The World Bank Mongolia Export Development Project (P147438) REPORT NO.: RES39061 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF MONGOLIA EXPORT DEVELOPMENT PROJECT APPROVED ON JULY 7, 2016 TO MONGOLIA FINANCE, COMPETITIVENESS AND INNOVATION EAST ASIA AND PACIFIC Regional Vice President: Victoria Kwakwa Country Director: Martin Raiser Regional Director: Hassan Zaman Practice Manager/Manager: Irina Astrakhan Task Team Leader(s): Ulle Lohmus The World Bank Mongolia Export Development Project (P147438) ABBREVIATIONS AND ACRONYMS AGRE Agricultural Reinsurance Company EDP Export Development Project EMSO-2 Second Economic Management Support Operation Loan MOF Ministry of Finance MOFALI Ministry of Food, Agriculture and Light Industry MongolianRe Mongolian National Reinsurance Company MTR Mid-Term Review PDO Project Development Objective PIU Project Implementation Unit SFFSP Strengthening Fiscal and Financial Stability Project SME Small and Medium Size Enterprises The World Bank Mongolia Export Development Project (P147438) BASIC DATA Product Information Project ID Financing Instrument P147438 Investment Project Financing Original EA Category Current EA Category Financial Intermediary Assessment (F) Financial Intermediary Assessment (F) Approval Date Current Closing Date 07-Jul-2016 30-Jun-2021 Organizations Borrower Responsible Agency Agricultural Reinsurance Company, now Mongolia MongolianRe,Ministry of Food, Agriculture and Light Industry Project Development Objective (PDO) Original PDO The development objective of the project is to support Mongolian Small and Medium size firms (SMEs) in the non- mining sectors to strengthen their export capabilities and expand access to export markets. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-58790 07-Jul-2016 26-Aug-2016 22-Dec-2016 30-Jun-2021 20.00 2.52 17.17 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Mongolia Export Development Project (P147438) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The Mongolia Export Development Project (EDP) was approved by the World bank Board for US$20.00 million on July 7, 2016 and became effective 5.6 months later, on December 22, 2016. The first disbursement was made on March 16, 2017. The Project’s implementation was progressing well with satisfactory ratings until the Ministry of Finance (MOF) was restructured in early 2018 and the Mid-Term Review (MTR) was completed in November 2018. After the MTR, the project was effectively put “on hold” mostly for the political reasons that were outside of the Project team’s control. One of the main reasons was the gridlock on the Bank’s Development Policy Operation, Second Economic Management Support Operation Loan (EMSO-2). A. Status of Achievements of PDOs and Key Performance Indicators 2. The project is making a steady progress towards the attainment of the Project Development Objectives (PDO). The project had delivered some good results by the MTR with the achievement of the key performance indicators: one of the four PDO indicators has been met and two are half-way to the target. Likewise, intermediate indicators have advanced towards the end-targets: three have been met, one is nearly met, and one is half-way to the target. B. Implementation Status 3. Project implementation is currently rated Moderately Unsatisfactory. While the project implementation started at a good speed, it slowed down after the new Cabinet was appointed at the end of 2017 and the Ministry of Finance (MOF) was restructured in early 2018. All key counterparts at the MOF for the project were changed after that restructuring of the MOF. Consequently, the project lost its “champion”. In addition, it was agreed that the same Project Implementation Unit (PIU) will start implementing another World Bank Project, the Strengthening Fiscal and Financial Stability Project (SFFSP), which became effective on September 11, 2017. Soon after the SFFSP implementation started, it became clear that the PIU was not able to fully focus on both projects and simultaneously give the EDP all the attention it required. EDP disbursements slowed. The PIU also became subject to frequent changes in its core staff, which further affected the Project implementation. The Project implementation progress was rated Moderately Unsatisfactory after the MTR in December 2018 and the progress towards achieving the PDO was downgraded to Moderately Unsatisfactory in June 2019, given there was no implementation progress since the Project was “on hold”. 4. Implementation of the project components has progressed at an uneven speed. Development of a new line of export finance products under Component 1 has a large allocation available for capitalizing the risk fund after the export credit insurance products are developed. After the MOF was restructured and the new team came in, it took time to explain the need to procure a large amount “master service agreement” for reinsurance and technical assistance and debt collection under the knowledge transfer and capacity building sub-component. Then the project was put “on hold” before procurement could start. Component 1 has made very limited progress and has been rated “Moderately Unsatisfactory” for the last year. Export competitiveness enhancement of SMEs under Component 2 was progressing at a satisfactory pace until the implementation stopped. It has provided grants to 85 SMEs and training to 100 SMEs and has a highly satisfactory rating from the customers (SMEs). Thanks to the Project, 8 new exporters emerged, the export volume of the participating companies doubled, and 4 new export products occurred for the already exporting SMEs. Table 1: EDP Commitments and Disbursements, US$ Components Allocated Budget As of September 30, 2019 The World Bank Mongolia Export Development Project (P147438) Disbursements Commitments Remaining Component 1 10,000,000.00 177,352.71 177,352.71 9,822,647.29 Component 2 8,500,000.00 1,346,225.53 1,524,087.98 7,153,774.47 Component 3 1,500,000.00 416,193.55 429,125.95 1,083,806.45 Total 20,000,000.00 1,939,771.79 2,130,566.65 18,060,228.21 Note: As reported by PIU as of September 30, 2019. Per system records, the disbursement amount is US$1,833,063.09 and the total deposit amount is US$2,517,597.60. 5. Project Management, Procurement, Financial Management, Audit, Safeguards and Monitoring and Evaluation status. Project management (Component 3) has been rated Moderately Unsatisfactory due to changes in leadership, the implementation delays, and a high turnover of PIU staff. Procurement performance has been Moderately Satisfactory while Financial Management has been conducted at a Satisfactory level. All audit reports have been “unqualified” and are submitted timely. Compliance with the Safeguard policies triggered has been Satisfactory. Monitoring and evaluation has been rated Satisfactory given the detailed tracking system on performance of the project beneficiaries that was developed at the beginning of the project. 6. Project Disbursements. The current disbursement ratio is 13 percent. The main cause of low disbursements is implementation delay: for the last 6 months, disbursements have been made only for covering the PIU operational expenses and servicing the existing contracts for the matching grants. There have been no new contracts procured since January 2019. Additionally, the overall disbursement is back-loaded given the large capitalization amounts to be made available under Component 1 in tranches only after the product development is successfully completed. The amount earmarked for capitalization is US$9 million, disbursed in three tranches. The first tranche of US$3 million would be disbursed only after the World Bank is ascertained that MongolianRe is ready to start with credit insurance operations. C. Rationale for Restructuring 7. Change in the Mongolian inter-governmental responsibilities. After the political issues related to the Bank’s Development Policy Operation, EMSO-2 were resolved in August 2019, the project was permitted to resume implementation. However, the Ministry of Finance would no longer be in charge. The Mongolian Government resolution No. 87 from April 2019 had called for consolidating SME related projects, programs and activities under the oversight of the Ministry of Food, Agriculture and Light Industry (MOFALI). The Government has thus proposed to transfer the EDP implementation from MOF to MOFALI. 8. EDP remains relevant but requires more time for implementation. EDP is relevant to the Government priorities aimed at economic and export diversification and jobs creation. The project is in line with the Mongol Export Program (MEP) for 2018-22, adopted in September 2018. However, the earlier implementation delays and recent halt of implementation have made it impossible to complete all planned activities by the current closing date of June 30, 2021. After the MOFALI becomes the beneficiary of the project, it will require time to establish a PIU since it will take some time to procure contracts for staff and make the new PIU fully functional. 9. The Project beneficiary/SME definition currently used for the project is restrictive. The SME definition in the Mongolian law is too restrictive1 and prevents many qualified companies that are already exporting, or are interested in exporting, from benefitting from the project. Those companies can be defined as very small on a global scale. 1 The maximum annual turnover for a mid-size company was set at around US$970,000 in July 2019. The World Bank Mongolia Export Development Project (P147438) Modifying the project’s “Beneficiary” definition to allow for using the EU’s SME definition for the purposes of the project will expand the accessibility to the project. The EU’s SME definition is also used by the EBRD and the EU for their projects that are supporting SMEs in Mongolia. 10. Given that additional changes to the project design would require conducting analytical/feasibility studies, a multi- step restructuring is recommended for the project. The current first restructuring will focus on (i) transferring the implementation of the Project from MOF to MOFALI; and (iii) amending the “Beneficiary” definition so that the analytical/feasibility studies can be conducted based on the EU’s SME definition. The first restructuring will also be used for addressing the name change of Mongolian Agricultural Reinsurance Company (AgRe), implementing agency for the project, to Mongolian National Reinsurance Company (Mongolian Re). The second restructuring for revising the Project components and reallocating project funds will be then conducted within the new institutional structures (i.e. MOFALI responsible) and based on the analytical studies using the revised SME definition. The second restructuring is expected to be completed before June 30, 2020 the latest. 11. Extension of the Project Closing date by 2 years has been requested by the MOF but will be considered latter. Project implementation has been delayed for the last 12 months and it still has about US$17 million to disburse. It is well acknowledged that the current closing date of the project of June 30, 2021 is no longer feasible, also given that time is required to establish a new project implementation unit (PIU), put in place the oversight arrangements and complete the second restructuring. The exact length of extension of the closing date will be defined based on a realistic and detailed implementation plan that will be prepared after the first restructuring (institutional change) is completed and the second restructuring (revision of components and reallocation of funds) agreed. 12. After MOFALI becomes responsible for the EDP implementation, preparations for the second restructuring will start. The preparatory work for this second restructuring would be guided by the following principles:  Component 1 – Development of a new line of export finance products at Mongolian Re would remain unchanged in terms of developing export insurance products, obtaining knowledge and capacity building on trade finance instruments. There would be no subsidiary established and all product development work shall be conducted by a designated unit at the Mongolian Re, who should also engage with the private sector insurance providers. After the products are developed, they should be tested for the actual market take-up/adequate pricing. A comprehensive analytical study should be conducted for assessing the feasibility of an option where Mongolian Re does not retain any risk on its balance sheet (or retains it at minimum) but passes it on to an international reinsurer. Based on the findings of this study and the market test, it would be determined how much, if any, capital contribution to the Mongolian Re is warranted and whether and how these funds will be reallocated.  Component 2 – Export competitiveness enhancement. The current sub-components for (i) training and research on foreign trade and (ii) the matching grants could be merged into one. This merged component for enhancing the overall competitiveness of SMEs would focus on boosting the productivity growth and improving the quality of products. Under the project, SMEs can request and receive: (i) general and customized training, (ii) capacity building on market research and plans, (iii) support for quality testing and certification, product adaptation, export fairs, national and international marketing tours, fair trade, export oriented business strategy and planning, and production management. For receiving the support, SMEs shall prepare an Export Development Plan. In addition, amended Component 2 could support implementation of the Mongol Export Program and related public sector policy initiatives. An analytical study would need to be prepared (using the new SME definition) to determine the new indicative amounts of support per SME that could be made available under the project. It will be important to clearly identify the objective, eligibility criteria and implementation modality among different programs supporting SMEs to avoid moral hazard and to create level playing field in supporting SMEs. The World Bank Mongolia Export Development Project (P147438) 13. An upgrade from a Moderately Unsatisfactory status would be assessed at the time of the second restructuring. II. DESCRIPTION OF PROPOSED CHANGES D. Project Development Objective 14. PDO remains valid. The Project’s development objective “to support Mongolian small and medium size firms (SMEs) in the non-mining sectors to strengthen their export capabilities and expand access to export markets” remains valid. E. Proposed Changes 15. Transferring the project implementation from MOF to MOFALI. In line with the Government Resolution No.87 which calls for consolidating SME related programs, projects and activities under the oversight of MOFALI, there are 3 donor projects currently in discussions of being transferred from MOF to MOFALI for implementation, and EDP is one of them. The MOF and MOFALI staff have confirmed the inter-ministerial agreement that EDP implementation shall be carried out through MOFALI. As a first step, MOFALI will put in place the new Project implementation team. A new standalone, dedicated PIU will be established at the MOFALI by January 31, 2020, the latest. The core members of the PIU will be competitively selected with terms of reference satisfactory to the Bank. The core PIU shall include a project coordinator; a financial management specialist, a procurement specialist, and a monitoring and evaluation specialist. Also, additional 4-5 technical experts may need to be hired at the PIU for Component 2 implementation. A new Project Steering Committee will be established at the MOFALI for the project oversight. The MOF and MOFALI Ministers have agreed the Project Director will be the Head of the Foreign Cooperation Division of MOFALI and the same division will be responsible for conducting oversight of the PIU and the overall project including policies related to the SME development. 16. Amending the “Beneficiary” definition to allow to define SME’s based on the EU definition2. The Government has requested the change to ensure access to the project to a larger number of SMEs in the non-mineral sector. The SME definition in the Mongolian law prevents many qualified companies that are already exporting or are interested in exporting from benefitting from the Project. Most of those companies can be defined as micro or small on a global scale. The EU’s SME definition uses (i) staff headcount and (ii) either turnover or balance sheet total to determine whether an enterprise is an SME as provided in Table 2. The EU’s definition is also used by the EBRD and the EU for their projects in Mongolia. 17. The name of the Mongolia Agricultural Reinsurance Company (AgRe) has been changed to the Mongolian National Reinsurance Company (Mongolian Re). It is suggested to use this restructuring of the project to address also this name change in the Financing Agreement and the Project Agreement. Table 2: EU’s SME definition Company category Staff headcount Turnover or Balance sheet total Medium-sized < 250 ≤ € 50 m ≤ € 43 m Small < 50 ≤ € 10 m ≤ € 10 m 2 defined in the EU recommendation 2003/361. The World Bank Mongolia Export Development Project (P147438) Micro < 10 ≤€2m ≤€2m 18. Overall risk rating has been changed given that implementing agency will change. Given that the project beneficiary will change and the new stand-alone PIU will be established the Institutional Capacity for Implementation and Sustainability risk and Fiduciary risk are upgraded to Substantial. The Procurement and Financial Management assessment on the new beneficiary would need to be conducted. III. SUMMARY OF CHANGES Changed Not Changed Implementing Agency ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ APA Reliance ✔ Implementation Schedule ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ The World Bank Mongolia Export Development Project (P147438) Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_IA_TABLE IMPLEMENTING AGENCY Implementing Agency Name Type Action Ministry of Finance Implementing Marked for Deletion Agency Agricultural Reinsurance Company, now Implementing No Change MongolianRe Agency Ministry of Food, Agriculture and Light Implementing New Industry Agency OPS_DETAILEDCHANGES_SORT_TABLE SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  High  High Macroeconomic  High  High Sector Strategies and Policies  Moderate  Moderate Technical Design of Project or Program  Substantial  Substantial Institutional Capacity for Implementation and  Moderate  Substantial Sustainability Fiduciary  Moderate  Substantial Environment and Social  Moderate  Moderate Stakeholders  Moderate  Moderate Other Overall  Substantial  Substantial .