Additional Financing (AF) to the Innovation for Rural Competitiveness Project (COMRURAL III) - GAFSP Financing

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Context:Honduras has been experiencing broadly modest, volatile growth and facing a series of structural challenges towards achieving inclusive and sustainable economic development. This modest economic growth has been insufficient to reduce poverty and Honduras remains the third poorest country in Latin America and the Caribbean region. The rural poor rely largely on low-productivity agricultural activities for income, have limited access to basic services, and are highly vulnerable to natural and macroeconomic shocks. Around 70 percent of indigenous populations live in poverty and female labor force participation in Honduras (52 percent) is far lower than the male rate (86 percent).The agri-food sector is one of the key pillars driving the Honduran economic performance. The agriculture sector accounted for 12 percent of the country’s Gross Domestic Product (GDP) in 2018, further expanded to around 23 percent when considering the backward and forward linkages with other sectors. The sector provides 30 percent of the country’s labor force. However, sectorial performance is undermined by low productivity and value addition, vulnerability to climate change, low technical and managerial capacity to start and develop agribusiness, limited access to financial services and to farm and organizational innovations, weak public sector institutional capacity to provide key services and improve the agribusiness enabling environment, insecurity over land ownership and food security issues. The sector is mostly composed of small-scale productive systems (92 percent), formed by family farmers, whose operations are characterized by low scale, productivity and competitiveness, low levels of organization and income generation, and high vulnerability to climate and internal market shocks. Parent Project The parent project COMRURAL III will contribute to economic recovery of smallholder family farmers by improving competitiveness, resilience and innovation in prioritized value chains, towards a more sustainable agri-food system. The design is based on turning the crises into an opportunity to build-back better the national agri-food system and prevent further nutritional and food security deteriorations. Competitiveness will be driven by environmentally friendly and inclusive investments in productive alliances to improve the ability of family farmers to increase productivity and value addition to successfully compete in the markets by meeting customers’ demands for price, quality, and quantity of products. The project will focus on supporting smallholder family farmers and their organizations to: (i) identify and prepare agribusiness plans that rely on productive alliances with key technical, commercial, institutional, and financial partners; (ii) improve the human capital in rural producer organizations for leading the transformation of the agri-food system; an d (iii) simplify and modernize the public services that are success factors for the productive alliances. The project will also help creating an immediate demand for jobs in the agribusiness sector as one of the key drivers for the country to restore and strengthen its economic dynamism, to mitigate the socioeconomic impacts of the crises. The direct beneficiaries will include primarily: (i) households lead by farmers or agri-food entrepreneurs who will participate in the project through the preparation of investment sub-projects, preferably as part of a producers’ group, association or cooperative and (ii) public and private sector institutions and their staff that play a primary role in facilitating and improving the agri-food system’s performance. The proposed project will also have indirect benefits for a much broader range of stakeholders in the agriculture sector through (i) en hancing the overall agriculture sector business environment by modernizing the public entities that provide services to those engaged in the agriculture sector (over 300 thousand families or nearly 1.5 million Hondurans); and (ii) helping improve rural productive infrastructure within the prioritized territories.The parent project is organized in four components:Component 1 will continue promoting the COMRURAL productive alliance model to improve the competitiveness, resilience, and inclusion or family farmers and their organizations within strategic value chains and to mobilize the co-financing of these investments by private financial institutions. The participatory design and implementation of the subprojects (business plans) will be supported with technical assistance for agribusiness development and a matching grant scheme to unlock the provision of co-financing from private financial institutions. Subprojects will be identified and selected through a demand-driven and transparent mechanism that will ensure the participation and inclusion of women, indigenous people and afro descendants, and the prioritization of climate-smart and nutrition-smart innovations, as well as farm and agrologistics innovations to boost productivity, value addition, food processing and bio-sanitary and safety procedures, food and nutrition security, and digitalization of agriculture.Component 2 will help improve the enabling environment of agribusinesses by supporting the modernization and strengthening of selected public sector services that are key to improve the performance and competitiveness of agribusiness in agri-food system of Honduras. The component will support this type of improvements in the Ministry of Agriculture and Livestock (SAG), National Service for Agri-food Health and Safety (SENASA), the Sanitary Regulation Agency (ARSA), amongst others.Component 3 will finance the overall project management including: (i) project management and coordination among different stakeholders; (ii) project monitoring, evaluation, and impact assessment; (iii) project fiduciary administration, internal controls, and audits; (iv) project environmental and social risk/safeguards management; (v) a citizen’s engagement mechanism; and (vi) project-related studies. Component 4 will be a Contingency Emergency Response Component (CERC) that will provide for an immediate response to eligible emergencies. In the event of such an emergency (the mechanism for declaration of an eligible emergency would be agreed between the World Bank and the Government of Honduras), this component will finance emergency activities and expenditures through the reallocation of funds from the project.Proposed Additional Financing: The GoH requested financing from GAFSP in order to respond to the urgent need for improving food security in the AF target region, Moskitia-Costa Atlantica due to long standing development challenges and recent weather shocks. The region was severely affected by Tropical Storm Julia in October 2022 and in a rapid assessment conducted the same month, more than 20 percent of the inhabitants in Gracias a Dios, equivalent to 24,000 people, were found to be facing serious livelihood and food security challenges due to the severe effects of the storm . Above-average levels of rainfall have also had devastating consequences and exacerbated pre-existing multi-sectoral needs throughout the country, and Moskitia-Costa Atlantica was one of the hardest-hit. Excess rainfall has caused significant crop loss, with nearly 25,000 hectares of crops affected, causing food shortages and price surges. The latest Integrated Food Security Phase Classification (IPC) projections for June to August 2022 found the Moskitia-Costa Atlantica region faced the highest severity of crisis-level food insecurity (45 percent) of the country’s eighteen departments.In March 2023, GAFSP awarded US$8.5 million to the GoH to respond to the food security crisis in La Moskitia. US$8.0 million will be channeled through the World Bank as an AF to COMRURAL III and US$0.5 million will be channeled through the World Food Program. In addition, US$3.7 million will be mobilized by local farmer organ