Documentof The World Bank FOR OFFICIAL USEONLY ReportNo: 42042-MR PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OF SDR3.2 MILLION (US$5.0 MILLIONEQUIVALENT) TO THE ISLAMICREPUBLIC OF MAURITANIA FOR A BUSINESSENVIRONMENT ENHANCEMENT PROJECT April 25,2008 Finance andPrivate Sector Development WesternandCentralAfrica Africa Region This document has a restricted distribution and may be used by recipients only inthe performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS ExchangeRate Effective: April 24, 2008 CurrencyUnit = Mauritanian OuguiyaUM 243 UM = US$1 1.6264US$ = SDR 1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AAP Africa Action Plan AFD FrenchDevelopment Agency (Agence Francaise de Dtveloppement) AfDB African Development Bank AMLICFT Anti-money Laundering and Combating Financing o f Terrorism B C M Central Bank o f Mauritania (Banque Centralede Mauritanie) BEEP Business Environment Enhancement Project CANIF National Commission for Financial Information (Commission Nationale d'lnformation Financiire) CAS Country Assistance Strategy CCM Central Procurement Commission (Commission centrale des marche's) CDM DepartmentalProcurement Commission (Commission dtparternentale des marchts) CFAA Country Financial Accountability Assessment CGEM General Confederation o fWorkers (Confe'dtration ge'ne'raledes employeurs de Mauritanie) CIMDET Mauritania Center for Economic Development Information(Centre d 'Information Mauritanien pour le Dtveloppement Economique et Technique) CQS Consultant's Qualification Selection DGPIP General Delegation for Private Investment Promotion (Ddle'gation Gtne'rale a la Promotion de 1'Investissement Privt) EDZ Free Economic Trade Zone (Zone de Dtveloppement Economique) ENA National Administration School (Ecole Nationale d 'Administration) EU EuropeanUnion EZ Export Zones (P6le d'Excellence) FMP Financial Management Plan FPSCBP FinanciaYPrivate Sector Capacity Building Project FRSO Fiscal Reform Support Operation FSAP Financial Sector Assessment Program GDP Gross Domestic Product GIRM Government o f the Islamic Republic o f Mauritania GLIN Global Legal Information.Network GNI Gross National Investment GPN General Procurement Notice HIPC Heavily IndebtedPoor Countries IBRD International Bank for Reconstruction and Development I A S International Accounting Standards I C Individual Consultants ICA Investment Climate Assessment ICB International Competitive Bidding I C D Insurance Control Department I C R ImplementationCompletion Report I C T Information and Communication Technology FOROFFICIAL USE ONLY IDA InternationalDevelopment Association IDF Institutional DevelopmentFund IFC InternationalFinance Corporation IFR InterimFinancial Report IMF International Monetary Fund LCS Least Cost Selection LPPMS Local Portfolio Performance Monitoring System MAURIPOST Mauritanian Post Office MDG MillenniumDevelopment Goals MEF Ministryofthe Economy andFinance (Ministdre de 1'Economieet des Finances) M&E Monitoring and Evaluation MHETIC Ministryo fHydraulic andEnergy and Information Technology(Ministdre de 1'Hydraulique, de 1'Energie et des Technologies de l'lnformation et de la Communication) MIGA Multilateral Investment Guarantee Agency M o J MinistryofJustice (Minist2re de la Justice) MTR Mid-termReview N P L Non-performing Loans OED Operations EvaluationDepartment OECD Organization for Economic Co-operation and Development PDO Project Development Objective PE Public Enterprise PPIAF Private-Public Investment Advisory Facility P I M Project ImplementationManual PIP Project ImplementationPlan PPF Project PreparationFacility PPP Public-Private Partnership PRSP Poverty Reduction Strategy Paper PSD Private Sector Development QCBS sc Quality and Cost Based Selection Steering Committee SMCP Mauritanian Company for the commercializationo f fish (SociCtCMauritanienne de Commercialisation du Poisson) SME Small and Medium-size Enterprises SNDE National Water Company (SocidtC Nationale de 1'Eau) S N I M National Mining Company (SociCtd Nationale d 'Industrie Minidre) SOE Statement o f Expenses SOMAGAZ Mauritanian Gas Company (SociCtSMauritanienne des Gat) SOMELEC Mauritanian Power Company (SociCtCMauritanienne d 'Electricite? SONELEC SociCtCNationale d'Eau et d'ElectricitS SRFP sss Standard Request for Proposals Single Source Selection TFP Total Factor Productivity TOR Terms o f Reference UNCDF UnitedNations Capital Development Fund UNDB UnitedNations Development Business UNDP UnitedNations Development Program Vice President: Obiageli K.Ezekwesili Acting Country Director: Antonella Bassani Sector Manager: Iradj Alikhani Task Team Leader: Sherri Archondo This document has a restricted distribution and may be used by recipients only in their official duties. Its contents may not be otherwise disclosed without World Bank authorization. ISLAMIC REPUBLICOFMAURITANIA BUSINESSENVIRONMENT ENHANCEMENT PROJECT CONTENTS Page I STRATEGICCONTEXTANDRATIONALE . ................................................................. 1 A . Country background............................................................................................................ 1 B. Constraints o fprivate sector development inMauritania................................................... 1 C . Rationale for Bank Involvement ......................................................................................... 6 D. Higher level objectives to which theproject contributes .................................................... 8 I1. PROJECTDESCRIPTION ............................................................................................. 9 A . Lending instrument............................................................................................................. 9 B Project development objective andkeyindicators.............................................................. . 9 C. Project components., ......................................................................................................... 10 D. Lessons learned and reflected inthe project design.......................................................... 12 E . Alternatives considered and reasons for rejection............................................................ 14 I11. IMPLEMENTATION .................................................................................................... 15 A . Partnership arrangements.................................................................................................. 15 B . Institutional and ImplementationArrangements .............................................................. 15 C. Monitoring and evaluation o f outcomeshesults ................................................................ 16 D. Sustainability..................................................................................................................... 17 . . . E . Critical RisksandPossible Controversial Aspects ........................................................... 18 I V . CREDIT CONDITIONSAND COVENANTS ............................................................ 20 V . APPRAISALSUMMARY ................................................................................................. 22 A . Economic andFinancial Analyses .................................................................................... 22 B Technical........................................................................................................................... 22 . C . Fiduciary ........................................................................................................................... 23 D. Social................................................................................................................................. 23 E. Environment...................................................................................................................... 23 F. Safeguard Policies............................................................................................................. 24 G. Policy Exceptions and Readiness ...................................................................................... 24 ANNEXES................................................................................................................................... 25 ANNEX 1: COUNTRY AND SECTORBACKGROUND .................................................... 26 AGENCIES............................................................................................................................... ANNEX 2: RELATED PROJECTSFINANCED BY THE BANKAND/OR OTHER 47 ANNEX 3: RESULTSFRAMEWORK AND MONITORING.............................................. 51 ANNEX 4: DETAILEDPROJECTDESCRIPTION.............................................................. 56 ANNEX 5: PROJECTCOSTS................................................................................................ 65 ANNEX 6: IMPLEMENTATIONARRANGEMENTS......................................................... 66 ANNEX 7: FINANCIALMANAGEMENT AND DISBURSEMENT ARRANGEMENTS 70 ANNEX 8: PROCUREMENT................................................................................................. 77 ANNEX 9: ECONOMIC AND FINANCIAL ANALYSIS.................................................... 86 ANNEX 10: SAFEGUARDPOLICY ISSUES ....................................................................... 87 ANNEX 11: PROJECTPREPARATIONAND SUPERVISION .......................................... 88 ANNEX 12: DOCUMENTS INTHE PROJECTFILE.......................................................... 90 ANNEX 13: STATEMENT OF LOANS AND CREDITS...................................................... 91 ANNEX 14:COUNTRY AT A GLANCE............................................................................... 92 MAURITANIA MR - BUSINESS ENVIRONMENT ENHANCEMENT PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTFP Date: April 25,2008 Team Leader: Sherri EllenArchondo Acting Country Director: Antonella Bassani Sectors: General industry andtrade sector Sector Director: Marilou Jane D.Uy (40%); Banking (20%); General energy sector Sector Manager: Iradj Alikhani (20%); Law andjustice (20%) Themes: Other financial andprivate sector development(P) Project ID: P102031 Environmental screening category: Not Required Lending Instrument: Specific Investment Loan [ ]Loan [XICredit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 5.00 Proposedterms: standardIDA terms, with amaturity of 40 years, includinga grace period o f 10 Borrower: MinistryofEconomyandFinance Nouakchott,Mauritania ResponsibleAgency: DClCgation GCnkrale a la Promotionde 1'InvestissementPrivk Nouakchott, Mauritania Project implementation period: Start November 15,2008 End: August 30,2012 Expected effectiveness date: August 29,2008 Expected closing date: August 29,2013 Does the project depart from the CAS incontent or other significant respects? Re$ PADI.D. [ ]Yes [XINO Does the project require any exceptions from Bank policies? Re$ PAD IKG. [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 I s approval for any policy exception sought from the Board? [ ]Yes [ ]No Does the project include any critical risks rated "substantial" or "high"? Ref: PAD III.E. [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? Re$ PAD IKG. [XIYes [ ] N o Project development objective Re$ PAD II.C., Technical Annex 3 The overallproject development objective (PDO) is to enhancethe business climate through improvements inthe financial, legal, regulatory and capacity environment. This would facilitate private-sector led growthhnvestment inthe economy andimprove services provided by the electricity sector. Project description[one-sentence summary of each component] Re$ PAD ILD., Technical Annex 4 The IDA-financed project cost is estimated to beUS$5 million equivalent, broken down into three components as follows: (a) Improving the Business Climate to Foster Private Sector Development (US$3 million equivalent); (b) BuildingPublic-Private Partnershipand Productivity Enhancement (US$ 1.5 million equivalent); and (c) Supporting Project Management (US$0.5 million equivalent). Which safeguard policies are triggered, if any? Re$ PAD I KF., Technical Annex 10 NIA Significant, non-standard conditions, if any, for: Re$ PAD I V Boardpresentation: 0 None Conditionsfor Efectiveness: 0 The GIRM and the B C M have adopted a Project Implementation Manual in form and substance satisfactory to IDA; and The GIRM has opened a commercial bank account for the deposit o f the fknds for the financing o f such portion of Project Eligible Expenditures which may not be financed from the proceeds o f the Financing, and has made an initial deposit into this account an amount equivalent to US$100,000 Dollars. Other conditions/covenants: 0 GIRM will request each commercial bank operating in Mauritania to have its Financial Statements prepared and audited in accordance with the rules and regulations issued by BCM. Each audit o f these Financial Statements will cover the respective fiscal years o f each of these commercial banks. Each annual audit report will be fkrnished to IDA no later than ninemonths after the end o f each respective fiscal year or by such other date as may be agreedby IDA. 0 Throughout Project implementation, GIRM will ensure that each public enterprise has had a financial and operational audit, including but not limited to SOMELEC, SNDE, SOMOGAZ, MAURIPOST and Port Autonome de Nouakchott (Port Authority o f Nouakchott) to have its Financial Statements prepared and audited in accordance with generally accepted international auditing standards. Each audit will cover the period o f one fiscal year. The audited Financial Statements for each such period will be published ' on GIRM's website (www.mauritania.mr) or other site as agreed with IDA no later than 3 months after the date o f delivery o f the final report prepared by the commissaire am comptes, who i s the statutory external auditor for GIRM. I. STRATEGICCONTEXTANDRATIONALE A. Countrybackground 1. The Islamic Republic o f Mauritania is a vast country on the western edge o f the Sahara desert. The population o f approximately 3 million inhabitants is heavily concentrated in the urban areas, including an estimated 800,000 in the capital city o f Nouakchott. Low levels of industrialization characterize the country's economy. Mauritania's export base i s still heavily concentrated; the top three commodities account for approximately 90 percent o f export receipts. Fishand ironore are the most important exports but remain highlyvulnerable to sharp swings in internationalprices and external demand. 2. A new Government o f the Islamic Republic o f Mauritania (GIRM) took office in April 2007 and i s committed to the overall objective of poverty reduction through macroeconomic stabilization and the promotion o f economic growth. Over the last several years, Mauritania has pursued sustained macroeconomic and sector adjustment reforms that have laid the groundwork for private sector-led growth. In2006, economic growth reached 11.7 percent, mostly due to the start o f oil production. Fiscal performance has been strong, reflecting GIRM's revenue collection efforts. Sustained spending discipline and strict adherence to fiscal and monetary policies were instrumental inbringingthe 12-month inflation rate downto 6.2 percent in2006. B. Constraintsof private sector development inMauritania 3. The constraints to private sector development (PSD) in Mauritania have been identified ina number of analytical and diagnostic studies that have been carried out inrecent years. In particular, the Investment Climate Assessment prepared in2007 (ICA, P089945) was based on a detailed survey o f enterprises, the Financial Sector Assessment Program (FSAP-2006) provided an in-depth analysis o f the financial sector, the Report on Justice, Inter-Ministerial Committee on Justice (2005) resulted in a comprehensive review o f the judicial reform process, and the annual publication o f the Doing Business Report (2008) provided a summary o f Mauritania's competitiveness in comparison to other countries. Together, these reports form the basis o f GIRM's reform efforts. 4. The latest Doing Business Report rankedMauritania 157 out o f 178 countries for the ease o f doing business. GIRM recognizes that the development o f the private sector requires an improvement o f the "investment climate" inorder to promote stronger economic growth within a market economy andto reduce poverty. Chart 1on the following page provides a summary o f the overall ease o f doing business in some African countries. While such rankings only give an indication o f the overall enabling environment for business, it i s clear that the private sector in Mauritania suffers from heavy regulatory burdens, low productivity and other constraints. 1 Chart 1. Easeof DoingBusiness2008 (rank) 200 180 160 140 120 100 80 60 40 20 0 Source: DoingBusiness 2008. 5. The Mauritanian economy presents a sharp contrast between a relatively modem sector and traditional subsistence sectors and it remains undiversified. The formal private sector i s still very small and its development is hampered, among other factors, by: 0 the limited access to and the high cost o f finance. This constraint is the one most commonly cited by Mauritanian companies; 0 a heavy regulatory framework (including heavy taxation, weak tax administration and problems with customs regulations) and a weak judicial system which remains unpredictable and inefficient in its role o f resolving business disputes and enforcing business contracts; 0 the poor access to and the highcosts of, keyfactors o fproduction, notablyelectricity; 0 a poorly educatedworkforce; 0 lack o f ready access to land and related difficulties inraising real estate-basedmortgage finance; and 0 a large concentration o f ownership o f economic assets and weak competition in the formal economy, while the informal sector thrives. 6. Chart 2 on the following page provides an overview o f the six leading constraints to doing business, as perceived by various sector groups. 2 Chart 2. The top six constraintsfor firms inMauritaniain 2006 (Pct) 60.0 Manufacturing 51.2 50.0 44.8 Trade 50.0 45 0 40 0 40.0 343 3 3 8 35 0 30 0 30.0 25 0 20.0 20 0 1 5 0 10.0 10 0 5 .O 0.0 0 0 .CCESI and cost Elecmcit) Practices of Qsmms and Inadequately Tax rate8 Access and Taxrates Tax Cusloms Practices o f Electricity or financing compctimrr m uade reguiatim educated the itformal woMoree c o s t o f regulations and trade cornpetiton fmancmg regulations inthe SCCtDI informal Sector Other sectors 45.0 7 MicroentrepriseslInformalFirms 40 0 35 0 30 0 25 0 20 0 15 0 10 0 5 0 0 0 Practices o f Access and Taxrates Access to Tax Electricity Access and Access to Taxrates Practices o f Transpoa Electricity cornpetiton c o s t o f land regulations c o s t o f land competitors $the fmancing fmancmg inthc informal informal sector sector Source: ICA (2007). 7. Limited access to and high cost offinance is the leading constraint to private sector investment. The commercial banking sector, in its current state, cannot contribute to shared growth and development o f the private sector, nor i s it yet able to participate efficiently in recycling o f the eventual petroleum resources. The country has a fairly dense network o f financial institutions, with nine commercial banks, seven insurance companies, sixty-seven micro-finance institutions, postal financial services, and a social security organization. The financial landscape is completed by a money market and a foreign exchange market. Despite the presence o f these institutions however, the financial sector does little to contribute to the development o f the country. The commercial banking sector remains fragile, is very compartmentalized, and serves only a restricted clientele, with the majority o f commercial clients having privilegedlinks with closely affiliated commercial banks. Microfinance i s still emerging, offers only limited services, and depends on subsidies for survival. The insurance sector, limited to third-party liability insurance, i s far from attaining its potential, because o f wide-spread non- compliance o f obligatory insurance requirements. The legal and regulatory framework which governs financial transactions (loan recovery, collateral registration, etc) has serious shortcomings; implementing decrees required by the various laws remain missing and the application and enforcement o f laws and contracts remains weak. 8. Financial services in Mauritania are underdeveloped, with the commercial banking system still accounting for an overwhelming share o f the financial sector. While commercial 3 banks hold 88 percent o f total assets o f the financial sector, commercial bank loans and deposits represent less than 20 percent o f Gross Domestic Product (GDP). Most commercial banks are closely affiliated with local conglomerates and channel deposits to affiliated companies on a concessionary basis, both interms o f lendingrates and leniency inpursuingloans indefault, For corporations having no direct links with a commercial bank and for the public at large, especially poorer households and clients in rural areas, the services o f commercial banks are hardly accessible, limited, costly and obsolete. Banking supervision i s weak andthe country operates in the absence o f a modem accounting systemand reliable financial statements. 9. The financial system has a strategic role to play in establishing a more broadly-based foundation for economic growth as well as in ensuring that Mauritania's petrodollars are efficiently absorbed into the economy and put to productive economic use. The FSAP describes a financial system that i s stuck in low-level equilibrium. As indicated above, the market i s heavily segmented, with commercial banks lending primarily to connected parties resulting in limited competition and severely restricted access to financial services by others. Highlevels o f non-performing loans (NPL) are cushioned by inefficient allocation o f capital'. Small and medium-size enterprises (SME), as well as businesses in rural areas, lack access to financial services. 10. Thepoor regulatory environmentfor business impedes investment and constrainsprivate sector development. Firms inMauritania face numerous hurdles interms o f redtape, regulations and requirements incarrying out business activities. Many o f the key laws which govem private sector activity do not have the appropriate accompanying regulations which result in arbitrary implementation, if any at all. Limited legislative capacity and the low priority attached to reforming the business environment inthe past have together resulted in a large backlog of draft legislative reform proposals that are still to be enacted. In addition, gaps have been revealed in the legal framework. For example, the absence o f an enabling law for credit reference bureaus reduces the scope for private sector initiatives inimproving access to finance. 11. Tax rates, as well as tax administration, create important problems for managers in the formal sector. According to the ICA survey, Mauritania's high tax rates are considered a major problem by the private sector. These conclusions are also confirmed inthe DoingBusiness Report. For 2007, the total tax rate on profits for firms inMauritania was 107.4 percent; one o fhighest not only o f the sub-region, but o f the world. Inthis context, tax evasion is a widespread phenomenon inMauritania. 12. A cumbersome business licensing regime imposes unnecessary costs on the private sector. A complex web of overlapping licenses and permits, many o f which serve only a very marginal regulatory function, govern the environment inwhich enterprises operate. This creates obstacles to the process o fmarket development by raisingthe costs o fbusiness entry and growth, and creates barriers to transition from the subsistence and very small-scale economy to the modem more productive sector. Excessive licensing requirements also create opportunities for rent-seeking behavior among bureaucrats, to the cost o f the private sector. Many entrepreneurs remain in the informal private sector due to the highcosts o f formalization, partially associated with licensing requirements. Thus, small informal firms established by such entrepreneurs are 'Gross NPLdtotal gross credit is almost 50percent of the totalportfolio. 4 unable to grow and benefit from economies o f scale or access additional benefits o f formalization, such as commercial bank finance and business development services. 13. The economy is characterized by a low level of understanding and application of what laws existfor businesses, as well as weak capacity to enforce commercial contracts and have commercial disputes resolvedfairly, predictably and professionally in any commercial court. Reforms o f the private sector, as well as the financial sector, require a corresponding strengthening o f the legal and judicial environment for financial and commercial activities. In particular, the legal framework for credit activities (debt collection and foreclosure procedures, secured transactions, commercial and credit registries, etc.) has serious shortcomings and does not adequately support the development o f financial intermediation and access to finance. The justice system o f Mauritania i s characterized by its duality o f Islamic law (sharia) and French- inspired law (so-called modem law). They differ in legal philosophy, content, formal structure and language (sharia-based laws and jurisprudence are in Arabic, whereas modern laws are in French). This situation flows from the country's history. The duality o f laws and the resulting legal ambiguity persist despite a number o f reform efforts in the past. In addition, relevant sources o f law including legislation, regulations andjurisprudence are not readily available to all o f the judiciary, and to domestic and foreign private sector operators. The application and enforcement o f laws and contracts also suffer from low judicial capacity in commercial and credit-related matters. Many judges involved in commercial and financial cases lack the necessary training and specialized experience, and the professional ethics o f members o f the judiciary i s a source o f concern. 14. Inadequate infrastructure services and the deteriorated financial and technical situation of the national power utility, Socie'te' Mauritanienne d 'Electricite' (SOMELEC (Mauritanian Power Company), Socie'te' Mauritanienne des Gaz (SOMAGAZ) and the Port de Nouakchott, undermine the competitiveness of goods and services produced in Mauritania. Years o f under- investment andpoor state management o f the key power and water utilities have resulted inhigh costs, unreliability o f service and poor outreach. This i s a major contributing factor to low firm- level competitiveness inMauritania's private sector and hence, to the country's inability to take full advantage of available export trade opportunities. The poor state oftransport infrastructure also contributes to high costs o f production. A more adequate infrastructure platform would make Mauritania's economy more competitive. 15. Low cost advantages are eroded by the limited availability of skilled workers and the low productivity of labor. Analytical evidence suggests that Mauritania possesses a comparative advantage in the region in terms o f low-cost labor. However, when considering total factor productivity (TFP) that takes into account the relative costs and returns to labor and capital together, Mauritania's cost advantage evaporates. 16. Finally, weakpolicy analysis,formulation and implementation create uncertainty in the private sector. Dialogue between the public and private sectors in Mauritania has historically been very weak. Limited consultation and partnershipwith the private sector has tended to result in poorly informed public sector decision-making that often fails to foresee the impact of decisions on the private sector. A general lack o f mutual accountability between the public and private sectors has also resulted invery weak policy implementation. 5 17. To sustain its economic performance and reduce poverty, a deeper and more ambitious PSD program needs to be implemented, including: (i)undertaking policy and institutional reforms to improve the business environment facing firms; (ii)developing markets for the private provision o f non-financial services to enterprises; (iii)improving corporate governance; (iv) fosteringpublic-private partnerships for efficient delivery of essential infrastructureservices; (v) improvingaccessto and efficiency of financial services; and (vi) supporting legal andjudicial systems that help to ensure the effective application o fthe rule o f law. 18. As an initial step, GIRM developed a comprehensive program to address policy, institutional and legal constraints for the efficient operation o f the financial sector and the promotion o f private sector investment in the country. GIRM will give high priority to: (i) designing and implementingmeasures to support the soundness o f commercial banks as well as microfinance and insurance entities, including financial transparency and disclosure; (ii) strengthening the supervisory capacity o f the Central Bank o f Mauritania (Bunque Centrule de Muuritunie (BCM)); (iii)implementing targeted reforms to improve the investment climate, including improving the legal and judicial framework for business and financial activities; and (iv) evaluating and implementingoptions for the restructuring o f the electricity sector, including private sector participation solutions. An immediate concern within the financial sector i s to strengthen supervisory capacity so as to prevent regulatory arbitrage betweenthe relatively large, mainstream commercial banking sector and other, considerably smaller, non-bank financial intermediaries and microfinance institutions. The Letter o f Private and Financial Sector Development Policy i s provided as Annex 15. This letter provides an in-depthdescription o f the measures that GIRM intends to take during the next five years to create a business environment that i s more conducive to private sector development inthe country. C. Rationale for Bank Involvement 19. The FSAP, ICA and Doing Business reports identified a wide range o f constraints to the growth o f the private and financial sectors inMauritania. Inresponse, GIRM's program seeks to address some o f the priority constraints through a combination o f different projects, which also includes mining, electricity and port stand-alone projects. There has been no substantial support for private or financial sector development by the World Bank since the previous FinancialPrivate Sector Capacity Building Project (FPSCBP) that closed on May 31, 2000 (Implementation Completion Report (ICR) No. 21561, December 28, 2000). The Private Sector Development Credit (Cr. 2726-MAU) closed on October 8, 1997. Some improvements were made in the legal and regulatory framework as well as in the judiciary, and some progress was achieved in creating the basis o f an enabling environment for financial sector activity. Ln particular, these projects contributed to an improvement in the range and accessibility o f financial services due to the growth in the number o f commercial banks and microfinance institutions, and to an increase in private investment, particularly in the mining sector. The Fiscal Reform Support Operation (FRSO), a single-disbursement operation which closed on June 30, 2001, assisted GIRM to implement the final phase o f its tariff reform agenda and the first phase of the tax reform program. Annex 2 provides a detailed description o fthese projects. 20. There is now a new window o f opportunity for economic development. Recognizing that oil revenues are limited, GIRM i s opening the economy and advocating a sound and stable financial sector and reliable, impartial and less-corrupt legal and judicial systems, all o f which are recognized as essential for broad-based and sustainable economic and private sector 6 development. The private sector will be supported on several fronts, namely by stronger financial, legal andjudicial systems that help to facilitate enterprise access to finance and allow firms to operate within a more transparent business environment. The proposed Project will support GIRM's efforts to stimulate private sector development and growth. GIRM plans to: (i) carry out regulatory reforms aimed at encouraging investment andboosting productivity; and (ii) encourage public-private partnerships in the power sector and in the provision o f other infrastructure services. Regulatory reforms will include the facilitation o f business start-ups, the reduction o f transaction costs, the reduction o f labor market rigidities, the enhancement o f market competition and business integration in global markets. In addition, GIRM will seek to strengthen corporate governance with a focus on select strategic public enterprises (PE) such as SOMELEC, Socie`te` Nationale de 1'Eau (SNDE, the National Water Company), SOMAGAZ, Poste Mauritunienne (Mauritanian Post Office, MAURIPOST) and the Port o f Nouakchott restructuringthe institutions (ifnecessary) and by raising the quality o f performance contracts to generally accepted international standardswhich will be vigorously monitored. 21. The situation in the electricity sector i s critical. The financial viability o f SOMELEC i s at risk and the technical condition o f its electricity generation and distribution equipment has substantially deteriorated. Therefore GIRM has asked the World Bank Group to accelerate its financial support and provide financing for some technical assistance under this Project. The technical assistance would support the restructuring efforts o f SOMELEC as well as the sector reform measures for the local power sector undertaken by the Ministdre de I'HydruuZique, de 1'Energie et des Technologies de l'lnformation et de la Communication (Ministry o f Hydraulic and Energy, and Information Technology, MHETIC). At the request o f GIRM, the proposed technical assistance will put a special focus on those reform measures that will facilitate and enhance future private sector participation in the power sector. This Project will therefore concentrate on short-term results and preliminary studies that will provide the foundation for a wider electricity sector reform program. The proposed assistanceto the power sector that will be provided under this Project i s closely linked to the proposed MR-Gas-to-Power Project (P107940), a public-private-partnership financing for a new power generation facility, which GIRM is currently preparing in collaboration with the International Development Association (IDA). 22. IDA'S support is timely. GIRM has worked closely with IDA and other donors to prepare and implement comprehensive development and investment frameworks. The Second Poverty Reduction Strategy Paper (PRSP-2,2006-2010), was presented to the World Bank Board o f Directors in January 2007. The new strategy is based on a set o f sound macroeconomic, structural and sector policies and it tackles the fundamental question o f how to manage Mauritania's natural resource wealth transparently, while focusing on growth, poverty and macroeconomic equilibrium. The strategy is articulated around five pillars, namely to: (a) accelerate growth and maintain macroeconomic equilibrium; (b) anchor growth in the economic environment o f the poor; (c) develop human resources; (d) strengthen good governance and capacity building; and (e) reinforce monitoring, evaluation and coordination. IDA has, in turn, worked with GIRMto prepare its Country Assistance Strategy (CAS) which was presented to the World Bank's Board in June 2007, in support o f the PRSP-2. The CAS focuses on these same five axes. 23. GIRM receives a substantial amount o f external support from donors, particularly the European Union (EU), the African Development Bank (AfDB), the Spanish Cooperation, the 7 United Nations Development Program (UNDP), and the Agence Franqaise de Dkvelopment (AFD). Duringthe recent Consultative Group Meeting (December 4-6,2007), GRIM'Sobjective was to raise US$1.6 billion to fund the gap in their PRSP. They received pledges for US$2.1 billion, with considerable positive support fi-om the United Arab Emirates, Saudi Arabia and the Arab Fund for Economic and Social Development, among others, which attests to the strong relationship between Mauritania and North Africa and the Middle East. Donor concerns, however, in a number o f macroeconomic and financial sector areas mirror those o f IDA, andthe authorities have requested IDA to help them coordinate donor interventions in these areas. IDA'S working relationship with other development partners enables the coordination o f disparate interests and activities inthe financial andprivate sectors. D. Higher levelobjectivesto which the projectcontributes 24. Poverty in Mauritania i s widespread. To attain the Millennium Development Goals (MDGs) by 2015, Mauritania needs to achieve at least a six (6) percent economic growth rate each year for the next seven years. This rate i s the minimumnecessary to have any meaningful impact on poverty levels in the country. For this growth to be achieved, however, it is essential that the private sector invests and createsjobs (see Figure 1below). Figure1:InvestmentClimateReformsandPovertyReduction Y Economic growth ........................................................................................... 25. The proposed Business Environment Enhancement Project (BEEP or the Project) contributes to the objectives defined in the Mauritania CAS dated June 2007, in particular, the pillars aimed at improving the investment climate, building public sector capacity and accountability, and increasing private sector investment levels and efficiency. These objectives are, inturn, consistent with those defined in GIRM's PRSP-2 and GIRM's Letter o f Private and Finance Sector Development Policy. These five objectives are as follows: 0 Improvethe business environment and reduce administrativebamers; 0 Reinforce the regulation and supervision o f the financial system in order to minimize the risk o f financial crises; 0 Modernize and expand the financial system (new instruments, increased coverage, etc.) and improve competition inthe sector; 0 Strengthen the legal and judicial systems to ensure improved application and enforcement o fbusinesdfinancial laws and contracts based upon them; and 0 Improve basic infrastructure. 8 26. The proposed BEEP supports assistance towards reducing a number o f constraints cited above, as well as GIRM's objectives under the PRSP, the mechanism through which development partners and GIRMjointly evaluate progress on the overall reform program on an annual basis. GIRM is interested in implementing a second generation o f reforms that will improve its standing in the Doing Business Report. Therefore, there are a number o f activities that will support GIRM's efforts to improve the business climate and support investment in Mauritania. The proposed operation will also include a rapid response component to support the reform efforts o f GIRM inthe local power sector aiming at an enhanced participation o f private investors inthe localpower market. 11. PROJECT DESCRIPTION A. Lendinginstrument 27. Coming nearly a decade after the last financiaVprivate sector intervention, the Project will be funded by a five-year IDA-financed investment credit o f US$5.0 million equivalent that focuses on strengthening the building blocks o f the overall business, financial and judicial environment, and includes support to restructure selected key public enterprises that directly impact private sector growth. Activities in the electricity sector will concentrate on short-term results and preliminary studies that will provide the foundation for a wider reform program, which i s a prerequisite for the realization o f the proposed IDA-financed MR-Gas-to-Power Project currently being pursued by GIRM with support by IDA'SAfrica Energy Department. GIRM will provide counterpart hding using the standard financing parameters approved by IDA'SRegional Vice President on February 6, 2006 where IDA would fund 90 percent o f all activities. 28. Other development partners, including the International Monetary Fund (IMF), AfDB, UNDP, the EU and the International Finance Corporation (IFC) are providing parallel assistance to GIRM for its financial and private sector development and reforms o f its legal and judicial systems. In coordination with the United Nations Capital Development Fund (UNCDF), the AfDB and the UNDP are also working inMauritania on microfinance issues (see Section I11on Implementation, Partnership Arrangements). B. Projectdevelopment objectiveand key indicators 29. The overall project development objectives (PDO) are to enhance the business climate through improvement inthe financial, legal andjudiciary sectors, and regulatory environment for business, and the support o f measures to restructure selected PES. This will facilitate private- sector led growthhvestment in the economy and improve the services o f the PESthat directly impact private sector growth and development. The baseline data has been incorporated into the results framework in Annex 3 o f this document and the key performance indicators at the outcome level are: (i) The percentage o fNPLwill be reduced from 50 percent to 15 percent by the completion o f the Project; 9 (ii) The number o fprocedures requiredto establish a business will be reduced from 11 (as measuredby, andpublishedinDoing Business 2008) to five (5) by the completion o fthe Project; (iii) Thepercentage ofcourt decisions from commercial courts inNouakchott and Nouadhibou, commercial chambers o f regional (wilaya) courts, courts o f appeal and the supreme court in the commercial and financial areas, published on the GIRM website www.mauritania.mr, or any other site or support selected in agreement with IDA (in order to ensure public access in a manner as broad and sustainable as possible with a view to the eventual development o f a case law database inthe commercial and financial areas as complete and reliable as possible) will have increased from 0 to 80 percent by the completiono fthe Project; and (iv) Each PE with respect to which an operational and financial audit has beencarried out under this Project will have signed a Performance Contract with GIRM by the mid- term review (MTR). In addition, an annual monitoring and evaluation report o f the implementation o f each such performance contract will have been produced annually by GIRMfor the period from mid-termreview untilcompletion o fthe Project. 30. The above outcome indicators are complemented by results indicators related to specific components. The full results framework i s provided in Annex 3. In addition to monitoring Project implementation, GIRM will monitor output indicators (on a semi-annual basis) for the specific activities in each component. The team will use the newly developed Local Portfolio Performance Monitoring System (LPPMS) that will provide feedback regardingthe effectiveness o f Project investments andtechnical assistance. C. Project components 31. The Project i s comprised o f two technical components, namely: (a) Improving the Business Climate to Foster Private Sector Development; and (b) Building Public-Private Partnerships and Productivity Enhancement; as well as one administrative component, (c) Support for Project Implementation. 32. The Project components build on lessons learned from the FPSCBP as well as other IDA projects that had financed private and financial sector activities. As a result, it i s recognized that: (a) genuine stakeholder participation inpolicy reform design i s critical; (b) selectivity inproject design is essential; and (c) institutional change, particularly where capacities are limited, requires long-term action. Priorities and hierarchies o f the work program will be established in accordance with the implementation capacity o f the executing agencies. An in-depth description o fthe components i s provided inAnnex 4 ("Detailed Project Description"). Component1: Improving the Business Climate to Foster Private Sector Development (US$3.0 million equivalent) 33. Component 1 supports GIRM's efforts to: (a) strengthen the financial sector and thus improve access to finance; (b) improve the legal and judicial framework for business and financial activities; and (c) streamline the regulatory environment and reduce the administrative barriers for commercial activities. 10 Strengthening the Financial Sector mS$l.O million equivalent) 34. The first subcomponent is underpinned by recommendations from the FSAP and supports GIRM's efforts to develop a solid and efficient financial sector and to increase access to financial services. This will entail the provision o f equipment and technical expertise to build capacity in the following areas: (a) strengthening o f the regulation and supervision o f financial institutions and financial markets through: (i) the preparationo f a draft for a proposed revision o f the banking law and implementing decrees; (ii) the preparation o f a draft for a microfinance law and implementingdecrees; (iii) the strengthening o f human resource capacity at the BCM; and(iv) the centralizationo fsupervision of financial institutions withinB C M(commercial banks and microfinance institutions); and (b) strengthening the financial institutions and developing measures to improve competitionwithin these financial institutions. Improving the Legal and Judicial Framework for Business and Financial Activities WS$1.O million equivalent) 35. The second subcomponent, based on recommendations from GIRM's Report on Justice and Judicial Reform as well as those o f the FSAP, will finance activities that support improvements to Mauritania's legal and judicial environment for business and credit-related activities. This will entail technical assistance and capacity building to improve the legal framework for business and financial activities through: (a) the development o f laws and regulations for the creation, perfection and enforcement o f mortgages and the improvement o f laws and regulations for movable property, accompanied by the development of a modem commercial and credit registry; (b) the simplification o f debt collection and contract enforcement mechanisms; (c) strengthening o f judicial capacities with respect to commercial law, financial law and commercial dispute resolution; (d) strengthening o f ethics in the judiciary; (e) the development o f judicial statistics and indicators to monitor progress o f the judiciary; and (f) improvement o f the dissemination o f legal information. Streamline the Regulatory Environment for Business (US1.O million equivalent) 36. The third subcomponent addresses streamlining the regulatory environment for business, including through: (a) the preparation o f reforms to improve the business climate such as to facilitate business start-up, simplify corporate taxation, improve trading across borders; and (b) the development o f an incentive system for private investments and assistance in establishing andmaintaining appropriate institutionalarrangements for investment promotion. Component 2. Building Public-Private Partnerships and Productivity Enhancement (US$1.5 million equivalenl) 37. .horder to sustain its economic performance and reduce poverty, a deeper and more ambitious public sector reform program i s envisaged by GIRM. This component, therefore, will support improving corporate governance in a select group o f PESand several reform measures in the Mauritanian electricity sector to attract increased private sector investments and participation inthe localpowermarket. Two activities are includedunder this component: 11 Improving;Corporate Governance inPublic Enterprises (US$l.1million equivalent) 38. The Project will finance technical assistance to improve corporate governance in PES through: (i) carrying out o f operational and financial audits; (ii) preparation o f action or the restructuringplans (as needed); and (iii) the design o f Performance Contracts, including a system for monitoring and evaluating performance. The first five key public enterprises to receive this support are expected to be SOMELEC, SOMAGAZ, SNDE, MAURIPOST and the Port o f Nouakchott. Support from other World Bank Group units including the IFC, the Multilateral Investment Guarantee Agency (MIGA), and the Private-Public Investment Advisory Facility (PPIAF) will be sought. Enhancing; the long-term electricity-sector expansion planning functions cUS$400,000 equivalent) 39. As part o f GIRM's reform efforts in the utility sector, MHETIC wants to enhance its electricity sector strategic planning function that would also allow for the identification o f future opportunities for private sector participation in the area o f electricity generation expansion, transmission and distribution. This subcomponent will support MHETIC's efforts in these respects by financing technical assistance to help GIRM prepare a sector investment plan that will be based on future demand and supply scenarios in accordance with assumed economic development scenarios for Mauritania. Component 3. Supportfor Project Implementation (US$SOO,OOO million equivalent) 40. The Dklkgation Gknkrale Ci la Promotion de 1'Investissement Privk (DGPIP), which falls under the purview o f the Presidency, was created by decree No. 130-2007 on July 5, 2007 to be responsible for coordinatingprivate sector development and the promotion o fprivate investment. Itwill also beresponsible for overall coordinationo fthe Project andhas allocated staffresources for this purpose. The Project will finance technical assistance, as needed, to strengthen DGPIP's capacity to ensure that all fiduciary activities are met, including but not limited to: (a) financial management according to international accounting standards (this includes payment o f invoices, maintaining appropriate accounts and requesting timely reimbursements from IDA); (b) procurement o f goods and consultant services (providing support to first-line executing agencies intheprocurement process); (c) annual reporting to IDA; (d) monitoring and evaluation (M&E); (e) audit o f Project resources; and (f) public information, which will include a communication strategy. N o DGPIP staff salaries will be financed by the Project, but wherever necessary, technical assistance will be provided (and may be financed by the Project) to strengthen the team. This will enable the transfer o f skills. The auditing function, to be carried out annually by independent, external auditors, will also be financed under this component. D. Lessons learnedand reflectedin the project design 41. Special attention has been given to ensure that the Project's design reflects both IDA'S experience inMauritania and private sector reform projects in other countries, particularly those that have financial as well as legal and judicial sector components. Project design takes into account the challenges inherent in sectors with multiple stakeholders and interests, diverse links with the macroeconomic framework and the real sector, long lead times for reforms to take effect, and the need for significant skill and capacity-building. Inparticular: 12 Project design is based on recommendations provided from analytical work undertaken over the past two years. 0 The Project recognizes the importance o f sequencing reforms for both financial and private sector development andbuilds on the FPSCBP. 0 The Project takes into account the fact that the implementation o f reforms o f this nature requires multiple steps and takes a significant amount o f time. Therefore the Project concentrates on building the foundation for more comprehensive reforms. The Project will be implemented over a period o f five years and activities will support "quick win" reforms that can be accomplished in the short-term. It will finance studies and capacity buildingto enable GIRM to implement more comprehensive reforms that will not only require more than five years in order to build consensus between public and private stakeholders, but also be subject to unforeseen interruptions that do not necessarily indicate a lack o f commitment on the part o f executing agencies. 0 Ultimate responsibility for Project implementation lies in a single Directorate o f GIRM responsible for private sector development and promotion. DGPIP will be the principle counterpart for the Project and the focal point for the coordination o f Project implementation with all executing agencies. 0 Whenever private sector participation inthe delivery o f infrastructure services i s included as a project objective, prior in-depth examination o f relevant political, economic and sector contexts are necessary. The analysis should offer alternatives for private sector investment amendable to national and international investment. Studies for future investments are useful only to the extent that financing o f recommended investments will be made available either through local resources or through multilateral and bilateral assistance. These resources and potential envelopes should be known to some degree in advance o f undertaking such studies. They should be taken into account in budget planning and financial projections (former World Bank supported electricity sector project, Energy/Water/Sanitation Sector Reform Technical Assistance Project, P066345). The electricity component under the Project i s closely linked to the MR-Gas-to-Power Project, which i s expected to support investments in the sector expansion as a consequence o f the services the Project will finance. 0 The Project does not assume that a single change can affect sustainable economic development. Instead, the Project takes a holistic approach to addressing constraints to private sector development which are influenced by the health o f the financial sector to provide efficient and affordable financial services and the efficiency o f the legal, administrative andjudicial systems to apply and enforce business and financial laws and the contracts that are based uponthem. Only a small part o fthe reforms willbe financed by IDA and it is anticipated that other donors will support GIRM in its efforts to implement reforms in microfinance, the insurance sector, social security and pensions. Most importantly, the Project recognizes that changes in laws and regulations are unlikely to have desired effects without parallel technical assistance and capacity building. Although there can be no guarantees that the Project will be successful, it is expected that interactions among measures will have a positive impact over the long- term. 13 E. Alternatives considered and reasons for rejection 42. Initially a project for US$7.5 million equivalent was envisaged. The approach to preparingthe project was to build on the body o f diagnostics work, and policy discussions and GIRM priorities, in order to formulate a project that supports the shared growth agenda. Following a minimum costing o f the core components that constitute the project, the team concluded that the available IDA allocation o f US$5 million equivalent i s not sufficient to ensure funding a critical mass o f activities. This is, inlarge part, because o f the depreciating dollar and the broadening o f the agenda, in response to the request to include coverage o f the electricity sector. During the decision meeting, it was agreed that Project activities would be prioritized and those that were unable to be financed under this credit would be included in a proposed additional financing credit, that will be prepared for presentation to the World Bank Board o f Directors as soon as additional IDA resources are made available for Mauritania. 43. The Project began with a focus strictly on reforms to the financial, legal and judicial sectors. As a result of the I C A and GIRM commitments with the IMF and realignment o f national priorities, however, the scope o f the Project broadened to include: (a) improving the investment climate; and (b) supporting public enterprise reform by financing technical assistance to (i) undertake operational and financial audits which will be used as a basis o f a restructuring program and (ii) prepare performance contracts for selected key public enterprises. 44. The need for support to private sector development i s high. The CAS establishes private sector development as one o fthe pillars o f IDA'S assistance to Mauritania. The I C A preliminary results, the Doing Business report as well as the Country Economic Memorandum highlight the challenges faced by the private sector. To address them, a large PSD project would have been justified, should IDAresources havebeen available. 45. There was also notable interest within IDA for the Project to include a component to support the expansion o f financial services to rural areas. However, as there i s already significant support inthis area, IDA'Svalue-added i s marginalized. Moreover, it was feared that a rural finance component could simply increase confusion inthe sector. Over the last ten years, numerous development partners, including IDA under the FPSCBP, supported the establishment o fmicrofinance institutions; several o f these have proven quite successful, and have the potential to become microfinance banks under the new Microfinance Law. Although existing microfinance institutions have limitedoutreach inrural areas, they are increasing their efforts in this direction. Furthermorethere is already a major intervention inthe area, ledby AfDB which has provided a credit to GIRM for US$10 million equivalent to support policy, legal and regulatory, and institutional aspects o f rural finance, as well as to finance potential rural investments. Given the size and scope o f the project managed by the AfDB, it was agreed that BEEPwould not provide direct assistanceto the micro andrural finance sector. 46. At the specific component level, it was agreed to limit activities regarding legal and judicial reforms to those that directly impact the development o f a modem framework for credit- related activities and judicial capacity in financial and commercial matters. These activities are not being supported by the EU project on the Strengthening and Rehabilitation o f the Judicial Sector (Euros 4.75 million, approximately US$6.0 million equivalent). Inparticular, the EU project aims to contribute to the rule of law by: (a) consolidating the judicial system (with a reinforcement o f the sector policy); (b) improving the capacity o f judges and others through 14 intensive training and modernization o f courts and equipment; and (c) improving access to the justice system through the publication and wide dissemination o f laws. Efforts will be closely coordinated with the EUto avoid duplication o f support. 111. IMPLEMENTATION A. Partnershiparrangements 47. Inresponse to a request from GIRM and in line with the Paris Declaration, the World Bank ledthe effort to coordinate donor efforts infinancial andprivate sector reforms. The IDA- financed Project will provide technical support where other development partners are not currently active, namely strengthening the financial sector and measures to improve the business environment. The fruit o f this work i s to be a comprehensive program that i s supported in part by the Project. GIRM's coordination efforts in these respects will be the responsibility of DGPIP. Several development partners are already financing clearly-defined activities, which will be coordinated with those financed by IDA. These activities are included inAnnex 2. B. Institutionaland ImplementationArrangements 48. The Islamic Republic o f Mauritania will borrow US$5.0 million equivalent from IDA under the Project. The GIRM has expressed its intention to take rapid reform measures so that the population will see immediate results. Thus the Project will be implemented over five years. A MTR will be planned for 30 months following effectiveness o f the Financing Agreement for the Project. 49. As noted above, Project coordination will be under the responsibility o f DGPIP. The implementation team will include a procurement specialist, an accountant and an executive assistant who will be responsible for providing the necessary guidance to executing agencies for procurement o f consultants, goods and services, as well as M&E. The DGPIP will not be responsible for technical implementation o fnon-fiduciary activities carried out under the Project. Wherever necessary, timely short-term technical assistance will be sought to strengthen the team and work with technical focal points. This technical assistance could include, but will not necessarily be limitedto, expertise inthe financial sector, law, judicial reform and private sector development, as well as financial management and procurement. It could take the form o f specialized training or the recruitment o f short-term consultants. 50. A Steering Committee (SC) for the Project was legally created by Arr6te` #407, dated February7,2008. The SC is chairedby the Ministry o f the Economy and Finance (MEF) andit includes high-level representatives (Director-level or above) from the ministries and public agencies involved in the GIRM's private and financial sector reform program. The SC will provide overall strategic guidance and Project oversight andwill meet at least once every quarter to review progress inthe Project against the agreed performance indicators, the procurement plan and the global reform Program as described in GIRM's Letter o f Private and Financial Sector Development Policy. 51. To maintain the bottom-up approach that began during Project preparation, with the assistance o f DGPIP, each executing agency will prepare the terms o f reference (TOR) for consultants, including required qualifications o f consultants and technical specifications for 15 procurement o f goods. Executing agencies will implement their respective components and report to DGPIP on a quarterly basis, including any modifications to the procurement andor training plans. These will be included inthe Project ImplementationManual (PIM). 52. Details o f the financial and disbursement arrangements are provided in Annex 7. The Financial Unit o f DGPIP will be responsible for financial management, maintaining overall records and managing disbursements o f the Project. Each executing agency will be responsible for technical implementation o f any activities in their respective components but these agencies will not have financial management responsibilities. A focal point from each executing agency has been named by these different structures to ensure coordination between the executing agencies and DGPIP. 53. The Project recognizes the capacity constraints which exist in Mauritania. The technical assistance i s demand-driven and GIRM's absorptive capacity has been considered inthe process. Therefore, this i s primarily a technical assistance project for staff training and institutional capacity-building which will enable GIRMto implement a more comprehensive reform program in the future. Sustainable capacity building inMauritania (as well as many other countries in Africa) has been and will remain a challenge and, as experience has shown, it does not necessarily stem from the design o f any program but requires deeper policy issues (such as salary scales and retentionrates) to be addressed at a highpolitical levels. Thus, such capacity building may not occur in the context o f this Project. Hierarchies and prioritization o f activities will be made in accordance with the implementation capacities o f Project institutions. The annual work plans, budgets and timetables will be established according to the executing agencies' capacities and will be included inthe PIM. 54. The capacity o f each executing agency will be enhanced through the provision o f information management systems and online services delivery. The design o f the systems will be based on a participatory approach using up-to-date and user-friendly application technology allowing each executing agency as well DGPIP to exchange data and information, both generated within the project cycle and from the day-to-day operation o f the executing agencies. This will foster ownership and accountability for Project implementationresults and outcomes. C. Monitoring and evaluation of outcomes/results 55. The Project's M&E system will be based on an agreed Results Framework that i s set forth inAnnex 3. The system will (i) the executing agencies to respond to GIRM's need enable for information and data; (ii) improve management o f these agencies; (iii) compare the county's business environment with international standards; and (iv) attract potential investors. 56. DGPIP will consolidate information and data received from the executing agencies. The focal points in each executing agency will be responsible for consolidating information and data relevant to their respective sectors. The quarterly table (Scorecard) will include: (i) the activity indicator; and (ii) the status of the indicator (red, amber or green). If an indicator status turns "red" in the Scorecard, the performance i s "off-track" and there i s a risk that the agreed target will not be attained. If this occurs, the focal point will prepare a repodplan to implement corrective actions to ensure that the agreed results can be attained. The action plan will then include a series o f corrective actions to be taken by the executing agency and allocate deadlines 16 andpersons responsible for takingall requiredactions. These Scorecards will be developed inan Excel format to facilitate their use. 57. As soon as the Financing Agreement is effective, all focal points will be provided training in LPPMS inorder to integrate the Project performance indicators as shown inAnnex 3, into the M&E system. This will facilitate access to Project execution data and consequently potential problems can be identifiedexpediently. 58. The Scorecards will be sent to DGPIP on a quarterly basis. It will consolidate the data in a concise M&E report which will be submitted to the SC for review and transmitted to GIRM for information. In addition, DGPIP will be responsible for monitoring the undertaking of all corrective actions to be taken. 59. The Scorecards and these reports will assess achievements against the Project Implementation Plan (PIP) and an overall Procurement Plan that will be prepared and incorporated into the PIM. DGPIP will be responsible for updating the PIP on an annual basis, taking into account experiences and the strategic focus o f the Project. The PIM includes, among other things, guidelines on all period reporting, and monitoring arrangements. The MTR will include an impact assessment o fthe Project. The objective o f the MTR will be to assess progress and, ifnecessary, make changes inthe Project based on additional lessons learned duringProject implementation as well as on the then prevailing realities on the ground. An ICR will be undertaken six months after the completion o f the Project. D. Sustainability b 60. The Project has a good basis for sustainability, being founded on GIRM's vision that Mauritania should become a "producing rather than consuming country, one which exports rather than imports". This vision i s enshrined inthe PRSP, on which all development assistance i s now being aligned. Trade and private sector development issues have not generally been accorded a highpriority inprevious Government policy, and recent donor support to Mauritania has tended to focus more on social sector development and the improvement o f social outcomes, rather than tackling the underlying causes o fpoverty, namely economic under-performance. 61. The private and financial sector reform program is a GIRM initiative, with strong national ownership. Many o f the constraints to PSD do not require large expenditures, merely the diagnosis o f policy, legal and administrative reforms, and technical support in implementing such changes. Therefore the cost o f such actions i s quite low, while the impact can be high. GIRM is committed to improving Mauritania's performance as assessedby the ICA and annual Doing Business surveys. Similarly, while many aspects o f reducing the cost o f doing business can be tackled with low-cost actions, others require resources well beyond the scope o f this Project. Mauritania's private sector suffers from very high transport costs for both exports and imports. Critical to the sustainability o f the Project is further investment in infrastructure, not just in transportation but also in power, telecommunications and water supply. The proposed electricity program, and the facilitation o f public-private partnerships (PPP) as envisaged under this Project will play an important role instartingto address these infrastructureconstraints, but additional public andprivate investment will be required to achieve real change. 62. The Project will fund technical assistance and associated institutional and policy support for a well-defined, time-bound process to strengthen the financial sector and improve the ease o f 17 doing business (as reflected in Mauritania's annual performance in the Doing Business survey, etc.). The nature o f most o f these actions and the undisputed commitment o f the current Government to these reforms enhances the likelihood that, once implemented, they will be sustained. 63. A number o f reforms have already been prepared and enacted with support of the the Project Preparation Facility (PPF). These include: (a) Central Bank Statutes; (b) a Banking Law; (c) a Microfinance Law; and (d) a regulation regarding commercial registries. GIRM has provided IDA with signed Letter o f Private and Finance Sector Development Policy stating its commitment to improve the financial, legal and business environments. Finally, the necessary steps to be able to implement the Project successfully with respect to operational procedures, financial management and procurement have already been established and agreed with IDA. The procurement plan for the first 18 months o f the Project has also been prepared and agreed with IDA. 64. The Project builds on work supported by the FPSCBP. The Operations Evaluation Department (OED) concluded that the FPSCBP's outcome was satisfactory. The FPSCBP recorded improvements ina number o f areas, inparticular inincreasing the capacity o f the B C M to supervise the financial sector and conduct monetary policy. In addition, there was increased capacity in other departments o f the BCM, as well as improvements in the legal and regulatory framework for the financial sector. A lesson drawn from OED's audit o f Bank-financed Projects was the importance o f sequencing financial sector reforms for both financial and private sector development. The Project has been built upon this lesson inproject design and will continue to work with GIRM on the proper sequencing o f reforms. Given GIRM's commitment, the IDA team i s confident that actions taken under the proposed Project will also be sustainable. 65. The capacity to analyze issues and to develop and implement strategies i s crucial to the success o f the reform programs. Recognizing the weaknesses in base capacity across some o f the executing agencies, in addition to sequencing activities, the Project explicitly includes capacity building in all o f its components, and more importantly, several components focus explicitly on buildinginstitutional capacity. As a result o f the FSAP and ICA, this process began during Project preparation which was carried out jointly by the executing agencies and the IDA team. E. CriticalRisksand PossibleControversialAspects 66. The Project's overall risk rating has been assessed as "medium". Improvements in macroeconomic management and public sector governance are the foundation of an improved private sector enabling environment, but a number o f institutional risks remain. 18 Risk Risk mitigation measures Risk rating with mitigation GIRMdoes not have the will to conduct This risk is mitigated by ensuring that H the reform program or to reverse long- ownership and understanding o f the Project i s standingpolicies. This may particularly both broad and deep throughout the civil be the case ifthe GIRM i s linked to service to negate self interests. The risk i s so industrial and commercial conglomerates far mitigated by the fact that the new Prime Minister i s the former reform-oriented Governor o f the BCM. The new Governor o f the BCMi s also reform-oriented. Change in GIRM. This risk i s mitigated by ensuring that M A change inGIRMwould be a riskifit ownership and understanding o f the Project i s resulted ina departure from current both broad and deep throughout the civil thinkingon the role o ftheprivate sector service, and therefore able to withstand indrivingeconomic growth. changes inpolitical leadership. Cost overruns due to underestimationof DuringMTR, priorities will be examined and H the cost of activitiesand/or currency activities may be cut or an additional fluctuations financing credit sought Macro-economic crisis/loss ofjiscal Credibility o f the current GIRM i s closely M discipline. linked to the maintenance o f macro stability Macro stability i s a pre-requisite for and an important element o f the Project will sustainable private sector development. be mainstreaming PSD issues across Hence ensuring that Mauritania's government and society, especially the achievements inthis regard are importance o f low and stable interest rates and maintained i s essential to the success o f inflation for private sector investment. Work the program. with GIRM to create fiscal space from oil receipts. Staff turn-over in Government. Inorder to address this challenge, staff at all M Staff attrition inGovernment i s a constant levels, across departments within DGPIP and challenge for buildingand maintaining other key institutions were involved early capacity. during Project design, appraisal and implementation. Performance contractswill not be GIRM has a firm commitment with the IMF M respected by PES to undertake the financial and operational audits, implement and carefully monitor the performance contracts. Interest rates remain high There are institutional and legal issues and M risks that currently keep lendinginterest rates high that cannot be addressed through this Project. GIRM and B C M are working with the IMF to improve monetary and fiscal policies in an effort to provide a good economic framework for financial sector development. 19 Capacity constraints of implementing The Project includes substantial capacity M institutionsmay causedelays building and training activities as requested by the institutions. Inaddition, activities will be prioritized and sequenced. GIRMdoes notgo ahead with the This riskis mitigatedbythe relatedMR-Gas- M electricitysector reform measures. To-Power Project. The related Project intends to develop a substantial generation capacity expansion in form o f a PPP. The restructuring o f SOMELEC and the reform o f the sector i s a prerequisite for GIRM to develop this very muchneededrelated project, thereby creating an important incentive for GIRM to implement the proposed reform measures. Inherentfinancial management M Fundsmay not be used inan efficient and The team o fappropriately qualifiedand economical way and exclusively for experienced staff may reduce this risk. purposes intended due to poor governance. Strong internal control procedures to be set up and maintained. Financial management control risks M Lack o f clear separation o f functions DGPIP's Inspector General will carry out the inherent to the limited number o f staff internal audit hnction with TORSacceptable for IDA and will report to the SC There i s no internal audit function Financial Reporting The appropriate format for the IFRs will be M Delays inthe submission o f agreed designated prior the negotiationo f the Project. Interim Financial Reports (IFR) and annual project financial statements The financial specialist will be trained on IFRs. External Audits Relevant qualified external auditors will be M Supreme Audit Institutionhas limited recruitedby DGPIP. capacity IV. CREDIT CONDITIONSAND COVENANTS Retroactive Financing 67. Inthe course o f the program, there are two important activities that were agreed to be pre-financed by GIRM for the reimbursement o f which authorization for retroactive financing is requested. These activities were not included inthe PPF as they had not been agreed duringthe- initial preparation period. The GIRM made a commitment with the IMF to put into place performance contracts for a select number o f key public enterprises that are listed in paragraph 20 20 and have a direct impact on private sector growth. There are several prerequisite measures which must be taken prior to the design o f a performance contract inline with international best practices. The first step inthe process i s a financial and operational audit. Following the audit, GIRM can prepare a restructuringplan and subsequently design the performance contract with clear objectives. GIRM had agreed with the IMF to put these in place quickly and had asked IDA to finance these activities under the Project. The retroactive financing would cover the advance payment, up to US$400,000 for the five contracts. The second activity which GIRM wanted and IDA had agreed to, was to have GIRM and private sector representatives participate inthe regionaleconomic forum heldinAbou Dhabi inFebruary2008. A Mauritaniandelegation comprised o f public and private sector representatives participated. The GIRM took this opportunity to discuss, with major investors, opportunities in the region and in particular, in Mauritania. The total cost o f this activity was US$50,000. Finally, the second Presidential Counsel was held in Nouakchott on February 13'h, 2007 which brought together more than 100 local and international investors to discuss investment opportunities in Mauritania. The Project will finance 50 percent o fthe cost which will be US$lOO,OOO. Thefollowing Conditionsfor Negotiation have been completed satisfactory to IDA. 0 Acceptable Terms o fReference and a short list for the recruitment o f an external auditor. 0 Agreed format of IFRandAnnual Project Financial Statements. 0 Draft Letter o fPrivate andFinancial Sector Development Policy. Conditionsfor Board: 0 None Conditionsfor Eflectiveness: 0 The GIRM and the B C M have adopted a Project Implementation Manual in form and substance satisfactory to IDA; and 0 The GIRM has opened a commercial bank account for the deposit o f the finds for the financing o f such portion o f Project Eligible Expenditures which may not be financed from the proceeds o f the Financing, and has made an initial deposit into this account an amount equivalent to US$100,000 Dollars. Other conditions/covenants: 0 GIRM will request each commercial bank operating in Mauritania to have its Financial Statements prepared and audited in accordance with the rules and regulations issued by BCM. Each audit o f these Financial Statements will cover the respective fiscal years o f each o f these commercial banks. Each annual audit report will be fbmished to IDA no later than nine months after the end o f each respective fiscal year or by such other date as may be agreed by IDA. 0 Throughout Project implementation, GIRM will ensure that each public enterprise has had a financial and operational audit, including but not limited to SOMELEC, SNDE, 21 SOMOGAZ, MAURIPOST and Port Autonome de Nouakchott (Port Authority o f Nouakchott) to have its Financial Statements prepared and audited in accordance with generally accepted international auditing standards. Each audit will cover the period o f one fiscal year. The audited Financial Statements for each such period will be published on GIRM's website (www.mauritania.mr) or other site as agreed with IDA no later than 3 months after the date o f delivery o f the final report prepared by the commissaire aux comptes,who is the statutory external auditor for GIRM. 0 Throughout Project implementation, GIRMwill cause to be prepared and furnished to IDA,no later thanJuly 31ineachyear, or such other date as maybe agreedby IDA, BCM's annual report, which will include, inter alia, the audited Financial Statements o f BCM, andbe inform, scope andlevel o f detail satisfactory to IDA. V. APPRAISAL SUMMARY A. Economic and FinancialAnalyses 67. Given the character o f this technical assistance operation, a quantitative economic and financial analysis is not an appropriate tool to assess the returns o f this Project. The pace and depth o f the reforms envisioned in this operation will determine the ultimate economic and financial benefits o fthe credit. B. Technical 68. The technical merits o f the Project design have been examined by IDA staff over the course o f Project preparation and are considered sound and in line with international standards. Project design i s based on analytical work undertaken, including the analysis and recommendations from the joint BanMFund FSAP, an I C A and the Judicial Reform Study. In addition technical assessmentswill continue throughout the Project's implementationperiod and an FSAP and I C A update will be carried out prior to the MTR (subject to available funds and agreement by GIRM). 69. The Project draws heavily on the results o f the I C A that demonstrated the need to integrate policy reforms initiatives and improve the business environment with technical and financial support to nurture the private sector and assist repositioningMauritania as a market-led economy. The Project thus aims to improve the business environment by reducing the costs o f doing business and by improving the legal framework for the entry, exit and operations o f businesses. The Project also aims to bring new technology and management know-how to private firms. 70. Substantial preliminary work and foundations have been laid in the course o f Project preparation with support o f the PPF, namely the preparation o f the microfinance law, banking law and Central Bank Act each adopted by the Conseil Militairepour la Justice et la De`mocratie by ordinance inthe first quarter o f 2007. The executing agencies have completed the necessary feasibility and needs assessment studies and the detailed work plans and budgets are a reflection o f this groundwork. The procurement plan (18 months) was agreed with IDA during Project appraisal. 22 C. Fiduciary 71. The Country Financial Accountability Assessment (CFAA) revealed that the systems for planning, budgeting, monitoring, and controlling public resources in Mauritania are improving but do not provide sufficient reasonable assurance that funds are being used for their intended purpose. The risk o f waste, diversion, and misuse o f funds was assessed as partially high. As the CFAA recommendations on financial accountability reforms have not been fully implemented yet, the country risk i s assessed as partially high. 72. Various measures to mitigate these risks have been taken and thus the project risk from a financial management perspective i s assessed as substantial before considering any risk mitigating measures. Therefore financial management arrangements are designed to ensure that (i)funds areused for thepurpose intended;(ii)timelyinformationisproducedfor Project management and government oversight; and (iii) to facilitate the compliance with Bank fiduciary requirements. 73. As noted above, the Financial Unit o f DGPIP will be responsible for financial management, project accounting, maintaining the records and managing disbursements for the executing agencies. Actions outlined in the Financial Management Action Plan will be undertaken by the Project to strengthen the financial management system. 74. The conclusion is that the financial management arrangements for the Project have an overall risk rating o f moderate which satisfies the Bank's minimum requirements under OPh3P10.02. The arrangements put in place to manage the financial resources are satisfactory and meet the minimum financial management requirements o f the World Bank. With the implementation o fthe action plan, the financial management arrangements will be strengthened. D. Social 75. There are no social issues triggered by this project. A number o f Project components are expected to lead to favorable social outcomes, including employment generation and poverty reduction. Key stakeholders from both the public and private sector have been involved in Project design through participation in several workshops and other consultative mechanisms such as technical working groups. Project implementation arrangements will build on the active participationo frepresentatives o fboththe public andprivate sectors. 76. Access to appropriate financial services is a critical tool for poor households to reduce vulnerability but, as noted above, the Project will not directly address this issue. The Project will, however, assist GIRM establish a framework for increased and more efficient access to financial services, and provide at least some improvements in the prevailing legal andjudicial systems to encourage the expanded use o f financial instruments. E. Environment Category C 23 F. SafeguardPolicies There are no safeguard issues. Safeguard Policies Triggered by the Project Yes No EnvironmentalAssessment (OP/BP/GP 4.01) [ I [XI Natural Habitats(OP/BP 4.04) [ I [XI Pest Management(OP 4.09) [ I [XI Cultural Property(OPN 11.03, beingrevisedas OP 4.11) [ I [XI Involuntary Resettlement(OP/BP 4.12) [I [XI IndigenousPeoples(OD 4.20, beingrevisedas OP 4.10) [ I [XI Forests(OPBP 4.36) [I [XI Safety ofDams (OP/BP 4.37) [ I [XI ProjectsinDisputedAreas (OP/BP/GP 7.60). [XI G. PolicyExceptionsandReadiness No policy exceptions. 'Bysupportingtheproposedproject,theBankdoesnotintendtoprejudicethejnaldeterminationof theparties'claimsonthedisputedareas 24 ANNEXES 25 MAURITANIA: BUSINESSENVIRONMENT ENHANCEMENT ANNEX1: COUNTRYAND SECTORBACKGROUND A. OVERALL BACKGROUND 1 Mauritania i s a large2and sparsely populated country (3.1 million inhabitants). In spite o f strong fluctuations, the growth o f the Mauritanian GDP was positive over 1994-2004 averaging 3.1 percent per annum. This performance i s slightly lower than that o f other Sub- Saharan African countries, but much lower than the average growth observed inthe Middle-East and inNorth Africa over the same period (Chart A.1.1). Chart A.l. 1.Real GDP Growth (1994-2004) inMauritania and neighbor countries I%) 5 4 4.4 4.0 3.8 3.5 3.5 Source: DDP dataset(June 2007 update) andrevised I M F m data for Mauritania. 2. Mauritania recorded a growth rate o f 5.4 percent in2005 and 11.7 percent in2006, thanks to the beginning o f oil extraction, while the average inflation rate was 6.2 percent in 2006. Its per capita income in 2006 was US$740. However, while Mauritania has performed relatively well these past few years in macroeconomic terms, poverty which is primarily a rural phenomenon has been reduced very modestly at best. The beginning o f oil exploitation should, to some extent, raise the country's growth path and thus improve the prospects for poverty reduction. Although the expected flow o f oil revenues is a positive development, it also constitutes a major risk factor. Due to the lack o f appropriate policies, many countries that have faced similar circumstances have not benefited from positive long-term outcomes. In addition, in 2007, uncertainties regarding the effective level of oil production in the country have increased the risk o f economic instability. ~~ With anarea ofabout 1million square kilometers. 26 3. The essential challenge confronting ChartA.1.2 Mauritania is to diversify its non-primary sources o f growth. This will allow the economy to face changes more easily inthe world prices o f its primary export products. 4. It is now widely recognized that the development o f the private sector requires an improvement o f the "investment climate" in order to promote stronger economic growth within a market economy and a reduction o f poverty3. Indeed, comparative development experiments indicate that countries having a favorable investment climate have a higher rate o f investment, which enables them to achieve stronger growth (Chart A.1. 2). 5. Although medium-term prospects for Mauritania remain positive, the country still has a weak investment climate. The economic structure presents a sharp contrast between a relatively small modern sector and traditional subsistence sectors. Recent analytical work underlines the fact that private sector growth, and therefore the country's overall growth, i s severely constrained4. For example, survey results presented in the I C A indicate that the investment climate in Mauritania, in mid-2006, was not favorable to the private sector, regardless o f the sector. The key constraints are: access to and cost o f finance. This constraint is the one most commonly cited by Mauritanian companies; 0 a heavy regulatory framework (including an heavy taxation, weak tax administration and problems with customs regulations) and a weak judicial system which remains unpredictable and inefficient in its role o f resolving business disputes and enforcing business contracts; poor access to and highcosts o fkey factors o fproduction, notably transport and energy; poor access to and difficulties in securing land and related problems in raising real estate- based mortgage finance; apoorly educated workforce; and a large concentration o f economic assets and weak competition in the formal economy while the informal sector thrives. World DevelopmentReport(2005).A Better Investment Climatefor Everyone, OxfordUniversityPress. World Bank (2007). Doing Business 2008, WashingtonD.C.; WorldBank (2007). Mauritanie: UneEvaluation du C h a t des Investissements,WashingtonD.C. andWorld Bank (2006). Financial Sector AssessmentProgram: Mauritania, WashingtonD.C. 27 Chart A.1.3. The top six constraintsfor firms inMauritania in 2006 (Pct) 60'o1 Manufacturing 51.2 50.0 i 44.8 'kade 50 0 40 0 30 0 20 0 10 0 0 0 ACCCSS cost and Electricity Pracoccso f Q~rromsand Inadequate?. Tax rates Access and Taxrates Tax Customs Practices o fElectncity O f fllancmg c~rnp?oror~ trade regYlaPonS lil educated costor regulatlons andrnde compeliton UIF mfOnlldl workforce secmr fmancing regulations m the mformal Sector Other sectors MicroentreprisesllnformalFirms 50 0 45 0 40.0 35 0 30 0 25.0 20 0 15.0 I O 0 5 0 0 0 Practices o f Access and Taxrates Access to Tax Electncity Access and Access to Taxrates Practices o f Transport Electncity competitors costof land regulations costof land competitors mthe fmancmg fmancmg m the mformal mfolllldl sector sector Source: ICA (2007) B. FINANCIAL SECTOR OVERVIEW 6. The financial sector, in its current state, can neither contribute to shared growth and the development o f the private sector, nor is it able to participate efficiently in the utilization o f petroleum resources. Mauritania has a fairly dense network o f financial institutions, with ten commercial banks (two new foreign-owned commercial banks recently entered Mauritania), one financial establishment, seven insurance companies, sixty-seven microfinance institutions, postal financial services, and a social security organization. The scene i s completedby a money market and a foreign exchange market. There i s no bond or stock market. The ratio o f money supply to GDP i s 31 percent, the ratio o f deposits to GDP is 20 percent, and that o f credit to GDP i s 18.7 percent. 7. The level o f NPL is high (reaching on average close to 50 percent o f the credit portfolio). Provisions are also high in real terms but remain inadequate to cover NPL. The principal risk to the stability o f the system would come from a further deterioration o f the commercial banks' credit portfolios. The high credit concentration increases this risk. Banking supervision has improved recently but i s still in need o f strengthening. The payment system remains archaic, with a manual clearing system and a low utilization o f electronic payment instruments. Together with the private sector, the authorities are developing a credit card system. 8. Eight commercial banks are basically departments o f commercial and industrial groups, resulting in a segmented banking system characterized by limited competition. Banks mainly deal with corporate and senior individual members o f the group, and customers that do not belong to respective groups have difficulties in obtaining financial services. This situation is aggravated by the general absence o f reliable financial statements o f firms and the weakness o f the accounting profession. The difficulty o f commercial banks to take a guarantee increases the problems o f access to commercial bank credit (for instance, the commerce registry where collateral agreements have to be publicized i s not operational and land title can only be obtained after having secured a so- called "precarious title"). The microfinance sector i s still emerging and the insurance sector i s far from reachingits full potential. 9. It is therefore not surprising that problems of financing (access to and cost o f finance) are perceived as the main barrier to the growth o f firms in Mauritania according to the I C A survey. Across sectors, between 38 and 51 percent o f Mauritanian firms regard the lack o f access to and the cost o f finance as "major" or "very severe" obstacles to the development o f enterprises inMauritania. Chart A.1.4. Pct. of long-term assets financed Chart A.l. 5. Structure of fundingfor longterm assets (Pct.) thoughthe bankingsystem China 7 120 4 194 Clorocco 1-1 u.2 Loaniiumfami@, 7 1 Senegal [I 17.7 South Africa 1-J 16.5 Indonesia 16.3 i Algeria 16 3 Kazakhstan 16 0 Brazil 14 3 Mali i II* 1 htemalfunds, Mauritania retamedeammgs 2 83 2 0 5 I O 15 20 25 0.0 20.0 40.0 60.0 80.0 NO.0 Source: ICA (2007) F3 Manufacturing Trade 0 Other 0 Micro/hfomal 10. In comparative terms, the limited use of commercial bank finance by firms in Mauritania tends to confirm these negative perceptions. Internal funds and retained 29 earningsare the main source o f financing o f firms inMauritania; they fimdbothshort and long-term assets. Thus, within the group o f selected comparators, firms in Mauritania have the smallest proportion o f financing o f their long-term assets through the commercial banking system (Chart A.1. 4). At the sector level, self-financing accounts for 62 to 83 percent o f the value o f long-term assets. Family loans are the other large source o f firm financing, particularly intrade and for informallmicro firms (Chart A.1. 5). TheMonetary Environment 11. After a long period o f fiscal domination, monetarypolicy recovered some defacto autonomy during the past three years. Since August 2004, the B C M has given priority to stabilization o f the exchange rate and reduction o f inflation. Monetary restraints have eliminated the gap between the official exchange rate and that o f the parallel market. 12. The regular sale o f Treasury bills serves the double objective o f financing the Treasury and managing the liquidity o f the commercial banking system on a monthly basis. The level o f liquidity depletion at the beginningo f 2006 forced the B C M to reduce the legal reserve ratio from 8 percent to 7 percent inJanuary 2006. 13. In practice, the volumes issued are used only for budget purposes. If, as is expected, fbture oil revenues enable the Treasury to finance the budget deficit in the medium term, it is likely that the volume o f bills issued by the Treasury for budgetary reasons will steadily reduce over the coming years. Meanwhile, since GIRM fbnding with oil revenues will result in injections o f liquidity into the commercial banking system, it i s important for the B C M to have a flexible instrument for managing liquidity. ThePayment System 14. The payment system remains archaic with a manual clearing system and a low utilization o f electronic payment instruments. The payment system i s deeply influenced by the low commercial banking rate o f the population (about 125,000 accounts for 3 million inhabitants), the predominance o f paper money, the importance o f informal and parallel economic structures, andthe late development inthe use o f credit cards. 15. The Clearing House in the B C M is the only payments' clearing process in Mauritania. However, this system, which dates back to 1978, conforms to only two o f the ten basic core principles defined by the Payment and Settlement Systems Committee and amply complies with only four o f the basic principles. The major shortcomings concern the final settlement o f operations, which occurs only on the day following physical exchange, as well as the exclusion process incase o f default. 16. Mauritania does not yet possess a complete and sufficiently updated legal framework to support a modern payments system. The current legal framework, mainly the Commercial Code, covers traditional types o f payments such as checks, but does not provide an adequate framework for electronic payments. Electronic information cannot, for instance, beused as evidence incourt. 30 BankingRegulationsand Supervision 17. An assessment o f compliance of prudential standards and bankingsupervision in force in Mauritania with the basic principles for efficient banking supervision as established by the Bhle Committee has highlightedcertaindeviations. 18. The framework within which commercial banks operate i s not developed in the sense that market discipline i s not effective, enterprises are not transparent, their membership in a group i s sometimes difficult to establish, and recovery o f commercial bank credits through the courts is difficult. Most commercial banks belong to private business groups, thereby reflecting the segmentation o f the population, and the sector has therefore remainedhighly compartmentalized. 19. Under the law, B C M is responsible for supervising 87 credit institutions (nine commercial banks, one leasing company, ten foreign exchange offices, and 67 mutual benefit savings and credit institutions). B C M has all o f the powers required to be an autonomous institution. Indeed, it is an approval, regulatory, supervisory and sanctioning authority. However, in practice, two factors undermine this independence, and could affect its capacity to edict coercive measures and have them followed, especially given the oligarchic nature o f the sector. The first is the fact that the Governor can be dismissed "ad nuturn" even though he i s appointed for a term o f four years; and the second is the absence o f legal protection for the control authority and its staff from any action that can be taken against them for acts done in good faith in the exercise o f their functions. 20. Bank supervision, however, has made good strides in Mauritania recently. The monitoring o f inspectors' conclusions i s rigorous and includes detailed follow-up letters, written explanations from the commercial banks, follow-up meetings, as well as discussions andagreements on timeframes for increasing provisions. 21. Microfinance Regulations and Supervision. Microfinance regulations and supervision are also under the responsibility o f BCM. The microfinance sector i s still emerging: institutions depend on subsidies for their survival and regulation and supervision fall short o f international standards. B C M has revised the regulations governing microfinance, which were approved inMay 2007. 22. Insurance Regulations and Supervision. The insurance sector has not reached its potential and the National Social Security Fund has experienced severe difficulties that have almost used up all o f the reserves o f the pension branch. Insurance operations are governed by Law 93-40 o f 20 July 1993 instituting the Insurance Code. The Insurance Code conforms to international standards, except that it does not establish the usual segregation between Life and other insurance operations (Fire, Accident, and Sundry Risks). The Code institutes three insurance obligations: that o f civil liability o f owners o f automobile vehicles, that o f importers o f goods (import possibilities), and that o f constructionworks. However, since the decrees definingthe implementing conditions o f 31 these last two have not been promulgated, obligations concerning them remain ineffective. 23. The Insurance Code fixes the minimum capital at a very low level: 80 million Ouguiyas, which i s equivalent to US$330,000. Incomparison, the minimum capital required by the Inter-African Insurance Markets Conference in the CFA zone is about 500 million CFA francs (which is equivalent to about US$l-1million). 24. The surveillance provided by the Law remains ineffective in practice in view o f its current operating conditions. Article 315 o f the Insurance Code provides that insurance control i s exercised by the Insurance Control Department (ICD), which i s responsible for granting approvals, ensuring financial surveillance and, more generally, protecting the interests o f users. A peculiarity in Mauritania is that the ICD is not attached to a Ministryresponsible for financial matters, but to the Ministry o f Trade. The staff o f I C D comprises only a director and two other lower grade civil servants, who are not specialists inthe sector. 25. The postal financial services contribute little to improved access to financial services. Access i s further limited because the financial sector i s dominated by an uncompetitive commercial banking sector at the service o f groups. Inaddition, there are only two specialized institutions: one in the area of leasing and the other in the area o f credit to SMEs and agriculture. Neither meets its objectives. The first requires the double collateralization o f the leased equipment and a land title, making leasing less attractive. The second extends loans o f an amount too high for SMEs. There are neither factoring companies nor venture capital firms inthe country. 26. The legal and judiciary framework does not adequately contribute to the development o f financial instruments and institutions or to the enforcement o f contracts and the recovery o f claims. Although important reforms have taken place, particularly with the revision o f critical pieces o f legislation, they have not had a concrete impact because of, among other things, the absence o f implementing decrees (the commercial code i s an example). Magistrates also lack training incommercial and financial laws and do not necessarily work intheir domain o f competency. c. LEGAL JUDICIALOVERVIEW AND 27. Progress in the financial and private sectors requires strengthening o f the legal andjudicial system. The legal and regulatory framework governing credit activities has serious shortcomings and developing an adequate and efficient framework for collateral debt collection and enforcement o f contracts will be essential. The application and enforcement of laws and contracts i s weak as many judges involved in commercial and financial cases lack the necessary training and specialization. It is also crucial that laws are applied by the appropriate judicial branches and accessible and clearly understood by domestic and foreign investors, legal andjudicial communities and the public-at-large. 32 28. The justice system o f Mauritania i s characterized by its duality o f Islamic law (sharia) and French-inspired law (so-called modem law). They differ inlegal philosophy, content, formal structure and language (Sharia-based laws andjurisprudence in Arabic, modem law in French). This situation flows from the country's history. The duality o f laws, and its ambiguity, persist despite a number o f reform efforts inthe past - 1961 (one year after independence), 1965 (court reform), 1983 (arabization), 1993 (modernization based on the 1991 Constitution). Matters o f daily life are governed by customary traditional rules which differ according to ethnic origin and economic activity, namely the pastoral lands inthe center-east o fthe country (Arab andPeulh), or the predominantly Afro-settled agricultural lands along the Senegal river (Selinke, Wolof, Halpoularen). 29. Despite a common two-year training course for graduates o f each o f the two legal teaching institutes (ISERIfor sharia scholars (jurisconsults)), and Nouakchott University Law Faculty for students trained in the French legal tradition) in the Ecole Nationale d'Administration (ENA), the two legal communities lack sufficient interaction to build a common legal and judicial system that could inspire stronger ownership. The formal legal system, as the administrative organization, follows the French model. Sharia-based fatwas emanate from the Council o fJurisconsults and Ulema, are seldom published, and when they are, are only inArabic. They are defacto followed, but officially ignored. Current state of thejudiciary 30. There is no social peace, nor economic development without a credible and well- administered legal framework. Mauritanian Presidents regularly pledge to foster the rule o f law, as do the country's religious leaders. But they do not refer to the same framework, and nor do they always accept the independence o f the judiciary. Despite intermittent efforts over four decades to improve the judiciary, a professional, transparent, credible and timely judicial system does not yet exist in Mauritania. The lack o f material, inadequate buildings, inaccessibility o f local laws and any legal literature for judges, including at the Supreme Court, the lack o f professional training (now being addressed) and deontological rigor, and the absence o f a transparent career planning policy in the Ministry o f Justice (MoJ) are all reasons for judicial system deficiencies. Visible evidence o f the lack o f a hnctioningjudicial system i s the fact that most judgments are not rendered within the statutory time limits; and are often not in writing. Even in the rare cases o f written and well motivated judgments, there are typically very few, if any, references either to prevailing legislation or to judicial precedent. Judgments are not published. Past efforts to improve on the availability of trustworthy legal services 31. Four administrative and judicial reforms have taken place in Mauritania (the last in 1993) to adapt the country to more modern, liberal economic and administrative policies through, inter alia, the hnding o f GIRM's IDA-assisted "FPSCBP" (Cr. 2730, eff. November 29, 1995). Its legal component aimed, among other things, at strengthening the judiciary through training, hrnishing o f equipment, revision o f procedural and substantive legal texts pertaining to civil law, formulation o f a 33 commercial code, regular publication o f laws inFrench and Arabic and the publication o f judgments. The project closed with the majority o f its activities implemented. However, no noticeable positive impact on the rendering o fjustice through the courts was achieved. A "Round Table of Justice", held in March 2000 to assess improvements under the project, highlighted remaining deficiencies and outlined further reforms needed in the judicial system. 32. The legal and judicial framework has undergone some reforms at the impetus o f development partners who were seeking to support improvement in the country's business and credit environment. While a substantial number o f important laws have been enacted, including a contract law, a commercial code, a law o f civil procedure and an investment code, the accompanying decrees have not yet been adopted with the result that these laws remain to be implemented. Also, the institutions to be established by these laws have not been funded. Furthermore, these new laws have not beenpublished, disseminated or publicized. Finally, the training o f legal and judicial officers remains inadequate. The result i s that these new laws are not understood, and therefore not appliedby lawyers, business managers, bankers, government officials orjudges. 33. Similarly, the judicial system has been regularly analyzed and criticized by economic operators as well as by public authorities without announced reforms significantly improving the perception o f the sector by the banking and business communities. The final Report on Justice' i s a GIRM assessment that recognizes the main problems affecting the judicial system, from weak competency and low remuneration to corruption. It recommends the implementation o f a series o f measures, in the short-, medium- and long-term, that are very ambitious, andwith a timetable that seems unrealistic. The MoJ i s working with several donors, including the EUon overall judicial reform. Whereas justice was considered as one o f the three pillars o f the former transitional government (along with democracy and good governance), the budget o f the MoJ increased only marginally (from 0.9 to 1 percent o f the national budget) during the transition andremains far below requirements. 34. The same Report shows that the number o f disputes being taken to court i s declining significantly as a result o f the population's lack o f confidence in the judicial system. Today, commercial banks resort to the courts to settle disputes with their customers only in highly exceptional cases. This i s due not only to the structure o f the commercial banking system (granting o f loans to affiliated companies against which compulsory debt recovery would not be appropriate from the point o f view o f the entire group), but also to the lack of: (a) reliability o f the judicial system; (b) information systems regarding loans; and (c) simplicity and efficiency in existing loan recovery procedures. 35. The Report also acknowledges that training, accompanied by long overdue specialization o f magistrates, must effectively be put into place. Today, there are specialized commercial and other chambers, but the magistrates who sit there have not Final Report on Justice, Inter-Ministerial Committee on Justice, November 2005, h~://www,mauritania.mr/fr/RapportsCMIRapport-Final-Justice.pdf 34 received specialized training. In addition, it is essential that magistrates who have received specialized training (inbusiness law, penal law, matrimonial law, etc.) be called upon to hear cases in their field o f specialization and be permitted and encouraged to develop ajudicial career pathinthe chosen area o f specialization. 36. Uncertainties regarding guarantees are some o f the reasons for the high cost and unavailability o f credit. Mortgages, though required as collateral by commercial banks, are considered unreliable. Mortgages are limitedbecause o fthe low number o f landtitles even in urban areas (there are about 18,000 land titles for the entire country), and uncertainties concerning the operations and records o f the Lands' Registry Office and landconservation system. 37. The acquisition of a title for landmust, inall cases, bepreceded bythe issuance of so-called "titre pre`caire" (or precarious title) such as an occupancy title (Art. 12 Ordinance No. 83-127 reorganizing landtenure). No titrepre`caire can in law, however, be used to support a mortgage, even though some commercial banks accept such titles together with a promise to obtain a land title. The binding effect o f any such promise is low and recovery by commercial banks i s ineffective against delinquent debtors. Moreover, the commercial banking supervisor does not recognize these instruments as guarantees. The effectiveness o f mortgages has also been handicapped by the lack o f commercial banks' diligence in registering these documents due to what commercial banks consider the unfairly high cost o f registration. Registration is, however, an essential condition for mortgage effectiveness. Responding to these concerns, the Finance Law for 2006 reduced the rate for registering a mortgage from four to two percent. 38. Although recently reformed by the Commercial Code, secured interests on personal property, such as liens or pledges on a business or on professional equipment, are rarely used. This is due in part to the prevailing difficulty that commercial banks complain o f in enforcing these sorts o f interests in court. Inthe result, commercial banks mistrusttheir borrowers, as well as thejudicial system, including its auxiliaries. For such collateral to be valid, it first must be recorded in the Commerce Registry which thereby publicizes the fact o f the collateral, its parties and its amount to third parties, including other commercial banks. The unsatisfactory status o f the Commerce Registry in Mauritania i s another hindrance to the constitution o f reliable guarantees. Instituted in 2000, the Commerce Registry i s still not operational because o f the absence o f an implementingdecree defining its operating conditions, and the lack o f resources for its operation. Even the implementing texts that would allow for the establishment o f third- party warehousing have not yet been issued. 39. Inaddition, the attachment ofrealproperty for mortgage or non-secured claims is a long, relatively costly and highly uncertainprocedure. The seized property i s generally kept by the commercial banks, with a negative impact in terms o f fiscal charges and liquidityratios. Once seized, the propertycanbe auctioned, however, inthe absenceof a secondary market and due to the prevailing cultural reluctance to purchase property under 35 such circumstances, commercial banks are often forced to bid themselves for the real estate inquestion and then keep it as part o ftheir own property. 40. A draft bill on recovery o f commercial bank loans, which has been under preparation for more than two years, contains interesting innovations, but does not seem to resolve all the difficulties encountered inthe loan recovery process. 41. Reforms o f the legal framework are always politically sensitive and time consuming, and therefore should be launched without delay. Technical assistance for the improvement o f the commercial framework (including the Commercial Code) i s an excellent place to start. Modernizing the collateral system in light o f Mauritania's economic and social environment will help strengthen debt collection and increase access to credit by diversifyingthe kinds o f collateral accepted by financial institutions. To that effect, the law on the debt collection and collateral foreclosure should be revised. Technical assistance on the formulation o f a mortgage law and the improvement o f movable collateral i s also essential. The training and specialization o f magistrates in commercial and financial law are equally important. More generally, it i s essential that laws be understandable and accepted by all (both local and foreign investors, legal communities and the general public) and be accessible to the general public, legal counsel, government officials and the courts. D. PRIVATESECTOR DEVELOPMENT 42. Mauritania has a narrow economic base. Most o f the formal sector employment i s provided by the mining and fisheries sectors (about 64 percent o f the formal sector labor force) and government services and provides nearly all export earnings7. About 50 percent o f the labor force works outside the formal sector in artisan fishing, agriculture, and livestock. Mauritania's unemployment rate is close to 30 percent, and about 50,000 youngsters enter the job market every year. Manufacturing remains fairly limited and accounted for about 5.8 percent o f GDP in2005. Therefore, the vulnerability to external shocks such as world price fluctuations and climatic changes i s very high. Main sectors andfirms performance 43, Mining Socie`te` Nationale d 'Industrie MiniBre (National Mining Company, SNIM), a conglomerate with majority public and diversified private minority ownership, accounts for much o f the mining sector. However, the sector structure i s likely to change as more foreign miningcompanies enter the country. 44. Fishing The national fisheries' sector consists o f a handfbl o f large private firms that produce much o f the sector's value-added, coexisting with numerous artisans. The "Socie`te'Mauritanienne de Commercialisation du Poisson " (SMCP), a partly public firm, has the quasi-monopoly on marketing exports o f frozen seafood as only a few 'The2003-2004,the team's comments on the draft bill can be found inthe technical note. For 3 main export products of the country accounted for 92.6 percent o f export earnings, one o fthe higher concentration ratio insub-Saharan Africa. 36 "Groupements d'Intbre^t Economique" have started to emerge in this segment o f the market. Foreigncompanies and institutions also operate inthe sector. They are generally not integrated with the national economy and international agreements and treaties govern their activities. 45. Other activities. Mauritania's manufacturing activities mainly consist o f groundnut processing, construction, brewing, tanning, baking, and production o f fmit juices, soaps and plastic containers. Other sectors with some potential include agro- industries, tourism and commerce. Mauritania i s heavily dependent on imports for most o f its manufactured products. 46. Firm's oroductivitv. Overall productivity levels remain low in the non-extractive secondary sector. Data indicate that labor productivity (median values) inmanufacturing i s rather low in Mauritania, even when compared with other low-income countries o f Sub-Saharan Africa. For example, it i s two-thirds lower than the observed rate o f productivity in Senegal, the country with the best performance o f all low-income countries in Sub-Saharan Africa so far. Labor productivity in Mauritania is also lower than that of Sub-Saharan African countries with intermediate incomes, as well as countries with intermediate incomes outside o f the African region that are considered comparators. Chart A.1.6. Labor Productivity inMauritania (USDper worker) 30,0001 27,548 I Intermediate Income Countries S A IntermediateIncome LowIncome Countries SSI Countries Source: ICA (2007). 47. This low labor productivity combined with a relatively high level o f remunerations explains why unit labor costs (wage costs adjusted for productivity levels) remain higher than those o f the selected comparators. Inother words, the negative effect o f low labor productivity i s not really compensated for by the level o f remunerations, which limits the competitiveness o f Mauritanian firms. The data also indicates that the capital intensity and capital productivity are low. 37 Chart A.1.7. Unit Labor Costs (Pct. of Value Added) o.6 1 0.54 0.5 0.4 0.3 0.2 0.1 0.0 Source: ICA (2007) 48. Although the previous measures o f firm productivity provide useful information on firm performance, they might be misleading when considered in isolation. To get an overall assessment o f productivity, it i s necessary to take both capital and labor use into account'. Estimates o fvarious specifications o f functions o fproduction indicate that TFP i s weak inthe manufacturing sector inMauritania. On average, TFP is approximately 77 percent lower than that observed in South Africa (the country which has the best TFP o f the continent), approximately three times lower than that observed in Brazil, and two times lower than that o f the firms inMorocco. These indicators o f productivity suggest that, currently, Mauritanian industry i s not competitive. The only exception, to some extent, seems to be the fishing industry; firms o f this sector have better performance indicators than inthe remainder o f the manufacturing sector. Constraints toprivate sector development 49. The low level of productivity o f Mauritanian firms can be understood as a result o f a set of severe constraints on the business environment. Constraints can be grouped into several categories: factor markets, corruption, infrastructure, regulations and representation o f the private sector. 50. Factor markets work Poorlv. Problems o ffinancing, access to and cost o f finance are perceived as the main barrier to the growth o f firms inMauritania. These issues were previously addressed in section B o f this annex. Another important factor market that is severely constrained inMauritania i s the labor market. The net impact o f the different factors o f production on fm-level productivity can be assessed by calculating total factor productivity. Differences in TFP are those differences in output that cannot be explained by differences in the use o f labor, capital and other inputs. Finns for which total factor productivity i s higher are more efficient than other firms because they produce more with less capital and workers. 38 51. Labor regulations appear to be rigid, which does not allow for a suitable flexibility o f this market. The index o f rigidity o f employmentg i s high in Mauritania, higher than the average for Sub-Saharan Africa, which stresses that conditions o f employment are complex, and include many limitations in terms o f hiring conditions, duration o fwork and dismissals. 52. There i s also a lack o f education o f the workforce, as well as a poor development o f suitable vocational training. The proportion o f employees without education i s quite high(7.1 percent), close to what is observed inSenegal. Moreover, Mauritania is one of the countries where the proportion o f employees with technical education i s the lowest (12.3 percent). According to the data, only about a quarter o f manufacturing firms in Mauritania provide formal training to their employees. In comparative terms this figure is weak; close to that o f Mali, lower than in Senegal and much lower than in countries such as Brazil and China. It i s also worth mentioning that there seem to be no connection between the performances o f production workers and their effective remunerations (low productivity bonuses). Inaddition, remuneration levels are relatively highincomparative terms, especially for unskilled workers. 53. Corruption remains a problem. Data indicate that corruption remains a considerable problem inMauritania. It generates instability inthe business environment and increases the operating costs o f firms. Corruption i s a serious concern for entrepreneurs in the manufacturing sector. The estimated share o f turnover devoted to "informal payments" i s much higher than what was recorded recently in other countries o f the region like Mali or Senegal, and relatively close to what i s observed in Algeria. Thus, in2006, on average 6.4 percent o f the annual turnover o fmanufacturing firms was devoted to "unofficial" payments. This i s higher than what i s observed at the national level on the whole sample, i.e. 3.8 percent o f the turnover. It can also be noted that the cost o f corruption in Mauritania i s higher than that o f two fast growing oil countries, Indonesia and Kazakhstan. 54. Infrastructure issues are severe. The quality and the availability o f infrastructure services create serious problems to firms in Mauritania. Over the whole sample o f manufacturing firms, electricity issues are the most important infrastructure issue. In 2006 Mauritanian manufacturing firms faced approximately 6 electricity outages per month, with an average duration o f 3.3 hours. These outages caused an average loss o f approximately 3.3 percent o f annual sales for manufacturing firms. Other infrastructures, such as transport and telecommunications, are also perceived as very problematic. Lastly, problems o fwater supply for industrial use are also non-negligible. 55. Remlatow constraints are non-nealiaible. Tax rates as well as tax administration create important problems for managers inthe formal sector. Tax rates are thus quoted as beinga major or very severeproblem by 31.7 percent o fmanufacturing firms, 36.6 percent o f the companies involved in trading activities and 37.9 percent o f the firms in other sectors. Lastly, this constraint is mentioned by 23.4 percent o f the microhformal firms. Along the same lines, 32.6 percent o f the firms in trade and 26.9 percent o f those in other Doing Business 2008 39 sectors consider tax administration as a major or very severe constraint. According to the Doing Business data, such perceptions are perfectly founded. For 2006, the total tax rate on profits for firms in Mauritania was 107.4 percent; one o f highest not only o f the sub- region, but o f the world. In this context, widespread tax avoidance in Mauritania is evident. 56. Although significant progress was recorded these last few years in terms o f liberalization o f foreign trade in Mauritania, customs regulations and regulations on foreign trade are perceived as strong constraints by the companies in the manufacturing sectors (33.8 percent) and in commerce (29 percent). Although very positive, earlier measures have not yet made it possible to strongly reduce some constraints related to trade facilitation. A certain number o f administrative complexities remain which are compounded by the highcosts o ftransport. 57. Entrepreneurs still have a significant lack o f confidence in the capacity o f the administration to provide a predictable interpretation o f regulations and to organize an effective judicial system (paragraphs 27-41). Moreover, the extent o f the corruption issues previously mentioned does not help to improve this perception. 58. Competition policies are still weak. Mauritania needs to improve its competition policies in various areas o f its economy. A key feature o f the modem sector is high concentration o f ownership by a few families. Their businesses are involved intrade and commerce, banking, insurance, productive activities and fisheries. These groups enjoy considerable monopolistic power on the domestic market, which is reinforced through formal (e.g. administrative authorizations to enter into some sectors such as tourism, transport etc.) and informal regulatory barriers" that tend to make markets less competitive. 59. The other major actor i s SNIM, which still operates under a special tax regime. SNIM i s extending its activities in a series o f non-core businesses rangingfrom transport to tourism. Also reflecting the high economic concentration, there are about 400 formally registered companies in the country and around 80 percent o f these firms are located in either Nouakchott or Nouadhibou (where both o f the country's main ports are located). A dynamic informal sector also exists; but tax and regulatory policies as well as the dominance o f large competitors restrict the emergence o fnew entrepreneurs. 60. The representation of the private sector needs improvements. Highconcentration i s also a feature o f organizations representing the private sector. These are limited mainly to the "patronat" (Confe`de`ration ge`ne`rale des employeurs de Mauritanie, CGEM) and a recently revived chamber o f commerce, and tend to cater more to established businesses than small entrepreneurs. Only a handful o f other formal associations exist. The most notable is CIMDET (Centre d'Information Mauritanien pour le De`veloppement Economique et Technique), which is a relatively new organization, set-up with donor support to assist SMEs and the informal sector. This state o f affairs hinders the lo the See 1999 FIASReport: "Mauritanie -Analyse des barrikres administratives et des blocages sectoriels a I'investissement." 40 emergence o f new formal entrepreneurs and favors vested interests. It i s caused by the difficulties associated with registering private associations under existing Mauritanian laws, which involves a time-consuming, complex and arbitrary approval process that i s much more onerous than that of other neighboring countries. Approvals may thus be denied or withheld for a long time. E. ELECTRICITY SECTOR 61. Mauritania's electricity sector is operated by the vertically integrated state-owned electric utility, SOMELEC. The main load centers o f the sector are not interconnected and are geographically separated over important distances. Only the capital Nouakchott i s linked to the neighboring markets o f Senegal and Mali by an existing transmission link. Mauritania's three load centers are as follows: + Country's capital Nouakchott (72 percent o fthe country's installedgeneration capacity serves the market o fNouakchott); + The City o fNouadhibou; and + 17 small local systems to supply 17 cities inthe Mauritanian Hinterland( 17 G VillesD) 62. Inaddition to the national gridwith those principle three (3) markets operated by SOMELEC, some local industries dispose of their own off-grid generation capacities. The biggest captive plant capacity (140 MW), which is also the biggest single generation capacity in the whole country, belongs to SNIM. While this important capacity exists it i s not available for the main grid as the capacity covers the demand from mining activities in the Northern part o f the country and i s not interconnected to SOMELEC's network. The key figures o f the sector are summarized inBox 1: Box 1: Kev fimres of the Mauritanian Dower sector: Total InstalledCapacity : 94MW Total Capacity Operational : 78 MW Operational Capacityby LoadCenter: o Nouakchott: 58 MW o Nouadhibou: 12MW o "Les 13 Villes" : 8 MW Net EnergyOutput : 437 GWh (incl.87 GWh importedfrom the regional power stationManantaliinMali) 0 ProductionBase : HFO, ADO andHydro (Manantalipower station) Total lengthofthe Transmission& Distributionnetwork: 1,500 km 41 Institutional and Legal Framework of the Sector: 63. Legal Framework. In 2001 by the "Loi no2001-18 du 25 janvier 2001 ))a Regulator had been established. The regulating authority is a multi-sector authority supervising not only the power sector but also the telecommunications, postal and water sectors. 63. In1998 the Government inplace at that time decidedto separate the water sector activities from electricity sector activities, until then carried out by the Societe National d'Eau et d 'Electricite (SONELEC). Electricity sector activities were outsourced to a newly formed company, SOMELEC. Furthermore it was GIRM's intention at that time to privatize SOMELEC after its formation. 64. Both efforts at the time were supported by IDA through GIRM's Energy, Water and Sanitation Sector Reform Technical Assistance Project (P066345), that closed in December 2005. This project provided technical assistancesto prepare for SOMELEC's privatization. 65. InMay2002, onlyonebidderofthe fiveinvitedenterprises submitted afirmoffer and the offered bid price was only slightly above the net value o f SOMELEC's assets. As a consequence, the Privatization Commission declared the bidding process unsuccessful. It considered the competition process flawed since the single bidder knew, before the bid submission date, that it would be the sole bidder. The other firms withdrew by reason o f the then prevailing market environment, including the September 11,2001 events, the Argentina crisis, and the Enron scandal. By January 2002, two o f the remaining three firms that had previously considered submitting a bid had received instructions from their respective headquarters to be selective in their new investments, which subsequently led them to withdraw. 66. In 2003, on the basis of a consultant's evaluation, the GIRM re-launched the privatization process, although it was reluctant to do so because o f an unfavorable political environment. The evaluation report covered the technical, economic, and financial aspects and presented various possibilities for involving the private sector in electricity service such as a concession, a leasing contract or affermage, and a management contract. 67. After due consideration, GIRM selected a transitional arrangement where it would retain primary responsibility for investment in electricity infrastructure over the short- and medium-term while laying the foundation for further privatization. This option ignored the increased perceived country risk and the deterioration o f SOMELEC's financial position, partly caused by oil price increases. This was a major departure from GIRM's original privatization plan. Since 2003, no fbrther action has been taken by GIRMto privatize SOMELEC. 42 Institutional and Legal Framework of the Sector: 68. Lenal Framework. When SONELEC's water and electricity fbnctions were separated, a new multi-sector (water, electricity, postal services and telecom) regulating agency was established (ARM)in2001 by the "Loi no2001-18 du 25 janvier 2001" and a Regulatory body was established. The privatization effort for SOMELEC at that time also led to the formulation o f "loi no 2001-19 du 25 janvier 2001 portant Code de I'dectriciti ",which was supposed to become Mauritania's new electricity law. This law was the first step towards private sector participation in the power sector and to endorse the principle that tariffs shouldbe set at levels that make the financing attractive. 69. However when the privatization o f SOMELEC failed, the new law was not enacted and SOMELEC's relation to GIRM remains governed by the "Contrat Programme o f 1997" (a performance contract between GIRM and SOMELEC). This performance contract defines the financial contributions by GIRM to SOMELEC and outlines the different performance targets the company has to achieve in the course o f three years. This contract has never been updated since the failed privatization o f SOMELEC, leaving the company and GIRM unclear regarding the company's performance goals and GIRM's financial obligations. This lack o f clarity has existed for several years and i s one o f cause o f SOMELEC's current financial crisis. 70. Another consequence o f the failed privatization o f SOMELEC was that GIRM changed the mandate o f ARM from a regulatory into an advisory role and put the implementation o f the regulatory framework on hold until the privatization o f SOMELEC. 71. Institutional Framework. Due to the lack o f the endorsement o f the newly created framework and sector law, the ministry responsible for the final tariff endorsement as well as the oversight o f SOMELEC remains MHETIC. This ministry is also responsible for the water and telecom sectors. The oversight o f SOMELEC i s shared with MEFwith regardto SOMELEC's financing. 72. The third Ministryinvolved inthe power sector is the Ministry o f Petroleum and Mines which i s responsible for the oversight o f S N I M and the state owned oil refinery (SOMIR). Both companies own several captive power plants for their production purposes inNouadhibou (SNIM and SOMIR) and inZoueiratt (SNIM). SOMELEC: 73. Since its separation from the water utility in 2000, SOMELEC is the single and non-unbundled operator o f Mauritania`s electricity sector. It is currently 100 percent government-owned. Box 2 summarizes certainkey facts o f SOMELEC: 43 Box 2: SOMELEC Key FiPures": General : 0 Permanent Staff 807 0 Temporary Staff 912 0 RegisteredCustomers: 94.260 Electrification Rate: 28 percent 0 NumberofPlants: 20 0 EfficiencyRate of Equipment: 71percent Key Financial Situation: 0 Total Assets in2006: 23,106 millionUM 0 Total Equity in2006: 6,996 million UM 0 Short term Debt2006: 9,426 millionUM Turnover (expected in2007): 15,900 millionUM 0 Payroll expenses: 9 percent oftotal expenses 0 Total FuelCosts : 43 percent of total expenses 0 Electricity purchase costs : 20 percento ftotal expenses 0 Net Loss expectedin2007 : -8.600.000.000 UM Financial Ratios: 0 Collections ofbilled sales: 75 percent 0 Returnon Investment : -48 percent 0 Levelof Indebtedness: 71 percent 0 Avg. Production cost of kWh : 81 Ouguiya 0 Estimateddaily loss : 23 millions UMby day (88.500 US$) 74. The above figures show that SOMELEC is currently undergoing a severe financial and operational crisis that threatens its ability to continue operating. The collapse of SOMELEC would have a severely negative impact on the supply of electricity to Mauritania's residents as well as its businesses. Two critical aspects are as follows: 75. Generation Infrastructure: The generation condition of SOMELEC's assets is poor due to the lack of maintenance over the past several years. Equally, the absence of adequate budget allocations and tariff adjustments for the purchase of spare parts has worsened SOMELEC's ability to cope with its worn-out infrastructure. 76. The poor condition o f certain assets has ledto some serious accidents inthe recent past that have resulted in the complete or partial loss of certain generators. Those capacity losses were partly bridged by the leasing of short-term thermal emergency The financial figures of this Box 2 are based on SOMELEC's preliminary 2006 Annual report which has not yet been audited and the latest FinancialModel from SOMELEC as o f February 2008. 44 capacity but this has resulted in production costs that are far higher than can be financially sustained at current tariff levels. 77. SOMELEC's finances: SOMELEC's equity has been used up to pay for operational losses by July 2007. In addition, SOMELEC has required additional capital in the order of UM3.5 billion from GIRM for the second half of 2007 to cover its operational expenses. 78. Evenwith this additional support, SOMELEC has been unable to repay all of the loans that become due in 2007 o f an estimated amount o f U M 6 billion. The cash flow o f SOMELEC would have to be improved by about UM4 billion to stabilize all the outstanding commercial bank debts. 79. The main reasons for this financial crisis are: higher world market oil prices, especially for expensive emergency diesel generation; a significant deteriorationo f generation assets; 0 a significant number o funcollectedbills from private andpublic sector consumers; 0 a significant number o fnon-technical losses; and 0 an absence o f adequate tariff increases over several years. 80. Faced with such severe crises, GIRM has taken certain initial steps. Inmid-2007, new management was appointed at SOMELEC that immediately proposed a set o f initial restructuring measures focusing on the rehabilitation o f the existing production facilities as well as the restructuring o f the short-term bank liabilities (55 percent o f the short-term commercial bank overdraft facilities have been transformed into long-term loans as o f February 2008). GIRM also allowed for a 2lpercent tariff increase that took effect in November 2007. Furthermore, GIRM indicated that it would make a cash contribution o f U M 3 billion (approximately US$12.5 million equivalent) to SOMELEC inearly 2008. 81. Although these initial restructuring efforts have helped improve SOMELEC's financial situation, the operational viability o f the company still remains under threat. GIRM therefore has asked IDA for assistance in addressing its current challenges inthe electricity sector. F. PROSPECTS 82. Since the beginning o f the 1 9 9 0 ~a~number o f structural reforms have been implemented in Mauritania. In spite o f these efforts, however, the investment climate at the time o fthe enterprise survey in2006 still remainedunfavorable to the development of the private sector. GIRM has articulated its commitment to take the necessary measures to improve the investment climate inMauritania as quickly as possible. 45 83. The private sector will be supported on several fronts, one o f which i s the provision o f technical assistance to strengthen the financial and legal systems. GIRM plans to take the steps necessary to improve the investment climate, to set up institutional arrangements for investment promotion, to foster SME development, to seek public- private partnerships particularly in infrastructure, and to promote corporate governance. GIRM will take measures to strengthen some strategic public enterprises, such as SOMELEC, MAURIPOST, SNDE, SOMAGAZ and the Port o f Nouakchott so that they can play a more pivotal role inproviding efficient and cost effective services for private sector development. 84. In order to sustain its economic performance and reduce poverty, Mauritania needs to adopt an ambitious PSD program. It needs to pursue the implementation o f the remaining reform agenda and to tackle second generation reforms which will ensure the deployment o f the various potential sources o f growth in a sound and enabling business environment. Efforts by GIRM, donors and stakeholders would thus need to develop more explicit linkages between macroeconomic reforms and microeconomic policies in order to attain specific results. Interest in the potential o f Information and Communication Technology (ICT) to help accelerate the country's growth has been expressed and GIRM i s developing a strategy and an action plan in that area. GIRM i s also committed to modernizing the payment systems and improve access to financial services. As the key development partner inthese sectors, IDA will seek to play a major facilitating role in addressing the right priorities so as to foster equitable economic growth inMauritania. 46 MAURITANIA: BUSINESS ENVIRONMENTENHANCEMENT ANNEX 2: RELATEDPROJECTSFINANCEDBYTHE BANKAND/OR OTHERAGENCIES 1. The World Bank's past assistance for PSD inMauritania over the last decade has focused on public enterprise reform and capacity building: Private Enterprise Sector Adjustment Project (Cr. 2166-MRY 1990), Public Enterprise Sector Institutional Development and Technical Assistance Project (Cr. 2167-MRY1990), and PSD Capacity BuildingProject (Cr. 2370-MRY1994). Under those operations, the World Bank assisted Mauritania to: (i) improve the legal and institutional framework for the public enterprise sector; (ii) the role o f the state inthe economy, through divestiture and elimination reduce o f state monopolies; (iii) restructure key enterprises such as S N I M and Air Muuritunie (Mauritania's National Airline) which was eventually privatized in 2000; (iv) improve the quality o f port services; (v) develop telecommunication services; and (vi) elaborate and implement policy and regulatory reforms inthe financial, legal, mining and fisheries sectors to promote private sector development. 2. Consistent with its development strategy, GIRMremains committed to sustain the PSD agenda, with the continued assistance o f the World Bank. Since the closing o f the last PSD operation in June, 2000 (Cr. 2730-MR), there has not been any private sector assistance instrument in Mauritania, even though GIRM has repeatedly requested that a new sector operation be developed. The proposed operation will be amulti-sector project and will be carried out inthe overall context o f the country's poverty reduction strategy. WorldBank Projects 3. BEEPbuilds on the FPSCBP (PO386611which closed on May 31,2000. Its PDO was to develop and strengthen the institutions charged with implementing the policy and institutional reforms in the financial sector. The project aimed at: (a) strengthening the B C M to enable it to administer monetary policy and carry out effective regulation and supervision o f the financial sector; (b) providing a regulatory and institutional framework to deepen the financial sector; and (c) supporting the systematic issuance o f treasury bills to manage liquidity. The OED evaluation o f the ICR concluded that the project's outcome was satisfactory. 4. The Private Sector Development Credit (Cr 2726-MAU) in an amount o f US$30 million equivalent closed on October 8, 1997. The project's overall objective was to promote private sector development by improving the legal and institutional framework and consolidating financial sector reforms, with an explicit emphasis on the mining and fishing sectors where private sector activity was considered to have scope for expanding. IDA'S performance in project design, preparation and appraisal were considered unsatisfactory because IDA didnot sufficiently appreciate the complexity o f the legal and regulatory reforms that were to be implemented, underestimated the time required to update laws and develop new regulations and did not adequately link the technical assistance support provided by the Capacity Building Project to the reform process. 47 However, GIRM performance was rated satisfactory and project outcome was deigned to be satisfactory and sustainability probable. 5. FRSO, Cr. 33520/33521 in the amount SDR 36.5 million closed in June 2001. The FRSO was a quick-disbursing single-tranche operation designed to assist Government implement the fourth and final phase o f the 1997-2001 tariff reform agenda, and the first phase o f the 1999-2002 direct tax reform program. The ICR rated the outcome as "highly satisfactory" and the sustainability as "highly likely". Both World Bank and GIRM performance was rated as "highly satisfactory". According to the ICR, corporate and personal tax reforms for fiscal year 2000 hadbeen implemented as agreed. The tax systemwas simplifiedand strengthened. Tax rates as well as the number of tax brackets had been reduced and tax administration had become more efficient. Thus, it i s unsurewhy tax administration continues to be amajor constraint to the private sector and that the total tax rate on profits for firms inMauritania continue to be so high. 6. The Enerw/Water/Sanitation Sector Reform Technical Assistance Proiect ("PARSEA" Project -P066345) in the amount o f approximately US$10.9 million equivalent was fully disbursed and closed on December 31, 2005. The development objective was twofold: (a) to restructure the legal and institutional framework o f the energy sector to create an environment for private sector participation; and (b) to prepare for future investment in the energy sector. The principal performance ratings were "unsatisfactory" in all areas, including regarding outcome and sustainability, as well as IDA and GJRMperformance. Infact, the privatization o f SOMELEC, with emphasis on the sale o f electricity assets, was one o f the principal macroeconomic objectives o f the reform and a trigger for the Heavily Indebted Poor Countries (HIPC) completion point. This privatization failed in 2002, as explained in Annex 1, which led to the overall "unsatisfactory rating" at project closure. 7. Institutional Development Fund (IDF) Grant (TF05 1455). The "Table Ronde sur la Justice" in March 2000 brought an end to World Bank Group support to the judicial sector. No other financing being available, an IDF Grant was accorded in September 2002 to address persistent institutional and legal/regulatory deficiencies which severely affect the role o f private sector development institutions: (i)the absence of implementation decrees for some relevant business/commercial laws; (ii)the lack o f public access to legal information (laws, decrees, judgments and professional interpretations o f the regulations); (iii)the lack o f professional monitoring o fjudges by the Ministry o f Justice; (iv) the lack o f resources to maintain a sound in-service training and continued education program for the judicial staff, notably in business law; and (v) organized private sector liaison with the judicial sector to promote understandingo f the importance, and the advantages of, relying on trustworthy sources o f legal information. The IDF Grant was closed inSeptember 2005 with mixedresults. 8. MR-Gas-to-Power project (P107940). The Bank's Africa EnergyDepartment has recently beenrequested by GIRM to assist GIRM in the structuring and partial financing o f one o f the next major planned capacity additions in the local power sector. The proposed MR-Gas-to-Power project (P107940) consists o f the construction and operation of a gas fired 120 to 160MW power plant that will use recently discovered local off-shore 48 gas resources andtransform them into much cheaper and cleaner electricity than currently exists. The project i s intendedto be substantially supported by the private sector inform o f a PPP scheme and will be structured in a way that even regional power markets could benefit from the project's output, when enough gas resources are confirmed. The restructuring o f the sector i s a prerequisite to attractingprivate investors for the financing, construction and operation o fthis new power facility. 9. A feasibility study for the restructuring o f this sector is underway with financing from the Arab Fund for Economic and Social Development. The study will explore the possibility o f the project beingstructured to allow electricity exports from the new power plantto Mali and Senegal. Other Projects 10. The proposed Project would provide support in those areas not covered by other development partners. The following projects provide parallel support inareas which are important to the development o f the private and financial sectors and not covered by BEEP. 11. UNDP: Plan d 'Action de Proaramme de Pavs (2006-2008). The proposed budget for the program is estimated at US$11 million and covers four axes: (a) governance; (b) program to alleviate poverty, which includes (i) developing a strategy; (ii)credit line for microfinance; (iii)improving the regulatory framework for microfinance; and capacity building; (c) developing a strategy for partnerships and communication; and (d) general support. 12. AfDB has been working with the PFSPD team by preparing a parallel project for microfinance. The estimated cost of this financing i s US$10 million. 13. European Union "Renforcement et rkhabilitation du secteur de la Justice" i s approximately Euros 4.7 million provide support to the judicial system, in terms o f institutional strengthening and capacity building. 14. IDFGrant to support the Implementation o f Anti-Money Laundering standards to promote financial integrity and good governance supporting (US$305,000) was approved on May 30,2007. The objective o f the Grant i s to support the strategy o f the Mauritanian government to combat financial crime and more specifically money laundering and terrorist financing, by helping institutions with a stake in the fight against those two forms o f crime to build up management and operational capacity and effectiveness on anti-money laundering and combating financing o fterrorism (AMLKFT). 15. This grant is expected to play an important role in spearheading this objective by helping the Mauritanian authorities to: (i)develop the operational capacities of the Commission Nationale d'Information Financidre (CANIF), the Financial Intelligence Unit responsible for collecting and processing suspicious transaction reports drafted mainly from commercial banks; (ii) promote an effective bank supervisory system inthe field o f AMLKFT; (iii) disseminate AMLKFT practices in commercial banks and non- 49 financial professions (lawyers, accountants, Non-Government Organizations; and (iv) train the Law enforcement agencies and the judiciary on AML/CFT. 16. In addition to these core objectives, the grant will also: (i) contribute to support Mauritania's effort to better fight corruption; and (ii)help the country to meet its international commitment as set forth in the United Nations Conventions on Terrorist Financing and transnational crime. Ultimately, by helping the country to create an operational AMWCFT systemconsistent with the international standards, the project will reinforce at the same time the action on Corporate Governance/Transparency and secure management o f oil revenues. 50 MAURITANIA: BUSINESS ENVIRONMENTENHANCEMENT ANNEX 3: RESULTSFRAMEWORKAND MONITORING -Time necessaryto obtamh e 1udiaaldecision c o ~ c t intormationto developheir s - %age ofjudicialdecisionspublished -Costrequiredfor businessstart-up ProjectDevelopment I ResultsIndicators Use of Information Objectives(PDO) I Percentage o fNPL To measure the improvement o f To enhance the business climate o Baseline: 50 the financial environment through improvement inthe o Target: 15 through a decrease innumber o f financial, legal, judiciary and non-performing loans regulatory environment and the support o fmeasures to Procedures requiredfor To measure some improvement restructure selected PES. business start-up (days) inthe business climate [Africa Action Plan (AAP) indicator] o Baseline: 11(OB 2008) o Target: 5 To measure some improvement Commercial and financial inthe legal environment decisions will be published on GIRMweb-site) o Baseline: BO o Target: <80percent IntermediateOutcomes(IO) IntermediateOutcome Use of Information Indicator SectorDevelopment Outcome1. A: - Percentage o fNPL To measure the improvement of tmproving the commercial o Baseline: 50 Banks portfolio banks' portfolios. o Target: 15 Outcomel.B - Percent ofcommercial and To measure improvement inthe tmproving the legal andjudicial financial decisions judicial framework and improve fkamework for business and published on GIRMweb- transparency financial activities. site o Baseline:>0 o Target:<80percent Outcome1.c - Cost requiredfor business To measure some improvement Streamlining the Regulatory start up (Percentage o f o fthe regulatory environment Environment and reduce the GNIper capita) (AAP administrative barriers for indicator] :ommercial activities. o Baseline: 56(DB 2008) o Target: 35 - Time requiredfor business start-up (days) [AAP 52 indicator] o Baseline: 65 (DB 2008) o Target: 30 - Percentage o f tax on gross revenue o Baseline: 107 (DB2008) o Target: 60 - Number o ftax payments per year o Baseline: 38 (DB2008) o Target: 20 Component2: BuildingPublic-l OivatePartnershipsandProdu tivityEnhancement Outcome2.A: Improved corporate governance Performance contracts are Provide information to inpublic enterprises. signed for at least five (5) government and firm's key public enterprises management to manage PES (SOMELEC, SOMAGAZ, andrespect performance SNDE, MAURIPOST and contracts. Port o fNouakchott. Outcome2.B Enhancing the long-term Investment Plan i s Provide information to electricity sector expansion completed government ministries to carry planning functions. out reforms accordingly. I Component3: Supportfor ProjectImplementation Outcome3.A: Project implementation on track Audits are "non qualified" inaccordance with annual Compliance with business plan. Procurement Plan SC meets at least twice a year and minutes o f meetings are issued. 53 Arrangementsfor resultsmonitoring Target Value Data collectionand monitoring Baseline Reports Data collection Person YR3 YR5 uenc instrument responsible 1.Percentage o fnon-performing loans 50 30 15 Annual BCMAnnual B C M focal Report point 2. Time requiredfor business start-up (days) 65 50 30 Annual Doing Business DGPIP 3. Time requiredto complete a case (days) >90 GO Quarterly Scorecard from M ~focal point MoJ J 4. Performance contracts are in 0 3 5 Quarterly MEF MEFfocalpoint Intermediate OutcomesIndicators Component 1:Improving the BusinessClimate to FosterPrivateSector Development Percentage o f NPL 50 30 15 Annual B C M Annual B C M focal Report point Improving the legal andjudicialframework for business andfinancial activities Time necessary to obtain the Scorecard from judicial decision >90 GO Quarterly MoJ MoJ focal point Percentage o fjudicial decisions Scorecard from published 0 80 Quarterly MoJ MoJ focal point Cost required for business start up (percentage ofGross National 56 45 35 Annual DoingBusiness DGPIP Investment (GNI) per capita) Time required for business start- UP (days) 65 40 30 Annual DoingBusiness DGPIP Percentage o f tax on gross income 107 80 60 Annual Doing Business DGPIP Number of tax payments per year 38 30 20 Annual Doing Business DGPIP Component2: BuildingPublic-PrivatePartnershipsand ProductivityEnhancement No. o f public enterprises using updatedperformance contracts informationto develop their 0 2 5 Annual DGPIP BusinessPlans Enhancingthe electricity sector environment to attract the privatesector participation 54 committee per year 55 MAURITANIA:BUSINESSENVIRONMENTENHANCEMENT ANNEX 4: DETAILEDPROJECTDESCRIPTION 1. The challenge confronting Mauritania i s to diversify its non-primary sources o f growth. For this growth to be achieved on a sustainable basis, it i s essential that the private sector invests and creates morejobs, both inthe primary and extractive sector but also more importantly, within the rest o f the economy. As noted above, GIRM has publicly committed to the "growth agenda" and will implement necessary reforms to improve the business environment and provide a transparent framework that supports private sector investment (domestic andforeign) inthe economy. 2. The proposed BEEP contributes to the previous objectives and i s consistent with that defined in the Mauritania CAS (2007), in particular, under the pillars aimed at improving the investment climate, buildingpublic sector capacity and accountability, and increasing private sector investment levels and efficiency. These objectives are, in turn, consistent with those defined in GIRM's PRSP-2 (2006) and the Letter o f Private and Financial Sector Development Policy (2007). These elements provide the underlying structure o f the Project which has two technical components and one administrative component described below. 3. The IDA-financed Project cost is estimated to be US$5.0 million equivalent, broken down into three components as follows: (a) Improving the Business Climate to Foster Private Sector Development (US$3 .O million equivalent); (b) Public Sector Reform and Productivity Enhancement (US$1.5 million equivalent); and (c) Supporting Project Management (US$500,000 equivalent). Component 1. Improving the Business Climate to Foster Private Sector Development(US$3.0 millionequivalent) 8. The first component of the proposed operation will support fostering private sector development, which comprises three subcomponents that address issues that affect the speed at which private sector can develop, namely: (i)strengthening the financial sector; (ii)improving the legal and judicia1 framework for commercial and financial activities; and (iii) streamlining the regulatory environment to reduce the cost o f doing business. Subcomponent 1.A. Strengthening the Financial Sector (US$l.Omillion equivalent) 9. The commercial banking sector, the cornerstone o f the financial sector, would be the first object o f attention. The structure andthe hnctioning o f the commercial banking system denote severe shortcomings of which the authorities are aware. The necessary in- depth transformation o f the commercial banking system would be introduced gradually according to a carefblly thought-out calendar. Inthe very near term, the newbankinglaw adopted in early 2007 i s a first step towards improving the legal framework, opening up o f the system and improving access to financial services. It still has a problem in the sense that it imposes on foreign commercial banks a minimum capital six times higher 56 than for domestic commercial banks. This would limit the entry o f foreign commercial banks and put at risk the continued presence o f the two commercial banks that recently entered the Mauritanian market. The authorities expect to mitigate this problem through the forthcoming implementingo fdecrees on which they areworking with assistancefrom the Bank o f France. In parallel, but spanning a longer period of time, banking supervision at the B C M would be further strengthened. A concerted effort to attract new entries to the banking sector, gradually and in reasonable number, carefblly selecting international commercial banks of high reputation will help pull up the system without unbalancing it. Two new foreign commercial banks began operations in2006 however it will take time to produce the desired increase incompetition. It is hopedthat the entry of new commercial banks with good models o f management and governance, the new bankinglaw and an increase inminimumcapital, will contribute to the merger o f existing domestic commercial banks, resulting ina stronger sector, with larger commercial banks, less linked to groups and ina better position to offer a variety o f services. 10. Strengthening o f the commercial banking system must be accompanied by a reinforcement o f BCM's management o f banking sector liquidity, the supervision o f the institutions and the development o f crisis management plans. In this context, the new central bank statutes have been adopted by the authorities. Supervision o f postal financial services could be brought under the purview o f the B C M and consideration could be given on how to treat supervision o f insurance companies (it would have to be moved away from the Ministry o f Trade. In addition, incentives could be designed to develop a true inter-bank market and a foreign exchange market with the allocation o f foreign exchange abiding by marketrules. 11. Finally, microfinance also requires urgent attention. A new microfinance law has been adopted. Implementingdecrees needto be issued. This would be followed by the establishment o f an adequate accounting plan, the strengthening o f supervision and the development o f the institutions andnetworks. IDAwill limit its support to the regulatory environment as there are several other development partners (AfDB, Oxfarm, UNDP) who are actively supporting the microfinance sector, primarily in respect to institutional strengtheningand capacity-building. 12. The first subcomponent, underpinned by recommendations from the FSAP will support GIRM efforts to develop a solid and efficient financial sector and to increase access to financial services. This will entail the provision o f equipment and technical expertise in order to build capacity in the following areas: (a) strengthening o f the regulation and supervision o f financial institutions and financial markets through support to: (i)the revision o f the banking law and implementing decrees, (ii) the revision o f the microfinance law and implementing decrees, (iii)the strengthening o f human resource capacity at the BCM, and (iv) the centralization o f supervision o f all financial institutions within BCM; (b) improving the payment system; and (c) strengthening the financial institutions and developing measures to improve competition within these financial institutions (i.e. commercial banks, microfinance institutions). 57 Subcomponent 1.A.l. Strengthening the institutional capacity of BCM 13. Specific activities include: (a) Support to the Department of Banking Supervision toward full implementation o f Base1 Iprinciples, including preparation o f a new inspection manual andon-the-job training. (b) Addressing issues related to new financial institutions, risks and instruments,including: 0 Preparation o f a supervisory framework and training for supervision o f non-bank financial institutions; 0 Training for supervision o fnew risks (anti-money laundering); 0 Training for supervision o f new instruments (electronic banking, leasing, and factoring); and 0 Training and technical assistance to staff in supervision techniques and procedures. (c) Strengthen research and reporting. Support will be provided to B C M to upgrade its capacity to monitor and analyze financial and monetary statistics, including economic forecasting and corporate financial information, The project will finance training, equipment and software. Subcomponent l.A.2. Strengthening the Commercial Banking and Microfinance Sectors 14. Specific activities include the preparation o f draft laws and diffusion o f targetedlaws andimplementingregulations, including: Preparation o f draft implementation regulations for the banking law and its diffusion; Preparation o f implementing decrees for the microfinance law; 0 Preparation o f commercial bank Chart o f Accounts compatible with International Accounting Standards (IAS), including documents andreporting. Diffusionand workshop o fthe new Chart o fAccounts; and 0 Feasibility study on refinancingmechanism for microfinance institutions. Subcomponent 1.B. Improving the Legal and Judicial Framework for Business and Financial Activities (US$l.0 million equivalent) 15. Progress in financial and private sectors requires strengthening o f the legal and judicial system. The legal and regulatory framework governing credit activities has serious shortcomings and developing an adequate and efficient framework for collateral debt collection andenforcement o fcontracts will be essential. 58 16. Based on recommendations from GIRM's Report on Justice and Judicial Reform and the FSAP, the second subcomponent will support the improvement of Mauritania's legal andjudicial environment for commercial and credit-related activities. An important issue i s to ensure the ability to secure land titles without, obtaining first a precarious title andwithout havingto develop the land. 17. Project activities to improve the legal framework for business and financial activities include: (a) The development o f a legal framework for the creation, perfection and enforcement o f security over immoveable and moveable assets; and (b) The simplification o f debt collection and contract enforcement mechanisms and the possible development o f alternative dispute resolution mechanisms; and 18. It is also crucial that all relevant laws are readily accessible and clearly understood by domestic and foreign investors, Government officials, the legal and judicial communities and by the public-at-large and are applied appropriately and consistently by Government officials and by the courts. The enforcement o f laws and contracts in commercial and credit-related matters suffer from low judicial capacity in these areas. Manyjudges involved in commercial and financial cases lack the necessary training and specialized experience, and the professional ethics o f members o f the judiciary i s a source o f concern. Thus the Project will concentrate on strengthening the capacity o fthejudges to play their roles inthese respects. 19. Activities to strengthen judicial capacities to improve the resolution of commercial andfinancial cases will be undertaken with: (a) Training and specialization o f judges in commercial and financial law as well as incommercial disputeresolutionmechanisms; (b) The strengthening o f ethics inthe judiciary; (c) The development o fjudicial statistics and indicatorsto monitor progress; and (d) The improvement o fthe dissemination o f legal information. Subcomponentl.C. Improvingthe BusinessEnvironment.(US$l.O millionequivalent) 20. The third subcomponent o f the Project is mostly based on recommendations by the ICA and will provide support to improve Mauritania's business environment and support specific sectors/actions. This will entail technical assistance, capacity building and implementation o f regulatory reforms in the following areas: (a) strengthening public institutions in charge o f promoting private sector investment; and (b) support to reforms aimed at improving the business environment andfostering growth. 59 Subcomponent 1.C.l. Strengthening public institutions in charge of promoting private-sector investment 21. As shown by most international rankings, Mauritania needs to urgently improve its reputation as a business place. As noticed by the recent ICA, but also by an earlier World Bank's evaluation report12 and the PRSP 11, there i s a need to (i) strengthen the capacity o f GIRM in the area o f private investment promotion and (ii) improve the to public-private sector dialogue. This i s an essential component as evidence suggests that there i s still a lack o f confidence from the Mauritanian private sector vis-a-vis GIRM and its ability to improve the business environment. This i s firther compounded by the relatively weak development o fbusiness organizations. 22. While DGPIP was created to help develop and private sector promotion, it i s necessary to fkther develop other institutions dealing with the promotion o f private investment. On the private sector side, the Chamber o f Commerce i s now being supported by various other donors and is being reinvigorated. The Project would therefore focus on supporting DGPIP on the public sector side. However, significant institutional instability still prevails inside GIRM and there i s therefore no certainty that DGPIP may still exist inthe medium-term as a stand-alone institution. To mitigate this risk, activities would focus on structural and capacity buildingactions aimed at providing a direct support to DGPIP. These activities are meant to be transferable and be relevant should the current institutional setting change. 23. Actions to be undertaken would include: (a) The finding o f a technical advisor. The aim would be to advise on the appropriate institutional structure for investment promotion, the strategy o f DGPIP and its relations with other parts o f the administration, help develop strategic and sector plans, provide on-the-job training and advice. The advisor would be resident in Mauritania for the first year o f the assignment and would after come back periodically to provide more targeted support over the project life; (b) The development o f a strategic plan for the promotion of private investmentand sustainable private sector development; (c) The definition and the implementation o f a communication strategy (both internal and external). This would be done through a technical assistant in this area who would be with DGPIP for the first six months of the assignment and would after come back periodically to provide more targeted support over the Project life; '* World Bank (2004). Rapport d'Evaluation Rttrospective, Rdpublique Islamique de Mauritanie: Crtdit pour le Dtveloppement du Secteur Privt, Crtdit de Dtveloppement du Secteur Privt et de Renforcement des Capacitds, Crtdit concernant la Gestion des Ressources Publiques, Credit a 1'Appui de la Rtforme de la Fiscalitt Directe, Washington DC. 60 (d) The development and maintenance o f a specific website which would centralize available information on DGPIP activities, existing regulations, available information on the country, etc. Funding would also cover (for the duration o fthe Project) updates andmaintenance o f the website; and (e) The Project would also provide significant support to DGPIP and GIRM through the funding o f local workshops/forum, the participation in Trade Fairs, specific technical workshops (e.g. Doing Business), promotion materials, etc. This is a key outreach component o f any institution o fpromotion andthis support would occur once DGPIP strategy has been defined and approved by GIRM. Subcomponent l.C.2. Support to reforms aimed at improving the business environment andfostering growth 24. Mauritania's regulatory environment remains o f poor quality. For example, according to the Doing Business indicator, Mauritania ranked 157 out o f 178 countries for the ease of doing business based on early 2007 regulations. As underlined by the PRSP I1and the recent Letter o f Private and Financial Sector Development Policy, there are still issues with the Investment Code and the Code o f Commerce, both being inneed o f improvement. In addition, there i s a need to fund specific feasibility studies (e.g. regarding a future Economic Zone for Nouadhibou), to improve the governance o f selected public enterprises and to provide support to specific categories o f firms. This subcomponent o f the Project therefore focuses on: (a) Regulatory reforms to improve competitiveness. Regulations are usually fairly complex in Mauritania. According to various sources (Doing Business, ICA, and meetings with the private sector) four areas deserve immediate attention, namely taxation. labor, and regulations dealing with a firm's creation and its closure. Improving this set o f regulations to the average level o f OECD countries (Organization for Economic Cooperation and Development) would enhance the competitiveness o f formal firms, foster competition and also contribute to reduce inf~rmality'~ withinthe ec~nomy'~. will thus be necessary It in each area to assess and apply ways to obtain structural improvements which will be reflected in future Doing Business indicators and the next ICA survey (in 2010), as well as to evaluate the impact o f changes ineach regulatory area. (b) Regulatory reforms to improve investment incentives. The 2002 Investment Code needs to be improved as it did not induce any significant increase inprivate investment, especially in exporting ind~stries'~.The Commercial Code needs to ~~ The informal sector is widespread is Mauritania and contributes to roughly 30 percent of the GDP; about 70 percent o f the urban labor force is involved inthe sector. l4ICA data show that the main perceived constraints to formality are by decreasing order of importance: the administrative burden linked to tax payments, formal labor regulations, taxation, minimum capital requirements,the time andcost neededto register a company. See ICA (2007), secondchart page 49. ''Letter o fPrivate and Financial Sector Policy, 2007. 61 be strengthened in the area o f competition policy. In effect, Mauritania's new legal texts, and particularly the Commercial Code, are up-to-date and take into account recent developments in the field o f business law. However, as indicated above, there i s a problem with implementation. This will require adding to the existing legal framework by adopting implementing provisions (de'crets d'application) that set out detailed regulations, among other things, to control and eliminate anti-competitive practices; in addition, the law on price fixing will have to be revisedto eliminate ambiguity regardingintervention standards. (c) Support to sectors with growthpotential: Feasibility studies for an Economic Development Zone (Zone de De'veloppement Economique, EDZ) and an Excellence Zone (Pole d 'Excellence,EZ) inNouadhibou. . EDZ. There is a lack o fareas able to support formal businessesinMauritania, due to infrastructure deficiencies, land allocation issues and other regulatory constraints. Improvements on a country-wide basis require time and huge investments. Taking this into account, it i s therefore proposed to follow a more targeted approach aimed at creating an EDZ which i s less expensive to develop than an Export Processing Zone, i s usually faster to start and easier to manage. The feasibility study would assess the advantages within the . Mauritanian context o f creating one or several EDZ, define the appropriate location and the costs, and evaluate the probable economic impact. -NouadhibouisthesinglefishingseaportofMauritaniaandmostofthe EZ. country's fishing industry i s concentrated around it. Fishing currently generates around five (5) percent o f GDP. Direct jobs are believed to number 7,000 in the industrial fishing sector and 21,000 in artisan fishing16. The sector however, i s having serious issues with deficient infrastructure (including poor unloading facilities, questionable treatment o f fish, unsanitary conditions requiring improvement and poor waste management) which need to be addressed quickly. The feasibility study will assess the advantages within the Mauritanian context o f creating an EZ in Nouadhibou, define the costs (including environmental costs and the way to mitigate them), and evaluate the probable economic impact. (d) Fund for sector studies: The strategic plan for the promotion o f private investment will define priority areas o f intervention. Once the plan i s agreed, there will be a need to carry out microeconomic feasibility studies, market research, etc., which i s the purpose o f this fund. Studies undertaken through this find will provide firms and financing institutions with adequate information on key sectors andwill facilitate sound investment decisions. l6World Bank (2006). MAURITANIA: ManagingNatural Resources: Challenges and Options, Country EconomicMemorandumUpdate, WashingtonDC. 62 Component2. BuildingPublic-PrivatePartnershipsandProductivityEnhancement (US$1.5 millionequivalent) 33. To help ensure Mauritania's favorable economic performance, an ambitious public sector reform program i s envisaged by GIRM. GRM realizes the urgency in restructuring SOMELEC and the importance o f overall sector reform that focuses on improving the efficiency and cost effectiveness o f a select group o f strategic enterprises which have the potential to play a pivotal role inprivate sector growth and development and which could ultimately lead to opportunities for private sector participation. 34. The reduction o f the available capacity and the lack o f a comprehensive generation expansion plan have ledto recent electricity supply shortfalls (about 15MW at peak in Nouakchott) with significant negative impact on mining, manufacturing and commercial business performance. The lack o f ready access to reliable and affordable power was the second major constraint for the manufacturing industry as reported in the I C A o f 2007 and was among the six most pressing issues for all other businesses in Mauritania. This component will therefore support several reform measures in the Mauritanian power sector that are envisaged by GRIM to attract increased private sector investments and participation inthe local power market as well as taking initial measures to strengthen public enterprises which include, but may not be limited to SOMELEC, SOMAGAZ, MAURIPOST, SDNE and the Port o f Nouakchott. The first will be the preparation o f a financial audit o f SOMELEC investment plan Two subcomponents are envisaged under this component: Subcomponent 2.A. Improving corporate governance for public enterprises (US$l.l million equivalent) 36. The Project will finance technical/hctional assistance and improve corporate governance inPESthrough: (i) the carrying out o f operational and financial audits; (ii) the preparation o f restructuring plans; and (iii) design o f performance contracts and o f a the system for the monitoring of such contracts for key public enterprises including, but not limited to SOMAGAZ, SOMELEC, SNDE, MAURIPOST, and the Port o f Nouakchott. The team will coordinate with other World Bank Group units including the IFC, MIGA and PPIAF. Subcomponent2.B. Enhancing the long-term sector expansion planning functions fUS$400,000 equivalent) 37. The State-owned power utility, SOMELEC, i s currently facing a significant financial and technical crisis. Substantial underinvestment over the last few years has resulted in serious deterioration in the efficiency and availability o f electric power generation facilities and o f the related transmission anddistribution networks. 38. The Bank's Africa Energy Department, with support from PPIAF, i s currently assisting GRM in the review o f SOMELEC's proposed restructuring plan. The review by external consultants has put a special focus on how the private sector could participate in SOMELEC's restructuring and also on how SOMELEC and the sector have to be 63 reformed in the short-term to attract substantial private sector participation and private foreign investment inthe electricity generation and distribution markets. 39. While the review o f SOMELEC's restructuring plan is still on-going, preliminary results of the assessment have already shown the importance o f having a comprehensive sector expansion planthat will show the needed capacity additions over the next 15 years inlinewith the expected growth oflocaldemand. Infact, one ofthe keyreasonswhy the private sector currently faces power shortages and unreliable service i s the absence of such a comprehensive planningtool. 40. To avoid future mismatches between the demand o f industrial, commercial and individual consumers and available supply, the immediate commissioning o f such a planning study is vital to secure future reliable services. This planwill also allow private sector investors to better assess future investment opportunities in the sector and to preparefor those accordingly. 41. This component will support MHETIC's efforts by financing technical assistance to help GIRM prepare a sector investmentplan that will be based on future demand and supply scenarios employing various assumed economic development scenarios for Mauritania. Component3. Supportfor ProjectImplementation(US$SOO,OOO equivalent) 42. The Project will, in substance, be implemented by the executing agencies. Overall Project coordination will be the responsibility of DGPIP. It will oversee the financial management, procurement, reporting, M&E, audit, public information and related functions, as well as manage several cross-cutting sector issues. While some o f the executing agencies have the capacity to manage activities supported by the Project, strong complementary implementation capacity may be needed to ensure that the Project objectives are met. 43. The Project Coordination Team will include, at a minimum, a Project Coordinator, an Administrative Officer/Accountant, an Internal Auditor, a Procurement Specialist, and support staff (executive secretary, driver and office assistant). Whenever necessary, technical assistance (on an "as needed" basis) will be sought to strengthen the team. This will enable a transfer o f skills from one project to another, including procurement and disbursement expertise. The implementation arrangementswill ensure that there i s an entity formally responsible for project technical coordination and monitoring and has the incentives to solve problems ina timely manner. 64 MAURITANIA: BUSINESSENVIRONMENTENHANCEMENT ANNEX 5: PROJECTCOSTS I I I I I I Local Foreign I Total I ; us us I ! us Project Cost By Component andor Activity I $million $million I$million Component1. Improvingthe BusinessClimateto FosterPSD 500,000 2,500,000 3,000,000 l.A FinancialSector 300,000 700,000 1,000,000 1.A.1 StrengtheningBCMCapacity 100,000 300,000 400,000 1.A.2 StrengtheningCapacity inBankingandMicrofinance 200,000 400,000 600,000 l.B Improvingthe LegalandJudicialFramework 250,000 750,O00 1,000,000 1.C Improvingthe BusinessEnvironment 225,000 775,000 1,000,000 l.C.l Strengtheningpublic institutionsincharge 75,000 325,000 400,000 ofpromotingprivateinvestment 1C.2 Support to reforms aimedat improving the 150,000 450,000 600,000 businessenvironment and fosteringgrowth Component 2. BuildingPublic-PrivatePartnershipsandProductivity Enhancement 100,000 1,400,000 1,500,000 2.A Improvingcorporategovernance for public enterprises 1,100,000 1,100,000 2.B Enhancingthe longtermsector expansionplanningfunctions 400,000 400,000 Component3. ProjectManagement 400,O00 100,000 500,000 TOTAL j1,000,000 I 4,000,000 5,000,000 Foreign expenditures means expenditures incurred inany country other than that o f the GIRM for goods or services supplied from the territory o f any country other than that o f the recipient Local expenditures means expenditures inthe currency o fthe GIRMor for goods or services supplied from the territory o f the GIRM. 65 MAURITANIA: BUSINESSENVIRONMENT ENHANCEMENT ANNEX 6: IMPLEMENTATIONARRANGEMENTS 1. The Project will be implementedover five (5) years. As noted above, support for Project implementation will be financed by the Credit with additional contributions from GIRM. DGPIP will be responsible for coordinating andmanagingthe Project on a daily basis, providing procurement and accounting services and ensuring that all fiduciary requirements are met. 2. DGPIP will include a procurement specialist, a financial management team and an executive assistant. Together, they will be responsible for providing guidance to executing agencies regarding procurement, as well as monitoring and evaluation. The capacity o f DGPIP will be reinforced with specialized training and additional staff (as needed) to ensure that it has the capacity to be able to implement such a complex program. By building capacity, the team will be able to provide qualified fiduciary services (procurement, financial management, monitoring and evaluation and reporting) andwill beprepared to support GIRMinits efforts later on. 3. Details o f the implementation arrangements have been agreed and are described inthe PIM. DGPIP will be responsible for: (a) reviewing project proposals prepared by the executing agencies; (b) undertaking quality control for TORSonce a project proposal has been agreed; (c) overseeing project implementation activities; (d) administering project fimding and procurement processing (including the employment o f consultants) andmanaging the project and special accounts; (e) following-up on the agreed financial and legal covenants; (f) proposing any necessary adjustments and amendments to implementation methods; (g) providing periodic project progress reports; and (h) acting as the focal point o f contacts between GIRM, the BCM, other executing agencies and IDA duringthe project implementation period. 4. Implementation arrangements have been designed to delegate the maximum feasible operational responsibility to the executing agencies or government departments. Executing agencies will be largely responsible for implementation o f their respective components, under the overall guidance o f DGPIP and the SC. Each executing agency will be responsible for the preparation o f the TORSfor consultants, including required qualifications, and provide technical specifications for procurement o f goods. Given the considerable extent o f its experience in procurement, it was agreed that B C M will carry out all procurement regarding the financial sector component. It will, however, work closely with the procurement specialist o f DGPIP to ensure that World Bank guidelines are followed. All executing agencies will report to DGPIP on a quarterly basis, including any modifications to the procurement andor training plans. The procurement specialist will work with executing agencies to ensure that all o f the World Bank Guidelines for procurement o f goods and consultant services are followed, as well as communicating the evaluations o f procurement proposals to the World Bank. Annex 8, Procurement providesthe details. 66 5. The DGPIP will liaise closely with the various executing agencies including MEF, B C M and MoJ to ensure that: (a) Project activities are handled effectively, in a timely fashion and in accordance with World Bank requirements; and (b) adequate information i s provided for reporting purposes. It will monitor Project implementation on a quarterly basis, and review achievements, work programs and budgets. DGPIPwill be responsible for all aspects o f financial management, including budgeting and auditing, procurement, quality assurance, monitoring and evaluation and reporting, etc. DGPIP will also be strengthened through appropriate training. As needed, short-term national or international specialists will be contracted. 6. Project Financial Management. A project-specific financial management system will be established within DGPIP. TORSfor this assignment will be agreed with DGPIP and will be included in the PIP. DGPIP will maintain the accounting system accounts and records in accordance with International Financial Reporting Standards. Project accounts will be based on a Chart o f Accounts with the assistance o f a World Bank Financial Management Specialist. The Chart o f Accounts will accommodate the Project inorder to capture sources and uses of funds, and all assets and liabilities in sufficient detail to satisfy Project Monitoring Report (PMR)-based reporting requirements. Cash basis accounting will be applied. In addition to producing periodic and cumulative budgeted and actual expenditures, the proposed system will link the financial data to procurement activities o f the Project. The proposed financial management guidelines are described indetail inAnnex 7. 7. As noted inparagraph 67 of the maintext (retroactive financing), inthe course of the program, two activities that were not included in the PPF were agreed to be pre- financed. GIRM made a commitment with the IMF to put into place performance contracts for a select number o f key public enterprises that have a direct impact on private sector growth. There are several measures which must be taken prior to the design o f a performance contract that i s line with international best practice. The first step in the process i s a financial and operational audit. Following the audit, GIRM can prepare a restructuring plan and subsequently design the performance contract with clear objectives. GIRM had agreed with the IMF to put these inplace quickly and requested IDA to finance these activities under the Project. Retroactive financing would cover the advance payment, up to US$400,000 for the five contracts. The second activity which GIRMwanted, andIDAhad agreed, was to attend inthe regional economic forum heldin Abou Dhabi in February 2008. A Mauritanian delegation comprised o f public and private sector representatives participated. GIRM wanted to take the opportunity to discuss, with major investors, opportunities inthe region and inparticular, inMauritania. The total o fthis activity will beUS$150,000. 8. Project Monitoring and Evaluation: Monitoring and evaluation of Project activities are key functions that will be carried out by DGPIP. As mentioned above, the comprehensive results framework in Annex 3 will provide the basis for joint supervision missions and evaluation o f program results. A quarterly monitoring tale and progress reports will be preparedby DGPIP, discussed with the Steering Committee. A draft PIP, a Financial Management Plan (FMP) and overall Procurement Plan will be prepared and incorporated in a PIM. The PIM includes among others, all period reporting, and 67 monitoring and evaluation throughout the project cycle. Apart from periodic reports and standard monitoring arrangements, an impact assessment will be carried out approximately 2.0 years into the Project. In addition, a MTR i s planned for 30 months into the Project, which could include an update o f the FSAP if GIRM agrees. Another assessmentwill be carried out one year prior to the Project's closing. The objective o f the review would be to assess progress and, if necessary, make appropriate changes to Project activities based on additional lessons learned andthe realities on the ground. 68 ImplementationStructure DGPIP (Technical and operational guidance; quarterly reports approval; address implementation problems, fiduciary (procurement, financial management, monitoring and evaluation \ Component1: Component2: 1.AFinancial Sector Reform: (BCM) 2.A Improving Corporate Governance (MEF) 1.B Judicial Reform: (MoJ) 2.B EnhancingLong-term Sector 1.C PSD Reform: (DGPIP) ExpansionPlanning Functions (electricity sector, MHETIC) 69 MAURITANIA: BUSINESSENVIRONMENTENHANCEMENT ANNEX 7: FINANCIALMANAGEMENT AND DISBURSEMENTARRANGEMENTS I. SUMMARYOFFINANCIALMANAGEMENTASSESSMENT A. Implementingentity 1. The Financial Unit o f DGPIP will be responsible for overall financial management o f the Project, including, Project accounting, record keeping, disbursements and arranging for an annual audit. The implementing entities, namely BCM, MoJ and MEF will have technical responsibility for the implementing their respective activities but will not have any financial management responsibility. Focal points have been appointed by the BCM, the MoJ, the MEF and the private sector to liaise with DGPIP. B. StaffingandTransactionRecording 2. The Financial Unit i s staffed with a financial specialist who i s implementing the PPF o f this project. The draft Administrative, Accounting and Financial Management Manual i s available and i s in the process o f being finalized. DGPIP has installed accounting software which will be used for the project operations. The Project Chart o f Accounts has been established. Nevertheless, an internal audit function will be required to ensure strong supervision and quality assurance at various parts o fthe Project. C. Conclusionof the financialmanagementassessment 3. The result o f the assessment showed that the overall risk rating o f the implementing unit was moderate which satisfies the Bank's minimum requirements under OP/BP10.02. The arrangements put in place to manage the financial resources o f BEEP are satisfactory and meet the minimumfinancial management requirements o fthe World Bank. 11. RISKANALYSIS A. Country risk analysis 4. The CFAA revealed that the systems for planning, budgeting, monitoring, and controlling public resources in Mauritania are improving but do not provide sufficient reasonable assurance that funds are being used for their intended purpose. The risk o f waste, diversion, and misuse o f funds was assessed as partially high. The recommendations from the CFAA have not yet been fully implementedtherefore the country riskis assessedas partially high. 5. Various measures to mitigate these risks have been taken andthus the Project risk, from a financial management perspective, i s substantial before considering risk mitigating measures. Financial management arrangements have been incorporated into the Project design to ensure that funds are used for the purpose intended, timely information i s produced for Project 70 management and GIRM oversight, and to facilitate the compliance with World Bank fiduciary requirements. B. RiskAssessment andMitigationMeasures 6. The main inherent and control risksandmitigatingmeasures are tabulated below. RiskMitigationMeasure ManagementRisks: CountryLevel Fundsmaynot be usedinan S The team of appropriately M efficient and economical qualified and experienced staff way and exclusively for may reduce this risk. purposes intended due to poor governance. Entity & Program Level Since the Project will be M An accountant will be M implementedby DGPIP in dedicated to IDA-supported charge o fnational Project investment promotion the riskcouldbe the possible confusion inmanaging different funds. 71 Risk RiskMitigationMeasure Financial Management Control Risk: Budgeting Lack o f quality and timely S The SC will be composed o f M o f budget reports highlevel stafffrom the executing agencies entities and will have the authority to make strategic decisions and ensure that the budget will be submitted and controlled Accounting Delays inaccounting and M The Project accountant team's M producing financial capacity will be strengthened statements on a continuous basis through appropriate training Internal controls Lack o f clear separation o f H The project will be rely on the M functions inherent to the DGPP's Inspector General limited staff who will carry out the internal audit function with TORS There i s no internal audit acceptable for IDA function 72 RiskMitigationMeasure Flow of funds Delays inthe bank foreign S The riskwill bemitigated M transfers through close monitoring by the Project Financial Specialist with the focal point inthe Central Bank. Financial Reporting Delays inthe submission of S The appropriate format for the M agreed IFRsand annual IFRswill be designatedprior Project financial statements the negotiationofthe Project, The financial specialist will be trained to prepare IFRs External Audits SupremeAudit Institution Externalauditors, satisfactory M has limitedcapacity to IDA, will be recruitedby DGPIP OVERALL RISK M ASSESSMENT H=High S = Substantial M=Moderate L=Low 7. The Project residual risk, from a financial management perspective, is moderate provided that the risk mitigating measures are implemented as shown inthe risk assessmenttable above. C. Strength and Weaknesses 8. DGPIP has a professionally qualified financial specialist who supervises the financial and accounting function. Nevertheless, the Financial Unit has weak reporting capacity with regardto World Bankprocedures. D. Information Systems 9. A Project-specific financial management system will be established within DGPIP. The Project's Chart of Accounts will accommodate the Project inorder to capture sources and uses of funds, as well as assets and liabilities in sufficient detail. The system should integrate the budgeting, operating, and accounting applications to facilitate monitoring andreporting. 73 E. AccountingPoliciesandProcedures 10. Project accounts will be properly maintained and will be augmented with appropriate records and procedures to track commitments and to safeguard assets. The Chart o f Accounts will facilitate the preparation o f relevant quarterly and annual financial statements, including (i) Project expenditures, and (ii) expenditures for each component/activity. All accounting and total control procedures will be documented inthe Administrative, Accounting and Financial Manual, a document that will be regularly updated. F. Internalcontrolsandaudits 11. DGPIP's Inspector General will carry out the internal audit function with TORS acceptable for IDA. The internal control will ensure the continuing adequacy o f the conformity with the Project's procedures and other due process. The internal auditor will report directly to the Steering Committee. G. Externalaudits 12. An external audit will be carried out annually by an independent audit firm, satisfactory to IDA. A single opinion on the Project Financial Statements in compliance with International Standards on Auditingwill berequired. 13. Inadditionto the annual audit reports, the external auditors will submit a Management Letter that includes observations and comments, and provides recommendations for improvements in budgeting, accounting records, information systems, controls and compliance with financial covenants. H. Flow of funds 14. The Financial Unit will be responsible to ensure that expenditures are eligible and to process payments andmaintain the Project accounts. Funds will flow from IDA Credit Account to the Designated Account that will be opened at a commercial bank on terms and conditions acceptable to IDA for payment o f eligible expenditures. These funds will finance IDA'Sshare o f expenditures related to the costs o f goods, consultants and training. The expenditures will be incurred by DGPIP and the executing agencies. DGPIP will process the payment for these expenditures upon confirmation by the executing agencies that the work has been successfully completed. Management o f funds will not be decentralized to these agencies. DGPIP will submit Statement o fExpenses (SOEs) andapplicationrequests for subsequent disbursements and replenishment o f the designated account and supporting documentation will be kept and maintainedby DGPIP for audit purposes and review by IDA and other development partners. 74 I. InterimunauditedFinancialReports(IFRs) 15. The format o f IFRs was agreed during appraisal. Quarterly IFRs will be produced and will include sources and uses o f hnds by Project components/activities. It will also include a comparison o fbudgeted and actual project expenditures to date and for the quarter. 16. Project Management will produce the IFRsby no later than 45 days after the end o f each quarter. The Project will produce Annual Financial Statements that will comply with International Accounting Standards and World Bank requirements. These Financial Statements " will be comprisedof: + A Balance Sheet reflecting the assets, liabilities and funding o f the Project, based on the cashbasis. + A Statement of Sources and Uses of Funds / Cash Receipts and Payments, which recognizes all cash, receipts, cash payments and cash balances controlled by the entity for the Project; and separately identifies payments by third parties on behalf o f the entity. The Accounting Policies Adopted and Explanatory Notes. The explanatory notes must be presented in a systematic manner with items on the Balance Sheet and Statement o f Cash Receipts and Payments being cross-referenced to any related information inthe notes. Examples o fthis informationinclude: + A Management Assertion that Project hnds have been expended for the intended purposes as specified inthe relevant financing agreements. J. DisbursementArrangements 17. The Designated Account will be managed according to the disbursement procedures described in the Administrative, Accounting and Financial Manual and Disbursement Letter. It will operate as follows: + IDA will provide an advance equivalent to financing anticipated for at least three months o f activity. This amount will be deposited in the account held in US dollars with a commercial bank satisfactory to IDA. + Project expenditures will be reimbursed by means o f Reimbursement Applications backed up by vouchers such as certified statements o f expenditures or summary statements. + All expenditures paid through the Designated Account will be approved by the Project Coordinator, who will also co-sign the checks with the Financial Specialist. l7Programfinancial statements mustbe all inclusive and cover all sources anduses of funds andnot only those provided through IDA funding. These statements thus are to reflect all Project activities, financing, and expenditures, as well as funds from other development partners and contributions in kind such as labor and accommodation, irrespective o f whether the program implementing agency controls the funds for a particular aspect of the program. 75 18. The maximum amount allocated to the Designated Account. was discussed during negotiations and will be transmitted to GIRM upon effectiveness o f the Financing Agreement. The GIRM may request withdrawals from the Credit Account to be made on the basis o f reports to be submittedto IDA inform and substance satisfactory to IDA. 111. NEXT STEPS A. Action Plan and Conditions 19. The actionplansto be implemented and conditions are described below. ACTION Conditionality 1. Acceptable Terms o f Reference and short list for the recruitment Negotiations - o f exfernal auditor 2. Agreed format o f IFRand Annual Project Financial Statements Negotiations 3. Adopt the Administrative, Accounting and Financial Effectiveness Management Manual describing accounting systems and procedures, internal controls and funds flow processes -Final draft incorporatingIDA comments B. FinancialCovenants 19. The GIRM will maintain a financial management system including records, accounts and preparation o f related financial statements inaccordance with accounting standards acceptable to the Bank. The Financial Statements will be audited in accordance with international auditing standards. The Audited Financial Statements for each period will be furnished to IDA not later thansix (6) months after the endofthe project fiscal year. 20. The GIRM will prepare and h i s h to IDA not later than 45 days after the end o f each calendar quarter, interim un-audited financial reports for the Project, in form and substance satisfactory to IDA. The GIRM will be compliant with all the rules and procedures required for withdrawals from the Designated Account o fthe Project. C. SupervisionPlan 21. Supervision activities will include: (i) o f quarterly IFRs; (ii)review o f annual review audited financial statements and management letter as well as timely follow up o f issues arising; (iii) participationinProjectsupervisionmissions,asappropriate. TheWorldBankFinancial and Management Specialist, responsible for Mauritania, will play a key role inmonitoring the timely implementation o f the financial management arrangements. In the first year after credit effectiveness, two on-site financial management visits will be undertaken. Subsequently, the intensity o f on-site financial management visits will be based on the assessed financial management risk for the project, i.e. ifthe risk rating remains "moderate", there will be only one on-site visit per annum. 76 MAURITANIA: BUSINESSENVIRONMENTENHANCEMENT ANNEX 8: PROCUREMENT A. General considerations 1. Procurement under the Project will be carried out in accordance with the Guidelines for Procurement under World Bank Loans and IDA Credits published inMay 2004, as revised as o f October 1, 2006, and the Guidelineson the Selection and Employment o f Consultants by World Bank published inMay 2004, as revised as o f October 1, 2006 as well as the provisions in the Financing Agreement. The various items under the different expenditure categories are described below. For each contract financed by the credit, the methods o f procurement or selection o f consultants, the need for pre-selection, the estimated costs, the prior review conditions, and the timing have been agreed between the GIRM and IDA in the procurement plan. The procurement plan will be updated at least once a year or as required to take proper account o f Project implementationneeds andimprovements ininstitutional capacities. 2. Procurement ofgoods. The total cost o f goods financed by the credit i s estimated at US$150,000. The goods to be procured under the Project include primarily office hrnishings and training equipment, specialized computer and office equipment for executing agencies other than DGPIP. The World Bank's standard bidding documents will be used for all national and international bidding agreed with IDA (or deemed satisfactory by it). Procurement other than that for financial sector activities will be the responsibility o f DGPIP, based on an evaluation o f needs and definition o ftechnical specifications by the executing agencies. 3. Direct contract. Direct contracting for goods without competition may be allowed upon prior clearance o f IDA under the conditions specified in paragraphs 3.6 and 3.7 o f the Guidelines. 4. Procurement ofnon-consulting services. Non-consulting services under the Project will include: workshops, transport, cleaning services, equipment, ICT maintenance services and training. As appropriate, the procurement o f non-consulting services will be done usingNational StandardBiddingDocuments acceptable to IDA. 5 . Training. When appropriate, training may be procured on the basis o f Single Source Selection subject to review and approval by IDA. Based on approved budgets and annual work plans, DGPIP will prepare and submit to IDA, for its prior review and approval, an annual training plan, as part o f the approval process for the procurement plan. Training will, inter alia, identify: (i) training envisaged; (ii) the thejustification for the training, including how it will lead to effective performance and implementation o f the Project andor sector (iii) the personnel to be trained; (iv) the selection methods o f institutions or individuals conducting such training; (v) the institutions which will conduct the training, if already selected; (vi) the duration o f the proposed training; and (vii) the cost estimate o f the training. A written report by each trainee upon completion o fhis or her training will be mandatory. 6. Works contracts. The Project does not call for any works contracts. 77 7. Selection of consultants. Consulting services for the Project include: training, technical assistance, feasibility studies, diagnostic studies, and audits. For services where the estimated cost i s less than the equivalent o f US$lOO,OOO per contract, the short-list o f consultants may consist entirely o f national consultants, consistent with the provisions o f paragraph 2.7 o f the Guidelines for the employment o f consultants. The Credit will finance a training and workshops component. Any training or workshops will be implemented on the basis o f a program approved in advance by IDA each year. Training and workshop proposals will be submitted to IDA at least two months in advance by DGPIP. They must specify clearly: (i) the results expected from the training or workshop; (ii) the list o f personnel to be trained; (iii) institution responsible the for conducting the training; (iv) the duration o f the training; and (v) an assessment o f the training or workshop, etc. Training programs will, to the extent possible, make use o f existing local institutions: Ecole Nationale d 'Administration (ENA), university and the Distance Training and Exchange Center. 8. Except as detailed below, consulting services will be selected through competition among qualified short-listed firms based on Quality- and Cost-Based Selection (QCBS). Consultants for financial audits and other repetitive services estimated to cost less than US$50,000 equivalent per contract will be selected through the Least Cost Selection (LCS) method. As appropriate, other selection methods such as Selection Based on Consultants' Qualifications (CQS), Selection o f Individual consultants (IC) and Single-Source selection (SSS) may be used for selection o f consultants. 9. In exceptional cases, and under circumstances described under Paragraphs 3.9 through 3.13 o f the Guidelines, GIRMmay, upon prior agreement with IDA, hire consultants through the single-source selection method. Consultants for services meeting the requirements o f Section V o f the Consultant Guidelines will be selected under the provisions for I C method. The procurement o f consultants will be done usingthe World Bank's Standard Request for Proposals (SRFP) and Standard Bid Evaluation and Recommendation for Award forms agreed with (or satisfactory to) IDA. 10. Short lists composed entirely of national consultants: Short lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. 11. Operating costs. Key personnel o f DGPIP and the operating costs o f DGPIP will be covered entirely by G I N , as well as the operations o f the focal points under the various components o f the project. However, from time to time, there may be a need to finance agreed operating costs. 12. Advertising. A General Procurement Notice (GPN) will be prepared and published in United Nations Development Business (UNDB), inDevelopment Gateway (dgMarket) and in at least one national newspaper after the project i s approved by the Bank Board, andor before effectiveness. The GPNwould show all International Competitive Bidding (ICB) for works and goods contracts and all consulting services involving international firms. Specific Procurement Notices for all goods to be procured under ICB and Expressions o f Interest for all consulting 78 services to cost the equivalent o f US$200,000 and above would also be published inthe UNDB, dgMarket as well as inthe national press. B. Assessment of the agency's capacity to implementprocurement 13. All procurement activities, with the exception o f those in the financial sector, will be handled by DGPIP, under the Director o f Private Sector in DGPIP, through the "Commision Departementale des March&" (CDM) o f DGPIP, for contracts below MRO 40 million (equivalent to US$150,000) for consultants; below MRO 50 million (equivalent to US$lSO,OOO) for goods, and below M R O 100 million (equivalent to US$370,000) for works, and through the "Commission Centrale des Marchks" (CCM) for contracts with amounts above those thresholds. All procurement relating to the financial sector component will be the responsibilityo fBCM. 14. An assessmento fthe capacity o fDGPIPto handle Project procurement was conducted in March 2006 by IDA procurement specialist based in Nouakchott and was updated during the Appraisal Mission inFebruary2007. The assessment focused on the planned organization o f the Project, the interaction among staff involved inprocurement, and the structures benefiting from support. 15. Capacity of DGPIP. The procurement specialist o f DGPIP will be provided training in the World Bank procurement guidelines, as necessary, before and during Project execution. According to DGPIP organization chart, procurement i s the responsibility o f the C D M for projects under DGPIP responsibility (below MRO 40 million for consultants, MRO 50 million for goods, and MRO 100 million for works). Other contracts are handled by the CDM, which has significant experience in procurement under IDA guidelines. The CDMDGPIP includes a representative from DGPIP, the Controller's Office o f the Ministryo f Finance, and the Ministry o f Trade, and i s assisted by a cabinet-level procurement unit. This procurement unit has experience with IDA guidelines and possesses the necessary means (offices, computer equipment, classification, and filing structures). Among the members o f the CDM/DGPIP, several have already received training in procurement under IDA guidelines through other projects financed by IDA, and also have experience in implementing several IDA-financed projects. 16. The quality o f procurement by personnel responsible for execution i s considered weak, and the overall institutional, political, and organizational risks are high. For this reason, the Project includes capacity building, with particular stress on: (i) programming o fprocurement; (ii) preparation o f requests for proposals; (iii) drafting o f the short list o f service providers; (iv) advertizing and notification, bid opening and evaluation; (v) award and signature o f contracts; and(vi) contract execution and dispute settlement. 17. Corrective measures have been agreed to remedy the weaknesses noted. A procurement specialist within DGPIP has been recruited and will be trained. Short-term consultants will be recruited as needed for specific technical activities and capacity-building. A contract programming and management system will be installed for DGPIP. The procurement document filing and classification system will be upgraded. Procurement transactions subject to post review will be reviewed twice a year during the project supervision missions. The independent procurement audit will be carried out once a year. 79 18. Capacity of BCM. BCM has expertise in procuring goods and services. It was agreed with DGPIP and IDA that BCMwould be responsible for the procurement o f consultant services to implement the Project's financial sector reform program. The World Bank Procurement Specialist will therefore assess BCM's capacity for procurement according to World Bank procedures and analyze what training may be required. Inthe interim, the procurement specialist at DGPIP will work closely with the BCM's procurement team to ensure that all World Bank/IDA guidelines are respected. The first 3 consultant contracts irrespective o f value who implemented by BCM will be subject to prior review by the Bank.. The person responsible for procurement procedures at BCM will be provided training in World Bank/IDA procurement guidelines, as necessary, before and duringProject execution. Action Plan on Procurement Capacities Weakness Recommendation Activitv Responsibility Timing No manual o f Develop and adopt Produce the DGPIP Manual to be procedures a procedures procurement developed and manual deemed procedures finalized before satisfactory to IDA manual. credit effectiveness (this could be a Approve the section inthe manual. administrative and Train staff inusing financial the manual. management manual) No procurement Develop a Develop a DGPIP Duringproject plan procurement plan procurement plan procurement appraisal for the fust 18 inaccordance with specialist or months for each the format agreed consultant hired by project component withIDA the project Weaknesses inthe Improve the Appoint and train a DGPIP First six months o f procurement procurement person incharge o f project execution document document filing. classification classification Design, system system classification. Purchase filing cabinets 19. The overall project risk for procurement is high. Procurement supervision missions will beundertaken on a semi-annual basis. 80 Procurementresponsibilities 20. The Project has been designed to support the project in four key departments (MEF, DGPIP, MoJ, MEHTIC and BCM). The procurement specialist within DGPIP will be responsible for the entire procurement process for the first four, and will provide support and mentoring for the executing agencies (officials o f the departments involved) in order to strengthen their procurement capacities. Internal approval procedures will be set out in the execution manual. As noted above, B C M will be responsible for procurement dealing with financial sector matters 21. As part o f the mitigation measures described above, and consistent with the capacity assessment, a procurement specialist was recruited through a competitive selection process, before credit effectiveness. The specialist's functions include: (i) assisting each o f the execution agencies in preparing the respective procurement plans; (ii)producing a consolidated procurement plan for the entire project (coordinated with the three departments involved); (iii) reviewing all procurement within DGPIP; (iv) developing the capacity required to train executing agency staff and assisting in the procurement process, particularly during the first years o f the project; (v) maintaining the registry o f interested bidders; (vi) monitoring and updatingthe procurement plan; (vii) compiling and consolidating all procurement information on the project; and (viii) monitoring contract implementation, etc. D. Procurementplan 22. For assessmentpurposes, the borrower has established a procurement plan for the first 18 months o f Project execution, to serve as the basis for the procurement methods. This plan was agreed between GIRM and IDA during Project appraisal. It i s also available in the Project database and at the World Bank's external website. The procurement planwill be updated on an annual basis, or as required to take account o f actual project execution needs and improvements ininstitutional capacities. Supervisionschedule andprocurementthresholds ExpenditureCategory Contract Value Procurement Contract Subjectto Prior Threshold (US%) Method Review 1. Works >=500,000 ICB All contracts <500,000 NCB 2. Goods >=250,000 ICB All contracts I _,.PA300 NCB First2contracts QCBC, CQ,LC All contractsandThe first 3 contracts irrespective of value who implemented by BCM, and I audit contract Individuals CQ All contracts>= 50.000 Single-sourceselection I I All contracts 81 23. Inadditionto prior review ofprocurement transactions that requirethis procedure, which will be done by the World Bank, the assessment o f the executing agency's capacities recommends two supervisory missions per year to conduct post reviews o f procurement transactions not subject to prior review. E. Review by IDA of Procurement Decisions 26. Tthe following contracts will be subject to Prior Review by IDA: (a) the first contract for goods whatever its estimated cost is; (b) each contract for goods estimated to cost the equivalent o f US$250,000 or more procured on the basis o f ICB; (c) each contract for goods procured on the basis o f Direct Contracting; (d) each contract for consultants' services provided by a firm estimated to cost the equivalent o f US$lOO,OOO or more; (e) each contract for consultants' services provided by an individual estimated to cost the equivalent o f US$50,000 or more; (f) the first three contracts for consultants' services whatever their respective estimated cost is, procured for the implementation o f activities under Part 1 (a) o f the Project; and (g) each contract for consultants' services procured on the basis o f Single Source Selection. 27. Eachterms o f reference for consultants' services will be subject to prior review by IDA. 28. Training activities will be carried out on the basis o f annual programs (identifying the general framework o f the training activities for the year, including: (i)the type o f training; (ii) the justification o f the training; (iii) personnel to be trained; (iv) the selection method o f the the institutions or individuals conducting the training; (v) the institution which will conduct the training; (vi) the duration o f the proposed training; and (vii) the cost estimate o f the Training, submitted annually for the prior approval o f IDA. Upon completion o f each training, the GIRM will provide a copy o fthe report on the training receivedto IDA. 29. All other contracts will be subject to post review by IDA. F. Frequency of Procurement Supervision 30. Inaddition to the prior review supervision that will be carried out by IDA, the capacity assessment o f the executing agencies has recommended supervision missions to visit the field every six months in the first year and thereafter once a year to carry out post review o f procurement actions. 26. Annual Procurement Post Reviews and or independent procurement audits may also be carried out and would aim to: (i) that the procurement and contracting procedures and verify processes followed for the projects were in accordance with the Financing Agreement; (ii) verify technical compliance, physical completion and price competitiveness o f each contract in the selected representative sample; (iii)review and comment on contract administration and management issues as dealt with by participating agencies; (iv) review capacity o f participating agencies in handlingprocurement efficiently; and (v) Identify improvements inthe procurement process inthe lighto f any identifieddeficiencies. 82 G. ContractAwardDisclosureRequirements 27. Contract awards through ICB procurement methodwill be consistent with Paragraph 2.60 o f the Guidelines: Procurement under the IBRD Loans and IDA Credits, May 2004 revised October 2006. Within two weeks o f receiving IDA'S''no objection" to the recommendation o f contract award, the GIRM will publish inUNDB online and in dgMarket the results identifying the bid and lot numbers and the following information: (i) o f each bidder who submitted a name bid; (ii) prices as readout at bidopening; (iii) andevaluated prices o feachbidthat was bid name evaluated; (iv) name o f bidders whose bids were rejected and the reasons for their rejection; and (v) name o f the winning bidder, and the price it offered, as well as the duration and summary scope o fthe contract awarded. H. ContractAwards done throughDirectContractingProcurement 28. Contract awards done through Direct Contracting Procurement Method will be consistent will Paragraph 3.7 o f the Guidelines: Procurement under IBRD Loans and IDA Credits, May 2004. After the contract signature, the GIRMwill publishinUNDB online and indgMarket the: (i)name ofthe contractor; (ii)price; (iii)duration; and (iv) scope ofthe contract. This publication may be done quarterly and inthe format o f a summarized table covering the previous period. I. ContractAwardsforConsultancies 29. Contract Awards for Consultancies will be consistent with Paragraph 2.28 o f the Guidelines: Selection and Employment o f Consultants by World Bank GIRMs, May 2004 revised October 2006. After the award o f contract, the GIRM will publish inUNDB online and indgMarket the following information: (i) ofall consultants who submittedproposals; (ii) names technical points assigned to each consultant; (iii) evaluated prices o f each consultant; (iv) final point ranking o f the consultants; and (v) name o f the winning consultant and the price, duration, and summary scope o f the contract. The same information will be sent to all consultants who have submitted proposals. J. ContractAwards for SelectionBasedon the Consultants' Qualifications(CQS) 30. Contract Awards for SelectionBased on the Consultants' Qualifications Selection (CQS) will be consistent with Paragraph 3.8 o f the Guidelines: Selection and Employment o f Consultants by World Bank Borrowers, May 2004. GIRM will publish, inUNDB online and in dgMarket, the: (i) o f the consultant to which the contract was awarded; (ii) price; (iii) name the duration; and (iv) scope o f the contract. This publicationmay be done quarterlyand inthe format o f a summarized table covering the previous period. 83 K. Goods and services other than consulting services 1 a) List ofprocurement packages: 1 1 2 3 4 5 1 6 1 7 Ref.N Item 1 E;i;;d Executing Procurement NrQ D o I t i c 0 (Description) agency method preference (yeslno) 1.B.1 DGPIP NCB quipinentfor CCIAM, CNPM& MoJ I Contracts awarded by international competitive biddingwhere the estimated cost exceedsUS$250,000 for goods per contract and all direct contractingwill be subject to a prior reviewby IDA. 2. Consulting services a) List o f consulting tasks for which there is a short list of international firms. 1 2 3 4 5 6 7 Ref. Description Estimated Executing Method Bank Planneddate of contract value agency of selection review for (prior/post) submissionof proposals 1.A.2 Accounting Plan for 30,000 BCM QCBS Prior 6/12/2008 1.A.2 preparationof 9,500 BCM I CI Prior 12/23/2008 implementing decrees I II I I II I onmicrofinance 1.A.1 Distributionoftext 10,000 BCM CI Post 711212008 1.A.1 on- and off-site 70,000 BCM QCBS Prior 3/29/2009 1.A.1 elaborationof 90,500I BCM I QCBS Prior I3/30/2009 supervisoryframework for leasing, factoring, I I etc. 1.A.2 Feasibility study on 90,000 BCM QCBS Prior 6/12/2008 refinancing mechanism 1.A.1 Improve capacityto 120,000 BCM QCBS Prior 511212009 analyze monetary and financial statistics 84 l.B.l Dev. Collateral 100,000 MoJ QCBS Prior Instruments 1.B.2 Asst. for Commercial 150,000 MoJ QCBS Prior Code, Code for Obligations & Contracts 1.B.3 Formulation of Strategy 200,000 MoJ QCBS Prior to improve landregime & landtitles 1.B.4 Put systeminplaceto 60,000 MoJ QCBS Post monitor statistics for judicial treatment 1.B.5 Strengthenaccess to 150,000 M oJ QCBS Prior GLIN(Global Legal InformationNetwork) 1.B.6 Develop an actionplan 50,000 MoJ QCBS Post 8/30/2008 to develop the enforcementof 1.B.7 Study on the 10,000 I MoJ I QCBS Post I5/14/2008 reorganizationof central I I I I I commercialregistry QCBS 1.c.1 Advisor to Minister 160,000 DGPIP QCBS Prior 1.c.2 Expert on 25,000 DGPIP CI Post 511812008 1.C.3 Study onthe One-Stop I 50,000I DGPIP I QCBS Post I11/5/2008 Shop 1.c.10 Strategyfor PSD. 500,000 DGPIP QCBS Prior 11/19/2008 2.A Audit of SONELEC 185,000 MEF/ QCBS Prior 12/15/2008 2.A Audit of SOMAGAZ I 185,000I MEF/ I QCBS Prior I12/16/2008 2.A Audit of SNDE I 185,000I MEF/ I QCBS Prior I12/17/2008 MHETIC 2.A Audit ofPort 185,000 MEFMT QCBS Prior 12/18/2008 2.A Audit of MAURIPOSTt 185,000 MEF QCBS Prior 12/19/2008 2.A Audit of SOMIR MEF/ QCBS Prior 12/20/2008 MHETIC 2.B Electricity Sector 400,000 MEF/ QCBS Prior 9/30/2008 [nvestmentPlan MEHTIC 3 ExternalAuditor 30,000 DGPIP QCBS Prior 5/1/2008 Short lists comprising entirely national consultants: short lists of consultants for services where the estimated cost is below the equivalent of US$lOO,OOO per contract may consist entirely of domestic consultants, consistent with paragraph 2.7 of the Guidelines. 85 MAURITANIA: BUSINESSENVIRONMENT ENHANCEMENT ANNEX 9: ECONOMIC AND FINANCIAL ANALYSIS NOT APPLICABLE. 86 MAURITANIA: BUSINESSENVIRONMENT ENHANCEMENT ANNEX 10: SAFEGUARDPOLICY ISSUES Category C (no issues) 87 MAURITANIA: BUSINESSENVIRONMENTENHANCEMENT ANNEX 11: PROJECTPREPARATIONAND SUPERVISION Planned Actual ProjectConceptNotereview August 5,2006 August 5,200 Initial PID to PIC September 10,2006 September 10,2003 Initial ISDS to PIC September 10,2006 September 10,2003 Appraisal January 15,2008 February4,2008 Negotiations February 14,2008 February 17,2008 Board/RVP approval May 29,2008 Planneddate of effectiveness August 29,2008 Planneddate ofmid-termreview August 15,2010 Plannedclosingdate June 30,201 1 Key institutionsresponsible for preparationofthe project: MEF BCM MoJ DGPIP MHETIC Bank staff and consultants who worked on the project included: Name Title Unit Andre Ryba Lead Financial Specialist AFTFP Shem Archondo Sr. Operations Officer (TTL) AFTFP Guillemette JafEin Financial Sector Specialist AFTFP Francois Nankobogo Sr. Private Sector Specialist AFTFP Jean Michel Marchat Sr. Private Sector Specialist AFTFP Pauline Aranda Consultant (Legal Reform) LEGPS Eric Haythorne Lead Counsel LEGPS OuldMohamedElMoctar Extraction Industrial Specialist AFTMR Tjaarda P. Storm van Leeuwen Lead Financial Analyst AFTEG Helene Bertaud Sr. Counsel LEGAF Robert Schlotter Financial Analyst AFTEG Paul Noumba Um Lead Specialist WBIFP Bella Lelouma Diallo Sr. Financial Management Specialist AFTFM Moustapha Ould El Bechir Procurement Specialistt AFTPC Renee Desclaux Finance Officer LOAG2 Manuella Koukoui Staff Assistant AFTFP Alice Aloua Tanon-Aguehounde Staff Assistant AFTFP IvanRossignol Team Leader (peer reviewer) AFTFP Ann-Rennie Lead Financial Sector Specialist (peer reviewer) AFTFP Vincent Palmade Lead Economist (peer reviewer) CICM HamidAlavi Sr. Private Sector Specialist (peer reviewer) MNSED 88 Bankfunds expendedto date on projectpreparation: 1, Bankresources: US$150,000 2. Trust fbnds: 3. Total: EstimatedApproval and Supervision costs: 1. Remainingcosts to approval: 2. Estimatedannual supervision cost: 89 MAURITANIA: BUSINESSENVIRONMENTENHANCEMENT ANNEX 12: DOCUMENTSINTHE PROJECTFILE Financial Sector Assessment Program (Aidemkmoire andVolume 1- Executive Summary) Financial Sector Technical Assistance Project -Appraisal Report - AfDB, August 2006 Investment Climate Assessment (2007) Doing Business (2008) Letter o f MEFrequesting support for the power sector, dated November 12,2007 Letter o fprivate and financial sectors development policy 90 MAURITANIA: BUSINESSENVIRONMENTENHANCEMENT ANNEX 13: STATEMENT OFLOANS AND CREDITS Differencebetween expectedand actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Fm. Rev'd PO82888 2007 MR-Pub Sec CB SIL (FY07) 0.00 13.00 0.00 0.00 0.00 10.88 0.79 0.00 PO94278 2006 MR-Health&Nutrition Supt (FY06) 0.00 10.00 0.00 0.00 0.00 6.55 0.26 0.00 PO88828 2005 MR-IrrigatedAgr Integr Dev APL 2 0.00 39.00 0.00 0.00 0.00 19.23 1.95 0.00 (FY05) PO87180 2005 MR-HigherEducation(FY05) 0.00 15.00 0.00 0.00 0.00 13.75 7.76 0.00 PO78383 2004 MR-Mining Sec TA SIL 2 (FY04)-(PRISM 0.00 18.00 0.00 0.00 0.00 13.10 3.01 0.00 2) PO78368 2004 MR-HN/AIDS MultiSecCntd (FY04)- 0.00 21.00 0.00 0.00 0.00 5.60 -0.82 -2.53 (PMW PO81368 2004 MR-ComBased Rural Dev (FY04) - 0.00 45.00 0.00 0.00 0.00 19.66 -4.47 0.00 (PDRC) PO71881 2002 MR-GDLC (FY02) (CFED) - 0.00 3.30 0.00 0.00 0.00 0.26 -0.35 -0.62 PO71308 2002 MR-EduSec Dev APL (FY02) - (PNDSE) 0.00 49.20 0.00 0.00 0.00 9.19 0.16 -2.57 PO69095 2002 MR-UrbDev Prgm(FY02) 0.00 70.00 0.00 0.00 0.00 23.76 9.34 3.90 Total: 0.00 283.50 0.00 0.00 0.00 121.98 17.63 - 1.82 MAURITANIA STATEMENT OF IFC's HeldandDisbursedPortfolio InMillionsofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2006 BSA Ciment 11.47 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 GBM 5.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 GBM 5.00 0.00 5.00 0.00 5.00 0.00 5.00 0.00 2005 GBM 9.82 0.00 0.00 0.00 9.82 0.00 0.00 0.00 GTFP GBM Maurit. 7.59 0.00 0.00 0.00 7.59 0.00 0.00 0.00 PAL-Tiviski 0.28 0.00 0.00 0.00 0.28 0.00 0.00 0.00 2006 SEF Hotel Halima 2.17 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 41.58 0.00 5.00 0.00 22.69 0.00 5.00 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. Total pendingcommitment: 0.00 0.00 0.00 0.00 91 MAURITANIA:BUSINESSENVIRONMENTENHANCEMENT ANNEX 14: COUNTRYAT A GLANCE Sub- POVERTY and SOCIAL Saharan Low. Maurltanla Africa income Development diamond. 2006 Population, mid-year(millions) 3.2 770 2,403 GNipercapita (Atlas method, US$) 740 842 650 Lifeexpectancy GNI(Atlas method, US$ bii/lons) 2.3 848 1562 Average annual growth, 2000-06 Population (%I 2.9 2.4 19 Labarfom(%) 3.0 2.8 2.3 Gross m a r ) M o s t recent estlmate (latest year available, 2000-06) capita enrollment Poverty(%of populafionbelownationaipovertyllne) 46 Urbanpopulation(%of fotelpopulafion) 41 36 30 Lifeexpectancyatbirth(pars) 54 47 59 Infantmortalityfper looolive births) 78 96 75 Childmalnutrition(%of childrenunder5) 32 30 Access to imDrovedvatersource Access to animprovedvatersource(%ofpopulatlon) 53 56 75 Literacy(%ofpopu/afion age #5+) 51 59 61 Gross primaryenroilment (%of school-agepopulation) 93 92 0 2 -Mauntanfa Male 93 98 a8 Lou-inco megroup Female 94 86 98 KEY ECONOMIC RATIOS and LONO-TERM TRENDS 1886 I986 2005 2006 Economic ratios' GDP (US$ billions) 0.80 14 18 2.7 Gross capitalformation1GDP 29.8 -23.8 44.8 23.3 Exportsof goods andservices1GDP 562 35.1 35.9 54.6 Trade Gross domestic savingsIGDP 6.6 -33.3 - 6 0 8.8 Gross nationa savings1GDP 27.7 -24.8 -5.4 Current account balance/GDP -*.9 -0.2 -50.9 Interest paynents1GDP 3.9 2.1 11 Total debt1GDP 2U.4 Q0.3 P42 Total debt seTvicBlexporls 215 Q.3 8.1 Present value of debt1GDP a3.9 Presentvalue of debtlekports 2310 Indebtedness 1886-86 1886-06 2005 2006 2006-IO (averageannualgmMh) GDP 2.4 3.8 5.4 117 - Maunfanfa GDP percapita 0.0 0.8 2.4 8.7 Lowincomegroup Eq~ortsof goods andservices -18 -19 6.2 STRUCTURE o f the ECONOMY 92 1986 1996 2005 2006 (%of GDP) Growth of capital and GDP (%) Agriculture 26.6 36.2 23.7 I7.O r Industry 311 25.4 29.3 43.9 Manufacturing t3.1 6.5 5.0 Services 42.2 38.4 47.0 39.1 Householdfinalconsumption expenditure 69.6 02.2 92.3 62.2 Generalgov't final consumptionevenditure 23.6 111 22.7 8.1 Importsof goods andservices 79.3 44.6 95.7 59.1 1986-96 W96-06 2005 2006 (average annualgmMh) Agnculture 2.3 4.2 7.9 Industry 17 2.9 -22 Manufacturing i.1 -15 -117 Services 2.5 7.5 6.8 Householdfinal consumption expenditure -12 5.5 27.2 Generalgov't final consumptionexpenditure 4.1 4.6 5.0 Gross capitalformation -7.0 30.6 32.4 imports of goods andservices -3.9 9.2 45.3 I -Exports -Inports I Note:2006data are preliminaryestimates. This tablews producedfrom the Development Economics LDB database. `Thediamonds showfourkeyindicators inthecountry(in bo1d)comparedwithits income-gmupaverage. lfdataaremissing,thediamondwill beincomplete Mauritania PRICES andGOVERNMENT FINANCE 1986 1896 2005 2006 Domestlc prlcer Inflation (K) (%change) Consumer prices 7.4 4.7 0.1 6.2 ImplicitGDP deflator 7.3 t9 8.0 29.6 Government flnance (%of GDP, Includescurrentgrants) Current revenue 25.1 24.1 26.6 210 01 02 03 M 05 OB Current budget balance -2.9 8.0 5.5 2.1 Overallsurplusldeficit -117 -0.5 -2.5 -4.0 -GDP d&iator -CPI TRADE 1986 1986 2006 2006 (US$ milllonsj Export and Import levels (US$ mlil.) Totalexports (fob) 4 8 464 604 I6Q 2.000 T ironore 142 207 2 7 223 Fish 274 277 158 `66 1,600 Manufactures Total imports (cif) 432 436 177 1205 1.000 Food 97 0 3 18 18 Fuelandenergy 29 43 15 D9 500 I I Capitalgoods 173 72 66 66 0 Exportprice index(2OOO=WO) 96 0 0 la ID W 01 02 03 04 05 M) Import price index(2OOO=WOj 69 ma 00 D O Exports Iqorts Terms of trade(2000=nOj 0 6 10 a 9 0 9 93 BALANCE of PAYMENTS I I986 1996 2005 2006 (US$millions) lr0;rent account balance to GDP (Oh) Exports of goods andservices 451 554 667 Imports of goods and services 637 680 1,778 Resource balance -186 -125 -1111 0 Net income -70 n 65 Net current transfers 0 7 a 5 112 -20 Current account balance -119 -3 -934 Financing items (net) a 9 -8 9 0 Changes innet reserves 1) 11 21 Memo: Reserves includinggold (US$ m///ions) 59 70 Conversion rate(DEC,/oca//US$) 74 4 0 7 2 268.6 2686 EXTERNAL DEBT and RESOURCE FLOWS 1986 1996 2005 2006 (US$ mlons) /Compositionof 2005 debt (US$ mlil.) Total debt outstanding anddisbursed 1,745 2,457 2.281 IBRD 69 8 0 0 I G 169 IDA 77 359 677 0 0 Total debt service 99 116 67 IBRD 1) 3 0 0 IDA 1 4 8 6 Compositionofnet resourceflows Officialgrants 71 174 123 Officialcreditors 0 0 58 90 Pnvate creditors 3 24 14 Foreigndirect investment (net inflows) 4 4 125 Portfolio equity(net inflows) 0 0 0 D 739 World Bank program Commitments 28 35 49 0 A E Bilater.4 Disbursements 23 36 42 26 B IDA -- IBRD D. Dttw mltllater.4 F Private -- Pnncipalrepayments 6 4 2 5 C-IMF G- Short-terr Net flows 16 32 40 21 Interestpayments 5 3 6 Net transfers 11 29 35 n3 Note:This tablewas produced from theDevelopment Economics LDB database. 9/28/07 94 IBRD 33445 MAURITANIA SELECTED CITIES AND TOWNS MAIN ROADS REGION CAPITALS RAILROADS NATIONAL CAPITAL REGION BOUNDARIES RIVERS INTERNATIONAL BOUNDARIES 15°W 10°W This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. MOROCCO 0 50 100 150 200 Kilometers To To Tindout indout 0 50 100 150 Miles MAURITANIA A L G E R I A Aïn Aïn Ben Tili t t i e To To Y Bu Craa Bir Moghreïn Moghreïn 25°N 25°N Former Spanish T I R I S ATLANTIC Sahara Z E M M O U R OCEAN To To a m i Taoudenni m a m S a h a r a H Fderik Zouérat Zouérat Kediet Ijill D e s e r t (915 m) To To o u f Bir Gandús Gandús El Moueïla Moueïla j D l M A L I Nouadhibou DAKHLET Khatt Atoui Choum E e Oudâne Oudâne a n Atar O u r A D R A R NOUADHIBOU Chinguetti 20°N Châmi Châmi E l 20°N I N C H I R I M Akjoujt r e y y é Bôu Rjeïmât Bôu Rjeïmât T A G A N T H O D H E C H z a Tidjikdja Tichit NOUAKCHOTT r C H A R G U I T R A R Z A T r a Moudjéria Moudjéria Boutilimit Tiguent B R A K N A Tamchaket Qualâta Qualâta Aleg A S S A B A Ayoûn yoûn To To Rosso el ''Atroûss Atroû Tombouctou Boguéé Bogu Kiffa H O D H E L Nema To To Dakar Kaedi Mbout G H A R B I Timbédra imbédra Kankossa Bassikounou GORGOL Maghama Ouadou ar To To To To To To Kayes To To Nara 15°N S E N E G A L SénégalSélibaby Sélibaby Nioro du Sahel Nampala 15°N GUIDIMAKA To To K arako Nayé Nayé M A L I 15°W 10°W 5°W NOVEMBER 2004