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RETHINKING FOGAPE Evaluating Chile’s Partial Credit

Guarantee Scheme

Margarita Armenteros Niccolò Artellini Andreas Hoppe Marco Urizar Bernard Yaros

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Table of Contents

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• SME sector in Chile contributes to 20% of GDP

• Over 50% of workforce employed in SMEs

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Source: World Bank

Motivation

2005 2006 2007 2008 2009 2010 2011 20120%

1%

2%

3%

4%

5%

6%

7%

8%

9%

-

2,000,000,000,000

4,000,000,000,000

6,000,000,000,000

8,000,000,000,000

10,000,000,000,000

12,000,000,000,000 8%

7% 7%8% 8%

8% 8% 8%

SME Outstanding loans- Commercial banks SME outstanding loans % GDP- Commercial banks

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Source: World Bank Enterprise Surveys (2010)

Constraints on Chilean Firms

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• Founded in 1982 but re-launched in 2000– Main goal Guarantee loans of SMEs

• Initially endowed with $13 million – Re-capitalized twice in 2007 and 2009 by $10

million and $130 million respectively

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

10000

20000

30000

40000

50000

60000

70000

80000

90000

0

10000000

20000000

30000000

40000000

50000000

60000000

70000000

80000000

Total Number of Operations(left axis) Total Annual Amount of Guaranteed Financing (right axis)Source: Fogape

Background of Fogape

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Auctioning Off Guarantee Rights

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• Short-term and long-term credit as well as contingent credit– 60% to working capital – 40% to investment projects

• Maximum coverage rate is: – 80% for loans below $120,000 – 50% for loans above $120,000

• Previously issued loans not eligible

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Eligibility of Loans

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• Only enterprises with total annual sales less than $750,000 in previous year

• Enterprises are non-eligible if: – Existing arrears in the financial system – Expected loss at time of loan issuance greater

than 3%

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Eligibility of SMEs

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• Lenders excluded if: – Previous default rates considered excessively

high– Less than 80% of the guarantee rights used

from past auctions • If SME defaults, it is up to lender to recover loan• Fogape charges a commission of 1 to 2% of the

credit to be guaranteed

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Regulation of Lenders

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• Loan recovery

– Timing of guarantee payouts

• Targeting of regions or sectors

• Coverage ratios

• Eligibility rules

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4 Elements of Partial Credit Guarantee Schemes

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• Longitudinal surveys from Ministry of Economy• Panel of 2,650 enterprises from 2007 to 2009

– Formal enterprises with annual sales over $35,000

• Over 500 variables– Firm-specific characteristics

• Representation of surveyed firms by size:– Micro (12%); Small (33%); Medium (19%); &

Large (34%)

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Data Description

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• Quasi-experimental research approach– Treatment depends discontinuously on

observable characteristic(s) of subjects• Intent to treat, or effect of eligibility• Restriction of sample around eligibility threshold

($750,000) within bandwidths:– 75% & 50% of threshold sales value of

eligibility

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Regression Discontinuity Design (RDD) Analysis

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• Log Salesi,2009 – Log Salesi,2007

• Profit margin in 2009

• Debt-to-equity ratio in 2009

• Long-term debt over total debt in 2009

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Outcome Variables

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• : constant

• Ti : dummy equaling 1 if firm i eligible in 2007 and 0 otherwise

• Si,2006 : firm i’s 2006 sales

• S*: sales eligibility threshold of $750,000

• ( Si,2006 – S*): normalized support variable

• f(): a polynomial function

• Xi : vector of controls

• r : fixed effects for r regions

• c : fixed effects for c sectors

• i : error term

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yi = + Ti + f( Si,2006 – S*) + f{(Si,2006 – S*)Ti} + Xi + r + c + i

Specification

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Validity Check

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Results (I)

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Results (I)

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Results (I)Results (II)

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Results (I)Results (III)

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Results (I)Results (IV)

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• As-if randomly assigned• Measurement error in survey data• Longer time horizon• Data coincides with financial crisis• Local treatment effect

– Results say nothing about effect of eligibility on eligible micro-enterprises

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Results (I)Caveats & Limitations

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• Are firms really credit constrained? • Are lenders substituting private for public

guarantees?• Do enterprises really have the expertise or

productivity to undertake successful investments?

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Results (I)Potential Problems

Credit Constraints

Fogape Loans

Productive Investments

Firm growth &

profitability

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• From 2000 to 2009, Fogape backed 250,000 loans– Only 124,000 beneficiaries

• Larraín and Quiroz (2006) find that 87% of surveyed firms using Fogape after 2000 already had credit

• Second Longitudinal Survey 2011:

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Of 369 firms that reported using Fogape, what percentage obtained their biggest loan in 2009 using:

Physical collateral 40%

Private guarantee 18%

Public guarantee 27%

Casting Doubt on Credit Rationing Assumption

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• #2 constraint for Chilean enterprises, according to WB Enterprise Survey (2010), is: – “Inadequately educated workforce”

• Around 25% of small and 22% of medium firms identify inadequate labor force as main obstacle

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Casting Doubt on Firm Productivity

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• More research into whether Fogape is truly easing financial constraints on the right firms

• Review loan portfolio of participating lenders

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Policy Recommendation (I)

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• Coordinate Fogape with other SME targeting programs

• Lenders should set up meeting of borrowers at origination of loan with:– Technical Assistance Fund (FAT)– Technical Cooperation Services

(SERCOTEC)– Export Promotion Program (PROCHILE)

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Policy Recommendation (II)

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Improving

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Legal Definition of Firm Size in Chile

Annual Sales (Unidades de Fomento)

Micro Less than 2,400 UF

Small From 2,400 to 25,000 UF

Medium From 25,000 to 100,000 UF

Large More than 100,000 UF

Appendix