Madagascar - Second Private Sector Development Project : proposed amendment to the Development Credit Agreement

Madagascar SecondPrivateSector DevelopmentProject - (Credit3567-MAG) Amendmentof the DevelopmentCreditAgreement 1. BACKGROUND 1. The objective of the project i s to assist the Borrower to improve access, reliability and affordability of key utilities, through completion of the divestiture program of key state-owned enterprises, and capacity buildinginitiatives to strengthen the capacity of autonomous regulators and privatization agencies, and facilitate entry of new operators in the deregulated sectors, and increase the competitiveness of Malagasy companies (as approved by the Board on November 14,2002). 2. The three components of the project are being implemented in a satisfactory way. Implementation of the critical aspects of the transactions and the private sector development activities i s proceeding in a timely and satisfactory manner. The disbursement pace i s picking up significantly these last five months with a total disbursed amount at US$9.4m as at early January 2005, which accounts for 39.5% of the total credit. 3. Upon a re-evaluation of the Project costs for the existing components, the Project has been found to have savings in the amount of US$ 3,000,000, and the Government has requested the Association to consider the utilization of these savings for the financing of two additional components as further described below. In addition, the Government has requested the Association to consider the increase in the thresholds for the procurement of goods, works and services. 2. PROPOSEDAMENDMENTS 4. The Government has proposed that the Project Savings be utilized to finance the following two additional components: (i) Madagascar's initial contribution to, and participation inthe Insurance Facility managed by African Trade InsuranceAgency (ATI), and (ii) Technical Assistance Facility for SMEs, in cooperation with IFC. The Government has requested the increase inthe thresholds for the procurement of goods, works and services 5. According to OP13.25, the Bank may exceptionally agree to apply some of the project savings to finance additional project activities not included in the original Project description provided that: (i) implementation i s satisfactory and includes substantial compliance with the Agreements of the project, (ii) the additional activities have a high priority and are consistent with the original Project Objectives, (iii) the activities have been fully appraised by Bank staff and are economically justified, and (iv) financing the activities does not violate the country financing parameters in cost sharing. 6. As has been indicated above, the Project currently has a satisfactory rating. Inaddition, as will be further described below in the detailed explanation on the proposed two new components, the additional activities have a high priority and are fully consistent with the Project's original objectives as they will further facilitate the entry of new participants in the  2 economically justified, and the country's financing parameters in cost-sharing have not been violated. Consequently, the requirements o f OP13.25 on the use o f Project savings have been met. A. The InsuranceFacility Component 7. The use ofproject savings would finance Madagascar's membership subscriptionto AT1 (US$lOO,OOO) and capital for Madagascar's insurance facility (US$900,000), which AT1 will manage. 8. The facility will cover productive activity involving cross-border trade and foreign investments, against political risks. Both imports into and exports fiom Madagascar have access to cover. The proposed facility is therefore consistent with the overall objective of the Project Objectives. In addition, the facility has been fully appraised by Bank staff as the component replicates a concept already usedunder the Regional Trade Facilitation Project (RTFP), currently under disbursement. 9. The design of the facility is flexible so that a wide variety o f transactions and financing structures can be covered. The coveredrisks include: Inability to convert andor transfer currency Impositiono f Exchange controls Cancellation o f Licenses and Restrictions on Import and Export Impositionor Increase o f Import or Export Taxes Expropriation Seizure o f Goods, Prevention o f Sale, or Preventiono f Export Interference with the Carriage o f Goods War or Civil Disturbance Embargo 10. Diversion o f voyage as a consequence o f any o f these risks as well as the same risks occurring while goods are intransit ina participating country are also covered. 11. The operating rules o f the facilities are set out in a detailed Operations Manual that was agreed at negotiations of the Regional Trade Facilitation Project between IDA, participating countries and ATI. A number o f rules definedinthe Operations Manual are designed to enhance the credibility o f the facility and ensure transparent decision making and policy issuance. These rules are reinforced inthe revised Development Credit Agreement between Madagascar and IDA and the Project Agreement between AT1 and IDA, and in various other Project Documents including an Insurance Facility Agreement among the Insurers participating in the Facility and ATI, and a Security Trust Agreement among the Insurers, AT1and a Trustee to be appointed to act as such with respect to the proceeds o f the Credit deposited in the Security Trust Account opened for purposes o f the Insurance Facility. One important rule i s the "first come, first served" rule which states that applications for policies must be handled in the order they are received to avoid preferential treatment o f certain applicants over others. Another key requirement is the "no objection" rule. An insurance policy cannot be issued unless IDA provides its no objection after reviewing the applications and supporting documentation. This rule ensures that AT1adopt a consistent and objective standard in underwriting, that only eligible transactions are covered  3 and that all the procedures set out in the Operations Manual, including the environmental screening o f projects, have been followed. 12. AT1will implement Madagascar's insurance facility in cooperation with a syndicate of private risk insurers and will be assisted by a facility broker. Agreements between ATI, the syndicate and the facility broker define how the facility works. (i)Leveraged Structure 13. Under a leveraged structure AT1 works in cooperation with private insurers to issue policies. The insurance policies are issued inthe name o f the private insurer(s), which can be in the form o f a syndicate. AT1 can participate on a first loss or pro rata basis. Madagascar will place the IDA funds allocated to it for the insurance facility in a separate trust account and the funds can be withdrawn from this account only to pay valid claims. Funds allocated to the insurance facility, as well as the amount o f leverage private insurers agree to for each transaction, will determine the maximum amount o f insurance available to cover transactions (both import and export transactions). For example, with a US$1 million IDA credit, and an average leverage ratio of 3 to 1, a maximum o f US$4 million in insurance policies could be issuedat any one time. Leverageratios may vary among transactions. 14. The funds in trust earn interest, which can be used to defray the cost o f operating the facility and to buildupreserves. 15. The risk sharing mechanismbetween ATVthe countries and the private insurers depends on whether AT1 intervenes on a first loss or pro rata basis. If AT1participates on a first loss basis, claims would be paid out o f the trust account up to a maximum o f ATI's share o f the risk at which point the private insurer(s) would be liable for additional claims. Ifthe policy i s issued on a pro rata basis, the amount o f the claim multiplied by ATI's share o f the policy would be paid out o f the trust account. It should be stressed that it i s not expected that claims would reach a level where Madagascar's funds would be completely used to pay claims unless a disaster scenario (such as a full-fledged civil war) occurred. Inaddition, for claims occurring as a result o f government actions, the Bank's Credit Agreement with Madagascar requires the government to replenish the trust account. This requirement strengthens the disincentive for the government to cause claims. (ii)Non-leveraged Structure 16. The non-leveraged structure can be used for political risk cover in countries where the private insurance market i s no longer willing to take riskand leverage the IDA funds. 17. Inthis scenario, AT1would issue a policy in its ownname, which would be fully cash- backed by the funds inthe trust account. 18. Similarly to a leveraged structure, the government would have to replenish the trust account incase o f a claim payment resulting from its own actions. 19. The component is specifically designed to create strong disincentives for the Government to cause claims as well as to stop further losses incase o f claims. IDA has the right to suspend disbursements for new liabilities under issued policies and for the issuance o f new policies if: (i)the government i s in arrears on a debt service payment to IDA; (ii) or civil war disturbance occurs in Madagascar; (iii) payment o f a claim resulting from a risk occurring  4 Madagascar is made usingcredit funds; and (iv) failure by Madagascar to reimburseAT1for the amount o f any claim caused by a risk other than war and civil disturbance. Suspensions of disbursement for reasons (i), and (iv) above automatically leads to loss of the right to use (iii) these funds after the project life. (b) Implementation Arrangements 20. As indicated above, this component will be implemented by ATI. AT1 is an intemational institution governed by the Agreement Establishing the African Trade Insurance Agency which was adopted at the COMESA Summit o f Heads o f State on May 18, 2000. Madagascar i s in the process o f fully joining ATI. AT1 has full juridical personality and i s deemed a legally constituted body corporate. Even though ATI's constituent instrument i s an Agreement between sovereign states, its character i s modeled as a private corporation incorporated or organizedunder the municipal laws o f a state. 21. African states or any public entity nominated or designated by any such State, international development financial institutions, regional economic organizations and private corporations (such as privately owned insurance corporations) may become members o f AT1 upon signature andratification, accession or acceptance o f the Agreement EstablishingATI. 22. AT1 is autonomous and enjoys administrative and financial independence. The Agreement Establishing AT1provides that AT1will be independent from political control from its members. ATI's operations must be insulated from political considerations and based on commercial considerations. 23. Initially supported by a US$5 million IDA credit, AT1 has been fully operational for over two years and i s currently managing 7 insurance facilities for seven countries which received IDA credits for this purpose under the Regional Trade Facilitation Project, representing a total o f $105 million. AT1 meets IDA'Srequirements in terms o f procurement, financial management and environmental safeguards. 24. AT1 and IDA will enter into a Project Agreement , as one o f the conditions for the disbursement o f funds, reflected below. The Project Agreement will inter alia require AT1 to carry out its functions with due diligence and efficiency using appropriate administrative and financial practices. AT1i s also required to maintain accounts o f its financial dealings, have these accounts audited in accordance with appropriate auditing principles, furnish regular reports to IDA of its operations, and participate inreviews and evaluations with IDA of the operations of the project. 25. IDA has the right to suspend disbursements for new liabilities under issued policies and for the issuance o f new policies in all participating countries if (i) there i s a failure by AT1to perform any o f its obligations under the Project Agreement; (ii) AT1fails to perform any of its obligations under the insurance arrangements with the cooperating insurers; (iii) governments the or any other authority havingjurisdiction shall have taken action for the dissolution o f ATI, or the suspension of its operations so far as it relates to the insurance facility; (iv) the provisions o f the multilateral agreement establishing AT1are amended without the consent o f IDA; or (v) any material or substantial provision o f the Operations Manual shall have been changed or there has been a change inthe form of policies o f insurance without the approval o f IDA.  5 26. AT1shall also enter into aParticipationAgreement with the Republic ofMadagascar, also as a disbursement condition, whereby the Republic o f Madagascar shall mandate AT1to act on its behalfwith respect to matters pertaining to the Insurance Facility. (c) Disbursement of Funds 27. Funds for this component will not use the Special Account, but will be disbursed to a Security Trust Account to be opened by AT1on behalfo f the Republic o f Madagascar. AT1shall also open a corresponding Income Account for the deposit o f the interest earned on the funds deposited into the Security Trust Account. (d) Procurement 28. This component has no procurement implications as the funds are used essentially as financial backup for the payment o f insurance claims. (e) Safeguard Policies 29. This component adds nonew safeguardpolicy implicationto the project. fl DisbursementConditions 30. The following actions will be taken prior to the disbursement o f funds under this component: (i) Borrower has become a member o f ATI; (ii) Borrower has entered into the the the Participation Agreement with ATI, in a form and substance acceptable to the Association, and such agreement has been duly executed and delivered on behalf o f the Borrower and ATI, and all conditions precedent to its effectiveness, if any have been fulfilled or waived; (iii) the Insurance Facility Agreement and Security Trust Agreement(s) shall have been entered into in a form and substance that i s acceptable to the Association; (iv) AT1has opened one Security Trust Account and one Income Account on behalf of the Borrower and provided one copy of the account- related informationto the Association; (v) the Project Agreement has been entered into between the Association and ATI; (vi) legal opinions satisfactory to the Association have been submitted establishing that: (A) the Agreement Establishing AT1has been duly ratifiedby the Borrower by all necessary action, and i s legally binding upon the Borrower in accordance with its terms; (B) the execution and delivery o fthe ParticipationAgreement has beenduly authorized or ratifiedby the Borrower and AT1by all necessary action and is legally bindingupon the Borrower and AT1 in accordance with its terms; and the execution and delivery of the Insurance Facility Agreements have been duly authorized or ratified by ATI, the Insurer and the Security Trust Account Trustee, respectively, and are legally valid and binding upon ATI, the Insurer and the Security Trust Account Trustee, respectively, inaccordance withtheir respective terms; and (8) Performance Monitoring Indicators 3 1. Issuance o f Insurance Contracts in an aggregate principal amount of one millionDollars ($1,000,000) or equivalent by the third anniversary o f the effective date o f the amendment o f the Development Credit Agreement and issuance o f Insurance Contracts in an aggregate principal amount of ten million Dollars ($10,000,000) or equivalent by the tenth anniversary o f the effective date o f this amendment letter, all inrespect o f transactions pertaining to the Borrower.  6 32. On average, in any twelve-month period commencing on the effective date o f the amendment o f the Development Credit Agreement, fewer than one Claimper year resulting from Covered Risks other than War or Civil Disturbance, Civil Commotion or Embargo has been made, which Claim, inthe opinion o f the Association, would have arisen as a result o f the action or omission o f the Government of Tanzania, including any department, agency or political or administrative subdivision thereof. (h) Costs, BeneJits and Risks Madagascar's initial contribution and insurance cauacitv to AT1 33. Potential costs to the government will materialize if claims are paid from Madagascar's Insurance Facility. The IDA funds would be used to pay the claim and, depending on the risk causing the claim, the government would have to replenish the Insurance Facility. The replenishment clause creates an incentive for the government to avoid causing claims through its own actions (e.g. by imposing a retroactive increase induties). 34. The benefits o f this sub-component are equated to the business that it will generate through the provision o f insurance. The Insurance Facility will be $900,000 as stated above. The private market is expected to leverage this amount 3 to 4 times. This translates into up to $3.6 million o f insurance coverage at any one time. The volume o f business generated will also dependon the nature o f the transactions covered. For example, short-term policies (less than one year) revolve and generate a multiple o f the value o f the outstanding insurance policy in a one year period. 35. Based on the above, it i s expected that Part D o f the project will generate about $4 millioninbusinessby the project's closing date. 36. Other benefits will include better financing terms for trade transactions; stronger regional integration and increased intra-regional trade; and access to risk management tools for Malagasy exporters wanting to expandtheir cross-border sales. Risk RiskMitigationMeasure Highlevel ofclaims Bank's ongoing policy dialogue with Government; Government's obligation to replenish facility for claims due to political risk; detailed Operations Manual for ATI's due diligence o f credit risk for transactions involving public obligors. Low demandlow awareness o f AT1 Effective marketing plan; continuous dialogue with the and its products market to adapt insurance products to changing demand; expansion o f AT1member countries. Lack o f awarenesshnterest by Follow-up with relevant government representatives, government representatives o f AT1 especially when personnel changes occur, and at least member countries and World Bank once a year; Presentations to Country Office staff at Country Office staff least once a year; strong local liaison office. B. Small andMediumEnterprises RiskCapitalFundComponent  7 37. The use of project savings would finance Madagascar's contribution o f US$2.0 million to a technical assistance facility. The Technical Assistance Facility will be used to complement investmentsmade by the SME Risk Capital Fund and i s expected to strengthen the recipient's management and operational capacity. The fund manager o f the SME Risk Capital Fund will work with the recipient to identify the recipient's TA needs and to structure the appropriate TA project. The fund manager will be responsible for overseeing the TA project as part o f the SME Risk Capital Fund's investmentinthe recipient. The recipient will be requiredto pay back the amount forwarded under the TA Facility, but this repayment will be subordinated to repayment o f the investment made by the SME Risk Capital Fund. The repayment mechanism i s expected to ensure that recipients use the funding from the TA Facility with discipline and extract the maximum commercial benefit fkom the projects funded by the TA Facility. It i s expected that projects financed by the TA Facility will be for amounts o f up to 20% o f each investment. 38. This initiative is ajoint IDA-IFC initiative to demonstrate the potential of blendedrisk capital to address SME financing conshaints. Its objective i s to mobilize investments and financing for SMEs in Madagascar, while at the same time providing technical assistance. The proposed sub-component is therefore consistent with the overall objective o f the Project which i s to increase the competitivenesso f Madagascar. This sub-component has been fully appraised by Bank staff. (a) Context 39. Indeveloped countries most SMEs obtain formal financing from banks usingassets and real property as collateral against bank loans, and early-stage SMEs may also finance start-up costs with credit card debt or soft loans from family and friends. However, few o f these sources o f debt are available to most SMEs in developing countries, where SME investment relies predominantly on equity fkom the savings o f the owner and hisher family and reinvested profits. While SMEs are widely regarded as the backbone o f any economy and a key driver o f employment growth and economic activity, providers o f finance to SMEs face some important challenges inAfrican countries: Lack of collateral. Evenwhere bank lending i s available inprinciple, most SMEs are unable to provide sufficient and satisfactory collateral to meet commercial bank requirements (often 150% or more of loan amounts), and the weak enforceability o f property rights further discourages banks even from collateralized lending other than to the largest concerns. High cost of appraisal. Unable to obtain sufficient security for collateralized lending, lenders must rely on the strength of a company's projected cashflow to service debt and this lending requires more due diligence which i s inreturn expensive. Limited Growth Potential. The majority o f SMEs are lifestyle business providing a steady income to the owners, who have little interest inrapid growth or selling the company to a third- party. Consequently, only the large SMEs attract interest from private equity funds. Limited exit potential. Inmost cases the entrepreneur is unlikely to agree giving up control o f the company that supports his or her lifestyle. And most SMEs are also too small to qualify for public offerings, which, especially inAfrica, are reservedfor only the largest enterprises. @) SMERiskCapitalFundStructure  8 SME Risk Capital Fund BPI Madagascar Fund Management GOM PSD I1 IDA TAFund 4 $2.0m Project Other BPI investors $10m + Madagascar Invest- ment Fund tnterest, royalties, dividen 40. At a very early stage Madagascar was part ofthe pool o f countries that was identified for the establishment o f quasi-equity mechanisms (the other two are Ghana and Kenya). The component will take advantage o f a joint IFC-IDA initiative to demonstrate the potential o f the blended risk capital model pioneered by an investment firm from South Africa (Business Partners) to address SME financing constraints in a country such as Madagascar, and thereby to introduce the Malagasy environment as one that can host lucrative investment. This will be a demand-led program.. 41. IFC along with other private investors will invest $10 million into the fund. Transfer o f technology and management services from Business Partners International will be covered from an IFC grant and eventually from returns to the investment fund. By demonstrating success, this pilot i s expected to pave the way for additional SME equity investment inthe future. (c) Rationale for IDA Support 42. The use o f IDA funds for TA is justified by the ability to leverage private investment funds that would otherwise not be available to SMEs, in a methodology specifically designed to support significant numbers o f SMEs. The World Bank Group (IFC, SME Department, and Africa Region) have been working collaboratively over the last two years to seek out models and best practices in this area. After reviewing a number o f players, including the experience o f institutions such as the Small Enterprise Assistance Fundand the Institute for SME Finance, only one operating model has been identified with the desired SME focus, methodology, and proven track record inreaching large numbers.  9 43. The South Afi-ican financial intermediary, Business Partners Limited (BPL), has over 20 years developed, refined, and successfully applied an appropriately balanced approach to equity, debt and quasi-equity financing targeted to ordinary SMEs.. The Bank has received a letter dated October 26,2004 from the Government expressing their interest and consent of selecting BPI as the FundManager. 44. The rationale for working with Business Partners is its unique approach to financing and supporting SMEs. IFC has not identified any other fund manager or financier that has had similar success investing over many years in SMEs and that i s willing to experiment with replicating the model in other equally or more difficult environments. Applying this model in a new country will require a technical assistance fund to substitute for the mentoring role that is incorporated into Business Partners. Because a new fund will not have adequate in-house ability to provide the mentoring services, a TA fund i s necessarily so that clients are able to finance external services that are needed to address management and production issues identified by the fundmanager duringthe appraisal process. (d) Implementationofthe SME RiskCapitalFundincooperationwith the IFC 45. There are four main benefits to this Component: (i) will not directly finance but will be It a critical factor inmobilizing US$lO.O million for investmentin SMEs inMadagascar. The fund manager will be permittedto recycle investments, which, if there i s capital available to recycle and there are sufficient investment opportunities, could substantially increase the amount invested in SMEs. (ii) The project will bring to Madagascar what IFC has identified as global best practice in financing and supporting SMEs. Since 1981, Business Partners has made over 27,000 investments in SMEs in South Africa. (iii) Business Partners range o f financing products have been tailored to fit the specific needs o f SMEs. The products are quasi-equity in risk profile, partially secured and structured based on cashflow projections. (iv) Business Partners will use a commercial approach to technical assistance. Using a third-party service provider, Business Partners will complement its investments with technical assistance programs. Recipients will be required to pay back the cost o f the technical assistance as a non-interest bearing loan, enabling the Fundto have an impact beyond the end o f the project. This aspect i s important in ensuring recipients understand the cost-benefit o f the technical assistance and in enforcing commercial discipline when usingtechnical assistance. (e) PerformanceMonitoringIndicators (i) The main performance measure for the Fund Manager will be the number of investmentsin SMEs, with minimumthresholds as follows: Year 1 15 Year 2 18 Year 3 18 Year 4 24 Year 5 27 Total 102 (ii) To measure the performance o f the TA Facility we take the default rate in paying back the TA money. The default rate should not be more than 20% within the observation periodof two years which is the remaining period for the PSDP2 credit. Recognizing that return o f TA monies i s subordinated to return ,  10 o f invested capital, a default rate of no more than 20% on TA monies would be acceptable. (f) Synergies betweenthe SME RiskCapitalFundandthe IFC & SME Solution Center 46. Building upon the successes and/or lessons learned from previous or existing IFC facilities or initiatives in Africa or in other parts o f the world such as Africa Enterprise Fund (AEF), Africa Project Development Facility (APDF), Private Enterprise Program (PEP) and African Management Services Company (AMSCO),IFC intends to promote a holistic approach to hlfilling the needs o f SMEs in Afkica by establishing a physical location referred to as an SME Solutions Center (SSC) that offers an integrated package of fit-for-market solutions to drive a sustainable development o f Afkican SMEs. 47. The SSC will have facilities and technology to provide SMEs with access to reliable market information and capacity building services, and to help improve the business environment for SMEs. The Business Partners Intemational (BPI) SME Risk Capital Fund, though a separate legal entity, will be situated in the offices o f the SSC. This will help attract more business, and will also make it easy for BPI'S clients to have access to information and to the business development services offered by the SSC. Furthermore, sharing offices and certain technical staff will reduce operational costs for bothparties. (g) Avoiding Conflictof Interestwithinthe WorldBankGroup 48. This IFC-IDA collaboration inthe preparation of this Project will enable us to develop a significantly better overall program that accurately reflects the requirements and expectations o f private parties in the Micro, Small and Medium Enterprise sector while also preserving the interests o f the Government. However, we recognize that it also raises the risk o f potential conflicts o f interest, or the perception thereof, between IDA and IFC activities in Madagascar. Accordingly, IDA and IFC have established a framework for identifying and managing conflicts o f interest in or the perception thereof between IDA and IFC activities in Madagascar within the context o f this Project. This framework will involve disclosure to concerned parties in communications and specific measures to manage actual, potential or perceived conflicts o f interest arising from the roles o f IDA and IFC. Specific measures that will be implemented include: Separate teams (consisting of IFC and IDA staff as appropriate) will be established, with no overlapping team leaders or, members, to handle the IDA preparatiodsupervision activities on the one hand, and IFC investmentactivities, on the other hand. These teams shall not share any team members. Accordingly, no staff who have beenpart o f the IDA preparation and supervision team would be assigned to work on IFC financing o f actual or potential beneficiaries o f the IDA Project. 0 No confidential information will be shared among the teams. Accordingly, the IDA preparation and supervision team would not provide IFC staff working on financing potential Project beneficiaries any confidential or privileged information obtained by the preparation and supervision team in the course o f the Project; and IFC staff which may become involved in providing financing for potential Project beneficiaries would not provide the preparation and supervision team any confidential or privilegedinformation obtained as a result o f their work with an IFC client.  11 0 The advice of the preparation and supervision team has been and will continue to be separate and independent from any IFC role or investment in a potential Project beneficiary. The preparation and supervision team will continue to provide stand-alone, independent advice based on international best practice and experience, and without regard to the possibility that IFC might eventually become a lender to or investor in a Project beneficiary. 0 The selection of Project beneficiaries will be based on best practice and transparent eligibility criteria which have been developed by the preparation team and agreed with the Government of Madagascar. (h) Risks Risks RiskMitigationMeasures Lack o f investable SMEs Country and market studies prepared for the project identify only a small number o f investable SMEs. However, it i s expected that programs such as the road program and the tourism development initiative will provide additional opportunities for Business Partners. Moreover, as Business Partners becomes more established, businesses currently operating on an informal basis may be encouraged to formalize and seek financing from Business Partners. Low demand for Business Business Partners products are priced commercially and Partner products reflect the risk profile o f the investment. SMEs used to bank products may not fully understand the nature o f a Business Partners product. Nevertheless, once Business Partners i s fully established the business community should be aware o f the flexibility and the benefits o f the product range. Poor transfer o f Business To date Business Partners has operated only in South Partners model Africa where extensive business infrastructure already exists. Some o f this infrastructure does not exist in Madagascar, which may hinder the transfer of the Business Partners model. In addition, different business practices may make it difficult to establish the model outside South Africa. Inorder to minimize the transfer risk, Business Partners i s establishing a separate intemational division to oversee the development and management o f intemational operations. Also, the Madagascar management team will be based in Antananarivo and will be comprised exclusively o f Malagasy nationals with extensive commercial experience in Madagascar. The management team will be trained fully in Business Partners operating systems and products.  12 Government's lack o f The Government might in the end not adhere to this support program for various reasons: (a) Other priorities might arise consequently the Government might opt to reallocate the funds currently benchmarked for the proposed component to address other issues and activities; (b) There i s a possibility that the Government o f Madagascar might show a lack o f interest in providing the necessary incentives to develop the range o f financial instruments suited for SMEs as part o f its sectoral development strategy. All stakeholders will be reminded o f potential rewards the program offers so that the momentum i s kept. In addition, Government officials will be frequently briefed on the progress o f theprogram. C. Procurement 49. The newthresholds were requested andrecommendedby the Procurement team following the Project PerformanceReview. 1. Paragraph4(i) o f Schedule 1i s amended by (i) and works under contracts not goods exceedingrespectively $150,000 and $200,000 equivalent. 1. Part B.2 (a) of Section Io f Schedule 3 i s amended to read as follows: "(a) Growing; o f contracts To the extent practicable, contracts for goods and works shall be grouped in bid packages estimated to cost, respectively, $150,000 and $200,000 equivalent or more each." 2. Part C.l o f the Section Io f Schedule 3 i s amended to read as follows: "1. National Competitive Bidding "Office furniture and supplies estimated to cost less than $150,000 equivalent per contract and works estimated to cost less than $200,000 equivalent per contract, may be procured under contracts awarded in accordance with the provisions o f paragraphs 3.3 and 3.4 o f the Guidelines; provided, however, that: (i) bidder shall be given adequate any response time (four weeks) for preparation and submission o f bids; (ii) bid evaluation and bidder qualification criteria shall clearly be specified in bidding documents and not applied arbitrarily; (iii) eligible firms shall not be precluded from participation; (iv) no preference margin shall be granted to domestic contractors and suppliers; (v) the award shall be made to the lowest evaluated bidder in accordance with pre-determined and transparent methods; and (vi) bid evaluation reports shall clearly state the reasons for rejection o f any non-responsive bid."  13 3 . Part C.2 o f Section Io f Schedule 3 i s amended to read as follows: "2. Goods estimated to cost less than $30,000 equivalent per contract may be procured under contracts awarded on the basis o f national shopping procedures in accordance with the provisions ofparagraphs 3.5 and 3.6 o fthe Guidelines.'' 4. Part D.2o f Section Io f Schedule 3 i s amended to read as follows: "2. Prior Review With respect to each contract for goods and works estimated to cost the equivalent o f $150,000 and $200,000 or more, respectively, the procedures set forth in paragraphs 2 and 3 o f Appendix 1to the Guidelines shall apply." 5. Part D.2 o f Section I1o f Schedule 3 i s amended to read as follows: "2. Prior Review (a) With respect to each contract for the employment of consulting firms estimated to cost the equivalent o f $200,000 or more, the procedures set forth inparagraphs 1, 2 (other than the third subparagraph o f paragraph 2(a)) and 5 of Appendix 1 to the Consultant Guidelines shall apply. (b) With respect to each contract for the employment o f consulting firms estimated to cost the equivalent o f $100,000 or more, but less than the equivalent o f $200,000, the procedures set forth in paragraphs 1, 2 (other than the second subparagraph o f paragraph 2(a)) and 5 o f Appendix 1to the Consultant Guidelines shall apply." " 3 . Procurement o f Small Works Works estimated to cost less than $30,000 equivalent per contract, may be procured under lump-sum, fixed-price contracts awarded on the basis o f quotations obtained from three (3) qualified domestic contractors in response to a written invitation. The invitation shall include a detailed description of the works, including basic specifications, the required completion date, a basic form o f agreement acceptable to the Association, and relevant drawings, where applicable. The award shall be made to the contractor who offers the lowest price quotation for the required work, and who has the experience and resources to complete the contract successfully." D. Proposed reallocation Therevised Schedule 1is set forth below.  Amount o f the Credit Allocated % o f (Expressed in Expenditures Category SDR Eeuivalent) to be Financed (1) Works 2,496,000 loo%** until December 31, 2003; 100%of foreign expenditures and 80% o f local expenditures thereafter (2) Goods 750,000 100%"" untilDecember 31, 2003; 100% of foreign expenditures and 80% o f local expenditures thereafter Consultants' services 9,624,000 loo%** untilDecember 31,2003; and audits 100% o f foreign expenditures and 83% o f local expenditures thereafter Training and 1,000,000 100% study tours Retraining Fund 650,000 100% under Part B.4 o f the Project Operating costs 2,250,000 loo%** untilDecember 31,2003; 90% thereafter Insurance Facility Funding for Part D of the Project (a) Initial Capital Stock Contribution 71,500 100% (b) InsuranceFacility 643,500 100% TA Loans under ' 1,430,000 100% o f amounts disbursed Part E o f the Project Unallocated 85,000 TOTAL 19,000,000 ** Note: These percentages have been calculated on the understanding that, in accordance with the applicable laws of the Borrower, the corresponding goods, works and services will be exempted from taxes and customs duties levied by the Borrower. It is understood that, if any change is made to such laws, or in their scope or application, which has the effect of permitting or requiring taxes or customs duties to be levied on such goods, works or services, these percentages shall be adjusted accordingly, in accordance with the provisions of Section 5.08 of the General Conditions.