FOR OFFICIAL USE ONLY Report No: PAD3127 PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF US$35 MILLION FROM THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT ACTING AS ADMINISTRATOR OF THE SINT MAARTEN: HURRICANE IRMA RECONSTRUCTION, RECOVERY AND RESILIENCE TRUST FUND TO SINT MAARTEN FOR A SINT MAARTEN ENTERPRISE RECOVERY PROJECT March 20, 2019 Finance, Competitiveness and Innovation Global Practice Latin America and Caribbean Region The World Bank Sint Maarten Enterprise Recovery Project (P168549) CURRENCY EQUIVALENTS Exchange Rate Effective March 15, 2019 Currency Unit = Netherlands Antillean Guilder (Na f.) Na f. 1.79 = US$1 FISCAL YEAR January 1 – December 31 Regional Vice President: Axel van Trotsenburg Country Director: Tahseen Sayed Khan Global Director: Alfonso Garcia Mora Practice Manager: Zafer Mustafaoglu Task Team Leader(s): Nadeem M. Karmali The World Bank Sint Maarten Enterprise Recovery Project (P168549) ABBREVIATIONS AND ACRONYMS AR Asset or Repair BCP Business Continuity Planning BDS Business Development Services CBCS Central Bank of Curacao and Sint Maarten (Centrale Bank van Curacao en Sint Maarten) CE Citizen Engagement DA Designated Account DFI Development Financing Institution E&S Environmental and Social ESMF Environmental and Social Management Framework FI Financial Institution FIF Financial Intermediary Financing FM Financial Management GDP Gross Domestic Product GRM Grievance Redress Mechanism GRS Grievance Redress System IFR Interim Financial Report IFRS International Financial Reporting Standards IMF International Monetary Fund IPF Investment Project Financing IRC Interim Recovery Committee LOC Line of Credit M&E Monitoring and Evaluation MCB Maduro & Curiel’s Bank MFI Microfinance Institution MG Matching Grants MSMEs Micro, Small, and Medium Enterprises NPL Nonperforming Loan NRPB National Recovery Program Bureau NRRP National Recovery and Resilience Plan OBNA Development Bank of the Dutch Antilles (Ontwikkelingsbank van de Nederlandse Antillen) OM Operations Manual PDO Project Development Objective PFI Participating Financial Institution PIU Project Implementation Unit PPSD Project Procurement Strategy for Development RBC Royal Bank of Canada SDTF Single Donor Trust Fund SESNA Small Enterprise Stimulation Fund Netherlands Antilles Programme SGCA Sub-Grant and Credit Agreement SMEs Small and Medium Sized Enterprises STEP Systematic Tracking of Exchanges in Procurement TA Technical Assistance TEATT Ministry of Tourism, Economic Affairs, Transport and Telecommunication WC Working Capital WIB Windward Islands Bank The World Bank Sint Maarten Enterprise Recovery Project (P168549) TABLE OF CONTENTS I. STRATEGIC CONTEXT ...................................................................................................... 8 A. Country Context................................................................................................................................ 8 B. Sectoral and Institutional Context .................................................................................................... 9 C. Relevance to Higher Level Objectives ............................................................................................. 10 II. PROJECT DESCRIPTION.................................................................................................. 11 A. Project Development Objective...................................................................................................... 11 B. Project Components ....................................................................................................................... 11 C. Project Beneficiaries ....................................................................................................................... 14 D. Results Chain .................................................................................................................................. 15 E. Rationale for Bank Involvement and Role of Partners.................................................................... 15 F. Lessons Learned and Reflected in the Project Design .................................................................... 16 III. IMPLEMENTATION ARRANGEMENTS ............................................................................ 17 A. Institutional and Implementation Arrangements .......................................................................... 17 B. Results Monitoring and Evaluation Arrangements......................................................................... 18 C. Sustainability ................................................................................................................................... 19 IV. PROJECT APPRAISAL SUMMARY ................................................................................... 19 A. Technical, Economic and Financial Analysis ................................................................................... 19 B. Fiduciary.......................................................................................................................................... 21 C. Safeguards ...................................................................................................................................... 21 V. KEY RISKS ..................................................................................................................... 24 VI. RESULTS FRAMEWORK AND MONITORING ................................................................... 26 Annex 1: Detailed Project Description .................................................................................. 33 Annex 2: Implementation Arrangements and Support Plan .................................................. 40 Annex 3: Financial Sector Overview and PFI Summary Assessments ..................................... 47 Annex 4: Economic and Financial Analysis ............................................................................ 54 Annex 5: Private Sector in Sint Maarten and Post-Hurricane Survey Results ......................... 56 Annex 6: Lessons Learned in Private Sector Recovery Support Post Disaster ......................... 61 Annex 7: Draft MSME Application Form and Draft FAQs ....................................................... 65 The World Bank Sint Maarten Enterprise Recovery Project (P168549) DATASHEET BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name St Maarten Sint Maarten Enterprise Recovery Project Project ID Financing Instrument Environmental Assessment Category Investment Project P168549 F-Financial Intermediary Assessment Financing Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-linked Indicators (DLIs) [✓] Small State(s) [✓] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [✓] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date Expected Closing Date 29-Mar-2019 29-Dec-2023 Bank/IFC Collaboration No Proposed Development Objective(s) The development objective is to support the recovery of micro, small, and medium sized enterprises through direct financial assistance to contribute to the restoration of economic activity. Components Component Name Cost (US$, millions) Page 1 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Component 1: Direct financial support to MSMEs for investment and working capital 33.00 Component 2: Study of financial solutions for improved disaster resilience 0.40 Component 3: Training, project implementation, audit and monitoring and evaluation 1.60 Organizations Borrower: Government of Sint Maarten Implementing Agency: National Recovery Program Bureau / Interim Recovery Committee Centrale Bank van Curacao en Sint Maarten PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 35.00 Total Financing 35.00 of which IBRD/IDA 0.00 Financing Gap 0.00 DETAILS -NewFinEnh1 Non-World Bank Group Financing Trust Funds 35.00 Miscellaneous 1 35.00 Expected Disbursements (in US$, Millions) WB Fiscal Year 2019 2020 2021 2022 2023 2024 Annual 3.50 8.75 9.63 6.13 3.50 3.50 Cumulative 3.50 12.25 21.88 28.00 31.50 35.00 INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Finance, Competitiveness and Innovation Page 2 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of Yes country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or No men's empowerment c. Include Indicators in results framework to monitor outcomes from actions identified in (b) No SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ High 2. Macroeconomic ⚫ Moderate 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Substantial 5. Institutional Capacity for Implementation and Sustainability ⚫ High 6. Fiduciary ⚫ High 7. Environment and Social ⚫ Moderate 8. Stakeholders ⚫ Moderate 9. Other ⚫ Moderate 10. Overall ⚫ High COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Page 3 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Does the project require any waivers of Bank policies? [ ] Yes [✓] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Performance Standards for Private Sector Activities OP/BP 4.03 ✔ 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 ✔ Legal Covenants Sections and Description Schedule 2, Section I.A.1(b)(i) - Institutional Arrangements. The Recipient shall maintain a Project implementation unit (“Recipient-PIU�) to be responsible for ensuring the proper management, coordination, implementation, and monitoring and evaluation of the Project, including the PFIs’ and ensuring the PFIs’ and Eligible Beneficiary Enterprises’ adherence to the relevant terms of the Grant Agreement and the Operations Manual, including all World Bank environment and social safeguard requirements; such Recipient-PIU shall include, unless otherwise agreed to by the World Bank, (A) a Project Manager, (B) an Operations Officer, and (C) a Procurement Officer; and Schedule 2, Section I.A.1(b)(ii) - Institutional Arrangements. The Recipient shall cause the Project Implementing Entity to maintain a Project implementation unit (“CBCS-PIU�) to be responsible for carrying out Component 1 of the Project and the Project’s technical and financial management responsibilities, as specified in the Operations Manual; in this respect, the CBCS-PIU shall include a Portfolio and Accounting Officer. Schedule 2, Section I.A.2 - Institutional Arrangements. The Recipient shall provide, or cause the Project Implementing Entity to provide, as promptly as needed, the funds, facilities, appropriate staffing, services, and other resources. Schedule 2, Section I.A.3 - Institutional Arrangements. The Recipient shall cause the Project Implementing Entity to perform all of the obligations of the Project Implementing Entity set forth in the Project Agreement and the Subsidiary Agreement, including: (a) selecting PFIs and extending Subsidiary Financing to PFIs, all based on criteria, Page 4 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) terms and conditions acceptable to the World Bank; (b) monitoring said PFIs in carrying out Component 1 of the Project, and ensuring the PFIs select Eligible Beneficiary Enterprises and Subprojects and extend AR Subgrants, AR Sub-loans and WC Sub-loans to Eligible Beneficiary Enterprises, all based on criteria and on terms and conditions acceptable to the World Bank; (c) ensuring the PFIs’ and Eligible Beneficiary Enterprises’ adhere to the relevant terms of the Grant Agreement and the Operations Manual; and (d) carrying out Project monitoring and evaluation. Schedule 2, Section I.A.5 - Institutional Arrangements. Not later than thirty days (30) days following the Effective Date, the Recipient shall establish, and thereafter maintain and publicize throughout Project implementation, a Project feedback and grievance redress mechanism, in form and substance satisfactory to the World Bank. Schedule 2, Section I.C.1 - Institutional Arrangements. The Recipient shall maintain, and ensure that the Project Implementing Entity maintains, throughout Project implementation, an Operations Manual in substance, form, and manner acceptable to the World Bank. Schedule 2, Section I.D (a) - Institutional Arrangements. The Recipient shall prepare and furnish, and as appropriate cause the Project Implementing Entity to prepare and furnish, to the World Bank not later than April 1st of each year during the implementation of the Project, a proposed Annual Work Plan and Budget, and ensure that the Project is implemented with due diligence during said following year, in accordance with such Annual Work Plan and Budget as shall have been approved by the World Bank. Schedule 2, Section I.E.1(a) - Institutional Arrangements. The Recipient shall ensure, and cause the Project Implementing Entity to ensure, as the case may be, that AR Subgrants, AR Sub-loans, and WC Sub-loans are provided under Component 1 of the Project for any Subproject only after said Subproject and relevant Eligible Beneficiary Enterprise have been screened and approved in accordance with the provisions of the Operations Manual and the Environmental and Social Management Framework (“ESMF�). Schedule 2, Section I.E.1 (b) - Institutional Arrangements. The Recipient shall ensure, and cause the Project Implementing Entity to ensure, as the case may be, that each Subproject under Component 1 of the Project has been subjected to an environmental and social analysis and its environmental and social impacts have been addressed by the respective Eligible Beneficiary Enterprise in a manner satisfactory to the World Bank in accordance with the provisions of the Operations Manual and the ESMF. Schedule 2, Section I.E.1 (c) - Institutional Arrangements. The Recipient shall ensure, and cause the Project Implement ing Entity to ensure, as the case may be, that PFIs and Eligible Beneficiary Enterprises under Component 1 of the Project take all necessary measures in accordance with the Operations Manual, the ESMF, and any Environmental and Social Management Plans (“ESMPs�), and that these instruments and their respective provisions are not amended, suspended, abrogated, or repealed without the prior approval of the World Bank. Schedule 2, Section I.E.1 (d) - Institutional Arrangements. The Recipient shall ensure, and cause the Project Implementing Entity to ensure under Component 1 of the Project, that no Subproject shall involve any land acquisition, Involuntary Resettlement, expropriation or other Excluded Activities. Schedule 2, Section I.E.1 (e) - Institutional Arrangements. The Recipient shall ensure, and cause the Project Implementing Entity to ensure through the respective PFIs, that for Subprojects that require an ESMP, the Eligible Beneficiary Enterprise concerned shall carry out such plan in a timely manner, requiring such ESMP to be in compliance with the Operations Manual and ESMF, and shall include adequate information on the carrying out of Page 5 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) such ESMPs in the Project Reports. Schedule 2, Section I.E.1 (f) - Institutional Arrangements. The Recipient shall ensure, and cause the Project Implementing Entity to ensure, that any contract or agreement financed by the Project, as the case may be, includes Codes of Conduct, in form and substance acceptable to the World Bank. Schedule 2, Section I.E.1 (g) - Institutional Arrangements. The Recipient shall ensure, and cause the Project Implementing Entity to ensure, that adequate information on the implementation of the ESMF is suitably included in the Project Reports. Schedule 2, Section II.A.1 - Project Monitoring, Reporting and Evaluation. The Recipient shall monitor and evaluate, and cause the Project Implementing Entity to monitor and evaluate, the progress of the Project and prepare Project Reports on the basis of indicators acceptable to the World Bank. Schedule 2, Section II.B - Project Monitoring, Reporting and Evaluation. The Recipient shall ensure, and cause the Project Implementing Entity to ensure, that a financial management system is maintained and that interim unaudited financial reports for the Project are prepared and furnished to the World Bank. Conditions Type Description Effectiveness Sections 5.01 (a), 5.02. As evidenced by legal opinions satisfactory to the Bank, the execution and delivery of the Grant Agreement and Project Agreement, on behalf of the Recipient and the Project Implementing Entity, respectively, have been duly authorized or ratified by all necessary governmental and corporate action, as the case may be, on behalf of the respective parties. Type Description Effectiveness Sections 5.01 (b), 5.02. As evidenced by legal opinions satisfactory to the Bank, a Subsidiary Agreement is executed by the Recipient and the Project Implementing Entity, acceptable by the World Bank. Type Description Effectiveness Section 5.01 (c). The Recipient has hired a Project Manager. Type Description Effectiveness Section 5.01 (d). The Recipient and Project Implementing Entity have adopted an Operations Manual satisfactory to the World Bank. Type Description Disbursement Schedule 2, Section IV.B.1 (a) - Withdrawal of Grant Proceeds. No withdrawal shall be made for payments made prior to the date of the Grant Agreement, except that withdrawals up to an aggregate amount not to exceed USD 300,000 may be made for payments made priorto this date but on or after December 17, 2018, for Eligible Expenditures under Category (2) [of Page 6 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) the withdrawal table]. Type Description Disbursement Schedule 2, Section IV.B.1 (b) - Withdrawal of Grant Proceeds. No withdrawal shall be made under Category 1 until: (i) the Recipient has hired an Operations Officer and a Procurement Officer for the Project; and (ii) the Project Implementing Entity has hired a Portfolio and Accounting Officer for the Project. Page 7 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) I. STRATEGIC CONTEXT A. Country Context 1. Sint Maarten is a high-income constituent country1 of the Kingdom of the Netherlands in the Caribbean. It occupies the southern half of an island shared with the French overseas collectivity of Saint Martin. It is the most densely populated country in the Caribbean with a population of roughly 40,000 and a per capita Gross Domestic Product (GDP) of US$27,200 as of 2016.2 Sint Maarten and Curaçao form a currency union with a joint central bank, the Centrale Bank van Curaçao en Sint Maarten (Central Bank of Curaçao and Sint Maarten, or CBCS) and a shared currency, the Netherlands Antillean guilder (NA f.), which maintains a fixed exchange rate to the U.S. dollar. Sint Maarten is currently rebuilding from damage caused by Hurricane Irma, a category 5 hurricane, that ravaged the island in September 2017, claiming lives and significantly deteriorating the socio-economic environment on the island. 2. Sint Maarten is highly vulnerable to adverse climatic events due to its location within the hurricane belt and has been exposed to high winds and numerous hurricanes in the past decades. These hazards have had catastrophic impacts on the economy, which relies on tourism. In 2016, tourism accounted for 45 percent of its GDP and 73 percent of its foreign exchange. The economy is driven by retail and wholesale trade, hotels and restaurants, real estate, transport and communication, yacht repair, and harbor services. Prior to the hurricane, Sint Maarten’s capital, Philipsburg, was the second most visited port in the Caribbean, and its airport served as a hub for several nearby smaller islands. Between 2012 and 2016, Sint Maarten received a yearly average of 1.8 million cruise passengers and 500,000 visitors arriving by air, who together spent about US$820 million a year.3 Sint Maarten’s nominal GDP was estimated at about US$1.07 billion in 2016. 3. Sint Maarten remains in need of assistance after Hurricane Irma. While loss of life was limited, total damages and losses were estimated at about US$2.7 billion or 260 percent of 2016 GDP. Of these total damages, approximately 129 percent of GDP in damages were in private housing, tourism and commerce sectors, and the publicly owned airport and harbor. Losses (foregone production and decline in economic flows over 2017 to 2019) were estimated at about 129 percent of GDP, mostly in the tourism sector.4 As a result, Sint Maarten’s economy is expected to contract by 8.5 percent in 2018, following an estimated 4.5 percent contraction in 2017. Growth is projected to rebound in 2019 and the economy is expected to return to its pre-Hurricane Irma real GDP level by 2025. Private external finance from direct investment, loans, pay-out of insurance claims, and funds held abroad will be needed to finance reconstruction of private properties and businesses. A sharp decline in tax revenue has cut public resource availability, while the need for public expenditure to rebuild public infrastructure and assist the affected population has risen sharply. 4. From an enterprise perspective, the hurricane has significantly depressed economic activity and improving resiliency is critical for the future. The hurricane has significantly affected the tourism sector. Before the hurricane there were a total of 4,115 hotel and timeshare rooms on the Dutch side. As of 1 Sint Maarten is one of the constituent countries of the Kingdom of the Netherlands, along with Netherlands, Aruba, and Curaçao. 2 From Central Bank of Curaçao and Sint Maarten, based on 2018 estimates. 3 Data from the International Monetary Fund (IMF) and Statistical Yearbook, 2017, Department of Statistics Sint Maarten. 4 National Recovery and Resilience Plan (2018). Page 8 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) October 2018, the capacity approached 65 percent of this level. Damages to the main airport and hotels have significantly reduced the number of overnight tourist arrivals and the airport is running at 60 percent throughput of the pre-hurricane levels (for both landing slots and passenger throughput), though cruise arrivals are now resuming to pre-hurricane levels. However, as most of the income on the island was derived from overnight stays of tourists arriving by air, the impact has been significant for enterprises and households. Many businesses have closed, and out-migration has increased. For surviving enterprises, there is a need to retain workers and continue the post-disaster recovery investment to restore to pre- hurricane enterprise capital and labor levels. B. Sectoral and Institutional Context 5. Larger tourism assets in Sint Maarten—the airport and the hotels—play a critical role in the economy driving tourist arrivals and generating economic activity for other businesses. This sector is slowly recovering with the number of available rooms growing, renewed support for a country-level marketing plan, and increasing airport passenger handling throughput. Work to repair the airport to handle capacities commensurate to pre-hurricane levels and concurrently provide for interim capacity, while the permanent structure is repaired, is ongoing. Although the hotel inventory will take longer to return, the majority of hotels have decided to reinvest and upgrade their properties, and almost all hotels have reinvestment plans to restore their room capacities over the next one to four years. Nevertheless, because some are struggling to secure financing and overcome short term cash flow challenges, while insurance payouts are still outstanding, a due diligence exercise is underway to assess hospitality financing needs and determine if a justification exists to provide public financing to address these needs in the future. 6. There is a dire need to provide assistance to micro, small and medium sized enterprises (MSMEs), as many continue to struggle post hurricane.5 The cascade generated from larger tourism assets—the airport and the hotels—plays a critical role in the overall economy, particularly for MSMEs. These large assets function as anchors that drive overnight tourist arrivals, that in turn generate economic activity for other businesses. While reconstruction efforts are ongoing, and the economy slowly recovers, MSMEs need support to recover and maintain their businesses to minimize the adverse impact on employment and overall economic activity. Two surveys of enterprises were conducted by the World Bank in February and August 2018 to assess the damages to enterprises and asset replacement needs, respectively. 7. These surveys confirmed that enterprises need financial support. The support is needed for working capital, asset purchases, basic nonstructural repairs, and improvements to the facade of buildings, so they can return their operations to pre-hurricane levels. Enterprises reported median damages of US$50,000 to buildings, US$65,000 to enterprises’ fixed assets, and US$40,000 to stock and inventory. Most enterprises were either not insured or underinsured. A reported 10 percent of enterprises closed as a result of the hurricane. Of those open, two-thirds were operating below pre-hurricane capacities. Many enterprises survived by: borrowing from family and friends, refinancing, through 5 According to the SME Policy Framework of the Ministry of Tourism, Economic Affairs, Transport, and Telecommunication (TEATT), MSMEs are defined based on monthly gross turnover, as follows: (a) micro enterprises: up to NA f. 15,000 (US$8,380); (b) small: from NA f. 15,000 (US$8,380) to NA f. 50,000 (US$27,933); (c) medium: from NA f. 50,000 (US$27,933) to NA f. 100,000 (US$55,866); and (d) large: above NA f. 100,000 (US$55,866). This is a standard definition also adopted in Curaçao. Currently, financial institutions (FIs) segment their credit portfolio based on loan size. Page 9 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) receiving extended grace periods offered by some lenders, using retained earnings, or extended supplier credit. The main obstacles to business operations listed by enterprises in August 2018 in descending order were: economic uncertainty, access to finance, taxes, and crime. Enterprises have not received any public financial support to date. 8. While the economy is not at full potential, there is a need to stimulate the MSME sector to restore its capacity. Some of these surviving enterprises have utilized most to all of their available liquid reserves or used other sources to help rebuild their businesses. A large percentage of MSMEs are not able to get financing as the commercial banks have high collateral requirements. Further, many have existing debt obligations or their collateral has been destroyed and are thus at their borrowing capacity because of the hurricane. The environment for lending is underdeveloped as there is no credit bureau or collateral registry, and, further, the market for unsecured lending is limited. Although the banking sector has remained well capitalized, with some increases in loan delinquency rates as a result of the hurricane, the hurricane has exacerbated the already limited access to finance for MSMEs. The four large commercial banks focus mainly on personal and large corporate real estate lending, and have limited offerings for MSME financing. The local development bank has a portfolio of 250 loans across the Dutch Antilles, some of which are MSME loans in Sint Maarten, but its portfolio has had low growth. A new microfinance institution that expanded into Sint Maarten last year (with 130 loans to date) has begun to serve the MSME segment. This proposed Enterprise Recovery Project therefore focuses on providing access to finance to MSMEs. C. Relevance to Higher Level Objectives 9. The project is primarily designed to support immediate MSME needs for economic recovery and will hereby support the objectives of Sint Maarten’s National Recovery and Resilience Plan (NRRP) to restore economic, community, and governance infrastructure and service delivery. One of the three top priorities of the NRRP is a multisectoral approach to restart and revitalize the economy. The strategy emphasizes the need for immediate support to struggling MSMEs and the reconstruction of critical infrastructure. It also proposes the establishment of an Economic Recovery Fund to provide concessional financing for businesses. The project is aligned with the World Bank’s twin goals of ending extreme poverty and boosting shared prosperity. It will target the entire population, help the country recover and resume economic activity, and contribute to strengthening future resilience to underpin sustainable and inclusive growth. 10. Building resilience to the impacts of climate change and natural disasters is a Government priority. Currently, Sint Maarten does not have specific climate change targets. However, the Government’s program called ‘Building a Sustainable Sint Maarten 2018–2022’ proposes to review the disaster preparedness plan, support for businesses to incorporate disaster preparedness plan, and the development of a climate change plan. This project will contribute to the exploration of medium-term financial solutions for disaster resilience and will raise capacity of the MSME sector on implementing business continuity (BC) planning for disasters. These capacity building activities have long term climate co-benefits and contribute to the economy’s adaption to climate change. Page 10 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) II. PROJECT DESCRIPTION A. Project Development Objective PDO Statement 11. The development objective is to support the recovery of micro, small, and medium sized enterprises through direct financial assistance to contribute to the restoration of economic activity. PDO Level Indicators 12. The PDO-level indicators are (a) cumulative number of MSMEs receiving packages for assets, repairs, or working capital and (b) volume of grants and loans supported through the project over its lifetime. These indicators are disaggregated by gender. 13. As this is an enterprise recovery project in the aftermath of a hurricane, its focus lies in short- term economic restoration, as reflected in its PDO indicators which mostly measure outputs . Some additional longer term outcomes are expected from activities under Components 2 and 3 address in support of financial resilience, and training in MSME lending and BCP. In order to measure the economic impact to beneficiary MSMEs, the third-party verification scheduled for 2021 will include an assessment of any financial and technical assistance using balance sheet and employment measures. B. Project Components 14. The proposed design to support the recovery of MSMEs considers the underwriting and screening requirements of MSMEs as well as the governance and implementation challenges that this operation presents. The design incorporates custom packages for MSMEs that will be a combination of (a) grants and loans for assets or repairs (ARs) and (b) working capital (WC) loans. The assets portion of the AR will be for productive capital assets, while the repair portion will be for basic nonstructural repairs. The AR will be part grant and part loan. The combination of grants, loans, investments assets, and WC into these packages is a direct outcome of the surveys that were undertaken. These MSME packages will be administered by participating financial institutions (PFIs). The PFIs will assess the individual business plan applications from MSMEs and make an independent financing decision. The PFIs will bear the credit risk for the loan portion of the packages. MSME eligibility will be based on official registration, and preference will be given to those MSMEs who were affected by the hurricane and to existing businesses, although there will be startup and refinancing windows as well. Startups are defined in the Operations Manual. The liquidity of the packages (both loan and grant) will come from the project and will be disbursed by the CBCS. 15. The loans (for the loan part of the AR and the WC) will initially be priced using interest rates below regular market conditions. This is in accordance with Bank Policy on Investment Project Financing (IPF)/Financial Intermediary Financing (FIF) due to the hurricane and is referred to herein as emergency- Page 11 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) based pricing for a first stage.6 The continuation of emergency pricing and grants for AR after this first stage pricing will depend on the outcome of the midterm review for the Project which will assess whether such pricing is still warranted. 16. Beyond this immediate assistance, two additional components focus on the long term. The second component includes an analysis of the market to understand how the range of financial solutions can strengthen disaster resilience. The third component will cover training to loan officers in MSME lending, and business continuity planning (BCP) training to both businesses and lenders. This training model strives to improve longer-term capacity of the sector to increase access to finance for MSMEs and strengthen resiliency of businesses in the case of disasters. In addition to the midterm review, the design also includes the commission of a third-party verification exercise to assess whether project stakeholders are making use of project funds and instruments as designed. Component 3 also includes project management and implementation and the annual project audit. Figure 1. AR and WC MSME Packages at Emergency Pricing 17. Component 1: Direct financial support to MSMEs for investment and working capital (US$33.00 million). This component will provide tailored packages to eligible enterprises of grants and loans for AR investment, as well as WC loans if required. Eligible enterprises are MSMEs as defined in the SME Policy Framework of the Ministry of Tourism, Economic Affairs, Transport and Telecommunication (TEATT). Based on the disbursements and demand after one year, the recipient and the World Bank will assess if the revenue threshold for enterprises should remain in place. The AR investment is structured so that 65 percent of the investment is a grant and 35 percent is a loan. The WC loan is structured as a loan. This is shown in Figure 1. These will be administered by the PFI, who will assess the MSMEs business plan applications and take the credit risk on the loan portion of the packages. Although the packages will be unique to each MSME and are fully flexible (subject to the conditions in Table 1), it is estimated that US$21.5 million will be for AR investments and US$11.5 million for WC loans. 6The strategy of the project and the rationale for below market interest rates is aligned with the World Bank OP 10/FIF guidelines. The subsidies (in terms of interest rates) are intended to be transparent, targeted, timebound, and capped. Lending terms in the design are consistent with OP 10/FIF requirements and good practices. Page 12 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Table 1. General Characteristics of the Packages and MSME Eligibility Criteria First stage • For AR: 65% grant and 35% loan with interest rates below regular market rates package structure • For WC: 100% loan with interest rates below regular market rates (Emergency pricing) • Packages without WC are permitted • All AR must contain a loan for 35% • Packages without AR (so WC only) are capped at US$30,000 Second stage • For AR: 100% loan with interest rates in line with regular market rates package structure • For WC: 100% loan with interest rates in line with regular market rates (Regular pricing)* • Packages without WC are permitted • Packages without AR (so WC only) are capped at US$30,000 Asset Definition • An asset that is productive that has the ability to generate profits and cash flow. • This includes: machinery; computers and electronic products; electric equipment, appliances and components; transportation equipment; furniture and related products; and other durable goods. All land acquisition is excluded. Non-structural • Refers to minor repairs including, but not limited to, painting, plastering, repair definition carpeting, beautification, tiling, and basic roof repair. • Excludes any internal or external load-bearing component of the building that is essential to the stability of the building or any part of it, including (but not limited to) foundations, floors, walls, roofs, columns and beams. Any component (including weatherproofing) that forms part of the external walls or building roof Loan tenor • Up to December 2023; just below 5 years Grace period • Up to 6 months Interest rate • Average projected to be between 5% and 9%, depending on project’s risk profile • There will be an interest rate cap agreed for the project Maximum amount • US$130,000 per MSME for complete package value Enterprise eligibility • For-profit enterprises with average monthly revenue of less than Na f. 100,000 (US$55,866) over the last calendar year to the year of the application • Based on the Dutch part of the island • For non-startups: registered and in operation before the hurricane • That abides with all local environmental policies and World Bank environmental and social (E&S) stewardship policies • From most sectors, with a few exceptions such as weapons and munitions, gambling, casinos, wildlife products, unbounded asbestos fibers, commercial logging (see ESMF for full list). • Registered and up-to-date in the Chamber of Commerce and Industry of Sint Maarten and tax department7. • Those that suffered substantial damages and/or losses from the hurricane will receive priority. Detailed requirements will be listed in the OM. • Startups are also eligible: 30% grant and 70% loan • Only one package per MSME (based on Chamber of Commerce ID) for the project • The maximum number of packages (from all PFIs) to connected MSMEs will be 3 For refinancing • Yes, up to a maximum of US$40,000 if the loan is performing and was originated after the hurricane. Loss from the hurricane must be demonstrated. Loan currency • U.S. dollars or Netherlands Antillean guilder Loan prepayment • Yes, without penalty. If there are excessive prepayments, a fee may be charged. Notes: * Will be determined if warranted through a midterm review two years after the first disbursement. MSME = micro, small and medium sized enterprise. AR= Asset or Repair. WC = Working Capital. PFI = Participating Financial Institution. ESMF = Environmental and Social Management Framework available here. **In 2020 there will be a short review in which it will be assessed if the revenue threshold for enterprises should remain in place, based on disbursements and demand. 7 Only if registration at the Chamber of Commerce and Industry is required by law to be operational in Sint Maarten Page 13 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) 18. MSME eligibility will be anchored in the definition of MSMEs in Sint Maarten as well as other criteria, while the packages will be subject to the size and combination criteria shown in Table 1. Communication and outreach will be carried out to raise awareness of the structure of the program. Eligible MSMEs must comply with the medium or smaller definition, which corresponds to average monthly revenue of less than US$55,866, where the reference period to calculate this average is over the previous calendar year, to the year of the application to the PFI.8 Eligible MSMEs will need to be registered with the Chamber of Commerce and Industry9 and tax department, while those that sustained damages and those with longer histories of operations in the economy will be given priority. There will be a window for startups; however, these MSME packages for startups will have lower grant percentages and there is also a window for refinancing. Both additional windows will have ceilings across the total project portfolio. Given the structure of the Trust Fund, loan tenors cannot be beyond December 2023. Reflows from loans will be capitalized at project closure in a separate account owned by the Government of Sint Maarten and a decision will be made at midterm review of the Project as to the use of these funds. 19. Component 2: Study of financial solutions for improved disaster resilience (US$0.4 million). This component will finance a longer-term study to explore financial instruments, markets, tools, and solutions for improving disaster resilience in Sint Maarten. Such markets or instruments may include private insurance, public asset insurance, sovereign insurance markets, regulation, and supervision of insurance and reinsurance. Some of the tools that may be explored include catastrophe modelling and valuations and appraisal standards. This will establish the need to build resiliency in the economy looking ahead. Although the project is chiefly targeted at immediate assistance, there is a concurrent need to support longer term sustainability and to strengthen disaster resilience. 20. Component 3: Training, project implementation, audit and monitoring and evaluation (US$1.60 million). This component will provide training to FIs to improve their MSME lending skills and training sessions of BCP for both enterprises and FIs. This component will also fund implementation support to ensure that the governance of the project is well managed. This includes the annual project audit and a one-time third party verification exercise. Although the FIs will be the MSME-facing entity, it will be important to ensure that they are regularly assessed and that there is monitoring and evaluation (M&E) reporting for the project. C. Project Beneficiaries 21. The main project beneficiaries will be (a) MSMEs and (b) FIs in Sint Maarten. MSMEs will benefit from financing for AR investments and WC loans to rebuild their businesses, expand current capacity, or start a new business. All enterprises (even those that do not apply for financing) will be able to attend the BCP training sessions. This will result in increased economic activity and contribute to the economic recovery in Sint Maarten. PFIs will benefit from capacity building in MSME lending, risk management, and BCP. The definition of MSMEs was established by the Government through 2014 SME10 Policy Framework. The project will be open to all enterprises that meet the eligibility criteria for the project and are medium size or below as per the Policy Framework, which corresponds enterprises with monthly revenue of less than US$55,866. The Results Framework has a beneficiary indicator to track the percentage of beneficiaries who feel project activities reflected their needs. Women-managed and women-owned 8 In 2020 a review will assess disbursement and determine if eligibility should be expanded above this threshold. 9 Henceforth “Chamber of Commerce� 10 SME = Small and medium enterprises. Page 14 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) MSMEs will also be beneficiaries and will be tracked in the Results Framework. FIs will also receive training through the project on MSME lending and therefore are also beneficiaries. These FIs may include any regulated lenders in Sint Maarten. This includes microfinance, credit unions, development banks, and commercial banks. D. Results Chain 22. There are three main results that the project aims to achieve across the three components. Component 1 provides direct grants and financing to eligible MSMEs to support their ongoing recovering and restore economic activity. This is simply an output indicator given the scale of the hurricane and the pressing needs of MSMEs. Component 2 seeks to undertake a study to strengthen the resilience of the economy to future shocks. The output of this component is the study itself and the outcome is improved resilience. Component 3 incorporates training of lenders in Sint Maarten to improve their MSME lending skills and tools, and also incorporates BCP training for enterprises and FIs. The output of these are the training events or workshops and the outcomes are improved MSME lending capabilities for better MSME access to finance and improved resilience of businesses. This is shown in Figure 2. Figure 2. Results Chain Inputs Outputs Outcomes Component 1: Restore MSME Financial Economic Support Activity Study on Improved Component 2: Financial Resilience Financial Solutions Solutions Trained Improved A2F and Component 3: Businesses & BCP Training Lenders Note: BCP = Business Continuity Planning, A2F = Access to Finance. E. Rationale for Bank Involvement and Role of Partners 23. The World Bank brings international and institutional expertise as well as technical support to such post-disaster situations. The World Bank processes have been put into place to ensure that projects are well designed and implemented, access to funds is timely, and funds are effectively and transparently used. Further, the project is being vetted by adequate financial, social, and environmental safeguards and procurement and institutional arrangements. In addition, supervisory systems including reporting and monitoring capacities as well as systematic project management help ensure that projects meet objectives. Page 15 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) F. Lessons Learned and Reflected in the Project Design 24. The design of the project considers the lessons learned from other post disaster recovery operations globally. Governments and development partners have used different mechanisms to support private sector development in post-disaster recovery. Some of strategies and instruments that have been used are: (a) financial incentives (microfinance, support to the financial sector, and enterprise challenge funds); (b) picking of winners (providing firm- or sector-level assistance to business, matching grant (MG) schemes, and support to agriculture); (c) market-integrated relief (ensuring that relief programs support local markets); (d) incentivizing of foreign investment (linking local business with foreign investors, political guarantees, roadshows, public private partnerships , investment facilitation); and (e) capacity building (training and business incubation). Many governments’ and development partners’ interventions have been multidimensional and combined several instruments.11 Regardless of the approach used, there is a consensus among stakeholders that interventions must be data driven and market aware. Also, it is important to build on existing local markets, systems, and robust M&E frameworks that support flexible and adjustable program designs.12 25. Previous World Bank projects suggest that better outcomes for credit lines are associated with (a) stable macroeconomic conditions; (b) strong financial sectors, including satisfactory competition policies and good legal and regulatory regimes governing financial institutions, and mostly market determined interest rates, few distortionary credit and tax policies, and limited state ownership of financial institutions; (c) use of clear eligibility criteria in the selection of participating financial institutions; and (d) use of only private sector financial intermediaries. In addition, smaller credit lines are associated with lower cancellation rates. 26. Matching grant (MG) schemes have been extensively implemented by the World Bank as a private sector development tool. A MG is a short-term temporary partial subsidy for investment and business development services (BDS) acquisition by SMEs, which is provided to the private sector on a cost-sharing basis. As a subsidy, MGs are used to support the financing of public goods or private goods with positive spillovers or the removal of market failures. Usually, WC is not an eligible expense for MG. The funding of equipment and other assets by MG has been debated, with a smaller number of projects allowing the financing of specific and limited assets. These projects used MG as a cost-efficient mechanism to respond to specific market failures in their contexts and achieve more specific objectives (for example, agribusiness projects).13 27. MG programs must be appropriately tailored to local contexts and capacities. MGs should only be used when they are determined to be the most adapted and least-cost tool to reach the project objective in the specific local context. The use of subsidy must be based on a sound economic rationale, generally the tackling of a well-identified market failure and targeted at clear beneficiary groups with a verified demand. Allocating sufficient human and financial resources to M&E is important, since these M&E systems are essential to identify potential issues in disbursement of funds and support a preliminary assessment of impact and adjustments, when needed. While there is no blueprint for MG schemes, some 11 Walton, Oliver. 2012. Incentives to the Private Sector and Early Recovery. Governance and Social Development Resource Centre. 12 The SEEP Network. 2017. Minimum Economic Recovery Standards. 3rd ed. Washington, DC: The SEEP Network and Rugby, United Kingdom: Practical Action Publishing. 13 World Bank. 2016. How to Make Grants a Better Match for Private Sector Development: Review of World Bank Matching Grant Projects. Washington, DC: World Bank Group. Page 16 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) considerations are noteworthy: (a) the active provision of TA to firms during the entire process often increases the probability of success; (b) broad stakeholder engagement and transparency by the implementing agency minimizes risks; (c) generally speaking, it is more advantageous to allow beneficiaries to select their service providers; (d) MG should be awarded based on objective and transparent criteria; (e) the level of subsidy should be sufficiently attractive for firms but should not be so high that it reduces their ownership; and (f) application and disbursement procedures should be simple.14 III. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 28. The National Recovery Program Bureau (NRPB) and the CBCS will be the implementing agencies for this project. The Government has established an NRPB that will be responsible for the implementation of recovery and resilience projects selected by Steering Committee of the Single Donor Trust Fund (SDTF) under the NRRP. For this project, the CBCS will also play a critical role. The NRPB will be responsible for overall project management, procurement, safeguards, legal, communication, M&E, reporting, and technical responsibilities. The CBCS will be responsible for qualifying PFIs and for the day-to-day financial management (FM) of the project, including managing disbursements to and from PFIs, accounting, and reporting. The CBCS will be responsible for the preparation and submission of quarterly unaudited interim financial reports (IFRs) and the annual financial statements, to be audited by an external audit firm that is acceptable to the World Bank. 29. Before the NRPB is fully in place, its project implementation responsibilities will be carried out by the Interim Recovery Committee (IRC), which was established by the Government to coordinate Trust Fund projects until the NRPB is in place. The IRC currently includes technical, administrative, legal, financial, and procurement staff to handle project implementation and additional staff such as E&S experts will be required for this project. It acts as an overarching project implementation support unit coordinating with and assisting all co-executing ministries/agencies, and it reports directly to the Prime Minister and Minister of General Affairs. Communication will be an important element for the role of the IRC. In a small economy, having a clear and consistent communication strategy for such a post-disaster enterprise recovery project will help manage bias and clarify eligibility and processes to follow. The financial intermediaries and the IRC will engage in outreach events and conduct workshops to ensure that all businesses—including the most marginalized—are aware of the project and understand how to access it. Feedback through the surveys and the interviews suggests that the needs for MSME TA in BDS are limited. Further the IRC will also have a formal grievance mechanism in which the project will be integrated and will conduct citizen engagement (CE) surveys. 30. The CBCS has minimal experience with implementing World Bank projects. The CBCS is currently only responsible for maintaining the Designated Accounts (DAs) of World Bank-financed projects and so the proposed project would require significant additional work from the CBCS. The CBCS’s Treasury Department will be responsible for the project’s qualifying PFIs, FM, accounting, and managing disbursements to and from PFIs. A Portfolio and Accounting Officer will be hired by the Treasury Department to undertake these functions, and this will allow the CBCS to on-lend and on-grant to PFIs at 14World Bank. 2016. How to Make Grants a Better Match for Private Sector Development: Review of World Bank Matching Grant Projects. Washington, DC: World Bank Group. Page 17 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) no marginal cost to the PFI or ultimate MSME beneficiary. Although it is not standard for credit-line operations to be channeled through central banks given the overarching objectives of central banks, the other apex options available were determined to be less effective. This was due to the CBCS’s advantage in managing payments through the automated clearing house, its experience in managing external projects and accounts for foundations, and its corporate governance structure. 31. Coordination between the CBCS and the NRPB will be critical for the project’s success, especially given that the CBCS is headquartered in Curaçao and the NRPB and project beneficiaries are in Sint Maarten. Given the portfolio monitoring as well as the disbursements and reflows management needs, the CBCS Treasury Department and the World Bank technical team determined that the project’s CBCS function would be better facilitated from Curaçao compared to Sint Maarten. This is despite the CBCS having an office in Sint Maarten. As such, monitoring and portfolio tools will need to leverage secure cloud-based solutions so that the project’s team can coordinate across the islands. 32. The project will make use of a detailed Operations Manual (OM) to ensure coordination across the NRPB and the CBCS, as well as with PFIs. This is a living document and an advanced draft was prepared prior to negotiations. This manual will be finalized with the input of the NRPB and the CBCS. The OM provides information that pertains to MSME eligibility, PFI eligibility, communication, loan and grant application process, loan and grant processing, disbursement, repayment, safeguards, procurement, FM, M&E, and reporting. As it is a living document, it will enable the implementing agencies to make adjustments to the project, subject to the World Bank’s no-objection, as the operation begins. Table 2 shows the expected project’s core team composition. Given the timing of the effectiveness and disbursement conditions, limited funds have been made available from a related trust-funded project in Sint Maarten and retroactive financing is permissible, subject to the conditions set forth in the Grant Agreement.15 Table 2. Core Team Composition Role PIU Timing Project Manager NRPB Before Effectiveness Procurement Officer NRPB Before Disbursement of Component 1 Operations Officer (loan application support) NRPB Before Disbursement of Component 1 E&S Specialist hired on a need basis NRPB As needed Portfolio and Accounting Officer CBCS Before Disbursement of Component 1 B. Results Monitoring and Evaluation Arrangements 33. The NRPB will be responsible for monitoring and evaluating progress toward achieving the PDO, with inputs from the CBCS. The NRPB will be responsible for monitoring and evaluating the PDO-level and intermediate results indicators for the project described in the Results Framework. The CBCS will be responsible for FM and given the project’s interaction with PFIs (for Component 1), for regular tracking of disbursements to PFIs and the monitoring of reflows. This FM function will, by definition, incorporate reporting. As such, the CBCS will keep a ledger of all loans and grants by PFIs and update the financial 15The Project Manager will be hired using project funds from Emergency Recovery Project I (P167339) for the first four months for the Project Manager’s tenure. Additionally, retroactive financing of up to US$300,000 is available for payments made prior to the date of the signing of the Grant Agreement but on or after December 17, 2018 for eligible expenditures under Category 2. This therefore allows to facilitate the achievement of the disbursement conditions. Page 18 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) performance of the loans on a quarterly basis. This ledger will form the basis of the PDO-level indicators that will be tracked by the NRPB. The CBCS will also complete the IFRs, which will include a custom indicator Component 1 to measure where the WC facilities have been utilized (as defined by a flow measure within a period). For Components 2 and 3, the CBCS will also perform the FM responsibilities and these components will be included in the IFRs. The NRPB will be responsible for tracking all the results in the Results Framework and will leverage the ledger that the CBCS builds to complement any further information that may be required at the loan and grant package level. The CBCS will also commission the project’s audit. The M&E activities will be financed under Component 3. The NRPB will provide, on a semiannual basis, through project progress reports, results of its M&E activities. Further details on the Results Framework are in section VI and in annex 2. In addition, the project will include a CE survey to obtain feedback from beneficiaries of the project and a third party verification exercise to ensure that project stakeholders are abiding to the design and intent of the project. This exercise will also include an assessment of measures of economic activity, as outcomes, of beneficiary MSMEs in terms of balance sheet line items and employment. C. Sustainability 34. The project is guided by OP IPF/FIF, which ensures that World Bank projects do not distort local lending markets. Given the current state of MSMEs (as summarized by the February and August 2018 surveys), the prevailing situation is one where support is required. As such, OP IPF/FIF provides the flexibility to lend at below market rates provided there is a justification. This will be monitored as per the guidance in the OM and reassessed at the midterm review two years after the first disbursement. This assessment will be guided by macroeconomic indicators to determine, along with other qualitative inputs, whether economic conditions have dramatically improved. If this is determined to be the case, the facility will adjust to normal lending rates and the grants will be suspended, provided that there are remaining funds in Component 1. Looking beyond the short term, Component 2 and 3 both set the framework to improve the resiliency of the economy. This is through a study of financial solutions and through lender training in MSME lending and training in BCP for businesses. These will strengthen internal buffers to adjust to shocks and contribute to longer-term sustainability. IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis 35. The design of the components is based on a strong policy dialogue on post-hurricane needs for private sector economic recovery, consultation with the private sector, and an assessment of the current supply of financial services. Two surveys have been undertaken to better understand the predicament of MSMEs after the hurricane and the prequalification of three FIs was conducted. In February and August 2018, surveys of enterprises were undertaken in Sint Maarten. The first survey focused on a damage assessment while the second focused on financing, asset, service, and repair needs. These are summarized in annex 5. Both demonstrate the outstanding needs of MSMEs and that their recovery is still ongoing. Although a year has passed since the hurricane, there is a need to provide subsidized support to these enterprises, especially to the more marginalized who cannot access financing at current market conditions. Further, the preparation of the project has the pre-qualified three FIs. One is a commercial bank, while the other two are a development bank and an MFI. The combination of the Page 19 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) policy dialogue, consultations, lesson learned from other project, and surveys has improved the design of the operation and allowed the project to be more fit for purpose for the situation in Sint Maarten. 36. Windward Islands Bank (WIB) has been pre-qualified as one of the potential financial intermediaries to participate in the proposed financing facility. WIB’s eligibility has been determined following a preliminary institutional and financial assessment, including compliance with local regulations, organizational structure, financial soundness and overall track record. Final eligibility will be confirmed by the CBCS based on the eligibility criteria set forth in the OM. WIB’s financial indicators have remained strong despite the negative impact on the loan portfolio after the hurricane. Nonperforming loans (NPLs) increased slightly to 1.7 percent at end-2017. The bank took a hit in profits by waiving interests on personal loans in the six months following the hurricane which caused foregone revenue of Na f. 4–5 million (US$2–2.5 million). Loan origination, risk management, and debt collection practices have been adapted to the relatively small size of the market, with strong reliance on well-established bank-client relationships and personal references. Furthermore, there is strong reliance on collateral lending, particular for SME and corporate loans. Very minimal lending activity takes place without collateral, which may pose a challenge for the project to reach out to the lower end of the MSME segment. 37. OBNA and Qredits have also been pre-qualified as two other potential FIs to participate in the proposed financing facility. OBNA has a long history of development banking across the Netherlands Antilles. It has had challenges in obtaining financing and is under new management, since a change two years ago. OBNA has committed to increasing its physical footprint in Sint Maarten to help deliver the project in terms of staff from its Curacao office. OBNA has expressed request for TA and this is part of Component 3. Qredits is a new MFI in Sint Maarten. It has also been pre-qualified for this proposed operation. It has a sound back-office function in the Netherlands and three years of Caribbean experience in other islands across the Netherlands Antilles. Qredits is newer and therefore its cost structure for the proposed project is not only variable costs. As a result, the ability for Qredits to undertake a large portion of the target beneficiaries may be limited in the short term due to this and the design of the project. Together these three pre-qualified institutions and others in the market, have been appraised to be able to deliver the quantity of MSME packages in the Results Framework. 38. Under reasonable assumptions, the estimated net present value of the project is equal to US$48 million. Using surveys of enterprises in other middle- to high-income Caribbean economies, a production function for output was estimated to understand how an increase in capital (assets, inventory, and WC) affects output for Caribbean enterprises. This is estimated to be 77 percent per year. Given that the median asset and WC damages were equivalent to 40 percent of pre-hurricane levels, this estimate of 77 percent is used to evaluate the impact of the MSME packages on output within the production frontier as the damages were severe. Depreciation of capital and additional leverage from recycling repaid loans were both excluded to yield the estimate of US$48 million. Additional details are available in annex 4. 39. In terms of additional credit, from a financial sector perspective, it is estimated that the project will provide access to an additional 18 percent of credit to MSMEs. A secondary perspective is to consider the additional credit that will flow to MSMEs as a result of the project. Although the exact grant and loan packages will be determined by the PFI, it is estimated that US$19 million will be in the form of loans. This will expand financial access to MSMEs in an environment where they are constrained in access to finance. Given the current credit levels in the market and the growth of microfinance, it is estimated that the project will have a cumulative effect of increasing MSME lending by the fifth year of the project by an additional 18 percent. Additional details are available in annex 4. Page 20 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) B. Fiduciary (i) Financial Management 40. The financial management responsibilities of this project will be undertaken by the CBCS. The financial statements of the CBCS is audited annually by a Big 4 international accounting firm. The CBCS is experienced in accounting, reporting and managing funds for Dutch foundations but has limited experience with World Bank-financed projects. The Treasury Department within the CBCS will be the unit responsible for the project and, if needed, supported by the Finance Department of CBCS. A Portfolio and Accounting Officer (PAO) will be hired by the Treasury Department to undertake the day-to-day FM responsibilities of this project. An FM assessment was therefore conducted on the CBCS in accordance with OP/BP for IPF and the Financial Management Manual for World Bank Investment Project Financing (IPF) Operations (OPCS5.05-DIR.01, issued February 10, 2017). It was concluded that CBCS has adequate FM systems that should provide, with reasonable assurance, accurate and timely information on the status of funds as required by the World Bank. (ii) Procurement 41. Procurement for the project shall be carried out in accordance with the World Bank's procurement regulation. These are known as the World Bank’s Procurement Regulations for Investment Project Financing (IPF) Borrowers for Goods, Works, Non-Consulting, and Consulting Services, dated July 2016, revised November 2017 and August 2018, hereinafter referred to as ‘Regulations’. The project shall be subject to the World Bank’s Anticorruption Guidelines, dated October 15, 2006 and revised in January 2011 and as of July 1, 2016. All procurement for the project will be carried out by the NRPB. 42. The NRPB will be responsible for procurement across all components. Initially, the IRC will undertake the bulk of the procurement for the project. The initial procurement will be the hiring of the core team that will be required to run the project. The CBCS will also be hiring one individual and this procurement will be undertaken as per the World Bank regulations in close collaboration with the NRPB and the World Bank and will require the no objection by the IRC. The rest of the three core team members will be hired by the IRC, with the no objection of the World Bank. One of these team members is a Procurement Officer. This officer will be responsible for ex post reviews, on a sampling basis, of the loan and grant packages to verify that three quotes were obtained for all asset and repairs with an individual cost above US$2,500. For values below that threshold, the Procurement Officer will verify that the goods and services were procured. The procurement for the study for Component 2 and the audit, third-party verification and training for Component 3 will be open and competitive international bidding. C. Safeguards (i) Environmental Safeguards 43. The project has been categorized as Category F-Financial Intermediary Assessment as per World Bank OP/BP 4.01 (Environmental Assessment). The project triggers Safeguards Policy OP/BP 4.01, given the potential for negative Environmental & Social (E&S) impacts from MSME operations. MSME grant and loan packages are to be disbursed by PFIs, while specific MSME activities, and locations are not yet defined, but they are expected to be in services, retail trade, tourism, and small-scale light manufacturing. Potential impacts are anticipated to be relatively minor to moderate. With appropriate standard Page 21 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) mitigation measures, potential negative impacts will be managed effectively. All repairs under Component 1 of the project will be nonstructural and are not expected to have downstream safeguard implications. Component 2 activities will be informed by the safeguard policies, and Component 3 has no safeguards implications. 44. Safeguards requirements have been addressed in an ESMF prepared for the project. Cleanup of damaged buildings may require use of mildewcides, herbicides, etc. and termite treatment may require pesticides; therefore, pesticides financed by the project must comply with requirements and standards acceptable to the World Bank as per OP/BP 4.09. The Natural Habitats (OP/BP 4.04) and Physical Cultural Resources (OP/BP 4.11) policies have been triggered because of effects on historical buildings and the possible participation of ecotourism-related MSMEs, which can negatively affect natural habitat or physical cultural resources if not properly managed. There are no large scale, significant, or irreversible impacts identified. 45. The ESMF includes provisions for supervision and capacity building. According to the ESMF, MSMEs are required to certify conformance with requirements for E&S requirements, and PFIs are required to effectively screen the MSMEs (including the World Bank Group exclusion list, permit status, and good practice), and ensure that safeguards requirements are clearly included in Sub-Grant-and-Credit Agreements. The Operations Officer at the NRPB will provide safeguards support to the PFIs and will contract additional consulting support if needed for more complex reviews or outreach/training activities. The NRPB (initially the IRC) will require that PFIs provide periodic reports on the status of their safeguards management efforts and portfolios. The final ESMF that incorporates the comments from the October 11, 2018 in-country consultations and comments from the in-country disclosure on November 19, 2018 on the NRPB website, has been published on the World Bank website on November 27, 2018. (ii) Social Safeguards 46. The project is expected to have positive social impacts through providing more small businesses with access to financing, sustaining livelihoods, and improving the lending strategies of lenders in the region. The Involuntary Resettlement policy (OP 4.12) will not be triggered. The project is designed to exclude land purchase. Therefore, no funds will be used to purchase land and any other space in a manner that could result in the displacement of persons. In the event the subprojects lead to loss of peoples’ livelihood permanently or temporarily due to the refurbishments of buildings or other improvements planned under Component 1, the client will prepare a livelihood restoration plan. No subprojects will result in permanent or temporary physical displacement of persons due to the exclusionary restriction that includes exclusion of land purchase. To ensure that OP 4.12 is not triggered, the policy will be part of the exclusion list in the ESMF and OM. Enterprises that may need additional land or space to rehabilitate or expand their business will only be able to access financing by providing a legal land acquisition document. The ESMF and the OM have clear guidance on the types of activities that will be funded and will not consider any activity that would result in any of the circumstances that would require triggering OP 4.12. 47. Another important social dimension of the project is the impact on women and female-owned or female-managed MSMEs. Based on an August 2018 survey of enterprises in Sint Maarten, 43 percent of enterprises had female managers. This is higher than the Latin America and the Caribbean average of Page 22 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) 15 percent from 2010 and a Caribbean average of 22 percent from 2014.16 The corresponding 2010 number for Africa is 13 percent and 8 percent for South Asia. The project will seek to maintain access and usage of financial services by women, with a target of allocating at least 40 percent of loan guarantees to women-owned or women-managed MSMEs. Part of the PFI lender training will include a module to sensitize lenders on the needs of women entrepreneurs. A specific indicator in the Results Framework tracks the gender of beneficiaries. (iii) Other Safeguards 48. Screening and exclusion criteria are provided in the ESMF to ensure that any MSMEs or activities that would trigger any other World Bank Safeguard Policies would not be eligible for funding under the project. These additional screening and exclusion criteria would exclude any subprojects related to the construction or rehabilitation of dams (which could trigger the policy for Safety of Dams OP/BP 4.37). Projects affecting International Waterways (OP/BP 7.50) are also excluded, any investment in hydroelectric, irrigation, flood control, navigation, drainage, water and sewerage, industrial and similar projects (or the detailed design and engineering studies for such types of projects) that involve the use or potential pollution of international waterways, as such waterways shall have been described more specifically in the Operations Manual. Any investment that may be in a disputed area are also excluded.17 Any proposed subprojects in and around Simpson Bay and Oyster Pond should be subject to the review and approval of the NRPB / IRC. Finally, any projects on the World Bank Group exclusion list would not be eligible for funding nor any Category A projects. (iv) Grievance Redress Mechanisms 49. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. 50. The project and the NRPB (initially the IRC) will build on the IRC’s GRM to register, track, address, and resolve any complaints or related issues associated with the project. The GRM is yet to be fully developed but it will include a designated e-mail account and/or telephone or fax. Reported issues should include a name, date, and contact information, with a detailed description of the case. All reported cases will be logged by the IRC and directed to the Project Manager’s attention for investigation. There will be a normal response time of 7 days for each case; however, high-level cases may require up to 14 or 16Enterprise Surveys (2010) and Compete Caribbean (2014). 17The Bank does not intend to make judgment on any legal or other status of any territories or to prejudice the final determination of any parties' claims. Page 23 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) more days for a response. The NRPB (initially the IRC) will maintain a database to log all complaints and to track each from date received to date resolved and highlight how each case was resolved. The NRPB will partner with PFIs to ensure a timely response to complaints where they occur. (iv) Citizen Engagement 51. The project will incorporate a Citizens Engagement (CE) feedback loop for MSMEs through surveys. A questionnaire will be designed for the project’s MSME beneficiaries. A selected subset of beneficiaries will receive the CE questionnaire, which will be designed to assess overall satisfaction of services (including the ease of access, quality, process, disclosure, and responsiveness of needs) of the project. The CE questionnaire and enumeration will be managed and reported by the NRPB (initially the IRC). The CE questionnaires would be developed after the start of implementation and closer to the midterm review. The CE questionnaire results will be analyzed and drafted into a project report that will contain key recommendations to improve the project (for consideration) during the review period. The report will be shared with Government partners, FIs, and other relevant stakeholders. V. KEY RISKS 52. The overall risk to achieving the PDO is High given the current economic conditions and the implementation capacity, and the design aims to mitigate these by working through the financial sector. Sint Maarten is in a post-disaster situation and therefore there are a number of factors that raise risk levels. In any post-disaster situation, the state of the economy means that implementing any program has risks as economic uncertainty leads to behaviors which are sometimes suboptimal. Further, the nascent constituent country with existing limited governance experience is stretched to face a disaster. As such, the design aims to channel all the disbursement components through the financial sector. There was a possibility of separating the MG component to be managed by another entity; however, this would require a new implementation agency with the requisite technical capacity and would also mean that MSMEs would need to go to two places to get a financial package that works for them. By using the existing and tested underwriting, disbursement and debt service collection capabilities of the FIs, the design is fit for the purpose. This is also the case from a governance and oversight angle, wherein the alternative to set up a complete grant or loan unit would require more oversight and governance layers in comparison to using the existing FIs. Although the FIs will have their own systems, the NRPB (initially the IRC) will need some project management function to provide an extra layer of oversight, ensuring compliance and conducting M&E. Future natural disasters are a macroeconomic risk which this project faces. 53. The fiduciary risk is rated High largely due to lack of familiarity of the counterparts with World Bank fiduciary requirements, particularly on procurement, and the fact that two institutions will be implementing several projects at once. Mitigating measures include hands-on support from the World Bank FM and procurement teams to the CBCS and the IRC, which aims to reduce this risk as implementation gets under way. Implementation of standard FM and procurement practices may be further supplemented with outside capacity, or from CBCS Finance Department on FM-related matters as needed. 54. Institutional capacity for implementation and sustainability risk is rated High. The NRPB and the IRC are new institutions in a post-disaster situation. They have low, though growing, capacity. This project Page 24 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) is the fourth project that the IRC will manage from the Trust Fund; however, their experience with World Bank projects is still limited. Similarly, the CBCS has limited experience with World Bank projects, although it has been in existence for much longer. Mitigating factors to address this risk include the design which seeks to rely on PFIs for MSME application appraisals and MSME disbursements. Further training and guidance will be provided through supervision to the NRPB (initially the IRC) and the CBCS. Further, the OM provides detailed guidance as well as templates to help support implementation. 55. Technical design risks are rated Substantial. There is a risk of insufficient use of the facility due to channeling the financing through PFIs, that bear the credit risk for the loan portion of the packages. This has been addressed and will continue to be mitigated by significant involvement of the private sector during project implementation, including potential FIs. The expected disbursement profile is front loaded due to the objective of the project as well as the requirement that loan tenors fall within the project’s closing date. Although four- or five-year loans are not uncommon for MSMEs in emerging markets, the project is not able to extend repayment beyond project closure due to the structure of the Trust Fund and monitoring requirements. To prevent abuse, only one package per MSME is permitted over the life of the project. The technical design has incorporated, to the extent possible, PFIs’ own requirements and processes for loan application and origination. In addition, design features will be closely monitored by the World Bank, the IRC, and the CBCS teams to make any necessary adjustments on time. Further, the foreign exchange risk will be borne by the PFI or the MSME as the loans will be on-lent and repaid in U.S. dollars from the CBCS to the PFI. 56. Political and governance risk is rated High. The project is implemented in a post-disaster context where there are risks of political volatility and there is a significant need for transparency. This transparency is crucial for leveling the playing field for FIs to participate and for MSMEs to benefit. Ensuring that MSME and PFI eligibility criteria are clear and adhered to will be important to mitigate risks of misunderstanding and discontent with project design and outcomes. To mitigate this risk, the NRPB (initially the IRC) will undertake a clear communication strategy to ensure that project rules and application procedures are clearly communicated. Continuous communication will also be critical, as will transparency and the efficacy of the built-in grievance mechanism. . Page 25 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) VI. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY: St Maarten Sint Maarten Enterprise Recovery Project Project Development Objectives(s) The development objective is to support the recovery of micro, small, and medium sized enterprises through direct financial assistance to contribute to the restoration of economic activity. Project Development Objective Indicators RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 Support the recovery of micro, small, and medium sized enterprises through financial assistance. Cumulative number of MSMEs receiving packages for assets, 0.00 300.00 450.00 540.00 570.00 600.00 repairs or working capital (Number) Cumulative number of women owned or managed MSMEs receiving packages for assets, 0.00 120.00 180.00 216.00 228.00 240.00 repairs or working capital (Number) Volume of grants and loans supported through the project 0.00 13,300,000.00 24,750,000.00 29,700,000.00 31,350,000.00 33,000,000.00 over its lifetime (Amount(USD)) Volume of grants and loans 0.00 5,280,000.00 9,900,000.00 11,880,000.00 12,540,000.00 13,200,000.00 supported through the project Page 26 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 to women owned or managed MSMEs over its lifetime (Amount(USD)) PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 Component 1: Direct financial support to MSMEs for investment and working capital Cumulative number of MSMEs that are new for participating 0.00 45.00 67.00 81.00 85.00 90.00 lenders (Number) Percentage of loan packages by volume that include grants 0.00 80.00 80.00 80.00 80.00 80.00 (Percentage) Percentage of beneficiaries that feel project activities 0.00 60.00 65.00 70.00 75.00 75.00 reflected their needs (Percentage) Percentage of loan packages that are less than US$25,000 0.00 15.00 15.00 15.00 15.00 15.00 (Percentage) Percentage of MSME packages that are non-performing 0.00 5.00 5.00 5.00 5.00 5.00 (Percentage) Component 2: Study of financial solutions for improved disaster resilience Study undertaken for improving financial solutions 0.00 0.00 0.00 1.00 1.00 1.00 for disasters (Number) Page 27 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 Component 3: Training, project implementation, audit and monitoring and evaluation Cumulative number of loan officers trained in MSME 0.00 3.00 6.00 9.00 12.00 15.00 lending (Number) Cumulative Number of enterprises and loan officers trained in business continuity 0.00 40.00 80.00 120.00 160.00 200.00 planning (BCP) (Number) IO Table SPACE UL Table SPACE Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection This will be the running This will be This is the total number of sum of unique MSMEs. collected CBCS ledger Cumulative number of MSMEs receiving MSMEs that receive The MSME ID from the quarterly of MSME CBCS. packages for assets, repairs or working packages. It will be Chamber of Commerce from the loans. capital measured based on will be used as the IFRs. disbursements. unique field. This seeks to measure the This will be outcome for women owned collected Application NRPB will receive Cumulative number of women owned or or managed MSME access to semi- forms for copies of all application NRPB. managed MSMEs receiving packages for the project. The application annually by project. forms from PFIs. assets, repairs or working capital form for the project will the NRPB. have a field to capture whether the MSME is Page 28 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) owned or managed by a woman and this will be captured by the application forms at the NRPB. This indicator is the cumulative volume of grants and loans supported through the project for MSMEs. It will be calculated by summing the quarterly disbursements from the This will be CBCS to the PFI, and will measured CBCS loan Using the disbursement Volume of grants and loans supported account for any recycled quarterly and grant data that the CBCS uses CBCS. through the project over its lifetime funds issued as loans only. from the ledger. for payments to PFIs. This will be measured at IFRs. disbursement and will not account for loan reflows and so will be measured at the beginning of each quarter. Any unused working capital facilities will be counted as disbursed. This seeks to measure the outcome for women owned or managed MSME access to This will be the project. The application collected Application NRPB will receive Volume of grants and loans supported form for the project will semi- forms for copies of all application NRPB. through the project to women owned or have a field to capture annually by project. forms from PFIs. managed MSMEs over its lifetime whether the MSME is the NRPB. owned or managed by a woman and this will be captured by the application forms at the NRPB and the Page 29 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) total amount financed will be compiled. ME PDO Table SPACE Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection This seeks to measure the outcome for increased access to finance (A2F). The This will be application form for the collected Application NRPB will receive Cumulative number of MSMEs that are project will have a field to semi- forms for copies of all application NRPB. new for participating lenders capture whether the MSME annually by project. forms from PFIs. has had a loan with the PFI the NRPB. before and this will be captured by the application forms at the NRPB. This seeks to track the type of packages being issued to This will be ensure that the AR grant- collected SGCA for NRPB will receive Percentage of loan packages by volume loan facility is being used. semi- approved copies of all SGCA NRPB. that include grants The approved SGCA will annually by packages. forms from PFIs. have the final breakdown the NRPB. and the NRPB will need to capture these percentages. A survey will measure the satisfaction of the project's final beneficiaries regarding Survey and Survey and outcomes Percentage of beneficiaries that feel Annual. NRPB. the activities implemented field visits. of field visits. project activities reflected their needs under the project. During Midterm Review and every year after that, the NRPB Page 30 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) will organize workshops (including online virtual workshops) targeting different project stakeholders or beneficiaries. Workshops will be organized taking into account the type of product or activity, the type of beneficiary, and geographical location. To measure the level of satisfaction amongst the beneficiaries, the NRPB will develop a set of questions and other tools with the support of the WB team. Field visits and interviews in situ will also be considered. This seeks to track the percentage of packages being issued to the micro This will be segment as defined by collected SGCA for NRPB will receive package size to ensure that Percentage of loan packages that are less semi- approved copies of all SGCA NRPB. the facility is including micro than US$25,000 annually by packages. forms from PFIs. enterprises. The approved the NRPB. SGCA will have the final breakdown and the NRPB will need to capture these percentages. This is defined as the total This will be This will be The data will come Percentage of MSME packages that are CBCS. number of outstanding measured measured from the loan tracking non-performing packages that have their annually. from the and loan repayment Page 31 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) long portions non- CBCS ledger profiles. performing. Non- of loans and performance is defined as their 90 days overdue. repayments. This indicator will ensure that the study from This will be NRPB NRPB procurement Study undertaken for improving financial Component 2 is complete. measured procurement NRPB. forms. solutions for disasters Guidance for the TOR for annually. forms. the study will be provided in the OM. This will measure the This will be NRPB NRPB training session Cumulative number of loan officers number of loan officers measured training NRPB. logs. trained in MSME lending from FI trained in MSME annually. session logs. lending. This will measure the This will be NRPB Cumulative Number of enterprises and number of enterprises and NRPB training session measured training NRPB. loan officers trained in business continuity loan officers from FI trained logs. annually. session logs. planning (BCP) in business continuity planning (BCP). ME IO Table SPACE Page 32 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Annex 1: Detailed Project Description COUNTRY: St Maarten Sint Maarten Enterprise Recovery Project 1. The proposed design to support the recovery of MSMEs considers the underwriting and screening requirements of MSMEs as well as the governance and implementation challenges that this operation presents. The design incorporates custom packages for MSMEs that will be a combination of (a) grants and loans for assets or repairs (ARs) and (b) working capital (WC) loans. The assets portion of the AR will be for productive capital assets while the repair portion will be for basic nonstructural repairs. The AR will be part grant and part loan. The combination of grants, loans, investments assets, and WC into these packages is a direct outcome of the surveys that were undertaken. These MSME packages will be administered by participating financial institutions (PFIs). The PFIs will assess the individual business plan applications from MSMEs and make an independent financing decision. The PFIs will bear the credit risk for the loan portion of the packages. MSME eligibility will be based on official registration and preference will be given to those MSMEs who were affected by the hurricane and to existing businesses, although there will be startup and refinancing windows as well. The liquidity of the packages (both loan and grant) will come from the project and will be disbursed by the CBCS. 2. The loans (for the loan part of the AR and the WC) will initially be priced using interest rates below regular market conditions. This is in accordance with the OP on IPF/FIF policy due to the hurricane and is referred to herein as emergency-based pricing.18 An assessment of the prevailing economic conditions will be conducted at midterm review to determine whether the rationale for emergency-based pricing remains in place. If the review confirms that the economic conditions no longer warrant such pricing, the interest rates will rise to regular market interest rates and the grant portion of the AR will be eliminated. 3. Beyond this immediate assistance two additional components focus on long term financial resilience. The second component includes an analysis of the market to understand how the range of financial solutions can strengthen disaster resilience. The third component will cover training to loan officers in MSME lending and training to businesses and FI loan officers in BCP. This training model strives to improve longer-term capacity of the sector to increase access to finance for MSMEs and strengthen resiliency of businesses. Component 3 also includes the annual project audit, a third party verification exercise, project management and implementation and monitoring and evaluation. 4. Component 1 will provide tailored packages to eligible MSMEs of grants and loans for AR investment, as well as WC loans if required. The AR investment is structured so that 65 percent of the investment is a grant and 35 percent is a loan. The WC loan is structured as a loan. These will be administered by the PFI, who will take the credit risk on the loan portion of the packages. Although the packages will be unique to each MSME and are fully flexible, it is anticipated that US$21.5 million will be for AR investments and US$11.5 million for WC loans. 18The strategy of the project and the rationale for below market interest rates is aligned with the World Bank OP 10/ FIF guidelines. The subsidies (in terms of interest rates) are intended to be transparent, targeted, and capped. Lending terms in the design are consistent with OP 10/FIF requirements and good practices. Page 33 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) 5. A working example is as follows: a restaurant that sustained damages through the hurricane has recommenced operations but is operating only a partial food menu. The restaurant is in need of a commercial extractor that costs US$20,000 as well as WC for US$5,000. Before the hurricane, the restaurant had borrowed for the lost commercial extractor and so a lender is unlikely to lend for a second asset without additional collateral or guarantees. Once the restaurant prepares a new application to an eligible lender with a business plan, the lender determines its comfort with the borrower and the proposed business plan. If the lender is comfortable with the credit risk and the restaurant meets the eligibility criteria, the lender can apply for a partial grant for the asset—the commercial extractor—and a 0% interest loan for the non-grant portion of the asset and the WC loan. If the grant percentage is set at 65 percent, the lender will on-grant US$13,000 and lend US$7,000 for the asset and US$5,000 for the WC line. There are no partial grants for WC. The lender must repay the loan portion and the borrower interest rate will be such that the lender covers its credit costs, operational costs, and a profit margin. The project will support MSMEs in preparing package applications and will provide support across all institutions to review documentation and compliance with procurement and safeguards to ensure that proceeds are used as planned. 6. MSME eligibility will be grounded in the definition of MSMEs in Sint Maarten as well as other criteria, while the packages will be subject to the size and combination criteria shown in Table 1. Eligible MSMEs must comply with the medium or smaller definition, which corresponds to average monthly revenue of US$55,866 over the last calendar year. Eligible MSMEs will need to be registered with the Chamber of Commerce19 and tax department, while those that sustained damages and those with longer histories of operations in the economy will be given priority. There will be a window for startups; however, these MSME packages for startups will have lower grant percentages, and there is also a window for refinancing. Both of these additional windows will have ceilings across the total project portfolio. Given the structure of the Trust Fund, all loan tenors cannot be beyond December 2023. Reflows from loans will be capitalized at project closure in a separate account owned by the Government of Sint Maarten and a decision will be made at midterm as to the use of these funds. 7. MSME eligibility criteria will focus on size, location, and registration and will prioritize businesses that suffered damages and losses as a result of the hurricane. Eligible MSMEs will need to be registered with the Chamber of Commerce in Sint Maarten and the tax department, be for-profit businesses, and conduct business on the Dutch side of the island. The SME Policy Framework defines a medium enterprise as one whose monthly revenue is less than US$55,866. No provisions will be made to distinguish between MSMEs. The majority of the Component 1 costs will be for business that were registered during the hurricane. Operational criteria will be assessed against records or other evidence which shows the business was operating immediately prior to the hurricane. Damages and losses will be determined based on substantial loss equivalent to US$10,000 in asset value and or a minimum 20 percent reduction in monthly gross turnover for 3 consecutive months immediately following the hurricane. The damage/losses will be supported by evidence, including but not limited to settled insurance claims, photographic evidence of damage to assets, and bank records showing trading variances. 8. The proposed flow of funds will combine grants well as loans. Figure 1.1 shows the proposed flows of funds. The Trust Fund is a grant to the World Bank and therefore the first transfer is an on-grant to the Government of Sint Maarten. These funds are then managed by the CBCS as implementing agent, who will in turn on-lend and on-grant these to the PFIs on behalf of the Government of Sint Maarten. As 19 Only if registration at the Chamber of Commerce and Industry is required by law to be operational in Sint Maarten. Page 34 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) the final step of the flow of funds, the PFIs on-lend and on-grant the funds to MSMEs and are responsible for the credit risk on the loan portion of the packages. All packages that have grants will include loans. Reflows begin from MSMEs as they start to repay their loans and will be capitalized in a separate CBCS account at the end of the project, and these reflows will be amalgamated with other reflows from other Trust Fund projects. A joint determination with the donor will be made at midterm review in terms of the uses of these funds. Uses that promote economic growth and disaster resilience would be natural destinations for such funds. Figure 1.1. Flow of Funds World Bank On-grant Government of Sint Maarten On-lending and reflows On-grant Central Bank of Curaçao and Sint Maarten On-lending On-grant and reflows On-lending PFI PFI PFI PFI and reflows On-grant MSME MSME MSME MSME MSME MSME MSME MSME 9. Credit line proceeds will be intermediated through eligible FIs for recovery response and will be priced and advertised accordingly. MSMEs are facing a post-disaster situation and need quick access to funds to replace assets, conduct repairs, or use as WC for their ongoing operation. The CBCS will on-grant and on-lend at 0 percent interest for the loan portion to eligible FIs. These loans may include longer repayment periods and/or lower interest rates than the regular market terms. The final interest rate to the MSMEs will be determined by the FI based on their risk assessment of the client but will not exceed a range pre-established under the program. The PFIs will charge a rate that covers their cost of funds, operating cost, and profit margin. 10. The process flow that underpins the flow of funds begins with an FI application to the CBCS for inclusion. This application will provide the CBCS with an expression of interest as well as key FI information for the CBCS to assess as per the PFI eligibility criteria (see Table 1.1). Once the CBCS confirms that the FI meets the criteria, this application package will be shared with the World Bank for no-objection. Then the CBCS and the FI enter into a SGCA, thereby making the FI a PFI. This signed document is also shared with the World Bank for no-objection. The PFIs will then process MSME applications as per the MSME eligibility Page 35 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) criteria (see below) and enter into sub-grant and credit contracts with MSMEs. The project agreement and contracts are shown in Figure 1.2. The Project Agreement is between the World Bank and the CBCS to help underpin reporting to the World Bank. Figure 1.2. Project Agreements and Contracts Central Bank of World Grant Government of Subsidiary Subsidiary Grant Subsidiary Agreement Agreement Curaçao & & Credit PFI Grant & Credit MSME Bank Sint Maarten Sint Maarten Agreement Contract Project Agreement 11. The intent of the program is to include as many FIs as possible. The FIs will apply to the CBCS. Application will be completed by letter or e-mail. The CBCS will make the final determination regarding whether a specific FI may participate and the completed application and the signed SGCA will be subject to World Bank no-objections. To participate in the program, the PFI should (a) be regulated and licensed to operate in Sint Maarten, (b) have a proven track record of lending to businesses in Sint Maarten, and (c) have at least one branch operating in Sint Maarten. PFIs will also need to demonstrate full and continuous compliance with the technical and prudential standards applicable to their activities and a clear drive toward increasing lending to MSMEs as a share of their credit portfolios. Table 1.1. PFI Requirements • Any FI that meets the eligibility criteria can participate. Who can • Initial pre-qualification has focused on working with Development Bank of the Dutch Antilles participate (Ontwikkelingsbank van de Nederlandse Antillen, OBNA), Qredits, and WIB. • Regulated and licensed to operate in Sint Maarten • Have a proven track record of lending to businesses in Sint Maarten • Have at least one branch operating in Sint Maarten Eligibility • Demonstrate full and continuous compliance with the technical and prudential standards criteria applicable to their activities • Passes the financial assessment that is based on profitability, capital adequacy, asset quality, prudential compliance, corporate governance, and risk management • The FI has to fill in an application expressing interest to the CBCS • The CBCS will assess the FI based on the eligibility criteria Application • If the CBCS confirms that the FI meets the criteria, it will share the application package with process the World Bank for no-objection • A SGCA will be signed between the CBCS and the FI 12. The selection of PFIs is therefore being undertaken in two stages: (a) pre-qualification and (b) final eligibility and selection. The procedure for pre-qualification and eligibility of PFIs is determined by the World Bank in close collaboration with the CBCS. PFIs are selected based on their financial strength, qualitative assessment of management, ability to intermediate resources efficiently to the desired enterprise segment, and compatibility with the parameters of the project. FIs to be selected for participation will have to meet the final eligibility criteria mentioned: be an intermediary accepted by the CBCS and have expressed interest in participation in the facility. The assessment for eligibility includes, among other things, assessing profitability, capital adequacy, asset quality, prudential compliance, corporate governance, and risk management. This is summarized in Table 1.1. In addition, the financial Page 36 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) analysis will evaluate the relevant asset size of the banks and their exposures to selected sectors. The due diligence will enable those banks to be determined as eligible to participate in the project. 13. Provisions are available for WC loans only, loans and grant packages for startups, and refinancing arrangements. Given the recovery-aspect objective of the project, ARs are the key area of focus. However, there is also a need for WC. As such, MSME packages that include WC loans only are capped at US$30,000 per MSME over the life of the project in total exposure. Loan and grant packages can be made to startups; however, the total outstanding startup exposure (measured quarterly to include grant disbursements) of the project will not exceed 10 percent of total Component 1 outstanding disbursements by PFI. In the case of startups, the grant portion will be reduced to 30 percent maximum. Additional provisions will be detailed in the OM. No refinancing will be permitted with grants. Loans originated after the hurricane but before the project start can be refinanced as loan-only packages, provided that the MSME eligibility criteria, safeguards, and procurement standards are met. 14. The types of MSMEs that are anticipated to be the main beneficiaries are primarily in the services sector and are tourism related. The project will not have a positive list of target sectors. Experience suggests that providing flexibility toward sectors is preferred, especially given that Sint Maarten is an island economy in a post-disaster situation. As such, the main sectors are likely to include restaurants, tour operators, professional services, transportation, light manufacturing, construction, and repair and maintenance. The project and the ESMF have a negative list which is included in the OM. Activities on the negative list include land acquisition, projects in international waterways, and harmful chemicals and pesticides. 15. Pricing on the loan portion of the packages will need to cover costs of administration. As the CBCS is one Project Implementation Unit (PIU), it will be able to on-lend and on-grant the funds to the PFI at no costs to the PFI. The CBCS costs are being covered by Component 3 rather than charging an interest rate spread to reduce the final cost to the borrower. All packages with grants must contain a loan for the PFI to access the facility. Interest rates of the loans will cover cost of funds, administrative expenses (which includes staff and operational costs), loan losses, and a profit margin. The interest rate cap will be determined in the subsidiary-grant and credit agreement to be signed between the CBCS and PFIs and be subject to World Bank no-objection. Current market interest rates are between 7 percent and 10 percent. As this project eliminates the costs of funds for PFIs, the anticipated interest rate will be in the region of 5 percent. 16. Given the particularities of the Trust Fund, loan tenors will need to fall within the project’s closing date and will therefore be declining over time. This is a constraint from the implementation arrangements and the sunset clause on the Trust Fund, and although it is not ideal from a financial development point of view, it is tenable given the recovery needs and average current tenors in the market. The project is scheduled to close at the end of 2023. With no implementation staff at the CBCS or the NRPB, monitoring and collecting many repayments will be difficult. Therefore, the project will be constrained to offer loans that start off with a maximum of a five-year tenor and then decline with every subsequent year. Given that the disbursement projections are front-loaded, it is anticipated that the average loan tenor will be four years. This also allows for reflows to be collected at project closing. 17. Using the Sint Maarten definitions of monthly firm revenues with standard debt service coverage ratios as well as the data received from the surveys in Sint Maarten, three typologies of packages were calculated to size the Component 1 allocation of US$33 million. These are shown in Table Page 37 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) 1.2. The estimates are to serve 300 micro enterprises, 200 small enterprises, and 100 medium enterprises. These are typologies only and it is expected that the actual numbers will be different as each MSME ’s needs will be unique. These target number are lower bounds as the loan portion of the funds will be repaid and then recycled (as loan-only packages). 18. Disbursements for Component 1 to the CBCS will be based on an initial advance and then moderated by the PFI progress as per the IFRs, and this will be mirrored in disbursements to the PFI from the CBCS. The project has a disbursement condition to ensure that the CBCS has a Portfolio and Accounting Officer to perform the FM functions. Once this is in place, the CBCS will disburse an advance based on the Results Framework for the first six months as a projection. This pattern will also work between the CBCS and the PFIs. Some PFIs have indicated that they are in need of liquidity and therefore this advance to some PFIs may be required. PFIs will not hold excess funds from which they can earn returns. PFIs will then be disbursed from the CBCS based on actual MSME packages on a monthly basis. Table 1.2. Typologies of MSME Packages by Enterprise Size Micro Small Medium Total Package Size (US$) 25,000 75,000 105,000 Asset or Repair (AR) 15,000 50,000 70,000 AR Grant 9,750 32,500 45,500 AR Loan 5,250 17,500 24,500 WC Loan 10,000 25,000 35,000 Total Grant in Package (US$) 9,750 32,500 45,500 Total Loan in Package (US$) 15,250 42,500 59,500 Estimated Monthly Loan Payment (US$) 355 988 1,384 Estimated Number of Beneficiaries 300 200 100 Total for Segment (US$) 7,500,000 15,000,000 10,500,000 Note: Four-year loans, estimates calculated at 5.5 percent annual interest. Grant percentage of AR is 65 percent. 19. Emergency pricing will be reevaluated at midterm review. This review will assess whether the prevailing economic conditions at midterm review (expected for 2021) still warrant emergency pricing. The review will use macroeconomic indicators provided in the Operations Manual to guide the assessment. However, these indicators will not be binding. Rather, they will be inputs into a comprehensive qualitative and quantitative review of the situation of MSMEs and the economy. In Q2 of 2020 a shorter review will assess if the revenue threshold for enterprises should remain in place, based on disbursements and demand. 20. Component 2 provides for the provision of a study to explore financial solutions to improve disaster resilience. More information on such options will be included in the OM. In recent years, many new solutions and financial instruments have been developed for countries, organizations, businesses, and individuals to better manage disaster risk. These include macro instruments such as sovereign catastrophe bonds, sovereign insurance, or disaster endowments. On the more micro side, there has been substantial work in improving insurance markets, conducting better modelling of weather risks and exposures, and how these are built into insurance contracts. Other options are on the regulatory side and Page 38 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) include strengthening insurance regulation and supervision, working on building codes, and using regulation to increase usage of such insurance products. Finally, there is also a suite of behavioral economics tools to improve disaster resilience that build on findings that highlight the importance of default options and nudges. 21. The project will need to provide frequent and accurate training to FIs. Areas of training will include, among others, MSME lending methodologies, commercial lending in the tourism sector, and risk management practices. The training curriculum should consider frequent staff turnover for lenders and that the training will therefore have to be offered on a regular basis. The comments and issues raised by those loan officers being trained will also provide good feedback to determine ways to improve the program. The Procurement Officer should consider whether there is sufficient demand to conduct quarterly trainings session or consider offering to conduct a session for a specific lender. 22. The content of the training should include basic cash flow calculations as well as BCP training. There is an annual budget for training which is intended to address a critical need in lender MSME underwriting capacity that was discovered during the due diligence of the project. This is also a recognition that the first point of contact for many business owners are loan officers. This budget also covers the training for both enterprises and FI loan officers in BCP. BCP training to loan officers will help them advise their client MSMEs on how to institute such practices into their businesses. Because this is targeting smaller enterprises, the types of BCP involve steps such as inventory management, backup of critical data, and other operational steps that enterprises can take to be able to resume business faster in the event that a disaster occurs. More details on the training will be included in the OM. Page 39 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Annex 2: Implementation Arrangements and Support Plan COUNTRY: Sint Maarten Sint Maarten Enterprise Recovery Project Project Institutional and Implementation Arrangements 1. The NRPB and the CBCS will be the implementing agencies for this project. The Government is establishing an NRPB that will be responsible for the implementation of all recovery and resilience projects selected by the SDTF’s Steering Committee under the NRRP. For this project, the CBCS will also play a critical role given the project design works through the financial system. The NRPB will be responsible for overall project management procurement, safeguards, legal, M&E, reporting, and technical responsibilities. The CBCS will be responsible for qualifying PFIs and the day-to-day FM aspects of the project, including accounting, reporting, and managing disbursements to and from PFIs. The CBCS will be responsible for the preparation and submission of quarterly unaudited IFRs and the annual financial statements, to be audited by an external audit firm that is acceptable to the World Bank. The NRPB will coordinate technical designs of the other SDTF projects with relevant ministries and conduct consultative and reporting functions. 2. Before the NRPB is in place, its project implementation responsibilities will be carried out by the IRC, which was established by the Government to coordinate Trust Fund projects until the NRPB is in place. The IRC currently includes technical, administrative, legal, financial, and procurement staff to handle project implementation, and additional staff such as E&S experts will be required for this project. It acts as an overarching project implementation support unit coordinating with and assisting all co- executing ministries/agencies and reports directly to the Prime Minister and Minister of General Affairs. Communication will be an important element for the role of the IRC. In a small economy, having a clear and consistent communication strategy for such a post-disaster enterprise recovery project will help manage bias and clarify eligibility and processes to follow. The financial intermediaries and the IRC will engage in outreach events and conduct workshops to ensure that all businesses—including the most marginalized—are aware of the project and understand how to access it. Feedback through the surveys and the interviews suggests that the needs for MSME technical assistance in business development services are limited. Further the IRC will also have a formal grievance mechanism in which the project will be integrated and will conduct CE surveys. 3. The CBCS has minimal experience with implementing World Bank projects. The CBCS is currently only responsible for maintaining the DAs of World Bank-financed projects, so the proposed project would require significant additional work from the CBCS. The CBCS’s Treasury Department will be responsible for the project’s qualifying PFIs, FM, accounting, and managing disbursements to and from PFIs. A Portfolio and Accounting Officer will be hired by the Treasury Department to undertake these functions, and this will allow the CBCS to on-lend and on-grant to PFIs at no marginal cost to the PFI or ultimate MSME beneficiary. Although it is not orthodox for credit-line operations to be channeled through central banks given the overarching objectives of central banks, the other apex options available were determined to be less effective. This was due to the CBCS’s advantage in managing payments through the automated clearing house, its experience in managing external projects and accounts for foundations, and its corporate governance structure. A fiduciary assessment of the CBCS is complete and is satisfactory. Page 40 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) 4. Coordination between the CBCS and the NRPB will be critical for the project’s success, especially given that the CBCS is headquartered in Curacao and the NRPB and project beneficiaries are in Sint Maarten. Given the portfolio monitoring as well as the disbursements and reflows management needs, the CBCS Treasury Department and the World Bank technical team determined that the project’s CBCS function would be better facilitated from Curacao compared to Sint Maarten. The Portfolio and Accounting Officer will be based in Curacao and will travel to Sint Maarten regularly. As such, monitoring and portfolio tools will need to leverage secure cloud-based solutions so that the project’s team can coordinate across the island. Table 2.1 shows the expected project’s core team composition. 5. The project will make use of a detailed OM to ensure coordination across the NRPB and CBCS, as well as with PFIs. An advanced draft of the OM has already been completed and its finalization is a condition of effectiveness. The current draft manual has been prepared in a manner that is acceptable to the World Bank. The OM provides information that pertains to MSME eligibility, PFI eligibility, loan and grant application process, loan and grant processing, disbursement, repayment, safeguards, procurement, financial management, M&E, and reporting. This will be a living document that would enable the implementing agencies to make adjustments to the project, subject to the World Bank’s no- objection, as the operation begins. Financial Management 6. Risk assessment. The FM responsibilities of this project will be undertaken by CBCS, which has experience in accounting, reporting and managing funds for Dutch foundations. The Treasury Department within the CBCS will be the unit responsible for the project and, if needed, supported by the Finance Department of CBCS. A Portfolio and Accounting Officer will be hired by the Treasury Department to undertake the day-to-day FM responsibilities of this project. Given that the CBCS is inexperienced with implementing World Bank supported projects, as well as applying World Bank financial management procedures, the overall financial management risk of this project is Substantial. Mitigating measures include the World Bank giving support to CBCS understand the financial management requirements of the Project. Implementation of standard FM practices may be further supplemented with outside capacity as needed. 7. Staffing. The overall financial management responsibility of the project will be undertaken by the Treasury Department within the CBCS. The Treasury Department of the CBCS has two divisions; (1) Treasury and (2) Payments & Settlements. CBCS will hire a Portfolio and Accounting Officer (PAO), who will be fully dedicated and responsible for the overall FM aspects of the project. The PAO will be a dedicated staff for this project and his/her work will be reviewed by senior Treasury staff members. The Bank’s FM Specialist will provide hands-on training on the World Bank’s policies and guidelines to the PAO and Treasury staff involved with the management of this project. 8. Budgeting. A budget for all the activities of the project for the entire implementation period will be prepared at the beginning of the project by the CBCS and reviewed and approved by the World Bank for reasonableness. This budget will be periodically reviewed and updated as needed to reflect the progress of implementation. Quarterly variance analysis (actual versus budgeted expenditures) should also be prepared and be provided as part of the quarterly progress reports. 9. Accounting and Internal Controls. The project transactions will be accounted for using an off-the- shelf QuickBooks accounting software, which the CBCS will purchase, that will not interact with CBCS’ Page 41 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) current accounting system. CBCS currently uses the accrual basis of accounting for its operations but will utilize the cash basis accounting for this project. The chart of accounts will be designed by sources of finance, projects components, sub-components, activities and disbursement categories. The daily operations of the project will be guided by an operations manual which will incorporate the financial management procedures. The manual will be updated throughout the life of the project as needed to reflect the current procedures and processes. 10. Reporting and External Audit. Unaudited Interim Financial Reports (IFRs) are required quarterly and should be submitted to the Bank within 45 days of each calendar quarter. Annual external audits, commissioned by the CBCS and performed by acceptable (‘no objection’ from the World Bank) auditors, are required with each audit covering one fiscal year (ending December 31). The annual project audit reports will only reflect the sources and uses of funds for the project and will not include normal operations of the CBCS. Project audit reports are due to the World Bank no later than six months after the end of each audit period. Disbursement and Funds Flow 11. The following disbursement methods will be available: Advance, Reimbursement, and Direct Payment. Disbursements for the study and project management (Components 2 and 3) will be primarily based on the use of Advances. For Components 2 and 3, the World Bank will disburse Trust Fund proceeds into the DA, denominated in U.S. dollars and currently maintained at the CBCS. Disbursements for Component 1 will also be primarily based on the use of Advances but will use the IFR to gauge the flow of future disbursements. For this it will be important for the IFRs to include a custom field to measure the flow-usage of WC facilities so that these can be counted as disbursed once an MSME uses a working capital facility provided by the PFI. 12. Designated Account (DA). CBCS will open two DAs for this project. One DA-A will be utilized for Eligible Expenditures to be financed from Disbursement of Component 1 for the transfer of the funds to the PFIs while the other DA-B will be for payments made for Components 2 and 3. Please refer to the Disbursement and Information Letter of the project for further details of the DAs. 13. Disbursements will be report based. Advances will be provided to the DA based on six month’s forecasts and subsequent quarterly IFRs will be used for documentation of expenditures and the request for subsequent advances. For Component 1, expenditures will be recognized upon the actual transfer of the funds for AR or WC from the PFIs to the MSMEs and not upon the approval of the related AR and WC MSME package. For Components 2 and 3, expenditures will be recognized upon the payment of the receipt of the goods or related services. The minimum application size for Direct Payments and Reimbursements and overall disbursement arrangements will follow standard disbursement policies and procedures established in the Disbursement Guidelines for Investment Project Financing, dated February 2017, and in the Disbursement and Information Letter of the project. Procurement 14. Procurement for the project shall be carried out in accordance with the World Bank’s Procurement Regulations for Investment Project Financing (IPF) Borrowers for Goods, Works, Non- Consulting, and Consulting Services, date July 2016, revised November 2017 and August 2018, hereinafter referred to as 'Regulations'. The project shall be subject to the World Bank's Anticorruption Page 42 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Guidelines, dated October 15, 2006, and revised in January 2011 and as of July 1, 2016. All procurement for the project will be carried out by the NRPB (initially the IRC). 15. Procurement assessment. The NRPB (initially IRC) and CBCS will be responsible for coordinating, implementing, supervising, finalizing, and documenting all the procurement activities related to the project. A total of four initial team members will be required. The World Bank will provide no objection to these initial hirings as well as post reviews, given the thresholds for the prior review in the Caribbean. 16. Procurement under the project. Procurement regulations will apply to Component 1 given that there are grants. A Procurement Officer will be hired by the NRPB. The Procurement Officer’s responsibility will be to check ex post on a sampling basis that all AR with value above US$2,500 had three quotes and that the chosen quote was actually purchases. For lower-value AR items, the Procurement Officer will check that the items were purchases. Under Components 2 and 3, it is envisaged that the project will finance mainly individual consultants, training costs, external audit, and operating costs. 17. Project Procurement Strategy for Development (PPSD). The PPSD has been prepared and is satisfactory. This will be further developed through implementation by the implementing agency with support and guidance by the World Bank. An acceptable Procurement Plan was also prepared and will be included in the new Systematic Tracking of Exchanges in Procurement (STEP) system. Environmental and Social (including safeguards) 18. The draft ESMF was prepared in October 2018, and feedback has been incorporated into the final version of the document. Key findings of the consultations have been summarized and included in the final revisions of the ESMF. The date of the consultations in Sint Maarten was October 11, 2018. The ESMF was publicly disclosed on the NRPB website on November 19, 2018. The final version incorporating the comments from the in-person and in-country consultation was published on the World Bank website on November 27, 2018. 19. The project environmental management aspects, including responsibilities, are described in detail in the project’s OM and the ESMF. MSMEs will be required to certify conformance with requirements for E&S performance, and PFIs must effectively screen (with the help of IRC project staff) the MSMEs, verify their eligibility, and ensure that E&S requirements are clearly included in sub grant and credit contracts. The NRPB (initially IRC) will require that PFIs provide periodic reports on the status of their E&S management efforts and portfolios, and the NRPB (initially IRC) and CBCS implementing team itself must conform to relevant E&S requirements. 20. The MSME screening and processing procedure involves the following steps: (a) compare with the World Bank Group’s exclusion list; (b) check local permit status; (c) check availability of land for business expansion; (d) assign E&S risk category; (e) undertake field visits (optional); (f) prepare documentation; and (g) guarantee administration, evaluation, and reporting. The project will build the E&S functions for the Operations Officer and will obtain support from external consultants as needed for assessments of more complex MSMEs and, or training and outreach. Page 43 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Monitoring and Evaluation 21. MSME packages will be monitored closely given that the CBCS will be disbursing and collecting reflows. Since the CBCS is in Curacao and the NRPB (initially IRC) is in Sint Maarten, online cloud-based secure tools will need to be used to keep track of MSME beneficiaries as well as the procurement ex post reviews. Further, the NRPB (initially the IRC) will also collect and store copies of approved MSME application forms as well as copies of sub grant and credit contracts for the life of the project and will use these to collect data related to the Results Framework. A draft application form is included in annex 7. This is a fillable online form so the data captured can be digitized quickly. The measurement of indicators for Components 2 and 3 are straightforward (counting the number of studies and number of trained MSME loan officers) and this will not require extensive build-out of systems. The Project Manager will be responsible for M&E. 22. Key indicators for measuring the PDO include the following: (a) Cumulative number of MSMEs receiving packages for assets, repairs, or working capital (Number) (b) Volume of grants and loans supported through the project over its lifetime (USD) These are gender disaggregated. 23. Key intermediate results indicators include the following: Component 1 (a) Cumulative number of MSMEs that are new for participating lenders (Number) (b) Percentage of loan packages by volume that include grants (Percentage) (c) Percentage of beneficiaries that feel project activities reflected their needs (Percentage) (d) Percentage of loan packages that are less than US$25,000 (Percentage) (e) Percentage of MSME packages that are non-performing (Percentage) Component 2 (a) Study undertaken for improving financial solutions for disasters (Number) Component 3 (b) Cumulative number of loan officers trained in MSME lending (Number) (c) Cumulative Number of enterprises and loan officers trained in business continuity planning (BCP) (Number) Strategy and Approach for Implementation Support 24. The implementation support strategy was developed considering the needs of the project and existing capacity of the IRC. The primary implementation support from the World Bank will be providing ongoing TA to the new IRC and CBCS team. While the OM contains a substantial amount of detail and is intended to be a road map for commencing operations, it is likely that the team may seek additional guidance on specific items discussed in the manual. Page 44 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) (a) Technical support. A team of Financial Sector Specialists will provide technical support and guidance to the project as each stage of the implementation plan progresses. This technical support includes financial, managerial, technological, or any other support necessary. (b) Procurement. A Procurement Specialist will provide ongoing guidance during the implementation phase as the NRPB (initially IRC) establishes its procurement practices. While guidance is provided in the OM, the option to ask a specialist various questions will be useful to the NRPB and CBCS team. (c) Financial management. An FM Specialist will provide implementation support to the CBCS, especially to the Portfolio and Accounting Officer. The Portfolio and Accounting Officer is responsible for establishing the financial systems used by the project and creating internal controls to ensure that these systems function properly. (d) Operations. After the project begins to disburse, the World Bank will provide implementation support to the team members of the project as issues arise. The first 10 packages, and all packages with total value above US$90,000 will be reviewed by the World Bank to ensure procedures and systems are working adequately. (e) Safeguards. The E&S Specialist will provide support and ongoing guidance to the NRPB (initially IRC) on E&S safeguards, including the application of the guidance provided in the OM. In addition, the specialist will participate in project implementation support missions and site visits. 25. The Implementation Support Plan will be reviewed periodically to ensure that it continues meeting the implementation support needs of the project. Table 2.1. Implementation Support Plan and Resource Requirements Resource Partner Time Focus Skills Provider Estimate (weeks) Role Implementation Task Team Leader/Financial Sector Specialist 8 — Procurement Procurement Specialist 4 — FM FM Specialist 3 — First 12 Safeguards E&S Specialist 4 — months Operations support Operations Officer 5 — Technical support Financial Sector Specialist, Technology Specialist 5 — Total 29 Ongoing operations Task Team Leader/Financial Sector Specialist 18 — Procurement Procurement Specialist 8 — 12–60 FM FM Specialist 8 — months Safeguards E&S Specialist 8 — Operations support Operations Officer 8 — Total 50 Page 45 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Table 2.2. Skill Mix Required Skills Provider Number of Staff Weeks Number of Trips Comments Team Leader/Financial Sector Specialist 26 8 n.a. Procurement Specialist 12 3 n.a. FM Specialist 12 4 n.a. E&S Specialist 11 3 n.a. Operations Officer 13 2 n.a. Technical support 5 2 n.a. Page 46 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Annex 3: Financial Sector Overview and PFI Summary Assessments COUNTRY: Sint Maarten Sint Maarten Enterprise Recovery Project 1. The financial sector in Sint Maarten is known for being largely foreign owned. The banking sector is liquid and solvent but has high NPLs and low profitability. Deposits have been growing steadily but credit to the private sector has been stagnant. After Hurricane Irma, banks curtailed lending, reflecting losses and risk aversion, and most of the corporate sector deleveraged. Despite the expected deterioration in asset quality and profitability, banks on the island proved to be resilient to the natural disaster shock. Financial Sector Overview Banking Sector 2. The banking sector in Sint Maarten comprises nine institutions, including a large indigenous bank, four foreign banks, and three DFIs. Commercial bank activity is led by the indigenous WIB with NA f. 1,303 million in deposits (74 percent of GDP), followed by foreign-owned banks including ORCO Bank, Banco di Caribe, Royal Bank of Canada (RBC), Scotiabank, and Canadian Imperial Bank of Commerce (CIBC). There is a development bank on the island (OBNA) and a payday lender called Island Finance. 3. Sint Maarten formed a currency union with Curaçao after the dissolution of the Netherlands Antilles and its constitution as an autonomous country within the Kingdom of Netherlands in October 2010. The two countries share a central bank (CBCS), whose primary objectives are to maintain the external stability of the Netherlands Antillean guilder (NA f.) and to promote the efficient functioning of the financial system in the constituent countries of Curacao and Sint Maarten. To realize these objectives, the CBCS, as supervisory authority, has frequently used credit control measures and to changing the discount rate. The domestic currency has been kept from the previous institutional arrangement and has been pegged to the U.S. dollar at 1.79 since 1971. Deposits and Credit 4. The banking sector is very liquid, due to a combination of vigorous deposit growth and stagnant credit. Residents’ deposits have seen a surge in the last two years that has brought total Sint Maarten commercial banks deposit to NA f. 2,843 million (161 percent of GDP) in May 2018 (figure 3.1). Banks’ deposit funding has increasingly relied on demand deposits, which represent 57 percent of deposits, while savings and time deposits stand at 25 and 18 percent, respectively. In contrast to the increased availability in bank funding, lending to the private sector in Sint Maarten had been subdued even before Hurricane Irma, with long-term investment decisions deterred by macroeconomic uncertainties. Commercial bank lending amounted to 94 percent of GDP (NA f. 1,721 million, or US$ 961 million), with lending to the private sector at 83 percent (figure 3.2). Despite their limited depth relative to funding availability, commercial banks are an important source of long-term funding. Commercial banks can typically offer loan maturities of approximately seven years and can potentially go up to ten years for the most creditworthy borrowers. Most of the lending is collateralized, with mortgages representing 59 percent of total loans. Page 47 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Figure 3.1. Sint Maarten Commercial Banks’ Deposits Figure 3.2. Sint Maarten Commercial Banks’ Loans by (Percentage of GDP) Term (Percentage of GDP) 120 180 160 100 140 120 80 100 60 80 60 40 40 20 20 0 0 Jul-16 Jan-17 Jul-17 Jan-18 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Public Sector Private NonFin Sector - Residents NonResidents Demand < 2 years > 2 years Mortgages Source: CBCS Monetary Union Statistics. Source: CBCS Monetary Union Statistics. 5. Credit growth, which was already weak in the years before the hurricane, was significantly affected by Hurricane Irma, particularly in the corporate sector. Banks curtailed lending, reflecting losses and risk aversion. Credit contraction took place despite regulatory relief for FIs. The bank supervisor, the CBCS, temporarily increased (for 3 months, expired December 2017) the maximum debt-to-income ratio (from 37 to 55 percent), thus relaxing a potential constraint on extending loans. Moreover, several banks offered debt relief programs consisting of a moratorium of 3–6 months on the interest and principal due on personal loans. Private credit expanded at a modest 1.2 percent interannual rate in real terms by mid- 2017 and went on to contract 6 percent in 2018. While post-hurricane credit to households remained stagnant, loans to enterprises had fallen 11 percent in real terms by June 2018. All types of credit were affected, though mortgages to corporates were the main factor behind post-hurricane private credit contraction (see table 3.1). 6. Most large economic sectors20 deleveraged after Hurricane Irma, led by a significant decrease in lending to wholesale and retail trade (table 3.2). Four-fifths of the NA f. 73 million contraction in corporate credit were explained by this sector, which saw 24 percent annual decline in real terms due to lower mortgages (−NA f. 28 million) and term loans (−NA f. 25 million). The finance, insurance, real estate, and business services sector, which ranks second in the banks’ portfolio, also experienced a credit contraction, though it was marginal. Notably, lending to restaurants and hotels (18 percent of the portfolio) was resilient to the hurricane and even posted a minor increase over the last year. The remaining third of the portfolio, which includes ‘other services’, ‘activities not adequately defined’, and the remaining sectors, also contracted 10 percent in real terms. 20Economic activity is defined by the International Standard Industrial Classification (ISIC), a United Nations classification system by industry. Page 48 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Table 3.1. Sint Maarten - Breakdown of Commercial Banks’ Loans to Domestic Sectors by Credit Type (NA f., millions) Jun-16 Jun-17 Jun-18 Change - June 17/18 NA f. Millions % real terms a. Corporates Current Account 79.5 65.7 63.5 -2.2 -6% Term Loans 419.3 265.4 249.5 -15.9 -8% Mortgages 266.3 452.6 412.6 -40.0 -11% Acceptances NA 68.6 53.4 -15.3 -24% Corporates sub-total 765.1 852.3 778.9 -73.4 -11% b. Individuals Current Account 12.2 2.9 3.1 0.2 4% Term Loans 260.9 196.4 209.6 13.2 4% Mortgages 435.2 447.7 451.6 3.9 -2% Acceptances NA 25.4 24.6 -0.8 -6% Individuals sub-total 708.3 672.4 688.9 16.5 0% Source: Central Bank of Curaçao and Sint Maarten and IMF (Inflation estimates). Table 3.2. Sint Maarten - Breakdown of Commercial Banks’ Loans to Domestic Sectors by Economic Activity (NA f., millions) Jun-16 Jun-17 Jun-18 Change - June 17/18 NA f. Millions % real terms a. Corporates Agriculture, Forestry and Fishing 9.8 0.4 0.2 -0.3 -59% Manufacturing 4.3 9.7 7.6 -2.1 -24% Food, Beverages and Tobacco 1.6 7.4 4.9 -2.4 -35% Construction 66.6 33.7 37.0 3.3 7% Wholesale and Retail Trade 258.0 266.3 206.8 -59.4 -24% Restaurants and Hotels 104.6 134.4 139.4 5.1 1% Transport, Storage and Communication 38.3 30.0 28.7 -1.3 -7% Financing, Insurance and Real Estate 42.8 200.3 199.1 -1.3 -3% Other Services 222.8 132.3 125.5 -6.7 -8% Other miscellaneous activities 16.2 37.9 29.6 -8.3 -24% Corporates sub-total 765.1 852.3 778.9 -73.4 -11% b. Individuals 708.3 672.4 688.9 16.5 0% Total Loans to the Private Sector 1,473.4 1,524.7 1,467.8 -56.9 -6% Percent of GDP 76.8% 81.4% 83.4% Source: Central Bank of Curaçao and Sint Maarten and IMF (Inflation estimates). Page 49 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Asset Quality and Solvency 7. Poor asset quality was one of the prime reasons underlying the slow credit growth before the hurricane and will be a significant factor to consider for banks to rebuild their portfolio. Limited risk appetite of commercial banks has been flagged as an important reason withholding credit growth, besides others related to the investment climate and macroeconomic expectations.21 The NPL-to-total loans ratio in the monetary union remained elevated at 11.3 percent in 2015, up from 4.6 percent in 2007 (figure 3.3). Figure 3.3. Financial Soundness Indicators of the Monetary Union Curaçao and Sint Maarten Curaçao and Sint Maarten Total Capital-to-Total Risk Weighted Assets (%) Return on Assets (%) 2.5 15 1.5 10 5 0.5 0 -0.5 2018* 2018* 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Curaçao and Sint Maarten Curaçao and Sint Maarten Nonperforming Loans to Total Loans (%) Liquid Assets-to-Short Term Liabilities (%) 15 45 10 40 5 35 0 30 2018* 2018* 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CBCS and IMF. Note: * denotes data to September 2018. 8. Despite a recent deterioration in asset quality and profitability, the banking sector appeared to be generally stable, supported by adequate capital buffers. Return on Assets (ROA) and Return on Equity (ROE) stood at 1.0 percent and 11.2 percent, respectively, in 2015, continuing to fall from the levels 21“On the feasibility to start a Development Bank in Sint Maarten�, Social Economic Council, SER/16/BP/68 September 20, 2016. Page 50 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) reached in 2013 as increased competition narrowed interest spreads and net interest margins by about 1 percentage point over the period (figure 3.3). This, along with a lower net interest margin and increased competition among banks, has negatively affected bank profitability. Banks’ capital buffers, however, appear to be adequate with a capital adequacy ratio of 13.6 percent in 2015, above the 10 percent regulatory requirement. In spite of this, the ratio of NPLs net of provision-to-capital ratio is 46 percent. This leaves a sizeable portion of domestic bank capital exposed to further adverse developments in loan portfolio quality. Interest Rates 9. The CBCS started increasing its Figure 3.4. Sint Maarten and Curaçao Interest Rates (%) reference rate in 2017 following the change in the federal funds rate in the United States. 12 Sovereign yields remained at historical lows. In 10 March 2017, the CBCS increased the pledging 8 rate by 0.50 percentage point to 1.50 percent for the first time since December 2008. 6 Monetary conditions were further tightened in 4 March 2018, when the pledging rate was set at 2 percent. Lending rates have shown a declining 2 trend, with time loans and mortgage rates 0 standing at 6.3 percent in 2016. The indicative yields on government securities in Curaçao and -2 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Sint Maarten are based on the relatively low CBCS Pledging Rate 3mo T-Bills effective yield of Dutch State loans with similar Medium & LT T-Bonds Mortgage Rate Time Loans maturities because the Dutch State Treasury Agency participates in the local tenders of Source: CBCS government securities at yields prevalent in the Dutch capital market (that is, the standing subscription). In this context, the average effective yield of medium- and long-term government bonds remained at −0.13 percent in July 2018 (figure 3.4). 10. Private sector and state-owned enterprises may see their cost of borrowing increase due to credit rating deterioration. Moody’s placed Sint Maarten's Baa2 government bond ratings on review for downgrade in September 2017 and confirmed the negative outlook in May 2018. According to the credit rating agency, Dutch support will limit the deterioration of the island’s public finances, but recovery efforts will likely necessitate some level of borrowing, which could lead to a material increase in its debt burden over the next 2–3 years. A significant rise in government debt metrics because of reconstruction costs or a negative assessment of future tourism inflows are mentioned as possible triggers for credit rating reduction. Although sovereign debt is shielded from a rating downgrade owing to borrowing at concessional rates from the Netherlands, it would still have an impact on local enterprises. Insurance Companies 11. There are 11 insurance companies operating in Sint Maarten, of which 3 are independent (1 of which has 50 percent of the market and has recently been placed under CBCS guardianship) and the other 8 are foreign branches or subsidiaries. In terms of indemnity insurance, property and motor are the main products and, to a lesser extent, marine. Total assets and profits related to this type of products Page 51 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) were declining during 2016 and 2017. Total insurance claims, mainly for property damage, amounted to about NA f. 970 million as of March 2018 (close to 50 percent of GDP and 40 percent of total damage), of which 54 percent was paid out from the insurance industry by end-March. The largest insurance company, the ENNIA Group, has a market share of 50 percent of the total insurance market in Curaçao and Sint Maarten and 80 percent of the pension market in Curaçao. The CBCS announced the restructuring of the group in July, when the authorities managed to retrieve US$100 million that was transferred out of the company’s accounts. The CBCS guardianship came after the Dutch central bank initiated a special investigation and flagged solvency concerns over the company in a confidential report in 2015. The emergency measure did not apply to ENNIA’s parent company Banco di Caribe, as the interest of depositors was not compromised. According to the CBCS, the application of the emergency measure did not trigger massive policies cancellations as of August 2018. Development Finance Institutions 12. There are three lending DFIs in the monetary union: OBNA, Curaçao’s Sustainable Development Corporation (Korpodeko), and Curacao Development Institute (CDI). OBNA was the first DFI to be established with a broad mandate to support economic development in all islands of the Netherlands Antilles, except Aruba. Created in 1981 with initial capital provided by the European Union and private investors, OBNA is a licensed bank whose purpose is to promote projects that foster regional economic development in the Netherlands Antilles and strive for a balanced development in the individual islands. Korpodeko was established in 1985 as a development bank and has a full banking license, but the foundation does not provide full banking services, such as collecting deposits. Its main clients are SMEs in the logistics and tourism sectors. Finally, CDI was established in 2016 with the main objective of enabling the financing of development projects by both local and international investors. The institution is not currently lending, as it is yet to be capitalized by the Government of Curaçao. CDI reports directly to the Ministry of Economic Development. A Memorandum of Understanding was signed recently between CDI and Korpodeko to merge the two institutions and specialize each entity: CDI’s primary task would be to carry out the Government of Curaçao’s sustainable development vision and operate as a development agency with a focus on knowledge management activities, while Korpodeko would continue to provide loans and support financial facilitation. 13. Following the dissolution of the Netherlands Antilles, DFIs have lost the leading role as a funding source for capital intensive projects. The increase in commercial bank and pension funds liquidity led them to take exposures to capital-intensive, riskier projects, effectively crowding out DFIs. Moreover, the DFIs’ lending portfolio has become more vulnerable to delays in debt service and higher NPL ratios. In terms of size, DFIs run significantly smaller operations than commercial banks. For example, OBNA’s balance total amounts to NA f. 102 million, while indigenous commercial bank WIB’s assets total NA f. 1,580 million. 14. The local DFIs present significant governance issues, including top-heavy staffing and lack of strategic guidance. The top-heavy staffing is evident from the fact that Korpodeko has 15 board members and 13 employees, while OBNA has 14 board members and 14 employees. As for the insufficient local authorities’ guidance, the Ministry of Finance of Curaçao has not appointed a board representative to OBNA, despite its 51 percent ownership share. Additionally, no board meetings were held from 2010 to 2015. The absence of a functional board leaves the control of the daily operation to its management, which makes its lending portfolio vulnerable to private capture. Page 52 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Other Non-Bank Lenders 15. There is also one new microfinance institution and a payday lender on the island. Qredits Microfinanciering Nederland (Qredits) is a microfinance nongovernmental organization established in 2009 as an alternative credit provider for SMEs in the Netherlands. In particular, the European Investment Fund guarantees 62 percent of the value of each loan Qredits makes. Qredits has a portfolio of over 13,000 loans, with a total of €260 million. In 2017 it opened a branch in Sint Maarten, where the Government provided a grant of US$200,000 to cover the operational losses during the first two years. More than 300 loans have already been issued on Caribbean locations (Sint Maarten, Aruba, and Curaçao), with an individual credit limit of US$50,000. After Hurricane Irma, Qredits introduced special loan conditions for entrepreneurs on Sint Maarten, in close cooperation with the Dutch Minister of the Interior and Kingdom Relations. The new soft loans were small business loans up to US$25,000, with a fixed interest rate of 2 percent during the six-year loan term and no capital amortization in the first six months. Demand for the product was been high, with Qredits receiving over 200 loan applications in the first five months, with over 90 percent of these approved and a total US$2 million disbursed. The majority of these loans are related to tourism, with 65 percent being asset related and 35 percent WC. As of July 2018, the program was discontinued due to lack of additional funding. Island Finance is a payday lender that provides unsecured lending with minimal documents requirements, with loans usually approved within a day. Summary of Appraisals of Pre-Qualified FIs 16. As part of the project design, and taking into consideration existing regulations and the role of CBCS as implementing agent, three FIs were pre-qualified in order for the project to start with financial institutions that are able and willing to serve the MSME sector. All licensed FIs in Sint Maarten will be able to apply to the CBCS once the project commences. 17. Table 3.3 summarizes the areas that the due diligence exercise covered for the PFIs considered. All had positive recommendations. The project will have a training component to help those financial institutions improve their MSME lending tools. Table 3.3. Summary of Due Diligence for Pre-Qualified FIs OBNA Qredits WIB Ownership ✓ ✓ ✓ Compliance with Regulations, Governance, and Management ✓ ✓ ✓ Company Profile ✓ ✓ ✓ Corporate Governance and Organization Structure ✓ ✓ ✓ External Audit ✓ ✓ ✓ Internal Audit ✓ ✓ ✓ Financial Statements Analysis ✓ ✓ ✓ Management Information Systems ✓ ✓ ✓ Risk Management ✓ ✓ ✓ Recommendation YES YES YES Page 53 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Annex 4: Economic and Financial Analysis COUNTRY: Sint Maarten Sint Maarten Enterprise Recovery Project 1. The economic and financial analysis for the project adopts two approaches: one that is enterprise based and the other that is financial-sector based. The first approach is to measure additional economic activity—as measured by enterprise output—that is a direct result of the investment of the project into assets, repairs, and WC. This is measured from an estimated production function using similar economies in the Caribbean. The second looks at the contribution to the stock of credit that the project is contributing to. Table 4.1. Production Function Estimates (1) (2) (3) (4) (5) (6) Log Output Log Output Log Output Log Output Log Output Log Output Log Capital (BV) 0.81*** 0.78*** (47.50) (44.51) Log Capital (MV) 0.78*** 0.77*** (49.09) (46.60) Log Capital (Rep) 0.66*** 0.63*** (39.79) (37.16) Log Labor 0.28*** 0.29*** 0.40*** 0.23*** 0.23*** 0.34*** (15.73) (17.26) (22.44) (10.22) (11.43) (15.14) Observations 813 941 940 813 941 940 R2 1.00 1.00 1.00 0.89 0.89 0.85 Sector-Fixed Effect No No No Yes Yes Yes Note: BV = book value, MV = market value, and ‘Rep’ is replacement value. t statistics in parentheses. *p < 0.10, **p < 0.05, ***p < 0.01. 2. To measure the additional economic activity that is directly attributable to the project, the first step is to estimate a production function for enterprises in the Caribbean. Unfortunately, there is no enterprise-level data available for Sint Maarten that contains capital, labor, and output for a cross-section of enterprises before the hurricane. Instead, a survey of enterprises across the Caribbean that was commissioned by Compete Caribbean in 2014 is used. The dataset is first restricted to middle- to high- income Caribbean countries. This reduces the sample size from 1,891 to between 813 to 941 observations.22 Using a Cobb-Douglas framework for production functions, that is standard in the productivity literature, a series of regressions are run of log output against log capital and log labor.23 There are three measures of capital: book value, market value, and replacement value. The results of these regressions are shown in table 4.1. 3. The estimates of the production function show the elasticity of capital to output and can be applied to the targets in the Results Framework. Across the six specifications shown in Table 4.1, the median elasticity of capital to output is 0.78 which corresponds to the market value of capital. The 22Included countries are Antigua and Barbuda, Barbados, Belize, The Bahamas, Saint Kitts and Nevis, and Trinidad and Tobago. 23The function form is Y = K�L(1-�) or log(Y) = �log(K) + (1-�)log(L). A constrained regression was also estimated; however, the sum of the unconstrainted estimates are close to 1 and yield more reasonable results than the unconstrained ones. More granular measure of labor—by education and by position—were also estimated. However, these changes did not modify the estimated output elasticity of capital. Page 54 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) February 2018 survey showed that that median damage to enterprises in Sint Maarten was US$65,000 to assets and US$40,000 to inventory, stock and WC. The August 2018 survey reinforced that only 10 percent of enterprises had restored their WC. The median market value of total assets of enterprises with less than 50 employees in the six countries from the Compete Caribbean survey is US$264,750, and therefore the loss in Sint Maarten is estimated at 40 percent of assets. This provides a rationale to use the elasticities estimated from the production function as assets were damaged and destroyed, and therefore the estimates are within sample, rather than extrapolated. Table 4.2 shows the estimated net present value of the project to be US$47,987,792 using the targets in the Results Framework. From a leverage perspective, this is an underestimate as it assumes no recycling of the loan funds through reflows. Table 4.2. Net Present Value Estimates Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 [1] Projected Disbursements (%) 40 35 15 5 5 [2] Loan and Grants Disbursed (US$) 13,200,000 11,550,000 4,950,000 1,650,000 1,650,000 [3] Additional Output (US$) 10,296,000 9,009,000 3,861,000 1,287,000 1,287,000 [4] Cumulative Additional Output (US$)a 10,296,000 19,305,000 23,166,000 24,453,000 25,740,000 Difference of [4] – [2] (2,904,000) 7,755,000 18,216,000 22,803,000 24,090,000 PV of [4] – [1] at 10% (2,640,000) 6,409,091 13,685,950 15,574,756 14,957,995 Net Present Value (US$) 47,987,792 Note: PV = Present Value. a. Assuming a capital elasticity of output of 0.78. 4. From a financial sector perspective, the project aims to provide both loans and grants to MSMEs and gauging the additionality of this is another measure of the project’s impact. As of June 2018, total corporate lending from commercial banks in Sint Maarten stood at US$435 million. This figure includes both large enterprises and MSMEs. Further, this figure excludes lending by development banks, microfinance, and personal commercial bank lending that is actually used for MSMEs. Based on the above, it is estimated that the size of the MSME credit market in Sint Maarten is US$85 million. The proposed project seeks to provide packages of both loans and grants for a period of five years. The total estimated loan figure from the project (although this will depend on each of the tailored packages administered by PFIs) is US$19 million. Therefore, the additionality, from a financial perspective, is additional credit of 16 percent in year 5. Table 4.3. Estimates of Financial Sector Additionality Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 [1] Estimated MSME Credit (US$)a 85,000,000 87,550,000 90,176,500 92,881,795 95,668,249 98,538,296 [2] Project Disbursements (%) 40 35 15 5 5 [3] Loans Disbursed (US$) 7,600,000 6,650,000 2,850,000 950,000 950,000 [4] Cumulative Loans Disbursed (US$) 7,600,000 14,250,000 17,100,000 18,050,000 19,000,000 [5] Total MSME Credit ([1] + [4]) 95,150,000 104,426,500 109,981,795 113,718,249 117,538,296 Additionality (%) [5] / [1] 8 14 16 16 16 Note: a. PV = Assuming credit growth of 3 percent. Page 55 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Annex 5: Private Sector in Sint Maarten and Post-Hurricane Survey Results COUNTRY: Sint Maarten Sint Maarten Enterprise Recovery Project 1. According to the Ministry of TEATT, there are approximately 7,000 active registered business.24 The government’s SME Policy Framework defines micro, small, medium and large businesses based on monthly turnover. Businesses with gross turnover of less than NA f. 15,000 monthly are classified as microenterprises. Businesses generating gross income between NA f. 15,000 and NA f. 50,000 monthly are classified as small. Businesses generating between NA f. 50,000 and NA f. 100,000 monthly are classified as medium-size enterprises while businesses generating more than NA f. 100,000 monthly are classified as large businesses (table 5.1). The national definition for micro and small enterprises in Sint Maarten in is line with the profile of firms in the Caribbean. However, medium-size companies are, by definition, much smaller in Sint Maarten than the rest of its Caribbean peers (table 5.2). Table 5.1. Categories of Business in Sint Maarten - by Monthly Gross Revenues Enterprise Size In NA f. In US$ Micro ≤15,000 ≤8,380 Small 15,000 to 50,000 8,380 to 27,933 50,000 to 75,000 27,933 to 41,899 Medium 75,000 to 100,000 41,899 to 55,866 Large >100,000 >55,866 Source: Ministry of TEATT - SME Policy Framework (2014). Table 5.2. National Definitions for SMEs in the Caribbean - by Annual Gross Revenues (US$) Sint Maarten OECS Jamaica Barbados Micro ≤97,008 ≤75,000 ≤120,000 ≤500,000 Small ≤323,340 ≤400,000 ≤600,000 ≤1,500,000 Medium ≤646,692 ≤2,000,000 ≤3,400,000 ≤4,000,000 Source: Prepared by the World Bank based on information of governments’ websites. Values were annualized for Sint Maarten for comparison purposes. Note: OECS = Organisation of Eastern Caribbean States. 2. Before Hurricane Irma, the Government estimated that SMEs account for approximately 85 percent of established firms and 20 percent of revenues from company turnover taxes.25 According to a World Bank private sector survey, 66 of respondents were MSMEs based on reported revenues after the hurricane during the low season (45 percent were micro, 6 percent were small, and 15 percent were medium). Based on the survey data, the distribution of firms by size has changed only slightly after Hurricane Irma, with 62 percent of respondents reporting being MSMEs before the disaster. The difference might be due to the higher damages faced by large hotels.26 3. Sint Maarten’s economy is primarily driven by the tourism sector. It is estimated that businesses in accommodation and tour operators accounted for 13 percent and 11 percent of firms, respectively. In addition, 28 percent and 12 percent of firms were shops and restaurants respectively, which strongly 24 The 2016 COSME study estimated that there were approximately 10,000 active MSMEs in the country. 25 The SME Policy Framework did not provide the distribution of firms by economic sectors. 26 World Bank. 2018. Private Sector Survey. Page 56 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) depend on tourism. Other sectors include wholesale (7 percent), transportation and shipping (2 percent), finance (1 percent), and marketing and advertising (1 percent) (figure 5.1). In terms of geographic location, 48 percent of firms were in Phillipsburg, 25 percent in Simpson Bay, 9 percent in Cole Bay, and 4 percent in Cupecoy / Lowlands Maho.27 February 2018 Survey of Enterprises in Sint Maarten 4. A World Bank survey to enterprises from Sint Maarten was conducted in February 2018. The objective of the survey was to get a sense of the state of operations of local enterprises in the aftermath of Hurricane Irma, the extent of the damages and losses, and their needs. Out of the 105 responses obtained, 60 were complete. The survey was sent to around 300 businesses. 5. In the immediate aftermath of Hurricane Irma, a significant portion of Figure 5.1. Sint Maarten Economic Sectors firms reported damages to premises, (as % of surveyed firms) inventory, and assets and business Tour Operator interruption. As of March 2018, 75 percent Other 11% of firms were in operation. Out of the firms 26% not in operation, 45 percent reported being uncertain about the reopening of Marketing & advertising operations and roughly 6 percent had 1% decided to close. In that context, 73 percent of firms reported damages to premises; 70 Transport & Shop percent reported damages to equipment, Shipping 28% furniture, and/or stock; and 62 percent 2% reported business interruption. Only 22 percent of surveyed firms reported having Wholesale business interruption insurance. Among 7% Restaurant Finance 12% other impacts, firms reported losses due to 1% looting, lower business volumes, and slow/ Source: World Bank Survey of Sint Maarten Enterprises, 2018. uncertain economic recovery. In terms of business volumes, the reduction in revenues reported by firms varied significantly, with roughly 30 percent of firms reporting reductions of at least 75 percentage points. 6. Damages faced by businesses and reconstruction needs varied significantly. Two surveys of enterprises in Sint Maarten were conducted in February and August 2018. The February 2018 survey assessed the damages to enterprises while the August 2018 survey focused on financing and asset replacement needs. Estimated costs for repairing/restoring damages building structures ranged from US$23,750 (25th percentile) to US$425,000 (75th percentile). The median costs were estimated at US$70,000. Firms reported that roughly 50 percent of these values were not expected to be covered by insurance. In addition to building structures, firms reported damages in assets ranging from US$15,000 to US$200,000, with a median value of US$65,000. Firms expected that 48 percent of the damages would not be covered by insurance. The value of damaged stock ranges from US$10,000 to US$150,000, with a 27 World Bank Survey, February 2018. Page 57 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) median value of US$40,000. According to firms, roughly 60 percent of damages in stocks were not covered by insurance (table 5.3). Table 5.3. Estimated Reconstruction Needs and Damages faced by Private Sector (US$) 25th 75th % of Damages Category of Damages Median Averagea Percentile Percentile Not Insured Building Structures 23,750 425,000 70,000 1,740,733 50 Assets 15,000 200,000 65,000 409,746 48 Stock 10,000 150,000 40,000 254,509 59 Source: World Bank 2018. Note: a. Differences between median and averages are explained by outliers. 7. Private firms have coped with damages using personal savings, insurance payouts, and relief loan programs offered by commercial banks. Most firms used personal savings or sold assets to resume business operations, pay salaries, and/or to initiate repairs in the immediate aftermath of the hurricane. Firms also used resources from insurance claims, as they were paid out. According to the CBCS, 51 percent of the value of property insurance claims had been paid out by March 2018. Roughly 90 percent and 73 percent of the value of motor and marine insurance claims had been paid, respectively. Moreover, firms received some loan relief, as most commercial banks offered a grace period/moratorium of 3 to 6 months and some banks lowered interest rates. 8. However, firms still reported the need for additional financial assistance. Only 27 percent of surveyed firms reported not having any problems accessing financing. Roughly 31 of firms reported difficulties in paying outstanding loans and 21 percent said they needed to renegotiate existing loans. Approximately 35 percent of firms needed new loans with softer terms. In addition, many firms reported difficulties in paying suppliers of their inventories and the need for some form of financing to maintain business operations. Government efforts to rebuild the airport and large hotels are highlighted as critical priorities to bring tourists back in the island. Moreover, many firms reported the need for financial assistance, in the form of soft loan, grants, or tax breaks. August 2018 Survey of Enterprises in Sint Maarten 9. A second World Bank Survey to enterprises from Sint Maarten was conducted in August 2018, following a previous survey from February 2018. The objective of the survey was to better understand the current state of operations of local businesses in Sint Maarten and their characteristics and needs. Out of the 105 responses obtained, 62 were complete. The survey was sent to around 300 businesses. 10. One year after Hurricane Irma, 90 percent of the enterprises are open, but only 33 percent are working at full capacity. Most of the businesses that took the survey have resumed their operations but are still working below full capacity. Out of the 11 closed businesses, 8 are expecting to reopen their business and 3 have permanently closed. Page 58 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) 11. Enterprises that took the survey offer a Figure 5.2. State of Operations as of August 2018 wide variety of products and services, many of which are related to tourism. Restaurants and other eating places (9.5 percent), miscellaneous store retailers (9.5 percent), clothing stores (9.5 percent), and tour operators (8.1 percent) were the most common products and service categories. Source: World Bank Survey of Enterprises in Sint Maarten, 2018 12. The main obstacles to enterprises’ current operations are economic uncertainty (92 percent) and access to finance (78 percent). More than 50 percent of businesses also identified taxes (68 percent) and crime, theft, and disorder (62 percent), as impediments to their current operations. 13. Most enterprises have a bank Figure 5.3 Product or Service Distribution account and obtain financing almost exclusively by banking institutions; 47 percent of respondents currently have a loan or line of credit (LOC). As expected, the majority of enterprises have an account in an FI and financing is obtained predominantly through banks—only one of the enterprises reported obtaining its most recent loan from a non-bank institution. 14. Almost half of the 47 percent that have a loan have missed a payment or been delayed on a payment, and very few have had success renegotiating the loan. Out of the 31 respondents that have Source: World Bank Survey of Enterprises in Sint Maarten, 2018 tried to renegotiate the terms and conditions of existing LOCs or loans, only 4 (13 percent) have done it successfully; 16 have tried but have not been successful. 15. Collateral is required for most LOCs and loans—particularly real estate owned by the enterprise—and 80 percent of real estate was damaged by Hurricane Irma. Out of the damaged collateral, 60 percent has since been repaired and the remaining 40 percent is under repair. Other forms of collateral assets used include personal assets of the owner (66.7 percent), accounts receivable and inventories (55.6 percent), and machinery and equipment (48.1 percent). 16. Insurance claims have been paid to 82 percent of enterprises that had hurricane damage insurance. One year after the hurricane, 18 percent still expect to receive insurance payouts. Almost a quarter of businesses did not have hurricane insurance. 17. Overall WC levels were significantly affected by Hurricane Irma and have not been restored yet. Moreover, current levels are considered insufficient. About 75 percent of enterprises reported that part of their WC was affected and only 10 percent of the affected enterprises have fully restored WC. About Page 59 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) 38 percent have partially restored WC and 52 percent have not restored it. About 64 percent of businesses believe that they currently do not have enough WC. 18. Only a third of respondents have applied for a new credit line or loan since the hurricane and have done so with mixed success—two-thirds had their loan approved but only a third in full. The main arguments for not applying for a loan were uncertainty about their capacity to repay a loan due to reduced and/or uncertain business volumes (42 percent) and complexity of application procedures (24 percent). About 31 percent of businesses that did not ask for a loan, did not do so because they did not need one. However, personal loans have been extensively used to finance business activities, with 43 percent of respondents currently using them. 19. About 62 percent of enterprises use durable goods in their operations, and their needs are very diverse. Only 3 of the 23 subcategories of durable goods received more than four responses: electric lightning equipment (5), material handling equipment (4), and ships and boats (4). The main durable goods categories identified by the enterprises are miscellaneous durable goods (65.9 percent); computer and electronic products (53.7 percent); furniture and related products (41.5 percent); transportation equipment (41.5 percent); and electrical equipment, appliances, and components (39 percent). 20. Although almost half of the respondents say they need BDS, however very few are willing to pay for them. The most demanded service that enterprises are willing to pay for is marketing (18.9 percent). Page 60 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Annex 6: Lessons Learned in Private Sector Recovery Support Post Disaster COUNTRY: Sint Maarten Sint Maarten Enterprise Recovery Project 1. In a post-disaster scenario, the speed of the recovery process is of the essence. Building back better not only means that the repaired and replaced assets are more resilient but also that the recovery process is shorter, more efficient, and more inclusive. A faster recovery can ensure that people restore their income and assets as early as possible, making it possible to use their savings to maintain consumption levels. If the average recovery speed is reduced from 3 years to 1 year, global well-being losses due to natural disasters could be reduced by 13.5 percent (or 23.3 percent when compared to a 5- year reconstruction period). For small island developing states, the 5-year reduction in well-being losses due to faster recovery ranged from 37 to 50 percent.28 In Sri Lanka, providing assistance to startups and also allowing loan restructuring helped speed up the recovery there. Figure 6.1. Reduction in Average Well-being Loss Due to Faster Recovery for 10 Selected Small island Developing States $1200M 50% $1000M Average well-being loss (US$) $800M 28% 30% $600M $400M 26% $200M 22% 23% 45% 54% 26% 3% $0M DMA TGO SLB ATG JAM LCA FJI TTO VUT VCT 5 years 4 years 3 years 2 years 1 year The top point refers to the well-being loss associated with a five-year reconstruction period, while the bottom point refers to a one-year reconstruction period. Percentages indicate the reduction in well-being loss by speeding up recovery from five years to one. Source: Hallegatte, Rentschler, and Walsh 2018. 2. Donors have used different mechanisms to support private sector development in early post- disaster recovery. Among the strategies and instruments used are (a) financial incentives (microfinance, support to the financial sector, enterprise challenge funds); (b) picking of winners (providing firm- or sector-level assistance to business, matching grant schemes, support to agriculture); (c) market- integrated relief (ensuring that relief programs support local markets); (d) incentivizing of foreign investment (linking local business with foreign investors, political guarantees, roadshows, PPPs, investment facilitation); and (e) capacity building (training, business incubation). Many donors’ interventions have been multidimensional and combined several instruments.29 Regardless of the 28 Hallegatte, Stéphane, Jun Rentschler, and Brian Walsh. 2018. Building Back Better: Achieving Resilience through Stronger, Faster, and More Inclusive Post-Disaster Reconstruction. World Bank, Washington, DC. 29 Walton, Oliver. 2012. Incentives to the Private Sector and Early Recovery. Governance and Social Development Resource Centre. Page 61 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) approach used, there is a consensus among donors that interventions must be data driven and market aware, building on existing local markets and systems and robust M&E frameworks that support flexible and adjustable program designs.30 Credit Lines 3. Previous World Bank projects suggest that better outcomes for LOCs are associated with (a) stable macroeconomic conditions; (b) stronger financial sectors, including satisfactory competition policies and good legal and regulatory regimes governing financial institutions, and mostly market determined interest rates, few distortionary credit and tax policies, and limited state ownership of financial institutions; (c) use of clear eligibility criteria in the selection of participating financial institutions; and (d) use of only private sector financial intermediaries. In addition, smaller LOCs are associated with lower cancellation rates. 4. In particular, conditions for better LOC outcomes include (a) a stable macroeconomic framework; (b) strong financial sectors (stable, competitive, well-regulated); (c) use of quantified eligibility criteria for selecting financial intermediaries, accompanied by sound analysis by the World Bank, as well as reasonably reliable data on financial performance and portfolio quality from the intermediaries and an external audit to verify the data; (d) better efforts to measure subsidies and to discuss their magnitude and the policies underlying them with the Government; and (e) a minimum set of key indicators established during appraisal and monitored during supervision, including a measure of the quality of the loan portfolio, with clear definitions, and other key ratios (such as capital adequacy) established by the prudential norms in the country. 5. LOCs should be offered through the financial sector, without discriminating between FI types: World Bank projects for the provision of LOCs had better results when delivered through the financial sector. To avoid interfering with a level playing field in the financing industry, all FIs that meet the eligibility criteria should be able to participate. Qredits, OBNA, and WIB have pre-qualified for the program, but the rest of the FIs in Sint Maarten are welcome to participate. 6. Decentralized decision making and sound incentive structure will contribute to reaching the most capable MSMEs: with each PFI selecting the MSMEs and carrying the credit risk, the choices of participants on the project are made by the entities most capable of identifying viable MSMEs. 7. Experience based on other World Bank-financed LOCs shows that the terms should allow for flexibility. For example, the Turkey Access to Finance for SMEs Project (P082822) was designed to allow for operational adjustments to ensure effective implementation. The loan terms were flexible and could be granted for WC and investment purposes. Microfinance 8. Donor-supported microfinance has been a common tool to promote private sector recovery in post-disaster and post-conflict environment. Microfinance encourages the restoration and expansion of businesses by offering unsecured lending with better terms to firms that are not served by traditional FIs. Usually, microfinance loans are small, short term, and flexible, in terms of repayment schedule and loan 30 The SEEP Network. 2017. Minimum Economic Recovery Standards. 3rd ed. Washington, DC: The SEEP Network and Rugby, United Kingdom: Practical Action Publishing. Page 62 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) use. Credit risk is mitigated by the frequent repayment schedules or deposit schedules, group lending/risk- sharing, and recurrent visits by credit officers, who have a good understanding about clients’ needs. Clients benefit from the design of the product, which is tailored to their needs, and from agile loan decisions and simpler application procedures. 9. International experience with post-disaster microfinance emphasizes the importance of flexibility. In post-disaster, market conditions are changing fast and the preferences for loans might change accordingly. Moreover, borrowers perceive microfinance schemes as too inflexible in some cases and prefer to borrow from informal sources, such as moneylenders. Evidence suggests that it is important for MFIs to function as a commercial business that can thrive when the reconstruction phase is over. Subsidies might be needed in some circumstances, but lessons learned from international experience highlight the importance of clarity between grant and microloans (when both are combined) during the relief phase and communicating to borrowers that soft loans are available only during a specified period.31 10. Results of microfinance programs in post-disaster stage have been mixed. Rigorous evaluations of microfinance programs in post-disaster and post-conflict environment are limited and provide mixed evidence, in terms of outreach, employment generation, and repayment rates. In Bosnia and Herzegovina, for example, the World Bank-funded Local Initiatives Project had positive results, in terms of outreach and employment generation. Repayment rates were very high, with average portfolio at risk below 1 percent.32 A 2003 study by the U.K. Department for International Development concluded that post- conflict microfinance has been associated with limited outreach and high delinquency rates.33 In Sri Lanka, there were different microcredit programs and some MFIs were recapitalized as a recovery tool after the 2004 Tsunami. Results from these projects were positive, in terms of changes in real income and employment.34 Information on portfolio quality was available for only four MFIs, which reported different patterns of portfolio at risk (2 institutions reported lower portfolios at risk).35 In 2016, the British Government provided a grant to VisionFund’s MFIs to support microloans in Kenya, Malawi, and Zambia, which were severely hit by El Niño’s droughts and floods. In 2017, MFIs had lent far more than expected and 93 percent of loans had been repaid, with missed payments being uncommon.36 Matching Grants 11. MG have been extensively implemented by the World Bank as a private sector development tool. An MG is a short-term temporary subsidy targeting knowledge services and BDS acquisition by SMEs, which is provided to the private sector on a cost-sharing basis. As a subsidy, MG are used to support the financing of public goods or private goods with positive spillovers or the removal of market failures. Usually, WC is not an eligible expense for MG. The funding of equipment and other assets by MG has been debated, with a smaller number of projects allowing the financing of specific and limited assets. These 31 Walton, Oliver. 2012. Incentives to the Private Sector and Early Recovery. Governance and Social Development Resource Centre. 32 World Bank. 2004. Bosnia and Herzegovina: Post-Conflict Reconstruction and the Transition to a Market Economy: an OECD Evaluation of World Bank Support. Washington, DC: World Bank Group. 33 USAID (U.S. Agency for International Development). 2009. A Guide to Economic Growth in Post-Conflict Countries. Washington, DC: USAID. 34 Becchetti, Leonardo, and Stefano Castriota. 2011. Does Microfinance Work as a Recovery Tool After Disasters? Evidence from the 2004 Tsunami. 35 Srinivasan, Girija. 2008. Review of Post-Tsunami Micro Finance in Sri Lanka. Institute of Policy Studies. 36 The Economist. 2018. Bucks After the Bank: How Microcredit Can Help Poor Countries After Natural Disasters. Page 63 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) projects used MG as a cost-efficient mechanism to respond to specific market failures in their contexts and achieve more specific objectives (for example, agribusiness projects). 37 12. MG programs must be appropriately tailored to local contexts and capacities. MG should only be used when they are determined to be the most adapted and least-cost tool to reach the project objective in the specific local context. The use of subsidy must be based on a sound economic rationale, generally the tackling of a well-identified market failure and targeted at clear beneficiary groups with a verified demand. Allocating sufficient human and financial resources to M&E is very important, since M&E systems are essential to identify potential issues in disbursement of funds and support a preliminary assessment of impact and adjustments, when needed. While there is no blueprint for MG schemes, some considerations are worth keeping in mind: (a) the active provision of TA to firms during the entire process often increases the probability of success; (b) broad stakeholder engagement and transparency by the implementing agency minimizes risks; (c) generally speaking, it is more beneficial to allow beneficiaries to select their service providers; (d) MG should be awarded based on objective and transparent criteria; (e) the level of subsidy should be sufficiently attractive for firms but should not be so high that it reduces their ownership; and (f) application and disbursement procedures should be simple.38 13. Evidence suggests that MG have usually supported positive outcomes for beneficiaries. Projects in different countries—though not in post-disaster—have observed increase in sales, exports, and income levels. However, they reveal the challenge in balancing rigorous selection criteria and application procedures, with the need for streamlined procedures to disburse funds quickly to create momentum.39 For MG projects that supported the purchase of equipment, there is caution about (a) oversubscription; (b) governance risks (if assets are being resold in the market); and (c) the perception of favoritism by firms that did not receive the grant, even when MG were distributed on a first-come, first-served basis with fairly eligibility criteria.40 37 World Bank. 2016. How to Make Grants a Better Match for Private Sector Development: Review of World Bank Matching Grant Projects. Washington, DC: World Bank Group. 38 World Bank. 2016. How to Make Grants a Better Match for Private Sector Development: Review of World Bank Matching Grant Projects. Washington, DC: World Bank Group. 39 Phillips, David. 2001. “Implementing the Market-Based Approach to Enterprise Support: An Evaluation of Ten Matching Grant Schemes.� Policy Research Working Paper 2589, World Bank, Washington, DC. 40 World Bank. 2014. Note on Cancelled Operation on a Credit to the Republic of Sri Lanka for the Sustainable Tourism Development Project. Washington, DC: World Bank Group. Page 64 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Annex 7: Draft MSME Application Form and Draft FAQs COUNTRY: Sint Maarten Sint Maarten Enterprise Recovery Project Page 65 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Page 66 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Page 67 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Page 68 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) Page 69 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) FAQs for Enterprises 1. What enterprises are eligible to receive a package? (a) For-profit enterprises with average monthly revenues of less than NA f. 100,000 (US$55,866) over the last calendar year. (b) Based in the Dutch part of the island. (c) Registered and in operation at the time/before the hurricane. (d) Abide with all local environmental policies and with the World Bank’s requirements for proper environmental and social stewardship. (e) Registered and up-to-date in the Chamber of Commerce and Industry of Sint Maarten and tax department. (f) Those that suffered substantial damages and/or losses as a result of the hurricane will receive priority. (g) Startups are also eligible to borrow but have more stringent conditions. The loan percentage of the package will be double the prevailing loan percentage for non-startups; for example, if the prevailing loan percentage is 35 for a non-startup, it will be 70 percent for a startup (the remaining 30 percent will be a grant). 2. What type of packages are offered? (a) Grant + Loan package for AR (Asset or Repair). (b) Credit lines for WC (Working Capital). 3. What is the structure of the AR component of the package? (a) 65 percent grant. (b) 35 percent loan with below-market interest rates and a tenure of up to December 2023. 4. What is the structure for the credit line for WC? (a) 100 percent loan at below-market interest rates. (b) If the loan is only for working capital, the maximum amount will be for US$30,000. 5. What interest rate will the financial institution charge for the loan? (a) Below-market interest rates. (b) Dependent on the risk profile of the borrower. 6. What is the maximum package size? (a) For AR only/and WC, US$130,000 is the maximum package per micro, small and medium sized enterprise (MSME) over the life of the project. (b) For WC only, US$30,000. 7. What financial institutions will participate in the program? (a) Initial pre-qualification has focused on working with OBNA, Qredits, and WIB. (b) All regulated financial institutions will be able to participate as long as they meet the eligibility requirements. Page 70 of 71 The World Bank Sint Maarten Enterprise Recovery Project (P168549) 8. How does the project scheme work? (a) The World Bank will on-grant the funds to the Government of Sint Maarten who will in turn on-lend/on-grant to the Central Bank of Curacao and Sint Maarten (CBCS). (b) The CBCS will on-grant and on-loan at 0 percent interest for the loan portion to the partner financial institutions (PFIs). (c) Eligible MSMEs will fill in the application form at a PFI. (d) If the MSME meets the eligibility conditions, the PFIs will determine the interest rate based on their risk profile of the client. 9. Can a business owner with multiple businesses apply for more than one grant? (a) Yes, up to 3 packages per owner if the businesses are registered as separate legal entities. (b) Otherwise, no. 10. Can the proceeds be used to refinance an existing loan? (a) Yes, up to a maximum of US$40,000 if the loan is performing and was originated after the hurricane. Loss from the hurricane has to be demonstrated, for example, proof of damages or insurance payouts. (b) No, if the loan was originated before the hurricane. Page 71 of 71