The World Bank Access to Finance for MSMEs (P152307) REPORT NO.: RES52001 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF ACCESS TO FINANCE FOR MICRO, SMALL AND MEDIUM ENTERPRISES PROJECT APPROVED ON JANUARY 29, 2018 TO MINISTRY OF FINANCE AND THE PUBLIC SERVICE FINANCE, COMPETITIVENESS AND INNOVATION LATIN AMERICA AND CARIBBEAN Regional Vice President: Carlos Felipe Jaramillo Country Director: Lilia Burunciuc Regional Director: Oscar Calvo-Gonzalez Practice Manager/Manager: Yira J. Mascaro Task Team Leader(s): Fadwa Bennani The World Bank Access to Finance for MSMEs (P152307) ABBREVIATIONS AND ACRONYMS AFI Approved financial institutions BDS Business development services COVID-19 Coronavirus disease 2019 CEF Credit Enhancement Facility DBJ Development Bank of Jamaica IC Investment committee IRI Intermediate results indicator MSME Micro, small and medium-sized enterprises PDO Project development objective PIU Project implementation unit RFP Request for proposals SME Small and medium-sized enterprises VMIL Victoria Mutual Investment Limited The World Bank Access to Finance for MSMEs (P152307) BASIC DATA Product Information Project ID Financing Instrument P152307 Investment Project Financing Original EA Category Current EA Category Financial Intermediary Assessment (F) Financial Intermediary Assessment (F) Approval Date Current Closing Date 29-Jan-2018 31-Jan-2024 Organizations Borrower Responsible Agency Ministry of Finance and the Public Service Project Development Objective (PDO) Original PDO The Project Development Objective (PDO) is to improve access to finance for micro, small, and medium enterprises (MSMEs). OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-88220 29-Jan-2018 02-Mar-2018 29-May-2018 31-Jan-2024 15.00 9.86 5.14 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Access to Finance for MSMEs (P152307) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Executive Summary of Proposed Restructuring 1. This level 2 restructuring of the Jamaica Access to Finance for Micro, Small and Medium Enterprises Project (P152307) proposes the following changes: (i) extension of the closing date from January 31, 2024, to January 15, 20251; (ii) adjustment of the results framework based on project performance and proposed extended closing date; and (iii) change in component-wise costs with reallocation of US$210,000 equivalent from Component 2 to Component 4 for project management over the extended lifetime of the project. This is the second restructuring for the project, resulting in an aggregate extension of 23.5 months from the original closing date. B. Project Status 2. The project was approved on January 29, 2018, with a Project Development Objective (PDO) to improve access to finance for micro, small, and medium enterprises (MSMEs). The project became effective on May 29, 2018. The PDO indicators are: (a) Number of guarantees issued for MSME loans through the improved Credit Enhancement Facility (CEF) (End target: 1,178 guarantees); and (b) Number of SMEs getting access to risk capital through the SME Fund (End target: 15 SMEs). 3. As per the archived Implementation Status and Results (ISR) Report of September 20, 2023, progress towards achievement of the PDO and Overall Implementation Progress are assessed Moderately Satisfactory. Substantial progress has been made across components, but there have been delays in the SME Fund Component (Component 2). The CEF (Component 1) has made appreciable progress given its increased relevance in the COVID-19 pandemic recovery as a mechanism to incentivize lenders to provide working capital and investment loans to MSMEs. The PDO indicator tracking the number of guarantees (end target of 1,178 guarantees) is exceeded, with 1,821 guarantees issued as of November 30, 2023. The volume of guarantees (intermediate results indicator - IRI) has shown strong annualized growth of 24.4 percent in fiscal year 2023/24 as of November 2023, due to the initiatives advanced by the Development Bank of Jamaica (DBJ) for its promotion.2 Under Component 3 of the project, the DBJ scaled-up its vouchers for technical assistance program to MSMEs, with the development of a fully digitized platform for the management of business development (BDS) services and the provision of over 248 vouchers to MSMEs financed by the Project. The reverse factoring related activities have been finalized, the platform established and there is an ongoing consultancy to update the market strategy to onboard financial institutions and buyers in the platform. Additional ongoing activities include consultancies to the DBJ for the development of an environmental, social and governance (ESG) framework and the greening of its activities, as well as the provision of technical assistance to SMEs to support their equity investment readiness and to build the capacity of the ecosystem for private equity and venture capital in Jamaica. 4. Although Component 2, the SME Fund, faced significant delays, it remains a priority for the Government. The 1 See Ministry of Finance and the Public Service’s (MOFPS) request letter dated November 2, 2023. 2With the push to support increased volumes and utilization of CEF Guarantees to increase access to finance for MSMEs in Jamaica, the DBJ has implemented a temporary increase in the claims cap for the CEF from 30 to 50 percent for the Financial Year 2022/23. The DBJ is exploring additional initiatives to promote the guarantee volumes which include: (i) further expanding guarantees on loans to businesses impacted by Covid-19 and (ii) considering the implementation of a hybrid guarantee product. In a hybrid guarantee product approved financial institutions (AFIs) can extend guarantees without referring to the guarantee scheme up to a limit. Above a certain threshold, the guarantee scheme appraises the loan application before extending the guarantee. This approach allows some flexibility, which is expected to increase further participation from lenders and the volume of guaranteed loans by the CEF. The World Bank Access to Finance for MSMEs (P152307) operationalization of the SME Fund faced the following setbacks due to the COVID-19 pandemic: (a) delayed selection of the SME Fund manager, (b) hindered progress in the fundraising process before the official launch of the SME Fund, and (c) challenges in the fund’s operationalization. The first request for proposals (RFP) for the selection of the fund manager issued in February 2020 coincided with the onset of the COVID-19 pandemic outbreak, resulting in its suspension shortly thereafter due to insufficient interest from potential bidders. The RFP was reissued in June 2020, incorporating amendments to attract a broader pool of bidders, and Actus Partners Limited was ultimately selected in April 2021. There were delays in the extended investor fundraising process, which was affected primarily by two factors: (i) the Fund Managers were not able to travel to Jamaica to conduct meetings and carry out fundraising activities with potential investors due to travel restrictions; and (ii) the increased uncertainty brought on by the COVID-19 pandemic impacted the interest of some potential investors, as well as extended due diligence and internal review processes of interested investors. It was only on June 9, 2022, Actus Partners (the SME Fund Manager), Victoria Mutual Investment Limited3 (VMIL, co-investor in the Fund) and the DBJ signed the legal agreements to constitute the SME fund. Finally, there were delays in the staffing and institutional set-up of the SME Fund Manager, which cascaded into delays in advancing the investment prospection efforts and the materialization of investments in SMEs. 5. Notwithstanding the delays, the SME Fund has shown progress over the past year, achieving significant milestones although only one investment in SMEs has been signed. (i) JASMEF (the Fund) has been duly registered; (ii) the Fund manager (Actus Partners) secured US$10 million from VMIL, showcasing a commendable private capital mobilization factor of 2x; (iii) key governance arrangements have been set-up with the establishment of the Fund’s Investment Committee (IC) and Advisory Committee (AC); (iv) the Fund manager has established a physical presence by leasing an office and initiating operations in Jamaica; and (v) the fund management team has been fully assembled, with the hiring of a senior analyst and two junior analysts, as planned. In addition, 1 SME transaction has been signed in December 2023, two prospective SME transactions have been presented to the Fund’s IC and 4 additional opportunities are in the pipeline. The two prospective transactions presented to the IC have been conditionally approved, hence there is uncertainty on when/if the transactions will close. The Fund manager has stated they are on track to present five investments post due diligence to the IC by end January 2024. 6. Financial Management is assessed to be Satisfactory and Procurement performance Moderately Satisfactory as of the last archived ISR report. The project does not have any outstanding audit reports and there are no unresolved audit observations. All audit reports are acceptable to the Bank. Major procurement activities have been completed and the remaining procurement activities are small value. A few pending clarifications to conclude the post review of FY 24 are expected to be resolved in January 2024. Procurement risk rating is assessed to be Moderate. The ratings for Monitoring and Evaluation, and Project Management are assessed to be Satisfactory. 7. Environmental and social (E&S) safeguards are assessed to be Satisfactory, and overall risk rating remains Substantial. Verification visits are being conducted, and ESMF continues to be implemented. E&S reporting has been Satisfactory, and the project continues to maintain and monitor its grievance mechanism. The overall risk rating remains to be assessed as Substantial, the same rating as at project’s approval. However, the political and governance, macroeconomic and fiduciary risk categories have improved since approval. C. Rationale for Restructuring 8. Implementation experience over the past year indeed highlights that the equity investment process is inherently time-consuming and not solely contingent on the Fund Manager. Thorough due diligence on potential 3 VMIL is the investment arm of the Victoria Mutual Financial group which comprises a range of financial services companies in Jamaica including deposit-taking and loans through a building society; insurance business; remittance services; pension management; securities and wealth management services. The World Bank Access to Finance for MSMEs (P152307) investments requires audits and risk assessments, which are necessary to ensure the success of the investment. Negotiating and structuring deals requires careful consideration to align the interests of all parties. Adding to the challenge, investing in Jamaica as a developing country comes with its own complexities. Navigating the economic landscape, dealing with regulations, and addressing corporate accounting and transparency practices make the due diligence process time intensive. As a result, despite the Fund Manager having several investments in the pipeline, the expectation is that only 5 investments will be brought to the IC by the current Project closing date, and only one transaction may be formally signed. 9. Accordingly, at this point, the full disbursement of the capital commitment of DBJ to the Fund (funded under the project) will not be achieved by the current closing date. The legal agreement between the DBJ and the Fund stipulates a firm financial commitment of US$5 million from the DBJ to the Fund. However, given the above-explained delays in investment advancement, this commitment cannot be met within the current project timeline. During the implementation support mission of September 6-8, 2023, different options were discussed to address these challenges. It was agreed that an extension of the closing date of the project and a priority drawdown of DBJ capital should be considered. The priority drawdown was agreed to by the Fund and the investors, which would ensure quicker disbursement, with up to the first US$5 million of investments funded with only DBJ capital, instead of the traditional pro rata basis for all investors (in this case, DBJ and VMIL). The portfolio of JASMEF would continue to be owned by both investors on a pro rata basis per their respective investments in the Fund. The mission discussed the option of early capitalization of the Fund by the initial closing date (January 31, 2024) without achieving the corresponding equity investments. However, this option was dismissed due to the increased risk of non-deployment of advanced capital, given the early stage of fund implementation. II. DESCRIPTION OF PROPOSED CHANGES 10. This Restructuring Paper proposes through a Level 2 restructuring the following changes: (a) extending the closing date to January 15, 2025; (b) modifying the results framework to adjust the target for the PDO-level indicator related to Component 2 and the IRIs for Component 1 and 2, incorporating a new intermediate indicator and adjusting the end target dates for all results indicators; and (c) reallocating financing from Component 2 to Component 4 (Project Management). Further details are provided below. 11. Extending the closing date to January 15, 2025, would provide more time to the SME Fund to execute the investments, allowing the DBJ to disburse its capital commitments to the Fund based on actual investments. The Fund manager has been actively building a pipeline of firms, which should help fast track investments. The additional time is crucial for the Fund to progress through the review, due diligence, and execution phases on prospective investment opportunities, adhering to its internal procedures and sound private equity and venture capital (PEVC) practices. This approach ensures that the DBJ avoids pre-capitalization of the Fund and effectively mitigates associated risks by aligning disbursements with actual investments. 12. The proposed changes to the results framework aim to adjust the end targets for the PDO-level and intermediate indicators for Component 2, add a new intermediate results indicator for Component 2, adjust the end target for the intermediate results indicator for Component 1 and adjusting the target dates for all results indicators in line with the revised closing date. The actual investments in SMEs are not fully within the control of the SME Fund Manager, as they depend on the approval of the IC committee and the final agreement with the SMEs. The SME Fund Manager is fully accountable for the number of investments presented to the IC. It is consequently proposed that: (a) the end target of the PDO-level indicator “Number of SMEs getting access to risk capital through the SME Fund” is decreased The World Bank Access to Finance for MSMEs (P152307) from 15 to 5, and (b) a new intermediate level indicator “Number of investment opportunities presented by the SME Fund Manager to the Investment Committee” is added to the results framework, with a target of 8 investments by the new closing date. The target for the IRI on the volume of risk capital to SMEs will also be rationalized from US$11.5 to US$4 million). The end target for the IRI for Component 1, ‘Volume of guarantees provided to MSME loans’, will be reduced from US$135 million to US$100 million. This adjustment is prompted by the general tightening of credit conditions in Jamaica, aligning with revised expectations from the Approved Financial Institutions and the DBJ regarding the anticipated growth in guaranteed volumes. 13. Financing will be reallocated from Component 2: Establishment of an SME Fund to Component 4: Project Management, to finance the project management expenses during the proposed additional period of implementation. Component 4 supports the management, implementation, monitoring, and evaluation of the Project by the project implementing unit (PIU) within the DBJ. This includes fiduciary management, implementation and monitoring of environmental and social compliances under the Project. A total amount of US$210,000 is proposed to be reallocated to Component 4 to cover additional project management costs by the PIU during the additional year of implementation. The reallocation between the components will not cause a reallocation of financing between the disbursement categories under the Project. III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Disbursement Estimates ✔ Implementation Schedule ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ PBCs ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ The World Bank Access to Finance for MSMEs (P152307) Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Enhancement of the Credit Enhancement of the Credit 5.55 No Change 5.55 Enhancement Facility (CEF) Enhancement Facility (CEF) Establishment of an SME Fund 7.00 Revised Establishment of an SME Fund 6.79 Improvement of enabling Improvement of enabling environment for access to environment for access to finance and Business 1.35 No Change finance and Business 1.35 Development Services for Development Services for MSMEs MSMEs Project management 1.06 Revised Project management 1.27 TOTAL 14.96 14.96 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-88220 Effective 30-Jan-2023 31-Jan-2024 15-Jan-2025 15-May-2025 The World Bank Access to Finance for MSMEs (P152307) OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2018 37,500.00 37,500.00 2019 2,375,205.22 2,375,205.22 2020 3,476,511.37 3,476,511.37 2021 1,040,000.00 1,040,000.00 2022 1,455,043.75 1,455,043.75 2023 2,838,000.00 538,381.00 2024 3,777,739.66 2,800,000.00 2025 0.00 3,277,358.66 . The World Bank Access to Finance for MSMEs (P152307) . Results framework COUNTRY: Jamaica Access to Finance for MSMEs Project Development Objectives(s) The Project Development Objective (PDO) is to improve access to finance for micro, small, and medium enterprises (MSMEs). Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 The PDO is to improve access to finance for micro, small and medium enterprises (MSMEs) Number of SMEs getting access to risk capital 0.00 0.00 0.00 0.00 0.00 0.00 1.00 5.00 through the SME Fund (Number) Rationale: Action: This indicator has Changed the endline date, and revised targets from 15 to 5 based on expectations from the fund manager and the DBJ.. been Revised Number of guarantees issued for MSME loans 78.00 200.00 358.00 564.00 831.00 1,178.00 1,178.00 1,178.00 through the improved CEF (Number) Rationale: Action: This indicator has Changed the endline date in line with the revised closing date. been Revised PDO Table SPACE The World Bank Access to Finance for MSMEs (P152307) Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Enhancement of the Credit Enhancement Facility (CEF) The DBJ has The DBJ has The DBJ has The DBJ has The DBJ has Training has been The DBJ has Improvements of the adequate systems adequate systems adequate systems adequate systems limited Installation and provided to adequate systems DBJ's institutional and expertise in and expertise in and expertise in and expertise in institutional operationalization strengthen DBJ and expertise in capacity in credit risk place to scale and place to scale and place to scale and place to scale and capacity to scale of the software for staff's expertise in place to scale and management of AFIs manage the CEF, in manage the CEF, in manage the CEF, in manage the CEF, in sustainably the AFIs' qualification. credit risk manage the CEF, in a (Text) a sustainable a sustainable a sustainable a sustainable CEF's operations. management. sustainable manner. manner. manner. manner. manner. Rationale: Action: This indicator has Change the endline date in line with the revised closing date. been Revised Volume of guarantees provided to MSME loans 4,412,800.00 15,771,544.00 32,014,469.00 55,241,852.00 88,457,010.00 95,000,000.00 97,500,000.00 100,000,000.00 (Amount(USD)) Rationale: Action: This indicator has Changed the endline date in line with the revised closing date, and revised the end target from US$136 million to US$100 million based on the expectations from been Revised the Approved Financial Institutions and the DBJ regarding the anticipated growth in guaranteed volumes. Establishment of an SME Fund Private capital mobilized 0.00 0.00 0.00 0.00 0.00 10,000,000.00 10,000,000.00 10,000,000.00 (Amount(USD)) Rationale: Action: This indicator has Changed the endline date in line with the revised closing date. been Revised The World Bank Access to Finance for MSMEs (P152307) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Volume of risk capital provided to SMEs 0.00 0.00 0.00 0.00 0.00 0.00 540,000.00 4,000,000.00 (Amount(USD)) Rationale: Action: This indicator has Changed the endline date in line with the revised closing date, and revised the amount targets from US$15 million to US$4 million based on the expectations from been Revised the fund manager and the DBJ. Number of SME investment opportunities presented to the Fund's 0.00 0.00 0.00 0.00 0.00 2.00 4.00 8.00 Investment committee for approval (Number) Rationale: Action: This indicator is New Intermediate indicator to track progress on SME investment pipeline by the fund. New Improvement of enabling environment for access to finance and Business Development Services for MSMEs Percentage of beneficiaries that feel project activities 0.00 0.00 0.00 0.00 75.00 75.00 75.00 75.00 reflected their needs (Citizen Engagement Indicator) (Percentage) Rationale: Action: This indicator has Changed the endline date in line with the revised closing date. been Revised New business No No No No Yes Yes Yes Yes development service The World Bank Access to Finance for MSMEs (P152307) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 platform operational (Yes/No) Rationale: Action: This indicator has Changed the endline date in line with the revised closing date. been Revised IO Table SPACE The World Bank Access to Finance for MSMEs (P152307) Annex 1: Proposed allocations by component (amounts in US$) Actual Proposed Revised Allocation Available Balance expenditure as of Reallocation in Component Original Allocation after First as of November Revised Allocation December 20, current Restructuring 30, 2023 2023 Restructuring Component 1 - Enhancing the Credit Enhancement Facility (CEF) for 5,550,000.00 5,550,000.00 5,549,215.23 784.77 - 5,550,000.00 guarantees to MSME loans Component 2 - Supporting the establishment of an SME Fund for risk 7,000,000.00 7,000,000.00 1,027,083.65 5,972,916.35 -210,000.00 6,790,000.00 capital financing to SMEs Component 3A - Enabling environment for access to finance for 860,000.00 650,000.00 652,064.20 -2,064.20 - 650,000.00 MSMEs, including the development of financial instruments Component 3B - Business development services for MSMEs to 700,000.00 700,000.00 629,727.46 70,272.54 - 700,000.00 improve bankability Component 4: Project Management 852,500.00 1,062,500.00 953,562.19 108,937.81 210,000.00 1,272,500.00 FRONT END FEE 37,500.00 37,500.00 37,500.00 - - 37,500.00 Total 15,000,000.00 15,000,000.00 8,849,152.73 6,150,847.27 - 15,000,000.00