Documentof The World Bank FOROFFICIALUSEONLY ReportNo: 46220-MZ PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OF SDR 16.8MILLION (US$25MILLIONEQUIVALENT) TO THE REPUBLIC OF MOZAMBIQUE FORA COMPETITIVENESSAND PRIVATE SECTORDEVELOPMENTPROJECT January 15,2009 Financeand PrivateSector Development Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World CURRENCY EQUIVALENTS (Exchange Rate Effective (November 18,2008) Currency Unit = New Mozambique Metical (MZN) US$1 = MZN24.31 US$l = SDR0.672 FISCALYEAR January1 - December31 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AGOA Africa Growth and Opportunity Act B C I Bank o fCommerce and Investment(Banco Comercial e de Investimentos) BDS Business Development Services BIM International Bank o fMozambique (Banco Intemacional de Moqambique) C E M Country Economic Memorandum CEPAGRI Centre for the Promotion o f Agriculture CFAA Country FinancialAccountability Assessment CPIA Country Policy and Institutional Assessment CPS Country Partnership Strategy DANIDA Danish InternationalDevelopment Agency DB Doing Business DPTUR Provincial Directorate o f Tourism EA Environmental Assessment ESHTI Superior College for Tourism and Hospitality inInhambane (Escola Superior de Hospitalidade e Turismo de Inhambane) e-SISTAFE Electronic- Public Financial Management System (Sist. D e Administraqao Financeira do Estado) ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan EU European Union FDI Foreign Direct Investment FIAS Foreign Investment Advisory Service FM Fiduciary Management FSTAP Financial Sector Technical Assistance Program GAP1 Small Investment PromotionAgency (Gabinete de Promoqao de Pequenos Investimenos) GDP Gross Domestic Product GASP Private Sector Support Unit,M I C GEF Global Environmental Facility GMU Grant Management Unit GoM Government o f Mozambique GTZ GermanTechnical Corporation IBRD International Bank for Reconstructionand Development .. 11 FOR OFFICIAL USE ONLY ICA Investment Climate Assessment ICR Implementation Completion and Results Report IDA International Development Association IFAC International Federation o fAccountants IFC International Finance Corporation IGF Inspectorate General o fFinance IIAM MozambiqueNational Institutefor Agriculture Research IMF International Monetary Fund INFOR Informal Sector Survey m o Q National Instituteo f Standardization and Quality I T InformationTechnology IPEX Institute for the Promotiono f Exports KFW German Development Bank M&E Monitoring and Evaluation MCPSD Mozambique Competitiveness and Private Sector Development Project MIC MinistryofIndustryand Commerce MGP Matching Grant Program M I C DAF Ministryo fIndustryandCommerceDirector ofAdministration andFinance MICOA Ministry o f Coordination and Environment MINAG MinistryofAgriculture MITUR MinistryofTourism MOF MinistryofFinance MPD MinistryofPlanning andDevelopment MSI Mozambique SME Initiative NAS National Advisory Committee N O W Norwegian Aid PARPA Poverty Reduction Support Strategy PCN Project Concept Note PDO Project Development Objectives PETS Public Expenditure Tracking Survey PFI Participating Financial Institutions PFM Public Finance Management PFM PEFA Public FinancialManagement (PFM) Performance Measurement Framework PID Project InformationDocument PIREP Integrated Education Perform Program (Programa Integrado da Reforma da EducaqaoProfissional) PlU Project Implementation Unit PODE Enterprise Development Project (Project0 para o Desenvolvimento Empresarial) PPF Project Preparation Facility PPP Public-Private Partnership PPPF Department o f Planning andFinance PRSC Poverty ReductionStrategy Credit PSD Private Sector Development PSWG Private Sector Working Group ROSC Report on Observance o f Standards and Codes This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may notbe otherwise disclosed without World Bank authorization. RPF Resettlement Policy Framework RSF Risk SharingFacility SADC Southern African Development Community SBD Standard BiddingDocuments SECO Swiss Aid SME Small and Medium Enterprises S N V Netherlands Development Organization TFCA Transfrontier ConservationAreas TFCATDP Transfrontier ConservationArea and Tourism Development Project TOR Terms o f Reference UNDO United Nations Industrial Development Organization us UnitedStates USAID UnitedStates Agency for International Development WB World Bank Vice President: Obiageli Katryn Ezekwesili Country Director: Michael Baxter Sector Director: MarilouJane Uy Sector Manager: Gerard0 Corrochano Task Team Leader: Mazen Bouri iv MOZAMBIQUE Competitiveness& Private Sector Development CONTENTS Page I STRATEGICCONTEXTANDRATIONALE. . ................................................................. 1 A . Country and sector issues .................................................................................................... 1 B . Rationale for Bank involvement.......................................................................................... 4 C . Higherlevel objectives to which the project contributes .................................................... 5 I1. PROJECT DESCRIPTION .............................................................................................. 6 A. Lendinginstrument.............................................................................................................. 6 B. Program objective and Phases:............................................................................................ 7 C. Project development objective and key indicators .............................................................. 7 D. Project components.,........................................................................................................... -7 E. Lessons learned and reflected inthe project design.......................................................... 13 F. Alternatives considered and reasons for rejection............................................................. 14 I11. IMPLEMENTATION ..................................................................................................... 16 A . Partnership arrangements .................................................................................................. 16 B. Institutional and implementation arrangements ............................................................... -16 C. Monitoring and evaluation o f outcomeshesults ................................................................ 17 D. Sustainability ..................................................................................................................... 17 E. Critical risks and possible controversial aspects ............................................................... 18 F. Loadcredit conditions and covenants .............................................................................. -21 I V . APPRAISAL SUMMARY .............................................................................................. 22 A. Economic and financial analysis ...................................................................................... -22 B. Technical ........................................................................................................................... 22 C . Fiduciary............................................................................................................................ 23 D. Social ................................................................................................................................. 23 E . Environment ..................................................................................................................... -23 F. Safeguard Policies ............................................................................................................. 24 G. Policy Exceptions and Readiness ...................................................................................... 25 V Annex 1: Country and Sector or ProgramBackground .......................................................... 26 Annex 2: Mappingof Donor Programsin Support of PSD in Mozambique ......................... 42 Annex 3: OverallResults Frameworkand Monitoring ........................................................... 46 Annex 4: DetailedProjectDescription ...................................................................................... 53 Annex 5: Project Costs................................................................................................................ 71 Annex 6: ImplementationArrangements .................................................................................. 73 Annex 7: FinancialManagementand DisbursementArrangements ..................................... 76 Annex 8: ProcurementArrangements ....................................................................................... 90 Annex 9: Economicand FinancialAnalysis ............................................................................ 102 Annex 10: SafeguardPolicy Issues ........................................................................................... 109 Annex 11: ProjectPreparationand Supervision .................................................................... 114 Annex 12: Documents in the Project File ................................................................................ 116 Annex 13: Statementof Loansand Credits ............................................................................. 117 Annex 14: Country at a Glance ................................................................................................ 119 Annex 15: Map Moz 33451 ....................................................................................................... 121 vi MOZAMBIQUE MZ-COMPETITIVENESS & PS DEVELOPMENT PROJECT APPRAISAL DOCUMENT AFRICA AFTFP Date: January 15th,2009 Team Leader: MazenBouri Country Director: Michael Baxter Sectors: Generalindustryandtrade sector Sector Manager: Gerard0 M.Corrochano (70%);Micro- and SME finance (30%) Themes: Small and mediumenterprise support (P);Regulation andcompetition policy (S);Other financial andprivate sector development (S) Project ID: P106355 Environmental screening category: Partial Assessment LendingInstrument: Specific Investment Loan [ ]Loan [XI Credit [ ] Grant [ ] Guarantee [ 3 Other: For Loans/Credits/Others: Total Bank financing (US$m.): 25.00 Total: 14.57 15.09 29.66 Borrower:Republic of Mozambique ResponsibleAgency: MinistryofIndustry andCommerce Praca25 de Junho, No. 300,7# Andar Mozambique Tel: (258-21) 427-204 vii Annual 0.50 4.70 6.80 6.00 4.60 2.40 Cumulative 0.50 5.20 12.00 18.00 22.60 25.00 Project description[one-sentence summary of each component] Re$ PAD II.D., Technical Annex 4 Component 1-Raise competitiveness o f SME's through improved access to business development services, broader tourism-led growth inInhambane, and improvedhorticulture skills through a new training centre inNampula. Component 2- Elevate the businessenabling environment by (i) supporting reforms to improve Mozambique's Doing Business indicators, (ii) investing inthe standardquality related services, (iii)strengthening the accountingprofession Component 3- Implement, monitor and evaluate each component to ensure efficiency and maximize effectiveness o f all components. Which safeguard policies are triggered, ifany? Re$ PAD I KF., Technical Annex 10 Environmental Assessment (OP/BP 4.01) Pest Management (OP 4.09) Involuntary Resettlement (OP/BP 4.12) Significant, non-standard conditions, if any, for: Vlll .I. !e$ PAD III.F. loardpresentation: February5th, 2009 ,oadcredit effectiveness: uly 1,2009 :ovenantsapplicable to project implementation: 'he Conditions o f Effectiveness consist o fthe following: 0 The Recipient has established the PIUat MIC, with a structure, equipment, hnctions and responsibilities acceptable to IDA, including a Project coordinator, a financial management specialist and a procurement specialist, all hired with qualifications and experience, and pursuant to terms o f reference, satisfactory to IDA 0 The Operational Manual, with financial management, accounting, and procurement annexes, (including a section pertaining to the administration and management o f SME Grants and Representative Organization Grants) has been issued and adopted by the Recipient, and approved by IDA. 0 The Recipient has established a procurement filing andrecord keeping system (including contract monitoring and contract control systems) for use o f the PIU, in form and substance acceptable to IDA. 'he conditions o f disbursement are the following: Recruitment o f a grant program manager and grants accountant and the establishment o f a grant accounting system as a condition o fdisbursement o f grants. 0 Recruitment o f a project coordinator and an FM specialist for the Inhambane PIU as a condition o f disbursementfor this sub-component. 0 Recruitment o f an FM specialist and the establishment o f an accounting system for the Nampula training centre as a condition o f disbursement for the training centre banana fmestablishment andoperatingcosts. batedcovenants are the following: External auditors for the project to behired within 3 months o f effectiveness. 0 'The environmental specialist, legal consultant, monitoring and evaluation specialist, and essential administrative staff in the Maputo PIU to be hired within 6 months o f effectiveness. i x I. STRATEGICCONTEXTANDRATIONALE A. Country and sector issues 1. Mozambique has staged a remarkable recovery from a devastating civil war that ended in the early 1990s and has successfblly completed an ambitious program o f "first generation" reforms. Since 1992, infrastructure has been improved and i s now approaching its pre-war levels, and incomes have risen considerably. The poverty headcount fell from 69 percent in 1997 to 54 percent in 2003. On average the economy grew by 8 percent annually since 1996. This accomplishment can be atfributed to the Government o f Mozambique's phased but determined approach to stabilization and structural reforms, as well as to concessional assistance (half o f Government expenditures), healthy agricultural growth, and fast expansion in tourism, construction, andcertain manufacturingsub-sectors. Another significant factor was the authorities' success inattracting "mega-projects" inaluminum smelting, natural gas, andtitaniummining. 2. Nevertheless, the country remains poor (US$330 per capita income in2007); infrastructure i s still inadequate; there are serious unmet education and health needs; and poverty rates remain high. Approximately 54 percent o f the population o f 21 million remains below the poverty line, according to the latest 2007 estimate. The urban working population is expected to grow at 4 percent annually until 2010, underscoringthe needfor a growth path with job creation. The 2008 Gender, Poverty, and Social Assessment concluded that rural poverty rates, while still high, declined faster than urban poverty rates. The situation would have been exacerbated by the recent increase in food and fuel prices and the return o f migrant workers from South Africa which has increased tensions inmajor urban centers. 3. It is unclear now, having completed the first generation reforms, whether the growth rates will continue to be sustained or be as poverty-reducing as before. IfMozambique is to sustain its growth rate, continue to improve its low GDP per capita, and harness the opportunities provided by regional trade integration, it is essential to broaden the base of economic growth and enhance domestic private sector competitiveness. The Government o f Mozambique's second Poverty Reduction Support Strategy (PARPA 11) covering 2006-2009, identified the private sector as the main engine for investment, growth, and employment. Realizing the vision set out in the PARPA I1 requires improving the business environment, stimulating exports, promoting growth insectors where Mozambique has a comparative advantage, and supporting small and medium enterprises (SMEs), which generate the greatest numbero fjobs. ThePrivate Sector: A Snapshot 4. The Mozambican private sector can be characterized by two distinct types o f enterprises. On the one hand are the few foreign-owned export oriented, capital intensive "mega-projects" that have contributed nearly 1.6 percent to the GDP growth rate since 1998. On the other hand are the vast majority o f firms, primarily small and medium enterprises, which sell mostly to the local market, face severe resource constraints, and contribute modestly to economic growth and exports. According to the National Statistics Institute, there were 31,735 private enterprises employing 310,000 people in 2002, the last year for which such data is available. The data breakdown reveals that almost 90 percent o f these firms were small, employing less than 10 employees, and 9 percent were medium firms employing 10-99 workers. Additionally, with the exception o f the 1 mega-projects, the export performance o f Mozambican firms has been weak with only 7 percent o f manufacturing output in 2003 exported. Expanding manufacturing output, improving quality o f produce, and tapping into international markets ,are all essential if Mozambique i s to diversify its exports and lessen its dependency on mega-projects. Additionally, developing linkages between SMEs and large investments would also help in expanding the benefits o f these investments. While there has been increasing linkages between the mega-projects and smaller firms , new mega-projects are coming to Mozambique and there is still much work to be done to expand linkages between SMEs and mega-projects. 5. Agriculture continues to play a significant role inthis predominantly rural country, making it the second largest contribution to GDP growth over the past decade, after the mega-projects. Agriculture employs nearly 80 percent o f the workforce with much o f them engaged in informal subsistence activities. With the majority o f the poor being subsistence farmers in rural areas, sustaining agricultural growth, improving agricultural productivity, and tapping into international markets for agricultural produce are vital to poverty reduction. Tourism is another sector that should be part and parcel o f a strategy for broadening the private sector. The plethora o f Mozambique's cultural, historic and natural attractions makes tourism an attractive sector inwhich Mozambique has an inherent comparative advantage. Its linkages to other sectors, such as transport, agriculture, food & beverage, retail, financial services, construction, arts and crafts, and the potential to develop and increase revenues from a relatively unexploited resource base-such as 2500km o f coral fringed coastline--offer compelling job creation and economic growth opportunities. Private Sector Development: Challenges and Opportunities 6. Despite some modest efforts at reform, Mozambique's business environment remains restrictive with a global ranking o f 141 out o f 181 and a regional ranking within Southern Africa Development Community (SADC) o f lothout o f 14thon the 2008 Doing Business Indicators. This continues to hinder business registration, expansion, and sustainability. Over the past two years there have been legislative changes that have made it easier for businesses to start-up, `protect investors, and add flexibility to labor regulations. There have also been administrative improvements that should streamline business licensing, facilitate tax administration, and accelerate contract enforcement. Efforts are under way to improve business closure and reform customs procedures. However, these reforms have not yet resulted in a fundamental shift in the regulatory business environment as evidenced by recent ranking in the Doing Business report. Reforms remain incremental in crucial areas such as labour, land, trade facilitation and business licensing and inspection. Furthermore, legislative reforms and administrative decrees are only a first step in the reform efforts. Equally important i s awareness o f the private sector o f these reforms and strengthening public sector capacity to implement the reforms - aspects that are not fully captured through DoingBusiness reports. 7. The 2008 Investment climate Assessment (ICA) data reveal that the most prominent obstacle that firms mention are the practices o f informal competition. Specifically, the I C A found that 78 percent o f firms compete against unregisteredor informal firms. Informal firms, by their very nature, do not expand, are more vulnerable to external shocks, provide irregular earning for their employees, and undermine the competitiveness o f other formal firms. On the other hand, informal firms have made a major contribution to job creation and poverty reduction in the past 2 ten years'. A strategy that seeks to further understand the dynamics o f informality, distinguishes between rural and urban informality, and points the way to bringing in the informal sector to the formal sector i s crucial to broaden the base o f the private sector. Simultaneously, it should be recognizedthat informality i s not likelyto go away completely. 8. The second major constraint identified by the I C A survey was access to finance (it was the first constraint inthe 2003 survey). The I C A revealedthat, for small enterprises, only 1percent o f working capital and 1 percent o f investment in fixed assets were bank financed whereas for medium enterprises it was at only 4 percent and 5 percent respectively. Obstacles to access to finance include continued high interest rates, limited risk appetite by banks, weak credit information systems, a weak collateral registration and enforcement system, and limited business and financial management skills in SMEs. While there are some indications o f increased bank competition and interest in lending to smaller firms, lack o f financing remains a major bottleneck for SME development. 9. The forthcoming 2008 Country Economic Management (CEM) highlights continued constraints inhibiting private sector competitiveness, including shortage o f skills, inadequate access to land, burdensome customs and tax administration procedures, and lack o f standards and certification for exports2. The C E M confirms the need to hrther reform the business environment while emphasizing the importance o f complementing general reform efforts with sector-specific reforms. Finally, the C E M calls for a strategy that focuses on economic diversification, export promotion, and SME development to broaden and sustain Mozambique's growth. Adding to the urgency o f dealing with these issues i s the regional trade integration within the Southern Africa Development Community (SADC)3, which envisions a customs union by 2010 and a common market by 2015. 10. Inresponse to stronger advocacy by the private sector and international partners' advice, the (GoM) has embarked on a five year strategy to improve the business environment. The Ministry o f Industry and Commerce (MIC) remains the focal point for business environment reforms; however, there has been recognition that reforms require concerted effort across the government. Therefore, the strategy envisions a more active role for the Prime Minister and a closer oversight by the Council o f Ministers. The Business Environment Strategy contains the following four pillars: (a) Legal Reform: aims to improve the business environment through reforms covering business registration, licensing, inspection, and closure; labour law; competition law; import-export facilitation; property registration; simplification o f tax administration; (b) Fiscal and Financial Sector Reform: aims to improve the fiscal environment and promote access to finance for SMEs; (c) Infrastructure: aims to reduce costs and increase access for private sector to basic infrastructure services, such as electricity and telecom; and (d) Governance and Implementation Mechanisms: covers the capacity building needed to implement the reforms and establishes a mechanism for overseeing and monitoring the strategy implementation. 'According to the 2004 Informal Sector Survey (INFOR2004) by the National Statistics Institute, 90 percent o f employments i s inthe informal sector, and o f those, 91percent is concentrated inthe informal agricultural sector. See Annex Ifor additional details on sectors covered by the CEM. 3 SADC region compromises Angola, Botswana, the Democratic Republic o f Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. As a first step towards regional trade integration, it i s expected that 85 percent o f products would go to tariff zero from January 2008. 3 11. To further complement the strategy, the Council o f Ministers in June 2008 adopted an action planwhich provides a roadmap o f timelines, reform actions, indicators o f achievement, and the responsible agencies under each o f the main pillars o f the business environment reform strategy. The M I C has also recently developed a strategy for SME development that was adopted by the Council o f Ministers in 2007. The SME strategy is supposed to complement that overall business environment strategy and focuses on specific areas o f support, through promoting access to finance, improving SME management and technical capacity, and ensuring that reforms are supportive o f SME development. The Government has also been working on sector-specific strategies inagriculture, tourism, as well as an overall approach to dealing with trade integration. 12. While these strategies can signal an understanding o f the challenges and strength o f commitment, it i s not clear what the level o f consultation has been both within Government and with the private sector at large inthe strategy development process and whether the capacity will exist to implement the far-reaching reforms envisaged in some o f these documents. It is also important for policy development to be coupled with results on the ground for them to be validated by the public, gain credibility in the eyes o f investors (whether large or small), and establish a virtuous cycle o f reforms yielding results that spur on more reforms. Inthis context the World Bank, working in coordination with other international partners, can play a catalytic role by supporting the Government in the process o f informing needed reforms, building capacity for implementation, and assisting inrealization o f results for business owners and workers. B. Rationalefor Bank involvement 13. The Government o f Mozambique, through the Ministryo f Industryand Commerce (MIC), requested World Bank support for a new Private Sector Development (PSD) operation which will assist inthe business environment reform efforts, in implementing the strategy to benefit from the greater international and regional trade integration, and in strengthening the small business sector. The Bank i s regarded as the key interlocutor on PSD and business environment issues by the GoM and the donor community andhas provided advice and technical input into the development o f the strategy on business environment and the SME support strategy. 14. The Bank's engagement in private sector development has been long-standing with the most significant intervention inrecent years beingthe PODE Enterprise Development Project, a 6- year multi-donor project which concluded in June 2006. PODE aimed to broaden private sector participation by strengthening the access o f Mozambican firms to training and advisory services, promoting linkages with mega-projects, enhancing access to finance, and capacity buildingo f key public agencies and business associations. As the first broad-based program following the structural adjustments o f the post-war period, PODE succeeded in laying the foundation for a local marketplace for consultancy, training, and linkages and played a catalytic role in advancing key business environment reforms. However, the market for these services remains under-developed and the private sector continues to face a restrictive business environment. The proposed Mozambique Competitiveness and Private Sector Development (MCPSD) Project seeks to advance PODE's achievements in improving private sector competitiveness by catalyzing the delivery o f second generation business services focused on sectors with growth and export potential such as tourism and agribusiness and advancing policy reform and implementation. With regards to access to finance, the PODE's Implementation and completion Results Report 4 (ICR) concluded that stand-alone credit lines have not been an effective instrument for promoting sustainable access to finance by SMEs. The ICR recommended that fbture interventions in this area consider both the financing and technical assistance aspects o f access to finance, including working closely with selected financial institutions, buildingthe capacity o f firms to borrow, and keepingthe design o f any financing mechanismsimple. 15. The World Bank and the International Finance Corporation (IFC) have relatedprograms in Mozambique that have an impact on private sector development. An ongoing Financial Sector Technical Assistance Project (FSTAP) aims to enhance the regulatory and supervision framework for the financial sector. The IFC has significant private investments in Mozambique and has two SME programs, the Mozambique SME Initiative which provides technical support and venture financing for medium-sized firms and the Africa M S M E Program which provides financing and technical assistance to private banks to catalyze lendingto SMEs4. The proposed MCPSD project would complement both the FSTAP and IFC initiatives by building capacity o f smaller firms to borrow and supporting the accounting and financial reporting training for SMEs. With regards to the investment climate, the MCPSD project would work with Foreign Investment Advisory Service (FIAS) and other donors to advance the critical reforms needed to achieve the GoM's goal in being the best in SADC by 2015 on the Doing Business indicators. The project would also buildthe capacity o f public sector institutions that are crucial for export promotion andwill assist in the local implementation o f policy reforms. As mentioned earlier, capacity to implement reforms is a major gap which the new project can help to address. 16. The donor community regards the World Bank as the leading partner for PSD issues. The World Bank has been working in partnership with the International Monetory Fund (IMF) on its policy dialogue and recommendations with Government on PSD with the expectation that the Bank would support the GoM's effort to implement the actions agreed in this area. Different donors are engaged in PSD-related issues. These include the United States Agency for International Development (USAID), the EuropeanUnion (EU), Norwegian Aid ( N O W ) , Swiss Aid, and others5. The Bank has been active inthe Private Sector Working Group (PSWG) which provides a forum for dialogue with government and coordination o f donor initiatives; the project can help to strengthen the role o fthe PSWG. C. Higher level objectives to which the project contributes 17. The project would contribute to the global PARPA I1(Second Poverty Reduction Strategy) goal o f reducing poverty through placing the private sector as the main engine o f growth and employment. This objective requires a robust private sector and an improved business climate that can attract the investments and generate the jobs necessary (see Figure 1). The IFC SME Initiative will be transferred to a private contractor out over the next year. The Africa MSME Programis close to signing its first agreementwith one of the leadingbanks inMozambique. 'Annex 2 provides an overview of the different donor interventions inthe private sector inMozambique. 5 Figure1:InvestmentClimateReformsand PovertyReduction creation Investment .... (domesticand Poverty foreign) -+ reduction -+ Economic ........................................................................................... The proposed project is consistent with the World Bank Country Partnership Strategy (CPS) for Mozambique (2008-201 1) and would help in achieving Pillar I11goals o f promoting sustainable and broad-based growth. The project would contribute to the realization o f the following four CPS result areas which are based on the PARPA 11: 0 ImDrovingthe business environment: through reducing barriers to business entry and cost o f doing business andpromoting access to finance for SMEs. 0 Promoting the develoDment o fhumanresources at all levels: through strengthening the skills o fthe owners and managers of SMEs and buildingthe capacity o f local trainers and business service providers. 0 Increasing;the competitiveness o f the rural economy: through strengthening the linkages between farmers and markets andpromoting exports o fhighvalue agriculturalproducts 0 Positioning Mozambique as a world class tourism destination: through increasing participation o f local companies and SMEs intourism investment and improving government capacity to regulate and oversee this sector. 11. PROJECTDESCRIPTION A. Lendinginstrument 18. The MCPSD project would be financed through a specific investment loan with an International Development Association (IDA) allocation US$25 million equivalent. An investment loan i s the most suitable instrument for financing the combination o f reforms, capacity buildingandinvestmentactivities envisaged under the project. The project duration is expected to be for five years. The IDA financing is expected to catalyze additional funding as follows: 0 From Government : The Government will provide physical facilities to the project implementationunit inMaputo and the building and land for the Nampula training Centre. From Private Sector: Under the matching grant sub-component, the private sector would contribute 25-50 percent o f the costs o f training and advisory services, which would be equivalent to US$ 4.16 million. The private sector i s also expected to contribute through training materials and trainers to the Nampula Training Centre. 6 0 From Donors: While the project will be closely coordinating its activities with donors that are already active in the PSD agenda to promote complementarities and share lessons learned, the project is not expected to enter into formal co-financing or additional financing agreements with other donors6. There have beenpreliminary discussions with IrishAid in supporting business environment reforms envisaged under the project; however, if that i s realized, it would take the form o fparallel financing with a distinct set o f activities. B. ProgramobjectiveandPhases: Not applicable. C. Projectdevelopmentobjectiveandkey indicators 19. The objective o f the Project is to improve the businessenvironment and enhance enterprise competitiveness in Mozambique by: (a) reducing the cost o f doing business in the country; (b) building technical capacity at public sector agencies; (c) strengthening the ability o f local intermediaries to enable them to deliver business services to SMEs; and (d) developing region specific interventions inthe tourism and horticulture sectors. Indicators would include results at the enterprise level such as increased sales; results at the intermediary level such as number o f new business services to SMEs; and at the policy level such as through improved trade facilitation and business licensing regimes. Annex 3 provides the project indicators. The project will benefit the following groups: 0 Small and MediumEnterprises and their workers who would benefit under matching grant Program 0 Tourism and tourism-related businesses inthe province o f Inhambane 0 Tropical fruits producers andworkers throughout the country 0 Localbusiness service providers, business associations, and training institutes National and local government agencies, including M I C and its agencies (Private Sector Support Unit, Directorate o f Industry, Provincial Directorates, One Stop Shops, National Institute o f Standardization and Quality , Institute for the Promotion of Exports, etc), Ministryof Tourism and its agencies ,MinistryofAgriculture and its agencies, Order of Professional Accountants, and the Governorates o fNampula and Inhambane. D. Projectcomponents 20. The project would consist o f two main components (improving enterprise competitiveness and promoting the business enabling environment) and a third project implementation component. The project components were developed to be complementary and should be viewed in an integrated fashion. For example, the regional tourism and horticulture sub-components would inform the policy development process at the national level and, subsequently, would support the implementation o f these reforms at the provincial level. Finally, the capacity building activities Annex 2 provides an overview o f the different donor interventions inthe private sector inMozambique. 7 provided to the customs and quality agencies would complement the activities under the matching grant and sector-specific sub-components to promote S M E exports. 21. Inorder for these synergies to materialize, the project's implementationarrangements must be flexible with adequate capacity, open communications, and clear accountabilities for all the stakeholders involved. The project recognizes the weak capacity that exists and has programmed extensive capacity support in the project implementation component. The private sector is an integral partner for the project and will be an integral element for the project's implementation, and ultimately, success. The implementation arrangements are briefly presented here and are hrther elaborated inSections I11and Annex IV. Component One: Improving Enterprise Competitiveness(US$14.39 million IDA) 22. This component would enhance the competitiveness o f SMEs and promote broad based growth through the following three sub-components: Promoting Access to Business Development Services KJS$6.46 million IDA contribution and US$ 4.16 millionbeneficiary contribution): 23. This sub-component would enhance SMEs growth and competitiveness. This would be achieved by promoting access to SMEs to business services providers for the delivery o f consultancy, advisory, and linkage services. Under this sub-component, IDA would finance grants for SMEs and provision o f goods and consulting services for runningthe management o f the grant program. The single over-riding aim o f this sub-component i s to maximize the rate o f sales growth in SMEs, compared to the rate o f growth in SMEs not supported. 24. The sub-component will deliver these two proposed activities to SMEs, intended to complement each other: 0 70 percent cost-sharing grants for micro-enterprises as defined by decree No. 39/2003 o f 26 November7 and 50 percent cost sharing grants for small and medium enterprises as defined by the same decree to buy specialized outside expertise [training, consulting, etc., including related travel expenses for delivery o f these services]; 0 Free advice firm for a limitedperiod to planand execute a sales growth plan 25. Beneficiary SMEs will have to meet the following criteria to access support under this sub- component: Be vested with legal personality, dedicated to for profit activities, and domiciled in the country. The decree defines micro and small and mediumenterprises as follows: Micro: Have at least two o f the following three characteristics: (i) less than 25 employees; (ii) than US$25,000 initial investment ;(iii) than 10 KVA less less power installed. Small: Have at least two o f the following three characteristics: (i) Between 26 and 124 employees; (ii) initial Investment betweenUS$25,to US$2.5 million; (iii) capacity installed between 10 to 500 KvA and Power Medium: Have at least two o f the following three characteristics: (i)Between 126 and 250 employees; (ii)initial Investment betweenUS$ 2.5 million and US$10 million; (iii) Power capacity installed between 500 to 1000KvA. 8 0 Produce a plan for business growth indicating a set o f actions it intends to undertake to achieve increased sales. 0 No SME may receive more than US$70,000 ingrants inaggregate. 26. The main target o f the sub-component will be SMEs in the manufacturing sector though the grants will be available to SMEs inall sectors. Representative Organization Grants 27. Inaddition to the above products, 75 percent cost-sharing grants will be made available to representative organizations inthe private sector for one o f the followingpurposes: 0 To build the capacity o f the organization to better serve its members and thus to build its strength, membership base, and subscription income. 0 To develop new services to be sold to members, thereby increasing its usefulness to them, andbuildingfinancial strength. To commission outside expert studies, surveys, research papers, etc., in support of submissions to G o M and its agencies that are aimed at improving the regulatory environment facing members. 28. This type o f grants will be provided to benefit representative organizations o f the private sector such as chambers o f commerce, trade and industry associations and professional bodies that: 0 Are vested with legal personality inMozambique and domiciled inthe country. Have elected officers inaccordance with their by-laws 0 Present a planfor purposes o fbuildingcapacity inthe organization, developing new services, and/or seekingtechnical assistance to improve the business environment facing its members. 29. All grants (for SMEs and private sector representative organizations) will be paid on a reimbursement basis. The management and administration details for the provision o f these grants will be set forth inthe OperationalManual for the Project. Promoting Tourism Sector inInhambane(US$5.01 million) 30. This sub-component proposes a regional approach to promoting broad-based growth using tourism as an entry point. The goal i s to leverage existing initiatives and deliver an integrated package o f services to stimulate growth in tourism-related employment and income generation with the possibility that this approach be replicated in other regions of the country. There is compelling evidence that Inhambane Province represents the best opportunity to test such an approach for results in this sector. Inhambane has the most attractive tourist-related resources and i s the province with the highest growth rates in terms o f investments and numbers o f tourist. In addition, two other World Bank Group projects are working on related aspects o f tourism 9 development in the province'. Drawing on a platform o f diagnostic work in the tourism sector in Mozambique, and particularly in Inhambane Province, the project proposes to finance the following activities two main areas: 0 Improvingpublic sector service provision in the tourism sector through support to the development and implementationo f a tourism strategy and tourism master and marketingplans for the province including, inter alia, aspects o f tourism planning and zoning, institutional development, policy and regulation, statistics and data collection, land registration database and enhanced environmental protection, and strengthening the provincial one-stop shops. Expanding the tourism-related private sector supply chain through (i) rehabilitation o f training facilities inInhambane, (ii) provision o f equipment to training institutes, (iii)recruitment oftrainers to provide training inneededareas(languages, tour operations, boat operations, diving, fishing, artisanal and crafts development, vocational hospitality skills, business development, business operations, marketing, catering, construction, carpentry, and maintenance, etc); (iv) provision o f legal and businessadvisory services to the private sector to enhance their competitiveness. Establishing a Tropical fruits training center inNampula (US$2.92 million IDA and 0.5 million Govt./Private Sector Contribution) 31. This sub-component aims to strengthen linkages between foreign investors and domestic producers and farmers in the horticulture sector. Horticulture has been identified as a sector o f high future export potential for Mozambique as well as of interest for the domestic high end market due to growing demand o f the middle class in cities as well as from the tourism industry, Quality i s an essential part o f a strategy to target these markets alongside other factors such as supply consistency, input availability and access to finance. To aid inthis, this sub-component will support the establishment o f a national quality training centre in Nampula specialized in tropical fruit operations. Nampula has tremendous agricultural potential and there have been recent investments, especially in banana operations. The Training Centre will be established as a non- profit private organization. It will be governed by a Board with one representative from each o f the public and private stakeholders (Governorate o f Nampula, IIAM (the Mozambique National Instituteo f Agriculture Research), Chiquita and each o f current and future banana farm operators), The public-private partnershipnature o f the project will be reflected inthe operation o f the Board which will serve (a) as governing board for the training center; and (b) as a forum for the discussion o f institutional and policy-related constraints to the development o f a tropical fruit industry. The Government will provide the existing buildings and compound at Namialo and use o f the adjacent land (behindthe current site). However, the management o f the combined facilities would be the responsibility o f the Board and in keeping with the way that the leasehold system works. Improvements to the buildings, and to any adjacent land would be seen as continued investment in the "public good" that is being created by the establishment o f the center and its training and ancillary activities. As long as the Centre continues to function the use o f the ~~~ ~~ The Transfrontier Conservation Areas andTourismDevelopment Project (TFCATDP) is supporting specific conservation areas inthe province. A secondproject, the IFC's Anchor InvestmentProgram, is also targeting and promoting Inhambane Province as an investment opportunity for the private sector. 10 combined facilities would continue to be managed by the Board. While the centre will operate in a public-private fashion, the centre's assets will belong to Government. 32. IDA, through this sub-component, will support building rehabilitation, facilities, equipment, materials for the training centre itself, as well as the technical assistance, goods, and operating costs for the establishment o f a 50 hectare banana farm which will constitute the training grounds o f the centre. Furthermore, support will be given to management and personnel resources o f the training centre including study tours, training; a tropical h i t advisor will be funded inthe establishment year. The project will also support the banana farm operating costs inthe first year. The training will include education in safe pesticide handling.Chiquita works with the Rainforest Alliance to satisfy a number o f environmental and social criteria and pesticide handling training will be done with the aim o f achieving Rainforest Alliance certification. The initial training focus will be inNampula but this is plannedto be a national training center, as there are other banana investments taking place or being negotiated in other parts of the country that can also benefit from this learning. It i s also envisaged that the training center would eventually diversify into other tropical h i t s including mango, pineapple and papaya, once the model has beentested. This way the centre would help inachieving the Government's Rural Industrialization Strategy goals o f promoting the development of value-added export-oriented agricultural products in rural areas o f Mozambique Component Two: Improving the BusinessEnabling Environment (US$5.3 million) 33. This component will support GoM's effort to improve the business enabling environment. In particular, the component will advance specific reforms based on the Business Environment Strategy, build the capacity o f key agencies that can play a catalytic role in improving service provision for exports and strengthen the accounting profession. Support to Business Environment Strategy CUS$4.2 million): 34. Working in partnership with the FIAS, this sub-component would support the reforms envisioned in the Government o f Mozambique's business environment reform strategy. The strategy entails (i)reforms to improve Mozambique's DB indicators; and (ii) broader systemic reforms aims improving the business environment such as business start-up procedures, streamliningthe business licensing regime and business tax administration; and facilitating trade as well as enhancing public-private dialogue. Following discussions with G o M and an extensive mapping exercise undertaken with the Private Sector Working Group and an agreed sharing o f tasks with FIAS and the Doing Business Reform Unit, the following tasks were agreed to be financed by IDA under this project:' Trade Facilitation(US$3.5 million): Provision o ftechnical assistance, training and goods to support the GoM's effort to update trade-related legislation and policies, streamline 9Annex 2 presents the resultsofthe DonorMappingExerciseandAnnex 4 :DetailedProjectDescriptionprovidesa table with the agreed divisionofresponsibilitiesbetweenthe DoingBusiness ReformUnit, FIAS, andIDA. 11 procedures, systems and build capacity to government agencies involved in trade, such as Customs and Institute for the Promotion of Exports (IPEX), in order to lower transaction costs, reduce clearance time o f imports and exports, and improve governance. Licensing Reform: (US$500,000): Consultancies, equipment purchases, works and training to support MIC's effort to streamline the business licensing process and to build the capacity o fone-stop shops. Public-PrivateDialogue: (US$200,000): Provision o f consu'ltancies, training, goods and technical assistanceto strengthen public-private dialogue mechanisms. 35. This subcomponent will remain responsive to provide training, consultancies, and goods for support to the implementation o f the Government's Business Environment and SME Strategies. Sup~ortto Oualitv/Standards Infrastructure (US$SOO,OOO) 36. Mozambique aims to broaden its export portfolio and that will require targeting markets o f higher quality products. Quality may be secured inmany ways, but strict adherence to recognized standards i s always part of the answer. The Mozambican Government has acknowledged this and i s supporting the National Institute o f Standardization and Quality (INNOQ) with the assistance o f the EU, United Nations Industrial Development Organization (UNIDO), Swiss Aid (SECO) and others. A key remaining challenge is the strong need for prioritization and for creating market based demand-driven services in the fields o f standardization, certification and metrology. Towards this goal, this sub-component will support the provision o f standards-related services by INNOQ in a way that i s market-led and that promotes exports in key sectors. Specifically, this sub-component will finance the cost of goods and services to enable a twinning arrangement between INNOQ and a middle income country institution for purposes o f training and coaching o f INNOQ personnel primarily in demand assessment and policy making. In addition to the costs associated with humanresources and training materials o f the twinning institution, the project will finance limitedinvestmentinIT technology to assist the training activities. Strengthening the Accounting Profession (US$600,000) 37. This activity will support the financial reporting infrastructure for the private sector. Currently, all corporate entities in Mozambique, including investments with foreign participation, are affected by a serious shortage o f qualified accountants and trained accounting technicians. SMEs are especially affected by this. The absence o f reliable financial statements in the private sector reduces the potential for cash-flow based lending. Banks and financial institutions are compelled to relay on collateral even when reliable financial statements might have otherwise facilitated cash-flow based lending. This sub-component will build on the recently concluded Accounting and Audit ROSC and support the establishment o f a twinning arrangement between the newly established professional accountancy body (Order o f Professional Accountants o f Mozambique) and a strong member o f the International Federation o f Accountants. The twinning 12 arrangement will provide technical assistance, training, and goods to the Order o f Professional Accountants o f Mozambique to enable it to function as a modem professional accountancy body. Component Three: Project Management, Monitoring, and Evaluation (US$3.66million) 38. The main technical counterpart for the project i s the Ministry o f Industry and Commerce (MIC). M I C i s the focal point for business policy reforms, has been very active in pursuing the PSD agenda, and has requested the new operation. A project implementation unit (PIU) would be established and would consist o f a project coordinator, a procurement specialist, a part-time environmental specialist, a legal consultant, a financial management specialist, and a monitoring and evaluation specialist. The PIU would be located within M I C to promote ownership and would have two mandates: to carry out the project management functions in accordance with IDA Guidelines and to buildthe capacity o fM I C inthese areas. This component will finance the following activities: Strengthening o f M I C capacity and that o f other Government agencies involved in the Project 0 Provision o f training to PIU and M I C staff on IDA'S Procurement and Financial Management Policies and Procedures; 0 Project audits 0 Project studies, including performance reviews and impact evaluations and the implementationo f a program to monitor and evaluate the Project results; 0 Financing o f PIU's Operating Costs; and 0 The provision o f technical assistance and training to staff responsible for the implementation o f the Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF) through the Environmental Specialist at the PIU E. Lessonslearnedandreflectedinthe projectdesign 39. The PODE Project ICR presented a number o f lessons on the technical design as well as at the implementation and fiduciary level. lo The following lessons from PODE have been incorporated: loPODEICRRatingfor DevelopmentObjectivewas ModeratelySatisfactory. This rating was confirmedby the IEG Review. 13 40. Building Capacity for Reforms: The project design reflects the fact that for policy reforms to have a real impact, they need to be properly implemented and the private sector needs to be informed o f any changes. Therefore, the focus o f the business environment component i s on strengthening public sector capacity to implement reforms (such as through capacity support to the one-stop shop and the customs agency) and strengthening public-private dialogue, particularly outside the capital region. Further, the project's tourism and agribusiness sub-components would provide support for public sector capacity at the provincial level, which has been a weak link in the reform implementationprocess. 41. Selectivity,both sectorally and geographically: While the project will have several sub- components that are mutually reinforcing, their design reflects the need to target the interventions in order to maximize impact and visibility and avoid overly complex structures. The matching grant program will have a national reach but will focus on priority and activities. The two sub- components on tourism and horticulture will be geographically focused. The business environment component will complement these initiatives and will focus on few reforms which have high potential to be realized and highimpact on the private sector. 42. Sustainability and Ownership: One o f the lessons o f PODE is the need to plan for sustainability in the early stages o f the project; real government and private sector ownership o f project components and processes i s essential for sustaining the interventions envisioned. These are cross-cutting themes and are factored into the design o f each component. The mechanism for sustainability will differ per the interventions envisioned. The matching grant sub-component aims to catalyze the delivery o f business services to SMEs and its sustainability depends on ability and willingness o f firms to source needed business services. The sustainability o f the Nampula Centre would depend on the continuation o f demand and the generation o f sufficient training and other fees to cover core costs. The sustainability o f the tourism intervention in Inhambane would be based on continued improved linkages, access to training for local workers, and an improved business environment for investors. The sustainability o f reforms under component two is linked to continued Government commitment to the reform goals and the continuation o f the capacity built to oversee and implement the reforms enacted. The project implementation unit will be located within M I C with the goal o f eventually mainstreamingthe project management functions. 43. Project Management Capacity: The previous PSD project had experienced significant project management constraints, including inprocurement and financial management. This had an adverse affect on the project's results, especially on the sustainability aspect. The MCPSD project i s utilizing the Project Preparation Facility (PPF) funds to build capacity at M I C on procurement, financial management, and project coordination. The project will fund the key fiduciary and monitoring and evaluation positions. The project funded staff would have two goals: (i) to ensure smooth implementationproject activities in line with Bank guidelines; and (ii) to build capacity o f counterpart staff. 14 F. Alternativesconsideredand reasonsfor rejection 44. Consideration was given as to whether the project would be designed as a Phase I1 o f PODE, i.e. maintaining the same overall approach and components with minor modifications. However, this was not pursued for two reasons. Firstly, as discussed inthe previous section, there were a number o f lessons from that experience that necessitated a fresh assessment o f the overall approach to be taken. Secondly, the characteristics, as well as constraints, facing the private sector inMozambique are quitedifferent thanthe situation existingin1998-99when the previousproject was designed. There is now clearly a need to take a more targeted approach to supporting private sector development with a greater emphasis on sector-specific and region-specific approaches. 45. The project also considered whether to support financial sector initiatives that could have a bearing on access to finance, one o f the main constraints facing SMEs. Specifically, the project considered establishing a risk sharing facility that would promote lending to SMEs by private banks through guaranteeing 50 percent o f their loans to small businesses. A question was raised about whether there i s sufficient demand for this type o f activity in light o f the fact that the IFC would be launching an SME dedicated credit line with one o f the leading banks in Mozambique. Further,current IDApolicies do not allow financing o f new facilities that cover bank commercial risk; however, a task force has been set up to possibly review the lifting o f this restriction inthe near future. Therefore, the project will not be including this activity and would seek to refer clients to the IFC program and would also assist SMEborrowers under the IFC program through training and advice from the project's windows. The demand for this activity would be re-assessed one year after the start o f project implementation to determine whether such a scheme would still be needed to catalyze bank lending to SMEs and also to allow sufficient time for the IDA task force review to be completed. 46. Consideration was also given as to whether the operation should fund only technical assistance and capacity buildingactivities and not support infrastructure development. However, it was felt that the project's impact would be enhanced if targeted "light" infrastructure activities were supported, particularly in the case o f the tourism and agribusiness sub-components. In addition, rehabilitation and upgrading o f existing facilities was judged to be necessary inthe case o f the supporting the one-stop shops andtraining centers inInhambane and the development o f the quality training centre inNampula. 47. Finally, there was consideration as to whether all the project's components would be limitedto the two regions selected for the tourism and agribusiness activities. However, there was concern that this would overly limit the project's impact and whether the absorptive capacity exists for such a completely regional approach. Also, for policy reform, it was agreed that there is a continued need to pursue reforms actively at the national level while supporting implementation at the regional level. 15 111. IMPLEMENTATION A. Partnershiparrangements(ifapplicable) B. Institutionalandimplementationarrangements 48. The GoM will borrow US$25 million from IDA for the project's implementation. The project's duration i s expected to be for five years from 2009-2014. The project will be overseen by a National Advisory Committee which will provide overall strategic advice and counsel to the project. The Committee will be chaired by the Minister o f Industry and Commerce and will consist o f high-level representatives from Government and the private sector in equal number. Government representatives will include the Ministers (or hisher delegate) o f Planning and Development, Finance, Tourism, Agriculture, and Environment; Governor (or delegate) o f Bank o f Mozambique and Executive Director o f SME Institute. Private sector representatives will include business associations, financial institutions, and private investors. The committee will meet on a quarterly basis and will review the Project's progress against the agreed performance indicators to address any issues that could adversely impact's the project implementation or attainment o f its objectives. 49. The day to day management o f the project will be delegated to a professional PIU which will be housed at MIC. The PIU will act as the advisory committee's secretariat and will be responsible to report to the committee, coordinate the committee meetings, and liaise with the other ministries as necessary. The PIU will be responsible for ensuring that all fiduciary requirements (procurement, financial management, environmental screening, monitoring and evaluation and reporting) are successfully maintained. It will be responsible for financial management and coordinate project accounting, maintain overall records and manage disbursements for the IDA project. The PIU will produce quarterly financial monitoring reports and annual financial statements and ensure their timely audit in accordance with International Auditing Standards. The PIU will be staffed with a full-time project coordinator, procurement specialist, financial management specialist, legal consultant, environmental specialist, monitoring and evaluation specialist, and administrative support staff. The PIU project coordinator will report to the Minister o f Industry and Commerce. The goal is to mainstream the project management activities into MIC; this would be done following an assessment o f MIC's capacity after the project's mid-tern review. As mentioned earlier, the terms o f reference o f the PIU staff will include provision o f training to counterparts at M I C (and other involved ministries) to build their capacity in the different project management functions. To build this capacity, the Project could allow Government staff to work in the PIU, provided that this staff is in absence o f leave without pay from Government' 50. To assist the Maputo PIU in carrying out its responsibilites, satellite PIUs will be established in Inhambane and Nampula to oversee and implement the activities in these two provinces. In Inhambane, it is expected that a local coordinator and an accountant will be recruited at the PIU in addition to a Small Business Advisor, and an Environmental Specialist. In Nampula, the staff o f the tropical fruits training center will double as the provincial project implementation unit with the director o f the center serving as the Nampula provincial coordinator. The provincial coordinators would report to the Maputo-based coordinator. Ineach o f these two 16 provinces, provincial level Advisory Committees will be established which will consist o f representatives from both public and private sector stakeholders. In Nampula, the Board o f Governors o f the tropical fruit training center will double as the Nampula provincial level Advisory Committee. These committees will provide advice and support to the project's activities and will help to promote local ownership and ensure that activities remain responsive to local needs. Annual action plans will be produced to include: (i) project activities to be carried out; (ii) procurement plan; (iii) disbursement schedule; (iv) operating costs o f the project; and (v) annual training budget. 51. While the PIU will be in charge o f the overall management, coordination, fiduciary and reporting o f the project, it will rely on the technical input and advice for the development o f consultants' Terms o f References (TORS and specification for the procurement o f goods and works from INNOQ, Customs, GASP, and Order o f Accountants for their relevant sub- components. C. Monitoringand evaluationof outcomes/results 52. The monitoring and evaluation (M&E) system will be based on the agreed Results Framework and monitoring arrangements (See Annex 3). Project design has been guided by a Results Framework intended to be useful for both project management and World Bank supervision. This framework focuses on the project development objective's outcomes (PDO) to be achieved and the intermediate outcomes expected. The PIUwill be responsible for conducting M&E activities. Baseline data and target values for all the agreed indicators will be verified and confirmed by the PIU inpartnership and collaboration with the designated technical staff in each implementing agency. The PIU will remain responsible for the data collection, analysis, and reporting o f the agreed project development outcome indicators. The primary monitoring mechanism will be quarterly reports and annual reports prepared by the Project Coordinator and presented to the Advisory Committee and IDA. These reports will assess achievements against the baseline values defined in the matrix for arrangements on results monitoring and overall project progress using the indicators defined in the Results Framework. All reports will be submitted to the World Bank and shared with other development partners as required. A mid-term review will be carried out at the half way point o f the project. An Implementation Completion Report (ICR) will beundertaken after completion o fthe project. D. Sustainability 53. The project is supporting the GoM's vision as articulated in PARPA I1 o f having the private sector as the main engine o f growth, investment, and employment. The project's components are under-pinned in the Business Environment Reform Strategy and the SME Strategy, both o f which have been adopted by the Government over the past year. The project would also contribute to the realization o f the Government's strategy for dealing with Regional Trade Integrationwhich has a focus on accelerating and diversifying Mozambique's exports. The GoM has been fully committed to the project and views it as an essential component to the realization o f broadening private sector-led growth. Equally important, the private sector has 17 been a partner in developing the project's approach and components. During the project preparation, the private sector, through discussions with business associations, leading enterprises, small businesses and stakeholder workshops, was consulted on the project's design and areas o f focus and has been supportive o f the project's goals. 54. Sustainability o fproject outcomes would be assured when there is: 0 Continued Government commitment and capacity to implement business environment reforms throughout the country Continued strong consultations between private sector representatives, including SME representatives, and Government on issues that affect private sector development 0 Enhanced capacity o f local business service providers to provide needed business and advisory services to SMEs and the ability o f SMEs to seek andprocure needed services 55. Towards these goals, the project design emphasizes capacity building in all o f its components in both the public and private spheres. Moreover, several components focus exclusively on capacity building, such as the work with the quality and customs agencies. By providing extensive technical assistance to the implementation o f the reform agenda, the project aims to strengthen government capacity to analyze private sector issues and identify and implement business environment reforms. By locating the PIU at M I C with a goal to eventually mainstreaming all project management functions, the project hopes to leave behinda strengthened management and administrative capacity within the Ministry. 56. There are other factors that may affect sustainability that are beyond the project's control such as a sudden change in political direction or external economic or natural shocks. The project, through a World Bank Group approach, would attempt to mitigate these as presented in the following section. E. Criticalrisks and possiblecontroversialaspects Riskfactors Description of risk Mitigation measures Rating of residual risk I.Countryandl Macroeconomic On track with IMFprogram since 1987. Fiscal and Country teams and economists actively engage framework monetary policies pursueexternal and internal with Government on macro management. balance. Further improvements inmacroeconomic Country team engages with the Monetary Low management in2007. Monetary Policy Committee Policy Committee. introduced in2007. Fiscalpolicy is consistent with macro stability and debt sustainability. The macroeconomic impact ofthe shocks is expected to be manageable. The WB's PRSC 5 Notwithstanding strong macro performance, there operation will support the Government's i s risk related to due to the sharp increase in food mitigation responsepackage, focusing on the and fuel prices. The world financial and economic most vulnerable people. 18 crises may also translate into a general contraction The project, through the WB Group, will o f the demand for basic products and services monitor the effects o f the crisis into (including agricultural products and tourism), and Mozambique, while strategies and investment o f the investment innew.markets. projects promotedunder this project should take into account this situation for the short and long run. T o mitigate the risks o f fiscal slippage the PRSC program (within the broader context o f donor coordination), supports the efforts by the Government to strengthenPFM systems (including the revenue collection systems), which increase transparency and reduce the country's vulnerability to fiscal slippage. Country Major weaknesses exist inthe FMenvironment The government i s committed to the reform Moderate fiduciary (staffing, operating system, reporting), resulting program, and has introduced a new legal and management primarily from low capacity. While the regulatory framework that i s underpinned by Government's reform program aims to strengthen the introduction and roll out o f the integrated accounting and audit capacity through the financial management system (e-SISTAFE). recruitment and training o f FM specialists and Introductiono f e-SISTAFE will contribute to accountants, this i s still a long way from being improvements inbudget execution and reduced achieved. Although the new integrated financial off-budget expenditures. The process has the information management system (e-SISTAFE) has full support o fthe Development Partners, with now beenrolled out to all ministries at central level, WB support currently channeledthrough the it is still inthe process o fcascading downto ongoing Public Sector Reform Project, as well provincial and district level as well as other as the upcoming decentralization project (phase government institutions. User training i s uneven, II), willalsostrengthenfinancialplanning that meaning that it is not yet operating at its optimal and management at local levels. level. Country N e w procurement law and regulations, capacity Capacity buildingprogram started countrywide. Moderate Procurement building program has started and procurement Procurement website operational. Need for systems system i s more transparent with Ethics Code more capacity buildingand assistance at the sanctions and appeal mechanisms included inthe UFSA. The government has started the approved procurement Law. Regulatory unit development o f a monitoring system for the (UFSA) inMOF operational. SBDs issued assessment o f the quality o f procurement and acceptable with few reservations. enforcement o f the Procurement Regulation. Bank teams will inonitor how the new system works. 11-Sector Specifi Risks Sector Business Regulatory Environment: There has been Through policy dialogue and participationin Moderate Governance, modest progress inthe business environment, for a such as the Financial and Private Sector Policies, and updating the commercial code, lowering the cost Working Groups, the Bank will continue to Institutions and time for business start-ups, automating the promote broad and effective policy reforms by commercial registry, simplifyingtax payments, and the Government o f Mozambique. The adding flexibility to labor regulations. However, Government has recently passed a five year Mozambique's business environment remains plan to improve the business environment and restrictive with an overall ranking o f 141 for 2008. i s inthe process o f enacting reforms to decrease It will be important to maintainthe momentum for minimumcapital requirements, streamline reforms which shouldbe broadened to encompass business inspections, and accelerate business business licensing, inspections (labor, health, licensing through the one-stop shops. These environment, etc), customs clearance time, and tax should have result in an improvement inthe requirements/ reimbursement . Doing Business Ranking. Financial Sector: The quality o f risk management 19 I infinancial institutions has improved together with I the better performing portfolio, but the size and depth o f the financial sector remains a binding constraint. I 111. Operation-specificRisks Country The project is fully compatible withthe GoM' MIC, with support from the Bank, i s leading the Low Ownershipof priorities to generatejobs and reduce poverty project preparation. Stakeholder consultation, Program through private sector development. The project including with private sector representatives, /Project will contribute to the realization o f are being conducted to validate the demand for Government's PARPA I1strategy through its the matching grant sub-component; field focus on SMEs, export promotion, and the consultations inthe two regions o f focus are priority sectors identifiedfor growth. The also being held. The approaches developed are project would support the GoM's strategy for building on a range o f diagnostic work, improving the business environment, MIC's including value chain studies, I C A and Doing strategy for and the strategy for SME Businessreports, the CEM and the Accounting development & Auditing ROSC. Technical The project responds to market needs as The project team's technical specialists with the Moderate Design identified by the Investment Climate Assessment are working closely with government, private and the CEM and the individual sector, and other donors to ensure that the final components/sub-componentshave been design reflects the needs, conditions and designed with a view to catalyze market-led capacities o f the government and the private growth and deal with obstacles that may impede sector. such growth. Implementation The project will support arange of instruments The project PIUwill be located within the MIC Moderate Capacity (businessservices, capacity building and and will be mandated to both carry out the infrastructure development), will have two project management functions and to buildM I C geographically based sectoral sub-components capacity. Housing the PIU inM I C would help (tourism and agriculture), and will involve inensuring the sustainability ofthe capacity multiple partners, inboth the private and public built. The management o fthe matching grant sectors. subcomponent would be contracted to private sector-oriented manager/advisors. This would There is a risk that the project implementation be consistent with the market-oriented approach unit and the technical implementing units for the that the project i s taking. PPF funding i s being different components will be challenged due to usedto finance the core PIU functions and to weak capacity. provide training onproject management as well as procurement and financial management. National and provincial level advisory committees will be established to facilitate communication, information sharing andbuy-in for the project's activities. Satellite PIUs will be established inNampula and Inhambane to ensure smooth implementation and adherence to Bank guidelines. Bank supervision missions will include technical specialist who would be complemented with country-based sector staff. The Bank's fiduciary team i s located inthe country office and will conduct regular follow- up (both during and out o f supervision missions) for the project's fiduciary management Sustainability There i s a risk that the business environment The project has programmed significant Moderate 20 reforms passed may be reversed inthe future or capacity buildingfor both government and the that the capacity to implement the reforms may private sector representatives and is supporting not be present. strengthened public-private dialogue. This i s to ensure that (i)public sector capacity exists; (ii) The business services supported by the matching stronger private sector perspective inpolicy grant program for SMEs may not continue making process. following project closure. The matching grant program i s designed to The training centre inNampule may not be introduce SMEs to business service providers financially sustainable following project closure and to buildthe capacity o f business providers to serve SMEs. A business planfor the Nampula Training Centre would be developed inthe first year o f the project with projections for financial self- sufficiency at project conclusion. Progress against the plan will be monitored. The major risks will relate to the Use o f Country Qualified FMspecialist will be recruited at the Moderate systems for the implementation o f the project Maputo PIUand at the two satellite PIUs in activities. This i s one o f the pilot projects Nampula and Inhmabane as well as accountant proposed to go onto the CUT, and the problems for the Grant Sub-component. These staff will o f low staff capacity inFM, constraints related ensure that project financial management to timing o f budgeting and finalization and adheres to IDA requirements and will also inclusion o fproject work plans inthe budget, provide o n the job training to Government will affect the smooth implementation. counterpart FMstaff. Disbursement at the provincial level also raises the risk. Procurement Unitwithin the Ministry o f Recruit a senior procurement specialist with High Industry and Commerce has beenrecently qualifications and experience acceptable to the created inthe framework o f the New Bank. Provide adequate furniture and basic for Procurement Regulations inMozambique; The UGEA staff. Establish an adequate procurement capacity to handle procurement under local filing record keeping system with detailed regulation i s limited and no prior experience described inthe Operations Manual. Prepare a with Bank Procurement Procedures. Procurement Manual and should clearly lay out all procurement procedures applicable under the project. Social and Lack o f environmental and social management The project will support an Environmental L o w environmental capacity at the implementing agency and at the Training Program for EnvironmentalFocal II safeguards Iprovincial level Points at the implementing agency and the Governors' offices inthe participating provinces I as well as other relevant stakeholders. IV. OverallRiskRating: MODERATE F. Loadcreditconditionsandcovenants 57. The Conditions o f Effectiveness consist o f the following: 0 The Recipient has established the PIU at MIC, with a structure, equipment, functions and responsibilities acceptable to IDA, including a Project coordinator, a financial management specialist and a procurement specialist, all hired with qualifications and experience, and pursuant to terms o freference, satisfactory to IDA 0 The Operational Manual, with financial management, accounting, and procurement annexes, (including a section pertaining to the administration and management o f SME Grants 21 and Representative Organization Grants) has been issued and adopted by the Recipient, and approved by IDA. e The Recipient has established a procurement filing and record keeping system (including contract monitoring and contract control systems) for use o f the PIU, in form and substance acceptable to IDA. 58. The conditions o f disbursement are the following: e Recruitment o f a grant program manager and grants accountant and the establishment o f a grant accounting system as a condition o f disbursement o f grants. e Recruitment o f a project coordinator and an FM specialist for the Inhambane PIU as a condition o f disbursement for this sub-component. e Recruitment o f an FM specialist and the establishment o f an accounting system for the Nampula training centre as a condition o f disbursement for the training centre banana farm establishment and operating costs. 59. Dated covenants are the following: e External auditors for the project to be hiredwithin 3 months o f effectiveness. e The environmental specialist, legal consultant, monitoring and evaluation specialist, and essential administrative staff in the Maputo PIU to be hired within 6 months o f effectiveness. IV. APPRAISAL SUMMARY A. Economic and financial analysis 60. A quantitative economic and financial analysis was undertaken for the activities under component one which include rehabilitation activities and catalytic interventions in the private sector. A qualitative analysis was conducted for the activities under component two which provide technical assistance and advice to improve the overall enabling environment. The analysis i s detailed in Annex 9. The conclusion o f the analysis is that component one activities are expected to result in an NPV o f US$34.60 million and an economic rate o f return o f 48 percent. Component two activities are expected to result in a better business climate for business expansion andjob creation. B. Technical 61. The project was designed based on extensive consultations with Government and the private sector, lessons learned from PODE as well as recent analytical work, including value chain 22 studies, the Investment Climate Assessment, the Country Economic Memorandum, and the Doing Business Reports. The project aims to tackle key constraints inhibitingprivate-sector led growth including lack o f training, inadequate supply o f business professional services, and difficulties in accessing finance. The project contributes to a government-wide strategy for business environment reforms and selected its policy interventions to complement and reinforce other donor initiatives in the sector. The tourism and horticultural sectors deal with two priority and promising sectors for Mozambique and are viewed as pilots that could be replicated based on the experiences under the project. C. Fiduciary 62. A professional PIU will be established prior to project effectiveness to ensure that all project procurement and financial management i s conducted in accordance with World Bank guidelines. The period o f the PPF i s being used to complete the recruitment o f the PIU staff and to begin the process o f building M I C capacity for project management. The results o f the financial management and procurements assessments, agreed arrangements, and action plans are presented inAnnexes 7 and 8, respectively. D. Social 63. A number o f project components are expected to lead to favorable social outcomes, including employment generation and poverty reduction. Key stakeholders from both the public and private sector have been consulted throughout the project design and involved in the project design through participation in planning workshops and other consultative mechanisms. The tourism component will have an emphasis on the involvement and consultation o f communities in investment planning and promotion decisions and this could become a pilot for the rest o f the country. The tropical fruit centre inNampula will promote best practice in safe pesticide use and will include a demonstration farm that could be replicated by farmers in other part o f Mozambique. E. Environment 64. Potential adverse environmental and social impacts such as soil and water pollution, pesticide poisoning, loss o f vegetation, and soil erosion are anticipated under component 1 due to the funding o f (a) light infrastructure activities (establishment o ftraining centers and rehabilitation o f existing government facilities) inthe context o f support for priority elements o f Mozambique's tourism master and marketing plan and tourism strategy in Inhambane province; and (b) the construction o f a new Training Center and development o f a 50 ha banana plantation for training purposes inNampula Province inthe context o f support for the establishment o f the public-private tropical fruits centre. 65. The borrower has prepared an Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF). The RPF outlines the policies and procedures to be 23 applied in the event that project activities cause involuntary resettlement affecting standard o f living, right, title, or interest in any house, land or any fixed or movable asset acquired or possessed temporarily or permanently by people affected by involuntary resettlement by these activities. The GoM will fund the resettlement costs (ifany) under the RPF. 66. The ESMF outlines an environmental and social screening process to be applied by qualified personnel to project activities. This screening process will guide future implementersin (i) identificationofpotentialadverseenvironmentalandsocialimpactsthroughtheuseofthe the Environmental and Social Screening Form; (ii) determination o f the appropriate environmental the category as per OP 4.01;(iii) identifyingand implementingappropriate mitigation measures using the Environmental and Social Checklist; (iv) carrying out separate EA reports; (v) public consultations; (vi) review and clearance o f screening results and separate EA reports; and (vii) environmental monitoring andreporting inthe context o fthe project's M&E system. F. Safeguard Policies 67. The project has triggered OP 4.01 Environmental Assessment, OP 4.09 Pest Management, and OP 4.12 Involuntary Resettlement; the environmental category i s B. Safeguard issues are limited to impacts related to the provision o f light infrastructure and the construction and operation o f a banana plantation (50 ha) at the new Training Center in Nampula Province. To address these issues, the borrower has prepared an Environmental and Social Management Framework (ESMF), including a Pest Management Plan (PMP); and a Resettlement Policy Framework (RPF). 68. The ESMF outlines an environmental and social screening process that will allow for the identification, mitigation and monitoring o f potential adverse environmental and social impacts o f fiture sub-projects. The ESMF includes a PMP to be applied during training operations at the banana plantation. To ensure effective implementation o f the ESMF, the project will fund relevant environmental training. Component 1 - public-private tropical h i t s training centre - will support relevant pest management training. The RPF outlines the policies and procedures to be applied in the event that project activities cause involuntary resettlement affecting standard of living, right, title, or interest in any house, land or any fixed or movable asset acquired or possessedtemporarily or permanentlyby people affectedby involuntary resettlement by these activities. 69. The ESMF (with the PMP as an attachment) and the RPF have been disclosed in Mozambique and at the World Bank's Infoshop on October 29,2008. Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10) 24 Forests(OP/BP 4.36) [I [XI Safety of Dams (OPBP 4.37) [I [XI Projects inDisputed Areas (OPBP 7.60)* [ I [XI Projects on International Waterways (OP/BP 7.50) [I [XI G. Policy Exceptionsand Readiness There are no policy exceptions. * By supporting theproposedproject, the Bank does not intend toprejudice thefinal determination of theparties' claims on the disputed areas 25 Annex 1:CountryandSector or ProgramBackground MOZAMBIQUE: MZ-Competitiveness & PS Development 1. Mozambique has staged a dramatic recovery from the damage o fthe civil war. Since 1992, infrastructure has been improved and i s now approaching its pre-war levels, and incomes have risen considerably. The poverty headcount fell from 69 percent in 1996/7 to 54 percent in 2002/3. On average the economy grew by 8 percent annually since 1996. This accomplishment can be attributed to the Government's phased but determined approach to stabilization and structural reforms, as well as to concessional assistance (half o f Government expenditure), healthy agricultural growth, and fast expansion in tourism, construction, and certain manufacturing sub- sectors. Another factor was the authorities' success in attracting "mega-projects" in aluminum smelting, natural gas, and titanium mining. 2. Nevertheless, the country remains poor (US $ 330 per capita income in 2007); infrastructure is still inadequate; there are serious unmet education and health needs; and poverty rates remain high. Approximately 54% o f the population o f 21 million remains below the poverty line, according to the latest 2007 estimate. Many o f the "first-generation" reforms associated with market liberalization have already been implemented. The country now faces the prospect o f tightening macroeconomic constraints, a need for substantial institutional improvement to make growth sustainable, an increasing desire for better prioritization and management o f public expenditures, the pressing goal to eliminate absolute poverty, and the necessity to engage in massive investment in infrastructure to promote growth and combat poverty. The urban working population is expected to grow 4 percent annually until 2010, underscoring the need for a growth path withjob creation. 3. Mozambique has the potential to overcome these challenges by building on its natural resources, agricultural base, tourism attractions, and location as a transportation hub for its neighbors. Indeed, the Government o f Mozambique's (GoM) second Poverty Reduction Support Strategy (PARPA 11) covering 2006-2009, placed the private sector as the main engine for investment, growth, and employment. Realizing the vision set out in the PARPA I1 entails inproving the business environment, stimulating exports, promoting growth in sectors where Mozambique has a comparative advantage, and targeting small and medium enterprises (SMEs), which generate the greatest number o fjobs. 4. The Mozambican private sector can be characterized by two distinct types o f enterprises. On the on the one hand are the few foreign-owned export oriented, capital intensive "mega- projects" that have contributed nearly 1.6 percent to the GDP growth rate since 1998 (see the following Box ). On the other hand are the vast majority o f firms, primarily small and medium enterprises, which sell mostly to the local market, face severe resource constraints, and contribute modestly to economic growth and exports. According to the National Statistics Institute, there were 31,735 private enterprises employing 310,000 people in 2002, the last year for which such data i s available. The data breakdown reveals that almost 90 percent o f these firms were small, employing less than 10 employees, and 9 percent were medium firms employing 10-99 workers. The other salient feature o f the private sector i s the continued divide between the southern part o f the country (Maputo and the surrounding region) and the interior and northern parts. The capital region has enjoyed the main benefits from reforms in the business environment and the post-war 26 infrastructure investments; the rest o f the country continues to lag in these areas and this poses serious constraints to private sector development outside Maputo. This also limits north-south business exchanges and opportunities for domestic expansion. 5. With the exception o f the mega-projects, the export performance o f Mozambican firms has been weak with only 7 percent o f manufacturing output in2003 exported. Further, while there has been increasing linkages between the mega-projects and smaller firms, there remains great potential for deepening and expanding these linkages. Adding to the urgency o f dealing with these issues i s the'regional trade integrations within SADC, which envisions a customs union by 2010 and a common market by 2015. Indeed, despite a marginal improvement in the Doing Business Indicators in 2007, Mozambique's business investment slipped in 2008 and remains restrictive with a global ranking o f 141 out o f 181 and a regional ranking within SADC o f 10thout o f 14th. The following section expands on the main constraints facing private investors drawing from the 2009 Doing Business and the forthcoming 2008 I C A reports. PrivateSector Constraints BusinessRegulations 6. As mentioned inthe main PAD section, the GoM has indicated its awareness o fthe need to improve the business environment through a five-year Strategy and Action Plan for Business Environment Reforms. It has also enacted reforms inthe following areas over the past two years: 27 Starting a Business. A new commercial code, and a new commercial registry and notary code were passed in2006 that cut start-up procedures were cut to 10 from 13, and the time involved was reduced from 113 to 29 days. Protecting Investors: As a result o f the new commercial code, Mozambique improved its ranking in the area o f protecting investors, which measures business transparency, protection against misuse o f corporate funds, and director responsibility to shareholders. 0 Enforcing Contracts: Recruitment o f newjudges, introduction o f court administrators, and establishment o f commercial courts should accelerate the time and cost to enforce contracts. 0 Paying Taxes: New tax laws which went into affect in 2008 should result expands the coverage for simplified tax payments and introduces electronic payment and filing for social security taxes. Employing Workers: The new labor passed in 2007 provides flexibility to businesses through allowing longer terms for temporary workers, reducing notice periods for dismissals and reducing severance pay. 7. Welcome as these reforms are, they do not yet represent the type o f comprehensive change requiredto fundamentally change the landscape for the private sector. Indeed, inthe recent Doing Business ranking, Mo.zambique's overall ranking slipped by two points to 141. The following table presents the results o f the just released 2009 Doing Business Report for Mozambique and compares that with its SADC" peers. "SADCregioncompromisesAngola, Botswana, theDemocraticRepublic ofCongo, Lesotho,Madagascar,Malawi, Mauritius, Mozambique, Namibia, SouthAfrica, Swaziland, Tanzania, Zambia and Zimbabwe. 28 Doing Business2009 and 2008 Reports *The overall rankingfor 2008 has been recalculated to reflect the inclusion of new countriesfor a total of 181 economies analyzed 8. While caution should be exercised in over-reliance on a simple year to year comparison, the clear conclusion i s that Mozambique continues to underperform vis-&vis its immediate neighbors. Even in areas where Mozambique has made some recent advances, such as contract enforcement and labor regulations, it still ranks poorly compared within its region. In addition to stronger contract enforcement and more flexibility in labor regulation, other areas that need urgent attention are licensing and inspection reform and streamlining trade regulations. Mozambique has made progress in tax reform through a long-running multi-donor fund; yet tax administration remains burdensome and the impact o f these reforms has yet to be felt by the private sector. As mentioned earlier, policy level reforms should be coupled with improved public sector capacity to deliver services ina more efficient and transparent fashion. 9. The 2008 ICA data provides broader and more disaggregated insights into private sector perception regarding business environment constraints. The 2008 ICA survey revealed that non - exporting firms are more likely to complain about access to finance than any other firm. Large and small firms voiced more concerns about competition from informal firms than other firms. Burden o f informal competitors falls more on firms operating in retail sectors than manufacturing or others; taxation level i s more o f a constraint for firms located in Maputo than those operating outside o f Maputo; size seems to have an impact on firms' perception o f corruption; larger firms are more likely to complain about corruption than smaller ones; and manufacturing firms or firms operating outside Maputo are more likely to report energy supply as a serious issue than firms operatinginother sectors or those operating inMaputo. 29 10. It is usefbl to compare these perceptions with the figures from a previous survey carried out in 2003. The figures in the following table show that there were important changes in the ranking o f obstacles: energy dropped from 2ndto 6thposition and labor legislation from 1lth to 15th;on the other hand, crime, tax rates and transport moved up inthe ranking, beingperceived as more important constraints. ICA Survey Comparison Business Perceptions o f Obstacles - 2003-2008 Major or Severe Obstacles to -g Ranking Business in2008 in2003 ~ Practices o f Informal Competition 1 5 Access to Finance 2 1 Crime 3 8 Tax rates 4 7 Corruption 5 3 Electricity 6 2 Transport 7 14 Tax Administration 8 10 Workforce Education 9 12 Licensing & Permits 10 13 Customs & Trade Regulations 11 9 Access to Land 12 15 Telecommunications 13 16 Political Instability 14 Labor Regulation 15 11 courts 16 Source: ICA Surveys Access to Finance 11. Lack o f finance ranked as the first most important constraint in the 2003 I C A survey and the second inthe 2008 I C A Survey. The key findings from the 2008 survey are as follows: e Although 78 percent o f firms surveyed had effective demand for credit, only 13 percent o f firms surveyed had obtained credit from the banking sector- lower than previous surveys (35 percent - Biggs, Nasir and Fisman, 1999), in 2002 (29 percent - ICA, 2003) and in 2006 (26 percent -DNEAP, 2006). e Most lending, which comes from private commercial banks, i s highly collateralized (around 90 percent o f loans) and lent at an average annual interest rate o f 22 percent (seemingly independent o f the loan type considered). e Financing for investment by firms i s largely done primarily using internal fundshetained earnings countering the view that informal loans form the major part o f micro and small enterprise financing. 12. Commercial banks (primarily foreign-owned) dominate the financial sector. The three largest banks alone account for over 80 percent o f total bank assets. In2007, the largest banks - the Banco Intemacional de Mopmbique (BIM), Banco Comercial e de Investimentos (BCI), Standard Bank and Banco Austral (now Barclays Bank) - held altogether 87.9 percent o f assets, 30 84.8 percent o f credit, 91.4 percent o f deposits and 75.7 percent o f the banking system's own funds. Although there are thirteencommercial banks licensedto operate inMozambique, most are concentrated inMaputo and provide services primarilyto enterprises that are larger; audited, and; able to provide collateral. The geographical distribution o f branches has not experienced substantial changes. Most o f the credit institutions are still concentrated inMaputo City and o f the 128 existing districts in the country; only 28 districts have bank branches, culminating in a poor distribution o fbankingservices through to the rural areas. . 13. Several papers have recently tried summarizing the main problems and challenges within the financial system in Mozambique'2. The financial market i s characterized by being tight and weak. Specifically: limited competition has resulted in non-dynamic financial system with low levels o f financial intermediation, highprofit margins (helped on its way by excessively high fees on banking services), and a large interest rate spread between deposits and loans (to some extent driven by the high reserve requirements). Until recently, excessive domestic borrowing by the government (andnoting that interest earned on T-bills are tax free) also put an upwardpressure on interest rates and crowded out available funds to the private sector. While tight credit may reflect weak entrepreneurship and poor quality o f investment projects, a careful analysis by USAID concludes that interest rates on metical loans appear to be higher than economic fundamentals merit. 14. Beyond the main commercial banks, several institutions provide finance to small and medium enterprises (SMEs). These include 2 leasing companies and 68 microfinance institutions (3 banks, 1 micro bank, 6 credit unions and 58 microfinance lenders). However, these institutions represents a relatively minor addition to overall credit availability and average loan sizes are considerably smaller than in the commercial bank sector and they often require higher interest rates. Moreover, the USAID study provides anecdotal evidence for the limited coverage o f informal (local moneylenders) and semi-informal (trade-credits) loan markets in Mozambique. Trade credits have played an important role in financing SMEs in South-East Asia, but in Mozambique previous evidence concludes that this arrangement only takes place within ethnic networks. This suggests that financial resources are not more easily accessible from micro-finance institutions or from the informal sector than from the formal bankingsystem. 15. The data reported above has implications on how businesses are financed. The following table provides firm estimates o f the proportion o f "investment" financing that in 2006 came from internal funddretained earnings divided by (i) working capital and (ii) purchases o f fixed assets and by firm size. Results support earlier report conclusions by showing that (i)the probability o f carrying out new investments increases with firm size and (ii) financing is done primarily using internal knddretained earnings. Interestingly, only one firm in the sample obtained investment financing through informal sources (moneylender or from family or friends), countering the view that informal loans form the major part o f especially micro and small enterprise financing. l2See Financial Sector Constraints on Private Sector Development inMozambique, by NathanAssociates for USAID, June 2007. 31 Investment Financing: Micro Small Medium Large Total Purchased Fixed Assets in 2006 26.1 31.4 39.7 66.7 33.9 Percentagefinancedby internalfundshetainedearnings Micro Small Medium Large Total Fixed Assets 89.7 90.8 86.4 74.7 87.8 Working capital 85.4 81.3 74.2 73.9 80.1 Note: All numbers in percentages Source: ICA Survey 16. As in other parts o f Sub-Saharan Africa this shows that alternative sources o f credit are limited in Mozambique, and given that informal credit markets are not well-established makes it even more important to address credit constraints facing firms, especially small and medium firms, inthe formal financial system. Challengeof Informality 17. Mozambican businesses in the 2008 I C A survey identified competition from the informal sector as the top constraint to their operations. While unfair competition is well known as one o f the undesirable consequences from informality, this result i s somewhat surprising as competition with informal firms is rarely identified-in Africa and elsewhere-as one o f the most important obstacles for busine~ses'~. Given the nature o f the variables being explored, what does become clear is that more productive firms view informality as more prevalent and relevant o f an issue in their sectors. Care must be exercised when interpreting this set o f results as informality i s a complex phenomenon involving both exit and exclusion and has many different causes, Also, the phenomenon o f urban informality i s very different from rural informality and policy responses should be tailored accordingly. Informality often results from the decision o f balancing costs and benefits o f registration. Due to their small size, microenterprises may find that using informal arrangements for accessing inputs i s more efficient than having to pay the costs associated with regulatory cornp~iance'~. 18. There is now considerable evidence showing that the varying incidence o f informality found across countries with similar levels o f per capita income is significantly linked not only to the nature o f business regulations but also to the quality o f governance. The scope for action can thus be wide; it ranges from policies to encourage entry in the formal sector, including taxation and labor issues, to the governance agenda -strengthening institutions, the rule o f law, and l3This result seems to be fairly robust when considering different breakdowns o fthe sample (industry, size, employment growth performance, etc). 14Empirical evidence shows that higher levels o f regulatory burden are correlated with lower growth and higher informality rates. However, the quality o f regulation matters and can mitigate its harmful effects on growth. See Loyaza, Oviedo, and Serven (2004). 32 confronting crime and violence-. As informality tends to prevail among smaller firms, policies targeted to improve the business environment for SMEs are particularly important. Interventions should prioritize improvement o f productivity, which contributes to higher formality rates among underperforming enterprises. In the case o f micro-enterprises with limited growth potential, incorporating them to the formal economy may require other types o f interventions whose effects are likely to materialize only in the medium to long term. Those measures include changes in educational policies and improvements in the investment climate aimed at raising productivity in the formal sector and reducing the attractiveness o f operating informal businesses, There should also be recognition that informality i s likely to remain a feature o f the private sector for some time to come and therefore pragmatic approaches to improving informal sector performance through better linkages with markets and suppliers should also be considered as part o f an overall strategy. This is an area that requires further exploration and scoping with stakeholders representing GoM, the formal private sector, and informal businesses themselves. Access to Infrastructure 19. Since the end o f war in 1992, Mozambique's infrastructure has been reconstructed and now finally surpasses pre-war levels o f service, Mozambique's infrastructure was devastated during the prolonged war. Most bridges and roads were mined, railroad and power transmission were heavily damaged. Land communications between the South and the Center o f the country were completely destroyed. After more than 15 years o f reconstruction Mozambique's infrastructure approaches the level o f its regional competitors. Despite the recent improvements, infrastructure still represents a significant fraction o f costs. Infrastructure costs have an important impact on private returns and investment decisions. Combining direct and indirect costs (such as sales losses due to power outages, delays on customs, and days o f inventory) the median firm in Mozambique spends on average 22 percent o f its sales in infrastructure-related costs. When compared to most o f its regional peers, total costs are low but the direct component o f costs i s the second highest ranked level o f expenditure. Infrastructure costs as share o fthe total sales Wh , Source: ICA survey 20. The following section briefly presents the access to infrastructure in power, telecommunication, transport and logistics sectors as perceived by the Mozambican firms surveyed bythe ICA: 33 21. Power: Electricity performance improved in the perception o f firms according to the results o f the I C A 2008 survey. Electricity was perceived as a major constraint for business performance in2003 by more than 60 percent o f firms. Itwas reported as the second main obstacle to business, after cost and access to financial services. Currently, only 24.7 percent o f the firms surveyed consider electricity among the three most important obstacles to business. This i s the result o f extensive reform efforts undertaken in the past ten years. When compared to other low- income countries in the region, Mozambique's electricity sector is relatively well perceived, but despite the improvements it does not reach the performance o f middle income countries such as South Africa and Brazil. Further, perceptions about electricity are quite unequal across firms; large firms outside Maputo seem particularly constrained by the quality and reliability o f electricity services. Losses due to inadequate provision are also highly unequal across firms. Average losses inregions outside Maputo are twice as highas inthe capital, reaching 8 percent o f total sales. In sum, electricity provision in Mozambique came a long way since the beginning o f reforms. The results o f the I C A survey reflect the progress inthe sector but expose some continued weaknesses, inparticular inrural andperi-urbanareasoutside the capital region. 22. Transport: Mozambique's internal market is too small insize and inpurchasingpower to sustain increases inproduction levels. International trade is therefore necessary to promote grow at high enough rates to bring down absolute poverty and to create the number and types o f jobs needed. The implementation o f an efficient transport infrastructure i s a therefore a fundamental step to guarantee Mozambican firm's international competitiveness. Unfortunately, Mozambican firms still perceive transportation as an obstacle to investment. Despite the reforms in the sector, the absolute perception o f firms about the sector changed very little with respect to the previous I C A survey in 2003. Currently, almost one quarter o f the enterprises consider transportation a major obstacle to investment against 27 percent in2003. Inrelative terms, transportation increased in importance as an obstacle to business, moving from the fourteenth position in 2003 to the seventh in 2008. Larger firms and firms outside Maputo are the most constrained by transportation problems. 23. Mozambique's performance is quite weak when compared with its regional peers; Malawi i s the only country in which a larger percentage o f firms consider transportation as an important constraint. The real costs o f transportation justify the perception o f firms. Transportationremains a significant factor in the high cost o f doing business in Mozambique. Firms experience very high indirect cost from inadequate transportation. Sixteen percent o f firms reported production losses from theft or breakage duringtransportation. The percentage is even higher for large firms, at least 33 percent experienced losses. Almost one half o f firms report that the quality o f roads i s not suitable for their activities; this share reaches 75 percent among large firms. 24. Customs and Trade Logistics:Sixteen years after the civil war ended Mozambique has successfully completed an ambitious program o f "first generation" reforms, including trade and customs reforms. Mozambique's trade policy has improved and is among the most progressive in the region. Mozambique reduced drastically the number and level o f tariffs. The government also designed a new customs code and invested heavily in improving capacity, management and transparency in customs operation^'^. However, international comparisons expose Mozambique's still fragile logistics. The trade across borders index presented in the following figures combines I SDeWulf andSokol(2004) provide a gooddescriptionofMozambique'sCustomReform. 34 procedures, regulations and costs o f trade reported inthe Doing Business database. Mozambique's performance i s slightly superior to its closest neighbors (Malawi, Angola and Zambia), but it is still below sub-Saharan and low-income averages. 25. High transportation costs and inefficient customs result in low share o f exports. Despite the reforms, Mozambican customs are still relatively slow and inefficient. According to the Doing Business report, an average firm might take up to 26 days to export a product. Firms also face delays importing machines and materials. An imported input requires more than 30 days to clear customs in Maputo and even more time in other regions. Easy access to input and output markets i s a fundamental determinant o f international competitiveness. High transportation cost, losses and delays explain why Mozambique still has one o f the lowest shares o f sales export in the comparison group. Mozambican firms export only 2 percent o f total sales, one fifth o f the average share o f exports inthe region. 26. Telecommunication:Telecommunication is perceived by firms as the least problematic among infrastructure services. In the previous I C A (2003), firms already perceived telecommunication provision as a minor obstacle to business performance. The low percentage o f firms reporting telecommunication as a major problem decreased further in 2008. This improvement in firms' perception is consistent with the transformations that have occurred in the sector. Despite improvements, the provision o f communication services is still quite unequal across the country. 65 percent o f fixed lines are concentrated inMaputo and only 1 percent o f total lines serve rural areas. The country's performance i s similar to its regional peers in access to mobile phones (11.2 subscribers/lOO individuals) and internet (0.9 users/l00 individuals). However, Mozambique's statistics for all three services (mobile, fixed-line and internet) are still significantly below those for middle income countries. Internet usage i s still relatively low and unequal amongst Mozambican firms. Only 28 percent o f firms have an e-mail address and only 14 percent o f firms have their own website. The use o f internet services i s significantly more prevalent among larger firms, approaching the use in middle income countries. The quality o f internet services also varies with firm size. Halfo f large firms have access to high speed internet, but only 30 percent o f small firms do. Large firms are much less susceptible to inadequate provision on internet services; they suffer 60 percent less interruptions than the other groups. Part o f Mozambique's relatively weak performance is a reflection o f the highlevels o fpoverty and low levels o f literacy. Yet much o f the responsibility lies with the small and geographically concentrated supply. Sector-SpecificIssues and Challenges 27. Inaddition to the businessenvironment constraints highlighted by the DoingBusiness and I C A reports, there i s a growing consensus o f the need to also consider sector-specific issues inthe reform process. Indeed, the forthcoming Country Economic Memorandum (CEM) for Mozambique, which i s focusing on Competitiveness and Regional Integration, argues cogently o f the need to complement general business environment refoms with sector-specific policies that address the particular needs and constraints o f key sectors. The following section presents a brief synopsis o f some o f the sectors analyzed by the C E M and the recent value chain studies. 35 Tourism 28. The plethora o f Mozambique's cultural, historic and natural attractions makes tourism a tradable sector inwhich Mozambique has an inherent comparative advantage. Its linkages to other sectors, such as transport, agriculture, food & beverage, retail, financial services, construction, arts and crafts, and the potential to develop and increase revenues from a relatively unexploited resource base-such as 2500km o f coral fringed coastline-offer compelling job creation and economic growth opportunities. Indeed, Mozambique's tourism industry has grown at a rate of 13 percent per annum since 1999 and the number o f international tourists visiting the country in 2004 was estimated at 500,000 compared tojust over 300,000 in2001, 29. However, tourism's contribution to GDP inMozambique is below average, particularly for coastal countries. Direct tourism revenue was recently calculated at 1.8% o f GDP16(US$ 144 million in export earnings in 2006) putting Mozambique well below some high performing countries inthe region (e.g. Tanzania 9.7%, South Africa 7.6%, and Mauritius 32%) and less than half the average for Sub-Saharan Africa (3.9%). Other aggregate indicators such as average expenditure and average length o f stay also show below average performance. a) Average expenditure per foreign tourist (US$) b) Average lengthof stay per foreign tourist (Days) Seychelles `90 Seychelles Tanzania Tanzania South Africa South Africa i Mauritius Mauritius Namibia Namibia Kenya Kenya Botswana Botswana Zambia Zambia Mozambique Mozambique 0 500 100 150 200 0 5 10 15 0 0 0 30. Overall tourism volumes were estimated at nearly half a million in 2004 and official statistics claim over a million tourists in 200617, but it should be mentioned that the number o f ports o f entry where data i s collected doubled in 2005. Whilst it i s difficult to assess growth rates due to this unreliable data, one million visitors are significant and it is important to understand why the economic performance is relatively poor, or, as the data shows, why expenditure per tourist and lengtho f stay per tourist are as low as they are. 16 August 2007: The Economic Contribution o f Tourism in Mozambique, Sam Jones and Hanifa Ibrahimo, Ministkrio de Planificaqiio e Desenvolvimento, Mozambique. 17No report has officially been published; this figure is mentioned inthe budget speechand inthe statistical abstract o f 2006. 36 31. Indications from various studiesI8including a FIAS Value Chain Assessment in 2006 and the tourism chapter o f the 2008 CEM are that three over-riding reasons are contributing to this weak economic performance: a) absence o f large international investments capable o f driving high value markets and building local supply chains and international awareness and PR for the destination; b) high input costs and low productivity incurrent tourism businesses; c) sub-optimal use o f existing resources and attractions. Agribusiness 32. Agriculture continues to play a significant role inthis predominantly rural country, making the second largest contribution to GDP growth over the past decade (after the mega-projects) and employing nearly 80 percent o f the workforce. With the majority o f the poor being subsistence farmers inrural areas, sustaining agricultural growth i s vital to poverty reduction. Agribusinessin Mozambique has very good potential considering that the country offers some special advantages to agribusiness investors-including its extensive undeveloped, fertile farm land, its abundance o f water for irrigation, its diverse agro-ecological environments suitable for growing a variety o f agricultural products, its close proximity to the largest export market in Sub-Saharan Africa ( e.g. South Africa) and its ready access to marketing and agricultural production expertise from Zimbabwe and South Africa. However, according to the 2005 CEM, the country's agricultural potential i s scarcely tapped with only 15% o f arable land under use. Given the limited domestic market, the key to sustaining growth in this sector would be to improve the ability to export and tap the opportunities in international trade. A number o f value chain studies were undertaken looking at different aspects o f commercial agriculture. The tropical fruits sub-sector (horticulture) illustrates well the challenges and potential for most agribusinesses. 33. Before independence and the onset of the civil war, Mozambique was an exporter o f tropical fruits primarily to South Africa. Mozambique benefits from favorable soils and a climate that provides opportunities for seasonal advantages. The 1990s and early 2000s saw a number o f private sector investors experimenting with once again building up a Mozambican tropical fruit sector. This development has been foreseen by extensive value chain research commissioned by the World Bank and other during the latest years. The research identified tropical fruit export opportunities in Mozambique given that the right mix o f policies can be designed and implemented. Mozambique has the potential to grow top quality fruit such as bananas and various types o f citrus, mangoes, litchis and potentially others. However the establishment o f an export industryrequires more thanjust the existence o f agro-climatic potential: this potential needs to be realized through value chain development. Logistics, technical knowledge, skills development, quality awareness and control, introduction o f new varieties and a suitable institutional and policy framework are some o f the bottlenecks that need to be addressed in order to build up a tropical fruits industry. Inthe last couple o f years the major expansion in investment has been inbananas, 182006MintelMozambique: Travel and Tourism Intelligence: Report on the tourism market; 2007 Ministry ofPlanning and Development, and DANIDA: The TourismEconomy inMozambique: Size, Impacts and Implications; 2005 MITUR:Transfrontier ConservationAreas; Economic Potential of Tourism inMozambique; Final Report, Exec Summary andAppendices 37 primarily targeted on the South African market. Building on this, other plantings are being made inlitchi - destined for Europe, mangoes - primarily targeted on the early South African market, and macadamia nuts. Apparel 34. The apparel industry has a great deal o f potential, especially with markets inEurope open to them through preferential trade agreements, Under AGOA and EU-EPA, Mozambican clothing exports enjoy a duty-free access to the U S and EUmarkets until2012l which makes Mozambican garments 17 per cent cheaper than non-SSA countries by default. Also, as a `lesser developing country', Mozambique i s exempt from the rules-of-origin clause so that it i s free to import necessary fabrics from anywhere inthe world. Yet the industry underperforms given the country's population relative to lower population countries in the region whose apparel sectors are far greater in scale. In2005, Lesotho with 2.2 million inpopulation exported US$ 494 million worth o f apparels, Swaziland which has only a 1.1 million population exportedUS$ 190million worth o f apparels, while Mozambique's population o f 20.2 million only managed US$ 400,000 worth. Labor reform and skill i s a major constraint. Workers need more training and the minimum wage should be reduced to improve profitability (the wages in the agricultural sector are below that o f the minimumwage inthe apparel industry). Furthermore technical processes should be improved. So it is also a question o f capacity buildinginthis industry, giving the workers the skills they need to add more value to the production process. Moreover, land acquisition i s difficult as the government restricts the sale or use o f land for commercial purposes, and it requires 381 days to obtain a construction permit. Infrastructure needs improvement, especially given that there i s no functioning North-South railway. Despite all these constraints, there have been recent indications o f greater investor interest in apparel which reaffirms the potential for this industry to take o f f in the right environment. Construction 35. The construction sector plays a significant role in the development o f poor countries, but too often it is not recognized as doing such. The construction sector in Mozambique has been hovering between 3 and 3.5% o f GDP in recent years which is quite small for a fast growing country - e.g. the construction sector has typically accounted for more than 10% o f GDP in high growth developing countries. The construction market now involves itself primarily with the buildingo f high-end luxury homes as well as public works projects that are mainly donor funded. Housing construction consists mostly o f informal "brick by brick" construction in slums and the manufacturing o f traditional straw huts in rural areas, which still account for the vast majority o f housing in the country. Social housing financed by the government i s non-existent. Private commercial and industrial construction i s also limited - mostly financed through FDI. Donor funded programs have been estimated to exceed $400 million in 2007 (with only a fraction sourced locally). Another related issue i s that the development o f the construction industry i s slowed down by constraints to productive investments in industries with high growth potential in Mozambique that would spur more construction projects. Also, despite low labor costs for most o f the workforce, construction costs in Maputo are more than 30% higher than in South Africa (it gets worse further north in the country). Material costs typically account for more than 50% o f total construction costs. Material costs in Mozambique are very high because the most valuable 38 materials are imported with high transportatiodlogistic costs and import duties. Only the most basic materials are sourced locally - e.g. cement andwood - even steel has to be imported. 39 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies MOZAMBIQUE: MZ-Competitiveness& PSDevelopment 1. The project was designed with a view to maximizing the complementarities with other Bank Group and donor related initiatives. With limited IDA resources, the project aims to leverage its different components and serve as a pilot for scale-up and replication. This will be discussed in detail in Annex 4 - Detailed Project Description. This Annex will provide a brief overview o fPSD-relatedprojects inMozambique. WorldBank Group Projects" 2. Financial Sector Technical Assistance Project (FSTAP): The overall development objective of the project i s to improve the soundness o f the Mozambican Banking Sector and to improve public debt management. This will be supported by (i) strengthening the bankingsector, including improving the institutional capacity o f the Bank o f Mozambique, (ii)improving financial accountability and transparency, (iii)strengthening public debt management and (iv) improving money and government bond market efficiency and depth. The project i s co-financed by AfDB and KFW. 3, Transfrontier Conservation Areas and Tourism Development Project (TFCATDP): The project builds on the experience o f the first GEF-funded TFCA Pilot and Institutional Strengthening Project aimed at assisting Mozambique to take advantage o f unique opportunities in biodiversity conservation, as a basis for tourism and rural development. The project will institutionalize a fully participatory, multi-sectoral planning and implementation process for transfrontier conservation areas (TFCAs) and integrate environmental and social values with economic development. The project will reinforce enabling conditions for community-oriented, private sector investment inenvironmentally and socially sustainable tourism. 4. The Programa Integrado da Reforma da Educacao Profissional (PIREP) (or Technical and Vocational Training Reform Program) is a pilot program fbnded by the World Bank that aims to restructure all vocational courses in Mozambique through a demand led, stakeholder driven process to develop financially sustainable courses. This i s a US$37.5 million government program that started in July 2007 and will be implemented over 5 years. PIREP is targeting 4-5 tourism sub-sectors, which will probably include bar and restaurants; catering; housekeeping. The courses will be developed for technical schools (equivalent to secondary schools). 5. Market-Driven Irrigation Project: This project is currently being prepared and will adopt a value-chain approach to supporting investments inirrigation and related agriculture infrastructure. 6. FIAS Business Environment Project: This advisory project was developed concurrently with the MCPSD project and serves to provide diagnosis and short term technical assistance that would be carried forward under the project's business environment component. The FIAS project has two components as follows: (i)business licensing and one-stop shops: assist in operationalizing the newly created one-stop shops to ensure efficient provision o f business See Annex 13 for complete listing ofBank Group Portfolio in Mozambique 40 licensing services, and review the current business licensing environment and suggest options to streamline; (ii)improve select Doing Business indicators such as Dealing with Licenses, Trading Across Borders, RegisteringProperty and Enforcing Contracts 7. IFC Mozambique Projects: The IFC has an active portfolio in Mozambique, both on the technical assistance and the investmentside. These include: (i) The MozLink program which aims to build on the achievements o f the SME linkages program with M O Z A L and work with other mega-projects; and (ii) The Tourism Anchor Investment Project which aims to stimulate growth and investment in Mozambique's tourism sector by taking a practical hands-on approach through pro-active project development in selected tourism zones. One o f the areas targeted for an anchor investmentis Inhambane which is also the area of focus underthe MCPSD project. 8. On SME Finance, the IFC has two initiatives. The Mozambique SME Initiative which provided quasi-equity investments in SMEs; MSI i s currently in transition and its management will be contracted to a private fund manager over the next year. The second is the Africa MSME program which will provide a mix o f technical assistance and line o f credit to banks to promote their lending to SMEs; one partner bank was selected and it is expected that the program would become operationalby end o f 2008. Other Donor Projects 9. Inorder to aid ininformation sharing, promote donor coordination, andminimize possible duplications, the Mozambique's multidonor Private Sector Working Group recently undertook a PSD donor mapping exercise. The results o f this mapping exercise are presented inthe table that follows. As mentioned, the project components were developed to be complementary not only to related Bank projects but also to other donor initiatives inPSD. 41 x* 3 3 n N U C m 223 $3'E 13 I r"cz 5 - ! E 2a 3 I I 3 3 0 0 0 0 0 3 R 8 8 8 b 0 b k 3 59 e e b m N 59 .- g .-3 .ha .ha -.- tzrIn 25 Q e 8 $ 8 5l-p: 8 a, 3 s0 5 a rcl 0 0 IA E 3 0 0 3 0 II 9 3 3 3 d 0 3 3 N 3 3 N 3 3N 3 3 0 sE v1 ,u a 2 a d e"8 H 2 0 0 N CI 2 0 N 0 N 3 In 3 >I 3 v) N N m Annex 4: DetailedProjectDescription MOZAMBIQUE: MZ-Competitiveness& PS Development 1. The project would consist o f two components (improving enterprise competitiveness and promoting the business enabling environment) and a third project implementation component as follows: Component One: Improving Enterprise Competitiveness (US$14. 39 million IDA) 2. This component would enhance the competitiveness o f SMEs in and promote broad based growth through the following three sub-components: Promoting Access to Business Development Services (US$ 6.46 million IDA contribution and US$4.16 million beneficiary contribution): 3. This sub-component would enhance SMEs growth and competitiveness. This would be achieved by promoting access to SMEs to business services providers for the delivery o f consultancy, advisory, and linkage services. IDA would finance grants for SMEs and provision of goods and consulting services for runningthe management o f this sub-component. The single over-riding aim o f this sub-component is to maximize the rate o f sales growth in SMEs, compared to the rate o f growth in SMEs not supported. 4. The sub-component will deliver these two proposed activities to SMEs, intended to complement each other: 0 70% cost-sharing grants for micro-enterprises as defined by decree no. 39/2003 o f 26 November" and 50% cost sharing grants for small and medium enterprises as definedby the same decree to buy specialized outside expertise [training, consulting, etc., including related travel expenses for delivery o f these services]; 0 Free mentoring/advice for a limited period to SMEs to plan and execute a sales growth plan 5. Beneficiary SMEs will have to meet the following criteria to access support under this sub-component: 2o The decree defines micro and small and medium enterprises as follows: Micro: Have at least two o f the following three characteristics: (i)less than 25 employees; (ii) than US$25,000 initial investment ;(iii) than 10KVA less less power installed. Small: Have at least two o f the following three characteristics: (i) Between 26 and 124 employees; (ii) InvestmentbetweenUS$25,000milliontoUS2.5million; (iii) capacityinstalledbetween10to initial Power 500 KvA and Medium: Have at least two o f the following three characteristics: (i) 126and 250 Between employees; (ii) initial Investment betweenUS$ 2.5 million and US$10 million; (iii) capacity installed Power between 500 to 1000 KvA. 53 0 Be vested with a legal personality within Mozambique, dedicated to for profit activities, and domiciled inthe country. Produce a plan for business growth indicating a set o f actions it intends to undertake to achieve increased sales. 0 Have at least two o f the following three characteristics: (i) to 250 employees; (ii) Up initial Investment up to US$lO million; (iii) consumptionup to 1000 KvA Power 0 Finally, no SME may receive more thanUS$70,000 ingrants inaggregate. 6. These products will also be available to co-operatives, so long as they are commercial in nature [eg. production co-op's, community tourism co-op's] and are registered, and also for sole traders, operating commercial businesses for profit. These two products can be used to support any commercial activity contributing to the economy o f Mozambique, and operating for profit, including commercial agriculture and commercial fishing. While the program will be open to businesses in all sectors, the project will actively seek out and promote the program to SMEs in the manufacturing sector. While there is no minimumgrant size, no firm or group o f firms under common control may receive more than $75,000 ingrants, intotal. 7. Based on the demand analysis, the following opportunities were identified for the early promotion o fthis sub-component: Buildingon the development work targetingMozal duringPODE, the grant management unit will target firms indeveloping supply to large new projects, including the Tete coal project, the Arcelor Mittal steel project, the Tantanite heavy sands project, and others. Services o f relevance could include preparing for quality certification [IS0 90001; specialized internal training for staff, to build product acceptance; plus external training for marketingstaff inhow to deal with these large, sophisticated customers. 0 Buildingon GoM's investmentina cold chain inthe Moamba area (inMaputo Province), assistance could be targeted at small producers o f fresh vegetables and h i t s in steadily displacing imported produce beingcurrently usedby hotels & restaurants inMaputo; and then later, replicating this in the Inhambane tourism area; and beyond into other tourism clusters to the north. Services o f relevance could include assistance with planning packhouses & cold chains; technical help with establishing seedling nurseries; technical help on irrigation techniques and on the selection o f irrigation systems. This concept could also extend into the supply to tourism establishments o f fresh fish from local artisanal fishing boats. Services could include training in techniques o f on- boat fish handling and preservation; and advice on establishing small-scale local ice production. The Sub-Component could build on the Ministry o f Tourism initiative in building the first wave o f standard small hotels, outside the big cities, to be managed by private parties. The project could assist these private hotel management entities with setting up, training, and building a quality offering. Services might include advice on selecting suitable front-office systems; training for breakfast and housekeeping staff; and assistance linking into key tourism websites, such as World Hotel Link. 0 Similarly, this ministry i s actively encouraging community tourism ventures, particularly within conservation areas. These canbe similarly assisted, andwith similar services. 54 Later, building on the IFC-supported Tourism Anchor Investment Program, the sub- component could assist firstly smaller firms within tourism [restaurants, bars, cafes, hotel shops, local tour organizers, activity providers, bus & coach operators, etc.], and secondly, smaller firms near to each anchor, supplying goods & services to tourism entities [vegetables & fruits, gardening services, security services, laundry services, advertizing agencies, printers, etc.] 8. For an individual firm to receive assistance, the key requirement i s that the applicant firm must have written down a simple business growth plan showing that management understands the firm's current situation and plans a significant set o f measures that are likely to leadto strong sales growth. In the case o f a very small firm, this growth plan may only run to one or two pages. Once this growth plan i s set down then, inprinciple, any usage made o f outside advisory services, that can reasonably be expected to contribute to the planned growth, can be supported by a grant. The aim for mentoring is to assist the firm to carry out all the measures in its plan, usingits own resources where appropriate, and usinggrant-assisted outside resources where this makes more sense. 9. The objective is private-sector growth. Client firms will be encouraged to seek the most suitable specialized expertise for their specific requirements, wherever they wish, either inside Mozambique or beyond. As with PODE, domestic suppliers o f broad general services will benefit considerably as suppliers to grant-supported firms and to representative organizations. But it is also almost inevitable that many o f the specialized services that are crucial to building competitiveness will come from outside, particularly South Africa. It is important to note, however, that domestic BDS suppliers that are not commercial entities will be equally eligible as any other firm for support from the sub-component inorder to buildtheir businesses. 10. Sustainability i s a key issue. The Government i s understandably concerned that too much activity i s being concentrated into time-bound projects rather than building sustainability within existing institutions. However, it should be understood that this activity i s by its nature intended to be a temporary subsidy. Once firms have become convinced o f the benefits o f using outside expertise and mentoring, compared to market costs, then the subsidy should be phased out. This i s what has already happened insome developed economies that used to operate such subsidies. 11. The sustainability that will be achieved will be generated from within the assisted firms themselves in the form o f an enhanced ability to compete and to grow. Additionally, sustainability will come from within the market for business support services which will become more firmly established and broader in scope. Thus, sustainability originates in the private, not thepublic, sector. Representative Organization Grants 12. In addition to the above products, 75% cost-sharing grants will be made available to representative organizations inthe private sector for the following purposes: 0 To build the capacity o f the organization to better serve its members and thus to buildits strength, membership base, and subscription income. 55 To develop new services to be sold to members, thereby increasing its usefblness to them, and buildingfinancial strength. 0 To commission outside expert studies, surveys, research papers, etc., in support o f submissions to GoM and its agencies that are aimed at improving the regulatory environment facing members. 13. This type o f grants will be provided to benefit representative organizations o f the private sector such as chambers o f commerce, trade and industry associations and professional bodies that : 0 Are vested with legal personality inMozambique and domiciled inthe country. 0 Have elected officers inaccordance with their by-laws 0 Present a planfor purposes o fbuildingcapacity inthe organization, developing new services, and/or seeking technical assistanceto improve the business environment facing its members. 14. As mentioned, grants will cover a generous 75% o f eligible costs, but with one important proviso. The total grants extended to an organization within one o f its financial years cannot exceed the actual income received from members [not from other sources such as donors] during the previous financial year, as verified by audited accounts. Management Arrangements 15. World Bank experience with such schemes highlights the importance of operational independence. It i s vital that the Unit managing the sub-component is successfully able to withstand any attempt that might be made to exert political influence over approval decisions. The Unit will therefore will be staffed by individuals recruited from the private sector. The manager o f the Unit will be answerable to the Project Coordinator. The World Bank will monitor closely the continuing performance and independence o f this Unit. It is expected that the manager o f the Unit will be have international experience and will bring to the task direct experience o f operating similar schemes elsewhere, probably within southern Africa. The other professionals required by the Unit will bringto the task direct experience inproviding consulting and/or mentoring services to private firms. 16. This sub-component will be directed by an Operational Manual that will be incorporated inthe overall ProjectManual. Systems will bedeveloped to ensure compliance with the terms of this manual but with the minimum possible paperwork and complexity. All grants (for SMEs and private sector representative organizations) will be paid on a reimbursement basis. The program should be so simple to access that it will appeal to even the smallest formal firm. Applicants will be encouraged to apply on-line and to communicate with the Unit by email wherever possible. 17. Everyfirm applying to the Unit will be paid an initial diagnostic visit on a strictly "first- come, first-serve" basis. After that, however, the manager will be free to allocate Unit resources as he or she sees fit in order to achieve the primary objective, namely to maximize the rate o f 56 growth within assisted firms. The manager will commit to quarterly and annual activity plans, establishing detailed verifiable indicators o f activity. These will be monitored closely by the Project Coordinator, the Advisory Committee and by regular Bank supervision missions. Inthe early months o f the program there will be intensive promotion o f the program in all regions o f the country linking to as many active business chambers and associations outside Maputo as possible. 18. Recognizing the importance o f access to finance, this program will work closely with a sister World Bank Group Initiative, the IFC Africa Micro, Small and Medium Finance (AMSME) Program2'. There is a clear complementarity that will be pursuedbetween this sub- component and the IFC program as clients that come to the matching grant program for training/advice but also need finance can be referred to the IFC program at BCI; conversely, potential SMEborrowers from the IFC program who require advisory services can be referred to the IDA project grant program. This way clients can be benefit from services under both programs and each program will help build a pipeline o f referrals to the other. Regular communication and information sharing and as a first step, it has been agreed that the Business Growth Manager and the IFC Program TA Advisor would hold regular quarterly meetings to apprise each other o f developments and opportunities for collaboration. Additionally, the programs would seek to holdjoint workshops to policy makers andprivate sector representatives to informthem o fthe availability o fthese two programs for SME development. Promoting Tourism Sector inInhambane (US$5.01 million) 19. The GoM has identified tourism as a priority sector and has developed a number o f strategies to boost tourism.22 However, Mozambique i s still far from realizing its tourism potential or even matching the performance o f neighboring countries in Africa. Studies have shown23this poor performance, only 2.5% o f GDP versus a regional average o f 6.5%, i s largely a result of underinvestment in i)adequate planning, ii)appropriate infrastructure, iii)human resource development, and iv) small and medium enterprises to provide facilities, activities and goods for tourists to consume. Inhambane Province represents the greatest opportunity for tourism development inMozambique yet encapsulates these challenges. With a coastline o f over 700km o f pristine beaches and colorful unspoiled stretches o f coral reefs, the province holds a 21 The AMSME Program is an initiative to help banks across sub-Saharan Africa to dramatically increase business with micro, small and medium sized businesses that face difficulty accessing funds from the formal sector. The Programhas 3 main components: (i) Term and other Financing: IFC provides long term financing to financial Long institutions invarious forms depending on client needs; (ii)Advisoly Services: The Program provides long term (2 years) advisory services to a bank to help implement their strategy in the M S M E sector (iii) Performance Based Incentive Package: An incentive structure for both the bank and the implementing consulting firm to encourage reaching targets and overall goal achievement.The Program i s just starting inMozambique and will make an US$8.5 investment to BCI Fomento to incentivize the Bank to increase its MSME lendingportfolio. The program will work with BCIFomento over five years and i s expected to help it grow its SME portfolio 22 For example, the GoM created the Ministry o f Tourism (MITUR) in 2001, adopted a Tourism Policy and Implementation Strategy (2003), produced a National Biodiversity Strategy and Action Plan (NBSAP), and repared a Strategic Plan for Tourism Development inMozambique (SPTDM) (2004-2013). p3 2006, A Value Chain Analysis o f Mozambique's Tourism Sector. FIAS/OECD;2006, South East Africa Tourism Investment Program; A Feasibility Study. IFC2006, Tourism Activity Program, A Feasibility Study. USAID 57 tremendous potential for marine tourism. The Marine Reserve o f the Bazaruto Archipelago has pristine beaches, abundant coral reefs and rare marine animals such as turtles, whales, dolphins and dugongs, which are the principal tourist attraction inMozambique. The town o f Inhambane is one o f the most attractive historical coastal towns o f Southern Africa reflecting an intriguing history dating back to the first millennium.The Great Limpopo Transfrontier ConservationArea, which will include Zinave National Park in Inhambane Province in its second phase, represents exciting opportunities for the hrther development o f eco-tourism and the integration o f the eco- tourism product o fthe hinterlandinto coastal tourism. 20. The provincial government i s supportive o f tourism development and has prioritized the sector within its development and economic growth strategies. There is an active Tourism Directorate Department that has had technical support from the German Government since 2005. The province already has an inventory o f nearly 2500 beds in some 80 registered hotels and guesthouses representing a significant potential market for SME suppliers. An inter-sectoral government working group has been established including representatives o f the municipality, environmental directorate, local administration, tourism directorate, maritime administration and public works. Very little product offering exists outside the accommodation sector. Most o f the activities are directly linked to the existing lodges and concentrate on water-based activities. The current profile o f tourists i s split roughly 50/50 between high-end fly-in tourists who go directly to the islands on pre-paid packages and lower budget independent tourists who stay on the mainland. Whilst this kind o f tourism typically (in other coastal destination such as Mombasa, Diani, Kilifi and Malindi in Kenya and Pemba in Mozambique and Dar es Salaam in Tanzania) provides abundant inc,ome generating opportunities for local entrepreneurs, there i s little evidence o f this in Inhambane Province. Local fishermen do operate dhow trips for tourists, however only one o fthese i s an officially registered and licensed operator. 21. The rationale for supporting tourism-related job creation and income generation within the scope o f this project i s that there i s a large opportunity to develop backward linkages with local entrepreneurs and the growing tourism industry in Mozambique. There is compelling evidence that Inhambane Province represents the best opportunity for results in this sector. It is the province with the most attractive tourism resources and with the highest growth rates in terms o f investments and tourist numbers. In addition two other World Bank Group projects are working on related aspects o f tourism development in the province. The Transfrontier Conservation Areas and Tourism Development Project (TFCATDP) i s supporting specific conservation areas through legal designation, establishment o f regulations, criteria, procedures and institutional structures for planning, management and development. The TFCATDP project i s not working outside protected areas and as such will have little overlap with the proposed project activities; however the improved quality of potential investment climate o f the protected areas will have a significant effect on boosting tourism visitation to the province. This in turn will offer opportunities for employment and income generation. A second project, the IFC's Anchor Investment Program, i s also targeting and promoting Inhambane Province as an investment opportunity for the private sector. However, that program i s focused on initiating a large private sector investment and as such will also contribute to the overall appeal o f the province as a tourist destination. Part o f the rationale for this project i s that it has a role in ensuring that the other two Bank Group projects achieve broader development impacts beyond their objectives; inthis case increased employment and income generation inthe local economy. 58 22. In line with the proposed project development objectives o f achieving broad-based growth in targeted sectors and regions, the results focus o f this component i s job creation and increased incomes in tourism-related activities in Inhambane Province. To achieve these results the project will work with tourism stakeholders in the public and private sector to improve the business and investment enabling environment and to create opportunities to grow the local tourism supply chain. Drawing on a platform o f diagnostic work in the tourism sector in Mozambique, and particularly in Inhambane Province, the project proposes interventions intwo main areas; improved public sector service provision in the tourism sector, expanding the tourism-relatedprivate sector supply chain capacity. 23. In the public sector, the project will work with the National Tourism Directorate in MITUR, the Provincial Directorate o f Tourism (DPTUR) in Inhambane, the Instituto Nacional de Turismo (INATUR), the local M I C Directorate, the Governor's office, and all the relevant public stakeholders to improve the business environment and investment climate for tourism in the province. The project will support the development and implementation o f a tourism strategy and tourism master and marketing plans for the province. It i s expected that the master plan and strategy will determine a five year growth strategy for tourism in the province, including, inter alia, aspects o f tourism planning and zoning, institutional development, rehabilitation o f one stop shops, policy and regulation, statistics (building on a framework for a tourism statistical information system already created under the TFCATDP, the project will support the development o f sub-national data collection through the DPTUR) data collection, land registration database and enhanced environmental protection. The project proposes to finance priority elements from the plan and strategy and leverage these interventions to attract further investments. 24. To improve the business environment and public sector service delivery in key tourism locales, the project will strengthen the Inhambane l-stop-shop facility to provide a similar service in Vilanculos, to service the key tourism hubs o f Vilanculos, Inhassoro and Bazaruto. The project will expand the functions o f these facilities to include the development and dissemination o f Portuguese and English manuals on legislation and regulations that affect the tourism industry, including those relating to licensing, registration, land, labor, finance, maritime, and environment. The project will also fund for a two-year period a Maputo-based tourism policy advisor to advice on impact o f licensing reform for tourism businesses, promote streamlined regulations for new investors, and share lessons learns from the province with national policy makers. 25. Inthe private sector, the project will expand the tourism-related supply chain through (i) rehabilitation o ftraining facilities inInhambane, (ii)provision o f equipment to training institutes, (iii) recruitment of trainers to provide training in needed areas (languages, tour operations, boat operations, diving, fishing, artisanal and crafts development, vocational hospitality skills, business development, business operations, marketing, catering, construction, carpentry, and maintenance, etc); (iv) provision o f legal and business advisory services to the private sector to enhance their competitiveness. The project will work closely with existing projects and organizations active in the tourism sector, particularly the TFCATDP Community Enterprise Fund, IFC's Anchor Investments Program, SNV, GAPI, CARE, ESHTI, and DANIDA. The project proposes to work closely with these organizations to provide technical support in the 59 fields o f legal advice, business development, marketing and promotion, land acquisition (including brokering agreements for land with local communities), financing, accounting, supply and demand, maximizing local linkages and partnerships, quality control, human resources development and advocacy. Tropical fruits training center in Nampula (US$ 2.92 million IDA Contribution and 0.5 million Private Sector/Govt. Contribution) 26. Mozambique i s now attracting the attention o f large multinational fruit companies with the potential to release critical value chain bottlenecks. The international banana marketer, Chiquita, seeks to develop Mozambique into an alternative source o f EU bound bananas. Chiquita will commit its expertise in banana production and handling and provide long term purchasing contracts with local investors who will invest in and own the banana production operations themselves. The Government's Rural Industrialization Strategy emphasizes the importance o f promoting the development o f value-added export-oriented agricultural products inrural areas ofMozambique takingadvantage ofnew investments and this sub-component will contribute to this goal. 27. The investments inbanana production will initially take place inthe Nampula Province, a province without a history o f commercial banana production but with very good agro-climatic conditions. The lack o f experience in commercial banana production however translated into a lack o f skills. Banana investors will need trained workers in the form o f supervisors and mid- level managers to undertake the cultivation o f high quality bananas. These people will either have to be brought to the region or they will have to be trained inthe region. 28. Within the overall project, the aim o f this sub-component would be to (a) establish a public-private partnership to built up the humanresources necessary to export tropical fruits; and (b) to increase Mozambique's exports o f tropical fruits. To that end, this sub-component will support the establishment o f a national training centre in tropical fruit operations. The training centre will initially be focused on banana production and handling but will eventually diversify into other tropical fruits. The training centre will be established while investing in buildings, facilities, equipment, materials for the training centre itself, as well as the establishment o f a 50 ha banana f m which will constitute the training grounds o f the centre. Furthermore support will be given to management and personnel resources o f the training centre including cost o f tuition at the Earth University in Costa Rica. A tropical fruit advisor will also be funded in the establishment year. The project will also support the banana farm operating costs in the first year. 29. The proposedTraining Centre would be established inNampula andprovide short-course (4 to 6 weeks/course), intensive training on commercial banana operations and management for prospective supervisors andjunior managers. Safe pesticide handling practices will be an integral part o f the curriculum taught. Chiquita works with the Rainforest Alliance to satisfy a number o f environmental and social criteria and pesticide handling training will be done with the aim o f achieving Rainforest Alliance certification. The trainees would be sponsored by the investors in export banana production. These will include investors in Nampula but also the banana plantations already existing inMaputo. This sub-industrytargets the South African market rather than Chiquita and the project will thereby spread the leaming benefits from the Nampula banana 60 investments to other parts o f Mozambique. Additionally, and later on, the Training Centre would also provide access to undergraduates and graduates from Mozambique's public sector training institutions and so incorporate state o f the art knowledge on tropical fruits production and distribution into the research and extension activities o f public institutions including in other parts o f the country. 30. So as to provide low-cost but highly relevant commercial training, the Training Centre would be established and operated as a non-profit private sector business with income streams coming from receipt o f training course fees, and from the sales o f export quality bananas produced on the Centre's own 50ha irrigated banana farm (market value o f the fruit approximately $1 million per year). The farm would be managed as a separate unit, but would provide an effective, practical and comprehensive training environment for the intendedtrainees. Successfil graduates from the courses would receive formal certification o f their qualifications from IIAMandthus be nationally recognized. 31. The Training Centre would accommodate up to 30 trainees at a time. Inthe first year to 18 months, the trainers would be provided by Chiquita as part o f their contribution to this public- private partnership. At the same time, these expert trainers would be fully counterparted by specially recruited local staff who would then take over the training responsibilities fill-time. Training courses would be based on the curricular material provided by Chiquita augmented by the practical demonstrations and guidance from the trainers. Trainees would be accommodated locally by private sector guesthouse operators, at the expense o f their sponsors. The Training Centre would not have any residential accommodation. 32. The interest o f large-scale international marketers is a window o f opportunity for Mozambique. The knowledge embodied in international level banana operations is complementary to other tropical fruit operations and the investment necessary in handling facilities and the overall increased volume o f trade will create important economies o f scale in handling andtransport that may benefit other tropical fmit operations. Mozambique therefore has a keeninterest insecuring that the knowledge transfer that will occur with the start o f production o f Chiquita bananas will benefit the entire tropical fruit industry. 33. Indue course, andonce the immediately urgent need for trained commercial supervisors and junior managers i s adequately met, trainers and teachers from public sector training institutions would also be welcomed at the Training Centre and thus they would be able to adopt the training material as part o f their own curricular material in the future. It is anticipated that donors would recognize the value o f such training and provide appropriate support in terms o f training fees and local accommodation costs. Similarly, there may be options to include shorter courses for undergraduates from national training institutions with special interests in banana export operations. These courses could be o f relevance and interest to donor organizations looking for locally-based relevant practical training courses and could perhaps be awarded to outstanding candidates in the form o f scholarships. The broadening o f the initial activities, the satisfaction o f demand from the Nampula banana industry, will require the development o f a curriculum that satisfies the demand o f new users. The services provided by the training centre will also include advisory services to tropical fruit operations. 61 34. The Training Centre will provide appropriate on-site practical training courses for field operatives o f commercial export banana growers in varying aspects o f commercial production ranging from: land preparation, irrigation, land and drainage maintenance, planting, fertilizer application, chemicals handling, general field husbandry and weed control, follower-selection, leaf pruning, stem protection, harvesting, post-harvest fruit handling and preparation, fruit selection, post-harvest treatments and packing, quality control, loading and handling o f refrigerated containers. These on-site training courses would be delivered at the commercial farm under the leadership and guidance o f fully- trained trainers and experts. 35. In addition, the Training Centre will provide training o f technicians and operational managers and supervisors in particular critical management aspects o f commercial banana production and export operations, including: accounting and financial control in commercial banana farms; production control, forecasting and management; record-keeping and analysis. The overall emphasis o f all training courses will be to instill management techniques into the trainees' everyday activities so that once employed in commercial positions they will have relevant leadership skills to manage the labour and drive efficiency in operations. The longer- term potential for the Training Centre i s for the provision o f more diversified commercial training in other tropical fruits, including mango, pineapple and papaya. The Training Centre would similarly establish commercially viable plots o f each o f these h i t s to provide a practical training environment as well as other income streams from the commercial sales o f the fruit. 36. The Training Centre will be established as a non-profit private organization. It will be governed by a Board with one representative from each o f the public and private stakeholders (Governorate o f Nampula, IIAM (the Mozambique National Institute o f Agriculture Research), Chiquita and each o f current and future banana farm operators). The public-private partnership nature o f the project will be reflected in the operation o f the Board which will serve (a) as governing board for the training center; and (b) as a forum for the discussion o f institutional and policy-related constraints to the development o f a tropical fruit industry. The government will provide existing buildings and compound at Namialo and use o f the adjacent land (behind the current site). However, the management o f the combined facilities would be the responsibility o f the Board and in keeping with the way that the leasehold system works. Improvements to the buildings, and to any adjacent land would be seen as continued investment in the "public good" that is being created by the establishment o f the centre and its training and ancillary activities. As long as the Centre continues to function then the use o f the combined facilities would continue to be managed by the Board. While the centre will operate in a public-private fashion, the centre's assets will belong to Government. 37. The project would need to hire a Director and a Training Coordinator for the 3-year duration o f the project. Four expert Trainers would be provided by Chiquita at no expense to the Training Centre other than modest administrative support costs. The Training Centre would have the capacity to train a maximum o f 250 supervisors andjunior managers per year, or potentially as many as 750 over the 3-year duration o f the project. At the end o f the project, the Centre would thus have a staff o f 1 Director, 1 Training Coordinator, and 4 Trainers, plus a modest support and administrative staff. 62 Component Two: Improving the Business Enabling Environment (US$5.3 million) 38. This component will support GoM's effort to improve the business enabling environment. Specifically, the component will advance reforms based on the Business Environment Strategy, build the capacity o f key agencies that will pay a catalytic role in improving service provision for exports, and strengthen andbroadenpublic-private dialogue. Support to Business EnvironmentStrategy (US$4.2 million): 39. Working in partnership with FIAS, this sub-component would support the reforms envisioned in the Government o f Mozambique's business environment reform strategy through initiallyworking on (i) supporting reforms to improveMozambique's DB indicators; (ii) broader systemic reforms improving the business environment such as improving business start-up procedures, streamlining the business licensing regime and business tax administration; and (iii) facilitating trade. Following discussions with GoM and an extensive mapping exercise undertaken with the Private Sector Working Group, the following table was developed to present the areas o f support to be provided by the World Bank Group as well as the division o f labor betweenthe FIAS and IDA teams: ______m____.... ,Q> \: ~ IDA FIAS Product i R~CPSD project Potential intervention Starting a Minimumcapital requirement One stop shop/BAU Supporting the capacity o f business reform for business the BAUs for business start-up facilitation services for SMEs Dealing Combining procedures, issue Business with occupancy permit with final licensingiregulatory licenses inspection, silence is consent reform/ E-licensing/ (long-term) licensing database (to include forms, procedures, instructions, etc.) Property Optional use o f notaries, Registration reduction o f transfer fee, standardized forms, notaries optional Paying Reductiono f time and number o f Business taxation taxes tax payments reform, focus on improving tax administration Trading Abolish PSI, ED1system, Support the establishment across introduce e-manifest, working o f the computerized risk borders hours of border crossing, management, scanning, communications, and legislative reform 8 Protecting New securities law investors 63 9 Enforcing Bankruptcy and Insolvency Law, contracts introduce case management, special courts for bankruptcy 40. The two reform areas targeted for support under this sub-component are: Trade Facilitation (US$ 3,500,000): Provision o f Technical assistance, training and goods to support the GoM's effort to update trade-related legislation and policies, streamline procedures, systems and build capacity to government agencies involved in trade in order to lower transaction costs, reduce clearance time of imports and exports, and improve governance. Specifically, IDA will finance activities inthe following three areas: Policy, Legislation and Procedures (US$800,000) The issues identified under policy, - legislation, andprocedures required to improve the overall regulatory and trade facilitation framework. 9 Inefficiencies Identified 9 InJune2006, the government proposedalaw 9 Carry out anassessmentofthe legalimplications for the acceptance o f electronic transactions. o f implementing and making mandatoryloptional the Single Window (e.g. authentication, privacy, digital signatures, security and storage o f data, access rights, sharing agreement frameworks etc) 9 There is no clear definition of technical, 9 Develop a process model ofall of the endto end functional or proposed commercial scope for trade facilitation and regulatory control business the development/replacement o f the Single functions and map to SW/TIMS systems Window and Declaration Processing `back replacement. office' svstems 9 There is a needto improve definition ofroles, 9 Carry out organizationalreview andjobprofiling responsibilities and levels o f authority for Customs personnel. 9 The working hours and places of attendance 9 Assess costfbenefit of2417 service provision o f the Customs administration (Mon - Fri 0700 to 1500) are not flexible enough to meet the demands o f the trading community. 9 Turnaround time for decisions to be made by 9 Examine the capacity of Customs and specify Customs on for instance origin, valuation and functional requirements for databasedesign tariff clarification 9 Trade obligations are not very clear in the 9 Reviewdrafting andidentifysupport publication legislation and administrative regulations. 9 Customs legislation needs updating 9 Reviewlaws andregulations inthe context of particularly in terms o f regional integration regional integration. with neighbouring countries where the legal base is according to Englishlaw. 9 Limiteduse ofsimplifiedcustoms procedures 9 Review anddraft simplifiedprocedures 9 Customs requires prescribed forms and does P Review inthe light of simplifiedprocedures and not accept incomplete commercial documents authorized economic operator proposal. `inlieu'. P Customs needs to revise forms as anumber of 9 Carry out areview offorms andmakeproposals declaration related forms are inuse and it i s for redesign an onerous process for the traders although a 64 number o f the forms are the result o f legacy systems. > The Trade community sees the continued > Carry out impact assessment and establish a presence o f the PSI company after 18 years as transition plan a cost and time impediment to legitimate trade. > The Trade community would like to see > Examine the extent to which Customs can Customs operate as the lead agency at the perform b c t i o n s o n behalf of other Agencies border. (e.g. permits, licenses, risk assessment, inspections etc.) and prepare proposal for consideration. > The Trade community would like to see a > An assessment needs to be carried out as to the significant reduction in inspection and an extent to which this initiative i s acting as a easing o f the mandatory usage o f container barrier to trade and its costhenefit contribution scanning to regulatory control. > Customs do not apply automated Risk > Determine a policy and procedure for Risk Assessment for inspection selections. The Management (identification, assessment, Trade reports a level o f inspection at between selection and results monitoring). Review in the 20 and 30%. light o f SW/TIMS replacement and specify functional process requirements > Dutypayment remains a manualoperation. > Establish the feasibility o f introducing electronic payment inthe light of SW/TIMS replacement > The current procedure for duty drawback / > Review current procedure, identify duty suspension and VAT rebate is lengthy improvements andpropose performance metrics and inefficient. > Trader computer records are not used in > Develop PCA procedure and develop training customs control processes. Post Clearance materials Audit is not used as part o f an ongoing investigation. > IPEX's efforts on behalf o f the business > Provide training to IPEX staff, strengthen their community continue to be hampered by poor market information capacity, and establish better information capacity and limited consultative consultative mechanism with the private sector mechanism with the private sector People, Communications and Training (US $1,300,000) - The issues identified under people, communications and training required to improve the overall human resource and change management capacity o f Customs insupport of its programme of work. >PInefficiencies Identified SUDDO~ ProDosed The importance o f trade facilitation and good >PDevelop Communication Plan working relations with business is not made clear at all levels o f the Customs organization. > There are no procedures inplace to ensure that > Training Plan and all relevant Customs Personnel are kept fully up-to-date with significant national and international trade developments. > Memoranda o f Understanding do not exist P Develop MOUtemplate between the business community (Trade Associations) and Customs. 65 9 A Customs Consultative Committee exists 9 Carry out stakeholder analysis anddefine between Customs and the CTA but there i s a governance structure and procedure need to identify a broader range o f stakeholders and to create a better governance structure and procedure for this forum. 9 The current ITHRcapacity is 60 staff 9 Anassessment offuture ITstaffing requirements covering the needs o f Customs and Tax. needs to be conducted inthe light o f proposed future developments. 9 Customshascapacityto projectmanage, 9 Providearesidentprojectmanagement advisor quality assure and contract manage and functional expert to support Mozambique developments such as the SW/TIMS Customs inthe design and implementation o f replacement their Single Window and back office systems 0 ICT (US $ I,400,000) - The issues identifiedunder this sub component of ICT required to improve the immediate technical capacity o f Customs to provide a more responsive service to the business community banks. 9 There is a limited levelofservice support > Establish a Customer Relationship Management available for the trade to seek advice on capability and Customer Support centre Customs procedures. 9 The physical infrastructure and capacityat 9 Carry out a site survey o fall customs sites with.a border crossings needs updating. view to physical infrastructure developments 9 Although the organizationofthe AT is 9 Examine the harvesting opportunities that may integrated, the systems for Customs and Tax exist from the existing system replacement. remain discrete and not integrated. k A dependency still exists whereby the PSI 9 Develop a suite of reference databases for company maintains the reference data for business registry, valuation, tariff management, declaration processing. origin certificates, legislationmanagement. 42. Public-Private Dialogue: (US$200,000): Provision o f consultancies, training, goods and technical assistance to strengthen public-private dialogue mechanism. A detailed diagnostic o f the current dialogue structure will be prepared and used as a guide to design initial project activities and provide baseline for measuringprogress 66 Support to Oualitv/Standards Infrastructure (US$ 500,000) 43. Mozambique aims to broaden its export portfolio and that will require targeting markets o f higher quality products. Quality may be secured in many ways, but strict adherence to recognized standards is always part o f the answer. The Mozambican government has acknowledged this and i s supporting the National Institute o f Standardization and Quality (INNOQ) with the assistance o f the EU, UNDO, SECO and other partners. A key remaining challenge i s the strong need for prioritization and for creating market based demand-driven services in the fields o f standardization, certification andmetrology. Towards this goal, this sub- component will support the provision o f standards-related services by INNOQ in a way that i s market-led and that promotes exports in key sectors. Specifically, this sub-component will finance the cost o f goods and services to enable a twinning arrangement between INNOQ and a middle income country institution for purposes o f training and coaching o f INNOQ personnel primarily in demand assessment and policy making. In addition to the costs associated with human resources and training materials o f the twinning institution, the project will finance limitedinvestment inIT technology to assist the training activities. 44. Other developing countries have faced and still face a similar situation. A twinning arrangement with a middle income country institution would allow the transfer o f knowledge o f how to assess demand for standards-relevant services and how to choose and implement the right choices. Given the narrow type o f demand and the meager resources, the solution would likely include careful consideration o f how INNOQ operates ina context where other actors, nationally and international ones, are present too. For some standardization needs, for instance, the import o f international standards would be a more cost effective response that the development o f national standards, and certification services, as another example, may be provided privately as well as publically. It is important that the arrangement is done with a middle income country rather than a high income country, as the middle income country would be more used to deal with the need for demand analysis. 45. The twinning arrangement will consist o f training and coaching o f INNOQ personnel primarily in demand assessment and policy making by inviting personnel o f the twinning institution to short term stays in Mozambique. In addition to the costs o f training materials and the time and costs o f the personnel o f the twinning institution, the project will finance limited investment in IT technology to assist the training activities. The EU also supports INNOQ. A new 3-year project starting in 2008 will support the provision o f services in the areas o f metrology, standardization, and certification. The support o f the EU i s o f a more technical nature, while the twinning arrangement foreseen here has a policy design perspective that will complement and enrich the existing donor interventions instandard policy inMozambique. Strengthening- the Accountancy Profession (US$ 600.000) 46. This activity will support the pillar o f financial reporting infrastructure for the private sector. Currently, all the corporate entities in Mozambique, including investments with foreign participation, are affected by a serious shortage o f qualified accountants and trained accounting technicians. SMEs are especially affected. The absence o f reliable financial statements in the private sector reduces the pot,ential for cash-flow based lending. Banks and financial institutions are compelled to relay on collateral even when reliable financial statements might have 67 otherwise facilitated cash-flow based lending. This sub-component will build on the recently concluded Accounting and Audit ROSC and support the establishment o f a twinning arrangement between the newly established professional accountancy body (Order o f Professional Accountants o f Mozambique) and a strong member o f the International Federation o f Accountants. The twinning arrangement will provide technical assistance, training, and goods to the Order o f Professional Accountants o f Mozambique to enable it to function as a modem professional accountancy bodyThe twinning arrangement will provide technical assistance to the new professionalbody invarious areas including the following areas: Prepare andimplement a strategic planfor development o f the accountancy profession in line with recent international developments; Design and implement internationally comparable governance and hnctioning arrangements for strong organizational effectiveness o f the professionalbody; Strengthen professionalstandards byputtinginplace arrangements for professional education, qualifying examination andpracticaltraining arrangements; Put inplace institutional arrangements for sustainable continuing professional development activities; Conduct audit firmpractice review and provide assistance to the audit firms to build capacity for improving the quality o f audit by all audit firms, specifically focusing on capacity buildingo f the small and medium sized audit practices; Take necessary steps for the professionalbody's full compliance with the membership obligations o f P A C . Provide assistancewith the development andissuance o f implementation guidance on International Financial Reporting Standards (IFRS) and International Standard on Auditing(ISA) for the public interest entities Provide assistancewith the implementation o f simplified financial reporting requirements bythe small andmedium-sized enterprises Develop specialized training programs and deliver the training programs indifferent parts o f the country, on the use o f quality accounting information for improving financial management o f the SMEs, and for improving SMEs' access to finance from the financial markets. Component Three: Project Management, Monitoring, and Evaluation (US$3.66 million) 47. The main technical counterpart for the project is the Ministryo f Industry and Commerce (MIC). M I C i s the focal point for business policy reforms, has been very active in pursuing the PSD agenda, and has requested the new operation. Within MIC, the main interlocutor for the project has been the private sector support unit. A project implementation unit (PIU) would be established and would consist o f a project coordinator, a procurement specialist, a financial management specialist, and a monitoring and evaluation specialist. The PIU would be located within MIC to promote ownership and would have two mandates: to carry out the project management functions in accordance with IDA guidelines and to build the capacity o f M I C in these areas. M I C Capacity to manage the project would be assessed at mid-term review and a determination o fwhether to mainstream the PIUat M I C would bemade at that point. 68 48. While M I C would be the project's main focal point, the project would also collaborate with other ministries such as Ministryo f Planning and Development, Ministry o f Tourism, the Ministry of Agriculture, Ministry of Finance and others to help it achieve its objectives. A Project Advisory Committee at the national level will be established and would include representatives from MIC, Ministry of Planning and Development, Ministry o f Tourism, Ministryof Agriculture, Ministryof Finance, as well as private sector representatives in equal number. The Committee would be chaired by M I C and would provide strategic advice and counsel to the project as well as facilitate communications between the project's different stakeholders. As mentioned earlier, a satellite PIU will be established in Inhambane and the management unit o f the Nampula centre will act as the local PIU in that province; provincial level advisory committees would also be established to promote ownership andprovide guidance to the project's activities in these two provinces24.The provincial coordinators would report to the PIUcoordinator inMaputo. This component would cover the costs o fthe implementationof: e Strengthening o f MIC capacity and that o f other Government agencies involved in the Project e Provision o f training to PIU and M I C staff on IDA'S procurement and financial management policies and procedures; e Project audits e Project studies, including performance reviews and impact the implementation of a program o monitor and evaluate the Project results; e Financing o f PIU's: Operating Costs; and e The provision o f technical assistance and training to staff responsible for the implementation o fthe ESMF and RPF through the short-term Environmental Specialist at the PIU 49. A monitoring and evaluation system will be established to provide ongoing feedback on results and lessons and allow for adjustments. Monitoring and evaluation indicators are currently being developed and will incorporate indicators at the output, outcome, and PDO levels. Indicators include measurements for results at the enterprise level such as increased sales and exports; and at the national level relatedto agreed policyreform goals. 50. Finally, the Government is in the process o f establishing an SME Institute. While the project will not contribute to the establishment o f the Institute, once the Institute i s established, the project could provide limited training and technical assistance help the Institute achieve its mandate. The Institute i s intended to become the first point o f contact for SMEs seeking services & assistance. Some services will be provided within the agency. Where the required services or 24Inthe case of activities inNampula, it is expectedthat the Training Center's board of governors would also act as the Project's provincial level advisory committee. 69 assistance are not available internally, the agency will operate as a referral agency. So, for instance, where an SME requires assistance with entering into export markets, it will be referred to IPEX, the export promotion agency. A similar relationship is envisaged betweenthe matching grant sub-component and the SME Institute. Thus, the SME Institute is likely to become an important source o freferrals for the private sector for a range o fproducts and services. 70 Annex 5: ProjectCosts MOZAMBIQUE: MZ-Competitiveness& PS Development 1.1. PromotingAccess to Business Development 6.46 4.16 10.62 Services Environment 2.1. Business Environment Reforms 4.2 4.2 2.2. Sumort to OualitdStandards Infrastructure 0.50 0.50 2.3 Strengthening the Accounting Professions 0.60 0.60 Component3: Support to ProjectImplementation 3.66 3.66 ? . Unallocated 1.05 1.05 PPFRefund 0.6 0.6 TotalProjectCosts 25.00 I 23.66 71 (million) Taxes) (1) Consultant's Services, Goods, Operating Costs, 12.84 100% IWorks, and Training for Managementof Sub-components 1.1and 1.3 and Components 2 and 3 (2) SMEGrants a. for micro-enterprises 1.o 70% b. for small andmediumenterprises 3.O 50% (3) RepresentativeOrganization Grants 0.5 75% (4) Tourism inInhambane( Consultants' Services, Goods, 5.01 100% Operating Costs, Training, and Works ) (5) Training CentreBananaFarm Establishment 1.oo 100% I(Consultants' Services, Operating Costs, Training, and gFkk!fund ofPreparationAdvance 0.6 100% 72 Annex 6: ImplementationArrangements MOZAMBIQUE: MZ-Competitiveness& PS Development 1. The GoM will borrow US$25 million from IDA for the project's implementation. The project's duration i s expected to be for five years from 2009-2013. The project will be overseen by a National Advisory Committee which will provide overall strategic advice and counsel to the project. The Committee will be chaired by the Minister o f Industry and Commerce and will consist of high-level representatives from Government and the private sector. Government representatives will include the Ministers (or hisiher delegate) o f Planning and Development, Finance, Tourism, Agriculture, and Environment; Governor (or delegate) o f Bank of Mozambique and Executive Director of the SME Institute. Private sector representatives will include business associations, financial institutions, and private investors. The committee will meet on a quarterly basis and will review the Project's progress against the agreed performance indicators to address any issues that could adversely impact's the project implementation or attainment o f its objectives. 2. The day to day management o f the project will be delegated to a professional PIU which will be housed at MIC. The PIU act as the committee's secretariat and will be responsible to report to the committee, coordinate the committee meetings, prepare the records o f the committee meetings, and liaise with the other ministries as necessary. The PIU will be staffed with a fill-time project coordinator, procurement specialist, financial management specialist, an environmental specialist, legal consultant, monitoring and evaluation specialist, and administrative support staff, The PIUproject coordinator will report to the Minister o f Industry and Commerce. The goal i s to mainstream the project management activities into MIC; this would be done following an assessment o f MIC's capacity after the project's mid-term review. As mentioned earlier, the terms o f reference o f the PIU staff will include provision o f training to counterparts at M I C (and other involved ministries) to build their capacity inthe different project management hnctions. Annual action plans will be produced by to include: (i) project activities to be carried out, (ii) procurement plan, (iii) disbursement schedule, (iv) operating costs o f the project; and (v) annual training budget. 3. The part-time environmental specialist will be responsible for (i)overseeing the implementation o f the provisions o f the ESMF and RPF; (ii)arranging for environmental training at the provincial level for staff responsible for implementing the environmental and social screening process outlined in the ESMF; (iii) arranging for the recruitment o f qualified professionals to prepare resettlement action plans (RAPS), if required; (iv) recruitment o f qualified EA consultants to carry out EAs as necessary; (v) arranging for the review and clearance o f the screening results, EA reports, and RAPS;and (vi) overseeing environmental monitoring activities at the provincial level andreporting the results to the PlU. 4. The PIU will be in charge o f overseeing the fiduciary and overall reporting for the project, inline with Bank Guidelines. To assist it inthis task, satellite PIUs will be established in Inhambane and Nampula to oversee and implement the activities in these two provinces. In Inhambane, it i s expected that a local coordinator and an accountant will be recruited at the PIU inaddition to a Small Business Advisor, and an Environmental Specialist. InNampula, the staff o f the tropical h i t s training center will double as the provincial project implementation unit 73 with the director of the center serving as the Nampula provincial coordinator. The provincial coordinators would report to the Maputo-based coordinator. In each o f these two provinces, provincial level Advisory Committees will be established which will consist o f representatives from both public and private sector stakeholders. In Nampula, the Board o f Governors o f the tropical fruit training center will double as the Nampula provincial level Advisory Committee. These committees will provide advice and support to the project's activities and will help to promote local ownership and ensure that activities remain responsive to local needs. 5. The environmental specialist inInhambane will be responsible, among other taks, for (i) providing environmental training to members o f enterprises, tourism operators, tourism schools; (ii)developing and implementing a Training o f Trainers (TOT) Program; and (iii) assisting inthe design o f school curriculas to include environmental issue. InNampula, safe pesticide handling practices will be an integral part o f the curriculum taught. Pesticide handling training will be done with the aim o f achieving Rainforest Alliance certification. 6. As noted above, the PIU will be responsible for ensuring that all fiduciary requirements(procurement, financial management, environmental screening, monitoring and evaluation and reporting) are successfully maintained. It will be responsible for financial management and coordinate project accounting, maintain overall records and manage disbursements for the IDA project. The PIU will produce quarterly financial monitoring reports and annual financial statements and ensure their timely audit in accordance with International Auditing Standards. While the PIU will be in charge o f the overall management, coordination, fiduciary and reporting o f the project, it will rely on the technical input and advice for the development o f consultants' TORSand specification for the procurement o f goods and works from INNOQ, Customs, IPEX GASP, Order o f Accountants for their relevant sub- componentdactivities (see figure 1on the followingpage for project organigram). Monitoringand evaluationof outcomes/results 7. The monitoring and evaluation (M&E) system will be based on the agreed Results Framework and monitoring arrangements. Project design has been guided by a results framework intended to be useful for both project management and World Bank supervision. This framework focuses on the project development objective's outcomes (PDO) to be achieved and the intermediate outcomes expected. The PIU will be responsible for conducting M&E activities. Baseline data and target values for all the agreed indicators will be verified and confirmed by the PIU inpartnership and collaboration with the designated technical staff ineach implementing agency. The PIU will remain responsible for the data collection, analysis, and reporting o f the agreed project development outcome indicators. The primary monitoring mechanism will be quarterly reports and annual reports prepared by the Project Coordinator and presented to the Advisory Committee and IDA. These reports will assess achievements against the baseline values defined in the matrix for arrangements on results monitoring and overall project progress using the indicators defined in the results framework. All reports will be submitted to the World Bank and shared with other development partners as required. A mid- term review will be carried out at the half way point o f the project. An Implementation Completion Report (ICR) will be undertaken after completion o f the project. 74 Figure 1:ProjectOrganigram ProjectAdvisory Committee (Chaired by Ministerof Industryand Commerce) Project ImplementationUnit (ProjectCoordinator,Procurement Specialist, --+ FinancialManagement Specialist,Monitoring&Evaluation) 4 Component One I Component Two - Sub-component 1.l: Trade FacilitationReform Grant Management Unit Sub-Component 1.2: Sub-Component 2.1.2: lnhambaneProjectImplementation BusinessLicensingReform - (GASP) Sub-Component2.2: Quality and Standards (INNOQ) - t Nampula Training Centre Management Unit Sub-Component2.3: Strengthening Accounting (Orderof Accountants) 75 Annex 7: FinancialManagementand DisbursementArrangements MOZAMBIQUE: MZ-Competitiveness & PS Development INTRODUCTION AND BACKGROUND 1. The financial management assessment was carried out in accordance with the Financial Management Practices Manual issuedby the Financial Management Board on 3 November 2005. The objective o f the assessment was to determine whether the Ministry o f Industry and Commerce (MIC) has acceptable financial management arrangements which will ensure: (1) that the project funds are used only for the intendedpurposes inan efficient and economical way, (2) the preparation o f accurate, reliable and timely periodic financial reports, and (3) that the entities' assets are adequately safeguarded. 2. A previous PSD project (the PODE) experienced significant project management constraints, including in procurement and financial management. A special audit was conducted on the project subsequent to its closure. The audit concluded that the capacity to manage the project had been extremely weak, with key functions severely understaffed, leading to an adverse affect on the project's results, especially sustainability. The new project under preparation, MCPSD, i s thus starting by focusing on capacity building in FM and Procurement, as well as Project coordination, at MIC, inorder to avert the previous capacity relatedproblems, COUNTRY ISSUES 3. The country's public financial management system has previously been noted as weak in diagnostic studies carried out in this area. The most recent o f these i s the Report based on the PFM PEFA Strengthened Approach (2006), which itself was a follow up to the country's first Public Financial Management Assessment conducted in September 2004. Prior to that, a Country Financial Accountability Assessment (CFAA) had been conducted in 2001. These early reports observed that the public sector financial management systems in Mozambique were weak and that the overall public sector fiduciary risk in Mozambique was high. Furthermore, although satisfactory improvements had been registered in the management of the economy, the comprehensiveness and transparency o f the budget was poor, the medium-term planning and budgeting was weak, while budget execution and accounting and reporting presented serious weaknesses. 4. Coming out o f these diagnostic reviews, the Government o f Mozambique, with the support o f its development partners, instituted a number o f reforms in an effort to address the weaknesses. These initiatives included the introduction o f a new Financial Management law that forms the basis for the introduction and implementation o f a computerized integrated financial management information system, e-SISTAFE, which has been rolled out in the Ministry o f Finance, the Ministry o f Planning and Development, and the majority o f line ministries at national level. To accompany these, the government also: (i) issued regulations for the Financial Management law; (ii) initiated the introduction o f a new and more-detailed hnctional classifier into the budget; (iii) introduced restrictions on bank accounts held by public institutions; (iv) started to incorporate off-budget revenues as well as donor-funded expenditures into the budget; (v) initiated training for budget staff in double-entry accounting; and (vi) established a 76 consolidated electronic treasury account to improve control o f treasury operations and cash management. 5. Comparing the situation in 2004 to that o f 2006, the PEFA report confirmed that significant improvements had been achieved in the quality o f PFM systems and processes, particularly inthe areas of: 0 Payroll, Procurement, and Internal Controls; 0 Cash Management; 0 Donor Practices, especially predictability o f budget support disbursements; 0 RevenueCollection and Management. 6. On the negative side however, the overall indicators covering accounting, recording, and reporting appear to have deteriorated slightly during the period, although even therein, improvements have been noted in the timeliness and regularity o f account reconciliations, and the timeliness and regularity o f in-year budget reports. What has not happened is a Public Expenditure Tracking Survey (PETS) inthe last three years. 7. The report noted that the quality o f the PFM was expected to continue improving as a natural consequence o f ongoing reforms such as e-SISTAFE; but indicated that this would take some time. INSTITUTIONALARRANGEMENTS 8. The Ministry o f Industry and Commerce will be the lead implementing ministry. A National Advisory Committee will be established and will provide overall strategic advice and guidance, and will be chaired by the Ministry o f Industry and Commerce. Its composition will include high-level representatives from Government and the private sector in equal number. Government representatives will include Ministry o f Planning and Development, Ministry o f Finance, Bank o f Mozambique, Ministry o f Tourism, Ministry o f Agriculture; while private sector representatives would include business associations, financial institutions, and private investors. The PIU will act as the committee secretariat and will be responsible to coordinate the committee meetings, liaise with the other ministries as necessary, and keep records o f the meetings proceedings. 9. The day to day management o f the project will be delegated to a professional PIU which will be embedded inthe MIC. Inthe first phase o f the project, the PIUwill be staffed with a fill- time project coordinator, procurement specialist, financial management specialist, monitoring and evaluation specialist, and administrative support staff, The PIU project coordinator will report to the Minister o f Industryand Commerce. To achieve this, the terms o f reference o f the PIU staff will include provision o f training to counterparts at M I C (and other involved ministries) to build their capacity inthe different project management functions. 10. The PIU will be in charge o f overseeing the fiduciary and overall reporting for the project, in line with Bank Guidelines. To assist it in this task, satellite PIUs will be established inInhambane and Nampula to oversee and implement the activities inthese two provinces. In Inhambane, it is expected that a local coordinator and an accountant will be recruited and will be 77 housed at the governorate. The Nampula Institute's management will act as the satellite PIU for the activities in that province. The provincial coordinators would report to the Maputo-based coordinator. In each o f these two provinces, provincial level Advisory Committees will be established which will consist o f representatives from both public and private sector stakeholders. These committees will provide advice and support to the project's activities and will help to promotelocal ownership andensure that activities remainresponsive to localneeds. 11. To manage the matching grant component, a separate `Grant Management Unit' (GMU) will be contracted, reporting to the PIU. The GMUwill be an independent professional unit set up to manage the grants inaccordance with a `grants management manual' to be designedfor the purpose. OVERALLPOLICYGUIDANCEFOR FINANCIAL MANAGEMENT 12. The M I C Director o f Administration and Finance (DAF) will have overall responsibility for the accounting and financial management for the project. However, during the period from start to mid term, it i s expected that the DAF will exercise its control through the PIU FM Specialist mentioned above. The DAF's duties will include: 0 establishing indicators o fprogress and performance inplanningand financial management 0 providing a platform for discussion and monitoring the indicators 0 ensuring proper review and follow up where necessary o fwork plans, financial reports andaudit reports 0 ensuring that reports are prepared and circulated on time Governance and Anti Corruption 13. The government o f Mozambique approved an Anti-Corruption Law in 2004. The law stipulates that all contracts to which state or municipal bodies are party must incorporate an anti- corruption clause and that whistle blowers are protected. Public officials now have to present a list o f their assets every year and a final list on leaving office. Critics argue, however, that although the law i s extensive in scope, implementation i s lacking. The Central Office for Combating Corruption (GCCC) has been established within the Attorney General's Office, replacing the now defunct anti-corruption agency from 2003 (known as the Anti-Corruption Unit). The GCCC carries out investigations of complaints in relation to corruption-related offenses within the public sector and has delegations in Maputo, Beira and Nampula. The unit receives an increasing number o f reports on corruption, but the number o f investigations and prosecutions i s still low, due partlyto under-staffing and lack o f funds. 14. While no specific issues o f governance and accountability came to light during the FM assessment, the following steps will be undertaken to minimize the incidence o f corruption during implementation o fthe project: 78 Reimbursementapproach to matchinggrants: only beneficiaries/applicants producing proof o f payment for the full amount will be reimbursed the 50 -70% % provided by the matching grant component (75% incase o fbusiness associations). 0 PFM system development :To enhance the use o f national systems inthe management o f the credit proceeds, as well as ensure adherence to laid done procedures and controls, all funds flow, accounting, and reporting for the M I C and Inhambaneprovincial activities will be through e-Sistafe, the government IFMIS. Advances will only be considered for the GMU andNampula Training Institute, both o f which will not be accessible through e- SISTAFE; 0 ExternalAudit: The TOR s for the auditors will include specific responsibilities towards the detection and reporting o f fraud and corruption inproject activities. 15. The above steps are anchored in the Mozambique country assistance strategy's three pillars for achieving growth with equity, namely: i) Strengtheninggovernance; ii) Spurringbroad-based economic growthby improving the business environment; iii) Improvingtheprovisionofservices,particularlytothepoor. RISKASSESSMENT 16. The financial management arrangements should be strong enough to: (i) that funds ensure are used only for their intended purposes inan efficient and economical way while implementing agreed activities; (ii)enable the preparation o f accurate and timely financial reports; (iii) to ensure that funds are properly managed and flow rapidly, adequately, regularly and predictably; (iv) enable project management to monitor the efficient implementation o f the MCPSD; and to (v) safeguard the assets andresources procuredusingproject funds. 17. Inorder to ensure a strong financial management system, the implementing units should have an adequate number and mix o f skilled and experienced staff, the internal control system should ensure the conduct o f an orderly and efficient payment and procurement process and the proper recording and safeguarding o f assets and resources. The accounting system should support the project's requests for funding and meet its reporting obligations to both the Government and IDA. Lastly, the Project's financial statements and internal controls should be the subject o f an independent audit. 18. The table below shows the results o f the risk assessment from the Risk Rating Summary. This identifies the key risks that management may face in achieving the project's objectives, together with the appropriate ratings. It also outlines the risk mitigating measures that are incorporated into the project design. 79 8 m 0 00 E E -1 it - - A 19. The FM risk for the project i s rated substantial, with the residual rating rated moderate after implementation o f the agreed strengthening arrangements. The general improvement in the country's PFM systems has been noted, and it is expected that activities inthe provinces will be accounted for through e-SISTAFE for Inhambane, while a stand alone system, preferably one in use by other stand alone colleges, will be designed and installed at the Nampula training institute as part of the project's strengthening o f that institute. An appropriate grants management and accounting system will be designed and installed to manage the matching grants component (grants manual being finalized). Strengths andWeaknesses 20. The main strengtho f the arrangement is use o fthe government accounting system, which enables the seamless incorporation o f the project activities into the ministry's ongoing work. This in particular allows incorporation of project activities in the ministry's budgeting and review process, and ensures that even after completion o f the project activities, targeted activities can continue to be on the ministry's radar annually. 21. The mainweakness will relate to the strength, inthat this is one o fthe pilot projects to be put on CUT. It is expected that there will be challenges in making this imbedded PIU work as effectively as would a stand alone PIU, as the normal government bureaucracy will obviously be felt in the completion o f some transactions. It i s hoped that the inclusion o f the specialist advisors will help mitigate the bureaucratic drag that might slow down project execution. FundsFlow MechanismsandDisbursementof funds 22. The project will operate one Designated Account as follows: 0 US$ Designated Account maintainedinthe Centralbank, andmanagedbythe PIU under the MIC. 83 World Bank ~ I MOF(DNT) I GMU Comniereial Bank A Grant beneficiaries and service providers 23. The Designated Account funds will be disbursed as follows: i) On CUT - The main PIU and Inhambane Provincial Component. These will be channeled through the Government 'single treasury account, CUT, following national procedures. Thus hnding requirements for the Inhambaneprovincial component will be accessed directly through the CUT at the InhambaneProvincial level. ii) Off CUT - The Nampula Training Centre, because Recipient's Government Public Financial Management System (e-SISTAFE) i s not yet available in its area o f 84 operation (when it becomes available the sub-component will move On-Cut); and the Grant Management Unit, because o f the special feature o f this activity. Commercial Bank accounts will be opened for these two components. Requests for advances will be made to M I C on a quarterly basis, based on approved work plans. Follow up advances will be based on satisfactory retirement with the PIU at M I C o f preceding requests. The commercial bank accounts will be managed by the `provincial PIU' in Nampula and the Grant Management Unit respectively. Hiring o f the requisite FM staff for these units will be made a disbursement condition for each component, as will identification o fpoint FMstaff to handleproject matters inInhambane. Disbursement 24. The project will use Report- based disbursement procedures to operate effectively through the CUT. This will be effected by producing quarterly disbursement IFRs .Disbursements will be on quarterly basis. Upon effectiveness o f the Financing Agreement, an initial advance, based on an estimate o f six months forecast financing requirements will be disbursed into the DA to cover eligible expenditure. 25. The Bank issued a "Disbursement Letter" which specifies the additional instructions for withdrawal o fthe proceeds o f the Credit. FINANCIAL MANAGEMENT INTERNAL CONTROL AND ACCOUNTING PROCEDURES 26. Accounting will be e-SISTAFE based, with internal controls derived from standard government accounting and procedures as issued by Treasury. However, procedures relating specifically to Bank document processing and reporting need to be developed and captured in a FM procedures manual for the MIC PIU and Inhambane provincial office as indicated earlier. Accounting Procedures for the Grant Mnagement Unit and the training Centre in Nampula will be different as they will not operate online with e-SISTAFE, hence separate manuals for these components need to be developed for use by the FM staff to be hired. Finalization o f all the FM manuals will be regarded as disbursement conditions for the respective component. The manual for the main PIU is meant to be producedby the FMSpecialist to be hiredby the PPF. ACCOUNTINGSYSTEM 27. The accounting system is used to track, record, analyze and summarize the financial transactions relating to the project. The accounts are prepared on a cash basis inaccordance with Mozambique government requirements, which are said to equate to International Accounting Standards. 28. Accounting staff within the M I C and Inhambane province have been trained on e- SISTAFE, although o f course additional training will be required for any new staff hired to satisfy requirements o f the project. Ongoing support will ensure proper maintenance o f the system and that appropriate controls are instituted to safeguard the confidentiality, integrity, and availability o f the data. For these components, the existence o f the direct link to e-SISTAFE 85 helps to reduce the risk o f human errors inrecord keeping, and enhances efficiency inpreparing reports. 29. The project will support the establishment o f professional college administration for the Training Centre inNampula. As part o f this professionalization, an FMperson will be hired, FM procedures designed and encoded in a manual o f procedures, and an appropriate accounting system installed. Similarly, as part o f the design o f the Grant Management Manual, accounting procedures for the grants management unit will be designed, accounting staff hired, and an appropriate accounting systeminstalled. 30. Documentation will be retained at the provinceshmplementing units and made available upon request during the regular reviews carried out by M I C or during supervision and audit missions. REPORTINGARRANGEMENTS 31. The objective o f the reporting system is to enable the production o f sufficiently detailed and regular information to assist inthe management and monitoring o f the implementation o f the project. The PIU under the M I C will be responsible for consolidation o f all project activities into a single report. This will incorporate the activities o f the separatehtand alone Grants Management Unit, as well as the operations at the provinces (Nampula and Inhambane). 32. Quarterly reports in a format to be agreed will be prepared and submitted to the Bank within 45 days o f the end o f each calendar quarter reported on. The financial reports will be designed to provide quality and timely information to project management, implementing agencies, and various stakeholders on project performance. These quarterly reports include Designated Account Activity Statements, Summary Statements o f DA expenditures subject to Prior Review, as well as DA expenditure not subject to prior Review; Sources and Uses o f Funds; Detailed Use o f Funds Schedule by Project Component/ Disbursement Categories, comparison with budgets; and short-term forecasts o f expenditure. Reporting by the two satellite PIUs in InhambaneandNampula, as well as the Grants Mangement Unit, will follow largely on the agreed report formats for the project to enable easy consolidation o f those inputs into the full reports to the Bank. The provincial PIUs will be required to report to the main PIU within 30 days o f the end o f the quarter to enable the main PIU to vet and incorporate their inputs into its submission to the Bank. A narrative summary o f implementation highlights for the quarter helps the readers understand the financial statements better. 33. Annually, audited accounts will be prepared and submittedto the Bank within six months o f the end o f the financial year audited. The audits will be conducted in accordance with international standards on auditing. The Annual Financial Statements for the project will include: a Statement of Sources and Uses of Funds showing funds from IDA and how they were applied, a Summary of Expenditures analyzed by both Component and Category, and the supporting Notes in respect o f significant accounting policies and accounting standards adopted by management; Designated Account Activity for the Year showing deposits and replenishments received, payments substantiated by withdrawal applications, interest that may be earned on the account and the balance at the end o f the fiscal year; an Implementation Report, which would be a narrative summary o f the implementation .progress for the project; and a Summary of 86 Withdrawals using IFRs, listing individual withdrawal applications by reference number, date and amount. OVERSIGHTARRANGEMENTS:AUDITS INTERNAL AUDITING 34. The Ministryo f Finance plays a central role inthe management o f public finances and in the coordination o f the implementation o f SISTAFE. Its organizational structure includes an Inspectorate General o f Finance (IGF). For operational purposes, the IGF is split into three geographical teams based inMaputo, Nampula, and Beira, with each team covering provinces in the southern, northern, and central regions respectively. Any internal audit reports produced will be used to compliment bank supervision efforts, as well as give guidance on audit emphasis for the external audit (below). EXTERNALAUDITING 35. The Tribunal Administrativo (TA) is constitutionally mandated to audit all government projects. The audit may be subcontracted to a firm o f private auditors, with participation by TA staff in the actual audit (private audit firms would be unable to access e-SISTAFE without this assistance). Where the audit i s subcontracted, the selected external auditor will be acceptable to IDA and will conduct a year-end audit according to international Standards on Auditing, based on terms o f reference acceptable to IDA. At this time, audit reports are not published in Mozambique, nor are they reviewed by Parliament. GoM will prepare the audit terms o f reference inconsultation with the Bank. 36. The audited financial statements, together with the auditor's report and management letter (incorporating management's comments) covering identified internal control and accounting system weaknesses, will be submitted to IDA within six months o f the end o f each financial year. A single audit opinion will be issued and will cover all project income and expenditures, Designated Accounts and quarterly reports. Any firm o f auditors subcontracted to carry out the audit will meet IDA'Srequirements in terms o f independence, qualifications and experience. FMAction Plan 0 Finalize the TOR and the schedule for hiring the external auditors (MIC, concluded during negotiations) Engage required FM staff (an FM Specialist / advisor for the main PIU by effectiveness; FM Specialists for Inhambane, Nampula, and the GMU as a condition o f disbursement for each sub-component); 0 Finalize the customized FM Procedures Manuals for each o f the main PIU, the Provincial PIUs and the GMU- as part o f the Operations Manual (by effectiveness) 0 Install a formal accounting system for the Nampula training Centre and the GMU (main PIU to manage, by the time disbursement i s required for the respective component); 87 0 Contract project external auditors (MIC, within 3 months o f effectiveness) Conditionality: Effectiveness 0 Engagement o f the FMSpecialist for the main PIUand Completion o f the FMProcedures Manual. Disbursement 0 Recruitment o f a grant program manager and grants accountant and the establishment o f a grant accounting system as a condition o f disbursement o f grants. 0 Recruitment o f a project coordinator and an FM specialist for the Inhambane PIU as a condition o f disbursement for this sub-component. 0 Recruitment o f an FM specialist and the establishment o f an accounting system for the Nampula training centre that has been assessed as adequate by the Association as a condition o f disbursement for the training centre banana farm establishment and operating costs. DatedCovenants 0 External auditors for the project to be hired within 3 months o f effectiveness, Financia1Covenants 37. A financial management system, including records and accounts will be maintained by the M I C and related implementing agencies for the life o f the project. Financial Statements will be prepared in a format acceptable to IDA, and will be adequate to reflect resources and expenditures o f the project, inaccordance with sound accountingpractices. SupervisionPlan 38. Supervision will be risk based, and will include: review o f quarterly IFRs; review o f annual audited financial statements and management letter as well as timely follow up o f issues arising; and participation in project supervision missions as appropriate. The Bank Financial Management Specialist in charge o f the MCPSDP will play a key role in monitoring the timely implementation o f the financial management arrangements. As a substantial risk project, a minimumo ftwo supervisionmissions will be fieldedper year. Conclusions 88 39. The overall conclusion of the assessment is that the overall risk i s substantial and that the Bank has asked the M I C to take remedial actions including: (i) the preparation of customized Manual o f Financial Procedures for each component to document procedures for withdrawing and reporting Bank credit proceeds as a compliment to prevailing G O M financial procedures and regulations; (ii) agreement on the format of IFRs and annual financial reports; and (iii) o f TORs audits2'; iv) hiring and installation o f the appropriate accounting systems in the case o f the Training Centre and the GMU. The timing of the implementation o f the recommendations i s per the conditionalities above. 25Agreement on the format o f IFRs and annual financial reports and TORs o f audits were concluded during the project negotiations 89 Annex 8: ProcurementArrangements MOZAMBIQUE: MZ-Competitiveness& PS Development (Recommended length 2-4 pages) A. General 1, Procurement for 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 revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006 and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank inthe Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementationneeds and improvements ininstitutional capacity. 2. The Government and World Bank, with the support o f the KfW and the African Development Bank, have carried out in 2008 an update of the Country Procurement Assessment Report (CPAR). The 2008 CPAR highlights that the Country has made considerable progress from the last CPAR, the government has adopted a new Procurement Regulation which make progress towards meeting the requirement o f OECD D A C indicators. Challenges lying ahead were also identified and, among others, corruption i s seen as a challenge. However, governance issues are high on the Government agenda. Bank and Partners will continue to engage with Government and aid the implementation o f the 2008 CPAR which will aim to strengthen, among others, the availability o f reliable procurement information to enable effective procurement management and public monitoring; an effective complaint mechanism to disclose abuse o f the systems and allow for effective remedies while maintaining the efficiency o f the process; effective internal control and audit mechanisms sensitive to "red flags" on fraud and corruption to ensure enforcement and limit abuse and a capacity-building system for public procurement mainstreamed into the national systems. 3. Procurementof Works: Works procured under this project would include: construction and Maintenance o f Tourism Training Center, construction o f greenhouses, rehabilitation o f One-stop shop, building farm office among others. N o ICB contracts are likely to be procured under this credit. 4. Procurement of Goods: Goods procured under this project would include: vehicles, IT equipment, furniture, office equipment, communication equipment among others. N o ICB contracts are likely to be procured under this credit. 5. National Competitive Bidding (NCB): NCB procedures shall apply to contracts for works and goods estimated to cost less than the equivalent o f US$2,000,000 and US$300,000 respectively. N C B shall be carried out in accordance with the Mozambican Procurement Regulations embedded in Decree Number 54/2005 enacted on December 13, 2005, with the 90 following exceptions: (a) Domestic preference will not apply, even when foreign bidders submit bids; (b) no bidder, foreign or domestic shall beprecluded from participating inNCB for reasons unrelated to their eligibility or capability to perform the contract; and (c), prior registration, obtaining a license or an agreement shall not be a condition for bidding. Small works estimated to cost less than $100,000 per contract and goods estimated to cost less than $75,000 per contract may be procured under the shopping method, by requesting at least three written quotations from the qualified contractors. The prior review threshold would be $500,000 equivalent per contract for works and $200,000 equivalent per contract for goods. 6. Procurement of non-consultingservices: Non-consulting services procured under this project would include very limited contracts estimated to cost less than $75,000 per contract: printing materials, publications of tourism legislation, and publication of Tourism Strategy Reports. These will usually be procured under the shopping method. 7. Selection of Consultants: Consultant's services required include: matching grant unit management, development o f a Tourism Strategy, Tourism Plan and Marketing Plan, data processing for tourism statistics training, Tourism Statistics System, design and planning of Technical Tourism Training Facility upgrade, Environmental Impact Assessment for land acquisition, twinning arrangement, contract management and operation o f the Training Centre and demonstration. 8. For consulting services estimated to cost below the equivalent o f US$200,000 per contract, the short list may comprise only national consultants, and therefore Decree 54/2005 may apply. The tourism component will have as an emphasis the involvement and consultation o f communities in investment planning and promotion decisions and this could become a pilot for the rest of the country. The tropical h i t centre inNampula will promote best practice in safe pesticide use and will include a demonstration farm that could be replicated by farmers in other part o f Mozambique. 9. All consulting service contracts costing more than US$ 200,000 equivalent for firms will be awarded through Quality and Cost Based Selection (QCBS) method. Contracts for highly specialized assignments estimated to cost less than US$ 200,000 equivalent may be contracted through Consultants' Qualification (CQS). 10. Quality Based Selection (QBS) will be used for selecting consultants for assignments o f complex or highly specialized assignment. 11. Least-Cost Selection (LCS) will be used for selecting consultants for assignments of a standard or routine nature (audit services) where well-established practices and standards exist estimated to cost less than US$200,000.00. 12. Selection Under a Fixed Budget (FBS). Services for assignments which the Association agrees meet the requirements o f paragraph 3.5 o f the Consultant Guidelines may be procured under contracts awarded on the basis o f a Fixed Budget in accordance with the provisions o f paragraphs 3.1 and 3.5 o f the Consultant Guidelines. 91 13. Single Source Selection (SSS) may be employed with prior approval o f the Bank and will be inaccordance with paragraphs 3.9 to 3.12 o fthe Consultant Guidelines. 14. All services o f individual consultants (IC) will be procured under individual contracts in accordance with the provisions o fparagraphs 5.1 to 5.4 o f the Guidelines. 15. All terms o f reference (TOR) for the selection o f firms and individual consultants, regardless o f the estimated cost of the assignment, will be subject to Bank review and no- objection. 16. Training: This category would cover all costs related to the carrying out literacy programs, study tours, training courses and workshops, i.e. hiring o f venues and related expenses, stationery, and resources requiredto deliver the workshops as well as costs associated with financing the participation o f farmers in short-courses, seminars and conferences including associated per diem and travel costs. Training programs would be part o f the Annual Work Plan and Budget and will be included in the Procurement Plan. Prior review o f training plans, including proposed budget, agenda, participants, location o f training and other relevant details, will be requiredonly on annual basis. 17. Operating Costs: Operating costs shall consist o f office supplies; operation and maintenance costs for vehicles and equipment; travel costs o fproject unit staff, among others. 18. Grants: Grants for SME and private sector representative organizations under the matching grant sub-component will be provided and all the arrangement will be set out on the Operation ManuaVGrants Manual. 19. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the OperatiordProcurement Manual prepared by the Borrower. B. Assessment of the agency's capacityto implementprocurement 20. Procurement activities will be carried out by the UGEA at the M I C that is under Permanent Secretary. The Permanent Secretary will act as the Competent Authority to make decisions and sign on behalf o f the Ministry as defined in the Mozambican Procurement Regulation Decree 5412005. UGEA is staffed by a Head o f Department and four (4) procurement officers, responsible for all procurement activities o f the Ministry and will also be responsible for handling World Bank funded activities. UGEA staff has attended procurement training organized in the region and further training in Government procedures under the new procurement regulations organized by UFSA. All procurement officers do not have prior experience inBank fiduciary requirements. 21. An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has been carried out by Amos Malate, Procurement Analyst on November 11, 2008. The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff (UGEA) responsible for procurement financed under 92 Competitiveness & PS Development and the Ministry's central unit for administration and finance. 22. Other key issues and risks concerning procurement for implementation o f the project have been identified and include the following: the UGEA is located inpremises that still require rehrbishment and enhanced by the provision on an adequate work environment and equipment. While the Ministry as a whole my face challenges to provide staff with a desirable level o f working conditions, it is o f paramount importance that office premises are improved, equipment purchased at earnest, including the necessary hardware for an adequate recording keeping and filing system, as otherwise the ability to satisfy minimumfiduciary requirements by UGEA will bejeopardized. 23. While the Ministry has made a considerable effort in sending the UGEA staff to attend training in Procurement for Bank financed operations, overall capacity at UGEA in Bank procurement remains low. It i s therefore required that during that first year o f Project Implementation staff are sent to attend additional training in Procurement and an adequate Technical Assistance consultant i s recruited to provide on-the-job continuous coaching . 24. Furthermore, the consultant would also assist UGEA in establishing the Procurement section o f the Operations Manual that would aim in detailing the applicable Government and Bankrequirements under the Project. 25. The Ministrydoes have an Internal Control unit that will enhance the check andbalances for the Procurement activities. Nevertheless the internal control procedures at the Ministry will need to be updated to include the UGEA activities and, additionally, the unit should be exposed to procurement to adequately carry out its activities. 26. The current record keeping and filing system is not up to standard and it needs an urgent enhancement to ensure that procurement records are adequate filed and easily retrieved and accessible whennecessary and for auditing purposes. 27. The Procurement section o f the Operations Manual should detail the approval requirements duringthe procurement cycle (TOWSpecifications, evaluation reports including the appointment o f Evaluation Committees). In addition, the Governmental mandatory approvals by the Ministry o f Finance and Tribunal Administrativo (or Administrative Court) should also be detailed and at time, leading to a considerable increase in the time taken up to the award and signing o f contracts. 28. The procurement manual will address the anti fraud and corruption in many ways. In order to improve the competition level and transparency specific recommendations, this manual shall include: mandatory use o f standard bidding documents to increase competition and transparency; at N C B level to remove provisions under the local law that are not conducive to economic, efficient and transparent procurement and may result in corrupt practice (e.g. require local representative); ensuring that the evaluation criteria are clear and objective; specific advise on how to identify the firms which are debarred or sanctioned by the Bank. Further, specific 93 training shall be delivered to the PIU in order to enhance the capacity in identifying collusion and other corruption flags and how to recognize and avoid conflict o f interest. Table A: ProcurementManagementAction Plan. MitigationMeasures By When Recruit a senior procurement specialist with Effectiveness qualifications and experience acceptable to the Bank I -PIU should have clearly defined roles and Effectiveness; not defined. responsibility for each staff, including a detailed job description; - Heado fUGEA should not be involved in Continuous; actual procurement but concentrate inquality control; - Permanent Secretary to exercise a much closer oversight responsibility to UGEA Continuous; Ministryshould expedite theprovision o f Effectiveness provided with adequate adequate furniture andbasic equipment such as working environment computers, telephone, fax machine, photocopier r and printers for UGEA staff. Recordkeeping Establish an adequate procurement filing record Effectiveness keeping systemwith detailed described inthe Operations Manual Procurement Manual A Procurement Manual should be prepared and Effectiveness should clearly lay out all procurement procedures applicable under the project and includes the approval arrangements by the Ministry and other Governmental Institutions Procurement activities UGEA should prepare a detailed Procurement Continuous not carried out planto be used as a management tool and efficiently record all major steps inthe procurement process, including the approvals. The Plan should be updated at east every quarter. Inadequate Contract Internal monitoring and control system shall be Continuous MonitoringKontrol updated. The format and requirements o f Systems reporting and applicable models shall be established 94 29. Giventhe lack o f previous experience under Bank fiduciary requirement, the absence of an enabling environment to adequately carry out procurement, the issues above identified, the overall project risk for procurement i s High. The mitigation measures above indicated aim at mitigating the risk of carrying out procurement. However, since the UGEA is not at present adequately mainstreamed within the Ministry,the procurement risk i s likely to remain High.The Bank should exercise close supervision of the project during the first 24 months. It is recommended that quarterly supervision missions are carried out during the first year after Effectiveness. The mission should address the issues found by recommending measures that will reduce the procurement risk. During the mission, at least twice per year for the first two years, Post Procurement Reviews will be conducted by the Bank. 30. The Procurement prior review thresholds should be set in manner to additionally reduce the risk. A Procurement Audit should be carried out by the end o f the second year o f project implementation, and lessons to be learned mainstreamed into the project implementation. Table B: Thresholdsfor ProcurementMethodsandPrior Review Contract Value Expenditure Category Threshold Procurement Contracts Subject to Method Prior Review (US$) (US$) 1.Works >2,000,000 ICB All 100,000 - 2,000,000 NCB First two contracts and all above $500,000 <100,000 Shopping None 2. Goods and Services >300,000 I C B All (other than 75,000 - 300,000 N C B Firsttwo contracts and Consultants' Services) all above $200,000 <75,000 Shopping None Direct Contracting All 3.Consultants'Services >200,000 QCBS, QBS All Firms <200,000 LCS, QBS and First two contracts and CQS all above $100,000 Single Source All Fixed Budget All 4. Individuals >75,000 I C All <75,000 I C First two contracts All Single Source All C. ProcurementPlan 95 31. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on November 13, 2008 and is available at UGEA - MIC. It will also be available in the project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementationneeds andimprovements ininstitutional capacity. D. Detailsof the ProcurementArrangementsInvolvingInternationalCompetition 1. Goods, Works, and Non ConsultingServices 3 4 5 6 Ref.No. Contract Estimated Procurement Review Expected (Description) cost Method by Bank Bid-Opening I (Prior / Post) Date G-01-2009 IVehicles for 230,000 NCB Prior June 09 implementation units G-02-2009 IT Equipment for 133,000 NCB Prior Jun-09 implementation units and one-stopshops G-03-2009 Office Equipment for 71,500 N S Post Jun-09 implementation unitsand one-stop shops G-04-2009 Office Furniturefor 99,900 NCB Post Juri-09 implementation unitsand Ione-stop shops G-05-2009 IPrinting, publication, and 65,000 NS Post Sep 09 translation of licensing manuals G-06-2009 PrintingMaterials for 60,000 NS Post Oct 09 Small Business and Tourism Product Development G-07-2009 PrintingMaterials for EIA 5,000 N S Post Dec-09 Training W-08-2009 Rehabilitation of l-stop 100,000 NCB Prior Oct-09 shop inVilanculo G-09-2010 IT Equipment for tourism 40,200 N S Post Jan-10 statistics ,tourism university, land database G-10-2010 Office Equipment for 14,800 N S Post Jan-10 tourism statisticsand university, land database G-11-2010 Office Furniturefor 5,150 N S Post Jan-10 tourism statistics & land database offices G-12-2010 GIS Software and 20,000 N S Post Jan-10 96 Equipmentfor Land RegistrationDatabase G-13-2010 PrintingMaterials for 45,000 N S Post Jan 10 Training ofTrainers on Tourism Services G-14-2010 Publication ofTourism 38,000 N S Post Jan-10 StrategyReports,Tourism Legislation and Regulation (1 Stop Shops) G-15-2010 RepeatersKommunication 20,000 N S Post Jul 10 Equipmentfor the Marine ProtectedAreas Network G-16-2010 Vehicles for Tourism 140,000 NCB Post Jul10 Training Center, Nampula center andGreenhouse Center G-17-2010 Training Materials: 1,800 printouts, DVDs for Training Center associated to the Greenhouse and processingcenter in Inhambane G-18-2010 Printing training manuals 4,200 N S Post Oct-10 for Tourism Training Center G-19-2010 KIT ofKitchen training 63,500 N S Post Oct-10 center for (Tourism Training Center) G-20-2010 Equipmentfor Processing 32,000 NS Post Oct-10 Center (cold storage; scales) W-21-2010 Construction and 36,000 N S Post Mar-10 MaintenanceofTourism Training Center W-22-2010 Constructionof the 80,000 N S Post Jul 10 ProcessingandTraining Center associatedto the Greenhouse inInhambane W-23-2010 Constructionof40 200,000 NCB Prior Jul 10 Greenhouses W-24-2009 Training Center 140,000 NCB Post Dec-09 Rehabilitation G -25-2010 IT Equipment for 45,000 N S Post Mar-10 NampulaTraining Center Office Equipment for 25,000 N S Post Mar-10 NampulaTraining Center CentreFurniture for 25,000 N S Post Mar-10 NampulaTraining Center FarmOffice Building 100,000 NCB Post Dec-09 97 W-29-2010 FarmPackhouse 200,000 NCB Post Feb-10 Construction W-30-2009 FarmEstablishment, 375,000 NCB Post Sep-09 ploughing, draining, road establishment,etc) G -3 1-2010 Equipment for Farm 170,000 NCB Post Jan-10 irrigation system G -32-2010 PlantationEquipment 50,000 NS Post Jan-10 G -33-2010 Tissue culture dants 100.000 NCB Post Jan-10 (a) Contract estimated to cost above $500,000 equivalent for works and $200,000 equivalent for goods and services per contract and all direct contracting will be subject to prior review by the Bank. If it established that the performance o f UGEA has improved, the threshold will be increased through the Procurement Plan. 1 2 3 4 5 6 Ref.No. Descriptionof Assignment Estimated Selection Review Expected Amount Method by Bank Proposals (Prior I Submission Post) Date C-01-2009 Manager for Matching Grant 110,000 IC Prior April 09 Unit FirstBusinessAdvisor 60,000 IC Post April 09 C-02-2009 C-03-2009 SecondBusiness Advisor 60,000 IC Post April 09 C-04-2009 Finance andAdminOfficer 30,000 IC Post April 09 C-05-2009 Consultantfor Development 58,500 IC Post July 09 Inhambane C-06-2010 Translator Manuals for 1 Stop- 18,000 IC Post Jan 10 Shops inIhambane C-07-2010 Consultancy for the 192,500 CQS Prior Jan 10 Implementation of Tourism Statistics System(including staff training, pilot survey, data quality control) C-08-2010 GIS Specialist Consultant to 72,000 IC Post Jan 10 Train FieldAssessors for Land Registration Database C-09-2010 FieldAssessor for Land 50,000 IC Post Jan 10 Registration Database C-10-2009 Consultantfor Design and 9,000 IC Post July 09 Planning ofTechnical Tourism 98 Training Facility Upgrade C-11-2010 Contract for Management the 225,000 Technical Tourism Training Center inInhambane C-12-2010 Management of Greenhouse 108,000 Prior Dec 10 and Processing Center in Inhambane C-13-2009 Consultant for Development of 13,500 July 09 a Greenhouseand Processing Center inInhambane I C-14-2010 Consultant for Environmental 8,000 IC Dec 10 Impact Assessment for Land TFT- Acquisition Post C-15-2010 Translator training manuals for 4,800 Oct-10 Tourism Training Center C-16-2010 Training for Tourism Service 180,000 QCBS Providers I IJan lo C-16-2009 ProjectManager- Coordinator 75,000 July 09 Inhambane PIU C-17-2009 Small business development 50,000 July 09 advisor/Training Coordinator Inhambane PIU C-18-2009 Legal Consultant-Maputo PIU 50,000 IlV 09 C-19-2009 Accountant-Inhambane PIU 30,000 C-20-2009 Environmental and MPA 40,000 specialist (EM capacity building)-Inhambane PIU C-21-2009 Driver-Inhambane PIU 20,000 IC Post July 09 C-22-2009 Driver-Inhambane PIU 20,000 IC Post July 09 `2-23-2009 IAdministrative staff- I 15,000 IC Post July 09 Inhmabane PIU C-24-2009 45,000 sss Prior Ju~-09 Tropical FruitAdvisor the NampulaTraining Centre i and Demonstration Farm for 3 C-26-2009 Advice on trade policy, 800,000 legislative, andregulatory reforms 2-27-2009 Provision of training and 1,500,000 QCBS resident advisors for Customs I Prior I June-09 2-28-2009 Improve the immediate 1,400,000 QCBS Prior June-09 technical capacity of Customs to provide a more responsive 99 service to the business community C-29-2009 Review and streamliningof 75,000 IC Prior April 09 existing business licensing proceduresandpreparationof manual C-30-2010 Consultancyto design 300,000 QCBS Prior Feb 2010 interactive, application form, develop a national database of businesslicenses, and, and design andinstall IT system C-31-2010 Legal reform andpromotion of 75,000 IC Prior Dec-10 revisedregulations for tourism businesses C-32-2009 Twinning Arrangement for 500,000 QBS Prior June-09 INNOQ C-33-2009 Twinning Arrangement for 600,000 QBS Prior June-09 Order of Professional Accountants C-34-2009 ProjectCoordinator 125,000 IC Prior April-09 April-09 April-09 June-09 June-09 April-09 April-09 June-09 Oct-2009 June 2010 (a) Consultancy services estimated to cost above $100,000 equivalent per contract for firms and $100,000 equivalent per contract for Individual consultant and single source selection o f consultants will be subject to prior review by the Bank. (b) Short lists composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less than $100,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. 100 (c) If it established during supervision that the performance of UGEA has improved, the thresholdwill be increasedthroughthe ProcurementPlan. 101 Annex 9: Economicand FinancialAnalysis MOZAMBIQUE: MZ-Competitiveness& PS Development 1. The Competitiveness and Private Sector Development Project i s aimed at facilitating increased growth and competitiveness and enhancing the business environment o f Mozambique's private sector through a combination o f financing instruments, capacity building initiatives and technical assistance to different businesses and SMEs. The overall objective o f the project would be achieved by reducing the cost o f doing business through support to G o M reforms and capacity building o f key public sector agencies, developing and strengthening the capacity o f local intermediaries to deliver business services to SMEs and piloting region specific intervention in tourism and horticulture sectors. The project addresses both supply and demand issues constraining the SME sector with an expected positive impact on the overall growth o f the private sector, employment and reduction inpoverty. Methodology 2. The economic analysis of this type o f private sector development project faces some difficulties particularly where there i s indirect relationship between the technical assistance provided under the project on its stream o fbenefits. Therefore inkeeping with common practices inthe appraisal o fproject o f this type, a mix o f quantitative and qualitative techniques has been used to analyze the economic benefits and costs o f the project. Component1:Imwoving:EnterpriseCompetitiveness 3. Improving Enterprise Competitiveness component o f this project has been designed in a manner that on one hand it would result in tangible economic benefits such as improved sales growth o f SMEs, increased growth in tourism revenues and increased exports proceeds due to horticulture. And on the other hand this component would yield intangible benefits such as enhancing the ability o f SMEs to develop specialized and innovative skills in different segments o f the production chain, creating a sustainable market for providers o f business development services, expanding the tourism related private sector supply chain capacity, and developing human resources necessary to export tropical fruits. Owing to these benefits, this component would also help in achieving the broader development objective o f increased employment and income generation inthe local economy. 4. Inorder to get a quantitative sense, a conventional methodology is used to carry out the economic analysis o f component 1, i.e. improving enterprise competitiveness, by estimating future stream o f costs and benefits and deriving net benefits to calculate the net present value (NPV) andeconomic rate o freturn (ERR)ina "with" and "without" project framework based on 10-year forecast time frame. NPV i s positive when ERR i s greater than the assumed discount rate.26The NPV i s the decision criteria. Table A.9.1 shows the aggregate estimates o f economic cost-benefit analysis o f component 1 26Opportunitycost of capital i s 10%inmost ofWorld Bank Projects. 102 Summaryof Benefitsand Costs TableA.9.1: EconomicAnalysis-Component 1 PresentValues o f Flows Net Economic-Financial Benefits (US $ mn) 44.86 7 costs (US $ mn) 10.26 Net Benefits (US $ mn) 34.60 ERR(%) 48% Notes: The discount rate used for above economic analysis is 12%. The results above are based on 10-year forecast time frame. BaseCaseResults 5. The NPV for component 1where benefits can be quantified is estimated at US$34.60mn for a 12% discount rate, and the ERR i s estimated at 48 percent. The project i s expected to have direct impact on SME sales. Supported SMEs under the matching grant sub-component are expected to experience a sales growth o f 20% above the general rate in comparable firms. In addition the number o f formally registered businesses i s expected to increase from a baseline o f 20 to 320 upon completion o fproject. Present Value o f Flows Benefits Costs Net Benefits ERR(%) Component1:Improving Enterprise Competitiveness 44.86 10.26 34.60 48% (i)MatchingGrantSub-component 7.24 3.57 3.66 31% (ii)PromotingTourismSectorinInhambane 18.21 3.47 14.24 36% (iii) Tropical fruits training Centre inNampula 19.41 2.71 16.69 69% 6. From the above subcomponent results, we can see that ERRSare greater than discount rate o f 12%, which shows that the results for component 1 are robust. The relatively high ERR for tropical fruits training institute i s on account o f current low volumes o f banana export from Nampula province. Therefore the support to this initiative would result in significant one-time shift inthe level o fexport proceeds from banana. 103 Assumptions: 7. Based on the information from field visits and experience from similar projects in other African countries, the following assumptions were made: i. Itisassumedthatthefinancialcostsandbenefitscanbeequatedwiththeeconomiccosts and benefits o f the project sub components. .. 11 The discount rate used for the economic analysis i s 12% based on the standard 9 assumption that the opportunity cost o f capital i s 10% inmost of World Bank Projects.27 ... 111. The project impact i s expected to start materializing during project implementation, The maximum impact of the project will be reached once the relevant capacity, institutions and investment climate are strengthened. Keepingthis in view, a 10-year forecast time frame i s used. iv. The additional output created by assisted firms is defined as the difference between the level o f output achieved by firms assisted by the projects and the level of output these same firms would have achieved otherwise. V. Under the Matching Grant Sub-component, it i s assumed that supported SMEs would increase their efficiency and capacity utilization rate that would yield an increase in output at two times the support. This i s based on experience in East Asia where output has increased 15 times the grant amount. InUganda, the Private Sector Competitiveness Project I1used 5 times the grant amount. Considering innovation o f other components of the project that involve initial testing of activities, a conservative estimate o f multiple of 2 i s appropriate for Mozambique. vi. For the sub component on support to tourism sector in Inhambane it is assumed that, owing to capacity building efforts and creation o f linkage contracts with SMEs, the tourism receipts o f the province would grow at an estimate o f 0.5% annually from year 2 onward. The estimate i s in line with the current long term average growth rate o f tourism inMozambique.2829 vii. A stable macroeconomic environment with price and exchange rate stability is also assumed. Table A.9.3: Resultsby Sub components (8-yearforecasthorizon) Present Value of Flows 27Handbook on Economic Analysis of Investment Operations, OPR, M a y 2006 28Source: UNWTO Tourism Highlights, 2008 edition. 29S N V , Baseline Study on Tourism and Socio-Economic Development inInhambane, Maputo, December 2007 104 Benefits Costs Net Benefits ERR(%) Componentl :ImprovingEnterprise Competitiveness 33.87 10.26 23.61 46% (i)MatchingGrantSub-component 6.56 3.58 2.98 30% (ii)PromotingTourismSectorinInhambane 11.48 3.47 7.50 30% (iii) Tropical h i t s training Centre inNampula 15.84 2.71 13.13 69% 8. Another scenario consists in adopting a more aggressive discount factor in acknowledgement o f fact that in the event of interest rates rise combine with exchange rate depreciation, the discount rate o f 12% is not sufficiently conservative. Present Value of Flows Benefits Costs Net Benefits ERR(YO) Componentl :Improving Enterprise Competitiveness 32.64 9.46 23.18 40% (i)MatchingGrantSub-component 5.64 3.24 2.41 25% (ii)PromotingTourismSectorinInhambane 12.44 3.60 8.84 29% (iii) Tropical h i t s training Centre inNampula 14.56 2.63 11.93 61% ComponentTwo: Improvingthe BusinessEnablingEnvironment: 9. Due to catalytic role and diverse nature o f activities that are envisaged under component two, a qualitative analysis of the cost-benefits is done to provide usehl insights on each sub- component. Supportto BusinessEnvironmentStrategy: TradeFacilitation 10. Recent studies have shown that the ability o f countries to deliver goods and services on time at lowest possible costs is a key determinant of integration into the world economy.30 According to the IFC/World Bank 'Trading on Time' study, each day o f delay reduces a country's export volumes by 1 per~ent.~'Keeping in view these factors, many countries are implementing reforms aimed at increasing the efficiency and transparency o f customs procedures. According to the Doing Business 2009 report, thirty-four economies have made it easier to trade in 2007/2008 and in this respect the electronic submission o f customs documents has proved to be the most popular for the trading across borders indicator. Also the report points 30World Bank Policy Research Working Paper 3703, Key issues inTrade Facilitation, Summary of World BanMEU workshops inDhaka and Shanghai, September 2005 31SimeonDjankov et al, Trading on Time, January 26,2006 105 that between 2005 and 2008 reforms with an impact on this indicator have reduced the average time to export by 3 days. Therefore the trade facilitation sub component o f the project, by providing support to training, policy environment, and systems works at customs, is likely to strengthen risk assessment techniques (rather than inspection o f individual consignments). This would result in reduced time, resources and levels o f error. It i s estimated that upon completion o f project, the number of days required to clear exports would decrease from the current 26 days to 13 days and similarly for imports the number o f days would decrease to 16 from the current level o f 32 days. LicensingReform 11. The FIAS 2006 study on the Impact o f Taxes and Licenses on Investment Climate in Mozambique have identified lack o f information, and transparency, discretionary decision making under the current national licensing system and corruption as three o f the major impediments to doing business32.In this respect, the Licensing Reform subcomponent o f this project that aims at the development o f licensing database, e-licensing capabilities, and strengtheningo fone-stop shops along with ajoint comprehensive licensingreview is well placed to complement the on-going efforts undertaken by FIAS in this area. The immediate economic benefits that are expected to be achieved from these efforts are: the increase in the number of new businesses; reduced time for business start up; and reduced cost (as currently, inthe absence o f information on requirements and standards, businesses often learn about the standard after a violation i s made and a fine has to be paid). The Doing Business 2009 draws on several examples from countries including Lesotho, Angola and Senegal where strengthening o f one- stop shops for new businesses and online licensing documentationhave significantly reduced the number o f days needed to start new business and the time involved in processing licensing documents. In the medium term, reducing the cost o f doing business through licensing reforms would contribute to an increase in profits ( which may lead to increased investments) or increasing market share (and thereby output and empl~yment)~~.Also, it can have some impact on reducing the size o f informal economy thereby allowing those firms to access to wider markets as well as finance.34 StrengtheningPublic-PrivateDialogue 12. The experiences and lessons learned from public-private dialogue across different countries and sections have shown that not only significant reforms can be associated to these dialogues but also these dialogues demonstrate a strong measurable economic impact. A recent 2007 IFC study on the Impact Assessment o f Public-Private dialogue initiatives on three countries has concluded that these dialogues have helped private sector in achieving a consensus and presenting a unified approach on reform issues and at the same time it has helped the government inimproving its own communication, coordination andinternal accountability. 32FIAS, Study o n the Impact o f Taxes, Customs, Licenses and other Fees on the Investment Climate, Mozambique, September 2006. 33See DCED, Supporting Business Environment Reforms, Practical Guidance for Development Agencies,2008 edition 34See for example: http://www.csd.bg/news/bertinenova.pdf and http://n-u.worldbank,ornidocumentslpublicpolicviournal/313Klapper.pdf 106 Supportto QualityEtandardInfrastructure 13. The support to the National Institute o f Standardization and Quality (INNOQ) through training and coaching o f INNOQ personnel in demandassessment and policy making i s likely to yield substantial economic benefits, since the component would allow focus on those sectors considered to have the highest export potential and/or the highest effective demand for the conformity assessment and related support services. An effective combination o f the two would evidently also have the highest impact in the short term in terms o f increased in volume o f exports as well as per unitprice o f exports. 14. More importantly, the increased focus on specific sectors may allow Mozambique exporters to reposition themselves in the international market and tap into the more specialized and hence more profitable market segments. For example in the agro-food sector, Kenya's horticulture industry underwent a transformation in response to and in anticipation o f changing regulations and tightening sanitary and phytosanitary standards in Europe, the country's primary export market. Starting the mid-1990s, most firms that are involved inhorticulture exports have been transforming their production, packing, and broader supply chain. This ongoing transformation has enabled the industry to reposition itself into a more profitable and faster growing value-added segment o f the European fresh vegetable market.35 Strengtheningthe AccountingProfession 15. A studyon World Bank's Accounting and AuditingROSCProgramhas identified lack o f capacity to comply (Le. absence of appropriately qualified individuals) as the major impediment towards application o f international standards. The study hrther asserts that the development and enhancement o f capacity would require a comprehensive approach in which systems, methodologies, application guidance, curricula, teaching and training material, examination and certification procedures must be adapted to support the new obligation^.^^ Thus this project sub - component has been designed to achieve most o f these challenges by providing support to the establishment o f capacity building program between the newly established professional accountancy body and a strong memberof International Federationo f Accountants. 16. The resultant improvement in the quality and number o f financial reporting would not only facilitate the access to credit for small-scale corporate borrowers from the formal financial sector by lowering the barrier o f high information and borrowing but it would also strengthen Mozambique's financial architecture and reduce the risk o f financial market crisis, together with their associated negative economic impacts. Conclusion 35 Jaffee, S. (2003) "From Challenge to Opportunity: TransformingKenya's Fresh Vegetable Trade in the Context of Emerging Food Safety and other Standards in Europe", World Bank, Agricultureand RuralDevelopmentDiscussionPaper No. 2. Washington, D.C. 36JohnHegartyet al., Implementationof InternationalAccounting andAuditing Standards, Lessons learnedfrom the World Bank's Accounting andAuditing ROSCProgram, September 2004 37This canbe achievedby shiftinggradually from collateral-basedlending decisionsto lendingdecisions which are basedonthe financial performanceofthe prospectiveborrower 107 17. In summary, significant economic benefit is expected to be derived from this project. Broadly, the project will create a business environment conducive to enterprise creation and growth and will improve SMEs credit market efficiency, which will respond to market opportunities. Inparticular, the project will: 0 Increase production and output o f the firms in the SME sector, which will increase the numbero f formal SMEs and create morejob opportunities; 0 Improve efficiency o f different institutions such as customs, National Institute o f Standard and Quality, professional bodies together with rationalization o f business licensing that would help Mozambique inimproving its business environment. Ultimately, through its economy wide demonstration effect, the project i s likely to generate benefits for a much larger number o f SMEs, with wider implications for private sector growthjob creation and poverty reduction. 108 Annex 10: SafeguardPolicyIssues MOZAMBIQUE: MZ-Competitiveness& PS Development 1. The project has triggered OP 4.01 Environmental Assessment, OP 4.09 Pest Management, and OP 4.12 InvoluntaryResettlement; the environmental category is B. Safeguard issues are limitedto impacts related to the provision o f light infrastructure and the construction and operation o f a banana plantation (50 ha) at the new Training Center in Nampula Province. To address these issues, the borrower has prepared an Environmental and Social Management Framework (ESMF), including a Pest Management Plan (PMP); and a Resettlement Policy Framework (RPF). Both documents have been disclosed in Mozambique and at the Bank's Infoshop prior on October 29,2008 OP 4.01 EnvironmentalAssessment 2. The project has triggered OP 4.01 due to the plannedrehabilitatiordconstruction activities under component 1 - promoting tourism in Inhambane section -.As a result, potential adverse environmental and social impacts such as soil and water pollution, loss o f vegetation, and soil erosion are anticipated due to the funding o f (a) light infrastructure activities (rehabilitation o f existing government facilities, establishment o f training centres) - support for priority elements o f Mozambique's Tourism Master and Marketing Plan and Tourism Strategy in Inhambane Province- ;and (b) the construction o f a new Training Center inNampula Province. 3. Since the exact locations o f future sub-projects and their potential adverse environmental and social impacts could not beidentifiedprior to appraisal o fthe proposedproject, the borrower has prepared an Environmental and Social Management Framework (ESMF). 4. The rationale for preparing the ESMF is that Mozambique's environmental policies and laws do not make provisions for the environmental and social screening o f small-scale investments, and thus the sub-projects would not be in compliance with OP 4.01. OP 4.01 requires that (i)all Bank-funded projects be screened for potential environmental and social impacts and assigned appropriate environmental categories (A, ByCyFI); and (ii) based on the screening results, the appropriate level o f environmental work be carried out. Thus, consistent with OP 4.01 the ESMF outlines an environmental and social screening process to be applied by qualified personnel to all future sub-projects to ensure they are environmentally and socially sustainable. 5. This environmental and social screening process will guide future sub-project implementers in (i) identification o f potential adverse environmental and social impacts the through the use o f the Environmental and Social Screening Form; (ii) the determination o f the appropriate environmental category as per OP 4.01; (iii)identifying and implementing appropriate mitigation measures using the Environmental and Social Checklist; (iv) carrying out separate EAs; (v) public consultations; (vi) review and clearance o f screening results and EA reports; and (vii) environmental monitoring and reporting in the context o f the project's M&E system. 109 6. The ESMF includes (a) Environmental Guidelines for Contractors to ensure the project employs environmentally and socially sustainable construction techniques; (b) an Environmental and Social Management Plan (ESMP) for the proposed project to ensure its efficient implementation o f environmental and social measures; (c) a summary o f the Bank's safeguard policies to ensure that these are respected during the sub-project planning and implementation processes; and (d) a Pest Management Plan (PMP) to be applied in the context o f training activities at the banana plantation. 7. To ensure effective implementation o f the ESMF, the project will appoint an environmental specialist who will be responsible for (i) overseeing the implementation o f the provisions o f the ESMF and RPF; (ii) arranging for environmental training at the provincial level for staff responsible for implementing the environmental and social screening process outlined in the ESMF; (iii) arranging for the recruitment o f qualified professionals to prepare resettlement action plans (RAPS),ifrequired; (iv) recruitment o f qualified EA consultants to carry out EAs as necessary; (v) arranging for the review and clearance o f the screening results, EA reports, and RAPs; and (vi) overseeing environmental monitoring activities at the provincial level and reporting the results to the PIU. OP4.09 PestManagement 8. The project has triggered OP 4.09 due to the operation o f a 50 ha banana plantation at the Training Center in Nampula Province. Unsafe use o f pesticides and other agro-chemicals could lead to pesticides poisoning among the trainees and pollution o f soils, water, and air. In compliance with OP 4.09, the project has prepared a PMP with a focus on pest management at theproject's banana plantation as well as the importance o fintegrated pest management (IPM) in future operations. Safe and proper pest management and use for tropical fruits would be an important topic o f training at the Nampula Institute and we would ensure that the provisions o f the PMP are fully applied to the training centre's banana plantation. This would be monitored as part o fproject management bythe Maputo-based PIUand Bank supervision. 9. Pests and pesticides: The PMP describes banana pests and pesticides, noting that the most important insect pests o f bananas affecting production in Mozambique are: the banana aphid (Pentalonia nigronewosa), banana weevil (Cosmopolites sordidus), thrips, and sugarcane budmoth (Decadurchisflavistriatu). Coconut scale (Aspidiotus destructor) is also a serious pest that can negatively affect the quality o f bananas slated for export. The presence o f one live insect can lead to the rejection o f an entire shipment under EuroGap. 10. The banana aphid has a major pest status because it i s a vector o f the banana bunchy top virus. Inaddition, nematodes also infest bananas, attacking systems o f the plant and impair water and nutrient uptake. In extreme cases, root systems are so weakened that heavily fixit laden banana plants will topple over in high winds. The key banana diseases are: banana bunchy top virus, Wilt and Black leafstreak. 11, The pesticides used on the banana plantations include pre- and post-harvest fungicides, nematicides, herbicides and insecticides. Fungicides are sprayed generally between 40 and 50 times per year. Others like Thiabenzadol and Imazalil are used in banana packing plants. The nematicides are sprinkled directly onto the soil once or twice a year. The herbicides are applied 110 incycles of approximately 8 to 10 weeks. The plastic bags that are used to protect the roots of the banana tree are impregnated with the insecticide Chlorpiriphos. Common pesticides used include: Chlorpiripphos, Diazinon, and Azadirachtin (Insecticide), Carbamate Nematicides, Carbofuran, and Oxamyl; Herbicide, Paraquat, and Organo-phosphate Nematicides include: Terbuphos, Cadusaphos, Phenamiphos, and Ethoprophos. A number o f previously used insecticides are currently banned. 12. Weed control in the banana plantation i s especially critical during the establishment period. The shallow roots o f the banana plant make it difficult to compete with weeds for nutrients, moisture, and sunlight. Additionally, weeds can harbor a banana mosaic virus which has many alternate weed and cultivated crop hosts. Once the banana plantings have established themselves, there i s adequate crop residue and deep shade from the canopy to effectively eliminate weed competition. Extra care is therefore needed during the early stages o f banana growth. 13. Current arrangementsfor pest management:The PMP includes a background section that discusses Mozambique's current pest management practices and institutional arrangements in this regard. For example, pest and disease attacks are widespread on cereals, cowpeas, and vegetables, which suffer heavy crop losses. The main method o f pest control i s the application o f chemical pesticide. For example, Malathion and propoxur are used for the control o f pests, while aerial and ground spraying with pesticides are used against migratory pests. The Ministry o f Agriculture (MINAG) conducts pest management activities in Mozambique. Broadly speaking, these operations are divided into two major kinds, namely (i) management o f general pests and (ii) ofmigratorypests. control 14. Pesticide regulation came into effect inMarch 2002. It requires registration o f pesticides, approval o f containers and labeling in Portuguese. MINAG in partnership with other relevant ministries, including MICOA, carries out the registration process. The Ministry o f Health and commodity farms import all the pesticides used in the country. There i s a strong desire to monitor all cycles o f pesticides, but lack o f trained manpower has hampered this effort. Also, according to FAO, Mozambique currently has about 340 metric tons o f obsolete pesticides that require resources for disposal. Some private companies have initiated efforts to re-cycle containers. There i s a Waste Treatment Station in Matola involved in the re-export o f obsolete pesticide for safe disposal. 15. While some pesticide regulations exist, there is no formal pesticide registry in Mozambique. The situation implies no control over what i s allowed into the country or regulations on pesticide labeling and usage. Pesticides such as DDT are banned inmost countries but can be found inMozambique. The lack o f government regulation on pesticides has led non- governmental organizations to press for conformity with international standards. M I C O A has initiated some efforts in this regard. Included in this aspect are: setting up a joint operational platform between GOM's MINAG, MISAU, the Custom Authorities and the private sector to monitor the import andthe distribution o fpesticides within the country. 16. Integrated Pest Management (IPM): Currently, no integrated pest management approach exists in Mozambique. There appears to be a general lack o f awareness about IPM including among the technical field staff, Significant efforts to develop and strengthen pesticide 111 procurement and use including under IPM, as needed, and other measures will be required. The success o f IPMdepends largely on developing and sustaining institutional and humancapacity to facilitate informed decision making by farmers, and empower farmers to integrate scientific and traditional knowledge to solve location-specific problems, and respond to market opportunities. Poor communication between farmers, extension agents and researchers has often led to poorly targeted research or to poor adoption o f promising options generated by research. The full benefits o f investments in agricultural research thereby remain untapped under these circumstances. 17. Monitoring and Evaluation: The PMP highlights the importance o f monitoring and evaluation. Currently, institutional capacity to monitor, collect, and analyze data such as on the causal links between land uses and potential environmental degradation at best i s very weak in Mozambique. For their projects, various government organizations, (mostly given the mandates from the donors and international import organizations) carry out (very) limited M&E activities. The situation is constrained by lack o f skills, awareness, funding and enforcement o f regulatory mandates. It i s particularly true for Mozambique. 18. For the project, there i s no defined responsibility, and it appears that it would be split between MINAG and MICOA. It i s suggested that given the short- and long-term potential for replication and wider adoption etc. that a specialized unit under MINAG, with technical strengths drawn from MICOA i s established. Since the needed laboratory resources may not be available, the analytical and other services, as needed and cost effective, are contracted out to resources in Africa. The lead organization, inparticipation with key stakeholders, should design a (strong) monitoring program. Included should be: the parameters to be monitored, their prioritization and monitoring frequency, data analysis and storage, and other specific needs, as identified. 19. The entity managing the Nampula horticulture farm should be actively involved. All result should be carefully analyzed since they can provide valuable guidance to other potential sites that may consider replication o fthe farm within Mozambique. 20. The PMP includes a number o frecommendations such as Review o f current pesticide management practices inMozambique to establish a base line; Identification o f critical factors preventing more effective management o f pesticides in Mozambique; Reinforcement o f the inspection and control activities within the country; Improvement o f the pesticide registration process and pesticide quality control; Review of all laws and regulations related to pesticides inMozambique; Harmonization o f the national legislation and regulations to provide to the Government o f Mozambique the legal foundation to support the implementation o f an efficient national strategy for pesticide management; Review of the I P M activities inMozambique; Preparation o f an action plan to scale-up the existing national I P M strategy with the final aims at reducingthe use o fpesticides inkey areas, such as cotton, tobacco or vegetable; Awareness raising inthe mass media; 112 e Preparation o f communication and awareness manuals for the farmers and populations who are at risk; While this project i s not expected to finance the implementation of these national-level recommendations which are beyond the scope o f the PMP provisions for the Nampula Centre, the MCPSD would coordinate with other departmentsinthe Bank such as Agriculture and Rural Development to advance the needed policy dialogue in these areas and explore financing possibilities. Additionally, the implementationof the pest management plan at the training centre farm could act as a model to be replicated inother parts o f the country. OP 4.12 InvoluntaryResettlement 21. The borrower has prepared a Resettlement Policy Framework (RPF) for the project which was approved and disclosed in Mozambique and at the Bank's Infoshop on October 29, 2008. The RPF outlines the policies and procedures to be applied in the event that project activities cause involuntary resettlement affecting standard o f living, right, title, or interest in any house, landor any fixed or movable asset acquired or possessedtemporarily or permanently by people affected by involuntary resettlement by these activities. The G o M will fund the resettlement costs (ifany) under the RPF. 113 Annex 11: ProjectPreparationand Supervision MOZAMBIQUE: MZ-Competitiveness& PS Development Planned Actual PCNreview 10/25/2007 10/25/2007 InitialPID to PIC 9/28/2007 12/06/2007 Initial ISDS to PIC 12/04/2007 12/06/2007 Appraisal 10/23/2008 10/29/2008 Negotiations 12/01/2008 12/04/2008 BoardRVP approval 02/05/2009 Planneddate of effectiveness 07/01/2009 Planneddate of mid-termreview 06/30/2011 Plannedclosing date 11/30/2014 Key institutions responsible for preparation of the project: Ministry o f Industry and Commerce, Ministry o f Tourism, Ministry of Environmental Coordination, Ministry o f Planning and Development, Ministry o f Finance, Ministry o f Agriculture, Governorateso f InhambaneandNampula, Private Sector Associations Bankstaffand consultantswho worked on theproject included: Name Title Unit Mazen Bouri PSD SpecialistProject TTL AFTFP Samuel Maimbo Senior-Financial Sector Specialist AFTFP Shaun Mann Tourism Development Specialist AFTFP Anna Spencely Tourism Development Specialist AFTFP Paramita Dasgupta Senior PSD Specialist FIAS Niraj Verma Financial Sector Specialist SASFP Gerard McLinden Senior Trade Facilitation Specialist PRMTR Thomas Joseph Doyle Trade Facilitation Specialist PRMTR Michael Friss Jensen Senior Economist PRMTR Lourdes Pagaran Senior Operations Officer AFTRL Andrew Osei Asibey Senior Monitoring and Evaluation Specialist AFTRL Chaoying Liu Evaluation Officer AFTFP Antonio Chamuco Procurement Specialist AFTPC Amos Malata Procurement Analyst AFTPC Jonathan Nyampukapa Financial Management Specialist AFTFM Edeltraut Gilgan-Hunt Environment Specialist ASPEN Yvette L.Djachechi Senior Social Development Specialist AFTCS Eduardo Brito Country Lawyer LEGAF Suzanne Morris Disbursement Officer LOAFC Laura Corder0 PSD Consultant AFTFP Yesherag Dagne Program Assistant AFTFP Adelina Mucavele Team Assistant A F c s 2 114 Bank funds expended to date onproject preparation: 1. Bank resources: US$lOO,OOO (variable) 2. Trust funds: 3. Total: US$lOO,OOO Estimated Approval and Supervisioncosts: 1. Remaining costs to approval:US$25,000 2. Estimated annual supervision cost: US$115,000 115 Annex 12: Documentsinthe ProjectFile MOZAMBIQUE: MZ-Competitiveness& PS Development 1. Investment Climate Assessment Program (2003) World Bank (2003). Mozambique IndustrialPerfonnance and Investment Climate Assessment. World Bank, Washington, DC. 2. Investment Climate Assessment (2008) World Bank (2008). Draft Mozambique Investment Climate Assessment,. Washington, DC. 3. Country Economic Memorandum (2008) World Bank (2008). Draft Mozambique Country Economic Memorandum, World Bank, Washington DC. 4. Country Economic Memorandum (2005) World Bank (2005). Mozambique Country Economic Memorandum: Sustaining Growth and ReducingPoverty, Report No. 32615-MZ ,World Bank, Washington DC. 5. Mozambique Competitiveness andPrivate Sector Project ConceptNote World Bank (2008). Project ConceptNote onMozambique Competitiveness andPrivate Sector Project, Washington DC. 6. DoingBusiness Reports World Bank (2008). Doing Business 2008, Washington DC. 7. Country Assistance Strategy (2008-2011) World Bank (2008). Country Assistance Strategy for Mozambique, Washington DC. 8. Mappingof Donor Projects and Programmes insupport of GoM Strategy to Improve the Business Environment," Private Sector Working Group Mozambique (2008) 9. UnitedStates Agency for International Development (2008). "Mapping o f Donor Projects andProgrammes inSupport of GoM Strategyto Improve the Business Environment". Private Sector Working Group Mozambique, Washington DC. 116 Annex 13: Statementof Loansand Credits MOZAMBIQUE: MZ-Competitiveness& PS Development Differencebetween expected and actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PI04566 2008 MZ-Water Services & Inst.Support 0.00 15.00 0.00 0.00 0.00 16.26 0.70 0.00 PO96332 2007 Maputo Municipal DevelopmentProgram 0.00 30.00 0.00 0.00 0.00 25.92 4.97 0.00 PO83325 2007 MZ-APL2 Roads&Bridges 0.00 100.00 0.00 0.00 0.00 101.71 11.91 0.00 PO93165 2006 MZ-Market Led Smallholder Dev (FY06) 0.00 20.00 0.00 0.00 0.00 20.19 2.88 0.00 PO87347 2006 MZ Tech& Voc Edu& Training (FY06) 0.00 30.00 0.00 0.00 0.00 29.79 6.82 0.00 PO86169 2006 MZ-Financial Sector TA Project 0.00 10.50 0.00 0.00 0.00 8.99 -0.08 0.00 PO71465 2006 MZ-TFCA & TourismDev (FY06) 0.00 20.00 0.00 0.00 0.00 18.31 1.46 0.00 PO82618 2005 MZ-Beira Railway SIL (FY05) 0.00 110.00 0.00 0.00 0.00 42.44 -10.70 0.00 PO01807 2004 MZ-Decentr Planning&Fin SIL (FY04) 0.00 42.00 0.00 0.00 0.00 9.48 3.32 0.00 PO69183 2004 MZ - EnergyReformand Access SiL 0.00 40.26 0.00 3.09 0.00 35.75 28.17 -1.42 (FY04) PO78053 2003 MZ-HIV/AIDS Response SIL (FY03) 0.00 55.00 0.00 0.00 0.00 26.55 9.07 0.00 PO72080 2003 MZ: Pub Sec Reform(FY03) 0.00 25.60 0.00 0.00 0.00 9.65 5.15 0.00 PO69824 2002 MZ-Higher EducationS I M (FY02) 0.00 60.00 0.00 0.00 0.00 21.41 -4.85 0.00 PO73479 2002 MZ-Corn Sec Reform 0.00 14.90 0.00 0.00 0.00 3.72 1.30 -0.55 PO42039 2000 MZ-Railway & Port Resh(FYOO) 0.00 100.00 0.00 0.00 0.00 8.18 1.99 -2.54 PO52240 1999 MZ-Natl Water 2 (FY99) 0.00 75.00 0.00 0.00 0.00 7.22 -15.78 -1.72 ~ _ _ _ _ _ ~ _ _ _ _ ~ ~~ ~ Total: 0.00 748.26 0.00 3.09 0.00 385.57 46.33 - 6.23 MOZAMBIQUE STATEMENT OF IFC's Held andDisbursedPortfolio InMillions ofU S Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2004 ENH 0.00 18.50 0.00 0.00 0.00 13.37 0.00 0.00 GTFP BDC 0.1I 0.00 0.00 0.00 0.11 0.00 0.00 0.00 1997 MOZAL 29.70 0.00 58.50 0.00 29.70 0.00 58.50 0.00 2001 MOZAL 10.12 0.00 0.00 0.00 10.12 0.00 0.00 0.00 2000 SEF Ausmoz 0.72 0.00 0.00 0.00 0.72 0.00 0.00 0.00 1997 SEF CPZ I.oo 0.00 0.00 0.00 1.oo 0.00 0.00 0.00 2000 SEF Cab0 Caju 0.58 0.00 0.00 0,oo 0.51 0.00 0.00 0.00 2001 SEF Grand Prix 0.33 0.00 0.00 0.00 0.33 0.00 0.00 0.00 2004 SEF Merec 1.02 0.00 0.00 0.00 1.02 0.00 0.00 0.00 Total portfolio: 43.58 18.50 58.50 0.00 43.51 13.37 58.50 0.00 117 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. Total pendingcommitment: 0.00 0.00 0.00 0.00 118 Annex 14: Countryat a Glance 119 Mozambique at a glance 9124l08 Sub- POVERTYand SOCIAL Saharan Low. Mozamblaue Development dlamond' Africa inwrne 2007 Poplation, midyear (millions) 21.4 800 1,296 GNI cer capita (Atlas method, US$) Lifeerpectanq 330 952 578 T GNI (Atlasmehod, US$billions) 7.1 762 749 Averaae annual aowth,200147 Population I%) 2.3 2.5 2.2 Laborfore (%) 1.8 2.6 2.7 GNI Gross per primary Mostrecent estirnateflatestvearavailable.200147) capita enrdlmen1 Poverty(% of powlation belownationalmvertv line) 54 Urbanpopulation (% oftolelpwlation) 36 36 32 Lifeemectancv at birth (years) 42 51 57 Infant mcntalitv (per 1,000live births) 96 94 a5 Child malnutrition(% dchildmn under 5) 21 27 29 Access to improvedwater source Access to an improved water sourw (% ofpopulation) 42 58 68 Literacv(% of populationa m 1%) 59 61 Gross Drimawenrollment (% ofschod-aw populakn) 105 94 94 -Mozambique kle 113 99 100 Low-income gmup ~ Female 97 88 89 KEY ECONOMK: RATIOSand LONG-TERMTRENDS 1987 1997 2006 2007 Economic ratios' GDP (US$ billions) 2.4 3.8 7.0 7.8 GrosscapitalformatiorVGDP 17.0 20.6 19.0 19.2 & p r t s o f g d s and serviceslGDP 6.6 13.4 40.7 38.6 Trade Gross domesticsavingslGDP -7.7 9.3 13.0 12.3 Gross national sawwslGDP -14.9 4.6 3.2 2.8 T Current acccunt balancelGDP -29.4 -16.3 -16.0 -16.5 Interest wvmentslGDP 0.8 1.I 0.4 Total debt/GDP 175.3 203.4 46.9 Total debt servicelexports 23.5 19.2 1.9 Present value of debtlGDP 10.1 I i Present value of debtlexports 23.9 Indebtedness 1987-97 1997-07 2006 2007 2007-11 (averme annualam&) GDP 4.2 7.7 85 7.3 7.0 I Mozambique GDP percapita 1.6 5.2 6.3 5.3 5.9 Low-income mu^ Exports of goods and services 12.6 18.9 8.O -8.2 10.0 STRUCTUREof the ECONOMY 1987 1997 2006 2007 IGrowth ofcapltal and GDP (%) (% of GDP) 1 pgriculbrre 44.1 34.9 27.6 27.6 Industry 21.4 17.8 26.6 25.7 Manufacturing 9.8 16.3 15.2 Services 34.4 47.4 45.8 46.7 Householdfinal consumDtionexwndibrre 96.7 83.9 76.1 75.6 General mv'tfinal consumDtionexpenditure 11.1 6.8 10.9 12.1 I -GDP Imports of goods and services 31.4 24.6 46.6 45.6 -GCF 1907-97 199747 2006 2007 (average annualgm&) Growth of exports and imports (%) Pgriculbrre 2.6 5.3 10.9 6.6 60 r Industry 1.9 13.9 9.1 6.6 Manufactunnp. 4.5 13.7 6.0 5.0 Services 4.6 6.6 7.9 6.4 Householdfinal consumDtionexcendibrtt? 3.0 5.1 8.4 8.6 General gov't final consumptionexpendibrre -0.2 -1.8 8.4 17.2 Grosscapital formation 5.3 7.2 13.1 4.2 Importsof gcnds and services 2.6 5.O 10.0 -2.1 Note: 2007 dataare preliminaryestimates. This table was mduced from the Development Economics LDBdatabase. The diamondsshowfour kev indicatorsinthe wuntv (inbold) comared with itsincomeqrcuD averme. Ifdata are mlssim, the diamond will be incomDlete. IBRD 33451R1 30° E 35° E 40° E 10° S 10° S LakeLake T A N Z A N I A To To MtwaraMtwara Malawi Malawi MOZAMBIQUE Mocimboa MuedaMueda da Praia Lugenda MetangulaMetangula C A B O N I A S S A Messalo D E L G A D O Pemba MALAWIMALAWI Lichinga LichingaLichinga MarrupaMarrupa q u e MontepuezMontepuez b i To To CaturCatur m u Lúrio ChipataChipata To To a a Z A M B I A Lilongwe Lilongwe e o z t MualadziMualadzi M l a To To P Nacala To To MangocheMangoche N A M P U L A Petauke Petauke CuambaCuamba FurancungoFurancungo RibáuRibáuè Ribáuè 15° S To To To To 15° S ZombaZomba LusakaLusaka FíngoFíngoè Fíngoè Montes Namule Montes Namule Nampula Nampula Moçambique Lago de T E T E (2,419 m) (2,419 m) Cahora Bassa ZumboZumbo SongoSongo Zambeze Gurué Gurué Guru To To Alto Molócue Alto Molócue BlantyreBlantyre MoatizeMoatize MilangeMilange Ligonha Tete ete Licungo Z A M B É Z I A Angoche ChangaraChangara MocubaMocuba To To Mutoko Mutoko SenaSena NamacurraNamacurra Pebane Z I M B A B W E CatandicaCatandica Zambeze Quelimane GorogosaGorogosa InhamingaInhaminga To To HarareHarare S O F A L A Chimoio Chimoio INDIAN OCEAN To To MANICAMANICA i n MasvingoMasvingo la Monte Binga Monte Binga P Beira 20° S (2,438 m) (2,438 m) (2,436 e 20° S To To Buzi u MasvingoMasvingo EspungaberaEspungabera i q b m Nova Mambone Save a z To To Inhassôro RutengaRutenga o M Vilanculos ChicualacualaChicualacuala 0 50 100 150 200 Kilometers MachaílaMachaíla To To MessinaMessina INHAMBANE INHAMBANE 0 50 100 150 Miles ChiguboChigubo MapaiMapai G A Z A S O U T H Limpopo Changane MOZAMBIQUE MassingirMassingir A F R I C A Inhambane PandaPanda SELECTED CITIES AND TOWNS GuijaGuija Inharrime ChibitoChibito PROVINCE CAPITALS 25° S MAPUTOMAPUTO NATIONAL CAPITAL 25S To To Xai-Xai NelspruitNelspruit This map was produced by RIVERS Manhica the Map Design Unit of The World Bank. The boundaries, MoambaMoamba MAIN ROADS colors, denominations and Matela Matela MAPUTO any other information shown on this map do not imply, on RAILROADS To To the part of The World Bank MbabaneMbabane Group, any judgment on the PROVINCE BOUNDARIES legal status of any territory, SWAZILANDSWAZILAND or any endorsement or INTERNATIONAL BOUNDARIES Zitundo a c c e p t a n c e o f s u c h boundaries. 30° E 35° E JANUARY 2007