Philippines: Small and Medium Enterprise Development Support Project

Transcription

1 Validation Report Reference Number: PCV: PHI Project Number: Loan Number: 2186 October 2011 Philippines: Small and Medium Enterprise Development Support Project Independent Evaluation Department

2 ABBREVIATIONS ADB Asian Development Bank BSP Bangko Sentral ng Pilipinas (Central Bank of the Philippines) CIB credit information bureau JFICT Japan Fund for Information and Communication Technology KfW Kreditanstalt fur Wiederaufbau (German Development Cooperation) MTDP Medium-Term Development Plan PBR Philippine Business Registry PCG PCR partial credit guarantee project completion report PFI participating financial institution ROA RRP return on assets report and recommendation of the President SB Corporation Small Business Guarantee and Finance Corporation SBC Security Bank Corporation SMEs small and medium-sized enterprises TA technical assistance NOTES (i) (ii) In this report, $ refers to US dollars. For an explanation of rating descriptions used in Asian Development Bank evaluation reports, see ADB Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations. Manila. Key Words asian development bank, bangko sentral ng pilipinas, independent evaluation department, philippines, nonperforming loan, small and medium-sized enterprises, small business guarantee and finance corporation Director General Director Team leader Team members V. Thomas, Independent Evaluation Department (IED) H. Hettige, Independent Evaluation Division 2, IED B. T. Nguyen, Senior Evaluation Specialist, IED R. Lumain, Senior Evaluation Officer, IED E. Li-Mancenido, Associate Evaluation Analyst, IED R. Perez, Senior Evaluation Assistant, IED The guidelines formally adopted by IED on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of the management of IED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area.

3 PROJECT BASIC DATA Project Number: PCR Circulation Date: 4 November 2010 Loan Number: 2186 PCR Validation Date: October 2011 Project Name: Small and Medium Enterprise Development Support Project Country: Philippines Approved Actual Sector: Industry and Trade Total Project Costs (SME development) ($ million) ADB Financing ($ million) ADF: 0.00 Loan ($ million) (Yen million equivalent) ( 2,746.63) ( 2,746.63) OCR: Borrower ($ million) Beneficiaries ($ million) Others ($ million) Cofinancier: None Total Cofinancing ($ million) Approval Date: 29 Sep 2005 Effectiveness Date: 16 Mar Feb 2006 Signing Date: 16 Dec 2005 Completion Date: Oct 2010 NA Project Officers: Validator: A.C. Malmstrom R.T. Moyes S. Tukuafu K.P. Kriegman E. Sasaki C. Dingcong, Consultant Closing Date: 30 Apr Feb 2009 Location: From To ADB headquarters Sep 2005 Jul 2006 ADB headquarters Aug 2006 Oct 2006 ADB headquarters Nov 2006 May 2007 ADB headquarters Jun 2007 Dec 2009 ADB headquarters Jan 2010 Oct 2010 Team Leader: B. T. Nguyen, Senior Evaluation Specialist, IED2 Quality Reviewer: N. Bestari, Advisor, IEOD Director: H. S. Hettige, IED2 ADB = Asian Development Bank, ADF = Asian Development Fund, IED2 = Independent Evaluation Department (Division 2), IEOD = Independent Evaluation Department (Office of the Director General), NA = not available, OCR = ordinary capital resources, PCR = project completion report, SME = small and medium-sized enterprise. A. Rationale I. PROJECT DESCRIPTION 1. Small and medium-sized enterprises (SMEs) formed a vital subsector in the economy of the Philippines in terms of employment and value added. However, effective SME operation was constrained by the absence of supportive policies; cumbersome and costly registration and licensing processes; lack of a national business registry and collateral registry; and lack of comprehensive credit information. Another key issue was access to and availability of finance, reflected in (i) banks reluctance to expand SME lending after the Asian financial crisis and lack of credit information; and (ii) SMEs difficulty in preparing and presenting credit business plans and realistic cash-flow estimates, and providing sufficient collateral for bank lending. In 1991, the Small Business Guarantee and Finance Corporation (SB Corporation) was established to provide loans and guarantees to SMEs, particularly for those that were viable but could not meet banks stringent collateral requirement or were below banks minimum loan limit. In July 2004, the SME Development Plan was formulated to improve the enabling environment for SMEs. President Arroyo s 10-point agenda and the Medium-Term Development Plan (MTDP) also highlighted SME support as central to creating employment. The MTDP included the establishment of a credit bureau as one of the targeted activities to promote SME development.

4 2 2. The Small and Medium Enterprise Development Support Project (the project) 1 was processed in parallel with technical assistance (TA) on strengthening SME credit management systems 2 and a grant financed from the Japan Fund for Information and Communication Technology (JFICT) to support the establishment of a Philippine business registry. 3 B. Expected Impact 3. The project and associated TA and JFICT grant were envisaged to help the Government of the Philippines implement the SME Development Plan and, by supporting SME development, to contribute to broad-based economic growth and generate employment opportunities (report and recommendation of the President [RRP], para. 31). In President Arroyo s 10-point agenda and the MTDP , the concrete target was to create at least 6 million jobs in 6 years through promoting SMEs by tripling financing available, supporting entrepreneurs, and developing land for agricultural business. At least 2,000 SMEs were expected to borrow through the project. This was envisaged to translate into at least 5,500 additional jobs created directly (footnote 1, para. 69; Project Summary). In addition, indirect job creation might result among suppliers and buyers. C. Objectives or Expected Outcomes 4. The overall objective of the project was to help the government implement its SME Development Plan Specifically, the project was envisaged to support the job creation objectives of President Arroyo s 10-point agenda and the MTDP by improving the enabling environment for SMEs; stimulating SME development by facilitating access to financing and augmenting financial resources at SB Corporation; and expanding private sector lending for medium-sized enterprises supported by a partial credit guarantee (PCG) (footnote 1, para. 31). Further, the associated TA was to enhance SB Corporation s capacity and performance in supporting SME development. D. Components and Outputs 5. The expected project outputs were: (i) increased SME lending by SB Corporation and participating financial institutions (PFIs) under the credit line and the PCG; (ii) equity investment in the credit information bureau (CIB); (iii) strengthened SB Corporation s credit underwriting and risk management practices developed under the TA; (iv) Philippine Business Registry (PBR) established with support from the JFICT grant; (v) simplified registration and annual licensing processes, undertaken under the JFICT grant; and (vi) blueprint for a movable assets collateral registry developed under the TA. 4 E. Provision of Inputs 6. The project involved a $25.0 million project loan from the public sector window of the Asian Development Bank (ADB), as a credit line to SB Corporation for onlending to SMEs; a PCG facility of up to 1 billion pesos (equivalent to $18.4 million) to encourage bank lending to medium-sized enterprises outside the scope of SB Corporation; and up to $1.0 million in equity 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan, Partial Credit Guarantee, and Equity Investment to the Philippines for the Small and Medium Enterprises Development Support Project. Manila. 2 ADB Strengthening SME Credit Management Systems. Manila. 3 ADB Proposed Grant Assistance to the Philippines for Developing the Philippine Business Registry (Financed by the Japan Fund for Information and Communication Technology). Manila. 4 Based on the design and monitoring framework of the RRP.

5 3 investment in a CIB from the private sector window. Based on project design, ADB s share in SB Corporation funding for relending (wholesale facility) and onlending (retail facility) was not to exceed 65% in either category. This limit was adhered to during project implementation. The actual share of ADB was 54% for wholesale lending and 35% for retail lending. F. Implementation Arrangements 7. SB Corporation was tasked as the executing agency to implement the loan and the TA. The design of the credit line component was followed. Of the ADB loan, $21.25 million was lent through SB Corporation to accredited PFIs under the wholesale lending facility and $3.75 was allocated to SB Corporation for retail lending to SMEs. The PFIs and SMEs were determined by using the borrower risk rating tool consistent with ADB's guidelines on financial intermediary loans. 5 In the late half of 2006, German development cooperation through German Development Cooperation (KfW) started to provide a loan to SB Corporation for lending to small businesses. An agreement was reached between ADB, KfW, and SB Corporation that made ADB the main provider of short-term loans and KfW the main provider of long-term SME loans. Implementation arrangements were adequate to support SB Corporation s SME lending operations under the wholesale and retail facilities. 8. Loan covenants were mostly complied with, except for the requirements on the return on assets (ROA) and nonperforming loan ratio. The ROA of 1.7% in 2006, which was lower than the covenanted figure of 2%, was attributed mainly to the increase in assets arising from the ADB loan releases. For 2008, the ROA of only 0.4% was due to a large other income deduction comprised mostly of foreign exchange loss caused by the utilization of the KfW loan. SB Corporation complied with the nonperforming loan ratio for wholesale lending, but not for retail lending. Past-due ratios for retail lending were much higher than the industry averages because of limitations in Republic Act 8289 that required SB Corporation to have congressional approval to write off nonperforming loans (project completion report [PCR], para. 9) The TA provided international expertise to SB Corporation in support of building efficient, profitable lending businesses that can achieve substantial outreach. The expected outcome of the TA to improve the quality of lending operations of SB Corporation was achieved through reorganization and establishment of a good credit risk management system. II. EVALUATION OF PERFORMANCE AND RATINGS A. Relevance of design and formulation 10. The project was developed in response to a government request for ADB assistance in implementing the SME Development Plan It was consistent with ADB s country strategy for the Philippines. 7 Also, it was aligned with the Philippine MTDP that focused on poverty reduction and recognized SME development as a tool for promoting sustainable growth and generating employment. At completion, the project was consistent with ADB s country strategy and program for and the MTDP that called for, among others, supporting SMEs to create jobs and promote broad-based growth. The project, TA, and JFICT grant were relevant to the government and to the SME sector in that they 5 ADB Financial Management and Analysis of Projects. Manila. 6 ADB Completion Report: Small and Medium Enterprise Development Support Project in the Philippines. Manila. 7 ADB Country Strategy and Program Update, Manila. 8 ADB Country Strategy and Program, Manila.

6 4 covered a broad area of SME development aimed at expanding SB Corporation s wholesale and retail lending, strengthening SB Corporation, improving the enabling environment for SMEs, and increasing private sector lending to SMEs through the PCG. 11. The project expanded the resources for SME lending of SB Corporation and increased the capacity for financing SMEs of one commercial bank through the PCG. The TA and JFICT grant helped strengthen SB Corporation s credit and risk management functions and the environment for the promotion and growth of SMEs. The PCR rated the project relevant and this validation concurs. B. Effectiveness in Achieving Project Outcomes 12. The PCR rated the project effective. It held that the rating was justified even though the ADB-funded credit lines failed to reach growth targets in lending (footnote 6, para. 32). The PCR pointed out that the shortfall in retail and wholesale lending compared with targets was mainly due to the global economic crisis in 2008 that resulted in the slowdown of businesses and the move of the Bangko Sentral ng Pilipinas (BSP, Central Bank of the Philippines) to increase the size and lower the interest rate of its rediscounting facility. 9 Nonetheless, SB Corporation s improvement in loan portfolio and its expansion in outreach were positive developments for the SME sector. 13. The PCR s assessment on the effectiveness of the project focused on the credit line component (footnote 6, paras ). This validation takes the view that other expected outputs from the TA, JFICT grant, PCG facility, equity investment in the CIB, and a movable collateral registry should have been taken into account in assessing effectiveness, since these were integral to the overall project. As regards the JFICT grant, the envisaged PBR was developed and the data flow between government agencies was linked. The TA developed the borrower risk rating that sets in place an operational credit scoring system. This was a significant achievement in that it improved the risk management system of SB Corporation. During implementation, one bank the Security Bank Corporation (SBC) utilized the PCG facility for a maximum amount of P500 million. This complemented SB Corporation s lending, particularly to larger SMEs not covered by SB Corporation. The PCR discussed these outputs in the section Project Outputs (footnote 6, paras ) but did not provide data to support how these outputs helped achieve the expected outcomes. 14. The CIB component was not realized because of the passage of Republic Act 9510, 10 which restricted ownership of the Central Credit Information Corporation to the government, industry associations of banks, quasi-banks, and other credit-related associations, including associations of consumers. Hence, this precluded any ADB equity investment in the credit bureau. Lastly, the blueprint of a movable collateral registry was dropped from the original scope of the TA because the legal and regulatory environment was found sufficient for such registry. 15. In sum, the SME facility of SB Corporation did not achieve the growth targets in lending. Extraneous factors (i.e., the global economic slowdown and BSP s rediscounting policy) beyond the control of the project contributed to the shortfall in lending performance compared with targets. Nonetheless, the infusion of the ADB project loan augmented SB Corporation s lending 9 The move of the BSP to increase liquidity in the banking system through the rediscounting facility competed directly with SB Corporation s wholesale lending operations. 10 Otherwise known as An Act Establishing the Credit Information System approved by the President of the Philippines on 31 October 2008.

7 5 resources and expanded its outreach to the private sector from about SMEs in 2008 to 610 in 2009 (footnote 6, para. 31). The TA and JFICT grant strengthened SB Corporation s capacity to expand its SME portfolio and helped improve the enabling environment for SMEs. Overall, this validation concurs with the PCR s effective rating. C. Efficiency of Resource Use in Achieving Outputs and Outcome 16. The turnover ratios of the wholesale and retail lending facilities were more than double the amounts drawn, indicating efficient utilization of lending funds. The loan was fully withdrawn by January 2009, 2 years ahead of the planned schedule. The cost of the ADB loan was significantly lower than the cost of SB Corporation s traditional funding, and therefore by utilizing the ADB loan more quickly, SB Corporation was able to rapidly decrease its average funding costs. This provided incentive for SB Corporation to conduct the ADB-funded operations efficiently for earlier disbursements. The implementation of the project was rapid in that the project loan was closed 2 years ahead of schedule. 17. Under the PCG facility, SBC developed prudent criteria and procedures for clients that enabled faster processing of SME accounts without sacrificing sound credit underwriting procedures. SBC successfully and efficiently utilized the PCG. At project completion, it had a distributorship program with one major food and beverage company, and requested ADB to increase the program limit for the existing distributor and an expansion to include other distributors. The resources for the PBR were efficiently utilized with the completion of a webportal site for providing unified registration and licensing procedures, and business development information for Philippine businesses. As regards the movable collateral registry component, the existing legal and regulatory environment was found sufficient and therefore the component was dropped from the original scope of the TA. 18. The RRP and PCR did not calculate the economic internal rate of return of the project or subprojects financed by the subloans. Neither a least-cost nor a cost-effectiveness analysis was carried out. While indeed the utilization of funds was efficient as indicated by the turnover ratios, and implementation of the project was rapid, there is no available evidence on the economic efficiency of the project and/or subprojects financed by the subloans. Hence, this validation is hesitant in confirming the highly efficient rating of the PCR. In view of this, this validation rates the project efficient. D. Preliminary Assessment of Sustainability 19. Although the PCR did not give an explicit rating for sustainability, the discussions tend to point to a likely sustainable rating based on SB Corporation s enhanced role in SME development. The past-due ratios of SB Corporation s wholesale lending were maintained at an acceptable level of 3% during the implementation period. However, past-due ratios in retail lending were high in the range of 15% to 28%, owing mainly to a limitation in Republic Act 8289 that required SB Corporation to seek congressional approval to write off nonperforming loans. 11 This hindered SB Corporation s ability to flexibly manage its loan portfolio. Further, the law caused SB Corporation to keep cumulative nonperforming loans in its books since The law was amended in May 2008 by Republic Act 9501, 12 which allowed SB Corporation to write off nonperforming loans following its by-laws and BSP rules. This flexibility to write off nonperforming loans will improve the quality of SB Corporation's retail 11 Republic Act 6977, as amended by Republic Act 8289, known as the Magna Carta for Small Enterprises. 12 Otherwise known as the Magna Carta for Micro, Small and Medium Enterprises.

8 6 lending portfolio. Also, under Republic Act 9501, SB Corporation is tasked to play a major role in national SME development, particularly in implementing the policies and programs to assist SMEs in all areas, including but not limited to finance, information services, training, and marketing. With this enabling law in place and with the TA and JFICT grant contributing to the improvement in the environment for the growth and development of SMEs, this validation rates the project outcome likely sustainable. E. Impact 21. The PCR did not give an explicit rating of the project s impact. It estimated 130,000 jobs created during project implementation, of which 40,000 were new jobs (footnote 6, para. 7). In terms of institutional impact, the ADB loan replaced the traditional funding sources for SME lending and reduced the average funding cost of SB Corporation. Traditional funding resources were shifted to a new operation, the Microfinance Wholesale Lending Facility for refinancing microfinance institutions lending to microenterprises. On the whole, the project had a positive impact on employment and institutional lending for the SME sector. This validation rates the impact of the project significant. III. OTHER PERFORMANCE ASSESSMENTS A. Performance of the Borrower and Executing Agency 22. SB Corporation was effective in implementing the project and the TA. It was able to carry out its assigned responsibilities and functions. The project was completed 2 years ahead of schedule. The institutional capacity of SB Corporation was adequate in implementing both the project and the TA. This validation agrees with the PCR s highly satisfactory rating of SB Corporation s performance as the executing agency. B. Performance of the Asian Development Bank 23. ADB fielded an inception mission, a mid-term review mission, two loan review missions, and a completion review mission. The training provided by ADB on ADB policies and guidelines helped SB Corporation in managing the project effectively. ADB also coordinated with KfW to ensure that the project complements KfW credit lines and the TA. ADB did not encounter major problems in implementation and coordination of the project. This validation rates the performance of ADB satisfactory. C. Other 24. The loan proceeds were utilized for the intended purpose of relending and onlending to SMEs in conformity with sound banking, administrative, financial, environmental, and business practices. SB Corporation ensured that all its PFIs and SME borrowers comply with BSP rules and regulations and/or industry requirements. IV. OVERALL ASSESSMENT, LESSONS, AND RECOMMENDATIONS A. Overall Assessment and Ratings 25. Overall, the project is successful. 13 It was able to expand financing to SMEs through 13 The overall weighted average score based on this validation is 2, which is equivalent to a successful overall rating.

9 7 SB Corporation and helped improve the environment for the growth of SMEs (para. 15). The project loan was closed earlier than planned and the funds for SME lending were rapidly utilized. Despite the global economic crisis and changes in BSP's rediscounting policy that affected the growth targets for lending, the project had positive impacts on employment and on institutional lending for the SME sector. It helped catalyze funding from other development partners. The TA improved the quality of lending of SB Corporation through reorganization and establishment of a good credit risk management system. Overall Ratings Criteria PCR IED Review Reason for Disagreement/Comments Relevance: Relevant Relevant Effectiveness in Effective Effective Achieving Outcome: Efficiency in Achieving Outcome and Outputs: Highly efficient Efficient Assessment mainly based on disbursements and implementation. There was no evidence presented on the economic efficiency of the project and/or subprojects financed by the subloans. Preliminary Assessment of Sustainability: Likely sustainable Likely sustainable Borrower and Executing Agency: Highly satisfactory Highly satisfactory Performance of ADB: Satisfactory Satisfactory Impact: Not rated Significant The project strengthened the institutional capacity of SB Corporation, helped improve the environment for SMEs, and facilitated greater access to SME financing. An estimated 130,000 jobs were created, of which 40,000 were new jobs. Overall Assessment: Successful Successful Quality of PCR: Satisfactory ADB = Asian Development Bank, IED = Independent Evaluation Department, PCR = project completion report. Source: PCR and evaluation team. B. Identification of Lessons 26. The PCR highlighted the importance of an effective policy environment and institutional arrangements to support SME lending operations. SB Corporation s healthy institutional and operations structure coupled with clear and effective laws provided the ingredients for lending operations to be conducted effectively and efficiently. The global economic downturn and the changes in monetary policy were beyond the control of the project. In this regard, the validation holds that adjustments during implementation should have been made in the growth targets to make them more realistic and aligned with developments in the overall environment. C. Recommendations for Follow-Ups 27. This validation agrees with the PCR s recommendations that the indicators in the design and monitoring framework should have been more realistic, focusing broadly on institutional development in SME financing rather than loan growth. This validation concurs that there should be an extension for the submission of audited financial reports, since the workload and auditing undertaken by the Commission on Audit is beyond the control of the executing agency.

10 8 28. This validation agrees with the follow-up actions recommended by the PCR. First, SB Corporation needs to seek alternative funding sources to sustain the level of SME lending supported by the project, as the outstanding ADB loan is declining annually and will become nil in Second, there has been a decrease since 2007 in the volume of wholesale lending of SB Corporation, owing mainly to the competing size and price of the BSP rediscounting facility. ADB needs to monitor how SB Corporation is responding to this, and how SB Corporation is developing other products in response to the changes in market conditions. V. OTHER CONSIDERATIONS AND FOLLOW-UP A. Monitoring and Evaluation Design, Implementation, and Utilization 29. The performance of the project compared with targets as specified in the design and monitoring framework was tracked and monitored by the project. The PCR indicated that the estimated impact on employment generation was based on formulas used by government financial institutions (footnote 6, para. 7). The project basically relied on these formulas to define the effects of project activities on employment generation. B. Comments on Project Completion Report Quality 30. The quality of the PCR is satisfactory. It is generally consistent with the PCR guidelines (PAI 6.07). 14 It is concise and adequately explains the exogenous factors that affected performance of SB Corporation s ADB-funded lending to SMEs. Appendix 4 Overview of SB Corporation is informative. The lessons drawn and the recommendations are sound and based on findings of the report. However, the report lacked the analysis for assessing the effectiveness of the project. Assessment of effectiveness was limited to the lending component. The effectiveness of the other outputs was not discussed and data were not provided (para. 13). The loan covenant required that specific levels of performance for financial ratios such as ROA or capital adequacy be met. It would have been very helpful if the financial performance of SB Corporation had been analyzed and presented in the report. C. Data Sources for Validation 31. Mission back-to-office reports, ADB's PCR, SB Corporation's PCR, RRP, TA completion report, JFICT grant proposal, minutes of the Management Review Meeting. D. Recommendation for Independent Evaluation Department Follow-Up 32. The Independent Evaluation Department may consider the PCR s recommendation for the preparation of the project performance evaluation report after 2013, when the implementation of the PCG facility has been completed. The project performance evaluation report could contribute to a special evaluation study of ADB operations in the SME sector. 14 ADB Project Completion Report for Sovereign Operations. Project Administration Instructions. PAI Manila.

11 9 REGIONAL DEPARTMENT S RESPONSE TO THE PROJECT COMPLETION REPORT VALIDATION REPORT On 21 September 2011, Director, Independent Evaluation Division 2, Independent Evaluation Department (IED), received the following comments from the Public Management, Financial Sector, and Trade Division, Southeast Asia Department: We have received IED s earlier draft project completion report validation report circulated to us on 6 May 2011 and its final draft that was sent to us on 8 September We have no further comments to offer on the final draft.