Uzbekistan: Ferghana Valley Rural Enterprise Development Project (P166305) Implementation Support Mission, October 14-23, 2024 Aide Memoire A. Introduction 1. A World Bank (the Bank) Implementation Support Mission1 (the mission) was conducted for the Ferghana Valley Rural Enterprise Development Project (the project) during October 14-23, 2024. The mission would like to thank the officials of the Ministry of Agriculture (MA), the Ministry of Economy and Finance (MEF), the Agency for Innovative Development (AID) under the Ministry of Higher Education, Science, and Innovation (MHESI), the Entrepreneurship Development Company (EDC), the Chamber of Commerce and Industry (CCI), the Project Implementation Unit (the PIU), the International Strategic Center for Agri-food Development (ISCAD), the Participating Financial Institutions (PFIs) and other organizations and project beneficiaries in Ferghana, Namangan, and Andjian provinces for their support in facilitating the work of the mission. 2. The mission carried out a review of the implementation progress of all key project activities including safeguards and fiduciary activities, identified implementation bottlenecks and issues and agreed with the Government counterparts on a time-bound action plan to address them. The mission undertook a field trip to Ferghana, Namangan, and Andijan provinces and consulted with the project beneficiaries and also organized a roundtable meeting with the representatives of the PFIs and the beneficiaries. The list of key persons met during the mission is provided in Annex 1. 3. This Aide Memoire (AM) summarizes the key findings and recommendations of the mission and the follow-on discussions conducted with the Government counterparts. The wrap-up meeting of the mission was held on October 23, 2024, which was chaired by the Director of ISCAD, the Ministry of Agriculture. The summary of project progress, key issues, and actions agreed to address the implementation bottlenecks are provided below. The full list of actions agreed during the mission is presented in Annex 2. The updated Results Framework is in Annex 3. The findings and recommendations of this AM are subject to review and approval by the management in the Bank. B. Project Data and Milestones Table 1: Key project data and ratings (October 23, 2024) Project Data US$ (millions) Original Project Amount 200.00 Total Disbursement 152.02 Disbursement in FY24 10.4 Closing Date July 31, 2025 Project Ratings: Previous Current PDO S S IP MS MS Component 1: Enterprise Development MS MS Component 2: Access to Finance S S Component 3: Project Management MS S Procurement MS MS Financial Management S S C. Implementation Progress and Key Findings 1 The mission comprised of Messrs. Bayarsaikhan Tumurdavaa, Senior Agriculture Economist/TTL; Dilshod Khidirov, Senior Rural Development Specialist/Co-TTL, James Hammersley, Credit Guarantee Specialist/Consultant; Nodira Akhmedkhodjaeva, Environmental Specialist; Akbarjon Khamraliev , Social Development Specialist; Adkham Ergashev, Credit Line Specialist/Consultant; Sanjeet Kumar, Senior Procurement Specialist; Nurgul Tatybekova, Financial Management Specialist; and Shakhnoza Aslanova, Program Assistant. 4. The project continues to make steady progress in all its key activities in the sixth year of its implementation. The project financed the establishment and operation of nine Business Incubation Hubs (BIHs) in Andijan, Namangan and Ferghana provinces, which supported the local entrepreneurs in business idea conceptualization, business plan preparation, facilitated access to finance, technology infusion, skills development, and provided market intelligence and linkages. The project, with the participation of CCI also supported the training of 3,133 project initiators in 36 districts of Ferghana Valley (including 1,478 women and 1,571 youth) through 448 practical activities for market promotion and technology testing. 5. The project also financed a total of 528 investment sub-projects with US$125.53 million of project fund, of which 81.9% were for small business entrepreneurs with an average loan size of up to US$125,000. According to the midterm impact assessment report and the implementation progress report, the project facilitated the creation of around 19,080 new jobs, of which 72.3% of jobs (13,795) are for women. The partial credit guarantees in the amount of US$16.9 million were provided to 140 business entities in the project areas. Around 74.5% of the respondents rated the benefits of the credits provided under the project as “high” and 77.8% of the respondents acknowledged that the credits opened new markets to sell their products. 6. During the past six months (since the last implementation review in May 2024), the project: (i) provided training for additional 641 business entrepreneurs at BIHs; (ii) started the implementation of 31 innovation startup businesses; (iii) supported overseas training and the capacity building activities for 12 employees of the EDC JSC; and (iv) financed additional 10 subprojects with the value US$2.36 million through credit line activities. 7. With renewed efforts of the PIU and the implementing agencies to accelerate the project implementation, the coordination between the PIU, the Agency of Innovative Development (AID), and the CCI has improved. However, the implementation pace of the credit line activities and innovation business start-ups slowed down mainly due lower than expect demand and there is a need to accelerate its implementation. During the mission, the Bank team and the Government counterpart have identified the specific implementation bottlenecks and agreed on time-bound actions to address them (see details in Annex 2) including the expansion of PFIs interested to participate in the project and the reallocation of currently unutilized resources to agriculture machinery leasing services, which are currently in high demand in the project area. 8. As of November 7, 2024, the project disbursement stands at 76.01% (US$152.02 million of US$200 million was utilized). The key PDO-level and intermediate results indicators are on track in meeting their targets. Based on the progress achieved so far, the rating for the progress towards achieving the project development objective (DO) remains Satisfactory and the rating for the implementation progress (IP) remains as Moderately Satisfactory. The project progress by components, the fiduciary (FM and procurement) and safeguards (social and environmental) performances (including current project bottlenecks and time-bound actions to address them) are discussed in the next sections. Component 1: Enterprise Development 9. This component facilitates the establishment and growth of micro-, small-, and medium- size enterprises (MSMEs) through: (i) business incubations and mentorship; (ii) technical and advisory support for innovation start-ups; (iii) targeted technical assistance and support packages for producer groups and enterprises in cluster areas; and (iv) market promotion and technology demonstration events targeting MSMEs. The component consists of the following three sub-components: Sub-component 1.1: Business Incubation and Mentorship; Sub-component 1.2: Cluster and Value Chain Development; and Sub- component 1.3: Market Promotion and Technology Testing. 10. Sub-component 1.1: Business incubation and mentorship. The sub-component delivers business and financial services directly to rural entrepreneurs. For doing this, the project has adopted two strategies: (i) setting-up of financial and business development service centers at BIHs, which are the physical locations equipped with human and digital (ICT-enabled) capacity to reach out to 36 districts in three regions to identify and train local entrepreneurs (with focus on women and youth), who are interested in setting up new businesses; and (ii) supporting of innovation start-ups in translating innovative technologies or business models into viable enterprises through sustained engagement and support for new technology/innovations focusing on challenge competitions for selection of ideas and participants and supporting start-ups to move from ideas to business plans. 11. BIHs: This activity is currently implemented by the Uzbekistan CCI through an ongoing contract of US$2 million signed between the ISCAD and the CCI. The scope of the CCI contract is to establish nine BIHs in Andijan, Namangan, and Fergana regions to support entrepreneurs in business idea conceptualization, business plan preparation, handholding to initiate a business, facilitate access to finance, technology infusion, skills development/upgradation, ensure regulatory compliances, provide market intelligence and linkages, and mentoring. 12. The mission noted that all nine BIHs are functioning well, the key staff positions filled, and the IT equipment for training installed. A series of training modules and materials have been developed and uploaded in the online platform (www.educat.uz) which is currently used for virtual/online training. The CCI signed a memorandum with the Association of Businesswomen and the Youth Union of the Republic of Uzbekistan. The memorandum enhances the inclusion of women and youth in the project activities and helps achieve the results specific to women and youth. 13. Various activities carried out by BIHs created the processes and systems necessary for delivering business and financial services to potential entrepreneurs. The project’s latest progress report shows that, as of today, around 3,133 project initiators (including 1,478 women and 1,571 youth) have been trained in 36 districts through 448 practical activities for market promotion and technology testing. The project is largely on track in achieving the end targets for the PDO- and intermediate-level indicators in the Results Framework. 14. The mission noted that there is an expected saving of around US$550,000 for activities related to BIHs due to lower than initially estimated costs of innovation subprojects being financed under the project. The AID, the implementing entity proposed to use these savings for additional training and for procurement of equipment to support the implementation of start-up projects. It was agreed that the AID and PIU will prepare an updated plan on the use of expected savings and submit it to the Bank for review and approval November 20, 2024. 15. Innovation start-ups: Based on the agreement signed between the Ministry of Innovative Development (MID) and the MA to implement a technical assistance in the amount of US$ 3.0 million, the start-up business activities under this sub-component are being supported through an acceleration company (consortium led by Ekvita Consulting LLC), under which the consortium provides business acceleration services for the implementation of incubation of start-ups for the AID.2 This activity provides business incubation and acceleration training and capacity building activities for the government institutions and at the same time renders business advisory and mentoring support to start-ups involved in the project. 16. Till now, under this contract a number of outputs has been delivered, which include: (i) development of a Toolbox3 for start-up acceleration/incubation professionals; (ii) development of operational guidelines4 to run start-up competition; (iii) development of communication strategy for promotion of start-up competition; (iv) training events for entrepreneurs and incubator/accelerator staff (till date acceleration/incubation staff (37.5%), entrepreneurs (16%), mentors (35%) have undergone training); and (v) launch and facilitation of the first innovation start-up competition. The consulting firm, together with AID, has chosen 75 start-ups. The financing of these start-ups by PIU has started. As of October 1, 2024, the financing of 31 startups (worth $457 000) has begun, so far $125 000 was disbursed. The consulting firm is planning to organize training for startup initiators who began to receive funding until the end of 2024. 2 Following reorganization of government ministries in January 2023, the MOD became the AID under the MHESI. 3 The toolbox provides methodological guidelines systemizing and demonstrating all processes necessary for the planning, operation, monitoring and evaluation of acceleration support that will be integrated in the start-up acceleration program. 4 Includes steps for identification of start-ups and acts as a flywheel for the identification of final beneficiaries of incubation/acceleration services. 17. For the start-up competition, an announcement was published in AID’s webpage. The project has made additional efforts to reach out through other social media platforms, and as a result, 75 start-ups were selected by the Selection Committee, which were submitted to the ISCAD for the next steps of the implementation. The PIU and the AID agreed to finalize the selection of 25 remaining start-ups and to finish financing already selected start-ups in the first quarter of 2025. 18. During the meeting with CCI, it was proposed and agreed to direct some of the funds allocated for CCI to activities aimed at developing educational, methodological, scientific capacity of regional business incubators, as well as organization of mutually beneficial events with neighboring countries in Fergana Valley. 19. To further expedite the implementation of innovation start-ups, the PIU and the AID have agreed to finalize the signing of agreements for 75 start-up businesses by December 23, 2024 and start their implementation and sign the remaining 25 start-up businesses by March 31, 2025. 20. Sub-component 1.2: Cluster and value chain development. These cluster development activities focus on groups of producers/enterprises and finance demand-driven investments to strengthen value chains and expand or establish enterprise clusters that seek to expand productive activities or reach new markets. These activities aim to integrate value chains, improve competitiveness, and develop an ecosystem of enterprises that deliver greater quality, volume, and profitability. 21. The project has contracted the services of a local consulting firm "Expert Info" LLC to collect and analyze the relevant data and information on cluster projects in Fergana Valley. Based on the final report submitted by the consultant, a list of activities to be carried out was identified for implementation. Subsequently, “Bureau” LLC, under a separate contract, organized training seminars for local entrepreneurs, farmers, government, commercial banks, and other stakeholders to support the implementation of cluster projects in Ferghana Valley, developed and published methodological manuals, and organized capacity building trips and exposure visits. 22. The PIU recently finalized the TORs for consulting services to diagnose clusters in Fergana Valley, to propose recommendations on type of support needed by the cluster, to carry selection of clusters and to provide technical assistance for the selected clusters. The diagnostic work is expected to start in November 2024. 23. Sub-component 1.3: Market promotion and technology testing. This sub-component focuses on supporting a set of market promotion and technology testing activities to facilitate the launching of enterprise clusters or SME activities. Activities planned were market-led technology transfer through demonstrations of improved technologies, support for trade promotion, and assessment of export and domestic marketing policies. 24. Under this sub-component, the project financed the construction of hangars for setting-up of the “Andijan Experimental Exhibition Site” under AID in Andijan. This also includes an installation of innovation promotion equipment. The construction of the hangars is completed. During the Mission, in order to make both hangars and the delivered equipment fully operational, it was stated the Andijan Experimental Exhibition Site required infrastructure work. However, they do not have allocated funds for this purpose. Therefore, they have requested that the funds from the saved budget within Subcomponent 1.3 to finance these infrastructure works. The cost-estimate of works have been provided. 25. 26. Under this sub-component, the project financed the construction of hangars for setting-up the “Scientific and Practical Center for Innovative Development” under the AID in Andijan. This also includes an installation of innovative equipment. The construction of hangars and installation of equipment inside are designed to demonstrate new technologies to the local entrepreneurs. By visiting this practical site an entrepreneur will get acquainted with the new technology as well as have the chance to familiarize with the production process, calculate real future risks, incomes. Entrepreneurs will also have an opportunity to discuss and get practical options how to further promote the final product in local and/or external markets. After some delays, the construction of the hangars has now completed, but the connection to some infrastructure including electricity and water still needs to be completed, which will require a marginal amount of additional fund. The PIU has agreed to address this issue and complete the connection to infrastructure and make the hangar fully operational. The cost estimates of the additional works have been provided to the PIU. The performance rating of Component 1 is rated as Moderately Satisfactory. Component 2: Access to Finance 27. This component facilitates the enhanced access to financial services by micro-, small-, and medium-size enterprises (MSME) in the Ferghana Valley along with the value chains targeted by the project to enable them to undertake the necessary investments to strengthen their productivity and competitiveness. The component consists of two sub-components: Sub-component 2.1: Credit line for MSMEs; Sub- component 2.2: Partial Credit Guarantees under the SFE. 28. Sub-component 2.1: Credit line for MSMEs. The implementation of this sub-component is progressing. As of October 1, 2024, 85.7% of the credit line funds (US$125.53 million out of the total US$146.5 million) have been disbursed. In total, 528 sub-loans have been issued since the project's inception, including 407 MSME sub-loans (with a lending limit of US$125,000 per loan) and 121 cluster window sub-loans (with a lending limit of US$2.0 million per loan). Table 2 below provides a summary of the disbursement and commitment status of the project’s credit line by PFIs over the past three years. Table 2. Breakdown of sub-loan portfolio status (October 23, 2024) SLA amount Sub-loans issued PFI Amount disbursed denominated (No.) (US$ million) (US$ million) # 1. Asaka Bank 15.0 37 8.69 2. Qishloq Qurilish Bank 61.5 237 64.88 3. Turon Bank 30.0 207 29.22 Sanoat Qurilish Bank 20.0 21 12.84 4. (Uzpromstroi Bank) 5. Ipoteka Bank 20.0 26 10.0 Total 146.5 528 125.53 29. All five Participating Financial Institutions (PFIs) continue to implement the subprojects approved earlier on. Biznesni Rivojlantirish Banki (formerly Qishloq Qurilish Bank) leads in sub-project financing with 237 sub-loans, totaling $64.788 million, followed by Turon Bank with 207 sub-loans amounting to $29.22 million, and Asaka Bank with 37 sub-loans totaling $8.69 million. The remaining two banks, Ipoteka Bank and Uzpromstroybank, financed 47 sub-projects collectively totaling $22.84 million. 30. As the project progress report indicates, out of the 528 sub-projects, the largest portion was allocated to small enterprises in the horticulture sector (203 sub-projects), followed by the textile industry (112 sub-projects), and investments in animal husbandry (85 sub-projects). 102 sub-projects were in areas of cold storage, small-scale industries, poultry farming, and agricultural product processing. The mission has recommended that PFIs closely monitor the implementation of sub-loans in the horticulture sector, the textile industry, animal husbandry, where loan concentrations are higher. Additionally, the PIU is advised to strengthen its monitoring efforts and enhance training activities for PFI institutions, particularly in the area of risk management. 31. According to the project progress report, the sub-projects financed through the credit line generated approximately 19,080 new jobs, reflecting an increase of 698 jobs compared to July 2023, which reported 18,382 new jobs. A total of 73 sub-projects includes women shareholders, of which 40 are entirely managed by women. 32. The mission noted that during the past seven months, the approval of new subprojects under the credit line slowed down considerably due to: (i) higher interest rates of credits offered under the Project resulting from LIBOR to SOFOR switch; (ii) exchange rate risk borne by the PFIs results in a reluctance to utilize the credit line resources committed to them; (iii) weak performances and lack of initiatives of some of the PFIs resulting in unutilized fund. 33. To expedite the credit line activities, it was agreed that, the PIU in collaboration with the MA and the MEF will carry out a thorough assessment of the performances of each PFI, and come up with an updated plan for acceleration of credit line activities, which will include: (i) identifying new PFIs interested in participating in credit line activities and reallocating to them the currently unutilized funds; (ii) finalizing with the Business Development Bank and other interested PFIs, the plan for the implementation of micro- credit program recently approved by the Government. To further the implementation of credit line activities, the PIU has agreed to prepare a revised implementation plan for credit line activities and submit it to the Bank by December 15, 2024, for review and no objection. 34. Sub-component 2.2: Partial credit guarantees under the EDC—Summary of Progress. This sub- component supports the implementation of a partial credit guarantee (PCG) scheme aimed at increasing financing to MSMEs in the Ferghana Valley through the EDC to provide guarantees to rural enterprises under the "Micro-, Small- and Medium-Enterprise Guarantee Fund". The EDC has so far provided credit guarantees to 12 banks. The following table shows guarantees approved between January 2020 and September 2024. Table 1. The amount and size of loans, the new jobs created and the PSGs Issued under the Project Quantity of Loan amount of Guarantee New jobs created approved approved amount № PFI Sub-projects Sub-project 1 Asaka bank 22 81,509 30,940 705 2 Ipoteka bank 17 86,669 41,951 715 3 Promstroy bank 15 108,916 44,410 507 4 Turon bank 49 115,965 55,315 1,119 5 Business Development Bank (prev. Qishloq 111,358 41,339 1,112 qurilish bank) 37 Total: 140 504,416 213,955 4,158 35. The implementation of PSG scheme continues to make a progress. The PSG scheme is currently earning about 20% to 21% on the investment of its capital. These earnings should be adequate to cover operating expenses and some of the losses. With the two phases of capital totaling USD 34.5 million, the earnings would be about USD 6.9 million per year. 36. Since the start of the year, the volume of PSG issuance slowed down, but a recent promotion and outreach effort of the EDC is addressing this issue. The scheme now offers a portfolio guarantee. A portfolio scheme was added to give certain banks more control over the process and permit even faster approval of loans. The requirements for the loans that can be included in a guaranteed portfolio are similar to those in the standard program. The maximum amount of a loan is related to the age of the business. The borrowers that have been in business three or more years can get a guaranteed loan up to 3 billion soms. The borrowers that have been in business between 2 and 3 years qualify for up to 1.5 billion soms. The guarantee coverage on all loans is up to 50%. 37. Currently, there are about 85 staff employed at EDC JSC out of total 105 positions with several vacancies, mostly in branch offices. There are 5 people allocated to the approval of loans and 5 more assigned to monitoring the portfolio. They have recently expanded their product line and added a portfolio scheme. The scheme should continue hiring as these products are likely to need additional supervision. 38. The PSG scheme is currently in the process of moving to the automated system operated by the Central Bank. When this transition is completed, the scheme will receive daily updates on the guaranteed loans from the Central Bank system. The scheme does not conduct routine reviews of lender files. Files are reviewed for compliance with scheme requirements when a claim is submitted. The scheme depends on the internal review processes of the banks to ensure that the files are properly maintained. With the implementation of a portfolio scheme, the EDC will not see application files before they receive a guarantee. The EDC should establish a lender oversight process to review files onsite at the PFI. 39. The PSG scheme is modifying the guarantee fee structure so that better performing banks would pay a lower fee. Banks will be given an A, B, C, or D rating. C and D rated banks will pay a higher guarantee fee. This needs to be monitored closely to prevent unintended consequences. 40. The PSG scheme has taken steps to obtain audited financial statements and expects to have an auditor selected by the end of the year. The statements for calendar year 2024 should be audited. 41. The mission noted that in some PFIs, the loan funds are not being used by the borrower as required in project document. The EDC addressed this issue by refusing to pay on the guarantee if the loan funds were not used properly. It will give the PFIs financial incentives to ensure that borrower loan proceeds are used as per subsidiary loan agreements. 42. High leverage was identified as an issue in the last mission and was noted to be 10.4. The EDC indicated that current leverage is between 15 and 20. This is considered very high for a new fund that does not have several years of performance data to use when determining an appropriate leverage. The mission recommended that the appropriate leverage level should be discussed by the Board and the leverage should be reduced to ensure the EDC is not vulnerable to financial risks. 43. To address the specific issues identified during the mission, the following time-bound actions were agreed with EDC JSC: (i) Implement full prudential regulation by the Central Bank and conclude the first full review of the guarantee scheme by September 25, 2025; (ii) Conclude audited financial statements for calendar year 2024 financial results, including testing of internal controls by June 30, 2025; (iii) Convert to an automated loan reporting system by using the platform offered by the Central Bank by September 25, 2025; (iv) Develop an implementation plan to integrate bank and credit bureau data into the IT system used by the EDC by June 30, 2024. This will enhance the development of credit scoring models and improve the efficiency of the EDC. All detailed time-bound actions agreed during the mission are in Annex 2. 44. Creation of a new subcomponent (Subcomponent 2.3: Agriculture Machinery Leasing Services) and re-allocation of fund. The MEF through its letter of August 23, 2024 proposed to re-allocate the US$19.5 million, which is currently not utilized by the project to support the agriculture machinery services in the project provinces. The objective of the new subcomponent is to enhance the quality of and access to agriculture machinery services for farmers, producers, and processors along the agriculture value chains in the project areas through the support of the Participating Leasing Companies (PLCs). The agriculture machinery leasing activities will be implemented according to a project-specific operational document, the Leasing Guidelines, which will be agreed with the MEF and the MA. The terms and conditions of the agriculture machinery leasing services will be articulated in the Leasing Guidelines and their fulfillment will be a condition for any disbursement of the funds. 45. The restructuring and amendment to the Loan Agreement will require: (a) a creation of a new subcomponent (Subcomponent 2.3) : Agriculture Machinery Leasing Services; (b) reallocation of US$14.5 million from “Unallocated” Category; and US$5.0 million from Subcomponent 1.1 (Business Development and Incubation) to the new subcomponent. 46. The Bank team is currently finalizing the restructuring package to create the new subcomponent and reallocate the fund. The restructuring will require an amendment to the Loan Agreement. The Bank’s approval for the restructuring package (requiring an amendment to the Loan Agreement), is expected around November 14, 2024. In anticipation of the Bank’s approval, and due to the urgency of agriculture machinery services in the project provinces, the PIU and the MA have agreed to finalize the selection of the first batch of subprojects to support the agriculture machinery leasing services and submit it to the Bank by November 27, 2024, for review and no objection. Component 3: Project Management 47. Overall, the progress of Component 3 is assessed as Moderately Satisfactory. The PIU has undergone significant change. The new PIU manager, the project coordinator, environment specialist, and the office manager were recruited in June 2024. Overall, the project management has improved. The PIU works more closely with agencies implementing the individual sub-components and effectively coordinates their activities. To further strengthen the capacity of the PIU, it was agreed that the PIU will hire: (i) three regional specialists to improve the project monitoring system; (ii) legal specialist to enhance its capacity to better enforce the contractual issues; and (iii) English language translator by November 29, 2024. 48. During the mission, the PIU raised the issue that the current salary levels of the project staff are still significantly below (20-25% lower) those other investment projects financed by the IFIs, which creates disincentive among the staff and causes high staff-turn over. The mission expressed the view that the salary levels of the PIU staff should be competitive enough to attract high-caliber staff and should be comparable to those of the ongoing market rates. D. Financial Management, Procurement, Environmental and Social Safeguards. 49. Financial management. The mission met with FM staff of the PIU and discussed the FM arrangements of the project (project budgeting, planning, accounting and reporting, funds flow, audit). Based on the satisfactory performance, the FM is rated Satisfactory and the FM risk was rated as Moderate. The project’s IFRs were submitted to the Bank on time. No issues were spotted by the Bank upon review of the submitted IFRs. 50. Procurement. Major packages under the project have been awarded, and procurement for the remaining packages will begin once the specifications are finalized. A total of 41 contracts, valued at an aggregate of US$ 6.88 million, have been awarded under the original financing. STEP analysis shows that 56 entries were made, with 15 canceled. Of the total, 33 contracts have been signed, 17 of which are completed. However, some signed contracts have not yet been updated in STEP. The PIU has been strongly advised to update all contracts in the system. Additionally, 1 package is currently in 'Pending Implementation' status, and 8 packages are 'Under Implementation.' In the upcoming months, it is expected that the Implementing Agency will initiate approximately 15 packages currently in pending status and ensure the information is updated in STEP. The PIU needs to closely monitor the timely preparation of draft Terms of Reference (ToR) and technical specifications for the remaining procurement packages. The performance rating remains “Moderately Satisfactory” contingent upon timely updates to the system and the commencement of the pending packages. 51. Environmental and social safeguards. The overall environmental and social performance of the project is assessed as Satisfactory. The PIU is equipped with sufficient capacity to oversee the overall environmental and social compliances, considering a large volume of sub-projects being financed. 52. All sub-loans were approved through a joint review by the PIU, the Participating Financial Institutions (PFIs) and the State Committee for Ecology and Environmental Protection (currently, Ministry of Ecology Environmental Protection and Climate Change). The risks were assessed in line with the Bank’s safeguards requirements and the national regulation and safeguards categorization and mitigation measures at the sub-project level were determined prior to sub-loan approval. Out of the 528 sub-loans in the current portfolio, 352 were assessed as Category B and 176 sub-loans were evaluated as Category C. The potential risks and impacts are generally well understood and can be mitigated with good industry practices and robust monitoring. None of these sub-loan activities requires involuntary land acquisition and/or results in access restrictions warranting management under Bank OP 4.12. 53. Due-diligence and field inspections were performed jointly by the PIU and the PFIs, focusing on larger sub-loans. As of October 2024, a total of 468 loan beneficiaries have been monitored through 30 field visits. Relevant concerns were associated with waste management, pollution risks, and construction- related risks. Remedial measures have been requested of the beneficiaries. No incidents and/or accidents were reported and/or made known up to now. 54. With regards to project information disclosure, the project's implementing agency – UZAIFSA- has been restructured and renamed as the ISCAD in 2021. For internal reasons, the ISCAD website remained unfunctional for a long period of time. The website became fully operational only during the week of the Mission. The mission agreed that project information, including updated ESMF should be migrated to the new website. Mid-term Review mission’s suggested to prepare and disclose abbreviated sub-loans database on ISCAD website for public’s view. The action was postponed to the delay in functionality of the website. The necessity of this action will be revisited based on the performance of the new website. 55. At the time of the mission, a project restructuring request was being submitted to reallocate the project’s undisbursed funds to a new financial intermediary, UzAgroLeasing company, for the leasing of agricultural machinery and equipment. The guidelines for agriculture machinery leasing services should include the environmental and social assessment (ESA) process in line with the ESMF. After approving restructuring, within 15 days following, current ESMF will need to be updated to include agriculture machinery leasing services as eligible activities. Other areas of the ESMF that should be updated/revised include 1) enhancing the GRM section to include comprehensive contact details including a dedicated hotline, email, messaging platforms and physical submission at the PIU office 2) Integrate include Code of Conduct as part of labor assessment guidelines (9.3), 3) Institutional Arrangements, etc. as deemed relevant. The updated ESMF should be redisclosed in-country and on the Bank’s website. 56. The project aims to more effectively utilize its primary credit window for small enterprises (up to US$ 125,000). In alignment with local legislation that supports access to finance for small businesses (PQ 36 dated 14.09.2023 and PQ 312 dated 07.09.2024), the mission agreed to simplify environmental and social screening form, especially for microloans up to 100 mln UZS (approx. US$ 8,000 (as of October 2024)) that are approved without collateral. These microloans will not be asked to provide any additional paperwork. Loan requests with amount up to US$ 125,000 (1.5 billion UZS (as of October 2024)) will be screened for civil works associated with the loan, and in case of presence of civil works, a standard ESMP needs to be acknowledged by the Beneficiary. Financing for clusters (up to US$ 2 million) will follow the full E&S due diligence process as described in the ESMF. 57. The PIU continued to maintain an adequate project’s grievance mechanism (GM). No new grievances were received as of October 2024. The Mission highlighted the importance of adopting a more comprehensive approach to GM channels. Therefore, dissemination of Project level GM through distributing leaflets and public consultation meetings shall be conducted regularly with project beneficiaries and project workers. Additionally, grievance posters shall be installed at all project sites to ensure that beneficiaries and other stakeholders are well-informed about the available grievance services and clearly state that anonymous grievances are also accepted. No complaints regarding the project's address have been received in the past six months. To date, the project has received in total 71 written requests concerning custom confirmation of receipts of loans for the purposes of custom clearances for imports of goods under the project. Enhancements in the environmental and social database shall require documentation of grievances received by the PFIs, including how they are resolved, if any. 58. The project has incorporated targeted approaches to support women in livelihoods development and entrepreneurship through the BIHs in partnership with the Businesswomen Association (BWA) and networks of mentors. Under the credit-line, the project has supported 73 sub-loans to MSMEs where women were represented as shareholders and of which, 40 are women-led MSMEs. 59. The positive trends were observed in wage growths for women in 2022, at 1.8 times compared to the project’s baseline prior to the project although still below the national average in the same year. To improve women’s participation in the labor market and access to the project’s benefits, the project has prepared a gender action plan, focusing on tailored support under business incubation (Component 1) and access to financing for female owned MSMEs and jobs (Component 2). The project will continue to maintain a gender disaggregated monitoring to track achievements and gaps where additional efforts may be required. In conjunction with expected uptake in provision of micro-loan credits at select PFIs, it was agreed that there is a need for the PIU will streamline the environmental and social safeguards requirements for micro- credit applicants. The PIU has agreed to development simplified procedures for environmental and social safeguards for micro-credits and submit to the Bank for review and no objection by November 24, 2024. E. Next Steps. 60. The time-bound agreed actions to address these issues and bottlenecks identified during the mission are provided in Annex 2. The Bank’s supervision mission is planned in March 2025. Annex 1 List of Key Persons Met MEF Mr. Fakhriddin Majidov, Head, Department Debt Management (IFIs) MIIT Mr. Dilshod Akhundjanov – Head of Department for IFIs Mr. Azimjon Toshpulatov – Head of Department for International Cooperation EDC JSC Mr. Kudrat Radjabov – Head of the Department Mr. Azizbek Saksonov – Head of the Department CCI Mr. Saidkamol Saidnazirkhanov – Adviser to the Chairman Ms. Dildora Ergasheva - Head of Department of CCI for the attraction of foreign investments and cooperation with IFIs Mr. Davron Kushanov – Financial Specialist under the Contract PFIs Asaka Bank Mr. Tukhtamurod Ergashev – Lead Specialist Qishloq Qurilish Bank Ms. Afize Ametova – Lead Specialist Turon Bank Mr. Marjina Niyozova – Head of Department Sanoat Qurilish Bank Mr. Khumoyun Parmonqulov – Head of Department Mr. Sardor Ilkhomov – Head of Department Ipoteka Bank Ms. Dilrabo Bazarova – Head of Department Entrepreneurs Andijan Mr. Mamatqodirov Alisher- Director of OOO "SIMONA BILLUR" Mr. Burkhanov Ziyodillo – Director of OOO "LUXURY GOLD TEX" Namangan Mr. Turashxanovich Toxirjon – Director of OOO “FAZMoAN TEKSTIL" Mr. Kamalov Akmaljon - OOO "ZAMIN GREEN-WORLD" Ferghana Mr. Eshinboev Elyor- Director of OOO "VODIY YUKSALISH DAVRI TOMORQA XIZMoATI" Mr. Davlatov Azizbek ООО Director of "JAHON AZIZ PLAST" MA/ PIU Mr. A. Shukurov, Deputy Minister of Agriculture Mr. Sh. Akramov, Director, ISCAD Mr. X. Tuychiev, Project Manager Mr. A. Nomanov - Project Coordinator Mr. A. Mavlonov - Procurement Specialist Mr. X. Ibragimov – Regional Coordinator Ms. D. Arlanseva – Environment Specialist Mr. Sh. Abdurakhmanova – Gender and Social Specialist Mr. F. Balqiev – FM Specialist Mr. S. Boynazarov – Credit line coordinator Mr. J. Anormatov – M&E specialist Mr. M. Pardayev – Start-up Coordinator Annex 2 Summary of Agreed Actions During the Mission (October 7-23, 2024) Actions Responsible Due Date Component 1: Enterprise Development Complete the signing of agreements with 75 start-up businesses and start AID, PIU December 23, 2024 their implementation. Complete the signing of agreements with the remaining 25 start-up AID, PIU March 31, 2025 businesses and start their implementation. Prepare an updated plan the use of expected savings and submit to the Bank AID, PIU November 20, 2024 for review and no objection. Component 2: Access to Finance Credit line for MSMEs and agriculture machinery leasing services Prepare a revised implementation plan for credit line activities and submit it PIU December 16, 2024 to the Bank for review and no objection. Prepare the Leasing Guidelines and the draft LSLAs and submit to the Bank PIU November 14, 2024 for review and no objection. Finalize the selection of the first batch of subprojects to support the PIU November 27, 2024 agriculture machinery leasing services and submit it to the Bank for review and no objection. Partial credit guarantees under the EDF JSC Implement full prudential regulation by the Central Bank and conclude the EDC JSC September 25, 2024 first full review of the guarantee scheme; Conclude audited financial statements for calendar year 2024 financial EDC JSC June 30, 2025 results, including testing of internal controls; Convert to an automated loan reporting system by using the platform offered EDC JSC September 25, 2025 by the Central Bank; Develop an implementation plan to integrate bank and credit bureau data EDC JSC June 30, 2025 into the IT system used by the EDC JSC Develop a plan to reduce the leverage rate from current rate of 20 to below EDC JSC December 30, 2025 15 and carry out the implementation Organize the regular (monthly) meetings between Director of EDC JSC and EDC JSC Monthly PFIs to enhance the knowledge and awareness on the use of PSGs and improve their impacts Fill in the vacant positions of EDC to improve the PSG supervision and EDC JSC June 30, 2025 monitoring. Actions Responsible Due Date Component 3: Project Management Hire (i) three regional specialists to improve the project monitoring system; PIU November 29, 2024 (ii) legal specialist to enhance its capacity to better enforce the contractual issues; and (iii) English language translator. Environmental and Social Safeguards PIU November 24, 2024 Develop simplified procedures for environmental and social safeguards for micro-credits and submit to the Bank for review and no objection. Annex 3 Results Framework Baselin End Actual Previous Comments Indicator Name e Target (Oct. 2024) (June 2023) Enterprise intensity index (%age) 100 110 - - Explanation on current reporting: The number female and youth leading enterprises has Enterprise intensity index - Female-led been relatively low, in spate of the fact that the PIU and 100 110 113 113 enterprises(%age) regional coordinators widely disseminated information Enterprise intensity index - led by youth (%age) 100 110 111 111 on the Credit Line among women and the youth Number of enterprises supported under the Explanation on current reporting: 0 2,000 528 501 project (Number) Starting from January till June 2023 the number of Sub- loan applications, submitted to the PIU has been small, Number of micro-enterprises supported under the due to the low activity of PFIs. 0 700 501 495 project(Number) Moreover, taking into account the funds remained under Number of enterprises – Female-led (Number) 0 500 73 67 the Credit Line (US$26 mln), there is a risk that the end target couldn’t be reached. We’d suggest to decrease the end target up to 600 for the number of enterprises supported under the project, up to 80 for the number of enterprises – Female-led (Youth- Number of enterprises - Youth (Number) 0 700 58 58 led). In addition, taking into account the Credit Line disbursement rate, we’d ask for considering an additional financing. Increase in total revenues of enterprises supported under the project, US$ (Amount 0 200,000 120,000 120,000 (US$)) Increase in revenues of micro-enterprises 0 10 15 15 supported under the project (%age) Baselin End Actual Previous Comments Indicator Name e Target (Oct. 2024) (June 2023) Increase in total revenues of small enterprises 0 15 15 - supported by the project (%age) Jobs creation Number of additional jobs generated by Explanation on current reporting: 0 20,000 19,080 18,382 enterprises supported by the project (Number) Implementing of Sub-projects significantly increased the number of additional work places in Project area (both Number of additional jobs generated by for female and youth). 0 5,000 13,795 13,674 enterprises supported under the project - female Under the Credit line it is expected to reach the end Number of jobs generated by enterprises target this year. 0 10,000 8,015 7,920 supported by the project - Youth ( Explanation on current reporting: Number of formal clusters or supply chain 0 20 15 15 Under the Credit line it is expected to reach the end contract arrangements in the project area target this year. Number of beneficiaries trained 0 5,000 3133 5,000 Explanation on current reporting: Seminars and trainings mainly held by CCI and Agency Number of beneficiaries trained - Female 0 1,500 1478 1,500 of Innovative Development. The beneficiaries were trained to the modern aspects of business. By the PIU seminar and trainings were held on the Number of beneficiaries trained - Youth opportunities of the Credit Line, presented information 0 2,500 1571 2,500 on cluster-oriented projects etc. (Number) The CCI is planning to increase the number of trained entrepreneurs during the implementation period. [Dropped] Number of districts where rural 0 36 36 9 business development services are being Baselin End Actual Previous Comments Indicator Name e Target (Oct. 2024) (June 2023) delivered under the project (Number) Explanation on current reporting: [New indicator] Number of rural business By now all 9 BIHs are reconstructed and fully equipped incubation hubs fully equipped and actively 0 9 9 9 established as well as they are actively organizing education and delivering services under the project trainings on modern business instruments. Explanation on current reporting: Market promotion events carried out by Acceleration Number of market promotion events carried out 40 24 24 company “Ekvita Consulting LLC”. The Company was (Number) hired by the PIU for the purposes of delivering support services to further development of startup ecosystem. Number of new business startups (Number) 0 100 75 - Explanation on current reporting: The business startups were envisaged to select on the Number of new business start-ups supported competitive basis by an Acceleration company and 0 10 - - under the project – Female (Number) submit to the PIU for financing. At the moment the Acceleration company (Ekvita Consulting LLC) has finished competition and selection procedure and submitted, together with the Agency of Innovative Number of new start-ups supported by Development 65 startup projects to the PIU. Currently 0 50 - - the project – Youth (Number) the PIU is organizing bidding procedure of these startups. The next stage will be to organize another competition to select remained 35 startup projects for financing the next year. %age of beneficiaries satisfied with services 0 65 - - provided under the project (%age) %age of beneficiaries satisfied with services 0 65 - - provided under the project – Female (%age) Baselin End Actual Previous Comments Indicator Name e Target (Oct. 2024) (June 2023) The volume of financing provided through 146.5 Explanation on current reporting: 0 125,530,000 119,605,000 participating financial institutions ((US$)) million Under the Credit Line the current volume of financing is estimated as satisfactory by the PIU. Under the Credit The volume of financing to micro-enterprises Line there is about US$26 mln remained balance. The 10 provided through participating financial 0 6,000,000 6,000,000 PIU is planning to disburse all the remained funds till the million institutions under the project (Amount (US$)) end of this year and reach end target. The volume of financing provided to small 20.0 enterprises through participating financial 0 12,000,000 11,600,000 million institutions (Amount (US$)) Number of sub-loans (Number (Thousand)) 0 1,200 528 501 Number of sub-loans Female (Number in 000) 0 100 - - Number of sub-loans - (Number in 000) 0 200 - - Non-performing Loans (%age) 0 5 1 85 Number of formal clusters or supply chain 0 [revised 79 contract arrangements in the project area target] [Dropped] Share of cluster sub-projects that 0 70 - - leverage external financing (%age) Share of complaints addressed (%age) 0 70 3 3