Bolivia - Private Enterprise Development Project

Document of The World Bank FOR OFFICIAL USE ONLY CiZ Z /3 Y - /so Report No. P-5270-BO MORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVEOPMIDT ASOCIATION TO THE xECXITlVE DIRECTORS ON A PROPOSED CREDIT IN AN AM4OUNT EQUIVALENT TO US$16.1 MILLION TO BOLIVIA FOR A PRIVATE ENTERPRISE DEVELOPMWNT PROJECT April 26, 1990 Tlis document has a restricted distribution and may be used by reciplents only in the performance of their officil duties. Its contents may not otberwise be disclosed without World Bank authorization.  CURRENCY EQUIVALTS Currency Unit - Boliviano (Bs) US$1.00 - Bs 3,045 (March 7, 1990) Bs 1.00 - US$0.328 FISCAL YEAR January 1 to December 31 GLOSSARY OF ABBREVIATIONS BCB Banco Central de Bolivia (Central Bank of Bolivia) DCD Development Credit Department, in BCB FEBOPI Federaci6n Boliviana de Pequefios Industriales (Bolivian Federation of Small Industries) ICI Instituciones de Cr6dito Intermedias (Financial Intermediaries) IDEA Instituto de Empresarios y Administradores (Institute of Entrepreneurs and Administrators) INBOPIA Instituto Boliviano de la Pequeffa Industria y Artesania (Bolivian Institute of Small Industry and Handicrafts) INPEX Instituto Nacional para Promocifn de Exportaciones (National Institute for Export Promotion) LIBOR London Interbank Offering Rate MICT Ministerio de Industria, Comercio y Turismo (Ministry of Industry, Commerce, and Tourism) PRODEM Fundacion para la Promoci6n y Desarrollo de la Hicro-Empresa (Foundation for the Promotion and Development of Micro-Enterprises)  FOR OFFIUL USE ONLY BOLVIA PRIVATE ENTERPLRISE DEVLOPEKMT PROJECT Credit and Proiect Sumnarv Borrower: Government of Bolivia ExecutinL Agency: Central Bank of Bolivia Beneficiaries: Industrial Enterprises Amount: SDR 12.5 million (US$16.1 million) Terms: Standard IDA terms, with 40 years maturity Onlendina Terms: The Government of Bolivia would onlend US$14 million of the credit's proceeds to the Central Bank on the same terms and conditions. The Central Bank would onlend these resources to approved financial institutions (ICIs) at the prevailing London Interbank Offering Rate (LIBOR). The ICIs in turn would comnence lending to eligible enterprises at a rate equivalent to the higher of: (i) a rate no more than 7.5 percentage points below the pre- vailing average market-determined onlending rate for U.S. dollar or U.S. dollar-linked loans; or (ii) the average U.S. dollar or U.S. dollar-linked term deposit rate. The interest rate would be periodically revised, consistent with an action plan to fully liberalize interest rates by March 31, 1993. The subborrower would bear the foreign exchange risk. The Central Bank would bear the cross- currency risk. The Government wculd transfer IDA pro- ceeds for technical assistance on a grant basis to the Central Bank, who would transfer resources to eligible enterprises on the same terms. Financina Plan: Local Foreism Total -------US$ millions-------- IDA 3.0 13.1 16.1 Beneficiaries 7.4 7.4 Government of Bolivia 1.4 1.4 Total 11.8 13.1 24.9 Staff Appraisal Report: No. 8445-BO Mai): IBRD 16591 This document has a testricted distribution and may be used by recipients only in the perfonnance of their offlcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  NEMORANDWH AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENt ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO BOLIVIA FOR A PRIVATE ENTERPRISE DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a proposed credit to Bolivia for SDR 12.5 million (US$16.1 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms, including 40 years maturity and 10 years grace. 2. Background. The Government has dominated the Bolivian economy during the last three decades, both as a regulator of activities and as a producer of goods and services. During this period, the State accounted for over two- thirds of total investment. The limited private investment which took place was geared to distorted incentives, resulting from a complex protectionary system of tariffs, import quotas, and subsidized credit provided by the State- dominated banking system. The years of palitical instability and economic mismanagement resulted in a small, cautious, dichotomized private sector, consisting of a highly concentrated formal sector (chiefly La the financial, mining, and energy sectors) and a large number of very small or informal activities in agriculture, mining, and manufacturing. 3. In the context of the stabilization program launched in 1985 and the reactivation measures taken in 1987, the Government introduced a number of reforms to enhance performance of the private sector. These reforms are oriented towards stabilizing the economy, reintroducing a free market policy framework, and eliminating constraints which impede resumption of economic~ growth and restoration of a more favorable business environment to reactivate the private sector. The reforms include: (i) unification of the exchange rate and institution of an auction for U.S. dollars; (ii) removal of quantita- tive restrictions on trade and reduction of tariffs tc 5Z for capital goods and to 20? for other goods; (iii) institution of an expor; rebate system for nontraditional exports in November 1988, reimbursement to exporters for value added tax payments, and streamlining of export procedures; (iv) elimination of almost all price controls; (v) submission to Congress of a new investment law establishing clear "rules of the game" for foreign investors, as well as of a new decree expanding opportunities for joint ventures with foreign partners; (vi) a major tax reform in 1986, streamlining the former regime of over 400 different taxes; and (vii) measures to reform the financial sector, including liberalization of all interest rates, except those for development credit, and removal of restrictions on financial transactions. 4. In the manufacturing sector, which is composed essentially of small enterprises, the production response to the 1985 stabilization and the Govern- ment's reactivation program has been slow. This is largely attributable to a number of structural phenomena which constrain the recovery and expansion of private industrial activities. These include infrastructure deficiencies; a weak financial system, characterized by high real interest rates; inadequate technical and managerial training; cumbersome procedures in connection with the establishment of new companies and exporters; and a lack of confidence in the stability of the economic and political environment, after a long history of frequent shocks. Most of these constraints have had a particularly severe effect on the small enterprises which overwhelmingly compose the private industrial sector.  - 2 - 5. Rationale for Bank Involvement. IDA assistance in recent years has focussed primarily on supporting the Government's economic reform efforts, through two Reconstruction Import Credits, a Financial Sector Adjustment Credtt, and technical assistance operations designed to strengthen public institutions critical to macroeconomic management. A second central focus has been on ameliorating the negative impact of adjustment on the poorest groups in Bolivia; in this regard, two Emergency Social Fund credits (1829-BO and 1882-BO) ha e been approved. 6. More recently, IDA assistance has focussed on supporting the supply response to economic adjustment. In this context, an Export Corridors proj- ect, directed at improving road transportation along key export routes, was approved last year, as well as a Mining Rehabilitation Project, directed at rationalizing the operations of the Corporacion Minera de Bolivia (COMIBOL) and supporting diversification and private sector development in the mining sector. Currently, projects directed at supporting natural resource manage- ment and agriculture, as well as a project to strengthen health services and infrastructure, are under preparation. To sustain and deepen reforms launched in the financial sector, a second financial adjustment loan is also in the planning stages. 7. The proposed credit would buttress the industrial private sector's adaptation to a new macroeconomic environment, consistent with efforts already under way in the mining and agricultural sectors. In addition, it would sup- port the social objectives of IDA's assistance strategy, by attempting to increase access to the credit system for groups presently excluded. Finally, it would support continued efforts to carry out adjustment in the financial sector, pending preparation of a second financial sector adjustment credit. 8. Proiect Obiectives and Description. The proposed project would address constraints to the development of private manufacturing described above by: promoting a broader client base for the banking system; providing training and technical assistance targetted to groups presently excluded from the formal financial system; supporting the simplification of the bureaucratic regime governing establishment and operation of industrial and export-oriented companies; strengthening key institutions in the sector; and undertaking steps towards full liberalization of interest rate policy, in the context of IDA's overall strategy in Bolivia's financial sector. Its major elements include: (i) increasing private industry's contribution to production, value added, employment creation, and exports, by facilitating access to longer-term work- ing capital and investment credit from the banking system; (ii) providing technical/managerial assistance to private firms, and in particular small firms, in order to improve their productivity and commercial possibilities; (iii) improving the quality of services provided by public and private sector institutions dealing with industrial sector enterprises; and (iv) simplifying the regulatory framework affecting the establishment of new businesses. 9. Major components would include: (i) a credit component of US$14 mil- lion to finance the needs of private manufacturing and tourism firms in fixed assets, working capital, and subproject-related technical assistance expend- itures; and (ii) a technical assistance (TA) component of about US$2.0 million to finance activities in support of the manufacturing sector, with a special focus on small and micro enterprises and on women. Under this component, a Technical Assistance Fund would be established, which would channel resources  - 3 - on a grant basis to private and public agencies providing developmental, pro- motional, or training services to the industrial sector. In addition, direct. technical assistance would be channelled to the Central Bank to strengthen the Development Credit Department and support project management. The TA compo- nent would also provide for the strengthening of participating private and public institutions and studies or actions in support of private sector development. 10. To ensure achieving the project's objectives and to avoid an exces- sive concentration of credit and other project benefits, the maximum loan or series of loans to any subborrower would be US$120,000. Funds allocated for credit would be onlent by the Central Bank to approved financial institutions (ICIs) at the prevailing London Interbank Offering Rate (LIBOR). The ICIs in turn would onlend to eligible enterprises at a rate equal to the higher of: (i) a rate no more than 7.5 points below the prevailing market-determined on- lending rate for U.S. dollar or U.S. dollar-linked loans; or (ii) the average term deposit rate for U.S. dollar or U.S. dollar-linked deposits. The subbor- rower would bear the foreign exchange risk, and the Central Bank would bear the cross-currency risk. The interest rate would be periodically revised, consistent with the action plan described below in para. 12, which would achieve full liberalization of all interest rates by March 31, 1993. 11. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Bolivia are given in Schedules C and D, respectively. A map has been included, and the Staff Appraisal Report, No. 8445-BO, dated April 26, 1990 is attached. 12. Agreed Actions. During the course of project preparation, the Gov- ernment prepared the framework program of the Technical Assistance Fund, as well as draft statements of policies and procedures for operation of the Technical Assistance Fund and the proposed credit line. As conditions of loan effectiveness, execution of a subsidiary loan agreement between the Government and the Central Bank for the transfer of the credit line component proceeds; execution of a technical assistance grant agreement between the Government and the Central Bank for the transfer of the technical assistance component proceeds; adoption of the agreed Policies and Procedures for the credit component; establishment of the TAP and adoption of its agreed Policies and Procedures and first year operating plan; and execution of three agreeme: :s between the Central Bank and participating ICIs would be required. In addi- tion, the BCB would take measures to ensure that the development credit onlending rate to final borrowers is as set out above in para. 10. Finally, the Government would prepare, before loan effectiveness, a financial sector strategy and action plan satisfactory to the Bank, with the objectives of liberalizing development credit interest rates completely during the next three years and defining the future operation of the development credit function. The action plan would have as objectives, inter alia, the full liberalization of development credit interest rates by March 31, 1993, and, as an interim step, a reduction in the spread between development credjt onlend- ing rates to the final borrower and the average market-determined U.S. dollar or U.S. dollar-linked onlending rate to 4 percentage points or less by September 30, 1991. Onlending rates under this credit would be revised as needed, to comply with the action plan mentioned above.  13. The proposed project would also provide for joint reviews of interest rate policy in October each year and in April 1993. In the event that 502 of the credit line is committed before October 1991, an additional review would be held as soon as possible after the 502 level is reached. The purpose of these reviews would be to assess the Government's progress with respect to the interest rate policy goals set out in the action plan. In the event IDA finds such performance unsatisfactory, it would have the option of stopping approval of additional subloans. A proposal for establishing a guarantee fund (or alternative arrangements to increase guarantees available to the private sec- tor) would be required by May 31, 1991. The technical assistance program would be reviewed and revised as needed annually and submitted to IDA for approval by September 1 each year. Inclusion of a technical assistance activ- ity in the approved program would be a condition for disbursement of each technical assistance grant. To provide flexibility in the operation of the public enterprise development program, up to one-third of the resources allo- cated to either the credit line or to the technical assistance fund could be reallocated to the other component. 14. Benefits. The proposed project, in addition to assisting in the recovery of the economy in Bolivia and by complementing other Government/IDA operations in increasing production, value added, and employment creation in the private manufacturing sector, is expected to pr ide financing for some 800 subprojects for modernization, creation, or expansion of private sector firms. It is expected to generate or help to maintain about 8,000 jobs, at a cost of about US$2,500 per job (in line with statistical evidence in smi.ll- to medium-size manufacturing firms in Bolivia). The expected employment impact, as well as the increase in productivity and competitiveness in manufacturing enterprises, would make a significant contribution to poverty alleviation ir. Bolivia. The TA component is expected to reach up to 1,500 beneficiaries and encourage and support the emergence of new entrepreneurs, chus facilitr ing expansion of Bolivia's private sector. Finally, the project provides *r full rationalization of interest rate policy in less than three years. 15. Risks. The main implementation risk associated with the project lies in the ability and interest of participating commercial banks to expar-d lend- ing to newer and sometimes smaller clients. To mitigate that risk, tLey would receive training under the project's TA component. Establishment of a Gaaran- tee Fund is also expected to help overcome the reluctance of financial inter- mediaries to participate in the smaller projects. It is expected that the project will require a higher frequency of supervision missions during the initial stages of implementation. 16. Recommendation. I am satisfied that the proposed credit would comply with IDA's Articles of Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. April 26, 1990  -5- SCHEDULE A BOLI& PRIVATE ENTERPRISE DEVELOPHMENT PROJECT Estimated Costs and Financing Plan Estimated Costs: 11 Local Foriatn Total -------- i}S millions -------- Prolect Items Project Preparation 0.1 0.1 Investment Projects 8.0 12.0 20.0 Technical Assistance 3.8 1.0 4.8 Total Proiect Cost 11.8 13.1 24.9 11 Rounded. Excludes taxes and duties. Financing Plan: Local Foreian Total ----------(US$ Millions)----------- IDA 3.0 13.1 16.1 Beneficiaries 7.4 7.4 Government of Bolivia 1.4 1.4 Total Project Cost 11.8 13.1 24.9  -6- SOU3DUL3 J lOL ~ PRIVATE ENTPISE OZV=lOS PROECT Proeuresent method m*d Disbursements ll (MS$ 14illions) Project Item Procurement Method Total Cost Other Fixed Assets and 20.0 20.0 Working Capital (14.0)21 (14.0) Technical Assistance 5.6 5.6 of which, (2.1) (2.1) Microcomputers and Other Equipment (0.4)31 (0.2) Consultant Services (2.0)!/ (2.0) Total 25.6 25.6 (16.1)1' (16.1) lI Goods would be procured according to standard commercial procedures for DPC-type projects, acceptable to IDA, which in this case would entail three lccal price quotations. 21 Figures in parentheses correspond to the amounts financed by IDA. 31 International shopping. Includes US$100,000 of equipment to be financed under "Grants to Approved Institutions' category below. 4/ Consultants would be selected in accordance with principles and procedures satisfactory to IDA. DIS5URSWEENTS (US$ Millions) Category Amount Percentane Credit $14.00 1002 Grants to Approved 1.68 1002 Institutions Consultant Services 0.12 1001 Equipment 0.20 1001 of foreign: 702 of local Project Preparation Facility 0.10 1002 Estimated IDA Disbursementss FYs: 1991 1992 1993 !.994 1995 - _________- US$ Millions ----------- Annual 1.2 3.0 4.0 4.0 3.9 Cumulative 1.2 4.2 8.2 12.2 16.1  -7- 8CRDULE C BOLIV PRIVATE ENTERPRISE DEVELORIT PROJECT Timetable of Key Prolect Process4n Ihets (a) Tine Taken to Prepare: 1-112 years (b) Prepared By: Government/Central Bank staff (c) First Bank Missions October 1987 (d) Appraisal Mission Departures June 1989 (e) Postappraisal: December 1989 (e) Negotiations: April 1990 (f) Board Presentationt May 1990 (g) Planned Date of Effectiveness: September 1990 (h) Relevant PCRs and PPARss None  -8- SCHEDULE D injVi. - STAInW MU IM U W _o _11 I. s3b_eomt Of 1#I4 I" L_e sW WA cn4t.s o6f _9 n,ewS. 1In9) Le" or AsS- (lose oeell.ioe) Credit PierS *tebsfgd mww yoVes Umteaw PrFee S11101 =A Wulsbsfted Total (E.l I I w of W de llar*) 10 Los and 16 credIts fully disbureed 274.9 11.7 -- 391.1 1708 196 gelivda Reconstruetion Import Credit -- 55.6 6.7 62.5 1/ 1719 1i66 solivia Vuelt arand -- 16.4 0.8 16.7 1/ 1609 1967 Bolivl Public Finonclal Mgmt. -- 9.2 2.6 11.8 1/ 1616 1967 Bolivia Powr Sector RehabilI- tatlon -- 2.7 4.2 6.9 1/ 1I2s 1967 Bolivli Reconstructlio Imp. Cr.I -- 20.6 26.6 47.2 1, 1629 1967 Bolivia Emergney Social Fund I ^- 10.5 0.01 10.5 1/ 1U4< 196l 3olivi* Le Paz Municipal Oovt. -- 9.9 5.5 15.4 1/ 1862 196 Bolivia Emergeney Social Fund II -- 22.1 2.7 24.9 1/ i926 1966 so0ivlv Financial Sector Adjust. -- 66.7 0.1 66.6 1/ 1977 1969 Bolivia Econ. Mg.t. Strenth. Op. -- 1.6 7.6 9.4 1/ 2012 1969 Bolivia Export Corridors -- 0 87.4 87.4 / 2013 1969 Bolivia Mining Sector -- 0 35.0 85.0'/ 1925-2 1990 Bolivia Financlal Sector Adjust. -- 0 9.7 9.7 Total 274.9 882.4 186.4 746.6 Of which has ben repaid 126.3 6.9 -- 1T8.2 Total now outstanding 146.6 328.5 186.4 610.6 Amount *old 0.05 0.05 Of which has ben repaid (0.05) (0.05) Total now held by bank and IDA 146 328.5 1J8.4 610.6 Total undisbursed 138.4 138.4 1/ Because of varltions in SOR exchange rat*, present amount is different from original smount. 2. Stetemet of FC lnetme"t (as of Docmber 31, 1969) Total gross commitments 26.6 3.9 tO_6 Loss cancellations, terminations. repsyments, and sales e.s 0.6 9.e Total commitents now held by IFC 17.6 3.1 20.9 Total undlebursed 10.3 3.0 18.8  I 0~~~~~~o' 60t pK t T9i~~~~~~ 0 L I v I A _ - Main Roods Relief (meters) Climoatc Zones Secondarry Roods 6000 A- A0OVE CLD i d 500m ond ob.0 Railroads 4000 50 3000 - 3 (COCX 13000-A500n ) j ndaties ~~~~~~~~~~~~~~2000 - 3000 TEMP4ESAIE Department Boundries 000 - 2000 0Su-TRONICAL International Boundoares 0- 1000 T TROPICAL #4 Cit/ ~91VX RAZ&I