Ghana - Private Small and Medium Enterprise Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 17250 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA PRIVATE SMALL AND MEDIUM ENTERPRISE DEVELOPMENT PROJECT (Credit 1996-GH) December 22, 1997 Economic Management and Social Policy Department Africa Region 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.  Currency Equivalents Currency unit - Cedi US$1 = Cedi 250 (at appraisal) US$1 = Cedi 2,180 (September 10, 1997) Weights and Measures Metric System Fiscal Year of Borrower January 1-December 31 Abbreviations and Acronyms BOG - Bank of Ghana BSD - Banking Supervision Department EDP - Entrepreneurship Development Program ERP - Economic Recovery Program FUSMED - Fund for Small and Medium Enterprise Development GIMPA - Ghana Institute of Management and Public Administration GRATIS - Ghana Regional Technology Industrial Services IDA - International Development Association MCGS - Mutualist Credit Guarantee Scheme MDPI - Management Development and Productivity Institute ME - Micro Enterprise MGA - Mutualist Guarantee Association MIST - Ministry of Industry, Science and Technology NBSSI - National Board for Small Scale Industries PFI - Participating Financial Institution RIR - Reference Interest Rate SME - Small and Medium Enterprise SSE - Small Scale Enterprise WWBG - Women's World Banking (Ghana) Ltd. Vice President : Jean-Louis Sarbib Director : Peter Harrold Acting Technical Manager Thomas W. Allen Operations Officer - Marilyn S. Manalo  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT GHANA PRIVATE SMALL AND MEDIUM ENTERPRISE DEVELOPMENT PROJECT (Credit 1996-GH) TABLE OF CONTENTS Preface Page Evaluation Summary i Part I Project Implementation Assessment A. Background ................................................1 B. Project Objectives and Description .......................................... 2 C. Achievements of Project Objectives ........................................ 2 D. Major Factors Affecting the Project ......................................... 6 E. Project Sustainability ..................... ........................... 7 F. IDA's Performance ................. ............................... 7 G. Borrower's Performance ................... : .8 H. Assessment of Outcome ........................... .................... 9 I. Future Operations ............... ............................... 9 J. Key Lessons Learned .................. ............................. 9 Part II Statistical Annexes Table 1. Summary of Assessments .12 Table 2. Related Bank Loans/Credits .13 Table 3. Project Timetable .14 Table 4. Credit Disbursements .14 Table 5. Key Indicators for Project Implementation 15 Table 6. Key Indicators for Project Operations .15 Table 7. Studies Included in the Project .16 Table 8. Project Costs and Financing .17 Table 9. Economic Costs and Benefits .17 Table 10. Status of Legal Covenants .18 Table 11. Bank Resources - Staff Inputs .19 Table 12. Bank Resources - Staff Missions .20 Appendix: 1 Final Supervision Mission's Aide Memoire 2 Borrower's Contribution to the ICR 3-5 Private SMEs Assisted Under the Project-Characteristics, Financing, Credit Status 6 Private SMEs Assisted Under the Project - Leasing Map 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.  IMPLEMENTATION COMPLETION REPORT GHANA PRIVATE SMALL AND MEDIUM ENTERPRISE DEVELOPMENT PROJECT (Credit 1996-GH) PREFACE This is the Implementation Completion Report (ICR) for the Private Small and Medium Enterprise Development Project in the Republic of Ghana for which Credit 1996-GH in the amount of SDR 22.3 million (approximately US$30 million equivalent at appraisal) was approved on March 28, 1989 and made effective on October 25, 1989. The credit closed .on June 30, 1997, six months later than originally projected. Final refund of the special account took place on October 14, 1997 after which a balance of SDR 484,114.55 was canceled. Preparation of the ICR began during IDA's final supervision mission and is based on material in the project files and information received from participating agencies and banks. The Borrower contributed to the ICR by providing its views as reflected in the mission's aide memoire of November 21, 1996 (Appendix 1), furnishing information incorporated in the report, commenting on the draft ICR and providing their own evaluation of the project's preparation and execution (Appendix 2).  IMPLEMENTATION COMPLETION REPORT GHANA PRIVATE SMALL AND MEDIUM ENTERPRISE DEVELOPMENT PROJECT (Credit 1996-GH) EVALUATION SUMMARY 1. Project Objectives and Description. The SME Project was designed to: (a) assist in financing private productive activities, facilities and resources to enable enterprises to contribute to the economic and social development of the country; (b) revive production and improve the economic viability of private SMEs and enable them to become more competitive; (c) develop an effective mechanism to foster participation of banks to provide long-term financing to SMEs; (d) support a program of assistance to micro-enterprises (MEs); (e) improve the availability of technical assistance (TA), extension services and entrepreneurial training for small-scale enterprises (SSEs) and women entrepreneurs; and (f) improve the policy and.institutional support framework for SME development. The Project had four key components to support these objectives: (a) a line of credit, (b) equipment leasing, (c) pilot mutualist credit guarantee scheme for MEs, and (d) TA to build up the capacity of an apex organization and provide a range of business advisory services to SMEs and women entrepreneurs. 2. Implementation Experience and Results. Overall, the objectives of the project were partially achieved. Financial assistance and advisory services were provided to a diverse group of SMEs relative to firm size, industrial sectors, and geographic location. The repayment rate by SMEs, however, has remained unacceptably low at about 50 percent on average. The establishment of an apex unit provided a mechanism to foster the participation of seven banks and two leasing companies and to develop their capacity to provide term financing and leasing services, respectively, to SMEs. Also, the business advisory services and entrepreneurial training extended to small and micro enterprises and women entrepreneurs provided the beneficiaries with additional tools to increase their productive activities. On the other hand, micro-enterprises received very little financial assistance (less than one percent of the Credit) as PFIs preferred lending to established SMEs in urban areas who required larger loans. In addition, the TA under the project was limited by the postponement and cancellation of some components. 3. Line of Credit Component. This component was administered by the Fund for Small and Medium Enterprise Development (FUSMED) Unit, established as an apex unit at the Bank of Ghana (BOG). Resources totaling approximately US$28.2 million financed 121 loans to 109 SMEs and led to the creation of about 3,164 new jobs (see Appendices 3-6 for the distribution, characteristics and cost of these subproj ects). Support for this component represented about 113 percent of the original allocation following requests made by BOG, and agreed by IDA, to reallocate resources from other components to meet continued demand for medium-term funds. The line of credit, as designed, was attractive to PFIs mainly because it provided: (a) medium- term resources not supported by their generally short-term deposit base; and (b) foreign currency.  - ii - While loan commitment and disbursement proceeded well, the major issue for this component was the high default rates. 4. Measures were taken to deal with the repayment problems, including regular monitoring of the subprojects, periodic updates of action plans of PFIs, and training sessions for PFIs. These measures helped the poorly performing banks to focus on loan recovery measures and assume a more conservative lending approach. Despite these changes, however, the errors reflected in the credit decisions of PFIs and business decisions of SMEs made in the earlier years of the project were difficult to correct. A diagnostic study on the problem sub-projects, technical assistance to some distressed SMEs, and the extension of the closing date by six months to complete related consultant support did not yield much improvement in the overall default rate. 5. Leasing Component. Under the leasing component, resources were provided by two leasing companies to 25 enterprises for leases on equipment totaling approximately US$1.4 million. When the Credit closed, a leasing company had problems with seven leases; the arrears position amounted to approximately Cedis 208 million. 6. Mutualist Credit Guarantee Scheme. The objective of the mutualist credit guarantee component to meet the financing needs of MEs and SSEs was not met. While US$28,000 was disbursed for loans to 45 MEs (members of two groups formed under the scheme) by two PFIs, FUSMED failed to execute the mutualist credit guarantee agreements and the funds for these groups were disbursed as regular sub-loans. Despite attempts to make this component more user friendly (including changing the preliminary complex design of this component as prepared by consultants, exploring the use of a loan insurance ftand, and including non-bank financial institutions (NBFIs) who lend primarily to the target group), the scheme was not implemented. Some PFIs continued to be interested in the scheme but did not have the wherewithal to assist micro enterprises and NBFIs did not meet BOG's regulatory requirements. IDA and BOG agreed to reallocate the resources for this component to the line of credit. 7. TA Component. The achievements of this component include: (a) enactment of the 1993 Finance Lease Law which contributed to increased competition with the establishment of new leasing companies; (b) establishment of business advisory centers; (c) development of an on- going Entrepreneurship Development Program at the National Board for Small Scale Industries (NBSSI) which provided training for about 5,150 participants; (d) training of about 167 bankers; (e) training of approximately 587 entrepreneurs (479 women) by Women's World Banking (Ghana) Ltd. (WWBG); (f) training of managers and staff in FUSMED (6), NBSSI (12), WWBG (1); and (g) completion of studies on financing needs for small businesses and establishing business incubators and growth centers. Despite these achievements, the TA objectives were only partially achieved because other components (for example, the pilot studies fund and the business incubators study) were canceled or postponed. 8. The estimated total project cost was US$57.4 million with IDA providing approximately US$30 million, PFIs approximately US$7.9 million, and the beneficiaries US$ 13.2 million. Co- financiers were approached to fill the project financing gap (approximately US$6 million) but efforts to obtain additional funding failed.  - 111 - 9. Summary of Findings and Future Operations. The key factors which affected project execution were the unfavorable macro-economic conditions, participation in the line of credit by some weak banks and undeveloped enterprises. The adverse macro-economic environment, was reflected in inflationary pressures, the depreciation of the cedi, increasing public sector borrowing and the subsequent squeeze on lending resources available to the private sector, and high interest rates. Despite training, some staff of the active public PFIs, lacked an appreciation of the time value of money and banking skills. This was further aggravated by weak credit management skills, little decision-making power in bank branches, inadequate performance- based incentives and logistical support, and decisions by PFIs to postpone any legal action because of the absence of an effective legal framework. In addition, poor implementation of capacity building measures negatively affected overall performance of the Project. For example, focusing more on loan approval and disbursement than on the performance. Many enterprises required essential financial, management and operational assistance. The over-leveraged positions of clients with good projects prevented them from meeting the lending criteria of PFIs including equity contributions and collateral requirements. The weaker enterprises that defaulted on their loans were unable to implement their projects as planned, utilized short-termn funds for capital expenditures, and faced chronic problems of insufficient working capital. The prevailing high interest rate resulted in increasingly insurmountable problems. The difficulties in finding lucrative markets and the inability to compete with imported goods following implementation of trade liberalization policies also contributed in a major way to entrepreneurs' poor performance. In addition, enterprises were unable to improve their businesses because the technical assistance available to SMEs was unaffordable or inadequate. 10. Weaknesses in project design and implementation contributed to the difficulties in bringing the repayment ratio up to acceptable levels. Major deficiencies in the design included the absence of: (a) criteria and procedures to address credit discipline and disallow weak financial institutions from accessing the credit; (b) well-defined indicators and incentives to ensure the disbursement and supervisory functions of the apex unit were supported with equal emphasis; and (c) an adequate consideration of subproject repayment as a project risk. 11. The project's outcome is unsatisfactory because: (a) the default rates were high; (b) leasing as a new financial product was developed and 25 enterprises were assisted but the leasing capacity of a participating company requires further strengthening as reflected in it's low recovery rate of only 30%; (c) the credit management capacity of some banks remains weak so that low loan recovery rates continue to erode banks' financial resources; and (d) many of the objectives of the technical assistance components that were designed to provide business assistance to SMEs were partially realized. 12. Capacity building in the financial and real sectors is a long term process that requires intensive work and commitment from all key players. It is uncertain that the few operations and benefits achieved under the project will be maintained and improved unless the Government consistently supports a development strategy guided by the need for macroeconomic stability, a disciplined financial system operating competitively, and a business environment conducive to private investment.  - iv - 13. Key Lessons Learned. The key lessons are: (a) Initiatives with capacity building objectives for the financial sector have a better chance of success if conditioned upon macroeconomic stability and include assistance for developing a disciplined financial system and a business environment conducive to private investment. Financial intermediary loans should focus heavily on developing the capacity to mobilize long term funds domestically. (b) The success of financial intermediary loans is dependent upon a disciplined credit environment. Where this is weak, measures should be included in the project design to improve it and address issues relating to governance, management, financial policies, collection performance, appraisal and supervision techniques, and credit risk management policies of PFIs. (c) If capacity building is a major goal and requires active participation by an apex institution, such an apex should be housed in a more permanent, commercially- oriented entity which does not compete with PFIs and is motivated by performance-based incentives (for example, investment banks, accounting firms, etc.). (d) Microenterprises require different financial products and delivery mechanisms compared to the traditional lines of credit targeted for small- and medium scale enterprises. The identification of institutions and partners dedicated to this target group is key to the effective delivery of services to this sector. (e) The availability of equity funds may have more far reaching effects to the development and growth of SMEs than credit for undeveloped SMEs. Banks are not well equipped to serve their needs because of information asymmetries on project quality and the lack of adequate collateral. The development of equity financing instruments is important because: (i) they provide SMEs access to technical know-how, (ii) through effective financial intermediation, equity funds can bridge the information gap between emerging entrepreneurs and the banking system; and (iii) as equity funds are used to nurture growth companies with the objective of selling participation in them, the supply of companies traded in the stock exchange increases leading to the development of the capital markets. (f) Where SMEs are still largely at an embryonic stage of development and the market for business services is distorted for a host of reasons, the development of affordable, effective, efficient, and sustainable capacity building services to SMEs should remain a priority to realize private-sector led growth in the real sector. Business development schemes should be based on key principles including that activities receiving support should: be generated locally; delivered on a fee for service basis; address actual market needs, provided by profit-driven private sector specialists chosen by the receiving firm; and time bound. It is also important that donors coordinate their efforts in supporting business know how  - v - and a service market. These lessons were reflected in the design of the on-going IDA-financed Private Sector Development Project. 14. In discussing a future operational plan, it was agreed that FUSMED and the BSD would proceed to work closely with PFIs to improve the repayment performance under the Project. Also, the Government is considering BOG's request to continue to make some of the reflows from this Project available to viable SMEs. In addition, BOG plans to house the management of the funds within an organization that is autonomous and established to implement a proactive program for SMEs.   IMPLEMENTATION COMPLETION REPORT GHANA PRIVATE SMALL AND MEDIUM ENTERPRISE DEVELOPMENT PROJECT (Credit 1996-GH) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Background 1. In the 1970s and early 1980s Ghana experienced major economic declines prompting the Government of Ghana (GOG) to introduce its Economic Recovery Program (ERP) in 1983 to improve the living standards and restore economic growth. By 1988 fiscal discipline was introduced, revenue collection increased, and direct controls on foreign exchange, imports, prices, interest rates, and credit allocation were abolished. The business climate improved as trade policy reforms were implemented including the introduction of a flexible exchange rate system, simplification of procedures for non- traditional exports, and improvements in the tax system. For a number of years, the economy grew by an average of 5 percent per year. Import substitution occurred in some sectors and the manufacturing sector continued to make progress in adjusting to a more competitive and liberalized market. 2. However, despite these positive economic changes, improved output levels were not associated with significant increases in labor demand and unemployment was a serious problem. Also, inflation continued to remain high (averaging 39% in 1987) and was attributed mainly to the lagged effect of the significant devaluation of the currency, the decline in domestic food production and the increases in domestic petroleum prices. The GOG, however, remained committed to its ERP and to implement further measures to support continued economic growth, sustained fiscal and monetary discipline, increased levels of domestic savings and investment, and further development of the private sector. 3. Recognizing that the development of private small and medium enterprises would be an important means to create employment opportunities in urban and rural areas and generate income and growth to help mitigate the social costs of adjustment, the Government and IDA designed the Private Small and Medium Enterprise (SME) Development Project to assist in meeting these objectives. This Project followed other IDA-supported projects that aimed to: revitalize the private sector by strengthening and rehabilitating economically viable industries, increase the production of locally manufactured goods, and develop the financial system. Excluding agriculture-related projects, these projects included two loans to the National Investment Bank (Loan 1180- GH, US$10 million, 1975 and Cr. 901-GH, US$19 million, 1979), the Second Reconstruction Import Project (Cr. 1573-GH, African Facility Cr. A-3 GH, US$87  -2 - million, 1985), and the Industrial Sector Adjustment Credit (Cr. 1672-GH, African Facility Cr. A-13-GH, US$25 million, 1986). The Financial Sector Adjustment Credit (Cr. 191 1-GH) to support policy and institutional reforms in the financial sector was concurrently prepared with the SME Project and approved in May 1988. B. Project Objectives and Description 4. The SME Project was designed to: (a) assist in financing private productive activities, facilities and resources to enable enterprises to contribute to the economic and social development of the country; (b) revive production and improve the economic viability of private SMEs and enable them to become more competitive; (c) develop an effective mechanism to foster participation of banks to provide long-term financing to SMEs; (d) support a program of assistance to micro-enterprises (MEs); (e) improve the availability of technical assistance (TA), extension services and entrepreneurial training for small-scale enterprises (SSEs) and women entrepreneurs; and (t) improve the policy and institutional support framework for SME development. The Project had four key components to support these objectives: (a) a line of credit, (b) equipment leasing, (c) pilot mutualist credit guarantee scheme for MEs, and (d) TA to build up the capacity of an apex organization and provide a range of business advisory services to SMEs and women entrepreneurs. 5. The preparation and focus of the SME Project were in line with the priority objectives of the Government and IDA's lending assistance strategy the thrust of which was to: establish more efficient industries and restructure or expand existing enterprises in the productive and service sectors; develop the financial sector's competitive ability to provide long-term investment resources; and stimulate employment, generate income and alleviate poverty. The Project was to alleviate the constraints to the development of SMEs, which were the unavailability of term resources and business support services. The Project was justified given the need to sustain the ongoing adjustment process with growth promoting programs and to facilitate a supply response and generate efficient employment in the productive sectors. C. Achievement of Project Objectives 6. Overall, the objectives of the project were partially achieved. Financial assistance was extended to a diverse group of SMEs relative to firm size, industrial sectors, and geographic location. The establishment of an apex unit provided a mechanism to foster the participation of seven banks and two leasing companies and to develop their capacity to provide term financing and leasing services, respectively, to SMEs. Also, the business advisory services and entrepreneurial training extended to small and micro enterprises and women entrepreneurs provided the beneficiaries with additional tools to increase their productive activities. However, micro-enterprises received very little financial assistance (less than one percent of the Project resources) as PFIs preferred lending to established SMEs in urban areas who required larger loans. Also, with the high default  -3 - rates, PFIs' financial resources will continue to erode. In addition, the TA under the Project was limited by the postponement and cancellation of some components. Line of Credit Component 7. This component was administered by the Fund for Small and Medium Enterprise Development (FUSMED) Unit, established as an apex unit at the Bank of Ghana (BOG). FUSMED onlent US$27.5 million to private SMEs for fixed investments, working capital requirements, consultancy services, and leases of industrial and business equipment through eligible participating financial institutions (PFIs). To remain eligible, PFIs were required to: comply with the monetary regulations and banking laws of the BOG; maintain a sound financial structure, a healthy portfolio, and the organization, management, staff and resources required for its efficient operations; and maintain and conduct its operations in accordance with sound financial principles and practices. Beneficiary SMEs for medium-term loans were required to have an equity contribution of at least 25 percent, a debt to equity ratio of not more than 3:1; a current ratio of at least 1.2 and a debt service coverage ratio of at least 1.4. Funding from the Project was available up to 70 percent of the sub-project investment cost and a maximum of US$750,000 (an agreed increase from the original limit of US$500,000) for each beneficiary SME. Resources were provided to: (a) PFIs at a market-determined reference interest rate (RIR) based on the average cost of 180-day deposits mobilized by PFIs; and (b) beneficiary SMEs at the PFI-determined spread above the RIR. The rate also applied to the leasing component but was discounted by 2 percent for the microfinance component to provide an added incentive to PFIs to extend financial services to the microenterprise sector. With PFIs assuming the credit risk, the BOG automatically debited the PFIs' accounts shortly after installment payment due dates. The Government bore the foreign exchange risk. 8. Resources totaling approximately US$28.2 million financed 121 loans to 109 SMEs and led to the creation of about 3,164 new jobs (see Appendices 3-6 for the distribution, characteristics and cost of these subprojects). Support for this component represented about 113 percent of the original allocation following requests made by BOG, and agreed by IDA, to reallocate resources from other components to meet continued demand for medium-term funds. The line of credit, as designed, was attractive to PFIs mainly because it provided: (a) medium-term resources not supported by their generally short-term deposit base; and (b) foreign currency. While loan commitment and disbursement proceeded well, the major issue for this component was the high default rates. 9. When the mid-term implementation review was conducted in May 1994, over 90 percent (10 percent less than projected at appraisal) of the funds were committed and about 50 percent of the borrowers servicing their loans were in arrears. In the course of implementing the Project, measures were taken to deal with the repayment problems, including regular monitoring of the subprojects, periodic updates of action plans of PFIs, and training sessions for PFIs. These capacity building measures helped the poorly  -4 - performing banks focus on loan recovery measures and assume a more conservative lending approach as evidenced by their reduced participation in the Project. The remaining 10 percent of the line of credit was committed over two and a half years. Despite these changes, however, the errors reflected in the credit decisions of PFIs and business decisions of SMEs made in the earlier years of project implementation were difficult to correct. A diagnostic study on the problem sub-projects, technical assistance to some distressed SMEs, and the extension of the closing date by six months to complete related consultant support did not yield much improvement in the overall default rate. Based on data provided by FUSMED, the overall arrears position (involving 56 enterprises) remained at about 51 percent when the Credit closed and amounted to approximately Cedis 10.5 billion. About 30 percent of the loans were classified sub- standard and below. PFIs confirmed that of the 109 enterprises assisted, eight have ceased operating. 10. Under the leasing component, resources were provided by two leasing companies to 25 enterprises for leases on equipment totaling approximately US$1.4 million. When the Project closed, one leasing company had problems with seven leases; the arrears position amounted to approximately Cedis 208 million. I1. The objective of the mutualist credit guarantee component to meet the financing needs of MEs and SSEs was not met. While US$28,000 was disbursed for loans to 45 MEs (members of two groups formed under the scheme) by two PFIs, FUSMED failed to execute the mutualist credit guarantee agreements and the funds for these groups were disbursed as regular sub-loans. During the life of the Project, despite attempts to make this component more user friendly (including changing the preliminary complex design of this component as prepared by consultants, exploring the use of a loan insurance fund, and including non-bank financial institutions (NBFIs) who lend primarily to the target group), the scheme was not implemented. Some PFIs continued to be interested in the scheme but did not have the wherewithal to assist micro enterprises and NBFIs did not meet BOG's regulatory requirements to participate in the Project. IDA and BOG agreed to reallocate the resources for this component to the line of credit. TechnicalAssistance Component 12. The TA component was designed to support capacity building and skills development for FUSMED, PFIs, SMEs, women entrepreneurs, and consultants. Technical assistance was in the form of business advisory and consulting services, training, and studies. The achievements of this component include the: (a) enactment of the 1993 Finance Lease Law which contributed to increasing competition with the establishment of new leasing companies; (b) establishment of three business advisory centers (Accra, Kumasi and Takoradi) which led to another nine business advisory centers (not funded under the Project) set up in eight regional capitals and two district capitals; (c) development of an on-going Entrepreneurship Development Program at the National Board for Small Scale Industries (NBSSI) from which training of about 5,150 participants (including women (59 percent), government re-deployed employees, and  -5 - micro and small-scale entrepreneurs); information provided by NBSSI indicate that approximately half of the participants received financing from formal and informal sources; (d) training of about 167 bankers and loan officers through seminars, workshops, and credit courses on the SME project operations, equipment leasing, credit management, and non-performing asset management; (e) training of approximately 587 entrepreneurs (479 women) by Women's World Banking (Ghana) Ltd. (WWBG) in Accra and Kumasi and the NBSSI in areas including small scale business, bookkeeping, inventory control, management, and marketing; many received financial assistance from formal and informal sources; (f) training of managers and staff in FUSMED (6), NBSSI (12), WWBG (1) in areas including financing schemes and support mechanisms for small-scale enterprises, loan supervision, and entrepreneurship development; (g) completion of a study on financing needs for small businesses; and (h) completion of a study on establishing business incubators and growth centers. 13. The objectives under the TA component were achieved partially. Despite the achievements enumerated above, support to the real sector envisaged under the project was minimized by the cancellation or postponement of some components and the inability of the Government to access co-financing resources to fill the project financing gap. The Pilot Studies Fund, designed to finance feasibility and implementation studies, consultant services, management counseling, and the acquisition of technological know- how, was canceled. Several reasons contributed to its cancellation: (i) the 50 percent cost of the TA to the beneficiary was designed as a loan -- from banks who were unwilling to take the risk should an investment project be deemed not credit worthy and to entrepreneurs who did not want the burden of a debt without a guarantee of a subsequent loan to cover their investment and operational requirements; and (ii) there was no strong support from entrepreneurs, PFIs, FUSMED/BOG, the Government or IDA to redesign the fund (for example, increasing the entrepreneur's contribution, incorporating any TA in a comprehensive package of loan support services offered by PFIs, or increasing the grant portion). 14. The decisions by the NBSSI first, to postpone the business incubator and growth center study because of a similar undertaking led by the Social Security and National Insurance Trust (SSNIT) and second, to carry it out later when there was insufficient progress by SSNIT, prevented further support under the Project to provide micro- enterprises with a shared work environment while preparing them to operate as independent business entities. 15. Early in the project implementation phase, the GOG also decided to cancel the assistance to the Management Development and Productivity Institute and the Ghana Institute of Management and Public Administration and increase the allocation to NBSSI. This reduced the development and implementation of short-term training programs in small business promotion and management intended for enterprises, private associations, banks and government institutions. The technology development study was implemented but under another IDA-financed project; recommendations from this study served as the basis of the Private Sector Development Project which benefits SMEs. Finally, the  -6- feasibility of establishing a duty free zone for export promotion was first postponed at the Government's recommendation (as assistance was being provided by an interested private American firm) and later financed under the IDA Agricultural Diversification Project. The establishment of a free zone is receiving support from foreign investors, other donors, and IDA under the proposed Gateway Project. Resources originally allocated for these components were reallocated to the line of credit component. 16. The estimated total project cost was US$57.4 million with IDA providing approximately US$30 million, PFIs approximately US$7.9 million, and the beneficiaries US$13.2 million. Co-financiers were approached to fill the financing gap (approximately US$6 million) but efforts to obtain additional funding were unsuccessful. D. Major Factors Affecting the Project 17. The key factors which affected project execution were the: a) Macro-economic conditions. The performance of the project was negatively affected by the adverse macro-economic conditions during the implementation period. The annual inflation rate ranged from 10 percent to 59 percent, the cedi depreciated ten- fold, and the claims on the central government and the non-financial public enterprises ranged from 7 percent to 21 percent of GDP squeezing out the availability of financial resources to the private sector. The Government's large borrowing requirements were reflected in high treasury bill rates that ranged from 19 percent to 41 percent. b) Participation by weak banks. Despite training, and as a result of years of operating in a non-competitive enviromnent, many staff in the active public PFIs lacked an appreciation of the time value of money, a commercial banking orientation, and flexibility in dealing with clients with respect to repayment schedules, funding of overruns or temporary accommodations. This was further aggravated by weak credit management skills, little decision-making power in bank branches, inadequate performance-based incentives and logistical support, and decisions to postpone any legal action toward defaulters because of the absence of an effective legal framework. Also, lending became less attractive (following the balance sheet clean-up exercise conducted under the FINSAC Project) as banks were increasingly preoccupied with their bottom lines and generally focused their attention on investing in risk-free BOG bills, attractive returns from short-term placements with discount houses, and on serving upscale, established clients rather than attracting new, small businesses. In addition, weak implementation of capacity building measures targeted at banks negatively affected the overall performance of the Project. For example, (i) the apex unit, FUSMED, focused more on its loan approval and disbursement role than on the performance of the Project portfolio because the PFIs bore the credit risk and their accounts with the BOG were automatically debited shortly after repayment due dates; and (ii) FUSMED funded more projects without taking steps to exclude PFIs whose credit management capacity was weak. Also, while banks' lending policies on loan  -7- pricing, credit approval, interest accrual, and provisions for actual losses on loans in arrears were in place, their unorthodox practice of insufficiently provisioning for potential losses on non-performing loans contributed to problems as a true picture of the health of the portfolio was difficult to obtain. c) Participation by enterprises that required essentialfinancial, management and operational assistance to thrive. The over-leveraged positions of clients with good projects prevented them from meeting the lending criteria of PFIs including equity contributions and collateral requirements. Weaker enterprises that defaulted on their loans were unable to implement their projects as planned, faced chronic problems of insufficient working capital, accepted loans that were untimely delivered or too small to meet their funding requirements, and utilized short-term funds for capital expenditures. With the prevailing high interest levels and the effect of compounded interest, they faced increasingly insurmountable problems. Difficulties in finding lucrative markets and the inability to compete with imported goods following implementation of trade liberalization policies also contributed in a major way to entrepreneurs' poor performance. In addition, enterprises were unable to improve their businesses because the technical assistance available to SMEs was unaffordable or inadequate. E. Project Sustainability 18. Capacity building in the financial and real sectors is a long term process that requires intensive work and commitment from all key players. The project was meant to contribute to the evolution and maintenance of financial sector reforms through an increase in the level of intermediation, an efficient and market-based credit allocation system, and a vigilant credit management system. It is uncertain that the few operations and benefits achieved under the Project will be maintained and improved, unless the Government's policies consistently support a development strategy guided by the need for macroeconomic stability, a disciplined financial system, and a business environment conducive to private investment. To continue meeting the challenge of sustainable growth, the Government needs to clearly and consistently send signals that translate into rigorous macroeconomic management and steady policy implementation to win the confidence of the private sector. Also, PFIs need to recognize that an efficient and competitive financial system is indispensable to private sector development. In addition, further development of the consulting industry to meet the demand for relevant business advisory services, and reforms in the legal infrastructure to support adequate security for loans and contract enforcement requirements are necessary. F. IDA's Performance 19. As designed, the Project reflected a correct analysis of the major constraints and weaknesses faced by the financial and real sectors; careful assessment of the background,  - 8 - experience, qualification and commitment of the implementing agencies; support for the development strategy and priorities of the Government and IDA; the allocation of Credit funds; and the establishment of the appropriate conditions prior to the effectiveness of the Credit. While it was recognized early on that having the central bank disburse resources under the line of credit component posed a potential conflict with its overall supervisory role in the financial sector, at the time the project was developed there was no other suitable organization that could implement this component satisfactorily. This necessitated the creation of an apex unit, FUSMED, at the BOG. The Project could have yielded better results if mechanisms were built to control potential problems resulting from this set up. Deficiencies in the Project design included the absence of: (a) criteria and procedures to address credit discipline and disallow weak financial institutions from accessing the Project resources; (b) well-defined incentives and indicators to ensure the disbursement and supervisory functions of the apex unit were supported with equal emphasis and in coordination with the Banking Supervision Department (BSD) of BOG; and (c) factoring unstable macroeconomic conditions and adequate consideration of subproject repayment as a project risk. Also, deficiencies in the design of the TA component of the project led it to its less than successful implementation. 20. To compensate for these design weaknesses, the supervision missions consistently stressed the importance of adequate appraisal of credit applications and close supervision of sub-project implementation and loan servicing. When unsatisfactory delinquency rates surfaced, IDA required FUSMED and PFIs to regularly follow up and report on the repayment rates, action plans to deal with delinquencies, arrears and provisioning positions. In addition to BOG-financed assessment studies, increased support was provided for training and workshops wherein managing directors and officers in the PFIs shared experiences and lessons learned from the assessment studies. However, IDA's efforts to build up the financial sector were undermined when: (a) stringent re- evaluations of individual PFI's capability, policies, procedures, finaincial performance and appraisal quality were not conducted; (b) more weight was given to the progress (albeit slow) in the privatization process of the state-owned PFIs under the FINSAC Project than in implementing radical measures to suspend poorly performing PFIs from participating in the Project; and (c) focus was on disbursement progress and meeting funding requirements of the real sector without intensifying institutional development measures for sub-borrowers. This was also evident in the satisfactory performance ratings recorded in supervision reports, despite a high default rate. G. Borrower's Performance 21. Overall, the collaboration between the FUSMED staff and the implementing agencies with the Bank in the preparation and implementation of the Project was satisfactory. FUSMED's positive performance was reflected in their overall good coordination with all the implementation agencies, cooperative relationships with PFIs, serious attempts at getting the microfinance and pilot studies fund components off the ground, persistence in the difficult task of gathering information to demonstrate Project impact, and the generally timely submission of audit reports.  -9- 22. The unfavorable market conditions, the weak credit management practices of PFIs, the choices made by sub-borrowers to default on loans, and the poor contract enforcement capacity in the judicial system all contributed to the difficult challenges to bring the repayment performance ratios up to acceptable levels. The sustainability of the Project achievements continued to be threatened by FUSMED's focus on delivering credit and their less than rigorous monitoring of sub-borrower and PFI performance. This deficiency was a result of FUSMED's reasoning that doing so would be overstepping their boundaries because the PFIs were taking the credit risk. A stronger commitment by and closer coordination between FUSMED and the Supervision Department at BOG to capacity building in the banking sector through stringent re-evaluations of the institutional and financial standing and credit management capacity of PFIs and disqualification of poorly-performing PFIs from participating in the line of credit would have improved the Project outcome. This was further complicated by a passive attitude prevailing among the state banks personnel who felt they operated in an environment where competition was not a problem. H. Assessment of Outcome 23. The Project outcome is unsatisfactory because: (a) although 109 enterprises were assisted and 101 continue to operate, the default rates were high; (b) leasing as a new financial product was developed and 25 enterprises were assisted but the leasing capacity of a participating company requires further strengthening as reflected by its over 30% recovery rate problem; (c) though the BOG and PFIs remain interested to continue providing term loans utilizing their own resources, some of the reflows from the Project, or funds from other lines of credit, the credit management capacity of some banks remains weak so that low loan recovery rates continue to erode banks' financial resources; and (d) many of the objectives of the technical assistance components that were designed to provide business assistance to SMEs were only partially realized. I. Future Operations 24. In discussing a future operational plan, it was agreed that FUSMED and the BSD would proceed to work closely with PFIs to improve the repayment performance under the Project. Also, the Government is considering BOG's request to continue to make some of the reflows from this Project available to viable SMEs. Pariicipating PFIs will be required to have increasingly higher and acceptable repayment rates and micro-finance institutions will be selected based on criteria that measure their sustainability and outreach capacity. In addition, BOG plans to house the management of the funds within an organization that is autonomous and established to implement a proactive program for SMEs. 25. The Government and many PFIs have also asked that IDA consider a similar follow-on project for continued assistance to SMEs. While the Government is not interested in assuming any foreign exchange risk, a key feature of the SME Project that  - 10- was attractive to PFIs, PFIs indicated that despite this position, there is still strong PFI interest in meeting the high demand for medium- and long-term financing with resources not available through the capital markets nor supported by their deposit base. If a future operation is considered, it should be designed to meet the objective of developing the financial sector so that future long term SME lending can continue as a viable lending activity with in-country sourced funds. It should address the credit disciplinary problem extensively; be based on the ability to locally mobilize domestic long-term funds; and involve sound banks or those participating in an intensive institutional restructuring and strengthening program and whose exposure is linked to achievements of monitorable targets. It is most important, however, that the Govermment remain vigilant in its work toward developing a stable macro-economic environment and an enabling financial and business environment in which the private sector can operate, compete and grow. The Bank continues to support these objectives through other on-going projects. J. Key Lessons Learned 26. The key lessons are: a) Initiatives with capacity building objectives for the financial sector have a better chance of success if designed to include assistance and conditions for support based on achieving macroeconomic stability and developing a disciplined financial system and a business environment conducive to private investment. Financial intermediary loans should focus heavily on developing the capacity to mobilize long term funds domestically. b) The success of financial intermediary loans is dependent upon a disciplined credit environment. Where this is weak, measures should be included in the project design to improve it and address issues relating to governance, management, financial policies, collection performance, appraisal and supervision techniques, and credit risk management policies of PFIs. For weak PFIs, capacity building should be addressed through action plans and commitment conditions incorporating time-bound and monitorable performance targets. Accrediting PFIs should be carried out by technically trained staff at the BSD at appraisal and periodically re-examined throughout project implementation so that PFIs are strengthened rather than undermined by their participation. c) If capacity building is a major goal and requires active participation by an apex institution, such an apex should be housed in a more permanent, commercially- oriented entity which does not compete with PFIs and is motivated by performance- based incentives (for example, investment banks, accounting firms, etc.). Apex arrangements with narrow administrative functions and located within central banks or government entities are best in environments with sufficiently large numbers of both institutionally strong PFIs and expected sub-borrowers that are good credit risks.  - I1 - d) Microenterprises require different financial products and delivery mechanisms compared to the traditional lines of credit targeted for small- and medium scale enterprises. The identification of institutions and partners dedicated to this target group is key to the effective delivery of services to this sector. e) The availability of equity funds may have more far reaching effects on the development and growth of SMEs than credit for undeveloped SMEs. Banks are not well equipped to serve their needs because of information asymmetries on project quality and the lack of adequate collateral. The development of private equity financing instruments is important because: (i) they provide SMEs access to technical know-how, (ii) through effective financial intermediation, equity funds can bridge the information gap between emerging entrepreneurs and the banking system; and (iii) as equity funds are used to nurture growth companies with the objective of selling participation in them, the supply of companies traded in the stock exchange increases leading to the development of the capital markets. In supporting an enabling environment for equity investments, initiatives will have to address constraints to the development of equity funds serving SMEs: high due diligence and supervision costs, lack of reliable exit mechanisms for selling minority shares, little understanding by entrepreneurs of the advantages and disadvantages of dealing with minority equity partners, and the existence of legal and regulatory obstacles. f) Where SMEs are still largely at an embryonic stage of development and the market for business services is distorted (because consulting fees are distorted upward by donor agencies that pay more for local firms; local firms experience a steep learing curve in targeting the appropriate expertise required to upgrade their capabilities; and firms do not appreciate the benefits they could derive from consulting services or justify the high fees in advance of experiencing the potential benefits accruing from the consulting services), the development of affordable, effective, efficient, and sustainable capacity building services to SMEs should remain a priority to realize private-sector led growth in the real sector. Business development schemes should be based on key principles including that activities receiving support should: be generated locally; delivered on a fee for service basis; address actual market needs, provided by profit-driven private sector specialists chosen by the receiving firm; and time bound. It is also important that donors coordinate their efforts in supporting business know how and a service market. These lessons were reflected in the design of the on-going IDA-financed Private Sector Development Project.  - 12 - PART II: STATISTICAL ANNEXES Table 1: Summary of Assessments A.L coetfObj cties : Substania j Partial J Neglgible [ Not Applicable- Macroeconomic policies Sector policies , _~~~~~~~~~~~~~~~~~~~~~~~~~~~, Financial objectives . Institutional development |_Physical objectives I Poverty reduction / Gender concerns / Other social objectives : Environmental objectives V Public sector management _ Private sector development V Other (specify) . jlRPretSusalablit, Lkel UJlef Uncertain C, E:nkterformsuce f Hlgh*5 Sa1 :i:0:sl*ei:ory $ 0 ;SaIsfeae Deficient Identification | Preparation assistance r Appraisal _ Supervision I Af Borrwev Deficien tlg il- P Preparation | D Implementation I | V Covenant compliance _ E. Aiiii*m H S_tshtr . St. tery l Unsatisfactory 10 I fI It-  - 13 - Table 2: Related Bank Loans/Credits Approval Preceding Operations: National Investment Bank I Development of SMEs, strengthen (Ln 1180-GH) National Investment Bank (NIB) 1975 Completed National Investment Bank Development of SMEs, develop a 1979 Completed II (Cr. 901-GH) restructuring program for NIB Export Rehabilitation Export sector policy and institutional 1984 Completed Project, Export reform, capacity building of key Rehabilitation TA, Export organizations and industries in the Rehabilitation Special Fund export sector (Cr.1435-GH, Cr. 1436-GH, Cr.F-9-GH) Second Reconstruction Finance inputs for selected industries 1985 Completed Import Project (Cr. 1573- GH, African Facility Cr. A- 3-GH) Industrial Sector Finance the development of the 1986 Completed Adjustment Project industrial sector (Cr.1672-GH, African Facility A- 13-GH) Following Operations: Financial Sector Financial sector policy and reform; 1988 Completed Adjustment Credit capacity building for key institutions in (Cr. 191 1-GH ) the sector Second Financial Sector Removal of remaining policy distortions, 1991 Ongoing Adjustment Credit (Cr.) further development of the financial sector Private Enterprise and Development of an enhanced export 1993 Ongoing Export Development credit program, the export financing Project (Cr. 2502-GH) capacity of banks, and the export capability of non-traditional exporters  -14- Table 3: Project Timetable Identification . 2/88 Appraisal 3/ 6/89 Negotiations 11/11/88 Board approval 3/28/89 Signing 5/ 1/89 Effectiveness 8/ 1/89 10/25/89 Mid-term review 5/10/94 Project completion 4/30/96 3/30/97 Loan closing 12/31/96 6/30/97 Table 4: Credit Disbursements - Cumulative Estimated and Actual (US$ million) Appraisal estimate 4.0 9.5 15.0 20.8 25.5 28.2 30.0 30.0 Actual disbursement 2.2 6.2 9.5 18.8 21.7 24.4 29.2 30.7 Actual as % of estimate 55 65 63 90 85 87 97 102 Final refund to the special account: October 14, 1997  -15- Table 5: Key Indicators for Project Implementation Key Incator- -Estimated Actual Line of credit commitment: 10% Mid-1990 1% 40% Mid-1991 42% 75% Mid- 1992 67% 100% Mid- 1993 88% Mid-1994 91% __ __ __ _ __ __ _ __ __ _Mid- 1995 103% Equipment leasing commitment: 20% Mid-1990 0 50% Mid-1991 0 80% Mid-1992 0 100% Mid-1993 0 Mid-1994 0 Mid-1995 55 Mid-1996 56 Regulatory and incentive environment for SSEs study End-1990 Cancelled; conducted by IDA Technology development study End-1990 Cancelled; implemented by IDA Export processing zone study End- 1991 Cancelled; conducted under the l_____________________________ ______________________________ Agricultural Diversification Proj. Equipment leasing study End- 1989 End 1990 Business incubator and growth center study March 1997 No. of SMEs assisted under the Pilot Studies and TA Fund: 50 Mid-1990 0 150 Mid-1991 0 300 Mid-1992 0 500 Mid-1993 0 Table 6: Key Indicators for Project Operation There were no specified indicators for project operation.  -16- Table 7: Studies Included in the Project lj.;;Study. ........ 0 7 7 -Purpose. S- 7t Impact Regulatory and Review problems faced by Cancelled Carried out by IDA under incentive environment the private sector, current an industry sector study; for SSEs incentive system recommendations were incorporated in projects ____________________ ______________________ assisting SSEs Technology Identify and examine Cancelled Carried out by IDA under a development constraints and sector study; opportunites for technical recommendations were development and incorporated in the Private ._____ _ innovation Sector Development Project Export processing zone Examine the potential for Cancelled Study implemented under -establishing a duty free Agricultural Diversification zone Project; recommendations incorporated in the .____________________ ._____________________ proposed Gateway Project Equipment leasing Examine the leasing. Completed Finance Lease Law, 1993 industry, define a leasing passed; new leasing law and develop the companies established and leasing industry participated in the Project's .____________________ ______________________ leasing com ponent Business incubator and Assess the feasibility and Completed Studies combined; growth study define the requirements requirements for setting up for establishing pilot incubators and growth incubators and growth centers defined and will centers serve as basis for establishing these centers Mutualist credit Study and define the Completed Microfinance procedures guarantee scheme procedures for providing were defined and the financial resources to scheme was established; microenterprises _ two banks participated and two groups were assisted Meeting the financing Assess the depth of Completed Studv provided an needs of SSEs financial services and important resource to instruments used to assist determine support SSEs mechanisms for MEs/SSEs (Non-Bank Financial Institutions Proj.)  -17- Table 8A: Project Costs (US$m) Line of credit 20.5 30.0 50.5 10.3 28.2 38.5 Leasing 0.6 2.5 3.1 0.3 1.4 1.7 Technical assistance 1.0 2.3 3.3 - 1.3 1.3 Unallocated - 0.5 0.5 - - - Total 22.1 35.3 57.4 10.6 30.9 41.5 Table 8B: Project Financing (US$m) |IDA | 0.8 l29.2 l30.0 l - |30.9 l30.9 | |Participating banks 7.9 07.9 0.3 0.3 SMEs 13.2 O 13.2 10.3 10.3 Co-financiers 0.2 6.1 6.3 Total 22.1 35.3 57.4 10.6 30.9 41.5 Table 9: Economic Costs and Benefits Ex-post FRR and ERR data for the beneficiary enterprises are not available.  - 18- Table 10: Status of Legal Covenants Development Credit Agreement Section Descripton Status Og Date Rev. Date 2.03 Closing date 3 C 12/31/96 6/30/97 3.01 Borrower's subsidiary agreement with Bank of Ghana 2 C 3.04 SME Policy Committee and Secretariat 3 C 4.01 Financial records, audit reports I C 6.01 Subsidiary Administration Agreement, operational policies and procedures, circular to the banking system, Participation Agreement 2 C 6.02 Ratification of the Project Agreement, Subsidiary Administration Agreement 2 C Sch. I Withdrawal of proceeds 2 C Sch. 4 Special accounts 2 C Sch. 2 Completion date 3 C 4/30/96 3/30/97 Project Agreement Section 1Description,' Ty17pe Sat, Orig. Date IRev. Date ._ - - 2.01 Establishment of the apex unit, FUSMED 3 C 2.02 Participation Agreement with PFIs 3, 2 C 2.06 Subsidiary Administration Agreement 3, 2 C 2.07 Implementation review and progress report 4 C 2.08 Staffing, coordination, monitoring 3,4 C . 2.09 Training for staff at Bank of Ghana, PFIs 5 C 2.10 Pilot mutualist credit guarantee scheme - study, establishment 5 C 12/31/89 2.11 Equipment leasing regulatory and policy framework - l______ study, implementation 5 C 12/31/89 2.12 Coordination between the Secretariat and IDA 3 C 2.13 Pilot Studies Fund establishment, implementation 5 C 9/30/89  19- Project Agreement Section Description s Statius. Orfg. Date Rev. Date 2.14 Annual review - social and economic impact 4 C 3.01 Financial records, audit reports 4 C Sch. 1 Principal terms, conditions of sub-loans, investments, l______ participation agreements 2, 3 C Sch. 2 Procedures for terms and conditions of sub-loans, investments 2, 3 C Sch. 3 Procurement, consultants' services 2, 3 C Covenant types: Present status: I - Accountstaudits 4 - Monitoring review, reporting C - Complied 2 - Flow, utilization of project funds 5 - Project implementation not 3 - Management aspects of the project, executing covered by categories 14 agency Table 11: Bank Resources - Staff Inputs (Staff Weeks) Stag of Actua- Through appraisal (preparation, 71.0 pre-appraisal) Appraisal-* Board (Negotiation) 32.6 Board -+ Effectiveness 14.9 Supervision 143.0 Completion 8.0 Total 269.5  -2o- Table 12: Bank Resourees - Staff Missions Stageof Month Number Days in I Staff SkiDls | Performrating b/ I Types ofFPoblem of rating__ b/Tpso Project Cycle Year Persons Field rpst Imp'n w Dcv't _ _ _ V_ _ _^_- Through FIN, OP, EC, appraisal 3/88 6 20 Credit Spec. Appraisal - FIN, OP, EC, Board 7/88 7 20 Credit Spec. Board -_ Effectiveness Supervision 7/89 2 5 EC, OP 5/90 2 7 EC, OP l 2 Slow loan processing because of a shortage in skilled staff, poor quality feasibility reports, delays in TA component implementation 10/90 2 8 EC, OP 1 2 Slow loan processing due to intemal problems and restructuring of some PFIs; delays in TA component implementation due to reorganizational processes 5/91 3 10 EC, PS/FN, OP 2 1 Slow submission of loans for term lending because of capital adequacy requirements, implications of financial restructuring; lack of interest in the Pilot Studies Fund 9/91 2 1 8 EC, PS/FN 2 l Weak capacity in PFIs, size of special account, absence of interest in the mutualist credit guarantee scheme and incorporation of a loan insurance scheme, non-utilization of the pilot studies fund 11/92 3 1 1 FN, PS, OP 2 2 Weak capacity in PFIs, slow disbursement, delays in establishing the mutualist credit guarantee scheme, lack of any leasing activity 9/93 2 15 OP, FN 2 2 Slowdown in disbursements under the line of credit component, no lending activity under the mutualist credit guarantee scheme and leasing component, high default rates, weak capacity in PFIs, computerization problems in the apex unit, absence of interest in the pilot studies fund 6/94 2 15 OP, FN S S High default rates, weak PFI capacity, lack of banking mentality, absence of leasing activity and lending to microenterprises, poor supervision support from the apex unit, no interest in the pilot studies fund 1/95 2 l l OP S S Low repayment rates, poor credit management capacity in PFIs, lack of interest in the mutualist credit guarantee scheme 6/95 4 4 OP S S Poor Repayment performance, delays in lease payment Completion 11/96 2 15 OP, Credit Spec. S U High default rates a/ EC-Economist, FN-Financial Analyst; OP-Operations Officer, PS-Private Sector Specialist, b/ Ratings: I-Minor problems, 2-Moderate problems, 3-Major problems, actions taken, 4-Major problems, insufficiently addressed S-Satisfactory, U-Unsatisfactory  Appendix 1 GHANA PRIVATE SMALL AND MEDIUM ENTERPRISE DEVELOPMENT PROJECT (Credit 1996-GH) FINAL SUPERVISION MISSION AIDE MEMOIRE 1. An IDA supervision mission represented by Ms. Marilyn Manalo (team leader) and Mr. Ramon Marks (Consultant) were in Accra November 6-21, 1996 to conduct the final supervision of the implementation of the Private Small and Medium Enterprise Development Project (SME Project, Credit 1996-GH) and to commence the preparation of the completion report for this project. This Credit was expected to close on December 31,1996 but an extension of the closing date has been proposed. 2. The mission would like to express its appreciation for the assistance and courtesies extended by FUSMED, the apex unit at the Bank of Ghana, representatives of participating financial institutions (PFIs), the National Board for Small Scale Industries, Ghana Leasing Co. Ltd., LeasAfric, Women's World Banking (Ghana) Ltd., and private sector beneficiaries. 3. Following is a summary of the implementation status of the project; an operational plan discussed with FUSMED; and the next steps to be taken by FUSMED, PFIs, and other beneficiary agencies in preparation of the completion report. confirmation of this aide memoire will be provided by the Bank upon the return of the mission to Washington, DC. A. Project Implementation Status Credit and Leasing Component 4. Under the line of credit component, support totaling approximately $ 28.6 million was approved for 109 small and medium enterprises. This represents about 122% of the original allocation for this component. The distribution of the enterprises assisted under this Credit are as follows: (a) sectoral: manufacturing-69%, service-3 1%; (b) geographical: Greater Accra-68%, Ashanti-12%, Western-6%, Brong Ahafo-6%, other- 8%; (c) loan size: medium-65%, small-27%, micro-8%. It is estimated that about 3,164 new jobs were generated under the project at an average cost of about $9,039. Total project cost for these subprojects is estimated to be $39.4 million, of which $28.6 million was financed by the Credit, $1 million by PFIS, and $9.8 million by the enterprise sponsors themselves.  -2- 5. While the loan commitment and disbursement status is satisfactory, the major issue on the line of credit remains the poor repayment collection performance. In the last year, the overall arrears position for the subprojects has deteriorated to around 60% of the amount outstanding. Of the 109 enterprises that have been funded under the Project, 47 are current with their repayments. Arrears for the remaining 62 enterprises amount to approximately Cedis 9 billion. 6. The Project's unsatisfactory loan recovery performance by the PFIs has been attributed to many factors. The difficult economic conditions prevailing in the country continue to adversely affect the ability of the enterprise to implement their projects, operate competitively, and service their loans. Other factors that contribute to this unsatisfactory performance include management, financial, accounting and technical weaknesses of some sub-borrowers, insufficient equity contributions, deficient and sometimes untimely credit approvals, and delayed implementation of sub-projects. In addition the weak credit management procedures and poor client relationships on the part of the PFIs also contributed to this position. In the discussions, the meetings highlighted the importance of sound project appraisal and close loan monitoring as a key lesson they learned from this Project. The importance of technical assistance to enterprises was also stressed. 7. In an attempt to improve the non-performing status of the sub-projects, FUSMED recently funded a review of the PFIs' portfolio of 35 problem projects financed under the SME project. This review was carried out by consultants from the Non-Performing Assets Recovery Trust. The goals of the review were to diagnose problems experienced by the SMEs and to recommend corrective actions FUSMED and the PFIs can take to enable the PFIs to recover the funds lent. Following the completion of this study, the findings and recommendations were provided to the managing directors of PFIs and discussed at workshops sponsored by FUSMED for loan officers of the PFIs. The mission was informed that in September 1996, recommendations stemming from the workshops and discussions with PFIs were submitted to the BOG for its consideration. As the Bank has not had the opportunity to comment on these recommendations, the mission expressed the need for the Bank to review BOG's plan of action for the concerned PFIs and enterprises and requested that this be forwarded to the Bank. During meetings with the mission, it was also agreed that FUSMED would provide BOG's Banking Supervision Department (BSD) with a copy of the report to enable the BSD to follow-up on the PFIs' action plans for the problem projects. For other non-performing clients, PFIs have rescheduled their loans or taken litigation action. 8. Under the mutualist credit guarantee component, $ 2 million was provided for micro and small enterprises. The component was not utilized. While $28,000 were allocated for 45 enterprise members in two groups formed under the scheme and supported by two PFIs, FUSMED failed to execute the mutualist credit guarantee agreements and the funds for these groups were disbursed as regular sub-loans. While there is continued interest in this scheme, the disbursement and repayment problems  - 3 - experienced under one sub-loan prompts the mission to strongly recommend that a re- examination of the grouping process, guarantee mechanism and the credit channeling arrangements be reviewed before funding for candidate groups are considered under the scheme. In addition, the legal documentation required between BOG and PFIs on the MCGS should be finalized for future adoption. 9. On the leasing component, approval was provided for 26 sub-projects submitted by two leasing companies totaling approximately $ 1. 8 million. As of end-July 1996, approximately $1.4 million was disbursed; the remaining funds will not be required by the lessees. Of the total Cedis 1. 5 billion due in lease payments, approximately Cedis 341 million was overdue. The same factors that contributed to sub-borrowers defaulting under the line of credit have also affected lessees of one participating company, Ghana Leasing Co. (GLC). GLC informed the mission that it continues to implement action plans for their non-performing clients to improve their lease payment performance. The second company, LeasAfric, has not been experiencing any problems with defaults to date. 10. The mission expressed concern that the persistent condition of high arrears would continue to adversely affect the outcome and sustainability of the Project. The mission recommended that FUSMED, BSD and PFIs take a more aggressive loan supervision approach to address the recovery issue and that PFIs continue their process of drawing up and implementing action plans for each non-performing sub-loan to reduce the arrears level. In addition, FUSMED and PFIs should reinforce the assistance provided to the defaulting sub-borrowers by extending technical assistance to help these enterprises strengthen their operations and eliminate their loan arrears with the PFIs. Technical Assistance Component 11. The technical assistance component was designed to support capacity building and skills development for FUSMED, PFIs, SMEs, women entrepreneurs, and consultants. Technical assistance was in the form of business advisory and consulting services, training and studies. Some preliminary indications of the qualitative achievements of the TA include the: * enactment of a finance lease law in 1993 following the completion of a study; * establishment of three pilot business advisory centers (Accra, Kumasi and Takoradi) which led to the further establishment of another nine business advisory centers (not funded under the project) in eight regional capitals and two district capitals; * development of an Entrepreneurship Development Program at the National Board for Small Scale Industries which contributed to the training of 5,150 entrepreneurs including women (40%), government redeployed employees, and micro and small-scale entrepreneurs;  -4 - * training of about 167 bankers and loan officers through seminars, workshops, and credit courses (11 in number) on the SME project operations, equipment leasing, credit management, and non-performing asset management; training of approximately 587 entrepreneurs (479 women) by Women's World Banking (Ghana) Ltd. in Accra and Kumasi and the NBSSI in areas including small scale business, bookkeeping, inventory control, management, and marketing; * training of managers and staff in FUSMED (6), NBSSI (12), WWBG (1) in areas including financing schemes and support mechanisms for small-scale enterprises, loan supervision, and entrepreneurship development; * completion of a study on financing needs for small businesses. A complete record of the achievements under the technical assistance component and an evaluation of the impact of the assistance provided will be covered in the Implementation Completion Report (ICR). To sustain the achievements listed above and to further assist entrepreneurs, FUSMED, PFIs, NBSSI, WWBG and SMEs have indicated the need for on-going training (in various areas including, for example, banking, financial services, project management, small business management, etc.) and logistics support. 12. NBSSI informed the mission that the study on the growth center/business incubator is expected to be completed prior to the Project's closing date. Because the consultants' work on this study is yet to commence, the mission expressed concern that the quality of the study may be jeopardized. NBSSI indicated that sufficient time is available for the work to be done and that all the support for the consultants would be made available. It was agreed that NBSSI will keep the Bank informed of the developments of the study given the very tight schedule. Project Administration 13. A review of FUSMED's records on the commitments to date under the Project for all components and discussions with PFIs on possible cancellations of allocations for some sub-projects revealed that approximately SDR900,000 will be available for onlending. Based on FUSMED's records, disbursements under the line of credit amount to approximately SDR21 million Given the extent of these resources, some PFIs and FUSMED have requested the Bank's consideration for more time to use these recently freed up resources to refinance some of the PFIs' projects which meet the objectives and the eligibility criteria under the Project. Recognizing the demand for medium-term resources, the mission advised FUSMED to formally request Bank consideration for an extension to the closing date from December 31, 1996 to June 30, 1997. 14. In light of the poor recovery performance of projects financed by the Project, the request for extension should include an action plan by FUSMED and PFIs for all sub- projects, technical assistance to beneficiary enterprises, eligibility criteria of PFIs, and utilization of funds (incorporating a listing of the number of eligible candidate projects by  - 5 - PFI and their funding requirements). The action plan should provide by defaulting sub- borrower information on: the total amount approved, total amount outstanding, arrears classification and amount, specific action to be taken to recover the loans made and the expected timing of the action and technical assistance to be provided to improve the repayment record. The mission suggested that on-going technical assistance programs (for example the Technology and Enterprise Development Fund under the Private Sector Development Project) specifically set up to assist SMEs can be tapped for this purpose. Also, the benefits of a technical expert to assist PFIs and SMEs specifically benefiting from the Project might be considered. It was agreed that the request for the closing date extension and the action plan will be sent to the Bank not later than December 16, 1996, The mission also stressed the importance of FUSMED and PFIs recognizing that only disbursements made by the closing date will be funded under the project. 15. The mission expressed concern that despite attention called by previous missions and repeated recommendations recorded in the-annual audit reports, FUSMED's accounting system is still not fully computerized and interactive. This results in delays in processing commitments, disbursements, repayment schedules, and aging analysis. The mission reviewed FUSMED's reporting procedures and suggested reporting formats that would enable FUSMED to monitor more effectively the performance of the Project. FUSMED also indicated that work has commenced to incorporate FUSMED's records into the overall BOG computerized network. 16. With regard compliance with the legal covenants, FUSMED submitted their audit reports in a timely manner. PFIs were also in compliance with the submission requirements for their annual audited financial report. However, in accordance with the Project Agreement, Schedule 1, para. (B)(2), PFIs were to include a supplementary audit statement on their compliance with eligibility criteria of investment projects. While this was not done, the evaluation of FUSMED of all sub-projects ensured compliance with the criteria. However, to ensure compliance with this legal requirement, it was agreed that FUSMED would ensure that an opinion on this audit for all PFIs would be included in the audit report for 1996. FUSMED will provide this report to the Bank by June 30, 1997. B. Operational Plan 17. In discussing a future operational plan, it was agreed that: a) FUSMED and the BSD would closely liaise with PFIs to obtain quarterly action plans for loans under the Project that are still being serviced; b) the mission would inform the Bank of the request from BOG and expressions of interest from FUSMED and PFIs for a second SME project. BOG also requested consideration for a foreign exchange guarantee scheme. The mission reminded the meetings that when this idea was discussed about two years ago, the Government  - 6 - indicated that it could no longer assume the foreign exchange risk if a second line would be contemplated. For this reason, PFIs indicated that a second line would not be as attractive as this Project and that there could be problems with its utilization. Following an expression of interest by PFIs on a follow-on line of credit m meetings with this mission, some PFIs informed the mission that despite the Government's position, if the project were properly designed to cover the foreign exchange risk, there still is scope in the system for another line of credit to meet the high demand for medium- and long-term financing. The mission agreed to bring this to the attention of the Bank's country team for serious consideration; c) FUSMED and BOG agreed to pursue their earlier request to the Government for resources from the reflows of this Project to re-lend to SMEs and micro-enterprises on a medium-term basis. The mission suggested, and the Deputy Governor confirmed, that the terms under the PEED Project's medium-term facility would be adopted for the facility funded by the reflows. Also, the mission asked that care in extending credit be exercised and that lessons from this Project be applied particularly in terms of (i) lending to viable enterprises following thorough examination of feasibility studies and careful assessment of the enterprises; (ii) making funds available to PFIs that have attained gradually increasing repayment rates of at least: 70% in the first year to over 90% in the third year (consistent with the medium-term facility under the Private Enterprise and Export Development Project); (iii) providing a sufficient level of resources on a timely basis; (iv) lending to micro-enterprises based on best practices relating to the ability of participating NGOs and other financial institutions to provide financial services on an operationally sustainable basis and with increasing outreach as a primary goal; (v) providing complementary technical assistance to both PFIs and entrepreneurs through existing service providers; and (vi) managing the funds within an organization that is autonomous and properly motivated to implement a proactive program for SMEs; and, d) most importantly, that the Government work toward providing financial intermediaries and entrepreneurs with an enabling macro-economic environment in which to operate and compete. C. Implementation Completion Report 18. The mission discussed the requirement of an implementation completion report (ICR) with the Bank of Ghana, FUSMED, PFIs, the National Board for Small Scale Industries, and the Women's World Bank (Ghana), Ltd. The policy of the Bank is to evaluate completed projects together with the Borrower and to record this evaluation in an ICR. The ICR is prepared jointly by the Bank and the Borrower and assesses primarily the (a) degree of achievement of project objectives; (b) prospects for the project's sustainability; (c) performance of IDA and the Borrower; (d) project outcome; and (e) plan for the project's future operation. The ICR provides the data and analysis to  -7 - substantiate these assessments and also identifies the lessons learned from implementation. 19. The mission discussed with FUSMED the requirements to complete the report. It was agreed that FUSMED would assist IDA in its preparation and would coordinate the submission of data from PFIs and other implementing agencies. Also, FUSMED will assist in the preparation of the Borrower's evaluation report to be attached, unedited, to the ICR. The Borrower's contribution will be supervised by the Ministry of Finance. The attached annex provides the format of the data to be incorporated in the report and to be submitted by FUSMED and all other implementing agencies. Accra, Ghana November 21, 1996  I  Appendix 2 PRIVATE SMALL AND MEDIUM ENTERPRISE DEVELOPMENT PROJECT (Credit 1996-GH) BORROWER'S CONTRIBUTION TO THE ICR   GHANA PRIVATE SMALL & MEDIUM ENTERPRISE DEVELOPMENT PROJECT CREDIT 1996-GH IMPLEMENTATION COMPLETION REPORT - FUSMED PORTION Introduction The SME Project was an integral part of IDA's strategy to support Ghana Government's reform programme aimed to reverse the decline in living standards and pave the way for sustained growth. A total amount of SDR22.3 million was made available by IDA to the Government in October 1989 when the Credit was declared effective. The Project closed finally on June 30, 1997 after postponement from the original date of December 31, 1996. Obiectives of Project The Government made the proceeds of the Credit available to the Bank of Ghana for the principal objective of financing the development of SMEs in the private productive sectors in order to generate a supply response and thus increase employment, output and income. The beneficiaries of the Credit included privately-owned SMEs in all economic sectors other than agriculture, trading and real estate, institutions or organisations providing business support services to SMEs such as NBSSI and WWBG as well as banks that were assisted to provide medium and long-term funds to SMEs. Also, the Credit sought to improve the broad policy support framework for the development of SMEs. The bulk of the proceeds of the Credit was to be lent to the participating financial institutions (PFIs) who were to on-lend the funds in cedi terms at variable and market  2 determined interest rates to the beneficiary SMEs. The Project had the following components:- (a) a line of credit to finance the fixed asset and working capital needs of SMEs; (b) equipment lease finances to provide an alternative and flexible source of long-term financing to SMEs; (c) a Pilot Studies Fund to assist micro and small enterprises obtain consultancy and technical assistance; (d) a pilot mutualist credit scheme for micro-enterprise lending; (e) an integrated technical assistance package to directly assist FUSMED, WWBG NBSSI, MDPI, GIMPA designed to provide capacity building and skills development; and (f) studies on equipment leasing, technology development, free trade zones and the regulatory and incentive environment for private sector and small enterprise development. PROJECT'S OUTCOMES AND RESULTS A total of SDR21.9 million ($30.9 million) was disbursed out of the total credit amount of SDR22.3 million. This amount may be considered a big contribution in terms of foreign exchange resources being made available to the economy of Ghana.  3 Line of Credit Component Under the line of credit component, 121 SME sub-loans were financed to the tune of $28.6 rmillion or SDR19.9 million through 7 PFIs. The beneficiary enterprises were located in 9 out of the 10 administrative regions in Ghana, and engaged in manufacturing and service industries such as printing, agro-processing, metal fabrication, food and beverage, timber/wood processing, hotels, transport and restaurant operations. Medium enterprises received $25.3 million or 88% of resources; small enterprises $3.2 million or 11 %; and micro-enterprises $0.13 million or 0.4% of resources. Equi2ment Leasing Component Twenty-five enterprises had $1.8 million approved for them through 2 leasing PFIs under the equipment leasing component, though only $1.6 million or SDR944,929 was eventually disbursed. The beneficiaries were engaged in various economic fields including services but generally located in urban centres mainly the city of Accra. As at June 30, 1997, one (1) lessee account was tenninated; 3 were expired; 8 were non- performing; the remainder were classified as current or performing. Pilot Studies Fund The Pilot Studies Fund scheme to assist micro and small enterprises with the cost of studies was cancelled due to lack of patronage arising from the design of the scheme and the peculiar problems of micro and small enterprises. Beneficiaries were required to contribute 50% of the cost of studies or technical assistance with the remaining 50% being provided by FUSMED as a loan. In accessing this facility, beneficiaries were  4 required to provide their contribution up front to PFIs which then applied for the second portion from FUSMED. Firstly, many micro and small enterprises could not afford the 50% contribution. Secondly, as there was no guarantee that the related sub-project would be successful, the risk of the second portion becoming a loan burden was a disincentive. Thirdly, PFIs were generally not interested in the scheme considering it unimportant to them. A number of small enterprises cited their frustrations with PFIs. Mutualist Credit Guarantee Scheme The Mutualist Credit Guarantee Scheme, another facility for MEs and SSEs, was virtually not implementable. Again, PFIs regarded the scheme as unimportant to them. It seems that where MEs and SSEs are concerned, there is little or no co-operation from PFIs. In December1995 when the credit line became fully exhausted against the background of continuing demand for credit, it was decided that SDR1,378.500 out of the MCGS allocation of SDR1,490,000 should be reallocated to the line of credit, the difference remaining in the books out of consideration. Again, in April 1996 a withdrawal of SDR91,500 was made out of the remaining amount. These reallocations were made because, among other things, not many MEs and SSEs came forward to form successful Mutualist Guarantee Associations (MGAs). The few that expressed interest in forming MGAs could not find PFI support while two MGAs that finally secured PFI sympathy found the processing time so long that its members  5 could not maintain the monthly membership contributions required to establish a guarantee fund (GF). For this reason, these two MCGS applications were eventually treated as sub-loans. The two groups, involving a total of 45 members, were assisted in the total sum of SDR12,822 ($28,000). Technical Assistance Component A total of $1.3 million was spent under the technical assistance component. The assistance covered training, consultancy services and logistics to the beneficiary institutions, FUSMED, NBSSI and WWBG together trained nearly 6,000 persons in skills related to management, project appraisal, supervision and monitoring, non- performing accounts management and entrepreneurship development. MDPI and GIMPA, original beneficiaries of technical assistance, were excluded by the SME secretariat in order to make more funds available to institutions directly supporting small enterprises. Studies on equipment leasing, financing needs of SMEs and the development of incubators and growth centres were completed.  6 General In all, there were 3 re-allocations of funds under the various components due to slow disbursement by June 30, 1997, the final closing date.  7 EVALUATION SUMMARY Assessment of Overall Implementation Results The objectives of the project were partially achieved. Fund for Small and Medium Enterprise Development (FUSMED), the apex unit set up at the Bank of Ghana (BOG), for the purpose, provided the avenue for seven banks and two leasing companies to assist their SME customers in the term financing. The banks accessed the line of credit mainly because it provided them with medium-term foreign exchange resources not available to them because of the generally short-term nature of their deposit base, and also because the Government of Ghana assumed the associated foreign exchange risk. The distribution of approvals under the line of credit component shows that the bulk of resources went to medium enterprises (88%) confirming PFI preference of medium-sized enterprises to MEs and SSEs. Urban and peri-urban located SMEs received 99% share of total funds disbursed. Female proprietors involved in 22 enterprises generally received about 20% of the Project's resources. The overall repayment under the Project remained low as at the closing date. Under the line of credit the amount of arrears was approximately