FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR...

FOR OFFICIAL USE ONLY Report No: PAD3058

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$ 200 MILLION

TO THE

REPUBLIC OF UZBEKISTAN

FOR A

FERGHANA VALLEY RURAL ENTERPRISE DEVELOPMENT PROJECT

February 28, 2019

Agriculture Global Practice Europe And Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

(Exchange Rate Effective January 31, 2019)

Currency Unit = Soum

8,383 Soum = US$1

FISCAL YEAR

January 1 ‐ December 31

Regional Vice President: Cyril E Muller

Country Director: Lilia Burunciuc

Senior Global Practice Director: Juergen Voegele

Practice Manager: Julian A. Lampietti

Task Team Leader(s): Melissa Brown, Dilshod Khidirov

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank AFD Agence Française de développement /French Development Agency BDS Business Development Services BIH Business Incubation Hubs BWA Business Women’s Association CASA Central and South Asia CBU Central Bank of Uzbekistan CCI Chamber of Commerce and Industry CPF Country Partnership Framework CPSD Country Private Sector Diagnostic EA Environmental Assessment EBRD European Bank for Reconstruction and Development ENPV Economic Net Present Value EOI Expression of Interest ERR Economic Rate of Return ESIA Environmental and Social Impact Assessment ESMF Environmental and Social Management Framework ESMP Environment and Social Management Plan EU European Union FIs Financial Intermediaries FM Financial Management GDP Gross Domestic Product GRM Grievance Redress Mechanism GRS Grievance Redress Service HDP Horticulture Development Project ICT Information and Communication Technology IFAD International Fund for Agriculture Development IFC International Finance Corporation IPF Investment Project Financing IRR Internal Rate of Return M&E Monitoring and Evaluation MIS Management Information System MITC Ministry for the Development of Information Technologies and Communication MoF Ministry of Finance MoID Ministry of Innovative Development MSMEs Micro, Small and Medium‐Size Enterprises NPF New Procurement Framework NPV National Present Value OM Operational Manual PCG Partial Credit Guarantee POM Project Operations Manual PFIs Participating Financial Intermediaries PIU Project Implementation Unit PPP Public Private Partnership

PPSD Project Procurement Strategy for Development PRAMS Procurement Risk Assessment and Mitigation SCD Systematic Country Diagnostic SFSED State Fund for the Support of Entrepreneurship Development SIC State Investment Committee SLA Subsidiary Loan Agreement SMEs Small and Medium Enterprises TA Technical Assistance TOR Terms of Reference UZAIFSA Uzbekistan Agency for the Implementation of Projects in the Field of Agroindustry and Food

Security YU Youth Union

The World Bank Ferghana Valley Rural Enterprise Development Project (P166305)

TABLE OF CONTENTS

DATASHEET .................................................................................. Error! Bookmark not defined.

I. STRATEGIC CONTEXT ........................................................................................................ 1

A. Country Context ................................................................................................................................ 1

B. Sectoral and Institutional Context .................................................................................................... 2

C. Relevance to Higher Level Objectives ............................................................................................... 4

II. PROJECT DESCRIPTION ..................................................................................................... 6

A. Project Development Objective ....................................................................................................... 6

B. Project Components ......................................................................................................................... 6

C. Project Beneficiaries ....................................................................................................................... 13

D. Results Chain .................................................................................................................................. 14

E. Rationale for Bank Involvement and Role of Partners ................................................................... 15

F. Lessons Learned and Reflected in the Project Design .................................................................... 15

III. IMPLEMENTATION ARRANGEMENTS .............................................................................. 16

A. Institutional and Implementation Arrangements .......................................................................... 16

B. Results Monitoring and Evaluation Arrangements ......................................................................... 18

C. Sustainability ................................................................................................................................... 18

IV. PROJECT APPRAISAL SUMMARY ..................................................................................... 19

A. Technical, Economic and Financial Analysis ................................................................................... 19

B. Fiduciary .......................................................................................................................................... 22

C. Safeguards ...................................................................................................................................... 23

V. KEY RISKS ....................................................................................................................... 25

VI. RESULTS FRAMEWORK AND MONITORING ..................................................................... 27

ANNEX 1: Sector Analysis and Project Description .......................................................... 37

ANNEX 2: Implementation Arrangements and Support Plan ........................................... 51

ANNEX 3: Economic and Financial Analysis ..................................................................... 59

ANNEX 4: Maps ............................................................................................................... 66


i

DATASHEET

BASIC INFORMATION BASIC INFO TABLE

Country(ies) Project Name

Uzbekistan Ferghana Valley Rural Enterprise Development Project

Project ID Financing Instrument Environmental Assessment Category

P166305 Investment Project Financing

B‐Partial Assessment

Financing & Implementation Modalities

[ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC)

[ ] Series of Projects (SOP) [ ] Fragile State(s)

[ ] Disbursement‐linked Indicators (DLIs) [ ] Small State(s)

[✓] Financial Intermediaries (FI) [ ] Fragile within a non‐fragile Country

[ ] Project‐Based Guarantee [ ] Conflict

[ ] Deferred Drawdown [ ] Responding to Natural or Man‐made Disaster

[ ] Alternate Procurement Arrangements (APA)

Expected Approval Date Expected Closing Date

21‐Mar‐2019 31‐Jul‐2025

Bank/IFC Collaboration Joint Level

Yes Complementary or Interdependent project requiring active coordination

Proposed Development Objective(s) To support the expansion of rural enterprise activity and job creation in Ferghana Valley Components Component Name Cost (US$, millions)


ii

Component 1: Enterprise Development 15.00

Component 2: Access to Finance 167.00

Component 3: Project Management and Coordination 3.00

Unallocated 14.50

Front end fee 0.50

Organizations Borrower: Republic of Uzbekistan

Implementing Agency: Agency for the Implementation of Projects in the Field of Agroindustry and Food Security "UZAIFSA"

PROJECT FINANCING DATA (US$, Millions)

SUMMARY‐NewFin1

Total Project Cost 240.10

Total Financing 240.10

of which IBRD/IDA 200.00

Financing Gap 0.00

DETAILS‐NewFinEnh1

World Bank Group Financing

International Bank for Reconstruction and Development (IBRD) 200.00

Non‐World Bank Group Financing

Counterpart Funding 40.10

Local Beneficiaries 40.10

Expected Disbursements (in US$, Millions)

WB Fiscal Year 2019 2020 2021 2022 2023 2024 2025

Annual 0.00 20.00 25.00 40.00 45.00 40.00 30.00


iii

Cumulative 0.00 20.00 45.00 85.00 130.00 170.00 200.00

INSTITUTIONAL DATA

Practice Area (Lead) Contributing Practice Areas

Agriculture Finance, Competitiveness and Innovation, Social, Urban, Rural and Resilience Global Practice

Climate Change and Disaster Screening

This operation has been screened for short and long‐term climate change and disaster risks

Gender Tag

Does the project plan to undertake any of the following?

a. Analysis to identify Project‐relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF

Yes

b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment

Yes

c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes

SYSTEMATIC OPERATIONS RISK‐RATING TOOL (SORT)

Risk Category Rating

1. Political and Governance Moderate

2. Macroeconomic Substantial

3. Sector Strategies and Policies Moderate

4. Technical Design of Project or Program Moderate

5. Institutional Capacity for Implementation and Sustainability Substantial

6. Fiduciary Moderate

7. Environment and Social Substantial

8. Stakeholders Moderate


iv

9. Other

10. Overall Substantial

COMPLIANCE

Policy Does the project depart from the CPF in content or in other significant respects?

[ ] Yes [✓] No

Does the project require any waivers of Bank policies?

[ ] Yes [✓] No

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 ✔ Performance Standards for Private Sector Activities OP/BP 4.03 ✔

Natural Habitats OP/BP 4.04 ✔

Forests OP/BP 4.36 ✔

Pest Management OP 4.09 ✔ Physical Cultural Resources OP/BP 4.11 ✔

Indigenous Peoples OP/BP 4.10 ✔

Involuntary Resettlement OP/BP 4.12 ✔

Safety of Dams OP/BP 4.37 ✔

Projects on International Waterways OP/BP 7.50 ✔

Projects in Disputed Areas OP/BP 7.60 ✔

Legal Covenants

Conditions Type Description

Effectiveness The Project Operations Manual (POM) has been adopted by the Borrower in form and

substance satisfactory to the Bank.


v

Type Description

Effectiveness The PIU has been established within the Agency for the Implementation of Projects in the

Field of Agroindustry and Food Security “UZAIFSA” Type Description

Disbursement The Borrower has adopted the Credit Line Guidelines in accordance with the Loan

Agreement. Type Description

Disbursement The State Fund for Support to Entrepreneurship Development (SFSED) has adopted the

Partial Credit Guarantee Guidelines and has signed the Partial Credit Guarantee Agreement,

in accordance with Loan Agreement. Type Description

Disbursement The SFSED has adopted the Partial Credit Guarantee Guidelines, has signed the Partial Credit

Guarantee Agreement and the volume of guarantees issued by the SFSED under Part 2 (b) of

the Project is equal to or larger than US$ 20,000,000.


Page 1 of 66

I. STRATEGIC CONTEXT

A. Country Context

1. Uzbekistan is currently undergoing a paradigm shift away from its state managed economy. In the past year, the Government of Uzbekistan has launched a wide range of reforms that represent a shift from a state‐led economic system to a market economy. As noted in the recent Performance and Learning Review, these entail four fundamental economic and social shifts: (i) from the state to the private sector; (ii) from inward‐looking to outward‐looking growth and jobs drivers; (iii) from general government subsidies to targeted social programs; and (iv) from central government to regional and local authorities, in particular as regards to responsibility and accountability for the implementation of the reform agenda on the ground. 1 2. The transition to a market driven economy is driven by an ambitious reform agenda. Major reforms in the past two years include the liberalization of the exchange rate and currency depreciation, the reduction of Government involvement in the agricultural sector, the progress on the discontinuation of forced and systematic labor mobilization in the cotton sector, the diversification of agriculture to shift away from cotton and wheat production, the introduction of price adjustments and differentiation in energy and utility tariffs, and efforts to improve communication with citizens, and improving access to information. Financial sector reforms have also emerged as a priority to support economic transformation and foster private‐led growth.

3. As reforms continue, an increasing share of economic growth and employment will be driven by the informal and non‐state sector. In 2017, around 78 percent of all employed individuals worked in small or individual enterprises and more than 27 percent of all employment was in the agriculture sector, followed by industry (13.5 percent), and trade (11 percent).2 The recent Country Private Sector Diagnostic (CPSD) identified inadequate job creation, reduced competitiveness, and domination of the formal sector by underperforming state‐owned enterprises as major constraints to developing private sector enterprises in Uzbekistan. In its reform agenda, the Government has recognized the need to find new drivers of economic growth and placed significant emphasis on accelerating private sector growth and modernization of the economy to ensure income growth and job creation for long‐term sustainability of the country’s social and economic gains.

4. Despite its achievements in reducing poverty over the past ten years, Uzbekistan faces significant longer‐term challenges in providing high‐productivity, well‐paid employment opportunities, especially for youth, women and rural populations. Uzbekistan experiences significant outmigration ‐ an estimated 1.2 million Uzbek citizens have legal work permits in Russia with an unknown number working informally. While recent survey data is not available, labor force participation among youth and women is low. A 2013 survey found Uzbekistan’s labor force participation rate for males (as a percentage of the male population aged 15‐64) was 79 percent and 51 percent for females. One in ten people aged 20‐24 were not looking for a job because they could not find one and an estimated one in three males aged 20 to 24 was a migrant with most migrants originating from rural areas. 5. The Ferghana Valley represents a unique part of Uzbekistan characterized by high population density and economic development that has not kept pace with its potential. The entire Ferghana Valley encompasses an area

1 World Bank. 2018. Uzbekistan ‐ Performance and learning review of the country partnership framework for the period FY16‐FY20. Washington, D.C.: World Bank Group. https://hubs.worldbank.org/docs/imagebank/Pages/docProfile.aspx?nodeid=29972276 2 Statistical Review of Uzbekistan, 2017


Page 2 of 66

located in three countries – the Andijan, Ferghana and Namangan regions in Uzbekistan; portions of the Sughd region in Tajikistan, and the Osh, Jalalabad, and Batkan regions of Kyrgyzstan. With a total population estimated at 14 million across all three countries, the portion of Ferghana Valley located in Uzbekistan is the largest, with approximately 9.3 million people, comprising 28 percent of Uzbekistan’s total population. The region is home to one quarter of Uzbekistan’s poor and is one of the most ethnically diverse regions in the country with populations of Tajik and Kyrgyz communities. The Ferghana Valley includes some of Uzbekistan’s most highly productive agricultural land and at the same time, has a relatively high level of industrial development compared to other parts of Uzbekistan. Despite being well endowed, development challenges include bio‐physical (climate change induced weather variability, water scarcity); social (high population density, growing labor pool); and economic (structural transition to a market‐led economic model, uneven growth leading to development gaps between districts). Isolated extremist groups emerged during the immediate post‐independence period in the Uzbek portion of the Ferghana Valley and while these groups have been largely pushed out of the country, there is concern about continued ties to the Ferghana Valley. 6. Climate change is expected to have an increasing impact in Uzbekistan, including in the Ferghana Valley. Analysis of future average warming in Uzbekistan estimate a temperature increase between 2‐3°C and precipitation is expected to become more variable. Climate change modeling shows that the Syr Darya East River Basin (which encompasses the entire Ferghana Valley) is highly vulnerable to water deficits and potential negative outcomes under a high impact scenario are greater than other river basins in the country. Models estimate the Syr Darya East Basin would experience a 12 percent shortfall in irrigation water by 2040 under low climate impact scenarios and up to a 52 percent shortfall under high impact scenarios underscoring the need for greater climate resilience and economic diversification.

B. Sectoral and Institutional Context

7. The shift from planned to market economy will create opportunities for Ferghana Valley’s population of micro, small and medium size enterprises (MSMEs). Economic reforms and expected Gross Domestic Product (GDP) growth will create opportunities for MSMEs in both domestic and regional markets. The population of MSMEs in Ferghana Valley is substantial and growing, with nearly 49,000 registered firms classified as micro (less than five employees) or small (less than 50 employees), and an additional 84,000 commercial farm enterprises or single entrepreneurs engaged in business activities.

Source: Chamber of Commerce and Industry Source: State Statistics Committee

18%

30%

18%

34%

33%

21%

31%

22%

50%

49%

51%

44%

National Total

Namangan

Ferghana

Andijan

Sectoral structure of GDP, 2016

Agriculture Industry (incl. construction) Services

15,00419,382

9,727

1,348

1,690

1,220

14,537

17,816

12,074

13,951

16,827

9,202

113

161

102

Andijan Fergana Namangan

Number of Enterprises and Registered Firms

Large companies

One personcompanies

Micro‐firms

Small companies

Farmers


Page 3 of 66

8. Ferghana Valley’s geographic location and comparative advantage in agri‐business/agri‐food, textile, and small‐scale manufacturing show high potential to expand trade. Ferghana Valley has developed a distinct domestic and international reputation for quality production in agri‐business/agri‐food, textile production and traditional crafts. The region’s horticultural products, silk and weaving materials, and traditional ceramics are sold within Uzbekistan and increasingly in the Central Asia region and beyond. The CPSD identified sectors with strong potential for growth and showed the financial industry, information and communication technology (ICT) and ICT‐enabled services, transport, chemicals and fertilizers, tourism, retail chains and food production, and horticulture and agri‐processing all have the potential to help propel the Uzbek economy toward much higher economic growth rates. While chemicals and fertilizers require significant economies of scale, all other sectors represent opportunities for MSME growth. This is particularly important as evidence globally shows Small and Medium Enterprise (SME) contribute significantly to job growth. In developing economies SMEs typically account for half of employment and the majority of jobs created. 3

9. A key challenge facing individual, micro, and small enterprises will be improving productivity and developing more effective value chain linkages to achieve more efficient and profitable production. Increasing land and labor productivity will be a necessary condition for most MSMEs to grow and improve profitability. A number of models to support increased competitiveness and profitability for small enterprises and firms have been identified internationally. They include models that facilitate supply chain linkages between small‐scale suppliers/producers and buyers (productive alliances) or structured support for a geographically concentrated cluster of interconnected enterprises and firms (clusters).4 A common element in these approaches has been the provision of structured support to groups of enterprises to help overcome informational or organizational failures or to strengthen linkages between producers, buyers, processors, and service providers to overcome market barriers, improve quality, and increase production levels. 10. Access to finance remains a significant constraint for MSMEs. Overall, Uzbekistan has a credit‐to‐GDP ratio of 44 percent, compared to 61 percent ratio observed in Europe and Central Asia. The MSME segment plays a significant role in the Uzbek economy, representing 78 percent of employment and 49 percent of the national GDP in June 2018 (70 percent in Namangan, 66 percent in Andijan, and 62 percent in Ferghana). 5 Despite their contribution to the economy, these firms are challenged by limited access to finance, which limits their ability, expansion and contribution to growth. According to the 2013 World Bank Enterprise Survey, 97 percent of registered firms had access to a checking or savings account, but only 26 percent had a bank loan or a line of credit, well below the average of approximately 38 percent for Europe and Central Asia.6 Firms relied heavily on internal funds to maintain and expand their businesses (only 16 percent of firms used banks to finance investments). Among the challenges are: (i) low financial literacy levels, lack of reliable financial statements and limited managerial capacity to prepare loan application; (ii) insufficient levels of the type of collateral acceptable to financial institutions, especially among new enterprises; (iii) limited availability of financial products and lending methodologies, which suit the specific needs of MSMEs; and (iv) limited financial market infrastructure (such as moveable collateral registration). These challenges are exacerbated by declining rates of liquidity observed by commercial banks in the past year.

3 World Bank. 2012. World Development Report 2013: Jobs. Washington, DC: World Bank. 4 For a useful summary of productive alliances see: World Bank Group. 2016. Linking Farmers to Markets through Productive Alliances: An Assessment of the World Bank Experience in Latin America. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/25752 For a useful summary on cluster development and competitiveness see: Nallari, Raj; Griffith, Breda. 2013. Clusters of competitiveness (English). Directions in development: private sector development. Washington DC; World Bank. http://documents.worldbank.org/curated/en/152521468158381169/Clusters‐of‐competitiveness 5 The State Committee of the Republic of Uzbekistan on Statistics. 6 Despite these numbers, a small percentage of firms identify access to finance as a pressing constraint and a significant percentage of firms report not needing a loan, which might reflect the lack of banking culture in the country.


Page 4 of 66

11. There is significant opportunity to promote the socio‐economic inclusion of women through MSME development. A number of demographic and structural challenges prevent women from effectively engaging in the economy, and employment outside the home is traditionally low. Only one third of women work outside the home and women struggle with low levels of human capital, particularly in rural areas. Around 60 percent of rural women have received only a general secondary education (grades 9 to 11) or below, and only around 8 percent have obtained higher education. Agricultural modernization of the cotton sector will put pressure on income generating opportunities for rural women who comprise 80‐90 percent of labor force in the sector. Nonetheless, a 2017 diagnostic found that attitudes and norms for women’s entrepreneurship are evolving. Barriers to entrepreneurial activities are decreasing and women’s interest in business is increasing. Women’s entrepreneurship—which is often in fields of interest to other women—were found to have significant potential both to improve local women’s employment opportunities and to contribute to more positive community attitudes toward women’s work ambitions. 7 12. The digital start‐up culture is growing in Uzbekistan and the digital economy shows potential to reduce transaction costs and lower entry barriers for MSMEs. There are currently an estimated 500 start‐ups in Ferghana Valley that are developing innovations, and many utilize digital technologies to reduce transaction costs. Government support for youth entrepreneurship has allocated financing to address the need for stable and high‐speed access to internet, development of business infrastructure, and adequate office premises. Reliable internet is planned for regional centers in the current year although development of last mile infrastructure in rural areas is expected to be more challenging. The Government is establishing a network of co‐working office spaces in every region of the country as part of a digital transformation initiative. The co‐working spaces are expected to be developed in empty premises of UzTelecom in the regions of the country and will furnish entrepreneurs with necessary communication infrastructure. While Uzbekistan has a strong education system, the opportunities offered in the modern digital economy may require new skills. 13. Improving climate change resilience will also require investments at MSME level to improve resource efficiency and achieve economic diversification. Better energy efficiency and water management are high priorities in Uzbekistan’s efforts to mitigate the negative effects of climate change and anticipated reductions in water availability. While current efforts to increase energy efficiency are targeting larger state‐owned enterprises, investing in resource efficient equipment at MSME levels is also important and also can play a vital role in contributing to broader climate change adaptation measures and resiliency.

C. Relevance to Higher Level Objectives 14. The project is consistent with the Government of Uzbekistan’s Development Strategy for 2017‐2021 and its goal to unlock economic growth, job creation and poverty alleviation through development of strategic sectors and growth in the private sector. The recent reform program includes a number of structural reforms and measures to improve the competitiveness of the economy including limiting the size and reach of state owned enterprises, improving the protection of private property rights, encouraging growth of small business and private enterprises; strengthening and modernizing the financial sector; and modernization and diversification of its leading industries. Uzbekistan’s Climate Change Action Plan and Nationally Determined Contributions are also focused on investments in energy efficiency and adaptive measures to address water scarcity. The Government has developed several flagship national programs to support MSME development in strategic sectors – agriculture and agri‐business are featured prominently ‐ such as the “Every Family an Entrepreneur Program,” which focuses on expanding home‐based businesses among low income households, and “Youth is our Future”, which supports the development of new business start‐ups among young

7 Romanova,Ekaterina; Kolybashkina,Nina; Hiller,Bradley Todd; Kochkin,Evgeny. 2017. Diagnostic study of barriers for strengthening livelihoods of low‐income rural

women in Uzbekistan. Washington, D.C.: World Bank Group. https://hubs.worldbank.org/docs/imagebank/Pages/docProfile.aspx?nodeid=27946196


Page 5 of 66

entrepreneurs. 15. The Bank’s country program has been adapted to meet Uzbekistan’s growing social and economic transformation and consistent with this effort the project will provide investments to address market failures and provide public goods. The proposed project falls under the proposed newly adjusted Country Partnership Framework (CPF) Focus Area 2: Reform of select state institutions and citizen engagement and will also support the CPF’s higher level goals to support the growth of private sector and creation of markets. The project is complementary to the economic and policy reform support being provided by the Bank in other operations such as the Development Policy Operations (DPOs) and support for policy and regulatory reforms associated with the Doing Business and Enabling the Business of Agriculture initiatives, as well as under the different technical assistance (TA) activities to strengthen the financial sector. 16. The new operation aims to add value by addressing a need for rural enterprise development and rural urban linkages that is currently unmet in the Bank’s portfolio. The Bank’s portfolio is already financing several investment operations that are active in the Ferghana Valley. There are seven active projects and two pipeline projects in the portfolio that are focused on infrastructure and service delivery (energy, heating, water resource development, and municipal infrastructure, digital development) and expanding economic opportunities and supporting SMEs in productive sectors (primarily agriculture/agribusiness, and tourism). Currently, there is limited investment in rural‐urban linkages and the rural non‐farm economy. The proposed project will add value to the current portfolio by making complementary investments that will focus on bridging gaps between rural and urban areas to better leverage economic opportunities and strengthening links between the farm and non‐farm economy (which is often part of the larger agri‐food system). The project will also help address gaps in the Bank’s portfolio, which has faced challenges in identifying mechanisms to reach the smallest segment of SMEs and the emerging cohort of youth who will be launching or participating in economic activities. 17. The project will contribute to a larger commitment by bilateral and international partners to coordinate financing support. The project will also put in place donor coordination mechanisms to coordinate with other active projects in Ferghana Valley financed by the Asian Development Bank (ADB), Agence Française de développement /French Development Agency (AFD), the European Union, and the International Fund for Agricultural Development (IFAD).


Page 6 of 66

II. PROJECT DESCRIPTION

A. Project Development Objective

18. The project’s objective is to support the expansion of rural enterprise activity and job creation in the Ferghana Valley. This will contribute to the larger goal of building greater economic and job opportunities within Ferghana Valley and facilitating private sector‐led economic growth. Project financing would be directed at: (i) rural entrepreneurship with a focus on business incubation and apprenticeship; (ii) cluster development to strengthen backward and forward linkages in supply chains and facilitate greater market access and business development; and (iii) improving access to non‐financial and financial services among micro and small enterprises in high potential sectors (agri‐food, tourism, textiles/apparel, light manufacturing). The project will place a strong focus on inclusion (targeting youth and women), innovation (deploying technology, digitization and management models to improve effectiveness, efficiency and scale); incubation (facilitation and mentorship for developing an entrepreneurial ecosystem); and linking rural areas with emerging economic clusters in urban areas and other economic clusters in the country and the region. 19. The project is expected to result in an increase in enterprise intensity within the region; increased employment (particularly among youth and women) as a result of new business start‐ups or expansions of existing enterprises; increase in access to financial and non‐financial services by micro, small and medium businesses; and increase in market linkages within value chains in targeted areas. PDO level results would be measured by the following outcome indicators:

(a) Enterprise intensity index8 (disaggregated by gender and age of owners); (b) Number of enterprises supported under the project (disaggregated by type of enterprise); (c) Increase in total revenues of enterprises supported under the project (disaggregated by type of enterprise),

US$; (d) Number of additional jobs generated by enterprises supported by the project (disaggregated by gender and

age of employees).

B. Project Components Component 1: Enterprise Development (US$ 15 million) 20. The objective of the first component is to facilitate the establishment and growth of MSMEs through the provision of technical support and facilitation. Financing would be provided for: business advisory and business development support services designed to incubate and mentor various classes of micro and small entrepreneurs through the Chamber of Commerce and other technical partners; technical and advisory support for innovation start‐ups, primarily implemented through the newly established regional innovation centers; targeted TA and support packages for groups of producers or enterprises within a selected cluster using independent business advisory services; and market promotion and technology demonstration events targeting a wide range of MSMEs. Sub‐Component 1.1: Business Incubation and Mentorship (US$ 11 million) 21. Business incubator hubs (BIH). The project will finance a business incubator program for rural entrepreneurs that address key bottlenecks faced by entrepreneurs ‐ obtaining business development and non‐financial services, exposure

8 Enterprise intensity index is calculated as the ratio of the number of enterprises and the able age population.


Page 7 of 66

to new technology and skills, managing risk and identifying potential sources of financing. The program will utilize the current infrastructure of one‐stop shops, business facilitation centers, and co‐working spaces to expand the menu of services available to entrepreneurs and facilitate greater outreach to rural areas. These efforts will complement the Government’s current investment in strengthening one‐stop shops, which primarily focus on providing administrative and regulatory services, as well as co‐working spaces, which provide ICT connectivity and networking space. 22. The objective of the BIH program would be to deliver business and financial services directly to rural entrepreneurs. The BIH will bridge the knowledge and business services access gap for new and existing entrepreneurs in the project area and provide a platform for providing special support to youth and women‐led enterprises. BIHs would support teams to deliver a range of services in business ideation and conceptualization, business plan preparation, hand‐holding support to initiate a business, facilitation support to access‐required finance, technology, skills; regulation compliances; market intelligence, information, and linkages; and mentoring. Risk management – both business and investment risk as well as physical and climate risks – would also form part of the support provided to entrepreneurs. Activities that could be financed under BIH include: (a) training, workshops; exposure visits; business exhibitions; buyer‐seller meetings; equipment and technology exhibits (b) consultant and non‐consultant services; (c) goods (including printing of manuals), ICT hardware and software and office refurbishment; and (d) operating costs including outsourced staff, and office running costs at regional and district levels. Financing will be designed to allow outreach outside the district capital directly to rural mahallas. 9 23. Project support will be open to any MSMEs and entrepreneur that expresses interest. The project will also provide targeted support to beneficiaries under the access to finance instruments under component beneficiaries as well as other SME financing programs such as Every Family and Entrepreneur Program, where many households have received collateral free loans for home‐based businesses but have had limited access to business development services (BDS). 24. The BIH will be managed as a program rather than a set of stand‐alone locations and would be led by the Chamber of Commerce and Industry (CCI) who will work closely in partnership and collaboration with Business Women Association (BWA) and Youth Union (YU). To ensure that the BIH can achieve outreach to micro and small rural entrepreneurs across the three regions, a decentralized BIH service provisioning model will be adopted and will target activities at the district level and below. To facilitate this, the BIH model will be ICT‐enabled and, in most cases, virtually integrated with web‐based platforms, applications, and calling‐in facilities. BIHs will utilize teams that will reach out to the district and below levels with business development campaigns and outreach events to enroll entrepreneurs as members of BIH. The members of BIH will be listed and enrolled based on criteria as outlined for project beneficiaries. The criteria and process of selection and operations guidelines of BIHs will be outlined in the POM.

25. In order to support jobs development as part of business incubation and BDS, the project will also finance TA to expand apprenticeships. Like many countries, Uzbekistan has a history of formal and informal apprenticeship (ustoz shogird) that provides a mechanism to train younger people in specialized crafts. Globally, apprenticeship programs are recognized as an alternative approach to improve vocational training and skills development, and used in crafts as well as other sectors (agri‐business, industry). The project will finance a study around apprenticeships in Ferghana Valley with the aim of identifying opportunities for enterprises that could function as mentors and in‐situ training sites to develop business and technical skills for enterprise promotion. 26. Innovation Start‐ups. While BIHs are expected to support new businesses, the project will also target specific

9 In Uzbekistan a mahalla is a self‐governing citizen’s body with primarily social functions but which also constitute the smallest geographic unit demarcated within a village, town or district.


Page 8 of 66

support facilitated innovation start‐ups in order to provide more intensive support to translate innovative technologies or business models into viable enterprises. This will involve sustained engagement and support for new technology/innovations. The project will finance challenge competitions to attract SMEs with the best business ideas and innovative products to come out and compete through an “innovation marketplace” model. Key phases would focus on challenge competitions for selection of ideas and participants; supporting start‐ups to move from ideas to business plans and ideas (pre‐incubation); supporting development of business plans to enterprises (incubation phase), submitting plans and pitching them to experts and financiers (launch phase); launching business and developing markets, customers and technology (growth phase). Eligible expenditures will include the goods and services associated with managing the challenge competitions as well as a start‐up award for winning proposals to kick‐start the SME activity. The project operational manual (OM) will detail the guidelines for running challenge competitions, including the ceiling for start‐up awards. 27. The innovation start‐up program would be anchored in the three new regional innovation centers that have been competitively awarded under public private partnership (PPP) arrangements by the Ministry of Innovative Development (MoID). Innovation centers were competitively selected by the MoID in late 2018 with a Youth Innovation center established at the Polytechnic University in Ferghana City, an agriculture focused Innovation Center in Andijan, and ICT focused innovation center in Namangan. Most regional innovation centers are located within universities and have developed consortium arrangements within the region to other educational campuses. The centers have a broader mandate for technology and innovation research and development as well as supporting entrepreneurship and new business development. The project would build on these efforts and would support institutional capacity building to implement the challenge program, which would expand their focus to facilitating business solutions for rural and agricultural enterprises. In order to facilitate the activities of the innovation center, additional support would also be provided for TA, civil works and other infrastructure investment within the regional innovation centers to complement the state budget resources. MoID’s Research & Development fund would also provide complementary resources to finance awards of innovation challenges. Sub‐Component 1.2: Cluster and Value Chain Development (US$ 2 million) 28. The cluster development activities under the second sub‐component will focus on groups of producers/ enterprises and finance demand‐driven investments to strengthen value chains and expand or establish enterprise clusters that seek to expand productive activities or reach new markets. The objective of these activities would be to integrate value chains, improve competitiveness and develop an ecosystem of enterprises that deliver greater quality, volume and profitability. Most clusters would be expected in the agriculture and food processing sector but would be open to handicraft, textile, tourism and small manufacturing sectors. Given the already strong focus and significant financing available for cotton/textile clusters, which constituted the initial emphasis of cluster development in the country, the project would not finance clusters involving primary cotton production. Textile clusters supported by the project would be those that focused on silk production or cotton textile manufacturing at the latter stages of production (sewing, weaving, or apparel manufacturing).

29. Various types of cluster models could be supported under the project and are expected to include: (i) vertically integrated clusters centered around a primary processing or exporting enterprise with the potential for contract farming or supply arrangements with a pool of raw material producers (a productive alliance model); (ii) a cluster of inter‐connected enterprises and firms that are geographically concentrated but who supply different parts of a value chain and may not have formal contractual relationships (such as agri‐food, small‐scale manufacturing or tourism clusters); or (iii) groups of producers or common interest groups who could develop better access markets with greater producer


Page 9 of 66

organization, aggregation and marketing capacity (such as agriculture, handicraft cooperatives). These different cluster models will have very different objectives, needs and organizational requirements but will share an over‐arching aim to leverage the capacity of the actors within the cluster to improve productivity and market access. 30. Project financing will be competitive and based on submission of a cluster or value chain development proposal that will present a business plan developed by enterprises or producers within the cluster. The full cycle for developing, evaluating and awarding project support for a cluster sub‐project is described in more detail in Annex 2 and would involve a two stage process to develop and evaluate proposals.

31. Project financing for cluster development proposals would include TA grants and coordinate with productive infrastructure investment if needed through the state budget or on‐going programs. A package of support could include, for instance, training or capacity strengthening to enable cluster participants to become more bankable, specific marketing and product development support, organizational support to develop supply chain linkages or contracts, or market access technologies (such as market information systems, or digital tools such as blockchain). Enterprises in the cluster would commit to significant co‐financing of the business plan. While the project will finance training and TA as part of the cluster development proposal under sub‐component 1.2, access to commercial financing through commercial banks would be provided through access to the guarantee and credit line in Component 2. Sub‐Component 1.3: Market promotion and Technology Testing (US$ 2 million) 32. The third sub‐component will also support a small set of market promotion and technology testing activities in order to facilitate the launching of enterprise clusters or SME activities. This could include market‐led technology transfer through demonstrations of improved technologies. Support for trade promotion and assessment of export and domestic marketing policies would also be pursued. 33. Project activities would be implemented through regional innovation centers and strengthen the technology demonstrations that have been launched under the Every Family an Entrepreneur Program. This program has supported technology fairs for micro and home‐based businesses at district level managed by district hokimiyats. Project financing would be provided to expand the number of technology demonstration sites within districts that have not been covered by the Every Family an Entrepreneur Program and to expand the number of technology options presented at the demonstration fairs. Coordination with the MoID and Ministry for the Development of Information Technologies and Communication (MITC) would be expected. Component 2: Access to Finance (US$ 167 million) 34. The project will support two financing instruments: a credit line and a partial credit guarantee (PCG) fund. The objective of the credit line is to address liquidity constraints faced by banks while the partial credit guarantees are intended to reduce financial institutions’ risk exposure and increase their risk appetite for MSME and agricultural lending. 10 The credit line and PCG will target micro, small and medium enterprises in Ferghana Valley in the value chains targeted by the project. The bulk of project investment will be allocated to the credit line with a limited amount of funding allocated to the PCG fund. This allocation may change over the life of the project but is based on the assessment of the immediate demand for greater liquidity for the provisioning of financing to MSMEs and the need to strengthen institutional capacity to manage the PCG fund, which is relatively new to Uzbekistan.

10 In 2018, the ratio of liquid assets to total assets decreased to approximately 11 percent from 24 percent in 2017.


Page 10 of 66

35. Linkages to component 1. Services provided under component 1 would be designed to also support farm and business management training to ensure that funds can be channeled to credit worthy agents and to increase suitable demand for credit for agri‐businesses and MSMEs. Financial and technology extension training given to firms and farms would be part of the business incubation and cluster TA services and would be designed to ensure adequate linkages between component 1 and 2. Sub‐Component 2.1: Credit line for MSMEs (US$ 146.5 million) 36. The credit line would be implemented through participating financial institutions (PFIs)11 to provide more liquidity for micro‐credit and micro‐loans in Ferghana Valley. The credit line would be implemented according to a project specific operational document, “Credit Line Guidelines” that is agreed with the Ministry of Finance (MoF) and compliant with the World Bank Guidance for Financial Intermediary Financing. Terms and conditions for the credit line will be established in the Credit Line Guidelines and will be a disbursement condition for any disbursement of credit line funds. PFIs would sign subsidiary loan agreements (SLAs) with the MoF based on terms agreed to in the Credit Line Guidelines. In order to reach micro and small enterprises, the credit line will make available credit in both foreign currency and soum. Should PFIs choose to offer local currency soum credit line, the foreign exchange risk will be managed at the MoF level. In order to target the beneficiaries of the project, the credit line will primarily target smaller‐scale enterprises and will be limited to individual applications of one billion soum (US$ 125,000) where loans will likely range from US$ 15,000 to US$ 50,000, and in the case of a cluster development sub‐project, up to US$ 2 million. 37. There is a risk that despite the credit line, commercial banks may not give loans to agribusiness SMEs and farmers as there is some evidence that banks do not lend much to these clients, and the problem faced in lending to such small business and farmers could be more structural in nature. In order to address these constraints, additional TA will be supplied to PFIs on developing products for agribusiness SME and the proposed investment in partial credit guarantees would address some of these constraints. 38. Technical and policy support to MSME finance. The project would directly finance targeted technical support for PFIs to build capacity to participate in the credit line but would also benefit from other regulatory or policy work undertaken with the World Bank Group. This includes the International Finance Corporation (IFC), which is currently providing technical policy support to develop a commercially sustainable micro‐finance industry and is conducting a feasibility study on micro‐finance and diagnostics of digital finance services. IFC plans to continue to partner with selected banking and non‐banking institutions to help increase access to credit for the private sector, including SMEs, through long‐term finance and short‐term trade finance lines, and to assist in improving their operational efficiency, enhance risk management and corporate governance structures through advisory services. 39. Child and forced labor. Project funds will not be used to finance activities that involve child or forced labor in any form. The activities of all potential Project beneficiaries will be pre‐screened and regularly monitored to ensure that they are not related in any form to child or forced labor. Should child or forced labor cases be found, the right of the Beneficiary to use the proceeds of the sub‐financings will be suspended and terminated and declared to be immediately due and payable to the PFI.

11 Given their strong presence in the Ferghana Valley, microfinance institutions providing productive loans to MSMEs on a commercial basis will be eligible to participate, conditional on a due diligence and eligibility criteria.


Page 11 of 66

Sub‐Component 2.2: Guarantee fund for MSMEs (US$ 20.5 million)

40. Through a project‐specific window, the project will support issuance of PCG schemes to support SME activities in the Ferghana Valley. The project will utilize an already existing institutional architecture to host the PCG scheme, which will be administered by the State Fund for Support of Entrepreneurship Development (SFSED) and which will issue guarantees to commercial banks. The State Fund, which was established under the Cabinet of Ministers in August 2017 and became operational in early 2018, has already launched a PCG scheme for small businesses and new enterprises using seed capital from the state budget. The SFSED also has an interest rate subsidy scheme and, to a lesser extent, a credit line for refinancing agricultural projects. The initial capital base of the Fund is approximately UZS 600 billion (US$ 73 million).12 Resources came from the state budget (from the liquidation of two existing funds) and, going forward, the State Fund will be supported by additional budget allocations and Central Bank’s annual net profits. In 2018, the scheme had issued 823 guarantees to MSMEs (184 in the Ferghana Valley), which were equivalent to UZS 599 billion (approx. US$ 70 million) and supported US$ 103 million in loans.13

41. The project will focus on provisions of TA to the SFSED in the first year to strengthen operational modalities and governance mechanisms of the proposed PCG to be financed by the project. The disbursement of project funds for the PCG would be based on the completion of an agreed set of operational guidelines that reflect international best practice, which would be developed with the TA program financed under the project. The “Partial Credit Guarantee Guidelines” will be agreed with MoF prior to disbursement of any PCG funds. Key principles for the PCG would be designation of SFSED as a separate legal entity with dedicated capital, independent governance arrangements, sustainability of operations in terms of administrative costs, and robust risk management. In line with best practice and global experience, project funds would be utilized to capitalize the fund rather than being treated as on‐lending from the MoF as is the case under the credit line. Sub‐Component 2.3: Pilots in Financial Services (beneficiary and counterpart funds only) 42. The project will support pilots on innovative financial solutions that show potential to increase the outreach of financial services to MSMEs. The following areas were identified as of interest by potential PFIs: microfinance, inventory finance, and digital financial services. A number of opportunities exist to test alternative methods of collateral (agri‐value chain finance, warehouse receipts finance, and inventory finance) and digital tools (mobile wallet, digital financial services, digital identity, real‐time credit assessment/scoring) to address gaps in access to financial services. Pilots will be proposed by PFIs and financed under the terms and conditions established for the credit line and described under the project’s Credit Guidelines (see above). Pilots will be financed through SLAs under budget allocations from the component 2.1 credit line budget or additional re‐allocation. Co‐financing of technical assistance to develop or launch pilots is expected through donors, and through PFI’s own financing. Component 3: Project Management and Coordination (US$ 3 million) 43. The third component will finance project management and coordination activities. A project implementation unit will be established to coordinate implementation activities and will be located in the Agency for the Implementation of Projects in the Field of Agroindustry and Food Security (UZAIFSA). The component will focus on strengthening UZAIFSA’s capacity for project management, monitoring and evaluation through the provision of goods, consultant services, training and financing of incremental operating costs. This component will: (i) support operation of UZAIFSA, and finance overall

12 US$ 50 million and UZS 200 billion. 13 Three claims have been made so far since the SFSED became operational in early 2018. Most loans are still under their grace periods.


Page 12 of 66

project management, as well as contract administration, procurement, safeguards, and financial management; and (ii) establish a robust performance‐based Management Information System (MIS) and beneficiary satisfaction survey, and arrange for data collection and reporting on key performance output and impact indicators, through baseline surveys, participatory assessments, mid‐term review and final evaluation. 44. The project will finance the goods, technical assistance, consulting services, training and incremental operational costs for UZAIFSA and other relevant agencies as appropriate to facilitate implementation of the Project (including the areas of financial management, procurement, disbursement, and monitoring and evaluation).

Unallocated (US$ 14.5 million)

45. Following appraisal, an unallocated category was formally set aside in the project budget to leave flexibility during project implementation and accommodate the potential for slower or faster implementation within project components. Both the first and second project components will involve a number of innovative elements that are likely to advance at different implementation rates based on implementation capacity and demand within MSMEs. The unallocated budget is expected to be re‐directed to activities in either the first or second component based on implementation progress and results achieved. Implementation support missions during the first and second year and the project’s mid‐term review will be used to determine priorities for reallocation. Table 1. Project Costs (in US$ millions)

Component IBRD Counterpart and

Beneficiary Funding Total

Component 1: Enterprise Development

1.1: Business Incubation and Mentorship 11.0 2.2 13.2

1.2: Cluster Development 2.0 0.4 2.4

1.3: Market Promotion and Technology Testing 2.0 ‐ 2.0

Component 2: Access to Finance

2.1: Credit Line for MSMEs 146.5 29.3 175.8

2.2: Guarantee Fund for MSMEs 20.5 4.1 28.7

2.3: Financial Services Pilots* ‐ 4.1 4.1

Component 3: Project Management and Coordination

3.1 Project management 3.0 ‐ 3.0

Unallocated 14.5 ‐ 14.5

Front end fee 0.5 ‐ 0.5

Total 200 40.1 240.1 * Pilots will receive re‐allocations under the project based on the demand driven approval of proposals for pilots

Linkages to on‐going Bank projects and IFC. The project would be complementary to a number of on‐going and planned Bank operations. Project financing would scale up pilots on women’s entrepreneurship initiated under the Trust Fund supporting Third Party Monitoring in the Cotton Sector; build on the successes of the Livestock Development Project and the Horticulture Development Project (HDP) by supporting further development of agri‐processing clusters and small‐scale producer organizations; and provide economic livelihood opportunities that would complement the investments made in community and municipal infrastructure and planning under the proposed Prosperous Villages/Obod Qishloq Project and the Medium Cities Project. As noted above, the project will also have a strong component of collaboration with IFC, particularly with IFC’s SME advisory work activities and planned IFC interventions in financial inclusion and the micro‐credit/micro‐finance sector. IFC is currently working on regulatory and demand assessments for micro‐credit. The project will also explore complementarity with the IFC risk sharing facility with commercial banks.


Page 13 of 66

46. Climate co‐benefits in the project. The project will support climate adaptation and mitigation across all components ‐ through investments in BDS that increase the skill of MSMEs and clusters to identify and manage climate risks, promotion of climate resilient technology through market promotion and technology demonstration activities, and financing for capital investments in MSMEs that improve energy efficiency and water resource management through the access to finance component.

C. Project Beneficiaries 47. Primary beneficiaries. The project’s primary target beneficiaries are current or potential entrepreneurs operating individual, micro, or small enterprises in Ferghana Valley who will benefit from the provision of training, technical assistance, services, facilitation, and access to SME financing. Entrepreneurs operating medium and larger sized enterprises are also expected to benefit as a result of cluster development activities and improved access to services and financial products for SMEs but the primary focus of the project will be on smaller enterprises. Training, TA and maximum loan sizes will be tailored to reach this segment of the SMEs. A typology of beneficiaries is contained in Table 2 below: Table 2: Typology of beneficiaries

Target Beneficiary Groups

Constraints/bottlenecks Existing interventions or programs

Project interventions

Micro‐entrepreneurs and new home‐based businesses

Knowledge of business opportunities and markets

Limited financial literacy

Access to appropriate technology

Access to credit with no collateral

Every family an Entrepreneur Program (no collateral loans, limited technology promotion activities)

Soft investments:

Business advisory/incubation

Technology promotion Hard investments:

Micro‐credit pilots

Small to medium size entrepreneurs

Knowledge of regional or export business opportunities and markets

Appropriate technology

Access to credit with limited collateral

State Fund for Entrepreneurship

Existing credit lines under State budget, World Bank, Asian Development Bank (ADB) projects (but very limited access to small enterprises)

Soft:


Technology and market promotion

Hard:

Credit line for small enterprises

Guarantee fund for small to medium enterprises

Financial innovations pilot

Groups of producers with potential to form new clusters

High transaction costs to organize producers within value chain

Limited knowledge of producer organizational models

High demand for credit to expand business activities

Productive infrastructure constraints

Existing credit lines under State budget, World Bank, ADB projects (but limited access)

Farmers Council Fund

Soft:

TA grants for producer organization, cluster development (cluster dev. sub‐projects)

Technology and market promotion

Hard:

Credit line for small enterprises

Guarantee fund for small to medium enterprises

Infrastructure allocation under State Budget/Obod Qishloq

New entrepreneurs Translating innovative ideas into viable business plans

Limited business skills

Youth Union Fund

Every Family an Entrepreneur Program

Soft:


Innovation start‐up


Page 14 of 66

Target Beneficiary Groups

Constraints/bottlenecks Existing interventions or programs

Project interventions

Access to finance with no business track record and limited collateral

Innovation centers (Min. of Innovation)

Co‐working spaces (Ministry of Justice)

support/innovation centers

Technology promotion Hard:

Micro‐credit/micro‐finance pilot

Rural job‐seekers Lack of skills for growing industries/agri‐businesses

Cost of on‐site job training

Current Government employment programs

Soft:

TA to develop rural apprenticeship models

48. Geographic focus and selection criteria. The project will be open to beneficiaries located in all 39 districts of Ferghana Valley. TA and training activities will be organized primarily at the regional level with participation drawn from districts. Business incubators would target beneficiaries from across the region and would have tailored programs focusing on youth and female entrepreneurs. Cluster development proposals can be from anywhere in the 39 districts but must be located in a rural area or demonstrate substantive rural linkages with some activities and participants located in rural areas.

D. Results Chain

Figure 1. Results Chain


Page 15 of 66

E. Rationale for Bank Involvement and Role of Partners 49. Bank financing under the project will be focused on measures to address market failures and public goods that are not currently being met by the public or private sector. Project investments are focused on addressing market failures such as the lack of information and coordination among market actors (to be addressed by project investments cluster development and technology promotion in component 1) and the lack of long‐term financing and risk sharing mechanisms for MSMEs (to be addressed by project investments in a dedicated long‐term credit line, PCG and pilots in financial services in component 2). Project investments in public service delivery and capacity development for small entrepreneurs (to be addressed by project investments in BDS and business incubation) are needed to address a gap in service provision that often leave out smaller entrepreneurs. The Bank has also become a trusted partner in the Government’s reform agenda and brings a wide range of global experience both in local community development methodologies and small‐scale enterprise development models. 50. The Bank’s engagement in the financial sector under the project is expected to provide a catalyst for further growth to strengthen the delivery of needed financial and non‐financial services from the commercial banking sector. The Bank is currently engaged in a larger financial sector strengthening and plans on providing capacity building support to financial institutions on micro‐finance products and SME financing through the IFC. 51. Discussions with other donor partners are on‐going ‐ while no co‐financing is currently planned, complementary activities have been developed within the project. The Bank has developed partnerships with most of the development partners active in Uzbekistan through joint or parallel financing of investment operations as well as TA to the Government. Currently International Fund for Agriculture Development (IFAD), ADB, EU and AFD are active or programming new support for SME development in the sectors targeted by the project. Both IFAD and AFD have plans to channel resources through the State Fund for Entrepreneurship and preliminary discussions have been held on harmonizing approaches. United Nations Development Programme is also supporting innovation and SME start‐up activities. The Bank will pursue TA partnerships with other development partners where possible.

52. Digital technology will be an area where non‐traditional partnerships are expected. The project’s focus on innovation and digital applications for developmental issues in Ferghana Valley is expected to lead to partnerships with private sector and other actors active in the digital space. This includes private sector service providers, digital technology developers, mobile applications and other disruptive technologies in areas of service delivery provisioning, financial inclusion and entrepreneurship development. Discussions around these partnerships are still very limited but are expected to grow through the use of the innovation market place and partnerships with the innovation and start‐up activities already launched in Tashkent.

F. Lessons Learned and Reflected in the Project Design 53. Lessons learned from productive alliance and programs for SME development show the need for appropriate targeting and selection criteria. Productive alliance programs have used grants and TA to facilitate linkages between small‐scale producers and buyers in the agriculture sector and matching grant programs more generally have also been used in many countries to finance knowledge and business development related services or SMEs. Assessments of both productive alliance and matching grant programs have identified a number of lessons, including the need to: utilize grants to address a well identified market failure; direct grants to a clearly defined beneficiary group with a verified demand; allow beneficiaries to select service providers; utilize cost sharing to retain ownership by beneficiaries; and


Page 16 of 66

ensure transparency and clear criteria in how grants are awarded.14 The project has designed mechanisms to incorporate these lessons into the selection of grants for cluster development through the use of a transparent process to select and award matching grants. 54. Lessons learned from targeted spatial development programs point to the need for incorporating market forces with interventions targeting lagging or under‐served areas. Analysis of regional or territorial development programs within the 2009 World Development Report on Reshaping Economic Geography, and more recently in the EU, have found that regional development policies have been most successful when focusing on supporting regions in reaching their economic potential and on achieving converging living standards or opportunities – not on converging incomes. In particular, more successful regional or territorial development programs have relied on the application of broad instruments aimed at economic growth and living standards (such as universal basic services) combined with incentives that may be spatially targeted (such as special economic zones or tax incentives). This contrasts with the approach used in first generation integrated regional development programs which focused primarily on spatially targeted investments aimed at dispersing economic activities to selected areas, which often had disappointing results. Lessons from these programs have underscored the need for regional development programs to aim at reducing the distance between people and economic opportunity as their primary driving force and letting market forces determine the nature of economic opportunities within a geographic space. 55. Partial credit guarantees can be used to reach less bankable clients but need careful design to ensure sustainability. Experience globally has shown partial credit guarantees can provide a critical element of “de‐risking” that allows financial institutions to be more willing to commit their own capital. Technical assistance will be provided to the State Fund for Entrepreneurship to align the existing guarantee scheme with international best practices. The TA will be guided by the Principles for Public Credit Guarantee Schemes for SMEs, which establish good practices for the operation of public partial credit guarantees. Key lessons learned include: need for adequate funding; importance of independent and effective supervision; a partial coverage ratio to avoid moral hazard; risk‐based premiums; transparent, specific, and efficient claims processes; accurate and efficient reporting on loans; and stringent eligibility criteria for MSMEs and

lenders.15 Experience from other countries also points to the risk of using public guarantees to cover public banks (eg.

Banco Agrario and FAG in Colombia). Using partial credit guarantees with private banks is best practice and can help mobilize private sector resources and maximize finance for development.

III. IMPLEMENTATION ARRANGEMENTS

A. Institutional and Implementation Arrangements 56. UZAIFSA will facilitate day‐to‐day implementation of the project with close collaboration with the three Ferghana Valley Hokimiyats and implementing partners. UZAIFSA will establish the project implementation unit (PIU) within its current structure and utilize its three regional Ferghana Valley offices located within the regional hokimiyat structure to facilitate day‐to‐day implementation of the project together with implementing partners. UZAIFSA will work closely with implementing partners who will be responsible for implementing specific activities within the project in the following areas:

14 “How to Make Grants a Better Match for Private Sector Development” World Bank 2016 and “Linking Farmers to Markets through Productive Alliances”, World Bank 2016. 15 World Bank. 2015. Principles for Public Credit Guarantee Schemes for SMEs. Washington, DC: World Bank.


Page 17 of 66

Business advisory services: The CCI (lead service provider), BWA, and YU would deliver the business development and technical assistance to start‐up and SMEs to participating entrepreneurs together with additional business advisory support or expertise as needed to expand BIH, including through existing infrastructure and one‐stop shop centers and mobile one‐stop shops (mobile portable offices)

Regional innovation centers under the MoID and regional hokimiyats will host and support innovation start‐up activities including providing physical space and support to UZAIFSA in managing innovation challenges.

Participating financial institutions will on‐lend credit lines for SMEs.

The State Fund for Entrepreneurship Development will manage the partial credit guarantee scheme under the project and work with participating financial institutions. The UZAIFSA will carry out fiduciary and safeguards oversight related to the use of project resources under the guarantee scheme.

57. UZAIFSA will also contract service providers to provide technical expertise and facilitate the development of cluster development sub‐projects and set up the initial business incubation and apprenticeship programs. 58. There will be an active role at the regional level for the Andijan, Ferghana, and Namangan regional administrations (or Hokimiyats), who will play a key role towards project implementation. The regional administration will play a key role in planning and managing implementation and the central government and hoikmiyat level and would be expected to actively participate in the planning and implementation processes at both levels. A steering committee would be established to provide oversight over implementation. 59. Non‐governmental bodies and service providers would play an important role around supporting business incubation, mentorship and enterprise development through the delivery of services and facilitation support. External TA and facilitation will be required for some business incubation and innovation activities, and partnerships with bilateral development partners are being explored to supplement project investment funds and facilitate the delivery of technical expertise.

Figure 2. Project Implementation Arrangements


Page 18 of 66

B. Results Monitoring and Evaluation Arrangements 60. The scope and specific functions of Monitoring & Evaluation (M&E) are defined by the nature of the project. The project’s M&E system involves stakeholders at regional and national levels and multi‐dimensional information including various subsectors and types of enterprises, and social impact on gender and youth. The M&E system will include routine monitoring of project implementation and results based on the data available in commercial banks, research institutions, centers and other organizations participating in the project. Baseline, mid‐term and end‐line surveys along with interim qualitative and quantitative assessments will be carried out to study changes in enterprise environment and activities as well as in perception of beneficiaries about quality of business support services and satisfaction of services.

61. M&E activities will be managed by UZAIFSA, including aggregation of information from the field, reporting on findings and ensuring that these results are reflected in quarterly and annual progress reports. A dedicated M&E Officer in UZAIFSA will be responsible for this task. The M&E Reports will also propose actions to resolve any issues affecting implementation. In addition, a dedicated Environmental and Social Safeguards specialist in UZAIFSA will monitor and evaluate the implementation of environmental, pest management and social safeguard activities of the project with support from other UZAIFSA safeguards specialists in place under other Bank and donor financed projects as needed.

62. A MIS developed under the project is the key element of the M&E system and project management. The MIS will provide an information channel between regional authorities and the project. It will also ensure links to a mobile application for entrepreneurs. The MIS will also be used to provide an integrated information on the governance and territorial development with related projects in Ferghana Valley.

C. Sustainability 63. The project’s sustainability is reinforced by the Government’s strong ownership of the overall project concept, which emerged from a specific high‐level request to support rural entrepreneurship and job creation within Ferghana Valley. The project’s design builds on and scales up on‐going Government programs, in particular, the recently launched “Every Family an Entrepreneur” initiative as well as the Government’s investment initiatives in innovation and cluster development. 64. The sustainability of project investments is expected to be supported by the direct linkage between project investments and private sector and commercial bank financing, which can help ensure services and investments are directed at viable business activities and show high potential for long‐term economic sustainability. The project’s investments in capacity building to institutions that deliver SME related business and administrative services are expected to put in place a service delivery model that should allow the institutions to operate on a cost‐recovery basis in the future. Institutions providing business incubation and BDS are expected to generate additional value for beneficiaries and allow them to develop models for service delivery that should generate revenue into the future. 65. The results achieved under the project will also generate spillovers as the guarantee and credit line funds will continue revolving in the PFIs beyond the life of the project as the expected repayment of the funds to MoF takes place according to a gradual repayment schedule. The technical sustainability of the credit line will be ensured through provisions of relevant training and hands‐on TA to the PFIs. The PFIs will be trained in applicability of the new financial products, assessing the suitability and effectiveness of these new products, and on mitigation of the related risks.


Page 19 of 66

IV. PROJECT APPRAISAL SUMMARY

A. Technical, Economic and Financial Analysis 66. Business incubation and business development services. There is some evidence emerging to show that support for soft and hard skills development for new entrepreneurs generates positive results in the formation of new businesses and on improving profitability, and that business incubation and SME development can be an important catalyst for growth.16 The significant amount of credit flowing to households offers both an opportunity and a challenge to ensure that the program leads to development of micro‐enterprise support ecosystem in addition to credit. The project’s focus on non‐financial services such as advisory services, business development, incubation, and market support, in addition to financial services, such as access to credit and other financial services, is an important balance to the current direction of the Government’s support to SMEs. 67. Value Chains, clusters and aggregation. Ferghana Valley has a number of locations where aggregation and clustering are already happening. Initial targets for the project will include clusters in the horticulture sector (fruits, niche products such as raspberry), Margilan and Rishtan (organic clusters on textiles, silk and ceramics), new business parks and industrial zones being set up, urban and tourism cluster (with a link to the Medium‐Cities project), Indo Rama (Textiles), Namangam (Ready‐made garments and Textiles with IFC), and any other such aggregation and clustering. Already some interesting models, such as the Margilan Silk Factory and Silk Business Association, are working on linking mulberry producers, silk cocoon reeling and weaving at village level and silk weaving and products manufacturing. Similar aggregation clusters are emerging in horticulture as well. The BWA also indicated that they are targeting developing women producer’s aggregation groups. Further inventories and diagnostics in the first year are expected to encourage development of projects and proposals. The project will target activities that cover the full value chain and make value chains bigger, inclusive and productive. The project design will include activities that enable development of these clusters including mini enterprises and industrial zones and infrastructure to provide good quality common services to encourage potential SMEs to agglomerate and invest. 68. Innovation and digitization. The project will source innovations from private sector, innovators and entrepreneurs and support development of entrepreneurial ecosystem for digital entrepreneurship in Ferghana Valley through dedicated incubators and innovation hackathons. These will enable younger entrepreneurs operating in the digital space to work on digital applications for developmental issues in Ferghana Valley. These could include mobile applications and other disruptive technologies in areas of service delivery provisioning, financial inclusion and entrepreneurship development. The project would support development of digital services, infrastructure and a platform as an organizing principle to enable development of more transparent and innovative solutions. The project would also explore mechanisms on how to create a data and knowledge platform to catalyze and spur new enterprises in the shared economy through provision of information and data on assets; public and private (pumps, tractors) and satellite imagery through precision agriculture including soil and moisture scanners and sensors. Similar digital platforms for financial services to create a credit rating and scoring platform for micro‐entrepreneurs will also be explored.

69. Linking digital technology to start‐up initiatives. The digital technology agenda is closely linked to the project’s focus on start‐ups and developing young entrepreneurs. There is a new generation of ICT induced start‐ups emerging in Uzbekistan and initial estimates show that there are more a range of start‐ups in the country. Currently the ecosystem

16 Carney, D and Gertler, P. Forthcoming. “The Return to Teaching Entrepreneurial Skills to Youth” and https://www.povertyactionlab.org/evaluation/soft‐versus‐hard‐skills‐entrepreneurial‐success‐evidence‐youth‐entrepreneurship‐training


Page 20 of 66

for supporting these start‐ups and incubating them is on a small scale and mostly centered in Tashkent. Promising nodes include State Technical University in Tashkent but with a branch in Andijan, the Ulugbek Innovation Center, and the Start Up Factory, a private company hosting start‐up events. The project’s focus on business incubation is intended to develop a start‐up ecosystem and economy in Ferghana so that young professionals with ideas are provided an opportunity to get started. Possible collaboration with the MITC and the Digital Central and South Asia (CASA) program will be important to identify existing innovators, start‐ups and other academic and private institutions which can be candidates for technical, managerial and financial support. 70. Credit demand for SMEs surpasses the availability of resources in the financial system. The liquidity position of commercial banks remains comfortable, but it has decreased substantially over the last year due to high credit growth. As of September 2018, highly liquid assets (US$ 2.8 billion) accounted for 12 percent of total assets, down from 24 percent in September 2017. This decrease has been driven by a robust expansion of the system’s credit portfolio, with the banking system reporting an annual credit growth rate of 44 percent (excluding devaluation effects). In contrast, deposits increased only by 15 percent, partially explained by the low banking and savings culture in the country, as well as persisting lack of trust in financial institutions. Credit growth has been driven by improvements in the business environment (the currency liberalization, trade agreements with other countries, non‐scheduled inspection, waiting times for permits, etc.) and state‐led investments. Financial institutions, including state‐owned banks that have traditionally focused on large corporates and project finance, are projecting and planning for a higher share of their commercial portfolio to MSMEs. Despite double‐digit growth rates, access to finance remains a challenge for MSMEs. While there are several Government programs to support entrepreneurs, especially micro‐firms and family enterprises, through concessional loans, the demand for credit far surpasses the availability of resources, according to financial institutions. Annual needs for finance among small businesses were roughly estimated at US$ 2.9 billion in a recent informal IFC assessment, while only an estimated US$ 0.89 billion were actually allocated to MSMEs, covering less than one‐third of an existing demand from micro and small businesses.

71. Continued support to credit lines for SMEs and agri‐business and satisfaction of the requirements under the Bank Guidance on Investment Project Financing for Financial Intermediaries. Analysis at pre‐appraisal stage has confirmed the appropriateness of continued support to credit lines. In general SMEs (both in agriculture and other sectors) tend to be constrained in access to finance due to lack of collateral, credit history or reliable financial accounts that could mitigate asymmetric information problems. Credit constraints hamper firm growth and economic performance (De Mel et al (2008), Banerjee and Duflo (2014)) and high interest rates on Agricultural and SME loans reflect these problems as well as weaker financial firm conditions. In some cases, high interest rates inhibit credit demand, but even when farmers and SMEs are willing to pay high interest rates, they may not get credit due to adverse selection (Stieglitz and Weiss, 1981). Ensuring qualifying institutions have adequate risk management systems and procedures would be key to ensure the adequate functioning of the project. Pricing of credits is a key element to ensure adequate risk management. To avoid credit distortions as required under the Bank’s policy on IPF, commercial banks may not price loans at below costs. Analysis of how banks calculate and price credit risks and overall credit will be part of the due diligence and certification of banks.

72. Climate change co‐benefits. The project would generate climate change co‐benefits through investments in energy efficient technologies (mitigation) and diversification of rural enterprise activity away from economic activities more vulnerable to climate change (adaptation). Project investments in individual entrepreneurs, vertically integrated firms and clusters of firms, or producers’ organizations will have investment proposals screened to ensure that climate adaptation/mitigation actions are incorporated. The Credit Line Guidelines will include proposed criteria for assessing sub‐loan activities to encourage climate resilient technologies. This could include, for example, high efficiency water


Page 21 of 66

management or energy systems. The incubation hubs will also show the potential to develop institutional support related to climate adaptation and mitigation as a part of their services package so that the business ideas and the business plans reflect the climate change priorities in the investment proposals that are financed through the lines of credit or guarantee‐related loans to the selected sub‐projects.

73. Economic and Financial Analysis. It is expected that the quantifiable benefits of the project would be generated by the following: (i) improved access to finance (the sub‐loans/guarantees); (ii) increased success rate of sub‐projects (due to business incubation and cluster development); and (iii) job generation and SME development. More specifically, the project benefits would derive from increased productivity and production of the supported sub‐projects due to the introduction of improved management and technologies, including intensive technologies, usage of improved seeds and varieties in agriculture, better business planning and skills and improved access to markets, including due to the cluster development. There are also some unquantifiable benefits that can be attributed to the Project that were also considered in the analysis (indirect benefits from improved rural infrastructure, spillover effect to other sectors, attracting more investments, etc.) 74. Most project activities and interventions will be demand‐driven making it difficult to identify with certainty which economic sectors and type of businesses will be prevailing during implementation. In order to quantify the expected benefits deriving from the improved access to finance and entrepreneurship environment supported by the Project, several indicative business activities (agri‐food, tourism, textiles/apparel, light manufacturing) were selected for the financial and economic analysis. The results of the analysis were then extrapolated to whole project in order to identify the overall Project’s economic impact.

75. Given the benefit and cost streams, the base‐case Economic Rate of Return (ERR) of the Project is estimated at 22.8 percent. The base‐case economic net present value (ENPV) of the project’s net benefit stream, discounted at 12 percent, is US$ 34.2 million. The additional economic effect of business incubation and cluster development would increase the ERR from 15.3 percent to 21.2 percent, improving the efficiency of funding and successful implementation of sub‐projects.

76. Shadow price of carbon. The estimation of the net balance from all greenhouse gases (GHGs) expressed in CO2

equivalent that would be emitted or sequestrated within the potential sub‐projects was made and the social price of carbon was included to the economic analysis. According to the calculations in EX‐ACT, the Project showed a total balance of 758,660 tCO2‐equivalent, which means that the Project will have more sequestration of carbon rather than emission. The overall carbon benefits improved the ERR from 21.2 percent to 22.8 percent.

77. The sensitivity analysis shows that the ERR is equally sensitive to changes in costs and in benefits and in absolute terms, these changes do not have a significant impact on it. A one‐year delay in project benefits reduces the ERR to 18.9 percent. Table 2. Sensitivity Analysis of Project Economic Return

Sensitivity Analysis ( 20‐year period)

Base case Costs Increase

Increase of Benefits

Decrease of Benefits Delay of Benefits

+10% +20% +50% +10% +20% ‐10% ‐20% ‐ 30% 1 year 2

years

ERR 22.8% 20.6% 18.7% 14.1% 25.3% 27.6% 20.4% 17.8% 14.9% 18.9% 16.2%

ENPV (US$ mln) 34.2 29.2 24.2 9.2 42.7 51.1 25.8 17.4 8.6 25.1 17.0


Page 22 of 66

78. The employment generation analysis showed that about 15,000 new jobs will be created by the Project because of the improved technologies and increased productivity and the emerging number of new SMEs and business oriented dehkan households.

B. Fiduciary Financial Management

79. Financial Management (FM) assessments. A FM assessment was carried out to determine whether the proposed FM arrangements: (i) are capable of correctly and completely recording all transactions and balances relating to the project; (ii) would facilitate the preparation of regular, accurate, reliable, and timely financial statements; (iii) would safeguard the project’s assets; and (iv) would be subject to acceptable auditing arrangements.17 80. The assessment of UZAIFSA indicates that Fiduciary risk is Moderate. UZAIFSA will be responsible for implementation of the fiduciary and accounting functions under the proposed project. UZAIFSA will be responsible for flow of funds, budgeting, accounting, reporting, and auditing. UZAIFSA has developed extensive experience in the implementation of the on‐going and already closed Bank‐financed projects. FM and disbursement arrangements for the project will include the following requirements: (i) establishment and staffing of a PIU for the project hired as per Terms of Reference (TOR) acceptable to the Bank with the PIU set‐up as a condition to effectiveness; (ii) adoption of the POM, that would describe in details the project fiduciary and operational internal controls, processes and procedures, also as a condition to effectiveness; (iii) adoption of the Credit Line Guidelines and the Partial Credit Guarantee Guidelines in accordance with the terms and conditions satisfactory to the Bank (condition to disbursement); (iv) utilization of an accounting software for project accounting, financial and reporting; (v) external audit conducted by independent private auditors and on TOR acceptable to the Bank and procured by the UZAIFSA; (vi) annual audited project financial statements submissions to the Bank within six months of the end of each fiscal year; (vii) financing of the cost of the audit from the proceeds of the credit; and (viii) UZAIFSA producing a full set of quarterly interim unaudited financial reports throughout the life of the project and will submit them to the Bank no later than 45 days after the end of each calendar quarter.

Procurement 81. Procurement procedures. The Borrower will carry out procurement under the proposed project in accordance with the Bank’s “Procurement Regulations for Investment Project Financing (IPF) Borrowers” (Procurement Regulations) dated July 2016 and revised in November 2017 under the “New Procurement Framework (NPF), and the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated July 1, 2016, and other provisions stipulated in the Financing Agreements. In line with the exemption under the Procurement Regulations, the goods, services and works to be financed via financial intermediaries to private borrowers will not follow the procurement regulations, but will be procured under national commercial practices. The POM will include the procurement arrangements under sub‐loans, including a sufficient level of detail on the terms of the national commercial practices that will be used by the financial intermediaries. The financial intermediaries will also apply the Anti‐Corruption Guidelines of 2016. Procurement capacity building for PFIs and potential sub‐borrowers to follow the

17 FM assessments were carried out in compliance with OP/BP 10.00 and related Directives and Guidance Notes, including Bank Directive: Financial Management Manual for World Bank Investment Project Financing Operations issued February 4, 2015 and effective from March 1, 2010; and the Bank Guidance: Financial Management in World Bank Investment Project Financing Operations Issued and Effective February 24, 2015


Page 23 of 66

POM will be organized in the first year of implementation and on demand in the later years.

82. PPSD Summary. A Project Procurement Strategy for Development (PPSD) has been initiated and completed during appraisal. The Bank procurement team has provided the necessary support and guidance for preparing the PPSD.

83. Procurement Risk Assessment and Mitigation (PRAMS). As part of the project preparation process, an assessment of procurement capacity of implementing entity was conducted and completed at appraisal using PRAMS and accordingly, risk mitigation measures have been proposed. A preliminary assessment of UZAIFSA procurement capacity focus indicates that procurement capacity is satisfactory.

84. Procurement risk. The overall procurement risk associated with the project in view of the project’s risk profile and the prior experiences of UZAIFSA with previous Bank‐financed projects is proposed as Moderate.

85. Oversight and monitoring by the World Bank. All contracts not covered under prior review by the Bank will be subject to post review during implementation support missions including missions by consultants hired by the Bank or through supreme audit institutions as part of the financial audit. The Bank may, at any time, conduct Independent Procurement Reviews of all the contracts financed under the credit.

C. Safeguards Environmental Safeguards

86. Project potential environmental and social impacts. The proposed project activities are expected to result in economic and social benefits but may also generate adverse environmental and social impacts. Under the projects’ second component potential investments might cause a series of various and direct environmental risks and impacts such as: increased environmental pollution with wastes, noise, dust, air pollution, health hazards and labor safety issues, due to civil works. Overall, most of these risks and impacts are expected to be typical for small‐scale construction/rehabilitation works, agri‐business activities, industrial production, temporary by nature and site specific, and can be easily mitigated by applying best construction practices and relevant mitigation measures, but in some cases (which would involve or generate hazardous materials and wastes) may be also more significant. Under the project’s first component, a series of consultancy activities related to development of business plans might, during their implementation and operational phases, generate some environmental and social impacts (air and water pollution, waste generation, labor and health risks). 87. Triggered Policies. Operational Policy 4.01 on Environmental Assessment (EA) is triggered as the project will generate some adverse environmental and social impacts (see above). The OP 4.04 on Natural Habitats as well as OP 7.36 on Forests, are not triggered as the project, the project is focused on existing infrastructure in urban and rural areas, and no natural habitats and/or forests will be impacted. As the project might support agriculture production sub‐projects, and in particular livestock sub‐projects, vineyards’ orchards’ planting or upgrading, greenhouses, which might cause increased use of agrichemicals, the OP 4.09 on Pest Management is also triggered. As required by the Bank’s disclosure policy, the draft ESMF has been disclosed. Public consultations took place in selected participating cities on January 17 and 18 following disclosure of the draft ESMF and comments incorporated into the final draft. 88. Project category and EA instruments to be applied by the project. In accordance with the Bank’s safeguard policies and procedures, the project is classified as Category B for which an EA with Environmental and Social Management Plan


Page 24 of 66

(ESMP) is required. Given the demand driven nature of project activities, many of which will only be determined during implementation, the most appropriate EA instrument is an ESMF that specifies all rules and procedures for the assessing sub‐projects and undertaking Environmental and Social Impact Assessment (ESIA). No project activity or sub‐project will receive financing that is determined to cause significant environmental impacts that may fall under the Category A classification and for which a full ESIA would be required (no such sub‐projects will be supported under the project). Sub‐projects located in protected areas, critical habitats or culturally‐ or socially‐sensitive areas, along with sub‐projects which might have an impact on international waterways, are also included in this negative list. However, sub‐projects may cause some adverse environmental impacts and would fall under the Category B classification, for which the Bank requires a simple and/or a partial ESIA and/or preparing an Environmental and Social Management Plan (ESMP).

Social Safeguards

89. The project is expected to generate positive social benefits through investments targeting the vulnerable (youth, women) and under‐served groups (rural micro and small enterprises). Potential adverse social impacts could arise in relation to labor issues within MSMEs supported under the project. Screening mechanisms in the ESMF include screening for labor issues (including forced labor) and the ESMF monitoring mechanisms will also assess compliance with national and international standards on labor. 90. Activities that show the potential for temporary or permanent involuntary land acquisition, negative impact on economic activities, or restrict access to resources will not be financed under the project. Any activity that is associated with the project will also be monitored to ensure there is no involuntary land acquisition or negative impact on economic livelihood. All investments in productive activities through cluster development and credit lines will be made on a demand‐driven basis and screened in the credit appraisal and cluster sub‐project evaluation process to identify any proposed activities that would contravene these principles. As a result, Bank Operational Policy OP 4.12 on Involuntary Resettlement is not triggered but social issues will continue to be assessed through the ESMF and will be monitored during supervision. Although involuntary land acquisition will not be allowed, a business will be allowed to acquire land in the open market of willing buyer‐willing seller situation or acquire unused government land. 91. Citizen Engagement. The project will apply participatory approaches in needs assessment, investment prioritization decision‐making, service delivery monitoring and feedback, and other key functions, leveraging applications of technology where appropriate. Project institutional and implementation arrangements will include a grievance redress mechanism (GRM). The project will monitor citizen engagement‐specific indicators such as: beneficiary satisfaction with the services provided under the project and complaints and PIU responsiveness. Participation of women during citizen engagement will be encouraged with monitoring indicators disaggregating information based on gender. 92. Gender. Project design has been informed by an in‐depth analysis of the situation of rural women in terms of economic participation, employment and entrepreneurship, as well as the barriers they face compared to men. While this analytical work 18 is not presented in detail in the PAD, its findings have guided the design of mechanisms for women’s participation in enterprise development activities. Project design includes measures to specifically target the economic participation of women in livelihood development and entrepreneurship activities and, incubator hubs will include activities dedicated exclusively for women entrepreneurs in partnership with various women’s networks and the BWA. The project will also develop a network of women entrepreneur mentors at all levels and involve them in creating an enabling ecosystem for women entrepreneurs. Gender disaggregated indicators and targets in the project results

18 See Romanova,Ekaterina; Kolybashkina,Nina; Hiller,Bradley Todd; Kochkin,Evgeny. 2017. Diagnostic study of barriers for strengthening livelihoods of low‐income

rural women in Uzbekistan. Washington, D.C.: World Bank Group. https://hubs.worldbank.org/docs/imagebank/Pages/docProfile.aspx?nodeid=27946196


Page 25 of 66

framework will also enable the project to monitor progress in improving gender gaps. 93. Grievance Redress Mechanisms. Any person who wishes to file a grievance with regards to project activities may do so, including anonymously. The project‐level grievance redress mechanism will be managed by the PIU, who will collect grievance claims. A grievance claim may also be brought to an implementing partner, contractor or PFI, but these entities would direct the claimant to the PIU for registering the grievance and facilitating follow up. Following receipt of the grievance claim, the relevant PIU staff will address the matter within 1 week of receiving a grievance. The PIU will enlist assistance from local leaders, as well as relevant agencies such as (CCI) (lead service provider), BWA, and YU, to resolve grievance. If the complainant is not satisfied with the PIU response, they can contact the Grievance Hotline established by the President’s office. If they are not satisfied with response, they can seek redress through the court system. 94. Communities and individuals who believe that they are adversely affected by a Bank supported project may also submit complaints to the Bank’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 Bank’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of Bank non‐compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s corporate GRS, please visit http://www.worldbank.org/en/projects‐operations/products‐and‐services/grievance‐redress‐service. For information on how to submit complaints to the Bank Inspection Panel, please visit www.inspectionpanel.org.

V. KEY RISKS

95. The overall project risk has been assessed Substantial with the following key risks: 96. Macroeconomic risk: The impact of the on‐going policy reform and market liberalization may negatively affect vulnerable populations or sectors. Inflationary pressures may contribute to higher financing costs, which might affect targeted beneficiaries. Reforms to state‐owned enterprises and state‐owned banks may also result in market disruptions as adjustments are made to business lines or as private sector actors enter to provide goods and services. The project’s credit‐line is expected to mitigate some potential impacts of disruption in the financial sector by providing needed liquidity while investments in BDS are expected to contribute to building a stronger base of private sector enterprises. The project will target youth and women who may be more vulnerable and require greater support to develop income generating opportunities. Other operations such as DPOs are also expected to contribute to a smoother transition and reform process. 97. Institutional capacity for implementation and sustainability risk (a): institutional capacity and readiness may impact implementation progress. The proposed design will require developing additional institutional capacity within various institutions that will play a key role in implementation. Project preparation will prioritize institutional capacity issues and technical assistance will be necessary at the very start of implementation in order to build capacity. The project’s design also relies on the availability of an adequate number of service providers to deliver business development and facilitation services, training and other TA. Based on project assessment there is a pool of service providers as a result of various initiatives including a recent European Bank for Reconstruction and Development (EBRD) program that support SME business advisory services. This program has supported the development of a certified pool of business advisors that are actively being contracted on a cost‐sharing basis from EBRD’s business advisory funds. The project will rely to


Page 26 of 66

the extent possible on national experts and where necessary regional or international experts. The project investments will also focus on building institutional capacity within existing organizations such as the (CCI), BWA, and universities to provide services. 98. Institutional capacity for implementation and sustainability risk (b): Uzbekistan’s weak mobile infrastructure, limited bandwidth, and high cost may act as barriers to further developing a digital economy. A nimbler digital infrastructure will be required in order for Uzbekistan to develop a strong digital economy and sustain the project’s investments in digital innovation. Other operations are addressing ICT policy (the planned Digital CASA Project and DPOs) and it is expected that further reform will improve services and introduce greater competition in the ICT sector.

99. Environment and Social risk (a): Child and forced labor are not considered a major risk in the project but mechanisms for screening and monitoring will be utilized. Child and forced labor is not anticipated as a significant risk as most incidences of forced labor in Uzbekistan are found in cotton production and harvesting, which is not eligible for support under the project. Nonetheless, the project will utilize the screening and monitoring mechanisms described in the ESMF to mitigate any risk of child and forced labor among MSMEs supported by the project. Sub‐loan agreements will also require the immediate termination and full repayment of any sub‐loans found to be associated with forced labor.

100. Environment and social risk (b): Screening has identified a range of climate and disaster risks. Nearly 66 percent of the population in Uzbekistan living in land area are at risk from natural and man‐made disaster. Key risks identified in the climate and disaster risk screening of the proposed project include: vulnerability to the expected increase in temperature and variability in precipitation which are both expected to lead to less favorable conditions for agriculture and water scarcity across a range of sectors, and natural disaster risks related to floods and earthquakes. In terms of mitigation measures, project investments and screening mechanisms are expected to promote adoption of more efficient technology and diversification to improve overall resilience among SMEs. Investments under the sub‐projects are also expected to follow applicable building standards in line with national regulations to address seismic risks. An on‐going Disaster Risk Management Program is currently being implemented in Uzbekistan through the Global Fund for Disaster Risk Reduction and Recovery and will strengthen the country’s capacity for disaster risk management.

.


Page 27 of 66

VI. RESULTS FRAMEWORK AND MONITORING

Results Framework

COUNTRY: Uzbekistan Ferghana Valley Rural Enterprise Development Project

Project Development Objectives(s)

To support the expansion of rural enterprise activity and job creation in Ferghana Valley

Project Development Objective Indicators

RESULT_FRAME_TBL_PDO

Indicator Name DLI Baseline End Target

Expanded enterprise sector in Ferghana Valley

Enterprise intensity index (Percentage) 100.00 110.00

Enterprise intensity index ‐ Female‐led enterprises (Percentage)

100.00 110.00

Enterprise intensity index ‐ led by youth (Percentage) 100.00 110.00

Number of enterprises supported under the project (Number) 0.00 2,000.00

Number of micro enterprises supported under the project (Number)

0.00 700.00

Number of small enterprises supported under the project (Number)

0.00 700.00

Number of enterprises ‐ Female led (Number) 0.00 500.00

Number of enterprises ‐ Youth (Number) 0.00 700.00

Increase in total revenues of enterprises supported under the 0.00 200,000.00


Page 28 of 66

RESULT_FRAME_TBL_PDO


project, US$ (Amount(USD))

Increase in revenues of micro enterprises supported under the project (Percentage)

0.00 10.00

Increase in total revenues of small enterprises supported by the project (Percentage)

0.00 15.00

Jobs creation

Number of additional jobs generated by enterprises supported by the project (Number)

0.00 20,000.00

Number of additional jobs generated by enterprises supported under the project ‐ female (Number)

0.00 5,000.00

Number of jobs generated by enterprises supported by the project ‐ Youth (Number)

0.00 10,000.00

PDO Table SPACE

Intermediate Results Indicators by Components

RESULT_FRAME_TBL_IO


Component 1: Enterprise Development

Number of formal clusters or supply chain contract arrangements in the project area (Number)

0.00 20.00

Number of beneficiaries trained (Number) 0.00 5,000.00

Number of beneficiaries trained ‐ Female (Number) 0.00 1,500.00

Number of beneficiaries trained ‐ Youth (Number) 0.00 2,500.00

Number of districts where rural business development services 0.00 36.00


Page 29 of 66

RESULT_FRAME_TBL_IO


are being delivered under the project (Number)

Number of market promotion events carried out (Number) 0.00 40.00

Number of new business startups (Number) 0.00 100.00

Number of new business start‐ups supported under the project ‐ Female (Number) 0.00 10.00

Number of new start‐ups supported by the project ‐ Youth (Number) 0.00 50.00

Percentage of beneficiaries satisfied with services provided under the project (Percentage) 0.00 65.00

Percentage of beneficiaries satisfied with services provided under the project ‐ Female (Percentage) 0.00 65.00

Component 2: Improving the Enabling Environment for SMEs and Business Clusters

Volume of financing provided through participating financial institutions (Amount(USD)) 0.00 100,000,000.00

Volume of financing to micro enterprises provided through participating financial institutions under the project (Amount(USD))

0.00 10,000,000.00

Volume of financing provided to small enterprises through partcipating financial institutions (Amount(USD)) 0.00 20,000,000.00

Share of cluster sub‐projects that leverage external financing (Percentage)

0.00 70.00

Number of sub‐loans (Number (Thousand)) 0.00 1,200.00

Number of sub‐loans ‐ Female (Number (Thousand)) 0.00 100.00

Number of sub‐loans ‐ Youth (Number (Thousand)) 0.00 200.00

Share of complaints addressed (Percentage) 0.00 70.00

Non performing Loans (Percentage) 0.00 5.00


Page 30 of 66

IO Table SPACE

UL Table SPACE

Monitoring & Evaluation Plan: PDO Indicators

Indicator Name Definition/Description Frequency Datasource Methodology for Data Collection

Responsibility for Data Collection

Enterprise intensity index

The percentage ratio of the number of enterprises to the number of able age population. Index in base year = 100, end target = 110 (10% increase)

Annual

Data of regional khokimiyats, demographic statistics, surveys under the project

Regional statistics, project surveys

AIFSA

Enterprise intensity index ‐ Female‐led enterprises

Enterprise intensity index is a ratio of female‐led enterprises to the number of population in the able age.

Annual

Data of regional authorities, regional statistics, project administrative records and surveys

Regional statistics, project surveys

UZAIFSA

Enterprise intensity index ‐ led by youth

The percentage ratio of the number of enterprises led by youth (30 years old and below) to the number of the able‐age population.

Annual

Regional statistics, project administrative data and

Regional statistics data collected from regional khokimiyats supplemented by the project data and

UZAIFSA


Page 31 of 66

surveys

surveys.

Number of enterprises supported under the project

The number of enterprises supported under the project

Annual

Commercial banks and project records

Commercial banks reports and project records

UZAIFSA

Number of micro enterprises supported under the project

The total number of micro enterprises supported under the project

Semi‐annual

Commercial banks, innovation centers, incubators, UZAIFSA records

Data reconciled from commercial banks reports, innovation centers, incubators, UZAIFSA records

UZAIFSA

Number of small enterprises supported under the project

Number of small enterprises supported under the project

Semi‐annual

Commercial banks, UZAIFSA

Data reconciled from commercial banks reports, innovation centers, incubators, UZAIFSA records

Number of enterprises ‐ Female led Number of enterprises of all sizes owned/led by women

semi‐annual

Commercial banks and project records

Commercial banks reports, project data

UZAIFSA

Number of enterprises ‐ Youth The number of enterprises of all types owned/led by youth

Semi‐annual

Commercial banks, project data

Reports from commercial banks, project data

UZAIFSA


Page 32 of 66

Increase in total revenues of enterprises supported under the project, US$

Increase in revenues of micro enterprises supported under the project

the percentage change in total revenues of micro enterprises supported under the project

Annual



UZAIFSA

Increase in total revenues of small enterprises supported by the project

A percentage change in total revenues of small enterprises supported by the project

Annual



UZAIFSA

Number of additional jobs generated by enterprises supported by the project

Number of total additional jobs generated by enterprises supported under the project

Semi‐annual

Commercial banks, project data, project surveys

Reports from commercial banks, project administrative records, survey data

UZAIFSA

Number of additional jobs generated by enterprises supported under the project ‐ female

The total number of jobs created by enterprises supported under the project employing women, number

semi‐annual


Reports from commercial banks, project data, data from surveys carried out by the project

AIFSA

Number of jobs generated by enterprises supported by the project ‐ Youth

The total number of jobs created by enterprises supported under the project employing youth, number

Semi‐annual


Reports from commercial banks, project records, survey data

UZAIFSA

ME PDO Table SPACE


Page 33 of 66

Monitoring & Evaluation Plan: Intermediate Results Indicators

Indicator Name Definition/Description Frequency Datasource Methodology for Data Collection

Responsibility for Data Collection

Number of formal clusters or supply chain contract arrangements in the project area

The number of formal clusters or supply chain contract arrangements in the project area supported by the project, number

Semi‐annual


Reports from participating commercial banks, project data

UZAIFSA

Number of beneficiaries trained

The total number of beneficiaries receiving average of 10 days of training over project lifetime, number

Semi‐annual

Project records

Project administrative records

UZAIFSA

Number of beneficiaries trained ‐ Female

The total number of female beneficiaries receiving on average 10 days of training under the project

Semi‐annual

Project data


UZAIFSA

Number of beneficiaries trained ‐ Youth

The total number of youth beneficiaries receiving on average 10 days of training under the project, number

semi‐annual

Project data


UZAIFSA

Number of districts where rural business development services are being delivered under the project

The number of districts where rural business development services are being delivered under the project

Semi‐annual

Project data

Project data

UZAIFSA

Number of market promotion events carried out

The total number of market promotion events carried out under the project, number

Annual

Project data

Project records

UZAIFSA


Page 34 of 66

Number of new business startups

The number of new business start‐ups supported by the project, number

Semi‐annual

Business incubators, innovation centers, AIFSA

Project data from business incubators, innovation centers, commercial banks

UZAIFSA

Number of new business start‐ups supported under the project ‐ Female

The number of new start‐ups supported under the project, number

Semi‐annual

Commercial banks, innovation centers, business incubators

Data collected from commercial banks, innovation centers, business incubators

UZAIFSA

Number of new start‐ups supported by the project ‐ Youth

The total number of new youth initiated start‐ups supported by the project, number

Semi‐annual

Commercial banks, innovation centers, business incubators

Data from commercial banks, innovation centers, business incubators

UZAIFSA

Percentage of beneficiaries satisfied with services provided under the project

Share of beneficiaries who are satisfied with the access to and quality of services provided under the project, percentage

Annual

Project surveys

Beneficiary surveys

UZAIFSA

Percentage of beneficiaries satisfied with services provided under the project ‐ Female

The share of the number of female beneficiaries who are satisfied with the services provided under project to the number of all female beneficiaries

Annual

Surveys

Survey data

UZAIFSA


Page 35 of 66

Volume of financing provided through participating financial institutions

The total volume of financing provided through participating financial institutions, US$

Semi‐annual

Commercial banks

Reports from commercial banks

UZAIFSA

Volume of financing to micro enterprises provided through participating financial institutions under the project

The total volume of financing provided to micro enterprises by participating financial institutions, US$

Semi‐annual

Commercial banks


UZAIFSA

Volume of financing provided to small enterprises through partcipating financial institutions

The total volume of financing provided to small enterprises by participating financial institutions under the project

Semi‐annual

Participating commercial banks

Reports from participating commercial banks

UZAIFSA

Share of cluster sub‐projects that leverage external financing

Measures if clusters are able to successfully leverage external financing following receipt of TA provided under the project.

Annual

Project reports

Reports from clusters and UZAIFSA

UZAIFSA

Number of sub‐loans

Measures the number of sub‐loans issued by participating financial institutions

Semi‐annual

PFIs

Reports from PFIs

UZAIFSA

Number of sub‐loans ‐ Female

Measures share of sub‐loans supporting Female entrepreneurs or female owned enterprises

Semi‐annual

Commercial banks


UZAIFSA

Number of sub‐loans ‐ Youth The total number of sub‐loans provided to young entrepreneurs

Semi‐annual

Commercial banks


UZAIFSA

Share of complaints addressed Percentage of complaints received under the project that are addressed

Annual

UZAIFSA data

UZAIFSA data

UZAIFSA


Page 36 of 66

Non performing Loans Semi‐annually

PFIs, UZAIFSA

financial reports

UZAIFSA

ME IO Table SPACE


Page 37 of 66

ANNEX 1: Sector Analysis and Project Description

COUNTRY: Uzbekistan

Ferghana Valley Rural Enterprise Development Project A. Sector Analysis

101. The SME sector is an important driver of Uzbekistan’s economy. The SME sector’s contribution to Gross Domestic Product (GDP), employment and population income is substantial and has demonstrated significant growth in the past decade. Nearly 57 percent of GDP and 80 percent of formal employment is provided by individual entrepreneurs and small firms (those with less than 100 employees) with much of the remaining formal employment generated by the public sector or State‐Owned Enterprises. Small and individual entrepreneurs are a growing share of exports as well, contributing only 10 percent of exports in 2000 and growing to 26.5 percent in 2016. 102. Analysis of the underlying dynamics in the SME sector is complicated by a lack of detailed enterprise data. Growth in the number of newly registered SMEs may be a sign of new enterprise establishment but could also reflect increasing formalization. Data is unavailable on the size of the gray economy in Uzbekistan, but it is estimated to be substantial. The large clustering of businesses in the small and individual enterprise category is also related to Uzbekistan’s tax regime, which has incentivized firms to stay small to avoid higher tax burdens.

Source: State Statistics Commitee Source: State Statistics Committee

103. Despite the lack of detailed enterprise data, it is clear the SME sector represents an important locus of economic activity in the Ferghana Valley. The total size of the formal entrepreneurial sector in Ferghana Valley exceeds 130,000 businesses if both non‐farm and farm enterprises are included – or nearly 90,000 businesses if farms enterprises are excluded. The number of businesses in Ferghana Valley represents around 24 percent of all registered businesses, a significant number given the high volume of registered businesses located in or near the capital in Tashkent city and Tashkent region. Table 1. Number of formally registered businesses by region, 2016 Region Large

companies Small

companies Micro‐firms

Sub‐Total

Farmers One‐person companies

Total number of businesses

Andijan 113 1,348 14,537 15,998 15,004 13,951 44,953

Ferghana 161 1,690 17,816 19,667 19,382 16,827 55,876

Namangan 102 1,220 12,074 13,396 9,727 9,202 32,325

Ferghana Valley sub‐total 376 4,258 44,427 49,061 44,113 39,980 133,154


Page 38 of 66

Region Large companies

Small companies

Micro‐firms

Sub‐Total

Farmers One‐person companies

Total number of businesses

Bukhara 134 1,210 11,603 12,947 10,465 13,207 36,619

Jizzakh 41 803 8,193 9,037 10,472 5,488 24,997

Karakalpakstan Republic 70 1,025 9,076 10,171 8,364 7,221 25,756

Kashkadarya 146 1,274 12,309 13,729 24,940 11,014 49,683

Khorezm 78 1,010 9,524 10,612 9,261 9,971 29,844

Navoiy 75 631 6,750 7,456 4,389 5,910 17,755

Samarkand 121 1,914 15,670 17,705 22,546 14,913 55,164

Surkhandarya 88 1,104 9,610 10,802 10,664 9,693 31,159

Syrdarya 49 518 6,606 7,173 6,308 3,530 17,011

Tashkent 264 2,065 18,341 20,670 19,065 13,708 53,443

Tashkent city 714 6,712 45,459 52,885 0 20,037 72,922

Total 2,156 22,524 197,568 222,248 170,587 154,672 547,507

Source: Chamber of Commerce and Industry

104. Employment is not keeping pace with growth in the economy. The recent Country Private Sector Diagnostic (CPSD) highlights the lack of skills as a barrier to private enterprise growth. Uzbekistan has a high rate of unemployment – around 7 percent in 2017 with an estimated one in ten people aged 20 to 24 not looking for a job because they do not believe they can find one. Unemployment rates for youth are about 18 percent, twice the overall rate CPSD, 2018). Low employment prospects have led to high levels of out‐migration with one in five males becoming an international migrant and even higher rates among young men. 105. According to the CPSD, 49 percent of firms in the industrial sector found it hard to attract qualified staff, as did more than 40 percent of firms in the construction, transport, communications and professional services sectors. Medium‐sized firms face disproportionate difficulties in hiring educated workers. In a 2008 survey, 73 percent of employers identified inadequate skills as an obstacle to doing business, up from 60 percent in 2005. In a 2013 survey conducted by the Bank, 35 percent of firms reported that employee skills posed a major or severe obstacle to growth. Industrial enterprises were those most likely to experience difficulties in finding workers with the right skills, with nearly half reporting a lack of qualified specialists with a higher education degree.

106. The SME sector’s demand for financing continues to exceed supply, particularly for smaller loan sizes. Uzbekistan scores significantly lower than other countries in Central Asia in terms of credit utilization, savings, account remittances and use of bank accounts, particularly by the poorest 40 percent of the population based on the last enterprise survey undertaken in the country. In 2013, only 16 percent of businesses were using banks to finance investments, below the ECA average of 24 percent. Despite increased support from both the state and International Financial Institute, the intermediation of the banking sector of Uzbekistan, which dominates the financial sector, is still low, evidenced by the latest 2017 Findex Data. Credit penetration in Uzbekistan was estimated at 43 percent of GDP at the end of 2017 – lower than regional averages but reflecting rapid growth from the estimated 27 percent at the end of 2016.

107. Financial inclusion of small businesses remains a challenge. Annual needs for finance among small businesses were roughly estimated at US$ 2.9 billion in a recent informal IFC assessment. Out of US$ 13.4 billion in bank loans only US$ 0.89 billion were allocated in the form of micro loans, covering less than one‐third of an existing demand from micro and small businesses. The latest IFC assessments showed a US$ 2.0 billion financial gap in the market for micro finance lending.


Page 39 of 66

Table 1. World Bank Enterprise Survey 2013 Uzbekistan ECA All

countries

% of firms with a checking or savings account 97.3% 91.0% 86.5%

% of firms with a bank loan/line of credit 26.4% 37.7% 33.5%

Proportion of loan requiring collateral 96.5% 78.7% 79.1%

% of firms using banks to finance investments 16.1% 24.7% 26.1%

% of firms using banks to finance working capital 13.1% 30.8% 30.1%

Table 2. Estimated Bank supply 2016

Total Bank loans 16,525

Microcredit loans 1,092

Microcredit loans as % of total 6.61

Source: IFC

108. Current regulations make provisions for three micro finance products ‐ micro loan (up to 150 times minimum wage or approx. US$ 3,000), micro credit (up to 1,000 times minimum wage or approx. US$ 21,000), and micro leasing. Regulations require interest rates on micro loans not to exceed 50 percent of the principal per year, limited cash disbursements (not to exceed 30 percent for micro loans and not allowed for micro credit), hard collateral requirements, and direct supplier crediting. Some of these requirements have been relaxed through the recently established State Fund for Entrepreneurship which has provided a window for SMEs to apply for guarantees of up to 50 percent of collateral or interest rate subsidies. Some credit lines established through donor‐financed projects have also introduced modifications to the requirements to ease access by SMEs.

109. International experience reveals a number of financial instruments that have proved successful in reaching rural small businesses and entrepreneurs with various financial services. Innovative financial solutions and tools are available and can enable commercial banks to increase their lending volumes to greater number of MSMEs and at the same time, maintain healthy portfolios. Many of these instruments eliminate or reduce collateral requirements, which can be obstacles for many small and often informal businesses to borrow. For instance, India, Pakistan, Brazil and Turkey have successfully applied agri‐value chain financing solutions such as first‐loss guarantee schemes financed by leading agricultural processors and extended to primary agricultural producers within their supply chains.

110. Efforts to support the growth of micro enterprises have been launched with a recent push to accelerate small‐scale or home‐based businesses. There have been sporadic and some structured attempts to develop micro enterprises in Ferghana. These include the Bank supported Rural Enterprise Support Project and others that have resulted in developing a pipeline of micro entrepreneurs with some good results. There are already many existing informal micro enterprises which remain small and at low productivity due to various constraints. The Government’s new decree on “Every Family an Entrepreneur’ is making a big push using subsidized credit to spur economic activity in an effort to boost self‐employment and micro entrepreneurship. The approaches are primarily supply driven with a strong focus on asset and equipment induced entrepreneurship through the supply of greenhouses, pedigree cattle, sheep, catfish fingerlings and a supply of various equipment such as sewing machines and small manufacturing of consumer products.

111. Key gaps in the current approach are further development of a micro enterprise support ecosystem that includes non‐financial services such as advisory services, business development, incubation, market support and financial services such as access to credit and other financial services. The access to micro credit/finance for micro enterprises in Ferghana is low and there is a need to develop a process of identifying MSMEs which have the potential to


Page 40 of 66

graduate and grow. Non‐Governmental Organizations, microfinance organizations and institutions such as the BWA and YU have also done training for women entrepreneurs and have a pool of micro entrepreneurs who can graduate. These efforts can be scaled‐up with additional support.

112. Business incubators offer a structured model to facilitate enterprise establishment and new entrepreneurship. Incubators provide an integrated facility for entrepreneurs with ideas to develop their ideas into business enterprises through a structured process of coaching, training, mentoring and provision of support services under one umbrella. Incubators are not about short‐term training but providing ecosystem support to prospective enterprises and start‐ups. They are also designed to develop high quality enterprises that can sustain and stay in the business. Incubators are about developing quality enterprises and not delivering mass quantity of entrepreneurs. The key assumption behind setting up Incubators is that entrepreneurs and start‐ups need support in developing ideas, doing market research, developing business plans, coaching and mentoring by successful and practicing entrepreneurs and support in raising initial financing and testing the enterprise idea. The incubation process provides a platform for start‐ups to acquire business, financial and management skills from experienced professionals, coaching and mentoring from entrepreneurs and financiers, peer learning from fellow start‐ups and a platform for connecting with services, finances and markets. 113. The best example seen during project preparation is the Business Incubator initiated by Chambers of Commerce and Industry (CCI) in Namangan. It initially selected 700 start‐ups with ideas and took them through various stages. Of 700 enterprises which went through the initial training and coaching, about 189 qualified for the more advanced support for further incubation. CCI reports that 60 percent of the original 700 have started their own business but out of this cohort, 79 enterprises have started exporting their products and are now running enterprises with export businesses. Of these, 66 are exporting to Asian countries and 13 are exporting to European countries. These entrepreneurs are not part of a co‐working space for the duration of their training but are providing many services under one roof through Enterprise House as they have become full‐fledged members of CCI. The sectoral distribution of start‐up enterprises is 50 percent textiles (as Namangan is already a ready‐made garment cluster); 30 percent agriculture, 10 percent construction and 10 percent other small manufacturing and business. Currently, the Incubator is financed through training charges, CCI membership, and advanced training charges. 114. Aggregation and clustering within certain value chains is evolving. There are a number of locations in Ferghana Valley where aggregation and clustering are already happening and show the potential to grow more inclusive and productive. Some examples include clusters in the horticulture sector (specialized fruit such as raspberry, and more widespread production of apples, grapes and stone fruits), textiles (ready‐made garments and textiles), silk (mulberry producers, silk cocoon reeling and weaving at village level and silk weaving and products manufacturing in urban centers such as Margilan) and ceramics clusters (Rishtan). New tax incentives and land allocations by hokimiyats have led to the creation of industrial parks in some locations. 115. ICT/Digital/ Innovation Start‐ups and Incubators: There are new generation ICT induced start‐ups emerging in Uzbekistan. Currently the ecosystem for supporting these start‐ups and incubating them is on a small scale and mostly centered in Tashkent. Initial assessments show that there are more than 300 such start‐ups in Uzbekistan. Promising nodes include State Technical University, Andijan and Tashkent, newly developed, Ulugh Bek institute, and the Start‐Up Factory.

B. Detailed Project Description Component 1: Enterprise Development (US$ 15 million)


Page 41 of 66

116. The objective of the first component is to facilitate the establishment and growth of micro and small enterprises through the provision of technical support and facilitation. Sub‐Component 1.1: Business Incubation and Mentorship (US$ 11 million) 117. The project’s business incubation and mentorship activities will focus on individual entrepreneurs and focus on providing support to new or emerging entrepreneurs. The project will support the following two main areas of business incubation: 118. Business incubator hubs. The project will finance a business incubator program for rural SMEs that address key bottlenecks faced by entrepreneurs ‐ obtaining business development and non‐financial services, exposure to new technology and skills, and identifying potential sources of financing. The program will utilize the current infrastructure of one‐stop shops and co‐working spaces to expand the menu of services available to entrepreneurs and facilitate greater outreach to rural areas. These efforts will complement the Government’s current investment in strengthening one‐stop shops, which primarily focus on providing administrative and regulatory services, as well as co‐working spaces, which provide ICT connectivity and networking space.

119. A number of institutional mechanisms exist within Uzbekistan to foster and support entrepreneurship, however efforts are scattered, small‐scale and mostly centered in Tashkent. There are a number of initiatives focused on providing short‐term training to entrepreneurs through Chambers of Commerce, Women League and Youth League and some Government agencies that constitute a solid base for further expansion. The project would support the development of larger enabling ecosystem to mentor and support prospective entrepreneurs, particularly youth and women. The project would build on existing initiatives and finance business incubators in multiple institutions in order to better target different classes of entrepreneurs, who may have unique requirements and needs.

120. The objective of the business incubation hub program (BIH) would be to deliver business and financial services directly to rural entrepreneurs. The BIH will bridge the knowledge and business services access gap for new and existing entrepreneurs in the project area and provide a platform for reaching out to provide special support to youth and women‐led enterprises. BIH would support teams to deliver a range of services in business ideation and conceptualization, business plan preparation, hand‐holding support to initiate a business, facilitation support to access‐required finance, technology, skills; regulation compliances; market intelligence, information, and linkages; and mentoring. Activities that could be financed under BIH include: (a) training, workshops; exposures visits; business exhibitions; buyer ‐ seller meets; equipment and technology exhibits; (b) consultant and non‐consultant services; (c) goods, including printing of manuals, ICT hardware and software and office refurbishment; and (d) operating costs including outsourced staff, office running costs at regional and district levels. The objective of financing will be achieve greater outreach outside district capitals directly to rural mahallas. 121. The BIH will be managed as a program rather than a set of stand‐alone locations and would be led by the CCI who will work closely in partnership and collaboration with Business Women’s Association (BWA) and Youth Union (YU). To ensure that the BIH can achieve outreach to micro and small rural entrepreneurs across the three regions, a decentralized BIH service provisioning model will be adopted and target activities at the district level and below. To facilitate this, the BIH model will be ICT‐enabled and, in most cases, virtually integrated with web‐based platforms, applications and call‐in facilities. Hubs will utilize outreach teams that will reach out to the district and below levels with business development campaigns and outreach events to enroll entrepreneurs as members of BIH. The members of BIH will be listed and


Page 42 of 66

enrolled based on criteria as outlined for project beneficiaries. The criteria and process of selection and operations guidelines of BIHs will be outlined in the project operations manual (POM).

122. Innovation Start‐ups. While BIHs are expected to support new businesses, the project will also target more intensive technical support to facilitate innovation start‐ups in order to translate innovative technologies or business models into viable enterprises.

123. New innovation start‐ups face a number of challenges and structured business incubators can be an effective mechanism to translate entrepreneurial potential into reality. Business incubators can be defined as an integrated facility for entrepreneurs to develop their ideas into enterprises through a structured process of coaching, training, mentoring and provision of support services. Incubators are not intended as short‐term training but a means for providing ecosystem support to entrepreneurs and start‐ups under one umbrella. Key phases involved in setting up incubators include challenge competitions for selection of ideas and start‐ups for enrollment into incubator; supporting start‐ups to move from ideas to business plans and ideas (pre‐incubation); supporting development of business plans to enterprises (incubation phase), submitting plans and pitching them to experts and financiers (launch phase); launching business and developing markets, customers and technology (growth phase).

124. The project will finance challenge competitions to attract SMEs with the best business ideas and innovative products to come out and compete through an “innovation marketplace” model. Key phases would focus on challenge competitions for selection of ideas and participants; supporting start‐ups to move from ideas to business plans and ideas (pre‐incubation); supporting development of business plans to enterprises (incubation phase), submitting plans and pitching them to experts and financiers (launch phase); launching business and developing markets, customers and technology (growth phase). Eligible expenditures will include the goods and services associated with managing the challenge competitions as well as a start‐up award for winning proposals to kick‐start the SME activity. The project OM will detail the guidelines for running challenge competitions, including the ceiling for start‐up awards.

125. The key phases involved in setting up start‐up incubators include: (i) challenge competitions for selection of Ideas and start‐ups for enrollment into the incubator; (ii) supporting start‐ups to move from ideas to business plans and ideas (pre‐incubation); supporting development of business plans to enterprises (incubation phase); (iii) submitting plans and pitching them to experts and financiers (launch phase); and (iv) launching business and developing markets, customers and technology (growth phase). The period of incubation typically varies from 1 year to 2 years. Good incubators need to have coaches and mentors, trainers and facilitators; adequate physical facilities and space with good infrastructure and connectivity; and a good network of entrepreneurs, financiers, government officials and market players for interaction. Typically, good incubators provide co‐working space to the entrepreneurs for a sustained period of time (in some places 2 years), connectivity, a group of mentors, access to good quality trainings and opportunities for accessing finance.


Page 43 of 66

126. The innovation start‐up program in the project would be anchored in the three new regional innovation centers that have been competitively awarded under Public‐private Partnership (PPP) arrangements by Ministry of Innovative Development (MoID). Innovation centers were competitively selected by the MOID in late 2018 with the first center in Ferghana Valley established at the Polytechnic University in Ferghana city. Most regional innovation centers are located within universities and have developed consortium arrangements within the region to other educational campuses. The centers have a broader mandate for technology and innovation research and development as well as supporting entrepreneurship and new business development. The project would build on these efforts and would support institutional capacity building to implement the challenge program, which would expand their focus to facilitating business solutions for rural and agricultural enterprises. In order to facilitate the activities of the innovation center, additional support would also be provided for TA, civil works and other infrastructure investment within regional innovation centers to complement the state budget resources. 127. Design of rural apprenticeship pilot. In order to support jobs development and develop a pipeline of entrepreneurs, the project will finance technical assistance (TA) to expand apprenticeships. Like many countries, Uzbekistan has a history of formal and informal apprenticeship (ustoz shogird) that provides a mechanism to train younger people in specialized crafts. Globally, apprenticeship programs are recognized as an alternative approach to improve vocational training and skills development and used in crafts as well as other sectors (agri‐business, industry). Apprentices can fill specific business needs and can often develop their skills more effectively on‐site rather than in a classroom. As such, apprenticeship programs serve a dual purpose by providing needed employees to expanding businesses in need of labor while also facilitating entry into industries by developing skills that enable apprentices to become future employees or start up their own business activities. Formal apprenticeship programs usually involve industry association or government agencies that play a role in facilitating the identification and placement of apprentices. Good practice has typically involved extensive employer engagement, appropriate funding and incentive structures to ensure adequate participation by both apprentices and employers/firms, and adequate support at the end of the apprenticeship period. Formal contracts that identify business needs and responsibilities of various parties are also common. 128. The project will support the design of an apprenticeship pilot in Ferghana Valley and target “anchor” enterprises, which are defined as well established businesses with potential for further growth and an expressed interest in accepting apprentices. These anchor enterprises would function as in‐situ incubators and focus on developing business and technical skills. Project activities would build on the system already in place within the Ministry of Labor, which already has a placement program that matches unemployed individuals with businesses that register and request support to


Page 44 of 66

expand their business activities. Financing under the project would be provided to finance the TA to design the program and further discussion around financing for implementation would take place through additional financing or possibly another stand‐alone project financed through the state budget or donor assistance. Sub‐Component 1.2: Cluster and Value Chain Development (US$ 2 million) 129. The cluster development activities under the second sub‐component will focus on groups of producers/ enterprises and finance demand‐driven investments to strengthen value chains and expand or establish enterprise clusters that seek to expand productive activities or reach new markets. The objective of these activities would be to integrate value chains, improve competitiveness and develop an ecosystem of enterprises that deliver greater quality, volume and profitability. Project support would target agriculture, food processing, handicraft, and small manufacturing sectors. Given the already strong focus and significant financing available for cotton/textile clusters, which constituted the initial emphasis of cluster development in the country, the project would not finance clusters involving primary cotton production. Textile clusters supported by the project would be those that focused on other primary production (e.g. silk) or cotton textile manufacturing at the latter stages of production (sewing, weaving and weaving or apparel manufacturing). 130. Various types of cluster models could be supported under the project and are expected to include: (i) vertically integrated clusters centered around a primary processing or exporting enterprise with the potential for contract farming or supply arrangements with a pool of raw material producers (a productive alliance model); (ii) a cluster of inter‐connected enterprises and firms that are geographically concentrated but who supply different parts of a value chain and may not have formal contractual relationships (such as agri‐food, small‐scale manufacturing or tourism clusters); or (iii) an informal cluster of producers or common interest groups who could develop better access markets with greater producer organization, aggregation and marketing capacity (such as agriculture, handicraft cooperatives). These different cluster models would have very different objectives, needs and organizational requirements but would share an over‐arching aim to leverage the capacity of the actors within the cluster to improve productivity and market access.

131. Project financing will be competitive and based on submission of a cluster or value chain development proposal that will present a business plan developed by enterprises or producers within the cluster. Project financing for cluster development proposals would include technical assistance grants and coordinate with productive infrastructure investment if needed through the state budget or on‐going programs. A package of support could include, for instance training or capacity strengthening to enable cluster participants to become more bankable, specific marketing and product development support, organizational support to develop supply chain linkages or contracts, or market access technologies (such as market information systems, or digital tools such as blockchain). Enterprises in the cluster would commit to significant co‐financing of the business plan. While the project will finance training and technical assistance as part of the cluster development proposal, access to commercial financing through Banks would be provided through access to the guarantee and credit line in Component 2. 132. Eligibility. Eligible clusters would be those operating within value chains targeted by the project (agriculture, food processing, handicrafts, textile, tourism, or rural based small‐scale manufacturing) and include participation of small‐ and micro‐enterprises. Beneficiaries would be groups but could include a range of organizational structures as noted above (common interest groups, producer organizations or enterprise groups). The minimum size and number of cluster actors to be considered eligible would be detailed in the operations manual.

133. Selection process. Project financing will be competitive and based on submission of a cluster development


Page 45 of 66

proposal that will present a business plan developed by enterprises or producers within the cluster. The project will launch a limited first round request for expressions of interest (EOI) in the first year to identify potential clusters. Based on the initial EOI, technical assistance will be provided to develop full cluster development proposals. A second, more full‐fledged round will be launched after the completion of the diagnostic studies described below. Evaluation of EOI and cluster development proposals will rest with a technical working group described in the POM.

134. Diagnostic and technical assistance support. An in‐depth diagnostic will be done in the first year to assess potential clusters and guide provision of technical assistance to support the development of cluster business plans. The diagnostic will identify and prioritize sectors and subsectors for investment through an inclusive strategy and value‐chain analytical approach. The diagnostic will also highlight potential strategic partnerships with relevant Government departments, private sector organizations, industry associations, financial institutions, and value chain actors. Based on initial assessments, it appears that the highest priority for SME development exists within agri‐food, textile, ceramics, silk, tourism, and service sectors.

135. The project will finance technical assistance to facilitate development of cluster development proposals and business plans, which could include knowledge exchange and exposure visits to identify models in place within Uzbekistan or internationally.

136. Eligible expenditures. Project financing for cluster development proposals would focus on soft investments – technical assistance – with enterprises in the cluster committing to significant co‐financing the business plan. This could include training for developing linkages for financing, marketing and product development. While the project will finance training and TA as part of the cluster development proposal, access to commercial financing through Banks will take place through component 2.

Figure 1. Example of Ceramics cluster sub‐project


Page 46 of 66

Figure 2. Example of agriculture cluster sub‐project

Sub‐Component 1.3: Market promotion and Technology Testing (US$ 2 million) 137. The third sub‐component will also support a small set of market promotion and technology testing activities in order to facilitate the launching of enterprise clusters or SME activities. This could include market‐led technology transfer through demonstrations of improved technologies. Support for trade promotion and assessment of export and domestic marketing policies would also be pursued. 138. Project activities would be implemented through regional innovation centers and strengthen the technology demonstrations that have been launched under the Every Family an Entrepreneur Program. This program has supported technology fairs for micro and home‐based businesses at district level managed by district hokimiyats. Project financing would be provided to expand the number of technology demonstration sites within districts that have not been covered by the Every Family an Entrepreneur Program and to expand the number of technology options presented at the demonstration fairs. Coordination with the MoID and MITC would be expected.

Component 2: Access to Finance (US$ 167 million) 139. The objective of the second component is to increase the capacity of the financial sector to support micro and small enterprises or clusters. The second component will utilize financial instruments that can address key constraints for SMEs including addressing the liquidity gaps for SME financing and provide technical and financial support to develop new products. This component would be closely tied to activities in the first component and aimed at putting in place the required architecture of services required to facilitate enterprise activity or economic aggregation activities. 140. The project will support two financing instruments: a credit line and a partial credit guarantee fund. These instruments will be implemented through eligible Participating Financial Institutions (PFIs). Financial institutions with strong physical presence in the Ferghana Valley, and likely users of these instruments, are the main public banks (Halq, Agrobank, Mikrocreditbank), the private bank Hamkorbank, and micro finance institutions. The credit line and partial


Page 47 of 66

credit guarantee will target micro, small and medium enterprises in Ferghana Valley in the value chains targeted by the project. The bulk of project investment will be allocated to the credit line (US$ 130 million) with a limited amount of funding allocated to the partial credit guarantee fund (US$ 20 million). This allocation may change over the life of the project but is based on the assessment made on the immediate demand for greater liquidity and the need to strengthen institutional capacity to manage the partial credit guarantee fund, which is relatively new to Uzbekistan. Sub‐Component 2.1: Credit line for MSMEs (US$ 146.5 million)

141. A credit line would be established with participating financial institutions (PFIs) to provide more liquidity for MSME financing in Ferghana Valley. The credit line would be implemented under Credit Guidelines agreed on between the Bank and the MoF, compliant with World Bank Guidance for IPF Financial Intermediary Financing. PFIs would sign SLAs with MoF based on terms agreed to in the Credit Guidelines. In order to reach micro and small enterprises, the credit line will make available credit in both foreign currency and soum. Should participating financial institutions choose to offer local currency soum credit line, the foreign exchange risk will be managed at the MoF level. In order to target the beneficiaries of the project, the credit line will primarily target smaller‐scale enterprises and will be limited to individual applications of 1 billion soum (US$ 125,000) and in the case of a cluster development sub‐project up to US$ 2 million.

142. Potential PFIs. A number of PFIs have been qualified in other Bank projects and will undergo required due diligence prior to acceptance for participation in the project. As has been the practice in other projects, an international consultant with relevant experience in due diligence of financial institutions will be engaged by UZAIFSA and the results of the due diligence will be subject to the Bank’s ‘no objection’. Should a PFI be active in Horticulture Development Project (HDP) or Livestock Development Support Project , additional due diligence may not be required, but this will be determined based on the findings of audited reports. The criteria for the initial due diligence and continued maintenance of a PFI status for commercial banks are provided below and mirror what is currently in place under both HDP and LDSP. These criteria shall also be used by the UZAIFSA to monitor the continued eligibility of the PFIs operating under the credit line. Both commercial banks and micro‐credit banks are eligible to participate in the credit line.

143. General standards. (a) be in compliance with all banking laws and prudential regulations of the Central Bank of Uzbekistan; (b) be interested and committed to servicing the range of clients, who are the intended beneficiaries of the project; (c) have or be willing to open branches or mini‐banks in the three regions of Ferghana Valley or ability to ensure other ways of servicing the potential borrowers in the project districts; (d) undergo an annual audit that is conducted in accordance with International Standards of Auditing by an audit company acceptable to the Bank for the purposes of audit of financial institutions, with an unqualified audit opinion; and (e) have the necessary staff, knowledge, physical, and other resources to implement the credit facility under the project.

144. Financial prudential standards. (a) at all times, meet the prudential regulations issued by the Central Bank of Uzbekistan; (b) have a risk‐weighted capital adequacy ratio of no less than 10 percent; (c) the maximum exposure to a single borrower or group of related borrowers shall not exceed 25 percent of the bank’s tier one capital; (d) have aggregate exposure to insiders (defined as members of the Board of Directors and the Management Board of such PFI, employees in management position and shareholders with voting rights in excess of 10 percent) of no more than 100 percent of tier one capital; (e) have a positive net income for the current and two immediately preceding financial years, as reflected in the financial statements audited in accordance with International Standards on Auditing; (f) have acceptable asset quality and quality management policies, procedures, and skills; (g) the aggregate share of sub‐loan/lease/sub‐financing portfolio outstanding under Bank financed projects (HDP, and the LSDP) shall not exceed 75 percent of the PFI’s capital according to International Accountants Standards.


Page 48 of 66

145. Corporate governance and managerial standards. (a) have a Board of Directors, responsible for setting the overall bank policy and perform appropriate oversight of the bank's operations; (b) have a qualified and capable management team; (c) have a sound business plan and appropriate budgeting and budget control procedures; (d) have sound lending policies and procedures, including in respect of the entire credit cycle, problem loan management, write‐offs of assets, credit approval authority, and so on; (e) have satisfactory internal control and audit procedures, including accounting principles and procedures and financial documents, internal controls and reporting, and operational controls, confirmed by external auditors; (f) not be exposed to undue interest rate risk, as confirmed by annual audited financial statements; and (g) have an internal reporting and management information system capable of providing sufficient information necessary for managing the bank's operations, performance, and risks. 146. Technical and policy support to develop viable micro‐credit and micro‐finance systems. The project would finance technical support for PFIs participating in the project and draw on the outputs of complementary efforts in the Bank to support policy and regulatory reform. Currently, IFC is providing technical support to develop a commercially sustainable micro‐finance industry and is conducting a feasibility study on micro‐finance and diagnostics of digital finance services. IFC plans to continue to partner with selected banking and non‐banking institutions to help increase access to credit for the private sector, including SMEs, through long‐term finance and short‐term trade finance lines, and to assist in improving their operational efficiency, enhance risk management and corporate governance structures through advisory services. Sub‐Component 2.2: Partial Credit Guarantee (US$ 20.5 million)

147. The partial credit guarantee fund will be administered by the State Fund for Support of Entrepreneurship Development (SFSED) which will provide guarantees to commercial banks. The State Fund, which was established under the Cabinet of Ministers in August 2017 and became operational in early 2018 and has already launched a partial credit guarantee scheme for small businesses and new enterprises associated with the Youth Union using state budget resources. 148. The project will focus on provision of TA in the first year to strengthen operational modalities and governance mechanisms of the proposed PCG to be financed by the project. The disbursement of project funds for the PCG would be based on the completion of an agreed set of operational guidelines that reflect international best practice, which would be developed with the TA program financed under the project. The “Partial Credit Guarantee Guidelines” will be agreed with MoF prior to disbursement of any PCG funds. Key principles for the PCG would be designation of SFSED as a separate legal entity with dedicated capital, independent governance arrangements, sustainability of operations in terms of administrative costs, and robust risk management. In line with best practice and global experience, project funds would be utilized to capitalize the fund rather than be treated as on‐lending from the MoF as is the case under the credit line.

Sub‐Component 2.3: Pilots in Financial Services (beneficiary and counterpart funds only) 149. The project will support pilots on innovative financial solutions that show potential to increase the outreach of financial services to MSMEs. Three areas where commercial banks indicated an interest include microfinance, inventory finance, and digital financial services. A number of opportunities exist to test alternative methods of collateral (agri‐value chain finance, warehouse receipts finance, and inventory finance) and digital tools (mobile wallet, digital financial services, digital identity, real‐time credit assessment/scoring) to address gaps in access to financial services. Pilots will be proposed by PFIs and financed under the terms and conditions established for the credit line and described under the


Page 49 of 66

project’s Credit Guidelines (see above). Pilots will be financed through SLAs under budget allocations from the component 2.1 credit line budget or additional re‐allocation. Co‐financing of technical assistance to develop or launch pilots is expected through development partners, donors, and through a PFI’s own financing.

Component 3: Project Management and Coordination (US$ 3 million) 150. The third component will finance project management and coordination activities. A project implementation unit will be established to coordinate implementation activities and will be located in the Agency for the Implementation of Projects in the Field of Agroindustry and Food Security (UZAIFSA). The component will focus on strengthening UZAIFSA’s capacity for project management, monitoring and evaluation through the provision of goods, consultant services, training and financing of incremental operating costs. This component will: (i) support operation of UZAIFSA, and finance overall project management, as well as contract administration, procurement, and financial management; and (ii) establish a robust performance‐based Management Information System (MIS) and beneficiary satisfaction survey, and arrange for data collection and reporting on key performance output and impact indicators, through baseline surveys, participatory assessments, mid‐term review and final evaluation. Unallocated (US$ 14. 5 million)

151. Following appraisal an unallocated category was formally set aside in the project budget to leave flexibility during project implementation and accommodate the variable rate of implementation within project components. Both the first and second project components will involve a number of innovative elements that are likely to advance at different implementation rates based on implementation capacity and demand within MSMEs. The unallocated budget is expected to be re‐directed to activities in either the first or second component based on implementation progress and results achieved. Implementation support missions during the first and second year and the project’s mid‐term review will be used to determine priorities for reallocation. Project Costs 152. The project will finance the goods, technical assistance, consulting services, training and incremental operational costs for UZAIFSA and other implementing partners to facilitate implementation of the Project (including the areas of financial management, procurement, disbursement, monitoring and evaluation).


Page 50 of 66

Table 1. Project Costs (US$ millions)

World Bank Counterpart and Beneficiaries Total

Amount % Amount % Amount %

1. Enterprise development 15.0 7.5% 2.6 6.5% 17.6 7.3% 1.1 Business incubation and apprenticeship 11.0 5.5% 2.2 5.5% 13.2 5.5% 1.2 Cluster development 2.0 10% 0.4 1.0% 2.4 1.0% 1.3 Market promotion and technology demonstration 2.0 1.0% ‐ ‐ 2.0 0.8%

2. Access to Finance 167.0 83.5% 37.5 93.5% 204.5 85.2% 2.1 Credit line for MSMEs 146.5 73.3% 29.3 73.1% 175.8 73.2% 2.2 Guarantee fund for MSMEs 20.5 10.3% 4.1 10.2% 28.7 10.2%

2.3 Pilots on Financial Services ‐ ‐ 4.1 10.2% 4.1 1.7%

3. Project Management 3.0 1.5% ‐ ‐ 3.0 1.2% Unallocated 14.5 7.3% 14.5 6.0% Front end fee 0.5 0.3% 0.5 0.2%

Total Project Costs 200.0 100.0% 40.1 100.0% 237.4 100.0%


Page 51 of 66

ANNEX 2: Implementation Arrangements and Support Plan

COUNTRY: Uzbekistan

Ferghana Valley Rural Enterprise Development Project Institutional Arrangements 153. Overall coordination and governance. Given the project’s multi‐sector and territorial focus, overall coordination will be provided by a steering committee comprised of the representatives of Andijan, Ferghana and Namangan regions; and the Deputy Ministers of relevant ministries (such as Ministry of Investment and Trade, MoA, MoID). The steering committee will meet at least annually to review progress and provide input into the annual work plans and budgets. A technical working group will be formed under the steering committee and provide project implementation monitoring and other support as needed. The POM will describe the composition of the steering committee and technical working group together with their terms of reference. 154. At the regional level the project will carry out periodic private sector consultations to provide general feedback on project implementation and to identify specific priorities for business development support services that would be financed under the project. These consultations would provide input into the planning of activities at the regional level and would be an important mechanism for ensuring citizen and stakeholder engagement in the project area. 155. Project implementation unit. A project implementation unit (PIU) will be established within UZAIFSA to facilitate day‐to‐day implementation of the project. UZAIFSA has already established capacity for fiduciary and project facilitation experience through its long experience implementing donor programs. Established in 1998 under the Ministry of Agriculture and Water Resources to implement agriculture and rural investment projects, UZAIFSA has acted as the executing agency for projects financed by World Bank, Asian Development Bank (ADB), and the International Fund for Agricultural Development (IFAD). As part of the re‐organization and reform of the MoA in early 2018, UZAIFSA was administratively shifted to the Office of the Cabinet and President and a new Director General appointed. UZAIFSA still retains its mandate, however, and its staff structure remains the same. At the regional level, UZAIFSA is administratively located within the regional hokimiyat structure with dedicated staff in regional UZAIFSA offices. Currently, UZAIFSA has a full complement of staff in Tashkent along with technical staff in each Ferghana Valley region including one environmental safeguards specialist in Ferghana region under the (HDP) who will cover multiple regions. 156. To establish the PIU for the project, UZAIFSA will utilize its three regional Ferghana Valley offices to facilitate day‐to‐day implementation of the project together with support from national offices in Tashkent. Under the project, additional technical staff would be hired by UZAIFSA at both national and regional level and would include in Tashkent: (i) a project coordinator; (ii) financial management specialist; and (iii) a procurement specialist. In Ferghana Valley additional staff would include: (i) component coordinators in each of the three regions (component 1 and 2); (ii) one monitoring and evaluation specialist and (iii) one environmental and social safeguards specialist. These latter two positions would be based on the three regional offices but provide support across all three regions.

157. Implementing partners. UZAIFSA will work closely with implementing partners, who will be responsible for implementing specific activities within the project. This includes the following:

Andijan, Ferghana, and Namangan regional administrations. The regional administration or Hokimiyats


Page 52 of 66

will play a key role in planning and managing implementation of the project, particularly in raising awareness around project activities and identifying potential cluster development sub‐projects.

158. Implementation of Component 1 would be led by CCI and MoID with additional support as follows:

The (CCI) (lead service provider), BWA, and YU would deliver the business development and technical assistance to start‐up and SMEs.

Ministry of Innovative Development and the regional innovation centers will host and support innovation start‐up activities including providing physical space and support to UZAIFSA in managing innovation challenges.

The one‐stop shop centers that fall under the Ministry of Justice would provide some support to host and facilitate the business incubator hubs where necessary and under the business incubator activities led by CCI, including through the utilization of their mobile one‐stop shops (mobile portable offices) where needed.

The Ministry of Agriculture (MoA) and its related agencies will work with UZAIFSA in implementation of the cluster development sub‐projects that fall in the agriculture sector, in line with their mandate to provide support services and exercise their regulatory functions.

159. Implementation of Component 2 will be led by:

Participating financial institutions will channel credit lines for MSMEs and be recipients of the partial credit guarantees.

The State Fund for Support to Entrepreneurship Development will manage the partial credit guarantee fund under the project and work with participating financial institutions.

160. UZAIFSA will also contract service providers to provide technical expertise and facilitate the development of cluster development sub‐projects and set up the initial business incubation and apprenticeship programs. Non‐governmental bodies and service providers would play an important role around supporting business incubation, mentorship and enterprise development through the delivery of services and facilitation support. External technical assistance and facilitation will be required for some business incubation and innovation activities and Partnerships with bilateral development partners are being explored to supplement project investment funds and facilitate the delivery of technical expertise. Implementation processes under Component 1 161. Activities under the project’s first component would have specific implementation processes to identify beneficiaries and project investments.

162. Business incubation. Eligibility for participation in business incubators would be open to both new entrepreneurs or existing SMEs with an interest in expanding or establishing a business in priority sectors identified under the project. Participation would be initiated through a short application process (expressions of interest) in response to


Page 53 of 66

advertisement or solicitation initiated by the business incubator hubs. Selection into the business incubator program would be managed by the business incubator service providers with monitoring by the PIU.

163. Successful completion of the business incubation program would enable participants to be competitive in developing new business plans and submitting credit applications to financial institutions participating in the credit line provided by the project. Existing SMEs that benefit from business incubation support would be expected to develop business plans around further expansion of their business and targeting new domestic and export markets. These new and existing SMEs will be well positioned to access the credit lines and guarantees established under the second component and could apply for the credit and/or guarantee funds using the processes established under the credit guidelines in component 2.

164. Cluster development sub‐project cycle. The cluster development sub‐project cycle will be initiated with an initial EOI by actors within the cluster based on a short template. Eligibility to submit an initial EOI would be restricted to group of producers or enterprises rather than a single company as the purpose of the cluster development is to take advantage of opportunities to generate economies of scale or geographic concentration across multiple enterprises to better deliver technical services or access additional processing or export opportunities. The initial evaluation will be undertaken to assess overall concept and feasibility – particularly market demand. Once an EOI is approved, a more detailed cluster development proposal process will be launched with additional technical assistance provided by the project. The cluster development sub‐project would include a detailed business plan, a public infrastructure plan (if needed), and a technical assistance plan. Cluster development proposals would be required to demonstrate sufficient ownership and buy‐in from all participants in the cluster. An extensive outreach and marketing strategy will be developed to ensure transparency, knowledge of, and uptake of the program. Figure 3. Cluster development sub‐project cycle

165. Public infrastructure investments. Public infrastructure investments will not be financed through the project but through existing stage budget within the appropriate line ministry (e.g. Ministry of Water Resources for irrigation investments or Uzbekenergo for energy related investments) or related programs. 166. Linkage to access to finance sub‐component. Business plans in cluster development sub‐projects will be eligible for financing under the credit line and partial credit guarantee fund established under Component 2.


Page 54 of 66

Financial Management Arrangements

167. UZAIFSA will be ultimately responsible for implementation of the fiduciary and accounting functions under the proposed project. UZAIFSA will be responsible for flow of funds, budgeting, accounting, reporting, and auditing and the overall internal control environment within the project. The UZAIFSA has developed extensive experience in the implementation of the ongoing and already closed Bank‐financed projects. Financial Management (FM) and disbursement arrangements for the project will be further developed as design if refined but will utilize arrangements that have been put in place for other projects including: (i) project audit conducted by independent private auditors and on terms of reference acceptable to the Bank and procured by the UZAIFSA; (ii) annual audited project financial statements submissions to the Bank within six months of the end of each fiscal year with subsequent public disclosure of audit reports by the Bank and the UZAIFSA in a manner acceptable to the Bank; (iii) financing of the cost of the audit from the proceeds of the credit; and (iv) UZAIFSA will produce a full set of quarterly interim unaudited financial reports throughout the life of the project and will submit them to the Bank no later than 45 days after the end of each calendar quarter. 168. The UZAIFSA should prepare an annual budget based on the Project Implementation and Procurement Plans, as well as operating expenses estimations. This annual budget should be submitted to the MoF for approval. The UZAIFSA would be responsible for the preparation, planning and execution of the project budget. Based on agreed budget, the UZAIFSA would be entitled to use funds from the Designated Account. 169. The UZAIFSA would be in charge of keeping the Project accounting records in a fully functional, secure and reliable accounting system throughout the project life. This system would allow fully automated accounting and reporting, including automatic generation of Project required financial statements. The project accounting will be maintained in accordance with the Cash Basis International Public Sector Accounting Standards for the Bank reporting, and in accordance with Accrual basis accounting to reporting with respect to state authorities requirements.

170. The accounting records will be maintained in the project currency and in the currency of payment, applying the actual exchange rate used at the currency conversion. Accounting records should include the necessary details, including all individual payments under each contract, balances and transactions from the Designated/Transit Account. 171. The UZAIFSA will be in charge of planning and managing project disbursements and preparation and submission of withdrawal applications to the Bank. Respectively, the UZAIFSA shall have access to the Bank’s Client Connection platform. The Project will use standard disbursement methods: Advances (Designated Accounts), Direct payments, Reimbursements and Special Commitments. A single Designated Account for the project will be opened and maintained by the UZAIFSA at the financial institution acceptable to the Bank. The Project funds will be disbursed to the single designated account at UZAIFSA and this designated account will be used for project funds inflows, disbursements to PFI and SFSED and payment of eligible project expenditures. The Disbursement Account will not be pooled with other funds not related to the project. 172. The funds for the SFSED will be directly disbursed by the Bank to a separate bank account to be opened by the SFSED at the financial institution acceptable to the Bank. This account should be used exclusively for the Loan funds, and will not be pooled with other funds. The SFSED and the PFIs will report on a regular basis to the UZAIFSA on usage and balances of the funds as per UZAIFSA and Bank requirements. The SFSED and the PFIs will provide access to records, system data and etc. related to Loan proceeds for external auditors, the Bank and the UZAIFSA staff when necessary.


Page 55 of 66

Procurement 173. Procurement procedures. The Borrowers will carry out procurement under the proposed project in accordance with the Bank’s “Procurement Regulations for IPF Borrowers” (Procurement Regulations) dated July 2016 and revised in November 2017 under the “New Procurement Framework (NPF), and the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated July 1, 2016, and other provisions stipulated in the Financing Agreements. In line with the exemption under the Procurement Regulations, the goods, services and works to be financed via financial intermediaries to private borrowers will not follow the procurement regulations, but will be procured under national commercial practices. The POM will include the procurement arrangements under sub‐loans, including a sufficient level of detail on the terms of the national commercial practices that will be used by the financial intermediaries. The financial intermediaries will also apply the Anti‐Corruption Guidelines of 2016. Procurement capacity building for PFIs and potential sub‐borrowers to follow the OM will be organized in the first year of implementation and on‐demand in the later years.

174. PPSD Summary. A Project Procurement Strategy for Development (PPSD) was completed as part of appraisal with the Bank procurement team providing the necessary support and guidance for preparing the PPSDs.

175. Procurement Risk Assessment and Mitigation (PRAMS). As part of the project preparation process, an assessment of procurement capacity of implementing entity will be conducted and completed at appraisal using PRAMS and accordingly, risk mitigation measures have been proposed. A preliminary assessment of UZAIFSA procurement capacity focusing indicates that procurement capacity is satisfactory.

176. Procurement risk. The overall procurement risk associated with the project in view of the project’s risk profile and the prior experiences of UZAIFSA with previous Bank‐financed projects is proposed as Moderate.

177. Oversight and monitoring by the Bank. All contracts not covered under prior review by the Bank will be subject to post review during implementation support missions including missions by consultants hired by the Bank or through supreme audit institutions as part of the financial audit. The Bank may, at any time, conduct Independent Procurement Reviews of all the contracts financed under the credit. Environmental Safeguards 178. The UZAIFSA Project Management Unit. The Central Project Management Unit (PMU), to be established under UZAIFSA at the national level will coordinate project implementation in three‐participating oblasts: Andijan, Ferghana and Namangan. The PMU will hire a Safeguards Specialist (SS) which will oversee the overall coordination of ESMF and individual ESMPs implementation, reporting to UZAIFSA and to the Bank regarding safeguards issues, as well as integrating safeguards requirements into bidding and contracting documents. He/she also will be responsible for interaction with the environmental authorities, ensuring an efficient implementation of safeguards documents and will undertake, randomly, field visits and environmental supervision and monitoring, assessing environmental compliance at worksites, advising UZAIFSA Ferghana Valley regional offices (FVROs) on environmental and social safeguards issues. The PMU SS will also be responsible for identifying Environmental Social Assessment training needs for all parties involved in ESMF/ESMPs implementation. 179. UZAIFSA Ferghana Valley regional offices. The project would be implemented at the local level through UZAIFSA


Page 56 of 66

Regional Offices which will be working closely with the respective oblast and rayon Hokhimiyats. The FVROs will also include a SS, who’s main duties would be to ensure that the project activities are implemented in compliance with the Bank safeguards Operational Policies and national EA rules and procedures. Among major responsibilities of the FVROs, SS will be responsible for the following: (a) ensuring that contractors complies with all ESMPs requirements; (b) coordinating all environmental and social related issues at the city and district level; (c) conducting ESMP supervision and monitoring and assessing environmental and social impacts and efficiency of mitigation measures, as well as identifying non‐compliance issues or adverse trends in results, and putting in place programs to correct any identified problems; (d) when needed, providing advice and consulting contractors in ESMP implementation; and, (e) reporting to the PMU with regard to ESMP implementation. All Regional offices will report to the Central PMU. 180. Participating Financial Intermediaries. The sub‐projects of ESIA and ESMPs implementation will remain under the responsibility of the PFIs and of sub‐borrowers, including responsibilities for supervision and monitoring of proposed activities and selected sub‐projects. Compliance with the ESMPs and monitoring of the impact during the construction phase will be undertaken by the PFIs and periodically by UZAIFSA and Regional Offices Safeguards Specialists as part of his/her contract supervisory duties. The PFIs will also play the major role in implementing ESMF provisions and will be required to ensure that sub‐borrowers conduct an appropriate ESIA and where necessary prepare an EMP, for each sub‐project. The PFIs will be involved in the process of project implementation from the very beginning, at the project’s appraisal stage. They will evaluate project proposals to attribute them to the Bank Category and determines the type of EA to be conducted for the project, reviews the set of documents prepared by sub‐borrowers (sub‐projects’ Information Sheet or Project Summary Sheet as well as all necessary permits and clearances needed for project implementation) completes Environmental Screening Checklist and makes a final decision on project’s financing. In case of non‐compliance with presumed mitigation measures during project implementation, the PFIs can make a decision on suspending of funding. 181. Access to Finance Guidelines (Credit Manual) EA provisions. This document will be prepared before the project start, providing not only the criteria for the selection of recipients of sub‐loans, and for the eligible investments, terms and conditions of the sub‐loan and other modalities and agreements of the access to finance, but also the rules and procedures for sub‐projects that ESIA provide in detail in the ESMF. 182. Beneficiaries/contractors’ responsibilities. The actual investments will be carried out by sub‐project beneficiaries and their contractors which should operate in full compliance with national environmental and social legislation and with the ESMPs requirements. Further, the beneficiaries/contractors are obliged to follow regulative requirements of the national law related to traffic safety, occupational health and safety; fire safety; environmental protection; and community health and safety. All ESMPs’ associated activities will be financed by the beneficiaries/contractors. The beneficiaries/contractors will also be requested to designate a person in charge of environmental, social, health and safety issues and for implementing the ESMP. 183. ESA capacity building activities. The implementation of the ESMF requires specific knowledge for beneficiaries and operators engaged in the different phases of the project implementation. As both PIU and FVROs levels do not have safeguards specialists hired yet, the project will support relevant trainings on knowledge and information on topics such as the ESMF implementation, ESMF/ESMP reporting, World Bank Guidelines, etc. For this purpose, before the civil works will start, the client will hire a consultant with knowledge on the environmental and social management requirements for Republic of Uzbekistan, including substantial knowledge on Bank safeguards policies and requirements which will provide EA training which will include the basic requirements of the Bank and National safeguards rules and procedures, as well as case studies in this regard. The training activities will continue also during the project implementation when


Page 57 of 66

the consultant will provide on‐the‐job training regarding environmental and social monitoring and supervision. 184. Environmental and social supervision, monitoring and reporting. Supervision of the ESMF and ESMPs implementation will be the responsibility of the beneficiaries/contractors and UZAIFSA Regional offices which periodically (as per monitoring schedule) will prepare short reports on ESMPs implementation to be submitted to the PMU. PMU will compile these reports and semi‐annually will present short information about the ESMP implementation as part of the Progress Reports to the Bank. Social Safeguards

185. Activities that show the potential for temporary or permanent involuntary land acquisition, land use restrictions, negative impact on economic activities, or restrict access to resources will not be financed under the project. Any activity that is associated with the project will also be monitored to ensure there is no involuntary land acquisition or negative impact on economic livelihood. All investments in productive activities through cluster development and credit lines will be made on a demand‐driven basis and screened in the credit appraisal and cluster sub‐project evaluation process to identify any proposed activities that would contravene these principles. As a result, Bank Operational Policy OP 4.12 on Involuntary Resettlement is not triggered but social issues will continue to be assessed through the ESMF and will be monitored during supervision. Although involuntary land acquisition will not be allowed, a business will be allowed to acquire land in the open market of willing buyer‐willing seller situation or acquire unused government land. 186. Citizen Engagement. The project will apply participatory approaches in needs assessment, investment prioritization decision‐making, service delivery monitoring and feedback, and other key functions, leveraging applications of technology where appropriate. Project institutional and implementation arrangements will include a grievance redress mechanism. The project will include citizen engagement‐specific indicators such as: community satisfaction with the quality of investments; community feedback on the effectiveness of engagement processes; and complaints and PMU responsiveness. The GRM and citizen engagement results indicators will be developed during preparation. Participation of women during citizen engagement will be encouraged with monitoring indicators disaggregating information based on gender and age. 187. Gender. The project has designed specific mechanisms for women’s participation in enterprise development activities. Specific activities for economic participation of women in livelihood development and entrepreneurship will be developed including business incubator activities dedicated exclusively for women entrepreneurs under the BWA in partnership with various women’s networks. The project will also develop a network of women entrepreneur mentors at all levels and involve them in creating an enabling ecosystem for women entrepreneurs. Grievance Redress Mechanisms 188. Any person who wishes to file a grievance with regards to project activities may do so, including anonymously. The project‐level grievance redress mechanism will be managed by the PIU, who will collect grievance claims. A grievance claim may also be brought to an implementing partner, contractor or PFI, but these entities would direct the claimant to the PIU for registering of the grievance and facilitating follow up. Following receipt of the grievance claim, the relevant PIU staff will address the matter within 1 week of receiving a grievance. The PIU will enlist assistance from local leaders, as well as relevant agencies such as (CCI) (lead service provider), BWA, and YU, to resolve grievance. If the complainant is not satisfied with the PIU response, they can contact the Grievance Hotline established by the President’s office. If they are not satisfied with response, they can seek redress through the court system.


Page 58 of 66

189. Communities and individuals who believe that they are adversely affected by a Bank supported project may also submit complaints to the Bank’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 Bank’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of the Bank’s non‐compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s corporate GRS, please visit http://www.worldbank.org/en/projects‐operations/products‐and‐services/grievance‐redress‐service. For information on how to submit complaints to the Bank Inspection Panel, please visit www.inspectionpanel.org.


Page 59 of 66

ANNEX 3: Economic and Financial Analysis

COUNTRY: Uzbekistan

Ferghana Valley Rural Enterprise Development Project

190. Approach for the analysis. Investments under the project are expected to contribute to the expansion of small enterprises and increase employment levels, which can be expected to generate economic benefits in the form of increased revenue and income. In addition, investments that contribute to increased access to services by households and communities could also generate benefits associated with improved small‐scale industrial and agricultural production as a result of better access to energy, irrigation water and reduced transport costs. 191. The economic and financial analysis undertook ex‐ante analysis of the proposed project in line with the Bank’s guidelines on economic analysis and new guidance on assessing the shadow price of carbon. This includes assessing carbon externalities associated with projects and will build on the Greenhouse Gas Accounting exercise and incorporate shadow carbon pricing in the economic analysis described.

I. Project Benefits 192. The project’s objective is to support the expansion of rural enterprise activity in Ferghana Valley and improve the enabling environment for entrepreneurship. This will contribute to the larger goal of building greater economic and job opportunities within Ferghana Valley and facilitating private sector‐led economic growth. 193. As it is mentioned in the PAD, the Project financing would be directed at: (i) rural entrepreneurship with a focus on business incubation and apprenticeship; (ii) cluster development to strengthen backward and forward linkages in supply chains and facilitate greater market access and business development; and (iii) improving access to non‐financial and financial services among micro and small enterprises in high potential sectors (agri‐food, tourism, textiles/apparel, light manufacturing). 194. It is expected that the quantifiable benefits of the Project would be generated by the following improvements, supported and promoted by the Project: (i) improved access to finance (the loan sub‐projects/guarantees); (ii) increased success rate of sub‐projects (due to business incubation and cluster development); and (iii) job generation and SME development. More specifically, the project benefits would derive from increased productivity and production of the supported sub‐projects due to the introduction of improved management and technologies, including intensive technologies, usage of improved seeds and varieties in agriculture, better business planning and skills and improved access to markets, including due to the cluster development. 195. These are the following unquantifiable benefits that can be attributed to the Project: (i) the rural communities would benefit from the improved infrastructure having better access to water, roads and markets; (ii) farmers and rural entrepreneurs will use the knowledge and skills gained in the business incubators in other activities beyond the scope of the Project; (iii) deeper value chain networks and wider support to the business development and clusters would facilitate the partner financial institutions to expand and/or pilot provision of financial services to the smallholders and rural entrepreneurs in a lower credit risk environment; and (iv) the Project would also support the partner financial institutions


Page 60 of 66

to develop their understanding of specific SME business models to be able to better assess credit risks and design and test appropriate financial products. Economic impact of improved access to finance and entrepreneurship environment 196. Most of the Project activities and interventions will be demand‐driven and at this stage it is quite difficult to identify what economic sectors and type of business will be prevailing during the Project implementation in terms of quantity of specific sub‐projects and funding structure. However, in order to quantify the benefits deriving from the improved access to finance and entrepreneurship environment supported by the Project in Ferghana Valley, several indicative business activities were selected for the financial and economic analysis. The results of the analysis were then extrapolated to the whole project in order to identify the overall Project’s economic impact. 197. It is important to underline that the Project would be complementary to a number of on‐going and planned Bank operations. Project financing would scale up pilots initiated under the Cotton Trust Fund on women’s entrepreneurship; build on the successes of the Livestock Development Project and the (HDP) by supporting further development of agri‐processing clusters and small‐scale producer organizations; and provide economic livelihood opportunities that would complement the investments made in community and municipal infrastructure and planning under Obod Qishloq and the Medium Cities Project. The project would also complement IFC SME advisory work activities and planned IFC interventions in financial inclusion and microfinance sector. While these Bank operations were mostly sector specific (horticulture, livestock, cotton sectors), the current Project is rather systemic and most of its activities and interventions are cross‐cutting, as they improve entrepreneurship in various agriculture and non‐agriculture sectors, including tourism, textiles/apparel, and light manufacturing. According to the official statistics, the horticulture and livestock sectors are making a significant contribution to the agricultural GDP of Ferghana Valley (approximately 70 percent), therefore, when it comes to support and development of the rural entrepreneurship, these sectors should not be avoided, and the Project will provide an additional support to further the development of agri‐processing clusters and small‐scale production in these sectors. 198. Several illustrative models were prepared to demonstrate the likely activities (loan sub‐projects) to be financed with support of the Project: 199. Apples intensive orchard sub‐project. This financial model illustrates the incremental benefits that a smallholder farmer who decided to intensify his/her fruit production business. It shows what benefit the farmer would gain from the establishment of an intensive apple orchard on 1 ha, replacing the low‐yield old orchard already owned by this smallholder. However, since the farmer does not have enough financial resources to support the above‐mentioned entrepreneurial initiative, he/she has decided to get a loan from one of the commercial banks that supports a credit line provided by the Project in order to develop the smallholders entrepreneurship in Ferghana Valley. The farmer also went to a Business Incubator supported by the Project and was trained on business planning, intensive small‐scale orchard production technologies, horticulture marketing and establishment of linkages to the horticulture clusters. 200. Apples remain one of the most popular fruits in Uzbekistan due to a high demand on both domestic and export markets. Benefiting from booming cold storage business in Ferghana Valley, the horticulture farmers are increasingly using cold storage services for their horticulture products and wait until the end of autumn and winter when the prices are almost twice higher than those in harvesting season. Similarly, according to this model, it is assumed that the farmer will keep his/her apples in one of the local cold storages.


Page 61 of 66

201. According to the business plan chosen by the smallholder he/she would need to invest about US$ 45,000 into the establishment of the intensive orchard (including the cost of a small‐scale drip irrigation system), 20 percent of which is the beneficiary contribution. This investment is justified by a significant yield increase which is expected to jump from the current 10 tonnes/ha to 100 tonnes/ha at full development of the loan sub‐project. Annual operation and maintenance cost is estimated at US$ 3,064. The model records a financial National Present Value (NPV) of US$ 28,589 over a fifteen‐year period and a financial Internal Rate of Return (IRR) of 19.6 percent before financing which is well above the opportunity cost (12 percent). The loan conditions for this investment are as follows: repayment period is 8 years with 2 years of grace period and an annual interest rate of 7 percent. After financing the model shows better financial return: a financial NPV of US$ 56,795 over a fifteen‐year period and a financial IRR of 74.7 percent. Such high IRR proves that this investment is financially viable and could be quite attractive for a smallholder farmer provided that he/she would also benefit from the non‐financial services supported by the Project (partial credit guarantee). 202. Sweet cherries intensive orchard sub‐project. The financial model of the establishment of a sweet cherries intensive orchard represents another case of entrepreneurial initiative in the fruits and berries sector that most likely will be attractive for smallholder farmers. Although Ferghana Valley does not have much available lands, there are still some abandoned agricultural lands that are not currently used because of a lack of irrigation and roads. Thanks to the infrastructure investments made by the Project, such land areas were provided with irrigation and access roads. Many small farmers who had land plots in these areas started using it for agricultural production. One of them has decided to establish a 1 ha intensive sweet cherry orchard. The anticipated main benefit would occur from the increased yield and production of sweet cherry as a result of the introduction of intensive technology. The yield increase is expected from the current 10 tonnes/ha to 50 tonnes/ha at full development of the loan sub‐project. 203. Same as for apples, the smallholder decides to store his harvest until the end of autumn and winter to enjoy the seasonal prices, which are twice higher than the actual ones. Unlike the apples model, the smallholder builds his/her own cold storage on the second year of production. 204. The expected amount of investment at the first year of the model by the smallholder for the establishment of an intensive sweet cherry orchard with a drip irrigation is US$ 5,769. The establishment of a cold storage costs US$ 17,500. Annual operation and maintenance cost is estimated at US$ 4,382. The model records a financial NPV of US$ 51,899 over a fifteen‐year period and a financial IRR of 25.7 percent before financing which is well above the opportunity cost (12 percent). The loan conditions for this investment are similar to those applied for the previous model: repayment period is 5 years with 2 years of grace period with an annual interest rate of 7 percent, the beneficiary’s contribution is 20 percent. The financial NPV after financing is positive – US$ 58,140 and the model also shows good financial return. 205. Table grapes vineyards sub‐project. Ferghana Valley is the well‐known region of Uzbekistan for the table grapes production, a significant part of which is produced by smallholder farmers (dehkans) who grow several varieties of the traditional table grapes for the local and export markets. It is expected that some smallholder farmers will try to engage with table grapes business and to establish the small‐scale vineyards on their land plots. A 1 ha financial model was prepared to demonstrate the investment return of table grape orchard business to be run by a small dehkan household farm. It is assumed that this 1 ha land was previously used for grain production with quite a low yield and poor grain quality and the farmer decided to establish a new vineyard in its place. The vineyard will be equipped with a small‐scale and an inexpensive drip irrigation system. 206. The anticipated main benefit would occur from the increased yield and production of table grapes as a result of the introduction of improved cultivation technology and drip irrigation. The yield is expected to be up to 20 tonnes per


Page 62 of 66

ha at full development of the vineyard. After the harvest in September‐October, the farmer will transport the table grapes to a local cold storage where it will be kept for 2‐3 months (until December‐January) when the price for table grapes almost double.

207. The investment costs are estimated at about US$ 4,719 in total, mainly for land preparation and drip irrigation equipment. The expected amount of investment at the first year of the model by the smallholder for the establishment of the vineyard with a drip irrigation is US$ 4,719. The assumed cycle of the table grape production is 25 years. The smallholder farmer would also spend US$ 1,401 each year on operating expenses. The model records a financial NPV of US$ 75,822 over a 25‐year period and a financial IRR of 34.7 percent before financing which is well above the opportunity cost (12 percent). According to the model, the farmer would need to take out a loan, provided by the Project through one of the commercial banks, with the following conditions: repayment period is 5 years with 2 years of grace period with an annual interest rate of 7 percent, the beneficiary’s contribution is 20 percent. The financial NPV after financing is positive: US$ 28,658 and the model also shows good financial return (IRR 41.1 percent). The model shows that the table grapes business is certainly financially‐viable and it is attractive for small‐scale entrepreneurship. 208. Lemon greenhouse sub‐project. Another option of rural entrepreneurship is the establishment of a household based small lemon greenhouse. This kind of business has a relatively low investment costs and it is also not labor intensive and demands a relatively low operating costs. These factors make it an attractive business option for young people and pensioners in rural area. It is expected that within the scope of the Project, the new rural entrepreneurs would complete the training courses in the business incubator on business planning, lemons production and marketing. It is worth mentioning that the lemon prices are quite high and stable. Also, lemons, unlike other fruits, can be easily transported and stored and they can be relatively easily sold in the local market, including bazaars, stores and HoReCa.

209. The technology of the household‐based small greenhouse is quite simple and cost‐effective. The structure includes a metal frame hammered into the ground and a pit with the depth of 0.5 meters. The young lemon plants shall be planted into this pit and two layers of plastic sheeting covers it from wind and cold.

210. Within this model, it is assumed that the smallholder entrepreneur would allocate 0.05 ha land of his/her backyard for the lemon greenhouse. The expected yield is to be up to 6.6 tonnes per 0.05 ha every year. The investment costs are estimated at about US$ 3,719 in total which will be mainly spent for establishment of the lemon greenhouse. The smallholder would also spend US$ 177 annually on operating expenses and US$ 930 for the renewal of the plastic sheeting of the lemon greenhouse every 3 years. The model shows a financial NPV of US$ 8,294 over a fifteen‐year period and a financial IRR of 36.2 percent before financing. Given high profitability of lemon production, the loan conditions for this investment would be less favourable than for the intensive models: repayment period is 2 years with a 1 year grace period with an annual interest rate of 7 percent. The financial NPV after financing is positive – US$ 4,138 and a financial IRR will be 38.0 percent.

211. Tomatoes/cucumbers greenhouse sub‐project. It is expected that the rural entrepreneurs, especially the newcomers, would also be willing to invest, establishing the tomato or cucumber greenhouse as it seems to be quite an attractive business option, especially for the newcomers, in large villages and around cities. This business could be a good source of additional income and can be run as a family business. Relatively low investment costs and good seasonal prices make it also attractive.

212. Within this model, it is assumed that the smallholder entrepreneur would allocate 0.05 ha backyard land of his/her house for the tomato/cucumber greenhouse. The expected amount of investment at the first year of the model for the


Page 63 of 66

establishment of the tomatoes/cucumbers greenhouse is US$ 3,370. The entrepreneur would also spend US$ 240 annually on operating expenses. The model shows a financial NPV of US$ 1,957 over a fifteen‐year period and a financial IRR of 21.5 percent before financing. With an introduction of credits with a repayment period of 5 years with a 1 year grace period with an annual interest rate of 7 percent. The financial NPV after financing is positive – US$ 289 and the IRR will be 23.6 percent.

213. Small livestock farm sub‐project. It is expected that some smallholder farmers will be willing to get engaged with livestock business and get financial and technical support from the Project. One of the models, developed in the frame of the Project’s economic analysis was prepared to analyze the profitability of the small‐scale livestock business in the conditions of the Ferghana Valley of Uzbekistan and whether the smallholders‐led livestock sector should be also considered as the potential area of rural entrepreneurship development. The model represents a small livestock farm which specializes in combined milk and beef production. It is assumed that a dehkan farmer had an old shed with feedlots for cattle, that is still suitable for further use, but it needs some further improvement and modernization. The anticipated main benefit would occur from the increased production of milk and meat, which will be sold on the local markets and/or supplied to a local dairy processing plant.

214. The expected amount of investment at the first year of production is US$ 2,250. The smallholder would also spend US$ 1,200 annually on operating expenses. The model shows a financial NPV of US$ 3,313 over a fifteen‐year period and a financial IRR of 69.6 percent before financing. With introduction of credits with a repayment period of 5 years with a 1 year grace period with an annual interest rate of 7 percent. The financial NPV after financing is positive – US$ 3,966 and the model also shows a good financial return, which could be very attractive for farmers and rural entrepreneurs

215. Traditional ceramics and textile sub‐project. It is expected that some new entrepreneurs would decide to get engaged with the traditional ceramics and textile business, targeting and benefiting from the booming tourist sector of Uzbekistan. Although the main touristic directions in the country are Samarkand and Bukhara, 10‐15 percent share of all tourists come to Ferghana Valley, the region of the traditional and attractive hand‐crafts (silk, ceramics, textile, etc.)

216. This model demonstrates the investment return of household‐based workshop equipped for production of the ceramic products. The model has been prepared from the perspective of the owner of this workshop who specializes on firing of ceramic souvenirs. This entrepreneur purchases raw material, prepares semi‐finished products, hires local painters to paint them, fires these products and then sells them.

217. The establishment of such workshop costs US$ 20,000. The considered production cycle is 15 years. The craftsman also would spend US$ 57,216 for operating costs annually. The model shows a financial NPV of US$ 35,158 over a fifteen‐year period and a financial IRR of 23.7 percent before financing. With introduction of credits with repayment period of 14 years with a 1 year grace period with an annual interest rate of 7 percent the financial NPV after financing is positive – US$ 5,167 and the model also shows good financial return.

218. Economic effect of business incubation and cluster development. The rural entrepreneurship in Ferghana Valley would be strengthened by business incubation and apprenticeship and the cluster development, supported by the Project, would strengthen backward and forward linkages in supply chains and facilitate greater market access and business development. All these, along with the improved access to non‐financial and financial services among micro and small enterprises in high potential sectors (agri‐food, tourism, textiles/apparel, light manufacturing), would certainly have some positive impact to the economy of the Ferghana Valley, as well as to the economy of the whole country.


Page 64 of 66

219. In order to quantify the economic effect of the business incubation and cluster development, which would be funded by the project, it was assumed that they would increase the number of successful rural enterprises, business initiatives and start‐ups. This would be achieved because the farmers and rural entrepreneurs will be trained by the business incubators (supported by the Project) and they will be well informed and equipped to operate their businesses.

220. According to some expert estimates, only approximately 60 percent of the farmers and rural entrepreneurs are successful in business. However, it is estimated that, thanks to the Project, this rate will be higher‐ reaching 80 percent of success on average. The overall economic return of the project (ERR) is 21.2 percent with a positive economic net present value (ENPV) (the overall economic analysis of the Project is presented in Annex 4, Section lll below) and it was estimated using the success factor of 80 percent (which means that only 80 percent of the sub‐projects analyzed in the economic analysis would be successful). However, if the success factor of 60 percent is applied (without project scenario), then the ERR would decrease to 15.28 percent with the still positive ENPV and well above the discount rate. However, it should be noted that the sensitivity analysis shows that in this case the Project becomes more vulnerable to increases in project costs and decreases in project benefits. In other words, the Project would not be successful and economically viable without its business incubation and cluster development components. 221. Economic effect of job generation and SME development. The employment generation analysis showed that about 15,000 new jobs will be created by the Project because of the improved technologies and increased productivity and the emerging number of new SMEs and business oriented dehkan households.

Overall Economic Analysis ENPV =US$ 29.4 million; ERR =21.2 percent (base‐case scenario)

222. The period of economic analysis is 20 years to account for the phasing and gestation period of the proposed interventions. The conservative scenario is presented in the analysis and it is indicative and demonstrates the scope of profitability originated from the conditions prevailing at the time of the preparation (end of 2018). 223. The analysis identifies the quantifiable benefits that relate directly to the activities undertaken following implementation of the project components, or that can be justifiable attributed to the project’s implementation.

224. The illustrative models described above have been used for the calculation of the overall benefit stream, on the basis of economic prices.

225. Considering the illustrative examples as a reasonable assumption of the investments likely to be implemented, an estimated average incremental annual net benefit per US$ 1 of investments is used. The incremental net benefits were derived by multiplying this indicator by the amount of estimated investments, but, considering the gradual increase of such benefits over the period of five years.

226. It was assumed that at least 80 percent of the investments would achieve the estimated returns, i.e. an 80 percent success rate was applied to the models. Financing flows have not been undertaken in the calculations as they are already reflected in the project costs or represent transfer payments (duties and taxes). 227. Given the benefit and cost streams, the base‐case ERR of the Project is estimated at 21.2 percent. The base‐case ENPV of the project’s net benefit stream, discounted at 12 percent, is US$ 29.4 million. This proves that the project is


Page 65 of 66

economically viable and justified and recommended for financing from the economic point of view.

228. Shadow price of carbon. The estimation of the net balance from all greenhouse gases (GHGs) expressed in CO2

equivalent that would be emitted or sequestrated within the potential sub‐projects was made and the social price of carbon was included in the economic analysis. According to the calculations in EX‐ACT, the Project showed a total balance of ‐ 758,660 tCO2‐equivalent, which means that the Project will have more sequestration of carbon rather than emission. The overall carbon benefits improved the ERR from 21.2 percent to 22.8 percent.

229. Sensitivity Analysis. Economic returns were tested against changes in benefits and costs and for various lags in the realization of benefits. In relative terms, the ERR is equally sensitive to changes in costs and in benefits. In absolute terms, these changes do not have a significant impact on the ERR, and the economic viability is not threatened by both a 20 percent decline in benefits nor by a 20 percent increase in costs, since the ERR in both cases remains well above the discount rate. A one‐year delay in project benefits reduces the ERR to 17.7 percent. The results are presented in the following table:

Table 1. Sensitivity Analysis of Project Economic Return

Sensitivity Analysis (20‐year period)

Base case

Costs Increase Increase of Benefits

Decrease of Benefits Delay of Benefits

+10% +20% +50% +10% +20% ‐10% ‐20% ‐ 30% 1 year 2

years

ERR 21.2% 19.1% 17.3% 13.0% 23.4% 25.5% 18.9% 16.4% 13.8% 17.7% 15.3%

ENPV (US$ mln)

29.4 24.4 19.4 4.4 37.3 45.3 21.5 13.5 5.4 20.9 13.3


Page 66 of 66

ANNEX 4: Maps

COUNTRY: Uzbekistan

Ferghana Valley Rural Enterprise Development Project

FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR...

Documents

Transcript of FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR...