Document of The World Bank FOR OFFICIAL USE ONLY Report No: 76790-HT INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 13.4 MILLION (US$20 MILLION EQUIVALENT) TO THE REPUBLIC OF HAITI FOR A BUSINESS DEVELOPMENT AND INVESTMENT PROJECT April 25, 2013 Finance and Private Sector Development Caribbean Country Management Unit Latin America and the Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank's Policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 15, 2013) Currency Unit = Haitian Gourde HT 1.00 = US$0.02 US$1.00 = HT 43.09 FISCAL YEAR October 1 - September 30 ABBREVIATIONS AND ACRONYMS AFB Agence Franqaise de Developpement BDS Business Development Services BRH Banque de la Republique d'Haiti CDEE Centre de Developpement de /'Entreprise et de 1'Entrepreneuriat Fl ----------- Centre de Facilitation des Investissements CIC Investment Climate Department CPRA Commission Pr sidentielle de R4forme du Droit des Affaires CTMO-Hope Tripartite Presidential Commission for the implementation of the Hope Law DA Designated Account DB JDoing Business DEC/DIME Development Economics Vice Presidency/ Development Impact Evaluation DZF Direction des Zones Franches EPZ Export Processing Zone ERR 1Economic Rate of Return ESMF Environmental and Social Management Framework EU European Union FA Financing Agreement FM Financial Management FY Fiscal Year GDP Gross Domestic Product GNI Gross National Income GoH Government of Haiti HELP Haiti Economic Lift Program I HOPE II --------------------- 1 Haitian Hemispheric Opportnity through Partnership Encour..a..g..e..m..e..n .t A.c .t....... IADB Inter-American Develop ment Bank IBRD International Bank for Reconstruction and Development IDA International Development Association IEZ Integrated Economic Zone IFC International Finance Corporation IG Investment Generation IMF International Monetary Fund ISN Interim Strategy Note LAC .Lat America and the Caribbean................... MCI iMinistry of Commerce and Industry M&E______ Mnitoring and Evaluation MEF iMinistr of Economy and Finance MSME Micro, Small and Medium Enterprises NPV Net Present Value OAS Organization of American States ORAF Operational Risk Assessment Framework OSS One Stop Shop PIM Parc1Industriel Metropolitain PDNA Post-Disaster Needs Assessment PDO Project Development Objective Fu ----U-- 1Pro ect Implementation Unit PPD Public-Private Dialogue PPA Project Preparation Advance PPP Public-Private Partnership PSD Private Sector Development PSEF Private Sector Economic Forum SME Small and Medium Enterprises SONAPI Societe Nationale des Parcs Industriels UNESCO United Nations Educational, Scientific and Cultural Organization UCP 1 Un itede Coordination de Projet US United States USAID United States Agency for International Development US$ United States Dollar UTE iUnite.Technique d 'Execution WB World Bank WBG World Bank Group Regional Vice President: Hasan A. Tuluy Country Director: Alexandre Abrantes Sector Director: Marialisa Motta Sector Manager: P.S. Srinivas Task Team Leader: Juan Buchenau HAITI Business Development and Investment Project TABLE OF CONTENTS Page I. STRATEGIC CONTEXT .................................................................................................1 A. Country Context ......................................................... 1 B. Sectoral and Institutional Context. .................................... 2 C. Higher Level Objectives to which the Project Contributes ................... 4 II. PROJECT DEVELOPMENT OBJECTIVES ...........................................................4 A. PDO........................................................ 4 B. Project Beneficiaries ..................................... ........ 4 C. PDO Level Results Indicators......................5.... ............5 III. PROJECT DESCRIPTION ......................................................................................... 5 A. Introduction.......................................... .......... 5 B. Project Financing .......................................... ..... 8 Lending Instrument ......................................... ....... 8 C. Lessons Learned and Reflected in the Project Design. ......... ............. 8 IV . IM PLEM ENTATION ..................................................................................................... 10 A. Institutional and Implementation Arrangements .................... ..... 10 B. Results Monitoring and Evaluation (M&E).............. .............. 11 V. KEY RISKS AND MITIGATION MEASURES......................................................12 A. Risk Ratings Summary Table ...................................... 12 B. Overall Risk Rating Explanation .............................. ...... 12 VI. APPRAISAL SUMMARY .........................................................................................13 A. Economic and Financial Analyses .......................... ......... 13 B. Technical .................................................... 14 C. Financial Management............................................ 14 D. Procurement ......................................... ......... 14 E. Social (including Safeguards) ...................................... 14 F. Environment (including Safeguards) ................................. 15 G. Other Policies Triggered ............ . .. . . . ................ 15 Annex 1: Results Framework and Monitoring .................................................................... 16 Annex 2: Detailed Project Description ...................................................................................20 Annex 3: Implementation Arrangements ............................................................................. 32 Annex 4: Operational Risk Assessment Framework (ORAF).............................................49 Annex 5: Implementation Support Plan ................................................................................ 53 Annex 6: Economic and Financial Analysis ......................................................................... 56 List of Tables Table 1: Project Cost and Financing ....................................................................................... 8 Table 2: Risk Ratings Summary .............................................................................................. 12 Table 3: Responsible agencies for implementation..............................................................33 Table 4: Project Cost and Financing ..................................................................................... 34 Table 5: Allocation of proceeds for IDA Financing Agreement......................................... 36 Table 6: Summary of Procurement Plan ............................................................................. 40 Table 7: Thresholds for Procurement Methods and Prior Review.....................................42 Table 8: Institutional Support ................................................................................................ 54 Table 9: Partners......................................................................................................................... 55 DATA SHEET Haiti Haiti Business Development and Investment Project (P123974) PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSPF Basic Information Date: April 25, 2013 Sectors: General industry and trade sector (60%), Agro-industry, marketing, and trade (40%). Country Director: Alexandre Abrantes Themes: Micro, Small and Medium Enterprise support (40%), Sector Manager: P.S. Srinivas Regulation and competition policy (30%), Trade Director: Marialisa Motta Facilitation and market access (30%) Project ID: P123974 EA Category: B - Partial Assessment Lending Instrument: Investment Project Financing Team Leader(s): Juan Buchenau Hoth Does the Project include any CDD component? No Joint IFC: No Recipient: Republic of Haiti Responsible Agency: Ministry of Commerce and Industry (MCI) Contact: Hugues Joseph Title: Directeur du Cabinet du Ministre Telephone: +509 - 4890-0158 Email: Huguesjoseph@yahoo.fr Project Implementation Start Date: July 1, 20131 End Date: May 31, 2018 Period: Expected Effectiveness Date: July 1, 2013 Expected Closing Date: May 31, 2018 Project Financing Data(US$ Million) Loan [X ] Grant [ ] Other [ ] Credit [ ] Guarantee For Loans/Credits/Others Total Project Cost (US$ M): 20.00 Total Bank Financing (US$ M): 20.00 The Project was prepared with support from a Project Preparation Advance (PPA), which was effective on July 24, 2012. 1 Financing Source Amount(US$M) BORROWER/RECIPIENT 0.00 IDA Grant 20.00 Total 20.00 Expected Disbursements (in US$ Million) Fiscal Year 2014 2015 2016 2017 2018 Annual 3.0 4.3 4.8 4.6 3.3 Cumulative 3.0 7.3 12.1 16.7 20.0 Project Development Objective(s) The objective of the Project is to assist the Recipient in: (a) improving the conditions for private sector investment and inclusive growth; and (b) improving its capacity to respond promptly and effectively to an Eligible Emergency. Components Component Name Cost (US$ Millions) 1 - Business Environment and Investment Generation 10.0 2 - Business Development Services for MSMEs 7.0 3 - Project Implementation, Evaluation and Monitoring 2.5 4 - Immediate Response Mechanism 0.5 Compliance Policy Does the Project depart from the CAS in content or in other significant respects? Yes [ ] No [X] Does the Project require any exceptions from Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy exception sought from the Board? Yes [ ] No [X] Does the Project meet the Regional criteria for readiness for implementation? Yes [ X] No Safeguard Policies Triggered by the Project Yes No 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 11 Effectiveness and Disbursement Conditions Name Recurrent Due Date Frequency Recipient has adopted operations manual satisfactory by No Effectiveness Once IDA (FA: Section 4.01) The action plan referred to under component 1.2 (b) of No Disbursement condition for Once the Project has been carried out in a manner satisfactory Category lb to the Association.(FA: Section IV.B. 1.b) Recipient has submitted selection criteria for IEZs No Disbursement condition for Once satisfactory to IDA (FA: Section IV.B. 1.c) Category 1c Recipient has adopted the Matching Grants Manual No Disbursement condition for Once satisfactory to IDA (FA: IV.B. 1.d) Category 3 Emergency Expenditures under component 4 of the No Disbursement condition for Once Project, unless and until the Association is satisfied, and Category 6 notified the Recipient of its satisfaction, that all conditions have been met in respect of said activities (FA: Section IV.B.1.e) Legal Covenants Name Recurrent Due Date Frequency MEF / MCI contractual arrangements in place No June 30, 2013 Once satisfactory to IDA (FA: Section IA 2 of Schedule 2) Recipient has submitted evidence acceptable to IDA, No Latest 16 months after Once that MCI has adequate capacity to manage the fiduciary effectiveness aspects of components 1 through 3 of the Project (FA: Section IA 3 of Schedule 2) Team Composition2 Bank Staff Name Title Specialization Unit Juan Buchenau Hoth Senior Financial Sector Task Team Leader LCSPF Specialist Armando Heilbron Senior Investment Promotion Investment Climate for CICIN Officer Industry Daniel Coutinho Operations Officer Investment Climate CICIN Gokhan Akinci Lead investment policy Special Economic Zones FCDKP Officer, SEZs Thomas Moullier Senior PSD Specialist Investment Climate - CICBR Business Regulation Penelope Demetra Fidas PSD Specialist Investment Climate CICBR Maria Deborah Kim Operations Officer Economic Development LCRRF Nyaneba E. Nkrumah Senior Natural Resources Environment Safeguards LCSDE 2 Sylvie Debomy, Diego Borrero, Bernard Drum, Shaun Mann, Julius Thaler, James Crittle, Nidal Mahmoud, Alois Ndorere, Austin Kilroy and Patricia Melo also provided valuable contributions to project design and some of them may continue doing so during implementation. 111 Management Specialist Peter Lafere Social Development Specialist Social Safeguards LCSCO Ghada Youness Senior Counsel Legal LEGLE Prosper Nindorera Senior Procurement Specialist Procurement LCSPT Franck Bessette Senior Financial Management Financial Management LCSFM Specialist Victor Ordoilez Conde Finance Officer Disbursement CTRLN Daniel Ortiz del Salto Extended Consultant Private Sector Development LCSPF Monica Rivero Program Assistant Private Sector Development LCSPF Karina Baba Junior Professional Associate Financial Sector Development LCSPF Non Bank Staff Name Title Office Phone City Locations Country First Administrative Location Planned Actual Comments Division Haiti Nord, Nord Ouest, For IEZs, to be X Support for Integrated Ouest, Centre, determined by site Economic Zones and business Artibonite, Nippes, assessment(s) and due development services Grand Anse and / or diligence Sud 1v  I. STRATEGIC CONTEXT A. Country Context 1. Two-and-a-half years after the earthquake that struck near Port-au-Prince, emergency response and early reconstruction activities are phasing out. Increasingly, Haiti and its partners are focusing on the structural issues that hamper the country's development and on building public and private institutions that can deliver goods and services to its 10 million citizens, of whom 78 percent live on less than US$2 a day. Responding to short-term imperatives, while pursuing medium-term objectives, is a critical challenge for government and donors alike. 2. Despite the many challenges posed by the repeated shocks that have hit the country in recent years, the macroeconomic outlook for FY13-15 is expected to be favorable, due to substantial externally financed investments in reconstruction and the government's strong focus on promoting economic growth and investment. Under the right conditions, Haiti can capitalize on its location near major markets, its preferential trade agreements with the US, Canada and Europe, and its comparative advantages in several sectors, such as agribusiness, apparel, tourism and, potentially, light manufacturing. However, to increase foreign and local private investment and achieve high levels of inclusive and sustained growth and job creation, the country needs to address longstanding structural problems, with special attention to the business environment, the investment framework and the performance of micro, small and medium enterprises (MSMEs). 3. In the years before the earthquake, the country faced a sharp rise in basic food and fuel prices and exceptionally difficult weather conditions (four consecutive hurricanes in 2008), which caused a loss of 15 percent of Gross Domestic Product (GDP). Furthermore, there was a decline in remittances and trade, due to the global economic crisis. In the aftermath of the earthquake, the March 2010 Post-Disaster Needs Assessment (PDNA) evaluated total damages and losses at US$7.9 billion, or 120 percent of GDP, and reconstruction needs at US$11.3 billion. GDP per capita had been falling: it was only US$656 in 2009 (in current US$) and fell a further 6.6 percent by 2010. In 2011, despite a slight upward trend (4.2 percent), Haiti remained the 23rd poorest country in the world, between Mali and Bangladesh. In addition, reconstruction efforts were hampered by a lengthy political transition after the Presidential elections of May 2011 and stability challenged by several changes in Government composition since. 4. Employment in Haiti is mostly informal, working conditions are precarious and incomes are very low. The minimum wage is 200 gourdes per day - equivalent to US$ 5. According to available data, only 19 percent of the country's adult population receives a regular wage, while 79 percent are reported to be self-employed. Information about unemployment is not available, but it can be assumed that a substantial part of the economically active population in the informal sector is underemployed. This situation has provoked about one million Haitians to migrate, mainly to the Dominican Republic, the United States, and to Canada. In 2012 the 1 country registered officially an inflow of approximately US$ 1.6 billion in remittances3, which accounted roughly for 19 percent of the Haiti's GDP. B. Sectoral and Institutional Context 5. Although Haiti presents a number of comparative advantages and a significant potential for growth in certain sectors, the country also faces a number of constraints. These include: (i) a chronically poor business environment marked by contradictory and outdated regulations, (ii) an atomized MSME sector, which lacks skills, access to finance, and links to stable value chains; and (iii) poor physical infrastructure, to name some of the most relevant. 6. The World Economic Forum (WEF) reports that the country is one of the least competitive in the world, ranking 141/142 in the Global Competitiveness Index. Notably, Haiti's availability and affordability of financial services and the ease of access to loans is among the worst.4 According to the World Bank Financial Inclusion Index, only 8% of the adult population has received a loan in 2011 and just 22% have an account at a formal financial institution.5 The regulatory framework is particularly challenging for firms: Haiti is ranked h 6 174t out of 185 countries on the ease of doing business. Finally, competition is very weak as there is no comprehensive policy to govern this area, which may be associated with the high cost of firm-level inputs as well as consumer goods. 7 7. Opportunities for inclusive growth and formal jobs in Haiti might benefit from the country's location near major markets, its preferential trade agreements with the US, Canada and Europe, and its comparative advantages in several sectors, such as agribusiness, apparel, tourism and, potentially, light manufacturing.8 Such opportunities can materialize, if Haiti improves its business environment and the conditions for investment. With abundant affordable labor and close proximity to major markets, Haiti possesses good potential to attract new investment in these sectors, as well as in construction and logistics, while transitioning to higher-value industries and services. 8. In countries like Haiti, where the business environment and uncertainties about land ownership may discourage investors, there is a strong motivation to attract investment in specific zones, where investors can be assured clear land tenure, basic infrastructure, as well as policies that are conducive to investment. Integrated Economic Zones (IEZs)9 therefore present 3 It is estimated, that up to 30% of the total remittance volume is not captured in the official statistics; a large portion of remittances from the Dominican Republic are delivered through informal channels. 4 World Economic Forum. Global Competitiveness Report 2012-2013: Haiti. Haiti ranks 138/144 on availability of financial services; 139/144 on affordability of financial services; and 142/144 on ease of access to loans. 5 World Bank. Financial Inclusion Index (2011 data.) Ash Demirguc-Kunt and Leora Klapper, 2012. 6 http://www.doingbusiness.org/ . For example, the time required to export or import is around one month. Business start-up procedures cost 286% of GNI per capita, and take 105 days. 7 World Economic Forum. Global Competitiveness Report 2012-2013: Haiti. Haiti ranks 134/144 economies on the intensity of local competition, 144/144 on the extent of market dominance, and 143/144 on the effectiveness of anti- monopoly policy. 8Haitian Institute for Statistics and Data (IHSI.) Economic Accounts for 2012, preliminary estimates. According to the latest data available, agriculture (including forestry, husbandry and fishing) contributed to 22.6% of GDP; manufacturing industries contributed 8%. Tourism receipts, from World Bank data 2009, contributed 8% that year. 9 IEZs are a category of Special Economic Zones (SEZs), in which site operators lease or sell space to investors in areas with clear land titles under specific laws and regulations. The term "integrated" emphasizes, that in Haiti such 2 a viable mechanism to address these constraints. The Government of Haiti (GoH) has announced its goal to establish at least two new IEZs over the next three years, as a key platform to facilitate private investment and help it achieve its goal of creating 500,000 jobs. IEZs alone will not create all these jobs, but represent one of the best options to contribute to this ambitious target. 9. Further opportunities for jobs and growth can emerge if MSMEs can be supported to become suppliers of IEZs and other value chains, by improving the quality of their goods and services and achieving economies of scale. However, in order to rise to this challenge, MSMEs in particular will require support to finance smaller fixed assets, for which loans are not available in the marketlo, and to enhance their business skills. 10. The Government of Haiti is well aware of the impediments to private sector development. In order to facilitate economic growth and increase formal employment, its priorities include: (i) a strong push to reform the business environment, especially in aspects measured by the Doing Business Report; (ii) the establishment of Integrated Economic Zones (IEZs) combined with a variety of activities to promote local and foreign investment; (iii) a sectoral approach that privileges agribusiness, apparel and tourism; and (iv) several programs to strengthen MSMEs. 11. To advance this agenda, the Government has already taken important steps. In September 2012, the Presidential Commission for the Reform of Commercial Laws (Commission pour la Reforme du Droit des Affaires, CPRA) was established as the entity in charge of drafting legal reforms to the business environment, which has already submitted several draft laws to Cabinet." Furthermore, the Government is setting up a high level Task Force involving several public and private sector entities to advance an ambitious business environment agenda. President Martelly recently issued a new regulation for Free Zones,12 while the Government pursues an aggressive plan to open new IEZsl3 and expand existing ones. In addition, the government has initiated activities in support of MSMEs, which include setting up a Partial Credit Guarantee Fund14, a credit registry at the Central Bank, and a variety of measures to facilitate the access of MSMEs to Business Development Services (BDS) and finance. 12. To further advance in these areas, additional steps need to be taken in order to: 15 (a) Finalize and implement a plan to improve the business environment zones are expected to have economic linkages with the local economy in contrast to some SEZs, which operate as enclaves, isolated from the local economy. 10 Typical investments of smaller MSMEs amount usually to less than US$ 20,000 and fall in a range that is significantly larger than the loans provided by microfinance institutions and financial cooperatives but smaller than those provided by banks. 1 The CPRA's mandate was recently extended for a period of six months. 12 The new regulation establishes, among others, appropriate environmental and social safeguards and has already being applied to develop a new free zone in Palmiers. " A new Industrial Park was established after the earthquake in Caracol and is already in operation. 14 The Partial Credit Guarantee Fund is supported by IDA through a grant (P121391). " This should focus on simplification of procedures for business entry and exit, operations (e.g., licensing & inspection regimes), trade logistics, MSME access to finance; and protection of minority shareholders. Measures must also be taken to establish a framework for competition in certain sectors such as agribusiness and tourism; 3 (b) Further improve the legal and incentive framework for investment in IEZs 6; and, (c) Establish linkages between MSMEs and large firms in promising value chains of key identified sectors, in order to leverage investments in these sectors. C. Higher Level Objectives to which the Project Contributes 13. The proposed Project is included in the World Bank Group's (WBG) Haiti Interim Strategy Note FY 13-14 (ISN 2 - 71885 - HT), discussed in September 2012. The ISN programs a second tranche of the US$500 million allocated to Haiti from the International Development Association (IDA) 16 Crisis Response Window. The objectives are to: (i) reduce vulnerability and increase resilience, (ii) encourage sustainable reconstruction, (iii) build human capital, and (iv) revitalize the economy. Strengthening governance is a crosscutting theme. The Project constitutes a key instrument for the achievement of the fourth strategic objective. It responds to Haiti's priorities to improve the business environment, promote investments, facilitate the creation of sustainable private sector jobs, strengthen MSMEs and promote economic decentralization outside Port-au-Prince through IEZs. Project activities complement and are coordinated with other WBG projects, leveraging the upcoming Cultural Heritage and Sustainable Tourism Project and WBG advisory work to promote foreign investments (IFC/CIC Haiti Investment Generation project). II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 14. The objective of the Project is to assist the Recipient in: (a) improving the conditions for private sector investment and inclusive growth; and (b) improving its capacity to respond promptly and effectively to an Eligible Emergency. 15. This will be done at the national level by supporting the Republic of Haiti to improve, inter alia, the regulatory frameworks that govern business activities, related procedures, and the capacity of implementing institutions. To facilitate private sector investment, GoH will update the IEZ law and build capacity in its implementing agency, while preparatory work will assess the feasibility of at least one IEZ. Business Development Services (BDS) will support MSMEs through technical assistance and matching grants to such firms operating in and around IEZs, as well as serving the tourism sector, as part of a strategy to promote a more inclusive model of economic growth. B. Project Beneficiaries 16. The direct Project beneficiaries are private sector operators, domestic and foreign, especially MSMEs, their owners and employees. Business environment reforms shall create a more level playing field for all firms and especially for MSMEs. Simplified procedures to open 16 Necessary reforms include drafting a new law to govern the establishment of IEZs to replace the three current policy and regulatory regimes [Free Zone (FZ) law, Industrial Park (IP) law, and Investment Code (IC)], that have resulted in investor confusion and higher costs; as well as the definition of a coherent, non-distortive incentive framework for their operation, and creation of institutions to facilitate investments (such as a one-stop shop). 17 In this, it will help the GoH implement, among other, the recommendations of the Doing Business Report. 4 a business, obtain construction permits and operational licenses, access to finance and enhanced competition, should help MSMEs to establish and grow. Reforms to debt resolution and business exit procedures are expected to expand credit to firms while preserving value (and jobs) of viable firms in distress. The introduction of an enabling environment for IEZs and the preparation of feasibility studies for one or more potential IEZ sites are expected to create necessary conditions to increase local and foreign investments in selected geographic areas, in which IEZ firms would establish commercial relations with local businesses. BDS support to MSMEs to enter value chains, will contribute to inclusive growth, targeting especially women. C. PDO Level Results Indicators 17. The following outcome indicators will be used to measure the achievement of the PDO: (a) Business environment reforms: initially, the improved business environment will be assessed by improvements in four to five measures that assess the quality of the business environment. The number and volume of loans secured with moveable assets will measure the impact of reforms to secured transactions and insolvency frameworks. (b) Investment generation: The completion of at least one feasibility study for IEZs is a process indicator. Increased private investments and job creation in two to three key sectors (agribusiness, apparel, or tourism), measured by the number and volume of additional investments and jobs (disaggregated by gender) created therein, facilitated by the Project, is an expected outcome. (c) Business development services: growth of supported MSMEs linked to value chains in key sectors, measured by the number of additional full-time jobs in MSMEs supported by the Project, disaggregated by gender. 18. A more detailed presentation of the outcome indicators and a description of the intermediate indicators can be found in Annex 1. III. PROJECT DESCRIPTION A. Introduction 19. This Project focuses on a selected and limited number of issues, where impact is likely to be significant and sustainable. Support is provided as part of a coordinated WBG approach which takes into account projects supported by the Inter-American Development Bank (IADB), the European Union (EU) and other partners. The Project will continue to leverage ongoing WBG advisory work in the areas of Investment Generation1s and Doing Business Reform, including on financial inclusion and secured transactions19. The successful implementation of the Project will require maintaining a fluid dialogue involving the executive and legislative branches of the government as well as private sector representatives and donors. 1 This advisory work helped provide a regulatory assessment for IEZ, draft the Presidential Decree for Free Zones mentioned above and carry out a scoping exercise involving 70 potential IEZ sites, as well as facilitate investments in the new Caracol Industrial Park. 19 Support in this area includes the Doing Business Reform memorandum and Action Plan, as well as the relevant inputs for the drafting of a Secured Transactions Law that is to be presented to the Haitian Parliament. 5 Project design pays special attention to leveraging existing entitieS20 that could support public private dialogue (PPD) and serve as a vehicle for stakeholder buy-in and informed decision making. Concretely, the Project will support workshops to include relevant stakeholders in discussions on the design of each of the activities, such as prioritizing reforms in the Business Environment Action Plan, selecting IEZ sites, and targeting of sectors and locations for MSME support. Component 1: Business Environment and Investment Generation (US$ 10 million equivalent) 1.1. Business Environment Reform: 20. This subcomponent will contribute to the design and implementation of economy-wide business environment reforms, as an improved business environment is correlated with higher private sector growth21. The activities comprise: (a) Assisting the Recipient in the design and implementation of economy-wide business environment reforms to improve the business environment through: (i) the implementation of a detailed action plan to: (A) revise the regulatory framework for secured lending; establish an electronic collateral registry; and provide training to enhance the capacity of registry staff and financial market clients; (B) improve the insolvency framework by updating the regulatory framework; building awareness and enhancing the capacity of the judiciary; and support the establishment of a regulatory framework and oversight mechanisms for insolvency administrators; and (C) carry out the regulatory and administrative business reforms covered by the said action plan; and (ii) the improvement of the licensing and inspection regimes in selected industries, all through the provision of goods, technical assistance, training and operating costs. (b) Provision and support to MCI for: (i) conducting a competition assessment and scoping review of the existing constraints and barriers to competitive markets in selected sectors; and (ii) identifying the legal and institutional changes required for fostering greater opening of markets to competition and addressing constraints specific to such sectors, all through the provision of goods, technical assistance, and training. (c) Provision of support to: (i) the entity under the auspices of the MCI, responsible for the legal reform related to the business environment; and (ii) the coordinating entities to be designated by the Recipient to improve the business environment, all through the provision of goods, technical assistance, training and operating costs. 1.2. Investment Generation: 21. In order to foster local and international private sector investment and growth, this sub- component will comprise the provision of support to MCI for: (a) carrying out an assessment of the existing institutions governing the industrial park and free zones to determine if the current regulatory and institutional frameworks need to be restructured; (b) preparing an action 20 E.g. the Private Sector Economic Forum, the Chamber of Commerce, and/ or the Council for Social and Economic Development 21 See Djankov, Simeon et al: "Regulation and Growth." Economics Letters 92 (3): 395-401, 2006 6 plan acceptable to IDA, based on the recommendations of the said assessment; (c) strengthening the IEZ supervisory authority, provided that the action plan referred to above has been carried out in a manner satisfactory to IDA; (d) preparing feasibility studies for the establishment of one or more new IEZs22; (e) carrying out market demand analyses and investment facilitation for existing and future IEZs; and (f) the establishment of a one stop shop (OSS) for IEZ investors, all through the provision of goods, technical assistance, Training and Operating Costs. 22. The government has announced that it may request IDA support for the development of basic on-site infrastructure23 for at least one IEZ, if the feasibility studies funded by this Project show promising results. In this case, IDA may consider the request in the form of additional financing to this Project or under another project, if an adequate legal, regulatory, and incentive 24 frameworks are in place at that time. Components 2: Business Development Services for MSMEs (US$ 7 million equivalent) 23. Business Development Services (BDS): The objective of this component is to build the capacity of MSME to serve the tourism value chain and to enter into the supply chain of IEZs supported by the Project, principally in the agribusiness and apparel sectors, thus contributing to a more inclusive model of development. The component will address an important constraint to their growth, namely their lack of business skills. This Project will target smaller MSMEs not reached by the IADB or other institutions through: 1. Provision of support to MCI for: (a) preparing a needs assessment of MSMEs in selected municipalities; (b) conducting sector-specific value-chain diagnostics; and (c) preparing the Matching Grants Manual; (d) developing a communication strategy to promote business development services; and (e) carrying out a census data mining exercise, all though the provision of technical assistance. 2. Providing business development services to MSMEs, through: (a) the provision of training to MSMEs on business improvement; (b) the provision of technical assistance to assist the trained MSMEs in preparing business improvement plans; and (c) the provision of Matching Grants to Beneficiaries to carry out subprojects. 3. Enhancing the capacity of the central and regional offices of MCI for the management, implementation, monitoring and evaluation of Parts 1 and 2 of this Component through the provision of goods, technical assistance and operating costs. Component 3: Project Implementation, Evaluation and Monitoring (US$ 2.5 million equivalent) 24. This component will support project management, monitoring and evaluation through the: 1. Provision of support to MEF and MCI for the Project implementation, monitoring and evaluation, through the provision of goods, technical assistance, training and operating costs. 22 This activity will build on a site scoping exercise to be carried out by IFC/CIC advisory services that will include a strategic environmental and social assessment. 23 Site clearance/earthworks, roads, water supply, wastewater, electrical connectivity. 24 The WBG is carrying out a parallel study on the incentive framework for IEZs with the objective of assessing whether current incentives are distortionary. 7 2. Provision of technical assistance to MCI for conducting a series of workshops for public awareness and consultation on the progress of Project. 25 Component 4: Immediate Response Mechanism (US$ 0.5 million equivalent) 25. The objective of this component is the provision of support to respond to an Eligible Emergency. B. Project Financing Lending Instrument 26. The Project will be implemented as Investment Project Financing financed by an IDA grant to the Republic of Haiti in the amount of US$20 million equivalent. Table 1: Project Cost and Financing (in US$ million equivalent) Project Components IDA % Project cost Financing Financing 1. Business Environment and Investment Generation 10.0 10.0 100 2. Business Development Services (BDS) for MSMEs 7.0 7.0 100 3. Project Implementation, Evaluation and Monitoring 2.5 2.5 100 4. Immediate Response Mechanism 0.5 0.5 100 Total Project Costs 20.0 20.0 Total Financing Required 20.0 20.0 F C. Lessons Learned and Reflected in the Project Design 27. The Project draws from the lessons learned from the World Bank Group's experience in supporting fragile and conflict-affected states (FCS) and post-disaster environments. Evaluations performed on other WBG projects in FCS26 call for prioritization and proper balance between long-term economic development and growth and short-term needs in order to strengthen institutional capacity. In addition, FCS country evaluations identified programmatic approaches, including budget support for reforms, as well as partnerships with donors and civil society, as vital for effective delivery of services. Following these recommendations, the design of the Project aims to ensure that actual reform agendas are focused and well prioritized in order to ensure their effectiveness, taking a phased approach, in order to gain momentum and stakeholder buy-in with early successes. In addition, the Project will leverage private 27 sector capacity and coordinate with other international organizations. 28. Past experience in investment climate reforms indicates the importance of understanding and linking regulations and administrative procedures with a country's social, political, and 25 This component is currently being established following a policy that applies to all new projects in Haiti in order to enable a rapid and flexible response in case of an unforeseen emergency. 26 World Bank Independent Evaluation Group (2006), "Engaging with Fragile States: an IEG Review of World Bank Support to Low-Income Countries"; and: World Bank Independent Evaluation Group (2013), "Restoring Confidence and Transforming Institutions: An IEG Evaluation of World Bank Group Assistance to Fragile and Conflict- Affected Situations", World Bank Independent Evaluation Group's Approach Paper. 27 Todd, David and Todd, Hazel (2011), "Natural Disaster Response: Lessons from Evaluations of the World Bank and Others", World Bank Independent Evaluation Group's Brief. 8 economic systems. Evaluations of WBG assistance to improve the investment climate28 recommend an increased focus on reforms at the institutional level-such as supporting the implementing agencies in charge of regulations that promote competition, protect property rights and enforce contracts. In cases where comprehensive reforms are politically impossible, it may be appropriate to focus on a few problems that, if fixed, could have immediate positive effects, in order to build political support for further reforms. Considering these lessons and the priorities of the GoH, the Project has identified reforms to secured transactions as an important element of an agenda to increase access to finance and is in process of defining other reforms, considering their feasibility and impact, especially on MSMEs. 29. IEZs are defined as geographically delimited areas administered by a single body, encouraging investment with certain policy tools to businesses which physically locate within the zone . To be successful, and considering global experience, IEZs should ensure that their development and management are based on free market principles in which market/investor demand leads the site selection process (rather than picking sectors without due analysis, or selecting politically preferential geographic regions). IEZs are perceived by investors as turn- key connection points with simplified business processes and quick access to markets, without the usual burden of acquiring industrial land, utility connections, cumbersome business start-up processes and trade infrastructure. Under the Haitian IEZ concept, mechanisms are developed to involve local firms, which are mostly informal and small, as suppliers of the firms in the IEZ as well as of the providers of goods and services to the workers in such IEZs. The Government of Haiti launched its IEZ strategy in December 2011, supported by the WBG.30 30. The design of the BDS component reflects lessons from MSME assistance programs in general and specifically matching grants. These lessons are gathered from several studies: one conducted in four countries in Latin America, one cross-country study of sixty World Bank projects, and one study on programs in Africa. These studies conclude that the key risks to matching grant programs are related to: (i) the distortion of eligibility criteria and political capture; (ii) overly strict eligibility criteria that may exclude most firms; and (iii) strict conditions, which made it difficult and burdensome for eligible firms to apply and receive support.31 To mitigate these risks, activities in this project will : i) clearly identify the market failures and barriers to be overcome based on research work, baseline studies, and sector- specific diagnostics to avoid their distortion and political capture; ii) provide matching grants with clearly defined eligibility criteria, adequate and attractive grant amounts, simple procedures and appropriate marketing; and, iii) establish an implementation unit with well trained staff that provides grants based on an independent and transparent approval process. 28 World Bank Independent Evaluation Group. See: http://Inweb9O.worldbank.org/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/DE4527B2FDEC879285257172007 99B96/$file/investment climate evaluation.pdf 29 FIAS, World Bank Group. "Special Economic Zones: Performance, lessons learned, and implications for zone development." April 2008. Found on: https://www.wbginvestmentclimate.org/uploads/SEZs%20- %20Performance,%2OLessons%2OLeamed%20and%20Implications%20for%2OZone%2ODevelopment.pdf 30 World Bank Group / FIAS (2008), "Special Economic Zones Performance, Lessons Learned, and Implications for Zone Development". 31 Francisco Campos, Aidan Coville, Ana Fernandes, Markus Goldstein and David McKenzie (2012) "Leaming from the experiments that never happened: Lessons from trying to conduct randomized evaluations of matching grant programs in Africa" World Bank Policy Research Working Paper no. 6296. 9 IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 31. The Project will be executed by the Ministry of Commerce and Industry (MCI).32 Fiduciary aspects will be handled initially by the Project Coordination Unit (l'UnWit de Coordination de Projet, UCP) at the Ministry of Economy and Finance (MEF), given that the MCI does not have in house the needed capacity to implement IDA projects33. With support of the Project, the MCI plans to establish its own fiduciary capacity to take over these tasks from UCP in order to enhance the capacity of MCI, reduce transaction costs and facilitate communication between the technical and fiduciary teams. For this, MCI will enter into an agreement with MEF, acceptable to IDA and for a duration of 18 months. Two months prior to the term of that agreement, IDA will assess the capacity of MCI to handle the fiduciary aspects of the Project. The transfer of fiduciary responsibility from UCP to MCI shall not take place unless and until IDA has satisfactory evidence that MCI has fulfilled the requirements which enable it to carry out the fiduciary responsibilities related to the Project. 32. The MCI will nominate a Project Coordinator to coordinate its implementation with public and private Project stakeholders, oversee the progress of all Project activities and ensure that its objectives and targets are met. 33. The MCI will lead Project work on Business Environment reforms, collaborating with the above mentioned Task Force for Business Environment Reform, which is currently being set up. Legal reforms will be prepared by the entity responsible for the drafting and revising commercial laws and regulations related to the business environment. For the implementation of each specific reform, the MCI will work with relevant public stakeholders (e.g. with the Tax Authority for the establishment of the electronic collateral registry) and private stakeholders (e.g. the Chambers of Commerce) to ensure its consistency. 34. MCI will coordinate Project activities related to the reform of the legal and institutional framework for IEZs with the entity responsible for the legal reform related to the business environment. The sites for feasibility studies (to be financed by the Project) will be selected in accordance with selection criteria satisfactory to IDA by MCI, in consultation with the Prime Minister, the MEF, the Comit Interministiriel dAmnagement du Territoire (CIAT), the DZF, SONAPI, relevant sector ministries and agencies, local authorities, as well as private sector and civil society representatives - in order to ensure their involvement, validation and support. While these consultations will be an important part of the site selection process, the final decision rests with the MCI. The realization of feasibility studies that will comply in their social and environmental assessments with applicable WBG standards for Public Private 32 The Project was initially to be executed by the MEF, as it also involved the Ministries of Tourism and Culture. Its execution was transferred to the MCI in February 2013, after the decision was made to reduce its scope to the activities described in this document (see also footnote 17). Initially, the Project was to be implemented by the Unite Technique d'Execution (UTE) at the MEF. The MEF decided at the beginning of February 2013 to specialize its implementation units. Due to this decision, this project will be now be implemented in its initial stage, as described, by UCP. As project preparation was carried out to a large extent by the UTE, fiduciary responsibilities and implementation arrangements have been adjusted to adapt to this situation. Among other things, the UCP has revised and adapted the safeguards documents to reflect this new reality. The UCP has already a clear record implementing IDA projects. 10 Partnerships (PPPs) will be coordinated by the new IEZ authority or by one of the existing entities (SONAPI, DZF), until the new authority is in place under the auspices of the MCI. 35. The recently established Centre de Developpement de 'Entreprise et de l'Entrepreneuriat (CDEE), which operates within the MCI, will be responsible for activities related to the implementation of BDS activities. The CDEE's regional office in Cap-Haitien will be the base to start their implementation in the North. The procedures for the implementation of the BDS activities will be similar to those of the two IADB BDS projects, which are also operated by CDEE and which target larger firms, in order to ensure a coherent approach. 36. In order to flexibly adapt to a fast changing environment, the Project will take a phased approach, focusing initially on activities with immediate impact as it prepares further interventions. During the Project's first phase (up to 30 months), well defined and agreed upon activities34 will be financed and implemented. An early mid-term review will be undertaken to determine the most effective, demand-driven activities to be implemented in the second phase. B. Results Monitoring and Evaluation (M&E) 37. MCI will set up and operate an M&E system with support from IDA. Joint teams including representatives from IDA with participation of the MCI and, initially, the UCP, will monitor Project progress. An M&E system will be put in place for different Project activities to ensure that required data are regularly generated and tracked. For example, to track investment and jobs created through the Project's investment promotion activities, MCI and other stakeholders (such as CFI, DZF and eventually the IEZ Authority) will establish an investor tracking system and periodically report data, beginning with Project effectiveness. In addition to monitoring activities, the Project will support rigorous impact evaluations for two activities, most likely analyzing the impact of the secured transaction reform on loans to MSMEs and that of different types of BDS services on the performance and growth of supported MSMEs. 38. Each component will require monitoring of specific data to measure progress towards Project objectives, and the MCI will be the leading supervisory authority of this monitoring. Progress towards the project development objective will be measured by activity. Progress on the business environment reform activities will initially be measured by: number and value of loans secured with moveable assets; number of investment climate reforms, including reforms measured by the Doing Business report. M&E of business environment reforms is likely to be coordinated closely with local stakeholders. Investment generation activities will be measured by: additional investments (volume and number), and jobs created therein. The BDS activity will be measured by the additional jobs created and increase in sales of the BDS recipients. Sustainability 39. The sustainability of the Project in implementing needed reforms to the business environment will strongly depend on the capacity of the Government to achieve results in the short run, in order to demonstrate the economic benefits of such reforms for Haitian and foreign businesses. The sustainability of the activities of the Project to enhance the legal and 34 Some activities were advanced significantly with WBG support during project preparation and some are already being implemented in the frame of a Project Preparation Advance (PPA). Examples of advanced work include the intensive dialogue on actions to improve the business environment; the drafting of a secured transactions law in coordination with CPRA and the issuance of a new framework for Free Zones. 11 institutional framework for the operation of IEZs, including the establishment of a one-stop shop, will depend on the quality of the model to be implemented. Overall, the activities to promote IEZs in Haiti, including those of the Project to facilitate the creation of one or more new IEZs, will depend on the capacity of the Haitian economy to establish firms that can compete in time in international markets by leveraging Haiti's geographic location, increasing productivity and enhancing the skills of the Haitian workforce. BDS activities are intended to be temporary. Their sustainability will depend on the selection of viable and eligible firms and on the quality of the provided services which both are expected to result in an enhanced ability of supported MSMEs to continue growing after the expiration of the Project. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Table 2: Risk Ratings Summary Risk Rating Stakeholder Risk Substantial Implementing Agency Risk High - Capacity Substantial - Governance High Project Risk High - Design Substantial - Social and Environmental High - Program and Donor Moderate - Delivery Monitoring and Sustainability High Overall Implementation Risk High B. Overall Risk Rating Explanation 40. Haiti is recognized by the WBG as a Fragile and Conflict-Affected State. The constant threat of political instability, civil unrest, natural disasters, combined with the insufficient institutional capacity of public and private institutions leads to the preparation and implementation overall risk rating to be High (High Impact/High Likelihood). The Project attempts to mitigate this risk by: (i) phasing activities over time taking into account the capacity of the different agencies, (ii) anchoring the Project at the MCI, which has general responsibility within the GoH for the topics supported by this project, (iii) engaging initially the UCP, an agency with a clear track record implementing IDA projects, as the Project Implementing Unit (PIU), reinforcing its capacity, and establishing a plan to transfer fiduciary responsibilities to MCI, once it has a structure and capacity acceptable to IDA, (iv) using a multi-sector team drawing on experience from different parts of the WBG, (v) having WBG staff in the field to assist Project implementation, (vi) leveraging technical assistance that will be provided through complementary advisory service projects and (vii) engaging systematically and regularly in a dialogue with relevant public and private stakeholders. Quarterly supervision missions are envisioned until mid-term, review, which is planned for 18 to 30 months after effectiveness and, depending on the evolution of the Project, thereafter. The mid-term review will provide an opportunity to revise the Project's development and make necessary adjustments. 12 41. Several other key risks emerged from the ORAF Matrix that could substantially affect the achievement of the PDO. A complete discussion of the Project's risks is presented in the ORAF (Annex 4). The main detected risks are: (a) Laws may be drafted and submitted, but not approved by Parliament, given the unstable political environment;35 (b) Institutional arrangements needed to assure the proper implementation of IEZs may not be implemented satisfactorily; (c) Institutions supported by the Project may not develop necessary institutional capacity and may furthermore not be sustainable, if government commitment to continue funding fades in time; (d) Investments into IEZs may not materialize, if their feasibility is not confirmed or if the required legal and regulatory framework does not provide a level playing field in regards to applicable incentives; (e) Coordination between ministries (including the MEF, the MCI, etc.), local authorities, and private sector representatives may not materialize; (f) MCI may not fully comply with IDA fiduciary standards, thus delaying procurement processes; (g) Monitoring and evaluation of the Project could be weak due to lack of trained staff; and (h) The country remains at risk for natural disasters and social unrest. VI. APPRAISAL SUMMARY A. Economic and Financial Analyses 42. Economic and financial rates of return have been calculated based on the Project's activities in support of investment generation and business development services, for which literature and experience gives reasonable estimates, as several of the activities lack rigorous estimation models to calculate a rate of return. If the investment generation IEZ feasibility and advisory work leads to an additional financing request for the development of one or more IEZs under this Project, economic and financial rates of return will be calculated for the proposed IEZs. Because of the difficulty in rigorously establishing a direct relationship between the project's overall support to business environment reforms and their combined economic impact, a qualitative analysis of the expected results of activities in this subcomponent, based on literature reviews, is further elaborated in Annex 6. No economic analysis was conducted for the project implementation, monitoring and evaluation, or emergency reserves components, due to the absence of generally accepted methodologies for the economic analysis of capacity-building activities. Therefore, their inclusion is justified based on cost-effectiveness. 43. Rates of return were estimated for the investment generation and for BDS. Based on conservative assumptions, an Economic Rate of Return of 23 percent for the entire Project was calculated, based on these two activities only, with net benefits of US$ 2.6 million and a positive net present value for the corresponding streams (See Annex 6). 3 Since 2008, only 7 or 8 laws/amendments have been passed (on average 2 per year), while in 2012 alone, at least 19 laws were submitted but not passed; see http://www.parlementhaitien.ht/ for statistics. 13 B. Technical 44. The Project builds on experiences gained during project preparation and on best practices of similar projects and studies in other countries and regions. Project preparation was carried out with the participation of experts from the Haitian Government and private sector, WB, and IFC, all of whom contributed to the design of the activities, using expertise gained from projects related to improved business environments, investment generation and BDS. C. Financial Management 45. The UCP manages another Bank financed project, the Infrastructure and Institutions Emergency Recovery36 and IDA's Financial Management (FM) team provides regular implementation support. It has acceptable financial management arrangements in place to take on the fiduciary responsibility for the Project. IDA will strengthen UCP's capacity so that it can cope with this project and will continue monitoring the UCP's fiduciary performance so that it keeps pace with the expansion of its activities. In the area of BDS, which is a new activity for UCP, the UCP team will receive specific training on financial management practices on matching grants operations. UCP will help establish fiduciary capacity at MCI, whose FM capacity will be assessed prior to transferring fiduciary responsibility. The Project's FM risks are rated "substantial". D. Procurement 46. IDA's Procurement team provides regular implementation support to UCP, which has acceptable procurement arrangements in place to comply with IDA policies. In addition, the UCP has recently updated its operational manual in coordination with IDA. This manual will also serve for this Project, requiring only the addition of one annex describing the specific institutional arrangements for the Project, including the planned transfer of fiduciary responsibility to the MCI. A specific training of procurement practices for matching grants operations will be offered to the UCP / MCI team in coordination with IADB. 47. However, the overall public procurement system in Haiti remains relatively weak. Despite some pre-earthquake reforms in the legal and institutional framework for procurement, human and physical capacity constraints have delayed the adoption of improved contracting practices in most government agencies. The Project's procurement risks are rated "substantial". E. Social (including Safeguards) 48. The Project's activities in business environment reform, investment generation, and BDS are expected to facilitate the creation of sustainable private sector jobs. Possible investments in one or more IEZs will further contribute to job creation in the medium to long term. BDS activities will be designed to be socially inclusive and benefit vulnerable population groups. As women mostly work in the informal sector, in low-yielding activities in agriculture or commerce, a gender-informed social analysis (SA) will be undertaken to ensure that the Project will reach out to women and vulnerable population groups, address gender specific barriers to business development, and generate inclusive job creation and equal opportunities. 49. While the Project will not finance investments into IEZs, the creation of an IEZ based on the Project supported feasibility studies may involve land acquisition, the use of eminent 36 The Infrastructure and Institutions Emergency Recovery and an additional financing: P130749 and P120895 14 domain or other measures covered by the Operational Policy on Involuntary Resettlement (OP 4.12) that would have impacts on surrounding communities. OP 4.12 has been triggered to ensure that the technical feasibility studies for IEZs will assess the social context, the situation with respect to land ownership and occupation, as well as the need for land acquisition and other land-related risks.37 The Operational Policy on Indigenous Peoples (OP 4.10) is not triggered as there are no indigenous peoples present in Haiti as defined under the policy. F. Environment (including Safeguards) 50. The Project is rated as an environmental risk Category B. The risk category is assigned with the understanding that the project will not finance the physical implementation of IEZs and that the activities supported under the matching grants initiative will not involve works with significant environmental impacts. Nevertheless, the project will support key environmental and social analysis as part of the feasibility assessments for potential IEZs. 51. The Environmental Assessment (OP/BP 4.01) policy is triggered due to: (i) the need to include environmental and social criteria into the proposed improvements to the legal, regulatory and institutional framework for IEZ under Component 1; (ii) the need to conduct environmental and social assessments as part of the feasibility studies associated with the proposed IEZ sites under Component 1; and (iii) the potential for adverse environmental impacts under the matching grants packages supported under Component 2. Other safeguards triggered include OP 4.04 (Natural Habitats), OP 4.09(Pest Management), OP 4.36 (Forests) and OP 4.11 (Physical Cultural Resources). 52. In terms of safeguard instruments, an ESMF was prepared by UTE with in-country consultations and was disclosed on April 11, 2013. The ESMF addresses many of the subprojects that have yet to be fully detailed particularly under component 2. Subprojects may include some small construction or rehabilitation of stores or work areas, equipment and 38 training. Within the ESMF is another screening tool that pertains to the MSMEs 53. The UCP will initially be responsible for the Project's safeguards tasks, until this responsibility is transferred to the MCI. Given that this project does not pose a high environmental risk, an environmental specialist will be recruited to work part-time to ensure safeguard compliance ensuring that the MSMEs are properly screened, that small works are consistently monitored, mitigated (where applicable) and supervised for possible negative environmental impacts. G. Other Policies Triggered None 3 If a site is identified for further development into an IEZ, the investment of this development will not occur under this Project, but may be supported with additional financing. At that point in time the appropriate resettlement plan would be prepared and implemented as per Bank requirements. 3 The screening tool will screen out MSMEs that have the potential to significantly impact the environment such as MSMEs that use a lot of wood or scarce natural resources, or MSMEs that may operate in natural habitat areas and will help detect and mitigate risks that these MSMEs generate waste that is not disposed of properly, or that they do not address worker safety issues, or issues related to construction of shops. 15 Annex 1: Results Framework and Monitoring Haiti: Business Development and Investment Project (P123974) Results Framework, Negotiations stage Target Values Data Source/ Responsibility for Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection 1.1 Business Environment Reform39 Value of loans secured US$ (loans covered 0 0 0 $ 1 million $3 million $10 million Annual Collateral registry UCP / MCI and WB with moveable assets per year) (to be team, coordinated with established) the MEF Number of SMEs SME (business N/A 0 0 50 150 500 Annual Collateral registry benefiting from X unit) (to be moveable collateral to established) secure loans Number of reforms Number 0 1 1 1 2 5 Annual Doing Business Doing Business report measured by the Doing report team Business report Specific reductions of Number 0 1 1 2 2 6 Annual regulatory time/cost to Doing Business operate a business40 report Doing Business report team 1.2. Investment Amount of $0 0 0 $700,000 $1.8 $3.6 Annual MCI, BRH, local MCI, CFI and Central Generation Investment million42 million43 authorities and Bank - M&E Project (US$/year) business Specialist, IEZ organizations, Authority (once Additional investments Number of 0 0 0 2 3 4 Annual investor surveys functional) facilitated by Project investment projects/year Number ofjobs Number ofjobs Annual created in new 0 0 0 19641 504 1008 investments (by gender) 39 Additional indicators will be selected at a later stage on the basis of the specific commitments of the Project to additional areas of follow-up technical assistance. 40 To be determined, based on GoH priorities 41 Job creation estimates based on IFC study, which expects that $100 million of new investments would create 28,000 new jobs, meaning each job 'costs' about $3,571 in investment. 42 This value could substantially increase, if an IEZ site is developed. 43 Idem. 16 Target Values Data Source/ Responsibility for Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection 1.3 Jobs and Growth Number Baseline data to 0 Baseline Baseline Baseline Baseline Annual Survey of BDS providers, CDEE in MSMEs (disaggregated by be gathered value plus value plus value plus value plus randomly and WBG team Additional jobs in X gender and region) from all BDS 0 2% 4% 6% 10% selected BDS MSMEs supported by recipients recipients from a the Project larger group of beneficiaries Intermediate Results Indicators Target Values Data Source/ Responsibility for Indicator Name Core Unit of Measure Baseline YRI YR2 YR3 YR4 End Target Frequency Methodology Data Collection 2.1 Business Environment Reform44 Business environment Process steps (i.e., Not existent Priority areas 1 - 2 areas of 1 - 2 reforms 1 - 2 reforms 1 -2 reforms Annual Task Force to MCI action plan (process completed or not for reform reform completed; 1 completed completed improve the indicator) completed) agreed with initiated - 2 additional business GoH and areas of environment other reform stakeholders initiated MCI and World Bank Revision of secured Process steps Not existent Legal Legal Registry Registry in Annual Group team transactions law, framework framework piloted operation establishment of drafted and approved by collateral registry collateral cabinet and registry submitted to designed parliament Competition framework Process steps Not existent Diagnostic of Legal Draft Core MCI Annual MCI MCI and World Bank (process indicator) 2 key sectors framework/a laws/amend team trained Group team completed mendments ments with other MEF drafted submitted to private sector Parliament stakeholders MCI 44 Additional indicators will be selected at a later stage on the basis of the specific commitments of the Project to additional areas of follow-up technical assistance. 17 Target Values Data Source/ Responsibility for Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection 2.2. Investment Generation IEZ Regulatory and Process steps Diverse IEZ Action plan Action plan for Institutional regimes ( Free regulatory for IEZ IEZ regulatory Framework (process zones, and regulatory and indicator) industrial institutional and institutional parks) and framework institutional framework institutions assessed framework implemented (DZF, agreed upon SONAPI) MCI, CFI, MCI - M&E Project Annual DZF, IEZ Specialist, World Bank IEZ Feasibility Study Process steps Not existent Procurement Study Authority Group team for study finalized, finalized, decision on study next steps initiated taken by authorities Creation of One Stop Process steps Not existent One stop One Stop shop Shop for investors shop implemented designed 2.3. Business Development Services for MSMEs Percentage of selected Municipalities with needs assessment of Percentage 0 50 80 100 100 100 MSMEs Cumulative percentage MCI / UCP - M&E of selected firms Percentage 0 20 40 60 80 100 Annual MCI UCP Project Specialist, receiving targeted World Bank team training Cumulative number of firms receiving Number 0 80 210 340 470 600 (total) matching grants 18 Annex 1: Results Framework and Monitoring (contd.) Haiti: Business Development and Investment Project Project Development Objective Indicators Indicator Name Description (indicator definition etc.) Value of loans secured with moveable assets Quantifies the value of loans issued. Number of MSMEs benefitting from moveable collateral to secure loans Supplements preceding indicator to clarify number of beneficiaries from loans. Number of reforms measured by the Doing Business report Tracks reforms to the business environment in topics measured by the Doing Business report Specific reductions of time/cost to open and operate a business (tbd by GoH) Quantifies the gains in efficiency to open and operate a business Amount of additional investments facilitated by the Project To measure growth in volume of investments as consequence of the Project Number of additional investments facilitated by the Project To measure growth in number of investments as consequence of the Project Number of new jobs created in new investments (disaggregated by gender) To measure the number of new jobs created due to investment facilitated by the Project, by gender Additional jobs in MSMEs supported by the Project (BDS component) To measure the impact of BDS on the creation of jobs by participating MSMEs Intermediate Results Indicators Indicator Name Description (indicator definition etc.) Business environment action plan (process indicator) To track the progress on identifying priorities and implementing the action plan Revision of the secured transactions law (process indicator) To track the implementation of the legal framework to use moveable collateral to secure loans, including the establishment of a moveable collateral registry Establishment of a competition legal framework (process indicator) To track the implementation of a legal framework for competition in two key sectors (agribusiness and tourism), including training for public and private stakeholders Creation of IEZ legal framework To track the implementation of a consistent IEZ legal framework and the establishment of a one-stop shop to facilitate investment into IEZs IEZ Feasibility study completed To track the execution of the feasibility study and the use of its results by the government Creation of a one-stop shop for investors To track the implementation of a one-stop shop to facilitate investment into IEZs Percentage of municipalities with needs assessment of MSMEs To track the percentage of municipalities on which a needs assessment of MSMEs has been conducted Cumulative percentage of selected firms receiving targeted training To track the percentage of selected MSMEs receiving targeted sector training Cumulative number of firms receiving matching grants To measure the number of firms making use of business development services 19 Annex 2: Detailed Project Description 1. The objective of the Project is to assist the Recipient in: (a) improving the conditions for private sector investment and inclusive growth; and (b) improving its capacity to respond promptly and effectively to an Eligible Emergency. 2. The Project's components will support initiatives identified by the GoH and the private sector to facilitate economic growth and increase formal employment. The GoH has established clear priorities that include: (i) a strong push to reform the business environment, especially in aspects measured by the Doing Business Report; (ii) the establishment of Integrated Economic Zones (IEZs) combined with a variety of activities to attract foreign investment; (iii) a sectorial approach that privileges agribusiness, apparel and tourism; and (iv) several programs to strengthen MSMEs. 3. Apparel presently employs 30,000 Haitians directly,45 exports close to USD 750 million to the U.S., and represents together with manufacturing about 8% of GDP. With preferential trade treatment through the HELP Act46 and the support of the Tripartite Presidential Commission on Implementation of the Haitian Hemispheric Opportunity through Partnership Encouragement Act (CTMO-Hope Act), these numbers and the labor productivity in this sector are expected to continue growing. Haiti has already demonstrated cost advantages over Bangladesh, Cambodia, India, Dominican Republic, China and Mexico in the production of specific apparel items for this market (t-shirts and chino trousers). With favorable trade access, existing and new apparel manufacturers in Haiti are well-positioned to capture a greater share of U.S. market demand, delivering up to an additional 35 million dozen knit products and 80 million woven products annually to U.S. buyers at competitive prices. 4. Agriculture, which represents over 22% of the country's GDP, is a key sector of government focus. Its National Agricultural Investment Plan identifies priorities such as "making the farmer a real entrepreneur" and "creation of added value in agriculture through the development of agro-industry in a sustainable development.47 While about 70% of Haiti is agricultural land, the annual growth rate of value-added agriculture has averaged just 0.5 % in the past twelve years, with a low of -7.5% and a high of 5.2% .48 The Government has identified a number of key constraints to development of the agribusiness sector, including: the deficit in infrastructure (especially roads and lands to host agriculture) (ii) difficulties in assuring regular and homogenous supplies, for domestic and export markets; and (iii) the absence of norms and quality control systems49. With the alleviation of these and other constraints, this sector has strong potential for development to provide local and foreign markets with high-quality tropical fruit, rice, meat and poultry, among other products. 45 Source: ADIH, Industry Association of Haiti. 46 The US HELP Act extends to 2020 duty-free access to the US for eligible knit/woven goods produced in Haiti and Dominican Republic, without regard to the source of fabric inputs. 47 Republic of Haiti. Ministry of Agriculture, Natural Resources and Rural Development. "National agricultural investment plan." 2010. 48 World Bank Data: Haiti. 49 Republic of Haiti. Ministry of Agriculture, Natural Resources and Rural Development. "National agricultural investment plan." 2010. 20 5. Receipts from international tourists were $312 million in 2009, which accounted for about 34% of the value of Haiti's total service exports and 8% of GDP that year - even in the current context of lagging skills and basic facilities. Tourism receipts are expected to rise significantly over the next five to ten years. An upcoming Project of IDA, with which this Project was originally combined, will rebuild historic and cultural sites in the country's North, and other projects are expected to emerge in Jacmel, Ile-a-Vache and other touristic areas. These are expected to contribute to the growth of the sector. 6. In addition, and given the high incidence of natural and man-made disasters, the Project will include a component for contingent emergency response. 7. The activities under the different components will be phased. The first phase until the mid- term review, which will take place latest 30 months after effectiveness, will concentrate on interventions that aim for quick results and on preparatory work that lays the ground for further reforms to the business environment, increased investment in IEZs, and expansion of the BDS to up to 600 MSMEs (beginning 18 to 30 months after implementation.). Component 1 - Business Environment and Investment Generation (US$ 10 million) 8. This component will provide support to improve the Haitian business climate by strengthening its regulatory and institutional frameworks, and promote and facilitate investment into IEZs. It will be carried out in close cooperation with accompanying technical assistance projects of the IFC and the WB (e.g. the technical assistance to be provided by the WBG on Doing Business Reforms will count with support from a trust-funded Doing Business Project). 9. GoH is currently setting up a Task Force to coordinate all business environment reforms. CFI, SONAPI, DZF and, once established, the new IEZ authority will be important counterparts to promote investments and advance the project's IEZ activities. Finally, legal reforms to all commercial laws are drafted and submitted to the Cabinet by a technical body responsible for legal reforms to the business environment under the MCI. Specific activities include: 1.1. Business Environment Reform (US$ 2 million) 10. Haiti's business environment is ranked by global indicators as among the worst in the world: the World Economic Forum rates its overall competitiveness as 141st out of 142 economies, while the World Bank Doing Business Report 2013 ranks its ease of doing business as 174th out of 185 economies. For example, the time taken to export and import is around one month. Business start-up procedures cost 286% of GNI per capita, and take 105 days. Obtaining all of the permits required to build a warehouse takes over three years. Finally, competition is very weak as there is no comprehensive policy to govern this area, which may be associated with the high cost of firm-level inputs as well as consumer goods. 11. This sub-component encompasses three major areas, namely: 50 http://data.worldbank.org 5 The Tourism and Cultural Heritage Project, which aims at restoring the monuments in the National Historic Park and in Cap-Haitien. Originally, these activities were part of the present operation, until the decision was made by IDA in December 2012 to spin them off into a separate operation, considering the complexities encountered during Project preparation. 21 L Business environment action plan and reforms: 12. This activity will assist GoH the Recipient in the design and implementation of economy- wide business environment reforms to improve the business environment through: (i) the implementation of a detailed action plan to, inter alia: (A) revise the regulatory framework for secured lending; establish an electronic collateral registry; and provide training to enhance the capacity of registry staff and financial market clients; (B) improve the insolvency framework by updating the regulatory framework; building awareness and enhancing the capacity of the judiciary; and support the establishment of a regulatory framework and oversight mechanisms for insolvency administrators; and (C) carry out the regulatory and administrative business reforms covered by the said action plan; and (ii) the improvement of the licensing and inspection regimes in selected industries, all through the provision of goods, technical assistance, Training and Operating Costs. 13. In detail, it will contribute to build capacity within the government to prioritize and implement a detailed Action Plan to improve the business environment, building on the Doing Business Reform Memorandum presented to the Haitian authorities in September of 2011. The Action Plan details reform recommendations for: business entry; construction permits; property registration; access to credit; protecting minority shareholders; trade logistics; commercial contracts; and insolvency procedures. Further support will be provided to assist the Government in reforming four to five of these or other areas of the business environment, such as business start-up and licensing. Support includes financing to: review reform proposals, get inputs from consultants for amendments to draft legislation and consultants to help implement the reform agenda (e.g., creation of one-stop shops for business registration, establishment or re- organization of property and collateral registries). All support will be coordinated so as not to overlap or contradict with existing support from other WBG projects and other institutions. 14. Currently, support is being provided, following the GoH's request, in two areas related to access to finance and business exit: secured transactions law and collateral registry and improving the insolvency framework, as well as licensing and inspection regimes. Details of this support are below. 1. Secured transactions support to: i. Revise the legal and regulatory framework for secured lending. This activity focuses on revising the Haitian Civil Code on secured lending and the law on non-possessory pledges of April 2009, to expand the scope of assets to use as collateral, improve enforcement, clarify priority of creditors, and lay the groundwork for a collateral registry. The key counterpart for this activity is the MCI, with key inputs from MEF, Ministry of Justice and BRH. ii. Create an electronic collateral registry. This activity includes: (i) purchase of hardware and software; (ii) preparing a capacity development plan for the registry, including a sustainable business model, operational processes, staffing and facilities, and communications strategy, and (iii) assisting in the design of the registry technology platform, including the identification of outsourcing solutions, if needed. The registry technology platform will provide a searchable online database where creditors can record pledges of movable assets against new loans and conduct searches to determine whether assets offered as collateral have existing liens. The key counterpart for this activity is the MEF, where the registry will be housed within the Tax Authority (DGI.) 22 iii. Conduct training and capacity building for Registry staff and financial market clients. This activity includes public awareness and training of reform beneficiaries, including public sector (registry staff, regulators, government officials, commercial judges, bailiffs) and private stakeholders (financial institutions, non-bank financial institutions, the business community and academia). The key counterpart for this activity is the MEF. In addition, other entities, such as the Ministry of Justice, the Tax and Customs authorities, and the private sector will be engaged to assist in identifying follow-up activities. 2. Insolvency framework: i. The Commercial Code dates from 1827 and, in effect, provides only for liquidation of failing companies, whereas it should include reorganization and other mechanisms to preserve value and jobs for companies in crisis. Furthermore, there is little awareness among professionals involved in the insolvency process (judges, bankers, administrators) of formal procedures other than liquidation and lack of oversight and professional qualifications. The activities include: ii. Improving the legislative framework. The initial focus will be to support the drafting of updates to the current legal provisions for bankruptcy (3rd chapter of the Commercial Code). Any amendments to a new draft law will be consistent with the new law on secured lending. iii. Building awareness and improving the capacity of courts and judges in implementing a new insolvency regime. Additionally, the Project will provide support for training and building awareness of other stakeholders, such as the administrators, Chamber of Commerce, the Banking Association, the BRH, and other government institutions. iv. Supporting the establishment of a regulatory framework and oversight mechanism for insolvency administrators (or "syndics"). This activity will support the development of a core group of professional syndics while creating minimum standards for qualification and licensing of insolvency professionals. 3. Licensing and inspection regimes: i. This activity will be carried out in close coordination with the Tourism and Cultural Heritage Project, as well as the IEZ and BDS activities of this Project in support of selected industries (e.g. tourism and agribusiness) in order to enhance regulatory quality in the inspections and licensing regimes. A number of value chain analyses from other donors covering tourism services and agricultural products note the poor quality of the inspections and licensing regimes. They show that a lack of standards and quality control hinders exports. Businesses in the tourism industry report, for example, that they are not subject to health and safety inspections, a fact which likely limits the quality of services and tarnishes the image of Haiti as a clean and safe tourist destination. ii. The activity will provide support to alleviate constraints for MSMEs, with a focus on inspection mechanisms. The Project will support an analysis of these constraints at the national or regional level, focusing initially on improving health and hygiene standards in the tourism industry and its value chains, in synergy with the Cultural Heritage and Sustainable Tourism Project. A particular effort will be supported to build awareness related to food safety among MSME owners. This activity will be carried out in close collaboration with the MCI and the Ministry of Tourism and will build on the ongoing establishment of a testing and standards body (Bureau de Normalisation), developed with support from the European Union. 23 II Competition policy framework: 15. Currently, there is no comprehensive framework for competition policy in Haiti. Collusion and extremely high prices for essential goods and services hurt private consumers and raise Haitian companies' input costs, rendering them uncompetitive. To address this issue, the Project will support MCI to: (i) conduct a competition assessment and scoping review of the existing constraints and barriers to competitive markets in the agribusiness and tourism sectors and (ii) advise on legal and institutional changes that could foster a greater opening of markets to competition and address constraints specific to these sectors, all through the provision of goods, technical assistance, and Training. Based on the results of the assessment, the MCI will determine priority areas to receive further support, with a focus on economy-wide and general antitrust issues or on removing sector-specific constraints. III. Capacity-building for the business environment reform process 16. The Project will provide support to: (i) the entity under the auspices of the MCI, responsible for the legal reform related to the business environment; and (ii) the coordinating entities to be designated by the Recipient to improve the business environment, all through the provision of technical assistance and Operating Costs. It is expected that with the above support, the MCI and its partners will achieve regulatory changes and a few legal reforms, given the traditionally complex process of building consensus across Parliament, government and the private sector. Legal and regulatory reforms to the business environment will most likely require additional extensions of CPRA's mandate (it was extended in March 2013 by six months). The MCI will monitor the institutional capacity committed to specific reforms, and may adjust as needed the support to focus on reforms that will have the most impact. 17. The GoH will receive further support to establish a communications strategy for the reforms process in order to share results and disseminate among key public and private stakeholders, thereby generating support for implementation. This support will consist of a communications consultant who will plan, design, execute, and monitor and evaluate the impact of communications strategies, activities, and campaigns about business environment reforms; write and oversee the preparation, production and dissemination of both routine and complex outreach products; and initiate and sustain effective professional relationships with key internal and/or external constituencies (including the media, civil society, NGOs, academia, businesses, government agencies, and parliamentarians. 1.2. Investment Generation (US$ 8 million) 18. With favourable trade access, existing and new apparel manufacturers in Haiti are well- positioned to capture a greater share of U.S. market demand, delivering up to an additional 35 million dozen knit products and 80 million woven products annually to U.S. buyers at 52 competitive prices. However, the lack of land with adequate services, industrial space and a working IEZ regime is an impediment for both domestic and foreign investors. 52 Us Department of Commerce, Office of Trade and Industry Information (http://tse.export.gov/TSE/TSEHome.aspx) 24 19. Uncertain land tenure is a serious constraint in Haiti, as the majority of plots are said to have several undocumented owners, and there are no registry records in place. Even if a particular property belongs to the government, settlers could claim it as their own after 10 years of uninterrupted use of the land. The GoH tends to exert powers of Eminent Domain when dealing with public interest in land with contested ownership (even if recorded as government property). Private investors have been affected by these inconsistencies - in some cases having to compensate multiple claims before being able to use a property. IEZs would help overcome this barrier: once the issue is solved by the GoH for a larger parcel of land (200-1000 ha), and the IEZ is declared in that site, new investors could negotiate more transparently with the IEZ operator to either rent or own land or industrial buildings on which to establish their operations. 20. In order to advance this agenda, the Project will support MCI for: (a) carrying out an assessment of the existing institutions governing the industrial park and free zones to determine if the current regulatory and institutional frameworks need to be restructured; (b) preparing an action plan acceptable to IDA, based on the recommendations of the said assessment; (c) strengthening the IEZ supervisory authority, provided that the action plan referred to above has been carried out in a manner satisfactory to IDA; (d) preparing feasibility studies for the establishment of one or more new IEZs; (e) carrying out market demand analyses and investment facilitation for existing and future IEZs; and (f) the establishment of a one stop shop (OSS) for IEZ investors, all through the provision of goods, technical assistance, Training and Operating Costs.Building on the work and results of the companion advisory project (Haiti Investment Generation)53, this activity aims to address shortcomings in institutional capacity for IEZs and investment promotion into IEZs. The joint IFC/WB work will support in detail the following activities: 1.2.1 The development of a new regulatory and institutional framework for IEZs and the establishment of an IEZ authority: 21. The three current policy and regulatory regimes-Free Zone (FZ) law, Industrial Park (IP) law, and Investment Code (IC)-are not conducive to attracting new investments that create jobs and enable investors to leverage Haiti's comparative advantages54. These policies and practices have resulted in investor confusion and higher costs, which are partly responsible for an underperforming Haitian zones regime. The activity will leverage the Free Zones Implementing Regulations, which are a first attempt at improving the existing framework. 22. MCI, in collaboration with the technical legal reform entity therein, will drive the IEZ legal reform process. The Project will provide the funds to support the preparatory and implementation work associated with the new IEZ regulatory framework, starting with the drafting of a IEZ Law. A companion advisory project will provide technical advice in drafting the new IEZ Law per international best practices. As a complementary activity, the Project will 5 The Haiti Investment Generation Project commenced in 2009 with the objective to create jobs and mobilize investment by supporting investment promotion activities, and the development of IEZ sites plus regulatory frameworks. 54 There are also three types of economic zones (using the WBG umbrella term) co-existing in Haiti: State-owned industrial parks, including Parc Industriel Metropolitain (PIM) in Port-au-Prince and Caracol Industrial Park, a newly established industrial estate with IADB and USAID support in the North of Haiti, both owned and managed by state entity SONAPI; Privately-owned industrial parks, like SHODECOSA; and Privately-owned CODEVI free zone in the Ouanaminthe area. 25 accompany the government's advocacy work to generate momentum and buy-in from both the main private stakeholders and the decision-makers in Cabinet and Parliament and will support the drafting of the corresponding IEZ implementing regulations. 23. Currently, multiple government entities have competing and often conflicting jurisdictional mandates over industrial space. The proposed IEZ law will establish a single IEZ authority as an autonomous regulatory authority to govern and supervise all IEZs in Haiti, which the Project will support. In the interim, prior to the passage of the proposed law, the MCI will define which existing entity will assume the roles and responsibilities of the proposed IEZ authority5. 24. Establishing an IEZ authority, possibly by merging and strengthening existing entities such as Direction des Zones Franches and/or SONAPI, will require institutional development support, staff outplacement, recruitment, training and coaching and capital/operating budget support. The Project will support this institutional development, strengthening the IEZ authority's oversight capacity in all aspects, including its capacity to properly oversee each site's compliance with applicable environmental and social safeguards, with technical inputs from the accompanying technical assistance project on the institutional framework, operating procedures, and training for staff. 1.2.2 Feasibility studies for the establishment of one or more new IEZs 25. This activity will support feasibility studies for one or more commercially viable IEZs in Haiti with participation of the private sector in their development and management. The government has announced a goal to establish two more IEZs in the next three years, as a key platform to facilitate job creation in the country. The goal is to create 500,000 jobs in that same period. Even if IEZs take time to develop, they represent one of the best options to contribute to that target. 26. The "hardware" of an economic zone-fully serviced sites with purpose-built facilities for sale or lease-is geared toward enhancing the competitiveness of manufacturers and service providers, while realizing agglomeration benefits from concentrating industries in one geographical area. Over the next five years, it is estimated that 600 hectares of serviced land will be required for industrial development in Haiti. Recognizing this need, IFC/WB performed a technical screening process, which included possible environmental and social impacts identified seven high performing sites from an original long list of 65 sites (to be developed under a PPP approach). 56 At the request of the government a second, complementary site screening will take place to reinforce existing analyses. 5 Should the IEZ Law not be enacted, the Project would continue supporting the entity chosen by MCI to take over this role. 56 The seven sites are Ganthier, Laffiteau, Corail (NABATEC), West Indies Free Zone, Fort-Liberte, Cap Haitien, and Park Hispaniola. These sites were presented to the government and other stakeholders based on their development potential during a workshop in Port au Prince on September 18, 2010. Feedback on the analysis was solicited and received, both verbally and in writing, from workshop participants representing the highest levels of government, private sector organizations, civil society associations, and the donor community. The comments of the participants largely supported the main findings of the site assessment. Final IFC reports, including that of site selection, were launched by MCI as part of its IEZ strategy in December 2011. 26 27. The companion advisory project will help conduct up to 10 new preliminary site assessments, that may include some of the sites considered in the previous exercise. The preliminary assessments will cover, inter alia, strategic environmental and social aspects of the site and surrounding communities. Building on this, the selection will then be narrowed down to one or two top sites. As a precondition for this activity, the government should identify several sites to be assessed. The identified sites should have favorable conditions to create jobs and support economic decentralization, be attractive to investors and well located in regards to potential markets, in areas in which social and environmental impacts can be mitigated in a cost- effective manner. 28. If the preliminary studies yield positive results, the Project will support the completion of two comprehensive feasibility studies, including an environmental and social (E&S) assessment at the selected site(s). The IFC/WB advisory project will provide templates and technical guidance to the government on the IEZ feasibility studies. 29. The feasibility studies will include specific information on each site's public services, physical and social infrastructure, as well as institutional capacity to manage the potential influx of new people moving to or nearer to the IEZ. The Terms of Reference for the feasibility studies will be specific for each selected site and they will consider both, investments in the IEZ, as well as needed public and private infrastructure outside the sites. The study will make recommendations on viable housing and public services solutions as well as recommendations on 57 how to link with MSMEs and how to minimize any negative social impacts on the region. 30. During the first year of implementation, the Project will also support preliminary analysis to select a second site, to be determined by the government. 31. The identification of the sites as well as the ultimate selection of one or more will be made by MCI in accordance with technical, financial, social and environmental criteria satisfactory to IDA and in consultation with the Prime Minister, the MEF, the Commission Interministeriel pour l'Amenagement du Territoire (CIAT) the DZF, SONAPI, relevant Ministries (e.g. Agriculture in the case of Agro-industrial IEZs) and the private sector in order to ensure their involvement and support. The realization of the feasibility studies (to be financed by the Project) will be coordinated with the new IEZ authority or with one of the existing entities, in the meantime, until the new authority is in place. 1.2.3 Reinforcing Market Demand Analyses and Investment Facilitation for existing and future IEZs: 32. The activities will include (i) detailed market demand/sector analysis for the proposed IEZs, in order to identify the target sector for promotion, (ii) identifying the potential pool of suitable IEZ developers, (iii) leverage the market demand analysis and a list of potential users to promote the IEZ concept (iv) target and attract anchor investors and IEZ developers to the existing and future IEZs. 5 The WBG team has already prepared relevant operational documents such as TORs and RFPs to support the full feasibility study and the design, operation, management and promotion of the zone. 27 1.2.4 The creation of a One-Stop Shop (OSS) for IEZ investors 33. The Project's support will include provision of technical assistance to the government on the design, organization, architecture and establishment of the new IEZ-oriented OSS, based on international best practices. The OSS design and piloting will happen during the first phase and most of the implementation of the OSS will take place during the second phase. Initially, the OSS will be operated by CFI, until the new IEZ authority is functional. At that time, the responsibility for operating the OSS will be transferred to the new IEZ authority. Component 2 - Business Development Services (US$7 million) 34. The WEF reports that overall, firms in Haiti lack business sophistication, including quality of goods and services to be local suppliers, production process sophistication, and marketing skills58. Other sources in Haiti testify that Haitian firms typically lack basic management and accounting skills, such as the inability to price goods and services59 or to separate business and personal finances. With the expected growth of the agribusiness, apparel60 and tourism sectors and investments into Integrated Economic Zones (IEZs), there will be significant opportunities for Haitian firms to enter these supply chains and to meet the surge in demand for local goods and services. This component will provide support to MSMEs, focusing initially on tourism and IEZ (agribusiness and apparel) value chains, for the preparation and implementation of viable investment projects. 35. The activity will promote growth and development of MSMEs through the delivery of a matching grants BDS program designed to improve their opportunities to overcome barriers that result from market failures for skills development, technology transfer and knowledge generation. This support will be provided simultaneously with two IADB sponsored projects to support the development of larger MSMEs: Project HA-L1057: Business Development and Training Services Program for Investment (US$ 11 million) and Project HA-L1068: Northern Economic Pole Business Accelerator Program (US$3.5 million). However, unlike the IADB programs, which are national in scope and target small, medium and large MSMEs, this Project will target small MSMEs associated with the tourism value chain as well as MSMEs providing IEZs and the surrounding areas with goods and services. If the establishment of a new IEZ is supported at a later stage, the Project will also provide matching grants to MSMEs in that area. 36. The activities to be financed by the project as part of component 2 are: a. Provision of support to MCI for: (a) preparing a needs assessment of MSMEs in selected municipalities; (b) conducting sector-specific value-chain diagnostics; (c) preparing the Matching Grants Manual; (d) developing a communication strategy to promote business 51 World Economic Forum. Global Competitiveness Report 2012-2013: Haiti. Haiti ranks 142/144 on business sophistication, which includes the following components: local supplier quality (141/144); production process sophistication (144/144); and extent of marketing (140/144), among others. 59 CECI, Haiti. CECI has conducted a needs assessment survey of about 200 small businesses in the North and North East. CECI shared some of preliminary results with the team informally in September 2012. 60 Haitian Institute for Statistics and Data (IHSI.) Economic Accounts for 2012, preliminary estimates. In 2012, alimentary industries (agribusiness) and textiles contributed 14% and 2%, respectively, of the growth of the manufacturing sector. 28 development services; and (e) carrying out a census data mining exercise, all through the provision of technical assistance. b. Providing business development services to MSMEs, through: (a) the provision of Training to MSMEs on business improvement; (b) the provision of technical assistance to assist the Trained MSMEs in preparing business improvement plans; and (c) the provision of 61 Matching Grants to Beneficiaries to carry out Subprojects. c. Enhancing the capacity of the regional offices of MCI for the management, implementation, monitoring and evaluation of the BDS activities mentioned above through the provision of goods, consultants' services, training and operating costs. Technical Assistance 37. Component 2 will finance technical assistance for an assessment to determine the needs in terms of business skills of MSMEs, starting with five selected municipalities near touristic centers in the North (Cap-Haitien, Dondon and Milot) and near to industrial areas (Caracol and Ounaminthe). An assessment is critical to understanding the number and specific needs of MSMEs with potential to enter into the tourism and IEZ value chains of agribusiness and apparel. Likewise, technical assistance will be provided to conduct a tourism value-chain 62 analysis on which to base assistance for MSMEs. 38. Also, component 2 will finance technical assistance to prepare the Matching Grants Manual. The completion of a Matching Grants Manual, acceptable to IDA, is a condition of disbursement for the provision of matching grants to eligible Haitians MSMEs. The CDEE (within the MCI) will be the responsible of submitting for IDA approval the Matching Grants Manual detailing further the rules and the administrative and fiduciary methods to be used. The manual will include, inter alia: i) detailed eligibility criteria and requirements for potential beneficiaries, ii) the average amounts for the matching grants, iii) the percentage of matching grants to be financed, iv) the projected disbursement schedule, v) criteria for appraisal and approval of a firm's improvement projects using matching grants, vi) institutional arrangements for grant administration, vii) constitution of a decision-making process for grant approval, viii) standard grant agreements including procedures for procurement, financial management, disbursement as well as social and environmental safeguards, ix) monitoring and evaluation methods, and x) communication strategy. Business Development Services for MSMEs 39. Component 2 will provide three types of BDS to Haitian MSMEs. 40. Training on Business Improvement (BDS1): This type of BDS will provide detailed guidelines to participating MSMEs about the basic aspects needed to succeed in different areas of business. The objective is to help them understand the value of increasing their knowledge and improving their skills through technical assistance and training. 61 Eligible MSMEs are micro, small and medium enterprises that are completely privately owned, not fully or partially owned or controlled by the Government of Haiti, and who are not and will not be receiving financial support from any other government source of funding for the activities for which they are applying for a matching grant. 62 Analytical work for MSMEs supplying IEZs will build on the corresponding IEZ feasibility studies, which will include an assessment of potential local suppliers. 29 41. Business Improvement Project Preparation (BDS2): This type of BDS will be provided to those MSMEs that complete the training program (BDS1) and will assist them to prepare the Business Improvement Plan, which is a requirement to get access to a matching grants package. 42. Matching Grant Packages (BDS3): A matching grant package is a combination of training, small investments (e.g., ovens, sewing machines, rehabilitation of some of their premises), and technical assistance that will be provided to eligible Haitian MSMEs in support of activities to be agreed upon with the MSMEs themselves. Specifically, training is provided to improve existing and create new products and services, to support quality certification processes, and to improve business management. Small investments are supported to increase production volume, standardize products, reduce costs, increase income and improve business image.63 Advice will be provided to find new customers and keep the existing ones loyal, and to create and strengthen partnerships within the tourism and IEZ value chains. Special attention will be given to attract and promote MSMEs owned and led by women. 43. It is estimated that around 600 MSMEs providing goods and services to the tourism industry, in the North of Haiti and in other touristic sites as well as to IEZs and around IEZs, will benefit from the abovementioned activities. Enhancing Capacity of the BDS Implementing Unit 44. The Centre de Developpement de 'Entreprise et de 'Entrepreneuriat (CDEE), which operates within the MCI, and its regional offices will be responsible for the management, implementation, monitoring and evaluation of the BDS activities. In the case of the municipalities in the North, the regional office in Cap-Haitien will support the execution of the BDS activities. In order to ensure its capacity, it will be strengthened with a technical and fiduciary team, goods such as equipment, software, and furniture, and capacity-building activities. Component 3 - Project Implementation, Evaluation and Monitoring (US$ 2.5 million) 45. This component will support to MEF and MCI to finance the cost of Project implementation, evaluation, and monitoring, through the provision of goods, technical assistance, Training and Operating Costs. For this, it will finance the costs of a Project Coordinator at MCI, who will be responsible for the technical implementation of the project. The fiduciary responsibility for Project implementation will initially be in the hands of the Project Coordination Unit (Unite de Coordination de Projet, UCP), within the MEF. The MCI plans to develop the needed capacity to take over fiduciary aspects of project management, which will be feasible, once it has a structure for this that is acceptable to IDA. 46. Close collaboration between the UCP (MEF) and the MCI will be a necessary condition for the successful implementation of the Project. The support under this component will ensure that sustainable capacity is in place for MCI and UCP to implement the Project and monitor the impact of all Project components. In addition to a manager and sectorial specialists, the project execution team will include specialists in procurement, financial management and environmental management. The Project will finance short-term advisors, as necessary, to support the implementation of the Project's components (both on the fiduciary as well as technical side), 63 The BDS component finances grants, rather than loans, as the funds required for these types of assistance are greater than the typical micro-loan, but less than the typical bank loan. 30 equipment for the functioning of UCP and of fiduciary capacity at MCI, and training for its staff. This component will also provide support for implementation of activities at the regional level. 47. As MCI will be responsible for M&E, this component will also provide support for MCI to build up necessary capacity in house. Such capacity will take advantage of M&E structures and activities undertaken by other entities, such as the Task Force that is being set up, in order to avoid duplicity. 48. In addition, this component will provide technical assistance to MCI for conducting a series of workshops for public awareness and consultation on the progress of Project. Component 4 Immediate Response Mechanism (US$0.5 million) 49. This component will provide support to respond to an Eligible Emergency, such as a natural disaster. Given that the Project area is exposed to several hazards, particularly geotechnical (earthquakes and earthquake-generated hazards (tsunami, soil liquefaction, landslides), hydro-meteorological (wind, hurricanes, cyclone, raz de maree) and climate-change effects (sea level rise, coastal erosion), the government may request the Bank to re-allocate Project funds to support response and reconstruction generated by a natural disaster. A similar approach will be adopted to deal with man-made disasters. This component will support the carrying out of Emergency Recovery and Rehabilitation Sub-projects and/or the implementation of a subsidy scheme for eligible beneficiaries affected by the emergency. Additional funds could also be made available through this window for the same purpose. 50. If this component is triggered, all expenditures will be in accordance with BP/OP 8.00 and will be appraised, reviewed, and found to be acceptable to the Bank before any disbursement is made. If not disbursed 12 months before the closing date, the currently allocated amount of US$0.5 million can be made available to finance activities under the other Project components. 31 Annex 3: Implementation Arrangements Project Institutional and Implementation Arrangements Project administration mechanisms 1. Overall coordination: The Ministry of Commerce and Industry (MCI) is the counterpart for the Project64, given the focus on promoting investments in IEZs and promoting BDS services for MSMEs (both activities, which fall under the purview of the MCI) as well as its involvement in promoting business environment reforms. The institutional and implementation arrangements for the Project will use initially existing institutions and mechanisms. The MEF's UCP (l'Unite de Coordination du Projet-Project Coordination Unit) will initially be responsible for all 65 fiduciary, procurement and safeguards aspects of the Project. This responsibility will be transferred to MCI, once MCI has the capacity to operate fiduciary aspects in a manner satisfactory to IDA. For this, MCI will enter into an agreement with MEF, acceptable to IDA and for a duration of 18 months. Two months prior to the term of that agreement, IDA shall conduct an assessment of the capacity of MCI to handle the fiduciary aspects of the Project. The transfer of fiduciary responsibility from UCP to MCI shall not take place, unless and until IDA has satisfactory evidence, that MCI has fulfilled the requirements, which enable it to carry out the fiduciary responsibilities related to the Project. 2. UCP has committed to support the establishment of the fiduciary capacity at MCI. For this, a plan will be prepared by MCI in coordination with UCP, in order to ensure that MCI will be able to comply with IDA procurement and fiduciary standards. The Project will support the establishment of fiduciary capacity at MCI. 3. UCP structure and capacity. The UCP currently is reported to have a total of 12 staff that include, among other, a Coordinator, a Deputy Coordinator, a Senior Procurement Officer, a Senior Administrative and Finance Officer, an Accountant and an Administrative Assistant, who are supported as needed by consultants on safeguards and technical issues. The UCP is currently managing implementation of Component 1 of the Institutions and Infrastructure Recovery Project of the World Bank (both the original project as well as the Additional Financing which became effective in February 2013); a Project that manages the resources obtained from the Debt Relief by the IMF as well as the Economic governance Project of the IDB. 4. The MCI will nominate a Project Coordinator to coordinate the implementation of the Project with the different public and private Project stakeholders, oversee the progress of all Project activities and ensure that its objectives and targets are met. The specific activities of the Project will be implemented as described below. 5. The MCI will lead Project work on Business Environment reforms and the reform of the legal and institutional framework for IEZs. In addition, it will select the sites for feasibility 64 This Project was designed initially to have the MEF as its main counterpart, as it involved other Ministries such as the Ministry of Tourism and the Ministry of Culture. Once its scope was reduces and focused on the activities described in this document, the MCI became IDA's main counterpart. 65 The safeguards documents (ESMF) were prepared for UTE at MEF. And the responsibility for fiduciary management is being transferred to the UCP, the ESMF have been updated by UCP to reflect the new institutional setup and have been published before appraisal. 32 studies (to be financed by the Project) in consultation with the Prime Minister, the MEF, CIAT, the DZF, SONAPI, relevant sector ministries and agencies, local authorities, as well as private sector and civil society representatives - in order to ensure their involvement, validation and support. The recently established CDEE, which operates within the MCI, will be responsible for activities related to the implementation of BDS activities. The following table provides an oversight of the responsibilities for implementation and the main actors involved in each activity 6. For the BDS component, the CDEE will oversee its implementation and carry out monitoring and evaluation out of its regional offices. In the case of the municipalities in the North, the regional office in Cap-Haitien will support the execution of the BDS activities. In order to ensure the regional office capacity, it will be strengthened with a technical and fiduciary team. Support to CDEE will complement support to be provided by the IADB, for the general administration of component two, including upgrading their accounting software, a management information system, computers and, furniture and other equipment, ensuring that CDEE has adequate capacity. Table 3: Responsible agencies for implementation Project activity Responsible Additional agencies participating in Project implementation agency CPRA66: Responsible for drafting legal and regulatory amendments Business Other entities to be consulted: environment reform MCI Task Force for Business Environment Reform (to be established) Relevant sector ministries and agencies Private sector stakeholders CPRA: Responsible for drafting legal and regulatory amendments (IEZ Law) IEZ Authority (to be established within MCI) Investment MCFI or SONAPI: Interim responsibility for IEZ-oriented OSS, until Generation Mnew IEZ authority is established. Other entities to be consulted in regards to IEZ sites: Prime Minister, MEF and relevant sector ministries, SONAPI, DZF, CIAT Local authorities and private stakeholders BDS MCI CDEE (within MCI): Implementation of BDS 7. In addition to the responsibilities previously mentioned, the fiduciary role and functions of the UCP and, later, of the MCI, will include: (i) providing assistance to Project partners in preparing procurement processes, (ii) hiring consultants for specific assignments, (iii) monitoring BDS projects to ensure compliance with agreed safeguard plans, (iv) validating results on the ground through local stakeholders, and (v) entering into contracts for goods and services. 8. MCI, on the other side, will be responsible for preparing the technical specifications for all procurement processes, initially in coordination with UCP, in order to ensure that such specifications are suitable to carry out the procurement processes in an efficient and timely manner. The MCI will sign all the contracts and will be responsible for the supervision of the contracts financed under the Project. 66 Or any other the entity set up by GoH to draft and revise commercial laws and regulations 33 Table 4: Project Cost and Financing IDA % Project Components Project cost Financing Financing 1. Business environment and investment generation 10.0 10.0 100 1.1 Business Environment Reform 2.0 2.0 1.2 Investment Generation, including IEZ regulation and 8.0 8.0 institutional framework, feasibility study, investment promotion mechanism, and one stop shop 2. Business Development Services 7.0 7.0 3. Project Implementation, Evaluation and Monitoring 2.5 2.5 100 3.1 Project Management 2.0 2.0 3.2 Monitoring and Evaluation 0.5 0.5 4. Immediate Response Mechanism 0.5 0.5 Total Project Costs 20.0 20.0 100 Interest During Implementation 0 0 Front-End Fees 0 0 Total Financing Required 20.0 20.0 100 Financial Management, Disbursements and Procurement Financial Management 9. Overall, the financial management (FM) risk of the Project is rated Substantial. The UCP will have the fiduciary responsibility over the proposed Project and will be directly responsible for the fiduciary implementation of all components until this function is transferred to MCI 18 months after effectiveness. The UCP and, later, the MCI will be responsible for the establishment of financial reports and annual audited financial statements for the whole Project. The current FM arrangements in place for the proposed Project at the UCP meet the minimum fiduciary requirements under OP/BP 10.02. The UCP has adequate financial management staff in place. Their roles and responsibilities will be revised to include the additional workload under the Project. Fiduciary responsibilities will only be transferred to the MCI once it has adequate financial management staff in place. The MCI will then take care, that all operational procedures are to be documented in the administrative, financial and accounting manual and the Project implementation manuals to be established. Project financial management arrangements will operate as follows: A. Designated Account: two Designated Accounts, one for MEF and one for MCI will be opened. MEF will establish the Designated Account "A" to use it from the beginning of project implementation until fiduciary responsibilities are transferred to MCI. Both accounts will be opened in the Central Bank of the Republic of Haiti (BRH) As soon as MCI's fiduciary capacity is considered acceptable to the Bank, MCI will establish the Designated Account "B" to be used from there until project closing. This is established for control purposes e.g. supporting documentation, auditing and processing of disbursements/reimbursements. Subsidiary accounts in Haitian Gourdes will also be opened in the BRH: a first one to be opened and managed by the UCP (account "C") and, and a second Subsidiary Account (account "D") to be opened by MCI, both in order to process payments in local currency. Documentation for all transactions will be retained by the UCP and, later, the MCI and made available for audit and to the World Bank and its representatives, if requested. While the UCP already has adequate disbursement procedures, such procedures will have to be stipulated in the administrative, financial and accounting manuals of the MCI, before 34 taking over fiduciary responsibility for the Project. The assessment of the manuals of the MCI will be part of the corresponding due diligence process to be carried out by IDA before the transfer of the fiduciary responsibility takes place. B. Budgeting and Funds Flow: The budget process will be stipulated in the administrative, financial, and accounting manuals. Annual budgets and work plans will be coordinated and prepared by the UCP and, later, the MCI. They will be approved by the MCI and consolidated by the Coordinator of UCP and, later, the MCI, with a no-objection from IDA at the beginning of the fiscal year. Any changes in the budget and work plans will also be approved by the MCI with IDA no-objection. In addition, the MCI will discuss and review implementation strategies and monitor and assess the implementation and results of the Project. C. Accounting: The provision by UCP of a Manual of Operations that details and documents 67 the Project's accounting, policies, and procedures, in a manner acceptable to IDA is a condition for Project effectiveness. For this, UCP will provide a draft to IDA in due time before the expected date of effectiveness, so that any comments can be addressed. The administrative, financial, and accounting procedures manual of the MCI in turn will have to be revised by and acceptable to IDA before the MCI can assume the fiduciary responsibilities for this Project. Detailed FM documentation will be maintained in UCP and MCI Project files for each component that they will manage covering the time of UCP's and MCI's respective responsibility over Project management. D. Internal controls: The UCP, and later the MCI, will ensure that staffing arrangements in the financial management departments of the MCI are in place and sufficient to ensure adequate internal controls, preparation, approval and recording of transactions as well as segregation of duties. The UCP will outline the financial management and administrative procedures in the Project's administrative, financial, and accounting manual. E. Financial reporting: The UCP and, later, the MCI will be responsible for the overall reporting. In cooperation with the Financial Management specialist, the Project Coordinator will ensure that quarterly consolidated Unaudited Interim Financial Reports are prepared and transmitted to IDA. The reporting format will be documented in the administrative, financial and accounting manual. The quarterly Interim Unaudited Financial Reports will be furnished to IDA no later than 45 days after the end of the quarter. Annual consolidated financial statements will be prepared and will be subject to annual external audits. The audit report shall be furnished to IDA no later than six months after the end of such each period. F. External audits: The annual financial statements of the Project as well as the system of internal controls will be subject to an annual audit by a reputable, competent and independent auditing firm, based on terms of reference satisfactory to IDA. The auditor will provide an opinion on the Project's consolidated financial statements prepared by the PIU, as per auditing standards acceptable to IDA. The audit report will be submitted to IDA no later than six months after the end of each period covered by the audit. In addition to the audit report, the auditor will also provide, in a separate document, a management letter detailing the status of the internal control systems used for the Project. 67 The possibility to produce an unified and non project-specific manual for the UCP will also be examined. 35 G. Implementation support missions: In addition to the regular audits, the IDA team will conduct frequent implementation support missions (see Annex 5). During these implementation support missions, IDA FM Staff will evaluate the FM arrangements to ensure that they remain adequate for the implementation of the proposed Project. Disbursements H. Disbursements from the IDA Grant will follow the transaction-based method, that is, traditional Bank procedures: (i) Advances, (ii) Reimbursements through Statements of Expenditures (SOEs), (iii) Direct Payments, and (iv) Special Commitments. The initial deposit into the DA will be based on a four-month forecast prepared by the UCP and, later, the MCI to be submitted with the Withdrawal Application. Subsequent disbursements into the DA will be based on SOEs, and accompanied by Withdrawal Applications, reconciled bank statements and copies of all bank statements. The supporting documentation for requests for direct payment should include records which provide evidence of eligible expenditures (copies of receipt, supplier's invoices). I. The following table specifies the categories of Eligible Expenditures that may be financed out of the proceeds of the Financing ("Category"), the allocations of the amounts of the Financing to each Category, and the percentage of expenditures to be financed for Eligible Expenditures in each Category: Table 5: Allocation of proceeds for IDA Financing Agreement Category Amount of the Percentage of Grant Allocated Expenditures to be (expressed in Financed SDR)68 (inclusive of Taxes) (1) Goods, non-consulting services, consultants' 100% services and Training for: (a) Component 1 of the Project, with exception of: (i) the financing of the strengthening of the IEZ supervisory authority and of (ii) the financing of 3,149,000 feasibility studies for IEZs (Parts A. 1, A.2(a), A.2(b), A.2(e) and A2(f) of the Project as detailed in Schedule 1 of the FA) (b) The financing the strengthening of the IEZ 670,000 supervisory authority as detailed under Part A.2(c) in Schedule 1 of the FA (c) The financing of feasibility studies for IEZs as 2,680,000 detailed under Part A.2(d) in Schedule 1 of the FA (2) Goods, non-consulting services, consultants' 100% services and Training for Component 2 of the Project as detailed under Parts B.1, B.2 (a), B.2 1,714,500 68 Exchange rate: 1 SDR = 0.667 US$ 36 (b) and B.3 of Schedule 1 in the FA (3) Goods, works, consultants' services and 100% of the eligible Training under Matching Grants under amount of a Matching Component 2of the Project as detailed under Part 2,713,500 Grant in accordance with B.2(c) in Schedule 1 of the FA the formula set forth in the Operations Manual and the Matching Grants Manual (4) Goods, non-consulting services, consultants' 100% services and Training for Component 3 of the 1,337,000 Project (5) Operating Costs under Components 1, 2 and 3 335,000 100% of the Project as detailed in Schedule 1 of the FA (6) Emergency Expenditures under Component 4 335,000 100% of the Project (7) Refund of Preparation Advance 466,000 Amount payable pursuant to Section 2.07 of the General Conditions TOTAL AMOUNT 13,400,000 Withdrawal Conditions 10. No withdrawal shall be made: (a) for payments made prior to the date of this Agreement; and (b) under Category lb for the financing of activities to strengthen an IEZ supervisory authority under Component 1 of the Project, unless and until the action plan for the establishment of a suitable regulatory institutional IEZ framework has been carried out in a manner satisfactory to IDA; (c) under Category Ic for the financing of IEZ feasibility studies under Component 1 of the Project, until the Recipient has submitted to the Association selection criteria for IEZs satisfactory to IDA; (d) under Category 4 for the financing of Matching Grants under Component 2 of the Project, until the Recipient has adopted the Matching Grants Manual on terms and in a manner acceptable to IDA; (e) under Category 6, for Emergency Expenditures under Component 4 of the Project, unless and until the Association is satisfied, and notified the Recipient of its satisfaction, that all of the following conditions have been met in respect of said activities: (i) the Recipient has determined that an Eligible Emergency has occurred, has furnished to the Association a request to include said activities in the IRM Part in order to respond to said Eligible Emergency, and the Association has agreed with such determination, accepted said request and notified the Recipient thereof; (ii) the Recipient has prepared and disclosed all safeguards instruments required for said activities, and the Recipient has implemented any actions which are required to be taken under said instruments, all in accordance with the provisions of Section I.C.3 (b) of Schedule 2 of the FA; 37 (iii)the Recipient's Coordinating Authority has adequate staff and resources, in accordance with the provisions of Section I.C.2 of Schedule 2 of the FA, for the purposes of said activities; and (iv)the Recipient has adopted the IRM Operations Manual in form, substance and manner acceptable to the Association and the provisions of the IRM Operations Manual remain - or have been updated in accordance with the provisions of Section I.C.1 of Schedule 2 of the FA so as to be appropriate for the inclusion and implementation of said activities under the IRM Part. Procurement 11. Procurement for the proposed Project will be carried out in accordance with the World Bank Guidelines: Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants dated January 2011 and Guidelines: Selection and Employment of Consultants under IBRD Loans & IDA Credits & Grants by World Bank Borrowers dated January 2011 and the provisions stipulated in the Financing Agreement. For each contract to be financed by the Project, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Recipient and IDA in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity. 12. Procurement activities for the Project will be initially executed under the responsibility of the UCP for all project activities as it has sufficient experience and a satisfactory track record implementing procurement financed by IDA and other donors. The operational manual UCP is using for the implementation of Infrastructure and Institutional Emergency Recovery Project as recently updated for the additional financing will be supplemented by an annex that will describe the project institutional arrangements. Further agreements will be met in a Memorandum of Understanding between the MEF and the MCI that will detail, how the UCP will support the MCI in setting us adequate procurement capacity to manage the project and, especially on how the overall responsibility for the procurement processes of this project will be transferred from the UCP to the MCI69 . The project will support both agencies (the UCP and the MCI) to strengthen their capacity during and after the transition process. With this strengthening, the UCP and the MCI should be well equipped to execute procurement according to IDA guidelines. However, the overall public procurement system in Haiti remains relatively weak. Despite some pre-earthquake reforms in the legal and institutional framework for procurement, human and physical capacity constraints have delayed the adoption of improved contracting practices in most Government agencies. Consequently, the overall Project risk for procurement is high. 13. Procurement Plan, Thresholds for Procurement Methods and IDA Review. The summary procurement plan for implementation of the proposed Project was agreed between the Recipient and IDA on April 11, 2013, and is presented below in Table 6. The plan will be updated at least annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity. Bidding documents will be made available through the MEF's website to 69 One option discussed could be that the UCP assist the MCI to recruit a procurement specialist to work initially in the UCP office. Under this model, procurement tasks would be carried out by the staff recruited by the MCI while UCP would maintain responsibility and sign off on all procurement documents. 38 the public. The recommended thresholds for the use of the procurement methods specified in the Financing Agreement are identified in Table 7 below. Supervision of procurement will be carried out primarily through prior review supplemented by supervision missions at least twice a year. 39 Table 6: Summary of Procurement Plan Procurement Plan for Goods, Works and Consultant Services, (Mainly Phase I, includes also some activities that are already identified for Phase H) Estimated Review by Date of INumber of RvebyProposal / Curc Ref. No Description of Contracts Cost es Bank Method Contract US$ (Prior / Post) Biddigdoc. Signature issued Goods and Works 1 1 Vehicle - UCP & 2 vehicles - CDEE 160,000 1 Prior Shopping Jul-13 Nov-13 2 Computer and IT Equipment - UCP 20,000 4 Prior Shopping Jul-13 Sep-13 3 Software - CDEE & Regional Office BDS 80,000 Multiple Prior Shopping Jul-13 Sep-13 4 Furniture - CDEE & Regional Office BDS 21,000 1 Prior Shopping Jul-13 Sep-13 5 Equipment - CDEE & Regional Office BDS 28,000 1 Prior Shopping Jul-13 Sep-13 Goods and 309,000 Works Consultants Establishment of the collateral registry (re- 1 engineering, digitization of data, software 500,000 1 Prior CQS Sep-13 Dec-13 solution etc.) 2 Consultants - Business Environment (5 690,000 Multiple Prior CQS Sep-13 Dec-13 years) 3 Adaptation of the law to Haitian legislation 150,000 Multiple Post CQS Aug-13 Oct-13 for the IEZ Framework 4 Advocacy for the IEZ Framework - 5 years 150,000 Multiple Prior DC Sep-13 Dec-13 5 Investor Advisor 75,000 2 Prior IC Aug-13 Oct-13 6 Feasibility study(s) for IEZs 2,000,000 1 or more Prior QCBS Sep-13 Dec-13 7 Consultants CDEE & Regional Office 250,000 Multiple Prior CI Sep-13 Sep-13 8 Consultants - M&E 211,000 3 Prior IC Sep-13 Dec-13 9 External Audit (5 years) 125,000 2 Prior LCS Nov-13 Nov-13 10 Surveying company - M&E 600,000 1 Prior QCBS Dec-13 Mai-14 11 BDS Training 80,000 Multiple Prior IC/CQS Oct-13 Jan-14 12 BDS Studies 530,000 Multiple Prior CQS Sep-13 Dec-13 13 BDS Technical Assistance 45,000 Multiple Prior IC/CQS Nov-13 Jan-14 40 14 BDS Matching Grants Packages 670,000 Multiple Prior IC/CQS Dec-13 Feb-14 15 Procurement Officer (5 years) 240,000 1 Prior IC May70-13 Sep-13 16 Financial Management Officer (5 years) 180,000 1 Prior IC May-13 Sep-13 17 IT Officer 180,000 1 Prior IC Jul-13 Sep-13 Consultants 6,676,000 Total G & C 6,985,000 70 Procurement and FM specialists and the Project Coordinator will be hired under the Project Preparation Advance and will continue under the Project. 41 Table 7: Thresholds for Procurement Methods and Prior Review71 Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) Method Prior Review (US$ US$ thousands thousands) 1. Works >1,000 ICB All 100-1,000 NCB first three contracts and all contract above 500 <500 Shopping First three contracts all contracts above 250 Regardless of value Direct Contracting All 2. Goods >500 ICB All 50 -500 NCB First three contracts and all contracts above 250 <250 Shopping First three contracts and all contracts above 100 Regardless of value Direct Contracting All 3. Consulting Regardless of value QCBS,QBS,FBS,LCS First three contracts and All Services contracts above 200 -3.A Firms <500 CQS First three contracts and All contracts above 200 Regardless of value Single Source All -3.B Individuals Regardless of value In accordance with First three contracts and All Chapter V of Consultant contracts above 100 and all Guidelines single source selection above 50 Abbreviations: ICB = International Competitive Bidding QCBS = Quality- and Cost-Based Selection NCB = National Competitive Bidding QBS = Quality-Based Selection DC = Direct Contracting FBS = Fixed Budget Selection LCS = Least-Cost Selection SSS = Single Source Selection CQS = Selection Based on Consultants' Qualifications Environmental and Social (including safeguards) 14. The Project triggers the following safeguard policies: Environmental Assessment (OP/BP 4.01). Description ofEnvironmental Safeguards Triggered and Implementation Arrangements 15. The Environmental Assessment (OP/BP 4.01) policy is triggered due to: (i) the need to include environmental and social criteria into the proposed improvements to the legal, regulatory and institutional framework for IEZ under Component 1; (ii) the need to conduct environmental 71 The herein defined procurement thresholds and rules are currently under review by the Country Management Unit and the Regional Procurement Department to better adjust them to the Haitian environment. 42 and social assessments as part of the feasibility studies associated with the proposed IEZ sites under Component 1; and (iii) the potential for adverse environmental impacts under the matching grants packages supported under Component 2. Other safeguards triggered include OP 4.04 (Natural Habitats), OP 4.09(Pest Management), OP 4.36 (Forests) and OP 4.11 (Physical Cultural Resources). 16. There are however no irreversible environmental impacts from this project and in general, it is considered low risk from an environmental standpoint. While the project will not invest in any civil works or services associated with the IEZs, these policies are triggered because the feasibility studies for IEZs will include specific assessment of the potential impacts and risks associated with these policies and will make recommendations for additional future work prior to the development of IEZs; and will recommend mitigation and management measures which would be consistent with Bank policy. 17. The IEZ feasibility studies will include a section assessing the potential environmental and social impact of the industries on air and water quality, in particular, as well as land capability. The TOR for the feasibility study will include specific reference to these issues. They will provide a negative list of industries that cannot use the site(s), given environmental considerations. They will also assess the government's capacity to manage related environmental risks and give recommendations on how to address capacity constraints. The conclusions and recommendations of the studies will determine which sites are acceptable for investment. Because IFC will provide advisory services for the preparatory work for the sites, safeguards specialists from IDA and IFC will continue to work closely together to assess risks at preparation and, when there is a decision to finance the development of the IEZ site. 18. OP 4.09 (Pesticides) is triggered as a precaution for MSME financing. Although the project does not intend to finance the procurement of pesticides, there may be investment in activities related to agriculture that may already use pesticides (prior investment). A pesticide plan is not required at this stage but the assessment of preexisting and current pesticide use in an MSME will determine if the MSME will be financed. MSMEs that are using unapproved pesticides (WHO) cannot be financed. Others may be considered if an approved pesticide plan is in place. 19. The Involuntary Resettlement (OP/BP 4.12) policy has been triggered to ensure that the technical feasibility studies for IEZs will include assessments of the social context, of the situation with respect to land ownership and occupation, as well as the need for land acquisition and other land related risks. However, the Project will not invest in any project activities that will involve temporary or permanent displacement or resettlement. A screening tool will be used in the selection of MSME to ensure that MSME projects that would involve resettlement are not selected. 20. Gender sensitivity of IEZ and BDS activities. The Project will include a gender-sensitive social analysis (SA) in the first phase to design a strategy that ensures women can overcome the additional barriers that they may otherwise face to benefit from the BDS services. The feasibility studies for the IEZs will also include analysis of social impacts by gender. The results framework will disaggregate the number of additional jobs created by supported MSMEs by gender and by region, based on data collected by the BDS provider. 21. The MEF's UCP and, later, the MCI will retain the responsibility to ensure that social aspects and safeguards are adequately addressed and prepared for in the feasibility studies of the 43 IEZs. The UCP and the MCI will design and implement the SA for the BDS and ensure the inclusion of its recommendations in its operation's manual. IEZ Implementation 22. The Project will undertake feasibility studies for the creation of an integrated economic zone (IEZ) in the center of the country and one other location. There are no immediate negative environmental impacts as a result of these studies, only positive impacts, because the feasibility study will assess environmental and social risks to the sites and based on these and other factors, two potential IEZ sites will be chosen. If any sites are chosen for additional financing under this project or another project, an EIA study will need to be commissioned. MSME Implementation 23. An environmental and social impact screening tool (included in the ESMF) will be used to exclude MSMEs that have the potential to significantly impact the environment such as MSMEs that use a lot of wood or scarce natural resources, MSMEs that may operate in natural habitat areas, or those whose activities would cause displacement, etc. It will require MSMEs (in the ESMF and operational manual) to put specific environmental and social details in their grant proposals such as: i. Description of the Project, its geographic location, description of any important natural resources in the vicinity (such as forests, wetlands, rivers, lakes, etc.), the Project's background, categorization, compliance status with the existing Environmental and Social local legislation, compliance with the environmental and social requirements set out in this ESMF, Environmental and Social programs, public consultation, existing or potential liabilities, potential environmental and social financial and reputational risks; ii. Description of any Environmental and Social mitigation measures and monitoring programs to be implemented; description of the health and safety measures and programs to be implemented; description of emergency/contingency procedures to be implemented; description of environmental, health and safety responsibilities; and estimated cost and time schedule to implement each individual measures; iii. Details of an environmental action plan to mitigate any impacts, if required. 24. Projects will be categorized based on their environmental risk. All A category projects will be excluded. For grants that are considered Category B projects where the Environmental specialist identifies moderate Environmental and Social issues during screening, inclusion may involve a combination of desk review and a physical site visit as appropriate to: i. Review the adequacy of any Environmental and Social impact assessments or analyses undertaken (including public consultation, disclosure and any resulting action plan); ii. Review compliance with any Environmental and Social contractual requirements; iii. Review the adequacy of any environmental and social management mitigation measures taken to address the identified issues. Borrower Capacity 25. Environmental management capacity is weak in Haiti. UCP already has an environmental specialist and plans are underway to recruit another specialist for another Bank project. An 44 assessment will be made to determine if this person can also work on the safeguards aspects of this Project. If not, an additional part-time recruitment will be made to ensure that all MSMEs are adequately screened and supervision is regular. Implementation of Business Development Services for MSMEs under Component 2 of the Project Matching Grants Manual 26. Not later than six (6) months after the Effective Date, the Recipient will: (i) prepare under terms of reference satisfactory to IDA and furnish to IDA for its review and approval a manual, consistent with the provisions of the Financing Agreement (FA), setting forth, inter alia: (A) the eligibility criteria for a Beneficiary to receive a Matching Grant; (B) the rules and procedures for the review, approval and processing of Matching Grants; (C) the accounting, disbursements, financial management, procurement, social and environmental procedures to be followed in the administration of Matching Grants, (D) a list of activities that may be financed under Matching Grants, and (E) a negative list of activities that may not be financed under Matching Grants; and (ii) afford IDA a reasonable opportunity to review such manual, and thereafter promptly adopt such manual as shall have been approved by IDA ("Matching Grants Manual"). 27. To assist in the preparation of the Matching Grants Manual, MCI will employ consultants in accordance with the FA. 28. Without limitation on the foregoing, each Matching Grant will be reviewed by a committee comprised of technical experts with qualifications and experience satisfactory to IDA and under terms of reference satisfactory to IDA ("Grant Selection Committee"). 29. Notwithstanding any provision of the FA to the contrary, in the event of any conflict between the Matching Grants Manual and the FA, the provisions of the FA shall govern. Eligibility Criteria for Matching Grants 30. No Beneficiary shall be eligible for a Matching Grant, unless GoH shall have determined, on the basis of an appraisal conducted by the Grant Selection Committee, in accordance with provisions of the Matching Grants Manual and of the FA, that the proposed Beneficiary of such Matching Grant and the proposed Subproject for which the Matching Grant is to be made satisfy the following eligibility criteria, as further elaborated in the Matching Grants Manual: (a) The proposed Beneficiary: (i) is a privately owned entity or a group of micro, small or medium scale enterprise, business associations or local producers; (ii) has the organization, staffing and resources necessary to carry out the proposed Subproject; (iii) has received Training in preparing business improvement plans; (iv) has prepared a detailed business improvement plan acceptable to the Recipient and the Association, setting forth the activities proposed to be included in the Subproject, and a financing plan for such activities to be developed on the basis of the Matching Grants Manual; and (v) is able to provide the cost-sharing percentage set forth in the Matching Grants Manual of the total cost of the proposed Subproject out of resources other than the Matching Grant. 45 (b)The proposed Subproject: (i) is economically and financially viable, technically feasible and environmentally sound; (ii) has been developed on the basis of the Matching Grants Manual; (iii) has been developed in accordance with the Safeguard Documents; and (iv) is in compliance with all laws and regulations of the Recipient. Matching Grants 31. GoH will make each Matching Grant to a Beneficiary under an agreement (the Matching Grant Agreement) on terms and conditions approved by IDA, which shall include the following: (a) The Matching Grant shall: (i) be made on a grant basis; and (ii) not exceed an amount equivalent to $ 25,000 (Twenty-five thousand Dollars). (b)GoH shall obtain rights adequate to protect its interests and those of IDA, including the right to: (i) suspend or terminate the right of the Beneficiary to use the proceeds of the Matching Grant, or obtain a refund of all or any part of the amount of the Matching Grant then withdrawn, upon the Beneficiary's failure to perform any of its obligations under the Matching Grant Agreement; and (ii) require each Beneficiary to: (A) carry out its Subproject with due diligence and efficiency and in accordance with sound technical, economic, financial, managerial, environmental and social standards and practices satisfactory to the Association, including in accordance with the provisions of the Anti-Corruption Guidelines applicable to recipients of grant proceeds other than the Recipient and with the Safeguard Documents; (B) provide, promptly as needed, the resources required for the purpose; (C) procure the goods, works, consultants' services and Training to be financed out of the Matching Grant in accordance with the provisions of this Agreement and the Matching Grants Manual; (D) maintain policies and procedures adequate to enable it to monitor and evaluate in accordance with indicators acceptable to the Association, the progress of the Subproject and the achievement of its objectives; (E) enable the Recipient and the Association to inspect the Subproject, its operation and any relevant records and documents; and (F) prepare and furnish to the Recipient and the Association all such information as the Recipient or the Association shall reasonably request relating to the foregoing. (d)GoH shall exercise its rights and carry out its obligations under each Matching Grant Agreement in such manner as to protect the interests of GoH and IDA and to accomplish the purposes of the Financing. Except as IDA shall otherwise agree, the Recipient shall not assign, amend, abrogate, terminate, waive or fail to enforce any Matching Grant Agreement or any of its provisions. C. Implementation Arrangements for Component 4 of the Project (Immediate Response Mechanism) 32. In order to ensure the proper implementation of Component 4 of the Project ("IRM Part"), GoH will take the following measures: (a)prepare and furnish to IDA for its review and approval, an operations manual ("IRM Operations Manual") which shall set forth detailed implementation arrangements for the IRM Part, including: (i) designation of terms of reference for, and resources to be allocated to, the 46 entity to be responsible for coordinating and implementing the IRM Part ("Coordinating Authority"); (ii) specific activities which may be included in the IRM Part, Eligible Expenditures required therefore ("Emergency Expenditures"), and any procedures for such inclusion; (iii) financial management arrangements for the IRM Part; (iv) procurement methods and procedures for Emergency Expenditures to be financed under the IRM Part; (v) documentation required for withdrawals of Emergency Expenditures; (vi) environmental and social safeguard management frameworks for the IRM Part, consistent with the Association's policies on the matter; and (vii) any other arrangements necessary to ensure proper coordination and implementation of the IRM Part; (b)afford IDA a reasonable opportunity to review the proposed IRM Operations Manual; (c)promptly adopt the IRM Operations Manual for the IRM Part as shall have been approved by IDA; (d)ensure that the IRM Part is carried out in accordance with the IRM Operations Manual; provided, however, that in the event of any inconsistency between the provisions of the IRM Operations Manual and the FA, the provisions of the FA shall prevail; and (e)not amend, suspend, abrogate, repeal or waive any provision of the IRM Operations Manual without prior approval by IDA. 2. The Recipient shall, throughout the implementation of the IRM Part, maintain the Coordinating Authority, with adequate staff and resources satisfactory to IDA. 3. The Recipient shall undertake no activities under the IRM Part (and no activities shall be included in the IRM Part) unless and until the following conditions have been met in respect of said activities: (a) GoH has determined that an Eligible Emergency has occurred, has furnished to the Association a request to include said activities in the IRM Part in order to respond to said Eligible Emergency, and IDA has agreed with such determination, accepted said request and notified the Recipient thereof; and (b) GoH has prepared and disclosed all safeguards instruments required for said activities, in accordance with the IRM Operations Manual, IDA has approved all such instruments, and the Recipient has implemented any actions which are required to be taken under said instruments. Monitoring & Evaluation 33. Please see Annex I for a table of Monitoring Indicators, data sources, and responsibilities. Monitoring will be the joint responsibility of implementing agencies (MCI, CFI, UCP), service providers (BDS providers, management of the moveable collateral registry), and the WBG team. Data must be maintained current, in electronic format and freely accessible among the parties mentioned above. Monitoring information is vital to the success of the Project-it allows the GoH to adjust its efforts as necessary, based on regular feedback from this Project's activities. The information is also key to policy design, demonstrating what types of activities have impact on economic and process outcomes in which the GoH is interested. 34. Beyond simple monitoring, this Project will also engage in rigorous impact evaluations of several of its activities, compared to a counterfactual. Identifying how many jobs (or how much growth) is created as a direct result of the overall Project is a challenge, as most of the interventions are national or regional in scope. However, impact evaluation will be used to 47 measure the impact of two major parts of the Project: (i) business development services (by comparing the impact of different types of grants to treatment and control groups), and (ii) secured transactions reform and the creation of a collateral registry. The exact nature of the impact evaluation design for each of the above will be decided by further consultation with the Project team before approval. A preliminary plan for each follows: i. The Project will measure the impact of BDS plus varying types of additional support by evaluating two or more groups of businesses selected at random among existing beneficiaries. That is, in the first phase of the intervention, all applicants to the BDS will receive identical assistance. In the second phase, all applicants will continue to receive support of equal value, although the form of support will vary among two or more groups within the beneficiaries. All groups will be monitored and data collected over the lifetime of the Project. It is expected that the difference in the data among the groups will be attributable to the BDS combined with the varying additional support. ii. Secured transactions and collateral registry reform is expected to increase access to finance for SMEs. After the terms of the revised law on secured transactions are finalized, the team will design an impact evaluation to test the impact of the reforms on loans to SMEs. Data will be collected from partners for the impact evaluation study, such existing financial institutions that offer loans to SMEs. 48 Annex 4: Operational Risk Assessment Framework (ORAF) Haiti: Business Development and Investment Project (P123974); Negotiations Stage The objective of the Project is to assist the Recipient in: (a) improving the conditions for private sector investment and inclusive growth; and (b) improving its capacity to respond promptly and effectively to an Eligible Emergency. This will be done at the national level by supporting the Republic of Haiti to improve, inter alia, the regulatory frameworks that govern business activities, related procedures, and the capacity of implementing institutions. To facilitate private sector investment, GoH will update the IEZ law and build capacity in its implementing agency, while preparatory work will assess the feasibility of at least one IEZ. Business Development Services (BDS) will support MSMEs through technical assistance and matching grants to such firms operating in and around IEZs, as well as serving the tourism sector, as part of a strategy to promote a more inclusive model of economic growth. 1.1 Stakeholder Risk Rating Substantial Description: Risk Management: 1 Lack of coordination between the government and private sector could occur, although The Project will periodically consult with the Private Sector Economic Forum (PSEF), the Chamber of Commerce, the CPRA and key they have already agreed with a general strategy for private sector growth (including the government ministries to ensure that the Project maintains its coherence with the main stakeholders.. establishment of regional growth poles) in the aftermath of the earthquake. Resp: MCI Stage: Preparation and Due Date: Ongoing Status: In Progress Implementation Risk Management: 2 There is a risk that improvements in the business climate could be perceived to favor a The Project will include a strong focus on MSME development. It will support MSMEs directly and focus on reforms that benefit such relatively small number of large companies, not the society as a whole. This could create firms. The Project will also establish regular consultations with associations that comprise MSMEs as part of the communication strategy tensions with regard to improvements in business climate. of the Project. The Project will permanently engage all the stakeholders in periodical meetings. The strong focus of the Project on MSME development 3. Unexpected changes in the government may delay activities and may produce meager as well as on a good communications and outreach strategy will help mitigate this risk. outcomes than expected. This could affect particularly the passage and enactment of laws The Project will support advocacy work both with the Executive and the Legislative branches of the Government to inform about the and regulations pertaining the business environment and, also, the establishment of an benefits of regulatory reforms promoted by the Project. The Project intends to promote study trips to one or more successful IEZs and/or adequate regulatory framework for IEZs that creates a level playing field. to countries which have successfully reformed their business environment. 4. Most of the governmental agencies the teams are working with do not have enough Funds within the Project will provide some budget for governmental agencies' to deliver on their agreements. staff to be as responsive as the Project may require. Resp: MCI Stage: Preparation and Due Date: Ongoing Status: In progress implementation 49 2.1 Capacity Rating Substantial Description: Risk Management: Despite achievements in terms of building up capacity, skills to implement and oversee Mitigation measures involve hiring of short term local and international consultants to assist with the establishment of needed procedures, large and complex projects are scarce in the country. This could impede a timely Project technical assistance in preparing required studies, in launching and supervising the activities as well as the careful design of the process to implementation. Physical resources such as computer and software equipment might also build up capacity at MCI and to transfer fiduciary responsibility form UCP to MCI. For this, an agreement, satisfactory to IDA, will be be needed to achieve a good implementation of the Project. signed between MEF and MCI. Project will initially be implemented by the UCP, housed at the MEF, which has already implemented Bank projects that will be further strengthened by the Project through capacity building and the hiring of experienced consultants for project management, procurement and safeguards. The transition of the PIU from the UCP at MEF to MCI may not be successful, as MCI MCI will furnish evidence satisfactory to IDA that it has adequate capacity to manage the fiduciary responsibilities before the transfer of may not establish sufficient capacity to manage complex procurement fiduciary processes such responsibilities can take place. In addition, IDA will have an operations officer on the ground, while WBG advisory services staff will provide technical assistance to the government in the areas of business environment and investment generation. The Project will furthermore be carried out in two phases, allowing adjusting targets and activities considering existing capacity after the mid-term review. Resp UCP / PIU at Stage: Implementation Due Date: Completion Status: ongoing MCI 2.2 Governance Rating High Description: Risk Management: Adequate coordination between ministries (the MEF and the MCI), and private sector MCI will have a Project Coordinator, who will be tasked with ensuring that relevant public agencies are involved and that project representatives is required to ensure that all the sectors involved are taken into activities are coordinated. Coordination should be facilitated by the fact, that the Project is well aligned with the strategic plan of the consideration. private sector and the government. The Private Sector Economic Forum, the Chamber of Commerce as well as local stakeholders of the BDS activity will be consulted systematically. Resp: MCI Stage: Implementation Due Date: Completion Status: ongoing 3.1 Design Rating Substantial Description: Risk Management: 1d. Project execution may be hampered by a fragile institutional setting. 1) The Project is designed to be carried out in phases. Project design will be adjusted after mid-term review. The current PIU, UCP at MEF, has a positive track record and reputation in executing private sector projects. Fiduciary capacity will be built up 2. The Project design might not extend the benefits of growth to larger proportions of at MCI with support from UCP and under close oversight by the IDA fiduciary specialists. The Project design foresees an the population since the Project will only support the growth of a limited number of intensive implementation support by IDA, with frequent implementation support missions and the presence of a Project MSMEs, while a large proportion of MSMEs in all key sectors of the Project suffer operations officer on the ground. WBG technical assistance that will be provided in parallel while strengthening their from insufficient levels of expertise. institutional capacity in technical aspects. 2) Project interventions will be prioritized, at least in part, in sectors and specific investments that have a high percentage of MSMEs. Specific activities will be undertaken to strengthen MSMEs and establish linkages to promising value chains. A communication strategy will be developed to ensure that MSMEs are informed of the Project's services and requirements. Lessons learned in the Project will be disseminated to other donors implementing projects and programs in the country. Resp: UCP / MCI / Stage: Preparation, mid- Due Date: Mid-term review Status: ongoing IDA term review 50 3.2 Social and Environmental Rating High Description: Risk Management: 1 Environment could be affected by MSMEs and the (future) development of 1) An Environmental and Social Management Framework (ESMF) has been developed that includes criteria to screen out activities of infrastructure development plans for IEZs, etc. supported MSMEs that may have negative social or environmental consequences. A thorough assessment of the environmental and social consequences of commercial and light industrial activities will be part of the terms of reference for the IEZ feasibility studies. The ESMF also includes guidance on capacity building and training of the relevant agencies involved in managing the MSME BDS program. 2 Risk of social unrest related to fears or opportunistic behavior of potential resettlement 2) The Project will ensure a high level of consultation, participation and communication with the affected communities to ensure broad in and around the areas that will be assessed for the implantation of an IEZ. community support of the proposed approach. The Terms of Reference of the Feasibility Studies will ensure that the minimizing of potential resettlement is taken into account as an important factor on which to base the ultimate site selection. The multiple assessments themselves ensure that alternative technical solutions are considered from the beginning. No works will be undertaken in the selected sites under this Project. Resp: UCP / MCI / Stage: Preparation, Due Date: Effectiveness, Status: ongoing IDA implementation implementation 3.3 Program and Donor Rating Moderate Description: Risk Management: 1 This Project will enhance CDEE's capacity together with the IADB. While the success Strong ongoing coordination with other donors, especially the IADB during Project preparation will continue into implementation. of activities of this Project will not depend on the results of the IADB Project, procedures Support to CDEE in the areas of BDS for MSMEs have been discussed from an early Project implementation stage on. However, Project should be aligned where applicable to reduce transaction costs for CDEE. success is not necessarily dependent on funding of other donors. MCI has been coordinating the work of donors, to ensure funding is leveraged at the most. Resp: Donors, UCP, Stage: Preparation and Due Date: Completion Status: Ongoing MCI implementation 3.4 Delivery Monitoring and Sustainability Rating High Description: Risk Management: 1. Due to lack of training of staff, adequate monitoring and evaluation of the Project Training will be available if monitoring and evaluation weaknesses are detected during implementation of the Project. A Project M&E could be weak. specialist will be hired and located in the MCI. 2. Monitoring, especially impact evaluations, requires reasonably reliable data, of The Project will organize primary data collection on the firm(s) that implement the BDS component, and financial institutions (including which there is very little available in Haiti. the collateral registry, once it is operational.) Resp: MCI / IDA Stage: Implementation Due Date: Implementation and Status: To be initiated closing Risk Management: 3. Supported economic activities may not prove competitive in meeting international demand 1) The Project will establish consultation mechanisms and will pursue a close dialogue with the Prime Minister, MEF, CIAT and private sector to ensure that activities are aligned with government and private sector priorities and that proper (budgetary) funding is assigned. 2) The HELP Act provides a stable framework to develop a competitive garment industry. Measures will be taken to attract investments and to improve the competitiveness of the country's IEZs. 51 Resp: MCI, IEZ Stage: Implementation Due Date: Closing Status: To be initiated authority 3.5 Other (Optional) Rating Preparation Risk Rating: High Implementation Risk Rating: High Description: Description: Comments: The overall risk rating is High driven largely by technical and fiduciary capacity weaknesses, and general governance issues in Haiti. 52 Annex 5: Implementation Support Plan Strategy and Approach for Implementation Support 1. The strategy for implementation support (IS) draws on the risk profile of the Project (ORAF, Annex 4) and aims to enhance the client's quality delivery of the proposed interventions. As such, the IS focuses on risk mitigation measures defined in the ORAF and standard Bank implementation support, including technical, institutional, safeguards (environment, social) and fiduciary aspects. 2. The TTL and specialists responsible for each component will be based at World Bank headquarters. Initially (at least until mid-term review), they will undertake supervision missions four times a year. The frequency of missions thereafter will be determined considering the development of the Project. Based on recent and current experience implementing projects in Haiti, the Project will hire an Operations Officer who will be based in Haiti and provide support to the Project's TTLs and team members. The operations officer will supplement occasional supervision from headquarters with daily supervision, monitoring, problem-solving, addressing bottlenecks in the Project, ensure coherence between Project components, make necessary connections between national and regional investments, undertake policy dialogue with the government and stakeholders and enhance coordination between MCI, the UCP and later the MCI, and other partner institutions and amongst various stakeholders and ensure the swift implementation of the different components and activities of the Project. 3. Overall Project oversight will be ensured by frequent supervision and coordination with MCI and, initially, the UCP, and with other Project partners such as the Ministry of Economy and Finance,-, representatives of the Chambers of Commerce (national and regional) and a national representative of small businesses, as needed. Initially, supervision missions will be carried out every three months. After the mid-term review and assuming the Project activities are well on track, supervision may decrease to semi-annual missions, however technical missions by the team's specialists may be carried out more frequently throughout the Project. In addition, there will be regular interactions with the Project team, including the locally based staff hired by the Project. The first steps in Project implementation will be the preparation of UCP and MCI (hiring additional staff, purchasing equipment) and coordination with Project partners. Regular supervision by the TTLs and IDA specialists will focus on the following areas: (a) Strategic - To the extent possible, implementation support missions will meet with the fiduciary entities and the partner institutions to: (i) review Project activities, (ii) re- confirm strategic alignment of the Project's activities to the PDO, and (iii) ensure the necessary coordination among respective stakeholders. (b) Technical - The implementation support team for the Project will consist of WBG specialists and consultants who will review and supervise the execution of the Project components with partner institutions, ensure the activities keep in-line with the PDO, and make adjustments to the design and procurement plan when necessary. The implementation support team will be complemented by other WBG specialists (private sector development specialists, investment officers), and external technical experts, who 53 will be providing advisory services to the Government in the areas of Business Environment and Investment Generation reforms. Ongoing support for M&E (through DIME and short-term cross-support, as needed) will continue to strengthen IDA's and the PIU's ability to both monitor Project progress and assess the impact of interventions. (c) Safeguards - IDA environment and social specialists or consultants (Headquarters based) worked with the UTE in the preparation and consultation of the ESMF for the Project. The UCP revised the ESMF and agreed to implement it. IDA's support to the UCP and the MCI will continue throughout project implementation. Social specialists will: (i) support the UCP and MCI with familiarization of the Bank's instruments, (ii) ensure the PIUs capacity to undertake social analysis and develop mitigation approaches, and (iii) ensure regular and close supervision of progress and implementation of these plans. (d) Fiduciary - The Bank's Headquarters and field-based financial management and procurement specialists will provide timely, targeted training to the UCP and the MCI and other possible executing institutions prior to Project effectiveness and through periodic supervision missions during Project implementation. The specialists will furthermore ensure, that the transfer of fiduciary responsibility from the MEF's UCP to the MCI will be well prepared and that the MCI will have the capacity to comply with IDA procedures prior to such transfer. These specialists will ensure the capacity of the PIUs to manage flow of funds and accounting procedures, in line with FM guidelines. Supervision of the Project's financial management arrangements will be conducted semi- annually and, as needed, in response to client needs. Procurement supervision will also be carried out semi-annually during regularly-scheduled Bank supervision. The support will focus primarily on contract management and in improving proficiency and efficiency in implementation, according to the Bank guidelines. There will be less focus on training in procurement or FM guidelines. (e) Client-relations - The TTL and the Operations Officer will: (i) coordinate Bank supervision to ensure consistent Project implementation, as specified in the legal documents (i.e. Grant Agreement, Project Operational Manual), and (ii) meet regularly with the client, to gauge Project progress in achieving the PDO and address implementation roadblocks as they may arise. II. Skills Mix Required - Institutional Support Table 8: Institutional Support Skills needed # Staff Weeks per # Trips per year Comments FY 54 Task Team Leader (Supervision) 15 4 HQ-based Operations Officer 17 - Country-based Procurement Specialist 4 2 HQ-based Financial Management Specialist 4 2 HQ-based Senior Investment Promotion 8 3 HQ-based Officer (IFC/CIC funded) PSD Specialist - Investment 15 3 HQ-based Climate-Business Regulation (Partially IFC/CIC funded) Lead Investment Policy Officer 8 2 HQ-based BDS Specialist 8 2 HQ-based Environment Specialist 1 1 HQ-based Social Specialist 1 1 HQ-based Monitoring/Evaluation Specialist 4 2 HQ-based Legal Counsel 1 - HQ-based III. Partners Table 9: Partners Name Institution/Country Role Client MCI Project counterpart, responsible for coordinating the Government of Haiti support for the Project PIU UCP (a unit of MEF), to be replaced Responsible for fiduciary aspects of Project by MCI execution Key Government Ministry of Commerce and Industry; MCI: Overall Project responsibility and Project Partner Ministry of Economy and Finance; coordination with other public and private institutions Ministry of Tourism; stakeholders for specific activities of the Project Project Partner MEF, CPRA; CFI, CIAT, DZF, Each partner institution has responsibility for institutions SONAPI, PIM, the IEZ authority to specific activities of the Project (Governmental) be established, and other; Private sector Various/including Private Sector Beyond consultation, play a key role in the partners Economic Forum, Chambers of sustainability of the Project by perpetuating Commerce, Associations and Project activities through investments and industries) taking over responsibility for service delivery beyond the life of the Project. 55 Annex 6: Economic and Financial Analysis 1. Relationship of Project Components to PDO: Given the economic context, the main objective of this Project is to assist the Republic of Haiti in improving the conditions for private sector investment and inclusive growth. There are several ingredients to achieving that objective, including improvements to Haiti's legal framework for doing business and implementation thereof, support to develop IEZs, a sectoral approach to development, and BDS for MSMEs. These ingredients are embodied in the main Project Components described in Section III of the PAD. 2. Economic Analysis: To be economically acceptable, a Bank-financed project must meet two conditions: (a) the expected net present value of the Project must be positive, and (b) the expected net present value of the Project must be higher than or equal to the expected net present value of mutually acceptable Project alternatives. Given that the Project contains several components, each component should be appraised as if it were a marginal component, and then appraised in combination. However, this standard method is only partly applicable to this Project, given that the success of each of each component is partly dependent on the existence of the other components (for example, increased investment in the Zones is partly dependent on successful reforms to the business environment; and likewise the benefits to reforms of the business environment may be maximized only through efforts to foster integrated economic zones). 3. As several of the activities lack rigorous estimation models to calculate a rate of return, economic and financial rates of return have been calculated based on the Project's activities in support of investment generation and business development services, for which literature and experience gives reasonable estimates. If the investment generation IEZ feasibility and advisory work leads to an additional financing request for the development of one or more IEZs, economic and financial rates of return will be calculated for the proposed IEZs. Because of the difficulty in rigorously establishing a direct relationship between the Project's overall support to business environment reforms and their combined economic impact, a qualitative analysis of the expected results of activities in this subcomponent, based on literature reviews, is further elaborated below. Furthermore, at least one rigorous impact evaluation will be conducted to assess the impact of a particular business environment reform-currently foreseen to be the creation of the moveable collateral registry. No economic analysis was conducted for the Project implementation, monitoring and evaluation, or emergency reserves components, due to the absence of generally accepted methodologies for the economic analysis of capacity-building activities. Therefore, their inclusion is justified based on cost-effectiveness. 4. For all calculations, the time horizon of the Project is set at 2018. This means that Net Present Values and Economic Rates of Return are calculated in a five-year window, from 2013 to 2018. The actual returns to project investments are likely to extend far beyond 2018, but these are not included in the calculations, in order to give only a conservative estimate of project benefits. We assume a discount rate of 10%, a conservative rate considering that the ceiling rates for Haitian Government bonds vary between 1% (7-day bond) to 3% (91-day bond.)72 72 Banque de la Republique d'Haiti. Information solicited by email from Christine Aimy Toussaint, Direction des Affaires Juridiques on November 5, 2012. 56 5. Based on conservative assumptions, we are estimating an Economic Rate of Return of 23 percent for the Project, with net benefits of US$ 2.6 million (after subtracting US$3 million in management costs) and a net present value of US$1.03 million. This is based on 2 per cent increase in FDI (over 2011 baseline value) and a 5 percent return on BDS activities over the five- year lifetime of the Project. Note that the Economic Rate of Return is a comparison of the costs and benefits of a project. Distinctly from a financial analysis, the costs and benefits go beyond what is paid by the investor and what is reaped by the intended beneficiary. This Economic Rate of Return of this project, therefore, considers the costs of the project, the expected return from the two mentioned sub-components, the discount rate applied to both costs and benefits (10%), as well as the additional effects expected to take place in the economy as a result of the initial project funds and the increase of firm activity or investment into IEZs, such as increased demand, additional jobs created, and wages spent in the economy. 6. The estimated 2 percent increase in FDI due to the investment promotion and facilitation activitieS73 (on the 2011 baseline value) assumes that the benefits accrue gradually during the course of the Project, with zero benefits in 2014 and 2015, 20% of full benefits in 2016, 50% of full benefits in 2017, and so on until full (2% total increase) benefits are achieved in 2018. Country cases of investment promotion and facilitation, such as the creation of a one-stop shop for investment in Slovakia, or a similar agency in Zimbabwe, have been associated with much higher increases in investment (between 50% and 200%.) Furthermore, a cross-country study of 58 countries shows a positive correlation between investment promotion and increased FDI, with improvements to the business environment magnifying the effect on FDI. Specifically, the study notes that an increase of an investment promotion agency's budget of 10% (up from a minimum of $2 million to be effective) is associated with a 7.5% increase in FD174. Therefore, the 2% increase over five years assumed in this analysis appears conservative. The investment promotion work is expected to cost US$3 million over the course of the Project. 7. For the BDS activities, we estimate a 5 percent return, with a 1.5 multiplier effect in the local economy. The 5% return to financing the BDS component is based on results seen in other countries, such as Bangladesh, Bolivia, Mexico and Zambia75, in which BDS support 73 The 5% estimate of increased FDI is based on experiences of other countries who have conducted investment promotion and facilitation activities, such as the creation of a one-stop shop for investors. In Zimbabwe, the expected effect of such an OSS was to increase FDI fourfold (see: http://allafrica.com/stories/201012140018.html). In Slovakia, a similar facility has increased FDI by about 50% over five years (see: http://spectator.sme.sk/articles/view/41069/3/investors_one stop_shop_reflects_on_fdi_dynamics.html). 74 Morisset, Jacques. World Bank Policy Research Working Paper 2038. "Does a country need a promotion agency to attract foreign direct investment? A small analytical model applied to 58 countries." See: http://imagebank.worldbank.org/servlet/WDSContentServer/IW3P/IB/2003/05/23/000094946_03051404103335/Re ndered/PDF/multi0page.pdf ' Duflo, Amie and Dean Karlan. "Can management consulting help small firms grow?" In: Stanford Social Innovation Review. Summer 2012. Found on: http://www.ssireview.org/articles/entry/can management consulting help small firms grow. McKernan, S.M.. "The impact of microcredit programs on self-employment profits: Do noncredit program aspects matter?" Review of Economics and Statistics, 84 (1) (2002), pp. 93-115. Copestake, J. and S. Bhalotra, S. Johnson. "Assessing the impact of microcredit: A Zambian case study." Journal of Development Studies, 37 (4) (2001), pp. 81-100. Nisttahusz, S. and G. Montafio Hernandez, M. Lavay6n. << La importancia de los servicios de desarrollo empresarial en el desarrollo de la micro y pequefia empresa y su relaci6n con las microfinanzas. > Funda-Pro, La Paz, Bolivia (2002). 57 consistently raised income and sales (between 28% and 120% over control groups) for recipients. The BDS component is expected to cost US$7 million in total. 8. Note that the ERR calculated here should be considered a lower bound, and that the Project may achieve substantially higher values as described below. To illustrate the combination of costs and benefits over the course of the Project lifetime, a visual representation of the estimated cash flow during implementation is shown below: $4,000,000 - $3,000,000 - $2,000,000 - Net Benefits (Cash Flow) $0 - 2014 2015 2016 2017 2018 -$1,000,000 - -$2,000,000 J The main assumptions underlying these calculations are detailed below, by component. Component 1 - Business environment and Investment Generation (US$10 million total). 9. This component will provide support to improve the Haitian business environment and support to facilitate and promote investments. Subcomponent 1.1: Business environment reform 10. Haiti's regulatory environment currently does not ease the process of doing business. The World Economic Forum (WEF) reports that the country is one of the least competitive in the world, ranking 141/142 in the Global Competitiveness Index. Notably, Haiti's availability and affordability of financial services and the ease of access to loans is among the worst.76 Consequently, according to the World Bank Financial Inclusion Index, only 8% of the adult population has received a loan in the past year and just 22% have an account at a formal financial institution.77 The regulatory framework is particularly challenging for firms: on a global scale, Haiti is ranked 174th out of 185 countries on the ease of doing business78. For example, the time taken to export and import is around 31 to 33 days. Business start-up procedures cost 286% of GNI per capita, and take 105 days. S.R. Halder. "BRAC's business development services-do they pay?" Small Enterprise Development, 14 (2) (2003), pp. 26-35. 76 World Economic Forum. Global Competitiveness Report 2012-2013: Haiti. Haiti ranks 138/144 on availability of financial services; 139/144 on affordability of financial services; and 142/144 on ease of access to loans. 77 World Bank. Financial Inclusion Index (2011 data.) Asli Demirguc-Kunt and Leora Klapper, 2012. 78 http://www.doingbusiness.org/ 58 Incremental Benefits 11. Substantial gains can be achieved through regulatory reform. To guide our estimations of the potential impact of selected business environment reforms, we turn to studies from other countries, with the caveat that they are largely more politically stable, institutionally capable and higher-income economies than Haiti. Still, the direction of the impact is consistent. For example, reforms to the secured transactions and insolvency frameworks, including the creation of a moveable collateral registry and a change of the legal framework, are expected to lower the cost of and expand credit to SMEs. This expectation is based on results seen in other countries who reformed their insolvency and debt resolution systems, such as Brazil (22% decrease in cost of debt, 39% increase on aggregate credit79)80; India (1.36 percentage point lower increase on interest rates8); and Thailand (decrease in non-performing loans and expected costs of financial distress.82) Specifically regarding collateral registries, a cross-country study of 73 economies found that the establishment of such registries increased firms' access to finance, 83 with somewhat larger effects for small firms . In countries that established such registries including Guatemala and Rwanda-firms saw a rise in access to finance by eight percentage points, an increase in working capital financed by banks of ten percentage points, and a decrease in the average interest rate of three percentage points84 12. In another area of business environment reforms supported by this Project-competition framework-the literature is equally optimistic on the positive impacts of reforms. In the agribusiness sector, removal of competition constraints has resulted in large consumer savings and an increase in total factor productivity . For example, in Kenya, opening the market and eliminating price controls for maize provided consumers a savings of $10.1 million annually, thanks to lower milling costs86. In the retail services sector, liberalization of services in Ukraine resulted in a total factor productivity increase of 3.6%87. In India, a study of 1,948 retail stores around the country found that pro-competition reforms can improve labor productivity by 87% 88 7 Funchal, Bruno. 2008. "The Effects of the 2005 Bankruptcy Reform in Brazil." Economics Letters 101 (1): 84-86. 80 If a similar effect were seen in Haiti, gross domestic credit could rise from 17.4% of GDP (2011) to 24.2%. However, note that Brazil's gross domestic credit is 98.3% of GDP (2011), making it difficult to compare or extrapolate a precise estimate of the predicted effect in Haiti. 8 Visaria, Surata. 2009. "Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India." American Economic Journal: Applied Economics 1 (3): 59-8 1. 82Foley, C. Fritz. 1999. "Going Bust in Bangkok: Lessons from Bankruptcy Law Reform in Thailand." Harvard Business School, Cambridge, MA. 8 Inessa Love, Maria Soledad Martinez Peria and Sandeep Singh. "Collateral Registries for Movable Assets: Does Their Introduction Spur Firms' Access to Finance?" Forthcoming, in the World Bank Global Financial Development Report. 84 Inessa Love, Maria Soledad Martinez Peria and Sandeep Singh. "Collateral Registries for Movable Assets: Does Their Introduction Spur Firms' Access to Finance?" Forthcoming, in the World Bank Global Financial Development Report. 8 Kitzmuller, Markus and Martha Martinez Licetti. "World Bank Group: Financial and Private Sector Development Vice Presidency Viewpoint: Competition Policy, Note Number 331." September 2012. 86 Jayne, T. S., and G. Argwings-Kodhek. 1997. "Consumer Response to Maize Market Liberalization in Urban Kenya." Food Policy 22 (5): 447-58. 87 Shepotylo, 0., and V. Vakhitov. 2012. "Services Liberalization and Productivity of Manufacturing Firms: Evidence from Ukraine." Policy Research Working Paper 5944, World Bank, Washington, DC. 88 Amin, Mohamed. Forthcoming. "Competition and Labor Productivity in India's Retail Stores." Journal of Comparative Economics. 59 Finally, the impact of a comprehensive competition law or policy-which Haiti currently lacks-has been found to be significantly positive. A cross-country study by Kee and Hoekman found that this reform results in an average increase of 7.2% of domestic firms89. Another study focusing on the enforcement of such policies found an increase of 1% in total factor productivity associated with a 20% increase in the level of enforcement (for example, from the level of Czech Republic to that of the United Kingdom90.) 13. The cost of subcomponent 1.1 (Business Environment only) is estimated at US$2 million over the course of the Project. These costs are described in greater detail in Section III of this document. Results of the Benefit-Cost Analysis 14. This component is estimated to have a Net Present Value of $5.25 million, which is a substantial return on a cost of $2.2 million over the course of the Project (or $1.7 million as a Present Value). The estimated Economic Rate of Return is 172%. It should be noted, however, that this calculation is based on job creation expected from business entry reforms91, which stand here to proxy for general business regulation reforms until the particular reforms in this Project are more precisely defined (i.e., in final versions of laws, for example in Secured Transactions, Insolvency, and Competition Policy,) as long as rigorous estimation models are available. Sensitivity Analysis 15. A sensitivity analysis reveals that this Project subcomponent will have a positive Net Present Value if it creates at least 1,234 jobs. This means creating 49 jobs for every 100,000 Haitians. Subcomponent 1.2: Investment Generation (Promotion and IEZs). 16. The Component will support economy-wide investment generation reforms to attract foreign and local investments (agribusiness, apparel, tourism and potentially light manufacturing). 17. We have carried out a partial standalone Benefit-Cost Analysis for this subcomponent, on Investment Promotion only (rather than IEZs.) With the caveat that investment generation requires business environment reform to be successful, as seen in the 92 literature , we calculate a partial Net Present Value for Investment Promotion activities only (cost: US$3 million.) The Integrated Economic Zones (cost: US$5 million) subcomponent activities are currently aimed at identifying and conducting feasibility studies for up to two sites. 89 Kee, H. L., and B. Hoekman. 2007. "Imports, Entry and Competition Law as Market Disciplines." European Economic Review 51 (4): 831-58. 90 Buccirossi, P., L. Ciari, T. Duso, G. Spagnolo, and C. Vitale. Forthcoming. "Competition Policy and Productivity Growth: An Empirical Assessment." Review of Economics and Statistics. 91 Estimate is based on a 1/10 of the jobs estimated to have been created as a result of business entry reforms in Colombia, based on research by Miriam Bruhn, DECFP. 92 Morisset, Jacques. World Bank Policy Research Working Paper 2038. "Does a country need a promotion agency to attract foreign direct investment? A small analytical model applied to 58 countries." See: http://imagebank.worldbank.org/servlet/WDSContentServer/IW3P/IB/2003/05/23/000094946_03051404103335/Re ndered/PDF/multi0page.pdf 60 Once the zone(s) are identified and their sector activities defined, we may conduct further analysis on their economic impact. At this time, we estimate the NPV and IRR of the Investment Promotion subcomponent and find that, assuming FDI will increase in total by 2% we report the threshold value of the percentage increase in FDI required to compensate for the value of those disbursements. We assume that the benefits accrue gradually during the course of the Project, with zero benefits in 2014 and 2015, 20% of full benefits in 2016, 50% of full benefits in 2017, and so on until full (2% total increase over 2011 baseline) benefits are achieved in 2018. Results of the Benefit-Cost Analysis 18. This component is estimated to have a Net Present Value of $1.8 million. The Economic Rate of Return is 56%. Sensitivity Analysis 19. On this basis and the results of a sensitivity analysis, the percentage of yearly additional FDI required by 2018 to generate a non-negative Net Present Value is 1.2% on the 2011 baseline value. Component 2 - Business Development Services (Cost: US$7 million) 20. The objective of this component is to build MSME capacity to serve the tourism value chain and enter the supply chain of IEZs supported by the Project, principally in the agribusiness and apparel sectors, thus contributing to a more inclusive model of development. 21. Haiti's credit market has relatively shallow financial depth. As proxy indicators for access to finance, there are 330 deposit accounts in commercial banks (and 42 in cooperatives) per 1,000 adults, but only 11 loan accounts from commercial banks (and 19 from cooperatives) 93 per 1,000 adults 22. BDS subcomponents of this Project will focus on extending access to finance, particularly amongst MSMEs. That will be achieved by helping firms write business plans that gain them access to finance, including through entrepreneurship and management skills, small fixed assets and technical assistance. Incremental Benefits 23. We estimate the incremental benefits of this Project subcomponent using a conservative estimate of a 5% rate of return on investments, together with a 1.5 magnitude local economic multiplier to the value generated. We assume that the returns to investments are yielded with a one-year lag (i.e. investments in 2013 will generate a return only in the following year). The 1.5 magnitude local economic multiplier is estimated on the basis that returns to investments will be earned by employees of the firms, or by employees of the goods and services purchased by the firms, and then a portion of that income will be re-spent in Haiti's economy. 1.5 is taken as a low estimate of the actual value of a multiplier, as we assume that initially, a low level of goods and services will be provided locally, so the portion of wages re- spent may go more to imports than to Haiti's economy. As this and the other component 93 http://data.worldbank.org/ In terms of volume of deposits and loans, a study in 2008/9 estimated that total assets of the sector were approximately US$ 172 million. The number of borrowers was estimated at 233,000, of which 23% was served by cooperatives. http://www.smghaiti.com/f/Le Secteur de la Microfinance en Haiti Rapport 2008-2009.pdf 61 activities are realized-such as an improved business environment and investment generation- we expect that investment, including domestic supply of goods and services, will increase. Results of the Benefit-Cost Analysis 24. This component is estimated to have a Net Present Value of $1.5 million. The Economic Rate of Return is 75%. Sensitivity Analysis 25. The first sensitivity analysis reveals that this project subcomponent will have a positive Net Present Value even if disbursements generate a negative rate of return of 21%. This sensitivity analysis was conducted by changing the value of rate of return on project disbursements, while keeping constant the local economic multiplier with a value of 1.5. This surprising result is achieved because the existence of a local economic multiplier means that even if project disbursements generate less value than the monetary value of disbursements (up to a threshold of 14% less), the multiplied value of those disbursements in Haiti's economy will still mean that the Net Present Value is positive. 26. The second sensitivity analysis reveals that this Project subcomponent will have a positive Net Present Value even if the local multiplier is as low as 1.13. This sensitivity analysis was conducted by keeping the value of rate of return on project disbursements constant at 5%, while changing only the local economic multiplier. 62