UKRAINE PROGRAM-FOR-RESULTS Accelerating Private Investment in Agriculture Program (P166941) Environmental and Social Systems Assessment (ESSA) World Bank February, 2023 1 ACRONYMS AND ABBREVIATIONS AIE Assessment of Impact on the Environment BIPs Boarder Inspection Points CAE Collective Agricultural Enterprise DLI Disbursement Linked Indicators DLR Disbursement Linked Results EIA Environmental Impact Assessment ESIA Environmental and Social Impact Assessment ESMP Environmental and Social Management Plan ESMS Environmental and Social Management Systems ESSA Environmental and Social Systems Assessment EU European Union EUR Euro FAO Food and Agriculture Organization GoU Government of Ukraine GSAP Government Strategic Action Plan GM Grievance Mechanism ha Hectare MAPF Ministry of Agrarian Policy and Food MENR Ministry of Environment and Natural Resources MOF Ministry of Finance MOJ Ministry of Justice MP Member of Parliament MRD Ministry of Regional Development, Construction, Housing and Communal Services NBU National Bank of Ukraine NGO Non-Governmental Organization PAP Program Action Plan PDO Program Development Objective PforR Program-for-Results PCGF Partial Credit Guarantee Fund Strengthening Project SPZ Sanitary Protection Zone SEA Strategic Environmental Assessment SMEs Small and Medium Enterprises SSUFSCP State Service of Ukraine for Food Safety and Consumer Protection SAR State Agrarian Registry TF Trust Fund UAH Ukrainian Hryvnas 2 Table of Content 1. Executive Summary ............................................................................................................................ 4 2. Introduction ......................................................................................................................................... 4 2.1 Environmental and Social System Assessment Purpose and Objectives ....................................... 4 2.2 ESSA Methodology ............................................................................................................................. 6 2.3 Program Context ................................................................................................................................. 7 2.4 Program Restructuring ...................................................................................................................... 9 2.5 Government’s Program 5-7-9 .......................................................................................................... 10 2.6 Implementation arrangements for 5-7-9 program ......................................................................... 10 2.7 Partial Credit Guarantee Fund Strengthening Project (PCGF) .................................................. 11 3. Environmental and Social Risks and Benefits ....................................................................................... 11 3.1 Potential Adverse Environmental Impacts .......................................................................................... 11 3.2 Potential Environmental Benefits ......................................................................................................... 12 3.3 Potential Adverse Social Impacts .......................................................................................................... 12 3.4 Potential Social Benefits ......................................................................................................................... 13 4. Regulatory Framework for Managing the Program’s Environment and Social Impacts ................. 14 4.1 EU Legislation and Best Practices Applicable for the Program: ....................................................... 15 4.2 Environmental Aspects .......................................................................................................................... 15 4.3 Social Aspects.......................................................................................................................................... 17 5. Assessment of Environmental and Social Management Systems and Implementation Capacity ..... 18 5.1 Summary of Assessment of Environmental and Social Systems ........................................................ 20 6. Program Action Plan................................................................................................................................ 30 6.1 Program monitoring............................................................................................................................... 31 7. Stakeholder Engagement and Consultations on ESSA, Grievance Mechanism ................................. 31 Annex 1. Use of fertilizers in 2022............................................................................................................... 36 Annex 2. General Approach to Pest Management .................................................................................... 40 Annex 3 Scope of E&S Audit for Existing Borrowers Under Governmental Initiative 5-7-9 ............... 41 3 1. Executive Summary This Environmental and Social Systems Assessment (ESSA) has been prepared to provide analysis and guidance on environmental and social aspects of the restructuring of the PforR loan – Accelerating Private Investment. The restructuring involves reallocation of the remaining budget towards two DLRs for financing 1) to the existing affordable credit program (“5-7-9â€?) through partial credit guarantees provided by Ukreximbank, building on a newly established Partial Credit Guarantee Fund (PCGF); and 2) to interest rate compensation managed by the Business Development Fund (BDF) under the Ministry of Finance (MOF). This ESSA assesses the extent to which the Program’s environmental and social management systems are consistent with core environmental and social principles to address issues associated with program activities. Risks associated with activities that would result from financing after change to DLRs are primarily related to absence of E&S screening procedures for small- to medium-size investments and associated risk of impacts on community and worker health and safety including exposure of loan beneficiaries to hazardous wartime conditions, impacts on ecologically sensitive sites, impacts on water resources and soils due to use of pesticides and agro-chemicals, and economic impacts on unofficial land users. The ESSA finds that while appropriate national legislation is in place to govern management of these risks, the capacity to inspect and enforce this legislation is especially weak given that government attention and resources have been diverted to national defence. A key area of action for the program should be on building in-country capacity to undertake due diligence and strengthen the Environmental and Social Management Systems (ESMS) of the Participating Financial Institutions (PFIs) that are providing loans backed by partial credit guarantees and interest rate compensation. The ESSA finds that Ukreximbank and the BDF have demonstrated an ability to carry out due diligence reviews of potential PFIs, monitor the portfolio of loans from financial institutions to eligible farmers and farm organizations for eligible activities, consolidate performance and identify opportunities to improve project financial activities. BDF has prepared a draft ESMS and is undertaking due diligence and capacity building as a condition of financing from its German partner financial institution, KfW. Given that the 5-7-9 program is already under implementation the ESSA proposes an audit of the associated retroactive financing based on representative sample of issued loans to confirm systems for screening and management of corrective actions to address environmental and social risks and further update BDF ESMS. The ESSA also recognises that the PCGF is being provided with capitalization and operationalization support as part of a separate World Bank Investment Project Financing (P180242 Partial Credit Guarantee Fund Strengthening Project) and proposes actions under that project to ensure ESMS due diligence and capacity building measures are in place for PFIs. All ESMS should ensure screening criteria excluding any activities that may cause permanent or temporary physical or economic displacement of landowners or users. Any purchase of land using PCGF or BDF guaranteed loans should occur on a willing buyer-willing seller basis as demonstrated by legal transaction records on fully registered and notarized private land where the absence of dispute over ownership or use has been confirmed through screening of loan applications by PFIs in accordance with their ESMS. The program will also require transparent and responsive grievance mechanisms to address complaints, with clear procedures, records about decisions/outcomes and guidance on escalation. This should also include a system for handling anonymous and sensitive complaints. 2. Introduction 2.1 Environmental and Social System Assessment Purpose and Objectives 4 Since 2019 the World Bank has provided support to the Government of Ukraine under the Government Strategic Action Plan (GSAP) for Leveraging Private Investment in Agriculture and Agribusiness Sectors through a Program-for-Results (PforR) loan - Accelerating Private Investment in Agriculture (the Program). Initially the Program was developed for the period of 2019 to 2023, but due to the full-scale military invasion of Ukraine by the Russian Federation, the Program’s development objectives, Program scope, results framework, closing date, Disbursement-Linked Indicators (DLIs) and Disbursement-Linked Results (DLRs), and disbursement estimates have been revised. This change will reflect refocusing of the Program on providing urgent support for the immediate short-term objective of ensuring a continued agricultural production (in 2022 and 2023) to avoid disruption of the production cycle. This will be done by promoting two new DLRs under DLI1 of the existing PforR. The two DLRs direct financing to the existing affordable credit program (“5- 7-9â€?) through partial credit guarantees provided by Ukreximbank and to interest rate compensation1 managed by the Business Development Fund (BDF) under the Ministry of Finance (MOF). The first DLI builds on a Partial Credit Guarantee Fund (PCGF), also being provided with capitalization and operationalization support as part of a separate World Bank Investment Project Financing (P180242 Partial Credit Guarantee Fund Strengthening Project). The remaining budget from the previous program is proposed to be reallocated between these two components. The program has been extended until 2025. This Environmental and Social Systems Assessment (ESSA) has been prepared by a World Bank ESSA Team for the proposed Program, which will be supported by the World Bank’s Program for Results (PforR) financing instrument. In accordance with the requirements of the World Bank Program-for-Results Financing Policy (PforR Policy), PforRs rely on country-level systems for the management of environmental and social effects. The PforR Policy requires that the Bank conduct a comprehensive ESSA to assess the degree to which the relevant PforR Program’s systems promote environmental and social sustainability and to ensure that effective measures are in place to identify, avoid, minimize, or mitigate adverse environmental, health, safety, and social impacts. Through the ESSA process, the Bank ESSA Team develops recommendations to enhance environmental and social management within the program, which are included in the overall management action plan. The main purposes of this ESSA is to: (i) identify the Program’s environmental and social effects, (ii) assess the legal and policy framework for environmental and social management, including a review of relevant legislation, rules, procedures, and institutional responsibilities that are being used by the Program; (iii) assess the implementing institutional capacity and performance to date to manage potential adverse environmental and social issues; and (iv) recommend specific actions to address gaps in the program’s environmental and social management system, including with regard to the policy and legal framework and implementation capacity. This ESSA assesses or considers the extent to which the Program’s environmental and social management systems are adequate for and consistent with six core environmental and social principles (hereafter, Core Principles), as may be applicable or relevant under PforR circumstances. The Core Principles are listed below. They are further given greater defined through corresponding Key Planning Elements that are included under each Core Principle in Chapter 4. Core Principle 1: Environmental and Social Management: Environmental and social management procedures and processes are designed to (a) promote environmental and social sustainability in program design, (b) avoid, minimize, or mitigate against adverse impacts; and (c) promote informed decision making relating to a program’s environmental and social effects. 1Interest rate compensation is paid to the banks, who lend to agricultural producers under one of the following three programs – Anti-Covid, Anti-Crisis, and Spring Planting, while partial (80 percent) credit guarantee to the banks is covered only under the latter program. 5 Core Principle 2: Natural Habitats and Physical Cultural Resources: Environmental and social management procedures and processes are designed to avoid, minimize, and mitigate any adverse effects (on natural habitats and physical and cultural resources) resulting from the program. Core Principle 3: Public and Worker Safety: Program procedures ensure adequate measures to protect public and worker safety against the potential risks associated with (a) construction and/or operations of facilities or other operational practices developed or promoted under the program and (b) exposure to toxic chemicals, hazardous wastes, and otherwise dangerous materials. Core Principle 4: Land Acquisition: Land acquisition and loss of access to natural resources are managed in a way that avoids or minimizes displacement, and affected people are assisted in improving, or at least restoring, their livelihoods and living standards. Core Principle 5: Indigenous Peoples and Vulnerable Groups: Due consideration is given to cultural appropriateness of, and equitable access to, program benefits, giving special attention to the rights and interests of indigenous peoples and to the needs or concerns of vulnerable groups. Core Principle 6: Social Conflict: Avoid exacerbating social conflict, especially in fragile states, post conflict areas, or areas subject to territorial disputes. An additional purpose of this ESSA is to inform decision making by the relevant authorities in the borrower country and to aid the Bank’s internal review and decision process associated with the Program. The findings, conclusions and opinions expressed in this document are those of the World Bank. The recommended actions that flow from this analysis have been discussed and agreed with Government of Ukraine counterparts and will become legally binding agreements under the conditions of the loan. 2.2 ESSA Methodology The World Bank undertook a comprehensive review of government policies, legal frameworks and program documents, and other assessments of Ukraine’s environmental and social management systems. This report was prepared by World Bank staff and consultants through a combination of reviews of existing Program materials and available technical literature, interviews with government staff, and consultations with key stakeholders. Findings of the assessment will be used in the formulation of an overall Program Action Plan (PAP) with key measures to improve environmental and social management outcomes of the Program. The findings, conclusions, and opinions expressed in the ESSA document are those of the World Bank. The ESSA review process seeks to describe and assess the systems for managing environmental and social effects of a proposed program. The World Bank drew on a wide range of data, sources, and inputs during the ESSA review process, including the following actions: − Assessment of the environmental and social effects of the program: The ESSA Team assessed the Program to cause adverse environmental and social effects, either due to its design and program components or due to gaps in Program systems. Such risks were assessed at various levels to understand environmental and social performance. − Comprehensive desk review of policies, legal framework, program documents, and other assessments of environmental and social management systems: The review examined the set of national policy and legal requirements related to environment and social management. − Institutional analysis: An institutional analysis was carried out to identify the roles, responsibilities, and structure of the relevant institutions responsible for implementing the Program funded activities, including coordination between different entities at the national and local levels. This draft ESSA will be updated based on the feedback received from stakeholders prior to finalization of the program. The final ESSA will be disclosed prior to World Bank Board consideration of the program. It will be 6 updated after Board approval, if needed, to reflect any important changes agreed by the Board to the program that affect environmental and social issues. This document is being made publicly available prior to Board consideration of the related Program for Results. This does not imply a presumed outcome. This document may be updated following Board consideration of the relevant PforR, and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. 2.3 Program Context Agrifood sector The agrifood sector has been a crucial backbone of Ukrainian economy and society. In 2021, the agriculture sector accounted for 10 percent of gross domestic product (GDP) and the food processing industry added additional 4 percent. Together with input supply and agricultural trade, the agrifood sector generated 20 percent of GDP. Primary agriculture alone employed 22 percent of the labor force. Over the last 15 years, Ukraine has established itself as one of the world’s top producers and exporters of wheat, corn, barley, maize, and sunflower products. In 2021, Ukraine’s value of export of agrifood products reached US$28 billion, accounting for 41 percent of total export value. Grain and leguminous crops accounted for 35 percent of the total volume in Ukraine’s export, and this number has been steadily increasing every year.2 In 2021, Ukraine was the world’s fifth largest wheat exporter, exporting 20 million tons of wheat and meslin, with a 10 percent global market share. For corn and barley, the country accounted for about 15 percent of global trade, primarily exporting to the European Union (EU), China and the Middle East.3 For maize, the Food and Agriculture Organization of the United Nations (FAO) estimated that Ukraine’s expected exports between 2021 and 2022 would represent up to 18 percent of global maize trade, thereby theoretically being the third largest exporter worldwide had it not been for the war outbreak. On top of this, Ukraine is providing up to 46 percent of global sunflower seed and sunflower oil production, making it the largest exporter of sunflower oil in the world. The value of these sunflower export products amounts to nearly half of the US$7.4 billion trade worldwide.4 Russia’s invasion of Ukraine on February 24, 2022 and the resulting war has been having devastating economic consequences. Official data indicates that Ukraine’s GDP shrank by 19.1 percent (quarter-on- quarter seasonally adjusted) in quarter (Q) 2, following the 19.3 percent decline in Q1. The year-on-year GDP decline was reported at 37.2 percent in Q2 versus the estimated 45 percent contraction in March 2022, suggesting that after the liberation of Kyiv and Chernihiv regions in April 2022 the economic activity has started to gradually improve. Nevertheless, according to the Bank’s projections, the GDP will contract by 35 percent in 2022. Inflation continued to grow reaching 23.8 percent in August 2022. Consumer prices are expected to increase further due to both continued supply and production disruptions and large monetization of fiscal deficit. The consumer price index is projected at around 30 percent at the end of the year. With the war continuing, Ukraine is facing three key macro-critical challenges: (i) high fiscal financing needs and inability to mobilize domestic revenues; (ii) increasing reliance on monetary financing and deteriorating asset quality of the financial sector; and (iii) weaker external position. The Bank provided the first emergency support for Ukraine’s agriculture sector in Spring 2022. In March 2022, the Government of Ukraine (GoU) put together an action plan to provide emergency assistance for agriculture, in particular for the spring crop planting, and asked the Bank to increase the advance of the Program to support it. The second Program restructuring completed on March 31, 2022, provided the 2 State Statistics Service of Ukraine. 2020. 2019 Agriculture of Ukraine. Kyiv. 3 USDA. 2022. The Ukraine Conflict and Other Factors Contributing to High Commodity Prices and Food Insecurity . Foreign Agricultural Service, US Department of Agriculture, Washington D.C. 4 Vesoulis, A. 2022. How the Ukraine-Russia Conflict Will Raise the Price of Snack Foods. Time. https://time.com/6155095/sunflower- oil-russia-ukraine/ 7 advance in the amount of US$31.0 million (disbursed on April 7, 2022), increasing the Program’s total advance from US$19.0 million to US$50.0 million and removing the initially approved retroactive financing reference in the loan agreement, which the Borrower did not use. No other changes were made during that second restructuring. Since then, Ukraine’s agrifood sector has continued to be severely impacted by the war, requiring significant additional support. The minimum damage, loss and needs for the agriculture sector from the start of war on February 24, 2022, to June 1, 2022, was estimated at US$30.5 billion. 5 Of this, the damages for the sector amounted to US$2.2 billion, while the economic losses incurred from lower agricultural production, lower farmgate prices, and higher production costs were estimated at US$28.3 billion. This excludes decontamination of landmines and unexploded ordinances on land, including agricultural land, and inland waterways, which is expected to exceed US$70.0 billion. As the war continues, the total cost is expected to significantly increase each month. To respond to the above-mentioned challenges, the GoU has taken several quick measures to strengthen local and global food and nutrition security. They prioritized support to the 2022 spring crop planting by facilitating agricultural lending (building on the existing affordable credit program “5-7-9â€?) through partial credit guarantees provided by Ukreximbank and interest rate compensation6 managed by the Business Development Fund (BDF) under the Ministry of Finance (MOF).7,8 Since February 2022, more than 8,000 farmers were able to borrow 52.6 billion UAH (an equivalent of US$1.7 billion) at the soft terms. For more than 4,000 farmers, who received 19.4 billion UAH of agricultural production loans from 27 commercial and state-owned banks, the loans were backed by the partial credit guarantees, and 82 percent of these loan beneficiaries were small- and medium-sized farms.9 In late July 2022, the repayment of short-term agricultural production loans, which were due in September 2022, was extended by six more months, as the prolonged war hampers export and depresses farmgate prices.10 Land sector The land reform agenda promoted ending the historical moratorium of agricultural land sales to improve the security of land tenure and enable the use of land as collateral to access credit for agricultural development. The moratorium on agricultural land sales undermined: security of land tenure; incentives to undertake productivity enhancing investments and manage the land in a sustainable manner; and access to financing for small and medium producers since land could not be used as collateral. An estimated 2 million households had to rent out their land at below market prices under the moratorium. The moratorium on land sales was lifted in July 2021. The land market has remained functional in large parts of the country despite the invasion and national emergency. Between February and October 2022, 21,192 agreements were concluded on the newly established land market in Ukraine, covering an area of 37,463 hectares. The war has disrupted the ability of the government and the private sector to direct financial support to farmers, communicate opportunities and provide legal and technical support particularly in Eastern and Southern Ukraine. While populations of Western and Central Ukraine have largely been able to continue their lives, war risks and impacts play out across many levels: loss of life; loss of assets and capital; destruction of public infrastructure such as roads and power lines; contamination of agricultural land by military debris; 5 World Bank and EU. 2022. Rapid Damage, Loss, and Needs Assessment (RDNA). August 2022. The RDNA, initiated by the Bank and the EU on May 30, 2022, is based on the internationally accepted damage and loss methodology. The RDNA aims to support the GoU and its international partners to understand the level of financing required to restore Ukraine’s social, productive, and inf rastructure sectors. 6 Interest rate compensation was paid to the banks, who lend to agricultural producers under one of the following three programs – Anti-Covid, Anti-Crisis, and Spring Planting, while 80 percent credit guarantee to the banks was covered only under the latter program. 7 The Cabinet of Ministers of Ukraine’s Resolution No. 274 from March 12, 2022. 8 Annex 3 presents the Financial Intermediary Financing Review. 9 In Ukraine, average farm sizes are much larger than the world average. Small-sized farms are considered farms with up to 500 ha of the arable land. The medium-sized farms are farms with up to 1,000 ha of the arable land. 10 Cabinet of Ministers of Ukraine’s Resolution No. 916 from July 29, 2022. 8 contamination of land by mines; destruction of records; destruction of public offices; incapacitation of local public institutions and their functions. The war has created new categories of vulnerable groups. About 7.4 million Ukrainian refugees currently reside outside the country and about 6.4 million are internally displaced within Ukraine. Refugees and internally displaced persons will have left behind land, assets, and documents. It is also possible that due to need and expediency, internally displaced people may have settled on other people’s land, or any land perceived as not claimed or used. The war has rendered some land plots environmentally toxic or otherwise unusable. Large swaths of land in the Eastern and Southern Ukraine may be affected by mines, environmental contamination by various debris of the war, or physical decimation. Water resources, roads, power structures or other ancillary facilities may also be affected, rending previously fertile agricultural land unusable in the short term. 2.4 Program Restructuring In October 2022, the GoU requested the Bank to restructure the Program to finance critical agriculture public expenditures at the time of war. The focus is on supporting the agricultural recovery of Ukraine, which is aligned with the GoU’s Recovery and Development Plan presented at the Ukraine Recovery Conference in Lugano, Switzerland, on July 4-5, 2022 and the Rapid Disaster and Needs Assessment. The priority agricultural programs include those that support liquidity for next production season, partial credit guarantees, horticulture production for nutrition security, and efficient irrigation water management/rebuilding back better. The Program’s scope will change from supporting a long-term agriculture development – which had focused on efficiency and transparency of the state support to farmers, enhanced export through sanitary and phytosanitary measures and cross-border trade, and efficiency of agricultural land markets – to supporting the short-term objective of ensuring a continued agricultural production (in 2022 and 2023) to avoid the disruption of production cycle. The lesson from the break-up of the Soviet Union is that restoring the broken agricultural production cycle, which Ukraine experienced in the 1990s, requires several years, with a significant cost to farmers and consumers in Ukraine and worldwide. The proposed change in the Program scope would promote recovery in a sustainable manner by making funds available for the programs that improve access to finance for small farms, diversify agricultural production by supporting horticulture production, and improve water deficit management and climate change adaptation. The restructured Program will include two new DLRs and drop all the unachieved DLRs: a. The first new DLR under DLI 1 (DLI 1: Improving efficiency and transparency in delivering state services to agriculture) will be, “Farmers who benefited from the state support in advance of the 2022 spring and winter crop plantings,â€? with the associated disbursement of US$100.0 million. The achievement of the DLR will be measured by the number of farmers, whose commercial loans for agricultural production were softened by the interest rate compensation and refinancing in 2022 with the support of the state. The verification report will be prepared by the Business Development Fund (BDF), which executes the agricultural finance support program and collects information from the state-owned and commercial banks on agricultural financing. b. The second new DLR under DLI 1 (DLI 1: Improving efficiency and transparency in delivering state services to agriculture) will be, “Funds for the priority agricultural programs that support liquidity for next production season, partial credit guarantees, horticulture development, and efficient irrigation water management included in the 2023 national budget of Ukraine,â€? with the associated disbursement of US$88.0 million, including to account for the disbursed Program advance. The achievement of this DLR will be measured by the inclusion of the funds for the above-mentioned programs in the adopted 2023 national budget of Ukraine. The verification will be carried out by the Bank by reviewing the 2023 national budget and confirming the budget lines with the above-mentioned agricultural support programs. 9 The Program restructuring is providing the emergency support for agricultural recovery in Ukraine during the Russian invasion of Ukraine and a related global food crisis. Under this Program, there is no direct line of credit – instead, there is support for (i) an interest rate subsidy to qualified commercial financial institutions to on-lend their own capital to eligible farmers, and (ii) capitalization of a newly created government partial credit guarantee system - through operationalization of the Partial Credit Guarantee Fund (PCGF) with a sound independent governance framework - to help participating financial institutions (PFIs) manage risks under these extraordinary circumstances. 2.5 Government’s Program 5-7-9 Under the state program 5-7-9, short-term working capital loans are provided by the banks using the GoU guarantee and interest rate of 0 percent, which will allow for loan pricing and other conditions to be adjusted quickly to a market-based approach as the country moves from the war time to recovery. By the end of implementation, the on-lending interest rate to farmers is expected to cover cost of funds, administrative expenses, loan loss provisions, and a profit margin for participating commercial and state banks, per FIF guidance. The exception is for one-time longer-term loans at 0 percent interest for emergency grain silo storage expansion. Twenty-seven commercial and state banks are participating financial institutions (PFIs) in the state program 5-7-9, supporting the 2022 spring planting. These banks have passed the standard due diligence review process. These banks provide the loan funds and receive the interest rate compensation from that state program. Requirements for the SME to be accepted to the Program An SME that meets the following criteria can become a Program participant: − SME is a natural person registered in accordance with the procedure established by law as a natural person - entrepreneur; − SME is a resident of Ukraine; − SME has not received state support for the period of last three years any state support in equivalent to EUR 200,000.00 − SME does not manufacture and/or sell weapons, alcoholic beverages, tobacco products, currency exchange − SME does not provide real estate for rent, which is one of the main types of activity; − SME is not recognized as bankrupt or in respect of whom a bankruptcy case has been initiated; − SME is not in the stage of termination of the legal entity or termination 2.6 Implementation arrangements for 5-7-9 program The Business Development Fund (BDF) is the financial institution serving as the apex financial intermediary, conducting due diligence of participating institutions that receive the interest rate subsidy. BDF plays a central role in financing the agricultural sector, especially the small and medium enterprise farms. Currently, 44 PFIs are accredited and 27 PFIs have received the interest rate subsidy for grain production and storage loans. These PFIs financed the 2022 spring planting season. The BDF has a demonstrated ability to carry out due diligence reviews of potential PFIs, monitor the portfolio of loans from financial institutions to eligible farmers and farm organizations for eligible activities, consolidate performance and identify opportunities to improve project financial activities. The BDF was established with the support of German KfW in 1997 and is managed by MOF. In November 2021, the National Bank of Ukraine presented the roadmap for all banks in Ukraine to adopt the internationally accepted ESMS during 2022, but the war has delayed this implementation. BDF is planning to finalize its ESMS (to be applied to 5-7-9 program lending) by the end of 2022. BDF management are 10 currently reviewing a draft of their ESMS prepared as a condition for receiving financing from KfW. BDF expect their ESMS to be approved by end of December 2022 and to start training PFI staff to introduce their ESMS. BDF has hired a consulting company to undertake due diligence review of existing PFI ESMSs and to prepare capacity building plans based on this review to inform participation of PFIs in the PCGF. Currently, 12 out of the 44 certified PFIs (handle about 50% of the 5-7-9 program) already have a functioning ESMS in place to control environmental and social risks in lending. BDF has a functional Grievance Mechanism (GM); however, anonymous submissions are not considered. 2.7 Partial Credit Guarantee Fund Strengthening Project (PCGF) Before the war, the GoU had begun to put in place key legal, regulatory, and supervisory elements of a commercially viable partial credit guarantee fund (PCGF). When the war started, the PCGF was not established yet, so the GoU decided to use the bridge arrangements providing credit guarantees for agricultural loans through its state program managed by Ukreximbank. The Bank financed successful projects with Ukreximbank previously to support export and extend loan maturities, similar to the objective in this project. The GoU is, however, committed to accelerate the PCGF establishment and replace the current temporary credit guarantee arrangements based on good governance, financial and systems standards. The PCGF will replace the credit guarantee program managed by the Ukreximbank. The Program will contribute to the capitalization of the new PCGF, with a sound independent governance framework, which will support credit-constrained farmers and significantly improve sustainability of the current credit guarantees, thereby providing the long-term benefits for agricultural development and food security. Moreover, under the WB project ‘Ukraine: Strengthening the Partial Credit Guarantee (PCG) Fund for small farmers in Ukraine’ (P180242), technical assistance is foreseen aimed at operationalizing the PCGF, increasing awareness of Ukrainian small farms of opportunities for agricultural and farmland-related investments and access to financial products offered by the banks participating in the PCGF, as well as incrementally improving the Ukrainian investment environment that approximates EU standards and enables successful access to banking products by non-bankable small farms. 3. Environmental and Social Risks and Benefits 3.1 Potential Adverse Environmental Impacts The Program will provide support to small farmers through state-financed programs that contribute to on- lending by PFIs. Both Program-supported governmental initiatives (5-7-9 and PCGF) through issued/guaranteed loans will support purchase of land, equipment and materials, covering operational expenses. Potential environmental impacts are connected to purchase of land, purchase and use of agrochemicals (pesticides, fertilizers), establishment of irrigation systems and include impact on biodiversity, surface and ground water sources, soil quality, OHS and community health and safety impacts, as well as war-related hazards such as land contamination and explosive remnants of war (ERW). Environmental risks are expected to be site-specific, temporary and can be readily addressed through standard mitigation measures and compliance with national laws, however, these risks may be exasperated by ongoing war and war-related hazards and threats (such as aerial attacks). Based on the analysis of regulatory system and previous activities implemented by NBU, the program is not likely to have significant impacts on natural habitats. With its many hills, steppes and rivers, Ukraine has a vulnerable terrain to environmental degradation from soil erosion. Good environmental practice needs to be closely monitored and mainstreamed into soil and water programs and the use of inorganic fertilizers and pesticides. 11 It is assumed that individual loans have, on average, low to moderate environmental and social risk, and each needs to be screened for adverse effects and potential sensitivities and the unpredictable context risks associated with war fighting. Specific potential adverse environmental impacts include: Water resources: Potential impacts include water quality and quantity degradation (both surface and ground water), surface water sedimentation, and spread of water borne diseases. This impact may be connected with excessive agrochemicals and pesticide use. Natural Habitats: Potential impacts include the introduction of invasive flora species; loss of flora and fauna with high biological value in case land plot is adjacent to this area; and potential damage to aquatic habitats. The Program will need to ensure that ecologically important areas are not negatively affected, according to Ukraine environmental regulations. Such areas of ecological sensitivity include the national parks, nature reserves, territory that fall under the Ramsar Convention or included to Emerald net etc. Soil Erosion: Potential adverse impacts include soil erosion and quality deterioration, resulting in sediment load into the near water bodies change in soil salinity, deforestation. Physical Cultural Resource and Mounds: Large-scale impacts on physical cultural resources and mounds are unlikely. Program activities should be screened for impacts on physical cultural resources with introduction of mitigation measures. The expectation is that the Program activities, such as land acquisition and cultivation of agricultural crops, will not result in significant adverse impacts with diligent implementation of the mitigation measures at each site. However, a screening should determine if a potential land plot has any mounds or is located in proximity to monuments. Cumulative impacts that can potentially develop is increased use of chemical fertilizers which will have downstream impacts, including water contamination and eutrophication of water sources. 3.2 Potential Environmental Benefits The risk screening suggests that the overall environmental impact of the Program also maybe positive with potential environmental benefits. The Program will include: (i) soil protection program - contributing to more sustainable land and water management and decreased erosion; (ii) soil fertility management and seed development – improving agricultural practices and increasing food security in the country. Other environmental benefits include promotion of integrated pest management practices and food security. 3.3 Potential Adverse Social Impacts Program activities associated with the provision of loans and credit guarantees for land purchase, working capital, equipment and construction works for small-scale agricultural activities (less than 500 ha) are likely to involve some site-specific adverse risks and impacts on workers and communities which in most situations will be easily manageable but are rendered unpredictable by the contextual risks associated with war fighting. Workforces participating in activities enabled by the credit guarantees are typically small due to high mechanization in the sector. Community and worker health and safety risks common to the activities being supported include risk of interaction with nearby communities during transport of equipment and machinery or during localized construction activities. The Program will support loans intended, among other things, for the purchase of land and it will be important to ensure that any land acquisition occurs on a willing seller- willing buyer basis documented by legal transaction records on fully registered and notarized private land where the absence of dispute over ownership or use is confirmed. Commercial banks participating in the Program-supported agencies (5-7-9 and PCGF) will require transparent external communications about the potential opportunities and the rights of stakeholders, and a transparent process for the resolution of disputes about land ownership prior to loan approval. Activities associated with private land purchase, equipment purchase, working capital and small-scale construction works are generally easily manageable through screening and site management plans. 12 The invasion and ongoing war in Ukraine pose significant contextual risks that are beyond the control of the Program such as risks associated with aerial bombardment, war fighting or further displacement of refugees. The ongoing national emergency and the widescale presence of internally displaced vulnerable people who have lost livelihoods and now reside in western areas of the country may present some labor management challenges. It will be important for labor risks to be screened and inspection procedures followed. These risks likely involve isolated incidents that are able to be prevented and mitigated due to the high degree of mechanization in the agricultural sector. There is a risk that provision of credit financing may benefit those enterprises with existing financial capacity, and not reach rural new starters, those with insolvency records, cultural minorities and/or the elderly without access to information or awareness of the program. Small entrepreneurs may be more reluctant to apply and take on debt during the current crisis. Financial products and training tailored to smallholders is required, for example, for women-led businesses, community enterprises, borrowers lacking a credit history or lacking financial skills. Visible efforts to ensure the inclusion of smallholders, particularly those from historically underrepresented or disadvantaged social groups less able to access sustainable financing, will combat perceptions that financing only benefits large enterprise and established oligarchic interests. Communications and transparency will minimize levels of concern, help to identify landowners and users and minimize disputes. Without adequate stakeholder engagement, particularly at the level of PFI external communications about financial products on offer, the Program risks reinforcing perceptions of inequity in receipt of benefits tied to trust in governance and reform legitimacy. The program will need a transparent and responsive grievance mechanism to address complaints, with clear procedures, records about decisions/outcomes and guidance on escalation. It should also include a system for handling confidential and sensitive complaints. Since retaliation is a real risk and stakeholders need to be able to complain safely, the program needs to establish systems to process anonymous complaints. This can either be accomplished through a change in regulation specifically applying to the program or in the designation of a third-party body (an independent lawyer or non-government organization) to receive and process complaints on behalf of the program. Overall, the quality and attention to management of social risks and stakeholder engagement reflected in the management systems deployed by PFIs is likely to vary and a capacity building approach will need to be integrated into the Bank TA activities to ensure that these systems are subject to due diligence review. The Implementing Agencies for both Program-supported governmental initiatives (5-7-9 and PCGF) require staff with environmental and social specialist expertise to provide overall coordination and support on assessment and management of environmental and social risks and development of environmentally sustainable and socially inclusive financial products. 3.4 Potential Social Benefits The assessment of the program reveals that the social impact of the Program is likely to be positive owing to benefits such as increase in productivity and commercialization of agriculture, and improved quality and accessibility of agriculture services thus improving the incomes and overall welfare and quality of life of citizens, especially in rural areas and vulnerable groups. No significant change in land use or large-scale land acquisition is expected for the proposed Program. Despite the invasion and national emergency, large parts of the country continue to function with economic activity and land-related transactions, albeit at a reduced scale. The land market has remained functional and between February and October 2022, 21,192 agreements were concluded on the newly established land market in Ukraine, covering an area of 37,463 hectares. Financing products aimed at increasing access to smallholder farmers, especially if these products are tailored to underserved social groups (women, the elderly, those from more culturally or geographically remote areas) will also benefit the process legitimacy of the land market reform. 13 4. Regulatory Framework for Managing the Program’s Environment and Social Impacts The legal basis for environmental protection in Ukraine is quite exhaustive and evolving towards EU standards and requirements (EU-Ukraine Association Agreement). Different Aspects of the national environmental protection and nature resource management associated with achieving the PforR Development Objective and DLIs are primarily covered by the following laws and regulations: • Law on Environmental Protection11, #1264-XII, adopted on June 25, 1991; • Law on Nature Reserve Fund12, #2456-XII, adopted on June 16, 1992; • Water Code13, #213/95-BP, adopted on June 6, 1995; • Law of Ukraine on Pesticides and Agrichemicals14, #86/95-BP, adopted on March 2, 1995; • Law of Ukraine On Plant Protection, #180-XIV, adopted on October 14, 1998; • Land Code15, #2768-III, adopted on October 25, 2001; • Law on Land (Sub-soil) Protection16, #962-IV, adopted on June 19, 2003; • Law on Environmental Audit17, #1862-IV, adopted on June 24, 2004; • Law on Urban Planning Activities18, #3038-VI, adopted on February 17, 2011; • Law on Access to Public Information, #2939-VI, adopted on January 13, 2011; • Law on Voluntary Association of Territorial Communities, #157-VIII, adopted on February 5, 2015; • Law on Environmental Impact Assessment19, #2059-VIII, adopted on May 23, 2017; • Law of Ukraine on the Protection of the Archaeological Heritage #1626-IV, adopted on 18 March 2004 20; • Law on Indigenous Peoples 1616-I, adopted 1 July, 2021 • Law of Ukraine on the Protection of the Cultural Heritage #1805-II, adopted on 8 June 2000 21; • Convention on wetlands of international importance, mainly as a habitat for waterfowl (The Ramsar Convention (The Convention on Wetlands of International Importance, especially as Waterfowl Habitat)) adopted in Ukraine 15 November 199722; • Convention on the Protection of Wild Flora and Fauna and Natural Habitats in Europe, date of ratification by Ukraine 29 October 199623 ; • Law of Ukraine on Labour Protection # 2694-XI 24, dated 14 October 1992; • Law of Ukraine On citizens' appeal, # 393/96 25 2 October 1996; • Law of Ukraine on Fund for partial guarantees of loans in agriculture, # 1865-IX, dated 4 November 202126; • Law on Strategic Environmental Impact Assessment, #2354-VIII, adopted on March 20, 2018, and • Secondary legislation adopted to cover practical implementations of the legislation mentioned above, defines public information request, grievance mechanisms and others, for example: 11 http://zakon.rada.gov.ua/laws/show/1264-12 12 http://zakon.rada.gov.ua/laws/show/2456-12 13 http://zakon.rada.gov.ua/laws/show/213/95-%D0%B2%D1%80 14 http://zakon.rada.gov.ua/laws/show/86/95-%D0%B2%D1%80/ed20120321 15 http://zakon.rada.gov.ua/laws/show/2768-14 16 http://zakon.rada.gov.ua/laws/show/962-15 17 http://zakon.rada.gov.ua/laws/show/1862-15 18 http://zakon.rada.gov.ua/laws/show/3038-17 19 http://zakon.rada.gov.ua/laws/show/2059-19 20 https://zakon.rada.gov.ua/laws/show/1626-15 21 https://zakon.rada.gov.ua/laws/show/1805-14 22 https://zakon.rada.gov.ua/laws/show/995_031 23 https://zakon.rada.gov.ua/laws/show/995_032 24 https://zakon.rada.gov.ua/laws/show/2694-12 25 https://zakon.rada.gov.ua/laws/show/393/96 26 https://zakon.rada.gov.ua/laws/show/1865-20 14 o The Decree of the Cabinet of Ministers of Ukraine No. 1026, December 13, 2017 defines the Procedure for the transfer, disclosure of documents required for the assessment of the environmental impact from financing of the project and registration of the project EIA in the Unified Register on Environmental Impact Assessment; o The Order of the Ministry of Ecology and Natural Resources of Ukraine #42, adopted on February 3, 2012, On Approval of the Procedure for Consideration of Requests for Public Information Received by the Ministry of Ecology and Environmental Protection of Ukraine, defines procedures; o State sanitary rules for the planning and development of settlements #173 dated 19 June 199627; o State Register of pesticides and agrochemicals 28 o Order On Approval of the Procedure of Performing of Agrochemical Passport for a land plot # 536, date 11 October 201129; o The Order of the Cabinet of Ministers of Ukraine on Procedure and Criteria for Provision of Subvention from the State budget to Local Budgets on the Implementation of Measures for the Socio-Economic Development of Individual Territories # 160, Dated 19 February 2020; and o The Order of the Ministry of Ecology and Natural Resources of Ukraine #234, adopted on June 23, 2017, On Approval of Permit Form for Special Water Use and Forms of Normative Calculation of Water Use and Drainage. Despite this comprehensive list of environmental legal and regulatory acts, most of provisions remain declaratory in nature, the implementation/enforcement of legislation undergoes limited analysis of its impact. Enforcement is not fully coordinated or streamlined, resulting in either duplication of efforts or gaps because of assumed redundancies. The signature of the EU-Ukraine Association Agreement is expected to spur enhancing environmental legislation, improving enforcement of environmental legislation and regulations, and stronger coordination among regulatory and enforcement bodies thus bringing the system in line with the EU directives and requirements. The Program will attempt to move this process along through supporting efforts to streamline laws and regulations and build regulatory and enforcement capacities. 4.1 EU Legislation and Best Practices Applicable for the Program: − Regulation (EC) No 1107/2009 of the European Parliament and of the Council as regards the list of approved active substances. − Environmental, health, and safety guidelines for annual crop production, Word Bank Group, dated March 30, 2016. − Environmental, health, and safety guidelines for perennial crop production, Word Bank Group, dated March 30, 2016. − Environmental, health, and safety guidelines for vegetable oil production and processing, Word Bank Group, dated March 30, 2016. 4.2 Environmental Aspects The Law of Ukraine on Environmental Protection, adopted in 1991, regulates institutional relations on environmental protection; water resources usage and management; renewable resources usage; environmental safety; prevention of negative impacts of productive activities on natural environment; preservation of nature and genetic fund of living organisms; preservation of unique landscapes including historical heritage. It sets a mandatory requirement for carrying out environmental impact assessments (EIAs). Since 2017, the Law on EIA requires project proponents to conduct the EIA and have it licensed by 27 https://zakon.rada.gov.ua/laws/show/z0379-96 28 https://mepr.gov.ua/content/derzhavniy-reestr-pesticidiv-i-agrohimikativ-dozvolenih-do-vikoristannya-v-ukraini-dopovnennya-z- 01012017-zgidno-vimog-postanovi-kabinetu-ministriv-ukraini-vid-21112007--1328.html 29 https://zakon.rada.gov.ua/laws/show/z1517-11#Text 15 MENR, which keeps a registry of EIA reports. In 2018, the Law on Strategic Impact Assessment, which MENR performs, was adopted. Law on Nature Reserve Fund (1992) defines the list of territories and objects of the nature reserve fund of national importance and the financing source. This law covers nature reserves, biosphere reserves, national nature parks, botanical gardens, parks, and zoological parks. The Law of Ukraine on Pesticides and Agrichemicals (1995) regulates the state registration, production, purchase, transportation, storage and trade of pesticides and agro-chemicals. It also regulates the health and safety of the environment and people using pesticides and agro-chemicals. Specifically, the law assigns responsibility to test and register pesticides and agrochemical before their production, purchase and usage in Ukraine to the MENR. The MENR must keep the registration list of pesticides and agro-chemicals that are permitted in Ukraine. The Ministry of Agriculture and Food (MAPF)’s responsibility is to propose the pesticides and agrochemicals to be permitted for use in Ukraine and added to the registration list. MAPF is also responsible for the implementation of state control over the residual quantities of pesticides, agrochemicals and heavy metals in surface water intended for agricultural purposes, soils on agricultural lands, animal feed, and in agricultural products and raw materials. Violation of the provisions of this law leads to civil, disciplinary, administrative, or criminal liabilities. Furthering regulation on pest management, the 1998 Law on Plant Protection introduces the concept of Integrated Pest Management (IPM). The law states that IPM is one of the pest management principles nationwide and implementation of IPM is a part of MAPF’s responsibilities. The Water Code was adopted in 1995 and amended regulates water conservation; rational water use; protection of water resources from pollution, contamination, and depletion; improvement of ecologic conditions of water bodies; and protection of water user's rights. The Water Code provides a background for the development of state targeted programs, regional programs, water cadaster and various legal acts. It foresees conducting ecological assessment during modernization and building the facilities related to water use; conducting a state recording of water consumption and sewage discharge; conducting standardization in the area of water protection and usage; and implementation of state monitoring of water resources. The main objectives of the ‘Land Code’ of Ukraine, adopted in 2001, are to regulate land relations in order to ensure the right to land of citizens, legal entities, territorial communities and the state, as well as the rational use and protection of the land in the interests of current and future generations. Also, this law regulates water relations, as well as relations of the use and protection of underground resources, as this concerns land relations. One of the provisions of the Code stipulates that a land parcel may be divided into portions without changing its purpose and permitted use. Ownership of land is acquired by purchasing it under a contract of sale, rent, donation, exchange, other civil law agreements. The Law of Ukraine on Land (Sub-soil) Protection defines the legal, economic, and social aspects of land protection to ensure rational use, protection reproductive capacity, soil fertility and other useful properties of soil, preservation of ecological functions of soil, and environmental protection. The Law on Environmental Audit (2000) determines the basic legal and organizational principles of implementation of environmental audit. The Law defines environmental audit as an independent documentary process of assessment of object of environmental audit including collection and objective assessment of proofs for establishment of compliance of certain types of activity, measures, conditions, systems of ecological management, and information. Provisions of this law extend to companies, organizations, their branches and representations or associations of all forms of ownership, separate productions, other economic objects in general, or by separate types of their activities. Law of Ukraine 'On Regulating Urban Development' adopted in 2011 establishes standards, scope, and review procedures for design documentation for construction/rehabilitation/modernization projects. The aim of this Law is "to establish legal and organizational principles of city planning activities which should be aimed at achieving sustainable development of territories taking into account state, public and private interests". Law of Ukraine ‘On Access to Public Information’ determines procedure for exercising and ensuring the right of everyone to access to information in possession of public authority and other administrators of public information determined by the Law and to information of public interest. The law specifies requirements for 16 environmental information provision, not only by governmental organizations, but also by other economically active organization must provide information (if they possess it) on the state of environment; quality of food and consumer goods; disasters, hazardous natural events and other events which can pose threat to the health and well-being of citizens. A formal response shall be provided within 48 hours. Recently adopted Law of Ukraine ‘On Environmental Impact Assessment’ came into force on December 18, 2017. The Law sets legal and organizational policies for an environmental impact assessment with a view to avoid and prevent environmental damage, ensure environmental safety, environmental protection, rational use and restoration of natural resources, in the process of decision-making on economic activities likely to cause a significant impact on the environment, taking into account state, public and private interests. Convention on wetlands of international importance, mainly as a habitat for waterfowl. Currently, the network of wetlands of international importance in Ukraine includes 50 territories, the protection and restoration of which is the key to preserving biodiversity, since about 40% of all species of plants and animal habitat in wetlands. Emerald Network is a network of nature conservation areas of European importance, which is created to fulfill the provisions of Convention on the Protection of Wild Flora and Fauna and Natural Habitats in Europe, that was ratified by Ukraine 29 October 1996. Ukraine has to complete the creation of the Emerald network in accordance with the Association Agreement between Ukraine and the EU. Order On Approval of the Procedure of Performing of Agrochemical Passport for a land plot # 536, date 11 October 2011. The agrochemical passport of the land is used for calculation of norm of the maximum allowable concentration of soil contaminants, quality of soil, indicators of land and soil degradation. 4.3 Social Aspects The Land Code of Ukraine was approved on March 03, 1992 and declared that there are three kinds of property to land: state, collective and private. Persons or firms interested in building any buildings or assets need to purchase and registered the land from the Government and local authorities. Collective means the property that at the same time belongs to a collective agricultural enterprise (CAE). Collective property might be equally shared among members of the CAE, if they apply. On August 8, 1995 President of Ukraine issued the decree of the president “On the order of sharing of the land that are provided to collective property of agrarian enterprisesâ€?. According to the decree of the president proses of sharing the collective lands started. Each of the members of former CAE received certificate. The document does not contain borders but confirms that the person has rights to ask for land plots with definite characteristics and registration as land ownership rights. Law of Ukraine State “On state registration of property rights and its encumbrancesâ€? of June 01, 2004: (in Ukrainian: “Про державну реєÑ?трацію речових прав на нерухоме майно та Ñ—Ñ… обтÑ?женьâ€? ). Rights on real estate (flats, buildings, constructions as well as on land plots) are registered according to the law. Law of Ukraine “On state land cadasterâ€? of July 7, 2011 (in Ukrainian: «Про державний земельний кадаÑ?тр»). According to the law, the system of registration of lands is created as well as other technical and other information related. If a land plot is registered, it becomes an object of property rights. Ukraine also has a constitution that was approved in 1996 that is related to economic activity in agriculture based on farmer’s business. There are two contradicting ideas that are directly related to land law (13 and 14 article): Land is declared as the property of the people of Ukraine (that may be understood as it is only state property allowed while only state may represent people of Ukraine). At the same time, the next article says that private property is allowed. As described above, the property of the people means “publicâ€? land which cannot be sold without the Government permission. The ‘public’ lands can be in forms of agriculture, industrial, forest, or other forms. Private lands, on the other hand, means lands where individuals who have clear written evidence in ‘Red books’ maintained by local authorities with proof of land ownership of particular owner. Ukraine has the Civil Code of Ukraine that was approved in 2003, which states that property rights were settled based on freedom of property, contracts, dignity and respect to rights of citizen. This code is based on socialist principles emanating from the Soviet period but is still considered relevant. Nevertheless, 17 Ukrainian land and agrarian business law still contain archaisms and ideas that are either populist or not in forcible. There are two key aspects in this regard: 1) Populist or not in forcible ideas of land law -Free privatization: everyone may receive land for free (maximum 2 ha of rural land, the rest is for buildings, garage, etc.). These lands belong to the people (public) of Ukraine and any lawful citizen who intends to construct a house, self-income including small agriculture (homestead), or industrial purpose has the right to apply for a piece of land from the government. The state agency in the respective location then assesses the application and will decide to offer a piece of land depending on the purpose of the use of such land. Since January 1, 2013, State land cadaster system attempted maintain one unified register, known as The Nation-Wide Register of Property Rights to Immovable Property, covers both the land and real estate other than the land. The authority that administers the nation-wide registration of rights to immovable property is the State Registration Service of Ukraine assisted by the local departments of the Ministry of Justice of Ukraine. The owners of the property have to register their property rights in the register before the property can be sold. Ukraine has two kinds of public property on land: communal and state ownership. Communal lands are governed by local councils, but state – by local power which is subordinated to the central power (local state administration and local branch of State Geocadaster). On June 12, 2020, the Government of Ukraine approved a new administrative-territorial system of the basic level. According to the orders of the Cabinet of Ministers, 1,469 territorial communities have been formed in Ukraine, which cover the entire territory of Ukraine. Territorial communities received communal ownership of almost 1.5 million hectares of agricultural land outside their settlements. Law of Ukraine on the Protection of the Archaeological Heritage #1626-IV, adopted on 18 March 2004 regulates relations related to the protection of the archaeological heritage of Ukraine. Law of Ukraine on the Protection of the Cultural Heritage #1805-II, adopted on 8 June 2000 regulates legal, organizational, social and economic relations in the area of cultural heritage protection for the purpose of its protection and use of cultural heritage objects in public life. Objects of cultural heritage that are located at the territory of Ukraine, within its territorial sea and adjacent zone, are protected by the state. State sanitary rules for the planning and development of settlements #173 sets Sanitary Protection Zone (SPZ) for storages of agrochemicals and pesticides to residential buildings and water bodies. Rules prohibit to storage and use of persistent and agrochemicals along rivers, seas and around lakes, reservoirs and other bodies of water (within water protection zone). Law of Ukraine on Labour contains basic provisions regarding the implementation of the constitutional right of employees to protect their life and health in the process of work, to proper, safe and healthy working conditions. Harmful child labor practices are prohibited under law and the government strengthened its child protection framework in 2021 (#1256-IX). However, labor inspection practices are restricted (Act 877-V 2007) and may have been further affected by the national emergency and ongoing war fighting and the presence of large numbers of internally displaced vulnerable people who have lost livelihoods as a result of the war. Despite this, risk of harmful labor is mostly associated with mining and illicit activities and not with the agricultural sector. Law of Ukraine on Citizens' Appeal regulates the issue of practical implementation by citizens of Ukraine of the right granted to them by the Constitution of Ukraine to submit proposals to state authorities, associations of citizens in accordance with their statutes to improve their activities, identify shortcomings in work, challenge the actions of officials, state and public bodies. The law provides to citizens of Ukraine the opportunity to participate in the management of state and public affairs, to contribute to the improvement of the work of state and local government bodies, enterprises, institutions, organizations to defend their rights and legitimate interests and to restore them in case of violation. Law of Ukraine on Fund for Partial Guarantees of Loans in Agriculture, # 1865-IX, dated 4 November 2021. The Fund for the partial guarantee of loans in agriculture is a non-bank financial institution, which provides support to micro-businesses and SME in the agricultural sector, by partially guaranteeing the fulfilment of obligations under credit agreements. The founder of the Fund is Ukraine represented by the Cabinet of Ministers of Ukraine. 5. Assessment of Environmental and Social Management Systems and Implementation Capacity 18 As described earlier, the PforR Policy requires assessment of whether a country’s environmental and social management system contains adequate measures to manage the environmental and social effects (particularly adverse impacts and risks) of the proposed Program. This includes (a) an adequate legal and regulatory framework and institutional setting to guide environmental and social impact assessment and the management of environmental and social effects, and (b) adequate institutional capacity to effectively implement the requirements of the system. This section assesses whether the program’s environmental and social management systems are consistent with the core principles and key planning elements contained in the PforR Policy and whether the involved institutions have the requisite capacity to implement these systems’ requirements. Program elements are necessary for ensuring that the environmental and social effects identified in Chapter 2 are effectively managed. As a result of its analysis, the ESSA team has identified gaps, which are addressed in Chapter 5. This ESSA examines and discusses only those aspects of the Proposed program’s environmental and social management systems and related capacity that the ESSA Team found to be relevant considering its identified environmental and social effects. This section provides a summary assessment of the Program’s systems and capacity as they relate to each of the core principles and key planning elements. 19 5.1 Summary of Assessment of Environmental and Social Systems The Environmental and Social Systems Assessment should assess the degree to which the systems address assessment and management of risks and impacts in a manner consistent with the core principles of the Bank’s PforR policy and directive. A summary of the assessment of relevant aspects of the country’s management systems relevant for the activities to be supported under the Program is presented in Table 1. Table 1: Assessment of Environmental and Social Systems based against the core principles of the Bank’s PforR Policy Core Principle 1: Environmental and social management procedures and processes are designed to (a) avoid, minimize, or mitigate adverse impacts; (b) promote environmental and social sustainability in program design; and (c) promote informed decision-making relating to a program’s environmental and social effects. Key Elements Systems assessment Key Findings and Recommendation Operate within an Ukraine has an adequate legal framework for environmental and social impact Full-scale EIA is the only instrument applied to the adequate legal assessment, backed by a set of well-defined laws, regulations, technical guidelines planned investment projects. The project not framework and and standards, which apply nationwide. requiring EIA but requiring design documentation regulatory authority to will have Assessment of Impact on the Environment Primary legislation on EIA is developed by Ministry of Environmental Protection guide environmental and (AIE) developed as a part of their design and Natural Resources (MEPR) and environmental committee of the Parliament social impact documentation. (Verchovna Rada of Ukraine), the legislation is then passed by the Parliament and assessments at the signed by the President. The secondary legislation and overall implementation of It is likely that many activities supported by loans programmatic level the process is done by Department of Environmental Assessment under MEPR. and interest relief as a result of this Program will not involve new investments or be large enough to The Law of Ukraine ‘On Environmental Impact Assessment’ lists project types that require either E&S instrument. Environmental and require EIA, agricultural activities are represented by: Social Management Systems that effectively screen • agricultural and forestry development, re-cultivation and melioration of lands for site-specific risks and apply exclusion criteria (water resource management for agricultural purposes including irrigation and corrective actions are needed to inform and melioration) covering the area of 20 hectares or more or in the territory decisions made on provision of loans and interest and objects of the nature-reserve fund or in the protection zones thereof relief under both Program-supported governmental covering the area of 5 hectares or more, construction of melioration systems initiatives (5-7-9 and PCGF). and individual objects of the engineering infrastructure of the melioration Recommendation: Since the first new DLR (5-7-9) systems; will cover refinancing for 2022 (i.e. some of the disbursement will cover retroactive financing), information is required on the number of financed 20 • forestation (except for the reforestation) of the areas exceeding 20 hectares activities (loans) that require EIA and AIE, and their or in the territories and objects of the nature-reserve fund or in the approval status in order to assess the degree to protection zones thereof covering the area of 5 hectares or more; which such systems are in place and being screened • change in the purpose of farming lands (where the new type of land use for relevance at the financial intermediary level. belongs to at least one type of activity referred to in paragraphs 2 and 3 of this Article) and change in purpose of particularly valuable lands; • installations for the rearing of: poultry (40 thousand places and more); pigs (1 thousand places and more, for sows – 500 places and more); cattle and livestock (1 thousand places and more); rabbits and other fur animals (2 thousand heads and more); • installations for the industrial procession, disposal of animal carcasses and/or stock-breeding waste; • intensive aquaculture with annual capacity of 10 tonnes or more or in the territories and objects of the nature-reserve fund or in the protection zones thereof; • reclamation of land on the water fund lands; Additionally, as per State Building Norms DBN A.2.2.-1-2021, Assessment of the Impact on the Environment (AIE, Ukrainian abbreviation ‘OVNS’) is a process of the determination of the scales and levels of environmental impacts of designed activity, development of anticipatory or mitigation measures for reducing of these impacts – an assessment of eligibility of projects’ decisions from the environmental point of view. Any project requiring design documentation will develop AIE as a part of their design except for those that require EIA. Incorporate recognized Per Law of Ukraine ‘On Environmental Impact Assessment’ (adopted on For projects not requiring EIA or AIE, no ES tool elements of 18.12.2017), Environmental Impact Assessment is a procedure that implies: covering screening, scoping, mitigation, and environmental and social stakeholder engagement is required under the law. 1) the preparation of an EIA report by the business entity; assessment good While the Law on EIA has provisions for social practice, including: (a) 2) public consultations; impact assessment (human health, land intake, early screening of cultural heritage, socio-economic conditions), it 21 potential effects; (b) 3) the examination by the competent authority of the information presented in does not provide adequate guidance on the social consideration of the EIA report and any supplementary information, as well as the information assessment, nor does MEPR or territorial strategic, technical, and received from the public through the public consultations; representatives have a sufficient capacity to review site alternatives the social aspects of the projects and so they are 4) the reasoned EIA conclusion by the competent authority, which takes into (including the “no often overlooked or not developed on the same account the results of the examination referred to in subparagraph 3; and actionâ€? alternative); (c) level of details as environmental issues. identification of 5) consideration of the EIA conclusion in the decision to conduct the planned Public consultations are limited to disclosure on measures to mitigate activities. number of required documents and one public adverse environmental Article 6 of the Law provides for the draft scope and scale of EIA: meeting with project proponents, this is not an or social impacts that - factors: human health, state of fauna, flora, biodiversity, land (including land ongoing process. cannot be otherwise avoided or minimized; take), soil, water, air, climate factors (including climate change and greenhouse Grievance redress is handled under the Law of (d) clear articulation of gas emissions), material assets, including architectural, archaeological and cultural Ukraine ‘On Citizens’ Appeals’ which does not allow institutional heritage, landscape, socio-economic conditions and the interaction among these for anonymous submissions of any kind. responsibilities and factors; Recommendation: ESMSs for both Program- resources to support - impacts: size and scale, type (where present – transboundary), intensity and supported governmental initiatives (5-7-9 and implementation of plans; complexity, probability, expected start, duration, frequency and irreversibility of PCGF) should cover screening, assessment, and (e) Responsiveness effects (including the direct impacts and any indirect, secondary, cumulative, management and monitoring of corrective actions; and accountability transboundary, short-term, medium-term and long-term, permanent and and establishment of GM at the government through stakeholder temporary, positive and negative impacts). program level. consultation, timely A notice of planned activity which is subject to EIA is developed by activity For the first new DLR (5-7-9) due diligence is dissemination of Program proponent and includes EIA scope. The notice is submitted to the authorized required on the existing ESMS in the PFIs, their information, and territorial authority, then disclosed so that members of the public may submit application to 5-7-9 loans, and what further responsive grievance their comments and proposals in connection with the planned activity, the scope improvements are necessary to address gaps with redress measures. of assessment, and a level of detail of information to be included in the international good practice environmental impact assessment report. When preparing the EIA report, the commercial entity takes into account the comments and proposals made by the public and authorized territorial authority, and a level of detail of information to be included in the EIA report, in their entirety, partially, or declines such comments and proposals stating a reason for its decision. EIA report shall include a description of the reasonable alternatives (for example in terms of geographical 22 and/or technological features) relevant to the planned activities, and an indication of the main reasons for selecting the chosen option, taking into account environmental impacts. EIA shall consider “no projectâ€? alternative. EIA report shall include a description of the measures envisaged to preclude, prevent, avoid, reduce, offset significant adverse impacts on the environment, including (where possible) the compensatory measures. The decision to conduct the planned activity states that the environmental requirements for conducting the planned activity are set out in EIA report. In case of significant incompliance, MEPR refers the case to the Environmental Inspection for action. Public participation is guided by the Resolution ‘On Procedure for Conducting Public Discussion while Preparing the EIA’ No. 989. Public engagement is required for scoping, and discussion of the EIA report. Public consultations are organized by MEPR and authorized territorial authorities with the participation of activities proponent and the team of professionals who carried out EIA. Core Principle 2: Environmental and social management procedures and processes are designed to avoid, minimize, and mitigate adverse effects on natural habitats and physical cultural resources resulting from the program Key Elements Systems assessment Key Findings and Recommendation Includes appropriate The EIA guidelines provide guidance on identification and screening of sensitive The screening process shall be applied to existing measures for early environmental and cultural resources, including survey of environmental baseline borrowers, to identify if any land plots are located identification and information. in sensitive environmental or/and cultural areas screening of potentially and where such plots have been transferred to important biodiversity private ownership to ensure that such plots are and cultural resource free of legal dispute and eligible for sale areas. Supports and promotes The top priority of the EIA is mitigation or offset measures are to be developed in It is expected that majority of activities supported the conservation, the environmental and social monitoring program. under the Program shall take place on already maintenance, and developed agricultural land without immediate 23 rehabilitation of natural relation to sensitive environmental sites/areas or habitats; avoids the sites with known cultural value. significant conversion or Recommendation: ESMSs for both Program- degradation of critical supported governmental initiatives (5-7-9 and natural habitats, and if PCGF) shall provide sufficient guidance on the avoiding the significant appropriate screening and mitigation practices to conversion of natural avoid, minimize, offset and otherwise mitigate habitats is not technically adverse impacts on the areas of biodiversity value feasible, includes and cultural heritage. measures to mitigate or offset impacts of the The guidance will cover proper environmental and Program activities. social management tools to be developed and applied, if required (Biodiversity management Plan, Takes into account The Law On the Protection of Cultural Heritage, provides adequate legal Cultural Heritage Management Plan etc.), as well as potential adverse impacts framework and procedures for protecting cultural heritage. If any physical cultural guidance for chance find procedures. on physical cultural resource is impacted, action to secure the property is required and protection property and, as measures should be defined. For the first new DLR (5-7-9) information is warranted, provides required on the chance finds (if any) or any The requirement to have the chance-find procedures are not specifically defined biodiversity impacts incurred. adequate measures to in the law, however, there is a well-established practice for management of any avoid, minimize, or chance-finds, including graves. mitigate such effects Core Principle 3: Program procedures ensure adequate measures to protect public and worker safety against the potential risks associated with (a) construction and/or operations of facilities or other operational practices developed or promoted under the program and (b) exposure to toxic chemicals, hazardous wastes, and otherwise dangerous materials. Key Elements Systems assessment Key Findings and Recommendation Promotes community, Ukraine has Rules on health and safety protection in agricultural production. Status of compliance with the national OHS individual, and worker legislation will be assessed as part of audit of These rules ensure the screening of safety issues, assessment of work safety safety through the safe retroactive financing. before and during work implementation in agriculture sector. design, construction, and Recommendation: O&M of physical 24 infrastructure, or in Harmful forms of labor are prohibited by law but labour inspection practices are ESMSs for both Program-supported governmental carrying out activities restricted. Recent improvements to the law have been made to safeguard initiatives (5-7-9 and PCGF) shall provide sufficient that may be dependent children. guidance on the appropriate OHS and community on such infrastructure health and safety procedures, especially in with safety measures, connection to the construction impacts, use of inspections, or remedial agricultural chemicals, use of agricultural works incorporated as machinery etc. needed. The ongoing national emergency and the widescale presence of internally displaced vulnerable people who have lost livelihoods and now reside in western areas of the country may present some labor management challenges associated with harmful child or forced labor. While such risks are likely to involve isolated incidents with easy mitigation, it will be important for labor risks to be screened and inspection procedures followed. For the first new DLR (5-7-9) information is required on incidents related to health and safety of public and workers. Existing borrowers shall be screened for compliance with health and safety requirements in the agricultural sector. Promotes the use of According to the toxicity, pesticides are divided into four groups by toxicity: Based on the available data, it is assessed that use recognized good practice of fertilizers has been done in compliance with • highly active, which have a lethal dose (LD) of less than 50 mg/kg of in the production, national legislation and has diminished overall due bodyweight management, storage, to economic reasons, but the types of • highly toxic — LD50 = 50 - 200 mg/kg; transport, and disposal agrochemicals and their compliance with applicable of hazardous materials • moderately toxic — LD50 = 200 - 1000 mg/kg; international requirements will be subject to audit generated through the • low toxicity — LD50 over 1000 mg/kg. of retroactive financing. 25 Program construction or Recommendation: Existing borrowers shall be operations; promotes screened on types of used pesticides and Ukraine has a list of allowed pesticides and agrochemicals, as well as State the use of integrated agrochemicals. Register of all certified pesticides and agrochemicals. However, the Ukrainian list pest management of allowed agrochemicals is not fully aligned with EU requirements, some Borrowers shall be allowed to use pesticides and practices to manage or adjustments are still being made. EU norms for agrochemicals usage are usually agrochemicals allowed according to requirements reduce pests or disease followed by agrarians who are export oriented, private households and internal specified in Annex 2 vectors; and provides market producers are less inclined to follow international rules for types of training for workers Borrowers shall follow the national and pesticides and norms of agrochemicals usage. involved in the international requirements during use of hazardous production, chemicals, plant protection and fertilizing (e.g. procurement, storage, inform locals before use, follow sanitary protection Law of Ukraine On Plant Protection regulates legal relations related to the transport, use, and zones etc.). protection of agricultural and other plants from pests, diseases and weeds. disposal of hazardous ESMSs for both Program-supported governmental chemicals in accordance initiatives (5-7-9 and PCGF) shall provide sufficient with international Law of Ukraine on Pesticides and Agrichemicals regulates legal relations related to guidance on the transportation, storage, use and guidelines and state registration, production, purchase, transportation, storage, trade and use of disposal of hazardous material. The guidance will conventions. pesticides and agrochemicals that are safe for human health and environment. In be in line with national legislation, relevant WBG November 2022, Ukrainian Law ‘On Pesticides and Agrochemicals’ was updated to EHS Guidelines (see Annex 2), WHO guidelines, FAO align with relevant EU legislation regarding management, certification and import guidelines etc. logistics of agrochemicals. For the first new DLR (5-7-9) information is Additional data on the situation with fertilizers usage in Ukraine in 2022 is required on types and quantities of hazardous provided in Annex 1. materials procured under issued loans. Includes measures to Ukraine does not have risk assessment systems for projects to identify areas Number of incidents related to ERW explosions avoid, minimize, or prone to flood and natural hazards. have occurred on agricultural lands of Ukraine in mitigate community, recent months. Ukraine has a high threat resulting from presence of ERW due to indiscriminate individual, and worker shelling and mining of occupied territories. Recommendation: Each borrower shall be assessed risks when the Program on potential flood hazard. activities are located within areas prone to ESMSs for both Program-supported governmental natural hazards (floods) initiatives (5-7-9 and PCGF) shall provide sufficient 26 and man-made hazard guidance on emergency awareness, preparedness (such as Explosive and response (both for natural and man-made Remnants of War - ERW). hazards); decontamination of agricultural lands; demining process before use a land plot. For the first new DLR (5-7-9) information is required on incidents related to natural and man- made hazards. Core Principle 4: Land acquisition and loss of access to natural resources are managed in a way that avoids or minimizes displacement, and affected people are assisted in improving, or at least restoring, their livelihoods and living standards. Key Elements Systems assessment Key Findings and Recommendation Avoids or minimizes land No significant change in land-use or large-scale land acquisition resulting in Recommendation: ESMSs for both Program- acquisition and related physical and/or economic displacement is expected for the proposed PforR. supported governmental initiatives (5-7-9 and adverse impacts; identifies PCGF) shall provide sufficient guidance on According to Art. 36 of the Law of Ukraine On the State Land Cadastre, Ukraine and addresses economic screening for the willing buyer-willing seller status, provides access to the basic data of the state land cadastre. In the public cadastral and social impacts caused the legality of land transactions initiated as a result map, can be found information about the cadastral number of the land plot, its by land acquisition or loss of the Program, and the absence of dispute over boundaries, area, form of ownership, purpose, according to the classifier, existing of access to natural ownership and use. Application of mechanisms for restrictions on use and other useful information. resources, including those resolution of legal disputes should be documented affecting people who may Land-related legislation of Ukraine does not cover squatters rights, unofficial prior to approving financing. lack full legal rights to users of land and their economic rights. For the first new DLR (5-7-9) information is assets or resources they required on any disputes (legal and out-of-court) use or occupy. over land rights and/or economic displacement. Provides compensation The legal/regulatory system in the country includes provisions for compensating sufficient to purchase for loss of assets at replacement cost and rehabilitation of adversely affected replacement assets of people. equivalent value and to meet any necessary transitional expenses, paid 27 prior to taking of land or restricting access. Core Principle 5: Due consideration is given to cultural appropriateness of, and equitable access to, program benefits, giving special attention to the rights and interests of indigenous peoples and the needs or concerns of vulnerable groups Key Elements Systems assessment Key Findings and Recommendation Undertakes free, prior, There are no groups which meet this criteria in the program. Not relevant. and informed consultations if Indigenous Peoples are potentially affected (positively or negatively) to determine whether there is broad community support for the Program. Ensures that Indigenous Peoples can participate in devising opportunities to benefit from exploitation of customary resources or indigenous knowledge, the latter (indigenous knowledge) to include the consent of the Indigenous Peoples. 28 Gives attention to groups Law On the Principles of preventing and countering discrimination in Ukraine Generally consistent. Improvement opportunities vulnerable to hardship or determines the organizational and legal principles of preventing and countering consistent with good practice include the design of disadvantage, including discrimination in order to ensure equal opportunities for the realization of the financial products and information tailored toward as relevant the poor, the rights and freedoms of a person and a citizen smallholders and others traditionally underserved disabled, women and by access to credit (businesses led by women, the The legal/regulatory system is robust enough to promote decentralized planning, children, the elderly, or elderly, cultural minorities, those with insolvency implementation and social accountability. In addition, special provisions exist to marginalized ethnic history). Financial intermediaries that provide loans safeguard the interest of the vulnerable on local levels. groups. If necessary, supported by the PCGF and 5-7-9 are well special measures are positioned to make such enhancements and some taken to promote may have Environmental and Social Governance equitable access to the policies to do this. Due diligence of management Program benefits. systems should also identify where such PFI policies exist. Core Principle: 6 Avoid exacerbating social conflict, especially in fragile states, post-conflict areas, or areas subject to territorial disputes Key Elements Systems assessment Key Findings and Recommendation Considers conflict risks, The Law of Ukraine On Citizens' Appeal regulates the issue of the practical ESMSs for both Program-supported governmental including distributional implementation by citizens of Ukraine of the right granted to them by the initiatives (5-7-9 and PCGF) shall provide sufficient equity and cultural Constitution of Ukraine to submit to state authorities, associations of citizens, in guidance on establishment of GM and update of sensitivities accordance with their charter, proposals to improve their activities, to expose the existing one to cover anonymous appeals. shortcomings in work, to challenge the actions of officials, state and public For the first new DLR (5-7-9) information is bodies. required on the existing GM, details of received grievances and status of their consideration. A functional grievance mechanism has been developed and is under use by BDF. Each PFI is likely to have it own process for stakeholder feedback and response but these will vary in quality and level of attention to the environmental and social risk issues identified as relevant to this Program. 29 6. Program Action Plan This section summarizes the measures that the ESSA Team recommends be taken during Program implementation to address important environmental and social gaps that have been identified during the Program implementation and may appear before the end of the Program. During implementation, the World Bank will continue to consult with program counterparts and provide support to help resolve implementation issues. The Bank will also monitor PAP implementation as part of Program performance. Key environmental and social impacts, risks and gaps: The key environmental impacts, risks and gaps identified in the preceding sections are summarized below: a) Impacts on ecologically sensitive sites, public and occupational health and public safety risks, impacts on water resources and soils due to use of pesticides and agro-chemicals; b) Absence of E&S screening procedure for small- to medium-scale investments; c) Impacts on the economic and/or property rights of unofficial land users, absence of dispute resolution and compensation process for such cases; d) GM at BDF does not accept anonymous appeals, GM at PCGF is not developed and operationalized. Table 2. Recommended Inputs for PAP No Action Implementing Timeline Agencies 1 PCGF ESMS: Due diligence and capacity building efforts to review, PCGF Q1 2023 enhance and adopt updated Fund-level and PFI ESMS for the PCGF will be undertaken as part of the preparation and implementation of the World Bank Investment Project Financing (P180242) Partial Credit Guarantee Fund Strengthening Project. 2 Audit of retroactive financing for 5-7-9 program: conduct an audit BDF Q1 2023 (based on representative sample of issued loans) to accumulate information specified in the Annex 3 to this ESSA. The audit should also provide guidance for improvement, in particular confirming that the program’s management system allows for screening and management of corrective actions to address environmental and social risks – this guidance will be used to update BDF ESMS. It is recognized that there may be gaps in the management systems of some PFIs in relation to good international practice that are unable to be addressed by the PforR given its short term and that, unlike in an IPF, there is no designated account where funds flow to specific PFIs allowing for no-objection by the Bank. But it is also recognized that the associated risks are likely to be low to moderate (either negligible or site-specific and easily manageable under national laws that apply). 3 BDF ESMS: BDF has prepared a draft ESMS which is currently BDF Q1 2023 under management review and expected to be endorsed by end December 2022. The BDF ESMS is a condition of financing from its German partner financial institution, KfW. As part of this process, BDF has also hired a consulting firm to undertake due diligence review of PFI ESMS to inform capacity building and training measures to be implemented by PFIs as a condition of 30 participation in the program. PFI ESMS due diligence and capacity building is expected to take place over the next quarter. The ESMS will account for the guidance prepared based on the audit of retroactive financing (item 2) 4 The PCGF and BDS ESMS shall provide screening criteria excluding BDF/PCGF Q4 2022 any activities that may cause permanent or temporary physical or economic displacement of landowners or users. Any purchase of land using PCGF or BDF guaranteed loans will occur on a willing buyer-willing seller basis as demonstrated by legal transaction records on fully registered and notarized private land where the absence of dispute over ownership or use has been confirmed through screening of loan applications by PFIs in accordance with their ESMS. 5 The program will need a transparent and responsive grievance BDF/PCGF Q4 2022 mechanism to address complaints, with clear procedures, records about decisions/outcomes and guidance on escalation. It should also include a system for handling confidential and sensitive complaints. Since retaliation is a real risk and stakeholders need to be able to complain safely, the program needs to establish systems to process anonymous complaints. This should either be through a change in regulation specifically applying to the program or in the designation of a third-party body (an independent lawyer or non- government organization) to receive and process complaints on behalf of the program. 6.1 Program monitoring The Program closing date will be June 30, 2023. This provides for a very short time for monitoring. World Bank reserves the possibility to undertake monitoring, evaluation and review of the Program elements within this timeframe. Monitoring will be undertaken as necessary to guide the Program participants in ensuring effective implementation and beneficiation to the Ukrainian citizens. Monitoring activities will include: − Ensuring the satisfactory implementation of the Program; − Ensuring that borrowers are in compliance with environmental and social requirements; − Ensuring that environmental degradation is eliminated or minimized, and that mitigation measures are implemented and monitored. 7. Stakeholder Engagement and Consultations on ESSA, Grievance Mechanism General requirements For the purposes of the Program, a stakeholder is defined as any individual or group who is potentially affected by the Program or who has an interest in it and its potential impacts. The objective of stakeholder identification is therefore to establish which organisations and individuals may be directly or indirectly affected (positively and negatively) by, or have an interest in, the Program. Stakeholder identification is an ongoing process, requiring regular review and updating of the stakeholder database as the Program proceeds. 31 Key institutional stakeholders include MAPF, NBU, Implementing Agencies for governmental initiatives (5-7- 9 and PCGF), participating commercial banks, regional and local administrations, local extension offices and their workers. Key potentially affected stakeholders are expected to include small and medium sized farm businesses consisting of primary producers of agricultural products cultivating no more than 500 hectares of land. These farmers would be beneficiaries of loans issued or backed by governmental initiatives and those that choose to sell their land to loan recipients. Those small businesses and land users who are more vulnerable and less likely to participate in benefits include farmers with poor credit history, those dissuaded from borrowing due to the crisis, those from cultural minorities, the elderly and others who lack access to financial knowledge. Other interested parties may include local and national level NGOs, local governments, universities and other associations and cooperatives concerned with agricultural development, land issues and the rights of specific interest groups such as refugees. The Program should promote engagement of female-led businesses, and businesses led by entrepreneurs from disadvantaged groups or regions. Those stakeholders from more remote areas and from vulnerable backgrounds (elderly, female smallholder farmers for example) are more likely to perceive land reform and associated access to credit as being a benefit for the wealthy. Lack of engagement and consultation would result in delays and nonparticipation, threatening the achievement of development objectives. Communications and transparency will minimize levels of concern, help to identify landowners and users and minimize disputes. Without adequate stakeholder engagement, particularly at the level of PFI external communications about financial products on offer, the Program risks reinforcing perceptions of inequity in receipt of benefits tied to trust in governance and reform legitimacy. Record of Engagement and Disclosure on this ESSA The draft ESSA has been disclosed in-country on the Ministry of Agrarian Policy and Food website and on the World Bank’s external website to serve as the basis for discussion and receipt of formal comments. Following incorporation of the feedback received, this revised ESSA is redisclosed in-country and on the World Bank’s external website. Due to the current national emergency context a limited online consultation and disclosure period was launched and a stakeholder meeting held on February 13, 2023 to discuss the results of the ESSA and implications for the program restructuring. The ‘meeting to discuss the assessment of ecological and social systems within the framework of the Program acceleration of private investments in agriculture’ involved 23 participants from the Ministry of Agrarian Policy and Food, Department of International Cooperation and European Integration, the Ministry of Justice, and Ministry of Finance. Participants fielded questions on the implications of the restructuring for actions already undertaken for the program, how to communicate about the restructuring and program changes with stakeholders, and what the scope, timing and intent of the proposed 5-7-9 program audit was. A related virtual meeting was also held to consult on the ESMS and associated requirements for the World Bank Investment Project Financing (P180242) Partial Credit Guarantee Fund Strengthening Project on February 1, 2023. The event was attended by 480 people from 22 agricultural associations, 31 banks, 3 Ministries, 2 state enterprises, local authorities, and farmers. Participants asked clarifying questions about the essence of environmental and social obligations, reporting mechanisms and verification of compliance. The main questions were about: − if in the process of monitoring the implementation of the E&S requirements a violation will be detected by the borrower will this influence the validity of the guarantee? − what types of E&S requirements violation will influence guarantee validity? − what does the process of compliance verification with E&S requirements look like? In addition, 23 people took part in an online survey (6 farmers including one woman, 9 managers of agricultural enterprises, 2 representatives from banks and 6 representatives of local government). Some key observations included: of the 23 respondents, less than half, namely 11 people, knew about the PCGF. However, the majority rated their level of awareness regarding the possibility of attracting financing under 32 the guarantees of the PCGF as below average. Out of 10 people who did not know about the Project before the virtual meeting, only two rated their level of awareness about the possibility of attracting financing under the guarantees of the PCGF as above average. A total of 13 interviewees assessed that the information disclosure process and the virtual meeting gave them a sufficient opportunity to express their voice and give feedback on the Project's goals, and only one person, a farmer, believes that he had practically no possibility to express his voice. Out of 8 participants, 6 of whom are farmers' representatives, and 2 are representatives of local governments, believe that the majority or more than half of small farmers will use the mechanism of partial guarantee for agriloans. 7 participants out of 23 find it difficult to answer this question. Among the most relevant channels/means of communication for obtaining information about the Project's goals the participants identified meetings and posting information on the websites of Ukrainian banks in the first place, then - posting relevant information on the website of the PCGF, and in the last place were leaflets/posters/information notes/announcements. Among the additional options, the participants noted: placing information on the website of the state JSC Agrarian Fund, involving associations, public organizations, informing through regional departments of agriculture and online webinars. As for the consideration of complaints related to the implementation of the Project, the majority, namely 15 participants, agreed on the involvement of local authorities. Also, 4 participants left their suggestions and opinions regarding the introduction of partial loan guarantees in agriculture. One participant believes that it is impossible for a farmer who cultivates 100 hectares to get a loan in Ukraine. Regarding the proposals, there were the following: it would be expedient to involve in the Project, in addition to banks, also credit unions that focus on small farmers in their activities and know how to work with them; the state needs, at the level of the Verkhovna Rada and the Cabinet of Ministers, to develop a mechanism for credit holidays for loans and leasing for the period of martial law for agricultural producers who ended up in the occupied and front-line territories; for the transparency of the project, it is desirable to develop a procedure through the website, possibly a smartphone application; for the purposes of the project, allocate a separate section on the website of the state JSC Agrarian Fund; this program is designed for small farms that lack the capacity to apply for loans. There is suggested that the PCGF should be designed as transparent as possible, with minimal admin burden. This and future feedback from stakeholders will inform the due diligence and development of ESMS for the PCGF, which constitutes a key recommendation made by the ESSA for input to the program action plan. Stakeholder Consultation Consultations with relevant institutions, program affected peoples, experts, and beneficiaries are essential in the proper planning and preparation of development projects and programs, to ensure effective identification and assessment of environmental and social effects, and to recommend measures to improve environmental and social management capacity. Stakeholder consultations are an integral part of the ESSA process and will be carried out consistent with applicable World Bank principles. Grievance Mechanism The Grievance mechanism for the Program-related issues should be developed in accordance with World Bank Environmental and Social Standards. These include: − Establish a procedure for receiving, recording and documenting grievances that is easily accessible, culturally appropriate, and understandable to affected people/neighbours; it should include procedures for handling confidential and sensitive complaints; − Inform the affected people/neighbours about the mechanism during the public engagement process (if any); − Consider when and how to seek solutions to complaints in a collaborative manner with the involvement of the affected people/neighbours; − Address concerns promptly, using an understandable and transparent process; 33 − Ensure full participation of both genders and vulnerable groups; − Assign consistent, experienced, and qualified personnel with responsibility for receiving and responding to grievances. The objective of this grievance procedure is to ensure that all comments and grievances from people directly affected by the Program are considered in an appropriate way Receiving a grievance Any person or organization may send comments and/or complaints in person or via post, email or any other suitable ways. At all times, responsible financial institution (one of 33 commercial and state banks) responsible for credit provision will accept comments and complaints concerning the Program in both verbal and written formats. All grievances will be recorded in a Grievance Log, containing next information: − Name and contact details of aggrieved party; − Grievance description; − Corrective Action, etc. Following a grievance being recorded, responsible financial institution will acknowledge the grievance, in writing, within an indicated period and state that this is now being investigated in accordance with the grievance mechanism. Once a grievance is received and logged, the nature and extent of the problem will be assessed. During the assessment, financial institution shall consider the information provided, gather additional information about the case as necessary, and determine whether and how the complaint might be resolved. All comments and complaints will be responded to either verbally or in writing, in accordance with the preferred method of communication. Grievances need to be tracked and monitored as they proceed through the system. Tracking and documentation accomplishes several targets: − Document the priority of a complaint (high, medium, low). The level of priority guides requirements for alerting senior management and determines the seniority of management oversight needed. − Provide assurance that a specific person is responsible for overseeing each grievance—from receipt and registration to implementation. − Promote timely resolution according to the time periods specified in this document. − Inform all concerned parties about the status of the case and progress being made toward resolution. − Monitor the implementation of any settlement to ensure that it is timely and comprehensive. Grievance Redress Service: Communities and individuals who believe that they are adversely affected as a result of a Bank supported PforR operation, as defined by the applicable policy and procedures, may submit complaints to the existing program grievance redress mechanism or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www. worldbank. org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www. Inspectionpanel.org 34 − 35 Annex 1. Use of fertilizers in 2022 How much fertilizers are used by Ukraine’s farms in comparison to other countries? The use of fertilizers (N, P, and K) in Ukraine increased over time, along with the increased profitability of agricultural production. But the per hectare application of fertilizers in Ukraine continues to significantly lag that in peer countries, such as France, Germany, Poland, and the United States. The following three figures from the FAOSTAT depict a fertilizer use per hectare from 1996 to 2019. Nitrogen use, kg/ha of arable land 180 160 140 120 100 80 60 40 20 0 2006 2011 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 France Germany Poland Ukraine USA P2O5 use, kg/ha of arable land 70 60 50 40 30 20 10 0 France Germany Poland Ukraine USA 36 K2O use, kg/ha of arable land 90 80 70 60 50 40 30 20 10 0 France Germany Poland Ukraine USA What were the global prices of fertilizers in 2022 compared to the previous years? The prices of fertilizers spiked in 2022, following Russia’s invasion of Ukraine. The International Fertilizer Association predicted the decline in global demand for fertilizers by at least 1.6 percent in 2022. What was the impact of the higher global fertilizer prices on their consumption in Ukraine in 2022? There is no data available to the team on the actual fertilizer use in 2022. But it is highly likely to have decreased. The use of fertilizers and other inputs in Ukraine in 2022 is very likely to have declined much more than globally due to the sharply declined purchasing power of farmers as a result of the lower agricultural output prices. Prior to the war, the wheat prices in Ukraine closely followed the wheat prices on global markets (proxied see the figure below). Since February 2022, however, the prices diverged. While the global prices increased, wheat prices in Ukraine dropped. The latter started to increase only in July in anticipation of the Black Sea grain export initiative. Still, Ukraine’s prices of agricultural outputs remain at least 50 percent 37 below the global level due to the increased cost of logistics, which eats farm profits and reduces their purchasing power to buy inputs. The average outlays for fertilizers and to the lesser extent chemicals have significantly increased in 2022, according to the estimates of Ukraine’s agribusiness club. The cost of fertilizer per hectare of corn production increased by 2.4 times. Surely, less fertilizer was bought and applied in Ukraine in 2022 than in 2021. The lower gluten content of wheat of the 2022 harvest is also an indicator of the lower use of fertilizers in 2022. The average gluten content dropped from 25.9 to 21.6 percent, reducing the share of exportable wheat, which requires the gluten content to reach at least 23 percent. The lower use of nitrogen fertilizer is the main reason of the reduced gluten. Prior to the war, the estimated gap in fertilizers for the spring planting was estimated at 64 percent. In other words, only 36 percent of fertilizers was procured and ready to use by farmers before the war started. It is highly unlikely to assume that farmers bought all remaining fertilizers after February 2022. The most frequently used fertilizers in Ukraine’s agriculture are nitrogen fertilizers (N). They are mostly manufactured domestically. Overall, about 75 percent of fertilizers used in Ukraine are manufactured locally. The main importers of fertilizers included Belarus, Bulgaria, Poland, Egypt, Turkey, and Kazakhstan. The low share of imported fertilizers reduces the risk of having more ‘damaging’ fertilizers through imports in 2022. Plus, the limited availability of foreign currency during the war reduced the likelihood of importing fertilizers. 38 39 Annex 2. General Approach to Pest Management The primary aim of pest management should not be to eradicate all organisms, but to manage “pests,â€? including insect pests, diseases, and weeds that may negatively affect annual crops so that they remain at levels beneath an economically damaging threshold. Pests should be managed through a process of integrated pest management (IPM)9 that combines chemical and non-chemical approaches to minimize pest impact, while also minimizing the impact of such measures on the environment. Pesticides should be used only to the extent necessary under an IPM and integrated vector management (IVM) approach, and only after other pest management practices have either failed or proven inefficient. Integrated pest management (IPM) refers to a mix of farmer-driven, ecologically based pest control practices that seeks to reduce reliance on synthetic chemical pesticides. It involves: (a) managing pests (keeping them below economically damaging levels) rather than seeking to eradicate them; (b) relying, to the extent possible, on nonchemical measures to keep pest populations low; and (c) selecting and applying pesticides, when they have to be used, in a way that minimizes adverse effects on beneficial organisms, humans, and the environment. A pesticide management plan (PMP) that includes procedures for the selection, procurement, storage, handling, and ultimate destruction of all out-of-date stocks should be prepared in accordance with FAO guidelines and should be consistent with country commitments under the Stockholm (http://chm.pops.int/), Rotterdam (http://www.pic.int/), and Basel (http://www.basel.int/) Conventions. The PMP prescribes the type of pesticides to be used, as well as the purpose of their use, and outlines best practice for the procurement and storage of all pesticides. Personnel must have appropriate training—including certification, where relevant—to handle and apply pesticides safely. In particular: • Ensure that any pesticides used are manufactured, formulated, packaged, labeled, handled, stored, disposed of, and applied according to the FAO’s International Code of Conduct on Pesticide Management (http://www.fao.org/fileadmin/templates/agphome/documents/Pests_Pesticides/Code/CODE_201 4Sep_ENG.pdf). • Do not purchase, store, use, or trade pesticides that fall under the World Health Organization’s (WHO) Recommended Classification of Pesticides (http://www.who.int/ipcs/publications/pesticides_hazard/en/) by Hazard Classes 1a (extremely hazardous) and 1b (highly hazardous), or Annexes A and B of the Stockholm Convention on Persistent Organic Pollutants • Do not use pesticides listed in WHO Hazard Class II (moderately hazardous), unless the project has appropriate controls established with respect to the manufacture, procurement, or distribution and/or use of these chemicals. These chemicals should not be accessible to personnel without proper training, equipment, and facilities in which to handle, store, apply, and dispose of these products properly. • Preferentially, use selective pesticides with low environmental impact quotient (EIQ) where appropriate, rather than broad-spectrum products, to minimize impacts on non-target species. • Manage expired and unwanted pesticides as hazardous wastes in accordance with the General EHS Guidelines and Food and Agriculture Organization (FAO) Guidelines for the Management of Small Quantities of Unwanted and Obsolete Pesticides (http://www.fao.org/fileadmin/user_upload/obsolete_pesticides/docs/small_qties.pdf) 40 Annex 3 Scope of E&S Audit for Existing Borrowers Under Governmental Initiative 5-7-9 E&S audit of a representative screening sample of SME farms in selected regions (covering but not restricted to those that received agricultural loans in 2022) to assess and confirm the following: • number of financed activities (loans) that required EIA and AIE, environmental permits of any kind and their approval status; • existing ESMS in the PFIs, their application to 5-7-9 loans, and recommended improvements; • water quality: quantities of use and source of water for any purposes (drinking, irrigation, preparation of agrochemicals etc.); sources of wastewater generation, quantities and procedure of wastewater treatment and discharge implemented by the borrowers; • soil quality: availability of agrochemical passport/s of the land plot/s (mandatory or voluntary issue); any additional soil investigation of the land plot under the loan; • chance finds (if any) or any biodiversity impacts incurred, follow-up actions (studies, management plans etc.); • incidents related to health and safety of the public and workers (types of incidents, follow-up actions, finalized and pending legal proceedings); • chemicals, agrochemicals and fertilizers: o list of agrochemicals and fertilizers that are used by borrowers (see guidance for applicable standards in Annex 2); o methods for agrochemicals and fertilizers induction to the soil (compliance with sanitary protection zone, notification to local population before use, if required); o storage methods and facilities for chemicals, agrochemicals and fertilizers; o procedure for storage and disposal of empty containers from agrochemicals and fertilizers; • air pollution: monitoring program of the exhaust gases of vehicles (list of monitoring activities, performing party, frequency, the results of the latest inspections); source of vehicle fueling – in case the borrower owns a fuel station documents on AST and/ or UST (passports, acts on consistence etc.); procedure for vehicles repair, including procedure of oil change; • waste management: procedure for waste management (types of waste streams, collection procedures, company responsible for collection, transportation and disposal (licenses for these activity)); • incidents related to natural and man-made hazards; • any disputes (legal and out-of-court) over land rights and/or economic displacement; • existing GM, details of received grievances and status of their consideration. 41