FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY EMERGENCY PROJECT PAPER ON A PROPOSED EMERGENCY RECOVERY GRANT IN THE AMOUNT OF SDR 14 MILLION (US$22.0 MILLION EQUIVALENT) TO THE ISLAMIC REPUBLIC OF AFGHANISTAN FOR A AFGHANISTAN NEW MARKET DEVELOPMENT PROJECT Finance and Private Sector Development Unit South Asia Region April 11, 2011 Report No: AF This document is made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank s Policy on Access to Information.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective February 28, 2011) Currency Unit = Afghani (AFN) AFN 45.4 = US$1 US$ = SDR 1 FISCAL YEAR March 21 March 20 ABBREVIATIONS AND ACRONYMS ACBRF Afghanistan Capacity Building for Results ISN Interim Strategy Note Facility ACCI Afghanistan Chambers of Commerce and IRR Internal Rate of Return Industry AISA Afghanistan Investment Support Agency M&E Monitoring and Evaluation ANDS Afghanistan National Development Strategy MoCI Ministry of Commerce and Industry ANMDP Afghanistan New Market Development MoE Ministry of Economy Project ARDS Afghanistan Reconstruction and MoF Ministry of Finance Development Services AREDP Afghanistan Rural Enterprise Development Project MRRD Ministry of Rural Rehabilitation and Development ARTF Afghanistan Reconstruction Trust Fund MTR Mid- Term Review BDS Business Development Services NRVA National Risk and Vulnerability Assessment EPAA Export Promotion Agency of Afghanistan OP/BP Operational Policies/Bank Procedures PDC Provincial Development Council OM Operations Manual DAB Da Afghanistan Bank PDO Project Development Objective ESMF Environmental and Social Management PMU Project Management Unit Framework FM Financial Management PSDD Private Sector Development Directorate FNMD Facility for New Market Development SDU Special Disbursement Unit GoA Government of Afghanistan SME Small and Medium Enterprise IDA International Development Association TA Technical Assistance IBRD IFC International Bank for Reconstruction and Development International Finance Corporation WB World Bank Vice President: Isabel Guerrero Country Director: Nicholas Krafft Sector Director: Ernesto May Sector Manager: Ivan Rossignol Task Team Leader: John Speakman

3 AFGHANISTAN New Market Development Project CONTENTS Page A. Introduction... 7 B. Emergency Challenge: Country Context, Recovery Strategy and Rationale for Proposed Bank Emergency Project... 7 C. Bank Response: The Project... 8 D. Appraisal of Project Activities E. Implementation Arrangements and Financing Plan F. Key Risks and Mitigating Measures G. Terms and Conditions for Project Financing Annex 1: Detailed Description of Project Components Annex 2: Results Framework and Monitoring Annex 3: Summary of Estimated Project Costs Annex 4: Operational Risk Assessment Framework (ORAF) Annex 5: Financial Management and Disbursement Arrangements Annex 6: Procurement Arrangements Annex 7: Implementation and Monitoring Arrangements Annex 8: Project Preparation and Appraisal Team Members Annex 9: Environmental and Social Safeguards Framework Annex 10: Economic and Financial Analysis Annex 11: Summary of Donor Private Sector Projects in Afghanistan Annex 12: Documents in Project Files Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance Annex 15: Map

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5 AFGHANISTAN NEW MARKET DEVELOPMENT Country Director: Nicholas J. Krafft Sector Manager/Director: Ivan Rossignol / Ernesto May Team Leader: John Speakman Project ID: P Expected Effectiveness Date: September 1, 2011 Lending Instrument: Emergency Recovery Grant EMERGENCY PROJECT PAPER SOUTH ASIA REGION Basic Information Project Financing Data [ ] Loan [ ] Credit [ x ] Grant [ ] Guarantee [ ] Other: Proposed terms: Financing Plan (US$m) Source Total Project Cost: IDA: Borrower: Total Bank Financing: Sectors: Private Sector Development Themes: Small and medium enterprise support (100%) with T.A. component Environmental category: B Expected Closing Date: February 29, 2016 Total Amount (US $m) Client Information Recipient: Islamic Republic of Afghanistan Responsible Agency: Ministry of Commerce & Industry (MoCI) Contact Person: 1. Mr. Pamir Patang, Chief of Staff to the Minister, MoCI Telephone No.: +93 (0) , pamirpatang@yahoo.com Estimated disbursements (Bank FY/US$m) FY Annual Cumulative Project Development Objective and Description Project development objective: To help in the revitalization of private sector activities in the four major urban cities of Kabul, Mazar-e-Sharif, Jalalabad and Herat through provision of business development technical assistance to support private firms initiatives to gain market knowledge, improve product quality and processing technologies, and increase their presence in both domestic and export markets. Component 1: Facility for New Market Development (US$ 18 million). This component is mainly a cost-sharing program to support Small and Medium Enterprises

6 and business associations with access to business development services (BDS) in order to enhance their productive capacity and encourage innovation through product and/or market diversification. The FNMD would operate in four key urban cities, Kabul, Mazar-e-Sharif, Jalalabad and Herat, which serve as the national hubs of economic activity. Other FNMD supporting activities include a marketing and communications program, skills building workshops, supplementary support to businesses for developing plans, and sharing results to encourage participation of new firms in the FNMD. Component 2: Project Implementation Support and Technical Assistance to Ministry of Commerce & Industry (MoCI) (US$ 4 million). This component will support the Ministry of Commerce & Industry (MoCI) with (a) the establishment and operation of a project management unit for the New Market Development Project; and (b) technical assistance to develop a strategic plan to access support from the proposed new Afghanistan Capacity Building for Results Facility which is currently under preparation by the World Bank and the Government of Afghanistan (GoA). Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waters (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) Does the project require any exceptions from Bank policies? Have these been approved by Bank management? Conditions and Legal Covenants: Financing Agreement Reference Description of Condition/Covenant Schedule 2, Sec. IV B.1.(b) Establish a PMU, (Cat. 1 and 2) [ x ]Yes [ ] No [ ]Yes [ x ] No [ ]Yes [ x ] No [ ]Yes [ x] No [ ]Yes [ x ] No [ ]Yes [ x ] No [ ]Yes [ x ] No [ ]Yes [ x ] No [ ]Yes [ x ] No [ ]Yes [ x ] No [ ]Yes [ x ] No [ ]Yes [ ] No Date Due Disbursement condition Schedule 2, Sec. IV B.1. (c)(ii) Schedule 2, Sec. IV B.1.(c)(iii) Enter into the Management Service Agreement with the FNMD Management Consultant (Cat 2) Develop and adopt the FNMD Operations Manual (Cat 2) Disbursement condition Disbursement condition

7 A. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide an IDA grant in an amount of SDR 14 million (US$22 million equivalent) to the Islamic Republic of Afghanistan for an Afghanistan New Market Development Project (ANMDP). 2. The proposed Project s development objective is to help in the revitalization of private sector activities in four major urban cities of Kabul, Mazar-e-Sharif, Jalalabad and Herat. The proposed grant will finance business development technical assistance to support private firms initiatives to gain market knowledge, improve product quality and processing technologies, and increase their presence in both domestic and export markets. The key outcome of the proposed project would be the increased market presence of beneficiary firms and enhanced value-added of business operations. B. Emergency Challenge: Country Context, Recovery Strategy and Rationale for Proposed Bank Emergency Project Country and Sector Context 3. Since 2002 the Government of Afghanistan (GoA) has been engaged in programs to rebuild security, legitimacy, and the economy. The government has made remarkable progress in many areas such as primary education, basic health services, irrigation rehabilitation, and rural development. However, the country remains extremely fragile. Afghanistan s poverty and social indicators remain among the lowest in the world. Government capacity is weak despite improvements and the pace of implementation of reconstruction programs has been short of popular expectations. The combination of poverty, insecurity, extremely low domestic revenue base and the country s heavy dependence on foreign aid means the GoA faces daunting challenges in taking the reconstruction agenda forward. 4. With a few notable exceptions in the telecommunication and mining sectors for which GoA with donor assistance have developed its visions and implementation strategies, efforts at promoting private sector development for other sectors, particularly for small and medium enterprises (SMEs), have yet to yield significant results. 5. Afghanistan s private sector is dominated by SMEs 1 engaged mainly in agro-processing and handicraft production. Nearly three decades of civil conflict have exacted a heavy toll on the operations of private sector firms, severely constraining their ability to access market and product knowledge and transport logistics. Consequently, the SMEs have lost their competitiveness and market share for the country s traditional export products including dried fruits, nuts and carpets, let alone venturing into new products and markets. 6. According to the Bank s 2008 enterprise survey of over 1,000 firms, while access to factor markets (land, capital and basic infrastructure) continue to constrain longer term growth prospects of private firms, firms desire and need immediate business development assistance to 1 In Afghanistan s context, an SME can be considered as any firm that has between employees. Large companies would be considered as having 100+ employees. 7

8 gain market knowledge, improve product quality to comply with international standards, build competitiveness and re-create market presence. 7. Government Strategies: The Afghanistan National Development Strategy (ANDS) is based on three pillars: Security; Governance; and Social and Economic Development. Under the third pillar, the ANDS states as a goal to, Reduce poverty, ensure sustainable development through a private-sector-led market economy, improve human development indicators, and make significant progress towards the Millennium Development Goals (MDGs). Most recently, the GoA has developed sector development strategies for the telecom/ict and mineral resources. For the broader SME sector, MoCI is in charge of formulating appropriate frameworks to support private sector growth, but these are work-in progress and it will take time for a comprehensive strategy to emerge. In the meantime, there is a shared recognition that immediate firm level assistance for business development is a priority intervention needed to stimulate private sector growth. 8. Donor programs: There have been a series of donor supported initiatives mainly led by USAID, DFID and GTZ, 2 ranging from funding equipment and capital to studies and analysis of key value chains. While these programs have contributed to the identification of sector development constraints and various measures to address them, provision of firm level business development assistance through demand-driven, cost-sharing arrangement to secure private firms ownership of initiatives is yet to be piloted and scaled up. 9. Rationale for Bank Support: The Government of Afghanistan has requested World Bank assistance to pilot a business development assistance program targeting SMEs. Given its operational knowledge and experiences with similar interventions in other countries, the Bank has unique comparative advantages to assist the government to implement the pilot. C. Bank Response: The Project 10. The Bank Group is supporting the Government s private sector agenda by: (i) continuing to address the overall constraints to private sector development through lending and advisory work; (ii) identifying and addressing specific measures that catalyze business growth; and (iii) through IFC interventions, investing directly in local companies, including banks, to help them expand business. This proposed project is to pilot a new program for providing firm level business development assistance to encourage private sector firms to develop and implement their own initiatives for growth. Project Development Objective (PDO) 11. The proposed Project s development objective is to help in the revitalization of private sector activities in the four major urban cities of Kabul, Mazar-e-Sharif, Jalalabad and Herat through provision of business development technical assistance to support private firms initiatives to gain market knowledge, improve product quality and processing technologies, and increase their presence in both domestic and export markets. 2 A summary of these initiatives are listed in Annex 11. 8

9 Summary of Project Components 12. The Project has two components as described below: Component 1: Facility for New Market Development (FNMD) (US$ 18 million): 13. This component will finance (a) business development technical assistance grants to participating firms and business associations (US$ 11.2m), (b) information, communications, knowledge sharing of best practices on business development planning, results monitoring and dissemination activities associated with the implementation of the Facility (US $1.3m), and (c) Facility management consultancy services (US$ 5.5m). Business development assistance will be provided on a cost-sharing basis. The project will reimburse (i) 50% of eligible expenditures incurred by participating firms and (ii) 70% of eligible expenditures incurred by business associations for activities aimed at developing and implementing business plans to access new markets through market research, product development, acquisition of new technologies and adoption of quality standards. Although the FNMD will by default work mainly with SMEs as they are the most dominant in the Afghan private sector, interested large firms will not be excluded from assistance. Component 2: Project Implementation Support and Technical Assistance to Ministry of Commerce & Industry (MoCI) (US$ 4 million): 14. This component will finance (a) the establishment and operation of a Project Management Unit for the New Market Development Project; and (b) technical assistance to help MoCI develop a ministry specific capacity building for results program to access support from the proposed Afghanistan Capacity Building for Results Program to be financed by ARTF which is currently under preparation 3. Through the TA support, the MoCI would define (i) the top priority goals that the Ministry aims to achieve for the next 5 years; (ii) a strategy to achieve the results benchmarks, which could include legislative and regulatory efforts and initiatives to improve the investment climate and address the private sector growth constraints; and (iii) steps to create a critical mass of managerial and professional staff resources to execute the MoCI s priority mandate. Eligibility for Processing under OP/BP Given the country circumstances, all lending operations for Afghanistan are processed under OP/BP 8.0. The proposed project would support the restoration of "the means of production and economic activities." Consistency with Country Strategy (ISN) 16. The Bank s strategy in Afghanistan as outlined in the Interim Strategy Note (ISN) rests on three pillars: building the capacity and accountability of the state to its citizens to provide services that are affordable, accessible and adequate; promoting growth of the rural economy and 3 The Capacity Building for Results Facility is a proposed project that will focus on assisting key line Ministries in their delivery of core services and budget execution. 9

10 livelihoods; and supporting growth of a formal, modern and competitive private sector. The project is consistent with the Bank Group s Interim Strategy Note (ISN) for Afghanistan. Expected Outcomes 17. The key overall outcome of the proposed project would be the increased market presence of beneficiary firms and enhanced value-added of business operations. Specifically, this can be measured against the goals of the FNMD reaching: about 750 private sector Afghan firms in each of the four target cities Kabul (about 300 firms), Jalalabad (about 150 firms), Mazar-e-Sharif (150 firms), and Herat (about 150 firms) very rough some 10% of the total population of such firms in Afghanistan. Support would not be pre-allocated to one location or the other. about 10 groups of businesses either consortia of individual firms self-organized or formally established Afghan business associations. Key Performance Indicators 18. The proposed development and implementation results will be monitored through several performance indicators including specifically for the FNMD: (i) number of firms benefited by the cost-sharing program, (ii) increased sales (%), (iii) product or market diversification (#), and (iv) number of jobs (direct and indirect), by gender, generated by FNMD participating firms. D. Appraisal of Project Activities Economic 19. ANMDP has developed a market-driven approach to increase employment and incomes through support to business associations and private firms. The project seeks to greatly expand the rate of capital formation and capital accumulation in urban Afghanistan. The project benefits will include: (i) increased access to technical knowledge and business support services; (ii) enhanced growth in employment opportunities and increased incomes; (iii) increased investments in enterprises; and (iv) expanded domestic and export market development. Although it is difficult to make an ex-ante assessment of economic rates of return in the context of Afghanistan, a rough estimate can be made based on the experience of similar investments in the Middle East, Africa and Latin America. Based on the envisioned benefits of additional generated sales and client value-added, the internal rate of return of the project including fiscal revenues to the government through corporate and income taxes can be estimated as high as 24%. Likewise, looking at the firm-level only, without fiscal benefits to the government, an IRR of 32% can be expected. 10

11 20. In addition, the experiences of similar projects in Ecuador, Tunisia and West Bank Gaza show that such project interventions yield a wide array of other social, institutional, and economic impacts over the medium and long terms 4. Technical 21. As the ANMDP s FNMD follows the successful models of previously implemented projects of the World Bank in other countries as mentioned above, lessons learnt have been incorporated in this project s design based on demonstrated success despite operating in difficult environments. The Afghanistan FNMD provides a package of sequenced, integrated and mutually-reinforcing products that involve building broad client-market awareness and business capability to tackle new market development, building core skills in a group setting on topics critical to this process, shoulder-to-shoulder help in planning and execution of proposals and cofinancing to reduce the risk to firms of undertaking such efforts. 22. The FNMD will finance on a reimbursement basis primarily expenditures pertaining to business development services. In general, there are three broad service categories within which FNMD business plans can be approved for financing including: (i) market research; (ii) product adaptation; and (iii) promotion. For example, the financed BDS can include business management training, international market research, product design, production and efficiency diagnostics, product testing and certification services, labeling and packaging design and marketing and sales promotion including missions. Further elaboration of possible expenditures can be found in Annex As the FNMD operates as a bottom up, fast-acting and flexible tool, it would produce concrete operational transformation and growth in income for the firm and its employees as well as spillovers to the broader business community and fiscal return to the government that may well cover the total cost of FNMD financing. Specifically, FNMD results would be evidenced in the 5 main ways: (1) diversification in the structure of markets and products; (2) qualitative growth in sustainable business capacity to build new markets; (3) quantitative growth in sales (export and domestic) and employment from market diversification; (4) spillover effects to nonclient business community; and (5) fiscal return from taxation on incremental sales. Given the market demand-based approach of the FNMD, it is not possible to go beyond orders of magnitude likely to be achieved within these categories. However, the ex post results in other countries (as cited in Annex 1) is likely to be indicative. Monitoring & Evaluation 24. FNMD results will be carefully monitored and evaluated under dual systems of an internal M&E, as well as contracting external independent M&E on a regular basis. The internal M&E will follow both randomized sampling techniques to compare beneficiary versus non- FNMD participating firms, as well as representative sampling to compare pre- and postassistance of participating firms. Such details are further outlined in Annex 7: Implementation & Monitoring Arrangements. 4 A summary of proven results from FNMD-type projects in these countries are given in Annex 1 under Results Expectations. 11

12 25. Cost-sharing principles and levels: The FNMD finances 50 percent of eligible expenses incurred by participating firms and 70 percent of eligible expenses incurred by participating business groups. Setting such requirements for significant contributions of the total costs of services helps ensure sound business development plan design and implementation, and reduces the likelihood of misallocation of funds or support for low-value services. As demonstrated by much international experience, the commitment of firms and associations to their projects significantly increases by virtue of their contributions to the cost. 26. Maximum cost-sharing support: Experience shows that the average cost-sharing financing amount per firm is likely to be in the range of about $15,000-25,000 (50% of the total cost of a business development plan) and that the plan will be implemented over a 6-12 month period. A life-time maximum of US$100,000 equivalent grant will be available to an individual firm for the implementation of one or more approved plans, thus offering the potential for firms to secure support for additional plans for related or separate purposes. An additional grant amount up to a maximum of $50,000 will be available to individual firms to set up an overseas presence. A maximum of $150,000 will be available to a business groups for the implementation of an approved business development plan. However, up to an additional $100,000 may be approved for an association for second business development plan, provided that the association has successfully completed a first plan. Grants received by a firm under an individual plan or under a joint plan both count toward these maximum levels. Lessons Learned from Previous Country & Bank Experience 27. The Bank Group has a long history of similar projects in places like Ecuador, Tunisia, West Bank Gaza, South Eastern Europe, and Indonesia, often in close cooperation with other parts of the Bank Group (IFC, MIGA) and donors. This rich history of projects provides many valuable design and implementation lessons: The most critical factor for success is government commitment and ownership. Activities proposed under the project have similarly been identified by the GoA as initiatives they wanted to undertake as part of their development strategies 5. In post crisis situations, grant financing tends to be more successful than credits. With grant financing it is possible to align incentives and outcomes, particularly when done in a "matching" way to facilitate risk-sharing. Conversely, credit financing requires firms to be willing to assume all the risk, in an environment that is highly uncertain. The project design must be simple and flexible: Too many components can overwhelm the client and their ability to implement the Project, and the Bank's ability to support project implementation can be challenged, particularly in an insecure environment. This project excludes many proposals such as assistance with industrial estates, value chain financing (which are left for follow on projects), financial sector support, etc., and is focused on the minimum needed to take initial steps at addressing only the most critical priorities. 5 ANDS ( ); MoCI Business Plan 12

13 Public Private Dialogue is essential to managing the huge coordination challenge inherent in any effort to improve the enabling economic environment. Implementation capacity is often limited in post crisis scenario. This project addresses capacity challenges by working through existing international management contractor with proven experience implementing such a project in similar environments, and puts a heavy emphasis on technical assistance to the main counterpart, MoCI. 28. In addition, the ANMDP team seeks to work in close collaboration with other Bank project teams including the Afghanistan Rural Enterprise Development Project (AREDP), Afghanistan Sustainable Development of Natural Resources Project II and the Afghanistan Capacity Building for Results Program in order to take full advantage of their complementary work while incorporating lessons learnt. Finally the Project team will collaborate with other existing in country SME support activities including IFC s Business Edge, USAID s Afghanistan SME Development (ASMED) program and DFID s Challenge Fund. Financial 29. The total cost of the overall Project will be US$22.0 million over a four-year implementation period. Of the overall IDA grant, the FNMD component allocation amounts to $18 million. Of the amount financed by the Bank, $12.5 million is provided directly to participating FNMD firms and $5.5 million to support the program management and evaluation costs of the FNMD. The distribution of costs between Kabul, Jalalabad, Mazar and Herat are initially estimated to be roughly 40:20:20:20. However, there is no pre-defined allocation of funds to firms in each urban area; this will depend upon FNMD uptake in the respective areas. The MoCI Technical Assistance component will entail a US$ 4.0 million allocation. Environmental & Social 30. To ensure that the project does not have any unforeseen negative environment and social impact, an Environment and Social Management Framework (ESMF) has been prepared. The proposed interventions of the Project in support of SMEs place the overall categorization of ANMDP in Environment Category B. 31. The ESMF defines the management procedures that allow the proposed Afghanistan New Market Development Project (ANMDP) to avoid, mitigate, or minimize adverse environmental and social impacts of supported enterprises. 32. The ESMF was prepared in accordance with definitions provided in the World Bank Operational Policies (OP) and in the triggered Operational Policy on Environmental Assessment (OP 4.01). The other operational policies included in the World Bank safeguards procedures are not triggered by ANMDP. 13

14 33. ANMDP and more specifically the FNMD has defined strategies, structures and tools to ensure that staff and Project beneficiaries not only apply, but also comprehend why they should apply environment and social safeguards procedures. Specifically, the FNMD would include a Safeguards Officer who will be in charge of ensuring the implementation of this ESMF. 34. A comprehensive matrix of all anticipated potential adverse environmental and social impacts of supported activities, as well as monitoring and mitigation tools has been developed and is given in Annex 9. E. Implementation Arrangements and Financing Plan Implementation 35. MoCI is in the process of recruiting key staff for setting up a Project Management Unit (PMU). The PMU will report to the Private Sector Development Director of the MoCI, who in turn will report to the Minister. The Minister s office will maintain a strong oversight over the project, and the PMU will have access to the Minister through the PSD Director and the Minister s Chief of Staff. The institutional and implementation arrangements outlined below will be carried out according to the rules and procedures agreed in the Operations Manual (OM). The OM will be subject to periodic joint reviews in the light of field experience. Further details on Implementation and Monitoring Arrangements are given in Annex The PMU will be responsible for (1) oversight of the management firm that will implement the Facility for New Market Development (FNMD); (2) oversight of consultants who will help develop the capacity building for results program for MoCI; and (3) addressing other private sector development needs identified by the MoCI. Institutional Arrangements 37. MoCI will be the implementing agency for the Project. A Project Steering Committee chaired by the MoCI and composed of representatives of AISA and the Afghan Chamber of Commerce and Industry will provide project oversight and set the strategic direction of the Project. The following table summarizes the arrangements: 14

15 38. The FNMD Management Team is responsible for the execution of the FNMD within the framework of annual plans approved by the MoCI PMU. To deliver the FNMD an international management firm will undertake full management of the delivery of the FNMD, including the appraisal and approval of individual cost-sharing financing, and be accountable to the MoCI for its results. Selection criteria for the international firm will call for substantial indepth experience using best practices and achieving good results in the implementation of similar programs in other countries and experience working in Afghanistan. The FNMD Management Team will consist of a total of around 28 staff which will include: a Team Leader, Account Managers in each city of which half with sector specializations, a Safeguards Officer, Communications and Workshop Managers, management systems specialists to carry out facilitation to mobilize BDS services for clients, program evaluation and case study preparation, financial management, IT/Web/MIS management, program coordinators and logistics/drivers. FNMD staff in the Provincial offices will report directly to the Team Leader in Kabul. For regular operational purposes, staff would make ample use of ICT communications to ensure that both locations work integrally. In addition, there will be a Management Committee, composed of the FNMD Team Leader and all 10 Account managers which will meet regularly to review and approve financing applications according to the set criteria and procedures in the Operations Manual. 39. Furthermore, once implemented, the Afghanistan FNMD international management firm, based on proven experience, will utilize an M&E system that tracks implementation progress to assess impact on: new market and product diversification, qualitative increases in business capacity, and incremental sales and export values. The FNMD also incorporates external independent evaluation to validate and deepen the impact assessment. 40. Consultative partners: To build effective communications in a streamlined fashion, FNMD management will establish an ad hoc consultative partners group to meet on an as needed basis. It will seek to include entities such as AISA, ACCI, HARAKAT, and Peace Dividend Trust. 15

16 Financing Plan 41. The total cost of the Project will be US$22.0 million over a four-year implementation period. The Project will be financed by an IDA grant. Additional resources will be sought to scale up the project if the pilot is successful in achieving its development objectives. Financial Management, Disbursement & Audit Arrangements 42. A PFM performance rating system has been developed for Afghanistan by the Public Expenditure and Financial Accountability (PEFA) multi-agency partnership program, which includes the World Bank, IMF, EC, and other agencies. Afghanistan s ratings against the PFM performance indicators portray a public sector where financial resources are, by and large, being used for their intended purposes as authorized by a budget that is processed with transparency and has contributed to aggregate fiscal discipline. 43. Financial management and audit functions for proposed project will be undertaken through the agents contracted under the IDA-financed Public Financial Management Reform project. These are the primary instruments for continuing to strengthen the fiduciary measures put in place for ensuring transparency and accountability of funds provided by the Bank and other donors. Under these contracts, two advisers Financial Management and Audit are responsible for working with the government and line ministries to carry out these core functions. The former, the Financial Management Agent (FMA) is responsible for helping the MoF maintain the accounts for all public expenditures, including IDA-financed projects and for building capacity within the government offices for these functions. The latter, the Audit Agent is responsible for providing technical assistance to the Control and Audit office in the performance of annual audits. 44. At the project level, a Project Management Unit (PMU) will be established within the implementing agency, MoCI. The PMU together with the MoCI Finance department will undertake responsibility of the project s financial management functions. 45. Quarterly Financial Monitoring Reports will be prepared by the PMU/ MoCI Finance department every quarter and submitted to the Bank within 45 days from the end of the quarter. Consolidated project reports will be prepared, reviewed, and approved by the MoF, supported by the FMA. 46. A Designated Account (DA) will be opened at Da Afghanistan Bank (DAB, Central Bank) in the name of the project on terms and conditions satisfactory to IDA. The DA will be maintained by the MoF. Withdrawal applications for new advances and submission of expenditure reporting will be done monthly. Fund Flows 47. Fund management for the Project will follow existing procedures. As with all public expenditure, all payments under the project will be routed through MoF. The FM Adviser will assist the MOF in executing and recording project payments. In keeping with current practices 16

17 for other projects in Afghanistan, the DA will be operated by the Special Disbursement Unit (SDU) in the Treasury Department of MoF. Requests for payments from DA funds will be made to the SDU by PMU/MoCI. In addition to payments from DA funds, PMU/MoCI can also request the SDU to make direct payments to consultants or consulting firms, and special commitments for contracts covered by letters of credit. Such requests will follow World Bank s procedures. All withdrawal applications to IDA, including advances, reimbursement, and direct payment applications, will be prepared and submitted by MoF. Accounting and Reporting 48. The PMU/ MoCI Finance department will maintain essential consolidated project transaction records using computerized accounting system/ Excel spreadsheets and generate required monthly, quarterly, and annual reports. In addition, the Facility for New Market Development (FNMD) component s management firm will maintain a computerized accounting system to maintain detailed financial data and generate periodic reports on the FNMD component. 49. The FM Manual, to be prepared by the PMU/ MoCI Finance department, and to be approved by the Bank, will include: i) roles and responsibilities for all FM staff; ii) linkages between the FM staff of the PMU, MoCI s finance department and the FNMD component management firm s finance staff; ii) documentation and approval procedures for payments; iv) project reporting requirements; and v) quality assurance measures to help ensure that adequate internal controls and procedures are in place and are being followed. In addition, the FM manual will also specify the minimum staffing, financial records and reporting requirements expected from the FNMD component s management firm. 50. The FM Manual will also establish project financial management in accordance with standard Afghan government policies and procedures including use of the government Chart of Accounts to record project expenditures. The use of these procedures will enable adequate recording and reporting of project expenditures. Overall project accounts will be maintained centrally in SDU, which will be ultimately responsible for recording of all project expenditures and receipts in the Government s accounting system. Reconciliation of project expenditure records with MoF records will be carried out monthly by the PMU/ MoCI Finance department. Disbursement Method 51. Disbursements from the grant will be made using advances, reimbursement, direct payment, and payments under Special Commitments including records or against reports, in the form of statements of expenditures, as appropriate. Audit of Project Funds 52. The Auditor General, supported by the Audit Agent, is responsible for auditing the accounts of all IDA and ARTF-financed projects; it will also be responsible for this project s audit. Annual audited project financial statements will be submitted within six months of the close of GOA s fiscal year. 17

18 53. There are no World Bank financed projects implemented by MoCI. As such, there are no overdue audit reports. Audit Responsible Entity 54. The responsible entity for the audit report is the Ministry of Commerce and Industries (MoCI). Procurement Arrangements 55. Procurement for the project will be administrated in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated January Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated January 2011 and the provisions stipulated in the Financing Agreement. In addition, the World Bank s Guidelines on Preventing and Combating Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants dated October 15, 2006 and revised January 2011 has been shared with the recipient. The World Bank s Standard Bidding Documents, Requests for Proposals, and Forms of Consultant Contract will be used. Civil works and goods following National Competitive Bidding (NCB) procedures shall be procured using the agreed Standard Bidding Documents (SBDs) for Afghanistan. In case of conflict/contradiction between the World Bank s procurement procedures and any national rules and regulations, the World Bank s procurement procedures will take precedence as per the Article 4(2) of the Procurement Law July 2008 (Amendments in January 2009 incorporated) of the GOA, the IDA Procurement/Consultant Guidelines shall prevail. The general description of various procurements under different expenditure categories are described in Annex 6: Procurement Arrangements. A detailed procurement plan has been prepared for the project as part of the Procurement arrangement. 56. The proposed project is implemented by the MoCI. MoCI staff for the time being have limited experience in handling procurement under IDA financed projects. Currently, the MoCI Procurement Department is equipped with 5 national staff that have limited experience in general procurement and have no experience in selection of consultants. 57. A Procurement Manual will be prepared by MoCI as part of the Project Operation Manual which will be approved by the Bank. The Project Operation Manual will include the FNMD manual which will detail the procurement process for SMEs and business associations under the cost-sharing mechanism. 58. As the project will be implemented in Jalalabad, Mazar Sharif, and Herat provinces, any bulky small value items (i.e. furniture, etc.) which will be difficult to transport to the above provinces from Kabul will be procured in the provinces. The request for quotations with proper specification will be prepared in Kabul by procurement specialist of the project/ards. The RFQ will be issued in the provinces and then offers will be sent to Kabul to PMU for evaluation and recommendation of award of the contract. 18

19 59. With donor assistance, Afghanistan has made considerable efforts to establish the Legal and Regulatory Framework for public procurement over the last five years. A Procurement Law, reflecting international best practice in public procurement was enacted in November 2005 replacing the earlier procurement regulations. While the law provides a very modern legal system for procurement, effective implementation of the law may encounter difficulties in the current weak institutional structure and capacity of the Government. A Procurement Policy Unit (PPU) has now been established under MoF to ensure implementation through the creation of secondary legislation, standard bidding documents, provision of advice, creation of the necessary information systems for advertising and data collection. Rules of Procedure for Public Procurement, which details the better implementation of the Procurement Law, has been issued by MOF as circular number PPU/C005/1386 dated April 12, The Procurement Appeal and Review mechanism is in place and the Manual of Procedures for Procurement Appeal and Review has been issued by MOF as circular number PPU/N001/1385 on March 18, The Procurement Law has been revised in July 2008 and amended in January 2009 and issued as a new Law by the Ministry of Justice and was published in the Official Gazette Number 957, (18 January 2009). The revised Rules of Procedures for Public Procurement has been issued as circular PPU/C027/1387 of November 18, The Special Procurement Commission (SPC), comprised of the Ministry of Justice and Ministry of Economy (MoE), under the chairmanship of MoF approves high-value contracts. These approvals will be done according to Article 91 of the Afghan Public Procurement Law. 61. In the absence of adequate capacity to manage procurement activities effectively, some interim arrangements have been put in place to improve Afghanistan s procurement management. A central procurement facilitation service, the Afghanistan Reconstruction and Development Services Procurement Unit (ARDS PU), has been established under the supervision of MoE. Bank Implementation Support and Supervision and Arrangements 62. Given the governance challenges and weak capacity issues facing Afghanistan, the Bank has developed a results and risk management framework for developmental activities in Afghanistan. This includes helping the government establish and operate appropriate systems for public financial management, public procurement, and internal and external audit; taking governance and accountability measures into project design; and focusing on greater implementation support to clients with risk-based fiduciary arrangements to maximize results. The project will utilize the Bank s overall framework for supervision of the ANMDP. 63. Based on security considerations, the Bank s ability to supervise the project on site is limited. To deal with this, the project task team will: (i) utilize Kabul-based staff to maintain continuous dialogue with the client and to conduct monthly review meetings and (ii) ensure that supervision missions, held every six months, will have adequate skill mix. 19

20 F. Key Risks and Mitigating Measures 64. The overall risk rating at preparation and implementation is high as defined in the project ORAF (Annex 4). The capacity and security constraints prevalent in the Afghan environment have severely affected project implementation across the World Bank portfolio. To mitigate these risks, an international management firm with a proven track record and experience with similar operations in other countries will be hired to manage the main project component. In addition, ongoing support will be provided to the MoCI to resolve any emerging implementation issues. 65. The FNMD Operations Manual will incorporate measures to mitigate risks to the achievement of project development objectives. Some of the main provisions, described below, are incorporated in light of both experience implementing similar projects elsewhere and explicit needs in Afghanistan. A more detailed analysis of risks is outlined in the ORAF in Annex 4. Potential Risk 1. The institutional framework for implementation of the FNMD does not ensure impartiality and a technical appraisal of business innovation plans and approval of associated financing needed for program success. 2. The selected contractor does not provide expert, supportive, businesslike and efficient management services to operate an AFNMD. 3. Corruptive practices, such as bribery in the approval of FNMD grants, falsification of activities under business development plans, or of invoices by FNMD financing client firms, and/or over-invoicing by services supplier and kick-backs to client firm, threaten FNMD s operations and the reputation of MoCI and the Association. 4. Security risks may slow down reach of FNMD grants to potential clients and may prevent implementation support from Bank staff as well as overall project supervision. This may also increase and inflate costs over the four year span of the project. Mitigating Measures The FNMD clearly structures the business development plan appraisal and financing approval processes as technical functions internal to the Management Contractor, exercised on a first-come first-serve basis, with separate, well-defined expost monitoring by the MoCI PMU. Furthermore, the project will develop local champions in the private sector to help raise any concerns voiced from the public and other stakeholders. The FNMD Operations Manual and bidding documents for the FNMD Management Contractor carefully describe the critical staffing and process elements for a highly professional FNMD management and operating culture. Thorough pre-operational staff training is also needed to ensure operations are carried out as defined. FNMD operates on a partial payment reimbursement system, enabling careful physical and documentary verification of payment requests. Close physical and documentary appraisal of finance requesting firms, their business development plans, and the inclusion of line-item budgets for each plan are also important tools to detect any fraudulent practices. Careful attention to procurement practices, the investigations of BDS to build the BDS Roster, the potential to delete BDS from the Roster for any malpractices, and financial audits of FNMD funds at the firm level should also be adequate tools to combat this risk. Finally a Grievance Redressal Mechanism will be put in place where stakeholders may file complaints warranting further investigation by the appropriate responsible parties. No concrete mitigation measure can be put in place but the team will monitor this closely and will consider restructuring the project in the event that security costs become a major issue. The fact that the project is diversified across four cities in different parts of the country, with a base in Kabul, will also help to make re-allocations of the project funding as necessary based on necessary measures to ensure project implementation. 20

21 G. Terms and Conditions for Project Financing 66. The proposed project will be on standard IDA grant terms and will finance 100% of project expenditures, including taxes. Implementation Covenants 67. Afghanistan shall: Establish and maintain throughout the period of implementation of the Project: (i) a Project Steering Committee; (ii) a Project Management Unit; and (iii) a Budget Committee; Select and retain throughout the period of implementation of the Project: (i) an internal auditor; and (ii) a monitoring and evaluation consultant; and (iii) a financial management specialist Enter into a Management Service Agreement with an FNMD Management Consultant for the administration of the FNMD (Component 1 of the Project); Adopt and apply, a FNMD Operations Manual, and a Financial Management Manual; Apply the Environmental and Social Management Framework; and 68. Afghanistan shall cause the FNMD Management Consultant to: Establish an FNMD Management Team, an FNMD Management Committee; and an ad hoc consultative group for the administration of Component 1 of the Project; Publicly call for private firms, consortia of private firms or business associations to submit proposal for FNMD Cost Sharing Grants; Screen the proposals for FNMD Cost Sharing Grant and the applicant firms/consortia or business association in accordance with pre-agreed eligibility criteria; Enter into Sub-Grant Agreements with selected firms for the financing of Sub-projects under the FNMD Cost Sharing Grants; and Implement a grievance redressal mechanism to address complaints regarding eligibility errors/mistakes. Disbursement Conditions 69. The Government of Afghanistan shall: Establish a PMU, (Cat. 1 and 2); Enter into the Management Service Agreement with the FNMD Management Consultant (Cat 2); 21

22 Develop and adopt the FNMD Operations Manual (Cat 2). 22

23 Annex 1: Detailed Description of Project Components Afghanistan New Market Development Project Summary 1. The overall Project consists of two interrelated components: (1) the Facility for New Market Development (FNMD), and (2) Project Implementation Support and Technical Assistance to Ministry of Commerce & Industry (MoCI) to be implemented over four years under a total budget of US$ 22 million. The proposed Project Development Objective (PDO) is to help in the revitalization of private sector activities in the four major urban cities of Kabul, Mazar-e-Sharif, Jalalabad and Herat through provision of business development technical assistance to support private firms initiatives to gain market knowledge, improve product quality and processing technologies, and increase their presence in both domestic and export markets. The proposed development and implementation results will be monitored through several key indicators. Specifically for the FNMD: (i) number of firms benefited by the costsharing program, (ii) increased sales (%), (iii) product or market diversification (#), and (iv) number of jobs (direct and indirect), by gender, generated by FNMD participating firms. 2. The overall Project will be managed by the MoCI through a Kabul based project management unit (PMU) together with MoCI staff in each of the pilot cities by each provincial office. The utilization of the provincial offices is important as it sends a strong signal that the Government is serious about empowering cities to develop their economies, and harness these local energies. The Kabul-based PMU staff will (i) carry out the necessary coordination with the field based units and stakeholders in Kabul on the FNMD and (ii) hire and oversee consultants for the capacity building for results program development and other consultants, as needed. The actual implementation of the FNMD and its respective activities under component 1 will be carried out by an international management firm and overseen by the MoCI. 3. ANMDP will initially be rolled-out in four key cities, and later, based on performance, support from donors, and the security environment, scaled-up eventually to all key cities of the country with access to major transport routes. The initial four target cities have been selected because of their major potential for enterprise development, accessibility, and relatively capable public offices (e.g. Governors Offices, MoCI, Afghanistan Investment Support Agency (AISA), Export Promotion Agency of Afghanistan (EPAA), Provincial Development Councils (PDCs), etc.). Background & Context 4. Afghanistan has a highly concentrated production structure in which agriculture and agro-processing accounts for 95% of the total, and in which its exports in 2008/09 were primarily composed of dried fruits (45%), carpets (27%) and fresh fruits (8%). Various recent analyses also show the underlying need for business innovation and new market development. For example, the Bank s 2008 Enterprise Survey showed that about 94% of firms do not use foreign licensed technology, 86% do not offer on-the-job training, and 95% have no internationally recognized quality certification. 23

24 5. Further, a study of the value chains of dried fruits and nuts sector identified the need inter alia to promote organic, fair trade and ISO certification, better market intelligence on potential customers and competitors in the European Union, other Asian countries and the USA, and trade missions to such markets. A growth strategy for the carpet cluster has called for similar market research to better position the sector overseas relative to competitors, the development of new indigenous designs, travel to buyer markets given resistance to visit Afghanistan, and more participation in international trade fairs. A separate plan for the gemstones cluster calls among other mechanisms for strengthening valuation and certification services to better underpin international trade, building an Afghan brand for gemstones, formulating specific marketing strategies for overseas destinations, and creating a trade association to promote gemstone brands and exports. 6. In many emerging countries, including Afghanistan, it is difficult particularly for smaller firms to successfully adapt to the ever more demanding conditions of international competition, either in the export market or in competition with imported products in the domestic market. Even preceding a need for capital and production assets, they very often lack critical intangible assets, such as (1) salable product designs, quality, packaging and labeling, (2) modern management skills, (3) up-to-date technology and know-how for efficient manufacturing, and (4) export marketing information and skills. The real constraints to be addressed here are the learning process and information and knowledge required which drive business innovation. 7. Entrepreneurs are often reluctant to invest in these elements of innovation due to both economic and psychological factors. This has particularly been the case in post-conflict and post-crisis environments. In this situation, they may not be able to readily identify or confide in the information, analytical resources and buyer-seller relationships needed to understand and initiate development of new domestic and international markets ( asymmetries of information ), compounded in the later case by the distances and unfamiliarity with external markets. They commonly under-invest in the business and technical skills, know-how, information and advice necessary for sustained outward-oriented growth that are often difficult to recover fully given the mobility of labor and the easy transfer of information. Entrepreneurs also tend to seriously undervalue the gains from using business development services to deal with competitiveness adjustments and to develop exports; and/or they simply cannot afford them in the near term. Finally, and not least of all, they often believe that making buyer contacts is the central obstacle to successful market development, rather than the need for substantial and sustained innovation investments in the market research, product adaptation and promotion processes. 8. Overcoming these factors requires, in advance of hardware investments, the investment in well-planned, practical learning experiences in product and process changes via carefully designed business development plans with the support of technical assistance business development services. Such learning experiences are sometimes available in a limited way from international buyers and suppliers of equipment; however, relatively few firms get opportunities to develop in this way. More commonly, experience in an impressive number of countries suggests that the most effective way of getting firms to innovate and improve performance is to encourage the use and development of active markets of local and international business development services (BDS), where the range of service requirements of individual firms is matched by a plurality of specialist provider options. In programs with such objectives, firms participate in a valuable learning experience and many increase their international 24

25 competitiveness and achieve new local and market export development very substantially as a result. Component 1: Facility for New Market Development (FNMD) (US$18m) 9. FNMD products. FNMD provides a package of sequenced, integrated and mutuallyreinforcing products that involves building broad client-market awareness and business capability to tackle new market development, build core skills in a group setting on topics critical to this process, shoulder-to-shoulder help in planning and execution of proposals, and cofinancing to reduce the risk to firms of undertaking such efforts. Summary of FNMD Products Product / Cost Targets Cost-sharing financing to reduce the risk of new About 750 firms at 50% of cost risk reduction market development at 50% for individual firms and 300 in Kabul 70% for consortia and business associations (nonreimbursements to implement business development 10 business associations at 70% of cost 150 each in Mazar, Jalalabad and Herat plans). (US$11.2 mill) Communication & Marketing Program to inform the private sector of the benefits of using market 4 major launch & anniversary events, 25 joint events, targeted business development meetings development, BDS and the FNMD to build new business Various media campaigns including radio (US$0.3 mill) interviews & TV spots, print advertising Online information, tools, client applications Core Skills Development Workshops at no charge to participants to disseminate best business practices About 30 informational workshops and seminars built around sectoral themes through sector-oriented workshops & Leveraging Results through Success Cases & Showcase Expos (US$ 0.2 mill) Preparation of 100 success case studies and 3 showcase expos per year Business Plan Supplementary Preparation Assistance prior to approval of cost-sharing to help clients improve the depth and quality of their business development plans ($0.8 mill) Up to 10 days specialized consulting time per firm for up to 375 firms (half the program total) 10. FNMD Management Consultancy. An international consulting firm will be hired by the Project to carry out the management of the above mentioned FNMD products in accordance with an agreed Operations Manual at a cost of US$5.5m. FNMD Firm Eligibility & Activities for Financing 11. All individual Afghan private firms in Afghanistan and their business associations in agro-industries, manufacturing (including artisans) and tradable services (including tourism, education and health but excluding retail, wholesale and restaurants) having qualifying business development plans would be eligible to participate in the FNMD. Indirect exporters will also be eligible under FNMD. 12. While the primary focus of the FNMD is on SMEs, export market development and existing firms, larger firms without new market development capacity or with weak local market development, and newly established firms with very sound market development plans and strong prior related business experience will also be eligible for FNMD help. 25

26 13. There are three broad categories within which FNMD business plans can be approved including: (i) market research; (ii) product adaptation; and (iii) promotion. The following presents a summary of possible eligible activities and services falling under these categories: 14. Market research - industrial research and development of new products, starting with information and analysis based on desk research, of promising potential markets, followed by market research fieldwork, or market exploration visits by staff, then strategic planning, securing of trademarks as needed, forming strategic alliances, subcontracting arrangements, etc.; 15. Product adaptation - on the basis of information collected on market preferences, assistance within the factory to advise on restructuring measures in order to meet market preferences---for example, through changes influencing product design, new product or service development, production productivity, cost, quality control and/or delivery, design of packaging and labeling materials, pre-production modeling and samples, product concept and design testing, design of new brands and trademarks; and 16. Promotion - training in strategic planning, product development, market standards and regulations, quality certification. 17. The FNMD Operations Manual will include a more specific and thorough description of services and some goods which may be eligible for financing. FNMD Advantage and Success Drivers 18. The success of a market development approach, rather than a purely public and centralized approach, is a deliberate choice for the Afghanistan Facility for New Market Development (FNMD). It is patterned after successful programs commonly found in OECD countries, advanced East Asian countries, and various client-countries of the World Bank. It utilizes a public-private sector partnership, in which resource allocation and service contracting are done at the market level with no targeting on a demand-driven basis by firms themselves. From the public support perspective, the FNMD is a public policy instrument for co-investment in learning which helps to (1) redress market failures which constrain a robust investment and output response by many entrepreneurs; (2) generate growth, employment and skills externalities from accelerating domestic and international trade and investment, which also acts as an import conduit to best international practice knowledge, skills and technologies, and (3) increase the number of stakeholders favoring international competitiveness and integration with the global economy. 19. The Afghanistan FNMD incorporates the successful elements of those facilities and best practice features in other countries to create a Facility uniquely designed to serve Afghanistan s own environment. 20. The five most important of these elements to bear in mind that will drive successful implementation of the Afghanistan FNMD that represents the essential and core operating culture are the following: 26

27 (a) The FNMD client enterprise drives the process, as a financial sharing relationship with individual firms implies substantial trust in the grant recipient, who co-invests his/her own resources in and makes the fundamental choices about the market development plan. It puts more management emphasis on implementation monitoring rather than ex ante screening, and simplified, flexible administrative processing; (b) A well-defined, high quality market development plan and strong client buy-in, conceptually clear in its direction and steps, suited to the abilities and possibilities of the FNMD client enterprise, providing a time-bound and objective-specific plan that helps the firm advance, and a basis to track monitorable results; (c) Expert, supportive, business-oriented and efficient FNMD management support, which understands the local business community and joins with its leadership to help meet the business development objectives of that community. It lends development expertise to prospective client firm or association to plan and execute his/her new market objectives, and promptly responds to client needs and payment reimbursements within 30 days of invoice presentation; (d) Autonomy, impartiality and technically-based approvals of co-financing grants in resource allocation, through structuring management as independent in executing the FNMD processes of support, appraisal and approval of grants; and (e) Broad FNMD promotion and non-discrimination in the participation of firms, offering first come, first served attention to potential clients and grant decisions based upon transparent, written, and widely disseminated criteria. Some Other Key Lessons Learned from other FNMD Projects A well-defined, high quality business development plan, based on businesses with good potential and time-bound and specific revenue-generating objectives and other monitorable results, is the core of program success and needs support for its development; Review and approval of grant applications best done at an internal, technical level, combined with regular outside oversight of the process; Building a flow of viable plans to the program works best through networking and public events rather than media promotion; Program demand materializes even in restricted and conflictive business environments, such as Gaza, and remote team management can in such areas can be effectively done; Increase local and internationally experienced account staff expertise to strengthen the designs of business development plans Procurement oversight needs to be the minimum necessary to provide support and fiduciary control, so as not to become an implementation bottleneck; Expand eligible expenditures to cover the establishment of export services offered abroad; Make more staff efforts to visit key regions to reinforce support to firms undertaking business development plans. 27

28 FNMD Objectives, Clients and Results Expectations 21. Objectives. Within the New Market Development Project Development Objective, the objective of the Afghanistan Facility for New Market Development (FNMD) would aim to make a measurable contribution toward the market diversification and growth of Afghanistan s production, at both the local and international levels. 22. The FNMD is geared to provide incentives and support through the provision of business development services (BDS) at the firm-level and at the business association-level for implementation of the business development plans of: about 750 private sector Afghan firms in four urban areas and their respective provinces Kabul (about 300 firms), Jalalabad (about 150 firms), Mazar-e-Sharif (150 firms), and Herat (about 150 firms) very rough some 10% of the total population of such firms in Afghanistan. Support would not be pre-allocated to one location or the other. about 10 groups of businesses either consortia of individual firms self-organized or formally established Afghan business associations. 23. Clients. At the extremes, objectives and results expectations depend upon the focus of policy and FNMD management: (1) where there is top priority on rapid growth in market value, there is a basic orientation to larger firms with ready-made products, process knowledge, and internal delivery capability. The business development plan financed by the FNMD emphasizes downstream, mainly marketing functions. (2) Alternatively, where the priority is on altering the market structure of national production, that is, diversifying the number of local and export market destinations, products and participants, as well as the supplier sources of export business services, this basically implies an orientation toward smaller firms with little or no export process knowledge, products somewhat less ready for expansion in the local and/or export markets, and lower internal enterprise capability to bring it about. The business development plan for this approach includes more upstream functions and downstream market functions. 24. The client focus of the FNMD in Afghanistan will be on formally established firms and: mainly existing firms. However, newly established firms with very sound market development plans and strong prior related business experience would also be eligible for FNMD help; mainly small and medium scale firms. However, larger firms without new market development capacity or with weak local market development would also be FNMD eligible; and mainly firms aiming to secure new export markets. However, firms seeking to build new strategic markets within Afghanistan through strong innovation measures would also be FNMD eligible. 28

29 25. Results expectations. In general these kinds of interventions produce high economic and financial rates of return as well as significant externalities (changing the mind set, encouraging competitiveness). Although existing donor programs, including USAID s ASMED program, offer matching grants to firms, the FNMD will focus on a different type of support by offering a broad range of technical assistance to firms or associations on a cost-sharing basis to stimulate new market and new product development as a mechanism for stimulating private sector growth. Broad discussions with many business and sector associations revealed that this service is not available and the mission found that this facility fills this void. 26. As FNMD operates as a bottom up, fast-acting and flexible tool, it produces concrete operational transformation and growth in income for the firm and its employees as well as spillovers to the broader business community and fiscal return to the government that may well cover the total cost of FNMD financing. Specifically, FNMD results would be evidenced in (i) Diversification in the structure of markets and products (ii) Qualitative growth in sustainable business capacity to build new markets (iii) Quantitative growth in sales (export and domestic) and employment from market diversification (iv) Spillover effects to non-client business community and (v) Fiscal return from taxation on incremental sales. Given the market demandbased approach of the FNMD, it is not possible to go beyond orders of magnitude likely to be achieved within these categories. However, the ex post results outlined in the tables below in Ecuador, Tunisia and West Bank Gaza are likely to be indicative 6 : 6 A more thorough analysis of potential results for the Afghanistan FNMD is laid out in Annex 10: Economic & Financial Analysis 29

30 Results (at mid project) Palestinian Facility for New Market Development (began July 08) 27. Timing of results. The outcomes of capacity changes and incremental local sales, export values and employment effects generated by the FNMD would, as demonstrated in similar 30