Mozambique - Enterprise Development Project

Report No. PID6979 PID6979.TXT Project Name Mozambique-Enterprise Development Project (@) (Projecto para o Desenvolvimento Empresarial, PoDE) Region Africa Sector Private Sector Development Project ID MZPE49874 Borrower Government of Mozambique Implementing Agency Ministry of Industry, Trade, and Tourism Date this Brief Prepared March 31, 1999 Appraisal Date March 1, 1999 Projected Board Date June 1999 1. Country and Sector Background - With a nominal per-capita income of US$210 (1998), Mozambique is one of the poorest countries in the world. Peace and political stability, progress in structural reforms, continued aid inflows, and good weather, however, have contributed to Mozambique's strong performance during 1994-1998. In particular, the Government has made significant progress on stabilization and the financial sector reform agenda: the state-owned Banco Comercial de Mo6ambique was privatized in July 1996 and Banco Popular de Desenvolvimento in September 1997. Mozambique has also recently embarked on comprehensive reforms of the Government's budgetary management as well as of the tax and trade systems. The privatization program for state-owned enterprises is one of the largest and most successful in Africa, and the Government is working towards the liberalization of petroleum distribution, and seeking private management of ports and railways and water companies. 2. In 1998 the rate of inflation was brought down to nearly zero, its lowest level since 1987. Sound fiscal and monetary policy, low import prices, and increased food production were the main contributing factors. Real GDP grew by around 11 percent, led by an excellent agricultural crop, along with strong growth in the industrial, transportation, and service sectors. In the medium term, Mozambique is targeting a non-energy GDP growth rate at over seven percent led by domestic and foreign investment and agricultural exports, and inflation rates below 10 percent. 3. Notwithstanding these substantial achievements in macroeconomic policy and in privatization over the last five years, the private sector faces many limitations, including inadequate technical skills, insufficient access to finance, and weak supporting institutions. These constrain the supply response to the improved macroeconomic environment. Programs are needed to address these constraints and to assist in "kick-starting" new economic activities. A central aim of the Enterprise Development Project will be to use focused, targeted efforts to build technical capabilities, provide finance, and develop business delivery services for firms. 4. Project Objectives - The Project will help broaden the base of private  participation in Mozambican economic growth. This would be achieved by: (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 buyers and investors; (iii) enhancing access to term finance by both first-time and other borrowers; and (iv) helping to strengthen the capabilities of key agencies. 5. Project Description - The project (US$33 million financed by IDA) will consist of three mutually reinforcing components aimed at reducing constraints to enterprises' and institutions' development. Project components will include: Technical learning in firms program to assist private Mozambican firms build up their technical capabilities through the utilization of matching grants; Financing facility to provide medium term financing for investment assets for private sub-borrowers in the industry, agro-processing, tourism, transportation, construction and services sectors; Institutional capacity building program to enhance the capabilities of private and public institutions to deliver business support services. 6. Strategy/Process - The Project is being developed in close consultation with multiple Government, donor and private sector counterparts and stakeholders. A working group convened during project preparation and included these various parties. The Government's strategy for project preparation is to: (i) seek input and feedback from stakeholders at each step of project processing; (ii) establish a Government representative group and integrate the group into the project design process of the project through joint reviews of project documents; (iii) identify private sector and donor organizations key to the project and integrate them equally into the project preparation process; and (iv) conduct firm-level interviews to ensure consistency between project design and firm needs. From the working group a PoDE Steering Committee would be established to oversee the implementation of the project. 7. Project Implementation - The overriding principle guiding the institutional and implementation arrangements for the Project is to delegate the maximum feasible operational responsibility and independence to selected agencies and managers implementing the Project components. Overall responsibility for the implementation and coordination of the Project will be entrusted to the PoDE Steering Committee under the purview of MICTUR. 8. Project Sustainability - The sustainability of the Project will critically depend on the success of the cost-sharing grant scheme in catalyzing a market for business services; the receptivity of public agencies to easing regulatory obstacles; the assessment, supervision, and repayment performance under the credit facility; the risk assessment and financial performance of banks; and the viability of the export processing zones. Continued support for the program will depend on positive evaluations received from beneficiaries and fulfillment by the implementing agencies and participating banks of performance indicators defined in the Project Implementation Plan. 9. Lessons Learned - Key elements of the Project design draw on lessons learned from previous IDA-financed projects: (i) a simple project design: -2 -  i.e., compatibility with political realities and institutional absorptive capacity of Government agencies. The scope and design of the project will be kept realistic and flexible to take into account existing and changing local conditions; and (ii) stakeholder involvement in design and execution of the project and development of local expertise. Experience dictates that local ownership of projects results in a better definition of the constraints faced by the private sector and the initiatives to address them, effective project execution, and sustained achievement of project objectives. 10. The design of the Project components also incorporates global lessons of experience as to what kind of support for the private sector is workable. Specifically: (i) initiatives to foster technical learning in firms need to be firmly embedded in the private marketplace: private firms learn best from other private firms (buyers, vendors of specialist services and other inputs) - and they learn best when they themselves have recognized the value of these services, as demonstrated by their willingness to pay some of the costs of learning; and (ii) there is enormous diversity within the private sector - and both financing and technical learning initiatives need to be designed in ways which are responsive to this diversity. Enterprise support programs which fail to reflect these differences end up offering little of value to any firms at all. At the same time, boxing firms into excessively segmented programs risks foregoing the opportunities for larger and smaller firms to link and learn from one another, and for firms progressively to improve technical capability, and move into more demanding markets. 11. Poverty Category - This Project does not contain a program of targeted interventions and therefore does not have a poverty category per se. The Project, however, is expected to alleviate poverty through sustainable employment generation resulting from increased economic activity. Consequently, the Project supports the medium-term anti-poverty strategy of the Government and IDA. 12. Environmental Aspects - The Project is not expected to present any specific environmental risk although IDA funds may finance investments that may result in adverse environmental impact. Parallel review procedures would be developed to ensure participating banks screen proposed sub-projects and sub-borrowers carry out appropriate environment assessments for each sub- project. Prior to sub-project approval, PFIs will verify that the sub-project meets the environmental requirements of appropriate national and local authorities and are consistent with applicable IDA environmental policies. 13. Program Objective Categories - The project would primarily contribute to the private sector development, financial intermediation, and institutional development categories. 14. Contact Points: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 -3-  Mr. Simon Gray 1818 H Street NW Washington, DC 20433 Telephone: (202) 473-4011 Fax: (202)522-1198. Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending May 14, 1999. - 4 -