FST Justification and Approval AID121BC1700001.pdf

JUSTIFICATION AND APPROVAL (J&A) ACTION MEMORANDUM

DATE: July 7, 2020

TO: Maria Televantos, Contracting Officer

CC: Deborah Broderick, Agency Competition Advocate

FROM: Natalia Petrova, Project Management Assistant, Office of Economic Growth

RE: Task Order No. AID-121-BC-17-00001 under Blanket Purchase Agreement (BPA) EEM-E-00-05-00002-00, Financial Sector Transformation (FST) Activity in Ukraine

SUBJECT: Justification and Approval (J&A) for Other than Full and Open Competition under the Expedited Procedures Package (EPP) for Responding to Outbreaks of Contagious Infectious Diseases

We request approval of this justification for use of other than full and open competition pursuant to the authorities under the EPP for Responding to Outbreaks of Contagious Infectious Diseases (the “Expedited Procedures Package”), approved on March 24, 2020. Your approval of this J&A constitutes the justification for other than full and open competition as required by Tab 1 (Determination and Findings (D&F) Authorization for the Use of Other than Full-and-Open Competition in the Award or Modification of Contracts) of the EPP.

a. Nature and/or description of the action being approved.

This is a request to approve а Task Order modification to extend the period of performance (POP) and increase the Total Estimated Cost (TEC) of Task Order No. AID-121-BC-17-00001, Financial Sector Transformation (FST) activity in Ukraine, implemented by DAI. The proposed modification will: 1) increase the TEC by $3,000,000, from $23,157,418 to $26,157,418; and 2) extend the POP by eight months from December 27, 2020 to August 27, 2021, resulting in a revised POP of October 28, 2016 to August 27, 2021. While the revised TO POP will not exceed five years, the BPA ordering period ended on December 30, 2019.

The additional funding and time would allow USAID to continue its assistance to the Government of Ukraine (GOU) in implementation of financial sector reforms to mitigate the economic impacts and support economic recovery resulting from the COVID-19 pandemic. The activity specifically focuses on supporting small businesses’ resiliency, strengthening consumer protection as predatory lending practices increase, improving access to finance for SMEs to navigate through COVID-19, and assisting financial sector non-profit organizations in strengthening their capacity and sustainability. Moreover, additional funding and time would provide continued support to ensuring the central bank’s independence and safeguarding financial stability.

b. A description of the supplies or services required to meet USAID’s needs (including the estimated value).

A $3,000,000 increase to the contract ceiling will allow the current implementer, DAI, to provide continued support to critical structural financial sector reforms and scale activities under the current objectives to mitigate the economic impacts of COVID-19 and support Ukraine’s economic recovery.

Specifically, additional support will be provided to the following activities under the current three Activity’s objectives:

Objective (a): Increased Public Confidence in, Understanding of, and Use of the Banking System

Financial Ombudsman Enhance consumer protection in financial services protecting vulnerable and disadvantaged populations.

Ukraine’s microloan sector totaled 79 bln UAH in 2019, a 53% increase from 2018, and this figure is expected to significantly increase in 2020: the COVID-19 pandemic disproportionately impacts vulnerable and disadvantaged Ukrainians as they generally have little to no savings to help them weather the economic impacts. Many have turned to microloans, including pay-day and personal loans, to meet their essential needs. These short-term loans, pay-day loans in particular, often have exorbitant interest rates and are poorly regulated. The potentially disastrous result is that the borrowers will become deeper and more entrenched in debt, making it even harder for them to recover financially. In 2018, FST, following international best practice, assisted in drafting a law on a Financial Ombudsman that will represent consumer interests by investigating and addressing complaints and violation of rights. Given the increase in predatory lending in the wake of the pandemic, Ukraine’s Parliament has seized on the importance of passing this law to protect its most vulnerable and disadvantaged citizens. FST will continue providing technical assistance on this critical piece of legislation as it goes through the legislative process as well as establishment of a Financial Ombudsman, if passed.

Objective (b): Transformed Non-Bank Financial Sector Regulatory Environment

NBFI Regulation Extend support to increase the National Bank of Ukraine’s (NBU) capacity to undertake its new role as non-bank financial sector regulator.

FST is providing significant assistance to the NBU and the NSSMC to undertake new regulatory functions as the regulators for non-bank financial institutions (NBFIs). Legislation mandating this new regulatory framework was adopted in September 2019 and with an expected effective date of July 1, 2020. Both the NBU and the NSSMC have struggled to meet the ambitious implementation schedule, with efforts further hindered by the COVID-19 pandemic. Though both have officially undertaken their new mandate, the regulatory framework is incomplete. In some positive signs, draft laws and regulations that were scheduled for release by December 2019 were finally released six months later. The NBU has also recently requested assistance in improving supervisory support and training in the area of NBFI regulation, signaling a resumed focus on their new regulatory role over credit unions, financial companies and the insurance industry. FST will provide similar support to the NSSMC as they prepare for their new role as regulator over private pensions and construction financing. Given FST’s work in shaping the NBFI legislation and their strong relationship with the NBU and the NSSMC, FST is well-placed to continue this critical work.

Objective (c): Increased Access to Finance for SMEs

SME Lending Platform Continue supporting financial intermediation to reach out to SMEs more effectively and efficiently.

Small and medium enterprises (SMEs) are critical for the economic and social development of Ukraine. They generate income and create jobs. SMEs are likely to do that at an accelerated speed when they are not constrained by lack of financing. Small businesses have been hit extremely hard by the impact of the coronavirus pandemic: the Ukrainian Chamber of Commerce estimated that nearly 700,000 small businesses employing 3.5-4 million people closed. SMEs are faced with reduced demand, disrupted supply chains, and worsening lack of finance. These new challenges resulting from the pandemic are compounded by existing challenges faced by SMEs. For example, because so many SMEs are in the informal sector (30- 40%) they lack financial statements, ownership and incorporation documents, and other requirements to qualify for loans. Thus, access to finance by SMEs is constrained because financial institutions view SMEs as “unbankable.” Advanced analytics platforms that provide a seamless experience for the loan customers from application to close are better positioned to serve SMEs’ financing needs, providing an opportunity to lead them out of imminent financial crisis, and unlock their potential.

During the COVID-19 quarantine restrictions on physical access to financial institutions and an unprecedented number of credit decisions within a very constricted timeframe to be made, banks have failed to serve clients. Recognizing that digitalization is a proven tool to increase financial inclusion, banks have recently sought FST support to extend their on-line consumer lending to a digital platform to include SME finance. The platform would include SME credit products and a “creditmeter” with verifiable, accurate total costs of the credits. The platform would also include an advisory section, providing information and templates for business plans, how to choose a credit product, how to apply for a bank loan, and overall business tips such as completing accounting and financial statements, and undertaking market analyses, risk management, and efficiency analyses. Currently, there is no such advisory and loan comparison platform to support SMEs in Ukraine, even though platforms operate successfully internationally. FST would support the creation of these on-line consumer lending platforms targeting the SME market.

Crowdfunding Employ crowdfunding as a financing instrument for low-cost, risk-tolerant capital to help entrepreneurs bridge the gap between microfinance and commercial lending.

SMEs have significant potential to stimulate innovation and drive growth. To reach this potential, they require financing options for their growth. Crowdfunding is a potential source of financing, funding projects traditional lenders would traditionally shy away from. The size of the crowdfunding market in Europe is rapidly growing but is not significant in Ukraine. Ukrainian crowdfunding platforms currently operate in a “grey area.” Without sufficient regulation over these grey areas, alternative sources of capital, such as diaspora finance, is discouraged. FST will work with the NBU, utilizing the existing regulatory “sandbox” approach, to fast-track fintech innovations while simultaneously introducing new legislation for international payments compatible with European requirements. FST, based on an initial study of crowd-lending, will also design and launch a pilot project for a crowdfunding platform for individuals and small businesses. Crowdfunding can potentially support entrepreneurship, fund “unbankable” businesses, and create and protect jobs that may be in danger due to COVID-19.

Leasing Market Recovery Program Improve access to finance for SMEs, especially for acquiring capital equipment and applications of new technology for operations through leasing.

Lack of access to capital is the single greatest constraint to the development of the leasing market in Ukraine. With a time and cost extension, FST would undertake a two-part activity to support the expansion of the leasing sector, one focusing on putting together an external funding facility and the second on providing technical assistance and training on restructuring credits.

1) Direct loan/guarantee fund: To help address the health impact of COVID-19, FST will facilitate the creation of a $20 - $50 million medical equipment direct loan/guarantee fund made available to qualified leasing companies. In addition, FST will provide advisory support to help the Ukrainian Union of Lessors (UUL) expand and modernize their operations to apply for external financing, such as the guarantee fund. This activity will further stimulate the utilization of leasing as a source of financing.

2) Lease restructuring: As a result of COVID-19, the financial leasing market is experiencing payment delays. Ukraine currently lacks experience with, and expertise on, lease restructuring options. FST’s second initiative would address this by providing technical assistance on restructuring and refinancing lease agreements. The UUL, as Ukraine’s premier leasing association, could develop and provide this much-needed service to its members as well as increase its self-reliance. FST would provide the technical assistance - which would include a needs assessment, legal analyses, manuals, and training programs - to the UUL, SMEs, and leasing companies.

Objective (d): Increased Financial Inclusion and Expanded Digital Finance Solutions

Digital Solutions Increase financial inclusion by introducing digital solutions that have the potential to boost economic growth.

The shift towards digital financial services was already helping societies advance financial inclusion before the pandemic started, benefiting many low-income households and small firms with typically little access to traditional financial institutions. Lockdowns and social distancing are accelerating the use of digital financial services. The activities suggested under Objective (c)

“Increased Access to Finance for SMEs” would be based on using digital technologies which have proven to be in demand as traditional banking services decline. FST would continue working with LIGA.Money, an online platform which provides independent advice to consumers on making reasonable financial decisions when choosing retail loans. The “creditmeter” will save consumers’ time, money, and stress by comparing bank credit offers on-line, negating the need to physically visit bank branches, critical in the times of COVID-19. LIGA.Money is a partnership with the private media platform Liga.net and Ukraine’s largest commercial banks.

The objective is to bring competition, disclosure, and fairness to the consumer loan market.

c. Identification of statutory authority permitting other than full and open competition.

AIDAR 706.302-70(b)(3) and 40 U.S.C. §113; See the “Expedited Procedures Package for Responding to Outbreaks of Contagious Infectious Diseases” approved March 24, 2020. The D&F is attached to this file in Tab 1. The Expedited Procedures Package can only be used for an Infectious Disease Outbreak, as defined in paragraph 2 of the D&F (Tab 1). The COVID-19 outbreak was declared a Public Health Emergency of International Concern by the World Health Organization (WHO) on January 30, 2020 and therefore the class D&F applies to COVID-19 emergency response activities.

d. A discussion of the proposed contractor’s unique qualifications or the nature of the acquisition that requires use of the authority cited.

DAI is uniquely positioned to bring the greatest degree of effectiveness and expertise to the implementation of the activities for strengthening financial sector and to provide timely technical assistance and training essential to Ukraine’s economic recovery from the COVID-19 crisis for the following reasons:

i. DAI is the current implementer of the FST activity, and an increase in time and funding will allow DAI to seamlessly build upon the activities and efforts already supported through the FST activity.

ii. FST’s financial sector reform efforts are designed to support foreign direct investment activities, introduce risk management practices for businesses, create new and innovative financial instruments to finance SMEs, restrict financial fraud and market manipulation, and rebuild the confidence of the public in the banking sector. DAI has advanced this agenda significantly and now needs additional time to solidify its achievements, delayed by the disruption in its implementation activities by COVID-19.

iii. Providing DAI additional time and funding will allow USAID to maximize its investment in financial sector reform, especially critical now as Ukraine experiences negative economic impact from COVID-19 and is planning for economic recovery. FST is an ongoing, established project with deep knowledge of the Ukrainian financial sector and established relationships with government institutions, financial market regulators, international financial institutions (e.g.

the IMF, the World Bank, the EU, etc.) and the private sector. This will save time and money in start-up activities. This will also benefit USAID’s other activities (Energy Security, Competitive Economy, Agricultural Growth, Credit Unions) as cross-activity collaborations have been delayed due to COVID-19. For example, FST is supporting the Energy Security Project in launching a power exchange by providing legal/regulatory technical advice and identifying financial infrastructure requirements: due to the COVID-19 pandemic, the project has experienced a significant slowdown.

iv. DAI has significant capacity and expertise in-country to provide rapid assistance to the NBU, National Securities and Stock Market Commission, and Government of Ukraine in many technical areas including legal support, communication, and management. DAI’s FST team have been long-standing actors in the financial sector. For example, they played a central role in drafting the Law on Consumer Lending and the Law on Consumer Protection, as well as the draft law on the Financial Ombudsman. The team’s lawyers have worked on capital markets legislation and with the Securities Commission since 2010, and are the original drafters of the recently passed Regulated Markets and Derivatives Law. The DAI FST team is well-known and well-respected by the NBU and the parliamentary committees involved with the legislation.

Both regulators, the NBU and the NSSMC, would benefit from follow-up technical assistance provided by the current team composition through implementation of those transformative regulations. To bring in a new team to assist the NBU and the NSSMC would further delay implementation given that they would need to establish their new relationships. FST invested time and resources not only in development of the financial sector in Ukraine but also in building and nurturing effective and positive relationships with its stakeholders.

FST is engaged actively with the NBU across more departments than any other assistance provider - Reform Strategy, Communications, Payments, Legal, Methodology, Digital Finance, and Consumer Protection. The COP and DCOP are on a first-name basis with the Governor of the Bank and all five Deputy Governors. The Activity is a valued contributor to IFI coordination and has close working relations with the IMF, World Bank, and EU colleagues.

v. The FST activity has performed well despite a difficult reform environment. DAI has consistently received outstanding evaluations, reflected in the Contractor Performance Assessment Reports in each of the last three years. In addition, a third party mid-term evaluation yielded a positive assessment, especially highlighting the activity’s strong reputation and relationships with its counterparts, other international technical assistance providers, and private sector and NGO partners.

These reasons underscore why DAI is uniquely qualified and positioned to provide timely technical assistance and training essential to Ukraine’s economic recovery from the COVID-19 crisis.

e. A description of efforts made to ensure that offers are solicited from as many potential sources as is practicable.

Publication of a notice is not required per the determination at AIDAR §705.202(b) as it was not practical under the circumstances. Due to the urgent nature of the needed assistance to respond to the immediate economic disruption from COVID-19, it was not practical to solicit offers from potential sources.

f. A determination by the Contracting Officer that the anticipated cost to the Government will be fair and reasonable.

The estimated budget is based on historical costs for similar services. The Contracting Officer has determined that awarding this TEC increase and POP extension to DAI will be at a substantially reduced cost and duration in comparison to competitively procuring a new contract.

As the current Contractor for FST, DAI has established processes, systems, and mechanisms to effectively implement these interventions. DAI has already developed the networks, confidence among stakeholders, and trust among beneficiaries to successfully complete the proposed work within an 8-month period in a cost-effective manner. A new Contractor would require significant additional time and resources to establish itself in this diverse and multi-stakeholder environment, and put operational systems and processes in place, thereby causing unnecessary delay and significantly higher costs.

By signing below, the Contracting Officer determines that the anticipated costs will be fair and reasonable, and in the best interest of the USG. Prior to signing the award modification, detailed proposed costs for the expansion will be reviewed by the Contracting Officer. In addition, upon approval of this justification, the Contracting Officer will review the Contractor’s detailed proposed costs for the expansion and conduct a thorough cost analysis of the proposal, with the same level of rigor as used with a competitive procurement, to ensure that the actual cost to the U.S. Government is fair and reasonable.

g. A description of the market research conducted (see FAR Part 10) and the results or a statement of the reason(s) market research was not conducted.

No new market research was conducted. DAI, the contractor implementing the FST activity, was competitively selected through fair opportunity in 2016. Since the purpose of the proposed extension is to mitigate the effects of COVID-19 on the economy of Ukraine, it is not feasible to select another contractor who would be able to undertake these activities promptly given DAI’s familiarity with the country context and established relationships with key GOU and private sector counterparts. As noted above, there have been substantial monetary and time investments associated with developing the necessary relationships and processes to effectively build the capacity of stakeholders, and it would be unacceptably difficult and time-consuming for a new contractor to obtain the required skills and capabilities to provide this critical assistance for the 8-month extension.

h. A listing of the sources, if any, that expressed, in writing, an interest in the acquisition.

Publication of a notice is not required per the determination at AIDAR §705.202(b) and no sources submitted a written expression of interest in this acquisition.

i. A statement of the actions, if any, USAID may take to remove or overcome any barriers to competition before any subsequent acquisition of the supplies or services required.

The original award was procured using fair opportunity procedures under the EEM-E-00-05- 00002-00 BPA. The proposed cost-extension will provide technical assistance to cope with the immediate economic impacts of the COVID-19 outbreak. FST is committed to providing a fast and flexible response; and is well-positioned to promptly detect and effectively respond to needs in the financial sector drawing on their expertise and country-level knowledge. USAID/Ukraine is currently designing a new activity to continue financial sector reforms and meet potential longer-term COVID-19 economic consequences that will be fully competed.

RECOMMENDATION

It is recommended that you approve this justification for use of other than full and open competition pursuant to the “Expedited Procedures Package for Responding to Outbreaks of Contagious Infectious Diseases”, approved on March 24, 2020. Your approval of this J&A constitutes the justification for other than full and open competition as required by Tab 1 (D&F for the Authorization of Less than Full and Open Competitive Procedures in the Modification or Award of Contracts) of the EPP.

Encl. Tab 1- EPP D&F for the Authorization of Less than Full and Open Competitive Procedures in the Modification or Award of Contracts.

Tab 1

2020-07-31_120442.pdf