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LESSONS:

Small and Medium Enterprise Export Development Project

| country: Indonesia

The Project environment changed from the time it was appraised to when it was implemented. Thus, it is important at project appraisal to make the effort to forecast what the project environment will likely be during project implementation. At appraisal, it would have been possible to predict with some degree of accuracy that the liquidity of participating banks would increase, and their cost of funds might be lower than those under the ADB loan, because of the ongoing improvement in the Indonesian economy after the financial crisis. Had that been done, it is possible that the Project might not have occurred or occurred only on a scaled-down basis.

Delay in the cancellation of the unused portion of the loan made the Government and participating banks pay ADB unnecessary commitment fees. That, as well as other resources expended by the Government, participating banks, and ADB in following up the Project during its implementation period, could have been saved had the unused portion of the loan been canceled earlier. The lesson learned is that early warning signals should be watched carefully. If signs indicate that a loan is going to be unsuccessful, ADB should initiate decisive action to cancel the unused portion of the loan. It can save resources and commitment fees from unnecessarily being incurred on a project that does not have much prospect for success.

Market fluctuations in interest rates affect lending through private sector banks for private sector entities. The ADB loan, however, did not have flexibility to adjust to the changing interest rates in the market. The long-term tenor of the ADB loan was not a decisive factor, as small and medium-sized enterprises (SMEs) mainly required shorter-term working capital loans. The Project was designed on the basis of a traditional public sector development finance institution credit line modality. The structure included London interbank offered rate (LIBOR)-based lending and required fees to be paid to the intermediaries involved, which made the loan price out of the market. In addition, the strict conditions and procedures for subloan approval made the use of the ADB loan both inconvenient and time-consuming for the subborrower. The lesson learned is that a public sector-type modality and structure does not have much prospect for success for financing private banks and private sector enterprises, particularly in a more open and fairly successful economy with sizable bank liquidity and foreign exchange reserves, as in the case of Indonesia. In this environment, SMEs seek the cheapest funds available and the most convenient sources from which they could borrow their needed funds. On both counts, this ADB loan was not competitive.

A more viable instrument for SME promotion would have been to consider the use of ADB credit guarantees scheme under the Partial Credit Guarantee Facility, that is, the ADB private sector window. This facility could have been extended to a selected number of viable private banks operating at the regional level to guarantee up to a certain percentage of well-defined SME loan portfolios without a counterguarantee from the Government. Credit guarantee operations had greater success prospects than loans in situations where there was high liquidity and foreign currency reserves in the market. ADB used such a facility through a selected number of private banks for SME promotion with success in the Philippines.

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