The Asian Development Bank has threatened to withdraw funds it had allocated for the Small and Medium Enterprise Sector Development Programme (SMESDP) on a breach of loan agreement.

The bank has further cautioned that it will also bring about a number of design constraints on future project, says a letter of the ADB addressed to the concerned functionaries and available with The News on Thursday.

"Legally speaking, a breach on that loan covenant gives ADB the right to call back the funds. This will surely be spotted during financial closure of the SME Program, and bring about a number of design constraints on future projects," cautioned the contents of the bank's letter addressed to the Planning Commission.

Despite complying nine out of 11 conditions for the release of third tranche for the program, the government of Pakistan gave a clear expectation to the ADB that the government would continue to implement the combined facility centres (CFC) program, in the timeframe envisaged by the CFC Implementation Plan and that ADB would continue monitoring these activities through independent performance audits, etc.

The loan agreement for second and the third tranche were (a) for the repayment of SME Bank liabilities to SBP, (b) for the cost of SME Bank staff separation packages, including VSS, and (c) up to $6,000,000 equivalent for the CFC Program, said the letter.

The Government has also complied with all second tranche conditions. In December 2006, the Government was fully compliant with only eight of 11 conditions set for the second tranche, while two conditions were substantially complied with and one was partially complied with. It has not reversed any of the reforms supported under the first, incentive, and second tranche of the policy loan, the ADB letter says.

One CFC has been established to date, for the ceramics industry. The CFC program has been delayed due to more stringent application of fiduciary norms in the transfer of funds to the first CFC. Proposals have been finalized for three other CFCs, two of which will be established in 2008-2009 and the last one in 2009-2010.
Audits can be undertaken after allowing the first CFC to complete at least one year of operation (expected by June 2009). Thus, the CFC program has no conceptual or policy conflict. Hence, no adverse impact is likely on the development objectives of SMESDP as a result of delays there is no conceptual or legal program. The government is committed to establishing other CFCs over a period of time.

"We are worried with the credibility risks to the future design of our programs in Pakistan if these issues are kept unresolved. We have been raising this concern with both Finance (ministry) and TUSDEC. We would like to seek your guidance on whether we, ADB, can play any role in resolving whatever handicap seems to impair the three common facility centers (CFCs) currently under appreciation," says Joao Farinha, an official of the ADB Mission on Economic Transformation.

The implementation difficulties have now been reflected in its Project Completion Report - already submitted to the ADB Board and made public on the ADB website - as pending issues, as we have been informed that the matter is still being discussed between Industries, Finance (ministries) and the Planning Commission, she added.

The Asian Development Bank (ADB) approved the Small and Medium Enterprise Sector Development Program (SMESDP) comprising (i) a program loan of o16.4 billion from ADB's ordinary capital resources to support policy reforms; (ii) a project loan of SDR12.5 million ($18 million) from ADB's Special Funds resources to support policy development, building institutions and markets for business development services (BDS), and credit for small and medium enterprises (SMEs); (iii) a partial credit guarantee (PCG) facility through ADB's private sector operations to leverage market-based financing of SMEs ($65 million); and (iv) a technical assistance grant ($0.25 million) to coordinate the program.