Project Name. PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6515 Afghanistan New Market Development Project

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1 Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report.: AB6515 Afghanistan New Market Development Project Region SOUTH ASIA Sector General industry and trade sector (100%) Project ID P Borrower(s) ISLAMIC REPUBLIC OF AFGHANISTAN Implementing Agency Ministry of Commerce & Industry (MoCI); Islamic Republic of Afghanistan; Kabul, Afghanistan Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared April 5, 2011 Date of Appraisal March 15, 2011 Authorization Date of Board Approval May 5, 2011 I. Country, Sectoral and Institutional Context 1. The Government of the Islamic Republic of Afghanistan (GoIRA) has made remarkable progress since 2002 in many areas such as primary education, basic health services, irrigation rehabilitation, telecommunications, and rural development. There has been strong, though slowing, economic growth in Afghanistan since 2002, with the GDP growth varying between 9 percent and 16.2 percent. 1 Per capita annual income has increased from US$189 in 2002/03 to US$426 in 2008/ 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. 3. 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. 1 World Bank World Development Indicators

2 4. Afghanistan s private sector is dominated by SMEs 2 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. 5. 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 gain market knowledge, improve product quality to comply with international standards, build competitiveness and re-create market presence. II. Project Development Objectives 6. The Project 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. III. Rationale for Bank Involvement 7. 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. IV. Project Description 8. The Project includes two components. Component 1: Facility for New Market Development (FNMD) 9. 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 2 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.

3 developing and implementing business plans to access new markets through market research, product development, acquisition of new technologies and adoption of quality standards. Component 2: Project Implementation Support and Technical Assistance to Ministry of Commerce & Industry (MoCI) 10. 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. V. Financing Source: Borrower/Recipient IBRD IDA Others (specify) 0 Total 22 ($m.) VI. Implementation 11. The Project will be set up and managed by the Government of Afghanistan through the Ministry of Commerce & Industry (MoCI) s Project Management Unit (PMU). The FNMD component will be implemented by a competitively selected international management firm. 12. A Project Steering Committee chaired by the Ministry of Commerce and Industry and composed of representatives of the Afghanistan Investment Support Agency (AISA) and the Afghan Chamber of Commerce and Industry (ACCI) will provide project oversight and set the strategic direction of the Project. For operational purposes, the FNMD will be an adjunct to and overseen by the New Market Development Project Management Unit (PMU). VII. Sustainability 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.

4 13. There is a high level of ownership of the Project and its associated activities within the MOCI and broadly across Government. A number of ministries and agencies have expressed support for and interest in using some of the facilities and services created through this Project pointing to a strong case for sustainability in terms of responsible ownership, management, and use of the resources created through this Project. VIII. Lessons Learned from Past Operations in the Country/Sector 14. The proposed Project design draws on lessons learned from operations both within Afghanistan and outside, particularly from other post-conflict countries. Key lessons learned and applied to the project design include: 15. 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 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. 17. 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. 18. Public Private Dialogue is essential to managing the huge coordination challenge inherent in any effort to improve the enabling economic environment. 19. 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. 4 ANDS ( ); MoCI Business Plan

5 IX. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10) Forests (OP/BP 4.36) Safety of Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP 7.60) * Projects on International Waterways (OP/BP 7.50) X. Contact point at World Bank and Borrower Yes World Bank Contact: John Speakman Title: Lead Private Sector Development (PSD) Specialist Tel: (202) jspeakman@worldbank.org Borrower/Client/Recipient Contact: Minister Anwar ul Haq Ahady Title: Minister of Commerce & Industry (MoCI) Kabul, Afghanistan Implementing Agencies Contact: Mr. Pamir Patang Title: Chief of Staff, MoCI Kabul, Afghanistan Tel: 0093 (0) Pamirpatang@yahoo.com XI. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

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