BiH Firm Recovery and Support Project

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In order to respond to this unprecedented crisis that has hit the most vulnerable hardest, and in light of uncertainties that lie ahead, this project aims to increase external financing support to MSMEs including underserved segments of the economy while helping firms adjust to the new normal through adoption of technology and digitalization. The project focuses on the provision of financing to MSMEs that are hit hard by the crisis, or are in the lagging regions, and are part of the vulnerable and underserved segments that would otherwise face challenges accessing term financing in support of enterprise recovery and growth. It also supports the redesign of government support programs aimed at helping firms adjust to the post COVID-19 world through the adoption of appropriate technology and digitalization, thereby increasing their resilience. Firm support programs coupled with enhanced monitoring and evaluation will help authorities respond quicker to future crises and help MSMEs build resilience of their business operations in an economic environment changed by COVID-19. The participation of microcredit and leasing institutions in the line of credit component is particularly important for reaching those underserved by the traditional banking products and those in lagging regions. Finally, the project will explore addressing climate change and disaster risk vulnerability through trainings and capacity building that will raise awareness of climate related risks for MSMEs and build capacity in BiH to ensure the lessons learned from the pandemics response are included in the design of government programs for responding to future potential climate related disaster events.The project will consist of three components: Component 1 - Line of credit (EUR 51.14 million): The first component establishes and operates a credit facility for the provision of subsidiary financing to select participating financial institutions (PFIs) which will provide sub-loans to eligible beneficiary MSMEs. The component will provide term financing to PFIs who will in turn provide financing at a maturity equal to or beyond 3 years to viable, privately-owned MSMEs affected by the crisis and other underserved market segments to help them weather the crisis, regain regular operations and continue to grow. To maximize outreach and additionality, this component focuses on the provision of longer term working capital and investment loans – in particular to smaller and underserved MSMEs.Key target groups to be financed are as follows (see Annex 2 for further detail on eligibility criteria):• Target Group 1 – Highly impacted MSMEs: Firms that experienced at least a [20] percent drop in gross sales/turnover in Q2 2020 compared to Q2 2019*.• Target Group 2 – Underserved MSMEs*: A perception of certain categories of enterprises, including women-inclusive enterprises, young enterprises and enterprises in lagging regions, as high-risk results in higher credit rationing to these groups even in normal times. These firms are expected to be impacted heavily by the COVID-19 crisis and will therefore be eligible for support under the proposed project, irrespective of firm level impact. At the minimum, 30 and 20 percent of loan proceeds for this component (FBiH and RS respectively) will be allocated to underserved MSMEs (*) and or any other criteria set forth in the Project Operations Manual.The aim of the provision of financing to Target Group 1 is to support privately-owned MSMEs affected by the COVID-19 outbreak. Target Group 2 focuses on undeserved MSMEs irrespective of firm level impact of the COVID-19 crisis. A total of 70 percent of project funds will be allocated to micro and small enterprises which have been particularly strongly affected by the crisis. In addition, at the minimum, 30 and 20 percent of loan proceeds for this component (FBiH and RS respectively) will be allocated to underserved MSMEs. Target allocations will be stipulated in the loan agreement and the POM. Moreover, the use of the line of credit funds for re-financing of loan obligations of PFIs’ existing clients will be capped at 25 percent. Project financing will be channeled via intermediaries, PFIs that meet the eligibility criteria for participation. It will be administered through two entity project implementation units (PIUs ), the RS Investment Development Bank (RS IDB) and the FBiH Development Bank (FBiH DB). There is no private sector crowding out in the proposed operation, since the WB operation is designed and will subsequently be implemented as a wholesale intervention — with Entity development banks on-lending to financial intermediaries applying market-based pricing policies. Through the project, the Entity development banks will be acting as catalysts by encouraging greater intermediation by the financial sector while refraining from creating distortions in financial markets. Rather than replacing markets, development banks will enhance them by providing term financing to financial intermediaries to on-lend to MSMEs at maturities that are otherwise unavailable to this sector. The significant market advantage that the MSMEs will derive from the project is the long-term funding, flexible in providing both working capital and investments, that is scarce on the market. Component 2 - Strengthen the institutional and program framework in support of firm recovery and growth via performance-based conditions (PBCs) (EUR 4.36 million). Component 2 provides financing for a FBiH and RS Eligible Expenditure Program to support the Federation Ministry of Development, Entrepreneurship and Crafts (FMDEC) and RS Ministry of Economy and Entrepreneurship (MEE) to: (1) adopt an annual action plan and allocate budget for programs promoting technology and digital adoption by firms to increase productivity in the aftermath of COVID-19; and (2)(i) establish an M&E mechanism to assess operations and effectiveness of firm support programs and (ii) operate all MSME support programs at Ministry under a consolidated M&E framework. Providing financing via PBCs is intended to help the authorities support programs for MSMEs on technology adoption and digitization. Use of PBCs allows the authorities, supported by the Bank, to review and revise existing programs as early evidence of COVID-19 impact on firms strengthens the argument for innovation and digitalization to be fast-tracked to build business resilience and flexibility of firms. The aim of the component is to refocus government programs in support of firm growth and helping build capabilities aimed at raising productivity, furthering recovery, and building the resilience of MSMEs in the aftermath of COVID-19. This would include streamlining existing entrepreneurship and innovation programs through better targeting, outreach, and selection and establishment of systematic M&E mechanisms to assess their operations and effectiveness. The improved alignment and targeting of policy instruments will aim to improve the competitiveness and productivity of BiH enterprises and opportunities for entrepreneurs in the post-COVID-19 new normal.40. The 2019 WB assessment of the BiH’s private sector performance identified technology upgrading through the adoption of international quality standards and the adoption of productivity improving technologies as key for private sector productivity growth and internationalization. The project will focus on getting firms to adopt new technologies, including digital means of operating during a period that requires physical distancing and includes movement restrictions for the foreseeable future. Moreover, the development of appropriate M&E mechanisms are key, including systemic reporting and collection of data on specific input and output indicators related to the implementation of the I&E support programs. This data is instrumental to monitoring the progress of the instruments towards achieving their stated objectives; or to guide appropriate adju