Report on Agribusiness Sectors Development Project

February 12, 2011 CURRENCY EQUIVALENTS (as of February 12, 2011) Currency Unit Bangladesh taka Taka 1.00 = $0.0140 $1.00 = Taka 71.00 ABBREVIATIONS ADB Asian Development Bank ASF Agribusiness Support Fund BDS business development services BSF Business Support Fund DAE - Department of Agriculture Extension FIRR Financial Internal Rate of Return SCA Seed Certification Agency GDP gross domestic product DLS Department of Livestock Services DOF Department of Fisheries MoF Ministry of Food, MoA Ministry of Agriculture, MoFL- Ministry of Fisheries and Livestock PCG Partial Credit Guarantee PFI Participating Financial Institution BARI Bangladesh Agriculture Research Institute PIO Project Implementation Office PMU Project Management Unit RSP Rural Support Program BB Bangladesh Bank SME Small and Medium Enterprise SMESDP Small and Medium Enterprise Sector Development Program SPS Sanitary and Phytosanitary Measures WTO World Trade Organization

NOTES (i) The fiscal year (FY) of the Government ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends. For example, FY2004 begins on 1 July 2003 and ends on 30 June 2004. (ii) In this report, "$" refers to US dollars.

This report is prepared by AHM Zahid Karim

CONTENTS LOAN AND PROJECT SUMMARY I. THE PROPOSAL II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis B. Analysis of Key Problems and Opportunities III. THE PROPOSED PROJECT A. Impact and Outcome B. Outputs C. Special Features D. Cost Estimates E. Financing Plan F. Implementation Arrangements IV. PROJECT BENEFITS, IMPACTS, AND RISKS A. Economic Benefits B. Environmental and Social Impacts C. Risks V. ASSURANCES A. Specific Assurances B. Condition for Loan Effectiveness VI. RECOMMENDATION APPENDIXES 1. Agribusiness Sector Analysis 2. Outline Terms of Reference for Consulting Services iii

LOAN AND PROJECT SUMMARY Borrower Classification Peoples Republic of Bangladesh Targeting classification: General intervention Sector: Agriculture and natural resources Subsector: Agriculture production, agroprocessing, and agribusiness Themes: Sustainable economic growth Subthemes: Developing rural areas, private sector investment, public-private partnerships

Project Description The project interventions focus on increased productivity, product quality, and value added by removing constraints facing agribusiness that occur throughout the product value chain from production and input supply to processing and exports. This will be achieved by (i) creating an agribusiness support fund (ASF) to provide farmers, farmer groups, and entrepreneurs with demand-driven technical and managerial services on a matching grant basis to improve their productivity, competitiveness, and creditworthiness to access financing for their enterprises; (ii) increasing access to agribusiness finance available from financial institutions to agroenterprises; (iii) revising and updating the agribusiness regulatory framework; (iv) strengthening and upgrading testing and certification facilities for seeds, nurseries, and crops; (v) streamlining the collection and dissemination of market information; (vi) strengthening agribusiness technical training capacity and the capability of related training institutions; (vii) formulating a national agribusiness policy and provincial horticulture policies. Rationale The Project rationale is to address constraints that impede development of the sector, and exploit domestic and export market opportunities in the agribusiness sector, thereby contributing to increased economic growth and rural employment. The Project will promote the realization of these opportunities by (i) improving the managerial, production, and processing skill levels of entrepreneurs and farmers; (ii) supporting participating financial institutions (PFIs) to increase agribusiness lending ; (iii)reorienting government institutions to become facilitators of agribusiness development, using public private partnerships; (iv) improving the policy, regulatory, and financial environment and (v) establishing the framework and standards Objective The Projects impact is to support economic growth and employment generation through agribusiness development. The outcome is to develop a competitive and sustainable agribusiness sector.

Cost Estimates The total project cost is estimated at $49 million equivalent, comprising $8.3 million of foreign exchange costs, and $40.7 million equivalent of local currency. Component investments include (i) agribusiness support service provision, (ii) agribusiness finance development, (iii) agribusiness capacity building, (iv) agribusiness policy and enabling environment development, and (v) project management support. Financing Plan ($ million)a Source Foreign Exchange

Local Currency 22.7 6.9 10.4 .1

Total Cost 31 6.9 10.4 0.1 49.0

Asian Development Bank 8.3 Government 0.0 Agribusiness Enterprises 0.0 Private Sector Institutions Beneficiaries 0.0 Total a Figures may not add up due to rounding. b Includes duties and taxes of about $3.6 million. Source: Asian Development Bank cost estimates.

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Loan Amount and Terms A loan of Special Drawing Rights 20,165,000 ($31 million equivalent) will be provided from the Special Funds resources of the Asian Development Bank (ADB). The loan will have a 32-year term including a grace period of 8 years, and an interest rate of 1% per annum during the grace period and 1.5% per annum thereafter. Period of Utilization Estimated Project Completion Date Executing Agency Ministry of Agriculture, Ministry of Fisheries and Livestock Until 31 March 2015 December 30, 2014 Ministry of Food,

Consulting Services Consultants will be selected and engaged in accordance with ADB Guidelines on the Use of Consultants by ADB and its Borrowers and other arrangements satisfactory to ADB for engaging domestic consultants. A total of 221 person-months of international and 128 person-months of domestic consulting inputs will be financed. Consulting services will be engaged in two packages. Of the three contracts under the first package, one will be issued for

agribusiness support fund promotion, and project management and studies. ADB will select the consultants. A second contract will provide agribusiness capacity building, and agribusiness policy and regulatory framework development. ADB will select the consultants. A third contract will focus on building awareness of agribusiness finance and monitoring. Project Benefits and Beneficiaries The Project seeks to address market failures leading to inadequate financial and technical support for the private sector to initiate agribusiness enterprises, failures in institutional capacity, and the absence of consistent and coherent agribusiness policies. This will result in (i) increases in efficiency by reducing transaction costs, and (ii) an increased supply of the services demanded by agribusiness clients. The Project will improve service delivery, institutional capacity, and the agribusiness policy environment in a comprehensive and systemic manner throughout the value chain. Risks and Assumptions Project implementation involves a number of agencies and the private sector, and could encounter delays. This risk is addressed through the establishment of strong oversight, implementation coordination, and governance provisions in the implementation arrangements. To facilitate effective coordination and timely implementation, the project management unit will recruit well qualified staff through an open and competitive selection process

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the Peoples Republic of Bangladesh for the Agribusiness Development Project. II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 2. Bangladeshs agriculture sector, accounting for 23% of gross domestic product (GDP),almost 63% of employment, and about 25% of exports, is at a crossroads. Growth of the sector, which is dominated by traditional food (wheat, rice) and industrial (jute, cotton, sugarcane) crops, declined to an average annual rate of 2.4% with sharp year-to-year fluctuations from 1990 to 2002, as compared with the overall rate of 3.5% achieved from 1960 onward. Yields of major crops have largely stagnated for the past decade. Diversification into commercially oriented crops and dynamism in the livestock subsector is encouraging, but the dominance of the major crops in agricultural GDP has slowed the performance of the agriculture sector as a whole. Rural poverty remained high at 48.9% in 2002, exacerbated by periodic drought. 3. The stagnating performance and persistence of high poverty in agriculture stand in contrast with the potential growth opportunities provided by domestic and international markets. With the Government targeting 8% GDP growth in the medium term, and with wideranging macroeconomic and sector (including financial) reforms well under way, the country is poised for a period of sustained economic expansion. In Bangladesh, as in all other rapidly growing developing countries, sustained growth is universally accompanied by changes in food demand, as consumers shift away from diets dominated by starchy staples and unprocessed foodstuffs toward much more income-elastic horticulture and livestock products. 4. Agribusiness enterprises range from micro-scale village based operations to large-scale, nationally recognized companies. Small and medium-scale agribased enterprises in the informal sector employ an estimated 1.5 million people. As the smaller enterprises are labor-intensive and generally located in or close to rural areas, the potential for direct and indirect (through linkages to farms) growth and employment generation is much greater than for the large firms.

B. Analysis of Key Problems and Opportunities 5. While markets provide economic opportunities, commercial agriculture and agribusiness development in Bangladesh is constrained by poor infrastructure (energy, transport, and storage); sector institutions and policies, and governance practices; as well as access to modern technology and to financial and business development services. No single project can address all these constraints. Through an ambitious public investment program, the People's Republic of Bangladesh is committed to rapidly developing major infrastructure to support broad-based economic growth.

6. The constraints facing agribusiness are present throughout the product value chain from input supply to processing and exports, leading to low productivity and value added. The following key constraints, identified during the project preparatory technical assistance,3 must be removed: (i) market failures, including limited availability of business development services (ii) institutional constraints, including weak public-private partnerships, weak institutional capacity, poor coordination between government agencies, and an absence of demand-driven agricultural research and extension; and (iii) the lack of a guiding national policy and long-term strategy aimed at developing a dynamic and competitive agribusiness. 7. Market Failures. The lack of a vibrant small and medium enterprise (SME) subsector for agribusiness is largely a result of market failure. Technical, managerial, marketing, financial, and legal advisory services to agribusiness by the private sector are almost nonexistent. Several of the systemic constraints to sector developmentincluding low levels of technical and managerial capacity, low product quality and market penetration, limited access to market. 8. Other developing countries have effectively improved the provision of BDS by establishing time-bound, cost-sharing grant schemes that provide funding for enterprises to access BDS, and for BDS providers to develop and upgrade the type of service that they provide to agribusiness clients. Well-conceived and implemented BDS can (i) lower barriers to entry; (ii) facilitate the establishment of new agribusiness enterprises; (iii) lower unit costs of production, transport, and marketing; (iv) increase marketable surpluses; (v) encourage and facilitate innovation at the enterprise and sector levels. 9. Institutional Constraints. Agro-enterprises require enhanced technical skills, greater marketing orientation and networking, better market information, and better linkages with service providers to enable them to contribute more significantly to economic growth.The Department of Agriculture Extension (DAE) is responsible for providing market information. Available market information does not correspond to the needs of entrepreneurs or producers. Private sector demand for the provision of commercial information services is increasing, demonstrated by agro-enterprises subscribing to commercial market information services. 10. Lack of Integrated Agribusiness Policy. The few national and provincial public agencies related to agribusiness work largely in isolation. An integrated and well-coordinated agribusiness strategy is needed to (i) support and promote the growth and performance of agribusiness, including enterprise start-up and expansion, value-chain integration, and product specialization; and (ii) incorporate the informal sector into the agribusiness mainstream, particularly in the context of globalization, international competitive pricing, the need for investment incentives, and world trade issues. Also, no province-specific horticulture policies prioritize specific local product opportunities and the use of limited public financial resources.

III. THE PROPOSED PROJECT A. Impact and Outcome 11. The impact of the Project is agribusiness growth. The outcome is to develop a more competitive and sustainable agribusiness subsector. Project activities will focus in particular on improving access of agribusiness enterprises to BDS, strengthening BDS providers to enhance skills throughout the agribusiness subsector, expanding access to agribusiness finance, and developing institutional capacity. The Project seeks to create a flexible private sector service delivery mechanism driven by market demand. The Project will concentrate on horticulture and hortibusiness; interventions to improve the livestock and dairy institutional framework will also be supported. The project interventions will contribute to strengthening and developing private sector capacity, involvement, and investment in agribusiness. This will ultimately lead to a strong foundation for SMEs operating in the sector. B. Outputs 12. The Project comprises five components: (i) agribusiness support service provision, (ii) agribusiness finance development, (iii) agribusiness capacity building, (iv) agribusiness policy and enabling environment development, and (v) project management support. 1. Agribusiness Support Service Provision 13. The Project will facilitate increased access to BDS by agribusiness enterprises by financing eligible services for capacity building, including technical, managerial, financial, and marketing skills. The Project will establish an agribusiness support fund (ASF) to provide funds to eligible agribusiness enterprises, farmers, research and extension service providers, and BDS providers. Eligible services for ASF finance include (i) capacity-building and related assistance to existing agribusiness enterprises and for enterprise start-ups, but excluding the financing of capital equipment; (ii) support to individual farmers and farmers groups for the formation of legally registered agribusiness enterprises that can then obtain ASF support for other eligible services; (iii) demand-driven research by private or public sector research institutions leading to increased and better quality production and improved production processes, or to meet an identified market demand; (iv) development of private sector extension services to be provided to small-scale farmers proposing to supply raw materials to agribusiness enterprises; and (v) support for private sector BDS providers to enhance the availability and quality of services provided to agribusiness enterprises. 2. Agribusiness Finance Development 14.Cooperation with PFIs will be implemented using the services of international consultants, first through awareness building, and second, through specific in-house consulting services provided to PFIs. The first phase will involve the selection of private sector financial institutions (predominantly commercial banks) having an interest in developing an agribusiness loan portfolio, according to selection criteria to be agreed with the Bangladesh Bank (BB).8 The awareness-building phase will identify a shortlist of PFIs to be given guidance in preparing a proposal to access capacity-building support from the Project, including an agribusiness finance

strategy and work plan. Proposals will be submitted to SBP for review. Based on the review, 35 PFIs will be selected to receive customized, in-house support to develop their agribusiness finance capacity. In the capacity-building phase, separate teams of international consultants will work with each selected PFI to refine its strategy and work plan, and identify market opportunities. 3. Agribusiness Capacity Building 15. Capacity building for agribusiness will focus on horticulture and hortibusiness, but will also support project activities to be undertaken in the livestock and dairy subsector. The component will seek to increase the private sector participation in the provision of services currently provided by public sector institutions. To facilitate agribusiness development and international compliance, the Project will support the rationalization, restructuring, and coordination of relevant Ministry of Agriculture, Food and Livestock (MoA, MoF,MoFL) agencies and offices concerned with alignment with WTO regulations and international product standards. The project preparatory technical assistance identified eight commercial banks and two microfinance institutions having an interest in developing an agribusiness lending function. 16. Market Information. The Project will improve the availability of market information, identified as a significant constraint to agro-enterprise expansion. The Project will promote the development of information on private sector markets through outsourcing by DAE. An appropriate private sector provider will be supported to develop a system that will initially focus on the 11 major wholesale markets in the country, and Bangladeshs major export markets for fruits and vegetables. DAE will continue to provide market information for other horticultural crops not covered by the private sector provider. The outputs of this subcomponent will be to (i) establish a private sector market information system providing reliable, impartial market information on a commercially viable and sustainable basis; (ii) provide agribusiness stakeholders with market information that meets their needs; and (iii) improve market efficiency and competitiveness by providing easily available and improved market information. 17. Export Quality Certification. Support will be provided to strengthen the capacity of DAE in export quality certification by (i) providing international training for key DAE staff; (ii) revising and updating national quality standards consistent with international standards; (iii) upgrading DAEs export certification centers; and (iv) introducing operating procedures of international standard for sampling, inspection, and quality monitoring systems. Subject to statutory requirements, the Project may support DAE to contract quality certification services to the private sector through public-private partnerships. 18. Seed and Planting Material Certification. The Project will help strengthen the Seed Certification Agency (SCA) by (i) establishing and equipping nine regional testing laboratories; (ii) developing a systematic and quality-oriented approach to the production of fruit and vegetable propagation materials; (iii) introducing internationally accepted standards; (iv) training staff in field inspection techniques; (v) improving operating systems; (vi) training nursery producers in improved production techniques, and better plant propagation and

hygiene practices; and (vii) reviewing and updating existing vegetable seed and fruit tree seedling certification standards and legislation.

19. Training. The BARI horticulture unit training coordinator, supported by provincial training coordinators, will organize training to (i) develop curriculum and course content specific to agribusiness; (ii) build the capacity of private sector trainers and the institutions or service providers that will provide training to entrepreneurs; (iii) improve technical and managerial skills in agribusiness enterprises; (iv) improve product output, quality and uniformity, and continuity of supply at the farm level; and (v) provide agribusiness training to provincial and special area staff. 20. Bangladesh Agriculture Research Institute (BARI). To develop more effective linkages between the public sector and private agribusiness, the Project will establish a horticulture unit within the private-sector-led BARI. The BARI unit will help implement project activities in the horticulture subsector, and facilitate interaction with agribusiness enterprises. 21. Department of Livestock Services(DLS). The Project will support the establishment of a livestock and dairy development board (DLS) as a corporate body, which will play a similar role to that of BARI in the livestock sector. The responsibilities of DLS will be to (i) coordinate national and provincial activities in livestock and dairy, (ii) promote investment in the sector, and (iii) promote livestock as the primary vehicle for poverty reduction among small and landless farmers, especially women. 4. Agribusiness Policy and Enabling Environment Development 22. This component will assist the Government to develop an appropriate policy and enabling environment for private-sector-led agribusiness development. The farmer field school concept is basically integrated crop management through training of trainers and facilitators. Farmers have begun to pay for such services in selected areas. A PMU and consultants will supervise the task force in its activities. The policy will cover (i) definition, vision, and strategy; (ii) institutional framework and scope of government facilitation; (iii) sector objectives including priority subsectors and products to exploit comparative and competitive advantages; (iv) a time-bound action plan for implementing the strategy with key production targets; and (v) other key issues identified by the task force. C. Special Features 23. The Project will establish market-based approaches to agribusiness development and enhance technical and managerial capacity in the subsector. It will dismantle barriers to entry for new enterprises, or expansion of existing enterprises enabling them to operate more effectively, penetrate new markets, and improve profitability, with significant multiplier effects throughout the agribusiness production and marketing chain. The introduction of greater market orientation in agribusiness will be accompanied by the mobilization of domestic financial resources to improve the delivery of financial services, in particular credit to agribusiness.

D. Cost Estimates 24. The estimated project cost is $49 million equivalent, inclusive of physical and price contingencies, taxes and duties, and interest and service charges during implementation (Table1). The foreign exchange cost is estimated at $8.3 million, 17% of the total cost. The local currency cost is estimated at $40.7 million equivalent, 83% of the total cost. Local currency costs include an estimated $3.6 million equivalent in taxes and duties to be paid by the Government. The detailed project cost estimates and financing

Table 1: Cost Estimates ($ million)a Item Foreign Exchange Local Currency Total Cost

A. Base Costb 1. Agribusiness Support Service Provision 2. Agribusiness Finance Development 3. Agribusiness Capacity Building 4. Agribusiness Policy Formulation and Enabling Environment Development 5. Project Management Support Subtotal (A) B. Contingencies 1. Physical Contingenciesc 2. Price Contingenciesd Subtotal (B) C. Interest Charge Implementation Total

1.4 2.7 1.9 0.2 0.9 7.2 0.4 0.0 0.4

22.4 1.8 8.6 0.4 6.5 39.7 0.9 0.0 0.9 0.0 40.7

23.8 4.5 10.5 0.6 7.4 46.9 1.3 0.0 1.3 0.8 49.0

during 0.8 8.3

a Figures may not add up due to rounding. b Cost estimates at February 2011. c Physical contingencies applied at 5% for all goods and services.

d Estimated at 4.3% for 2011, 0% for 20122013, and 0.6% for 2014 for foreign exchange costs; and 4% for 2011, and 5% for 20122013 for local currency costs. Price contingencies have not been applied to Agribusiness Support Fund funds. Includes duties and taxes of about $3.6 million. Source: Asian Development Bank estimates. E. Financing Plan 25. The Government has requested a loan of $31 million equivalent from ADB's Special Funds resources to help finance the Project. The loan will have a 32-year term, including a grace period of 8 years, and an interest rate of 1.0% per annum during the grace period and 1.5% per annum during amortization. The loan will fund the entire foreign exchange cost of $8.3 million and $22.7 million equivalent of the local currency cost (56% of the total local currency cost). The Government will provide $6.9 million equivalent, or 14% of the project cost. Agribusiness enterprises including BDS and private sector research and extension providers will fund $10.4 million (21% of total project costs) as their matching contribution to the services to be supported by the ASF, including training costs. Private sector institutions (market information service providers, market committees, and PFIs) will finance $0.6 million (1% of total project costs) as their contribution to operating costs of the services that they provide under the Project. Beneficiaries (farmers) will finance $0.1 million (0.2% of project costs) by contributing to the costs of training received under the Project. The use of ADB's Special Funds resources and local cost financing is justified because the project components provide capacity building as a catalyst to develop agribusiness and enhance skill levels. The financing plan is in Table 2.

Table 2: Financing Plan($ million)a Source Foreign Exchange

Local Currency 22.7 6.9 10.4 .1

Total Cost 31 6.9 10.4 0.1 49.0

Asian Development Bank 8.3 Government 0.0 Agribusiness Enterprises 0.0 Private Sector Institutions Beneficiaries 0.0 Total a Figures may not add up due to rounding. b Includes duties and taxes of about $3.6 million. Source: Asian Development Bank cost estimates.

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F. Implementation Arrangements 1. Project Management and Execution 26. MoA and MoFL will be the Executing Agency for the Project.12 It will oversee the establishment of the ASF until its board of directors is appointed. Thereafter, the ASF will operate as an autonomous private sector company independent of government. BB, as the

Implementing Agency for the agribusiness finance development component, will be responsible for (i) establishing PFI eligibility criteria, (ii) approving PFIs that will benefit from capacity building in agribusiness finance, and (iii) coordinating the selection and recruitment of the capacity-building consultants for agribusiness finance awareness and agribusiness finance. BARI and DLS will also be important project implementation partners and facilitators, particularly in identifying potential applicants to the ASF.13 BARI will be especially important given its extensive network in the horticulture subsector and allied industries. A project steering committee, chaired by the MoA secretary, has been established to approve the appointment of key PMU personnel; approve the annual work plan and budget; review project performance and provide guidance on required project modifications; provide policy, strategic, and regulatory advice and oversight; and facilitate coordination among the participating agencies. 27. The PMU, PIOs, and other project-related institutions will promote the ASF and link potential ASF clients to it. Rural support programs may be contracted through the ASF to identify existing farmer clients wishing to form a legally registered farmer group enterprise, and support them through enterprise incorporation and establishment procedures. Following their establishment as an enterprise, the farmers will be able to submit applications to access ASF funds for eligible services. In all cases, responsibility for completing grant applications will be that of the grant applicant. All contractual arrangements relating to approved grants will be made between the ASF and grant recipients, and will not involve any intermediary or agent. Details of the scope, management, and operation of the ASF. 2. Implementation Period 29. The Project will be implemented over 5 years . Year 1 will be spent establishing the project management and implementation framework, including the PMU, BARI horticulture unit, and PIOs. The ASF will be incorporated within 9 months of loan effectiveness. Immediately upon its incorporation, the ASF will process a limited number of applications to enable fine-tuning of procedures and processes, and to ensure that the administrative capacity will not be overwhelmed in the early stages. This will allow the client base to be built in a gradual and focused manner. 3. Procurement 30. Goods and related services financed by ADB will be procured following ADB Guidelines for Procurement. Supply contracts for equipment or materials are not expected to exceed $500,000, but should such a contract be required it will be awarded on the basis of international competitive bidding. Those costing less than the equivalent of $500,000 (other than minor items) will be awarded on the basis of local competitive bidding, or as applicable, international shopping. Direct purchase will be used for small or off-the-shelf items valued at less than $100,000. 4. Consulting Services 31. Consultants will be selected and engaged in accordance with ADB Guidelines on the Use of Consultants by ADB and its Borrowers and other arrangements satisfactory to ADB for engaging domestic consultants. A total of 221 person-months of international and 128 person months of domestic consulting inputs will be financed under the Project. Consulting services will be

engaged in two packages. The first package will have three contracts. One contract will be issued for agribusiness support fund promotion, and project management and studies. ADB will select the consultants. 5. Disbursement Arrangements 32. The loan proceeds will be disbursed in accordance with ADB Loan Disbursement Handbook. For the timely release of funds, imprest accounts will be established at the National Bank of Bangladesh for the use of the ASF, MoA, MoF, MoFL, BARI, and BB.18 The imprest accounts will be established, managed, replenished, and liquidated in accordance with ADB Loan Disbursement Handbook and detailed arrangements agreed to by the Government and ADB. The initial cumulative amount to be deposited in the imprest accounts will not exceed 6 months of estimated expenditure or 10% of the total loan amount, whichever is less. Any individual payment to be reimbursed or liquidated under statement of expenditure procedures will not exceed the equivalent of $100,000. 6. Accounting and Auditing 33. ASF, MoA,MoF, MoFL, BARI, and BB will prepare and maintain separate accounts for project-related disbursements. ASF, BARI, and BB, as implementing agencies, will prepare and submit their accounts to MoA. MoA will consolidate the accounts and, after audit, submit them to ADB. MoA will establish an audit review process and commission financial and performance audits of the PMU by an audit agency in accordance with auditing standards acceptable to ADB. ASF, BARI, and BB will establish similar audit procedures using auditing firms associated with internationally recognized firms, or an audit agency acceptable to ADB, in accordance with auditing standards acceptable to ADB. 7. Project Performance Monitoring and Reporting 34. The PMU, assisted by consultants, will use a project performance monitoring program to ensure that project activities and facilities are managed efficiently, and that target groups receive the intended benefits. The PMU and its consultants will submit a detailed plan for monitoring performance on a gender-disaggregated basis for ADBs review and concurrence within 9 months of loan effectiveness. A baseline survey will be completed within the first 6 months. . 8. Project Review 35. In the first 3 years of the Project, ADB will carry out semiannual reviews to determine whether the implementation and monitoring arrangements are appropriate and effective. These reviews will monitor relevant indicators, to be identified at the beginning of project implementation, to assess whether the process-oriented approach is working. During year 3, a detailed study will review project progress before the ADB comprehensive midterm review to assess performance; identify any problems and constraints affecting project implementation, including changes in the policy and institutional environment; and reach agreement on required changes to address any shortcomings. IV. PROJECT BENEFITS, IMPACTS, AND RISKS A. Economic Benefits

36. The Project seeks to address (i) market failures leading to inadequate financial and technical support to the private sector to initiate agribusiness enterprises, (ii) failures in institutional capacity, and (iii) the absence of consistent and coherent agribusiness policies and direction. The Project will encourage investment by the private sector in new or upgraded enterprises. Agribusiness clients (primarily horticulture agro-enterprises and farmer groups) will gain greater power in product and service markets, thereby improving access at lower costs, accountability, and service delivery. About 2,000 agro enterprises in the formal and informal sectors are anticipated to benefit from ASF operations, which will include up to 12,500 farmer entrepreneurs incorporated into agribusiness enterprise groups over the 5-year Project. B. Environmental and Social Impacts 37. The Project is classified as category FI in accordance with ADB Environmental Assessment Guidelines. The Project's focus is on capacity building, so the Project will not have adverse impacts on resettlement, indigenous peoples, or the environment, and thus will not trigger mitigating measures in accordance with ADB policies on indigenous peoples and on involuntary resettlement . Nonetheless, initial environmental examinations were carried out on potential agro-enterprises as part of project preparation. C. Risks 38. The Project involves a number of agencies and the private sector, and could encounter delays. This risk has been addressed through the establishment of strong oversight, implementation coordination, and governance provisions in the implementation arrangements. The PMU, BARI, and PIOs will help to facilitate effective coordination and timely implementation, and all three will recruit well-qualified staff from the private sector. V. ASSURANCES A. Specific Assurances 39. In addition to the standard assurances, the Government has given the following assurances, which are incorporated in the legal documents: (i) Within 1 month of loan effectiveness, the Government will establish a project implementation coordination committee to be chaired by the Secretary of MoF and include as members, the project director, project coordinator, representatives of SCA, PFIs, BARI, PIOs, BB, the private sector, and each of the provinces and special areas. (ii) Within 3 months of loan effectiveness, the Government will establish in each province and special area, a horticulture and livestock coordination committee to be chaired by the secretaries of agriculture and livestock as appropriate, with members comprising the PIO coordinator; representatives of the agriculture, finance, industries, livestock, planning and development departments in the respective province or special area; the private sector; and other concerned agencies such as SCA, DLS, and BARI. (iii) Within 3 months of loan effectiveness the PMU, and within 6 months of loan effectiveness, the horticulture unit of BARI, and PIOs will be respectively established, adequately staffed, and assigned powers and functions to the mutual satisfaction of the Government and ADB. (iv) Within 6 months of loan effectiveness, the Government will ensure that the ASF general manager is recruited.

(v) Within 6 months of loan effectiveness, a first year work plan for the Project will be prepared and submitted for ADB approval. (vi) Within 6 months of loan effectiveness, the Government will ensure that the memorandum, articles of association, and other required documents to incorporate ASF are prepared. (vii) Within 9 months of loan effectiveness, the Government will ensure that the ASF is incorporated as a not-for-profit company under Section 42 of the Companies Ordinance with the board of directors comprising eight members (five from the private sector and three from project-related government agencies). (x) Within 12 months of loan effectiveness, the Government will either (i) submit to its Cabinet for approval and submission to Parliament a bill to establish DLS as an autonomous statutory agency, or (ii) incorporate DLS as a not-for-profit company with responsibility to promote the development of the livestock and dairy subsectors. (xi) Within 15 months of loan effectiveness, the Government will either (i) submit to its Cabinet for approval and submission to Parliament a bill to establish BARI as an autonomous statutory agency, or (ii) incorporate BARI as a not-for-profit company with responsibility to promote horticulture development and exports. (xii) Within 2 years of loan effectiveness, the Government will submit to its Cabinet for approval and submission to Parliament the amendment of the relevant laws, including those specified in para. 31, to achieve alignment with the requirements under the WTO commitments. (xiii) The Government will ensure that throughout implementation of the Project, adequate budgetary allocations of the required counterpart funds are approved and released in a timely manner to ensure proper project implementation. (xiv) The Government will ensure that the Project will not cause any involuntary resettlement and negative impact on indigenous people. The Government will also ensure that none of the loan proceeds will be utilized for land acquisition purposes. B. Condition for Loan Effectiveness 54. The competent authority of the Government will have duly approved the PC-1 for the Project. VI. RECOMMENDATION 40. 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 in various currencies equivalent to Special Drawing Rights 20,165,000 to the People's Republic of Bangladesh for the Agribusiness Development Project from ADBs Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 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.

AGRIBUSINESS SECTOR ANALYSIS A. Introduction 1. Agribusiness is a complex of interlinked activities related to the commercial production of agricultural commodities (including crops, livestock, fisheries, and forestry); the transformation of agricultural commodities into products; the provision of inputs to the production of agricultural commodities (including planting and genetic material, agrochemicals, equipment, and pharmaceuticals); and the marketing, distribution, and trade of agricultural commodities and products. Agribusiness in the context of the Project refers to horticulture and hortibusiness development, with selected interventions to improve the livestock and dairy institutional framework and support selected enterprises. B. Sectoral Constraints and Issues 4. Although markets provide the economic opportunities, constraints to commercial agriculture and agribusiness development in Bangladesh encompass infrastructure (energy, transport, and storage); sector institutions and policies, and governance practices; and access to modern technology and to financial and business development services. No single project can address all these constraints. Through an ambitious public investment program, the Government of Bangladesh is committed to rapidly developing major infrastructure to support broad-based economic growth. Similarly, in part with Asian Development Bank (ADB) support, the Government is moving to improve governance, accelerate private sector development and decentralization, and improve the performance of the financial sector. The Project will complement these initiatives through a set of carefully targeted interventions specific to the needs and constraints of agribusiness. 5. Market Failures. The horticulture subsector and its agro-enterprises are not classified as an industry and do not have access to competitive loans for enterprise establishment. Risk aversion among the private sector financial institutions is high, with low lending comfort levels. The subsector is at a distinct disadvantage as compared with other subsectors such as industrial crops. The bulk of agro-enterprises are family owned, and are characterized by investment based on internal sources of funding and organic growth. One outcome of recent financial sector reforms is a significant increase in private sector credit, including credit delivery in the agriculture sector.

7. Institutional Failures. Hortibusiness and agro-enterprises require enhanced technical skills, greater marketing orientation and networking, better market information, and better linkages with service providers to enable them to contribute more significantly to economic growth. MoF has the mandate for (i) market information services; (ii) quality control and grading standards, which includes international standards compliance; and (iii) agricultural commodity research. However, it needs to promote private sector involvement in the provision of some of these services, particularly market information services, and commodity research. The private sector cannot develop fully unless an environment is created that allows it to enter into service areas currently being provided by government. 8. All agricultural and agribusiness research in the country is funded by the public sector. Fiscal constraints affect operational research funding, with 90% of all funds assigned to staff salaries, and only 10% available for operational activitiesgrossly insufficient to conduct tangible research activities. Research institutes are not commercially oriented; they are not even allowed to sell their germ-plasm and breeding materials to the private sector. The extension service has a comparatively high cost, lacks efficiency and quality, with fiscal sustainability a major problem. The agriculture extension services main focus is on the major staple and industrial crops, and primarily on production, with little work in the field of postharvest technology and processing. Farmers lack knowledge and awareness of modern production techniques, and need practical training and extension to support development. The approach of the farmer field school has proven to be highly successful in providing farmers with improved agronomic, postharvest, and integrated pest management practices, and leads to formation of farmer groups that are able to access required extension advice from private sector providers. 12. Lack of Agribusiness Policy. Although a few national and provincial public agencies are related to agribusiness, these agencies work largely in isolation. An integrated and well coordinated agribusiness strategy is needed to (i) support and promote the growth and performance of the agribusiness subsector, including enterprise start-up and expansion, value chain integration, product specialization; and (ii) incorporate the informal sector into the agribusiness mainstream, particularly in the context of globalization, international competitive pricing, the need for investment incentives, and world trade issues. C. Government Policies and Plans 13. MoA has stated that a number of policy issues need to be addressed by the Government in agriculture and agribusiness. Those relevant to agribusiness include (i) making agriculture a priority area to address issues of rural unemployment, poverty reduction, and economic growth; (ii) providing a policy focus for sustainable food security, increasing productivity, commercial agriculture, import substitution, income diversification, and export orientation; (iii) increasing farmer productivity and profitability; (iv) prioritizing the private sector's role in leading public-private sector partnerships; (v) restructuring the institutional services of agricultural research and extension to raise farmer productivity and profitability; (vi) establishing new markets in areas where the marketing structure is weak; and (vii) building capacity on WTO issues. D. Lessons Learned

14. The Government has implemented many projects in the agriculture, rural development, irrigation, horticulture, livestock, and SME and trade promotion sectors during the last 2 decades . The operational lessons from Bangladesh and other emerging markets are that (i) where policy, institutional, financial, and technical market failures exist, a comprehensive approach to overcome these constraints is required; (ii) while governments play a key role as facilitators for market development, direct service provision should be left to the private sector, except where the market failure requires public sector service provision;2 (iii) regulatory support and stimulation of market-based business development services has proven effective in promoting economic growth and employment generation; (iv) business development services should be demand driven. E. Agribusiness Opportunities 15. During project preparation, the financial viability of nine representative agro-enterprises was studied. All had a financial internal rate of return of more than 12%, clearly demonstrating the opportunities that exist for entrepreneurs in agribusiness. About 1.5 million people are employed in such small- and medium-size horticultural enterprises. There is a pressing need to encourage the growth of micro horticultural enterprises to support the transition to small and ultimately medium-scale enterprises to make the sector competitive on domestic and international markets. 16. Market Opportunities. With a rapidly growing population,3 the domestic demand for fruit and vegetables and their processed products is expanding, which presents an opportunity for producers and processors. The income elasticities for processed fruits, vegetables, and milk products are much higher, and result in annual increases in demand in excess of 10% on average, indicating a sizeable potential market for domestic processors. The major commercial fruits with a strong domestic demand are apples, apricots, dates, citrus (mainly kin now), guavas, grapes, mangoes, peaches, and plums. The major vegetable crops are chili, carrot, cauliflower, onion, potato, and tomato. The market for fruit juices, fruit based drinks, and tomato ketchup is expanding rapidly, at about 1520% annually. The production for horticultural products is highly seasonal. In addition, large price variations and cyclic trends lead to fruit and vegetable imports, creating opportunities for import substitution.

OUTLINE TERMS OF REFERENCE FOR CONSULTING SERVICES A. Background 1. Given the generally low level of capacity in agribusiness, the Project requires a significant input of consulting services both at the institutional and enterprise levels. Given the need to enhance Bangladeshs agribusiness quality standards to international levels, the innovative nature of the Agribusiness Support Fund (ASF), and the Projects approach to agribusiness finance development, a major part of consulting services will be provided by international consultants. A total of 221 person-months of international and 128 person-months of domestic consulting inputs will be financed under the Project. A high degree of flexibility will be written into each consulting contract to allow implementing agencies to recruit consultants according to needs determined as project implementation proceeds. B. Agribusiness Support Service Provision 2. International and domestic consultants will be engaged at the start of project implementation to prepare and implement a nationwide promotion campaign for the ASF. Given the innovative nature of the ASF within the agriculture sector in Bangladesh and the need for sound governance and management to ensure effective delivery of ASF funding, the ASF manager will be recruited as an international consultant for the duration of the Project. The consultant will initially be responsible for incorporating and establishing the ASF, preparing a business plan and operating procedures, and coordinating the promotion campaign. Thereafter, the consultant will be responsible for day-to-day management of the ASF and evaluating funding applications. C. Agribusiness Finance Development 3. Since the financing of agribusiness of the type to be supported by the Project is very limited in Bangladesh at present, agribusiness finance development consultants will all be recruited internationally. The first phase will involve a program of awareness building within potential participating financial institutions (PFIs) to discuss with them on a one-to-one basis the constraints and opportunities for agribusiness finance development. These discussions will result in the preparation of a shortlist of PFIs that demonstrate a commitment to developing agribusiness lending with the support of the Project. From the shortlist, 35 PFIs will be selected for the second, capacity-building phase. In the capacity-building phase, separate teams of consultants will work with individual PFIs to avoid issues of confidentiality and conflict of interest, and will negotiate individual contracts with the Bangladesh Bank, and subsidiary agreements with the PFI they support. Consultants will review business plans for agribusiness finance development prepared by the selected PFIs. Based on a strategy and work plan (with performance targets and evaluation criteria) agreed with the PFI management, they will establish an agribusiness lending unit within the PFI. Consultants will support the unit for up to 36 months, during which time they will develop loan products, prepare operating procedures and manuals, and train PFI staff. At the end of the assignment, each PFI will have an operating agribusiness finance unit that it can take over and operate itself. The participation of PFIs in the Project is expected to be phased over the first 3 years of the Project.

4. Throughout the implementation of the capacity-building phase, independent international consultants will monitor the performance of the international consultants in agribusiness finance development in each PFI, in accordance with the targets agreed with each PFI. Contracts between the capacity-building consultants and each PFI will stipulate actions to be taken depending on the results of the performance monitoring review. D. Capacity Building for Agribusiness 5. Capacity building in both public and private sector institutions is a priority to support implementation of the enabling policy and regulatory environment, and to move agribusiness toward a more private sector and market-oriented approach. An international institutional restructuring and coordination consultant will be engaged in the first year of the Project to support the reorganization of the Ministry of Food, Agriculture, and Livestock to enable it to perform in a manner consistent with the new policies and regulatory framework. The Ministry of Food will be supported by international consultants in the first year to enhance its export certification. Domestic consultants employed intermittently over the first 3 years of the Project will be responsible for coordinating staff training and dissemination of information on department functions. International consultants will be engaged intermittently during the first 3 years to strengthen the role of the Federal Seed Certification and Registration Department in improving seed and fruit nursery certification and enforcing germ-plasm standards and uniformity. 6. The Project will implement a significant training of trainers program aimed at upgrading the capacity of public sector training institutes and private sector providers to deliver training in business management, technical skills, total quality management, and alignment with World Trade Organization regulations. Senior staff and lecturers at vocational training institutes and government commerce colleges will receive training in school management and training delivery methods. A combination of international agribusiness training curriculum development and national curriculum development and training dissemination and coordination consultants will be engaged to implement the training program. Curriculum and training program development will be an ongoing exercise during the first 3 years of the Project to allow for refinement of the training message and delivery mechanisms based on implementation experience. In recognition of the potential for floriculture, an international floriculture training consultant will provide training to vocational training institute and government commerce college staff and other training providers in flower production and presentation for onward training to flower growers and processors. The consultant will be engaged intermittently during the life of the Project. E. Policy Formulation and Enabling Environment 7. International consultants supported by task forces comprising public and private sector nominees will be engaged to develop a national agribusiness policy using a consultative approach with relevant sector stakeholders. Provincial and special area horticulture policies will be developed in a similar way using domestic consultants and public and private task forces. An international consultant will be employed to develop an agribusiness regulatory framework and to promote compliance with international quality standards among Bangladeshs agribusiness institutions and enterprises. Both the agribusiness and horticulture policies and regulatory

framework will be completed in the first year of the Project in order to facilitate implementation thereafter. F. Project Management Support 8. An international consultant with experience of implementing similar projects with diverse components and activities will be recruited to support the Ministry of Food, Agriculture, and Livestock in the establishment of the project management unit, provincial project implementation offices, and project implementation procedures in accordance with Asian Development Bank guidelines. A domestic monitoring and evaluation consultant will be contracted to establish the project performance monitoring system and to assess project impact during the life of the Project. Starting in the second year and for the duration of the Project, a domestic environmental monitoring and evaluation consultant will assess the environmental impact of project-supported interventions. 9. Domestic consultants will be engaged to undertake two studies identified as priorities for supporting agribusiness development. These are a competitive and comparative advantage study to identify horticulture products that may offer the greatest potential for development in Bangladesh, and a livestock and dairy study to identify potential areas of growth and investment. 10. To accommodate unforeseen consulting service needs, 6 months international and 12 months domestic consulting services have been included, but not allocated to any specific area or task. These will be available at the discretion of the project management unit to supplement consulting inputs as necessary. G. Procurement of Consulting Services 11. Consultants selected must have proven international experience in relevant fields of expertise and prior exposure in South Asia. Companies will be eligible to bid for providing consulting services in more than one of the identified packages.