PMU, and shall ensure that the AEDMU and MOF-PMU are adequately Institutio staffed by nal personnel and Arrangem consultants ents, with IDA- CONTINUOU Complied Schedule qualifications No Change H9640 S with 2 of the and under FA, terms of Section reference and I.A. functions at all times in accordance with procedures necessary and appropriate for the carrying out of the Project, and acceptable to the Association. Institutio The Recipient IDA- Complied nal shall establish 16-Feb-2015 No Change H9640 with Arrangem and thereafter 12 ents, maintain, a Schedule Steering 2 of the Committee to FA, provide Section strategic I.A. guidance for Project implementatio n. The mechanism and composition of the Steering Committee will be decided by the Government at the time of the establishment of the Steering Committee. The Recipient shall establish and thereafter maintain, an Evaluation Committee (EC) for the purpose of appraising and evaluating Institutio Sub-projects nal eligible for Arrangem Commercializa ents, tion Grants, in IDA- Complied Schedule accordance 31-Mar-2015 No Change H9640 with 2 of the with the FA, criteria set Section forth in the I.A. POM. Membership and composition of the EC shall be acceptable to the Association, and shall include a representative 13 of the consulting firm retained under Component I. For the purposes of Component II.A of the Project, the Recipient shall ensure that eligible PFIs are selected, Provision and Subsidiary of Line of Loans and Credit, Sub-loans are IDA- Schedule made in CONTINUOU Complied No Change H9640 2 of the accordance S with FA, with the Section criteria and I.C procedures set forth in the Line of Credit Operational Manual and on terms and conditions referred to in the Financing Agreement. The Recipient shall make Subsidiary Loans to eligible PFIs Provision under of Line of Subsidiary Credit, Loan IDA- Schedule Agreements to CONTINUOU Complied No Change H9640 2 of the be entered into S with FA, between the Section Recipient and I.C. each eligible PFI. E the Association shall otherwise agree, the Recipient shall 14 not assign, amend, abrogate or waive the Subsidiary Loan Agreement or any of its provisions. For the purpose of carrying out Component II.B of the Project, the Provision Recipient, of through the Commerc AED PMU, ialization shall make IDA- Grants, CONTINUOU Not yet Commercializa No Change H9640 Schedule S due tion Grants to 2 of the Grant FA, Beneficiaries Section in accordance I.D with eligibility criteria and procedures acceptable to the Association. The Recipient shall not undertake any Safeguard Project s, activities that Schedule involve land IDA- Complied 2 of the acquisition or Semi-annual No Change H9640 with FA, resettlement of Section people or loss I.E of assets or income, or cotton production. Implemen The Recipient tation shall install IDA- Arrangem and adopt the Complied 31-Dec-2014 No Change H9640 ents, 1C accounting with Schedule software for 2 of the project 15 FA, accounting, Section budgeting and I.A. reporting within MOF- PMU, and ensure that the MOF-PMU’s accounting staff and Financial Management consultant are fully trained on the adopted program. The Recipient shall, in consultation with project stakeholders and Implemen beneficiaries, tation establish and Arrangem maintain a ents, Grievance IDA- Complied Schedule Redress 27-July-2015 No Change H9640 with 2 of the Mechanism, in FA, accordance Section with I.A. procedures and guidelines set forth in the POM, and acceptable to the Association. Conditions PHCondTbl Source Of Funds Name Type IDA Effectiveness; Termination, Effectiveness Article IV of FA, 4.01a Description of Condition The Original Project Operational Manual has been updated by the Recipient for the purposes of the Additional Financing in a way satisfactory to the Association. Source Of Funds Name Type IDA Effectiveness; Termination, Effectiveness Article IV of FA, 4.01b Description of Condition 16 The MOF and the MOA has entered into arrangements, satisfactory to the Association, to ensure full compliance of the Recipient with its safeguard related responsibilities set forth in Section I.A.3 of Schedule 2 to this Agreement utilizing the capacity of the AED PMU. Risk PHHHRISKS Risk Category Rating (H, S, M, L) 1. Political and Governance Substantial 2. Macroeconomic Substantial 3. Sector Strategies and Policies Substantial 4. Technical Design of Project or Program Moderate 5. Institutional Capacity for Implementation and Sustainability Substantial 6. Fiduciary Substantial 7. Environment and Social Moderate 8. Stakeholders Moderate 9. Other OVERALL Substantial Finance PHHHFin Loan Closing Date - Additional Financing (ACP Additional Financing - P158499) Proposed Additional Financing Loan Closing Source of Funds Date International Development Association (IDA) 30-Jun-2022 Expected Disbursements (in USD Million) (including all Sources of Financing) Fiscal 2018 201 2020 2021 2022 2023 2024 2025 2026 2027 Year 9 Annual 1.50 3.50 4.00 4.00 2.00 0.00 0.00 0.00 0.00 0.00 Cumulativ 1.50 5.00 9.00 13.00 15.00 0.00 0.00 0.00 0.00 0.00 e Allocations - Additional Financing (ACP Additional Financing - P158499) IDA Grant Allocation, SDR IDA Credit Allocation, US$ Source of Currenc Category of Fund y Expenditure Proposed Disbursement Proposed Disbursement Amount % Amount % 100% of the 100% of the (1) Sub-loans approved Sub- approved Sub- under loans with the loans with the IDA Component 1,090,000 maturity of two 7,500,000 maturity of two II.A of the (2) years or (2) years or Project more, more, 17 80% of the 80% of the approved Sub- approved Sub- loans with the loans with the maturity less maturity less than two (2) than two (2) years years (2) Matching Grants under IDA Component 1,800,000 100% 0.00 n/a II.D of the Project (3) Goods, works, non- consulting services, consultants’ services, IDA Training and 2,510,000 100% 0.00 n/a Operating Costs for Components III.E, III.F and IV of the Project Total: 5,400,000 7,500,000 Components PHHHCompo Change to Components and PHHCCC Cost The activity and cost of component II will be amended, to broaden the scope of the project beneficiaries to and provide access to finance to rural micro- and small businesses. The cost of component III will be increased to manage the scaled-up project, and the technical assistance to the participating financial institutions will be revised in terms of budget and training content. A new component IV will be introduced to provide technical assistance to emerging start-ups and other eligible beneficiary companies, to enable them to access the credit line under the project. The project will operate in the entire country, except the municipal borders of the city of Dushanbe. Component II: Access to Finance (original financing - US$15.32 million, including US$11.4 million IDA, proposed amount under the AF – US$13.2 million, including US$11.5 million IDA). Activity 1: Credit Line. The proposed AF will allow for increasing the amount of the credit line (by US$9.0 million) and expand its scope to include a wide range of rural business activities outside the municipal borders of Dushanbe. The beneficiaries of the credit line are expected to have undergone training and received technical assistance under the Component IV before accessing the 18 credit line. Similar to the original ACP credit line, it will be disbursed through eligible PFIs (commercial banks and micro-finance institutions), with the PFIs responsible for selecting eligible beneficiaries, setting the on-lending rates, as well as assuming full credit risk. The terms and conditions of the credit line are expected to be largely similar to those under ACP, subject to incorporating the new modalities (such as the matching grant scheme described below) proposed under this AF below. Activity 2: Matching Grant Program (US$2.5 million, all IDA) for start-up target groups will introduce a matching grant program (MGP), which will complement the credit line, in support of new enterprise and job creation (including self-employment) for targeted groups: starts-ups among youth (up to 30 years of age), women and PWD. The matching grants will form a portion of the sub- loans provided under the project to provide incentives for these target groups to access the financing (since a portion of the sub-loan will become non-repayable under certain conditions), and for the PFIs to serve these beneficiaries, as prior experience with similar programs has shown that it improves the repayment discipline. Under the MGP, sub-borrowers will receive 100 percent of the required financing from the PFIs, which will be coming from two sources of funds: the first 50 percent will be on-lent credit line resources, and the second up to 50 percent of the financing will be provided from the MGP. The beneficiaries will be required to repay the sub-loan portion (first 50 percent) of the financing due to the PFI to “trigger” the grant portion, which will be offset against the remaining 50 percent of the sub-loan principal. Thus, the beneficiary will only repay 50 percent of the sub-financing (sub-loan plus matching grant) received, provided they repay in full the 50 percent due first. The MGP is expected to improve the repayment discipline of borrowers, and the appetite of the financial institutions to lend to such enterprises. Component III: Institutional Capacity Building and Project Management (US$3.90 million, all IDA, proposed amount under the AF – US$1.0 million). Activity 1: Capacity Building for financial intermediaries (US$0.5 million, all IDA). Capacity building to financial intermediaries will be provided in two main areas: (i) Training to PFIs on start- up business financing modalities, including risk identification and appraisal, and structuring of the repayment. The training will also include key environmental safeguards associated with rural business financing. (ii) Capacity building support to selected smaller micro-finance institutions with good potential to grow and expand the opportunities for access to finance, in particular for small rural and agricultural businesses. The project will support around five such smaller MFIs, to strengthen their operations, develop new financial products and expand outreach. The specific nature of the TA to be provided will be determined upon selection of the micro-finance institutions following a call for proposals, and identification of areas for improvement of the selected group of MFIs. Activity 2: Project Management (US$0.5 million, all IDA) will be allocated for project management expenses for implementation of the proposed additional activities financed under the additional financing. The PMU MOF will be responsible for the relevant procurement, financial management and Monitoring and Evaluation (M&E) activities, including the baseline and results assessment studies for the project. The AED PMU under the MOA will be responsible for Social and Environmental safeguards. 19 Component IV: Entrepreneurship Training and Business Development Services to MSMEs (NEW, proposed amount under the AF - US$2.5 million). A new component will be added to support potential target groups of entrepreneurs with entrepreneurship training, business development services and start-up support, as well as pilot to innovative approaches to promote entrepreneurship and job creation. The component will aim to address the following key issues faced by entrepreneurs: lack of access to appropriate business services, lack of market knowledge, lack of access to networks and lack of access to appropriate financing products. Activity 1: Entrepreneurship training and business development services (US$1.5 million, all IDA) to start-ups with more intensive focus on youth-led, women-led enterprises and enterprises led by/employing PWDs. The project will finance basic entrepreneurship training to a wide group of potential beneficiaries and more complex business development services13 (BDS) to select start-ups. The entrepreneurship training and business consulting services will aim to help prepare borrowers to take advantage of the credit line (including business plan preparation) and other services (accounting, financial planning, and marketing) to improve the likelihood of utilizing the loans successfully and generating jobs. Youth-led, women-led and enterprises led by and/or employing PWDs are expected to receive a higher share of resources. Activity 2: Entrepreneurship Hub (US$1.0 million, all IDA). Piloting innovative approaches to promote start-up growth and job creation, including business incubation, business mentoring and training programs. The project will consider different models of entrepreneurship hubs, including NGO-led, public-private partnerships, private-led, etc. The project will assist with opening an Entrepreneurship Hub with business incubation services in Kurgan Tybe (Khatlon Oblast) for select companies, as well as scale up some of the good business mentoring and training services to support start-ups more generally. It is expected that the pilot would contribute towards development of an ‘entrepreneurship ecosystem’ in the region, as early entrepreneurship support infrastructure (such as incubators, hubs, etc.) plays an important role in developing the innovation and entrepreneurship ecosystem by fostering dialogue and cooperation among providers of business and financial support, policy makers, and entrepreneurs. Proposed Current Component Proposed Current Cost Cost Action Name Component Name (US$M) (US$M) Component IV: Technical Assistance and Capacity Building to the 0.00 2.50 New Emerging and Existing Entrepreneurs 13 Business development services are defined as those non-financial services and products offered to entrepreneurs at various stages of their business needs. These services are primarily aimed at skills transfer or business advice (IFC). 20 Component I: Component I: Improvement of Improvement of Technical Knowledge Technical Knowledge 6.70 6.70 No change and Skills in Support and Skills in Support of Commercialization of Commercialization Component II: Access to Finance for Agri- Component II: Access Business Enterprises 11.40 22.90 Revised to Finance and Small-Scale Commercial Farms Component III: Component III: Institutional Capacity Institutional Capacity 3.90 4.90 Revised Building and Project Building and Project Management Management Total: 22.00 37.00 Appraisal Summary PHHHAppS Economic and Financial AnalysisPHHASEFA Support for small and medium-scale rural business activities will provide additional income opportunities for rural households and generate non-farm employment in rural areas. Evidence from other countries indicates that increased rural incomes also have a wider impact on rural economies, with a multiplier effect of 1.5-1.8. Project support for rural businesses will include: a US$13.2 million extension of the existing project credit line for investment; a 50 percent matching grant to further support start-ups by youth (up to 30 years of age), women and the PWD; and the provision of entrepreneurship training and business development services. While these project inputs will provide critical resources and services for business development, they will not target specific types of businesses. The choice of business activity will be decided by project beneficiaries according to their objectives, skills and resources. As this choice cannot be determined ex-ante, it is not feasible to calculate an overall economic or financial return for this project component. The diverse nature of rural business activities (tailors, mobile phone repair shops, brick-makers, veterinary services, agro-input shops etc), and their wider, indirect multiplier effects further complicates any attempt to aggregate the impact of these activities and calculate an overall economic or financial rate of return. The economic and financial analysis is based on the calculation of financial internal rates of return (FIRR) for a representative sample of small and medium-scale rural enterprises, thus demonstrating their viability. The sample includes six small-scale enterprises suited to youth, women and PWDs – which would be eligible for both credit and matching grants; and two medium-scale enterprises, which would be eligible for credit only. Projected FIRRs from this representative sample were between 28 and 40 percent, consistent with the observed growth of business activity in rural areas. Further sensitivity analysis showed that, in most cases, these returns were robust in the face of income falls of 10 percent or cost increases of 21 10 percent. Due to the high interest rate (28 percent) on project credit, projected profitability and viability were higher for enterprises with lower capital requirements and lower consequent loan requirements. A higher equity contribution from the owner also improves profitability and viability, by further reducing loan size. As the high interest rate limits the benefits conferred by extending the loan term or grace period, the analysis assumes that loans are repaid as quickly as possible – without compromising underlying viability. A summary of the financial analyses for the sample of rural business enterprises considered suitable for finance is presented in Annex 4. All have a positive net present value (NPV), with FIRR values ranging from 28 percent - 40 percent, as mentioned above. Please see Annex 4 for full details. Technical Analysis PHHASTA The proposed additional financing supports the private sector development agenda, including creating income and employment opportunities for the returning migrants and other budding entrepreneurs (including women, youth, and PWD). It proposes a complementary approach, providing access to knowledge and financing. The concepts developed (and to some extent, tested) under the original ACP (such as access to business support/extension services, access to finance and markets) will be expanded, beyond agriculture and agribusiness, to other types of rural sub-sectors and businesses, interested in creating self-employment as well as providing job opportunities for others. These could be business, income generation and employment creation opportunities as auxiliary products and services for agricultural value chains, off-farm opportunities, as well as other rural businesses. The AF is also expected to consolidate and expand impacts of the ACP in terms of increasing the rate of commercialization of goods and services, covering not just agriculture, but also other rural products and services. The AF would thus enhance the impact of the original project, while improving the overall sustainability of knowledge service and investments. OP10.0 Financial Intermediary Financing. The proposed Credit Line was reviewed for compliance with the Bank’s provisions for OP10.0 Financial Intermediary Financing, which governs the Bank’s financial intermediary lending (FIL). The review found that the proposed Credit Line is in line with OP10.0 Financial Intermediary Financing guidelines. Social Analysis PHHASSA Citizen Engagement. The ongoing effort for engaging with citizens through the established Grievance Redress Mechanism (GRM) for the ACP will be sustained. The existing GRM ensures that the project beneficiaries are aware of the GRM and understand how they could reach out for resolution of their grievances. The efforts will be made to adjust modalities of the current system for an expanded scope of activities and further publicize the existence of the GRM, its procedures, details of those to whom grievances should be addressed through community outreach and public awareness raising. The project, in its turn would use the feedback received from beneficiaries to better target interventions in order to improve the project's outcome. To date, there have been no grievances filed under the project, most of the feedback is collected through project activities, such as training. The feedback collected then is used to improve the project activities. For instance, after 22 the excellent feedback the project received on its nutrition-improvement activities for women, it was decided to expand these activities. The project will also establish a citizen engagement indicator in its Monitoring & Evaluation system. Child and Forced Labor. Child and forced labor (CFL) in agriculture is mainly associated with cotton production. In Tajikistan, child labor is broadly regarded as helping parents generate income for the family. Usually children work outside the school hours (without disturbing school attendance), and there is no pressure from the local authorities to use child labor in agricultural production. The project will continue in compliance with applicable national legislation on CFL. As in the case of the original project, the AF will not finance any interventions in the cotton sector. Mitigation measures that are in place to avert the risk of financing investments in which child and forced labor is utilized.14 Gender. The original project acknowledged that women relied heavily on agriculture for employment and income generation though their voice, decision-making power and/or earning capacity were limited. Findings of the updated Social Assessment (SA) further confirm the complex context which impacts women’s participation in commercial/entrepreneurial activity in agriculture. Women, despite the proclaimed legal and social equality, do not enjoy equal access to land compared to men and especially in rural areas due to marriage patterns and customary norms. Rural women are not sufficiently aware of their economic rights, as well as legal rights to the use of land and face specific difficulty accessing finance due to poverty, lack of collateral, education, and knowledge. While engaged in almost all fields of the economy and mostly in agriculture, they continue to earn rather low wages. By some estimates, 48 percent of women are employed in agriculture, but the figure could be higher if all the unpaid women who work alongside their husbands or other male relatives were counted. The project will ensure that women have better access to economic opportunities offered by the project and especially to those with low levels of knowledge of legal rights to land, financing, and skills to participate in its activities for income generation. Specifically, the project will strive to ensure:  Gender- informed training (both in substance and delivery) at a community level on equal access of women to land to raise their awareness of the relevant legal documents, land reforms and procedures for establishing dehkan (commercial) farms and their management;  Develop and deliver training modules for rural women with low levels of financial literacy to inform them on the project’s financial programs and instruments as well as programs of other financial institutions and build their skills and capacity for entrepreneurship and commercial activities. It is expected that the training will also incorporate the elements of personal initiative to improve soft skills of women entrepreneurs;  Project interventions that respond to women’s needs based on assessment of their demands;  Conduct advocacy programs on the role of women in land reform. Such programs shall cover women-farmers and rural women-leaders;  Access to project’s grievance redress mechanism. 14 The measures include screening out any investments related to the cotton sector, as well as regular field monitoring by the PFIs and PMU of the sub-projects financed. 23 OP 4.12 Involuntary Resettlement. The policy is not triggered under the project. All activities will take place on privately held land and the checklist of the Environmental Management Plan (EMP) used for the original project to screen out projects with OP 4.12 impacts will be continued. Other Social Issues are covered in more details in Annex 3 and Annex 5. Environmental Analysis The proposed project restructuring and additional financing will not change the project category and not trigger new safeguards policies, however, the scope of access to financing will be broader, including also a wide range of new rural business activities (such as manufacturing; providing services to local population), outside of traditional agriculture and agribusiness. This required updating of the initial project Environmental and Social Management Framework (ESMF) by providing guidance on potential environmental and social impacts for the new types of business activities that would be financed, along with monitoring requirements and implementing arrangements. The revised ESMF undertaken by the client also clarifies the procedures of the subprojects’ Environmental Assessment (EA) and of preparing Environmental and Social Management Plans (ESMPs) for sub-projects to be financed, including for business incubators to be build or rehabilitated in Khatlon Region. The ESMF also proposes the curricular for the training which includes applicable safeguard requirements to address the impacts related to commercial agro- enterprises for Technical Assistance (TA) activities for  the proposed under Component I Training and Advisory Services activities, as well as measures for EA capacity building for MFIs under the revised Component II.  Any activities involving new construction and/or expansion of existing facilities that might trigger OP4.12 would be diligently screened out and not financed by the project. Any activities involving child and forced labor will also be screened out. The revised ESMF was disclosed and consulted with all interested parties before Appraisal. Overall, the participants of all consultation meetings agreed with the proposed environmental safeguards arrangements, emphasizing the importance of training and information dissemination activities on sustainable water and soil use as well as on safety issues within pest management. The Environmental and Social Specialists have the relevant capacity to implement environmental and social safeguards issues, - based on last WB implementation support missions (in 2016-2017), the project environmental and social performance is considered satisfactory. Climate Risk Screening. The project was screened for climate risks. Given the nature of the project, only Storage and Processing sub-sector was included in the screening. It was assessed that the sub- sector is slightly exposed, with low potential impact and low risk, to extreme precipitation and flooding risk and drought risk. Risk PHHASRisk The overall implementation risk is Substantial. Most of the risks are assessed as Substantial, except for the Technical Design, Environmental and Social, and Stakeholder risks, which are assessed as Moderate. The political and governance risks, as well as macroeconomic risks and sector strategies and policies would be mitigated through the Bank’s dialogue with the Government of Tajikistan. 24 The Substantial risk for institutional capacity for implementation would be mitigated by engaging regional and international consultants to assist in project implementation, as well as capacity building of the PMU staff through advice and training. The fiduciary risks would be mitigated by close supervision and advice by the Bank’s team, as well as capacity building of the fiduciary staff. IV. World Bank Grievance Redress 27. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. 25 Annex 1: Results Framework and Monitoring . TAJIKISTAN AGRICULTURE COMMERCIALIZATION PROJECT (P158499) Additional Financing Revisions to the Results Framework Comments/ Rationale for Change PDO Current (PAD) Proposed To increase the commercialization of farm and The project development objective is to increase the The scope of the PDO was expanded to agribusiness products, by improving the commercialization of farm and agribusiness products include the broader rural businesses, which performance of selected value chains and productive and to support micro-, small and medium enterprise will be supported under the additional partnerships through increased access to finance and development in rural areas by providing better access to financing. strengthened capacity of project beneficiaries. finance and strengthened capacity of project beneficiaries. PDO indicators Current (PAD) Proposed change* Number of small farmer beneficiaries with improved Number of beneficiaries with improved commercial The scope of the “beneficiary” is commercial activity. activity expanded, as additional financing is expected to reach (predominantly small) rural businesses in addition to the small farmers. Women, youth, and PWD beneficiaries will be tracked separately. Marketed surplus of selected agricultural products by Marketed surplus of selected agricultural products by No change. small (subsistence and semi-subsistence) farmers small (subsistence and semi-subsistence) farmers benefitting under the project. benefitting under the project. Sales value by commercial farms and agribusinesses Increase in total sales value of beneficiaries. The new indicator includes the new type benefitting under the project. of beneficiaries, i.e., rural businesses to be supported under the addition al financing. Expressed as a percentage increase rather than an absolute number for more 26 meaningful assessment of the project progress. N/a Firms benefitting from private sector initiatives (CRI) The new indicator would measure the number of micro-and small enterprises supported by the additional financing. Intermediate Results indicators Current (PAD) Proposed change* Portfolio at risk – SME Continued, with no change in the end of project target Project-end target value remains at 5 value percent. Percentage of project-supported institutions that are Continued, with no change in the end of project target Project-end target value remains at 100 reporting this indicator. value percent. Direct project beneficiaries Farmers reached with agricultural assets and services The indicator has been re-worded to match (CRI) the wording of the Corporate Results Indicator Female beneficiaries Female farmers reached with agricultural assets and The indicator has been re-worded to match services (CRI) the wording of the Corporate Results Indicator. Total investment mobilized in the agricultural sector Total investment mobilized in the agricultural and rural Continued with an expanded scope under the Access to Finance component sectors under the credit lines (including rural sector) and an increase in end-of-project target value. Farmer group members benefitting from the access Continued, with no change in the end of project target to commercialization grants value. N/A Number of start-ups benefitting from the loan with a NEW; will measure the number of matching grant window beneficiaries (start-up women-, youth and PWD-led businesses) that have benefitted from the loan with a matching grant Farmers (new subscribers) subscribing to the Market Dropped from the RF This indicator represents a small portion of Information System funds in the enlarged project; will continue to be tracked outside the formal Results Framework Financial sector staff (loan officers and branch Dropped from the RF Training has been completed under ACP. managers) trained New training in new relevant subjects will be carried out under the additional financing. This indicator represents a small portion of funds in the enlarged project; 27 will continue to be tracked outside the formal Results Framework Number of technical advisors trained Continued, with no change in the end of project target This indicator only refers to the original value. ACP-financed activities. Productive partnerships established Continued, with no change in the end of project target This indicator only refers to the original value. ACP-financed activities Proposal for curriculum change at the Agricultural Dropped from the RF The implementation of this work in University and Colleges developed underway. This indicator represents a small portion of funds in the enlarged project; will continue to be tracked outside the formal Results Framework. Client days of training provided (number) Continued, with an increase in the end of project target Training provided to the rural enterprises value will also be included in the end of project target value. Continued, with an increase in the end of project target Training provided to the rural enterprises Client days of training provided - Female (number) value will also be included in the end of project target value. Dropped from the RF This indicator will be tracked as part of the Farmers receiving advice, extension and training “Farmers reached with agricultural assets and services (CRI)” indicator. Volume of Bank Support: Institutional Development Dropped from the RF Former CRI. - SME Will be tracked as part of the “Total investment mobilized in the agricultural and rural sectors under the credit lines” indicator. Volume of Bank Support: Lines of Credit - SME Dropped from the RF Former CRI. This indicator represents a small portion of funds in the enlarged project; will continue to be tracked outside the formal Results Framework N/A Percentage of project-supported enterprises still existing Will measure the effectiveness of the 12 months after establishment technical assistance and access to finance provided under the project. N/A Percentage of MSMEs/farmers/beneficiaries reporting An indicator to measure citizen that project interventions met their needs (gender engagement. disaggregated) New Indicators PDO Level 28 Number of beneficiaries with improved commercial Number of small farmers (here, defined as up to 1Ha per shareholder) and micro- and small activity enterprises (as defined by the GOT) that have, as a result of benefiting from the project activities, started selling surplus production, or increased sales of their products. Of which women No description provided. Of which youth No description provided. Of which PWD No description provided. Marketed surplus of selected agricultural products by Increase (or decrease) in the value of marketed surplus by small farmers (here, defined as up to 1Ha small (subsistence and semi-subsistence) farmers per shareholder) and micro- and small enterprises benefiting from the project activities. [This benefitting under the project. indicator predominantly applies to ACP beneficiaries.] Increase in total sales value of beneficiaries. Increase (or decrease) in the value of sales by commercial farms, agribusinesses and any other enterprises benefiting from the project activities. Firms benefitting from private sector initiatives Number of micro- and small enterprises supported by the project Intermediate Indicators Portfolio at risk – SME Portfolio at Risk = Outstanding (or not yet repaid) balance of all loans where payment is late by > 90 days / Gross outstanding loan portfolio. Report the Portfolio at Risk (PAR) for the PFI's entire SME portfolio. Do not report on the PAR for just the Bank-funded portion. Loans that have been rescheduled or renegotiated should also be included in the numerator of the PAR. Weight each institution's PAR by its outstanding SME portfolio to calculate the average PAR for the project. The optional "breakdown" tab can be used to report by institution. Percentage of project-supported institutions that are No description provided. reporting this indicator. Farmers reached with agricultural assets and Farmers that have benefitted from financing, knowledge, training or any other services or assets under services (CRI) the project. Total investment mobilized in the agricultural and Volume of the credit line + volume of the grant funding +beneficiary co-financing for sub- rural sectors under the credit lines loans/leases and grants +PFI co-financing. Farmer group members benefitting from the access Total number of members of farmer groups benefiting from the commercialization grants. to commercialization grants Number of start-ups benefitting from the loan with a Total number of start-ups benefitting from the loan with a matching grant window. matching grant window Number of technical advisors trained Number of technical advisors trained under components 1 and 3. Productive partnerships established Number of technical advisors trained under components 1 and 3. Client days of training provided (number) This indicator measures the number of client days of training provided i.e. the number of clients who completed training multiplied by the duration of training expressed in days. 29 Percentage of project-supported enterprises existing Number of project-supported enterprises still existing 12 months after their establishment, as a 12 months after establishment. percentage of total supported enterprises under the project. This indicator refers to the beneficiaries of additional financing-supported activities. Percentage of MSMEs/farmers/beneficiaries An indicator to measure citizen engagement. reporting that project interventions met their needs (gender disaggregated) . 30 Results Framework and Monitoring Project Development Objective (PDO): The project development objective is to increase the commercialization of farm and agribusiness products and to support micro-, small and medium enterprise development in rural areas by providing better access to finance and strengthened capacity of project beneficiaries. Responsibility Data Source/ Cumulative Target Values Frequency for Data Comments Methodology Corporate Indicator Progress Collection PDO Level Results Indicators UOM Baseline Results to Date 2018 2019 2020 2021 2022 The share of female Indicator One: Number of 11,50 12,50 Progress/ AED PMU, participants 5,000 7,500 Monitoring MOF PMU will be beneficiaries with improved 0 0 Reports measured commercial activity. Number under all 2,245 TBC* Annual feasible 1,750 2,625 4,025 4,375 project Of which female activities Of which youth 500 2,000 4,000 6,000 Of which disabled 0 100 200 400 Indicator Two: Marketed surplus of selected Progress/ agricultural products by Percentag Monitoring AED PMU, e 0 TBC* 10% 12% 15%` 20% 20% Annual Reports MOF PMU small (subsistence and semi- subsistence) farmers benefitting under the project. Indicator Three: Increase Annual Progress/ AED PMU, Percentag in total sales value of e 0 TBC* 10%0 12% 15% 18% 20% Monitoring MOF PMU beneficiaries. Reports Indicator Four: Annual Progress/ AED PMU, Firms benefitting from Number 0 0 300 300 900 1,200 1,500 Monitoring MOF PMU private sector initiatives. Reports 31 Intermediate Results and Indicators Cumulative Target Values Intermediate Results Baseline Progress Responsibility Data Source/ Indicators UOM Original to Date Frequency for Data Comments Methodology Core Project 2018 2019 2020 2021 2022 Collection Intermediate Result Quarterly Progress/ Indicator 1: Portfolio at risk Number 0 TBC** 5.00 5.00 5.00 5.00 5.00 Monitoring MOF PMU - SME Reports Intermediate Result Indicator 2: Percentage of MOF PMU Percentag Quarterly Progress/ project-supported 0.00** 100% 100% 100% Monitoring e 0 100 100 institutions that are reporting % % Reports this indicator Intermediate Result Indicator 3: Farmers 0 4,026 reached with agricultural Progress/ AED PMU, assets or services Quarterly Monitoring MOF PMU Number Reports Of which female 0 1,288 Includes PFI Intermediate Result and Indicator 4: Total Progress/ MOF PMU beneficiary 4.7 18 20 Quarterly contribution investment mobilized in the Number 0 million 7 mil 11 mil 15 mil mil Monitoring agricultural and rural sectors Reports under the credit lines Intermediate Result Progress/ Indicator 5: Farmer group Monitoring AED PMU members benefitting from Number 0 0 500 1,000 1,500 2,000 2,000 Quarterly Reports the access to commercialization grants 32 Intermediate Result Progress/ Indicator 6: Number of Monitoring start-ups benefitting from Number 0 0 0 200 400 600 800 Quarterly Reports MOF PMU the loan with a matching grant window Intermediate Result Progress/ Monitoring Indicator 7: Number of Number 0 42 56 65 80 80 80 Quarterly Reports AED PMU technical advisors trained Intermediate Result Progress/ Indicator 8: Monitoring Number 0 44 80 120 160 200 200 Quarterly AED PMU Productive partnerships Reports established Progress/ Intermediate Results AED PMU, 12,00 14,00 16,00 18,0 18,5 Monitoring Indicator 9: Client days of Number 0 8,670 Quarterly Reports MOF PMU 0 0 0 00 00 training provided (number) Intermediate Results Indicator 10: Percentage of Progress/ Percentag Monitoring project-supported e 0 0 0 0 10% 20% 40% Quarterly Reports MOF PMU enterprises existing 12 months after establishment. Intermediate Results Indicator 11: Percentage of MSMEs/farmers/beneficiari Progress/ Percentag Monitoring es reporting that project e 0 70% 75% 80% 85% 85% 85% Quarterly Reports MOF PMU interventions met their needs (gender disaggregated) * Will be confirmed on the basis of the results of the agricultural season. ** Will be confirmed on the basis of the audited reports. 33 Annex 2: Tajikistan Agriculture Commercialization Project Additional Financing Detailed Project Description A. The Proposed Revised Project Development Objective 1. The Proposed Revised Project Development Objective (PDO) is to increase the commercialization of farm and agribusiness products and to support micro-, small and medium enterprise development in project areas by providing better access to finance and strengthened capacity of project beneficiaries. 2. The Project Outcome Indicators have been expanded and/or adjusted to reflect the modified PDO as well as the changes of the Access to Finance component and the new proposed Component IV. The revised proposed PDO Indicators are as follows:  Number of beneficiaries with improved commercial activity (target value –12,500);  Marketed surplus of selected agricultural products by small (subsistence and semi- subsistence) farmers benefitting under the project (target value – increase by 20 percent);  Increase in total sales value of beneficiaries (target value – increase by 20 percent);  Firms benefitting from private sector initiatives (target value – 1,500). 3. Project area. The project area is defined as the entire country except the city of Dushanbe. B. Detailed Component Description Component II: Access to Finance (original financing - US$15.32 million, including US$11.4 million IDA, proposed amount under the AF – US$13.2 million, including US$11.5 million IDA). 4. Activity 1: Credit Line. The proposed AF will allow for increasing the amount of the credit line (by US$9.0 million) and expand its scope to include a wide range of rural business activities outside the municipal borders of Dushanbe. Similarly to the original ACP credit line, it will be disbursed through eligible PFIs (commercial banks and micro-finance institutions), with the PFIs responsible for selecting eligible beneficiaries, setting the on-lending rates, as well as assuming full credit risk. The terms and conditions of the credit line are expected to be largely similar to those under ACP, subject to incorporating the new modalities (such as the matching grant scheme described below) proposed under this AF. 5. To contribute towards addressing the current market failures of (i) providing medium-term credit for investment in the rural space on the demand side; and (ii) encouraging commercial banks and micro-finance institutions to lend for micro-, small-and medium sized-business development, in particular, start-ups, a credit line will be provided through the commercial banking sector and micro-finance institutions ensure access to businesses developing in the rural space. Sub-loans will be available for start-ups, but also for entrepreneurs expanding their businesses and creating new jobs. With a view of continuing to promote private financial sector development, the project will 34 work with the smaller banks and micro-finance institutions. The credit line will extend the following lending products: (i) Medium-term loans and leases for investment, expected for up to 7 years, with a maximum exposure per beneficiary of up to US$100,000, to finance equipment, technologies, and other assets needed for business development in rural areas. Leasing would also be included, to allow for improved access to long-term finance for potential borrowers, especially small farmers, who do not have sufficient collateral and thus are excluded from borrowing from the financial sector. (ii) Working capital loans for short-term financing needs with a maturity of up to two years. The same maximum loan amount of US$100,000 would apply, but the maximum exposure to one sub-borrower should not exceed US$100,000 under the credit line. PFIs will be required to co-finance the (portion of) sub-loans with maturities of up to 2 years in the amount of 20 percent of the sub-loan. 6. The funds will be available both in Somonis and US Dollars15, based on the demand of the sub-borrowers. The interest rate to PFIs will be (i) a six months US Dollar Libor + a minimum of 3 percent margin to cover administration costs for US Dollar resources, and (ii) the refinancing rate of the National Bank of Tajikistan (NBT) plus 1 percent margin to cover the risks associated with the currency exchange, or the reference rate which shall be equal to the average of annual inflation rate projected by the NBT for the current year and the actual inflation rate of the preceding year, plus a 1 percent margin to cover the risks associated with the currency exchange, whichever lower, for Somoni-denominated loans. Investment sub-loans will be expected to have a maturity of above 2 years, and conversely, the maturity of working capital loans shall not exceed 2 years. Sub-borrowers will be expected to contribute a minimum of 10 percent of the sub-project costs (in cash or in kind). 7. It is proposed that each tranche of the credit line proceeds is extended to the participating financial institutions for a period of 5 years, with a grace period of 4 years and 10 months. The PFIs structure the repayment of the sub-loan in a manner that is acceptable to the sub-borrowers and rely on the cashflows generated by the investment. Repayment of the funds by the PFIs to the Ministry of Finance will take place in accordance with detailed repayment schedule, upon the expiration of the grace period. The PFIs will collect repayments from the borrowers and pay the amounts due to the Ministry of Finance. The amounts collected from the borrowers and not needed for repayment to the Ministry of Finance, will be extended by the PFIs in new sub-loans meeting the project objectives. Such an arrangement will allow maximizing the benefits from this scarce long-term money, and the PFIs to finance sub-projects for the needed period, based on the projected cash-flows. 8. Target Borrowers. The project’s credit line will be targeted at micro-, small and medium- sized businesses, including start-ups. These businesses could be individual entrepreneurs (including farmers) or legal entities with 100 percent private ownership and duly registered is 15 US Dollar loans are expected to be taken by sub-borrowers with foreign exchange income. 35 accordance with the laws of the Republic of Tajikistan, and who are engaged in or intending to engage in an eligible entrepreneurial activity as a result of financing from the credit line. 9. Implementation mechanism. The Ministry of Finance (MOF) will channel the funds through qualified commercial banks and non-bank financial institutions (jointly called the Participating Financial Institutions; PFIs), which are regulated by the National Bank of Tajikistan and selected through a due diligence process on the basis of a set of PFI Eligibility Criteria (there will be separate ones for commercial banks and micro-finance institutions). The criteria will be the same as those used under the ACP, and will be attached in the credit line guidelines. Any new PFIs will be selected (or the suspended ones allowed back into the credit line) on the basis of a due diligence process. The due diligence, which will be carried out by a financial sector specialist on behalf of the World Bank and the Borrower will include, but will not be limited to, the PFI’s overall lending capabilities, and financial and portfolio performance. The PFI shall have a satisfactory financial and management structure, satisfactory risk-based capital adequacy, an acceptable asset quality and lending performance, adequate liquidity, majority private ownership, and the organization, management and technical staff and other resources required for the efficient carrying out of the operations. The same standards shall be used to constantly monitor the continued eligibility of a currently operating PFI. 10. The PFIs will sign Subsidiary Loan Agreement (SLA) with the MOF. A separate operational manual for the credit line, to be developed jointly by the World Bank and the Implementing Agency – will set forth the eligibility criteria for PFIs, sub-borrowers and sub- projects to be financed and the procedures for all parties involved in the implementation of the credit line. The compendium of these documents will contain all necessary provisions for the implementation of the credit line, including potential ways to secure the MOF’s interest in the subsidiary loans. Sub-borrowers under credit line will not be able to benefit from the commercialization grants. 11. The PFIs will carry out full appraisal of loans, set interest rates and repayment terms to final beneficiaries based on prevailing market conditions and the type of investment financed, and bear the full risk of loan repayment. Except, each PFI will have to submit to the World Bank for a prior review first three sub-loans, providing more detailed information to substantiate their lending decision. This will allow assessment of the PFI staff lending skills. The Credit Line will be disbursed to PFIs on a “first-come, first-served basis”, within the exposure limits established for the PFIs, which will ensure that the most active PFIs have access to the necessary financing. Given the likelihood that a number of the PFIs will qualify for participation, it will help ensuring the competitive environment necessary for the sub-borrowers to benefit from competitive terms and conditions of the financing. 12. Similarly to ACP credit line, the MOF PMU will continue the rigorous monitoring of the credit line implementation and the financial and operational status of the PFIs. The monitoring during the initial stages of the project will be done on monthly basis, switching to quarterly when the situation in the financial sector permits. 13. Activity 2: Matching Grant Program (US$2.5 million, all IDA) for start-up target groups will introduce a matching grant program, which will complement the credit line, in support of new 36 enterprise and job creation (including self-employment) for targeted groups: starts-ups among youth (up to 30 years of age), women and PWD. The matching grants will co-finance sub-loans provided under the project to provide incentives for these target groups to access the financing (since a portion of the sub-loan will be become non-repayable under certain conditions), and also for the PFIs to serve these beneficiaries, as prior experience with similar programs has shown that it improves the repayment discipline due to their structure. The matching grant mechanism is proposed as follows: the matching grants will be available together with a borrowing from the financial sector, in the amount of up to 50 percent of the financing needed by the enterprise. Grants will be provided as the last portion of the financing, and the beneficiaries will be required to repay the sub-loan portion of the financing due to the PFI before benefitting from the grant. For instance, in case an enterprise (borrower) requires US$1,000, the grant portion would be US$500. The grant portion will become non-repayable upon full and timely repayment of the sub-loan portion including any interest due on it. The Matching Grant Program (MGP) is expected to incentivize repayment by the borrowers, and also increase attractiveness of such borrowers to the financial institutions. 14. Whereas the same overall sub-loan size will apply to the sub-loans benefitting from a matching grant, it is expected that the maximum size of financing (sub-loans and matching grants) will be much lower under this window, up to US$20,000 due to the start-up nature of the sub- borrowers. The matching grants will constitute 50 percent of the financing, but not more than US$10,000 equivalent. The matching grants may only be received once, and the minimum maturity of the underlying sub-loan should be two years. 15. The participating financial institutions (PFIs) will receive Matching Grant financing from the PMU as an interest-free conditional loan. Similarly, the matching grant portion of the sub- loans will be provided by PFIs to beneficiaries also as a conditional loan. In case of the full repayment of the repayable portion of the financing (the 50 percent sub-loan, as explained above), the remaining 50 percent, i.e., the matching grant portion, will be “written off”. However, in cases when even one payment of the sub-loan is missed or late, the entire matching grant will become a repayable loan, with interest retroactively accrued on the grant portion from the day that the financing was issued. In such cases, the interest collected from the matching grant-turned sub-loan will be retained by the PFI. The collected matching grant principal will be used to co-finance new sub-loans. 16. MGP will only be provided for financially sound business proposals and will be part of the sub-loan package appraisal carried out by the PFI. A detailed manual for the MGP will set forth terms and conditions for selection of MGP beneficiaries, as well as the necessary formats for application for matching grants, safeguard requirements, and other necessary guidelines. 17. Rigorous monitoring of this activity will be carried out by the PMU to monitor jobs created (through robust baseline data collection) and their sustainability (i.e. long-term such as those lasting at least 12 months). The project’s M&E system will be enhanced to capture the different dimensions of jobs created, including wages/earnings. 37 Component III: Institutional Capacity Building and Project Management (US$3.90 million, all IDA, proposed amount under the AF – US$1.0 million). 18. Activity 1: Capacity Building for financial intermediaries (US$0.5 million, all IDA). Capacity building to financial intermediaries will be provided in two main areas: (i) Training to PFIs on start-up business financing modalities, including risk identification and appraisal, and structuring of the repayment. The training will also include key environmental aspects associated with rural business financing. This training will be organized class-room style, and each session is expected to be 5 (five) days long. Separate training materials will be developed to present this training course. The training will be practical, based on realistic case studies and expected loan proposals; (ii) Capacity building support to selected smaller micro-finance institutions with good potential to grow and expand the opportunities for access to finance, in particular for small rural and agricultural businesses. The project will support around five such smaller MFIs, to allow them to strengthen their operations, develop new financial products and expand outreach. The specific nature of the TA to be provided will be determined upon selection of the micro-finance institutions following a call for proposals, and identification of areas for improvement of the selected group of MFIs. 19. Activity 2: Project Management (US$0.5 million, all IDA) will be allocated for project management expenses for implementation of the proposed additional activities financed under the additional financing. The PMU MOF will be responsible for the relevant procurement, financial management and Monitoring and Evaluation (M&E) activities, including the baseline and results assessment studies for the project. The AED PMU under the MOA will be responsible for Social and Environmental safeguards. Component IV: Entrepreneurship Training and Business Development Services to MSMEs (NEW, proposed amount under the AF - US$2.5 million). 20. A new component will be added to support potential target groups of entrepreneurs with entrepreneurship training, business development services and start-up support, as well as pilot innovative approaches to promote entrepreneurship and job creation. The component will try to address the following identified market gaps:  Lack of basic business skills and knowledge (legal, financial, taxation) was one of the key constraints potential and existing entrepreneurs face.  Access to finance is critical as well, but it was noted that basic financial literacy is very low, and improving the skills and knowledge of potential entrepreneurs was necessary to improve outcomes.  Other constraints mentioned include: lack of collateral to apply for loans (especially for women); high interest rates, excessive taxation.  The entrepreneurship ecosystem is underdeveloped, i.e. the institutional support for start-ups and young businesses is generally lacking, especially in rural areas. There are no established business centers, incubators or ‘one stop’ shops which could provide services beyond registration, resulting in lack or limited access of entrepreneurs to such important services as access to market knowledge, business networks, personalized coaching and mentoring, etc. 38 21. As part of the AF, a new Component IV will be added to expand the scope of the ongoing project to provide entrepreneurship training and business development services to potential entrepreneurs and start-ups to promote entrepreneurship and job creation. The component is expected to consist of the following two main activities. 22. Activity 1: Entrepreneurship training and business development services (BDS) (US$1.5 million, all IDA) to start-ups with more intensive focus on youth-led, women-led enterprises and enterprises led by/employing persons with disabilities. The project will finance basic entrepreneurship training to a wide group of potential beneficiaries and more complex business development services16 (BDS) to select start-ups. The entrepreneurship training and business consulting services will aim to help prepare borrowers to take advantage of the credit line (including business plan preparation) and other services (accounting, financial planning, and marketing) to improve the likelihood of utilizing the loans successfully and generating jobs. Youth-led, women-led and enterprises led by, or employing, persons with disabilities are expected to receive a higher share of resources. 23. Specifically, the component will finance the following: (i) Basic entrepreneurship skills training for start-ups, including youth, women and PWD.17 Training will be geared toward business plan preparation and developing fundamental skills on how to start a business, including basic financial literacy. The standard training package will be developed, but tailored for different groups of beneficiaries (youth, women, and people with disabilities). (ii) Business plan preparation and its implementation (post-creation) support focusing on improving business practices: graduates of the basic entrepreneurship skills training as well as other potential entrepreneurs may be eligible for more intensive one-on-one support including business plan preparation, assistance in loan application (through Credit Line Component II), and post-creation support of up to 12 months focusing on improving business practices. To maximize potential for job creation among resulting start-ups, this service will be provided to those who pass an entrepreneurship aptitude test18, which will be developed/adapted under this component, or other criteria to be developed and included in the Project Operational Manual (POM). 24. Implementation arrangements:  Basic entrepreneurship skills training (financial literacy, business skill development and business registration and management) to startups (including youth, women and PWD) will be provided by competitively selected providers, mostly expected to be non-governmental organizations (NGOs). 16 Business development services are defined as those non-financial services and products offered to entrepreneurs at various stages of their business needs. These services are primarily aimed at skills transfer or business advice (IFC). 17 The training will build, for instance, upon the modules developed by the Central Asia Youth Empowerment & Entrepreneurship Development team, which has been implemented in 2016-2017 with almost 4,000 youth. 18 The test would evaluate risk attitudes, personality, socio-emotional skills, information on past business or work experience, motivations and description of business idea. 39  Awareness raising seminars will be organized throughout the project area to sensitize the potential beneficiaries regarding the business development opportunities provided by the project; particular attention will be paid to reach out to potential women beneficiaries through dedicated outreach strategy.  The beneficiaries will be able to obtain assistance in business plan preparation to secure funding from a financial institution. Following the financing, the start-up entrepreneurs will be able to benefit from post-creation support services for a period of about 12 months on various aspects of business management.  Business plan preparation and post-creation support services will also be delivered by competitively selected providers paid by results (such as successful loan application/repayment by a supported start-up, start-up survival and/or growth (in sales), etc.). This more complex assistance could be provided on the basis of passing an entrepreneurship aptitude test or other criteria developed by the project to assess the entrepreneurship motivation of the applicant. 25. Activity 2: Entrepreneurship Hub (US$1.0 million, all IDA). Piloting innovative approaches to promote start-up growth and job creation, including business incubation services, business mentoring and training programs. The project will consider experience of implementing different models of entrepreneurship hubs, including NGO-led19, public-private partnerships, private-led, etc. The project will assist with opening of an Entrepreneurship Hub with business incubation services in Kurgan-Tybe, Khatlon, for select companies, as well as scale up some of the good business mentoring and training services to support start-ups more generally (with a particular focus on women, and youth-led, and PWD-led/employing enterprises). It is expected that the pilot would contribute towards development of an ‘entrepreneurship ecosystem’ in the region, as early-stage entrepreneurship support infrastructure (such as incubators, hubs, etc.) plays an important role in developing the innovation and entrepreneurship ecosystem by fostering dialogue and cooperation among providers of business and financial support, policy makers, and entrepreneurs. 26. Within the project scope, particular attention and TA will be provided to ensure development of realistic sustainability strategy for the Entrepreneurship Hub, including building strong value proposition to attract private sector and to support the Government priorities through entrepreneurship promotion, job creation and industry development. It is expected that strong linkages with all entrepreneurship ecosystem stakeholders as well as sound results will enable Hub to develop comprehensive proposition for external funding from the Governments both at local and national levels, other donors, and private sector partners.The Business Incubation20 function of the Entrepreneurship Hub is aimed at supporting the development and scaling of growth- oriented, early-stage enterprises, to provide them with an enabling environment at the startup stage of enterprise development. This environment is expected to help reduce the cost of launching the enterprise, increase the confidence and capacity of the entrepreneur, and link the entrepreneur to resources required to start and scale up a competitive enterprise. It is expected that the enterprises would stay at the Business Incubator until an agreed upon milestone is reached, often measured in 19 For instance, Imon International has a lot of experience in supporting women entrepreneurs, as well as provision of business incubation services in Sughd. 20 A recent study of 9 business incubators in 8 ECA countries across found that the incubators studied have generally been effective in fostering entrepreneurship and high quality job creation20 (World Bank 2014). 40 terms of sales revenue or profitability. The Business Incubator21 is expected to ensure the following services to its members (please see the Table below): Table A2.1: Key components of business incubation Services Benefits Infrastructure (e.g. office space, meeting Economies of scale decrease the cost of starting rooms, electricity, phone, internet, lab a business + benefits from a professional look facilities, etc.) and brand. Business services (e.g. help with registration, Help with non-core business activities saves time licenses, accounting, strategy advice, market and money research, exporting facilitation, etc.) People connectivity (e.g. mentoring, coaching, Learning, exchange of ideas, psychological and interaction with fellow entrepreneurs (a support, partnerships, business relationships micro-cluster), market linkages) Source: World Bank (2014) Impact Assessment of Business Incubation Models in Eastern Europe & Central Asia. 2014. infoDev, Finance and Private Sector Development Department. Washington, DC: World Bank. 27. On the mentoring and training services side, the project will support existing and new business coaching/mentorship (start-up and early entrepreneurship development) opportunities implemented including business connect meetups for start-ups, public lectures by role models/mentors, and other competitively selected proposals to develop an ‘entrepreneurship ecosystem.’ An open call for proposals would be done at least twice a year, and the proposals would be evaluated by an independent panel based on criteria to be developed and reflected in the POM. Applications focusing on youth, women or PWD-led start-ups would be given priority. 28. Specifically, the component will finance the following:  A pilot of a business incubator in Khatlon (or another region, based on demand): Based on lessons learned in other ECA countries and local experience (incubators in Khujand and Dushanbe), the Project will finance development and piloting of a business incubator. A feasibility study is underway to assess the specific needs of aspiring entrepreneurs or young enterprises in Khatlon Region, and the most suitable operational modalities for such a business incubator. It would also include a detailed plan for development of such incubator, and detailed costing. It is expected that the project would pay for refurbishment of the premises (if needed), equipping the business incubator, staff skill improvement, as well as operating costs.  Competitive grants to existing and new business coaching/mentorships to support start-ups more generally (with a particular focus on women-, and youth-led, and PWD-led/employing enterprises): The Project will finance small grants (~US$500 – US$1,000) to support existing and new business coaching/mentorships opportunities implemented including business connect meetups for start-ups, public lectures by role models/mentors, and other competitively selected proposals to develop an ‘entrepreneurship ecosystem.’ The grant program will be done in collaboration with the Entrepreneurship Hub. 21 The financial services, which often form part of the services package at a business incubator will not be provided by the Business Incubator set up under the project. 41 29. Implementation arrangements:  A pilot of a business incubator will be implemented by a competitively selected service provider. Proposals including public-private partnership approaches (in collaboration with universities, business associations, and government agencies) will be prioritized in the selection.  Competitive grants to existing and new business coaching/mentorships will be implemented by the Entrepreneurship Hub, NGOs, private sector associations. Further details will be provided in the Project Operational Manual. 42 Annex 3: Implementation and Fiduciary Arrangements Project Implementation Arrangements 1. The MOF PMU is implementing the ACP’s credit line and the related TA to PFIs under Component II. As most of the proposed project activities are more relevant to the activities currently being implemented by PMU MOF, it was agreed that MOF PMU will be the main implementing unit for the AF. Hence, the proposed additional activities under Component II and proposed new activities under the Component IV (as described above) will be implemented by the MOF PMU. The MOF PMU will also be responsible for the relevant procurement, financial management and Monitoring and Evaluation (M&E) activities, including the baseline studies/surveys for the project, as well as establishment and maintenance of the Grievance Redress Mechanism (GRM). Support to Environmental and Social aspects of the AF is expected to be provided by the Specialists of the AED PMU. Additional staff, as necessary, will be hired at MOF PMU. 2. The existing TACP’s M&E system will be further enhanced to capture the jobs creation impact of the AF funded activities. A rigorous monitoring of this activity will be carried out by the MOF PMU to ensure that the jobs created as a result of loans/matching grants are new (through robust baseline data collection) and sustainable (i.e. long-term such as those lasting at least 12 months). Project’s M&E system will be further enhanced to capture different dimensions of jobs created, including wages/earnings. It was also agreed that financial management and procurement capacity assessments will be carried out in the coming weeks to assess the current capacity of PMU MOF to implement the Project. 3. The Project Steering Committee was set up under the ACP to provide strategic guidance for project implementation, as well as ensure that key issues that need to be resolved are brought to the attention of the Government and their resolution facilitated. The Steering Committee consists of representatives of the Prime Minister’s Office, Ministry of Agriculture, Ministry of Finance, Ministry of Economic Development and Trade, Ministry of Education, National Bank of Tajikistan, and private sector representatives. The ACP Steering Committee will provide strategic guidance also for the Additional Financing. Environmental and Social Aspects 4. While the proposed project restructuring and additional financing will not change the project category and not trigger new safeguards policies, the scope of access to financing will be broader, including also a wide range of new rural business activities (such as manufacturing; providing services to local population; etc.), outside of traditional agriculture and agribusiness. This required updating of the initial project Environmental and Social Management Framework (ESMF) by providing guidance on potential environmental and social impacts for the new types of business activities that would be financed along with monitoring requirements and implementing arrangements. The revised ESMF done by the client also clarifies the procedures of the subprojects’ Environmental Assessment (EA) and of preparing Environmental and Social Management Plans (ESMPs) for sub-projects to be financed, including for business incubators to 43 be build or rehabilitated in Khatlon region, considering the experience obtained implementing the ACP during 2015-2017. The ESMF also proposes the curricular for the training which includes applicable safeguard requirements to address the impacts related to commercial agro enterprises for TA activities for the proposed under Component 1 Training and Advisory Services activities, as well as measures for EA capacity building for micro-finance institutions (MFIs) under the revised Component 2.  Any activities involving new construction and/or expansion of existing facilities that might trigger OP4.12 would be diligently screened out and not financed by the project. Any activities involving child and forced labor will also be screened out. 5. The revised ESMF have been disclosed and consulted with all interested parties before Appraisal. The Environmental and Social Specialists have the relevant capacity to implement environmental and social safeguards issues, - based on last WB implementation support missions (in 2016-2017), the project environmental and social performance is considered satisfactory. Procurement 6. Procurement for the proposed AF will be carried out in accordance with both “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” dated January 2011 (revised July 2014) and “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” dated January 2011 (revised July 2014). The World Bank “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credit and Grants” dated October 15, 2006 and revised in January 2011 and as of July 1, 2016, will also apply. For each contract to be financed by the Association, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between MOF PIU and the Association task team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect actual project implementation needs and improvements in institutional capacity. 7. The MOF PMU will be responsible for the project procurement. The MOF PMU is implementing several donor-financed projects with credit lines activities. 8. MOF PMU procurement capacity. The initial overall procurement risk under the project is currently assessed as Substantial. The key issues and risks concerning procurement include: (i) given the larger scale of the program, the PMU may not be able to cope with additional responsibilities assigned under the project; (ii) Beneficiaries of the credit lines and beneficiaries of the Grants may have limited procurement experience; participating financial institutions (PFIs) may not have knowledge of procedures to ensure acceptability of procurement methods used to the Bank; (iii) Limited contract monitoring and management skills and tools; and (iv) Overall high public procurement risk environment. 9. Given the above risks and based on the lessons learned from similar experiences, the following measures are proposed to strengthen MOF PMU’s capacity and ensure effective project implementation:  Hiring of additional procurement staff; 44  Arrangement for dissemination of procurement knowledge by PMU-MOF to PFIs credit officers. The PMU would update the existing procurement manual in part applicable to the Credit Lines. The PMU-MOF would deliver regular procurement training on the manual to the PFIs credit officers working with the Credit Lines target beneficiaries;  Establishing contract management system; training of respective staff in appropriate areas related to procurement and contract management;  Enforcement of public disclosure and transparency provisions of the Bank’s Guidelines; due diligence on winning bidders; close Bank’s implementation supervision. Financial Management 10. The financial management responsibilities for the Additional Financing (P158499) to the Agriculture Commercialization Project would remain with the MOF PMU. The organizational structure is in place for the implementation of the Project. The MOF established internally a Project Management Unit (MOF PMU) responsible for fiduciary and technical support. The MOF PMU recruited the FM Consultant and Disbursement Consultant to provide support for all fiduciary aspects to the Chief Accountant of PMU, who is overall responsible for the financial management arrangements. The MOF PMU has gained required capacity in implementing donor funded projects, it is adequately staffed and appropriate controls and procedures have been instituted. The internal control system for projects at the PMU continues to be overall acceptable to the Bank. The Project Director approves all project expenditures and signs the payment orders along with the Chief Accountant of the PMU. The financial management arrangements for the Projects including accounting and reporting arrangements, internal control procedures, planning and budgeting, external audits, funds flow, organization and staffing arrangements are assessed as moderately satisfactory. 11. The MOF PMU submits quarterly IFRs on time and they are satisfactory to the Bank. The project audit for CY2016 was issued with unmodified opinion. The consolidated audit report and the accompanying project financial statements are acceptable to the World Bank. 12. To improve the financial management capacity, the MOF PMU should update the existing automated accounting system for the AF to cope with the rigorous requirement for project accounting and reporting, inbuilt controls and capacity to generate consolidated interim unaudited financial reports (IFRs), and update the existing FM chapter of the POM to enable to track the activities of the proposed project in proper manner. 13. Financial management arrangements for the project are adequate. However, the following action plan, as agreed with the MOF PMU, will need to be implemented to incorporate additional financial management requirements for the proposed project. Completion Action Responsibility Date/remarks Revision of Financial Financial Management part of POM needs to 1 Management part of the MOF PMU Effectiveness be updated to reflect AF activities. POM Accounting software Accounting software needs to be updated, Within 30 days 2 MOF PMU implementation including development of consolidated after 45 reports. Effectiveness 14. The MOF PIU is recommended to open a DA in a commercial bank, acceptable to the WB for the portion of credit and grant funds allocated to it. The ceiling for the Designated Account and other disbursement details will be provided in the Disbursement and Financial Information Letter. However, the situation in TJ banking sector continues to be very problematic. The main issues are high NPLs, insufficient provisioning, liquidity issues (local currency as well as foreign currency), delays in processing transactions/payments and issuing bank statements, etc. the Bank will conduct a review of banks audited financial statements of 2016 to assess the current situation of local banks issues, due to capital deficiency and serious under provision for bad loans. Based on that the Bank will update its list of acceptable commercial banks for TJ. The Bank is discussing with the MOF this difficult situation and suggested to transfer all projects DAs currently held with local commercial banks into widely-known international commercial banks outside Tajikistan. Under the original project funds are inaccessible in DA account in Tojprombank (TPB) in amount of USD 257,194.83. As the TPB is in liquidation, World Bank’s preferred creditor status applies, and as soon as TPB assets will be sold, DA will be able to recoup losses from proceeds of sale. 15. The MOF PMU will submit quarterly consolidated interim un-audited financial reports (IFRs) that will be generated by the respective accounting software based on formats agreed with the World Bank. The reports, to include Statement of Sources and Uses of Funds, Uses of Funds by Project activities (Components & Expenditure Categories) and Statement of DA, will be submit-ted to the World Bank within 45 days of the end of each quarter, with the first reports under the proposed Project being submitted after the end of the first full quarter following initial disbursement. 16. The MOF PMU will submit the annual consolidated audited project financial statements within six months of the end of each fiscal year of the Client. Each such audit will include the project financial statements, SOEs and DA Statement. The cost of the audit will be financed from the project funds. Following the Bank’s formal receipt of the audited financial statements from the MOF PMU, the Bank will make them available to the public in accordance with the Bank’s Access to Information (AI) Policy through its website. In addition, the MOF PMU will publish the audit reports in a manner satisfactory to the Bank. 17. The overall residual FM risk of the project is Substantial. 46 Annex 4: Economic and Financial Analysis 1. Support for small and medium-scale rural business activities will provide additional income opportunities for rural households and generate non-farm employment in rural areas. Evidence from other countries indicates that increased rural incomes also have a wider, indirect impact on rural economies, with a multiplier effect of 1.5-1.8. Project support for rural businesses will include: a US$13.2 million (including beneficiary contribution of US$1.7 million equivalent) extension of the existing project credit line for investment; a 50 percent matching grant to further support start-ups by youth (up to 30 years of age), women and PWD; and the provision of entrepreneurship training and business development services. 2. While these project inputs will provide critical resources and services for business development, they will not target specific types of business enterprise. The choice of business activity will be decided by project beneficiaries according to their objectives, skills and resources. As this choice cannot be determined ex-ante, it is not feasible to calculate an overall economic or financial return for this project component. The diverse nature of rural business activities (tailors, mobile phone repair shops, brick-makers, veterinary services, agro-input shops etc), and their wider, indirect multiplier effects further complicates any attempt to aggregate the impact of these activities and calculate an overall economic or financial rate of return. 3. Economic and financial analysis is thus based on the calculation of financial internal rates of return (FIRR) for a representative sample of small and medium-scale rural enterprises, to demonstrate their viability. The sample includes six small-scale enterprises suited to youth, women and PWD – which would be eligible for both credit and matching grants; and two medium-scale enterprises, which would be eligible for credit only. 4. Projected FIRRs from this representative sample were high, consistent with the observed growth of business activity in rural areas. Further sensitivity analysis showed that, in most cases, these returns were robust in the face of income falls of 10 percent or cost increases of 10 percent. Due to the high interest rate (28 percent) on project credit, projected profitability and viability were higher for enterprises with lower capital requirements and lower consequent loan requirements. A higher equity contribution from the owner also improves profitability and viability, by further reducing loan size. As the high interest rate limits the benefits conferred by extending the loan term or grace period, the analysis assumes that loans are repaid as quickly as possible – without compromising underlying viability. FIRR and Sensitivity Analysis for Representative Rural Business Enterprises 5. A summary of the financial analyses for the sample of rural business enterprises considered suitable for finance is presented below. All have a positive net present value (NPV), with FIRR values ranging from 28 percent - 40 percent. 6. All analyses were generated with the following assumptions:  Calculated in somoni (TJS), with a discount rate of 12 percent;  A beneficiary contribution of 20-30 percent of the total cost of the investment;  A matching grant of 50 percent of the total cost for enterprises suited to youth, women and 47 PWD;  Loan terms: 28 percent interest in TJS, with maturity at 2-5 years; and a grace period of 3- 9 months;  Taxes were based either on the “simplified tax” of 5 percent levied on small businesses employing staff, with a gross income less than one million TJS; or on a monthly, flat “patent tax” of 100-250 TJS/month (depending on the type of activity and size of business) for small businesses not employing staff.  Payments for social welfare were calculated at 25 percent of salary costs, or 1 percent of total revenue.  Wages were set at or above the current legal minimum wage rate of 800 TJS/month, with: 800-900 TJS/month for unskilled labor and 1,000-1,200 TJS/month for semi-skilled or skilled labor. Piece work rates were used for brick-making labor, consistent with current practices. 7. Detailed financial projections and calculations of the FIRR and sensitivity analyses are contained in the project files. 8. Mobile Phone Repair Service: The use of mobile phones is now widespread in Tajikistan, with subscription rates of 98.6/100 people in 2015 – up from 65.8/100 people in 2009 (World Bank Development Indicators). This creates a high demand for local mobile phone repair services. 9. Financial analysis assumes that the business is run by an owner-operator, with no staff employed. Start-up costs are low for people with the requisite skills and experience, with the main costs being: rented office space, basic furniture, a back-up power supply, tools, a computer, and a small stock of spare parts. Total borrowing is based on the need to finance 80 percent of capital costs plus working capital to cover operating costs for the first 2 months. The loan assumes a grace period of 3 months. Investment Requirement (TJS) Loan Terms Financial Indicators Assets 15,500 Loan Term 2.0 years Investment Period 4 years Working Capital 11,499 Interest Rate 28% NPV 4,330 TJS Total 26,999 Grace Period 3 months FIRR 35% Of Which Sensitivity Analysis FIRR Loan 10,800 10% cost increase 17% Matching Grant 10,800 10% revenue fall 13% Owner Contribution 5,400 20% 10. The enterprise has a high potential profitability, with an FIRR of 35 percent, an NPV of 48 4,330 TJS and the capacity to repay the loan in 2.0 years. Once the loan is repaid the enterprise will generate an estimated annual income of 19,240 TJS after tax, sufficient to cover the owner- operator’s annual “salary” of 12,000 TJS plus a “profit” of 7,240 TJS. Sensitivity analysis shows that returns remain adequate in the face of a 10 percent cost increase or a 10 percent fall in revenue. 11. Tailor Shop: Per capita household expenditure grew by 22 percent in real terms from 2005-2013 (World Bank Development Indicators), with a consequent growth in consumption. Household demand for consumer goods such as clothes has grown in response, creating opportunities for small-scale tailor shops to thrive. 12. Financial analysis assumes a business run by an owner-operator, with four salaried staff. Start-up costs include: rented floor space, basic furniture, five sewing machines and other sundry equipment. Total borrowing is based on the need to finance 80 percent of capital costs plus working capital to cover operating costs for the first 2 months. The loan assumes a grace period of 6 months. Investment Requirement Loan Terms Financial Indicators (TJS) Assets 33,500 Loan Term 2.5 years Investment Period 5 years Working Capital 24,135 Interest Rate 28% NPV 11,156 TJS Total 57,635 Grace Period 6 months FIRR 31% Of Which Sensitivity Analysis FIRR Loan 23,054 10% cost increase 15% Matching Grant 23,054 10% revenue fall 13% Owner Contribution 11,527 20% 13. The enterprise has a strong potential profitability, with an FIRR of 31 percent, an NPV of 11,156 TJS and the capacity to repay the loan in 2.5 years. Once the loan is repaid the enterprise will generate an estimated annual income of 26,358 TJS after tax, sufficient to cover the owner- operator’s annual “salary” of 12,000 TJS plus a “profit” of 14,358 TJS. The enterprise will also provide full-time employment for four people. Sensitivity analysis shows that returns remain adequate in the face of a 10 percent cost increase or a 10 percent fall in revenue. 14. Agro-Input Shop: The demand for agricultural inputs continues to grow in Tajikistan, driven by the expansion of livestock, fruit and vegetable production. Fruit production has increased by more than 120 percent since 2005 and vegetable production by more than 145 percent. This has boosted the demand for seeds, seedlings, agricultural chemicals and fertilizer; and suppliers who can provide informed advice on how best to use these farm inputs. Similar growth in the livestock sector has increased the demand for animal feed (see discussion of veterinary service enterprise). 49 15. Analysis of the returns to an agro-input shop assumes a small business run by an owner- operator, who also supplies other goods such as construction materials to improve viability and cash flow. Start-up costs are relatively low, with the main costs being: the rent of storage and retail space, office furniture, construction of a small greenhouse for seedling production, and a small stock of seeds, chemicals, fertilizer, animal feed and tools. As the sale of these products is highly seasonal, the analysis assumes that the enterprise sells crop products for 6 months and livestock products for the other 6 months of the year. Total borrowing is based on the need to finance 80 percent of capital costs plus working capital to cover operating costs for the first month. The loan assumes a grace period of 6 months. Investment Requirement (TJS) Loan Terms Financial Indicators Assets 13,000 Loan Term 2.5 years Investment Period 4 years Working Capital 13,925 Interest Rate 28% NPV 3,210 TJS Total 26,925 Grace Period 6 months FIRR 28% Of Which Sensitivity Analysis FIRR Loan 10,770 10% cost increase 20% Matching Grant 10,770 10% revenue fall 16% Owner Contribution 20% 5,385 16. The enterprise has a strong potential profitability, with an FIRR of 28 percent, an NPV of 3,210 TJS and the capacity to repay the loan in 2.5 years. Once the loan is repaid the agro-input shop will generate an estimated annual income of 19,232 TJS after tax, sufficient to cover the owner-operator’s “salary” of 12,000 TJS plus a “profit” of 7,232 TJS. The agro-input shop also provides an essential private sector service for agriculture. Sensitivity analysis shows that returns remain high in the face of a 10 percent cost increase or a 10 percent fall in revenue. 17. Private Veterinary Service: The strong continued growth of the livestock sector creates a strong demand for veterinary services. Cattle numbers have increased by more than 60 percent since 2005, sheep and goat numbers by more than 80 percent, and the gross value of livestock production has more than tripled (FAOSTAT). Increasing returns to livestock production have also raised farmers ability to pay for private veterinary services. 18. Analysis of the returns to a veterinary clinic assumes a business run by a qualified veterinarian. No staff are employed. Low start-up costs include the rental of office space, purchase of a motorbike for transport, a refrigerator for storing medicines and a small stock of livestock medicine. Total borrowing is based on the need to finance 80 percent of capital costs plus working capital to cover operating costs for the first 2 months. The loan assumes a grace period of 6 months. 50 Investment Requirement (TJS) Loan Terms Financial Indicators Assets 18,000 Loan Term 2.5 years Investment Period 5 years Working Capital 9,637 Interest Rate 28% NPV 6,279 TJS Total 27,637 Grace Period 6 months FIRR 31% Of Which Sensitivity Analysis FIRR Loan 11,005 10% cost increase 16% Matching Grant 11,005 10% revenue fall 12% Owner Contribution 20% 5,527 19. The enterprise has a strong potential profitability, with an FIRR of 31 percent, an NPV of 6,279 TJS and the capacity to repay the loan in 2.5 years. Once the loan is repaid the clinic will generate an estimated annual income of 22,452 TJS after tax, sufficient to cover the owner- operator’s “salary” of 14,400 TJS plus a “profit” of 8,052 TJS. The enterprise also provides an essential private sector service for agriculture. Sensitivity analysis shows that returns remain adequate in the face of a 10 percent cost increase or a 10 percent fall in revenue. 20. Small-Scale Poultry Farm (Eggs): Domestic egg production in Tajikistan has tripled since 2005 (FAOSTAT) in response to growing consumer demand. Low start-up costs and the ability to scale-up easily mean that small-scale egg producers can benefit from this growth in demand. Small-scale egg production farms are also relatively easy to manage in association with other income earning or household activities, and so well suited to women, youth and PWD. 21. Analysis is based on a 300 layer business run by an owner-operator, with family labour. Start-up costs include: simple housing, equipment (ventilators, cages, incubators), a back-up power generator, 300 laying hens and poultry feed. Total borrowing is based on the need to finance 80 percent of capital costs plus working capital to cover operating costs for the first 3 months. The loan assumes a grace period of 6 months. Investment Requirement (TJS) Loan Terms Financial Indicators Assets 42,000 Loan Term 2.0 years Investment Period 5 years 17,707 Working Capital 9,278 Interest Rate 28% NPV TJS Grace 6 Total 51,278 FIRR 39% Period months 51 Sensitivity Of Which FIRR Analysis Loan 20,511 10% cost increase 19% Matching Grant 20,511 10% revenue fall 11% Owner Contribution 20% 10,256 22. The enterprise has a strong potential profitability, with an FIRR of 39 percent, an NPV of 17,707 TJS and the capacity to repay the loan in 2.0 years. Once the loan is repaid the enterprise will generate an estimated annual income of 39,487 TJS after tax, sufficient to cover the owner- operator’s “salary” of 10,800 TJS plus a “profit” of 17,477 TJS. Sensitivity analysis shows that returns remain high in the face of a 10 percent cost increase or a 10 percent fall in revenue. 23. Small-Scale Brick Production Business: Construction is a continuous source of economic activity in Tajikistan, as businesses expand and modernize and households seek to improve their living conditions. This continuous demand creates opportunities for enterprises that produce low-cost construction materials such as bricks. 24. Analysis of the return to small-scale brick production assumes a business run by an owner- operator, with four staff working on piece-rates (based on the number of bricks produced). Equipment costs raise start-up costs but the reliance on piece-work employment makes this enterprise flexible in the face of changes in demand and so quite resilient. The enterprise is assumed to operate for 8 months of the year. Total borrowing is based on the need to finance 80 percent of capital costs plus working capital to cover operating costs for the first 3 months. The loan assumes a grace period of 6 months. Investment Requirement (TJS) Loan Terms Financial Indicators Assets 74,000 Loan Term 2.5 years Investment Period 6 years 37,974 Working Capital 44,404 Interest Rate 28% NPV TJS Grace Total 118,404 6 months FIRR 35% Period Sensitivity Of Which FIRR Analysis Loan 44,401 10% cost increase 19% Matching Grant 44,401 10% revenue fall 11% 52 Owner Contribution 29,601 20% 25. The enterprise has a strong potential profitability, with an FIRR of 35 percent, an NPV of 37,974 TJS and the capacity to repay the loan in 2.5 years. Once the loan is repaid the enterprise will generate an estimated annual income of 39,513 TJS after tax, sufficient to cover the owner- operator’s “salary” of 9,600 TJS (for 8 months) plus a “profit” of 31,513 TJS. The enterprise will also provide employment for four people for 8 months/year. Sensitivity analysis shows that returns remain high in the face of a 10 percent cost increase or a 10 percent fall in revenue. 26. Medium-Scale Poultry Farm (Eggs): No Matching Grant. Analysis of a medium-scale poultry farm is based on a 500 layer business run by an owner-operator, with one employee plus family labor. Start-up costs include: housing, equipment (ventilators, cages, incubators), a back- up power generator, 500 laying hens and poultry feed. Total borrowing is based on the need to finance 70 percent of capital costs plus working capital to cover operating costs for the first 3 months. The loan assumes a grace period of 6 months. The enterprise is not eligible for a matching grant. Investment Requirement (TJS) Loan Terms Financial Indicators Assets 58,000 Loan Term 3.0 years Investment Period 5 years Working Capital 15,857 Interest Rate 28% NPV 22,059 TJS Total 73,857 Grace Period 6 months FIRR 33% Of Which Sensitivity Analysis FIRR Loan 51,700 10% cost increase 13% Matching Grant 0 10% revenue fall 10% Equity Finance (30%) 22,157 27. The enterprise has a strong potential profitability, with an FIRR of 33 percent, an NPV of 22,059 TJS and the capacity to repay the loan in 3.0 years. Once the loan is repaid the enterprise will generate an estimated annual income of 39,304 TJS after tax, sufficient to cover the owner- operator’s “salary” of 12,000 TJS plus a “profit” of 27,304 TJS. The enterprise also provides full time employment for one employee. Sensitivity analysis shows that returns remain adequate in the face of a 10 percent cost increase or a 10 percent fall in revenue. 28. Medium-Scale Brick Production Business: No Matching Grant 29. Analysis of the return to a medium-scale brick production enterprise assumes a business run by an owner-operator, with six staff working on piece-rates (based on the number of bricks 53 produced). Equipment costs raise start-up costs but the reliance on piece-work employment makes this enterprise flexible in the face of changes in demand. The enterprise is assumed to operate for 8 months of the year. Total borrowing is based on the need to finance 70 percent of capital costs plus working capital to cover operating costs for the first 3 months. The loan assumes a grace period of 9 months. The enterprise is not eligible for a matching grant. Investment Requirement (TJS) Loan Terms Financial Indicators Assets 83,000 Loan Term 4.0 years Investment Period 6 years Interest 118,612 Working Capital 69,369 28% NPV Rate TJS Grace 9 Total 152,369 FIRR 40% Period months Sensitivity Of Which FIRR Analysis Loan 106,658 5% cost increase 16% Matching Grant 0 5% revenue fall 15% Equity Contribution 45,711 30% 30. The enterprise has a strong potential profitability, with an FIRR of 40 percent, an NPV of 118,612 TJS and the capacity to repay the loan in 4.0 years. Once the loan is repaid the enterprise will generate an estimated annual income of 59,598 TJS after tax, sufficient to cover the owner- operator’s “salary” of 9,600 TJS (for 8 months) plus a “profit” of 49,998 TJS. The enterprise also provides employment for six people for 8 months/year. Sensitivity analysis shows that returns remain high in the face of a 5 percent cost increase or a 5 percent fall in revenue, but the large loan required and high consequent repayment costs limit sustainability when profitability falls by more than 5 percent. 54 Annex 5: Social Issues in the AF to Agriculture Commercialization Project 1. The borrower has updated a Social Assessment (SA) prepared for the original ACP project, which along with the Environmental Assessment (EA) is included within a single Environmental and Social Management Framework (ESMF) for the expanded scope of activities under the AF. Guided by the project’s expanded scope, the SA aimed, therefore, to focus on the social context in which additional beneficiaries including vulnerable groups like women, youth, returning migrants of both genders and PWD cope with livelihood challenges. The SA was prepared in consultation with and inputs from a range of stakeholders including local government authorities, community (jamoat, mahalla) leaders, non-government organizations and community members (men and women), returning migrants and PWD. The draft SA was disclosed in-country in May 2017 and public consultations were held in three potential project sites. Consultations were well attended and included a broad range of stakeholders. This Annex provides details on the specific elements of the AF design. Gender 2. The original project acknowledged that women heavily relied on agriculture for employment and income generation though their voice, decision -making power and/or earning capacity were limited. The constraints to higher incomes from agriculture were significant in rural areas where women face cultural and structural barriers. Few women hold use rights to lands and even in cases where opportunities for de facto ownership persist women have limited voice in decision making. Access to information by women female laborers and farmers in most cases was limited and informed by cultural norms. 3. Findings of the updated Social assessment further confirm this as well as conclusions from other sources22 about a complex context which impacts women’s participation in commercial/entrepreneurial activity in agriculture. Women, despite the proclaimed legal and social equality, do not enjoy an equal access to land compared to men and especially in rural areas due to marriage patterns and customary norms. Rural women are not adequately aware of their economic rights, as well as legal rights to the use of land and face specific difficulty accessing finance due to poverty, lack of collateral, education, and knowledge. While engaged in almost all fields of the economy and mostly in agriculture, they continue to earn rather low wages. By some estimates, 48 percent of women are employed in agriculture, but the figure could be higher if all the unpaid women who work alongside their husbands or other male relatives were counted. 4. The project will factor in the above constraints and will ensure that women have better access to economic opportunities offered by the project and especially to those with low levels of knowledge of legal rights to land, finances, and lacking basic skills to participate in its activities for income generation. Specifically, the project will strive to ensure:  Gender- informed training (both in substance and delivery) at a community level on equal access of women to land to raise their awareness of the relevant legal documents, land reforms and procedures for establishing dehkan (commercial) farms and their management; 22 Tajikistan CPS for FY15-18 Tajikistan Country gender Assessment. ADB. 2016 55  Develop and deliver training modules for rural women with low levels of financial literacy to inform them on the project’s financial programs and instruments as well as programs of other financial institutions and build their skills and capacity for entrepreneurship and commercial activities;  Project interventions that respond to women’s needs based on assessment of their demands;  Conduct advocacy programs on the role of women in land reform. Such programs shall cover women-farmers and rural women-leaders;  Access to project’s grievance redress mechanism. 5. These elements of the project design will also be consistent with most recent strategic initiatives in Tajikistan in this regard. Namely, the private sector-led growth pillar in the CSP Tajikistan which focuses on improving women’s access to economic opportunities, building their capacity and skills, and providing access to land rights and finance leading to higher productivity especially in the low paid agriculture sector. The support for women’s entrepreneurship is also a goal of the National Strategy for Enhancing the Role of Women in the Republic of Tajikistan for 2011–2020. Persons with disabilities 6. In accordance with the RT Constitution (1994, amended in 2003), every individual, including persons with disabilities, shall be treated equally and has the right to all services guaranteed by the Government. The Law on Social Protection of Persons with Disabilities, approved in December 2010, represents a significant advance on the 1991 law with the same title and lays the basic foundations for compliance with the Convention on the Rights of Persons with Disabilities. The Law states that it “shall determine the legal, economic and organizational basis for ensuring the social protection of PWD and provide them with equal opportunities for vital activity and integration into society”23 7. It is obvious that persons with disabilities (PWD) are granted specific rights under Tajik legislation. However, while some parts of legislation are fully designed to suit persons with disabilities, most of these rights are defined in subsections and articles. Despite a body of law that has the potential to define the rights of persons with disabilities adequately, this fragmentation constitutes a major barrier to the implementation of a coherent system of services.24 Moreover, due to the economic situation in the country funding to implement programs to socially support PWD appears to be curtailed. 8. Persons with disabilities in Tajikistan, like in any other developing country, face a multitude of barriers to securing a decent livelihood. Difficulty in identification of suitable jobs, accessibility, negative attitudes and lack of education and skills are among major factors that affect their livelihoods. With poverty levels still noteworthy, especially in rural areas the exact number of PWD who live in poverty can hardly be determined for the lack of sufficient and accurate data. Empirical analysis suggests that most of PWDs in Tajikistan do not have opportunities for 23 Situational Analysis State of rehabilitation in Tajikistan. Disability and Rehabilitation Program. Breaking Barriers to Include All. WHO. 2015 24 Ibid 56 employment. The unemployment rates among them might be very high though no accurate data are available. 9. The SA notes that PWDs tend to use their legal right to access to land. Most of those who have own land plots (shares) at dehkan farms usually involve their family members and close relatives (wife, children), if they do not have a physical ability to garden own land plots. However, PWDs are not entitled to any special/additional privileges related to access to land, financial resources (loans) and other services. Likewise, PWDs and parents of children with disabilities do not receive any targeted financial or any other in-kind support (in the form of seeds, seedlings, equipment, etc.) either from government or donors for agricultural production. 10. Within agricultural associations there is no specialized support for farms led by persons with disabilities. Due to specifics of rural environment, the accessibility to places where the agricultural farms are located is a most common challenge for PWDs. At a community level, transportation for people with minor impairments (claudication, poor eyesight and hearing, paralyzed arm and other physical limitations) is non-existent. The need for specialized wheelchairs, self-propelled carts and other support for PWDs is acute to enable their commute especially when exposed to cold and heat when they need to work in the field. 11. The project will effort to include PWDs in its activities through:  Special trainings organized for PWD, business owners employing them, local authorities responsible for social protection to increase awareness of the PWD legal rights, types of social assistance available, ways to empower them through education and employment;  Monitoring participation of the PWD in project activities;  Considering options for concessional loans/ grants for employers of PWD.  Develop programs to support self-employed PWD in rural areas where unavailability of the necessary resources as well as lack of supportive environment for livelihood opportunity are absent. Returning migrants 12. The economic downturn as well as rigid measures taken in Russia to curb outside labor migration during the past few years has forced many young men and women to return to their homeland. With limited opportunities to be employed in urban areas many of them now seek employment opportunities in agriculture. Returning migrants do not have any barriers with to access to land, some even possess own shares at dehkan farms. However, many of them lack a basic knowledge of how to run a business in agriculture. The state employment agencies do not provide them with any specialized or business courses or any agricultural programs. In addition, local authorities do not keep a record of returning migrants employed in agricultural sector. 13. Majority of this target group have some or very limited experience in participating in financial programs (mainly loans) for agriculture. At the time of the survey and consultations they believed they could benefit from such programs in future if offered. However, many cautioned on the risks involved that a lack of knowledge or poor financial literacy might lead to non-purposeful use of financial resources and inability to repay duly loans and interests. 57 14. In building capacity of this target group the project will aim not only to enhance its formal access to finance, but also access to technical and financial services aimed at supporting entrepreneurship. Such assistance will include, but not limited to, training, advisory and business extension services, assistance in drafting financial statements and preparing loan/credit applications. While young women from this group will also benefit from other trainings and programs designed for women. 15. The overall approach will be to aim to form long-lasting partnerships among participants of the value chain. Workshops bringing together different parties in the chain will be provided where they will have an opportunity to engage and share information with each other and discuss specific problems within the value chain. Such approach will enhance trust among different players. Child and Forced Labor 16. Child and forced labor in agriculture is mainly associated with cotton production in general. Currently, child labor is broadly regarded as a support to parents off school hours without disturbing school attendance while there is no pressure from the local authorities to use child labor in agricultural production. The project will continue its implementation in compliance with applicable national legislation on child and forced labor. As in the case of the original project, the AF will not finance any interventions in the cotton sector. Mitigation measures that are in place to overt the risk of financing investments in which child and forced labor is utilized will be further sustained for the AF. OP 4.12 Involuntary Resettlement 17. The policy is not triggered under the project. All activities will take place on privately held land and the checklist of the EMP used for the original project to screen out projects with OP 4.12 impacts will be continued. Grievance Redress Mechanism 18. The Grievance Redress Mechanism (GRM) established for the original project will be modified to include the expanded activities and newly targeted beneficiaries. The management of current GRM will, therefore, be assessed. Any shortcomings of the existing system and the extent to which satisfactory outcomes can be enhanced will be examined. Furthermore, it will continue to be used as a vehicle for continued engagement with different stakeholders participating in project activities. . 58