Democratic Socialist Republic of Sri Lanka: Third ...

Third Additional Financing of Small and Medium-Sized Enterprises Line of Credit Project (RRP SRI 49273)

Project Number: 49273-004 Loan Number: LXXXX Grant Number: GXXXX Technical Assistance Number: TAXXXX November 2020

Democratic Socialist Republic of Sri Lanka: Third Additional Financing of Small and Medium-Sized Enterprises Line of Credit Project

Project Administration Manual

http://www.adb.org/Documents/RRPs/?id=49273-004-3

ABBREVIATIONS

ADB – Asian Development Bank BPO – business process outsourcing CBSL – Central Bank of Sri Lanka COVID-19 – coronavirus disease DMF – design and monitoring framework EMS – environmental management system ESMS – Environmental and social management system GAP – gender action plan ICT – information and communication technology JFPR – Japan Fund for Poverty Reduction LIBOR – London interbank offered rate MOF – Ministry of Finance MOF-DDF – Department of Development Finance MPI – Ministry of Plantation PCR – project completion report PFI – participating financial institution PMU – project management unit PPMS – project performance management system SLRs – Sri Lanka rupees SLTB – Sri Lanka Tea Board SMEs – small and medium-sized enterprises SOE – statement of expenditures TSHDA – Tea Small Holdings Development Authority TA – technical assistance We-Fi – Women Entrepreneurs Finance Initiative

CONTENTS

I. PROJECT DESCRIPTION 1

Background 1 Project Design of New Additional Financing 2

II. IMPLEMENTATION PLANS 6

Project Readiness Activities 6 Overall Project Implementation Plan 9

III. PROJECT MANAGEMENT ARRANGEMENTS 16

Project Implementation Organizations: Roles and Responsibilities 16 Key Persons Involved in Implementation 20 Project Organization Structure 21

IV. COSTS AND FINANCING 21

Allocation of Loan Proceeds 22 Disbursement S-Curve 24 Fund Flow Diagram for the SME Credit Line and Tea Credit Line 24 Fund Flow Diagram for the Emergency Response Component 25 Fund Flow Diagram for the We-Fi Grant and JFPR Grant 26

V. FINANCIAL MANAGEMENT 26

Financial Management Assessment 26 Disbursement 27 Accounting and Auditing Arrangements 29

VI. PROCUREMENT AND CONSULTING SERVICES 31

Advance Contracting and Retroactive Financing 31 Procurement of Goods, Works, and Consulting Services 31 Procurement Plan 31

VII. SAFEGUARDS 31

VIII. GENDER AND SOCIAL DIMENSIONS 32

IX. PERFORMANCE MONITORING, EVALUATION, REPORTING, AND COMMUNICATION 36

Project Design and Monitoring Framework 36 Monitoring 36 Evaluation 37 Reporting 38 Stakeholder Communication Strategy 39

X. ANTICORRUPTION POLICY 40

XI. ACCOUNTABILITY MECHANISM 40

XII. RECORD OF PAM CHANGES 40

APPENDIXES

Appendix 1: Allocation Request Forms 41 Appendix 2: Allocation Request Form for We-Fi Grant 43

Appendix 3: Allocation Request Form for JFPR Grant 44 Appendix 4: Participating Financial Institution Criteria 45 Appendix 5: Subloan and Subborrower Criteria 46 Appendix 6: Advance Reconcilation Worksheets 52 Appendix 7: Advance Reconciliation Worksheet We-Fi Grant 54 Appendix 8: Advance Reconciliation Worksheet JFPR Grant 55

Project Administration Manual Purpose and Process

1. The project administration manual (PAM) describes the essential administrative and management requirements to implement the project on time, within budget, and in accordance with the policies and procedures of the government and Asian Development Bank (ADB). The PAM should include references to all available templates and instructions either through linkages to relevant URLs or directly incorporated in the PAM.

2. The Ministry of Finance (MOF) and participating financial institutions (PFIs) are wholly responsible for the implementation of ADB-financed projects, as agreed jointly between the borrower and ADB, and in accordance with the policies and procedures of the government and ADB. ADB staff is responsible for supporting implementation including compliance by MOF and PFIs of their obligations and responsibilities for project implementation in accordance with ADB’s policies and procedures.

3. At loan negotiations, the borrower and ADB shall agree to the PAM and ensure consistency with the loan agreement and project agreement. Such agreement shall be reflected in the minutes of the loan negotiations. In the event of any discrepancy or contradiction between the PAM and the loan agreement and the project agreement, the provisions of the loan agreement shall prevail.

4. After ADB Board approval of the project's report and recommendations of the President (RRP),

changes in implementation arrangements are subject to agreement and approval pursuant to relevant government and ADB administrative procedures (including the Project Administration Instructions) and upon such approval, they will be subsequently incorporated in the PAM.

I. PROJECT DESCRIPTION

Background 1. The Small and Medium-Sized Enterprises Line of Credit Project comprising ADB’s loan, attached grant and technical assistance (TA) provided by the Japan Fund for Poverty Reduction (JFPR), and grant and TA funded by the Women Entrepreneurs Finance Initiative (We-Fi), are aimed at improving small and medium-sized enterprises’ (SMEs’) access to bank financing in the Democratic Socialist Republic of Sri Lanka. 2. SMEs are sources of economic growth and employment. Yet, SMEs, in particular, women-led SMEs, often struggle to access bank loans because banks typically consider SME loans as riskier and more expensive to administer. The project, TAs, and grants will address this issue from two angles. First, the credit line and grant will use financial incentives to encourage banks to lend to SMEs, particularly those who struggle with access to financing. Second, the TA will strengthen the supply of creditworthy SMEs through supporting Sri Lanka’s export-oriented SME clusters, including tea smallholding sectors, and to women entrepreneurs. 3. The project’s impact will be employment opportunities in SMEs increased. The outcome will be SME’s access to finance strengthened, with a focus on women-led SMEs.1 The project’s outputs will be (i) financing to SMEs through formal intermediaries increased, (ii) innovative SME financing schemes developed, (iii) capacity of SMEs to access financial services enhanced, (iv) international competitiveness of the information and communication technology (ICT) and business process outsourcing (BPO) cluster and tea cluster strengthened, (v) gender-inclusive policy and regulatory framework and support enhanced, and (vi) evidence based on women entrepreneurship development to inform future policymaking strengthened.2

4. The original $100 million credit line was fully disbursed through 4 semiannual fund allocations as subloans to target borrowers as of 6 December 2018. An additional $75 million loan (Loan 3640) was approved on January 2018 and was fully disbursed through 4 semiannual fund allocations as of 28 February 2020. On 8 June 2018, an additional $10.165 million from the We-Fi grant was approved, of which, $6.55 million have been disbursed as of 28 February 2019 and $2.95 million has not been allocated. 3 The We-Fi grant together with the credit line, is available for principal paydown support for individual loans undertaken by women-led SMEs. The We-Fi grant is available to qualified women-led SMEs on the dates of the current allocation process. The original closing date for Loan 3640 was on 30 September 2020 and that for the We-Fi grant was on 31 December 2019. Both products were extended to 31 December 2020.4 A $2 million grant from JFPR was attached to the original credit line and has been implemented since 2016 (JFPR-funded SME TA). An increase of $2.387 million from the We-Fi grant was approved in June 2018 to enhance the project’s gender dimensions (We-Fi funded SME TA).

1 The original definition of women-led SMEs under the SME credit line was (i) 51% owned by women, (ii) at least 60%

of senior managers are women, or (iii) at least 50% of board members are women. Under the new additional financing, the original definition will be changed to the definition of women-led SMEs that are eligible for We-Fi grant (footnote 5).

2 ADB. 2018. Report and Recommendation of the President to the Board of Directors: Small and Medium-Sized Enterprises Line of Credit Project - Additional Financing. Manila.

3 This amount can be broken down into $9.5 million to be provided as grant for principal paydown for eligible women-led SMEs, and $665,000 in administrative fee to ADB.

4 The first extension of the closing date for the We-Fi grant to 30 September 2020 was made in June 2019 based on the findings of the midterm review in January 2019. In September 2020, the closing date for both the loan and We-Fi grant was extended to 31 December 2020 to allow a few PFIs to find eligible SMEs under the economic slowdown due to COVID-19 pandemic.

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Project Design of New Additional Financing

1. Overall Structure 5. The new $165 million additional loan and the new $1.25 million JFPR grant will be approved in November 2020. The new $165 million additional loan, together with the new $1.25 million JFPR grant will be spilt into 3 components (i) SME finance component (SME Component), (ii) tea smallholder finance component (Pilot Component), and (iii) SME component for short-term financing needs in response to coronavirus disease (COVID-19) (Emergency Response Component). 6. SME Component. A $45 million credit line from the new additional loan is provided exclusively to targeted underserved SMEs in productive sectors mainly for their capital investment to accelerate business growth (SME credit line). The targeted underserved SMEs are (i) women-led, (ii) first-time borrowers, (iii) borrowing subloans against which fixed or financial assets are not pledged, and (iv) located outside of Colombo. The “productive sectors” are defined as the real sectors of the economy, including the agriculture, industry and service sectors, and excluding wholesale and retail trade operations and leasing and rental businesses. 7. Pilot Component (including a new JFPR Grant). A $20 million credit line from the new additional loan is provided to tea smallholders with landholdings not exceeding 50 acres for capital investments to enhance productivity, such as new planting, replanting, infilling, nursery development, mechanization, and soil and water management (tea smallholder credit line). The new $1.25 million JFPR grant is earmarked to be blended with the tea smallholder credit line for targeted marginal tea smallholders with landholdings of less than 10 acres for the principal paydown support up to 10%–20%. 8. Emergency Response Component. A $100 million credit line from the new additional loan is provided to SMEs in productive sectors to meet their short-term financing needs, including those for working capital, under economic disruption due to COVID-19. The component also promotes cashflow-based lending with a lending target. The reflow from the repayments under this component will be reallocated to SME Component and/or Pilot Component to support business expansion in the economic recovery phase. 9. We-Fi Grant. To blend with the SME credit line for the first 3 semiannual allocations (i.e., 10th–12th allocations, see Table 1), the We-Fi grant fund will be further extended to 31 December 2022. The remaining $2.95 million We-Fi grant will be blended with the SME Component for the principal paydown support up to 10%–25%. Eligible women-led SMEs are eligible for a 10% principal paydown funded by the We-Fi grant for an eligible subloan with the principal size of between SLRs750,000–SLRs30,000,000. 5 In addition, if the women-led SME borrower is accessing finance for economic activity in lagging regions (Uva, Sabaragamuwa, Northern or Eastern provinces), an additional 5% of principal paydown is provided. Furthermore, if the women-led SME borrower completes the associated training and presents the certificate of completion to the PFI, the subborrower is eligible for an additional principal paydown of 10%. The We-Fi grant cannot be blended with Emergency Response Component.

5 Defined as (i) 51% of enterprise ownership is controlled by women or (ii) meets the below 3 criteria: (a) at least 20%

of enterprise ownership is controlled by women; (b) a woman is either the chief executive officer (i.e., senior most manager) or chief operations officer (i.e., second most senior manager); and (c) 30% of board members are women, where a board exists.

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10. JFPR Tea TA. In addition to the JFPR-funded SME TA and the We-Fi funded SME TA (para. 4), a $1.75 million new JFPR TA (JFPR Tea TA) will enhance productivity of tea smallholders and support project implementation. For a detailed design of the JFPR Tea TA, please refer to the linked document on Attached Technical Assistance Report.6

2. Fund Allocation Mechanism 11. Fund allocation procedure for SME Component and Pilot Component. Fund allocations under the SME Component and the Pilot Component will be carried out semiannually in end-June and in end-December. Eligible PFIs will request for the amounts that they would like to be allocated from (a-1) SME credit line, (a-2) We-Fi grant, (b-1) tea smallholder credit line, and (b-2) JFPR grant separately (Appendixes 1 and 2). The request should be submitted no later than the allocation request date stated in Table 1 unless otherwise agreed between ADB and the government. 12. The fund allocation schedule, indicative allocation amounts, and maximum available amounts for each allocation for the SME Component are in Table 1. The maximum available amount for each semiannual allocation can be increased upon agreement between ADB and the government before ADB asks for fund allocation requests from PFIs. Each PFI may request up to the prorated maximum available limit at each of the semiannual allocations. If funds are insufficient to meet all of the PFIs’ requests, the funds will be allocated pro rata. For the Pilot Component, the funds will be allocated indicatively through 5 semiannual allocations. During implementation, the government and ADB may decide to reduce the number of allocations if the demand is found to be strong. 13. Fund allocation procedure for Emergency Response Component. Given the large refinancing needs for short-term borrowing, the $100 million loan is deemed to cover a 6-month estimate of the PFIs’ subloan pipeline, and will be fully disbursed upon loan effectiveness by ADB to the government upon submission of an advance withdrawal application by the government. Such advance will subsequently be liquidated as the government relends to eligible SMEs through 10 PFIs. Immediately after the ADB’s loan disbursement, each PFI can have access to an allocation of $5 million. Thereafter, the allocation of the remaining $50 million by the government to the 10 PFIs will be on a first-come-first-serve basis. Once each PFI utilizes 80% of the allocation (i.e., $4 million) in compliance with the eligibility criteria for subloans (including the 20% target for subloans that are not collateralized by fixed or financial assets), it can request for an additional allocation of $5 million. The Project Management Unit (PMU) will confirm the eligibility for additional allocation. 14. The principal and interest payments of the Emergency Response Component by PFIs to the government will be semiannual on 1 June and 1 December. The government will grant at least 1 year moratorium for principal repayment. Accordingly, if the first allocation is made before 1 June 2021, the principal will start to be repaid on 1 June 2022 and the final principal repayment will be in June 2024.7 Before 30 June 2022 (i.e., 13th allocation), the government will submit a proposal to reallocate the reflow from the Emergency Response Component to the SME Component and/or the Pilot Component for ADB’s approval.

6 The attached new JFPR Tea TA is intended to: (i) improve tea smallholders’ access to finance; (ii) develop a mobile

platform for tea smallholders; (iii) develop an enabling environment for sustainable and gender sensitive tea value chain; and (iv) support project monitoring and evaluation. Attached Technical Assistance (accessible from the list of linked documents in Appendix 2).

7 If subsequent allocations are made before 1 June 2021, their principals will start to be repaid on 1 June 2022 and will be fully repaid to the government on 1 June 2024.

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Table 1: Allocation Schedule

Allocation Round 9th 10th 11th 12th 13th 14th 15th 16th 17th

Key Schedule

Allocation Request Date NA Dec 2020

Jun 2021

Dec 2021

Jun 2022

Dec 2022

Jun 2023

Dec 2023

Jun 2024

Disbursement Date Dec 2020

Apr 2021

Oct 2021

Apr 2022

Oct 2022

Apr 2023

Oct 2023

Apr 2024

Oct 2024

Cut-off Date NA May 2021

Nov 2021

May 2022

Nov 2022

May 2023

Nov 2023

May 2024

Nov 2024

Maximum Allocation Amount (in million)

(a) SME Component

(a-1) SME credit line $15.00 $15.00 $15.00 [$20.00]c [$20.00]c [$20.00]c [$20.00]c [$20.00]c

(a-2) We-Fi grant a $1.50 $1.00 $0.45d - - - -

(b) Pilot Component

(b-1) tea smallholder credit line

$4.00 $4.00 $4.00 $4.00 $4.00 - -

(b-2) JFPR grant $0.25 $0.25 $0.25 $0.25 $0.25 - -

(c) Emergency Response Componentb

(estimated)

$100.00 - - ($20.00)b ($20.00)b ($20.00)b ($20.00)b ($20.00)b

Total estimated Allocation Amount (in million)

$100.00 $20.75 $20.25 $19.70 [$24.25] [$24.25] [$20.00] [$20.00] [$20.00]

( ) = negative, [ ] = tentative, JFPR = Japan Fund for Poverty Reduction, NA = not applicable, SME = small and medium-sized enterprises, We-Fi = Women Entrepreneurs Finance Initiative a We-Fi grant can be attached only to (a-1) SME credit line. b It is assumed that, under the Emergency Response Component, $50 million will be allocated upon loan

effectiveness in December 2020. The remaining $50 million is expected to be fully allocated to PFIs before 1 June 2021. The principal of the first allocation and subsequent allocations will start to be repaid on 1 June 2022 and the final repayment will be on 1 June 2024. If subsequent allocations are made on or after 1 June 2021, the principal repayment will start on 1 December 2022 and the final repayment will be on 1 December 2024. The reflow will be redistributed to (a-1) SME credit line and/or (b-1) tea smallholder credit line. Given the limited demand for tea smallholder credit line, it is expected that the majority of the reflow will be redistributed to (a-1) SME credit line.

c From the 13th allocation (June 2022), the reflow from Emergency Response Component will be redistributed. Given the limited demand for tea smallholder credit line, it is expected that the majority of the reflow will be redistributed to (a-1) SME credit line.

d Prior to the last allocation (12th allocation), the Steering Committee and ADB may claw back any undisbursed allocation from any PFI and reallocate to another PFI.

15. ADB’s disbursements to the government for the SME Component and Pilot Component will be held semi-annually around 1 April or 1 October. The last ADB’s disbursement is expected to be on 2 April 2023 (for 14th allocation), whose last principal repayment is going to be on 1 October 2033, which is aligned with Section 2.02 (d) of the loan agreement. 16. PFI’s eligibility criteria. PFI’s common eligibility criteria for all the components are specified in Appendix 4. 17. In addition, separate sets of eligibility criteria for PFIs to participate in semiannual fund allocations apply for the SME Component and Pilot Component.8 PFI’s failure of meeting eligibility

8 The eligibility criteria for SME credit line from the 3rd additional financing to ensure a more targeted intervention.

Currently, (i) SMEs from all the sectors are eligible and (ii) at least 70% of the SME subborrowers are the targeted SMEs that are (a) located outside of Colombo District, (b) borrowing for working capital that is not collateralized by fixed or financial assets, (c) led by women, or (d) first-time borrowers from licensed commercial or specialized bank.

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criteria for one component will not affect the PFI’s eligibility for the other component.

(i) SME credit line. To participate in a subsequent allocation of SME credit line and We-Fi grant, PFIs must meet the following disbursement and development targets 1 month prior to the allocation:

(a) 80% of the previous allocation of SME credit line has been disbursed/lent

to eligible SME subborrowers;

(b) 20% of the number of subloans has been disbursed/lent to subborrowers who have not previously borrowed from a licensed commercial or specialized bank (first-time borrowers);9 and

(c) 20% of the number of subloans has been disbursed/lent to subborrowers who are led by women.10

(ii) Pilot Component. To participate in a subsequent allocation of tea smallholder credit line and JFPR grant, PFIs must meet the following disbursement targets 1 month prior to the allocation: (a) 80% of the previous allocation of credit line has been disbursed/lent to

eligible tea smallholders and for eligible capital investment; and

(b) 80% of the previous allocation of JFPR grant has been disbursed/lent to eligible marginal tea smallholder and for eligible replanting and new planting.

(iii) We-Fi Grant. To participate in as subsequent allocation of We-Fi grant, 80% of the

previous allocation of We-Fi grant fund has been disbursed/lent to eligible women-led SME subborrowers. A PFI also must meet the eligibility criteria for the SME credit line (para. 17(i)).

18. Emergency Response Component. A PFI can request an additional allocation if they meet the following disbursement and development targets:

(i) 80% of the previous allocation has been disbursed/lent to eligible SME subborrowers; and

(ii) 20% of the number of subloans has been disbursed/lent without fixed or financial

From the 3rd additional financing, the eligible SMEs will be narrowed down to the targeted SMEs in productive sector (i.e., 100% of the SMEs borrowers must be the targeted SMEs in productive sector). The definition of the targeted SMEs will be retained. The productive sectors are defined as the reals sectors of the economy, excluding wholesale and retail trade operations and leasing and rental business.

9 The target on first-time borrowers will be waived for the allocation of the SME Component in December 2020 (10th allocation). The PMU and ADB may agree on waiving or lowering the 20% target on first-time borrowers for allocations in 2021 by taking into consideration the economic recovery status from COVID-19.

10 Defined, in accordance with We-Fi grant, as (i) 51% of enterprise ownership is controlled by women or (ii) meets the following criteria: (a) at least 20% of enterprise ownership is controlled by women; (b) a woman is either the chief executive officer (i.e., senior most manager) or chief operations officer (i.e., second most senior manager); and (c) 30% of board members are women, where a board exists. While the original definition of women-led SMEs for the SME credit line is (i) 51% owned by women, (ii) at least 60% of senior managers are women, or (iii) at least 50% of board members are women, this original definition will not be used for the third additional financing.

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assets pledged as collateral.

19. If a PFI cannot fully disburse allocated funds under the Emergency Response Component in compliance with applicable eligibility criteria within 6 months from the allocation, the PFI cannot access to another allocation, and it shall return the unutilized portion to the government for reallocation to other eligible PFIs. 20. Following the provision of the first 500 subloans under this component, ADB and the PMU will undertake a review of the component and may introduce new geographical and gender targets for new allocations. 21. Subborrowers’ and subprojects’ eligibility criteria. For each component, detailed and updated eligibility criteria for (i) subborrowers, including the definitions of women-led SMEs and marginal tea smallholders (with landholding less than 10 acres) and (ii) subprojects are in Appendix 5. Key eligibility criteria for subborrowers and subprojects are summarized below:

Eligible Subborrowers Eligible Subprojects

SME Component Targeted SMEs in productive sector

• Capital investments

• Short-term financing needs (only when subloans are not collateralized by fixed assets or working capitals)

Pilot Component Tea smallholders Capital investments only

Emergency Response Component

SMEs in productive sector Short-term financing needs, including working capital, only

22. Midterm review for Pilot Component. The progress of the Pilot Component will be reviewed before the 11th allocation during the midterm review mission. If the demand for the Pilot Component is low, ADB will decide, in consultation with the government, to allow part of the remaining funds to be transferred to the SME Component. However, the remaining JFPR grant must be used exclusively for eligible marginal tea smallholders unless another arrangement is agreed upon between the Government of Japan and ADB, in consultation with the government.

23. Claw back of undisbursed allocation of We-Fi grant. Prior to the last allocation (i.e., 12th allocation in December 2021), the Steering Committee and ADB may claw back any undisbursed allocation from any PFI and reallocate to another PFI.

II. IMPLEMENTATION PLANS

Project Readiness Activities

Indicative Activities

2019 2020 Responsible Unit 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11

Financial and integrity due diligence on participating commercial banks conducted

▲ ▲

▲

ADB

Stakeholder analysis and consultation have been undertaken and are

▲

▲

ADB

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reflected in the project documents

Major risks (including governance) have been identified, and mitigating measures are indicated

▲

▲

ADB

Establish project implementation arrangements

▲ ▲ ▲ ▲ ▲ ▲ ▲ ▲ ▲ ▲ ADB, MOF, MPI

GOJ’s approval on JFPR grant and JFPR-funded tea TA

▲

Loan negotiations ▲ ADB, MOF, MPI

ADB Board approval

▲ ADB

Loan and project agreements signing

▲ ADB, MOF, PFIs

Government legal opinion provided for Loan agreement

▲ MOF, AGD

Signing of the subsidiary loan agreements between MOF and PFIs (Emergency Response Component)

▲

MOF, AGD

Signing of the subsidiary loan agreements between MOF and PFIs (SME Component and Pilot Component)

▲

MOF, PFIs

Loan effectiveness

▲ MOF, ADB

Emergency Response Component: Loan First disbursement

▲ MOF, PFIs

Pilot Component: Loan First allocation

▲ MOF, PFIs

Pilot Component: Loan First disbursement

Apr 2021

ADB, MOF

Amendment to We-Fi grant agreement

▲ ADB, MOF

Amendment to We-Fi project agreement

▲ ADB, PFI

Stakeholder consultation undertaken for JFPR grant project

▲ ▲ ▲ ▲ ▲ ▲

ADB

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JFPR grant project implementation arrangements finalized

▲ ▲ ▲ ▲ ▲

ADB

JFPR Grant agreement signing

▲ ADB, MOF, PFIs

Government legal opinion on JFPR grant

▲ MOF, AGD

JFPR-funded tea TA approval

▲ ADB

JFPR-funded tea TA contract with consulting firms and mobilization of consultants for financial literacy trainings

Dec 2020 ADB,

MOF, MPI,

TSHDA

Launch of financial literacy training

Feb 2021

ADB, MOF, MPI,

TSHDA

JFPR grant effectiveness

▲ MOF, ADB

JFPR grant first allocation

▲ MOF, PFIs

First disbursement of JFPR grant

Apr 2021

ADB, MOF

ADB = Asian Development Bank, AGD = Attorney’s General Department, JFPR = Japan Fund for Poverty Reduction, MOF = Ministry of Finance, MPI = Ministry of Plantation, PFIs = participating financial institutions, TSHDA = Tea Smallholdings Development Authority. Source: Asian Development Bank.

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Overall Project Implementation Plan 24. The scheduled implementation period, including the original loan and additional financing as well as the grant, is 7 years (March 2016–March 2024).

Key Activities with Milestones 2016 2017 2018 2019 2020 2021 2022 2023

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

1. Financing to SMEs through formal intermediaries increased

1.1 Conduct 11 semiannual disbursements to PFIs for financing to SMEs during Q1 2016–Q2 2022 (8 rounds conducted) (changed)

1.2 Submit monthly and semiannual performance reports and a completion report on auction results by Q3 2023 (reports through August 2020 submitted) (changed)

1.3 Conduct at least 5 semiannual disbursements for financing to tea smallholders during Q4 2020–Q2 2023 (added)

1.4 Start reallocating the repaid $100 million Emergency Response Component to PFIs by Q2 2022 (added)

1.5 Publish sex-disaggregated subloan data and develop policy recommendations by Q4 2023 (added)

2. Innovative SME financing schemes developed

2.1 Establish an independent administration unit for the auction mechanism by Q1 2016c (completed)

2.2 Establish operating rules for the auction mechanism, including a dissemination plan for auction results by Q1 2016c (completed)

2.3 Conduct first auction by Q2 2016c (completed)

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1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2.4 Collate all relevant information on undertaking a demand analysis for the NCGS for SMEs by Q1 2016 (completed)

2.5 Provide a business plan, based on demand analysis, for the NCGS; and structure options for establishing the NCGS, including partnerships and a subsidiary of existing entities by Q3 2016 (completed)

2.6 Specify NCGS incorporation options, including fund ownership arrangements and capital requirements by Q3 2016 (completed)

2.7 Organize a seminar on the NCGS and provide draft reports, including capitalization and structuring options, and presentation materials to seminar participants by Q4 2016 (completed)

2.8 Submit a proposal on the NCGS to the steering committee by Q1 2017 (completed)

3. Capacity of SMEs in targeted clusters to access financial services enhanced

3.1 Identify a potential borrowing cluster by Q3 2016 (completed)

3.2 Establish a special purpose vehicle or other collaboration that will borrow on behalf of SMEs in the cluster by Q2 2017 (completed)

3.3 Structure the cluster-based loan and prepared the loan proposal by Q4 2017 (completed)

3.4 Conduct a gender-responsive value chain analysis of 3 targeted clusters (ICT–BPO, fruits and vegetables, and processed food and beverages), and developed a strategy for expanding women entrepreneurship and financing, and helping women move up the value chain in the 3 clusters by Q2 2017 (completed)

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1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

3.5 Assess the capability development needs of women entrepreneurs and design training modules on business development and management (including financial literacy) in the 3 clusters based on the identified capability development needs by Q2 2017 (completed)

3.6 Launch initiatives to strengthen networks of women entrepreneurs by Q4 2017 (completed)

3.7 Train 500 actual and potential women entrepreneurs in business development and management (including financial literacy) in the 3 SME clusters by Q1 2019 (completed)

3.8 Train at least 250 existing and potential women entrepreneurs in business development and management across all SME clusters by Q1 2020 (completed)

3.9 Develop a template of simplified financial statements that will be submitted by SME subbborrowers under the Emergency Response Component through PFIs to the PMU by Q4 2020 (added)

3.10 Develop interactive online platform, including mobile applications for networking by Q4 2020 (timeline changed)

3.11 Upload revised material for associated training course for business management and financial literacy by Q4 2020 (timeline changed)

3.12 Register 450 women entrepreneurs on the online platform by Q4 2020 (unchanged)

3.13 Train 1,500 tea smallholders, including 500 women, in financial literacy in at least 3 districts by Q1 2022 (added)

3.14 Structure a new loan product for tea smallholders to strengthen value chain

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1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

linkage with tea factories by Q1 2022 (added)

3.15 Provide a business plan for a new mobile application platform on business management for tea smallholders, including the scope of service, marketing, and implementation arrangements by Q2 2021 (added)

3.16 Develop a new mobile application on a pilot basis by Q4 2021 (added)

3.17 Register 1,500 tea smallholders, including 500 women, on the mobile application platform by Q2 2022 (added)

3.18 Complete baseline survey for tea smallholders on business practices by Q2 2022 (added)

3.19 Complete endline survey for tea smallholders on business practices by Q2 2023 (added)

3.20 Develop a long-term business plan for the full rollout of the new mobile application platform, including the governance structure of service provider, scope of service, and financial model (including fee structure) by Q3 2023 (added)

3.21 Conduct seminar on smart tea agriculture in Sri Lanka by Q4 2023 (added)

4. International competitiveness of ICT–BPO cluster strengthened

4.1 Conduct a gap analysis on current international branding campaigns by other stakeholders in the ICT–BPO cluster and develop a strategy for strengthening EDB support for international branding of the ICT–BPO cluster by Q1 2017 (completed)

4.2 Launch an international branding campaign, including strengthening EDB’s business matching services by Q3 2017 (completed)

13


1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

4.3 Develop a product and/or service quality assurance mechanism for the ICT–BPO cluster, if practical, in partnership with organizations such as the Sri Lanka Association of Software and Service Companies by Q2 2017 (completed)

4.4 Facilitate the participation of at least 40 ICT–BPO staff members attending a seminar on international branding of Sri Lanka’s ICT–BPO cluster by Q1 2018 (completed)

4.5 Identify economic, social, and regulatory barriers that prohibit women from entering and staying in the ICT–BPO cluster; include an assessment of the cost and benefits of statutory prohibitions on women’s working hours; and develop a cluster strategy to attract women workers by Q1 2017 (completed)

4.6 Provide support for school career counselors to construct a strong network with ICT–BPO professionals by Q2 2018 (completed)

4.7 Launch a career forum for women with interest in the ICT–BPO cluster by Q4 2017 (completed)

4.8 Facilitate the participation of at least 500 women in career events on working in the ICT–BPO cluster by Q3 2018 (completed)

4.9 Conduct consultations with stakeholders including CSOs on a sustainable and gender-sensitive tea value chain by Q3 2021 (added)

5. Gender-inclusive policy and regulatory framework and support enhanced

5.1 Complete gender gap assessment of government agencies’ support for gender

14


1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

development in entrepreneurship by Q4 2020 (timeline changed)

5.2 Facilitate train-the-trainer sessions for government agencies involved in assessment based on the gender and development plan by Q4 2020 (timeline changed)

5.3 Complete gender gap analysis in CSOs’ support to women entrepreneurship by Q4 2020 (timeline changed)

5.4 Conduct technical seminars for CSOs by Q4 2020 (timeline changed)

5.5 Conduct baseline and endline surveys of the government staff of the 3 agencies completing action plans to support women entrepreneurship to assess their awareness on gender-specific challenges in women’s entrepreneurship by Q1 2021 (timeline changed)

5.6 Complete gap assessment of financial institutions’ gender-based practices, products, and policies by Q4 2020 (timeline changed)

5.7 Complete plan to develop PFIs’ gender-inclusive policies and practices by Q4 2020 (timeline changed)

6. Evidence based on women entrepreneurship development to inform future policymaking strengthened

6.1 Complete baseline survey for impact evaluation and focus group discussions by Q1 2019 (completed)

6.2 Complete endline survey for impact evaluation and focus group discussions by Q1 2021 (timeline changed)

6.3 Submit a policy paper on women entrepreneurship in Sri Lanka submitted to

15


1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

the SME steering committee by Q4 2021 (timeline changed)

6.4 Document at least 4 success stories of women-led SMEs who have benefitted from We-Fi funding by Q2 2020 (completed)

6.5 Hold at least 4 national and regional seminars in total to disseminate findings on women entrepreneurship development challenges and solutions by Q2 2021 (timeline changed)

ADB = Asian Development Bank, BPO = business process outsourcing, CSO = civil society organization, EDB = Export Development Board, ICT = information and communication technology, JFPR = Japan Fund for Poverty Reduction, NCGS = National Credit Guarantee Scheme, PFI = participating financial institution, PMU = project management unit, Q = quarter, SME = small and medium-sized enterprise, We-Fi = Women Entrepreneurs Finance Initiative.

16

III. PROJECT MANAGEMENT ARRANGEMENTS

Project Implementation Organizations: Roles and Responsibilities

1. Steering Committee 25. A steering committee will oversee project implementation. The members are:

(i) Secretary or Deputy Secretary to the Treasury (chair), (ii) Director General or alternate, Department of Development Finance, (iii) Secretary or alternate, Ministry of Plantation, (iv) a representative from the External Resources Department, (v) a representative from the Asian Development Bank, (vi) a representative from the National Enterprise Development Authority, (vii) a representative from the Federation of Chambers of Commerce and Industry, (viii) a representative from the Central Bank of Sri Lanka, and (ix) a representative from a cabinet ministry in charge of SME development.

26. The secretariat steering committee will be performed by the project management unit (PMU) of Ministry of Finance (MOF). Although PFIs will not be members of the steering committee, the steering committee will periodically seek their feedback. 27. The principal function of the steering committee is to discuss and advise the executing agency on policy issues relevant to the implementation and management of the project, inter alia:

(i) review and approval of major policy changes of operating guidelines, (ii) supervision of the project, and (iii) any other issues related to the smooth operation of the project.

28. The steering committee will convene semiannually during the first 12 months of implementation and thereafter as needed. 29. The steering committee may also decide in advance to reallocate any undisbursed funds and increase the maximum allocation available in the last allocation to ensure loan closing is not delayed due to undisbursed funds.

30. A subcommittee on tea smallholders’ development (tea subcommittee) will also monitor the implementation of the tea smallholder credit line, the attached JFPR grant (Pilot Component) and the attached JFPR-funded tea TA and provide recommendations through the Secretary or alternate, Ministry of Plantation (MPI) to the steering committee. The members of the tea subcommittee are:

(i) Secretary or alternate to the Ministry of Plantation (chair), (ii) Tea Commissioner or alternate, Sri Lanka Tea Board, (iii) General Manager or alternate, the Tea Smallholder Development Authority, (iv) a representative from the Tea Research Institute, (v) a representative from the Department of Development Finance, and (vi) others who may be considered appropriate by the Government of Sri Lanka.

31. The secretariat of the subcommittee on tea smallholders’ development will be performed by the MPI.

17

2. Project Management Unit 32. The PMU has already been established, and there are currently eight staff as of 20 February 2020. 33. The position of project director will be assigned to the PMU head. The project director will be primarily responsible for project implementation and PMU management. Preferably, the PMU will be staffed with officials who have prior experience with ADB projects.

34. The various functions of the PMU, which include implementation, administration, and operation of the project on behalf of the implementing agency are shown below:

(i) General administration and treasury section (a) maintenance of MOF advance and local currency accounts and the PFIs’

ledgers; and (b) preparation of statements of the MOF advance account, MOF local

currency account, and PFIs’ ledgers.

(ii) Recovery and monitoring (a) invoicing of PFIs for interest and repayment; and (b) preparation of annual reports and project completion report (PCR).

(iii) Administration and appraisal

(a) annual accreditation of PFIs; (b) review of withdrawal applications from PFIs to include verifying compliance

with the onlending requirements for targeted SMEs and, where appropriate, preparation of initial environmental examination;

(c) approval and disbursement of the funds to PFIs; and (d) submission of statement of expenditure.

Project Implementation Organizations

Management Roles and Responsibilities

Ministry of Finance • Acts as executing agency for the overall project (ADB loans, We-Fi grant, JFPR grant and the JFPR and We-Fi funded SME TA [TA-9080])

• Responsible for executing the subsidiary loan and grant agreements with the participating financial institutions

Department of Development Finance

• Acts as implementing agency for: (a) SME Component (SME credit line and We-Fi grant); (b) Pilot Component (tea smallholder credit line and JFPR grant), together

with MPI; (c) Emergency Response Component (d) JFPR-funded SME TA components for financial innovation (i.e., SME

credit guarantee scheme and cluster finance) under TA-9080, (e) all We-Fi-funded SME TA components under TA-9080 except for the

capacity building for women entrepreneurs (training and online platform), and

(f) the access to finance component of the JFPR Tea TA.

18



• Leads the PMU

• Submit withdrawal applications to ADB;

• Manage advance account (incl. all related sub-accounts).

• Approves PFI’s withdrawal requests to include verifying compliance with the onlending requirements for targeted SMEs and tea smallholders and, where appropriate, preparation of initial environmental examination.

• Endorse GAP quarterly progress reports.

• Prepare a PCR.

• Submission of monthly sub-loan progress reports.

• Submission of quarterly SME borrower financial progress for the emergency component.

National Enterprise Development Authority

Act as the implementing agency for the We-Fi funded SME TA component to strengthen capacity of women entrepreneurs (i.e., training for potential and existing women entrepreneurs, and online learning and mentoring platform).

Central Bank of Sri Lanka

• Upon loan disbursements being deposited into MOF’s advance account at CBSL, convert disbursements into local currency and deposit into a separate MOF local currency account that will hold the funds on behalf of the PFI.

• Upon MOF’s instructions, transfer funds from MOF’s local currency account to PFI accounts.

• Participate in the steering committee and inform in confidence with ADB and other steering committee members through appropriate channels of any PFI covenant breaches particularly where relating to corporate governance, reputation and/or integrity, and anti-money laundering.

Ministry of Plantation

• Acts as implementing agency for the Pilot Component (tea smallholder credit line and JFPR grant), together with MOF-DDF.

• Act as executing agency for the JFPR Tea TA and monitor its progress.

• Provide guidance and support for PMU at MOF-DDF.

• Provide key input for PCR on the Pilot Component and the JFPR Tea TA.

• Under the JFPR Tea TA, finalize a white paper on sustainable and gender sensitive value chain development for tea smallholders for submission to the steering committee.

• Promote the Pilot Component (tea smallholder credit line and JFPR grant) to tea smallholders through TSHDA and SLTB.

• Monitor the progress of GAP for the tea-related indicators.

Sri Lanka Tea Board • Issue certificate for new planting and replanting tea smallholders (with landholdings of 10–50 acres), which will be used for PMU’s verification of eligibility criteria for the tea smallholder credit line.

• Under the JFPR Tea TA, oversee the implementation of mobile application platform for tea smallholders.

• Under the JFPR Tea TA, support developing contents for mobile application platform in corporation with tea factories and tea intermediaries.

• Under the JFPR Tea TA, provide key inputs on the white paper on sustainable and gender sensitive value chain development for tea smallholders especially on measures to promote direct selling to international buyers.

Tea Small Holdings Development Authority

• Issue certificate for new planting and replanting to tea smallholder (with landholdings of less than 10 acres), which will be used for PMU’s verification of eligibility criteria for the tea smallholder credit line and JFPR grant.

• Issue certificate for marginal tea smallholders on the completion of financial literacy training and preparation of business records to allow the tea smallholders access to the additional 10% principal paydown under the

19



JFPR grant. The completion of financial literacy training and preparation of business records under the JFPR Tea TA will be verified by TSHDA officers and ADB’s consultants.

• Under the JFPR Tea TA, support the implementation of financial literacy training with banks and tea societies (if appropriate).

• Under the JFPR Tea TA, support promotion of the mobile application platform for tea smallholders to increase their subscription.

• Under the JFPR Tea TA, support developing contents for mobile application platform to improve tea smallholders’ access to extension service, training and mentorship opportunities with gender inclusive features.

• Under the JFPR Tea TA, provide key inputs on the white paper on sustainable and gender sensitive value chain development for tea smallholders especially on measures to improve capacity of tea smallholders and public service delivery by TSHDA.

Tea Research Institute

• Under the JFPR Tea TA, support developing contents for mobile application platform to improve tea smallholders’ knowledge on good agricultural practice for tea cultivation with the features of gender inclusiveness and climate change adaptation.

• Under the JFPR Tea TA, provide key inputs on the white paper on sustainable and gender-sensitive value chain development for tea smallholders especially on measures to adapt to climate changes and promote sustainable farming techniques to tea smallholders.

Participating financial institutions

• Assess creditworthiness of subborrowers and financial viability of subprojects.

• Implement and ensure compliance with the selection criteria for subborrowers, subprojects, and subloans and with covenants in project agreements.

• Ensure that the qualified subborrowers comply with ADB's Safeguard Policy Statement and applicable environmental, health and safety, and social laws and regulations of the borrower.

• Submit to MOF and ADB a quarterly monitoring report for Emergency Response Component.

• Submit to MOF the certificate of new planting and replanting.

• Submit to MOF a withdrawal request for approval.

• Submit annual audited entity-level financial statements with the auditors’ report and management letter.

• Submit audited statements of fund utilization.

• Submit through the PMU semiannual reports as of 28 February and 31 August within 30 days of the reporting period end.

• Submit to ADB annual safeguards monitoring report.

• Respond to other information requests as required.

• Support ADB consultants and TSHDA to carry out financial literacy trainings to tea smallholders through tea societies.

• Submit quarterly SME’s financial and business data to the PMU

ADB • Prepare a project completion report (PCR) within 12–24 months from project closing date.

• Provide overall project coordination including reviewing and approving submission of withdrawal applications to ADB.

• Monitor PFIs’ compliance with project agreement covenants.

• Monitor achievements of the project’s targets established in the design and monitoring framework.

20



• Conduct periodic field reviews of implementation.

• Administer the SME TA funded by JFPR and We-Fi and the JFPR Tea TA.

• Administer the We-Fi grant and the JFPR grant.

• Send PMU (i) a list of eligible women SMEs for additional 10% We-Fi grant and (ii) a list of eligible tea smallholders for additional 10% JFPR grant.

ADB = Asian Development Bank, CBSL = Central Bank of Sri Lanka, GAP = gender action plan, JFPR = Japan Fund for Poverty Reduction, MOF = Ministry of Finance, MOF-DDF = Department of Development Finance, MPI = Ministry of Plantation, PCR = project completion report, PFI = participating financial institution, PMU = project management unit, SLTB = Sri Lanka Tea Board, SMEs = small and medium-sized enterprises, TA = technical assistance, TSHDA = Tea Small Holdings Development Authority, We-Fi = Women Enterprises Finance Initiative. Source: Asian Development Bank.

Key Persons Involved in Implementation

Executing Agency Ministry of Finance

Ms. Geetha Wimalaweera Director General, Department of Development Finance Ministry of Finance +94 11 248 4542 E-mail: [email protected] Mr. Manjula Hettiarachchi Director, Department of Development Finance Ministry of Finance +94 11 248 4572 E-mail: [email protected]

Asian Development Bank Public Management, Financial Sector, and Trade Division (SAPF) South Asia Department (SARD)

Mr. Takuya Hoshino Financial Sector Specialist Tel. No.: +63 2 8632-6627 E-mail: [email protected]

mailto:[email protected]

21

Project Organization Structure

ADB = Asian Development Bank, CBSL = Central Bank of Sri Lanka, EA = executing agency, IA = implementing agency, JFPR = Japan Fund for Poverty Reduction, MPI = Ministry of Plantation, MOF = Ministry of Finance, PFI = participating financial institution, PMU = project management unit, We-Fi = Women Entrepreneurs Finance Initiative. Note: Solid arrows represent fund flows and broken arrows information flows that trigger fund flows. Source: Asian Development Bank

IV. COSTS AND FINANCING 35. The current project cost of $185.17 million comprises the $100 million original loan, $75 million additional loan and $10.17 million We-Fi grant. With the new additional loan of $165 million ADB’s OCR loan and $1.25 million JFPR grant, the total project size will be $351.42 million.

MOF’s

accounts at CBSL

Ledger for PFI-C

Ledger for PFI-B

Ledger for PFI-A

PFI-A PFI-B PFI-C

Finance grant for women entrepreneurship

ADB

MOF’s advance/local currency accounts

Project agreement

MOF (EA) MOF and MPI (IAs)

PMU (at MOF)

Loan agreement Grant agreement Subsidiary loan agreement

Subsidiary grant agreement

Steering Committee

We-Fi

Advise

JFPR

Finance grant for marginal tea smallholders

Tea Subcommittee

Advise

Remit

Remit

Remit and Record

22

Table 2: Revised Financing Plan

Item Currenta

New Additional

Financing Total

Source Amount Share (%) Amount Share (%) Amount Share (%)

ADB

OCR (regular loan) 175.00 94.5 165.00 99.2 340.00 96.8

We-Fi (grant)b 10.17 5.5 0.00 0.0 10.17 2.9

JFPR (grant) 0.00 0.0 1.25 0.8 1.25 0.3

Total 185.17 100.0 166.25 100.0 351.42 100.0 ADB = Asian Development Bank, JFPR = Japan Fund for Poverty Reduction, OCR = ordinary capital resources, We-Fi = Women Entrepreneurs Finance Initiative. a Refers to the original loan (L3370), first additional loan (L3640), and grant (G0574). b $10.17 million includes $9.5 million Women Entrepreneurs Finance Initiative grant and ADB’s administrative

fee of $665,000. Source: Asian Development Bank.

Allocation of Loan Proceeds

36. ADB loan (ADB to Sri Lanka). Sri Lanka will be the borrower. The ADB loan will have a 10-year term bullet repayment based on disbursement-linked repayment schedule, an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility,11 a commitment charge of 0.15% per year and such other terms and conditions set forth in the loan agreement. 37. The terms and conditions for relending (government to PFIs) and onlending (PFIs to subborrowers) are set differently for (i) SME Component, (ii) Pilot Component and (iii) Emergency Response Component as below.

1. SME Component ($45 million)

38. Relending (government to PFIs). MOF will relend the ADB loan and the principal paydown support from the We-Fi grant fund to the PFIs in local currency fixed at the Central Bank of Sri Lanka’s (CBSL’s) most recently published average weighted deposit rate, with a 10-year term, and with principal due at maturity pursuant to a subsidiary loan and grant agreement with each PFI. The Government of Sri Lanka will bear the foreign exchange risks. 39. Onlending (PFIs to SMEs). Onlending from the PFIs will be at interest rates that reflect their cost of funds plus a spread to cover transaction costs and risks reflecting full commercial and competitive terms at the PFIs’ discretion. For loans that do not qualify for the We-Fi grant, ADB loan will finance 100% of the PFIs’ subloans up to the individual transaction ceiling of

11 The interest will not include any maturity premium. This is based on the above loan terms and the government’s

choice of repayment options and dates.

23

SLRs50 million.12 For loans that do qualify for the We-Fi grant, the ADB loan will finance the PFIs’ subloans less the We-Fi grant’s principal paydown.13

2. Pilot Component ($20 million) 40. Relending (government to PFIs). MOF will relend the ADB loan and the principal paydown support from the JFPR grant to the PFIs in local currency fixed at the most recent 6 month LIBOR plus 1.5%, with a 10-year term, and with principal due at maturity pursuant to a subsidiary loan agreement with each PFI. The Government of Sri Lanka will bear the foreign exchange risks. 41. Onlending (PFIs to tea smallholders). Onlending from the PFIs will be at interest rates that reflect their cost of funds plus a spread to cover transaction costs and risks reflecting full commercial and competitive terms at the PFIs’ discretion. For loans that do not qualify for the JFPR grant, ADB loan will finance 100% of the PFIs’ subloans.14 For loans that do qualify for the JFPR grant, the ADB loan will finance the PFIs’ subloans less the JFPR grant’s principal paydown.15 The subloans for new planting and replanting must have at least 2 years grace period for principal repayment.

3. Emergency Response Component ($100 million) 42. Relending (government to PFIs). MOF will relend the ADB loan to the PFIs in local currency fixed at the most recent 6 month LIBOR plus 1.5%, with a maximum tenor of 3.5 years, including a grace period for principal repayments of at least 12 months, and with straight-line principal repayments.16 The Government of Sri Lanka will bear the foreign exchange risks. 43. Onlending (PFIs to SMEs). Onlending from the PFIs will be for a maximum term of 3 years, including a maximum grace period for principal repayments of 6 months. Onlending from the PFIs will be at interest rates that reflect their cost of funds plus a spread to cover transaction costs and risks reflecting full commercial and competitive terms at the PFIs’ discretion.

12 Furthermore, the We-Fi grant will finance 10% of principal for individual subloans for eligible women-led small and

medium-sized enterprise (SME) borrowers up to the individual transaction ceiling of SLRs30 million. In addition, the We-Fi grant will finance an additional 10% of principal for individual subloans for eligible women-led SME borrowers who complete the associated training. An additional 5% principal paydown of individual subloans for eligible women-led SME subborrowers will be financed if the individual transactions are for eligible women-led subborrowers accessing finance for economic activity in the regions within the Uva, Sabaragamuwa, Northern and Eastern provinces.

13 Generally, the PMU will approve the subloan and the We-Fi grant principal paydown simultaneously. There will, however, be some situations where the PMU will approve the We-Fi grant after it has already approved the subloan, e.g., a women entrepreneur completes the training earning an additional 10% principal paydown. In this situation, the We-Fi grant will additionally paydown the subloan within the same fund allocation cycle.

14 JFPR grant will finance 10% of principal for individual subloans for eligible marginal tea smallholder borrowers for replanting. Furthermore, JFPR grant will provide an additional 10% principal paydown for the eligible tea smallholders who completed the financial literacy training and demonstrated the practice of business record keeping.

15 Generally, the PMU will approve the subloan and the JFPR grant principal paydown simultaneously. There will, however, be some situations where the PMU will approve the JFPR grant after it has already approved the subloan, e.g., a marginal tea smallholder completes the business record keeping program earning an additional 10% principal paydown. In this situation, the JFPR grant will additionally paydown the subloan within the same fund allocaton cycle.

16 Interest will be paid on 1 December and 1 June. No grace period will be given for interest payments.

24

Disbursement S-Curve

2020 2021 2022 2023

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Disbursement ($ million)

100.00 0.00 19.25 0.00 19.25 0.00 19.25 0.00 4.25 0.00 4.25 0.00 0.00

Contract Awards ($ million)

0.00 50.00 50.00 16.20 3.05 16.20 3.05 16.20 3.05 3.20 1.05 3.20 1.05

Fund Flow Diagram for the SME Credit Line and Tea Credit Line

0

20

40

60

80

100

120

140

160

180

4Q2020(Dec)

1Q2021(Mar)

2Q2021(Jun)

3Q2021(Sep)

4Q2021(Dec)

1Q2022(Mar)

2Q2022(Jun)

3Q2022(Sep)

4Q2022(Dec)

1Q2023(Mar)

2Q2023(Jun)

3Q2023(Sep)

4Q2023(Dec)

3. Conversion from USD to SLRs

MOF’s local currency (SLRs) sub-account at

CBSL

DST’s account

2. ADB loan in USD at LIBOR + 50 bps at T+3 months

ADB

MOF’s USD advance

account at CBSL

10. Repay in USD at 10 years of T+3 months

8. Repay at subloan maturity

7. Onlend at funding cost plus bank margin

SMEs and Tea smallholders

1. Report Allocation Results at T

4. Request fund release

approval

6. MOF releases funds to PFIs

9. Repay in SLRs at 10 years of T+3

months

PFIs MOF-PMU

5. Approve the request and instruct CBSL to release funds

25

ADB = Asian Development Bank, CBSL = Central Bank of Sri Lanka, DST = Deputy Secretary to Treasury, LIBOR = London interbank offered rate, MOF = Ministry of Finance, PFI = participating financial institution, PMU = project management unit, SLRs = Sri Lankan rupees, SME = small and medium-sized enterprise, USD = United States dollar. Notes: 1. SME Credit Line includes the original loan and the 1st additional loan. 2. Solid arrows represent fund flows and broken arrows information flows that trigger fund flows. 3. For each individual loan transaction for eligible women-led SME subborrowers and eligible tea smallholders

subborrowers, PFIs will be reimbursed for the credit line for the individual transaction loan balance less the amount of We-Fi grant and JFPR grant.

Source: Asian Development Bank.

Fund Flow Diagram for the Emergency Response Component

ADB = Asian Development Bank, CBSL = Central Bank of Sri Lanka, DST = Deputy Secretary to Treasury, LIBOR = London interbank offered rate, MOF = Ministry of Finance, PFI = participating financial institution, PMU = project management unit, SLRs = Sri Lankan rupees, SME = small and medium-sized enterprise, USD = United States dollar. Note: 1. Solid arrows represent fund flows and broken arrows information flows that trigger fund flows. 2. The PFIs’ principal repayments of the short-term working capital loans under the Emergency Response Component

by PFIs will be made to MOF’s local currency project accounts for reallocation to SME Component and/or Pilot Component by June 2022.



MOF’s local currency (SLRs) sub-account at

CBSL

DST’s account

at CBSL

8b. Repay principal of allocation semiannually

ADB

MOF’s USD advance

account at CBSL

1. ADB loan in USD at LIBOR + 50

bps at T

16. Repay in USD at 10 years of T

7 & 13. Repay debt of subloans

6 & 12. Onlend at funding cost plus bank margin

SMEs

3 & 9. Request fund release approval

5 & 11. MOF releases funds to PFIs

8a & 14. Repay interests semiannually 15. Repay principal at 10 years of T

PFIs MOF-PMU

4 & 10. Approve the request and instruct CBSL to release funds

26

Fund Flow Diagram for the We-Fi Grant and JFPR Grant

ADB = Asian Development Bank, CBSL = Central Bank of Sri Lanka, JFPR = Japan Fund for Poverty Reduction, MOF = Ministry of Finance, PFI = participating financial institution, PMU = project management unit, SLRs = Sri Lankan rupees, SME = small and medium-sized enterprise, USD = United States dollar, We-Fi = Women Entrepreneurs Finance Initiative. Note: Solid arrows represent fund flows and broken arrows information flows that trigger fund flows. Source: Asian Development Bank.

V. FINANCIAL MANAGEMENT

Financial Management Assessment

44. A financial management assessment has been conducted on MOF and 10 PFIs in accordance with Financial Management Assessment Technical Guidance Note (2015). The overall financial management risk for the project is assessed as moderate. MOF is the most appropriate organization to administer the project because of its prior experience in administering similar donor-funded programs. MOF has the necessary financial management capacity—including procedures for making payments, managing ADB advance and statement of expenditure (SOE) procedures, accounting for transactions, financial reporting, auditing of financial statements, and internal control procedures—to avoid misuse or misappropriation of funds and assets. The PFIs are regulated, have mature financial management systems in place, and have successful track record of implementing the ADB’s existing SME Line of Credit Project


2. We-Fi grant and

JFPR grant in USD

MOF’s local currency (SLRs)

sub-account

ADB

MOF’s USD advance

account at CBSL

7. Principal paydown for women-led SMEs (We-Fi) and Marginal tea smallholders (JFPR)

Women-led SMEs (We-Fi) Marginal tea smallholders (JFPR)

1. Report Allocation Results at T

4. Request fund release

approval

6. MOF releases funds to PFIs

PFIs MOF-PMU

5. Approve the request and instruct CBSL to release funds

27

since 2016. An integrity due diligence has been undertaken on the 10 PFIs in coordination with the Office of Anticorruption and Integrity. No major concern for disclosure has been identified. 45. Key risks identified include (i) the ability of PFIs to handle fund flow and monitor eligibility criteria of end-borrowers, (ii) inadequate staffing for SME lending at some PFIs, (iii) manual monitoring of the project undertaken by some PFIs. Mitigating measures as financial management action plan, have been proposed including (i) frequent review missions by PMU and ADB, (ii) ADB’s ongoing TA may advise PFIs to install gender-disaggregated management information system, and (iii) frequent communication with PFIs to raise their awareness of fiduciary risks. To support PMU to expedite its appraisals of PFIs’ subloans under Emergency Response Component, ADB will reallocate the JFPR TA (TA-9080) budget for PMU’s activities. With the above measures/action plan in place, the overall financial management arrangements are considered adequate.

Disbursement 46. General. For each allocation for the credit lines, the We-Fi grant and the JFPR grant, no withdrawal shall be made from the MOF’s local currency account for a PFI until:

(i) project agreements (loan, We-Fi grant and JFPR grant), in form and substance satisfactory to ADB, has been duly executed and delivered on behalf of ADB and the PFI; and

(ii) the PFI has provided ADB a legal opinion specifying that the project agreements

have been duly authorized, executed, and delivered on behalf of the PFI, and is legally binding on the PFI in accordance with its terms.

47. ADB’s advance fund and SOE procedures will be used for disbursement/liquidation under the loan.17

48. The PMU will consolidate eligible expenditures and submit to ADB for liquidation. Liquidation will follow SOE procedures because (i) SME subloans (benefitting from both SME credit line and We-Fi grant), (ii) Tea smallholder subloans (benefitting from both tea smallholder credit line, JFPR grant and We-Fi grant) and (iii) subloans under Emergency Response Component are expected to be numerous and small. SOE records should be maintained with the PMU and made available for review upon ADB’s request for submission of supporting documents on a sampling basis and for independent audit. The advance account reconciliation statements are also required to be submitted. 49. Emergency Response Component. The entire $100 million under the Emergency Response Component will be disbursed by ADB to the government upon loan effectiveness and following submission of a withdrawal application by the government to ADB. A $50 million will be immediately allocated to 10 PFIs. The remaining 50 million will be allocated to PFIs on the first-come and first-served basis, rather than through a pre-defined fund allocation schedule. Once each PFI utilizes 80% of the allocation (i.e., $4 million) in compliance with the eligibility criteria for subloans (including the 20% target for subloans that are not collateralized by fixed or financial assets), it can request for an additional allocation of $5 million. PMU will confirm the eligibility for additional allocation.

17 Details of SOE procedures are available in the ADB’s Loan Disbursement Handbook (2017).

28

50. SME Component and Pilot Component. PFIs that have not disbursed at least 80% of their allocated funds from ADB’s SME credit line and 80% of their allocation from the We-Fi grant within 2 months of the previous disbursement may not request for additional funds from the SME Component. PFIs that have not disbursed at least 80% of their allocated funds from ADB’s tea smallholder credit line and 80% of their allocation from the JFPR grant within 2 months of the previous disbursement may not request for additional funds from the Pilot Component. The PMU will request ADB’s loan disbursement to the advance account based on an estimate of expenditures sheet. Supporting documents should be submitted to ADB or retained by PMU in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time) when liquidating or replenishing the advance account.18

51. Advance accounts. The ADB loan will be disbursed per the 6-month estimated expenditures of the allocation mechanism, and in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time). MOF will administer three separate US dollar advance accounts: one for ADB loan, one for We-Fi grant, and one for JFPR grant in US dollars at CBSL for exclusive use of the project to facilitate disbursements and provide accountability.19 MOF, who will establish the advance accounts under its name at CBSL, is accountable and responsible for the proper use of advances to the advance accounts. In addition, MOF will administer 5 separate local currency (SLRs) sub-accounts for: (i) SME credit line, (ii) tea smallholder credit line, (iii) Emergency Response Component, (iv) We-Fi grant and (v) JFPR grant. (i)-(iii) will be directly linked with the US dollar advance account for the ADB loan; and (iv) and (v) will be directly linked with the two other US dollar advance accounts respectively. 20ADB will transfer loan and grant proceeds to MOF’s 3 US dollar advance accounts upon receipt of a satisfactory withdrawal application. The US dollar proceeds will be converted into Sri Lankan Rupees (SLRs) and deposited in the 5 separate SLRs local currency sub-accounts as soon as practical. The MOF will maintain separate ledgers for each PFI to track how much funding is being held in the local currency accounts on behalf of each PFI.

52. Subloan approval by PMU. To release funds from the three separate local currency accounts, PFIs will submit separate withdrawal requests to the PMU.21

53. Minimum value per withdrawal application. The minimum value per withdrawal application for the ADB’s loan, We-Fi grant and JFPR grant is $200,000 equivalent. Individual payments below these threshold amounts should be paid by the MOF and subsequently claimed from the ADB advance accounts, unless otherwise agreed to with ADB.

54. Recycling of reflows from SMEs and tea smallholders to PFIs.

(i) SME Component and Pilot Component. As subloans from SME credit line and

tea smallholder credit line are repaid to PFIs prior to their repayment to the government, PFIs may relend to SMEs or tea smallholders. In the case of the SME credit line, the relending rate is equal to or less than the average weighted deposit

18 The advance request should equal the amount requested through the semiannual allocation plus any funds not yet

liquidated to ADB at the time of preparing the withdrawal application. ADB’s Controller’s Department will disburse the requested amount net of the unliquidated amount.

19 The existing USD advance account for We-Fi grant will be retained and the other two new USD advance accounts will be established for the third additional financing.

20 The existing local currency sub-account for We-Fi grant will be retained and the other four new local currency sub-accounts will be established for the third additional financing.

21 For SME Component and Pilot Component, a PFI only needs to submit one withdrawal request for a subloan that is disbursed in semi-annual tranches. For Emergency Response Component, a PFI needs to submit a withdrawal request when they request an additional allocation.

29

rate plus the average weighted credit margin that the PFI charged on the initial subloans. In the case of the tea smallholder credit line, the relending rate is equal to or less than 6 months LIBOR plus 1.5% plus the average weighted credit margin that the PFI charged on the initial subloans. The PFIs must also continue to comply with fiduciary and safeguard covenants in the subsidiary loan agreements with the government. PFIs shall maintain separate ledgers to manage revolving funds and the government may request the PFIs to provide reports on this relending.

(ii) Emergency Response Component. The interest and principal repayments of the government’s subloans to PFIs will be semiannually on 1 June and 1 December. The tenor of the government’s subloans to PFIs will be a maximum of 3.5 years with an amortized principal repayment schedule over 5 semiannual repayments. If the first allocation will be made before 1 June 2021, the PFI’s interest payment will start on 1 June 2021, the PFI’s principal repayment will start on 1 June 2022 and the final principal repayment will be on 1 June 2024.22 Recycling of reflows within the Emergency Response Component shall not be permitted. Before 30 June 2022 (i.e., 13th allocation), the Government will submit a proposal to reallocate the reflow from the Emergency Response Component to the SME Component and/or Pilot Component for ADB's approval. The government will reallocate such reflow to PFIs based on the PFIs’ performance on the provision of non-collateral based subloans under the short-term financing facility. The more reflow will be reallocated to the PFIs who provided either (a) the larger amount of non-collateral based subloans or (b) the larger number of non-collateral based subloans. The terms and conditions of recycled lending of the reflow by the Government to PFIs will follow those for applicable components. The repayment structure will be bullet repayment on or before the repayment date of the ADB’s loan as per the disbursement date of the Emergency Response Component.23

Accounting and Auditing Arrangements

55. MOF will keep separate records of the utilization of funds from SME credit line, tea smallholder credit line, Emergency Response Component, We-Fi grant and JFPR grant and will ensure that the record-keeping and accounting undertaken is in accordance with national accounting laws and regulations which are consistent with international accounting principles and practices. Accounting and auditing arrangements will be guided by ADB’s Handbook for Borrowers on the Financial Management and Analysis of Projects and relevant Technical Guidance Notes.24 56. PFIs will also maintain separate books and accounts relating to all subloans with separate entries for subloans from SME credit line, tea smallholder credit line, Emergency Response Component, We-Fi grant and JFPR grant respectively. Project financial statements, i.e. statement of utilization of funds will be prepared using the same accounting principles and guidelines as the PFIs’ statutory financial statements. Each PFI will cause the statement of utilization of funds to be audited in accordance with national standards on auditing which are consistent with international

22 If subsequent allocations are made before 1 June 2021, the interest payment will start on 1 June 2021, the principal

repayment will start on 1 June 2022 and the final PFI’s principal repayment will be on 1 June 2024. If subsequent allocations are made on or after 1 June 2021, the interest payment will start on 1 December 2021, the principal repayment will start on 1 December 2022 and the final PFI’s principal repayment will be on 1 December 2024.

23 The first tranche of the ADB’s OCR loan for Emergency Response Component will mature on around 15 August 2030.

24 ADB. Financial Management. https://www.adb.org/about/financial-management-resources

https://www.adb.org/about/financial-management-resources

30

auditing principles and practices and with the government's audit regulations by an independent auditor acceptable to ADB.25 PFIs will prepare and submit the audited statement of utilization of funds for subloans, in the English language within 6 months after the end of the fiscal year. 57. Each auditor report will include audit opinions which cover (i) whether the statement of utilization of funds presents a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework; (ii) whether or not loan proceeds were used only for the purposes of the project; (iii) if We-Fi grant proceeds and JFPR grant proceeds were used only for the purposes of, We-Fi grant eligible subloans and JFPR grant eligible subloans and for the conditional amount provided for the purposes of support for principal paydown for each subloan. A management letter will also be provided, unless the auditors provide written confirmation that no management letter was issued along with associated justification satisfactory to ADB. PFIs will enable ADB, upon ADB's request, to discuss the financial statements for the project with the auditors and will authorize and require such auditors to participate in any such discussions.

58. PFIs will cause their entity-level financial statements to be audited in accordance with international standards on auditing and with the government's audit regulations by an independent auditor acceptable to ADB. If the audited entity-level financial statements do not address each of the project’s financial covenants, then PFI’s auditor must prepare a separate letter that reports on each covenant. The audited entity-level financial statements, together with the auditors’ report, will be submitted in the English language to ADB within 1 month after their approval by the competent authority.

59. Compliance with financial reporting and auditing requirements will be monitored by review missions and during normal project supervision and followed up as needed with all concerned, including the external auditor.

60. MOF has been made aware of ADB’s approach on delayed submission, and the requirements for satisfactory and acceptable quality of the audited financial statements.26 ADB reserves the right to require a change in the auditor or for additional support to be provided to the auditor, if the audits required are not conducted in a manner satisfactory to ADB, or if the audits are substantially delayed. ADB reserves the right to verify the project's financial accounts to confirm that the share of ADB’s financing is used in accordance with ADB’s policies and procedures.

61. Public disclosure of the audit opinion and related statements of fund utilization will be guided by ADB’s Access to Information Policy (2018).27 After review, ADB will disclose these

25 In the case of the state-owned banks, auditors appointed by the auditor general constitute an independent auditor. 26 ADB approach on delayed submission of the audited statement of utilization of funds and entity-level financial

statements: (i) when either the statement of utilization of funds or entity-level financial statements have not been received by due date, ADB will write to the executing and implementing agencies advising that (a) the audit documents are overdue and (b) if they are not received within the next 6 months, requests for new commitments and disbursement such as new replenishment of advance accounts and processing of new reimbursement will not be processed; (ii) when either the statement of utilization of funds or entity-level financial statements have not been received within 6 months after the due date, ADB will withhold processing of requests for new commitments and disbursement such as new replenishment of advance accounts and processing of new reimbursement, ADB will (a) inform the executing and implementing agencies of ADB’s actions and (b) advise that the loan may be suspended if the audit documents are not received within the next 6 months; and (iii) when either the audited statement of utilization of funds or entity-level financial statements have not been received within 12 months after the due date, ADB has the option to suspend the loan.

27 ADB. 2018. Access to Information Policy 2018. Manila.

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within 14 days the date of their receipt by posting them on ADB’s website. The audit management letter and the entity-level audited financial statements will not be disclosed.

VI. PROCUREMENT AND CONSULTING SERVICES

Advance Contracting and Retroactive Financing 62. There is no advance contracting or retroactive financing under the project.

Procurement of Goods, Works, and Consulting Services 63. Procurement in subloans will be in accordance with ADB’s Procurement Policy and Regulations (2017, as amended from time to time), and relevant ADB’s Procurement Staff Instructions (2020, as amended from time to time). Procurement will be undertaken by subborrowers in accordance with private sector or commercial practices, which are acceptable to ADB. 64. For the We-Fi and JFPR-funded SME TA and the JFPR Tea TA will be administered by ADB. ADB will engage the consultants and carry out procurement following the ADB Procurement Policy (2017, as amended from time to time) and its associated project administration instructions and/or staff instructions.

Procurement Plan 65. A procurement plan is not applicable for the financing component (financial intermediary loans).

VII. SAFEGUARDS 66. PFIs will be classified as follows:

(i) Class C. PFIs that finance only category C subprojects. These are subprojects where the impacts are minimal to null. No environmental assessment is required although environmental implications need to be reviewed and incorporated into the due diligence report; or

(ii) Class B/C. PFIs that finance category B and C subprojects. Category B subprojects are those whose environmental impacts are site-specific, some irreversible, and, in most cases, mitigation measures can be designed more readily. An initial environmental examination is required. Class B/C PFIs are also required to have an existing environmental and social management system (ESMS) that has been approved by ADB. The ESMS aims to: (a) avoid, and when avoidance is not possible, minimize and mitigate adverse impacts of subprojects on the environment and affected people; and (b) maximize opportunities for environmental benefits.

67. If a PFI does not have an ESMS that ADB has approved, it may only lend to category C subprojects that are included in the environmental management system framework (as may be updated by ADB from time to time during implementation) or that have been reviewed and confirmed as category C by the PMU’s safeguards officer. This will be covenanted in the loan

32

agreement. PFIs still can establish an ESMS to qualify it to participate as a class B/C PFI, subject to ADB’s concurrence. 68. In the selection of subprojects, PFIs will ensure that:

(i) all subprojects using ADB funds are screened against the Prohibited Investment Activities List of the ADB Safeguard Policy Statement (2009);

(ii) all subprojects using ADB funds with potential environmental and/or social impacts are reviewed and evaluated against safeguard requirements 1–3 of the ADB Safeguard Policy Statement (2009);

(iii) all subprojects are reviewed and evaluated against the national laws, regulations, and standards on environment, health, and safety, involuntary resettlement and land acquisition, indigenous peoples, and physical cultural resources; and

(iv) all subprojects will undergo screening and categorization using a checklist as approved by ADB.

69. At subproject identification stage, the safeguard personnel (or other designated officer) of the PFI will work with the subproject company to make a rapid assessment of the potential impacts of the project on the environment and community. A template checklist, approved by ADB, will guide the team in determining the significance of potential impacts associated with the subproject. Once the checklists and the verification work are completed by the PFI, the subproject will be classified as category B or category C. 70. The following categories will be outright rejected in the list of eligible subprojects for financing: (i) category A subprojects for environment, involuntary resettlement, or indigenous peoples (i.e., for environment, subprojects where the impacts are irreversible, diverse, or unprecedented over an area larger than the sites or facilities subject to physical works); and (ii) category A or B for involuntary resettlement and indigenous peoples. 71. PFIs that finance subprojects with minimal or no adverse impacts on the environment (category B and/or C) and have no impacts on resettlement and indigenous peoples (category C for both resettlement and indigenous peoples) are preferred. A project has minimal or no impacts on the environment if it does not generate harmful atmospheric emissions, significant nose and vibration impacts, and waste byproducts on water and on land; and does not have significant impacts on workers and the community. A project has no impacts on resettlement and indigenous peoples if (i) there is no land acquisition; (ii) there is no involuntary restriction on land use or on access to legally designated parks and protected areas; and (iii) the customs and traditions of indigenous peoples are kept intact.

VIII. GENDER AND SOCIAL DIMENSIONS 72. Potential gender and social impacts were reviewed. Given the important gender credit gap in Sri Lanka, the project has integrated specific design elements to facilitate women’s access to finance and to foster an enabling and empowering business environment. This is reflected in the project documents and is an integral part of the overall project design which is categorized

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thematically as gender equity as a theme (GEN).28 Furthermore, the We-Fi funded SME TA will build women entrepreneurs’ capacity to access financial resources and services, and will conduct gender analyses of existing public policies and business services with the objective to design tailored and targeted action plans with government partners and PFIs. 73. Initial assessment of the gender situation of SMEs in Sri Lanka was gathered as follows:

(i) In Sri Lanka, the low female labor participation rate of 39% suggests a large pool of untapped human resource for national economic development. A potential measure to address this is to strengthen women’s business skills and capacity in the SME sector, and identify entry points for more gender-inclusive SME policies and business practices.

(ii) Data from the Ministry of Rural Economic Affairs shows that in Sri Lanka, of the 766,766 entrepreneurs, 24.8% (or 252,915) are women. Of them, 1,190 are involved in the information technology sector. No data is available on women entrepreneurs involved in the fruits and vegetables sector. As this report did not mention the sizes of the enterprises, it is assumed that the cited number of entrepreneurs pertains to all sizes of enterprises. It is further assumed that the overall percent of women-led SMEs is lower than 24.8%. The ADB Asia SME Finance Monitor 2014 reported a total of active 1,017,480 enterprises in 2013, of which 86.5% (880,066) were microenterprises and 13% (132,483) were SMEs. No sex-disaggregated data on these enterprises were however provided. These figures suggest the lack of reliable data on women-led SMEs, more so on those involved in the ICT–BPO and fruits and vegetables. The gender responsive value chain analysis of these SME clusters, and rigorous impact evaluation thus aim at among others, gathering these data in project areas.

(iii) According to the Women’s Chamber of Industry and Commerce, women entrepreneurs face 4 key challenges: (a) lack of skills and cultural barriers to start and run a business and dependence on their husbands for financial support, (b) lack of access to markets and information on market needs and difficulties in finding new markets for products, (c) lack of access to finance due to low financial literacy and lack of collateral for bank loans, and (d) weak government institutional support. The government’s recognition, in the upcoming National Policy Framework for SME Development, of the need for stronger support to women-led SMEs and new women entrepreneurs point to greater action of the government on these issues. This project will seek to assist the government to respond to these issues.

74. A gender action plan (GAP) was developed during the ongoing project, which will continue to be implemented during the new additional financing. The implementation of the initial activities is generally on track. The implementing agencies of the associated TAs and the on-site Project Manager (staff consultant) are responsible for ensuring the effective implementation of the gender action plan and monitoring its progress and completion. The We-Fi funded SME TA and the JFPR Tea TA will also support gender empowerment activities in the tea smallholding sector.

28 The overall project is categorized as GEN, but the additional financing is categorized as effective gender

mainstreaming (EGM).

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Table 3: Revised Gender Action Plan

Activities Performance Indicators and

Targets Responsible

Unit Timeframe

Output 1. Financing to SMEs through formal intermediaries increased 1.1 Monitor PFI’s compliance with the

project agreement covenants and disbursement requirements

a. Participating banks assessed to have complied with the disbursement of $9.5 million of the We-Fi grant to qualified women-led SMEs in accordance with the project’s disbursement requirementsa

b. At least 250 women-led SMEs accessed We-Fi grant financing by 2020

c. By 2020, 10% of We-Fi funded women-led SMEs report increased revenue

d. By 2021, at least 100 women-led SMEs affected by COVID-19 accessed affordable working capital credit line

e. PFIs monitor and report on quarterly basis the sex-disaggregated data of SME subborrowers (including tea smallholders)

PMU, PFIs Q4 2023

Output 3. Capacity of SMEs in targeted clusters to access financial services enhanced 3.1. Develop new strategy to promote

women’s entrepreneurship in targeted clusters

a. Gender responsive value chain analysis of ICT–BPO, fruits and vegetables, and rubber clusters conducted

b. Strategy for expanding and strengthening women entrepreneurship in the clusters developed and approved by the government

PMU, EDB, Consultants

Completed in Q2 2017

3.2 Train 750 actual and potential women entrepreneurs in business development and management (including financial literacy)

a. Training modules designed based on identified capability development needs of women entrepreneurs

b. At least 500 actual and potential women entrepreneurs trained in business development and management (including financial literacy) in 3 SME clusters

c. At least 250 existing and potential female entrepreneurs in total trained in business development and management across all SME clusters

d. Business management plans of at least 60% of trained women entrepreneurs passed the standards and/or evaluation of trainers

Consultants, EDB

Completed in Q1 2020

3.3 Develop interactive online platform including mobile applications for networking among women entrepreneurs

At least 450 women entrepreneurs registered for online learning and development platform to support networking and mentoring for women entrepreneurs

Consultants

Q1 2021

3.4 Strengthen financial literacy of tea smallholders

At least 500 women tea smallholders will complete financial literacy training.

Consultants, PFIs, TSHDA

Q1 2022

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Targets Responsible

Unit Timeframe 3.5 Develop mobile application service

for tea smallholders a. At least 500 women from tea

smallholding segment accessed through mobile application service

b. By 2023, at least 60% of growers from tea smallholding segment (including at least 300 women) who have accessed to mobile application platform improved business practice

Consultants, SLTB,

TSHDA

Q3 2023

Output 4. International competitiveness of ICT–BPO cluster and tea cluster strengthened 4.1 Identify economic, social, and

regulatory barriers that prohibit women from entering and staying in the ICT–BPO cluster, and assess the cost and benefits of statutory prohibitions on female working hours, and develop a cluster strategy to attract women workers

a. Barriers to women’s participation in the ICT–BPO cluster identified and the costs of statutory prohibitions against women working at night assessed

b. Strategy to attract women to enter and stay in the ICT–BPO cluster developed

Consultants, EDB

Completed in 2017

4.2 Provide support for school career counselors to form strong network with ICT–BPO professionals

a. MOU forged with identified educational institutions

b. Career counselors in at least five schools are updated at least quarterly on developments and work opportunities in the ICT–BPO cluster

Q4 2020

4.3 Launch a career forum for women with interest in the ICT–BPO

At least three participating schools developed networks with ICT–BPO professionals

Q4 2020

4.4 Facilitate the participation of at least 500 women in career events in the ICT–BPO

At least 500 women attended career forums on ICT–BPO

Completed in 2018

4.5 Conduct a policy research on strengthening international competitiveness of tea cluster

A report on sustainable and gender-sensitive value chain development of tea smallholders in Sri Lanka, which includes measures to promote women entrepreneurship in the tea sector, endorsed by SME Steering Committee

Consultants, SLTB

Q4 2021

Output 5. Gender-responsive policy and regulatory framework and support enhanced 5.1 Conduct a gender assessment of

government agencies’ support for women entrepreneurship

Gender gap assessment of existing policies in at least three government agencies completed and action plans to support women entrepreneurs developed

Consultants, PMU

Q4 2020

5.2 Train the trainers of government agencies on gender-inclusive entrepreneurship

At least 25% of government staff surveyed in the three government agencies completing action plans to support women entrepreneurship report higher levels of awareness of gender-specific challenges in women’s entrepreneurship

Q4 2020

5.3 Conduct a gender assessment of CSOs’ support for women entrepreneurship

Action plans to support women’s entrepreneurship developed for at least two CSOs

Q4 2020

5.4 Conduct technical seminars for CSOs

Participants of technical seminars report increased knowledge of challenges and policy opportunities for women’s entrepreneurship

Q4 2020

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Targets Responsible

Unit Timeframe 5.5 Conduct a gender assessment of

the PFIs’ practices, products or services, and policies

At least seven of PFIs’ Board of Directors endorsed new gender-responsive business policies and practices by 2020.

Consultants, PFIs

Q4 2020

Output 6. Evidence based on women entrepreneurship development to inform future policymaking strengthened 6.1 Conduct rigorous impact evaluation

on policy interventions for women entrepreneurship development

a. Conduct baseline and endline surveys on women-led SME borrowers benefitting from We-Fi grant

b. An impact evaluation report submitted to the SME Steering Committee

Consultants, PMU

Q3 2021

6.2 Conduct a policy research on the challenges of women entrepreneurship in Sri Lanka

A policy paper on women’s entrepreneurship in Sri Lanka endorsed by SME Steering Committee

Q4 2021

6.3 Disseminate the results of the project through national and regional seminars, and development communications

a. At least four success stories of women-led SMEs who have benefitted from We-Fi funding documented

b. Four national and regional seminars in total held to disseminate the findings on women entrepreneurship development challenges and solution

Q2 2022

BPO = business process outsourcing, CSO = civil society organization, EDB = Export Development Board, ICT = information and communication technology, MOU = memorandum of understanding, PFI = participating financial institution, PMU = project management unit, SLTB = Sri Lanka Tea Board, SME = small and medium-sized enterprise, TSHDA = Tea Small Holdings Development Authority, We-Fi = Women Entrepreneurs Finance Initiative. a The disbursement requirements are (i) 20% of the number of subloans must be lent to subborrowers that have not

previously borrowed from a licensed commercial or specialized bank; (ii) 20% of the number of subloans must be lent to subborrowers that are led by women; (iii) 100 % of the total subloan amount must cumulatively be lent to targeted SMEs, including SMEs which are either (a) located outside Colombo district, (b) borrowing against which fixed or financial assets are not pledged, (c) led by women, or (d) not previously borrowed from a licensed commercial or specialized bank; (iv) 80% of the loan and 80% of the grant from the previous allocation must be disbursed.


IX. PERFORMANCE MONITORING, EVALUATION, REPORTING, AND

COMMUNICATION

Project Design and Monitoring Framework 75. Please refer to Appendix 1 of the Additional Financing Report to the President for the revised project design and monitoring framework (DMF).

Monitoring

1. Project Performance Monitoring 76. To ensure that the project is managed efficiently and its benefits are maximized, MOF will implement a project performance management system (PPMS) that is satisfactory to ADB. The key performance indicators and assumptions in the DMF will be the basis for the system. MOF will have such information made available to review missions and to the government for future impact assessment surveys. MOF will submit monthly progress reports and a PMU semiannual

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report to ADB for the duration of the project. The PPMS will monitor and evaluate the project information and data to ensure that planned interventions achieve the desired results, including key outcome indicators.

2. Compliance Monitoring 77. PFIs’ compliance with the covenants will be monitored by MOF based on the PFI semiannual report, annual audited entity-level financial statements, and audited statement of utilization of funds.

3. Safeguards Monitoring 78. PFIs will evaluate subprojects that are category B for environment on an annual basis against the applicable environmental requirements. The safeguards staff of the PFIs will prepare an annual environmental and social performance report29 and submit this to the management of the PFI and to ADB via the PMU for review and approval. 79. The designated PFI safeguards officer (or other designated officer) communicates with the subprojects companies and conducts an annual performance check to ensure that (i) the subproject company is undertaking the obligations of compliance with all applicable environmental and social safeguard requirements, and (ii) the PFI will promptly report to ADB any actual or potential breach of the compliance requirements through a compilation of incident reports.30 The PFI will supervise and coordinate with the subborrower so that the subborrower can take corrective action, if any.

4. Poverty and Social Actions Plans 80. The project manager based in SLRM will submit quarterly GAP monitoring report to the PMU and ADB. This reporting will include the indicators reported by the GAP.

Evaluation 81. To ensure responsive and timely implementation, ADB will undertake periodic review missions. There will be regular interaction between the executing agency, PFIs, and ADB. Semiannual performance reviews will be conducted by the MOF, and the Department of Project Management and Monitoring and ADB will review the project annually as part of the ADB Project Portfolio Review. 82. Within 9 months (updated) of the final disbursement, the executing agency, implementing agency, and Department of Project Management and Monitoring will submit a project completion report (PCR) to ADB in a form acceptable to ADB.31 Subsequently, ADB will field a mission to finalize the PCR. 83. Within 12 months of final disbursement, an endline survey for the We-Fi funded SME TA component on impact evaluation and focus group discussions will commence. The complementary baseline surveys were implemented by Q1 2019. 4 months after the endline survey, a final results report and a report on the completed We-Fi grant will be provided including

29 Sample reporting format provided in the Environmental and Safeguard Monitoring Framework. 30 Sample reporting format provided in the Environmental and Safeguard Monitoring Framework. 31 PCR format is available at http://www.adb.org/sites/default/files/institutional-document/33431/pai-6-07a.pdf.

http://www.adb.org/sites/default/files/institutional-document/33431/pai-6-07a.pdf

38

the results of the endline surveys. An impact evaluation report will be submitted to ADB by the consultants.

Reporting 84. The PPMS is ADB’s system for setting program objectives, designing projects, and monitoring and evaluating project performance based on the DMF to ensure that goals are consistently being met in an effective and efficient manner.32 The PPMS will include the following components: Name of Document Submitter Receiver Timing/Frequency Purpose

Advance request/Withdrawal Application

PMU ADB Following each allocation

ADB’s Advance to the government’s advance account

Subloan Application

PFI PMU At discretion of PFI Approval of subloans for the government’s fund release to PFIs

Statement of expenditure

PMU ADB As required Liquidation

Monthly progress report

PMU ADB A week after the end of every month

Spreadsheet that screens PFIs’ eligibility for the next fund allocation and monitor progress of the project

Monthly subloan report

PFI PMU, ADB A week after the end of every month

Spreadsheet that captures detailed information of each subloan

GAP implementation report

Consultant through

ADB

PMU, ADB Quarterly; also included in the PCR

Provides an assessment of the progress and accomplishment of gender-related target outputs

Semiannual report on subborrowers (excluding microenterprises) under Emergency Response Component

PFI PMU, ADB Within 30 days of every 6 months.

Monitors and evaluates the effectiveness of Emergency Response Component on businesses of SME subborrowers.

Semiannual reporta PFI, consultant,

PMU

PMU, ADB Within 30 days of and as of 28 February and 31 August

Monitors and evaluates the effectiveness of ADB’s Project on businesses of SME subborrowers based on (a) monthly subloan report and (b) quarterly report on subborrowers under Emergency Response Component

Audited statement of utilization of funds

PFI PMU, ADB Within 6 months of the end of fiscal year

Basis for audited annual project-level financial statements prepared by PMU

32 Japan International Cooperation Agency, under the ongoing “Financial Sector Project for the Development of Small

and Medium-Sized Enterprises” intervention has developed a detailed and comprehensive PPMS which will be used as the basis for the development of ADB’s PPMS.

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Name of Document Submitter Receiver Timing/Frequency Purpose

Audited annual entity-level financial statements

PFI PMU, ADB Within 1 month of their approval by the relevant authority

Mandatory under ADB policy (OM J7)

Annual environmental performance report

Class B/C PFI

PMU, ADB Within 2 months of the end of fiscal year

Mandatory under ADB policy (OM F1)

PCR MOF ADB Within 9 months of the final allocation

Provides initial assessment of the project vis-à-vis the design monitoring framework

Impact evaluation report

Consultant through

ADB

ADB By June 2022 Provides results of quantitative and qualitative assessment of the socioeconomic impact of the We-Fi grant project

ADB = Asian Development Bank, GAP = gender action plan, OMF1 = Operations Manual on Financing of Interest and Other Charges During Construction, OM J7 = Operations Manual on Project Financial Reporting and Auditing, PCR = project completion report, PFI = participating financial institution, PMU = project management unit, TA = technical assistance. a The report will include among other items: (i) original principal amount of each small and medium-sized enterprise

(SME) loan; (ii) terms including interest rate, tenor, and collateral; (iii) sector of activity; (iv) outstanding principal balance; (v) size of SME in terms of number of SME employees and annual turnover; (vi) whether the SME is classified as “women-led,” (vii) location of the SME subprojects (to include inside or outside of Colombo district); (viii) if the SME has not previously borrowed from a licensed commercial or specialized bank; and (ix) purpose of the loan (land, working capital, plant, purchase, or equipment).


Stakeholder Communication Strategy

85. ADB will communicate the information about this project and the outcome of this project through its publications, presentations, and on its website. ADB will also communicate with the project‘s internal stakeholders through written documents. 86. The key communication objectives of the project are:

(i) to inform potential and existing targeted SMEs (located outside Colombo district, borrowing for non-collateral working capital, led by women and not previously not previously borrowed from a licensed commercial or specialized bank) of the opportunities that the project offers including capacity building activities and increased access to credit resources;

(ii) to empower potential targeted SMEs and encourage them to enter into business ventures;

(iii) to strengthen SMEs’ networks and create a learning environment through sharing of experiences;

(iv) to provide public accountability; (v) to provide greater public awareness of the contributions of women-led SMEs to the

economy and society more broadly; and (vi) to create public support for the project.

87. In particular, PMU and ADB will ensure women-led SMEs in remote areas be aware of the Emergency Response Component given they have limited access to information.

40

X. ANTICORRUPTION POLICY 88. ADB reserves the right to investigate, directly or through its agents, any violations of the Anticorruption Policy relating to the program. 33 All contracts financed by ADB shall include provisions specifying the right of ADB to audit and examine the records and accounts of the executing agency and all program contractors, suppliers, consultants, and other service providers. Individuals and/or entities on ADB‘s anticorruption debarment list are ineligible to participate in ADB-financed activity and may not be awarded any contracts under the project. 89. To support these efforts, relevant provisions will be included in the legal agreements. During project processing, financial management assessment and integrity due diligence were conducted on the applicant PFIs. Copies of ADB's Anticorruption Policy and Integrity Principles and Guidelines were given to the government and MOF during loan negotiations. 90. ADB’s Office of Anticorruption and Integrity34 is the point of contact to report allegations of fraud and corruption among ADB-financed projects or its staff. Anyone coming across evidence of corruption associated with the project may contact below by telephone, facsimile, e-mail, or by mail:

Office of Anticorruption and Integrity Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Telephone: +63 2 632 5004 Fax: +63 2 636 2152 E-mail: [email protected] or [email protected]

XI. ACCOUNTABILITY MECHANISM

91. People who are, or may in the future be, adversely affected by the program may submit complaints to ADB‘s Accountability Mechanism. The Accountability Mechanism provides an independent forum and process whereby people adversely affected by ADB-assisted projects can voice and seek a resolution of their problems, as well as report alleged violations of ADB‘s operational policies and procedures. Before submitting a complaint to the Accountability Mechanism, affected people should make a good faith effort to solve their problems by working with the concerned ADB operations department. Only after doing that, and if they are still dissatisfied, should they approach the Accountability Mechanism.35

XII. RECORD OF PAM CHANGES 92. The PAM was amended in June 2020 to incorporate the changes in the implementation arrangements, specifically, changes in the projection of contract awards and disbursements and extension of the grant closing date.

33 ADB. 2015. Integrity Principles and Guidelines 2015. Manila. 34 ADB's Integrity Office website is available at http://www.adb.org/site/integrity/main. 35 For further information, see https://www.adb.org/site/accountability-mechanism/main

mailto:[email protected]

http://www.adb.org/site/integrity/main

https://www.adb.org/site/accountability-mechanism/main

Appendix 1 41

ALLOCATION REQUEST FORM ADB’S SME LINE OF CREDIT PROJECT – SME LOAN

The local currency equivalent of [$15 million] is available to be allocated among [] banks for this allocation. Requests must be at least $1 million and in increments of $100,000. Instead of specifying a specific amount, banks may request the maximum available based on pro rata distribution. If undersubscribed, the funds will be distributed as mutually agreed by ADB and the project management unit. The allocation will be lent at a rate of []%, which is the [6 or 1]-month average weighted deposit rate published on the Central Bank of Sri Lanka’s website as of [Month/Year]. Your institution will be notified within 3 working days of your allocation. The allocation will be available to disburse for qualified withdrawals on or around [30 September [Year]/1 April [Year]]. From this date, your institution will begin to incur interest charges. This form must be returned to ADB [[email protected]] with copy to [[email protected]] and [[email protected]] by midnight (Sri Lanka time) of [30 June [Year]/31 December [Year]]. Forms may be sent earlier than that date, but form sent after that time may not be accepted. If a form is incorrectly completed, ADB will attempt to return it; the institution can resubmit it if time permits. By signing this form, your institution confirms that the signatory is authorized to conduct business on its behalf for this project (including execution of this fund allocation request), that the request for these funds is binding and final, that ADB reserves the right not to accept an allocation request without giving cause. Institutions are reminded that failure to disburse at least 80% of the loan by [30 November [Year]/31 May [Year]] will preclude your institution from participating in the [December [Year] /June [Year]] allocation. Either enter an amount _____________________(minimum $1 million expressed in increments of $100,000) or leave the amount blank and check this box if requesting the maximum available based on a pro rata distribution. Signature: ___________________________________ Name: ___________________________________ Position: ___________________________________

42 Appendix 1

ALLOCATION REQUEST FORM ADB’S SME LINE OF CREDIT PROJECT – TEA LOAN

The local currency equivalent of [$4 million] is available to be allocated among [] banks for this allocation. Requests must be at least $0.1 million and in increments of $100,000. Instead of specifying a specific amount, banks may request the maximum available based on pro rata distribution. If undersubscribed, the funds will be distributed as mutually agreed by ADB and the project management unit. The allocation will be lent at a rate of []%, which is the [6 or 1]-month average weighted deposit rate published on the Central Bank of Sri Lanka’s website as of [Month/Year]. Your institution will be notified within 3 working days of your allocation. The allocation will be available to disburse for qualified withdrawals on or around [30 September [Year]/1 April [Year]]. From this date, your institution will begin to incur interest charges. This form must be returned to ADB [[email protected]] with copy to [[email protected]] and [[email protected]] by midnight (Sri Lanka time) of [30 June [Year]/29 December [Year]]. Forms may be sent earlier than that date, but form sent after that time may not be accepted. If a form is incorrectly completed, ADB will attempt to return it; the institution can resubmit it if time permits. By signing this form, your institution confirms that the signatory is authorized to conduct business on its behalf for this project (including execution of this fund allocation request), that the request for these funds is binding and final, that ADB reserves the right not to accept an allocation request without giving cause. Institutions are reminded that failure to disburse at least 80% of the loan by [30 November [Year]/31 May [Year]] will preclude your institution from participating in the [December [Year] /June [Year]] allocation. Either enter an amount _____________________(minimum $0.1 million expressed in increments of $100,000) or leave the amount blank and check this box if requesting the maximum available based on a pro rata distribution. Signature: ___________________________________ Name: ___________________________________ Position: ___________________________________

Appendix 2 43

ALLOCATION REQUEST FORM WOMEN ENTREPRENEURS FINANCE INITIATIVE – WOMEN GRANT

The local currency equivalent of $[] million is available to be allocated among [] banks. Requests must be made in increments of $10,000. Instead of specifying a specific amount, banks may request the maximum available based on the lower of a pro rata distribution or 33.3% of a participating bank’s allocation under the credit line. If undersubscribed, the funds will be distributed as rolled over to the next allocation or otherwise allocated. Your institution will be notified by [] of your allocation. The allocation will be available to disburse for qualified withdrawals on or around [30 September [Year]/1 April [Year]]. This form must be returned to ADB [[email protected]] with copy to [[email protected]] and [[email protected]] by midnight (Sri Lanka time) of [30 June [Year] /29 December [Year]]. Forms may be sent earlier than that date, but forms sent after that time may not be accepted. If a form is incorrectly completed, ADB will attempt to return it; the institution can resubmit it if time permits. By signing this form, your institution confirms that the signatory is authorized to conduct business on its behalf for this project (including execution of this fund allocation request), that the request for these funds is binding and final, that ADB reserves the right not to accept an allocation request without giving cause. Institutions are reminded that failure to disburse at least 80% of the grant by [30 November [Year]]/31 May [Year]] will preclude your institution from participating in the [December [Year]/June [Year]] allocation. Either enter an amount _____________________(expressed in increments of $10,000) or leave the amount blank and check this box if requesting the maximum available based on the lower of a pro rata distribution or 33.3% of a participating bank’s allocation under SME credit line. Signature: ___________________________________ Name: ___________________________________ Position: ___________________________________

44 Appendix 3

ALLOCATION REQUEST FORM JAPAN FUND FOR POVERTY REDUCTION – TEA GRANT

The local currency equivalent of $[] million is available to be allocated among [] banks. Requests must be made in increments of $5,000. Instead of specifying a specific amount, banks may request the maximum available based on the lower of a pro rata distribution or 25% of a participating bank’s allocation under the credit line. If undersubscribed, the funds will be distributed as rolled over to the next allocation or otherwise allocated. Your institution will be notified by [] of your allocation. The allocation will be available to disburse for qualified withdrawals on or around [30 September [Year]/1 April [Year]]. This form must be returned to ADB [[email protected]] with copy to [[email protected]] and [[email protected]] by midnight (Sri Lanka time) of [30 June [Year] /29 December [Year]]. Forms may be sent earlier than that date, but forms sent after that time may not be accepted. If a form is incorrectly completed, ADB will attempt to return it; the institution can resubmit it if time permits. By signing this form, your institution confirms that the signatory is authorized to conduct business on its behalf for this project (including execution of this fund allocation request), that the request for these funds is binding and final, that ADB reserves the right not to accept an allocation request without giving cause. Institutions are reminded that failure to disburse at least 80% of the grant by [30 November [Year]]/31 May [Year]] will preclude your institution from participating in the [December [Year]/June [Year]] allocation. Either enter an amount _____________________(expressed in increments of $5,000) or leave the amount blank and check this box if requesting the maximum available based on the lower of a pro rata distribution or 25% of a participating bank’s allocation under Tea smallholder credit line. . Signature: ___________________________________ Name: ___________________________________ Position: ___________________________________

Appendix 4 45

PARTICIPATING FINANCIAL INSTITUTION CRITERIA 1. Domestic banks in good standing with the Central Bank of Sri Lanka (CBSL), whether publicly or privately owned, are eligible. Eligibility criteria includes:

(i) CBSL must have confirmed at project inception that the participating financial institution (PFI) is in good regulatory standing, including its corporate governance, reputation and/or integrity, and compliance with anti-money laundering requirements;

(ii) Due diligence of Asian Development Bank (ADB) of the PFI is satisfactory; (iii) The PFI complies with CBSL’s regulatory capital minimum as of its last audited

financial statements or as confirmed by its auditor; (iv) The PFI has a net nonperforming loan ratio less than or equal to 5.0% as of its last

audited financial statements or as confirmed by its auditor;1 (v) The PFI was profitable for all or part of the prior 3 financial years; (vi) The PFI must have tangible equity of at least Rs1 billion as of its last audited

financial statements as confirmed by its auditor; (vii) If the PFI has undisbursed funds from any other ADB project, including those with

ADB’s Private Sector Operations Department, the PFI must covenant that it will not prepay the other ADB loan;

(viii) The PFI must maintain a management information system that can provide quarterly reports on subloan disbursements, repayment performance, lending spreads, targeted SMEs, and other subproject and subborrower information;

(ix) For a PFI participating under the Emergency Assistance Component, the PFI has provided to ADB and the Project Executing Agency quarterly financial reports of Qualified Enterprises under the SME Emergency Response Component, including asset turnover, number of employees, profit, debt-equity ratio, liquidity position and other subborrower information;

(x) The PFI must consent that ADB can publicly disclose detailed data on the PFIs’ performance and the subloans; and

(xi) The PFI can maintain separate records of subloans under the project. 2. PFIs will ensure that the subloans finance subprojects with no involuntary resettlement or indigenous peoples impacts under ADB’s Safeguard Policy Statement (2009). Furthermore, subprojects may have environmental impacts that are not significant (categorized as B under ADB’s Safeguard Policy Statement) only if the PFI maintains an environmental management system acceptable to ADB and that environmental management system has certified that the subloan is compliant with national laws and ADB’s Safeguard Policy Statement (2009). In the absence of such system, the subprojects will have no environmental impact. 3. In addition to these criteria, the PFI must adhere to other requirements as specified in the project agreement. 4. Failure to adhere to these criteria could result in a PFI’s exclusion from allocations or a demand to repay to the government any outstanding loans under the project.

1 The PMU and ADB may agree on waiving or raise the minimum net NPL ratio of 5% in 2020 and 2021 by taking into

consideration the economic recovery status from COVID-19.

46 Appendix 5

SUBLOAN AND SUBBOROWER CRITERIA FOR SME CREDIT LINE COMPONENT

1. Participating financial institutions (PFIs) will comply with the following requirements in selecting eligible subborrowers:

(i) subborrowers must be economically and financially viable; (ii) subborrowers must be registered business; (iii) subborrowers may not be related parties of the PFI’s board or senior management; (iv) subborrowers (the parent company and any subsidiaries) must have annual

turnover under SLRs750 million or less than 300 employees if in manufacturing or 200 employees if in services;

(v) subborrowers must be either (a) located outside Colombo district, (b) borrowing subloans (both working capital loans and investment loans) against which fixed or financial assets are not pledged, (c) led by women,1 or (d) not previously borrowed from a licensed commercial or specialized bank;

(vi) subborrowers’ main businesses may not be wholesale and retail trade and leasing and rental;2 and

(vii) subborrowers must contribute equity, if required by the PFIs, to subprojects as per commercial norms.

2. PFIs will comply with the following requirements in originating the initial subloans:

(i) 20% of the number of subloans must be lent to subborrowers that have not previously borrowed from a licensed commercial or specialized bank; 3 and

(ii) 20% of the number of subloans must be lent to subborrowers that are led by women (footnote 1);

3. Maximum subloan size is Rs50 million except for cluster loans. Subloans for vehicles are ineligible unless the SMEs primary business is transport or tourism or the project management unit has approved the subloan. Subloans may not be used to repay another loan. Subloans must be for the purpose of capital investments unless they are not collateralized by fixed or financial assets (i.e., subloans against which fixed or fiannial assets are not pledged may be for the purpose of working capital). 4. PFIs will ensure that the subloans are for financing subprojects with no involuntary resettlement or indigenous peoples impacts under ADB’s Safeguard Policy Statement (2009). Furthermore, subprojects may have environmental impacts that are not significant (categorized as B under ADB’s Safeguard Policy Statement) only if the PFI maintains an environmental and social management system acceptable to ADB and that environmental and social management system has certified that the subloan is compliant with national laws and ADB’s Safeguard Policy Statement. In the absence of such system, the subprojects will have no environmental impact.

5. PFIs whose environmental and social management system has not been approved by the ADB may lend to subprojects that are potentially category C, although not included in the

1 Defined as 51% of enterprise ownership is controlled by women or meets the below 3 criteria: (a) At least 20% of

enterprise ownership is controlled by women; (b) a woman is either the chief executive officer (i.e., senior most manager) or chief operations officer (i.e., second most senior manager); and (c) 30% of board members are women, where a board exists.

2 Wholesale and Retail Trade is defined as business to purchase final goods to resell them to customers. In this regard, filling stations are considered as wholesale and retail trade business.

3 The 20% target on the first-time borrowers will be waived for the allocation in September 2020. The PMU and ADB may agree on waiving or lowering the 20% target on the first-time borrowers for allocations in 2021 by taking into consideration the economic recovery status from COVID-19.

Appendix 5 47

Attachment 1 of the Environmental Management System Framework, provided that the project management unit’s safeguard officer has confirmed eligibility. The safeguard specialist’s review would include a site visit, the costs of which the PFI will shoulder. 6. We-Fi Grant. Women-led SMEs that meet both criteria (i) and (ii) below are eligible for a 10% principal paydown funded by the Women Entrepreneurs Finance Initiative (We-Fi) grant:

(i) 51% of enterprise ownership is controlled by women or meets the below 3 criteria: (a) At least 20% of enterprise ownership is controlled by women; (b) A woman is either the chief executive officer (i.e., senior most manager) or

chief operations officer (i.e., second most senior manager); and (c) 30% of board members are women, where a board exists.

(ii) The loan principal is between SLRs750,000–30,000,000.

7. In addition, if the women-led SME borrower is accessing finance for economic activity in Uva, Sabaragamuwa, Northern or Eastern provinces, an additional 5% of principal paydown is provided. 8. Furthermore, if the women-led SME borrower completes the associated training and presents the certificate of completion to the PFI, the subborrower is eligible for an additional principal paydown of 10%. If women-led SME borrowers are granted principal paydown support in one allocation round and then subsequently complete the associated training, the additional principal paydown will be taken from the PFI’s We-Fi allocation within the same fund allocation round (i.e. if the fund allocation is on 30 June 2021, the additional paydown associated with the subsequent training is allowed until 31 December 2021). 9. Recycling. If subloans are repaid to the PFIs prior to their repayment to the government, PFIs may onlend the funds so long as the criteria in paragraph 1 are still met. The PFIs must also continue to comply with fiduciary and safeguard covenants in the subsidiary loan agreements with the government.

10. For subloans collateralized against fixed or financial assets, If such subloans are repaid to the PFIs within 3 years from the PFI’s subloan provisions, the PFIs must immediately repay the principal amount to the government for reallocation. 11. In addition to the above criteria, PFIs must adhere to other requirements as specified in the loan project agreement and the We-Fi grant project agreement. 12. Failure to adhere to these criteria could result in a PFI’s exclusion from allocations or a demand to repay to the government any outstanding loans under the project.

48 Appendix 5

SUBLOAN AND SUBBOROWER CRITERIA FOR PILOT COMPONENT

1. Participating financial institutions (PFIs) will comply with the following requirements in selecting eligible subborrowers:

(i) subborrowers must be economically and financially viable; (ii) subborrowers may not be related parties of the PFI’s board or senior management; (iii) subborrowers are tea smallholders with landholdings up to 50 acres; (iv) subborrowers must contribute equity, if required by the PFIs, to subprojects as per

commercial norms; and (v) Subborrowers must possess certification from Tea Smallholder Development

Authority or the Sri Lankan Tea Board confirming that its proposed subproject involving new planting or replanting, complies with applicable agricultural requirements established by the Tea Research Institute.

2. Maximum subloan size is SLRs30 million. Subloans must be used for capital investments for new planting, replanting, infilling, nursery development, mechanization and soil and water management by tea smallholders. Subloans may not be used to repay another loan. Subloans for vehicles are ineligible. 3. PFIs will ensure that the subloans are for financing subprojects with no involuntary resettlement or indigenous peoples impacts under ADB’s Safeguard Policy Statement (2009). Furthermore, subprojects may have environmental impacts that are not significant (categorized as B under ADB’s Safeguard Policy Statement) only if the PFI maintains an environmental management system acceptable to ADB and that environmental management system has certified that the subloan is compliant with national laws and ADB’s Safeguard Policy Statement. In the absence of such system, the subprojects will have no environmental impact.

4. PFIs whose environmental management system has not been approved by the ADB may lend to subprojects that are potentially category C, although not included in the Attachment 1 of the Environmental Management System Framework, provided that the project management unit’s safeguard officer has confirmed eligibility. The safeguard specialist’s review would include a site visit, the costs of which the PFI will shoulder. 5. JFPR Grant. Maximum subloan size is SLRs5 million. Subloans will qualify for Japan Fund for Poverty Reduction (JFPR) grant-funded principal paydown of 10% when the subloans are used for new planting and replanting by marginal small tea holders with landholdings of less than 10 acres.

6. We-Fi Grant. Subloans will be blended with the grant funded principal paydown from the Women Entrepreneurs Finance Initiative (We-Fi) if they meet the eligibility criteria in SUBLOAN AND SUBBOROWER CRITERIA FOR SME CREDIT LINE COMPONENT (Appendix 5 of the PAM, paras. 6-8). 7. Furthermore, if the marginal tea smallholders complete the qualified financial literacy training (supported by the JFPR tea TA) and prepare business record keeping and presents the TSHDA’s certificate of compliance to the PFI, the subborrower is eligible for additional principal paydown of 10%. If the marginal tea smallholder borrowers are granted principal paydown support in one allocation round and then subsequently complete the business record keeping program, the additional principal paydown will be taken from the PFI’s We-Fi allocation within the same fund allocation round (i.e., if the fund allocation is on 30 June 2021, the additional paydown associated with the subsequent training is allowed until 31 December 2021).

Appendix 5 49

8. Recycling. If subloans are repaid to the PFIs prior to their repayment to the government, PFIs may onlend the funds so long as the criteria in paragraph 1 are still met. The PFIs must also continue to comply with fiduciary and safeguard covenants in the subsidiary loan agreements with the government.

9. If subloans are repaid to the PFIs within 3 years from the PFI’s subloan provisions, the PFIs must repay the principal amount to the government for reallocation. 10. In addition to these criteria, PFIs must adhere to other requirements as specified in the loan project agreement and JFPR grant project agreement. 11. Failure to adhere to these criteria could result in a PFI’s exclusion from allocations or a demand to repay to the government any outstanding loans under the project.

50 Appendix 5

SUBLOAN AND SUBBOROWER CRITERIA FOR EMERGENCY RESPONSE COMPONENT

1. Participating financial institutions (PFIs) will comply with the following requirements in selecting eligible subborrowers: (i) subborrowers must be economically and financially viable; (ii) subborrowers must be registered business: (iii) subborrowers may not be related parties of the PFI’s board or senior management; (iv) subborrowers (the parent company and any subsidiaries) must have annual

turnover under SLRs750 million or less than 300 employees if in manufacturing or 200 employees if in services;

(v) subborrowers’ main businesses may not be wholesale and retail trade and leasing and rental;4 and

(vi) subborrowers must contribute equity, if required by the PFIs, to subprojects as per commercial norms.

2. At least 20% of the number of subloans may not be collateralized by fixed or financial assets. 3. PFIs must disburse 80% of the most recent allocation within 6 months from the allocation date. If PFIs cannot comply with this disbursement target, they must return undisbursed fund to the Government for reallocation to other PFIs.

4. Maximum subloan size is SLRs10 million. Subloans are for short-term financing needs, including financing for working capital. Vehicles are ineligible unless the SMEs primary business is transport or tourism or the project management unit has approved the subloan. Subloans may not be used for purposed of refinancing or repayment of existing debt obligations. 5. PFIs will ensure that the subloans are for financing subprojects with no involuntary resettlement or indigenous peoples impacts under ADB’s Safeguard Policy Statement (2009). Furthermore, subprojects may have environmental impacts that are not significant (categorized as B under ADB’s Safeguard Policy Statement) only if the PFI maintains an environmental and social management system acceptable to ADB and that environmental and social management system has certified that the subloan is compliant with national laws and ADB’s Safeguard Policy Statement. In the absence of such system, the subprojects will have no environmental impact.

6. PFIs whose environmental and social management system has not been approved by the ADB may lend to subprojects that are potentially category C, although not included in the Attachment 1 of the Environmental Management System Framework, provided that the project management unit’s safeguard officer has confirmed eligibility. The safeguard specialist’s review would include a site visit, the costs of which the PFI will shoulder. 7. Recycling is not allowed by PFIs. If subloans are repaid to the PFIs, PFIs must immediately repay to the government.

8. PFIs will submit simplified quarterly financial statements and business records of a subborrower to the Project Management Unit and ADB.

4 Wholesale and Retail Trade is defined as business to purchase final goods to resell them to customers. In this regard,

filling stations are considered as wholesale and retail trade business.

Appendix 5 51

9. Failure to adhere to these criteria could result in a PFI’s exclusion from allocations or a demand to repay to the government any outstanding loans under the project.

52 Appendix 6

ADVANCE RECONCILIATION WORKSHEET (1) ADB SME CREDIT LINE

Items

PMU Request

from Previous

Allocation (USD)

Liquidated by MOF

(USD Equivalent)

Balance from Last Allocation

(USD Equivalent)

Banks’ Requests for this

Allocation (USD)

PMU Request for

this Allocation

(USD)

ADB Disbursement (USD)

A B C D E F

E from previous Advance

Reconciliation

Worksheet

A – B

Result of Allocation Request

Form

C + D E – C

Example 3,500,000 3,000,000 500,000 4,000,000 4,500,000 4,000,000

Bank of Ceylon

Commercial Bank

DFCC Bank

Hatton National Bank

Nation’s Trust Bank

NDB Bank

People’s Bank

Regional Development Bank

Sampath Bank

Seylan Bank

Total

ADB = Asian Development Bank, MOF = Ministry of Finance, PMU = project monitoring unit.

Appendix 6 53

ADVANCE RECONCILIATION WORKSHEET (2) ADB TEA SMALLHOLDER CREDIT LINE

Items

PMU Request

from Previous

Allocation (USD)

Liquidated by MOF

(USD Equivalent)

Balance

from Last Allocation

(USD Equivalent)

Banks’

Requests for this

Allocation (USD)

PMU

Request for this

Allocation (USD)

ADB Disbursement

(USD)

A B C D E F


Reconciliation

Worksheet

A – B


Form

C + D E – C

Example 3,500,000 3,000,000 500,000 4,000,000 4,500,000 4,000,000

Bank of Ceylon

Commercial Bank

DFCC Bank



NDB Bank

People’s Bank


Sampath Bank

Seylan Bank

Total

ADB = Asian Development Bank, MOF = Ministry of Finance, PMU = project monitoring unit.

54 Appendix 7

ADVANCE RECONCILIATION WORKSHEET WOMEN ENTREPRENEURS FINANCE INITIATIVE (WE-FI) GRANT

Items

PMU Request

from Previous

Allocation (USD)

Liquidated by MOF

(USD Equivalent)

Balance


(USD Equivalent)

Banks’

Requests for this

Allocation (USD)

PMU

Request for this

Allocation (USD)

ADB Disbursement

(USD)

A B C D E F


Reconciliation

Worksheet

A – B


Form

C + D E – C

Example 3,500,000 3,000,000 500,000 4,000,000 4,500,000 4,000,000

Bank of Ceylon

Commercial Bank

DFCC Bank



NDB Bank

People’s Bank


Sampath Bank

Seylan Bank

Total

ADB = Asian Development Bank, MOF = Ministry of Finance, PMU = project monitoring unit, We-Fi = Women Entrepreneurs Finance Initiative.

Appendix 8 55

ADVANCE RECONCILIATION WORKSHEET JAPAN FUND FOR POVERTY REDUCTION (JFPR) GRANT

Items

PMU Request

from Previous

Allocation (USD)

Liquidated by MOF

(USD Equivalent)

Balance


(USD Equivalent)

Banks’

Requests for this

Allocation (USD)

PMU

Request for this

Allocation (USD)

ADB Disbursement

(USD)

A B C D E F


Reconciliation

Worksheet

A – B


Form

C + D E – C

Example 3,500,000 3,000,000 500,000 4,000,000 4,500,000 4,000,000

Bank of Ceylon

Commercial Bank

DFCC Bank



NDB Bank

People’s Bank


Sampath Bank

Seylan Bank

Total

ADB = Asian Development Bank, MOF = Ministry of Finance, PMU = project monitoring unit, We-Fi = Women Entrepreneurs Finance Initiative.

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