Mexico - Fourth Small and Medium Scale Industry Project

 Fourth Small and Medium Scale Industry Project Report No: ; Type: Report/Evaluation Memorandum ; Country: Mexico; Region: Latin America And Caribbean; Sector: Small Scale Enterprise; Major Sector: Industry; ProjectID: P007595 The Mexico Fourth Small and Medium Scale Industry Project for US$185 million equivalent, supported by Loan 2858-ME was approved in FY87. The project was extended twice and the loan was reduced to US$100 million and was fully disbursed and closed in FY96. The Implementation Completion Report (ICR) was prepared by the Latin America and Caribbean Regional office. The Borrower's contribution is included as an appendix. This was the fourth of a series of loans for the Program of Support for Small and Medium Industries (SMIs) of the National Industrial Development Bank. Nacional Financiera (NAFIN). NAFIN, through its SMI-oriented trust funds, was to be the executing agency for the project. The project objective was to provide a broad range of financial and technical assistance services to micro, small and medium-sized industrial enterprises. Specifically, it was to (i) provide medium and long term credit to finance fixed investment and working capital; (ii) provide equity and near-equity finance; (iii) establish an institutional framework and provide funds for restructuring viable SMIs in financial distressed; (iv) provide funding for construction of industrial buildings and construction and modernization of industrial parks: (v) assist in the financing of micro- enterprises; and, (vi) provide technical assistance to the industrial extension service, and finance studies by the Office of the Director-General, Ministry of Trade and Industrial Development (SECOFI) to improve the policy framework for the development of SMI. After Board approval, in an unanticipated move, NAFIN was restructured as a second-tier bank, to function as a discount window, rather than a traditional development bank. The three trust funds, which were to have executed the project, were liquidated and merged into NAFIN. In addition, the Government requested a reduction of the loan to US$100 million. These developments resulted in delaying effectiveness for 26 months while the loan was being restructured and the legal/financial implications of the reorganization were sorted out. The ICR, which is of satisfactory quality, rates project outcome as unsatisfactory, sustainability as unlikely, institutional development impact as modest and Bank performance as unsatisfactory. OED concurs with these ratings. While the loan provided financial support for SMIs. the objectives of institution building and improvement of the policy framework were not met. As a result of the restructuring of NAFIN, the project became a rediscounting operation managed by a large development bank, instead of assisting three relatively small, experienced institutions providing financial and technical services to SMIs. Field observations indicated that SMI loans financed expansion of firms, increased employment, and/or improved performance and competitiveness. The Pilot Microenterprise component was fully disbursed. However, absence of data on rates of return and portfolio quality hampers assessment of outcomes and sustainability. The economic and financial analysis of subprojects was minimal, as the Bank, in order to expedite disbursements, exempted loans below US$ 100,000 from the calculation of ERRs and FRRs and allowed NAFIN to delegate approval authority to its regional offices. Moreover, the operational database on subproject performance was weak and there was no formal ex-post evaluation of projects. The key technical assistance activities associated with portfolio management, evaluation of subprojects, and monitoring were not carried out, nor were the studies of the structure of the regulatory framework and incentive system. Finally, the reorganization of NAFIN meant the end of the industrial extension activities for small and medium scale firms. The main lessons to be drawn from this project are: (i) if achievement of project objectives is not possible, cancellation of a project may be the best alternative: (ii) project supervision should not concentrate on acceleration of disbursements at the expense of institution building. The objective of Bank lending is to strengthen institutions and improve policies; absent this, the benefits of disbursement of loans are ephemeral; (iii) reinforcing implementing agency commitment to project objectives is essential especially if original project arrangements and objectives are changed; (iv) monitoring and evaluation systems and outcome indicators are essential for the Bank and implementing agencies to determine impact and project sustainability. No audit is planned.