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TRANSCRIPT
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: PAD864
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED GRANT
IN THE AMOUNT OF SDR 19.60 MILLION (US$30 MILLION EQUIVALENT)
TO THE
DEMOCRATIC REPUBLIC OF CONGO
FOR A
FINANCIAL INFRASTRUCTURE AND MARKETS PROJECT
February 25, 2014
Finance and Private Sector Development Country Department AFCC2
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
(Exchange Rate Effective January 31, 2014)
Currency Unit = Congolese Franc (CGF) CGF 924 = US$1 US$1.53 = SDR 1
FISCAL YEAR
January 1 – December 31
ABBREVIATIONS AND ACRONYMS ACB Association of Congolese Banks (Association des Banques Congolaises) ACH Automated Clearing House AIMF Association of Microfinance Institutions ASBL Non-Profit Organisation (Association à but non lucratif) ATM Automatic Transfer Service BCC Central Bank of Congo (Banque Centrale du Congo) BDS Business Development Services BIO Belgian Investment Company for Developing Countries CAS Country Assistance Strategy CFEF Project unit for implementation of financing in fragile states (Cellule d'exécution des
financements en faveur des états fragiles) CGAP Consultative Group to Assist the Poor CGF Congolese Franc CGPMP Unit in charge of projects and public procurement (Cellule de Gestion des Projets et des
Marchés Publics) COMESA Common Market for Eastern and Southern Africa COOPEC Association of Cooperatives CQ Consultant’s Qualifications CSD Central Securities Depository DA Designated Account DB Doing Business DFID United Kingdom Department for International Development DRC Democratic Republic of Congo ESMS Environmental and Social Management System ESOM Environmental and Social Risk Management Operational Manual FPM
Fund for Financial Inclusion in DR Congo (Fonds pour l’Inclusion Financière en RD Congo)
FSAP Financial Sector Assessment Program GAC Governance and Anti-Corruption GDP Gross Domestic Product GNI Gross National Income HDI Human Development Indicator IC Indicators of Conformity ICB International Competitive Bidding ICT Information and Communication Technology IDA International Development Association IFC International Finance Corporation ILO International Labor Organization
IMF International Monetary Fund ISR Implementation Status and Results Report KfW German Reconstruction Credit Institute (Kreditanstalt für Wiederaufbau) LOC Line of credit LTA Long-term advisor M&E Monitoring and Evaluation MFI Microfinance institutions MSME Micro, small and medium enterprises MTR Mid-Term Review NCB NGO
National Competitive Bidding Non-Governmental Organizations
NPS National Payment System OHADA Organization for the Harmonization in Africa of Business Law) (Organization pour
l’Harmonisation en Afrique du Droit des Affaires) ORAF Operational Risk Assessment Framework PAD Project Appraisal Document PCU Project Coordination Unit PFI Participating Financial Institutions PIM POS
Project Implementation Manual Point of Sales
PSDCP Private Sector Development and Competitiveness Project QCBS RTGS
Quality and Cost Based Selection Real Time Gross Settlement
SA Incorporated company (Société anonyme) SADC Southern African Development Community SBD SME
Standard Bidding Documents Small and Medium Enterprises
SOE SOFIDE
Statements Of Expenditures Financial Development Agency (Société Financière de Développement)
SSA Sub-Saharan Africa SSS Single Source Selection TA Technical Assistance TORs Terms of Reference UNCDF United Nations Capital Development Fund UNDP United Nations Development Programme USAID United States Agency for International Development WFI Wholesale Financial Intermediary WGPP IDA-financed Western Growth Poles Project
Regional Vice President: Makhtar Diop Country Director: Eustache Ouayoro
Sector Director: Gaiv Tata Sector Manager: John F. Speakman
Task Team Leader: Steven R. Dimitriyev
DEMOCRATIC REPUBLIC OF CONGO Financial Infrastructure and Markets Project
TABLE OF CONTENTS
Page
I. STRATEGIC CONTEXT .................................................................................................1
A. Country Context ............................................................................................................ 1
B. Sectoral and Institutional Context ................................................................................. 3
C. Higher Level Objectives to which the Project Contributes .......................................... 9
II. PROJECT DEVELOPMENT OBJECTIVE ................................................................10
A. PDO............................................................................................................................. 10
B. Project Beneficiaries ................................................................................................... 10
C. PDO Level Results Indicators ..................................................................................... 10
III. PROJECT DESCRIPTION ............................................................................................10
A. Project Components .................................................................................................... 12
B. Project Financing ........................................................................................................ 19
C. Lessons Learned and Reflected in the Project Design ................................................ 19
D. Alternatives considered ............................................................................................... 21
IV. IMPLEMENTATION .....................................................................................................22
A. Institutional and Implementation Arrangements ........................................................ 22
B. Partnership Arrangements ........................................................................................... 24
C. Results Monitoring and Evaluation ............................................................................ 24
D. Sustainability............................................................................................................... 25
V. KEY RISKS AND MITIGATION MEASURES ..........................................................26
A. Risk Ratings Summary Table ..................................................................................... 26
B. Overall Risk Rating Explanation ................................................................................ 26
VI. APPRAISAL SUMMARY ..............................................................................................27
A. Economic and Financial Analysis ............................................................................... 27
B. Financial Management ................................................................................................ 28
C. Procurement ................................................................................................................ 28
D. Social and Environment (including Safeguards) ........................................................ 29
E. Governance and Anti-Corruption (GAC) including Performance of Implementation Agencies ...................................................................................................................... 31
Annex 1: Results Framework and Monitoring .........................................................................32
Annex 2: Detailed Project Description .......................................................................................39
Annex 3: Implementation Arrangements ..................................................................................57
Annex 4: Governance and Anti-Corruption (GAC) and Performance of Implementation Agencies ........................................................................................................................................74
Annex 5: Operational Risk Assessment Framework (ORAF) .................................................83
Annex 6: Donor interventions in the sector ...............................................................................87
Annex 7: Economic Analysis .......................................................................................................89
Boxes Box 1: SOFIDE ............................................................................................................................. 17 Box 2: FPM SA ............................................................................................................................. 18 Box 3: SOFIDE ............................................................................................................................ 48 Box 4: FPM SA ............................................................................................................................ 51 Tables Table 1: Bancarisation in DRC compared to other SSA countries ............................................... 4 Table 2: Coverage of the market ..................................................................................................... 5 Table 3: Microfinance sector landscape ......................................................................................... 6 Table 4: Cost Table by Component .............................................................................................. 19 Table 5: Commercial banks’ lending by sector; end-2012 .......................................................... 49 Table 6: Financial Management Action Plan to reinforce the control environment .................... 61 Table 7: Grant Allocation Proceeds ............................................................................................. 64 Table 8: Thresholds for Procurement Methods and Prior Review .............................................. 69 Table 9: Sector Performance and Performance Indicators for Implementing Agency ................ 81 Figures Figure 1: Distribution of types of bank accounts ............................................................................ 6 Figure 2: Organizational Chart of the Implementation Arrangements ......................................... 23 Figure 3: Organizational Chart of the Implementation Arrangements ......................................... 57 Figure 4: The Quality of Governance in DRC relative to other low income countries, 2012 ...... 75 Figure 5: The Quality of Governance in DRC relative to the regional average, 2012 ................. 76
.
PAD DATA SHEET
Congo, Democratic Republic of
Financial Infrastructure and Markets (P145554)
PROJECT APPRAISAL DOCUMENT.
AFRICA
AFTFW
Report No.: PAD864.
Basic Information
Project ID EA Category Team Leader
P145554 F – Financial Intermediary Assessment
Steven R. Dimitriyev
Lending Instrument Fragile and/or Capacity Constraints [ ]
Investment Project Financing Financial Intermediaries [X]
Series of Projects [ ]
Project Implementation Start Date Project Implementation End Date
18-Mar-2014 31-Dec-2020
Expected Effectiveness Date Expected Closing Date
18-Jun-2014 31-Dec-2020
Joint IFC
No
Sector Manager Sector Director Country Director Regional Vice President
John F. Speakman Gaiv M. Tata Eustache Ouayoro Makhtar Diop .
Borrower: Ministry of Finance
Responsible Agency: Ministry of Finance, Project unit for implementation of financing in fragile states (Cellule d'exécution des financements en faveur des états fragiles, or CFEF)
Contact: Alain Lungungu Title: Project Coordinator
Telephone: No.:
+243 99 81 63 097 Email: [email protected]
.
Project Financing Data(in USD Million)
[ ] Loan [ ] Grant [ ] Guarantee
[ ] Credit [ X ] IDA Grant [ ] Other
Total Project Cost: 30.00 Total Bank Financing: 30.00
Financing Gap: 0.00
.
Financing Source Amount
BORROWER/RECIPIENT 0.00
IDA Grant 30.00
Total 30.00.
Expected Disbursements (in USD Million)
Fiscal Year 2015 2016 2017 2018 2019 2020 2021
Annual 5.00 5.00 5.00 5.00 5.00 5.00 0.00
Cumulative 5.00 10.00 15.00 20.00 25.00 30.00 30.00 .
Proposed Development Objective(s)
The project development objective is to modernize payments infrastructure and increase availability of term financing to Micro, Small, and Medium Enterprises (MSMEs) in the Recipient’s territory. .
Components
Component Name Cost (USD Millions)
Component 1: Modernization of Payments Infrastructure for Inclusive Finance
7.00
Component 2: Technical Support to Financial Market Development
7.00
Component 3: Line of Credit for Medium to Long Term Finance
15.00
Contingency 1.00.
Institutional Data
Sector Board
Financial Inclusion Practice .
Sectors / Climate Change
Sector (Maximum 5 and total % must equal 100)
Major Sector Sector % Adaptation Co-benefits %
Mitigation Co-benefits %
Finance SME Finance 50
Finance Payments, settlements, and remittance systems
50
Total 100
I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. .
Themes
Theme (Maximum 5 and total % must equal 100)
Major theme Theme %
Financial and private sector development Micro, Small and Medium Enterprise support
50
Financial and private sector development Other Financial Sector Development 50
Total 100 .
Compliance
Policy
Does the project depart from the CAS in content or in other significant respects?
Yes [ ] No [ X ]
.
Does the project require any waivers of Bank policies? Yes [ ] No [ X ]
Have these been approved by Bank management? Yes [ ] No [ X ]
Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]
Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] .
OP 4.03 on Performance Standards for Private Sector Activities applies to the Project. .
.
Legal Covenants
Legal Covenants
Name Recurrent Due Date Frequency
Proceeds made available to FPM ASBL 18-Sep-2014
Description of Covenant
The Government shall, within three months after the Effectiveness Date, make part of the proceeds of the Financing allocated from time to time to Category (1) of the table Section IV.A.2 of Schedule 2 of the Financing Agreement available to FPM ASBL under a microfinance contract between the Recipient and FPM ASBL, under terms and conditions approved by the Association.
Conditions
Name Type
Line of Credit Operations Manual and Partnership Agreement Disbursement
Description of Condition
No withdrawal shall be made for Lines of Credit under Category 2 unless the Association has received the Line of Credit Operations Manual as adopted by the Government and a Partnership Agreement signed by the Government and an Eligible Participating Financial Institution, all in form and substance satisfactory to the Association.
Team Composition
Bank Staff
Name Title Specialization Unit
Steven R. Dimitriyev Senior Private Sector Development Specialist
Team Lead AFTFW
Abdoulaye Gadiere E T Consultant Environment AFTN1
Abibou Gaye Consultant Payment Systems AFTFW
Aissatou Diallo Senior Finance Officer Senior Finance Officer CTRLA
Alexandra Bezeredi Regional Environmental and Safeguards Advisor
Regional Environmental and Safeguards Advisor
AFTSG
Alice Dubiwa Zanza Sr Financial Sector Spec. Payments Systems FFIFI
Andrej Popovic Sr. Financial Sector Specialist Sr. Financial Sector Specialist FFIMS
Angelo Donou Financial Management Specialist
Financial Management Specialist
AFTMW
Antoine Ngoupou Mounmemi
Junior Professional Associate Junior Professional Associate AFTFW
Antoine V. Lema Senior Social Development Specialist
Senior Social Development Specialist
AFTCS
Bourama Diaite Senior Procurement Specialist Senior Procurement Specialist AFTPW
Cedric Mousset Lead Financial Sector Specialist Lead Financial Sector Specialist AFTFW
Dileep M. Wagle Consultant Consultant IEGPS
Douglas Pearce Practice Manager Practice Manager FFIDR
Hanneke van Tilburg Senior Social Development Specialist
Senior Social Development Specialist
AFTSG
Ibrahima Dione Consultant Consultant AFTFW
Irina Astrakhan Sector Manager Sector Manager AFTFE
Isabella Micali Drossos Senior Counsel Senior Counsel LEGAM
Jacqueline Veloz Lockward
Program Assistant Program Assistant AFTFW
Juliana C. Victor-Ahuchogu
Senior Monitoring & Evaluation Specialist
Senior Monitoring & Evaluation Specialist
AFTDE
Korotoumou Ouattara Sr. Financial Economist Sr. Financial Economist SASFO
Lisa Kristina Stahl Jr. Professional Officer Jr. Professional Officer AFTFE
Louise Mekonda Engulu Senior Communications Officer Senior Communications Officer AFRSC
Maximilien Onga Nana Consultant Consultant AFTFW
Melissa Landesz Operations Officer Operations Officer AFTSG
Michael Goldberg Operations Adviser Operations Adviser AFTDE
Milaine Rossanaly Finance and Private Sector Development Analyst
Finance and Private Sector Development Analyst
AFTFW
Nicole Kasongo Kazadi Team Assistant Team Assistant AFCC2
Papa Demba Thiam Sr. Private Sector Development Sr. Private Sector Development AFTFW
Specialist Specialist
Philippe Mahele Liwoke Senior Procurement Specialist Senior Procurement Specialist AFTPW
Philippe Marie Aguera Sr Financial Sector Spec. Co-Team Lead AFTFW
Tazeen Hasan E T Consultant Gender PRMGE
Teymour Abdel Aziz Economist Economist MNSF1 .
Locations
Country First Administrative Division
Location Planned Actual Comments
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I. STRATEGIC CONTEXT
A. Country Context
1. The Democratic Republic of Congo (DRC) is slowly but gradually emerging from a long period of conflicts, which have had devastating impacts on the economy and the population. The country suffered two civil wars that claimed more than three million lives and continues to severely affect both economic and social developments. But although recovery has been slow and uneven, the country managed to hold two legislative and presidential elections in 2006 and 2011 respectively, the latter being marred by violence and disputed results. Elections at the provincial and local levels have been delayed because of lack of financial support and need to reform the electoral system. The security situation is getting stabilized in most of the country except in few areas of the Eastern provinces which have been affected by recurrent violence for decades.
2. As a result, DRC is one of the world’s poorest countries with a 2012 per capita gross national income (GNI) of US$230. More than 70 percent of its population, which is estimated at 71 million, lives in poverty (under the US$1.25-a-day poverty line (2006). The country’s Human Development Index (HDI) ranks it last among 187 countries. Moreover, poverty in DRC poses gender issues and geographical disparities: 28 percent of women have never attended school, compared to 14 percent for men; poverty affects more rural areas (75.7 percent) than urban areas (61.4 percent) and the percentage of people in the poverty trap is 35 percent in rural areas compared to 26 percent in urban areas (World Bank, 2007). Food insecurity affects the majority of the population, while more acute in rural areas. In fact, the country’s comparative advantage in terms of tremendous but dormant sources of growth in quasi all sectors seems to fuel conflicts around the control and predation of economic resources, instead of creating the basis of shared prosperity and poverty alleviation. 3. The formerly robust industrial base has deteriorated to the detriment of economic diversification. The main sectors of the DRC’s economy are agriculture (39 percent in 2011), mining (12 percent in 2011), trade, and construction. Industry’s contribution to the economy has been stagnating over the past decade, partly due to difficulties in accessing power supply and lack of economic integration in the country, which impedes the formation and expansion of supply chains to increase value addition.1 The contribution of the manufacturing sector (from over 6,000 manufacturing companies in the 1960s now shrunk to under 200 companies, employing between 50-60,000 workers) to the GDP only increased slightly from 4.2 percent in 2002 to 4.7 percent in 2008. Over 80 percent of manufacturing contribution to the GDP is accounted for by seven sectors: cement, beer, cigarettes, sugar, flour, sodas and bread making. Numerous industrial and agricultural estates are inactive and abandoned, with unknown or disputed property titles, and the economics for their revival dependent on improved infrastructure and investor confidence. Most manufacturing labor force is trapped in very low productivity activities in the informal sector. The stagnation of the industrial sector, however, is in stark contrast with the sustained growth in the construction sector, which has averaged above 10 percent annually over the recent years. In the last decade, services increased by 6 percentage points, partly fueled by growth in telecommunications, finance, real estate and business services.
1 DRC Investment Climate Assessment 2008, The World Bank.
2
4. Although the DRC seems to be recovering, the country continues to face challenges posed to a fragile state. Among these are: (i) weak governance systems and structures; (ii) limited public capacity to provide public goods and/or support private sector led inclusive growth; (iii) huge deficit in physical and institutional infrastructure; (iv) limited industrial base to support economic diversification, transformation and structural change; (v) insufficient extension services to support the development of agricultural supply and value chains; (vi) predatory culture of rent seeking that fuels corruption in all segments of the economic and social activity; (vii) huge information asymmetry that increases commercial, financial and political risk perception; (viii) limited judicial protection of investment etc. that all together tend to dilute prospects for resource based inclusive growth and sustainable jobs creation.
5. Economic growth of about 7 percent annually since 2010 (including 8.5 percent achieved in 2013, and 8.7 percent projected for 2014) has so far not translated into lower poverty and higher employment, due to incomplete consolidation of governance and institutions, a process hampered by preoccupation with festering regional and community conflicts which compound the challenges of economic rehabilitation. This has made it difficult for majority population across the vast country to benefit from the rapid economic growth. The quality of public administration, as measured in the 2012 Country Policy and Institutional Assessment, has stabilized at 2.0 (of 6.0), compared to the average among International Development Association (IDA) borrowers of 2.9. With only 1.2 percent of the workforce formally registered in the private sector, DRC’s population hardly comprehends the rhetoric around macroeconomic stabilization which does not mirror in their daily lives. Young people are most affected by the underemployment, particularly in urban areas. More than 70 percent of those aged 15 to 24 have no jobs, and there is no viable policy yet to deal with this problem. Shortage of jobs feeds growth of the informal sector and, due to weak supportive structures, to social ills, including crime. In addition, a majority of women, despite being main providers to their households in most of the country, and especially in rural areas, are not fully contributing to private sector development due to customary laws that force them to get their husband’s authorization before entering into specific activities such as registering business enterprise, opening accounts, signing contracts, purchasing or pledging property, obtaining credit, or filing lawsuits. In sum, the DRC’s formidable infrastructure, legal, and institutional drags on employment creation have engendered demographic imbalances that compound feelings of social and political exclusion.
6. Remedying this paradox is at the heart of the Government’s economic policies and structural reforms. Stable institutions are beginning to emerge at the national level, but challenges remain to effectively project Governmental authority across the entire country. Addressing deep imbalances will require the establishment of more inclusive and equitable local governance mechanisms. The focus of the Government program, which operationalizes the 2011 Poverty Reduction Strategy (PRS), is on governance, public finance management, promoting a modern public administration, private-sector-led growth, human development, closing the infrastructure gap, and improving security. With support from the World Bank and the International Monetary Fund (IMF), the DRC reached the Highly Indebted Poor Country completion point in 2010 with debt cancellation of US$12.3 billion.
3
7. The country is pursuing regional integration and has recently become the 17th member of the OHADA (Organisation pour l’Harmonisation en Afrique du Droit des Affaires), applicable since September 2012. DRC is also a member of the COMESA (Common Market for Eastern and Southern Africa), the SADC (Southern African Development Community), and ECCAS (Economic Community of Central African States).
B. Sectoral and Institutional Context
8. DRC is vulnerable to global economic shocks related to volatility in markets for its exported commodities, and to security concerns regarding possible food shortages, due to a non-diversified economy dependent largely on primary extractive industries and import of virtually all manufactured products, including processed food. Historically an exporter of agricultural output until collapse of political and economic structures in the 1990s, abundant production of raw agricultural goods across the highly fertile landscape the size of Western Europe is wasted due to poor institutional, physical, technological, and financial infrastructure for delivering goods to markets by a fast-growing, and increasingly entrepreneurial, population. Recent gains in stabilizing military conflicts in DRC’s eastern regions have, however, improved conditions for improvement in political and economic governance, which, with the Government’s strong commitment to reforms in private sector development and public administration, have facilitated the higher rates of economic growth and increased confidence among investors. The financial system, among the least developed in Sub-Saharan Africa, has recovered from financial crisis in 2008-10, and the banking sector been recapitalized by its international and domestic private investors. Foreign Direct Investment at US$3.3 billion in 2012 continues to climb, though primarily concentrated in the extractive industries.
9. Given the structure of economy and markets, it is commonly agreed that future growth in employment and incomes will rest on the competitiveness of sectors dominated by MSMEs, specifically through increased value addition from processing and marketing of the final products, particularly in the agribusiness/food processing sector, as well as in construction and services. These sectors are benefitting from the growing integration of the economy, as new markets sprout and supplier chain linkages expand across the countryside from newly opened transport and trade corridors, in reflection of intensive reconstruction of roads, railways, and waterways, much of it with Bank assistance. However, potential growth is constrained by lack of catalytic finance to entrepreneurs and business that are unable to implement their projects due to mismatch between their needs for longer term, cheaper capital and what is currently available in the Congolese financial system. Furthermore, lack of skilled lending services and innovativeness among Congolese financial institutions when it comes to financing what they perceive to be high risk ventures, especially those in agriculture, combined with their reticence to deal with unfamiliar borrowers or unsecured transactions, cripples the achievement of potentially much higher rate of economic growth and employment in the country. Lagging reforms of the insurance sector, and introduction of alternative methods of financing, such as leasing, factoring, hire-purchase, and the lack of functional institutions dedicated to development finance, housing finance and agriculture finance, also cause drag on capacity of financing the most promising drivers of economic growth - the industrial and agribusiness value chains fostering increasing linkages across the country as the vast infrastructure steadily improves, along with business sophistication.
4
10. Weighing down private sector development and entrepreneurship is the regulatory and administrative burden on business, making DRC among the most difficult countries to do business in the world. The 2014 Doing Business Report ranks DRC in 183th place out of 189 countries studied in terms of cost of doing business, with performance in 7 out of 10 indicators measures as ranking in the bottom quintile of all countries. While reform of the business regulatory environment is prominent among Government priorities, as reflected in recent progress across a broad range of investment climate improvements, it is still in its nascent stages and will take considerable time to produce appreciable impact on the economy. Focus on making business registration easy and convenient for investors has shown remarkable success (reduced duration of process from over 150 days in 2007 to current 25), but with limited results due to high costs (approximately 200.1 percent of per capita income, on top of the required paid-in minimum capital of 909.1 percent of per capita income). The cumulative effect of these administrative barriers and the overall laggard development of the governance and other infrastructure explained above were also reflective of findings of the DRC 2010 Enterprise Survey of private business owners and managers, which highlighted the poor access to finance and electricity, along with the prevalent practices related to informality, as the major obstacles faced by entrepreneurs in DRC.
11. Access to finance was identified as the biggest constraint to business growth by 54 percent of firms surveyed in the Enterprise Survey. Amidst improving regulations and a fast growing but still small and underdeveloped banking sector, domestic credit continues to be scarce and expensive, particularly for MSMEs that have one of the lowest levels of access to bank loans in Sub-Saharan Africa. As presented in Table 1, only 11 percent of firms had a bank loan or line of credit (half of the regional average) in 2010. However, the results vary substantially by firm size. Smaller firms were more than 1.5 as likely as large firms to rank access to finance as a major concern (77 percent and 50 percent respectively). In addition, smaller firms reported higher values of collateral needed for a loan, at 283 percent of the loan amount – regardless of the size; the average value of collateral needed is significantly higher in the DRC, at 261 percent compared to 160 percent regionally.
Table 1: Bancarisation2 in DRC compared to other SSA countries
DRC
Enterprise size (number of employees) Sub-Saharan Africa
Small (5-19)
Medium (20-99)
Big (100+)
Percentage of companies with a bank loan 11% 9% 13% 21% 22% Percentage of companies with access to a bank to finance their investments 7% 3% 7% 23% 15% Percentage of companies with access to a bank to finance their working capital needs 9% 7% 11% 18% 20% Percentage of companies identifying access to credit as a major constraint 73% 77% 70% 50% 45%
12. This low market penetration rate by banks is due to (i) high risks and costs of lending; (ii) low profitability of banks during their rapid expansion phase; (iii) high cost of liquidity; (iii) weak capacity for long-term or large-scale investment project finance; (iv) constraints imposed 2 French term for “penetration of banking services”.
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by rebuilding confidence in the banking system; and (v) slow development/reform of the nonbanking financial sector, including insurance, pension system, leasing, secured lending, and other forms of financing.
13. The challenges faced by businesses and individuals in accessing credit in the DRC can also be partly explained by conditions in the banking sector. The Congolese financial system is dominated by relatively small banks by international standards. The 18 licensed banks in operation, which represents 95 percent of the total financial system, have total assets of US$3.7 billion (19 percent of GDP) and deposits of US$2.7 billion (14 percent of GDP) at end of June 2013. The banks are well capitalized, though they contend with very high operating and liquidity costs, resulting in declining capital adequacy ratio, and amplifying the risks posed by poor data reliability and the sector’s significant vulnerability to macro-shocks. The four most important banks hold nearly 60 percent of total banking assets and about 62 percent of deposits. Operations are not very sophisticated and consist of collecting deposits (mostly demand deposits in U.S. dollars from companies’ working capital) and short-term financing operations, resulting in lack of availability of medium and long term lending due to lack of term resources in the banking system (term deposits represent 1.7 percent of GDP, compared with sight deposits of 14.6 percent). Corporate lending, therefore, is mainly to finance short-term business needs and export/import activities. With the exception of microfinance, credit is restricted primarily to the largest companies or loans that are cash collateralized or benefit from offshore guarantees. Trade finance (letters of credit, performance bonds) is developing with the recent influx of large investment projects. The banks also contend with very high operating and liquidity costs. Table 2 below describes the type of financial institutions used by MSMEs and corporates.
Table 2: Coverage of the market
14. Financial intermediation is underdeveloped. The hyperinflation seen in the 1990s destroyed the old banking system and confidence of Congolese in the banking system. As shown in Figure 1, less than 5 percent of the population holds a bank account and only 16.2 people per 1,000 held bank deposits at the end of 2012. The number of branches per 100,000 inhabitants went from 0.44 in 2005 to 0.66 in 2011, a rise of more than 50 percent; the figure is still very low, though, and hence very likely to keep on growing rapidly in future. However, in the past five years the financial sector has grown twice as fast as the real economy. Private sector lending has risen by an average of 22 percent since 2010, and the banking sector’s consolidated assets were up 30 percent in 2012 alone.
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Figure 1: Distribution of types of bank accounts
15. The microfinance sector is the fastest growing sector of DRC economy, having grown from 100,000 clients in 2007 to over one million clients in 2013, and achieving on average 38 percent of women participation. Recent developments in bancarisation (penetration of banking services, in this case, for example, the policy to dispense civil service payrolls through direct deposit at commercial banks) and expansion of banking coverage, especially in the Eastern provinces, are further boosting rapid microfinance growth across the less served regions, especially among the majority masses of disadvantaged and poor population. However, compared to the size of the country, the microfinance sector remains tiny and faces many challenges. Savings and loan cooperatives were severely affected during the crisis in the 1990s but development of the sector started again in 2001. Out of the one million customers as of end-December 2012, 56 percent of total accounts opened were in savings and loan cooperatives and 44 percent in MFIs. Two banks that specialize in loans to micro, small, and medium enterprises (MSMEs) account for 51 percent of deposits and 42 percent of the credit of the entire microfinance sector (see Figure 2). Overall deposits rose from US$67 million to US$162 million and loans from 50 million to 112 million between December 2009 and June 2013.
Table 3: Microfinance sector landscape
Institutions
Number
Deposits (US$ million)
Loans (US$ million)
Banks (specializing in loans to MSMEs) 2 150 69 Savings and loan cooperatives 119 122 66 - Primary savings and loan cooperatives (COOPEC) (117) (112) (62) - Central savings and loan cooperatives (COOCEC) (2) (10) (4) Microfinance institutions (MFIs) 23 22 29 - Micro-credit enterprises (18) (2) (4) - Microfinance companies (4) (20) (24)
TOTAL 144 294 164 Source: BCC and FSAP (2013) 16. The rapid expansion of the microfinance industry has been underpinned by technical assistance and financing from development partners, through the Fund for
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Financial Inclusion in DR Congo (FPM). The FPM, set up as a non-profit organization (ASBL in French) in 2010 by international donors including KfW, UNDP/UNCDF and the World Bank (through the ongoing PSDCP), and managed by the Frankfurt School of Business (Germany), presently enjoys a situation of monopoly in the area of technical assistance (TA) and medium term financing of MFIs in DRC. The FPM ASBL’s 2013-2018 Business Plan calls for splitting the FPM ASBL into two separate institutions under the same FPM umbrella, with FPM ASBL retaining provision of TA while a newly created entity FPM SA would specialize in medium term finance to Partner Financial Institutions (PFIs), including MFIs and banks. The FPM SA, which would be a corporate for profit institution capitalized with approximately US$40 million from founding investors KfW (lead), Dutch CORDAID, Belgian BIO, and DFID, is finalizing internal investor agreements, having already secured agreements with the Ministry of Finance, before applying for registration in March 2014. Documents for operating license from the BCC (Banque Centrale du Congo, Central Bank of Congo) have been filed and awaiting corporate registration before being processed. The new FPM SA is expected to be operational by mid-2014.
17. Even with the success of FPM ASBL, which focused on a small number of most viable MFIs and downscaling banks during its brief operation to date, the majority of the country still remains underserved, with the exception of Kinshasa and the East part of DRC (North and South Kivu), where most MFIs are located. However, a number of institutions have started discussions with commercial banks and telecom operators to offer e-money services. One MFI has developed a large network of agents equipped with terminals using digital fingerprint recognition to authorize financial transactions (savings withdrawals and deposits, payment of loans due, etc.). 18. There is an urgent need to strengthen the sector and improve the regulatory environment by providing adequate solutions that will contribute to its growth. The sector is negatively impacted by governance, financial management and internal audit deficiencies. As a result, among the 36 main savings and loan cooperatives and MFIs, representing 85 percent of the sector assets, considered by BCC as priority institutions, only two (three percent of the total sector) achieved operational self-sufficiency as of end-June 2013, with a sector’s average risk portfolio indicator (PAR 30) far above the regulatory benchmark of five percent. The number of recovery and liquidation plans has increased significantly (from 29 to 80 from 2011 to 2012) and 23 institutions were liquidated in 2012 (three in 2011). Institutions with negative performance account for 18 percent of sector assets, and those with negative equity, nine percent. By March 2013, 37 largely inactive institutions were put under involuntary liquidation status, though the BCC recently enforced a detailed prudential regime for microfinance. Licensing conditions have been strengthened (the minimum capital of microfinance companies authorized to take in public savings was set at US$350,000 in 2013 and will increase to US$700,000 in 2017) along with operating conditions (prudential standards, loan classification and provisioning, and performance indicators), more robust supervision of the sector continues to be a major challenge for BCC. Its 2012-2013 Microfinance Action Plan rests on four pillars: (i) reforming the sector’s legal and regulatory framework, (ii) having a reliable database that can be updated, (iii) conducting surveillance in an efficient manner, and (iv) building an inclusive financial sector. The BCC is also preparing a directive on consumer protection.
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19. The low level of bank intermediation is also due to unsophisticated credit culture among consumers. According to the banks, this is explained by the lack of well-articulated projects, thereby requiring resort to liquid guarantees, and by the inadequacy of promoters to prepare their business plans in a secured manner from the point of view of banks. Many of the credits are issued against proofs of cash flow profiles consistent with the repayment profile, rather than accepting third party guarantees that would be difficult to execute. Partial credit guarantee schemes have been provided by the United States Agency for International Development (USAID) on a pilot basis but without success in inducing greater lending, due to prevalence of other risks and conditions explained above, as well as complex paperwork filing and reporting regime. 20. It is also acknowledged that MSMEs’ productivity in DRC is constrained by lack of access to critical know-how, including: (1) appropriate technology, market information, and linkages; (2) product development and marketing; (3) human resource management; (4) quality management and efficient production systems; and (5) accounting and financial management. For a number of reasons, appropriate knowledge providers are not available in the quantity, price and quality range required by MSMEs. Local Business Development Services (BDS) providers - which can include specialized consulting firms and individuals, formal education institutions, business membership organizations, non-Governmental organizations (NGOs), and firms within the value chain such as input suppliers - have limited capacity or lack the necessary skills to offer products that are appropriately tailored for MSMEs. This is particularly true for sector-specific technical training. Most providers tend to use off-the-shelf products that are usually created for larger, more formal businesses. On the demand side, MSMEs make little use of BDS, partly because they feel unable to afford such services and partly because they lack information about these services and the benefits they can derive from their use. However, to this end, the IFC’s implementation of training and advisory programs which inform on the use IFC’s SME business planning tool “Business Edge” has been widely praised and well received by beneficiary banking institutions as well as individual entrepreneurs. 21. Commerce and intermediation are also hampered by high transaction costs of settling payments, most of which have to be in cash due to lack of modern payments system that can settle accounts, clear payments and process funds between traders, investors, banks, businesses, as well as between various levels of Government. DRC’s National Payment Systems is the least developed among African countries. Cash has remained the most widely used payment medium in the consumer sector in DRC, accounting for more than 70 percent of most business transactions. Inter-bank domestic transactions within the capital city can take 3-4 weeks in some extreme cases to clear checks or wire transfer. It is also costly and fraught with risks of erroneous settlements, fraud, delayed payments, and an overreliance on cash handling, even for large amounts (which adds costs, danger, risks, and overall discourages business initiative). Only a few banks support the use of credit cards issued by international organizations such as American Express, VISA and Master Card, and while almost all commercial banks offer stand-alone ATM services, there is no interoperability between the delivery channels and their respective customers. The few Point of Sale (POS) services in the country are mainly available in large retail outlets and hotels. Government payments are predominantly made by check, while, for salary payments to civil servants are distributed by banks upon receipt of bulk checks from ministries, along with paper instructions and customized payment schedules. The manual,
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paper-based process of payments clearing and settlement results in cumbersome, costly way of doing business in DRC, and, moreover, in large amounts of funds unavailable to the economy, due to slowly-processing, clogged financial networks which are unable to pump the funds through the economy/society fast enough to feed the liquidity needs of economic actors, households, and civil service, including the flow of funds among and between Government institutions and civil service. The manual systems furthermore impede more efficient performance of the Anti-Money Laundering/Countering Financing of Terrorism (AML/CFT) activities of the relevant authorities in Congo. 22. In addition, the DRC lacks other key pillars in the regulatory and financial infrastructure that facilitates access to credit, particularly for SMEs. These include effective collateral and credit information systems, as well as strong disclosure requirements and protection for minority shareholders. As in the case of credit bureaus, effective movable collateral regimes can contribute to greater access to finance for all firms, but may be particularly important for SMEs that traditionally do not have large assets to use as guaranties for a loan. Development partners led by KfW and DFID have taken lead to assist with establishment of credit bureau and movable collateral framework, in conformance with OHADA requirements. 23. The Bank has provided assistance in improving economic development and high rates of economic growth through projects such as the Private Sector Development and Competitiveness Project (PSDCP), which has delivered improvements in public sector enterprise and banking governance, investment climate, bank and microfinance regulation, and initiated the modernization of the National Payments System infrastructure for which the additional financing support will be provided by the proposed Project. The PSDCP was also a co-founder and financier of the FPM ASBL, alongside KfW and UNDP/UNCDF. Both the National Payments System and FPM components of the PSDCP required innovative institutional and technological architecture; including from initial strategic visioning and planning, to legal instruments, financial multi-stakeholder agreements and long periods of policy dialogue and public consultations.
C. Higher Level Objectives to which the Project Contributes
24. As an integral part of the Bank’s FY13-FY16 Country Assistance Strategy (CAS) directly contributing to Strategic Objective Two, to “boost competitiveness to accelerate private-sector-led growth and job creation”, this project addresses the overall World Bank objective of reducing poverty and boosting shared prosperity. The Bank’s strategy in DRC to support growth will focus on boosting competitiveness of targeted highest-potential industries, through removal of key binding constraints to growth in these areas, including infrastructure, access to finance or productivity-enhancing knowledge and skills, including through linkages, partnerships, entrepreneurship, or direct financial interventions. It will leverage reforms already implemented in areas of investment climate, disengagement of the state from the economy, regulation, and financial sector/innovative payment systems development. This project fits into the overall Bank approach in DRC and is comprehensively supportive of the Government’s Poverty Reduction Strategy in that, it will provide growth opportunities for the Congolese financial sector, as well as availability of scarce financing for MSMEs that is needed to propel economic growth and inclusion to new heights.
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II. PROJECT DEVELOPMENT OBJECTIVE
A. PDO
25. The project development objective is to modernize payments infrastructure and increase availability of term financing to MSMEs in the Recipient’s territory. This will be achieved through (i) payment system modernization, (ii) MSME finance market development, (iii) provision of medium to long term financing support to MSMEs development, and (iv) promotion of financial inclusiveness.
B. Project Beneficiaries
26. Beneficiaries include entrepreneurs across the economy, from micro to large enterprises, in obtaining financial resources to start or scale up their business in order to increase employment and incomes, from greater availability, efficiency and confidence in the financial sector’s ability to provide expedient and targeted services. Tangible solutions offered by the project consist of longer duration loans at reasonable cost and the settlement of payment transfers and other financial transactions in an efficient and accurate way that would make their business more competitive. Individual citizens of DRC would have greater access to financial sector services in areas where these were not previously offered, through expansion of microfinance and banking industry, as well as of electronic (including mobile) and branchless banking operations, across the country. Government payment transfers across the public sector would also be faster, of higher quality and cost-efficiency, thereby supporting revenue management and fiscal decentralization. Beneficiaries also include financial institutions that will receive technical assistance and/or financial support such as FPM, SOFIDE and BCC, as well as Government.
C. PDO Level Results Indicators
27. The measurable outcome indicators include: (i) Number of transactions increased through the Real Time Gross Settlement System (RTGS); (ii) Number of transactions increased through the Automated Clearing House (ACH) in US dollars (USD); (iii) Number of transactions increased through the Automated Clearing House (ACH) in Congolese francs (CGF); (iv) Reduction of portfolio at risk in the microfinance sector; and (v) Volume of cumulative Bank funding provided to SMEs.
III. PROJECT DESCRIPTION
28. The Project will finance activities already begun under the PSDCP, supplement them with additional resources to strengthen financial inclusion and institutional capacity, and provide a line of credit facility for medium to long term finance to MSMEs. The overall financing framework being put in place will capitalize on new market knowledge, technical capacity and innovative/custom market offerings to be generated by the Project as a demonstration pilot requiring only modest funding that could be easily scaled up later by IDA as well as other partners.
29. The Bank is already financing the modernization of the DRC National Payment System (NPS) and the FPM ASBL through the PSDCP, which will close in June 2014. The
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PSDCP provided for the establishment of regulations and supervision capacity at the BCC and has been providing technical assistance for in these matters and on financial inclusion (including on literacy, use of mobile technology, early dialogue on consumer protection, etc. since the mid-2000s). However, access to inclusive finance remains an impediment, in particular for MSMEs that wish to move up the value chains either through their vertical or horizontal integration, involving capital investment, or through multiparty contractual frameworks that can be difficult for banks to finance without additional capacity, tools and new approaches to cash-flow based securitization. Moreover, the speed, accuracy and transparency of financial transactions in DRC have retarded reliance on the formal financial sector in conduct of much of commerce within DRC. The project will thereby make possible real-time, accurate payments settlements among business investors, households, and Government entities, enable the interoperability of electronic funds transfer across the economy, including through mobile forms of payment and banking. The new payment system will strengthen anti-corruption and anti-money laundering activity in DRC, improve integrity and trust in correct reconciliation and settlement of payments for commercial transactions, accelerate and reduce costs of money transfers, thereby increasing cash flows to the economy, and improve revenue management by the Government, especially helping inter-Governmental funds transfers between the central and provincial authorities. By continuing to strengthen the microfinance sector by expanding access to MFIs to secondary cities and underserved areas, while providing financial and technical support to the regulatory authority at the BCC with a view of achieving greater inclusiveness, the project will also provide a sustainable and inclusive demonstration model for medium to long term financing solutions to support development of MSMEs as well as of the financial sector.
30. This project addresses the overall World Bank objective of reducing poverty and boosting shared prosperity. It also addresses the imperatives of improving governance, transparency, and public trust, as well as wider social inclusion in distributive impact, especially in terms of gender equity. Addressing corruption and improving governance in fragile states like DRC calls for the establishment of transparent regulations and procedures, and emphasize the need to strengthen public finance management (PFM), including through the setting up of a strong payment system. The operationalization of a NPS would lead to more effective controls, increase in revenue collection and greater budgetary controls in the country. In addition, a modern payment system will help develop the remittance systems and reduce transaction costs, thus contributing to economic reconstruction and development, given the magnitude of their flows. Entrepreneurs across the country and their families will benefit from great access to finance and increased revenues, including women who will also receive tailored technical assistance on financial literacy. The project will build on ongoing regulatory reforms to the current Family Code which for now requires spousal permission to open a bank account and access loans. Once the reformed Family Code, prepared with support from the Bank under the DFID-funded Investment Climate Diagnostic, is adopted by the Government (expected around March 2014), the project will build on it to increase gender balance in financial inclusion.
31. Two of the three components of the Project are already under implementation under the Private Sector Development and Competitiveness Project (PSDCP), and will begin disbursing immediately upon effectiveness. The Project will support the continuation of activities of Components 1 and 2 using the same institutional arrangements already in place, and being in possession of all technical specifications already developed under the PSDCP, including the full set of all bidding documents required for completion of modernization of the National
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Payments System (for all elements, including ATS/CSD, Telecommunications Network Infrastructure and National Payments Retail Card Switch). Procurement for the first two, and partial implementation, will have been completed by Project startup. All disbursement for Component 1 is expected to finish before Mid-Term Review (September 30, 2017). Moreover, the Project will continue to utilize the same legal agreements and governance arrangements currently administering the usage of IDA funds by the FPM ASBL, which was setup under the PSDCP, in collaboration with KfW and UNDP/UNCDF. The FPM ASBL is already fully compliant with Bank OP10.0, and it has been operating under the Bank’s FMS and Procurement guidelines, as well as enforcing IFC Environmental Safeguard Performance standards, since its inception in 2011. The spin-off entity FPM SA, which will provide medium to long term financing to banks, will utilize the same framework, as confirmed by its investor council and management team already in place.
32. The three components are described below. A more detailed description is available in Annex 2.
A. Project Components
Component 1: Modernization of Payments Infrastructure for Inclusive Finance (US$7 million IDA) 33. Modernization of the infrastructure serving the nation’s financial system will focus on the operationalization of a new National Payments System (NPS) providing real-time, fault-free electronic processing of financial transactions across the economy. This will support deepening and expansion of the banking sector among unbanked population, and will improve Governmental fiscal services in the collection, accounting, and disbursement of funds. It will also add incentives for formalization of enterprises, for cash-less funds transfer among all stakeholders, and for greater lending by financial institutions. Achieving this goal under the Project will entail:
a. Completion of the implementation of an Automated Transfer System (ATS). The ATS will provide both Real Time Gross Settlement (RTGS) and Automated Clearing House (ACH) capabilities for the clearing and settlement, within one integrated system, of all interbank electronic payments. It will provide a single, unified system for the processing of all payment types, irrespective of their characteristics. The ATS is combined with the Central Securities Depository (CSD) to form the backbone of the Congolese’s national payment system infrastructure, all of which will have been designed and procured (but not implemented) under the PSDC project, along with the Telecommunications Network Infrastructure (which, in turn, would also support the future centralized microfinance data processing center, i.e. “microfinance hub”);
b. Establishment of a National Payments Card Retail Switch will allow the interoperability and interface between all financial institutions, primarily to provide routing for: ATM and POS Transactions, Visa and MasterCard gateway, Mobile Banking Transactions and Internet Banking Transactions. Technical assistance will be provided by strategic advisors and system integration consultants at both the NPS Steering Committee and Expert Group levels at the BCC, to ensure proper governance and
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guidance at key strategic and technical junctures, as well as to support the capacity strengthening of the new Payment Systems department at BCC.
34. There are key legal and policy prerequisites to ensure the implementation of an efficient payment infrastructure, including the passing of the draft payment law, a clear commitment to processing of both foreign currency (US$) and Congolese franc (CGF) transactions, and the choice of a settlement agency that would be acceptable to the private banking sector.
35. All of the technical components of the NPS were designed over the past two years under the PSDCP, and all technical specifications (“bidding documents”) have been prepared. Procurement has been completed for the ATS/CSD and Telecommunications Network Infrastructure, and the first stage of their implementation will have been financed by the PSDCP prior to its closure in June 2014. The remainder of implementation will require financing from the proposed Project, as would the entire procurement and installation process for the National Payments Card Retail Switch (for which the bidding documents have also already been prepared under the PSDCP). Technical assistance currently being provided under the PSDCP will be sustained under the Project, providing expert advice on systems integration, policy decisions pending (e.g. choice of settlement agent, completion of legal process for establishment of the National Payments Card Retail Switch enterprise, amendments to laws on payment systems) and for capacity building in the operations and oversight of the new NPS operations. This entire Component is expected to be fully implemented and all IDA disbursed within the first two years of the Project, i.e. by Mid-Term Review.
Sub-component 1.1: Physical Infrastructure (ATS/CSD, Telecommunications Network Infrastructure, and National Payments Card Retail Switch) (US$5 million IDA)
36. The ATS will provide an efficient, final and irrevocable settlement of interbank obligations, and will enable the BCC to monitor and manage systemic risk and to implement its monetary policy objectives, through an effective mechanism that directly impacts the market. The ATS, CSD, and Network Infrastructure will be established to provide a single, unified system for the Processing of all payment types. The ATS (including CSD and Telecommunications Network Infrastructure) is being procured competitively under the PSDCP, with expectation that the first phase of acquisition and customization of technical equipment will be completed by June 2014, following resolution of an incidental issue during the procurement process that has resulted in a complaint by one of the bidders. It is projected that an additional six to eight months of implementation will be needed to complete the installation work after closure of the PSDCP in June 2014, supplemented by completion of testing, documentation, training, and oversight support that will be needed during the phases of organizational capacity development at the BCC.
37. The National Payments Card Retail Switch will connect all the commercials banks, the BCC’s ATS, and third party processors for electronic payments. The Switch solution will also have an interface to multiple core banking hosts: Bilateral, Consortiums, Credit Card Host, Local Financial Switch, MasterCard and VISA. It would provide for absolute interoperability among the private sector electronic payment networks, which will in turn promote diversified electronic payment products and help in expanding e-commerce activities
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across DRC, as well as pave way for further integration of cross-border electronic payments regimes. The commercial banks having ATM/POS/e-Payment Gateways/Mobile Payment Switches, or which are connected to any other shared switch network, will be able to send inter-bank (or inter-switch) payment instructions to the National Payments Card Retail Switch for clearing and settlement purposes.
38. The improved access and integration of financial services will enable growth and interoperability of payment accounts, thereby feeding expansion of the banking sector, while increasing the profitability of instruments and services provided to consumers, private sector, Government agencies, and other payment service providers. An implementation process of approximately two years will be required to fully implement and operationalize the new Switch which is to be housed as a newly created enterprise under a public-private partnership (PPP) between the BCC and commercial banking sector. Interagency protocols have already been prepared for the creation of the Switch enterprise, which is initially to be housed at the BCC facilities). The Project will contribute to financing of the acquisition and installation of all software and network hardware required for ensuring interconnectivity with the Switch, along with the costs of technologically outfitting the data center facility, and providing capacity building for the newly hired organization.
Sub-component 1.2: Technical Assistance and Capacity Building (US$2 million IDA)
39. Requisite technical assistance, training and coaching to BCC to support the implementation of above technologies and functionalities will be provided under the Project, as was done under the PSDC project. The assistance is essential due to high-risks associated with the adoption of modern technologies and new organizational functions to coordinate, supervise and service the nation’s financial system, especially in recognition of very weak capacity within the BCC to manage the complexity of all projects and multiple vendors, under circumstances which require very efficient planning and execution with little margin for error, and considerable time-sensitive synchronization of activities. New organization units at the BCC will be provided close coaching and training in the oversight and operation of the NPS.
40. This capacity building effort will build on the preparatory work already launched at the BCC with support from the FIRST trust fund, starting with the implementation of a department at the BCC to operate and oversee the NPS, which was done in early 2013. The FIRST project is also assisting with the drafting of enabling amendments to banking and payment laws both to support the new NPS operations within DRC, as well as to harmonize them with those of DRC’s regional trade partners in SADC, COMESA, and others in order to comply with regional directives and facilitate integration of DRC into regional trade and investment flows.
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Component 2: Technical Support to Financial Market Development (US$7 million IDA)
41. This component provides technical assistance to support (a) the rapid growth of the microfinance industry with greater focus on inclusion; (b) MSME development, including along value chains in key growth sectors; (c) institutional capacity building for sustainable provision of medium-to-long term finance; and (d) public-private dialogue to support evidence-based reform advocacy, including research and analytic works, workshops, etc. in support of financial industry associations.
Sub-component 2.1: Strengthening Microfinance Regulation and Supervision by BCC (US$1 million IDA) 42. The Project will provide capacity-building and expertise to BCC to: (i) implement a robust MFI intervention and resolution framework; (ii) use more effectively its core banking systems in data management/analysis for more effective supervision of the MFI sector, and (iii) organize the Apex Institutions of MFI and cooperatives networks in each of the Recipient’s provinces for easier surveillance, regulation, and better targeting of future investment in capacity building and other forms of assistance.
43. It will continue to strengthen BCC’s capacity and impact, by providing one long-term advisor (LTA) who would provide part-time support on as-needed basis over two years, along with a discretionary budget for just-in-time (JIT) experts to be deployed for specific needs of short duration in agreement with the client and Bank. Regulatory effectiveness is severely challenged by lack of capacities to address current cases of insolvency that carry some systemic risk, especially in the Eastern provinces which represent 61.9 percent of MFIs assets in the country. The LTA’s focus would be (in support of the BCC regulator’s agreed priorities for 2014-2017) to provide expert inputs and coaching for (a) implementation of a robust MFI intervention and resolution framework, including advisory assistance to actual cases in the field, (b) more effective use of Core Banking Systems at the BCC (or specialized software systems in place or to be acquired by the MFI regulatory unit of BCC) in data management/analysis for more effective supervision of the MFI sector, and (c) organizing the apex institutions of MFI and cooperatives networks in each province of DRC for easier surveillance, regulation, and better targeting of future investment in capacity building and other forms of assistance.
44. The LTA would provide coaching to the regulator on effective coordination with KfW and other development partners in planning and executing their collective programs to support expansion of consumer literacy and protection, building upon efforts already begun under the PSDC project in collaboration with IFC and CGAP on basic legislation and institutional/regulatory establishment.
Sub-component 2.2: Technical Support to Microfinance Expansion and Inclusion (US$3.5 million IDA)
45. The Project will provide US$3.5 million to supplement the approximately US$1.3 million IDA still available at the FPM ASBL from the ongoing PSDC Project, in funding of the 2014-2018 Business Plan to finance capacity building for MFI, financial cooperatives and commercial banks interested in offering their services to MSMEs and entrepreneurs. This
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additional financing aims to strengthen the capacity of (i) a few, selected MFIs, including but not only those interested in upscaling to service SMEs, and of (ii) commercial banks, especially those expanding branchless banking and including those interested in downscaling, to tailor their lending to the specific needs of MSMEs and entrepreneurs. High growth sectors will be especially targeted, such as agribusiness and services, particularly in currently non-served areas around secondary cities throughout the country, with strengthened emphasis on gender balance and youth employment. The IDA funding will complement contributions from KfW and UNDP/UNCDF. The FPM ASBL’s new business plan, currently under preparation, is expected to be approved by their Board in March 2014.
46. The project will support FPM ASBL’s communication program that includes organizing regular forums in different parts of the DRC, particularly in remote cities around secondary cities. Topics to be covered in 2014 include e-banking, access to finance for all and especially for women, as well as an international savings day. The project will also support the ongoing monitoring and evaluation system, to track impact of financed activities on targeted populations as well as collect statistics on access to finance for women and youth.
47. As of the end of 2012, after less than three years of existence, the FPM ASBL provided medium term loans (pre-conditioned by requisite technical assistance for capacity building) to MFIs and commercial banks that were on-lent to nearly 3,641 additional MSMEs (35 percent of which were SMEs), across 9 of 11 provinces in the DRC (Kinshasa, Bas-Congo, Bandundu, Equateur, Orientale Province, North Kivu, South Kivu and Maniema). In 2013, the FPM ASBL’s lending activities will be transferred to a new corporate entity FPM SA that will specialize in medium-term refinancing intermediation and be operational by mid-2014. The additional funding to FPM ASBL under this project will be used to scale-up technical assistance to well-established PFIs to encourage, facilitate, and support their expansion of services to meet growing MSME demands. This assistance will consist of: (a) market studies, focusing on industry sectors and value chains, (b) communications and outreach programs to promote the knowledge yielded from the market studies, as well as of new products and services available in the financial sector, specifically to promote MSME development, including along value chains in key growth industries (c) specialized, custom capacity building to PFIs interested in building innovative capacity to service clients within specific high-growth industries and value chains, which would be provided on cost-sharing, competitive basis, and (d) supplemental studies to assess the feasibility and benefits of “smart subsidies” to be provided on cost-sharing, competitive basis to PFIs, that would be administered by the Ministry of Finance, in collaboration with the Association of Microfinance Institutions (AIMF), the Association of Cooperatives (COOPEC), and the Association of Congolese Banks (ACB).
Sub-component 2.3: Capacity Building for Sustainable Medium and Long Term Finance (US$2.5 million IDA)
48. The Project will support the implementation of FSAP (Financial Sector Assessment Program) recommendations towards expanding financial services in the DRC and building a sustainable mechanism for MSME medium and long term financing. This will include supporting the restructuring and transformation of SOFIDE (Société financière pour le développement) into a viable competitive financial intermediary institution capable of raising new funds for long-term lending. In this respect, SOFIDE will cease its retail operations to SMEs
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in order to commit to its transformation process. The technical assistance will consist of (a) a review of the current portfolio of SOFIDE; (b) expert studies to develop strategic and action plans for addressing changes required to its current portfolio, including its restructuring and/or resolution, legal and statutory framework, governance structures, organization and staffing, technical capacity, and business and operational plans; and (c) legal and other technical assistance to secure formal agreements with shareholders and future investors, including the responsible Government authorities (e.g. Ministry of Finance), and other (minority) shareholders such as private banks (e.g. BCDC) and small private investors.
Box 1: SOFIDE
SOFIDE is DRC’s largest parastatal development finance institution. It was founded with IDA and international partners support in the 1970s as direct financier of SMEs, which it continues to this day. The intent is to transform it into a second-tier financial institution, in order to help to position it as a provider of medium and long term finance to financial sector institutions on a sustainable basis. The restructured SOFIDE, as a “Société Financière”, will be supervised by the Central Bank. Upon completion of its transformation, SOFIDE should enjoy a level of competitiveness and recognized quality that would be well positioned to access independent sources of long term finance in the future, including from international capital markets as well as domestic savings. The Project’s support to the grooming of SOFIDE into a competitive financial intermediary is in line with the recent FSAP recommendations that any public assistance mechanism for supporting SME financing should be structured with a view to sustainability and reliance on private commercial banks’ risk management skills for determination of customer eligibility and creditworthiness, as well as assurance of portfolio quality. Such a public-private partnership would foster better use of public resources while expanding the SME sector’s access to finance through the banking system.
49. In addition, the project will support the establishment of a technical unit within the Ministry of Finance for a close monitoring and implementation of financial sector reforms. To this end, the project will finance the recruitment of technical experts. Finally, specific fiduciary and coordination needs of this project will be supported through the existing coordination unit within the Ministry of Finance (see implementation arrangements section). The project coordination will include a communication and outreach program, targeting the unbanked geographic areas and segments of population. A solid tracking system will be put in place to measure impact of project activities on targeted beneficiaries and ensure that the project meets its development objective. Component 3: Line of Credit for Medium to Long Term Finance (US$15 million IDA) 50. After the first year of its implementation, the Project will make available a Line of Credit (LOC) to Eligible Participating Financial Institutions, for on-lending of medium to long term finance to viable projects of creditworthy private MSMEs operating in DRC, including their capital investment and capacity expansion needs. The IDA line of credit will be administered by an Eligible Intermediary Financial Institution, compliant with the eligibility criteria enshrined in OP10.0 as a condition of disbursement. The Project will finalize its Line of Credit arrangements with the Eligible Intermediary Financial Institution after the first year of Project implementation, by which time the requisite due diligence and other studies, such as described in Component 2, will have been completed, along with any other formal institutional pre-requisites.
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51. The only Intermediary Financial Institution currently available that meets the stated eligibility criteria is FPM ASBL, which is in the process of transferring its lending operations to a new entity, FPM SA, soon to be operational by mid-2014 (see Box 2). FPM ASBL has a high quality governance structure of recognized international investors and a strong management team, which is being superimposed onto the structure and operations of the new entity FPM SA. As FPM ASBL, the new entity FPM SA will preserve compliance with OP10.0 and the practiced enforcement of IFC Environmental Performance Standards and ILO Labor Standards.
Box 2: FPM SA
FPM SA is on track to be registered and licensed by mid-2014 and is expected to be fully capitalized and operational by July 2014, before the Project becomes effective and commences disbursement of the Line of Credit. During the first year of project implementation, this project will focus on provision of technical assistance for market studies and capacity development under Component 2. The draft statutes and operating scheme of FPM SA under preparation by its investors (led by KfW, who is the controlling investor in both FPM ASBL and of FPM SA) are almost completed, and the management team from Incofin (an internationally recognized financial management company selected on competitive basis, with a respected international pedigree, including years of management experience in DRC) has been recruited and is already installed in the new premises of FPM ASBL in Kinshasa. Legal agreements between investors are currently being finalized and ratified by respective Governments, while the lead investor KfW, which will also be custodian for the investments from BIO, has already secured all legal protocols and endorsement from the DRC Ministry of Finance.
52. Implementation of the Line of Credit will be achieved through a two-pronged, phased approach. The first phase (years two to three of the Project) will provide financial intermediation on a pilot basis, relying on the experience of two to three competitively-selected commercial banks and MFIs, who would be assisted with appropriate market information, specialized technical capacity through FPM ASBL, and access to long term competitively-priced financing for their potential pipeline of bankable propositions, including for capital investments, along the job-creating value-chains. The second phase (years three to five of the Project) will scale up and expand the financial intermediation support based on experience and lessons from the pilot phase. 53. Eligible Participating Financial Institutions (commercial banks and MFIs) will have to demonstrate their commitment to medium long term financing to MSME, including a clear strategy, a dedicated unit to serve MSMEs, satisfactory MSME loan approval processes and risk management procedures in place. Eligible criteria are detailed in Annex 2. 54. Sub-loans extended to eligible MSMEs will include both investment in subprojects and working capital loans for increased production of goods and services, excluding consumption and housing loans. They will not finance working capital to maintain existing levels of production. They will not finance any of the products or activities deemed illegal under host country laws, regulations or international conventions and agreements, or subject to international bans, such as pharmaceuticals, pesticides/herbicides, ozone depleting substances, PCBs, wildlife etc. as detailed in Annex 2. The subprojects will meet eligibility and development criteria that ensure subprojects are financially viable and technically, commercially, managerially and environmentally sound.
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B. Project Financing
Lending Instrument 55. The lending instrument is an Investment Project Financing (IPF), to be provided on standard IDA grant terms. This is considered to be the most appropriate instrument for this project due to the sector issues to be addressed. 56. Project cost will be US$30 million equivalent and will be financed by an International Development Association (IDA) grant. The project will be implemented over a six-year period. The closing date will be December 31, 2020. The table below summarizes project costs by component. Project Cost and Financing
Table 4: Cost Table by Component
Component
IDA Total US$
million
Local US$
million
Foreign US$
million
Total US$
million Component 1: Modernization of Payments Infrastructure for Inclusive Finance
1.1. Physical Infrastructure 1.50 3.50 5.00 5.00
1.2 Technical Assistance and Capacity Building 0.60 1.40 2.00 2.00 Component 2: Technical Support to Financial Market Development
2.1. Strengthening Microfinance Regulation and Supervision by BCC 0.30 0.70 1.00 1.00
2.2. Technical Support to Microfinance Expansion and Inclusion 1.05 2.45 3.50 3.50
2.3. Capacity Building for Sustainable Medium and Long Term Finance
0.75 1.75 2.50 2.50
Component 3: Line of Credit for Medium to Long Term Finance
12.00 3.00 15.00 15.00
Total Base Costs 16.20 12.80 29.00 29.00
Contingencies 1.00 1.00
Total Financing Required 16.20 12.80 30.00 30.00
C. Lessons Learned and Reflected in the Project Design
57. The project takes into account lessons learned from project implementation in DRC including: (i) champions within Government are essential to move things forward and keep the reform momentum; (ii) implementation readiness is critical to show results quickly and build broad support for programs; (iii) greater synergies with other development partners should be built up; (iv) given the country context, the approach in DRC should remain flexible to take into account changes in the environment, delays and overruns in execution, due to complex and underdeveloped country logistics and capacity, to cumbersome legal and procedural due process,
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and irregular implementation discipline; and (v) increasing beneficiary participation to secure their buy-in. 58. The specific lessons of project implementation in DRC are also taken into account. As a fragile post-conflict society experiencing rapid institutional transformations and quickly absorbing new fiduciary disciplines, modern technologies, and specialized areas of advanced knowledge (in sectors, industries, products, services, delivery channels, et al), the pace and diligence of project execution in DRC have required extraordinary care and attention, warranting modesty and realism in expectations. Issues of transparency, interagency collaboration, and fiscal discipline tend to cause frequent disruptions in progress, vigilant troubleshooting, and often involve multiple stakeholder groups, who, in demanding good governance and accountability, resort to legal and other interventions to exercise their rights to due process. For this reason, the design of the Project affords extensive attention to the Governance and Anti-Corruption agenda to mitigate risks, while the Bank’s fiduciary specialists have formulated specific action plans conforming to the specific needs of the environment in DRC. Compounding the difficulties are scarcity of reliable statistical data across sectors, a fact universally recognized during preparation of all Bank and other partner operations. Security concerns permeate the countryside, a fact best known by the Congolese institutional partners of the Project, who nevertheless have committed to the goals of this operation and all operations promoting social and financial inclusion as a priority of the nation. 59. Experience with similar projects in other African and developing countries, specifically in Rwanda and Ethiopia yielded useful information on how to design and implement the proposed project. The following are the most important lessons and recommendations incorporated in the current project:
a. Project Ownership by the Government. The project’s implementation is successful if high
degree of borrowers’ ownership of the program. Actual results showed that even a very complex and ambitious program can be implemented successfully with a high level commitment.
b. Selection of financial institutions. Management is the key to the successful
implementation by financial institutions. It is, therefore, important for the donors and the implementing agency to select suitable partner institutions. The selection should be based largely on senior management’s understanding of, and commitment to MSME lending, rather than its current performance.
c. Technical assistance. Careful selection of the TA providers and design of the TA is
crucial to the success of the project, e.g. recruitment of experts and targeted and measurable TA.
d. A strong financial sector infrastructure, including the availability of reliable credit
information, is important for the development of SME finance.
e. A modern new framework for secured transactions in both movable and immovable assets contributes greatly in MSME development.
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f. Financial information on SMEs can be further improved by encouraging financial
institutions to submit complete firm data.
g. A strong monitoring and evaluation (M&E) framework is key to measure the impact of Government’s activities on increasing access to finance for SMEs. Comprehensive evaluation mechanisms are best practices to measure achievements in terms of outreach, additionally and sustainability.
h. Substantial capacity building is required for SMEs to develop adequate financial,
accounting, and management skills. It is recommended that the existing business development programs offered by public and private partners are reviewed for their effectiveness and that successful program are scaled up.
60. Implementation of lines of credit projects relies on commercially-oriented private sector financial intermediaries selected based on clear and quantifiable eligibility criteria; independent confirmation of PFI selection and confirmation of compliance by external auditors can mitigate political interference and ultimately ensure that sound credit decisions are made. To ensure sustainability, the PFIs that assume credit risk should be free to set interest rates reflecting costs and risk. The size of the branch network of PFIs can be essential in ensuring a broader outreach. The ability of the wholesale apex institution to attract funds from diverse sources is important for enhancing sustainability of the support provided by credit lines as a catalyst to deepening the engagement of private sector intermediaries. 61. The project also builds on lessons from the 2011 World Development Report on “Conflict, Security and Development”. The report highlights that in fragile and post-conflict countries such as DRC, projects that can show quick tangible results, projects that foster private sector participation to create employment and generate revenues, and integrated and coordinated interventions, are critical. The recently launched Global Financial Development Report 2014: Financial Inclusion indicates a growing recognition that access to financial services has a critical role in reducing extreme poverty, boosting shared prosperity, and supporting inclusive and sustainable development. D. Alternatives considered
62. Alternative solutions were discussed with technical specialists as well as stakeholders in the private sector, and banking community, to increase the availability of financial resources to meet the growing demands of the economy, in particular the MSME sector. The most obvious alternative, used more successfully in some countries, would have been a risk-sharing facility, i.e. partial credit/risk guarantees. Unfortunately, as most agreed, such schemes always sound attractive until they actually become operational, and then they are perceived as too costly to use, requiring excessive paper trails for application and for reporting, and, after all, their usefulness is only as loss-mitigation facilities, i.e. to reduce the amount of losses incurred from bad lending decisions, not to increase profits. For these reasons, and for the risks they entail that they would encourage bad lending practices and hurt, rather than help, the soundness and regulatory discipline of the growing (and healing) banking sector, this alternative was rejected. Moreover, the likelihood of it being effective is tempered by the overwhelming
22
presence of other lending risks, which would be unlikely mitigated by the existence of a credit guarantee scheme in DRC. This has been proven in practice, as virtually all existing programs providing credit guarantees were found to be underperforming, and subjected to dismissive assessments by their target users and beneficiaries. 63. Alternative solutions for provision of financial intermediation services have generated considerable debate and are continually being examined. The project will launch the restructuring and transformation of SOFIDE, a parastatal DFI with troublesome track record of performance and governance, into a potential intermediary of long term finance from large international and domestic funds to help build Congolese industry and infrastructure, and to support increased standards of living of consumers. This will require several years to fully transform SOFIDE with new business operating models, modern skills, and improved governance and management structures. If no other available institutional alternatives existed in DRC, the project would have focused more resources and attention on successful completion of the transformation of SOFIDE, as an end in itself a new, high quality, blue chip financial institution of indigenous Congolese pedigree, capable to provide a sustainable flow of attractively priced long term finance to DRC enterprises. However, an alternative was made available in the presence of FPM SA, which, while still being established, will be grounded in a good track record of its ancestor FPM (ASBL), and strengthened/scale up in capitalization by a factor of 500 percent for refinancing of financial portfolios. FPM SA will be the largest fund of medium to long term finance in the country, with about US$40 million from four highly respected international partners, including KfW, DFID, CORDAID, and BIO, and seeking more funding to on-lend. It is clearly the better choice than the alternatives, due to its quality track record, a top-notch governance structure and management team, and its already primed pipeline of clients. 64. Finally, venture capital and leasing solutions were also examined in the context of DRC economy conditions and needs, and in consideration of their performance elsewhere under similar conditions. The one venture capital fund in DRC for SMEs, King Kuba Capital, has been performing well, but disburses limited amounts due to the heavy due diligence it must perform, which is very effort-intensive and time consuming. Meanwhile, although the legal enabling environment for the growth of leasing industry is still incomplete and nascent, the project will be watchful for such positive opportunities in the market. Bottom line was that IDA funds would not reach as many clients through the venture capital approach, and that it, along with the lucrative leasing business, would be better suited for IFC (Investments or Advisory Services) than for the IDA. Furthermore, it was decided that the best way to multiply the positive impact of this small allocation of IDA would be to use it as demonstration pilot for line of credit that provides exactly the long term financing that currently does not exist in DRC but is cited as among the biggest constraints to investment in capacity expansion and in helping industries move up the value chains. IV. IMPLEMENTATION
A. Institutional and Implementation Arrangements
65. The design of the institutional and implementation arrangements takes into account lessons learned as mentioned above. The weak capacities as well as coordination failures
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within the Congolese public sector need to be addressed for the project to achieve its development impact. All the relevant institutions of the public and private sectors as well as the civil society, which have contributed to the project preparation, continue to support project implementation. Their capacity will be strengthened through the recruitment of consultants, training and workshops. The implementation design of the project was defined during project preparation and is summarized in Annex 3. The main responsibilities of the core structures of the implementation arrangement are briefly summarized in the Figure below.
Figure 2: Organizational Chart of the Implementation Arrangements
a. The project will be anchored within the Ministry of Finance that led its preparation from the Government side.
b. The steering committee that was created by decree to provide strategic guidance to the IDA-funded Western Growth Poles Project will be in charge to provide strategic guidance to the new operation. It will be chaired by the Ministry of Finance or his Representative. Meetings of the steering committee will be limited to representatives of Ministries involved in the project preparation, and will be expanded to include representatives of institutions involved in the project (such as BCC, ACB, FPM ASBL and the selected Intermediary Financial Institution), private sector and civil society.
c. Project coordination. The existing CFEF unit (Cellule d'exécution des financements en faveur des états fragiles) under the Ministry of Finance will be the Project Coordination Unit (PCU) for this project, thus responsible for the overall coordination of the project, M&E and of the administrative and fiduciary aspects, mainly financial management. This unit, set up by the African Development Bank, is already implementing the IDA-funded Western Growth Poles Project and has experience in managing Bank projects. It is currently staffed with a national coordinator, an M&E and communication department, a fiduciary department, a technical department and an audit & internal control unit. The
Ministry of Finance
(MinFin)
Steering Committee Chaired by Minister of
Finance
Project Coordination Unit (CFEF
unit)
Component 1: Modernization of Payments Infrastrucure for Inclusive
FinanceBCC
Component 2: Technical Support to Financial Market DevelopmentBCC, FPM ASBL and CFEF
Component 3: Line of Credit for Medium to Long Term
Eligible Intermediary Financial Institution
CGPMP
24
existing M&E and communication staff will also work on the new project. The audit arrangement is also acceptable and will be applied to the new project.
d. CFEF will be strengthened with an operations officer dedicated to the new project,
along with an assistant accountant and a high level procurement specialist. The procurement specialist will be recruited to strengthen the National Public Procurement Unit (Cellule de Gestion des Projets et des Marchés Publics - CGPMP), an existing fiduciary unit within the Ministry of Finance that will be in charge of procurement activities for the new project. A performance contract acceptable to IDA will be signed between CFEF and the CGPMP to ensure that objectives are met.
e. Executing units within BCC and FPM that have been implementing activities under the ongoing PSDCP for over three years will be responsible for the implementation of Components 1 and 2 under the new Financial Infrastructure and Markets project. The implementation of the new payment system will be done in coordination with the ACB. The association’s implication is key for a successful implementation of the new system, especially to ensure ownership from commercial banks. The Line of Credit in Component 3 will be disbursed by the selected wholesale financial intermediary.
B. Partnership Arrangements
66. Several donors are active in the financial sector, providing different forms of assistance, but in limited geographic areas and with narrow eligibility criteria, e.g. for agriculture, craftsmanship, mining, etc. and they are shown in the table in Annex 6. The proposed project fits into the broader financial sector development framework pursued collaboratively by international development partners. Through this project, IDA will work in partnership with KfW and UNDP/UNCDF on support to growth of microfinance industry through funding of the FPM, as has been the practice under the existing PSDCP operation since 2010. Furthermore, the Line of Credit component of the project will be administered by FPM SA, whose ownership structure and capital base reflects the partnership of IDA with the international organizations KfW, DFID, CORDAID and BIO. The project will also be forging partnerships with various microfinance holdings that have been benefitting greatly from the provision of lending and technical assistance over the years. Moreover, this project is complementary with IFC’s activities, in particular on the demand side of bank lending, in that the tailored training programs for SMEs in the use of Business Edge toolkits and business planning assistance will be devoted to expanding financial literacy and inclusion as well as access to bank finance. IFC also holds quasi-equity in several commercial banks that have developed services specifically targeting SMEs (RAWBANK, PROCREDIT and ADVANS BANK). A detailed table presenting different donors interventions in the sector is presented in Annex 6. Moving forward, the Bank will work closely with the IFC especially on providing advisory services to women entrepreneurs. C. Results Monitoring and Evaluation
67. The Project’s M&E system will provide in a timely manner data needed for assessing project performance and guide the timely adoption of corrective measures. The system is based on the results framework presented in Annex 1. The results monitoring
25
framework will assess progress towards the PDO by means of four key indicators that focus on measuring the increase of access to financial services to MSMEs. In addition, intermediate indicators will be used to monitor the progress of each component over the life of the project. A rigorous monitoring and evaluation system (M&E) will enable the Government and all partners to monitor progress on all indicators. The overall M&E system will be the responsibility of the M&E specialist working in the Project Coordination Unit (PCU) and will also benefit from regular reporting from the Project Executing Unit at BCC. Monitoring will occur at each stage of the project’s implementation, in order to provide a framework for learning lessons, to identify potential problems and issues, and to promptly consider and adopt corrective measures in order to improve the design of the project accordingly. The PCU will provide semi-annual/annual reports on all indicators. 68. The project will conduct a Mid-Term Review (MTR) around September 2017. The mid-term review will assess the project’s performance, intermediate results and outcomes. This will be the opportunity to assess the project’s performance and ensure that lessons learnt in the implementation of the first cycle are taken into account for the second cycle. The MTR will gauge the extent to which progress is being made towards achieving the PDO, the quality of the technical assistance provided, the performance of the financial intermediary used as part of Component 3, and the overall efficiency of the project.
D. Sustainability
69. The project has been designed based on Government’s commitment to supporting economic growth through enabling institutions and infrastructure providing quality and availability of long tenure financing for MSMEs. 70. Sustainability of payments infrastructure. The project will finance the implementation of technology for most efficient processing of financial transactions available on the world market today. The new payments system is the most modern technology available, and is the first of its kind in the immediate region of SADC. The hardware and software will be bought as turnkey packages with extensive warranty and maintenance plans. The National Switch sub-component of the payment system will be sustained by active sharing of governance and financial management by participating private banks and other beneficiary institutions, in whose interest will be the long term sustainability of the new venture. These infrastructures are expected to contribute to increasing productive activities which will in turn improve the viability of the infrastructure and justify the need for its sustainable maintenance and development. 71. Sustainability of capacity building and policy reforms through technical assistance. The project will also finance technical assistance to the building of knowledge, skills, and productivity tools to strengthen the capacity of institutions, including private banks, MFIs, associated industry groupings, as well as the state-owned DFI, SOFIDE. Sustainable capacity will provide value added services and financial injections to MSMEs, by building their capacity to improve their productivity and contribute to the development of targeted values chains. The project will also support TA to support policy reforms and regulatory effectiveness to make the microfinance sector more robust, capitalized, solvent and investor-friendly, which will serve to compounding improvements in the investment climate.
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72. Environmental and social sustainability. The project is expected to rely on financial intermediaries with similar safeguard standards as the Bank. The FPM, for one, has for years been applying environmental and social frameworks including standards similar to those applied by the Bank and IFC, among others. Involvement of all the stakeholders of the Project was organized prior to appraisal. Eligibility criteria for any of the financial intermediaries will include disclosure of their compliance with acceptable environmental and social safeguards. Technical assistance to the financial institutions will further sensitize stakeholders and project beneficiaries on the environmental and social implications of the project activities. 73. The project Mid-Term Review will assess progress towards achieving its objectives, including long-term sustainability of activities supported by the project. Recommendations and corrective measures will be proposed as a result of the assessment.
V. KEY RISKS AND MITIGATION MEASURES
A. Risk Ratings Summary Table
Risk Category Rating
Stakeholder Risk S
Implementing Agency Risk
- Capacity S
- Governance M
Project Risk
- Design S
- Social and Environmental L
- Program and Donor M
- Delivery Monitoring and Sustainability S
Overall Implementation Risk S
B. Overall Risk Rating Explanation
74. The overall risk is rated as Substantial. Despite great strides made by the country to reform its financial sector with the adoption of new microfinance laws and regulations, and with recent recapitalization of the fast-growing banking sector, the project risk ratings range from medium to high, reflecting a blend of factors that include: (i) well performing FPM ASBL with capable management and governance structure in place, an increasingly competent banking and microfinance regulatory authority at the BCC, which has also dedicated an impressive technical and professional team to implement the National Payments System but which will need continuous training in its operations; (ii) unpredictable macroeconomic environment in the DRC, due to exposure to global economic shocks as well as to political instability and election related risks, that could also be manifested in increased fragility of the banking system; and (iii) fragile state status needing improvements in reform implementation capacity, transparency and economic governance and facing delays in implementing reforms. This project will contribute toward diversifying the economy and provide capacity to the financial systems to expand outreach within industries and actors of DRC as well as with regional trade partners. With an
27
accent on continuous capacity strengthening, the project will also contribute to the sustainability of access to finance and to effective governance reforms across the economy and public administration. 75. Some of the key risks also include (i) risk of lack of coordination and commitment to reforms; (ii) the risk of lack of capacity and incentives for relevant civil servants; (iii) reluctance of financial sector operators and other project clients to appropriate/adhere to project objectives and approach (for example, refusal to connect to the payments system, the Switch, etc.); and (iv) lack of market response due to lack of capacity on the demand side. The paragraphs below summarize the key risks and the proposed mitigation measures that will be regularly assessed during project implementation. The Operational Risk Assessment Framework (ORAF) in Annex 5 presents these risks in greater details, including their ratings and the relevant mitigation measures. 76. Mitigation for the potential lack of coordination and commitment to reforms. The PCU will be responsible for organizing regular multi-sectoral project task force meetings that will be comprised of technical focal points from all the relevant public and private institutions involved in project implementation. The task force will be supported by dedicated and experienced consultants who will follow up and provide the technical expertise needed to prepare and process project related documents. Regular meetings of the multi-sectoral task force are expected to improve coordination among these institutions. 77. Mitigation for the possible lack of capacity and incentives for relevant civil servants. Since the project will be implemented using country systems, the PCU will be strengthened with staff and technical assistance that will contribute to building the capacity of the Ministry to coordinate the implementation of such projects. Similarly, the BCC will be strengthened with experienced consultants and technical assistance to ensure proper execution of project activities.
78. Mitigation for the possible reluctance of financial sector operators and other project clients to appropriate/adhere to project objectives and approach. The project has been subject to large consultations with key operators active in the financial sectors and the Congolese authorities and has taken into consideration main inputs received to ensure adequacy and relevance of the solutions provided as well as ownership. Moreover, capacity response on the demand side is being addressed in part by IFC’s good record of expanding business planning skills through its Business Edge programs, as well as the international community’s growing assistance to financial literacy programs across DRC, and the steady growth of the nascent local consulting industry in DRC in general. VI. APPRAISAL SUMMARY
A. Economic and Financial Analysis
79. The economic analysis is based on Component 3 which will provide a line of credit for a wholesale intermediary entity (to be identified) in charge of providing (i) medium and long term financing and (ii) technical assistance for the development of the select value chains (e.g. cassava, rice and palm oil). A budget of US$15 million is allocated under this component. The economic analysis is based on a time horizon equivalent to the duration of the project, six years.
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The economic rate of return (ERR) is 15.8 percent, and the net present value (NPV) is US$0.1 million, assuming a discount rate of 12 percent.3 A detailed analysis in presented in Annex 7. B. Financial Management
80. In accordance with the Financial Management Manual issued on March 2010, the financial management arrangements of the Financial Infrastructure and Markets Project have been reviewed to determine whether it is acceptable to IDA with consideration for the country’s post conflict situation. To this end, the financial management aspects of the World Bank-financed Western Growth Poles Project (WGPP) (P124720), on which the proposed project will be entrusted, have been reviewed. The proposed project will follow an approach similar to the arrangements in place for the WGPP implemented by CFEF that will be strengthened by the additional mitigations measures described below. The overall FM risk is considered Substantial. The proposed financial management arrangements including the mitigation measures for this project are considered adequate to meet the Bank’s minimum fiduciary requirements under OP/BP10.00. 81. The review revealed that the following actions will need to be completed: (i) the updating of the CFEF’s existing manual of procedures to capture the specificities of the new project, ensure adequate ownership by the new stakeholders, and strengthen the anti-corruption aspects; (ii) the recruitment of one additional accountant dedicated to the new project; (iii) the configuration of the existing version accounting software acquired under WGPP’s financing to reflect the new project specificities; (iv) the revision of the ToRs of the current internal auditor to reflect the new project specificities; and (v) the recruitment of an independent external auditor in compliance with acceptable Terms of Reference.
82. Financial Management arrangements are included under Annex 3. C. Procurement
83. Procurement for the proposed operation will be carried out in accordance with the World Bank’s “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011 (“Procurement Guidelines”), in the case of goods, works and non-consulting services; and the World Bank’s “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011 (“Consultant Guidelines”) in the case of consultants’ services, and the provisions stipulated in the Financing Agreement. Further, the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated October 15, 2006 and revised in January 2011 will apply. 84. Procurement will be carried out by the Procurement Management Unit named CGPMP (Cellule de Gestion des Projets et Marchés Publics) of the Ministry of Finance. The
3 Deposit interest rate ranged between 16.8% and 7.7% in the past five years, being on average 12.7%. During this period (excluding 2009 when inflation rate skyrocketed to 729%), inflation rate (CPI) has been on average 30.6% (WDI).
29
CGPMP of Ministry of Finance will benefit from needed support and technical assistance from the Procurement Unit of the PCU (CFEF Unit) within the Ministry of Finance. To strengthen the capacity of the CGPMP, a procurement expert will be recruited to provide periodically technical support and training to the CGPMP. Given the country risk and the weak capacity of the CGPMP, the procurement risk is therefore rated High. D. Social and Environment (including Safeguards)
85. Social benefits – Poverty and Equity. The project will provide financing solutions to enable entrepreneurs to expand their business operations, generate employment, and increase earnings to improve livelihoods of their families and communities. Individual citizens, men and women of DRC will have greater access to financial services in remote areas where these were not previously offered, through expansion of microfinance and banking industry, as well as of electronic (including mobile) and branchless banking operations, across the country, enabling them to . Government payment transfers across the public sector would also be faster and more cost- and quality-efficient, thereby supporting revenue management and fiscal decentralization, thus addressing corruption and improving governance. More specifically for financial services recipients, the benefits will include, but not limited to: a) enhanced accessibility to credits for SMEs; b) cheaper credits; c) job creation; d) job security; f) improved business environment for SMEs and c) capacity building. For the nation, a better financial environment is expected, likewise, a healthier and more productive SME sector. 86. Consultation – Communication. This project builds on an ongoing Bank financed project, the PSDCP, and is the result of ongoing dialogue with the Government, at the national as well as at the sector level. Also, the project builds on consultations with other development partners. The components of the project build on lessons learned from the ongoing investment. Key stakeholders include: FPM ASBL, the Central Bank and the “Association des Institutions de Microfinance”. 87. Safeguards aspects. Overall, this project is not expected to induce adverse environmental and social impacts. Project investments focus on institutional support and do not include direct investments in infrastructure or in land acquisition that would induce adverse environmental and social impacts. Component 3 investments (Line of Credit for Medium to Long Term Finance) may, however, induce land acquisition through third party (SMEs) investments or bad working conditions for workers.
88. OP 4.03 on Performance Standards for Private Sector Activities enables the Association to opt for applying IFC Performance Standards to IDA support for projects (or components thereof) that are designed, owned, constructed and/or operated by a private entity, in lieu of the World Bank’s safeguard policies (“WB Safeguard Policies”). Under OP 4.03 the Bank may, unless the member country objects, apply the IFC Performance Standards, in lieu of the WB Safeguard Policies, to a private sector activity which is part of a project. Accordingly it is proposed to apply those standards to Component 3 of the project. The proposed project is classified F (rating FI-2) as half of the total financing will go to the Financial Intermediary program (Component 3) while the other half will finance TA activities under Components 1 and 2 which will have no or negligible adverse environmental and social impacts. The EA category FI-2 is equivalent to a category B under the WB Safeguards Policies. The FI-2 rating is based on
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the anticipated knowledge that the on-lending activities under Component 3 may lead to subprojects that have potential limited adverse environmental or social risks or impacts that are few in number, generally site-specific, largely reversible, and readily addressed through mitigation measures. Subprojects with potential significant adverse environmental or social risks or impacts that are significant, irreversible, or unprecedented will not be funded under this project. 89. The following Performance Standards apply to the project: Performance Standard 1 (Assessment and Management of Environmental and Social Risks and Impacts); Performance Standard 2 (Labor and Working Conditions); Performance Standard 4 (Community Health, Safety, and Security); and Performance Standard 5 (Land Acquisition and Involuntary Resettlement). The Financial Intermediary program under Component 3 will initially assess environmental and social risks of transactions according to Performance Standards 1, 2, 4, and 5, and will require its borrowers/investees to comply with these performance standards and any others if deemed necessary in the future, in their operations. 90. With regard to the on-lending activities under Component 3, one of the prerequisites of the support for eligible Wholesale Financial Intermediaries (WFIs) is that they as well as the PFIs they integrate into their lending operations, will have to meet the requirements of environmentally and socially sound and sustainable development as identified in laws and regulations of the Government of DRC and pursuant to the relevant WBG performance standards. Accordingly, the borrower has produced an Environmental and Social Risk Management Operational Manual (ESOM) for the Line of Credit reflecting all the requirements of environmentally and socially sound and sustainable development, and the eligible WFIs and their PFIs will be required to produce Environmental and Social Management Systems (ESMS) based on the guidance provided in the ESOM. The ESMS developed by the WFIs will be subject to review and approval by the WB. The WFIs will in turn be responsible for the quality of the ESMS prepared by the PFIs they integrate into their lending operations. These measures will ensure that appropriate risk management measures have been identified for implementation not only for the Line of Credit, but also by the loan applicants in each of the Project PFIs.
91. Participating financial institutions are required to establish or arrange for proper capacities to duly implement their Environment and Social Management Systems (ESMS) in a manner consistent with the guidance that will be provided in the ESOM. The ESMS will describe key features such as: social and environment policies and procedures; current organization structure and staffing for managing environmental and social risk; skills and competencies in social and environmental areas; training and awareness of the institution's investment, legal, and credit officers on the organization's ESMS; reporting systems to managers; and performance monitoring procedures. Additionally, the Project Implementing Entity shall collect, compile and submit to the Association, each calendar year (or at such other frequency as may be agreed with the World Bank), consolidated reports on the status of compliance with the ESOM.
92. FPM SA is currently the only WFI envisaged to become eligible for the Line of Credit under Component 3. FPM ASBL is divesting its financing operations to a new entity FPM SA which is undergoing the process of establishment as a legal entity. It is understood that
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FPM SA will retain the governance structure of FPM ASBL and will have adequate capacity dedicated to Environmental and Social Management. With regard to environmental and social norms, FPM ASBL currently abides by (1) DRC labor and social protection laws; (2) International Labor Organization (ILO) labor standards; and (3) IFC performance standards.4 FPM SA will also rate its PFIs according to their compliance with responsible finance standards, positive social impact, and degree of environmental impact. PFIs with activities that have significant environmental impacts are not eligible for FPM SA financing. E. Governance and Anti-Corruption (GAC) including Performance of Implementation
Agencies
93. The Democratic Republic of Congo is ranked among the worst performing countries worldwide in Governance related issues according to Transparency International Government Defense Anticorruption Index 2013, correlating with its low ranking on the Doing Business (DB) 2014 Index. In addition to the overall governance and accountability risks, the need for performing implementation agencies and increase efficiency and transparency in procedures will be essential to yield expected results. Annex 4 of the present Project Appraisal Document (PAD) is dedicated to addressing these in a more detailed manner.
4 Per FPM’s « Politique Générale du FPM pour une Finance Responsable. Respect des normes sociales et environnementales et protection des clients ».
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Annex 1: Results Framework and Monitoring
DEMOCRATIC REPUBLIC OF CONGO: Financial Infrastructure and Markets Project
Project Development Objective (PDO): The proposed Project Development Objective (PDO) is to modernize payments infrastructure and increase availability of term financing to MSMEs in the Recipient’s territory.
.
Project Development Objectives .
PDO Statement
The project development objective is to modernize payments infrastructure and increase availability of term financing to Micro, Small and Medium Enterprises (MSMEs).
These results are at Project Level .
Project Development Objective Indicators
Cumulative Target Values Data Source/ Responsibility for
Indicator Name Core Unit of
Measure Baseline YR1 YR2 YR3 YR4
End Target
Frequency Methodology Data Collection
Increase in number of transactions through the Real Time Gross Settlement System (RTGS)
Number 310.00 360.00 440.00 510.00 540.00 790.00 Annual BCC report BCC
Increase in number of transactions through the Automated
Number 5219.00 7000.00 11000.00 15000.00 19000.00 31000.00 Annual BCC report BCC
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Project Development Objective Indicators
Cumulative Target Values Data Source/ Responsibility for
Indicator Name Core Unit of
Measure Baseline YR1 YR2 YR3 YR4
End Target
Frequency Methodology Data Collection
Clearing House (ACH) in US$
Increase in number of transactions through the Automated Clearing House (ACH) in CDF
Number Sub-Type Supplemental
578.00 781.00 1055.00 1425.00 1710.00 2540.00 Annual BCC report BCC
Portfolio at Risk - Microfinance Percentage 25.00 25.00 20.00 15.00 12.00 5.00 Annual BCC report BCC and FEF
Percentage of project-supported institutions that are reporting on this indicator
Percentage Sub-Type Supplemental
0.00 0.00 0.00 100.00 100.00 100.00
Volume of Bank Support: Lines of Credit - SME
Amount(USD)
0.00 0.00 2070000.00
3493000.00
5250000.00
8000000.00
Annual
Wholesale Intermediary Institution Report
FEF
.
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Intermediate Results Indicators
Cumulative Target Values Data Source/ Responsibility for
Indicator Name Core Unit of Measure
Baseline YR1 YR2 YR3 YR4 End
Target Frequency
Methodology Data Collection
National Payment System (NPS) is operational. Percentage of banks connected to the National Payment System (NPS)
Percentage 0.00 25.00 50.00 75.00 100.00 100.00 Annual BCC BCC and FPM
Number of transactions using ATM
Number 3250.00 4800.00 7300.00 11000.00 16500.00 31200.00 Annual BCC BCC and FEF
Cumulative Number of staff trained in the operation of the NPS at the BCC
Number 0.00 6.00 12.00 16.00 16.00 Annual BCC report BCC
Cumulative number of non-served areas/secondary cities to which the MFIs expand services
Number 0.00 1.00 2.00 3.00 4.00 5.00 Annual FPM FPM and FEF
Percentage of MFIs providing quarterly regulatory financial
Percentage 52.80 60.00 75.00 90.00 90.00 90.00 Annual BCC report BCC
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Intermediate Results Indicators
Cumulative Target Values Data Source/ Responsibility for
Indicator Name Core Unit of Measure
Baseline YR1 YR2 YR3 YR4 End
Target Frequency
Methodology Data Collection
statements (Balance Sheets and Profit/Loss Accounts)
Women as percentage of population benefitting from the expansion of MFIs into non-served areas/secondary cities
Percentage 0.00 20.00 30.00 40.00 40.00 40.00 Annual FPM report FPM ASBL
Portfolio review of SOFIDE completed
Yes/No No Yes Yes Annual FEF report FEF
Volume of Bank Support: Lines of Credit - Microfinance
Amount(USD)
0.00 0.00 1380000.00
2857000.00
5250000.00
7000000.00
Annual
Wholesale Intermediary Institution Report
FEF
Cumulative value of TA provided by FPM ASBL to MFIs to strengthen their capacity to meet growing demand,
Amount(USD)
0.00 2000000.00
Annual FPM ASBL report
FPM ASBL
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Intermediate Results Indicators
Cumulative Target Values Data Source/ Responsibility for
Indicator Name Core Unit of Measure
Baseline YR1 YR2 YR3 YR4 End
Target Frequency
Methodology Data Collection
especially in non-served areas. .
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Project Development Objective Indicators
Indicator Name Description (indicator definition etc.)
Increase in number of transactions through the Real Time Gross Settlement System (RTGS)
This indicator will measure the number of interbank transactions in CDF and USD using the RTGS.
Increase in number of transactions through the Automated Clearing House (ACH) in US$
This indicator will measure the number of transactions (checks, interbank transfers and direct debit) for the ACH.
Increase in number of transactions through the Automated Clearing House (ACH) in CDF
This indicator will measure the number of transactions (checks, interbank transfers and direct debit) for the ACH.
Portfolio at Risk - Microfinance Portfolio at Risk = Outstanding (or not yet repaid) balance of all loans where payment is late by > 30 days / Gross outstanding loan portfolio Provide the Portfolio at Risk (PAR) for the PFI's entire microfinance portfolio. Do not report on the PAR for just the Bank-funded portion. Loans that have been rescheduled or renegotiated should also be included in the numerator of the PAR. Weight each institution's PAR by its oustanding Microfinance portfolio to calculate the average PAR for the project. The optional "breakdown" tab can be used to report by institution.
Percentage of project-supported institutions that are reporting on this indicator
No description provided.
Volume of Bank Support: Lines of Credit - SME A line of credit is "SME finance" if the supporting subloans have an average outstanding balance > microfinance cut-off noted below, but no more than $300,000. A line of credit is classified "microfinance" if supporting subloans: a) Have an average outstanding balance (gross loan portfolio ÷ number of active borrowers) < 300% of the latest per capita GNI, OR b) Less than $1,000. EITHER circumstance triggers classification as microfinance. Lines of credit and other funding for retail SME sub-loans by Participating Financial Institutions or Community-Managed Loan Funds. Report the cumulative amounts disbursed as of most recent date available. If a split by micro and SME is not available or possible, please use 50% for each as proxy.
.
Intermediate Results Indicators
Indicator Name Description (indicator definition etc.)
National Payment System (NPS) is operational. Percentage of banks connected to the National Payment System (NPS)
No description provided.
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Number of transactions using ATM This indicator will measure the number of ATM transactions on an annual basis using credit cards.
Cumulative Number of staff trained in the operation of the NPS at the BCC
No description provided.
Cumulative number of non-served areas/secondary cities to which the MFIs expand services
No description provided.
Percentage of MFIs providing quarterly regulatory financial statements (Balance Sheets and Profit/Loss Accounts)
No description provided.
Women as percentage of population benefitting from the expansion of MFIs into non-served areas/secondary cities
No description provided.
Portfolio review of SOFIDE completed No description provided.
Volume of Bank Support: Lines of Credit - Microfinance
A line of credit is classified "microfinance" if supporting subloans: a) Have an average outstanding balance (gross loan portfolio ÷ number of active borrowers) < 300% of the latest per capita GNI, OR b) Less than $1,000. EITHER circumstance triggers classification as microfinance. Lines of credit and other funding for retail Microfinance sub-loans by Participating Financial Institutions or Community-Managed Loan Funds. Report the cumulative amounts disbursed as of most recent date available. If a split by micro and SME is not available or possible, please use 50% for each as proxy.
Cumulative value of TA provided by FPM ASBL to MFIs to strengthen their capacity to meet growing demand, especially in non-served areas.
No description provided.
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Annex 2: Detailed Project Description
DEMOCRATIC REPUBLIC OF CONGO: Financial Infrastructure and Markets Project Component 1: Modernization of Payments Infrastructure for Inclusive Finance
A. Scope of the National Payment System 1. The development of the National Payment System in the DRC and the interoperability of payment services are closely intertwined with the promotion of access to financial services by the majority of the bankable population in DRC. The creation and delivery of payment accounts, instruments and services to consumers, businesses and Government agencies is a core business function of banks and other payment service providers. The Central Bank of Congo (BCC) promotes and facilitates this process through its public policy roles related to the payment system in general. Accordingly, the development of the national payment system is a shared responsibility; with the Central Banks of Congo (BCC) at the center of the process and payment service providers being active partners. 2. This project will achieve at least the following primary objectives:
a. Implement an efficient and safe infrastructure for interbank clearing and settlement of all retail payment instruments;
b. Put in place mechanisms and processes that can safely and cost-effectively support the transfer of money from payer to payee;
c. Achieve a payment infrastructure for electronic funds transfers that cover the country, extend and improve the operational reliability of the electronic networks of individual bank. The bank branches throughout the country should be connected to their head offices and the NPS, and availability, capacity and business continuity procedures and facilities should be improved.
d. Put in place an adequate legal and regulatory framework that effectively supports modern payment and securities settlement systems, practices and instruments such as electronic funds transfers, card payments and so on;
e. Achieve interoperability of the various networks for ATMs and POS-terminals of banks;
f. Create the network base for eventual data linkages with microfinance institutions.
3. Implementation of the NPS follows a multiple phase approach. The hybrid ATS platform (RTGS, ACH) and the Central Security Depository (CSD) solutions are being procured under the PSDC project (P071144) as a turnkey integrated solution with the prospective bidders providing the full complement of hardware, application software, equipment and other services, including for communication and security. 4. Implementation will follow considerable progress made at the BCC in 2011-2013 to:
a. Create a new Payment System Department with a new organizational structure b. Update the regulatory framework (currently under finalization under FIRST TF) c. Create a project implementation team with 25 teams members d. Complete construction of new Data Centers and the communications networks
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e. Complete acquisition of the ATS and CSD f. Complete the RFP and procurement process for the National Switch
B. Importance of the National Payment System
5. By ring-fencing the payment systems component the Bank recognizes the importance of this component in the financial sector and in supporting economic activity in any country. Worldwide, the role of central banks in promoting safe, sound and efficient payment and settlement arrangements is now not only recognized as a critical function, but an objective with wider policy and strategic implications for central banks. ATS, such as the one that BCC wishes to implement, is used by central banks widely and forms the core of the modern financial system, providing a mechanism for efficient, final and irrevocable settlement of interbank obligations. The ATS Platform enables the central bank to monitor and manage systemic risk and to implement its monetary policy objectives, through an effective mechanism that directly impacts the market. 6. From the time that the first ATS system was implemented, the design and features of such systems have evolved over the years. It is, therefore important to take note of this when compiling bidding documents. In addition, the central bank has to have adequate resources to support the pre and post implementation phase of such systems and ensure that they comply with best practice. The release of the new standards in April 2012 puts additional pressure on central banks not only in understanding but also in complying with these standards.
C. Automated Transfer System (ATS)
7. The new ATS will be housed in BCC’s existing Data Center, and the Functional and Technical administration team will take over the platform after the Go Live. The ATS will provide both Real Time Gross Settlement (RTGS) and Automated Clearing House (ACH) capabilities for the clearing and settlement of all interbank electronic payments, within one integrated system. The main objectives of the ATS system are to: a. Provide efficient and cost-effective clearing and settlement capabilities for all interbank
payments, with the ability to handle expected future growth in volumes of payments; b. Achieve real-time settlement of payments between its participants in the books of the
BCC to deliver irrevocability and finality of payments; c. Provide facilities to increase the efficiency of daily liquidity management by banks
through the provision of real-time settlement account information reporting and monitoring;
d. Provide the interface the BCC Core Banking System (GL); e. Provide and interface to the national interbank card switch to allow the interoperability; f. Provide the technical platform for the BCC to participate in the Southern African
Development Community (SADC) payment platform, which will interlink the RTGS systems of all Southern African Community member states to facilitate cross-border payments;
g. Provide for the clearance and settlement of Government securities transactions to achieve Delivery versus Payment once interfaced and integrated to a CSD;
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h. Provide for ministries such as the Ministry of Finance (Accountant General) and Internal Revenues and Customs to become participants of the system;
i. Provide for other clearing institutions (e.g. Commodity Exchange, Stock Exchange) to become participants of the system for clearing and settlement of their obligations;
j. Provide platform for also integrating linkages with microfinance institutions for their transaction settlement.
8. The ACH element of the ATS will facilitate the electronic clearing and settlement of checks, cards, direct debit and direct credit transfers. The ACH will be linked to the RTGS system to settle participants’ multilateral net positions intraday in defined window(s).
D. Central Securities Depository (CSD) 9. The Central Securities Deposit System will be connected to the ATS (RTGS) to settle the cash leg on a delivery versus payment (dvp) basis, in which delivery of securities occurs, if and only when payment takes place and vice versa. The CSD will include an integrated primary trading (auction) and the secondary market module tightly linked with the RTGS function of the ATS for the settlement of securities transactions, following the principle of Delivery versus Payment (DvP).
E. National Switch 10. The Switching refers to the routing of transactions between different payments systems to facilitate interoperability of systems among payment service providers. The Central Switch processes card based interbank operations. It is connected to all ATM’s POS-terminals, ebanking of the different commercial banks to allow the interoperability. The system switch requests authorization automatically from the core banking system of the banks where the cardholder has its account. It also calculates the commission banks owe each other for the use of the facilities of other banks and, depending on which option is valid, calculates the net balances resulting from these operations and sends this to the RTGS for settlement. 11. Thus by establishing a central switch the Banks could obtain the following major benefits.
a. Allow the interoperability between all the FI’s in DRC; b. Facilitate their customer service by providing them a wide network to access their
accounts; c. Reduce the level of investment required for expanding or acquiring network
through resource sharing; d. Handle the Franc Congolese transactions locally with a relatively cheaper unit
cost without the need to use international networks like Visa, MasterCard and AMEX.
F. Enlargement of access to banking and payment services for MFI
12. Access to banking services in general and to payment services in special is an important goal. A larger access to banking services could lead to an increase in savings and
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internal mobilization of funds in DRC. It will promote the economic development, while on the other hand it will increase the volume in the systems. 13. However, access to payment services in rural areas is almost non-existent at the moment in DRC since most of the branches of commercial banks are established in more densely populated centers in Kinshasa, and other providers of financial services such as the MFI’s are not connected to the payment infrastructure. With respect to provide ICT solutions including the linking of the MFI’s to the central clearing and settlement infrastructure in DRC, the technologic platform will be created that could eventually facilitate the following: a. Create an MFI Host and provide access to the Core Banking Solution to the MFIs; b. Establish a central service organization for MFIs that connects the MFIs to the central
clearing and settlement infrastructure, routing the payments to the individual MFIs, support them with the development of in-house payments services and offers liquidity management services to the MFIs. The central service organization will participate in the payment infrastructure for retail and large value and opens a settlement account with the BCC;
c. Connect the head offices of MFI’s to a central inter-bank clearing and settlement system for retail payments and give the head offices the possibility to open an account with the BCC for settlement purposes;
d. Implement a two tiered system in which the MFIs will be connected via one or more commercial banks that act as clearing member(s);
e. Broaden the existing branch network and reduce the traveling time to visit a branch of a bank or an MFI. At present in the rural area some customers have to travel more than 20 kilometers;
f. Connect the MFIs to the inter-bank payment infrastructure and promote the development of payment services in this sector that fits the need of the rural population. Connection of the MFIs and development of payment services within the MFIs would broaden the outreach of the payment system substantially. It will also bring forward that the rural area are covered by the new NPS;
g. Develop efficient bill payment facilities for customers, alleviating the need to go in person to the tellers of utility companies, insurance companies or the Government to pay their bills or taxes;
h. Develop a good infrastructure for electronic funds transfers for a cost-effective distribution of remittances all over the country. Reducing costs brings forward that the beneficiary will receive more money (higher net amount) due to lower fees and thus, encourage households receiving recurrent payments from abroad to open a bank account or an account with an MFI. Lower costs will also form an incentive for Congolese abroad to send more money to their friends and relatives;
i. Develop retail bank products for households such as housing loans (mortgages), consumer credits, insurance product etc. In these cases the consumer will normally open a bank account or an account with an MFI on which his salary is paid in etc.
G. Governance of the national payment system project
14. Proper governance of the project is essential in order to achieve success implementing the project and rollout the National Payment System. The following structure should apply to the governance of the project in order to maintain current momentum and
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achieve quick delivery of the project execution. As an initial activity, and to ensure the proper operation of the effort, the formation of a project organization on the top of the existing, encompassing the broad collection of actors, is essential for coordination and collaboration. The governance and management structure established for the organization ensures involvement of all relevant stakeholders and the making of well-structured discussions on the present and future needs, goals, objectives, principles and measures. It should ensure adequate decision taking at the appropriate level and commitment of all involved parties for the execution thereof. This organizational structure will be the road map for the other on-going systems implementation undertake by the Banque Centrale du Congo (BCC) 15. The proposed project organization encompasses:
a. The NPS Steering Committee; b. The Expert Group; c. The Project Director/Manager; d. The Project Team; e. A Project Bureau; f. Working groups.
16. Since BCC will operate the ATS/CSD solution itself the following diagram depicts the typical staffing for Payment System operational resource roles. Finalization of the actual roles will be decided by the BCC as the functional implementation team should be driving the activities as key strategic personnel, as they become subject matter experts for the various functionalities.
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BCC ATS/CSD Project Organizational Structure
Component 2: Technical Support to Financial Market Development Sub-component 2.1: Strengthening Microfinance Regulation and Supervision by BCC 17. The sector is negatively impacted by governance, financial management and internal audit deficiencies. As a result, among the 36 main savings and loan cooperatives and MFIs, representing more than 85 percent of the sector assets, considered by BCC as priority institutions, only two (3 percent of the total sector) achieved operational self-sufficiency as of end-June 2013. Institutions with negative performance account for 18 percent of sector assets, and those with negative equity, 9 percent.
18. The microfinance sector is governed by three laws, two of which were adopted in 2002 and one in 2011 and the entire sector is regulated by the BCC. The BCC intends to take advantage of the harmonization of Law No. 002-2002 on savings and loan cooperatives with the OHADA Uniform Act on Cooperatives to introduce a minimum capitalization ratio. The BCC recently enforced a detailed prudential regime for microfinance. Licensing conditions have been strengthened (the minimum capital of microfinance companies authorized to take in public savings was set at US$350,000 in 2013 and will increase to US$700,000 in 2017) along with operating conditions (prudential standards, loan classification and provisioning, and performance indicators). More robust supervision of the sector continues to be a major challenge for BCC. Its 2012-2013 Microfinance Action Plan rests on four pillars: (i) reforming the sector’s legal and regulatory framework; (ii) having a reliable database that can be updated; (iii) conducting
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surveillance in an efficient manner; and (iv) building an inclusive financial sector. The BCC is also preparing a directive on consumer protection. 19. The Project will continue to strengthen BCC’s capacity and impact, by providing one long-term advisor (LTA) who would provide part-time support on as-needed basis over two years, along with a discretionary budget for just-in-time (JIT) experts to be deployed for specific needs of short duration in agreement with the client and Bank. The LTA’s focus would be (in support of the BCC regulator’s agreed priorities for 2014-2017) to provide expert inputs and coaching for (a) implementation of a robust MFI intervention and resolution framework, including advisory assistance to actual cases in the field, (b) more effective use of Core Banking Systems at the BCC (or specialized software systems in place or to be acquired by the MFI regulatory unit of BCC) in data management/analysis for more effective supervision of the MFI sector, and (c) organizing the apex institutions of MFI and cooperatives networks in each province of DRC for easier surveillance, regulation, and better targeting of future investment in capacity building and other forms of assistance.
20. The LTA would provide coaching to the regulator on effective coordination with KfW and other development partners in planning and executing their collective programs to support expansion of consumer literacy and protection, building upon efforts already begun under the PSDC project in collaboration with IFC and CGAP on basic legislation and institutional/regulatory establishment. This sub-component will therefore support continuation of activities begun under the PSDCP, by strengthening Microfinance laws and regulation, to be put in compliance with OHADA for the COOPECs, and broadening understanding and compliance with recently revamped Microfinance prudential framework and associated accounting, financial management and disclosure rules. In coordination with other development partners, and led by the Long Term Advisor (LTA). 21. The project will seek to answer concerns highlighted in the strategic plan of the control unit of microfinance to the BCC, which necessitates a close attention in order to improve the organization within the sector, extend services to remote areas and encourage financial inclusion for women. It will in particular support:
a. ‘‘Réseautage des Coopératives d’Epargne et de Crédit’’ (COOPEC), a formation of networks in accordance with Instruction No. 011 which Central Unit will have the following objectives: (i) the pooling of shared costs to services and common tools, such as internal audit, on-site inspection and testing, training, refinancing, (ii) the ability to compete and better cope with the changes and evolution of activities ; (iii) the mutual exchange of experiences, tools and strategies, (iv) the search for solvency and viability of member institutions, with a professionalization perspective, (v) the refinancing of member institutions to lower interest rates, and (vi) economies of scale.
b. Consolidation of the microfinance sector as a whole and its stabilization, through the strengthening of national financial structures installed in underserved areas and the improvement of financial inclusion by providing traditional financial services, savings and credit transfer in the hinterland.
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22. The LTA, who would have a small IDA allocation at disposal for just-in-time technical assistance of specific nature, would be an instrumental focal resource to the technical assistance efforts to implement an effective supervision of the sector and perform studies on the microfinance industry and financial inclusion strategies, including to production of new or updated regulations, as well as the dialogue related to “smart subsidies” that might consider proposals by BCC for support to the expansion of the industry, such as the following examples:
a. Purchase of equipment (desktops and laptops, and printers running with solar panels) for "flagship institutions" installed in the hinterland in order to improve the delivery of financial statements and data needed for control, better framework and monitoring for real-time transmission of data and reporting, reduce transmission time while improving the quality DSE financial data provided to the BCC;
b. Improving financial inclusion through bank agents; c. Introduction of responsible finance through consumer protection in financial
services 23. Furthermore, BCC is in urgent need of securing data received by the microfinance institutions. Quality of accounting and prudential information must be stepped up in order for supervisors to perform an accurate surveillance. Data accuracy checks and analysis processed by BCC agents need to be strengthened. The LTA will assist the BCC with correct usage of information technologies in place, and reinforce the analytical procedures for addressing (and redressing) the financial situation of the 36 “Institutions phares”, which represent 80 percent of the microfinance sector. Implementation of such a tool and methodology should allow the internal rating of these institutions by the Central Bank’s supervisors. Accordingly, through the services of the LTA, the project will support expanding consumer literacy and consumer protection, by advising the BCC on the building upon efforts already begun by IDA, IFC, CGAP and other donors, on basic legislation and institutional/regulatory establishment. Sub-component 2.2: Technical Support to Microfinance Expansion and Inclusion
24. The Project will provide the new financing to supplement the approximately US$ 1.3 million IDA still available at the FPM from the ongoing PSDC Project, in funding of the 2014-2018 Business Plan. This additional financing aims to strengthen the capacity of (i) a few, selected MFIs, including those interested in upscaling to service SMEs, and of (ii) commercial banks, especially those interested in downscaling and expanding branchless banking, to tailor their lending to the specific needs of MSMEs and entrepreneurs. High growth sectors will be especially targeted, such as agribusiness and services, particularly in currently non-served areas around secondary cities throughout the country, with strengthened emphasis on gender balance and youth employment. The IDA funding will complement contributions from KfW and UNDP/UNCDF. The FPM’s new business plan, currently under preparation, is expected to be approved by their Board in March 2014. 25. As of end of 2012, after less than three years of existence, the FPM provided medium term loans (pre-conditioned by requisite technical assistance for capacity building) to MFIs and commercial banks that were on-lent to nearly 3,641 additional MSMEs (35 percent of which were SMEs), across 9 of 11 provinces in the DRC (Kinshasa, Bas-Congo, Bandundu, Equateur,
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Orientale Province, North Kivu, South Kivu and Maniema). With the discontinuation of lending activities by FPM in 2013 in order to create a new corporate entity FPM SA that will specialize in medium-term refinancing intermediation and be operational by mid-2014, the additional funding to FPM will be used to scale-up technical assistance to well-established PFIs to encourage, facilitate and support their expansion of services to meet growing MSME demands. This assistance will consist of: (a) market studies, focusing on industry sectors and value chains, (b) communications and outreach programs to promote the knowledge yielded from the market studies, as well as of new products and services available in the financial sector, specifically to promote MSME development, including along value chains in key growth industries (c) specialized, custom capacity building to PFIs interested in building innovative capacity to service clients within specific high-growth industries and value chains, which would be provided on cost-sharing, competitive basis, and (d) supplemental studies to assess the feasibility and benefits of “smart subsidies” to be provided on cost-sharing, competitive basis to PFIs, that would be administered by the Ministry of Finance, in collaboration with the Association of Microfinance Institutions (AIMF), the Association of Cooperatives (COOPEC), and the Association of Congolese Banks (ACB). Sub-component 2.3: Capacity Building for Sustainable Medium and Long Term Finance 26. The Project will invest in the grooming of a viable wholesale financial intermediary institution equipped with the appropriate legal/statutory, organizational and operational structures, and with the technical capacity, to attain a level of competitiveness over a reasonable Project timeframe that would place it on track for eligibility to access independent sources of long term finance in the future, including from international capital markets as well as domestic pension and insurance industry. 27. SOFIDE is an established development finance institution (DFI) in DRC, with a pedigree from its founding by international development partners and a number of private commercial banks and investment funds, along with the Government of DRC when the country was known as Zaire. Its capital base, however, was dilapidated over decades of economic calamity, social unrest, and political transformations in DRC, when its client portfolio was largely destroyed along with their solvency. Having long ago enjoyed a respectable track record as a DFI, SOFIDE in modern times has a small lending portfolio funded by the Government for on-lending at subsidized cost, which had of dubious quality and barely sufficient to sustain the institution, which relies greatly on rents from its vast real estate holdings. However insufficient, this portfolio was to make significant impact on the economy, the apparent resurgence of SOFIDE during 2013, accompanied by active Government support to clear the institution’s legacy issues with previous shareholders, has rekindled interest by a number of current as well as new private shareholders to begin recapitalizing the institution on the assumption of improved governance and potentially growing pipeline of bankable projects. Given DRC’s scarcity of indigenous institutional capacity to provide financial services to industry at competitive terms and with market-based discipline, and pointing to the need for a sustainable source of long term finance for economic development (through the financial sector) that could one day also manage public investments, the Project would launch analytic support to with to the transformation of SOFIDE.
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28. The project will support the launching process of the restructuring of SOFIDE (Société financière pour le développement) to become a second-tier financial institution and position it as a provider of medium and long term finance to financial sector institutions (instead of directly to SMEs), and possibly eventually also as a DFI for long term investments in infrastructure on the assumption of its access to DRC’s long term funds from insurance and pension systems as well to international capital markets. This would be in line with the recent FSAP recommendations that any public assistance mechanism for supporting SME financing should be structured with a view to sustainability and reliance on private commercial banks’ risk management skills for determination of customer eligibility and creditworthiness, as well as assurance of portfolio quality. Such a public-private partnership would foster better use of public resources while expanding the SME sector’s access to finance through the banking system. 29. Restructuring of SOFIDE to attain the above objectives (which has been agreed in principle with its largest and controlling shareholder, the Ministry of Finance) will be predicated on (a) completion of a number of studies to develop strategic and action plans for addressing changes required to its current portfolio, legal and statutory frameworks, governance structures, organization and staffing, technical capacity, and business and operational plans; (b) formal agreements with shareholders, including the responsible Government authorities (e.g. Ministry of Finance), and other (minority) shareholders such as private banks (e.g. BCDC) and small private investors; and (c) the implementation process, which is expected to take up to 2 years once formal agreements are in place. The Project will finance the requisite technical studies, and support implementation based on availability of resources and cost-sharing by the shareholders.
Box 3: SOFIDE
SOFIDE was established in 1970 with the objective of funding the development of enterprises in Congo, through medium and long-term loans and equity participation.). Its mission was to promote medium- and long-term financing of SMEs. The first 20 years of its existence were good years. It received eight lines of credit from IDA, six from KfW as well as financing from EIB, CIDA, OPEP, and AFDB. At no time did it collect deposits. Activities of SOFIDE were suspended from the early nineties to 2012. It ceased operations when international assistance was suspended, as this cut its funding sources, and when the quality of its currency-denominated loans deteriorated. The Government no longer assumed the foreign exchange risk; borrowers had increasing difficulties in repaying their loans; and relationship between Congo and the donors soured. Internally, mismanagement led to laxism in loan extension and little effort at credit recovery. SOFIDE registered losses, its portfolio shrank. It implemented a restructuring plan, selling real properties and renting its administration building in Kinshasa. Its staffing was sharply reduced (from close to 270 to 30). It has generated income by renting its real property and granting three to six month loans (portfolio of US$1.5 million). In 2012, the State decided to strengthen its financial base in order to encourage SME financing. Capital was increased from US$2 million to US$24 million following a reevaluation of its real property assets. A further increase to US$64 million is expected. The two advances of US$10 million granted by the State in September 2012 and January 2013 will then be converted. State ownership should increase to 75 percent (from the current 56 percent following the recent takeover of the BCC shares). At end of September 2013, the gross portfolio was already composed of sixty-three projects for a gross amount outstanding close USD 20 million. Loan maturities range from three to three and a half years and average loan amounts stand at close to US$300,000. The interest rate is 15 percent and loans are collateralized. Funded projects cover mainly independent SMEs rather than big groups. Arrears on this portfolio concern three clients and amount to four percent fully provisioned All activities are in USD.
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Component 3: Line of Credit for Medium to Long Term Finance 30. This component will promote the establishment of a sustainable financial intermediation framework for MSMEs in DRC by supporting eligible Participating Financial Institutions (PFIs) through a line of credit administered by a qualified Intermediary Financial Institution (IFI). As medium and long term lending is unavailable to SMEs due to lack of term resources in the banking system and restrictive regulatory constraints (prudential liquidity rules from the Central Bank), the Line of Credit (LOC) will be made available to eligible participating financial institutions (banks and MFIs) to provide them with medium-to-long term funds for financing of viable projects of creditworthy private MSMEs operating in DRC, including their capital investment needs. 31. The aim will be to support SMEs development and promote their financial inclusiveness primarily by increasing commercial banks and MFIs lending to SMEs along value chains and expanding outreach to microenterprises respectively. In a first phase, on a pilot basis and in a limited geographical area, two or three sound financial institutions offering MSMEs services will be identified and provided with technical assistance to target SMEs along value chains and on how to integrate value chain into their product mix.
Table 5: Commercial banks’ lending by sector; end-2012
32. This component will address the current lack of refinancing opportunities for financial institutions for a tenor above one year. The project will provide participating
50
financial institutions with term funding and a more balanced asset and liability structure, so that they are in a better position to support MSME investments on a longer term. 33. MSMEs are severely constrained by limited access to credit due to deficiencies in the business environment which raise lending risks, low capacity of banking sector to manage risks associated with downscaling and serving SMEs, and very high operating and liquidity costs. In addition, MFIs development is limited by structural weaknesses as one-fifth of the 28 largest savings and loans cooperatives (COOPECs) have negative equity, although COOPECs account for most of the assets in the microfinance sector (73 percent of assets in 2012). Though for historical reasons savings still exceed loans from MFIs (the COOPECs originally were created in the 1970s as savings networks), theses deposits are highly volatile, due to uncertainties in the local environment, especially in the Kivu provinces. 34. By granting loans earmarked for SMEs, the project will incentivize eligible financial institutions to approach non-formalized SMEs, which represent the most important part of the local economic environment but are neglected for risk considerations, as commercial banks in DRC are competing on a limited number of enterprises able to produce audited accounts. In addition, it will support qualified MFIs to expand their outreach to microenterprises and help the poorest populations to obtain access to basic financial services, also in rural areas. This realization is grounded in achievements during year one of the Project, specifically the implementation of Component 2 of the Project.
35. It is geared around the realization of an expanded and deepened technical and financial capacity of the financial sector to provide term finance with which to support MSME-led growth and diversification of the economy, especially in industry sectors with largest potential for job creation and social inclusiveness in the supply of products to market. 36. This will be achieved through a two-pronged, phased approach. The first phase (years 2-3 of the Project) will provide financial intermediation on a pilot basis, utilizing 2-3 competitively-selected commercial banks and MFIs who would be assisted with appropriate market information, specialized technical capacity, and potential pipeline of bankable propositions, and supplemented with access to long term competitively-priced line of credit for on-lending to MSMEs along the job-creating value-chains, including for capital investments. The second phase (years 3-5 of the Project) will scale up and expand the financial intermediation support based on experience and lessons from the pilot phase, to other PFIs with confirmed performance towards the MSMEs market, possibly due to their technical capacities improvements following technical assistance provided during Phase 1.
37. The IDA line of credit (LOC) will be administered by a qualified wholesale intermediary entity, which in order to make the project successful will have (i) to comply with the eligibility criteria listed below; (ii) to demonstrate its technical capacity to appraise and select PFIs, implement and monitor the LOC, in a transparent and equitable manner vis-à-vis the whole banking system, (iii) its ability to support through technical assistance by FPM ASBL potential PFIs who wish to finance MSMEs, and especially those linked to value chains, (iv) to administer the LOC in line with the project criteria and in a professional manner.
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38. One potential wholesale institution being considered could be FPM SA, a financial services corporation in process of being registered and expected to be operational by mid to late 2014, with multi-donor funding led by KFW, and potential other private investors.
Box 4: FPM SA
FPM SA will be a spin-off of the refinancing activities of FPM, a non-profit NGO providing capacity building to the financial sector in DRC, that was created end of 2011 by KfW, UNDP/UNCDF and the World Bank in the frame of DRC’s “Programme d’Appui au Secteur de la MicroFinance” (PASMIF), to which the Belgian Development Cooperation is about to grant US$4.3 million in 2014. FPM SA will gradually constitute a loan portfolio with Participating Financial Institutions (“PFIs”) with a sustainable profile across the financial sector, and will rely on FPM (original NGO, in French ASBL) for the capacity building. In this context, targeted weaker microfinance institutions will first be reinforced through capacity building from FPM ASBL, while larger banks will be incentivized to start downscaling programs to make sure that the loans granted are effectively used for SME funding. FPM SA will be a unique vehicle that will incentivize the financial sector to provide longer term financing to the missing middle (mesofinance). FPM SA will be set up as an OHADA accredited Congolese Société Anonyme and will be licensed as “Société Financière” by the Central Bank of DRC. The other prospective founding investors next to BIO are KfW, DFID, Cordaid and LMDF. The duration of FPM SA is fixed at 10 years, with the opportunity to extend by two consecutive periods of 5five years (decisions to be taken resp. in year five and ten). According to the base case, with currently anticipated total commitments and a limited leverage, US$136 million of long-term refinancing will be provided by FPM SA to the financial sector in DRC in a ten year period. FPM SA will be managed by Incofin IM, a reputable Belgian fund manager that BIO knows well through investments in their microfinance funds and with whom we have a very positive track record. FPM SA will inherit the standards of compliance adhered to by FPM, in terms of IFC Environmental Performance Standards and ILO Labour Standards. It will continue to endorse the Smart Campaign which aims at protecting the final clients of the financial institutions and requests its partner financial institutions to apply the 7 Client Protection Principles (“CPPs”) when they receive a loan: - Avoidance of Over-Indebtedness - Appropriate product design and delivery - Transparent and Responsible Pricing - Appropriate Collection Practices - Ethical Staff Behavior - Mechanisms for Redress of Grievances - Privacy of Client Data FMP SA will be set up as an OHADA accredited Société Anonyme, which will be able to grant loans to MFI’s and banks directly without having to go through an intermediary. While FPM ASBL will continue to be donor funded, FPM SA will be funded by investors looking for a minimum level of return. FPM SA will start with a blank loan portfolio, as it would be too complicated to transfer the existing loan portfolio of FPM ASBL. Since FPM SA needs to be able to carry out lending operations directly to MSME clients and as it will not be active as a deposit taking institution, FPM SA will not be created as a bank but as a “finance company”, avoiding thereby the constraint linked to the minimum capital requirements (US$10 million) imposed to banks in DRC. For that kind of institution, no precise minimum capital requirement is specified in the Central bank’s guidelines but the latter agreed to set the floor at US$5 million for FPM SA. The duration of FPM SA is fixed at ten years, with the opportunity to extend with two consecutive periods of five years (decision to be taken resp. in year five and ten). A first decision to extend will have to be taken in year five, at a time when FPM SA will already have a sufficient track record to allow the shareholders to take an articulate decision. The decision to extend will be taken by special majority on the occasion of an extraordinary general meeting. In case of extension, shareholders who will have voted against will benefit from a priority exit right through capital reduction.
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In case the duration is not extended, a phase out of the lending activity will be organized, with a pro rata reimbursement of the different shareholders following the gradual repayments of the outstanding loans. FPM SA will grant long term financing to Partner Financial Institutions (“PFIs”) focusing on micro, small and medium enterprises. The PFIs in DRC can be divided in the three following categories: � Local microfinance: This category includes local microfinance initiatives, COOPECs and COOCEC. This is the most numerous categories, but only a few seem to be able to become economically sustainable in the long term. The continued support through capacity building from FPM ASBL will be key in many cases, as it will either eventually make some of them eligible for FPM SA funding in due course or increase their absorption capacity if they are already eligible. Even if this should form the largest number of PFIs in FPM SA’s portfolio, it should represent around 20 percent of the loan portfolio, given their lower absorption capacity. � International microfinance: These PFIs, being either MFIs part of a larger international microfinance group or MFI banks, already have most key processes in place to grow. They will be aiming at expanding their activities in DRC, and will therefore welcome local long term funding through FPM SA. � SME banks: The bigger universal banks of course will appreciate the long term funding offered by FPM SA, but a specific attention will be given to ensure that the funds are effectively used for SME funding. A quarterly monitoring tool will be put in place to ensure proper use of the funds.
Proposed Line of Credit Design 39. Once the qualified wholesale Intermediary Financial Institution (IFI) is identified during year one of the project, the following framework will be used to finalize the design and operational set up for the implementation of the credit line. Flow of funds 40. The flow of funds will be as follows:
41. Loan from the Government to the IFI. The structure of the funds flow from the Government of DRC to the IFI will be in the form of a grant or senior or subordinated debt, with terms and conditions for reimbursement, that take into account development objectives of the project, including the medium and long-term nature of the funds to be extended from the IFI to the PFIs. The appraisal and selection of the potential IFI will be done by the World Bank team. 42. Loan Terms to PFIs. Expected loan maturity of up to five years, with a consideration for an appropriate grace period (up to two years) on principal repayment. The on-lending rate to PFIs will be set to reflect the cost of funds, administrative/operational costs, and credit risk, in alignment with the market conditions. The loans will be extended to eligible PFIs in USD or, if
World Bank
Minister of Finance
DRC IFI Term
Funds
Participating Finance
Institutions
Final Borrowers (MSMEs)
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hedging instruments are available for PFIs, in local currency. Foreign exchange risks will not be passed on to the final borrowers. 43. Sub-Loan Terms: Expected loan maturity of up to five years, and grace period of up to 2 year. The PFIs will assume full credit risk for their sub-loan portfolios and will be free to price the loans in line with the market conditions to ensure their sustainability. There will be no interest rate subsidies or interest rate capping. 44. Allocation of the Loan Amount to PFIs. Access to the line of credit would be made on a first-come-first-serve basis. Lending thresholds will be set to limit excessive exposure to a single PFI. 45. Availability of funds to PFIs. Once a PFI needs funding, it will make a request to the wholesaler to refinance the sub-loans to be extended to the sub-borrowers for the related sub-projects. The wholesaler will evaluate each PFI application to ensure that the final borrower and the sub-project requests meet the agreed eligibility criteria and that the PFI’s sub-loan appraisal and approval conforms to the project criteria and the Operations Manual. 46. Eligible Sub-Loan Activities and Terms. Sub-loans which will include both investment and working capital loans will be extended to eligible MSMEs. MSMEs funded under the Line of Credit will include creditworthy private sector entities operating in DRC, under the combination of the two following criteria : i) borrowers of loans up to 150 thousand USD, excluding consumption and housing loans and ii) for loans over 150 thousand USD , enterprises with an annual turnover under 3 million USD. MSMEs will be eligible if they are not already affiliates of large corporates and if the total exposure amount of the financing bank towards this counterpart and its related parties is compliant with banks prudential regulations. Audited annual reports will ensure the actual implementation of these criteria. Goods and works on the Bank’s negative list will not be eligible for financing. The Bank policy on environmental and social safeguards also will have to be complied with, as defined in this document. 47. Sub-loans extended to eligible MSMEs will include both investment in subprojects and working capital loans for increased production of goods and services, excluding consumption and housing loans. They will not finance working capital to maintain existing levels of production. They will not finance any of the products or activities deemed illegal under host country laws, regulations or international conventions and agreements, or subject to international bans, such as pharmaceuticals, pesticides/herbicides, ozone depleting substances, PCBs, wildlife etc. The subprojects will meet eligibility and development criteria that ensure subprojects are financially viable and technically, commercially, managerially, and environmentally sound. 48. For example, the following activities will not be eligible for financing under this project:
a. Production or trade in weapons and munitions; b. Production or trade in alcoholic beverages; c. Production or trade in tobacco; d. Gambling, casinos and equivalent enterprises;
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e. Production or trade in radioactive materials. This does not apply to the purchase of medical equipment, quality control (measurement) equipment and any equipment where the radioactive source is considered to be trivial and/or adequately shielded;
f. Production or trade in unbounded asbestos fibers. This does not apply to purchase and use of bonded asbestos cement sheeting where the asbestos content is less than 20 percent; and
g. Production or activities involving harmful or exploitative forms of forced labor /harmful child labor.
49. Reporting. The PFIs will be expected to report on their MSME portfolio and key financial and performance indicators on a monthly basis during the drawdown and quarterly thereafter. The wholesaler will prepare quarterly reports. 50. Supervision. The IFI will be responsible for implementing and supervising the credit line with respect to the project criteria. This will include assessing and monitoring PFIs compliance with eligibility criteria, supervision of withdrawal applications and sub-loans, and reporting on the credit line implementation progress. The supervision process will also include review of the PFIs audited financial statements on annual basis.
51. Eligibility of Participating Financial Institutions (PFIs). In order to qualify for the access to the credit line and become a participating financial institution under the project, all financial institutions considered will be appraised against the eligibility criteria listed below. The chosen wholesale institution will have responsibility to appraise and select the financial intermediaries in line with the project established criteria and monitor their compliance during the project implementation, with formal review conducted annually. The Association will review the eligibility reports for each institution as prepared by the wholesaler. 52. Eligibility of the participating institutions (PFIs) will be assessed based on the following core criteria:
a. PFI must be duly licensed and at least two years in operation; b. PFI’s owners and board of directors should be “fit and proper”; c. It must have qualified and experienced management, adequate organization and
institutional capacity for its specific risk profile; d. PFI must be in “good standing” with its supervisory authority (i.e. it should meet
all prudential and other applicable laws and regulations) and remain in compliance at all times;
e. PFI must have well defined policies and written procedures for management of all types of financial risks (liquidity, credit, currency, interest rate and market risk, as well as risks associated with balance sheet and income statement structures);
f. PFI must maintain capital adequacy as prescribed by prudential regulations; g. PFI must have adequate liquidity; h. PFI must have positive profitability and an acceptable risk profile; i. PFI must have adequate portfolio quality; j. PFI must have adequate internal audits and controls for its specific risk profile; k. PFI must have adequate management information systems;
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l. PFI must demonstrate commitment to MSME finance; m. PFI must have in place satisfactory MSME loan approval processes and risk
management procedures.
Key indicators monitored under the line of credit 53. Targets will be determined during the first year of the project, when the Line of Credit arrangements will be finalized once the eligible intermediary institution is identified. 54. As for the qualified wholesale intermediary financial institution (IFI), the following indicators will be monitored:
Baseline Targets – Phase 1 Actuals
Indicators 2014 2015 2016
2015 (Jun)
2015 (Dec)
2016 (Jun)
2016 (Dec)
Volume of wholesale loans financed 0 Number of wholesale loans financed Wholesale Portfolio at Risk Number of PFIs 0 55. For each PFI, due to the low quality of data in the country, straight-forward impact criteria will be put in place, as follows:
Baseline Targets – Phase 1 Actuals
Indicators 2014 2015 2016
2015 (Jun)
2015 (Dec)
2016 (Jun)
2016 (Dec)
Number of new sub-loans financed SME sub-loans: Micro-subloans
Volume of new loans financed SME sub-loans ( USD) Micro-sub-loans ( USD)
Number of loans financed in other Provinces than Kinshasa and Kivu
SME sub-loans Micro-sub-loans Volume of loans financed in other Provinces than Kinshasa and Kivu
SME sub-loans (USD) Micro-sub-loans (USD)
Tenor of Loans (by currency) Average tenor of loans in CDF Average tenor of loans in USD
PFI MSMEs Portfolio at Risk Outstanding PFI MSME Loan Portfolio (USD)
PFI compliance with prudential regulations (yes/no)
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56. Additional relevant criteria may be developed during implementation. 57. Further indicators will be monitored under the project for analytical purposes. These will include an impact assessment, commissioned at the end of the project, including a survey of borrowers, to evaluate impact of the line of credit, especially on MSME beneficiary performance in terms of increase in sales and/or employment; geographic location; and sub-loan features (e.g. loan size, maturity, and interest rate).
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Annex 3: Implementation Arrangements
DEMOCRATIC REPUBLIC OF CONGO: Financial Infrastructure and Markets Project 1. The design of the institutional and implementation arrangements takes into account lessons learned in other countries as well as during the implementation of other projects in the DRC. The weak capacity as well as coordination failures within the Congolese public sector needs to be addressed for the project to achieve its development impact. All the relevant institutions of the public and private sectors as well as the civil society, which have contributed to the project preparation, continue to support project implementation. Their capacity will be strengthened through the recruitment of consultants, training, and workshops. The main responsibilities of the core structures of the implementation arrangement are briefly summarized below.
Figure 3: Organizational Chart of the Implementation Arrangements
2. The project will be anchored within the Ministry of Finance that led its preparation from the Government side. 3. A Project Coordination Unit set up under the Ministry of Finance will be responsible for the overall coordination and of the administrative and fiduciary aspects of the project, mainly procurement and financial management. Some project components or specific activities will be executed by technical services of the BCC and FPM. Financial Management, Disbursements, and Procurement
Country PFM situation and Use of Country System
4. The Country Financial Accountability Assessment (CFAA), the Public Expenditures Review (PER), and the Public Expenditure and Financial Accountability (PEFA) 2008 and
Ministry of Finance
(MinFin)
Steering Committee Chaired by Minister of
Finance
Project Coordination Unit (CFEF
unit)
Component 1: Modernization of Payments Infrastrucure for Inclusive
FinanceBCC
Component 2: Technical Support to Financial Market Development
BCC and FPM
Component 3: Line of Credit for Medium to Long Term
Financial Intermediary Institution CGPMP
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2012 have shown an unsatisfactory economic and financial control environment including weak budgeting preparation and control, financial reporting, external audit and human resources. In-depth structural reforms are consequently required in the areas of economic governance, public expenditure management, financial sector, and public enterprises to strengthen capacity in the public administration. To this end, with the support of the donor community, the Government of DRC has undertaken a series of PFM reforms in budget preparation and execution, adhesion to Treasury forecasts, preparation of regular budget execution reports, and simplification of the national budget classification system. The first critical step of these series of Public Financial Management (PFM) reforms is the adoption in July 2011 of a new PFM organic Law preceded by the adoption of a new Procurement code in December 2008. Additional decrees are being finalized to further clarify the organic Law. Yet, there is reason for cautious optimism; since it will take time for these reforms to yield substantial improvements in the management of public funds. As a result, the overall country fiduciary risk is still considered High. The repeated PEFA, just concluded at the end of 2012, took stock of the areas of progress and revised the existing PFM strategy plan accordingly. This will pave the way for a new PFM Technical Assistance operation. In that vein, an assessment of the use of the country national PFM systems (UCS) has been undertaken in April 2013 with the aim to identify areas in which these systems could be relied upon for the implementation of Bank-financed projects. The UCS assessment report is in process to be finalized. While waiting for the outcomes of the use of country system assessment, the proposed project will (i) be entrusted at the CFEF Unit, (ii) and rely on WGPP’s fiduciary arrangements that will be strengthened. Risk Assessment and Mitigation Measures 5. The Bank’s principal concern is to ensure that project funds are used economically and efficiently for the intended purpose. Assessment of the risks that the project funds will not be so used is an important part of the financial management assessment work. The risk features are determined over two elements: (i) the risk associated to the project as a whole (inherent risk), and (ii) the risk linked to a weak control environment of the project implementation (control risk). The content of these risks is described below.
Risk Risk
rating Risk Mitigating Measures
Incorporated into Project Design
Risk after mitigation measures
Conditions for effectiveness
(Y/N) Remarks
INHERENT RISK S S Country level Delay in the implementation of the different PFM reforms that might hamper the overall PFM environment.
H Finalize the preparation of the current project (US$ 26 million) in support of the PFM reforms. This operation will be prepared under the Bank leadership as to address the key new challenges the country is facing. Rely on the existing coordination unit in charge the PFM reforms which has benefited from Bank – DFID initial TA.
H N The Bank last assessment (September 2012) of the implementation of the existing PFM strategy has shown an acceptable progress.
Entity level None except additional workload.
M CFEF Unit is familiar with IDA FM procedures and staffed with experienced fiduciary consultants.
M
N
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Risk Risk
rating Risk Mitigating Measures
Incorporated into Project Design
Risk after mitigation measures
Conditions for effectiveness
(Y/N) Remarks
Project level The project funds may not reach all beneficiaries and would be used for goals other than the intended purposes.
S CFEF Unit will strengthen ex-ante and ex-post control of funds allocated to the implementing entities. The scope of the external audit and Bank’s FM supervision will include review of expenditures incurred at all levels. Project’s staff fiduciaries capacity will be strengthened to strictly adhere to the fiduciary procedures included in the Project manual.
S
N
CONTROL RISK S S Budgeting Weak budgetary execution and control inducing budgetary overspending or the inefficient use of funds.
S Annual work plan and budget will be prepared each year. The project FM Manual of Procedures will define the arrangements for budgeting, budgetary control and the requirements for budgeting revisions. Annual detailed disbursement forecasts and budget required. IFR will provide information on budgetary control and analysis of variances between actual and budget.
S
Accounting Risk of increasing of the FM team workload leading to some delays in the submission of the required reporting
M
The current FM staffing arrangement is adequate but may be strengthened with one additional accountant recruited on competitive basis. The existing accounting software will be customized to take into account the new project’s specificities.
M
N
Internal Controls and Internal Audit The manual of procedures used by CFEF Unit doesn’t describe the specifics of the new project Internal controls procedures.
S (i) Update the CFEF’s existing manual of procedures to capture the specificities of the new project; (ii) update the ToRs of the current internal audit unit to reflect the new project specificities; and (iii) establish a channel of collaboration between IGF and the current project's internal audit unit to agree on project's risk mapping and work program .
S
N
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Risk Risk
rating Risk Mitigating Measures
Incorporated into Project Design
Risk after mitigation measures
Conditions for effectiveness
(Y/N) Remarks
Funds Flow (i) Risk of misused of funds and (ii) use funds to pay non eligible purposes (i) Risk of misused and inefficient use of funds; and (ii) delays in transfer and justification of advances made to decentralized offices.
S (i) Payment requests will be approved by the Coordinator and the administrative and financial manager prior to disbursement of funds, and (ii) the ToRs of the external auditors will include field visits (physical verification of goods, services acquired).
S
N
Financial Reporting (i) Delay in the submission of IFRs due to the increase in the PCU activities; (ii) format and content of the IFR may not be appropriate
M (i) A computerized accounting system in place and adequate staffing arrangements are in place under the Western Growth Poles Project (WGPP). (ii) The current content and format of the WGPP’s IFR are acceptable to IDA. The IFR of the new project will use the same format and content.
M
N
External Auditing Scope of the audit may not cover key issues; poor performance of the external auditor; or delays in submission of audit reports
S (i) Recruitment of an external auditor acceptable to IDA in line with International Accounting Standards (including fraud and corruption) (ii) involve the DRC’s Supreme Audit Institution (Cour des Comptes) in the process of the external auditors’ selection and their reports reviewing.
S Three
months after
effective-ness
N
Governance and Accountability Possibility of circumventing the internal control system with colluding practices is a critical issue.
H The TOR of the external auditor will comprise a specific chapter on corruption auditing (i) FM manual of procedures will include anti-corruption measures including a specific safety mechanism that enables individual persons and NGOs to denounce abuses or irregularities; (ii) Robust FM arrangements designed to mitigate the fiduciary risks; and (iii) Measures to improve transparency such as providing information on the project status to the public, and to encourage participation of civil society and other stakeholder will be built into the project design.
H Over
implementation
N
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Risk Risk
rating Risk Mitigating Measures
Incorporated into Project Design
Risk after mitigation measures
Conditions for effectiveness
(Y/N) Remarks
The implementing agency will prepare a code of conduct including clear procedures for disciplinary action.
Overall FM risk S S 6. The overall risk rating is Substantial.
Table 6: Financial Management Action Plan to reinforce the control environment
Issue Remedial action recommended Responsible
entity Completion
Effectiveness conditions
Staffing Recruit one assistant accountant dedicated to the new project.
CFEF Unit Three months after
effectiveness
N
Information system accounting software
Upgrade the existing accounting software version acquired under WGPP’s financing to reflect the new project specificities
CFEF Unit Three months after
effectiveness
N
Administrative, Accounting and Financial Manual of procedures
Update the current WGPP’s manual of procedures (i) to include the specificities of the new project; (ii) ensure adequate ownership by the new players; and (iii) strengthen the anti-corruption aspects.
CFEF Unit Three months after
effectiveness
N
Internal auditing Revision of the ToRs of the current internal auditor to reflect the new project specificities.
CFEF Unit Three months after
effectiveness
N
External financial auditing
Recruitment of the external auditor acceptable to IDA
CFEF Unit Three months after
effectiveness
N
7. Governance and anticorruption considerations. The country political situation has weakened the governance and corruption environment. In the context of the project, the following governance and anti-corruption measures will contribute to enhance transparency and accountability during the project implementation: (i) an effective implementation of the fiduciary mitigation measures should contribute to strengthen the control environment, (ii) the appropriate representation and oversight of the Steering Committee involving key actors, as well as the transparency in both operation implementation and dissemination to stakeholders and the public during project implementation, (iii) the TOR of the external auditor will comprise a specific chapter on corruption auditing, (iv) FM manual of procedures will include anti-corruption measures with a specific safety mechanism that will enable individual persons and NGOs to denounce abuses or irregularities, (v) measures to improve transparency such as providing information on the project status to the public and to encourage participation of civil society and other stakeholders will be strengthened during project implementation, and (vi) finally, update the existing GAC action plan under the Western Growth Poles Project to include the current project's GAC risks. 8. Staffing and Training: The CFEF Unit staffing should be adequate and commensurate with the extent of the operations and activities under the project; should be sufficient to maintain
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accounting records relating to project financed transactions; and should be able to prepare the project’s financial reports. Currently CFEF Unit is staffed, on the FM side, with (i) a qualified and experienced Financial Management Expert in charge of the supervision of all FM activities of the project; (ii) an experienced Accountant; and (iii) a Treasurer. One additional accountant will be recruited to reinforce the FM team in the perspective of the workload which the new project will generate. On the internal audit side, the current arrangement is acceptable and will be applied to the new project. The ToRs of the internal auditor will be revised within three months after the project effectiveness to take into consideration the new project specificities. The team will have the overall FM responsibility over, budgeting, accounting, reporting, disbursement, internal control and auditing. The staff will have its capacity reinforced over the project implementation with the rolling out of the training plan which includes among other, training on IDA disbursement procedures, training on OHADA accounting principles and its implication for a donor-financed operation, and training on IDA financial reporting arrangements. 9. Budgeting: The WGPP’s manual of procedures previously used by CFEF Unit already includes detailed budgeting procedures, the preparation of annual work plan, and the adoption by the Steering Committee to the budget execution. It will be revised to incorporate the new project specifics. 10. Accounting Policies and Procedures: The WGPP’s manual of procedures currently used by CFEF unit details the accounting policies and procedures which are in line with the Congolese accounting principles. This manual of procedures will be revised to include the new project's specifics. The accounting software acquired under WGPP’s financing will be used. This accounting software is multi-projects, multi-sites and multi-donors. 11. Internal Control and Internal Auditing: Subject to revision of the manual of procedures, the existing internal control arrangements will be applied. The ToRs of the internal auditor will be revised by negotiation to take into consideration the project specificities. The internal auditor will report directly to the Coordinator and Steering Committee. He will undertake periodic assessments on the strengths and weaknesses of the internal control system at all levels. All control deficiencies or circumvented practices identified will be communicated in a timely manner to the overall senior management of the project for immediate corrective action as appropriate. One of each such report will also be communicated to the Bank. He will prepare relevant manuals and guidelines. In line with the DRC Use of Country System (UCS) Report to fully rely on Inspection Générale des Finances (IGF) for project’s internal audit, the current project's internal control system could be strengthened by establishing a channel of collaboration between IGF and the current project's internal audit unit to agree on project's risk mapping and work program. Funds Flow and Disbursement Arrangements 12. A Designated Account (DA) will be opened in a commercial bank on terms and conditions acceptable to IDA under the fiduciary responsibility of CFEF Unit. This DA will be managed according to the disbursement procedures described in the Project Implementation Manual (PIM) and the Disbursement Letter (DL) for the Project. The ceiling of the account will be specified in the DL estimated to be the equivalent of four months of project cash needs and takes into account the disbursement capacity of the various structures implementing the Project.
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This ceiling will be set at US$ 2 million. This Designated Account will be used to finance all eligible project expenditures under the different components. Payments will be made in accordance with the provisions of the manual of procedures (i.e. two authorized signatures will be required for any payment). This DA will be used to pay the suppliers selected through acceptable Bank procurement procedures. Replenishment of these accounts will be done at least once a month by the project upon submission of acceptable supporting documents. Advances to the Designated Account will be made against withdrawal applications supported by Statements Of Expenditures (SOE) and other documents as specified in the Disbursement Letter. All supporting documents should be retained at the project and readily accessible for review by periodic IDA implementation support missions and external auditors. 13. Disbursement method. Upon Grant effectiveness, transaction-based disbursements will be used during the first year of the project implementation. Thereafter, the option to disburse against submission of quarterly unaudited Interim Financial Report (also known as the Report-based disbursements) could be considered subject to the quality and timeliness of the IFRs submitted to the Bank and the overall financial management performance as assessed in due course. In the case of the use of the report-based disbursement, the DA ceiling will be equal to the cash forecast for two quarters as provided in the quarterly unaudited Interim Financial Report. The option of disbursing the funds through direct payments to suppliers/contractors for eligible expenditures will also be available for payments equivalent to twenty percent (20 percent) or more of the DA ceiling. Another acceptable method of withdrawing proceeds from the IDA grant is the special commitment method whereby IDA may pay amounts to a third party for eligible expenditures to be paid by the Recipient under an irrevocable Letter of Credit (LC). The funds flows diagram for the DA is as follows:
Commercial bank managed by CFEF Unit Designated Account
Suppliers / Service Providers
IDA
Transfers of funds
Flow of documents (invoices, good receipt notes, purchase order, contract)
Payment to suppliers
Transactions based
Direct payment
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14. Disbursement of Funds to other Service Providers and Suppliers. The CFEF Unit will make disbursements to service providers and suppliers of goods and services in accordance with the payment modalities, as specified in the respective contracts/conventions as well as the procedures described in the project’s Administrative, Accounting, and Financial Manual. In addition to these supporting documents, the Project will consider the findings of the internal audit unit while approving the payments. The CFEF Unit, with the support of its internal audit unit, will reserve the right to verify the expenditures ex-post, and refunds might be requested for non-respect of contractual clauses. Misappropriated activities could result in the suspension of financing for a given entity. 15. Disbursements by category. The table below sets out the expenditure categories to be financed out of the Grant. This table takes into account the prevailing Country Financing Parameter for DRC in setting out the financing levels. In accordance with Bank standard procurement requirements, contracts will continue to be approved “all taxes included” for local expenditures. The project will, however, claim invoiced amounts excluding taxes. The Government will take appropriate steps to cover the tax portion of contracts signed by the project with contractors and suppliers of goods and services.
Table 7: Grant Allocation Proceeds
Category Amount of the Grant Allocated
(expressed in US$)
Percentage of Expenditures to be Financed
(inclusive of Taxes)
(1) Goods, Works, Non-Consulting Services, Consultants’ Services, Operating Costs, Workshops and Training for Components 1, 2, and 3 of the Project
14,000,000
100%
(2) Lines of Credit under Component 3 of the Project
15,000,000
100%
(3) Unallocated 1,000,000
TOTAL AMOUNT 30,000,000
16. Financial Reporting and Monitoring: Financial reports will be designed to provide quality and timely information on Project performance to Project management, and relevant stakeholders. Formats of the various periodic IFRs to be generated from the financial management system will be developed using the World Bank’s Financial Management Practices in WB-financed Investment Operations. The Project will use the same format of IFRs as WGPP which will be automatically generated from the project’s accounting software. This accounting software has features multi-projects, multi-sites and multi-donors. The quarterly IFR includes (i)
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the statements of sources and used funds, and utilization of funds per category; (ii) the updated of the procurement plan; (iii) the physical progress; (iv) expenditure types and implementing agent, showing comparisons with budgets; (iv) Designated Account activity statements and explanation notes to the IFR; and (v) the summary of missions of internal audit as well as implementation status of the recommendations of internal or external audit and supervision missions. The IFR will be prepared and submitted to IDA, 45 days after the end of each quarter. In compliance with International Accounting Standards and IDA requirements, the Project will produce annual financial statements. These include: (i) a Balance Sheet that shows Assets and Liabilities; (ii) a Statement of Sources and Uses of Funds showing all the sources of Project funds, expenditures analyzed by Project component and category expenditures; (iii) a Designated Account Activity Statement; (iv) an Implementation Report containing a narrative summary of the implementation progress of the Project; (v) a Summary of Withdrawals using SOE (transactions-based disbursement), listing individual withdrawal applications by reference number, date and amount; and (vi) Notes related to significant accounting policies and accounting standards adopted by management and underlying the preparation of financial statements. The financial statements will be submitted for audit at the end of each year or other periods to be stated. 17. External Auditing. The project’s financial statements and internal control system will be subject to external annual audit by an independent external auditor which will be recruited on Terms of Reference acceptable to IDA. The external auditor will give an opinion on the annual financial statements in accordance with auditing standards of IFAC. In addition to audit reports, the external auditor will also produce a management letter on internal control to improve the accounting controls and compliance with financial covenants under the financing agreement. The project will be required to submit, no later than June 30 of each fiscal year, the annual audited financial statements of the previous year. In compliance with the DRC UCS Report, the DRC’s Supreme Audit Institution (Cour des Comptes) could start being involved in the process of the external auditors’ selection and their reports reviewing. In line with the new access to information policy, the project will comply with the disclosure policy of the Bank of audit reports (for instance making available to the public without delay after receipt of all reports final financial audit, including audit reports qualified) and place the information on its official website within one month after acceptance of final report by IDA. 18. Implementation Support Plan. The bank’s FM implementation support mission will be consistent with a risk-based approach, and will involve a collaborative approach with the entire Task Team. Based on the current overall residual FM risk, the project will be supervised twice a year to ensure that project FM arrangements still operate well and funds are used for the intended purposes and in an efficient way. A first implementation support mission will be performed six months after the project effectiveness. Afterwards, the missions will be scheduled by using the risk based approach model and will include the following diligences: (i) monitoring of the financial management arrangements during the supervision process at intervals determined by the risk rating assigned to the overall FM Assessment at entry and subsequently during Implementation (Implementation Status and Results Report, ISR); (ii) integrated fiduciary review on key contracts; (iii) review the IFRs; (iv) review the audit reports and management letters from the external auditors and follow-up on material accountability issues by engaging with the task team leader, Client, and/or Auditors; the quality of the audit (internal and external)
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also is to be monitored closely to ensure that it covers all relevant aspects and provide enough confidence on the appropriate use of funds by recipients; (v) physical supervision on the ground specially; (vi) assistance to build or maintain appropriate financial management capacity; and (vii) the implementation support mission will include transactions reviews of expenditures occurred. 19. Conclusions of the FM Assessment. The overall residual FM risk is considered Substantial. The proposed financial management arrangements for this project are considered adequate to meet the Bank’s minimum fiduciary requirements under OP/BP10.00.
Procurement
General 20. Procurement for this project will be carried out in accordance with the World Bank’s “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011 (“Procurement Guidelines); and the World Bank’s “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011 (“Consultant Guidelines”) and the provisions stipulated in the Financing Agreement. The various procurement actions under different expenditure categories are described in general below. For each contract to be financed under the Financing Agreement, the various procurement or consultant selection method, the need for pre-qualification, estimated costs, prior review requirements, and time frame have been agreed between the borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual implementation needs and improvements in institutional capacity. The implementing entities, as well as contractors, suppliers and consultants will observe the highest standard of ethics during procurement and execution of contracts financed under this project. “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated October 15, 2006 and revised in January 2011 (the Anti-Corruption Guidelines) shall apply to the project. Reference to the National Procurement Regulatory Framework 21. For all contracts awarded through NCB method, the Bank may authorize the use of the national institutions and regulations that comprise the law including its texts of application, the institutions set up for the control and regulation and the institutions responsible for procurement activities implementation. The national competitive bidding procedures currently in force in DRC deviate slightly from the World Bank Procurement Guidelines NCB procedures for procurement of Works, Goods and Services (other than consultant services); thus, they have been already reviewed and appropriate modifications have been proposed to assure economy, efficiency, transparency, and broad consistency with the provisions included in Section I and paragraphs 3.3 and 3.4 of the Bank Procurement Guidelines (refer to the paragraph below).
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Requirements for National Competitive Bidding 22. The procedures to be followed for National Competitive Bidding shall be those set forth in the Recipient’s Procurement Code of April 27, 2010, as revised from time to time in a manner deemed acceptable to the Association, subject, however, to the modifications described in the following paragraphs required for compliance with the Procurement Guidelines:
a. Standard Bidding Documents. All standard bidding documents to be used for the Project under NCB shall be found acceptable to the World Bank before their use during the implementation of Project.
b. Eligibility. Eligibility of bidders and acceptability of their goods and services shall not be based on their nationality and/or their origin; and association with a national firm shall not be a condition for participation in a bidding process.
c. Advertising and Bid Preparation Time. Bidding opportunities shall be advertised at least in a national newspaper of wide circulation and on the website of the Recipient’s Procurement Regulator (Autorité de Régulation des Marchés Publics) and bidders should be given at least 30 days from the date of invitation to bid or the date of availability of the bidding documents, whichever is later.
d. Criteria for Qualification of Bidders. Qualification criteria shall only concern the bidder’s capability and resources to perform the contract taking into account objective and measurable factors. Such criteria for qualification of bidders shall be clearly specified in the bidding documents.
e. Bid Evaluation and Contract Award. A contract shall be awarded to the substantially responsive and lowest evaluated bidder provided that such bidder meets the qualification criteria specified in the bidding documents. No scoring system shall be allowed for the evaluation of bids, and no “blanket” limitation to the number of lots which can be awarded to a bidder shall apply. The criteria for bid evaluation and the contract award conditions shall be clearly specified in the bidding documents.
f. Preferences. No preference shall be given to domestic/regional bidders; to domestically/regionally manufactured goods; and to bidders forming a joint venture with a national firm or proposing national sub-contractors or carrying out economic activities in the territory of the Recipient.
g. Publication of Contract Award. Information on all contract awards shall be published in at least a national newspaper of wide circulation or in the Recipient’s Procurement Regulator (Autorité de Régulation des Marchés Publics) web-site.
h. Fraud and Corruption. In accordance with the Procurement Guidelines, each bidding document and contract shall include provisions stating the World Bank’s policy to sanction firms or individuals found to have engaged in fraud and corruption as set forth in the Procurement Guidelines.
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i. Inspection and Audit Rights. In accordance with the Procurement Guidelines, each bidding document and contract shall include provisions stating the World Bank’s policy with respect to inspection and audit of accounts, records and other documents relating to the bid submission and contract performance.
j. Requirement for administrative documents and/or tax clearance certificate. The bidding documents shall not require foreign bidders to produce any administrative or tax related certificates prior to confirmation of awarding a contract.
k. Modifications of a Signed Contract. Any change in the contract amount which, singly or combined with all previous changes, increases the original contract amount by 15 percent (fifteen percent) or more must be done through an amendment to the signed contract instead of signing a new contract.
23. Procurement of Works. There are no works planned under this project. 24. The procurement will be done using the Bank’s Standard Bidding Documents (SBD) for all ICB and National SBD found acceptable by the Association. Other methods of procurement will be direct contracting and quotations. 25. Procurement of Goods and non-consulting services. Goods procured under this project include mainly: vehicles; computer equipment; office furniture; data collection tools; and software. Non-consultancy services procured under this project will include workshops, training in the region and abroad. 26. The procurement will be done using the Bank’s SBD for all ICB and National SBD found acceptable by the Bank. Other methods will be direct contracting; LIB (Limited International Bidding), and Shopping. The first two contracts for Works and the first two contracts for Goods and services other than consultants’ services will be subject to prior review by the World Bank. 27. Selection of Consultants. Consultancy services required for the project would cover consultancies and technical assistance, including installation of the network infrastructure for the ATS/CSD. All consulting services contracts with estimated costs equal to or more than US$200,000 equivalent for firms will be awarded through Quality and Cost Based Selection (QCBS) method. Contracts for Specialized assignments with costs less than US$200,000 equivalent may be contracted through Consultant’s Qualifications (CQ) and Quality Based Selection (QBS) method. Contracts for standard accounting audits and of a routine nature may be awarded under Least Cost Selection (LCS). Single Source Selection (SSS) may be employed with prior approval of the Bank and will be in accordance with paragraphs 3.8 to 3.11 of Consultant Guidelines. All services of Individual Consultants (IC) will be procured under individual contracts in accordance with the provisions of paragraphs 5.1 to 5.6 of Consultant Guidelines. Short lists of consultants for services estimated to cost less than US$ 100,000 equivalent per contract for ordinary services and USD 200,000 for design and contract supervision may be composed entirely of national consultants in accordance with the provisions
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of paragraph 2.7 of the Consultant Guidelines. However, if foreign firms express interest, they will not be excluded from consideration. All TORs, regardless the cost estimate, will be subject to prior review by the Bank. 28. Operating Costs. The operating costs for this project will include expenses related to Management of the CFEF. These expenses shall consist of some staff (consultant) salary costs, office supplies, travel expenses and subsistence expenditures, operation and maintenance costs for vehicles and equipment, which would be procured using the implementing agency’s administrative procedures. 29. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the procurement manual. Training and Workshops: Training and workshops will be based on capacity needs assessment. Detailed training plans and workshop activities will be developed during project implementation, and included in the project annual plan and budget for Bank’s review and approval.
Table 8: Thresholds for Procurement Methods and Prior Review
Expenditure Category
Contract Value Threshold
(US$) Procurement Method
Contract Subject to Prior Review (US$)
1. Works ≥10,000,000 ≥5,000,000 <5,000,000 <200,000 All amount
ICB NCB NCB Shopping Direct contracting
All All Two first contracts None All
2. Goods ≥1,000,000 <1,000,000 <500,000 <100,000 All amount
ICB NCB Shopping from all major brands of vehicles dealers or distributors of petroleum products. Shopping Direct contracting
All All contracts ≥500,000 and the first two contracts Short-list of: (i) vehicles dealers; and (ii) distributors of petroleum products. The technical specifications of vehicles. None All
3. Services Firms
Ind. Consultants
≥200,000 <200,000 All amount ≥100,000 <100,000 All amount
CQ SSS IC IC SSS
All None All All None All
Assessment of the agency’s capacity to implement procurement 30. Procurement activities will be carried out by the CGPMP (Cellule de Gestion des Projets et Marchés Publics) of the Ministry Finance that reports to the Secretariat General of the said Ministry. In this context, procurement capacities of the Ministry of Finance were evaluated
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in March 2013. Although the concerned CGPMP staffs have received procurement training on the national procurement system in force in DRC, they have limited experience on Bank procurement rules and procedures. The CGPMP will benefit from needed support and technical assistance from the CFEF procurement specialist. To strengthen the capacity, a procurement expert will be recruited to provide periodically technical support and training to the CGPMP. Assessments on the risks and measures to mitigate 31. The Key issues and risks concerning procurement for implementation of the project have been identified and include:
a. The CGPMP of Ministry of Finance has no experience in implementing Bank-funded projects – staff experience is limited to procurement of goods through NCB and shopping procedures, with no experience in ICB procedures of selection of large-value consultancy contracts;
b. The record keeping is inadequate; c. The working environment is inadequate in terms of space for procurement records
and working space for procurement staff; d. The qualification of procurement staff is not sufficient; e. There is lack of clear procedures and guidelines spelled out in manuals; f. Government officials likely to be involved in project procurement through tender
and evaluation committees may not be familiar with procurement procedures according to World Bank guidelines and rules;
g. Control and regulation mechanism according to the provisions of the Country procurement law and its application procedures could delay the procurement process if mandatory reviews are required.
32. The overall project risk for procurement is high. Measures to mitigate the risks 33. Proposed corrective measures which have been agreed to mitigate the risk are summarized in the following table.
Ref. Tasks Responsibility Due date
1 On the job training of identified procurement staff on Bank procurement procedures by the recruited procurement expert
Ministry of Finance Continuous
2
Set up the project filing system in order to better keep procurement documents and reports and identify a staff responsible for this task. Train staff in data management.
CGPMP Three months after
effectiveness
3 Training of staff on World Bank procurement procedures in a specialized institution performing in DRC or abroad
CGPMP Three months after
effectiveness 4 Prepare a Project Implementation Manual including
procurement methods to be used in the project along with their step by step explanation as well as the standard and sample documents to be used for each method.
Ministry of Finance Four months after
effectiveness
5
Identify the root cause of procurement delays at National level and propose appropriate solutions (global)
CGPMP, DGCMP, ARMP and
By the end of this FY
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Ref. Tasks Responsibility Due date CSPP/World Bank
6
Inclusion of the procurement system (planning, monitoring and contract management) with the computerized project financial management system.
CGPMP Three months after
effectiveness 7 Recruitment of procurement specialist who will provide
periodically technical support and training to the CGPMP. Ministry of Finance Three months
after effectiveness
Procurement Plan 34. The Recipient, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Recipient and the Project Team, and is available at the CFEF (Government’ project coordination unit). It will be updated and made available in the project’s database and in the Bank’s external website. The Procurement Plan will also be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Frequency of Procurement Supervision 35. In addition to the prior review supervision to be carried out from Bank offices, the procurement capacity assessment has recommended at least two implementation support missions to visit the field and carry out post review of procurement actions during the initial two years of the project. As agreed with the Government, contracts will be published on the web. Annual compliance verification monitoring will also be carried out by an independent consultant and would aim to:
a. verify that the procurement and contracting procedures and processes followed for
the projects were in accordance with the Financing Agreement;
b. verify technical compliance, physical completion and price competitiveness of each contract in the selected representative sample;
c. review and comment on contract administration and management issues as dealt with by the implementation entity;
d. review capacity of the implementation entity in handling procurement efficiently; and
e. identify improvements in the procurement process in the light of any identified deficiencies.
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Details of the Procurement Arrangements Involving International Competition A. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting Works 36. No works will be carried out under this project. Goods
1 2 3 4 5 6 7 8 9 10 11
N° Réf
Contract Description Package Number
Estimated Amount in US$ (‘000)
Procure-ment
Method
Pre-or Post-
Qualifica-tion
Domestic Preference
(yes/no)
Prior or Post
Review
Estimated Bid Closing-
Opening
Estimated Contract Signature
Comments
Component 1: Modernization of Payments Infrastructure for Inclusive Finance
1. Automated Transfer System and Central Securities Depository (ATS/CSD)
1 Lot 1: Acquisition and installation of all software and network hardware for the ATS
Lot 1 3,000.0 ICB NO NO prior 10/28/2013 2/20/2014
US$1.2 million budgeted under the ongoing project
2. National Payments Card Retail Switch
2 Lot 2: Acquisition and installation of all software and network hardware for the NS
Lot 2 1,000.0 ICB NO NO priori 5/9/2014 8/12/2014
B. Consulting Services (a) List of consulting assignments with short-list of international firms
1 2 3 4 5 6 8
N°Réf Contract Description Procurement
Method
Estimated Amount in US$ (‘000)
Review by Bank
(prior/Post
Expected Contract Signature
Date
Comments
Component 1: Modernization of Payments Infrastructure for Inclusive Finance
Subcomponent 1.1. Physical Infrastructure
1 Network infrastructure for ATS/CSD (complete turnkey services, including hardware and software, training, maintenance warranties, etc) QCBS
1,800.00 prior 10/14/2014
Sub component 1.2. Technical Assistance and Capacity Building
2 TA to support the implementation of the Automated Transfer System (ATS)
QCBS 1,000.00 prior 10/14/2014
3 Technical advisors to NPS Steering Committee and Expert Group levels at the BCC
IC 500.00 prior 9/14/2014
4 Capacity strengthening and operation and oversight on the new Payment Systems department
QCBS 300.00 prior 1/14/2015
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1 2 3 4 5 6 8
N°Réf Contract Description Procurement
Method
Estimated Amount in US$ (‘000)
Review by Bank
(prior/Post
Expected Contract Signature
Date
Comments
at BCC
Component 2: Technical Support to Financial Market Development
Sub component 2.1. Strengthening Microfinance Regulation and Supervision by BCC
5 Long-term advisor for implementation of a robust MFI intervention and resolution framework
IC 500.00 prior 9/28/2014
6 Just in time short term consultant IC 400.00 prior 9/28/2014
Sub component 2.2. Technical Support to Microfinance Expansion and Inclusion
7 Market studies of high growth industry sectors and key value chains
QCBS 300.00 prior 10/14/2014
8 Communications, awareness building, and outreach to women
IC 900.00 prior 11/14/2014
Sub component 2.3. Technical Support to Microfinance Expansion and Inclusion
Capacity building for financial reforms
9 Studies to develop strategy and action plans to address required changes for SOFIDE
QCBS 250.00 prior 7/15/2014
11 Capacity building to financial sector reform unit QCBS 250.00 prior 5/10/2014
Capacity building for project management and monitoring--evaluation
14 Operations manager IC 346.6 prior 8/27/2014
15 Accountant IC 288.0 prior 8/27/2014
16 Procurement specialist high level for two years (non-permanent) IC 120 prior 8/27/2014
18 Audit of project account QBCS 200.0 prior 8/27/2014
Component 3: Line of Credit for Medium to Long Term Finance
13 Management of the line of credit DC 900.00 prior 5/10/2014
C. Training, Workshop, Study Tours 37. At the beginning of each year, each beneficiary will submit their proposed staff development plans in the form of an annual training plan for the coming year, to be reviewed by IDA. The plan would indicate the persons or groups to be trained, the type of training to be provided, indicative learning outcomes, the provider or location of the training, and its estimated cost. Selection of training institutions for workshops/training should be based on a competitive process, using the consultant’s qualification method of selection.
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Annex 4: Governance and Anti-Corruption (GAC) and Performance of Implementation Agencies
DEMOCRATIC REPUBLIC OF CONGO: Financial Infrastructure and Markets Project Objectives 1. In terms of the quality of governance, the Democratic Republic of Congo (DRC) lags behind virtually all other Sub-Saharan African (SSA) states. Its Governance profile highlights weaknesses on all aspects of governance, including on institutions, governance outcomes and the business and investment climate. Improving the quality of governance is crucial to ensuring the conditions for sustainable economic growth and poverty alleviation. 2. The objectives of the present Annex is to describe mechanisms to secure good governance and management of the financial infrastructure development project in DRC, and strengthen project implementation agencies performance and accountability to project’s resources and outcome, thereby mitigating the risk of corruption, collusion, fraud, waste and mismanagement, and to ensure that project objectives are achieved.
3. In addition to the overall governance and accountability risks, the need for performing implementation agencies and increase efficiency and transparency in procedures will be essential to yield expected results. The present annex 4 is dedicated to addressing these in a more detailed manner.
4. According to the 2012 World Governance Indicators, DRC ranks in the lowest 10th percentile on voice and accountability and regulatory quality, and as low as the 5th percentile on Government effectiveness, the rule of law, political stability and control of corruption. This performance remains significantly below the LIC and Sub-Saharan averages (Figure 4 and Figure 5, respectively). 5. Knowing that governance and anti-corruption measures are essential to mitigating fiduciary risks in projects, the purpose of this annex is to clearly envisage a governance and accountability approach as a quintessential part of the strategy for the implementation of the project, taking into account the institutional weaknesses and risks associated with this implementation. A minimum set of indicators on governance and accountability need to be defined including measures to improve transparency such as creating an internal audit and providing information on the project status to the public. This plan will be integrated in the PIM, which will be available by effectiveness.
6. A Project Implementation Manual (PIM), including a project implementation plan, administrative, procurement, financial and accounting, monitoring and evaluation procedures, has been finalized. It spells out the mandates, responsibilities, governance structure, and relationship between each implementing units. The PIM also takes into account an assessment of the capacity of the institutions to be involved and their coordination mechanisms. It clarifies the terms of reference of each structure which will be involved in project implementation. Semi-annual performance review meetings will be organized with all relevant stakeholders given the need for close monitoring. Annual performance review meetings will be
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organized for the overall project. A more comprehensive mid-term review will be held based on project implementation performance approximately 30 months after credit effectiveness to assess progress and adopt corrective measures aimed at improving implementation and reaching project objectives. Activities of the GAC action plan will be included in the PIM and the PIP. 7. In addition to institutional strengthening efforts envisaged in the context of the project and other WB and donors initiatives in DRC, some precautions will be recommended to secure efficient resources management and encourage good accountability practices in project implementation. The project will need to fund staff and stakeholders training and awareness building activities for capacity building which is agreed to be a risk-mitigating factor for corruption. 8. This Governance Action Plan is grounded on the commitment of the Government of the DRC, and more specifically, the Ministry of Finance, as well as other line ministries, and other agencies involved in strengthening financial sector efficiency, transparency and integrity.
Figure 4: The Quality of Governance in DRC relative to other low income countries, 2012
Source: 2012 World Governance Indicators. Economies are divided in income group according to 2011 GNI per capita, calculated using the World Bank Atlas method. LICs have GNI per capita income of US$1,025 or less.
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Figure 5: The Quality of Governance in DRC relative to the regional average, 2012
Source: 2012 World Governance Indicators.
Mechanisms to combat fraud in project administration and management 9. The Government project team recognizes the inherent complexity and risks of a project that cuts across a number of units within ministries, especially a project that traverses several ministries in a high-risk environment. The project proposes to address these complexities, and the governance challenges they pose, in a systematic manner, actively promoting greater transparency, accountability, and integrity through smart project design and implementation arrangements. 10. The planned Project Coordination Unit (PCU) will have the overall responsibility for project fiduciary management. The FM function will be carried out by a team composed of (i) a qualified and experienced FM expert, in charge of the supervision of the overall FM activities of the project; (ii) an experienced Accountant; and (iii) a Treasurer. The team will have the overall FM responsibility over budgeting, accounting, reporting, disbursement, internal control, and auditing. The FM expert will provide technical assistance to the existing FM team of PCU to build the capacity of the FM unit. PCU accounting staff will have its capacity reinforced over the project implementation, the rolling out of the training plan, which includes, among initiatives, training on IDA disbursement procedures, training on OHADA accounting principles, and its implication for a donor-financed operation, and training on IDA financial reporting arrangements. 11. The overall country fiduciary risk is still considered high. The project will be supervised twice a year to ensure that project FM arrangements still operate well and funds are used for the intended purposes and in an efficient way.
12. Procurement will be handled by one single entity for all components of the project. A Project Operations manual, satisfactory to the Bank, has been adopted to define and describe: (i) the procurement procedures and process; (ii) the roles and responsibilities of each actor/beneficiary in the management of the procurement cycle and the process to be followed; and (iii) the role of the Bank in the review process.
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13. To mitigate the governance risks and promote greater accountability, the project supports the development and strengthening of a number of innovative mechanisms, including (i) maintaining an active political-economy dialogue on key aspects of the reform agenda and seek to build consensus at every step of the way; (ii) formal consultation process with financial sector operators; (iii) regular formal consultation with project clients using external consultants firms and auditors (External Evaluation Agencies-EEA); institution of performance agreements and performance evaluation schedules and improvement plans in and with implementation agencies.
14. These risks to be included in the ORAF Matrix can be summarized as follows:
Description Risk Management
1. Poor procedures and poor service contracts/work quality.
Technical audits on procedures and service contracts, using parameters that focus on financial management, procurement procedures, transparency, quality of contracted services, and cost variance from standard will be included with media participation and publication of outcomes are essential to stakeholders and the general public information on project implementation progress, this can foster more accountability
2. Complexity of the project and lack of technical capacity
A project specific communication strategy will be designed in which good practice will be encouraged. Project will fund periodic meetings and trade/fare with strong participation of media outlets both national and international. Space will be provided for exchange and reporting on governance.
3. Delay in strengthening relevant institutions and coordination failures
Strengthen relevant stakeholders (Finance, FPM, Central Bank, Association des Institutions de Microfinance) through Technical Assistance for the implementation of project activities to mitigate the risk related to the complexity of the project. Provide implementation team with a precise PIM and request Bank project supervision team and steering committee to put emphasis on a zero tolerance on gap between prescribed procedures and processes and actual implementation.
4. Low staff motivation Annual work-plans including coordination timetable will be prepared, validated and assessed every year, with recommendations for corrective measures eventually.
5. Reluctance of financial sector operators and other project clients to appropriate/adhere to project objectives and approach
Financial incentives to be provided to the focal points and Staff of the Directorates of all the relevant ministries and public entities, that are expected to play a key role during project implementation. To keep work ethics high and a good performance culture, annual performance evaluation will be conducted with focus on staff commitment, individual and organizational performance.
6. Weak internal management structures, controls and oversight
Formal and regular consultation with financial sector operators and other project clients, and ensure their full agreement and appropriation/adherance to project objectives and approach.
7. Transparency and Corruption risk in grant allocation
Considering that the “Cour des Comptes”, the Supreme Audit Institution, has been assessed as weak, a qualified, experienced, and independent external auditor will be recruited on approved terms of reference.
8. Financial Management is weak. Internal controls, audit delays; risk of duplicate payments, phantom or ineligible beneficiaries
Hiring a strong external audit firm will be crucial to the success of operations. External audit firm’s intervention/assessment schedule will include assessment on compliance with GAC and FM procedures. These will be carried out on a regular basis with the results communicated to the PCU and the World Bank, as well as
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Description Risk Management public and private media.
9. Risk of circumventing internal control systems
Financial Management functions will be handled by a team composed of (i) a qualified and experienced FM expert, in charge of the supervision of the overall FM activities of the project; An experienced Accountant; and a Treasurer.
10. Procurement risks (delays)
The implementing agency will prepare a code of conduct including clear procedures for disciplinary action. In addition, a detailed FM manual will be designed to mitigate fiduciary risks.
11. Limited capacity of the implementing Agency
Procurement functions for the new project will be handled by a full-time procurement specialist and a part-time international procurement specialist. The latter will have the mandate to oversee and to advise on procurement-related issues. This will ensure an additional safeguard. FM, Procurement, and Fiduciary aspects of the project will be handled by highly qualified and experienced experts hired based on ToRs acceptable to the Bank.
12. Proper Data Management
A dedicated sub-unit will be created, staffed, equipped and training provided to secure proper data gathering and management required by international standards, for financial infrastructure strengthening, appropriate for such a weak environment as in DRC.
13. Independence of the External Evaluation Agencies and Auditors
Involvement of private, independent media outlets for communication on all aspects of project. Open competition/bidding in hiring of auditors/ the External Evaluation Agencies
Project Implementation Arrangements 15. Based on existing diagnostics and governance assessments on DRC and on regional good practice on GAC, the following will guide the design of the project’s GAC Action Plan: Planned arrangements for project implementation
16. Audits on Procedures and Value for money. It is absolutely relevant to be clear up front, on including technical audits on procedures and works, using parameters that focus on financial management, procurement procedures, and transparency. In so doing, media participation and publication of outcomes are essential to stakeholders and the general public information on project implementation progress, this can foster more accountability. Particularly in countries like DRC where there is an extremely high prevalence of corruption, poor performance, and misuse of public resources, the risk to pay high for less is very substantial. It is therefore key to make sure along the road, that all contracted services purchased are delivered at standard quality and at the right cost. 17. A project specific communication strategy will be designed in which good practice will be encouraged. Project will fund periodic meetings and trade/fare with strong participation of media outlets both national and international. Space will be provided for exchange and reporting on governance.
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18. Efficiency and performance monitoring of implementation agencies. It is oftentimes taken for granted that project implementation units and management agencies are all “centers of excellence “and will remain as such for the lifetime of the project. Previous experiences in the region suggest that caution be applied to secure sustainable commitment to results and good practices. Implementation and management agencies should entertain the constant challenge of keeping work standards and ethics high. As supported by regional good practices, to foster this performance culture, implementing units and project management agencies should themselves be subject to regular organizational efficiency evaluation and monitoring, concluding with performance improvement plans if needed. Implementation agencies’ compliance to set processes and standards and their organizational efficiency must be addressed in the implementation strategy. This will happen through regular assessment of annual work plans and budgets as well as supervision missions recommendations Recommendations 19. A set of actions that would help mitigating the identified risks and enhance sector governance and performance would include the following areas: Overarching governance requirement
- Political support and leadership - Sector Governance
Clear and coherent distribution of roles and coordination across stakeholders. Broader, and mandatory, dissemination of information on planned services, budgets
and funds utilizations. Zero tolerance on deviation from agreed/set standards. Sector-wide M&E of Performance.
Project specific good governance requirement - Organizational Efficiency
Complaints handling. Sector Performance and performance indicators for the implementing agency.
- Strengthening the Procurement Function Mitigation of the risk of collusion and fraud. Strengthening the procurement function: Basic principles governing national
competitive bidding. (oaths, statements of good faith and honor on excellent governance practices, number of cases sent to prosecution/ number of detected malpractices.
- Stakeholder Participation, complain mechanism and external oversight Users of services provided by each agency and Ministry of Finance. Technical audits.
- Development procurement management systems incorporating a red flag system Build a red flag system in the project FM system and in any other software in use by
the project. Train key staff on use of the system.
20. The GAC Action Plan rationale is to work with the Government and the private sector in setting an environment conducive to good performance by strengthening
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organizational and technical capacities, accountability, and transparency of institutions that will manage the new project. The GAC Action Plan is designed to address these concerns. To monitor performance and confirm adherence to measures agreed to, the GAC Action Plan is considering a number of Indicators of Conformity and organizational efficiency. These will be linked to and tracked through the overall management of the project as discussed below. The Governance and Accountability Action Plan
21. Political support and leadership. Support from political leadership and Accounting Officer is essential to bring about change. It is essential to mainstream governance and accountability in all sector related political activity and statements such as Annual Policy Statements and reports. 1. Specific to Financial Infrastructure Sector Governance 22. Clear and coherent distribution of roles and coordination across stakeholders. The Ministries of Finance, Agriculture, Roads, and Construction will need to bring together communities, local Governments, implementation agencies, to develop the policy framework for all actors with a particular reference to developing policy on good governance and accountability and a sound and appropriate communication strategy related thereto, and specific to the financial infrastructure project. 23. Broader, and mandatory, dissemination of information on planned services, budgets and funds utilizations. It is essential that communications offices be responsible for implementing a strategy for proactive promotion of project activities and issuing main reports and procurement documents. Respective offices of communications needs to prepare and implement a strategic communication plans with a strong focus on transparency and interaction with users of services, among others.
24. Sector-wide M&E of Performance. Ministry of finance has already set up a unit in charge of monitoring of all WB financed projects. This will keep close track of how sector agencies are performing and to remind all actors of their share of responsibility in achieving their respective assigned goals. A unit within Ministry of finance should centralize all reports on audits and evaluation conducted. This unit would also follow up on performance agreements and remind all actors on respective reporting tasks and due dates. Regular and documented reporting to Accounting Officers and Minister as well as to media is required for the success of the strategy.
2. Organizational Efficiency 25. Complaints handling. An efficient and independent mechanism will need to be established to handle complaints lodged by private sector operators who feel they have been wronged in the application of procedures or in a contract award. Access to independent avenues of recourse is important for the private sector if one of its operators feels that decisions causing the harm are in violation of prevailing regulations and therefore may compromise the desired competition, equity and transparency.
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26. Sector Performance and performance indicators for the implementing agency. Sector performance will be measured though organizational performance and conformity to procedures and processes set forth for procurement and in credit agreement. At the operational level, performance indicators will be Indicators of Conformity (ICs) used to gauge how the system is actually working. The ICs will essentially address the practical application of World Bank Guidelines, the provisions of the Credit Agreement and the Project’s Implementation Manual. The internal and external auditors, as well as the External Technical Auditor, will use these important source documents.
Table 9: Sector Performance and Performance Indicators for Implementing Agency
27. Sector Performance and performance indicators for the implementing agency. Sector performance will be measured though organizational performance and conformity to procedures and processes set forth for procurement and in credit agreement. At the operational level, performance indicators will be Indicators of Conformity (ICs) used to gauge how the system is actually working. The ICs will essentially address the practical application of World Bank Guidelines, the provisions of the Credit Agreement and the Project’s Implementation Manual. The internal auditors, as well as the External Evaluation Agency/Auditor, will use these indicators to assess PCU and all project agencies. Periodic Directorate efficiency will be evaluated and the result integrated in performance improvement plans and agreement to be signed and evaluated as well. Details on ICs will be included in the manual of procedures/implementation manual.
Key Area Proposed Action Indicators of Performance Responsibility 1. Political
Commitment/Support and Leadership for GAC
Use the Project to increase commitment of key political leaders for GAC in the Sector
GAC visibility in country respective Sectors Policy Statements and Sector specific annual Reviews
Prime Minister, Minister of finance
2. Sector Governance Doing business
Put in place and facilitate Clear and coherent distribution of
roles and coordination across stakeholders
Broader, and mandatory, dissemination of information
M&E of performance
Existence of Sector wide policy on good governance and accountability Progress made on performance improvement agreements
Prime Minister, Minister of finance
3. Organizational Efficiency
Introduce and enforce Sector performance and performance
indicators for the implementing agencies
Indicators of Organizational Efficiency in PIM
Minister of finance; Project Coordination Unit
4. Procurement Function
Strengthen transparency in procurement under national competitive bidding, preventing collusion and fraud, and integration of a red Flag System in MIS
Indicators of Conformity in PIM
Minister of finance; Project Coordination Unit
5. Stakeholder participation; public complaint, mechanisms and external oversight
Conduct regular Technical audits Identify Infractions and apply
sanctions for the public and private sector
Indicators of Organizational Efficiency in PIM
Minister of finance; PIU; private sector org. and products users groups…
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3. Strengthening the Procurement Function and complain mechanism 28. Mitigation of the risk of collusion and fraud. Procurement activities will be monitored by procurement unit. This unit will verify bids, using monitoring software to detect possible signs of collusion, and will provide the necessary guidance and training in ways to reduce the risk of collusion and fraud. 29. Strengthening the procurement function: Basic principles governing national competitive bidding. To assure credibility and fair and competitive bidding, which will in turn help guarantee the quality of services provided for all technical and financial audits, random audits as well as all regular and random inspections, a red flag system will be designed and built into the MIS to be introduced.
30. Stakeholder Participation, complain mechanism and external oversight. Users of services provided will be consulted through user surveys to assess service quality for the purpose of reengineering the way service is provided if necessary. Close external oversight will be provided by key stakeholders under the watch of the Ministry of Finance.
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Annex 5: Operational Risk Assessment Framework (ORAF)
DEMOCRATIC REPUBLIC OF CONGO: Financial Infrastructure and Markets Project Stage: Board
Risks .
Project Stakeholder Risks
Stakeholder Risk Rating Substantial
Risk Description: Risk Management:
Lack of incentives for relevant civil servant who are expected to play a key role during project implementation.
Terms of reference with clear deliverables and responsibilities will be prepared for all the focal points. The incentives will foster accountability and encourage the focal points to work together, provide input and clearance to relevant project related documents, and timely contribute to project activities. This will also contribute to strengthening their capacity. To keep work ethics high and a good performance culture, annual performance evaluation will be conducted with focus on staff commitment, individual and organizational performance.
Resp: Client Status: In Progress
Stage: Implementation
Recurrent:
Due Date:
Frequency:
Implementing Agency (IA) Risks (including Fiduciary Risks)
Capacity Rating Substantial
Risk Description: Risk Management:
Lack of technical capacity to timely implement project activities.
The project will be implemented by an existing Project Coordinating Unit that was established by the African Development Bank. That unit also manages the IDA-funded Western Growth Poles project and has experience in project coordination and management. It will be strengthened with an assistant project coordinator, procurement and FM specialists, dedicated to this project. Capacity building workshops on growth and competitiveness will be organized with all the stakeholders in the early stage of project implementation. An operation manual has also been prepared to provide guidance.
Resp: Client Status: In Progress
Stage: Implementation
Recurrent:
Due Date:
Frequency:
Governance Rating Moderate
Risk Description: Risk Management:
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a) Poor procedures and poor work quality. b) Complexity of the project and lack of technical capacity. c) Delay in strengthening relevant institutions and coordination failures. d) Low staff motivation.
Technical audits on procedures and works, using parameters that focus on financial management, procurement procedures, transparency, work quality, and building cost variance from standard will be included with media participation and publication of outcomes are essential to stakeholders and the general public information on project implementation progress, this can foster more accountability a) A project specific communication strategy will be designed in which good practice will be encouraged. Project will fund periodic meetings and trade/fare with strong participation of media outlets both national and international. Space will be provided for exchange and reporting on governance.
Resp: Client Status: Not Yet Due
Stage: Implementation
Recurrent:
Due Date:
Frequency:
Risk Management:
b) Strengthen relevant stakeholders (Ministry of Finance, FPM, and Central Bank) through Technical Assistance for the implementation of project activities to mitigate the risk related to the complexity of the project. Provide implementation team with a precise PIM and request Bank project supervision team and steering committee to put emphasis on a zero tolerance on gap between prescribed procedures and processes and actual implementation.
Resp: Bank Status: Not Yet Due
Stage: Implementation
Recurrent:
Due Date:
Frequency:
Risk Management:
c) Annual work and coordination timetable will be prepared, validated and assessed every year, with recommendations for corrective measures eventually.
Resp: Client Status: In Progress
Stage: Implementation
Recurrent:
Due Date:
Frequency:
Risk Management:
d) To keep work ethics high and a good performance culture, annual performance evaluation will be conducted with focus on staff commitment, individual and organizational performance.
Resp: Client Status: Not Yet Due
Stage: Implementation
Recurrent:
Due Date:
Frequency:
Project Risks
Design Rating Substantial
Risk Description: Risk Management:
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Project relative complexity due to high number of complementary activities, and number of stakeholders which creates risk of coordination failures and delay in implementation.
The design of the project is based on an assessment of the critical needs in the financial sector and is also based on lessons of experience. It is expected that the recruitment of experts (including private firms, specialized development partners and NGOs) to support the implementation of project activities will help mitigate the risk relate to the complexity of the project.
Resp: Bank Status: Completed
Stage: Preparation
Recurrent: Due Date:
Frequency:
Social and Environmental Rating Low
Risk Description: Risk Management:
This project is not expected to induce adverse environmental and social impacts. Project investments focus on institutional support and do not include direct investments in infrastructure or in land acquisition that would induce adverse environmental and social impacts. Component 3 investments (Inclusive Growth of the Microfinance Sector) may, however, induce land acquisition through third party (SMEs) investments.
The borrower has produced an Environmental and Social Risk Management Operational Manual (ESOM) for the Line of Credit reflecting all the requirements of environmentally and socially sound and sustainable development, and the eligible WFIs and their PFIs will be required to produce Environmental and Social Management Systems (ESMS) based on the guidance provided in the ESOM. The ESMS developed by the WFIs will be subject to review and approval by the WB. The WFIs will in turn be responsible for the quality of the ESMS prepared by the PFIs they integrate into their lending operations. These measures will ensure that appropriate risk management measures have been identified for implementation not only for the Line of Credit, but also by the loan applicants in each of the Project PFIs.
Resp: Bank Status: Completed
Stage: Preparation
Recurrent:
Due Date:
31-Jan-2014 Frequency:
Program and Donor Rating Moderate
Risk Description: Risk Management:
The targeted activities covered under this project have been identified by the government as an impediment to the expansion of the financial sector, therefore expected to be also supported through government's own budget. However, the government's own resources may not be sufficient to implement the program in a sustainable manner. Several donors’ initiatives are being or will be implemented with a risk of lack of coordination to effectively support government's initiative.
The implementation arrangements have been fined tuned and strengthened to ensure that key strategic activities (Modernization of National payment system, Credit line for SMEs, and support to financial reforms including microfinance) will continue to be effectively implemented with government's own resources or other development partners as part of the government program. The project has been prepared in close collaboration with other development partners including the IFC, UNDP, KFW and the IMF. The project is also building on the ongoing initiatives supported by the partners and is expected to foster synergies and create a framework for a more integrated approach. The project will be implemented in parallel with other development partners’ projects but the Project Coordination unit within the Ministry of Finance will ensure that collaboration and information sharing will be done systematically during project implementation. A Task force of development partners involved in the targeted areas exists and the project team will meet with them on a regular basis to monitor matrix of interventions and action plan. The task force will also be represented in the project steering committee meeting.
Resp: Client Status: In Stage: Imple Recurrent: Due Frequency
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Progress
mentation
Date: :
Delivery Monitoring and Sustainability Rating Substantial
Risk Description: Risk Management:
Project effective delivery may be affected by the delay in procurement as well as completion of key studies. The impact of the project implementation may not be properly and timely assessed to ensure that the project is progressing towards its objectives in a sustainable manner. Overall monitoring capacities are weak and need to be strengthened.
A detailed procurement plan has been prepared with detailed cost tables. Draft Terms of Reference have also been prepared for the recruitment of PCU staff. The project has established a monitoring and evaluation system that will quickly collect data to enable the adoption of corrective measures. The project Mid-term review will assess progress towards achieving its objectives, including long-term sustainability of activities supported by the project. Recommendations and corrective measures will be proposed as a result of the assessment to improve delivery and sustainability.
Resp: Client Status: In Progress
Stage: Implementation
Recurrent:
Due Date:
Frequency:
Overall Implementation Risk
Overall Risk: Substantial
Risk Description: Risk Description:
Overall risk rating is substantial due to government's implementation capacity that needs to be built while implementing project's interventions.
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Annex 6: Donor interventions in the sector
DEMOCRATIC REPUBLIC OF CONGO: Financial Infrastructure and Markets Project
Donors Area of intervention and support for financial inclusion
French Development Agency
TA to BCC for the development of regulatory framework of COOPEC and MIFs Grants and TA to Advans Bank and PROCREDIT Support to the application and tailored training for SMEs Support to FINCA for extension to Lubumbashi Support to the launch of OXUS with PROPARCO and with mainly TA Ongoing discussions with FPM to check ownership options Support to Commercial Banks through a line of credit for SMEs
IFC RAWBANK : Support to downscaling and training programs PROCREDIT : share in equity for the development of SMEs ADVANS BANK: share in equity for the development of SMEs Bank Of Africa (BOA) : capacity building FINCA : capacity building Global Trade Finance: training programs to ProCredit Bank and RAWBANK Program to finance capacity building of 500 women entrepreneurs in the Bas- Congo Support to a local organization to support SMEs in the pilot project "Private Investment Fund" AGRIBUSINESS: TA to strengthen farmers’ capacities in accessing financial services Support to mobile banking , ICT for the benefit of private training centers for young entrepreneurs Study on the private education sector to improve management capacity of private schools Tool: launch of an SME Toolkit to enable the dissemination of information on SMEs.
GIZ
Consumer protection: Preparation of the regulatory framework. Financial Literacy: Support to the development of a common approach Central Credit Risk: Support to the elaboration of a law covering telecommunications companies, electricity
and water Risk Management Bureau at BCC: Support to the implementation of the Sub-Directorate Risk Management
and the Board of Management of Foreign Exchange Reserves. Strengthening capacities of other services at BCC jointly defined, ex. Support to the Change Management
unit and IT Department KfW Centrale des Risques : Modernization
Deposit Guarantee Fund: Feasibility study FPM: Shareholder ProCredit Bank Congo: Shareholder Advans Banque Congo: Shareholder FINCA DR Congo: long-term credit National Association of Microfinance Institutions: Support in launching the institution Event: International Day Savings: Introduction in DRC and support to the organization Radio Emission: Nzete are Masolo / Radio Business Club: Creation Access to Finance Forum: Support for the organization: Creation Workshops: Finance Manager: Organization Study: Economic empowerment through access to microfinance products in DRC Study: Difficulties for entrepreneurs to access credit in the DRC Study: Challenges for financial institutions to extend credit in the DRC
USAID Tool: Toolkit for agriculture Agribusiness: Support to the banking sector and SMEs, especially in rural areas, on access to financial
services BIAC: Support to guarantee fund for agricultural sector TMB: Support to targeted SMEs in Katanga Survey: Functionality of agricultural credit in the DRC Study: Funding Strategic value chains (cassava, maize and legumes)
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Belgian Cooperation
Contribution to PASMIF II, via UNDP / UNCDF: support capacity building in the sector: Support to the Action Plan of the BCC; Institutional support to professional associations (APROCEC, ANIMF) Technical assistance and training for COOPECs, MFIs and banks through FPM ASBL BIO: Investments at PROCREDT and BOA
DFID Flexible facility to support Government’s projects in the areas of: Reform of the business environment (start with a support implementation of the program OHADA) Access to finance Fight against corruption Potential investment of the FPM SA. A project of "Running the steps for the benefit of the poor" (M4P) - in some areas (m-banking)
Swedish Cooperation
Contribution to PASMIF II, via UNDP / UNCDF: support capacity building in the sector Support to the Action Plan of the BCC; Institutional support to professional associations (APROCEC, ANIMF) Technical assistance and training of COOPEC, MFIs and banks by FPM ASBL
FIDA Support to institutions willing to deploy in rural areas and providing agricultural credit Study on empowerment
UNCDF Macro: support to BCC’s action plan (strengthening communication and awareness of legal texts, monitoring and control, publication of data on sector’s activities and capacity building for BCC’s managers on CGAP modules)
Macro: support to the reformulation of the national access to finance strategy_ MAP / UNCDF / CENTRI Méso: Professional Association of COOPEC (APROCEC): Support for the creation of the association as
well as for the action plan (consumer protection, data collection for promoting financial transparency on Mix Market, capacity building through field trips and exchange visits)
Méso: Support for capacity building of audit firms to conduct external audit, for the benefit of audit firms and Boards members of APROCEC and ANIMF
Diagnostic study: a diagnostic study of the Information System and Management (GIS) SACCO Study: Diagnostic of microfinance organizations, including professional associations of microfinance and
technical support providers Study : Youth Access to Financial Services: Opportunities and Constraints Micro: Support Fund for the Promotion of microfinance _FPM ASBL for capacity building and technical
assistance, among other things for the expansion to underserved areas and the development of innovations. Market surveys in Bandundu, Kasai, and Ecuador Support to certifying training Support for the articulation of VSLA or MUSOS with accredited institutions to meet the targets of UNDP
and UNCDF ; FINCA: support the product " Youthstart " to increase young people's access to financial services MicroLead: Support to Opportunity International for the mobilization of Savings CLEAN START: Microfinance and access to clean energy. Sector Study Private Sector: Partnerships for Corporate Social Responsibility (CSR) Participation in the organization of the JIE for its extension into provinces
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Annex 7: Economic Analysis
DEMOCRATIC REPUBLIC OF CONGO: Financial Infrastructure and Markets Project 1. The project is organized in three main components in order to: (i) advance the modernization of the payment system, (ii) facilitate the development of the microfinance market, (iii) support value chains financing for the development of SMEs, and (iv) promote financial inclusiveness. 2. Component 1 and 2: The activities under these components are catalyzers for the expansion of the banking system and therefore have an indirect impact on producers and consumers. In DRC almost 74 percent of the firms identify access to finance as a major constraint to business, a substantially higher share than in other Sub-Saharan Africa where the average is below 55 percent. In DRC a bank loan or a line of credit are accessed only by 11 percent of the firms, this share doubles in the rest of the subcontinent. Access to finance is challenging also for consumers. In DRC there are 35 accounts in commercial banks for every thousands of adults. The (median) benchmark level for low income countries in Sub-Saharan Africa is about 74. Therefore, by promoting a stronger and more inclusive banking system, the project has the potential to generate large welfare gains for both firms and consumers. However, by their own nature the activities proposed under these components have only indirect effects on production and consumption decisions. 3. Standard economic analysis would involve substantial subjective decisions in order to assess the final impact of these components on the DRC economy. A priori it is challenging to identify the sectors that will benefit the most from a relaxation of the credit supply. More importantly, it is hard to quantify the expected changes in production (e.g. type, quantity and quality of inputs used; level of output produced, etc.) in a precise yet realistic way. It is therefore preferable to evaluate the project based on the successful completion of the DPOs listed in Annex 1. 4. Component 3: The component will provide a line of credit for a wholesale intermediary entity (to be identified) in charge of providing medium and long term financing for the development of small and medium enterprises. A budget of US$ 15 million is allocated under this component. The economic analysis is based on a time horizon equivalent to the duration of the project, 6 years. The economic rate of return (ERR) is 15.8 percent, and the net present value (NPV) is US$0.1 million, assuming a discount rate of 12 percent5. 5. The expenditure will be back-loaded, with 75 percent of the investments expected to take place during the second half of the project implementation phase. The lag in time is required to finalize the implementation details on the basis of the information from the recent FSAP mission and consultations in the field.
5 Deposit interest rate ranged between 16.8% and 7.7% in the past five years, being on average 12.7%. During this period (excluding 2009 when inflation rate skyrocketed to 729%), inflation rate (CPI) has been on average 30.6% (WDI).
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6. The technical assistance and medium and long term financing are expected to benefit small and medium firms. When applicable, assumptions are downward biased in order to provide more conservative estimates of the impact of the project. 7. The following changes are expected at each stage along the value chains:
a. Increase in agricultural yields. Currently DR Congolese farmers achieve low productivity because of poor husbandry practices6. Improvements in agricultural productivity are limited by lack of necessary funds for (i) the adoption and diffusion of improved seeds variety, (ii) implementation of improved farming practices and technologies7. The vast majority of rural households face binding credit constraints because of lack of collateral and unfavorable loan terms conditions8. By providing line of credit, 2,400 farmers are expected to be able to gain access to improved inputs which in turn will translate into higher agricultural income. These assumptions are based on similar interventions that took place in recent years in Africa. Agricultural profits are computed as a weighted average of the profits that can be extracted from each crop, assuming that farms face costs as high as 70 percent of revenues. Improved access to credit to purchase better quality inputs is expected to generate a 15 percent increase in farm-level productivity9. b. Increase in profits of processing firms. By the end of the project 260 among SMEs, processors, and investors, are expected to benefit from the improvements in access to credit. The economic analysis is informed by the data in the Enterprise Survey fielded in DRC in 2010. In particular, the analysis focuses on the formal small and medium firms and (ii) informal firms. Firms with more than 100 employees are excluded from the sample based on the assumption that they are already able to obtain the credit they may need. The median firm in the sample earns slightly less than US$ 222,000 per year in sales. As for producers, processors’ costs are assumed to be around 70 percent of total sales. Improved access to credit is assumed to bring about an increase in (i) profit of existing firms, (ii) labor income (as firms grow they will hire more workers), (iii) new firms.
8. The figure below summarizes the expected impact of the project. The vast majority of the gains are expected to be generated from growth in processing, rather than in production.
6 53 percent of arable land is cultivated according to the slash and burn shifting techniques. 7 Muayila, K. H., and E. Tollens. “Assessing the Impact of Credit Constraints on Farm Household Economic Welfare in the Hinterland of Kinshasa, Democratic Republic of Congo”, African Journal of Food, Agriculture, Nutrition and Development 12.3 (2012): 6095-6109. 8 Credit is available for short terms and at high interest rates partly are the result of thin credit markets and high risk of agricultural activities. 9 The assumptions are consistent with estimates for similar interventions in other African countries.
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9. Sensitivity analysis: The results are sensitive to different scenarios:
a. If the discount rate is 2.5(15) percent, the NPV becomes US$ 0.54 (0.02) million. b. If producers achieve a 10 (20) percent increase in productivity, the ERR becomes
15.5 (16.1) percent. c. If processors achieve a 2.5 (10) percent increase in productivity, the ERR
becomes 5.9 (34.8) percent.