PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: PIDA3989 Public Disclosure Copy Project Name Horticulture Development Project (P133703) Region EUROPE AND CENTRAL ASIA Country Uzbekistan Sector(s) Agricultural extension and research (23%), SME Finance (77%) Theme(s) Rural markets (100%) Lending Instrument Investment Project Financing Project ID P133703 Borrower(s) Ministry of Finance Implementing Agency Rural Restructuring Agency Environmental Category B-Partial Assessment Date PID Prepared/Updated 18-Apr-2014 Date PID Approved/Disclosed 21-Apr-2014 Estimated Date of Appraisal 18-Apr-2014 Completion Estimated Date of Board 10-Jun-2014 Approval Decision Public Disclosure Copy I. Project Context Country Context Uzbekistan, a low middle-income, resource rich, landlocked country, is the third largest country in Central Asia by land mass, and the largest in terms of population (30.5 million as of January 1, 2014). The Uzbek economy grew strongly over the past decade and showed resiliency during the global financial crisis. GDP growth averaged 8% per year over the period 2004–12, and reached US $56.8 billion (in 2013, current US$, World Bank), while GDP per capita grew on average 6.4% per year over the same period. Poverty declined from 27.5% of the population in 2001 to 15% in 2013 due to rapid economic growth, creation of new small businesses and jobs, large government investments in education, health and infrastructure, increases in public sector salaries, and increased remittances. However, the elasticity of poverty reduction to GDP growth remains low, including due to low productivity of the agricultural sector and regional divergences in growth. Going forward, Uzbekistan’s development strategy aims to transform the country into an industrialized upper middle-income country by the middle of the century. The World Bank twin goals of poverty reduction and shared growth are central to the authorities’ development agenda. One of the cross- cutting development policy goals and priorities include that the benefits of overall growth are to be shared equitably by the entire population. It is pertinent to the shared prosperity agenda, as well as the poverty agenda, of the World Bank Group. Along the line of these directions, the authorities’ Page 1 of 8 development programs are focused on disadvantaged regions, which include Karakalpakstan and the Fergana Valley areas. Public Disclosure Copy Sectoral and institutional Context Agriculture plays an important role in Uzbekistan's economy. In 2012, 49 percent of the population - more than 14.5 million people - lived in rural areas. As in many parts of the world, the majority of poor people live in rural areas, and the sector has a significant impact on rural livelihoods, jobs, and food security. In 2010, agriculture provided 25 percent of total employment. Although agriculture’s contribution to GDP declined from 34 percent in 2001 to 19 percent in 2011, farm output has doubled in real terms and continues to grow steadily, at a rate of 7.1 percent per year. Uzbekistan has become a major producer of horticultural products, with a global potential. Uzbekistan is among the top five producers of apricots in the world, the sixth largest producer of cherries, and seventeenth in apple production. It has a comparative advantage in horticulture based on its natural endowments. Its agro-climatic conditions, which are similar to Chile, Turkey, and California in the United States, support many of the same crops grown in in these countries. It produces a large variety of fruits and vegetables, including some sub-tropical fruits, such as persimmons and pomegranates. Its climate supports two vegetable crop harvests in most places, and three harvests in some regions. The climate also allows farmers to grow crops with different ripening periods (early, medium, and late) throughout the year. Favorable conditions also reduce problems related to pests and diseases. Farmers often use organic fertilizers and the weather also allows high productivity without the heavy use of pesticides. These special features give farmers a unique opportunity to deliver high-quality fruit, nuts and vegetables to domestic and high-end export markets. The agricultural sector has been going through continued farm restructuring. Since 1998, the former state and collective farms were converted into cooperative farms (shirkats), where production assets Public Disclosure Copy were managed by families, who held ownership shares. Between 2002 and 2007, the government undertook a massive conversion of shirkats into private leasehold farms, with land allocations under long-term leases for 30-50 years. These farms (set at 30 ha) are generally subject to cotton and/or wheat production quotas, for which they receive support from the government, unless they are designated for growing other crops (e.g. 5 ha per horticultural private farm). Private leasehold farms specializing in horticulture are given some latitude to decide what they produce. There were about 66,000 private leasehold farms in Uzbekistan in 2010. Starting in 2006, "agri-firms" - non- government associations and private firms that participate in the distribution and processing of fruits and vegetables - were established within the horticulture sector. There are currently around 270 agri-firms in the country. At the same time, there are about 4.7 million dehkan/household farms with small-scale agricultural land plots (0.35-0.5 ha), largely based on household labor. Dehkan farms operate independently, without government intervention or material support. Figure 1: Output of Key Agricultural Products, 1990-2010 Horticulture is an important component of the agricultural sector in Uzbekistan, although its significance is easy to miss. Compared to traditional crops such as wheat and cotton, the footprint of horticulture is small. Horticulture accounts for about 16 percent of the aggregate arable lands in contrast to grains (47 percent) and cotton (37 percent). However, with a growing domestic and export market, the area devoted to horticulture has increased steadily, primarily by displacing land used to grow cotton. Consequently, horticultural production has been increasing faster than Page 2 of 8 traditional crops in recent years. The economic impact of the fruit and vegetables subsector is large, accounting for 50 percent of the value of crop output and over 35 percent of agriculture export value. Public Disclosure Copy Growing domestic and external demand generates new opportunities for Uzbek horticulture. Steady economic growth over the last 10 years, resulting in rising household incomes, a growing population and increased urbanization contribute to the increased domestic demand for horticultural products. Indeed, today, most fruits and vegetables are consumed domestically. Fruits are mostly consumed fresh (about 69 percent), while about 11 percent is exported and 20 percent is processed (e.g. jams, juices, dried fruits). Similarly most vegetables are also consumed fresh (81 percent), 11.3 percent is processed by the domestic food industry, 4.3 percent is utilized for seeds, and the remaining 3.4 percent is exported. Most fresh vegetables are grown by private farmers and small household farms and supplied to local markets. But there are also some large Agro-firms which grow and supply vegetables under contract to fruit/vegetable processing companies. Uzbekistan’s horticultural products are fast becoming the second largest agricultural export commodity group, after cotton (i.e. cotton lint, linter and oil). Horticultural export revenues have more than tripled, from about US$373 million in 2006 to US$1.2 billion in 2010. Uzbekistan is geographically well positioned to take advantage of the large and growing markets for horticultural products domestically and abroad. Uzbekistan’s main export markets are its neighboring Commonwealth of Independent States (CIS) republics (in particular Russia and Kazakhstan), and some European and Asian countries. Russia and Kazakhstan accounted for about 93 percent of Uzbek fruit and vegetable exports (around US$700 million) in 2011. However, Uzbekistan is far from fully realizing its potential in international markets. Meeting quality and food safety requirements of the more stringent export markets remain a challenge. Horticulture sector development has received increased government priority in recent years. Food security concerns, increasing water scarcity – projected to be exacerbated by climate change, and Public Disclosure Copy the environmental and social problems associated with cotton production have spurred the shift in the cropping structure in the country - first to wheat to achieve food security, and now to horticulture crops, to capture the benefits of the growing domestic and lucrative export markets. The environmental and social benefits are also notable, as horticulture crops are less water intensive, they offer the highest potential for increasing incomes (their gross margins per ha are up to five times higher compared to cotton and wheat), and they generate more all-season employment. Horticulture is an important source of livelihoods for the 4.7 million dehkan farmers who comprise the poorest households. The government is supporting the increased expansion of the horticulture area through greater direct technical and financial support to the sector, e.g. through various trade and export promotion activities and in partnership with the World Bank, including through the Second Rural Enterprise Support Project, RESP II ($67.96 million), its additional financing ($40 million) and this proposed project. More rapid growth of the horticulture sector, however, is hampered by several constraints. There is limited knowledge by farmers and entrepreneurs on modern and improved horticulture-related technologies and farm practices to increase productivity and reduce post-harvest losses and on mechanisms to more effectively link farmers to markets. Uzbekistan yields of major horticultural crops remain below those of other leading producing countries. The horticulture value chain is developing, but many market bottlenecks remain, including inadequate infrastructure (e.g. cool- chains, grading and packing facilities), a weak market information system, and limited private Page 3 of 8 sector capacity to meet quality and food safety standards in different markets. In addition some government policies constrain private activities. For example, the Government sets minimum export prices and sometimes intervenes to restrict exports. Public Disclosure Copy Organizations engaged in export of horticultural products are included in the list of exporters approved by the Government. To assure that domestic markets are well supplied, the Government may sometimes deny export requests. As a result, the system encourages the use of informal and illegal marketing channels, and this stands in the way of building up the type of formal markets needed to access premium markets, domestically and abroad. Farmer and private enterprise capacity to address these constraints are further impeded by limited access to finance for working capital and/or long term capital to undertake needed investments. Although lending for agriculture has increased (including through RESP II and its AF), the demand is considerably greater. It is estimated that the investment needs in the horticulture sector is more than US$1 billion. The financing needs for planting of new orchards and vineyards and replacement of some old ones alone is estimated to be in the order of about US$600 million. The project will contri bute to addressing these constraints at several levels. It will support the strengthening of key research institutes and exte nsion services, and in collaboration with private input providers, implement various training and demonstration activities to promote the adoption by farmers of improved technologies and practices. It will support value chain development through measures to strengthen market information and quality and food safety systems in the country, technical assistance to the government on improving the policy environment for the horticulture sector, and by providing a line of credit to increase access to finance by farmers and private sector entrepreneurs to undertake the needed investments to improve their competitiveness. Child and Forced Labor in the Cotton Sector. Although the use of child and forced labor tends to be limited to the cotton sector, the project recognizes the concern over the use of child and forced labor in the agricultural sector. Such practice is ostensibly driven by a combination of socio-economic Public Disclosure Copy factors and the peculiarities of agricultural production arrangements in the cotton sector. Other crops, particularly horticulture (which this project supports), are not subject to state procurement quotas and operate under a more liberalized market environment. Driven by market conditions, horticulture is more profitable, and consequently may offer more competitive wages to attract wage labor. Further, as horticulture production is steady throughout the year, rather than seasonal, it does not necessitate the availability of a large number of seasonal workers. In this respect, the project will require all participating financial institutions (PFI), agri-firms and farmers benefiting from the project to sign legally binding agreements prohibiting any form of child and forced labor in project activities or in the project area. In case of established non-compliance with laws and regulations on child and forced labor by a beneficiary utilizing sub-financing from a PFI, the disbursed amount of the sub-financing will be refunded to the Rural Restructuring Agency and the undisbursed amount cancelled, and the PFI will be disqualified from further participation in the credit line. The World Bank, in consultation with the government and development partners, has adopted a multi-pronged approach to address child and forced labor issues in Uzbekistan. These include (i) pursuing continuous country dialogue and collaboration with international/multilateral agencies and donors to address these issues; (ii) performing sector analytic work and policy dialogue to promote diversification away from cotton and mechanization of cotton harvesting; (iii) strengthening project-level mitigation measures and binding provisions, including implementing a Third Party Monitoring (TPM) and Feedback Mechanism (FBM) to help address child and forced labor issues Page 4 of 8 in connection with the project activities or within the project areas; and (iv) promoting crop diversification and intensification, and supporting agricultural mechanization through a number of investment operations, including the RESP-I, RESP-II, AF-RESP-II, the proposed South Public Disclosure Copy Karakalpakstan Water Resources Management Improvement Project and this project. This comprehensive effort to eliminate the use of child and forced labor in cotton harvesting has received wide support and endorsement from development partners and community based organizations. With an aim to eliminate child and forced labor, the World Bank and Government of Uzbekistan have agreed on an initial list of projects which would be subject to the World Bank- managed TPM and FBM and this project is one of them. The TPM and FBM will be financed through a separate Trust Fund and will focus on child and forced labor issues. Although this project will exclusively support horticulture related activities, where child and forced labor is unlikely to be found, it adopts other provisions to address child and forced labor issues, including: (i) awareness raising and training of beneficiaries on the national legislation regarding child and forced labor, (ii) all credit line beneficiaries are required to comply with the applicable laws and regulations on forced labor and child labor; and (iii) credit line beneficiary selection criteria that excludes those engaged in cotton production. II. Proposed Development Objectives The project development objective is to enhance the productivity and profitability of horticulture sector in the project area. III. Project Description Component Name Agricultural Support Services Comments (optional) Component 1: Agricultural Support Services. This component will (i) strengthen the capacity of participating research institutes and plant protection services to provide demand driven, Public Disclosure Copy participative technology transfer that will help the farmers to respond to the emerging market opportunities; (ii) enhance the capacity of farmers to improve quality and productivity of their product, as well as to identify and respond to market opportunities both domestically and in export markets; (iii) improve the country’s food safety management system, as well as ensure their regulatory harmonization with international food safety requirements. Component Name Access to Credit Comments (optional) Component 2: Access to Credit. The component aims to enhance access to financial services for farmers and agribusinesses operating in Uzbekistan’s horticulture sector, to enable them to undertake the investments to strengthen their productivity and competitiveness. It will support activities including the purchase of new cultivars, seeds/seedlings, water-saving irrigation facilities (such as drip irrigation), cold storage and other cold chain facilities, and value added handling/ processing equipment and facilities. The component will build on the experience gained during Second Rural Enterprise Support Project (RESP II) which has achieved sizeable results with the provision of financial services to Uzbekistan’s agricultural enterprises. Component Name Project Management Page 5 of 8 Comments (optional) Component 3: Project Management. The component will be focused on strengthening the Rural Restructuring Agency (RRA’s) capacity for project management, monitoring and evaluation through Public Disclosure Copy the provision of goods, consultant services, training and financing of incremental operating costs. This component will: (i) support operation of RRA, and finance overall project management, as well as contract administration, procurement, and financial management; and (ii) establish a robust performance based Management Information System (MIS) and beneficiary satisfaction survey, and arrange for data collection and reporting on key performance output and impact indicators, through baseline surveys, participatory assessments, mid-term review and final evaluation. In addition, the RRA wi IV. Financing (in USD Million) Total Project Cost: 160.00 Total Bank Financing: 150.00 Financing Gap: 0.00 For Loans/Credits/Others Amount Borrower 10.00 International Bank for Reconstruction and Development 150.00 Total 160.00 V. Implementation Institutional and Implementation Arrangements Overall responsibility for implementation of the project will rest with the RRA. The RRA is a specialized organization that was created for implementing investment projects in the agriculture and rural sector. It implements a number of donor-funded projects, including the RESP II and Global Environment Facility (GEF) Sustainable Agriculture and Climate Change Mitigation project. Public Disclosure Copy RRA is staffed by a number of teams with responsibility for implementing specific projects. Financial management of the HDP will be undertaken by a dedicated Chief Accountant who will be based at the Central RRA office in Tashkent. The Chief Accountant will liaise with financial specialists in the seven regional offices in disbursement, accounting and reporting. All of the financial management specialists will be trained and have experience in the World Bank financial management guidelines and requirements. Specialized institutes such as the Mirzayev Institute, Uzbek Scientific Research Institute for Plant Protection (UzNIIZR) and Institute of Vegetables, Melon Crop and Potato (IVNCP), the Uzbekistan State Center for Standardization, Metrology and Certification (Uzstandart) and Uzbekistan Chamber of Commerce will have responsibilities for implementing specific sub-components of the project. A marketing and trade consulting company with international experience in development of value chains and productive linkages and identification of market opportunities will be assisting the RRA in the implementation of these activities. In terms of the Credit Line, the RRA will be responsible for overall implementation and monitoring. The PFIs will be responsible for the implementation of the Credit Line, but due diligence will be carried out by international consultants in collaboration with the RRA. Selection of recipients for the Credit line, appraisal of sub-projects loans and execution of disbursement and loans will be the responsibility of the PFIs. Training of the PFIs will be carried out by international consultants Page 6 of 8 together with local trainers to ensure transfer of knowledge from RESP II experiences and continuing of training. Public Disclosure Copy Results Monitoring and Evaluation: Monitoring and evaluation activities will be managed by the Central RRA Office, including aggregation of information from the field, reporting on findings and ensuring that these results are reflected in quarterly and annual progress reports. A dedicated Monitoring and Evaluation (M&E) Officer in the Central RRA will be responsible for this task. The M&E Reports will also propose actions to resolve any issues affecting implementation. In addition, a dedicated Environment Officer in the Central RRA Office will monitor and evaluate the implementation of environmental, pest management and social safeguard activities of the project. Sustainability: The development of a sustainable horticulture sector requires building the capacity farmers, farmers group, entrepreneurs and research institutes in Uzbekistan to meet emerging market opportunities and challenges. The previous strong role of government in managing resource allocation, farming operations and maintenance in infrastructure has now been transferred to the farmers. The project will support capacity building of horticulture farmers, vulnerable groups (such as women, elderly, youth, unemployed, etc.) in the horticulture sector, and entrepreneurs, foster market linkage development, and facilitate their finance to enable them to undertake the needed investments to meet the new market opportunities. It would also support the establishment and development of a Fruit and Vegetable Industry Association of Uzbekistan (comprising horticulture farmers and traders) to look after the interests of the horticulture producers in the longer-term. The project would commission a study during the second half of the project period to determine the most appropriate form and structure of this association. Investments under Components 1 and 2 will result in: (i) improved agricultural productivity and production intensification and diversification; (ii) decreased production losses due to improved storing, cooling and packing facilities; and (iii) improved water management by introducing water saving technologies. Public Disclosure Copy The sustainability of the results achieved under the project will be multiplied as the credit line funds will continue revolving in the PFIs for a period of 20 years, with a gradual re payment of the funds to the MOF according to the agreed schedule. The new sub-loans extended will have to be in accordance with the operational guidelines of the credit line and aimed towards continuing achievement of the project PDO. The technical sustainability of the credit line will be ensured through provision of relevant training and hands-on technical assistance to the PFIs. The PFIs will be trained in applicability of the new financial products, assessing the suitability and effectiveness of these new products, and on mitigation of the related risks. The sustainability of the funding that the PFIs will be receiving will be ensured by using the RRA that has accumulated extensive experience and continues to monitor the implementation of the previous World Bank-financed credit lines. Further, under the established Credit Line, the PFIs will continue to relend back to back to new/ additional sub-borrowers beyond the life of the project until these funds have to be repaid to the Ministry of Finance after a period of twenty years. This will ensure that the benefits of the project will continue to be extended well beyond the project period. VI. Safeguard Policies (including public consultation) Page 7 of 8 Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✖ Public Disclosure Copy Natural Habitats OP/BP 4.04 ✖ Forests OP/BP 4.36 ✖ Pest Management OP 4.09 ✖ Physical Cultural Resources OP/BP 4.11 ✖ Indigenous Peoples OP/BP 4.10 ✖ Involuntary Resettlement OP/BP 4.12 ✖ Safety of Dams OP/BP 4.37 ✖ Projects on International Waterways OP/BP 7.50 ✖ Projects in Disputed Areas OP/BP 7.60 ✖ Comments (optional) VII. Contact point World Bank Contact: Dilshod Khidirov Title: Senior Rural Development Specialist Tel: 5771+255 Email: dkhidirov@worldbank.org Borrower/Client/Recipient Name: Ministry of Finance Contact: Mr. Jamshid Kuchkarov Title: Deputy Minister Tel: (998 71) 233-7073, 139-1132 Public Disclosure Copy Email: JKuchkarov@mf.uz Implementing Agencies Name: Rural Restructuring Agency Contact: Title: Tel: /Fax: (998-712) 371-657 Email: resp_sks_uz@slider.sks.uz VIII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Page 8 of 8