document of the world bank...date achieved 06/30/2010 07/31/2016 11/30/2016 comments (incl. %...

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Document of The World Bank

Report No: ICR00004029

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-78390IBRD-81670)

ON A

LOAN

IN THE AMOUNT OF EURO 47.80 MILLION

(US$ 70 MILLION EQUIVALENT)

AND ADDITIONAL FINANCE

IN THE AMOUNT OF EURO 90.10 MILLION (US$ 120 MILLION EQUIVALENT)

TO

BOSNIA HERZEGOVINA

FOR THE

ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT

December 8, 2016

Finance and Markets Global Practice Bosnia and Herzegovina Country Unit Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of December 1, 2016)

Currency Unit = Convertible Mark (BAM) BAM 1.00 = US$ 0.54 US$ 1.00 = BAM 1.84

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS

AF Additional Finance BiH Bosnia and Herzegovina BAM Convertible Mark BD Brcko District BIS Bank for International Settlements CB BiH Central Bank of Bosnia and Herzegovina CMU Country Management Unit CPS Country Partnership Strategy EBRD European Bank for Reconstruction and Development ECA Europe & Central Asia EU European Union EMP Environmental Management Plan ESRF Environmental Safeguards Review Framework FBiH Federation of Bosnia and Herzegovina FM Financial Management GDP Gross Domestic Product IBRD International bank for Reconstruction and Development ICR Implementation Completion and Results IFC International Finance Corporation IFI International Financial Institution IMF International Monetary Fund ISR Implementations Status and Results KFW Kreditanstalt für Wiederaufbau MCO Microcredit Organization M&E Monitoring & Evaluation MoFT Ministry of Finance and Treasury NPL Non-Performing Loan Odraz Foundation for Sustainable Development OM Operations Manual PAD Project Appraisal Document PDO Project Development Objective PFI Participating Financial Institution PIU Project Implementation Unit

iv

RS Republika Srpska RS IDB Republika Srpska Investment-Development Bank SMEs Small and Medium Enterprises TTL Task Team Leader UN United Nations USAID U.S. Agency for International Development WB World Bank

Senior Global Practice Director: Gloria Grandolini

Practice Manager: Mario Guadamillas

Project Team Leader: Johanna Jaeger, Ruvejda Aliefendić

ICR Team Leader: Natalie Nicolaou

v

BOSNIA AND HERZEGOVINA Enhancing Small and medium Enterprises Access to Finance

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ................................................... 12. Key Factors Affecting Implementation and Outcomes ................................................ 103. Assessment of Outcomes .............................................................................................. 214. Assessment of Risk to Development Outcome ............................................................. 275. Assessment of Bank and Borrower Performance ......................................................... 286. Lessons Learned............................................................................................................ 357. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ............... 36Annex 1. Project Costs and Financing .............................................................................. 37Annex 2. Outputs by Component...................................................................................... 38Annex 3. Economic and Financial Analysis ..................................................................... 40Annex 4. Bank Lending and Implementation Support/Supervision Processes ................. 41Annex 5. Beneficiary Survey Results ............................................................................... 42Annex 6. Stakeholder Workshop Report and Results ....................................................... 43Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ......................... 44Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ........................... 56Annex 9. List of Supporting Documents .......................................................................... 57 MAP

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A. Basic Information

Country: Bosnia and Herzegovina

Project Name: Enhancing SME Access to Finance

Project ID: P111780 L/C/TF Number(s): IBRD-78390,IBRD-81670

ICR Date: 12/21/2016 ICR Type: Core ICR

Lending Instrument: FIL Borrower: BOSNIA AND HERZEGOVINA

Original Total Commitment:

USD 70.00M Disbursed Amount: USD 157.71M

Revised Amount: USD 190.00M

Environmental Category: F

Implementing Agencies: Foundation for Sustainable Development - OdRaz The Republic of Srpska Investment-Development Bank (IRBRS)

Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 02/19/2009 Effectiveness: 08/16/2010

Appraisal: 09/22/2009 Restructuring(s): 07/29/2011 09/28/2012 07/15/2015

Approval: 12/15/2009 Mid-term Review: 01/26/2015 01/26/2015

Closing: 07/31/2014 07/31/2016 C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Satisfactory

Risk to Development Outcome: Substantial

Bank Performance: Satisfactory

Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Moderately Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Moderately Satisfactory

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Overall Bank Performance:

Satisfactory Overall Borrower Performance:

Moderately Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance

Indicators QAG Assessments

(if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes

Original Actual

Major Sector/Sector

Financial Sector

SME Finance 50 50

Banking Institutions 50 50

Major Theme/Theme/Sub Theme

Finance

Financial Infrastructure and Access 45 45

MSME Finance 45 45

Financial Stability 10 10

Financial Sector oversight and policy/banking regulation & restructuring

10 10

Private Sector Development

Enterprise Development 45 45

MSME Development 45 45 E. Bank Staff

Positions At ICR At Approval

Vice President: Cyril E Muller Philippe H. Le Houerou

Country Director: Ellen A. Goldstein Jane Armitage

Practice Manager/Manager:

Mario Guadamillas Lalit Raina

Project Team Leader: Johanna Jaeger Irina Astrakhan

ICR Team Leader: Natalie Nicolaou

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ICR Primary Author: Natalie Nicolaou F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The project development objective is to enhance access to finance for small and medium enterprises in Bosnia and Herzegovina in the context of the global financial crisis. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Total amount of loans disbursed by the PFIs under the project (US$ million)

Value quantitative or Qualitative)

0

189.0 (including original loan and additional finance)

157.7 (including original loan and additional finance)

Date achieved 06/30/2010 07/31/2016 11/30/2016

Comments (incl. % achievement)

83 percent of the total amount was disbursed (combined original loan and additional finance)

Indicator 2 : Medium to long term (>12m) credit granted by the PFIs under the project


0

100%

98%

Date achieved 06/30/2010 07/31/2016 11/30/2016


11 loans had exactly 12 month maturity, and only 1 loan had maturity of 6 months.

Indicator 3 : Number of firms financed


0

140 (including original loan and

338

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additional finance)

Date achieved 06/30/2010 07/31/2016 11/30/2016 Comments (incl. % achievement)

Target was exceeded

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Number of all loans disbursed to SMEs under the credit line

Value (quantitative or Qualitative)

0

150

390


Target was exceeded

Indicator 2 : Outstanding SME finance Loan Portfolio (amount US$ million)


515

2,156

Date achieved 06/30/2010 12/31/2015


This Intermediate Outcome Indicator collection served for analytical purposes and project implementation adjustments. This is a core indicator for all WB credit lines that provide financing for SMEs.

Indicator 3 : Number of jobs created


0

1,937

Date achieved 06/30/2010 11/30/2016


This Intermediate Outcome Indicator collection served for analytical purposes and project implementation adjustments.

Indicator 4 : Total NPL for this credit line volume (%)


0

Under 7%

1.7%

x


Indicator 5 : Portfolio at risk - % (>90 days)


5.9%

15.18%

Date achieved 06/30/2010 12/31/2015



Indicator 6 : Return on Assets (%)


0.09

1.04

Date achieved 06/30/2010 12/31/2015



Indicator 7 : Return on Equity (%)


0.8

7.38

Date achieved 06/30/2010 12/31/2015



G. Ratings of Project Performance in ISRs

No. Date ISR Archived

DO IP Actual

Disbursements (USD millions)

1 06/30/2010 Satisfactory Satisfactory 0.00 2 01/03/2011 Satisfactory Satisfactory 4.01 3 09/25/2011 Satisfactory Satisfactory 23.26 4 05/11/2012 Satisfactory Satisfactory 58.71 5 01/14/2013 Satisfactory Satisfactory 64.09 6 10/29/2013 Satisfactory Moderately Satisfactory 64.48

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7 06/24/2014 Satisfactory Satisfactory 96.26 8 12/01/2014 Satisfactory Satisfactory 123.53 9 06/03/2015 Satisfactory Satisfactory 147.36

10 12/03/2015 Satisfactory Satisfactory 156.45 11 07/28/2016 Satisfactory Satisfactory 156.45

H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

DO IP

07/29/2011 S S 18.60 Increase in commercial practice thresholds

09/28/2012 S S 64.09

Allocation of EUR 300,000 of unallocated funds (category 3) to Category 2 (Project Management and Monitoring Component in FBiH only.

07/15/2015 S S 152.57

Extension of closing date of the original loan by two more years to July 31, 2016 to match the closing dates of the Additional Finance and to enable utilization of the remaining balance of the original project funds related to project management and monitoring

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I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal A. Political and Institutional Background At the time the project was designed, Bosnia and Herzegovina (BiH) had been at peace for under fifteen years and faced a highly complex political and administrative situation. The armed ethnic conflict which took place between 1992-1995 following the collapse of communism in Eastern Europe, and the disintegration of Yugoslavia, ended with the Dayton Peace Agreement in 1995. The Peace Agreement restored peace and divided the country administratively into a weak central government and two entities: the Federation of Bosnia and Herzegovina (FBiH), which is further divided into ten autonomous cantons, and the Republika Srpska (RS). There are 144 municipalities in the country, of which 79 are a part of the FBiH and 65 are a part of the RS. In 1999, Brcko District (BD) was established as a self-governing administrative unit. The implementation of the agreement was supervised by the Office of the High Representative, which carries extensive powers to legislate and remove public officials. BiH institutions include the Council of Ministers, the Parliamentary Assembly, and the Central Bank of BiH (CB BiH), which is primarily mandated with monetary stability. Both entities, FBiH and RS, have their own government, parliament, and judicial system. Within the financial sector, each entity also has its own regulatory and supervisory responsibilities for banking, insurance, and capital markets as well as its own stock exchange. While the resulting complex political system brought peace by protecting the interests of the three major political constituencies and preserving a high degree of entity autonomy, it also weakened overall effectiveness in policy formation and implementation. Opposing views on the role of the state often led to political obstruction of reforms and frequent political gridlocks impeded rapid advances in economic reforms. In 2007, the Country Partnership Strategy (CPS) for BiH FY2008-2011 (Report No. 41330 – BA)1 noted that “according to the World Governance Indicators, BiH lags behind the averages of its income group in several aspects of governance and behind new EU member states in every aspect. Government Effectiveness and Regulatory Quality are very low (just above the 25th percentile).” B. Macroeconomic Background Prior to the global financial crisis, BiH experienced robust growth (6 percent average in

1 http://siteresources.worldbank.org/INTBOSNIAHERZ/Resources/CPS131107.pdf

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the period 2000-08). Much of this growth was consumption driven and had been fueled by capital inflows. Other factors for the growth included high commodity prices, growth of remittances from abroad, and strong export growth. However, despite several years of economic expansion, BiH GDP per capita remained below that of their peers in the region. Figure 1. GDP growth rates and unemployment rates

Figure 2. GDP per capita, comparison among peer countries

Source: International Labour Organization, WB, OECD

Source: WB, OECD

The global financial crisis impacted BiH significantly since late 2008. The economy contracted by 3 percent in 2009 and unemployment reached 24 percent. FDI and capital flows slowed down, demand for exports was reduced, and commodity prices fell. Following the crisis, consumption expenditures were constrained by the rising unemployment and falling remittances (29 percent decrease in 2009) while gross capital formation fell from 27 percent of GDP in 2008 to 19 percent of GDP in 2009. Figure 3. Investment and Consumption as a % of GDP

Figure 4. Personal remittances received as a % of GDP

Source: WB, OECD Source: WB, OECD

22%

24%

26%

28%

30%

32%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Une

mpl

oym

ent r

ate

GD

P g

rwot

h ra

te

GDP growth rateUnemployment rate

0

10,000

20,000

30,000

40,000

BiH SerbiaCroatia RomaniaEU

103%

104%

105%

106%

107%

108%

109%

14%

16%

18%

20%

22%

24%

26%

28%

Investments Consumption

10%

15%

20%

25%

30%

3

C. Business Conditions At the time of appraisal of the original loan, private sector contribution was estimated at 50 percent of GDP, which was relatively low compared to other countries in Eastern Europe.2 The private sector initially developed following the privatization program that started in 1999. In addition to privatized enterprises, there was a small number of Small and Medium Enterprises (SMEs). At the time of appraisal, there were 34,088 SMEs in FBiH and RS. BiH lagged other countries in the region in creating and sustaining SMEs with less than 10 SMEs per 1,000 inhabitants. However, SMEs were an important source of job creation, contributing about 75 percent of total employment in FBiH and 55 percent in RS. Hence, SMEs represented an untapped source of economic development and SME growth was a priority for the authorities.

The business climate was hindered by the complex institutional structure and an unfavorable regulatory context. The unwieldy public administration, multiple layers of approval authorities, overlapping competencies, and the lack of harmonization among laws increased the costs and risks of doing business. In the 2009 Doing Business Report, BiH was ranked 119th among 181 countries and the 3rd worst in Europe. The enterprise sector was further hit by the economic crisis as consumption and exports decreased. In addition, enterprises faced decreased access to credit and higher interest rates. SMEs in particular were faced with declining access and higher costs of working capital, medium and long-term investment financing, jeopardizing liquidity and profitability. In 2009, the Global Competitiveness Index ranked BiH 122nd out of 133 countries in terms of financial market sophistication, and 90th for ease of access to loans. C. Banking Sector At the time of appraisal of the original loan, there were 20 banks licensed in the FBiH and 10 in RS although a number of banks in the two entities belonged to the same international banking groups. The sector was dominated by foreign-owned banks with 88 percent share of total bank assets in 2009. Similar to other countries in the region, BiH experienced rapid financial deepening prior to the financial crisis with compound annual growth rate of banking sector assets and credit to private sector of 27 and 10 percent respectively between 2000 and 2008. This substantial credit expansion was funded by the parent banks of domestic banking subsidiaries as well as surging residents’ deposits. Household deposits grew at a compound annual growth rate of 37 percent between September 2000 and September

2 Private sector contribution in Czech Republic was 80 percent of GDP, in Bulgaria and Poland 75 percent, in FYR Macedonia 65 percent and in Croatia 60 percent.

4

2008. The total banking sector assets reached 54 percent of GDP in end 2008, which was in line with regional peers although still below the EU average (190 percent). With the onset of the crisis, the trend was abruptly reversed and credit declined by 3 percent in 2009 as the foreign banks became more risk averse. In 2009, external exposures of banks to BiH, as reported to the Bank for International Settlements (BIS), stood at 20 percent of GDP. The risk of deleveraging was considered high as foreign parent banks would be less willing to support their local subsidiaries in light of the higher cost of funding on international capital markets while home country banking regulators for the parent banks could implement measures to tighten capital and liquidity buffers. At the same time, liquidity in the system declined. Deposit levels fell by as much as 10 percent in the period from September 2008 to June 2009, due to slower remittance transfers as well as deposit withdrawals. Bank liquidity reserves decreased to 21.6 percent (of total bank assets) from 27.1 percent in 2006. The CB BiH reacted swiftly and stabilized the system by decreasing mandatory reserve requirements. Additional measures, including the negotiation of a Stand-by Agreement with the IMF, and increase in deposit insurance coverage, were put in place to help safeguard financial stability although fears of deposit withdrawals remained. With declining deposits, in particular long-term deposits, and the prospective of declining longer-term liabilities from parent banks, lending was squeezed and enterprises faced liquidity and funding pressures at a time of worsening market conditions. Loan maturities became shorter while interest costs increased. Figure 5. Banking assets (% of GDP) Figure 6. Credit growth

Source: WB, OECD, CB of BiH Source: IMF, WB, OECD

0%

50%

100%

150%

200%

BiH EU Average

-10%-5%0%5%

10%15%20%25%

Serbia RomaniaCroatia European UnionBiH

5

Figure 7. Banking liquid reserves to bank assets

Figure 8. Deposits (BAM million)

Source: IMF Source: CB BiH

These fundamentals had not changed significantly by April 2012, at the time of the approval of the Additional Finance (AF).

The political and macroeconomic climate remained fragile. Following national elections in October 2010, there were delays in forming a government. In this context, an impasse on the 2011 BiH institutions budget hindered the adoption of the 2012-2014 fiscal framework, causing Standard and Poor’s to lower BiH credit ratings in December 2011. While a fiscal framework passed, it was feared that the political context would have a persistent adverse effect on domestic demand and inflow of foreign investments. Economic growth had been weak, with real GDP growth of 0.7 in 2012 while unemployment rate remained stubbornly high at 28 percent.

While credit conditions mildly recovered with a 2 percent growth, lending rates remained high. Banks remained reliant on parent funding but as had been feared atthe time of appraisal of the original loan, the banking sector experienced deleveraging. BIS reporting banks’ external positions to BiH, which captures local banks’ foreign liabilities, declined from 20 percent of GDP in 2009 to 13 percent in 2012. At the same time, asset quality was deteriorating. The non-performing loan (NPL) ratio was up from 5.9 percent in 2009 to 13.5 percent in 2012. With concerns over the further decline in the quality of the loan portfolio, the willingness of banks to extend new loans was further impaired and the need for additional capital in some banks increased.

10%

15%

20%

25%

30%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

6

Figure 9. Banks’ external position to BiH (% of GDP)

Figure 10. NPL ratio (% of Gross Loans)

Source: BIS Source: IMF, Global Financial Stability Report

D. Rationale for Bank Involvement WB support in the form of a credit line for SMEs was requested by the authorities on March 6th, 2009, in response to the emerging consequences of the global financial crisis on the financial and real sector in the country. The authorities had already taken a series of actions to mitigate the impact of the financial crisis including the negotiation of Stand-By Agreement with the IMF, participation in the European Bank Coordination Initiative or “Vienna Initiative,” 3 and a two-step increase of deposit insurance coverage. The rationale for WB involvement was to help address SMEs’ access to finance, especially medium and long-term, which had been identified as a major impediment to growth and competitiveness in the enterprise sector, and maintaining existing levels of employment. The project would thus help enterprises’ adjust to the new unfavorable and uncertain market environment and strengthen their competitiveness. The project was also consistent with the World Bank ECA Strategy and the CPS FY08-FY11 in terms of the main pillars such as deepened reforms for improved competitiveness and actions for sustainable growth to address BiH’s challenges. The strategies included expanding business activities in the country, specifically, promoting conditions for SMEs access to finance.

3 The initiative, undertaken in January 2009 by European banks and governments sought to prevent large scale withdrawals from developing regions and countries, ensure that large banks commit to maintaining exposure to subsidiaries and recapitalize them, avoid home bias in aid, agree on crisis management and resolution, and strengthen cross-border regulatory cooperation.

0%

5%

10%

15%

20%

25%

0%

5%

10%

15%

20%

25%

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Following the successful project implementation of the original loan, the BiH Ministry of Finance and Treasury (MoFT) requested continued WB support on February 16th, 2012 in the amount of US$100 million. Due to the continuing crisis in Europe, additional funds were made available for BiH. The CPS FY2012-15 (Report No. 64428-BA) saw fostering productivity and improving competitiveness as key factors for growth and the CPS aimed to address one of the chief constraints to private sector growth as access to credit through the credit line operation. Given the urgency and the continuing need for financing for SMEs in BiH, AF was fast tracked.

1.2 Original Project Development Objectives (PDO) and Key Indicators According to the Loan Agreement, the PDO is to enhance access to finance for small and medium enterprises in the borrower’s territory in the context of the global financial crisis. The PDO remained the same for the additional finance. The Results Framework and Monitoring in the PAD specified the following project outcome indicators, which were maintained with minor revisions for clarification in the project paper for additional finance.

Table 1. Project Outcome Indicators Original Loan (PAD) Additional Finance (Project Paper) The total loan disbursed (US$ million equivalent)

Revised: Total amount of loans disbursed by the PFIs under the project

Medium to long term (>12m) credit granted

Revised: Medium to long term (>12m) credit granted by the PFIs under the project

Number of firms financed Same The intermediate results indicators were modified significantly from the original loan to the additional finance as follows: Table 2. Intermediate Results Indicators Original Loan (PAD) Additional Finance (Project Paper) Number of loans disbursed Revised: Number of all loans disbursed to

SMEs under the credit line Total NPL measured as number of loans and volume

Revised: Total NPL for this credit line volume (%)

Total lending by participating PFIs to Corporate (US$ million equivalent)

Dropped

Annual turnover of sub-borrowers Dropped Export of sub-borrowers Dropped Jobs created/maintained Revised: Number of jobs created New: Volume of Bank Funding: Lines of

Credit - SME (amount US$)

8

(Note: for this loan, this indicator is identical to the first PDO indicator)

New: Portfolio at risk (for SME portfolio for banks in BiH) - % (Outstanding or not yet repaid balance of all loans for the institutions entire SME portfolio where payment is late by > 90 days / Gross outstanding loan portfolio)

New: Outstanding SME finance Loan Portfolio (amount US$)

New: Return on Assets (%) New: Return on Equity (%)

Note: All the new intermediate indicators added for Additional Finance were part of the required core indicators for all WB credit lines that provide financing for SMEs.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification N/A

1.4 Main Beneficiaries The primary beneficiaries are small and medium enterprises from a broad set of industrial sectors. The PAD defined that final beneficiaries must be privately owned and duly licensed and registered with tax authorities and they should be active in manufacturing, food production or agro processing, or in related services.4 The project’s Operations Manual (OM) initially defined eligible SMEs as follows:

Employs fewer than 250 persons Has an annual turnover not exceeding BAM equivalent of EUR 50 million, and/or

its balance sheet with assets of less than BAM equivalent of EUR 43 million Demonstrates prior operating experience in the activity to be financed Is duly licensed with a number assigned by tax authorities Is engaged in agro-processing, food production, manufacturing or related value-

added services Is privately owned, with more than 50 percent of private equity. The owners and

managers of the enterprise must be “fit and proper”

4 The Loan Agreement defined “beneficiary” as a creditworthy, duly licensed and registered, small or medium private enterprise. Hence, there was no restriction on the economic sector. The first OM contained an SME exclusion list including: purchase of land, non-value added wholesale and retail trade, construction of housing and business premises for commercial purposes, Procurement, storage, trade or use of pesticides or any other hazardous chemicals that require controlled use, procurement of used equipment and goods for wholesale and retail.

9

Has organization, management, staff and financial and other sources required for the efficient carrying out of its operations, including the carrying out of the sub-project

Is creditworthy, and has a sound financial condition. The secondary project beneficiaries were the Participating Financial Institutions (PFIs), which had to be commercial banks and were subject to eligibility requirements. Access to medium- and long-term funding would enable PFIs to extend long-term credits to the real economy while mitigating the maturity mismatches on their balance sheet. The PFI eligibility requirements were expected to help the PFIs, in particular the small and locally-owned banks, build capacity in terms of credit appraisal, risk management, procurement, and financial management and environmental safeguards, in addition to International Financial Institution (IFI) procedures.

1.5 Original Components The original loan and the additional finance consisted of the following components: Table 3. Components Category Original Loan

(EUR) Additional Finance (EUR)

1. Credit Line 46,972,200 89,874,7502. Project Management and Monitoring Component (in FBiH only)

408,300 0

3. Unallocated funds (in FBiH only) 300,000 0Total 47,680,500 89,874,750

The Credit Line component included financing to be extended through eligible PFIs to eligible SMEs to cover investment and/or incremental working capital for sub-projects in both FBiH and RS. The funds were allocated to the two entities under both the original loan and the additional finance as follows: 60 percent of the funds to FBiH and 40 percent to RS. The Project Management and Monitoring Component in the original loan includes EUR 408,300 to finance costs (goods, consultant services and operating costs) related to overall project management including monitoring, financial management, audits and other activities in FBiH.5 An additional EUR 300,000 of unallocated funds served as contingency in FBiH under the original loan.

5 In RS the project management costs were financed exclusively by the interest margin charged on the funds provided to PFIs.

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1.6 Revised Components The unallocated funds of EUR 300,000 were allocated to Project Management and Monitoring Component for FBiH after the additional finance was approved, through project restructuring, in September 2012.

1.7 Other significant changes N/A

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry The project design reflected lessons from other WB credit lines in other countries and other projects in BiH, reflecting the characteristics of the institutional structure of the country. Allocation of funds: At the time of preparation and today, most WB loans were made to the BiH MoFT and then divided according to a pre-determined ratio through subsidiary agreements between MoFT and entity Ministries of Finance. For this loan, the allocation of funds was: 60 percent to FBiH and 40 percent to RS. This allocation was mutually agreed by the two entities before negotiations and was consistent with allocations of WB and other IFIs, the level of economic activity, and the number of SMEs in each entity. Figure 11. Credit Line Structure

Target beneficiaries: The project focused exclusively on SMEs, reflecting lessons from analytical work indicating that SMEs are more seriously affected by business environment constraints than larger firms, have less access to credit (especially in periods of crisis), and have less access to information. This focus on SMEs also allowed for a large footprint of

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the project on the real economy as the overwhelming majority of all companies in the country were SMEs. Flexibility in design: This CPS FY08-FY11 encouraged greater flexibility in project design in BiH in order to mitigate the complex and inflexible institutional and administrative structures and processes in the country. In line with the CPS, there was a high degree of flexibility in the design of this project. The credit line was available to SMEs across a broad range of economic sectors, for both working capital financing and for investment, including refinancing. Sub-loans were available in EUR or BAM. The OM was used to refine SME eligibility requirements based on the implementation progress and developments in the country. Focus on banking sector: The project PFIs were commercial banks only. The option of including Microcredit Organizations (MCOs) as PFIs was initially considered at the concept phase, but not pursued. This was reasonable due to the fact that a) the original loan amount was not sufficient to effectively address demand both from the banking sector and MCOs, and b) other IFIs, including IFC and EBRD, had ongoing or planned investments in the MCO sector, which would complement the IBRD support via the banking sector. The size of the loan initially was US$70 million, or about 1 percent of total banking sector assets at the end of 2009, which is reasonable to have sufficient impact. Credit Line: The project was consistent with the WB Operational Policy 8.30 on Financial Intermediary Financing and included lessons and best practices from other credit line operations in ECA and other regions (Ukraine, Poland, Turkey, and India). Most significantly, the credit decisions and pricing for the SME loans were left to PFIs, based on their own credit appraisal. PFIs were appraised by the WB based on strict eligibility criteria6 and re-appraised annually to ensure continuous compliance. Lending was initially made available on a first-come first-served basis. PFIs bore SME credit risk. Project Implementation Units: The WB preparation team carefully examined many options for Project Implementation Units (PIUs) to ensure suitability and risk mitigation in the context of the country. The WB also explored the option for a single PIU for both entities, which while theoretically more efficient was seen as impractical and not politically feasible. The project was implemented by OdRaz (Sustainable Development) Foundation in FBiH and RS Investment Development Bank (RS IDB) in RS. Odraz is a dedicated unit under the supervision of the Ministry of Finance mandated with development projects’ implementation. It had ample experience in WB projects. For RS, the RS IDB is a financial

6 Eligibility requirements for PFIs: a) duly licensed and at least two years in operation, b) Fit and proper ownership and management, c) qualified and experienced management, adequate organization and institutional capacity for its specific risk profile, d) in good standing with its supervisory authority, e) well defined risk management policies and procedures, f) capital adequacy prescribed by prudential regulations, with the minimum risk-based capital adequacy of 12 percent, adequate liquidity and meet the minimum liquidity prescribed by prudential regulations.

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intermediary administering credit lines funded by the government to banks operating in RS. It also had WB experience. The RS IDB would not perform direct lending under the WB credit line. The WB team appraised both PIUs and identified concrete actions to enhance capacity before negotiations, which were monitored closely Risks: The risks identified at the time of appraisal included: (i) macroeconomic risk, which would reduce SME credit demand, ii) deterioration of the banks’ financial condition due to the crisis; (iii) implementation risks due to the presence of two separate PIUs, one in each entity, and which needed additional capacity, iv) financial management risks due to banks’ limited familiarity with WB procedures, v) procurement risks relating to the use of commercial practices, and vi) risk relating to social and environmental safeguards. The SME credit risks were born by the PFIs. The overall risk for the project was rated moderate, below the overall risk in the BiH program in the CPS FY08-FY11, which was substantial. The Project Paper for AF highlighted the following two additional risk factors: vii) project stakeholder risk, relating to “poor communication and cooperation between the stakeholders, poor prioritizations, delay in decision-making and implementation, fragmented implementation, increased costs, and sub-optimal output quality”, and viii) the possibility of interference in the selection of SMEs. Mitigation: To mitigate the risk of lower than expected credit demand by SMEs, PFIs did not have a pre-allocated amount and funding was made available on a first-come first-served basis. The financial sector risk was mitigated by inviting banks to express interest to the credit line and assessing their eligibility in advance. As a result, by September 2009, before the original project was approved, the team had ascertained that “the banks that meet the eligibility criteria account for about over 70 percent of the credit market in the FBiH and for about 80 percent of the credit market in RS.” Implementation risks were mitigated through careful examination of several candidates for the Project Implementation Unit (PIU) in each entity, including the option of a single PIU for both entities and final selection of PIUs with prior experience in WB projects. The team had ongoing consultations with PIUs on necessary steps to increase capacity prior to effectiveness (e.g. by hiring specialized staff). Financial management (FM) risk was mitigated by the OM, which outlines internal control, accounting, and other FM procedures. The procurement risk was mitigated by introducing a threshold above which international competitive bidding would be made mandatory.7 Social/Environmental risks were mitigated by not allowing sub-projects entailing significant environmental risk8 or land acquisition and/or resettlement.

7 Contracts less than 750,000 for civil works and less than 375,000 for goods could be awarded with the established commercial practices.

8 Eligible sub-projects only include sub-projects classified as low (Category I) and intermediate risk (Category II)

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For the AF, the project stakeholder risk was mitigated by a time-bound action plan for preparation of the AF to be agreed with BiH and entity stakeholders, and the use of already recognized and acceptable procedures during implementation. The governance risk in the credit selection process was mitigated through the clear and predefined processes outlined in the OM, as well as frequent site visits and contract audits. Participatory process: The authorities were highly committed and remained involved throughout the preparation process. The project was designed in close cooperation with BiH, FBiH and RS ministries of finance, and the BiH Central Bank. Intensive consultations and coordination efforts were implemented to improve targeting and avoid overlap with ongoing and the planned activities of other IFIs. The team engaged with EBRD, IFC and KFW and USAID.

2.2 Implementation The following table summarizes the various milestones for the original loan and the AF. Table 4. Project Milestones Milestone Date Board Approval (original loan – US$70 million) December 15, 2009 Effectiveness (original loan) August 16, 2010 Restructuring (increase in commercial practice thresholds) July 29, 2011 Board Approval (additional finance – US$120 million) May 17, 2012 Restructuring (allocation of unallocated funds) September 28, 2012 Effectiveness (additional finance) April 18, 2013 Restructuring (extension of closing date of original loan) July 15, 2014 Original Loan Closing Date July 31, 2014 Midterm review February 3, 2015 Revised Closing Date July 31, 2016

A. Changes during implementation The project underwent restructuring in July 2011, to increase the procurement thresholds for commercial practices consistent with the revisions of the regional thresholds matrix by the ECA Regional Procurement Manager office in January 2011. The thresholds for commercial practices were initially set to EUR 750,000 per contract for civil works, EUR 375,000 for goods, and EUR 75,000 for consultants. The thresholds per contract for goods and civil works were increased to EUR 1.3 million through the restructuring. Disbursement of the original loan was satisfactory, with the full funds (with the exception of the unallocated EUR 300,000) disbursed in both entities within two years of effectiveness, and almost two years ahead of the original closing date. Given the success of the original loan, AF of US $120 million was approved to enhance the development impact. Given the full and quick disbursement of the original loan, the AF project paper served in lieu of a midterm review of the loan. The AF was a scale-up operation and did not involve any additional activities rather it replicated the same successful design, which was crucial in the complex setting.

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After approval of the AF, the unallocated funds of EUR 300,000 were allocated to Category 2 (c). The closing date of the original loan was extended by two more years to July 31, 2016 to match the closing dates of the AF, which had been approved, and to enable utilization of the remaining balance of the original project funds as related to project management and monitoring. A midterm review was undertaken for the additional finance in a timely manner (late 2014/early 2015), between effectiveness of AF and the revised closing date. The following table summarizes the allocation to each entity in accordance with the loan agreements. Table 5. Entity Allocations EUR Allocated – Original Loan Allocated – AF Total FBiH 28,680,000 54,060,000 82,740,000

RS 19,120,000 36,040,000 55,160,000Total 47,800,000 90,010,000 137,900,000

Note: The front-end fee is included in the above table. The full amount of the funds had been disbursed in FBiH out of a total allocation of EUR 82.5 million for both the original loan and the AF. In RS, the full allocation of the original loan was disbursed and 57.7 percent of the AF was disbursed. In total, in RS, EUR 39.9 million was disbursed, equivalent to 72.4 percent of the total amount allocated of EUR 55 million. B. Factors affecting implementation Political / Institutional The project has been affected by delays in ratification as a result of the political structure of the country. Ratification takes place both at BiH and entities level and the process is expected to take a minimum for 6 months for WB projects in general with a significant political risk. The Country Management Unit (CMU) has reported an average of 8.5 months for ratification across the entire WB project portfolio in BiH. Ratification took 8 months for the original loan and 11 months for the AF. The conditions for effectiveness for this project consisted of the execution of the following legal documents: a) Project Agreement between World Bank and each entity, b) Subsidiary Loan Agreement between BiH and each Entity, c) Project Implementation agreement between each entity and the PIU, d) establishment of satisfactory accounting and reporting mechanisms for the PIUs, e) draft subsidiary financing agreements between each PIU and at least 2 PFIs, f) adoption of OM. These documents were negotiated and approved/executed separately for each entity, and communication and coordination among different stakeholders was lengthier than anticipated.

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For the original loan, there was a delay associated with fulfilling the effectiveness conditions in RS, including the Project Implementation Agreement between the RS Ministry of Finance and RS IDB satisfactory to the Bank and associated delays with the subsidiary financing agreements of RS IDB. For the AF, the effectiveness deadline was extended twice, after requests by the BiH MoFT due to protracted ratification procedure and delays within FBiH due to management changes within the PIU. Significant delays relating to the legality of the management of the PIU further affected the implementation process in FBiH. The delay affected the project as the funds could not be disbursed and at the time, as noted in the aide memoires from the period, there was strong demand for the funding throughout the country. During the AF, there was political and institutional uncertainty in RS following the arrests of 10 individuals in spring 2016 by the BiH State Investigation and Protection Agency over allegations for fraudulent loans and guarantees granted by a bank which failed in 2014 (and which is not related to the WB project). These arrests included the director of the RS banking agency and the Director of RS IDB. While these developments did not affect the performance of the technical unit in charge of the project implementation, it is perceived they had a negative impact on the reputation of RS IDB and the RS banking sector. The latter effect is deemed to have adversely affected the willingness of PFIs to broadly engage with RS IDB. Financial / banking sector The banking sector continued to face challenges in the aftermath of the global financial crisis. In the context of slow economic growth, weak domestic demand, and a continuously high unemployment rate, lending activity was largely determined by the household sector. The compounded annual growth rate for credit to the private non-financial sector was a low of 2 percent between 2009 and 2015. Within RS specifically, according to the latest available Economic Monitor (April 2016), published by the RS IDB, lending activity of the banking sector fell in the first nine months of 2015 with total loans in RS falling by as much as 5.5 percent compared to the same period the year before, with loans to private enterprises declining by 12.6 percent on an annual basis. Due to the repeated increase of the BiH country risk premium (under pressure from stringent EU regulations) and tepid economic growth, parent banks continued to reduce their exposure to domestic banks with external positions of BIS reporting banks declining by 16 percent (compounded average annual growth 2009-15). Non-performing loans rose from 5.9 percent in 2009 to 13.7 percent in 2015. The average return on assets was 0.4 percent in 2015, still lower than pre-crisis levels (0.8 percent in 2007). Profitability was negatively impacted by the growing NPLs as well as lower interest rates and compressed bank net interest margins. In an environment of excess liquidity, banks remained cautious in extending credit. Large foreign-owned banks tend to view SME lending as risky, a perception that was aggravated by the global financial crisis. According to the Enterprise Surveys of 2013, collateral requirements in BiH were high, with firms identifying access to finance as the second major constraint (after political instability).

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These factors, in conjunction with the political developments outlined earlier, disproportionately affected the implementation of the AF in RS. As a result, the additional finance was not fully disbursed, with disbursement slowing down throughout 2015 and stalling in 2016. Contrary to the original loan, during the AF, no domestically-owned bank met the eligibility criteria in RS so only foreign banks were PFIs. Domestically-owned banks have a larger SME client base than foreign banks, which focus mostly on the larger, corporate segment of the lending business. In addition, smaller banks typically have more difficulties accessing longer-term funding sources. The foreign-owned banks that were eligible PFIs diminished usage of the line during AF, due to the general weak credit demand, the growing risk aversion especially affecting SMEs, and the availability of lower-cost funding through their parents and other sources. The following table shows the percent of fund disbursement for the original loan, and the AF in each entity, broken down by bank ownership. Table 6: Participation of domestically-owned banks by entity Original Loan Additional Finance FBiH RS FBiH RS Foreign-owned 20.1% 26.0% 63.6% 100.0%Domestically-owned 79.9% 74.0% 36.4% 0.0%Total 100.0% 100.0% 100.0% 100.0%

Interest charged to PFI Implementation was affected by the different interest rate structures of the funds charges to the PFIs in each entity. The interest rate for the WB loan to the borrower was LIBOR plus the WB variable spread.9 This was the same interest rate charged on the funds on-lent by the borrower to each entity. The two PIUs then charged an interest rate to PFIs in each entity (set in the Project Implementation Agreement). In FBiH, Odraz charged to each PFI interest on withdrawn funds equal to 6-month EURO LIBOR plus 1 percent. In addition, Odraz obtained funds from the Project Management and Monitoring component to finance overall project management costs. In RS, RS IDB did not obtain any funds to finance its project management costs and initially charged each PFI interest of 6-month EURO LIBOR plus 2 percent in addition. The difference in the interest margins is reasonable given the different roles of each PIU. The RS IDB, as a financial intermediary, bore market and credit risks itself (in case of non-payment by the PFIs) and had to cover all its administrative costs. In contrast, in FBiH the risks was borne by the FBiH Ministry of Finance with the PIU functioning purely as a project implementation unit without taking any credit risk.

9 For Additional Finance, the WB Reference Rate for EUR-denominated loans became EURIBOR and hence the interest rate became EURIBOR + variable spread.

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As initial disbursement of the original loan in RS was slow, RS IDB re-assessed its operating costs and risk profile and reduced the margin from 2 percent to 1.3 percent in July 2011 in consultation with the WB. For the additional finance, RS IDB changed the interest rate structure by directly passing through the variable spread charged by the WB to the borrower (and by the borrower to the entity, and then to the PIU). This measure was taken in response to increasing total variable spread applied by the WB.10 As a result, the interest rate charged to PFIs by RS IDB became 6-month EURO LIBOR + variable spread + 1.3 percent. This interest rate is considered to be in line with the WB guidelines on financial intermediary financing, according to which the interest rate charged to PFIs “should be sufficient to cover the financial costs of mobilizing resources, the administrative costs […]; the risks inherent in lending; and an expected profit that will build the intermediary’s capital base […].” Based on this principle, the margin of 1.3 percent above its cost of funds is considered justifiable. Nevertheless, this adjustment coincided with a time period of declining interest rates. In the context of the institutional uncertainty, weaknesses in the domestic-banking sector, excessive liquidity of the banking sector and availability of low-cost long-term funding for the foreign-owned banks (which were the only PFIs found to be eligible during the AF in RS), the revised interest rate charged to PFIs and was not as attractive as before. Figure 12. Interest Rate charged by PIUs to PFIs

Source: Bloomberg, WB calculations Natural disaster Project implementation was adversely affected by floods caused by extraordinary rainfall in BiH in May 2014. According to the assessments conducted by the EU, the WB, and the UN, it was estimated that 81 municipalities in BiH suffered damage, losses, and social

10 A maturity premium on WB loans that have average maturities greater than 8 years was introduced in July 2010 and applied for Additional Finance. Hence, the total spread for AF included an additional 0.20 percent maturity premium over the variable spread.

-1%

0%

1%

2%

3%

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Euro Libor Federation PIU RS PIU

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and/or environmental impact of varying degrees. Around 90,000 people were displaced, and more than 40,000 people took refuge in public or private shelters. The floods are estimated to have caused the equivalent of nearly 15 percent of the country’s GDP in damages and losses in 2014, while economic activity fell sharply after the disaster. In 2014, real GDP growth rate was 1 percent, (down from 2 percent in 2013) while unemployment increased to 28 percent (up from 27 percent). As a result of the floods, the WB agreed to allow reprogramming of existing loans of flood affected SMEs under the credit line, in line with the entity banking authorities’ temporary measures on credit obligations. Eight SMEs who benefited from the credit line, out of a total of 313 SMEs financed, were affected by the floods, two of which took advantage of the reprogramming. In response to the floods, SME eligibility for new loans was broadened and extended to agribusinesses.11 The floods are deemed to have negatively affected broader credit demand by SMEs, particularly for investment loans.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The objectives of the project were clearly specified in the PDO. The project outcome indicators approved for the original loan were consistent with the project’s activities and PDO and adequately measured the project’s impact. These indicators measured impact on access to finance through indicators on (1) total loan disbursement, (2) amount of medium and long-term lending, and impact on outreach by measuring (3) number of beneficiaries. The intermediate outcome indicators collected information on the following: (4) total number of loans to further measure the extent of outreach of the project, (5) the level of non-performing loans to monitor the quality of credit portfolio and the sustainability of the results, and (6) total amount of lending by PFIs to enterprises to assess whether PFIs had increased lending to the commercial sector, beyond the credit line. Three sector indicators comprised: (7) annual turnover of SMEs, 8) level of exports and 9) job creation/maintenance. Targets were set in the PAD for indicators 1, 2, 4 and 5. Although indicator 3 did not have a target in the PAD, some initial ISRs presented targets. The OM included templates for data reporting by PFIs to the PIUs and 2 PIUs to the WB, although the information was not specific enough. Aide Memoires for the original loan did not report on the results consistently. The M&E framework in the ISRs deviated from the PAD in certain areas (for example, by including additional indicators that were not part of the PAD, introducing targets which were not presented in the PAD, not presenting targets

11 The project did not initially envisage farming and agricultural activities as eligible activities for SMEs based on the Environmental Safeguards Review Framework (ESRF), which was part of the OM. According to the ESRF, the project cannot finance activities that significantly impact the environment. In light of the floods, eligibility was extended to agribusinesses registered as SMEs with the exception of noted activities which would increase use of pesticides and pest management by chemicals or other manner.

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for some of the indicators, and using different definitions for the same indicator).12 Sector indicators were conducted via monitoring reports, and not through the ISRs. Following feedback from the CMU, the M&E framework was streamlined and its implementation improved during the AF. The PDO indicators underwent a slight revision for clarification, without changing the substance, while targets were set for all PDO indicators. The intermediate outcome indicators were changed but remained in spirit of the operation: three intermediate indicators were dropped either because it was not possible to establish targets or monitor regularly, one indicator was modified, and five new indicators were added. The new indicators added were part of the required core indicators for all WB credit lines that provide financing for SMEs. The revised indicators were reflected in the templates in the OM, and upon approval of the AF, the ISRs consistently reported results as presented in the Project Paper. Despite minor shortcomings in the M&E systems during design and implementation, the M&E system fulfilled its role of providing accurate and timely information to decision makers for strategic and operational decisions. The M&E framework was used throughout the project to assess overall progress. The team also monitored key indicators in each entity separately in order to inform about decision-making, and make specific recommendations on actions to support implementation in each entity. The consistency and quality of data received for the ICR was satisfactory. The M&E quality monitoring is rated substantial.

2.4 Safeguard and Fiduciary Compliance

A. Procurement Compliance

The procurement processes under the sub-loans were carried out by the final borrowers following established commercial practices up to certain thresholds, in accordance with WB guidelines included in the Loan Agreement and the OM. These thresholds were increased in the course of the project after successful project restructuring. The OM

12 For example, ISR 2 includes a target (of 35) of the indicator “Number of firms financed”. This target was not included in the PAD. The same indicator is reflected with different wording in ISR 3 “Number of SMEs supported under the WB credit line based on disbursements” but a target is not shown. ISR 3 also included an additional indicator “Number of SMEs with medium term credit granted under the WB credit line based on disbursement”. ISR 4 includes a target of 30 for both indicators “Number of SMEs supported under the WB credit line based on disbursements and “Number of SMEs with medium term credit granted under the World Bank credit line based on disbursement.”

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included a Procurement Plan, to be completed by each PFI to report on procurement arrangements for each sub-loan.

The two PIUs were responsible for ensuring that procurement rules were followed by the PFIs and final borrowers. RS IDB maintained specialized procurement staff throughout the project. Even though a procurement officer left Odraz and there were delays hiring a new procurement officer, the procurement-related tasks were taken over by other PIU staff without impacting delivery of responsibilities.

The WB reviewed the procurement arrangements on a sample basis, performed by PFIs and supervised by the two PIUs bi-annually. Throughout the implementation phase, the WB team noted measures to strengthen procurement practices in the two PIUs, which were adopted by the PIUs and reflected in updated versions of the OM. The bank held a joint workshop discussion with both PIUs to exchange knowledge and share experiences. The midterm review conducted by the WB in December 2014 reported that all supervised activities were in line with established private sector commercial practices agreed to in the project documents.

Procurement ratings were satisfactory in the ISRs.

B. Environmental Safeguards Compliance

The project was classified as WB Category B, triggering OP 4.01 on Environmental Assessment. Since the activities and areas of operation of the SMEs to be financed were not known at the time of appraisal, an Environmental Safeguards Review Framework (ESRF) (corresponding to an Environmental Management Framework) was prepared by the client with substantial guidance and help by the WB team. The ESRF was concluded with adequate disclosure and public consultations (held on September 10, 2009). The ESRF document includes a screening framework for projects that (a) screens out activities with complex, irreversible environmental impacts corresponding to a Category A and (b) assigns one of the four categories based on the associated environmental impacts and risks. Projects with moderate environmental impacts are subject to an additional development of an Environmental Management Plan (EMP), including public disclosure and consultations. The screening procedure is included in the OM. This procedure held for both the original loan and the AF.

The two implementing agencies had dedicated staff responsible for the environmental overview of the screening, questionnaires, and procedures prepared by the PIUs and the PFIs. A number of training and discussion sessions were organized by the two PIUs and the PFIs. Working together with the WB environmental specialist, the group helped to address all operational issues related to environmental screening, including revisions of the exclusion list within the ESRF. PIU staff participated WB safeguards trainings. Regular reporting on EMP preparation and compliance was conducted by both sides, and included in the semi-annual reports. The PIU staff and the WB team visited a considerable number of randomly chosen SMEs. At no time were there any major discrepancies or issues noted.

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The fact that the PIUs had dedicated staff (not necessarily full time environmental specialists, but rather staff working on other aspects of project implementation as well), with the number of trainings participated in and organized, as well as the revised exclusion lists and monitoring of ESFR, implementation can be considered as best practice both by the participating PIUs and the WB team. Environmental safeguards compliance was rated satisfactory in the ISRs.

C. Fiduciary Safeguards

The Financial Management (FM) arrangements and related PIU responsibilities are detailed in the OM. Each review of the FM arrangements, conducted annually by the WB FM specialist (most recently in June 2016), concluded that the FM systems, including accounting, budgeting, and reporting, have been satisfactory, and that the project units were well staffed and well managed.

Semi-annual interim un-audited financial reports were received regularly and were acceptable. There were no overdue auditor’s reports and audited project financial statements throughout the project. The auditors issued an unmodified audit opinion on the individual and consolidated project financial statements throughout the project, and the project management recommendations letters did not report any accounting issues or internal controls deficiencies.

During reviews, minor FM issues arose infrequently and were resolved adequately by the PIUs. Such issues included one client obtained two loans with two different PFIs using one invoice for documenting expenditure. In another case, one sub-borrower obtained a loan for a certain purpose, and had used it for different purpose. In both cases remedial actions were taken and discussed with the WB team. The team provided additional recommendations to further strengthen internal controls for the project. Implementation of fiduciary safeguards procedures in the ISRs has been rated as satisfactory.

2.5 Post-completion Operation/Next Phase N/A

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation The relevance of objectives, design and implementation of the project is high. The banking sector in BiH is still dealing with the aftershocks of the global financial crisis which weakened financial sector asset quality and profitability, in line with overall trends in banking in the region. While the banking sector remains stable and has reduced its reliance on foreign financing, many of the foreign-owned banks, which continue to dominate the banking system, have been gradually deleveraging as in many other emerging markets,. This has contributed to the decline in the rate of credit expansion relative to the pre-global financial crisis period. In the second quarter of 2016, NPLs were at a high 12.1

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percent (vs. 5.9 percent in 2009), and return on assets at 0.70 percent. Although the banking system remains broadly sound, significant vulnerabilities continue to exist among domestically-owned banks. Figure 13. NPL ratios

Source: IMF, Global Financial Stability Report Figure 14. Credit growth

Source: IMF, International Financial Statistics, WB and OECD GDP estimates

Figure 15. Return on Assets

Source: Financial Soundness Indicators, central bank websites

As long-term loans are primarily funded by long-term liabilities, which are mainly provided from parent banks or IFIs, there is a continued need for long-term bank funding, especially for locally-owned banks. For the sixth year in a row, the rate of credit growth was in the low single digits (2.7 percent at the end of 2015), or near zero on a real basis. This has had a particularly negative effect on SMEs, which constitute the large majority of businesses in the country, and are particularly vulnerable to the weaknesses in the credit environment. Businesses continue to face access to finance obstacles. BiH was ranked 79th out of 189 countries in the 2016 Doing Business Report. The 2016 Global Competitiveness Index ranked BiH 123rd out of 138 countries in terms of financial services meeting business needs, 115th for affordability of financial services, and 68th for ease of access to loans.

0%

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The Reform Agenda for BiH for the period 2015-2028, which was agreed in July 2015, targets several areas of reform, including boosting competitiveness through a more stable and accessible financial sector. In line with the reform agenda, one of the three focus areas of the CPF FY16-FY20 (Report No. 99616-BA) is creating conditions for accelerated private sector growth, including building a more stable and accessible financial sector, particularly for underserved segments in the market.

3.2 Achievement of Project Development Objectives The efficacy of the combined project is rated substantial. The project’s objective was “to enhance access to finance for small and medium enterprises in the Borrower’s territory in the context of the global financial crisis.” The achievement of this objective is measured according to the results framework, as revised for the AF using indicators for a) total loan disbursement, b) amount of medium and long-term lending, and c) number of beneficiaries. The following table summarizes the achievements of the combined project (both original and additional finance) for these indicators. Table 7. PDO Indicators for original loan and additional finance Baseline

End Target

Actual November 2016

Total amount of loans disbursed by the PFIs under the project (US$ million)*

0 189.0 157.7

Medium to long term (>12m) credit granted by the PFIs under the project

0 100% 98%

Number of firms financed 0 140 313 *This indicator measures the same quantity as the intermediate indicator “Volume of Bank Support: Lines of Credit – SME.” A total of 390 loans were provided for a total amount of US $157.7 million. The loans were provided to 313 unique SMEs13 (1 percent of SMEs in BiH) across economic sectors and operating throughout BiH. The project supported the estimated creation of 1,937 jobs while maintaining a healthy loan portfolio. It is estimated that the project contributed to investments totaling US$ 27.2 million (21.3 percent of disbursed funds), enabling SMEs to expand capacity, purchase equipment, and employ workers. In addition, the project contributed US$ 19.8 million (15.5 percent of disbursed funds) to working capital financing, enabling SMEs to manage their liquidity and operations. The remainder (63 percent) was used to refinance existing loans at more favorable rates, boosting SMEs’ liquidity and profitability through lower interest expense.

13 A small number of SMEs were financed more than once through the credit line.

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a) Total loan disbursement: A total of US$157.7 million was disbursed (83 percent of the total). The undisbursed amount (US$ 31.3 million) was the portion allocated to RS under AF. Several factors have contributed to the lagging disbursement, including political and institutional uncertainty, weak economic fundamentals aggravated by the severe floods, growing bank risk aversion, falling interest rates, and the eventual participation of only foreign-owned banks as PFIs in RS. According to the FBiH PIU, the PIU received additional requests from PFIs for loans amounting to US$50 million that could not be met. b) Amount of medium and long-term lending. 98 percent of the total value of all the loans had a maturity over 12 months. Out of 390 loans, a marginal number of loans had a maturity of exactly 12 months (11 loans for a total of US$2.6 million). One loan had a maturity of 6 months (US$108 thousand), used for refinancing purposes. 378 loans had a maturity of over 12 months, for a total of US$ 125.2 million. Average maturity of all loans is 5 years. The project did not include an eligibility requirement on minimum maturity in order to allow for greater flexibility. After the midterm review, the loan focused on longer term loans (strictly greater than 12 months) and this became a de facto eligibility requirement. The goal was hence largely met. During the ICR mission, some PFIs, particularly the domestically-owned banks, confirmed that without access to this credit line, they would not have been able to extend long-term loans, which are primarily needed for investment. This was further confirmed during the SME focus groups, during which the majority of SMEs stated that they would likely not have been able to obtain loans with sufficiently long tenors at attractive rates or at all without access to this credit line. See Annex 2 for additional information on the composition of the loan portfolio by sector, size and purpose. c) Number of beneficiaries. The number of firms financed significantly exceeded the initial targets set with a total of 338 firms financed versus the target of 140 firms. This result points to a significant breadth of beneficiaries reached. The average loan size was US$328 thousand. Table 8. Intermediate indicators for combined project (original loan and AF) Intermediate Indicators Baseline

June 2010End Target

Actual November 2016

Number of all loans disbursed to SMEs under the credit line

0 150 390

Outstanding SME finance Loan Portfolio (amount US$ million)

515 N/A 2,156*

Outreach Number of jobs created 0 N/A 1,937 Portfolio quality Total NPL for this credit line volume (%)

0 Under 7 1.7

Portfolio at risk - % (>90 days) 5.9% N/A 15.18* Sustainability Return on Assets (%) 0.09 N/A 1.04* Return on Equity (%) 0.8 N/A 7.38*

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Note: The intermediate indicators shown as per the amended results framework approved under AF. The intermediate indicator “Volume of Bank Support: Lines of Credit – SME”, which is a core indicator, measures the same quantity as the first PDO indicator, hence it is included in Table 7. * Actual data for these is as of end of year 2015, as PFIs had to report these on annual basis. Regarding intermediate indicators, most were collected for analytical purposes and project implementation adjustments. Notably, the quality of the portfolio is high with lower NPLs than the average banking sector (1.7 percent vs. target of under 7 percent). The higher portfolio at risk for the PFIs overall portfolio than the NPL ratio of loans under the credit lines may be attributed to several factors including: a) the legacy of more relaxed credit standards pre-crisis, b) the PFI and SME eligibility criteria under the WB credit line that encouraged prudent lending, c) and the difference in the age of the two portfolios. Based on the achieved expansion of access to finance, the achievement of the objective is rated substantial.

3.3 Efficiency The efficiency of the operation is rated substantial. Efficiency of project resources in terms of ensuring that the most economically viable subprojects receive funding from the credit line (which therefore maximizes "value-for-money" to the economy) was achieved through the design of the project. The design optimized efficiency based on a several best practice features for credit lines. Financial intermediation of funds to sub-borrowers took place only through PFIs. PFIs are commercially operating banks, hence profit-maximizing entities. PFIs were selected and frequently re-appraised by the WB based on strict eligibility requirements, including compliance with banking regulations, acceptable lending policies, and appropriate appraisal, and supervision and monitoring procedures. As there was no direct lending through this project, all projects were appraised by PFIs and all loans were priced by PFIs, ensuring that each project met adequate credit standards and was priced according to its risk profile. This design was used both for the original loan and the AF. The efficiency of the design also contributed to the high repayment profile and quality of the sub-loan portfolio. The combined project (original and AF) also benefited from having 25 large sub-loans (above 2 million BAM each), and amounting to 34 percent of the total loan disbursements) that led to higher administration and monitoring efficiency by the PIUs. For the combined project, one PDO indicator was fully achieved and exceeded (number of firms), one PDO indicator was largely met and met in spirit (medium and long-term financing) and one PDO indicator was partially met (disbursement). Regarding disbursement, the original loan was fully disbursed in both entities while for AF, it was fully disbursed in FBiH and partially disbursed in RS. Undisbursed funds of US$31.3 million in RS are attributed to banking sector developments, the protracted economic slow-down, which was further exacerbated by the floods, and the adverse effect on the reputation

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of the institution following the arrests of 10 individuals, one of whom was the Director of the PIU. During this time, the WB and the PIU in RS undertook additional efforts to accelerate disbursement. The implementation agencies demonstrated adequate capacity and managed the project efficiently. Project management from the WB has been efficient, demonstrated by processing the AF and project restructurings in a timely manner and preemptively escalating supervision measures to support disbursement in both entities. There were delays in the implementation of the AF in FBiH due to changes in PIU management. Protracted lack of legal confirmation of the management caused uncertainty over the ability of Odraz to manage the operations of the AF. This uncertainty caused administrative and financial costs to certain PFIs and SMEs. Some PFIs preemptively extended loans to SMEs from other, more expensive funding sources, and were unable to then change the source once the AF was implemented as they had already met the lending limits. Some sub-borrowers received bridge financing from the PFI until the AF became effective resulting in higher interest expense than what would have been under the credit line. However, this issue did not ultimately affect disbursement or significantly affect outcomes in FBiH. The efficiency is rated high of the original loan and modest for AF. For the combined project, the efficiency is rated substantial.

3.4 Justification of Overall Outcome Rating Rating: Satisfactory Based on the high relevance of the project throughout its life, its impact on the enhancement of access to finance in the context of the crisis, and the substantial efficiency, the project is rated satisfactory.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development While the project did not have a target for financing SMEs with female ownership, out of the 208 unique SMEs financed in FBiH, 28 SMEs (or 13.5 percent of total) had female owners / shareholders and out of 105 unique SMEs financed in RS, 25 (or 23.8 percent of total) were female owned. (b) Institutional Change/Strengthening While the project directly enhanced access to finance, it has also contributed to lasting effects in the banking sector, thereby positively affecting the sustainability of the project’s results. These second level contributions relate to: a) strengthening bank policies, b) increasing bank capacity for credit appraisal for longer-term loans, and c) exposing PFIs to IFI processes.

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a) The project strengthened local banks operational policies and practices due to the multiple and comprehensive due diligence reviews, which were undertaken on an annual basis by the WB team and specialists.

b) The project strengthened credit appraisal policies and procedures among PFIs, especially the smaller, locally-owned banks. These banks do not benefit from corporate-level policies and manuals derived from their parent banks, which have established credit risk procedures. At the same time, the smaller locally-owned banks have limited access to longer-term credit lines e.g. from parent banks or other IFIs and face funding restrictions for extending long-term loans.

c) The project specifically built capacity in credit appraisal for longer-term tenors for investment projects, which carry a higher risk than short-term working capital loans. In addition, for some PFIs, this was the first experience with the WB as an on-lender. The project presented an opportunity to develop institutional capacity for credit lines, which can be applied for future operations, including best practices for collaboration with IFIs, design of the credit lines, monitoring and reporting practices.

In addition, the project also strengthened institutional capacity of the two PIUs through the workshops, technical assistance, and training provided throughout the project. It should be noted that one of the PIUs will be dismantled at the end of the operation (Odraz), and this capacity may not be sustained at an institutional level although the staff may be moved to relevant ministries. (c) Other Unintended Outcomes and Impacts (positive or negative) N/A

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops N/A

4. Assessment of Risk to Development Outcome Rating: Significant Risks to the development outcomes relate to the intertwined political/institutional risk economic, and financial sector risks in the country.

The risk in the overall WB program is rated as high as a result of the high political/institutional risk.

A related institutional risk relates to the PIUs. The FBiH government decided to dismantle Odraz upon completion of this project. Odraz was a non-profit foundation with dedicated units mandated with assisting implementation of WB projects, among others. While permanence of the PIU is not a requirement, the ongoing presence of a PIU supports sustainability of the project results, and encourages institutional capacity-building for other projects. This development could affect the implementation of the revolving fund from repayments of the sub-loans. However, the borrower is investigating alternative options including the initiation of reforms at the FBiH Development Bank, to potentially enable it to undertake this role in the future, supported by the IMF and the WB.

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Economic growth since the crisis has been slow and credit demand by SMEs has been lower than expected, which if continued poses a risk to credit growth. In addition, BiH is exposed to global, regional and EU-level macroeconomic developments.

BiH is vulnerable to natural disasters. Financial sector risks to the development objective relate to the ability and

willingness of banks to continue to extend long-term finance to SMEs. Based on banking sector assessment and meetings with PFIs, this risk is quite significant based on current economic conditions, particularly for foreign-owned banks. SMEs that are currently bankable would be affected by limited access to longer-term loans or higher costs; SMEs that are not bankable would generally not gain access to credit.

Based on these factors the risk is rated significant.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The project design was highly relevant for the country’s development priorities and responsive to requests from the authorities to provide immediate assistance to the financial sector at a time of crisis. The team assessed several options regarding project components and implementation taking into account the unique bi-furcated political structure and the local context. The fundamental elements of the design were discussed and accepted by the authorities and entity governments. There are two design elements which could have been improved and to which largely depended on the borrower: the inclusion of SMEs based in Brcko District, and flexibility in re-allocating proceeds. WB support to the borrower in designing these features. Section 5.2 discusses these two elements in greater detail. The project was based on the design of credit lines in other countries and allowed for a high degree of flexibility, which was valuable in the highly complex institutional structure. Flexibility enabled a dynamic process of “adjust-as-you-go” to support implementation during the supervision phase. Features such as SME eligibility criteria, conditions for refinancing, loan maturity requirements, and lending ceiling for each PFI were revised during the life of the project through routine supervision discussions with entity authorities and PIUs. There was some ambiguity regarding certain project parameters initially, which were resolved during supervision, hence it would be important to ensure a thorough first draft of the OM upon entry to ensure clarity and mutual understanding of project parameters of all stakeholders PIUs, PFIs, SMEs. The project’s risk assessment framework was careful and candid. The team correctly identified several risks which eventually influenced the outcomes (such as weak credit demand and impact of financial sector conditions). The risk assessment would have been more comprehensive with a more detailed assessment of the political/institutional risk. This

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risk affected the implementation of the project by affecting both effectiveness and disbursement. The mitigation measures in the design phase of the project were appropriate. The team preemptively took many actions to ensure implementation success during preparation e.g. by pre-approving PFIs and organizing training and capacity building for the PIUs. The principles of the results framework were reasonable and in line with the objectives of the project. While initially the M&E framework lacked clarity and was not monitored consistently, this was corrected in AF. The WB also developed reporting templates that helped ensure the availability of quality data at the time of the ICR. (b) Quality of Supervision Rating: Satisfactory Project supervision was undertaken regularly and entailed field visits to borrower, PIUs, PFIs, and end beneficiaries in each entity. Supervision missions focused on active and detailed problem solving resulting in a dynamic process of continuous adjustments in response to various institutional, economic, administrative and other factors. There were 10 supervision missions in total. Regular ongoing supervision by the local office complemented formal supervision missions. WB specialists supervised the project regularly regarding fiduciary and safeguards compliance. Aide-memoires following implementation support missions were submitted on time and provided detailed and comprehensive implementation progress updates in each entity specifying issues discussed, and tangible next steps to be undertaken by each party in response. A few aide memoires provided updated information on the macroeconomic / financial sector developments in the country, and their impact on implementation. The majority of aide memoires include assessment of financial management, procurement arrangements, as well as compliance with WB safeguard policies on environment. As noted earlier, it would be recommended to use the results framework for communication to the stakeholders in the aide memoires. As a suggestion for future operations, it would be useful to include a summary table of the implementation progress (using the results-framework) for each entity separately, even if the approved results framework consists of aggregate-level indicators for the whole country. This will provide a more accurate overview of the progress of the project in each entity. Also more comprehensive updates on the exogenous factors affecting implementation including political, economic and banking sector developments are recommended. ISRs provided a snapshot of progress, albeit with inconsistent reporting on the results framework for the original loan, as noted earlier. The project was rated Satisfactory throughout with the exception of a Moderately Satisfactory rating in October 2013, relating to the legality of management of the PIU, which hindered implementation by more than six months. The lagging disbursement in RS was identified in late 2015, with only six months to closing. At that time, the disbursement ratio was 83 percent for the entire project, while FBiH portion of the loan had fully been disbursed. While the rating for overall implementation progress could have captured the slowing disbursement in RS and the

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overarching factors affecting implementation, the last two ISRs provide a description of the key issues, as well as actions for management attention. In general, stakeholders, including borrower, PIUs, and PFIs praised the WB team’s collaboration, proactivity, strong technical background, and the engagement of the Task Team Leaders (TTLs). The presence of a co-TTL based in the local office has been described as instrumental for successful project management and execution. The co-TTL provided hands-on support to stakeholders in both entities on a frequent and continuous basis including meetings with the authorities, visits to both PIUs in between regular supervision missions, and discussions with PFIs in order to solve issues in implementation. These measures accelerated as soon as the lagging disbursement in AF was identified, in mid- 2015. While missions focused primarily on resolution of operational and strategic issues, there was strong emphasis on technical assistance and capacity-building. Both the entity government and PIUs noted the importance of workshops and training provided by the expanded WB team including the specialists on an ongoing basis. This included the one-day conference in Croatia for PIU managers and the ministries of finance (FBiH and RS) to share knowledge with the Croatian Bank for Reconstruction and Development, which had a parallel project (P116080). The WB conducted due diligence for PFIs and confirmation of eligibility on an annual basis. Due diligence entailed a thorough assessment of each PFI by senior banking experts against PFI eligibility criteria. The WB held workshops for PFIs to enhance their understanding of procurement, financial management, and environmental safeguard guidelines. While this ensured a high quality of the PFIs involved in the project, which necessitated the involvement of banking operation experts, a suggestion for future operations would be to involve the banking regulation authorities in providing input in the due diligence process, which would also serve to increase capacity and sustain results. The WB also intensified dialogue with PFIs as disbursement was slowing down in RS to understand the slow-down in the sub-loan pipeline and identify possible solutions. The team demonstrated flexibility and responsiveness addressing the concerns of PIUs, PFIs and SMEs. As a result, the OM was adapted to ensure all stakeholders understood the requirements of the project and to support disbursement of the funds in both entities (e.g. extending the period for refinancing for eligible goods and purchases, broadening and clarifying SME eligibility criteria etc.). The team responded efficiently to entity government requests, which included by processing the AF expeditiously and by enabling loan programming for borrowers in flood-affected areas. During project appraisal, the WB teams conducted several meetings with other IFIs. A suggestion is to ensure that supervision teams continue engage with other IFIs and donors, especially in a country with extensive donor presence. This helps to ensure a continuous dialogue and exchange of ideas, especially within the area of financial sector engagement.

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Despite the fact that there were multiple TTLs (1 TTL during preparation and 3 different TTLs during supervision, as well as one acting TTL), the borrower noted the cooperation from the WB was seamless throughout this project. This is a result of the hands-on involvement of the local office and in particular the eventual locally-based co-TTL, in identifying issues and addressing them effectively on the ground. New TTLs also contributed new perspectives in supervision to address different issues in various facets of the project. A project midterm review for the AF was undertaken in late 2014/early 2015. The review was well timed and undertaken shortly after a change in TTL, as well as final resolution of key implementation hurdles in FBiH. As such, the midterm review was a helpful starting point for reviewing the efficacy and effectiveness of the project design and planning for future project activities. At the time the midterm review was undertaken, the factors surrounding the lagging disbursement of AF in RS had not yet surfaced. Given the decision of the FBiH on the discontinuation of Odraz as well as the institutional developments in RS and affecting RS IDB, the WB team has escalated technical assistance at the request of the authorities of both entities. The WB team in coordination with external experts have conducted diagnoses of RS IDB and FBiH Development bank (FDB) aimed at strengthening institutional governance and supervisory arrangements. It is noted that FDB is a separate institution from Odraz, and is envisaged to play a larger role in future project implementation in FBiH, which would address the institutional gap created by the discontinuation of Odraz. The supervision rating of satisfactory is justified by the successful completion of the first credit line with one borrower and two PIUs in a complex setting, the implementation of AF despite numerous unforeseen exogenous factors, and the considerable efforts by WB teams to address implementation bottlenecks throughout supervision. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory Based on the above, the bank overall performance is rated satisfactory.

5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory The authorities at all levels demonstrated strong ownership of the project and commitment to its objectives. Following successful performance of the original loan, the BiH MoFT officially requested support in the form of AF. There was good and frequent communication and coordination among the BiH MoFT entity ministries, especially in the early phases of project preparation, appraisal and negotiation. BiH MoFT was responsible for submitting/processing the ratification, and organizing timely audits. The rest was managed primarily by the entities including ensuring effectiveness and the resolution of issues at a political level. The borrower at all levels demonstrated a high degree of technical capacity.

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There were two design features which, in hindsight, could have been improved and which are largely in control of the entity governments. The Loan Agreement between BiH (borrower) and the WB and the subsequent subsidiary agreements between the borrower and each entity limit each entity to work in its own territory, de facto excluding the participation of SMEs based in Brcko District. Future projects should enable the participation of eligible beneficiaries from across the country. The treatment of BD should be mentioned explicitly and either one of the two entities would need to agree to implement on behalf of BD, which has been the case of other WB and other PIU projects, or BD would need to implement that component of the project itself.14 Similarly, the allocation to each entity based on a pre-determined ratio proposed by the authorities, was in retrospect restrictive as it was not possible to reallocate funds from entity to the other in the case of weaker demand in one of the entities. Inclusion of BD and flexible reallocation would contribute to bigger impact and more sustainable results, especially since some of the funds were eventually undisbursed. The authorities maintained a stable macroeconomic environment conducive to the success of the project, were committed to enhancing access to finance for the enterprise sector. A number of initiatives were initiated to support access to finance for SMEs. Both entities adopted decisions on placement of funds from the repayment of the project in support of entrepreneurs, enterprises and employment. Both entities prioritized private sector and job retention/creation activities after the devastating floods of 2014. This included the implementation of emergency measures to provide temporary relief for borrowers in flood-affected areas (e.g. moratorium or extension of grace/repayment period). For the initial period of the original loan, there were concerns over indirect interference of the FBiH MoF over the interest rates charged by PFIs.15 The issue was discussed with the FBiH MoF and resolved. PFIs in FBiH and RS as well stated they freely determined interest rates throughout the project. There were significant delays in the effectiveness of the AF relating to the legality of management and the appointment of the director of Odraz, with the deadline extended several times. Several missions were dedicated to resolving issues concerning the lack of clarity on the management of the FBiH PIU. This delay indicates a need for swifter and more coordinated entity government action or political decision-making to resolve issues affecting the operation of PIUs. Furthermore, the FBiH government decided to dismantle Odraz upon completion of the project and transition arrangements for the continuation of project-related activities remain pending.

14 Assuming that the entity would not be willing to finance the BD component itself, BD would need to sign a Subsidiary Agreement with BiH to repay its share of the project.

15 FBiH MoF had stated that Odraz should not approve loans above a margin of the bank of 5 percent.

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(b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory There were two implementation agencies for this project, Odraz in FBiH and RS IDB in RS. Despite differences in implementation and disbursement, the performance of both PIUs is rated moderately satisfactory. Implementation in FBiH: From the beginning of the project, Odraz proactively raised awareness about the project in the private sector including advertisement on the website, visits to approximately 500 SMEs, conducting presentations for SMEs, and facilitating over 30 events for chambers of commerce throughout the federation. The direct outreach efforts had a positive impact although some PFIs expressed concern over the promotional activities targeting SMEs directly, as this had the negative effect of attracting some SMEs without adequate credit worthiness. Odraz worked closely with PFIs from the project outset. Some PFIs mentioned a longer-than expected processing time, although this may also be attributed to additional WB requirements. The disbursement of the project in FBiH was satisfactory with the exception of the period during which the implementation of AF was delayed due to questions concerning the management of the agency. Although the resolution of the issue was beyond the mandate of the PIU, several PFIs and SMEs were adversely affected by the delay and the uncertainty. This delay created the need for more intense supervision from the outset of AF, and increased both administrative and financial costs to PFIs and SMEs. Some PFIs had to extend loans to SMEs from other, more expensive funding sources, and were unable to then change the source as they had already met the lending limits under the credit line. Some sub-borrowers received bridge financing from the PFI until the loan became effective resulting in higher interest rate during that period than what would have been under the credit line. Following resolution of that issue, implementation accelerated. In the end, Odraz achieved full disbursement. In the Federation, 258 loans were disbursed to 208 unique SMEs. This collectively increased employment by 1,467. The vast majority of the disbursed loans were medium and long term.16 Implementation in RS: Initial implementation of the original loan in RS was slower than expected. In consultation with WB, RS IDB undertook steps to facilitate implementation. RS IDB promoted the credit line by providing field presentations to SMEs representatives in cooperation with municipalities across RS, and with on-going dialogue with PFIs including workshops for loan officers at PFIs. The project was promoted on the RS IDB

16 In the course of project implementation, there was a case of corruption involving bribery which was detected and pursued by the authorities. At the time of writing this report, the case was ongoing.

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website, in national media through multiple appearances of RS IDB representatives, and also by press releases and articles. The project benefited from having a financial intermediary such as a PIU with contacts in the banking sector and which is familiar with credit line processing. In general PFIs were satisfied with the collaboration with RS IDB. Initial disbursement was slow, but the PIU took several steps in support of the disbursement, including lowering the on-lending interest rate margin charged to PFIs, bringing it closer to the rate in FBiH. As a result, implementation in RS improved considerably and the original loan was fully disbursed. During the period of implementation of the AF, disbursement slowed in RS primarily driven by market and broader banking sector developments, including the lack of domestic bank eligibility as PFIs. Market factors included excessive liquidity in the banking sector and availability of funding at more favorable rates than the WB credit line in an environment of unprecedented low interest rates. In addition, two PFIs which had been active in the original loan did not participate in the additional finance for reasons not related to the PIU. One of these PFIs was not confirmed as part of the WB due diligence process. The other PFI was part of a leading international banking group which underwent resolution in the context of the European crisis. Disbursement was also negatively affected by the reputation of the organization after the arrest of the PIU director and other individuals outside the PIU in spring 2016. As a result, only 57.7 percent of the additional finance was disbursed in RS, or 72 percent of the total allocation to RS. In RS, 132 loans were disbursed to 105 unique beneficiaries, which collectively increased employment by 472. The vast majority of the disbursed loans were medium and long term (92 percent of total number of loans representing 94 percent of the total value of the loans). Monitoring: Both PIUs were adequately staffed throughout the project. The PIUs monitored approved loans, which included a review of the documentation received by PFIs, and conducting field visits to validate the purpose of the loan (Odraz checked usage of funds in 50 percent of SMEs and RS IDB in 76 percent). Both PIUs complied with the WB environmental and fiduciary safeguards and undertook necessary actions recommended by the Bank to strengthen compliance during implementation. PIUs visited a large number of sub-borrowers to validate the purpose of the loans. The two PIUs cooperated and regularly exchanged views and knowledge about the performance of the project. This exchange should be further strengthened in the future. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory Based on the above ratings, the overall rating for borrower performance is moderately satisfactory.

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6. Lessons Learned A number of lessons can be drawn from the project design and implementation that would be useful for the Bank and other donors for the design of financial sector operations, other projects in the country, as well as with broader application. Lessons relevant to credit lines:

Financial sector operations and credit lines in particular, are highly susceptible to macroeconomic and market conditions. In the long period between project preparation and project close, the economic and banking environment can change substantially. As a result, rapid disbursement in one period is not a guarantee for success in a follow-on operation. In order to be prepared for possible changes during the project cycle, flexibility in design and in supervision is essential. This will help to ensure that the projects remain relevant and attain their objectives.

The credit lines are most relevant for banks that do not have access to other long-term funding sources, which are predominantly locally-owned banks. Credit line operations should plan for sufficient participation by locally-owned banks and mitigate against the risk of insufficient participation. The role of due diligence of PFIs is extremely valuable and if possible the banking authorities should be involved.

Credit operations should rely on market gap analyses in advance regarding the need and demand for the loan for both PFIs and final beneficiaries. Nonetheless, market gap analysis should be viewed in context of the availability and accuracy of historical data, reliability of firm and beneficiary surveys, and assumptions about lending rates.

In general, PIUs which have a financial intermediation mandate are preferable partners for credit lines, and can add value with their local knowledge of the banking and real sector. Credit lines intermediated through financial intermediaries have an additional benefit of building institutional capacity and promoting sustainability of results. Pricing of the line to the financial intermediaries should adequately reflect the costs and risks borne by the financial intermediary.

In context of limited capacity or familiarity with WB projects, technical assistance to support PIUs is essential in the form of trainings, knowledge exchange, workshops etc.

Lessons relevant to projects in BiH

Given the rigid institutional and complex political context, it is important to retain flexibility in the design of the project, and to the extent possible enable the re-allocation of funds between the two entities without requiring a new process of ratification of legal agreements (e.g. this could be done by including provisions in the legal agreement for an increase in the allocation up to a ceiling without requiring additional parliament approval)

Projects should ensure the eligibility of beneficiaries based in Brcko District, which broaden outreach and contribute to the overall achievement of the project objectives. This inclusion should be explored without adding another administrative, legal layer, or another implementation agency.

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Lessons with broader application In an environment with a high level of political fragility, projects remain vulnerable

to political uncertainty through all phases of preparation and implementation. In this context, the choice of the PIU becomes even more important. Unforeseen changes in the PIU leadership can substantially delay or derail the process. It is important to conduct full due diligence of prospective PIUs, including their capacity and governance, and not rely solely on past PIU performance.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies See Annex 7. (b) Cofinanciers N/A (c) Other partners and stakeholders N/A.

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate

(USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

Total Baseline Cost 0.00 0.00

Physical Contingencies

0.00

0.00

0.00

Price Contingencies

0.00

0.00

0.00 Total Project Costs 0.00 0.00

Front-end fee PPF 0.00 0.00 .00 Front-end fee IBRD 0.00 0.00 .00

Total Financing Required 0.00 0.00

(b) Financing

Source of Funds Type of

Cofinancing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 0.00 0.00 .00 International Bank for Reconstruction and Development

70.00 0.00 .00

International Development Association (IDA)

0.00 0.00 .00

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Annex 2. Outputs by Component

A. Loan Composition in FBiH

(a) Composition of loans in FBiH by industrial sector

(b) Composition of loans in FBiH by maturity

(c) Composition of loans in FBiH by use of loan

FBiHSector BAM (%) Count (%)

Manufactoring of Food Products 42,143,137 26% 52 20.2%Manufactoring of Basic Metals and Metal Products 19,408,337 12% 37 14%Traffic, Warehousing, and Communications 18,761,704 12% 47 18%Catering 16,711,878 11% 11 4%Manufactoring of Rubber and Plastic Products 13,518,942 8% 18 7%Manufactoring of Paper Products, Print, and Publishing 8,201,264 5% 11 4%Wood and Wood Products 7,600,307 5% 22 9%Manufactoring of Textile and Textile Products 6,450,000 4% 6 2%Civil Engeneering 5,275,284 3% 12 5%Other Manufactoring Industry 4,794,430 3% 15 6%Production of Other Non-Metal Products 4,476,087 3% 11 4%Production of Electric and Optical Appliances 2,969,708 2% 2 1%Manufactoring of Leather and Leather Products 1,874,044 1% 2 1%Other 6,867,416 4% 12 5%

Total 159,052,539 100% 258 100%

Amount Number of Subloans

FBiHMaturity BAM (%) Count (%)

85-120 months 67,633,937 43% 57 22%37-60 months 39,798,878 25% 89 34%61-84 months 32,577,128 20% 36 14%13-36 months 18,642,597 12% 74 29%Up to 12 months 400,000 0% 2 1%

Total 159,052,539 100% 258 51600%


FBiHLoan size BAM (%) Count (%)

> 2,000,000 47,039,607 30% 15 6%1,000,000 - 2,000,000 42,675,820 27% 27 10%500,001 - 1,000,000 31,372,486 20% 42 16%250,000 - 500,000 26,153,070 16% 74 29%< 250,000 11,811,556 7% 100 39%

Total 159,052,539 100% 258 100%


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B. Loan composition in RS

(a) Composition of loans in RS by industrial sector

(b) Composition of loans in RS by maturity

(c) Composition of loans in RS by use of loan

RS Sector BAM (%) Count (%)

Manufacture of Food and Beverage Products 23,779,575 31% 26 20%Construction of Residential and Non-residential Buildings 12,983,568 17% 10 8%Sawmilling and Planing of Wood 7,085,239 9% 22 17%Manufacture of Metal and Steel Products 5,945,000 8% 14 11%Manufacture of Floors 5,919,575 8% 5 4%Manufacture of Non-metallic Mineral Products 4,000,000 5% 1 1%Manufacture of Instruments for Measuring, Testing and Navigation 3,600,000 5% 2 2%Collection of Non-hazardous Waste 3,000,000 4% 1 1%Postal Services 2,757,000 4% 20 15%Manufacture of Machinary Tools 1,737,000 2% 4 3%Raising of Poultry 1,450,000 2% 3 2%Manufacture of Furniture 1,098,500 1% 3 2%Manufacture of Printing Products 875,323 1% 6 5%Education 850,000 1% 2 2%Other 2,705,867 3% 13 10%

Total 77,786,647 100% 132 100%


RS Maturity BAM (%) Count (%)

37-60 months 30,037,600 39% 44 33%85-120 months 18,510,083 24% 12 9%13-36 months 13,755,889 18% 54 41%61-84 months 10,874,075 14% 12 9%Up to 12 months 4,609,000 6% 10 8%

Total 77,786,647 100% 132 100%


RSLoan size BAM (%) Count (%)

> 2,000,000 34,507,658 44% 10 4%1,000,000 - 2,000,000 13,097,000 17% 9 3%500,001 - 1,000,000 11,428,500 15% 15 6%250,000 - 500,000 10,561,950 14% 27 10%< 250,000 8,191,539 11% 71 28%

Total 77,786,647 100% 132 100%


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Annex 3. Economic and Financial Analysis N/A

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/

Specialty Lending Irina Astrakhan Practice Manager GFM02 Dominique Bichara Director SECCA S. Brajovic-Bratanovic Consultant GEE01 Rinku Chandra Lead Financial Sector Speciali GFM03 Arben Maho Procurement Specialist GGO03 Lamija Marijanovic Financial Management Specialis GGO21

Haris Mesinovic Private Sector Development Spe ECSF1 -

HIS

Tarik Sahovic Senior Private Sector Speciali GTCEU

Supervision/ICR Nikola Kerleta Consultant GGO02 Isfandyar Zaman Khan Program Leader ECCU5 Esma Kreso Senior Environmental Specialis GEN03 Lamija Marijanovic Financial Management Specialis GGO21

Haris Mesinovic Private Sector Development Spe ECSF1 -

HIS

Tarik Sahovic Senior Private Sector Speciali GTCEU Tatiana Segal Senior Operations Officer GTC10

(b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY08 0.77

Total: 0.77 Supervision/ICR

Total: 0.00

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Annex 5. Beneficiary Survey Results N/A

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Annex 6. Stakeholder Workshop Report and Results N/A

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR A. FBiH PIU ASSESMENT OF THE OPERATION’S OBJECTIVE, DESIGN, IMPLEMENTATION AND OPERATIONAL EXPERIENCE

The EAF SME (IBRD 78390BA) Project was approved on 15th December 2009 in amount of 47,80 mil EUR with maturity of 25 years and grace period 10 years, interest rate - LIBOR plus variable spread. The value of the Project for the FBiH was 28.68 mil EUR including 408.300,00 EUR for operational costs, disbursement fee 0,25% as well as 300.000,00 EUR unallocated funds, that were used for operational costs for EAF SME AF Project. Additional financing, the EAF SME AF Project (IBRD 81670 BA), was requested since on 01st February 2012, i.e. in less than 18 months since the Project EAF SME started, 79,36% of funds were disbursed to a special account and more than 64% to final beneficiaries. Taking into consideration a great success in the implementation of the EAF SME Project, additional funds were necessary to strengthen its development influence. The value of the EAF SME AF Project was 90,10 mil EUR (60% i.e. 54,06 mil EUR for the FBiH – disbursement fee 0,25% was included). The effectiveness of the Loan started on 18th April 2013. The loan conditions were the same as for the first one, with only one component – credit line. 300.000,00 EUR of unallocated funds from the first loan were used for operational costs. The SMEs were served on the basis “first come, first served” and they had to fulfill all preconditions requested by the PFIs. The repayment of loan nr. 78390BA will be as follows: interest repayment until 15th December 2019 when grace period ends and repayment of principal starts. The repayment of loan nr. 81670BA will be as follows: interest repayment until 15th July 2022 when grace period ends and repayment of principal starts. The goal of the project was: For SMEs:

‐ Maintenance and enhancing access to finances to SMEs (small and medium enterprises) in the context of global financial crisis

‐ Financing investment activities and working capital with the aim of stimulating export and support in increase of production, production of food, agricultural development and development of relevant services.

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For Participating Financial Institutions (PFIs): ‐ Access to funds in the situation when the access to financial market was disturbed

due to global financial crisis, ‐ Increase of the PFIs income as well as improvement in maintenance of credit risks.

We would like to emphasize that the issue of referential rate stayed unsolved for the loan 81670BA. Namely, in the Loan Agreement signed between the State of BH and IBRD as well as in the Loan Agreement signed between the FMF and the F OdRaz, EURIBOR as the referential rate is mentioned. However, in Subsidiary loan Agreements signed between the FMF and PFIs, EURO LIBOR as the referential rate is mentioned. At the end, it was decided that EURO LIBOR will remain as the referential rate as value of both referential rates is almost equal. We consider that this issue should be solved in the near future.

ASSESSMENT OF THE OUTCOMES AGAINST THE AGREED OBJECTIVES

‐ The implementation of the first loan EAF SME started in 2010 and was successfully implemented by the end of 2013,

‐ Number of disbursed loans: 84, ‐ Number of SMEs financed: 71, ‐ The first withdrawal of funds from EAF SME AF (additional financing) happened

in the mid of March 2014. The funds were spent until 31st December 2015 ‐ Number of disbursed loans: 174, ‐ Number of SMEs financed: 143.

IN TOTAL, 258 LOANS WERE DISBURSED IN BOTH LOANS AND THE TOTAL NUMBER OF FINAL BENEFICIARIES (SMEs) WAS 214. Due to inadequate usage of funds, the loan nr. BA-SME-AF-CP-1410-14-8167BA-BOR-SA in amount of 150.000,00 KM was early repaid and transferred to a special account. The evaluation of the outcomes was done during the monitoring of 105 SMEs (49,06%). The total amount of disbursed monitored loans is 100,90 mil KM. We also used data given in the loan summaries (projections of increase of financial indicators and predicted number of new employees after borrowing funds and proper usage of funds). These are the positive effects of this credit line:

‐ SMEs got EXCEPTIONALLY CHEAP FUNDS, ‐ PFIs HAD SIGNIFICANT SOURCE OF CHEAP FUNDS (the PFIs showed an

interest for loans in amount more than 93 mil KM after the funds had been spent), ‐ The economic activity in FBiH was increased, ‐ The income increase in certain number of SMEs ‐ The increase of export and employment, ‐ The huge number of employees kept their jobs,

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‐ The continuity in production process i.e. in specific business activity in most of the SMEs was insured,

‐ By financing working capital, SMEs could use own potential much better and decrease production costs through possibility to purchase inputs in bigger quantities as well as possibility to improve procurement process,

‐ The profitability of the SMEs was increased and in the same time the employees income increased,

‐ The more favorable business climate was created, new knowledge, experience and ideas that could help SMEs to increase competitiveness at the global marked were gained.

Table with a number of employees before and after the implementation of the Project

Nr of loan Loan amount

(mil. EUR)

Number of sub-loans disbursed

Number of financed

SMEs

Number of employees

Before the loan

After the loan

78390BA 28,68 84 71 9081

10548 81670BA 53,92 174 143

TOTAL 82,60 258 214 1.467 (new employees)

EVALUATION OF OWN PERFORMANCE (EMPHASIS ON LESSONS LEARNED)

The implementation of the Project in the FBiH was done by the Foundation for the sustainable development - OdRaz (PIU). The Project implementation team (PIT) was engaged for specific activity. The members of the PIT are as it follows:

‐ The project manager, ‐ The credit analyst, ‐ The procurement specialist, ‐ The financial specialist, ‐ The environmental specialist.

The support to the PIT was given by other employees in the Foundation OdRaz as well as by management of the Foundation OdRaz. All mentioned members of PIT as well as supportive team members have a long-term working experience in the area for which they were responsible within the team.

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PIT received loan requests from PFIs and brought decisions if the amount of the loan was below free limit. In case that the loan amount was higher than the free limit, credit committee in the Foundation brought decisions about the same. The Credit committee members met once a month. For the future projects, the dynamics of the credit committees should be set in advance, so that the loan requests could be approved much faster. After this, PFIs involved in the Project submitted withdrawal requests for each sub-loan. The funds would be transferred to PFIs from a special account. Signatories for payment order were representatives of FMF and the Foundation. The complete repayment risk in on PFIs. The PFIs are obliged to take care on regularity of loan repayment. The obligations of PIT's members were: a close cooperation with PFIs through regular meetings, education of PFIs employees through presentations of eligible projects and documentation that should be prepared and delivered, follow-up on regularity of loan repayment, reporting and monitoring of certain number of final beneficiaries. Information about the Project were regularly posted on the Foundation's WEB page. In this way, a huge number of SMEs could be introduced with this favorable credit line and become a beneficiary. WE CONSIDER THAT THE FOUNDATION ODRAZ I.E. existing PIT IS APSOLUTELY COMPETENT for implementation of new arrangements, administration of the Project and financial management.

EVALUATION OF THE PERFORMANCE OF THE BANK AND OTHER PARTNERS

The Project was implemented in a cooperation of the representatives of the WB, FMF, PFIs and OdRaz (PIU). SMEs were the final beneficiaries of the funds. 8 PFIs took part in the first loan EAF SME, while 10 PFIs participated in the second loan EAF SME AF. The opinion of the PIT and the management of the Foundation Odraz is that the cooperation between the parties in the Project was more than a good one. The fact that the Project was completely realized before the defined deadline verifies the above mentioned. The opinion of the WB representatives is that this Project was one of the best implemented project in the FBiH. A certain number of PFIs submitted letters expressing successful cooperation with the PIU and PIT. The repayment of the loans by final beneficiaries is regular.

DESCRIPTION OF ANY PROPOSED ARRANGEMENTS TO ENSURE SUSTAINABILITY OF RESULTS

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To ensure the sustainability of achieved results and continuance of positive trend of economic growth as a result of enhanced economic activities of SMEs, it is necessary to continue with the implementation of a Revolving fund (unfortunately still not active). Currently, there are 84,41 mil KM available in the Revolving fund. The funds indeed would be a good support to economic development. Status of account - Revolving fund on 30.09.2016. TITLE Mil. KM

Revolving fund – Loan 78390 BA 44,54

Revolving fund – Loan 81670 BA 39,87

TOTAL REVOLVING FUND 84,41

PFIs loan requests in amount above 93 mil. KM stimulated us to design a new project called „Support to socio-economic development of FBiH through favorable lending conditions to SMEs“. The proposed value of the project was 100 mil. KM. The project was nominated within the Program of public investments in FBiH but due to its specificity it was not scored by relevant commission. To ensure the sustainability of archived results, it is necessary to continue with the design of new projects with the similar goals. In this way, SMEs would have continuous access to financial means that would help them to realize new ideas, expansion of existing business activities, increase of turnover and number of employees. The new project(s) should ensure:

‐ Involvement of enterprises with more than 250 employees (textile and leather industry, wood processing industry, etc.),

‐ More favorable financing conditions for SMEs i.e. lower interest rates through different way of selection of PFIs (tender with predefined conditions),

‐ Regress of the interest rates for activities that are defined by Government of FBiH as the strategic ones,

‐ Easy approach to financial funds for strategically important SMEs by creating Guarantee fund in the FBiH,

‐ Shorten administrative procedures for getting loan funds.

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B. RS PIU

Introduction

Investment Development Bank of Republika Srpska (IDBRS) is the Project implementation unit (PIU) responsible for implementing Republika Srpska part of Small and Medium Enterprises Enhancing Access to Finance (SME EAF) Project. After successful completion of the original SME EAF Project in Republika Srpska in amount of 19,120,000 EUR, Additional financing (AF) in the amount of 36,040,000 EUR was approved by the World Bank – IBRD.

Both original Project and Additional financing were intended for financial support of SMEs in an environment of constrained funding due to the impact of Eurozone crisis on the financial sector. The subprojects financed by investment and working capital loans were expected to stimulate exports and help maintain growth trends in variety of sectors in BiH.

Implementation progress Disbursement

Original Project started in 2011 and all available funds in amount of 19,120,000 EUR (including front-end fee of 47,800 EUR) were disbursed by mid-2012. Additional financing started in October 2013 and ended on July 31, 2016 with 58% of funds disbursed (20,789,581 EUR including front-end fee of 90,100 EUR).

Economic situation in Republika Srpska changed significantly after the original Project which was especially noticeable at the end of implementation of Additional financing. After very active beginning of the EAF AF implementation in late 2013 which also continued through 2014, PFIs activities were gradually decreasing over time. Second half of 2015 and entire 2016 were particularly inactive and as a result the number of loans and the amount disbursed was very low.

In total 132 loans were financed from the Project. From original Project 38 loans (37 SMEs) and from Additional financing 94 loans (68 SMEs).

Funds were used to finance both working capital and investments. Enterprises financed various procurements which are in line with Operations Manual guidelines.

In the original Project five PFIs were accepted by the World Bank and most active of them was Nova banka a.d. Banja Luka with total disbursement of 14.2 million EUR (74%). For Additional financing also five PFIs were accepted and most active was ProCredit bank d.d. Sarajevo with 7.75 million EUR (37%).

Terms and conditions

For SME EAF interest rate was in interval from 5.69% to 7.69%. Majority of loans was approved with maturity period of 60 months.

For EAF AF clients interest rates were in range from 3.52% up to 7.00%. Majority of loans has maturity period of 36 months and only one loan has been approved on

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maximum repayment period allowed by EAF AF Operations Manual (120 months). Grace period of up to 12 months was approved for 20 loans.

Loans Short-term Medium-term Long-term

EAF 1 23 14

EAF AF 10 74 10

Total 11 97 24

Table 1 - Number of loans according to maturity

Figure 4 - Loan maturity

Geographical loan distribution

From both EAF and EAF AF majority of loans was distributed in the western, more developed, part of Republika Srpska. Over 48% of funds were invested in only

0

5

10

15

20

25

30

35

40

6 12 15 18 24 30 33 36 48 54 60 72 84 96 108 120

Number of loans

Months

EAF AF

EAF

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three cities - Banja Luka, Teslić and Laktaši, with almost 25% of all funds invested in Banja Luka, Republika Srpska’s capital city.

EAF EAF AF

Teslić 5,000,000 Banja Luka 7,115,649 Banja Luka 2,569,407 Laktaši 2,034,942 Laktaši 2,271,418 Gradiška 1,966,939 Šipovo 2,045,168 Bijeljina 1,693,086 Bijeljina 1,789,522 Zvornik 1,636,134 Gradiška 1,661,699 Čelinac 1,562,947

Milići 1,380,488Kozarska Dubica

756,711

Zvornik 511,292 Prnjavor 460,162 Čelinac 511,292 Bratunac 409,033 Prnjavor 452,493 Pale 357,904 Šekovići 393,695 Kotor Varoš 306,775 Kozarska Dubica

255,646 Modriča 272,007

Prijedor 153,388Istočni Stari Grad

260,758

Doboj 76,694 Šekovići 255,645 Trebinje 255,645 Prijedor 254,879

Mrkonjić Grad

204,516

Teslić 204,516 Šipovo 153,387 Han Pijesak 118,670 Srbac 102,258 Kostajnica 102,258 Ugljevik 76,693 Doboj 71,580

Istočno Novo Sarajevo

66,374

Table 2 - Loan distribution by municipalities (in EUR)

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Figure 5 - Loan distribution by municipalities (in EUR)

Employment

Enterprises financed from the SME EAF planned to hire 124 new employees in total. Number of existing jobs in those companies was 1,819.

0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000

Banja Luka

Teslić

Laktaši

Gradiška

Bijeljina

Šipovo

Zvornik

Čelinac

Milići

Kozarska Dubica

Prnjavor

Šekovići

Bratunac

Prijedor

Pale

Kotor Varoš

Modriča

Istočni Stari Grad

Trebinje

Mrkonjić Grad

Doboj

Han Pijesak

Srbac

Kostajnica

Ugljevik

Istočno Novo Sarajevo

EAF

EAF AF

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For the EAF AF total number of planned jobs is 122 while number of existing jobs in financed enterprises is 2,975. On June 30, 2016 PFIs reported that total number of jobs created from EAF AF financed sub-projects is 348.

Monitoring

In IDBRS Development and Monitoring Unit is responsible for controlling and monitoring of all loans approved by IDBRS, including loans from SME EAF and SME EAF AF Projects. They control SMEs documentation at IDBRS and PFIs if necessary and afterwards conduct field visits where they check if the approved purpose of loan is respected.

Monitoring of loans from original Project confirmed that all funds were used as planned. From Additional financing up to date 63 loans were controlled by IDBRS, both documentation control and field visits were conducted, and all of them have been confirmed as satisfactory.

Remaining SMEs from EAF AF will be controlled in coming months according to the action plan of this department.

Operational issues

World Bank, IDBRS and PFIs cooperation has been excellent during the entire Project. Also, good cooperation was kept with PIU from Federation of Bosnia and Herzegovina - Foundation for Sustainable Development (OdRaz).

During the Project implementation several issues were noticed. These include technical issues, eligibility issues, reporting and information transfer issues from all stakeholders (WB, IDBRS and PFIs), procedural inconsistencies from PFIs, PFIs not familiar with their obligations, etc. With joint efforts from World Bank teams in Sarajevo and Washington, IDBRS and PFIs teams, all of these issues were successfully solved.

One of the larger issues was the inconsistency in dates for Reference rate calculation for the EAF AF Project. Loan agreement between Bosnia and Herzegovina and IBRD stated July 15 and January 15 as the Reference dates while the Subsidiary financing agreements (SFAs) with all PFIs and subsequently all PFI/SME contracts quote June 15/December 15. This has caused financial losses for IDBRS but it is rectified from January 15, 2015 with Amendments of SFAs.

WB, OdRaz and IDBRS teams enabled easier implementation of the Project by extending list of financed activities and giving much needed clarifications of existing eligibility criteria. Eligibility criteria now include farming and agriculture, collection of waste for recycling, production from bio masse, etc. Also explanations on construction, catering, tourism, cargo and passenger transport, education, IT business, renewable energy sources, etc. were given. All these changes were included in the revised Operations Manual delivered to PFIs.

Another situation where WB and PIUs adequately responded was in moment of devastating floods that occurred in May 2014 in entire region. WB and IDBRS have given the opportunity for enterprises affected by floods to get reprograming of loans in accordance with Republika Srpska Banking agency “Decision on Temporary

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Measures on Credit Obligations of Clients Affected by Natural Disaster” that offers SMEs possibility to get moratorium or extension of grace/repayment period. This change was also implemented in revised Operations Manual. Fortunately there were no major problems with SMEs. PFIs reported that some of them were affected directly or indirectly by floods, but that they are not requesting any special actions and they are able to pay their loan obligations on time and regularly. Only one enterprise has filed request for additional grace period and rescheduling of repayment period due to difficulties in servicing its obligations caused by floods.

Only remaining issue that was left unsolved due to its complexity is Reference rate inconsistency for Additional financing in agreements between World Bank, Bosnia and Herzegovina, Republika Srpska, IDBRS, PFIs and clients. In Loan agreement between World Bank and Bosnia and Herzegovina Reference rate is Euribor (in accordance with General Conditions for Loans) and in all other subsequent agreements Libor is used as a reference rate. Libor was used as a Reference rate for original Project and that has led to the oversight of the Reference rate change made for the Additional financing which resulted in this inconsistency.

Overview Original Project completely fulfilled its purpose and helped SMEs to overcome problems they have faced in economic crises more easily. Considering the current situation on the market Additional financing was also successful even though all funds available were not used. As mention earlier, reason for decrease in demand for EAF AF funds was caused by major economic changes that have occurred in recent years both on global and domestic market. These changes have negatively affected domestic economic activity and also domestic banking sector which responded with significantly lowered interest rates offered to SMEs mainly from their own funds. In addition to this, somewhat complicated procedures and additional documentation needed compared to PFIs regular loans including several limitations in subprojects eligibility criteria have made EAF AF funds less attractive to clients and PFIs. Regardless of this, multiple benefits are achieved by both Projects. Original Project brought favorable loan funds compared to loans offered by commercial banks in terms of maturity and interest rates and Additional financing has continued the same to certain extent. Both Projects helped to save current jobs and also enabled SMEs to create jobs for additional 470 workers. SMEs were also able to modernize their production, introduce new products and also to increase exports. By financing working capital SMEs were able to achieve better positions with their suppliers and also to improve their liquidity. All of the above mentioned information shows the need for more targeted financing in the future, providing support to specific industries or providing funding with technical assistance, etc.

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World Bank with Governments in Bosnia and Herzegovina and also implementation units in Republika Srpska and Federation of Bosnia and Herzegovina should jointly define new financing scheme in order to provide the best support option for Bosnia and Herzegovina economy. We believe that World Bank and Investment Development Bank of Republika Srpska will continue their excellent cooperation in the future and that IDBRS will again prove itself as a stable and reliable partner.

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Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders N/A

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Annex 9. List of Supporting Documents 1. Original Loan

i. RS MoF request ii. Decision meeting comments and note

iii. PAD iv. Legal Documents: Loan Agreement, Project Agreements, Project Implementation

Agreements, Subsidiary Loan Agreements v. Operational Manuals

vi. Aide Memoires, ISRs vii. Restructuring Papers 2. Additional Finance

i. BiH MoFT request for additional finance ii. Concept memorandum, comments & Decision Note

iii. Project paper iv. BiH MoFT requests for extension of effectiveness deadline v. Legal Documents: Loan Agreement, Project Agreements, Project Implementation

Agreements, Subsidiary Loan Agreements vi. Operational Manuals

vii. Aide Memoires, ISRs, Midterm review viii. Restructuring paper 3. Country Partnership Strategies

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MAP