Mali - Private Sector Assessment

CONFIDENTIAL 13559-MLI MALI PRIVATE SECTOR ASSESSMENT 1 December 1994 Private Sector Development and Economics Division Industry and Energy Division Technical Department, Africa Region Sahelian Department, Africa Region CONTENTS LIST OF ACRONYMS ...................................................................................................3 EXECUTIVE SUMMARY..............................................................................................4 P o te n tial......................................................................................................................... 4 C on strain ts and Issues......................................................................................................5 A g e n d a ............................................................................................................................ 6 I. ECONOMIC CONTEXT ..............................................................................................8 A. The Economy of Mali...................................................................................... G eo g ra p h y .......................................................................................................................9 D em o g rap h y ....................................................................................................................9 E co n o m ic S tructure........................................................................................................ 10 B. Economic Policies, Reforms, and Performance........................................................1 A dju stm ent P rogram ...................................................................................................... 11 T rad e an d A id ................................................................................................................ 12 C. Implications of the Devaluation .........................................................................12 II. PRIVATE SECTOR PROFILE ....................................................................................15 A. Micro and Small Enterprises..............................................................................16 B. Medium and Large Enterprises ...........................................................................17 C o m m e rce ..................................................................................................................... I8 M an u factu rin g ............................................................................................................... 18 M in in g ........................................................................................................................... 19 In frastru ctu re ................................................................................................................. 19 Construction and Civil Engineering............................................................................... 20 S e rv ic e s ......................................................................................................................... 2 1 C. Public Enterprises and Privatization .....................................................................21 D. Sources of Entrepreneurship ..............................................................................22 E. Business Associations ......................................................................................24 III. POTENTIAL AND CONSTRAINTS............................................................................25 A. Product Markets and Potential for Development ......................................................25 B. Costs of Doing Business ..................................................................................27 Regulatory and Administrative Systems......................................................................... 27 T h e Jud icial System... ................................................................................................... 28 T h e T ax S ystem ............................................................................................................. 2 8 Business Services and Information................................................................................ 28 C u sto m s ......................................................................................................................... 2 9 L ab o r F lexib ility ............................................................................................................ 30 C. Public-Private Relationship ...............................................................................30 D. Financial Markets ..........................................................................................31 B an k in g System ............................................................................................................. 3 1 Formal Non-bank Financial Institutions.. . . . . . . . . .......... 33 Informal Savings and Credit......................................................................................... 34 Credit Programs for Small- and Medium-size Enterprises.............................................. 35 E. Human Resources...........................................................................................37 F . Infrastructure ................................................................................................37 IV. AGENDA FOR PRIVATE SECTOR DEVELOPMENT....................................................39 A. Priority Measures for the Short to Medium Term.....................................................41 B. The Costs of Doing Business .............................................................................42 Sim plifying the Regulatory System ................................................................................ 42 Adapting the Legal System to Modem Business Transactions ........................................ 42 R ethinking Investm ent Incentives................................................................................. 42 K eeping the Labor M arket Flexible................................................................................ 43 Strengthening Information and Monitoring Services.................................................... 44 Encouraging Technology Development and Quality Control.......................................... 44 Im proving O ther Business Services................................................................................ 45 C. A More Productive Relation between the State and the Private Sector............................46 D . F inancial System ............................................................................................48 Reorienting the Banking System towards the Real Economy.......................................... 48 Connecting the Banking System and Support Agencies.................................................. 48 D eveloping M icro Finance............................................................................................. 48 E . The H um an R esource Base ................................................................................49 E m phasizing Prim ary Education.................................................................................... 49 D eveloping V ocational Training .................................................................................... 49 F . In frastructure ................................................................................................50 G . Sum m ary: K ey A ctions....................................................................................51 Annex 1 Credit Cooperatives and Their Development In Mali..........................................53 Annex 2 Mali's Investment Code ............................................................................55 Annex 3 AGETIPE Experience in Mali.....................................................................57 R E F E R E N C E S ............................................................................................................58 This report is based on the findings of a mission that took place in February, 1994, and a supervision mission for the Private Sector Assistance Project in July 1994. The data collection and writing team consisted of Messrs. William Steel (Adviser, AFTPS; Task Manager) and Maurice Klein (AFTPS) and Mine. Christine Rouban (consultant). Field support was provided by Mine. Linda McGinnis (Resident Representative) and Mr. Youssouf Thiam (Economist). Mines. Chantal Dejou (AF5AG) and Anne-Marie Chidzero (PSD) were the peer reviewers. This task was managed by AFTPS, Mr. Michel Wormser, Division Chief, for AF5IE, Mme. Silvia Sagari, Division Chief Mr. Jean-Louis Sarbib is the AF5 Department Director. 2 LIST OF ACRONYMS AGETIPE Agence d'exécution des travaux dans l'intérêt public pour l'emploi APEP Agence de promotion des entreprises privées AMIP Association malienne pour l'insertion professionnelle des jeunes BCE.AO Banque centrale des Etats de l'Afrique de l'Ouest BCS Banque commerciale du Sahel BDM Banque de développement du Mali BIAO Banque d'investissement de l'Afrique de l'Ouest BMCD Banque malienne de crédit et de dépôt BNDA Banque nationale de développement agricole CAEC Caisse associative d'épargne et de credit BOA Bank of Africa CAPES Centre d'ássistance aux projets, entreprises et sociétés CCIM Chamber of Commerce and Industry of Mali CEPI Centre d'études et de promotion industrielles CFA Communauté financière africaine CFD Caisse française de développement CIDA Canadian International Development Agency CMDT Compagnie Malienne pour le développement du textile CMT Compagnie malienne de textile CNE Caisse nationale d'épargne COMANAV Compagnie malienne de navigation CVECA Caisses villageoises d'épargne et de crédit autogérées EDM Energie du Mali EMAMA Entreprise malienne de maintenance FNEM Fédération nationale des employeurs du Mali GDP Gross domestic product GEMINI Growth and equity through microenterprise investment and institutions (USAID) GIE Groupement d'intérêt économique ILO International Labour Organization IMF International Monetary Fund Kfw Kreditanstalt fur Wiederaufbau (Germany) NBFI Nonbank financial institution NGO Nongovernmental organization OECD Organization for Economic Cooperation and Development PAPME Projet d'appui aux PME PME Petites et moyennes enterprises PMI Petites et moyennes industries SCPCE Société des chèques postaux et de la caisse d'épargne SDID Société de développement international des jardins SOGEMORK Société de gestion et d'éxploitation des mines d'or de Kalanga SONAREM Socéte nationale de recherce minière UMOA Union monétaire Ouest-Africaine (West African Monetary Union) UNDP United Nations Development Program USAID United States Agency for International Development VAT Value added tax 3 EXECUTIVE SUMMARY I. Mali today is one of the poorest countries in the world, with exceptionally low levels of education, health and infrastructure. Although its position in the center of western Africa was a basis for rich empires based on regional trade in previous centuries, in this century its access to international markets has been constrained by its landlocked, vast and sparsely populated territory. Dominated by agriculture, its economy has been highly vulnerable to drought and periodic weak prices for cotton, its principal export. Economic crises have been aggravated by inward-looking, state-centered policies that have fostered inefficiency rather than growth. In this environment, the formal sector has stagnated, and some 90 percent of Malians are engaged in informal activities to earn a living. In recent years, a basis for economic recovery has been established through liberalization of markets, better macroeconomic management, and a devaluation of the CFA franc. Potential 2. New opportunities for private investors in Mali have been opened up by the devaluation and by plans to privatize a substantial share of Mali's public enterprises. Sectors ripe for export production include gold mining, agrobusiness and textiles. Devaluation has favored import-substitution and service activities with high domestic input and nontradable components. The prime opportunities for smaller investments oriented mainly toward the domestic market are in agroprocessing, construction and transport. Substitution for imported foods has already begun, based on local corn, oil seeds, fruit and cattle, and can grow rapidly if internal transport infrastructure is improved. There are good opportunities for new entry and rapid growth of local business to provide building materials and to build infrastructure, if the contracting is implemented so as to give smaller firms access. Privatization opportunities include canning, groundnut and cottonseed oils, agricultural machinery, pharmaceutical goods, cement, printing, textiles, and hotels. 3. Successful growth based on private sector development must be two-pronged: broad-based measures to strengthen opportunities and capabilities in the informal sector, and removal of barriers to investment, growth and competitiveness in the formal sector. To raise the potential of the self-employed and microentrepreneurs, it is essential to expand primary education and create sustained growth of demand through sound agricultural policies. To help existing businesses adjust to change and to attract investors who can bring capital and market knowledge, the Government needs to continue improving the business environment by removing regulatory obstacles, moving toward a supportive rather than a competing or controlling role, and improving the accessibility of financial and technical resources to private entrepreneurs. Long-term success of these efforts will depend importantly on strong fundamental policies of sound macroeconomic management and investment in infrastructure. 4 Constraints and Issues 4. Costs of doing business: Mali's economic regulations and business laws are too complex for a country with its limited formal sector activities, and the legal system is ill adapted to enforcing business contracts. Some progress is being made in reducing the steps and decisions required to register a business, although the number of hurdles is still excessive. In addition, efforts are needed to change the attitudes of Government officials from controlling to permissive. Unless business law and the court system are reformed to provide quick settlement of contractual problems, most transactions are likely to remain informal and bilateral rather than incur the costs of becoming formal. Only when these costs are lowered will more firms be able to realize the cost advantages that come with formal, systematic contractual relationships. 5. Private sector capabilities are weak in the wake of years of suppression, protection from international markets, and orientation toward short-term commercial gains rather than long-term investment. Other than in import trading, few experienced intermediaries exist who can provide market information by translating demand opportunities in urban areas or abroad into orders to small local producers. An important issue is how to build the managerial capacities and the support services that will enable small domestic entrepreneurs to perceive new market opportunities, respond to them, and adapt new technologies. 6. Roles ofpublic and private sectors: The Government is attempting to redefine its role, but there is a long way to go before the private sector views Government as a partner devoted to improving the business environment. Although limited progress has been made in liquidating or privatizing some state enterprises, the Government has not yet moved decisively to reduce its overweening role in many economic sectors. The private sector believes that it is consulted only after decisions have been made, while the Government views the private sector as divided among itself and unable to propose a feasible agenda for reform. Despite enormous strides, both parties still need to find more effective ways to communicate. 7. Financial sector: Mali's highly segmented financial system, with limited competition and weak term financing capability in the banking sector, provides an inadequate basis for mobilizing financial savings and intermediating them to help finance investment in private economic activities, and the savings rate remains low. Interest rate liberalization and introduction of a money market have improved incentives for banks to lend to the private sector, but they have responded cautiously so far. Nonfinancial savings remain dominant in rural areas, although informal savings and credit mechanisms are spreading. 8. Human resources and infrastructure: The basic conditions for development of a competitive private sector are relatively weak in Mali. Education and skill levels are quite low even in comparison to most African countries. Although transport routes to the exterior are reasonably well developed, internal transport is made difficult by the low 5 population density and inadequate maintenance of the roads that do exist. The costs of energy and other utilities tend to be high. Greater competition in infrastructural services is needed to stimulate greater efficiency and lower prices. Agenda 9. . Three principal objectives of private sector development measures in Mali are to: * lower the costs of doing business and of becoming formal; * establish a responsive, problem-solving relationship between the state and the private sector; * strengthen intermediary institutions that link producers with markets, growing firms with support services, and informal with formal activities. 10. Costs of doing business: The objective is to establish a legal and regulatory framework that is simple, clear, predictable, equitable, and fairly enforced. Short-term measures to simplify registration include eliminating Commissions that are no longer needed to review applications under the Investment Code and streamlining the procedures under the guichet unique. Over the longer term, the whole business registration system should be reviewed to try to replace it with a single registration instrument that can serve the minimum statistical and regulatory requirements and the tax system likewise revised to reduce the number of taxes. Liberalization of the requirements of the Labor Code should be extended to eliminate local officials from reviewing employment contracts. 11. Support institutions: The principal objective of strengthening intermediary and business support institutions is to facilitate rapid growth in size and productivity of enterprises that are exploiting profitable niches in export or domestic markets. For export activities, the priority is to develop export houses and centralized or cooperative quality control mechanisms that can serve relatively small suppliers. For enterprises oriented toward the domestic market, the network of support agencies needs to be strengthened to make services more widely known and accessible in a way that helps firms improve their management, address technical constraints, and gain the confidence of banks. The AGETIPE approach has proven effective in providing small contractors access to the demand generated by public works projects and to the technical assistance needed to upgrade their performance. The AGETIPE model could be extended to give smaller enterprises access to procurement in other sectors and to private contracts 12. State-private roles and relationship: Steadier progress in privatization is important to open up greater possibilities for private investors and to convince them that the Government is serious about reducing its direct role. Two types of consultative mechanisms need to be established: broad consultations where government officials can take a wide range of private sector views into account in the policy-making process; and highly focused sectoral mechanisms for identifying and solving specific problems. Holding a regular series of discussions with the private sector is one way for the Government to show new openness to private sector concerns; the private sector in turn needs to propose 6 more effective alternatives to the Chamber of Commerce and Industry so that different voices can be heard. For certain key subsectors (preferably with proven export potential, such as agro-processing), a subsector consultative mechanism consisting of government officials, private producers, workers, and perhaps NGOs could be formed to quickly identify and resolve particular bottlenecks. The demonstration effect of successes in some subsectors would create demand for similar problem-solving in other subsectors. 13. Financial system: Over time, profit motives should gradually induce banks to provide more credit to the private sector. At present, however, competitive forces remain weak and complementary measures to accelerate the process may be in order (for example, training, restructuring portfolios, interbank guarantee fund). Possible measures to inject liquidity into the business sector in the short-to-medium term include settling Government arrears to the private sector, making sure that existing lines of credit from donors can be used for working capital (not just investment), and enabling firms to revalue assets without capital gains taxation. 14. There is a growing network of informal savings and credit associations and NGOs providing finance to micro and small enterprises. A systematic review of these institutions to assess their efficiency, loan recovery, and outreach is a first step toward developing a strategy of support to extend their reach and move to higher levels of sustainability. A particular issue is how to adapt financial regulatory procedures to permit experimentation and growth of non-bank segments of the financial market and encourage greater linkages between formal and informal segments. 7 I. ECONOMIC CONTEXT 15. Mali has undertaken important initial steps for the private sector to emerge as a leading source of economic development. To realize its potential, however, the private sector needs a more favorable business climate, greater access to finance, a supportive institutional structure, and less government intervention. While the recent devaluation of the CFA Franc has created short-term strains, it has also opened up new opportunities by making exports more profitable and by changing domestic spending patterns. But the response of private entrepreneurs to these changes is constrained by the high costs of doing business in Mali and the lack of a supportive enabling environment. This report reviews these constraints and suggests an agenda for forging a new partnership of government, the private sector, and support institutions that will facilitate the growth of production and employment in private enterprises. 16. The challenge for Mali is to adjust rapidly to the post-devaluation economic situation and move to a path of sustained growth with widely shared benefits. Given the limitations on the government's resources and capabilities, the impetus for growth will have to come mainly from private resources, and distribution of the gains will depend on widespread participation. The government's principal role is to establish a positive climate through a sound, stable macroeconomic and political framework and investment in basic infrastructure and education. It also needs to build investor confidence by shifting more visibly from controlling private business to actively helping solve the problems that businesses face. 17. The purpose of this report is to assess the situation of the private sector and how to release its energies. Conceptually, successful private development depends on incentives to invest, capable entrepreneurs, their access to resources and markets, the costs of doing business, and the availability of finance and technical support when needed. Chapter 1 sets the economic context by reviewing Mali's economy and the implications of devaluation to indicate the conditions, resources and markets that determine the incentives to invest. Chapter 2 profiles the private sector as it exists today, focusing on the entrepreneurs who can help transform Mali's predominantly agrarian economy by taking advantage of opportunities in high-productivity sectors such as light manufacturing, construction, transport, and services. Chapter 3 briefly indicates activities with high growth potential and then analyzes the various regulatory, administrative, institutional and human resource constraints that may inhibit the private sector from realizing that potential. Chapter 4 highlights the priorities for private sector development and recommends actions to overcome constraints in the most important areas. A. THE ECONOMY OF MALI 18. Mali, a vast, landlocked country mid-way between the Sahara Desert and the coastal rain forest of West Africa, has a long trading tradition. The exchange of salt, metal, and merchandise from the north for gold and agricultural products from the coast 8 brought wealth to kingdoms that could create a stable environment for trade. In the fourteenth century the riches of the empire of Mali were reputed throughout North Africa.' In the eighteenth century, "every market bore witness to the diversity of trade in the kingdom: there was rice, millet, mead, perfumes, incense, hides, dried and smoked fish and imported goods so plentiful they had become quite common."2 19. Today Mali is one of the poorest countries in the world, with a GNP per capita of US$310 (1992 exchange rate). Real per capita income fell between 1980 and 1986 as GDP growth stagnated. Adult literacy (below 20 percent), life expectancy (48 years at birth), and access to basic health services (one in six children die before the age of one) are among the lowest in the world. Primary school enrollment and access to safe water are the lowest and maternal mortality the highest worldwide.' 20. The resulting low levels of labor productivity, combined with very low availability of electricity and telecommunications, provide a weak basis for industrial development. In general, a combination of geographical, demographic, structural, policy and trade factors have held back Mali's transition to a modern, competitive economy. Geography 21. Only about one-quarter of the country's 1.2 million square kilometers is arable. Mali has a short rainy season between mid-May and mid-October and a long dry season the rest of the year, with rainfall heaviest and most regular (127 centimeters per year) in the southeast. Two tributaries of the Niger River drain the southern and southeastern portions of the country into a sprawling inland delta of lagoons and lakes upstream from Mopti before converging into a single river near Tombouctou. Seasonal floods inundate the area, leaving behind damp fields for cultivation and pasture for livestock. Periodic droughts have devastated the economy, accelerated desertification, and fostered heavy dependence on foreign assistance. 22. Mali has significant geological potential, but the weakness of its infrastructure and the distance from ports have restricted development of the mining sector. Mining has so far been limited to the production of phosphate, salt, and gold. Demography 23. Mali's domestic population of 9 million is predominantly young and rural. Half of its people are under twenty years old; and more than three-quarters live in rural areas, with an overall density of seven people per square kilometer (1992). Repeated droughts have increased migratory flows to the urban centers, which have grown at 4.2 percent a year. The demographic pressures created by the high rate of population growth (now nearly 3 percent a year) constitute an important challenge for the Malian economy. ' J. D. Fage, A History of West Africa, Cambridge: Cambridge University Press, 1969. 2 Maryse Condd, Segu, New York: Ballantine Books, 1987. 3 World Bank, World Development Report 1994. 9 24. Since independence, primary education has been neglected. Each year the education system produces an oversupply of poorly qualified graduates of secondary and higher education. Primary enrollment, after rising from about 10 percent at independence in 1960 to 26 percent in 1975, stagnated and even declined slightly to 25 percent in 1992 (17 percent for girls), compared to the Sub-Saharan Africa average of 77 percent. Enrollment in secondary education increased slightly from 5 percent in 1970 to 6 percent in 1993. Higher education enrollments increased from 700 in 1970 to 8,030 in 1993. Economic Structure 25. Despite some diversification of production since 1960, agriculture, livestock, and other primary activities (stock raising, fishing, and forestry) continue to dominate GDP (46 percent in 1990, down from 61 percent of GDP in 1976), employment (80 percent, of which 70 percent is in agriculture alone), and exports (cotton and livestock account for 50 and 30 percent respectively). Agricultural production is mainly cereals, including rice, maize, millet, and sorghum, and cotton, which is grown in the southern part of the country. Private small-scale farms predominate, and most cultivation occurs on traditional family-owned plots of 2-3 hectares. Cultivation is primarily rain-fed, although important irrigation schemes exist for rice. Agricultural growth is constrained by low rainfall, fragile soils, and low-productivity traditional technologies. Major droughts in 1968-1973 and 1982 caused production losses and decimation of livestock. 26. The secondary sector (mining, crafts, modern industry, construction, and public works) represents nearly 14 percent of GDP (9 percent in 1976) and 9 percent of total employment. The tertiary sector (trade, transport, telecommunications and other services) has been growing steadily, with a strong contribution from commercial activities. Trade represents the main activity of the private sector (13 percent of employment), most of it based in the West African region. The national market represents only a small share of sales. 27. The active labor force is estimated at 3.5 million people, most of them in agriculture, although significant underemployment in agriculture is fueling urban migration. The formal sector is estimated at 14,000 private sector workers, 37,000 civil servants, and 11,000 parastatal employees. Between 1976 and 1988 registered open unemployment doubled to 20 percent, where it has remained. Youth unemployment (ages 15-29) makes up about two-thirds of open unemployment, and 85 percent ofjob seekers are young. The primary causes of this unemployment are slow economic growth and general job scarcity, worsened by rapid growth of the labor force. An estimated 3 million Malians live abroad. Job opportunities in destination countries are declining, however, and a return of these workers would almost surely worsen the employment situation in Mali. Informal activities-ranging from self-employed petty traders to small manufacturing establishments-provide the bulk of labor absorption, often at very low productivity. 10 B. ECONOMIC POLICIES, REFORMS, AND PERFORMANCE 28. The socialist economic policies of the 1970s and early 1980s, with their emphasis on the public sector as the engine of growth, have left an imprint on Mali's public sector institutions and policies. The state enterprises that proliferated during that period proved to be both unmanageable and a financial disaster. By the early 1980s, recurring droughts, a narrow human and physical resource base, a decline in the terms of trade, and inappropriate economic and financial policies brought Mali to a serious economic crisis. Adjustment Program 29. The Government started a stabilization and structural adjustment program in 1982, with major improvements in economic management. In late 1985, however, world cotton prices dropped sharply, a shock to Mali's major export commodity. Although economic and financial policies were tightened in the first half of 1986, there were serious slippages in the second half, and adjustment efforts came to a virtual standstill in 1987. 30. In response to the persistence of fiscal and balance-of-payments imbalances, the Malian authorities introduced a medium-term adjustment program in mid-1988. The measures attempted to improve public finance and to strengthen the private sector so that it could take over as the driving force of economic growth. Several major macroeconomic improvements occurred in the late 1980s: " The overall fiscal deficit (excluding external grants) fell from its peak of 13.9 percent of GDP in 1985 to 7.7 percent in 1990. o Inflation was held to a 2 percent annual rate. o Real per capita income rose modestly as did domestic savings. o The current account deficit (excluding official transfers) fell from a peak of 28.5 percent of GDP in 1985 to 13.9 percent in 1990. o Export values grew at a rate of 7.4 percent a year, while non-cereal imports rose by only 2.6 percent a year. o The debt service ratio (before debt relief, excluding debt service to China and the former Soviet Union) fell from its peak of 31 percent in 1986 to 17 percent in 1991. 31. Tentative steps were also taken to open the economy to faster development of the private sector: o Economic regulations were streamlined to facilitate the private sector's participation in production, trade, and employment (the Commercial Code of 1986 is being reviewed to further simplify the operating conditions of enterprises and a new investment code was established in March 1991). o The Labor Code was amended to facilitate dismissal, and the government employment agency was abolished. o Price controls were eliminated (except on petroleum products, which were liberalized in 1992). 11 * Foreign trade policies were liberalized (abolition of quantitative restrictions, replacement of import licenses with a system of automatic registration, suppression of export taxes, replacement of specific taxes with ad valorem taxes). * The tax burden on enterprises was lightened. o Some public enterprises were privatized or liquidated. 32. A poor harvest in 1990-91 and political upheaval in 1991 slowed Mali's economic momentum. Economic activity was disrupted and some industrial and administrative facilities were destroyed. Real GDP fell by 0.2 percent in 1991, while the rate of inflation (measured by the GDP deflator) was limited to 1.4 percent. There was a sizable deterioration in the Government's net position with respect to the banking system, and external payments arrears mounted (US$ 2.6 million in 1992). 33. To improve its fiscal position, the Government emphasized reconstruction and the strengthening of tax and customs administration. In early 1991 the tax on business and services was replaced by a value-added tax (VAT), a special tax on services was introduced, and customs duties were streamlined. Measures were taken to strengthen the control and monitoring of budgetary procedures. While liberalizing prices and markets and improving the regulatory framework, the Government also continued to slowly reform the public enterprise sector. In early 1992, the transitional Government concluded negotiations with the International Monetary Fund (IMF) and the World Bank on an adjustment program for 1992-95. Trade and Aid 34. Despite export growth averaging 6.5 percent per annum over 1980-92, Mali's export earnings barely cover half the cost of its imports. In 1992 exports were US$388 million and imports US $740 million. The resulting resource gap (and a similar gap between domestic savings and investment) is financed mainly through a large inflow of official development assistance, amounting to 18.5 percent of GDP in 1991.4 In part a legacy of drought relief and in part resulting from French support for parity of the CFA franc, this level of dependence on assistance--US$52 per capita, higher than all of its neighbors except Senegal--is unlikely to be sustainable. Developing new exports is essential both to maintain growth of imports and to reduce the economy's vulnerability to fluctuations in the price of cotton. C. IMPLICATIONS OF THE DEVALUATION 35. In January 1994, the fourteen African countries of the franc zone agreed to change the parity of the CFA franc from CFAF 50 to CFAF 100 to the French franc, to reduce the substantial overvaluation of the CFA franc and its negative effects on exports, capital flight, and the balance of payments. The initial impact of the devaluation on private business was most evident in price increases, lower consumer demand, and a deterioration 4 World Bank, World Development Report 1994. 12 in firms' liquidity position. The Government quickly took a number of measures to moderate these effects: o The producer price of cotton was raised from CFAF 85/kg to CFAF 120/kg. o The guaranteed minimum wage was increased by 10 percent as of March I and civil service and parastatal salaries by 10 percent as of April 1, 1994 (plus another 5 percent in October 1994). o Promotion arrears for civil servants would be made up over the next 24 months and student grants would be increased by 10 percent. o Indicative prices for main consumer goods were increased an average of 25 percent. o Import duties on sugar were waived for one month, and taxes were reduced on drugs and essential raw materials. o The maximum cumulative tariff rate on imports was lowered from 46 percent to 36 percent, and the variable tax on imports and the protection tax were suspended. o The ad valorem tax was lowered from 17 percent to 15 percent. o The tax on artisans and self-employed entrepreneurs was reduced from 45 percent to 35 percent. 36. The Government has been relatively successful in containing the inflationary effects of the devaluation while permitting the intended rise in the cost of imports relative to domestically-produced commodities. For example, the price of imported powered milk had risen by 67 percent by July 1994 but the price of domestic fresh milk rose by only 15 percent. Inflation in the first quarter of 1994 was at 22 percent, well below that in its franc zone neighbors (34 to 48 percent, except Benin at 63 percent). Although retailers initially attempted to double the prices of most goods, whether imported or not, consumer reticence soon brought prices down closer to the indicative levels set by the Government. By not enforcing price controls (imposed temporarily on selected commodities after the devaluation) too rigidly, the Government avoided shortages in the markets and encouraged a longer-term supply response, especially of domestic products. 37. One positive long-run effect of the devaluation for private investment is to raise the competitiveness of domestic production, relative to both imports and to trading. The most immediate result was a sharp increase in exports to the West Africa subregion, despite regulatory obstacles. Just as some Malian importers began shifting their supply sources toward neighboring countries for some manufactured products, demand from those neighbors rose for livestock, fresh fruits and vegetables, and other agricultural products from Mali. Cottonseed oil, which before devaluation could not compete with imported oil, was suddenly in heavy demand from neighboring countries because of its relatively cheap price. ITEMA, the large textile mill which had been closed in the face of cheap imports, reopened in October 1994 on the strength of new orders for exports, facilitated by government-guaranteed loans from the Caisse Frangaise de Developpement and a syndicate of local banks. Domestic consumers began shifting their spending from imported to local products, especially foods (for example, from imported coffee to local tea). Despite the initial dampening effect on domestic demand, the gains in export markets and the shift from imported to local products means that GDP growth is expected to recover from a decline in 1993 to 2-3 percent growth in 1994. 13 38. By greatly reducing the real cost of labor in terms of foreign exchange, the devaluation has also restored Mali's ability to compete on world markets. Prior to the devaluation, unit labor costs in CFA countries were estimated to be about double those in other African countries, such as Ghana, Kenya and Zimbabwe, that had already adjusted their exchange rates and thereby achieved wage costs competitive with many low-income Asian countries (Biggs et al. 1994). If the Government is able to hold average wage increases to 15 percent in nominal terms within the first year after devaluation, as planned, it will have achieved more than 40 percent reduction in the foreign exchange cost of labor, creating the potential for foreign investment. 39. The devaluation increased the liquidity requirements for businesses. Since many firms (especially in industry) were already in financial difficulty following a period of economic stagnation, and since banks were not disposed to increase the riskiness of their portfolios in a time of substantial economic uncertainty, few firms had ready access to bank finance to meet their increased demand for working capital, and most will have to struggle to build up additional internal funds. The result is likely to be a shift in industrial structure away from highly-protected, import-dependent industries, which will find it difficult to finance the doubling of input costs, in favor of those that are more intensive in domestic inputs and labor, whose costs have risen relatively less. For example, in the initial three months after devaluation, production in the flour mill-dependent on imported wheat-fell by about half, whereas sales of cottonseed oil rise to 60 percent over the preceding year (driven by export demand). While greater access to liquidity is an important objective of financial sector measures to support a strong supply response, the liquidity squeeze will favor efficient exporters and import-substituters who can finance growth out of expanded profits.5 5 The liquidity situation could be eased for some firms by settling the substantial arrears on government contracts. An audit has been undertaken with the support of the World Bank to determine the exact amount of these arrears (cross-arrears between government agencies should also be settled through this process), but the situation is further complicated by government claims of substantial arrears in tax payments by firms. Settling the Government's arrears to firms as quickly as possible is one means to inject liquidity quickly. Tax arrears could be negotiated for more gradual repayment so that firms have time to return to normal cash flow. 14 II. PRIVATE SECTOR PROFILE 40. The number of private enterprises (at least 80 percent owned by nongovernment interests) in Mali has grown rapidly over the last decade, while the public enterprise sector has contracted. The share of privately owned firms in industry rose from 45 percent of the total number registered in 1981 to 64 percent in 1988. This trend is expected to continue as the government expands the public enterprise restructuring program begun in 1988. When informal activities are included, the private sector currently employs over 90 percent of Mali's working population. In 1991, it accounted for 84 percent of domestic consumption, but just under half of investment. 41. There are three main categories of private non-agricultural enterprises in Mali: privatized former state enterprises, registered formal enterprises, and informal enterprises. Former state enterprises generally have substantial accumulated losses and are unlikely to lead economic growth. Legal, registered enterprises include many that are relatively old and fragile, having been established by traders under heavy protection for import- substitution production. Rehabilitating those that can adjust to the changes in relative prices resulting from the devaluation and facilitating new investment in response to new opportunities should be an important objective, requiring substantial improvements in the ease of investing and obtaining licenses. Informal enterprises, which operate on the margin of legality and lack formal accounting systems, constitute the bulk of private sector firms and employment and therefore must have a large place in a private sector strategy. The private sector dominates at the smaller end of the size spectrum and the public sector at the larger end (Figure 1). Figure 1: Share of Private Enterprises by Size Category (percent of firms) 100 90 80 , 70 > 60 50 40 30 20 10102 1-9 10-25 26-100 101-500 500+ Number of workers per firm Source: Direction Nationale des Industries. 15 42. Mali's private enterprises run the gamut from small backyard farms, self-employed artisans, family-run bakeries, and two-person metal forges, to medium-size vegetable canneries restaurants, fruit packaging cooperatives, to large factories milling flour, weaving textiles, producing batteries, or mining gold. Other than farming and trading, the key sub-sectors are food processing, beverages, tobacco, construction, transport, and mining. Mali's modest manufacturing sector is based largely on the processing of agricultural products (cotton textiles and clothing, vegetable oils, leather goods, and wood products). Services such as warehousing, garages, banking, and insurance make up the balance. Some three-quarters of registered private enterprises are geographically concentrated in the Bamako district. A. MICRO AND SMALL ENTERPRISES 43. The base of the private sector pyramid consists of micro and small enterprises, almost all operating outside official regulation. The majority of the nonagricultural population depends on informal activities for a living, estimated at nearly 80 percent of the active population outside the primary sector (Kessous and Lessard 1993). Droughts and economic recession have resulted in a constant influx of rural labor seeking urban employment, most of them ending up in informal self-employment. People dismissed from the downsized public sector, civil servants on voluntary retirement, and young graduates likewise engage in informal income-earning activities. Informal activities also provide supplemental income for workers employed in the formal sector. Informal self- employment and microenterprises are the largest source of employment for women, both inside and outside the home. 44. The main activities of micro and small-scale enterprises, by sector, are as follows (according to official figures, probably underestimated): Primary 0 Some 100,000 artisan gold miners (many of them women), exploiting over 200 mines and producing about 3 tons of gold a year. Secondary o Small agroprocessing units throughout rural areas, using low-productivity traditional technologies. o Some 80,000 artisans and 35,000 apprentices in cloth dyeing and textiles, garments (tailoring), gold and silver, leather, wood products, metal working, and machinery and bicycle repair. o About 2000 small construction firms. 16 Tertiary * Road transport (at least 5,000 taxis, buses, and trucks, mostly old). o River transport (some 4,000 boats of varying size). * Small traders linked to a few large commercial trading firms through family ties or supplier relationships. o Thousands of petty traders. * Over 150 private pharmacies (which have proliferated since private importation and sale of drugs became legal in 1992). 45. Women predominate in many informal activities, and they often have more than one business. Concentrated in activities that require little formal education or technical skills, they are quickly affected by changes in the economic environment and suffered during the economically difficult period of the late 1980s. 46. Economic stagnation and the influx of new workers have led to saturation of many informal activities. For example, a 1989 survey in Bamako found that over half of the unemployed were in commerce and the number of 'inactive' respondents in commerce exceeded the number actively engaged (mostly in petty trade). Many enterprises have trouble finding clients or market niches, and those that succeed face financial constraints because personal savings are inadequate to expand their business or inventory. Most entrepreneurs lack access to external credit. Other constraints include difficulty obtaining raw materials, lack of technical equipment and training, and inadequate information on new opportunities and methods. 47. Technical skills are usually acquired informally, through apprenticeships to artisans. According to a recent survey by the Club du Sahel, approximately 1,500 small firms represent an important source of training for craft workers and technicians in the larger urban areas of Bamako, Segou, and Sikasso. B. MEDIUM AND LARGE ENTERPRISES 48. The 944 formal sector firms in secondary and tertiary activities as of 1992 were distributed as follows ' * 61 percent comm r n u * 10 percent food processing * 10 percent other manufacturing (paper and printine. chemicals, metal products, woodworking, leather, textiles, cement, glass) * 5 percent construction * 6 percent transport * 2 percent banking and insurance * 6 percent other services. 6 There were an additional twenty-four registered firms in agriculture, mining and energy. 17 Commerce 49. The commercial sector receives about 80 to 90 percent of bank credit to the economy, although it accounts for only about 16 percent of GDP. The sector is highly concentrated, with about 10 percent of the 570 or so registered firms controlling over 80 percent of imports and receiving much of the credit. The larger companies also control much of the distribution of local crops and other products. Large importers may provide credit to their clients, at relatively high rates. Small traders may receive goods on credit in the morning and pay out of their proceeds in the evening. 50. The availability of quick returns has made commerce a more attractive investment opportunity than industry, both for Malians and for banks. The change in incentives after devaluation, however, may induce more trading profits to flow into manufacturing for export or import substitution. Manufacturing 51. With 6.5 percent of GDP and 5 percent of total employment in 1990, the modern manufacturing sector was a minor part of Mali's economy. The private sector contributed less than 22 percent of manufacturing value added (in 1988), crowded out by the rapid, state-led industrial expansion of the 1980s. Since the initiation of the economic liberalization program, however, several public companies have been liquidated or acquired by private investors. There is little foreign investment, except for a few subsidiaries of European industrial groups operating in the food products industry. The capital of 62 percent of registered private enterprises is entirely held by private nationals, usually a single owner, accounting for only 24 percent of formal manufacturing employment. 52. Agro-industry is the most important manufacturing subsector, accounting for 30 percent of recorded industrial employment. Bakeries comprise over half of the seventy seven registered private agro-industries; beverages and dairy products are the only other subsector with more than two firms. The two most profitable firms (a brewery and a flour mill) have been heavily protected. All but the brewery have heavy debts. 53. By number of firms metal working (twenty two firms) is the second largest private manufacturing subsector. Two recently privatized firms have had difficulty because of their high costs. Although some other firms are more profitable, prospects for development of this sector are limited because the market is saturated. Likewise, the twenty or more private paper and printing enterprises have limited prospects because of their low technological level. Chemicals (seventeen private firms, five public and semi- public) may have more opportunities through import substitution. 54. There are only four private firms among the seventeen in textiles and leather, the second largest industrial subsector in terms of production. Textile production is stagnant in the face of heavy competition from cheap Asian imports (often smuggled in to avoid 18 duties and restrictions). Although the devaluation will make Mali's firms more competitive, they may still be unable to compete successfully because of high cost structures and inefficient operation. Difficulty getting adequate raw materials is another problem; the recently privatized leather factory is having trouble getting skins and hides, even though the total supply substantially exceeds its demand. 55. Over 30 percent of enterprises import all of their raw materials; 18 percent purchase entirely on the local market. Enterprises created since 1988 are as dependent on imported inputs as are older enterprises. As a result, except in food products, textile and clothing, and soap and cosmetics, interindustrial relations are limited: only 25 percent of enterprises regularly obtain raw materials from Malian enterprises. Mining 56. Mali's only operating large-scale gold mine at Siama is a joint venture between the Government and foreign private investors. Opened in 1990, it produces about 3 tons of gold a year valued at about US$30 million, and is expected to reach 6 tons by 1996. A new gold mine in preparation is expected to produce 10 tons annually. Gold accounts for 8.5 percent of Mali's exports. Two large state-owned mines (SOGEMORK and SONAREM), established in part with Russian finance, went bankrupt in the 1980s, victims of poor management and Government intervention. The mining sector, although it represented only 1.6 percent of GDP in 1990, has potential for significant private sector growth and export earnings. Infrastructure 57. Except for road transport, the public sector has dominated the provision of infrastructural services and energy. In recent years, however, financial difficulties have led the Government to privatize or reorganize some of the parastatal companies in this sector. An audit has been conducted for EMAMA to prepare for privatization, and energy has been divided among three firms: EDM for water and electricity, a firm specializing in hydraulic works, and Maligaz in natural gas. The Government is also encouraging the privatization of dock-side activities in Lome, Abidjan, and Dakar. Nevertheless, the key to greater efficiency and lower prices in infrastructural services will be greater competition in the long run, not simply privatization. 58. Despite rapidly rising commercial demand, Mali's energy consumption per capita remains extremely low; less than 5 percent of the population has access to electricity. Private sector participation in the energy sector consists mainly of the production and marketing of wood and charcoal in urban areas. Fuelwood is still the most widely consumed energy source. Mali's substantial wood resources should be sufficient to allow up to 70 percent of the population to be self-sufficient in energy supply for several decades. Mali has no fossil fuels. 19 59. Some thirty-nine private road transport and transit companies represent the main private sector participation in medium- and large-scale transport. Although productivity is fairly low, this sector represents a promising area for private development as the economy grows. Imports through the port of Abidjan have to be brought in by truck from the Abidjan-Ouagadougou railway line. 60. The private sector has a relatively small share of formal river transport, which is dominated by the state-owned Compagnie Malienne de Navigation (COMANAV). About 4,000 boats of varying sizes carry an average of 40,000 tons of products and 50,000 passengers per year during the six months when the Niger River is navigable. 61. Rail transport (passenger and cargo) from the port of Dakar is controlled by the state-owned Regie de Chemin de Fer du Mali. It carries about a million passengers a year, the number swollen because of a lack of roads. The international airport at Bamako- Senou is also managed by a public agency, Aeroports du Mali. International flights are handled by foreign airlines, while internal flights are provided by six private companies and a new mixed-ownership company, Malitas. Construction and Civil Engineering 62. Construction and civil engineering include about eighty private medium- and large- scale enterprises, accounting for about 8.5 percent of GDP and 3.8 percent of value added. The state enterprise SONETRA has been liquidated. 63. Civil engineering is dominated by four foreign companies (95 percent of value added). Informal microenterprises (about 400) account for the major share of housing construction (an estimated 86 percent of value added). 64. The Direction Nationale des Travaux Publics takes care of the planning, building, maintenance, and management of the road network, but road construction is contracted out to private companies. Local private enterprises generally have difficulty competing with foreign enterprises because of undercapitalization, inadequate machinery and materials, outdated technologies, lack of analytic accounting, cumbersome administrative procedures for tender offers and procurement, delays in obtaining customs authorization for imported materials, and difficult access to medium-term credit. Furthermore, the financial market is not organized to mobilize capital for housing and other building projects.7 Nevertheless, this sector offers substantial potential for the private sector as the economy develops and the shortcomings are resolved, especially in building materials (such as plaster, cement blocks, roofing sheets, pipes). A study of housing finance is to be undertaken under the World Bank Private Sector Assistance Project. 20 Services 65. About ninety medium- and large-scale enterprises provide various services (insurance, research consultancy, maintenance, hotel business and tourism). Facing increasing local demand, this sector needs to be developed and to offer better quality services. C. PUBLIC ENTERPRISES AND PRIVATIZATION 66. Until the mid-1980s, Mali looked to the public sector for economic growth, and the government provided political and budgetary support to public enterprises. School graduates were guaranteed jobs in public enterprises. Between 1960 and 1980, seventy- seven state-owned enterprises were created in all sectors of the economy. Private enterprises were not encouraged. Except for the rare joint venture with France or with other socialist governments, foreign investment was all but excluded by the hostile business climate. The private sector was generally discriminated against in the allocation of import licenses, foreign exchange, and bank credit. Squeezed out of the more profitable markets in the country, private operators remained underdeveloped and mainly informal. 67. During the 1980s, the financial performance of state enterprises was disappointing. Efficiency was low and most state enterprises accumulated substantial losses (US$30 million per year). Only a few public enterprises escaped bankruptcy, despite heavy protection and subsidies. Between 1986 and 1988, a series of budget crises dramatically reduced the government's capacity to subsidize public enterprises, forcing a turn to the private sector. A 1991 survey of twenty-two firms undergoing privatization showed that their failures came from market stagnation and an inability to respond to changing markets, inadequate cost control, poor maintenance of equipment and lack of technical information, redundant and unproductive employees, excessive investment, undercapitalization, and unfavorable price control policies. 68. A public enterprise reform program was initiated in 1988 under the structural adjustment program. The government sought to privatize and liquidate unsustainable public enterprises and to limit public enterprises to the provision of services that cannot readily be provided by the private sector. By the end of 1991, nineteen public enterprises were liquidated, twelve were privatized, two were merged, and three were transformed into public administrative agencies. In addition, the government held a minority interest in two privatized enterprises. 69. Privatization has not gone without a hitch. Some privatizations proceeded too rapidly, with firms going to private purchasers who,lacked the competence to restructure the enterprises--many of which were in deficit and unprofitable. Too many privatizations went ahead without a thorough appraisal of viability or a concerted effort to find partners with the technical and managerial competence to implement required changes or the resources'to make necessary investments. 21 70. Rapid adjustment to changing domestic and international markets requires flexibility and business skills of a sort not found in the public sector. Capacity is nearly as poor in the private sector, following years of suppression, protection from international markets, and orientation toward short-term commercial gains rather than long-term investment. An important concern is whether the private sector can develop the managerial capacities required to absorb and modify new technologies and whether it has sufficient influence on government decision-making to produce policies more hospitable to private investment. 71. The public sector remains large in the economy, accounting for 16 percent of consumption and over half of investment in 1991. It is important that renewed efforts be made to accelerate the privatization process. First, it will help remove lingering doubts about the seriousness of the Government's intention to leave directly productive activities to the private sector. Second, there are good opportunities for privatized operations to be successful in the post-devaluation context, for example in canning, groundnut and cottonseed oils, agricultural machinery, pharmaceuticals, cement, printing, textiles, and hotels. Third, attraction of foreign investors in some of these areas would bring in badly needed market knowledge, as well as capital. D. SOURCES OF ENTREPRENEURSHIP 72. After decades of being squeezed out of the more productive areas of the economy, the private sector is underdeveloped and lacks the financial, technical, and managerial resources essential for moving into more sophisticated modem industries. Entrepreneurs have concentrated in trade and services, where state involvement has been less and quick returns with limited capital exposure were possible. Traders with long-established networks and entrepreneurial capacity constitute an important resource for building up long-term productive capacity. Some of them have the skill and funds to invest in local manufacturing if the incentives and enabling environment are right, including stronger institutional support systems to stimulate productivity increases and development. More problematic is the role to be played by unemployed young people, often university educated, who can no longer expect to fill civil service positions in the deflated public administration, and public sector workers who have been terminated from government services and received a small severance payment. Though much money and energy have been devoted to these groups, they lack experience and capital and have little incentive to repay loans if their business efforts fail. Hence it may be the traders who offer the greatest promise for the emergence of an entrepreneurial class in Mali. 73. Interest in industrial investment has so far been limited. Of 465 new small enterprises financed through the European Development Fund as of 1991, only 3 percent were industrial projects (the bulk being in agriculture, commerce, transport, and tourism). A 1991 survey of about one hundred small manufacturing enterprises in Bamako found that 30 percent of entrepreneurs had simply entered the family business and another 30 22 percent had started their own business for lack of other employment opportunities; only 26 percent were explicitly responding to a profitable opportunity (Kessous and Lessard 1993). Building an effective entrepreneurial class that can take advantage of new investment opportunities in industry and other activities will require improved incentives, a suitable environment, finance, support, and time. 74. A potential source of investment that should not be overlooked is among Malians abroad - estimated to number as many as 3 million. Recorded workers' remittances in 1991 were US$91 million, equivalent to 3.7 percent of GDP and a quarter of the gap between imports and exports. An improved economic and regulatory environment could induce some to return with their accumulated savings and expertise by raising their confidence of being able to succeed in business. Further investigation of the views of Malians active in business abroad would help set priorities for making investment in Mali more attractive - initially for Malians abroad, ultimately for foreign investors. 75. Increased participation of women could be another source of new dynamism, particularly in the informal economy. At only 16 percent of the labor force, Mali's female labor force participation is among the lowest in the world.' Low participation reflects the low level and stagnation of female primary school enrollment (whereas Niger and Burkina Faso have more than doubled the proportion of eligible girls enrolled in primary school over the last twenty years). Women are active in rural self-help associations and savings and credit cooperatives, and expansion of the abilities of such institutions to provide financial services could facilitate greater entry of women into self-employment and microenterprises. Important conditions for their incomes and productivity to rise are the growth of agricultural incomes to provide the demand for simple consumer goods and services, the expansion of women's access to education, cultural acceptance of women's involvement in economic activities, and removal of regulations such as the requirement in the Commercial Code that married women obtain their husband's authorization before engaging in business. 76. Although Mali has held little interest for foreign investors, they should be encouraged. They offer the promise of better access for local products to international markets and a means of technology transfer to Malians. The presence of foreign companies may serve as a catalyst for the expansion of local enterprises through partnership or subcontracting arrangements. Despite the importance of foreign collaboration on technology development for a rapid improvement in technological capabilities, there have been few cases of technology-based marketing or management agreements with foreign firms, subcontracting agreements, or brand name licensing. * World Bank, World Development Report 1994. This figure undoubtedly underestimates their contribution to agricultural production. National accounts data indicate that women account for 38 percent of the economically active population. 23 E. BusINEss ASSOCIATIONS 77. Business associations in Mali include the Chambre de Commerce et d'Industrie du Mali (CCIM), eighteen professional associations grouped into a Federation Nationale des Employeurs du Mali (FNEM), the Association des Ing6nieurs Conseils du Mali (created in 1990 to promote cooperation among research consultants), the Ordre des Experts Comptables (audit and accounting services), the Reseau de l'Entreprise du Mali (the local branch of a West African business association), and the Chambre d'Agriculture, which represents the rural private sector. Recently-established associations include the Association des Conseils en Management and the Federation des Artisans. 78. The CCIM was created in 1974 under the supervision of the Ministry of Commerce. It has about 1200 members, with representatives in all regional centers. The Chamber represents the interests of enterprises in trade, industry, handicrafts, and services to the government; serves as a source of information for these enterprises; advises the government on policies and regulations affecting businesses; and assists new and existing enterprises. Its business service functions include commercial promotion, industrial and small business promotion, vocational training, resource center, legal assistance and public relations. However, the chamber's effectiveness is limited; it is essentially a state organization, rather than a creation of the private sector, and it lacks the personnel, data, documentation, and access to information needed to play its intended assistance role. It is dominated by traders, and industry representatives feel that it does not adequately represent their interests. 79. The FNEM was created in 1980 to bring together various professional associations, including the Organization Patronale des Industriels. Its committees on economics and finance and on fiscal and regulatory issues conduct studies and prepare papers for presentation to the government. 80. The Reseau de l'Entreprise du Mali is a member of the Reseau de l'Entreprise de l'Afrique de l'Ouest, an informal association of business people from Benin, Burkina Faso, Cape Verde, C6te d'Ivoire, Ghana, Mali, Nigeria, and Senegal. The aim is to develop private business within West Africa by identifying the needs of the African private sector, attempting to change the regulatory framework, and promoting trade throughout West Africa. 81. Government services in support of business are also weak. The Office National de la Main d'oeuvre et de l'Emploi deals only with low-level technical skills. The Institut de Productivite et de Gestion Previsionnelle and the Centre d'Etudes et de Promotion Industrielles (recently united as the Centre d'Assistance aux Projets, Entreprises et Societes or CAPES), have the capacity to provide management, accounting, and feasibility study training, but much of their energies are devoted to the Government program geared toward new secondary school and college graduates, who, for political reasons, are accepted for training despite their lack of business skills or interests. 24 III. POTENTIAL AND CONSTRAINTS 82. Mali's low income per capita reflects serious economic constraints, especially its fragile economy, low human resource base, weak financial and business support institutions, and legacy of excessive state intervention in and regulation of the economy. But the potential exists for the private sector to lead a sustained increase in the rate of economic growth. The conditions for this potential to be realized include sound macroeconomic management, steady growth of agricultural output and productivity, substantial improvement of the business environment, and investment in basic education and infrastructure. Positive steps in these areas have already been initiated, although much remains to be done. 83. This chapter discusses why promising investments in certain subsectors (section A) may, nevertheless, be inhibited by the shortcomings in the regulatory environment and other determinants of the costs of doing business in Mali (sections B and C). Section D discusses the financial system in detail, including projects designed to improve the access of small firms, and section E summarizes the limitations of the educational and training system. Chapter IV develops an agenda for reforms to address these constraints and accelerate private sector development. A. PRODUCT MARKETS AND POTENTIAL FOR DEVELOPMENT 84. Before the devaluation the Malian market held little attraction for investors, domestic or foreign. The small national market is concentrated mainly in Bamako, with dispersed local markets in the rest of the country. Transport facilities are scarce and poorly maintained, raising the cost of delivering goods to and from Bamako. The only advantage to this dispersed market lies in the cost advantage to localized import- substitution provided under the "protection" of high transport costs. Export-driven activities include mostly agricultural products and agroprocessing; handicrafts and manufactured goods are of low quality. 85. Three main difficulties-high taxes and duties, obsolete equipment, and difficult access to credit for working capital-are particularly restrictive for the clothing, wood products, cosmetics, building-materials, and metal-products sectors (Kessous and Lessard 1993). The high price of local raw materials is a frequently mentioned impediment in the food products subsector. Textile enterprises are sensitive to increases in the price of imported inputs and the high costs of electricity. Enterprises in the wood products industry and, to a lesser extent, in the cosmetics industry have problems of weak demand in addition to difficulties in procuring raw materials. In the building-materials subsector, demand is less of a problem than obtaining credit for working capital and the high cost of transportation. Distance to sources of raw materials, the poor condition of the transport infrastructure, and the weight of inputs and products all contribute to the high transport costs. 25 86. Despite these limitations, private investment has been reasonably high in Mali compared to other African countries and stable at around 11 to 12 percent over the last five years. This constitutes a sound basis for accelerating private sector growth, if complemented by improved incentives and removal of constraints, as discussed in this chapter. 87. Devaluation and plans to privatize a substantial share of Mali's public enterprises have opened new opportunities for foreign investors. Sectors ripe for investment in export production are mining (especially gold), agrobusiness (processing of fruits and vegetables, off-season exports to Europe, livestock, meat and hides), and textiles (centered on the country's cotton crop). Privatization opportunities include canning, groundnut and cottonseed oils, agricultural machinery, pharmaceutical goods, cement, printing, textiles, and hotels. Making these opportunities attractive to prospective buyers, however, requires the removal of regulatory obstacles and a clear implementation plan for the privatizations. Continued progress is important to demonstrate the seriousness of the Government's stated intent to withdraw from productive activities. 88. For the domestic market, sectors that offer the greatest potential for successful investment are agroprocessing, construction, and transport: o Agroprocessing. Mali has a comparative advantage in agroprocessing based on local raw materials (corn, oil seeds, cattle, and fruit) and relatively cheap labor. With the gradual development of better infrastructure, larger investments in technology transfer, and better management of distribution problems, local production should steadily be able to substitute for many food imports. o Public works. Malian construction firms have the potential to increase their share of the market, either on their own or through joint ventures. Expansion of programs such as AGETIPE can help local firms raise their technical capacities and management know-how while carrying out public works contracts. Providing building materials based on local resources should be a competitive import- substitution activity. o Transport. The growing demand for transport in a land-locked country offers important opportunities for private business, which now dominates only in road transport, once monopolies are eliminated, the present excess capacity in road transport is resolved, and new exports expand. The expected development of import- substitution and export-driven firms will further boost the growth potential. 26 B. COSTS OF DOING BUSINESS Regulatory and Administrative Systems 89. Mali's legal system, a legacy of the French colonial period, is not adequately sensitive to the needs of business. Changes in the regulatory framework since independence have generally followed the French system, without regard to the evolving realities of Mali's economic situation. Legal reform has been slow and inadequate for addressing the problems of modern business. Implementation of the reforms has been even slower. 90. Mali's economic regulations and business laws are too complex for a country with its limited formal sector activities. Business owners find compliance with laws and regulations to be disproportionately time consuming and costly, especially for smaller entrepreneurs with limited personnel and financial resources. A step in the direction of improving the legal system within the CFA zone is the Treaty of Harmonization of Business Law in Africa, signed in 1993, which will create a regional system of laws, courts, and arbitration and training of court officials. 91. A striking characteristic of the Malian business framework is the great number of state authorities firms have to deal with at various stages in their development, despite the introduction of a specialized window (the guichet unique) intended to streamline the process of applying for benefits under the Investment Code (see Annex 2). Before the creation of the specialized window, a new business had to obtain authorizations from several ministries before legally beginning operations. The specialized window, managed by the Ministry of Industry, is supposed to handle these authorizations on behalf of the client, but in practice has difficulty obtaining responses within the specified time period. For some applicants, it even complicates matters by adding another bureaucratic layer. 92. During 1994, steps were taken to lower the cost and time for setting up a new company. Businesses no longer pay a fee for services of the specialized window. Nor do they now need to register with the Tribunal d'Instance, the Property and Registration Department, or the Ministry of Finance. As a result, the bias in favor of remaining informal has been lessened, although more remains to be done. 93. A license is still required to start a company in the fields of health, tourism, public works, teaching, or communication. Investors from countries that do not have a convention d' itablissement with Mali need a special license as well to start a business. The procedure is costly, imprecise (the law does not specify the conditions of its implementation), and unevenly applied. The Mining Code is not sufficiently conducive to new investment (it is being revised in the context of a World Bank project), and the policy and administrative environment is inhibiting. 27 The Judicial System 94. In addition to the regulatory framework, business transactions are handicapped by the way laws are implemented. Potential investors need to feel secure about contract enforcement. It is now usually more expedient to settle business differences outside the court system, a practice unlikely to change until judicial decisions are impartially reached and businesses gain more respect for the laws that are supposed to govern their behavior. The commercial code refers frequently to the 1957 plan comptable, which is rarely used, making it difficult for judges to ground decisions on a legal basis. Though the bankruptcy law is sophisticated in form, it has not worked well in practice because of an absence of specialized courts and the court system's isolation from the business community. In 1994 a system of Tribunal de Commerce was decreed, which could help resolve this problem, but it has not yet begun functioning because the CCIM has not nominated the Assesseurs who assist in its operation. The Tax System 95. Despite tax reforms in recent years, the fiscal system is still a disincentive to private sector development. Major impediments are the complexity and diversity of taxes, the high rates in some cases, and the narrow tax base centered on a few formal firms. Although informal firms do not pay these direct taxes, they may bear heavy indirect taxes in the form of import duties and other taxes on their inputs. Ongoing efforts to reform customs and taxes at the level of UMOA may provide a mechanism for addressing the problems of their high nominal levels and complexity. 96. Modern firms in the real sector bear almost the entire direct tax burden. The theoretical burden is punitive, resulting from a patchwork of many different taxes (patente, business licensing fee, property tax, the mortmain tax, tax on goods and service, profits tax, minimum flat rate tax, flat rate tax on wages, contribution to the Manpower and Employment authority or to the social security system, income tax on securities). Numerous exemptions and means of evading payment make application of the taxes nontransparent and tax collection inefficient. Thus the actual tax burden is much lighter than tax laws would suggest. Fiscal reforms have concerned mainly tax rates and tax collection problems. More fundamental reform is required that balances the state's need for revenue with development of the private sector, in a tax system that is fair and transparent. Business Services and Information 97. Most formal sector firms in Mali cannot get good and appropriately priced services in management techniques, accounting, personnel management, equipment-related training, maintenance, technology transfer, and marketing information and support. There are many private consulting agencies, though their technical skills are still lacking in many areas. They have not yet developed the marketing capacity or the network 28 management needed to ensure adequate service to the business community. They are reasonably well prepared to conduct feasibility studies. 98. Published economic, financial, commercial, and market information is scarce in Mali. The few published sources that are available relate mainly to formal and large-scale segments of the private sector. The statistical authorities lack the financial resources to collect the microeconomic data or to carry out the comprehensive economic studies that entrepreneurs need. Government statistical bulletins are circulated to a very limited audience and do not provide the kind of market information that would be useful to the private sector. Mali does not need sophisticated statistical coverage or ambitious economic studies, but it lacks even the bare minimum required by prospective investors or would-be exporters. 99. The importance of reliable information and appropriate assistance is reflected in the success of the Agence d'Exdcution des Travaux d'Interdt Public pour l'Emploi (AGETIPE). Created under the Public Works and Capacity Building project financed by the World Bank and KfW, this agency designs public works contracts in small amounts with reasonably simple bidding procedures to make them accessible to small contractors (see Annex 3). Perhaps more important, it monitors the work and pays promptly upon completion, avoiding the problem of arrears that plagues most private firms doing business with the Government. In addition, it provides technical assistance to improve the capability of small contractors to bid on contracts and implement them according to the required standards. It also makes use of local private consulting firms to carry out many of its activities, such as evaluation and monitoring. While AGETIPE has so far operated only for contracting of public works, it could extend its operations into other areas of public procurement (such as education and health) and even into competition for private contracts. The principles that give it a potential cost advantage (as well as giving small contractors access) include simple procedures, clear standards and criteria, close monitoring, prompt payment, and technical support as needed. 100. There are growing efforts by donor agencies to strengthen the availability of technical and business services to micro and small enterprises. There is not yet, however, a strong market for such services, since few small enterprises have experienced strong profit opportunities that could be exploited with better technology or management. The Enterprise Assistance Project of the United Nations Development Program and International Labor Organization is experimenting with vouchers and subcontracting in providing assistance to firms in order to get clients accustomed to paying and minimize the problem of free donor-funded programs competing with emerging local private providers. Customs 101. Customs regulations, although simplified since the 1991 reform, continue to stand in the way of private sector development. Inputs purchased by new firms are taxed, while existing firms can receive exemptions. Equipment taxes impede modernization. Regulations generate a cost disadvantage and incentives for corruption. Customs fraud is 29 a major impediment to development of the formal sector and results in large revenue losses (collections were one-fourth what they should have been in 1991). Applying for an investment code exemption from duty rates is a slow process that seems to accelerate only when side payments are made. Labor Flexibility 102. Despite many reforms, regulation of labor imposes undue burdens on private business. Though the state no longer has a monopoly on hiring, the private hiring offices created to take over this role are under the control of the Direction Nationale du Travail. Hiring contracts for more than three months but less than two years require the approval of the Inspection du Travail. All hiring of foreigners also has to be approved by the Direction Nationale du Travail and cannot be for longer than two years. A Malian national must be hired at the same time as the foreign worker, to replace the worker at the end of the contract. Foreign workers may not be hired for any position for which a national training program exists. Though the extent of the state's power over employment is limited by the extent of the informal sector and the excess supply of job seekers, such laws deter firms from entering the formal sector. C. PUBLIC-PRIVATE RELATIONSHIP 103. Even if the regulatory obstacles and costs of doing business are lowered, lack of confidence in the intentions and role of the state may inhibit potential investors from committing their resources. To replace a legacy of state suppression and crowding out of the private sector, a new relationship must be forged between the public and private sectors. Since 1990 the government has signaled its willingness to engage in dialogue with the private sector by holding several round table discussions and seminars or private sector development issues. 104. Despite enormous strides both parties still need to find more effective ways to communicate. The private sector believes that it is consulted only after decisions have been made. Hence the Government needs to visibly include private representatives in the information-gathering and decision-making process and to clearly define its role in laying the foundation, rather than substituting for private initiative. 105. The private sector also needs to put its own house in order. Its representatives are divided among themselves and lack credibility with their constituency and a feasible agenda for reform. No real improvement in the public-private dialogue should be expected until both sides redefine their roles and the way they function within their sphere of influence. Suggestions along these lines are made in chapter IV. 30 D. FINANCIAL MARKETS 106. Mali's highly segmented financial system provides a weak basis for mobilizing financial savings and intermediating them to help finance investment in private economic activities. The domestic savings rate is only about 5-7 percent of GDP, and a higher rate of investment has been made possible only through foreign assistance and remittances. Liberalization of interest rates and introduction of a money market in 1993 have improved the incentives for banks to lend to the private sector, but they have responded cautiously so far. Although informal savings and credit associations are widespread, they are oriented more toward welfare and smoothing of the crop cycle than toward investment, and nonfinancial savings remain dominant in rural areas. Interaction between segments of the finance sector is limited, except for an effort to give village associations some access to bank credit. Special donor-financed programs-some of them showing reasonable promise-are the only access small and microenterprises have to finance. Banking System 107. Mali's commercial banking system has traditionally favored deposit collection over lending, the public over the private sector, and short-term over longer-term finance. Although this orientation is gradually changing-indeed must change, if banks are to be profitable under current money market conditions-it will be some time before banks will be able to aggressively support expansion of the private sector. A conservative approach is dictated in part by the risks of term lending in an uncertain economic climate, an inadequate legal system for enforcement of contracts, few clients with a good track record and sound collateral, and lack of experience with small private business operations. Furthermore, attempts to involve banks in financing new small enterprises have not met with good repayment rates. 108. Until the 1980s, the banking system was dominated by the Banque de Developpement du Mali (BDM), which served as principal banker to the public sector and accounted for about 50 percent of total deposits and 60 percent of loans. The financing of projects of questionable viability and overexposure to the public sector (90 percent of its loans were nonperforming) brought the financial system to the verge of collapse in 1989. A restructuring program-supported by the World Bank and BCEAO-included the transfer of viable assets to a new entity, BDM-SA, and introduction of a new management team from the Banque Marocaine du Commerce Extdrieur, which instituted new policies, overhauled procedures, sharply curtailed lending, and concentrated on improving the bank's operations. 109. Of the other five commercial banks, three are primarily trade finance institutions: Banque Internationale pour I'Afrique Occidentale au Mali (BIAO/Meridien Mali), Banque Malienne de Credit et de Dep6t (BMCD), and Banque Commerciale du Sahel (BCS). The Banque National de D6veloppement Agricole (BNDA) is an agricultural development bank and has made some efforts to interact with village associations. The Bank of Africa 31 (BOA) appears to be the most interested in financing productive activities in order to improve its competitive position. All of these banks have been operating under financial policies that effectively discouraged lending to private operators-for example, by guaranteeing a high rate of interest (averaging 10 percent in 1992-93) on funds left on deposit with the BCEAO and by mandating a lower rate of interest on loans to small enterprises (9 percent instead of 13 percent, prior to 1991). Their main sources of funds are demand deposits by commercial clients and cash deposits against letters of credit. 110. The introduction of a money market by BCEAO in October 1993 has radically altered the conditions for successful banking. Each week, banks offer surplus funds to the money market or place demands, and BCEAO acts as a clearinghouse. All banks receive the prevailing rate of interest (recently 8 to 9 percent) only on the portion of offered funds that are taken up by the market. This proportion has been falling gradually, so that as much as 45 percent of banks' funds on deposit with BCEAO are not earning interest. The writing on the wall is clear: a growing proportion of these funds must be lent out to the private economy (since the public sector is already in arrears) if banks are to turn a profit. 111. So far, however, banks have been content to let substantial excess liquidity sit idle. Unless their behavior changes, the banking system will be ineffective as a channel for lines of credit aimed at the private sector (unless the banks act only as an agent without bearing any of the risk, contrary to current standard practice). Banks attribute their reluctance to increase financing to the private sector to the limited number of clients with adequate security for loans (that is, fixed property). Uncertainty about the ability of clients to survive increased financial obligations in the wake of the devaluation; and legal difficulties in pursuing nonpaying clients (permission of the Minister of Justice is required before foreclosing on property put up as collateral). 112. Another problem is a public mentality that loans from formal institutions (especially if government-owned) do not need to be repaid (particularly among jobless young graduates and laid-off civil servants, who feel aggrieved); The general public has little confidence in the banks and views them as an arm of the government (three of the four largest bank are majority government-owned). Small clients who are accustomed to the personal interactions and confidentiality of informal financial transactions are put off by the impersonal written procedures of the formal banks-especially if they are illiterate, as most Malians are. 113. Banks also point out that the short-term structure of their deposits makes it difficult for them to move into term lending. Though this may become a constraint as banks shift their assets out of deposits with BCEAO into the real economy, the 12 percent of their deposits that are for two years or more appear to leave them some room to increase long-term lending even without engaging in term transformation or developing more long-term instruments (Figure 2). 9 One bank reported that 80% of its loans to jeunes diplomds are in arrears. 32 Figure 2: Structure of Deposits, 1992 Term (2 + yrs) 12% Passbook k savings 28% Current 60% 114. When banks have cooperated with efforts to increase credit to the private sector, the results have not always been encouraging. Lending to new small and microenterprises involves numerous difficulties. Risks are high because such firms have no prior track record and are starting up new projects. For example, BIAO provides half the financing (and takes half the risk) to small enterprises that are being supported by the Projet d'Appui aux Petites et Moyennes Enteprises (PAPME). Some two-thirds of these clients are in arrears. Banks may need to begin such lending with established clients, preferably by providing working capital for less than six months rather than longer-term investment loans. The scarcity of trained banking staff means that lending programs need to be accompanied by special monitoring measures (perhaps involving an NGO) to identify implementation problems before they become loan repayment problems. 115. There are, nevertheless, some positive signs that commercial banks are trying to reach a wider clientele. BOA has experimented with alternative forms of collateral rather than exclusively property if the borrower can secure a moral guarantee from a member of the Advisory Board and has at least 25 percent equity (Duggleby 1992). Small enterprises account for about 10 percent of BOA's portfolio. In 1988 BIAO launched "Plan Epargne" to attract small savers and eventually to extend credit based on a monthly savings requirement (over an average of 18 months) to achieve a minimum deposit/loan ratio (collateral was also required to receive credit). The scheme had to be shut down because of the lack of response (some 300 savers, of whom only 4 obtained loans) and the high cost of managing the program (about 30 percent of the amount mobilized, Duggleby 1994). Formal Non-bank Financial Institutions 116. Non-bank financial institutions (NBFIs) in Mali are mostly savings-oriented and do not offer direct finance to the private sector. They represent an important segment of Mali's financial sector and an untapped source of funds that could be intermediated through the money market to reach private borrowers, if more effective credit mechanisms were in place. The Societe des Cheques Postaux et de la Caisse d'Epargne (SCPCE) is an autonomous institution restricted to savings mobilization, with deposits of about CFAF 33 2.7 billion. It also manages the Caisse Nationale d'Epargne (CNE), which has about CFAF 500 million in long-term resources. These institutions are major providers of long- term funds to the money market. In addition, there are six insurance companies (one of them government-owned, but slated for privatization). Recently a group of local private individuals has set up La Financidre, a venture capital company funded through monthly subscription and introduced primarily to offer finance to the private sector. It has not yet begun operations. Informal Savings and Credit 117. There are growing efforts to improve financial intermediation in rural areas. Financial savings instruments are beginning to compete with more traditional forms such as livestock, jewelry, and real estate. Although Islamic traditions inhibit the application of simple interest rates, informal credit generally bypasses the issue by levying a fee on the amount lent. 118. Financial savings in rural areas are generally accumulated through group arrangements, to help members get through the agricultural production cycle and cope with emergencies. The most common arrangements are (see Annex 1 and Webster and Fidler 1994 for further details): o Savings and credit cooperatives (caisses villageoises): Credit unions designed to mobilize savings at the village level and to make them available for credit to members (see Annex I for examples) have substantial potential for advancing financial development and microenterprise finance. Efforts to link them to each other and to the formal banking system should be encouraged to facilitate the flow of funds between surplus and deficit units. o Self-help associations (associations et tons villageois): The traditional system of mutual assistance at the village level has evolved to include economic and financial functions. Associations of producers work cooperatively in marketing and obtaining inputs-a role that has sometimes been imposed through state efforts to control production through cooperatives. The Office du Niger has encouraged associations in villages under their jurisdiction to accumulate savings and pay off loans for communally-owned machinery. Donors have used these associations as conduits for credit, although they are not as explicitly organized for this purpose as the credit cooperatives. o Rotating savings and credit associations (tontines): Rotating funds are a widespread informal means for small groups of people with common interest to accumulate money faster than they could by saving alone. Members contribute regularly to a pool, which they receive in turn (the amounts, period, and rules of access vary, average monthly accumulations per tontine are said to be in the range of CFAF 70 to 130,000). A study in Bamako suggests that there are some 10,000 tontines of about ten members each in which at least half the working population 34 participates (Kessous 1992). Although tontines are an important means of mobilizing financial savings, particularly for lumpy consumer expenditures, they have limited capacity for financial intermediation outside the group, and the amounts available to individual members are not adequate for entering a business other than petty trade. 119. While these informal financial structures provide a useful basis for further financial development, they constitute a relatively weak foundation. Despite strong promotional and educational efforts, savings mobilization remains well below its estimated potential. Many farmers tend to be wary of cooperative credit associations in part because of past government efforts to impose cooperatives. Low levels of literacy make it difficult to find qualified people to run local credit cooperatives (illiteracy should not be a barrier to participation, however, if the right technologies are used). Links between informal and formal financial systems are virtually nonexistent. Regulation also presents a sensitive issue. UMOA has attempted to establish an appropriate regulatory framework that would encourage savings and credit cooperatives to develop in a sound manner. There is some concern, however, that these regulations might impede the movement of village associations into savings and credit activities. Credit Programs for Small- and Medium-size Enterprises 120. A number of donor agencies have established credit programs to support small- and medium-scale enterprises. Most Malian entrepreneurs who have the potential for sustained growth of output and employment fall in this range, but their growth is likely to be constrained by lack of access to external capital." Few firms of this size have the track record and collateral needed to be considered for commercial bank credit (although some of the best ones may be able to get overdrafts). 121. Illustrative of the successes and problems of such donor programs is the Projet PME/PMI of the European Development Fund. The program, begun in 1988, screens applicants carefully to reduce the risk of default; some 15,000 inquiries generated about 4,500 applicants, of whom some 900 have received loans (about 40 percent of them jeunes dipldmis and 20 percent women). The project is supervision-intensive, with monthly visits by the project officer and additional follow-up in case of arrears, plus technical assistance if needed (drawing heavily on the resources of the UNDP/ILO project). Recovery rates have been problematic, ranging from 62 percent to 90 percent across different regions as of 1992 (Duggleby 1994), although by 1994 recoverable debts were at a manageable level of about 9 percent. Problems stemmed from targeting youths with no business experience who were able to manipulate the group methods put in place to ensure savings and repayment. '0 Self-employed persons and family or microenterprises with fewer than five workers are less likely to grow to significantly larger sizes and are more likely to be able to finance themselves from retained earnings, loans and gifts from relatives, and informal sources--including credit cooperatives. 35 122. The project's use of groupements d'interet 9conomique (GIEs)-a legal form of joint economic activity involving three or more people without a need for other formal licensing-is both its strength and its weakness." Prospective clients must form a GIE and make regular monthly savings contributions until at least 10 percent of their combined annual income has been accumulated. The funds are deposited in a blocked account that secures loans to individual group members whose proposals are accepted by the credit committee (a second group member can apply for a loan after the first one is 30 percent repaid). One problem is that some phony GIEs have been established by applicants who sign up friends and pay their contributions (or even borrow elsewhere to get the savings up to the required level). Although the intention was that GIEs should continue saving regularly to build up their fund, in practice many of them stop saving as soon as they receive credit (survey data indicated dropout rates of 43 percent in Bamako and 70 percent in Segou; Duggleby 1994). 123. Repayment and savings rates were much higher among GlIEs whose members had a common economic interest than in those formed solely to qualify for a loan. That finding suggests that the success rate could be improved by concentrating more on groups with a pre-existing common econonuc interest and by introducing stronger sanctions- both through incentives for group members to pressure nonperforming borrowers and by penalizing groups that stop saving. 124. Projet PME/PMI is in the process of becoming an independent, legal non-bank financial institution, Le Cridit Initiative. It believes that it can cover its operational costs by charging 15 percent on loans (13 percent for agriculture and livestock) as long as it continues to receive low-cost funds (from donor agencies and from loan repayments; as a non-bank, it cannot take in voluntary savings). This experience indicates that lending to small enterprises may be sustainable, with intensive screening, supervision, and technical assistance and a large enough spread to cover these costs. However, unless a sufficient scale of operations can be achieved and processing streamlined, it may be difficult to overcome the high costs resulting from Project PME/PMI's high ratio of staff (expatriate and local) to clients. 125. The PAPME project, financed by the Canadian International Development Agency (CIDA) has successfully attracted commercial banks into its operations to support the creation and development of micro and small-scale enterprises. One motivation behind the project is the idea that local banks, as they start investing in good small firms, will become integrated into private sector development. The project works primarily with new businesses providing training, technical assistance, and follow-up services, resulting in a relatively high-cost operation. It is in the process of evaluating whether it can restructure its operations in order to survive beyond the impending end of its current funding. 126. The response has been encouraging, though behind initial projections. The evolution of banks' relations with well-prepared new business operations is especially promising. BIAO has developed close ties with the project, and the BMCD and the BOA " This paragraph is based on Duggleby 1994 and Keita and Gahigi 1993. 36 will shortly set up joint programs. In general, however, the project has not been able to overcome the reluctance of banks to work with small business investors on their own. Furthermore, operating expenses are high and repayment rates are low. Weaknesses in the project will need to be remedied before 1995, when the institutional setting will change and the project will begin to charge for its services. 127. The Groupe Pivot PME/PMI of AFRICARE in Bamako is modeled after Grameen Bank. It is based on solidarity groups of five members, each sharing a pre-existing economic activity. Group savings must represent at least 75 percent of the loan amount to any member. Savings earn interest of 3 percent (less than in commercial banks); loans are for three months at 5 to 8 percent. E. HUMAN RESOURCES 128. Mali cannot hope to respond to the needs of an internationally competitive economy unless there is substantial upgrading of its education system, vocational schools, and on the job training. The low primary school enrollment rate stems from a combination of factors, including insufficient schools and equipment, long distances to school, inadequate training of teachers, high population growth, status of women, difficulties of poor families meeting the costs, and the poor quality of the curriculum. Until these problems are addressed, primary school graduates will be unable to benefit from technical education. 129. Mali's vocational system consists of public and highly subsidized private institutions that are a poor match for private demand. In 1993, less than one in three vocational training school enrollees received industrial training. Most received training in simple skills that already saturate the job market. 130. Few firms provide formal or informal training on the work site. The weak training capacity of the modem sector is a consequence of its limited size, the lack of fiscal incentives for training, and the failure of trade organizations and training facilities to develop a labor market information network. 131. Not surprisingly, nonformal training modes dominate. Apprenticeship is common in the informal sector, but is of low technical quality and limited in scope. F. INFRASTRUCTURE 132. Although Mali's trunk road system is good, it is deteriorating from poor road maintenance and overloading of vehicles. There is presently excess capacity in rolling stock resulting from the build-up to handle food aid during the 1980s. While this yields relatively low transport costs for the present, it prevents the stock from being renewed, causes overloading, and is likely to result in some companies exiting. The internal road 37 system is in poor condition, especially in rural areas during the rainy season.12 Besides improving the management of road maintenance, there is a need to reexamine the system of taxation so that road users pay a larger share of the maintenance costs. 133. State enterprises in the railroad, air and river transport systems are in the process of being restructured. Monopolies in the airline and port sectors raise costs and inhibit exports. It is essential to continue opening up possibilities for private participation to help improve efficiency in these transport sectors. 134. Electricity in Mali serves a very low share (under 5 percent) of the population and is costly relative to neighboring countries, due to a combination of low population density, management problems, and high costs of development. Mali has substantial hydroelectric potential, but production from the Selingue and Sotuba dams meets only part of national electricity demand. The high cost of building dams makes them hard to finance. Although the Electricity Code of 1989 authorizes private initiatives, most rural collectives do not have the funds to purchase generators for their own use. The high cost of importing relatively small volumes of petroleum products hampers the competitiveness of Mali's industries and makes it essential to ensure their efficient distribution. '2 The World Bank has recently approved a USS305 million transport sector project. 38 IV. AGENDA FOR PRIVATE SECTOR DEVELOPMENT 135. To enable private enterprises to become efficient producers of goods and services and contribute to Mali's development, the Government must first provide a supportive environment. Maintaining sound macroeconomic management is a precondition, especially to sustain the substantial incentives for export and substitution of domestic production for imports and to establish a virtuous circle of stability, investment, growth of production, and widespread expansion of employment opportunities. Positive effects on the private sector will result from: stability and reduced uncertainty for investors; greater competitiveness through lower real costs of domestic inputs (raw materials, labor, energy, transport); and rising demand from higher agricultural incomes as production responds to the incentives. 136. Reasons to be optimistic regarding macroeconomic management include the relatively low degree of macroeconomic distortions in recent years compared to many other African countries, the extent of reforms already undertaken, and the seriousness with which the Government is trying to address macroeconomic issues. The Malian authorities have demonstrated the capability to keep deficits and inflation under control despite occasional slippages and political and financial strains, both in the late 1980s and since the devaluation. But unless macroeconomic policies continue to be well-managed to maintain stability, investors will remain hesitant and informal employment growth will be driven by the supply pressures of population growth and migration rather than by the demand pull of a buoyant economy. 137. Agriculture holds the key to rapid expansion of the non-agricultural private sector not just because it dominates the economy, but because the income generated raises demand for the goods and services produced by micro and small enterprises, which account for most indigenous private businesses and employment. Agriculture is responding well to post-devaluation opportunities: exports to neighboring countries of livestock and food products such as onions and potatoes have reportedly doubled; and, with substantial irrigation already in place, rice planting is expanding rapidly. If Mali is indeed on its way to realizing its long-recognized potential to become the "breadbasket of West Africa," the resulting widespread increase in demand will expand the opportunities for small private suppliers of goods and services, as well as for larger investors in export and import-substitution industries. 138. In this context, discussion of the agenda for private sector development in this chapter focuses on measures to facilitate a strong response from private non-agricultural enterprises to changing prices and new opportunities. In the short term, the most pressing need of existing enterprises is for working capital to facilitate the process of adjustment to post-devaluation prices and markets (Section A). In the longer term, actions are needed on several fronts to improve the business environment and overcome the constraints identified in Part III. 39 139. The government should continue to deepen its reforms by establishing a legal and regulatory system that is simple, clear, predictable, equitable, and properly enforced and by developing the infrastructure, human capital, and institutions that provide business services and help to lower transactions costs. A broad approach is necessary because direct assistance cannot be expected to reach more than a small proportion of firms, whereas improvements in institutions and procedures can have a widespread effect. However, in some high-growth subsectors it may be desirable to take a subsector approach as a mechanism for state-private cooperation to solve particular bottlenecks and begin addressing constraints where they are most binding. 140. Costs of doing business (Section B): The first priority is to continue reducing legal and regulatory hurdles that raise the costs of investing and doing business, at least in the formal sector. The process of streamlining investment approval and simplifying the tax system should be strengthened. Only as the costs of moving into the formal sector are lowered and small informal businesses see their interests tied to the overall economy will they be motivated to graduate into the formal sector. At the same time, lowering the cost of doing business will enable larger firms to attain international competitive standards. 141. Over time, capabilities of NGOs and professional associations to provide direct firm-level support in finance and technical and business services need to be built up as well to help firms improve their productivity and management and so their chances to survive and grow. Important target groups include traders and professionals who have some funds of their own to invest in directly productive activities. 142. State-private relations (Section C): In the course of implementing short-term actions, the Government should systematically reduce its ownership of directly productive activities in favor of investment in education, health and infrastructure and demonstrate its willingness to listen and respond to the concerns of the private sector. This involves establishing channels through which different segments of the private sector can express their views to the Government and formulating practical problem-solving mechanisms. A flexible, trial-and-error approach is desirable to work out mutually satisfactory methods. 143. Institutional development: Initial steps have been taken to improve the institutions that facilitate the expansion of private enterprises, but more needs to be done over the longer term to establish a truly conducive environment. Continued development of the financial system (Section D) is especially important, particularly increasing competition among banks and enhancing their ability to serve smaller and non-commercial businesses. Efforts by donors and NGOs to develop informal and semi-formal financial mechanisms also deserve continuing support. Although human resource development (Section E) takes time to pay off in higher productivity, measures are needed now to lay a sound foundation for the future, in particular by raising basic literacy and numeracy through widespread primary education and providing adequate incentives for on-the-job training. Continued investment in infrastructure (Section F) is important to keep lowering costs in order to sustain the gains in competitiveness made possible by the devaluation. Although 40 detailed discussion of education and infrastructure lies beyond the scope of this report, without significant improvements in primary education, transport, electricity and telecommunications, other efforts toward private sector development will not realize their potential impact on long-term productivity and growth. A. PRIORITY MEASURES FOR THE SHORT TO MEDIUM TERM 144. The immediate steps taken by the Malian government following the devaluation now need to be reinforced through measures to improve firms' access to the financed needed to adjust in the short to medium term. In the current situation of transition and uncertainty, the banking system remains imperfect in its ability to perceive the longer-term gains that would ensue from expanded lending to private producers in the short term and in its capacity to evaluate and service new clients. Procedures and requirements-such as fixed property for collateral, even for an overdraft-are ill suited to many of the small- and medium-scale enterprises that could expand rapidly in newly profitable market niches. This situation should gradually change as banks develop strategies in response to the 1993 money market reforms and increased competition over time. There are, however, some short-run measures that can accelerate the process by improving some firms' creditworthiness and augmenting the liquidity that is available: * Expandfirms' access to liquidity: Government arrears to the private sector should be settled to inject liquidity into the system and help restore the credibility of the Government. A delayed schedule of payments can be .negotiated for private firms that owe taxes so that firms can survive to pay taxes tomorrow. Current beneficiaries of donors' lines of credit could be offered automatic augmentation of working capital loans. Guidelines for investment-oriented lines of credit could be eased to improve access to working capital loans. * Creditworthiness: Revaluation of assets to reflect the devaluation (including waivers of taxes on capital gains, if necessary) would improve the balance sheets of firms applying for credit. BCEAO is finalizing an interbank guarantee fund to encourage bank financing of the private sector; direct participation of the commercial banks is important to give them an incentive to make sure that it is a well-run group insurance scheme. 145. Donor funds for public works, projects and social funds should be used in a way that supports enterprise development and employment through contracting with smaller, more labor-intensive firms, following the models of AGETIPE strategy or World Education. These models could be extended in several directions. Public services and procurement in other sectors, such as health, could be passed through AGETIPE or a similar agency to facilitate bidding by small suppliers. The agency could be given the right to compete for private construction contracts. Technical support services to small 41 enterprises could be designed to help them compete for private as well as public contracts, for example in housing construction. B. THE COSTS OF DOING BUSINESS 146. To make the environment more hospitable to business, the Government should simplify the regulatory system, adapt the legal system to business transactions, make investment incentives more performance-oriented, keep the labor market flexible, and improve the services rendered to businesses. Simplifying the Regulatory System 147. As a first step toward simplifying the regulatory system and setting a target for regulatory reform, the Government intends to organize a workshop to discuss new roles of the state and the private sector. Unless there is evidence of a strong commitment to eliminate nonessential regulations-indeed to rethink the whole purpose of regulation- most Malian entrepreneurs will remain informal rather than confront the bureaucratic hurdles to regularizing a business. The next step is to replace the remaining approval procedures with a single registration that serves legitimate statistical purposes and provides information to other authorities if needed. 148. The Direction Nationale des Industries is making the one-stop-window more effective by delegating authority for firm creation procedures to itself, thereby concentrating all the necessary steps in one place. The review commissions will be abolished and replaced by a technical review to confirm that the applicant meets the conditions that automatically qualify it for incentives under the new Investment Code. Adapting the Legal System to Modern Business Transactions 149. Reform of the legal system will be a long and difficult process that goes against strong traditions of French colonial centralization. Companies seldom apply to the courts to resolve legal issues because of a lack of confidence in the judicial system. Contract enforcement and business dealings are severely handicapped by the inability to adjudicate complaints and enforce decisions. One measure to improve the court system would be a more generous budget. Another would be to train magistrates in business law. USAID and the French Ministry of Cooperation are planning projects to strengthen the business courts, establish a resource center, and provide training. The ongoing efforts to harmonize business laws in the CFA zone could be a vehicle for simplifying the legal environment. Rethinking Investment Incentives 150. The new investment code of 1991 was a start in the right direction (see Box 1), but more needs to be done to make the new system performance-oriented and to 42 encourage firms to enter into export-oriented and labor-intensive activities. Special exemptions should be eliminated for two main reasons: first, in exempting certain types of investors, they increase protection, and can create distortions in the way factors of productions are allocated in favor of noncompetitive activities; second, they discourage local production of competing goods. With the new exchange rate, which make Malian products more competitive on international markets, tax exemptions should be replaced with other types of incentives based on performance. Tax exemptions (or credits) should be linked to firms' results through predefined criteria, such as exports, labor intensity, and decentralized location. Further work is needed to devise workable incentives to make sure that exporters are not penalized by taxes on their inputs. 151. Special incentives for investment of funds held abroad could help reverse capital flight and induce overseas Malians to return or remit capital to set up businesses. Average remittances during 1990-92 were double those during 1987-89, indicating a rising level of confidence even before the devaluation. Suitable instruments are needed so that such funds do not add to excess liquidity in the banking system, but are invested directly in new or privatized businesses or indirectly through offshore managed venture capital funds. Keeping the Labor Market Flexible 152. The historically stringent regulation of the labor market has been eased somewhat by the adoption of a new Labor Code in 1992 and the abolition of the monopoly on job placement held by the Office National de la Main d'oeuvre et de l'Emploi (ONMOE). Nevertheless, formal sector employers remain subject to a bewildering and costly array of provisions, and the incentive to evade them by remaining informal is still strong. Several steps could be taken relatively quickly to continue progress toward a flexible labor market in which wages, hiring, and firing are openly negotiated by the parties involved, with the Government only setting minimum guidelines to make sure that workers' rights are protected. 153. First, the requirement that the local Inspecteur du Travail approve employment contracts of more than three months is no longer necessary and should be dropped. This would ratify in practice the principle that the Ministry of Labor (through the ONMOE) no longer has the authority to decide who gets hired. Second, the prohibition against hiring foreign workers for more than twenty-four months and then replacing them by national employees should be eased. This provision makes it impossible to make long term commitments to skilled foreign workers, and in some professions the lack of highly skilled local workers cannot be overcome within just two years of on-the-job-training. The consequence is to discourage foreign investors who might bring badly needed expertise, technology and capital. Third, employers should be given more discretion in making layoffs for economic reasons. They are still subject to the discretion of the local Inspecteur du Travail, who has to render an opinion within a specified period. 43 Strengthening Information and Monitoring Services 154. The Ministry of Industry should reorganize its services to focus more on providing economic and marketing information to local and foreign investors. Investors in Mali need ready access to statistics on the national economy and local markets, to facilitate market research. And Malian producers would benefit from information about potential markets for Malian products in other countries in the region and overseas. If Mali is going to move toward export-driven growth, producers will need information on the new system of international standards (ISO 9000). 155. As foreign investors become increasingly interested in Mali, they will undoubtedly seek local partners. While the Ministry of Industry might be an initial point of contact, the process of match-making can probably be handled most effectively by the Chamber of Commerce and Industry or other business associations. 156. Continuous monitoring of services to identify and ease bottlenecks is needed to ensure that weak implementation does not impede the Government's transition to playing a supportive role to the private sector. Particularly for new exporters a monitoring and problem-solving mechanism should be put in place to resolve logistical, marketing, customs, and accounting problems. The monitoring services should be carried out by private consulting firms, to ensure independence. In the early stages, substantial subsidization would be in order to facilitate the transition process and accelerate export growth. Over time, the private sector should assume an increasing portion of the costs, either indirectly (for example, through sponsorship by business associations) or through direct fees for services used. Encouraging Technology Development and Quality Control 157. The expectation that Mali's participation in global markets will increase implies substantial upgrading of firms' technical capabilities and their knowledge of new products and process innovations in the industrialized countries. To facilitate rapid technological innovation through acquisition of foreign technologies, Mali needs a legal framework, investment code, and assistance institutions that facilitate the licensing of foreign technology, joint ventures, and direct investment in technology-oriented industries. 158. For Mali to penetrate export markets for semi-processed and manufactured products, quality control is critical. In many countries, the exporting industry imposes its own quality standards on its members, since all exporters of a product suffer if the country gains a reputation for poor quality. This approach cannot readily be applied to nontraditional exports in Mali, because there are so few producers of a given product and business associations are weak. Hence the scope for public-private partnership needs to be discussed. Again, it may be possible to develop private providers of quality control services, with the government (or donors) and firms sharing the cost. 44 159. Attracting high-productivity foreign investments and absorbing new technical knowledge depends on having a well-educated and skilled labor force-which is not presently the case. The human resource development measures suggested below are essential complements to technology development. Improving Other Business Services 160. The first step in extending the use of business services by private, especially small businesses is to improve the quality of existing agencies and to encourage greater use of their services. The World Bank's Private Sector Assistance Project aims to strengthen the existing network of agencies by coordinating them through a private business support structure (APEP, or Agence de promotion des entreprises privees). APEP is expected to help providers of business services improve their management, address technical constraints, and gain the confidence of banks in their ability to provide high-quality studies on which credit decisions can be based. 161. APEP has five target areas for implementing its objectives: * Communication: make sure that firms are aware of the content of the Private Sector Assistance Project and its objectives. * Identification: select new and existing firms to receive technical assistance. * Resources: provide selected firms with ready-to-use information on the services currently available. * Networking: organize existing public and private support agencies into a network to facilitate sharing of information, approaches, and methodologies. * Linkage: connect entrepreneurs, support agencies, and banks to provide entrepreneurs with the technical resources to prepare feasible project proposals that will be accepted by the banks. 162. The objective over time is for suppliers of business services and training to be able to support themselves on fees for their services. This will require efforts to increase demand for these services and to improve their quality. APEP also will undertake networking efforts and training programs to raise firms' awareness of the importance of using the available services. The most important areas for improvement of business services are in export facilitation, market information (domestic and foreign), and technology transfer and dissemination. 45 C. A MORE PRODUCTIVE RELATION BETWEEN THE STATE AND THE PRIVATE SECTOR 163. The Government needs to signal more clearly its resolve to move toward a supporting role rather than direct production that crowds out the private sector. It should move decisively to reduce the 42 enterprises currently in the state's portfolio to the anticipated level of 22, and consider further privatization among those. The contracting out of the management of Electricite du Mali (EDM) shows that positive steps can be taken even with retained state enterprises. 164. Another way to signal a change in the relationship toward partnership rather than control would be to hold regular meetings to debate openly issues of importance to the private sector. The private sector usually has a clearer sense of the constraints and the solutions to private sector development than does the government. 165. The proposals for the reorganization of the Chamber of Commerce and Industry (CCIM) put forth in a 1991 study by the Investment Development Consultancy deserve careful consideration. The report suggested that the CCIM be split into three distinct chambers representing the interests of trade, industry, and handicrafts. It urged the chamber to be more dynamic in assisting enterprises, providing information, promoting exports and training managers. The simplest way to achieve this result would be to make the CCIM a private organization that would contract with the government (or directly with private.businesses) to provide these services. The report also recommended the creation of a private association, the Conseil Superieur de 1 'Entreprise Malienne, to bring together the constituent bodies of CCIM, FNEM, banks, technical assistance associations, and other private sector representatives. Such an umbrella organization would provide a suitable forum for dialogue among private sector interests and between them and the government. 166. The private sector needs to take a more active role in initiating and advocating practical proposals to the Government. As it is consulted more, it should produce more discussion papers, strategic analyses, and practical suggestions for creating a business- friendly environment. Private sector representatives should propose their own agenda for changing the status of CCIM and establishing a better representation for industry. In addition, a channel is needed for microentrepreneurs and informal sector operators to express their concerns. 167. The Government, for its part, must demonstrate its willingness to listen to private business representatives and address their concerns. It should do so in an open way that recognizes that there are many different private interests. Insisting on a single voice from the private sector means that only the most powerful will dominate, and weaker groups may feel disenfranchised. The plan to hold a workshop with the private sector is an excellent way of showing openness to diverse viewpoints. To demonstrate serious intent by the Government and steady progress in removing obstacles, it is important to 46 institutionalize not only the consultations but mechanisms for acting on them. Ways to maximize the impact of such consultations include: * holding a regular series of workshops focusing on different issues that are of primary concern to different segments of the private sector (commercial, industrial, construction, transport, large, small, micro; importers, exports); * establishing a permanent Round Table as a regular forum for the Government and representatives of the private sector to exchange views; * identifying problems identified in each workshop or Round Table meeting that can readily be addressed through administrative measures and taking actions to solve at least some of them, preferably before the next meeting; or, if there is a consensus that a major problem needs to be addressed, setting up a mechanism to address it and reporting to subsequent meetings what has been done. 168. In certain subsectors with proven high growth potential, such as agro-processing, an integrated subsector approach can provide a useful mechanism for the Government, private operators, donors, and NGOs to work cooperatively to remove bottlenecks and support rapid expansion. This approach was endorsed by the Special Program of Assistance (SPA) in October 1993 and has been articulated by USAID's GEMINI program (Boomgard et al. 1991, Haggblade and Gamser 1991, and Kilmer 1993). It involves establishing a consultative forum for all policy-makers and stakeholders involved in the production chain and financing of a particular commodity. Regular meetings are held to identify problems and find solutions to them. 169. Attention to all stages of production is important because success can be blocked by a failure at any point-raw materials, financing, processing, quality control, transport, etc. A subsector in high demand (preferably including for export) is chosen to avoid having to pick unproven winners and to capture the gains that would otherwise be lost waiting for system-wide solutions at each stage of production. Problems that are hard to solve globally often can be dealt with in particular cases-for example, delays at customs. Furthermore, different subsectors may have different binding constraints. The demonstration effect of these particular solutions can help build momentum for systemic reforms. 170. Successful solution of problems in a particular subsector through this approach would help convince the private sector that the Government is serious about acting effectively as a partner. Agricultural processing might be a candidate. The Agricultural Trading and Processing Promotion Project is designed to support both public and private agencies in a comprehensive subsector approach to the production, processing and marketing of agricultural products, which are in high demand following the devaluation. Other possible candidates for an integrated subsector approach include exportables such as leather and cotton products. Subsector studies could be helpful in identifying the main stakeholders-suppliers, manufacturers, distributors, government agencies, NGOs, 47 donors-and evaluating whether key bottlenecks could be addressed effectively through concerted action. D. FINANCIAL SYSTEM Reorienting the Banking System towards the Real Economy 171. Reform of the money market has created incentives for banks to place more of their funds with the private sector, and continuing to operate the money market so that banks do not earn a return on excess liquidity will help maintain the pressure for them to change their behavior. However, the continued wariness of banks and excess liquidity in the system suggest that lines of credit would be ineffective and additional measures may be in order to accelerate the transition. Bank's concern about the quality of their portfolios suggests that a concerted effort may be needed to clean up the existing portfolio before banks will be willing to incur the risks involved in expanding lending to new private sector clients. 172. Competition can be a potent force for inducing banks to serve clients better and to seek new ones by offering better services, including easier access to credit. Banks should be encouraged to go after smaller businesses as a market niche. As an incentive to banks to retrain their staff for greater lending to smaller firms, assistance in training programs is in order. Hence the bank training component of the World Bank's Private Sector Assistance Project should be implemented quickly. The interbank guarantee scheme that is being established may make some banks more willing to seek out riskier clients. Connecting the Banking System and Support Agencies 173. The success of efforts to raise firms' demand for business services (see above) will depend in large part on whether such services increase the probability of bank finance. Thus a close link between banks and support agencies is in their mutual interest. Support agencies need to be more aware of banks' expectations, and banks should refer clients with potentially good but inadequately prepared proposals to the support agencies for assistance. CAPES and PAPME have been working to build up such a mutually supportive relationship, and these efforts should be sustained. Developing Micro Finance 174. Mali's substantial network of informal and semiformal financial mechanisms is important in making financial services available at the village level in many parts of the country, and should be nurtured. For longer-run development of the financial system, the question is how to better integrate the different segments: formal, semiformal, and informal. BNDA's relationship with traditional village associations as an intermediary and guarantor for loans is one model that could be developed further. The success of some caisses populaires in using high interest rates to mobilize savings and cover the costs and risks of credit could be a model for some commercial banks to move more aggressively in 48 this area, if usury laws were modified to permit high charges for working with small, risky transactions. 175. There is significant ongoing experimentation among NGOs and self-help groups in methods of providing financial services to small and micro enterprises and the poor. However, many problems have emerged. Informal associations have achieved high repayment rates but have a weak institutional basis for scaling up. Donor-supported programs feature systematic approaches and technical support, but typically with high costs and low repayment. The next step is to evaluate systematically the actual and potential efficiency, outreach and sustainability of these programs and their demand for funds and assistance. Then a strategy can be designed to facilitate their access to savings deposits and funds from the formal system and to provide cost-effective institution- building technical assistance. E. THE HUMAN RESOURCE BASE Emphasizing Primary Education 176. Education is the foundation for the sustainable development of the private sector. Broad-based education promotes widespread sharing in the benefits of economic growth by giving large numbers of people the capability to raise their productivity. A minimum level of literacy and numeracy is important for self-employment and for workers to efficiently absorb training and improve quality for formal sector employment. Entrepreneurial success, particularly the growth of small enterprises, tends to be associated with the level of education. Thus, expanding primary education is the most important long-term measure for creating the conditions for sustained, equitable growth of the private sector. 177. The first priority is to raise the primary share of the education budget from a third (1993/94) to over 40 percent. At the same time, efficiency improvements are needed through double-shift teaching, redeployment of teachers, and use of temporary teachers to raise the teacher/pupil ratio. Efforts should also be made to mobilize complementary private sector resources through a framework that fosters the development of private and community-sponsored education. Developing Vocational Training 178. Major efforts are needed to raise Malian capacities to the level required by extensive private sector development. Since the expansion of primary education will take time to have an effect on the labor force, immediate improvements will require learning- by-doing on the factory floor and overseas. But employers are frequently wary about investing too much in worker training, since better-trained workers may seek more remunerative employment in other firms. . Some sort of cost-sharing is necessary to induce employers to take the risk that other employers may capture some of the benefits of the training they give their workers. 49 179. The most immediate means of giving employers incentives to train their workers is through the tax system. To avoid disincentives, training expenditure should explicitly be deductible as business expenses. Tax credits for training expenditures may also be appropriate. As long as wages remain regulated under the Labor Code, provisions should be made for apprenticeships at less than the minimum wage. 180. Another approach is to establish a cost-sharing fund that employers can tap to lower the direct costs of providing in-house training. Such a fund could initially be established on a pilot basis, with increasing contributions over time from levies on the firms themselves (as in Singapore). 181. The preceding measures concern primarily formal sector workers. An essential but daunting task is to upgrade the capabilities and skills of informal sector workers so that they can better respond to economic incentives and raise their productivity. Expanded primary education is the principal vehicle for widespread improvement of human capital in the informal sector. Most technical and artisanal skills are at present transmitted through the apprenticeship system. Stronger vocational training to supplement these basic skills is needed to facilitate the transition from informal to formal modes of production and to support faster private sector growth, especially in manufacturing and repairs. Such training could be addressed both through improvements in formal pre-service vocational training and through a Vocational Training Fund, which would provide demand-driven training in subsectors where growth is expected to be highest and informal production is important--such as agroprocessing, construction and transport (including vehicle maintenance). F. INFRASTRUCTURE 182. For Mali's industrial products to compete with imports and on export markets, a long-term strategy is needed to lower the costs and raise the reliability of electricity, transport, communications, and other infrastructural services. Rationalizing the management and financing of the energy and road sectors is an essential first step. With sound management and attention to the quality of distribution, the situation in electricity should improve over the next six years with the implementation of ongoing and planned projects. However, the Government needs to launch a process of widespread consultation to develop an electrification strategy that includes reorganization of the existing system and steady expansion of electricity in urban centers besides Bamako. In telecommunications, the private sector could play a larger role, and the Government should shift away from heavy public investment toward establishing an appropriate policy and regulatory framework. The road transport situation could deteriorate further unless actions are taken soon to improve maintenance. In air transport, greater competition would encourage lower costs. 50 G. SUMMARY: KEY ACTIONS 183. Based on the agenda described above, the following specific measures should be considered for inclusion in an Action Plan to make visible progress in improving the environment for private business over the next year: Costs of doing business: deregulation * Eliminate the commissions that review applications under the investment code and take action on other recommendations by the Direction Nationale des Industries to reduce the number of approvals needed and streamline the functioning of the guichet unique. * Consolidate the various taxes on business activities to reduce their number, make their cost more transparent, and make it easier for small enterprises to comply. * Drop the requirement that the local Inspecteur du Travail approve employment contracts. Public-private partnership * Privatize the CCIM so that it provides business services on the basis of contracts with the government (or with private businesses). * Establish a regular forum for meeting with private sector representatives to exchange views, identify problems, and (where there is a consensus) prepare action plans to address them. Besides a general forum, a subsector-level consultative mechanism could be a useful means of eliminating bottlenecks for selected activities with high growth potential, beginning with agro-processing and with other subsectors added based on subsector studies to identify the main stakeholders and problems. * Set out a clear, transparent implementation plan for continued privatization of public eriterprises. Cost of doing business: support systems * Hold regular meetings of the ad hoc committee set up to oversee implementation of the Private Sector Assistance Project and periodically r.nnvtn 11 intpr-zted parties to inform them of progress. 51 o Extend the accessibility of public works and procurement contracts to small enterprises through AGETIPE-type methods, including through social funds to alleviate poverty and develop infrastructure at the neighborhood level. Finance o Settle Government arrears to the private sector. o Expand access to working capital of existing beneficiaries of donors' lines of credit. o Enable firms to revalue assets without capital gains taxation. o Finalize interbank guarantee fund. 184. Some of these recommendations can be supported through on-going projects of the World Bank (particularly the Private Sector Assistance Project) and other donors, such as the Caisse Francaise de Developpement and USAID. Others can be incorporated in projects that are coming on stream in agro-processing, public sector reform, financial development, and energy. A consultative process involving the Government, the private sector, and donors would be useful, first, to establish priorities as to what problems should receive primary attention, second, to gather more information if needed, and, third, to set out detailed actions plans for each priority area. 52 ANNEX 1 CREDIT COOPERATIVES AND THEIR DEVELOPMENT IN MALI Kafo Jiginew is an association of village savings and loan cooperatives operating in Mali- sud since 1987 as a project financed by a consortium of European NGOs. Membership consists predominantly of cotton farmers, who have a common economic interest in smoothing out their seasonal cash flow by accumulating enough savings to provide a base for credit when needed between harvests or to purchase agricultural inputs. It is the largest such association, with about 10,000 members and CFAF 200 million in deposits. It builds on previous efforts of the CMDT to develop village associations to help in the management and marketing of cotton production. Each local cooperative (caisse, or jiginew) consists of 7 to 10 nearby villages (average population of about 5,000) who are represented on the loan committee. These cooperatives in turn are grouped into four unions, which hold a portion of the capital and help to promote and train the local cooperatives. The unions in turn are represented in the overseeing kafo jiginew body. Deposits receive interest of 4-6%; lending rates range from 18% per annum for equipment loans (up to three years) to 8% per month for short-term loans (one week to three months) for petty trade. Risk minimization procedures include prior savings, equity participation by the borrower, and individual and group guarantees. Individual defaults are virtually nil. Four local cooperatives have been closed because of poor management (42 remain). It was initially hoped that deposits and earnings would be sufficient to cover costs within five years, but this period has had to be extended. CVECA (Caisses villageoises d'6pargne et de cr6dit autog6r6es): CVECA provides a village-level mechanism for very small savings and loans among the low-income Dogon (since 1986) and Malink6 (since 1991) populations, financed by the German KfW and implemented by the French Centre International de Developpement et de Recherche (CIDR). It has two unique features: interest rates are exceptionally high to encourage deposits (16-24%, resulting in lending rates of 40-60%); and it has access to credit from BNDA. Membership is open to all villagers upon payment of an initial subscription; the village assembly is the decision-making body. As the program has grown to 67 village associations (sometimes including a neighboring village) and some 9,300 members (including the new programs in Kita and Bafoulabe), the proportion of women has risen to 40%. Total deposits, however, are only CFAF 45 million, or less than CFAF 5,000 per member. Loans are on the order of CFAF 5-20,000 for an average of four months; the small size and the group pressure brought to bear by the involvement of the village have resulted in virtually 100% repayment. Access to BNDA refinancing (at 20%) is subject to fairly stringent conditions that require the association to have made at least 15 loans itself over at least a year, and to have a good repayment record CAEC (Caisse Associative d'Epargne et de Crddit, or Kondo Jigima) supports the artisanal sector in urban areas under the PNUD/BIT program of assistance to the informal sector. Seven associations (five in Bamako) were created in 1991, with 440 members and assets of 53 CFAF 9 million (of which 1.8 is capital, 4.4 blocked savings, and 2.6 voluntary savings) . Despite fairly stringent loan conditions (six months of regular savings, group guarantee, productive activity), the repayment rate is only around 56%. SDID (Societe de Developpement International Desjardins) applies the methods of CVECA and Kafo Jiginew in villages in the zone of the Office du Niger around Segou. It has so far established associations in eight villages totaling 500 members and CFAF 9 million in deposits (CFAF 18,000 each, reflecting greater cash income in the rice farming areas compared to the CVECA and Save the Children projects). Loans averaging around CFAF 30,000 are given for 3-6 months at 20% per annum, on the condition that the borrower has saved a quarter of the loan and can provide a guarantee. Save the Children: This NGO has since 1987 established 21 savings and credit facilities in low-income villages (i.e., with little in the way of cash crops or secondary production, and with virtually no literacy). The administrative structure is similar to that of the Kafo Jiginew. With over 500 members, they have accumulated total subscriptions and savings of CFAF 2.6 million (like CVECA, around CFAF 5,000 per person). Perhaps because of the low income levels and the strong social orientation, the repayment rate of this program is only 55%. World Education launched a program in 1993 to establish women's savings and loan associations in Bamako and surrounding areas. So far four have been created, with 300 members. AMIJP (Association Malienne pour l'Insertion Professionelle des Jeunes) operates in and around Dodo, and is supported by Freedom from Hunger. Source: Keita and Gahigi, 1993. 54 ANNEX 2 MALI'S INVESTMENT CODE The Investment Code is composed of three sections, divided according to the size of investment. Regulation A contains a set of regulations and incentives which applies to investments of at least 150 million CFA. Regulation B pertains to the largest investments of more the an I billion CFA. Finally, Regulation C applies to small and medium-sized businesses requiring a capital outlay of at least 25 million CFA. The Malian Investment Code applies to all manufacturing and service industries and offers particular advantages for those which contribute to overall economic and social development, including human and animal health; environmental protection; professional and non-professional training; and cultural development. Two sectors not covered by the code are mining and petroleum-related activities, which have their own specific regulations and investment in strictly export-import or commercial activities that do not use domestically-produced inputs. These investments are subjected to the same application and approval process as priority enterprises, but their contract terms are negotiated on an ad hoc basis and they are not eligible for the benefits outlined in the present code. The code contains various investment incentives and performance requirements. Meeting specific performance requirements, notably contributions to national economic welfare or a significant percentage inputs from products of local origin, qualifies investment projects for certain tax exemptions or other benefits. Domestic inputs may include the use of local electricity, raw materials or the employment of Malian nationals. In some cases, firms hoping to obtain tax exonerations or other benefits must be prepared to tailor their operations to the needs of the Malian economy, although officials provide liberal interpretation of such contributions. Foreign or domestic investors wishing to obtain benefits should heed the guidelines which are stated in the Investment Code. Favorably received are investment projects which use inputs of Malian origin (including raw materials, intermediate and finished components; work closely with Malian service companies; generate significant local employment and training; use appropriate technology; conform to environmental standards; provide at least 20 percent of initial investment in cash; reinvest at least 15 percent of net proceeds in Mali; and report regularly to the Investment Commission on the status of their operations in terms of finance, and local employment. A National Commission on Investment has been created to examine applications for projects amounting to at least 150 million CFA. The commission is chaired by the Minister of Industrial Development Hydrology and Energy. In June 1990, the Government issued a decree creating, within the National Directorate of Industries, a one- stop specialized window for the processing of foreign investment applications. An investment application in 55 a prescribed format is required for all investors in Mali and should be submitted to the National Commission on Investment for authorization. The Commission submits its approval of applications to the Ministry of Industry, Hydraulics and Energy, which subsequently authorizes individual investment proposals by decree. 56 ANNEX 3 AGETIPE EXPERIENCE IN MALI The Agence d'execution des travaux dans I'intir&public pour I'emploi (AGETIPE) is a non-governmental organization established in 1992 as an executing agency for the Public Works and Capacity Building Project. Its objective is to create employment by encouraging labor-intensive techniques in the implementation of the project through simplified, transparent procurement procedures that facilitate bidding by small contractors. It minimizes working capital problems for its contractors by engaging local consultants to promptly monitor work done and making payments within an average of six days after completion. These techniques are continually improved through the exchange of information with a network of similar agencies in eight other African countries, which met in Bamako in November 1994. As of November 1994 it had committed a total of US$38.5 million (59 percent disbursed) for 280 subprojects, including some for other projects in the education, health, urban, and highway sectors (for example, in 1994 118 contractors were engaged to build 465 classrooms and 1,040 small enterprises provided 22,300 benches and 780 desks). A total of 940 contracts have been handled, averaging US$50,000. Direct employment creation to date is the equivalent of 8,750 person-years, with induced employment estimated at nearly three times that amount. The wage bill has to equal at least 20 percent of the contract amount. AGETIPE also provides technical assistance to help upgrade the skills and competitiveness of its contractors, including unsuccessful bidders. Some 1,200 contractors and beneficiaries have been trained, with many of them making the shift from informal operation to the formal sector. 57 REFERENCES Biggs, Tyler, Gail R. Moody, Jan-Hendrik van Leeuwen, and E. Diane White. 1994. Africa Can Compete! Washington, D.C.: World Bank Discussion Paper No. 242. Boomgard, James J., Stephen P. Davies, Steven J. Haggblade, and Donald C. Mead. 1992. "A Subsector Approach to Small Enterprise Promotion and Research." World Development, 20 (February, pp. 199-212 Duggleby, Tamara. 1994. "Filling the Financial 'Missing Middle," in "Africa's Management in the 1990s: From 'Transplant' Approaches to Institutional Reconciliation." Washington, D.C.: World Bank, Africa Technical Department, AFTCB. Draft. Duggleby, Tamara. 1992. "Best Practices in Innovative Small Enterprise Finance Institutions," Washington D.C.: World Bank, Industry and Energy Department Working Paper, Industry Series No. 62, Part II. Etude Economique Conseil. 1991. "Le secteur industriel au Mali: reponses A l'ajustement." Canada. Grant, William. 1993. "A Review of Donor-Funded Projects in Support of Micro- and Small- Scale Enterprises in West Africa: Case Studies." Washington, D.C.: USAID, GEMINI Technical Report No. 54a. Haggblade, Steven J., and Matthew S. Gamser. 1991. "A Field Manual for Subsector Practitioners." Washington, D.C.: USAID GEMINI Program. Investissement Developpement Conseil. 1991. "Etude diagnostique du secteur prive." France. Keita, Foun6ke, and Gerard Gahigi. 1993. "Mobilisation de l'Epargne Inteme en Vue du Financement du Secteur Informel au Mali." Bamako: La Primature. Kessous, Jean Claude. 1992. "Le Secteur Industriel au Mali: Reponses A l'ajustement." Societ6 d'Ingmernie Bancaire Internationale (cited in Keita and Gahigi 1993). Kessous, Jean-Claude, and Gilles Lessard. 1993. "Industrial Sector in Mali: Responses to Adjustment." In A.H.J. Helmsing and T. Kolstee, eds., Small Enterprises and Changing Policies. London: IT Publications. Kilmer, Gary D. 1993. "Application of the GEMINI Methodology for Subsector Analysis to MSE Export Activities: A Case Study in Ecuador." Washington, D.C.: USAID, GEMINI Working Paper No. 39. Webster, Lelia M. and Peter Fidler, eds. 1994. "A Review of Informal Sectors in the Sahel." Draft paper for the World Bank, Africa 5 Industry and Energy Operations Division. 58 FILE COPY CONFIDENTIAL Report No: 13559 MLI Type: SR