Report and Recommendation of the President

to the Board of Directors

Project Number: 47305-004

Loan Number: 3471-UZB
May 2018

Proposed Loan for Additional Financing

Republic of Uzbekistan: Horticulture Value Chain
Development 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 12 April 2018)

Currency unit – sum (SUM)

SUM1.00 = $0.00012
$1.00 = SUM8,109.81

ABBREVIATIONS

ADB – Asian Development Bank

CBU – Central Bank of Uzbekistan
ESMS – environmental and social management system
GDP – gross domestic product
ha – hectare
m3 – cubic meter
PAM – project administration manual
PFI – participating financial institution
RRA – Rural Restructuring Agency

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 Meenakshi Ajmera, Principal Safeguards Specialist, Southeast Asia
Department (SERD)
Cindy Shayne Cabrales-Chiong, Associate Project Analyst, CWRD
Marie Stephanie Igaya, Associate Project Officer, CWRD
Feruza Insavalieva, Associate Project Analyst, CWRD
Mekhri Khudayberdiyeva, Senior Social Development Officer (Gender),
CWRD
Tal’at Nasirov, Senior Project Officer, CWRD
Aysha Qadir, Principal Counsel, Office of the General Counsel
Umida Rasul-Zade, Operations Assistant, CWRD
Mary Alice Rosero, Social Development Specialist (Gender and
Development), CWRD
Thi Thanh Phuong Tran, Senior Environment Specialist, CWRD
Peer reviewers Aliya Mukhamedyarova, Unit Head, Project Administration, SERD
Pavit Ramachandran, Principal Environment Specialist, SERD

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

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1
B. Impact and Outcome 5
C. Output 6
D. Investment and Financing Plans 6
E. Implementation Arrangements 7

III. DUE DILIGENCE 8

A. Economic and Financial 8
B. Governance 9
C. Poverty and Social 9
D. Safeguards 9
E. Risks and Mitigating Measures 10

IV. ASSURANCES AND CONDITIONS 10

V. RECOMMENDATIONS 10

APPENDIXES
1. Revised Design and Monitoring Framework 11
2. List of Linked Documents 13
 Project Classification Information Status: Complete

PROJECT AT A GLANCE

1. Basic Data Project Number: 47305-004

Project Name Horticulture Value Chain Development Department CWRD/CWER
Project (Additional Financing) /Division
Country Uzbekistan Executing Agency Rural Restructuring Agency
Borrower Ministry of Finance
2. Sector Subsector(s) ADB Financing ($ million)
Finance Small and medium enterprise finance and leasing 130.00
Agriculture, natural Agricultural policy, institutional and capacity development 2.00
resources and rural Agro-industry, marketing, and trade 48.00
development Land-based natural resources management 18.00
Total 198.00

3. Strategic Agenda Subcomponents Climate Change Information

Inclusive economic growth Pillar 2: Access to economic Adaptation ($ million) 50.00
(IEG) opportunities, including jobs, made Climate Change impact on the Low
more inclusive Project
Environmentally sustainable Eco-efficiency
growth (ESG) Global and regional transboundary
environmental concerns
Natural resources conservation
4. Drivers of Change Components Gender Equity and Mainstreaming
Governance and capacity Client relations, network, and Effective gender mainstreaming
development (GCD) partnership development to partnership (EGM)
driver of change
Knowledge solutions (KNS) Knowledge sharing activities
Pilot-testing innovation and learning
Partnerships (PAR) Implementation
Private Sector
Private sector development Promotion of private sector investment
(PSD)
5. Poverty and SDG Targeting Location Impact
Geographic Targeting Yes Rural High
Household Targeting No Urban Low
SDG Targeting Yes
SDG Goals SDG5, SDG8, SDG9
6. Risk Categorization: Low
.

7. Safeguard Categorization Environment: FI Involuntary Resettlement: FI-C Indigenous Peoples: FI-C

.

8. Financing
Modality and Sources Amount ($ million)
ADB 198.00
Sovereign Development financing institution (DFI) (Concessional Loan): Ordinary 198.00
capital resources
Cofinancing 0.00
None 0.00
Counterpart 128.00
Beneficiaries 60.00
Government 68.00
Total 326.00

Source: Asian Development Bank

This document must only be generated in eOps. 22102017152407336730 Generated Date: 12-Apr-2018 15:07:09 PM
 I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to
the Republic of Uzbekistan for the additional financing of the Horticulture Value Chain
Development Project.1

2. The proposed additional financing will help the Government of Uzbekistan to scale up the
existing project’s support to horticulture value chain development in all 12 regions nationwide and
in the Republic of Karakalpakstan. It will increase the outreach of participating financial institutions
(PFIs) and improve access to market-based bank finance for horticulture enterprises (farmers,
agro-processing enterprises, owners and operators of cold storage facilities, and trading and
logistics service suppliers). These will include both additional enterprises not financed under the
existing project and enterprises already financed under the existing project to enable them to
expand operations. The additional financing will enhance the impact of the existing project and
further increase farm productivity, improve processing and storage capacity, and reduce post-
harvest losses through upgrading and establishing intensive orchards; modern and efficient
greenhouses; and processing, storage, and refrigeration facilities. This will, in turn, promote long-
term economic and environmental sustainability, and enhance profitability for farmers and
agribusiness enterprises.

II. THE PROJECT

A. Rationale

3. Sector performance. Uzbekistan’s economy grew consistently during 2010–2016, when

gross domestic product (GDP) grew at an average annual rate of 8.0%, reaching $63.4 billion in
2016.2 The economy has proved resilient to the downward pressures exerted from 2008 onwards
on other economies by the global financial crisis. Despite an economic downturn in the Russian
Federation (Uzbekistan’s major trading partner and source of remittances), the Uzbek economy
achieved GDP growth rates of 7.8% in 2016 and 5.3% in 2017. GDP growth is expected to be
7.3% in 2018.3 According to national poverty line estimates, overall poverty declined from 27.5%
of the population in 2001 to 12.8% in 2016 as a result of rapid economic growth.4 Along with
overall economic growth, agriculture GDP in Uzbekistan grew at an average annual rate of 6.7%
during 2012–2016. There was however, a slowdown in 2017 when the sector grew by only 2.0%.
The higher rate of growth in other sectors resulted in a decline in the agriculture sector’s
contribution to GDP, from 34.4% in 2000 to 19.2% in 2017. Agriculture’s contribution to GDP has
traditionally derived from the production of cotton and wheat, which the government has regarded
as strategic crops and supported through preferential access to land, inputs, and finance.
However, there has been a shift in the contribution of these crops to GDP since 2000. The share
of cotton production in GDP declined from 3.6% in 2000 to 2.3% in 2016. Over the same period,
the contribution of grains to GDP fell from 3.4% to 2.4%, while the combined share of fruit and
vegetables increased from 5.2% to 10.6%.5

4. Despite its declining share of GDP, agriculture remains an important sector. In 2017, it
accounted for 27% of total employment. It is also a key income source in rural areas, where 49%

1 The design and monitoring framework is in Appendix 1.

2 World Bank estimate in dollars. http://www.worldbank.org/en/country/uzbekistan (accessed 1 January 2018).
3 Asian Development Bank (ADB). 2017. Asian Development Outlook 2017. Manila.
4 On the basis of $1.90 purchasing power parity criterion, an estimated 68.1% of the population was below the poverty
line in 2012. ADB. 2017. Basic 2017 Statistics. Manila.
5 Government of Uzbekistan, State Committee on Statistics. 2017. Statistical Report 2017. Tashkent.
2

of the population resides, and which account for 75% of people living below the poverty line. About
4.7 million rural households operating dehkan (small-scale) farms derive their income from
agriculture. Dehkan farms, which operate independently of government support, account for the
production of 66% of vegetables, 76% of potatoes, 54% of fruit, and 49% of grapes on farms of
0.35–0.50 hectares (ha).

5. The shift in production from cotton and wheat to horticulture is also reflected in exports.
Agricultural exports grew at an annual average rate (in current dollar terms) of 12.5% during
2000–2013, while cotton exports grew by an annual rate of only 2.0%. During 2010–2017, cotton
exports declined from $1.5 billion to $477.1 million, while the share of cotton exports in total
exports fell from 27.5% in 2000 to 3.4% in 2017. By comparison, the share of food products in
exports rose from 5.00% in 2000 to 6.35% in 2017.6 Fruit and vegetable exports grew from $68.7
million in 2000 to $1.45 billion in 2016, equating to an average annual growth rate of 21%, while
the share of fruit and vegetables in total exports increased from 2% to 9%. In 2016, the value of
fruit and vegetable exports exceeded that of cotton exports by more than 30% ($600 million).

6. Binding constraints. Although it is expected to continue to grow, the agriculture sector

is characterized by low productivity and remains labor intensive. The horticulture subsector is
constrained by limited access to quality land, specialized horticulture machinery, appropriate
inputs, and, in particular, finance. Limited access to either equity or long-term debt financing for
producers and enterprises throughout the value chain constrains development. The horticulture
subsector does not receive preferential financing under government programs, as is the case for
cotton and wheat production. Financial institutions have a largely negative perception of the
profitability and creditworthiness of the agriculture sector, exacerbated by an undeveloped
regulatory framework for the use of movable assets as loan collateral, and a lack of acceptable
collateral among many small-scale producers or collateral with low realizable values among
agribusiness enterprises. Further, access to information on potential borrowers is limited as the
credit information system is not efficient. Financial institutions have yet to develop credit policies
and loan products appropriate to the needs of horticulture producers and enterprises, including
cash-flow-based loan appraisal suitable for horticulture investment and seasonality of production.

7. The high cost of funds, perceived risks, and administrative costs associated with lending
to individuals and small businesses require banks to charge interest rates of 11%–25% for local
currency loans and 6%–15% for foreign currency loans. Individuals and small businesses are
generally required to borrow at the higher end of these ranges. 7 Deposit mobilization is
undermined by public mistrust in banks and is compounded by administrative hurdles in
withdrawing cash from bank accounts. Bank loans are mainly short-term, with an average maturity
of 18 months. While there is a high demand for medium- and long-term loans, banks are not able
to finance due to their lack of equivalent medium- and long-term funding sources. Moreover,
access to finance for private individuals and enterprises is constrained by weak rural branch
networks and limited mobile banking services. Family, friends, and informal sources fund 80% of
small businesses. 8 In addition, farmers and agribusiness enterprises have poorly developed
business and managerial skills and generally low financial literacy.

6 Ministry of Foreign Economic Relations, Investment, and Trade. http://www.mfer.uz (accessed 1 January 2018).
7 Under the existing project, PFIs receive ADB loan funds via the Ministry of Finance at 3%. To this PFIs add 2.5–3.5
percentage points based on their normal credit and risk management policies.
8 World Bank. 2014. Business Environment and Enterprise Performance Survey, 2012–2014. Washington, DC.
 3

8. Opportunities. The potential of a growing and more sophisticated consumer demand for
both fresh and processed products in domestic and export markets is not being realized because
of such constraints. Significantly larger volumes of produce with improved quality could be
marketed if better post-harvest logistics, notably cold storage and transport, existed.9 Of the 20
million tons of horticultural output in 2016, only 15% was processed. Of the 3 million tons of fruit
produced, 69% are consumed fresh, 20% are processed, and 11% are exported, while for the 10
million tons of vegetables, 81.0% are consumed fresh, 11.3% are processed, 4.3% are used for
seeds, and 3.4% are exported. This indicates a significant opportunity for improved value addition
from increased processing and exports of both fresh and processed products. The revealed
comparative advantage analysis by ADB staff suggests that Uzbekistan produces more
specialized horticultural products than many other countries, indicating potential to expand
exports.

9. Continued diversification from cotton and wheat production toward horticulture also offers
significant environmental benefits as it could decrease demand for irrigation water. Climate
change projections for Uzbekistan from 2005 to 2050 indicate that (i) water supply will decrease
from 57 billion cubic meters (m3) to 52–54 billion m3, (ii) water demand will increase from 59 billion
m3 to 62–63 billion m3, and (iii) the water deficit will increase by more than 500% from about 2
billion m3 to 11–13 billion m3.10 Horticulture crops typically use less water than cotton and are
more efficient in water use than grain crops. In Uzbekistan, 4,426 m3 of water is required to grow
1 ton of cotton and 2,068 m3 of water is required for 1 ton of wheat.11 By comparison, grape
production per ton requires about 2,400 m3 of water and apples 820 m3. Diversification of fruit and
vegetable production from field to greenhouse cultivation, which is specifically supported under
the project, also offers significant water use efficiency and environmental management benefits.

10. Government’s sector strategy. The government aims to take more steps to increase
agriculture production. 12 Measures include (i) further structural reforms in agriculture and
diversification of agricultural production; (ii) mechanization of agriculture, improvement of
infrastructure, and development of agribusiness; (iii) more productive use of land and water; (iv)
greater financial stability of farm entities; and (v) more market-oriented agricultural policies. The
government’s sector development plan up to 2020 includes further reductions in cotton and wheat
production and an increase in horticulture production. The strategy for further land reallocation
will result in the following production area increases: 36,000 ha for potatoes, 91,000 ha for
vegetables, 18,000 ha for fruit orchards, and 11,200 ha for vineyards.13 The strategy will also aim
at improving logistics and processing to boost exports of agricultural products, including
horticulture.14

11. In the finance sector, the government has implemented programs to support small
businesses and banking industry growth, and has increased access to finance. To improve the

9 Staff estimates indicate that post-harvest losses are up to 45.0% of the harvested crop, and that existing cold storage
will only be able to store 2.3% of the total forecast horticulture output by 2020.
10 World Bank. 2010. Uzbekistan: Climate Change and Agriculture Country Note. Washington, DC.
11 M. M. Aldaya, G. Munoz, and A. Y. Hoekstra. 2010. Water Footprint of Cotton, Wheat, and Rice Production in Central

Asia. Value of Water Research Report Series. Number 41. Delft, the Netherlands: UNESCO-IHE Institute of Water
Education.
12 Government of Uzbekistan. 2015. Presidential Decree No. UP-4707. Tashkent. Under this decree, a program of

measures on structural reforms, modernization, and diversification of production for 2015–2019 was adopted.
13 Under the farm size optimization program approved by the Cabinet of Ministers on 29 December 2015.
14 Government of Uzbekistan. 2016. Presidential Decree PP-2505. Tashkent. Under this decree, a program on

measures to further develop the raw material base; expand the processing of horticulture, meat, and dairy products;
and increase production and export of foodstuffs during 2016–2020 was adopted.
4

capacity of the banks to assess borrower creditworthiness, the Law on Credit Information,
promulgated in 2011, has established a public credit bureau. To facilitate registration of movable
assets as loan collateral, the 2013 Law on Collateral Registry supports establishing an
electronically secured transactions registry. Laws enacted in the late 1990s need to be improved
to facilitate the use of movable property as collateral. Assisted by the International Finance
Corporation, the government prepared draft legal amendments for enactment in 2017. The
government’s development strategy is consistent with the country partnership strategy, 2012–
2016 of the Asian Development Bank (ADB) for Uzbekistan and is included in ADB’s country
operations business plan, 2016–2018.15

12. Development partners have supported agriculture and horticulture through a variety of
projects and technical assistance. The World Bank has implemented two rural enterprise
restructuring projects that included the provision of credit to farmers and food processing
enterprises. The World Bank is also implementing a horticulture development project with total
financing of $650 million (including $500 million additional financing approved in January 2018).16
This project includes (i) providing credit lines to PFIs, (ii) improving financial literacy and business
planning skills for horticulture farmers and agribusiness enterprises, (iii) establishing a national
network of private growers through training and technical assistance, and (iv) strengthening state
research institutes and plant protection services. The International Fund for Agricultural
Development (IFAD) is implementing a $30 million horticulture development project. 17 Other
development partners have also provided broad support to enhance the business environment
and capacity building for financial institutions and small businesses. 18 Despite the recent
injections of long-term finance (estimated at $0.9 billion) in horticulture through these World Bank
and IFAD projects and ADB’s ongoing project, there remains significant unmet demand for long-
term finance in the horticulture subsector. The Rural Restructuring Agency (RRA), which is
implementing these projects, estimates the demand for additional investment finance during
2018–2022 to be in the range of $0.8 billion–$1.0 billion.

13. Assessment of the existing project. The existing project was approved in November
2016 and became effective in April 2017. Overall, implementation progress is rated highly
satisfactory. As of February 2018, cumulative fund release was $151.7 million, accounting for
98.5% of total loan proceeds ($154.0 million). A total of $151.4 million has been released to PFIs
for subloan financing, of which $130.2 million has been disbursed by PFIs to subborrowers. The
remaining $21.2 million has also been committed to eligible subprojects. Cumulative liquidated
subloans amount to $82.1 million, accounting for 63% of total loan proceeds versus 22% of project
implementation time elapsed. The project has supported 124 horticulture subprojects through
subloans. Fifty-four of the subprojects financed to date, with a subloan value of $66.4 million,
have been for production, and 70 subprojects, with a subloan value of $63.8 million, have been
for post-harvest storage and processing. The project has helped (i) establish 2,753 ha of intensive
orchards and 109 ha of water- and energy-saving greenhouses, (ii) increase the refrigerated
storage capacity by 39,150 tons and post-harvest processing capacity by 7,224 tons, (iii) establish
packaging material manufacture of 12 million square meters, and (iv) procure 171 units of
agricultural machinery. Given the nature of subprojects financed, in both production and modern
post-harvest facilities, the project will have a positive effect on the production, marketing, branding,
and export of Uzbek horticultural produce.19

15 ADB. 2012. Country Partnership Strategy: Uzbekistan, 2012–2016. Manila; ADB. 2015. Country Operations Business
Plan: Uzbekistan, 2016–2018. Manila.
16 World Bank. 2018. Project Appraisal Document for Uzbekistan Horticulture Development Project. Washington, DC.
17 IFAD. 2013. Project Design Report for Uzbekistan Horticulture Development Project. Rome.
18 Development Coordination (accessible from the list of linked documents in Appendix 2).
19 Summary of Project Performance (accessible from the list of linked documents in Appendix 2).
 5

14. Compliance with safeguard policy requirements has been rated satisfactory. All PFIs have
been implementing environmental and social management systems (ESMSs) and will be required
to further strengthen their ESMS and staff capacity during the remaining project implementation
period. Risk management arrangements are satisfactory. PFIs have assigned staff to the existing
project who are able to effectively appraise subloan financing, subproject safeguards, and social
and gender development aspects. Other than in certain limited cases, all PFIs are compliant with
Central Bank of Uzbekistan (CBU) prudential regulations and ADB loan covenants. Subproject
risks are further mitigated by screening of PFIs’ advance requests, demand projections, and
individual subloan applications by the RRA, which is well staffed and is capable of undertaking
subproject appraisal and monitoring functions. The project performance rating is on track since
April 2017, when the project became effective.

15. The rapid disbursement of existing project funds reflects the high level of demand within
the horticulture subsector for long-term finance. PFIs and the RRA estimate that demand exists
for financing of a further $1 billion. The scaling up of the existing project through additional
financing rather than a separate stand-alone project represents the most effective and fastest way
to meet such demand. The PFIs engaged in the existing project will also participate in the
proposed additional financing project. These PFIs have well-established systems and procedures
for subloan identification, appraisal, disbursement, and monitoring. The PFIs concerned also
continue to satisfy ADB’s financial intermediary eligibility criteria, and the existing project meets
ADB’s criteria for additional financing.20

16. ADB’s value addition and lessons. The project will help enhance private sector
participation in the agriculture value chains to increase efficiency gains while reducing the fiscal
burden on the state. Moreover, through enhanced access to long-term finance, PFIs will be able
to sustainably increase their outreach into horticultural business as a high-potential niche.
Expanded export of horticultural produce will help increase overall price and income transmission
to small-scale producers and small and medium-sized agribusinesses. Capacity development
activities under the existing project will enhance subborrowers’ technical capacity for their
proposed investments. Implementation results of the existing project suggest that the success of
projects of a similar nature lies in PFIs proactively identifying a diverse potential clientele (or
subborrowers) with financing demand for export-oriented horticulture value chain activities. Seven
qualified PFIs have undertaken an inventory of potential clientele, the preliminary demand
estimates of which indicate that the proposed additional financing loan of $198 million can be fully
utilized by December 2021.21

B. Impact and Outcome

17. The impact and outcome for the overall project will be the same as for the existing project.
The overall project is aligned with the following impact: improved contribution of the horticulture
subsector to inclusive economic growth and rural employment (footnote 12). The overall project
will have the following outcome: increased production and marketing of horticultural products,
which also remains unchanged from the existing project.

20 ADB. 2011. Additional Financing. Operations Manual. OM H5/BP. Manila.

21 Lessons and Synergies (accessible from the list of linked documents in Appendix 2).
6

C. Output

18. The proposed additional financing will scale up the existing project’s output. The
incremental output will be increased finance to the horticulture subsector. PFIs will receive credit
lines from the ADB loan to extend subloans to interested and qualified subborrowers for
horticulture operations, including planting materials, processing and storage equipment, and
mechanical equipment. 22 Capacity building, training, and technical support will be provided
through the management and implementation budget of the existing project to (i) PFIs in subloan
appraisals and environmental safeguards compliance; and (ii) subborrowers in business planning,
horticulture agronomic techniques, post-harvest operations, and export market penetration. The
existing project management office based in the RRA will continue to oversee implementation
activities.

D. Investment and Financing Plans

19. The project is estimated to cost $326 million (Table 1).

Table 1: Project Investment Plan

($ million)
Current Additional
Item Amounta Financingb Total
A. Base Costc
1. Finance to horticulture subsector 231.9 318.0 549.9
2. Project management and implementation 2.6 0.0 2.6
Subtotal (A) 234.5 318.0 552.5
B. Contingenciesd 0.4 0.0 0.4
C. Financing Charges During Implementatione 6.1 8.0 14.1
Total (A+B+C) 241.0 326.0 567.0
ADB = Asian Development Bank.
a Refers to the original amount and ADB’s minor change in financing plan per memo dated 6 July 2017. Includes

taxes and duties of $30.6 million financed from government resources and $0.2 million financed from ADB loan
resources.
b Includes taxes and duties of $60 million financed from government resources.
c In January 2018 prices.
d Contingencies are not applicable to the additional financing since the entire loan proceeds will be onlent to

participating financial institutions, which will withdraw on a demand basis. The budget of the existing project will be
sufficient to cover project management and implementation expenses associated with the additional financing.
e Includes interest charges during implementation for ADB’s Ordinary Capital Resource concessional loan

financed from government resources.

Source: Asian Development Bank estimates.

20. The government has requested a concessional loan of $198,000,000 from ADB’s ordinary
capital resources to help finance the project. The loan will have a 25-year term, including a grace
period of 5 years; an interest rate of 2.0% per year during the grace period and thereafter; and
such other terms and conditions set forth in the draft loan and project agreements. Subborrowers
will contribute $60 million as their equity contribution for subprojects financed by the loan, and the
government will contribute $68 million, comprising $60 million through exemptions of taxes and
duties for imported goods and $8 million for interest charges during implementation. 23 The
financing plan is in Table 2 and is further detailed in the project administration manual (PAM).24
22 Eligibility criteria for PFIs, subborrowers, subprojects, and subloans are detailed in the project administration manual
(PAM) (accessible from the list of linked documents in Appendix 2).
23 PFIs will determine subborrower equity contributions based on the nature of the credit risk, which, depending on

each PFI’s credit policy, would be equivalent to at least 25% of the subproject cost.
24 Project Administration Manual (accessible from the list of linked documents in Appendix 2).
 7

Table 2: Financing Plan

Current Additional Financing Total
Amount Share of Amount Share of Amount Share of
Source ($ million) Total (%) ($ million) Total (%) ($ million) Total (%)
Asian Development Bank
ADF (loan) 154.0 63.9 0.0 0.0 154.0 27.2
OCR (concessional loan) 0.0 0.0 198.0 60.7 198.0 34.9
Subborrowers’ contributions 50.3 20.9 60.0 18.4 110.3 19.5
Government 36.7 15.2 68.0 20.9 104.7 18.4
Total 241.0 100.0 326.0 100.0 567.0 100.0
ADF = Asian Development Fund, OCR = ordinary capital resources.
Source: Asian Development Bank estimates.

21. The government will onlend the loan proceeds in dollars to PFIs through subsidiary loan
agreements that satisfy ADB’s eligibility criteria set out in the PAM and the loan and project
agreements.25 The government is expected to onlend the loan proceeds to PFIs for a tenor of 20
years and a grace period of 3 years. The government’s onlending rate will be the interest rate
charged by ADB for the loan plus a margin to cover administrative and risk costs.26

22. PFIs’ subloans may be issued in dollars and/or local currency and priced by PFIs at market
rates that cover risks related to foreign exchange, credit, maturity, and interest rates. Subloan
repayment may be in dollars and/or local currency subject to the subborrowers’ demand and
subprojects’ revenue streams, as well as specific agreements between PFIs and subborrowers.
Subloans extended by PFIs will have a tenor of up to 10 years. PFIs will revolve subloan
repayments to finance additional subloans during the 20-year tenor of loans received from the
government. PFIs will determine the creditworthiness of subborrowers and assume the full credit
risk. The maximum subloan size will be $5 million based on demand of PFIs’ clientele.

23. Participating financial institutions. Seven of eight PFIs implementing the existing
project expressed their interest to participate in the project. They are Asaka Bank, Davr Bank,
Ipak Yuli Bank, Ipoteka Bank, National Bank of Uzbekistan, Turon Bank, and Uzpromstroybank.
These PFIs underwent comprehensive due diligence by ADB, and for the most part comply with
CBU prudential regulations and meet ADB’s eligibility requirements for financial intermediaries
and ADB-determined financial covenants.27 Areas of marginal noncompliance improvements and
action plans for PFIs to ensure compliance with CBU regulations and ADB financial covenants
are indicated in the PAM. 28

E. Implementation Arrangements

24. The implementation arrangements are summarized in Table 3 and detailed in the PAM.
The additional financing will not alter the existing implementation arrangements substantially,
except that (i) Hamkorbank, one of the PFIs in the existing project, will not participate in the

25 Based on each PFI’s absorptive capacity, tentative allocation of loan proceeds is as follows: Asaka Bank $40 million,
Davr Bank $6 million, Ipak Yuli Bank $20 million, Ipoteka Bank $22 million, National Bank of Uzbekistan $50 million,
Turon Bank $40 million, and Uzpromstroybank $20 million.
26 The government will charge the interest on the ADB loan plus 1% per year to the PFIs. The PFIs’ interest rates carry

the cost for (i) loan origination, (ii) provision of foreign exchange to service the ADB loan, and (iii) credit risks.
27 Based on seven eligibility criteria set out in para. 8 of ADB. 2008. Financial Intermediation Loans. Operations Manual.

OM D6/BP. Manila.
28 Areas of marginal noncompliance improvements for Asaka Bank, Davr Bank, Turon Bank, and Uzpromstroybank

include foreign currency exposure, cost–income ratio, return on assets, and return on equity. Action plans include
measures to address noncompliance and to enhance financial, accounting, and risk management training.
8

additional financing project; and (ii) there will be no procurement or consultant recruitment related
to project management.

Table 3: Implementation Arrangements

Aspects Arrangements
Implementation period June 2018–December 2021
Estimated completion date 31 December 2021 (loan closing date 30 June 2022)
Management
(i) Executing agency RRAa
(ii) Key implementing PFIs: Asaka Bank, Davr Bank, Ipak Yuli Bank, Ipoteka Bank, National
agencies Bank of Uzbekistan, Turon Bank, and Uzpromstroybank
(iii) Implementation units Project management office under RRA and one project implementation
unit in each PFI
Procurement Not required
Consulting services Not required
Advance contracting Not required
Disbursement The loan proceeds will be disbursed in accordance with ADB’s Loan
Disbursement Handbook (2017, as amended from time to time) and
arrangements agreed upon between the government and ADB.
ADB = Asian Development Bank, PFI = participating financial institution, RRA = Rural Restructuring Agency.
a The RRA was established under the Ministry of Agriculture and Water Resources in the form of an incorporated

agency as part of the government to facilitate the implementation of certain agriculture projects. As part of the ongoing
reforms, the ministry was divided into the Ministry of Agriculture and the Ministry of Water Resources in February
2018. The government issued a decree on 17 April 2018, which decides, among other things, to reorganize the RRA.
Specifically, effective from 1 July 2018, the RRA and Center for Implementation of Investment Projects in Agriculture
and Water Sectors will be merged to form the “Agency for Implementation of Projects in Agro-Industrial and Food
Sectors”. The newly-established agency will be under the Cabinet of Ministers of the Republic of Uzbekistan. The
decree also states that the new agency will be the legal successor of the RRA and the Center for Implementation of
Investment Projects in Agriculture and Water Sectors on their rights, obligations and contracts.
Source: Asian Development Bank.

25. Based on portfolio analysis and loan utilization of PFIs under the existing project,
subborrowers have procured equipment with associated works and services from the Russian
Federation and Iran because of the suitability of technologies and reasonably low costs. It is
envisaged that potential subborrowers of PFI subloans will procure goods, works, and consulting
services from both member and nonmember countries of ADB. A request to ADB’s Board of
Directors is being made, pursuant to Article 14(ix) of the Agreement Establishing the Asian
Development Bank, to approve procurement of goods, works, and consulting services from non-
ADB member countries by subborrowers using loan proceeds under the project in appropriate
circumstances. 29 This request reflects the market-based nature of the project, subborrowers’
demand, and procurement history. The Board of Directors must approve the waiver by a vote
representing not less than two-thirds of the total voting power of the members of the Board.

III. DUE DILIGENCE

A. Economic and Financial

26. The proposed project will help improve horticulture subsector productivity and value
addition in line with the government strategy. By addressing the horticulture subsector constraint
of accessing long-term finance, the proposed project will facilitate and spur investment in intensive
energy- and water-efficient technologies for fruit and vegetable production and post-harvest
storage, processing, and marketing facilities. This will increase the volume and enhance the

29 ADB. 1966. Agreement Establishing the Asian Development Bank. Manila.

 9

quality of Uzbek horticulture produce for both domestic and export markets. All subprojects,
subborrowers, and subloans to be financed under the proposed project will be required to meet
technical and financial eligibility criteria established under the existing project as defined in the
PAM. Analysis of a sample of representative production and agribusiness investments financed
by the existing project indicates that such investments are both financially and economically
viable.30

27. The seven proposed PFIs satisfy ADB’s financial intermediary criteria and eligibility criteria
established under the existing project as defined in the PAM, and have experience in lending to
the agriculture sector, with varying levels of agricultural loan portfolios. They have all been
assessed as financially sound. Financial projections for the project implementation period indicate
the PFIs will continue to perform well and comply with CBU regulations and loan financial
covenants. The maximum value of project-financed subloans is projected to range from 0.2% to
2.0% of PFIs’ gross loan portfolios during project implementation in 2018–2021. Borrowing under
the proposed project is, therefore, well within the absorptive capacity of each PFI.31

B. Governance

28. Financial and integrity due diligence has been undertaken on each PFI. The overall
premitigation financial management risk is classified moderate. An action plan for each PFI to
address financial management issues has been prepared and will be implemented up to the
second quarter of 2019. A financial management assessment of the RRA did not identify any
issues that would adversely affect its project management role. ADB’s Anticorruption Policy (1998,
as amended to date) was explained to and discussed with the government, the RRA, and PFIs.
The specific policy requirements and supplementary measures are described in the PAM.

C. Poverty and Social

29. The existing project supports poverty reduction indirectly through horticulture value chain
development. With 32% of the total workforce in agriculture, the proposed project will help many
horticulture farmers and entrepreneurs boost their investments, maintain and expand employment,
and provide stable incomes for themselves and their employees and suppliers. The proposed
project is classified as “effective gender mainstreaming.” Gender actions will help enhance female
entrepreneurship in the horticulture subsector.32 ADB conducted due diligence and confirmed that
core labor standards were complied with within the horticulture subsector. The loan and project
agreements include covenants on labor standards and safety.

D. Safeguards

30. The project is classified as “financial intermediation” for environment and category C for
involuntary resettlement and indigenous peoples’ safeguards. Subprojects that are identified in
ADB’s Prohibited Investment Activities List in ADB’s Safeguard Policy Statement (2009),
classified category A for environment, and classified category A or B for involuntary resettlement
or indigenous peoples’ safeguards are not eligible for project financing. In addition, eligible
subprojects will comply with all applicable national regulations. ADB carried out due diligence on
PFIs’ implementation of ESMSs. All PFIs have been implementing ESMSs under the existing
project in accordance with the requirements of ADB’s Safeguard Policy Statement.

30 Economic Analysis (accessible from the list of linked documents in Appendix 2).
31 Financial Analysis (accessible from the list of linked documents in Appendix 2).
32 Subprojects financed by the existing project have reportedly employed over 20% female workers.
10

E. Risks and Mitigating Measures

31. Major risks and mitigating measures are summarized in Table 4 and described in detail in
the risk assessment and risk management plan.33 The overall project risk is rated moderate. The
integrated benefits and impacts are expected to outweigh the costs.

Table 4: Summary of Risks and Mitigating Measures

Risks Mitigating Measures
Local currency depreciation against the PFIs have asset–liability management functions in place
dollar adversely affects PFIs’ credit risk and follow prudent lending policies, considering devaluation
profile and subborrowers’ debt service impact on the subborrowers’ debt service capacity.
capacity.
Increased loan loss provisions based on PFIs will conduct stress testing and internal capital
the CBU’s capital adequacy standards adequacy assessment, and increase capital as required
require additional capital.
PFIs incur credit risks. PFIs were selected based on their financial track records.
CBU = Central Bank of Uzbekistan, PFI = participating financial institution.
Source: Asian Development Bank.

IV. ASSURANCES AND CONDITIONS

32. 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 loan
documents.

33. The government has agreed with ADB on certain covenants for the project, which are set
forth in the loan and project agreements. As a condition for loan disbursement for relending to a
PFI, the government and the RRA shall enter into a tripartite subsidiary loan agreement with each
PFI, in form and substance satisfactory to ADB.

V. RECOMMENDATIONS

34. I am satisfied that the proposed loan would comply with the Articles of Agreement of the
Asian Development Bank (ADB) and recommend that the Board approve the loan of
$198,000,000 to the Republic of Uzbekistan for the additional financing of the Horticulture Value
Chain Development Project, from ADB’s ordinary capital resources, in concessional terms, with
an interest charge at the rate of 2.0% per year during the grace period and thereafter; for a term
of 25 years, including a grace period of 5 years; and such other terms and conditions as are
substantially in accordance with those set forth in the draft loan and project agreements presented
to the Board.

35. I also recommend that the Board approve the proposal in para. 25 of this report to permit
procurement in nonmember countries of ADB of goods, works, and services.

Takehiko Nakao
President
18 May 2018

33 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).
 Appendix 1 11

REVISED DESIGN AND MONITORING FRAMEWORK

Impact the Project is Aligned with
Current project
Contribution of horticulture subsector to inclusive economic growth and rural employment improved
(Presidential Decree UP-4707)a
Overall project
Unchanged
Performance Indicators Data Sources
Results Chain with Targets and Baselines and Reporting Risks
Outcome

Current project Current project

Production and By 2022: a–b. National Local currency
marketing of a. Exports of horticultural produce Statistics depreciation
horticultural products increased: Committee, against the dollar
increased (i) vegetables to 630,000 tons (2015 Ministry of adversely affects
baseline: 286,600 tons); Economy, RRA PFIs’ credit risk
(ii) melons to 16,900 tons (2015 monitoring profile and
baseline: 7,700 tons); reports, customs subborrowers’
(iii) fruit to 239,140 tons (2015 data, and debt service
baseline: 108,700 tons); and Uzagroexport capacity.
(iv) grapes to 326,300 tons (2015 reports
baseline: 186,900 tons) Increased risk
provisions based
b. Value of horticultural produce exports on the CBU’s
increased to $1.3 billion (2015 baseline: capital adequacy
$0.6 billion) standards require
additional capital.
Overall project Overall project a–b. National
Unchanged By 2022: Statistics
a. Exports of horticultural produce Committee,
increased: Ministry of
(i) vegetables to 1,000,000 tons Economy, RRA
(2015 baseline: 286,600 tons); monitoring
(ii) melons to 30,000 tons (2015 reports, customs
baseline: 7,700 tons); data, and
(iii) fruit to 400,000 tons (2015 Uzagroexport
baseline: 108,700 tons); and reports
(iv) grapes to 600,000 tons (2015
baseline: 186,900 tons)

b. Value of horticultural produce exports

increased to $2.1 billion (2015 baseline:
$0.6 billion)
 12 Appendix 1

Output

Current project Current project

Finance to the By 2021: 1a–b. PFIs’ PFIs incur credit
horticulture subsector 1a. 332 subloans extended to progress reports risks.
increased horticulture development:b and RRA
(i) 181 for production, and monitoring reports
(ii) 151 for storage improvement and
processing

1b. Subprojects financed by PFIs’

subloans employ at least 20%
female workers

Overall project Overall project

Unchanged By 2021:
1a. 370 subloans extended to 1a–b. PFIs’
horticulture development:b progress reports
(i) 190 for production, and and RRA
(ii) 180 for storage improvement and monitoring reports
processing

1b. Unchanged
Key Activities with Milestones
Finance to the horticulture subsector increased
1.1 Establish environmental and social management systems at PFIs (Q1 2017) (unchanged)
1.2 Sign additional financing subsidiary loan agreements between the MOF, RRA, and PFIs (Q3 2018)
(changed)
1.3 Disburse PFIs’ loans to horticulture farms and enterprises (Q2 2017–Q4 2021) (unchanged)
1.4 Disburse PFIs’ loans from the additional financing loan to horticulture farms and enterprises (Q1 2019–
Q4 2021) (changed)
Project Management Activities
Set up project management office with required staff by Q1 2017 (unchanged)
Establish project implementation unit at each PFI by Q1 2017 (unchanged)
Set up project performance management system by Q1 2017 (unchanged)
Provide technical support to PFIs and subborrowers (Q2 2017–Q4 2021) (unchanged)
Prepare project completion report by Q4 2021 (unchanged)
Inputs
Asian Development Bank Government of Uzbekistan Subborrowers
$154,000,000 (current)b $ 36,700,000 (current) $ 50,300,000 (current)
$198,000,000 (additional)c $ 68,000,000 (additional) $ 60,000,000 (additional)
$352,000,000 (overall) $104,700,000 (overall) $110,300,000 (overall)

Assumptions for Partner Financing

Current project: Not applicable
Overall project: Unchanged
CBU = Central Bank of Uzbekistan, MOF = Ministry of Finance, PFI = participating financial institution, Q = quarter, RRA =
Rural Restructuring Agency.
a Government of Uzbekistan. 2015. Presidential Decree No. UP-4707. Tashkent. Under this decree, a program of measures

on structural reforms, modernization, and diversification of production for 2015–2019 was adopted.
b Asian Development Fund (loan).
c Ordinary capital resources (concessional loan).

Source: Asian Development Bank.

 Appendix 2 13

LIST OF LINKED DOCUMENTS

http://www.adb.org/Documents/RRPs/?id=47305-004-3

1. Loan Agreement: Special Operations

2. Project Agreement: Rural Restructuring Agency
3. Project Agreement: Participating Financial Institutions
4. Sector Assessment (Summary): Agriculture, Natural Resources, and Rural Development
5. Project Administration Manual
6. Summary of Project Performance
7. Contribution to the ADB Results Framework
8. Development Coordination
9. Financial Analysis
10. Economic Analysis
11. Country Economic Indicators
12. Summary Poverty Reduction and Social Strategy
13. Gender Action Plan
14. Financial Intermediary: Environmental and Social Management System Arrangement
15. Risk Assessment and Risk Management Plan

Supplementary Documents
16. Detailed Sector Assessment: Agriculture, Natural Resources, and Rural Development
17. Detailed Project Economic Analysis
18. Detailed Social and Gender Assessment
19. Lessons and Synergies