Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2888 Project Name MR – Business Environment Enhancement Project (BEEP) Region AFRICA Sector General industry and trade sector (40%); Banking (20%); General energy sector (20%); Law and justice (20%) Project ID P102031 Borrower(s) GOVERNMENT OF MAURITANIA Implementing Agency Délégation Générale à la Promotion de l’Investissement Privé (DGPIP) Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) Date PID Prepared January 22, 2008 Date of Appraisal Authorization January 17, 2008 Date of Board Approval May 29, 2008 1. Country and Sector Background 1. A new Government of the Republic of Mauritania (GIRM) took office in April 2007 and is committed to an overall objective of poverty reduction through macroeconomic stabilization and the promotion of economic growth. Over the last several years, Mauritania has pursued sustained macroeconomic and sector adjustment reforms that have allowed it to lay the ground work for private sector-led growth. In 2006, economic growth reached 11.7 percent mostly due to the start of oil production. Fiscal performance has been strong, reflecting the government’s revenue collection efforts. Sustained spending discipline and strict adherence to fiscal and monetary policies were instrumental in bringing the 12-month inflation rate down to an average of 6.2 percent in 2006. 2. The constraints to private sector development in Mauritania have been identified through a number of analytical and diagnostic works that have been carried out in recent years. In particular, the Investment Climate Assessment (ICA-2007) was based on a detailed survey of enterprises, the Financial Sector Assessment Program (FSAP-2006) provided an in-depth analysis of the financial sector; the Report on Justice, Inter-Ministerial Committee on Justice (2005) is a comprehensive review of the judicial reform process, and the annual publication of Doing Business Report (2008) provides a summary of Mauritania’s competitiveness in comparison to other countries. These reports will help Government focus its reform efforts. 3. The Doing Business Report ranked Mauritania 157 out of 178 countries for ease of doing business. It is now widely recognized that the development of the private sector requires an improvement of the “investment climate” in order to promote stronger economic growth within a market economy and a reduction of poverty. Chart 1 on the following page, provides a summary of some of the African countries in the overall ease of doing business. While such rankings only give an indication of the overall enabling environment for business, it is clear that the private Page 2 sector in Mauritania suffers from a heavy regulatory burden and low productivity as well as other constraints. 5. The economic structure presents a sharp contrast between a relatively small modern sector and traditional subsistence sectors. The Mauritanian economy remains undiversified. The formal private sector is still very small and its development is hampered, among other factors, by: o limited access to and cost of finance. This constraint is the most commonly cited by the companies; o a heavy regulatory framework (including heavy taxation, weak tax administration and problems with customs regulations) and a weak judicial system which has difficulties in enforcing business contracts; o poor access to, and high costs of, key factors of production, notably electricity; o a poorly educated workforce; o access to land; and o a large concentration of economic assets and weak competition in the formal economy while the informal sector thrives. 2. Project Development Objective 9. The overall project development objective (PDO) is to enhance the business climate through improvements in the financial, legal, regulatory and capacity environment. This would facilitate private-sector led growth/investment in the economy and improve services provided by the electricity sector. Much of the baseline data is available and the rest will be sought during the appraisal mission. The key performance indicators at the outcome level are: · Improve the business investment climate in areas related to business start-up (cost and time to start a business), workers’ employment and taxation (corporate); · Improve the legal and judicial system by: (a) providing an adequate framework for new and revised collateral instruments; (b) simplifying debt collection and foreclosure procedures; (c) increasing access to legal information; and (d) improving the capacity of judges to take decisions in specialized commercial and financial areas; · Ensure that all commercial banks fully comply with improved prudential regulations and meet the needs of a broad spectrum of the population. This will be measured by: (a) the overall size of bank deposits; (b) the extent of NPL; and. (c) strict adherence to connected lending regulations. · Provide a legal framework for private sector participation in the electricity sector. Page 3 3. Rationale for Bank Involvement The FSAP, ICA and Doing Business reports identified a wide range of constraints on the growth of the private and financial sectors in Mauritania. In response, the GIRM’s program seeks to address some of the priority constraints through a combination of different projects, which includes mining, energy and port. There has been no substantial support for financial or private sector development by the World Bank since the previous Financial/Private Sector Capacity Building Project (FPSCBP) that closed on May 31, 2000 (Implementation Completion Report (ICR) No. 21561, December 28, 2000). As a result, some improvements were made in the legal and regulatory framework as well as in the judiciary, and some progress was achieved in creating the basis of an enabling environment for financial sector activity. In particular, they contributed to an improvement in the range and accessibility of financial services, due to the growth in the number of banks and microfinance institutions, and to an increase in private investment, particularly in the mining sector. There is a window of opportunity for economic development. With a new democratic Government in power, the economy is opening up and the GIRM is advocating a sound and stable financial sector and a reliable, impartial and less corrupt judicial system, both of which are recognized as essential for broad-based and sustainable economic and private sector development. The private sector will be supported on several fronts by supporting Government to address some of the constraints to: (a) increase competitive forces through facilitating the entry of new institutions and strengthening the regulatory framework; (b) improve the business environment through reforms tackling five key areas affecting the ease of doing business index and strengthening the public-private sector dialogue; (c) increase intermediation capacity through investments in financial systems infrastructure (credit and accounting information, payments systems, etc.) and (e) improve contract enforcement (legal reforms and judicial institutional strengthening). The situation in the electricity sector has become so severe that GIRM has asked the World Bank to provide some assistance under this project which will help to improve the current electricity supply level to the private industrial and commercial sector as well as to enhance future private sector participation in the local power sector. The facilitation of an enhanced private sector investment in the sector will also free up budgetary resources that GIRM could use for other sectors in need and where private participation is more difficult to be attracted. 4. Project Description Coming under a new reform-minded Government and nearly a decade after the last financial/private sector intervention, the project will be a technical assistance credit that focuses on strengthening the building blocks of the overall business, financial and judicial environment, including support to the electricity sector. The project will be funded by a five-year IDA-financed investment credit for US$5.0 million equivalent. The credit will be used to finance equipment and technical expertise for measures which can be taken in the short-term and studies which will provide the foundation for a wider reform program, including preliminary studies for the proposed MR-Gas-to-Power Project. Page 4 Project components were designed on the basis of recommendations from the FSAP, ICA and Doing Business Report, which were the basis of the analytical framework. The project is comprised of two technical components and one administrative component: (a) Improving the Business Climate to Foster Private Sector Development, which includes direct support to small and medium size enterprises to strengthen their capacity to compete; (b) Building Public-Private Partnerships and Productivity Enhancement; and (c) Support for Project Implementation. The first component of addresses the two primary constraints highlighted in the analytical work, namely: (i) access to finance and (ii) streamlining the regulatory environment for business, including reduction of administrative barriers and tax reform, while the second component partially addresses weak infrastructure with support to the electricity sector. Component 1: Improving the Business Climate to Foster Private Sector Development The first component supports Government’s efforts to: (a) strengthen the financial sector and thus improve access to finance; (b) improve the legal and judicial framework for business and financial activities; and (c) streamline the regulatory environment for business. Strengthening the Financial Sector The first subcomponent is underpinned by recommendations from the FSAP and will support Government efforts to develop a solid and efficient financial sector and to increase access to financial services. This will entail the provision of equipment and technical expertise in order to build capacity in the following areas: (a) strengthening of the regulation and supervision of financial institutions and financial markets through (i) the revision of the banking law and implementing decrees (ii) the revision of the microfinance law and implementing decrees, (iii) the strengthening of human resource capacity at the BCM, and (iv) the centralization of supervision of all financial institutions within BCM; (b) developing a payment system, (c) strengthening the financial institutions and developing measures to improve competition within these financial institutions; and (d) developing new products and new institutions, such as those devoted to leasing, factoring, venture capital and lending to small and medium-size enterprises. Improving the Legal and Judicial Framework for Business and Financial Activities The second subcomponent, based on recommendations from the GIRM’s Report on Justice and Judicial Reform as well as from those of the FSAP, will provide support to improve Mauritania’s legal and judicial environment for business and credit-related activities. This will entail technical assistance and capacity building in the following areas: (a) improving the legal framework for business and financial activities through (i) the development of a legal framework for the creation, perfection and enforcement of mortgages and the improvement of the framework for movable collateral, accompanied by the development of a modern commercial and credit registry; (ii) the simplification of debt collection and contract enforcement mechanisms; and (iii) the formulation of a strategy for land reform with a view to supporting the improvement of the mortgage regime 1 ; and (b) strengthening judicial capacities to improve the resolution of commercial and financial cases through (i) training and specialization of judges in 1 Implementation will only occur as part of the larger Program provided that there is a high level of consensus on the strategy ultimately ensues and that the required financing is available to ensure that the corresponding action plan can be implemented so as to achieve agreed strategic targets. Page 5 commercial and financial law as well as in commercial dispute resolution mechanisms; (ii) strengthening of ethics in the judiciary; (iii) developing judicial statistics and indicators to monitor progress; and (iv) improving the dissemination of legal information. Streamline the Regulatory Environment for Business This subcomponent addresses preliminary results of the ICA that highlights that Government needs to take measures to improve the investment climate. The private sector development component will consist of the following five sets of activities which include (a) regulatory reform to improve the investment climate by addressing issues pertaining, but not limited to, business start-up, corporate taxation, labor market flexibility, trading across borders; (b) investment promotion to develop an incentive system for private investments and assistance in the set-up of the appropriate institutional arrangement for investment promotion; (c) small and medium enterprise capacity building and linkages development for the provision of business development services and technology enhancement system, value chain strengthening, and linkages development, leveraging particularly the growing extractive industry. Component 2. Building Public-Private Partnerships and Productivity Enhancement To sustain its economic performance and reduce poverty, a deeper and more ambitious public sector reform program is envisaged by Government. In addition, this component will support several reform measures in the Mauritanian power sector that are envisaged by GRIM to attract increased private sector investments and participation in the local power market. Four major activities are envisaged under this component: Improving Corporate Governance in Public Enterprises The project will finance technical/functional assistance for the design and monitoring of performance contracts for key public enterprises including SOMOLEC, SNDE, SMH, and SNIM. Collaboration with other World Bank Group units including the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the Private- Public Investment Advisory Facility (PPIAF) as well as parallel financing from other donors will be sought. Implementing utility reform and private participation measures The project will finance a technical assistance for the implementation of various reform measures to facilitate enhanced private sector investment in the local electricity sector in the form of Public Private Partnerships and to allow for private sector participation in the national utility SOMELEC. This technical assistance will be based on the outcomes and recommendations of GRIM’s due diligence process of the power sector currently ongoing and supported by the Private-Public Investment Advisory Facility (PPIAF). Enhancing the long term sector expansion planning functions As part of the Government’s reform efforts in the utility sector and to identify future opportunities in the area of generation expansion, transmission and distribution, this subcomponent will finance two technical assistances. The first technical assistance will finance Page 6 the a sector investment plan based on the future demand and supply scenarios and identifying opportunities for private sector participation in the future sector expansion. Under the second technical assistance the project will finance a technical assessment of the existing electricity generation, transmission and distribution infrastructure. The evaluation report will make recommendations on how efficiency of the current infrastructure can be improved and in what areas private sector investments for such rehabilitation measures should be pursued. Preparing the First Public-Private-Partnership generation project IDA has been mandated by GIRM to prepare and finance the first Public Private Partnership project in Mauretania in the electricity generation field. The project will thus support GIRM’s efforts to develop the MR-Gas-to-Power project (P107940) to support initial preparatory work for this separate IDA-financed project. This may include, but not be limited to feasibility studies or analytical work in the context of this project. Component 3. Support for Project Implementation DGPIP will be responsible for overall coordination of the project and will allocate sufficient staff resources. The project will finance technical assistance, as needed, to strengthen the DGPIP capacity to ensure that all fiduciary activities are met, including but not limited to: (i) financial management according to international accounting standards (this includes payment of invoices, maintaining appropriate accounts and requesting timely reimbursements from IDA); (ii) procurement of goods and consultant services (providing support to first-line beneficiaries in the procurement process); (iii) annual reporting to the World Bank; (iv) monitoring and evaluation; (vi) audit; and (vi) public information, which will include a communication strategy. It is not anticipated that any supplemental salaries will be financed, but wherever necessary, technical assistance (on a punctual basis) will be sought (and may be financed by the project) to strengthen the team. This will enable the transfer of skills. The auditing function, to be carried out annually by independent, external auditors, will also be financed under this component. 5. Financing Source: ($m.) BORROWER/RECIPIENT 2.00 International Development Association (IDA) 5.0 Bilateral Agencies (unidentified) Total 7.0 Page 7 Institutional and Implementation Arrangements The Islamic Republic of Mauritania, will borrow US$5.0 million equivalent from IDA. The new Government has expressed its intention to take rapid reform measures so that the population will see immediately results. Thus the project will be implemented over four years. A mid-term review (MTR) will be planned for 30 months following the effectiveness of the project. Project coordination will be the responsibility of DGPIP. Institutional responsibilities for coordinating and managing the project on a daily basis and providing procurement and accounting services to components will be delegated to members of DGPIP staff which was created for the promotion and development of the private sector. The team will include a procurement specialist, an accountant and an executive assistant and be responsible for providing the necessary guidance to beneficiaries for procurement of consultants, goods and services, as well as monitoring and evaluation, and provide advice on the overall thrust of financial sector reforms, judicial reform, private sector reform and any cross-cutting issues. Wherever necessary, timely short-term technical assistance will be sought to strengthen the team. This technical assistance could include, but will not be limited to, expertise in financial sector, judicial reform and private sector development issues, as well as financial management and procurement and can take the form of specialized training or recruiting short-term consultants. A Steering Committee (SC) was created which is chaired by the DGPIP and includes high-level representatives from the beneficiaries. The SC will provide overall project guidance and strategic oversight. The SC will be comprised of the Director-level (or higher) staff of the beneficiaries who have the authority to make strategic decisions in their agency and to make commitments to ensure that the Government’s private sector reform agenda is advancing and the project continues to support these efforts. It will meet at least once every quarter to review the progress of the project. Beneficiaries will prepare quarterly reports on the progress of their respective activities towards meeting project objectives which will be consolidated into a report for discussion at a quarterly SC meeting. Minutes will be prepared and sent to the IDA for information. To maintain the bottom-up approach began during preparation, it will be the responsibility of each beneficiary to prepare (with the assistance of the DGPIP implementation team) the terms of reference (ToR) for consultants, including required qualifications of consultants and technical specifications for procurement of goods. Beneficiaries will implement their respective components and report to DGPIP on a quarterly basis, including any modifications to the procurement and/or training plans, which will be prepared prior to project effectiveness and included in the Project Implementation Manual (PIM). 6. Sustainability The Project has a good basis for sustainability, being founded on the Government’s PRSP and its continued commitment to improving its business environment as well as strengthening the financial sector and improving its regulatory and judiciary environment. The Government’s request for a FSAP and an ICA, followed by the development of a comprehensive program highlight its continued interest in advancing the PSD agenda. This project provides a second generation of private and financial sector technical assistance and associated institutional and Page 8 policy support for a well-defined, time-bound process involving financial sector strengthening and ultimately improving Mauritania’s performance on the Doing Business survey. The nature of most of these actions and the undisputed commitment of the current Government of these reforms enhances the likelihood that, once implemented, they will be sustained. As mentioned above, the project builds on work support by the FPSCBP. The Operations Evaluation Department (OED) concluded that the FPSCBP’s outcome was satisfactory. This project recorded improvements in a number of areas, in particular in increasing the capacity of the BCM to supervise the financial sector and conduct monetary policy. In addition, there was increased capacity in other departments of the BCM, as well as improvements in the legal and regulatory framework for the financial sector. A lesson drawn from OED's audit of Bank- financed projects was the importance of sequencing financial sector reforms for both financial and private sector development. The project team has built upon this lesson in project design and will continue to work with the Government on proper sequencing of reforms. Given the Government’s commitment, the team is confident that actions taken under the proposed project will also be sustainable . The project is supporting the Government’s vision that Mauritania should become a “producing rather than consuming country, one which exports rather than imports”. This vision is enshrined in the PRSP and the Letters of Financial and Private Sector Development, around which all development assistance is now being aligned. Trade and private sector development issues have not generally been accorded a high priority in previous Government policy, and recent donor support to Mauritania has tended to focus more on social sector development and the improvement of social outcomes, rather than tackling the underlying causes of poverty - namely economic under-performance. The BEEP was launched as a Government initiative, with full national ownership. Many of the constraints to PSD do not require large expenditures, merely the diagnosis of policy, legal and administrative reforms, and technical support in implementing such changes. Therefore the cost of such actions is quite low, while the impact can be high. The GRIM is committed to improving Mauritania’s performance as assessed by the ICA and annual Doing Business surveys and made the results public in a workshop. Similarly, while many aspects of reducing the cost of doing business can be tackled with low-cost actions, others require resources well beyond the scope of this project. Mauritania’s private sector suffers from very high transport costs for both exports and imports. Critical to the sustainability of the project is further investment in infrastructure, not just in transportation but also in power, telecommunications and the water supply. The proposed transport and energy programs, and the facilitation of public-private partnerships as envisaged under this project will play an important role in addressing these infrastructure constraints, but additional public and private investment will be required to achieve real change. The capacity to analyze issues and to develop and implement strategies is crucial to the success of the reform programs. Recognizing the weaknesses in base capacity across some of the beneficiaries, in addition to sequencing activities, the project explicitly includes capacity building in all of its components, and more importantly, several components focus explicitly on building the institutional capacity. This process has already begun as part of the FSAP and of the ICA as well as during preparation of the project, which was prepared jointly by the beneficiaries and the Bank team. Page 9 7. Lessons Learned from Past Operations in the Country/Sector Special attention has been given to ensure that the project design reflects both IDA’s experience in Mauritania and private sector reform projects in other countries, particularly those that have financial and judicial components. In particular, project design takes into account the challenges inherent in a sector with multiple stakeholders and interests, diverse links with the macroeconomic framework and the real sector, long lead times for reforms to take effect, and the need for significant skill and capacity-building. In particular: · The project design is based on recommendations provided from analytical work undertaken over the past year, including the analysis and recommendations from the joint Bank/Fund FSAP, ICA and the Judicial Reform Study of Justice; · The project recognizes the importance of sequencing reforms for both financial and private sector development and builds on success of the FPSCBP; · The project takes into account the fact that the implementation of reforms has multiple steps and takes a significant amount of time. Therefore the project will concentrate on building the foundation for more comprehensive reforms. The project will be implemented over a period of four years and activities will support “quick win” reforms which can be accomplished in the short-term and provide studies and capacity building to enable the GIRM to implement reforms which require greater time to build consensus between public and private stakeholders that are often subject to interruptions that do not necessarily indicate lack of commitment on the part of beneficiaries; · Whenever private sector participation is included as an objective, it is necessary beforehand to examine in-depth the political, economic and sectoral contexts. The analysis should offer alternatives for private sector investment amendable to national and international investment · Ultimate responsibility for project implementation lies in a single Government ministry responsible for private sector development and promotion. DGPIP will be the principle counterpart for the project and the focal point to work with beneficiary agencies to coordinate project implementation. · The project does not assume that a single change can affect sustainable economic development. Instead, the PFSPD takes a holistic approach to addressing constraints to private sector development which are influenced by the health of the financial sector to provide efficient and affordable financial services and the efficiency of the judicial sector to enforce contracts for business and financial activities. Only a small part will be financed by IDA and it is anticipated that other donors will support the GIRM to implement reforms in the microfinance, insurance sector, social security and pensions. Most importantly, the project recognizes that changes in laws and regulations are unlikely to have the desired effect without parallel technical assistance and capacity building. This cannot guarantee that the project will be successful, but it is expected that interactions among measures will have a positive impact over the long term. Page 10 8. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP 4.01) [ ] [X ] Natural Habitats ( OP / BP 4.04) [ ] [X ] Pest Management ( OP 4.09 ) [ ] [X ] Cultural Property ( OPN 11.03 , being revised as OP 4.11) [ ] [X] Involuntary Resettlement ( OP / BP 4.12) [ ] [X ] Indigenous Peoples ( OP / BP 4.10) [ ] [X ] Forests ( OP / BP 4.36) [ ] [X ] Safety of Dams ( OP / BP 4.37) [ ] [X ] Projects in Disputed Areas ( OP / BP 7.60) * [ ] [X ] Projects on International Waterways ( OP / BP 7.50) [ ] [X] 9. List of Factual Technical Documents · Investment Climate Assessment (2007) · Doing Business (2008) · Financial Sector Assessment Program (2006) · Country Financial Accountability Assessment 10. Contact point Contact: Sherri Ellen Archondo Title: Sr. Operations Off. Tel: (202) 458-1799 Fax: Email: Sarchondo@worldbank.org 11. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: pic@worldbank.org Web: http://www.worldbank.org/infoshop * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 11