FOR OFFICIAL USE ONLY Report No: PCBASIC0166512 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF US$75 MILLION TO THE REPUBLIC OF HONDURAS FOR INTEGRATING INNOVATION FOR RURAL COMPETITIVENESS IN HONDURAS - COMRURAL II June 6, 2019 Agriculture Global Practice Latin America and Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective March 31, 2019) Currency Unit = Lempira 24.5 Lempira = US$ 1.00 FISCAL YEAR January 1 - December 31 Regional Vice President: Axel van Trotsenburg Country Director: Yaye Seynabou Sakho Senior Global Practice Director: Juergen Voegele Practice Manager: Preeti S. Ahuja Task Team Leader(s): Augusto Garcia, Ramon Ernesto Arias ABBREVIATIONS AND ACRONYMS AF Additional Financing ARSA Sanitary Regulation Agency (Agencia de Regulación Sanitaria) CE Citizen Engagement CEEA Committee to Enable the Environment of Agribusinesses CENISS National Center for Social Sector Information (Centro Nacional de Información del Sector Social ) CERC Contingency Emergency Response Component CO2-eq Carbon dioxide equivalent COMRURAL Honduras Rural Competitiveness Project COMRURAL II Integrating Innovation for Rural Competitiveness in Honduras Project CPF Country Partnership Framework CSA Climate-smart Agriculture CSAIP Climate-Smart Agriculture Investment Plan ENEE National Electricity Company (Empresa Nacional de Energia Electrica) ERR Economic Rate of Return ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan FHIA Foundation for Agricultural Research (Fundación Hondureña de Investigación Agrícola) FM Financial Management FONGAC Guarantee Fund for COMRURAL GDP Gross Domestic Product GHG Greenhouse Gas GoH Government of Honduras GRM Grievance Redress Mechanism GRS Grievance Redress Service ICF Implementing Consulting Firm ICT Information and Communication Technology IDA International Development Association INVEST-H Honduras Strategic Investment Office (Inversión Estratégica de Honduras) IPAPF Indigenous Peoples and Afro-descendants Planning Framework IRR Internal Rate of Return LAC Latin America and the Caribbean M&E Monitoring and Evaluation MFD Maximizing Finance for Development MoU Memorandum of Understanding NAC National Agriculture Council NACIS National Agro-Climatic Information System NPV Net Present Value PDO Project Development Objective PIU Project Implementation Unit POM Project Operational Manual PMP Pest Management Plan PPSD Project Procurement Strategy for Development PROSASUR Honduras Corredor Seco Food Security Project RPO Rural Producer Organizations RPF Resettlement Policy Framework SAG Ministry of Agriculture and Livestock (Secretaría de Agricultura y Ganadería) SEFIN Ministry of Finance (Secretaría de Finanzas) SENASA National Service for Agri-food Health and Safety (Servicio Nacional de Sanidad e Inocuidad Agroalimentaria) SEP Stakeholder Engagement Plan SIAFI/UEPEX Integrated System for Financial Administration/Executing Units of External Projects (Sistema de Administración Financiera Integrada/Unidades Ejecutoras de Proyectos Externos) SIG Management Information System (Sistema Integrado de Gestión) SMEs Small and Medium Enterprises STEP Systematic Tracking and Exchanges in Procurement USAID United States Agency for International Development WB World Bank WBG World Bank Group The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) TABLE OF CONTENTS DATASHEET ................................................................................. Error! Bookmark not defined. I. STRATEGIC CONTEXT ...................................................................................................... 9 A. Country Context................................................................................................................................ 9 B. Sectoral and Institutional Context .................................................................................................. 10 C. Relevance to Higher Level Objectives............................................................................................. 11 II. PROJECT DESCRIPTION.................................................................................................. 12 A. Project Development Objective (PDO) ........................................................................................... 12 B. Project Components ....................................................................................................................... 12 C. Project Beneficiaries ....................................................................................................................... 16 D. Results Chain .................................................................................................................................. 17 E. Rationale for World Bank Involvement and Role of Partners......................................................... 17 F. Lessons Learned and Reflected in the Project Design .................................................................... 17 III. IMPLEMENTATION ARRANGEMENTS ............................................................................ 18 A. Institutional and Implementation Arrangements .......................................................................... 18 B. Results Monitoring and Evaluation Arrangements......................................................................... 19 C. Sustainability................................................................................................................................... 19 IV. PROJECT APPRAISAL SUMMARY ................................................................................... 19 A. Technical, Economic and Financial Analysis ................................................................................... 19 B. Fiduciary.......................................................................................................................................... 20 C. Safeguards ...................................................................................................................................... 21 V. KEY RISKS ..................................................................................................................... 24 VI. RESULTS FRAMEWORK AND MONITORING ................................................................... 27 ANNEX 1: Implementation Arrangements and Support Plan .......................................... 36 ANNEX 2: Costs, Financing Sources, and Beneficiaries of COMRURAL II by Component .. 43 ANNEX 3: Progression of Beneficiaries from Social Protection Programs to Commercially Oriented Agriculture in COMRURAL II ........................................................................... 44 ANNEX 4: Theory of Change – COMRURAL II .................................................................. 47 ANNEX 5: Coordinating COMRURAL II with Other World Bank Water Resource Management Initiatives ................................................................................................ 49 ANNEX 6: Map of Project Area ...................................................................................... 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) DATASHEET BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name Honduras Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II Project ID Financing Instrument Environmental Assessment Category Investment Project P168385 B-Partial Assessment Financing Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [✓] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date Expected Closing Date 27-Jun-2019 30-Sep-2024 Bank/IFC Collaboration No Proposed Development Objective(s) The PDO is to improve access to markets and climate-smart practices and contribute to the economic inclusion of targeted beneficiaries in select agricultural value chains. Components Component Name Cost (US$, millions) Page 1 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) Support to enhance the competitiveness, resilience, and innovation of agribusiness 115.40 initiatives Support to the modernization of Honduras’ agribusiness enabling environment 22.40 Project management support 9.10 Contingency Emergency Response Component (CERC) 0.00 Organizations Borrower: Republic of Honduras Implementing Agency: Inversion Estrategica - Honduras (INVEST-H) PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 146.90 Total Financing 146.90 of which IBRD/IDA 75.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Development Association (IDA) 75.00 IDA Credit 75.00 Non-World Bank Group Financing Counterpart Funding 18.40 National Government 12.70 Local Beneficiaries 5.70 Commercial Financing 53.50 Unguaranteed Commercial Financing 53.50 Page 2 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) IDA Resources (in US$, Millions) Credit Amount Grant Amount Guarantee Amount Total Amount National PBA 75.00 0.00 0.00 75.00 Total 75.00 0.00 0.00 75.00 Expected Disbursements (in US$, Millions) WB Fiscal Year 2019 2020 2021 2022 2023 2024 2025 Annual 0.00 0.50 17.15 26.65 16.60 9.70 4.40 Cumulative 0.00 0.50 17.65 44.30 60.90 70.60 75.00 INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Agriculture Finance, Competitiveness and Innovation Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of Yes country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or Yes men's empowerment c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ Substantial 2. Macroeconomic ⚫ Substantial Page 3 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Substantial 5. Institutional Capacity for Implementation and Sustainability ⚫ High 6. Fiduciary ⚫ High 7. Environment and Social ⚫ Substantial 8. Stakeholders ⚫ Substantial 9. Other ⚫ Substantial 10. Overall ⚫ Substantial COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [ ] Yes [✓] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Performance Standards for Private Sector Activities OP/BP 4.03 ✔ 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 Waterways OP/BP 7.50 ✔ Page 4 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) Projects in Disputed Areas OP/BP 7.60 ✔ Legal Covenants Sections and Description Schedule 2. Section I. A. 1. For purposes of carrying out Parts 1, 2, and 3 of the Project, the Recipient, through INVEST-H, shall maintain throughout Project implementation a steering committee (the Steering Committee) responsible for Project oversight and coordination, comprised of representatives of, inter alia, INVEST-H, SAG, RPOs, and other relevant private sector entities (and any other institution in addition to or in substitution of the aforementioned, as approved by the Association and set forth in the Project Operational Manual). Sections and Description Schedule 2. Section I. A. 2. For purposes of the implementation of Parts 1, 2, and 3 of the Project, the Recipient shall: (a) ensure that INVEST-H is operated and maintained with technical functions, staffing, and responsibilities satisfactory to the Association, as set forth in the Project Operational Manual; and (b) through INVEST-H, maintain throughout Project implementation a Project Implementation Unit (PIU), with functions and responsibilities and composition acceptable to the Association, including fiduciary functions, staffing (including inter alia, procurement and financial management specialists), as set forth in the Project Operational Manual. Sections and Description Schedule 2. Section I. A. 3. No later than one hundred and twenty (120) calendar days from the Effective Date, the Recipient, through INVEST-H, shall hire the following staff: (a) a dedicated financial management specialist for its central office; (b) a dedicated financial management officer for rural support; and (c) a procurement specialist; all under terms of reference, qualifications and experience acceptable to the Association. Sections and Description Schedule 2. Section I.C. 1. For purposes of carrying out Part 1(b) of the Project, the Recipient, through INVEST-H, shall ensure that the selection of each RPO, and Subproject complies with the process and eligibility criteria set forth in the Project Operational Manual. Sections and Description Schedule 2. Section I.A. 4. To facilitate the implementation of Part 2 of the Project the Recipient, through INVEST-H, shall: (a) no later than three (3) months after the Effective Date, establish a committee to enable the environment of agribusiness (“CEEA Committee”) which shall be comprised by representatives of, inter alia, SAG, INVEST-H, ARSA, SENASA; and (b) no later than four (4) months after the Effective Date, enter into a technical coordination Page 5 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) agreement (Inter-institutional Agreements) with each Relevant Entity; all under terms and conditions acceptable to the Association. Sections and Description Schedule 2. Section I.B. 1. The Recipient, through INVEST-H, shall update, adopt and thereafter carry out Parts 1, 2, and 3 of the Project in accordance with the Project Operational Manual acceptable to the Association. Sections and Description Schedule 2. Section I.C. 2. Before the carrying out of each Subproject, the Recipient, through INVEST-H, shall enter into an agreement with each RPO (the Subproject Grant Agreement), under terms and conditions satisfactory to the Association and set forth in the Project Operational Manual. Sections and Description Schedule 2. Section I.D. 3. If resettlement is foreseen for any specific Subproject, the Recipient, through INVEST-H, shall, prior to carrying out said Subproject, with the assistance of the pertinent RPO: (a) prepare, disclose and carry out consultations of the pertinent resettlement action plan, acceptable to the Association; and (b) thereafter implement the pertinent resettlement action plan or abbreviated plan, as the case may be, all in accordance with their terms and in a manner acceptable to the Association. Sections and Description Schedule 2. Section I.C. 3. The Recipient, through INVEST-H, shall exercise its rights under each Subproject Grant Agreement in such a manner as to protect the interests of the Recipient and the Association and to accomplish the purposes of the Credit, and except as the Association shall otherwise agree, not assign, amend, terminate, abrogate, waive or fail to enforce any Subproject Grant Agreement or any provision thereof. Sections and Description Schedule 2. Section I.D. 1. The Recipient, through INVEST-H, shall carry out the Project, and shall ensure that the RPOs carry out their Subprojects in accordance with the Safeguard Instruments. Sections and Description Schedule 2. Section I.D. 2. Before any activity is carried out under any given Subproject and pursuant to the terms of the ESMF, and the IPAPF, the Recipient, through INVEST-H, shall: (a) carry out an environmental assessment and thereafter, with the assistance of the RPO, prepare the pertinent site-specific environmental management plan, social responsibility plan and indigenous peoples’ development plan, as applicable; and (b) thereafter, cause the pertinent RPO to implement plans in accordance with their terms and in a manner acceptable to the Association. Sections and Description Schedule 2. Section I.D. Page 6 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) 5. The Recipient, through INVEST-H, shall ensure that: (i) the terms of reference for any consultancy required under the Project shall be satisfactory to the Association following its review thereof; and (ii) to that end, such terms of reference shall duly incorporate the requirements of the Safeguards Instruments, as applied to the advice conveyed through such technical assistance. Sections and Description Schedule 2. Section I.E. 2. For purposes of carrying out Part 1(b) of the Project, the Recipient shall establish and maintain throughout Project implementation, a credit guarantee fund satisfactory to the Association, set up with the Recipient’s own resources with at least an amount equivalent to one million three hundred thousand Dollars ($1,300,000), to be used exclusively to guarantee loans made by PFIs for Subprojects, all in accordance with the structure and procedures set forth in the Project Operational Manual. Conditions Type Description Effectiveness Article 5 5.01. The Additional Condition of Effectiveness consist of the following, namely that the Project Operational Manual has been updated and adopted in a manner and with contents acceptable to the Association. Type Description Disbursement Section III B. Withdrawal Conditions; Withdrawal Period 1. Notwithstanding the provisions of Part A above, no withdrawal shall be made: (a) for payments made prior to the Signature Date; or (b) for payments under Category (4) for Emergency Expenditures under Part 4 of the Project, unless and until the Association is satisfied, and has notified the Recipient of its satisfaction, that all of the following conditions have been met in respect of said Emergency Expenditures: (i) the Recipient has determined that an Eligible Emergency has occurred, has furnished to the Association a request to include said Eligible Emergency under Part 4 of the Project in order to respond to said Eligible Emergency, and the Association has agreed with such determination, accepted said request and notified the Recipient thereof; (ii) the Recipient has prepared and disclosed all safeguards instruments required for said Eligible Emergency, and the Recipient has implemented any actions which are required to be taken under said instruments, all in accordance with the provisions of Section I.F.2(b) of this Schedule; (iii) the Coordinating Authority has adequate staff and resources, in accordance with the provisions of Section I.F.1(b) of this Schedule, for the purposes of said activities; and (iv) the Recipient has adopted the Emergency Response Operations Manual in form, Page 7 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) substance and manner acceptable to the Association and the provisions of the Emergency Response Operations Manual are fully current in accordance with the provisions of Section I.F.1(a)(iii) of this Schedule, so as to be appropriate for the inclusion and implementation Part 4 of the Project. Page 8 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) I. STRATEGIC CONTEXT A. Country Context 1. Over the past 30 years, volatile economic growth in Honduras, along with the absence of a robust economic base for generating more and better jobs, has undermined productivity growth and poverty reduction. From 2000- 2015 Honduras experienced growth in real gross domestic product (GDP) of 4.2 percent per year on average, exceeding the average for Latin America and the Caribbean (LAC) of 3.4 percent. Even so, efforts to diversify the economy, improve productivity growth, and reduce poverty have been thwarted by the country’s susceptibility to external shocks, exposure to natural hazards, fiscal instability, limited investment, and challenges to competitiveness. 2. High rates of poverty, inequality, and violent crime remain a persistent development challenge in Honduras, one that is driving growing numbers of people to leave the country. About 64 percent of Honduran households live at or below the national poverty line.1 The overall unemployment rate was about 4.5 percent in 2017, and youth unemployment was about 8.2 percent. With a Gini Index of 0.50 in 2017, Honduras has among the highest rates of inequality in LAC. Regionally, Afro-descendants are over 2.5 times more likely to be chronically poor than other races.2 Labor force participation is far lower among females (47 percent) than males (84 percent), and employed women tend to receive lower wages than employed men.3 These conditions, as well as high levels of crime and violence, are driving the growing exodus. 3. Across all sectors in Honduras, high levels of informal economic activity—characterized by low job quality, productivity, and earnings—cripple efforts to reduce poverty and inequality. The significant level of informal economic activity (about 75 percent) indicates that the major share of poverty is structural. Average earnings per worker vary widely across and within sectors, with self-employment in agriculture being the least remunerative (average monthly earnings of Lempira 2,404 per person in 2016, in contrast to formal wage work at an average of L 9,300).4 Honduras is ranked 75th of 149 countries,5 behind regional neighbors such as Nicaragua and Panama, in terms of economic participation and opportunity for women. The Government of Honduras (GoH) has recognized that the creation of employment opportunities—especially for youth and women—is a priority, as reflected in the Honduras 2020 Plan.6 4. Honduras is among the countries that are most affected by negative climate and weather events, and its poorer populations have little capacity to cope and adapt. In 1998, Hurricane Mitch generated economic damages estimated at around 81 percent of GDP. More recently, the 2015 drought affected 1.3 million people, with small-scale farmers suffering an average loss in agricultural production of about 80 percent. 1 World Bank (2019), “Poverty & Equity Brief, Honduras.” 2 World Bank (2018), “Afro-descendants in Latin America: Toward a Framework of Inclusion.” 3 ILOSTAT, retrieved April 2019. World Bank (2019), “Honduras Jobs Diagnostic.” 4 World Bank (2019), “Honduras Jobs Diagnostic.” 5 World Economic Forum (2018), “Global Gender Gap Report.” 6 The Honduras 2020 Plan (2016) is a public-private initiative; one of its priorities is to create jobs for lower-skilled workers to curb migration. Page 9 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) B. Sectoral and Institutional Context 5. While the agriculture sector remains a strong pillar of economic growth in Honduras, the scale of poverty and food and nutrition insecurity in rural areas requires a more intensive effort. Favorable agro-ecological conditions enabled the agriculture, forestry, and fishing sectors together to grow by 10.7 percent in 2017, accounting for 12.9 percent of GDP (excluding the numerous backward and forward linkages between primary agriculture and other upstream and downstream sectors) and representing a five-year peak in growth. Agriculture provided jobs to about 28 percent of the national workforce in 2017. In rural areas, where about 44 percent of the population resides, most people depend on agriculture for their livelihoods, and many are poor: more than half of the poor and two-thirds of the extreme poor live in rural areas. Rural poverty is concentrated in western and southern Honduras, known as the “Dry Corridor” (Corredor Seco).7 An estimated 72 percent of agricultural families engage in semi-subsistence farming, typically characterized by low productivity and competitiveness, low revenue generation, and high vulnerability to shocks. Agriculture is also the predominant activity for most Indigenous peoples and Afro-descendant groups. 6. Climate change and other weather-related events are widely recognized to present critical risks for the water, soils, and other natural capital on which Honduran agriculture relies—with equally important links to migratory pressures. Coffee production declined by 23 percent in 2012-13 when a severe coffee rust outbreak was fueled by intensifying climate variability. This outbreak was a key catalyst of the spike in Honduran migration from 2012 to 2014. The 2018 drought also significantly affected agricultural production and is recognized (particularly in the Corredor Seco) as driving farmers to migrate to other countries.8 Looking forward, as these negative climate and weather impacts intensify, improvements in the productive use of water in agriculture will be essential to enhance the resilience of small-scale farmers, especially in the Corredor Seco. 7. Investing in rural productivity, resilience, and innovation is also critical for boosting export competitiveness and jobs, as the agriculture sector generates about 36 percent of all primary exports. While initiatives such as the Dominican Republic–Central America Free Trade Agreement have increased access to foreign markets, they also expose producers to increasingly competitive markets. Honduran agriculture has strong comparative advantages, including proximity to major regional/international markets and agro-ecological conditions that favor agricultural value chains capable of meeting market quality demands. For example, Honduras has emerged as a global exporter of specialty coffee, a sector that accounts for about one-third of agricultural production and 5 percent of GDP. The Government is taking a similar approach to boost exports for other crops (for instance, cacao for high-end markets). 8. Important and persistent barriers prevent Honduras from strengthening agricultural competitiveness and leveraging its agri-food export potential. Agri-entrepreneurs have limited access to finance, mostly because of a lack of regulations for specialized financial products for agriculture. Public services to support agribusiness—particularly within the National Service for Agri-food Health and Safety (SENASA) and the recently created Sanitary Regulation Agency (ARSA)—must be modernized. The lack of adequate agro-logistics,9 both hard (infrastructure) and soft (services), is a critical barrier to improving agricultural competitiveness. Harnessing innovations in data and technology—including information and communication technology (ICT)—as well as boosting human, financial, and 7 The Honduran Dry Corridor covers 27.3 percent of the national territory and is characterized by severe cyclical drought related to El Niño. 8 Financial Times, December 2018. 9 Wageningen University defines agro-logistics as “The transportation, storage, distribution and control (management and organization) of the agri-food streams throughout the agri-food chain from raw materials to consumers, i.e. in the fresh produce sector and animal transport.” Additional secondary agro-logistical aspects relate i.a. to the security of containers and city congestion risks. Page 10 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) institutional capital in promising agri-food value chains will be critical for improving competitiveness, employment opportunities, and the agribusiness environment. 9. The ongoing Honduras Rural Competitiveness Project—COMRURAL (P101209)—is the GoH flagship initiative for promoting agricultural competitiveness and exports. COMRURAL, approved by the World Bank Group (WBG) Board of Executive Directors in 2008 (US$23 million) and extended through an Additional Financing (AF) in 2017 (US$25 million), is recognized throughout Honduras for its success in linking smallholder farmers to domestic and international markets. This success has been achieved through support to commercial production and post-harvest value addition structured under the “productive alliances” model.10 Through their participation in Rural Producer Organizations (RPOs) and productive alliances, about 7,200 small rural producers have benefited from improved financial inclusion, technical capacity, and market access under COMRURAL. Each US$1 of the project has leveraged US$1.50 from private financial partners. There is growing interest in this model from the financial sector, as shown by commercial banks entering into Memorandums of Understandings (MoUs) with COMRURAL.11 The GoH views the deepening of the COMRURAL approach through the proposed project, Integrating Innovation for Rural Competitiveness in Honduras (COMRURAL II), as a key pillar for supporting implementation of the 2020 Plan. C. Relevance to Higher Level Objectives 10. The project is in line with the GoH vision and the focus areas of the WBG Honduras Country Partnership Framework (CPF) FY16-FY20. The project will contribute to all three CPF focus areas (fostering inclusion, bolstering conditions for growth, and reducing vulnerabilities to enhance resilience) by supporting financial inclusion, technical assistance, and market access for small rural producers; improving the enabling conditions for agribusiness entrepreneurship; and reducing agriculture vulnerability to climate and other weather-related threats. 11. The project’s design is aligned with the WBG strategic twin goals of ending extreme poverty and boosting shared prosperity. The project will significantly contribute to rural poverty reduction through investments in agriculture sector value chains, businesses, and producer associations that will improve the livelihoods and incomes of an estimated 50,700 producers and their families. The project will contribute to shared prosperity by targeting subsistence farmers and small and medium enterprises (SMEs) in agribusiness and by setting targets and including activities to ensure the participation of historically disadvantaged groups such as Indigenous peoples and women. 12. The project is aligned with and supports the WBG Climate Change Action Plan and the new set of climate targets for 2021-25. In support of the International Development Association (IDA) 2018 overarching theme, “Towards 2030: Investing in Growth, Resilience and Opportunity” and policy commitment to delivering 10 Climate-smart Agriculture Investment Plans (CSAIPs), the project will link to the CSAIP for Honduras. The CSAIP is a tool to identify climate-smart investments and policies in agriculture value chains. 10 Under COMRURAL, a “productive alliance” is a business relationship (alliance) between an RPO, a technical assistance provider, a commercial financial institution, and an identified market or buyer. These parties enter into a joint business plan to meet a market demand while improving productivity, value addition, market position, and sales on a benefit-sharing basis. The participation of buyers is critical to the productive alliance model, as buyers provide the market linkages and may continue to do so after project support has ceased. 11 The capacity of the ongoing COMRURAL to help RPOs and their allies prepare feasible and innovative business plans (subprojects eligible for matching grants) with strong market-orientation, innovative value-addition, diversification into high-value products, support with business development services, and ties to potential buyers) has been highly valued by several commercial banks, such as Banco de Occidente, Banhcafe, and Banco Atlántida. The MoUs are designed to build confidence and business relationships between the RPOs and banks. Page 11 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) II. PROJECT DESCRIPTION A. Project Development Objective (PDO) PDO Statement The PDO is to improve access to markets and climate-smart practices and contribute to the economic inclusion of targeted beneficiaries in select agricultural value chains. Indicators Achievement of the PDO will be measured through the following indicators: • Farmers adopting improved agricultural technology (Number) • Jobs12 (full-time) created under business plans financed by the project (Number) • Increase in gross sales generated by business plans in implementation (Percentage) • Rural producer organizations (RPOs) working under a productive alliance approach 24 months after first disbursement (Percentage) B. Project Components 13. The project is an Investment Project Financing, comprising an IDA credit of US$75 million, with a US$12.7 million in in-kind national counterpart financing that is expected to leverage an additional US$53.5 million in private commercial finance (including microfinance for less commercially-oriented beneficiaries) and US$5.7 million in in- kind contributions from Rural Producer Organizations (RPOs). The project will be implemented over a five-year period by the Honduras Strategic Investment Office (INVEST-H). 14. The project introduces several design enhancements that build on the strong base and experience of the ongoing COMRURAL. The project will bring greater nuancing, sophistication, and innovation to the productive alliance approach while deepening beneficiary engagements and agribusiness partners’ reach within the current 13 departamentos.13 It has five major design enhancements; (i) Enhancing private sector financing for agribusiness development: The project will leverage and extend beyond the ongoing COMRURAL model, which significantly improves access to finance by reducing the level of risk to financial institutions, promoting competitive improvements, and deepening private financial sector participation along the full spectrum of backward and forward value chain linkages.14 This aspect of the design links to the WBG’s Maximizing Finance for Development (MFD) approach by actively crowding in private sector finance; (ii) Investing in agro-logistics to support agricultural value chains: The project will explore reduction of inefficiencies and add value by strengthening selected agro-logistics in targeted value chains; (iii) Creating inclusive job opportunities and stimulating economic graduation of beneficiaries: The project sets targets for participation by youth (18-30 years old), women, Indigenous peoples, and Afro-descendants and prioritizes subprojects that have the potential to generate full-time rural employment opportunities. It also links to 12 Jobs are understood to be high-quality, full-time jobs. Based on previous experience in Honduras and estimates from the Jobs Global Practice, the project allocates US$ 9,300 of investment to create each new job; creation of jobs will be monitored in the Results Framework. 13 These are: Santa Barbara, Copan, Ocotepeque, Lempira, Intibucá, La Paz, Comayagua, Francisco Morazán, El Paraíso, Choluteca, Cortés, Atlántida, and Colon. The value chains currently covered under the ongoing COMRURAL operation include specialty coffee, horticulture, fruits, livestock (beef and dairy), cacao, and aquaculture. 14 A recent GoH exercise identified and prioritized value chains based on the commercial potential an d the country’s comparative advantages, as well as their impact on the generation of new jobs and income for rural families. The value chains prioritized include those currently covered under the ongoing COMRURAL operation and have a total required investment program estimated to be US$ 1,200 million. Page 12 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) existing GoH social programs and, through a graduation scheme of three grant windows, will help farmers to graduate from subsistence to transitioning and then to commercially-oriented agriculture; (iv) Mainstreaming resilient and low-carbon approaches: To help address agricultural vulnerability and reduce agricultural emissions of greenhouse gases (GHGs) where possible, when selecting subprojects, the project will prioritize the inclusion of climate-smart agriculture (CSA) approaches as well as promote water resource management initiatives to improve climate resilience especially in the Corredor Seco—in coordination with other WB activities; (v) Strengthening institutions and modernizing services for an enabling agribusiness environment: The project will help address key legal and regulatory barriers to enable competitiveness in the agriculture sector. This aspect of project design will contribute to MFD by reducing key barriers to private sector finance for agribusiness. 15. The project is organized into four components, as described below. 16. Component 1: Support to enhance the competitiveness, resilience, and innovation of agribusiness initiatives (US$ 56.2 million IDA credit). The purpose of Component 1 is to support competitive, innovative, and climate-resilient agribusiness initiatives (“subprojects”) in prioritized agricultural value chains under the productive alliance model. Specifically, this component will finance: (i) works, goods, training, technical assistance, operational costs, and consulting and non-consulting services for the selection, preparation, and implementation of selected subprojects by participating partners; (ii) matching grant incentives to co-finance subprojects for the adoption of innovative practices and technologies to improve productivity, market access, and climate resilience, with water management prioritized in Corredor Seco subproject selection as a basic productive asset in the promotion of sustainable agribusiness and with significant capacity to adapt and mitigate the effects of climate change; and (iii) climate-resilient and innovative complementary investments in small-scale agro-logistics services and infrastructure. To contribute to improved economic inclusion, three grant windows will be financed under this component: Window 1 (subsistence agriculture) will target informal groups of farmers that have the potential to enter into productive investments of an incipient commercial nature; Window 2 (transitioning agriculture) will target producers who practice agriculture as their main livelihood, are organized into formal RPOs, and aim to “transition” from subsistence to commercially-oriented production; and Window 3 (commercially-oriented agriculture) will target formal groups of farmers who already have a commercial orientation as well as the potential to scale up and contribute to job generation and other aspects of rural economic growth. 17. Subcomponent 1.1: Pre-investment for the preparation of subprojects. This subcomponent will support pre- investment activities to: (i) promote the project concept and outreach to RPOs, commercial partners, and private financing entities, as well as identify, create, and consolidate productive alliances among RPOs and commercial partners; (ii) identify potential business opportunities on the part of the productive alliance (business proposal); (iii) prepare business plans reflecting the identified opportunity; (iv) build capacity among technical service providers to enhance the quality of the services provided to the productive alliances; (v) support project-related studies to promote specific, prioritized value chains and evaluate the potential for subproject investments to contribute to climate change mitigation and resilience and to the economic inclusion of historically marginalized groups; and (vi) develop and implement communication strategies to help form productive alliances for small subsistence farmers and Indigenous and Afro-descendant beneficiaries. 18. Subcomponent 1.2: Productive investments to improve competitiveness through innovation. The purpose of this subcomponent is to support key investments and innovative approaches to improve the productivity, market access, and resilience of individuals participating in selected RPOs, as well as their partners and allies, participating in productive alliances under the project. Subcomponent 1.2 will provide matching grants to finance business plans Page 13 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) selected as part of Subcomponent 1.1. Financing under Subcomponent 1.2 will support the implementation of subprojects, technical assistance and co-financing of the subprojects, and the incorporation of feedback and lessons learned into new cycles of calls for proposals. Grants will cover that portion of the alliance’s business plan devoted to fixed capital (such as plant and equipment, minor infrastructure), working capital, technical assistance expenditures, and other investments to support improving productivity, processing capacities, agro-logistics, marketing, and sales. 19. Component 2: Support to the modernization of Honduras’ agribusiness enabling environment (US$ 9.7 million IDA credit). This component helps to modernize and strengthen selected public sector services and to improve the regulatory framework and institutional capacity for enabling agribusiness competitiveness. Component 2 will also finance combinations of works, goods, training, technical assistance, consulting and non-consulting services, and operational expenses for two subcomponents, as indicated below. 20. Subcomponent 2.1: Improving selected public agribusiness services. This subcomponent aims to enhance selected public services that are critical for enabling agribusiness. Through a functional review of the main institutions providing public services for agribusiness—namely, SENASA and ARSA—Subcomponent 2.1 will identify key barriers and implement solutions for improving the agribusiness enabling environment. Additionally, for SENASA, these activities will include, among others, supporting implementation of an Information and Communications Technology system for phyto- and zoosanitary certifications and a national agricultural, aquaculture, and fishing traceability and registration system. For ARSA, this subcomponent will support construction and equipment for two small laboratories for processed food and beverage analysis, a mobile ARSA office for remote areas, and barcode provision to comply with international standards, among other activities. These activities will help beneficiaries to access markets by increasing the quality of their products and buyers’ confidence in their quality. 21. Subcomponent 2.2: Improving public-private coordination on policies for agribusiness. The objective of this subcomponent is to enhance cooperation between the public and private sector on policies, regulations, and information related to the enabling agribusiness environment. This subcomponent will facilitate the required investments for: technical assistance to design the governance structure and operational functions of a National Agriculture Council (NAC) and Technical Unit under the Ministry of Agriculture and Livestock (SAG);15 technical assistance to prepare a National Agro-logistics Strategy under the NAC (the strategy will identify bottlenecks based on existing demand and robust projections of the development of the main value chains to identify priority areas for investment); design of a National Agro-Climatic Information System (NACIS) under the NAC, which will combine biophysical information from remote sensing/real-time weather data with information on the local context for agriculture (such as local cropping calendars) to provide information relevant to stakeholders’ decisions at the district and national levels;16 and support for key reforms to address legal and regulatory constraints that affect agribusiness.17 22. Component 3: Project management support (US$9.1 million IDA credit). Component 3 will finance: (i) project coordination and management; (ii) monitoring, results evaluation, and impact assessment of project activities; (iii) fiduciary implementation and oversight, including audits; (iv) environmental and social risk/safeguards oversight and management; and (v) implementation and monitoring of a Stakeholder Engagement Plan (SEP), Grievance Redress 15 The NAC will provide a platform for public-private sector dialogue on the agribusiness enabling environment. This activity will also support the design of a NAC Technical Unit and potentially contribute to the strengthening of the Foundation for Agricultural Research to improve its capacity to support the NAC. 16 Technical assistance for this activity will include support from an existing Trust Fund—the Global Facility for Disaster Risk Reduction and Recovery—and will coordinate with the CSAIP for Honduras. 17 The results of the Enabling the Business of Agriculture 2019 report will inform the implementation of Component 2 as it relates to public institutions, policies, and regulations. Page 14 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) Mechanism (GRM), and beneficiary satisfaction survey. Specifically, this component will finance goods, training, operational costs, and consulting and non-consulting services. 23. Component 4: Contingency Emergency Response Component (CERC) (total cost US$ 0.0 million). Reflecting the strategic approach taken in Honduras across the portfolio, this component will provide for an immediate response to eligible emergencies. In the event of such an emergency (as defined in the Contingency Emergency Response Operational Manual prepared and adopted by GoH), this component will finance emergency activities and expenditures through the reallocation of funds from the project. 24. Social assessment. The project will address potential adverse social and environmental impacts through the implementation of five safeguards instruments specific to the project, hereafter referred to as the “safeguards instruments”: an Environmental and Social Management Framework (ESMF), an Indigenous Peoples and Afro- descendants Planning Framework (IPAPF), a Stakeholder Engagement Plan (SEP), and a Resettlement Policy Framework (RPF). The Environmental and Social Management Plans (ESMPs), which will be subproject-specific plans, will be prepared during implementation and also fully disclosed and consulted. The ESMF, which was prepared and consulted upon before appraisal, is based on an integrated social and environmental assessment; it identifies and addresses potential adverse impacts and benefits for vulnerable social groups under the project. 25. Gender strategy. The gender strategy prepared as part of the ESMF is based on the literature on current barriers to improving gender equality in rural Honduras and the agribusiness sector (low female labor participation rate; lack of opportunities for women in general; earning differentials) and on experiences from the ongoing COMRURAL. The project addresses gender gaps on three levels. First, the preparation of business profiles will include, based on the provisions of the ESMF, an analysis of relevant gender gaps. The analysis will address: (i) differentiated roles of males and females in each group and the primary value chains in which they participate; (ii) factors of production and other inputs upon which females depend; (iii) key production, market, commercialization, finance, and other barriers faced by females; (iv) social and family dynamics (such as domestic workload and domestic abuse) that influence females’ capacity to participate in productive activities; and (v) female-specific needs in regard to training, mentoring programs, social networks, and access to finance. Second, the selection process for the development and implementation of business plans will allocate a certain number of additional points to organizations of rural producers that have females on their Boards of Directors, and to those that have a minimum of 30 percent of households led by women among their members; this process will be detailed in the Project Operational Manual (POM). Third, the ESMPs will include activities to address the identified gender gaps in each of the subprojects, helping to ensure inclusion of the specific needs, concerns, and aspirations of women in the design of Business Profiles and promote the implementation of those that help to address these issues. Through this strategy, the project endeavors to reach a target of 25 percent female beneficiaries and 25 percent of jobs created under the project going to women. Progress on this target will be monitored in the Results Framework through two indicators. 26. Maximizing Finance for Development. The project investment will create the conditions to leverage an estimated US$53.5 million in private commercial finance (in addition to US$5.7 million in expected contributions from RPO beneficiaries), which will be tracked in the Results Framework. The promotion of investments through this model is expected to transcend the productivity and value-added focus of the RPOs, giving rise to the development of an entire industry of agricultural services and strategic alliances. Such alliances with the private sector will lead to improved conditions in the agro-logistics and public policies that currently limit agribusiness development. The project will invest Page 15 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) in strategic institutional and policy measures to improve the agribusiness enabling environment and public sector capacity to attract and leverage private finance. 27. Climate co-benefits, GHG analysis, and disaster risk screening. The team has completed a climate change and disaster risk screening, which resulted in a climate change risk rating of High. This is due to the fact that, while one of the project’s objectives is to enhance the resilience of the agriculture sector by introducing CSA practices and technologies (in the form of both hard irrigation infrastructure and soft components such as information services and emergency planning), the country’s underlying vulnerability to extreme events outside the control of investments, policy, and planning remains high, and adaptive capacity remains low. The ex-ante GHG analysis, available in project files, considered the effect of land use change, improved agricultural practices on annual crops and perennial systems, grassland system improvement, livestock system improvement, input management, and investments; it used a standard 20-year implementation period. The net carbon balance quantified GHGs emitted or sequestered because of the project compared to the “without project” scenario. Over the duration of 20 years, the project is expected to lead to a net carbon sink of 1,709,185 tons of carbon dioxide equivalent (tCO2-eq) and provide a sink of 85,459 tCO2- eq per year, equivalent to 1.82 t CO2-eq per hectare per year. 28. Citizen engagement (CE). Community involvement through CE activities is part of the SEP and will be monitored through two indicators in the Results Framework. Consultative and participatory processes formed part of the preparation of the social management instruments; they included representatives of Indigenous peoples, Afro- descendants, and women’s organizations. The results informed project design, ESMF, IPAPF, RPF, gender strategy and action plan, communication activities, and GRM. During project implementation, participatory processes with beneficiary groups including women, youth (18-30 years old), and local communities will be integrated into operational procedures as part of the preparation and implementation of the RPO business plans, ensuring that the necessary linkages are established with local-level planning and decision-making processes. INVEST-H will be responsible for the execution and monitoring of CE activities under the project, based on the social management instruments, and will also carry out beneficiary satisfaction surveys at initiation, during implementation, and upon completion of key project activities. C. Project Beneficiaries 29. The project will benefit farmers and agri-entrepreneurs in the Honduran agriculture sector directly and indirectly. The direct beneficiaries will be: (i) the members of the agribusiness enterprises (formal groups, associations, or cooperatives of small/medium-sized producers and agri-entrepreneurs) participating in subprojects under Component 1 (about 18,000 producers); and (ii) those benefitting directly from improvements to SENASA and ARSA processes under Component 2 (about 1,700 producers). The project will also indirectly benefit an estimated 31,000 beneficiaries who are part of other agricultural enterprises (other groups/cooperatives or private individual firms) participating as partners/allies in the subprojects (such as agro-processors, wholesalers, traders) or essential service providers (such as firms renting specialized equipment). The project will have further indirect benefits for a broader range of stakeholders in the agriculture sector as a result of enhancing the overall agribusiness environment and strengthening and modernizing the public entities that provide services to the large number of Hondurans engaged in the sector. The project will also promote the participation of women, youth (18-30 years old), Indigenous peoples, and Afro-descendants. The IPAPF and ESMF will assist in determining a beneficiary typology and refining the targeting approach, which will help to strengthen the inclusion of Indigenous and Afro-descendant producers. The project will also help to support the rural transition strategy from subsistence agriculture into commercially-oriented initiatives through the graduation scheme described earlier (and in detail in Annex 3 Page 16 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) D. Results Chain 30. Theory of Change. The project aims to improve access to markets and climate-smart practices and contribute to the economic inclusion of targeted beneficiaries in selected agricultural value chains. To this end, as shown in the Theory of Change (Annex 4), the project will contribute to overcoming critical barriers to unlocking the potential of Honduras to participate in agricultural markets through: increasing the availability of public and private sources of finance for the adoption of technology to improve the productivity, market access, and climate resilience of small farmers (Component 1); improving the efficiency of selected public agribusiness services (Subcomponent 2.1); and ensuring coordination between the public and private sector with regard to policies, regulations, and access to information (Subcomponent 2.2). At the same time, it is important to highlight that some critical assumptions are not entirely under the control of the project, such as the willingness of beneficiaries to organize and of financial partners to co-finance business plans, as well as assumptions on mitigation measures. E. Rationale for World Bank Involvement and Role of Partners 31. The need for public sector financing to increase agribusiness competitiveness in Honduras and the longstanding engagement of the WB in agribusiness development uniquely positions the WB to achieve results in concert with other partners. Public sector financing for the project is justified based on market failures that prevent the rural poor from organizing and integrating into profitable markets. The incentives set out in the project to form RPOs and rural productive alliances will help to correct this market failure and enable the rural poor to share more fully in growth and prosperity, which should ultimately help to reduce poverty and to improve climate resilience, which underpins future food and nutrition security in Honduras. The Bank’s extensive experience in implementing rural productive alliance projects in Latin America (and specifically in Honduras through COMRURAL) will prove instrumental in supporting this project. The project will also benefit from internal collaboration with Water and other WB Global Practices and from external collaboration with the Inter-American Development Bank, the Central American Bank of Economic Integration, and others active in the rural agribusiness sector and Dry Corridor. F. Lessons Learned and Reflected in the Project Design 32. Project design incorporates several good practices and lessons from the ongoing COMRURAL and other productive alliance models throughout the region. First, experience with the ongoing COMRURAL has shown that productive alliances are successful and sustainable over time when they respond to a strong market demand. Project design will support investment in value chains that have been prioritized by the GoH due to their potential either for domestic consumption or international export. Second, risk mitigation for private financial institutions to co-finance project investments has shown to be critical to the success of the ongoing COMRURAL. The project will continue this approach by leveraging matching grants, providing guarantees, strengthening small farmers’ productive and managerial skills, and promoting the use of technology and good environmental practices to add value; it will also expand on this approach by aiming specifically to reduce climate change vulnerability and related risk. Third, economic inclusion is maximized when producer organizations are well positioned and have a strong focus on generating opportunities for historically marginalized groups (49 percent of COMRURAL beneficiaries are Indigenous). The project builds on this approach by targeting Indigenous peoples, Afro-descendants, women, youth aged 18 to 30, and beneficiaries of social protection programs. Fourth, the design of Component 1 also reflects several findings of the 2016 WBG report, “Linking Farmers to Markets through Productive Alliances: An Assessment of the World Bank Experience in Latin America.” These findings include a call to increase the emphasis on identifying and analyzing those value chains that are promising within a national, regional, and global context; requiring beneficiary contributions or Page 17 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) bank loans as co-financing to ensure buy-in on the part of producers; and accompanying producer groups over an extended period of time, allowing them to become stable and profitable in the longer term. III. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 33. Project management, including fiduciary aspects and monitoring and evaluation, would be managed by INVEST- H. INVEST-H, under the General Coordinator of the Presidency of the Republic of Honduras, is a government agency for supporting strategic projects for the country’s socio-economic development. A Project Implementation Unit (PIU) will be established at the central level within INVEST-H. The PIU will coordinate with SAG, ARSA, SENASA, private sector stakeholders, and other institutions on the implementation of the project. The institutional arrangements build on successful experiences with INVEST-H for the implementation of the ongoing COMRURAL project and the Corredor Seco Food Security Project (P148737). The project will rely on the existing four regional offices of COMRURAL and expand the coverage with one additional regional office, as established on the basis of assessments completed during preparation. 34. To bolster the capacity of INVEST-H, implementation of business plans under Component 1 will rely in part on improvements in the capacity of the PIU and in part on the contracting of two Implementing Consulting Firms (ICFs). The ICFs will be contracted for the implementation of all business plans under Window 1 and a portion of business plans under Windows 2 and 3. The PIU will act as a supplementary implementing agent for the business plans under Windows 2 and 3, following the current procedures under the ongoing COMRURAL, which includes fiduciary responsibility for the transfer of funds to the RPOs. The transfer of funds to RPOs to finance business plans will remain under a matching grant agreement between the RPOs and INVEST-H on behalf of the GoH. The five PIU regional offices will also provide overall guidance and monitoring to the ICFs. 35. Financial management (FM). The WB assessed the FM capacity of INVEST-H in relation to the proposed project in accordance with WB Policy for Investment Project Financing and the FM Manual. FM performance under COMRURAL has been assessed as satisfactory. However, the proposed project is a larger operation; it has new components and stakeholders and features such as the contracting of ICFs to implement subprojects, and thus it requires additional fiduciary implementation arrangements (Annex 1). The PIU is headed by the National Coordinator and staffed by a team of technical and fiduciary specialists, including staff of four regional coordinating units, with the fifth regional unit to be established. The INVEST-H Administrative and Financial Directorate will be responsible for the fiduciary functions of the project and will be strengthened with at least two more project-dedicated financial specialists and a financial officer. 36. Procurement. INVEST-H through the PIU will be responsible for the implementation of all procurement processes with the support of the two ICFs. INVEST-H has experience in Bank-financed projects and will strengthen the PIU with qualified procurement experts in accordance with the complexity of the procurement activities. Technical aspects of the envisaged procurement activities will require appropriate coordination among the technical and procurement units, as established in the POM and implementation agreements specifying the roles and responsibilities of all parties. The Project Procurement Strategy for Development (PPSD) was finalized prior to Negotiations, and a Procurement Plan covering at least the first 18 months of project implementation was prepared (Annex 1). Page 18 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) B. Results Monitoring and Evaluation Arrangements 37. INVEST-H will be responsible for the overall monitoring and evaluation of project activities. The INVEST-H Monitoring and Evaluation (M&E) Team will consist of three staff, who will be responsible for carrying out the M&E tasks of the project. Their responsibilities will include planning as well as managing and integrating M&E data into the Management Information System (SIG) of the project, in coordination with the other participating institutions. INVEST- H has experience with managing M&E systems in similar projects, including the ongoing COMRURAL and the Honduras Corredor Seco Food Security Project, which it handled successfully with WB support. The M&E experience gained through COMRURAL will be used to further develop the project’s M&E System and expand it to include the additional areas of intervention introduced under COMRURAL II. SENASA and ARSA will provide information for the M&E system. 38. The SIG will include: (i) a module for FM, with the ability to provide information by project component, disbursement category, and sources of financing (this system is already in operation at INVEST-H); (ii) a business plan module (physical and financial); (iii) a beneficiary monitoring module with geo-referencing; and (iv) a control panel for monitoring the Results Framework indicators as well as progress in implementing project operational plans. The SIG will produce: (i) semi-annual and annual progress reports; (ii) baseline data; (iii) mid-term review data; and (iv) inputs for the project’s final evaluation. The baseline will be taken from different sources (business plans formulated, surveys conducted by a third party, and data provided by implementing contractors and regional offices of the project). Joint semi-annual supervision missions with WB staff and INVEST-H will be carried out to assess the status of key project results and compliance with legal agreements. The mid-term review will focus on: (i) evaluating the degree of progress in achieving project outcomes; (ii) evaluating the effectiveness of institutional arrangements for the implementation of the project; and (iii) recommending mid-course adjustments needed for efficient, effective project implementation. C. Sustainability 39. The agribusiness development agenda is a high priority for the GoH, which shows strong commitment to and ownership of the project activities. The Honduras 2020 Plan (2016) is a transformational public-private initiative to foster the socio-economic growth of the country, focusing on six priority sectors (including agribusiness) that show significant competitive advantages. The GoH considers the scaling up of the COMRURAL approach as a key pillar for implementing the 2020 Plan and has demonstrated continued commitment to investing in those innovations that will help fulfill the commercial potential of the country. 40. In addition, the project is designed to promote sustainable agribusiness development beyond the timeframe of the project. Experiences with the COMRURAL model show that it not only leverages private sector financing but also fosters new interest on the part of private financial institutions to invest in rural producers, which is sustained even after subprojects are concluded. Furthermore, through investing in agro-logistics alliances in addition to traditional productive alliances, the project contributes to the development of much-needed infrastructure and services that will continue to facilitate agribusiness development beyond the project’s duration. IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis 41. COMRURAL-II will finance both public and private goods. Public involvement and financing for the generation of private goods is justifiable, given that market failures in Honduras currently restrict the project’s targeted beneficiaries Page 19 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) from accessing key financial and non-financial services required to successfully identify and take advantage of concrete market opportunities. With project support, beneficiaries will overcome such barriers, increase their income, and support the generation of much-needed rural employment. Investments in public goods will also improve the enabling environment for agribusinesses, underpinning sector-wide development. 42. The ex-ante economic and financial analysis confirms that the project is a sound investment. The economic analysis includes all project investments and operational costs, regardless of the financing source, and estimates the economic benefits most directly associated with the project, which are largely the benefits derived from Component 1 investments and the expected global economic benefits arising from a net reduction in GHG emissions. The economic analysis estimates overall benefits of the project by using a low and a high carbon price, per current WB guidelines. The analysis yields an economic rate of return (ERR) of 24.2 percent with a low carbon shadow price and an ERR of 24.7 percent with a high carbon shadow price. The economic net present value (NPV) was estimated at US$555.63 million for the low carbon shadow price scenario and at US$577.53 million for the high carbon shadow price. The benefit-cost ratio ranges from 1.39 to 1.41 for the low and high carbon shadow prices, respectively. 43. The robustness of these results was tested and confirmed by a sensitivity analysis. Switching values or Inflexion Points are calculated with respect to the maximum increases in costs and maximum reductions in benefits for low and high carbon prices. The sensitivity analysis suggests that the project could remain economically viable even with a 33 percent reduction in the economic benefits projected by the analysis or an increase in total costs of around 50 percent. Even without accounting for the economic benefits derived from an expected net reduction of 85,459 tCO2-eq in GHG emissions, the project would be economically feasible, with an economic rate of return of 23.7 percent, NPV of US$533.7 million, and a benefit-cost ratio of 1.37. 44. An ex ante financial analysis for COMRURAL-II suggests that producer organizations would have enough financial incentives to continue their operations beyond the project implementation period. It yields an internal rate of return (IRR) of 17.5 percent, a financial NPV of US$231.75 million, and a benefit-cost ratio of 1.18, consistent with project design (using a 15 percent discount rate to depict the opportunity cost of capital in local financial markets). All models constructed to assess the financial feasibility of likely subprojects in various value chains proved to be financially feasible, yielding positive NPVs and IRRs greater than the applied discount rate. This result adds a degree of certainty to the realization of the anticipated economic benefits. During implementation, each subproject proposal will undergo a thorough ex ante financial cost-benefit analysis as part of the vetting process to be considered for co- financing under the proposed project. B. Fiduciary 45. Financial management. INVEST-H is a well-established entity with significant experience implementing externally funded operations including two active WB financed projects. Given the complexity and large operation of COMRURAL II, strengthening measures were agreed upon with the GoH. Processes, procedures, and other operational arrangements under the ongoing COMRURAL require updating to better respond to the needs of the project. Financial management teams are being strengthened at both central and regional levels, and processes are being modified as follows: (i) RPOs will be required to report on activities implemented and expenditures made on a quarterly basis; (ii) new modalities will be introduced for the implementation of subprojects with the RPOS, where for Windows 2 and 3 an ICF will assume the technical implementation of the subprojects and ensure that the RPOs comply with the fiduciary aspects of the subprojects. The PIU will still undertake the fiduciary responsibility of the transfer of funds to the RPOs and the respective accountability, but the RPOs will have responsibility for fiduciary aspects of subprojects. Page 20 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) The PIU will also continue to implement subprojects following current COMRURAL procedures, technical and fiduciary; (iii) the SIG will complement the recording and monitoring of the flow of funds to RPOs’ primary and secondary bank accounts, as well as the RPOs accountability for the use of funds; (iv) for Window 1 an ICF will assume both full technical and fiduciary responsibilities of subproject implementation; and (v) RPOs and other subprojects reports, monitored through the SIG systems, will include all financing sources, project and counterpart. These arrangements will be reviewed within the first 6 to 12 months of execution to ensure that these are operating as intended, and adjustments will be made if needed. 46. Procurement. Procurement will be carried out in accordance with “World Bank Procurement Regulations for IPF Borrowers” (July 2016, revised November 2017 and August 2018) (“Procurement Regulations”). The PPSD finalized prior to Negotiations describes how procurement in this operation will support the attainment of the PDOs and deliver value for money under a risk-based approach. It also provides adequate supporting market analysis for the selection methods detailed in the Procurement Plan. Mandatory Procurement Prior Review Thresholds detailed in the Bank’s Procurement Procedure Annex I are observed. All procurement procedures, including roles and responsibilities of different units, will be defined within the POM. Considering the complexity of inter-institutional coordination, and since this is a key factor for success of the project, the POM and the inter-institutional agreements will detail the specific steps, roles, and responsibilities (including enhancements based on lessons learned from previous and current projects) of INVEST-H, ARSA, and SENASA related to the implementation of procurement processes. Additionally, the POM will detail the procedures to be used for procurement to be implemented by the ICF for Window 1, and the procurement procedures set forth for the purchase of goods, works, consultant services and non-consultant services by the RPOs. C. Safeguards 47. Environmental safeguards. Based on the available information, this project has been classified as Category B. The WB environmental safeguard polices triggered by the project include: • Environmental Assessment (OP/BP 4.01): As the location and specific type of interventions are not known at this stage, a set of safeguards instruments has been prepared by the client and disclosed on the client’s website.18 They include an ESMF, which anticipates the types of impacts (such as the impacts of pesticide mismanagement on aquatic and terrestrial natural habitats and on producers’ health and safety, and of minor civil works such as small laboratories) that might be caused by the project and identifies mitigation measures for each of these potential impacts. In addition, subproject-specific ESMPs will be prepared during implementation. The ESMF includes screening provisions to assess the environmental and social impacts of subprojects; an exclusion list that makes ineligible those subprojects likely to cause irreversible or significant environmental or social impacts (Category A) or that involve the risk of significant pollution because of agrochemicals; a section with mitigation activities; implementation arrangements; capacity- building measures; a section on M&E; and a budget estimate. The ESMF also establishes provisions to strengthen the project’s GRM, including strengthened requirements for subprojects to develop their own GRMs and provisions on gender, working conditions, labor influx, measures to prevent child labor, and strategies for vulnerable groups. The ESMF also includes an outline Pest Management Plan (PMP) and a 18The Environmental and Social Assessment/ESMF was disclosed in-country by INVEST-H on April 25, 2019 on the INVEST-H website, and on April 26, 2019 on the WB external website. Page 21 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) Stakeholder Engagement Plan (SEP), which will guide the engagement processes during project preparation and implementation. • Natural Habitats (OP/BP 4.04): Project activities will not involve significant loss or degradation of natural habitats. Under the ESMF procedures, all investments funded under the project will be screened for the potential to cause negative impacts to terrestrial and aquatic natural habitats, including critical natural habitats. Any activity likely to cause irreversible or significant damages to habitats, or that involves unmitigable impacts, will be excluded from project funding, as specified in the exclusion list included with the ESMF. • Forests (OP/BP 4.36): The ESMF guides the assessment of potential impacts of the planned investments on forests. It includes a negative list of activities/impacts that could lead to degradation or conversion of forests to exclude them from financing. • Pest Management (OP/BP 4.09): The project finances agricultural activities that are expected to involve the use of different types, quantities, and applications of agrochemicals for pest management. The project will emphasize Integrated Pest/Crop Management through technical assistance. The ESMF provides the necessary initial guidance for related screening and good practices via a specialized annex, the Pest Management Plan (PMP). These two instruments together with the POM will include subproject selection criteria to avoid purchases of excluded agrochemicals—among others, red label and (only in exceptional circumstances and following rigorous controls) yellow label chemicals and any others prohibited by national regulations. During implementation, proposed business plans will be assessed in detail and managed based on good international pest management practices. The selection process will give additional points to projects that utilize organic practices. For each project that requires the use of pesticides, a specific PMP will be prepared as part of each ESMP. The ESMP/PMP will outline the various elements or actions that must be taken to adequately address concerns during project implementation. • Physical Cultural Resources (OP/BP 4.11): Project activities are not expected to involve any major civil works. No major movement of earth or excavation is anticipated, nor is it expected that natural features and landscapes with some level of cultural significance might be adversely impacted by the project. As such, it is unlikely that physical cultural resources will be impacted. Nevertheless, guidelines and provisions related to chance finds in the subprojects were included in the ESMF to comply with OP 4.11 and national laws on cultural protection. • Safety of Dams (OP/BP 4.37): It is likely that some existing small dams will be used for irrigation. For subprojects that depend on water supplied by an existing small dam or a small dam under construction and cannot function if the dam fails, INVEST-H will take measures prescribed by OP 4.37 and indicated in the ESMF. • International Waterways (OP 7.50): The project will finance subprojects in the upper parts of the Goascorán River Basin, the Lempa River Basin, and the Rio Negro River Basin, which are considered international waterways under the policy. Because the subprojects will support the productive use of existing hydraulic assets without increasing the amount of water abstracted, the proposed activities are not likely to adversely affect the quantity or quality of the water flowing to downstream riparians, and the project will not be affected by the water use of other riparians. Accordingly, an exception to the riparian Page 22 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) notification requirement has been obtained, as noted in an Office Memorandum approved on February 1, 2019 and available in the Project Files. 48. Social safeguards. Social safeguard policies triggered by the project include Involuntary Resettlement (OP/BP 4.12) and Indigenous Peoples (OP/BP 4.10). Other social management measures not specifically associated with these policies are included in the ESMF, which is described in the Environmental Safeguards section. The precise locations of the subprojects and their activities will be defined during the project’s execution stage. The Borrower prepared an RPF and an IPAPF in compliance with the requirements of OP/BP 4.12 and OP/BP 4.10, respectively. These frameworks, which were consulted upon and disclosed prior to appraisal, will guide COMRURAL in the screening and assessment of potential adverse social impacts during project execution, and for the preparation of site/activity-specific Resettlement Plans and/or Indigenous Peoples Plans as needed during project implementation. As part of the social risk management measures, the Borrower prepared a set of safeguards instruments based on tables of contents agreed with the WB and conducted consultations with national and regional organizations in December 2018 and January 2019. The main social actors consulted during project preparation were Indigenous and Afro-descendant peoples’ organizations identified through the stakeholder mapping conducted to prepare the SEP, which identified opportunities for greater socioeconomic inclusion, taking these stakeholders’ own decision-making systems into account. Other key stakeholders consulted included organizations of rural producers, government agencies, financial institutions, and civil society organizations.19 The safeguards instruments were prepared in Spanish, a language that is understandable and accessible to the project stakeholders. The instruments were disclosed in-country by INVEST-H on April 25, 2019 on the INVEST-H website, and on April 26, 2019 by the WB on its external website. 49. Through the effective implementation of the ESMF, the subproject-specific ESMPs, and supervision by the PIU and WB safeguard specialists, the overall impact of the project is expected to be positive, and none of the anticipated activities are expected to generate significant risks, irreversible adverse impacts, or significant adverse social impacts. 50. Grievance Redress Mechanism (GRM). The GRM for the project was established under the ongoing COMRURAL project in 2008 and includes maintaining a project complaint log and filing system to monitor status and follow up on each complaint. The GRM will be strengthened during project execution, based on the provisions established in the ESMF. The ESMF also contains a strengthened requirement for establishing grievance mechanisms at the level of the subprojects. Complaints or inquiries can be submitted by phone, through the project websites, http://www.comrural.hn/buzon-de-quejas/ and http://www.mcahonduras.hn/contactenos/, and in person at INVEST- H regional offices (located in Santa Rosa de Copan, La Ceiba, and Siguatepeque). Signs with contact information to submit complaints are also placed in each of the subproject locations. The Borrower will provide biannual reports to the WB on the GRM. The Results Framework includes an indicator to monitor grievances. The detailed process for handling complaints, as well as guidelines and measures to strengthen that process, is included in the project ESMF. 51. Communities and individuals who believe that they are adversely affected by a WB-supported project may submit complaints to existing project-level GRMs or the WB Grievance Redress Service (GRS). The GRS ensures that 19For the consultation process to be meaningful, the consultations made use of different formats, such as socialization events, workshops, work meetings, interviews, and the virtual review of documents, such as the safeguards instruments prepared for the project. These activities took place between December 3, 2018 and January 28, 2019 in more than 16 separate events at locations that included Tegucigalpa, Olancho, Valle, Yoro, Catacamas, Juticalpa, Culmí, La Ceiba, Tela, Trujillo, Puerto Cortes, and La Puzanca. The SEP provides more detailed information about the stakeholders, the consultations conducted during project preparation (including documentary evidence), and the guidelines for the socialization process to be conducted during the preparation of business plans and their ESMPs for each of the subprojects. Page 23 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) complaints received are promptly reviewed to address project-related concerns. Project-affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel, which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to WB’s attention, and WB Management has been given an opportunity to respond. For information on how to submit complaints to WB’s corporate GRS, visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the WB Inspection Panel, visit www.inspectionpanel.org. V. KEY RISKS . 52. The project’s overall risk has been assessed as Substantial, driven by the key factors described below. 53. Political and governance – Substantial. Political polarization has continued to deepen against the backdrop of unresolved issues from the 2009 political crisis. Emerging political fragmentation and other governance issues highlight the country’s continued governance and institutional weaknesses and may further diminish efforts to facilitate political dialogue. This polarization may delay Congressional approval of WB investment projects and affect the implementation pace and/or direction of WB projects. To mitigate this risk, the WB will continue to focus on areas of critical importance for the country’s development, including this project, and will seek to support dialogue with all stakeholders based on shared development objectives and priorities. During implementation, the team will promote dialogue with key stakeholders, including the private sector, as a mitigation measure to support overall commitment to the project and its public-private approach. 54. Macroeconomic – Substantial. Increased uncertainty related to global trade, adverse weather, and lower international prices for key agricultural products like coffee may strongly affect Honduras by leading to large agricultural losses and reducing exports. Domestically, the persistent deficit of the state-owned electricity company (ENEE) threatens Honduras’ fiscal position, while prolongation of the amnesty for taxes and electricity bills weakens the tax base and widens the fiscal deficit. If these circumstances further limit the fiscal space, expenditure ceilings and thus the annual project budget could be affected. The GoH aims to strengthen the country’s fiscal sustainability through stronger consolidation of the central government, cuts in investment spending, and adoption of a comprehensive plan to rescue the country’s electricity system and reduce the debt of ENEE. The team will closely track these issues with the GoH and, if necessary, adjust component activities. Separately and through technical assistance, the WB is also supporting the GoH to find a sustainable solution to the challenges of the energy sector. 55. Technical design of the project – Substantial. While the technical design of the project is informed by the ongoing COMRURAL, it has naturally evolved and become more complex for several reasons, including the financing amount, the three financing windows, and beneficiary targeting. The project also promotes the adoption of innovative technologies and design elements that beneficiaries may not have utilized before. To address these risks, the project will continue (as under the ongoing COMRURAL) to provide a feedback loop to incorporate lessons learned into new calls for proposals (including through the GRM), track CE, and remain in close dialogue with the GoH throughout the project to discuss any necessary adjustment in the project approach. 56. Institutional capacity for implementation and sustainability – High. Because COMRURAL II is larger, more complex, and incorporates more innovations compared to COMRURAL, the institutional capacity risk is rated as High. To mitigate this risk, the project will supplement the capacity of INVEST-H by hiring two ICFs to implement subprojects. In addition, the GoH has defined a new development strategy through the 2020 Plan to promote the transformation Page 24 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) and modernization of agribusiness; it also benefits from considerable experience in INVEST-H with externally financed projects, and is seeking to build on the successful COMRURAL model. The task team will work closely with the GoH to coordinate and provide rigorous implementation support to COMRURAL II activities within existing agribusiness development efforts. 57. Fiduciary risk – High. This risk rating reflects the complexity of project design. While contracting with ICFs to implement subprojects will mitigate the institutional capacity risk, it also poses risks for FM, as ICFs may not be familiar with WB fiduciary processes. This risk will be mitigated through close supervision of the ICFs by the central and regional PIU offices. The Project Implementation Unit will also have fiduciary responsibility for transferring funds to the RPOs and respective accountability for subprojects in Windows 2 and 3. INVEST-H will also implement the FM assessment action plan agreed during preparation to strengthen the proposed FM arrangements acceptable to WB. The POM will include detailed descriptions of the roles and responsibilities of the ICFs. From a procurement perspective, the rating is due to complex inter-institutional arrangements; the structure of INVEST-H and its current workload; the support and monitoring of contracts resulting from subprojects with local governments, individuals, and new rural organizations; and the country context. Factors such as market conditions, violence, and security issues could also significantly impact the implementation of activities. Specific measures to mitigate the fiduciary risks are detailed in Annex 1. 58. Environmental and social risk – Substantial The overall environmental risk rating is Substantial because the project involves interventions in rural areas with the potential to negatively impact terrestrial and aquatic natural habitats and forests, even though any activity leading to forest clearance is excluded. Additionally, pesticide use represents an occupational health and safety issue for farmers. The overall social risk rating is also Substantial as the project could involve occupational risks for agricultural workers, risks related to community health and safety for the population surrounding the subprojects, and the potential risk of child labor. The social context in which the project will be implemented is characterized by the presence of Indigenous and Afro-descendant communities, and there have been social conflicts surrounding the agribusiness sector and the use of water. To manage these potential environmental and social risks, in accordance with WB requirements the Borrower has prepared a corresponding set of safeguards instruments that provide a framework to identify and address potential risks. These instruments include an ESMF, consulted upon and disclosed prior to appraisal, which outlines a PMP and provisions for preparing site- specific PMPs. Once the subprojects and their locations have been defined, the RPOs will prepare ESMPs for each subproject. Subproject-specific ESMPs will: (i) identify and seek to avoid/minimize adverse impacts; (ii) define specific mitigation procedures (such as the promotion of good manufacturing practices, considerations for gender and vulnerable groups, water resource management activities, and measures to prevent child labor) and define arrangements to monitor them; (iii) establish subproject-specific GRMs; and (iv) determine whether additional social management instruments should be prepared and take action on these determinations. The RPOs will receive specialized environmental and social management support from the ICFs contracted by the project and from INVEST- H to help them develop and implement their ESMPs and carry out their socialization activities. WB supervision missions will check compliance with safeguards instruments developed under the project. 59. Stakeholders risk – Substantial. There is a history of social conflicts in the agribusiness sector, including recent conflicts over land tenure. This could impact the implementation of potential project investment activities and the Page 25 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) participation of private sector finance. To address this risk, the project includes a Stakeholder Engagement Plan and consultation activities during the preparation and implementation of business plans and other project activities. 60. Other risk – Climate change – Substantial. The underlying vulnerability of Honduras to extreme events outside the control of investments, policy, and planning remains high, and the overall adaptive capacity of the country remains low. The project includes climate-smart practices and technologies to promote resilience and address climate vulnerabilities. 61. Other risk – Mobilization of private capital – Substantial. The project expects to mobilize a total of US$53.5 million in private commercial financing, posing a risk that this capital is not leveraged in full. The project will mitigate this risk by ensuring that business plans are developed by qualified financial service providers. The project will also guarantee a portion of project investments through the COMRURAL Guarantee Fund (FONGAC), which has operated successfully for the 10 years in which COMRURAL has been active. Furthermore, the ongoing COMRURAL entered into an MoU with partner financial institutions that provides an established framework for commercial private banks and micro-finance institutions to finance business plans. This MoU will continue under the proposed project, helping to reduce the risk that the anticipated levels of commercial private finance do not materialize. The project will also seek to establish similar MoUs with additional financial institutions. If despite these measures a portion of the anticipated financing does not materialize, the project is designed to be scaled down to achieve the PDO. Page 26 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) VI. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY: Honduras Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II Project Development Objectives(s) The PDO is to improve access to markets and climate-smart practices and contribute to the economic inclusion of targeted beneficiaries in select agricultural value chains. Project Development Objective Indicators RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 Improved adoption of climate-smart agriculture practices in project areas Farmers adopting improved agricultural technology (CRI, 0.00 4,400.00 10,080.00 12,600.00 12,600.00 Number) Farmers adopting improved agricultural technology - Female 0.00 3,150.00 (CRI, Number) Farmers adopting improved agricultural technology - male 0.00 9,450.00 (CRI, Number) Improved access to markets of project beneficiaries Increase in real gross sales generated by business plans in 0.00 5.00 10.00 15.00 20.00 execution (Percentage) Page 27 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 Improved economic inclusion Jobs (full-time) created under business plans financed by the 0.00 3,400.00 7,800.00 9,700.00 9,700.00 project (Number) Percentage women (Percentage) 0.00 25.00 Sustainability of project design Rural Producer Organizations working under a productive 100.00 80.00 80.00 80.00 80.00 alliance approach 24 months after first disbursement (Percentage) PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 C1: Support to enhance the competitiveness, resilience, and innovation of agribusiness initiatives Business plans financed under the project (Number) 0.00 132.00 296.00 370.00 370.00 Rural Producer Organizations that reach the goals defined in the 0.00 70.00 70.00 70.00 70.00 Business Plans (Percentage) Beneficiaries participating in business plans under the project 0.00 6,400.00 14,400.00 18,000.00 18,000.00 (Number) Percentage women (Percentage) 0.00 25.00 Percentage youth (Percentage) 0.00 10.00 Page 28 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 Percentage Indigenous (Percentage) 0.00 10.00 Percentage Afro-descendant 0.00 5.00 (Percentage) Percentage covered under GoH social protection programs 0.00 10.00 (Percentage) Private Capital Mobilized 0.00 19,000,000.00 42,800,000.00 53,500,000.00 53,500,000.00 (Amount(USD)) Beneficiaries satisfied with technical and financial assistance 0.00 80.00 80.00 80.00 80.00 received under the project (Percentage) Beneficiaries satisfied with the participatory process of business 0.00 80.00 80.00 80.00 80.00 plan preparation (Percentage) Percentage of beneficiaries who report that they received satisfactory response to their 0.00 80.00 80.00 80.00 80.00 grievances reported through the GRM (Percentage) C2: Support to the modernization of Honduras’ agribusiness enabling environment Reduction in the average time required for select, prioritized 0.00 10.00 20.00 20.00 30.00 SENASA processes (Percentage) Reduction in the average time required for ARSA laboratory 0.00 10.00 20.00 20.00 30.00 analyses (Percentage) IO Table SPACE Page 29 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) UL Table SPACE Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection The household irrigation This indicator measures systems will be used for the number of farmers supplementary irrigation of adopting (at least one) rained agriculture, for improved agricultural diversification of production technology(ies) and/or or for the transformation practice(s) transferred from a primarily subsidence during technical agriculture towards the assistance that production of one or two increases the resilience marketable products, of agro-ecosystems to depending on the regional climate change-induced Midterm and conditions and depending Midterm and risks in the project. final M&E project team of Farmers adopting improved agricultural on the farmers' interests. final These could include e.g. evaluation INVEST-H technology Technical assistance will evaluation conservation report introduce good agricultural agriculture, soil and practices adjusted to each water conservation, situation. These are, among and water harvesting; other, the use of organic the formulation is close fertilizer, certified seeds, to the CRI "Farmers diversification and shifting adopting improved cultivation and will be agricultural identified during project technology," where implementation. The technology refers to indicator evaluates if at seed preparation, least one good agricultural planting time, feeding practice transferred during schedule, feeding Page 30 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) technical assistance is being ingredients, post- adopted by the farmer. harvest, storage, Municipal staff using their processing, etc. This site visits will evaluate use indicator will be of agricultural practices or measured through a improved agricultural survey, conducted by a technology. One year after third party, applied to a the completion of the first representative sample systems, an independent of farmers who are part evaluation will confirm of those business plans monitoring results of the that incorporate municipal staff. If needed, climate-smart practices an additional independent or technologies. evaluation will be realized during mid-term review. Reports of Climate-smart practices monitoring reported through visits to sites business plan Farmers adopting improved Annual M&E team of INVEST-H of business monitoring systems and agricultural technology - Female plan verified through activities. monitoring visits. Reports of Climate-smart practices monitoring reported through visits to sites business plan Farmers adopting improved Annual M&E team of INVEST-H of business monitoring systems and agricultural technology - male plan verified through activities monitoring visits. Percentage increase over Annual from Monitoring Data collected by the M&E project team of Increase in real gross sales generated by the baseline established in year 3 and implementers of the INVEST-H business plans in execution the business plans (in terms evaluation audited financial Page 31 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) of real gross sales) system statements (in Windows 2 and 3) and survey for Window 1. Monitoring Data collected by New, full-time jobs created and M&E project team of Jobs (full-time) created under business Annual implementers through along the value chains evaluation INVEST-H plans financed by the project follow-up visits. supported by the project. system Percentage women This indicator measures project's efficacy in establishing commercial Commercial alliances between Business agreements are Plan beneficiaries and Monitoring reported by Business Rural Producer Organizations working commercial partners, and Annual Plan representatives M&E project teams. under a productive alliance approach 24 through documents that evaluation and technical advisors, months after first disbursement identify the quantity, value, system verified through period, delivery dates, monitoring visits. quality standards, and other commercial aspects of the alliances and how they are sustained overtime. ME PDO Table SPACE Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection This indicator measures the Semi- Monitoring Business plans and the M&E team of INVEST-H Business plans financed under the project total number of Business annual and monitoring and Page 32 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) that are financed by the evaluation evaluation system project. system of COMRURAL INVEST- H This indicator measures the percentage of RPOs that Monitoring Business plans and the meet or exceed the Annual and monitoring and Rural Producer Organizations that reach performance projections M&E team of INVEST-H from year 3 evaluation evaluation system the goals defined in the Business Plans (productivity) established in system COMRURAL INVEST-H the business plans according to each window and / or value chain. This indicator measures the Monitoring Business plans and the number of beneficiaries Annual and monitoring and Beneficiaries participating in business M&E team of INVEST-H participating directly in from year 2 evaluation evaluation system plans under the project business plans under the system COMRURAL INVEST-H project. Business plan This indicator measures the and Business plan and percentage of women Semi- beneficiary beneficiary monitoring M&E team of INVEST-H Percentage women beneficiaries participating annual monitoring system directly in business plans system under the project. Business plan This indicator measures the and Business plan and Semi- percentage of youth directly beneficiary beneficiary monitoring M&E team of INVEST-H Percentage youth annual participating in business monitoring system plans under the project. system This indicator measures the Semi- Business plan Business plan and M&E team of INVEST-H Percentage Indigenous percentage of indigenous annual and beneficiary monitoring people directly participating beneficiary system Page 33 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) in business plans under the monitoring project. system Business plan This indicator measures the and Business plan and percentage of Afro- Semi- beneficiary beneficiary monitoring M&E team of INVEST-H Percentage Afro-descendant descendants directly annual monitoring system participating in business system plans under the project. This indicator measures the percentage of beneficiaries Business plan directly participating in and Business plan and Semi- Percentage covered under GoH social business plans under the beneficiary beneficiary monitoring M&E team of INVEST-H annual protection programs project who are currently monitoring system registered under any of the system GoH social protection programs. Business plans and the Private commercial finance Annual monitoring and & micro-finance leveraged M&E System M&E team of INVEST-H Private Capital Mobilized from year 3 evaluation system by the project to implement COMRURAL INVEST-H business plans. This indicator measures the Survey of a level of satisfaction of Midterm Midterm and representative sample Beneficiaries satisfied with technical and beneficiaries with the and final final of M&E team of INVEST-H financial assistance received under the agricultural technical evaluation evaluation beneficiaries, assessed project assistance received under by a third party. the project. This indicator measures the Midterm Midterm and Survey of a Beneficiaries satisfied with the level of satisfaction of and final final representative sample M&E team of INVEST-H participatory process of business plan beneficiaries with the evaluation evaluation of beneficiaries, preparation participatory process assessed by a third Page 34 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) implemented to prepare party. business plans under the project. This indicator measures the percentage of beneficiaries Survey of a Percentage of beneficiaries who report who report that they Beneficiary representative sample that they received satisfactory response received satisfactory Biannual satisfaction of beneficiaries, INVEST M&E team to their grievances reported through the response to their grievances survey assessed by a third GRM reported through the GRM party. according to the beneficiary satisfaction survey. This indicator measures the Midterm Midterm and percentage reduction in Analysis of the annual Reduction in the average time required and final final M&E team of INVEST-H. days to register for select, database of processes for select, prioritized SENASA processes evaluation evaluation prioritized SENASA processes. This indicator measures the Midterm Midterm and Analysis of the Reduction in the average time required percentage reduction in and final final database of laboratory M&E team of INVEST-H for ARSA laboratory analyses days for ARSA laboratory evaluation evaluation analyses analyses to be completed. ME IO Table SPACE Page 35 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) ANNEX 1: Implementation Arrangements and Support Plan Republic of Honduras Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II 1. The project will be implemented by Inversión Estratégica de Honduras (INVEST-H), a public sector agency under the oversight of the General Government Coordination Secretariat, which will host the PIU . INVEST-H was created to support the preparation and implementation of projects and programs (including their fiduciary and technical aspects) classified as strategic for the economic development of the country. The agency currently manages three WB-financed projects, including the ongoing COMRURAL (P101209), Corredor Seco Food Security Project (P148737), and the Pilot Program for Climate Resilience (P157795). 2. Project management. A PIU will be established at the central level within INVEST-H and at the regional level through five regional offices (four of which are already established and functioning under the ongoing COMRURAL). Current COMRURAL staff will remain with the PIU of the proposed project to build on the experience and capacity of INVEST-H and lessons learned in managing WB projects. This PIU, supported by the INVEST-H Department of Procurement and Department of Financial Management, will be responsible for all of the project’s fiduciary aspects, safeguards, and monitoring and evaluation, and it will centralize all procurement activities and FM arrangements for the implementation of all project components. The PIU will ensure compliance with the ESMF and related WB environmental and social safeguards, as well as monitoring and evaluation (M&E) arrangements. Figure 1 displays the organizational chart for implementation arrangements. Figure 1: Implementation arrangements for COMRURAL II 3. The implementation of business plans under Component 1 will rely on a combination of two ICFs and the improved capacity of the PIU. The two ICFs will have full responsibility for the implementation of business plans for all windows, including the provision of technical assistance to comply with fiduciary, social, and environmental Page 36 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) safeguards requirements as specified in the POM. The ICFs will be contracted to implement the entire portfolio of business plans under Window 1 and a portion of the business plans under Windows 2 and 3. The ICFs will be responsible for (i) facilitating consultations, (ii) mobilizing interested participants of selected value chains, (iii) establishing productive partnerships, (iv) supporting formulation of business plans (subprojects), and (v) providing technical support for the implementation of business plans, including support for monitoring fiduciary and safeguards compliance. The transfer of funds to the RPOs to finance business plans will remain under a matching grant agreement between the RPOs and INVEST-H on behalf of the GoH. The five PIU regional offices will provide overall guidance and monitoring to the ICFs. Additionally, the PIU will complement the implementation of business plans under Windows 2 and 3, acting as a supplementary implementing agent and following the current procedures under the COMRURAL AF, which include fiduciary responsibility for the transfer of funds to the RPOs. 4. Component 1 will be coordinated by the COMRURAL implementation Steering Committee, which is responsible for project oversight and coordination, comprised of representatives of INVEST-H, SAG, RPOs, and the private sector. After each public call for proposals, business plans will be selected following the detailed eligibility criteria for each Window set forth in the POM. The process will include approval by an evaluation committee composed of: (i) one value chain specialist; (ii) environmental and social specialists; (iii) one financial specialist; (iv) one procurement specialist; and (v) one outside expert selected and contracted on an ad hoc basis. Final decisions made by this evaluation committee shall be ratified by the Steering Committee and made publicly available. 5. The project will also coordinate with the public sector institutions that are the beneficiaries of project activities under Component 2. In Component 2, SENASA, ARSA, and SAG will have technical roles. These institutions will oversee preparation of the technical inputs for bidding documents and support PIU activities of supervision, auditing, and evaluation, along with any other activities agreed in the inter-institutional agreements signed with INVEST-H. Each institution (SAG, SENASA, and ARSA) will appoint staff with specific responsibilities as described in the inter- institutional agreements to interact directly with the PIU in line with the scope of their work, effectively carrying out project activities, support coordination of their respective subcomponents, and liaise with their institutions. To this effect a Committee to Enable the Environment of Agribusinesses (CEEA), comprised of high-level officials of these institutions, will be created to act as a multidisciplinary technical task force to ensure proper coordination and supervision of activities under Component 2. A representative of the Presidency and a representative of the private sector will be invited to support the coordination of the CEEA. The project will facilitate the implementation of a Problem Driven Iterative Adaptation approach to guide the preparation and implementation processes of Component 2. A complete description of the CEEA will be part of the POM. 6. Given the complex nature of the project, provisions will be made to augment the implementation capacity of the PIU. COMRURAL currently operates a total of four regional offices covering 13 departments of Honduras. The offices provide overall implementation support (on fiduciary, safeguard, and technical matters) for the preparation and implementation of business plans. The four regional offices currently functioning as part of the PIU for COMRURAL will be further strengthened to ensure the proper coordination of activities among project stakeholders at the central level, and to supervise and monitor activities on the ground, coordinating with local agencies, governments, and other stakeholders. In addition, a fifth regional office will be established. It is expected that new staff of the PIU will include fiduciary (procurement and FM), safeguards (social and environmental), and technical staff specialized in public agricultural services and agro-logistics, among other areas. To strengthen the Borrower’s capacity for environmental and social management, INVEST-H will recruit at least four additional environmental and social specialists (two environmental and two social) for the PIU to monitor, supervise, and report on the implementation of the safeguards instruments, including the ESMF, SEP, IPAPF, and RPF. These specialists and instruments will strengthen the indicators Page 37 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) and monitoring system for environmental and social aspects of the subprojects. They will also support the broader institutional strengthening of INVEST-H under the project, which will also evaluate the possible creation of a Socio- Environmental Coordination Unit at INVEST-H. Specialist contractors engaged by the PIU to support the development, implementation, and monitoring of farmers’ business plans will also be required to have environmental and social specialists on their teams. The PIU environmental and social team will also benefit from a safeguards training workshop to be organized around the time of project launch. The basic structure of a regional office is described in the POM. The ultimate structure and composition of each regional office entails some flexibility, however, because it will be based on each region’s business plan portfolio, which in turn depends on the results of each public call for proposals. Additionally, funds will be earmarked for yearly audits of the project’s financial, operational and fiduciary performance. Finally, periodic external evaluations and consultancies on knowledge management and beneficiary satisfaction are planned to gauge progress, extract and disseminate lessons, and create a framework for adaptive management. Financial Management 7. Key fiduciary risks relate to four aspects of the project. The first aspect is the project design, which allocates 60 percent of resources for subprojects implemented under three modalities under Subcomponent 1.2 and adds a new component that supports two enabling government entities (SENASA and ARSA). The second is the complexity of the funds flow for subprojects, in which (i) RPOs in Windows 2 and 3 of Subcomponent 1.2 will undertake certain fiduciary tasks despite their limited capacity, and (ii) subsistence agriculture subprojects under Window 1 will be executed through a contractor in charge of technical and fiduciary matters related to implementation. The third aspect is that extensive operational arrangements are needed to record, control, report on, and monitor the use of funds to ensure the effective, timely implementation of subprojects by RPOs and beneficiaries of subsistence subprojects, and the activities under Component 2 that support the GoH (which require no transfer of funds but entail responsibility for the technical implementation of the financed activities). A fourth aspect of the project contributing to fiduciary risk is the use of multiple information systems—the Integrated System for Financial Administration/Executing Units of External Projects (SIAFI/UEPEX) and the SIG of the PIU—which poses challenges for the timely availability and reliable linking of information required to monitor project implementation. 8. Based on the FM assessment and subject to the implementation of the agreed action plan for strengthening FM, the agreed upon FM arrangements are considered acceptable to the WB. In particular, INVEST-H agrees to: (i) improvements in the SIG platforms to record and report information to ensure the accountability of the subprojects; (ii) the format and content of the interim financial report, PIU and contractors, and project chart of accounts structure; (iii) the hiring of additional financial staff, both at the central and regional level; (iv) the monitoring controls for contracts financed under the project; (v) document proposed indirect costs to be financed under the project, to be subject to WB review every two years; (vi) enter into inter-institutional agreements specifying the roles and responsibilities of ARSA, SENASA, and other entities as applicable that receive support for institutional strengthening under Component 2; (vii) update the POM to reflect and incorporate the new component/activities, updated organizational structure, flow of funds, and information systems (among other information); and (viii) complete, within four months from effectiveness, the selection and contracting of the additional FM staff, and contract the external auditors. The PIU will provide fiduciary training so that contractors and RPOs understand their fiduciary responsibilities before receiving funds. 9. Flow of funds. A separate designated account in US dollars will be opened at the Central Bank of Honduras. Advances to the designated account will be based on a variable ceiling—namely, the cash flow projected for the Page 38 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) coming six months (or alternate period if necessary). Payments from the designated account will be made as follows: (i) funds for RPOs to operate subprojects will be transferred to the dedicated RPO primary bank accounts (cuentas primarias) in US dollars, and from those accounts to the secondary bank accounts in lempiras, for payment of subproject expenditures; (ii) payments of consulting fees to contractors, for Windows 1, 2, and 3, and other project activities; and (iii) transfer of funds to the contractor for the subsistence subprojects (Window 1). To mitigate risk related to the RPO primary bank accounts, procedures include joint signatures by the PIU and the RPOs, and an agreement with the financial entities providing credit under the project to RPOs, to restrict the use of funds to approved project activities. 10. Budgeting, accounting, and financial reporting. The PIU with support of project dedicated financial staff will be responsible for preparing and monitoring the annual operating plans and budget; the budget will be integrated into the INVEST-H annual budget and monitored through SIAFI/UEPEX. The project budget and accounting are managed through SIAFI/UEPEX, and due to this system’s limitations, monitoring of the subprojects under Subcomponent 1.2 will be complemented by data and information recorded and reported from the SIG platform. The two ICFs implementing the subprojects will provide quarterly reports with agreed format and content, reviewed by the regional coordinators, uploaded into the SIG platform, and approved by the PIU. The SIG platform will capture and monitor all the RPO sources of funds (credit, private financial partners, and RPO counterpart funding), as well as the control of the primary and secondary bank accounts. INVEST-H will submit semi-annual interim unaudited financial reports (June 30 and December 31), within 45 days after the semester being reported, in the format and with the content agreed upon with the WB. The POM will be updated to strengthen internal controls in relation to: monitoring of contracts; fiduciary management procedures of the activities supporting the strengthening of government entities; monitoring technical and fiduciary aspects of the subprojects implemented by the RPOs and beneficiaries of subsistence subprojects; as well as supervision and monitoring by the PIU of the subprojects implemented by the ICFs under Subcomponent 1.2. Figure 2 illustrates the management information system for the proposed project. Figure 2: Management Information System for COMRURAL II 11. Subproject implementation modalities – Subcomponent 1.2. Two ICFs selected on a competitive basis will implement this subcomponent. One ICF will focus on the subsistence subprojects under Window 1, under arrangements similar to those concluded with the operators of the Corredor Seco Project implemented by INVEST-H. ICF consulting fees will be paid against agreed products, and funds for the subprojects will be transferred to the ICF, based on cash flows projected for the next six months, with quarterly accountability reports presented to the PIU. The Page 39 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) ICF will have full responsibility for subproject implementation, including technical, fiduciary, and safeguards aspects. A second ICF will focus on the transitioning and commercial subprojects under Windows 2 and 3. It will provide technical assistance and ensure that RPOs comply with fiduciary arrangements, while transfers of funds to the RPOs and monitoring of their financial accountability will remain the responsibility of the PIU. As with the ICF focusing on Window 1, consulting fees for the ICF focusing on Windows 2 and 3 will be paid against agreed products. A discussed, the PIU will support and supervise the ICFs and also implement subprojects under Windows 2 and 3, following the current procedures for the COMRURAL AF. 12. Indirect costs. The project will finance the share of indirect costs borne by INVEST-H. Based on projections of current indirect costs, salaries, and operating costs to 2025, the estimated indirect cost rate is approximately 2.2 percent. The rate will be reviewed every two years, and upon agreement with the WB the indirect cost contribution will be adjusted, if applicable. 13. Audit arrangements. The annual financial statements of the project will be audited by a private firm under terms of reference and selected from a list of audit firms acceptable to the WB, with an interim review of the first calendar semester, and audit results will be communicated in a management letter within 90 days after the review is conducted. The auditors will also conduct compliance audits of the subprojects implemented by the RPOs. Those results will be presented in a separate report, along with the project annual audit report, and submitted to the WB no later than six months after the end of each audited period. 14. Table 1 summarizes the disbursement categories for the proposed project, and Table 2 summarizes the major elements of the FM Action Plan. Table 1: Disbursement categories Category Amount of the Credit Percentage of Allocated (expressed in USD) Expenditures to be Financed (inclusive of Taxes) (1) Consulting services, under Part 1(b) of the Project 21,000,000 100% (2) Subprojects under Part 1(b) of the Project 28,500,000 100% (3) Goods, works, non-consulting services (including compliance and 25,500,000 100% Project audits), consulting services, Training, and Operating Costs for Parts 1 (except Part 1(b) of the Project), 2 and 3 of the Project (4) Emergency Expenditures for Part 4 of the Project 0 100% TOTAL AMOUNT 75,000,000 Table 2: Action Plan for financial management 1. POM approved by WB Effectiveness condition 2. Enter into Inter-institutional Agreements Within 4 months after effectiveness 3. External auditors contracted Within 4 months after effectiveness 4. Financial specialists and finance officers contracted Within 4 months after effectiveness Procurement 15. The WB carried out a procurement capacity assessment of INVEST-H and identified specific requirements for resources and actions to strengthen procurement. The procurement team of INVEST-H has experience and knowledge of procurement processes of other multilateral organizations and agencies (such as the Inter-American Page 40 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) Development Bank, Millennium Challenge Corporation, and Central American Bank for Economic Integration), and has implemented three WB-funded projects. The procurement team of the ongoing projects and the procurement staff from INVEST-H participated in the WB Regional Procurement training in March 2018. Procedures related to the procurement of subprojects will be updated and enhanced to include lessons learned to ensure more effective coordination in planning activities, bundle goods and services when feasible, implement more strategic planning of procurements, and optimize the use of project resources during implementation to achieve value for money. 16. It has been agreed that for INVEST-H to properly perform the procurement functions for the project, it will need to hire a subcoordinator for procurement, three senior procurement specialists, and two additional field procurement officers, in addition to the five procurement staff already included in the COMRURAL AF. The subcoordinator will have authority to approve procurement processes, in accordance with thresholds detailed in the POM, and will closely supervise all project procurement staff. Such staff will coordinate all activities with the Project Coordinator and report to the INVEST-H Procurement Director. Regarding the three new senior procurement specialists, one will be assigned exclusively to procurement related to Component 2, and the other two will be assigned to all other project components. The main tasks of the two additional field procurement officers will be to train and support RPOs in their procurement processes under the coordination and supervision of the senior procurement specialist. All field procurement officers and their supervisor will closely monitor the assistance provided by the ICF for Windows 2 and 3 to ensure that it is of the quality expected and that RPOs are receiving the support needed to comply with procurement requirements. This action will mitigate the risk that RPOs (because they lack knowledge of public procurement procedures) may fail to comply with the Procurement Guidance for Subprojects approved by the WB. To further ensure that procurement under subprojects is conducted transparently, fairly, and effectively, the POM will include enhancements based on lessons learned from implementing the ongoing COMRURAL, adjustments to the new project implementation structure and current market conditions, and (as an annex) the Procurement Guidance for subprojects for all three Windows. The Procurement Guidance for subprojects will specify the procurement procedures agreed between the WB and the Borrower related to all procurement processes that are implemented by RPOs and funded, partially or wholly, by the WB. It will include the detailed activities required for each procurement method and thresholds for review by INVEST-H, and by the WB for processes with budgets that surpass the maximum thresholds for post review for the project. As noted, standard documents for subproject procurement will be adjusted to reflect local market conditions and needs of beneficiaries. 17. Procurement Plan. In accordance with paragraph 5.9 of the World Bank Procurement Regulations of July 1, 2016 (revised November 1, 2017 and August 1, 2018), the WB Systematic Tracking and Exchanges in Procurement (STEP) system will be used to prepare, clear, and update Procurement Plans and conduct all procurement transactions for the project. The Borrower prepared the Procurement Plan in accordance with the results provided by the PPSD, including a timeline for implementation of procurement processes, which was agreed upon with the WB as part of the Negotiations. A summary of the PPSD will include a recommended procurement approach for higher risk/value contracts; see Table 3 at the end of this annex. 18. Civil works. The project will finance civil works that include the construction of stationary control posts, rehabilitation of infrastructure for hosting an IT system, rehabilitation of user support centers, construction and provision of equipment for two small laboratories to analyze processed foods and beverages, rehabilitation of a research center, and other minor construction or rehabilitation initiatives. 19. Goods. Goods to be financed under this project will include the purchase of mobile control posts, equipment for stationary control posts, vehicles, IT equipment, IT software, hardware for an IT system, and equipment for user Page 41 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) support centers and global positioning. 20. Non-consulting services. The project will finance non-consulting services such as the implementation of communication campaigns, printing of materials, and so on. 21. Selection of consulting services. Consulting services to be financed under the project mainly concern the ICF hired for Window 1, the ICF hired for Windows 2 and 3, technical assistance, development of software for automating SENASA processes, M&E services, design and supervision of civil works for small laboratories, and external auditing, among other services. 22. Bidding procurement documents. Standard Procurement Documents shall be used for all contracts subject to international competitive procurement and those contracts as specified in the Procurement Plan tables in STEP. For bidding processes using a national market approach, bidding document and requests for quotations documents were agreed upon with the WB at Negotiations. 23. Operating costs. Operating costs refer to incremental expenses incurred in the course of implementing the project and consist of communication costs, office supplies and maintenance, equipment maintenance, utilities, document duplication/printing, consumables, insurance and the costs of travel and per diem for project staff whose travel is linked to the implementation of the project. They exclude the cost of consulting services and salaries of officials of the Recipient’s civil service. 24. The key issues and risks concerning procurement for project implementation include: (i) current structure and workload of INVEST-H; (ii) the incremental work due to new resources; (iii) the need for coordination between technical units and procurement; and (iv) the complex inter-institutional arrangements for the project. The corrective measures agreed upon to mitigate those risks are to: (i) hire an independent consultant to assess the capacity of INVEST-H in relation to its current workload, including a proposal for restructuring the entity; (ii) equip the PIU and the procurement unit with appropriate staff in terms of qualifications and quantity; and (iii) clearly define in the POM the roles and responsibilities of the technical and procurement units, and put into place an inter-institutional agreement setting forth the roles and responsibilities of the different entities. 25. Frequency of procurement supervision. In addition to prior review supervision, the WB will perform post-review missions annually with a sample of at least 20 percent of contracts. Table 3: Summary of PPSD (recommended procurement approach for higher-value contracts) Description Estimated cost Prior/post Market Procurement method (US$) Review approach CONSULTING SERVICES Hiring of ICF for Window 1 14,500,000 Prior International Quality and cost-based selection Hiring of ICF for Windows 2 and 3 12,000,000 Prior International Quality and cost-based selection Development of software to automate SENASA 1,571,814 Prior International Quality and cost-based selection processes WORKS Construction and provision of equipment for 2 5,887,727 Prior International Request for Bids laboratories Page 42 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) ANNEX 2: Costs, Financing Sources, and Beneficiaries of COMRURAL II by Component Republic of Honduras Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II Private Number Beneficiary Counterpart Totals Number of IDA commercial of Number of Component contributions funding (US$ indirect Credit finance and business beneficiaries (in-kind) (in-kind) million) beneficiaries micro-finance plans 1 Support to enhance the competitiveness, resilience, and 56.2 53.5 5.7 - 115.4 370 18,000 31,000 innovation of agribusiness initiatives 1.1 Pre-investment for the preparation of subprojects 6.7 - - - 6.7 - - - 1.2 Productive investments to improve competitiveness 49.5 53.5 5.7 - 108.7 370 18,000 31,600 through innovation Window 1: Productive linkages through (informal) groups 14.5 - 1.8 - 16.3 240 6,000 18,000 of producers (subsistence) Window 2: Productive linkages through the strengthening 25.0 28.5 1.9 - 55.4 100 9,000 7,000 of Rural Producer Organizations (transitioning) Window 3: Productive value chain and agro-industrial 10.0 25.0 2.0 - 37.0 30 3,000 6,000 development (commercially oriented) 2 Support to the modernization of Honduras’ agribusiness - - 9.7 - - 12.7 22.4 1,700 enabling environment 2.1 Improving selected public agribusiness services (ARSA, - - 8.7 - - 12.7 21.4 1,700 SENASA) 2.2 Improving public-private coordination on policies for - - - 1.0 - - - 1.0 agribusiness 3 C3 Project management support - - - 9.1 - - - 9.1 4 C4 Contingency Emergency Response Component - - - 0.0 - - - - (CERC) Total 19,700 31,000 project Totals 75.0 53.5 5.7 12.7 - Total project beneficiaries: cost: 146.9 50,700 Page 43 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) ANNEX 3: Progression of Beneficiaries from Social Protection Programs to Commercially Oriented Agriculture in COMRURAL II Republic of Honduras Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II 1. Component 1 of the project takes an economically inclusive approach to beneficiary targeting by financing three windows that correspond to three types of targeted beneficiaries, linking to existing WB operations and GoH programs, and setting targets and including activities to ensure the participation of historically marginalized groups. Beneficiaries in all windows will have the opportunity to develop business proposals for agribusiness investment (production, processing, marketing) as well as related agro-logistics services and small-scale infrastructure. Across all windows, a minimum threshold will be set for the participation of women, youth (18-30 years old), Indigenous peoples, and Afro-descendants. These thresholds represent the minimum level of participation to be achieved while also maintaining flexibility, given that subproject activities will be demand-driven. The inclusion of these groups will be promoted through procedures tailored to them and to their sociocultural reality, including outreach and technical assistance for the preparation of proposals (Subcomponent 1.1). In addition, within Window 1, a target for including beneficiaries of existing social programs is set to enable beneficiaries to graduate out of poverty; these beneficiaries may overlap with the abovementioned thresholds for women, youth, Indigenous peoples, and Afro-descendants. Measured in the Results Framework, these design aspects will help to address the low levels of labor force participation and economic opportunity for women and other historically marginalized groups. Business plan Box 3.1: Climate-smart approaches promoted to selection across windows will also prioritize the inclusion support resilience under Component 1 of climate-smart approaches appropriate to the type of The selection of business plans for funding under the three beneficiary under each Window (see Box 3.1). Clear windows of Component 1 will give priority to plans that selection criteria and processes for subprojects will be include climate-smart approaches appropriate to the type elaborated in the POM. Also, the POM will describe the of beneficiary under each window. Examples include: detailed procedures for coordination and collaboration • Soil and water conservation management practices. with public sector institutions and, when applicable, with • Pasture management, silvo-pastoralism, and fodder commercially oriented public credit institutions (i.e. production. potentially BANHPROVI and others). • Improved livestock management (health, genetics, feeding). 2. Window 1 (subsistence agriculture) will target • Farmer-led irrigation and small-scale collective informal groups of farmers for the creation of productive irrigation schemes. and agro-logistics alliances. This window has a minimum • Improved water harvesting and storage in small, excavated ponds. target for reaching participants in PROSASUR, a program • On-farm drip and sprinkler irrigation technologies. that focuses on the extreme poor. It will also seek to • Low-cost, energy-efficient water pumping systems coordinate with the Ministry of Development and Social (including solar). Inclusion to identify and target a minimum number of • Biodigesters (with livestock manure) for renewable beneficiaries who currently participate in the Bono Vida energy. Mejor program (supplementing, not replacing, the • Energy-efficient agro-logistics infrastructure such as support they receive under this program) and who have (cold) storage, transportation, handling, and processing the potential to enter into productive investments of an facilities. incipient commercial nature. In principle, the eligibility • Facilities for composting crop residues. criteria for this window will be the same as the eligibility criteria for the PROSASUR Agriculture Business Plans; selection of participants will potentially draw on data provided by the National Center for Social Sector Information (CENISS), which currently is one of the sources used by PROSASUR Page 44 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) to select beneficiaries. Investments under this window will focus on innovative approaches to improve production and management capacities in ways that increase productivity and profitability, and on the adoption of climate-smart practices and approaches, particularly farmer-led irrigation and small-scale collective irrigation schemes in the Corredor Seco, but also sustainable pasture management, silvo-pastoralism, resilient fodder production strategies, improved livestock management (health, genetics, feeding), energy efficiency measures, and soil and water conservation management practices. 3. Window 2 (transitioning agriculture) will target formal groups of farmers for the creation of productive and agro-logistics alliances. This window seeks to reach producers who practice agriculture as their main livelihood, are organized into formal RPOs, and aim to “transition” from subsistence to commercially oriented production. This window is an extension of the ongoing COMRURAL model, and it will use the same criteria for selecting beneficiaries. Investments under this window will focus on innovative approaches for improving access to markets (for example, by increasing production and competitiveness sufficiently to market surplus production, encouraging diversification, and increasing value addition) and on adopting climate-smart practices and approaches both on the farm and in agro- logistics throughout the value chain. Examples of climate-smart approaches include improved water management through drip/sprinkler irrigation; low-cost and energy-efficient water pumping systems (including solar); biodigesters (with livestock manure); energy efficient cold storage, handling, and processing facilities; and facilities for composting crop residues. 4. Window 3 (commercially oriented agriculture) will target commercially oriented groups of farmers for the creation of productive and agro-logistics alliances. This window seeks to reach formal groups of farmers who are already commercially oriented and have the potential to scale up and contribute to job generation and other aspects of rural economic growth. Beneficiaries will be selected for Window 3 based on the same criteria used for Window 2, in addition to criteria related to the potential to create jobs. Investments under this window will focus on innovation in scaling up and expanding agribusiness to create jobs and stimulate the rural economy and on generating climate- smart approaches for developing agro-logistics services and infrastructure. Examples of climate-smart agro-logistics approaches include innovation centers (to foster innovation in the provision of support services to value chains and other aspects of rural transformation), technology demonstration parks, agricultural growth corridors, and innovative mechanization services (“Hello Tractor” is one potential model). The activities financed under this window will also contribute to tax revenue and agricultural exports, as seen under the ongoing COMRURAL. 5. Figure 3.1 on the next page shows how beneficiaries can progress from social protection programs to commercially oriented agriculture under Subcomponent 1.2. Page 45 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) Figure 3.1: Progression of beneficiaries from social protection programs to commercially oriented agriculture under Subcomponent 1.2 Page 46 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) ANNEX 4: Theory of Change – COMRURAL II Republic of Honduras Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II 1. Figure 4.1 depicts the theory of change for the proposed project, and Table 4.1 summarizes the underlying assumptions. Figure 4.1: Theory of Change – COMRURAL II Page 47 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) Table 4.1: Assumptions in COMRURAL II Theory of Change and Measures to Reduce Risk Assumption Measures to Address Assumption and Reduce Risk Beneficiaries are motivated to organize and establish The project will continue implementing a communications and stakeholder more competitive agribusinesses. engagement strategy for small farmers to highlight the technical and financial benefits of organizing. Financial partners are willing to co-finance business The project will continue engaging closely with financial partners to foster the proposals. financial inclusion of organized small farmers. Public services that undermine overall national INVEST-H and WB will continue dialogue with other development partners to competitiveness (such as energy, customs, security) promote complementarity of investments. are being enhanced by the GoH with support from development partners. Agribusiness competitiveness is affected by The project will support measures (institutional, technical) to mitigate climate risks increased climate vulnerability. and remain flexible to respond to potential climate-related emergencies. There is continued political will to implement the The implementing agency and task team will regularly report to high-level project. authorities to highlight project impacts, achievements, and relevance. Page 48 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) ANNEX 5: Coordinating COMRURAL II with Other World Bank Water Resource Management Initiatives Republic of Honduras Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II 1. COMRURAL II will coordinate with other WB water resource management initiatives. As illustrated in Figure 5.1, COMRURAL II, like the ongoing COMRURAL, will promote interventions at the level of primary agricultural production (farmer plots and farms) aimed at adding value and improving access to markets. Based on demand, COMRURAL II will also offer the possibility of including small investments Figure 5.1: Planned interventions of COMRURAL II and in water (water solutions) within business plans. Note that the Water Security Project in the Dry Corridor COMRURAL II will not work on watershed management (protection of sources, reforestation, and so on), Future intervention of the Water Security Project in CS administration and planning of water resources (regulation of water law, information system, granting of rights for Physical Interventions in the territory different uses, and similar activities), the quantitative Planned Interventions (balance of use) and qualitative (pollution) aspects of water of COMRURAL II resources, or on large- or medium-scale hydraulic (river basins) investments (multipurpose dams, medium or large irrigation systems, drinking water and sanitation systems, and so on). Rather, it is understood that those activities are being considered under the Water Security in the Dry Corridor of Honduras Project (P169901) under preparation which reflects results of technical assistance support provided to Upper and Mid-Sections of River basin Lower section of river the Pilot Program for Climate Resilience, implemented by at institutional Interventions INVEST-H. Reform / Institutional level Reform / Modernization of Water Resources Administration modernization of Agricultural sector 2. COMRURAL II will give priority to consolidating existing water management initiatives and to the productive use of water systems that are currently idle. As certain projects in the Corredor Seco close in the coming months and years— the United States Agency for International Development (USAID) project in 2019, PROSASUR in 2021—COMRURAL II will have a primary role to play in consolidating irrigation development initiatives, such as the 126 subprojects financed by the Alliance for the Dry Corredor-USAID and the 150 subprojects of PROSASUR. That role includes consolidating their productive capacity and market access, and technical support for sustainable governance of irrigation systems. The COMRURAL II calls for proposals will include an exhaustive list of "water solutions" eligible for support. Especially for the Corredor Seco and Windows 1 and 2 (subsistence and transitioning), this list should include water solutions at the source (groundwater, alternative sources, and reuse) as well as the types of investments that can make use of those water solutions. The list of alternatives will be based on vast national and international experience with these solutions. The project will favor collective and small-scale action to amortize the costs of investing in collective water infrastructure over a wider area and among a greater number of beneficiaries. 3. To promote effective collective water solutions in the Corredor Seco, subsistence farmer organizations in particular must be strengthened. COMRURAL II will need to make a strong investment in building the capacities of subsistence farmer groups before (and in parallel with) the promotion and implementation of business plans that include water solutions. Page 49 of 50 The World Bank Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II (P168385) ANNEX 6: Map of Project Area Republic of Honduras Integrating Innovation for Rural Competitiveness in Honduras - COMRURAL II 1. Figure 6.1 presents details on the area where the proposed project will operate. Figure 6.1: Area of the proposed COMRURAL II Page 50 of 50