Ghana - Private Enterprise and Export Development Project

Do_mmmt of The World Bank O OMCLAL USE ONLY RNpt No P-6004-G NENRANDUN AND OF THlE PRESIDENT OF THE INTERATIONAL DEVELOPMENT ASSOCIAIION TO THE EXECuTIVE DIRECTRs ON A PROPOSED CREDIT OF SDR 29.6 NILIOI TO TE REPUIBLIC OF GHANA FOR A PRIVATE ENTERPRISE AND EXPORT DEVELOPENT PROJECT APRIL 27, 1993 p t1Lort'F- t30 '4 LH"' 't Ti tlF : PPIV17hE r.NTFF2JPr 21> ANiD F.XF-i)r'0T Author> '^: (t )'N,NGT-Y V F.: .,I 1977 Jxc'r: ( : C 2'3 D&i: F. :AF4I This d_omet bass restited distribution ad may be used by reciients oly in the perfomumace of tbeir official duties Its contnts may not otherwise be disclosd owiot World Bank uthorization.  - B-C (as of March 5, 1993) Currency Unit = Cdi (C) US$I = 592 C = US$0.0019 BOO - Bank of Ghana EAP - EAonm Action Plan ECR1F - Export Credit Reman and Guaran Facility EFC - Export Fmance Company EFO - Export Finance Office-BOO ERP - Economic Recover Program GiC - Ghana investment Center GSE - Ghaa Stock Exchange IDA - Intenaional Development Association MFEP - Misty of Finance and Economic Planning NC - National Insurance Commission NPART - Non-Performing Assets Recovery Trust NTE - Non-Tradional Export Flu - Project Implemeon Unit-MFEP PFI - Participaing Financial Institu PVE - Potentially Viable Enterprise SME - Small and Medium Scale Enterprise TIP - Trade and lIvestment Project USAID - United States Agency fr International Development January 1 - December 31  FOR OMCIAL USE ONLY pUAT ENTRPIS AND ECPORT DVLOPMENT PRQDtU CREDIT AND PROJECT SUMMARY IOcrgZff. Republic of Ghana STIR 29.6 milHion (US$41 million equivalent). TO: Standard 3DA with 40 years maturity Ageadaries: Bank of Ghana (BOO), participating fnacial institutions (PFIs), private eporters, National Insurance Commission (NMC), Gha StDck Exchange (GSE). Onboding TeMM: Funds for export tade finance (US$34 million equivalent) will be provided to BOG. BOG will discount eligible short-tem (up to 360 days) tade credits from PTh on the following inerest rate terms: (O for domestic cufrency at the average 180day commerci bank deposit rate, and (ii) for foreign currency at the equivalent Buollar London ntbank Offered Rate (LBOR) prevailing at the tme plus 2.625 percent. A technical assistance component (US$7 million equivalent) would fiance magement and tecical taining, conulnt services and equipment and materials for facilitaing implemention of the releevant programs. MANCING PLFAN. (US$ million) Lol EoreiMn raw IDA 8.00 33.00 41.00 Govrnment 2.00 2.00 Exporter 6.00 - 6.00 Local Banks 0.20 - 0.20 Other Commercial 0.30 - 0.30 Total 18 0 1 11 Net of duties and taxes EMoQnMk Rate of lltRd= Not applicable &a ApSasal NOWr No.: 11607-GH m: IBRD 24755 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF GHANA FOR A PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT 1. I submit for your approval the following report and recommendation on a proposed credit to the Republic of Ghana (GOG) for SDR 29.6 million, the equivalent of US$41 million, to help finance the Private Enterprise and Export Development Project (PEEDP). The credit would be on standard IDA terms with a maturity of 40 years. GOG would make available $34 million equivalent to the Bank of Ghana (BOG) for an export credit program. In addition, US$7 million equivalent would be passed on to beneficiary agencies for technical assistance. 2. Badcgroud. The Economic Recovery Program (ERP) launched by the Government in April 1983 was a dramatic break with Ghana's previous policies and is one of the most sustained reform efforts in Sub-Saharan Africa. The economic consequences of the reform program have been positive: economic growth has averaged about 5 percent a year, and the Government has allowed the exchange rate to ove in line with market forces, dismanted most price and distribution controls, elimnated many subsidies, broadened the tax base, improved tax collections, and provided more adequately for maitenance and capital expenditre. Ihe current emphasis on ensuring macroeconomic stability to continue economic progress includes development of the foreign exchange market to maintain a free and flexible excchange rate, fiscal policies designed to increase public savings, and monetary policies to reduce inflation. While these liberalization measures have been important, a robust supply response has yet to develop in the private sector, particularly the non-traditional sector, which would be strong enough to sustain even current economic growth levels. 3. Ghana' focus has begun to si from economic recovery to policies and investmens needed to stimulate accelerated growth from a more dynamic supply response, especially the private sector. A major increase in domestic private savings and investment is required to support this strategy over the next few years, supplemented by direct foreign investment and a reurn of the accumulated surpluses of overseas Ghanaian capital. With these objectives, the Government, in conjunction with IDA, has progressively developed a comprehensive enabling framework wihin which the proposed investment credit will be used to further broaden the base of private sector exports and exporters. A more dynamic private sector will thereby be promoted and the foundations for sustained development furither strengthened. 4. After several years of improved macroeconomic performance, the Govenment is strongly committed to supporting a range of inititives that will increase and accelerate the future growth of the economy. Notwithstanding the successes achieved, however, the financial and private sectors in Ghana remain very fragile for the following reasons: (a) the contiued overang of a large public sector contnes to crowd out private sector financing and activities; (b) the restructuring of the banks and a tighter supervisory climate have yet to create the necessary degree of self confidence within the financial sector to respond forcefully and creatively enough to anticipate and meet the emerging needs of the private sector especially the export sector; and (c) the inability of companies to plan or communicate their needs to their banks and the reciprocal inflexibility of banks in dealing with the needs and problems of such companies. lhere is thus a need in this environnent to create certain catalydc forces to spark the necesary initiatives in export finance and develop thereby an ongoing and sustainable capacity amongst both banks and their corporate clients.  - 2 - 5. In 1991, IDA, USAID and GO identified a number of issues aising fom the above constrants cononting Ghanaian and exporters. Recognizing a need to establish a complamena of efforts, it was proposed to develop two projects in parlel. the USAID project focuses on the mau ng and export sectors, coammitting grant funding to the development of production capacity, techical improvement, design, export systems and foreign twing arrangements for manufcturers. The IDA project focuses on the financal requirements of the eport sector, by developing improved export finance conpetenies in both lenders and exporters and by conButin a financial base that wil catalyze on a revolving basis additional short-term export financial liquidity. For the longer term, the project has taken accowunt of the need to examine whether the absence of forward exchange markets or credit information systems are also constraints that can be addressed to deepe the responsiveness of the financial system. With respect to the private sector in general, the project addresses the need to develop a framework that would support makiet- bas Ad corporate restructuring through systematic evaluation of the enabling legal framework and through developing capacity in the institutional debt markets. 6. Ihe project is fully supportive of Ghana's accelerated growth sWegy vhich emphasizes the importance of promoting non-traditional areas of agro-processed products and light industry. While the country's trade ratios (18% ratio of exports to GDP and 25% ratio of imports to GDP) have risen in recent years, for a sml couny and one which has the potential to become a major West African trade hub, these ratios could increase substanaly. The export ratio unfortuately remains low because Ghana's exports, outside of cocoa and gold, remain relatively small. For years Ghana relied mainly on those traditonal exports of cocoa, gold, and to a lesser extent on diamonds, timber and electricity. In recent years, however, its other exports including manganese, bauxite, and the fudl range of non-tradional products have been increasing. In part this can be atributed to a range of export incenives that have been implicidy included in policies and procedures that have been implemented since the ERP was intoduced. Until 1990 the majority of non-tradional e s consisted of agricultura products such as pineapples, cocoa waste, tuna, lobsters, shrimp, prawns and other fish. Now Ghana is developing exports of processed and semi-processed goods including wood products, aluminum, and processed food. Exports of processed and semi- processed goods first exceeded those of the non-traditonal primay agricltural exports in 1990, indicating a positive trend towards higher value-added exports. To promote further non-traditional exports Ghana should provide non-discrnatig export incdves and must focus on liberaizing fnance and developing infrastructure for exporting firms. It must also consider adoping more aggressive and creative measures to attract foreign direct investment especialy geared towards exports. GOG is committed to a wide range of actions to support many of these initiatives. 7. Project Objectives. The overall objectives of the proposed project are to foster the growth of priate Ghanaian exporters by (a) promoting a sustainable export finance system; (b) providing technical assistance to the banking and commercial export sectors to increse their efficiency and competitiveness; and (c) supporting in addition, the development of a business action plan to assess the legal and business requirements that will be a prrequisite to addressing a market-driven corporate restructuring program for potentally viable enterprises presendy located in the Non-Performing Assets Recovery Trust (NPART). 8. Project Descripdon. The proposed project includes two principal coments: (i) a revolving ewxport credit refinance and guarantee facility (US$34 million equivent) to assit private eporters except for cocoa, gold, diamonds, electricity, and raw timber in obaning  short-term pr and post-shipment finance from banks; and (ii) a comprehesive technial assistance component (US$7 million equivalent) to finance, frsly, management and technical training, consultant services, equipment and materials for strengthening the export finance infastructure, and secondly, appropriate expertfrv to develop the legal and finacial issues involved In preaing a business and action plan for dealing with restructdng viable companies under NPART. 9. Project Flmndng. IThe total cost of the proposed project is esdmated at US$51 million eqpivalent with a foreign exchange component of US$33 million equivalent and a local cost component of approximately US$18 million. IDA financing would cover 81 percent of total project costs excluding duties or taxes for 100 percent of the foreign exchange requirements and about 46 percent of the local costs excluding duties and taxes. Schedule A provides a breakdown of costs and financing for the Project. Amounts and methods of procurement and disbursement and the disbursement schedule are shown in Schedule B. A timetable of key project processing events are in Schedule C and the map of Ghana is attached at the back of this report. The Staff Appraisal Report (Report No. 11607-OH) is being distributed separately. 10. Funds for the finance component of the rpQ redit faciliV will be passed to the BOG through an apex arrangement and on-lent to participating financial institutions (PF;s) by the refinancing of trade credits. The function and responsibilities of the BOG apex unit, housed within an Export Finance Office (EFO), and the PFIs will be defined in subsidiary fmancing agreements between the Government and BOG and BOG and the PFIs. PFls will be subject to a range of eligibility criteria which wiUl specifically include that by December 31, 1994, each PFI will have achieved at least 51 percent private ownership. Approved loans for refinancng wfll carry rates of interest that will be calculated on the following basis: (a) Domestic Currency: cedi denominat-2d loans will be refinanced at a rate equivalent to the average 180-day commercial bank deposit rate as published by the BOG. (b) Foreign Currency: dollar denominat loans will be refinanced at the equivalent Eurodollar London Interbank Offered Rate (LIBOR) prevailing at time of loan approval plus 2.625 percent per annum equivalent for the borrowing term. The EFO will retain a service charge of 2% incorporated in the onlending rate to the PFI, to cover expenses. This rate structre will be reviewed with IDA and the BOG semi-annually, to ensure that rates remain positive and reflective of market conditions. The onlending rate from PFIs to the exporters will be market determined. The EFO will operate within a free limit per application of $200,000 equivalent and will not expose more than $500,000 equivalent to any one underlying borrower at any one time. The maximum subloan will be for 85 percent of the export order. Maturities on these loans will not exceed 360 days. 11. The associated guarantee prora will be an integral part of the credit facility and is estimated to require fumding of approximately US$5 million equivalent. The purpose of the facility would be to provide the PFI and the exporter a credit enhancement facility to incent the PFIs to broaden their export financing. Twenty percent of the guarantee fund wiUl be initially funded by the Government into a special Export Guarantee Fund (EGF). The remaining 80 percent for the EGF will be funded from the first repayment installments under the refinance facility. The guarantee will be offered either in US dollars or cedis, depending on the underlying liability. The guarantee will be limited as follows: (a) it will only cover the risk of default on pre-shipment credit and so will not cover receivables risk to the exporter; and (b) access to the guarantee will be denied to any borrower who uas claimed twice under the guarantee. Cover will be offered for 65 percent of the face amount of the  loan wihi the PFI retning 35 percent of the risk. In order to ensurc credibilit of the guaranee, BOO will undertake to make prompt setdement of PFI claims. 12. 1he proposed IDA lebWga assisance component will provide US$7 million equivalent to assist in financing a program aimed at overcoming deficiencies of the financial export system. Assistance will be provided to: (a) set up the EFO at the BOO and provide the requisite training to implement the export refiance and the credit guante fcility; (b) train and develop both bankers and exporters on an interactive basis in the financial methods and practices of export finance and provide onsite training prograns abroad for Ghanaian bankers in documenary credit departments and foreign exchange departments of major commercial banks. Banks and exporters are expected to share the trairing costs. Approximately 420 bankers and 1,000 exporters are expected to be trained over 5 years; (c) develop an action plan which will begin the process of identifying the legal and business 3ssues involved in developing a market driven corporate restructuring effbrt for a pilot sample of potendally viable enterprises within NPART; (d) develop and implement the introduction of an interational payments setlement system; (e) investigate and advise on the establishment of a forward foreign exchange market; (t) in conjunction with the Ghana Stock Exchange, institute a study and training program for the development of an institutionalized short and long term debt market; (g) find an in-country study of commerca Inrance products to support commercial companies, establish recommendations and implement appropriate advisory programs; and (h) determine the feasibility of esti'91ishing a credit reference agency. 13. Project Implementation. The EFO will be responsible for implementing the export credit refinance and guaranee facility. It would be formed in the BOG and would operae under policies that would clearly define its objectives, scope and method of operation. It would have its own operational procedures developed to provide an acceptable degree of autonomy to avoid undue delay in the processing of subprojects submitted for financing by PFs. The credit components are expected to be committed over a period of about four years from effectiveness. The EFO will also be responsible for implementing technical assistance components which bear direcdy on the bankdng system. The Project Implementation Unit (PIU) in the Ministry of Finance will be responsible for implementation of the corporate restructuring program, (which will involve close liaison with NPART); the institutional debt market study and training program, and the commercial insurance development study. The overall responsibilities and reporting requirements of the two implementing units (EFO and PIU) were discussed and agreed upon during negotiations with the two designated managers. 14. Project Sustainabiilty. The project would enhance and increase the capacity of the export sector to respond to ongoing reforms in investment, trade and banking policies, export promotion and expansion supported by IDA financed operations as well as through close cooperation with USAID and its Trade and Investment Project (TIP). In addition, the project design supports initiatives to increase the provision of export credit and technical assistance to develop the financial and other supporting infrastructure for private exporters. The credit and technical assistance components will both enable the financial sector to provide assistance to exporters on a revolving basis. Sustainability is reinforced by (i) market-determined on- lending rates for the credit; (ii) the prudential guidelines that PFIs must meet; and (iii) the building of technical capacity in the BOG and the PFIs to handle the provision of credit to exporters on an ongoing basis. 15. Lessons from Previous IDA Involvement. The lessons that emerged from experience in past and current operations in Ghana were applied in project preparation and design  - 5 - including: (a) instituting simple procedures to facilitate the application of the trade credit component of the project; (b) close consuvltation with officials of beneficiary agencies in the design of programs and determination of terms of reference of the technical assistance experts to ensure ownership of program goals; (c) provision of overseas attachment and on-site training programs to strengthen institutions and upgrade skldls; (d) setting monitorable Indicators to evaluate the extent and impact of training programs; and (e) close dialogue with other donors at the identification and design stages of the project cycle to take advantage of savings from implementation of related projects. 16. Rationale for IDA Involvement. The project has been designed in the light of IDA's Country Assistance Strategy (CAS), which was first discussed with the Board in December 1991 and which has been updated for discussion with tLe Board in June 1993. The CAS emphasizes the importance of a private sector led supply response. The project will complement the continuing role of IFC which is aiding the private sector through support for small and medium scale enterprises and the development of the private financial sector. Ihe project specifically addresses the overall strategic objectives by: (i) strengthening of the financial sector by building on the progress made in earlier IDA projects; (ii) developing a broader base of private sector exports and exporters by working in close paraUlel with the USAID TIP; and (iii) deepening the private sector by addressing many infrastructure, legal and other constraints holding back the development of this sector. The project will complement and build on gains made by previous structural and sectoral adjustment loans and will provide parallel support to the ongoing USAID TIP to reinforce private export growth. 17. Agreed Actions. The Government has appointed the managers of the EFO and the PIU and has signed and delivered a Letter of Strategic Development Policy on the framework for private sector development. During negotiations the following significant assurances were obtained: (a) a shift from an ex-ante approval process to an ex-post review on all investment no later than December 31, 1993 and that by January 1, 1995 the GIC will no longer have any regulatory functions; 0b) detailed eligibility criteria were agreed for the PFI's including the limitation that by December 31, 1994 eligibility would be restricted to the financial institions having 51 percent or more private ownership; (c) recognizing the importance of continUing support for the export sector, the Government agreed to continme to recycle the credit funds for the purpose of providing export credit for the life of the project; (d) it was agreed that the Government would include in the 1994 budget, for funding no later than Februay 1, 1994, US$1 million equivalent for the Export Guarantee Fund; (e) to ensure responsiveness to market conditions, interest rates will be reviewed on a quarterly basis; (fl it was agreed that there would be a mid-term review of the project in 1995 to review progress on the credit program, the corporate restructuring program, the adequacy of the institutional arrangements, the execution and impact of the various training components and a review of the status of he modifications to the regulation of investments and other reforms set out in the Letter of Strategic Development Policy. 18. Conditions for credit effectiveness include: (a) submission to IDA of detailed proposals for implementig ff) ex-post review rather than ex-ante approval of all investments; (U) how fiscal investment incentives will be incorporated with the filing of tax returns; and (iii) the elimination of the regulatory function of the Ghana Investment Center (GIC); 0) receipt by IDA of signed BOG subsidiary administration agreements; (c) designation of at least five banks as PFls by BOG; (d) EFO and PIU will be fully staffd with personnel with qualifications and experience satisfactory to IDA; and (e) submission of draft bidding  - 6 - documents/letters of invitation for the technical assistance components except for the nternatlonal payments setement system. 19. lie preparation of the EFO's operational policies and procedures, approved by the BOG and accptable to IDA and the issuance by BOG of a circular to the banking system satisfactory to IDA, outlining the conditions and procedures for the utilization of export finance and credit guarantee program by the PFIs, and the signing of a participation agreement between BOG and at least two PFIs on terms and conditions satiscory to IDA will be conditions for disbursemnt for the export credit and guarantee fility. 20. Environmental Aspects. The BOG and the PFIs will review all sub-loans to be made under the credit to satisfy themselves they ale consistent with existing environmental policies and are emvironmentally sound. 21. Program Objective Categories. The project will clearly support the development of the private sector. In addition, through the Impact on growth and employment, the project should have an indwrect impact on poverty reduction. 22. Project Benefits. The proposed project, in parallel with the USAID TIP, will assist Ghana's accelerated growth strategy by stimulating the growth of present pnvate exporters and expanding that number, and by helping to foster an environment in which it can flourish. The growth of this segment of the economy is expected to contrbute to strengthening the culture of exporting through providing the catalytic benefits of continuing export credit support and export credit enhancement, stimulating competition and related improvements in productivity and generating the much needed supply response and growth. Finally, the project will promote economic development by broadening direct and indirect employment potential, thus contributing to poverty alleviation. The tangible objectives that should be anticipated over the five years of the project (giving due account to the parallel efforts occurig under the USAID project) are to see: (a) private sector exports double again as they did in the past five years; (b) the share of manufa GDP to total GDP condinue to mcrease; and (c) all Ghanalan banks operating as competitive prvately controlled entities and offering the export sector viable financial infrastructure support. 23. Risks. lhe main risks are institutional. While the Government has indicated its commitment to the proposed project, there are a nmnber of complex legal and procedural arrangements to be overcome before it can fully deliver its objectives. Nevertheless, the Bank's on-going economic and sector dialogues, as well as previous adjustment credits, should assist in identifying and correcting institutional and regulatory obstacles that might negatively impact the project. Additionally, the strong commitment of the private sector in general, and the manufaurers' and exporters' associations in particular, helps to minimize this risk. Further risks are related to the limked experience of banks and non-bank financial insttons supporting private enterprises and the limited managerial and marketing experience of the entrepreneurs themselves. The technical assistance to be provided under the project is designed to correct and lessen these risks.  24. _da tion. I am satisfied that the proposed credit would comply with the Aticles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D. C. April 27, 1993  Sg,bale A PlUVAF EN1 MRISE AND goT DEVELOPri ERQJ= PROJECT COSr AND FINANCING PLAN Local Foreg zlQl MUS $ Mllion Equivalent) Export Credit Refinance and Guaranee Facility 15.00 26.00 41.00 (a) Export Finance Facilities 0.08 0.57 0.i55 (X) Finncil fawucture 0.42 4.43 4.85 (c) Crporat Restrucuring 1.00 0.30 1.30 (d) Other nsttutonal Support and Studies 1.2Q Total 11 51.00 IDA 8.00 33.00 41.00 Govemnment 2.00 2.00 Exporte 6.00 6.00 Local Bank 0.20 0.20 Other Commercial 0.30 0.30 Instions Q Total 1/ Net of duties and taxes  Scbedul B Pag 1 of 2 GHN PRIVAT15 RXEOAND EXPRT DEVELO ROECQr SUMMARY OY PROPOSE PROCUREMENT ARRANGEMENTS Olbet Total (IDA-financed) WE Pw Export Credit Refinance and Guazatee Facily 34.0 i/ 7.0 41.0 Tecboical assicsm Ponal computes, vehicles and office equipmt 4.1 h/ 4.1 Consultant's services 0.8 c/ 1.1 1.9 Tinings 0.4