Report and Recommendation of the President to the Board of Directors

Project Number: 51039-002 October 2018

Proposed Grant Islamic Republic of Afghanistan: Horticulture Value Chain Development Sector Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 3 September 2018)

Currency unit – afghani/s (AF)

AF1.00 = $0.0136 $1.00 = AF73.4579

ABBREVIATIONS

ABE – agro-business enterprise ADB – Asian Development Bank GDP – gross domestic product ha – hectare MAIL – Ministry of Agriculture, Irrigation and Livestock

O&M – operation and maintenance PAM – project administration manual PMU – project management unit SIP – subproject investment proposal SIR – subproject investment report

NOTE

In this report, “$” refers to United States dollars. Vice-President Wencai Zhang, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Director Donneth Walton, Environment, Natural Resources, and Agriculture

Division, CWRD Team leader Bui Minh Giap, Senior Natural Resources and Agriculture Economist,

CWRD Team members Mohammad Hanif Ayubi, Senior Project Officer (Natural Resources and

Agriculture), Afghanistan Resident Mission, CWRD Cindy Shayne Cabrales-Chiong, Associate Project Analyst, CWRD Nurlan Djenchuraev, Senior Environment Specialist, CWRD Jose Tiburcio Nicolas, Senior Social Development Specialist

(Safeguards), CWRD Aysha Qadir, Principal Counsel, Office of the General Counsel Nathan Rive, Climate Change Specialist, CWRD Mary Alice Rosero, Social Development Specialist (Gender and

Development), CWRD Peer reviewer Pavit Ramachandran, Principal Environment Specialist, East Asia

Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1 B. Impact and Outcome 5 C. Outputs 5 D. Summary Cost Estimates and Financing Plan 5 E. Implementation Arrangements 6

III. DUE DILIGENCE 8

A. Technical 8 B. Economic and Financial 8 C. Governance 8 D. Poverty, Social, and Gender 8 E. Safeguards 9 F. Summary of Risk Assessment and Risk Management Plan 10

IV. ASSURANCES AND CONDITIONS 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 14

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 26072018162515302072 Generated Date: 26-Jul-2018 16:25:23 PM

1. Basic Data Project Number: 51039-002Project Name Horticulture Value Chain Development

Sector Project Department/Division

CWRD/CWER

Country Afghanistan, Islamic Republic of Executing Agency Ministry of Finance

Borrower MInistry of Finance

2. Sector Subsector(s) ADB Financing ($ million)Agriculture, natural resources and rural development

Agricultural production 45.00

Agro-industry, marketing, and trade 30.00

Total 75.00

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 2: Access to economic opportunities, including jobs, made more inclusive

Environmentally sustainable growth (ESG)

Natural resources conservation

Climate Change impact on the Project

Low

4. Drivers of Change Components Gender Equity and MainstreamingKnowledge solutions (KNS) Knowledge sharing activities

Partnerships (PAR) ImplementationPrivate Sector

Private sector development (PSD)

Promotion of private sector investment

Effective gender mainstreaming (EGM)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

NoNoYes

Rural High

SDG Goals SDG2, SDG9

6. Risk Categorization: Low.

7. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C.

8. Financing

Modality and Sources Amount ($ million)

ADB 75.00

Sovereign Sector grant: Asian Development Fund 75.00

Cofinancing 0.00

None 0.00

Counterpart 43.66

Beneficiaries 43.05

Government 0.61

Total 118.66

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed grant to the Islamic Republic of Afghanistan for the Horticulture Value Chain Development Sector Project. 2. The proposed project will help strengthen the horticulture value chain in Afghanistan by (i) improving the processing efficiency and marketing capacity of domestic agro-business enterprises (ABEs); (ii) modernizing crop production through better planting material, trellising, modern greenhouses, and on-farm facilities; and (iii) contributing to the national effort in establishing internationally recognized brands of Afghan horticultural produce. It will increase value addition for horticultural commodities produced in 11 provinces in the central, southern, and eastern parts of Afghanistan.1 As such, the project will contribute to increasing the supply of fresh and processed fruit and vegetables, and expanding exports of high-value fruit, vegetables, and nuts in which the country has a comparative advantage.2

II. THE PROJECT A. Rationale 3. Sector performance. Afghanistan is one of the least-developed countries in the world. In 2016, its poverty rate was 55%, while 44% of inhabitants were considered food insecure.3 Between 2011 and 2016, the average annual per capita gross domestic product (GDP) was $630, ranking Afghanistan 168th of the 183 countries reported by the World Bank.4 Agriculture is Afghanistan’s major source of livelihood, employing 62.2% of the national workforce of 10.9 million people in 2017 and contributing 21.9% of the national GDP, with sector value addition of $4.1 billion in 2016.5 Historically, the sector was a significant source of foreign exchange because of the country’s unique agro-climatic conditions. Of the total export earnings of $771 million in 2016, export earnings from agriculture were $375 million, accounting for 48.6%. Export earnings from fruit and vegetables alone amounted to $331 million (42.9% of total exports).6 4. Within the agriculture sector, the horticulture subsector has been a major contributor through the production of a wide array of crops, unique varieties, and an extended range of maturity periods, providing a strong comparative advantage in export markets. In 2016, licit horticulture crops were grown on 360,000 hectares (ha) that included 14% of the total irrigated area and generated $1.4 billion equivalent annually, representing 34% of agriculture GDP. Labor requirements for production and harvesting are the equivalent of 200,000 full-time equivalent jobs

1 Project provinces are Bamyan, Ghazni, Kabul, Khost, Kunar, Laghman, Logar, Nangahar, Paktika, Paktya, and

Wardak. Kandahar has great potential as a project province and may be included after year 1 of project implementation subject to a review of the security situation, demand for subproject investment, and appropriate implementation arrangements. These provinces were selected based on production area and output for fruit and vegetables. Together, these provinces account for 26% of the national planted area of fruit, 21% of the national area of vegetables, and 22% of the national horticulture production output.

2 Asian Development Bank (ADB). 2017. Technical Assistance to the Islamic Republic of Afghanistan for Preparing the Horticulture Value Chain Development Sector Project. Manila.

3 Government of Afghanistan, Central Statistics Organization. 2017. Afghanistan Living Conditions Survey (2016–2017). Kabul.

4 World Bank. World Development Indicators. http://data.worldbank.org/data-catalog/world-development-indicators (accessed 30 April 2018).

5 https://www.theglobaleconomy.com/Afghanistan/Share_of_agriculture/ (accessed 5 May 2018). 6 Center for International Development at Harvard University, Atlas of Economic Complexity.

http://atlas.cid.harvard.edu/ (accessed 6 May 2018).

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(seasonal income for about 2 million people). Many horticulture crops provide a good source of revenue for commercial farmers compared with alternative crops to the extent that they are widely promoted by the government and development partners as an alternative to poppy cultivation. 5. Grapes generated the greatest income of any crop with nearly $150 million for fresh grapes and $280 million for raisins in 2016. Almonds generated $120 million, while pomegranates generated $100 million in that year. About one-third of Afghanistan’s horticulture crops are exported, primarily to India and Pakistan, although significant quantities of raisins are exported to the Russian Federation, Iraq, the United Arab Emirates, and central Asian countries. Vegetable production also contributes significantly to horticulture GDP (estimated at $475 million per annum) but remains highly seasonal. During the off-season, the country relies on imported vegetables—particularly onions, potatoes, and tomatoes—from neighboring India and Pakistan. 6. Binding constraints. Growth in the horticulture subsector is constrained by a large number of small-scale producers that are geographically scattered. On-farm productivity is low and post-harvest losses are high because of (i) limited access to water largely because of dilapidated irrigation infrastructure and lack of on-farm distribution and application systems; (ii) old orchards with low-productivity varieties; (iii) limited access to quality production inputs, including planting material but also fertilizers and agro-chemicals for pest and disease control; (iv) a predominance of traditional production technologies; (v) lack of access to finance to modernize production systems and processing for value addition; (vi) absence of national certification and/or branding strategies for horticultural produce, particularly outside the traditional export markets of India and Pakistan; and (vii) insecure land tenure, which discourages farmers to invest in on-farm facilities and land improvement. Post-harvest losses for fruit and vegetables are in the range of 30%–60% of total production.7 The main causes include (i) lack of precooling facilities, cold storage, refrigerated transport, and packhouse facilities; (ii) inadequate processing facilities; (iii) poor transportation facilities and high transportation costs; and (iv) a lack of farmers' knowledge of good post-harvest practices. 7. The banking subsector in Afghanistan has a narrow base with weak governance and low intermediation and outreach. In 2017, the subsector consisted of 15 banks with total assets of $4.0 billion, customer deposits of $3.6 billion, and a gross loan portfolio of less than $0.7 billion. Credit to the private sector is low—just 4% of GDP—and the loan–asset ratio is below 15%. Only 2% of enterprises use bank loans to finance investments because (i) loan interest rates are extremely high (12%–20% per annum); and (ii) loans are mainly short term, with an average maturity of 10 months. While there is a high demand for medium- and long-term loans, banks are not able to extend loans of the same terms because of their lack of equivalent medium- and long-term funding sources, and access to finance for individuals and enterprises is constrained by limited branch networks. In this context, and given public mistrust of domestic banks since the Kabul Bank collapse in 2010, project financing interventions through financial intermediation are currently not an appropriate choice. 8. Growth potential. Afghanistan currently exports some fruit and vegetables, yet there has been increasing dependence on seasonal imports of both fresh and processed horticultural produce. Imports result from inadequate domestic supplies because of limited in-country processing, post-harvest handling, and appropriate storage to stabilize sources of supply throughout the year and ease seasonal shortages. Production gains can be achieved through a

7 United Nations Economic and Social Commission for Asia and the Pacific, Center for Alleviation of Poverty through

Sustainable Agriculture. 2018. Post-harvest Losses of Vegetables in South Asia. http://uncapsa.org/?q=palawija-articles/post-harvest-losses-vegetables-south-asia (accessed 6 May 2018).

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reduction in post-harvest handling and storage losses and increased production output. Total production could increase from 3.9 million tons per annum in 2017 to 5.0 million tons per annum by 2026. Together, these changes could lead to an annual GDP contribution of about $3.5 billion by 2026 (compared with $1.4 billion in 2016). This would add another 362,000 full-time equivalent jobs by 2026—around 267,000 in horticultural production and 95,000 in other economic activities along the value chain. 9. The domestic demand is estimated at 0.9 million tons for fruit and 1.4 million tons for vegetables.8 In 2017, Afghanistan produced 3.9 million tons of horticultural produce (1.5 million tons of fruit and 2.4 million tons of vegetables). Of the surplus of 1.6 million tons of fruit and vegetables, an estimated 0.5 million tons were exported and the balance of 1.1 million tons might have been post-harvest losses, while a small percentage is used for seeds. Over 85% of horticultural produce is unprocessed, whether being marketed domestically or for export. 10. Government strategies. The key development strategy of the Ministry of Agriculture, Irrigation and Livestock (MAIL) is that the National Comprehensive Agriculture Development Program 2016–2020 highlights horticulture value-chain development as one of its seven strategic pillars.9 Under horticulture value-chain development pillar, the priorities are (i) expansion of the horticultural land base; (ii) increase in crop productivity; (iii) development of value chains for selected crops, where the country has a high comparative advantage; (iv) infrastructure and market development; (v) promotion of standardization and certification; (vi) support to the private sector, (vii) development of crop nurseries through adaption research; and (viii) expansion of the area under conservation agriculture. 11. Development partners have contributed to agriculture sector development with the horticulture and irrigation subsectors being the main beneficiaries. 10 Ongoing World Bank-financed projects include the National Horticulture and Livestock Project,11 the On-farm Water Management Project,12 and the Afghanistan Agricultural Inputs Project,13 while the United States Agency for International Development financed the Commercial Horticulture and Agricultural Marketing Program14 and the European Union financed the MAIL Transition Project,15 each addressing various aspects in the horticulture subsector. Three Asian Development Bank (ADB)-financed projects—the Rural Business Support Project,16 the Agriculture Market Infrastructure Project,17 and the Enhanced Agricultural Value Chains for Sustainable Livelihoods Project18—have helped promote market linkages for fruit and vegetables while enhancing rural

8 Based on minimum per capita consumption of 0.11 kilograms of vegetables and 0.07 kilograms of fruit per day, and

the 2016 national population of 34.7 million. 9 Government of Afghanistan, MAIL. 2016. National Comprehensive Agriculture Development Program 2016–2020.

Kabul. 10 Development Coordination (accessible from the list of linked documents in Appendix 2). 11 World Bank. 2016. Project Information Document for National Horticulture and Livestock Project. Washington, DC. 12 World Bank. 2011. Project Appraisal Document for On-farm Water Management Project. Washington, DC. 13 World Bank. 2011. Project Appraisal Document for Afghanistan Agricultural Inputs Project. Washington, DC. 14 United States Agency for International Development. 2010. Fact Sheet for the Commercial Horticulture and

Agricultural Marketing Program available at https://www.usaid.gov/node/67201/ (accessed 14 May 2018). 15 European Union. 2012. Afghanistan: Support to Capacitate the Ministry of Agriculture, Irrigation and Livestock in

Transition for Sustainable Public Services Delivery. Brussels. 16 ADB. 2006. Grant Assistance Report: Proposed Grant to the Islamic Republic of Afghanistan for the Rural Business

Support Project. Manila. 17 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Grant to the Islamic

Republic of Afghanistan for the Agriculture Market Infrastructure Project. Manila. 18 ADB. 2012. Grant Assistance Report: Proposed Grant to the Islamic Republic of Afghanistan for the Enhanced

Agricultural Value Chains for Sustainable Livelihoods Project. Manila.

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entrepreneurship. To enhance the intermediation function and efficiency of the banking subsector, in March 2018 the World Bank approved the $40 million Modernizing Afghan State-Owned Banks Project to help (i) strengthen corporate governance of state-owned banks, and (ii) support institutional development and business strategy and the modernization of management information systems.19 12. The project will support the National Comprehensive Agriculture Development Program 2016–2020 (footnote 9) through both physical investments and capacity development to increase value addition along the horticulture value chain. It will complement and enhance the impacts of past and ongoing projects financed by ADB and development partners by promoting an integrated and practical approach to value chain development in high-impact production zones. The judicious use of matching funds under the project will stimulate mobilization of private resources as ABE contributions reduce the risks associated with subproject investments and promote sustainability. The project design adopts a sector modality because of the clear development plan for the sector and MAIL’s experience in the implementation of other internationally financed projects in horticulture, while the project will contribute to national polices in respect of quality certification and applied research. The project meets the sector modality criteria as (i) the government has a clear sector development plan to meet the priority development needs of the sector, (ii) MAIL has implemented a large number of similar sector projects and has adequate institutional capacity to implement the sector development plan, and (iii) the strategies and policies applicable to the sector are appropriate and will be improved though the project’s approaches to strengthening linkages between ABEs and producers. 13. Value added by ADB assistance. The project promotes business linkages between ABEs and farmers in high-impact production zones, and is expected to create significant economic opportunities for agribusiness development both vertically and horizontally. The project reflects lessons from past and ongoing sector projects financed by ADB and development partners. Key lessons call for the need to increase the government’s ownership, avoid setting up parallel management structures, set up realistic implementation plans, keep interventions simple yet effective, and promote market linkages in a holistic manner addressing key farm–market constraints. The project follows the fragile and conflict-affected states approach in that it uses (i) a sector modality, which allows flexibility in subproject selection and implementation given security concerns; and (ii) a streamlined project management structure, which helps long-term programmatic sector interventions. The project’s readiness is enhanced by using advance recruitment and financing taxes on eligible project expenditures.20 14. The project is consistent with ADB's country partnership strategy, 2017–2021 which supports the government’s strategic priorities, and is included in ADB’s country operations business plan, 2017–2019.21 The project is aligned with ADB’s operational plan for agriculture and natural resources, 2015–2020 and ADB’s water operational plan, 2011–2020. 22

19 World Bank. 2018. Modernizing Afghan State-Owned Banks (P161348). Washington, DC. 20 In accordance with ADB. 2015. Enhancing Operational Efficiency of the Asian Development Bank. Manila. 21 ADB. 2017. Country Partnership Strategy: Afghanistan, 2017–2021—Achieving Inclusive Growth in a Fragile and

Conflict-Affected Situation. Manila; and ADB. 2017. Country Operations Business Plan: Afghanistan, 2017–2019. Manila.

22 ADB. 2015. Operational Plan for Agriculture and Natural Resources: Promoting Sustainable Food Security in Asia and the Pacific in 2015–2020. Manila; and ADB. 2011. Water Operational Plan, 2011–2020. Manila.

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B. Impact and Outcome 15. The project is aligned with the following impact: improved agricultural productivity and food security (footnote 9). The project will have the following outcome: increased production and value addition of horticultural products. 23 C. Outputs 16. Output 1: Horticulture value chain infrastructure and facilities improved. Two groups of subprojects are envisaged for project financing. First, eligible subprojects for ABEs will include (i) precooling rooms (static and mobile); (ii) packhouse, sorting, or grading buildings and equipment; (iii) storage (zero energy, cold storage, and controlled atmosphere) facilities; (iv) processing equipment and machinery to expand processing capacity; (v) a quality control accredited laboratory; (vi) introduction of hazard analysis and critical control point and good manufacturing practices into horticulture processing plants; and (vii) a tissue culture laboratory (potatoes, clonal rootstock, and micropropagation). Second, eligible subprojects for affiliated farmers will include (i) modern greenhouses; (ii) planting material (potatoes and onions, tomato and cucumber hybrid seeds, clonal rootstock, and high-density certified saplings); (iii) trellising (for grapes and high-density orchards); (iv) on-farm storage for onions and potatoes; (v) on-farm processing, drying, and grading equipment; and (vi) on-farm water sources and distribution systems (such as storage ponds, rainwater harvesting, and drip irrigation).24 17. Output 2: National capacity for horticulture export expansion developed. Three areas have been identified for project support: (i) adaptive research to demonstrate the benefits from introduced varieties and modern production technologies and applying these under local conditions, (ii) the introduction of internationally recognized standards and certification to provide quality assurance to buyers, and (iii) the promotion of national marketing and/or branding strategies for uniquely Afghan horticultural produce so as to establish an internationally recognized brand with associated quality on higher-priced markets. This output will be achieved through the provision of resources for studies and institutional development combined with technical expertise for branding in a competitive commercial and/or international environment. D. Summary Cost Estimates and Financing Plan 18. The project is estimated to cost $118.66 million (Table 1). Detailed cost estimates by expenditure category and by financier are included in the project administration manual (PAM).25 19. The sector modality is proposed for the project as it facilitates identification and financing of high-value subprojects on a demand-driven basis during implementation. The government has requested a grant not exceeding $75.0 million from ADB’s Special Funds resources (Asian Development Fund) to help finance the project. The summary financing plan is in Table 2 and further detailed in the PAM (footnote 25). ADB will finance expenditure in relation to civil works, equipment and machinery, consulting services, and taxes and duties. 26 The ABEs will contribute

23 The design and monitoring framework is in Appendix 1. 24 List of Candidate Subprojects and Estimated Demand (accessible from the list of linked documents in Appendix 2). 25 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 26 ADB will finance taxes and duties estimated at 5%–10% of total project cost, which does not represent an excessive

share of the financing plan and is within applicable country partnership strategy parameters. ADB. 2005. Innovation and Efficiency Initiative—Cost Sharing and Eligibility of Expenditures for Asian Development Bank Financing: A New Approach. Manila.

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$38.0 million and affiliated farmers $5.05 million as cost sharing for subprojects. The government will contribute $0.61 million in the form of office space and utilities for project implementation.

Table 1: Summary Cost Estimates ($ million)

Item Amounta

A. Base Cost b 1. Horticulture value chain infrastructure and facility improvement 113.37 2. National capacity development 2.32 Subtotal (A) 115.69 B. Contingencies c 2.97 Total (A+B) 118.66

a Includes taxes and duties of $6.04 million which does not represent an excessive share of the project cost. b In June 2018 prices. c Physical contingencies computed at 10% for civil works, and 5% for field research and development, training,

surveys, and studies. Price contingencies computed at annual rate of 1.5% on foreign exchange costs and 5.0% on local currency costs (compounded over the project implementation period); includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

Source: Asian Development Bank estimates.

Table 2: Summary Financing Plan Amount

($ million) Share of Total

(%) Source

Asian Development Bank Special Funds resources (Asian Development Fund grant) 75.00 63.21

Agro-business enterprises 38.00 32.02 Affiliated farmers 5.05 4.26 Government of Afghanistan 0.61 0.51

Total 118.66 100.00 Source: Asian Development Bank estimates.

E. Implementation Arrangements 20. The Ministry of Finance will be the executing agency and MAIL the implementing agency. A project management unit (PMU) and four regional project implementation units will be set up under the existing structure of MAIL’s Central Program Management Office to implement the project. Implementation support consultants (ISC) will be recruited to assist the PMU for the entire implementation period. A nongovernment organization will be engaged as the facilitation partner to assist with solicitation and consolidation of on-farm subproject proposals and facilitation of business linkages between producers and ABEs. A subproject evaluation committee comprising independent membership from various government agencies and the private sector will be set up to assess the merits of subprojects based on the guidelines for evaluation of subproject investment proposals (SIPs), and make recommendations regarding candidate subprojects. 21. Two types of subprojects envisaged for project financing are ABE subprojects and on-farm subprojects. The subproject selection, appraisal, and approval will be undertaken with the following steps: (i) identify subprojects and solicit SIPs through public awareness campaigns; (ii) screen SIPs based on the eligibility criteria; (iii) prepare subproject investment reports (SIRs) with due diligence on technical, social, financial, economic, social and environmental safeguards, implementation arrangements, and operation and maintenance (O&M); (iv) assess SIRs by subproject evaluation committee based on the eligibility criteria and recommendations made to accept or reject candidate subprojects; (v) sign subproject agreements by MAIL’s delegated authority and subproject owners if SIRs pass the evaluation; and (vi) procure goods, works, and

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services in accordance with terms and conditions of the subproject agreements. This subproject selection, appraisal, and approval process will ensure that only subprojects of merit and high impact will be selected for project grants, which will minimize risks of corruption and collusion. For ABE subprojects, the project will promote private sector participation by requiring selected ABEs to contribute 50% of subproject costs and be responsible for subproject implementation under the guidance of the PMU and the ISC. ABEs will undertake the procurement on commercial practice to ensure that procured items are relevant to the ABEs’ operational needs and the equipment and/or facilities are fully utilized and maintained. ABEs will be required to submit all invoices and payment evidences related to subproject costs in order to substantiate 50% of the project grant. In this regard, financial management and funding risks will be minimized. For on-farm subprojects, the PMU will undertake the procurement using framework agreements based on demand by geography and type of goods, works, and services as consolidated by the facilitation partner. The entire subproject appraisal process and subsequent subproject implementation will be undertaken and/or supervised by the PMU with assistance of the ISC and the facilitation partner. The implementation arrangements are summarized in Table 3 and described in detail in the PAM (footnote 25).

Table 3: Implementation Arrangements Aspects Arrangements

Implementation period 1 January 2019–30 December 2024 Estimated completion date 30 December 2024 Estimated grant closing date 30 June 2025 Management

(i) Executing agency MOF (ii) Implementing agency MAIL (iii) Implementation units One PMU in MAIL’s head office (under CPMO), and four regional PIUs

located in the provinces of Bamyan, Ghazni, Nangarhar, and Paktya. Total staff will be 76 in PMU and 80 in PIUs.

Procurement OCB 1 contract for vehicles for PMU $250,000

FA 18 contracts using framework agreements for on-farm subprojects

$18.0 million

CPP 49 contracts for on-farm subprojects $3.4 million RFQ 6 contracts for PMU and PIU office

equipment $245,000

Consulting services QCBS 90:10 1 contract with 334 person-months for implementation support consultants

$3.64 million

QCBS 90:10 1 contract (total 800 person-months) for the facilitation partner

$2.44 million

CQS 10 contracts $1.3 million ICS 2 contracts (10 person-months) $130,000

Retroactive financing and/or advance contracting

Advance recruitment action for implementation support consultant will be required. However, no contract will be awarded before grant effectiveness.

Disbursement The grant proceeds will be disbursed following ADB's Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB.

ADB = Asian Development Bank; CPMO = Central Program Management Office; CPP = community participation in procurement; CQS = consultant’s qualification selection; FA = framework agreement; ICS = individual consultant selection; MAIL = Ministry of Agriculture, Irrigation and Livestock; MOF = Ministry of Finance; OCB = open competitive bidding; PIU = project implementation unit; PMU = project management unit; QCBS = quality- and cost-based selection; RFQ = request for quotations. Source: Asian Development Bank estimates.

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III. DUE DILIGENCE A. Technical 22. The project is designed to ensure long-term sustainability. To maintain infrastructure and equipment throughout its economic life, various design and implementation support measures are included. For ABE investments, full feasibility studies will be prepared that will include detailed engineering designs of planned works prior to appraisal by the subproject evaluation committee. These will require international standards to be adopted in the design of subproject works and facilities. As a subproject eligibility criterion, ABEs are required to demonstrate and commit adequate financial resources for O&M of buildings, equipment, and machinery to be financed by the project. For on-farm interventions, the project will provide capacity building to subproject owners in O&M of installed facilities and equipment. B. Economic and Financial 23. Project benefits are multifaceted and include increased value addition for Afghan horticultural produce. First, the introduction of improved equipment and cold storage facilities will reduce losses by an estimated 30%–50%, adding to the economic benefit from the project.27 Second, the increased availability of fruit and vegetables will minimize imports and increase exports and foreign reserves. The increased supply of quality produce will enhance competitiveness in international markets. Third, increased economic opportunities will be created for upstream (input suppliers) and downstream (processors and market intermediaries) stakeholders. The analysis of two representative subprojects indicates that the investments are financially and economically viable. The calculated financial internal rates of return for these subprojects are 19.3% and 19.5% as compared with the funding cost of 7.14%, and the economic internal rates of return are 18.9% and 19.0%, well above the economic opportunity cost of capital of 9.0%. The sensitivity analysis indicates that both subproject cash flows are robust with respect to potentially adverse movements in revenue and cost streams.28 C. Governance 24. The overall premitigation financial management, procurement and funding risk is classified substantial. Assessments have identified risks related to the country's public financial management system in the areas of internal control, procurement management, financial reporting, and external auditing.29 Action plans have been agreed with MAIL to strengthen its financial management. ADB’s Anticorruption Policy (1998, as amended to date) was explained to the Ministry of Finance and MAIL. The specific policy requirements and supplementary measures are in the PAM (footnote 25). D. Poverty, Social, and Gender 25. Poverty. The project will benefit ABEs and their affiliated farmers in the project areas that include low-income and marginal farmers (with household landholdings of 1–2 ha). The project provinces (footnote 1) belong to the highest food insecurity category, ranging from “stress” to

27 The project may incur climate change mitigation benefits. However, since subproject financing is demand-driven, an

inventory of climate finance scale and associated benefits will be revisited during the project mid-term review. 28 Financial and Economic Analysis (accessible from the list of linked documents in Appendix 2). These sample

subprojects have considered linkages with small-scale on-farm subprojects through stable supply of harvested crops. 29 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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“crisis” on the famine early warning system network.30 Project interventions will increase annual production of fruit and vegetables, contributing significantly to improving the food security of project beneficiaries and others in the project area. Incremental household income and jobs created, particularly for women in packing and processing premises, will significantly contribute to local poverty reduction. 26. Social and gender. The project is categorized as effective gender mainstreaming. Gender activities will be mainstreamed in the project.31 It will directly benefit ABEs and affiliated farmers, including poor households within the project areas, through increases in agricultural production and farm incomes. Improved access to water-efficient on-farm distribution and application systems, quality planting material, modern production systems, on-farm greenhouses, and storage facilities will allow farmers to access higher off-season prices for perishable produce and reduce income inequality. Women subproject owners will be specifically targeted to ensure that they participate equally in access to grant funding. Supply contract arrangements between ABEs and affiliated farmers will be developed, taking into account the special requirements of farming households headed by women. E. Safeguards 27. Environment (category B). An environmental assessment and review framework and initial environmental examinations for two representative subprojects were disclosed on ADB’s website in July 2018. Site-specific environmental impacts may occur in each of these subprojects during the construction and operation phase. Adequate mitigation measures are included and will be implemented through environmental management plans. ADB conducted public consultations for the representative subprojects in May 2018. The review framework ensures project compliance with ADB’s Safeguard Policy Statement (2009) by specifying environmental safeguards procedures required for subprojects prepared during implementation. Each subproject will be screened for environmental classification. Subprojects classified category A will not be eligible. Category B subprojects will require an initial environmental examination, including an environmental management plan, and incorporation of environmental management plan measures into civil works contracts. Category C subprojects will require summaries of environmental implications in their feasibility studies. Adequate resources have been allocated for environmental safeguards preparation, implementation, monitoring, and reporting.32 28. Involuntary resettlement (category C). Subproject proposals that involve land acquisition or lead to involuntary resettlement will not be considered. As a good practice, a resettlement framework was prepared to guide screening of subproject selection and documentation of subproject sites for involuntary resettlement due diligence. The resettlement framework describes the measures required to ensure that potential land acquisition and resettlement impacts are identified, avoided, reduced, and mitigated in accordance with ADB’s Safeguard Policy Statement and the laws and regulations of Afghanistan. The resettlement framework covers subproject screening, categorization, and preparation of social safeguard due diligence reports for each category C subproject. The resettlement framework and social safeguard due diligence reports on two representative subprojects were disclosed on the ADB website in July 2018.33

30 http://fews.net/central-asia/afghanistan/food-security-outlook/october-2017 (accessed 17 July 2017). 31 Gender Action Plan (accessible from the list of linked documents in Appendix 2). 32 Environmental Assessment and Review Framework, and Initial Environmental Examinations (accessible from the list

of linked documents in Appendix 2). 33 Resettlement Framework (accessible from the list of linked documents in Appendix 2).

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29. Indigenous peoples (category C). Afghanistan is inhabited by ethnic groups across its 34 provinces. None of these groups are considered indigenous peoples as defined in ADB’s Safeguard Policy Statement for operational purposes. F. Summary of Risk Assessment and Risk Management Plan 30. Significant risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.34 The overall project risk is moderate.

Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures

Deterioration of security conditions in the project areas causes delay or even suspends project activities.

A participatory community-based approach will empower community elders to keep staff safe and ensure that works can continue. Contractors will be responsible for security of their staff.

Horticultural exports may be constrained by competition from neighboring countries.

The increased volume and quality of produce generated by modern infrastructure and facilities will help increase Afghanistan’s market share.

The project design in which agro-business enterprises finance 50% of subproject cost may entail substantial funding risks.

Procedures are in place for subproject selection, screening, evaluation, approval, monitoring of procurement, invoicing, and verification. External financial auditors will be tasked with checking and confirming the actual beneficiary contributions.

Source: Asian Development Bank.

IV. ASSURANCES AND CONDITIONS

31. The government has assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and grant agreement. 32. The government has agreed with ADB on certain covenants for the project, which are set forth in the grant agreement. Conditions for withdrawal from the grant account are (i) MAIL has prepared the Guidelines for Evaluation of Subproject Investment Proposals, acceptable to ADB, which will include methodology for assessment of ABEs’ financial position and capacity to fund 50% of total subproject cost; and (ii) MAIL has trained relevant project staff in using these guidelines.

V. RECOMMENDATION 33. I am satisfied that the proposed grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the grant not exceeding $75,000,000 to the Islamic Republic of Afghanistan from ADB’s Special Funds resources (Asian Development Fund) for the Horticulture Value Chain Development Sector Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board.

Takehiko Nakao President

3 October 2018

34 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK Impact the Project is Aligned with Agricultural productivity and food security improved (National Comprehensive Agriculture Development Program 2016–2020).a

Results Chain Performance Indicators

with Targets and Baselines

Data Sources and Reporting Mechanisms

Risks

Outcome Production and value addition of horticultural products increased

By 2025: a. The production of horticultural goods increased to 5.0 million tons per year (2017 baseline: 3.9 million tons) b. Horticulture’s annual contribution to gross domestic product increased to $2.0 billion (2016 baseline: $1.4 billion) c. Post-harvest losses of horticultural commodities reduced by 50% (2017 baseline: 0.35 million tons)

a. MAIL annual reports b. Ministry of Economy annual reports c. PMU annual progress reports

Horticultural exports may be constrained by competition from neighboring countries.

Output 1. Horticulture value chain infrastructure and facilities improved

By 2024: 1a. 30 precooling rooms and/or controlled atmosphere rooms, 30 packhouses, 5 tissue culture laboratories established, and 40 units of processing equipment installed in processor premises (2017 baseline: 0)

1a. PMU biannual progress reports

Deterioration of security conditions in the project areas causes delay or even suspends project activities. Funding risks maybe high as a result of requiring ABEs to finance 50% of subproject cost.

1b. 50 modern greenhouses, 750 on-farm storage units, 200 on-farm processing units, and 500 water sources established (2017 baseline: 0)

1b. PMU biannual progress reports

1c. 300 ha of high-density orchards and vineyards established with certified planting material, an incremental 400 ha of orchards and vineyards rehabilitated with trellising, an incremental 220 ha of on-farm irrigation systems developed (2017 baseline: 0) 1d. At least 80% of employees working in subproject-financed premises are women (2018 baseline: 60%)

1c. MAIL annual statistics and project progress reports 1d. PMU biannual progress reports

2. National capacity for export expansion developed

By 2024: 2a. International quality certification procedures introduced into 20 fruit and vegetable packhouses and/or processing facilities, including two facilities owned by women (2017 baseline: 0)b

2a. PMU annual updates on membership certificates of International Accreditation Forum

12 Appendix 1

Results Chain Performance Indicators

with Targets and Baselines

Data Sources and Reporting Mechanisms

Risks

2b. Capacity for production of certified grafted planting material increased from 2 million saplings per annum to 6 million per annum (2017 baseline: 0)

2b. MAIL annual statistics and PMU biannual progress reports

2c. Six students, including at least two women, engaged in post-graduate training at internationally recognized tertiary institutions in aspects of horticulture value addition (2017 baseline: 0) 2d. Six professional staff, including at least two women, completed fellowship studies in internationally recognized tertiary horticulture programs (2017 baseline: 0)

2c.–g. PMU biannual progress reports

2e. At least one woman financial manager or controller employee from each participating ABE with improved skills on financial management and entrepreneurship (2018 baseline: 0)

2f. Processors using results from adaptive research program to inform contract suppliers of production and post-harvest handling technologies (2017 baseline: 0)

2g. Long-term national horticulture marketing and branding strategy for high-value commodities prepared and approved for implementation. (2018 baseline: 0)

Key Activities with Milestones 1. Horticulture value chain infrastructure and facilities improved 1.1 Issue request for proposal for implementation support consulting services (Q4 2018). 1.2 Issue request for proposals for facilitation partner services (Q3 2019). 1.3 Execute subproject agreements with approved subproject investors for goods and works for the

two representative subprojects (Q2 2019). 1.4 Conduct awareness-raising campaign, elicit subproject investment proposals, screen and evaluate

subprojects, and execute subproject agreements on conforming subprojects (Q1 2019–Q4 2023). 1.5 Facilitate construction and/or materials and equipment supply for approved subprojects (Q3 2019–

Q3 2024). 1.6 Formalize delivery contracts between affiliated farmers and ABEs (Q4 2024). 2. National capacity for horticulture export expansion developed 2.1 Conduct quality assurance audits for processors and/or traders, develop plans for upgraded

facilities, and provide training on procedures (Q3 2020–Q3 2024). 2.2 Pilot brand development for key horticultural produce unique to Afghanistan (Q1 2022–Q4 2024).

Appendix 1 13

Key Activities with Milestones 2.3 Undertake adaptive research to support the modernization of horticulture production, processing,

and marketing (Q1 2020–Q4 2023). 2.4 Prepare long-term national horticulture marketing and branding strategy for high-value

commodities (by Q4 2020). 2.5 Identify suitably qualified individuals to undergo post-graduate and fellowship training (Q3 2020). 2.6 Support farmer, processor and/or trader, and MAIL staff capacity-building initiatives (Q4 2020). Project Management Activities Refurbish the PMU and/or regional project implementation units and appoint implementation staff by Q1 2019. Set up project performance management system by Q2 2019. Prepare draft project completion report by Q4 2024. Inputs Asian Development Bank: $75.00 million (Asian Development Fund grant) Agro-business enterprises: $38.00 million Affiliated farmers: $5.05 million Government of Afghanistan: $0.61 million

Assumptions for Partner Financing Not applicable

ABE = agro-business enterprise; ha = hectare; MAIL = Ministry of Agriculture, Irrigation and Livestock; PMU = project management unit; Q = quarter. a Government of Afghanistan, Ministry of Agriculture, Irrigation and Livestock. 2016. National Comprehensive

Agriculture Development Program 2016–2020. Kabul. b International quality assurance procedures comprise Hazard Analysis Critical Control Point and International

Organization for Standardization standards introduced into packing facilities. Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=51039-002-2

1. Grant Agreement: Special Operations 2. Sector Assessment (Summary): Agriculture, Natural Resources, and Rural Development 3. Project Administration Manual 4. Contribution to the ADB Results Framework 5. Development Coordination 6. Financial and Economic Analysis 7. Country Economic Indicators 8. Summary Poverty Reduction and Social Strategy 9. Gender Action Plan 10. Initial Environmental Examination 11. Environmental Assessment and Review Framework 12. Resettlement Framework 13. Risk Assessment and Risk Management Plan Supplementary Documents 14. Social Safeguard Due Diligence Report 15. List of Candidate Subprojects and Estimated Demand 16. Detailed Financial and Economic Analysis 17. Financial Management Assessment: Ministry of Agriculture, Irrigation and Livestock 18. Procurement Capacity Assessment: Ministry of Agriculture, Irrigation and Livestock 19. Lessons and Synergies 20. Governance Risk Assessment and Risk Management Plan 21. Detailed Social and Gender Assessment