Tunisia - Second Small and Medium Scale Industry Development Project

 Second small & medium scale industry development project Report No: ; Type: Report/Evaluation Memorandum ; Country: Tunisia; Region: Middle East And North Africa; Sector: Small Scale Enterprise; Major Sector: Industry; ProjectID: P005667 Tunisia: Second Small and Medium Scale Industry Development Project (Loan 2911-TUN) The Implementation Completion Report (ICR) for the Tunisia, Second Small- and Medium-Scale Industry Development Project (Loan 2911-TUN, approved in FY88, and closed, on schedule, in FY95) was prepared by the Middle East and North Africa Regional Office, with an Annex providing comments from one of the implementing agencies. This US$28 million loan was designed to increase the flow of financial resources through commercial banks for medium and long term lending to small- and medium-scale industries (SMI). The objectives of the project were to foster economically, financially and technically sound projects in the SMI sector, develop and deepen entrepreneurship and generate sustainable employment and job creation. The project included a technical assistance component to strengthen the institutional capacities of the participating banks and Government agencies responsible for support to the SMI sector. Cofinancing was provided by grants from the Government of Belgium (US$730,000) and the United Nations Development Program (UNDP) (US$530,000) for technical assistance to one of the participating SMI support agencies. The objectives of the project were only partially met. While the objective of increasing the flow of financial resources through the commercial banks to SMIs was achieved, the performance of the sub-projects financed was poor, with the result that broadening entrepreneurship and generating sustainable employment were only partially achieved. In two of the three commercial banks, 60 percent of the sub-loans were in arrears. Including the two development finance institutions which were also involved in onlending, 50 percent of all sub-loans were in arrears at the time of the ICR. Furthermore, 50 percent of the sub-projects experienced significant cost over-runs resulting in lower than expected economic and financial rates of return. Finally the project achieved less than half the expected job creation. The reasons for this poor performance are diverse. The quality of the participating financial institutions was uneven, particularly with regard to their appraisal capabilities, and the technical assistance provided for institutional strengthening was only marginally effective. Financial sector reform, while underway in Tunisia, was limited, with inadequate incentives for sound prudential practices. Finally there were deficiencies in project design which encouraged an understatement of the full cost of subprojects and resulted in severe liquidity problems for many SMI borrowers. The ICR rates the project's outcome as unsatisfactory, institutional development as negligible, and sustainability as unlikely. OED concurs with these assessments. The ICR rates Bank performance as satisfactory during appraisal and unsatisfactory during implementation. OED rates overall Bank performance as unsatisfactory because the appraisal was deficient in not undertaking a sufficiently comprehensive review of the participating bank's portfolio and sub-project appraisal capabilities. The ICR is satisfactory and provides a candid and detailed insight into the problems this project encountered. It also includes a forward-looking discussion of ways to deal with portfolio problems of the banks. There are some omissions however. The ICR does not include an Aide-Memoire or comments from the co-financiers and has only limited comments by one of the implementing agencies. A number of crucial lessons emerge from this project. For financial sector operations, there need to be objective criteria for assessing the capabilities and quality of onlending institutions. This thorough appraisal can then lead to a realistic, adequately planned and funded technical assistance program of institutional development. The financial system must provide the correct signals to reward sound prudential management and penalize those that deviate from these sound banking practices. Finally, the Bank needs to ensure adequate supervision time, that encompasses a detailed review of the performance of sub-borrowers. No audit is planned.