Ministry of Foreign Affairs, Department for European Neighbourhood File no.: 403..1-1-3.

Internal Grant Committee Meeting 11 December 2013 Agenda Item no.: 5

1. Title: Inclusive Economic Development for Young Entrepreneurs in Moldova

2. Partners: International Fund for Agricultural Development (IFAD)

3. Amount: 30,350,000 DKK

4. Duration: January 2014 to January 2018 (48 months)

5. Previous Grants: Youth Entrepreneurship Rural Financial Services and Agribusiness Development Project, 2010-13, 27 million DKK.

6. Strategies and policy priorities: Strategy for the Danish Neighbourhood Programme 2013-17, Growth and Employment 2011-2015, Strategy for ’s Development Co-operation, “Right to a Better Life.”

7. Danish National Budget § 06.32.11.10.41, Naboskabsprogrammet, account code: Programindsatser

8. Desk officer: Ole Dahl Rasmussen

9. Head of Department: Michael Suhr, Department for European Neighbourhood

10. Summary: is largely a rural phenomenon, with rural poverty rates at 30%. The rural youth is particularly disadvantaged and migrates to a large extent. The present project aims to enable the poor rural youth to raise their incomes by increasing access to financial services. This in turn will contribute to job creation. It does so by providing loans together with matched grants to young entrepreneurs, in combination with a variety of training and technical assistance. This will generate income and create employment and will support a necessary transformation in Moldovan agricultural and rural development. During the last decade, growth in Moldova has been driven by , which have financed an increase in consumption and imports. For future growth, employment and poverty reduction, increased productivity is needed, in particular in , which accounts for 11% of the country’s GDP. The programme is implemented in a delegated partnership with IFAD who has operated a similar programme since 2011. During the last two years, this programme has led to the establishment of more than 270 new businesses with over 760 employees. 2

Objective and problem formulation The objective of the Danish support is to increase living standards for Moldova’s rural poor by increasing access to financial services for rural youth entrepreneurs, age 18 to 35. Combined with training in business management and technical assistance in agriculture this will expand opportunities for young people in rural areas. Through business growth and job creation, the intervention will indirectly benefit the rural poor more generally.

The relevant background is the situation regarding poverty in Moldova in general and rural poverty in particular. As in most post-Soviet countries, poverty increased immediately after independence. This trend was reversed in 1998, and during the last decade Moldova has experienced economic growth and a decline in poverty, with 30% of the population living below the absolute poverty line in 2006 and 17% in 2012.1 Growth has been driven by an increase in remittances, which accounted for 23% of GDP in 2012 and made Moldova particularly vulnerable to the financial crisis.

Poverty rates are highest in rural areas, where 30% fell under the poverty line in 2010, compared to 10% in urban areas. There is a need for Moldova to reorient its rural growth away from a -based model with widespread subsistence agriculture, and toward an -based economy with higher productivity. Increase in agricultural productivity is a key priority by the Government of Moldova as a means to reducing poverty. A more inclusive financial sector is a part of this priority.2 In this context, the present programme aims to increase rural productivity through a combination of financial support and technical assistance. In particular, the intervention will increase access to finance by making matched grants available, which will be provided together with loans through commercial financial institutions. At the same time, the programme will build participants’ competences within both business management and agriculture through a combination of courses and supervised mentoring.

The Danish support targets youth, since this group is particularly challenged due to lack of collateral and no credit history, while at the same time being generally receptive to new ideas and technologies. A specific loan component for women has been added to remedy the fact that few women applied in the previous round.

Apart from the strategic alignment with the government’s priorities, Denmark’s support is integrated into a larger programme implemented by the Moldovan Ministry of Agriculture and Industry and International Fund for Agricultural Development (IFAD). The development objective of the larger programme is to create inclusive rural economic development and employment. This larger programme is organised in three components: climate change resilience, rural finance and infrastructure. The outputs supported by Denmark, and described in the following, falls under the second component of the larger programme, and are integrated into the overall programme in terms of implementation, management and reporting.3

1 National Bureau of Statistics of the Republic of Moldova (Millennium Development Goals by Indicators and Years) and World Development Indicators. The poverty line is set at minimum required consumption, equivalent to 2282 kcal/person/day. 2 Agriculture and Rural Development Strategy 2014-2020, Government of Moldova 3 The three components supported by Denmark falls under outputs 2.1, 2.4 and 2.5 in the project LFA, page xi in the project design report. These outputs cover young entrepreneurs as well as entrepreneurs more generally. The appraisal 3

Resource efficiency The programme is a continuation of a previous programme and thus the implementation structures are already in place. A consolidated programme implementation unit in the Ministry of Agriculture and Food Industry administers all components of the programme, including the Danish support, thereby avoiding a separate implementation unit for different areas. This increases efficiency. Administration cost constitutes less than 5% of the total programme budget.

To ensure harmonisation with other donors, a series of consultations was carried out prior to programme formulation, including the EU, the World Bank and USAID. The EU provides budget support to Moldova within the area of rural development. This programme will most likely continue in the next programming period 2014-20 under the European Neighbourhood Programme for Agriculture & Rural Development. Also, IFAD continues to play and active role in the joint donor coordination in Moldova and works continuously to insure close alignment to national development policies.

Challenges and underlying reflections Rural entrepreneurs face a number of different challenges. Limited access to financial services in rural areas has been identified as the single most important constraint to business development in Moldova by the World Bank.4 This is caused by risk aversion on behalf of the banks, lack of collateral, challenges in valuation of existing collateral and, lastly, a so-called maturity mismatch: Loans in demand are long term, in particular for agriculture, whereas deposits are short-term, partly because the pension system is under-developed.

Some related challenges include sensitivity to droughts, which affected the country in 2004, 2007, 2009 and 2012, low quality infrastructure and weak market linkages. Climate change resilience and infrastructure are addressed by the complimentary components of the larger IFAD programme.

Project description The sector and its importance for combating poverty The sector is characterised by small family farms, with 390,000 small family farms with an average size of 1.5 hectare. Commercialisation and diversification require larger farm sizes, which will push some of the least productive farmers to seek employment elsewhere. The present intervention will seek to optimise the poverty impact of this process by promoting both investment and job creation among young entrepreneurs.

At the same time, ten per cent of the Moldovan population work abroad. Two thirds of these come from rural areas and they belong mainly to the younger population. Because of this, only 17% of the rural workforce is between 15 and 34 years old, whereas this group constitute 25% of the workforce in urban areas. Losing skilled and entrepreneurial young people impedes rural productivity as well as future rural economic growth and thus poverty reduction.

determined that the Danish component was sufficiently identified in the project document and that reporting should be done at an aggregate level. 4 IFC Enterprise Survey 4

Due to the high rural poverty rate, an increase in income for the rural population translates directly into a decrease in poverty. Agriculture is also important for the economy as a whole. It accounted for 11% of the country’s GDP in 2012 and employed 26% of the active labour force.

Priority of the sector Developing a high value agricultural sector is one out of ten key challenges that the Ministry of Agriculture and Food Industries has identified in its list of priorities for the period 2012 to 2015. Another is the development of a modern market infrastructure. Finance for agriculture is important in this regard, since investment in production is a necessary first step toward diversification and commercialisation.

Principal stakeholders The main stakeholders in the implementation of the programme are, apart from the beneficiaries, the Ministry of Agriculture and Food Industry and IFAD. The government has exempted the project from taxes and duties worth 19 million DKK to the overall programme (total grant component of 54 million USD). A programme implementation unit is situated within the ministry, which makes coordination with other initiatives easy and entails capacity building of the ministry. The finance component is implemented through commercial financial institutions.

The support is divided into three components:

Component 1: Increased investment finance for rural youth entrepreneurs This component consists of matching grants for young entrepreneurs, age 18 to 35 for in agriculture and agricultural businesses. The grants are provided as a supplement to loans and the maximum grant share is 40% of the total grant and loan package. The maximum grant amount is 51,000 DKK and borrowers must provide a down payment of 10% of the grant and loan package. Loans and grants have a maturity of up to eight years, which enables investments in vineyards and orchards. The loans are provided by the participating commercial financial institutions, something which ensures that the projects are assessed on a commercial basis.

Component 2: Business plan development An application for a loan and a grant must include a business plan prepared by the applicant. Previous experience has shown that lack of skills in business plan development can be a barrier to productive investments, so applicants can furthermore apply for financial support for business plan preparation. The support covers a maximum of 2,100 DKK and maximum 50% of the total cost for business plan development.

Component 3: Business training and technical assistance within specific value chains Apart from the business plan development, the programme offers business training and agricultural training. The former deals with general business management skills, including business management and finance. The latter focuses on facilitating the development of new types of agriculture and agri-businesses in rural areas. For this purpose, a training package will be offered by private providers within selected value chains on topics such as horticulture 5

production, animal husbandry, field crop production and post-harvest handling. The package includes courses, field demonstrations, study trips and on-farm consulting.

Programme management The programme is implemented in a delegated partnership with IFAD, who has implemented activities in Moldova since 1999 and has a close partnership with the Ministry of Agriculture and Food Industries as well as with the government. The programme will be supervised by a steering committee with representatives from the Ministry of Agriculture and Food Industry, the Ministry of Finance, the Ministry of Economy, the Aid Coordination Unit, State Chancellery, the Parliament’s Agricultural Committee and the . IFAD is not member of the national steering committee, as this is a Moldovan public entity, but IFAD closely assesses decisions taken by the steering committee. The Danish Ministry of Foreign Affairs will participate in the annual IFAD monitoring missions (reviews) and IFAD will as delegated partner keep the Danish Ministry of Foreign Affairs informed about progress and program assessment. The Danish Ministry of Foreign Affairs may, together with IFAD, arrange to take part in meetings with the steering committee, and the Ministry will receive bi- annual reports directly from the consolidated programme management unit.

Previous results Denmark has supported activities related to young entrepreneurs since 2011 as a part of IFAD’s Rural Financial Services and Agribusiness Development Project. This project ends on December 31, 2013. Since the beginning in 2011, the programme has financed 334 young entrepreneurs and created more than 270 new businesses. Even though 334 is in fact below target, this is mainly due to a slow start. In September 2012, less than 100 young entrepreneurs were financed, since it took longer than expected to create awareness among the potential beneficiaries and to establish the necessary grant-making procedures together with the participating banks. In the period from September 2012 to September 2013, more than 200 entrepreneurs were financed, which shows that procedures are now in place and demand is strong. The 334 young entrepreneurs employ a total of 768 persons and monitoring shows that financial institutions are now more active in rural areas. These results are expected to increase as businesses grow. Furthermore, the programme contributed to public awareness on rural opportunities through four TV presentations. On the implementing side, the structures were essentially the same as in this project, namely anchored in a programme implementation unit under the Ministry of Agriculture and Food Industries and licensed commercial banks to handle the loans and grant.

Apart from the positive results just mentioned, there were a number of challenges. Monitoring reports showed that the grants and training attracted only a few women. This has given rise to changes that are aimed at attracting rural women, particularly parts of the matching grants allocated specifically for women and expanding to non-agricultural activities. Monitoring reports will be disaggregated by gender. Moreover, the age limit is increased from 30 to 35 to allow for more returnees to apply for grants. Finally, applicants must be the legal owner of at least 50% of the business, to avoid financing de facto parents’ companies.

Special considerations and priorities The present support is in accordance with the Danish Neighbourhood Strategy 2013-2017, in particular its second major objective which includes sustainable and inclusive economic 6

development, skills development and job creation. Furthermore, several of the issues mentioned in Denmark’s strategy for development co-operation, The Right to a Better Life, are taken into account in the programme. Apart from supporting the general goal of promoting economic rights, the programme will increase income and job creation especially for the youth.

Budget for the Danish contribution Year (DKK ‘000.) 2014 2015 2016 2017 Total Component 1: Increased investment finance 4,400.7 8,801.6 8,801.6 3,727.7 25,731.6 Component 2: Business plan development 275.1 473.1 385.1 320.0 1,453.3 Component 3: Business training and technical 385.1 880.2 715.1 834.7 2,815.1 assistance Review 350.0 350.0 Total 5,060.9 10,504.9 9,901.8 4,882.4 30,350.0

The programme budget for the larger programme, which the present programme is a part of, is 192 million DKK, of which 138 million DKK is loans and the remaining 54 million DKK is grants funded by IFAD, World Bank and the Danish Ministry of Foreign Affairs. In addition, the project is exempt from taxes and duties worth 19 million DKK and the beneficiaries themselves provide 41 million DKK.

Significant risks The following risks are described in accordance with Guideline to Risk Management (2013). Contextual risks include political uncertainty and macroeconomic instability. Political uncertainty is mitigated through the programmes unanimous support across the political spectrum, including the communists. Macroeconomic risks, for example eurozone recession or stagnation in CIS-countries, are mitigated through the government’s National Development Plan, in particular improvement of the business climate and financial systems. Also, an eventual association agreement with the EU will work in this direction. A related risk in this regard is the chance that , in the event of an association agreement between Moldova and the EU, will implement punitive measures, for example changes in the work permits temporary Moldovan workers in Russia leading to a decrease in remittances. Another possibility is an increase in the price of gas. The economic effects of this will be severe, in particular in the short term. Furthermore, such initiatives will only strengthen the need for Moldovan agriculture to become more productive. Programmatic risks include limited capacity of entrepreneurs to actually carry out investments with support from the programme or negative effects of the programme on the financial market, e.g. due to crowding out of commercial funding by the subsidized loans. The former is unlikely since the current project has seen a large demand for the combination of matched grants and loans, particularly from young people, and only one out of 325 has been written off until now. Crowding out of commercial funding could potentially be very damaging, but is mitigated by the fact that implementation is done through existing commercial institutions, thus ensuring their presence in the implementation areas. Finally, an institutional risk is too low capacity among the service providers for technical assistance. To mitigate this, a specific budget line has been included to cover capacity building of these private service providers. 7

Annex 1 - Partners Ministry of Agriculture and Food Industries, Consolidated Programme Implementation Unit (CPIU). The Ministry plays a central role in the economy of Moldova, in particular in relation to rural areas. Ministry of Agriculture and Food Industries and IFAD have collaborated closely in previous phases of the programme. The consolidated programme implementation unit is established to ensure this collaboration and it has documented its ability to efficiently manage the programme.

Ministry of Finance, Credit Line Directorate The credit line directorate in the Ministry of Finance has administered the return of funds on concessional loans from the World Bank and IFAD, among others. The government’s contribution to the loan component comes from these funds.

Commercial financial institutions Moldova’s banks have managed the financial crisis well. One reason is tight credit policies. This means that loans require large amounts of collateral. This means that young entrepreneurs, who do not have much collateral, have no access to loans. The banks have experience from previous phases of the programme and will play a main role in implementation. Banks in Moldova were criticised in 2012 for weak corporate governance. For this reason, staff from the consolidated management unit visits participating financial institutions and beneficiaries after each loan disbursement to ensure the proper use of funds.

International Fund for Agricultural Development (IFAD) IFAD was established in 1977 with the mandate to eradicate poverty in rural areas. IFAD is being funded by donations from the 165 member states, special contributions, inflows from loans repayments and investment income. The Fund works in more than 80 countries and the volume of yearly commitments for new projects and grants amounts to approximately USD $500 million. The first IFAD project for Moldova was approved in 1999. Experience from previous projects is that implementation is effective and supervision is thorough. Under the Neighbourhood Programme, Denmark finances IFAD-run operations in .

Private training providers A number of training providers will be identified through a procurement process once the programme is approved.

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Annex 2 - Background facts: Surface Area 33,700 sq. km Population 3.56 million (2012) GDP 10.511 billion USD (2011 estimate) GNI per capita 2.250 USD (2012) GDP per capita 5.600 USD (2012) Annual GDP growth 3.8 % (2012) Unemployment rate 6.9% (2012 estimate) 0.660, rank 113 of 187 (2012 Doing Business Index Rank 86 of 189 (2013) Transparency International Index 36/100, rank 94 of 176

Economic development Moldova is approaching middle-income status, and based on its growth rate of 6.4 percent in 2011, the economy has made a full recovery from the 2008-2009 global financial crisis. Growth has been led by higher value of exports from increased access to EU markets and higher prices for agricultural commodities. The massive inflow of remittances plays an important role in Moldova’s economy. However, remittances are expected to decline. During 2014 it is possible that Moldova will sign an association- and free trade agreement with the EU, which will further increase export. This is, however, dependent on the reactions from Russia, which is Moldova’s second export market.

Poverty situation With a total of 22 per cent of its residents living below the national poverty line – the rate topping 30 per cent in rural areas – Moldova is Europe’s poorest country.5 Between 2003 and 2010, the number of people classified as poor fell from 29 per cent to 22 per cent of the population. However, throughout the growth period, poverty remained more deeply entrenched in rural areas. An estimated 30 per cent of the rural population is now affected by poverty, as compared with 10 per cent in urban areas.

Political scene In March 2012, the Constitutional Court validated the election of Nicolae Timofti as President of the Republic, ending a long period of political and constitutional deadlock and paving the way for political stabilisation and large-scale reforms. However, in February 2013, a battle between the members of the ruling coalition called into question the benefits achieved during 2012. This battle ended with the new government in summer 2013.

Human rights situation According to EU’s latest progress report from 2013 some areas of fundamental rights and the legal framework have improved and encouraging legislation has been adopted in the fields of access to justice, anticorruption, non-discrimination, and social inclusion. However, the right of LGBT persons to freedom of assembly and other fundamental rights remain an issue.

5 Measured using the food poverty line, set at a consumption level equivalent to 2282 kcal/person/day, which is the required consumption for an adult. Data from World Bank World Development Indicators. If instead the 1.25 PPP poverty line is used, less than one per cent is poor. Since this line was created as the average of the 15 poorest countries’ poverty lines based also nutrition, and since most of these countries do not include heating as part of the budget, the local Moldovan calorie poverty line seem more appropriate in this context. 9

Annex 3 - Indicators

As mentioned above, the components that receive Danish support are part of a larger programme. Monitoring is integrated in this larger programme. For this reason, the numbering of the indicators below corresponds to the numbers in the programme. Moreover, the goal of the entire programme, as well as selected objectives and indicators are included to illustrate the role of the Danish funding, even though the Danish funding will not in and of itself achieve these goals. The base year is 2014. Since all indicators are measured at the unit of the entrepreneur and since the specific entrepreneurs will not be identified until later, baseline data, particularly regarding existing employment in the businesses, will be collected as entrepreneurs join the programme. Abbreviations are explained below.

Overall programme: Narrative Summary Key Performance Indicators Means of Verification Assumptions / Risks Goal: To enable the poor rural . 62,000 people or 23,850 . National statistics . Continued people to raise their Households with (MEC/NBS Poverty Government incomes and strengthen improvements in asset Profiles) commitment to pro- their resilience. ownership . Household Surveys poor macro-economic policies . 62,000 or 23,850 Households . Impact assessment with increased income and studies (e.g. PCR, . Increased uptake and improved food security: thematic studies, control adaptation of resilient vs. treatment group production evaluations, comparison technologies with national average) . Maintenance of conducive policy for Programme . Increase in turnover (40%) . Banks quarterly and development of Development Objective and profits (8%) of annual reports private sector Inclusive rural economic supported entrepreneurs, . Internal M&E system agriculture and development and enterprises and farmers from PFIs. agribusiness employment creation . 1500 increase in direct and . Baseline survey . Conducive financial indirect employment creation (benchmark). sector policy and . 50% increase in private . Farmers and rural macro-economic sector investments in enterprises interviews framework maintained targeted rural entities. . Government agricultural statistics. . Enterprise statistics, including farms . Household interviews

Outcome 2 Key performance indicators for the parts which the Danish component contributes to Narrative Summary Key Performance Indicators Means of Verification Assumptions / Risks Outcome 2: . 1170 additional employees in . Monitoring reports . No major disruption Inclusive Rural Finance companies owned by young . Quarterly and annual of Moldovan exports and Capacity entrepreneurs, measured reports of participating . Continued macro- Development from when they receive the financial institutions economic framework Component: Enhanced first loan. conditions and access to financial services . An average of 7,000 USD is improved conditions for rural MSMEs and provided, additionally and for doing business youth entrepreneurs without support from the programme, by commercial financial institutions in loans to companies owned by young entrepreneurs within a period of three years after the entrepreneurs have 10

Narrative Summary Key Performance Indicators Means of Verification Assumptions / Risks received the first loan.

Outputs: . USD 7.5 million loans to at . Quarterly and annual . Financial institutions 2.1 Increased investment least 470 young statistics of the National are willing to gradually finance for rural entrepreneurs (>30% Commission for lower their collateral youth entrepreneurs female) Financial Markets requirements and MSMEs by PFIs . USD 4.4 million in matching . Quarterly reports by 2.4 Micro entrepreneurs grants to the young ODIMM on the credit supported with entrepreneurs) guarantee scheme business plan . At least 300 young development and entrepreneurs having business training received business plan 2.5 Young entrepreneurs support (>30% female) receive pre- and post- . At least 260 young investment training entrepreneurs having and support received pre-financing business training, technical training or other support (>30% female) . 470 young entrepreneurs having received post- financing technical training (>30% female)

Abbreviations CLD – Credit line directorate MOF – Ministry of Finance MSME – Micro, medium and small enterprises NBS Poverty Profiles – National Bureau of Statistics poverty profiles ODIMM – Organisation for Small and Medium Enterprises Development PCR – Programme completion report PFIs – Participating financial institutions 11

Annex 4 - Approved response by representation to summary of recommendations in the appraisal report

N/A 12

Annex 5 - List of relevant supplementary material: Desk Appraisal Report – Danish Support to the Agricultural Sector Moldova (2014-19), Danish Ministry of Foreign Affairs

Note - Joint Danish/IFAD supervision of the Youth Entrepreneurship Sub-component under the IFAD financed Rural Financial Services and Agricultural Development Project in Moldova, September 20, 2012

IFAD 2013, Inclusive Rural Economic and Climate Resilience, Final Design Report Agriculture and Rural Development Strategy 2014-2020, Government of Moldova

Agriculture and Rural Development Strategy 2014-2020, Government of Moldova