Revised Program Administration Manual Program Number: 26194 Project Number: 42151 Loan 2452 and TA 7142 November 2016

India: Khadi Reform and Development Program

Contents

I. PROGRAM DESCRIPTION 1 A. Program’s Rationale, Location and Beneficiaries 1 B. Impact and Outcome 3 C. Outputs 3

II. IMPLEMENTATION PLANS 7 A. Loan History 7 B. Overall Program Implementation Plan 9 C. Revised Program Implementation Plan 11

III. PROGRAM MANAGEMENT ARRANGEMENTS 15 A. Program Implementation Organizations: Roles and Responsibilities 15 B. Key Persons Involved in Implementation 15 C. Program Organization Structure 16

IV. COSTS AND FINANCING 17 A. Cost Estimates by Expenditure Category 18 B. Allocation and Withdrawal of Loan Proceeds 19

V. FINANCIAL MANAGEMENT 20 A. Financial Management Assessment 20 B. Disbursement 21 C. Accounting 21 D. Auditing 22

VI. SAFEGUARDS 22

VII. PERFORMANCE MONITORING, EVALUATION, REPORTING AND COMMUNICATION 23 A. Revised Program Design and Monitoring Framework 23 B. Monitoring 28 C. Evaluation 28 D. Reporting 29

VIII. ANTICORRUPTION POLICY 29

APPENDIXES

1. Terms of Reference for the Reform Implementation and Monitoring Committee 2. Reform Implementation Division Responsibilities and Actions 3. Reform Management Unit's Responsibilities and Actions 4. Development Policy Letter and Revised Khadi Reform Package 5. Revised Policy Matrix and Revised Policy Conditions 6. List of Ineligible Items 7. Withdrawal Application 8. Sample Certificate From the Borrower 9. Proforma of the Executing Agency's Program Progress Report 10. Sample Audit Letter

CURRENCY EQUIVALENTS

(31 October 2016)

Currency unit – Indian rupees (Re/Rs) Rs1.00 = $ 0.015

$1.00 = Rs 66.78

ABBREVIATIONS ADB - Asian Development Bank CSP - central sliver plant DRA - direct reform assistance FY - financial year FYP - five year plan GDP - gross domestic product GOI - Government of India KI - Khadi Institutions KVI - khadi and village industries KVIB - khadi and village industries board KVIC - Khadi and Village Industries Commission MIS - management information system MO - marketing organization MOU - memorandum of understanding MMSME - Ministry of Micro, Small and Medium Enterprises NGO - nongovernment organization PPP - public-private partnership RID - reform implementation division RMU - reform management unit RNS - rural nonfarm sector TA - technical assistance

I. PROGRAM DESCRIPTION

A. Program's Rationale, Location and Beneficiaries 1. Rapid economic growth in India has led to a marked decrease in poverty incidence from 45% in fiscal year FY1993-94 to 37.2% in FY2005 to 21.9% in the 2011-121. Nevertheless, in absolute numbers, as on 2011-12 India still has 269 million poor; with 80% or nearly 216 million of the poor live in rural areas. The growing rural–urban divide is reflected in sharp disparity in per capita income. In addition, gender inequalities in terms of nutrition, health, education, work burden, and powerlessness persist. While over 70% of the Indian population resides in rural India and 56% draw their sustenance from agriculture, agricultural productivity has been decelerating. As a result, the agriculture sector is unable to absorb the large rural work force even at subsistence levels. 2. With an overarching focus on inclusive growth, the 12th Five Year Plan (FY2012–2013 to FY2016–2017) seeks to increase employment, with a significant increase in the rural nonfarm sector (RNS). According to Planning Commission analysis of performance of the sectors during 12th Plan Period, wherein the total employment in agriculture is expected to reduce from 242.4 million in 2011-12 to 226 million in 2016-17 (CAGR -1.4%), while in case of RNS, the same is expected to increase from 226.1 million to 276.4 million (CAGR 4.1%) in the corresponding period indicating a structural change away from agriculture toward the RNS. Growth of real per capita nonagricultural output through the promotion of the RNS can have a significant impact on reducing rural poverty. The RNS has immense potential to generate new jobs with relatively low direct investments, by utilizing local skills and resources or by meeting local demands by adopting simple technology. 3. Khadi and village industries (KVI), originally promoted by Mahatma Gandhi in 1920s for rural self-employment, is integral to the RNS and has been identified by the 12th Five Year Plan as one of the subsectors with significant prospects for employment. Khadi and Village Industry (KVI) sub-sector is an integral part of the rural non-farm sector (RNS) and largest source of employment after agriculture in the country. Khadi, a handspun and handwoven cloth, is the single largest component of KVI subsector. The production of khadi is organized by nongovernment organizations known as khadi institutions through artisans (spinners and weavers). Khadi is marketed by the outlets of khadi institutions throughout the country. At the apex, the Khadi and Village Industries Commission (KVIC) provides policy, technical, and marketing support. The Government extends financial support through subsidies to promote khadi. 4. Notwithstanding the recognition of khadi in India and the large and diverse potential market that the country provides, khadi sales has nearly stagnated even when the textile market is making remarkable progress. Production and marketing inefficiencies left unattended for decades have isolated khadi from changing consumer preferences. The constraints include (i) aging equipment and inconsistent product quality; (ii) khadi institutions are fragmented and dispersed; and lack professional expertise, financial means, and unified vision to adjust to changing market trends; (iii) marketing and sales are primarily through 7,050 outlets of khadi institutions that are isolated from current marketing trends in terms of products design and service quality; and (iv) incentive structures through subsidies for production and marketing have impeded reforms meant to anchor khadi to changing consumer preferences.

1 Planning Commission, July 2013 - Percentage and Number of Poor Estimated by Tendulkar method, using Mixed

Reference Period (MRP)

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5. In order to fully realize the significant growth potential of KVI sector, the Khadi Reform and Development Program (KRDP) is being implemented by Government of India and KVIC since 2010, with assistance from Asian Development Bank (ADB). The key outcome of the program focused on revitalization of the Khadi and Village Industries (KVI) subsector with enhanced sustainability and promotion and marketing of khadi; increased employment, higher incomes and welfare for the Khadi artisans; institutional strengthening; and development of traditional village industries. The policy conditions related to the private sector participation in raw material production and setting up of Marketing Organization with majority private sector shareholding could not be complied despite attempts made by KVIC and MMSME. In this context, ADB and GOI has agreed to drop such infeasible conditions and restructure the Program. 6. Over the duration of the program, reform measures were made in various areas and a substantial progress was achieved including but not limited to (a) formulation and implementation of the Khadi Mark, which was being launched by the Honourable President of India (b) notification for market pricing enabling the Khadi Institutions to make profits and redistribute among the Khadi stakeholders (c) development of the 5 village industry clusters (d) policy level reforms including introduction of benefit chart and production incentive plan (e) direct reform assistance to Khadi Institutions enabling them to increase their productivity with the assistance of new implements and increase their sales with the renovation of their sales outlets (f) capacity building and institutional strengthening of KVIC with a focus on technological advancement and so on. 7. The Program covers the Khadi Village Industries Commission, Head Office in Mumbai and six zonal and 36 state/divisional offices. The Program originally planned to implement comprehensive reforms in 300 khadi institutions in the following states which as part of restructuring has been increased to 400 institutions.

Table 1: Khadi Locations

West Zone Maharashtra, Gujarat South Zone Tamilnadu, Kerala, Karnataka, Andra Pradesh North-East Zone Assam, Arunachal Pradesh North Zone Delhi, Rajasthan, Punjab, Jammu & Kashmir, Himachal

Pradesh, Haryana Central Zone Uttaranchal, Uttar Pradesh, Gorakhpur, Madhya Pradesh,

Chattisgarh East Zone Bihar, Orissa, Jharkhand, west Bengal

8. The reform of khadi institutions, the primary producers, will enhance quality, design, and artisan income. Nearly half of the program resources are directed to supporting khadi institutions. The institutional reforms at KVIC will strengthen its development role. The Program envisaged gradual disengagement from production of raw material and khadi marketing. However, the private sector participation in these activities were found to be infeasible during the implementation period so has been removed from the policy conditions as part of the restructuring. 9. At the macro level, the Program supports poverty reduction by enhancing employment and incomes, and thus contributing to stability and peace in rural areas. KVI subsector provides

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employment opportunities to the rural poor including in remote and hilly areas. The poverty impact will be widespread and cover the country’s poorest states, and those with low human development and social indicators, as khadi production and marketing encompass the entire country. The Program will have positive impacts in terms of reducing non-income poverty. Increases in household incomes will lead to a change in expenditure patterns in favor of nonmaterial consumption, such as education and health. The impact of khadi on rural development, and in reducing rural–urban migration is also significant. Development of khadi will therefore promote inclusive growth, involving women, and socially and geographically marginalized groups. The Program will not have any adverse impact on indigenous peoples. 10. The Program will enhance artisans’ employment and earnings through production, marketing, and governance reforms for khadi institutions. Governance reforms ensure artisan representation on boards of directors of khadi institutions to empower artisans by involving them in decisions relating to wages and distribution of surplus. The regulatory conditions for the use of a Khadi Mark along with the removal of restrictions on pricing of products and the enhanced efficiency of the artisans with the new implements to be given under the program, will help provide higher wages for artisans. B. Impact and Outcome 11. The impact of the proposed Khadi Reform and Development Program (KRDP) is enhancement of income and employment growth for the KVI sector. The Program outcome is revitalization of the KVI subsector with enhanced sustainability of khadi, increased employment generation and incomes, increased artisan welfare, and development of select traditional village industries. The reform of production and marketing of khadi will lead to sustainable employment opportunities at low per capita investment. In addition to reduction in income poverty, the Program will also reduce non income poverty. Khadi is a geographically widespread economic activity encompassing all states and regions in the country. Given the high involvement of women, and marginalized groups in the KVI subsector, its development will promote inclusive growth. Reforms of khadi will help facilitate KVI subsector wide reforms. C. Outputs

1. Establishing a Policy Reform and Implementation Framework

12. A Comprehensive Reform Package for the Development of Khadi. The policy and institutional framework for khadi needs be anchored to the core principle of sustainability. Khadi has to move away from a welfarist approach to a market-based approach. Accordingly, as part of the Program, the Government has formulated a comprehensive reform package for khadi and established an implementation framework for KVIC to carry out the proposed reforms. Specifically, under the Program

(i) The Government conducts review of the performance of KVIC and other subsidiary institutions and developed a khadi reform package for strengthening production and marketing of khadi.

(ii) Khadi reform package comprising policy, legal, marketing, and institutional reforms for achieving sustainability of khadi and enhancing artisan income and empowerment has been agreed between the Government and KVIC.

(iii) KVIC has developed (a) criteria for selecting khadi institutions eligible for assistance under the khadi reform package, and (b) memorandum of understanding (MOU) on comprehensive reforms of khadi institutions with

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performance benchmarks and sanctions for khadi institutions that fail to meet the performance benchmarks.

(iv) KVIC is in the process of selecting 400 khadi institutions eligible for support under the Program.

13. These activities have been completed and set a strong foundation for implementation.2 During implementation, KVIC will disseminate the khadi reform package nationwide through workshops and will sign MOUs with 300 eligible khadi institutions to implement the khadi reform package. Prior to assistance under the Program, independent auditors will audit the khadi institutions. Based on audit findings, a minimum threshold for acceptance of khadi institutions will be developed. During implementation, assessment of the reforms will be conducted and appropriate measures undertaken to address the feedback.

2. Promoting and Marketing Khadi

14. Establish Identity of Khadi through a Khadi Mark. Creating a niche as a handspun and handwoven fabric produced through fair trade practices is the most likely way for khadi to become commercially viable in a highly competitive textiles market. Under KRDP, KVIC has already developed a Khadi Mark including the design of a logo (i) as an indicator of genuine khadi and to build awareness and popularity of khadi, and (ii) to guarantee the “Earth Friendly” (handspun/woven nature) and “People Centric”/“Ethical” (employment, primarily to women on specified base wages) attributes of khadi. The Khadi Mark will be linked to specified base earnings for artisans. Originally, the Khadi Mark was envisaged to be registered under the Trade Mark Act in order to ensure legal protection3 and regulations for granting the use of Khadi Mark will be developed. KVIC and MMSME faced the legal impediment in registering it under the Trade Mark Act as a certifying mark as KVIC is still involved in production and marketing activities. To achieve the similar level of legal protection, the Khadi Mark Regulations 2013 was notified by GOI and gazette in July 2013 along with a logo to provide distinct identity to khadi. All khadi institutions affiliated to KVIC and KVIB will adopt the Khadi Mark. In addition to khadi institutions, institutions external to the KVIC khadi program will also be allowed to use the Khadi Mark. Further, basic testing infrastructure for Khadi Mark will be created and KVIC will conduct random spot audits on the adherence to licensing requirements for Khadi Mark.

15. Effective Marketing. Professional capability and orientation to assess evolving market dynamics and the flexibility to respond swiftly is critical for the effective marketing of khadi. Under the Program, KVIC was required to identify private partner to set up a majority private-owned marketing organization outside of KVIC. The responsibilities of the marketing organization include (i) developing marketing strategies, (ii) identifying products to be marketed in domestic and international markets, (iii) introducing public-private partnership (PPP) in the department sales outlets of KVIC, and (iv) rejuvenating the sales outlets of khadi institutions (or Institutional Sales Outlets). This policy condition was found to be infeasible after earnest effort made by MMSME and KVIC. The condition has been dropped as part of the restructured Program. KVIC will retain the right of promoting and using Khadi Mark and can transfer the same to third party under a licensing agreement.

2 The relevant information is at the Supplementary Appendixes of the RRP. 3 Such protection includes the right for the holder of a registered intellectual property right, i.e., trademark or a trade

description to file a suit in the court seeking permanent injunction against the person infringing the trademark; claim damages; and restraining the other party from disposing assets in a manner which adversely affects the ability of the holder of the registered intellectual property rights to recover the damages, costs, or other remedies.

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3. Realizing Procurement and Production Efficiencies

16. Facilitate Procurement and Processing of Raw Materials. High cost of raw material, processing inefficiencies, and inadequate testing capabilities are major constraints in the khadi value chain. Accordingly, the Program requires actions for improving procurement, processing, and quality control of raw material i.e., sliver. KVIC will establish quality norms for raw material procurement by khadi institutions and also train them on quality testing of raw materials. Under KRDP production efficiencies were to be gained by bringing private sector participation in the CSPs. However there was limited interest in private sector due to issues such as old state of machinery, outdated technologies and smaller production capacity. Hence considering the critical role or production efficiency, KVIC and MMSME shall explore an alternate approach for refurbishment of CSPs to ensure improvement in quality and quantity of raw material output. 17. Market-Linked Pricing to Replace Cost-Based Pricing. Inflexible product pricing due to the cost chart and its linkage with the rebate limits the scope for enhancing artisan earnings. The cost chart also inhibits creativity, enterprise, and the potential for artisans to enhance earnings. A benefit chart, as a replacement, would ensure better linkage of production, marketing, and pricing by enabling the khadi institutions to set khadi prices as determined by the market. While the proposed Khadi Mark is intended to ensure payment of base wages4 by all producers of khadi, the benefit chart is intended to ensure that surpluses are used for the benefits of the khadi artisans and workers. 5 Accordingly, the Program requires KVIC to formulate and implement a benefit chart in respect of khadi institutions. KVIC will organize training in coordination with the marketing organization for product pricing and familiarization with the benefit chart. The impact of benefit chart on artisans earnings will be assessed. 18. Rationalize Financial Assistance for Khadi. Anchoring the production of khadi to markets requires that financial support that impedes innovations and enterprise be discontinued. However, this will need to be done gradually in a manner that does not cause disruption in the artisan income and employment status. Under the Program, KVIC will formulate a production incentive plan for all khadi products and shift to production incentives in lieu of the sales rebate and market development assistance. Further, during the Program period, KVIC will also determine the product categories on which the production incentives could be phased out. Interest subsidy eligibility certificate will also be phased out along with phasing out of production incentives on specific product categories. In addition, working capital requirements for khadi institutions will be assessed and access to working capital will be facilitated. 19. Rationalize Financial Assistance for Khadi. Create New Khadi Ventures with Greater Entrepreneurial Activity and Enhanced Artisan Empowerment. In order to spur growth in khadi and empower artisans, under the Program, KVIC will develop and implement a producer company6 model and an entrepreneur model, for new khadi ventures under the KVIC khadi program. These will complement the khadi institutions by enhancing the production and marketing base of khadi. The producer company, as a means of artisan empowerment, only comprises primary producers (artisans, spinners, and weavers) which collectively appoint a governing board responsible for all decisions to be made for the producer company. The

4 Khadi institutions will have the flexibility to pay over and above the base wages. 5 Options for artisan’s benefits suggested are (i) at least 50% of the surplus to be distributed as bonus on fiscal year

end to artisans based on production record, and (ii) the balance earnings to be utilized for creating provisions for future capital requirements including improved equipment and benefits for artisans.

6 Set up as per provisions of Companies (Amendment) Act 2002, the producer company can form alliance or partnership with any entrepreneur or entity for marketing its products. Details of models for new khadi ventures are in Supplementary Appendix H of the RRP.

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enterprise model enables enterprises without sacrificing artisan income and empowerment and authenticity of khadi that could avail assistance from KVIC in the form of Rural Employment Generation Programme assistance. As part of the restructuring, MMSME has decided to cover the implementation of the new ventures through other schemes.

4. Implementing Institutional Reforms

20. Organizational Restructuring of KVIC for Better Focus on Facilitative and Development Role. Given the enormous inclusive development, employment, and income generating scope of khadi, KVIC has significant responsibilities to discharge and a pivotal role to play as the nodal institution for the development of khadi. Efforts to reform KVIC have so far been fragmented and, as a result, it currently is neither appropriately organized nor skilled to bring about an intended transformation in khadi. KVIC needs to focus on promotional and development role and gradually disengage from direct commercial activities, such as production and marketing, which are not specifically based on its core competencies. Simultaneously, KVIC needs to play a facilitative role to strengthen khadi institutions, enhance the stake and role of artisans, facilitate the flow of raw materials and finances, and to create a niche for khadi through Khadi Mark. Under the Program, KVIC has adopted a restructuring and devolution plan including (i) restructuring khadi, village industries, science and technology, and economic research directorates; (ii) strengthening of human resource and administration directorate; (iii) realignment of reporting relationships; and (iv) devolution of powers and responsibilities to zonal offices. KVIC shall continue to leverage on the restructured plan. Under KRDP, KVIC shall also bring operational efficiencies through development and implementation of an integrated management information for the Khadi Institutions and Integrated Financial Management System for KVIC and its stakeholders.

21. Revitalize Khadi Institutions. Being fragmented and dispersed, the khadi institutions lack the professional expertise, financial capacity, and a unified vision to adapt to evolving market trends. As primary level producer and marketers of khadi, the reform of khadi institutions constitute the base for the transformation of khadi envisaged by the Government. Under the Program, KVIC will implement the comprehensive reform plan for 400 khadi institutions, selected primarily on the basis of performance, to ensure enhanced artisan earnings and empowerment and improved viability of khadi institutions, through (i) production, (ii) marketing, (iii) governance, and (iv) information technology. The model comprehensive reform plan has been developed with due recognition of the need for adaptation to requirements of specific khadi institutions. Reforms are phased to enable evaluation and incorporation of lessons learned. The revised scope of comprehensive reforms at khadi institution level is in Linked Document 13 of the major change RRP. 22. In addition, all khadi institutions 7 will be recategorized based on new norms that emphasize (i) role for artisans, (ii) governance structure, (iii) human resources, (iv) financial health, and (v) diversified networks and market linkages. 23. Strengthen the Capability of All Institutions. Systemic skills deficit persists at all levels in the set up for khadi which will have to be addressed. The Program requires the development of a comprehensive capacity building plan, including physical infrastructure and training of trainers, to strengthen capabilities at all levels. The comprehensive capacity building plan, based on assessment of existing training arrangements (infrastructure, capacity of

7 The Program covers 300 eligible khadi institutions whereas the reform of all khadi institutions is part of the khadi

reform package. The Government will develop customized restructuring plan for weak khadi institutions.

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trainers, and curriculum), will adopt a two-pronged focus (i) demand: a team within KVIC’s human resources development directorate to focus on regular interaction with all other directorates and the marketing organization, to continuously assess the demand (nature/sector/skill level) for training; and (ii) supply: developing linkages with external training programs, enhancing the training institutes under the KVIC, and detailing and implementing capacity building. 24. Under KRDP, KVIC will develop and implement a Comprehensive Reform Plan to be implemented in a phased manner for 400 KIs selected with focus on regional balance and the inclusion of backward areas. The elements of the Comprehensive Reform Plan shall comprise of a Direct Reform Assistance to ensure viability of KIs and enhancement of artisan earnings and empowerment and shall comprise of (i) Production reforms to include supply of new model charkhas, looms, warping machine, yarn processing unit, spinning sheds and working capital support to cover the increase in working capital requirement due to capacity enhancement and other reform measures (ii) marketing reforms, linking to overall marketing reforms to enable expert inputs from the MO for product strategy including product processing, designing and local marketing strategy. Marketing reforms will also include renovation of sales outlets; (iii) Governance Reforms: Re-organization of artisans into Self Help Groups and (iv) system Reforms: Supply of basic information technology infrastructure (including accounting systems) and electronic networking of KIs with KVIC.

25. Develop Synergies with Traditional Village Industries. There are inherent synergies between khadi and traditional village industries, which are in line with the overall ethos of khadi – “handmade,” “use of organic inputs/processes” and/or “socially aware.” The Program identified five “traditional village industries” as part of the first tranche namely Handmade Paper, Honey, Herbal Health and Cosmetic products, Leather and leather products and Agro food products. A cluster approach to pool efforts for developing the identified traditional village industries will be adopted. The capacity building needs for the cluster will be integrated with the comprehensive capacity building plan and implemented simultaneously.

II. IMPLEMENTATION PLANS

A. Loan History

Milestones Dates Inception of the PPTA 04 January 2008 Consultation mission for PPTA 17-21 March 2008 Review mission for PPTA 10-17 April 2008 Concept paper 6 June 2008 Fact Finding Mission 17-24 June 2008 Consultation Mission 24-25 July 2008 1st MRM 30 July 2008 Appraisal Mission 7-11 August 2008 2nd MRM 20 August 2008 Loan Negotiations 27-28 August 2008 Loan Approval 02 October 2008 Signing of loan and Program agreement 22 December 2009 Loan Effectiveness 02 February 2010 First Tranche Disbursement 17 February 2010 First Loan Extension Loan Closing date 30 September 2013

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Milestones Dates made effective on 26 September 2011 Second Loan Extension Loan Closing date made effective on 04 December 2013

30 September 2015

Third Loan Extension Loan Closing date made effective on 01 February 2016

30 June 2016

First Consultation Mission for exploring loan revival

24 February – 03 March 2016

Second Consultation Mission for exploring loan revival

27 April – 29 April 2016

Third Consultation Mission for exploring loan revival

11 May – 13 May 2016

First Review Mission for restructuring 29 June – 7 July 2016 Fourth Loan Extension Loan Closing date made effective on 01 July 2016

31 December 2016

Second Review Mission for restructuring 17 August – 24 August 2016

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B. Overall Program Implementation Plan

A ct ivi tie s 20 0 8Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4

P lan n e d A ct ivi ty P re c ed e n t to T ra n c h e s20 1 0 20 1 1 2 0 12 2 0 13

1.1 A co m pre hen siv e re fo rm p ac k ag e f o r the de ve lopm e nt o f k ha di

Kh a d i re for m p ac kag e for m u la ted a nd a pp ro ve d b y the G ove rn m en t an d KV IC ( by O ct 2 00 8 )Se le ct io n cri te ri a a n d th e l is t of 3 0 0 se le cte d kh a di i ns ti tutio n s for im p le m en ta ti on o f kh a d i re for m pa cka g e ( by O ct 2 00 8 )D ra ft M O U b etwe e n K V IC a nd se le c ted 30 0 kh ad i in st itu t io ns ( b y O ct 2 00 8 )Au d it f in di ng s fo r the se le c ted 3 00 kh ad i i ns t i tu tio n s by in d e pe n de n t a u di tor (b y N ov 2 0 11 )KV IC co n du cts f ir s t in de p en d en t as ses sm e n t o f the kh ad i r efo rm pa cka g e ( by No v 2 01 1 )KV IC co n du cts se co n d in d ep e n de n t a sse ssm en t o f th e kh a d i re for m p ac kag e (b y Jan 2 01 3 )

Re for m im p le m e nta t io n a n d m o ni to ri ng co m m itte e co n st itute d (b y O ct 2 0 08 )Re for m im p le m e nta t io n d iv i s io n e s ta bl ish e d ( by O ct 20 0 8 )

2.1 Es t ablis h ide ntit y of k ha di throu gh k had i m a rkKV IC a g re es to un d e rtak e ste p s to d eve lo p kha d i m a r k an d l in k the ar tisa n ’s b ase e ar ni ng s to th e use of kh a di m a rk th ro ug h ap p ro val of kh a di r efo rm pa cka g e ( by O ct 2 00 8 ) K V IC u nd e rta kes ( i) th e fo rm u la ti on a nd e xe cu tio n o f the M O U w i th the M i ni s try o f Te xtile s fo r tes t i ng i nfr as tr uc tu re , (ii ) th e fo rm ulat io n an d e xe cu ti on o f th e m o de l a g re em e nt for lice n sin g th e use o f k ha d i m a rk ; (ii i) th e d e velop m en t of th e d e ta il ed p la n fo r the cr ea t io n o f ba s i c te s tin g in fr a s tr u c tur e fo r kh ad i m a rk a t K V IC; an d (iv ) th e ar ra ng e m e n t fo r m an a g in g kh a di m a rk b y KV IC S tate /D iv i s io n al o ff ice s su p p or te d by A DB A DTA (b y O ct 2 0 10 )

K V IC a do p ts pr oce d ur e s an d a ssi gn s th e kh a di coo r di na tio n d ir ec to ra te to g ra nt u sa ge of kh a di m a rk to kh ad i in st itu t io ns a n d o th er s sup p o rted b y AD B A DTA (b y O ct 20 1 0)

K V IC thr o ug h i ts kha d i d ire c to ra te e n sur es th a t th e k ha d i in s titu ti on s r eg is te re d at e ithe r K V IC o r K VIB a d op t the kh ad i m ar k (b y O ct 2 0 1 0)

Kh a d i m a rk d e vel op e d a n d r eg is te re d by K V IC (b y O ct 2 0 10 ) KV IC th ro u gh the kh ad i d ir ec to ra te p r ep a re s an d m a in tai ns a li s t o f kh ad i in s t itu tio ns a n d o th er s au th or ize d to use kh a di m a rk a nd p ub li sh th is in its we b s ite s up p or ted b y A D B A DTA (b y No v 20 1 1 )

KV IC cr ea te s the ba s i c te s tin g in fra s tru c tur e fo r th e kh a di m a rk (b y No v 2 01 1 ) Th e kh ad i m ar k is u sed b y at le a s t a ll KV IC /K V IB r eg is te re d kha d i in st itu tio ns a n d o the r th ir d p ar ty a u tho ri zed in s t itu t io ns su p po r te d by A DB A DTA (b y Jan 2 01 3 ) F irs t sp o t a u di t r ep o rt b y K V IC o f k ha d i in s t itu ti on s a n d o the rs r eg a rd in g a d h er en ce to li cen s i ng r eq u ire m en ts for the us e o f kha d i m a rk ( b y N ov 2 0 11 )Se co n d sp o t a u d it re po rt b y KV IC o n k ha d i in s titu ti on s a n d o the rs r eg a rd in g a d he r en ce to li cen si ng re qu ir e m e nts fo r th e u se of kh ad i m a rk (b y Ja n 2 0 13 )

2.2 M a rke t k ha d i th rough p riv a te s e c tor pa rtic ipat ionKV IC i de n ti f ie s po te nt ia l p ri vate pa rtn e rs fo r the n ew m a rke t in g o rg a ni zat io n an d in cor p or ate s m a rke t in g or ga n iza tio n th ro ug h an M O U a n d in co rp o ra t io n ce rt if i cate su pp o rte d b y A DB A D TA ( by O ct 20 1 0)

M M S M E iss ue s a d ir ec ti ve to al lo w K VIC to pr ov i de ca p ital con tri bu t io n fo r th e e s ta bl ish m e n t o f the jo in t-ve ntu re m a rk etin g or ga n iza tio n ( by O ct 20 1 0 ) The K ha d i M a rke t in g E xte ns i on P ro g ra m is d e vel op e d fo r in ce n ti v iz in g th e es ta b lis hm en t of n e w DS O s by th e m a rke t in g o rg a ni zat io n (b y Oc t 2 0 10 )Li ce ns i ng a gr ee m en t es ta b lis he d u n de r w hi ch K V IC tra ns fe r s th e rig h ts of p ro m o tio n a n d u sa ge o f kh ad i m ar k to m ar ke ti ng o rg an iza t io n u n d er a li cen s i ng ag r ee m e n t sup p or ted b y A D B A DTA (b y O ct 20 1 0)

Su r vey r ep o rt of K V I p ro d uc ts a n d a m a r ket in g stra teg y for al l kh ad i r el ate d i ns ti tu t io n s an d on id en t ify in g pr od u cts for bo th d o m e stic a n d in te rn at i on a l m a rk ets su p po rte d b y A DB AD TA (b y O ct 20 1 0)

M a rke t in g o rg a ni zat i on de ve lo p s fr am e wo rk fo r in tro du ci ng P PP in the DS O s an d in tr od u ce s PP P in 2 DS O s sup p o rted b y AD B A DTA (b y No v 2 01 1 )

M a rke t in g o rg a ni zat i on de ve lo p s th e In s t itu tio n al S a le s O utl ets Re ju ve na tio n Plan (b y No v 20 1 1)M a rke t in g o rg a ni zat i on pr e pa re s a pr od u ct cata lo g ue a nd se ts u p the m a rk et in for m a tio n s ystem (b y No v 20 1 1)

M a rke t in g o rg a ni zat i on in tro du ce s P PP s in a t l ea s t two o th er KV IC DS O s (b y No v 2 01 1 )F ir s t p r og re ss r ep o rt on m a r keti ng or g an iza tio n’ s im plem en ta tio n o f th e In s titu t io na l S a le s Ou tle ts Re ju ven a tio n P la n ( b y N ov 2 0 11 )

10

M a rk e t in g o rg a n i z a t i on im p l em e nts t h e In s t itu ti on a l S a l es O u t le t s R e ju v en a t io n P la n ( by J a n 20 1 3)M a rk e t in g o rg a n i z a t i on f o r m u la tes g u id e lin e s fo r t h e s e t t in g u p o f n ew s a l es o u t le ts b y k h ad i in s t itu ti on s (b y J a n 2 0 13 )M a rk e t in g o rg a n i z a t i on in t ro du c e s P P P in a t l ea s t 4 D S O s s u p p or te d by A D B A D T A (b y J a n 2 01 3 )M a rk e t in g o rg a n i z a t i on es ta b lis he s a t l ea s t 1 3 D S O s (b y J a n 2 0 13 )S a le s o u tl e ts o w n ed a nd o pe ra te d b y 30 0 k ha d i in s t itu t io ns a re re n ov a te d ( by J a n 20 1 3)S e c o n d p ro g re s s re p or t o n m a rk e t in g or ga n iz a t io n ’ s im p le m en ta t i on o f t h e In s t itu t io na l S a le s O u t le ts R e ju v en a t io n P la n ( b y J an 20 1 3 )

3.1 F a ci l i ta te r aw m a t er ia l p r o cu r em e n t an d co tto n s l i v er p r o d u c tio n

K V IC d e v e l op s q ua li t y n o rm s fo r r a w m a ter ia l p ro c u re m e nt b y k h ad i in s t it u t io ns ( b y O c t 2 00 8 ) K V IC i n i ti a te s c re a t io n o f a fu nd to k i c k -s ta r t p ri v a te s e c tor p a rt ic i pa t io n in s liv e r/ ro v in g p r od u c t io n ( by O c t 2 0 08 )K V IC c o n du c ts t ra in in g fo r t h e 3 0 0 e li g i b l e k h a d i in s t it u t i on s o n q u a l it y te s t in g o f ra w m ate ri a l s s u pp o rte d b y A D B A D T A ( by O c t 20 1 0 )K V IC e x e c ute s P P P a gr e em en ts , o n p ilo t ba s i s , i n tw o C S P s s u pp o rte d b y A D B A D T A ( by O c t 20 1 0 )

P r o gr es s r e po rt o n K V IC as s es s m e n t o f P P P in C S P s s up p o rted b y A D B A D T A (b y N o v 2 01 1 )K V IC d e v e l op s th e s l iv e r c a pa c ity a u gm en ta t io n p la n f o r k h a d i i ns ti t u t io n s (b y N o v 20 1 1)K V IC e x e c ute s P P P in the re m a i n i ng C S P s s u pp o rte d b y A D B A D T A ( by J a n 2 0 1 3)

3.2 R e p lac e co st b as e d p r ic in g w i th m a r k et -l in k ed p r ic in gK V IC a g re es t o un d e rtak e s te p s to a llo w k h ad i i ns t i tu t io n s to s e t th e ir k h a d i p r ic e s t h r o ug h a p p ro v a l o f k h ad i re fo rm p a c k a g e (b y O c t 20 0 8)

K V IC fo rm u l a te s b en e f it c ha rt s u p po rte d by A D B A D T A (b y O c t 2 0 10 )K V IC n o ti f ie s th e be n ef i t c h a rt a nd the re q u i re m e n t fo r t h e b e ne f it c h ar t to be im p le m e nte d by k h a d i in s t itu ti on s (b y N o v 2 01 1 )

P r o gr es s r e po rt o n t h e e f f ec ti v en e s s o f th e i m p le m e n ta t i on o f t h e b e ne f it c h ar t s up p or ted by A D B A D T A (b y J an 2 01 3 )

3.3 R a tio n a l i z e f in a n c ia l as s ist an ce to k h a d iK V IC a g re es t o un d e rtak e s te p s fo r t h e k ha d i in s t itu ti on s to s h i ft to th e p r od u c t io n i nc e n t iv e p l an t h r ou g h a p pr ov a l o f k ha d i re fo rm p a c k a ge (b y O c t 20 0 8)

K V IC fo rm u l a te s a nd s ta rt s im p l em e nta t io n o f th e p r od u c t io n i nc e n t iv e p la n t o a ll k h a d i p r od u c ts s u pp o rte d b y A D B A D T A ( by O c t 20 1 0 )

K V IC r ea s s e s s e s w o rk i ng c a p i ta l r e qu ir em e nt f o r k h ad i p ro d uc t i on (b y O c t 2 0 10 )K V IC a p po in ts a f o c a l p e r s o n to e n g ag e w it h th e b a nk er s t o e nh a n c e a c c e s s o f w or k in g c ap ita l to k h ad i in s t itu t io ns ( b y O c t 2 01 0 )

In c o n s u l t a t io n w ith m a rk e t in g o rg a n iz a ti on , K V IC d e te r m in e s t he p ro du c t c a teg o rie s to p h as e o u t o f p r od u c t io n i nc en t iv e s , an d c om m e n c e ph a s in g o u t s u p p or te d by A D B A D T A (b y N o v 20 1 1)F ir s t p r og re s s r ep o rt on K V IC a s s e s s m e nt o f th e im p a c t on s a le s as a re s u lt o f p ro d uc t i on in c e nt i v es ph a s in g o u t on c e rta in p ro d u c t c a te go r ie s s up p or ted b y A D B A D T A (b y N o v 20 1 1 )F ir s t p r og re s s r ep o rt on t he p ha s i ng ou t b y K V IC o f t h e IS E C , in lin e w it h th e p ro d u c t io n in c e n ti v es ph a s e o u t s up p or ted b y A D B A D T A (b y N o v 20 1 1 )S e c o n d p ro g re s s re p or t o n the ph a s in g ou t o f p ro du c t io n in c en t iv e s b y K V IC o n o th er c a te g o r ie s o f p r od u c ts (b y J a n 2 0 13 )S e c o n d p ro g re s s re p or t o n K V IC a s s e s s m en t o f t h e i m p a c t o n s a l es a s a re s u lt o f p ha s in g ou t o f p r od u c t io n i nc en t iv e s on o the r p ro d uc t c a te go ri es t h ro u gh a p ro g re s s re p or t (b y J an 2 01 3 )S e c o n d p ro g re s s re p or t o n the ph a s in g ou t o f IS E C by K V IC on o th e r c a teg o rie s o f p r od u c ts in lin e w it h ph a s in g o u t o f p r o du c t io n i nc en t iv e s (b y J a n 2 0 13 )

3.4 C r e a t e n e w k h a d i ve n t u r es w i th g re a te r en tr e p r e n eu r ia l a ct iv i ty a n d e n h a n c e ar t is a n em p o w e r m en t

K V IC a g re es t o pu r s ue the p ro du c e r c o m pa n y m o de l a n d e n te r pr is e m o d e l f o r n e w v en tur e s in k ha d i t h r ou g h a p pr ov a l o f k ha d i re fo rm p a c k a ge (b y O c t 20 0 8)K V IC d e v e l op s th e f ra m ew o r k fo r p ro d uc er c om p an y m o d e l an d e n ter pr is e m o d e l fo r n e w v e ntu re s in k h ad i s u p po rte d b y A D B A D T A (b y O c t 2 0 10 )K V IC i m p le m e n ts th e fr a m e w o rk f o r p r o du c e r c o m p a ny m o de l a nd e nte rp ri s e m o de l f o r n ew v e n tur es in k ha d i s u pp o rte d b y A D B A D T A ( by N ov 2 0 11 )F ir s t p r og re s s r ep o rt on K V IC i m p le m en ta t i on o f t h e p ro d uc er c om p an y m o d e l an d en ter p ris e m o d e l f o r n e w v e n tu re s in k h ad i s u p po rte d b y A D B A D T A (b y N ov r 20 1 1 )S e c o n d p ro g re s s re p or t o n K V IC i m p le m e n ta t io n o f t h e p ro d uc e r c o m pa n y m o d e l a n d e n ter p r is e m o d e l fo r n e w v en tu re s in k ha d i (b y J a n 2 0 13 )

4.1 R e st r u c tu r e K V IC o r g a n iz a tio n a l ly fo r b e t te r f o c u s o n fa c il i t a t iv e an d d ev e lo p m e n ta l r o leK V IC c r ea te s the s tee r in g c o m m it te e a n d u s e rs c o m m it te e f o r t he IT / IS p la n n i ng a nd im pl em e nta t io n (b y O c t 2 0 08 )

K V IC a d op ts re s t ru c tu rin g de v o lu t io n p la n ( by O c t 2 00 8 )K V IC i m p le m e n ts re s t ru c tur in g d e v o l u t i on p l an s u p po rte d b y A D B A D T A ( b y O c t 2 01 0 ) K V IC d e v e l op s s ta f fi ng n or m s c o n s o na n t w ith t h e k h a d i re for m p ac k ag e s u pp o rte d b y A D B A D T A ( by O c t 2 0 10 )

K V IC d e v e l op s in te g r a te d M IS s u p po rte d by A D B A D T A (b y O c t 2 0 10 ) K V IC d e v e l op s IT /e -g ov e rn a nc e r oa d m a p , i n f ra s t r uc tu re re q u i re m e n ts , a n d li nk ag e o f IT / IS s t r a te gy to t he k h ad i r e fo rm pa c k a g e s u p po rte d by A D B A D T A (b y O c t 2 0 10 )

M M S M E re v ie w s th e f u nc ti on s o f th e m a rk e t in g d ir e c to r a te o f K V IC (b y O c t 2 0 10 ) K V IC r ev i ew s th e ex is ti ng s t ru c tu re s a nd p r o c es s fo r c e r ti fi c a ti on o f k ha d i in s t itu ti on s a n d to s tr ea m lin e t he c e rt if ic a t io n pr oc e s s i nc l ud in g th e d i re c tor a te s w i th in K V IC th e au tho r it y to m a k e s u c h c er ti f ic a t io n (b y O c t 2 0 10 )

K V IC i m p le m e n ts th e M IS s up p or ted by A D B A D T A (b y N o v 20 1 1) K V IC i m p le m e n ts th e in te g ra ted a pp li c a ti on s y s te m s u p po rte d by A D B A D T A (b y N o v 2 0 11 )

Activities 2008Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Planned Activity Precedent to Tranches2010 2011 2012 2013

11

C. Revised Program Implementation Plan

Restructured Tranche Conditions Q3 2016

Q4 2016

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Timeline for completion

Policy Reform and Implementation Framework

KVIC shall have ensured the completion of the audit for hundred and eighty (180) eligible Khadi institutions by independent auditors.

Aug-16

KVIC shall have disseminated the Khadi Reform Package nationwide through workshops. Aug-16

KVIC shall have (a) undertaken the initial assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback.

Aug-16

KVIC shall have ensured the completion of the audit of remaining two hundred and twenty (220) eligible Khadi institutions by independent auditors.

Aug-16

KVIC shall have (a) undertaken the independent assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback.

Jun-17

Promoting and Marketing Khadi

KVIC shall have developed the Khadi Mark, including designing its logo, and notified the Regulations for enforcing Khadi Mark under the KVIC Act, 1956.

Aug-16

KVIC shall have(a) undertaken pan India arrangements for independent testing of Khadi; (b) obtained undertaking from users to abide by regulations for use of Khadi Mark (c) developed the detailed plan for the creation of basic testing infrastructure for Khadi mark at KVIC; and (d) undertaken the arrangement for managing Khadi Mark by KVIC state/divisional offices.

Aug-16

KVIC shall have adopted the procedures and assigned its Khadi directorate to grant usage of Khadi mark to Khadi institutions and other entities.

Aug-16

KVIC through its Khadi directorate shall have ensured that the Khadi institutions registered at either KVIC or KVIB adopt the Khadi Mark.

Aug-16

KVIC shall have commissioned a product specific market survey of Khadi and Village Industries products through a specialist firm.

Aug-16

KVIC through its Khadi directorate shall have prepared and maintained a list of Khadi institutions and other entities authorized to use Khadi Mark and publish this in its website.

Aug-16

12

Restructured Tranche Conditions Q3 2016

Q4 2016

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Timeline for completion

KVIC shall have created the basic testing infrastructure for the Khadi Mark. Sep-16

KVIC shall have conducted random spot audits of Khadi institutions and other entities authorized to use Khadi mark regarding their adherence to the licensing requirements for the use of Khadi mark.

Aug-16

Based on the outcome of the survey, KVIC shall have identified products for both domestic and international markets and develop marketing strategies for all Khadi related institutions and products.

Jan-17

The KVIC shall have prepared a product catalogue and set up the market information system.

Feb-17

KVIC shall have continued to conduct random spot audits of Khadi institutions regarding the adherence to licensing requirements for the use of Khadi mark.

May-17

Realizing Procurement and Production Efficiencies

KVIC shall have conducted training for the three hundred (300) eligible Khadi institutions on quality testing of raw materials.

Aug-16

KVIC shall have issued a notification to allow Khadi institutions to set market linked prices. Aug-16

KVIC shall have formulated the benefit chart. Aug-16

KVIC shall have formulated the production incentive plan and provides production incentive to all Khadi products.

Aug-16

KVIC shall have reassessed working capital requirement for Khadi production. Aug-16

KVIC shall have appointed a focal person to engage with the bankers to enhance access of the Khadi institutions to working capital.

Aug-16

KVIC shall have developed the framework for producer company model and enterprise for new ventures in Khadi.

Aug-16

KVIC shall have formulated the benefit chart. Aug-16

KVIC shall have monitored and assessed the effectiveness of the implementation of the benefit chart.

May-17

KVIC shall have continued the phasing out of production incentives on other categories of products and assess the impact on sales as a result of this.

Oct-17

13

Restructured Tranche Conditions Q3 2016

Q4 2016

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Timeline for completion

Implementing Institutional Reforms

KVIC shall have (a) restructured its Khadi directorates, village industry directorates, science and technology directorates, and economic research directorates; (b) strengthened the human resource and administration directorates; (c) realigned reporting relationships for efficiency; and (d) devolved power to zonal offices.

Aug-16

KVIC shall have (a) reviewed the existing structures and processes for the certification of the Khadi institutions; and (b) issued appropriate guidelines to empower a committee within the directorates of KVIC with the authority for the certification of Khadi institutions, under the guidance and advice of the central certification committee.

Aug-16

KVIC shall have developed an integrated management information system and roll out in 100 KIs.

Aug-16

KVIC shall have developed IT/e-governance roadmap, infrastructure requirements, and linkage of IT/IS strategy to the Khadi Reform Package.

Aug-16

The Borrower through the Program Executing Agency shall have reviewed the functions of the marketing directorate of KVIC.

Aug-16

KVIC shall have modified categorization norms for Khadi institutions and recategorize 400 Khadi institutions using the modified norms.

Aug-16

KVIC shall have adopted the comprehensive reforms plan to empower and revitalize the four hundred (400) eligible Khadi institutions.

Sep-16

KVIC shall have signed MoUs with one hundred and eighty (180) eligible Khadi institutions for comprehensive Khadi institution reforms.

Aug-16

KVIC shall have completed (a) the assessment of existing training arrangements (infrastructure, capacity of trainers, curriculum, and demand for training); and (b) based on the assessment, the comprehensive plan for (i) demand driven training delivery, (ii) the creation of linkages with external training program, (iii) the upgrading of physical infrastructure, and (iv) the enhancement of the skills of training staff.

Aug-16

KVIC shall have identified five thrust traditional village industry clusters based on market assessment study.

Aug-16

KVIC shall have formulated the cluster development strategy for the identified village industries.

Aug-16

KVIC shall have implemented the management information system in 400 KIs. Jan-17

14

Restructured Tranche Conditions Q3 2016

Q4 2016

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Timeline for completion

KVIC shall have implemented the integrated application system. Oct-17

KVIC ensures that the 80 eligible khadi institutions implement the comprehensive reforms plan and implementation plan developed and approved for 100 additional KIs.

Aug-16

KVIC shall have signed with two hundred twenty (220) eligible Khadi institutions the MOUs for comprehensive Khadi institution reforms.

Sep-16

KVIC shall have implemented the comprehensive capacity building plan. Aug-16

KVIC shall have periodically published in its website the training calendar. Aug-16

KVIC shall have ensured the establishment of one (1) cluster for each of the identified village industry.

Dec-16

KVIC shall have ensured the implementation of the comprehensive capacity building plan in the identified clusters.

Dec-16

KVIC shall have examined and reviewed the role and relevance of the central certification committee in the certification process of the Khadi institutions.

Aug-16

KVIC shall have ensured that three hundred and twenty (320) eligible Khadi institutions shall have implemented the comprehensive reforms plan.

Jul-17

KVIC shall have evaluated the performance of the four hundred (400) eligible Khadi institutions.

Sep-17

KVIC shall have monitored the performance of the clusters. Sep-17

KVIC shall have recategorized the remaining Khadi institutions using the modified norms. Dec-16

15

III. PROGRAM MANAGEMENT ARRANGEMENTS

A. Program Implementation Organizations: Roles and Responsibilities

1. Executing Implementing Agencies 26. MMSME, the Executing Agency (EA), will be responsible for overall Program implementation. KVIC, the Implementing Agency, will be responsible for implementation of reforms. MMSME and KVIC will ensure a conducive environment, provide adequate powers and resources to KVIC’s reform implementation division (RID) and the reform management units (RMU), and be responsible for issuing necessary notifications and directives to facilitate implementation and establishment of the Khadi Mark.

2. Program Management Organization 27. Prior to loan effectiveness, MMSME will set up a reform implementation and monitoring committee (RIMC) to be chaired by the MMSME secretary. The committee will serve as the program steering committee, and (i) provide policy and technical guidance to KVIC and the RID, (ii) review the progress of program implementation, (iii) monitor the performance of the RID and RMUs, and (iv) ensure program coordination. It will meet at least quarterly and include representatives from the Department of Economic Affairs of Ministry of Finance, Ministry of Textiles, KVIC, a marketing expert from the Confederation of Indian Industry, and a financial expert from the banking sector. The terms of reference for the reform implementation ad monitoring committee is in Appendix 1. 28. Prior to loan effectiveness, KVIC will establish the RID, which will be responsible for (i) coordinating actions under the Program in accordance with the implementation schedule, and (ii) monitoring overall program progress. The RID will be headed by a KVIC director with sufficient knowledge and experience in KVI related programs, who will report to KVIC’s chief executive officer. The RID will comprise four subdivisions: (i) promotion and marketing, (ii) raw material procurement and production, (iii) institutional reform, and (iv) program coordination and administration. KVIC will assign about 13 of its officers to the RID and about 7 administrative staff. Consultants will be hired to provide specialist support. RID’s responsibilities and actions are provided in Appendix 2. 29. Within one month of loan effectiveness, KVIC will establish an RMU at each of its state and divisional offices to manage and monitor program implementation at khadi institutions. Each RMU will be headed by a KVIC assistant director or an official of similar rank, and at least one officer will be assigned to support the head. The RMUs will coordinate with khadi institutions and facilitate monitoring and implementation of the reforms under the Program. RMU’s responsibilities and actions are provided in Appednix 3. B. Key Persons Involved in Implementation

Names Company Position Address Telephone / Fax No / email address

B. H. Anil Kumar

MMSME Joint Secretary 171, Udyog Bhawan, New Delhi-11011

T-23-061543 F-23-062858

Usha Suresh Khadi and Village Industries

Chief Executive Officer

Gramodaya. 3. Irla Road, Vile Parle (West), Mumbai-400056

T- 91-22-26713679

16

Names Company Position Address Telephone / Fax No / email address

Commission S.K. Sinha Khadi and

Village Industries Commission

Deputy CEO (RID / Khadi / EcR)

Gramodaya. 3. Irla Road, Vile Parle (West), Mumbai-400056

T-91-22-26715860 F-91-22-26715860

M. Teresa Kho ADB Country Director, INRM

4 San Martin Marg, Chanakyapuri, New Delhi 110021

T - 91 11 2410 7200

Leonardus Boenawan Sondjaja

ADB Deputy Country Director, INRM

4 San Martin Marg, Chanakyapuri, New Delhi 110021

T - 91 11 2410 7200

Balabhaskara Reddy Bathula

ADB PMU Head 4 San Martin Marg, Chanakyapuri, New Delhi 110021

T - 91 11 30900641

Ruchira Pande ADB Project Analyst 4 San Martin Marg, Chanakyapuri, New Delhi 110021

T - 91 11 30900629

C. Program Organization Structure

As per original PAM

= line of authority, = information flow, = adjustment cost fund flow, = agreement / MOU

PROGRAM MANAGEMENT CHART

Program Loan $150 million

$150 million

KVIC(Implementing Agency)

RID

$150 millionPolicy and institutionalreforms: $48 millionMarketing reforms:$27 millionStrengthening of khadiinstitutions: $75 million

MMSME(Executing Agency)

MOFDEA

ADB

KVIC State/Divisional Office 36 states RMU

ZonalOffice

Marketing Organization Joint Venture Company

Private Sector Partner

State KVIBs

Khadi institutions (300)

EquityJoint Venture

Reform Implementation and Monitoring Committee

MOU

17

ADB = Asian Development Bank; DEA = Department of External Affairs; KVIB = Khadi and Village Industries Board; KVIC = Khadi and Village Industries Commission; MMSME = Ministry of Micro, Small and Medium Enterprises; MOF = Ministry of Finance; MOU = memorandum of understanding; RID = reform implementation division; RMU = reform management unit. Source: Asian Development Bank.

18

As per revised PAM

ADB = Asian Development Bank; DEA = Department of External Affairs; KVIB = Khadi and Village Industries Board; KVIC = Khadi and Village Industries Commission; MMSME = Ministry of Micro, Small and Medium Enterprises; MOF = Ministry of Finance; MOU = memorandum of understanding; RID = reform implementation division; RMU = reform management unit. Source: Asian Development Bank.

IV. COSTS AND FINANCING

30. A loan for $150,000,000 from the ordinary capital resources of the Asian Development Bank (ADB) was approved and provided under ADB’s London interbank offered rate-based lending facility. As per restructure program, the loan amount has been reduced to $ 105,000,000. The loan will have a 15-year term including a grace period of 3 years, and an interest rate to be determined in accordance with ADB’s London interbank offered rate-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the loan agreement. 31. The loan is restructured to be released in 3 tranches. The first tranche of $20 million has been released on 17 February 2011. The second tranche shall be $40 million to be released in December 2016 and the third tranche of $45 million to be released by December 2017. 32. The ADB funds will support reforms that address complex and fundamental issues as described in the development policy letter (Appendix 4) and policy matrix (Appendix 5). Costs

ADB

MoF / DEA

MSME (Executing Agency)

KVIC (Implementing Agency)

Reform Implementation Division (RID)

Khadi Reform and DRA (USD 72.07 mn) Khadi Mark (USD 1.44 mn) Marketing Reforms (USD 0.83 mn) Production Efficiency (USD 8.79 mn) Financial Management (USD 0.63 mn) Institutional Capacity Building (USD 6.67 mn) IT - MIS & E-gov (USD 11.26 mn) Khadi New Ventures (USD 0.21 mn) Village Industries Program (USD 3.11 mn)

KVIC State / Divisional Office 36 states RMU

Marketing Directorate

State KVIB

Reform Implementation &

Monitoring Committee (RIMC)

Khadi Institutions (400)

Zonal Offices

MoU

19

are triggered by policy and institutional reforms, especially for revitalizing khadi institutions; and constitute the bulk of the cost. KVIC estimates the cost of strengthening all 2,223 khadi institutions at nearly $800 million over 4 years. The cost of reforms is expected to exceed these estimates, if delays are encountered. The impact of proposed reforms on phasing out subsidies will only be felt in the medium term, i.e., when the khadi institutions selected for program support make a turnaround and become sustainable, and other khadi institutions are reformed along similar lines through Government support. The Government will ensure that the counterpart funds are used for costs associated with reforms introduced under the Program. A. Cost Estimates by Expenditure Category

Program Components

Key Cost

Items

Administered by

Details

Amount

US$‘000

Amount

Rs. Crores

First Tranche

USD 20 mn ($1= INR

47.8)

Second and Third

Tranche ($1= INR

66.46)

Khadi Reform and DRA

Audit

Workshops

Direct Reform Assistance

KVIC National and State / Divisional Workshops @0.2 mn INR;

DRA per KI @ INR 11 mn

72067 469

Khadi Mark Basic Testing Infrastructure

Random Spot Audits

KVIC INR 30 mn for Testing infrastructure

INR 25,000 for random spot audit per KI

1437 9

Marketing Reforms Market Survey

Catalogue

KVIC INR 14 mn for market survey

INR 10 mn for product catalogue

825 5

Production Efficiency

CSP development

KVIC 8787 42

Financial Management

Study & Assessment

Dissemination costs

KVIC INR 10 mn for study and assessment

INR 3.6 mn for Dissemination

631 3

Institutional Capacity Building

Training Cost KVIC INR 200 mn (INR 25000 * 8000 trainees)

6673 40

IT- MIS and E-Gov MIS Development and Implementation

E-Gov / IFMS

KVIC INR 544 mn for MIS development and roll out

INR 100 mn for IFMS

11259 72

Khadi New Ventures

Field Visit KVIC 212 1

20

Program Components

Key Cost

Items

Administered by

Details

Amount

US$‘000

Amount

Rs. Crores

First Tranche

USD 20 mn ($1= INR

47.8)

Second and Third

Tranche ($1= INR

66.46)

Village Industries Program

Survey Cost

Cluster Strategy

Capacity Building

KVIC Survey and fee to technical agency of INR 10 mn for each VI

Development of cluster strategy of 10 mn for each VI

Capacity building plan of INR 1 mn per cluster

3109 25

Subtotal 105,000 666

B. Allocation and Withdrawal of Loan Proceeds

33. The following provisions of Schedule 3 of the Loan Agreement shall apply to the withdrawal of Loan proceeds from the Loan Account: (a) Withdrawals from the Loan Account shall be made for the financing of the cost of Eligible Items.

(b) No withdrawals from the Loan Account shall be made in respect of any expenditures which have been financed by credits from official international or bilateral aid agencies or any other loans made by ADB. 34. (a) An application for withdrawal from the Loan Account shall be submitted to ADB by the Borrower and shall be in a form satisfactory to ADB. 35. (b) Such withdrawal application shall be accompanied by a certificate of the Borrower confirming that (i) in case the proceeds of the Loan will finance imports already made, the value of Eligible Imports in the period concerned exceeded the amount of the requested withdrawal, or (ii) in case the proceeds of the Loan will finance items to be imported, the value of Eligible Imports in the immediately preceding one-year period was equal to or greater than the amount of the requested withdrawal plus all other amounts expected to be withdrawn from the Loan Account during the succeeding one-year period.

(c) For the purposes of this paragraph, the term "Eligible Imports" means the total imports of the Borrower during the relevant period minus the following imports during the same period:

(i) imports from countries which are not members of ADB;

21

(ii) imports for ineligible items specified in the Attachment 1 of the Schedule; and

(iii) imports financed from credits from official international or bilateral aid agencies or any other loans made by ADB.

(d) The Borrower shall allow experts appointed by ADB to verify the value of

Eligible Imports during any period in respect of which the Borrower has certified the value of Eligible Imports in its withdrawal application. 36. (a) Prior to submitting the first application to ADB for withdrawal from the Loan Account, the Borrower shall nominate an account (the Deposit Account) at RBI into which all withdrawals from the Loan Account shall be deposited. The Deposit Account shall be established, managed and liquidated in accordance with terms and conditions satisfactory to ADB.

(b) Separate accounts and records-in respect of the Deposit-Account-shall be maintained in accordance with consistently maintained sound accounting principles. Upon ADB's request, the Borrower shall have the Deposit Account audited by independent auditors, whose qualifications, experience and terms of reference are acceptable to ADB, in accordance with appropriate auditing standards. Promptly after their preparation but in any event not later than six (6) months after the date of ADB's request, certified copies of such audited accounts and records shall be furnished to ADB, all in the English language.

(c) Throughout the Program implementation period, the Borrower shall submit trade statistics and any other information as ADB may require from time to time to assess the Borrower's compliance with the formula for determining Eligible Imports. 37. Notwithstanding any other provisions of the Loan Agreement or the Loan Regulations and except as ADB may otherwise agree, no withdrawals shall be made from the second tranche unless ADB shall be satisfied, after consultation with the Borrower, that (a) sufficient progress has been achieved by the Borrower in the carrying out of the Program; and, in particular, (b) the Borrower has fulfilled the conditions for the release of the Second Tranche specified in Attachment 2 of the Schedule. 38. Notwithstanding any other provisions of the Loan Agreement or the Loan Regulations and except as ADB may otherwise agree, no withdrawals shall be made from the third tranche unless ADB shall be satisfied, after consultation with the Borrower, that (a) sufficient progress has been achieved by the Borrower in the carrying out of the Program; and, in particular, (b) the Borrower has fulfilled the conditions for the release of the third tranche specified in Attachment 3 of the Schedule. 39. Notwithstanding any other provisions of this Loan Agreement or the Loan Regulations and except as ADB may otherwise agree, no withdrawals shall be made from the fourth tranche unless ADB shall be satisfied, after consultation with the Borrower, that (a) sufficient progress has been achieved by the Borrower in the carrying out of the Program; and, in particular, (b) the Borrower has fulfilled the conditions for the release of the fourth tranche specified in Attachment 4 of the Schedule.

22

V. FINANCIAL MANAGEMENT

A. Financial Management Assessment

40. The objective of the financial management assessment is to determine whether the entities implementing the Program components have acceptable financial management arrangements—including procedures for making payments, accounting treatment of transactions, financial reporting, audit of financial statements, and internal control procedures—to avoid misuse or misappropriation of funds and assets. The assessment indicates that the Program is being prepared in an area of low financial management risk, as the entities that will implement the KRDP have successfully undertaken (or are currently undertaking) Programs from numerous donor agencies (including the World Bank and the United Nations Development Program). As a result, the overall financial management capacities of the executing agency (EA) and implementing agency (IA) are developed to a satisfactory level to ensure smooth functioning of the KRDP. 41. The EA for the KRDP will be the Ministry of Micro, Small and Medium Enterprises (MMSME). The KVIC will be the IA. The MMSME will set up a reform implementation and monitoring committee (RIMC) which will be the program steering committee. A reform implementation division (RID) is to be set up at KVIC. At the State Khadi and Village Industries Board (KVIB), which cover the second and third year program implementation, and each KVIC institution for pilot implementation, a reform management unit (RMU) will be established. The responsibility for major payments, accounting, and conduct of audit will remain with the RID. B. Disbursement

42. In accordance with provisions of ADB’s Simplification of Disbursement Procedures and Related Requirements for Program Loans (1998), the proceeds of the program loan will be disbursed to the Government as the Borrower. The loan proceeds will be utilized to finance the full foreign exchange costs (excluding local duties and taxes) of imports produced in, and procured from, ADB member countries, other than those specified in the list of ineligible items (Appendix 6) and imports financed by other bilateral and multilateral sources. The Government will certify that (i) the value of the country’s eligible imports is equal to, or exceeds, the amount of ADB’s projected disbursements under the loan in a given period; and (ii) the loan proceeds will be utilized in a manner satisfactory to ADB. The loan proceeds will be disbursed based on certification provided by the Government confirming that the requirements for the loan have been met. ADB will have the right to audit the use of the loan proceeds, and to verify the accuracy of the Government’s certification. 43. Simplified disbursement procedures and related requirements will be adopted. Prior to submitting the first application to ADB for withdrawal from the loan account, the Government of India (Borrower) would be required to open an account in RBI into which all loan disbursements would be deposited. 44. In order to withdraw loan proceeds the Borrower would have to submit a withdrawal application (Appendix 7). Such withdrawal application shall be accompanied by a certificate from the Borrower (Appendix 8), confirming that (i) the value of country’s eligible imports is equal to, or exceeds, the amounts of ADB’s projected disbursements under the policy loan in a given period (in accordance with the policy matrix in Appendix 2); and (ii) the policy loan

23

proceeds would be used in a manner satisfactory to ADB. ADB would have the right to audit use of loan proceeds to ensure that they are used for the intended purposes. C. Accounting

45. The Government and KVIC will maintain records and accounts to identify all goods and services financed by the loan proceeds. The RID will be responsible for maintaining the records, and will submit annual accounts and financial statements to Department of Economic Affairs. The Government will ensure that accounts and financial statements are audited annually, in accordance with sound accounting principles, by independent external auditors. D. Auditing

46. The RID will be responsible for maintaining the records, and will submit annual accounts and financial statements to MMSME. The MMSME will ensure that accounts and financial statements are audited annually, in accordance with sound accounting principles, by independent external auditors. The external audit of the EA and IA are conducted according to International Organization of Supreme Audit Institution’s auditing standards. The Comptroller and Auditor General of India, an independent constitutional authority, conducts the external audit of the EA and IA. Audit to a khadi institution is regularly conducted and the standing order No.1616 of KVIC stipulates (i) profoma of audit/inspection report on the affairs of khadi institutions, (ii) code of operation on the finding of the audit report, and (iii) code of administrative action on findings of audit reports for the fund flow from KVIC to khadi institutions. The independent audit to eligible khadi institutions is also a part of policy conditions. 47. An audit of the use of the loan proceeds will be undertaken if requested by ADB and ADB retains the right to (i) audit any account and (ii) verify the validity of the certification issued by the Government for each withdrawal application. Immediately after the loan effective date, the Government shall establish a special account at a commercial bank acceptable for ADB for the special purpose of depositing and utilizing the counterpart funds. Prior to withdrawal, the Government will open a deposit account at the Reserve Bank of India to receive all loan proceeds. The accounts will be established, managed, operated, and liquidated in accordance with terms satisfactory to ADB. MMSME, through KVIC, will maintain separate records and accounts on the use of the counterpart funds following sound accounting principles, and will have such accounts and records audited annually by auditors acceptable to ADB, and will furnish, within 6 months of the close of the financial year, certified copies of the audit report with auditors’ opinion to the Government and ADB.

VI. SAFEGUARDS

48. The Borrower shall, and shall cause KVIC to ensure that all activities under the Program shall be carried out in accordance with all applicable environmental laws and regulations of the Borrower, and ADB’s Environmental Policy (2002). 48. The Borrower shall, and shall cause KVIC to ensure that under the Program no persons shall be (a) adversely affected in terms of ADB’s Involuntary Resettlement Policy (1995), and applicable laws and regulations of the Borrower related to resettlement and rehabilitation, and (b) affected in terms of ADB’s Policy on Indigenous Peoples (1998) and related laws and regulations of the Borrower.

24

VII. PERFORMANCE MONITORING, EVALUATION, REPORTING AND COMMUNICATION

A. Revised Program Design and Monitoring Framework

Impacts the program is aligned with: Enhancement of income and employment growth for the RNS1

Result Chain Performance Indicators with Targets and Baseline

Data Source and Reporting

Risks

Outcome Revitalized KVI subsector provides Sustainable employment to artisans with higher earnings

a. At least 12% increase in number of artisans employed by khadi institutions by 2017 (2010 baseline: 0.98 million) b. At least 20% increase in khadi sector earnings by 2017 (2010 baseline: INR 4.25 billion)

a. Annual Reports of KVIC b. Annual Reports of KVIC

Competing avenues for rural employment – specifically the Centrally sponsored National Rural Employment Generation Scheme(NREGS)

Outputs 1. Policy reform and implementation framework is established to carry out the proposed reforms

1. Khadi reform package implemented (by December 2017)

1a. Independent assessments of program implementation and impact

1b. KVIC annual report

1a. Weak reform implementation 1b. Reluctance and resistance from Khadi Institutions

2. Khadi is effectively promoted and marketed to ensure commercial viability as well as generate market demand for khadi

2. Increase in sales by 40% on over the numbers prevailing in 2010 by 2017 (Baseline for sales in 2009-10: INR 8.67 billion)

2a. KVIC annual report 2b. Official gazette/ Relevant government notifications

2a. Competing product especially handlooms and linen 2b. Reluctance among Khadi Institutions for adopting marketing reforms

3. Reduce the working capital blocked in the production value chain and enhance capacity utilization of CSPs

3a. 25% reduction in debtor days of CSPs from prevailing number of days in 2010 (by Sep 2017) (Baseline for debtor days of CSPs in 2009-10: 389 debtor days) 3b. 10% increase in capacity utilization of CSPs from prevailing utilization levels in

3a. KVIC CSP Reports 3a. Low demand for sliver produced by CSPs 3b. Purchase of sliver on credit by KIs due to inadequate working capital

1 12th Five Year Plan document of Planning Commission, Government of India – extracts placed in revised PAM for

KRDP

25

Result Chain Performance Indicators with Targets and Baseline

Data Source and Reporting

Risks

2010 (by September 2017) (Baseline for capacity utilization of CSPs in 2010: 87%2)

4. Institutional reforms are implemented to restructure KVIC, revitalize khadi institutions and develop synergies between khadi and traditional village industries

4a. The comprehensive reform plan is implemented for 400 eligible khadi institutions (by Dec 2017) 4b. IT and e-governance systems and practices of KVIC are strengthened (by Dec 2017) 4c. Five traditional village industries implement the cluster development strategy (by Sept 2017)

4a. KVIC Annual Report

4a. Reluctance of KIs to adopt reforms 4b. Low competencies in IT operations at institutional level

Activities with milestones (Second and Third Tranche) Inputs 1. Khadi Reforms and Direct Reform Assistance 1.1. KVIC shall have ensured the completion of the audit for hundred and eighty (180) eligible Khadi institutions by independent auditors by August 2016 (Second Tranche)

1.2. KVIC shall have disseminated the Khadi Reform Package nationwide through workshops by August 2016 (Second Tranche)

1.3. KVIC ensures that the 80 eligible khadi institutions implement the comprehensive reforms plan and implementation plan developed and approved for 100 additional KIs by August 2016 (Second Tranche)

1.4. KVIC shall have (a) undertaken the initial assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback by August 2016 (Second Tranche)

1.5. KVIC shall have signed MoUs with one hundred and eighty (180) eligible Khadi institutions for comprehensive Khadi institution reforms by August 2016 (Second Tranche)

1.6. KVIC shall have modified categorization norms for Khadi institutions and recategorize 400 Khadi institutions using the modified norms by August 2016 (Second Tranche)

1.7. KVIC shall have recategorize the remaining Khadi institutions using the modified norms by December 2016 (Third Tranche )

1.8. KVIC shall have evaluated the performance of the four hundred (400) eligible Khadi institutions by September 2017 (Third Tranche)

1.9. KVIC shall have ensured that three hundred and twenty (320) eligible Khadi institutions shall have implemented the comprehensive reforms plan by July 2017 (Third Tranche)

1.10. KVIC shall have (a) undertaken the independent assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback by June 2017 (Third Tranche)

$66.8 million

2 Data for target and achievement for production provided by KVIC

26

Activities with milestones (Second and Third Tranche) Inputs 1.11. KVIC shall have signed with two hundred twenty (220) eligible Khadi institutions the MOUs for comprehensive Khadi institution reforms by September 2016 (Third Tranche)

1.12. KVIC shall have ensured the completion of the audit of remaining two hundred and twenty (220) eligible Khadi institutions by independent auditors by August 2016 (Third Tranche)

1.13. KVIC shall have adopted the comprehensive reforms plan to empower and revitalize the four hundred (400) eligible Khadi institutions by September 2016 (Third Tranche)

2. Establish identity of Khadi through Khadi mark 2.1. KVIC shall have conducted random spot audits of Khadi institutions and other entities authorized to use Khadi mark regarding their adherence to the licensing requirements for the use of Khadi mark by August 2016 (Second Tranche)

2.2. KVIC shall have developed the Khadi Mark, including designing its logo, and notified the Regulations for enforcing Khadi Mark under the KVIC Act, 1956 by August 2016 (Second Tranche)

2.3. KVIC shall have(a) undertaken pan India arrangements for independent testing of Khadi; (b) obtained undertaking from users to abide by regulations for use of Khadi Mark (c) developed the detailed plan for the creation of basic testing infrastructure for Khadi mark at KVIC; and (d) undertaken the arrangement for managing Khadi Mark by KVIC state/divisional offices by August 2016 (Second Tranche)

2.4. KVIC shall have adopted the procedures and assigned its Khadi directorate to grant usage of Khadi mark to Khadi institutions and other entities by August 2016 (Second Tranche)

2.5. KVIC through its Khadi directorate shall have ensured that the Khadi institutions registered at either KVIC or KVIB adopt the Khadi Mark by August 2016 (Second Tranche)

2.6. KVIC through its Khadi directorate shall have prepared and maintained a list of Khadi institutions and other entities authorized to use Khadi Mark and publish this in its website by August 2016 (Second Tranche)

2.7. KVIC shall have continued to conduct random spot audits of Khadi institutions regarding the adherence to licensing requirements for the use of Khadi mark by May 2017 (Third Tranche)

2.8. KVIC shall have created the basic testing infrastructure for the Khadi Mark by September 2016 (Third Tranche)

3. Reforms in marketing of Khadi 3.1. KVIC shall have commissioned a product specific market survey of Khadi and Village Industries products through a specialist firm by August 2016 (Second Tranche)

3.2. The KVIC shall have prepared a product catalogue and set up the market information system by February 2017 (Third Tranche)

3.3. Based on the outcome of the survey, KVIC shall have identified products for both domestic and international markets and develop marketing strategies for all Khadi related institutions and products by January 2017 (Third Tranche)

4. Reforms in financial management of Khadi 4.1. KVIC shall have notified the benefit chart to the Khadi institutions by August 2016 (Second Tranche)

4.2. KVIC shall have appointed a focal person to engage with the bankers to enhance access of the Khadi institutions to working capital by August 2016 (Second Tranche)

$0.9 million

$ 0.5 million

$ 0.2 million

27

Activities with milestones (Second and Third Tranche) Inputs 4.3. KVIC shall have reassessed working capital requirement for Khadi production by August 2016 (Second Tranche)

4.4. KVIC shall have formulated the production incentive plan and provides production incentive to all Khadi products by August 2016 (Second Tranche)

4.5. KVIC shall have formulated the benefit chart by August 2016 (Second Tranche)

4.6. KVIC shall have issued a notification to allow Khadi institutions to set market linked prices by August 2016 (Second Tranche)

4.7. KVIC shall have continued the phasing out of production incentives on other by categories of products and assess the impact on sales as a result of this by October 2017 (Third Tranche)

4.8. KVIC shall have monitored and assessed the effectiveness of the implementation of the benefit chart by May 2017 (Third Tranche)

5. Institutional Strengthening of the Khadi 5.1. KVIC shall have examined and reviewed the role and relevance of the central certification committee in the certification process of the Khadi institutions by August 2016 (Second Tranche)

5.2. KVIC shall have periodically published in its website the training calendar by August 2016 (Second Tranche)

5.3. KVIC shall have implemented the comprehensive capacity building plan by August 2016 (Second Tranche)

5.4. KVIC shall have completed (a) the assessment of existing training arrangements (infrastructure, capacity of trainers, curriculum, and demand for training); and (b) based on the assessment, the comprehensive plan for (i) demand driven training delivery, (ii) the creation of linkages with external training program, (iii) the upgrading of physical infrastructure, and (iv) the enhancement of the skills of training staff by August 2016 (Second Tranche)

5.5. The Borrower through the Program Executing Agency shall have reviewed the functions of the marketing directorate of KVIC by August 2016 (Second Tranche)

5.6. KVIC shall have (a) reviewed the existing structures and processes for the certification of the Khadi institutions; and (b) issued appropriate guidelines to empower a committee within the directorates of KVIC with the authority for the certification of Khadi institutions, under the guidance and advice of the central certification committee by August 2016 (Second Tranche)

5.7. KVIC shall have (a) restructured its Khadi directorates, village industry directorates, science and technology directorates, and economic research directorates; (b) strengthened the human resource and administration directorates; (c) realigned reporting relationships for efficiency; and (d) devolved power to zonal offices by August 2016 (Second Tranche)

5.8. KVIC shall have conducted training for the three hundred (300) eligible Khadi institutions on quality testing of raw materials by August 2016 (Second Tranche)

6. IT reforms in Khadi 6.1. KVIC shall have developed IT/e-governance roadmap, infrastructure requirements, and linkage of IT/IS strategy to the Khadi Reform Package by August 2016 (Second Tranche)

6.2. KVIC shall have developed an integrated management information system and roll out in 100 KIs by August 2016 (Second Tranche)

6.3. KVIC shall have implemented the integrated application system by October 2017 (Third Tranche)

6.4. KVIC shall have implemented the management information system in 400 KIs by January 2017 (Third Tranche)

$ 4.6 million

$ 9.7 million

$ 0.0 million

28

Activities with milestones (Second and Third Tranche) Inputs 7. Development of new ventures under Khadi 7.1. KVIC shall have developed the framework for producer company model and enterprise for new ventures in Khadi by August 2016 (Second Tranche)

8. Develop synergies through traditional village industries 8.1. KVIC shall have formulated the cluster development strategy for the identified village industries by August 2016 (Second Tranche)

8.2. KVIC shall have identified five thrust traditional village industry clusters based on market assessment study by August 2016 (Second Tranche)

8.3. KVIC shall have ensured the establishment of one (1) cluster for each of the identified village industry by December 2016 (Third Tranche)

8.4. KVIC shall have ensured the implementation of the comprehensive capacity building plan in the identified clusters by December 2016 (Third Tranche)

8.5. KVIC shall have monitored the performance of the clusters by September 2017 (Third Tranche)

$ 2.3 million

Program Inputs ADB Program Loan $105 million (OCR) ADTA Grant (JSF) $2,000,000 Government of India counterpart funding $500,000 equivalent ADB Review Missions MMSME and KVIC a. Counterpart Staff b. Office Accommodation c. Obtaining required information d. Participation in meetings Assumptions for Partner Financing None ADB = Asian Development Bank, ADTA = Advisory technical assistance, CSP = Central Sliver Plant, EA = Executing Agency, ISEC = Interest Subsidy Eligibility Certificate, IT = Information Technology, IS = Information System, JSF = Japan Special Fund, KVI = Khadi and Village Industries, KVIB = Khadi and Village Industries Board, KVIC = Khadi and Village Industry Commission, MIS = Management Information System, MMSME = Ministry of Micro, Small and Medium Enterprises, MOU = Memorandum of Understanding, OCR = Ordinary Capital Resource, RNS = Rural Nonfarm Sector.

29

B. Monitoring

49. The restructured loan will be released in three tranches till 2017. The first tranche of $20 million has been released on 17 February 2010. The second tranche and third tranche shall be of $40 million and $45 respectively; and shall be released subject to compliance with their respective tranche release conditions. 50. The Government and ADB will conduct semiannual reviews throughout program implementation to identify actions required for the continued development of the khadi sector. The midterm review will be undertaken on a regular basis on (i) compliance status of the next tranche conditions, (ii) status and implementation of policies, (iii) status and implementation of reforms, (iv) initial lessons, and (v) progress in achieving the indicators in the design and monitoring framework. 51. The KVIC through RID will design, develop and implement a program performance monitoring system (PPMS) for monitoring the program reform, building up socio-economic data and evaluation of the Program during implementation. RID will be assisted by Program Monitoring Specialist and MIS Specialist through associated TA. The RID and RMU are expected to closely monitor the progress, both at the policy level and the institutional level, towards meeting program objectives.

C. Evaluation

52. Based on information provided both by the RID and RMU through independent evaluation, the RIMC will undertake semi-annual reviews during the implementation. This will provide RIMC the opportunity to fine tune policy initiatives in light of changes in the external environment. 53. Program implementation and management will be guided by PPMS, which will be established to track reform in the RID. The PPMS will generate a biannual report which will be prepared by RID and submitted to MMSME. The PPMS will track implementation of the policy matrix in the KRDP including all activities described under the policy framework and actions. In addition, PPMS will also provide information on the impact the reform agenda is having on the performance of the khadi institutions and artisans. In this, PPMS will track financial and operation performance using indicators for asset performance, transaction costs, outreach, etc. The PPMS will include:

(i) Performance monitoring, impact assessment and reporting arrangement for program monitoring.

(ii) Development of special data collection protocols and publications to track

performance of the reforms for enabling monitoring aspects. (iii) Baseline indicators and initial survey to provide a basis to assess the

socioeconomic and poverty impacts of Khadi Reform Package includes at least but not limited to the information as:

30

(a) Increased rural nonfarm per capita income, (b) increase in employment growth rates in the RNS, (c) number of artisan employed by khadi institutions, (d) prevailing earnings of khadi artisans, (e) Increase in sales fo Khdi products, (f) reduction in raw material (sliver) production cost, (g) The status of comprehensive reform plan to be implemented for 400

eligible khadi institutions, (h) developments in IT and e-governance systems and practices of KVIC, (i) status of five traditional village industries implementation the cluster

development strategy.

D. Reporting

54. KVIC through RID will prepare quarterly progress reports and submit them to ADB within 20 days of the end of the applicable period. The reports will be prepared in a format acceptable to ADB and include (i) Program progress in each state and component, (ii) the status of institutional development activities, (iii) delays and problems encountered and actions taken to resolve them, (iv) compliance with loan covenants, and (v) expected progress during the next 3 months. PAI 5.01 describes the details of the requirement for preparing the progress report by EA. The suggested format and contents of the progress report is provided in Appendix 9. Within 3 months of program completion, KVIC will prepare and submit to ADB, through MMSME, a Program completion report including costs and compliance with loan covenants.

VIII. ANTICORRUPTION POLICY

55. The Program directly addresses governance issues related to KVIC and khadi institutions by (i) conducting independent audits of khadi institutions eligible for the comprehensive reform plan, (ii) reforming the governance structure of khadi institutions for artisans’ autonomy and empowerment by modifying the categorization norms and introducing a new khadi venture model, (iii) establishing new rules for usage and authority of the Khadi Mark and conducting random spot audits for khadi institutions on the licensing requirement for the Khadi Mark, and (iv) implementing institutional reforms for KVIC. Independent audit of khadi institutions will reduce the vulnerability to corruption. Modifying the categorization norm of khadi institutions and institutional reform of KVIC will ensure (i) enhanced corporate governance, (ii) compliance with transparency and disclosure requirements, and (iii) adequate monitoring mechanisms. A governance and anticorruption risk assessment is in Appendix 10 of the RRP. 56. In addition, ADB's Anticorruption Policy (1998, as amended to date) and the Second Governance and Anticorruption Action Plan 10 was explained to and discussed with the executing agency and implementing agency. Consistent with its commitment to good governance, accountability, and transparency, implementation of the Program shall adhere to ADB's Anticorruption Policy (1998, as amended to date). ADB reserves the right to review and examine, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating the Program. In this regard, investigation of government officials, if any, would be requested by ADB to be undertaken by the Government. In this context, a financial management assessment was also undertaken by the Executing Agency (Supplementary Appendix K of the RRP) to provide assurance that ADB loan funds will be used for their intended purpose. ADB will regularly review the financial reports of the audit authorities to

10 ADB. 2006. Second Governance and Anticorruption Action Plan (GACAP II). Manila.

31

assess any potential financial and administrative irregularities. During regular review missions, the financial management, and governance and anticorruption risk assessments will be updated to ensure that their provisions remain valid and are helping the reforms to succeed.

32 Appendix 1

TERMS OF REFERENCE FOR THE REFORM IMPLEMENTATION AND MONITORING COMMITTEE

1. Composition of Reform Implementation and Monitoring Committee (RIMC). RIMC will function as a program steering committee and will be chaired by Secretary, Ministry of Micro, Small and Medium Enterprise (MMSME) and will include Joint Secretary, MMSME; Additional Secretary & Financial Adviser, MMSME; Joint Secretary (ADB & INFRA), Department of Economic Affairs, Ministry of Finance; Joint Secretary, Ministry of Textile; Chief Executive Officer, Khadi and Village Industries; A Marketing Expert to be nominated by Confederation of Indian Industries; Financial Expert from the Banking Sector to be nominated by Secretary (Financial Services), Ministry of Finance; Senior Adviser / Principal Adviser, VSE division, Planning Commission; Financial Adviser, Khadi and Village Industries Commission. RIMC will be mainly responsible to providing policy and management guidance to the Khadi Reform and Development Program and is to meet at least quarterly. MMSME, the Executing Agency functions as the secretariat for RIMC. 2. Terms of Reference for Steering Committee. The RIMC will ensure that program objectives are met through the smooth implementation. With this objective the RIMC shall:

(i) Provide review policy initiatives and provide policy and management guidance for the achievement of program objectives;

(ii) Monitor performance of implementation arrangements and progress towards meeting tranche release conditions;

(iii) Review performance of Reform Implementation Division (RID) and Reform Management Units (RMU) and provide technical inputs where required;

(iv) Ensure RID and RMUs maintain separate accounts and to be audited following acceptable accounting principles;

(v) Ensure effective Program coordination and (vi) Approve the appointment of the RID Director in case of a change in the Director.

3. Meeting of the RIMC. The RID, in coordination with the Committee chairperson, shall organize the committee meetings as follows:

(i) Regular RIMC meeting shall be convened at least quarterly by notice to the member by the chairperson;

(ii) The chairperson at his/her discretion may convene a meeting of RIMC to discuss any extraordinary issues that may arise on a date specified in the request;

(iii) The chairperson shall preside at each meeting of RIMC. The quorum necessary for transacting business at a meeting of RIMC shall be six members present at any meeting of the RIMC;

(iv) The minutes of the RIMC meetings shall be recorded by MMSME and confirmed by all the members present at the meetings; and

(v) The decisions of RIMC shall be by majority vote.

Appendix 3 33

REFORM IMPLEMENTATION DIVISION RESPONSIBILITIES AND ACTIONS

Prior to loan effectiveness, KVIC will establish the RID, which will be responsible for (i) coordinating actions under the Program in accordance with the implementation schedule, and (ii) monitoring overall program progress. The RID will be headed by a KVIC director with sufficient knowledge and experience in KVI related programs, who will report to KVIC’s chief executive officer. The RID will comprise four subdivisions: (i) promotion and marketing, (ii) raw material procurement and production, (iii) institutional reform, and (iv) program coordination and administration. KVIC will assign about 13 of its officers to the RID and about 7 administrative staff. Consultants will be hired to provide specialist support. Responsibilities Required Actions Reference1. Tranche Condition Compliance

Prepare and update the overall implementation plan and schedule for the program.

Coordinate actions for implementing tranche conditions under the program.

Monitor the status of the implementation. Coordinate with RMUs for implementing the

policy actions.

RRP Loan Agreement, Program Agreement, PAM Policy Matrix;

2. Monitoring Identify necessary data available for the performance target

Prepare data formats and request RMUs and other sources for data on program implementation

Collect all data and process for reporting.

PAM (Program) / RRP

3. Evaluation Process the data collected for the program and prepare an evaluation report to be submitted to MMSME and RIMC

Establish the program performance and monitoring system

PAM (Program) / RRP

4. Procurement Prepare the guidance, as required for the procurement issues such as for hardware and software requirements in accordance with the rules of the Government of India.

Prepare a procurement plan for implementing the program and implement.

Loan Agreement, Program Agreement Guideline of Government of India

5. Contract Awards

Prepare guidance, as required for contract award in accordance with the rules of the Government of India

Loan Agreement, Program agreement Guideline of Government of India

6. Disbursement Arrangements

Prepare a report on tranche release condition compliance of the program components and submit to ADB at least two month before scheduled tranche. In case of possible non-compliance report to ADB to facilitate remedial measures.

Loan Agreement Program agreement PAM (Program)

34 Appendix 2

7. Reporting Prepare quarterly progress report and submit to ADB within 20 days of the end of the applicable period.

Loan Agreement Program agreement PAM (Program)

8. Accounting and auditing

Maintain the records, accounts and financial statements on the use of the counterpart funds following sound accounting principles

Keep the accounts and financial statements audited annually by independent external auditors

Loan Agreement Program agreement PAM (Program

8. Liaising with RMUs

Coordinate necessary actions and reporting of the program implementation with RMUs

Provide necessary support for implementation activities of RMUs

Loan Agreement Program agreement PAM (Program)

9. Support for ADB Missions

Provide logistical support for regular ADB review missions.

Prepare midterm review and Program completion reports on program progress

Loan Agreement Program agreement PAM (Program)

ADB = Asian Development Bank, IA = implementing agency, NIMC = National Implementation and Monitoring Committee, PACS = primary agricultural credit society, PAM = Program administration memorandum, RMU = reform management unit, RRP = Report and Recommendation of the President, TA = technical assistance.

Appendix 3 35

REFORM MANAGEMENT UNIT'S RESPONSIBILITIES AND ACTIONS

Within one month of loan effectiveness, KVIC will establish an RMU at each of its state and divisional offices to manage and monitor program implementation at khadi institutions. Each RMU will be headed by a KVIC assistant director or an official of similar rank, and at least one officer will be assigned to support the head. The RMUs will coordinate with khadi institutions and facilitate monitoring and implementation of the reforms under the Program.

Reform Management Units (RMUs) (RMU Structure at State / Divisional Offices KVIC)

Dy. CEO (RID / Khadi /Ec.R)

State / Divisional Director

Reform Implementing Officer (RIO) – One each at Institution’s level

Programme Implementing Officer (PIO) *

Dev. Officer/ADO (K)

Reform Management Officer (RMO) –

Programme Research Officer (PRO) **

Eco. Officer / Eco. Investigator

Programme Implementing Institutions (PII)

PII PII PII PII

* PIO is responsible for Institutional Reform and Capacity Building

** PRO is responsible for Information, Monitoring and Reporting

36 Appendix 4

DEVELOPMENT POLICY LETTER

Appendix 4 37

38 Appendix 4

Appendix 4 39

40 Appendix 4

Appendix 4 41

42 Appendix 4

Appendix 4 43

44 Appendix 4

Appendix 4 45

46A

ppendix 5

REVISED POLICY MATRIX AND REVISED POLICY CONDITIONS

I. REVISED POLICY MATRIX

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

I. Establishing a Policy Reform and Implementation Framework

A comprehensive reform package for the development of khadi

Government of India (the Government) conducts a review of the performance of khadi sub-sector comprising KVIC and other subsidiary institutions and develops a khadi reform package to strengthen the khadi sub-sector. (khadi reform package) KVIC agrees on the khadi reform package comprising – policy, legal, marketing, and institutional reforms for achieving sustainability of khadi and enhancing artisan welfare. (KVIC letter indicating concurrence) KVIC, in consultation with MMSME, develops (i) criteria for selecting khadi institutions eligible for assistance under the khadi reform package, which will primarily be performance-based

KVIC shall have ensured the completion of the audit for hundred and eighty (180) eligible KIs by independent auditors. (Summary of audit findings) KVIC shall have disseminated the Khadi Reform Package nationwide through workshops. (List of state-wide workshops and training report) KVIC shall have (a) undertaken the initial assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback. (Assessment Report and identify feedback and mitigation measures)

KVIC shall have ensured the completion of the audit of remaining two hundred and twenty (220) eligible KIs by independent auditors. (Summary of audit findings) KVIC shall have (i) undertaken the independent assessment of the Khadi Reform Package, (ii) held a stakeholder consultation on the outcome of the assessment, and (iii) prepared appropriate measures to address the feedback. (Assessment Report and identify feedback and mitigation measures).

47A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

with due regard to regional balance and the inclusion of backward areas, and (ii) draft MOU between KVIC and khadi institutions on comprehensive reforms for khadi institutions, which will include performance benchmarks and sanctions for khadi institutions that fail to meet the performance benchmarks (eligibility criteria and MOU). KVIC selects 400 khadi institutions eligible for support under the khadi reform package (list of eligible khadi institutions).

II. Promoting and Marketing Khadi

Establishing identity of khadi through Khadi Mark

KVIC agrees to undertake steps to develop Khadi Mark and link the artisan’s base earnings to the use of Khadi Mark (khadi reform package).

KVIC shall have developed the Khadi Mark, including designing its logo, and notified the Regulations for enforcing Khadi Mark under the KVIC Act, 1956. [(a) Notified Khadi Mark Regulation (b) Khadi Mark Logo and (c) Summary findings of random spot audit reports] KVIC shall have (a) undertaken

KVIC shall have created the basic testing infrastructure for the Khadi Mark. (Testing Infrastructure Report) KVIC shall have continued to conduct random spot audits of KIs regarding the adherence to the licensing requirements for the use of Khadi Mark. (Summary of spot audit reports)

48A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

pan India arrangements for independent testing of Khadi; (b) obtained undertaking from users to abide by regulations for use of Khadi Mark (c) developed the detailed plan for the creation of basic testing infrastructure for Khadi Mark at KVIC; and (d) undertaken the arrangement for managing Khadi Mark by KVIC state/divisional offices. [(a) MoU with the accredited agency b) Undertaking from users for usage of Khadi Mark c) Plan of testing infrastructure d) Khadi Mark Procedural Protocol as notified] KVIC shall have adopted the procedures and assigned its Khadi directorate to grant usage of Khadi Mark to KIs and other entities. (Gazette notification for Khadi Mark Regulations) KVIC through its Khadi directorate shall have ensured that the KIs registered at either KVIC or KVIB adopt the Khadi Mark. (List of KIs registered for Khadi Mark)

49A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

KVIC through its Khadi directorate shall have prepared and maintained a list of KIs and other entities authorized to use Khadi Mark and publish this in its website. (List of Khadi Institutions) KVIC shall have conducted random spot audits of KIs and other entities authorized to use Khadi Mark regarding their adherence to the licensing requirements for the use of Khadi Mark. (Summary of the spot audit reports)

Effective marketing through private sector participation

KVIC agrees to establish a new marketing organization with majority private sector ownership (khadi reform package).

KVIC shall have commissioned a product specific market survey of Khadi and Village Industries products through a specialist firm. [(a) Work order and (b) the market survey report]

Based on the outcome of the survey, KVIC shall have identified products for both domestic and international markets and develop marketing strategies for all Khadi related institutions and products. [(a) Market Survey Report b) Strategy report based on survey)] KVIC shall have prepared a product catalogue and set up the market information system. (Product Catalogue and

50A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

operational market information system)

III. Realizing Procurement and Production Efficiencies

Facilitating raw material procurement and cotton sliver production

KVIC develops quality norms for raw material procurement by khadi institutions (quality norms issued by KVIC). KVIC initiates the creation of a fund to kick-start private sector participation in sliver/roving production (KVIC letter, which will incorporate the guidelines for utilization of the fund).

KVIC shall have conducted training for the three hundred (300) eligible KIs on quality testing of raw materials. (Training Report)

Market-linked pricing to replace cost-based pricing

KVIC agrees to undertake steps to allow khadi institutions to set their khadi prices (khadi reform package).

KVIC shall have issued a notification to allow KIs to set market-linked prices. (Notification for Market Linked Pricing) KVIC shall have formulated the benefit chart. (Notification for Benefit Chart) KVIC shall have notified the benefit chart to KIs. (Circular / Order for Benefit Chart)

KVIC shall have monitored and assessed the effectiveness of the implementation of the benefit chart. (Assessment report)

51A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

Rationalization of financial assistance for khadi

KVIC agrees to undertake steps for the khadi institutions to shift to the production incentive plan (khadi reform package).

KVIC shall have formulated the production incentive plan and provided production incentive to all Khadi products. (Guidelines as issued to all Khadi Institutions for Market Promotion Development Assistance) KVIC shall have reassessed working capital requirement for Khadi production. (Report of Working Capital Assessment) KVIC shall have appointed a focal person to engage with the bankers to enhance access of the KIs to working capital. (Office order for appointment of Focal Person)

KVIC shall have continued the phasing out of production incentives on other categories of products and assess the impact on sales as a result of this. (Progress report)

Creation of new khadi ventures with greater entrepreneurial activity and enhanced artisan empowerment

KVIC agrees to pursue the producer company model and enterprise model for new ventures in khadi. (khadi reform package)

KVIC shall have developed the framework for producer company model and enterprise for new ventures in Khadi. (Notification for implementation of Producer Company)

IV. Implementing Institutional Reforms

Organizational restructuring of KVIC

KVIC adopts the restructuring devolution plan for (i)

KVIC shall have (a) restructured its Khadi directorates, village

KVIC shall have implemented the management information system

52A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

for better focus on facilitative and developmental role

restructuring khadi, village industries, science and technology, and economic research directorates; (ii) strengthening of human resource and administration directorate; (iii) realignment of reporting relationships; and (iv) devolution of powers and responsibilities to zonal offices (restructuring devolution plan). KVIC creates the steering committee and users committee for the IT/IS planning and implementation (KVIC notification).

industry directorates, science and technology directorates, and economic research directorates; (b) strengthened the human resource and administration directorates; (c) realigned reporting relationships for efficiency; and (d) devolved power to zonal offices. [(a) Circular on restructuring; b) Circular on strengthening the HR and administration directorates; c) Circular on realignment of reporting relationships; d) Circular on devolution of powers to zonal offices)] KVIC shall have (a) reviewed the existing structures and processes for the certification of the KIs; and (b) issued appropriate guidelines to empower a committee within the directorates of KVIC with the authority for the certification of KIs, under the guidance and advice of the central certification committee. [(a) Review report of certification of Khadi Institutions b) Notification on empowering CCC to manage certification process)]

in four hundred (400) KIs. (Progress Report on fully operational MIS in 400 Khadi Institutions) KVIC shall have implemented the integrated application system. (Achieved "Go-Live" for the application system)

53A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

KVIC shall have examined and reviewed the role and relevance of the central certification committee in the certification process of the KIs. (Review report) KVIC shall have developed an integrated management information system and roll out in one hundred (100) KIs. [(a) Work order issued to vendor for developing MIS and (b) Progress Report on roll out for 100 KIs] KVIC shall have developed IT/e-governance roadmap, infrastructure requirements, and linkage of IT/IS strategy to the Khadi Reform Package. (IT Roadmap and Tender Notification) The Borrower through the Program Executing Agency shall have reviewed the functions of the marketing directorate of KVIC. (Action Taken Report with minutes)

54A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

Revitalize khadi Institutions

KVIC agrees to formulate the comprehensive reforms plan for the 300 eligible khadi institutions (khadi reform package).

KVIC shall have modified categorization norms for KIs and recategorized four hundred (400) KIs using the modified norms. (List of re-categorized Kis and modified recategorization norms) KVIC shall have signed MoUs with one hundred and eighty (180) eligible KIs for comprehensive KI reforms. [(a) List of Institutions along with date of signing of MoUs (b) Sample MoU)] KVIC shall have ensured that the eighty (80) eligible KIs implement the comprehensive reforms plan and implementation plan developed and approved for hundred (100) additional KIs. [(a) Progress Report on implementation of 80 Khadi Institutions and (b) Implementation plan for 100 Khadi Institutions approved by KVIC]

KVIC shall have adopted the comprehensive reforms plan to empower and revitalize the four hundred (400) eligible KIs. (Comprehensive Reforms Plan) KVIC shall have recategorized the remaining KIs using the modified norms. (List of re-categorized KIs and modified recategorization norms) KVIC shall have signed with two hundred twenty (220) eligible KIs the MOUs for comprehensive KI reforms. (List of MoUs with dates of signing and sample MoU) KVIC shall have ensured that three hundred and twenty (320) eligible KIs shall have implemented the comprehensive reforms plan. (Progress Report) KVIC shall have evaluated the performance of the four hundred (400) eligible KIs. (Evaluation Report)

Strengthen the KVIC agrees to develop a KVIC shall have completed (a)

55A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

capability of all institutions

comprehensive capacity building plan covering KVIC, KVIBs, khadi institutions, and artisans. (khadi reform package)

the assessment of existing training arrangements (infrastructure, capacity of trainers, curriculum, and demand for training); and (b) based on the assessment, the comprehensive plan for (i) demand driven training delivery, (ii) the creation of linkages with external training program, (iii) the upgrading of physical infrastructure, and (iv) the enhancement of the skills of training staff. (Comprehensive capacity building plan) KVIC shall have implemented the comprehensive capacity building plan. (Progress Report) KVIC shall have periodically published in its website the training calendar. (Training calendar)

Develop synergies through traditional village industries

KVIC agrees to identify around 5 village industries that are in line with the ethos of khadi – handmade, use of organic inputs processes, and socially aware (khadi reform package).

KVIC shall have identified five (5) thrust traditional village industry clusters based on market assessment study. (Market Assessment Report and list of clusters identified for implementation)

KVIC shall have ensured the establishment of one (1) cluster for each of the identified village industry. (Progress Report) KVIC shall have ensured the implementation of the comprehensive capacity building

56A

ppendix 5

Policy Actions First Tranche $20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

KVIC shall have formulated the cluster development strategy for the identified village industries. (Cluster development strategy report)

plan in the identified clusters. (Progress Report). KVIC shall have monitored the performance of the clusters. (Progress report)

CSP = central sliver plant; DSO = department sales outlets; ISEC = interest subsidy eligibility criteria; IT = information technology; IS = information system; KVIB = Khadi Village Industries Board; KVIC = Khadi and Village Industries Commission; MIS = management information system; MMSME = Ministry of Micro, Small and Medium Enterprises; MOU = memorandum of understanding; PPP = private–public partnership.

57A

ppendix 5

II. REVISED POLICY CONDITIONS BASED ON THE REVISED POLICY MATRIX

A. Second Tranche – 32 Conditions (32 Completed)

SN Finalized Restructured Tranche Restructured Evidence Status as of 30 September 2016

1 KVIC shall have ensured the completion of the audit for hundred and eighty (180) eligible KIs by independent auditors.

Summary of audit findings Completed

2 KVIC shall have disseminated the Khadi Reform Package nationwide through workshops.

List of state-wide workshops and training report

Completed

3 KVIC shall have (a) undertaken the initial assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback.

Assessment Report and identify feedback and mitigation measures

Completed

4 KVIC shall have developed the Khadi Mark, including designing its logo, and notified the Regulations for enforcing Khadi Mark under the KVIC Act, 1956.

a) Notified Khadi Mark Regulation (b) Khadi Mark Logo and (c) Summary findings of random spot audit reports

Completed

5 KVIC shall have (a) undertaken pan India arrangements for independent testing of Khadi; (b) obtained undertaking from users to abide by regulations for use of Khadi Mark (c) developed the detailed plan for the creation of basic testing infrastructure for Khadi Mark at KVIC; and (d) undertaken the arrangement for managing Khadi Mark by KVIC state/divisional offices.

a) MoU with the accredited agency b) Undertaking from users for usage of Khadi Mark c) Plan of testing infrastructure d) Khadi Mark Procedural Protocol as notified

Completed

6 KVIC shall have adopted the procedures and assigned its Khadi directorate to grant usage of Khadi Mark to KIs and other entities.

Gazette notification for Khadi Mark Regulations

Completed

7 KVIC through its Khadi directorate shall have ensured that the KIs registered at either KVIC or KVIB adopt the Khadi Mark.

List of KIs registered for Khadi Mark Completed

8 KVIC through its Khadi directorate shall have prepared and maintained a list of KIs and other entities authorized to use Khadi Mark and publish this in its website.

List of Khadi Institutions Completed

9 KVIC shall have conducted random spot audits of KIs and other entities authorized to use Khadi Mark regarding their adherence to the licensing requirements for the use of Khadi Mark.

Summary of the spot audit reports Completed

58A

ppendix 5

SN Finalized Restructured Tranche Restructured Evidence Status as of 30 September 2016

10 KVIC shall have commissioned a product specific market survey of Khadi and Village Industries products through a specialist firm.

(a) Work order and (b) the market survey report

Completed

11 KVIC shall have conducted training for the three hundred (300) eligible KIs on quality testing of raw materials.

Training Report Completed

12 KVIC shall have issued a notification to allow KIs to set market-linked prices.

Notification for Market Linked Pricing Completed

13 KVIC shall have formulated the benefit chart. Notification for Benefit Chart Completed

14 KVIC shall have notified the benefit chart to KIs. Circular / Order for Benefit Chart Completed

15 KVIC shall have formulated the production incentive plan and provided production incentive to all Khadi products.

Guidelines as issued to all Khadi Institutions for Market Promotion Development Assistance

Completed

16 KVIC shall have reassessed working capital requirement for Khadi production.

Report of Working Capital Assessment Completed

17 KVIC shall have appointed a focal person to engage with the bankers to enhance access of the KIs to working capital.

Office order for appointment of Focal Person

Completed

18 KVIC shall have developed the framework for producer company model and enterprise for new ventures in Khadi.

Notification for implementation of Producer Company

Completed

19 KVIC shall have (a) restructured its Khadi directorates, village industry directorates, science and technology directorates, and economic research directorates; (b) strengthened the human resource and administration directorates; (c) realigned reporting relationships for efficiency; and (d) devolved power to zonal offices.

(a) Circular on restructuring, b) Circular on strengthening the HR and administration directorates, c) Circular on realignment of reporting relationships, and d) Circular on devolution of powers to zonal offices

Completed

20 KVIC shall have (a) reviewed the existing structures and processes for the certification of the KIs; and (b) issued appropriate guidelines to empower a committee within the directorates of KVIC with the authority for the certification of KIs, under the guidance and advice of the central certification committee.

a) Review report of certification of Khadi Institutions b) Notification on empowering CCC to manage certification process

Completed

21 KVIC shall have examined and reviewed the role and relevance of the central certification committee in the certification process of the KIs.

Review report Completed

59A

ppendix 5

SN Finalized Restructured Tranche Restructured Evidence Status as of 30 September 2016

22 KVIC shall have developed an integrated management information system and roll out in one hundred (100) KIs.

(a) Work order issued to vendor for developing MIS and (b) Progress Report on roll out for 100 KIs

Completed

23 KVIC shall have developed IT/e-governance roadmap, infrastructure requirements, and linkage of IT/IS strategy to the Khadi Reform Package.

IT Roadmap and Tender Notification Completed

24 The Borrower through the Program Executing Agency shall have reviewed the functions of the marketing directorate of KVIC.

Action Taken Report with minutes Completed

25 KVIC shall have modified categorization norms for KIs and recategorized four hundred (400) KIs using the modified norms.

List of re-categorized Kis and modified recategorization norms

Completed

26 KVIC shall have signed MoUs with one hundred and eighty (180) eligible KIs for comprehensive KI reforms.

(a) List of Institutions along with date of signing of MoUs (b) Sample MoU

Completed

27 KVIC shall have ensured that the eighty (80) eligible KIs implement the comprehensive reforms plan and implementation plan developed and approved for hundred (100) additional KIs.

(a) Progress Report on implementation of 80 Khadi Institutions and (b) Implementation plan for 100 Khadi Institutions approved by KVIC

Completed

28 KVIC shall have completed (a) the assessment of existing training arrangements (infrastructure, capacity of trainers, curriculum, and demand for training); and (b) based on the assessment, the comprehensive plan for (i) demand driven training delivery, (ii) the creation of linkages with external training program, (iii) the upgrading of physical infrastructure, and (iv) the enhancement of the skills of training staff.

Comprehensive capacity building plan Completed

29 KVIC shall have periodically published in its website the training calendar.

Training calendar Completed

30 KVIC shall have implemented the comprehensive capacity building plan. Progress Report Completed

31 KVIC shall have identified five (5) thrust traditional village industry clusters based on market assessment study.

Market Assessment Report and list of clusters identified for implementation

Completed

32 KVIC shall have formulated the cluster development strategy for the identified village industries.

Cluster development strategy report Completed

60A

ppendix 5

B. Third Tranche – 18 Conditions

SN Third Tranche Conditions (Restructured KRDP) Evidences Timeline for Completion

Status as of October 2016 (To be updated)11

1 KVIC shall have ensured the completion of the audit of remaining two hundred and twenty (220) eligible KIs by independent auditors.

Summary of audit findings

Aug-16 Not Completed

2 KVIC shall have (i) undertaken the independent assessment of the Khadi Reform Package, (ii) held a stakeholder consultation on the outcome of the assessment, and (iii) prepared appropriate measures to address the feedback.

Assessment Report and identify feedback and mitigation measures

Jun-17 Not Completed

3 KVIC shall have created the basic testing infrastructure for the Khadi Mark.

Testing Infrastructure Report

Sep-16 Not Completed

4 KVIC shall have continued to conduct random spot audits of KIs regarding the adherence to the licensing requirements for the use of Khadi Mark.

Summary of spot audit reports

May-17 Not Completed

5 Based on the outcome of the survey, KVIC shall have identified products for both domestic and international markets and develop marketing strategies for all Khadi related institutions and products.

a) Market Survey Report b) Strategy report based on survey

Jan-17 Not Completed

6 KVIC shall have prepared a product catalogue and set up the market information system.

Product Catalogue and operational market information system

Feb-17 Not Completed

7 KVIC shall have monitored and assessed the effectiveness of the implementation of the benefit chart.

Assessment Report May-17 Not Completed

8 KVIC shall have continued the phasing out of production incentives on other categories of products and assess the impact on sales as a result of this.

Progress report Oct-17 Not Completed

9 KVIC shall have implemented the management information system in four hundred (400) KIs.

Progress Report on fully operational MIS in

Jan-17 Not Completed

11 Status will be updated immediately after loan signing through a ADB Review Mission.

61A

ppendix 5

SN Third Tranche Conditions (Restructured KRDP) Evidences Timeline for Completion

Status as of October 2016 (To be updated)11

400 Khadi Institutions

10 KVIC shall have implemented the integrated application system. Achieved "Go-Live" for the application system

Oct-17 Not Completed

11 KVIC shall have adopted the comprehensive reforms plan to empower and revitalize the four hundred (400) eligible KIs.

Comprehensive Reforms Plan

Sep-16 Not Completed

12 KVIC shall have recategorized the remaining KIs using the modified norms.

List of re-categorized KIs and modified recategorization norms

Dec-16 Not Completed

13 KVIC shall have signed with two hundred twenty (220) eligible KIs the MOUs for comprehensive KI reforms.

List of MoUs with dates of signing and sample MoU

Sep-16 Not Completed

14 KVIC shall have ensured that three hundred and twenty (320) eligible KIs shall have implemented the comprehensive reforms plan.

Progress Report Jul-17 Not Completed

15 KVIC shall have evaluated the performance of the four hundred (400) eligible KIs.

Evaluation Report Sep-17 Not Completed

16 KVIC shall have ensured the establishment of one (1) cluster for each of the identified village industry.

Progress Report Dec-16 Not Completed

17 KVIC shall have ensured the implementation of the comprehensive capacity building plan in the identified clusters.

Progress Report Dec-16 Not Completed

18 KVIC shall have monitored the performance of the clusters. Progress report Sep-17 Not Completed

62 Appendix 6

LIST OF INELIGIBLE ITEMS

1. Loan proceeds will finance the foreign currency expenditures for the reasonable cost of imported goods required during the Khadi Reform and Development Program. 2. No withdrawals shall be made in respect of

(i) expenditures for goods included in the following groups or subgroups of the United Nations Standard International Trade Classification, Revision 3 (SITC, Rev. 3), or any successor groups or subgroups under future revisions to the SITC, as designated by ADB by notice to the Borrower;

Table A9: Ineligible Items

Chapter Heading Description of Items 112 Alcoholic beverages 121 Tobacco, unmanufactured; tobacco refuse 122 Tobacco, manufactured (whether or not containing tobacco

substitute) 525 Radioactive and associated materials 667 Pearls, precious and semiprecious stones, unworked or worked 718 718.7 Nuclear reactors, and parts thereof, fuel elements (cartridges),

nonirradiated for nuclear reactors 728 728.43 Tobacco processing machinery 897 897.3 Jewelry of gold, silver, or platinum-group metals (except

watches and watch cases) and goldsmiths’ or silversmiths’ wares (including set gems)

971 Gold, nonmonetary (excluding gold ore and concentrates) Source: United Nations Development Programme.

(ii) expenditures in the currency of the Borrower or of goods supplied from the territory of the Borrower;

(iii) expenditures for goods supplied under a contract that any national or

international financing institution or agency will have financed or has agreed to finance, including any contract financed under any loan or grant from ,ADB;

(iv) expenditures for goods intended for a military or paramilitary purpose or for

luxury consumption;

(v) expenditures for narcotics; (vi) expenditures for environmentally hazardous goods, the manufacture, use or

import of which is prohibited under the laws of the Borrower or international agreements to which the Borrower is a party; and

(vii) expenditures on account of any payment prohibited by the Borrower in

compliance with a decision of the United Nations Security Council taken under Chapter VII of the Charter of the United Nations.

Appendix 7 63

WITHDRAWAL APPLICATION

WITHDRAWAL APPLICATION FOR DIRECT PAYMENTAND REIMBURSEMENTDate:

Application No.

To: Type of Disbursement

Direct Payment

Reimbursement

Sir/Madam:

1. In connection with the Loan Agreement dated ________________ between the Asian Development Bank and the (Borrower) , please pay from the Loan Account:

Currency Amount in Figure Amount in Words

The said amount is required for payment or reimbursement of eligible expenditures in the said currency as described in the attached Summary Sheet(s).

2. The undersigned certifies and agrees as follows:

a. these expenditures were/are/will be made for the purposes specified in the Loan Agreement and the undersigned has not

previously withdrawn from the Loan Account or obtained or will obtain any other loan, credit, or grant for the purpose of fully

or partially meeting these expenditures.

b. the goods or services have been procured in accordance with the Loan Agreement and the cost and terms of the purchase

thereof are reasonable and in accordance with the relevant contract(s).

c. the goods or services were or will be produced in and supplied by a member country of ADB as specified in the attached

Summary Sheets(s).

d. for expenditures claimed on the basis of a Statement of Expenditures (SOE), all authenticating documents have been

retained in the location shown on the individual SOE Summary Sheets and will be made available for review by auditors and

ADB representatives upon request.

e. as of the date of this application, there is no existing default under the Loan Agreement, the Project Agreement or the

Guarantee Agreement, if any.

f. if any funds withdrawn pursuant to this application are returned, the current value of such funds will be applied as credit to

the Loan Account or, if the amount is small, applied to the next loan service payment due.

3. Payment Instructions:

A. Payee's Name and AddressPayee's NamePayee's Address

B. Name and Address of Payee's Bank and Account No.Bank NameBank AddressPayee's Account No.SWIFT Code

C. Correspondent Bank (If Payee’s Bank is not located in the Country whose currency is claimed, enter the name

and address of their bank’s correspondent in the country whose currency is to be paid.)Bank NameBank AddressAccount No. ofPayee's BankSWIFT Code

D. Special Payment Instructions and Other References

4. This application consists of _______ pages including ____ pages of Summary Sheets.

From:Name of Borrower

Signature of Authorized Representative(s)

Printed Name/Position/Title of Authorized Representative(s)

ADB Loan No. --------------------------------

Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippines

Attention: Loan Administration Division, Controller's Department (CTLA)

64 Appendix 7

{INSERT APPENDIX TITLE}

Instructions in preparing the Withdrawal Application Form for Direct Payment and Reimbursement(ADB Form ADB-DRP/RMP)

General Instructions

1. Submit original Withdrawal Application (WA) to the Asian Development Bank (ADB) (or to its Resident/Regional Mission, if instructed).

2. Prepare separate WA for each currency of payment and for each payee.

3. Number WAs consecutively, not exceeding five digits/characters.

4. Consolidate claims until the amount being withdrawn is at least US$100,000 equivalent or an amount advised by ADB.

5. When completed, verify the application for completeness of supporting documentation and accuracy of details before passing to the Authorized Representative(s) for signature. Mistakes and omissions result in delayed payment.

Withdrawal References

1. Date: Enter the date the WA is signed by Authorized Representative(s), not the date it was prepared.

2. Loan Number: Show ADB loan number clearly.

3. Application Number: Number WAs consecutively. If the project has more than one executing agency (EA) or implementing agency, the project coordinator should assign an alpha identification for each EA. For example : A0001 to A9999 for EA no. 1 and B0001 to B9999 for EA no. 2.

4. Type of Disbursement: Indicate in the appropriate box the type of WA claim, whether for Direct Payment or Reimbursement Procedure.

Payment Instructions

1. Payee Name and Address: Indicate full name and address of Payee for identification of payment.

2. Name and Address of Payee’s Bank and Account No. : Indicate full name and address of the Payee’s bank, which may include a banker/branch designation. Account number is important. Give SWIFT code if Payee’s bank is a member of SWIFT.

3. Correspondent Bank: Where payment is to be made to a bank not located in the country of the currency to be paid, indicate its full name and address. Provide SWIFT code if the bank is a member of SWIFT.

4. Special Payment Instructions: Indicate any particulars, special instructions or references to facilitate payment or identification of payment.

5. Name of Borrower: Fill in name as it appears in the Loan Agreement.

6. Authorized Representative(s): Pass this application only to Authorized Representative(s) for signature. Verify if the list of Authorized Representative(s) has been changed.

Appendix 8 65

SAMPLE CERTIFICATE FROM THE BORROWER

66 Appendix 9

PROFORMA OF THE EXECUTING AGENCY'S PROGRAM PROGRESS REPORT A. Introduction and Basic Data Provide the following:

� ADB loan number, program title, borrower, executing agency(ies), implementing agency(ies);

� total program amount and financing plan; � status of program implementation � dates of approval, signing, and effectiveness of ADB loan; � original and revised (if applicable) ADB loan closing date and elapsed loan period

based on original and revised (if applicable) loan closing dates; and � date of last ADB review mission.

B. Utilization of Funds (ADB Loan,) Provide the following:

� cumulative disbursements from the ADB loan, and comparison with time-bound projections (targets); and

C. Program Purpose Provide the following:

� status of program component/implementation arrangements compared with those in the report and recommendation of the President (RRP), and whether major changes have occurred or will need to be made;

� an assessment of the likelihood that the immediate development objectives (program purpose) will be met in part or in full, and whether remedial measures are required based on the current Program scope and implementation arrangements;

� an assessment of changes to the key assumptions and risks that affect attainment of the development objectives; and

� other program developments, including monitoring and reporting on environmental and social requirements that might adversely affect the Program's viability or accomplishment of immediate objectives.

D. Implementation Progress Provide the following:

� assessment of program implementation arrangements such as establishment, staffing, and funding of the RID or RMU;

� information relating to other aspects of the EA’s and IA's internal operations that

may impact on the implementation arrangements or Program progress; � progress or achievements in implementation since the last progress report;

Appendix 9 67

� assessment of the progress of the program component, such as,

- � assessment of progress in implementing the overall program to date in

comparison with the original implementation schedule—quantifiable and monitorable target, (include simple charts such as bar or milestone to illustrate progress, a chart showing actual versus planned expenditure, S-curve graph showing the relationship between physical and financial performance, and actual progress in comparison with the original schedules and budgets, the reference framework or guidelines in calculating the program progress including examples are shown in Appendix 2); and

� an assessment of the validity of key assumptions and risks in achieving the

quantifiable implementation targets. E. Compliance with Covenants Provide the following:

� the borrower's compliance with policy loan covenants such as sector reform initiatives and EA reforms, and the reasons for any noncompliance or delay in compliance;

� the borrower’s and EA’s compliance with financial loan covenants including the EA’s financial management, and the provision of audited Program accounts or audited agency financial statements; and

� the borrower’s and EA’s compliance with Program-specific loan covenants associated with implementation, environment, and social dimensions.

F. Major Program Issues and Problems Summarize the major problems and issues affecting or likely to affect implementation progress, compliance with covenants, and achievement of immediate development objectives. Recommend actions to overcome these problems and issues (e.g., changes in scope, changes in implementation arrangements, and reallocation of loan proceeds).

68 Appendix 10

SAMPLE AUDIT LETTER

ASIAN DEVELOPMENT BANK

Regional Department Sector Division / Regional or Resident Mission

[Date]1

[The Borrower] Dear Sir or Madam: Subject: [Loan No. and Program Title]

FINANCIAL REPORTING AND AUDITING REQUIREMENTS This letter is to ensure your timely compliance with the loan covenants and the quality of financial information as required by ADB. ADB's Handbook for Borrowers on the Financial Governance and Management of Investment Programs Financed by the ADB (the Booklet) is enclosed to guide you. ADB, by its Charter, is required to ensure that the proceeds of any loan made, guaranteed, or participated in by ADB are used for the purposes for which the loan was approved. ADB requires accurate and timely financial information from its borrowers to be assured that expenditure was for the purposes stated in the loan agreement. For this particular loan, the requirements are stipulated in sections _____2

and _____3 of the Loan Agreement of ______________ between ADB and [the Borrower] and sections ______4

and _____5

of the Program Agreement6 of _____________ between ADB and [name of the EA]7. Copies of the Loan/Program Agreements are enclosed for onward transmission by your office to your EA and the auditor(s), together with a copy of this letter. The following are the main requirements:

ADB requires the EA to maintain separate Program accounts and records exclusively for the Program to ensure that the loan funds were used only for the objectives set out in the Loan or Program Agreements. The Program accounts comprise the following: Listed are standard accounts required from nonrevenue-earning entities. Try to identify specific titles of financial statements expected to be submitted by the Borrower and EAs. For revenue-earning entities, the submissions consist of the entities’ audited financial statements. For nonrevenue-earning entities, the submissions consist of audited Program accounts.

The first set of Program accounts to be submitted to ADB covers the fiscal year ending ________________. As stipulated in the Loan or Program Agreements, they are to be submitted up to _________________ months after the end of the fiscal year. For this loan, the deadline is by _________________. A sample report format with explanatory notes, is attached as Annex A.

The accounts and records for the Program are to be consistently maintained by using sound

accounting principles. Please stipulate that your external auditor is to express an opinion on whether the financial report has been prepared using international or local generally accepted accounting standards and whether they have been applied consistently.

ADB prefers Program accounts to use international accounting standards prescribed by the International Accounting Standards Committee. Please advise your external auditor

Appendix 10 69

to comment on the impact of any deviations, by [name of the Executing Agency] from international accounting standards.

Please ensure that your external auditor specifies in the Auditor's Report the appropriate

auditing standards they used, and direct them to expand the scope of the paragraph in the Auditor's Report by disclosing the key audit procedures followed. Your external auditor is also to state whether the same audit procedures were followed for all supplementary financial statements submitted.

ADB wishes that auditors conform to the international auditing standards issued by the International Federation of Accountants. In cases where other auditing standards are used, request that your external auditor to indicate in the Auditor's Report the extent of any differences and their impact on the audit.

The external auditor's opinion is also required on whether

- the proceeds of the ADB's loan have been utilized only for the Program as stated

in the Loan Agreement; - the financial information contains data specifically agreed upon between [name

of the Borrower or EA] and ADB to be included in the financial statements; - the financial information complies with relevant regulations and statutory

requirements; - compliance has been met with all the financial covenants contained in the Loan

or Program Agreements; - Imprest Account/ Second Generation Imprest Account(s) funds have been

correctly accounted for; and - documents and controls on the use of the Statement of Expenditures (SOE)

procedure are adequate.

The Auditor's Report is to clearly state the reasons for any opinions that are qualified, adverse, or disclaimers.

Actions on deficiencies disclosed by the external auditor in its report are to be resolved by

[name of Borrower or Executing Agency] within a reasonable time. The external auditor is to comment in the subsequent Auditor’s Report on the adequacy of the corrective measures taken by [name of Borrower or EA].

Compliance with these ADB requirements will be monitored by review missions and during normal Program supervision, and followed up regularly with all concerned, including the external auditor. Yours sincerely, Director / Country Director (Sector Division/ Regional or Resident Mission) cc: (EA) (External auditor of the Borrower or EA)

70 Appendix 10

1. The audit letter, with the loan and Program agreements, is sent to the borrower when the auditor has been appointed or when the agreements are sent by the program department to the Ministry of Finance or other authority of the borrower.

2. Specify section no. in the loan agreement on maintaining Program accounts and records.

3. Specify section no. in the loan agreement on the audit requirements.

4. Specify section no. in the Program agreement on maintaining Program accounts and records.

5. Specify section no. in the Program agreement on the audit requirements.

6. If there is a Program agreement.

7. When more than one Program agreement, provide similar information.

Appendix 17 71