Document of The World Bank FOROFFICIALUSEONLY ReportNo: 31985-GH PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHE AMOUNT OF SDR 31.1MILLION (US$45 MILLIONEQUIVALENT) TO THE REPUBLICOF GHANA FORA MICRO, SMALL AND MEDIUMENTERPRISEPROJECT December 5,2005 PrivateSector Unit Africa Region This documenthas a restricteddistributionandmay be usedbyrecipientsonly inthe performanceof their official duties. Its contents maynot otherwisebe disclosedwithout WorldBank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective September 30,2005) CurrencyUnit = Cedi Cedi 9,062.5 = US$1 US$1.44891 = SDR 1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AGSSIP Agricultural Services Sub-sector Investment Program) BDS Business Development Services BMO Business Membership Organization BPO Business Process Outsourcing CAS Country Assistance Strategy C A G D Controler and Accountant General Department CBRD Community-Based Rural Development D C A Development Credit Agreement DFID Department for International Development (UK) EPZ Export Processing Zone FIAS Foreign Investment and Advisory Services FINSSP Financial Sector Strategic Plan FMR Financial Monitoring Report GCIs Government Catalytic Interventions GDP Gross Domestic Product GEPC Ghana Export Promotion Council GIAC Ghana Investors Advisory Council GICTed Ghana Information Communication Technologies Directorate GIFTEL Ghana Investment Fundfor Telecommunications Development GNI Gross National Income GoG Government o f Ghana GPRS Ghana Poverty Reduction Strategy GSB Ghana Standards Board I C B International Competitive Bidding I C T Information, Communications and Technology IAF International Accreditation Forum I L A C International Legal Assessment Consortium IDA International Development Association IFC International Finance Corporation IPPR Industrial Process Plant Retrofitting LCCS Large Construction Companies LCS Least-Cost Selection LOC Line of Credit M D A s Ministries, Departments, Agencies MDGs Millennium Development Goals MOT1 MinistryofTrade and Industry MOU Memorandum o f Understanding MPIP Multi-Purpose Industrial Park M PSD/PS I MinistryofPrivate Sector Development / Presidential Special Initiatives MSMEs Micro, small, and medium enterprises PCG Partial Credit Guarantee PEP Private Enterprise Partnership for Africa PEPTA Public Enterprises and Privatization Technical Assistance PIM Project Implementation Manual PRSP Poverty Reduction Strategy Paper PSDS Private Sector Development Strategy PSOC Private Sector Oversight Committee PTIS Proactive Trade Information System QCBS Quality and Cost Based Selection QSTM Quality, Standards, Testing, Metrology REDP Rural Enterprise Development Program cscs Common Service Centers SMEs Small and MediumEnterprises SOE Statements o f Expenditures SWAP Sector-Wide Approach TIPCEE Trade and Investment Program for Competitive Export Economy TU Technical Unit UESP I1 Second Urban Environmental SanitationProject WBG World Bank Group Vice President: Gobind Nankani Country Director: Mats Karlsson Sector Managerprogram Manager: Demba Ba/Maxwell Aitken Task Team Leader: Papa Demba Thiam GHANA MICRO.SMALL. AND MEDIUMENTERPRISEPROJECT CONTENTS Page A STRATEGIC CONTEXT AND RATIONALE . ................................................................... 1 1. Country and Sector Issues............................................................................................... 1 2. Rationale for World Bank Group Involvement .............................................................. 4 3 . Higher Level Objectives to Which the Project Contributes............................................ 4 B . PROJECT DESCRIPTION ................................................................................................. 5 1. Lending Instrument......................................................................................................... 5 2. Project Development Objectives and Key Indicators ..................................................... 5 3 . Project Components........................................................................................................ 5 4. Lessons Learned and Reflected inthe Project Design.................................................. 17 5. Alternatives Considered and Reasons for Rejection..................................................... 19 C. IMPLEMENTATION ........................................................................................................ 20 1. Partnership Arrangements............................................................................................. 20 2. Institutional and ImplementationArrangements .......................................................... 20 3 . Monitoring and Evaluation of Outcomes and Results.................................................. 23 4. Sustainability................................................................................................................. . . . 24 5. Critical Risks and Possible Controversial Aspects ....................................................... 24 7. Loadcredit Conditions and Covenants........................................................................ 29 D. APPRAISAL SUMMARY ............................................................................................. 30 1. Economic and Financial Analyses ................................................................................ 30 2. Technical....................................................................................................................... 30 Fiduciary ....................................................................................................................... 30 4. 3 . Social............................................................................................................................. 32 5. Environment.................................................................................................................. 32 6. Safeguard Policies......................................................................................................... 32 7. Policy Exceptions and Readiness.................................................................................. 33 Annex 1: Country and Sector Background .............................................................................. 34 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .................39 Annex 3: Results Frameworkand Monitoring ........................................................................ 41 Annex 4: DetailedProjectDescription ..................................................................................... 51 Annex 5: ProjectCosts ............................................................................................................... 93 Detailed Cost Allocation ............................................................................................................. 94 Annex 6: Implementation Arrangements ................................................................................. 95 Annex 7: Financial Management and DisbursementArrangements .................................. 102 Annex 8: Procurement Arrangements ................................................................................... 109 Annex 9: Economic and Financial Analysis .......................................................................... 115 Annex 10: Safeguard Policy Issues .......................................................................................... 117 Annex 11:Project Preparation and Supervision ................................................................... 118 Annex 12: Documents in the Project File ............................................................................... 120 Annex 13: Statement of Loans and Credits ............................................................................ 121 Annex 14: Country at a Glance .............................................................................................. 123 Annex 15: Conflicts of Interest Management Framework .................................................. 125 Annex 16: M a p 33411 .............................................................................................................. 125 GHANA MICRO, SMALL, AND MEDIUMENTERPRISEPROJECT PROJECTAPPRAISALDOCUMENT Africa AFTPS Date:December5, 2005 TeamLeader: PapaDembaThiam CountryDirector: Mats Karlsson Sectors: Micro- and SME finance (80%), law and Sector ManageriProgramManager: Demba justice (20%) BaMaxwell Aitken Themes: Financialintermediation,small and ProjectID: PO85006 mediumenterprise support (P); regulationand LendingInstrument: Specific InvestmentCredit competitionpolicy (S) Project Financing Data [ ] Loan [XI Credit [ 3 Grant [ ] Guarantee [ ] Other: For LoansiCreditslOthers: TotalProjectCost (US$m.): 118.9 Cofinancing: TotalBankFinancing(US$m.): $45.O Source Local Foreign Total BORROWER/RECIPIENT 1.3 0.6 1.90 INTERNATIONALDEVELOPMENT 17.2 27.8 45.O ASSOCIATION INTERNATIONALFINANCE 40.0 0.0 40.0 CORPORATION PRIVATE SECTOR 31.08 0.92 32.0 Total 89.58 29.32 118.9 Estimated Disbursements (Bank FY/US$m) 1 Year 1 Year 2 Year 3 Year 4 Year 5 Annual 5.5 10.4 12.1 10.0 7.0 Cumulative 5.5 15.9 28.0 38.0 45.0 Projectimplementationperiod:Fiveyears Expectedeffectivenessdate: May 31,2006 Expectedclosingdate: December31,2011 Doesthe projectdepart from the CAS incontent or other significantrespects? RejTAD A.3 [ ]Yes [XI No Does the projectrequireany exceptionsfrom Bankpolicies Re$ PAD D.7 []Yes[X] No Havethese beenapprovedby bank management? [ ]Yes [ XI No I s approval for any policy exception sought from the Board? [ ] Y e s [ X ] No Does the project include any critical riskrated "substantial or high"? Re$ PAD C and Annex 7 [ X ]Yes [INo Given that firm commitments from participating bank(s) will follow forthcoming the bank selection process, IFC appraisal of selected banks, there is a risk that the Partial Credit Guarantee (PCG) and Line o f Credit (LOC) Programs may not be utilized as anticipated due to lack o f interest from private banks. Because several banks have expressed interest inthe programs, this risk is considered medium. Ifthe capacity-building programs for PCGParticipating Banks and SMEs are as successful as anticipated, then the l o w SME loan default rates will reduce guarantee calls. This will lead to an "under disbursement" o f funds allocated to cover such defaults. Within the context o f the PCG Program's objectives, this "risk o f under disbursement" would be a welcome and positive result. Does the project meet the regional criteria for readiness for implementation? Re$ PAD D.7 [XIYes [INo Project development objective Ref PAD B.2, Technical Annex 3 The project aims to enhance the competitive and employment levels of Ghanaian MSMEs. This will be achieved by: (i) building an integrated market access and trade facilitation infrastructure; (ii) proactively supporting entrepreneurship development; (iii) developing and strengthening, o n a sustainable basis, the capacity of local intermediaries to deliver financial and non-financial services to MSMEs, and MSMEs to make productive use o f these services; (iv) reducing selected business constraints, including technical barriers to trade, faced by MSMEs; (v) providing an enabling environment (access to finance, trade promotion, and trade facilitation infrastructure) to boost increased investments in the MSME sector; and (vi) enhancing the facilitation, project development, and implementation roles o fthe Government. Project descriptionRe$ PAD B.3.a, TeclznicalAnnex 4 Project Components: Component 1: Access to Finance Component:(indicative US$82.1 million: IDA US$13.4 million; IFC US$40.0 million; Participating Banks US$27.1 million; SME borrowers US$1.6 million equivalent). This component aims to significantly improve SME access to finance (particularly term finance), thereby fostering S M E growth, competitiveness, and employment creation. The component, designed to achieve this objective through a multi-pronged approach that will address key bottlenecks to SME financing, comprises five sub-components: (1) an I D N I F C SME loan portfolio Partial Credit Guarantee Program (PCG); (ii) an IDA-funded Performance-Based Grant Program for banks participating in the Line o f Credit (LOC) facility to be financed by IFC; (iii)technical assistance matching grants for S M E finance capacity building in PCG and L O C participating banks, and-to the extent possible-to other local banks; (iv) technical assistance matching grants for existing and potential SME clients o f PCG and L O C participating banks; and (v) technical assistance and matching grants for additional financial instruments to SMEs to be developed and tested inthe course o f project implementation. Component 2: Access to Markets, Trade Facilitation, and Entrepreneurship Development Component (US$24.5 million; Government USS1.2 million, IDA US$20 million; clients US$3.3 million equivalent). This componentwill help MSMEs overcome operational, technical, and regulatory barriers to markets. Project support will focus on the development o f a market o f non-financial services to MSMEs through building sustainable delivery capacities for local service providers and other private sector and trade development support structures. The assistance to be provided will respond to needs assessments in selected value chain clusters, business membership organizations, and specialized business service providers. The project will also support the implementation o f a business linkages fund established to facilitate sub-contracting between larger and smaller enterprises, whether informal or formal. The approach will be piloted in the construction sector and extended to others. In addition, building on achievements under the Gateway Project, project activities will reinforce the Government's trade facilitation and investment promotion objectives. Project resources will finance the development of the markets access and trade facilitation infrastructure as well as support new approaches to trade promotion as a response to globalization. Finally, this project component will support specific strategic and catalytic interventions of the Government within the framework o f its entrepreneurship development strategy. Inthis vein, the credit will support the transformation of the Tema Export Processing Zone (EPZ) enclave into a Multi-Purpose Industrial Park (MPIP) with an information, communications, and technology (ICT) park, a furniture city. and common service centers for selected branches o f manufacturing activities. Component 3: BusinessEnvironment Component.:(US$4.9 million: IDA US$4.5 million, Governmenl USS0.4 million equivalent). Activities supported under this component will support the National Medium- Term Private Sector Development Strategy (PSDS) and will team up efforts with other developmenl partners to ensure the implementation o f the program in the holistic and effective way. While providing support through the fund pooling mechanism, the IDA funds will: (i)support the implementation of thc Ghana trade policy; (ii)reform business registration; (iii)improve the national system o f standardization certification, and accreditation o f conformity assessment by encouraging broader private sectoi participation and by updating and enforcing regulations in this area; and (iv) build the institutional capaciD o f the Government's Ministries, Departments, and Agencies (MDAs) to effectively deliver services to thc private sector and strengthen public-private dialogue. Component 4: Project Implementation,Monitoring, and Evaluation Component. : (US$3.2 million IDA US$2.9 million; Government US$0.3 million equivalent). This component is designed to support thc execution, reporting, review, and monitoring requirements o f the project. Provisions will be made to (i)tes out models proposed to assist MSMEs; (ii)enable the Government to design and implement : comprehensive project performance framework; (iii)assist the Government (primarily the Ministry o Trade and Industry, the Ministry o f Private Sector Development/PresidentialSpecial Initiatives, and thi Ministryo fTelecommunications) to coordinate project activities and carry out the objectives o f the project components as provided in a Project Implementation Manual; (iv) facilitate the partnership between the Government and the private sector to better ensure ownership and sustainability of reforms; and (v) enable the Government to maximize assistance received from its development partners on initiatives addressing similar constraints as the M S M E Project by harmonizing implementation and pool funding arrangements. Which safeguard policies are triggered, if any? Re$ PAD 0.6, TeknicalAnnex 10 The policy triggered by the proposed project i s the one on environmental assessment (OPBP 4.01) The environmental category assessed for this project is B. Although the project i s not expected to present any specific environmental risk, IDA funds may finance services that may lead to adverse environmental impact. Under the Trade Facilitation and EntrepreneurshipDevelopment component, the project will have infrastructure elements including construction o f a buildingand laying down fiber optic cables at the industrial park. Although these are building on the achievements under the IDA- funded Gateway Project, these were not covered in the EnvironmentalAction Plan for that project, Recognizing the achievements and functional capacity within the Environmental Protection Agency that oversees the environmental concerns under the Gateway Project, and that these components do not involve development o f a new site nor have any resettlement issues, ASPEN has granted clearance to disclose again the Environmental Action Plan in Ghana and in the World Bank's InfoShop and that the mitigation and management measures in these documents apply to all infrastructure components o f this project. Appropriate reference to the Environmental Action Plan and implementationrequirements have been incorporated inthe legal documents. Significant, non-standard conditions, if any, for: Effectiveness: 0 A final Project Implementation Manual satisfactory to IDA has been adopted by the Government. Disbursement conditions: 0 For the Business Environment Component, an annual work plan and budget for the activities financed from the PSD pooled fund during the respective fiscal year has been finalized and i s satisfactory to IDA. 0 For all BDS Grants and LOC Performance Grants, the MOT1has competitively selected consultants to serve as the B D S Manager, and the arrangements and procedures for their appraisal and approval specified inthe D C A and the PIM have been complied with. 0 For the Partial Credit Guarantee Program, an agreement (to be signed by the Government, IFC, and IDA) on IFC's administration o f the PCGFacility, and IFC commitment o f the PCGsinrespect o f which IDA disbursement i s requested. Covenants applicable to project implementation: 0 The BDS Fund/Technical UnitManager will have primary responsibility for appraisal, disbursement, and supervision of all BDS Grants as provided inthe Project Implementation Manual. 0 The detailed arrangements for disbursement and administration o f all L O C Performance Grants by the BDS Manager will be defined inthe Project Implementation Manual. (IFC will finance and manage the underlying Line o f Credit facility on its own account.) 0 The Business Environment Component activities will be implemented through a Sector Wide Approach (SWAP) modality in accordance with an MOU signed between donors and the Government, including a pooled fund into which the allocated IDA proceeds will be disbursed. 0 IFC will manage the IDNIFC Partial Credit Guarantee Facility on its own account and on account o f the Government in accordance with an agreement to be entered into between IFC, IDA, and the Government. 0 Independent financial and procurement auditors will be appointed within six months after the effectiveness date. A. STRATEGIC CONTEXT AND RATIONALE 1. Country' and Sector Issues Ghana was the first country in Sub-Saharan Africa to emerge from colonialism, achieving independence in 1957. Situated in the middle of the West African coast between Cote d'Ivoire, Togo, and Burkina Faso, it i s the third largest member o f the Economic Community o f West African States (ECOWAS) and a major trading partner within the West African Economic and Monetary Union. The country i s a signatory to the Accra Declaration that created the West Africa Monetary Zone in April 2000 and i s expected to host the headquarters of the West Africa Central Bank. It i s also a key player in ongoing regional activities, including trade and transport facilitation and energy. Characterized by strong social institutions that play a mediating role critical for promoting national consensus and easing social tensions, the nation continues to enjoy peace ina sub-region plaguedwith political and ethnic problems. The Government made important strides to deepen its dialogue with the growing civil society movement and the private sector. With increased civil participation inthe Government's development process, Ghana i s one country in the region that has a chance o f meeting the Millennium Development Goals (MDGs). Over the past decade, poverty was reduced from around 52 percent tojust under 40 percent2 Continued progress and achievement o f the MDG i s likely if growth i s accelerated and partnership for poverty reduction i s deepened. But additional partnership efforts between the public and private sectors will be required to reverse past economic trends and support the economic growth necessary to increase living standards inthe country. Inthepast decades, cyclical andexternalfactors haveconstrainedeconomic growthinGhana. Withits good endowment o f natural resources and geographical location, Ghana was well poised to achieve a sustained increase in economic growth after independence. That outcome was not achieved, however. Ghana experienced spurts o f growth in the 1960s, but rapid economic decline set in during the mid- 1970s. The economy rebounded following a change in policy direction from a state-controlled to a market-driven economy in the early 1980s and with the aid o f buoyant cocoa and gold prices by mid- 1980s. This was followed by a period o f sustained output growth interrupted by episodes o f weak macroeconomic management associated with the electoral cycle. Despite gross domestic product (GDP) growth in the 4 to 5 percent range over the last 20 years, Ghana's growth prospects have been stymied by slow progress on reforms. I t s economy structure remained broadly the same since independence. There are a number of contributing factors to this lack o f economic diversification. Agriculture remains dominated by smallholder farming; the natural resources sector i s unable to operate efficiently and effectively; utility services are unreliable and relatively high cost; the manufacturing sector has not diversified much since the 1980s; state-owned enterprises weigh heavily on the economy; and state involvement in the provision o f services i s extensive and unsustainable. Investment climate constraints still hinder private investment. Most recent assessments o f the business environment in Ghana, including those conducted by the Foreign Investment and Advisory Service (FIAS), confirm that the business environment i s not severely ' "Memorandum of the President o f the International Development Association and the International Finance Corporation to the Executive Directors on a Country Assistance Strategy o f the World Bank Group for the Republic o f Ghana," World Bank Report no. 27838-GH, February 20,2004. 'Ghana, "1998-99 Ghana Living Standards Survey" By L S M S Database Administrator for the Ghana Statistical Service hostile to private sector growth. The World Bank's "Doing Business in 2005" report highlights the achievement o f the International Development Association (IDA) investment climate triggers inGhana. Time and cost o f starting a business fell from 129 to 85 days (-34 percent) and from 130.8 percent o f gross national income (GNI) per capita to 87.5 percent (-33 percent), respectively. Public-private policy dialogue has improved both in content and process following the creation o f the Ghana Investors Advisory Council (GIAC). However, more needs to be done to make significant improvements, as confirmed by FIAS.3 Regulatory bamers persist in Ghana and affect micro, small, and medium enterprises (MSMEs) to a significant extent. This creates for them, more reluctance to comply with business regulations. For example, discretionary powers o f public officials are often used for rent seeking, and delivery of public services remains weak. Administrative procedures remain cumbersome and ineffective. Public agencies lack capacity to implement and enforce regulations. These factors result in high costs for doing business, particularly for MSMEs, and undermine entrepreneurship development. Two additional surveys noted that the high cost o f doing business prevents small and medium enterprises (SMEs) from expanding and reaching a size sufficient to compete inboth domestic and world markets. The MSME sector, which represents around 30 percent o f the workforce, contributes to only around 6 percent o f the GDP. The Government realizes that the development o f this sector i s imperative to realizing its growth and poverty reduction goals. For example, an annual real GDP growth o f 5 percent i s projected to reduce poverty to 32 percent by the end o f 2007, and a per capita growth rate o f just 2 percent will be sufficient to achieve the MDGpoverty goal, given the country's significant progress on reducing headcount poverty.' However, the MSME sector continues to experience difficulties in accessing financial services. Access to medium to long-term finance i s a key constraint to MSMEs' ability to grow and compete in the domestic or global markets. Although banks face conditions o f over liquidity, most funds deposited are o f short-term nature. Real interest rates, also driven by huge local borrowing by the Government, have long hindered private enterprises' access to affordable financing. Private commercial banks have few incentives to significantly expand lending to the MSME sector, long considered risky by the formal financial sector because o f its history o f high default rates. Government and donor programs, which were established inresponse to the weak market, have credit terms and conditions that are too stringent or often inappropriate for MSMEs in terms o f loan duration or collateral requirement. Information asymmetry, compounded by enterprises' poor financial records, has limited financial institutions' ability to assess risk and their willingness to extend services to smaller businesses. Other factors include hindrances in the payment systems; a weak policy, regulatory, and legislative framework guiding the financial business environment; and a rural and micro finance sector increasingly responsive to MSMEsbut still too weak to significantly expand their outreach. MSMEs face other challenges as well. Potentially bankable SMEs lack the management capacity, entrepreneurial appetite, business planning, and financial skills to develop into attractive propositions for banks. They do not have sufficient access to land, labor, know-how, information, updated equipment, and research and development to innovate and remain competitive. Their access to public contracts and subcontracts i s limited, arising from cumbersome bidding procedures. Previously insulated from international competition, SMEs are now faced with greater external competition and the need to expand market share as a consequence o f trade liberalization. However, their limited international market exposure, low quality products, default in compliance with standards, and little FIAS, "Ghana AdministrativeBarriers to InvestmentUpdate" (Washington, DC: June 2003). "World Business Environment Survey, 2000" and "Regulatory andAdministrative Cost Survey, 2003," conductedby BruksandAssociates and sponsoredby FIAS and the GhanaInvestmentPromotion Council. 'World Bank, "Ghana: ReducingPovertyand ImprovingHumanDevelopment," World Bank Reportno. 26220- GH, June 13,2003. 2 access to international partnership impede M S M E participation into global markets. In addition, inefficient distribution channels often dominated by large firms also make it difficult for SMEs to access markets. Trade-related infrastructure i s poor; bureaucratic red tape and corruption still persist. The Government recognizes that it must address key sector issues that constrain private sector development, inparticular, M S M E growth and expansion. The Government mapped out a medium-term strategy to promote growth and reduce poverty in the 2004-2007 Ghana Poverty Reduction Strategy (GPRS). Supportingpolicies are focused on developing dynamic and competitive financial and private sectors as documented in the Financial Sector Strategic Plan (FINSSP) and the 2004-2008 National Medium-Term Private Sector Development Strategy (PSDS). The PSDS highlights the Government's commitment to "developing effective markets for the golden age o fbusiness" with the private sector taking a lead in economic growth. It envisions Ghana providing a world class business environment wherein firms capitalize on the country's comparative advantage, the private sector i s equipped to compete in global and regional markets, and, with better functioning markets, the poor are more economically active and growth i s broad based. Buildingon progress on the implementation o f recent and ongoing projects and cooperative relationships with the World Bank Group and other donor partners, the Government translated this vision into four priority development areas: (i) enhancing Ghana's position in the global and regional markets; (ii) improving the efficiency and accessibility o f national markets; (iii)increasing the competence and capacity levels o f private firms; and (iv) strengthening the Government's capacity for private sector policy formulation, implementation, monitoring, and evaluation. This clearly indicates that growth policies need to be underpinned by enterprise development and entrepreneurship development based on improved public- private policy dialogue. In particular, the visibility o f economic opportunities should be improved and made more attractive to the private sector through relevant policies and targeted interventions. The country has adopted a trade policy based on the paradigm that the private sector i s the engine of growth, with the Government providing a trade-enabling environment to actively stimulate private sector initiatives. This is to be achieved through the full spectrum o f trade policy instruments across the following thematic areas: multilateral trade, creating a fair and transparent import-export regime, facilitating trade, enhancing production capacity for domestic and export markets, domestic trade and distribution, consumer protection, fair trade, and protection o f intellectual property rights. The implementation o f the trade policy will be effected through a Trade Sector Support Program with a policy action statement that will specify activities to be undertaken annually. The Government has also developed a comprehensive FINSSP aimed at strengthening the financial sector. Specifically, FINSSP focuses on: (i)creating a preferred source o f finance for domestic companies (development of a bond market, a venture capital and private equity industry,and secondary market liquidity); (ii)promoting efficient savings mobilization (development o f long-term savings vehicles through liberalization o f pension industry, investment management industry, sound corporate governance, and mobilization of informal sector savings); (iii) ensuring a stronger and more facilitative regulatory regime (increase competition through regulation o f services, establishing a level playing field among financial institutions, stronger enforcement o f regulations); and (iv) achieving a diversified domestic financial sector within a competitive environment (broadened range o f financial instruments, more effective rural and micro finance). The World Bank Group (WBG) i s assisting the Government in addressing these constraints. Documented in its results-based Country Assistance Strategy (CAS, March 2004), direct support to the GPRS focuses on three pillars: (i)sustainable growth and job creation; (ii) human development and services delivery; and (iii)governance and development. Assistance for private sector development i s currentlyprovided through the Ghana Trade and Investment Gateway (Gateway), and Partnership with 3 Traditional Authorities projects. The M S M E project is aimed at narrowing the remaining gaps through interventions that support MSMEs' access to financial and non-financial services and that address technical barriers to trade. In addition, the project will support the Government's interest to capitalize on donor partners' harmonization efforts in addressing overall private sector and trade development issues through coordination o f projectdactivities and pooled funding in the area o f business environment retrofit. The project components, as designed, support the Government's Poverty Reduction Strategy Paper (PRSP), the PSDS, and the implementation o f the National Trade Policy (NTP); they are also inline with the growth agenda outlined inthe WBG CAS. 2. Rationalefor World Bank Group Involvement The project i s one o f the ten pilot projects of the joint I D N I F C M S M E Program for Africa.6 The WBG involvement in this project i s based on its ability to provide a range o f instruments and on the mandate given by its Board o f Executive Directors to pilot a combination o f IFC/IDA instruments in search o f solutions to financing and scaling up MSMEs inAfrica. Under the project, the Bank Group will provide essential financing and technical support to hone and implement best-practice interventions in support o f M S M E development in Ghana. As part o f a broader Africa-wide pilot program, this project will benefit-in both preparation and supervision phases-from an enhanced partnership between IDA and IFC. The advantages are threefold: (i) Increased capacity to leverage investment funds in concert with the IDA credit, which i s made possible from a closer linkage between WBG advisory and IFC transactional expertise; (ii) Economies o f scale in knowledge acquisition and transfer resulting from the implementation o f similar projects systematically across multiple countries-building jointly on World Bank and IFC experiences with internationally recognized best-practice technical partners-will provide major opportunities throughout the life o f the project to mainstream learning and reduce costs o freplication and scale-up; and (iii) By combining IDA and IFC expertise, the project can better support the Government o f Ghana in its efforts to foster private-public sector dialogue, private sector investment, and more effective donor coordination. This project is also being designed to mobilize certain initiatives on a fast track to achieve the earliest possible set o f results that can then "set the bar" and serve as demonstration effects for the remainder o f the project. 3. HigherLevelObjectivesto Whichthe ProjectContributes The project aims to trigger shared growth and lower poverty levels by increasing the competitiveness and employment levels o f MSMEs in Ghana to further realize both the Government's objectives highlighted in its poverty reduction strategy and its private sector development strategy and IDA'S development benchmarks specified inthe CAS. "Program Framework Document for a Joint IDAiIFC Micro, Small, andMediumEnterprise Development Pilot Program for Africa", discussed by the Boardo f Executive Directors inDecember 2003, World BankReport no. SecM2003-0614.2003. 4 B. PROJECT DESCRIPTION 1. LendingInstrument Resources to meet the project goals will be provided through a specific investment loan, which i s an appropriate instrument to make direct financing available for: (i)building a market access and trade facilitation infrastructure; (ii) relevant capacity-building assistance for intermediaries in the financial and non-financial services sectors and their client MSMEs; (iii)a partial credit guarantee program and support for an LFC line o f credit; and (iv) technical assistance to selected public sector agencies that directly implement the project and support MSMEs. 2. ProjectDevelopmentObjectives and Key Indicators The project aims to enhance the competitive and employment levels o f Ghanaian MSMEs. This goal will be achieved by: (i) building an integrated market access and trade facilitation infrastructure; (ii) proactively supporting entrepreneurship development; (iii)developing and strengthening, on a sustainable basis, the capacity o f local intermediaries to deliver financial and non-financial services to MSMEs and the capacity of MSMEsto make productive use of these services; (iv) reducing selected business constraints, including technical barriers to trade, faced by MSMEs; (v) providing an enabling environment (access to finance, trade promotion, and trade facilitation infrastructure) to boost increased investments in the MSME sector; and (vi) enhancing the facilitation, project development, and implementation roles o fthe Government. Key indicators would include the following: (i)percentage increase in volume o f SME term loans extended by participants ; (ii)percentage o f MSMEs that are making use o f the trade information system and reporting improvement in their business ; and (iii) number o f MSMEsreporting increased operational efficiency, market share and profitability. A project performance framework will be available to measure the impact o f the project on the MSME sector (see Annex 3). 3. Project Components The project will comprise four mutually reinforcing components: (i)access to finance; (ii) to access markets, trade facilitation, and entrepreneurship development; (iii)business environment; and (iv) project implementation, monitoring, and evaluation. Component 1: Access to Finance (indicative US$82.1 million: IDA US$13.4 million; IFC US$40.0 million; ParticipatingBanks US$27.1 million; SMEborrowers US$1.6 million equivalent). This component aims to significantly increase the volume, range, and geographical reach o f commercially viable SME credit operations in locally based commercial banks. To this end, the component i s designed to comprehensively address key bottlenecks to SME lending, including: (i) banks are generally averse to significantly expanding into the SME sector, a relatively new market for them, without instruments that reduce their risk or market-entry costs; (ii) banks mostly provide short working capital SME loans because they have inadequate long-term funds to support the provision o f long-term SME loans; (iii)most banks do not have adequate institutional structures, such as strong SME units, and traditional loan officers generally lack effective SME credit risk assessment and supervision skills (particularly cash-flow-based analysis and intensive loan monitoring methods), which prevents them from expanding SME lending sustainably; (iv) asymmetric information, which i s particularly acute in the SMEs sector, leads banks to make lending decisions largely based on the value o f assets pledged by a borrower (rather than the borrower's expected revenues and cash-flows); and consequently, collateral requirements are often unnecessarily high, sometimes in excess o f 150 percent 5 o f the loan amount; and (v) many potentially creditworthy SMEs lack the necessary business and financial management skills to present attractive proposals to demonstrate that their enterprises are indeed bankable and to ensure that they remain so in the long run. Effective training programs or business development services are limitedand costly for most SMEs. The access to finance component i s an integrated program aimed at addressing each o f these constraints. The program will be targeted at private banks based in Ghana that have existing SME lending operations, meet the program's eligibility criteria, which included financial sector prudential standards, and demonstrate a commitment to strengthening institutional SME finance capabilities and expanding their SME credit portfolios. The project design draws heavily on detailed analytical work and ongoing or successfully completed projects aimed at expanding SME finance. Fundamental to the project design i s the use o f commercial (IFC) financing and timebound subsidies (IDA-funded grants) to: (i)address market imperfections through cost-effective, incentive-based interventions; (ii) achieve additionality; and (iii)catalyze commercially sustainable SME lending to currently underserved markets, Emphasis i s placed on enhancing, not distorting, the competitive environment in the financial sector or subsidizing otherwise sustainable business activity. To this end, the proposedprogram reflects lessons learned in meeting this fundamental objective through guarantees (including IFC experience, U.S. Agency for International Development,' global case studies,* International Labor Organization's practitioners' guidelines'). It also draws on experiences o f IFC and other international financial institutions in extending credit lines to expand lending to small businesses, adapting structures that have been used with significant success, inparticular in Central Asia, the former Soviet Union, and Eastern Europe, In addition, the design o f technical assistance activities relies heavily on the experience o f donor partners in Ghana (particularly GTZ SPEED) with which the program seeks to leverage synergies. The Access to Finance Component comprises the following five sub-components: (i) IDNIFC SME an loan portfolio Partial Credit Guarantee Program (PCG) for private banks in Ghana; (ii) an IDA-funded Performance-Based Grant (PBG) Program for banks participating in the IFC-financed SME Line o f Credit (LOC) facility; (iii)technical assistance matching grants for SME finance capacity building in PCG and LOC participating banks, and-to the extent possible-to other local banks; (iv) technical assistance matching grants for existing and potential SME clients of PCG and L O C participating banks; and (v) technical assistance and matching grants for development o f additional financial instruments to SMEs. Participating banks will be selected on the basis of their financial strength, branch network, knowledge o f the SME market, and commitment to engage in sustained SME lending. Banks participating in the PCG will not be eligible to participate in the LOC and vice versa. (A more detailed description of the program i s provided inAnnex 4.) I.IDMIFC SME Loan Portfolio Partial Credit Guarantee (PCG) Program": (indicative US$48.2 million: IDA U S 4 . 1 million; IFC up to US$20 million; and Participating Banks up to US$24.1 million equivalent) The PCG program is a risk-sharing instrument that seeks to facilitate greater SME lendingby reducing the risk that commercial banks face in expanding in this relatively new market. The PCG will cover 50 percent o f net principal default loss o f a portfolio o f new loans originated by local participating banks 'Paul Freedman, Designing Loan Guarantees to Spur Growth in Developing Countries (Washington, DC: USAID, 2004). Grahan Bannock and Partners Ltd., Credit Guarantee Schemesfor Small Business Lending (London: 1997) 'LindaDeelen DFID, Do Credit Guarantees Lead to Improved Access to Financial Services? (London: 2005). and Klaas Molenaar, Guarantee Fundsfor Small Enterprises: A Manualfor Guarantee Fund Managers (Geneva: ILO, 2004). lo The amounts given for IFC and local bank contributions are estimates only. 6 on apari-passu basis. The IDA credit will be used to finance the Government's obligations to cover on the "first loss" basis (estimated 5-150 percent) o f default loss; with IFC resources covering the remaining (estimated 45-35 percent) guarantee exposure, to leverage limited IDA resources". The PCG will be denominated in local currency. SME borrowers from all sectors with total assets between US$50,000 and US$2 million equivalent and SME loans with both short and medium-term maturity will qualify. II.Line of Credit Performance Grants: (indicative US$22.1 million: IDA US$2.1million; IFC US$20 million; equivalent) The IFC LOC facility (indicative IFC up to US$20 million) will primarily address the term financing constraints faced by commercial banks and, hence, enable significantly more SMEs to access longer term funds needed for capital formation and technological upgrades. The commercially priced IFC LOC o f an estimated 5-7 tenor will be extended to participating banks for finance new term lending to commercially viable SMEs at market-based interest rates. The IFC LOC will be complemented by the IDA-funded performance-based grants sub-component. The performance incentive sub-component will include an IDA-funded semiannual bonus payment (for the life o f the Ghana MSME Project) to encourage participating banks to achieve desired development results. Commercially priced lines o f credit, targeting SMEs, are generally unattractive to banks, given the high capacity-building costs associated with significant expansion into this sector. Traditional SME credit lines have often been underutilized or are not on-lent to intendedborrowers. Intensive SME finance capacity-building assistance i s crucial to the development of banks' ability to target this market profitably. Such assistance i s most effective when provided on the principles o f output-based aid. To this end, LOC participating banks will be eligible for ex-ante technical assistance and ex-poste performance- based grants that significantly reduce credit line "all-in" costs associated with entering deeper into this perceived riskier market, but only after pre-agreed financial and developmental impact targets have been met. III.Performance-Based Technical Assistancefor Partner Banks: (indicative US$7.0 million: IDA USS4.0 million; and ParticipatingBanks US$3 million). Noting that the characteristics o f SME credit operations are quite distinct from existing collateral-based lending operations in commercial banks, technical assistance (TA) will be available on a cost-sharing, performance basis for participating banks (in the PCG and L O C programs) to enable them to develop efficient or expand existing SME lending operations within their institutions. Such time-bound intensive capacity-building assistance, provided in conjunction with financial instruments, has proven effective in helping financial institutions to establish the internal systems, procedures, and develop a cadre o f specialized staff critical to the development o f commercially viable SME lending operations. I K Performance-Based TAfor SME Borrowers: (indicative US$4.8 million: IDA US$3.2 million; and SMEBorrowers US$1.6 million) The project will provide pre- and post-financing technical assistance for potential and existing client SMEs (of the participating banks in the PCG and LOC programs) on a cost-sharing and performance basis, through local business development services (BDS) providers. The goal o f this activity i s to improve SMEs' capacity to present credible loan application packages, including proper financial "Assumingtheguaranteecoverageratioof7.5percentbytheIDAand42.5 percentbytheIFC, theproposed US$4.5 millionequivalentIDA support would mobilize US$60 million equivalent amount o f SME loans, o f which US$30 millionequivalentwould be coveredunderthe PCG Program. 7 statements and business plans, make productive use o f the loans, and improve their ability to service the debt by addressing strategic planning, business management, and technical capacity constraints. Such targeted assistance to the program's key beneficiaries, SMEs, i s intended to significantly increase the effective demand-bankable enterprises-for the expected expansion inavailable credit for SMEs. K Additional Financial Instruments (no costing provisionally, to be eventually funded under the unallocated category) This sub-component will support the structuring and implementation o f additional financial instruments for financial institutions and, thereby, additional term financing for SMEs. Such interventionmay include financial instruments to catalyze term financing sources for local banks, standby liquidity facilities, guarantees for foreign currency loans for local bank funding, guarantees for term trade finance for banks and SMEs, innovative leasing products, and local bond market development products. Given the time and sequencing requirements to develop and structure relevant instruments, it i s proposed that the scope for these alternative interventions will be reviewed during the early stages of project implementation. Component 2: Access to Markets, Trade Facilitation, and Entrepreneurship Development (indicative US$24.5 million; Government US$1.2 million, IDA US$20 million; clients US$3.3 million equivalent) This component has been designed and developed to provide a WBG operational response to Government o f Ghana (GoG) selected policy prescriptions and progradproject profiles that are defined inthe national Private Sector Development Strategy (PSDS), the National Trade Policy (NTP), and the Trade Sector Support Program (TSSP). As such, this component aims to help MSMEs overcome technical barriers to trade in order to support their presence and expansion in the domestic and foreign markets. On a pedagogical and demonstration basis, the component will support enterprise development by helping existing MSMEs in selected sectors expand their operations in terms o f overall products and markets development, including the transition from the informal to formal sector and related capacity building for management o f objectives and processes. On a more sustainable basis, this component will help provide operational and structural responses to broad sectoral issues with the view to strengthen the integration o f MSMEs in the country overall economic fabric. To contribute to operationalizing GoG and WBG approaches to shared growth for poverty reduction, the component aims to create more entrepreneurship opportunities through increased outreach o f economic opportunities and catalytic interventions (with expected demonstration effects) to make both prospects and risks mitigation more visible to the private sector and investment more attractive in non-traditional sectors. And, finally, in order to support and consolidate the pursuit o f these objectives, this component will contribute to rationalizing, strengthening, and integratingthe country's overall trade facilitation systems and structures. Therefore, the project resources will support selected interventions inthe areas o f access to markets, trade facilitation, and entrepreneurship development. I.Access to Markets (indicative US$5.7 million; Government US$0.3 million, IDA US$4.7 million; clients US$0.7 million equivalent) MSMEsinGhana face a combined lack ofmarket exposure and market-ledproduct development culture. These result in their limited capacity to identify and take advantage o f economic opportunities offered by the growing globalization and accessible through the transformation o f available natural resources in several productive sectors. Furthermore, because o f their limitation in size, most MSMEs cannot afford to develop, the critical mass o f functions that are essential to access markets and secure market shares. Under such circumstances, supporting MSMEs to access and settle on markets on the sustainable basis 8 entails at least the following: (i)developing a holistic and voluntarism approach to bridging the structural gap o f the information asymmetry; (ii) strengthening the systems and structures aimed at helpingMSMEs utilize relevant market information to comply with quality and standards and enhance products and markets development; and (iii) developing the market o f non-financial services to enterprises to help MSMEsoutsource the vital functions they needbut cannot access on their own. To reach the above described objectives, project interventions will focus on selected clusters o f activities that are at the interface between the markets and the productive activities. Some of these include: compliance with quality and standards, product adaptation, product development, proactive marketing, active sales and marketing, integration to value chains, and management. The interventions that are envisioned can be classified into three categories: (i) developing the market o f non-financial services to enterprises; (ii) supporting the transition o f the informal sector through sub-contracting and other business linkages models; and (iii) making selected meso-level interventions such as value chain integration for clusters o f enterprises to address common industry problems and contribute to the (sector-specific) business environment retrofitting. For the sake o f demonstration effects and visible impact, activities related to these three categories o f interventions will roll out in the agribusiness and construction sectors and then to any sectors that meet the set criteria and prove to make a significant impact. These initial target sectors were chosen following preliminary extensive due diligence work that suggested that not only a large number o f MSMEs are operating in these sectors and need selected outsourced support, but also that sector specific interventions targeted at tailoring their immediate business environment will help MSMEs better integrate into the relevant supply and value chain clusters that are expected to be equally rationalized and enhanced through these same interventions. (Q Developing the Market of Non-financial Services to Enterprises The aim o f this category o f intervention i s to stimulate the market and buildrelevant local capacities for the provision o f direct non-financial services to enterprises. The related interventions will be performed through the following activities: To demonstrate to MSMEsthat it i s worth have recourse to external providers o f direct support to enterprises (by individual consultants and/or by specialized BDS providers), the project has established a business development services fund (BDS Fund) based on a cost sharing (matching grant) mechanism. To build sustainable capacities for all types o f providers o f direct non-financial services to enterprises, grants under the BDS Fund will be extended to specialized BDS providers, national consulting groups (NCGs), and other enterprise and trade development support structures (ETSS), in so far they are involved in direct support to enterprise development, be it for products and market development or for the enhancement o f managerial capacities; selected service providers will also benefit from an integrated business services fund under the BDS Fund to fund selected business equipment to facilitate delivery o f services to SMEs. The integrated fund will be carfully administered based on pre-established qualification criteria and for a limited range o f equipment. To support the private sector's contribution to buildingthe process and the content o f the public- private policy dialogue (through the design o f sector strategies and implementation o f business linkages programs for instance) and to support private sector associations' capacity to transit from the status o f lobbying organizations to recognized policy advocacy interlocutors, policy advocacy groups/structures and apex organizations such as business membership organizations (BMOs) will be eligible to receive grants from the BDS Fund. 9 The BDS Fund will finance these three activities through the credit. A BDS fund manager will manage the fund inline with market conditions and other donor programs. (ii) ExpandingDomestic Market and the Transition of theInformal Sector through Linkages Overall, this intervention will provide business services to facilitate linkages between MSMEs and large- scale industries. Specifically, MSMEs will be supported to operate inthe area o f sub-contracting to enable them play a significant role in private sector-led economic growth. A four-pronged integrated approach will be used: (i)comprehensive management development (training and consultancy); (ii) business linkage services (matchmaking and embedded services); (iii) assistance to industry business management and intermediary organizations; and (iv) assistance to Micro-Construction Enterprise Clusters. Because this intervention seeks to build the capacity o f MSMEs to participate in the increasing scale o f government, donor, and private sector projects, pilot activities will be supported in the construction sector to enable MSMEs to effectively play their pivotal role o f delivering infrastructure. Specifically, MSMEs will be supported to operate inthe area o f sub-contracting to enable themplay a significant role inprivate sector-led economic growth. The Government will be encouraged to create incentives for large construction firms to sub-contract to smaller firms to ensure that MSMEs are mainstreamed into GoG construction projects. To complement the provision o f business linkage services, clusters o f SME suppliers and large industries will be supported on a sector basis to strengthen their operations. This will take a form o f project development to establish common service facilities (for example, storage and distribution facilities), support to obtain financing facilities, support to overcome infrastructure bottlenecks that prohibit SMEs from effectively supply inputsto large industries, and others. Lessons learned during the project implementation will be applied to support enterprises' transition through sub-contracting in other priority sectors, notably in agribusiness and other sectors, to contribute to integrating MSMEs into the production and supply chains. (iii) Meso-Level Interventions Apart from supportingthe sectors identified above, the project will provide technical assistance to support the identification of other priority sectors in which Ghana has the potential to develop competitive industries, benchmark Ghana's current production vis a vis its international competitors, and support the development o f sector strategies. To improve integration along the targeted value chains, the project funds will support the mobilization o f firms tojointly create sector strategies that address specific bottlenecks in the flow o f goods, services, and information from the farm to the export gate. Joint business plans for clusters o f firms, which meet eligibility criteria, will be supported to carry out initiatives identified in the sector strategies. Based on available analytical work, the project funds will initially provide technical assistance to clusters o f firms and specialized BDS providers to improve efficiency and performance along the value chains, with a special focus on the processing-to-exporting functions and developing the domestic market by promoting local demand for "Made in Ghana" products. For export markets, initial support will be provided for the value chains in selected sectors, based on available analytical work and Government-identifiedpriority sectors.12 In addition to supplyingexport markets, a large number o f SMEs produce for the domestic market, both as suppliers o f industrial inputs and o f consumer goods and services. These SMEs face substantial barriers in terms o f their small size (which particularly constrains their ability to produce sufficient quantities and consistent quality for industrial inputs) and in terms o f an information barrier (both downstream producers and consumers are unaware o f what goods and services are available and how they can be purchased). ''Management, implementation, and monitoring costs for this sub-component are US$1.3 million. 10 To help overcome these common sector constraints, project resources will also finance two specific activities that have beenpre-identified: Web-based PlatformmTational Product Gallery. A Web-based National Product Gallery will be developed to provide a virtual storefront to showcase "Made in Ghana" goods and services electronically. To facilitate sales, a Web-based buyer-seller matchmaking database will be attached to the product gallery. Industrial Sub-contracting and Partnership Exchange (SPX). The existing Association o f Ghana Industries/U.N. Industrial Development Organization ( A G W I D O ) SPX will be supported under this activity to promote and facilitate sub-contracting and partnership agreements between industry MSMEs and large companies, and it will be piloted in the construction sub-sector. Specifically, the SPX should complement the project activities by providing matchmaking services and collating and managing relevant information to facilitate capacity-building interventions, as well as monitoring and evaluation (M&E). The SPX should also facilitate training and consulting services (complementing the activities of business associations). The existing database will be modified and customized to suit the matchmaking and M&Eneeds. Based on the findings of value chain analyses, new meso-level interventions in agribusiness will be designed and implemented duringthe project lifetime.Additionally, the project will gradually open up to other sectors to be identifiedthrough the prioritization exercise discussed above. All meso-level interventions will be financed through direct technical assistance under the project, except those activities that fall under the matchmaking category (for example, business associations and SPX, which will be financed by the BDS Fund). II.Entrepreneurship Development (indicative US$12.4 million; Government US$0.6 million, IDA US$lO.l million; clients US$1.7 millionequivalent) Prospective entrepreneurs are not able to identify and take advantage o f business opportunities because o f the existing information asymmetry and industrial missinglinks. To close this gap and stimulate private sector participation to transform economic prospects, the Government has decided to engage in codified catalytic interventions with clear Government exit strategies. The objective o f this intervention therefore, i s to promote entrepreneurship development through projects aimed at enhancing economic opportunities and promoting demonstration effects through various incubation processes. The proposed project resources will support: Government information, communications, and technology (1CT)-based entrepreneurship development initiatives; institutional building to support Government Catalytic Interventions (GCIs) such as Presidential Special Initiatives (PSIS) and Rural Enterprise Development Program (REDP); incubation and set-up o f pilot common service centers (CSC)-for demonstration purposes- for selected clusters o f enterprises in selected branches or sectors; and project development for the creation o f common service centers for MSMEs, including joint- venture arrangements and public-private partnerships. (i) ICT-Based Entrepreneurship Development The project resource will support ICT-based entrepreneurship development to kick-start ICT- and knowledge-led socioeconomic growth by focusing on (i)increasing employment in the ICThformation Technology-Enabled Services (ITES) by attracting firms in an ICT Park located in the Tema Multi- Purpose Industrial Park (MPIP); and (ii) initial steps to create an overall environment conducive to taking ICTiITES investment. This initial support i s consistent and complementary with the potential project called e-Ghana, which will build on and expand these efforts, as well as cover some additional areas. Unless circumstances change, the e-Ghana Project will not reach the board before July 2006. However, some o f the activities, notably those related to the ICT Park that will showcase the Tema MPIP, have been highlightedas prioritiesby the Government. The project resources will finance the following interventions: Information and Communication Technology Park (ICT Park). To stimulate the startup and growth o f technology-intensive, knowledge-based businesses in Ghana, the project resources will support the Government's initiative to establish an ICT Park within the Tema Export Processing Zone (EPZ) that will become an MPIP at completion o f the Gateway Project restructuring. The park will provide infrastructure and business support services designed to assist export-oriented small and mediumICT businesses as well as ITES firms and to maximize their potential for growth. It i s expected that the park will be established as a Public-Private Partnership (PPP), in which the implementation would be private sector driven, enabled by Government support. WBG assistance in establishing the park would include a comprehensive feasibility and implementation study to identify required infrastructure and ancillary services, targeted industriesand companies, legislative and regulatory issues, financial projections, and proposed financing structure (PPP), as well as a business strategy. Based on the results o f this study, Bank funding would support site planning, a marketing strategy, purchase and installation o f telecommunications equipment, construction o f a business center and an administrative center, and administrative costs. Support to set up a conducive environment for Business Process Outsourcing (BPO) and Information Technology (IT) and ICT businesses in Ghana. The Government o f Ghana has commissioned a competitive assessment study (co-financed by InfoDev and Multilateral Investment Guarantee Agency) to identify niche markets inthe BPO and IT/ICT sector inwhich Ghana can acquire a competitive advantage on the global market. This sub-component will allow an early implementation of the competitive study findings from February 2006 while the e-Ghana Project will extend this support starting in 2007. This subcomponent will more particularly focus on businesses likely to populate the ICT Park in the Tema MPIP. In addition to consultancies and equipment, it will have a training component driven by the K o f i Annan ICT Center o f Excellence. Support to Ghana Information Communication Technologies Directorate (GICTeD). The Government intends to develop the GICTeD to establish, oversee, and coordinate the Government's IT programs on electronic government and commerce, online services, associated IT infrastructure, and the Internet. GICTeD will also be in charge o f the Government IT architecture and the interoperability framework. It i s expected that better coordination o f Government IT programs, procurement, existence o f an operability framework and accreditation mechanism, as well as roll-out o f e-Government applications will result in increased contracting opportunities for ICT service firms, including those to be located in the ICT Park, building their experience to export services outside o f Ghana. Support to GICTeD will be aimed at facilitating and consolidating its establishment and will range from hardware to consultancy services (which may include key staffing), following an organizational capacity-building study. The envisaged support will be complemented by the assistance envisaged under the e-Ghana Project. Capacity Buiding for the Ministry of Communications. This support, which will include technical assistance training, the organization o f an ECOWAS workshop, and targeted IT equipment, i s key to improve the ministry's capacity in participating in regional and sub-regional harmonization efforts, notably on issues with a direct impact o f the cost o f doing business for the businesses at the I C T Park in the Tema MPIP. Ensuring proper oversight o f SAT3 access, and facilitating the materialization o f interconnection with neighboring countries have a direct impact on the availability or non-availability o f 12 broadband services (high-speedInternet and data transfer) to the park tenants, as well as on price level o f such services. This capacity-building assistance will also be used for its role as implementation agency for the ICT-based entrepreneurship development sub-component. This subcomponent will also include support to postal sector reform and operationalization o f the Ghana Investment Fund for Telecommunications Development (GIFTEL) with a specific focus on impact for SMEs' connectivity. (iq Support to Ministry of Trade and Industry (MOTI) and GCIs. This support will focus on complementary capacity-building requirements that enable the Government to meet its objectives o f exiting from the strategic and catalytic interventions commenced under its PSIs to maximize the role o f the private sector. Support will be driven by best practice, based on performance, and would include: (i) capacity building and training for participating firms; (ii) support for the apparel and garment sector; (iii) appropriate technical assistance for Government agencies charged with the PSIs and REDPs; (iv) consultancy for codifying implementation and management; and (v) establishment o f Community-Based Technology Transfer Centers (CTTCs) outside Accra. (iiqlncubation and Set-up of Pilot Common Service Centers To foster linkages and contribute to the integration o f the national economic fabric, project resources will finance the development o f sustainable common service facilities to be accessed by MSMEs. This will be implemented on a pilot basis, through direct funding o f required physical structures in the framework o f PPPs-with codified public intervention and agreed Government exit scenarios-to catalyze the process and improve the visibility o f these types o f opportunities for the private sector. The common service centers will support clusters o f firms and activities to improve efficiency and performance along the value chains inpriority sectors, with special focus on the processing-to-exporting functions. On a pilot basis, an integrated package o f interventions based on generic and specialized BDS, common service centers, and specifically, access to finance and business linkages models (supported by a fund) will be implementedto facilitate sub-contracting between larger and smaller enterprises, and between formal and informal ones, within the construction sector. T o develop common service facilities and infrastructure support, specific activities have been identified, Including: Furniture City The Government and the WBG have agreed to use the credit to contribute to finance the establishment o f a Furniture City Common Service Center within the TEMA MPIP on a pilot and demonstration basis. The objective i s to develop a wood furniture city to resettle small-scale furniture producers and provide them with common facilities. Activities to be financed include: developing the relevant infrastructure for wood /furniture city; constructing 300 workshop units for small-scale carpenters, furniture makers, wood workers, and joiners; constructing a common show room and an administrative building; installing common facilities and equipment (that is, wood kiln dryers, laminators, mold-making plant, and so on); providing relevant capacity building; establishing a Wood Technology and Design Center; creating a Website for e-Commerce; and integrating overall market access and trade facilitation infrastructure. Garments and Textiles. Under this activity, credit would be used to establish a Clothing Technology and Training Center outside Accra, which would feature common specialized machinery for use by SMEs (with maintenance services provided). Training would be provided to SMEs to service their equipment and upgrade their production systems. Activities to be financed include the following: developing the relevant infrastructure for equipment maintenance; constructing a common show room and an administrative and training building; installing common facilities and equipment (that is, specialized computer-aided designs and so on); providing relevant capacity building; establishing a Garment and 13 Technology Technology and Design Center; creating a Website for e-Commerce; and integrating overall market access and trade facilitation infrastructure. (iv) Projects Developmentfor the Creation of Common Service Centersfor MSMEs Buildingon demonstration effects, project resources will be usedfor fundingo fCommon Service Centers (CSCs) projects development, maturation, and incubation, including joint-venture arrangements, whether for PPP or totally private sector led. This intervention i s justified by the fact that not only i s economic opportunities not visible to the private sector, but private sector organizations lack the maturity and funds to initiate such approaches. The cost o f project development will be borne ex-post by private sector after Government exit. III.TradeFacilitation (indicative US$6.4million; Government US$0.3 million, IDA US$5.2 million; clients US$0.9 million equivalent) Given that all the above interventions could to be leveraged and made sustainable only within an integrated economic fabric, project funds will finance the construction and expansion o f an integrated trade facilitation infrastructure based on online proactive databases and interactive trade information systems to be accessed and used by service providers involved in trade promotion, active sales and marketing, and handholding o f MSMEs for product development and adaptation, including compliance to standards and investment promotion. These mechanisms will be used together with other tools and facilities to contribute to the development and growth o f priority sectors identified. This component has been designed and will be implemented on a demand-driven basis. The credit will support the construction o f the market access and trade facilitation infrastructure through funding of: (i)a proactive trade information system for SME development; (ii) promotion; (iii) export tourism development; and (iv) interfacing and integrating the market access and trade facilitation infkastructure. (i) Information System (a) SME database. The main objective i s to establish a one-stop Information Resource Centre (Data Center) to address some o f the information needs o f MSMEs. The specific objectives include: (i) facilitating access o f policy makers to information needed for policy formulation, monitoring, and evaluation; (ii)disseminating timely and relevant information to prospective investors in the MSME sector at the national and district levels; and (iii) networking with other MSMEresource centers to be able to monitor industry trends and other best practices worldwide. The center will serve the following functions: (i) collecting, collating, and analyzing data relevant for the realization o f defined objectives o f MSMEs; (ii) undertaking periodic updates o f data on MSMEs; and (iii) disseminating information on MSMEs.The expected output is twofold: (i) establishment one-stop Information Resource Center in the Accra with a branch network in the Business Advisory Centers (BACs) in the 110 districts, which would be based on Wide Area Network (WAN) to address specific needs o f businesses in the districts; and (ii) annual reports on performance o f MSMEsinthe country. The database would be used as a benchmark for sector competitiveness and would inform the implementation o f sector strategies. It would be updated regularly to ensure that sector strategies are responsive to changing demand and supply conditions. 14 (b) Proactive Trade Information System (PTIS). As mentioned above, MSMEs in Ghana evolve in total opacity vis-a-vis markets; correlatively, they cannot appraise new economic opportunities to emerge from the transformation o f national resources, as well as the gaps to be closed to take advantage o f the market prospects. Under these circumstances, supporting MSMEs to access and settle on markets on the sustainable basis entails an interventionist approach to bridging the gap o f information asymmetry. For the identified priority sectors, an industrydatabase will be established to detail the current status o f each industryinGhana and internationally. This will result in a clear understanding o fmarket requirements for each sector and support a gap audit o f Ghana's current supply capacity vis a vismarket requirements and the identification o f bottlenecks. But the approach to closing the gap o f information asymmetry i s to be done on a pro-active basis, because managers and prospective entrepreneurs need information but do not know which information or for what purpose. Because closing the information gap could only be effective if the information provided embodies relevant protocols and pedagogical tools that will make the enterprise understand the implications and translate them into relevant adjustments at all required levels, the configuration o f the proactive trade information system entails assistance in capacity building to deliver online (web-based) services for training, product development and adaptation, packaging, labeling, and so on. The PTIS will feature potentially exploitableresources inGhana and opportunities for investment, potential product profiles for export and domestic markets, detailed definition o f the characteristics o f targeted markets by sector and product lines, available and exploitable technologies by sector including training, marketing, product design, development and/or adaptation, packaging and labeling, industrial process plant retrofitting (IPPR), and others, as well as protocols to enable enterprises to translate the market requirements and regulations into concrete adjustments. The PTIS will be accessed by all players operating in the area o f market trade and investment promotion, including standards institutions, service providers to enterprises and business organizations. (ii) Enhancing Export Promotion The effectiveness o f export promotion to achieve increased export opportunities has been relatively limiteddue to lack o f adequate professional support inproduct development and planning by the largely small- and medium-sized export companies. Additionally, the market promotion activities for outputs o f PSI and REDP companies require professionally packaged supply-side information and market-focused sales interventions to introduce and sustain the demand for the products overtime. A coordinated market development program, encompassing buyer-seller matchmaking and agency representation abroad, i s anticipated within collaborative efforts o f public-private sector interests. International consultancies, training, and basic trade infrastructure for product promotion will be procured through the Ghana Export Promotion Council (GEPC) for the targeted export companies and programs. (iii) Support to Tourism Development Project funds will be used to support the inception stage o f tourism development in Ghana through capacity building for the Ghana Tourist Board. It i s pertinent to support micro tourism businesses in the communities hosting tourist sites to boost export o f non-traditional commodities, create job opportunities for the people, and most important reduce poverty. For instance, those inthe local crafts industryin craft villages are to be supported to add value and increase production o fnon-traditional export items. (iv) Integration of Export Facilitation and Logistics Management SMEs face substantial information barriers and high transaction costs in accessing export trade services such as export credit, export insurance and export guarantees. In addition, the small size o f SME production inhibits SMEs from meeting high volume export orders in a timely manner. T o support SMEs to overcome these constraints in exporting, two key activities are envisaged under this sub-component: first, establishing an Export Round Table (ERT) to act as a one-stop facilitating mechanism for export 15 trade services; and second, establishing Export Trade Houses to support SMEs to meet the volume and overall integration o f trade facilitation infrastructure. Export Round Table. TA and credit will be provided to establish a one-stop facilitating mechanism for export trade services. The ERT will be composed o f key public and private sector institutions including banks, insurance companies, airlines, shipping companies, business advisory services, and customs. When SMEs are ready to export, they will bring their order to the Export Round Table secretariat who will hand-hold the SME to enable access to the services provided by the round table members. This i s a relatively low-cost initiative inwhich TA will be provided to operate the Export Round Table secretariat. The secretariat will be self-financing through a user-fee system. Relevant capacities should be built within the ERT to help establish the facility and stimulate demand. The functions o f the export secretariat include: 0 Acting as the secretariat to the Export Round Table to ensure coordination and streamlining o f functions between the key public and private export trade service providers ;and 0 Providing hand-holding services to SMEs to ensure that they secure timely and efficient access to export trade services. As for any other specialized BDS, the ERT will be eligible to marching grants through the BDS Fund established under the credit. Export Trade Houses. TA and credit will also be provided to establish Export Trade Houses, which will act as brokers and distributors for SMEs, enabling SMEs to meet critical export volumes and timeframes for specific orders, ensure consistent quality o f exports, and negotiate bulk shipment rates, reducing the cost o f transportation and enhancing competitiveness. Export Trade Houses will eventually be self- financing through a user-fee system, but consultancy i s required for the first three years to efficiently establish the Export Trading Houses and ensure commercial viability. To stimulate demand, SMEs using the facilities offered by Export Trading Houses will be eligible for matching grants. (v) OverallIntegration of the TradeFacilitation Infrastructure Several initiatives are already being carried out in the framework o f trade development in Ghana. Additional targeted interventions was proposed and appraised in this project. There i s a need to integrate all these and connect all systems and structures to the overall trade facilitation infrastructure. Therefore, project credit will finance relevant expertise to assess the missing links within the overall trade development system and provide with relevant solutions to integrate it. Component 3: Business Environment (US$4.9 million: IDA US$4.5 million, Government US$0.4 million equivalent) The component will support efforts of the Government and its development partners (DPs) to improve the business environment in Ghana by supporting activities identified under the PSDS. Specific initiatives will leverage activities and the expected impact from other project components, avoid duplications and overlaps with other donor activities and reinforce synergies. The component will support the implementation o f the PSDS through pooling the financial resources with other development partners. The Bank contribution will support overall efforts to: (a) support the implementation o f the Ghana trade policy; b) improve the business registration process so business start-up procedures are further simplified and more MSMEs enter the formal sector and increase their accessibility to both financial and non- financial resources; (c) reform the existing system o f standardization, certification, and accreditation o f conformity assessment organizations by updating and enforcing regulations in this area and provide capacity building for relevant agencies, including the Food and Drug Board, the Ghana Standards Board, 16 and laboratories; and (d) enhance the PSD-related activities o f ministries, departments, and agencies (MDAs) and provide capacity-building assistance so these MDAs can more effectively play their coordination and facilitation role in support o f MSMEs. The funds allocated under this component will be pooled together with funds being provided by other development partners-namely, United Kingdom's Department for International Development (DFID) and the Danish development agency, Danida. This basket fund will be used to finance the following activities envisaged by the PSDS Composite Work plan: 1. Implementingthe selected activities under the Trade Sector Support Program 2. Implementingmarket-oriented reforms inthe national system o f quality standards 3. Strengthening the public-private dialogue 4. Improving business legislation 5. Reforming business startup procedures and regulations 6. Streamliningthe levying o f local taxes on businesses 7. Buildingthe MDAs capacity to effectively serve the private sector needs 8. Monitoring and evaluating the PSDS Given the risk that other donors may not meet the co-funding requirements, project resources will fully finance the market-oriented reforms in the national system o f quality standards and the business startup procedures and regulations. Component 4: Project Implementation,Monitoringand Evaluation(indicative US$3.2 million: IDA US$2.9 million; Government US$0.3 million equivalent) As designed, resources will be available for the execution, reporting, review, and monitoring requirements o f the project. Activities include testing out models proposed to assist MSMEs and providing assistance to the Government (primarily the Ministry o f Trade and Investment to coordinate project activities and carry out the objectives o f the project components as provided in the Project Implementation Manual). Also incorporated in the project will be a project performance framework, which will monitor and assess results at four levels: output, intermediate outcome, economic outcome, and impact across the four principal components o f the project at the institutional (service providers and facilitators) and end-user (MSME target groups) levels. Assistance will be extended to enable the MOTI-in collaboration with the Private Sector Oversight Committee (PSOC) and the Ministry o f Private Sector Development ( M P S D t t o assess the impact o f the project during project implementation and after the project i s completed. Resources allocated to this component will fund financial audits, implementation monitoring, training, and the consultant assignments required to execute the project, including for real time monitoring. Provisions will also be made for equipment and operational costs (within an agreed framework) and support to carry out a comprehensive impact assessment survey. The latter will provide baseline data on enterprise productivity and the cost o f doing business. 4. LessonsLearnedandReflectedinthe ProjectDesign The project design draws on both the expertise from the World Bank's Finance, Private Sector, and Infrastructure Network, the IFC Africa regional and capital market teams, the SME Global Product Department, FIAS, the PSD Investment Climate Unit, and sector experiences in Ghana and elsewhere. The project was developed in collaboration with development partners operating in Ghana to build on their knowledge and experience and to incorporate international best practices. The project designreflects the following key lessons learned: 17 Market Development Approach: The project focuses most directly on building the capacity o f the intermediaries, providing services to MSMEs rather than delivering direct assistance to enterprises. Aid funding is often a poor instrument through which to directly support enterprises. However, evidence indicates that more upstream support creates a sustainable market for the demand and supply o f services transactedbetween private actors and enhances outreach and impact. Joint Private and Public Sector Leadership: The Government will have the primary responsibility for project implementation and may delegate some functions to the private sector (when public agencies are limited by constraints in absorptive and delivery capacities) to promote responsiveness to enterprise demand and enhance commercial sustainability. Government agencies will implement project activities directly under their charge. The project implementation process will also provide the necessary opportunities to build Government's capacity through learning by doing. The Government remains committed to providing an enabling environment for investments, implementing private sector and M S M E policies following best practices, and supporting strong public-private policy dialogue that will facilitate and reinforce broad ownership o f the project initiatives. Performance-Based Matching Grant Agreements: Maximizing grant recipients' contribution to total project costs and disbursing grant funds in tranches on the basis o f meeting performance agreements increase the likelihood o f success. The proportion or level o f costs borne by each recipient will therefore be designed to enhance the recipient's commitment to the project and will contribute to the sustainability o f the project. Incertain instances, the cost-sharing arrangements will be designedto allow for catalyzing innovative projects or supporting institutions with public good benefits (such as business associations), which may require a significantly different level o f cost sharing on the part o f the recipient. To this end, flexibility in determining the cost-sharing arrangements will be clearly reflected in the applicable eligibility criteria. Greater Access to a Range of Key Services to MSMEs: A principal conclusion of reviews o f M S M E interventions, including from Implementation Completion Reports o f IDA projects, i s the diminished results that accrue where MSMEs are unable to access the full range o f services they require. Finance without the right technical assistance has been a common failure in IDA lines o f credit. The evidence i s very strong that active intervention does not work unless the basic environment for the private sector i s in place. In light o f this, the current project strives to increase access to all the key services required by MSMEs and tackle some business constraints. Industry Focus: Better results have been realized where BDS are directed to particular industries. In view of this, the project will target resources at particular points o f demand in high growth potential industryvaluehupply chain clusters. The linkages between firms in these clusters increase the absorptive capacities for know-how transfer and dissemination. The valuehpply chain cluster approach i s used to enable Ghanaian firms to develop sufficient leverage for better access to international markets. l3 Single Access Point Business Centers: High opportunity costs o f identifying relevant BDS, accessing required market information, and making effective use o f it constrains MSMEs in developing countries. The single access point business centers, which market services on a commercial basis and have a strong private sector buy-in,have been proven to lower the costs o f doing business significantly. Pooling Funds: Pooling funds for those activities where: (i) i s clear Government ownership; (ii) there sector wide program i s developed, and (iii) harmonizing o f donor projects and resources i s the most effective mechanism for financing. The project will add resources to the donor basket fund to finance agreed activities based on the PSDS under the Project Business Environment component. l3 G. Gereff, "The Organizationo fBuyer-DrivenGlobal Commodity Chains" in G. Gereffi and M. Korzeniewicz (eds), Commodity Chains and Global Capitalism (Westport, CT, Praeger, 1994) ., 18 Market Access and Trade Facilitation Infrastructure: Evaluations have revealed that the impact o f most SME promotion programs based only on incentives such as matching grants i s severely limited by the lack o f market access and trade development infrastructure, which contribute to enabling environment to promote enterprise and entrepreneurship developments. One of the objectives o f the proposed project i s to build a market access and trade facilitation infrastructure to be accessedby all players, including MSMEs, services providers and support institutions. 5. Alternatives Consideredand Reasonsfor Rejection The Government requested the World Bank to consider supporting an IDA line-of-credit operation through financial intermediaries for SMEs. Experience with World Bank projects showed that most IDA line of credits show poor re~u1ts.l~The proposed IFC/IDA L O C and PCGprograms (with accompanying TA both the participating banks and SME portfolio companies) have been designed as an integrated, private sector-led package, addressing the lessons from previous IDA operations and therefore encouraging bank lending to the SME sector. Experience in Ghana has been that the government-sponsored guarantee program has suffered from low usage due to administrative complexity and concern by some banks for timely payment when the guarantee was called. The proposed PCG Program will be managed by the IFC and will be structured as a portfolio guarantee to streamline guarantee provision and payout, given the expected small size o f individual loans to be guaranteed. The initial project design envisaged technical assistance support to improve the business environment for non-banking financial institutions and to focus on limited areas that would facilitate MSMEs' access to finance. It was agreed that other critical financial sector constraints would best be addressed under the forthcoming Economic Management Capacity Building (EMCB) Project, which will support a broad range o f legal and institutional reforms in the financial sector as defined in the FINSSP. In addition, the IFC's Private Enterprise Partnership for Africa (PEP) plans to launch a new leasing project, which addresses the legal and institutional problems o f the leasing industry in Ghana. Also, support for the financial sector i s beingprovided by other development partners. Early consideration was given to use a voucher scheme to facilitate eligible MSMEs' access to business services instead o f matching grants for business service providers. However, the experience with voucher schemes in Ghana shows the highrisks interms o f information asymmetry, and other issues. One way o f ensuring transparency and minimizing this risk i s to build a sophisticated information system for the administration o f the voucher, but, to justify its cost, a similar system would require larger numbers o f beneficiaries than the target envisaged under this activity. In addition, a more generic BDS approach to improve competitiveness o f Ghanaian MSMEs was considered. However, the objective to increase global competitiveness for certain products and the need for very specific and coordinated activities to improve access to markets made it clear that a sector-specific approach i s more effective. Several studies were launched duringpreparation to examine possible sectors for inclusion. l4 OED, "Review ofBank Lending for Lines of Credit" (Washington, DC: October2004). 19 C. IMPLEMENTATION 1. PartnershipArrangements The proposed project has been designed with the support o f the Development Partners (DPs). Donor coordination efforts will be particularly strengthened under the Business Environment Component to minimize overlaps and reinforce synergies and complementarities. Pooled resources in support o f the PSDS will be governed by a Memorandum o f Understanding (MOU) that has been signed between the Government and participating DPs. This agreement specifies the details o f the activities to be financed from the basket as well as implementation, procurement, financial management, disbursement, reporting, and monitoring and evaluation arrangements. 2. InstitutionalandImplementation Arrangements The projected implementation period for the project i s five years, January 2006-December 2011. As illustrated in the organigrams (see Annex 6), MOTI will serve as the Project Executing Agency and will have overall responsibility for the management o f the project. MOTI will delegate the day-to-day implementation, supervision, and financial management responsibilities for all the project components to the SME Directorate inthe ministry. The SME Directoratewill be supported by consultants covering the financial management, procurement, disbursement, monitoring and evaluation, and progress reporting. Financial and procurement management support, currently provided within the Gateway Secretariat, will continue for the first two years o f project implementation o f the M S M E Project. The existing Private Sector Oversight Committee, comprising public and private sector representation, will provide strategic advice, approve contract awards for major activities funded by the project, and approve grant awards for consultant assignments above a pre-defined threshold under the Access to Finance and the Access to Markets, Trade Facilitation, and Entrepreneurship Development components. The Government agreed that it will obtain support from a private consulting firm or a team o f private consultants to serve as the BDS Fund/Technical Unit (TU) and manage the performance grant program available under the Access to Finance and the Access to Markets, Trade Facilitation, and Entrepreneurship Development components. The BDS Fund Manager will be supported by a Technical Unit that will provide technical input and ensure that activities are implemented in line with the Development Credit Agreement (DCA) and the Project Implementation Manual (PIM), advise on grants above defined thresholds (see paragraph below), and assist inthe development o f new criteria. The BDS Fund Manager's primary responsibility is processing applications through the different BDS Fund windows and disbursing grants. These consultants will assess all grant applications, approve those within their threshold limits, and make recommendations to the SME Directorate for proposals above those limits, procure technical assistance, and report on the implementation experience and impact o f the program. The consultants will be competitively selected following IDA procurement procedures. Relevant Government agencies and ministries will implement project components under their charge and capacities will be built within these organizations to enable them to appropriately implement and coordinate their component activities. In support of an effective and efficient implementation process for the performance grant fund, review and approval thresholds and grant limits were established and agreed with the Government. The following grant limits and thresholds will apply: For private MSMEs and BDS providers: 0 All grants will maximize the cost-sharing contribution o f the beneficiary; contributions will also increase for repeat beneficiaries. 20 0 No application will be considered for a grant o f under US$2,000. No single recipient firm or conglomerate may receive total grants in excess o f a cumulative total of US$200,000. 0 Based on the recommendations made by the BDS Fund/TU Manager, the SME Directorate will review and approve all allocations for amounts over US$lOO,OOO up to US$150,000. 0 Based on the recommendations made by the BDS Fund/TU Manager and the SME Directorate, the PSOC will review and approve all allocations for amounts over US$150,000. For financial institutions: 0 All grants will maximize the cost contribution o fthe beneficiary. 0 No application will be considered for a grant o funder US$2,000. 0 No single recipient firm or conglomerate may receive total grants in excess o f a cumulative total o f US$2.5 million. 0 Based on the recommendations made by the BDS Fund/TUManager, the SME Directorate will review and approve all allocations for amounts over US$lOO,OOO up to US$150,000. 0 Based on the recommendations made by the BDS FundTUManager and the SME Directorate, the Private Sector Oversight Committee (PSOC) will review and approve all allocations for amounts over US$150,000. The implementation arrangements will be guided by the Project Implementation Manual (PIM) for the M S M E Project, including the MOU for the Business Environment component. The manual will define robust control arrangements, summarize oversight functions to be provided by the SME Directorate and the PSOC to mitigate against weaknesses in the implementation environment, provide the overall accountability arrangements for the project, and ensure a seamless flow o f information and rapid turn around among the Directorate, consultants, and Government ministries and agencies. The procedures manual will also include service standards and necessary measures to ensure compliance with these standards. The proposed institutional arrangements for the major components o f the project are summarized as follows: Access to Finance Component Partial Credit Guarantee (PCG): The IFC will act as the administrator o f the IDNIFCPCG Program. An agreement governing the operation o f the PCG i s expected to be concluded between the Government and the IFC, defining among other things, roles and responsibilities o f IFC as the PCG administrator and operational mechanics for payments to be made by GoG through the disbursement o f the IDA credit funds directly into a PCG Program account to prepare for meeting obligations in the event a guarantee i s called. A Guarantee Facility Agreement would be entered between the IFC and each Participating Bank, to define the terms and conditions o f the PCG. Each Participating Bank as the beneficiary o f the guarantee would be responsible for conducting due diligence o f SME borrowers and loan uses, underwriting SME loans to be guaranteed and monitoring and reporting the performance o f the loan portfolio. As PCG administrator, IFC would implement and manage the PCG, subcontracting, as necessary, part o f its functions to an agent to be selected. 21 IDA LOC Performance-Based Grants. The IDA-financed LOC Performance-Based Grants that compliment the IFC LOC will be allocated to a "performance-based grants window" inthe BDS Fundand managed by the BDS FundTU Manager. The IFC LOC investment appraisal will determine the performance thresholds that trigger payment o f grants, and the level o f grants issued against these predetermined thresholds. Those detailed arrangements will be specified in the PIM. An agreement among the IFC, the LOC ParticipatingBanks, and the BDS FundManager will detail the thresholds, level o f grants, and disbursement mechanisms. Disbursement o f the performance-based grants will be subject to verification o f achievement o f thresholds by a third-party verifier (such as a local audit or financial specialist firm). Implementation progress and assessment reports for this sub-component will be provided by the BDS Fund/TUManager to the SME Directorate. IFC will manage the LOC on its own account. IFC will provide progress reports on a regular basis to the BDS FundTU Manager, who will include L O C progress updates in implementation progress and assessment reports to be submitted to the SME Directorate. Performance-BasedTA for Partner Banks and Performance-BasedTA for SME Borrowers:These activities will be managed by the BDS FundTU Manager. The PIM will define the eligibility, scope, costs, and content o f the BDS Fund. The BDS Fund/TU Manager will determine these factors in consultation with the participating banks and SME borrowers. The Manager will also be responsible for providing implementationprogress and assessment reports to the SME Directorate. Additional Financial Instruments: For the additional financial instruments, in accordance with the project implementation manual, the BDS FundTU Manager will administer the proposed financial initiatives and technical assistance to support proposals for consideration by the Government, IDA, and IFC. Access to Markets, Trade Facilitation, and Entrepreneurship Development Component The BDS FundTUManager will be charged with the implementation o f the access to market activities to be carried out under this component. The activities under the trade facilitation sub-component will be coordinated by the SME Directorate and implemented by relevant government agencies or public-private consortiums. The SME Directorate will coordinate, monitor, follow-up, and provide reports on implementation progress to the PSOC, IDA/IFC, and donors. The entrepreneurship development sub- component will be implemented by relevant government agencies (the Ministry o f Communications for the ICT-based activities; the SME Directorate for the furniture city, development o f common service centers, support to REDP; and the MPSD for capacity building for GCIs). Overall coordination o f this sub-component will be the responsibility o f the SME Directorate. Consultants will provide capacity- building support to these ministries, as required. Under the trade facilitation and entrepreneurship development components, performance contracts will be signed between the PSOC and each implementing agency. The implementing agencies/structures will be held accountable for the delivery o f project outputs. These performance contracts will include measurable indicators and the means o f verification as definedinthe project's Logical Framework. BusinessEnvironment Component The PSDS Oversight Committee has a role to oversee the implementation o f the activities under the PSDS, including those financed from the pooled funds. Reporting to the PSDS Oversight Committee, the SME Directorate and MPSD will have primary responsible for the day-to-day administration o f the component activities and meeting the reporting requirements. There will be working groups created to coordinate specific areas o f reforms under the PSDS. The one for business registration reforms has been established. This group includes representatives from the Ministry o f Finance and Economic Planning; 22 Ministry of Justice; Registrar-General's Department; Custom, Excise, and Preventive Service; VAT Service; and Internal Revenue Service. It i s proposed that representatives o f the M O T I and Accra Metropolitan Authority be included in this group. The group will oversee the implementation o f business registrationreform and serve as a platform for the efficient cooperation o f all the state agencies involved. It will provide guidelines for the consultants, monitor the component implementationprocess, review and approve reports, and advise the cabinet on issues related to the policy and legislation changes. Implementation, Monitoring, and Evaluation Component The SME Directorate will be primarily responsible for project execution and will coordinate project activities with beneficiary agencies and groups targeted under this component. As required, it will obtain technical support on a contractual basis (following IDA procurement procedures). The Project Implementation Manual will be drafted by the SME Directorate, with input from other implementing agencies, the BDS Fund/TU Manager, and IDA/IFC. This manual will provide: (i)a detailed description of the roles and responsibilities o f the implementing agency (SME Directorate, BDS Fund/TU, PSOC, and other implementing agencies); (ii)the institutional and operational guidelines for each component o f the project including a procedures manual for the grant component o f the project; (iii) thresholds for grant approvals; (iv) detailed project performance framework (indicators and targets); and (v) the pooled funding agreement, between participating donors and the Government including an annual action and procurement plan for the activities financed from the PSD pooled fund. The implementation manual will be agreed among the Government, IDA, and IFC. 3. Monitoring and Evaluation of Outcomes and Results The SME Directorate at the MOTI, the BDS Fund/TU Manager, other government ministries and agencies, and the PSOC will meet twice a year to review progress in project implementation, share accomplishments, identify problems, and agree on remedial actions. IDA supervision missions will be scheduled to coincide with these consultative reviews. A mid-termreview will be conducted to evaluate progress on implementation and determine whether the project should further extend its operations countrywide within 24 months after effectiveness, seek supplemental funding, or refocus. Quarterly progress reports will provide the basis for project monitoring and operational reviews. The SME Directorate will be responsible for monitoring project activities and providing project progress reports in line with the P I M and annual work plans. Project evaluations-addressing efficiency, effectiveness, and impact criteria-will be carried out by independent specialists in accordance with the performance framework and its implementation plan. The SME Directorate will be tasked with developing and populating the database required for the evaluation plan to be implemented. The evaluation plan will include bi-annual independent operational audits o f efficiency and effectiveness parameters o f the project. The first o f these audits will be prepared for the mid-term review. A key challenge for the project will be to assess project impact. This will require, inter alia, a determination be made as to whether the grant provided by the Government through this IDA credit resulted in sustained improvements in firm performance, additional to what would have been achieved without the subsidy.T o address this question, it i s necessary to compare with both "before and after" (assess target firms benefiting from the project both ex ante and ex post) and "with and without" (assess target firms performance relative to those who have not benefited from the project) controls. Two other major issues must be considered when trying to isolate the effects of the project: (i) to control for other factors in need the enabling environment that may be affecting firm performance, in addition to the project; and (ii) the difficulties posed by selection bias, in that firms benefiting from the project will tend to be ones that are more successful in the first place, bringing into question the additional benefits generated by the project grant. 23 4. Sustainability The sustainability o f the project will depend critically on: (i) Government's agreement and adoption o f the an arms-length approach to project implementation; (ii)the satisfactory achievement o f performance targets that measure the catalytic effects o f the initiatives to be taken inthe financial and BDS market; and (iii) commitmentoftheGovernmentandtheprivatesectortoprojectgoals, recommendedreforms, the and implementation arrangements. In addition to high Government interest and its commitment to the project objectives, the basis o f support to the private sector in this project-response to demand-driven needs, performance-based grants, and cost-sharing arrangements-should further ensure stakeholders' sustained interest to project activities and objectives. Implementation o f the project will be accompanied by a strong communicationsprogramand a sustained participatory process between the public and private sectors. The Access to Finance component o f the project aims to encourage local commercial banks to lend to SMEs, which contribute substantially to the economy o fthe country but are perceived as a risky sector by the banks. The project will build awareness that SMEs could be creditworthy and profitable clients for commercial bank lending. Given the favorable development in the financial markets in the country, including reduction in the interest rates and excessive liquidity in commercial banks and support from some donors (for example, USAID's assistance to one local bank), lending to SMEs has begun to increase at several private commercial banks in Ghana. The project will buildon these conditions and introduce a new and expanded guarantee mechanismand transaction-oriented technical assistance that will provide for greater awareness for SME credits and facilitate their access to domestic commercial debt financing. The PCG Program will help develop sustainable SME lendingpractices at participating banks through capacity building, which will enable them to expand SME business beyond the program period. Increased access to finance and capacity building for SMEs are also expected to lead to higher level o f entrepreneurial activity, private sector development, and improvements in economic output. 5. Critical Risks and Possible Controversial Aspects There are several risks andpossible controversial aspects to the project, which include the following: 0 The Government has been insisting that the project largely focus on increasing SME finance, with a preference for interventions that have a history o f failure, for example, IDA-funded credit lines, involvement o f weak government financial institutions, and government-controlled guarantee schemes. Recent discussions have concluded to support the combination o f an IFC/IDA L O C Program and an IDNIFC Partial Credit Guarantee program as per the components now proposed in the project. The design o f the two instruments was supported by best practice, taking into account IFC and IDA policies and guidelines and IDA OP8.30 provisions. But given these program innovations, continuing resistance or interference from some quarters inthe Government may be expected. 0 Other donor projects involved in MSME promotion in Ghana finance similar and somewhat competing programs, and to the extent that these incorporate subsidies in user fees, programs supported by this project, which will take a commercial approach, could experience problems. Constant dialogue with other donors during project preparation and implementation will be important to avoid this problem. 0 The combined IDA-IFC PCG and LOC programs are innovative. Although several strong commercial banks have confirmed keen interest, attention will need to be paid to ensuring that 24 there i s substantive real demand for the product, other imperfections in the financial markets do not adversely impact on demand and performance, and that administrative arrangements are kept simple but effective. The design o f this component has appropriately addressed related financial sector issues, particularly on subsidies, as called for under OP8.30 but will be subjected to high scrutiny. 0 The strategy used under the Access to Markets component i s new for Ghana. It requires willingness o f all players, inparticular the Government, to apply a private sector-led approach to value chains and sub-sectors, which will allow private players to influence interventions. To the extent that this strategy i s diluted into a more top-down approach, project success i s at risk. 0 A demand-driven approach is essential for the value chain approach. A strategy in which decisions are made on the basis o f over supply or with disregard to current and professionally forecasted demand will seriously challenge impacts inthe area o f competitiveness. 0 Business centers have to be runwith highdecision-making power o f the private sector. They must be commercially and demand oriented. A supply orientation may lead to fundamental inefficiencies and low demand for a center's services. 0 There i s the possibility o f litigation on land dedicated for the EPZ between the private developers and the Government. 0 Development partners and the Government might not be able to agree on all aspects o f implementation o f the PSDS through the pooled fund or there may be financial gaps for the whole program. Should this occur, project resources may be refocused on reform activities relating to quality standards and business registration. Risks with Toproject development objective By way o f requesting compliance In order to reduce the impact o f N with its policy prescriptions, the interferences, specific attention will be given Government has challenged the to the design o f the Project Implementation WBG to develop new approaches Manual (PIM), particularly in terms o f good to SME and trade development project governance. Also, because o f the with innovative instruments and complexity o f the project and in order to programsiprojects harmonization build local capacities to manage the project with the Development Partners implementation, monitoring and evaluation, (DPs). Given the project multiple the design o f the PIM which normally falls innovations, continuing resistance within the Government domain, will rather or interference from some quarters stem from a joint exercise involving WBG, in the Government and further DPs and Government. Right after Board consultations with DPs may be approval, a series o f workshops will be help expected aside from the need to (one for each componenthstrument) with build the Government capacity to the objective to bring all players on the same implement, monitor, evaluate and page and derive a plan o f operations owned re-orientate the project (ifneeded). by all stake-holders; this will lay down the foundations o f the final draft o f the PIM. 25 Risks RiskMitigation Measures RiskRating with Mitigation To component results The Government has been Although several strong commercial banks M insisting that the project largely have confirmed keen interest, attention will focus on increasing SME finance, need to be paid to ensuring that there i s with a preference for interventions substantive real demand for the product, that have a history o f failure, until other imperfections in the financial markets an agreement was reached with the do not adversely impact on demand and WBG. Difficult discussions have performance, and that administrative concluded to support the arrangements are kept simple but effective. combination o f an IFC/IDA LOC In the case that private banks do not show Program and an IDA/IFC Partial enough interest for the proposed instruments, Credit Guarantee Program (PCG) provisions exist to cancel the related as per the components now subcomponents and re-allocate the proceeds. proposed in the project. The The Access to Finance component will design o f the two instruments was nevertheless remain in the project as the supported by best practice, taking provision exists to develop and implement into account IFC and IDA policies additional financial instrumentsthat fit inthe and guidelines and IDA OP8.30 actual economic structure o f the country. provisions. But both the PCG and This flexibility allows adjustments andor IFC/IDA LOC still need to be changing course inneeded. fully appraised by IFC. There is a risk that private banks do not finally express interest; there i s also a risk that the IFUIDA LOC Program does not receive clearance o f the Financial Sector Board depending on the conclusion o f the IFC appraisal. The integrated strategy used under Provisions exist within the project to N the Access to Markets, Trade strengthen the structure and the substance of Facilitation and Entrepreneurship the public-private policy dialogue. Joint Development component i s new public-private implementation arrangements for Ghana, and new to the WBG. o f several project intervention instruments It requires willingness o f all will provide with pedagogical tools for players and strongiactive public-private partnerships with clear interfaces between Government Government entry/exit scenarios. WBG staff agencies themselves and between that will be involved in project supervision Government and private sector. To need to acquire further exposure to the the extent that this strategy i s proposed new instruments. This will be diluted into a more top-down initially done during the workshops aimed at approach, the project success may developing the project overall plan of be at risk. For instance, Common operations for the PIM. Service Centers (CSC) should be run with high decision-making Dower of the Drivate sector. They 26 Risks RiskMitigation Measures RiskRating with Mitigation must be commercially and demand oriented. A supply orientation may lead to fundamental inefficiencies and low demand for a center's services. There i s a possibility that the Though under the restructured Gateway S dispute between Government and Project, the Bank has received assurance a private enclave developer over a from the Government that it will re-enter the significant portion o f the land disputed land within the State assets base, dedicated for the present EPZ (to one has to make sure that Government be transformed into a MPIP) is not handles this issue promptly and successfully. resolved. Though the portion o f The Bank should offer its assistance for the the land that is dedicated to the dispute resolution ifnecessary. ICT Park and the textile village i s not under dispute, this situation may delay companies' settlement inthe overall MPIP,notably inthe portion o f the land that i s expected to host Furniture City. Beneficiary service providers do Beneficiaries will be service providers, who M not seek technical assistance on a have a clear understanding o f M S M E timely basis to implement project constraints and requirements o f MSMEs and components; services are not whose continued access to project resources delivered effectively. Payments will be based on their responsiveness to these on loans and services are not needs, their outreach, and their ability to received as agreed with client meet performance indicators. Regular firms. review, monitoring and evaluation will assess the project's impact. The value chain and sub-sector approaches, which assess gaps in competitiveness, will increase transparency on MSMEs demands in terms o f business services. Instruments for quick demand analysis will assist providers to develop appropriate products. Also, the project will be designed and applied incollaboration with other donor programs to foster a coordinated and complementary approach to the provision o f commercial services to MSMEs. In addition, a communications package that informs MSMEs o f products and services available through providers will be designed and implemented. Specific BDS which will be developed are not yet widely available in Ghana. Crowding out by subsidized firms i s therefore at least initially less risky. Demand o f firms for specific services, offered under 27 Risks RiskMitigationMeasures RiskRating with Mitigation the project, will be stimulated through a series of interventions such as awareness raising, joint sector action plans, or collective matching grants. Intermediaries fail to perform in The project will be continually learning and M accordance with performance adapting as its know-how in terms o f how to agreement support providers in target markets in Ghana grows. This knowledge will be used to adapt performance arrangements to strengthen performance o f intermediaries, re-direct support to new services and screen out services that do not provide the impact at the level o f the M S M E that i s being sought. Development partners and the Should this occur, the project resources may M Government might not be able to be refocused on reform activities relating to agree on all aspects o f quality standards and business registration, as implementation o f the PSDS initiallyplanned? through the pooled fund or there may be financial gaps for the whole program. Other donor projects involved in This issue will be taken care o f as part o f the M M S M E promotion in Ghana harmonizationagenda. The workshops aimed finance similar and somewhat at preparing the project plan o f operations competing programs, and to the and subsequent PIM will offer a good extent that these incorporate opportunity to mitigate this risk. Also, subsidies in user fees, programs regular dialogue with the DPs during project supported by this project, which preparation and implementation will be will take a commercial approach, important to avoid this problem. could experience problems. Developedreforms for business Government endorsement received at all start-up and quality standards are stages o f the component implementation. not introduced. Governmental officials are teamed up with N the consulting team Even if the reform are Broad information campaign about new M implemented informal MSEs procedures and incentives to transfer to the remained reluctant to comply with formal sector the simplified regulations Overall risk rating M Risk ratings: H-highrisk, greater than 75 percent probability that the outcomeiresult will not be - modest risk, probability o f 25-50 percent that the outcome/result will not be achieved; N- low or achieved; S - substantial risk,probability of 50-75 percent that the outcome/result will not be achieved; M negligible risk,probability o f less than 25 percent that the outcome/result will not be achieved. 28 6. Conflictsof InterestManagement IFC and IDA have and will continue to collaborate in the preparation, financing and supervision o f the project as part o f the I D N I F C M S M E Program approved by the executive directors o f IDA. The coordination o f investment and advisory activities between the two institutions i s designed to improve the quality o f their advice and financial support so as to enable the Government to develop a better program that accurately reflects the needs o f MSMEs in Ghana. However, notwithstanding the benefits o f improved coordination, it i s recognized that the multiple roles o f the IFC in the preparation and implementation o f the proposed `project may raise potential or perceivable conflicts o f interest issues in view o f the possibility that some existing or potential IFC clients could receive support through the PDG and LOC programs and BDS grants under the project. Consistent with the World Bank Group's Conflict of Interest Guidelines, IDA and IFC have established a framework for identifying and managing such conflicts o f interest in this Project. The main features o f this framework involve: (i) prior disclosure o f any actual, potential or perceived conflicts o f interest to concerned parties; (ii) maintenance o f a two separate teams, one dedicated to the I D N I F C project preparation and supervision and the other focused ,onprocessingandmanagingtheIFCinvestment;and(iii) non-sharing o f any confidential information between the two teams without the prior consent o f the affected parties. The Government has confirmed its acceptance o f this framework (see Annex 15 for details). 7. Loan/Credit Conditionsand Covenants Effectiveness: 0 A final Project ImplementationManual satisfactory to IDA has been adoptedby the Government Disbursement Conditions: 0 For the Business Environment Component, an annual work plan and budget for the activities financed fiom the PSD pooled fund during the respective fiscal year has been finalized and i s satisfactory to IDA. 0 For all BDS Grants and LOC Performance Grants, MOT1has competitively selected consultants to serve as the BDS Fund/TUManager, and the arrangements and procedures for their appraisal and approval specified inthe D C A and the P I M have been complied with. 0 For the Partial Credit Guarantee Program, an agreement (signed by the IFC, the Government and IDA) on IFC's administrationof the PCGFacility, and IFC's commitment o f the PCGs inrespect to which IDA disbursement i s requested. Covenants applicable to project implementation: 0 The BDS FundTUManager will have primary responsibility for the appraisal, disbursement, and supervision o f all BDS Grants as provided inthe Project ImplementationManual. 0 The Business Environment Component activities will be implemented through a Sector-Wied Approach (SWAP) modality in accordance with an MOU signed between donors and the Government, including a pooled fund into which the allocated IDA proceeds will be disbursed. 0 IFC will manage the IDA/IFC Partial Credit Guarantee Facility on its own account and on account o f the Government in accordance with an agreement to be entered into among IFC, IDA, and the Government. 0 The detailed arrangements for disbursement and administration o f all L O C Performance Grants by the BDS Manager will be definedinthe Project ImplementationManual. (IFC will finance and manage the underlyingLine o f Credit facility on its own account.) 29 0 Independent financial and procurement auditors will be appointed within six months after the effectiveness date. D. APPRAISAL SUMMARY 1. Economic and FinancialAnalyses The economic benefits expected to be realized from this project will come in the form o f improved productivity and increased competitiveness. These benefits should in turn be translated into increased employment and increased total value added for the sectors being targeted. See Annex 9 for a detailed explanation o f the method usedto calculate the benefits and o f the assumptions which were used in these calculations. The net present value o f the benefits expected to be realized when the project is fully implemented are US$54,3 million, which translates into an internal rate o f return o f 23.3 percent. Most o f the expected benefits result from increases employment levels and increased value addition within targeted sectors o f Ghana's economy. The multipliers that apply to increased disposable income in a country like Ghana are quite significant consequently the "knock-down" effects o f economic growth are quite large. The fiscal impact o f the project i s expected to be positive with an estimated US$24,5 million inadditional tax revenue. Overall, the sensibility analyses show that the project i s robust with a rate o f return remaining above the discount rate o f 12percent under different scenarios. 2. Technical The project i s seeking to ensure appropriate technical standards are achieved inthree ways: (i) partnering with practitioners and technical experts with proven track records in successfully transferring know-how through local capacity building; (ii) focus on commercial, market-driven provision o f services will limit the creation o f grant dependency among beneficiaries and promote a demand responsiveness among service providers; (iii)developing specialized financial services for the M S M E market and targeting BDS to address specific industry needs will increase quality, market relevance and uptake o f services. The public sector role would be to: (i)revise public policies and regulations that produce high transaction costs and thus create a competitive disadvantage for MSMEs, and; (ii) facilitate the provision o f services to MSMEs to ensure efficiency and avoid crowding out o f private initiatives. This strategy represents a fundamental shift in the role o f the Government, away from direct provision o f services and toward facilitating the development o f private markets and networks. 3. Fiduciary The SME Directorate at MOT1 will be responsible for managing the financial and disbursement requirements o f the project, including preparing financial statements and carrying out the day-to-day financial management requirements o fthe project components. The SME Directorate will be supported by sufficiently trained staff at the Gateway Secretariat, who will maintain adequate accounting records in compliance with the D C A and will monitor the financial aspects o f the project activities under each component. The Gateway Secretariat will also manage the project bank accounts for the MSME Project. The Finance and Administration Division will submit requests for funds or withdrawal applications to the World Bank, and prepare the ministry's consolidated financial statements. The Secretariat will supervise and account for disbursements. Because this unit i s already currently involved in the management o f an IDA-funded project, it will be supported with personnel familiar with IDA procedures. 30 Independent and qualified auditors acceptable to the Bank will audit the project. The auditors will be selected on a competitive basis in consultation with the Auditor General and in accordance with Bank guidelines. It i s recognized that although it i s the responsibility o f the Auditor General o f Ghana to audit these government entities, it was agreed to recruit a qualified private sector auditor to carry out the audit. The auditors will be selected and appointed prior to negotiations. A management letter would be required to be submitted after the audit o f the financial statements. The Bank carried out the procurement assessment o f the Gateway Secretariat of MOTI, which will be responsible for providing procurement support to the implementing agencies under the project. Each o f the implementing agencies will be responsible for carrying out procurement for their work activities. The procurement capacity assessment examined the quality, transparency, and efficiency o f procurement and the appropriateness o f organization and institutional capacity in the Gateway Secretariat. The Gateway Secretariat i s familiar with Bank procurement policies and procedures and has been responsible for procurement management for the Trade' and Investment Gateway Project. Overall, the assessment indicates an average procurement risk rating for the M S M E Project. The findings are consistent with those o f the previous procurement post reviews (PPRs) carried out for the Gateway project. The main weaknesses common to most implementing agencies in the country include uncertainty about the agreed program o f work, inadequate procurement planning and monitoring, delays in processing procurement, poor record keeping, and inadequate contract management. The staff in the Gateway Secretariat includes a Procurement Specialist and an Assistant together with an Accountant and a Project Coordinator. The MOTI will identify trainable staff that will be mentored by the Procurement Specialist o f the Gateway Secretariat to ensure that the procurement functions are transferred over a two-year period. The procurement methods and prior review thresholds are found in Annex 8. The procurement methods and Bankreview procedures are stipulated ina formally agreed procurementplan. Under the M S M E Project, all international competitive bidding (ICB) and selection o f consultants involving international consultants will follow the Bank Procurement and Consultants Selection Guidelines. All other procurement and consultants' selection will follow the provisions o f the Ghana Public Procurement Act 663. The mission noted that the relevant structures-tender committees and the like-are already in place in the implementingagencies. A procurement plan covering an initial period o f at least 18 months has been submitted for IDA review by negotiations and was found satisfactory. The procurement plan will list the individual contract packages, and each package will include the estimated cost, the proposed procurement method, and the dates o f all processing steps through contract completion. Inaccordance with Bank Procurement Guidelines and the Ghana Public Procurement Act, the agreed procurement plan, as well as annual updates and contract award information, will be published. It was agreed that an independent procurement audit will be carried out annually. The Procurement Specialist will prepare a learningplan for the key officials o f the implementing agencies who will be involved in procurement. The learning plan will include indicators for measuring the effectiveness o f the learning activities. The project will finance key staff o f the implementing agencies including members o f the tender committees to attend the Bank-supported procurement courses at the Ghana Institute o f Management and Public Administration (GIMPA). The World Bank Ghana Office will also provide hands-on training to the implementingagencies on procurementrecords management and the establishment and maintenance o f contract registers. The Development Partners have agreed that IDA will review and provide clearances on procurement for pooled components on behalf o f the DPs. 31 4. Social There are no social issues triggered by this project. A number o f project components are expected to lead to favorable social outcomes, principally: (i) employment creation; (ii) contribution to poverty reduction; and (iii) institution building within markets, civil society, and within certain activities o f government. Project activities will provide short- to medium-term indirect social benefits resulting from increased investment and production and an overall stronger andbroader economy. 5. Environment The environmental category assessedfor this project i s B. Although the project i s not expected to present any specific environmental risk, IDA funds may finance services that may lead to adverse environmental impact. Under the Trade Facilitation and Entrepreneurship Development Component, the project will have infrastructure elements including construction o f a building and installing fiber optic cables at the industrial park. These components do not involve development o f a new site nor do they have any resettlement issues. Although they are building on the achievements under the IDA-funded Gateway Project, they were not covered in the Environmental Management Plan for the Gateway Project. However, recognizing the achievements and functional capacity within the Environmental Protection Agency, the Government agreed that this environmental assessment and management plan will be disclosed again in Ghana and in the World Bank's InfoShop and that the mitigation and management measures in the Gateway environmental assessment will apply to all infrastructure components o f this project. Appropriate reference to the environmental management plan and implementation requirements have been incorporated inthe DCA. In assessing potential beneficiary financial and business service providers and MSMEs under the other project components, the BDS Fund/TU Manager will review the environmental screening mechanisms o f the applicants. Once service providers are selected as beneficiaries under this project, the BDS Fund/TU Manager will make recommendations to build their environmental screening and verification capacity, as well as their ability to support and provide technical advice on relevant environmental aspects o f their clients' businesses and to link them with the appropriate ministry or environmental protection agency. It i s proposed that the PCG Program will use the environmental guidelines o f IFC, which will administer the PCGProgram and issue guarantees. 6. Safeguard Policies Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.0 1) [x 1 11 Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [I [XI Involuntary Resettlement (OP/BP 4.12) [I [XI IndigenousPeoples (OD 4.20, being revised as OP 4.10) 1.1 [XI Forests (OP/BP 4.36) [I [XI Safety o f Dams (OP/BP 4.37) 11 [XI Projects in Disputed Areas (OPIBPIGP 7.60)* [I [XI * Projects on International Waterways (OP/BP/GP 7.50) [I [XI By supportingthe proposedproject,the Bank does not intendto prejudicethe final determinationof the parties'claims on the disputed areas. 32 7. Policy Exceptionsand Readiness The project complies with all applicable Bank policies. Actions needed to meet fiduciary requirements have been taken and the financial management systems are in place. The project also complies with safeguard policies. A procurement plan for the first 18 months has been agreed with the borrower, and resources have been adequately allocated in the project cost and financing plans. The project implementation plan will be completed before effectiveness. Other required technical studies in support o f the trade facilitation and entrepreneurship development sub-components (building on prefeasibility work carried out during project preparation) will be completed during the first two years o f project implementation. 33 Annex 1:Country and Sector Background GHANA: Micro, Small, and MediumEnterpriseProject CountryBackground" Ghana was the first country in Sub-Saharan Africa to emerge from colonialism, achieving independence in 1957. Situated in the middle o f the West African coast between Cote d'Ivoire, Togo, and Burkina Faso, it i s the third largest member o f the Economic Community o f West African States and a major trading partner within the West African Economic and Monetary Union. The country is a signatory to the Accra Declaration that created the West Africa Monetary Zone in April 2000 and i s expected to host the headquarters of the West Africa Central Bank. It i s a key player in ongoing regional activities, including trade and transport facilitation and energy. Characterized by strong social institutions that play a mediating role critical for promoting national consensus and easing social tensions, the nation continues to enjoy peace ina sub-region plagued with political and ethnic problems. The Government has made important strides to deepen its dialogue with the growing civil society movement and the private sector. With increased participation in Ghana's development process, it i s one of the few countries in the region that has a chance o f meeting the Millennium Development Goals (MDGs). Over the past decade, poverty was reduced from around 52 percent to just under 40 percent.I6 Most of the social development targets and long-term debt sustainability are likely to be achieved if growth i s accelerated and partnership for poverty reduction i s deepened. Poverty in Ghana i s related to a number of factors including geographic location, access to services, demographics, educational attainment, and socioeconomic group." For example, in 1999, the incidence o f poverty among food crop farmers was 50.4 percent, compared with those in private formal employment, where only 11.3 percent were considered poor." Poverty is more acute in the three regions o f the north and in the rural coastal zones. Regional inequalities have persisted with large numbers o f households in the savannah and the rural coastal zones appearing to be in a situation o f chronic or persistent poverty, owing to their relative isolation from markets. Uneven quality o f service delivery, unavailability o f funding for new priorities, and inadequate development o f rural infrastructure have contributed to increasing poverty concentration in these areas. Limited access to education, markets, and public services has left households largely disconnected from economic growth and limited in opportunities to escape from poverty. Considerable efforts will be required to reverse past economic trends and support the economic growth necessary to increase living standards inthe country. In the past decades, cyclical and external factors have constrained economic growth. With its good endowment o f natural resources and strong export base, Ghana was well poised to achieve a sustained increase in economic growth after independence. That outcome was not achieved, however. Ghana experienced spurts o f growth in the 1960s but rapid economic decline set in during the mid-1970s. An Economic Reform Program launched in the early 1980s marked a change inpolicy direction from a state- controlled to a market-driven economy. By mid-l980s, the economy reboundedwith the aide o f buoyant cocoa and gold prices. This was followed by a period o f sustained output growth interrupted by episodes of weak macroeconomic management associated with the electoral cycle. Beyond the economy's vulnerability, however, Ghana's growth prospects have repeatedly been stymied by slow progress on "Memorandum o f the President o f the International Development Association and the International Finance Corporation to the Executive Directors o n a Country Assistance Strategy o f the World Bank Group for the Republic of Ghana," Report no. 27838-GH, February 20,2004. l6 Ghana, "1998-99 Ghana Living Standards Survey." Ghana Statistical Service, "Poverty Trends inGhana inthe 1990s" (Accra: 2000). 18 Ghana Statistical Service, "Poverty Trends." 34 structural reforms. Despiterecording average real GDP growth inthe 4 to 5 percent range over the last 20 years, the structure o f the Ghanaian economy has remainedbroadly the same since independence. There are many contributing factors to this structure. Agriculture remains dominated by smallholder farming and the natural resources sector has not yet been able to operate efficiently and effectively. The manufacturing sector has not diversified muchbeyond the industrial activities developed as a result o f the industrial-cum-trade policy reforms of the 1980s. The state-owned enterprises sector weighs heavily on the economy, and state involvement in the provision o f services is extensive and unsustainable. Investmentclimate constraints still hinder private investment. Inaddition, the micro, small, and medium enterprise (MSME)sector, whichrepresents around 30 percent o f the workforce and contributes around 6 percent to GDP, continues to experience difficulties in accessing financial services. This inhibits their ability to grow and compete in the domestic or global markets. Curtailing factors to access, especially medium- to long-term finance, include: (i) government financing requirements that crowd out private sector access to credit; (ii) ineffective lending policies that reflect the traditional cautious approach financial institutions take because o f high default rates and risks associated with the sector; (iii) government and donor programs established in response to the weak market, which have credit terms and conditions that are too stringent or often inappropriate for MSMEsin terms o f loan duration or collateral requirement; (iv) information asymmetry, where without appropriate information on businesses, compounded by their poor financial records, banks experience difficulties in assessing risks; (v) hindrances in the payment systems; (vi) weak policy, regulatory, and legislative framework guiding the financial business environment; and (vii) a rural and micro finance sector increasinglyresponsive to MSMEsbut still too weak to significantly expand their outreach. For example, the shortage o f financial resources to MSMEs can be illustrated by the fact that venture capital funds set up inthe past 10 years are now fully invested and two other regional funds formed recently are expected to invest innot more than ten companies in Ghana and focus on investments o f around US$2 million. MSMEs also face other significant business environment challenges. Potentially bankable small and medium enterprises (SMEs) lack the management capacity, entrepreneurial spirit, business planning and financial skills to develop into attractive propositions for banks. They do not have sufficient access to land, labor, know-how, information, updated equipment, and research and development to innovate and remain competitive. Their access to public contracts and subcontracts is limited, arising from cumbersome bidding procedures. Previously insulated from international competition, SMEs are now faced with greater external competition and the need to expand market share as a consequence o f trade liberalization. However, their limited international marketing experience, insufficient quality control and product standardization, and limited access to international partners impede their expansion into global markets. In addition, inefficient distribution channels often dominated by larger firms also make it difficult for SMEs to access markets. Trade-related infrastructure i s poor, and bureaucratic red tape and corruption still persist. To achieve the Government's poverty-reduction goals, key sector issues that constrain private sector development, primarily the growth and expansion of MSMEs, need to be addressed. The Government recognizes this and has taken action focused on the development o f MSMEs to deal with some o f these issues.- In assessing the business environment in Ghana, recent reviews including one conducted by the Foreign Investment and Advisory Services (FIAS) that focused group discussions on SMEs, public sector officials, and the donor community, confirm that the business environment and underlying policies are not severely hostile to private sector growth. Indeed, a World Bank report, "Doing Business in 2005," documented that last year Ghana demonstrated improvements in achieving the International Development Association (IDA) investment climate triggers. The time and cost to start a business fell from 129 to 85 days (-34 percent) and from 130.8 percent o f GNI per capita to 87.5 percent (-33 percent), respectively. Selective indicators form the "Doing Business in 2005" report show that Ghana performs relatively well comparing with the business environment in some other Sub-Saharan countries. Additionally, a dialogue 35 between the Government and the private sector has improved with the establishment o f the Ghana Investors Advisory Council (GIAC) and their effectiveness in setting a clearer agenda for private sector development. However, although some reforms have been implemented to date, they were not comprehensive enough to make significant improvements, as confirmed by FIAS in the analysis o f administrative barriers to investment and the progress in removing identified constraints since 1995,I9 Two other surveys also noted that SMEs bear a relatively high share o f the costs o f the business environment in Ghana, preventing them from expanding and reaching a size sufficient to compete in the domestic market and to enter world markets.*' Selective Indicatorso f Doing Business in Some Countries o f Sub-Saharan Africa Starting a Business Getting Credit Enforcing Contracts Economic Characteristics cost GNI per Informal (Yo ofCapita Economy debt) (US$) (%GNI, 2003) - 2 23 337 -29.1 5 19 229 -10.7 2 23 200 -14.4 4 25 360 -41.3 3 29 280 -22.8 -34.6 41.O 0 21 242 -35.3 58.3 0 15 II -37.2 209 22.3 43.1 Source: World Bank, DoingBusiness in 2005, Washington, DC: 2005. The Government realizes the importance o f SMEs in raising growth to continue reducing poverty. An annual real GDP growth o f 5 percent i s projectedto bring poverty down to 32 percent by the end o f 2007. A per capita growth rate o fjust 2 percent would be sufficient to achieve the MDGpoverty goal, given the country's significant progress on reducing headcount poverty.*' To accomplish this, however, growth- oriented policies will need to be accompanied by interventions that empower the private sector, particularly MSMEs and rural populations. Also, aligned with the MDGs, the Government mapped out a medium-term strategy to promote growth and reduce poverty in the Ghana Poverty Reduction Strategy (GPRS) 2004-2007. Policies are focused on developing dynamic and competitive financial and private sectors as documented inthe National Medium-TermPrivate Sector Development Strategy (PSDS) 2004- 2008, the Financial Sector Strategic Plan (FINSSP), and the National Trade Policy. The PSDS highlights the Government's commitment to "developing effective markets for the golden age o f business" with the private sector taking a lead in economic growth. It envisions Ghana providing a l9"Ghana Administrative Barriers to InvestmentUpdate", ForeignInvestment Advisory Services, June 2003. ' OThese surveys are "World Business Environment Survey, 2000" and "Regulatory and Administrative Cost Survey, 2003," conductedby Bruks and Associates and sponsoredby FIAS and the Ghana Investment Promotion Council. I' World Bank, "Ghana: Reducing Poverty and Improving Human Development," World Bank Report No. 26220- GH, June 13,2003. 36 world class business environment wherein firms capitalize on the country's comparative advantage, the private sector i s equipped to compete in global and regional markets, and, with better functioning markets, the poor are more economically active and growth i s broad based. Building on progress on the implementation o f recent and ongoing projects and cooperative relationships with the World Bank Group and other donor partners, the Government translated this vision into four priority development areas: (i)EnhancingGhana'spositionintheglobalandregionalmarketsbydevelopingatradepolicythat reduces tariff and non-tariff barriers to trade, enhances quality standards, improves the investment climate to attract investments,and provides support, including subsidies, for certain strategic and catalytic sector-specific, export-oriented measures. (ii)Improving the efficiency and accessibility of national markets through the creation o f a macroeconomic environment conducive to private sector development; reforms in the financial sector; continuation o f the existing infrastructure programs that call for private sector participation and a customer-oriented and cost-recovery-based business licensing regime; and a reformed public sector (as reflected in the reduction in the high cost o f registering and doing business, and improvements inthe legal, judicial, and regulatory framework so that access to land i s increased, property rights are respected, and commercial disputes are resolved). (iii)Increasingthe competence and capacity levels of private firms through access to business development and financial services basedbest practices. (iv) Strengthening the Government's capacity to formulate, implement, monitor, and evaluate pro- private sector development policies and regulations (through improved consultative processes with the private sector, modifying ongoing private sector development programs to follow best practices, and training programs that enhance the Government's capacity to make effective and market-orienteddecisions). Focusing on the financial sector, the Government's FINSSP i s comprehensive and ambitious aiming to establish a financial sector that i s efficient in the mobilization and allocation o f funds, fully integrated with the global financial system, and supported by a regulatory system that promotes a high degree o f confidence. Targeted development areas supporting this strategy include: (i)Creatingapreferredsourceoffinancefordomesticcompanies(developmentofabondmarket,a venture capital and private equity industry, and secondary market liquidity). (ii)Promotingefficient savings mobilization (development oflong-term savings vehicles through liberalization o f pension industry, investment management industry, sound corporate governance, and mobilization o f informal sector savings). (iii)Ensuringa stronger and more facilitative regulatory regime (increase competition through regulation o f services, establishing a level playing field among financial institutions, and stronger enforcement o f regulations). (iv) Achieving a diversified domestic financial sector within a competitive environment (broadened range o f financial instruments, more effective rural and micro finance). The Trade Policy i s based on the paradigm that the private sector i s the engine o f growth, with Government providing a trade-enabling environment to actively stimulate private sector initiatives. This i s to be achieved through the full spectrum o f trade policy instruments across the following thematic areas: multilateral trade; creating a fair and transparent import-export regime; facilitating trade; enhancing production capacity for domestic and export markets, domestic trade, and distribution; 37 consumer protection; fair trade; and protection o f intellectual property rights. The implementation o f the trade policy will be effected through a Trade Sector Support Program whose annual policy action statement will specify activities to be undertaken annually. 38 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies GHANA: Micro, Small, and MediumEnterpriseProject Agricultural Services Sub-sector Investment Program (AGSSIP): AGSSIP is an IDA-financed project that supports a number o f activities to achieve the following objectives: (i) generating and diffusing agricultural technology; (ii)strengthening the Ministry o f Food and Agriculture to support its policy, monitoring, and outreach functions; (iii)strengthening farmer-based organizations; and (iv) improving agricultural education. The project was restructured to include new initiatives on the horticulture export industry, oil palm development (production), irrigation, and fisheries infrastructure. The value chain component will support synergies with this project and complement other agribusiness support from donors including USAID (TIPCEE Competitiveness Program), GTZ, and Danida in linking up with the BDS Ideas Fundincooperation with Association o fGhanaian Industries(AGI). Linkages in Small-Scale Construction: This activity leverages existing World Bank Group (WBG) support to infrastructure in Ghana, including three projects to finance infrastructure such as the Ghana Second Urban Environmental Sanitation Project (UESP II), the Community-Based Rural Development (CBRD), and Small-Towns Water Supply Project) and the Country Assistance Strategy (CAS)." Other GTZ, Danida, DFID, and joint donor-Government initiatives, such as the Road Sector Development Program, are recognized, and the project seeks to build on these activities. In particular, this sub- component will buildon the GTZ's past work with the Department o f Feeder Roads and contractors inthe road construction sector. Danida, Ghana: BusinessSector Programme Support (BSPS): The BSPS pursues a pro-poor strategy in line with Ghana's Poverty Reduction Strategey (GPRS) and has beendesigned to create "equitable growth in production and employment achieved through development o f a competitive and vibrant business sector." The BSPS focuses on strengthening the legal andjudicial environment for business in Ghana; improving the culture for business; supporting micro and long-term credit schemes, venture capital for MSMEs, BDS services, and piloting information and communication technology in Ghanaian businesses; and improving access to markets. Harmonization efforts between this project and the M S M E Project will be strengthened particularly for the Business Environment Component o f the M S M E Project. KfW and Danida,Ghana: Support Program for Enterprise Empowerment and Development (SPEED). The overriding goal o f SPEED is to contribute to the achievement o f the objectives o f the GPRS by enhancing economic growth and creating employment. In collaboration with KfW's (Kreditanstaltfur Wiederaufbau) Rural Finance project, it aims to ensure better access to financial and non-financial services for MSMEs in urban and rural areas and a better response o f the quality o f financial and non- financial services to the needs o f the rural poor. The M S M E Project was designed to complement the SPEED Project activities. USAID, Ghana: Trade and Investment Program for Competitive Export Economy (TIPCEE): TIPCEE echoes the ultimate goal o f poverty reduction by working to expand export markets for small- and medium-size producers, with special attention to non-traditional exports. Assistance focuses on three themes-competitiveness, modernization, and integration-of all levels o f private sector activity into demand-driven, export-led growth. *'Other examples include Africa Project Development Facility (APDF) activities, an upcoming PrivateEnterprise Partnershipfor Africa (PEP) initiative to supportthe policy environment for equipment finance, the Rural CommunityDevelopment Project, the Urban Sanitation Project, and the GatewayProject. 39 Nigeria MSME Project (joint IDADFC): The MSME Project in Nigeria was the first project to be approved by the Board under thisjoint IDNIFC Program for MSME Development inAfrica. The project in Nigeria aims to increase the performance and employment levels of MSMEs in selected non-oil industry subsectors and in three targeted states o f the country. To achieve this objective, the project will: (i)develop and strengthenthe capacity of local intermediaries to deliver financial and non-financial services to MSMEs; (ii) reduce selected investment climate barriers that constrain MSME performance; and (iii) mobilize increased private investments in MSMEs and intermediaries. The project was approved by the Board (Report 27213-UNI) inDecember 2003. 40 Annex 3: Results Framework and Monitoring GHANA: Micro, Small and MediumEnterpriseProject Project Development Objective Outcome Indicators Use of Outcome Information To enhance the capacity o f MSMEs Efficient management o f MSMEs Assess the dynamism o f Ghanaian to improve their operational resulting inimproved production MSMEs intheir contribution to efficiency, market share, job creation capacity, increased market share and growth; identify problems and capabilities while contributing to job creation potential solutions to meeting shared growth and poverty reduction project development objectives; determine overall impact o f project Project Activities and Results Indicators for Each Use of Results Monitoring IntermediateResults Activity Application o f proven management Demonstrate how the financial Improved operational efficiency and practices resulting inincreased intermediation platform, provided profitability o f MSMEs access to finance, market share, and through the project, has increased job creation the potential of MSMEs and thereby improve their market share and capacity for job creation 1.1Partial Credit Guarantee (PCG) a) Number o f banks participating in Duringproject implementation, 1.2 IFC Line o f Credit (LOC) and the PCG, LOC and TA for Banks assess progress inmeeting financial IDA Performance Based Grants programs intermediation objectives and 1.3 Complementary TA to banks determine appropriate adjustments to 1.4 Complementary TA to SMEs b) Percentage increase involume of development strategies and 1.5 Additional Financial Instruments SME loans extended by participating corrective measures to banks implementationprocedures c) Percentage increase involume o f A t project end, evaluate component SME term loans extended by contributionto financial sector participating banks targets and provide information on future development efforts. During project implementation, assess I progress inmeeting financial intermediation objectives and determine appropriate adjustments to development strategies and corrective measures to implementationprocedures At project end, evaluate component contribution to financial sector targets and provide information on future develoDment alternatives Component 2: Access to Markets, Trade Facilitation, Entrepreneurship Development Overall Outcome Numbero fMSMEs reporting Appropriately targeted, value added Improved operational efficiency, increased operational efficiency, services can improve the market market share and profitability share o f MSMEs 41 vISMEs Specific Interventions VIeso-Level Interventions Comprehensive supply chain luring project implementation, strategies developed to address issess progress inproviding value- relevant missing links for access to idded BDS services to MSMEs and markets by MSMEs. letermine appropriate adjustments to ievelopment strategies and :orrective measures to mplementationprocedures Development o f the Market o f % increase o f MSMEs that have 4t project end, evaluate component Vonfinancial Services to Enterprises recourse to all kinds o f BDS to :ontribution to the M S M E sector improve their productivity, market :argets and provide information on share and profits. Future development alternatives Expansion o f Domestic Market a) % o f MSMEs that have improved Duringproject implementation, their productive capacity and mess progress inproviding value- domestic market share added BDS services to MSMEs and determine appropriate adjustments to b) Number o f MSMEs with development strategies and improved access to construction sub- corrective measures to contracts inrelation to large firms implementationprocedures since the inception o f the project Increase invalue-added services for c) YOof M S M E applying new At project end, evaluate component MSMEsthrough business management techniques as a result contribution to the M S M E sector membership organizations, linkages o f the project targets and provide information on fund future development alternatives d) Evidence that participating MSMEs have met their institutional targets as a result of innovations introduced through the project Trade Facilitation Infrastructure a) Trade information system At project end, evaluate component established contribution to the M S M E sector targets and provide information on b) % o f MSMEs that are making use future development alternatives o fthe trade information systemand reporting improvement intheir business c) % o f MSMEs accessing services from one-stop information resource centers Entrepreneurship Developmen a) three common service centers A t project end, evaluate component established contribution to the M S M E sector targets and provide information on b) % o fMSMEs accessing services future development alternatives from common services centers 42 :)Number o f strategic businesses leveloped resulting from the nterventions o f the project i) ICT Park set up within the Tema vlulti-Purpose Industrial Park MPIP) and connected to SAT 3. ;) IT architecture and operability 'ramework are inplace 7 At least 10 companies are hosted it the ICT Park ;) At least 300 persons are trained in .he ICT Park. I) At least 100are supported inthe ?urniture City. .)Tourism Development Strategy/ Waster Plan have been issued. Jomponent 3: Business Environment 3verall Outcome 3nhanced business environment Business start up and Registration Appropriate interventions to reduce .esulting in improved production and Procedures Reform red tape provide opportunities for xofitability for MSMEs Extension of Quality Standard the growth o f MSMEs outreach Specific Interventions 3.1 National system o f quality a) Proportion of MSMES reporting Duringproject implementation, standards increased growth in exports due to assess progress inproviding value- improved system o f quality added BDS services to MSMEs and standards determine appropriate adjustments to development strategies and [ncreased access to local, regional, b) Percent increase inthe application corrective measures to md global markets by Ghanaian o f national standards implementation procedures LlSMEs c) Proportion o f MSMEs complying At project end, evaluate component with mandatory certification contribution to the M S M E sector requirements targets and provide information on future development alternatives 3.2 Business Startup and a) Percent increase inthe number of Duringproject implementation, Registration Procedures Reform MSMES by taking advantage o f assess progress inproviding value- project interventions added BDS services to MSMEs and determine appropriate adjustments to Business startup procedures and b) Percent reduction inthe cost o f development strategies and regulations simplified business start ups due to project corrective measures to interventions implementation procedures c) Government overhead on new At project end, evaluate component business registrationprocedures contribution to the M S M E sector reduced by 50 percent targets and provide information on future development alternatives 43 Implementation,Monitoring and Evaluation OverallOutcome A culture o f evidenced-based Acquisition o f appropriate software Adoption of international decision-making i s introduced and and hardware to facilitate better management practices should strengthened resulting in improved procurement, financial and human improve the oversight accountability at all levels within the resource managementpractices responsibilities and accountability M o T I and related agencies within the MoTI, MPSD and other Establishment o f a results-based related agencies M&Esystem to facilitate evidence- M&Ecouldbe a usehl tool for based decision-making decision-making ifit i s results-based interms o fhavingthe capacity to collect, analyze and disseminate informatioddata to senior management 4.1 Capacity Buildingfor MOTI, a) Annual M S M E competitiveness Duringproject implementation, MPSDiPSI workshop held with Government assess progress inproviding value- participation added B D S services to MSMEs and Enhancedprivate and public sector determine appropriate adjustments to dialogue, improved facilitative role, b) At least 10PSD-related development strategies and enabling M S M E policies and regulatory impact assessments corrective measures to programs conducted and regulations revised implementationprocedures At project end, evaluate component contribution to the M S M E sector targets and provide information on future development alternatives 4.2 Implementation, Monitoring, and Duringproject implementation, Evaluation assess progress inproviding value- added B D S services to MSMEs and Project impact assessment ) Performance framework determine appropriate adjustments tc appropriately implemented established and project data development strategies and available corrective measures to implementation procedures At project end, evaluate component contribution to the M S M E sector targets and provide information o n future development alternatives 44 Y k 0 c) m 9z ru 0 e, h m 13 13 $ sE $ sE Ez EB I :3 sEz v) 5 h 0 41 0 6 6 $ 5 v) v) 3 Annex 4: DetailedProject Description GHANA: Micro, Small, and Medium Enterprise Project COMPONENT 1: ACCESS TO FINANCE: (indicative US$82.1 million: IDA US$13.4 million; IFC US$40.0 million;ParticipatingBanksUS27.1; SME borrowersUS$1.6 million) Background In Ghana, small and medium enterprises (SMEs) account for an estimated 90 percent of registered businesses. As in many countries in the Africa region, micro, small, and medium enterprises (MSMEs) provide the bulk o f private sector employment and play a particularly crucial role ineconomic growth and poverty reduction. A vibrant M S M E sector would have the potential to provide even more income- generation opportunities for the poor; however, MSMEs remain constrained by a limited ability to access finance. Consultations with commercial banks indicate that several are currently extending financing to SMEs. Although a large part o f this financing i s short term, many have started extending term loans (up to 7 years or so) to the sector. SMEs need short- and long-term financing to effectively address both their working capital and investment needs. Presently, there are few market incentives for private commercial banks to significantly expand lending to the SME sector, which they perceive as risky in terms o f borrower credit. Banks have inadequate SME finance expertise and operating systems and therefore lack the institutional framework critical for a significant and sustainable expansion o f SME finance. Assessing the real sector, many bankable SMEs lack the business planning and accounting skills critical for the preparation o f credible loan applications. Many potentially creditworthy SMEs lack management capacity as well as entrepreneurial, financial, and book-keeping skills to develop into attractive propositions for banks. In addition to these constraints, SMEs face significant business environment challenges. The Access to Finance program seeks to effectively address these constraints through an integrated approach that combines financing instruments with extensive capacity-building assistance to participating banks and SME borrowers. The program's effectiveness will be greatly enhanced by the Access to Markets and Business Environment components, which seek to address the broader sectoral and regulatory framework challenges. Project Description The Access to Finance Component comprises the following five sub-components: (i)an IDNIFC SME loan portfolio Partial Credit Guarantee Program (PCG); (ii)an IDA-funded Perfornance Based Grant Program for banks participating in the IFC-funded Line o f Credit (LOC) facility; (iii) technical assistance matching grants for SME finance capacity building in PCG and LOC banks, and-to the extent possible-to other local banks; (iv) technical assistance matching grants for existing and potential SME clients o f PCG and LOC participating banks; and (v) technical assistance and matching grants for development o f additional financial instruments for SMEs. Participating banks will be selected on the basis o f their financial strength, branch network, knowledge o f the SME market, and commitment to engage in sustained SME lending. For the PCG and LOC sub-components, the IDNIFC Advisory Team has worked with the Government to identify appropriate selection criteria for participating banks and will advise the Government in the selection o f applicant banks in accordance with such criteria. Banks participatingin the PCG will not be eligible to participate inthe L O C and vice versa. 51 I. SMELoanPortfolioPartialCreditGuarantee(PCG)Program:(indicativeUS$48.2 IDA/IFC million: IDA US$4.1 million; IFC US$20 million; and ParticipatingBanks US$24.1 million) An innovative I D N I F C Partial Credit Guarantee Programwill be targeted at two or three private banks based in Ghana that: (a) meet financial sector prudentialrequirements; (b) have existing exposure to SME lending; (c) have access to adequate liquidity; and (d) demonstrate a commitment to strengthening institutional SME finance capabilities and expanding their SME credit portfolios. The proposed I D N I F C PCG i s a risk-sharing instrument aimed at encouraging local commercial banks to lend to SMEs, a sector perceived a high risk by banks. The PCG Program will leverage both IDA credit and IFC resources and capabilities and will form an integral part o f the Ghana M S M E Project. IDA credit funds will serve a critical role inmobilizing local currency lending to SMEs. US$4.5 million equivalent IDA resources allocated for this sub-component is expected to mobilize US$25.5 million IFC guarantee, which in turn i s expected to jointly mobilize commercial banks loans to SMEs totaling about US$60 million equiva~ent.~' Implementation Arrangements: Each guarantee written under the PCG Program and issuedfronted by IFC will cover a portfolio o f loans originated by a few local private commercial banks (Participating Banks). In so doing, IFC would act: (i) as the agent o f the Government o f Ghana (GoG), and (ii) its for own account. The GoG would use the funds o f the IDA credit to finance its payment obligation under its share o f the PCGs in the event a PCG i s called by a Participating Bank under the PCG Program. Each Participating Bank will be selected based on their experience and willingness in SME lending and its general bankinghancial management capacity. A Guarantee Facility Agreement would be entered between the IFC and each Participating Bank, to define the terms and conditions o f the PCG. Each Participating Bank as the beneficiary of the guarantee would be responsible for conducting due diligence of SME borrowers and loan usages, underwriting SME loans to be guaranteed, and monitoring and reporting the perfonnance o f the loan portfolio. As PCG Program administrator, the IFC would manage the PCG issued under the PCG Program, subcontracting, as necessary, part o f its functions. An agreement governing the operation o f the PCG Program i s also expected to be concluded between the GoG and IFC, defining among other things, roles and responsibilities o f IFC as the PCG Program administrator and operational mechanics for payments to be made by GoG through the disbursement o f the IDA credit funds directly into a PCG Program account to prepare for meeting obligations inthe event a guarantee i s called. Guarantee Coverage: It i s proposed that partial credit guarantees issued under the PCG Program will cover 50 percent o f net outstanding principal amount o f a portfolio o f new loans originated by local Participating Banks, on a pari-passu basis with the Participating Banks. Because SMEs are perceived to be higher risk borrowers and usually lack cash collateral needed to obtain bank loans, the PCG would provide banks with the credit protection needed to mitigate the perceived high risk o f SME lending. The 50-50 pari-passu risk sharing, under which Participating Banks would also be exposed to borrower default, i s intended to ensure that Participating Banks conduct proper borrower credit appraisal and apply strict loan underwritingcriteria (including taking proper security) in establishing the loan portfolio. Size and Denomination:Given that SME loans are chiefly denominated inlocal currency Cedis to match revenues flows o f SME borrowers, guarantees issued under the PCG Program would be denominated in Cedis. Because the IDA credit proceeds allocated to the PCG Program are capped in Special Drawing Rights (SDR), the project team i s continuing to explore the feasibility of structuring maximum guarantee exposures under the PCGProgram to be capped at local currency amounts without a U.S. dollar cap. 25The amount of IFC andlocal bank contributions are estimates only. 52 RiskSharing underthe PartialCredit Guarantee Program 1 Participating 2ndloss Bank: [45-401% IFC:[45-35]% [90-701% Participating GoG (IDA Credit): lstloss Bank: [5-10]?40 [5-15]?40 [10-301% GoG (IDA Credit)/lFC Risk Sharing: The IDA credit would be used to finance the Government's obligation under the PCG to cover 5-15 percent o f default loss o f the principal repayment o f the disbursed and outstanding loan portfolio on apari-passu basis with the Participating Banks but on a first loss basis, whereas IFC would cover 45-35 percent o f the default losses on apari-passu basis with the Participating Bank on a second loss basis after the Government. The risk-sharing arrangement will be finalized upon the appraisal by IFC of Participating Bank candidates and the finalization o f each Guarantee Facility Agreement. (See also under Portfolio Guarantee and Guarantee Call.) Leverage: Assuming the guarantee coverage ratios o f 7.5 percent by the IDA credit and 42.5 percent by the IFC and constant foreign exchange rate, the proposed US$4.5 million equivalent IDA credit support will mobilize US$25.5 million equivalent IFC PCG support on its own account; and together the IDNIFC PCG Program would mobilize US$60 million equivalent amount o f loans to the SME sector, o f which US$30 million equivalent o f principal repayment would be covered under the PCGs. For the given IDA credit support, this would represent the leverage o f 1to 13. Eligible Participating Banks: A few (currently conceived 2-3) private banks in Ghana that would meet eligibility and selection criteria and would be acceptable to the GoG and IFC will be selected as Participating Banks in the PCG Program. The banks will be screened for eligibility based on their credit underwriting and credit management policies, procedures, standards, and historical experience, and portfolio o f SME loans that meet pre-established criteria in terms o f credit quality and diversification as well as other checks that IFC would provide following the appraisal o f the banks. The PCG Program facilities would be made available to banks that would commit to increasing their overall lending to SMEs as a result o f their participation inthe PCG Program. EZigible SME Borrowers: Criteria for eligible SME borrowers will include: (a) those SMEs not engaged in an exclusion list (Bank Group excluded expenditure plus no private/household property); (b) those SMEs that achieved adequate turnover levels appropriate by business type; (c) SMEs with at least 5 1 percent o f voting stock held by the private sector; (d) SMEs with less than 10 percent o f its capital held in the aggregate by the Participating Bank or related entities; and (e) SMEs in compliance with the IFC's environmental procedures and policies and IFC's Financial Intermediary Environmental compliance guidelines. The program will not address any priority to a specific borrower category or sectors to allow Participating Banks to be entrepreneurial in cultivating new SME business. As discussed with the Government, eligible SMEs would likely be defined as enterprises with total assets between US$50,000 and US$2 million equivalent. Eligible SME Loan Portfolio: Only new loans extended by the Participating Banks upon the effectiveness o f the Guarantee Facility Agreement, and those loans that would not benefit from any other third-party guarantees, will be included in the loan portfolio to be guaranteed under the program. Eligibility criteria for loans to be included in the portfolio under the program will be defined in detail 53 under the Guarantee Facility Agreement. Although the eligibility criteria will be finalized later on based on due diligence in detail, it i s currently conceived that: the maximum aggregate o f loans to any one borrower would not exceed [USSSOO,OOO] equivalent; and the minimum and the maximum maturity o f each loan would be six months and 5-7 years, respectively. Participating Banks will be given considerable flexibility, based on their internal prudent loan underwriting criteria, in extending new loans to the existing borrowers and new SME borrowers to be covered under the PCG Program. It i s proposed that the PCG Program will use the environmental guidelines o f IFC, which will administer the PCG Programand issue guarantees. Portfolio Guarantees: At the start, the PCG Program will have a defined availability period (likely to be 2-3 years) during which Participating Banks can add new loans to the portfolio to be guaranteed under the Program within the maximum limit defined under the Guarantee Facility Agreement. Each PCG Facility with a Participating Bank i s expected to be non-revolving. Given the expected small size o f individual loans to be guaranteed and to streamline guarantee application and administration, it i s conceived that: (a) the PCG Program will be committed to provide guarantees up to the guarantee facility amount for each Participating Bank provided that the agreed underwriting criteria be met; (b) Participating Banks will be obliged to report on a quarterly basis details o f the loan portfolio covered under the PCG, including the composition o f loans outstanding, terms o f individual loans and performance o f the loan portfolio under the facility; and (c) eligibility o f underlying loans will be verified ex-post upon the guarantee call. Loan Default and Guarantee Call: The guarantee will be called no more than once a quarter to pay an amount equivalent to the aggregate amount o f defaults net o f all amounts recovered by the Participating Bank. The Participating Bank will be allowed to make a guarantee call: (a) no fewer than an expected period o f 90 to 180 days after the occurrence o f such loan default, during which the Participating Bank will be obliged to make recovery efforts to cure such default; (b) with a written guarantee call notice with documents required under the Guarantee Facility Agreement including certification o f the amount o f loan principal guaranteed and due but unpaid and evidence that the demand notice has been made to the borrower and due efforts have been made to demand payments. The amount to be paid under the PCG will be the product o f the amount o f such loan loss multiplied by 50 percent [aggregate GoG (IDA credit)/IFC guarantee coverage ratio], subject to the GoG (IDA credit) (first loss) and IFC (second loss) respective maximum guaranteed amount. Guarantee Program Pricing: Guarantee charges (up-front fees, commitment fees, guarantee fees, and so on) will be payable by Participating Banks at levels to reflect market conditions, program management expenses to be incurred, and the development nature o f this innovative PCG Program. It i s contemplated that the share o f guarantee charges allocated to the guarantee coverage provided by the GoG through the IDA credit and collected by IFC as the PCG Program administrator will remain in a PCG Program account as a reserve against future calls on the guarantee. Guarantee fees are generally expected to be 2-3 percent on the outstanding guarantee amount in US. dollar terms. Final pricing will be contingent on further due diligence o f SME loan portfolio o f Participating Banks to be selected and IFC internal processing and approval for the proposed PCG structure. IDA Credit Agreement and I D A Credit Disbursement: The Government, under the IDA Development Credit Agreement for the project, will be obliged to pay standard commitment charges and credit charges to IDA. It is proposed that IDA funds will be disbursed into a PCG Program account administered by IFC upon the signing of each Guarantee Facility Agreement up to the GoG (IDA credit) portion of the maximum facility limit including a notional allocation for exchange rate appreciation. It i s currently expected that all the Guarantee Facility Agreements will be entered within two years. Remedial Actions: To minimize the amount o f guarantee losses, and thereby the amount o f losses for the GoG, Participating Banks, which will be delegated substantial part o f initial borrower due diligence and 54 credit follow-up, will be selected carefully based on the default performance o f their SME portfolio. In addition, it i s contemplated to include safeguard provisions in the Guarantee Facility Agreement with each Participating Bank to define triggers interms o f cumulative amounts paid to meet guarantee calls to require remedial action plans by the Participating Bank, which may include (a) the reduction o f the unused facility amount, and (b) the suspension of the issuance o f new guarantees under the program. These provisions would at the same time largely eliminate chances that the second loss IFC PCG would be called. Performance Criteria: The benchmark for the successful implementation o f the PCG Program will be based on the utilization and underlying portfolio performance. This will include: (a) the number and aggregate volume o f the new SME loans extended; (b) the quality o f borrowers and loans such as the share o f new borrowers versus the share o f follow-on loans, size distribution among SME borrowers, share o f term loans, share of unsecured loans, and so on; and (c) guarantee claims made and paid, the default performance o f the loan portfolio, determined as the ratio o f performing loans (portion o f outstanding loans with current payments on due dates), default ratio (the cumulative loan loss amount versus. cumulative loan amount in the guaranteed loan portfolio), ratio o f principal loss claims and recovery, and so on. The task team will conduct mid-term review after the second year o f operation to assess the performance o f the program, including PCG Program's value added and sustainability in the form o f an accelerated Expanded Supervision Report. IFC as the administrator o f the program will also prepare annual supervision reports and quarterly credit risk assessment reports. If the utilization will not reach a benchmark measure, the facility amount unused by a Participating Bank will be reallocated to other Participating Banks to maximize utilization duringthe remaining availability period o f the program. Lessons Learned The design o fthis component buildson lessons from previous guarantee schemes in Ghana and emerging market experiences with partial loan guarantee and other structured finance products o f IFC, the Bank, other donors, and the Government. In addition, implementation will be based on the following guiding principles: (a) the use o f a streamlined portfolio approach (versus project by project guarantee); (b) the use of efficient local banks based on existing portfolio histories; (c) ex-ante monitoring procedures that will include a "stop loss" mechanism to prematurely terminate a poorly performing program; (d) the use of a commercial approach with IFC to facilitate a program with minimum perceived potential political interference (which has precluded local bank participation in the past); (e) participation based on the participating banks; (f) streamlined approach to ensure utilization by the local banks; (g) the pari-pasu risk sharing with the local banks, to provide the appropriate incentive to minimize moral hazard and maximize the ability o f the guarantee to ensure that productive assets are booked; (h) availability o f performance based, pre- and post-financing TA available to banks and SMEs; and (i)appropriate performance monitoring. 55 11.Lineof CreditPerformanceGrants(indicative US$22.1million: IDAUS$2.1 million; IFCU S 2 0 million equivalent) The IFC line(s) o f credit to participatingbanks (indicative IFC, up to US$20.0 million) i s expected to be of 5-7 year tenor and priced at IFC market rates in Ghana. IFC will assume full risk o f the credit line(s). The actual size, tenor, volume and other structuring parameters will be determined after the participating bank(s)' have been selected and IFC due diligence conducted. IFC (and IDA) will reserve the right to void any participating bank selected that, pursuant to the IFC due diligence, i s deemed ineligible. Credit will be made available in the same currency as the IFC credit line (US$ or EUR). One or two private banks in Ghana that meet eligibility and selection criteria and are deemed acceptable to the GoG and IFC will be selected as ParticipatingBanks inthe PCGProgram. The IDA-funded performance incentive sub-component o f the project will include an IDA-funded semi- annual bonus payment (for the life of the Ghana M S M E Project) to encourage LOC Participating Banks to achieve desired development results. Model: The model, combining an IFC credit line with performance-based grants complimented by TA to banks and borrowers, i s modeled on a successful approach developed and implemented by the European Bank for Reconstruction and Development (EBRD) inEastern Europe, as well as on a recent IFC project in Indonesia (which usedbilateral donor funds and IFC trust funds to finance the TA and performance- based grants). The European Union (EU)/EBRD performance-based grants approach combines intensive capacity-building funding with performance based fees designed to provide the participating financial institutions with an incentive to expand their M S M E financing. The performance fees are granted only after the financial institutions meet performance targets including the volume and quality o f their M S M E loan portfolios. The IFC project with Bank NISP inIndonesia entails a credit line o f up to U S 3 0 million, capacity-building TA, and performance-based grants. In these models, lending instruments are complimented by timebound TA tailored to the needs o f each participating bank. Banks received 2-3 years of on-site TA to render them capable of rapidly expanding their M S M E loan portfolios while maintaining highportfolio quality levels. In addition, participatingbanks are eligible for performance fees that can partially offset the high costs associated with the rapid expansion, such as investments in systems, staff, and training, new product development, and marketing. These experiences demonstrate how the combination o f TA with performance-based grants provides the necessary assistance and incentives to ensure that the banks use the line o f credit for effective SME lending and target SMEs. The approach i s also consistent with the Output Based Aid (OBA) approaches in other Bank Group sector projects. Approach: Commercially priced lines o f credit targeting SMEs are generally unattractive to banks, given the high capacity-building costs associated with significant expansion into this sector. As a result, traditional SME credit lines have often been underutilized or are not on-lent to intended borrowers. Failure to adapt appropriate credit tools often delays utilization or leads to higher than expected non- performing loans (NPLs) driven by unmanaged growth. Intensive S M E finance capacity-building assistance i s therefore crucial to commercially viable SME finance operations. The model, combining an IFC credit line with performance-based grants complimented by TA to banks and borrowers, i s adapted from programs implemented by IFC, EBRD, and others with significant success. Grant-based interventions are most effective when implemented on the principles of OBA. To this end, L O C Participating Banks will be eligible for both: (i) technical assistance to help them develop ex-ante the necessary capacity for expanded SME lending; and (ii)the ex-post performance based grants that significantly reduce credit line "all-in" costs associated with entering deeper into this perceived riskier market, but only after pre-agreed financial and developmental impact targets have been met. Entry costs include investments in systems, staff, training, new branches, marketing, new product development, and 56 administration. Thus, the performance-based grants encourage banks to maintain financial covenants and to ensure funds are used for targeted development outcomes that may include (but are not limited to) lendingvolumes, tenor, rural diversification, outreach to women, highdegree o f cash flow-based lending, and sound portfolio performance. The levels o f ex-ante TA and ex-post performance-based grants will be determined after in-depthassessments o f Participating Banks' to ensure the total grant funding provided meets the intended objectives, without distorting the market by way o f their size or disbursement mechanics. Structure: The performance incentive structure would have two levels: first, performance thresholds, which trigger whether the incentive will be paid or not; and second, a formula, which determines how much the bank will be paid if it meets the performance thresholds. Performance thresholds are set to predetermined metrics (for example, minimum portfolio volumes, maximum average loan size, or maximum level o f NPLs). The appropriate thresholds for the LOC Program will be determined during IFC's investment appraisal and agreed between the participatingbank(s) and IFC prior to disbursement o f the credit line(s). The thresholds will take into consideration previous growth rates and NPL levels at the participating bank(s) and will be set for both the existing SME portfolio and the IFC-fundedportfolio to ensure that the IFC-funded lending i s not undertaken at the expense o f already planned growth o f the bank's portfolio. The incentives are designed to ensure that minimum quality and outreach levels are achieved before the incentives are triggered. A formula, to be determined during IFC's appraisal, will be usedto establish the level o f incentive to be paid out. The projected amount of funds needed for the incentive program i s based on experiences from similar IFC schemes. The incentive level will be set against a financial indicator (for example, as a percentage o f the average monthly outstanding portfolio financed by the IFC credit line). The incentive will be a maximumpercentage o f the chosen indicator, declining to a minimal level inthe final year o f the project. This structure provides a greater incentive earlier in the program as the participating banks are moving into new markets, undertaking internal changes, and incurring most costs associated with the aforementioned market failures. By reducing incentive levels over time, it encourages the banks to mainstream these activities and increase efficiencies sooner rather than later. Finally, by differentiating between different types o f clients or geographical regions, the incentive structure takes into consideration the varying degree o f challenges inherent in different market niches and can encourage lending to smaller and severely underserved SMEs. SME finance on-site experts engaged for the TA components will be involved in the comprehensive redesign and testing o f the requisite methodologies. No disbursements under the IFC L O C will be made until critical changes are implemented. TA providers will be partially responsible for monitoring and validating the banks' performance. In addition, IFC as a commercial risk taker maintains intensive supervision to ensure that risks related to information asymmetries (moral hazard and adverse selection) are mitigated through proof o f effective capacity building and proper use o f funds. The BDS Fund/TU Manager will be responsible for verifying achievement o f development impact and performance thresholds that trigger payment o f the grants and for disbursingthe grants to eligible participating banks. Disbursements under the performance grants will be based on measurable triggers set out inPerformance- Based Grant Agreements with recipients o f such grants. Sustainability: The performance-based grants are timebound, for the life o f the project. The banks are expected to incur the high SME finance expansion costs earlier in the program and rapidly build up their SME lending operations to meet desired development impact targets. Consistent with the O B A principles underlyingthe model, provision o f grants for outputs-not inputs-creates the appropriate incentives for the banks to the necessary institutional capacity in the short run that will provide a strong foundation for sustained SME finance operations inthe long run. 57 111. Performance-Based Technical Assistance (TA) for Partner Banks: (indicative US$6.6 million: IDA US$3.6 million; and ParticipatingBanks US$3 million equivalent) Objective and Rationale: A core objective o f the I D N I F C Partial Credit Guarantee Program i s the introduction or refinement of Participating Banks' (in the L O C and PCG programs) SME lending technologies and operating systems. The characteristics of SME credit operations are quite distinct from those o f most commercial banks' regular credit analysis and risk management approaches, which often rely exclusively on collateral. Because o f the poor performance o f pure SME lending programs worldwide, it has become international best practice to combine financing mechanisms with technical assistance packages that are tailored to ensure efficient and effective delivery o f financing to viable SMEs. The capacity building program's intensity and duration i s based on identified partner banks' needs. Preliminary assessments of potential partner banks indicate that most have inadequate expertise in SME lending operations. Drawing from experiences with similar institutions, a two-year capacity- buildingprogram is envisioned. Many institutions require additional capacity-building efforts beyond the envisioned phase. Program Description/Lessons Learned: The program will be tailored to ensure the establishment o f the following conditions crucial for successful SME finance operations: 0 The Participating Bank's management must demonstrate a commitment to establishing SME operations as a strategically important commercial product and to adapting credit analysis and portfolio supervision methods that are particular to SME lending. Demonstrated commitment includes ear-marking matching funds for the capacity-building program. 0 The bank must create (or strengthen if existing) a SME Business Unit that has operational flexibility and autonomy from the bank's other business and that i s insulated from non-technical interference from within or outside the bank. Where appropriate, the unit will incorporate existing structures, thus avoiding duplication and resultant inefficiencies. Over time, this "ring fenced" SME lending model could be mainstreamed into the bank's operations, as lending culture becomes widely accepted and as expertise in the SME lending methodologies becomes part o f a regular loan officers skills set. 0 The unit develops a strategic marketing program (based on thorough sector analysis) that focuses on delivery through branches located in high demand markets and identifies effective methods for minimizing transaction costs and processing time. 0 The bank's core banking system must be reoriented to accommodate requirements specific to SME lending. This includes that the MISAT systems facilitate real-time loan monitoring and an industry database that serves as a future base for credit history assessment and credit scoring tools. 0 The cash-flow-based lending method i s one o f the pillars o f successful SME lending operations. It entails the granting loans primarily on the basis of the borrowers' cash-flow, consideration o f non-official numbers (off-balance items) in credit assessment, loan assessment on the basis o f information gathered by the loan officers during field visits (and not just copied from financial statements submitted by the client), and frequent visits to the client (even to households ifdeemed necessary) for credit assessment and portfolio monitoring purposes. 0 SME loan interest rates and fees should be market-priced to avoid market distortions resultant o f interest rate subsidies and caps. 0 Decentralized decision-making processes (based on clear, transparent, and strictly enforced procedures) and regularly held credit committees ensure that loan officers meet the SMEs need for rapid responses to their applications and are not hindered by the bank's often lengthy and complex decision procedures. 58 A "house bank" relationship with the client provides an incentive for good debt servicing. Punctual repayment o f a loan i s rewarded with access to larger loans with longer maturities and more favorable interest rates (graduation principle), whereas default is penalized on a timely basis, often by denyingaccess to follow-up loans. Loan officers are responsible for the whole loan cycle: from credit assessment, to contract negotiation and enforcement, to recovery efforts. Performance-based salaries schemes reward the acquisition o f new clients more than repeat clients and efficiency levels (disbursement speed and clients-per-officer ratios) but provide disincentives for poor portfolio quality. Good incentive schemes are effective tools for achieving rapid but rationale business growth targets, while maintaining highcredit assessment and risk management standards. Use of Funds: Funding would be used to engage a Technical Assistance Provider, and operational and some capital costs over an initial period (until the bank covers their operational and capacity-building requirements). IV. Performance-Based TA for SME Borrowers: (indicative US$5.2 million: IDAUS$3.6 million; and S M E Borrowers US$1.6 million equivalent) Objectives: The objectives o f this TA will be to: (1) increase the creditworthiness o f prospective clients o f the partner banks (in the PCG and LOC programs), thus increasing the number o f new S M E loans; and (2) help SMEs that have received loans from the partner banks to remain bankable, thus reducing the number of NF'Ls and increasing the growth of the firms. This will be achieved by providing matching grants to SMEs and business service providers to help expand services tailored for target SMEs. Rationale: SMEs make little use of training and consulting services, partly because they feel unable to afford such services and partly because they lack information about these services and the benefits they can derive from their use. The project will use a matching grant scheme inwhich firms receive part o f the costs of utilizing business support services. The range o f services to be provided will be consulting and training services in financial and business management. SMEs can either access the scheme directly or through business associations. On the supply side, the scheme will also support the development o f local support services, by extending similar cost-sharing grants to service providers to support new service development and outreach costs. Although a number o f local providers offer very high quality services, these services are not available in the quantity, price, and quality range required by SMEs. Most providers use off-the-shelf products that do not address the needs o f the target group and those that offer tailor-made products charge fees that small firms cannot afford. Selected service providers will be assisted to provide high quality and affordable consulting and training services in auditing, bookkeeping, accounting, and financial and business management to prospective loan applicants. Descriptiort: This TA i s a core element o f the guarantee program. Without this support to partner bank clients, the guarantee program may not achieve desired targets. The TA for borrowers will help create a pipeline of bankable business proposals for the partner banks and will help SMEs remain viable and grow faster. The project will: (i)improve SMEs access to quality affordable BDS in financial and business management, (ii) address the information gaps that limit the ability o f providers to tailor their services to banks' requirements and SMEs' needs, and (iii)accelerate the growth o f the partner banks' S M E portfolio. In addition, this intervention will have a number o f spillover effects: (i) will create a pipeline it of new viable businesses for other financial institutions; (ii) it will increase the overall capacity o f SMEs therefore generating jobs and growth; and (iii) will create a sustainable delivery mechanism o f quality it non-financial services to which firms beyond the initial target group will have access. 59 Direct Target Group;The recipients o f the matching grants are (i) growth oriented SMEs and (ii) selected business service providers, which can include specialized private consulting firms and training organizations, formal education institutions, business membership organizations, and nongovernmental organizations (NGOs). The selection criteria for SMEs will emphasize the willingness and ability o f the business owner to co- fund the cost o f the capacity-building process as well as the business owner/key management commitment to project time and resources. The selection criteria for service providers will emphasize track record and financial soundness o f the provider (see below for details). The ultimate beneficiary o f these grants are the SMEs, so the providers that receive grants ("partner service providers") will be those that offer the best quality o f service at the lowest cost, thus transferring most o f the grant benefit to the SMEs. It i s expected that the project will work with up to six providers. The ultimate beneficiaries o f the matching grants are SMEs who seek to obtain a loan, pre-qualify for a loan from one o f the participating banks, or existing bank clients who want to sustain growth and remain bankable. The partner service providers will conduct explicit marketing and awareness rising (interms o f the benefits from the use o f these services) among the "high potential clients" o f the partner banks. The project will agree on criteria with each bank to determine when a client i s "high potential" and should be targeted for support; for example, those that show creditworthiness but whose loan application requires professional support to meet the minimumrequirements. A broader range o f MSMEs will also benefit from these services because the provider will continue to offer this service to any client that can afford to pay. This activity o f the M S M E project will be closely linked to the broader BDS activities under the agribusiness, construction, and other project components. For example, the latter will provide a pipeline o f potential customers for the partner banks. However, non-qualified loan applicants and other SMEs will also benefit from these services since the provider will continue to offer this service to any client that can afford to pay. This activity o f the M S M E project will be closely linked to the broader BDS activities under the linkages component. For example, the latter will provide a pipeline o fpotential customers for the partner banks. The project component technical advisor will facilitate the selection o f five to six firms or organizations on the basis o f their track record and other criteria, to develop and deliver two types of services: (i) pre- financing services to help high-potential clients with the loan application preparation and documentation, providing specific training tailored to the loan application requirements o f the partner banks, including accounting, book-keeping, financial management, auditing, and business planning services; and (2) post- financing support to enhance the SMEs' commercial viability, thus enabling the SMEs to credibly apply for financing from I D N I F C PRG PartneringBank(s) and other commercial banks and to make productive use o f the loans. Training in this area will include entrepreneurship and business and financial management, as well as technical issues specific to the firms. SME Beneficiaries: Each individual grant to a recipient SME must be matched by a contribution from the enterprise itself. N o preferential rates of support will be given to particular sectors, types o f service, firm size, firm category, or region. The level of subsidy may be reviewedperiodically and may be revised byrecommendation o fthe Private Sector Advisory Manager. Sewice Provider Beneficiaries. Successful beneficiaries will need to show clear market demand for the service proposed, lowest cost compliance with technical criteria, substantiated evidence that they possess, or have a credible program to develop, the institutional capacity to deliver on a performance-based agreement and a business strategy for commercial viability. Specific eligibility criteria include (but are 60 not limited to) the following: technical competence/experience, governance, commitment to the project, financial capacity, institutional capacity, reputation, business strategy, and operating strategy. The providers will receive support for (i) market research and product adaptation and development; and (ii) some portion o f the delivery cost, on a decreasing basis. GuidingPrinciples: This activity under the M S M E Project will be guided by the following principles: 0 Limitper Firm: Each firm may obtain grants up to a specified cumulative value to be determined by the BDS Manager, Technical Advisor, and Private Sector Advisory Manager. Within this total, each firm may return to the scheme for multiple grants, so long as each application satisfies all qualification including bank performance criteria. In other words, each application must make sense on its own merits as contributing to a significant development o f the business and or increased loan performance. This cumulative figure will be reviewed regularly by the BDS Manager and component Technical Advisor, subject to requisite endorsement. 0 Avoiding Double Subsidies: Usage o f beneficiary service providers will be on the basis that double subsidizing o f activities i s to be avoided. Grants will be calculated so that the total subsidy element from all sources external to the firm does not exceed a predetermined limit. 0 Performance: BDS grant disbursements are linkedto minimumthreshold triggers or performance targets. Funds are disbursed only when firms show concrete evidence o f having achieved the performance targets and when they have complied with reporting requirements. 0 Additionality: The BDS Fund supports projects that would not otherwise find full private funding, by offering grant support toward the cost o f developingnew products and services, or o f expanding existing products and services to new areas that would not otherwise be developed or reached. 0 Impact: The fund supports the development o f products and services that can significantly improve the competitiveness o f MSMEs. Performance targets must include outreach targets to MSMEs. 0 Sustainability: Applicants' proposals must be able to demonstrate the long-term viability o f their proposed projects without relying on continuing BDS Fundgrants. 0 Cost Sharing: Services will be fee based. Providers that receive the grants will pass on the benefits to the ultimate target (that is, the SMEs)-. The pricing strategy will vary by provider but the structure should reflect (i) effectiveness and (ii) cost sustainability and commercial orientation (that is, after a certain period o f time, the services will be fully paid by clients). For example, a client that obtains advice on business planning would contribute at least the minimumallowable amount o f the fees for such service. Ifthe firm obtains a loan, the provider will continue offering monitoring and mentoring services paying an increasing share o f the cost. Through the use o f these services, SMEs will be able to (i) meet the requirements o f the banks' loan application criteria; (ii)improve their ability to meet the banks' credit appraisal criteria; and (iii)improve their performance and their management capacity thus increasing their ability to serve the debt if they obtainthe loan. 0 Building on Local Capacity and Sustainable Delivery Mechanisms: The capacity o f local business service providers in Ghana to offer this range o f services i s very high. Private initiatives, as well as a number of government and donor programs, have helped emerge a large number o f 61 very good providers experienced in the SME market. The project will work with existing providers that present a sound and viable business model. Dissemination and Learning: Providers will be required to disseminate their results and experience to different audiences to maximize the spillover effects. Lessons Learned and Reflected in Project Design: The project has been designed drawing on the World Bank Group's experience in Sub-Saharan Africa and other regions and in consultations with various stakeholders in Ghana. A number o f studies and project documents from existing donor and government projects focused on BDS development influenced the proposed design, including Danida and GTZ various reports for SPEED and project documents from the Rural Financial Services Project. V. Additional FinancialInstruments (no costing provisionally, to be eventually funded under the unallocatedcategory) This sub-component will support the design, structuring and implementation o f additional innovative financial instruments to further mobilize term financing for financial intermediaries and ultimately, MSMEs. It i s also recognized that the country suffers from structural shortages o f medium- to long-term financing sources (including bank deposits). Although many banks face the phenomenon of over liquidity, most bank deposits are o f short-term nature. A portion o f these deposits are classified as core deposits by the regulators (and hence under local regulations acceptable for use in term loans). Nonetheless, prudent banking would seek diversified financing sources to complement the utilization o f core deposits to respond to medium- and long-term SME finance demands. Therefore, the proposed program calls for the development o f additional innovative financial instruments that seek to catalyze term financing sources for local banks, and ultimately, additional term financing for SMEs. Suchjoint financial instrumentsto spur access to term finance could include inter alia: 0 standby liquidity facilities for banks, 0 guarantees for foreign currency loans or local bank financings, 0 innovative term leasing products, 0 credit enhancement products for local bond market products, and 0 term trade finance guarantees for banks. Given that it may take time to design, structure, and implement these relevant instruments, it is proposed that, leveraging the experience o f the PCG program, the scope for these alternative interventions will be reviewed during the early stages o f project implementation. This component will also leverage the ongoing pilots with innovative instrumentsin other M S M E projects. COMPONENT TWO: ACCESS TO MARKETS, TRADE FACILITATION, AND ENTREPRENEURSHIP DEVELOPMENT (indicative US$24.5 million: Government USs1.2 million; IDA USs20.0 million; clients US$3.3 million equivalent) Origin and Context Government has requested WBG assistance to enable it to further meet the challenges defined in its Private Sector Development Strategy (PSD), Trade Strategy Support Program (TSSP), and those brought about by changes within the international trade environment. Government has also requested assistance 62 from the WBG to leverage, reinforce, and reorient some activities o f the Ghana Trade and Investment Gateway Project (CR.3 114 GH). General Issues The potentials o f the SME sector in Ghana are yet to be realized due to a numbers o f factors, including a lack o f appropriate policies, lack o f adequate access to financial services, lack o f market exposure and access to market information, obsolete machinery and equipment, low skill level in managerial and technical areas, limitations o f size, limited/effective access to technical assistance, and weak institutional support. Under these circumstances, supporting MSMEs to be able to access and integrate into markets on a sustainable basis entails: (1) creating opportunities for businesses to access market information and analysis; (ii)improving the performance and efficiency o f growing sectors o f the economy; (iii) improving the quality o f the market for non-financial services to enterprises; (iv) building the relevant market access and trade facilitation infrastructure; and (v) promoting entrepreneurship development through codified catalytic interventions and demonstration effects. The component will support both interventions directed at specific priority sectors (such as agribusiness, construction, furniture, and textiles) and interventions directed at broader market issues (such as access to information and export promotion activities). It i s anticipated that during project implementation, as global markets present new or changing opportunities, theproject will beflexible to include other sectors. This component has been designed and developed to provide a World Bank Group (WBG) operational response to Government of Ghana (GoG) selected policy prescriptions and progradproject profiles that are defined in the national Private Sector Development Strategy (PSD), the National Trade Policy (NTP), and the Trade Sector Support Program (TSSP). As such, this component aims to help MSMEs overcome technical barriers to trade to support their presence and expansion in the domestic and foreign markets. On a pedagogical and demonstration basis, the component will support enterprise development by helping existing MSMEs in selected sectors expand their operations in terms o f overall products and markets development, including the transition from the informal to formal sector and related capacity building for management o f objectives and processes. On a more sustainable basis, this component will help provide operational and structural responses to broad sector issues with the view to strengthening the integration o f MSMEs in the country overall economic fabric. To contribute to operationalizing GoG and WBG approaches to shared growth for poverty reduction, the component aims to create more entrepreneurship opportunities through increased outreach o f economic opportunities and catalytic interventions (with expected demonstration effects) to make both prospects and risks mitigation more visible to private sector and investment more attractive in non-traditional sectors. And, finally, to support and consolidate the pursuit o f the above described objectives, this component will contribute to rationalizing, strengthening, and integratingthe country's overall trade facilitation systems and structures. Therefore, the project resources will support selected interventions inthe areas o f access to markets, trade facilitation, and entrepreneurship development. Selection of Sectors The following criteria have been applied inthe sector selection: 0 Strong global demand for the products, potential for global competitiveness, and growth o f the sector inGhana, 0 Number ofMSMEsinthe sector and potentialimpact o fthe project on MSMEs, 0 Lack o f regulatory or other prohibitive barriers that would preclude the positive results o f the project interventions, and 0 Value addition to other public sector, private sector, and donor initiatives; the MSME project would complement ongoing activities. 63 I.Access to Markets (indicative US$5.7 million: Government US$0.3 million; IDA US$4.7 million; clients US$0.7 million equivalent) MSMEsinGhana face a combined lack ofmarket exposure and market-ledproduct development culture. These result in their limited capacity to identify and take advantage o f economic opportunities offered by the growing globalization and accessible through the transformation o f available natural resources in several productive sectors. Furthermore, because o f their limitation in size, most MSMEs cannot afford to develop, the critical mass o f functions that are essential to access markets and secure market shares. Under such circumstances, supporting MSMEs to access and settle on markets on the sustainable basis entails at least the following: (i)developing a holistic and voluntarism approach to bridging the structural gap of the information asymmetry; (ii) strengtheningthe systems and structures aimed at helping MSMEs utilize relevant market information to comply with quality and standards and enhance products and markets development; and (iii) developing the market o f non-financial services to enterprises to help MSMEsoutsource the vital functions theyneedbutcannot accessontheir own. To reach the above described objectives, project interventions will focus on selected clusters o f activities that are at the interface between the markets and the productive activities. Some o f these include: compliance with quality and standards, product adaptation, product development, proactive marketing, active sales and marketing, integration into value chains and management. The interventions that are envisioned can be classified into three categories: (i) developing the market o f non-financial services to enterprises; (ii) supporting the transition o f the informal sector through sub-contracting and other business linkages models; and (iii) making selected meso-level interventions such as value chain integration for clusters o f enterprises to address common clusters o f problems and contribute to the (sector-specific) business environment retrofitting. For the sake o f demonstration effects and visible impact, activities related to these three categories o f interventions will roll out in the agribusiness and construction sectors and then to any sectors that meet the set criteria and prove to make a significant impact. These initial target sectors were chosen following preliminary extensive due diligence work that suggested that not only a large number o f MSMEs are operating in these sectors and need selected outsourced support, but also that sector-specific interventions targeted at tailoring their immediate business environment will help MSMEs better integrate into the relevant supply and value chain clusters that are expected to be equally rationalizedand enhanced through these interventions. (0 DevelopingtheMarket of Non-financial Services to Enterprises The aim o f this intervention i s to stimulate the market and buildrelevant local capacities for the provision of direct non-financial services to enterprises. The related interventions will be performed through the following activities: 0 To support the demonstration (to MSMEs) that it i s worth have recourse to external providers o f direct support to enterprises (by individual consultants and/or by specialized BDS providers), the project has established a business development services fund (BDS Fund) based on a cost sharing mechanism (matching grant mechanism-MGM)). 0 To build sustainable capacities for all types o f providers of direct non-financial services enterprises, the provisions o f the BDS Fund will be extended to specialized BDS providers, national consulting groups (NCGs), and other enterprise and trade development support structures (ETSS), in so far they are involved in direct support to enterprise development, be it for products and market development or for the enhancement o f managerial capacities. Selected service providers will also benefit from an integratedbusiness services fund under the BDS Fund 64 to fund selected business equipment to facilitate delivery o f services to SMEs. The integrated fund will be carefully administered based on pre-established qualification criteria and for a limited range o f equipment. 0 To support the private sector's contribution to buildingthe process and the content o f the public- private policy dialogue (through the design o f sector strategies and implementation o f business linkages programs for instance) and private sector associations to transit from the status o f lobbying organizations to the status o f recognized policy advocacy interlocutors, policy advocacy groupshtructures and apex organizations such as business membership organizations (BMOs) will be eligible to the BDS Fund. These three activities will be financed under the BDS Fund to be availed through the credit. The BDS fund will be managedby a BDS fundmanager inline with market conditions and other donor programs. Detailed Description of Activities in Agribusiness Background: Ghana provides very favorable conditions for dynamic growth o f exports in agribusiness products, and global retailers indicate a high demand for supplies o f fresh and semiprocessed goods from Ghana. In the last ten years, Ghana has had considerable success in entering global markets in several agribusiness areas, particularly in fresh and semiprocessed fruits, juices, fresh vegetables, and palm oil. The value o f Ghana's exports o f horticultural products more than doubled in the period from 1995 to 2000 (from less than US11million to US$27.2 million). The value o f sales o f pineapple alone increased by 76 percent in2002. Ghana has become a leadingexporter o f fresh produce to the Europeanmarket, but a new sophisticated industry has evolved around this business with its own set o f skills, networks, and supporting industries. Sub-sector selection will be made based on available studies and Government priority areas corresponding to new global market conditions. Specific Industry Issues: Although some agribusiness sectors in Ghana have grown in recent years, Ghana i s still a small producer in the world market, and certain limitations hamper further dynamic expansion o f the agribusiness industry, due to developments inthe global food market and new barriers to entry that make it increasingly challenging for newcomers to enter these markets.26 The global food market has undergone fundamental changes within recent years, including an increased consumer focus on nutritional factors and purity in agnbusiness products. As consumer demands have become very sophisticated, so has the ability o f the industry to respond quickly to this demand. Efficient consumer response-the ability to quickly respond to changes in demand-has become one o f the key issues o f competition in the global food market. These and other developments have greatly affected export markets for Ghanaian agricultural products. Business services in Ghana do not yet effectively reflect the fundamental changes that have been taking place in international business and trade. Sophisticated services that are critical for firms to access international markets, such as certification, supply chain management, enterprise resource systems, bar coding, and commercial farm management, are in infancy stages or do not exist at all Ghana. Inthe cases where service companies have entered Ghana, local firms may not be aware o f the critical importance o f the issues, and the demand for their services remains low. Nonetheless, as the global agribusiness market imposes increasing strict requirements on firms, these services are crucial to competitiveness. According to diagnostic studies and interviews with the target groups, most firms in Ghana, inparticular MSMEs, cannot comply with the industry requirements and the increasingly difficult entry barriers o f In2001, for example, Thailand exported418,722 tons ofprocessedpineapple, whereas Ghana exported only 1.4 tons; Costa Rica held a 24 percent market share of the same product in 2003, compared with Ghana's 6 percent share. 65 agribusiness value chains. 2 1 Typical problems include: (i)quality: few entrepreneurs have the information and systems in place to meet quality and traceability standards, and firms are not certified for HAACP and EurepGAP, which are pre-requisites for access to EU markets; (ii)eficient consumer response: firms are not aware o f global market requirements, cannot forecast and respond quickly to trends, and have little innovation; (iii) logistics and transport: insufficient trade-related infrastructure and logistics makes transport expensive and threatens delivery commitments; (iv) scale: lack o f large farms and lack of management/coordination o f smallholders makes it difficult to reach the volume o f supply necessary to gain access to global markets; (v) technology: technology levels are often insufficient to comply with quality requirements; and (vi) fragmentation: farm-to-market chains are highly fragmented inGhana, with a few fully-integratedmultinational companies beingthe only exceptions. Activities: The sub-component seeks to: (i)improve the ability o f agribusiness firms to overcome bottlenecks to identifying and responding to market opportunities, including access to high-quality, relevant business services by providing matching grant funds for firms to purchase specialized business services; and (ii) support business service providers through a matching grant fund, to design and tailor relevant, high-quality services, such as product and process conformity assessment (testing), logistics, marketing, and management, while stimulating the demand for these services. Specifically, the activities inthis sub-component are as follows: Activity I:Matching Grant Fundfor Firms Activity Description: To catalyze the demand for specialized business services that will improve the competitiveness of agribusiness firms and offset the current high cost o f international private testing/conformity assessment services, the BDS Fund will have a matching grant window available to firms inthe targeted value chains to purchase specific business services that are not currently accessing on a commercial basis, or for which the cost o f international services i s prohibitively high. This demand-side intervention will be timebound and closely monitored so as not to create undue distortions in the market for business services. The goal i s to stimulate demand for local private services. The BDS Fundwill support those enterprises committed to certifying their quality management processes (for example, I S 0 9000) or having their products properly certified for exporting abroad, improving their marketing, logistics, processing, and information analysis practices. Lead firms (large firms connected to global buyers that currently subcontract or seek to subcontract with MSMEs) will play a key role in this activity, as they have crucial information about global demand, requirements for pesticide use, traceability, and other food safety issues. A role for lead firms inthis activity would be to identify groups o f subcontractors or outgrowers that need to be trained in a certain production process to meet requirements.'* Use ofFunds: Matching grants will be provided to local agribusiness firms in the selected value chains, on a cost-sharing basis, to ensure that the services developed will be o f commercial value to MSMEs. Services purchased could include: testing and certification, logistics advisory services, communications, supply chain management advisory services, innovative financial management services, market information and analysis services, bar coding, commercial farm management, international marketing, food processing training services, and other relevant services outlined by the Project Technical Unit2' 27 Diagnostic studies were undertaken inthe course o f project design, including a workshop held inNovember 2004 to target specific focus groups inthese sectors. Inmid-2005, IFC commissioned an additional Agribusiness Value Chain Analysis to complete findings from existing studies. *'IFC has worked with many such schemes through its linkages work and its Grassroots Business Initiative to develop several effective products that link micro enterprises to large firms and may be applied under this initiative. 29 Cost sharing may be lower for the beneficiary in the case o f certification services, as these services are available locally through international firms, but the costs are prohibitively high. As local services become available, the contribution o f the beneficiary i s expected to increase. Other business services will likely be shared on a higher 66 Implementation: Implementationo f this activity will be managed through a specific window inthe BDS Fund. The Technical Unit will oversee the eligibility criteria, market the BDS Fundwindow to potential applicants, approve grants above a certain monetary value,30 determine new eligibility criteria based on knowledge and research o f the market, and modify the orientation o f the initiative as market conditions change. EZigibiZity Criteria: To qualify for the matching grant fund, the local private firm will be already active inone o fthe export-oriented agribusiness sectors with demonstrated global or regional demand, willing to share the cost o f business services, willing to participate in follow-up evaluation surveys, and will adhere to other criteria developed inthe PIM. Direct Target Group: The target group i s agribusiness firms who are committed to being certified for quality management processes or having their products certified for exporting abroad, and/or committed to improving their financial and resource management practices to increase competitiveness. Activity 2: Matching Grant Fundfor SpecializedBusinessServiceProviders Activity Description: Several key gaps in the availability o f high-quality local business services have already been identified in the course o f project preparation: local product and process testing services (there are international firms to certify HAACP and I S 0 processes, for example, but the services are prohibitively expensive for most local firms), information services that will improve know-how along the chain, full-service logistics, analysis o f market information, outgrower schemes, and international marketing to link buyers to suppliers. The activity will help Ghanaian business service providers to develop and tailor these specialized services to MSMEs in agribusiness and oil industries and will ensure the development o f the supply o f business services for which demand has been stimulated inActivity 1. To address the lack o f available high-quality, affordable, relevant business services that are critical to competitiveness along the selected agribusiness value chains, the BDS Fund will have a matching grant window for business service providers in the agribusiness industry. This window will provide matching grants for technical assistance to specialized business service providers to help them innovate or upgrade their services, tailor their services to the targeted MSMEs, train staff, and better market their services to MSMEs. The initiative will complement the activities under the Reforming the National System o f Quality Standards sub-component o f the Business Environment component by focusing on developing specific services for the international certification o fMSMEs. Use of Funds: Matching grants will be provided to local private business service providers, on a cost- sharing basis to improve or develop their testing and certification services, logistics, communication, supply chain management services, innovative financial management services, market information and analysis, enterprise resource systems, bar coding, commercial farm management, international marketing, processing, and other training and advisory services o f commercial value to agribusiness firms. Implementation: Implementation o f this activity will be managed through a specific window in the BDS Fund for agribusiness service providers. A technical expert in the Technical Unit will oversee the eligibility criteria, market the BDS Fund window to potential applicants, approve grants above a certain cost-sharing basis on the part o f the beneficiary. Funds will be used for local private agribusiness firms to purchase services for which they are not currently accessing at commercial rates. Modalities for firms applying for multiple hnding will be addressed inthe Project Implementation Manual (PIM). 30To be detailed inthe Project ImplementationManual. 67 monetary ~ a l u e , ~determine new eligibility criteria based on knowledge and research o f the market, and ' will modify the orientation of the initiative as the BDS market changes. The BDS Fund Manager will process the matching grants through the different matching grant windows outlined in the sub-component description, and further detailed inthe PIM. Buildingon past lessons learned from matching grants, other implementation features include the following: (i)clear performance targets for service providers, linking grants to performance; (ii) commercial orientation o f services; (iii)coordination with other related donor programs to provide clear market signals; (iv) provision of grants on a reimbursement basis; (v) increasinglevels o f cost sharing; and (vi) timebound subsidies with a clear exit strategy. Eligibility Criteria: The local private service providers who qualify for matching grants will need to demonstrate a track record of providing business services o f proven commercial value to MSMEs, a commitment to expand services to MSMEs in Accra and relevant agribusiness regions, commitment to cost-share with the project on the development o f new products and services, expertise in agnbusiness service areas such as logistics, supply chain management, conformity assessment, commercial farm management, communication, innovative financial management, market analysis, enterprise resource systems, bar coding, international marketing, and milling/processingtraining services. Direct Target Group: The direct target group i s local private business service providers (including consultants, training providers, other firms, NGOs, business associations, and others). Indirect Target Group: The indirect target group i s agribusiness firms that purchase business services to improve their competitiveness. Rationale for Bank Involvement: By catalyzing the demand for business services in this industry, the project will stimulate a supply-response from business service providers to create and tailor relevant business services that will ultimately improve the performance o f MSMEs. By supporting business service providers and firms in export-oriented agribusiness sectors, the project will leverage the activities of the public sector and other donor initiatives (such as USAID's TIPCEE and WBG/GoG's AGSSIP project) to help provide a comprehensive solution to the constraints that MSMEs encounter inexport-oriented agribusiness. (io Expansion of Domestic Market and the Transition of the Informal Sector through Linkages Overall, this intervention will provide business linkage services to facilitate linkages between MSMEs and large-scale industries. Specifically, MSMEs will be supported to operate in the area o f sub- contracting to enable them play a significant role inthe private sector-led economic growth. Government will be encouraged to create incentives for large firms to sub-contract to smaller firms to ensure MSMEs are mainstreamed into large projects and economic activities. To complement the provision o f business linkage services, clusters of SME suppliers and large industries will be supported on a sector basis to strengthen their operations. This will take a form o f project development to establish common service facilities (for example, storage and distribution facilities), support to obtain financing facilities, support to overcome infrastructure bottlenecks that prohibit SMEs from effectively supply inputs to large industries, and others. Detailed Description of the Support to Small-Scale Construction in Infrastructure Issues. The construction sector i s an important private sector-led industryin Ghana. Infrastructure works such as roads, buildings, and water supply, provide basic services to communities and businesses and play 3 1To be detailed inthe Project ImplementationManual. 68 an important role inthe productivity and growth o f the Ghanaian economy. The Government, beingaware o f the role o f improved infrastructure on economic growth, continues to make considerable investment in this sector. Small- and Medium-Scale Infrastructure Construction Enterprises (MSME/Ghanaian Contractors) are important in Ghana because they play a central role in infrastructure delivery, represent large numbers o f small enterprises, and constitute a large component o f the private sector. Currently, the construction industry i s composed o f over 15,000 local contracting firms and a few large foreign ones. There i s a significant percentage o f small-scale contractors (financial classes 3 and 4) in the industry; MSMEs comprise 85 percent o f the 806 active road contractors, and 84 percent o f the 12,538 registered buildingand civil works contractors. Nevertheless, many o f these infrastructure construction MSMEs are having problems in fulfilling their expected role, and as a result infrastructure projects suffer from delays and quality problems. The World BanWMinistry o f Finance Country Procurement Assessment Report (CAPR) in 2003 found that many public contracts suffer from poor contract management, which results in delayed completion and cost overruns, often in excess o f allocated budgets. The study identified varied reasons for this situation, notably the low efficiency o f the private contracting sector and failure to adhere to contract terms, particularly to delivery schedules. In an analysis o f the performance o f small-scale contractors in the execution o f 700 contracts for "periodic maintenance and minor works" in the project portfolio o f the Ministryo fRoadandTransport (MRT), 84percent were found to be unacceptable. The study further attributed reasons for the poor performance o f MSMEs to weak managerial capacity, inadequate/obsolete equipment, weak financial capacity, inability to motivatehetain professional staff, and contractor overload. These findings are affirmed by a recent survey conducted by the World Bank Group in which large construction companies (LCCs), ministries, departments, and agencies (MDAs), as well as the MSMEs themselves attribute industry problems to low capacity o f MSMEs to perform, inability to obtain working capital and equipment financing, poor management and planning, as well as lack o f qualified management and technical staff inter alia. MSMEs face managerial, financial, and technical problems in fulfilling their central role in delivering much-needed infrastructure. External factors contributing to industry problems include the Government payment process and facilities and institutional arrangements with respect to classification. Proposed Interventions. This group o f activities aims to increase the capacity o f small-scale contractors in the infrastructure sector with a view to: (i)ensuring the quality and timely delivery of infrastructure projects; (ii)responding to an increasing scale o f projects funded by the government, donors, and the private sector; and (iii) increasing the rate of return on infrastructureprojects. Eligible Activities. The proposed activities seek to use a comprehensive range o f BDS to strengthen MSMEs inplaying their pivotal role in infrastructure development and to make them attractive candidates for lease financing and bank credit. A four-pronged integrated approach will be used: (i) comprehensive management development (training and consultancy), (ii)business linkage services (matchmaking and embedded services), (iii) assistance to industrybusiness management and intermediary organizations, and (iv) provision o f services to micro construction enterprise clusters. To complement these activities, the project will support the existing UNIDO/AGI Sub-contracting and Partnership Exchange (SPX) to promote and facilitate sub-contracting and partnership agreements between industry MSMEs and LCCs. A targeted implementation approach will be used for specific sub- industry groups, cluster of industry MSMEs, and specific projects awarded to large construction firms with linkages potential. These services will be funded via the matching grant mechanism through the construction window o f the project's BDS Fund. 69 Activity 1: Comprehensive Management Development (Training and Consultancy) The WBG will take a holistic approach to developing the market for BDS services by addressing not only the demand but also supply and facilitating (information) mechanics. The project will use a matching grant scheme on both the demand and supply side. The BDS Matching Grant Fund (Construction Window): The aim o f the matching grant facility i s to facilitate the development o f a BDS market serving MSMEs inthe infrastructure construction sector (and indirectly, other sectors through development and extension o f the market). This will be accomplished through incentives to stimulate demand for BDS and for providers to develop their products, as well as through measures to bridge the demand and supply gap and thereby ensure an efficient market. The matching grant subsidy i s particularly advantageous for low-income MSMEs for whom the price o f a previously inaccessible product i s reduced, leading to increased demand. Once there i s measurable improvement in business performance after patronizing BDS products, MSMEs should be willing to pay more for other relevant products. Recent lessons from experience indicate that a demand-driven approach i s more likely to yield sustainable support to MSMEs than past supply-drivenapproaches. Preliminary studies conducted by the project team and other stakeholdershave identified a wide range o f available business development needs to enhance the perfonnance o f SMEs ininfrastructure construction: training and technical assistance, business management, input supply, technology and product development, financing mechanisms, infrastructure, market access, policy, and advocacy. 32 Target Group: Specific targets appraised are SME road contractors and SMEs operating in the community, water and sanitation sector, mostly in Classes 3 and 4 o f the Ministryo f Roads and Transport (MRT) and Ministry o f Works and Housing (MWH) classification. Other infrastructure contractors can also benefit as long as they meet the criteria below. Target SMEs will acquire innovative business support services through the BDS Fund. Eligibility Criteria: The eligibility criteria include the following elements: 0 ExistingMSMEs providing infrastructure constructioninGhana; 0 Registered with MRT, MWH,or requisite agency; 0 Willingness and ability to co-fund the cost o f training and consultancy services; and 0 Commitment to training and consultancy process. SMEs selection will be on a competitive, cost-sharing basis with transparent procedures and eligibility criteria. Sustainability and Exit Strategy: This sub-component has been designed and will be implemented on demand-driven principles and the creation o f a sustainable market. The advantages o f the matching grant approach are that it is: 0 Demand-driven with sufficient cost-sharing to ensure that a perceived need i s being addressed and that the user has a personal interest and commitment to the process; 0 Structured to assist service providers to acquire the necessary skills and services to address enterprise-level constraints and demands; and 32(i) IFCIAPDF: Profile of Ghana's Small Scale Construction Industry - Samuel Ampadu, September 2004 (ii) IFCIAPDF: Survey of Small-scale Enterprises in the construction of Infrastructure- IMAS Limited, September 2004 (ii)GovernmentofGhana:ReportoftheCommitteeonImprovingthe Capacity ofGhanaianContractorsTo AccessContracts Financed by The World Bank and Other DevelopmentPartners.Study commissionedby the Vice-president, January 2003 (iii) PPlAF / World BankKommunity Water and Sanitation Agency: SME Needs Assessment and Strengthening Report- Y-SEF, September, 2001 70 0 Designed to be phased out through progressively lower subsidy rates as an exit strategy to lead to sustained transactions between willing suppliers and users. Bridging the Demand and Supply Gap: Information mechanisms are neededto bring supply and demand into close contact. Business Membership Organizations (BMOs) and SPX can provide MSMEs with an appreciation o f what products are available and the expected effects o f these products on their enterprises. Their information function also enables the SMEs to influence the development o frelevant products. This information function also gives service providers (SPs) a platform to market existing products as well as to develop new and relevant ones, thereby facilitating o f a sustainable and dynamic training market beyond the exit o f the matching grant facility. Exit Strategy: Every effort will be made to implement this sub-component inharmony with the broader project BDS Fund, ongoing industry programs (including the ASROCIGTZIINVENT program), Development Partners, and Government programs. Facilitative activities o f the BMOs and SPX, are expected to stimulate a smooth exit. Service Providers Capacity Building (Training of Trainers): To strengthen the supply side and respond to existing gaps in industry-specific business service provision, this activity will conduct a training o f trainers program (TOT)for local SPs with experience or demonstrated interest or potential. The aim i s to build their capacity and to standardize training and consultancy packages to combine technical and managerial elements. Past experience suggests that management skills in the construction sector must be addressed in combination with technical themes to be perceived as relevant. This must be addressed through practical, hands-on techniques, rather than in classroom settings. Performance-based matching grants will address (i)combined technical and business management services; and (ii)firm-level and supplier "embedded" business services. Specific tasks inthis activity include: 0 Supporting the development o f low-cost delivery mechanisms for skills-transfer and best practice methods for adult learning; and 0 Recruiting lead firm(s) to assist service providers to develop, modularize, and standardize BDS content using international best practices and adapted or relevant content for the construction sector. A possible proposal will likely be a combination o f an international management training firm and a local partner. With the requisite assistance to tailor and adapt their modules and deliver to suit the infrastructure construction industry,most BDS providers should be able to provide the services required. Activity 2: Assistance to Industry BusinessManagement Organizations In preliminary studies, BDS providers expressed interest to service the infrastructure MSME contractors but had difficulty in identifying their interest and needs. To improve the flow o f information, this sub- component will buildthe capacity o f industryBMOs and the SPX. The BDS Fundwill be used to finance the marketing, networking, advocacy, and information functions of construction industry BMOs to enable them play key roles during implementation and thereby ensure sustainability. Marketing o f this activity i s very important to ensure outreach to targeted groups, specifically those in remote areas. They will also be expected to play an advocacy role by sensitizing policy makers on key industry issues and trends as a powerful tool in enhancing private sector development in line with the Ghana Poverty Reduction Strategy. The activity will facilitate collaboration between training institutions, BMOs, MDAs, and the Government. 71 Partnership Arrangements: As part o f the broader project objective and for sustainable impact, this sub- component will collaborate with existing and pipeline development partner programs during implementation. Specifically, the project will build on, inter alia, the GTZ/ASROC SME Project. DFID's Business Sector Advocacy Challenge (BUSAC) funds will be used to supplement the M S M E Project's Grant Fund to assist industry BMOs. Further, the mission i s working with the EU to explore the possibility o f collaboration. The broader Access to Markets component and the supporting BDS Fund should be implemented incollaborationwith the proposed GTZ/KFW/DaniddSPEED Project. The proposed IFC's Private Enterprise Partnership (PEP)/Africa Ghana Leasing Project i s expected to complement this project by facilitating lease finance MSMEs. The benefits o f the program include (i) creating an appropriate legislative environment; (ii)building the capacity o f local lessons; and (iii) conducting a public education campaign to educate private enterprises, financial institutions, and regulatory agencies about leasing. Activity 3; BusinessLinkage Services(Matchmaking and EmbeddedServices) MSMEs will be mainstreamed into infiastructure construction through value-adding Business Linkage Services. The sub-component will make use o f existing linkages between LCCs, or large input suppliers (LIS) and small-scale construction firms, by using "embedded" services. Business services will be "embedded" into existing focal points, such as LCCs (which subcontract to small firms), cement, bitumen, and other input suppliers, and equipment suppliers. Using this delivery mechanism, LISs and LCCs may act as business SPs. Business services may, for example, include both supplier-site delivery and regular follow-on mentoring to firms and suppliers to address specific problems in managing production processes, tendering and negotiation, and human and material resources. Indirect Target Group: The indirect target group will be infrastructure construction SMEs. Direct Target Group: The direct target group includes large construction companies, large input suppliers, service providers, and SPX. Support toAssociation of Ghana Industries (AGI)LJNIDO Industrial Sub-contracting and Partnership Exchange (SPX): The existing SPX will be supported under this activity to promote and facilitate sub- contracting and partnership agreements between industry MSMEs and LCCs. Specifically, the SPX should complement the project activities by providing matchmaking services and collecting relevant data to facilitate capacity building interventions, as well as monitoring and evaluation (M&E). The SPX should also facilitate training and consulting services (complementing the activities o f the BMOs). The existing database will be modified and customized to suit the matchmaking and M&E needs. The Government will be encouraged to create incentives for large construction firms to sub-contract to smaller firms to ensure MSMEs are mainstreamed into Government construction projects. 72 Industrial Partnership and Sub-contracting Exchange (SPX): The SPX i s a link between M S M E sub-contractors and large contractors for outsourcing o f processes, services, contract components, supplies, and so on according to pre- established directions. Sub-contracting and Partnership Exchange (SPX) i s a matchmaking mechanism between main and sub-contractors and consists o f a data bank, a technical team, and an information system. It operates as a technical information center for business contacts and promotion. The objectives of the SPX are to (1) help SME infrastructure contractors identify LCCs and LIS inneed o f sub-contracting services, (ii) LCCs and LIS identify local SMEs assist with required abilities, (iii)facilitate the transfer o f technology and know-how from large- to small-scale industries, and (iv) facilitate easy access to business information. , The services provided the SPX are matchmaking, database, promotional activities, training, and consulting. To cater to the needs o f relatively micro and small enterprises (MSEs) who may not be able to afford direct BDS and other technical assistance, the project will develop a facility set within an ongoing Government- and donor-funded project where these MSEs will have service providers deliver services to a group o f enterprises and have a common pool o f facilities for their operations. The delivery mechanism and implementation will be cost effective and ensure M S E clusters will be able to afford these services using their pooled resources. Thus, MSEs operating in infrastructure construction will obtain much- needed customized quality BDS and other facilities at affordable costs. To facilitate a practical, hands-on embedded approach to management and financial capacity building, the facility will be established within on-going projects such us the Road Sector Development Project and community water and sanitation projects insmall towns and peri-urbanareas. Specialized training packages will be designed incorporating management skills with technical schemes to suit the unique needs and requirements o f the MSEs. The BMOs and SPX will also play a key role in facilitating the outreach, marketing, and implementation of these services, as well as the matchmaking and sub-contracting process. The aim i s to ensure that microenterprises obtain sub-contract jobs from the ongoing or other projects. It i s expected that some o f these microenterprises will increase managerial and operational capacity and will be able to afford direct BDS within and beyond the project time frame. Project funds will be used for the basic infrastructure for the common service centers and associated findcluster consultancy and other eligible services will be funded under the BDS Fund. Institutionaland ImplementationArrangement: This activity will be managedby the Component Manager who will work under the supervision o f and report to the Private Sector Service Delivery ManagedProjectManagement Unit (PMU). The Component Manager will work closely with and industry Technical Advisors. BDS activities will be funded through the BDS Fundmanaged by the BDS Fund Manager based on pre-established terms, conditions, and eligibility criteria and recommendations. Other Fundswill be managedthrough the project funds inline with project disbursement requirements. Rationalefor BankInvolvement: Public and private sector demand for the constructiono f infrastructure has grown significantly inrecent years. GDP growth for construction as a sub-sector o f "industry" increased from 2.7 percent in 1990to 4.2 percent in2000, even while the total contribution o f "industry sector" to GDP fell. According to the Government's PSD Strategy for 2004-2008, the 73 construction sector contributes 8 percent to Ghana's GDP. The infrastructure sector has received investments o f about US$1,335.47 million from the Government and bilateral and multilateral development partners from 1996 to 2000. However, the large numbers o f M S M E infrastructure contractorshave not experienced commensurate growth incapacity and account for only 27 percent o f donor-fundedroads works and about 55 percent o f total infrastructure contracts. 33 Intervention to raise the capacity o f the local M S M E construction industryto manage their businesses more efficiently and perform on contracts can lead to increased domestic GDP, employment and wealth creation, and sustainable poverty reduction. The rationale for Bank assistance to the M S M E infrastructure/construction sector, therefore, has three elements: SystematicApproach to Unlocking Potential Contribution of Local MSMEs: The IDNIFC M S M E Program for Africa i s specifically designed to implement a systematic, holistic approach to supporting M S M E development, as a response to the past failure o f partial strategies. Recognition o f the potential o f MSMEs to generate widespread employment growth and private sector participation has fostered past efforts to establish government agencies or donor programs providing services below cost and to provide packages o f training and support that were determinedmore by the suppliers than by the MSMEs themselves. In light o f lessons learned by the World Bank, the IFC, and other development agencies, the approach proposed in this project will be demand-driven, with complementary efforts to build up the supply o f BDS to MSMEs and to develop institutions and information systems that can facilitate creation o f a sustainable market for those services. 34 Significant Cross Cutting, Expenditure, and Income Impact: The infrastructure ministries (MRT, MWH) are generally allocated about 25 percent of the annual budget. The allocation increased from Cedis 523 billion in2000 to Cedis 1,000 billion in2001, From 1996 to 2000, the resource envelope o f MRT3' for infrastructure was over US$l,OOO million, and during the same period, the resource envelope o f the MWH was over US$327 million. Furthermore, there i s invariably some form o f construction activity in all five main budget sectors: general administration, economic services, infrastructure, social service, and public safety. Complementarity with Government, WBG, and Other Donor Strategies: Infrastructure development i s one o f the five priority areas in the Ghana Poverty Reduction Strategy, and the Government's PSD Strategy for 2004-2008 underlines the role o f infrastructure development in creating access to markets. This sub-component leverages existing WBG support to infrastructure in Ghana, including four projects to finance infrastructure (UESPII, CBRD, Small-Towns Water Supply Project, CWSA), and the CAS. Other GTZ, Danida, DFID, EU, and joint donor-Government initiatives, such as the Road Sector Development Program, are recognized, and the project seeks to build on these activities. Higher LevelObjectivesto whichthe Project Contributes. Facilitating increasedMSME contractors participation ininfrastructure development will result inincreased growth, employment, wealth creation, and sustainable poverty reduction. The Project Development Objectives and their key indicators include: Improved capacity o f M S M E infrastructure contractors (roads, water, and sanitation, and so on) access donor funded and private sector jobs. [percent of contracts to MSMEs] 33 Governmentof Ghana: Report of the Committee on Improving the Capacity of GhanaianContractors to Access Contracts Financedby the World Bank and Other DevelopmentPartners,study commissionedby the Vice President. 34 IDNIFC,Program Frameworkfor n Joint IDA/IFCMicro, Sninll, and Medium Enterprise Development Pilot Programfor Africo (Washington, DC: 2003);Committee of Donor Agencies for Small EnterpriseDevelopment, BusinessDevelopmentServices for Small Enterprises:Guiding Principlesfor Donor Intervention(2001). 35 Ghana Ministry of Roads and Transport, 2000. Resource envelope includesdonor funds and consolidated funds. 74 . 0 Strengthened capacity o f Service Providers to offer quality demand driven BDS to existing and potential industry MSMEs. [percent of MSMEs payingfor BDS] Enhanced sustainability o f targeted MSMEs. [proJitability] (iii)Meso-Level Interventions Apart fiom supportingthe sectors identified above, the project will provide technical assistance to support the identification o f other priority sectors in which Ghana has the potential to develop competitive industries, to benchmark Ghana's current production vis A vis its international competitors, and to support the development of sector strategies. To improve integration along the targeted value chains, the project funds will support the mobilization o f firms to jointly create sector strategies that address specific bottlenecks in the flow o f goods, services, and information from the farm to the export gate. Joint business plans for clusters o f firms, which meet eligibility criteria, will be supported to carry out initiatives identified in the sector strategies. Based on available analytical work, the project funds will initially provide technical assistance to clusters o f firms and specialized business service providers to improve efficiency and performance along the value chains, with a special focus on the processing-to- exporting functions and developing the domestic market by promoting local demand for "Made inGhana" products, For export markets, initial support will be provided for the value chains in horticulture, processed cereals, and palm oil, as per available analytical work and Government-identified priority sectors.36 Inaddition to supplyingexport markets, a large number of SMEs produce for the domestic market, both as suppliers o f industrial inputs and of consumer goods and services. These SMEs face substantial barriers in terms of their small size (which particularly constrains their ability to produce sufficient quantities and consistent quality for industrial inputs) and in terms o f an information barrier (both downstream producers and consumers are unaware o f what goods and services are available and how they can be purchased). To help overcome these common sector constraints, project resources will finance also finance two specific activities that have been pre-identified: Activities in Agribusiness: Value Chain Integration A key element o f an integrated approach to value chains is a participatory analysis o f global competitiveness and coordination along different segments o f the chain. T o improve integration along the targeted value chains and to demonstrate a practical application o f value chain methodology to Ghanaian firms and policy makers, the Value Chain Integration Fund o f the project will support direct technical assistance to mobilize firms and relevant support institutions to jointly create sector strategies. The sector strategies will provide input for joint business plans for initiatives that would address specific bottlenecks in the flow of goods, services, and information from the farm to the export gate. Joint business plans from clusters o f firms for initiatives that meet eligibility criteria will be awarded TA matching grants through the BDS Fundto carry out initiatives to address problems identified inthe sector strategy: 0 Sector analysis and strategy development: Sector or subsector analysis will bejointly conducted by value chain experts procured by the Technical Unit o f the M S M E Project and by businesses and other actors in the subsectors. The technical assistance will support the participantsto jointly create sector strategies to benchmark the overall competitiveness o f the sub-sector looking at factors like cost, quality issues, time to market, availability and quality o f relevant business services, and so on, and to identify gaps on several levels (policy, service provision, and firm 36Management, implementation,andmonitoringcosts for this sub-componentare US$1.3 million. 75 productivity). The sectorhb-sector strategies will provide input for joint business plans from clusters o f firms for technical assistance that would help them improve the flow o f goods, services, and information from the farm to the export gate. This activity will be implemented by the Technical Advisor, who will procure value chain experts with the appropriate project procurement procedures through the Value Chain Integration Fund. 0 Joint business plans. Joint business plans from clusters of firms for initiatives that meet eligibility criteria will be awarded TA matching grants through a window in the BDS Fund to carry out initiatives which specifically address bottlenecks identified in the sector strategy (for example, a group o f commercial fruit processors submits a proposal for training on proper fruit storage techniques). Business membership organizations and large lead firms will play a key role in mobilizing firms for these activities, and funds will be available for the development of business plans and for the implementation o f initiatives designed in the business plans. This activity should be flexible to accommodate a wide spectrum o f business plan proposals. Implementation: Implementation o f the first part of this activity+reation o f a joint sector strategy- will be managed by the project's private sector Technical Advisory Unit, who will advise on the competitive selection o f value chain experts to lead the activity and mobilize players along the chains. Implementation o f the second part o f the activity-the TA matching grants to clusters of firms for joint business plans-will be done through a specific window in the BDS Fund, with oversight from the Technical Advisory Unit. Eligibility Criteria: Eligibility criteria for participation in the sector strategy will be as open as possible to include a large number o f public and private players in each value chain to contribute to the sector strategy. Eligibility criteria for the TA grants to support joint business plans will be further outlined in the PIM but will include presence in the selected sectors, willingness to cost-share, potential impact o f initiatives, and a demonstrated demand for the product line by global or regional buyers. Direct Target Group: Targets in the sector strategy are industry associations, policy makers, business services providers, and firms. Then, clusters o f firms are targeted as beneficiaries o f matching grants to support specific business plans to overcome problems identified in the sector strategy. Although large agribusiness "lead" firms will play a key role inthis activity, they are not direct targets o f the project. Rationalefor Bank Involvement: By using the value chain methodology through mobilizing clusters o f firms to create joint sub-sector strategies, the project aims to transfer this analytical tool to the hands o f Ghanaian firms and policy makers to react to new sector opportunities inthe future. Activities inthe Construction Sector Business Linkage Services: Overall, this intervention will provide business linkage services to facilitate linkages between MSMEs and large-scale industries.Specifically, MSMEs will be supported to operate in the area o f sub-contracting to enable them play a significant role in the private sector-led economic growth. Because this intervention seeks to build the capacity o f MSMEs to participate in the increasing scale o f government, donor, and private sector projects, pilot activities will be supported inthe construction sector to enable MSMEs to effectively play their pivotal role o f delivering infrastructure. Specifically, MSMEs will be supported to operate inthe area o f sub-contracting to enable them play a significant role inprivate sector-led economic growth. Government will be encouraged to create incentives for large construction f i r m s to sub-contract to smaller firms to ensure that MSMEs are mainstreamed into Government construction projects. To complement the provision o f business linkage services, clusters o f SME 76 suppliers and large industries will be supported on a sector basis to strengthentheir operations. This will take a form o f project development to establish common service facilities (for example, storage and distribution facilities), support to obtain financing facilities, support to overcome infrastructure bottlenecks that prohibit SMEs from effectively supply inputsto large industries, and so on. Lessons learned during the project implementation will be utilized to support enterprises transition through sub-contracting in other priority sectors, notably in agribusiness and other sectors to contribute to integrate MSMEs into the production and supply chains. Web-Based PlatformAVational Product Gallery. A Web-based National Product Gallery will be developed to provide a virtual storefront to showcase "Made in Ghana" goods and services electronically. To facilitate sales, a Web-based buyer-seller matchmaking database will be attached to the product gallery. II.Entrepreneurship Development (indicative US12.4 million: Government US$0.6 million; IDA US$lO.l million; clients US$1.7 million equivalent) Prospective entrepreneurs are not able to identify and take advantage o f business opportunities because o f the existing information asymmetry and industrial missing links. To close this gap and stimulate private sector participation to transform economic prospects, the Government has decided to engage in codified catalytic interventions with clear Government exit strategies. The objective o f this intervention, therefore, i s to promote entrepreneurship development through projects aimed at enhancing economic opportunities and promoting demonstration effects through various incubation processes. The proposed project resources will support: 0 Government ICT-based entrepreneurship development initiatives; 0 Institutional buildingto support Government Catalytic Interventions (GCIs); 0 Incubation and set-up o f pilot common service centers (CSCs)-for demonstration purposes-for selected clusters o f enterprises inselected brancheshectors; and 0 Project development for the creation o f CSCs for MSMEs, including joint-venture arrangements and public-private partnerships. (i) ICT-Based Entrepreneurship Development Background Ghana has entered a phase o f accelerated economic expansion over the last three years with real GDP growth averaging 5.2 percent, compared to a 20-year average o f 4.4 percent. Although recent growth has been fueled by the good performance o f traditional exports (cocoa and gold), the economy has also continued to diversify and broaden its export base. The performance o f non-traditional exports (NTEs) i s a case in point, with NTEs increasing by 9 percent in dollar terms in 2004. As stated earlier in this document, the Government o f Ghana i s committed to further accelerating economic growth. The Government has identified I C T applications as a source o f growth and job creation. The Information Technology-Enabled Services (ITES) sector, which ranges from call centers to medical transcription to claim processing and i s also known as Business Process Outsourcing (BPO) i s already present in Ghana and currently provides approximately 2,000 jobs. Although this illustrates Ghana's potential to become a significant player inthis niche market, this potential has yet to take off. In line with this, the Government has shown its strong commitment by developing, after an extensive nation-wide consultative process, the "ICT-led Socio-Economic Policy for Accelerated Development." The aim o f the policy is to realize the potential for shared growth by transforming Ghana into an 77 infrastructure-rich, knowledge-based and technology-driven economy and society. In the words o f H.E. John Agyekum Kuffuor, President o f the Republic o f Ghana, "this policy i s to be integrated within government's three-pronged development strategy for its second term, which revolves around the development and enhancement o f the nation's human resource base, the continued rejuvenation o f the Private Sector, and the entrenchment o f Good Governance." Inparallel, the Government has adopted a pro-investment National Telecommunication Policy, engaged inthe revamping of its telecommunications legislation andregulations, as well as initiated work with the industryon the e-legislation package, both o f which are key buildingblocks for an ICT- and knowledge- led growth, as well as for e-governance and e-government applications involving public-private partnerships. The ICT-based entrepreneurship development sub-component will be used as an initial support to kick- start an ICT- and knowledge-led socioeconomic growth by focusing on (i) increasing employment in the IT/ITES sector by attracting firms in an ICT Park located in the Tema Multi-Purpose Industrial Park (MPIP), and (ii) by taking initial steps to create an overall environment conducive to IT/ITES investment. This initial support is consistent and complementary with the forthcoming e-Ghana Project that will build on and expand these efforts as well as cover some additional areas. Unless circumstances change, the e- Ghana Project will not reach the board before July 2006, but some o f the activities, notably related to the ICT Park that will showcase the Tema MPIP, have been highlightedas priorities by the Government o f Ghana. The activities which will be supported under the MSME project will cover the following areas: Information and Communication Technology Park (ICT Park): To stimulate the startup and growth o f technology-intensive, knowledge-based businesses in Ghana, the Government intends to establish an I C T Park within the Tema MPIP. The park will provide infrastructure and business support services designed to assist export-oriented small and medium ICT businesses, as well as ITES firms, and to maximize their potential for growth. Residents will benefit from state-of-the-art telecommunications access, including a link to the international fiber network o f SAT-3 via Voltacom. Targeted businesses include software development, data transcription, call centers, telecommunications, IT training and services, and computer assembly. The park i s expected to foster skilled employment, increased export o f ICT products and services, transfer of technology, and research and development. It is expected that the park will be established as a public-private partnership (PPP), in which the implementation would be private sector driven and enabled by Government support. World Bank Group assistance in establishing the park would include a comprehensive feasibilityhmplementation study to identify required infrastructure and ancillary services, targeted industries and companies, legislative and regulatory issues, financial projections, and proposed financing structure (PPP), as well as a business strategy. Based on the results o f this study, Bank funding would support site planning, a marketing strategy, purchase and installation o f telecommunications equipment, construction o f a business center and an administrative center, and administrative costs. The creation of the technology park will be a key element o f the Tema MPIP and will help marketing the latter as a growth-orientedindustrial park. Support to set up a conducive environment for Business Process Outsourcing (BPO) and IT and ICT businesses in Ghana. The Government o f Ghana has commissioned a competitive assessment study to identify niche markets in the BPO and ITACT sector where Ghana can acquire a competitive advantage on the global market. This sub-component will allow an early implementation o f the competitive study findings from February 2006, while the e-Ghana Project will extend this support starting in 2007. This 78 subcomponent will more particularly focus on businesses likely to populate the above ICT Technology park inthe MPIP in Tema. In addition to consultancies and equipment, it will have a training component driven by the K o f i Annan ICT Center o f Excellence. This will be aimed at initiating the appropriate IT training courses to fulfill the specific needs o f the MSMEs and ITES firms located at the Tema site and more specifically inthe ICT Park. Sustainability o f the course program will be achieved through training fees once the program has beeninitiated. Support to GICTeD. The Government intends to develop the GICTeD to establish, oversee and coordinate the Government's IT programs on electronic government and commerce, online services, associated IT infrastructure, and the Internet. GITeD will also be in charge o f the Government IT architecture and the interoperability framework (to allow applications in different Government departments to talk to each other, to facilitate the establishment o f an accreditation mechanism for firms wishing to bid for Government's ITprojects, to roll-out e-Government applications). The GICTeD will be an implementing agency/directorate o f the Ministryo f Communications. It is expected that better coordination o f Government IT programs, procurement, existence o f an operability framework and an accreditation mechanism will result in increased contracting opportunities for ICT service firms, including those locatedinthe I C T Park, buildingtheir experience to export services outside o f Ghana. Support to GICTeD will be aimed at facilitating and consolidating its establishment and will range from hardware to consultancy services (which may include key staffing)' following an organizational capacity- building study. This will complement the support envisaged under the e-Ghana Project. Capacity Building for the Ministry of Communications. This support, which will include technical assistance, training, organization o f an ECOWAS workshop, and some IT equipment, i s key to improving the ministry's capacity in participating in regional and sub-regional harmonization efforts, notably on issues that have a direct impact o f the cost o f doing business for the businesses at the ICT Park in the Tema MPIP. Ensuring proper oversight o f SAT3 access for cheaper international communications and facilitating the materialization o f interconnection with neighboring countries have a direct impact on the availability or non-availability o f broadband services (high-speed Internet and data transfer) to the park tenants as well as on price level o f such services. This sub-component will also include support to postal sector reform and operationalization o f the Ghana Investment Fund for Telecommunications Development (GIFTEL)with a specific focus on impact for SMEs' connectivity. An efficient exporthmport strategy-the key to the success o f the ICT Park and Tema MPIP-hinges on cost-effective postal services. Support to the sector would assist in articulating a strategy to improve the efficiency o f the sector to be responsive to businesses. This will take the form o f an initial support to (i) develop and implement policies, guidelines, rules, and regulations regarding the operations o f postal and courier services; and (ii)develop and enforce operational quality standards in the postal and courier services. The strategy would also explore options for increased PPPs and collaboration in the postal sector, as well as to promote the advancement and use of cutting-edge technology in the postal industry. For its part, GIFTEL i s expected to play a key role in providing targeted subsidies for extending telecom and Internet access to less commercially viable communities and enterprises including some selective MSMEs targeted to operate in the MPIP. The anticipated support will be used as contribution to prepare a strategy for GIFTEL fund use, a manual o f procedures to guide fund administration, and a sensible strategy for digital inclusion with a specific focus on MSMEs. This capacity-building assistance will also be used for its role as implementation agency for the ICT- based entrepreneurship development sub-component. 79 (ii) Support to MOTIIGCIs Project Activities This support will focus on complementary capacity buildingrequirements that enable the Government to meet its objectives o f exiting from the strategic and catalytic interventions commenced under its PSIs to maximize the role o f the private sector. Support will be driven by best practice, based on performance, based, and would include: (i)capacity building and training for participating firms; (ii) support for the apparel and garment sector; (iii)appropriate technical assistance for Government agencies charged with the PSIs and REDPs; (iv) consultancy for codifying implementation and management; and (v) establishment o f a Community-BasedTechnology Transfer Center (CTTC) outside Accra. (iii) Incubation and Set-up of Pilot Common Service Centers To foster linkages and contribute to the integration o f the national economic fabric, project resources will finance the development o f sustainable common service facilities to be accessed by MSMEs.This will be implemented on a pilot basis, through direct funding o f required physical structures in the framework o f PPPs with codified public intervention and agreed Government exit scenarios to catalyze the process and improve the visibility o f these types o f opportunities for the private sector. The common service centers (CSCs) will support clusters o f firms and activities to improve efficiency and performance along the value chains inpriority sectors, with special focus on the processing-to-exporting functions. On a pilot basis, an integrated package o f interventions based on generic and specialized BDS, CSCs, and, specifically, access to finance and business linkages models (supported by a fund) will be implemented to facilitate sub- contracting between larger and smaller enterprises, formal and informal ones, within the construction sector. To develop common service facilities and infrastructure support, specific activities have been identified, including: Furniture City::The Government and the WBG have agreed to use the credit to finance the establishment of a Furniture City Common Service Center within the Tema MPIP on a pilot and demonstration basis. The objective i s to develop a wood furniture city to resettle small-scale furniture producers and provide them with common facilities. Activities to be financed include the following: developing the relevant infrastructure for woodfurniture city; constructing 300 workshop units for small-scale carpenters, furniture makers, wood workers, and joiners; constructing a common show room and administrative building; installing common facilities and equipment (such as wood kiln dryers, laminators, a mold- making plant, and others); providing relevant capacity building; establishing a Wood Technology and Design Center; creating a Website for e-Commerce; and integrating overall market access and trade facilitation infrastructure. Garments and Textiles: Underthis activity, credit would be used to establish a Clothing Technology and Training Center outside Accra, which would feature common specialized machinery for use by SMEs (with maintenance services provided). Training would be provided to SMEs to service their equipment and upgrade their production systems. Activities to be financed include the following: developing the relevant infrastructure for equipment maintenance; constructing a common show room and an administrative and training building; installing common facilities and equipment (such as specialized computer-aided designs); providing relevant capacity building; establishing a Garment and Technology and Design Center; creating a Website for e-Commerce; and integrating overall market access and trade facilitation infrastructure. 80 (iv) Projects Developmentfor tlie Creation of CSCsfor MSMEs Building on demonstration effects, project resources will be used for funding o f SCS projects development, maturation, and incubation, includingjoint-venture arrangements, whether they are PPPs or totally private sector led. This intervention i s justified by the fact that not only i s economic opportunities not visible to the private sector but private sector organizations lack maturity and funds to initiate such approaches. The cost o f project development will be borne ex-post by private sector after Government exit. III.TradeFacilitation (indicative US$6.4 million: Government US$0.3 million; IDA US$5.2 million; clients US$0.9 million equivalent) Given that all the above interventions could to be leveraged and made sustainable only within an integrated economic fabric, project funds will finance the construction and expansion o f an integrated trade facilitation infrastructure based on online proactive databases and interactive trade information systems to be accessed and used by service providers involved in trade promotion, active sales and marketing, and handholding o f MSMEs for product development and adaptation, including compliance to standards and investmentpromotion. These mechanisms will be used together with other tools and facilities to contribute to the development and growth o f priority sectors identified. This component has been designed and will be implemented on a demand-driven basis. Trade Facilitation Infrastructure. -The credit will support the construction of the market access and trade facilitation infrastructure through funding of: (i)a proactive trade information system for SME development; (ii) export promotion; (iii) tourism development; and (iv) interfacing and integrating the market access and trade facilitation infrastructure. (i) I nformation System (US$2.9 million) SME Database (PSDB). The main objective is to establish a one-stop Information Resource Center (Data Center) to address some o f the information needs o f MSMEs. The specific objectives include: (i) facilitatomg access o f policy makers to information needed for policy formulation, monitoring, and evaluation; (ii) disseminating timely and relevant information to prospective investors in the MSME sector at the national and district levels; and (iii)networking with other MSME Resource Centers to be able to monitor industry trends and other best practices worldwide. The Center will serve the following functions: (i) collect, collate, and analyze data relevant for the realization o f defined objectives o f MSMEs;(ii) undertake periodic update o f data on MSMEs; and (iii) disseminate information on MSMEs. The expected output i s twofold: (1) the establishment one-stop Information Resource Center in Accra with branch network in the Business Advisory Centre (BACs) in the 110 districts, which would be based on Wide Area Network (WAN) to address to specific needs o f businesses in the districts; (ii) annual reports on performance o fMSMEsinthe country. The database would be used as a benchmark for sector competitiveness and would inform the implementation o f sector strategies. It would be updated regularly to ensure that sector strategies are responsive to changing demand and supply conditions. Proactive Trade Information System (PTIS). As mentioned above, MSMEs in Ghana evolve in total opacity vis-a-vis markets; correlatively, they cannot appraise new economic opportunities to emerge from the transformation of national resources, as well as the gaps to be closed to take advantage o f the market prospects. Under these circumstances, supporting MSMEs to access and settle on markets on the 81 sustainable basis entails an interventionist approach to bridging the gap o f information asymmetry. For the identified priority sectors, an industry database will be established to detail the current status o f each industryinGhana and internationally. This will result ina clear understanding o f market requirements for each sector and support a gap audit o f Ghana's current supply capacity vis a vis market requirements and the identification o f bottlenecks. But the approach to closing the gap o f information asymmetry i s to be done on a pro-active basis because managers and prospective entrepreneurs need information but do not know which information or for what purpose. Because closing the information gap could only be effective ifthe information provided embodies relevant protocols and pedagogical tools that will make the enterprise understand the implications and translate them into relevant adjustments at all required levels, the configuration o f the proactive trade information system entails assistance in capacity building to deliver online (Web-based) services for training, product development and adaptation, packaging, labeling, and so on. PTIS will feature potentially exploitable resources in Ghana and opportunities for investment, potential product profiles for export and domestic markets, detailed definition o f the characteristics o f targeted markets by sector and product lines, available and exploitable technologies by sector including training, marketing, product design, development and adaptation, packaging and labeling, IPPR, and others, as well as protocols to enable enterprises to translate the market requirements and regulations into concrete adjustments. The PTIS will be accessed by all players operating in the area o f market trade and investment promotion, including standards institutions, service providers to enterprises, and business organizations. (io Enhancing Export Promotion The effectiveness o f export promotion to achieve increased export opportunities has been relatively limited due to lack o f adequate professional support in product development and planning by the largely small- and medium-sized export companies. Additionally, the market promotion activities for outputs o f PSI and REDP companies require professionally packaged supply-side information and market-focused sales interventions to introduce and sustain the demand for the products overtime. A coordinated market development program, encompassing buyer-seller matchmaking and agency representation abroad i s anticipated within collaborative efforts o f public-private sector interests. International consultancies, training, and basic trade infrastructure for product promotion will be procured through the Ghana Export Promotion Council (GEPC) for the targeted export companies and programs. (iii) Support to Tourism Development Project funds will be used to support the inception stage o f tourism development in Ghana through capacity building for the Ghana Tourist Board. It i s pertinent to support micro tourism businesses in the communities hosting tourist sites to boost export o f non-traditional commodities, create job opportunities for the people, and more important reduce poverty. For instance, those in the local crafts industry in craft villages are to be supported to add value and increase production o f non-traditional export items. (iv) Integration of Export Facilitation and Logistics Management SMEs face substantial information barriers and high transaction costs in accessing export trade services such as export credit, export insurance, and export guarantees. In addition, the small size o f SME production inhibits SMEs from meeting high volume export orders in a timely manner. To help SMEs overcome these constraints in exporting, two key activities are envisaged under this sub-component: first, the establishment o f an Export Round Table (ERT) to act as a one-stop facilitating mechanism for export trade services and, second, the establishment o f Export Trade Houses to support SMEs to meet the volume and overall integration o f trade facilitation infrastructure. Export Round Table: TA and credit will be provided to establish a one-stop facilitating mechanism for export trade services. The ERT will be composed o f key public and private sector institutions, including 82 banks, insurance companies, airlines, shipping companies, business advisory services, and customs. When SMEs are ready to export, they will bring their order to the Export Round Table secretariat ,which will handhold the SME to enable it to access the services provided by the Round Table members. This i s a relatively low-cost initiative in which TA will be provided to operate the Export Round Table secretariat. The secretariat will be self-financing through a user-fee system. Relevant capacities should be built within the ERT to help establish the facility and stimulate demand. The functions o f the export secretariat include: 0 Acting as the secretariat to the Export Round Table to ensure coordination and streamlining o f functions between the key public and private export trade service providers; and 0 Providing hand-holding services to SMEs to ensure that they secure timely and efficient access to export trade services. As for any other specialized BDS, the ERT will be eligible to matching grants through the BDS Fund established under the credit. Export Trade Houses: TA and credit will also be provided to establish Export Trade Houses, which will act as brokers and distributors for SMEs, enabling SMEs to meet critical export volumes and timeframes for specific orders, ensure consistent quality of exports, and negotiate bulk shipment rates, reduce the cost o f transportation, and enhance competitiveness. Export Trade Houses will eventually be self-financing through a user-fee system, but consultancy i s required for the first three years to efficiently establish the Export Trading Houses and ensure commercial viability. To stimulate demand, SMEs using the facilities offeredby Export Trading Houses will be eligible for matching grants. (v) Overall Integration of the Trade Facilitation Infrastructure Several initiatives are already being carried out in the framework o f trade development in Ghana. Additional targeted interventions was proposed and appraised in this project. There i s a need to integrate all these and connect all systems and structures to the overall trade facilitation infrastructure. Therefore,' project credit will finance relevant expertise to assess the missing links within the overall trade development system and provide with relevant solutions to integrate it. COMPONENT 3: BUSINESS ENVIRONMENT (indicative US$4.9 million: IDA US$4.5 million; Government US$0.4 million equivalent) Background The objective o f this component i s to improve selected business environment areas, which particularly impede the M S M E growth and diminishtheir access to financial resources and market opportunities. The Business Environment Component activities support the National Medium-Term Private Sector Development Strategy (developed by the Government in collaboration with the Bank and other development partners), which aims to introduce broad-based economic reforms by improving the key areas o f the business environment in Ghana, such as trade policy, business startup procedures, the system o f standards, and the role o f key public institutions in facilitating private sector-oriented reforms. Launched in July 2004, the National Medium-Term Private Sector Development Strategy (2004-2008) focuses on removing or reducing bureaucratic and institutional bottlenecks that constrain private sector development. To improve the competitiveness o f the private sector, the PSDS focuses on: (i) enhancing Ghana's position in global and regional markets; (ii) developing the capacity o f private firms; and (iii) 83 strengthening the Government's private sector policy formulation, implementation, and monitoring and evaluation capacity. In implementing this project component, the Government agreed with its donor partners to pool the project resources with other donor funds (provided by DFID and Danida) to finance the following activities envisaged by the PSDS Composite Work plan: (i) implementingselected activities under the Trade Sector Support Program; (ii)implementing market-oriented reforms in the national system o f quality standards; (iii)strengthening public-private dialogue; (iv) improving business legislation; (v) reforming business start-up procedures and regulations; (vi) streamlining the levying o f local taxes on businesses; (vii) building capacity for the MDAs to effectively serve the private sector; and (viii) monitoring and evaluating progress in meeting the PSDS. However, to mitigate possible risks o f underfundingo f the implementation plan for the PSD Strategy, which mayjeopardize the success o f other M S M E Project components, and to focus on the implementation o f the most needed reforms targeted under this project, the project envisages an option for the Government to use IDA funds to finance the following activities: (i)update, disseminate, and enforce regulations related to certification and accreditation; and (ii) reform the business entry procedures and regulation at the national and local levels This option will be used if the Government could not allocate enough funds to finance all the activities proposed for the pooled funding. These sub-components are further elaborated below. (0 Implementationof the TradeSectorSupport Program Trade Sector Support Programhas been recently developed and broadly discussed with the private sector and donor community. It underlines a strong need for Ghana to open its markets as well as to adhere to the international standards and market trends to improve the country competitive position. There are a number o f ongoing activities, which support this program through direct interventions in the different areas. The Access to Markets component o f the M S M E Project addresses some o f the key constraints enterprises face in entering new markets and deepening existing ones. This work will complement this and other efforts focusing on the reforms needed at the policy level and ensuring that public institutions are capable o f effectively facilitating sector growth. A detailed work plan i s under preparation and will be included inthe overall composite work plan o f the PSDS. (ii) Market-Oriented Reforms in the National System of Quality Standards One o f the problems faced by Ghanaian businesses relates to lack o f opportunities for their growth and graduation from small to medium companies. A limited access to finance i s one part o f the problem, Another side o f the same problem i s that due to relatively weak capacity o f the internal market in Ghana, at the certain stage o f their growth, Ghanaian businesses are faced with necessity to expand to foreign markets. Markets in developed countries, however, represent significant challenges for Ghanaian enterprises because of the high safety and quality standards imposed on goods. Occasionally, prospective exporters need to certify their goods abroad, mostly in small batches that significantly increase costs of exported goods undermining their competitiveness. There are some examples when importers in other countries accepted domestically certified Ghanaian products (such as fish exported to the EU). However, there are only few o f them, and therefore Ghanaian exporters depend on the good will o f their counter- partners. The existing national system of technical regulations in Ghana, which i s centered around two agencies-the Ghana Standards Board (GSB) and Food and Drugs Board (FDB) (with lesser involvement o f the MOTVPSI and Plant Protection and Regulatory Services)-needs to be reformed to become a catalyst for business expansion to foreign markets. In Ghana, standardization mostly remains the domain o f the government with certain participation of the private sector providing feedback, which i s quite acceptable on the international level. However, conformity assessment i s heavily dominated by state-owned institutions that, in the long run, would prevent proper competition on the part o f private laboratories and certification bodies. There are very few 84 private laboratories and certification bodies in Ghana; the mostly widely known and recognized, such as SGS and Bureau Veritas, operate in the voluntary sphere and are very costly, especially for small and medium enterprises. Ghana also needs more qualified private consultants and auditors able to help businesses build quality management or HACCP systems. The current legislation being revised now does not encourage the movement to a decentralized conformity assessment market and recognition o f Ghana- issued certificates at the international markets. In the area of conformity assessment, Ghanaian legislation needs to be improved to describe the functioning o f the conformity assessment systemin Ghana and the powers o f its participants, as well as to delineate clearly between legally regulated (mandatory certification) and unregulated (voluntary certification) areas. The Ghanaian market for certification services remains mostly in the government domain; the Ghana Standards Board is the only certification body in Ghana operating mandatory certification for products. However, there i s now discussion on the unilateral recognition o f the conformity assessment results o f some certification bodies outside. Ghana needs more infrastructure for operating a domestic conformity assessment services market, such as qualified consultants, well-equipped and accredited laboratories, and certification bodies o f Ghanaian origin, whereas services o f the affiliates o f some well-known European and South African certification bodies remain too costly for most Ghanaian producers. The area of accreditation policy in Ghana remains a major challenge for advancing toward the internationally recognized practice. Presently, there i s no national accreditation body in the Republic o f Ghana. A couple o f options are currently being discussed. One o f them i s to move toward the creation o f the cross-country regional accreditation body. However, even if a regional or national accreditation body i s in place, there should be a decent market that generates demand and supply o f conformity assessment services. On the one hand, if there i s no accreditation body, there is no demand for accreditation services, and therefore the formation o f the market o f certification services i s seriously impeded. On the other hand, absence o f the accreditation body handicaps integration o f the Ghanaian system o f technical regulation into the global framework. Ghanaian certification bodies and testing laboratories, to get their conformity assessment results recognized outside o f Ghana, have to get accreditation from national accreditation bodies o f other countries, which i s expensive and, although useful in the short-term perspective, unacceptable from the strategic point o f view. As has been noted above, the absence o f accreditation o f Ghanaian certification bodies and testing laboratories impedes conclusion o f mutual recognition and equivalence agreements as well as makes acceptance o f Ghanaian certification bodies and testing laboratories into widely recognized voluntary certification systems (such as EurepGAP) problematic. It is important to note that when establishing an accreditation body, one important issue must be taken into account: The functions o f certification and accreditation cannot be combined. This essentially means that to encourage a more competitive market, a body dealing with accreditation cannot at the same time perform the functions o f certification, although combinations o f functions o f standardization and certification or standardization and accreditation are permissible. Thus, whereas in the short-term perspective accreditation o f Ghanaian certification bodies and testing laboratories in one o f the national accreditation agencies o f developed countries i s quite acceptable, inthe long run Ghana should seek to set up the accreditation body with the prospect o f its accessionto International Legal Assistance Consortium (ILAC) and International Accreditation Forum (IAF). The national system o f quality standards in Ghana will be reformed by the creation o f a system that i s compliant with international standards, based on commercial testing laboratories and conformity assessments entities duly accredited by an appropriate regulating agency. Creation o f such a system will represent the first step inthe direction o f a fully international integrated system o f technical regulations in 85 Ghana. It i s recognized that the creation o f an efficient national system o f quality standards, fully integrated into global markets, i s a long and expensive process. Nevertheless, initial steps inreforming the current system are critical for the future o f the Ghanaian economy and the competitiveness o f MSMEs. Recognizing this problem, the Government puts priority on the necessary reforms as summarized in the MediumTermPrivate Sector Development Strategy. Supporting the Government efforts in this area, this activity will focus on developing a cost effective, responsive, and efficient system for delivering quality standards to the private sector. It i s important that the system works at all the levels, starting from the top (macro level) with the introduction o f a proper regulator and regulatory framework, moving to the meso level by enabling capable service providers, and further to the ultimate customers, MSMEs, by improving their ability to access market opportunities resulting from reforms at the macro and meso levels. In particular, it will help in developing new or adjusting the existing national standards in line with the international ones; streamlining the legal and regulatory framework, which ensures a growing role o f the commercial laboratories in the service provision; sharpening the role o f the government as a regulator; expanding the market o f the provision o f the quality standards services by increasing the awareness among the private sector o f quality standards issues; strengthening the institutional capacity o f the regulatory agencies; and enabling the growth o f internationally accredited commercial laboratories. These activities will be implemented simultaneously with the activities under the Access to Markets component, which supports the objectives stated above through the direct support to the market participants. Assistance to the Government o f Ghana to reform the national system o f quality standards will be provided in the following areas: (i)assessingthe existing system and identificationof overlapping responsibilities among various government agencies involved inregulation and supervision o f the system of quality; (ii)designing and implementing the reform proposals including legal and institutional framework and developing procedures for the national accreditation o f conformity assessment organizations; (iii)training government officials on technical regulations including study tours and on site training; (iv) building capacity to pilot conformity assessment organizations and laboratories including procurement o f necessary equipment; (v) fine-tuning established national system o f quality standards and assessing its effectiveness; (vi) launching a public awareness and outreach campaign on the procedures and requirements of the new national system o f quality standards; and (vii) performing impact assessments o f reforms. 3. Strengtheningthe Public-Private Dialogue Macroeconomic stability i s the foundation for private sector development, because it provides a key incentive for entrepreneurs to take risks and invest in their businesses. Private sector stakeholders have recognized that macroeconomic performance has improved in Ghana inrecent years. A survey o f investor perceptions suggested that both domestic and foreign investors in Ghana had generally positive perceptions in relation to Ghana's economic policy. However, there are a number o f critical issues that impact adversely on private sector development. The voice o f the private sector needs to be heard on these issues and taken into account during the decision-making process at the policy level. The PSDS will take measures to encourage more effective dialogue with the private sector in relation to its macroeconomic policy making, especially in the context o f the budget process. There are already established forums for this dialogue, such as the Ghana Investors Advisory Council and Private Enterprise Foundation. This activity will ensure private sector participation inthe budget process. The Government o f Ghana has declared its commitment to make the budget process transparent and participatory. An appropriate 86 modality for the private sector and other stakeholders' participation in this process will need to be designed and implemented. Additionally, the task will be to ensure that different segments (especially the most vulnerable ones, such as micro businesses and women entrepreneurs) o f the private sector are properly represented in such dialogue. Often, larger firms use the dialogue to address the concerns they face, while voice of the small firms are marginal and fragmented. This activity will try to ensure the problems o f these segments are properly integrated inthe government reforms. 4. Improvement of the Business Legislation This activity envisages the review of the business-related legislation in Ghana to improve it and make it more business-friendly. This activity will also support the implementation o f the changes proposed under this review. A number o f the legislative acts in Ghana were inherited from the colonial times. There is an urgent need to update them in accordance with international best practice. For instance, the Company Code was introduced in 1963 and does not respond to the current trends o f the enterprise sector. The primary task will be to revise the code and draft modem legislationregulating the enterprise sector inGhana. There are a number o f other legislative and regulatory acts that will also need to be revised. This activity will not only identify the list o f such acts but also assist the Government in amending the existing or drafting new acts. Before the introduction o f new legislation, their drafts will be discussed with the private sector and their feedback incorporatedinto final versions to be presented to the parliament. The activity will also provide seminars and workshops for the members o f parliament with the presentations o f new or amended legislative acts. The activity will also provide for benchmarking the proposed changes to best international practice. Efforts will also be made to ensure proper dissemination, including through information campaigns and Internet, o f the new business legislation. 5. Business Startup Procedures and Regulations Reforms The business community and the Government o f Ghana recognized business start-up procedures and regulations as problematic and prioritized them for reform efforts. A study completed by FIAS last year identified the process o f starting up a business in Ghana as complex; for example, new business entrants are required to comply with regulations and procedures under a number o f government agencies (see figure below).37 The Government confirmed its interest in further implementingrecommendations o f the FIAS study, as summarized in the Government's National Medium-Term Private Sector Development Strategy. Business Startup: Registration and Approvals38 37 Ghana, Administrative Barriers to Investment Update, FIAS, 2003 38 The process flow above relatesto business startup by foreign investors (or businesses with foreign participation). The same procedures are applied for domestic businessesexcept registration with Ghana Investment Promotion Centre and Ghana Immigration Service. The Tax Identification Numbering (TIN) Centre of the RevenueAgencies Governing Board, MOFEP is responsiblefor issuing TIN for all registeredbusinesses (local and foreign). TIN is issued as part o f the registration process for Sole Proprietorships and Partnerships, and issued to trigger the issue of Commencement Certificate for Companies. 87 Local (District) Assembly 7 Pay far Business Licensesand Propcrty Tax I I 4 Registrar- I b Certificate ofRegistration & Incorporation General's Department 5, TIN Ccntrc rends TIN Number to RGD 4- 4 Proof o f Capitdl lnvesmen1 5b Certificate lo Commence Business (Commencement Certificate) 3c Informof A Capital Investment 6a Submit Forms IT22A 6b Tax Registration and Number and Tax 2998 Clearance Ccrtificatc v 4a Submit Application for Resident Permit ~ Ghana IRS Commercial Immigration BankICEPS Service One sector that would benefit from reforms in this area i s the informal sector, whose estimated share o f GDP i s almost 40 percent.39 Informal enterprises do not enter the formal sector when the cost o f doing so (that is, o f complying with the regulatory requirements), i s higher than the benefits they perceive accrue to them. As such, many micro and small enterprises do not have access to finance and business support services; the judicial system, especially for the contract enforcement and property rights protection; and export-import operations. Thus, those informal businesses (mostly micro and small ones) with a greater potential to grow will mainly benefit from reducing the cost and complexity o f regulation for business entry. The source of the problems connected with business startup relates to the necessity for prospective businesses to deal with numerous governmental agencies and the absence o f a reliable, unified interface for business registration in Ghana. This leads to a cumbersome process for searching the uniqueness o f business names, frequent losses o f registrationfiles, highdegree o f tax evasions, and dangers dealing with partners, whose stability could be at risk by large tax arrears that can be claimed at any moment. There i s also widespread practice o f partial registration only with local authorities or IRS in Ghana. This situation causes uncertainty and unpredictability for businesses as well as significantly limits the growth o f individual companies. In addition, this situation also limits MSMEs' access to finance, as financial institutions are very reluctant to lend funds to the unregistered or even quasi-registered companies. The Government o f Ghana, with support from Danida and the Bank under the Public Enterprises and Privatization Technical Assistance (PEPTA) Project, took steps in addressing the issue o f business startup and proper record keeping through a unified and automated business database. Basic software for searching the availability o f business names has recently been developed and installed inthe central office o f the Registrar-General Department. It i s currently gradually introduced to all the officers dealing with the business name search. A fundamental review o f the startup procedures has recently been finalized and laid a good background for developing an action plan for reforms. A work plan o f reforms has been 39DoingBusinessin2005, World Bank Grouphttp://rm.worldbank.org/DoingBusiness/ 88 discussed between representatives o f public and private sectors and will guide the implementation o f this sub-component. Consensus has been reached that the new system o f business startup in Ghana will have to be constructed around one database and that a one-stop shop approach for the government to business interface would be employed. This revised system would be based on an existing agency involved in the business legitimization process. Reforms will have to cover a broad spectrum o f regulations for starting up a business and involve other agencies and institutions beyond the Registrar-General's Department. The immediate challenge will be to integrate the registration process at the Registrar-General Department with the tax authorities inGhana. The next step will be to include local authorities inthis process. For instance, the Accra Metropolitan Authority procedures for issuing operational permits to businesses need to be integrated in the unified business startup process. Another problem to be addressed is an availability of the business registration services outside the capital city. Now, it i s an additional cost for entrepreneurs, especially for MSMEs, to travel to Accra from the remote areas to register their businesses. An option to be validated during the project implementation is to use the infrastructure o f post offices around the country to interface with the private sector interested in submittingtheir applications. Resources will be used to: (i) conduct a comprehensive review o f the startup regulatory regime including setting up a baseline data for monitoring and evaluation purposes; (ii) the simplified system, which design includes revisions to the legal and institutional framework (the Companies Code, in particular) and streamlined procedures; (iii) upon adoption o f the reform package by the Government, implement the design including the unified automated business database; (iv) procure necessary equipment to support the reform process; (v) test and finetune the established startup processes; (vi) train agency officials to administer the simplified procedures; (vii) conduct public awareness and outreach campaign on the new startup procedures and requirements for the private sector; (viii) carry out an impact assessment o f the new system. 6. Streamlining the Levying of Local Taxes on Businesses This activity will address the problems businesses face at the sub-national level. These problems are particularly peculiar to micro and small business, because in most cases, they contact local rather than national authorities while complying with regulations. Various studies identified the burden o f local fees, taxes, and levies as one o f the most severe business environment problem in Ghana. Local authorities see these payments as an important source o f revenue for their budget. However, often, their desire to maximize these revenues leads to the increase in the number and amount of all these charges imposed on the private sector. But, instead o f the growth of revenues, it leads to its decline due to the tax evasion. Businesses comment that it i s sometimes cheaper to pay fines or bribes than to comply fully with all these requirements. Additionally, the low capacity o f the local administrations to effectively administer these requirements contributes to the arbitrariness o f the application o f these requirements and increases the administration cost. This activity will provide assistance to the district authorities to streamline their tax policy inregardto the private sector. For these purposes, the activity will help the authorities to redesign their existing systems of taxes, fees, and levies. There will be developed detailed guidelines the local authorities can use to further improve their efficiency. It will also provide training to the officers responsible for the administration o f the tax, fees, and levies collection. The activity will also include seminars for the private sector. 89 7. Building the MDAs' Capacity to Effectively Serve Private Sector Needs This project component will focus on enabling MDAsto effectively play their facilitative role inrealizing goals defined in the Government's National Medium Term Private Sector Development Strategy. Recognizing the wide range o f challenges the Government agencies face as they transform their role from financier, owner, and operator o f services to facilitator and regulator o f privately provided services, this activity attempts to respond to the request for guidance in developing policies and detailed strategies for involving the private sector, facilitating competition, and designingand establishing legal, regulatory, and institutional frameworks. The Government i s clear that, while they have initiated programs and received assistance from various donors in these areas, much remains to be accomplished so their top-down strategy can work well where there i s political will, capacity, and a productive dialogue with the private sector. Opportunities must not be lost, reforms ought to be executed, and key stakeholders (that is, citizen entrepreneurs) must remain engaged. Noting that a sound investment climate unleashes the entrepreneurial talents o f MSMEs, including poorer ones, and leads to productivity improvements, diffusion o f good practices, and the creation o f productive jobs, this component will support the MDAs' efforts to: (i) andreformpoliciesthat affect review MSMEs; (ii) systematically engage stakeholders in the diagnosis o f development issues, the identification o f reform priorities, and the implementation o f programs and projects; and (iii) measure results critical to achieving objectives increased M S M E growth and competitiveness. To this end, it will support a complementary set of tools, which could be in the form o f surveys, technical analysis by consultants, consultations through the Ghana Investment Advisory Council and business membership organizations, and the development or improvement o f methodologies that measure the impact o f policies and evaluate the efficiency o f programs targeting MSMEs. The assistance to be provided to select MDAs will provide global market intelligence to MSMEs to develop a sector policy for selected sectors and to facilitate efficiently public-private dialogue and partnerships. A specific intervention will support the agencies to facilitate intra-ministerial cooperation, inparticular relevant for certain PSIS. One o f the key players among MDAs, whose primary responsibilities are to support the private sector growth, i s the Ministry o f Private Sector Development and President's Special Initiatives (MPSD/PSI). It was established three years ago within the presidency to coordinate and harmonize efforts that will translate the vision o f the Government's "Golden Age o f Business" into reality through a deeper participation o f the private sector in policy formulation, advocacy, and business development. It i s envisaged that coordinated efforts inall sectors will facilitate the role o f the private sector as the engine o f economic growth. The MPSDIPSI expects to accomplish this by: (i)facilitating the removal o f institutional and legal bottlenecks that impede the development o f the private sector; (ii) facilitating the private sector's ability to access capital and other business and public services; (iii) facilitating innovation and entrepreneurship in the formal and informal sectors; (iv) encouraging domestic and foreign investment; and (v) serving as the Secretariat for the Ghana Investors' Advisory Council. Four functional directorates were created in the ministry to respond to the demands o f these tasks: (i) innovation and entrepreneurship; (ii) publidprivate partnership; (iii) institutional reform; (iv) policy planning, monitoring and evaluation. Responding to the MPSDPSI efforts on improving the investment climate and enhancing the delivery o f basic services, especially to poor people, requires policy reforms and commercial disciplines. Project resources will be used to strengthen these efforts to achieve results on the ground. It will stress the need to systematically engage stakeholders, in particular the private sector, in the identification o f reform priorities and the implementation o f programs and projects using best practices and lessons learned. Consultations and impact measurements will be conducted at the regional and local levels to actively pursue the best business environment for their constituencies. Active institutions of civil society will participate in public-private dialogue and participate in monitoring government actions and conducting 90 outreach and education campaigns to foster a broad-based understanding o f the goals and benefits of reforms by the Government. In accomplishing these tasks, the MPSDRSI already undertook initial steps in institutionalizing a Regulatory Impact Assessment (RIA). Early efforts were partly funded by DFID. A template has been developed to determine the relevance o f policies; identify others that may require re-design; analyze the costs and benefits o f the policies; and assess the impact on the reduction o f the cost o f doing business. Buildingon accomplishments to date and responding to the request from the ministry to further develop procedures for a comprehensive regulatory assessment, the project will finance next steps, including the drafting, adoption, and enforcement o f regulations. Important criteria and benchmarks for an effective governance process will be developed, and the drafting and implementation regulations will incorporate an obligatory consultative process with the private sector. Mechanisms, such as public hearings and publication o f drafts, formalization o f cost-benefit justifications for regulations with governmental and independent clearing provisions, sunset provisions, and a monitoring system based on quantitative outcome indicators, will be developed. The donor pooling resources will specifically cover technical assistance to build sustainable capacity within MPSD/PSI to (i) efficiently coordinate and assess private sector activities across ministries; and (ii)conduct regulatory assessments o f proposed and existing regulations and making necessary changes to regulations, as required. On the regulatory assessments, assistance would be provided in the following areas: (i)assessing the existing procedures to initiate, draft, justify, and enforce policies; (ii)developing RIA methodologies and procedural guidelines, including mechanism for private sector participation, adapted to the Ghanaian context; (iii) testing and finetuning the RIA; (iv) training Government officials on the new IRA system; and (v) buildingthe MPSDIPSI's institutional capacity to effectively implement the PSD strategy. 8. Monitoring and Evaluation of the PSDS Developing the strong and effective M&E system i s one o f the prerequisites o f the successful implementation o f the PSDS. Proper monitoring and evaluation o f the PSDS implementation i s extremely important to measure its results as well as to review and update the PSDS content. Development partners agreed to finance developingand implementingthe M&E system for the PSDS, including the appropriate indicators and the methodology to collect and summarize them. COMPONENT4: MSME PROJECTIMPLEMENTATION, MONITORINGAND EVALUATION (indicative US$3.2 million: IDAUS2.9 million; Government US$0.3 million equivalent) To facilitate the implementation o f this project, resources allocated to this component will fund the financial, audit, training, and consultant assignments required to execute the project, report and review (on a semi-annual and mid-term basis) on implementation progress, and monitor project components. Provisions will also be made for equipment and operational costs (within an agreed framework). Resources will be allocated to carry out a comprehensive impact assessment survey, which will provide baseline data on enterprise productivity and the cost o f doing business. Inaddition, support will be available to Government agencies to (i) coordinate project activities and carry out the objectives of the project components as provided inthe PIM; (ii) facilitate the partnership between the Government and the private sector to better ensure ownership and sustainability of reforms; and (iii) enable the Government to maximize assistance received from its development partners on initiatives addressing similar constraints as the M S M E Project by harmonizing implementation and pool funding arrangements. 91 Recognizing the wide range o f challenges the Government agencies face as they transform their role from financier, owner, and operator o f services to facilitator and regulator o f privately provided services, this activity attempts to respond to the request for guidance in developing policies and detailed strategies for involving the private sector, facilitating competition, and designing and establishing legal, regulatory, and institutional frameworks. The Government i s clear that, while they have initiated programs and received assistance from various donors in these areas, much remains to be accomplished so their top-down strategy can work well where there is political will, capacity, and a productive dialogue with the private sector. Opportunities must not be lost, reforms ought to be executed, and key stakeholders. (that is, the citizen entrepreneurs) mustremain engaged. Resources will support MOTI's interest in being active in a range o f activities that enhance their role in: (i)buildingpublic and private sector consensus for appropriate policy, regulatory, and institutional reforms; (ii)designing and implementing specific policy, regulatory, and institutional reforms; (iii) framing development strategies to take full advantage o f the potential for private sector involvement; (iv) facilitating the design, implementation, and evaluation (measurement o f program inputs and outputs, impact on firm productivity, institutional performance, and market development) o f pioneering projects that support private entrepreneurs and service providers. Aligned with these activities, provisions will be made for the capacity-building requirements o f the SME Directorate within the MOTI. The MOTIestablished the SME Directorate in 2003 responding to the fact that MSMEs constitute 93 percent o f the Ghanaian private sector that requires a coordinated approach to SME development. SMEs are considered importantplayers inthe economy given their contribution tojob creation and employment, economic growth, restructuring large enterprises, enhancing competitiveness, stimulating innovation through new technologies and techniques, increasing productivity, promoting exports and regional and social cohesion. Technical assistance will be used to enable the Directorate to meet its objectives of: (i) formulating and harmonizing policies to ensue collaboration in the SME sector; (ii)enabling efficient and effective institutional support structures for SME development; (iii) supporting the improvement o f entrepreneurial skills and culture; (iv) facilitating business support services (technology, capital market, product development facilities, linkage and networking) to SMEs; (v) promoting active participation o f women and vulnerable groups in SMEs; and (vi) promoting the growth o f enterprises and industries in rural areas and stimulating their contribution to job and wealth creation. Specifically, technical assistance will focus on: advising the Directorate on its organizational structure; developing action plans for the future; guiding the performance o f its various tasks so services are results oriented and based on best practice; training so the organization i s run in an efficient, professional, and entrepreneurial way; developing a Business Development Services facilitation procedures manual; and possibly establishing an ongoing coaching system with small business agencies elsewhere in the world. In addition, resources will be used to build its capacity to collect and analyze information, including industry and market trends; identify SME development issues; and define priorities in support o f the sector. It is expected that the implementation o fthese activities will lead to entrepreneurs having a vast network o f resource partners; the Directorate advocating for all SMEs and taking the leadership in building productive partnerships between the private sector and the Government; and the spirit o f entrepreneurship empowered in communities. The Directorate's performance will also be measured by SMEs' success in both the domestic and global markets. 92 Annex 5: Project Costs GHANA: Micro, Small and MediumEnterprise Project PROJECT COMPONENTS& FINANCINGSOURCE COMPONENTS/ACTIVITIES IDA IFC GOG Others TOTAL b. Line of Credit c. Tech Assist. for Banks (BDS) 3. BusinessEnvironment 4.5 - 0.4 4.9 4. Project Implementation, Monitoring, andEvaluation: 2.9 0.3 3.2 5. Unallocated 4.2 4.2 GRAND TOTAL 45.0 40.0 1.9 32.0 118.9 93 Detailed Cost Allocation Ghana IDA/IFC Cost Allocation USD'million COMPONENT DESCRIPTION IDA IFC GOG Others Total Access to Finance 13.4 40.0 28.7 82.1 PCG 48.21 LOC 22.1 Bank TA fBDS) 6.6 SME TA fBDS) 3.6 1.6 5.2 Access to Markets,Trade Facilitation& Entrepreneurship 20.0 1.2 3.3 24.5 Access to Markets 4.7 Non-Financial Services to Enterprises (Const, Agri, Others) 2.7 BDS 2.2 Integrated BDS 0.5 Expansion of Domestic Market- Linkages (Const, Agri, Others) -l--l-L L 0.9 BDS 0.7 Integrated BDS 0.2 Meso Level Interventions IdentlJication of Priority Sectors SPX Web Gallery 0.36 EntremeneurshiD Develomnent 10.1 I I I 10.1 ICT-BasedEntrepreneurship 4.2I Support to MoTI/GCIs 0.5 Incubation and Pilot Common Service Centers 5.0 Furniture City GarmentdTextiles 4.1 Garments/Textiles 0.9 Projects Developmentfor Creation of Common Service 0.4 Trade Facilitation Infrastructure 5.2 1 Information System EnhancinPExvort Promotion 0.4 Suuuort to TourismDevelovment 0.5 Integration of Export Facilitation and Logistics Mgt. 0.9 1 Export Round Tables 0.5 TradeHouses 0.5 Overall Integration of the TradeFacilitation Infrastructure 0.5 BusinessEnvironment 4.5 0.4 4.9 Implementation, Monitoring& Evaluation 2.9 0.3 3.2 Unallocated 4.2 4.2 GRANDTOTAL 45.0 40.0 1.9 32.( 118.9 94 Annex 6: ImplementationArrangements GHANA: Micro, Small and MediumEnterpriseProject The projected implementation period would be five years: January 200tLDecember 2010. As illustrated in the organigram below, MOT1 will serve as the Project Executing Agency and will have overall responsibility for the management o f the project. The Private Sector Oversight Committee, composed o f public and private sector representation, will provide strategic advice and approve grant and contract awards above agreed thresholds. The SME Directorate will work with each component manager, beneficiary agency, and group targeted under this project. As required, it will obtain additional technical support on a contractual basis, following IDA procurement procedures, including a private firm, competitively selected following IDA procurement procedures, to serve as the BDS FundTU Manager charged with the daily implementation requirements o f BDS grants under the Access to Finance and the Access to Markets, Trade Facilitation, and Entrepreneurship Development components o f the project. For the additional financial instruments, in accordance with the Project ImplementationManual, the BDS Fund/TUManager will administer the proposed financial initiatives and technical assistance to support proposals for consideration by the Government, IDA, and IFC. S M E Directorate - (Project management. Oversight Committee (Financial, procurement,disbursement, (Policy guidance) procure ment nigt) monitoring& evaluation ) ImplementingMinistries/Agencies -- Technical Advisory Board (Public sector implementation, - (Accessto FinanceCompo nent, BDS capacitybuilding) Fund, Private sector technical support, Public sector training) Trade Facili tation BusinessEnvironment Access to Finance Access to Markets, Sub -Component Component Component Trade Facilitation, Entrepreneurship Development Sub -Component (Performance Grants) Private MSMEs (Perfomiance -based matching grants) 95 A Project Implementation Manual will be drafted by the SME Directorate, with input from other implementing agencies and the BDS FundTUManager and in consultation with IDNIFC. This Manual will provide: (i) detailed description o f the roles and responsibilities o f the implementing agency (SME a Directorate, BDS Fund/TU, the Private Sector Oversight Committee, or PSOC, and the IFC); (ii) the institutional and operational guidelines for each component o f the project including a procedures manual for the grant component of the project; (iii)thresholds for grant approvals; (iv) detailed project performance framework (indicators and targets); and (v) the pooled funding agreement between participating donors and the Government including an annual action and procurement plan for the activities financed from the PSD pooled fund. Institutional Host: Ministry o f T r a d e a n d Industry (SME Directorate) (Oversight Committee1 I Technical Advisor! EvaiUatiOn Accounting Private Sector Service Delivery Manager Min. of Mia. of Food Sector Dev. CO,",". and Agric - Aciiviiy i .Activity I -Acti\ity 2 .Aciivity I .Aclivil) 2 -Activity 2 Beneficiaries The implementation of the grants components o f the project will be in accordance with a Grant Procedures Manual that will be incorporated in the PIM. The key features o f the grants procedure are: (i) a description o f the basis o f eligibility and performance criteria and disbursements based on measurable triggers set out in a performance agreement; (ii)thresholds guiding approvals o f grant proposals by the BDS FundiTUManager; (iii) on technical advice from specialists, review and approval procedures based for proposals received under both access to finance and BDS by the SME Directorate and the PSOC for applications above agreed thresholds; and (iv) semiannual reviews o f the grant program portfolio by the PSOC, the Government and IDA. This will also support an ongoing assessment o f the BDS Fund/TU Managers' performance in order to ensure that the grant program stays on track and remedial actions can be taken promptly as required. The principle guiding the provision o f grants i s built on the premise that maximizing grant recipients' share o f costs (contribution to total project cost) increases likelihood o f success. The grant programs are 96 expected to entail a contribution from recipients. The proportion/level o f costs borne by each recipient will be designed to enhance the recipient's commitment to the project and contributes to the sustainability of the project. In certain instances, the cost-sharing arrangements will be designed to allow for catalyzing innovative projects or supporting institutions with public good benefits (such as business associations), which may require a significantly different level of cost sharing on the part of the recipient. To this end, flexibility in determining the cost-sharing arrangements will be clearly reflected in the applicable eligibility criteria incorporated inthe final implementation manual. 97 GHANA IDMIFC MSME PROJECT BDS FUNDSERVICE DELIVERY SCHEMATIC TechnicalAdvisoryUnit/ OIerall Management I Project Areas with TA/BDS Meso Level/ Beneficiary Institutions Client MSRlEs Service Providers(SPs) -n - LEGEND 0 MSMEs <-, Direct Contracting of SPs Service Providers - CBiTA to FaciIitators/Institutions <=> Clusters Matching Grants to MSMEsiSPs Consultation 98 FUNCTIONS 1. Project Support Services in InstitutionalHost Financial Management and Procurement: 0 Procure BDS FundManager 0 Ensurethat FundManagers procurement procedures and capabilities conform to GOG and WB standards 0 Ensurethat prior reviewsand no objections are carried out where necessary 0 Transfer quarterly estimated budget into FundManagers account 0 Receive and review monthly (or quarterly) submissions o f documentation 0 Submit to WB for replacement 2. Private Sector Services Delivery Manager 0 Approve Terms o f Reference/Request for Proposals (TORdRFPs) for Technical Advisors and BDS FundManager 0 Review and approve annual work programs and annual/quarterly budgets o f Technical Advisors and BDS Fund 0 Overall supervision o fwork o f Technical Advisors and BDS FundManager 0 Advise institutional host on implementationo frelevant project components 3. Technical Advisors 0 Select (according to established criteria) facilitating/intermediary institutions, and interface with them on a technical advisory level 0 For TA to facilitating intermediarykleso Level institutions and Lead firms/agencies, assist indevelopment o f capacity buildingprogram and sign off on requests to BDS FundManager for funding. 4. BDS Fund Manager 0 Consultation with project management and stakeholders to agree on criteria, subsidies/co-payment and terms for funding 0 Prepare operational manual and information brochures for each category o f access to BDS/TA. 0 Screen applicants and proposed activities for eligibility. 0 Select appropriate fundingmechanism for the particular activity 0 Procure Service Providers (pre-qualification for generic services, ad hoc for specialized services), or approve certain agencies to do work, procurement (consistent with GOG and WB requirements) 99 In support of an effective and efficient implementation process for the performance grant fund, review and approval thresholds and grant limits will have to be established and agreed with the Government. The following grant limitsand thresholds are proposed: For private MSMEs and BDS providers: All grants will be based on the principle of maximizing the beneficiary contribution, with an increasing cost-sharing arrangement expected from repeat beneficiaries o f the fund. No application will be considered for a grant o f under US$2,000. No single recipient firm or conglomerate may receive total grants in excess o f a cumulative total of US$200,000 but 2,500,000 for financial institutions. Based on the recommendations made by the BDS Fund/TU Manager, the SME Directorate will review and approve all allocations for amounts over US$lOO,OOO up to US$150,000. Based on the recommendations made by the BDS Fund/TUManager and the SME Directorate, the PSOC will review and approve all allocations for amounts over US$150,000. For financial institutions: 0 All grants will follow the principle ofmaximizing the beneficiary contribution. 0 No application will be considered for a grant o f under US$2,000. e N o single recipient firm or conglomerate may receive total grants in excess o f a cumulative total of US$2 million. 0 Grants will not exceed 50 percent o f the total project cost. 0 Based on the recommendations made by the BDS Fund/TU Manager, the SME Directorate will review and approve all allocations for amounts over US$lOO,OOO up to US$150,000. 0 Based on the recommendations made by the BDS Fund/TUManager and the SME Directorate, the PSOC will review and approve all allocations for amounts over US$150,000. Implementation o f the Business Environment Component will be guided by the Memorandum o f Understanding (MOU) that has been signed between the Government o f Ghana and various development partner^.^' The MOU establishes a common approach to the development partners' support for private sector development; defines the PSD Strategy Pooled Fund; summarizes the action plan for 2005-2009; provides an annual planning, reporting, and reviews calendar; sets out the PSD strategy management arrangements; lays out the format for financial reporting, monitoring, and evaluation frameworkiplan; and provides a schedule of indicative contributions through the pooled fund and sector budget support. The SME Directorate at the MOTI, the BDS Fund/TU Manager, other government ministries and agencies, and the PSOC will meet twice a year to review progress in project implementation, share accomplishments, identify problems, and agree on remedial actions. IDA supervision missions will be scheduled to coincide with these consultative reviews. A mid-term review will be conducted to evaluate progress on implementation and determine whether the project should further extend its operations countrywide within 24 months after effectiveness, seek supplemental funding, or refocus. Quarterly progress reports will provide the basis for project monitoring and operational reviews. The SME Directorate will be responsible for monitoring project activities and providing project progress reports in line with the PIM and annual work plans. Independent specialists will carry out project 40 Memorandum o f Understanding between the Government o f Ghana for the implementation o f the Ghana National Medium-Term Private Sector Development Strategy and Action Plan, 2005-2009. 100 evaluations-addressing efficiency, effectiveness, and impact criteria-in accordance with the performance framework and its implementation plan. The SME Directorate will be tasked with developing and populating the database required for the evaluation plan to be implemented. The evaluation plan will include bi-annual independent operational audits o f efficiency and effectiveness parameters o f the project. The first o f these audits will be prepared for the mid-term review. A key challenge for the project will be to assess project impact. This will require, inter alia, a determination be made as to whether the grant provided by the Government through this IDA credit resulted in sustained improvements in firm performance, additional to what would have been achieved without the subsidy. To address this question, it is necessary to compare with both "before and after" (assess target firms benefiting from the project both ex ante and ex post) and "with and without" (assess target firms performance relative to those who have not benefited from the project) controls. Two other major issues will need to be borne inmindwhen trying to isolate the effects o f the project: (i) to control for other need factors inthe enabling environment that may be affecting firmperformance, in addition to the project; and (ii) difficultiesposedbyselectionbias,inthatfirmsbenefitingfromtheprojectwilltendtobeones the that are more successful inthe first place, bringinginto question the additionality generatedby the project grant. 101 Annex 7: FinancialManagement andDisbursementArrangements GHANA: Micro, Small, andMediumEnterpriseProject ExecutiveSummary The objective o f the Financial Management Assessment is to determine whether the entities identified for the implementation o f the Micro, Small, and MediumEnterprise Project (MSME)-that is, the Gateway Secretariat and the Controller and Accountant General Department have acceptable financial management arrangements in place. These include the entities' system o f accounting, reporting, auditing, and internal controls. The entities' arrangement are acceptable if they are considered capable o f recording correctly all transactions and balances, supporting the preparation o f regular and reliable financial statements, safeguarding the entities' assets, and are subject to auditing arrangements acceptable to the Bank. Financial management assessment o f the accounting unit o f the Gateway Secretariat o f the Ministry o f Trade and Industry (MOTI) was undertaken between 28 February and 18 March, 2005. The assessment was undertaken jointly by a World Bank Financial Management team and the project accountant o f the Gateway Secretariat. Financial Management Assessment Questionnaires were completed jointly by the project accountant and the World Bank team. The team did not use fm assessment questionnaires as part of its financial management assessment at the Controller and Accountant General Department (CAGD). CAGD has been assessed as part o f the Ghana Country Financial Accountability Assessments (CFAA) and other Public Financial Management (PFM) work inthe country. The accounting unit of the Gateway Secretariat is responsible for the Bank-funded Gateway Project. The unit is headed by a Project Accountant, who is a professionally qualified accountant with extensive experience in financial management o f Bank-funded projects. H e and his team o f staff have participated in various seminars and workshops on World Bank disbursement and are therefore capable of managing Bank-funded projects. The unit also has adequate financial management systems, documented infinancial procedures manual and computerized. It has been agreed that the accounting unit o f the Gateway Secretariat will provide financial management oversight for the MOTI component o f the M S M E Project. This will, however, require some minor modifications to the unit's current computerized system. The CAGD has put in place arrangements that will enable it to manage the pooled funds from partners, including the World Bank, which will be used to support the implementation o f the MPSD component o f the project. CAGD will therefore be responsible for all accounting, disbursement o f funds to all participating agencies, financial reporting, and ensuring that the component i s audited at the end o f each year. The CAGD has adequate staff, and although some may not have received training on World Bank- specific disbursements, they will be trained prior to project effectiveness. In conclusion, our assessments o f the financial management arrangements as put in place, for managing the financial resources of the M S M E project under the two components are adequate and meet the Bank's minimumfinancial managementrequirements for Bank-fundedprojects. CountryIssue The Government o f Ghana has implemented several reforms in response to the findings o f the Country Financial Accountability Assessment (CFAA) for Ghana, carried out in 2001 and updated in June 2004. Some o f the key actions taken include the enactment o f 102 1) Financial Administration Act 2003, in response to the identified weakness o f the fragmented legal structures that governed public financial management; ii) Internal Audit Agency Act 2003, in response to the setting up o f the nonexistence o f modern internal audit for government departments; and iii) ThePublicProcurementAct, toimprovetheefficiency ofpublicprocurement systemsand practices. The summary risk analysis i s based on the country work and assessment o f the financial management unit of the Ministry of Trade and Industry (Gateway Secretariat), the institutions responsible for the management o f the project. Summary of FinancialAccountability RiskAnalysis Risk 1g ! g IRisk Mitigation Measure InherentRisks: Country a) Non-effective implementation S The Government has introduced a new comprehensive of New Financial Administration legal framework for public financial management-the Act (FAA). Financial Administration Act (FAAtwith related regulations for implementation. There i s need for close monitoring to ensure effective implementation o f this act. b) Non-compliance o f statutory H The Governmentneeds to institute measures that ensure regulations and non-enforcement the systematic review, update, and enforcement o f o f penalties. penalties for non-compliance. c) MDA may not fully comply S Government has passed legislation, Internal Audit with new Internal Audit Agency Agency Act (IAAA), for all MDAs to establish internal Act, inthe establishment o f audit function withintheir offices. Assistance will be internal audit units within their provided to strengthen the internal audit o f MOTIand offices. other participatingMDAs under the project to meet the act's requirements and for the benefit o f the project. OverallInherentRisk S Control Risks: Staffing and Internal Controls at the Ministry of Tradeand Industry (MOTI) M Financial management unit o f the Gateway Secretariat a) MOTI has not got the required will provide financial management support for the qualified accounting staff to project. This will include managing the SA and manage the project funds. preparing Withdrawal Applications. b) MOTIfinancial management M Financial management unit o f the Gateway Secretariat systems are weak and not will assist MOTIto improve its system and document its documented inprocedures procedures in a manual duringproject implementation. manual. Financial management M This is a condition for disbursement for the Business arrangements for managing the Environment Component. pooled fund are not satisfactory Funds Flow a) Delays inprocessing payments M Introduce service standards for the finance and accounts 103 to ImplementingAgencies and unit o f Gateway Secretariat to achieve. This will be service providers for services monitoredover time. rendered. Implement simple streamlined procedures for processing payment to beneficiaries. This will be reflected inthe accounting procedures manual to be modified for use by the Droiect. b) The non-timely preparation and M Accountant at Gateway Secretariat i s experience and submission o f withdrawal will provide support to any support staff that mayjoin applications to the World Bank team. for the releases of funds. Internal Audit a) N o professional internal audit S All MDAsare requiredto set uptheir IAunits inline (IA)function exists at Ministry. with the new Internal Audit Agency Act (IAAA).The project will assist MOTIto set up its IA unit.This unit b) Government IA is limited to will then provide internal audit functions for the project. pre-auditing, with no added value. External Audit Project audit reports likely to be M MOTIthrough Gateway will institute mechanism where submitted late. the audit program for the relevant years are agreed with the auditors prior to year end and monitored to ensure compliance. Auditor's contract will be limited to one year and renewal will be contingent on timely completion and submission o f their audited reports. Reporting and Monitoring a) Delays inthe submission o f M Since disbursement i s based on the submission o f FMR, agreed Financial monitoring there i s an incentive for the preparationand submission reports (FMRs), and other o f the requiredreports. There will be support provided relevant reports. by the partners to improve overall FMo f Ministryo f Finance and Economic Planning (MOFEP). Information Systems MOTI-Gateway financial system M The project will support Gateway finance unit to expend i s computerized. Delay inre- the chart o f accounts o f its computerized system to customizing for the activities include activities o fthe MOTIcomponent o f the M S M E under MOTI component. project. Business Environment The project will support the CAGD to maintain Component- Risk that CAGD will adequate manual system, and when required support it not be able to complete to include activities o f the business environment Government computerized for component inits computerized system project to benefitfrom its use. Overall Control Risk M Ratings: H - High, S - Substantial, M - Modest, N-Negligible 104 Financial Management under the M O T I Component of Project The Accounts Section o f the Gateway Secretariat has financial management responsibility for the project, The head o f the Accounts Section, the Project Accountant, i s a qualified accountant with extensive experience in financial management of Bank-funded projects. H e has participatedin various seminars and workshops on World Bank disbursement and procurement procedures. H e i s assisted by two assistants. Based on our assessment, it i s recommended that an additional assistant be identified from the MOTI accounts office to join the team, which will enable the finance unit to perform its duties and ensure the existence o f adequate internal controls. The Project Accountant will be responsible for day-to-day financial management o f the project, which will include maintaining adequate accounting records to reflect all transaction o f the project, processing payments for services rendered, and preparing financial reports for management. H e will also prepare the project financial statements and ensure that project audits are carried out timely at year end and copies submittedto the World Bank. Financial Management under the MPSD Component The Ministryo f Private Sector Development i s a relatively new ministry, and as a result it has not got its full complement o f accounting staff. In addition, the implementation o f this component involves several MDAs and partners. The participating partners have also agreed to pool their resources in a harmonized manner for the purpose o f implementing this component. Giventhat the ministry does not have the capacity to manage the financial resources to be provided, it has been agreed that the Controller and Accountant General's Office will be responsible for the financial management o f this component. A unit has been set up within CAGD to manage the pooled account o f partners. CAGD will therefore be responsible for all accounting, disbursement o f funds to all participating agencies, financial reporting, and ensuring that the component i s audited at the end o f each year. These arrangements have been agreed in an MOU between the participating partners and the Government represented by the MPSD. Flow of Funds under MOTI Component The MOTIcomponent o f the project will operate a centralized accounting and funds management system and as a result there will be no elaborate flow o f funds arrangements. All requests for payment by ImplementingAgencies will be submitted to the Project Accountant's office at the Gateway Secretariat for review, processing and payment. To ensure the timely processing o f all requests, the Project Accountant will issue instructions to all implementing agencies on the steps and support documentation that will be requiredprior to effecting payments. Flow of Funds under the MPSD Component Based on the agreed arrangements, the mission agreed on a flow o f funds mechanism with the CAGD as follows: 1) ChiefDirector o f MOFEP requests funds half-yearly, or based on FMRs, in January and June, or as need be, from Pooled Fund DPs into Pooled Fund Dollar Account with the Bank o f Ghana, based on Contribution Schedule inMOU or financial statements (FMRs); ii) Bank of Ghana advises CAGD o f receipt o f funds into Pooled FundDollar Account; 105 iii) CAGDacknowledgesreceiptofPooledFundstotherespectiveDP; iv) Validated PSDS Procurement Plan (See Procurement Process below) i s submitted to CAGD for preparationo f Cash Plans; V I Controller and Accountant-General and Chief Director o f MPSD transfer funds from Pooled FundDollar Account to PooledFundCedi Account, based on Cash Plan prepared by CAGD from approved Procurement Plan; vi) Implementing MDAs initiate activities in approved Composite Work Plan, based on procurementplan; vii) Implementing MDAs submit payment requests to CAGD based on contracts for goods, works, and services; viii) C A G D processes requests from MDAs; a. Basedon Payment Vouchers approved by the MDAs authorizing authority b. Payment Vouchers shall be supported by Invoices, StoresIService Received Advice and any other relevant documentation ix) Controller and Accountant-General and Chief Director of MPSD sign cheques based on approvedPayment Vouchers by CAGD; X I C A G D releases cheques to Implementing MDAs; xi) MDAsrelease cheques inpayment for goods, works, and services. CAGD then prepares the required financial reports to the partners. Auditing Arrangements Independent and qualified auditors acceptable to the partners would carry out the annual financial audit o f all components under the project. The financial auditors would be inplace by effectiveness o f the project. I t i s recognized that it i s the responsibility o f the Auditor General of Ghana to audit these government entities, as a result, the selection o f these independent auditors will be done in collaboration with the Auditor General. The auditors' reports and opinions including the management's letter of the annual financial audit would be furnished to the World Bank and all partners within six months o fthe close of each fiscal year. Reporting and Monitoring The Bank requires projects to prepare quarterly FMRs in the areas o f finance, procurements including contract details and project progress. The quarterly FMRs include; Quarterly Financial Reports: Consisting o f sources o f funds and their uses, statement o f uses o f funds by project components and activities, special account reconciliation statement, and a six-month project cash forecast as needed. 106 Quarterly Project Progress Report. Consisting o f output monitoring report on contract management and on unit o f output by project activity. Quarterly Procurement Report: Consisting o f procurement process monitoring and contract expenditure reports for goods, works, and consultants' services. The report compares procurement performance against the plan agreed at negotiations and appropriately updated at the end o f each quarter. The report should also provide any information on complaints by bidders, unsatisfactory performanceby contractors, and any contractual disputes. M O T I will be responsible for preparing and submitting the FMR required to be produced under its component. In this regard, the finance unit o f the Gateway Secretariat will ensure that these reports are prepared on timely basis to enable MOTI meet this reporting obligation. Copies o f these FMR reports would be submitted within 45 days o f the end o f each quarter. The contents and format o f the FMRs will be agreed at appraisal. Disbursement Arrangement There will be one special account and one "Pooled Account" for the project: (i) project components for managed by the Gateway Secretariat for the M O T I component; and (ii) to be managed by the CAGD for activities under the pooled funds with participating development partners. Special Account: The special account would be established and operated inUS.dollars at a commercial bank, under terms and conditions satisfactory to IDA. Upon credit effectiveness, a sum o f US$2,000,000 would be deposited by the Bank into the special account, and further replenishments would be made into the special account against submission o f withdrawal requests. Pooled Account: Disbursements into the pooled account will be against the submission o f financial monitoring reports. The CAGD shall submit the project FMRs supported by a bank reconciliation statement o f the pooled bank account, together with copies o f the bank statements. Based on the cash needs and the IDA budget for the particular year, request for funds will be paid into the pooled account. Use Statement of Expenditures (SOEs) Disbursements for all expenditures under the M O T I component would be against full documentation, except for items o f expenditures under contracts and purchase orders below US$250,000 equivalent for goods, US$500,000for works, US$lOO,OOO for consulting firms, and individual consultants and US$ 150,000 for BDS Grants, training and incremental costs for which disbursements would be based on statement o f expenditures (SOEs). Supporting documentation for SOEs would be retained by Gateway for MOTI for review by IDA missions and external auditors. Disbursement under the MPSD component will be against the submission o f financial monitoring reports. The SOE will not be applicable. Performance-Based Grants Disbursement Arrangements Disbursementsunder the performance grants will be based on measurable triggers set out inperformance- based grant agreements with recipients o f such performance grants. The BDS FundiTUManager will be responsible for verifying achievement o f development impact and performance thresholds that trigger payment o f the grants and for disbursingthe grants to eligible participatingbanks. The SOE or report-based format for justifying expenditures against performance grants (to be cleared by the FMS and FO) will be reflected in the implementation manual upon completion o f an IFC appraisal 107 mission. The grant agreement to be entered into between each respective LOC Performance Grant recipient, the BDS Grants Manager and IFC will lay out the schedule o f payment terms and conditions to be used for capacity-building activities. It will help to mention in this context that we will be relying on the precedent set by the MSME project inNigeria (signed on February 17,2004). Retroactive Financing To expedite project implementation and coordinate activities prior to effectiveness, there is a need for retroactive financing inthe amount o f 100,000 SDR for all expenditures incurred after November 1, 2005. Allocation o f Credit Proceeds us ExpenditureCategory $million FinancingPercentage 100% o f foreign expenditures and 1. Works 4.71484 90% o f local expenditures 100%o f foreign expenditures and 2 Goodst 5.4402 90% o f local expenditures 3 Consultants' services and audits 10.24395 90% 4 Training 2.53876 100% 5 Operating costs 0.63469 90% 6 BDS Grants 6.51541 100% o f amounts disbursed 7 LOC Performance Grants 2.1 100%o f amounts disbursed Such percentage of Eligible Expenditures as the Association 8 Subprograms 4.5335 shall determine from time to tim 9 Partial Credit Guarantees 4.08015 100%o f amounts disbursed 10 Unallocated 4.1985 Total 45 108 Annex 8: ProcurementArrangements GHANA: Micro, Small, andMediumEnterpriseProject General Procurement through International Competitive Bidding (ICB) and selection o f consultants estimated to cost more than US$200,000 under the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004, and the provisions stipulated in the Development Credit Agreement. All other procurement and selection o f consultants will be carried out in accordance with the Ghana Public Procurement Act 663 o f 2003. The general description o f various items under different expenditure category i s provided. For each contract to be financed by the credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan shall cover an initial period o f 18 months and will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The Development Partners have agreed that IDA will review and provide clearances on procurement for pooled components on behalf o f the DevelopmentPartners. Procurement of Works: Works procured under this project would include: construction o f workshop units at the proposed furniture city construction o f f a m walkways and pathways under the PSI, and minor building and office rehabilitation. The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all ICB and National Standard Tender Documents satisfactory to the Bank. Procurement of Goods: Goods procured under this project would include: computers, communication equipment, equipment for the proposed Furniture City and the Wood Technology and Design Centre, vehicles, office equipment, software, and laboratory and other testing equipment, and furniture. The procurement will be done using Bank's SBD for all ICB and National Standard Tender Documents satisfactory to the Bank. Procurement of Non-consulting Services: Non-consulting services to be procured under the project include surveys, computer and office equipment maintenance, facilities management, advertising, promotion, and vehicle maintenance services. The procurement will be done usingbiddingdocuments satisfactory to the Bank. Selection of Consultants: Consulting services to be provided under the project include funds management services, various institutional and sector studies, advisory services, engineering and design services, and capacity building. Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely o fnational consultants inaccordance with the provisions of paragraph 2.7 o f the Consultant Guidelines. Operational Costs: Other sundry items (office rental and utilities) and other project implementation-related expenses to be financed by the project on a declining basis would be procured using the Ghana's Public ProcurementAct 663 o f 2003. Training, Workshops, and Study Tours: These will be carried out on the basis o f approved programs on a yearly basis. The programs will identify the general framework of training and similar activities for the year, including the nature and objectives o f training and study tours, workshops, the number o f participants, cost estimates, and the translation o f the knowledge gained in the actual implementation o f project components. 109 Assessment of the Agency's Capacity to Implement Procurement Procurement activities will be carried out by each o f the implementing agencies under the project. The Gateway Secretariat o f the Ministry o f Trade and Industries (MOTI) will provide procurement support to the various implementing agencies. The staff in the Gateway Secretariat includes a Project Coordinator, an Accountant, a Procurement Specialist, and a Procurement Assistant. The staff i s made up o f individual consultants who are familiar with the Bank's procurement policies and procedures having implemented other Bank-financed projects, including the Trade and InvestmentGateway Project. An assessment o f the capacity of the implementing agency to implement procurement actions for the project has been carried out by Kofi Awanyo inMarch 2005. The assessment reviewed the organizational structure for implementing the project and the interaction between the Gateway Secretariat, the MOTI, and the various implementing agencies under the project. Most of the issuedrisks concerning the procurement component for implementation o f the project have been identified and include inadequate procurement planning and monitoring, delays in processing procurement, poor record keeping, and inadequate contract management. The corrective measures that have been agreed are preparation o f annual procurement plans and preparation o f quarterly procurement monitoring reports. The project will finance procurement and contract management training o f key staff and the tender committees o f the implementing agencies. The Procurement Specialist in the Gateway Secretariat will provide mentoring and coaching for procurement staff and the tender committees in the implementing agencies. The Procurement Specialist will prepare a learning plan for the key officials o f the implementingagencies who will be involved inprocurement. The learningplan will include indicators for measuring the effectiveness o f the learning activities. The World Bank Ghana Office will also provide hands-on training to the implementing agencies on procurement records management and the establishment and maintenance o f contract registers. The overall project risk for procurement is average. The table below shows the indicative procurement method and prior review thresholds. 110 Table 1: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) M e t h o d Prior Review US$ Works >=2,000,000 ICB All Contracts >=50,000- <2,000,000 NCB Contracts >=US$ 500,000 <50,000 Shopping None All values Direct contracting All contracts Goods and non- >=250,000 ICBiLIB All contracts Consulting Services >=30,000- < 250,000 NCBILIBNN None <30,000 ShoppingNN None All values Direct Contracting All contracts Consulting Services >= 100,000 firms QCBS All contracts Below 100,000firms QCBSiLCSlFBSICQS None >=50,000 individuals Individual All contracts < 50,000 individuals Individual None All values Single Source Selection All contracts Procurement Plan The Borrower, at appraisal, developed a Procurement Plan for project implementation that provides the basis for the procurement methods. This plan was agreed betweenthe Borrower and IDA by negotiations. The agreed procurement plan will be available in the project's database and in the Bank's external Website. The Procurement Plan will be updated inagreement with IDA annually, or as required,to reflect the actual project implementationneeds and improvements ininstitutional capacity. Frequency of Procurement Supervision Inaddition to the prior review supervision to be carriedout from Bank offices, the capacity assessmento f the Implementing Agency has recommended yearly supervision missions to visit the field to carry out post review o f procurement actions. This will be in addition to annual procurement audits to be carried out by independent external procurement auditors. 111 Attachement 1 Details o f the procurement arrangement involving international competition are as follows: 1. Goods and Works andNon-consulting Services (a) L i s t of Contract Packagesto be Procured following ICB and Direct Contracting Ref.No. Description Estimated Procurement Expected Bid Contract cost ($) method preference Review open date Award Date d d i v d d / y MSME-G! Equipment sourcing 400,000 ICB Prior 4/21/06 7/3/06 for GarmentslTextiles MSME-G2 External 300,000 ICB N/A No Prior 3/5/07 5/14/07 1ightingIGeneratorfor I C T Park MSME-G3 I C T Park Networking 600,000 ICB N/A No Prior 8/14/07 10/24/07 equipment & installation MSME-W1 Infrastructure 500,000 ICB N/A Yes Prior 2/20/07 Developmentfor furniture city MSME-W2 Construction of Units 2,010,000 ICB N/A Yes Prior 2/20/07 Workshopslfor 7 furniture city MSME-W3 Construction of 1,970,000 ICB 5/14//07 Multipurpose communal facilities building for I C T Park I 112 (b) All works contracts estimated to cost above US$500,000 per contract, all goods contracts estimated to cost above US$250,000 per contract and all direct contractingwill be subject to prior review by the Bank. 2. ConsultingServices (a) Listof ConsultingAssignmentswith Short-List of InternationalFirms: Ref.No. Descriptionof Assignment Estimated Selection Bank Expected Contract cost ($) method Review Proposal Award Date Submission date d d / y d d / y MSME- BDSNon-financial Services to 1,200,000 QCBS Prior 5/12/06 8/8/06 c1 Enterprises MSME- BDS Expansion of Domestic Market 700,000 QCBS Prior 5/19/06 8/15/06 c 2 Linkages MSME- Marketing linkages - Support for 200,000 QCBS Prior 8/18/06 11/14/06 c 3 MOTIIPSIIDIP MSME- Consultancy for Garments/Textiles Prior 6/15/06 9/11/06 c 4 3009000 I QcBs MSME- Engineering & Architectural Design 500,000 QCBS Prior 7/6/06 10/02/06 c 5 for furniture city MSME- Design and Landscapingfor I C T 200,000 QCBS Prior 5/8/06 8/15/06 C6 Park MSME- Preparatory studies & Project 150,000 ss Prior c 7 Development for ICT concept ** N/A I ** Alreadyin progress. (b) Consultancy services estimatedto cost above US$lOO,OOO per contract for firms and above 50,000 for individuals and all Single Source selection o f consultants will be subject to prior review by the Bank. (c) Short listscomposedentirely of nationalconsultants: Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions of paragraph 2.7 o f the Consultant Guidelines. 113 Training Ref.No. Description o f Estimated Assignment cost $ ProactiveTrade Information System 200,000 Extending QSTM Outreach 300,000 Enhancing Export Promotion 150,000 Support for Tourism Development 100,000 Establishment o f the Furniture City Common Service Center at the MPIP 200,000 114 Annex 9: Economic and Financial Analysis GHANA: Micro, Small, and MediumEnterpriseProject The cost-benefit analysis ofthis project presents the difficulty encountered inall similar analyses. The difficulty is mainly due to the lack o f sound time series that are used to compute relevant coefficients o f correlation. Also, it i s difficult to reasonably quantify the direct effects o f the different project activities on production andjob creation. These difficulties are inherent to cost- benefit analyses, especially for projects aimed at institutional development and business climate reforms which cannot directly be linkedto firms' performance. A good monitoring and evaluation system should be implemented during the project lifetime to track the performance o f the sectors supported and facilitate the ex-post cost benefit analysis to be completed at project closing. That said the results obtained from the simple model used for the analysis are useful to get a sense o f the trends. Assumptions (in the basecase scenario) Several conservative assumptions were made to calibrate the model and forecast the potential impacts: (i) discountrateusedtocalculatetherateofreturnandnetpresentvalue(NPV)is12percent; the (ii)giventhe difficulty to resasonablyestimate ex-ante the quantitative impactofinstitutional development, it i s assumed that the financial costs and benefits can be equated with the economic costs and benefits o f the operations o f assisted firms; (iii) supportprovidedwouldincreaseefficiencyofthesupportedrecipientsandwouldyield the an increase in economic outputs at a multiple o f 2 times the amount o f support; (iv) the benefits o freforms materialize with a lag oftwo years; (v) the additional output created by assisted firms is defined as the difference betweenthe level of output achieved by firms assisted by the project and the level o f output these same firms would have achieved in the absence o f the project; (vi) the increase in firms' output i s discounted by 66 percent to take into account the social costs o f other crucial resources in the economy that are diverted into the project from other activities not directly supported by the project. Base case results As summarized in table 1, the net present value o f the project is estimated at about US$54.3 million for a 12% discount rate and over a projection horizon o f 12 years. The corresponding 115 internal economic rate o f returni s estimated at 23.3%. The fiscal impact i s positive and estimate at US$24.5 million as a result o f increasedcorporate and personal income taxes. Table 1: Summary o f Overall Results o f Cost and Benefit Analysis r-- PresentValue of Flows I Fiscal Impact Economic Financial Analysis Analysis(a) Taxes Subsidies Benefits(US$million) 122.3 24.5 nia Costs (US$million) 68.0 nia nla Net Benefits (USS million) 54.3 24.5 nia IRR(%) 23.3 The results by component indicate that all the components exhibit a rate o f return greater that the discount rate which indicate that the project i s robust. For the sake o f consistency and simplicity, the trade facilitation and Entrepreneurship development sub-components are lumped together with the business environment component given that the model quantify their impact similarly, usingthe same multiplier effect. Table 2: Results by component Present Value of Net Increases in output Net Present IRR(b' (US$ million) Value (US$) Project Component A - Access to Finance 85,9 38,8 23.4% B - Access to market 11,8 7,8 35.2% C BusinessEnvironment - 24,5 7,7 19.5% Total 122,3 54,3 23.3% Sensitivity Analysis Two sensitivity tests were carried out by switching values o f critical items: (a) the first test assumed a 75 percent social cost (up from 66 percent in the base case) o f resources diverted into the project, the NPV was reduced to about U S 2 1 . 9 million and the IRR dropped to 17.2 percent; (b) the second test assumed a 50% social cost o f resources diverted into the project, the NPV increased to US$111.8 million while the IRRjumped to 31.7%. Finally, it should be noted that the fiscal impact remain positive in the two sensitivity analyses performed with the US$17.9 million and U S 3 5 . 6 million for the two scenario respectively. The overall results confirm the project robustness. 116 Annex 10: SafeguardPolicy Issues GHANA -Micro, Small, and MediumEnterpriseProject The environmental category assessedfor this project is B. Although the project is not expected to present any specific environmental risk, IDA funds may finance services that may lead to adverse environmental impact. Underthe Trade Facilitation and Entrepreneurship Developmentcomponent, the project will have infrastructure elements including construction o f a building and laying down fiber optic cables at the industrial park. Although these are building on the achievements under the IDA-funded Gateway Project, these were not covered in the Environmental Action Plan for that project. Recognizing the achievements and functional capacity within the Environmental Protection Agency that oversees the environmental concerns under the Gateway Project, and that these components do not involve development o f a new site nor have any resettlement issues, the Government agreed to disclose again the Environmental Action Plan in Ghana and in the World Bank's InfoShop and that the mitigation and management measures in these documents apply to all infrastructure components o f this project. Appropriate reference to the Environmental Action Plan and implementation requirements `have beenincorporated inthe legal documents. Inassessing potential beneficiary financial andbusiness service providers under the other Project components, the Project Management Unit (PMU) will review the environmental screening mechanisms o f the applicants. Once service providers are selected as beneficiaries under this project, the PMU will make recommendations to build the their environmental screening and verification capacity, and ability to support and provide technical advise on relevant environmental aspects of their clients' businesses and to link them with the appropriate ministry and environmental protection agency. 117 Annex 11: ProjectPreparationand Supervision GHANA -Micro, Small, and MediumEnterpriseProject ~ Planned Actual PCNreview October, 2004 March 11, 2004 Initial PID to PIC April 7,2004 Initial ISDS to PIC April 7, 2004 Appraisal February 7-21,2005 February 28-March 18, 2005 Negotiations May 2,2005 October 18,2005 BoardIRVP approval December 20,, 2005 Planned date of effectiveness March 1,2006 Planned date o f mid-term review June 9,2008 Planned closing date December 3 1,201 1 Key institutions responsible for preparation o f the project: The Ministryof Trade and Industry (MOTI) i s the key government agency responsible for the project preparationand supervision. Other ministries include the Ministryo f Finance and Economic PlanningMOFEP), the Ministryo f Private Sector Development (MPSD), the Minstry o f Communication (MOC) and the Ministryo f Justice (MOJ). Bank staff and consultants who worked on the project included: Name Title Unit Papa Demba Thiam Task Team Leader AFTPS FerdinandTsn Apronti Procurement Specialist AFTPC Irene Arias Business Development Officer CSMFN Maxwell Aitken Senior Manager CSMST Antonio Borges Staff Assistant AFTPS Wolfgang Chadab Finance Officer LOAG2 Samuel Dzotefe Investment Officer c A F w 2 Serigne Omar Fye Sr. Environmental Specialist AFTS1 Tom Gibson Consultant Manush Hristov Counsel LEGAF Kyle Kelhofer Program Manager CGFFS Makanda Kioko Program Officer CGFFS Kristen Klemperer-Fenster Investment Officer c A F w 2 Minerva Kotei Business Development Officer CSMSP Manlyn S. Manalo Operations Officer AFTPS Susan Maslen Consultant LEGCF Tomoko Matsukawa Sr Financial Officer IEFPFG Ricarda Meissner Business Development Officer C S M Sarah Mattingly Consultant SFRSI Andrei Mikhnev Sr Private Sector Development CSMSE Specialist Modou Badara Njie Regional Manager, APDF CAFAG Solomon Quaynor Principal InvestmentOfficer CAF Alice Ouedraogo Business Development Officer CAFAG 118 Elvira Santayana ProgramAssistant C S M Jessica Schnabel Business Development Officer CSMSP William Steel Sr. Private Sector Development Adviser AFTPS Henry Scott Stevenson Sr. Investment Officer CGFTG Anthony Thompson Sr. Financial Sector Specialist AFTFS Leila Webster Sr. ProgramOfficer C S M K M Frederick Yankey Sr. Financial Management Specialist AFTFM Sylvia Zulu Program Officer CGFFS Andrea Vasquez-Shnchez Sr. ProgramAssistant AFTPS Kofi-Boateng Agyen Sr. Operations Officer AFTPS IsselmouLouleid Junior Professional Associate AFTPS Andrew Asibey Sr Monitoring & Evaluation Spec. AFTKL RonaldJ. Kopicki Lead Private Sector Development AFTPS Specialist K o f i Awanyo Sr Procurement Spec. AFTPC Marie-Christine Balaguer Paralegal LEGAF Blanschard Marke Division Manager LOAG2 Sylvia Zulu Program Officer CGFFS Christine Kimes Sr Operations Off. AFTOS Amadou Dem YP, AFTPS Irene Chacon Operations Analyst AFTPS Bank funds expended to date on project preparation: 1. Bank resources: US$80,000 2. Trust funds: N/A 3. Total: US$80,000 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$57,000 2. Estimated annual supervision cost: US$115,000 119 Annex 12: Documentsin the ProjectFile GHANA -Micro, Small andMediumEnterpriseProject Memorandum of Understandingbetweenthe Government o f Ghana for the implementation o fthe Ghana National Medium-Term Private Sector Development Strategy and Action Plan, 2005-2009 Agribusiness Value Chain Analysis, Ayernor and Joosten, May 2005. Technical Note on Agribusiness Value Chains, April 2005. Environmental Action Plan, October 27, 2005. Project Concept Note 11/26/2003 Integrated Safeguards Datasheet (concept stage) 3/17/2004 Project Information Document (concept stage) 4113/2005 Approved Minutes of Project Concept ReviewMeeting 3/23/2004 Integrated Safeguards Datasheet (appraisal stage) 10/27/2005 Project Information Document (appraisal stage) 10/27/2005 Aide MemoirePre-Appraisal Mission 12/23/2004 Approved Minutes of Decision Meeting 03/02/2005 120 Annex 13: Statement of Loansand Credits GHANA-Micro, Small, and MediumEnterpriseProject Difference betweenexpected OriginalAmount inUS$ and actual Millions disbursements Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. ID Rev'd PO50620 2004 Educ. Sect. Project 0.00 78.00 0.00 0.00 0.00 77.13 0.00 0.00 PO71157 2004 GH LandAdministration 0.00 20.51 0.00 0.00 0.00 21.07 -0.32 0.00 PO71399 2003 Partnerships w/ Traditional 0.00 0.00 0.00 0.00 0.00 4.85 0.77 0.00 Authorities PO73649 2003 2nd Health Sect. Prog. 0.00 57.30 0.00 0.00 0.00 79.71 4.46 0.00 support PO50623 2002 GH ROAD SECTOR 0.00 220.00 0.00 0.00 0.00 201.04 5 1.95 0.00 DEVELOPMENT PROGRAM PO67685 2002 Ghana:GEF- Northern 0.00 0.00 0.00 7.90 0.00 6.69 3.01 0.00 Savanna PO00968 2001 Ghana:AGRIC SERVICES 0.00 67.00 0.00 0.00 0.00 5 1.96 66.65 0.00 PO71617 2001 AIDS Response Proj. 0.00 25.00 0.00 0.00 0.00 14.01 -13.90 0.00 (GARFUND) PO50616 2000 COMMUNITY WATER I1 0.00 25.00 0.00 0.00 0.00 10.38 11.66 -0.64 PO50624 2000 URBAN5 0.00 10.83 0.00 0.00 0.00 1.13 0.73 0.34 PO69465 2000 Ghana:RURAL 0.00 5.13 0.00 0.00 0.00 4.28 18.64 0.00 FINANCIAL SERVICES PROJECT PO40659 1999 Community-basedPov. 0.00 5.oo 0.00 0.00 0.00 2.33 1.98 0.38 Red. PO00970 1999 TRADE GATEWAY & 0.00 50.50 0.00 0.00 0.00 23.67 20.17 0.00 INV. PO00974 1999 Nat. Func. Lit.Program 0.00 32.00 0.00 0.00 0.00 21.94 14.64 9.01 PO45188 1998 Ghana:FOREST 0.00 0.00 0.00 8.90 0.00 6.67 4.66 0.00 BIODIVERSITY PO41150 1997 Ghana:VILLAGE 0.00 30.00 0.00 0.00 0.00 3.83 5.58 0.00 INFRASTRUCTURE PO42516 1996 PUBLIC 0.00 26.45 0.00 0.00 0.00 3.72 5.18 1.18 ENTERPRISEiPR PO00926 1995 GH Thermal (Power VII) 0.00 175.60 0.00 0.00 0.00 22.05 24.77 24.06 Total: 0.00 828.32 0.00 16.80 0.00 556.46 220.63 34.33 121 STATEMENT OF IFC's Committedand OutstandingPortfolio (US$ millions,as of 09/30/2005) Committed Disbursed IFC IFC FY Company Loan Equity Quasi GT" Loan Equity Quasi GT" Approval 1989191/93 CAL Bank Ltd 0.00 0.87 0.00 0.00 0.00 0.87 0.00 0.00 1990191/96 AAIL 0.00 2.55 2.56 0.00 0.00 2.55 2.56 0.00 1998 AEF NCS 0.00 0.00 0.53 0.00 0.00 0.00 0.53 0.00 1997 AEF PTS 0.00 0.00 0.31 0.00 0.00 0.00 0.31 0.00 1994 AEF Shangri-la 0.93 0.00 0.00 0.00 0.93 0.00 0.00 0.00 1996 AEF Tacks 0.43 0.00 0.00 0.00 0.43 0.00 0.00 0.00 Farms 2001 Diamond 3.25 1.oo 0.00 0.00 3.25 1.oo 0.00 0.00 Cement 2000 ELAC 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.00 1991 GHANAL 0.00 0.22 0.00 0.00 0.00 0.22 0.00 0.00 2001 MFI SSLC 0.00 0.43 0.00 0.00 0.00 0.43 0.00 0.00 2005 Scancom 40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 School Fin 0.00 0.00 0.00 1.05 0.00 0.00 0.00 0.25 Facility Totalportfilio: 44.61 5.17 3.40 1.05 4.61 5.17 3.40 0.25 *Guarantee ~~ ApprovalsPendingCommitment FY Company Loan Equity Quasi Partic. Approval 2000 GAGL IV-Restr 0.00 0.00 0.00 0.00 Totalpending 0.00 0.00 0.00 0.00 commitment: 122 Annex 14: Countryat a Glance GHANA-Micro,Small, and MediumEnterpriseProject Sub- POVERTY and SOCIAL Saharan Low- Ghana Africa income Develovment diamond* 2002 Population,mid-year(mil/ions) 20.1 688 2,495 Lifeexpectancy GNI per capita (Atlasmethod, US$) 270 450 430 GNI (Atlas method, US$ billions) 5.4 306 1,072 T Average annual growth, 1996-02 Population($A) 2.1 2.4 1.9 Labor force (%) 2.4 2.5 2.3 GNI Gross primary M o s t recent estimate (latest year available, 1996-02) capita enrollment Poverty ("Aof populationbelownationalpovertyline) Urbanpopulation (%of totalpopulation) 37 33 30 Lifeexpectancyat birth (years) 55 46 59 1 Infant mortality(per 7,000 live births) 55 735 81 Child malnutrition (%ofchildren under5) 25 Access to improvedwater source Access to an improvedwater source (%ofpopulation) 73 58 76 Illiteracy(% ofpopulationage a+) 26 37 37 Gross primaryenrollment (%ofschool-age population) 80 86 95 w I x * I ~ I u ~ xGhana Male 84 92 733 Low-incomegroup Female 76 80 87 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billions) 4.0 6.4 5.3 6.0 b- Gross domestic investmentlGDP 3.4 72.8 24.0 22.7 Exports of goods and servicesiGDP Trade 3.3 77.2 52.2 51.0 Gross domestic savingslGDP 3.7 13 5.8 6.5 Gross nationalsavingsiGDP 3.5 3.6 18.2 '6.6 Current account balanceiGDP -4.8 -9.2 -7.3 -8.1 Domestic investment Interest paymentsiGDP 0.7 1.3 13 2.1 savings Total debt/GDP 36.8 70.3 127.5 Total debt serviceiexports 15.5 28.2 72.8 I' 1 Present value of debffGDP 74.4 Present value of debtiexports '60.4 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (averageannualgrovdh) GDP Ghana 4.7 4.2 4.0 4.5 5.O ~~" GDP percapita 1.1 2.0 19 2.6 3.6 I Low-incomeW U P I IgE2Igg2 Growth o f investment and GDP ( O h ) (%of GDP) Agriculture 573 448 359 347 "1 Industry 6 2 I74 252 249 Manufacturing 3 6 9 3 9 2 94 Services 364 378 389 403 -20 Private consumption 898 866 78 7 791 40 Generalgovernment COnSUmptlOn 6 5 721 156 144 imports of goods andservices 3 0 288 70 5 67 1 GDI --.O---GDP I 1982-92 1992.02 2001 2002 Growth o f exports and imports ( O h ) (averageannualgrovdh) I Agriculture 2.1 3.8 3.7 4.1 T Industry 7.1 3.7 4.0 6.3 6o 40 Manufacturing 7.3 12 7.6 0.0 20 Services 7.3 4.8 4.3 4.4 0 Private consumption 4.7 4.2 14 n.3 20 Generalgovernment COnSUmptiOn 4.5 4.5 15.0 4 . 7 - -40 Gross domestic investment 7.1 19 -11 D.1 Exports -o-&rports Importsof goods and services 7.4 9.4 2.0 6.6 123 Ghana P R I C E S and GOVERNMENT FINANCE 1982 1992 2001 2002 Inflation ( X ) D o m e s t i c prices I (%change) Consumer prices 22.3 m.0 33.0 15.9 Implicit GDP deflator 27.9 112 34.6 20.2 Government Finance (%of GDP,includes current grants) O ! Current revenue 6.O 18.5 20.7 22.3 97 98 99 00 01 02 Current budget balance -3.2 4.2 2.9 3.0 GDPdeflator ---o---CPI Overall surplusideficit -6 1 -5.4 -4.5 =- 1y T R A D E 1982 1992 2001 2002 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 986 2,380 2,681 Cocoa 302 503 535 Timber 1% 225 265 Manufactures Total imports (cif) 1,589 3,781 4,099 Food 38 Fuel and energy 6 2 257 275 1I I Capital goods 277 Export price index (895=WO) 85 78 81 96 97 98 99 00 01 02 Import price index(1995=W0) m3 99 96 OEXports Inports Terms of trade (S95=WO) 83 79 85 B A L A N C E o f P A Y M E N T S 1982 1992 2001 2002 Current account balance t o G D P (US$ millions) ( O h ) ~xportsof goods and services 711 l a 5 2,433 2,607 Imports of goods and services 8t3 1.845 3,428 3,662 Resource balance -m3 -740 -995 -1,055 Net income -89 4 6 -0 8 -185 Net current transfers -1 255 787 750 Current account balance - 8 2 -592 -386 -490 Financing items (net) 81 467 465 559 Changes in net reserves 1 P4 -79 -69 M e m o : Reserves including gold (US$ millions) 431 679 Conversion rate (DEC,local/US$) 21.4 437.1 7,170.8 7.932.7 E X T E R N A L D E B T and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) ~ C o m p o s i t i o n o f 2001 debt (US$ mill.) Total debt outstanding and disbursed 1.484 4.508 6,759 IBRD t31 87 6 IDA P5 1631 3,72 G555 A 6 Total debt service 111 3 8 3 6 IBRD 6 21 4 IDA 1 14 59 Compositionof net resource flows Official grants 30 218 305 Official creditors 56 309 269 Private creditors 14 45 154 Foreign direct investment 6 23 89 Portfolio equity 0 0 0 D 545 C 284 World Bank program Commitments 0 375 433 ,A-IBRD E- Bilateral Disbursements 24 0 0 8 3 B-IDA D-Otherrmltilateral F - Rivate Principal repayments 8 25 37 C - I M F G- Short-terr 124 Annex 15: Conflicts ofInterestManagement Framework GHANA -Micro, Small, and MediumEnterpriseProject IFC and IDA have and will continue to collaborate inthe preparation, financing, and supervision o f the project as part o f the I D N I F C M S M E Program approved by the Executive Directors o f IDA. The coordination of investment and advisory activities between the two institutions is designed to improve the quality o f their advice and financial support so as to enable the Government to develop a better program that accurately reflects the needs o f MSMEs in Ghana. However, notwithstanding the benefits o f improved coordination, it i s recognized that the multiple roles of the IFC inthe preparation and implementation of the proposed project may raise potential or perceivable conflicts o f interest issues. Consistent with the World Bank Group's Conflict o f Interest Guidelines, this annex outlines the framework for identifying and managing such conflicts o f interest that has been agreed between IDA, IFC, and the Government o f Ghana (GOG). In line with the philosophy of this program, the proposed MSME Project in Ghana includes an Access to Finance component, an integrated approach comprising the following five sub- components: (i) IDNIFCSMEloanportfolioPartialCreditGuaranteefacility (PCG) relatingto An partial credit guarantees to be issued by IFC to support lending by participating banks to small and medium enterprises (SMEs) in Ghana. It i s envisaged that there will be risk sharing between the Government of Ghana (GOG) and IFC. IDA funding will be used to finance the GOG obligations with respect to the PCG. (ii) IFC-FundedLineofCredit(LOC) toparticipatingbanksforon-lendingtoSMEs An in Ghana. The LOC is a commercially priced IFC credit line(s) o f an estimated 5-7 year tenor. (iii)IDA-Funded Performance-Based Grants to LOC participating banks to significantly reduce L O C "all-in'' costs to these banks and to catalyze expanded SME finance. (iv) Matching grants to support technical assistance to PCG and LOC participating banks, and-to the extent possible-to other local banks (TA for participating banks). (v) Matching grants to support technical assistance to existing and potential SME clients o f PCG and LOC participating banks (TA for SME borrowers). Inadditionto the above mentionedtechnical assistance for banksand SMEs underthe Access to Finance component, the proposed M S M E Project also includes other technical assistance through grants to SMEs under the Access to Markets, Entrepreneurship Development, and Trade Facilitation component. All SMEs will be able to apply for any o f the grants for which they qualify. Eligibility criteria to be specified in the Project Implementation Manual will include a pre-specified cumulative value o f grants that each SME can receive under the project, thus precluding the double subsidization o f each grant recipient. The project preparation team has determined that there i s a possibility that some existing or potential IFC clients could receive support from the project through the PCG, LOC, or TA 125 components. Should such a situation arise, IFC will disclose its business interests in or relationship with these entities. IFC's current investments in Ghana are listed at the end o f this annex. The project has been designed and will be supervised by a joint team of IDA and IFC staff (the I D N I F C Advisory Team). In the case of the PCG and LOC sub-components, the IDNIFC Advisory Team would assist the Government in identifying appropriate selection criteria for participating banks and advise the Government in the selection o f applicant banks in accordance with such criteria. Once participating banks have been selected, a separate team composed o f staff from IFC's Global Financial Markets Department (the IFC Investment Team) will conduct a detailed appraisal o f selected banks. Thereafter, the IFC Investment Team will be solely responsible for working with the Government to process the investments. This work will include design o f the financing terms o f the PCG and LOC, and negotiating and concluding legal documentation for the PCG and LOC. The proposed investments will be subject to IFC's internal approval o f the client banks and terms o f the investment. Consistent with the World Bank Group's Conflict o f Interest Guidelines and IDA policies, the IFC Investment Team would not participate in the selection o f the partner banks (that is, the World Bank Group would maintain separate teams for its advisory and its investment role). However, in the interest of providing appropriate design o f the TA sub-component, after participating banks have been selected by the Government, a member o f the I D N I F C Advisory Team will accompany the IFC Investment Team in the appraisal o f selected participant banks, solely for the purposes o f appraising the TA sub-component o f the project and subject to obtaining prior informed consent o f the selected banks. This joint arrangement would help leverage each team's expertise and facilitate the design o f an effective approach to SME finance, which integrates financing with capacity-building efforts. The IFC-IDA collaboration inthe preparation o f this project will help to develop a significantly better overall program that accurately reflects the needs o f MSMEs inGhana while preserving the interests o f the Government. However, it i s recognizedthat this design raises the risk o f potential conflicts o f interest, or the perception thereof, between IDA and IFC activities in Ghana if any existing or potential IFC clients benefit from support under the project as mentioned above. Accordingly, IDA and IFC have established a framework for identifying and managing conflicts of interest, which will involve disclosure to concerned parties in communications and a set o f measures to manage any potential or perceived conflicts o f interest arising from the multiple roles of IFC. The Government has confirmed its acceptance o f this framework. 126 IFCInvestmentsinGhana IFC has equity investments in and/or loans to the following entities: CAL Bank Limited Procredit Savings and Loans Company Limited Ghanaian Australian Goldfields Limited Diamond Cement Ghana Limited Enterprise Life Assurance Company Limited Ghana Aluminum Products Limited Securities Discount Company Limited Ghana Printing and Packaging IndustriesLimited Network Computer Systems Professional Technical Services Limited Shangri-La Limited Tacks Farms Limited Appiah Menka Complex Limited Trust Bank Limited 127 IBRD 33411 2°W 0° 2°E To Tenkodogo BURKINA FASO To Hamale Navrongo U P P E R E A S T Bobo- Diolasso WalewaleTumu Bolgatanga GHANA Nakpanduri U P P E R W E S T Walewale To Dapaong 10°N Black Volta Kolpawn Wa Wa 10°N Gushiegu White Volta To Djougou N O R T H E R N Yendi To Tamale Ferkéssédougou BENIN Sawla Fufulsu Bole Daka To Djougou CÔTE Nakpayili Oti TOGO D'IVOIRE To BlackVolta Salaga Bouna Makongo Yeji Kintampo Dambai 8°N 8°N Jema V O L T A B R O N G - A H A F O Atebubu Kwadwokurom Tain Techiman Pru Berekum To Sokodé Sunyani Mount Afadjato (880 m) K w Bia a h Afram u Lake Kpandu nges AgbovilleoT P Volta To l Agogo Ra Abomey Goaso a t e a u Kumasi Bibiani E A S T E R N -Togo Ho Krokosue A S H A N T I Anum im To Porto- no Obuasi Diaso Birim p Novo a aT Kade Koforidua kw Volta Aflao 6°N Oda W E S T E R N A 6°N Dunkwa Enchi GREATER 2°E ACCRA AbidjanoT Tema Twifo Praso ACCRA Prestea C E N T R A L GHANA Ankobra Pra Tarkwa Winneba SELECTED CITIES AND TOWNS Cape Coast REGION CAPITALS Newtown NATIONAL CAPITAL This map was produced by Sekondi the Map Design Unit of The Axim Takoradi RIVERS World Bank. The boundaries, Gulf of G uinea colors, denominations and any other information shown MAIN ROADS on this map do not imply, on the part of The World Bank 0 20 40 60 80 Kilometers RAILROADS Group, any judgment on the legal status of any territory, REGION BOUNDARIES or any endorsement or 0 20 40 60 Miles a c c e p t a n c e o f s u c h boundaries. 2°W 0° INTERNATIONAL BOUNDARIES SEPTEMBER 2004