Independent Evaluation

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Evaluation of the Rural Enterprise Development Project in the Republic of Uzbekistan
Completed: 2006

ADB provided the Government of Uzbekistan a $50 million loan in December 1996 to support the Government's development thrusts in agro-industry. Responding to the Government's strong request, ADB fast-tracked the processing and approval of this first loan to Uzbekistan with two objectives in mind: (i) rehabilitate and modernize agroprocessing small and medium enterprises to increase exports, and (ii) provide collectives and family farms with new dairy micro-processing facilities to increase value added and rural income.

An accompanying advisory technical assistance was approved for the institutional strengthening of the National Bank for Foreign Economic Activity of the Republic of Uzbekistan (NBU). This evaluation looked at three major outputs:

• Agroprocessing subprojects
• Enterprise shares
• Project management and institutional development

Summary of Findings

• The Project is rated 'irrelevant'. Despite its clear support to the Government's priority, the Project manifested inadequacies in at-entry assessments of the financial sector and the NBU, inappropriateness in at-entry assessment of agro-processing industry potential, inadequacies in financial covenants and TA scope, inadequacies in foreign exchange risk analysis and risk mitigating measures, and inadequacy in ADB policy dialogue with the Government on financial sector reforms.



• The Project is assessed 'less effective' on account of the underperformance of 12 out of 28 subprojects leading to less-than-expected outcomes.



• The Project is rated 'less efficient' due to its less-than-satisfactory subloan repayment performance, marginal improvement of NBU's overall operational efficiency despite improvements in NBU's small and medium enterprise credit allocation, and limited subproject contributions to productivity gains and organizational innovations.



• Sustainability is assessed as 'likely to be sustainable'. As at end 2004, nearly 60% of NBU's loan portfolio is classified as substandard, doubtful, or loss. NBU's deposit mobilization remained relatively small. It needs to intensify the operational and financial restructuring of underperforming loans to restore its financial viability.

Lessons Identified

• Fast-tracking loan processing and approval could greatly undermine the full understanding of the country and sector context and the capabilities of government officials for project decision making and implementation.



• In designing financial intermediation loans in transitional economies, detailed institutional analysis of financial intermediary and effective policy dialogue with the Government are essential.



• Inclusion of risk management in loan covenants could address and complement the executing agency's inadequacy in loan-loss provisioning for state-guaranteed loans.



• Awareness of the general weakness in small and medium enterprise corporate and financial sector governance could lead to more well-founded project decisions.



• Project experience underscores the need for ADB to consider an alternative approach in creating a functional monitoring framework for financial intermediation loans that balances increased administrative costs with the need for, and use of, the data collected.