Document of The World Bank FOR OFFICIAL USE ONLY Report No: 62655-TN PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF EURO 34.8 MILLION (US$50 MILLION EQUIVALENT) TO THE THE REPUBLIC OF TUNISIA FOR A MICRO, SMALL AND MEDIUM ENTERPRISE (MSME) DEVELOPMENT PROJECT AS PART OF THE MICRO, SMALL AND MEDIUM ENTERPRISE FACILITY FOR THE MIDDLE EAST AND NORTH AFRICA REGION UNDER THE ARAB WORLD INITIATIVE June 17, 2011 Social and Economic Development Group Finance and Private Sector Development Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective June 15, 2011) Currency Unit = Tunisian Dinar (TND) TND 1 = US$0.73 US$1 = TND 1.37 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS AFD Agence Française de GCC Gulf Cooperation Council Développement ICT Information and Communications AfDB African Development Bank Technology ANPE Agence Nationale de Protection IDP Industrial Development Project de l'environnement ILO International Labour Organisation APL Adaptable Program Loan IMF International Monetary Fund BMZ Bundesministerium für INLET International Network of Wirtschaftliche Zusammenarbeit Lebanese Entrepreneurs and und Entwicklung Technologists DGSB Bank Supervision Department IsDB Islamic Development Bank Banque Tunisienne de Solidarité JICA Japan International Cooperation CBT Central Bank of Tunisia Agency CGAP Consultative Group to Assist the KFW Kreditanstalt für Wiederaufbau Poor NBFI Non-Bank Financial Institution DFID Department for International NGO Non-Governmental Organization Development OECD Organisation for Economic Co- EFSE European Fund for South East operation and Development Europe PCG Partial Credit Guarantee EIA Environmental Impact PEFA Public Expenditure and Financial Assessment Accountability EIB European Investment Bank PFIs Participating Financial Institutions ENDA Environnement et Développement PIE Project Implementation Entity du Tiers-Monde SICARs Societes d'Investissement en ESMS Environmental and Social Capital Risque Management System SICAV- Société d'Investissement à Capital FATF Financial Action Task Force SIF Variable FDI Foreign Direct Investment Specialised Investment Funds FILs Financial Intermediary Loans SOTUGAR Société Tunisienne de Garanties FM Financial Management FSAP Financial Sector Assessment Program Regional Vice President: Shamshad Akhtar Regional Strategy and Programs Director: Jonathan Walters Country Directors for MNC01: Neil Simon Gray MNC02: Hedi Larbi MNC03: A. David Craig Sector Director: Manuela V. Ferro Sector Manager: Simon C. Bell Task Team Leader (MSME Facility APL): Douglas Pearce Task Team Leader (Tunisia ‗APL 1‘): Laurent Gonnet Table of Contents Regional APL.................................................................................................................................. 1 I. Strategic Context ..................................................................................................................... 1 A. Country (Regional) Context ............................................................................................. 1 B. Sectoral and Institutional Context .................................................................................... 2 C. Higher Level Objectives to which the Project Contributes .............................................. 5 Tunisia Country Loan ..................................................................................................................... 6 I. Strategic Context ..................................................................................................................... 6 A. Country Context ............................................................................................................... 6 B. Sectoral and Institutional Context .................................................................................... 8 C. Higher Level Objectives to which the Project Contributes .................................................. 11 II. Project Development Objectives........................................................................................... 12 Project Beneficiaries: ................................................................................................................ 13 a. PDO Level Results Indicators ............................................................................................ 13 III. Project Description............................................................................................................. 14 A. Project components..................................................................................................... 14 APL 1 (Tunisia) ........................................................................................................................ 17 B. Project Financing ........................................................................................................ 19 Project Cost and Financing: Regional APL .......................................................................... 19 Project Cost and Financing: Tunisia sub-loan (FIL)............................................................. 20 C. Lessons Learned and Reflected in the Project Design ............................................... 20 IV. Implementation .................................................................................................................. 23 A. Institutional and Implementation Arrangements: APL .............................................. 23 A. Institutional and Implementation Arrangements: APL 1 (Tunisia) ............................ 24 B. Training and Capacity Building ................................................................................. 25 C. Results Monitoring and Evaluation ............................................................................ 25 D. Sustainability .............................................................................................................. 26 V. Key Risks and Mitigation Measures ..................................................................................... 27 VI. Appraisal Summary ........................................................................................................... 29 A. Economic and Financial Analysis .............................................................................. 29 B. Technical .................................................................................................................... 30 C. Financial Management ............................................................................................... 31 D. Procurement ................................................................................................................ 32 E. Social (including safeguards) ..................................................................................... 33 F. Environment (including safeguards) .......................................................................... 34 Annex 1: Results Framework and Monitoring.............................................................................. 37 Annex 2A: Detailed Project Description: Regional APL ............................................................ 45 Annex 2B: Detailed Project Description: APL 1 (Tunisia) ......................................................... 49 Annex 2C: Detailed Project Description: Technical Assistance Component .............................. 52 Annex 3A: Implementation Arrangements: Regional APL ......................................................... 57 Annex 3B: Implementation Arrangements: APL 1 (Tunisia) ...................................................... 60 Annex 3C: Implementation Arrangements: Technical Assistance component ........................... 75 Annex 3D: Implementation Arrangements: Support to high potential growth SMEs ................. 79 Annex 4 Operational Risk Assessment Framework (ORAF) ....................................................... 81 Annex 5: Implementation Support Plan........................................................................................ 92 Annex 6: Team Composition ........................................................................................................ 95 Annex 7: Economic and Financial Analysis ................................................................................. 96 Annex 8: Country and MSME Finance Sector Figures, Tables.................................................. 101 Annex 9: Country At-A-Glance .................................................................................................. 106 Annex 10: MAP .......................................................................................................................... 109 PAD DATA SHEET Republic of Tunisia MSME Facility for MENA PROJECT APPRAISAL DOCUMENT Middle East and North Africa MNSED Date: June 17, 2011 Sector(s): Micro- and SME finance (100%) Regional Strategy & Programs Director: Themes: Small and medium enterprise support (80%); Jonathan Walters Other financial and private sector development (20%) Country Director: Neil Simon Gray EA Category: FI Sector Director: Manuela V. Ferro Sector Manager: Simon C. Bell Team Leaders: Douglas Pearce Laurent Gonnet Project ID: P124341 Lending Instrument: Adaptable Program Loan (APL) – Horizontal and Vertical Project Financing Data: Proposed terms: [ X ] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: Source Total Amount (US$M) Total Project Cost: 100 Cofinancing (African Development 50 Bank): Borrower: Total Bank Financing: 50 IBRD IDA New Recommitted Borrower: The Republic of Tunisia Responsible Agency: Ministry of Planning and International Cooperation/Central Bank of Tunisia Contact Person: H.E. M. Abdelhamid Triki Telephone No.: Fax No.: +216 71 351 279 Email: A.Zekri@mdci.gov.tn Eligible Borrowers under the MSME Facility APL: Egypt, Jordan, Lebanon, Morocco, Tunisia, any other MENA country meeting the stated criteria. - ii - Estimated Disbursements (Bank FY/US$ m) FY 2012 2013 2014 2015 2016 Annual 15 15 10 5 5 Cumulative 15 30 40 45 50 Project Implementation Period: 5 years Expected effectiveness date: August 1, 2011 Expected closing date: January 31, 2017 Does the project depart from the CAS in content or other ○ Yes X No significant respects? If yes, please explain: Does the project require any exceptions from Bank policies? X Yes ○ No Have these been approved/endorsed (as appropriate by Bank X Yes ○ No management? Is approval for any policy exception sought from the Board? ○ Yes X No If yes, please explain: As per OP 6.0 on Bank Financing, an increase to the limit of retroactive financing from 20% to 40% was sought. The Regional Vice President, in consultation with the Vice President, OPCS, approved the exception on June 7, 2011. Does the project meet the Regional criteria for readiness for X Yes ○ No implementation? If no, please explain: Project Development Objective Micro, Small and Medium Enterprise (MSME) Facility: to catalyze financing, risk-sharing and technical assistance to address policy, legal, institutional, capacity, and informational constraints holding back MSME access to finance in the MENA region, and thereby to support improvements in MSME employment, competitiveness, and incomes. Regional APL: to improve access to finance for micro, small and medium enterprises in the MENA region. APL 1 (Tunisia): to improve access to finance for MSMEs in Tunisia, including through enabling previously creditworthy MSMEs to maintain access to credit. - iii - Project description MSME Facility: a comprehensive package of financing and support will be provided or leveraged through a MSME Facility for the MENA region, jointly with the IFC. The MSME Facility will include: i) this proposed IBRD APL; ii) the IFC‘s proposed Risk Sharing Facility for SMEs; iii) the proposed joint World Bank-IFC Technical Assistance component; and iv) support to innovative and high potential SME. Policy Lending to improve the enabling environment for MSME Finance will complement the MSME Facility in the region. APL: the proposed APL provides a structure for rolling out country level financial intermediary loans (FILs) in the MENA region, complemented by regional technical assistance. Country Loans under the APL: country level FILs can include a line of credit component and a contingent credit (risk sharing) component, so that the most appropriate instrument can be used in each market to stimulate MSME Finance. This proposed Tunisia loan (‗APL 1‘) is the first FIL under the APL structure. Discussions have been initiated with Jordan, Lebanon, Egypt and Morocco with regard to potential borrowing under this APL. Borrowing countries would have the option of securing greater donor and investor resources by financing through the IFC‘s proposed SME Facility or through the proposed regional KFW-led SANAD Fund. Safeguard policies triggered? Environmental Assessment (OP/BP 4.01) X Yes ○ No Natural Habitats (OP/BP 4.04) ○ Yes X No Forests (OP/BP 4.36) ○ Yes X No Pest Management (OP 4.09) X Yes ○ No Physical Cultural Resources (OP/BP 4.11) X Yes ○ No Indigenous Peoples (OP/BP 4.10) ○ Yes X No Involuntary Resettlement (OP/BP 4.12) ○ Yes X No Safety of Dams (OP/BP 4.37) ○ Yes X No Projects on International Waterways (OP/BP 7.50) ○ Yes X No Projects in Disputed Areas (OP/BP 7.60) ○ Yes X No Conditions and Legal Covenants : Financing Agreement Description of Date Due Reference Condition/Covenant The Execution Agreement has Effectiveness been executed on behalf of the Borrower and the Project Implementing Entity. The Project Operations Effectiveness Manual, satisfactory to the Bank, has been finalized and adopted by the Borrower and the Project Implementing Entity. Regional APL I. Strategic Context A. Country (Regional) Context1 1. The Middle East and North Africa (MENA) region faces a shared challenge of raising growth, improving competitiveness, and generating significant new employment, which has been highlighted by recent political upheavals known as the „Arab Spring‟. Although growth in MENA has accelerated over the past decade, averaging 4.7%, it still lags behind other developing regions‘ average of 6%, surpassing only Latin America and the Caribbean (3.1%). In per capita terms, growth in MENA has been modest compared to other developing regions and MENA has been unable to make substantial progress in reducing persistently high unemployment rates, especially among youth and women. The private sector has a larger role in MENA countries now, but it falls short of creating sufficient jobs for young entrants coming into the market every year while public sector jobs are prevalent, creating distortions in the market and contributing to long unemployment spells. In addition, restrictive labor regulations have increased the costs of hiring labor and reduced the competitiveness of the private sector by increasing labor costs. The labor force does not have the skills the private sector needs, and labor market institutions are ineffective in matching labor demand to supply. 2. By the end of 2010, MENA countries had largely recovered from the impacts of the global financial crisis, and growth was expected to reach pre-crisis levels in 2011. The impact of the global economic crisis was not as strong in MENA as in East Asia and Eastern Europe due to the low integration with the global economy, limited exposure of financial markets and the predominant role of the public sector in MENA economies. Economic growth region-wide nearly reached 4 percent in 2010 with an increase of close to 2 percentage points over growth in 2009 and the region was expected to grow at 4.8 percent in 2011 and 2012, respectively. GCC countries led the economic recovery in MENA as emerging markets rebounded, demand for oil picked up, and their financial sectors stabilized; followed by developing oil exporters through the oil channel, and oil importers through revival of trade with Europe.2 3. In the midst of the economic recovery, MENA countries experienced a series of pro- democracy movements that began in early 2011 and resulted in swift regime change in Tunisia and Egypt, and spread to other countries in the region. This has impacted short-term growth, fiscal and trade prospects, inflation, and the status and speed of economic reforms in the region. Recent developments have now reduced growth prospects for 2011, especially for countries affected directly by the turmoil (Egypt and Tunisia). MENA‘s growth is now expected 1 Annex 8 has graphs and tables to illustrate the MENA country and sector analysis here. 2 Gulf Cooperation Council (GCC) countries include, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. Developing oil exporters includes Algeria, Islamic Republic of Iran, Iraq, Libya, Syrian Arab Republic, and Yemen. Oil importers include countries with strong GCC links (Djibouti, Jordan, and Lebanon) and those with strong EU links and located in North Africa (Egypt, Morocco and Tunisia). Developing MENA represents all MENA countries except the GCC oil exporters. -2- to average 3.7 percent in 2011—a decline of about 1 percentage point, compared to pre conflict forecasts—interrupting the pace of economic recovery in MENA countries, particularly oil importers. Growth rates for oil producing countries may increase due to high oil prices, but for oil importers and countries directly affected by disturbances, there could be a sharp decline in 2011. The main factors affecting the outlook for oil importers are a large drop in tourism; ongoing business disruptions; a slowdown in domestic demand; and reduced investment following loss of confidence in the prospects of this group of countries. Short-term growth, fiscal and current account balances, investment and FDI of the oil importers are expected to be revised downward compared to estimates prior to the unrest, due to continuous uncertainty in the sub region. Growth among oil importing countries is expected to decline by about 2 percentage points with respect to what was previously projected for 2011 mostly as a result of sharp drop in growth of oil importers in North Africa. 4. Unemployment and inflation will continue to be overriding concerns. Oil net importers will likely experience an increase in unemployment (and in particular youth unemployment) due to declines in tourism (a prominent sector)3 and overall investment as potential visitors avoid the region and investors (both domestic and foreign) avoid committing their resources in an uncertain environment. Inflationary pressures are likely to persist in the near term due to sustained international food and commodities (including oil) price increases, and could be further exacerbated by exchange rate depreciation in some countries. 5. A critical challenge in the region is to increase demand for labor. MENA‘s regional demographic transformation has led to an abundance of working age young adults. In 2005, about 22 percent of the regional population was between 15 to 24 years of age, with another 33 percent at less than 15 years of age. This has led to countries facing rising labor supply that has outstripped labor demand, leading to stubbornly high unemployment rates of 10% with even higher female unemployment rate of 16%. The aggregate rates for females in most countries in North Africa are much higher with unemployment rate in Tunisia being 17%, in Egypt 23%, in Morocco 10%. As a result the informal economy has expanded and absorbed a large number of unskilled as well as discouraged educated workers (affecting mostly women) which were not been able to find job opportunities in the formal sector. In Egypt, young employees are 1.7 times more likely to work in the informal sector than adults, while 85% of small businesses are in the informal sector constituting about 44 percent of total employment. In Tunisia urban youth informality rate stands at 71%. In Egypt and in Tunisia, most of the net employment creation in recent years occurred in the informal sector (commerce, construction, and transport). B. Sectoral and Institutional Context 6. MSMEs account for a very high share of private sector employment in MENA, particularly in countries with large informal sectors. According to official statistics, MSMEs typically account for 10 to 40 percent of all employment in MENA. However, employment in MSMEs is likely to be significantly under-counted in official records due to informality, for example under-reporting of employment for tax reasons, or enterprises not being registered. The 3 Tourism generates sizable revenues, foreign exchange and employment in the oil importing MENA countries. In Egypt, tourism is the top foreign exchange earner; it generates a sizable share of GDP, and provides about 1 in 8 jobs. In Tunisia, tourism generates around 5 percent of GDP and 1 in 9 jobs. -3- typical non-GCC MENA country is estimated to employ as much as 67 percent of its labor force informally, although only 6 percent of GCC labor is informal. (Loayza & Wada, 2010). 7. The majority of enterprises in MENA are micro, small and medium enterprises.4 For Egypt, Morocco, Lebanon and Yemen, MSMEs represent between 86 and 97 percent of all formal sector enterprises, and an even higher proportion if informal enterprises were also taken into account. Egyptian Labor Market Survey Data for 2006 indicated that over 85 percent of enterprises are informal and over 70 percent of private sector wage workers are engaged informally. Even medium and large firms hire nearly a quarter of their workers informally (without a secure contract, social security, etc). GCC countries tend to be more dominated by large corporates than non-GCC countries (related to the importance of oil and gas), which may reduce the number of microenterprises, although another explanation is possible under-recording of informal small/micro enterprises. 8. A number of MENA banking sectors have relatively high liquidity levels, but these are falling, and the IFC estimates an „SME Financing Gap‟ of over $2.2 billion for MENA. The IMF notes a reduced bank ability to lend in the MENA region post-crisis however, linked to less favorable macro-economic conditions, slower deposit growth, and strains on balance sheets from non-performing loans.5 Excess banking sector liquidity in Morocco, for example, is falling due to the changed economic environment, lower remittances, and reduced tourism income. In Tunisia strong credit growth in 2010 significantly reduced the excess liquidity systemwide. Further liquidity issues are expected in 2011 because of increasing arrears in loan service due to the economic downturn and expected decreasing foreign currency reserves. Debt financing is therefore appropriate for banks in several MENA countries, such as Tunisia, Morocco, and to an extent Jordan. Recent estimates for the IFC-led G20 Experts Group on SME Finance, indicated a potential financing gap of $2.26 billion for SME lending in the MENA countries eligible for this proposed loan, including $1.05 billion in Egypt, $547 million in Jordan, $497 million in Morocco, and $247 million for Tunisia. Moreover, non-bank microcredit providers have a clear need for debt financing as they are not able to intermediate deposits (except for a few qualifying institutions in Syria and Yemen), and can be dependent on relatively short term or high cost commercial bank lending. MSME Finance 9. MSMEs in MENA have the lowest levels of usage of bank loans of all regions except sub-Saharan Africa, according to World Bank enterprise surveys. MENA also lags most regions on the headline access to finance indicators of deposit and loan accounts per population. Only 24.5 percent of adults in MENA have a loan account. The low levels of MSME access to finance are despite the MENA region having greater financial depth – as measured by private credit as a proportion of GDP – than all other regions except for OECD countries and East Asia. Bank lending tends to be concentrated to large, corporate customers, and many banks still prefer 4 MSMEs are typically defined by employees (the minimum threshold for small enterprises in MENA can be 5-10, and 20-25 for medium enterprises, and 100-200 for large enterprises, but this varies widely by institution and country), turnover, and capital. 5 IMF Working Paper ‗Recent Credit Stagnation in the MENA Region: What to Expect? What can be Done?‘, September 2010. -4- to utilize excess liquidity to finance the government's deficit, or established large corporates. High potential and start-up SMEs face significant constraints in accessing growth capital (angel finance, venture capital), whether from banks or from more specialized investors and funds. 10. The reluctance of MENA banks to lend to MSMEs does not reflect a lack of interest in MSMEs. A recent World Bank/Union of Arab Banks survey of over 130 MENA banks indicates that banks have an average SME lending target of 21 percent of their loan portfolio, as compared to an actual proportion of 8 percent. Banks in the MENA region have not faced strong competition from non-bank financial institutions and as a result have not expanded their outreach to MSMEs. As a result they offer a very narrow range of credit products to MSMEs, with many MSMEs not seeing banks as relevant to their financing needs beyond overdraft facilities or occasional working capital loans. Product development (for example leasing, factoring) to better fit MSME needs and demand would increase the effective demand for MSME finance, and enable banks to allocate much greater levels of financing to MSMEs. Capacity needs for banks in MENA encompass developing market segmentation strategies, tailoring lending products, marketing, screening SMEs, growth strategies and portfolio risk management. 11. MSME finance in MENA is held back by a range of factors, including the regulatory environment, financial infrastructure, financial institution lending capacity and tools, MSME management skills and creditworthiness, liquidity (although this varies by country), and the availability of risk-sharing instruments. MENA ranked last in the legal rights index for Getting Credit (Doing Business, 2011). MENA banks cite a lack of MSME transparency, difficulties in using collateral, and uncertainty over creditor rights as primary barriers to their greater involvement in MSME finance.6 Reinforced IFC and World Bank advisory services and lending supporting financial infrastructure and regulatory reforms are therefore a priority. Due to a lack of available borrower information and to outdated SME lending technologies, banks lend inefficiently and are not able to expand SME lending significantly while also managing costs and risks. This situation is changing though, with new or improved credit reporting systems in Morocco, Egypt, and Jordan that provide the basis for transaction-based lending and for lowering information asymmetry, and therefore for significant increases in lending volumes and outreach. Regulatory reforms in Egypt and other MENA countries should also enable non-bank financial institutions such as leasing companies and microfinance institutions to be set-up or to receive more significant investment. 12. Given the still evolving policy and legal framework, and financial infrastructure, for MSME Finance, MENA banks need additional assurance – in the form of risk-sharing arrangements and credit lines - to take advantage of the improving financial infrastructure and regulatory framework and significantly expand MSME lending. This is particularly the case given the ongoing post-crisis dampening effects on banking sector liquidity and risk appetite, and the impacts of political upheaval, and the Libya conflict, in countries such as Tunisia, Egypt and Jordan. 13. Microcredit is growing in outreach in many MENA countries, although still has a lower number of active microcredit borrowers compared to working age adults than all regions 6 Rocha, Farazi, Khouri, Pearce, 2010 -5- except sub-Saharan Africa.7 Microcredit loan portfolios represent a significantly smaller proportion of total credit8 than any other region, and there is considerable potential for growth. Major constraints include the lack of enabling microfinance regulatory frameworks, and a tendency for MENA microfinance institutions (MFIs) to be organized as NGOs rather than as investible corporations. There were 2.81 million microcredit borrowers in the MENA region at the end of 2008, with a total loan portfolio of US$1.5 billion. Microcredit is concentrated in two countries: 47 percent of the region‘s microcredit borrowers were in Egypt and 33 percent in Morocco.9 Jordan has the highest microcredit coverage of its poor population in the region. Tunisia and West Bank & Gaza have the only other microcredit sectors of any notable size in the region, although microcredit is growing in scale in Yemen, Iraq, and Syria. Microcredit can be vulnerable to repayment crises and client over-indebtedness, if institutional governance, risk management, and credit information are not priorities. 14. Leasing is present in most MENA countries, although often only at a limited scale. Leasing is primarily provided by banks or bank subsidiaries. 28 percent of MENA banks offer leasing. Leasing has increased significantly in recent years as a source of funding for fixed asset investment for Tunisian SMEs. Leasing penetration in gross fixed capital formation in Tunisia reached 10.6 percent in 2008. Factoring is not well developed yet in MENA, although is expanding in some countries. For example $352 million of invoices were purchased in Tunisia in 2008, up 10.4 percent from 2007, involving 511 firms and 24,156 buyers. SME stock exchanges have been set up in Egypt (NILEX) and Tunisia (Marché alternative) to promote SME access to finance. While promising initiatives neither market is yet particularly active. There are also government-support schemes to facilitate access to venture capital for high growth companies, for example by FOPRODI in Tunisia. There are at least 40 venture capital funds operating in Tunisia, but they face capacity and regulatory constraints and exits for their investments on the stock market are not straightforward. C. Higher Level Objectives to which the Project Contributes10 15. The MSME Facility addresses the MENA region priorities of opening up access to private sector opportunities for income and employment, through easing a significant constraint on enterprise operations, start-up, competitiveness and growth. The MSME Facility framework will catalyze a comprehensive package of financing, technical assistance, policy support and risk-sharing, and is a timely response to the increased priority placed on generating MSME opportunities, growth and employment by MENA Governments in the context of the ‗Arab Spring‘ upheavals. 16. The regional APL design, which is applied for the first Tunisia country loan, uses transparent criteria for allocating financing, and clear reporting against pre-agreed indicators and requirements, which will contribute to improved governance and will open up access to smaller and newer firms that do not have existing connections with financiers. The design of the MSME Facility is consistent with the Principles for Financial Inclusion approved by the G20 in 2010 – 7 Microfinance Information Exchange data. 8 Domestic private credit to the real sector by banks. 9 Sanabel microfinance network, 2010. 10 A new country partnership strategy for Tunisia will be elaborated after the elections of the Constituent Assembly. -6- and is seen as the regional pilot for the proposed global G20 SME Finance Facility, and may receive financing from the global Facility in the future when it is established. Tunisia Country Loan I. Strategic Context A. Country Context 17. In December 2010, Tunisia experienced a wave of protests that led to the toppling of the previous regime in January 14, 2011. These protests were fueled by a lack of social, economic and political opportunities, and exacerbated by anger over the misgovernance that favored insiders. An interim government is now tasked with organizing free and fair elections to a Constitutional Assembly (currently planned for October 23, 2011). 18. The 2011 protests highlighted how, despite good economic growth, many challenges persisted in addressing economic, social and regional inequalities. Tunisia‘s macroeconomic performance has been consistently positive in the past years. The country enjoyed a 5 percent average annual growth in GDP over 1997-2007, placing the country among the leading performers in the MENA region (average 4.3 percent), thanks to macroeconomic stability coupled with a gradual but steady opening to trade and foreign investment. Economic growth exhibited great resilience to exogenous shocks (GDP grew by 3.1% and 3.7% respectively in 2009 and 2010 in the aftermath of the global financial crisis and economic downturn), thanks to the fiscal space built in the previous years of stronger growth and prudent macroeconomic management that allow expansionary policies when needed. The steady increase in per capita income over the past 20 years has been the main engine for poverty reduction and social progress. However, despite the progress in social and economic indicators, unemployment remained stubbornly high, regional disparities are marked and a big part of the population and economic actors experienced a sense of missed opportunity, as they felt increasingly more excluded from the economic and social progress of the country. 19. Extensive restrictions to economic activity in the domestic market have prevented greater investment and stifled job creation. The economic environment in Tunisia had evolved on dual tracks: an ‗offshore‘ export-oriented sector which operates under a liberal regime and coexists with a restrictive local ‗onshore‘ economy without any significant production and trade links. Significant steps have been taken in recent years to improve the investment climate (reflected in the recent improvement of Tunisia‘s ranking in Doing Business). Nevertheless, the ‗onshore‘ sector continued to be characterized by pervasive barriers to competition, heavy State intervention and red tape. The limited competition and the extent of private domestic investment11 (around 15 percent on average) have prevented greater jobs creation. Unemployment has been increasing from 12.1 percent in 2007 to 13.3 in 2009, as job creation has been falling short of the additional labor supply coming from changing 11 Among the most binding obstacles to growth, Tunisian firms report the cost and access to finance, which constrains their capacity to invest. -7- demographics12. Difficulties are even bigger for young graduates, in particular located in the interior regions. Demographic trends suggest that unless the pace of economic growth accelerates substantially, unemployment will continue to worsen significantly over the next decade (and based on current trends could reach 17 percent by 2014). 20. The recent political instability and the consequences of the Libyan crisis have depressed the short-term economic outlook. GDP growth was previously expected to reach approximately 5 percent in 2011, but it is now projected to slow down to 1.5 percent (World Bank assessments). This projection is based on assumptions of a 40 percent drop in tourism revenues and 20 percent reduction in FDI flows but also on the assumption that the public investment stimulus that the interim government has put in place to support the economy will be effective starting from the second half of the year. This level of economic slowdown would further increase unemployment to approximately 15 percent. The fiscal deficit is expected to rise to 4.8 percent of GDP in 2011 (from 1.3 in 2010), to account for the lower revenues, the higher cost of food and fuel subsidies (as a consequence of higher international commodities prices), and the additional spending to finance the social/unemployment measures and the public investment stimulus. Tunisia‘s external position is also expected to worsen temporarily in 2011. As a result of the upheaval and the Libya crisis, the current account deficit is now expected to widen to 6.5 percent of GDP in (up from 4.8% in 2010) as the trade balance deteriorates compared to 201013 due to the drop in tourism receipts, and a lower increase in exports of goods with respect to imports (9.2 percent and 11.4 percent, respectively), and a reduction in workers‘ remittances (due to the conflict in Libya, which accounts for approximately 10 percent of Tunisia‘s total remittances). This short term downturn will affect otherwise creditworthy MSMEs, which will likely face declined demand and delayed payment on one side, and increased difficulty in accessing credit, as banks will tend to reduce the credit to the economy in order to retain liquidity. 21. The medium-term economic outlook however remains positive.14 The pace of growth is expected to increase to approximately 5 percent in 2012 and 2013 as a result of the combined effect of the recovery in exports which already started in 2010, the contribution of major public investments, and the package of reforms adopted by the interim government. Notably, domestic private investment is expected to expand in 2012 and beyond, as a result of the structural reforms (supported by the World Bank) including improved transparency and accountability in the public administration, reduced business transaction costs, and better access to finance. The growth target for 2012 is based on the assumption of a good year for agriculture (+5 percent annual growth), an increase in manufacturing (around 3 percent growth), a recovery in tourism (+8 percent), and in energy production (+10 percent). 22. Tunisia needs to achieve higher economic growth that generates employment and increases incomes, contributing to further social gains. Addressing the growth and employment challenge will require a comprehensive approach to enable a structural 12 Since 2005, annual job creation (between 70,000 and 80,000) has fallen short of covering the additional labor supply (approx 100,000 annually), much less made inroads into the stock of unemployed (approx 500,000 people in 2009). 13 It is worth mentioning that 2010 includes events that impacted positively the trade balance. 14 See Annex 8 for a summary table of Selected Economic Indicators for Tunisia. -8- transformation to facilitate private investment into labor intensive, high value-added and knowledge-intensive sectors. To accelerate growth and reduce unemployment the government needs to create an enabling environment for greater investment and productivity. The private sector will necessarily have to play a key role, particularly MSMEs, which represent the backbone of the economy and account for the majority of private sector employment. In this regard, an expanded access to finance for MSMEs will remove a significant constraint on MSME employment, competitiveness, and incomes and increase opportunities to create jobs, in particular for young graduates. B. Sectoral and Institutional Context 23. Similar to other MENA countries, MSMEs form the backbone of the Tunisian economy. Data from the National Institute of Statistics indicate that enterprises employing less than 10 people account for almost 87 percent of all Tunisian companies. Firms employing between 10 and 99 people account for roughly 11 percent, while large firms (100+ employees) account for only 2 percent of all enterprises. Hence, using the criteria of employment (less than 100 employees), at least 97.8 percent of Tunisian firms (in all sectors) fall within the MSME category. While precise data on employment is not available, it is estimated that MSMEs play an important role as a provider of jobs in the Tunisian economy. Figure 1. Size distribution of firms in Tunisia – sorted by number of Employees (%) 90 79.8 80 70 60 50 40 30 20 7 9.3 10 1.8 2.2 0 <6 6-9 1 - 49 50 - 99 100 + Source: INS/ Repertoire National d’Entreprises 2005. 24. MSMEs account for more than 90% percent of industrial companies. Manufacturing, which, historically, has been at the core of Tunisia‘s development, dominates the industrial sector. The textile/clothing sector, followed by agro-industry, currently leads the formal manufacturing sector with regard to number of enterprises and jobs. While the electronic and electrical appliance industries as well as the textile/clothing sectors have the highest export rates, the export growth rates in this segment remain low. -9- Figure 2. Sector distribution of firms in the services sub-sectors - sorted by no. employees (%) 100.0 88.1 86.9 90.0 85.5 80.0 76.5 70.2 70.0 60.0 50.0 40.0 30.0 20.0 14.6 10.4 11.0 8.4 10.0 6.0 5.2 6.3 4.8 4.6 5.7 2.2 2.6 0.4 0.3 1.2 2.2 1.7 2.5 1.0 1.8 0.0 Construction Trade Hotels and restaurants Transport and communication Services to firms Less than 6 employees [6-9] employees [10-49] employees [50-99] employees [100 + [ employees Source: INS/ Repertoire National d’Entreprises 2005. Financial Sector 25. While financial indicators for the Tunisia banking sector have improved during the past few years, the banking sector as a whole remains relatively weak and subject to vulnerabilities. With 21 banks and net total assets of approximately 100% percent of GDP, the Tunisian banking system is small and fragmented. Three of the largest banks are public and represent 37 percent of total deposits. Due to stiff competition among banks, spread between deposit and credit rates tends to be structurally low (around 2.4 percent). In 2010, credit growth surpassed that of deposits, leading to a loans-to-deposits ratio slightly exceeding 100%. At the same time, capital adequacy (made of tier one mainly) remained relatively high, at 10%, while NPLs continued to decrease (from more than 20% in 2000 down to 12 percent in 2010). However, NPL provisioning remains low at 60% (compared with an expected average of 70%). 26. Much progress has been made in improving the corporate governance framework in Tunisia over the past decade, as noted by a March 2011 World Bank corporate governance assessment of the banking sector. However, relative to internationally recognized good practice, critical corporate governance challenges remain. These challenges are threefold: (i) underdeveloped board practices (most boards do not carry out their primary role of managerial oversight and strategic decision-making), (ii) Poor transparency (although financial reporting is said to have improved markedly over the past decade, banks are required to prepare their audited financial statements according to Tunisian and not International Financial Reporting Standards) and (iii) nascent risk management, internal control, and audit structures (risk management, internal control, compliance, and internal audit structures remain under-resourced for the most part, generally lack appropriate reporting and independence). Mindful of these challenges, the CBT has issued a Circular to address the problems identified. - 10 - 27. The Tunisian Revolution that started in December 2010 put the banking sector under pressure both in terms of liquidity and credit risks. The banking system liquidity decreased rapidly with the enforcement of security measures put in place by the interim Government (curfew and state of emergency). The Central Bank took the necessary steps and injected enough liquidity in the system. The situation has rapidly improved, but banking system liquidity remains tight. In the coming months, banks‘ loan portfolios are expected to deteriorate due notably to a negative impact on tourism15 and export sector. In order to better assess these risks, the Bank fielded a mission in April 2011 to work with the authorities in assessing the stability of the banking sector with a stress test by bank. Depending on the scenarios, capital adequacy ratios may fall under the 8% regulatory threshold for some banks, leading the CBT to demand recapitalization plans. 28. The MSME finance sector in Tunisia faces significant immediate challenges as a result of the recent changes in the political, economic and financial sector landscape. The deteriorating financial and economic environment is likely to be aggravated by the ongoing turmoil in Libya and is expected to have a significant negative impact on MSMEs. The difficulties faced by microenterprises are already being felt by microfinance institutions, which have seen their unpaid loan ratios rise to up to 60 percent at the end of February 2011. Banks are reporting that the number of their SME clients in distress remains limited, but they expect a significant rise in SME payment defaults as the economic growth rate falls. While many SMEs that will be hit by the economic downturn, they will remain economically viable, and will need to refinance some of their loans to weather the negative impacts of the crisis. It is worthwhile noting that the economic downturn may be temporary, and political stability and a commitment to reforms may result in renewed business activity and investment. 29. Despite the existence of a diversified financial system in Tunisia, access for Tunisian SMEs to financing remains limited due to supply and demand side constraints. Banks complain about the lack of reliable information on SMEs, which includes the difficulty to obtain proper credit information on this type of firms as well as reliable financial statements. On the supply side, banks are increasingly facing funding constraints, and they also lack standardized products and lending technologies that would reduce the cost of lending to this segment16. Banks rely mostly upon the ability of SMEs to provide immovable assets as collateral, and on the borrower‘s reputation. This business model excludes a large number of potentially creditworthy SMEs with a good payment record and sustainable cash flows, who are unable to provide adequate collateral – particularly on the smaller end. 30. SME financing in Tunisia remains limited and largely short-term. Some Tunisian banks are still burdened by a high level of non-performing loans on their balance sheets, which reduces their ability to expand into SME finance. Tunisian companies consider access to and cost of bank financing to be two of the greatest barriers to their growth. Although precise data on SME finance is not available, commercial banks are considered to be the main funding source of SMEs, followed by leasing companies and factoring firms. There are a number of government funded mechanisms aimed at increasing SME access to finance, including SOTUGAR, a 15 Tourism sector represented 12.7 percent of total loans in 2009. 16 Some lending technologies cannot be fully used due to limitations of the current credit reporting system. - 11 - guarantee fund set up to provide the collateral SMEs need to back their loan application, and BFPME, a public bank specialized in the financing of start-ups and existing SMEs. 31. The Tunisian Microfinance sector is the third largest market in the MENA region, after Egypt and Morocco. The sector is dominated by one large provider of microcredit, ENDA, an international non-profit NGO established in 1990, that is not allowed to collect deposits and which relies for funding on commercial banks and international donors. In addition to ENDA, there are a large number of small microfinance organizations (288). Unlike ENDA, most small microfinance organizations are not sustainable, do not have sophisticated financial statements, and are not rated, rendering their access to funding more difficult. Similar to most MENA countries, Tunisia‘s microfinance organizations are not allowed to collect deposits. Their funding is primarily secured through loans from commercial banks and international donors, so there is a potential demand for a credit line. They operate under the framework of the microfinance law from 1999 and are registered at the Ministry of Finance. Their funding is mainly provided by the Banque Tunisienne de Solidarité (BTS), a state-owned bank funded in 1998 which focuses on microenterprise financing. C. Higher Level Objectives to which the Project Contributes17 Link to World Bank Program in Tunisia 32. The Bank‟s program in Tunisia as set out in the Country Partnership Strategy FY10-13 will be formally revised following the election of a new government.18 The CPS envisages three strategic pillars: (i) employment, growth and competitiveness; (ii) sustainable development and climate change; and (iii) improving the quality of service delivery. While the core of the CPS remains valid to address the structural problems facing Tunisia, the Bank recognizes that many of the elements of the 2009 CPS, which was prepared with the pre- revolution government, are no longer relevant. At present, however, the situation is still too fluid for the Bank to lay out a new strategy, particularly given the short-term horizon of this interim government. A new strategy document will likely be prepared only after a new elected government under a new constitution is in place. 33. In the short term the Bank is adopting a flexible approach suited to the social and economic challenges of Tunisia. The interim government has asked the Bank for support in four areas. The first is on governance to show that the interim government is doing things differently. The second is employment and addressing regional disparities, to address one of the root causes of widespread social discontent. The third is on the financial sector to ensure its stability and accessibility for economic actors. And the fourth area is on the social sectors, including health and an overall improvement of social services also with a regional focus. These four areas constitute the core and rationale of the Bank‘s interim engagement approach. The proposed Tunisia country loan under the regional APL responds directly to the priorities of employment and of stability and accessibility through the financial sector, by improving MSME access to finance, and by assisting otherwise creditworthy MSMEs to avoid going out of 17 A new country partnership strategy for Tunisia will be elaborated after the elections in 2011. 18 The CPS was approved by the Board of Executive Directors in December 2009. IBRD (2009). Country Partnership Strategy for the Republic of Tunisia for the Period FY10-13. Report No. 50223 –TUN. - 12 - business due to short-term economic difficulties related to the current situation. The loan design will also contribute to the first priority of addressing the governance failures which have undermined banks‘ performance and the ability of the financial system ability to play its catalytic financing role and contribute to growth and job creation through MSMEs. 34. During this transition period there are important needs and opportunities which the Bank plans to address through a five-fold set of interventions:  The first is through a multi-sector DPL for USD500 million that supports the adoption of emblematic measures that address some of the demands expressed by the population in the revolution and show that the government has made fundamental changes compared to the previous orientations and approach.  A second area is this APL under the AWI Micro and Small and Medium Enterprise Facility targeting MSME finance.  The third area of Bank response is the fast tracking implementation of two recently approved community development projects (approximately USD125 million) to ensure that job creation activities and related programs are put in place in the country‘s poorer regions.  The fourth area of Bank response will be the piloting of innovative programs in the areas of youth, employment, local development and employment and support to the Tunisian workers returning from Libya. A proposal was recently prepared for JSDF financing for employment generation activities through a community based local development program totaling USD3 million. In addition, a USD3.8 million grant proposal was submitted for review to the State and Peacebuilding Fund (SPF) to supports community building and the reintegration of displaced persons from Libya in underserved regions.19 A JSDF program to put in place innovative youth programs is currently being implemented.  Finally, the Bank is providing substantial technical assistance. This is expected to include improving the legal and operational frame work for a sound development of MSME finance, through this proposed operation. II. Project Development Objectives 35. Project Development Objectives (PDOs) are presented at three levels, as the MSME Facility provides the framework for the APL proposal for Board review, and the proposed Tunisia loan (‗APL 1‘) for Board approval:  Micro, Small and Medium Enterprise (MSME) Facility: to catalyze financing, risk- sharing and technical assistance to address policy, legal, institutional, capacity, and informational constraints holding back MSME access to finance in the MENA region, and thereby to support improvements in MSME employment, competitiveness, and incomes. 19 About 40,000 Tunisians are estimated to have returned from Libya as a result of the current crisis. - 13 -  Adaptable Program Loan (APL): to improve access to finance for micro, small and medium enterprises in the MENA region. The APL is the IBRD financing mechanism for the MSME Facility.  APL 1 (Tunisia): to improve access to finance for MSMEs in Tunisia, including through enabling previously creditworthy MSMEs to maintain access to credit. Project Beneficiaries: 36. The end beneficiaries of the MSME Facility will be micro, small and medium enterprises. A wider definition of beneficiaries would include Governments, regulators, and financial institutions benefitting from technical assistance. The end beneficiaries for the regional APL will be MSMEs, and in the case of APL 1 (Tunisia) this will include MSMEs applying for new loans, as well as those MSMEs affected by the current economic downturn, which face temporary business activity decline but remain otherwise sound businesses in the medium term. Eligible financial institutions for APL 1 (Tunisia), based on pre-agreed eligibility criteria, are expected to include up to 5 private banks, up to 2 public banks, and up to 3 leasing companies. Microfinance institutions will also be considered, although none yet meet the eligibility criteria. a. PDO Level Results Indicators 37. The following results are expected in fulfillment of the PDO. The Board is being asked for approval for the first APL loan, to Tunisia, so while the Results Framework in Annex 1 is for the APL at a regional level and will be applied to each borrowing country under the APL, the baseline indicators and target values are for the Tunisia loan. MSME Facility:  At least 4 MENA countries make policy, legal or financial infrastructure reforms to promote access to finance for MSMEs, which are recommended by World Bank Group policy lending or technical assistance.  Partnerships developed with at least 2 providers of business services and/or equity financing to high potential or start-up SMEs. APL:  $50 million additional IBRD lending or guarantees for MSME Finance, within 5 years.  At least 2 MENA countries borrowing from the APL, within 3 years.  Participating financial institutions (PFIs) increase their MSME Finance portfolio and the number of new Micro and SME borrowers during the APL period (targets will be set at the country level for each loan). APL 1 (Tunisia):  MSME Finance portfolio of participating financial institutions increases by at least 20% within 5 years, and  Number of new MSME borrowers in PFIs increases by at least 10% within 5 years. - 14 - III. Project Description A. Project components 38. The MSME Facility aims to provide a comprehensive package of financing and support for the MENA region, jointly with the IFC. The MSME Facility will include:  The APL as an IBRD regional financing mechanism, that provides a structure for rolling out country level financial intermediary loans (FILs). Country level loans under the APL structure can include a line of credit component and a contingent credit (risk sharing) component, so that the most appropriate instrument can be applied in each market to stimulate MSME Finance. The proposed Tunisia loan is the first FIL under the APL structure. Discussions have been initiated with Jordan, Lebanon, Egypt and Morocco with regard to potential borrowing under this APL. The APL is described in more detail in Annex 2A and Annex 3A, and the first loan under the APL to Tunisia is presented in Annexes 2B and 3B.  The IFC’s proposed SME Facility for MENA, which is being presented to the Board concurrently with the IBRD APL.  Technical Assistance for MSME Finance, coordinated through a joint regional approach with the IFC, for i) policy and legal reforms, ii) capacity-building and advisory services to financial institutions, and iii) support to MSMEs. A technical assistance (TA) package of at least $20 million over 5 years is envisaged, dependent on donor funding being available, or borrowing countries agreeing to include a technical assistance component in their APL loans. In addition to new financing for TA, there are also coordination improvements and cost efficiencies in a regional technical assistance approach between the IBRD, IFC and partners, and greater potential impact and value for MENA countries having access to more significant expertise than a country-level TA project, and to promising approaches from other MENA countries. The technical assistance component is set out in Annexes 2C and 3C.  Support to innovative and high potential SMEs: through partnerships with providers of business services, risk capital for high potential growth enterprises and start-ups, and sources of mentoring, business networking, and business expertise. For example through the ‗Accelerating of Information and Communications Technology (ICT) and ICT- enabled SMEs‘ project in Lebanon, InfoDev, Arab Diaspora entrepreneur initiatives, and Abraaj Capital, as set out in Annex 3D. 39. Policy Lending to improve the enabling environment for MSME Finance will complement the MSME Facility, through Development Policy Loans (DPLs) and the associated Policy Matrix measures agreed with Governments. The resulting policy and legal reforms will strengthen the impact of the financing provided by the APL, by enabling financial institutions to offer financial services to smaller and under-served MSMEs, including women- headed MSMEs. Development Policy Loans are under preparation in Morocco, Jordan and - 15 - Tunisia that include measures that improve the policy, legal and sector context for MSME Finance. Figure 3. MSME Facility for MENA: Framework POLICY LENDING, POLICY REFORMS INNOVATIVE, HIGH World Bank DPLs, Diagnostics, Technical Assistance POTENTIAL SMEs Business Services, Equity Invt. COUNTRY 1. Credit Line IMPLEMENTING 1. Credit Line FINANCIAL LOANS component AGENCIES component 1. Onlending INSTITUIONS IBRD APL IFC SME Facility Banks, Leasing $100m Companies, MSMEs 2. Contingent National PIUs, 2. Contingent Microfinance 2. Lending AfDB Credit Apexes, PCG Credit institutions, from PFI ($50m) component: Schemes component: that meet resources drawdown guarantee eligibility criteria IsDB (tbd) triggered by SANAD Fund arrangements claims MSME FACILITY TECHNICAL ASSISTANCE -Regional Approach, coordinated by WB-IFC -Funding: Donors, AfDB, IsDB (tbd), APL country loans, Reimbursable TA 40. The rationale for the APL is threefold: i. Up to 6 IBRD countries in the region may ask for MSME Finance loans over the next 3 years, and this framework enables a quicker and streamlined response to the sometimes fast-changing MENA country priorities and needs, through applying and adapting a pre- approved FIL structure. Subsequent country loans would be approved at Regional VP level pending the absence of objection by the Board, while the vertical structure of the APL allows for allocation of funds in line with need and performance. ii. The APL structure provides a mechanism through which it is anticipated that Governments could leverage significant additional regional funds from the proposed IFC SME Facility, and also the KFW-led SANAD Fund for MSME finance in the MENA region (initial closing in late 2011 projected at $150 million). Governments could choose to activate the contingent credit component of the IBRD APL to finance guarantees offered by the IFC Facility, or the SANAD Fund, which would leverage significant additional financing from banks, investors and development finance institutions. iii. A regional APL within a MSME Facility framework can better coordinate the financing support provided by the World Bank, IFC, Arab Fund for Social and Economic Development, African Development Bank (AfDB), Islamic Development Bank (IsDB), - 16 - KFW, and other partners, and result in greater impact on expanding MSME Finance in the MENA region. 41. The World Bank will leverage partnerships through the MSME Facility in order to ensure comprehensive support to MSME Finance. The African Development Bank will finance the Tunisia APL 1 in parallel with the World Bank (although the project is not dependent on this AfDB financing), and may also choose to provide parallel financing in Egypt and Morocco. The Islamic Development Bank has also expressed strong interest in being a partner in financing APL loans. Both the AfDB and the IsDB have also indicated potential funding for the technical assistance component. Partnerships are being developed with non-traditional partners such as emerging networks of Arab and Diaspora investors and entrepreneurs too, in order to address the demand side (MSMEs) and the shortage of pre-bank and equity financing for high potential SMEs and start-ups. Providers of business services to MSMEs and start-ups, including InfoDev, and country-level SME agencies such as JEDCO in Jordan, are also being explored under the MSME Facility. 42. Borrowing country eligibility criteria for APL loans will be: i) IBRD borrowing country in the MENA region, ii) Government or Regulator commitment to improved MSME Access to Finance, demonstrated through specific policy measures, legal reforms, or other good practice public interventions as assessed by the World Bank in economic and sector work or mission reports, and iii) Government or Regulator commitment to environmental and social sustainability. Candidate countries under these criteria will include Egypt, Morocco, Tunisia, Jordan and Lebanon (see Table below). These are net oil importers and face common challenges of growth, competitiveness, and employment. World Bank Preparation and Appraisal missions will respond to Government interest in borrowing from the APL, and would further assess country eligibility, financing needs, and the appropriate mix of the line of credit component, contingent credit component, technical assistance, and support to innovative and high potential SMEs. 43. Subsequent APL loans to eligible countries would be set out in Project Appraisal Documents for Regional VP approval (pending the absence of objection by the Board in each case). The allocation of funding in each country between the line of credit and contingent credit components will vary according to assessed need, demand, and the existence of a suitable implementing agency for each. If subsequent countries request more than the available resources under the initial $100 million, additional IBRD resources could be made available from a regional or country allocation, in line with the APL structure. Additional financing for countries – such as Tunisia – that have already borrowed through the regional APL could be provided as an additional loan, or as a restructuring if the contingent credit component was added. 44. Country eligibility criteria for assistance through the Technical Assistance component will be: i) MENA region country (as defined by the World Bank), ii) Strong demand and for technical assistance, and counterpart or recipient with commitment to MSME Finance, iii) Availability of APL or donor resources for funding the TA. Preference will be given in allocating limited grant resources for the technical assistance component to countries that borrow under the MSME Facility APL structure, or to countries that would like to fund the technical assistance (for example GCC countries, or where there is a donor trust fund that covers MSME - 17 - finance). , for example through the Technical Assistance trust fund that will be established by the World Bank, or through existing IFC Advisory Services trust funds. Potential candidate countries include: Egypt, Morocco, Tunisia, Jordan, Lebanon, Saudi Arabia, Kuwait, Iraq, West Bank & Gaza (see table below). It should be noted that these are indicative amounts only. TABLE 1. APL ALLOCATION BY COUNTRY (INDICATIVE) Initial APL Subsequent APL TA Component Allocation Loans (potential)($m) (funded as part of the APL (tbd) ($m) or separately by donors) Tunisia 50 50 3 Morocco 35 50 3 Jordan 10 50 3 Lebanon 5 10 1.5 Egypt tbc 140 3 Saudi Arabia - - 3 Kuwait - - 1.5 Iraq tbc tbc 220 West Bank/Gaza - - tbc Yemen - - tbc TOTAL 100 300 20 APL 1 (Tunisia) 45. For Tunisia, a financial intermediary loan (FIL) of EUR 34.8 million ($50 million equivalent) would be provided through the regional APL structure. This would be the first in an anticipated series of FILs across eligible countries. This would be provided in parallel with the AfDB, which would commit a further $50 million for Tunisia. The initial analysis conducted of the Tunisia MSME finance market would justify an allocation of USD 50 million for the first 12 months, given the estimated SME finance gap of 70 to 110 USD million.21 Over 12-36 months a further USD 50 million (at least) would be justified, if not sooner. If these estimates prove conservative, then the APL‘s vertical structure would enable refinancing with VP approval. Only the credit line component of the FIL would be included in APL 1, as an immediate crises response to the liquidity needs of the financial sector, and the temporary repayment challenges facing MSMEs. A contingent credit could be introduced when the current liquidity and economic situation has improved, through a loan restructuring or new loan. 46. The criteria for eligible institutions are consistent with those for the regional APL, and refer to legal status, profitability and asset quality of the institution, commitment and track record in serving the SME segments, and adherence to prudential standards. Indicators are tailored to the Tunisia market but still in line with international good practices (see Annex 2B). 20 Donor trust fund. 21 World Bank assessment. Government assessment amounts to 220-290 USD million. - 18 - Based on a preliminary application of these criteria, 6 banks and 3 leasing companies would qualify. Together these institutions account for approximately 75 percent of total SME lending in Tunisia. The microfinance sector in Tunisia is currently severely affected by the current economic difficulties in Tunisia, due to its weaker systems and risk management capacity, the absence of a sound legal and regulatory framework, and to the Government funds for microenterprises that were not subject to strict repayment enforcement. Microfinance institutions that subsequently meet the eligibility criteria would still be eligible for financing though. 47. Allowable uses of the credit line by PFIs would include: lending in line with pre- defined screening procedures and eligibility criteria to existing MSME clients (including refinancing) and new MSME clients. In the case of Tunisia, and potentially also for other MENA countries affected by political upheaval, the objective of improving MSME access to finance would include those otherwise creditworthy MSMEs affected in the short term by falling demand or delayed payments, through supporting loan reprogramming or refinancing by participating financial institutions. This will help viable MSMEs affected by the crises to get back into a sustainable repayment plan as well as to stimulate fresh MSME lending. PFI loans would need to meet the detailed eligibility criteria set out in Annex 2B, for sub loans and MSMEs. The criteria related to loan portfolio ensures that the financing is focused on i) the underserved segment of the MSME market (the smaller end of the enterprise sector that is perceived by financial institutions as more risky), and ii) crisis-affected MSMEs that are otherwise good borrowers, to put them back into a sustainable repayment plan. The MSME criteria ensure the avoidance of MSMEs that are not creditworthy or that are over-indebted. The option to use the line of credit for refinancing MSME loans will only be available for the first 12 months of the loan, as it is hoped that economic conditions will by then have improved. A cap of 70 percent of the line of credit being used for refinancing loans has been set, and a cap of $25 million for each participating financial institution (regardless of loan use), for the first 12 months of project implementation. 48. Priority areas for technical assistance in Tunisia that would complement the APL 1, and would be financed by the World Bank, IFC, AfDB and donors, include assistance in improving the capacity of the Central Bank to supervise the financial sector and promote good corporate governance, and in the development of a regulatory framework and financial infrastructure that underpins viable MSME Finance, including microfinance regulations, a movable asset registry and a stronger credit bureau that includes a wider set of lenders. Financial institutions would be offered training and technical assistance in introducing more effective (low cost and low risk) models for extending financial services to MSMEs. Technical assistance for the microfinance sector will be coordinated with partners such as the IFC, AfDB, AFD and EC, to introduce a policy and regulatory framework that promotes the development of strong microfinance institutions, and to assist the largest current microfinance institution (ENDA) to manage its current repayment problems and strengthen its risk management capacity. While MSMEs would be assisted through partners to improve financial transparency and competitiveness, and to access bank and investor finance. The team met with the Agence de Promotion de l‘Industrie (API) and the Chamber of Commerce of Tunis, who both provide business support services to MSMEs through satellite branches throughout the country, and - 19 - could be considered as implementing agencies for this component. Further details on the technical assistance component are provided in Annex 3C. B. Project Financing Lending Instrument 49. An Adaptable Program Loan (APL) structure will be used as a regional framework for country sub loans, which would take the form of financial intermediary loans (FILs). The FILs could have a line of credit and a contingent credit component, as outlined in the Project Description section. Project Cost and Financing: Regional APL Project Components (US$ million) Project cost IBRD % Financing Financing 1. Financing (line of credit, contingent credit 150 m 99.75 m 66.5% component) 2. Capacity Building (three levels: 20 m 0 m (*) 0% policy/regulatory, financial institutions, MSMEs) Total Baseline Costs 170m 99.75m Physical contingencies Price contingencies Total Project Costs Interest During Implementation Front-End Fees 0.25m Total Financing Required 99.75m (*) Governments will be asked to help fund the technical assistance, as part of the APL loans, or as reimbursable technical assistance, or through existing funds for technical assistance. In the case of Tunisia though the Government is not planning to borrow for technical assistance, and donor funds will be used as available. The AfDB intends to provide technical assistance funding in Tunisia, and potentially in other North African countries, while the IsDB, EIB and donors have indicated they may provide further support. - 20 - Project Cost and Financing: Tunisia sub-loan (FIL) Project Components (US$ million) Project cost IBRD % Financing Financing 1. Financing (line of credit) 100 m 49.875 m 49.8% 2. Capacity Building (three levels: policy/regulatory, financial institutions, Up to 5 m 0m 0% MSMEs) Total Baseline Costs Physical contingencies 105 m 49.875m Price contingencies Total Project Costs Interest During Implementation Front-End Fees Total Financing Required 0.125 49.875 m C. Lessons Learned and Reflected in the Project Design 50. APL design incorporates lessons learned from World Bank financial intermediary lending, IEG‘s assessment ‗World Bank Lending for Lines of Credit‘, international best practice in MSME finance, and OP8.30 guidelines. A principal lesson is that increased liquidity through debt financing to banks and other MSME lenders may not be sufficient to change lender behavior and to improve the viability of MSME finance. This APL therefore offers finance to back risk-sharing arrangements (through the contingent credit component), alongside credit lines, to incentivize MSME lenders to use their own resources in scaling up MSME finance. Moreover, the APL would be complemented by technical assistance, and support to policy and legal reforms to remove barriers to MSME finance, which could lower the cost and risk of MSME lending. Advisory services would assist financial institutions to introduce more effective MSME finance techniques and improved product design. 51. Guiding principles for credit guarantee schemes based on international practice include: (a) share risk on a partial basis with the participating financial intermediaries, to provide the appropriate incentives, minimize moral hazard and leverage funding; (b) leverage the financial institutions oriented to MSMEs and their commercial incentives to apply due-diligence on the borrower; (c) establish ex-ante eligibility criteria for financial institutions‘ participation; (d) consider using a streamlined portfolio approach (versus credit by credit guarantee); (e) consider offering technical assistance to participating financial institutions and MSMEs to support MSME lending techniques and financial capability and (f) establish appropriate performance monitoring. The APL would only back guarantee arrangements for guarantee institutions (or facilities) that are broadly in line with these lessons learned. 52. Regional World Bank projects tend to perform less well than national projects, and also tend to be IDA rather than IBRD-financed. QAG‘s ‗Regional Projects Learning Review‘ of - 21 - February 2010 noted that out of the 60 regional projects in the Bank, only 8 are IBRD projects – the majority are IDA. QAG found that Regional Projects are twice as likely to have problems achieving their Development Objective, and are twice as likely to be in Problem Project status - 32.7 percent compared to 14.8 percent for projects Bankwide. They also tended to have a significantly lower Disbursement Ratio -- 9.8 percent compared to 26.5 percent Bankwide. Regional project TTLs noted that country directors tended not to be supportive of regional projects; that dealing with multiple financial management, procurement and safeguard colleagues (across countries) presented problems, and that Bank budgets, management oversight, and incentive mechanisms are not aligned to support such operations. Having a strong champion for such projects was considered critical (the Central Bank governor and minister of finance both play this role for the Tunisia loan for the counterparts, and the Regional VP and Regional Strategy and Programs Director on the Bank side). Project design and preparation will need to take these lessons fully into account. Country TTLs will be used for country sub-loans through the MSME Facility, to help ensure country director buy-in, while MENA region managers for procurement, financial management, and safeguards have been involved to ensure coordination between their specialists at country level. 53. The Bank‟s “Fourth Review of Adaptable Lending” (2005) provides a number of lessons learnt from past APLs. Staff found the APL to be a suitable solution for a multi- country approach, and that it allows for a clearer strategic framework. However some TTLs noted that there were no savings in time or cost in preparing and supervising sub-loans under the APL framework, and that adequate preparation and implementation budgets are needed. 54. Another lesson is that implementing agencies need to have sufficient capacity and to be accountable for performance. An assessment would first be conducted of the governance, management, systems, staffing, financial statements, methodology, and social/environmental practices of potential implementing agencies to ensure implementation capacity and accountability. In the case of Tunisia (APL 1), the central bank has a long track record of administering external credit lines, both for bilateral loans (France, Italy, Spain, Belgium, Japan) and for multilateral organizations, including the EIB, the AfDB and the World Bank. The Central Bank is familiar with the World Bank‘s monitoring and reporting requirements for managing credit lines. The Central Bank‘s capacity will be strengthened by a Project Operations Manual to ensure the monitoring and reporting of the proposed operation, and by a short tailored training course funded by the World Bank and the AfDB, supplemented by consultant support and advice as appropriate. 55. Lessons learnt from microfinance apexes include that apex institutions need to set high performance standards for MSME lenders that they finance, and that apex boards and management must be protected from political influence.22 In Tunisia, the Central Bank is relatively protected from political interference since the Governor is not appointed by the Government but by the President of the Republic (for a six-year mandate). Training and/or technical assistance will be provided to any country-level implementing agencies. In the case of Tunisia (APL 1), training and orientation will be provided from World Bank and AfDB budget 22 For example: CGAP Donor Brief, ‗Apex Institutions in Microfinance‘, July 2002; Pearce, Douglas, 2002, ‗Lessons Learned from the World Bank -supported Apex Facility in Bosnia‘; Levy, Fred, 2001, ‗Apex Institutions in Microfinance‘; CGAP Occasional Paper, No. 6. - 22 - resources to the Central Bank, to the PFIs, and to the auditor, in the APL procedures and requirements, including for safeguards. Reporting by implementing agencies will be in line with the World Bank core indicators for MSME finance projects, covering outreach, disbursement, female participation, portfolio quality, and profitability, as set out in Annex 1.23 56. As the November 2010 report by the G20‟s Financial Inclusion Experts Group states, SME growth is affected by a range of constraints that are not just financial. Financing interventions ideally also need to be accompanied by improvements in the enabling environment for SME lending, such as improved credit bureaus, collateral and insolvency regimes, and capacity building of financial institutions – as is increasingly the case in the eligible countries for this APL. A number of MENA countries have introduced reforms that have paved the way for expanded lending to MSMEs, and for demand for the proposed regional APL, including Egypt, Morocco, Jordan and Lebanon. A further lesson is that high potential enterprises need access to both private equity and advice. The project incorporates these lessons in the project design through the fourth component to support high potential SMEs, and through the technical assistance component including a focus on capacity building of SMEs through increased connections to incubators and investor networks. 57. High potential enterprises need access to equity and advice. The job creation impact of the increased access to MSME finance resulting from this project could otherwise be reduced due to high potential enterprises not receiving the type of investment they need from banks and other MSME lenders, or the advisory services they need, while start-up enterprises tend to be deemed too high a credit risk by many banks in MENA (particularly where good quality borrower information is not accessible). The project‘s link with mentoring and advisory services, and with providers of angel finance (equity investment that is for start-ups before they reach the scale where venture capital is an option), is a considerable strength in this regard. 58. The project design for the Tunisia FIL reflects lessons learned from existing credit lines in Tunisia. Those credit lines that have had limited uptake by banks were designed too narrowly (for example restricted to certain uses, or with requirements to purchase goods in donor countries), or had burdensome bureaucratic requirements, such as for reporting. Other credit lines are less restrictive, but are priced above the price financial institutions would pay if they were to raise such funds from the market. Leasing firms noted that they have to pay a higher foreign exchange fee compared to banks, which reduced the attractiveness of external credit lines less to them. 59. The design of the proposed operation aims to incorporate the lessons learned from existing credit lines as follows: the proposed credit line will not limit the usage of the credit line to specific sectors or be linked to specific procurement terms. The APL 1 credit line will be open to all economic sectors that meet the World Bank‘s environmental and social safeguards as set out in the Environmental and Social Management System, except for real estate promotion and those activities on the World Bank‘s prohibited list (see Annex 2B). The Bank has worked closely with the Central Bank to streamline the monitoring and reporting of the credit line, to minimize the administrative burden to PFIs. As agreed with the Borrower, the pricing of the loan will be in line with market prices and allow PFIs to freely determine the interest rates charged to 23 Guidance Note: ―World Bank Support for Micro- and Small/Medium Enterprise Finance: A Reporting Framework‖ - 23 - end-customers based on their risk profile and creditworthiness. The Ministry of Finance has indicated that the cost of funds transferred by the PIE on behalf of the Borrower to bank PFIs will be the same as for leasing PFIs. IV. Implementation A. Institutional and Implementation Arrangements: APL 60. The structure for the institutional and implementation arrangements at regional level is set out in Annex 3A. The $100 million APL would be allocated across countries, rolling out the Board-approved loan structure through project appraisal documents submitted for Regional VP level approval (pending the absence of objection by the Board), that outline the amounts and implementing agencies for each country. The $100 million resources would be allocated in line with assessed demand, need, and demonstrated performance in allocating resources in line with the agreed criteria and procedures. 61. The structure of the country loans under the APL – with the option of a credit line and contingent credit component – would be the same across borrowing countries, although the allocation of funds between the two components may vary (and in the case of the first APL in Tunisia the contingent credit component is not being included yet). The loans under the regional APL structure would be concluded by means of a Loan Agreement with each of the borrowing countries. For each country loan under the APL, suitable implementing agencies would be selected, whether regional (the proposed IFC SME Facility or SANAD Fund) or national (project implementation units, apexes, partial credit guarantee schemes). Technical Assistance – if not funded under the APL country loan - would be funded by donor grants and by cost sharing from recipients (the level of cost sharing would vary by type of beneficiary, and by country). 62. APL financing through the contingent credit component will back claims made under partial credit guarantees that are granted by guarantee institutions to PFIs. The loans under this component will be 'contingent' in nature because the funds would only be drawn once claims under the partial credit guarantees are made. Because the guarantee institutions issue partial credit guarantees there is a share of risk between the guarantee institution and the PFI (as the PFI assumes part of the risk of non-payment by the MSME). The agreed amount of payments by the guarantee institution through a partial credit guarantee will be funded by the government. The contingent credit loan component would therefore be used to fund the government's share of the risk. If a payment is triggered, then the guarantor would withdraw under the IBRD loan (pursuant to withdrawal instructions agreed by governments) the agreed percentage of the amount the guarantor is liable to pay under the PCG. The contractual arrangements would specify in which circumstances the guarantee institution would have the right to withdraw money under the IBRD loan on behalf of the government. Detailed mechanisms for making commitments and processing claims would be captured in, as applicable, Framework Agreements, Subsidiary (or Execution) Agreements, Project Agreements and Project Operations Manuals. The guarantee institution may be the proposed IFC SME Facility for MENA, the proposed KfW-led SANAD Fund or a national partial credit guarantee (PCG) institution. - 24 - A. Institutional and Implementation Arrangements: APL 1 (Tunisia) 63. This section outlines the proposed Tunisia loan arrangements (also in Annex 3B). The Central Bank of Tunisia will be the project implementing entity for the line of credit component. The Central Bank would communicate the features of the Loan to the licensed financial institutions and seek their interest in its utilization. It would also monitor compliance with the eligibility criteria. A successful eligibility assessment will be a precondition for the Minister of Finance to enter into a loan agreement with the eligible PFIs, and for the Central Bank to operate the disbursement of funds out of the Borrower's Designated Account on behalf of the Borrower to the eligible PFIs wishing to benefit from the line of credit. The Central Bank would provide ‗project reports‘ covering the following, using formats set out in Annex 1: Outreach (for PFIs and for the line of credit), Region and Sector Breakdown, Sub-loan characteristics, Development Outcomes (annually), and Financial Information. 64. The APL 1 for Tunisia will only be a line of credit, in response to Tunisia‘s immediate liquidity needs, and due also to the lack of a suitable guarantee fund for the contingent credit to support. Neither the IFC SME Facility or the KFW-led SANAD Fund are yet operational, and the national PCG scheme SOTUGAR does not have sufficient capacity. A contingent credit component could be activated later through a loan restructuring, or an additional loan, based on a World Bank assessment of the governance, management, systems, staffing, financial statements, methodology, and social/environmental practices, of the proposed guarantee fund. 65. The MSME APL structure would be applied to APL 1 for Tunisia, as set out in the diagram below. Figure 4: APL 1 (Tunisia) POLICY LENDING, POLICY REFORMS INNOVATIVE, HIGH World Bank Development Policy Loan, Financial Sector Assessment Program (proposed), Corporate POTENTIAL SMEs Governance Assessment, etc Partners: tbc (in development) MINISTRY Loan Agreements OF PFIs MSMEs FINANCE CENTRAL Sub-Loan IBRD Execution Selection, Banks, Leasing Agreement BANK PIE Monitoring Agreements / $50m Companies, Disbursement (EXECUTING Microfinance AGENCY) institutions, AfDB that meet $50m Applications, eligibility criteria Sub-Loan Reporting Reporting Repayments MSME FACILITY TECHNICAL ASSISTANCE - Risk Management and Debt Restructuring, Microfinance Regulatory Framework, Financial Infrastructure, Advisory Services and Training to PFIs, and other priority TA. - WB, IFC, AfDB, Donor Partners - 25 - 66. The African Development Bank would provide grant funding through existing trust funds for technical assistance to complement the Tunisia FIL. The AfDB is applying for grant financing for technical assistance to improve policy and legal frameworks for MSME Finance, and to provide capacity building to PFIs. JICA is assessing potential grant funding for technical assistance under the MSME Facility and has submitted a funding proposal internally. Other donors are being approached, including the EC and the Agence Française de Développement (AFD). The EIB has indicated that it will apply for funding for the technical assistance component from the Neighbourhood Investment Fund if it joins the MSME Facility (as a financier to the IFC-led SME Facility), and from other EC-managed funds. The Bankers Association has been pre-assessed as a potential source of technical assistance in Tunisia, given its training capacity and expertise. B. Training and Capacity Building 67. The Central Bank of Tunisia has requested focused training sessions for implementing the APL 1 line of credit. The CBT is currently handling $367 million in a total of six credit lines though, so has proven capacity. Hence, the CBT has requested an initial training and orientation on application of the eligibility criteria, environmental, social and financial management procedures, including disbursement requirements and auditing, and results reporting requirements. Training sessions on these areas, tailored to PFIs, would be offered to selected PFIs and their external auditors. Training would also be offered to the auditor contracted by the PIE to review compliance at PFI level. Refresher training would be offered to the PIE after the first year of implementation, or if the PIE hires new staff to work on this loan later. The cost of this training would be shared by IBRD and AfDB, using supervision and other budget resources. C. Results Monitoring and Evaluation 68. The APL will have a comprehensive framework for monitoring and evaluating project level outcomes, which will be applied and tailored for the APL 1 in Tunisia. A standard set of the specific monitoring templates has been designed to ensure that the implementing agencies across all the APL borrowing countries use a similar approach in collecting and reporting of the data. The overall Results Framework (Annex 1) is articulated in two parts: a) The first provides a comprehensive list of monitoring indicators for all the various activities that can be undertaken under the umbrella of the regional facility. As countries join the APL, it is anticipated that each will develop a subset of indicators from the overall framework provided in Annex 1. The sub-set of the indicators that are applicable for the Tunisia Loan under the APL has been filled out in Annex 1A. b) The second part details the indicators that will be tracked for the assessment of broader development impacts from the project even though they are not part of the PDO. 69. The monitoring template for the Government of Tunisia for the financing component is attached in Annex 1A. The results indicators have been harmonized with the African - 26 - Development Bank requirements under the project, as the AfDB is financing in parallel with the World Bank in Tunisia, and hence for Tunisia we will aim for one joint set of monitoring and evaluation templates. We anticipate that a similar approach will be used in other countries – i.e. a subset of indicators will be drawn upon from the overall framework based on agreement with the relevant partners. There may be some adjustments to the development indicators outside the PDO based on the country specific circumstances. 70. In the Tunisia loan, the TA components are anticipated to be financed outside of the loan, from AfDB and donor funds. Therefore the TA indicators are not being applied to Tunisia. Nevertheless, the project has developed a comprehensive results framework that includes TA to ensure a common starting point for discussion for subsequent country loans under the APL. Impact Assessment 71. The following option for a joint impact assessment with AfDB (subject to the anticipated funding being available) is being prepared: an assessment of the impact of the refinanced and new loans financed by the project, on the basis of administrative data from participating financial institutions. Selected PFIs would be asked to provide data on the payment performance of loans that are comparable to the loans financed, but did not meet the eligibility criteria and therefore were not included. For example, projects that were approved say nine months prior to the crises instead of six months, or those that were affected by the crises but whose loan amounts were over the cut-off of 1.5 million Tunisian Dinars for the project but were close to it (i.e. less than 2.5 million TDs), or those that met the loan size requirements but were in excluded sectors. The project would compare the information of on the characteristics and payment patterns of these ―comparable but not financed through credit line‖ with the loans financed by the project to assess the impact of the project‘s financing. These criteria to identify the ―comparable‖ test group would be detailed in the terms of reference for the impact evaluation. 72. The project could also assess a sample of each set of loans to see if there is evidence of other benefits to the MSME beneficiaries including in terms of increased sales turnover, exports or employment. The total cost of this option is estimated to be $100,000-$200,000, and would be subject to funding availability. D. Sustainability 73. Sustainable increases in MSME Finance will be promoted by the APL, in addition to sustainable positive impacts at the level of MSMEs. Credit lines enable financial institutions to expand into MSME Finance, while guarantees leverage further MSME lending from financial institutions‘ own resources, and technical assistance enhances its viability, lowering costs and risks of MSME lending. Credit guarantees backed by the APL would be structured to ensure that PFIs shoulder part of the loss from defaulted loans and pay a risk premium on the portfolio that they need covered, in order to ensure that they fully assess and manage the risk of MSME lending. In Tunisia, MSME sustainability will also be directly - 27 - promoted, through refinancing SMEs that might otherwise close due to the current economic difficulties affecting the sector. 74. Technical assistance will support improvements to the enabling environment for MSME finance, the introduction of new products and techniques that increase the viability of MSME lending, and more creditworthy MSMEs. This will help ensure sustainability through APL borrower Governments‘ commitment to foster MSME development at a policy and regulatory level. Technical assistance to financial institutions will support the development of new systems and tools for lending to MSMEs to guarantee sustainability of lending even after the line of credit or partial credit guarantee are terminated. Moreover, by building the capacity of MSMEs through a network of existing TA providers and investors, the project ensures that there is continued support in the market system for continuing the TA and training to ensure a pipeline of viable MSMEs for funding. 75. The Tunisian Government has demonstrated a strong commitment to support MSMEs. Several Government programs have been designed for this purpose, including: i) supporting and helping SMEs to export, ii) facilitating their creation and coaching, and iii) helping SMEs access finance by creating a SME bank (BFPME) and guarantee scheme (SOTUGAR). The challenge now for the Tunisian government – which the APL 1 directly supports - is to i) maintain access to finance to SMEs in a banking system that tends to scale down its financing of the economy as the NPL ratio increases and liquidity remains constrained, and ii) promote new ways of operating that open up access to enterprises that were previously excluded from favored market networks and opportunities, and from financing. The Central Bank Governor and the Minister of Finance are supportive of new measures to improve access for MSMEs to financial services, including this proposed loan. V. Key Risks and Mitigation Measures APL 76. At the regional level, there is a risk that other countries will not take up the option of borrowing under the proposed APL, although the complementary technical assistance should make the loan more attractive to Governments. Governments may prefer budget support from the World Bank, or may prefer to borrow from other sources, for example the Arab Fund for Economic and Social Development (AFESD) or the African Development Bank. We are therefore working closely with the AfDB (as parallel financiers for the first Tunisia loan under the APL), the Islamic Development Bank (who may also provide parallel financing in APL countries), KfW, and other sources of development financing to ensure a joined up approach to supporting MSME Finance in MENA. The MSME Facility package of financing, guarantees, support to policy reforms, and technical assistance, would complement the AFESD‘s new SME and private sector fund very well, and there is strong potential for a well coordinated approach. 77. For the APL there is also the added complexity of potentially having both national and regional implementation agencies for the contingent credit component. Regional facilities being developed by the IFC and KFW could receive financing from the APL to back guarantee arrangements provided to financial institutions, as could country level partial credit - 28 - guarantee (PCG) schemes. In order to reduce complexity, a standard structure for the contingent credit would be offered, irrespective of whether regional or national facilities are financed. APL 1 (Tunisia) 78. There is a risk of lending in a political transition period when the financial sector is facing challenges such as restructuring past bad debt. This risk is mitigated by the need for a timely response to help sustain MSME lending (as requested by the interim Government), to avoid otherwise creditworthy businesses closing and boost investments. The Tunisian Authorities have strongly welcomed and requested this proposed loan. The World Bank is also supporting the Central Bank in identifying and managing risks related to the current economic downturn through the recent stress testing exercise. 79. There is a risk of onlending to undercapitalized banks. Recent stress tests carried out jointly by the CBT and the Bank have revealed that, depending on the severity of the scenario, some banks may require additional regulatory capital to continue operating with a capital adequacy above the regulatory 8% threshold. The economic slowdown expected for 2011 is likely to exacerbate this undercapitalization issue. In the most severe scenario developed by the Bank to test the resilience of the banking system, most of the banks would face significant capital shortfalls in 2012 and 2013. To mitigate this risk, the Bank has transferred some stress test tools and knowledge to the Central Bank in order to enable the Banking Supervision Department to better anticipate banking sector crises as the economic situation evolves. Also, the eligibility criteria for the APL1 includes a criteria stating that ―an eligible PFI may be prevented from benefiting from the line of credit should the PIE (Central Bank) have reasonable information on an upcoming deterioration of its financial soundness‖. 80. There is a political risk that the loan might finance the established private sector elite. However this loan is designed to do the opposite, as it should open up access to new, smaller, and previously disenfranchised enterprises that are in the interior regions. The APL 1 would be on-lent in relatively small loan sizes; the Central Bank as implementing agency would allocate resources based on transparent criteria, and would require regular reporting on PFI performance and on funds allocation; while World Bank technical assistance would support financial sector and governance reforms. Moreover, the Central Bank has issued a circular for directing banks to improve corporate governance practices in the areas of: i) board oversight of managers, and board strategic decision-making, ii) financial transparency, and iii) risk management and internal control. 81. The Tunisian government or Central Bank might introduce limits on bank on- lending interest margins to MSMEs that would make MSME lending less attractive and viable for banks. This would aim at offsetting the advantages of the PFIs having access to more affordable resources (compared with the money market for example). The Minister of Finance has decided to lend to the PFIs at a market rate and agreed not to cap on-lending rates and/or margin by PFIs using the line of credit. - 29 - 82. There is a risk that banks will be constrained in expanding SME lending due to financial infrastructure or capacity constraints. Banks typically have outdated SME lending practices that do not assess risk very well and overly rely on known enterprises and on mortgage collateral. Technical assistance will address these constraints, for example to assist banks develop credit scoring and rating models, and to support improvements to the collateral framework. The FSAP update mentioned above would inform the design of technical assistance for Tunisia. 83. Tunisian banks and microfinance institutions are accustomed to low cost subsidized funding sources, including from donors. There is a risk that IBRD financing may be considered as relatively high cost and not used by banks. In such a context, it will be important not to over-burden the implementing agency(s) with excessive reporting or compliance requirements. Non-bank financial institutions, such as microcredit providers and leasing companies, may see the IBRD financing as more attractive though. 84. There is also a risk that technical assistance will be delayed until after the start of implementation of APL 1 in Tunisia, as the Government is not borrowing for TA under this loan. However it is likely that the AfDB will provide funding so that technical assistance can be initiated early in loan implementation. Moreover, existing trust funds managed by the IFC may facilitate advisory services to financial institutions in the meantime. VI. Appraisal Summary A. Economic and Financial Analysis 85. MSMEs provide employment and income for significant proportions of labor in rural and urban areas. A major advantage of the MSME sector is its employment potential at low capital cost. Furthermore the labor intensity of this sector is much higher than that of the large enterprises. MSMEs are increasingly seen as an essential ingredient in promoting inclusive growth, improving the well being of the poor and women by providing significant income and employment generating opportunities. For MSMEs to be successful in improving competitiveness, growing sales and jobs, and contributing more broadly to economic growth, they need access to appropriate working capital loans, investment financing, risk capital, trade finance, and other financial services. Restricted access to finance constrains MSME expansion of capacity, adoption of innovations, and ability to look for and take advantage of new market opportunities, which in turn prevents the increases in competitiveness and employment that the region needs. The proposed APL and Tunisia loan directly address these constraints. 86. The proposed APL 1 loan to Tunisia, and associated technical assistance, is expected to: i) Lower the costs and risks of MSME lending, which would in turn result in both increased lending to MSMEs and enhanced stability of the financial system; ii) Help initiate a systemic change in the perception of the bankability of MSMEs, which will lead to expanded and sustainable credit through a demonstration effect; iii) Enable MSMEs to improve competitiveness and increase employment or incomes; iv) Improve governance and opportunity in the private and financial sector, with MSMEs accessing financing based on transparent selection criteria and on better quality information; v) Decrease the level of informality, as firms have to comply with tax and other legislation to get access to loans; and vi) increase MSME - 30 - access to credit during a challenging period for the financial sector and economy, thereby increasing the number of enterprises likely to survive until during the economic slowdown. 87. The APL design supports improved economic governance in the MENA region, including in Tunisia,24 through maintaining access to finance flows during the economic slowdown and opening up access to finance for enterprises beyond the established corporate sector. The eligibility criteria will help ensure access for smaller firms, and for firms in underserved regions. Technical assistance and policy lending will support reforms that enable financial institutions to lend to enterprises that are not existing bank customers, and that do not have land or property to offer as collateral, and reforms that promote competition between financial institutions to better serve the MSME sector. B. Technical 88. The proposed approach is consistent with international best practices in MSME finance and financial sector development, as set out in the G20 Principles for Financial Inclusion, the World Bank‘s OP8.30, the G20 SME Finance report ‗Scaling-Up SME Access to Financial Services in the Developing World‘, and latest good practice in World Bank and IFC MSME Finance operations. A similar loan design has recently been implemented in Sri Lanka by the World Bank for example, with credit line, risk-sharing, and technical assistance components. 89. Critical to the proposed MSME Facility design, including the regional APL, are the following good practice features: i) debt financing will only be provided where needed, and even then with clear eligibility criteria, and for smaller enterprises rather than the established corporate sector;25 ii) risk-sharing will help unlock excess liquidity in banks; iii) only implementing partners with sufficient capacity to manage loan funds or risk-sharing in line with good practices will be selected ; iv) policy, legal and institutional barriers, including elements of financial infrastructure such as credit information and collateral frameworks, will be addressed; v) capacity will be built at the level of financial institutions for MSME finance; and vi) the capacity of MSMEs to access and take advantage of finance will be supported. 90. The OP8.30 review assessed the project design as compliant with OP8.30. The Bank has prepared this operation in close coordination with the IFC (for financing and technical assistance), which has been involved since the design phase of the project. The Bank has had consultations with all major donors who are active in Tunisia, including the EIB, EU, AFD, AfDB, JICA and explored opportunities to partner with them. As a result, the AfDB has agreed to launch a FIL similar to the Bank loan, aligning the design with the proposed Bank operation as parallel financing, and to try and secure grant resources for technical assistance from available trust funds. Talks are underway with other donors to partner on TA provision. The APL would 24 As set out in the World Bank 2010 publication ‗From Privilege to Competition: Unlocking Private-led Growth in the Middle East and North Africa‘ 25 Recent estimates for the IFC-led G20 Experts Group on SME Finance, indicated a potential financing gap of $2.26 billion for SME lending in the APL candidate countries, including $1.05 billion in Egypt, $547 million in Jordan, $497 million in Morocco, and $247 million for Tunisia. - 31 - not be market-distorting as PFI loans to MSMEs would be at market rates, and could also help address market failures through offering longer tenors 91. Eligibility criteria, monitoring and reporting indicators have been developed for PFIs that are in line with OP 8.30 guidelines, although the team anticipates applying stricter eligibility criteria in other countries given that the Tunisia APL 1 loan is responding to difficult financial sector and economic conditions. In addition to sound corporate governance, financial performance and outreach, the team has ensured that all financial institutions that are considered as potential partners currently operate using sound commercial practices: The APL 1 funds will be provided from the PFIs to the sub-borrowers at market interest rates based on their assessment of the project viability and risk profile. While a law on excessive interest rates is in place, it does not seem to represent a real constraint to market based-pricing as most interest rates charged to SMEs are below the ceiling due to high competition in this market segment. Banks and leasing companies do not consider the maximum interest rates provided by the excessive interest law to be binding. There is a risk nevertheless that financial institutions will under serve certain segments of the MSME market that are considered to have higher transaction costs (e.g. very small enterprises) or have a very high risk profile (e.g. newer businesses). Therefore the Bank will initiate a dialogue with the Tunisian authorities towards a reform of this provision, to support the introduction of risk-based pricing for MSME lending. 92. For the Tunisia loan, the Bank team conducted an assessment of the Central Bank as the potential PIE in April 2011 and concluded that it operates sufficiently in compliance with the O.P. 8.30 guidelines. The Central Bank has a long track record of administering external credit lines and strictly implements the conditions specified in the respective loan agreements. The unit within the Central Bank that would lead the PIE function is an organizationally independent unit within the Central Bank, does not interfere in the lending policies of beneficiary financial institutions, and has the capacity to perform the monitoring and reporting roles of this operation. The Central Bank has prepared a draft Project Operations Manual with the World Bank, which details the roles and responsibilities of the Central Bank, PFIs, and MSMEs. C. Financial Management 93. Implementing (or ‘executing’) agencies will be responsible for implementation of the regional APL, and will be responsible for the overall financial management of the project including disbursement, operation of the Designated Accounts (DAs) including claiming replenishments, disbursement of project funds, submission of semi-annual Unaudited Interim Financial Reports (UIFRs) to the World Bank for the project and interaction with project auditors on any audit issues and their follow up. In the case of Tunisia the Central Bank of Tunisia (CBT) will be the Project Implementation Entity (PIE) for the APL 1. The CBT will finish a comprehensive Project Operations Manual that will include, among other topics, procedures for selecting MSMEs for project funding, disbursement arrangements to the PFIs, project financial reporting and external audit. 94. PFIs receiving funds from the line of credit will be responsible for disbursing them to the MSMEs as well as for maintaining the necessary books and records relating to such - 32 - disbursements. The PFIs will monitor the use of funds by SMEs through their standard loan monitoring systems to ensure that the disbursed funds are utilized for their approved and intended purposes. The PFIs will submit semi-annual financial reports to the CBT detailing the disbursement to MSMEs. After the close of the financial year, the PFIs will also submit a copy of their annual financial statements statutory audit reports, and project audit report to the CBT. The disbursement of the line of credit funds from the PFIs to the MSMEs will be treated as disbursements for eligible expenditures for IBRD and AfDB reporting purposes. If IBRD and AfDB determine that these disbursements are used for ineligible expenditures, the amounts should be refunded to relevant donor(s). 95. The Financial Management (FM) capacity and the FM arrangements were assessed during project preparation and it was concluded that the central bank has the capacity to handle the FM aspects of the APL 1 line of credit in compliance with the Bank‟s fiduciary requirements. 96. The financial management capacity of SOTUGAR (Société Tunisienne de Garanties - the Tunisian Guarantee Company) was assessed, as a recipient of financing under a future contingent credit component of the APL for Tunisia (assessment set out in Annex 3B). The assessment highlighted a number of actions needed first in order to meet the Bank‘s fiduciary requirements. Financial management assessments of the proposed IFC SME Facility and the proposed KfW-led SANAD Fund were not possible as neither Facility is yet sufficiently advanced in its design. However both the IFC and KFW have significant global experience in designing and financing similar funds, and the proposed fund manager for the SANAD Fund has proven capacity and track record. D. Procurement 97. Given the type of on-lending operation, there is no procurement involved, except when the beneficiary MSMEs use Bank-financed funds (channeled through two-tier lending arrangements with financial institutions) for procuring goods, works or services. In this case, paragraph 3.13 of the Procurement Guidelines applies, which allows for established private sector or commercial practices to be followed. In these cases of three-tier lending arrangements, the Bank would review the Operation Manuals or the proposed lending agreements that would be used by the intermediary microfinance institutions and banks, to ensure that they describe the procurement practices that would need to be followed by the ultimate recipients of these loans for procuring goods, works or services, and that such commercial practices are acceptable. Information gathered from a number of commercial banks and from the specialized SME bank, shows that (i) they exercise due diligence at various stages of the process to ensure, in addition to the viability of the project, (ii) the investment costs are in line with related markets and they are based on true pro-format invoices, (iii) that goods have been effectively delivered and (iv) make payments directly to the supplier. These diligences, among others, have led to conclude that the practices are acceptable and could be relied upon. Nevertheless, the Bank will require that the Operation Manual (or Project Implementation Document) shall describe the basic guiding principles and acceptable procedures applicable to the loan as stated in paragraph 3.13 of the Procurement Guidelines. Any consultant services required for the Project that are financed out of the proceeds of the Loan would be procured in - 33 - accordance with the requirements set forth or referred to in Sections I and IV of the Consultant Guidelines. E. Social (including safeguards) 98. Projects supported by the regional APL and Tunisia FIL are expected to have primarily positive social impacts. The MSME Facility more broadly, including the APL, is intended and expected to lead to increased investment and increased indirect labor demand in the medium-long term. In general, the poverty and social impacts of increased investment will be positive, through the benefits of induced economic growth, and through the direct provision of MSME services. 99. The project will target finance towards underserved groups, including women and individuals in poorer areas. However, there is a potential risk that MSMEs taking on debt for the first time may not understand the risks of over indebtedness nor have the capacity to know how to manage their loans. The financial institutions that the Regional APL will lend to have experience lending to these groups, and this project will attempt to overcome this risk through screening clients, and through small regular loan repayments. No additional negative social implications are expected. 100. From a social development perspective, recent events in North Africa make this program highly relevant and timely. The social turmoil in Tunisia, if not triggered by lack of economic opportunity alone, certainly had economic drivers, and the sense of grievance towards governing elites managing resources to their own ends. Opportunities opened up by the APL financing will contribute to a greater sense of social inclusion. Eligibility criteria for selection of participating financial institutions will ensure that the banks and leasing companies that onlend MSME APL resources are also present, through branch offices, in less developed regions of Tunisia. Eligibility criteria for selection of MSMEs by the PFIs will seek to ensure that end borrowers are smaller MSMEs, including new enterprises, and not larger well connected enterprises that have privileged access to resources. Consultations 101. The project team has held consultations to date in Tunisia, Morocco, and Jordan. In Tunisia, consultations were held with potential PFIs (private and state owned commercial banks, leasing firms), ministries (Ministry of Cooperation and International Development, Ministry of Finance, Ministry of Industry and Commerce) and other government bodies (Central Bank of Tunisia, Agence de la Promotion de l‘Industrie et de l‘Innovation – API, SOTUGAR) to understand the needs of the MSME finance, to present them the proposed structure of the project and to receive their guidance on how its impact can be maximized. The project team has also participated in and contributed to a round table which was organized by the API, which brought together business associations, young entrepreneurs, as well as MSMEs. This forum enabled the project team to hear the views of MSMEs on their constraints to accessing financing and TA needs, to present the proposed project structure to relevant stakeholders and to get their feedback on its design. The team held additional consultations with three business associations, the Chefs d‘Entreprises Arabes and the Chamber of Commerce of Tunis, in order to get their views on the - 34 - constraints for MSMEs, the proposed FIL, as well as their ideas on and potential partnership in the provision of technical assistance to MSMEs. All financial institutions will be notified of the availability of funds from the APL 1 by the PIE. This information will outline the conditions of eligibility of loans under the Tunisia FIL. 102. Subprojects to be financed have not yet been identified and the Project Operations Manual is being drafted. For these reasons, and the need to have the implementing agency confirmed in order to discuss its role in implementing the ESMS, no consultations with civil society have been held thus far, although have been conducted with representatives of the private sector, SMEs, the financial sector, and Government. Additional consultations on the ESMS will be carried out with a wider range of stakeholders, including civil society. The implementing agency will continue to carry out consultations and disclosure activities when the ESMS is finalized. During project implementation, subproject specific safeguards instruments will be subject to consultations and disclosure as required by Bank Policies, and also IFC Performance Standards if the proposed IFC regional fund is used as an implementing agency. F. Environment (including safeguards) 103. The project is classified as Category “FI”, according to both World Bank and African Development Bank Safeguard and Environmental & Social review procedures. To obtain financing, MSMEs would borrow through Participating Financial Institutions, which would make the decision on whether to support a sub-project based on its commercial viability and potential environmental and social impacts and risks. 104. A Master Environmental and Social Management System (ESMS) has been developed to identify, minimize, avoid, screen out, mitigate and monitor potential social and environmental impacts in compliance with World Bank and AfDB Policies, the participating countries‘ applicable laws and regulations. The ESMS will be applied by the PFIs in the selection and supervision of MSMEs and sub-projects to be financed, and therefore is in compliance with the policies of all development partners. The ESMS will need to be disclosed prior to appraisal of APL country loans, and adopted by the PIE(s) or other implementing entity prior to effectiveness of those loans. The ESMS is an integral part of the Project Operations Manual (POM) for Tunisia. 105. The ESMS consists broadly of (i) a screening mechanism to determine the environmental category of the sub-project, and (ii) impact assessment and mitigation. For its application to other APL borrowing countries, assessment and mitigation would be done according to the Bank‘s and applicable Donors‘ safeguards policies and each country‘s environmental legislation. The ESMS would therefore reflect each participating country‘s environmental legislation that subprojects would have to meet to obtain the required permits and approvals. The ESMS has been prepared to the satisfaction of the Bank and AfDB, and was disclosed in Tunisia on May 23, 2011 and to World Bank Infoshop on May 26, 2011. 106. The ESMS would include a section for each borrowing country (initially Tunisia). Modified versions of the ESMS would be prepared by other countries as they access the ESMS, if necessary, although the Master ESMS would in theory be generic enough to be acceptable to - 35 - all targeted countries. The ESMS would be disclosed in country (and has already been disclosed in Tunisia), in a language understandable to the local population, as well as on the AfDB‘s, KFW‘s, the World Bank's, and all relevant Ministry of Finance (MOF) websites. The final version of the ESMS would be the basis for the environmental and social sections of the Project Operations Manual (POM). The PIE will set out the relevant screening criteria and procedures from the ESMS in its communication to financial intermediaries. 107. In the case of Tunisia, subprojects (MSME loans) would be less than 1.5 million Tunisian Dinars, and are therefore expected to be limited in scope and size, and no major environmental issues are anticipated. However, the scale and location of impacts can only be identified at the time that the PFIs screen subproject proposals financed by the APL 1. Impact minimization and mitigation measures would therefore be prepared by MSMEs working with PFIs. In most cases, the negative environmental impacts that may be generated by the sub- projects would be easily mitigated by complying with national law and through the implementation of the ESMS, which includes a screening mechanism against common environmental impacts such as the creation of waste, wastewater, dust, noise, disturbance to traffic, potential injury to personnel, land appropriation, etc, according to applicable WB and AfDB safeguards. It is anticipated that for subprojects with negative impacts, in most cases, the preparation and implementation of subproject-specific Environmental and Social Management Plans (ESMPs) would be sufficient. If subprojects are categorized ―C‖, no environmental action would be required. 108. In Tunisia, environmental approval for projects is provided by the national environmental protection agency (Agence nationale de protection de l'environnement - ANPE) which categorizes projects according to impact: Category ―A‖ (Annex I according to Tunisian law) projects are subject to EIA, with ANPE under the obligation of providing an opinion on the EIA within 90 days (or 21 days for projects with lesser impacts) of receiving the EIA; Category ―B‖ projects (Annex II according to Tunisian law) are subject to standard mitigation procedures as defined in a manual (cahier de charges). After screening and approval of the impact assessment by the ANPE, the sub-project is cleared for financing under the Facility. Mitigation actions would be specified as an Annex to the impact assessment, in an environmental and social management plan (ESMP), which would include: impact; mitigation; party responsible for mitigation; monitoring indicator; indicator; timing; cost. Independent annual supervision may monitor indicators such as waste management, verify if mitigation actions are being taken and indicators monitored, and cumulative impacts. The ESMS excludes Category A sub projects; sub projects that affect natural habitats or threaten endangered species; that may trigger OPs 4.10 or 4.12; that cause deforestation; that are related to the safety of dams; that affect international waterways; or that take place in disputed areas. In Tunisia, in the event of sub project uncovering physical cultural resources e.g. historical ruins, national procedures for the preservation of archaeological relics would be set in motion. In case subprojects cause an increase in the use of agrochemicals, they would carry out integrated pest management as specified in the ESMS. Sub projects on the Bank‘s exclusion list are also excluded.26 26 Sub projects promoting the following: illegal activities; Production or trade in weapons and ammunitions; Production or trade in alcoholic beverages (excluding beer and wine); Production or trade in tobacco; Gambling, casinos and equivalent enterprises; Trade in wildlife or wildlife products regulated under CITES; Production or trade in radioactive materials; Production or trade in or use of unbounded asbestos fibers; Commercial logging operations; - 36 - 109. The MSMEs, PFIs, and implementing agency(s) would need a minimum environmental capacity to carry out these tasks. Where this capacity is not present, technical assistance (TA) under the project could help build it. TA would cover screening, impact assessment, preparation of ESMPs, monitoring, reporting and carrying out spot environmental audits. The Tunisia project would carry out annual supervision of a sample of subprojects, including cumulative impacts and impacts on labor safety and conditions. Indicators broad enough to cover all sub-project types, that measure multiple impacts, and are simple to collect would be used by the project, monitored by the external auditors of the PFIs, and collected by the Project Implementation Entity (PIE). They include: (i) number of sub-projects in compliance with national and WB environmental regulation / policies at approval; and (ii) number of sub-projects in compliance with national and WB environmental regulation / policies 1, 2 and 3 years after startup i.e. number of subprojects correctly implementing their ESMPs. Subprojects would also carry out their own monitoring and supervision, by monitoring indicators appropriate to impacts, such as air quality, water quality, impact on biodiversity, etc. 110. The screening and review procedures must be carried out before sub-projects are financed in order to prevent funding of economic activities with negative impacts on human development and the environment. Safeguard Policies Safeguard Policies Triggered Yes No TBD Environmental Assessment (OP/BP 4.01) X Natural Habitats (OP/BP 4.04) X Forests (OP/BP 4.36) X Pest Management (OP 4.09) X Physical Cultural Resources (OP/BP 4.11) X Indigenous Peoples (OP/BP 4.10) X Involuntary Resettlement (OP/BP 4.12) X Safety of Dams (OP/BP 4.37) X Projects on International Waterways (OP/BP 7.50) X Projects in Disputed Areas (OP/BP 7.60) X 111. Category A sub-projects would not be eligible; furthermore, sub-projects that trigger OP/BP 4.04 (Natural Habitats), OP 4.12 (Involuntary Resettlement), OP/BP 4.36 (Forests), OP/BP 4.37 (Safety of Dams), OP/BP 7.50 (that affect International Waterways) and OP 7.60 (Disputed Areas) would not be eligible for financing; OP 4.10 (Indigenous People) would not be triggered as indigenous people are not present in Tunisia. Production or trade in products containing PCBs; Production or trade in pharmaceuticals subject to international phase outs or bans; Drift net fishing in the marine environment using nets in excess of 2.5 km. in length; Production or trade in Ozone Depleting Substances (ODS) subject to international phase out. - 37 - Annex 1: Results Framework and Monitoring Regional APL – Tunisia „APL 1‟ The Results Framework for the Regional APL has been applied for the Tunisia country loan, below. TA indicators are not included for Tunisia as TA will be funded by donors separate to the Tunisia APL 1. Risk Sharing indicators are not included as the contingent credit is not included in this first country loan. Project Development Objective (PDO): To improve access to finance for micro, small and medium enterprises in the MENA region. Cumulative Target Values** Responsibility Description PDO Level Results Unit of Data Source/ (indicator Baseline Frequency for Data Core Indicators* Measure YR 1 YR 2 YR3 YR 4 YR5 Methodology definition etc.) Collection Indicator 1: Increase in total no % 0 0% 1% 3% 6% 10% Annual Reporting by CBT – PIE (MSME Loan of MSME loans in PFI participating Size: up to portfolios financial 1,500,000 Indicator 2: Increase in the % 0 0% 2% 7% 12% 20% institutions Tunisian Dinars) total volume of outstanding MSME portfolio of PFIs. INTERMEDIATE RESULTS Enhanced Outreach to SMEs: For Financing through Lines of Credit and/or Risk Sharing Facilities Intermediate Result indicator1: Number 0 75 150 200 230 250 Semi- Reporting by CBT – PIE (MSME Loan No of MSME loans financed by Annual participating Size is up to the Line of Credit financial 1,500,000 Intermediate Results Indicator US$ 0 15 30 40 45 50 institutions Tunisian Dinars) Volume of MSME loans million financed by the Line of Credit Intermediate Result indicator3: US$ mill 0 15 30 40 45 50 Semi- Reporting by CBT – PIE Volume of financing from the X Annual participating Line of Credit to PFIs financial Intermediate Result indicator4: No 0 2 3 3 4 4 institutions No of participating PFIs Intermediate Result indicator5: X Number 8500 8500 8600 8800 9000 9200 No of active MSME loan accounts in PFIs Intermediate Result indicator6: X US$ 1.5 1.5 1.53 1.6 1.62 1.65 Annual Volume of outstanding MSME billion loans in PFIs CORE INDICATOR tracking: Portfolio at Risk > 90 days for X % 24.1 Same or MSME sub-loans (weighted by better asset size) than baseline ROA of PFIs (weighted by asset X % 1.2 Same or size) better than baseline - 38 - Description Responsibility Core Unit of Data Source/ (indicator Indicators* Baseline Cumulative Target Values** Frequency Methodology for Data definition Measure Collection etc.) Enhanced Term Financing for MSMEs Intermediate Result indicator9: No. Not Cumulative number of active Applicable MSME loans >3 year term Intermediate Result indicator 10: US$ mill Not Cumulative volume of loans to Applicable MSMEs (>3 year maturity) Risk Sharing/Guarantee Facility for MSMEs Intermediate Result indicator11: No of Not MSME accounts included by guarantees Applicable Intermediate Result indicator12: Not Volume of MSME portfolio covered by Applicable the guarantees ($ million) Technical Assistance for Enhancing MSME Finance: Policy Level, PFI and Beneficiary Levels Intermediate Result indicator 13: Policy No Not Annual Level: No of policy recommendations Applicable shared with relevant authorities. Intermediate Result indicator 14: Policy No Not Annual Level: No of recommendations from Applicable policy reviews implemented by authorities Intermediate Result indicator 15: PFI No Not Semi- Level: No of Bank officers trained on Applicable Annual MSME lending tools and practices. Intermediate Result indicator 16: PFI No (%) Not Semi- Level: No (%) of PFIs with enhanced IT Applicable annual systems for tracking MSME portfolio / credit scoring and rating models Intermediate Result indicator 17: No (%) Not Semi- MSME Level: No (%) MSMEs receiving Applicable annual TA & training in preparing loan applications and updating systems. Intermediate Result indicator 18: No (%) Not Semi- MSME Level: No (%) of MSMEs Applicable annual receiving start-up or growth capital through support provided under the TA. - 39 - Annex 1A: Templates for Results Measurement for TUNISIA Table 1: OUTREACH of MSME Portfolio27 Financed by the Line of Credit Table 1 needs to be consolidated by the CBT based on information from participating Financial Institutions and provided to the World Bank at the time of: a) Replenishment of the Special Account b) Every 6 months for the purposes of supervision. For loans co-financed by more than one participating Bank, the reporting will be done by only the leading Bank to avoid double-counting. The data will be collected and consolidated by the Bank Supervision Unit, verified by the external auditor on a sample basis, and presented to the World Bank by the External Resources Department. Frequency: Semi-Annual Responsibility: PFI to provide, PIE to aggregate across PFIs Source: PFI management information (reporting) systems Target Actuals Indicators (for loans less than 1.5 2011 2012 2011 2012 2012 2013 million TDs) (dec) (jun) (dec) (jun) No of loans refinanced28 n.a. No of new loans financed 75 150 No of loans financed in interior tbd tbd regions29 Volume of loans refinanced30 n.a. Volume of new loans financed 15 30 Volume of loans financed in tbd tbd interior regions31 27 MSME refers to enterprises whose total outstanding credit (with any regulated financial institution) is less than TD 6 million. For example, if an MSME has an overall debt of TD 4 million comprising 2 loans – one for TD 3 million and another for TD 5 million, the MSME is eligible but the line can be used only for the TD1 million loan. The TD 3 million loan will not be eligible. 28 The intention is not to set ideal targets for refinancing: more is not necessarily better. The purpose is to monitor and refinance only viable loans affected by the crises. The refinancing window is thus open for a maximum of 12 months. 29 Interior regions: Northwest, South, Center West. 30 Refer footnote 26. 31 Refer to footnote 25. - 40 - Table 2: REGION AND SECTOR BREAKDOWN of MSME Portfolio32 Financed by the Line of Credit Table 2 collects regional and sectoral information on the beneficiaries. The economic sector and the regional categories will be determined by the CBT. Table 2 data needs to be consolidated by the CBT based on information from PFIs, and provided to the World Bank at the time of: a) Replenishment of the Special Account b) Every 6 months for the purposes of supervision The data will be collected and consolidated by the Bank Supervision Unit and presented to the World Bank by the External Resources Department. Frequency: semi-annual Responsibility: PFI to provide, PIE to aggregate across PFIs. Source: PFI management information (reporting) systems Indicators Dec 2011 2012 2013 No of Sub-Loans by Economic Sectors  Agriculture and Fisheries  Extractive Industries  Construction  Energy (electricity, gas)  Manufacturing  Commercial Services  Transport & Communication  Health & Social Services  Hotels and Restaurants  Education  Public Administration Services  Real Estate Services  Other Services (Residential, Collective, Domestic, drivers) Volume of Sub-Loans by Economic Sector  Agriculture and Fisheries  Extractive Industries  Construction  Energy (electricity, gas)  Manufacturing  Commercial Services  Transport & Communication  Health & Social Services  Hotels and Restaurants  Education  Public Administration Services  Real Estate Services  Other Services (collective, domestic, drivers) 32 Refer Footnote 24. - 41 - Table 2B: Credits Financed by Region Demographic Indicators Dec 2011 2012 2013 No of sub-loans financed by Region Center West South Northwest Greater Tunis Volume of sub-loans financed by Region Center West South Northwest - 42 - Table 3: SUB-LOAN CHARACTERISTICS of MSME Portfolio Financed by Line of Credit Table 3 needs to be consolidated by the CBT based on information from all participating Financial Institutions and provided to the World Bank and AfDB at the time of: a) Replenishment of the Special Account b) Every 6 months for the purposes of supervision The data will be collected and consolidated by the Bank Supervision Unit and presented to the World Bank by the External Resources Department. Data will be verified by external auditors on a sample basis. Frequency: semi-annual Responsibility: PFI to provide, PIE to aggregate across PFIs. Source: PFI management information (reporting) systems Sub-Loan Characteristics Actuals 2011 2012 2013 2013 Financial Terms of the Sub-Loans  Weighted Average Loan Size  Weighted Average Interest Rate  Range of Weighted Average Interest Rates (Min & Max )  Weighted Average Term of Loans Frequency: annual Environmental Compliance  No of MSMEs financed with Environmental clearance  No of MSMEs with up-dated positive annual environmental clearances (% of total MSME with clearance) - 43 - Table 4: Development Outcome Indicators for MSME Beneficiaries of the Line of Credit Participating Financial Institutions will be required to collect at the time of the sub-loan applications and annually track: financial information (asset size, sales, and exports), as well as employment profile of the MSME beneficiary (total number employed, no of women employed and no of youth employed). PFIs will collate the information from the sub-loans and present a consolidated table to CBT annually, which in turn will collate the information from all PFIs and make this available to the World Bank – both at the consolidated and PFI level. PFIs must make available the sub-loan level data for research purposes if so required by the World Bank, in coordination with the CBT. Frequency: annual Responsibility: PFI to provide, PIE to aggregate across PFIs. Source: Annual data from the MSME clients that benefit from the Line of Credit For loans less than TD 1.5 Values million Baseline Year 1 Year 2 Year 3 1. Financial Information on MSME Beneficiaries (TD millions) Total Assets of MSMEs (TD million) Exports (TD Million) Sales Turnover (TD millions) 2. Employment Profile of MSME beneficiaries No of new jobs created Total number of employees Number of women employed Number of youth employed (<30 yrs) - 44 - Table 5: FINANCIAL INFORMATION on the Participating Financial Institutions This table captures the financial health of the PFIs. This information needs to be collected from the PFIs on a semi-annual basis and verified by the CBT‘s Bank Supervision Department, and made available by CBT during the supervision by the World Bank. Frequency: semi-annual Responsibility: Central Bank Supervision Unit Source: PFI regular reporting to the CBT Indicators Bank 1 Bank 2 Bank 3 Weighted average (by Assets) Return on Assets Return on Equity NPL Ratio (%) NPL Ratio on refinanced loans (%) NPL Ratio on MSME portfolio (%) - 45 - Annex 2A: Detailed Project Description: Regional APL The country loans (FILs) under the APL structure would include the option of two components, which would be agreed in the Loan Agreement with each borrower: i) a credit line for on-lending through an implementing agency, and ii) a contingent loan to back national credit guarantee funds or regional funds. The credit line component would help meet the increasing demand for liquidity in financial markets such as Morocco, Tunisia, Egypt, and the demand for financing from non-bank microfinance institutions, and would enable participating financial institutions (PFIs) to expand MSME lending (‗sub-projects‘) prudently. The risk-sharing (contingent credit/ loan) component would help unlock bank resources for financing MSMEs, also enabling PFIs to expand MSME lending. A number of MENA countries have introduced reforms that have paved the way for expanded lending to MSMEs, and for demand for the regional APL. The Moroccan government has introduced measures to extend access through microcredit associations and banks, including through a new postal bank. In 2008 banks were invited to develop financial inclusion strategies, and the central bank more recently has signaled to banks that it is open to allowing innovations in products and delivery mechanisms. The Central Bank of Egypt has launched a multi-pronged financial inclusion agenda, including supporting the development of a credit bureau, I-Score, and a Pensions and Payments Initiative to extend access to basic bank accounts by providing pensions, salaries and procurement payments through the financial system. New regulations for electronic payments and licenses to banks to link with telecoms companies in developing mobile payments services are also very promising. The Egyptian Financial Services Authority has introduced a Licensing and Regulation Law to stimulate the creation of microfinance, leasing, and factoring companies. The Jordanian, Tunisian, and Lebanese governments have also implemented access to finance reforms and support programs. Debt financing is appropriate for banks in several MENA countries, such as Tunisia, Morocco, and to an extent Jordan. Recent estimates for the IFC-led G20 Experts Group on SME Finance indicated a potential financing gap of $2.26 billion for SME lending in the APL candidate countries, including $1.05 billion in Egypt, $547 million in Jordan, $497 million in Morocco, and $247 million for Tunisia. Non-bank microcredit providers have a clear need for debt financing as they are not able to intermediate deposits in the eligible countries for the APL, and can be dependent on relatively short term or high cost commercial bank lending. Microcredit provider absorption capacity constraints can be eased by the policy and regulatory reforms, financial infrastructure improvements, and technical assistance linked to this proposed project. By financing the backing of guarantee arrangements through the contingent credit component, the APL could also catalyze longer-term lending from banks to microcredit providers, and bring down costs through competition as more banks offer such financing. Risk- sharing, through partial credit guarantees made by guarantee institutions, can help unlock excess liquidity held by MENA banks and make it available to MSMEs. Partial credit guarantee (PCG) schemes in a number of MENA countries are not operating to international good practices and levels of coverage (the exception being Lebanon‘s Kafalat scheme, and to a lesser extent the - 46 - PCG schemes in Morocco and West Bank/Gaza), and there is significant scope for expanding and improving guarantee products. The allocation of loan funds between credit line and contingent components, would depend on demand, and borrower preference – making use of the vertical APL structure. The contingent loan component would be disbursed only in the event of claims submitted in line with an agreed process set out in the Loan Agreements and Subsidiary (or Execution) Agreements, if applicable. Detailed eligibility criteria are in Box 2A.1. Box 2A.1: Eligibility Criteria for the Regional APL The following details the eligibility criteria to be used for the Regional APL. These criteria provide the broad framework for the design of each country loan in this APL, and will be adjusted to country-specific circumstances. For example, the specific criteria for the Tunisia Loan are listed in Annex 2B. These criteria are specified at three levels: a) the eligibility of the Financial Institution that can access the credit; b) the portfolio of the PFI that can be covered under the financing; and c) the Microenterprises and SME beneficiaries that are eligible. PFI Eligibility: Line of Credit and Contingent Credit Components The following criteria will be used to determine bank and financial institution eligibility:  Financial institution must be licensed to operate in the country, and must have sufficient base to operate in specific geographic or sector areas of interest if such is a priority for Micro and SME finance in the country.  Meets all national regulations and reporting requirements and is not under any national administrative procedure or restructuring (unless such restructuring is subject to an action plan acceptable to the Bank).  Must have track record of delivering financial services to MSMEs as evidenced by at the percentage share of MSMEs in the total portfolio as specified, and/or for new PFIs, commitment to MSME lending as evidenced by marketing plans and capabilities to develop new MSME loans.  PFI must meet specific country-level criteria on the financial soundness standing indicators as determined according to the World Bank‘s internal guidelines (OP8.30 and OP 10.02 ) including: a) Return on Average Assets and Equity, b) NPL ratio and provisions, c) Capital Adequacy Ratio or other as specified in the country PAD.  An eligible PFI may be prevented from benefiting from the financing if the national level PIE has reasonable information on an upcoming deterioration of its financial soundness.  PFI must provide audited financial statements and should seek World Bank no objection any FI with qualified opinion on the financial statements.  Commitment to follow all relevant World Bank and national Environmental and Social standards, financial management and procurement standards.  Commitment to provide all requisite monitoring and development outcome data as agreed by the World Bank and the borrower. Loan or Portfolio Eligibility Once a financial institution has been deemed eligible, a second-level filter will be used to determine whether the specific loan portfolio of that institution is eligible for participation:  Loan size to MSME beneficiaries must meet the limits set at the country level - 47 -  Only loans affected by specific political or economic crises are eligible for refinancing and must meet the following conditions broadly, or as adjusted at the country level. a) Refinancing window will have country specific time limits no longer than 12 months of the effectiveness of the loan. b) Loans for refinancing purposes cannot exceed 70% of the utilization. c) MSMEs are deemed viable by the financial institutions after refinancing and will be able to make timely repayments; d) Only loans that started defaulting after an economic/political crises is eligible; e) Loans should not have already been subjected to any prior rescheduling or restructuring (unless such restructuring is subject to an action plan acceptable to the Bank).  Loans must comply with World Bank environmental and social safeguards requirements as detailed in the Operational Manual for each country loan.  Loans must meet any sector restrictions that may be specified at the country level, based on the findings on environmental and social safeguards, or other criteria. Eligible MSME beneficiaries MSME beneficiaries should:  Not be over-indebted already – and must meet country specific limits on the aggregate outstanding credit with any regulated financial institution.  Must meet country-specific criteria on number of people employed or other criteria used to define the beneficiaries.  MSMEs must demonstrate a clean history and track-record record on unpaid installments and bounced checks for at least 1 year prior or as adjusted at the country level. The line of credit component would be managed and onlent by country intermediaries acting as implementing agencies. Apexes, or Project Implementation Entities (PIEs), are widely used to manage and on-lend funds to financial institutions, and to accelerate the growth of sound MSME finance retail capacity in order to expand access to finance. National partial credit guarantee (PCG) schemes could be supported through the contingent credit component, as could the proposed IFC regional SME Facility, or the proposed KFW-led SANAD Fund. These risk sharing facilities would have the potential to leverage bank, investor and development finance resources for MSME lending, increase loan volumes, reduce loan losses and offer net welfare improvements such as fixing market failures related to adverse selection and correcting for unequally distributed endowments. The MENA region hosts 14 MSME-oriented PCG schemes. According to a recent World Bank survey of 74 PCG schemes worldwide, outstanding guarantees typically equate to 0.2 percent of GDP in high-income countries and 0.3 percent in low- or middle-income countries.33 Only those in Morocco, Tunisia, Lebanon and West Bank/Gaza approach this level, and the data shows particular need for additional capital to increase outstanding guarantees in Egypt, Syria, and Jordan. Technical assistance could support reform of promising PCG schemes, to improve their design, additionality, coverage, and the extent to which guarantee pricing and allocation is linked to risk. 33 Beck, Klapper, and Mendoza (2008). - 48 - As neither the IFC SME Facility or the KFW-led SANAD Fund for MSME Finance in MENA are yet operational, or finalized, the World Bank team was not yet able to assess fund capacity, governance, financial management, environmental, and other key criteria for determining suitability for APL financing as part of the APL 1 Tunisia loan. But due to the significant experience and track record of IFC and KfW in managing and supporting MSME Finance Facilities, the proposed design of the Funds, and the close collaboration with the World Bank in the design and preparation process, it is expected that both will be eligible for the APL for later loans, depending on the decision of borrowing governments. The proposed IFC-led SME Facility is expected to have a duration of 7-10 years to provide primarily risk sharing facilities to enhance the financial capacity of well managed local and regional private commercial banks and other financial institutions to provide funding and financial services to SMEs. The MENA SME Facility may also provide other instruments to support SME financing in target markets depending on need and customized to market conditions. This could be used for SME working capital financing and the purchase of machinery and equipment to help SMEs to increase productivity, energy efficiency, modernize and expand. The SANAD Fund will be set up as an investment company (SICAV-SIF) in Luxembourg for an unlimited duration with the purpose of offering and facilitating market based financing to participating financial institutions serving MSMEs in the MENA region. It will be managed by a private Fund Manager selected through a competitive bidding process called Finance In Motion (in consortium with Oppenheim Asset Management Services). Finance In Motion has implemented and managed the well-regarded MSME European Fund for South East Europe (EFSE), among other funds. The EFSE has become the world‘s largest microfinance investment vehicle. MSME Facility Framework components Policy Lending, Support to Policy Reforms: World Bank Group policy dialogue and support to reforms will continue through development policy lending (operations are in design or consideration for Morocco, Tunisia, Egypt and Yemen), technical assistance, and analytical work. The World Bank provides significant development policy lending in MENA in support of financial sector reforms, and undertakes in-depth financial sector assessments through the FSAP and ROSC programs. A major regional finance study (a Finance Flagship report) led by the World Bank in 2010 included an SME Finance Survey with 140 MENA banks, and a review of partial guarantee schemes. World Bank Group technical assistance has supported MSME regulatory reforms and financial infrastructure throughout the region. Support to innovative and high potential SMEs: the World Bank project „Accelerating IFC and ICT-enabled SMEs‟ is being activated in Lebanon and potentially also in Jordan. This is part of the wider MSME Facility framework, and contributes to achieving the PDO. Critically, the type of MSME Finance that would be catalyzed by this project would be growth capital for innovative and start-up enterprises, and it would be linked to non-financial services such as mentoring, access to market networks, and business incubator services. This would be an important complement to bank financing, which tends to be debt financing and to not be linked to the kind of business services that high potential MSMEs need. - 49 - Annex 2B: Detailed Project Description: APL 1 (Tunisia) The purpose of the first loan under the APL structure, to Tunisia, is to stimulate new lending while at the same time ensuring that viable MSMEs that have now been affected by the crises are able to get back to a sustainable loan repayment plan. The APL 1 would be provided as a line of credit by the Project Implementing Unit for the purpose of providing PFI Loans to eligible PFIs for on-lending as Sub-loans to Eligible MSMEs for the carrying out of Sub-projects. Accordingly, APL 1 will finance MSME sub loans up to TD 1.5 million, which is appropriate to meet the financing needs of smaller enterprises, including those in underserved regions and sectors (larger loans would need to be financed from PFI‘s own resources). Table X: Breakdown of Loan Portfolio of Tunisian Banks (% of Total Credit, December 2010)34 13% 24% Individuals 7% Government Large Firms 10% Medium Firms Small Firms 46% Source: CBT PFI Eligibility: Line of Credit and Contingent Credit Components In line with the regional APL criteria set out in the previous Annex, the following criteria will be used to determine financial institution eligibility:  Financial institution is licensed to operate in Tunisia, and operates representative offices in at least 6 governorates (or has signed a distributing agreement with banks with a network meeting the geographical coverage criteria). 34 These figures are based on data obtained from the 10 largest banks (by assets). Loans to firms were defined by loan size (small: 0-1.5 million TND; medium: 1.5-5 million TND; large: > 5 million TND) - 50 -  Meets all CBT or Ministry of Finance regulations and reporting requirements (including those outlined in the criteria for Bank assessments agreed with the World Bank and AfDB).  Is not under administrative procedure (―administration judiciaire”) or restructuring (unless such restructuring is subject to an action plan acceptable to the Bank).  Experience in delivering financial services to MSMEs as evidenced by at least 10% share of MSMEs in the total portfolio35 or demonstrated commitment to MSME lending as evidenced by marketing plans and capabilities to develop new MSME loans for the line of credit and other financing instruments.  Overall financial standing36 determined according to World Bank internal guidelines (OP8.30 and OP 10.02 ) including: (i) Positive Return on Average Equity (ROAE); (ii) Positive Return on Average Assets (ROAA); (iii) NPL < 12% and Risk-weighted Capital Adequacy Ratio (RWCAR) of at least 10% (or Tier 1 RWCAR of at least 8%) (iv) Provisions > 65%.  An eligible PFI may be prevented from benefiting from the line should the PIE has reasonable information on an upcoming deterioration of its financial soundness.  No PFI can receive more than $25 million of the total loan proceeds (AfDB and WB), during the first 12 months of implementation.  Must provide audited financial statements and should seek World Bank no objection for FIs with qualified opinion on the financial statements.  Commitment to follow the Environmental and Social Management System.  Commitment to provide all requisite monitoring and development outcome data as agreed by the World Bank and Central Bank of Tunisia. It is anticipated that up to 6 banks, and up to 3 leasing companies, will qualify as eligible in Tunisia. No microfinance institutions will initially qualify as eligible, but may do so during the loan period if performance improves and one meets the criteria. Loan or Portfolio Eligibility Once an institution has been deemed eligible, a second-level filter will be used to determine whether the specific loan portfolio of that institution is eligible for participation: 35 Measured as loans to commercial entities, defined by loan size (loans below TND 1.5 million). 36 The financial ratios should be calculated according to the CBT regulation, or any future Ministry of Finance or CBT regulations for microfinance institutions. - 51 -  Aggregate amount of the loans to MSME beneficiaries not greater than 1,500,000 TD, from the same PFI.  Loans could be utilized for refinancing purposes but they should not exceed 70% of the utilization;  MSMEs must demonstrate a record of 0 unpaid installments and 0 bounced checks in the last 12 months (according to the Credit Registry of the CBT)  For loans eligible for refinancing, the following conditions must be met: a) MSMEs are deemed viable by the financial institutions after refinancing and will be able to make timely repayments; b) Only loans that started defaulting after December 31, 2010 are eligible for refinancing; c) Loan should not have already been subjected to any rescheduling or restructuring (unless such restructuring is subject to an action plan acceptable to the Bank); d) Refinanced loans must have tenure of at least 2 years; e) Refinancing of loans (i.e. the point at which they are approved by the credit committees of the PFIs) must be undertaken within 12 months of the effectiveness of the loan, or 31st December 2012, whichever is earlier.  Loans must comply with World Bank environmental and social safeguards requirements.  Facility is open to all sectors except f) Those on the World Bank‘s prohibited list37, g) Real estate promotion, h) Category A subprojects i) Subprojects that affect natural habitats or threaten endangered species; that cause involuntary resettlement; that cause deforestation; that are related to the safety of dams; that affect international waterways; or that take place in disputed areas. Eligible MSMEs MSMEs eligible for the credit loan:  Must have less than 6 million TD in aggregate outstanding SME credit (with any regulated Bank or Financial institution) These criteria may be subject to adjustment depending upon the take-up of the loan. 37 See Section F. (Environment) - 52 - Annex 2C: Detailed Project Description: Technical Assistance Component REGIONAL As the November 2010 report by the G20‟s Financial Inclusion Experts Group highlights, SME growth is affected by a range of constraints that are both financial and non-financial in nature. The World Bank and IFC bring a comprehensive set of technical assistance instruments and expertise at the legal/regulatory framework level as well as capacity building for financial institutions and SMEs to unblock MSME finance and to enable lower cost and lower risk financial service provision to MSMEs at a greater scale. Through coordination with donor and regional partners, we can leverage shared resources for technical assistance (TA) on a regional basis that would offer improved efficiency given the similarity in the challenges faced by MENA countries and shared learning. MSMEs also need assistance and services. Banks in MENA cite opacity of MSMEs as a main constraint second to financial infrastructure. Banks place the blame on MSMEs, citing the poor quality of loan proposals, in particular financial statements, and management capacity as primary reasons for their limited outreach. Given the heavy dependence of MSMEs on bank lending, as highlighted above, this is a significant constraint. However, MSMEs in the MENA region are reluctant to invest in training. Constrained by limited time, staff, and financial resources, smaller companies consider training costly and do not recognize its long term benefits. Technical assistance to SMEs in MENA would focus on providing linkages to new markets, technologies and investors. Provision of business development services through banks, training organizations and incubators is ongoing but need significant scaling up. Existing provision of technical assistance by the World Bank, IFC and partners in support of MSME Finance is not yet sufficiently comprehensive in content and coverage to ensure a positive enabling environment for MSME Finance, although much progress is being made. There are gains to be made through better coordination of technical assistance activities and resources, by organization at a regional level (economies of scale/efficiencies, ability to share lessons and models from across the region), and through additional funding. The MSME Facility aims to provide a well coordinated and comprehensive package of at least $20 million in technical assistance over 5 years, dependent on donor funding, in order to improve access to finance for micro, small and medium enterprises. This would be a strong complement to the MSME Facility financing through the APL, and the complementary financing by the IFC, KFW and others through the regional facilities. An MSME Facility Technical Assistance unit would be based in Cairo (potentially in the IFC Advisory Services or World Bank offices). This would initially be a virtual IFC-World Bank regional unit, to take advantage of existing IFC and World Bank capacity, office support, management, donor trust funds, projects, products, staff, and expertise. As donor funding is secured for the TA unit and component, the TA unit would strengthen its capacity to scale-up and broaden TA, and would potentially evolve to have a manager, earmarked resources, clear branding, and an appropriate governance structure such as a Steering Committee. This would be a strong complement to the $100 million expected to be provided through the APL, and the substantial further financing and guarantees anticipated through regional facilities set up by KFW and IFC. - 53 - Proposed Technical Assistance Activities  Theme 1: Support for policy reforms of the legal, regulatory and institutional framework for the financial and business sectors, to promote MSME Finance. Could include strengthening legal frameworks for: microfinance; credit information; secured transactions and leasing; banking regulation; corporate governance; the commercial code; environmental and social compliance; and private equity. Support may also be provided for impact monitoring capacity; risk management training for supervisors; and developing an enabling environment for Shari‘ah-compliant financing.  Theme 2: Strengthening financial institutions to enable them to increase financial intermediation. This includes providing advisory services for SME banking and micro finance, strengthening risk management and corporate governance practices, and sharing knowledge and best practices through workshops, seminars and training events.  Theme 3: Support for SMEs through entrepreneur networks, mentoring, business incubator- type services and links to investors. Broadening the range of services provided by business incubators and other partners in the region to include links to investors, new markets and technologies; as well as to scale incubator operations to reach a larger number of entrepreneurs. Link high potential entrepreneurs to mentoring, networks, and risk capital. Providing business training to small entrepreneurs using the IFC Business Edge product, and assisting banks to reach out to their SME clients through the use of the web-based IFC SME Toolkit. Operating Guidelines for the Technical Assistance component would include:  Technical Assistance would be consistent with the MSME Facility PDO.  The World Bank would take the lead in business development and execution of TA for policy and legal reforms for Theme 1, working with the IFC and partners such as the AfDB, while the IFC and World Bank would agree leads for financial infrastructure based on institutional expertise;  The IFC would take the lead for Theme 2, in coordination with KFW (SANAD Fund), AfDB and others; and  Partner organizations would be principal providers of services for Theme 3, such as InfoDev, IFC Advisory Services, Abraaj Capital, and Rising Tide.  Theme 1 TA would be informed by diagnostics such as FSAPs and FSAP modules, Doing Business reports, Corporate Governance surveys, the IFC‘s new ‗Abatement Curve‘ model, and Enterprise Surveys.  For Theme 1 (where possible) and for Theme 2, the program would employ a cost-sharing approach when funding projects, which is consistent with IFC‘s corporate pricing policy (at least 50% of cost is shared with the client).  TA engagements in high income countries, such as Saudi Arabia, Kuwait and Algeria, would be pursued on a full-cost reimbursement basis.  Reporting to development partners would be based on a common pre-determined format and approach to the extent feasible.  The IFC and World Bank are actively raising donor funds for the MSME Facility TA component. - 54 - Table: Regional Technical Assistance (TA) Needs In addition to Tunisia (which is the focus of the following section), a provisional list of MSME Finance technical assistance needs for several other APL eligible countries are set out below, based on an initial assessment with World Bank and IFC experts working on the region. COUNTRY Theme 1: Policy reforms of Theme 2: Strengthening Theme 3: MSME support legal, regulatory and financial institutions (FIs) to through mentoring, institutional framework enable increased financial entrepreneur networks, intermediation incubators & business development services Egypt  Regulatory framework for  Technical assistance to  Links to supply chain NBFIs (Issue licensing law NBFIs (capacity building, credit for MFIs, leasing and transformation when new  Risk capital investors and factoring companies) law in place) associated mentoring and  Microfinance regulations  Credit guarantee scheme market networks  Movable assets registry  Establishment of an  MSME Training  MFI Credit Reporting MSME Bank  SME Corporate  Leasing Legal Framework  TA for Banks to set-up Governance  MSME Steering and strengthen internal Committee SME Departments Jordan  Financial inclusion  Credit information and  Market research strategy use of transaction-lending  Technical services  Regulatory and techniques is limited for (supply chain mgmt) supervision framework for MSMEs, therefore  Tech center & incubation NBFIs assistance with credit network (innovation  Consumer protection ratings, revised MSME project)  Credit bureau support lending  JEDCO as potential  Collateral registry procedures/products partner  Consumer Protection  Use of technology to  Link with investor extend financial services networks Morocco38  Secured transactions  MSME products and  Link with investor framework process (including on networks, market access,  Equity investment in high environment) competitiveness potential SMEs Lebanon  Legal, policy reforms to  MSME products and  Technology center and attract SME investment procedures ( including incubation network  Secured transactions women in business) (innovation project) framework 38 The World Bank is currently preparing a Development Policy Loan and policy matrix, which may identify further priorities for technical assistance. - 55 - TUNISIA The policy and legal framework for MSME Finance in Tunisia needs reformed, and financial infrastructure developed. Microfinance operates with a patchwork legal framework at present, and a revised legal framework is being drafted with donor support. The Central Bank‘s credit registry suffers from limitations such as the lack of important information sources (credit card providers, non-regulated entities, MFIs) and the lack of detailed historical data. The framework for secured lending and for credit information sharing needs significant improvements. While the leasing legal framework is adequate, there is lack of awareness in the judicial system on leasing sector, which heightens transaction cost for leasing companies – e.g. in cases of contract enforcement, or in recognizing the distinction between financial ownership of an asset versus physical ownership etc. Absence of financial data, market data to help assess the risk of clients is a significant issue for leasing companies. A comprehensive financial inclusion strategy, with targets agreed with the private sector, and informed by diagnostics and market data, would need Government or Central Bank leadership, and could be an effective mechanism to focus public, private and civil society actors on achieving shared financial inclusion goals. Financial institution capacity in MSME Finance needs developed. Immediately following the crisis, financial institutions also need immediate assistance with management of non-performing loans, and may require strategy/product reviews as well as support on robust risk management frameworks to get back on track. The leading microfinance institution, ENDA, has 4 immediate technical assistance needs: 1) NPL management; 2) Strategy and product review; 3) Risk management; 4) Support in ‗transformation‘ to a NBFI/Bank. EIB would focus on NPL management and transformation support, while the IFC would focus on strategy review and risk management. IFC expects to start technical assistance for a strategy review in July 2011, followed by TA on risk management. At the MSME level, MSMEs could benefit from training on accounting, auditing and preparation of financial statements, as well as on technical skills; MSMEs could benefit from improved financial literacy which would allow them to better analyze and choose their financial options; high potential SMEs need to be linked to bridge capital and mentoring. Priority areas for technical assistance for Tunisia include:  Theme 1: Strengthening regulatory and institutional capacity for microfinance (regulatory framework in draft); strengthening CBT capacity to monitor banks (knowledge transfer on stress test methodology and policy recommendation regarding crisis management and banking restructuring); strengthening the regulatory environment of banks‘ corporate governance practices; support the development of a Financial Inclusion policy or strategy; movable asset registry, collateral law reform; credit bureau strengthening; leasing framework.  Theme 2: Loan restructuring and/or risk management training for banks, MFIs and leasing companies; strategy / product review and risk management support to ENDA - IFC Advisory Services; establishment of credit rating systems and credit scoring models for assessing - 56 - MSME risk for FIs including leasing companies; risk analysis training and capacity building for actuarial assessments for SOTUGAR; development of Information Management systems; sector analyses/ market studies to help financial institutions target MSMEs.  Theme 3: Enhance transparency of MSME financial reporting; Assistance to improve MSME creditworthiness, and to link high potential SMEs with investors; Support to MSME competitiveness. Technical assistance activities for Tunisia, dependent on donor funding, could include: Phase/Theme Need Funder /Lead Agency Est. Cost Year 1 Theme 1: Policy 1. Moveable assets registry/collateral law reform (priority) 1. WB/IFC Advisory 1. $250K Development, 2. Stress Testing for CBT (crisis-related) Services (AS) 2. $70K Regulatory Reforms, & 3. Capacity Building for CBT 2. WB 3. $100K Financial Infrastructure 4. Microfinance Legal & Regulatory Framework 3. EU 4. $300K 5. Improve the functioning of the PCR (could be in Year 1) 4. Government, with 5. $200K WB, AfDB, others 5. WB / IFC AS (CIC) Theme 2: Strategy 1. Strategy review and risk management framework for ENDA (crisis- 1. IFC/AfDB 1. $300K Development, Training, related) 2. Bankers‘ 2. $30K & Capacity Building for 2. Loan restructuring and/or risk management training (crisis-related) Association/IFC 3. $300K FIs 3. Help PFIs develop and operationalize credit rating/scoring models 3. IFC/Other 4. $250K for SMEs (priority) 4. IFC/Other 5. Tbc 4. Development of IT systems for PFIs (priority) 5. AfDB 6. Tbc 5. TA for PFIs (scope tbd) 6. AfDB 6. NPL Management (crisis related) Theme 3: Incubation, 1. Vocational training and business plan development for SMEs 1. InfoDev (tbc)/IFC 1. $500K Mentoring, Business 2. Training on the need for good financial statements and accounting 2. Tbd 2. Tbd Development Services, and auditing issues (priority) & Linkages to Risk Capital for MSMEs TOTAL $2-3 million Year 2-3 Theme 1: Policy 1. Ensure proper functioning of newly established private credit bureau 1. IFC AS (CIC)/WB 1. $100K- Development, 2. Legal Framework for Secured Lending and Insolvency (continued 2. IFC AS (CIC)/WB 150K Regulatory Reforms, & from Year 1) 3. WB/CGAP/ IFC AS 2. $250K Financial Infrastructure 3. Support for Financial Inclusion Policy (priority) 4. ANPE, MSMEs, FIs 3. $250K 4. Environmental compliance, awareness, monitoring, reporting 4. $75K Theme 2: Strategy 1. Developing MSME lending strategy 1. IFC 1. tbd Development, Training, 2. Client Segmentation 2. IFC 2. tbd & Capacity Building for 3. Standardization of products and processes (IT and MIS) 3. IFC 3. tbd FIs 4. TA for PFIs (scope tbd) 4. AfDB 4. tbd Theme 3: Incubation, 1. SICAR capacity-building (e.g. in financing ICT projects) 1. tbd 1. $200K Mentoring, Business 2. Strengthening and Scaling up Business Incubators and Chamber of 2. InfoDev, Other 2. $200K- Development Services, Commerce-type business support services 3. InfoDev, Private 400K & Linkages to Risk 3. Link SMEs to Growth Capital (mentoring, market linkages, linked to Investors, Networks 3. Tbd - Capital for MSMEs investment) investors TOTAL >$1.5million - 57 - Annex 3A: Implementation Arrangements: Regional APL The flow of funds for the APL structure is outlined below, for the line of credit (LOC) and contingent credit (risk sharing) components. For each country FIL under the APL structure, suitable implementing agencies would be selected, whether regional (the proposed IFC or KfW funds) or national (project implementation units, apexes, partial credit guarantee schemes). APL Structure and Flow of Funds COUNTRY 1. Credit Line IMPLEMENTING 1. Credit Line FINANCIAL LOANS component AGENCIES component 1. Onlending INSTITUIONS IBRD APL IFC SME Facility Banks, Leasing $100m Companies, MSMEs 2. Contingent National PIUs, 2. Contingent Microfinance 2. Lending AfDB Credit Apexes, PCG Credit institutions, from PFI ($50m) component: Schemes component: that meet resources drawdown guarantee eligibility criteria IsDB (tbd) triggered by SANAD Fund arrangements claims The contingent component of the FILs would finance the country‘s share of risk should it participate in regional or national guarantee/risk-sharing arrangements. IBRD will provide loans to countries which will back partial credit guarantees (PCGs) schemes granted by the IFC SME Facility, the KfW led SANAD Fund or a national guarantee institution to participating financial institutions (PFIs). The purpose of the guarantees provided by these institutions would be to compensate the PFIs for a certain pre-agreed percentage of their losses in case of defaults by MSME borrowers, thereby incentivizing the PFIs to undertake short and medium term lending to MSMEs. The PCGs offered by the Guarantee Institutions would be on a portfolio basis and would cover all eligible risks and be payable on first demand when loans are in default for a specified number of days, to be agreed, and where no loan recovery has taken place within this period. In the event of no repayments (net of expected loan recoveries) resulting from a default by the MSMEs, in the contingent loan component of the IBRD loan would be disbursed in order to pay validated claims from the PFIs under the PCGs up to a pre-agreed proportion. The balance of the loss would be borne by the PFIs and other third parties such as participating donors and other financial institutions. The IBRD contingent loan component could be utilized by borrowing governments to support their share of risk sharing in these PCG schemes backing either junior or senior tranches of lending by PFIs to MSMEs. The exact percentage of risk sharing would be based on a market assessment to determine the risk appetite of the banks in each country, and the design of the implementing guarantee agency or fund. The extent of risk sharing could therefore vary from country to country. The IFC MSME Facility support could be provided both in local currency and US dollars, and would be based on pre-determined lending criteria including lending caps with respect to each country. - 58 - The PFIs would pay risk premiums on the average outstanding covered portfolio, to reflect the risk profile of the PFIs and the guarantee agency. A diagram outlining how claims would be structured is below. APL Structure and Flow of Funds: Contingent Loan Component IBRD Contingent National Component Guarantee Funds PFI Payment Claims Claim Default Country A SANAD FUND MSMEs Payment Risk Sharing Country B Disbursement Lending IFC SME with PFI Country C Facility Guarantees Implementing Agencies for any Contingent Credit components under the regional APL Governments may prefer that a country intermediary acts as implementing agency and manages the line of credit or contingent credit components of the country FILs under the APL structure. Implementing agencies (PIEs or apexes), would be selected based on a capacity and performance assessment, including governance and management, systems, financial health, financial and performance track record, sustainability of loan portfolio and demonstrated commitment to good practice MSME finance. Selection criteria for the banks and other financial institutions that would receive financing through these agencies would be pre-agreed (as set out in Annex 2B), to ensure that financing is provided on market terms and consistent with good practices. IFC SME Facility for MENA – part of the MSME Facility Framework The proposed IFC-led SME Facility is expected to have a duration of 7-10 years, and to provide primarily risk sharing facilities to enhance the financial capacity of well managed local and regional private commercial banks and other financial institutions to enable them to provide financial services to MSMEs. The SME Facility may also provide funding facilities to banks/financial institutions, as needed, for SME working capital financing and the purchase of machinery and equipment to help SMEs to increase productivity, energy efficiency, modernize and expand. The Facility‟s objective would be to expand outreach and to assist banks and financial institutions to scale up SME lending on a sustainable basis. Its target size is expected to be up to US$500 million and it will be organized by IFC in collaboration with international financial institution (IFI) partners (participating in an IFI Senior tranche). IBRD participation through this proposed APL‘s contingent credit would be used to finance the government‘s risk share in the junior tranche (along with other donors, if any). Risk-sharing by the government, IFC and IFIs could provide capital relief and headroom to PFIs which would further assist them to expand their risk taking capacity in the SME sector. The junior and senior/IFI tranches could - 59 - also share up to 40% (exact percentage to be finalized) of the risks of a portfolio of SME loans by PFIs, inter alia, doubling the expected financial leverage. The balance of the 40% risk would be assumed by the PFIs. For each country targeted by the MENA SME Facility, IFC expects to establish distinct pools consisting of IFI senior tranche and government-supported junior tranche allocations to be backed by donor funds and (where Governments so choose) IBRD contingent loans. Joint MSME Facility missions have been conducted with the IFC in Jordan, Tunisia and Morocco to date. The SANAD Fund The SANAD Fund will be set up as an investment company (SICAV-SIF) in Luxembourg by KFW, for an unlimited duration with the purpose of offering and facilitating market based financing to participating financial institutions serving MSMEs in the MENA region. It will be managed by a private Fund Manager selected through a competitive bidding process called Finance In Motion who is in consortium with Oppenheim Asset Management Services. Finance In Motion has experience in complex Fund structures and has implemented and managed the well regarded MSME European Fund for South East Europe (EFSE). The SANAD Fund‟s initial target countries will be Egypt, Jordan, Lebanon, and Tunisia. The SANAD Fund‘s initial capitalization is expected to be US$ 150 million, with the issuance of C shares to be taken up by donors which will be fully subordinated to other investors, B Shares which will form the Mezzanine tranche to be taken up by IFC, KFW and other IFIs and A shares which will be subscribed to by senior debt providers. In addition to debt and equity lending, the SANAD Fund expects to provide a Guarantee Facility and technical assistance to the participating financial institutions. SANAD will make Partial Credit Guarantees through its Guarantee Facility to PFIs for onlending to MSMEs in the target countries. The Guarantee Facility will be made available to PFIs on a portfolio basis and the extent of PCG coverage would vary according to country requirements but is not expected to exceed 70%, in order to ensure some element of risk sharing for governance reasons, as well as to facilitate the capacity building of PFIs in the credit and risk analysis of the MSMEs as well as in the enforcement of collaterals and security packages. The SANAD Fund may have IBRD contingent loan component backing for these guarantees, within individual country caps agreed with each targeted borrowing country. The Guarantee Facility would be offered by the Fund on the basis of Investment Guidelines and Eligibility Criteria to be agreed with IBRD and the borrowing governments. The SANAD Fund would pay a guarantee fee to the borrowing governments for the IBRD support of the Guarantee Facility, but the governments would be responsible for repaying the loan, as usual for all IBRD loans, in the event disbursements are triggered by the Fund for payments of claims to PFIs. The governments would also be responsible for the payments of interest to IBRD on these loans, as usual for all IBRD loans. The Fund would package IBRD-backed guarantees with its lending and technical assistance to leverage the support from the Fund to the recipient countries, thereby enhancing its support to MSMEs in the region. The Fund is expected to achieve its initial Financial Closure by end-2011. - 60 - Annex 3B: Implementation Arrangements: APL 1 (Tunisia) The line of credit will be managed by the Central Bank of Tunisia (CBT), under the terms of an Execution Agreement agreed with the Borrower. The External Resources Department (DPDE) will provide the Project Implementing Entity (PIE) function, and will coordinate inputs from the Bank Supervision Department (DGSB). The External Resources Department of the CBT will host the Designated Account. The Central Bank will communicate the eligibility criteria to all the relevant financial institutions and seek letters of interest from the financial institutions. The External Resources Department does not have the capacity to assess financial institutions‟ compliance with the eligibility criteria, not for collating and consolidating reporting information required for the project. Hence this will be undertaken by the Bank Supervision Department, on behalf of the External Resources Department, which routinely regulates and supervises the financial institutions participating in this project. The Bank Supervision Department will assess the eligibility of each institution on the basis of mutually agreed criteria, while the External Resources Department will determine whether or not the portfolio of loans submitted by the institutions qualify. The line of credit is open to all public and private financial institutions that meet the criteria. Compliance with the eligibility criteria will be determined through a due diligence exercise for each interested institution. Based on this input from the Bank Supervision Department, and their own assessment of the eligibility of the MSME and sub-loans submitted the eligible PFIs, the Ministry of Finance will enter into loan agreements with the eligible PFIs, while the DPDE will make the necessary funds transfer on behalf of the Borrower. Each semester, the Bank Supervision Department will be responsible for collecting and consolidating the necessary monitoring data and information outlined in this document, and make this available to the World Bank via the DPDE. In a similar vein, we expect the DPDE to ensure that MSME borrowers financed by the line of credit have updated annual environmental clearances (through statements sent by the PFIs and special audits carried out by the external auditors of the PFIs). Banks and financial institutions already track ANPE clearance when the loan is initiated. They will require MSME borrowers financed by the line of credit to update this clearance annually. Training and Capacity Building The CBT is currently handling $367 million in a total of six credit lines though, so has proven capacity. However there are very limited external lines focused on rescheduling and refinancing on existing loans, hence the CBT and PFIs may need some assistance in determining loans eligible under the line of credit, as well as on aspects such as a) disbursement procedures, financial management requirements and procurement guidelines, b) screening for environmental compliance, and c) reporting on monitoring indicators and development outcome indicators. A short intensive training program will be provided to eligible PFIs as detailed in Annex 5 and the Project Operations Manual, funded by the World Bank (from Bank budget) and AfDB, as agreed with the CBT. - 61 - Future possible Contingent Credit component A new loan proposal (or a loan restructuring) could include a contingent credit component, which might be implemented by SOTUGAR, the partial credit guarantee scheme supported by the Tunisian Government. The team made an initial assessment of SOTUGAR‟s capacity to play the role of an implementing agency for a contingent credit component, during the preparation mission in April 2011. The team concluded that SOTUGAR currently does not meet the World Bank requirements to play this role. SOTUGAR is undertaking a modernization process. The team‟s initial assessment has concluded that SOTUGAR will have to significantly enhance its technical and human capacity to be considered as an implementing agency. At present, SOTUGAR issues guarantees to banks using a compliance based approach, instead of a risk based approach. There are five guarantee products that can be used for loans for specified sectors and purposes: Once a loan meets the pre-defined criteria, it becomes eligible to be covered by the fund at a flat fee. SOTUGAR currently lacks the adequate risk management capacity to evaluate the risk profile of individual loans and loan portfolios, and does not price its guarantees accordingly. Its current product offering is limited to certain sectors39, and continues to suffer from limited visibility within the banking sector. The management of SOTUGAR is aware of the shortcomings of the current structure and has initiated an ambitious modernization program aimed at improving the agency‟s functioning and capacity. Talks are being held to integrate SOTUGAR into the “El Moubadara” group, a new holding which will host BFPME and SOTUGAR under the same roof, a structure based on the French model of OSEO. OSEO has, in collaboration with the Agence Française de Developpement, already started to provide technical assistance to SOTUGAR to improve its underwriting process, but significant additional assistance will be needed to complete the modernization process. SOTUGAR would need to meet at a minimum the following requirements to be considered as a PIE for any future contingent credit component:  Improve risk management capacity: train or hire new staff on to appraise credit risk and introduce an adequate IT platform supporting this function.  Introduce risk-based pricing of guarantees: Guarantee fees are currently not linked to the risk profile of individual loans or loan portfolios, but are flat for specific loan categories (start-ups, etc.). It does not allow SOTUGAR to reward banks for sound credit appraisal and monitoring practices and may accentuate the problem of moral hazard. SOTGUAR will have to introduce a risk-based pricing method in order to reward PFIs with sound credit appraisal and monitoring systems. 39 Activities of the manufacturing industries annexed to the decree n° 94-492 of February 28, 1994, determining the lists of the activities depending of the sectors covered by articles 1,2,3 and 27 of the incentive investments code as modified and completed by the subsequent texts, Activities of computer sciences, services related to software production, services of research and development, services of study, counsel, assistance, maintenance services and repair of vehicles, environment, leisure, agricultural mechanization, Eligible Projects for the incentive plan for Innovation in Information Technology (RITI). - 62 -  Increase HR and financial capacity: At present, SOTUGAR has a very small team which processes a large number of transactions. While the current team size may be sufficient in light of the compliance based assessment, a risk-based analysis of loans will require more financial and human resources to process the current level of transactions. In addition, staff will have to be trained/hired to perform a risk-based analysis of loan request, requiring additional human and financial resources. FINANCIAL MANAGEMENT The project is designed to finance the needs of Micro, Small and Medium Enterprises (MSMEs) meeting eligibility criteria, by channeling funds through eligible Participating Financial Institutions (PFIs), including banks and leasing companies. The APL 1 (financial intermediary) loan to the Republic of Tunisia under the regional APL will consist of a line of credit component to be passed as subsidiary loans to PFIs that meet minimum eligibility requirements. The CBT will hold the designated accounts on behalf of the Borrower, and will be the implementing entity for the loan to the Republic of Tunisia. Two departments will be involved in implementing the project; the External Resources Department (DPDE), which would lead implementation of the line of credit, and the Bank Supervision Department (DGSB). Country Financial Management System The Bank‟s experience in Tunisia and the main conclusions of the 2010 PEFA indicate the legal and administrative framework for public financial management (PFM) is sound and offers a solid level of assurance regarding the reliability of information and a strong control environment; however the report also identified transparency and accountability failures. The particular PFM challenges raised by the PEFA, do not affect the project since the CBT operates as an entity autonomous from the Government public finance system. The Report on Standards and Codes on Accounting and Auditing for Tunisia (ROSC) was performed in 2004 and assessed positively the supervisory role of CBT, which ensures that audit scope of PFIs covers prudential standards ASSESSMENT OF THE FINANCIAL MANAGEMENT SYSTEM The Ministry of Finance will ensure that the CBT implements the project through the DPDE, with the support of the DGSB, in accordance with the Project Operations Manual and the Project Agreement. An assessment of the financial management system in place at CBT was carried out to determine if it complies with the Bank requirements for the project management in respect to the OP/BP10.02. The FM assessment concluded that financial management systems of CBT, as set out for this Project, satisfy the Bank‟s minimum requirements. The CBT will be the implementing entity (PIE) for the credit line, monitoring compliance with loan covenants and the use of the funds. The DPDE and the DGSB will be in charge of the project execution, providing day to day project management and ensuring coordination between the participating financial institutions involved in the project. - 63 - Law n° 58-90 of September 19, 1958 governs the creation and organization of the Central Bank of Tunisia, as modified by the law n°2006-26 of May 15, 2006 and the law n°2007-69 of December 27, 2007. The Central Bank of Tunisia's general assignment is to preserve price stability. In this respect CBT is notably in charge of:  Watching over the monetary policy ;  Controlling money in circulation and being watchful with respect to sound functioning of systems of payments as well as guaranteeing their soundness, efficiency and security ;  Supervising the lending institutions ;  Preserving both the stability and security of the financial system. In addition to the role of Banker to the Government and Banker to the banks, CBT is in charge of banking supervision, according to the Law n° 2001-65 of July 10, 2001 as modified by Law n° 2006-19 of May 2, 2006: (i) Financial Institutions provide the Central Bank with all documents, information, explanations and justifications necessary to the control of their situation. (ii) Financial Institutions‟ chartered auditors submit to the Central Bank, within six months following the end of the fiscal year, an annual audit report. (iii) Auditors are also required to inform the Central Bank of Tunisia of any fact which can jeopardize the financial institution‟s situation. Moreover, the CBT conducts onsite supervision missions to check the accuracy of reported information, assess the organization and the internal functioning of Financial Institutions. Internal control system The CBT is governed by (i) an Executive Board (ii) the Governor and (iii) a Deputy Governor. The CBT organization consists of 14 General Departments including the External Resources Department (DPDE) and the Bank Supervision Department (DGSB). These two Departments will be directly involved in the implementation arrangements of the Loan. The DPDE will lead the PIE function, managing the Designated Account, and informing the PFIs on eligibility criteria, while the DGSB will assess the PFIs compliance and monitor the reporting information. The internal control system set within the CBT guarantees the separation of the functions through several levels of independent controls. It is compliant with the country‘s regulation and has been deemed satisfactory by the Bank. PFIs involved in other Bank‘s project have adequate internal control procedures for the projects and these controls are documented in the information system. In addition, the PFIs have internal audit departments and the project related transactions will be subject to their regular reviews. The risk associated with internal controls and internal audit is low. - 64 - External control system CBT is subject to join statutory annual audit performed by two independent auditors. In addition the President of Republic of Tunisia can designate a commission to exercise any mission of control or investigation on the Central Bank. Accounting system The Central Bank of Tunisia‟s financial statements are prepared in conformity with the terms of law n°58-90 of September 19, 1958 governing its founding and organization (as modified in subsequent texts) and Tunisian accounting standards, taking into account the specific nature of the Central Bank‟s activities. Reporting CBT financial statements prepared at the end of each year include:  balance sheet,  statement of off balance sheet commitments,  income statement, and  financial statements notes. These financial statements with the audit reports are published in the Official Gazette. KPMG audited 2010 and 2009 financial statements and provided a clean opinion. FINANCIAL MANAGEMENT (FM) ARRANGEMENTS The key success factors for the project FM arrangements given the design and the different intermediaries are: (i) the defined mechanism for the flow of funds including what triggers transfer of funds to the intermediaries and the flow of information from and to CBT and Participating Financial Institutions (PFIs) (ii) the reporting and auditing requirements by the different levels of intermediaries. The FM arrangements for the line of credit -in particular on eligibility, reporting, auditing and disbursements - are jointly agreed with AfDB. Loan Administration An Execution Agreement will be signed between the Government of Tunisia and the CBT. The Ministry of Finance will provide loans to PFIs in accordance with PFIs agreements and the Operations Manual. The CBT will handle the loan administration by ensuring, during project implementation, that proceeds of the loan would finance PFIs that comply with eligibility criteria, for eligible sub-loans to eligible MSMEs (eligibility criteria set out in Annex 2B). Sub- loans could finance goods, works or services. Accounting and Reporting Requirements The PFIs will maintain financial management systems in accordance with accounting standards acceptable to the Bank. PFIs will maintain separate accounts for the use of funds under the project. PFIs will be responsible for the financial management of the funds allocated by the Ministry of Finance in the Agreement, and will account for the project funds transferred from the - 65 - CBT (on behalf of the Borrower) using their own accounting systems. CBT routinely ensures that PFIs do maintain adequate accounting standards40. PFIs are required to prepare and submit to DPDE, within 30 days of each semester, separate semi-annual Unaudited Interim Financial Reports (UIFR). The UIFRs will be prepared in accordance with Bank‟s guidelines. The format of UIFRs was agreed upon during negotiations. These reports must include: (i) a statement on sources and uses of funds for the reporting period and cumulative; (ii) a detailed statement of commitments and disbursement by MSME (sub- projects and sub-loans), and by donor (IBRD and AfDB), (iii) a reconciliation statement of the dedicated account. All participating PFIs will have their financial statements audited by independent auditors acceptable to the Bank, in accordance with consistently applied auditing standards acceptable to the Bank. The DPDE will prepare a consolidated UIFR which will be submitted to IBRD and AfDB within 45 days after the end of each semester. The consolidated UIFR will be submitted along with UIFRs prepared by each PFI. These UIFRs will be established in accordance with Bank‟s guidelines. The DPDE will maintain a financial management system and prepare financial statements in accordance with consistently applied accounting standards acceptable to the Bank, to reflect the operations, resources and expenditures related to the Project. The DPDE will produce annual Financial Statements of the Project (FSP) which will include a detailed statement of commitments and disbursement by MSME and by donor (IBRD and AFDB). External Audit The financial statements of the project will be audited annually by the auditors appointed by CBT and acceptable to the Bank. As a part of the project external audit, the auditors will audit the disbursements of the designated accounts maintained by CBT. The project audit report will be submitted to the IBRD and AfDB within 6 months from the end of each fiscal year. Currently all PFIs in Tunisia are audited by external auditors, in a way that is acceptable to the Central Bank. PFIs will submit their annual audit reports and the management letters on internal control procedures to DGSB for review and submission to the IBRD and AfDB within 6 months from the end of each fiscal year. PFIs audited financial statements will include Sub-projects and Sub-loans financed by the credit line. This requirement will be included in the agreement signed between PFIs and the MoF. The Credit Institutions Act requires the PFI auditors to communicate a detailed report on accounting aspects to the Central Bank of Tunisia. This obligation concerns aspects which could threaten the credit institution or applicants. The obligation of professional secrecy on auditors is outweighed by this Act so therefore the CBT has full access to this information. The Central Bank has defined the terms of reference of a detailed report of the external auditor in the note to banks no. 93/23 of 30 July 1993, which is by and large consistent with the 40 ROSC Accounting and Auditing- 2006 Report - 66 - recommendations of the Basel Committee on the Banking Supervision as well as with those of IFAC. Special Purpose Assignment In order to ensure that disbursements by PFIs are eligible, the Bank requires that the PIE contract a bi-annual special purpose audit:  Special purpose audits will ensure each semester that the sub-loans granted during this period by PFIs to MSMEs meet the eligibility criteria notified by the CBT as outlined in the Project Operations Manual. If the auditors determine that disbursements are used for ineligible expenditures, the amounts should be refunded to the relevant donor, i.e. IBRD and/or AfDB.  The special purpose audit of PFIs will also verify how many of the MSMEs have updated annual environmental clearances, for needed activities, from the ANPE (the national environmental agency).  The TORs of the special purpose audits will be included in the Project Operations Manual. Disbursement Arrangements and Flow of funds The Bank loan will finance 100% of the amounts disbursed by the PFIs for eligible sub-loans to MSMEs falling below TD 1.5 million. Disbursements will be made on the basis of Statement of Expenditures (SOEs) for sub-loans made by PFIs. In order to facilitate funds management and disbursement of eligible expenditure, each PFI will open a dedicated account for the project. The disbursements from the CBT to the PFIs will be done on the basis of a disbursement request. Supporting documents would be retained by the PFIs and will be available for review when requested by Bank supervision missions and project auditors. In order to further facilitate funds management and disbursement procedures of eligible expenditure, DPDE will open a segregated Designated Account at the Central Bank in Euro to cover Loan's share of eligible project expenditures. The Ceiling of the Designated Account would be Euro 10 million. The disbursement mechanism will be through the Designated Account. DPDE will be responsible for submitting quarterly replenishment applications along with Statement of Expenditures (SOEs) and in accordance to the procedures defined in the Disbursement Letter, and on the basis of AfDB procedures for the replenishment of the Special Account The PFIs have to justify the use of advances transferred by the CBT on behalf of the Borrower with new disbursement requests. If the PFIs do not apply for a new disbursement request, they must justify the utilization of advances at the end of every semester. If not, they must reimburse unjustified advances. - 67 - SOEs IBRD / AfDB Designated account CBT Replenishment request PFI Dedicated account Supporting Documents MSMEs MSME Bank A/C Flow of information PFIs will be responsible for approving the loans to MSMEs following their own loan screening procedures, after ensuring that the eligibility criteria specified by the Project Operations Manual are met. The procedures for screening by the PFIs of loan applications from MSMEs are determined by PFIs‟ policies and guidelines and subject to regulation and supervision by the Bank Supervision Department of the Central Bank. The Project Operations Manual will include among other: eligibility criteria for MSMEs and sub-projects, FM requirements for PFIs and MSMEs, roles and responsibilities, internal controls, conflict of interest, ongoing monitoring, risk assessment and management compliance with eligibility criteria for PFIs, disbursement arrangements, reporting and auditing requirements. The detailed flow of information will be further spelled out in the Operation Manual. The information and decision making process would be sequenced as follows: - 68 - Stage Actions Responsible Periodicity 1 The Central Bank will inform the Tunisian DPDE / DGSB Financial sector that a new credit line is being launched. This information would spell out the features of the loan, its disbursement modality; the eligibility criteria for MSMEs, and for MSME sub loans, and reporting requirements for PFIs. 2 The DGSB will inform the DPDE on the eligible DGSB Biannual PFIs through a positive list updated on a regular basis. 3 The Ministry of Finance will enter into a PFI Ministry of agreement with all eligible PFIs. Finance / PFIs 4 MSMEs submit their loan requests to eligible MSMEs PFIs. 5 PFIs submit their disbursement request to the PFI CBT for reimbursement/accounting for use of advance. This request will be supported by the list of MSMEs. 6 Eligible PFIs approve and make loans to MSMEs PFI based on eligibility criteria specified by the Project Operations Manual. 7 DPDE through the Designated Account/ Special DPDE Account will remit funds on behalf of the Borrower to PFIs in their dedicated accounts. 8 On quarterly basis, DPDE will prepare a DPDE withdrawal request to replenish the Designated / Special Account based on SOEs. 9 The IBRD and AfDB will replenish the IBRD / AfDB Designated / Special Account. 10 Auditors ensure every six months that sub-loans CBT/Auditors Biannual meet eligibility criteria set by the CBT‘s information to the PFIs, as outlined in Project Operations Manual. 11 DGSB informs DPDE of ineligible amounts (if DGSB / DPDE any). DPDE notifies IBRD and AfDB and requests the PFIs to reimburse non eligible financing. - 69 - Follow up and monitoring phase 1. The bi-annual special purpose audit ensuring the eligibility of disbursements will be sent to DPDE and DGSB along with the results measurement tables 2. Should the report flag an anomaly, the DPDE would then notify the IBRD, and will request the concerned PFI for a reimbursement of the funds that have been unduly utilized. 3. The DGSB would send the results measurement table to the DPDE, which would transmit consolidated reporting to the Bank every six months. Risk assessment Given the satisfactory capacity of the CBT and the nature of the project with multi intermediaries, at different levels, the overall FM risk has been assessed as “Moderate” before mitigation and low after mitigation measures which are (i) Rigorous eligibility criteria for PFIs with respect to prudential norms and experience with MSMEs, (ii) prepare a Project Operations Manual for the project and (iv) give a special purpose assignment to auditors at the PFI level to ensure each semester that the sub-loans granted by PFIs to MSMEs meet the Bank eligibility criteria. In depth supervision will be conducted for the non compliant PFIs to assess its eligibility to Bank criteria. Planning of Supervision Project supervision will be performed in different phases. Initially, the project financial management specialist will provide close support (at least semi-annually) to CBT and PFIs during the first phases of implementation and thereafter will conduct annually two supervision missions for the project. The semi-annual UIFRs for the Project and the financial audit reports will be reviewed on a timely basis by the Bank. During the Bank‟s supervision missions, the Project‟s financial management and disbursement arrangements will be reviewed to ensure continuing adequacy of FM arrangements. In addition Bank supervision missions will visit a sample of MSME beneficiaries. Retroactive Financing A number of eligible sub-loans to MSMEs may be ready before loan signing, expected during the third quarter of 2011. The amount available for retroactive financing is Euro 13.92 million, up to a total of 40% of the line of credit (an exception to the 20% limit was obtained on June 7, 2011). The date of retroactive financing is applicable as of March 31, 2011 until the Signing of the Loan Agreement. The first audit of the project should cover the expenditures retroactively financed, and any PFI requesting more than 5 million USD retroactive financing would have the proposed MSME sub loans checked by the auditor. - 70 - POTENTIAL CONTINGENT CREDIT COMPONENT – FM ASSESSMENT If a contingent credit component is introduced for a subsequent loan, then SOTUGAR (Société Tunisienne de Garanties - the Tunisian Guarantee Company) is a potential option for financing under that component. SOTUGAR is a limited liability company created in June 2003. It is a public interest company meant to reinforce the mechanisms set up for the development and promotion of the SMEs during the most decisive phases of their life (creation, development, innovation and restructuring). SOTUGAR is under the supervision of the Ministry of Finance; it is a neutral and open institution and having its financial autonomous. It has large shareholding financial partners. Its authorized capital is held to a total value of 37% by the State and 63% by the banks and is managed by a Board of Directors. SOTUGAR would use a similar approach of verification against the listed eligibility criteria as well as helping to collect and provide consolidated reporting on institutional and loan performance as per the agreed framework listed in Annex 1. The FM capacity and the FM arrangements for a potential future contingent credit component were assessed during project preparation and it was concluded that SOTUGAR would first need to put in place a number of conditions in order to meet the requirements to handle the FM aspects in compliance with the Bank‟s fiduciary requirements, and a subsequent FM assessment would be needed to confirm eligibility. The FM assessment of SOTUGAR is summarized below: Internal control system The internal control system set up within SOTUGAR guarantees the separation of the functions through several levels of independent controls. SOTUGAR has adequate internal control procedures for the projects and these controls are documented in the information system. However SOTUGAR is lacking:  An internal audit department,  An application software to monitor projects which it guarantees. External control system The financial statements of SOTUGAR are subject to an annual external audit. The auditors are members of the Tunisian Institute of Certified Public Accountants. The auditor issued a qualified opinion for 2009 financial statements and raised the following internal control weaknesses:  Lack of exhaustive information regarding the loans granted by FI to their clients and that are under SOTUGAR guaranty.  Absence of justification of certain clients accounts  Lack of procedures manual and formal chart of organization SOTUGAR has put in place an action plan during last year to address these observations. Accounting system and reporting - 71 - SOTUGAR applies the accrual basis accounting method as required by the Accounting System for Enterprises promulgated by Law 96-112 of December 1, 1996. Its financial statements are prepared by December 31 of each fiscal year and include the following: a statement of account balances; an income statement, a statement of treasury flows; and financial statement notes. Risk assessment The FM capacity and the FM arrangements of the second contingent credit component were assessed during project preparation and it was concluded that SOTUGAR need to put in place a number of actions in order to meet the requirements to handle the FM aspects of this component in compliance with the Bank‟s fiduciary requirements. More specifically, SOTUGAR still lacks:  A sufficient number of financial and accounting staff to carry out the financial management activities and control expenditures eligibility or funding under the project.  An internal audit department;  An adequate accounting software to provide timely financial statements; To mitigate these risks, the following actions should be taken:  Recruitment of a financial and accounting staff;  Creation of an effective internal audit department;  Put in place an adequate accounting software ; Summary of actions to be implemented before SOTUGAR could be eligible for any future contingent credit component:  Design and implement an Operational Manual acceptable for the Bank  Agree on Subsidiary Loan Agreement content between SOTUGAR and PFIs  Agree on Auditors TOR  Recruitment of a financial and accounting staff and an internal auditor at SOTUGAR level  Acquisition of an adequate accounting software A future contingent credit component could also be financed through the proposed IFC SME Facility for MENA, or the proposed KfW-led SANAD Fund. The IFC Facility is expected to be designed as a debt facility to provide primarily risk sharing facilities to assist well managed commercial banks and other financial institutions to channel lending to SMEs. Its target size is expected to be between Euro 75-100 million and will be managed by IFC through the establishment of Trust Funds and/or collaboration agreements with partners. A FM assessment would have to be performed on this Fund to ensure that it meets minimum FM requirements. The SANAD Fund is being set up by KFW as an investment company (SICAV-SIF) in Luxembourg for an unlimited duration with the purpose of offering and facilitating market based financing to participating financial institutions serving MSMEs in the MENA region. It will be managed by a private Fund Manager selected through a competitive bidding process called „Finance In Motion‟ who is in consortium with Oppenheim Asset Management Services. The SANAD Fund‟s initial capitalization is expected to be US$ 150 million. In addition to debt and - 72 - equity lending, it expects to provide a Guarantee Facility which could be backed by an IBRD contingent loan on behalf of the borrowing governments. An FM assessment would also have to be performed on this Fund to ensure that it meets minimum FM requirements. PROCUREMENT Assuming that the proceeds of the loan will be used only for on-lending operations, then there is no procurement involved, except when the beneficiary MSMEs use Bank-financed funds from the proposed MSME Finance Facility for procuring goods, works or services. In this case, paragraph 3.13 of the Procurement Guidelines applies, which allows for established private sector or commercial practices to be followed. In these cases of three-tier lending arrangements, the Bank will review the Operation Manual and/or the proposed lending agreements that would be used by the intermediary microfinance institutions and banks, to ensure that they describe the procurement practices that would need to be followed by the ultimate recipients of these loans for procuring goods, works or services, and that such practices are acceptable. Any consultant services required for the Project that are financed out of the proceeds of the Loan would be procured in accordance with the requirements set forth or referred to in Sections I and IV of the Consultant Guidelines. The Project Operations Manual shall also describe the basic guiding principles and acceptable procedures applicable to the loan. These principles shall, inter alia, include:  Mandatory provisions that beneficiaries of the loan shall not award contracts to their parent or affiliate companies unless there is an established arms-length arrangement.  The documentation shall define the main responsibilities of financial intermediary institutions and entities (or of their designated agencies) such as: (a) Assessing the capacity of the beneficiaries to carry out procurement efficiently; (b) Approving acceptable plans for the procurement of goods, works, and non-consulting services, and the selection of consultants as may be applicable; (c) Agreeing to supervision and oversight arrangements under each sub-loan (consistently with the provisions under the Bank loan) for the procurement to be carried out by the beneficiaries so as to ensure compliance with the agreed private sector methods and commercial practices under the sub-loans; and (d) Maintaining all relevant records for the Bank‟s post review and audits when requested (e) The financial intermediary institution or entity (or its designated agency) should satisfy itself with the reasonableness of the price of contracts awarded by the beneficiaries in the particular market through the hiring of an independent entity or auditors, if necessary. Given the demand-driven nature of the project, it will not be necessary to prepare Procurement Plans as required per paragraph 1.18 of the Guidelines. ENVIRONMENTAL AND SOCIAL (INCLUDING SAFEGUARDS) A “Master Framework” has been prepared to screen all sub project loans and ensure that they are in compliance with donor and national environmental and social laws, regulations and policies. - 73 - Given the scale of the MSME Facility, and the diversity of agencies involved, a negative list would prohibit certain sub projects in order to ensure compliance. Initial training in screening sub project loans would be provided to PFIs to ensure that PFIs finance only environmentally and socially sustainable sub projects, and to ensure that negative impacts of sub projects are adequately avoided, reduced or mitigated. Tunisia, as the first recipient of MSME Facility loans, would track the number of sub projects in compliance with national environmental laws and Bank safeguards as part of its main monitoring activity. Independent annual evaluations, including of cumulative impacts attributable to sub projects under the Facility, would be carried out. The sub projects under the Facility are unlikely to give rise to environmental and social risks of great magnitude; most will be on a limited scale. However, an independent annual evaluation of cumulative impacts would be carried out, and would provide guidance for additional activities, if required. MONITORING & EVALUATION The Results Measurement Framework developed in Annex 1 aims to provide a comprehensive set of M&E indicators for all activities that may be undertaken by the regional facility. The purpose of such a framework is to provide a single, comprehensive set that may then be broadly adapted to specific country program (as in Tunisia) as the APL progresses and more countries come on board. This will ensure that similar data is being collected across all the countries participating in the APL and thereby will facilitate cross-country referencing and collation of information. In Tunisia, the data necessary for monitoring outcomes and results will be provided by the participating Banks and Financial Institutions directly to the Central Bank‟s Bank Supervision Unit. The CBT‟s Bank Supervision Department will verify the data and then collate it for presentation to the World Bank in the specified formats (see Annex 1A). The data required may be broadly classified into the following categories:  Data on the loans financed from the line of credit specifically – these can easily tracked by the Banks and financial institutions.  Data on the financial performance of the participating Banks and financial institutions – the Central Bank‟s Supervision Department usually collects this data from the institutions in themselves and so would be in the best position to verify this.  Data on the outreach of the participating institutions to the target group overall – this is also routinely collected by the Banks. While the exact processes and capacity relative to the IT systems of the participating financial institutions may vary, the indicators are simply designed and are closely integrated with the broad policy objectives of the government – i.e. tracking loans made in interior regions etc. - 74 -  Data on the development outcomes of the financing: effects on employment and the environment. The data on employment and environmental clearances is routinely tracked by the BFPME (dedicated public sector SME bank that co-finances loans with other public and private commercial banks). These are the aspect where PFIs may face some difficulties – i.e. in tracking how many of the line of credit borrowers have updated annual environmental clearances, and the employment generated by age, gender and total. This is also only the case where the PFIs have not used BFPME as the co-financier. Nevertheless, these are basic priorities in MSME Finance for the Government of Tunisia, the region as a whole and World Bank and its partners, and hence the additional focus on collecting this data is important. The data will have important signals for adjusting project implementation:  First, the up-take of the line of credit by the participating institutions will signal the Bank program‟s competitiveness in the current environment.  Second, it will also help the Bank and its partners determine whether to introduce a risk sharing component for a subsequent loan (or restructuring), and if so then the balance with the line of credit in terms of funds allocation. It will also help the Government and the Bank assess whether additional financing through the APL structure is needed.  Third, the data on financial performance of the institutions overall and their MSME portfolio will help target institution-specific TA through the regional or country level TA facility, and also give an indication of the volume of support that will be necessary. This will also be needed to ensure continued application of the Bank‟s eligibility criteria, and to determine when and how the line of credit allocation to different institutions needs to be adjusted.  Last but not least, it is also important to know the development effects of the MSME portfolio in terms of jobs, regional development, exports and the environment. This is necessary for not just project reporting and information but to plan the design of further assistance in the country. - 75 - Annex 3C: Implementation Arrangements: Technical Assistance component REGIONAL TECHNICAL ASSISTANCE Technical assistance would be funded by donors through a proposed new World Bank trust fund, and through existing IFC trust funds, as well as directly. It would leverage resources from, and work in partnership with, donors and regional partners,41 as well as country level partners.42 AfDB has indicated strong interest in financing technical assistance under the MSME Facility framework in Tunisia, and potentially also for Egypt and Morocco. Initial funding proposals have been made to the FIRST Initiative and to JICA for technical assistance funding, and a range of potential donors have been briefed on the Technical Assistance component and its funding needs, including AFD and the EU. Funding from the UK Department for International Development (DFID) is also in design, to support Islamic MSME Finance through the MSME Facility Technical Assistance component. This would be in partnership with the Islamic Development Bank, DFID and CGAP. The EIB has indicated that it would apply for funding for the technical assistance component of the MSME Facility if it finances the proposed IFC MSME Facility, from EC funds such as the Neighbourhood Investment Facility. The MSME Facility Technical Assistance unit would be structured in line with donor and government support. Until sufficient funding is received, this will initially be a virtual unit which uses existing World Bank, IFC and partner staff, consultants, infrastructure and arrangements. As funding is secured, the unit could be formalized and capacity strengthened, with the option of an assigned manager, earmarked resources and clear branding. A potential, or indicative, future structure is outlined in the figure below. The structure outlined would be located in Cairo in order to leverage both IFC and World Bank expertise in the MENA region efficiently through a regional hub. In addition, IFC has amassed considerable fundraising expertise in the MENA region, and would be well placed to raise funds for the TA window through the regional hub in Cairo. The World Bank and the IFC have agreed to initially assign staff to coordinate this effort, and have agreed the following starting principles for the joint TA unit:  IFC‘s central point of contact would be the Access to Finance regional business line leader, who will work with the regional IFC leads for SME Banking, MFI, and Financial Infrastructure.  The IFC will assign their senior donor coordination officer based in Cairo to conduct the fundraising effort for the TA unit.  The Bank leads will be the regional TTL for the MSME facility and the country financial sector leads.  The Bank would contribute a small allocation of World Bank budget, if available, as seed money to hire a consultant to coordinate and set up the unit.  Consultants will be brought in for specific TA and advisor tasks (as determined by need and funding availability). 41 Potential regional partners: World Bank (FIRST Initiative, InfoDev), IFC, CGAP, KfW, DFID, Islamic Development Bank, African Development Bank, Abraaj Capital, SANAD. 42 Potential country level partners: For example in Tunisia: JICA, AFD (Groupe Agence Française de Développement), Pépinières d‘Entreprises, Centres d‘Affaire. In Jordan, JEDCO is a strong potential partner. - 76 -  Secondments from partner organizations (e.g. AfDB, IsDB) would be invited to support the unit. Potential TA Unit Structure WBG institutions and Other Donors: KfW, DFID, Other regional/local partners: affiliates (WB, IFC, FIRST, Islamic Development Bank, JICA, JEDCO, Abraaj Fund Financing of up to $20 mn infoDev, CGAP) African Development Bank Policy and technical Steering committee (TBD) guidance (WB, IFC, donors, regional and MENA MSME Technical government representatives) Assistance Unit (MMTAU) Coordination IFC SME Fund Functions Categories of Service Business Development: Theme 1: Legal, regulatory, Identify new projects across institutional reform region that are consistent with facility’s PDO Execution of Technical Theme 2: Capacity building for Assistance leveraging wider WBG FIs and MFIs and donor/partners expertise Donor Reporting based on a Theme 3: SME support and common pre-determined support of business incubators reporting approach that mentor SMEs Fundraising from development partners - 77 - TUNISIA TECHNICAL ASSISTANCE The African Development Bank intends to provide grant funding through existing trust fund mechanisms available for technical assistance, both through their public sector financing window (related to policy and regulatory environment, theme 1) and the private sector window (PFI level and enterprise level TA, theme 2). Separate TA financing proposals are being submitted for the public and private sector components due to the use of different grant financing mechanisms. Capacity building support for Theme 2 from the AfDB is anticipated to be in the region of US$ 600,000, and may be available after a 3-4 month application process. Additional grant funding is expected for the policy and regulatory framework level activities. The AfDB intends to secure grant funding from its Middle Income Country Trust Fund and other vehicles at the regional level (for Morocco, Egypt and Tunisia) too. Agence Francaise de Developpment (AFD) and JICA have expressed strong interest in funding the TA component. AFD already has TA programs at the MSME level on mentoring, setting up entrepreneurial networks, and business services. The EIB would access EC grant funds for MSME Facility technical assistance if it joins the IFC SME Facility as a co-investor. IFC Advisory Services (Cairo Office) has begun to mobilize TA funding at the regional level for the MSME Facility, including for Tunisia. The World Bank, and IFC Advisory Services, are well placed to provide technical assistance at all levels. The World Bank would coordinate technical assistance at the policy and legal framework level, while the IFC has the capacity to provide advisory services to financial institutions and SMEs. Both have capacity to support financial infrastructure improvements. The AfDB funding modalities will in partly determine the selection of TA providers though, and Requests for Proposals may be needed for AfDB‘s TA financing from its Private Sector window, for consultant TA providers. Potential implementing agencies for the TA component in Tunisia include the Central Bank‘s training institute, the Banker‘s Association training institute and a number of private sector institutions. The Central Bank‘s training institute has capacity to guide on monetary policy of central bank, international best practices etc, and is willing to conduct seminars and sensitization sessions for Theme 1 of the TA window. The Bankers Training Institute is a credible option for coordinating TA operations that are aimed at enhancing the PFI level capacity (Theme 2) – especially those related to risk management, NPL management and developing credit scoring models. The Institute can identify and coordinate expert consultants and trainers. This institute was established in 1961 and is now transforming into an academy of finance. It trains 2,000-3,000 people annually and maintains a database of professional trainers. While it currently caters only to banks, management expressed willingness during discussions to open training to all financial institutions, including investment companies (SICARs), which have financial activities. They are also willing to prepare customized training, for instance, catering to SMEs. The institute has reasonably good infrastructure (lecture halls, classrooms etc) which could help facilitate the training. Discussions revealed that SOTUGAR, the partial credit guarantee scheme, considers the Bankers Training Institute a suitable candidate to train SOTUGAR employees too. The Bankers Association could - 78 - also be a useful forum to undertake further stakeholder discussions and seek inputs from financial institutions on the legal and policy actions that may be supported by the project. For the enterprise level TA (Theme 3), the Chamber of Commerce is already actively involved in MSME support activities across Tunisia and could be utilized as the implementing agency. The Institut Arabe des Chefs d‘Entreprises, a think tank/business association, also provides training to private sector staff and executives, but primarily caters to corporates, and not specifically to SMEs. - 79 - Annex 3D: Implementation Arrangements: Support to high potential growth SMEs Partnerships with IFC Advisory Services, InfoDev (a World Bank Group trust fund supporting business incubators, SME business services and access to capital), Abraaj Capital, investor networks (such as Oasis 500), and with successful Arab Diaspora entrepreneur initiatives (such as Global Technology and Innovation Partners and Plug and Play Technology Center) are being developed through the MSME Facility to provide start-up and growth SMEs with access to equity finance, know-how and advice. There is significant potential for facilitating this access in the fields of technology, green industries, mobile banking and e-health. InfoDev is a multi-donor program to support SMEs, that is housed in the Financial and Private Sector Development Department of the World Bank Group. infoDev has promoted the start-up and growth of innovative SMEs in developing countries through business incubation since 2001. It has accumulated a wealth of knowledge about how to best design, implement and scale intermediary organizations that deliver services to SMEs to help reduce the cost and risk of starting a new venture, increase the skills-level of entrepreneurs, and link them to financing and markets. infoDev has codified this knowledge into a state-of-the art training curriculum for incubator managers and stakeholders. 300 locally owned and operated business incubators throughout the developing world participate in infoDev‘s network (www.idisc.net). In MENA 21 incubators in 12 countries participate, collectively representing 1500 SMEs. The incubators‘ members are often SMEs are small innovative companies with good potential to scale and to create new jobs. The MSME Facility will seek to leverage infoDev‘s know-how and networks to increase SME competitiveness, and help expand infoDev‘s presence in the Region by scaling intermediary organizations and expanding their service offerings. The World Bank is initiating a „Supporting SMEs and Business Start-ups through Innovation Systems‟ technical assistance project under the MSME Facility framework. This seeks to link ICT entrepreneurs in Lebanon, Jordan and Syria with investors and to create mentoring relationships for them. These initiatives have links with potential investors from the Arab Diaspora, such as TechWadi 100, the International Network of Lebanese Entrepreneurs and Technologists (INLET), Women in Information Technology (WIT), the French Lebanese IT Professionals Association and the Oasis500 in Jordan. Another new World Bank project under the MSME Facility framework is the ‗Accelerating of Information and Communications Technology (ICT) and ICT-enabled SMEs‘ project, that has been requested by Lebanon. Abraaj Capital, the leading private equity provider in the MENA region, is rolling out a $500 million Growth Capital Fund (Riyada Enterprise Development (―RED‖)) for MENA, with capital pre-allocated for each of the MSME Facility focus countries. RED seeks to invest in high impact MSMEs, including through microfinance institutions, and thereby directly increase access to sophisticated finance for MSMEs and by example to inspire incremental investment in these segments. Alongside this Fund, Abraaj are making a range of business services available for high potential SMEs and start-ups, including mentoring services, business information, and market contacts. Abraaj Capital and the World Bank are exploring mechanisms for cooperation under the MSME Facility. This could involve: i) coordinating efforts in support of extending access for - 80 - entrepreneurs and MSMEs to education, mentoring, entrepreneur networks, investment, and market information; ii) making World Bank data (such as enterprise surveys, bank surveys, and other non-confidential information) accessible to entrepreneurs through entrepreneur-focused websites such as www.wamda.com, and iii) linking entrepreneurs in business incubators to sources of equity capital and also mentoring. IFC Advisory Services: Business training to small entrepreneurs using the IFC Business Edge product and SME tool-kit will help enhance the capacity of MSME managements to build knowledge of and enhance their capacity to develop and present to financial institutions business plans and apply for financing, which includes training on issues such as inventory and cash management, accounting and auditing, marketing, market research and segmentation. - 81 - Annex 4 Operational Risk Assessment Framework (ORAF) Appraisal and Post Appraisal Package Version43 Project Development Objective(s) PDO for the Regional APL: The objective of the World Bank’s Regional MSME Finance Adaptable Program Loan is to improve access to finance for micro, small and medium enterprises in the MENA region. The proposed APL structure would be applied at country level through financial intermediary loans, to directly increase resources available for MSME lending through participating financial institutions. The lending is expected to have a multiplied impact due to the revolving nature of loan portfolios, and to leverage risk-sharing mechanisms. Policy lending and technical assistance would help remove policy, legal, capacity, and other non-financial constraints to MSME Finance. PDO for the Tunisia Country FIL (first loan of the Regional APL): The objective of the Tunisia country loan is to improve access to finance for MSMEs in Tunisia, including through enabling previously creditworthy MSMEs to maintain access to credit. PDO Level Results For the MSME Facility: Indicators: At least 4 MENA countries make policy, legal or financial infrastructure reforms to promote access to finance for MSMEs, which are recommended by World Bank Group policy lending or technical assistance. Partnerships developed with at least 2 providers of business services and/or equity financing to high potential or start-up SMEs. For the Regional APL: $50 million additional IBRD lending or guarantees for MSME Finance in the MENA region within 5 years. At least 2 MENA countries borrowing from this APL, within 3 years. Participating financial institutions increase their MSME Finance portfolio and the number of new Micro and SME borrowers during the APL period. (Targets will be set at the country level). At least 5 MENA countries make policy, legal or financial infrastructure reforms to promote access to finance for MSMEs, which are recommended by World Bank Group policy lending or technical assistance as part of the wider MSME Facility. For APL 1 (Tunisia): PFIs increase their MSME Finance portfolio by at least 20% within 5 years, and PFIs increase the Number of new MSME borrowers by 10% within 5 years. 43 This is the version that should be used for Appraisal stage for Track 2 as well as for seeking clearance by management for Track 1 to move forward with negotiations. - 82 - Status C= completed O = ongoing NYD = Not yet Due Risk Risk Rating N/A = Not Risk Category Rating Explanation Risk Description Proposed Mitigation Measure Applicable 1. Project Stakeholder Risks Regional Regional: Egypt and Tunisia currently have interim Approval is being sought now for the regional governments. Other potential borrowing APL, so that the Bank can respond quickly to countries have changed ministers recently changing political circumstances – for example and may do so again in the short-medium a newly established Government that wants to term. immediately support SME economic activity. Regional: There is a risk that no Governments may decide not to borrow in If sufficient donor funding is available then governments apart order to participate in the regional APL, this would be an option. A clear case will be from Tunisia will and may instead wish to only take presented to potential borrowing Governments Regional: 1.1 Stakeholder; decide to borrow advantage of the technical assistance about the merits of borrowing from the High Government from the regional component. regional APL though. On-going APL. Tunisia: Tunisia Tunisia: High Tunisia: Interim Tunisia currently has an interim  Fast track preparation while interim Government government. There is considerable political government is in place. therefore potential uncertainty as the interim government may  Strong ownership and commitment from political instability. not last beyond 3-4 months or till the end of the Central Bank and relevant Ministries. this year. Once the constitutional committee finalizes the new constitution  Implementation Unit is located within the (may be up to 2 years), elections for a new Central Bank. CB Governor is appointed government will be held. for a 6-year term (see oversight below). The mandate of the current Governor will end in 2017. Regional: There are a number of donors operating Regional: Donor competition  Close cooperation in design with KfW lines of credit in eligible borrowing 1.2 Stakeholder: medium and tension (MOU agreed), IFC, JICA, EIB, AFD and countries. In Tunisia JICA, EIB, AfDB, Donors undermine project others. On-going AFD, Italian, KFW, all have grant-funded Tunisia: preparation and  Regional funds (IFC, KFW-led) offer a technical assistance. medium implementation. well coordinated financing mechanism with other donors. - 83 - Tunisia:  Joint project design with AfDB, and parallel financing.  Design intends to be complementary/gap- filling. E.g.: loan refinancing not included in other credit lines. Regional: Clear communication and transparency of the eligibility criteria. The eligibility criteria are open, with all Regional: Banks that do not financial institutions considered. However High meet eligibility Tunisia: 1.3 Stakeholders: the eligibility criteria are set in line with criteria could lobby  Central Bank would issue the criteria as a Not yet due Banks good practice, so some institutions will be Tunisia: against the project fax. excluded. State banks may have some High  Criteria are aligned with and formulated in influence with Government. close cooperation with the Central Bank and AfDB, WB guidelines and benchmarks. Regional and Tunisia:  Focuses on priorities of public – finance to smaller enterprises, and employment.  Avoids financing the elite.  Tunisia: Consultation has been conducted Regional and Tunisia: with MSME sector, and loan would help Regional: potential meet the immediate needs for financing for misinterpretation Given political uncertainty and any mistrust support. of World Bank of international agencies, there could also  Limited fiscal impact of the loan. The Regional: lending. be a contrary perception that the Bank is Government can repay the loan and the 2.4 Stakeholder: Medium over indebting a country. loan cost through the on-lending General Public Tunisia: potential Ongoing arrangement with PFIs. Tunisia: for misinterpretation High of World Bank loan Questions have been raised in the media  Tunisia: Relatively small loan compared at this time. about the impact of past debt from the to the financial sector‘s demand for World Bank and other IFIs e.g. in Egypt financing, in order to test demand and and Tunisia. performance, and can be increased through the MSME Facility structure later.  Tunisia: Equal AfDB participation and inclusion of other donors. - 84 - 2. Operating Environment Risks Regional: Regional: Approval is being sought now for the regional Current political instability in the MENA APL, so that the Bank can respond quickly to region leads to short term risks but also changing political circumstances – for example Current and near- opportunities. a newly established Government that wants to term anticipated Regional: political instability immediately support SME economic activity. Tunisia: 2.1 Country Risk: High could affect the Currently has an interim government and Tunisia: Politics and demand for country On-going there is considerable political uncertainty. Governance Tunisia: loans (regional), and  Fast track approval, with anticipated The interim government may not last High the effectiveness effectiveness July-September 2011. beyond 3-4 months or till the end of 2011. and disbursement of  Design focuses on common priorities for Once the constitutional committee finalizes the country loans. all parties: jobs and regional development the new constitution (may be up to 2 years), elections for a new government will be  Implementation Unit is located within the held. Central Bank. The CB Governor is appointed for a 6-year term. Tunisia: While the current law on association includes restrictive and discretionary Tunisia: provisions, it is being revised and The Government is taking critical steps to supported by the WB DPL. In the empower civil society. It expects to: meantime, the Ministry of Interior is  Revise the law on association to simplify approving all new associations. Tunisia: the establishment of new associations and Despite recent remove possible discretion from the Advocacy and user associations are very 2.1 Country Risk: Tunisia: critical changes, the administration. limited and/ or new and thus their capacity Civil Society Capacity Medium country has virtually  Establish a new law on public access to to fulfill this mission is still limited. no civil society information and statistics to foster public capacity yet. debate and transparency. Participation in policy formulation and execution is limited for above mentioned  The press code is currently under revision reasons. to remove restrictive and discretionary provisions. The media is free since the revolution on January 14 and the dismantling of the ministry of information. Tunisia: Tunisia: Tunisia: High national Strong environmental regulations and 2.1 Country Risk: Tunisia: Include a strict negative list of controversial standards policies in place. National attention to Ongoing Environment Low projects Limited sub-project environmental issues is high due to Reinforce capacity of PFIs to screen projects. scope significant reliance on tourism. Proximity - 85 - to European Union is motivation for strong environmental capacity. Tunisia: Tunisia: Given the important economic ties Libya Renewed political has with Tunisia, the protraction of the instability and risks Libyan crisis could have an additional and to macroeconomic sizeable impact on Tunisia in terms of outlook that could reduced exports (Libya represents more result from spillover than 6 percent of Tunisia‘s total exports in from the Libyan goods), FDI and remittances (both 10 The loan refinancing option would only be crisis percent of Tunisia‘s total inflows), as well open for 12 months, in case the economic 2.1 Country Risk: as an additional negative impact on downturn proved to be protracted rather than Tunisia: Downward risk to Economic tourism. Also, the number of Tunisians temporary. Not yet due Medium the macroeconomic Management returning home escaping from Libya will outlook linked to the cause additional strain to the budget Technical assistance would improve the effectiveness of the resources as they will be in need of housing capacity of regulators and of PFIs to manage economic stimulus. and social assistance. risk. Both the above Lower than expected economic growth and could restrict additional pressure in the labor market demand and supply could lead to renewed social tensions and a of MSME Finance. reinforced sense of lack of economic opportunities. Tunisia: Tunisia: Tunisia: Procurement: The PFM risk pre-revolution was assessed as Procurement: Control practices by lending current control low, and no signals that this has institutions have been assessed and found procedures do not deteriorated. acceptable. In addition, the Operations Manual include procurement and/or a model agreement between the lending of goods and The Tunisian Public Finance system is intermediary and the end beneficiary will spell services. governed by an elaborate legal and out the guiding principles and acceptable Tunisia: regulatory framework that offers reliability 2.1: Country Risk: procedures applicable to the loan. Medium - Financial and transparency of safeguards. Overall, it Fiduciary Management Low Management: can be considered to present low budgetary Financial Management: Control and audit Current country and financing risk factors. There is a full practices have been assessed by the Public level financial panoply of audit arrangements in place Expenditure and Financial accountability management (internal and external) ensuring effective Assessment in 2010 and this found country procedures audits of the public sector. public financial, control and audit considered to be arrangements to be sufficient. reliable and present Contracts/ Procurement: The beneficiary low financing risk. borrowers will not use the loan proceeds in - 86 - an efficient way and for the intended purpose. Tunisia: Tunisia: According to the law, the Central Bank The project has both a development (new Tunisia: must ensure low inflation and financial MSME loans) and stability aspect (refinancing The current central sector stability while supporting economic of existing MSME loans). The project design 2.2 Institutional Risk bank Governor Tunisia: development. There is a risk that the newly will assist the financial sector maintain prudent Ownership and and/or the future Not yet due Medium appointed governor, if the economic MSME lending during any financial sector Commitment Government lacks situation continues to deteriorate, puts more difficulties. commitment to a emphasis on financial stability actions at The borrower (MOF) and PIE (the central shared strategy. the expense of his support to the bank) have a track record of supporting MSME development aspects in the project. development. Regional:  If regional facilities are not favored by the Regional: borrowing government, national The IFC and KfW regional facilities for implementing agencies would need to MSME finance, when set-up, will be strong have sufficient capacity and to follow potential implementation agents/partners, good practices. although governments may prefer to  The TA component will support Regional: finance through national agencies. improvements in financial institution implementing capacity and products for MSME Finance. agencies for APL Banks in MENA often use outdated or lack capacity. inappropriate SME finance techniques. Tunisia: Banks are introducing SME finance units,  A Project Operations Manual would Regional: Regional: but there is still some way to go in outline processes, roles and Medium 2.2 Institutional Risk: PFIs lack capacity to sufficient capacity being built. responsibilities between both units of the Not yet due Institutional Capacity serve MSMEs CBT and will help reduce this aspect of Tunisia: Tunisia: institutional risk. Medium Tunisia: The CBT has a 30-year track record of  Training and TA is being offered for both PIE lacks capacity donor loan implementation (in financial CBT officials and PFIs on managing management) and has capacity to project implementation including on PFIs lack capacity to implement a WB loan. verification of eligibility criteria, financial serve MSMEs. management, monitoring and Most Banks and financial institutions lend environmental issues. to SMEs using outdated credit  TA focused on client segmentation, credit methodologies. There is an over-reliance on risk modeling and rating systems, and mortgage collateral, and a limited use of IT/MIS systems for MSME portfolio of credit rating systems. the PFIs will improve their capacity to meet MSME financing needs (donor dependent). - 87 -  TA should also support improved financial infrastructure to underpin improved MSME lending techniques. Tunisia: Tunisia: There is significant policy support from the Tunisia: Depending on the outcome of the next prior and current interim Government for The future election, the new government may de- MSME lending. The Minister of Finance and government may prioritize support and development of Central Bank Governor are strongly change policy MSMEs or change policy to MSME supportive. The prior government has put in toward SMEs. finance that affects project sustainability. 2.2 Institutional Risk: Tunisia: place various program aiming at helping Ongoing Policy Medium SMEs. Banks and PFIs may PFIs that are committed to lending to the not find the credit smaller enterprise segments may focus on All Tunisian banks have introduced SME line attractive more secure segment (mainly loans to the Finance Units. The commitment would also be State, State Owned Entities and large generated as a result of training and greater corporate) should the economy deteriorate institutional capacity for better risk assessment further. and measuring of SME portfolio. Tunisia: Tunisia: Tunisia: The government or To increase its anti-cyclical response to the  The CBT intends to enforce a Corporate CBT may favor economic downturn, the Government and Governance Circular in order to improve some PFIs and the CBT may want to channel most of the transparency and monitoring capacity in 2.2 Institutional Risk: enhance the access funding through State-owned banks. Tunisia: the Tunisian banks. Fraud and Corruption to the loan for them. Ongoing Medium  Eligibility Criteria will prevent unsuitable (Laurent) PFIs may utilize the PFIs being selected for financing loan to finance Persistent weaknesses in PFIs corporate clients/operations governance may lead the Bank‘s loan being  Central Bank conducts independent audit, than those targeted channeled toward non viable SMEs. as well as the external auditors (notably on by the Bank‘s loan. related lending). 3. Implementing Agency Risks (including FM & PR Risks): Medium Tunisia: Tunisia: Tunisia: Lack of PIE skills The central bank PIE has a long track  A Project Operations Manual is being and knowledge to record of managing external credit lines finalized, which details the conduct project and is respected within the banking sector. implementation arrangements related to reporting and Most external credit lines have had, this loan, including on monitoring 3.1 Capacity Tunisia: monitoring activities however, very limited reporting and requirements. Ongoing Medium monitoring requirements. Under the  Close monitoring (based on project Links of central proposed structure, the central bank would reports) and supervision of central bank‘s bank to PFIs have more responsibilities, which include implementation of PIE role and its reporting and monitoring of PFIs. There is application of the agreed criteria Procurement: The a risk that PIE staff may not immediately  Capacity building may be provided to the - 88 - current control have the adequate knowledge and skills to PFIs on environmental fiduciary and procedures do not effectively conduct the reporting and reporting requirements. cover procurement monitoring activities required under the  The central bank PIE will report to the of goods and project. WB on a regular basis on banks‘ services. eligibility. The central bank PIE may have a preference for state owned banks, with Procurement: Control practices by lending which there are ties (the head of the bank institutions have been assessed and found supervision department is on the board of acceptable. In addition, the Project Operations BFPME while all CEOs of most State- Manual will spell out the guiding principles Owned Banks are prior CBT staff). They and acceptable procurement procedures may be more reluctant to strictly enforce applicable to the loan. the eligibility criteria towards state owned banks. Contracts/ Procurement: The beneficiary borrowers will not use the loan proceeds in an efficient way and for the intended purpose. Tunisia: Tunisia: Accountability and Oversight, Behavior Accountability and Oversight, Behavior and Political inference in and Norms: Norms: 3.1 Governance Tunisia: central bank -Central bank may be vulnerable to -Central Bank Governor has operational Not yet due Low decision-making political influence, but Governor has independence (including from Board), and operational independence and central bank central bank is financially independent is financially independent. Tunisia:  Project Operations Manual sets out clearly the eligibility criteria Tunisia:  Training for the central bank on the Transparency and Controls: financial management requirements before Tunisia: potential CBT does not choose eligible PFIs and effectiveness 3.2 Fraud & for fraud and beneficiaries appropriately. Tunisia:  Central bank has independent external Corruption corruption at CBT does not have adequate resources to Not yet due Low audits to verify the appropriate application implementing supervise the eligible PFIs and provide agency reports to the WB and AfDB. of eligibility criteria every 6 months.  CBT to ensure staff and auditors adequately supervise financial institutions using the line of credit - 89 - 4. Project Risks Regional: Complexity of having a regional structure Regional: Regional: that is applicable to different country Complexity of Regional: contexts  Only 2 components of APL: line of credit Project Design and Medium and contingent credit, to avoid complexity. Regional Nature 4.1 Design Option of regional funds (IFC, KFW) and  APL structure has sufficient flexibility for Not yet due Tunisia: national agencies as implementing tailoring regional structure to country Tunisia: Complexity Low agencies. contexts. of Regional Project Design  Standard selection criteria and role for Tunisia: straightforward project design, implementing agencies. with a line of credit only at this stage. Residual Environmental risk: Sub projects are -Risk of Archaeological finds Environmental: 4.2 Social & generally small. -Capacity to measure cumulative impacts -Preparation of ESMS at/for Appraisal Environmental Low Ongoing Exclusion list - Exclusion list includes natural habitats, - Training to PFIs to ensure pre-screening for specified. forests, dams and legal safeguards such as exclusion list projects as needed. international waterways, etc. Regional:  The approach is to set-up a TA trust fund at the regional level, through which donors could earmark funds for specific countries. Regional: Regional:  A joint WB-IFC approach should prove Planned Technical Assistance activities Donor funding for more effective in raising donor funding, as may be limited in scope if donor funding is TA not yet firm each institution has different contacts and limited. Very few donors profile. Existing IFC Advisory Services Donors tend not to fund for the MENA Regional: operate at a regional trust funds could mobilize donor funding. 4.4 Program and region but rather for countries or other High (MENA) level The IFC plans to assign their senior donor Donor Risk: regional groupings such as Africa region, or coordination officer based in Cairo to head Ongoing Donor Collaboration European neighborhood.. Tunisia: Tunisia: the fundraising effort for the TA window. Low Potential lack of  Promising early funding discussions with Tunisia: donor coordination IsDB, EIB, others. Donors may not come through with TA and focus funding. Tunisia:  AFD, JICA and AfDB may fund TA, and AfDB is initiating internal funding application processes, as is JICA.  The team will continue to engage these and other potential donors. - 90 -  Regional & Tunisia: joint design of the Regional: Regional & Tunisia: Regional & Tunisia: regional TA unit with the IFC, and joint 4.5 Program and Medium Need for parallel Need for good collaboration on the scope TA mission conducted for Tunisia Donor Risk: collaboration with and timing of parallel donor TA activities,  Tunisia: harmonized AfDB-WB results Ongoing Donor Delivery Tunisia: multiple donor TA if if funding occurs. framework and eligibility criteria for the Medium funding occurs project. Donor coordination with others e.g. AFD, EU, is reasonably good Tunisia: Tunisia: The Central Bank governor is strongly Tunisia: Change in CBT‘s committed to enhance SME finance. The Bank has a wider financial sector dialogue commitment based Nevertheless, given the political instability with the Tunisian central bank and ministry of on political and and based on financial sector performance, finance, including a planned FSAP and other country and there may be changes in the political Financial Sector DPL, which promotes a sector level changes. environment that affects the operations of market-based/good practice approach to the Central Bank and therefore the loan. financial sector regulation. Risk that there is a Managing lines of credit is routine for the 4.6 Delivery Quality: policy change that External Resources Department. For the Tunisia: The TA component will aid improvements to Sustainability caps interest rates, Bank Supervision Department, experience Ongoing Medium the enabling environment, PFI capacity, and or imposes in managing this loan will build on their MSME creditworthiness, that will make restrictions on SME current capacity and can easily be sustained MSME Finance more viable and attractive to lending that affect beyond the project for other financial sector PFIs, and therefore more sustainable. financial operations. sustainability beyond the life of While OP8.30 can help ensure that the line the project. of credit does not distort market interest rates, there may be changes beyond the life of the project that affect financial viability of SME lending. Tunisia: Tunisia: Tunisia: Low- Many of the financial indicators on PFIs are  Keeping indicators tracked to a minimum Medium already being tracked by the Bank but including relevant financial and non- Tunisia: Supervision Department. Both the Bank financial information. The PIE or Banks supervision Department and ANPE have  Transparency with all participating Banks 4.7 Delivery Quality: may not want to significant capacity to ensure adequate and financial and non-financial and Measurability fully comply with consolidation of reporting. reporting requirements. reporting  Development of specific reporting requirements. PFIs may not be interested in reporting all templates. of the data as they are not used to routinely  Common reporting framework for AfDB tracking non-financial information. But and World Bank for the financing. reporting on jobs, regional development,  Reporting to development partners for the - 91 - exports and environmental compliance are TA window would also be based on a useful for CBT and policy makers. common reporting approach (broad framework is proposed). Design was based on careful analysis of  data provided by some of the banks. A standard template was used to collect this information, and this was used to set baselines and targets. IT systems of the FIs are in different stages of development. 4.9 Delivery Quality: Contract Management A - Proposed Rating before Decision Meeting44: Risk Rating: Risk Rating: Project Team Preparation Implementation Date Comments Overall Risk Regional: High High 5/5/11 Tunisia: High High B - Review by IL Risk Team for Decision Meeting: Risk Rating: Risk Rating: Risk Team Preparation Implementation Date Comments Overall Risk H H 5/11/11 ILRT agrees with the above ratings proposed by the task team. Final Decision Meeting Rating: Risk Rating: Risk Rating: Appraisal Decision Chair Preparation Implementation Date Comments Overall Risk H H 5/24/11 44 For Track II Operations only. - 92 - Annex 5: Implementation Support Plan The Implementation Support Plan proposed below describes how the World Bank, IFC and other partners will support the implementation of the risk mitigation measures and provide the technical advice necessary to facilitate the achieving of the PDO. I. Strategy and Approach The strategy and approach for the Implementation Support Plan is based on:  Strong coordination between WB, IFC and other partners. The project is jointly designed with AfDB; and with close coordination with KfW (MOU agreed in draft), IFC, JICA, EIB and others. The World Bank and IFC bring a comprehensive set of financing and technical assistance instruments and expertise to unblock MSME finance and to enable lower cost and lower risk financial service provision to MSMEs at a greater scale. Through coordination with donor and regional partners, we can better leverage shared resources on a regional basis that would offer improved efficiency and shared learning.  Building the capacity of implementing partners – the CBT PIE in the case of Tunisia - and also PFIs.  Ensuring a transparent approach to selection of PFIs and MSMEs, in line with international good practices for MSME Finance  Sensitivity to price distortion. Technical assistance guidelines take note of the potential distortion of a level playing field through the differing pricing policies of the World Bank and IFC with regard to advisory services. As a mitigating factor, for Theme 2, the program would employ a cost-sharing approach when funding projects, which is consistent with IFC‘s corporate pricing policy and will also evoke stronger client ownership. In addition, TA engagements in high income countries, such as Saudi Arabia, Kuwait and Algeria, would be pursued on a full-cost reimbursement basis  Clear communications and transparency. Given the risk of renewed political uncertainty, clear communications and transparency is critical to the success of the project and its continuity in the face of potential shifts in political structures. The World Bank and partners will be open and transparent with client counterparts on options, feasibility, and uncertainties involved. II. Implementation Support Plan The Implementation Support Plan will be based on the following: The fiduciary assessment of the Central Bank PIE (External Resources and Bank Supervision Department) concluded that it was capable to manage the Program and was already familiar with donors‘ financial management procurement procedures, but that its capacity will need to be enhanced and reinforced given the volume of funding they are currently managing is limited. - 93 - The CBT plans to reinforce its capacity to ensure adequate management of the project. An intensive 1-3 day training program will be offered (financed by the World Bank and AfDB) to ensure that there is adequate knowledge among CBT officials and the PFIs on the project- specific reporting requirements related to eligibility criteria, results monitoring and reporting, financial management and environmental compliance. If needed, and subject to CBT agreement, an advisor may be retained to answer questions as and when they arise. The Environmental and Social Management System is acceptable to the AfDB and IBRD and this is included in the Operation Manual. The PFIs will be responsible for ensuring appropriate pre-screening for environmental clearances, and this will be periodically verified by the external auditor. In order to ensure that disbursements to PFIs are eligible, auditors will check each semester that the sub-loans granted during this period by PFIs to MSMEs meet the Bank eligibility criteria set out by the CBT‘s initial information as outlined in the Project Operations Manual. If the auditors determine that disbursements are used for ineligible expenditures, the amounts should be refunded to the relevant donor, i.e. IBRD and/or AfDB. Time Focus Skills Needed Resource Partner Role Estimate First 12 Launch of the line of credit to Selection of PFIs 1-3 day AfDB and IBRD months provide quick disbursement to Financial training to share cost of the PFIs and from there on to the Management program training eligible SMEs. Procurement Determining Training to both CBT and PFIs portfolio of loans on eligible for i) Eligibility criteria coverage ii) Financial Management and Results reporting Procurement ii) Environmental screening iii) Reporting requirements 12-48 Adequate reporting and Review reporting Refresher ½ For contingent months replenishment of the Special data, audit report day training training, to be account for new PFIs financed by IBRD Re-evaluate TA needs based Training for on additional scope or based any new on up-take capacity needs III. Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments (estimated) (estimated) Environmental Specialist 2-4 staff weeks for One trip each:  Semi-annual Financial Management training before effectiveness supervision by specialist 10-12 staff weeks for (FM + Env + results financial Results reporting team supervision (5-6 + eligibility criteria) management staff for 1 week twice a  Semi-annual year) supervision missions jointly with AfDB. - 94 - IV. Partners Name Institution/Country Role Ministry of Planning and Government of Tunisia Counterpart for the project and partner International Cooperation in identifying and preparing the project. Ministry of Finance Government of Tunisia Counterpart Borrower. Loan Agreements with PFIs. Central Bank of Tunisia Central Bank of Tunisia Project Implementing Entity African Development Bank - Project partner: Parallel financing for the loan. - 95 - Annex 6: Team Composition World Bank staff and consultants who worked on the project: Name Title Unit Douglas Pearce Sr. Private Sector Development MNSFP Specialist and Task Team Leader (MSME Facility) Laurent Gonnet Sr. Financial Sector Specialist and Task MNSFP Team Leader (Tunisia) Teymour Abdel-Aziz Economist MNSFP Deepa Chakrapani Senior Financial Sector Specialist FPDPD Farida Mazhar Consultant/Lead Financial Officer FEU Khaleel Ahmed Chief Investment Officer CFGME Gabi Ben Afram Sr. Financial Sector Specialist SASFP Ben Fisher Consultant OPCIL Jean-Charles de Daruvar Senior Counsel LEGEM Julie Rieger Counsel LEGEM Fiorella Delpino Fernandez Counsel LEGCF Ximena Talero Chief Counsel LEGCF Irina Kichigina Chief Counsel LEGEM Tracy Hart Sr Environmental Specialist MNSEN Nicolas Kotschoubey Consultant, Environment MNSEN Hassine Hedda Finance Officer CTRFC Sara Al Rowais Operations Analyst SASFP Shanthi Divakaran Program Officer FPDST Slaheddine Ben-Halima Consultant, Procurement MNAPR Akram El-Shorbagi Senior Financial Specialist MNAFM Anas El-Mikias Senior Financial Specialist MNAFM Moez Makhlouf FM Consultant Colin S. Scott Lead Specialist MNSSO Soukeyna Kane Senior Financial Specialist MNAFM Steve Wan Yan Lun Operations Analyst MNSFP Daniela Marotta Country Economist MNSPR Lili Mottaghi Economist MNACE - 96 - Annex 7: Economic and Financial Analysis 1. Expanding SME Access to Finance: Background A large body of literature provides robust evidence that financial development and access to financial services lead not only to income growth, but also to poverty reduction, better health, education, and gender equality outcomes 45. The empirical finance and growth literature has been motivated by a recurring observation that small and medium size enterprises in many developing countries face significant financing constraints. Without access to credit, individuals and firms, especially SMEs, have to rely on their own savings or on those of persons around them to generate or expand their productive or market-related activities. A World Bank Enterprise Survey of over 50,000 firms in more than 70 countries highlights that SMEs rank access to finance as one of their top constraints to growth. These studies have shown how financial development allows enterprises to overcome financing constraints with positive repercussions for investment, innovation and economic growth. Other impact evaluations of relaxing credit constraints to small and medium firms in the South Asia and Latin America regions have documented such firm growth, increased productivity and investment that, ―if it is the medium-sized firms that are constrained, the productivity loss due to the misallocation of capital caused by credit constraints may be potentially very large: indeed, we argue that it may be large enough to explain the entire productivity gap between India and the US.‖46 . Relaxing liquidity constraints seems to improve firms‘ and a country‘s growth. Access to finance for SMEs in Tunisia is below what is predicted by Tunisia‟s GDP per capita level and the size of its financial sector. In 2009, the World Bank has carried out a comprehensive study on SMEs access to finance in Tunisia which spells out the various obstacles, both from the demand and the supply side, which prevent Tunisian financial system from achieving greater performance. The four main outcomes of this study are as follow: (i) Among 19 potential constraints to firms‘ growth, Tunisian firms consider cost and access to finance as the first and third most constraining obstacles. Compared with the other countries, Tunisia ranks fairly high in terms of enterprises‘ perception of this constraint. 45 See, for example, the World Bank report ―Finance for all – Policies and Pitfalls in Expanding Access,‖ 2007, or the 2005 study ―Reaching out: Access to and use of banking services across countries‖ (World Bank Policy Research Paper number 3754). 46 Bannered, Abhijit V., and Esther Duflo (2008), ―Do Firms want to borrow more? Testing Credit Constraints using a Directed Lending Program‖ - 97 - % of Firms Identifying Access of Finance as a Major Constraint 60 50 40 30 20 10 0 Sources: IACE and ITCEQ (2003-2007) (ii) Tunisian SMEs consider banks‘ collateral requirements to be the chief obstacle blocking access to bank credit. On average, banks require collateral worth up to 167 percent of the loan granted. In the MENA region, Tunisia is the country where the collateral value is the highest. This situation is likely to improve with the launching of the ―El Moubadara Group‖ (from the merger of the SOTUGAR and the BFPME). Collaterals‟ value in % of the loans granted 250 200 150 100 50 0 Sources: IACE and ITCEQ (2003-2007) (iii)On the supply side, the banking sector needs encouragement to expand its SME finance. The proportion of SME lending to total lending in Tunisia is only 15 percent. Alternative sources of external funding are increasingly available for SMEs though (namely venture capital, leasing and factoring). Introduced 30 years ago in Tunisia, leasing has been growing steadily. Total leasing assets to GDP amounts to - 98 - 1.6 percent (compared to 2 percent in Morocco where leasing was introduced more recently and France -1.7 percent- or Germany -2.4 percent- benefiting from a leasing industry established a long time ago). Various institutional and demand constraints limit Tunisian firms access to primary and alternative stock market. Venture capital does not fully play its role since most of the VC entities are banks‘ subsidiaries seeking for tax exemptions (and therefore behaving like banks). 2. Significant economic benefits expected to be derived from this project Political Economy: Benefits to Different Actors in the Economy The Project‘s expected benefits can be measured among various actors in the economy:  Benefits to Government: This operation is aimed at maintaining financial intermediation capacity at a time when the banking sector is reducing its financing to the economy. Bolstering access to finance to MSMEs will help smooth the negative impact of the economic slowdown. Additionally, by supporting the activity of MSMEs, the Government would expect better fiscal revenues.  Benefits to the PFIs, include: (a) access to long-term funding to finance inter alia refinanced loans and therefore help close asset/liability maturity gaps; (b) extend new loans for existing profitable MSME and therefore maintain a certain level of revenues (interest and fees); (c) access to new clients and (d) portfolio diversification (away from retail and large corporate).  Benefits to the MSMEs. This will mainly include (a) access to credit in difficult times and (b) opportunities to refinance more MSME loans, thus increasing the number of MSMEs likely to survive until the rebound of the economic growth.  Benefits to the public at large include the maintaining of employment as a result of MSMEs able to weather the crisis. Economic and social benefits For this project, the economic and social benefits are expected to be the following:  Job generation and economic growth. The project is expected to enable participating financial institutions to diversify their lending away from the current focus on large businesses or public sector entities. Literature has established that this shift is particularly important as MSMEs are an important engine of growth and job generation. In Tunisia, the MSME sector indeed constitutes 87 percent of the total number of enterprises (MSME are almost 98%) and the vast majority of employment.  Improved Access to Finance will translate into increased productivity, investment and firm growth. The benefits are not only to firms. In fact, a significant body of research points to a close link between inclusive financial systems, rapid growth and better income distribution.  Increased access to finance may lead to less informality. Since access to bank credit typically requires compliance with tax and employment legislation, firms are more likely to incur such formalization costs once bank credit is more widely available at lower cost. It is found that - 99 - formalization rates increase with financial deepening, especially in sectors where firms are typically more dependent on external finance. 3. Costs and Benefits of this Project This section attempts to present a cost benefit analysis which is mostly qualitative. Conducting a standard net present value and internal rate of return analysis for the project is not straightforward. Many of the benefits are not easy to quantify, other than making broad estimates of the increases in systemic liquidity, credit and the ensuing benefits. Cost of Line of Credit (LOC) Of the project‘s components, only the LOC to Tunisia (US$50 million equivalent) and its directly associated technical assistance to financial institutions (to be financed by AfDB) are susceptible to meaningful NPV analysis. The beneficiaries of the LOC and associated technical assistance are the financial institutions. The costs of the project are for the LOC component. As shown in the excel sheet, the NPV and IRR of the LOC are both positive at $306,287.94 and 15.89 percent, respectively. This means that the project may have its desired effect of demonstrating to risk-averse banks that MSME portfolios can be profitable. The costs of the project for the LOC component include:  the cost for the financial institutions of borrowing LOC funds; plus,  overhead costs  the cost of the technical assistance itself (which will be mostly in the form of grants);  the cost of capital required to support the on-lent loan portfolios of the financial institutions;  the costs of provisions on MSME lending using LOC funds. Benefits to PFIs An NPV and IRR analysis show the quantitative benefits that PFIs could derive from the project. The benefits that can be quantified in order to conduct an NPV analysis are those that arise from the substitution of increased amounts of credit for informal borrowing, producing a one-for-one increase in borrower incomes. Further benefits, such as the positive impact on incomes from the ability to finance new economic activities and improvements in the supply and pricing of inputs could be substantial but cannot be estimated. - 100 - Net Present Value and Internal Rate of Return Analysis Item (US$) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 LOC on Lending (Avg. balance) 15,000,000 15,000,000 20,000,000 -15,000,000 -15,000,000 -20,000,000 Overhead costs 1.00% -150000 -300000 -500000 -500000 -500000 -350000 -200000 0 Cost to PFI of TA -1,000,000 -1,000,000 -1,000,000 LOC Cost of Funds to PFI 4.40% -660000 -1320000 -2200000 -2200000 -2200000 -1540000 -880000 0 Avg. Rate on LOC onlending 11.50% 1725000 3450000 5750000 5750000 5750000 4025000 2300000 0 Credit Losses on LOC on-lending 4.00% -600000 -1200000 -2000000 -2000000 -2000000 -1400000 -800000 0 Provision Costs 0.50% -75000 -150000 -250000 -250000 -250000 -175000 -100000 0 Net Benefit/Cost -760000 -520000 -200000 800000 800000 560000 320000 0 Discount Rate 9.00% NPV $306,287.94 IRR 15.89% Assumptions: 1. There is a average 66 months repayment from PFI to GoT, made at the beginning of each year 2. 9% discount rate based on WB calculations 3. 4.4% discount rate for LOC Cost to PFI (TMM + Margin) 4. Credit Losses of 4% is based on discussions with banks at appraisal 5. Minimum 0.5% Provision Costs 6. Overhead costs are based on an Assessment of the Banking System conducted during project preparation 7. The total cost of TA to PFIs of US$3 million equivalent is based on AfDB estimates. . Benefits to SMEs Expected benefits of the LOC for MSME borrowers are high because of the substantial difference between LOC on-lent finance and MSMEs alternative sources of financing, (the informal sector or not borrowing). LOC funds are expected to be on-lent to MSMEs at rates in the range of 0-15 percent per annum, whereas borrowing the same funds informally carries interest rates in the 20 to 100 percent range. The major benefit to MSME is expected to be increased profitability for MSMEs, which should result from the ability to borrow at a lower cost to expand their businesses. However, that potential is very difficult to quantify. The direct benefit derived by MSMEs from the LOC consists of the amount of funds on lent (US$50 million equivalent) times the annual average reduction in interest costs (10 to 80 percentage points – i.e. US$5 million to US$22.8 million per annum). - 101 - Annex 8: Country and MSME Finance Sector Figures, Tables Figure 1. Short term prospects of oil importers in North Africa (percentage point change relative to January forecasts) 0.5 0.0 2010 2011 2012 -0.5 -1.0 -1.5 -2.0 Fiscal balance, % of GDP -2.5 Current account balance, % of GDP -3.0 Growth, % -3.5 Source: World Bank data, Egypt, Tunisia and Morocco Figure 2 Youth unemployment remains high in MENA 30 25 20 15 10 5 0 North Middle SA LAC World Sub South East Asia Africa East Saharan Asia Africa Source: ILO, KILM net (2008) - 102 - Figure 3. …with low participation rates particularly among women, % EAP SSA ECA LAC SA total female MENA 0 20 40 60 80 100 Source: World Bank data (2008) Figure 4: MSMEs as Employers 100 90 80 70 60 50 40 30 20 10 0 Sources: Government Databases - 103 - Table 1. MSMEs as a Proportion of Total Enterprises (Formal Sector) Size Breakdown Country (% of all MSMEs) Micro Small Medium Bahrain 78.3 13.0 8.7 Egypt 98.1 1.7 0.1 Israel 85.4 12.9 1.7 Jordan 89.1 9.2 1.6 Lebanon 97.5 2.3 0.2 Morocco 97.8 1.9 0.3 Oman 81.4 12.6 6.1 Saudi Arabia 20.6 48.5 30.9 UAE 59.1 37.5 3.4 Yemen 96.4 3.4 0.2 Sources: Government Databases, World Development Indicators. Box 1: World Bank and IFC support to MSME Finance in the MENA Region Enabling Environment for MSME Finance: • World Bank: made $1.2 billion in Financial Sector loans with significant MSME Finance components to Egypt and Morocco in 2009 and 2010, supporting far-reaching policy reforms for MSME finance. Also has MSME Finance projects in Iraq, Jordan. Also provides technical assistance, diagnostics, and advice to governments and regulators. • IFC: advisory services have supported reforms to credit information sharing, leasing regulations, secured transactions frameworks, and other critical areas of financial infrastructure Research and Diagnostics: • World Bank and Union of Arab Banks: Survey of 130 banks in 16 MENA countries in 2009/10 • World Bank: 13 financial sector assessment program (FSAP) reviews, since 2005, in MENA • World Bank: 12 investment climate assessments in MENA • World Bank: 8 insolvency and creditor rights reviews (ROSCs) • World Bank/IFC: annual Doing Business reviews Investments • IFC: $80m investment through Private Equity Funds 2007-2008 • IFC: Financial Sector Portfolio of $1.2 billion, which has reached 1.3 million MSME borrowers. Guarantees • World Bank: MENA region benchmarking of partial credit guarantee (PCG) schemes. Technical Assistance to SME guarantee schemes in Djibouti and (planned) in Jordan and Oman. • IFC: Risk-sharing facilities with commercial banks Bank SME lending technology and skills: • World Bank: DC-based and in-region experts, active on economic sector work, policy advice, lending etc • IFC: 75 in-region staff for advisory services, training to 544 banks and financial institutions. - 104 - MSME Support:  IFC: SME Toolkit, develop a website with content designed to build SME capacity through Banks and other institutions working with SMEs in the Middle East.  IFC: Business Edge provides practical solutions for SMEs delivered by certified local trainers. The program is currently available in Yemen, Egypt, and Jordan.  InfoDev: supports several business incubators in the region providing shared facilities, business services and mentoring to small firms with high growth potential. Their network in MENA includes 27 incubators in Tunisia, Jordan, Egypt, Morocco, West Ban/Gaza, etc. Corporate governance reform:  World Bank Group Corporate Governance diagnostics  IFC: financial institutions - board diversity, impact reporting, etc. Table 2. Liquidity of MENA banking sectors Net loans to Loans to Loans to deposits Liquid assets to total assets deposit ratio and borrowing deposits (%) (%) (%) (%) Egypt 37.9 45.5 41.0 43.0 Jordan 43.7 55.7 53.3 35.5 Morocco 58.4 70.5 62.1 24.7 Tunisia 66.3 106.1 83.2 29.9 Lebanon 25.1 28.8 23.1 36.3 Palestinian Territory 29.3 43.4 45.1 52.2 Yemen 20.9 24.1 12.5 62.6 Turkey 48.0 69.4 60.3 22.0 Source: Bankscope. Liquid assets: Trading Securities, FV through Income, Cash and Due from Banks. - 105 - Tunisia Selected Economic Indicators 2008-2013 2008 2009 2010 2011 2012 2013 Act. Act. Est. Proj. Proj. Proj. National income and prices Real GDP growth rate (%) 4.5 3.1 3.7 1.5 5.0 5.0 Nominal GDP ( TND million ) 55,297 58,768 63,380 67,418 73,055 79,776 Nominal GDP per capita (in U.S. dollars) 4,346 4,172 4,206 4,387 4,587 4,841 GDP inflation (%, period average) 5.0 3.1 4.5 4.0 3.5 4.0 Unemployment rate 13.3 13.0 15.0 Central government (percent of GDP) Total Revenues and grants 24.1 23.1 23.1 23.4 23.7 24.9 Total expenditure and net lending 24.8 25.8 24.4 27.9 27.5 28.2 Current expenditure 19.0 18.1 18.0 20.5 20.5 21.5 Capital expenditure 6.1 7.7 6.4 7.4 6.9 6.7 Overall balance before grants -1.0 -3.0 -1.3 -4.8 -4.2 -3.7 Money and credit Broad M oney (M 2)/GDP 58.4 61.8 61.8 61.8 61.8 61.8 Broad M oney (M 2, 12 months % change) 14.5 13.0 10.8 5.0 Credit to the economy (percent change) 13.4 9.9 17.8 4.6 Interest rate (money market rate, in percent, e.o.p) 5.2 4.3 4.2 Investment and savings Gross domestic savings(excluding grants)/GDP 22.1 21.5 19.7 18.5 18.9 19.8 External sector Current account balance/GDP (excluding grants) -3.8 -2.8 -4.8 -6.4 -4.0 -2.7 Of which, imports by megaprojects Exchange rate (TND per USD, period average) 1.23 1.35 1.43 1.44 1.48 1.52 Debt stock Public debt (as percent of GDP) 43.3 43.4 40.4 42.8 42.8 41.6 Domestic Debt 16.9 17.6 15.9 17.3 19.0 19.3 External Debt 26.3 25.8 24.5 25.5 23.8 22.3 Sources: T unisian Authorities, World Bank staff estimates - 106 - Annex 9: Country At-A-Glance Tunisia at a glance 2/25/11 M. East Lower Key Development Indicators & North middle Age distribution, 2009 Tunisia Africa income (2009) Male Female Population, mid-year (millions) 1 0.4 325 3,767 75-79 Surface area (thousand sq. km) 164 8,778 31,923 60-64 Population growth (%) 1.0 1.8 1.2 45-49 Urban population (% of total population) 67 57 40 30-34 GNI (Atlas method, US$ billions) 38.8 1,078 7,682 15-19 GNI per capita (Atlas method, US$) 3,720 3,315 2,039 GNI per capita (PPP, international $) 7,810 7,759 4,502 0-4 6 4 2 0 2 4 6 GDP growth (%) 3.1 4.8 7.5 percent of total population GDP per capita growth (%) 2.1 2.9 6.3 (most recent estimate, 2003–2008) .25 Poverty headcount ratio at $1 a day (PPP, %) 3 4 .. Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2.00 a day (PPP, %) 13 17 .. Life expectancy at birth (years) 74 71 68 80 Infant mortality (per 1,000 live births) 18 29 44 Child malnutrition (% of children under 5) 3 12 25 60 5 Adult literacy, male (% of ages 1 and older) 86 82 87 40 5 Adult literacy, female (% of ages 1 and older) 70 65 73 Gross primary enrollment, male (% of age group) 108 106 109 20 Gross primary enrollment, female (% of age group) 106 104 105 0 Access to an improved water source (% of population) 94 87 86 1990 1995 2000 2008 Access to improved sanitation facilities (% of population) 85 84 50 Tunisia Middle East & North Africa a Net Aid Flows 1980 1990 2000 2009 (US$ millions) Net ODA and official aid 240 391 222 479 Growth of GDP and GDP per capita (%) Top 3 donors (in 2007): European Commission 1 25 71 230 10 France 79 76 93 160 8 Japan 5 27 72 54 6 Aid (% of GNI) 2.8 3.3 1.2 1.2 4 Aid per capita (US$) 38 48 23 46 2 Long-T erm Economic T rends 0 95 05 Consumer prices (annual % change) .. 6.5 3.0 -1.0 GDP implicit deflator (annual % change) 12.8 4.5 3.2 2.9 GDP GDP per capita Exchange rate (annual average, local per US$) 0.4 0.9 1 .4 1.4 Terms of trade index (2000 = 100) .. 64 100 100 1980–90 1990–2000 2000–09 (average annual growth %) Population, mid-year (millions) 6.4 8.2 9.6 10.4 2.4 1.6 1.0 GDP (US$ millions) 8,743 12,291 19,443 39,561 3.3 4.7 4.9 (% of GDP) Agriculture 14.1 15.7 12.3 7.8 2.8 2.3 2.6 Industry 31 .1 29.8 28.6 30.0 3.1 4.6 3.6 Manufacturing 1 1 .8 16.9 18.2 16.5 3.7 5.5 3.6 Services 54.8 54.5 59.1 62.3 3.5 5.3 5.9 Household final consumption expenditure 61.5 63.6 60.7 63.4 2.9 4.3 5.3 General gov't final consumption expenditure 14.5 16.4 15.6 13.1 3.8 4.1 4.4 Gross capital formation 29.4 27.1 27.3 26.8 -1.8 3.6 2.9 Exports of goods and services 40.2 43.6 44.5 52.0 5.6 5.1 4.1 Imports of goods and services 45.6 50.6 48.2 55.3 1.7 3.8 3.6 Gross savings 25.1 21.7 23.2 23.6 Note: Figures in italics are for years other than those specified. 2009 data are preliminary. .. indicates data are not available. a. Aid data are for 2008. Development Economics, Development Data Group (DECDG). - 107 - Tunisia Balance of Payments and T rade 2000 2009 Governance indicators, 2000 and 2009 (US$ millions) Total merchandise exports (fob) 5,840 6,61 1 6 Voice and accountability Total merchandise imports (cif) 8,556 18,602 Net trade in goods and services -705 -1,468 Political stability Current account balance -821 -1,545 Regulatory quality as a % of GDP -4.2 -3.9 Rule of law Workers' remittances and compensation of employees (receipts) 796 1,964 Control of corruption Reserves, including gold 1,821 10,227 0 25 50 75 100 2009 Country's percentile rank (0-100) Central Government Finance higher values imply better ratings 2000 (% of GDP) Source: Kaufmann-Kraay-Mastruzzi, World Bank Current revenue (including grants) 24.1 24.2 Tax revenue 21.6 20.8 Current expenditure 19.9 20.8 T echnology and Infrastructure 2000 2008 Overall surplus/deficit -3.7 -3.8 Paved roads (% of total) 68.4 65.8 Highest marginal tax rate (%) Fixed line and mobile phone Individual .. .. 00 subscribers (per 1 people) 11 95 Corporate .. 30 High technology exports (% of manufactured exports) 3.4 4.9 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 1 1 ,307 21,709 Agricultural land (% of land area) 61 63 Total debt service 1,906 2,104 Forest area (% of land area) 6.2 7.0 Debt relief (HIPC, MDRI) – – Terrestrial protected areas (% of surface area) .. 1.5 Total debt (% of GDP) 58.2 54.9 Freshwater resources per capita (cu. meters) 429 406 Total debt service (% of exports) 20.1 7.2 Freshwater withdrawal (billion cubic meters) 2.6 .. Foreign direct investment (net inflows) 752 1,595 CO2 emissions per capita (mt) 2.1 2.3 Portfolio equity (net inflows) -18 -89 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 7.1 8.2 Composition of total external debt, 2009 IBRD, 1,385 Energy use per capita (kg of oil equivalent) 764 864 IDA, 20 IMF, 0 Short-term, 4,801 Other multi- W orld Bank Group portfolio 2000 2009 lateral, 5,107 (US$ millions) IBRD Total debt outstanding and disbursed ,21 1 1 1,385 Disbursements 136 184 Principal repayments 150 152 Private, 6,948 Bilateral, 3,448 Interest payments 79 57 US$ millions IDA Total debt outstanding and disbursed 39 20 Disbursements 0 0 Private Sector Development 2000 2009 Total debt service 2 2 Time required to start a business (days) – 11 IFC (fiscal year) Cost to start a business (% of GNI per capita) – 5.7 Total disbursed and outstanding portfolio 11 280 Time required to register property (days) – 39 of which IFC own account 11 179 Disbursements for IFC own account 1 109 Ranked as a major constraint to business 2000 2009 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 1 6 n.a. .. .. n.a. .. .. MIGA Gross exposure – – Stock market capitalization (% of GDP) 14.5 23.1 New guarantees – – Bank capital to asset ratio (%) 7.5 .. Note: Figures in italics are for years other than those specified. 2009 data are preliminary. 2/25/11 .. indicates data are not available. – indicates observation is not applicable. Development Economics, Development Data Group (DECDG). - 108 - Millennium Development Goals Tunisia With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years) T unisia Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2008 .25 Poverty headcount ratio at $1 a day (PPP, % of population) 5.9 6.5 2.6 .. Poverty headcount ratio at national poverty line (% of population) 7.4 7.6 .. .. Share of income or consumption to the poorest qunitile (%) 5.9 5.6 5.9 .. Prevalence of malnutrition (% of children under 5) 8.5 8.1 .. 3.3 Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 93 97 96 98 Primary completion rate (% of relevant age group) 80 92 88 93 Secondary school enrollment (gross, %) 44 58 76 92 Youth literacy rate (% of people ages 15-24) .. .. .. 97 Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 85 92 99 103 Women employed in the nonagricultural sector (% of nonagricultural employment) .. 23 24 25 Proportion of seats held by women in national parliament (%) 4 7 12 23 Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1 ,000) 50 36 27 21 Infant mortality rate (per 1,000 live births) 40 30 23 18 Measles immunization (proportion of one-year olds immunized, %) 93 91 95 98 Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 1 00,000 live births) 130 1 10 83 60 Births attended by skilled health staff (% of total) 69 81 90 95 Contraceptive prevalence (% of women ages 1 5-49) 50 60 66 60 Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 1 5-49) .. .. 0.1 0.1 Incidence of tuberculosis (per 100,000 people) 29 29 24 24 Tuberculosis case detection rate (%, all forms) 87 93 90 94 Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 81 86 90 94 Access to improved sanitation facilities (% of population) 74 78 81 85 Forest area (% of total land area) 4.1 5.2 6.2 7.0 Terrestrial protected areas (% of surface area) .. .. .. 1.5 CO2 emissions (metric tons per capita) 1.6 1.8 2.1 2.3 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 6.6 6.8 7.1 8.2 Goal 8: develop a global partnership for development 00 Telephone mainlines (per 1 people) 3.7 5.8 10.0 12.0 00 Mobile phone subscribers (per 1 people) 0.0 0.0 1.2 83.3 00 Internet users (per 1 people) 0.0 0.0 2.7 27.1 00 Personal computers (per 1 people) 0.3 1.4 2.2 9.7 Education indicators (%) Measles immunization (% of 1-year olds) ICT indicators (per 100 people) 125 100 120 100 100 75 75 80 50 50 60 25 40 25 0 20 2000 2002 2004 2006 2008 0 0 1990 1995 2000 2008 2000 2002 2004 2006 2008 Primary net enrollment ratio Ratio of girls to boys in primary & secondary Tunisia Middle East & North Africa Fixed + mobile subscribers Internet users education Note: Figures in italics are for years other than those specified. .. indicates data are not available. 2/25/11 Development Economics, Development Data Group (DECDG). IBRD 33500R 38°N 8°E 10°E 12°E Sicily This map was produced by the Map Design Unit of The World Bank. M e d iterranean Sea The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank (ITALY) Group, any judgment on the legal status of any territory, or any La Galite St endorsement or acceptance of such boundaries. ra it Bizerte of BIZE RT BIZ ERT BIZERT E Gulf of Tunis Tabarka . Si s Mts ARIANA L'Ariana ci ly To Algiers Atla TUNIS Pantelleria Beja NABEUL (ITALY) JENDOUBA Ben Arous To Jendouba BE JA BEJ A BEN AROUS Sétif Nabeul ue Zaghouan eg ell ZAGHOUAN M SIL IANA Gulf of Hammamet 36°N Le Kef Siliana 36°N Isole Pelagie KE LE KEF SOUSSE (ITALY) Sousse To Sétif Kairouan Monastir Thala MONASTIR Lampedusa KAIROUAN (ITALY) KASSERINE ud Mahdia El ro MAHDIA Ze ALGERIA Ha teb El Djem Jabal ash Shanabi (1544 m) Kasserine Sidi Bou Zid SIDI BOU SFAX ZID Sfax Kerkenna GAFSA Maharès Islands Mediterr an e an Gafsa Sea Skhira Gulf of 34°N Gabes 34°N Tozeur Houmt Souk Gabes TOZEUR El Hamma Djerba Chott el Jerid Island To Kebili GABES Touggourt Zarzis MEDENINE Medenine KEBILI Tataouine To Al -Ji Tripoli far 0 25 50 75 100 Kilometers ah Pla TATAOUINE in 0 25 50 75 Miles Remada L I B YA g Er 32°N n ter Dehibat To s Mizdah 8°E Ea t ea Gr El Borma TUN I S I A To Dirj SELECTED CITIES AND TOWNS GOVERNORATE CAPITALS NATIONAL CAPITAL RIVERS TUNISIA MAIN ROADS RAILROADS GOVERNORATE BOUNDARIES INTERNATIONAL BOUNDARIES 30°N 10°E JANUARY 2007