Mozambique - Enterprise Development

 ICRR 12596 Report Number : ICRR12596 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 04/27/2007 PROJ ID : P049874 Appraisal Actual Project Name : Enterprise US$M ): Project Costs (US$M): 47.6 39.75 Development Country : Mozambique Loan/ US$M ): Loan /Credit (US$M): 26.0 25.01 Sector Board : PSD Cofinancing (US$M ): US$M): 14.3 14.74 Sector (s): Micro- and SME finance (43%) General industry and trade sector (29%) Central government administration (28%) Theme (s): Export development and competitiveness (40% - P) Other financial and private sector development (40% - P) Small and medium enterprise support (20% - S) L/C Number : C3317 Board Approval Date : 01/27/2000 Partners involved : DFID, EU, Norad Closing Date : 06/30/2005 06/30/2006 Evaluator : Panel Reviewer : Group Manager : Group : Ilka Funke Gita Gopal Ali Khadr IEGCR 2. Project Objectives and Components: a. Objectives: The project's overall objective was to help broaden the base of private participation in Mozambique's economic growth. This would be achieved through : (i) boosting the competitiveness of Mozambican private firms by strengthening their access to, and use of, support services external to the firm; (ii) providing a more efficient market for training and capacity building services and establishing forward and backward linkages to existing and new local and foreign buyer; (iii) enhancing access to term finance by both first -time and other borrowers; and (iv) helping to strengthen the capabilities of the Ministry of Industry, Trade and Tourism, the Investment Promotion Center, and business organizations with potential to improve the business environment . b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components (or Key Conditions in the case of DPLs, as appropriate): 1. Support for building the technical capabilities of majority Mozambican -owned firms (expected costs US$13.6 million, actual US$18.74 million) administered through: (i) Firm Competitive Office (FCO) to boost the competitiveness of firms by promoting their access to consultancy services on a 50% matching grant basis. (ii) Training and Advisory Office (TAO) to support the development of an active business and technical training market. Matching grants of 50% would be made available to qualified trainers to provide training services to local firms. (iii) Linkage Program Office (LPO) to facilitate supply linkages between Mozambican supplier firms and joint-venture or foreign-owned firms in Mozambique. The three offices would be jointly managed by a single contractor to facilitate information sharing . 2. Improve access to term financing for firms in all sectors (excluding trading, finance, and real estate ) through a line of credit (estimated costs US$12.7 million, actual US$5.45 million) for: (i) a special facility designed to provide very small, first -time bank borrowers with loans amounting to a maximum of US$15,000 (ii) a traditional facility to finance loans up to US$ 300,000 for small and medium-scale borrowers. 3. Institutional Capacity Building assistance to the Investment Promotion Center (CPI), the Ministry of Industry, Commerce and Tourism (MICTUR), and the Commission of Economic Associations (CTA) to enhance their capabilities to deliver business support services and to support the Government agencies' capacities to provide business facilitation and promotion services, including identification and elimination of bureaucratic rigidities (estimated costs US$17.4 million, actual costs US$12.83 million). d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: The project closed with a delay of one year . Its actual costs were US$39.75 million, or 83.5% of the estimated costs due to lower than expected demand under the Line of Credit and lower expenses for Capacity Building measures, which were in part compensated by higher disbursements under Component 1. DFID, NORAD, and the EU provided co-financing in the range of US$8.69 million. The project was not officially restructured, but the line of credit component was changed during implementation to allow on-lending to participating financial institutions in foreign currency, to increase the maximum value of the sub-loans under the Special Facility from US$ 15,000 to US$40,000, and to allow development finance institutions to participate in the scheme. The Capacity Building component was slightly changed to include additional beneficiaries . 3. Relevance of Objectives & Design: The project's objectives were well aligned with the 1998 CAS's central pillar of promoting sustainable and broadly based private sector growth, which included developing local enterprises as well as partnerships with foreign capital . The objective remained relevant under the later CASs, which placed a strong focus on improving the investment climate. The design of the project had some important weaknesses : (1) The analysis with respect to the supply of and demand for SME credit was flawed . In 1998, the ICR of the predecessor loan, the Small and Medium Enterprise Development Project, highlighted the devastating outcome of its Line of Credit, under which 73% of the sub-loans defaulted. A similar experience was reported for the Industrial Enterprise Project, which also closed in FY 99. The PAD acknowledged that high short and long -term interest rates and a weak credit disciplinary environment were serious problems for increasing intermediation, but concluded on the basis of interviews with bankers that the latter would be interested in increasing term lending if they had an appropriate term funding base. With hindsight, this assessment was too optimistic . The FSAP in 2003 concluded that the prohibitively high interest rates (around 30-34% in real terms at this time) and the lengthy and unreliable debt recovery mechanisms were the key obstacles to increased financial intermediation, and not the availability of term funding. (2) The institutional arrangements for the technical assistance were complex, and the capacity -building component included too many partners. This put a strain on the weak capacity in the newly created coordination unit . The individual components were not sufficiently linked and adequate monitoring and evaluation systems were not developed (see below, and ICR p.9). 4. Achievement of Objectives (Efficacy): Mozambique's economy has grown at an average real rate of economic growth of over 8% since 2001, 3% higher than expected at appraisal . Boosting the competitiveness of Mozambican private firms by strengthening their access to, and use of, support services external to the firm (not rated due to lack of consistent information on overall impact ). The project provided substantial support services to a broad range of private sector firms, and surpassed the output indicators estimated at appraisal. In particular, 40% of the overall 714 consultancies (targeted 200) and 51% of the 3,160 trainings (targeted 200) were provided to firms outside of the capital, which is a significant achievement in Mozambique. With regard to impact, there is no consistent information on the production, investments, sales, exports and new jobs created in the participating companies, as suggested an indicator in the PAD . The ICR reports that 77% percent of the 42 firms surveyed at completion indicated moderate (67%) or high (10%) benefits from the consultancies. The ICR provides anecdotal information on the usefulness of selected trainings, but also points out that "there is some indication that not all training delivered was of good quality ", and "that the course topics may have been too disbursed [sic ] with too many topics and sectors covered " (ICR, p 34). Providing a more efficient market for training and capacity building services and establishing forward and backward linkages to existing and new local and foreign buyer (substantial ). The linkage program brokered 180 linkages (estimated 30 at appraisal) for 57 local suppliers worth over US$65 million (estimated US$5 million at appraisal). The program is expected to continue after project closing . With regard to the market for training and capacity building services, some initial progress was made as described in the paragraph above, but the institutional structure has been dismantled at closing . Enhancing access to term finance by both first -time and other borrowers (negligible ). As indicated above, this component did not address the major bottlenecks that constrain access to finance for the private sector . Disbursements were slow in the initial years, and only picked up after non -bank financial institutions, partly owned by the government and other donors, were allowed to participate and the range of financing was broadened . Overall, the component financed 52 loans for a total amount of US$4.3 million (compared to an estimated US$10 million), 70% of which were initiated during the last two years . Repayments so far have been good, with 95% of the loan portfolio performing, but it is too early to judge the quality of the portfolio based on this . The ICR Review concurs with the ICR's conclusion that the financing provided under this component was not sufficient to meet the longer -term goal of promoting on-going access to term financing by SMEs . Strengthen the capabilities of the Ministry of Industry, Trade and Tourism, the Investment Promotion Center, and business organizations with potential to improve the business environment (substantial ). Technical assistance under this component has helped, among others, pass a new Commercial Code, a Tourism Law and simplify the Investment Law regulations and Business Registration guidelines . The Doing Business Unit estimates that if the reforms are fully implemented, the time to establish a business will drop from 113 to 52 days. A first Industrial Park was established, and attracted so far 22 enterprises with US$15 million worth of investments and creating up to 1,000 direct jobs. 5. Efficiency (not applicable to DPLs): Based on the ICR, the Economic Rate of Return under the first component alone was 47%, assuming that a dollar of the matching grant resulted in an output increase of 10 times the grant amount. This assumption is not supported by any data on what really happened . The project was likely not the least -cost alternative. The components were not well linked with each other, thus reducing potential spill-over benefits: For example, the technical support to private sector firms could have been used to help develop financially viable projects to be presented to financial institutions for financing . Furthermore, the institutional capacity building component was too broad and dispersed the support among too many beneficiaries . The line of credit should have been cancelled early on . ERR )/Financial Rate of Return (FRR) a. If available, enter the Economic Rate of Return (ERR) FRR ) at appraisal and the re- re -estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal Yes 24.7% 100% ICR estimate Yes 43% 47% * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The project has achieved or even surpassed its output indicators under components 1 and 3, and some of the activities have likely boosted private sector competitiveness and broadened the base of private participation in Mozambique's economic growth. However, in light of significant weaknesses in project design and efficiency (see under 3. and 5.), this review concurs with the ICR's rating of moderately satisfactory . a. Outcome Rating : Moderately Satisfactory  7. Rationale for Risk to Development Outcome Rating: The ICR states that the program unit in charge of implementing the private sector capacity building component was disbanded at the end of the project, and that the local staff shifted to private sector positions or positions with other international projects. Some trained Government officials moved to other areas of the public sector . The success of the legal reforms will depend on whether the newly passed laws are implemented . a. Risk to Development Outcome Rating : Moderate 8. Assessment of Bank Performance: The performance of the Bank is downgraded to moderately unsatisfactory . Quality at entry is rated moderately unsatisfactory due to the above mentioned flaws in the credit component and implementation arrangements (see 3.), as well as the shortcomings in M&E arrangements (see 10.). The Bank was proactive and flexible during project implementation, which substantially improved project outcome. It added support for the establishment of an industrial park, which was one of the main achievements of the project, and modified the matching grant program to allow full travel subsidy outside Maputo under the Technical Learning component, thus reaching out to otherwise unserved beneficiaries . Additionally, it was the Bank team that detected irregularities in financial management and disbursements, although the Bank was then rather slow in taking stronger remedial action (see 11.). There were major shortcomings during supervision with regard to impact assessment of the technical assistance component (see 10.). Furthermore, in light of an already complex project design, the Bank should have canceled the Line of Credit component when it was clear that term funding was not the prime constraint . As it was, adding new support without reducing the scope of work in other areas likely contributed to the PIU's financial management problems in the final years of the project (see also ICR p.9). at -Entry :Moderately Unsatisfactory a. Ensuring Quality -at- b. Quality of Supervision :Moderately Satisfactory c. Overall Bank Performance :Moderately Unsatisfactory 9. Assessment of Borrower Performance: Throughout the project, the government showed commitment to improving the enabling environment for the private sector and passed relevant laws and regulations . However, no government counterpart funds materialized, and, according to the ICR, the Government was not very proactive in addressing and resolving the financial and administrative weaknesses in the project implementation unit (PIU). As described under "Other issues", the PIU was not able to handle financial management and procurement in a satisfactory way, which led to irregularities and also at times delayed project implementation . a. Government Performance :Moderately Satisfactory b. Implementing Agency Performance :Unsatisfactory c. Overall Borrower Performance :Moderately Unsatisfactory 10. M&E Design, Implementation, & Utilization: M&E design and implementation was deficient . At appraisal, the responsibility for the collection of performance data was dispersed among the various sub -agencies without a clear system in place . The key performance indicators were refined during supervision to better reflect expected outputs, regional outreach and to establish some benchmarks, but failed to include impact indicators to measure achievements particularly for the technical assistance component. The ICR makes some attempt to close this gap . a. M&E Quality Rating : Modest 11. Other Issues (Safeguards, Fiduciary, Unintended Positive and Negative Impacts): With hindsight, the project experienced early on significant problems in financial management and procurement due to the weak capacity in the PIU . Those irregularities went unnoticed in four unqualified audit reports done by one of the Big Five accounting firms, but were eventually discovered by the Bank team in 2005. The Bank initially tried to overcome these problems through technical assistance, but after some months also started to reduce payments to the Special Account in order to compensate for ineligible disbursements . Latterly, the Bank requested a new external audit report from an auditor acceptable to IDA for the entire implementation period . This report is still pending. 12. 12. Ratings : ICR IEG Review Reason for Disagreement /Comments Outcome : Moderately Moderately Satisfactory Satisfactory Risk to Development Moderate Moderate Outcome : Bank Performance : Moderately Moderately see above under 8 Satisfactory Unsatisfactory Borrower Performance : Moderately Moderately Unsatisfactory Unsatisfactory Quality of ICR : Satisfactory NOTES: NOTES - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate . 13. Lessons: 1. The individual components of a private sector development project need to be clearly focused and should be linked with each other to create synergies and increase impact . 2. Monitoring and evaluation systems need to be developed and implemented to assure quality control and impact . 3. With now 3 failed Lines of Credits in Mozambique, the Bank should abstain from this instrument until the main causes for poor intermediation are addressed . Instead of dragging on with promoting a Line of Credit, it might be better to cancel the component and focus the limited implementation capacity on the remaining components . 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: Overall, the ICR is well written and candid . The ICR is clear on the major achievements of the project, but also discusses the absence of impact information and makes an attempt to close this information gap . It highlights some of the deficiencies in design, monitoring arrangements, and discusses the problems in financial management . On a minor note, the ICR would have profited from including information on the on -lending terms and the viability of the participating financial intermediaries under the LOC, as provided for in OP 8.30. Additionally, there are some shortcomings in the Annex tables . Annex 3 does not include the sources of funds estimated at appraisal, and no information on timing and staffing on individual supervision missions is given . a.Quality of ICR Rating : Satisfactory