PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: PIDA72 Public Disclosure Copy Project Name Haiti Business Development and Investment Project (P123974) Region LATIN AMERICA AND CARIBBEAN Country Haiti Sector(s) General industry and trade sector (60%), Agro-industry, marketing, and trade (40%) Lending Instrument Specific Investment Loan Project ID P123974 Borrower(s) Ministry of Commerce and Industry Implementing Agency UCP at the Ministry of Economy and Finance Environmental Category B-Partial Assessment Date PID Prepared/Updated 13-Mar-2013 Date PID Approved/Disclosed 25-Mar-2013 Estimated Date of Appraisal 15-Mar-2013 Completion Estimated Date of Board 21-May-2013 Approval Decision Public Disclosure Copy I. Project Context Country Context Two-and-a-half years after the earthquake that struck near Port-au-Prince, emergency response and early reconstruction activities are phasing out. Haiti and its partners are focusing more on the structural issues that hamper the country’s development and on building institutions that can deliver investments 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, remains a critical challenge for the government and donors alike. 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. The earthquake exacerbated an economic situation which was already difficult. 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$11.3 billion. GDP per capita had been falling in US$ terms: it was only $656 in 2009 (in current US$) 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. Page 1 of 7 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 Public Disclosure Copy 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 country registered officially an inflow of approximately US$ 1.6 billion in remittances, which accounted roughly for 19 percent of the Haiti’s GDP, surpassing the participation of other sources of incomes, such as foreign aid and foreign direct investment and helping mitigate poverty and the consequences of the 2010 earthquake. Despite the pressing need to rebuild physical infrastructure, human capacity and develop the economy, a lengthy political transition and subsequent instability hampered efforts. Presidential and legislative elections, along with a drawn out electoral process, concluded in May 2011 with the swearing in of President Michel Joseph Martelly. However, the opposition retained a majority in both houses of Parliament. This delayed the nomination of Prime Minister Gary Conille to October 2011, and contributed to his resignation five months later. A second Prime Minister, Mr. Laurent Lamothe, was nominated in April 2012. The macroeconomic outlook for FY 2013–15 is expected to be favorable, thanks to substantial externally financed investments in reconstruction and the government’s strong focus on promoting economic growth. 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 areas of business environment, the framework for investments and the performance of MSMEs. II. Sectoral and Institutional Context Public Disclosure Copy Despite Haiti’s comparative advantages and growth potential in certain sectors, firms—foreign, domestic and MSMEs—face 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) physical infrastructure - communications, industrial, commercial and tourism, that does not meet the needs of the private sector, to name some of the most relevant. Haiti’s business environment currently does not ease investment or firms’ growth. 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. 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. The regulatory framework is particularly challenging for firms: Haiti is ranked 174th out of 185 countries on the ease of doing business. For example, the time taken to export and import is around one month (though import time decreased slightly to 31 from 33 days in 2011). It takes 530 days to enforce a simple commercial contract in the courts. 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. Page 2 of 7 Opportunities for inclusive growth and formal jobs in Haiti might capitalize particularly on the country’s favorable 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, Public Disclosure Copy tourism and, potentially, light manufacturing . Such opportunities can materialize if Haiti improves its business environment and the conditions for investment. With abundant affordable labor and close proximity to the United States for shipping and travel, Haiti possesses good potential to attract new investment in the agribusiness, apparel and tourism sectors, as well as construction/building materials and logistics, in the near term, while eventually transitioning to other higher-value industries and services. In a country such as Haiti, where both the business environment and the physical environment may discourage investors, there is a strong motivation to attract investment in specific zones, where investors can be assured of conducive policies as well as basic infrastructure. Furthermore, the Government may use these zones to pilot policies before rolling them out nationwide. In this light, the government has announced its goal to establish two new Integrated Economic Zones (IEZs) over the next three years, as a key platform to facilitate private investment and help it in achieving its goal of creating 500,000 jobs. Even if IEZs take time to develop, they represent one of the best options to contribute to that ambitious target. A pipeline of 35 projects already exists with the potential to generate US$130 million in investments and create more than 100,000 jobs. To realize new investments in these zones, investors in IEZs will need over 2,000 hectares of serviced land over the next 20 years, as well as a clear legal and institutional framework to secure their investments. 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 advantages. Furthermore, a myriad of agencies are involved in the establishment and operations of IEZs. These policies and practices have resulted in investor confusion and higher costs, which are partly responsible for an underperforming Haitian zones regime. Public Disclosure Copy Apparel presently employs 30,000 Haitians directly, 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 Act 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. In fact, 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. 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.� 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%. The Government has identified a number of key constraints to development of the agribusiness Page 3 of 7 sector, including: the deficit in infrastructure (especially roads, lands to host agriculture) (ii) difficulty in assuring regular and homogenous supplies, for both domestic and export markets; and (iii) the absence of norms and quality control systems . With the alleviation of these and other Public Disclosure Copy 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. 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 the International Development Association (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. Further opportunities for jobs and growth can emerge if MSMEs can be supported to become suppliers of the value chains in these sectors, by improving the quality of their goods and services and achieving economies of scale. 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 skills. Other sources in Haiti testify that Haitian firms typically lack basic management and accounting skills, such as the inability to price goods and services or to separate business and personal finances. With the expected growth of the agribusiness, apparel 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. However, in order to rise to this challenge, MSMEs in particular will require support to finance smaller investments assets, for which loans are not available in the market, and business skills. The Government of Haiti is well aware of these impediments to the private sector. In order to facilitate economic growth and increase formal employment, it has established clear priorities that Public Disclosure Copy 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. 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 formally established as the entity in charge of drafting legal reforms to the business environment. It has already completed and submitted to Cabinet several draft laws, including one on secured transactions that is expected to facilitate access to finance for MSMEs, allowing them to use moveable assets to secure loans. Furthermore, the Government is preparing to coordinate the Doing Business reform agenda under a high level Task Force involving several Government and private sector entities. President Martelly recently issued a new regulation for Free Zones, while it pursues an aggressive plan to open new IEZs and expand existing ones. In addition, the government has initiated activities in support of MSMEs, which include setting up a Partial Credit Guarantee Fund, 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. To further advance in these areas, additional steps need to be taken in order to: Page 4 of 7 (a) Finalize and implement a plan to improve the business environment. This should focus on simplification of procedures for business entry, operations (e.g., licensing & inspection regimes), trade logistics, tax administration and exit; access to finance by MSMEs; and protection of minority Public Disclosure Copy shareholders. Measures must also be taken to establish a framework to increase competition in certain sectors such as agribusiness and tourism; (b) Further improve the legal and incentive framework for investments in IEZs. 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 advantages. They have resulted in investor confusion and higher costs, which are partly responsible for an underperforming Haitian zones regime. Necessary reforms include drafting a new law to govern the establishment of IEZs as well as the definition of a coherent, non-distortive incentive framework for their operation, and the creation of efficient institutions to facilitate investments (such as a one-stop shop), and facilitate and promote investment into key sectors, especially agribusiness and apparel; and, (c) Establish linkages between MSMEs and large firms in promising value chains of key identified sectors, such as agribusiness, apparel, tourism and light manufacturing, in order to leverage investments in these sectors. The successful implementation of this agenda will require maintaining a fluid dialogue involving the executive and legislative branches of the government as well as private sector representatives and donors. III. Project Development Objectives The Project Development Objective is to assist the Republic of Haiti in improving the conditions for private sector investment and inclusive growth. This will be done at the national level by supporting the Republic of Haiti in updating and improving the legal and regulatory frameworks that govern business activities, both within and beyond the Doing Business topics, and through institutional strengthening activities for Public Disclosure Copy implementing agencies that will also help update and streamline relevant procedures. 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. IV. Project Description Component Name Component 1 – Business environment and Investment Generation Component 2 –Business Development Services for MSMEs Component 3 – Project management, evaluation and monitoring Component 4 – Risk and emergency response contingency reserve V. Financing (in USD Million) For Loans/Credits/Others Amount BORROWER/RECIPIENT 0.00 IDA Grant 20.00 Page 5 of 7 Total 20.00 Public Disclosure Copy VI. Implementation MCI is the executing project counterpart, coordinating the activities of all involved public and private entities. The UCP of the MEF, an agency with a clear track record implementing IDA projects, will have initially the fiduciary responsibilities for this Project, given that MCI does not have yet the capacity to manage the fiduciary aspects of IDA projects. These responsibilities may be transferred thereafter to MCI, once it has the fiduciary capacity to operate in a manner satisfactory to IDA. MCI and MEF will enter an agreement, satisfactory to IDA, that will delineate the areas and procedures for collaboration and that will describe, how MCI would take over fiduciary responsibilities. The UCP, and MCI, -once the necessary capacity at MCI is in place- will be responsible for the Project’s procurement, financial management as well as fiduciary tasks. The MCI will coordinate the overall implementation of the Project with the different Project stakeholders. For this, MCI will appoint a Project Coordinator who will be responsible for overseeing the progress of all Project activities, ensuring that the objectives and targets of the Project are met, and coordinating with other public and private stakeholders involved in Project implementation. The Project Coordinator at MCI will lead the work on Business Environment reforms supported by the Project, collaborating with the Task Force for Business Environment Reform, which is currently being set up under the Prime Minister and which will comprise representatives from the public and private sectors. With project support, legal reforms will be drafted by CPRA, which is responsible for drafting and revising commercial laws and regulations. For the implementation of each specific reform, the MCI will collaborate with relevant public stakeholders (e.g. with the Ministry of Tourism for reforms to foster competition in the tourism sector) and private stakeholders (e.g. the Private Sector Economic Forum (PSEF) and/or the Chambers of Commerce) to ensure their Public Disclosure Copy consistency with public and private sectoral policies. The Project Coordinator at MCI will be responsible for coordinating Project activities related to the reform of the legal and institutional framework for IEZs with the CPRA and its corresponding steering committee. The sites for feasibility studies (to be financed by the Project) will be selected by MCI, in consultation with the Office of the Prime Minister, the MEF, the Comité Interministériel d'aménagement du Territoire (CIAT), the DZF, SONAPI, relevant sector Ministries (e.g. Agriculture in the case of Agro-industrial IEZs) and agencies, local authorities, as well as representatives from the private sector and from local civil society organizations – 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. Furthermore, the realization of the feasibility studies will be coordinated by the new IEZ authority or with one of the existing entities (SONAPI, DZF), until such time as the new authority is in place under the auspices of the MCI. The recently established Centre de Développement de l’Entreprise et de l’Entrepreneuriat (CDEE), which operates within the MCI, will be responsible for activities related to the implementation of BDS for small MSMEs. The CDEE’s regional office in Cap-Haitien will be the base for the implementation of the BDS activities that will start in the North. The Project will support it in setting up a technical and fiduciary team as well as with equipment and a management information system. The procedures for the implementation of the BDS activities will be similar to those of the Page 6 of 7 two IADB BDS projects, which are operated by CDEE and which target larger MSMEs, in order to ensure a coherent approach. Public Disclosure Copy VII. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✖ Natural Habitats OP/BP 4.04 ✖ Forests OP/BP 4.36 ✖ Pest Management OP 4.09 ✖ Physical Cultural Resources OP/BP 4.11 ✖ Indigenous Peoples OP/BP 4.10 ✖ Involuntary Resettlement OP/BP 4.12 ✖ Safety of Dams OP/BP 4.37 ✖ Projects on International Waterways OP/BP 7.50 ✖ Projects in Disputed Areas OP/BP 7.60 ✖ VIII.Contact point World Bank Contact: Juan Buchenau Hoth Title: Sr Financial Sector Spec. Tel: 458-4793 Email: jbuchenau@worldbank.org Borrower/Client/Recipient Name: Ministry of Commerce and Industry Contact: Hugues Joseph Title: Directeur du Cabinet du Ministre Public Disclosure Copy Tel: 5094890-0158 Email: Hugues_joseph@yahoo.fr Implementing Agencies Name: UCP at the Ministry of Economy and Finance Contact: Lys Faucher Title: Coordonnateur Tel: 5092517-0772 Email: ucp@mefhaiti.gouv.ht IX. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Page 7 of 7