LOCAL DEVELOPMENT PILOT PROJECT (LDP) The World Bank and Bosnia and Herzegovina

PROJECT BACKGROUND BiH Local Governments are Responsible for Provision of Public Services and Infrastructure Weak Institutional and Financial State Post-war Emergency Reconstruction Relied on Donor Aid Infrastructure Investment Needs Increased = To Start Building a Financial System to Enable LGs to Access Funding for Financing Infrastructure Projects

LOCAL DEVELOPMENT PILOT PROJECT (LDP) The LDP is designed by the World Bank and the State and Entities Governments of Bosnia and Herzegovina for the purpose of developing a municipal credit market in BiH. The Project is managed by two Project Management units ( PMU)s, which are responsible for Project Management and for channeling WB/IDA funds via PCBs to LGUs for financing infrastructure on local level.

PROJECT DEVELOPMENT OBJECTIVES  Strengthening institutional and financial capacity of local governments in BiH so as to enable them to provide improved municipal infrastructure and services, and  Initiating, on a pilot basis, the development of a municipal credit market, as a long-term source of financing of infrastructure projects in creditworthy municipalities.

PROJECT FINANCING World Bank/IDA Credit $ 15 M Government Contribution $ 1,5 M Italian Grant (Consult. Ser.) $ 0,885 M Dutch Grant (Consult. Ser.) $ 0,4 M TOTAL $ 17,785 M

PROJECT COMPONENTS Local Government Capacity Building Banking Sector Capacity Building Local Development Fund (LDF) – A Revolving Loan Fund for Financing Municipal Projects Project Management

LOCAL GOVERNMENT CAPACITY BUILDING Provision of technical assistance and training to eligible municipalities to strengthen their capacity in financial management, preparing bankable projects and capital investment planning, and to ensure public participation. App. 37% of all municipalities in BiH have participated in technical assistance and training program provided within the LDP.

LOCAL GOVERNMENT CAPACITY BUILDING SELECTION OF MUNICIPALITIES  Financial Condition/Potential Creditworthiness Assessment  Economic Environment  Management Capacity: Budgeting, Accounting and Financial Management  Economic and Urban Plan  Citizen Participation in Prioritisation of Capital Projects

LOCAL GOVERNMENT CAPACITY BUILDING CAPITAL PLANNING AND BUDGETING FINANCIAL MANAGEMENT FINANCIAL REPORTING ACCOUNTING AND PROJECT ADMINISTRATION, DISBURSEMENT AND AUDITING DEBT MANAGEMENT PROJECT PREPARATION

BANKING SECTOR CAPACITY BUILDING Provision of technical assistance and training to local private commercial banks (PCBs) to improve their municipal credit analysis and project appraisal skills to ensure sound lending decisions. 5 PCBs are selected for LDP municipal lending: Raiffeisen Bank BiH, Unicredit/ Zagrebačka Bank, Univerzal Bank, LHB Bank and Nova Bank.

BANKING SECTOR CAPACITY BUILDING SELECTION OF BANKS  Managerial Capacity  Compliance with Banking Agency Regulations: Financial Indicators and Qualitative Indicators  Credit Analysis and Credit Risk Management Policies  Potential to Strengthen/Develop Municipal Lending

LOCAL DEVELOPMENT FUND L(DF) The WB/IDA Funds provided to BIH are, on a project by project basis, provided to Project Management units (PMUs) for on lending these funds to Private Commercial Banks (PCBs) for the purpose of funding particular municipal project loans. Revolving loan fund from which funds are on-lent to PCBs for financing municipal loans. Loans to banks are denominated in EUR and loans to municipalities in convertible marks (KM). Represents more than 80% of the entire LDP funds.

LDF LOAN TERMS AND CONDITIONS ConditionsPMUs to BanksBanks to Municipalities Term 5 to 10 years Same as PMU to Banks Grace PeriodNot applicableUp to 1 Year Interest Rate4% p.a.maximum 9% p.a. FeesNone0.5% Size of loans -maximumKM 2.0 million -minimumKM 0.1 million -average (expected)KM 0.7 million

LDF MUNICIPAL LENDING The PMUs are responsible for managing the LDP: (i) by providing, through municipal and banking consultants, expert training and technical assistance to municipalities and banks participating in the LDP, and (ii) by lending LDP funds to participating banks for the funding of loans extended by the banks to municipalities and municipal enterprises for the financing of eligible infrastructure projects.

LDF MUNICIPAL LENDING The PCBs are expected to bear the credit risk of municipal loans extended by them. The PCBs make their own credit analysis and are solely responsible for loan collection. The PCBs are fully responsible for successful repayment of LDF loans. The PCBs are provided with assistance in establishing adequate lending policies and procedures within capacity building.

LDF MUNICIPAL LENDING Municipal lending transactions have started two years after the Project’s onset. 23 loans are approved and disbursed to municipalities via 5 PCBs in an amount of EUR 8.4 M (US$ 10.2 M). LDF’s loan portfolio is high quality loan portfolio - 100% loan repayment rate. Start up of replacement from LDF is expected as of the last quarter of FX risk to be resolved through extension of both loans in national currency (KM).

MUNICIPAL LENDING - NEXT STEPS Planning for the transition to a sustainable system of private capital available for public local investment – main activity during forthcoming period; Rational for continued operations of the revolving fund; Institutional arrangement upon completion of Project.

PROJECT OUTCOMES Introduction of better financial management and project design practices, as well as LG’ accountability and transparency; Increased creditworthiness of municipalities as precondition to access private sector municipal credit market; Introduction of PCBs to municipal lending; Sustainability of municipal credit market by imposing strong criteria for lending by PCBs; Market competition among banks and decrease of interest rate on municipal loans (on the onset max. i.r. of 9% to app. 8% with a tendency of further reduction).

PROJECT OUTCOMES Creation of small-scaled but sustainable municipal credit market in BiH Entry of other international financial institutions (USAID, KfW) into this market –access to additional funds Involvement of the LDP non-participating banks in this new banking business Establishing appropriate regulatory framework for municipal borrowing

CONCLUSION Considerable progress is achieved toward development objectives. Summarizing results achieved by the LDP, it may be concluded that the Project put in place all 3 elements of self-sustaining municipal credit market: municipalities capable and willing to borrow, banks willing to lend and basic legal framework for municipal borrowing.