Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) Report Number : ICRR0020214 1. Project Data Project ID Project Name P121328 LK: SME Development Facility Country Practice Area(Lead) Sri Lanka Finance & Markets L/C/TF Number(s) Closing Date (Original) Total Project Cost (USD) IDA-48040 31-Mar-2014 57,400,000.00 Bank Approval Date Closing Date (Actual) 07-Sep-2010 30-Sep-2015 IBRD/IDA (USD) Grants (USD) Original Commitment 57,400,000.00 0.00 Revised Commitment 51,886,431.15 0.00 Actual 51,662,959.34 0.00 Sector(s) SME Finance(31%):General industry and trade sector(31%):Banking(30%):Public administration- Financial Sector(8%) Theme(s) Micro, Small and Medium Enterprise support(100%) Prepared by Reviewed by ICR Review Coordinator Group Nestor Ntungwanayo Fernando Manibog Christopher David Nelson IEGSD (Unit 4) 2. Project Objectives and Components a. Objectives The Project Development Objective (PDO) is "to improve access to finance (including term finance) for SMEs affected by the global financial crisis in Sri Lanka." (Financing Agreement-FA, p.4) The statement of the PDO in the Project Appraisal Document (PAD) on page 7 is identical to the one in the FA. The June 2013 project restructuring, which did not entail a change in the PDO, reallocated resources among components and increased the targets for PDO indicators without changing them, making a split assessment unnecessary. Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) b. Were the project objectives/key associated outcome targets revised during implementation? No c. Components The project had two main components. The changes made at project restructuring are indicated below. Component 1: Financing and Risk Sharing Facility (US$41 million equivalent at appraisal) • At project approval 1(a): Line of credit to Participating Financial institutions (PFIs) to refinance short term and long term SME loans (US$28 million equivalent at appraisal). The World Bank was to provide a credit line to the Government for on-lending to participating licensed commercial and specialized banks for SME loans. Access, modalities and pricing were to include features such as competitive interest rates and maturities in line with ongoing commercial practices to ensure that no market distortions are created, while the technical assistance would be mandatory for all PFIs. This refinancing facility was to provide loans with a maximum maturity of 10 years including a maximum grace period of up to 2 years. 1(b): Risk Sharing Facility (RSF) to reduce the banks’ risk of lending to SME borrowers (US$13 million equivalent at appraisal). The purpose of the RSF would be to backstop commercial lenders’ losses in cases of defaults by SME borrowers. This instrument would provide an additional incentive for commercial banks to lend to SMEs. The RSF was to be issued by Sri Lanka Insurance Company (SLIC) on a portfolio basis. The eligible loan portfolios for the RSF were those of commercial banks’ loans to new SME borrowers and to SMEs operating in specific sectors and/or in selected regions. SLIC intended to provide a limited risk coverage on a 50/50 pari passu basis with PFIs. The RSF would cover all risks, and be payable on first demand when a loan is in default for a specified number of days. • Modifications in the June 2013 Restructuring Following the failure to operationalize the RSF two years after approval, due to the absence of a legal agreement with the Sri Lankan authorities, the project was restructured in June 2013 to: (i) increase the amount of the line credit, with resources from the RSF initial allocation, the policy and capacity enhancement for SME banking component and unallocated funds; (ii) revise the end-project targets of the PDO indicators; and (iii) extend the project closing date. Component 1: Financing and Risk Sharing Facility (US$41.00 million equivalent at appraisal, US$50.40 at restructuring, and actual cost of US$50.43 million). 1(a): Line of credit to Participating Financial institutions (PFIs) to refinance short term and long term SME loans (US$28.00 million equivalent at appraisal, US$50.40 million at restructuring, with actual costs amounting to US$50.43 million). Resources initially allocated to the RSF were entirely reallocated to the line of credit, as the Government of Sri Lanka committed to provide the resources for the RSF. The RSF was to be issued by the Project implementing Unit (PIU) on a loan-by-loan basis and cover only loans where funding has been provided under the LOC. 1(b): Risk Sharing Facility (RSF) to reduce the banks’ risk of lending to SME borrowers (US$13 million equivalent at appraisal, no cost at restructuring, and no actual cost). The earlier allocation to this component was entirely reallocated at restructuring. The title of this subcomponent was modified to indicate that the risk RSF will be offered alongside a line of credit. The Government of Sri Lanka was to provide the resources for the RSF while the LOC will be funded with the IDA credit proceeds. Component 2: Policy and Capacity Enhancement for SME Banking (US$12 million equivalent at appraisal) • At project approval 2(a): Capacity enhancement for lending institutions and SMEs (US$7 million equivalent at appraisal). In partnership with the IFC and other development agencies, the project intended to provide technical assistance on a matching basis to the commercial banks benefitting from the credit line or RSF, in order to (i) help build their capacity to provide lending services to SMEs and (ii) ensure that SMEs have the capacity to effectively utilize loans from the banks for the growth of their businesses. The project has planned to include capacity enhancement and technical assistance to SME clients, to be provided by the PFIs at the branch level. 2(b): Support to strengthen the enabling environment for small and medium enterprise financing (US$1 million equivalent at appraisal). This was to include undertaking a diagnostic of constraints and measures addressing such constraints. The project envisioned to carry out activities such as (i) assessment to identify the legal and regulatory issues that constrain SME Banking; (ii) establishment of an out of court mechanism for rehabilitation of troubled SMEs; and (iii) improvement of access to finance through setting up the movable collateral registry. 2(c): Implementation support for the Project Implementation Unit (PIU) (US$4 million equivalent at appraisal). This component Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) aimed at building expertise to manage the project, compensating the Facility Agent to manage the RSF, undertaking a detailed impact evaluation framework for assessing the impact of the project on the targeted clients and other implementation support activities. Unallocated funds (US$4.4 million equivalent at appraisal). This amount was set aside so that it can be mobilized and made available for additional funding for any of the above components. • Modifications in the June 2013 Restructuring Component 2: Policy and Capacity Enhancement for SME Banking (US$12 million equivalent at appraisal, US$7.00 million at restructuring, and actual cost of US$1.23 million) 2(a): Capacity enhancement for lending institutions and SMEs (US$7 million equivalent at appraisal, US$4.00 million at restructuring, with actual cost of US$0.83 million). While TA to PFIs and SMEs had reached targeted levels in terms of numbers, the quality and effectiveness of this training needed to be strengthened. The mechanism had to be refocused to ensure that PFIs continue to undertake TA on a more narrow scope of activities that will include specialized TA to improve their processes, as well as training to SMEs on relevant subject areas. To this effect, the project was to continue to make financing available for the ongoing training to be continued in a much more focused way. 2(b): Support to strengthen the enabling environment for small and medium enterprise financing (US$1 million equivalent at appraisal, with all resources reallocated to the credit line at restructuring). Activities that were identified intitially under this component were dropped from this project, and the Bank will only play a facilitating role for those activities that will be funded by other donors. 2(c): Implementation support for the Project Implementation Unit (PIU) (US$4 million equivalent at appraisal, against US$3.00 million at restructuring, and actual costs of US$0.4 million.: Planned activities were unchanged during restructuring. Unallocated funds (US$4.4 million equivalent at appraisal, reallocated to Component 1). At restructuring, the total amount was reallocated to the credit line under Component 1. C. Effects of the project restructuring The project restructuring was prompted by limited RSF demand from the stakeholders in the banking sector and the Government's inability to deliver on the required oversight and management. Unallocated resources and those that were initially devoted to the funding of the RSF and the technical capacity of entities supporting the SMEs were reallocated to the LOC component, thus increasing the amount of the latter by 80 percent. Modifications brought in by the restructuring and project's disbursed amounts are shown in the Table 1 below. The higher level of LOC operations was offset by less emphasis on making the RSF instrument operational and diminished enhancement of technical capacity. Table 1 : Allocation of project resources at different phases of implementation Components/Activities At appraisal At restructuring Actual 1. Financing and Risk Sharing Facility 41.00 50.40 50.43 1.a.Line of credit to PFIs 28.00 50.40 50.43 1.b. Line of credit and Risk Sharing Facility 13.00 0.00 0.00 2.Policy and Capacity Enhancement for SME Banking 12.00 7.00 1.23 2.a. Capacity enhancement for lending institutions and 7.00 4.00 0.83 SMEs 2.b. Support to Strengthen the Enabling Environment for 1.00 0.00 0.00 SME Banking 2.c.Implementation Support and Monitoring 4.00 3.00 0.40 Unallocated 4.40 0.00 0.00 Total 57.40 57.40 51.66 Source: Data collected from the project documents and reports. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates Project cost: The initial appraised project cost was US$57.4 million. The actual cost of the project is in the amount of US$51.66 million, or 90 percent of the approved amount. After restructuring, the LOC allocation was increased by 80 percent, following the transfer of resources initially devoted to funding the RSF and the policy and capacity enhancement to promote SMEs. Financing: The project was a financial intermediary operation financed entirely by an IDA credit from the Pilot Crisis Response (CRW) facility. Borrower contribution: There was no planned Borrower contribution at appraisal. At restructuring, the Government committed to take over the funding of the RSF but was unable to make it operational. Dates: The project was approved on September 07, 2010, with a closing date set on March 31, 2014. An amendment to the Credit Agreement was signed on June 26, 2013 to (I) reallocate resources toward increasing the amount of the line of credit, (ii) revise the end- Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) project targets of the PDO indicators, and (iii) extend the project closing date until September 30, 2015. The project was closed on the new schedule. 3. Relevance of Objectives & Design a. Relevance of Objectives An enterprise perception survey of Sri Lankan firms completed in 2011 found that access to finance was among the major constraints for firms' expansion. In the context of the global economic crisis, the project would provide countercyclical funding at competitive rates. The project addressed one of the priorities of the Government’s vision for 2010–2016, namely sustained domestic investment for high economic growth as the country transitioned to middle-income status, and was also fully aligned with the National SME Strategy published in October 2015. In addition, access to long-term finance for SMEs was high on the agenda Government’s 2016 budget speech, which underscored the need to strengthen SME capacity. The RSF was acknowledged as a key tool to develop the capacity of SMEs. Most importantly, the project was designed in a fast track mode, as it aimed to mitigate the shocks of the global crisis on the SME situation. However, during project restructuring, there was an internal reallocation of resources favoring a surge in the funding for the LOC, at the expense of the funds devoted to the RSF's operationalization and the policy and technical enhancement components. The promise of the Government to fund the RSF's operationalization did not materialize until project closure. The project was also consistent with the FY13–16 Country Partnership Strategy, which had three pillars aiming to (i) facilitate and sustain private and public investment, (ii) support the structural shifts in the economy, and (iii) improve living standards and social inclusion. The project was consistent and complementary to other Bank projects supporting the above pillars, was designed to assuage the shocks of the global crisis on the economy in general and on the SMEs in particular, and was substantially relevant throughout the project life until its closure. Rating Substantial b. Relevance of Design The project's design was consistent with the goal of improving access to finance, including long term finance to SMEs affected by the global crisis. The results framework was strong, because the project intended to use two financing instruments to increase the supply of finance to SMEs: (i) a preferential line of credit, and (ii) a risk sharing facility (RSF), as well as (iii) an assistance package of financing and training to allow for a sustainable development of SME finance. The line credit was to be entrusted to PFIs, which would on-lend the resources to SMEs, and would use cost-sharing to enhance technical capacity in SMEs. However, the RSF operationalization failed to take off due to a lack of diligence from the Government and limited demand from the key stakeholders in the financial sector, including the PFIs. The project restructuring in June 2013 affected the relevance of design. While it increased the amount of the credit line, the Bank's funding of the RSF was cancelled following the Government's decision to fund the RSF’s amount from its own resources. This implementation decision led to a higher reach of the project's credit line and to increased financing for PFIs for on-lending to SMEs, but the RSF's efficacy stalled, because the PFIs’ concerns related to the RSF were not assuaged, and might have affected the leverage availability of other funders. In all, the results framework remained strong; however, the mix of instruments to facilitate SME access to finance was affected by the failure to make the RSF operational. Rating Substantial 4. Achievement of Objectives (Efficacy) PHREVISEDTBL Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) Objective 1 Objective The Project Development Objective is "to improve access to finance (including term finance) for SMEs affected by the Global Financial Crisis in Sri Lanka." Rationale The efficacy of the project is assessed at the level of outputs and outcomes, as delineated below: Outputs: • The total amount of the line of credit was fully disbursed to SMEs. • All Participating Financial Institutions (PFIs) introduced new products, processes, or systems dedicated to their SME business. These include development of a management information system (MIS), credit scoring, and an upgrade of credit evaluation system. • Through training sessions organized by the 8 PFIs or the Ceylon Chamber of Commerce in collaboration with the PIU, staff from 21,212 SMEs were trained under the project. 705 SME staff were trained under the TA facility. • The project co-financed the training of 12,652 loan officers in SME banking and credit risk management. By the time of project restructuring, more than 4,000 SMEs and 4,000 bank staff had been trained, and the target of 400 loan officers trained on SME banking procedures and credit risk management was far exceeded. • Other enhancements can be directly attributed to the project as follows: (I) integration of environmental and social safeguards policies in the credit appraisal process; (ii) development of e-learning modules; (iii) preparation of the bank’s SME strategy; (iv) establishment of SME centers; and (v) development of refinancing, risk management, credit risk rating, and M&E systems for SME finance. Outcomes: As the key change in the project restructuring was a large increase the funding of the LOC, all key related PDO indicators were scaled up; therefore the review will assess efficacy against the revised performance indicators of the LOC component. • Banks responded positively to the availability of the Small and Medium Enterprise Development Facility (SMEDeF) project funding in order to meet the credit demand from SME borrowers. Smaller banks had access to long-term credit under the SMEDeF facility and could positively respond to the demand from crisis-affected SMEs in all sectors of the economy. • SME access to finance improved: In total, 824 SME loans for an aggregate amount of US$50.4 million have been disbursed with the funding of the SMEDeF Project (i.e., 82 percent of revised target achieved) . The majority of loans (57 percent) was below US$38,500.00 and the average loan amount in the SMEDeF portfolio was US$61,000.00. The maximum loan amount was US$462,000.00, while the median loan amount was US$115,500.00. • The provision of term finance, defined as financing with maturity of three (3) years or more, was successfully achieved: In total, 671 SME loans totaling US$45.6 million had a maturity greater than three years against a target of US$25.2 million. Within the SMEDeF portfolio, long-term loans represented 81 percent of total loans by number and 90 percent by volume. Thus, the project revised targets for total and volume of long- term lending were exceeded (134 percent and 181 percent, respectively). The average size of long-term SMEDeF loans was US$68,000. By comparison, the average size of short-term loans (maturity below three years) was about US$31,500.00. • The non performing loans (NPL) ratio of the Participating Financial Institutions (PFI) holding the SMEDeF portfolio improved: The share of non- performing SMEDeF loans of more than 90 days in the SMEDeF portfolio was 3.37 percent, compared to the revised target of 8 percent. The NPL ratio ranged from 0 percent to 8.2 percent for the eight participating banks. • The optional and voluntary RSF instrument was unable to take off: While it was anticipated that 1,000 new SME borrowers would get access to finance through the RSF, none was achieved at project closure despite the Government's commitment to use its own resources to support the RSF. In conclusion, all key PDO indicators were either achieved or exceeded, with one indicator slightly missing the target. The project helped banks reach out to new SME clients, as about a third of the loans have been granted to new SMEs (by number and volume), and the SMEDeF loans helped finance 107 new startup enterprises. PFIs reported that for every loan disbursed to an SME in the portfolio, they have contributed (through their own funds) additional loans or other financial assistance to the same SME. PFIs further estimated that the total volume of loans disbursed because of the SMEDeF Project (project and PFI resources combined) is close to US$77 million. Finally, the ICR indicated (p.18) that with more than 80 percent of loans classified as investment loans (three years or more), the SMEDeF contributed to the higher-level impact of increased investment and employment. The PFI survey revealed that the lending leverage ratio reached 2.2, as SME beneficiaries have actually more than doubled their financing to projects, and contributed in fresh equity in their Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) business, and created 6,500 additional jobs. Rating Substantial 5. Efficiency An economic and financial analysis of the project was conducted at appraisal, which generated, among other benefits, an IRR of 21 percent and an NPV of US$492,000. A similar exercise was undertaken at the project closure, and resulted in the following findings: (i) Benefits of the LOC and TA for PFIs: • With an overall LOC of US$50 million and TA of about US$500,000 in the ICR's updated model, the project generated a 30 percent IRR and an NPV of US$191,000. The lower NPV stems from (a) the difference between the actual and estimated annual flow of funds to PFIs and (b) the repayment method of the LOC for PFIs, where the funds are returned to Government instead of revolving in their books for further lending. The IRR would have been even higher if the model had assumed an average on-lending interest rate higher than the 15 percent applied to the model. (ii) Benefits of the LOC and TA to SMEs • Outreach: There were already 824 new SME loan accounts through the LOC, and the PFI survey reveals that 705 SMEs got loans after their participation in a PFI training. Based on the above developments and additional assumptions, the ICR concluded that more than 1,150 SME loan accounts were opened as a consequence of the project. The total number of SMEs reached through TA financing was 22,036, of which 275 were new SME clients and almost 4,000 were SMEs with which PFIs built new relationships through training. • Employment generation: By project closing, based on limited data available in the PFI survey, the total number of new jobs created by SME loan beneficiaries was found to be 6,456 for 824 loans disbursed. The ICR inferred that for every loan disbursed, the SME created, on average, 8 new jobs, with no possibility to compare appraisal estimates to project closing actuals. (iii) Benefits of the RSF: • The RSF--which was an optional, voluntary instrument--did not become operational during project implementation. No benefits and costs were generated. The RSF aimed to leverage lending from banks to SMEs by up to ten times the amounts committed by IDA, and while some leverage took place, it did not reach that expected level. (iv) Operational efficiency: • The actual project implementation cost was US$0.4 million, against an estimate of US$4 million at approval, and US$3 million at project restructuring. In addition, the unit cost of delivery of the TA was US$41 per staff trained and US$10 per SME, while at restructuring the estimates were US$250 per staff and US$222 per SME, what is equivalent to significant efficiency gains. The key factor to budget gains is that the PIU relied strongly on civil servants that contributed their time to the running of the PIU, instead of hiring expensive experts. However, sometimes the PIU was understaffed, with negative impact on project implementation. • There was a significant delay, however, of two years to obtain the legal opinion of the Government on the RSF. This was in large part due to the inactivity of the Project Steering Committee, which had the responsibility of escalating implementation issues that required high-level attention and decisions. However, the Committee met only once throughout the implementation period despite repeated reminders from the Bank. This had the seriously negative impact of failing to receive the legal opinion on the RSF only in 2012, i.e., two years after project approval--only to provide a contrary opinion to the RSF design and operation that had already been agreed at appraisal and negotiations. This contributed directly to the failure to operationalize the RSF (an operational manual was prepared, however, and was shared with the PFIs) . Moreover, an SME banking expert was unavailable to the PIU throughout implementation. The PIU itself was not as proactive as expected despite implementation delays, and its quality waned particularly after restructuring, in part because the project director and deputy director held other full-time jobs within the Ministry of Finance and Planning. Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) The overall rating for efficiency takes into account both the "value for money" measures and the project's operational and implementation efficiency, as discussed above. Efficiency Rating Modest a. If available, enter the Economic Rate of Return (ERR) and/or Financial Rate of Return (FRR) at appraisal and the re-estimated value at evaluation: Rate Available? Point value (%) *Coverage/Scope (%) 54.00 Appraisal  21.00 Not Applicable 90.00 ICR Estimate  30.00 Not Applicable * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome The relevance of project objectives was substantial. The relevance of design was also substantial. Efficacy was substantial, as access to finance and the provision of long-term finance to SMEs increased, and the NPL ratio of the Participating Financial Institutions (PFI) holding the SMEDeF portfolio improved. Capacity building through training was also significant, but could have been expanded. However, the leverage sought by the RSF did not occur as desired, because that instrument could not take off, and could not contribute to the expected level of providing guarantees to Bank's lending to SMEs. Efficiency was modest, because of the significant delays in obtaining the Government's legal opinion on the RSF, the failure of the Project Steering Committee to meet, the absence of an SME banking expert within PIU, the weak proactivity and quality of the PIU overall, and the ensuing implementation delays leading to a delayed closing date. a. Outcome Rating Moderately Satisfactory 7. Rationale for Risk to Development Outcome Rating Key achievements included a contribution to the expanded access finance by SMEs and the increased technical capacity of PFI and SMEs. With the government support to SME development and finance, and the ongoing institutional changes achieved in most PFIs, the reversal of development outcomes is unlikely. There is an on-going SME finance project financed by the Asian Development Bank and the European Investment Bank. The Central Bank of Sri Lanka has also just created a new department in charge of SME finance as a priority area, especially for areas most affected by the war. The risk to development outcome is modest, given the continued donor support and other initiatives by the Government, which point toward the further expansion of SME finance. a. Risk to Development Outcome Rating Modest Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) 8. Assessment of Bank Performance a. Quality-at-Entry The project was prepared on short notice while not compromising on the quality of design. The RSF instrument was adopted because it was innovative and had the potential to further strengthen the SME financing, and its design followed best practice at the time for such facilities. The demand for the RSF during the preparation phase was broad-based, both potential partner financial institutions and the Government showed commitment to it. Furthermore, requiring all PFIs to sign TA agreements as a condition for participation in the LOC contributed to increasing the impact of the project on SME finance. The risks to project implementation that were identified during project preparation were appropriately mitigated by the team, including through the use of legal covenants. However, the low demand for the RSF and the reluctance of PFIs toward using that instrument were not clearly identified as risks, despite the known experience of the previous RSF operations. While the M&E framework was well defined and connected to project outcomes and components, M&E arrangements were not well described at the design stage. The M&E arrangements did not allow for granular-level information on SME borrowers and loans, and closer monitoring of performance in training. Quality-at-Entry Rating Moderately Satisfactory b. Quality of supervision The key asset for this project was the continuity of field presence and the right composition of the project team. The Bank team proactively engaged the government very early on about the implementation issues related to the RSF and undertook the project restructuring as soon as agreement was reached with the government on how to proceed. This agreement was a priority that had to be done before the midterm review. Seven supervision missions were conducted between September 2010 and September 2015, and aide-memoires were prepared to take stock of progress, and suggest adjustments. The restructuring was done in June 2013, based specifically on the need to review the design of the RSF. The project’s midterm review (MTR) took place three months after restructuring and 33 months after project effectiveness, as opposed to the 18 months required in the FA. The Bank, in conjunction with IFC, also needed to have shown more caution in relation to the replacement of the SLIC by the PIU in the RSF management. To address the M&E shortcomings identified above, the Bank team recruited an experienced consultant who followed up with PFIs to obtain additional information on their projects, including through the PFI survey. The Bank’s option to rely on country-based commercial practices for fiduciary and safeguards policies was positive and allowed quicker implementation, because it imposed less burden on beneficiaries. The team was also proactive in detecting and addressing most implementation issues and was candid in all supervision mission documents and in providing comprehensive updates on project outcomes. Quality of Supervision Rating Moderately Satisfactory Overall Bank Performance Rating Moderately Satisfactory 9. Assessment of Borrower Performance a. Government Performance The Government showed its support to SMEs, by preparing a national SME strategy and by making official budgetary announcements on SME finance issues. The Government allocated dedicated funds for the RSF liability beyond the project period, thus setting up a financial instrument to mitigate future risks in SME lending, and committed to transfer the responsibility of its implementation to the Ministry of Finance and Planning at project completion. In an attempt to serve more SMEs, there were on-going negotiations between the Government and the PFIs on the cost and future of the RSF instrument. The Government established SME centers and encouraged PFIs to develop new training modules relevant to SME business growth. The Government organized regular meetings (including the Bank team) to ensure that the PFIs were exchanging operational experiences and the latest training modules. Finally, the Government assigned qualified civil servants to the PIU. (The Government clarified that by the time of the midterm review, the SME Banking Advisor, which had been playing a pivotal role, had to leave the project unexpectedly, but trained project staff filled in his role.) Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) However, there were three key shortcomings on the Government's side, as follows: (i) the legal opinion from the Attorney General's Office on the RSF was severely delayed and hindered the launch of the RSF for two full years, which threatened project outcomes, (ii) the Government was behind the replacement of the SLIC by the PIU in the RSF management, and (iii) the Project Steering Committee, although created on paper, never met until one month before the project closing, and the committee did not have full membership, although it could have played an essential role in resolving promptly key issues such as the RSF. (The Government did clarify that although the Steering Committee was held only once, the project staff and the Deputy Secretary to the Treasury, as empowered by the Secretary of the Ministry, closely monitored the project.) Overall, Government's weaknesses in the oversight and management of the project in general and the RSF instrument in particular, constituted major shortcomings that affected the performance of the project. Government Performance Rating Moderately Satisfactory b. Implementing Agency Performance Under the aegis of the Ministry of Finance and Planning, the PIU was composed of a team of specialists overseeing fiduciary and environmental issues, headed by a project director and deputy project director, and assisted by an SME banking advisor for technical guidance. Both the project director and his deputy held other full-time positions, which interfered with their proactivity under the project. By mid-term review, the SME banking advisor position was left vacant, and this absence affected the PIU’s ability to implement a focused and effective TA component; similarly, the absence of a social development officer led to a substantial delay in the preparation of the Social Impact Assessment (SIA). After the project was approved in September 2010, the project had a slow start despite its crisis-response nature. The PIU carefully monitored project outcomes as required by the results framework; however, the system put in place was limited in its ability to provide timely information on project disbursements, as it depended on quarterly Central Bank's data to be able to provide disbursement data for the LOC. Implementing Agency Performance Rating Moderately Satisfactory Overall Borrower Performance Rating Moderately Satisfactory 10. M&E Design, Implementation, & Utilization a. M&E Design The M&E framework reflected fairly the project’s objectives, and original indicators were in line with the project’s activities and adequately measured the project’s impact. There were detailed M&E arrangements and reporting requirements in the PAD, as the frequency and scope of monitoring reports were explicit. In addition, baselines and targets were indicated for all indicators. However, the PIU’s M&E capacity was limited, as its system depended on the Central Bank's system to obtain disbursement data on PFIs and real-time disbursement status of the LOC. b. M&E Implementation Indicators were monitored during project supervision. Information, aide memoires and Implementation Status and Results Reports (ISRs) provided updated information for the results framework. Targets for the results framework were revised to factor in the new LOC and the implementation delays related to the RSF instrument. However, information on individual SMEDeF borrowers and their participation in any training sessions was unavailable, and the quality and content of the training and TA provided to SMEs were difficult to monitor for the PIU. c. M&E Utilization Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) Seamless communication between the PIU and the Bank team allowed the latter to know about the difficulties in operationalizing the RSF, and this triggered the project restructuring, albeit delayed. In order to get preliminary feedback in relation to the project's impact, the Bank team recruited a consultant who followed up individually on the PFIs and collected impact data directly from their clients. In addition, the project carried out a Social Impact Assessment (SIA) in 2014, which provided useful insight on the spillover effects from the project. Information from these efforts helped establish that (I) the demand remains high for SME credit and for capacity-building for PFIs and SMEs, and (ii) access to finance remains a major constraint for SMEs in urban and rural areas, both in terms of equity and debt. M&E Quality Rating Modest 11. Other Issues a. Safeguards The project was assigned the category FI, and the OP/BP 4.01 (Environment Assessment) was triggered. An Environmental Risk Management Framework was prepared to serve as a technical guide for the financial sector and for SMEs to (I) increase their awareness and understanding of environmental standards and (ii) minimize potential risks associated with beneficiary SMEs financed under the LOC. There were initial delays in ensuring full compliance with the related project requirements, but implementation improved subsequently. The ICR indicates (p.13) that the project maintained a moderately satisfactory rating, and no major environmental issues arose over the lifetime of the project. To strengthen compliance with environmental regulation in a sustainable manner, the following actions were completed: (a) capacity building of SMEs through the TA component, with training sessions on environmental standards, and (b) monitoring of TA to PFIs. As a result of the project’s support, PFIs have started to incorporate environmental safeguards mechanisms into their credit appraisal process. b. Fiduciary Compliance Financial management: There were semi-monthly review missions carried out by the Bank’s FM specialist at the PIU and PFI levels, with random review of SMEs. The PIU has generally complied with the main FM covenants, and submitted accurate and timely interim unaudited financial reports, as well as acceptable annual audit reports. There were no serious observations and accountability issues in the project’s external audit reports, and no audit observations have required further follow-up action from the Bank. Procurement : There were semi-annual post reviews by the Bank procurement specialist at the PIU and PFI levels, and a random joint procurement and financial management (FM) review covering a sample of beneficiary SMEs. Finally, procurement plans were submitted on time, and there were no issues raised during implementation. c. Unintended impacts (Positive or Negative) --- d. Other --- 12. Ratings Reason for Ratings ICR IEG Disagreements/Comment Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) The relevance of objective and design were both substantial. Efficacy was also substantial. Outcome Satisfactory Moderately Satisfactory Efficiency was modest, given the operational shortcomings that led to major delays in implementation. Risk to Development Outcome Modest Modest --- The Bank team's supervision was proactive overall but the midterm review was seriously delayed, Bank Performance Satisfactory Moderately Satisfactory occurring 3 months after the already-much delayed restructuring. Borrower Performance Moderately Satisfactory Moderately Satisfactory --- Quality of ICR Substantial --- Note When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate. 13. Lessons IEG concurs with the four lessons identified in the ICR, which are rephrased below: (i) Associating technical assistance with finance can produce sustainable impact: By addressing demand- and supply-side constraints to SME finance, the project ensured that SMEs will continue to receive finance for their growth. The longer-lasting effect of the project was the institutional changes in PFIs as well as the acquired skills provided through training and experimentation. (ii) Engaging key stakeholders before launching new and specialized financial instruments matters: RSFs are attractive financial instruments for the provision of relatively cheaper and longer-term financing. However, there must be extensive consultations with all stakeholders, especially the legal authorities, at the design stage, to ensure that the technicalities are clearly discussed and agreed upon before negotiations. It is essential for future operations with RSFs to clearly communicate mechanisms, criteria, and conditions, provide incentives as appropriate and engage stakeholders on a regular basis. (iii) Flexibility in project implementation and design parameters can be beneficial for project efficacy. The Bank team decided to remain flexible and adjust the parameters of the LOC to prevailing market conditions, and this allowed a high demand from PFIs and SMEs to be maintained. However, too much flexibility in the delivery of the training to SMEs yielded mixed results; the quality and focus of training sessions were more appropriate for entrepreneurs than for other categories of beneficiaries. (iv) Steering committees can play an important role, if used appropriately: The steering committee was never put to use, although the condition of having a steering committee was met. An effective steering committee could have helped escalate issues such as the RSF that required urgent attention at a higher level. It is key to have in place a balanced composition of the steering committee to ensure that stakeholders are represented at any point in time. 14. Assessment Recommended? No 15. Comments on Quality of ICR • The ICR is comprehensive and well written but could have been more concise. The ICR's assessment of project design and implementation is clear and thorough, and was articulated around the outputs and outcomes of the line of credit. • The two themes that needed a deeper analysis and a closure statement were the experience of the RSF instrument and the technical capacity in PFIs Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review LK: SME Development Facility (P121328) and SMEs. First, the ICR asserted that there was a broad-based support to the RSF instrument from the PFIs and the Government, but at the same time gave the reasons why both of them did not adhere to the RSF implementation, even after the Government committed to use its funds for the RSF. Second, the ICR delineated the outputs related to training, but also indicates that the capacity building goals in PFIs and SMEs were not entirely met (an amount of US$5.2 million was canceled at project closure) without providing an adequate overall assessment. • The ICR identified lessons, findings and recommendations, which were derived from the project implementation experience. a. Quality of ICR Rating Substantial