The World Bank Croatia Innovation and Entrepreneurship Venture Capital Project (P152130) REPORT NO.: RES30694 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF CROATIA INNOVATION AND ENTREPRENEURSHIP VENTURE CAPITAL PROJECT APPROVED ON JULY 7, 2015 TO REPUBLIC OF CROATIA TRADE & COMPETITIVENESS EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Arup Banerji Senior Global Practice Director: Anabel Gonzalez Practice Manager/Manager: Paulo Guilherme Correa Task Team Leader: Francesca de Nicola, Austin Francis Louis Kilroy The World Bank Croatia Innovation and Entrepreneurship Venture Capital Project (P152130) ABBREVIATIONS AND ACRONYMS ISR Implementation Status & Results Report NCO Note on Cancelled Operation PDO Project Development Objective PIU Project Implementation Unit PVC Pilot Venture Capital SCIF Sub-financing Co-Investment Financing The World Bank Croatia Innovation and Entrepreneurship Venture Capital Project (P152130) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P152130 Investment Project Financing Original EA Category Current EA Category Financial Intermediary Assessment (F) Financial Intermediary Assessment (F) Approval Date Current Closing Date 07-Jul-2015 30-Sep-2021 Organizations Borrower Responsible Agency Republic of Croatia - Ministry of Finance Hamag-Bicro Project Development Objective (PDO) Original PDO The project development objective is to strengthen risk capital financing for innovative SMEs and startups in Croatia OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-85180 07-Jul-2015 08-Jul-2015 06-Oct-2015 30-Sep-2021 21.92 .65 21.28 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Croatia Innovation and Entrepreneurship Venture Capital Project (P152130) Note to Task Teams: End of system generated content, document is editable from here. I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. The Project is structured in three components: the first supporting the development of venture capital fund, the second financing seed co-investments, and the third providing for technical assistance. Activities under the first component have not been implemented. Limited progress has been registered under the remaining two components. Under Component 2, the first call for proposals for Seed Co-Investment Fund required an extension to attract interest at all, and still only a low number of applications was received. Under Component 3, capacity building activities have not been implemented as expected, resulting in missed learning opportunities for Government, investors and potential investees. Hence, progress towards achievement of the Project Development Objective (PDO) and implementation progress have been rated as “unsatisfactory” as per the December 2017 ISR. The Project will be closed with a rating in the “unsatisfactory” range because the PDO has not been achieved and related activities have not been carried out. The exact rating will be determined with the note on cancelled operation (NCO) report. B. On September 1, 2017, the World Bank received a request for restructuring of the Project from the Ministry of Finance, dated August 28, 2017. The request included a partial cancellation and moving forward the closing date of the loan by nine months. Following internal review and discussions at the management level, the World Bank advised the Borrower that its recommendation is not to restructure the Project as suggested, but rather work towards closing the Project altogether due to the above-mentioned difficulties and delays in its implementation. The official response from the World Bank was sent to the Borrower on September 20, 2017. In its letter dated December 1, 2017, received by the World Bank on December 6, 2017, the Ministry of Finance informed the World Bank of the Government’s agreement with the World Bank’s recommendations, namely, to formally cancel all the Project activities related to the first component with an immediate effect. With regards to the second component, where there are two ongoing sub-financing co-investment financing (SCIF) contracts, it was proposed that the Project continues to fund these contracts and the related activities under the third component until the proposed new closing date. In its letter, the Minister of Finance confirmed that the Republic of Croatia shall fulfill its obligations under sub-financing agreements after the Project closing date, i.e., until their stipulated termination. The PIU took measures to secure proceeds from State Budget and fulfill these obligations. The request also agreed with December 31, 2017 as the new date for an early closure of the Project. As a result of the above-mentioned changes, the following revisions to the Project funding envelope are requested: (a) cancellation of the EUR 12 million allocation for the PVC fund as of October 6, 2017, pursuant to provisions of Schedule 2, Section V.2. of the Loan Agreement; and (b) cancellation of EUR 7,422,226.35, the remaining undisbursed loan funds as of December 6, 2017, in accordance with the Section 7.01. of the General Conditions. II. DESCRIPTION OF PROPOSED CHANGES The World Bank Croatia Innovation and Entrepreneurship Venture Capital Project (P152130) A. Change in Loan Closing Date – It is proposed to move forward the loan closing date from September 30, 2021 to December 31, 2017. A regular four-month grace period until April 30, 2018 will allow for the completion of the remaining payments for activities completed until the new closing date, and document the outstanding designated account balance to the World Bank Group. B. Cancellation of the Undisbursed Loan Funds – It is proposed to cancel the remaining undisbursed loan funds in the total amount of EUR 19,422,226.35, thus leaving a total remaining project allocation at EUR 577,773.65, consisting of the amount advanced to the designated account of EUR 500,000 and the amount of EUR 77,773.65 disbursed as of December 6, 2017. The PIU indicated that the amount still available for further disbursements from the designated account is sufficient to pay all remaining eligible expenditures incurred before the proposed new closing date. They include two SCIF agreements under the second component, technical assistance and management expenses under the third component. If any of the ongoing SCIF agreements should be extended beyond the proposed new closing date, the Croatian authorities shall cover outstanding expenditures using other sources. In line with the request received by the Bank on December 6, 2017, cancellation would take place in two tranches, with EUR 12 million being cancelled as of October 6, 2017, based on the legal agreement’s provision mentioned above, and EUR 7,422,2226.35 being cancelled as of the date of the World Bank’s receipt of the request, December 6, 2017. The Portal allows to enter only one cancellation amount and one cancellation date, because of system limitations. The loan department colleagues (WFALN) will make the necessary corrections in order to report the cancellation entries for the two dates and amounts, once the Amendment is approved, signed and countersigned, through manual system override and manual entry of the two different tranches. C. Prepayments: The Ministry of Finance discussed with the World Bank an option of full prepayment of the loan and related charges, once the 4-month grace period lapses and the loan account is officially closed. Should the Ministry of Finance decide to proceed with the prepayment option, an official request for such action would need to be prepared and submitted to the World Bank to initiate the process. D. FM and audit requirements: All financial management provisions and requirements are up to date and there are no overdue or qualified audits. Audit of the loan proceeds will be carried out in the first quarter of 2018 and paid with the available loan funds at the designated account within a four-month grace period from the new closing date. Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. III. SUMMARY OF CHANGES Changed Not Changed Change in Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ The World Bank Croatia Innovation and Entrepreneurship Venture Capital Project (P152130) Change in Implementation Schedule ✔ Change in Implementing Agency ✔ Change in DDO Status ✔ Change in Project's Development Objectives ✔ Change in Results Framework ✔ Change in Components and Cost ✔ Change in Disbursements Arrangements ✔ Change in Disbursement Estimates ✔ Change in Overall Risk Rating ✔ Change in Safeguard Policies Triggered ✔ Change of EA category ✔ Change in Legal Covenants ✔ Change in Institutional Arrangements ✔ Change in Financial Management ✔ Change in Procurement ✔ Other Change(s) ✔ Change in Economic and Financial Analysis ✔ Change in Technical Analysis ✔ Change in Social Analysis ✔ Change in Environmental Analysis ✔ IV. DETAILED CHANGE(S) 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-85180 Effective 30-Sep-2021 31-Dec-2017 30-Apr-2018 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE The World Bank Croatia Innovation and Entrepreneurship Venture Capital Project (P152130) CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation BORROWER' S REQUEST IBRD- Disburs EUR 20,000,000.00 19,422,226.35 06-Dec-2017 577,773.65 FOR 85180-001 ing COUNTRY REASONS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-85180-001 | Currency: EUR iLap Category Sequence No: 1 Current Expenditure Category: PVC Investments 12,000,000.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: PVC Management IOC 3,600,000.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: SCI Subprojects 2,500,000.00 0.00 361,891.60 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: CS, TR, IOC 1,500,000.00 77,773.65 215,882.05 100.00 100.00 iLap Category Sequence No: 5 Current Expenditure Category: Unallocated 400,000.00 0.00 0.00 Total 20,000,000.00 77,773.65 577,773.65 The World Bank Croatia Innovation and Entrepreneurship Venture Capital Project (P152130) Note to Task Teams: End of system generated content, document is editable from here.