Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6047 (The report # is automatically generated by IDU and should not be changed) Project Name Post-Disaster Partial Credit Guarantee Program Region Latin America and the Caribbean Country Haiti Sector Financial Sector Lending Instrument Specific Investment Grant Project ID P121391 {If Add. Fin.} Parent Project ID Recipient Republic of Haiti Implementing Agency Central Bank of Haiti/Fonds de Developpement Industriel Environmental Screening Category { }A {X}B { }C { }FI Date PID Prepared October 5, 2010 Estimated Date of Appraisal Completion October 7, 2010 Estimated Date of Board Approval November 18, 2010 Decision Project authorized to proceed to negotiations upon agreement on any pending conditions and/or assessments. Other Decision Decision was taken to re-categorize this project as environmental screening category B instead of FI as this is not an on-lending project. I. Country Context 1. Haiti is the poorest country in the Western Hemisphere. Some 78 percent of its population of 9.6 million live below the poverty line (less than US$ 2 a day), with 54 percent in extreme poverty (less than US$ 1 a day). Over the last two decades, it has been affected by adverse natural events, volatile commodity prices, and economic and social crises. 2. Despite such a risky environment, the Haitian economy has shown signs of positive performance. Economic growth averaged 2.5 percent per year over the 2007-09 period, with a minimal impact of the global crisis and a post-hurricane rebound. This trend continued during October-December 2009. Growth reached 2.9 percent in Fiscal Year (FY) 2009 (ending in September 2009), driven by strong agricultural and manufacturing output, while annual inflation bottomed out at -4.7 percent due to falling global commodity prices. In addition, the fiscal deficit (excluding grants and externally financed projects) was contained at 4.4 percent of GDP due to Page 2 efficient fiscal consolidation. Textile exports increased as a result of the HOPE 1 Act of the US Government and low import prices. Exports and resilient remittances helped reduce the external current account deficit to 3.2 percent of GDP in FY09, from 4.5 percent in FY08. 3. Haiti’s recent positive performance was dramatically reversed on January 12, 2010, when the country was shaken by a 7.0 magnitude earthquake. The epicenter was located only 17 km south-west of the densely populated capital area of Port-au-Prince. Over 230,000 lives were lost. Hundreds of thousands of Haitians were left homeless and fled the affected area to find refuge in the provinces, adding to an economic situation which was already difficult in those regions. Many of them have since returned to Port-au-Prince to live in sprawling tent cities. 4. The Post-Disaster Needs Assessment (PDNA), prepared by a joint team composed of representatives of the Haitian Government and members of the international community, evaluated the impact of losses and damage to be US$ 8 billion, or 1.2 times the country’s 2009 GDP. Reconstruction costs and requirements are estimated by the PDNA at US$ 12 billion. The overall economic impact of the earthquake is likely to result in an 8.5 percent fall in the country’s GDP growth rate in 2010, which is expected to rebound by 9.8 percent in FY 2011 and by 8.4 percent in FY 2012. 5. The earthquake affected economic activity disproportionately because it occurred near the Port-au-Prince area where 65 percent of economic activity is concentrated. Its impact was especially harmful for the private sector, which, according to the PDNA, suffered damage and losses in an amount of US$ 5.7 billion (70 percent of the total damage and losses). The most affected private sector was the housing sector, which suffered damages in an amount of US$ 2.3 billion, followed by commerce (US$ 639 million), private education (US$ 437 million), industry (US$ 342 million), food (US$ 330 million) and transport (US$ 316 million). The earthquake disrupted borrowers’ income sources while damaging the quality of physical assets and inventories. As a consequence, the earthquake jeopardized the private sector’s ability to keep up with the terms of their loans and reduced the value of their collateral. II. Sectoral and Institutional Context 6. Prior to the earthquake, the financial sector was considered sound in general but with significant development challenges. The Financial System Stability Assessment (FSSA) of 2008 2 found that Haiti’s financial system played a limited role in supporting economic growth. Constraints were found in the legal and institutional frameworks, fragile security, limited 1 Haitian Hemispheric Opportunity through Partnership Encouragement. 2 Financial System Stability Assessment, including a Report on the Observance of Standards and Codes on Banking Supervision, March 27, 2008. Page 3 competition among banks, poor governance, high reserve requirement ratios and the absence of a functioning credit registry. 7. As of December 2009, the Haitian banking sector consisted of nine commercial banks, including two public banks (BNC and BPH) and seven private banks. The system was highly concentrated with the three largest banks holding 80 percent of total assets. Access to banking credit was limited as loans (net of provisions) only stood at 30 percent of total banking assets (this ratio is around 60 percent in the region). Non-performing loans (NPLs) stood at 8.6 percent for the sector, but reflected different performance between banks. The system was highly liquid (ratio of cash and short term investment to deposits close to 40 percent), mostly as a result of substantial reserve requirements established by the Central Bank ( Banque de la République d’Haïti, BRH) in domestic and foreign currency. 8. The impact of the earthquake on the country’s financial institutions has been three-fold: (i) financial institutions have lost staff and suffered damages in their branches; (ii) the quality of loan portfolios has deteriorated, because borrower’s capacity to repay has been hindered and borrowers in the affected areas lost their collateral; and (iii) this has led banks to restrict credit to existing borrowers in good standing. Banks managed to reopen nine days after the disaster despite the magnitude of human and material losses. III. Project Development Objectives 9. The objective of the Project is to support the development of a partial credit guarantee program by the Recipient to help (i) financial institutions restart lending; and (ii) financial sector borrowers overcome the impact of the Emergency 3 . This objective is consistent with the Haiti Recovery Plan presented by the government in March 2010. IV. Project Description 10. The IDA’s contribution to the Project will be implemented as a Specific Investment Grant (SIG) in the amount of US$ 3 million equivalent to the Republic of Haiti. The Project will have two components: (i) provision of partial credit guarantees (PCGs) for the financial sector with two Pillars, the second one involving support to an organic Partial Credit Guarantee Fund) and (ii) technical assistance to design and carry out measures to remove some of the most pressing obstacles to credit growth. 3 Emergency is a generic term defined and used for all Haiti operations to refer to the consequence of the January 2010 earthquake. Page 4 R       P       P   P   R  L            F      US   M F  IDA  IADB  HRF T  A F  S  R P   N  L   SME      F  IADB P   S  W     C    P  C   G  P PCGP C    T   A 11. The first component of the Project has two pillars: a) Pillar 1 which will provide partial credit guarantees on restructured loans to borrowers who have been affected by the recent earthquake but are still considered viable b) Pillar 2 which will involve the establishment of an organic Partial Credit Guarantee Fund to provide partial credit guarantees to Micro, Small and Medium Enterprises and housing financing to new or existing borrowers. 12. IDA resources will be leveraged by grant funding from other donors, and form part of a larger initiative to revive the Haitian credit market. Given its expertise and prior knowledge of the Haitian financial system, IDA has played a key role in designing the scheme and has contributed in other areas, such as the insurance sector. The design of the PCGP follows a specific request by Haiti’s BRH and the private sector banks, and has been closely coordinated with the Inter-American Development Bank (IADB) and the US Department of Treasury, supported by the experts from FOGAPE, the Chilean Partial Credit Guarantee Fund; valuable inputs were received from the International Finance Corporation and the International Monetary Fund. V. Financing Source: IDA (US$m.): 3.0 Others (specify) IADB Haiti Reconstruction Fund 20.0 12.5 Total: 35.5 Page 5 13. The Bank, IADB and HRF’s contributions will fund the window designed to support the restructuring of small loans (Pillar 1). Any resources of this grant which are not needed for Pillar 1 or freed up after repayment of the restructured loans will be transferred to Pillar 2. VI. Implementation a. First Component: Provision of Partial Credit Guarantees 14. The Project is closely coordinated with the BRH, the IADB and the US Treasury. A Steering Committee ( Comité de Pilotage) including the BRH, the Haitian Ministry of Finance and the donors (some of them as observers as permitted under their respective rules) will oversee the management of the PCGP. 15. The implementing agency for the PCGP (Pillar 1) will be the Fonds de Développement Industriel (FDI). The FDI is a specialized institution of the BRH endowed with operational and financial autonomy and dedicated to promoting the development of the private sector by offering loans and guarantees to SMEs. 16. The responsibilities of the FDI, as the implementing agency, will be, among others: (i) reviewing the corresponding documentation of the portfolios to be guaranteed; (ii) approving the granting of partial credit guarantees and submit information to the Fiduciary Agent; (iii) collecting fee payments from participating institutions; (iv) verifying eligibility of loans, compliance with all the covenants of the guarantee, and payment of all guarantee fees up to date;(v) verifying that participating institutions maintain their eligibility status in time as outlined in the Manual. 17. An individual advisor or an advisory firm will be hired by the FDI to help it manage the program and transfer knowledge. Additionally, a Fiduciary Agent will ensure the proper use of the resources allocated to Pillar 1. In particular, the Fiduciary Agent will be responsible for: (i) ex-post analysis of portfolios by sampling and visiting financial institutions and borrowers, in order to determine if banks have included non-viable loans or loans that violate social and environmental safeguards; (ii) authorizing the release of funds upon the call of the guarantees. The IADB will fund the costs for the advisor and the Fiduciary Agent. b. Second component: Financial Sector Technical Assistance 18. While the PCGP will remove some of the obstacles to lending by providing borrowers with additional collateral, the second component will provide support for the design and implementation of measures that will remove existing obstacles for credit growth, following up on the diagnostic and suggestions of the FSSA. Page 6 19. The BRH has suggested organizing a consultative financial sector working group which will include the institutions that participated in the design of the PCGP and which will meet regularly to discuss financial sector issues and support related activities. This component of the grant will provide technical inputs (consultancies) for the design and implementation of measures to improve the lending conditions in the country. The BRH will be the implementing agency, advised by the financial sector working group. VII. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP 4.01) X Natural Habitats ( OP / BP 4.04) X Pest Management ( OP 4.09 ) X Physical Cultural Resources (OP/BP 4.11) X Involuntary Resettlement ( OP / BP 4.12) X Indigenous Peoples ( OP / BP 4.10) X Forests ( OP / BP 4.36) X Safety of Dams ( OP / BP 4.37) X Projects in Disputed Areas ( OP / BP 7.60) * X Projects on International Waterways ( OP / BP 7.50) X VIII. Contact point at World Bank and Borrower World Bank Contact: Juan Buchenau Title: Senior Financial Sector Specialist Tel: 202-458-4793 Email: jbuchenau@worldbank.org Borrower/Client/Recipient Contact: Ronald Baudin Title: Minister of Economy and Finance Tel: TBD Email: TBD Implementing Agencies Contact: Charles Castel Title: Governor of the Central Bank of Haiti Tel: TBD Email: TBD * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 7 IX. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop