Implementation Completion Report - Industrial Restructuring and Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 21165-HA IMPLEMENTATION COMPLETION REPORT (TF-21551; IDA-20710) ON A CREDIT IN THE AMOUNT OF SDR 9.1 MILLION TO THE REPUBLIC OF HAITI FOR INDUSTRIAL RESTRUCTURING AND DEVELOPMENT PROJECT October 31, 2000 Finance, Private Sector and Infrastructure Department Caribbean Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their I official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized CURRENCYEQUIVALENTS (ExchangeRate EffectiveOctober31, 2000) Currency Unit = Gourde G I = US$ 0.043 US$ 1 = 23 G FISCALYEAR September30 October31 ABBREVIATIONS AND ACRONYMS AAN AutoriteAeroportuaire Nationale APN AutoritePortuaireNationale BRH Banquede la Republiqued'Haiti CMEP Conseilde Modernisation des EntreprisesPubliques FDI Fonds de Developpement Industriel G. GourdeHaitienne IDB Interamerican DevelopmentBank SAR Staff AppraisalReport TELECO Les Telecomunication d'Haiti SAM TA TechnicalAssistance USAID UnitedStatesAgencyfor InternationalDevelopment Vice President: David de Ferranti CountryManager/Director: OrsaliaKalantzopoulos SectorManager/Director: DannyLeipziger Task Team Leader/TaskManager: HeidiMattila/JyotiShukla FOROFFICIAL USE ONLY CONTENTS Page No. 1. ProjectData I 2. PrincipalPerformanceRatings 1 3. Assessment of Development Objective and Design,and of Qualityat Entry 2 4. Achievement of Objectiveand Outputs 7 5. MajorFactorsAffectingImplementation and Outcome 12 6. Sustainability 14 7. Bankand BorrowerPerformance 15 8. LessonsLearned 17 9. PartnerComments 18 10.AdditionalInformation 19 Annex 1. Key Performance Indicators/Log FrameMatrix 21 Annex2. ProjectCosts and Financing 22 Annex 3. EconomicCostsand Benefits 24 Annex4. Bank Inputs 25 Annex5. Ratingsfor Achievement of Objectives/Outputs of Components 27 Annex6. Ratingsof Bank and BorrowerPerformnance 28 Annex 7. List of SupportingDocuments 29 Annex 8.A BorrowerContribution - CMEP 35 Annex 8.B BorrowerContribution - FDI 39 Annex9. CofinancierContribution - USAID 74 This documenthas a restricted distribution and may be used by recipientsonly in the performanceof their official duties. Its contents may not be otherwisedisclosed without World Bank authorization. Project ID: P007309 Project Name: INDUSTRIAL RESTRUCTURING & DEVELOPMENT Team Leader: Jyoti Shukla TL Unit: LCC3C ICR Type: Core ICR Report Date: October 31, 2000 1. Project Data Name: INDUSTRIAL RESTRUCTURING & LIC/TFNumber: TF-21551; IDA-20710 DEVELOPMENT Country/Department: HAITI Region: Latin America and Caribbean Region Sector/subsector: DB - Business Environment; DI - Private Infrastructure KEY DATES Original Revised/Actual PCD: 12/15/86 Effective: 08/02/90 08/02/90 Appraisal: 03/15/89 MTR: 12/10/97 Approval: 12/05/89 Closing: 06/30/95 03/31/2000 Borrower/lmplementing Agency: GOVERNMENT OF HAITI/FONDS DE DEVELOPPEMENT (FDI), CONSEIL DE MODERNISATION DES ENTREPRISES PUBLIQUES (CMEP) Other Partners: UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT (USAID) STAFF Current At Appraisal Vice President: David de Ferranti Shahid Husain Country Manager: Orsalia Kalantzopoulos Ping Loh Sector Manager: Danny Leipziger John Page Team Leader at ICR: Heidi Mattila, Jyoti Shukla Kanella Vasiliadis ICR Primary Author: Patrick Tardy; Dana Rysankova 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely,L=Likely, UN=Unlikely, HUN=Highly Unlikely,HU=HighlyUnsatisfactory, H=High,SU=Substantial, M=Modest, N=Negligible) Outcome: U Sustainability: UN Institutional Development Impact: N Bank Performance: S Borrower Performance: U QAG (if available) ICR Quality at Entry: U Project at Risk at Any Time: Yes 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 OriginalObjective: The original objectives of the Project, as defined in the Development Credit Agreement, were to: (i) Assist in financing, through a line of credit, such productive facilities and resources in the territory of the Borrower as will contribute to the economic and social development of such territory; (ii) Support the Borrower's private industrial sector in undertaking the adjustments required to become export oriented and competitive; (iii) Assist the Borrower in carrying out the Trade Policy Reform Program; (iv) Assist in the further strengthening of BRH (Banque de la Republique d'Haiti), FDI (Fonds de Developpement Industriel) and Financial Intermediaries; and (v) Improve the regulatory framework of the Borrower's industrial sector. Assessment: The original objectives were justified at the time the Project was identified and prepared Haiti had just embarked on an ambitious trade liberalization program supported by an Economic Recovery Credit,financed by IDA. Haitian private enterprises, long shelteredfrom competition, especially those producingfor the domestic market, needed to adjust to the new environment. Furthermore, the regulatory and supporting institutional structure needed to be strengthened The Project was designed as a follow-up to a previous IDA Credit (Credit 1131 HA), under which the Fonds de Developpement Industriel (FDI) was created as a financial intermediary and performed reasonably well. 3.2 Revised Objective. These Project objectives were modified in December 1997. In 1991, Project implementation was negatively affected due to a military coup and a subsequent default on the country's international financial commitments. As a result, an economic embargo was imposed on Haiti and all donor aid, including this Credit, was suspended for more than 3 years between October 1991 and December 1994. When the embargo was eventually lifted and international lending resumed in 1995,the economic situation had changed completely. Real GDP had dropped by about 30%, and industrial output and investment had fallen dramatically. In order to respond to these changed circumstances, the Project was first reformulated in September 1995 within its original development objectives, and subsequently restructured further with revised developmentobjectives in December 1997. The revised development objectives were to: (i) Assist in financing such productive facilities and resources in the territory of the Borrower as will contribute to the economic and social development of such territory; (ii) Support the Borrower's private sector in undertaking adjustments consistent with the Private Sector Development Program; (iii) Assist in the further strengthening of BRH, FDI, CMEP (Conseil de Modernisation des Entreprises Publiques), the Ministry of Economy and Finance and Financial Intermediaries; and (iv) Improve the regulatory framework of the Borrower's public services. The amendment eliminated some of the original, pre-embargo objectives that had become either outdated, such as support for the Haitian trade reform which had largely been implemented, and others such as the improvement of the regulatory framework of the industrial sector, as more substantive technical support was being made available through other multilateral agencies such as the Inter-American Development -2 - Bank. More importantly, however, new objectives were added to support privatization of the state-owned enterprises (objective (ii)), institutional strengthening of the privatization agency CMEP (objective (iii)) and development of an appropriate regulatory framework for public services (objective (iv)). At first glance, the revision of the Project objectives might appear minor. In reality, however, the focus of the Project shifted considerably from the restructuring of private enterprises towards the privatization of state-owned utilities, although privatization was not mentioned directly in the revised objectives. Instead, the Private Sector Development Program was defined as "the Borrower's program for increasing participation of the private sector in economic activities by means, inter alia, of the modernization of the state-owned enterprises pursuant to the Borrower's Law dated October 2, 1996". Assessment: For allpracticalpurposes, this amendment effectively changed the entire Project as the line of credit component closed within six months of this amendment, and the remaining activities were focused entirely on privatization and regulatory reform. An alternative course of action would have been to close the Project on its revised Closing Date of June 30, 1998 and prepare a separate operation to support privatization. This, in fact, was the option first explored by IDA management and a TA operation to support civil service reform, tax reform and privatization was prepared and approved by IDA's Board in September 1996 (Second Technical Assistance Credit -- TAC II). This operation, however, as well as several other operations, could not be made effective as Haitian law required all external credit to be approved by its Parliament, and such parliamentary approval could not be obtained in the prevailing political situation ofpoliticalfragmentation. At the same time, the Government's requestfor assistance with implementation of its privatization program was highly time-sensitive. An extension and amendment of the existing Project, which did not require parliamentary approval, were seen to be the most expedient solution to respond to the country's needs and political constraints. 3.3 OriginalComponents: The original Project comprised two major components, a credit component and a technical assistance (TA) component. The credit component, in an amount of US$10 million equivalent (88% of Project costs), consisted of: = Sub-loans for restructuring private enterprises (US$4.8 million equivalent) and * A "regular credit line" (US$5.2 million equivalent) including sub-loans and guarantee mechanisms for "non-restructuring" private enterprises. FDI served as a rediscounting institution for the line of credit, providing medium and long-termn loans to eligible financial intermediaries, with IDA reimbursing 65% of the approved FDI sub-loans. These fnancial intermediariesthen on-lent to private enterprises. FDI charged a fixed interest rate calculated to reflect the average cost of funds to the banking sector, with the interest varying between 8% for large and medium enterprises and 7% for on-lending to small-sized enterprises. The final interest rate charged to the enterprise was set by the financial intermediary. The design of this component was based on experience with a similar credit line that had been supported by IDA's previous Credit 1131-HA and a survey of 62 restructuring enterprises undertaken during project preparation. The survey had indicated that there was a significant demand for term credit to finance restructuring and investment as Haitian financial institutions were generally reluctant to lend other than short-term. The credit line was sub-divided into loans to restructuring and non-restructuring enterprises. Restructuring enterprises were defined as enterprises undergoing specific industrial restructuring plans. Initially 10 enterprises were selected on the basis of the above-mentioned survey, with more enterprises expected to be - 3- included during project implementation. The remaining credit line was for FDI's "normal lending", financing fixed asset investment for viable existing firms and new export-oriented firms, that needed financial assistance but no restructuring. This component also included a modest guarantee sub-component. The TA component (US$1.4 million equivalent, 12% of project costs) covered a wide range of activities, including: * Strengthening of FDI and of financial intermediariesto improve their project evaluation and supervision capabilities (US$800,000); * Strengthening of the Supervision Department of BRH (Central Bank) to improve regulation and supervision of the banking sector (US$100,000); * Improvement of customs administration (US$350,000), and * Studies to be undertaken by the Ministry of Economy and Finance on banking legislation and regulations, restructuring needs of the banking, non-banking and informal credit sectors. (US$150,000). These activities were included to support industrial restructuring and development effectiveness of the industrial credit, based on the experience of the previous credit line. Specifically, improvement of customs administration was considered important as domestic private enterprises were being hurt by large illegal imports. Also, the banking sector was poorly regulated and needed restructuring, as a fair portion of credit appeared to be delivered by the informal sector. Additionally, it was felt that supervisory and regulatory functions of the Haitian Central Bank should be strengthened. Assessment: Project preparation was diligent in identifying term credit as a constraint to enterprise growth. Preparation also identified significant shortcomings in the overall institutional and policy environmentfor private businesses and the financial sector. It is questionable, however, if the inclusion of a line of credit and a limited TA component, with a number of small activities, were the appropriate instruments to address problems of such complexity. Many of these issues clearly required a strong policy dialogue, considerable technical analysis and commitment at the highest levels to undertake the requisite policy reforms and support the complementary institutional strengthening. A line of credit with some TA components could not have provided the necessary input and leverage to achieve this. At the same time, it was not clear what the ultimate outcome of these TA initiatives was expected to be and no benchmarks ofpolicy improvement were identified. At the implementation level, this design made the Project complex, involving many implementing agencies and stretching the limited implementation capabilities of the public administration. In the end, with the exception of the TA to strengthen FDI and financial intermediaries, which represented a direct and logical link to the credit line, none of the other TA activities were implemented. In retrospect, a credit line and small TA components without clearly defined outcomes and political commitment could not have been sufficient to overcome the significant policy and institutional constraints in Haiti. It should, however, be noted that this Project design was not uncommon at the time that the Project was identified and appraised, and IDA's own assessment of best practice has developed considerably since that time. 3.4 Revised Components: Project components were revised twice, in September 1995 and in December 1997. In 1995, the main objective was to simplify and streamline the Project in the context of the changed circumstances after three - 4 - years of embargo. Withinthe creditline,the difference betweenrestructuring and non-restructuring enterprises had largelydisappearedand the originalenterpriserestructuring planshad becomeoutdated. Manyof the TA activitiesforeseenunderthe originalprojectdesignwere also droppedto reduceproject complexity and restorefocus. Thenew Projectconfiguration becameas follows: * Underthe creditcomponent, (i) the total amountfor enterpriserestructuring was reducedto US$1.1 million equivalent, and (ii) financingavailablefor FDI'sregularlendingand guarantee mechanism was increased to US$8.8 million equivalent. * Underthe TA component, fundsallocatedto institutional development and consultingservicesof FDI increasedto US$1.5million. The othercomponents -- supportto BRHSupervisionDepartment, to the Customsand to Ministryof Economyand Finance-- were eliminated to focusthe Projectalmost completely on the credit line and the institutional strengthening of FDI, the implementing agency. The Projectwas restructured moredeeplyin December1997,when a new privatization componentwas added. * Underthe creditcomponent. (i) financingavailableto supportenterpriserestructuringwas further reducedto US$0.5millionequivalent; and (ii) financingavailablefor FDI discounting facilityand guarantee mechanism wasalso reducedto US$7million. * Underthe TAcomponent the amountallocatedfor the institutional development, trainingand consultingservicesof FDI remainedaboutthe sameat US$1. 5 millionequivalent. • A new privatization TA component (US$2.4 million equivalent) was added,including: (i) Technical assistance to the newly created CMEP (Conseil de Modernisation des Entreprises Publiques) - privatization agency - to prepare privatization of a group of Haitian public enterprises; (ii) Development and implementation of a comprehensive communication strategyfor the PrivateSector Development Program; (iii) Preparationof a reformprogramto modernize the utilitieslegal and regulatoryframework; (iv) TA to Ministryof Economyand Financefor the preparation of a legaland regulatoryframework conduciveto the implementation of the PrivateSectorDevelopment Program. The creditcomponent closedas plannedon June30, 1998,only six monthsafter the date of the amendment, and uncommitted fundswere transferredto the privatization component. The Projectactivitiesthenfocused solelyon privatization activities. As a resultof this expansionof Projectobjectivesand scope,the Projectclosingdatewas extendedthreetimes -- to June 30, 1998,June 30, 1999 and finallyto March31, 2000. Thelast two extensions relatedonlyto the privatization/regulatory reformcomponent. Assessment. As discussed earlier, the inclusion of this privatization/regulation component was a practical response on IDA 's part to be responsive to the Government's request for assistance in this area, and its inability to get Parliamentary approval to new Credits. This approach was responsive and flexible, and helped Haiti maintain its allocation of scarce IDA resources which it would otherwise have lost. It also provided thefledgling Government a vote of confidence and an avenue for improving infrastructure services in the economy. For IDA, this was clearly a high risk component, but it was felt that despite the risks it was importantfor the international community to offer support. -5 - 3.5 Quality at Entry: ICR rating: MarginallyUnsatisfactory Creditand initialTA components As mentioned earlier,the originalobjectivesseemedto be justifiedat the time of Project appraisal. The FDI credit line was also a useful, albeit limited, instrument to provide long-term credit to Haitian private enterprises during a period of difficult economic adjustment, and the inclusion of the TA components addressing several constraints of the policy and institutional environment reflected an appreciation of the complexity of the constraints to the business environment. Such a Project design was not atypical of similar projects at the time that this Project was appraised. Nevertheless, with the benefit of hindsight, the design had some key deficiencies that contributed to its unsatisfactory implementation and slow disbursement of the credit component: * With regard to the line of credit component, appraisal was diligent in assessing the demand for term credit, but the Project did not adequately address the more systemic constraints to term credit and enterprise growth such as unreliable judicial system and lack of procedures for the use of loan collateral that made it very difficult for banks to foreclose on delinquent loans. ( On the implementation side, credit line procedures were cumbersome and slow. In addition to FDI procedures, all sub-loans required prior approval of the IDA. As a result, many financial intermediaries came to the conclusion that accessing FDI resources was not worth the trouble. * FDI term resources were not sufficiently attractive to induce Banks to overcome the above mentioned constraints. Initially, FDI charged PFIs a flat 7 or 8 percent interest rate, depending on the size of the loan. Banks would then charge market rates. After the 1995 credit amendment, FDI retained from 40 to 70 percent of the interest rate charged to the final borrower, even as it was not taking a commercial risk (it took the banking risk). At present, SOFIHDES, FDI's largest client, typically charges enterprises an interest rate in the range of 20 to 25 percent, of which SOFIHDES pays back 60 percent to FDI. * With respect to the TA component, its objectives and scope were very broad with many small TA activities that made the Project complex. Many of these activities involved major policy issues and restructuring, which could not reasonably have been addressed through limited technical assistance, without high level Government attention and intensive policy dialogue and supervision on IDA's part. This problem was eventually resolved in part in 1995 by dropping many of these secondary TA components, whichwere also beingaddressedthroughcomplementary technicalassistancefrom other sources. In retrospect, the Projectmighthavebeenmoreeffectiveif key policy issueswere better definedduringpreparation and corresponding policy reformbenchmarksand actionsidentifiedand monitoredduringProjectimplementation. Thedesignof the Privatization component, seemsto havebeenadequateand its key components --- privatization transactions; regulatoryenvironment; and public communication programproperlyidentified and funded. Considerable workwas done by IDA staff in closecooperation with Haitiancounterpartsin early 1997 to design a strong implementing agency (CMEP); establish an ambitious privatization agenda and timetable;and garnersupportfromthe Government and otherdonors. Whatmay havebeen overlooked was an appropriate exit strategy in case that political support for privatization vanishes. Given the high level of political uncertainty in the country, and the intrinsic political nature of this component, Project - 6 - designcouldhaveincludedclearerperformance benchmarks and corresponding triggersto be appliedin the caseof a weakening of the Government's commitrnent to privatization. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Projectobjectives supportedtwo broad areasof reform: (i) privateenterpriserestructuring and development, represented by the firsttwo objectives and partlyby the institutional strengthening includedin thethirdobjective,and (ii) privatization and improved regulation of public servicesrepresented by the secondandfourth amendedobjectives and partlyby the thirdobjective.In both cases,Project achievements were partial. Thoughmanyof the individual activitieswere implemented with somesuccess, theiroverallimpactin the contextof a volatilepoliticalsituationand waninggovernment commitment was only marginal, thus leadingto an Unsatisfactory ratingfor overallimpact. a) Enterprise restructurine and investment. TheProjecthad limitedinfluence on restructuring and financingof privateenterprises.The availability of term resourcesdid not changethe behaviorof banks. Theyremained risk adverseand most would lendonly short-terrn and fortrade activities. In fact, overall term lendingby Haitianbankshas decreasedsincethe early '90s. According to information receivedfrom variousbanks,term lendingusedto representaround25 percentof bank lendingbut is now downto 10 to 15 percent. Ultimately,FDI becamea smallplayerin the Haitianfinancialsector. As of September 20, 1999,FDI'sloanportfolioamounted to G109million(aroundUS$5.7millionequivalent), i.e. around1.2 percentof aggregate outstanding creditextendedby the bankingsectorin Haiti. Further,the economic embargo, politicaluncertainty and endemicinstitutional weaknesses of theeconomycontinued to havea significant negativeimpacton the overallbusinessenvironment, commercial andpoliticalrisksand the abilityof enterprises to becomemorecompetitive. FDPsline of credit,howeverwellimplemented, had littlechanceof significant impactin the faceof thesehighlyadversecircumstances. b) Privatization and Resulatorv Reform After its restructuring in December1997,improving the efficiency of a few state-owned industrialfirmsand of themain utilitiesthroughprivatization of management or of saleof their equity,becamethe main focusof the Project. Twosignificant industrial publicenterprises were privatized and most of the technicalworkfor privatization of threeutilities completed. However, the privatization of thesethreeutilitiesstopped just short of issuingbidding documents as Government commitment to privatization waned. Considering that the ultimateoutcomeof this component wassupposedto be a transferof the management and/orthe ownershipof theseenterprises to privateoperators, the component must be ratedpartiallyUnsatisfactory.In addition,the regulatory reformsimplemented by the Government werealso onlyhalf-hearted.Althoughsomeprogresshas been achieved towardsestablishing independent regulatorsand soundlegaland regulatoryframework, severalof the key laws,draftedundertheProject, couldnot be enacteddue to absenceof the Parliamentin the period fromJanuary 1999untilthe closureof the Project. Otherimportant activities,suchas public information campaign, were alsonot implemented. It is important to see the Unsatisfactory ratingfor this Projectin the contextof the particularcountry situationduringits implementation.TheProjectwas implemented duringan especially difficultperiodof Haitianhistory. Followingthe oustingof President Jean BertrandAristidein September1991 by a military coup,a 3-yearembargowas imposedon Haiti. Theeconomydeteriorated dramatically.Duringthe embargoyears,GDP fell by 30%, the currencydepreciated by a factorof 3.6 and morethan half industrial jobs werelost. Evenafter the restoration of the constitutional regime,the politicalenvironment remained unsettled,with frequentchangesin Govermment. Altogether, therewere 14 successive governments during - 7- the lifetimeof the Project. Since1995,most of the IDA projectsin Haitihave beenevaluatedas unsuccessful and/orhaveencountered majorsdelays. Projectssponsored by otheragencieshavehad similarresults. Since1997,the paralysisof Government and the conflictbetweenexecutiveand legislative creatednewuncertaintyand furtherdelaysin implementation.TheParliamentwasdismissedin January 1999and a new one was not electedbeforethe end of the Project. In the finalyears of the life of this Project,the momentum for reformall but evaporated and the incumbent Government becamereluctantto take decisions.As a result,donors' supportwas sharplycurtailedin all sectors. This Project-- particularly the politicallysensitiveprivatization program-- was severelyaffectedby the Govermment's lackof action. PROJECT LIFE POLITICAL EVENTS 1990 August 90 - Project becomes effective 1991 September91 - October 94 September 91 - military coup, followed by 3-years Project suspended embargo September 94 - military government steps down 1995 September 95 - First restructuring, project components Embargo lifted and donor aid resumed simplified 1997 October 97 - flour company privatized March 97 - resignation of Prime Minister Decemnber 97 - second Project restructuring, Privatiation objectives and components added From mid 1997on - continued political instabilityand institutional crises 1998 June 1998- credit component closed 1999 November 99 - cement company privatized January 1999 - Parliament dismissed 2000 March 2000 - Project closed 4.2 Outputs by components: Creditcomponent. Initially,US$10millionequivalent was allocatedfor the credit line.Eventually this allocation was reduced to US$7.5 million equivalent. Disbursements under the Project remained slower than expected through most of the implementation period, although one of the main causes for this situation (embargo and its economic consequences) lay outside the control of the implementing agency and the Government. At Project Closing, a total of US$7.6 million was utilized for both lines of credit (76% of the initial estimate) during 4.5 years of component effectiveness, i.e. an average of US$1.7 million per year, while appraisal estimate was US$2.5 million per year. Financial intermediaries largely continued being uninterested in long-term lending and had excess liquidity in most years, except in 1996 when the Central Bank increased the reserve requirement to 53 percent of lending. For the enterprise restructuring sub-component, initially, US$4.8 million equivalent was earmarked to finance restructuring of 10 enterprises identified during project preparation. Eventually, only four restructuring enterprises received financial support for a total of US$1 million, all disbursed within a few months of effectiveness, after which the program stopped for lack of interest from other firms. Input from financial intermediaries and beneficiary enterprises indicates that its procedures were seen as excessively cumbersome, bureaucratic and slow. US$5.2 million equivalent was earmarked for FDI to finance new - 8 - investment and workingcapitalfor thenon-restructuring enterprises. Duringthe 1995Projectamendment this figurewas increased to US$8.8millionequivalent and thenagainreducedto US$7 millionin 1997. In total,the line of credit contributed to financingof 61 loans and 124micro-loans during 1990-91and 1995-97period. The total costsof these investment projectswas approximately G650million (US$45 millionequivalent), to whichthe IDA Creditcontributed approximately 17 percent. Theseinvestment projectsare estimated to havecreatedaround3,000jobs. Of these61 loans,21 went to largeenterprises, 26 to medium-sized and 14 to smallenterprises.The loanswere concentrated primarilyin three sectors: agriculture and foodprocessing,construction materialsand servicesfollowedby exportassemblyand chemicalsectors. Half of the loans werechanneledthrougha singlefinancialintermediary - SOFIHDES specializedin termcredit,althoughan additional10privatebanksparticipated in this loan scheme. Additionally, FDI financedapproximately 30 otherloansthat were not refinancedby IDA. (Moredetailson FDI sub-loansare includedin Section10 - AdditionalInformation) FDI also offered credit guarantees,amounting to G36.7million(aboutUS$2.3millionequivalent), i.e. 35 percentof its loanportfolio. FDI is the only financialinstitution in Haitito providesuchguarantees.The guaranteesare considered by Haitianbankersas a usefulproduct,which shouldhavebeen marketedmore aggressively. However,the relativelysmall sizeof FDI lending,and the obligationthat guaranteesshould stay withina 40 % limitof its loanportfolio,precludedany furtherexpansionof this instrument. FDI also playeda useful role in assistingbanksin assessing enterpriseinvestment proposals,as well as the training of their staff and the provisionof computersoftware. Overall,FDI appearsto havebeena relativelywellrun institution giventhe overallweak institutional capacityin Haiti and has continuedto surviveundervery difficultcircumstances. As of September 20, 1999,FDI's loanportfolioamnounted to G109million(aroundUS$5.7millionequivalent), i.e. around 1.2 percentof aggregate outstandingcreditextendedby the bankingsectorin Haiti. Despiteits smallpresence in the financialsectorin Haiti, it remainsprofitable and self-financing and has beenable to weatherthe embargoand the interruption of IDA funding. Giventhe environment in which it operates,it takesonly limited commercial risk -- only on its guarantee portfolio and with banks -- and its loan portfolio is presentlyquitehealthy(defaultrate is 3.5%). However,its portfoliois excessively dominated by one financialintermediary -- SOFIHDES(64%of current loanportfolioand 54% of guarantee portfolio), which poseshigh risksdue to lackof diversification. SOFIHDESis the only financialintermediary in Haitispecializing in industriallong-termcredit. The Projecthas also financedseveral TAactivities withinthe creditcomponent. Initially,the Projectwas supposedto financea seriesof technicalassistanceactivitiesto supportregulatoryand institutional frameworksof financialand industrialsectors,involving a numberof institutions, includingthe Central Bank, CustomsAdministration and Ministryof Financeand Economy. Thesesub-components, however, had neverbeenimplemented and eventually weredroppedduringthe 1995restructuring. TAto FDI and financialintermediaries was the only originalTA componentthat survivedboth amendments and evenwas increasedfromUS$0.8millionto US$1.5millionequivalent.Eventually, however,only $0.84millionwas utilized. This component financed a wide rangeof activities,including trainingfor FDI and financialintermediaries in areas suchas projectevaluation, microcredit,guarantee management, internalstudieson FDI's operational efficiencyand strategic optionsand a seminarfor credit evaluationstaffof financialintermediaries. Theseactivitieswereclearlyrelatedto Projectobjectivesand had positiveimpacton institutional strengthening of FDI and financialintermediaries.Themajorityof resources,however,(US$0.6million)were usedto financeexternalstudies,suchas a studyon rice and sugarcane industries and a feasibilitystudy for establishing an international port in the south of the -9- country. The relationship between these studies and the Project's credit component were not very clear. In any case, this TA component does not appear to have had a significant impact on Project outcome. Privatization TA Component. Work on public enterprise privatization started soon after the passage of the Privatization Law (Loi de Modernisation des Entreprises Publique) in September 1996, i.e. more than a year before fnancial support was made available under this Project. This work was mostly financed by two successive Project Preparation Facilities for a new TA operation for support of privatization being prepared by IDA. When it was decided to support the privatization activities through the undisbursed funds in this Credit, US$2.4 million equivalent was allocated for this purpose, of which US$1.2 million was eventually spent. In addition, USAID also approved a Trust Fund of US$3.55 million, administered by IDA, to co-finance technical assistance for the privatization of port, airport and telecom utilities. Of this trust fund, approximately US$2.9 million was spent. Eventually, two state-owned industrial firms were privatized, using the capitalization method. Consultations with private sector representatives involved in the bidding indicate that in both cases the process was transparent and professionally managed: * In October 1997, 70 percent of the equity of a flour companv was awarded to a consortium of foreign and local investors, through an open, transparent and competitive bidding process, in exchange for US$9.1 million to be invested in the company. This flour plant is now working at full capacity and appears to be a success story. As a result of increased efficiency and restructuring, the price of bread in Haiti has decreased by around 8 percent while consumer prices increased by an estimated 15 percent. In addition, the plant now produces around 4,000 to 5,000 metric tons of wheat shaft a month, which is in very strong demand by animal breeders to supplement other sources of food (particularly at a time of severe drought in Haiti). It employs 280 full time workers and 50 part-timers and also generates jobs in related sectors, such as transport. 3 In May 1999, sixty-five percent of the stock of a cement comoany was awarded to a consortium of foreign and local investors, for an amount of US$15.6 million, also to be kept in the company for much needed investment, as the cement company ceased operation in 1993. Work is presently under way to rehabilitate the plant. The new management is optimistic about future prospects and expects operations to resume in January 2001. Also in this case the bidding process was open, transparent and competitive. In addition, CMEP has mostly completed the preparatory work for the privatization and associated legal and regulatory reformns of the public utilities in the three sectors included in the credit -- ports: Le Port Public International de Port-au-Prince de l'Autorite Portuaire Nationale (APN); airports: L'Aeroport International de Port-au-Prince de l'Autorite Aeroportuaire Nationale (AAN); and telecommunications: Les Telecommunication d'Haiti SAM (TELECO). The Government, however, has postponed the decision on their privatization and the legal and regulatory frameworks have largely not been enacted. In addition to these three utilities, CMEP has been involved in discussions on privatization of the water company of the Port-au-Prince metropolitan area (CAMEP), the national power utility (EdH) and the two state-owned banks, assisted by he Inter-AmericanDevelopment Bank. In none of the cases, has there been any significant progress on privatization. * Ports: The preparatory work for privatization of Port-au-Prince port was completed including diagnostics and rehabilitation plans, information memorandum, tendering papers and process, draft management contract, as well as the preparation of the draft law and regulations. The technical - 10- studiesrecommended a threeto fiveyear management contractsfollowedby a longtermconcession onceharboroperations were spunoff to a port authority. APN would be transformed intothe regulatorof the harborand maritimesector-- a draftLaw has been preparedto that effect. However, this law stillneedsto be presented to the Parliament. * Airports: Thepreparatory technicalworkfor privatizing the management of the airportof Port-au-Prince and the accompanying legal and regulatory reformswasalso largelycompleted by the consultants financedby theCredit. The technicalstudiesrecommended a similarapproachof an initial management contract,to be followed at a laterstageby a long-term concession. However,the resolution of a numberof problemsremained pendingbeforethe transaction couldgo ahead,including: (i) enactmentof the legal and regulatoryframework for the sector,(ii) decisionon airporttariffs,(iii) rationalization of excesslabor;(iv) definingthe futurestatusof otherHaitianairports;and (iii) resolving the issueof assumption of AANincomeby the Treasury. Significant improvement has been achievedin caseof OFNAC, ('Office Nationalde l'AviationCivile), the technical/safety regulatorof the sector.The staffof OFNAChas beenretrainedandthe new Codede I 'AviationCivile drafted. Most importantly, the safetyand securityof the airportof Port-au-Prince have improvedsignificantly and the airportis no longerratedunsafeby the US FederalAviationAuthority. _ Telecoms: The preparatory workto privatizeTELECOwas also undertakenthroughProjectactivities. Technically the companycouldsoonbe takento the market. Underthe proposedprivatization strategy, a significant portionof the equity-- 40-50percent-- would be transferredto a strategicinvestor,using the capitalization mechanism.However,thereremainsresistanceto privatization and reform,partly dueto publicfears of laborrationalization.Some sectorreform,however,has taken placede facto with increased competition as newlicenceshavebeengrantedto mobileoperators.Also,the telecommunications sectoris alreadyregulatedby an agency,CONATEL, althoughthe regulatory framework is outdated. A new telecommunication law and regulations were draftedunderthe Project, addressingsectorliberalization and privatization, including tariffs,inter-connection pricing,frequency management, and designand responsibilities of the regulatoryagency. The Government is currently organizing a forumto discussthis draft law with ali relevantsectorentities,afterwhichthe draft law shouldbe presented to the Parliament. However,despiteconsiderable technicalwork,politicalsupportfor sectorreformand privatization, which was strongin 1997,has waveredin recentyears.Facedwith the decisionto taketheseutilitiesto the market and to addressthe variousissuesmentioned above,the Government decidedto postponethe transactions. Theregulatoryreformis also incomplete, particularlyin ports and airportssectors. Lawshavebeen draftedto establishmodemregulatorysystemswith independent regulators, but they couldnot be enacted, sincethe Parliament was dissolvedin January1999. Althoughthe Parliament has nowbeenelectedin July 2000, it is uncertain whethersuchlegislation would be passedany time soon. Anotherdeficiency of the privatization processwas an absenceof publicconsultation and an information campaign, whichwasenvisagedas an integralpartof the Projectdesignunderthe revisedproject components. Thecampaignwassupposed to supportconsultation, mitigatenegativepublic perceptions of privatization and addresssomeof thepublic concernsrelatedto the privatization process. Although eventually some information programstook place,with activeparticipation of CMEP,CMEPnever receivedan authorization of the Government to launcha full-scale communication campaign, potentially the first signof the Government's waningcommitment to the privatization process. Overall,the componentis ratedpartiallyUnsatisfactory, considering that the ultimateoutcomesof the transferof the management and/orthe ownershipof the public enterprises to privateoperatorswere - 11 - achievedonlypartiallyfor the flour and cementcompanies.It mustbe acknowledged, however,thatthe technicalpreparatoryactivitiesfor the privatization of the threeutilitieswere implemented satisfactorily. The privatization processcouldstill go forwardif the politicalcommitment was restored. Unfortunately, considering recentdeterioration of the politicalenviromnent in Haiti afterthe Parliamentary elections were criticizedinternationally for irregularities and lackof transparency, mountingpoliticaltensionsbeforethe Presidential electionsand constrainedavailability of assistancefrom international donors,an earlydecision to resumethe privatization processis considered unlikely. 4.3 Net Present Value/Economic rate of return: Not applicable 4.4 Financialrate of return: Not applicable 4.5 Institutionaldevelopmentimpact: The institutional impactof the Projectis considered negligible over the longerrun. Duringthe Project,the staff of thetwo main implementing agencies,FDI and CMEP,receivedextensivetrainingand built up strongcompetencies in their respective technicalfields,with significant personalhumancapitalformation. CMEP,in particularhas beenexposedto world class consultants and its management and staff have clearlyacquireda statureand understanding of privatization strategies,methodsand processeswhich wouldfacilitateany possiblefurtherwork in this field. The Projectalso introducednew standardsof transparency and professionalism in the workpracticeof Haitianagencies. However,despitethese positive outcomesat the levelof personalhumancapitalformation,both institutions have experienced a certain degreeof marginalization by the end of the project. Particularly in the case of the CMEP,withthe end of this Credit,its futureexistenceitselfremainsuncertain. 5. Major Factors Affecting Implementation and Outcome 5.1 Factorsoutsidethe controlof governmentor implementingagency: TheProjectwas stronglyaffectedby politicaleventsand uncertaintyin Haiti: * The militarycoup of September1991,followedby a 3-yearembargo,had a detrimental impact on the economy,overallinvestment and business environment and the demandfor long-term credit. * The unsettledpoliticalenvironment after 1997had a stronglynegativeimpacton the decision-making processof theExecutivebranchof the Government. * Absenceof a functioning Parliamentafter January1999preventedpassageof legislation drafted underthe Projectand hinderedimplementation of the regulatoryreformobjectiveof the Privatization component. 5.2 Factorsgenerallysubject to governmentcontrol: * In the years afterthe liftingof the embargo,deteriorating macro-economic conditions, lack of publicinvestmentin infrastructure and growinginsecurityled to a furtherdeterioration of the businessenvironment. - 12 - * TheGovernment neveraddressed someof the deep-rooted obstaclesthat negatively affected the creditline component, in particularan unreliable judicialsystemand the lackof proper enforcement of contractand collateral legislation. * FDI faceddifficulties in 1995-96in providingrequiredcounterpart funds(35 percentof financing). This was mainlydue to a 3-folddepreciation of the currencyagainstthe US$ since mid-199 1. * As mentioned earlier,CMEPwas not authorized to go aheadwith the plannedpublic communication campaign whichcouldhavehelpedthe Government to mitigatesomeof the negativeperceptions, misconceptions and concernsaboutprivatization. * Morefundamentally, the privatization programwascriticallyaffectedby the reversalin supportto privatization at the highestlevelsof Govermnent. As a result,the privatization program was put on hold in the summerof 1999and neverresumed. 5.3 Factorsgenerallysubjectto implementing agencycontrol: e It mightbe arguedthat CMEPshouldhavebeenmoreforcefulin involving the Government institutions (Ministriesand the CentralBank),regulators(particularly CONATEL), utility management andthe unionsin the privatization process. However,it is likelythat without strongand continuous Government support,CMEPwouldnot have had muchsuccesson that front. 5.4 Costsandfinancing: Thetotal costsof the projectsto be supported by the creditline wereestimatedat appraisalto be US$23.2 million,of whichUS$10millionwas supposed to be financedby IDA,US$5.3millionby FDI and US$7.9 millionby financialintermediaries and finalborrowers (enterprises).Eventually, the total costs of FDI sub-loanssupported by the IDA Creditwashigherthanexpected,US$45.2million,to whichIDA contributed with US$7.6million,FDI US$4.3million,financialinternediariesapproximately US$12 millionand the rest wasfinancedby enterprises or alternative financingsources.Thehighercostsmeanthat a higherproportion of individual projectcostswas financedby alternative means,outsidethe FDI discounting scheme. In additionUS$0.8millionhas beenspentin TechnicalAssistance for FDI and financialintermediaries. As far as the privatization component is concerned, only 50%(US$1.2million)of the amountearmarked forthe privatization TA was disbursed, partlydue to the unfinished privatization agenda,partlydue to the factthat a US$3.553millionTrustFundwas also madeavailableby USAIDto fnance privatization TA, that madethe amountavailableunder Credit2071-HAhigherthan necessary. Finaldisbursements under the Projectamounted to US$9.6millionequivalent (SDR 6.9 million),resulting in a cancellation of US$2.8millionequivalent. (SDR2.2 million)') Due to the change inUS$/SDRexchangerate,the totalof disbursedand undisbursed funds in US$ amountsto US$12.4 millionequivalent, whilethe originalCreditamountwas US$11.4millionequivalent. - 13- 6. Sustainability 6.1 Rationale for sustainability rating: Projectsustainability is unlikely. FDI has nowbeenin operationfor twentyyears. It has successfully weatheredthreeyears of economic embargoand the suspension of IDA fundingand has remainedprofitableand self-financing.However, there arequestionsaboutits presentrole and usefulnessas a stand-alone financialinstitution.FDI's share in the overalllendingof Haitianfinancialinstitutionsis minor.In addition, FDI'sportfoliohas been declining sinceJune 1998,whenthe creditcomponent of this projectclosed. As of September30, 1999, theFDI portfolioarnounted to G104million(aroundUS$6.5million),and was down27 percentfrom the previousfinancial year. Theportfoliois also becomingincreasingly concentrated on SOFIHDES. Only two otherbanksborrowedfrom FDI in the financialyearof 1998-99,downfroman earlierpeakof eleven banks. Privatizing FDI and possiblymergingit with SOFIHDESare solutionswhichshouldbe explored further. The privatization transactions that alreadyhavebeencompleted(flourand cementcompany)are considered successstoriesand are expectedto be sustainable.In the caseof publicutilities,sustainability dependson Government's politicalwillto proceedwith sectorreformsand the privatization transactions.Whilethe technicalworkfor the privatization of the threeutilitiesin ports,airportsand telecomshas been completed, Government actionon proceeding with thesetransactionsis seento be unlikelyin the shortrun. Delaysof morethanone year wouldprobablynecessitate that a considerable amountof the analysisneedto be redone. CMEPis a competently staffedagency,which is still operating,and is availableto providesupportto Government in areassuch as futureprivatization transactions,representing the Stateas the ownerof a portionof the stockof privatizedenterprises,assistingregulatoryagenciesin gettingorganizedor monitoring implementation of management contractsand concessions. However,in the absenceof donors' funding,there arequestionsaboutthe willingness and the capacityof theGovernment to continuefinancing its operations. 6.2 Transitionarrangementto regularoperations: Inthe case of FDI, it is likelyto continueto maintain