PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: PIDA3296 Public Disclosure Copy Project Name Lao PDR - Small and Medium Enterprise Access to Finance Project (P131201) Region EAST ASIA AND PACIFIC Country Lao People's Democratic Republic Sector(s) SME Finance (100%) Theme(s) Micro, Small and Medium Enterprise support (100%) Lending Instrument Financial Intermediary Loan Project ID P131201 Borrower(s) Ministry of Finance Implementing Agency Department of SME Promotion Environmental Category F-Financial Intermediary Assessment Date PID Prepared/Updated 18-Mar-2014 Date PID Approved/Disclosed 25-Mar-2014 Estimated Date of Appraisal 28-Mar-2014 Completion Estimated Date of Board 29-May-2014 Approval Decision Public Disclosure Copy I. Project Context Country Context Lao PDR is in the midst of an economic transformation. GDP growth rates have been high over a long period and are expected to continue with the target of 8 percent growth rate per year. The country is blessed with many natural endowments and is located in the center of a fast growing region. Lao PDR has embarked on a path of exploiting its abundant natural resources and is likely to maintain the momentum and become a middle-income country by 2020. Despite the solid economic growth, in the short-term there are signs of vulnerabilities that need to be closely monitored. In the past two years, the economy has been overheating from expansionary macroeconomic policies. The fiscal deficit is estimated to have widened to 6.5 percent of GDP in 2013 from 4.8 percent in 2011, mainly from a doubling of public sector employee compensation and higher capital spending. Government liquidity is tight, and wage and other arrears of 2–3 percent of GDP have emerged. Monetary policy has been accommodative, and credit growth remains vigorous. Real GDP growth is projected at 8¼ percent this year, led by investment and private consumption, and consumer price inflation is projected to rise to 7.5 percent by year-end from 4.3 percent in 2012. The current account deficit is expected to remain close to 30 percent of GDP, and despite strong foreign direct investment inflows, international reserves—amounting to Page 1 of 4 US$0.5 billion (0.8 month of prospective imports) in June 2013—are very low. Fiscal consolidation is central to restoring macroeconomic stability. Public Disclosure Copy In the medium term, the economy will have to become much more competitive and the overall business environment much more conducive towards private sector activity. According to the World Bank Doing Business Report 2014, Lao PDR ranks 163 out of 185 countries for overall ease of doing business. Lao PDR ranks particularly low in terms of the time and cost of resolving insolvency (position 185), protecting investors (184), getting credit (167), trading across borders (160), paying taxes (126), and enforcing contracts (114). Becoming a prosperous market-based economy will require structural reforms in Lao PDR to enable entrepreneurs to conduct their business activities on an efficient and competitive manner vis a vis other nations. Sectoral and institutional Context Despite impressive economic performance in the past years, most firms in Lao PDR still remain small. At the end of 2010 there were 126,913 registered firms out of which only 196 (0.15%) were large enterprises with more than 100 staff; 1,081 were medium firms (0.85%) with 20 to 99 staff; and 125,616 (98.98%) were small-size enterprises with 1 to 19 staff. Access to finance is one of the three major constraints faced by SMEs in Lao PDR. Banks are reluctant to lend to SMEs due to excessive information asymmetries and serious difficulties in executing collateral. A large number of SMEs that apply for bank loans are simply not registered. From a legal point of view, this means that they do not exist and banks can simply not lend to them. Moreover, most SMEs do not have or keep accounting records. A large number of business transactions conducted by SMEs are settled in cash without invoices. Moreover, many of the firms that have accounting records are not able to convince banks to lend to them, because their accounting records are not reliable in the eyes of banks. Having parallel systems of accounting, one for banks and one for tax authorities, seems to be a practice among many SMEs in Lao PDR. Public Disclosure Copy When SMEs default on their loans, the execution of collateral becomes a lengthy and costly process for commercial banks. In Lao PDR, the judicial system is not prepared to handle collateral execution in an expedite manner. It takes up to 5 years for banks to take possession of collateral through the judicial system. Moreover, the legal system of Lao PDR does not have specific provisions to handle and resolve firm insolvency. Therefore, banks prefer to lend only to well- established firms with sufficient collateral (mostly real estate), excluding all start-ups as well as other SMEs with no or insufficient collateral. II. Proposed Development Objectives This project aims at providing long-term funding sources for banks to provide long-term credit to SMEs. The project will support the growth of privately-owned SMEs by increasing the supply of long-term finance provided by commercial banks and by strengthening the capability of the Department for Small and Medium Enterprise Promotion (DOSMEP) to formulate and implement public policies that promote access to finance for SMEs. III. Project Description Component Name 1. Line of Credit to Commercial Banks to Support SME Loans Comments (optional) Page 2 of 4 Component Name Public Disclosure Copy 2. Risk-sharing facility Comments (optional) Component Name 3. Technical assistance Comments (optional) IV. Financing (in USD Million) Total Project Cost: 47.00 Total Bank Financing: 32.00 Financing Gap: 0.00 For Loans/Credits/Others Amount BORROWER/RECIPIENT 0.00 International Development Association (IDA) 20.00 International Finance Corporation (IFC) 12.00 Borrowing Country's Fin. Intermediary/ies 15.00 Total 47.00 V. Implementation The project will be implemented by the Department for Small and Medium Enterprises of Lao PDR. The National Implementation Unit of the Ministry of INdustry and Commerce will assist DOSMEP Public Disclosure Copy to meet fiduciary and safeguards requirements under the project. VI. 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 ✖ Comments (optional) VII. Contact point Page 3 of 4 World Bank Contact: Jose De Luna-Martinez Title: Sr Financial Economist Public Disclosure Copy Tel: 5778+8343 / Email: jdelunamartinez@worldbank.org Borrower/Client/Recipient Name: Ministry of Finance Contact: Deputy Director General Title: External Affairs Department Tel: 856-21900969 Email: Implementing Agencies Name: Department of SME Promotion Contact: KINGXAY CHOUNLAMOUNTRY Title: DIRECTOR Tel: 856-21-414064 Email: KINGXAY@YAHOO.COM VIII. 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 Public Disclosure Copy Page 4 of 4